Credit Bubble Bulletin : October 2017

Tuesday, October 31, 2017

Wednesday's News Links

[Bloomberg] Stocks Gain as Metals Surge; Crude Extends Rally: Markets Wrap

[Bloomberg] U.S. Oil Rises to 10-Month High as Stockpiles Seen Dropping

[Bloomberg] U.S. Companies Add Most Workers in Seven Months, ADP Data Show

[Bloomberg] Fed Chair Drama Steals Spotlight From FOMC: Decision Day Guide

[Reuters] Fed set to hold rates steady ahead of Trump's leadership decision

[CNBC] The House GOP will delay releasing its tax bill until Thursday

[Bloomberg] GOP Braces for ‘All Hell’ to Break Loose When Tax Bill Finally Drops

[Bloomberg] Treasury Maintains Long-Term Debt Sales, Sees Rise in 2018

[CNBC] Caixin China manufacturing PMI is 51.0 for October, meeting expectations

[Bloomberg] Australia's Housing Boom Is ‘Officially Over,’ UBS Says

[Bloomberg] This Four-Bedroom Home in Hong Kong Just Sold for $149 Million

[WSJ] Fed Likely on Hold, but Could Give Clues on Possible December Rate Rise

[WSJ] Chinese Property Shopping Spree Fades as Beijing Hits the Brakes

[WSJ] China’s Dandong Port Group Defaults on $150 Million in Bonds

Tuesday Evening Links

[Bloomberg] Japan Stocks Point Higher as Kiwi Soars on Jobs: Markets Wrap

[Bloomberg] U.S. Consumer Confidence Just Hit Its Highest Level in Almost 17 Years

[Bloomberg] U.S. Manufacturing Is Powering Up, Regional Report Cards Show

[Bloomberg] Bitcoin Surges After World's Biggest Exchange Announces Plans for Futures

[WSJ] House Tax Plan to Delay Estate-Tax Repeal, Set Corporate Rate at 20%

Monday, October 30, 2017

Tuesday's News Links

[Bloomberg] Stocks Extend Gains; Euro Drops as Inflation Slows: Markets Wrap

[Bloomberg] Home-Price Gains in 20 U.S. Cities Showed Acceleration in August

[Bloomberg] U.S. Employment Costs Pick Up on Faster Wage Gains at Factories

[Politico] Trump’s unusual chance to stack the Fed

[Bloomberg] BOJ Keeps Stimulus Unchanged as It Trims Inflation Outlook

[Bloomberg] China Factory PMI Falls From Five-Year High on Pollution Cleanup

[Bloomberg] China Takes Action After Bond Market Sell-off With One-Two Punch

[Bloomberg] Another China Company Defaults on Bond Payment as Borrowing Costs Jump

[Bloomberg] You Wanna See Something Really Scary? Try These Market Charts

[Reuters] Beijing seen poised for fresh South China Sea assertiveness

[NYT] Thanks to Wall St., There May Be Too Many Restaurants

[FT] IMF warns volatility products loom as next big market shock

[WSJ] China’s Dangerous Return to One-Man Reign

Monday Evening Links

[Bloomberg] U.S. Stocks Fall, Dollar Slumps as Treasuries Gain: Markets Wrap

[Bloomberg] House to Consider Five-Year Phase-in for Corporate Tax Cut

[Reuters] Trump likely to pick Fed's Powell to lead central bank: source

[CNBC] There are plenty of things that might be in this tax bill that could give the market indigestion

[CNBC] Savings rate hits lowest since financial crisis as Americans take on more risk

[Bloomberg] Homes Are Getting Snapped Up at the Fastest Pace in 30 Years

[Reuters] U.S. consumer spending grows at fastest pace since 2009, savings drop

[Bloomberg] Bitcoin's Market Cap Surges Past $100 Billion

[Reuters] China warns against attempts to contain Beijing before Trump visit

[NYT] Trump Is Expected to Name Jerome Powell as Next Fed Chairman

[WSJ] Bets on the Next Fed Chair: A History of Speculation Gone Wrong

[WSJ] ECB Decision Reopens Divide Atop Central Bank

Sunday, October 29, 2017

Saturday, October 28, 2017

Saturday's News Links

[BBC] Catalan ex-leader Carles Puigdemont vows to resist takeover

[Reuters] Kuroda looks favored to get second term as Bank of Japan chief: Nikkei

[Reuters] Catalan police call for neutrality as Spain exerts control

[Reuters] Mattis, in Seoul, says U.S. can't accept nuclear North Korea

[CNBC] North Korea accuses US of 'criminal moves' as three Navy carriers operate in Asian waters

[FT] Billionaire boom is a sign that rates need to rise

Friday, October 27, 2017

Weekly Commentary: Must Stop Digging

Amazon, Google, Microsoft, Intel and Draghi all handily beat expectations. Booming technology earnings confirm the degree to which Bubble Dynamics have become entrenched within the real economy. Draghi confirms that central bankers remain petrified by the thought of piercing Bubbles.

There is a prevailing view that Bubbles reflect asset price gains beyond what is justified by fundamental factors. I counter with the argument that the inflation of underlying fundamentals – revenues, earnings, cash-flow, margins, etc. – is a paramount facet of Bubble Dynamics (How abruptly did the trajectory of earnings reverse course in 2001 and 2009?).

With extremely low rates, loose corporate Credit Availability, large deficit spending, inflating asset prices and a glut of “money” sloshing about, there is bountiful fodder for spending and corporate profits. And with technology one of the more beguiling avenues to employ the cash-flow bonanza – and tech start-ups, the cloud, AI, Internet of Things, robotics, cybersecurity, etc. white-hot right now – the Gargantuan Technology Oligopoly today luxuriates at the Bubble Core.

By this time, expanding global technology capacity is a straightforward endeavor, while the industry for now enjoys booming demand and outsized margins. This confluence of extraordinary attributes provides “tech” the latitude to operate as a powerful black hole absorbing global purchasing power (throughout economies as well as financial markets). As such, it has been a case of the greater the scope of the Bubble, the more supply of “tech” available to weigh on overall goods and services pricing pressures. Central bankers continue to misconstrue this dynamic, instead perceiving irrepressible disinflationary forces that they are compelled to counter (with year after year after year of flagrant monetary stimulus).

The Nasdaq Composite’s 24.5% y-t-d gain has provided a fantastic windfall to fortunate investors as well as tens of thousands of extremely fortunate employees. This financial godsend will exacerbate wealth disparities along with housing inflation in select localities. Yet there will be little boost to reported wages (capital gains instead) and negligible impact on the overall CPI index. Is CPI these days even a relevant gauge of inflationary pressures or monetary instability?

As for Mario Draghi’s practice of beating market expectations, he is the present-day Alan Greenspan – the savvy operator that over the years has grown too comfortable wielding power over global markets (not to mention over central bankers at home and abroad). Headline from the Financial Times: “Draghi Pulls Off Dovish Trick with His QE ‘Downsize’ - ECB President Determined Not to Repeat Mistake of Premature Tightening.”

The ECB – right along with central bankers around the globe – has replayed the fateful mistake of delaying for (way) too long the removal of monetary stimulus. Draghi refused to set a date to end the ECB’s “money” printing operations, ensuring at least several hundred billion of additional stimulus in 2018. And with the commitment to hold rates at the current negative level until well past the end of QE, a most inert “normalization” process will not even commence until well into 2019. Apparently, short rates likely won’t make it much past 1% for several years. Draghi’s central bank will continue to purchase large quantities of corporate debt next year. Moreover, with open-ended QE and assurances that operations could at any point be expanded, spoiled markets take great comfort that their beloved liquidity backstop is as unyielding as ever.

October 26 – Bloomberg (Alessandro Speciale and Mark Deen): “The European Central Bank should have decided on an end date for its asset-purchase program rather than retaining the option to extend it after September 2018, Bundesbank President Jens Weidmann said. ‘From my point of view, a clear end of net purchases would have been appropriate,’ Weidmann said in a speech… ‘The development of domestic price pressures shown in projections is in line with a trajectory that will take us toward our definition of price stability.’ Weidmann’s critique comes one day after the Governing Council extended quantitative easing until September at a monthly pace of 30 billion euros ($35bn), leaving the door open for further buying after that if needed. The Bundesbank president was among a handful of policy makers who didn’t support the decision, according to Germany’s Boersen-Zeitung.”

German stocks gained 1.7% this week, while French equities jumped 2.3%. German (38bps) and French (79bps) yields declined seven basis points to seven-week lows. Portuguese bond yields dropped 11 bps to a 30-month low 2.19%. Dropping nine bps, Italian 10-year yields traded back below 2%. And in a sign of these strange times, even Catalonia chaos couldn’t keep Spanish yields from declining eight bps to 1.58% (83bps below Treasuries!). Yet Draghi has company when it comes to assuring markets that central bank liquidity backstops are here to stay.

October 20 – Financial Times (Sam Fleming): “Janet Yellen… has warned that there is an ‘uncomfortably high’ risk that the central bank will have to deploy crisis-era stimulus tools again — even in the case of a less severe downturn than the Great Recession. Her comments come as President Donald Trump considers a sharp change of direction at the Fed which could see him install new leadership that is much more dubious about the Fed’s use of quantitative easing. Ms Yellen said in a speech that the US economy had made ‘great strides’ but that policymakers may be unable to lift short-term rates very far as the recovery proceeds. This could leave the Fed once again leaning on quantitative easing and forward guidance on the future rate outlook when the economy hits a downturn, she suggested… ‘Does this mean that it will take another Great Recession for our unconventional tools to be used again? Not necessarily. Recent studies suggest that the neutral level of the federal funds rate appears to be much lower than it was in previous decades,’ Ms Yellen said. ‘The bottom line is that we must recognise that our unconventional tools might have to be used again. If we are indeed living in a low-neutral-rate world, a significantly less severe economic downturn than the Great Recession might be sufficient to drive short-term interest rates back to their effective lower bound.’”

Apparently, there is an “uncomfortably high risk” that QE will be employed “in the case of a less severe downturn” because “policymakers may be unable to lift short-term rates very far as the recovery proceeds.” Does anyone believe that the Yellen Fed is less than comfortable with the prospect of restarting QE?

Q3 marked the second consecutive quarter of 3% U.S. growth; consumer confidence is the highest in years; stock markets are booming with record prices and “money” flooding into ETFs; debt issuance remains on record pace; leveraged lending and M&A are booming; a strong inflationary bias persists in housing; and the unemployment rate is down to 4.2%, lowest in 16 years. Why not begin a real normalization of monetary policy? Because some measures of core consumer price inflation remain slightly below 2.0%?

It has become increasingly apparent that central bankers recognize their predicament and have chosen not to risk piercing Bubbles. I suspect Draghi, Yellen and Kuroda (and others) fear the consequences of a destabilizing jump in global bond yields. I too fear the amount of leverage and range of distortions that have accumulated over the past nine years. The inescapable adjustment after such a prolonged boom will be quite difficult. Yet the analysis gets back to the “First Law of Holes:” Must Stop Digging. At this late (historic) Bubble stage, systemic risk is piling up exponentially.

October 24 – Financial Times (Robin Wigglesworth): “Inflows into exchange-traded bond funds have surged past last year’s record with several months to spare, as the seismic migration towards passive investing broadens out beyond the equity market. ETFs that track fixed-income benchmarks have attracted nearly $130bn so far this year, comfortably surpassing the record-breaking 2016, when almost $117bn gushed into bond ETFs… Bloomberg data puts this year’s inflows at more than $140bn. ‘It’s been a year of robust flows,’ said Steve Laipply, head of fixed income strategy at BlackRock’s iShares ETF business… ‘There has been accelerating institutional investor adoption of these products’… ETF providers such as Vanguard, State Street and BlackRock have rapidly grown their franchises, with BlackRock revealing in its latest quarterly earnings that it is currently taking in about $1.5bn a day.”

October 22 – Wall Street Journal (Christopher Whittall): “Investors hungry for returns are piling back into securities once tarnished by the financial crisis. Complex structured investments developed a bad reputation during the credit crunch. Ten years later, investors seeking yield are overcoming their skepticism and buying into securities that rely on financial engineering to juice returns. Volumes of CLOs, or collateralized loan obligations, hit a record $247 billion in the first nine months of the year… Fueled by a wave of refinancings and nearly $100 billion in new deals, that far outpaces their recent full-year high of $151 billion in 2014 and the precrisis peak of $136 billion in 2006. The CLO boom is the latest sign of the ferocious hunt for yield permeating markets. Stellar performance over the past year has made CLOs increasingly hard to ignore for investors like insurance companies and pension funds.”

October 20 – Financial Times (Gillian Tett): “A decade ago, whenever I chatted to anyone at Switzerland’s Bank for International Settlements, I felt like I was hobnobbing with dissidents. The reason? Back then, most western central bankers and finance ministers were convinced that the global economy was in good shape: inflation was low, growth was steady, corporate and consumer optimism was high. In fact, the data seemed so benign that economists had labelled the first decade of the 21st century the ‘great moderation’. Not the BIS. Starting in 2003, officials at… institution, which aims to ‘promote global monetary and financial stability through international co-operation’, started to warn that the world economy was plagued by excessive levels of debt. This made the system dangerously distorted; so went the off-the-record murmurs from men such as William White… and Claudio Borio... Most central bankers dismissed these warnings — some even tried to silence the BIS… Earlier this month I travelled to Washington for an International Monetary Fund and World Bank meeting. There was a cheery mood in the air, just as there was in 2006… But now, just as before, those BIS dissidents are muttering in the wings. At the IMF gala, Borio (still at the BIS) told me that the pesky matter of debt has not disappeared. On the contrary, since the 2008 credit crisis, it has risen sharply: the level of global debt to gross domestic product is now 40% — yes, 40% — higher than it was in 2008. The world has responded to a crisis caused by excess leverage by piling on more, not less, debt.”

There are aspects of the current global Bubble that are reminiscent of pre-2008 crisis – though the amount of debt these days is larger, price distortions greater and misperceptions more perilous. Then: “Washington will not allow a housing bust.” Now: Global central bankers will not allow market dislocation. Unprecedented market distortions – including Trillions of mispriced “AAA” debt securities – back in 2008 look pee-wee when compared to today’s fiasco in perceived money-like instruments (fixed-income as well as equities)

At the same time, today’s “tech” party is more 1999 – just so much more expansive. Loose “money” coupled with government/central bank backstops have nurtured another epic sector mania – replete with more dangerous regional economic and housing Bubbles. Today’s EM backdrop has uncomfortable characteristics reminiscent of 1996, with the current “hot money” onslaught compounding already acute financial, economic, social and geopolitical fragilities from Asia to Eastern Europe to Latin America.

And there are elements of fixed-income excess that recall all the way back to 1993. The proliferation of leveraged derivatives strategies cultivates latent fragility. Meanwhile, the scope of flows into fixed-income ETFs at this late stage of the cycle is astonishing – yet, as they say, “par for the course.” It’s consistent with the flood of funds into passive U.S. equities indices and the emerging markets; the near-panic buying of European and U.S. corporate debt – the tsunami of “money” inundating virtually all risk assets via the ballooning ETF complex.

What most sets today’s Granddaddy of All Bubbles apart? Historic excess and distortion throughout the securities and derivatives markets – and asset markets more generally – on an unprecedented synchronized, systemic global scale. It’s become myriad powerful booms all packed into one killer Bubble unlike the world has ever experienced. History will not be kind to central banker fixation on arbitrary 2% annual CPI targets. Nasdaq inflated 2.2% in Friday’s session – the Nasdaq100 2.9%!

For the Week:

The S&P500 added 0.2% (up 15.3% y-t-d), and the Dow increased 0.5% (up 18.6%). The Utilities added 0.3% (up 13.2%). The Banks rose 1.0% (up 11.4%), and the Broker/Dealers increased 0.4% (up 20.4%). The Transports slipped 0.4% (up 9.8%). The S&P 400 Midcaps gained 0.3% (up 10.8%), while the small cap Russell 2000 was little changed (up 11.1%). The Nasdaq100 jumped 1.7% (up 27.8%). The Semiconductors surged 2.6% (up 39.4%). The Biotechs dropped 3.0% (up 33.9%). Bullion declined $7, while the HUI gold index was slammed 5.3% (up 2.6%).

Three-month Treasury bill rates ended the week at 107 bps. Two-year government yields added a basis point to 1.59% (up 40bps y-t-d). Five-year T-note yields added one basis point to 2.03% (up 10bps). Ten-year Treasury yields gained two bps to 2.41% (down 4bps). Long bond yields rose two bps to 2.92% (down 15bps).

Greek 10-year yields were little changed at 5.49% (down 153bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 2.19% (down 155bps). Italian 10-year yields fell nine bps to 1.95% (up 14bps). Spain's 10-year yields declined nine bps to 1.59% (up 21bps). German bund yields fell seven bps to 0.38% (up 18bps). French yields declined seven bps to 0.79% (up 11bps). The French to German 10-year bond spread was little changed at 41 bps. U.K. 10-year gilt yields gained two bps to 1.35% (up 11bps). U.K.'s FTSE equities slipped 0.2% (up 5.1%).

Japan's Nikkei 225 equities index surged 2.6% to a 20-year high (up 15.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.07% (up 3bps). France's CAC40 jumped 2.3% (up 13%). The German DAX equities index rose 1.7% (up 15.1%). Spain's IBEX 35 equities index slipped 0.2% (up 9.0%). Italy's FTSE MIB index gained 1.4% (up 17.8%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 26.1%), and Mexico's Bolsa fell 1.6% (up 7.8%). India’s Sensex equities index jumped 2.4% (up 24.5%). China’s Shanghai Exchange gained 1.1% (up 10.1%). Turkey's Borsa Istanbul National 100 index declined 0.6% (up 38.1%). Russia's MICEX equities index was little changed (down 7.3%).

Junk bond mutual funds saw inflows of $123 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose six bps to a 14-week high 3.94% (up 47bps y-o-y). Fifteen-year rates gained six bps to 3.25% (up 47bps). Five-year hybrid ARM rates added four bps to 3.21% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up nine bps to a 15-week high 4.20% (up 53bps).

Federal Reserve Credit last week declined $5.0bn to $4.428 TN. Over the past year, Fed Credit slipped $2.4bn. Fed Credit inflated $1.608 TN, or 57%, over the past 259 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $0.3bn last week to $3.365 TN. "Custody holdings" were up $240bn y-o-y, or 7.7%.

M2 (narrow) "money" supply last week declined $20.8bn to $13.727 TN. "Narrow money" expanded $666bn, or 5.1%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits fell $17.6bn, and Savings Deposits declined $5.6bn. Small Time Deposits were unchanged. Retail Money Funds were little changed.

Total money market fund assets added $3.6bn to $2.748 TN. Money Funds rose $97bn y-o-y, or 3.6%.

Total Commercial Paper gained $5.5bn to $1.067 TN. CP gained $164bn y-o-y, or 18.2%.

Currency Watch:

The U.S. dollar index gained 1.3% to 94.916 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 0.1%. For the week on the downside, the South African rand declined 3.3%, the Swedish krona 2.5%, the Norwegian krone 2.0%, the Australian dollar 1.8%, the euro 1.5%, the Canadian dollar 1.4%, the Swiss franc 1.4%, the Brazilian real 1.3%, the New Zealand dollar 1.2%, the Mexican peso 0.7%, the British pound 0.5%, the Singapore dollar 0.3% and the Japanese yen 0.1%. The Chinese renminbi decline 0.45% versus the dollar this week (up 4.43% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.4% (up 3.4% y-t-d). Spot Gold slipped 0.5% to $1,274 (up 10.6%). Silver lost 1.9% to $16.752 (up 4.8%). Crude rose $2.06 to $53.90 (unchanged). Gasoline surged 5.4% (up 6%), and Natural Gas rose 1.7% (down 21%). Copper dropped 2.0% (up 24%). Wheat increased 0.3% (up 5%). Corn gained 1.2% (down 1%).

Trump Administration Watch:

October 26 – Bloomberg (Maria Tadeo, Esteban Duarte, and Rodrigo Orihuela): “President Donald Trump stoked the sense of drama surrounding his choice for the next Fed chairman Friday as he tweeted out a video teasing an announcement he said would come next week. The president is leaning toward appointing Federal Reserve Governor Jerome Powell to be the next chairman of the Fed, according to three people familiar with the matter. ‘People are anxiously awaiting my decision as to who the next head of the Fed will be,’ Trump said in short Instagram video he sent to his 41 million Twitter followers. ‘It will be a person who hopefully will do a fantastic job. And I have somebody very specific in mind.’”

October 26 – CNBC (Jeff Cox): “The race to see who will lead the Federal Reserve in 2018 and beyond is becoming a process of elimination, with two and perhaps three candidates remaining. President Donald Trump apparently has solidified his thinking and is now choosing between Fed Governor Jerome ‘Jay’ Powell and Stanford economist John Taylor. However, several twists have been interjected into the equation. ‘Trump changes his mind about it everyday,’… The site speculated that current Chair Janet Yellen remains in the mix because Trump is worried that removing her might disrupt the hardy stock market rally that has taken place since his election.”

October 26 – Associated Press (Marcy Gordon): “President Donald Trump and Republicans were at odds on Wednesday over changing the 401(k) retirement program to help finance tax cuts, with the president insisting the middle-class favorite will remain untouched and lawmakers open to revisions. Rep. Kevin Brady, the chairman of the House’s tax-writing panel, wouldn’t rule out changes to the program used by 55 million U.S. workers who hold some $5 trillion in their 401(k) accounts, a system that has become a touchstone of retirement security for the middle class. Earlier this week, Trump promised the program would be left alone, and appeared to bolster that pledge Wednesday, saying he moved swiftly to end speculation that the tax-deferred program may be changed because it’s vital for working Americans. But he went on to muddy the waters…”

October 25 – Wall Street Journal (Michael C. Bender and Kristina Peterson): “The fault lines within the Republican Party cracked further on Tuesday as feuding between President Donald Trump and senators intensified within the U.S. Capitol, and anti-establishment activists claimed political momentum outside of it. Arizona Sen. Jeff Flake, in a speech where he announced he wouldn’t seek re-election, sharply criticized Mr. Trump, declaring himself unwilling to follow the lead of a president whose behavior in office is ‘not normal’ and ‘dangerous to a democracy.’”

Federal Reserve Watch:

October 24 – New York Times (Binyamin Appelbaum): “The two men that President Trump is considering as replacements for Chairwoman Janet L. Yellen of the Federal Reserve have sharply different views on monetary policy, offering a stark test of Mr. Trump’s economic priorities. The choice pits a status quo candidate, a current Fed governor, Jerome H. Powell, against a Stanford University economics professor, John B. Taylor, who is celebrated by many conservative Republicans for his insistence that the economy would produce stronger growth if the Fed would just get out of the way. Mr. Trump said last week that he also might nominate Ms. Yellen, whom he said he liked ‘a lot,’ to a second term. He said Monday that a decision is ‘very, very close.’ At a meeting with Senate Republicans on Tuesday, Mr. Trump conducted an informal poll, asking for a show of hands in support of Mr. Powell and Mr. Taylor.”

U.S. Bubble Watch:

October 25 – Bloomberg (Sho Chandra): “U.S. purchases of new homes unexpectedly surged in September to the highest level in a decade as activity accelerated in the South after hurricanes Harvey and Irma… Single-family home sales rose 18.9% m/m to 667k annualized pace (est. 554k), the strongest since October 2007. Purchases in U.S. South surged 25.8% m/m to 405k rate, fastest since July 2007… Supply of homes at current sales rate dropped to 5 months from 6 months; 279,000 new houses were on market at end of September.”

October 22 – Financial Times (Gregory Meyer and Joe Rennison): “Intense price swings in cryptocurrencies are luring the highest-volume traders on Wall Street as they search for relief from the low volatility blanketing finAncial markets. Proprietary trading firms, which bet their own capital in markets from stocks to futures, are wading into bitcoin, ethereum and other cryptocurrencies better known as a playground for small speculators and a haven for money-laundering. DRW of Chicago, one of the world’s largest proprietary trading companies, has led the charge.”

China Bubble Watch:

October 23 – Financial Times (Gideon Rachman): “The Communist party congress in Beijing is a milestone. As the Xi Jinping era enters its second term, China’s challenge to the west is becoming more overt. There is a growing official confidence in Beijing — verging on arrogance — that China is on the rise, while the west is in decline. The Chinese challenge to the west is taking place on three fronts: ideological, economic and geopolitical. In the realm of ideas, the Communist party leadership is increasingly strident in repudiating western liberalism. President Xi and his colleagues argue that one-party rule works well for China — and should extend long into the future. There is more discussion of the idea that a ‘China model’ can be pushed in the rest of the world — as an alternative to America’s promotion of democracy. Just as the financial crisis of 2008 damaged the credibility of western economic ideas in China, so the election of Donald Trump and the fracturing of the EU have made it easier for China’s leaders to scorn western political practices.”

October 24 – Bloomberg: “Whether or not Chinese President Xi Jinping signals a successor Wednesday, he’s amassed enough power to effectively rule for decades. The Communist Party approved a sweeping charter revision at the end of its twice-a-decade congress Tuesday that elevates Xi to a status alongside the nation’s most vaunted political figures. The document put Xi’s contributions on par with those of Mao Zedong and Deng Xiaoping and also declared him the party’s ‘core’ leader indefinitely.”

October 24 – Bloomberg (Ting Shi and Keith Zhai): “Chinese President Xi Jinping unveiled a new leadership line-up that didn’t include a clear potential heir, breaking with a quarter-century-old succession system and raising the chances that he might seek to stay in office beyond 2022.”

October 25 – Wall Street Journal (Jeremy Page and Chun Han Wong): “The future of 1.4 billion people, the world’s second-largest economy and an emerging military juggernaut now lies largely in the hands of just one man: China’s President Xi Jinping. In unveiling a new top leadership lineup without a potential successor to Mr. Xi…, the Communist Party edged closer to resurrecting one-man rule, four decades after the death of Chairman Mao. The parade of the seven-man Politburo Standing Committee onto a red-carpeted podium in Beijing’s Great Hall of the People was the climax of a twice-a-decade process that placed Mr. Xi on a par with Mao in the party constitution and positioned him as pre-eminent leader even beyond his second five-year term… Mr. Xi is calculating that strongman rule will make it easier to add China to the ranks of rich, global powers and to project Chinese power globally.”

October 24 – CNBC (Sri Jegarajah): “China is looking to make a major move against the dollar's global dominance, and it may come as early as this year. The new strategy is to enlist the energy markets' help: Beijing may introduce a new way to price oil in coming months — but unlike the contracts based on the U.S. dollar that currently dominate global markets, this benchmark would use China's own currency. If there's widespread adoption, as the Chinese hope, then that will mark a step toward challenging the greenback's status as the world's most powerful currency. China is the world's top oil importer, and so Beijing sees it as only logical that its own currency should price the global economy's most important commodity. But beyond that, moving away from the dollar is a strategic priority for countries like China and Russia. Both aim to ultimately reduce their dependency on the greenback, limiting their exposure to U.S. currency risk and the politics of American sanctions regimes.”

October 22 – Financial Times (Gabriel Wildau and Tom Mitchell): “When Zhou Xiaochuan last week used the phrase ‘Minsky moment’ to warn against complacency during the current period of unexpectedly strong Chinese growth, it was not the first time the central bank chief had highlighted risks from excessive debt and speculative investment. But Mr Zhou, governor of the People’s Bank of China, would surely have known that the colourful phrase — redolent of the 2008 financial crisis, which resurrected the reputation of the US economist Hyman Minsky — would grab headlines. Mr Zhou’s statements about Chinese economics and policy have become increasingly candid in recent weeks, and central bank watchers say it is no accident. At the same meeting where he warned of Minsky-ite risks, Mr Zhou, 69, confirmed that he would retire ‘soon’ after serving since 2002… As rumours swirl about his possible successor, observers say Mr Zhou’s increasing bluntness reflects a final appeal directed towards Communist party elites to continue financial reforms that he has advocated but that have suffered setbacks over the past year.”

October 22 – Bloomberg: “China home prices rose in the fewest cities since January 2016, adding to signs of a property slowdown as curbs on buyers bite. New-home prices, excluding government-subsidized housing, in September rose in 44 of 70 cities tracked by the government, compared with 46 in August… Prices fell in 18 cities from the previous month and were unchanged in eight… President Xi Jinping renewed a yearlong call that homes are built ‘to be inhabited’ and not for speculation in his speech at the twice-a-decade Party Congress, inking the language in one of the nation’s top policy frameworks.”

October 26 – Bloomberg (Katia Porzecanski): “Hedge fund manager Kyle Bass, who has been betting against the yuan and warning of a collapse in China’s banking system, said the nation will one day come to regret handing Xi Jinping more power than any leader in decades. ‘Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,’ Bass… said… ‘Xi desperately seeks credibility, but true developed economies do not impose severe capital controls or move short-term rates hundreds of basis points overnight in attempts to manipulate their own currency.’ …‘Recklessly growing a banking system in pursuit of global economic growth and respect will cause severe financial instability in the years to come… The dangerous $40 trillion credit experiment with Chinese characteristics will run its course.’”

Central Banker Watch:

October 25 – Financial Times (Claire Jones): “When Mario Draghi evaluated the market reaction to the European Central Bank’s policy announcement on Thursday — its most important of the year — he allowed himself a wry smile. The ECB had just said that its bond buying spree in 2018 was likely to be less than half the size of that spent on quantitative easing this year. And yet the euro had fallen, stock markets were up. That investors bought the line that this was no ‘taper’ but merely a ‘downsize’ of eurozone QE says much about how far the region’s recovery has come over the past 12 months. The ECB’s communication was also ‘pretty effective’, Mr Draghi crowed, in the sense that most analysts had correctly predicted the ECB would promise to buy €30bn in bonds a month from January until September. But it was not just that. In the detail and in his post-meeting remarks, the ECB was more dovish than its watchers had forecast. The message to investors was clear. Under Mr Draghi’s watch, the bank would not make the same mistake it did in 2008 — and again in 2011 — when it raised interest rates, only to find itself having to reverse course, after the collapse of Lehman Brothers in the first instance and then during the region’s sovereign debt crisis. The central bank still reserved the right to boost QE…”

October 24 – Financial Times (Claire Jones): “The European Central Bank is gearing up for its most important meeting of the year, as senior officials gather to decide the fate of the €2.1tn asset purchase scheme that many credit with breathing life into the eurozone recovery. At issue is whether the ECB will declare this week that the economy has recovered sufficiently for quantitative easing to end next year… On one side of Thursday’s debate is Mario Draghi, the ECB’s president, who would like to preserve room for manoeuvre. On the other are more hawkish policymakers, notably from Germany, who have long been uncomfortable with the bank’s ultraloose monetary policy and are keen for the ECB finally to bring the curtain down on QE. The hawks accept that the ECB’s governing council cannot completely rule out buying more bonds. ‘We know that you cannot lock the door,’ said one person familiar with its deliberations. ‘But there are many on the council who want the message to be communicated that the door is nowhere near as open as it once was.’”

October 24 – Wall Street Journal (Christopher Whittall): “In the spring of 2016, traders at Germany’s central bank sat down with investment bank advisers in Frankfurt to discuss a once unthinkable project: how to build a multibillion-euro corporate-debt fund. Fast forward 18 months and the European Central Bank has changed the face of the euro corporate-debt market, having bought almost €120 billion ($141bn) of these securities. Financing costs for companies have fallen to the point where junk-rated firms can borrow at similar yields to U.S. government debt, prompting concerns it is fueling a bubble… ‘When the ECB steps back, it increases vulnerability in the market,’ said Hans Lorenzen, head of European credit strategy at Citigroup…”

October 24 – Financial Times (Dan McCrum): “Canada today, Europe tomorrow, then Japan, the US and England in quick succession. An eight-day parade of central bank meetings will signal the direction for monetary policy. Rather than a return to normal, another lap near zero seems a more likely outcome. The Bank of Canada, after increasing interest rates twice in quick succession, to 1%, has shifted tone. Governor Stephen Poloz recently said ‘we will continue to feel our way cautiously as we get closer to home’. Market expectations have slipped, with prices implying a less than 50/50 chance of another rise this year. Mario Draghi’s European Central Bank has reached the point when announcing a reduction in the €60bn of bonds purchased each month is inevitable. Yet the noise has been about calibration, leading to some new market jargon. Instead of a US-style ‘taper’, expect a European ‘scaling’ of purchases. Leaving its options open, while announcing say nine months of buying at a reduced level, would suggest normality remains a distant prospect.”

October 23 – Wall Street Journal (David Harrison and Harriet Torry): “Leaders of the world’s largest central banks indicated that weak inflation in advanced economies could prolong the postcrisis era of easy money policies. Despite a broad-based improvement in the global economy, wages and consumer prices remain stubbornly low, making central bankers wary of removing their stimulus measures too quickly, they told a Group of 30 banking conference… Their concerns contrasted with the generally upbeat tone that prevailed during last week’s fall meetings of the International Monetary Fund and World Bank, and they suggest that there is still work to do to get the world’s economy on track nearly a decade after the onset of the global financial crisis.”

Global Bubble Watch:

October 24 – Financial Times (Michael Mackenzie): “The endless debate over valuation metrics that have accompanied the storming bull run in stocks misses a much bigger point about investing in 2017. Thanks to the outsized role of central banks, it is the credit markets that run the show. If you want clues on when the bull run in equities is entering the red zone, keep your eyes on the corporate debt market. Before central banks’ quantitative easing policies engineered the current cycle of financial suppression, credit markets had already established their bona fides as an early warning system for investors. When equities peaked in October 2007, the credit market had already begun turning lower. A decade on, the risk premium, or additional yield, offered by corporate bonds over that of a US government bond is at its narrowest since 2007… The big lesson digested by investors since the financial crisis is that you need to own yield, and the money gushing into bond funds remains immense. About $241bn flowed into US high grade bond funds and exchange traded funds in the first nine months of the year, according to Bank of America Merrill Lynch estimates. That’s a whopping 34% higher than 2012’s full-year record of $180bn, the bank says. This high tide of money means companies can keep selling debt — running at a record $1.4tn pace this year in the US — at very low interest rates. The resulting higher leverage in the system helps explain why the equity market keeps updating the record books with alacrity.”

October 24 – CNBC (Fred Imbert): “As stocks have climbed to record levels this year, investors are neglecting one very important aspect of financial markets, according to analysts at Bank of America Merrill Lynch. That aspect is the existence of risk, said Nikolay Angeloff, equity-linked analyst… ‘The market seems to currently imply there is no way a shock can happen,’ he said. ‘We have now recorded 334 days without a 5% or more pullback, the fourth longest period since 1928,’ Angeloff said. ‘If it continues at this pace, it will be the least volatile October in history and third least volatile month ever.’”

Europe Watch:

October 26 – Bloomberg (Maria Tadeo, Esteban Duarte, and Rodrigo Orihuela): “Catalonia is headed for a dramatic confrontation with Spain after the insurgent region’s parliament voted to declare independence and the government in Madrid gained the power to oust its separatist leadership. The resolution approved by lawmakers in Barcelona said the establishment of Europe’s newest sovereign country had been set in motion. The portion of the text submitted to a vote included measures to ask all nations and institutions to recognize the Catalan Republic.”

October 24 – Wall Street Journal (Jeannette Neumann and Giovanni Legorano): “Spanish Prime Minister Mariano Rajoy asked lawmakers to grant him unprecedented power to remove the leaders of Catalonia and temporarily control the region from Madrid, a forceful move aimed at bringing the separatist movement to heel. Mr. Rajoy on Saturday said Spain’s central government ministries would administer the region’s agencies until new elections are called, a shake-up meant to quell Catalan leaders’ insurrection.”

October 24 – Reuters (Renee Maltezou): “Outgoing German Finance Minister Wolfgang Schaeuble urged debt-wracked Greece to stop blaming others for its financial woes and stick to a reform agenda instead of relying on debt relief. Schaeuble, a leading advocate of Greece’s tough austerity programs and one of Germany’s most powerful politicians, was elected speaker of its lower house of parliament… ‘When you ask others for loans, you cannot insult them for granting the loans. It doesn’t make sense. Greece’s problems are Greece’s problems,’ the conservative Christian Democrat said in an interview aired in Greece…”

Brexit Watch:

October 22 – Reuters (Alastair Macdonald): “Theresa May looked ‘despondent’, with deep rings under her eyes, EU chief executive Jean-Claude Juncker told aides after dining with the British prime minister last week… The report by a Frankfurter Allgemeine Zeitung correspondent whose leaked account of a Juncker-May dinner in April caused upset in London, said Juncker thought her ‘marked’ by battles over Brexit with her own Conservative ministers as she asked for EU help to create more room for maneuver at home.”

Japan Watch:

October 22 – Bloomberg (Isabel Reynolds): “Prime Minister Shinzo Abe’s gamble on an early election may have just won him a chance to lead Japan through 2021. Abe… saw his ruling coalition retain its two-thirds majority in the 465-member lower house in an election on Sunday. That boosts his chances at winning another term next year as head of his Liberal Democratic Party… The landslide win -- helped along by a disparate and weak opposition -- paves the way for more ultra-easy monetary policy that has boosted stocks to the highest level in two decades and helped Asia’s second-biggest economy expand for six straight quarters. Yet pressure is also growing for Abe to tackle Japan’s swollen debt, increase stagnant wages and overhaul the labor market to replenish a rapidly aging workforce.”

Emerging Market Watch:

October 24 – Bloomberg (Ben Bartenstein): “John-Paul Smith won’t give up on his bearish bet against developing nations. The founder of research firm Ecstrat Ltd., renowned for his early warning of Russia’s equity-market plunge in 1998 while at Morgan Stanley, is finding plenty of places to direct his pessimism. Among his latest concerns: authoritarian regimes in China and Russia as well as governments in Thailand, Turkey and the Philippines shifting in that direction. Smith’s caution runs counter to recent history, in which the world’s autocratic nations have rewarded bond traders with larger returns than democratic countries. While that may be true in the early stages of a regime, he says an authoritarian rule eventually hurts productivity with the value of debt and equity assets taking a hit. ‘I’m struggling to identify any attractive bets for emerging markets under authoritarian regimes,’ Smith said… ‘The notion that both sovereign and corporate governance throughout the world will gradually converge towards some supposed liberal norm is now well and truly dead.’”

October 26 – Bloomberg (Colleen Goko, Neo Khanyile, and Thembisile Dzonzi): “The rand and South African bonds extended declines as foreign investors dumped the country’s notes in the wake of government forecasts for higher public debt and wider budget deficits in the next three years. Stocks rose to a record as gains for rand hedges offset drops for banks and retailers. The nation’s currency extended its longest losing streak in a month, while the yield on benchmark 10-year notes rose to the highest in 16 months.”

Leveraged Speculation Watch:

October 23 – Financial Times (Robin Wigglesworth): “Two Sigma has vaulted over the $50bn assets under management mark to put it on a par with Renaissance Technologies as the biggest global quantitative hedge fund, as investors continue to pile into computer-powered investment strategies. The… hedge fund set up in 2001 by computer scientist David Siegel and mathematician John Overdeck has been growing rapidly in recent years. Two Sigma managed about $6bn in 2011, but jumped past the $50bn mark earlier this month… That puts it roughly level with Renaissance Technologies… and more than DE Shaw’s $45bn… Investor demand for algorithmic investing has exploded in recent years, even as the rest of the hedge fund industry has struggled with poor performance and outflows. Morgan Stanley recently estimated that various quant strategies, ranging from cheap next-generation exchange traded funds to pricey sophisticated hedge fund vehicles, have grown at 15% annually over the past six years, and now control about $1.5tn.”

Geopolitical Watch:

October 25 – Reuters (David Alexander, David Brunnstrom and Idrees Ali): “The recent warning from North Korea’s foreign minister of a possible atmospheric nuclear test over the Pacific Ocean should be taken literally, a senior North Korean official told CNN… ‘The foreign minister is very well aware of the intentions of our supreme leader, so I think you should take his words literally,’ Ri Yong Pil, a senior diplomat in North Korea’s Foreign Ministry, told CNN.”

October 21 – Reuters (Jim Finkle): “The U.S government issued a rare public warning that sophisticated hackers are targeting energy and industrial firms, the latest sign that cyber attacks present an increasing threat to the power industry and other public infrastructure. The Department of Homeland Security and Federal Bureau of Investigation warned in a report… that the nuclear, energy, aviation, water and critical manufacturing industries have been targeted along with government entities in attacks dating back to at least May.”

October 21 – Reuters (Dirimcan Barut and Tulay Karadeniz): “Turkish President Tayyip Erdogan showed no retreat from a diplomatic row with the United States…, castigating Washington for what he said an ‘undemocratic’ indictment against his security detail. His comments may further dash hopes of a quick resolution to an on-going diplomatic crisis between the NATO allies. Both Ankara and Washington have cut back issuing visas to each other’s citizens as ties have worsened.”

October 24 – Reuters (Maher Chmaytelli): “Iraqi Prime Minister Haider al-Abadi defended the role of an Iranian-backed paramilitary force at a meeting with U.S. Secretary of State Rex Tillerson… Tillerson arrived… hours after the Iraqi government rejected his call to send home the Popular Mobilisation, an Iran-backed force that helped defeat Islamic State and capture the Kurdish-held city of Kirkuk. In his opening remarks at the meeting with Tillerson, Abadi said Popular Mobilisation ‘is part of the Iraqi institutions,’ rejecting accusations that it is acting as an Iranian proxy.”

Friday Evening Links

[Bloomberg] Tech Surge Sends Stock Indexes to Record Highs: Markets Wrap

[Bloomberg] Treasuries Gain After Report That Trump Is Leaning Toward Powell for Fed Chair

[Reuters] Oil up 2 percent, Brent hits $60/bbl on support for extending curbs

[Reuters] Spain sacks Catalan government after independence declaration

[Bloomberg] Spain Gets Ready to Take Control After Catalonia Declares Independence

Thursday, October 26, 2017

Friday's News Links

[Bloomberg] Dollar Extends Gain on U.S. Tax Moves, Growth: Markets Wrap

[Bloomberg] Trump Leans Toward Jay Powell as Next Fed Chairman

[Bloomberg] U.S. Growth at Above-Forecast 3% on Consumer, Business Spending

[Bloomberg] Tax Plan Has Lobbyists Swarming, Lawmakers Asking What’s in It?

[Bloomberg] It’s Going to Stay a Yellen Fed No Matter Who Gets the Job

[Bloomberg] Fed Candidate Taylor Calls for Reforms That Echo Trump Agenda

[Politico] How the GOP Learned to Stop Worrying and Love Spending

[Bloomberg] Weidmann Says ECB Should Have Set Clear End Date for Bond Buying

[Bloomberg] ECB Sees Option for Ending QE With Short Taper in 2018

[Bloomberg] Catalonia’s Parliament Votes in Favor for Independence

[Bloomberg] Bond Volatility Shows Signs of Life as Rates Divergence Widens

[Reuters] Spain set to impose direct rule in Catalonia as crisis spirals

[Reuters] Japan consumer prices rise for ninth straight month; energy key driver

[Bloomberg] Australia Government in Crisis as Deputy PM Ejected in Citizenship Ruling

[Bloomberg] After $6 Billion Wipeout, Wine County Fires Still Imperil PG&E

[Bloomberg] On North Korea Border, Mattis Says Kim Threatening ‘Catastrophe’

[WSJ] Chinese Banks’ Capital Cushion Isn’t So Comfy

[WSJ] Billionaire Boom: More of Them, With More Billions

Thursday Evening Links

[Bloomberg] Dow Flirts With New High on Earnings, Euro Sinks: Markets Wrap

[Bloomberg] Draghi Goes Lower for Longer in Overhauling Bond Buying Plan

[CNBC] Luxury homes can't keep up with high demand

[Bloomberg] Rising Rents Are Pushing More Tenants Past the Breaking Point

[Reuters] Catalonia crisis deepens as region's leader rules out snap election

[FT] Draghi pulls off dovish trick with his QE ‘downsize’

Wednesday, October 25, 2017

Thursday's News Links

[Bloomberg] U.S. Stocks Rise on Strong Earnings, Euro Falls: Markets Wrap

[Bloomberg] ECB Slows Asset Purchases as Draghi Heads for Stimulus Exit

[CNBC] Trump apparently is having a hard time making up his mind for Fed chair

[Politico] Fed fight gets even weirder

[Bloomberg] House Leaders Face State-and-Local Storm to Begin Tax Debate

[AP] Trump, GOP at odds over using 401(k)s to pay for tax cuts

[Bloomberg] Kyle Bass Says History Will Remember Xi for Reckless Policies

[Bloomberg] Debt Rising Sends South Africa's Rand Tumbling, Stocks to Record

[NYT] As European Central Bank Eases Emergency Measures, Risks May Lurk

[Reuters] North Korea diplomat says take atmospheric nuclear test threat 'literally'

[WSJ] House Republicans Are Still Considering 401(k) Changes in Tax Overhaul

[FT] The future of QE: what to expect from Mario Draghi

[WSJ] China Edges Closer to One-Man Rule

[FT] Inside China’s secret ‘magic weapon’ for worldwide influence

Wednesday Evening Links

[Bloomberg] Stock Slide to Extend to Asia on Earnings Jitters: Markets Wrap

[Reuters] U.S. House speaker says tax plan entering most difficult phase: Reuters interview

[CNBC] Interest rates whipped higher in perfect storm of stronger US data and Fed speculation

[Reuters] U.S. business spending on equipment robust, new home sales surge

[Bloomberg] The Seven Men Who Will Rule China for the Next Five Years

[Reuters] Crisis over Catalan independence nears crucial few days

[Reuters] Beginning of the end for Europe's loose money? ECB to curb stimulus

[FT] Bonds sell off as participants eye central banks

Tuesday, October 24, 2017

Wednesday's News Links

[Bloomberg] Dollar Drops as U.S. Treasury Bonds Pare Losses: Markets Wrap

[Bloomberg] U.S. New-Home Sales Unexpectedly Jump to Highest Since 2007

[Bloomberg] China Unveils New Leaders With No Clear Xi Successor in Sight

[Bloomberg] World's Best Carry Trades Lose Appeal as Interest Rates in Focus

[CNBC] China has grand ambitions to dethrone the dollar. It may make a powerful move this year

[Reuters] BOJ sees less to fret about low inflation, policy on hold

[NYT] Trump’s Fed Finalists Offer a Clear Choice: Status Quo or Significant Change

[FT] European Central Bank divided over wisdom of declaring end to QE

[FT] Why credit is the Hotel California of markets

[FT] Record flows for exchange traded funds that track bond markets

[FT] Rates normality still a distant prospect

[FT] Chinese investment banks face new headwinds

Tuesday Evening Links

[Bloomberg] Strong U.S. Earnings Reports Push Dow to New High: Markets Wrap

[Reuters] U.S. dollar firm on report of support for Taylor as Fed chief

[Bloomberg] Trump Asks GOP Senators for Show of Hands on Fed Nominee Choices

[CNBC] The market is acting like risk no longer exists, Bank of America says

[Reuters] China to unveil new leadership line-up as Xi cements power

[Reuters] Don't blame others for your problems, Germany's Schaeuble tells Greece

[WSJ] Trump Asks GOP Senators: Should Taylor or Powell Be Fed Chief?

[WSJ] Rift Widens Within GOP in Battle for Control of Party

Monday, October 23, 2017

Tuesday's News Links

[Bloomberg] U.S. Stocks Rise on Blue-Chip Earnings; Euro Gains: Markets Wrap

[Reuters] Bond yields grind higher, Caterpillar smashes forecasts

[Bloomberg] Why This Stock Bear Sees No Hope for Emerging Markets

[Bloomberg] Xi's New Milestone Positions Him to Rule China for Decades More

[Bloomberg] China Is About to Get an Answer to Its Big Succession Question

[Reuters] China enshrines 'Xi Jinping Thought', key Xi ally to step down

[NYT] China’s Entrepreneurs Squirm Under Xi’s Tightening Grip

[WSJ] Central Bankers Cling to Stimulus Amid Weak Inflation

[FT] An assertive China challenges the west

[WSJ] What Happens When the ECB Steps Back From Corporate Bonds?

Monday Evening Links

[Bloomberg] Asian Stocks to Track U.S. Declines; Vix Jumps: Markets Wrap

[Bloomberg] U.S. Stocks Drop at Start of Big Week for Earnings: Markets Wrap

[Reuters] Bets on hawkish Fed flattens U.S. yield curve

[Reuters] Abadi defends role of Iranian-backed paramiltaries at meeting with Tillerson

Sunday, October 22, 2017

Monday's News Links

[Bloomberg] U.S. Stocks Climb at Start of Big Earnings Week: Markets Wrap

[Bloomberg] Catalan Separatists Plot Response to Spain’s Shock and Awe

[Reuters] Catalonia warns of civil disobedience as Madrid readies direct rule

[Bloomberg] China's Home Prices Rise in Fewest Cities Since January 2016

[Bloomberg] Draghi Seen Going for ECB Bond-Buying Limit in QE's Last Hurrah

[Bloomberg] Venezuela’s Behind on Its Debt and Facing Two Huge Bond Payments

[Bloomberg] Risky Business Set to Dominate High-Yield Bond Market in 2018

[Reuters] Defense chief Mattis in Asia, will discuss North Korea crisis with allies

[WSJ] ECB Taper Promises to Set Off Ripples Across Many Markets

[FT] China bank governor talks bluntly as retirement looms

Sunday Evening Links

[Bloomberg] Yen Falls, Japan Stocks Set to Gain on Abe Victory: Markets Wrap

[Bloomberg] Abe Placed to Lead Japan Through 2021 After Big Election Win

[Reuters] 'Despondent' May losing sleep on in-fighting, said Juncker: FAZ

[FT] Wall Street trading firms jump into cryptocurrencies

[FT, Tett] How we all became addicted to cheap debt

Saturday, October 21, 2017

Sunday's News Links

[Reuters] Catalonia's leaders fight off direct rule from Madrid

[Reuters] Stock market's future in Trump's hands as Federal Reserve chair pick looms

[Reuters] Abe to push reform of Japan's pacifist constitution after ruling bloc election win

[Reuters] Ramping up rhetoric, Turkey's Erdogan chastises U.S. over democracy

[Reuters] U.S. warns public about attacks on energy, industrial firms

[WSJ] Spain Moves to Seize Control of Catalan Government, Call Regional Elections

[FT] ECB poised to outline pace of bond buying

[WSJ] Hunt For Yield Fuels Boom in CLOs

Saturday's News Links

[Reuters] Trump expected to pressure China's Xi to rein in North Korea: officials

[Reuters] Spain will sack Catalan government, call regional election

[Bloomberg] Taylor Has Complex History to Overcome If Picked as Fed Chair

[Bloomberg] Yellen Defends Legacy Amid Uncertainty Over Fed Leadership

[Reuters] Turkish banks could face big U.S. fines over Iran: report

[WSJ] Trump Signals Yellen Still a Top Candidate for Fed Job After Meeting This Week

[FT] Yellen says Fed might turn to QE in another downturn

Friday, October 20, 2017

Weekly Commentary: Arms Race in Bubbles

The week left me with an uneasy feeling. There were a number of articles noting the 30-year anniversary of the 1987 stock market crash. I spent “Black Monday” staring at a Telerate monitor as a treasury analyst at Toyota’s US headquarters in Southern California. If I wasn’t completely in love with the markets and macro analysis by that morning, there was no doubt about it by bedtime. Enthralling.

As writers noted this week, there were post-’87 crash economic depression worries. In hindsight, those fears were misplaced. Excesses had not progressed over years to the point of causing deep financial and economic structural maladjustment. Looking back today, 1987 was much more the beginning of a secular financial boom rather than the end. The crash offered a signal – a warning that went unheeded. Disregarding warnings has been in a stable trend now for three decades.

Alan Greenspan’s assurances of ample liquidity – and the Fed and global central bankers’ crisis-prevention efforts for some time following the crash – ensured fledgling financial excesses bounced right back and various Bubbles hardly missed a beat. Importantly, financial innovation and speculation accelerated momentously. Wall Street had been emboldened – and would be repeatedly.

The crash also marked the genesis of government intervention in the markets that would evolve into the previously unimaginable: negative short-term rates, manipulated bond yields, central bank support throughout the securities markets, Trillions upon Trillions of central bank monetization and the perception of open-ended securities market liquidity backstops around the globe. Greenspan was the forefather of the powerful trifecta: Team Bernanke, Kuroda and Draghi. Ask the bond market back in 1987 to contemplate massive government deficit spending concurrent with near zero global sovereign yields – the response would have been “inconceivable.”

Articles this week posed the question, “Could an ’87 Crash Happen Again.” There should be no doubt – that is unless the nature of markets has been thoroughly transformed. Yes, there are now circuit breakers and other mechanisms meant to arrest panic selling. At the same time, there are so many more sources of potential self-reinforcing selling these days compared to portfolio insurance back in 1987. Today’s derivatives markets – where various strains of writing market insurance (“flood insurance during a drought”) have become a consistent and popular money maker – make 1987’s look itsy bitsy.

The record $3.15 TN hedge fund industry barely existed in 1987. The $4.1 TN ETF complex didn’t exist at all. To be sure, the amount of trend-following finance dominating present-day global markets is unprecedented. Moreover, the structure of contemporary finance has already (repeatedly) proven itself conducive to financial dislocation. Over the years – and especially post-2008 reflation – boom and bust dynamics have turned only more forceful. Central bank fixation on countering the bust has precariously propelled the latest boom.

The ’87 crisis response fatefully unleashed the “Terminal Phase” of Japanese Bubble excess – the consequences of which persist to this day. Decades of exceptional development flushed away with a few years of recklessness. In China, officials over the years claimed to have learned from the dismal Japanese Bubble experience. Clearly, they did not. The 2008 crisis was multiples of 1987. The recent post-crisis reflation, as well, has been at an incredibly grander and prolonged scale. This has ensured that China’s Bubble and “Terminal Phase” have inflated so far beyond Japan’s eighties fiasco.

Bubble mirage had Japan’s economy and banking system poised to lead the world. Now it’s China. In contrast to Japan’s beleaguered post-Bubble political class, China’s communist party won’t have to agonize over elections.

China faces extremely serious issues – and I’ll assume enlightened Chinese communist party officials are not oblivious. Beijing was the leading culprit behind my disquiet this week. Most focused elsewhere. The Trump administration’s tax package made initial headway in the Senate. There was also market-friendly reporting that Federal Reserve governor “Jay” Powell may be Trump’s leading candidate for Fed chairman. With securities markets rising ever higher into record territory, who cares about some communist party gathering? Heck, is communism even pertinent in today’s tantalizing New Age? Did you see those cryptocurrencies this week?

Chinese President Xi Jinping has a plan. China will be the world’s super power. The great communist party, with its progressive system of meritocracy, is the only mechanism to adroitly guide Chinese “new era” development. And President Xi is the master – the modern-day Emperor – with the depth of experience, the vision, the charisma, the power to ensure China’s rightful place on the world stage. He embodies the benevolent dictator for the masses; the resolute commander for an increasingly hostile world; the deity to guide and protect an insecure society. Spooky stuff.

October 20 – Financial Times (Tom Mitchel): “‘Government, military, society and schools — north, south, east and west — the party is leader of all,’ Mr Xi proclaimed in a three-and-a-half hour speech… to the party congress. Next week the congress will appoint a new Politburo Standing Committee stacked with Xi loyalists. One person who advises senior officials attributes Mr Xi’s now seemingly unassailable dominance of Chinese politics to a Machiavellian insight. ‘Because of the economic prosperity of the reform era, almost everyone in officialdom was corrupted,’ he says. ‘Xi used this fact as leverage to scare everyone. They have to follow him because everyone is vulnerable. All you have to do is investigate them.’ In his marathon address to the congress this week, Mr Xi positioned himself not just as modern China’s third great leader after Mao and Deng, but also the heir to a glorious Communist tradition stretching back to Russia’s Bolsheviks. ‘A hundred years ago, the salvos of the October Revolution brought Marxism-Leninism to China,’ Mr Xi said, noting that the Chinese Communist party was founded just four years later. ‘From that moment on, the Chinese people have had in the party a backbone for their pursuit of national independence and liberation, prosperity and happiness.’ According to Mr Xi’s arc of history, China is only three decades away from resuming its traditional and rightful place as the world’s dominant economic and cultural power, with the US caught in a downward spiral accelerated by Mr Trump’s election.”

Xi’s speech was said to have left young devotees sobbing (and previous leadership yawning and checking their watches). Xi is moving aggressively forward with a consolidation of power – assiduously crafting a cult of leadership. He has shrewdly perched his government’s skill and competence up on a high pedestal, with its leader the unassailable “man now regarded as China’s great centraliser and most powerful ruler since Mao Zedong, the party’s revolutionary hero.”

October 17 – Bloomberg (Ting Shi): “President Xi Jinping warned of ‘severe’ challenges while laying out a road map to turn China into a leading global power by 2050, as he kicked off a twice-a-decade party gathering expected to cement his influence into the next decade. In a speech that ran for more than three hours on Wednesday, Xi declared victory over ‘many difficult, long overdue problems’ since he took power in 2012. He said China would continue opening its doors to foreign businesses, defend against systemic risks, deepen state-run enterprise reform, strengthen financial sector regulation and better coordinate fiscal and monetary policy. ‘Right now both China and the world are in the midst of profound and complex changes,’ Xi said. ‘China is still in an important period of strategic opportunity for development. The prospects are very bright, but the challenges are very severe.’”

Xi and Chinese leadership are battening down the hatches. Recall that less than two years ago the Chinese Bubble was at the brink. It was Xi and his “national team” that took incredible measures to reverse a dynamic of collapsing markets and exodus from the Chinese currency. In short, confronting an inconveniently timed bust, they resorted to stoking their historic Bubble. Why not – everyone else has gotten away with it.

The upshot has been two additional (fateful) years of rapidly inflating apartment prices and economic maladjustment. There has been as well a couple more years of historic compounding Credit growth. It was only fitting that Xi’s overstated exultation elicited a shot of sobriety from China’s respected central bank chief (from his catbird seat).

October 19 – Financial Times (Gabriel Wildau): “China’s central bank governor has warned in unusually stark language of the risks from excessive debt and speculative investment, as he used the Communist party congress to caution that the country’s fast-growing economy faced a possible ‘Minsky moment’. ‘When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified,’ Zhou Xiaochuan, governor of the People’s Bank of China, said at a meeting on the sidelines of the Communist party gathering in Beijing. ‘If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.’”

Credit growth accelerated into the communist party congress. Chinese Total Social Financing (total non-governmental Credit) expanded a stronger-than-expected $277 billion during September. Year-to-date Total Social Financing growth of $2.375 TN is running 16.3% above last year’s record pace. Lending was led by booming demand for household real estate purchases. Total Chinese Credit could surpass $4.0 TN in 2017, easily outdoing U.S. Credit growth at the height of our mortgage finance bubble. Despite all the talk about excessive debt levels and the need for deleveraging, Chinese officials have yet to get their arms around a historic credit bubble.

Xi spoke of a focus on financial stability. His comment, “Houses are built to be inhabited, not for speculation,” reiterates official concern for housing prices. Past efforts to counteract apartment inflation with added supply failed to dampen enthusiasm for speculating on ever higher prices. At this late stage of such a prolonged Bubble, only harsh medicine will suffice. Prices will need to fall and speculation punished for the spell to be broken.

Bubbles are always about a redistribution and destruction of wealth. Its unparalleled global scope makes the current Bubble is so concerning. Xi now owns the Chinese Bubble, and there would appear little prospect that he’ll ever be willing to take responsibility for the damage wrought. Fingers will be pointed directly at foreigners, foremost the U.S. and Japan.

I believe the global government finance Bubble - history’s greatest financial boom - will conclude this long Credit cycle going back to the conclusion of WWW II. As the “granddaddy of Bubbles,” it is fitting that things turn really crazy during an exceptionally prolonged “Terminal Phase.” We’re at the point where no one is willing to risk bursting the Bubble, certainly not timid central bankers.

There’s so much at stake. Importantly, from the global Bubble perspective, a faltering Bubble would risk surrendering power on the global stage. Xi certainly doesn’t seem willing to see a faltering China retreat from global ascendency. The same can be said for Shinzo Abe in Japan. Here at home, making America great again gets no easier with a bursting Bubble. And while there’s no President of Europe, Mario Draghi has assumed the role of defender of European resurgence with an interminable windfall of free “money.”

It’s all quite unsettling. Global finance has run completely amok. This has been unfolding for so long now that few are concerned. Most revel in asset inflation drunkenness. Instead of safeguarding sound finance and stable money – the bedrock of civil societies and peaceful global relationships - governments and central banks around the world are harboring Bubble excesses like never before. This ensures catastrophic consequences when Bubbles burst. It has reached the point where these Bubbles have become part and parcel to global power, with countries not willing to risk being left behind. It’s as if it has become An Arms Race in Bubbles.

Three decades of serial booms and busts begat An Age of Government Strongmen – and weak central bankers. It would only be fitting for President Trump to opt for the milquetoast Jerome Powell to shepherd Fed inflationist doctrine, perhaps even trying to placate his base with a slot on the FOMC for John Taylor. Apparently, there are more urgent fights these days than reform at the Federal Reserve. Everywhere, it seems, various fights are taking precedence over stable finance. It just makes one dread the kind of conflicts that could break out when this historic global financial boom buckles. But, then, who on earth cares? The Dow is mere days away from 24,000, and Bitcoin is surely poised to make a run to $10,000!

For the Week:

The S&P500 gained 0.9% (up 15.0% y-t-d), and the Dow jumped 2.0% (up 18.0%). The Utilities rose 1.6% (up 12.8%). The Banks rallied 2.3% (up 10.2%), while the Broker/Dealers were little changed (up 20.0%). The Transports added 0.4% (up 10.3%). The S&P 400 Midcaps gained 0.9% (up 10.5%), and the small cap Russell 2000 added 0.4% (up 11.2%). The Nasdaq100 increased 0.3% (up 25.6%). The Semiconductors rose 1.0% (up 35.8%). The Biotechs slipped 0.4% (up 38.0%). With bullion sinking $24, the HUI gold index fell 2.6% (up 8.3%).

Three-month Treasury bill rates ended the week at 109 bps. Two-year government yields rose eight bps to 1.58% (up 39bps y-t-d). Five-year T-note yields jumped 12 bps to 2.02% (up 9bps). Ten-year Treasury yields gained 11 bps to 2.39% (down 6bps). Long bond yields rose nine bps to 2.90% (down 17bps).

Greek 10-year yields were little changed at 5.51% (down 152bps y-t-d). Ten-year Portuguese yields declined three bps to 2.31% (down 144bps). Italian 10-year yields fell four bps to 2.04% (up 23bps). Spain's 10-year yields gained five bps to 1.66% (up 28bps). German bund yields rose five bps to 0.45% (up 25bps). French yields gained five bps to 0.86% (up 18bps). The French to German 10-year bond spread was little changed at 41 bps. U.K. 10-year gilt yields slipped four bps to 1.33% (up 10bps). U.K.'s FTSE equities slipped 0.2% (up 5.3%).

Japan's Nikkei 225 equities index jumped 1.4% (up 12.3% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.075% (up 4bps). France's CAC40 added 0.4% (up 10.5%). The German DAX equities index was about unchanged (up 13.2%). Spain's IBEX 35 equities index slipped 0.3% (up 9.3%). Italy's FTSE MIB index dipped 0.3% (up 16.2%). EM equities were mostly lower. Brazil's Bovespa index declined 0.8% (up 26.8%), while Mexico's Bolsa was little changed (up 9.5%). India’s Sensex equities index slipped 0.1% (up 21.6%). China’s Shanghai Exchange declined 0.4% (up 8.9%). Turkey's Borsa Istanbul National 100 index jumped 2.1% (up 38.8%). Russia's MICEX equities index dropped 1.3% (down 7.2%).

Junk bond mutual funds saw outflows of $450 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to 3.88% (up 36bps y-o-y). Fifteen-year rates dipped two bps to 3.19% (up 40bps). Five-year hybrid ARM rates added a basis point to 3.17% (up 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to a five-week low 4.11% (up 48bps).

Federal Reserve Credit last week jumped $13.6bn to $4.433 TN. Over the past year, Fed Credit slipped $2.1bn. Fed Credit inflated $1.622 TN, or 58%, over the past 258 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.6bn last week to $3.365 TN. "Custody holdings" were up $243bn y-o-y, or 7.8%.

M2 (narrow) "money" supply last week jumped $27.6bn to a record $13.748 TN. "Narrow money" expanded $677bn, or 5.2%, over the past year. For the week, Currency was little changed. Total Checkable Deposits jumped $49.3bn, while Savings Deposits declined $21.8bn. Small Time Deposits were about unchanged. Retail Money Funds were unchanged.

Total money market fund assets added $2.9bn to $2.744 TN. Money Funds rose $109bn y-o-y, or 4.1%.

Total Commercial Paper declined $2.0bn to $1.062 TN. CP gained $157bn y-o-y, or 17.3%.

Currency Watch:

The U.S. dollar index gained 0.7% to 93.701 (down 8.5% y-t-d). For the week on the downside, the New Zealand dollar declined 3.0%, the South African rand 2.8%, the Brazilian real 1.5%, the Japanese yen 1.5%, the Canadian dollar 1.3%, the Norwegian krone 1.2%, the Swiss franc 1.0%, the Singapore dollar 0.9%, the Australian dollar 0.9%, the British pound 0.7%, the Swedish krona 0.7%, the Mexican peso 0.5%, the euro 0.3% and the South Korean won 0.2%. The Chinese renminbi declined 0.62% versus the dollar this week (up 4.90% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was little changed (up 1.0% y-t-d). Spot Gold fell 1.8% to $1,281 (up 11.1%). Silver dropped 1.9% to $17.078 (up 6.9%). Crude added 39 cents to $51.84 (down 4%). Gasoline rose another 3.4% (unchanged), while Natural Gas fell 2.8% (down 22%). Copper gained 1.0% (up 26%). Wheat sank 3.1% (up 4%). Corn fell 2.0% (down 2%).

Trump Administration Watch:

October 20 – Bloomberg (Erik Wasson and Saleha Mohsin): “The U.S. posted its largest budget deficit since 2013 in the fiscal year that just ended, as a pickup in spending exceeded revenue gains. The federal government’s gap grew to $665.7 billion in the 12 months through Sept. 30, compared with a $585.6 billion shortfall in fiscal 2016… Treasury Secretary Steven Mnuchin and Budget Director Mick Mulvaney, in a statement accompanying the report, blamed weaker-than-expected tax receipts on historically ‘sub-par’ economic growth.”

October 19 – Wall Street Journal (Demetri Sevastopulo): “CIA director Mike Pompeo on Thursday warned that North Korea could be just ‘months away’ from developing the ability to strike America with a nuclear-armed ballistic missile. Speaking at the Foundation for Defense of Democracies, Mr Pompeo said the US had to deal with North Korea under the assumption that Kim Jong Un was ‘on the cusp’ of being able to hit the US after a spate of missile tests that have helped his scientists improve their expertise. ‘We ought to behave as if we are on the cusp of them achieving that objective,’ he said when asked if Pyongyang was “perilously close” to developing that capability.”

October 19 – Wall Street Journal (Michael C. Bender and Felicia Schwartz): “Secretary of State Rex Tillerson warned China on Thursday that the U.S. has an arsenal of economic weapons to force Beijing to address trade imbalances and a continuing territorial dispute in the South China Sea. ‘We can do this one of two ways,’ Mr. Tillerson said during a 35-minute interview in his State Department office, seeming at times to speak directly to his Chinese counterparts. ‘We can do it cooperatively and collaboratively, or we can do it by taking actions and letting you react to that.’”

October 19 – Politico (Ben White, Victoria Guida and Josh Dawsey): “Federal Reserve Governor Jerome Powell is the leading candidate to become the chair of the U.S. central bank after President Donald Trump concluded a series of meetings with five finalists Thursday, three administration officials said. The officials cautioned that Trump, who met with current Chair Janet Yellen for about half an hour on Thursday, has not made a final decision.”

October 16 – Bloomberg (Jennifer Jacobs, Saleha Mohsin, and Craig Torres): “Stanford University economist John Taylor, a candidate for Federal Reserve chairman, made a favorable impression on President Donald Trump after an hour-long interview at the White House last week, several people familiar with the matter said. Former Fed board governor Kevin Warsh has meanwhile seen his star fade within the White House, three of the people said. They would not say why but Warsh’s academic credentials are not as strong as other candidates, and his tenure on the Fed board has been criticized by a diverse group of economists ranging from Scott Sumner to Nobel laureate Paul Krugman. Trump gushed about Taylor after his interview, one of the people said.”

October 17 – Bloomberg (Garfield Clinton Reynolds): “Investors are still betting a Federal Reserve run by economist John Taylor would mean higher U.S. interest rates despite his signaling he would be more flexible in setting monetary policy than his academic work suggests. Reflecting such suspicion, the dollar rose and the 10-year U.S. Treasury note fell on Monday after Bloomberg News reported Taylor… impressed President Donald Trump in a recent White House interview. Driving those trades was speculation that the 70 year-old Taylor would push rates up to higher levels than a Fed helmed by its current chair, Janet Yellen. That’s because he is the architect of the Taylor Rule, a tool widely used among policy makers as a guide for setting rates since he developed it in the early 1990s.”

October 19 – Bloomberg (Laura Litvan and Erik Wasson): “The year’s most divisive fights in Congress are set to converge in a bitter partisan clash in December that could result in a U.S. government shutdown. The unresolved battles -- over a wall on the U.S.-Mexico border, immigration, health-care subsidies, Planned Parenthood and storm relief -- are hanging over talks on must-pass spending legislation to keep the government open after Dec. 8. The spending measure is at risk of becoming so weighted with controversial items that it collapses. ‘The laundry list of things they want to put on it grows every day,’ said Jim Dyer, a former House Appropriations Committee Republican staff director. Even without contentious issues, completing a trillion-dollar spending bill in time would be a tall order.”

October 15 – Politico (Rachael Bade and Burgess Everett): “Republicans’ unified control of Washington is triggering an identity crisis within the party over what it means to be a fiscal conservative in the age of Donald Trump: Do deficits even matter, or do tax cuts trump all? If the White House and GOP lawmakers can’t come to terms on the matter soon, it could very well doom Trump’s cherished tax reform initiative. Conservatives have long railed against the nation’s now-$20 trillion debt. But now that they’re desperate to pass a tax bill, many Republicans’ repulsion to red ink is fading fast. Yet some deficit hard-liners are holding the line, insisting that tax cuts be paid for, either by axing deductions or with stiff spending cuts. The debate is causing some hard feelings within the GOP.”

October 18 – Financial Times (Shawn Donnan): “Republicans in Congress are examining how to block a potential move by Donald Trump to pull the US out of the North American Free Trade Agreement as members of the president’s own party also warn him that any such move could put a joint push for tax cuts at risk. The preparations come amid rising concerns on Capitol Hill and among US businesses about changes to the 23-year-old trade pact with Canada and Mexico that the Trump administration is pursuing and what they fear are ‘poison pill’ proposals intended to force a collapse of increasingly bitter negotiations. They also illustrate how the Trump administration is becoming isolated in Washington on trade and other issues and how pro-trade Republicans are gearing up for another fight with the president to protect a Nafta they see as vital to the US economy.”

October 16 – Reuters (David Lawder and Dave Graham): “The top U.S. and Canadian and trade officials… accused each other of sabotaging efforts to renegotiate the North American Free Trade Agreement, even as they and Mexico agreed to extend talks into the first quarter of 2018. A seven-day round of talks… ended in acrimony over aggressive U.S. demands on autos, a five-year sunset clause on the pact itself and Canada’s dairy regulations, among other key issues. Canada’s foreign minister, Chrystia Freeland, accused Washington of pursuing a ‘winner take all’ approach.”

Federal Reserve Watch:

October 19 – Wall Street Journal (Kate Davidson): “After criticizing the Federal Reserve for the past eight years, Republicans have a chance to change the course of the central bank when President Donald Trump nominates someone to take the helm in early 2018. But they are divided over which direction monetary policy should take. GOP efforts to subject the Fed to more scrutiny and limit its discretion gained traction in the wake of the financial crisis, especially in the House, and Republicans hammered Fed officials over why they continued to keep interest rates so low, saying the policy hurt savers and distorted markets. Now, with the prospect of a Republican-led tax cut and faster economic growth on the horizon, some in the party are wary of a choice that could disrupt markets or cut off growth by lifting rates higher to keep inflation under control. ‘I’m not sure there’s a clear way that Republicans think about the Fed,’ said Tony Fratto, who worked on economic issues in the George W. Bush administration. ‘When you ask, ‘What would you want from a new Fed chair,’ I think it’s a little bit all over the place.’”

October 18 – Reuters (Lindsay Dunsmuir): “The U.S. economy expanded at a modest to moderate pace in September through early October despite the impact of hurricanes on some regions, the Federal Reserve said in its latest snapshot of the U.S. economy…, but there were still few signs of an acceleration in inflation. ‘Despite widespread labor tightness, the majority of districts reported only modest to moderate wage pressures,’ the U.S. central bank said in its Beige Book report of the economy, derived from talking to business contacts across the country.”

U.S. Bubble Watch:

October 16 – Financial Times (Nicole Bullock, Robin Wigglesworth, John Authers and Christian Pfrang): “Art Cashin recalls the heady atmosphere that dominated the New York Stock Exchange for much of 1987. After five or six straight days of the market rallying, senior partners at brokerage trading desks would instruct the junior partners [traders] to ‘lighten up a little bit’, Mr Cashin says. ‘When they did, the market just went higher.’ ‘The market in 1987 was relentless,’ says Mr Cashin, director of floor operations for UBS Financial Services at NYSE, who began working on ‘the floor’ as an assistant clerk in 1959… ‘Unfortunately there are some similarities [to today]. It reminds me a bit of what we have seen this year.’”

October 18 – CNBC (Michael Santoli): “The 30th anniversary of the 1987 crash is a perfect occasion to take in the vivid accounts of a headlong bull market skidding violently off course. ‘The bull is dead,’ a senior trader at the old Shearson Lehman told a reporter. ‘I've been in the business 33 years and it's one of the worst corrections I have ever seen.’ His counterpart at the former Donaldson Lufkin & Jenrette added, ‘We have young traders out here with their eyes popping out of their heads.’ An analyst at Josephthal & Co. reported, ‘My guts are numb. It's unreal; it's just unreal.’ But here's the thing: All of those accounts of market carnage were made the Friday before the crash on Monday, Oct. 19, 1987, when the Dow Jones industrial average plunged 22.6% in the worst single session in Wall Street history.”

October 16 – Bloomberg (Cecile Vannucci): “The number of speculators’ bets against CBOE Volatility Index futures just hit a fresh record, but so did the number of VIX contracts outstanding. Wagering on equity swings has become increasingly popular this year as the gauge of stock swings heads for its lowest ever annual average. While the VIX is up this month, history shows that it tends to fall in the fourth quarter.”

October 19 – Wall Street Journal (Riva Gold): “Stocks continue to hit record highs, yet those pushing them there are trading less and less. The number of stocks and exchange-traded products changing hands in the U.S. and Europe has fallen steadily in recent months as ultralow volatility, a lack of market-moving news and the rising popularity of passive investment funds have kept many investors on the sidelines. Some investors are mulling what the drop-off says about a global equity rally that has lifted many markets, including in the U.S., to new highs.”

October 18 – CNBC (John W. Schoen): “Voters worried that Congress and the White House can't tame federal borrowing may be overlooking another big debt bomb closer to home. States are falling further behind in the money they owe public employee pension funds, leaving taxpayers on the hook, according to… S&P Global Ratings… Despite recent stock market gains, state governments are not setting aside enough money to keep up with the rising liability of paying public worker pensions and other retirement benefits… In all but two states (Michigan and Alabama), the money set aside as a share of what's needed fell last year to an average ratio of 68%. That means states have funded just 68 cents for every dollar they owe in future payments.”

October 19 – Bloomberg (Yuji Nakamura and Lulu Yilun Chen): “Tezos, the startup which raised $232 million in a July initial coin offering, plunged on derivative exchanges after revealing a management spat and little progress in developing its product. Derivatives on Tezos tokens fell as much as 31%... On BitMEX, December futures on the tokens plunged 58% as traders unwound bets the project would be launched before the end of the year. The actual tokens have yet to be created. Founders Arthur and Kathleen Breitman said in a blog post… that recruitment had come to a standstill and little work has been done on their product: a better blockchain for digital currencies.”

China Bubble Watch:

October 18 – Wall Street Journal (Nathaniel Taplin): “Politicians are widely distrusted by citizens in most societies, but surprisingly often they say what they actually mean. On Wednesday, Chinese President Xi Jinping opened the nation’s twice-a-decade congress—where the leadership for the coming five years will be selected—with a robust and lengthy defense of the Communist Party’s role as captain of the economy, and a series of rote gestures toward further market-based economic reforms. Investors should take him at his word."

October 16 – Wall Street Journal (Lingling Wei): “As a new president, Xi Jinping promised to give markets more room in China’s economy. He even considered scrapping a hulking ministry supervising state-owned companies. Today, Mr. Xi has set aside such notions. In today’s China, state intervention attempts to engineer economic outcomes, ranging from raw-materials prices to the value of stocks and the currency. State-owned corporate giants are bulking up, with private capital funneled into them for support. The agency Mr. Xi toyed with dismantling is back in the driver’s seat. Going into his second term, Mr. Xi finds relying on markets too risky and state capitalism a better model. When the Chinese leadership talks of reform today it doesn’t mean economic liberalization as it did in, say, the era of Deng Xiaoping. It means fine-tuning a government-led model.”

October 17 – CNBC (Everett Rosenfeld): “Chinese President Xi Jinping… stressed the benefits of ‘socialism with Chinese characteristics’ at the beginning of the Communist Party's once-every-five-year Party Congress. The president told the assembled members of the party that his nation's prospects are bright, but it faces severe challenges. He proceeded to lay out his vision for a socialist future. ‘We will unite the Chinese people of all ethnic groups and lead them to a decisive victory in building a moderately prosperous society in all respects and in the drive to secure the success of socialism with Chinese characteristics for a new era,’ he said…”

October 15 – Reuters (Lusha Zhang and Kevin Yao): “Chinese banks extended more loans than expected in September, buoyed by demand from home buyers and companies, even as the government tightened the screws to wean the economy off its years-long addiction to cheap debt… Both bank lending and total social financing, a broad measure of credit and liquidity, look set to hit another record high this year… In September, banks extended 1.27 trillion yuan ($193.05bn) in net new yuan loans… Analysts polled by Reuters had predicted 1.1 trillion yuan, compared with August’s 1.09 trillion yuan… Total social financing (TSF), a broad measure of credit and liquidity in the economy, rose to 1.82 trillion yuan in September from 1.48 trillion yuan in August.”

October 18 – New York Times (Keith Bradsher): “China turned to a tried-and-true recipe to cook up another three months of respectable growth. Heavy lending by state-owned banks, brisk government spending and strong exports helped keep China’s economy growing briskly and steadily. China’s statistical agency said… that the economy had grown 6.8% in the July-to-September period, compared with the same quarter a year ago. President Xi Jinping had put heavy pressure on practically every government ministry to make sure that the economy put in a solid performance. The Chinese Communist Party’s twice-a-decade congress began this week, and it’s a time when the country’s leaders want predictability and an image of strength… Chinese officials say they are working hard to control China’s ballooning debt. The third quarter may not be a good example of that. Measures of credit and money supply grew faster than the economy itself in August and September…”

October 17 – Bloomberg (Nisha Gopalan and Andy Mukherjee): “So what if there's a lot of China debt out there, and the pile just keeps getting bigger? Investors, at least, appear not to care. As President Xi Jinping prepares for a second five-year term, he's already managed to convince markets that China's deleveraging train has left the station -- never mind that there's no evidence state-owned enterprises have even begun to shed assets or debt, more than a year after the government rolled out steps to rein in borrowing. At the end of 2012, just before Xi took office, as many as 986 nonfinancial state-owned and state-linked enterprises had a little more than $2 trillion in assets supported by around $775 billion in shareholders' funds, an analysis by Gadfly shows. Assets have since swelled to $3.6 trillion, while the equity cushion has grown to only $1.25 trillion. Financial leverage… has thus risen to 286%, from less than 274%, on the eve of this week's twice-a-decade Communist Party congress.”

October 16 – Bloomberg: “China’s factory prices jumped more than estimated, as domestic demand remained resilient and the government continued to reduce excess industrial capacity. Consumer price gains matched projections. The producer price index rose 6.9% in September from a year earlier, versus an estimated 6.4%.”

October 16 – Bloomberg: “They’ve made billions of dollars helping sell everything from iPhones to hairdryers on China’s burgeoning online shopping platforms. Now, tech giants led by Alibaba Group Holding Ltd.’s finance affiliate are making money off the loans consumers use to buy those products. Amid surging demand from cash-strapped Chinese millennials, companies such as Ant Financial -- controlled by Alibaba’s billionaire founder Jack Ma -- have been extending more consumer loans. The firms are then packaging the debt into complex financial products that they then sell on to investors, with Ant Financial selling at least 149 billion yuan ($23bn) of the so-called asset-backed securities this year… But the new practice is raising red flags for some analysts, who say there needs to be more transparency about how the securities, known as ABS, are created.”

October 18 – Financial Times (Tom Hancock and Gabriel Wildau): “Ocean Flower Island is a vision of luxury, Chinese-style. A man-made archipelago off the coast of the tropical island of Hainan in the South China Sea, it will boast thousands of apartments, 28 museums and 58 hotels including one which is ‘7-star level’ and another shaped like a European castle. Gold-painted Mercedes golf carts whisk potential customers to the sales centre for the project, where Chinese developer Evergrande Real Estate is leading construction. Inside the centre, Mr Yu, a 56-year-old owner of a building company who asked not to use his full name, wears a shirt emblazoned with the words ‘Beverly Hills Polo’ and sips green tea. He is keen to buy a 108 sq m apartment on one of the islands, adding to his eight properties elsewhere. ‘The house will definitely increase in value,’ he says.”

October 16 – Reuters: “China’s official Xinhua news agency attacked Western democracy as divisive and confrontational…, praising on the eve of a key Communist Party Congress the harmony and cooperative nature of the Chinese system. China’s constitution enshrines the Communist Party’s long-term ‘leading’ role in government, though it allows the existence of various other political parties under what is calls a ‘multi-party cooperation system’. But all are subservient to the Communist Party. Activists who call for pluralism are regularly jailed and criticism of China’s authoritarian system silenced.”

Central Banker Watch:

October 14 – Wall Street Journal (Tom Fairless): “The European Central Bank should be patient and persistent in the face of weak eurozone inflation, ECB President Mario Draghi argued…, as the bank prepares to decide on the future of its giant bond-buying program. Speaking on the sidelines of the meetings here of the International Monetary Fund and World Bank, Mr. Draghi gave an upbeat assessment of the economic outlook for the 19-nation eurozone. But he argued that underlying inflation remains too weak, perhaps due to weak wage growth. That means the ECB should be patient as it considers its future policies, he said. ‘It’s going to take time,’ he said. ‘We have got to be persistent with our monetary policy.’ The ECB’s €60 billion-a-month bond-buying program, known as quantitative easing or QE, is due to expire in December.”

October 17 – Financial Times (Claire Jones): “The European Central Bank looks set to remain active in the eurozone bond markets for most of 2018, confounding expectations that policymakers would end their landmark €60bn-a-month quantitative easing programme as early as June next year. ECB watchers now expect Mario Draghi… to say at the next governing council meeting on October 26 that the central bank will continue its asset purchases until next September — or possibly even December 2018. ‘It’s the first time since QE began that the communication from the eurozone’s monetary policymakers is clear: both the hawks and the doves seem in agreement that it will be a slow taper,’ said Frederik Ducrozet, economist at Pictet Wealth Management.”

October 17 – Bloomberg (Lucy Meakin): “Mark Carney reaffirmed that the Bank of England is close to its first interest-rate increase in over a decade, as inflation hit 3% and one of his colleagues said the economy is approaching a ‘tipping point.’ In a series of testimonies to lawmakers, the BOE governor and the two newest members of the rate-setting Monetary Policy Committee signaled that the erosion of economic slack is dominating their thinking as they prepare for a Nov. 2 decision. The appearances coincided with a report showing consumer prices rising at the fastest pace since April 2012.”

Global Bubble Watch:

October 18 – Reuters (Kevin Yao and Elias Glenn): “China’s central bank chief… issued a stark warning about asset bubbles in the world’s second-largest economy, which looks set to clock its first acceleration in annual growth since 2010, driven by public spending and record bank lending. Speaking on the sidelines of the closely-watched, twice-a-decade Communist Party Congress, People’s Bank of China Governor Zhou Xiaochuan spoke of the risks of a ‘Minsky moment’ in the economy, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.”

October 15 – Wall Street Journal (David Harrison and Harriet Torry): “Leaders of the world’s largest central banks indicated that weak inflation in advanced economies could prolong the postcrisis era of easy-money policies. Despite a broad-based improvement in the global economy, wages and consumer prices remain stubbornly low, making central bankers wary of removing their stimulus measures too quickly, they told a Group of 30 banking conference… Their concerns contrasted with the generally upbeat tone that prevailed during last week’s fall meetings of the International Monetary Fund and World Bank…”

October 15 – Reuters (Howard Schneider and Leika Kihara): “The leaders of the world’s top central banks who risked trillions of dollars and their reputations to rescue the global economy are now set to walk off stage at a time when the lingering effects of the crisis, evolving technology and a combustible political landscape will challenge their successors. The Federal Reserve, the Bank of Japan and the People’s Bank of China may all have new bosses in early 2018 and there will be a new head of the European Central Bank the following year… Some $10 trillion in assets bought by the Fed, the ECB and the BOJ to prop up their economies remains on the books and will have to be pared back. Stubbornly low global inflation and weak growth complicate the return to more conventional policies. There are unfinished reforms in China and Europe, while the rise of nationalism could erode central bank independence.”

October 17 – Bloomberg (Theophilos Argitis and Greg Quinn): “Canada’s banking regulator released final rules that will make it tougher for borrowers to take on uninsured mortgages, adding to a growing list of measures to rein in the nation’s housing markets. The Office of the Superintendent of Financial Institutions announced measures targeting borrowers in the uninsured segment of the mortgage market that has been responsible for the bulk of growth recently. A mortgage doesn’t need to be insured against default if the borrower makes a down payment of at least 20%.”

October 17 – Bloomberg (Ranjeetha Pakiam): “Gold wins out over cryptocurrencies when assessed on the majority of the key characteristics of money, according to Goldman Sachs…, which adds that fear and wealth are the core drivers of bullion. ‘Precious metals remain a relevant asset class in modern portfolios, despite their lack of yield,’ analysts including Jeffrey Currie and Michael Hinds wrote. ‘They are neither a historic accident or a relic.’ Looking at properties such as durability and intrinsic value, they are still relevant even with new materials discovered and new assets emerging, such as cryptocurrencies, they said.”

Fixed-Income Bubble Watch:

October 18 – CNBC (Patti Domm): “The bond market is warning that trouble could be on the horizon, either from an economic slowdown or an eventual recession. The yield curve, a set of interest rates watched closely by bond market pros, has gotten to its flattest level since before the financial crisis. The spread between 2-year note yields and 10-year yields this week reached near the lows, at about 0.75, it has been since before the financial crisis.”

Europe Watch:

October 19 – Bloomberg (Charles Penty, Todd White, and Esteban Duarte): “Prime Minister Mariano Rajoy will deploy the Spanish government’s most wide-ranging constitutional powers for the first time in the country’s history as he seeks to land a decisive blow on the Catalan separatist movement. Spanish stocks and bonds dropped as Rajoy’s government said it will move forward with the process of suspending the powers of the Catalan administration after regional President Carles Puigdemont refused to shelve his claim to independence. Spain’s government issued a statement on Thursday morning invoking Article 155 of the Constitution ‘to restore the legality’ of the semi-autonomous region.”

October 19 – Bloomberg (Esteban Duarte): “Separatist campaign group the Catalan National Assembly is calling on its supporters to pull cash from lenders including CaixaBank SA and Banco Sabadell SA between 8 a.m. and 9 a.m. Friday. In a video posted on twitter Thursday night, the Assembly asked Catalans to withdraw money from the top five banks, highlighting CaixaBank and Sabadell to protest at their decision to move their legal domiciles out of the region.”

October 14 – Reuters (Francois Murphy and Michael Shields): “Austria’s shift to the right in a parliamentary election has paved the way for young conservative star Sebastian Kurz to become the next leader and opened a path for the resurgent far right to return to power. The People’s Party, which named 31-year-old Foreign Minister Kurz its leader only in May, secured a clear victory on Sunday with a hard line on immigration that left little space between it and the anti-Islam Freedom Party (FPO).”

October 18 – Reuters (Mark Bendeich and Sara Rossi): “As nervous investors retreat from Catalonia, afraid the wealthy region may secede from Spain, another European region whose politicians once campaigned for independence is looking to attract some of them -- by talking of autonomy, not secession. The Italian region of Lombardy, the country’s industrial engine and home to its financial capital Milan, is holding a referendum on Sunday for more autonomy, an outcome its once-proudly secessionist leader hopes will lure more investment.”

Japan Watch:

October 17 – Bloomberg (Stephen Stapczynski, Ichiro Suzuki, and Masumi Suga): “Kobe Steel Ltd. said it will co-operate with the U.S. Department of Justice after the agency requested documents related to the fake data scandal that risks engulfing Japan’s third-biggest steelmaker. Kobe has said some 500 companies worldwide are in a supply chain tainted by admissions that it falsified certifications on the strength and durability of metals going back to 2007, including automotive giants Ford Motor Co. and General Motors Co. and the U.S.’s biggest plane maker, Boeing Co.”

Emerging Market Watch:

October 18 – CNBC (Gauri Bhatia): “If there's an idea, there will be funding. That's been the reality for India's start-up community for years — but it might be ending. India's start-up dudes — largely male, young engineering graduates or dropouts —are being jolted out of their fantasy world as investors tighten their purse strings and demand a greater bang for every buck they spend. India is the third-largest start-up hub in the world… It saw a peak in funding in 2015 when close to $6 billion was invested in new companies… Start-ups were originally seen as job creators and innovators who were solving India's problems. But that reputation has taken a hit and investor confidence in the sector is the lowest it has been in two years, industry insiders said.”

Geopolitical Watch:

October 16 – Associated Press: “North Korea's deputy U.N. ambassador warned… that the situation on the Korean Peninsula ‘has reached the touch-and-go point and a nuclear war may break out any moment.’ Kim In Ryong told the U.N. General Assembly's disarmament committee that North Korea is the only country in the world that has been subjected to ‘such an extreme and direct nuclear threat’ from the United States since the 1970s — and said the country has the right to possess nuclear weapons in self-defense. He pointed to large-scale military exercises every year using ‘nuclear assets’ and said what is more dangerous is what he called a U.S. plan to stage a ‘secret operation aimed at the removal of our supreme leadership.’”

October 18 – Reuters: “U.S. Secretary of State Rex Tillerson said before a visit to India next week that the Trump administration wanted to ‘dramatically deepen’ cooperation with New Delhi, seeing it as a key partner in the face of negative Chinese influence in Asia. Speaking… less than a month before President Donald Trump is due to make his first state visit to China, Tillerson said the United States had begun to discuss creating alternatives to Chinese infrastructure financing in Asia. In another comment likely to upset Beijing, he said Washington saw room to invite others, including Australia, to join U.S.-India-Japan security cooperation…”

October 16 – BBC: “State department spokeswoman Heather Nauert urged all parties to ‘avoid further clashes’. Iraqi soldiers moved into Kirkuk three weeks after the Kurdistan Region held a controversial independence referendum. They are aiming to retake areas under Kurdish control since Islamic State militants swept through the region. Residents of Kurdish-controlled areas, including Kirkuk, overwhelmingly backed secession from Iraq in a vote on 25 September.”

October 18 – Bloomberg (Javier Blas): “The crisis unfolding around the Iraqi city of Kirkuk has left some of the world’s largest commodity trading houses worried the country’s autonomous Kurdish region will struggle to repay billions of dollars in cash-for-oil loans. The approximately $3.5 billion in debts were going to be met with the roughly 500,000 to 600,000 barrels a day of crude that the northern region of Iraq was pumping… But output has now collapsed to about half that level after the federal government in Baghdad recaptured some oilfields that the Kurds seized in 2014.”

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