Saturday, September 16, 2017

Weekly Commentary: Monetary Disorder

Global Credit, Bubble and market analysis is turning more interesting.

China August Credit data were out Friday. Total (aggregate) Social Financing jumped to 1.48 TN yuan ($225bn), up from July’s 1.22 TN and above the 1.28 TN estimate. New Loans were reported at a much stronger-than-expected 1.09 TN (estimates 750bn yuan), up from July’s 825bn. New loans expanded 13.2% y-o-y. Through August, Total Social Financing is running 18% above 2016’s record pace. Total system Credit growth (“social financing” plus govt. borrowings) appears on track to surpass $4.0 TN. While “shadow banking” has of late been restrained by tighter regulation, household (largely real estate) borrowings remain exceptionally strong.

It was the weaker Chinese economic data that made the headlines this week. Retail sales (up 10.1% y-o-y), industrial production (up 6.0%) and fixed investment (up 7.8%) were all somewhat below estimates. At the same time – and I would argue more importantly - Chinese inflation is running hotter than forecast. Considering the scope of the ongoing Credit expansion, inflationary pressures should come as no surprise.

September 10 – Bloomberg: “Inflationary pressure emanating from the factory to the world is proving more resilient than economists have anticipated. China’s producer-price inflation accelerated to 6.3% in August from a year earlier, exceeding all but one of 38 estimates… That data… followed 5.5% readings in the prior three months… The surprise strength gives support for global inflation spanning from metals to fuel and shows the effects of resilient domestic demand and reduced supplies of some commodities.”

Up 1.8% y-o-y, Chinese August CPI was the strongest since January. This follows last week’s stronger-than-expected import data. China is demonstrating classic signs of a Credit-induced Bubble economy – one where domestic Credit excesses are seeping into the global inflationary backdrop through commodities and some modest upward pressure on goods and services prices.

It’s now only about a month until the (10/18) start of the National Congress of the Communist Party of China. Financial stability will be a primary focus, though I question whether the party appreciates how unstable things have become. Chinese officials have dabbled with myriad (“macro prudential”) tightening measures. For the most part, stop and go policies have attempted to balance mounting financial risks against a determination to meet growth targets. Fatefully, policymakers have been willing to accommodate ever-expanding Credit expansion. And for how much longer?

At this late stage of the cycle, Beijing’s bid to direct finance into productive economic investment will surely achieve about the same results as similar desires during the late-twenties U.S. Bubble period. Officials at some point will need to bite the bullet and rein in system Credit.

It’s the nature of Credit Bubbles that risk rises exponentially during “Terminal Phase” excess. In simple terms, the quantity of new Credit expands greatly while quality deteriorates rapidly. A hypothetical chart of systemic risk – that had been rising left to right steadily for years - takes a moon shot. A surge in risky mortgage Credit fuels unsustainable real estate inflation, while business borrowings expand rapidly from entities that will struggle with solvency issues as soon as the Bubble falters. The real economy suffers deep maladjustment that remains largely masked so long as rampant Credit growth (and self-reinforcing asset inflation) runs unabated.

Global policymakers have delusions of controlling Bubble Dynamics. Or should I say that the appearance of being able to manage Bubbles creates the complacency necessary for immense, out-of-control Bubble inflations. A dangerous notion took hold that, rather than permitting Bubbles to burst, they will simply be inflated away. Surely part of the underlying angst affecting central bankers (from Washington to Frankfurt to Tokyo to Beijing) these days is the realization that they indeed do not control inflation dynamics. Instead of inflating consumer prices so as to catch up with inflated asset prices, their reflationary measures are exacerbating price instabilities and inflationary divergences.

A key aspect of global Bubble analysis is that inflationary policymaking and resulting monetary disorder have badly distorted economic and financial structures. QE and other monetary inflation were supposed to rectify the dilemma of insufficient “aggregate demand.” Yet all this “money” and Credit sloshing around the global system is creating dangerous market contortions, destabilizing speculation and ubiquitous price Bubbles. China’s financial system is straining under the burden of intermediating $4.0 TN of 2017 Credit growth into perceived “money-like” instruments (that folks are willing to hold).

September 13 – Wall Street Journal (Yifan Xie and Chuin-Wei Yap): “In just four years, a money-market fund created by an affiliate of China’s Alibaba Group… has become the world’s largest, providing millions of the country’s savers a high-returning place to park their money. Now, it is facing pressure from regulators to slow down. Fueled by contributions from some 370 million account holders, the fund, known as Yu’e Bao—which means ‘leftover treasure’—has grown rapidly to manage $211 billion in assets. It is more than twice the size of the next largest money-market fund, a U.S. dollar liquidity fund managed by J.P. Morgan… Yu’e Bao’s assets doubled in the past year alone, and the fund now makes up a quarter of China’s money-market mutual fund industry.”

A Yu’e Bao investor provided the salient point from the above WSJ article: “I am not too concerned about what Alibaba does with my money since it’s too big to collapse.” Yu’e Bao these days provides an enticing return of 4.02%, compared to 1.50% for one-year bank deposits and a 3.6% yield on 10-year government debt. “The fund invests most of its money in certificates of deposits issued by Chinese state-owned or state-supported banks.” So, this massive (circuitous) flow of funds to Chinese banks provides liquidity to fund late-cycle lending, including to China’s booming population of “zombie” corporations and uneconomic ventures and enterprises.

September 4 – Financial Times (Gabriel Wildau): “China will impose tighter regulation on ‘systemically important’ money-market mutual funds, potentially forcing Ant Financial’s popular fund to de-risk its portfolio and reduce yields for investors. MMFs have exploded in popularity in recent years, as Chinese investors seek high-yielding alternatives to bank deposits. Total assets reached Rmb5.48tn ($848bn) at the end of June… But analysts warn that even as Chinese investors shift en masse from bank deposits to MMFs, the funds are not subject to the same capital and liquidity regulations as banks.”

The first Chinese mutual fund opened in 2003. Assets were only about $20bn to begin 2013 but have since swelled to $848bn. From the WSJ: “Investors continue to pile in. In July alone, another $114 billion flowed into Chinese money-market funds…”

For investors in Chinese money market funds, various bank liabilities, local government debt, corporate Credit and real estate, confidence is higher than ever that Beijing will not tolerate a crisis. And whether it’s money market assets, Chinese bank negotiable certificate of deposit borrowings, “repo” financing or “shadow banking” more generally, China confronts an unprecedented (and rapidly escalating) risk intermediation problem. For too long Beijing has nurtured the financial alchemy necessary to transform progressively risky Credit into perceived safe and liquid instruments. There will be no unobtrusive approach to reining in the beast.

Before I segue from China, it’s worth noting that China’s currency declined almost 1% this week, a sharp reversal after a rally that saw the renminbi appreciate almost 7% versus the dollar y-t-d. Beijing’s efforts to stabilize its currency proved too successful. I ponder how much “hot money” has over recent months been enticed by China’s combination of high yields and an appreciating renminbi – and what this week’s currency policy adjustment might mean for speculative flows.

September 10 – Wall Street Journal (Lingling Wei): “China is reversing a range of measures it had put in place to support its currency, a response to a recent surge in the value of the yuan that has hurt Chinese exporters and added to the country’s economic headwinds. Starting Monday, the People’s Bank of China will scrap a two-year-old rule that made it more expensive for traders to bet the yuan will fall in value... The move, which ends a deposit requirement on trades called currency forwards, will make it less expensive for companies and investors to buy dollars while selling the yuan. That would put some pressure on the currency to decline, traders and analysts said. The step will ‘fend off macro-financial risks,’ said the central bank notice…”

On the subject of China, unstable Bubble Finance and newfound regulator zeal, how about bitcoin?

September 15 – Bloomberg (Olga Kharif and Belinda Cao): “Bitcoin’s meteoric summertime surge risks coming to a painful end as Chinese policy makers move to restrict trading amid growing warnings of a market bubble. The biggest cryptocurrency dropped as much as 40% since reaching a record high of $4,921 on Sept. 1, cutting about $20 billion in market value. The collapse extended to as much as 30% this week since China began sending stronger signals of a clampdown on Sept. 8, making this the biggest five-day decline since January 2015, when it traded at around $200.”

Historians will surely look back at this period and struggle to understand why global central bankers after all these years were so reticent in reducing extraordinary monetary stimulus. Bitcoin and the cryptocurrencies have gone parabolic. U.S. and global equities grind further into record territory; global bond prices are indicative of one of history’s greatest financial Bubbles; real estate prices continue to inflate in most markets globally; debt issuance is on record pace and financial conditions remain incredibly loose virtually everywhere.

A few – not necessarily market-friendly - headlines worth pondering: “UK inflation rate rises to 2.9%”; “Euro zone wage growth surges, making ECB taper more likely”; “Bank of Canada open to alternatives to inflation target”; “Inflation data prompt rethink on US rates”; “Inflation is heating up with some help from the hurricanes”.

Recent inflation readings have generally surprised on the upside, including those in China, UK, U.S. and India. The GSCI commodities index gained 2.2% this week to trade to highs since April. Crude (WTI) was back above $50 this week. While down this week, industrial metals have been on fire. Meanwhile, Harvey and Irma will now make U.S. economic and inflation analysis even more of a challenge. Interestingly, market probabilities for the Fed to boost rates again before year-end have increased to almost 50%.

Global bond markets have begun taking notice. UK yields surged a notable 32 bps this week to 1.32%, near a seven-month high. Ten-year yields were up 10 bps in Canada to an almost three-year high. Australian 10-year yields were up 16 bps to 2.74%, near the high since March. Sweden saw yields jump 13 bps to 0.85%, the high since January 2016. German bund yields rose 12 bps to 0.43%.

Ten-year Treasury yields rose 15 bps this week to 2.20%. Two-year Treasury yields jumped 12 bps to 1.38%, quickly closing in on early-July’s multi-year high of 1.41%. Five-year Treasuries were under heavy selling pressure, with yields jumping 17 bps to 1.81%. Meanwhile, currency trading continues to indicate underlying instability. Two currencies popular in speculative trading strategies – the Japanese yen and British pound – both posted big moves this week. The pound surged 3.0%, while the yen sank 2.7%.

September option expiration helped U.S. equities push higher into record territory. There was likely a decent amount of hedging (North Korea, Trump, etc.) in September derivatives. Then we saw hurricane Irma bearing down on Florida, with the potential for a catastrophic direct hit on Miami. Markets were also concerned that North Korea might follow up the previous week’s nuclear test with another ICBM launch on Saturday. When worst fears failed to materialize over the weekend, equities rallied big on Monday as hedges and short positions were unwound.

The fact that markets continue to so readily disregard risk is consistent with Bubble Dynamics. We’ve seen it all before – except never on a such an all-encompassing, multi-asset class and global basis. I would argue that bond yields have been held artificially low by a combination of complacent central bankers, mounting geopolitical risks, Trump uncertainties and the general view that equities and risk markets have become increasingly vulnerable. There is at least some indication that global central bankers are becoming a little less complacent.


For the Week:

The S&P500 gained 1.6% (up 11.7% y-t-d), and the Dow rose 2.2% (up 12.7%). The Utilities slipped 0.3% (up 12.0%). The Banks surged 4.0% (up 2.2%), and the Broker/Dealers jumped 3.3% (up 10.6%). The Transports gained 1.7% (up 5.6%). The S&P 400 Midcaps jumped 2.0% (up 5.6%), and the small cap Russell 2000 rose 2.3% (up 5.5%). The Nasdaq100 increased 1.3% (up 23.1%).The Semiconductors surged 4.9% (up 26.5%). The Biotechs dipped 0.3% (up 35.8%). With bullion down $26, the HUI gold index sank 4.5% (up 13.5%).

Three-month Treasury bill rates ended the week at 101 bps. Two-year government yields jumped 12 bps to 1.38% (up 19bps y-t-d). Five-year T-note yields surged 17 bps to 1.81% (down 12bps). Ten-year Treasury yields rose 15 bps to 2.20% (down 24bps). Long bond yields gained 10 bps to 2.77% (down 30bps).

Greek 10-year yields slipped three bps to 5.40% (down 163bps y-t-d). Ten-year Portuguese yields were unchanged at 2.80% (down 94bps). Italian 10-year yields jumped 12 bps to 2.08% (up 27bps). Spain's 10-year yields rose six bps to 1.61% (up 23bps). German bund yields jumped 12 bps to 0.43% (up 23bps). French yields rose nine bps to 0.71% (up 3bps). The French to German 10-year bond spread narrowed three to 28 bps. U.K. 10-year gilt yields surged 32 bps to 1.31% (up 7bps). U.K.'s FTSE equities index dropped 2.2% (up 7.5%).

Japan's Nikkei 225 equities index surged 3.3% (up 4.2% y-t-d). Japanese 10-year "JGB" yields increased three bps 0.03% (down 1bp). France's CAC40 rose 2.0% (up 7.2%). The German DAX equities index rallied 1.7% (up 9.0%). Spain's IBEX 35 equities index advanced 1.9% (up 10.3%). Italy's FTSE MIB index jumped 2.1% (up 15.6%). EM equities were mixed. Brazil's Bovespa index surged 3.7% (up 25.8%), while Mexico's Bolsa slipped 0.3% (up 9.4%). South Korea's Kospi rose 1.8% (up 17.7%). India’s Sensex equities index gained 1.8% (up 21.2%). China’s Shanghai Exchange dipped 0.3% (up 8.1%). Turkey's Borsa Istanbul National 100 index declined 0.7% (up 37.9%). Russia's MICEX equities index increased 1.0% (down 8.0%).

Junk bond mutual funds saw outflows of $96 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at a 2017 low 3.78% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.08% (up 31bps). The five-year hybrid ARM rate declined two bps to 3.13% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.00% (up 38bps).

Federal Reserve Credit last week expanded $4.8bn to $4.417 TN. Over the past year, Fed Credit declined $5.9bn. Fed Credit inflated $1.607 TN, or 57%, over the past 253 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose another $6.6bn last week to $3.372 TN. "Custody holdings" were up $208bn y-o-y, or 6.6%.

M2 (narrow) "money" supply last week declined $7.2bn to $13.669 TN. "Narrow money" expanded $685bn, or 5.3%, over the past year. For the week, Currency was little changed. Total Checkable Deposits declined $14.3bn, while Savings Deposits increased $5.2bn. Small Time Deposits added $2.8bn. Retail Money Funds slipped $0.9bn.

Total money market fund assets gained $16.8bn to $2.739 TN. Money Funds increased $80bn y-o-y, or 3.0%.

Total Commercial Paper jumped $16.2bn to $1.024 TN. CP gained $60bn y-o-y, or 6.2%.

Currency Watch:

The U.S. dollar index rallied 0.6% to 91.872 (down 10.3% y-t-d). For the week on the upside, the British pound increased 3.0%, the New Zealand dollar 0.5% and the Mexican peso 0.3%. On the downside, the Japanese yen declined 2.7%, the South African rand 1.7%, the Swiss franc 1.7%, the Norwegian krone 1.4%, the euro 0.8%, the Brazilian real 0.8%, the Australian dollar 0.7%, the Swedish krona 0.4%, the South Korean won 0.4%, the Canadian dollar 0.3% and the Singapore dollar 0.3%. The Chinese renminbi declined 0.9% versus the dollar this week (up 6.0% y-t-d).

Commodities Watch:

September 11 – Bloomberg (Thomas Biesheuvel): “The price of one of the most critical materials for the Western world’s economy and defenses is spiking faster than any major commodity. Tungsten, used to harden steel in ballistic missiles and in drill bits, has surged more than 50% in the last two months amid growing concern about supply cutbacks in China, where about 80% of the metal comes from.”

The Goldman Sachs Commodities Index gained 2.2% (down 0.6% y-t-d). Spot Gold dropped 2.0% to $1,320 (up 14.6%). Silver fell 2.3% to $17.701 (up 10.8%). Crude surged $2.41 to $49.89 (down 7%). Gasoline increased 0.9% (down 1%), and Natural Gas jumped 4.6% (down 19%). Copper fell 3.0% (up 18%). Wheat rallied 2.6% (up 10%). Corn slipped 0.6% (up 1%).

Trump Administration Watch:


September 11 – Bloomberg (Sahil Kapur): “The White House said President Donald Trump cut a short-term debt ceiling and government spending deal with Democrats to clear the deck for a major tax bill. But the agreement could be complicating tax efforts by eroding trust within his own party. Not only has the deal sowed doubt among the GOP about its unpredictable president, but it’s also driving a wedge between Republicans and their leaders in Congress, just as the party is desperate to deliver on one of its top priorities.”

September 12 – Politico (Colin Wilhelm and Aaron Lorenzo): “Congressional Republicans came back to Washington ready and eager to work on tax reform, but they’re still missing one thing: a plan. That’s triggered frustration among rank-and-file lawmakers who feel pressure from President Donald Trump to pass a tax reform bill but have seen no plans and worry they’ll be backed into a corner on legislation they haven’t even seen, much like they were with the failed Obamacare repeal earlier this summer. ‘This time around there is no room for error. This has got to be a home run,’ Rep. Dave Brat (R-Va.) said... ‘I would hope everyone wants to know what’s in it before you vote on it. That’s the old [Nancy] Pelosi joke on health care, it turned into a colossal joke. ‘You’ll find out what’s in it after we pass it.’"

September 13 – Politico (Nancy Cook and Rachael Bade): “Conservative lawmakers and strategists have deep concerns that Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn — the administration’s two key leaders on tax reform — don’t have the know-how or political credibility to push a major GOP tax overhaul through Congress this fall. Neither man has ever worked in or with the legislative branch. They lack inside knowledge about how to navigate Congress at an especially fractious time. Cohn remains a registered Democrat; Mnuchin is a Republican, but he also has a long history of donating to the other party. Those Democratic connections have been magnified in the wake of the president’s sudden debt-ceiling deal with Chuck Schumer and Nancy Pelosi…”

September 13 – CNBC (Jacob Pramuk): “President Donald Trump… claimed rich Americans ‘will not be gaining at all’ from the tax reform plan that Republicans hope to pass this year. ‘I think the wealthy will be pretty much where they are. ... If they have to go higher, they'll go higher, frankly,’ the president said during an afternoon meeting with bipartisan members of Congress amid a recent string of outreach to Democrats. GOP congressional leaders are working to draft tax legislation and aim to introduce it in the coming weeks.”

September 13 – Bloomberg: “President Donald Trump blocked a Chinese-backed investor from buying Lattice Semiconductor Corp., casting a cloud over Chinese deals seeking U.S. security clearance and spurring a call for fairness from Beijing. It was just the fourth time in a quarter century that a U.S. president has ordered a foreign takeover of an American firm stopped on national-security concerns… The spurned buyer, Canyon Bridge Capital Partners LLC, is a private-equity firm backed by a Chinese state-owned asset manager. The Trump administration has maintained a tough stance against Chinese takeovers of American businesses even as it seeks China’s help to resolve the North Korean nuclear crisis.”

September 12 – Financial Times (Demetri Sevastopulo and Katrina Manson): “The Trump administration has warned China that the US will target Chinese banks unless Beijing takes much stronger measures to impose economic pain on North Korea by reducing trade and financial transactions with the regime in Pyongyang. Marshall Billingslea, a top Treasury official, told Congress… that the US had not seen sufficient evidence that China was willing to curb North Korean revenue flows and ‘expunge North Korean illicit actors’ from its banking system. He said the Trump administration would continue to work with China to maximise pressure on North Korea, but would ‘not hesitate to act unilaterally’… Donald Trump… described the latest UN sanctions as ‘a very small step’ that were ‘not a big deal’. He added that while it was nice to get a unanimous vote, ‘those sanctions are nothing compared to ultimately what will have to happen’.”

September 13 – Bloomberg (Saleha Mohsin and Arit John): “Treasury Secretary Steven Mnuchin warned the U.S. may impose additional sanctions on China -- potentially cutting off access to the U.S. financial system -- if it doesn’t follow through on a fresh round of United Nations restrictions against North Korea… ‘If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system -- and that’s quite meaningful,’ Mnuchin said…”

September 11 – Reuters (Jonathan Landay, Arshad Mohammed, Steve Holland): “President Donald Trump is weighing a strategy that could allow more aggressive U.S. responses to Iran’s forces, its Shi‘ite Muslim proxies in Iraq and Syria, and its support for militant groups, according to six current and former U.S. officials. The proposal was prepared by Defense Secretary Jim Mattis, Secretary of State Rex Tillerson, national security adviser H.R. McMaster and other top officials, and presented to Trump at a National Security Council meeting on Friday…”

China Bubble Watch:

September 11 – CNBC (Rebecca Ungarino): “The Chinese National Congress is set to meet in mid-October, and some predict the session will have wide-reaching implications for global markets and the economy. Discussions around the growth of the country's debt in recent years will be particularly consequential, said Chad Morganlander, portfolio manager at Washington Crossing Advisors. ‘One critical thing to watch is how they rebalance their economy. Over the course of the last five years, you've actually seen nonfinancial debt in China increase by roughly $14 trillion, which is pretty close to 90 to 100% growth. That growth rate is not sustainable,’ Morganlander said… This apparent mountain of debt has created ‘financial fragility’ across China, he said, and the country's Communist party would like to ‘decelerate’ that growth rate. ‘Unfortunately, that rebalancing does have major implications on U.S. markets and foreign markets,’ he said…”

September 13 – Bloomberg: “The pace of China’s economic expansion unexpectedly cooled further last month after a lackluster July, as factory output, investment and retail sales all slowed. Industrial output rose 6.0% from a year earlier in August, versus a median projection of 6.6% and July’s 6.4%. That’s the slowest pace this year. Retail sales expanded 10.1% from a year earlier, versus a projection of 10.5% and 10.4% in July, also the slowest reading in 2017. Fixed-asset investment in urban areas rose 7.8% in the first eight months of the year over the same period in 2016, compared with a forecast 8.2% rise. That’s the slowest since 1999.”

September 13 – Bloomberg: “China’s home sales last month grew at the slowest pace in almost three years amid regulatory moves to rein in prices. The value of new homes sold rose 3.8% to 807 billion yuan ($123bn) in August from a year earlier… That compares with a 4.3% jump a month earlier, and is the slowest increase since November 2014. China’s leaders are determined to cool rising home prices across China, imposing buying restrictions to rein in demand.”

September 11 – Bloomberg: “Foreigners have been slow to warm to China’s domestic bond market, the world’s third-largest by value. A look at the latest corporate default may explain why. Wuyang Construction Group Co., a builder in the eastern province of Zhejiang, defaulted on two put-able notes totaling 1.36 billion yuan ($209 million) last month. Bondholders are now up in arms, claiming… that the company didn’t disclose a raft of transgressions in sale documents for the bonds, which were sold in 2015… The incident is a good example of the teething problems China is seeing as it works to develop its $9 trillion bond market -- made more accessible to offshore investors via a connect with Hong Kong in July.”

September 13 – Wall Street Journal (Shen Hong): “Foreign investors last month more than tripled their holdings of a popular short-term debt instrument issued by Chinese banks—reflecting both the attraction of a rising yuan and a growing risk appetite… Central banks and sovereign-wealth funds were big buyers, according to a Shanghai-based banker at a global bank… NCDs—effectively high-yielding bonds, generally with maturities of a month to a year—have become extremely popular with Chinese banks, especially smaller lenders, since their launch in late 2013. But as concerns have grown that banks are issuing them as a tool for leveraged investment rather than to meet genuine refinancing needs, they have drawn heightened scrutiny from Chinese regulators, who recently imposed a partial ban.”

September 10 – Bloomberg: “China will set a deadline for automakers to end sales of fossil-fuel-powered vehicles, becoming the biggest market to do so in a move that will accelerate the push into the electric car market led by companies including BYD Co. and BAIC Motor Corp. Xin Guobin, the vice minister of industry and information technology, said the government is working with other regulators on a timetable to end production and sales… The world’s second-biggest economy, which has vowed to cap its carbon emissions by 2030 and curb worsening air pollution, is the latest to join countries such as the U.K. and France seeking to phase out vehicles using gasoline and diesel.”

September 11 – Bloomberg (Fion Li): “Hong Kong’s Financial Secretary Paul Chan warned potential buyers to be careful buying property in the world’s most expensive housing market, as moves by the Federal Reserve to unwind its balance sheet may shrink money supply. Chan warned in June that Hong Kong’s property market is in a ‘dangerous situation’ and vulnerable to a correction. Hong Kong Chief Executive Carrie Lam describes housing as citizens’ No. 1 concern and recently set up a task force on increasing land supply as she tries to rein in ever-escalating prices… Hong Kong home prices, the least affordable in the world, have surged 21% in the 12 months through June 30…”

Central Bank Watch:

September 14 – Bloomberg (Lucy Meakin and Jill Ward): “Signaling that inflation is overtaking Brexit-related slowdown as an economic risk, Bank of England policy makers said they’re headed toward raising interest rates for the first time in more than a decade. The pound surged and gilt yields jumped as investors anticipated rates may increase as soon as November, far earlier than the previous consensus. That came after the BOE revealed that for a majority of policy makers, ‘some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target.’”

September 12 – Bloomberg (Lucy Meakin): “U.K. inflation is on the rise again, accelerating more than forecast in August after the biggest surge in clothes prices in almost three decades. The jump to 2.9% from 2.6% in July puts the spotlight squarely back on one of the most prominent economic repercussions of the Brexit vote in 2016. The pound has fallen 11% against the dollar since the referendum, boosting import costs and feeding through to prices for everyday household items. The annual inflation rate has never been higher since 2012 and helped push Bloomberg’s Brexit barometer to the lowest since June.”

Global Bubble Watch:


September 12 – Bloomberg (Chris Anstey): “Banks from China, Japan and Canada have overseen a surge in overseas lending since the financial crisis, helping to cushion a deep slide in cross-border capital flows thanks especially to a retreat by European banks, according to the McKinsey Global Institute. While the stock of global foreign holdings -- including loans, equities, bonds and foreign direct investment -- has remained about the same since 2007 at 183% of world GDP, gross flows of capital across borders have plunged 65%. Much of that has been due to European banks refocusing on their domestic markets as the euro crisis and new capital rules took hold, McKinsey said… Key exceptions have been banks in China and Japan, which have funded their countries’ companies abroad…”

September 13 – Bloomberg (Pooja Thakur Mahrotri): “Prices of office, retail and industrial properties in most global cities have reached records since the global financial crisis, with values in Hong Kong tripling over the past decade, according to a survey by Real Capital Analytics Inc. With the exception of a handful of cities such as Amsterdam, Chicago, Tokyo and Washington, prices in the other cities have fully recovered and gone on to set new records… Prices in Manhattan and London’s West End have almost doubled…”

September 10 – Financial Times (Robin Wigglesworth): “At the peak of the South Sea Bubble three centuries ago, a wag famously poked fun at the craze by issuing a prospectus for ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’. Cryptocurrency mania has now arguably reached the same stage. This summer an unknown software developer launched what he termed the ‘Useless Ethereum Token’, an ‘initial coin offering’ of a variant of a cryptocurrency whose popularity rivals that of the more famous bitcoin. But this was the ‘world’s first 100% honest’ ICO, he promised, and was admirably transparent about its purpose. ‘You’re literally giving your money to someone on the internet and getting completely useless tokens in return,’ he wrote on the UET website. ‘There are no ‘whitepapers’, no ‘products’, and no ‘experts’. It’s just you, me, your hard-earned Ether, and my shopping list.’ The ICO raised more than $200,000, according to the backer.”

September 13 – Bloomberg (Hugh Son, Hannah Levitt, and Brian Louis): “JPMorgan… Chief Executive Officer Jamie Dimon said he would fire any employee trading bitcoin for being ‘stupid.’ The cryptocurrency ‘won’t end well,’ he told an investor conference…, predicting it will eventually blow up. ‘It’s a fraud’ and ‘worse than tulip bulbs.’ If a JPMorgan trader began trading in bitcoin, he said, ‘I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.’”

September 10 – Bloomberg (Emily Cadman): “Here’s something else for policy makers to worry about as they attempt to engineer a soft landing in Australia’s property market. The country’s lenders could be sitting on A$500 billion ($402bn) of ‘liar loans,’ or mortgages obtained on inaccurate financial information, according to an estimate from UBS… A survey by the firm of 907 Australians who took out a mortgage in the last 12 months found only 67% stated their application was ‘completely factual and accurate,’ down from 72% the previous year. The most common inaccuracies were overstating income and understating living expenses, the survey found.”

Federal Reserve Watch:

September 13 – Bloomberg (Matthew Boesler): “Former Federal Reserve Chairman Alan Greenspan, in year nine of a U.S. economic expansion, conceded in 1999 that patience was sometimes a better policy than his doctrine of preemptive interest-rate moves because ‘the future at times can be too opaque to penetrate.’ For some Fed officials, these days look like one of those times to wait for clarity. Faith in preemption -- the Greenspan-era strategy of setting of monetary policy based on forecasts to get ahead of where the economy was going -- is beginning to falter among some officials. That’s because in the current expansion’s ninth year, inflation isn’t accelerating as they predicted for reasons that aren’t yet understood, even as the labor market tightens and global growth improves. ‘The conventional wisdom did not work in the 1990s and it is not working now,’ said Allen Sinai, chief executive officer of Decision Economics…”

U.S. Bubble Watch:

September 13 – Reuters (Lindsay Dunsmuir): “The U.S. government recorded a $108 billion deficit in August, the Treasury Department said… That compared with a budget deficit of $107 billion the same month one year… The deficit for the fiscal year to date was $674 billion, compared to $619 billion in the same period of fiscal 2016. On an adjusted basis, the fiscal-year-to-date deficit was $705 billion last month versus $619 billion in the year-earlier period.”

September 14 – Bloomberg (Sho Chandra): “Inflation may finally be getting back on track to reach the Federal Reserve’s goal, as the U.S. cost of living accelerated following a weak stretch of readings… Consumer-price index increased 0.4% m/m (est. 0.3% gain) after 0.1% rise the prior month; rose 1.9% y/y (est. 1.8%). Excluding food and energy, so-called core CPI rose 0.2% m/m (matching est.) after rising 0.1%; up 1.7% y/y (est. 1.6%) after 1.7% advance. Increase in core index driven by biggest gain in shelter since 2005.”

September 13 – CNBC (Diana Olick): “Homebuyers are clamoring to capitalize on the lowest interest rates in almost a year, driving total mortgage application volume 9.9% higher last week… After declining for weeks, mortgage applications to purchase a home jumped 11% for the week and were 7% higher than a year ago.”

September 13 – Bloomberg (Sho Chandra): “Rising U.S. wholesale prices in August reflect the biggest jump in energy costs since January, while underlying inflation remained contained… Producer-price index rose 0.2% m/m (est. 0.3% rise) after 0.1% drop the previous month. PPI rose 2.4% y/y after 1.9% gain in prior 12-month period.”

September 14 – CNBC (Jeff Cox): “Professional investors are at their most pessimistic since before the election of President Donald Trump, despite a bull market that continues to roll along. The Investors Intelligence survey, which gauges the sentiment of investing newsletter authors, showed bullishness at 47.1%, a decline of 2.4 percentage points from last week. That's the lowest level since just before Trump's win back in November and comes as bearishness has risen to 20.2%, which is a high since the election. As recently as July the bulls were above 60%, with a 2017 peak of 63.1 in late February. Bearishness had been in a range between 16.5% and 18.3% for most of the year…”

Europe Watch:


September 14 – Financial Times (Marcello Minenna): “The euro area’s Target2 (T2) balances have continued to diverge. As of June 2017, Italy owes €430bn to the rest of the eurosystem and Spain owes €377bn, while Germany’s claims on the eurosystem are worth €835bn. Recent research has linked the launch of the European Central Bank’s quantitative easing with the resumption of the T2 divergence process in the euro area, after a period (2012-2014) of relative reduction. The ECB itself believes that QE has been the main driver of the T2 balances. In an official bulletin the ECB highlights the linear relationship between liquidity injected into European financial systems through the purchase of government bonds and the corresponding increase in T2 balances. For Italy, Portugal, and Spain, the effect has been to increase T2 obligations… While QE has had the opposite effect in Germany, the Netherlands and Finland…”

Japan Watch:

September 11 – Bloomberg (Chikako Mogi and Takako Taniguchi): “Japan’s regional banks are turning toward private equity, hedge funds and real estate in search of higher returns as regulatory concerns restrict ownership of foreign bonds. Alternative assets was the favored choice of investment for five lenders, according to a Bloomberg survey… Foreign bonds was picked by three respondents, while none of the lenders said they found Japanese government debt attractive given depressed yields. Japanese banks are following the nation’s largest insurance companies in considering more alternative assets as choices narrow with the Bank of Japan committed to holding down the benchmark bond yield at around zero percent.”

EM Bubble Watch:

September 12 – Bloomberg (Archana Chaudhary): “India’s August inflation rate accelerated to the fastest since March, exceeding expectations ahead of the central bank’s policy review in October. Consumer price inflation quickened to 3.36% in August…”

Geopolitical Watch:

September 13 – Reuters (Jack Kim, Kiyoshi Takenaka): “A North Korean state agency threatened… to use nuclear weapons to ‘sink’ Japan and reduce the United States to ‘ashes and darkness’ for supporting a U.N. Security Council resolution and sanctions over its latest nuclear test. The Korea Asia-Pacific Peace Committee, which handles the North’s external ties and propaganda, also called for the breakup of the Security Council, which it called ‘a tool of evil’ made up of ‘money-bribed’ countries that move at the order of the United States. ‘The four islands of the archipelago should be sunken into the sea by the nuclear bomb of Juche. Japan is no longer needed to exist near us,’ the committee said…”

September 13 – Reuters (Johan Ahlander): “Neutral Sweden has launched its biggest war games in two decades with support from NATO countries, drilling 19,000 troops after years of spending cuts that have left the country fearful of Russia’s growing military strength. On the eve of Russia’s biggest maneuvers since 2013, which NATO says will be greater than the 13,000 troops Moscow says are involved, Sweden will simulate an attack from the east on the Baltic island of Gotland… ‘The security situation has taken a turn for the worse,’ Micael Byden, the commander of the Swedish Armed Forces, said during a presentation of the three-week-long exercise.”