Yet none of the above is worthy of Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.
Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.
Coming into 2017, there was some concern for a tightening of financial conditions. U.S. unemployment was below 5% and consumer price inflation was on the rise. A U.S. tightening cycle was expected to support the dollar, while a strong greenback risked pressuring currencies and liquidity conditions in China and EM generally. As the year progressed, however, it became apparent that seemingly nothing would budge the Fed from their commitment to an ultra-dovish gradualist approach to rate “normalization”.
And with virtually all assets experiencing price inflation at multiples of financing costs (short-term rates and market yields), financial conditions only loosened further as the Yellen Fed hesitantly took three little baby-steps (boosting rates a mere 75 bps). A 70 bps 2017 jump in the two-year did not inhibit a four bps decline in 10-year Treasury yields. Of course, the flattening yield curve was interpreted as a warning against further Fed “tightening”. In reality, historically low global bond yields were an indication of extraordinarily loose financial conditions, along with perceptions that central bankers would ensure finance remained loose for years to come.
December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”
December 20 – ETF.com (Drew Voros): “As of last Thursday, the amount of new assets flowing into U.S.-listed ETFs totaled $466 billion, putting the milestone of $500 billion in new assets for the year closer into view, which would be almost double the previous annual record of new ETF assets. What’s more, combined with performance, the asset inflows grew the ETF market to $3.4 trillion—almost $1 trillion bigger than where the market sat a short year ago.”
December 28 – Bloomberg (Patrick Clark): “Your home may not have made the same gains as stocks or bitcoin, but it still was a robust year for the U.S. housing market. The value of the entire U.S. housing stock increased by 6.5% -- or $2 trillion -- in 2017, according to… Zillow. All homes in the country are now worth a cumulative $31.8 trillion. The gain in home values was the fastest since 2013…”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10% lower than the next-closest year. It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.”
When the Fed initially adopted crisis-period QE to reliquefy financial markets, they were clearly on a slippery slope. After the Fed in 2011 revealed its “exit strategy,” I titled a CBB “No Exit.” What I did not anticipate was that the Fed would in a few years again more than double balance sheet holdings to $4.5 TN. In 2012, with Draghi proclaiming “whatever it takes,” I wrote that it was a “pretty good wallop of the can down the road.” I never thought it possible that the Germans would tolerate year-after-year of massive ECB monetary inflation. Yet when I ponder a historic failure of central bankers to tighten conditions in 2017, my thoughts return to chairman Bernanke’s 2013 “the Fed is prepared to push back against a tightening of financial conditions.”
The epic untold story of 2017: markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.
As such, booming equities put no pressure on bond prices. Market concern for a destabilizing fixed-income deleveraged episode disappeared. Indeed, the greater the risk asset Bubble the more certain the bond market became of an inevitable redeployment of QE measures. And with bond markets well under control and confidence in central bank market liquidity backstops running high, why wouldn’t the cost of market insurance sink to record lows? Writing flood insurance during a drought. Moreover, with cheap insurance so readily available, why not push the risk-taking envelope? Build lavishly along the beautiful coastline.
Throughout the markets, speculative forces became only more deeply entrenched and powerfully self-reinforcing. It was a veritable tsunami of “money” into passive equity index, corporate bond and EM ETFs. Why not? Markets are going up, while active managers might adjust to the risk backdrop and underperform index products. It was a year where it never seemed so patently rational to uphold faith in central banking and “invest” in “the market”.
Markets are dominated by Greed and Fear. When central banks banish the latter, one’s left with an overabundance of the former. I chuckle these days when thinking back to the late-eighties as “the decade of greed.” And when it comes to The Year of Greed, most would think of “still dancing” 2007 or “dotcom” 1999. But in terms of global excess across various asset classes, ’99 or ’07 Can’t Hold a Candle to 2017. Booming equities, strong returns in fixed income and still about $10 TN of global sovereign debt sporting negative yields. Phenomenal.
The S&P500 returned 21.8% (price and dividends). The DJIA surged 25.1%. The Nasdaq100 gained 31.5% and the Nasdaq Composite rose 28.2%. Facebook rose 53.4%, Amazon.com 56.0%, Apple 46.1%, Netflix 55.1%, Google/Alphabet 32.9% and Microsoft 37.7%. Tesla jumped 45.7%, Micron Technology 87.6%, and Nvidia 81.3%. The Nasdaq Computer Index gained 38.8%. The Semiconductors (SOX) rose 38.2%, and the Biotechs (BTK) jumped 37.2%. The Homebuilders (XHB) gained 32.7%. The Broker/Dealers (XBD) gained 29.2% and the Banks (BKX) rose 16.3%. Bank of America gained 33.6%, Citigroup 25.1% and JPMorgan 23.9%.
Globally, Japan’s Nikkei gained 19.1%. Asia bubbled. Major indices were up 21.8% in South Korea, 27.9% in India, 36% in Hong Kong, 20% in Indonesia, 48% in Vietnam, 18% in Singapore, 22% in China (CSI 300), 15% in Taiwan and 14% in Thailand. In Europe, Germany’s DAX gained 12.5%, Italy’s MIB 13.6%, and Franc’s CAC 40 9.3%. Notable EM gains included Turkey’s 47.6%, Poland’s 23.2%, Hungary’s 23.0%, Brazil’s 26.9%, Chile’s 34.0% and Argentina’s 77.7%,
This has been going on for so long now that it’s all accepted as normal. Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.
Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.
I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.
Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a Phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.
Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.
And for those interested, please mark your calendars for January 18th, 4:30 pm Eastern (2:30 pm Mountain) for the Tactical Short Q4 Conference Call. Call details to follow.
For the Week:
The S&P500 declined 0.4% (2017 gain 19.4%), and the Dow slipped 0.1% (up 25.1%). The Utilities recovered 0.3% (up 9.0%). The Banks fell 1.1% (up 16.3%), and the Broker/Dealers declined 0.8% (up 29.2%). The Transports declined 0.6% (up 17.3%). The S&P 400 Midcaps slipped 0.2% (up 14.5%), and the small cap Russell 2000 declined 0.5% (up 13.1%). The Nasdaq100 fell 1.1% (up 31.5%).The Semiconductors dropped 1.4% (up 38.2%). The Biotechs added 0.5% (up 37.3%). With bullion surging $28, the HUI gold index gained 1.8% (up 5.5%).
Three-month Treasury bill rates ended the week at 135 bps. Two-year government yields dipped about a basis point to 1.89% (up 70bps y-t-d). Five-year T-note yields declined four bps to 2.21% (up 28bps). Ten-year Treasury yields fell eight bps to 2.41% (down 4bps). Long bond yields dropped nine bps to 2.74% (down 33bps).
Greek 10-year yields were little changed at 4.07% (down 295bps in 2017). Ten-year Portuguese yields jumped 11 bps to 1.94% (down 180bps). Italian 10-year yields rose 10 bps to 2.02% (up 20bps). Spain's 10-year yields gained 10 bps to 1.57% (up 19bps). German bund yields added a basis point to 0.43% (up 22bps). French yields rose four bps to 0.79% (up 11bps). The French to German 10-year bond spread widened three to 36 bps. U.K. 10-year gilt yields declined five bps to 1.19% (down 5bps). U.K.'s FTSE equities gained 1.3% (up 7.6%).
Japan's Nikkei 225 equities index declined 0.6% (up 19.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 fell 1.0% (up 9.3%). The German DAX equities index dropped 1.2% (up 12.5%). Spain's IBEX 35 equities index lost 1.4% (up 7.4%). Italy's FTSE MIB index dropped 1.6% (up 13.6%). EM markets were mostly higher. Brazil's Bovespa index rose 1.6% (up 26.8%), and Mexico's Bolsa jumped 2.0% (up 8.1%). South Korea's Kospi index gained 1.1% (up 21.8%). India’s Sensex equities index added 0.3% (up 27.9%). China’s Shanghai Exchange increased 0.3% (up 6.6%). Turkey's Borsa Istanbul National 100 index surged 3.8% (up 47.6%). Russia's MICEX equities index gained 0.3% (down 5.5%).
Junk bond mutual funds saw outflows of $240 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased five bps to 3.99% (down 33bps y-o-y). Fifteen-year rates gained six bps to 3.44% (down 11bps). Five-year hybrid ARM rates rose eight bps to 3.47% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 22bps).
Federal Reserve Credit last week expanded $9.4bn to $4.418 TN. Over the past year, Fed Credit declined $9.5bn. Fed Credit inflated $1.607 TN, or 57%, over the past 268 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.7bn last week to $3.362 TN. "Custody holdings" were up $182bn y-o-y, or 5.7%.
M2 (narrow) "money" supply slipped $2.9bn last week to $13.863 TN. "Narrow money" expanded $686bn, or 5.2%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits dropped $56.4bn, while Savings Deposits jumped $50.4bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.
Total money market fund assets jumped $9.4bn to $2.842 TN. Money Funds gained $113bn y-o-y, or 4.1%.
Total Commercial Paper added $1.0bn to a 19-month high $1.080 TN. CP gained $93bn y-o-y, or 9.4%.
Currency Watch:
The U.S. dollar index declined 1.3% to 92.124 (down 10.0% y-t-d). For the week on the upside, the South African rand increased 1.9%, the Swedish krona 1.6%, the Swiss franc 1.4%, the Norwegian krone 1.4%, the Australian dollar 1.3%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.1%, the New Zealand dollar 1.1%, the Brazilian real 0.9%, the South Korean won 0.9%, the Singapore dollar 0.6%, the Japanese yen 0.5% and the Mexican peso 0.5%. The Chinese renminbi gained 1.08% versus the dollar this week (up 6.73% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index surged 3.1% (up 11.0% y-t-d). Spot Gold gained 2.2% to $1,303 (up 13.1%). Silver surged 4.3% to $17.145 (up 7.3%). Crude jumped $1.95 to $60.42 (up 12%). Gasoline advanced 1.9% (up 8%), and Natural Gas surged 10.7% (down 21%). Copper added 1.9% (up 32%). Wheat increased 0.5% (up 5%). Corn slipped 0.4% (unchanged).
Trump Administration Watch:
December 24 – Wall Street Journal (Kristina Peterson): “While many Republicans celebrated the recent passage of their tax overhaul, some worry the party’s year in control of Congress and the White House has done little to rein in federal spending. Fiscal restraint has been a watchword for the party for decades. But various actions this year, including the tax rewrite, are expected to add to the federal deficit, with spending likely to increase in 2018. ‘Most of the drive upward has not been on the Democratic side, which is disheartening,’ Sen. Bob Corker (R., Tenn.) said. ‘It’s been on the Republican side.’ The new tax law, which President Donald Trump signed Friday, will add just under $1.5 trillion to the federal budget deficit over 10 years, according to the nonpartisan Congressional Budget Office.”
December 28 – Reuters (David Brunnstrom and Susan Heavey): “U.S. President Donald Trump… said he had ‘been soft’ on China on trade issues and said he was not happy that China had allowed oil shipments to go into North Korea. ‘I have been soft on China because the only thing more important to me than trade is war,’ Trump said… Earlier on Thursday, Trump said on Twitter that China has been ‘caught’ allowing oil into North Korea and said such moves would prevent “a friendly solution” to the crisis over Pyongyang’s nuclear program.”
China Watch:
December 28 – Reuters (Li Zheng): “China’s banking regulator will further tighten the screws on the trust industry next year, two sources with direct knowledge of the matter said, as Beijing steps up a campaign to clampdown on the country’s shadow banking sector. Trusts have been a key part of China’s shadow banking sector, which helps channel deposits into risky investments via products often designed to dodge capital or investment regulations.”
December 28 – Bloomberg: “The last day of a bitter year for China’s non-bank borrowers is proving to be especially painful: they’re now paying a record premium for short-term funds. As interbank lending rates climbed on Friday due to banks hoarding cash for year-end regulatory checks, the increase was especially significant for non-bank financial institutions, such as securities and insurance companies. A measure of what they’re paying for seven-day funds relative to costs for big Chinese banks surged to the highest level ever. The funding cost gap is reflected in the spread between China’s seven-day repurchase rate fixing and the weighted average rate, which expanded to almost 3 percentage points…”
December 27 – Bloomberg: “Recent economic data offer a ‘warning for 2018’ now that Chinese leaders are less motivated to prop up growth in the wake of their Congress in October, according to the China Beige Book. ‘Incentives to ensure the economy was growing smartly at the time of the Communist Party Congress do not apply as next year wears on,’ CBB president Leland Miller and chief economist Derek Scissors said… Fourth-quarter results already show some signs of a transition to slower growth, according to a private survey by CBB International, which collects anecdotal accounts similar to those in the Federal Reserve’s Beige Book.”
December 26 – Financial Times (Emily Feng): “Felix Tao still remembers how thrilled he was to receive one of his biggest orders: a Rmb1.6m ($244,000) deal to supply phone parts to Le Mobile, the mobile phone subsidiary of tech conglomerate LeEco. Almost two years later, however, the young supplier from the coastal province of Shandong says he is still waiting to be paid… The unravelling of LeEco, the tech group that once aimed to be the Tesla and Netflix of China, has devolved into a chaotic scramble for cash, providing a case study case into the shakiness of the country’s nascent corporate bankruptcy regime. This has sweeping implications for the country’s ability to allocate and manage debt. A dysfunctional bankruptcy system has allowed China’s insolvent businesses to continue with little pressure to restructure. It has also discouraged investors and banks from properly pricing credit risk into their lending, which spells trouble for a country with $18tn in corporate debt, equal to 169% of gross domestic product..”
December 24 – Bloomberg: “A Chinese central bank official said China should allow local governments to go bankrupt to help rein in regional authorities’ excessive borrowing. A case like the bankruptcy of Detroit would convince investors that the central government is really determined to dispel beliefs of an implicit guarantee for regional authorities, Xu Zhong, head of research bureau at the People’s Bank of China, wrote... Just a couple of days ago, China’s finance ministry pledged to break the ‘illusion’ that Beijing would bail out local governments’ hidden debt. Their calls for limiting local borrowings are in line with central government’s financial policy for 2018. President Xi Jinping said earlier this month that a priority for next year is to ‘effectively’ control leverage and prevent major risks.”
December 26 – Financial Times (Gabriel Wildau and Yizhen Jia): “Chinese stockholders are ramping up borrowing against shares, driving revenue for securities houses but creating risk of a chain reaction in the event of a sharp market downturn. Shareholders in 317 Shanghai and Shenzhen-listed companies had pledged shares worth at least 40% of those companies by December 18, up from 224 companies on the same date a year earlier, according to Wind Info. Share-pledging is especially common for small and mid-cap companies, where a single shareholder often owns a large stake. Controlling shareholders sometimes reinvest the proceeds into company projects or buy additional company shares on the secondary market to boost the share price. ‘Companies use ‘market-value management’ to push up the share price, pledge the shares to brokers and then take the money and run,’ said Hao Hong, head of research at Bocom International in Hong Kong.”
December 27 – Financial Times (Emma Dunkley): “A record number of companies have listed in mainland China this year as the market prepares to open the floodgates to foreign investment in the next six months. More than 400 companies floated in 2017 on the Shenzhen and Shanghai stock exchanges to reach the milestone, according to data from EY. A flurry of small and medium-sized enterprises have listed in mainland China this year, assisted by a streamlined process as exchanges have attempted to work through a backlog of applications, EY said.”
Federal Reserve Watch:
December 28 – CNBC (Rebecca Ungarino): “As equity markets in the U.S. look to cap off a stunning year full of record winning streaks, all-time highs and strong returns across multiple asset classes, investors are left wondering: What will 2018 hold? The ‘single most important’ trade for the market next year will lie not in the stock market, but rather in Fed funds futures, said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. The strategist told CNBC's ‘Trading Nation’ …that the apparent divergence between the Federal Reserve's expectations for interest rates' direction and the market's expectations for its tightening path will be of the utmost importance as 2018 unfolds.”
U.S. Bubble Watch:
December 28 – Bloomberg (Alexandre Tanzi): “The total value of all homes in the United States rose 6.5% in 2017 to $31.8 trillion, according to Zillow. Renters paid a record $485.6 billion this year. The Los Angeles and New York markets each account for more than 8% of the overall value of U.S. housing stock, worth $2.7 trillion and $2.6 trillion, respectively. The San Francisco market follows at $1.4 trillion and the Washington D.C. housing market is valued at just under $1 trillion.”
December 28 – Bloomberg (Katia Dmitrieva): “The U.S. merchandise trade deficit reached a more than two-year high in November, while inventories at wholesalers and retailers increased, according to… the Commerce Department. Goods-trade gap grew to $69.7b (est. $67.9b), the widest since March 2015… Exports of goods rose 3% to $133.7b on increased shipments of automobiles and consumer and capital goods Imports increased 2.7% to a record $203.4b.”
December 28 – Wall Street Journal (Kenan Machado and Saumya Vaishampayan): “Being passive can leave you with too much of a good thing. Investors who loaded up on U.S. and Asian stock-index funds might be surprised to learn just what they own now: technology stocks—a lot of them. Led by Apple Inc., Facebook Inc. and their peers, the weighing of technology stocks in the S&P 500 index has climbed to 23.8% as of Dec. 26, from 20.8% at the end of last year, according to S&P Dow Jones Indices. Three years ago, tech stocks had a 19.7% weighting in the widely used U.S. stock market benchmark, which is currently tracked by funds with more than $2 trillion in assets.”
December 26 – Bloomberg (Katia Dmitrieva): “Housing prices in 20 U.S. cities accelerated more than forecast in October, rising by the most since mid-2014 as lean inventories continued to prop up values amid steady demand, S&P CoreLogic Case-Shiller data showed… 20-city property values index increased 6.4% y/y (est. 6.3%), the biggest gain since July 2014. National home-price gauge rose 6.2% y/y, the most since June 2014… All 20 cities in the index showed year-over-year gains, led by a 12.7% increase in Seattle and a 10.2% advance in Las Vegas.”
December 26 – Reuters (Eric M. Johnson, Richa Naidu): “The U.S. holiday shopping season is on track to break sales records on the back of surging consumer confidence and increased use of mobile devices, presenting an unexpected boon for retailers and the delivery companies they rely on. The holiday shopping season, a crucial period for retailers that can account for up to 40% of annual sales, brought record-breaking online and in-store spending this year of more than $800 billion, according to Mastercard Inc’s analytics arm. Stakes are particularly high this year for traditional retailers that have invested heavily in technology and free delivery and returns, determined to stay relevant in a market increasingly dominated by Amazon.com Inc.”
December 26 – Bloomberg (Alex Barinka): “IPO cheerleaders gave a collective sigh of relief in 2017 -- a comeback year for U.S. listings. Conditions were ripe for initial public offerings. Broader equity markets continued to rise, with the S&P 500 Index up almost 20% since the start of the year as December winds to a close. Meanwhile, the year’s volatility averaged less than the lowest point of all of 2016. Forty-nine percent more companies went public this year than last.”
December 27 – Financial Times (Jennifer Thompson): “Smart beta funds have hit the $1tn of assets milestone, testifying to the increasing popularity of the investment strategy. A hybrid between active and passive investment management, smart beta funds take a passive strategy but modify it according to one or more factors, such as favouring cheaper stocks or screening them according to dividend payouts, in order to generate better returns. Also known as strategic beta or factor investing, the funds’ growth has coincided with increasing criticism of the high fees charged by traditional active managers as well as heightened scrutiny of their performance.”
December 29 – Financial Times (Joe Rennison): “Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007… The boom in auto ABS comes as other structured credit products, such as deals backed by leveraged loans or credit card debt, have also seen a glut of issuance. Demand is being driven by investors who are seeking alternative assets as the premiums offered on corporate bonds and loans continue to decline. That investor appetite has helped push down the cost of funding for borrowers with less than pristine credit ratings.”
December 26 – Financial Times (Gregory Meyer): “Robots may one day steer trucks across America. But in winter 2017, US trucking companies are confronting a shortage of human drivers. Rates to hire long-distance trucks have soared as rising freight volumes and robust retail sales during the festive season drive up demand, just as a strong US jobs market makes drivers harder to come by… The ratio of loads in need of movement to trucks available is this month expected to be the highest on record, according to DAT, an online trucking bulletin board. There is ‘very little, if any, excess capacity in the system’, said Avery Vise of FTR, a consultancy. The situation could push up the cost of consumer goods.”
December 28 – Bloomberg (Brian K Sullivan and Jim Efstathiou Jr): “In the year that President Donald Trump pulled out of the Paris accord and downplayed global warming as a security threat, the U.S. received a harsh reminder of the perils of the rise in the planet’s temperature: a destructive rash of hurricanes, fires and floods. The country recorded 15 weather events costing $1 billion or more each through early October, one short of the record 16 in 2011, according to the federal government’s National Centers for Environmental Information in Asheville, North Carolina. And the tally doesn’t include the recent wildfires in southern California.”
Global Bubble Watch:
December 28 – Bloomberg Intelligence (Dragos Ailoae): “Global fixed-income ETF assets under management have climbed 380% since December 2010 to about $746 billion. That’s on net issuance of $567 billion of shares as of Dec. 20. By comparison, equities-focused ETF assets grew 250% to $3.2 trillion. Commodity ETF assets shrank over 10% to $127 billion during the period. Mark-to-market losses have taken a toll, despite $21 billion of inflows. Commodity prices have plunged almost 50% since December 2010, as gauged on the Bloomberg Commodity Index.”
December 27 – Financial Times (Kenan Machado and Saumya Vaishampayan): “Worldwide mergers and acquisitions activity has exceeded $3tn for the fourth consecutive year, extending an unprecedented wave of dealmaking that bankers say is set to accelerate in 2018. The final month of 2017 was capped by three blockbuster transactions sparked by companies taking action against the threat of disruption from the likes of Amazon, Facebook and Netflix, which are using their size and scale to push into new sectors. …The US’s biggest drugstore chain CVS Health agreed to acquire healthcare insurer Aetna for about $69bn. Meanwhile, Amazon’s effect on retail worldwide prompted Australia’s billionaire Lowy family to sell its global shopping centre business Westfield to France’s Unibail-Rodamco for $24.7bn.”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “The richest people on earth became $1 trillion richer in 2017, more than four times last year’s gain, as stock markets shrugged off economic, social and political divisions to reach record highs. The 23% increase on the Bloomberg Billionaires Index, a daily ranking of the world’s 500 richest people, compares with an almost 20% increase for both the MSCI World Index and Standard & Poor’s 500 Index.”
December 27 – Wall Street Journal (Christopher Whittall): “Hellman & Friedman LLC and other investors sought last month to borrow money in the loan market to finance a takeover. The U.S. private-equity firm offered a yield of about 3%, but few of the protections once considered routine. Still, the investors bought. Rampant demand for leveraged loans is allowing private-equity firms to water down legal safeguards for investors. Many lawyers and bankers increasingly worry that such changes could result in higher losses for investors during the next downturn, as creditors find themselves with less protection… Investors are clamoring for leveraged loans as years of low interest rates and central banks’ bond buying have pushed down returns elsewhere. Trillions of dollars of sovereign debt, primarily in Europe, continue to sport negative yields… With ‘far too much cash trying to find too few homes,’ private-equity firms ‘can be more aggressive and lenders will take it,’ said Adam Freeman, a partner at Linklaters LLP.”
December 26 – Wall Street Journal (Sam Goldfarb and Nigel Chiwaya): “By almost any measure, corporate borrowers had it easy in 2017. Yields on corporate debt, which fall as prices rise, began the year at very low levels and ended the year even lower. Investors bought up pretty much every type of debt instrument, from investment-grade bonds to collateralized loan obligations. Many analysts expect more of the same in the early part of 2018. A test could come later in the year, as combined net bond-buying by the Federal Reserve and European Central Bank is expected to turn negative, removing a key support for fixed-income markets.”
December 27 – Financial Times (Nicole Bullock, Robert Smith and Emma Dunkley): “Global exchanges attracted the largest number of listings since the financial crisis this year, with a resurgence of activity in the US and a record number of Chinese deals belying concerns that companies are cooling to the idea of public ownership. Almost 1,700 companies floated in 2017, an increase of 44% over 2016 and the most initial public offerings since 2007, according to Dealogic. Proceeds rose 44% to $196bn, the largest amount since 2014, which had been boosted by Alibaba’s $25bn listing. In the US companies raised $49bn — double the $24bn of listings in 2016, which was the worst year for IPOs in more than a decade. European listings rose more than 40% and China marked a record number of deals, which helped to boost the global deal count.”
Fixed Income Watch:
December 27 – Bloomberg (Edward Bolingbroke and Brian Chappatta): “The U.S. yield curve is getting one final flattening push before calling it a year. The spread between the yields on 2-year and 10-year Treasuries narrowed to just 50.6 bps Wednesday, close to the decade low reached on Dec. 6. While a small part of the more than six-basis-point narrowing is a function of the market shifting to a new benchmark 2-year note, the move is nonetheless one of the biggest single-session shifts of 2017. The gap between 5-year and 30-year yields also contracted as long bonds staged their biggest advance since September.”
Europe Watch:
December 29 – Reuters (Joseph Nasr): “German inflation hit its highest level in five years in 2017, initial data showed on Friday, sowing the seeds of more discord among rate setters at the European Central Bank, where some policymakers want to stop pouring money into the euro zone. Consumer prices harmonized to make them compatible with inflation data in other European Union countries rose by 1.6% year-on-year in December, compared to the 1.4% forecast by analysts polled by Reuters.”
Japan Watch:
December 26 – Bloomberg (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… it was important to scrutinize whether economic expansion was leading to excessive risk-taking in financial markets. ‘In the current recovery phase, there are no signs of excessively bullish expectations in asset markets and financial institutions’ behavior. But financial developments warrant close attention,’ he said…”
December 25 – Bloomberg (Yuko Takeo): “Japanese inflation unexpectedly picked up in November but prices are still rising at less than half the rate targeted by the central bank. The tightest job market in decades got even tighter. Core consumer prices, which exclude fresh food, increased 0.9% in November from a year earlier (estimate 0.8%). The unemployment rate fell to 2.7%.”
Emerging Market Watch:
December 27 – New York Times (Kirk Semple and Clifford Krauss): “A general with no energy experience has been installed as the head of the state oil company. Arrests, firings and desperate emigration have gutted top talent. Oil facilities are crumbling, while production is plummeting. As the rest of the oil-producing world recovers on the back of stronger energy prices, Venezuela is getting worse, the result of dysfunctional management, rampant corruption and the country’s crippling economic crisis. The deepening troubles at the state oil company, the country’s economic mainstay, threaten to further destabilize a nation and government facing a dire recession, soaring inflation and unbridled crime, as well as food and medicine shortages.”
Leveraged Speculation Watch:
December 26 - CNBC (Tae Kim): “Greenlight Capital's David Einhorn, who is known for his prescient short bets against stocks like Lehman Brothers, shared the top reasons for his stellar hedge fund career. The billionaire hedge fund manager was asked what he believed is the most important factor for his investing success during an Oxford Union event last month. ‘If I had to pick one, I think it is critical thinking skill. It's the ability to look at a situation and see it for what it is, which isn't necessarily what is presented to you,’ Einhorn said. ‘And when something makes sense to figure out what makes sense. And when something doesn't make sense to question it, to challenge it, to look at it from a different way, to often come to the opposite conclusion.’”
Geopolitical Watch:
December 24 – Wall Street Journal (Michael R. Gordon): “President Donald Trump’s decision to provide Javelin antitank missiles to Ukraine reflects the broad assessment of his national security advisers that the shipment of defensive lethal arms is needed to raise the cost to Russia of its aggression in the conflict-ridden country and provide the West with fresh leverage in negotiations over its future. But the decision is also noteworthy for those trying to divine where the White House may be headed next year in its policy toward the Kremlin. While Mr. Trump has talked about improving relations with Russian President Vladimir Putin, he went along with aides who see Moscow as a revisionist power that is prepared to upend the post-Cold War order, and one that needs to be deterred.”
December 23 – Reuters (Ben Blanchard and Hyonhee Shin): “The latest U.N. sanctions against North Korea are an act of war and tantamount to a complete economic blockade against it, North Korea’s foreign ministry said on Sunday, threatening to punish those who supported the measure."
December 28 – Financial Times (Charles Clover): “With international attention this year diverted by North Korea, China has been quietly making geopolitical gains further south. Throughout 2017, Beijing has been equipping its artificial islands in the contested waters of the South China Sea for potential military use. Aerial photos published by the Center for Strategic and International Studies… show new construction on islands built by China, which now bristle with bunkers, aircraft hangars and shelters for radar, aircraft, warships and artillery. The new infrastructure leaves China in a position to station fighter jets and warships on the outcrops in 2018, and to make ambitious claims to territorial waters and airspace around them if Beijing chooses, say analysts.”
December 26 – Bloomberg (Alex Barinka): “IPO cheerleaders gave a collective sigh of relief in 2017 -- a comeback year for U.S. listings. Conditions were ripe for initial public offerings. Broader equity markets continued to rise, with the S&P 500 Index up almost 20% since the start of the year as December winds to a close. Meanwhile, the year’s volatility averaged less than the lowest point of all of 2016. Forty-nine percent more companies went public this year than last.”
December 27 – Financial Times (Jennifer Thompson): “Smart beta funds have hit the $1tn of assets milestone, testifying to the increasing popularity of the investment strategy. A hybrid between active and passive investment management, smart beta funds take a passive strategy but modify it according to one or more factors, such as favouring cheaper stocks or screening them according to dividend payouts, in order to generate better returns. Also known as strategic beta or factor investing, the funds’ growth has coincided with increasing criticism of the high fees charged by traditional active managers as well as heightened scrutiny of their performance.”
December 29 – Financial Times (Joe Rennison): “Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007… The boom in auto ABS comes as other structured credit products, such as deals backed by leveraged loans or credit card debt, have also seen a glut of issuance. Demand is being driven by investors who are seeking alternative assets as the premiums offered on corporate bonds and loans continue to decline. That investor appetite has helped push down the cost of funding for borrowers with less than pristine credit ratings.”
December 26 – Financial Times (Gregory Meyer): “Robots may one day steer trucks across America. But in winter 2017, US trucking companies are confronting a shortage of human drivers. Rates to hire long-distance trucks have soared as rising freight volumes and robust retail sales during the festive season drive up demand, just as a strong US jobs market makes drivers harder to come by… The ratio of loads in need of movement to trucks available is this month expected to be the highest on record, according to DAT, an online trucking bulletin board. There is ‘very little, if any, excess capacity in the system’, said Avery Vise of FTR, a consultancy. The situation could push up the cost of consumer goods.”
December 28 – Bloomberg (Brian K Sullivan and Jim Efstathiou Jr): “In the year that President Donald Trump pulled out of the Paris accord and downplayed global warming as a security threat, the U.S. received a harsh reminder of the perils of the rise in the planet’s temperature: a destructive rash of hurricanes, fires and floods. The country recorded 15 weather events costing $1 billion or more each through early October, one short of the record 16 in 2011, according to the federal government’s National Centers for Environmental Information in Asheville, North Carolina. And the tally doesn’t include the recent wildfires in southern California.”
Global Bubble Watch:
December 28 – Bloomberg Intelligence (Dragos Ailoae): “Global fixed-income ETF assets under management have climbed 380% since December 2010 to about $746 billion. That’s on net issuance of $567 billion of shares as of Dec. 20. By comparison, equities-focused ETF assets grew 250% to $3.2 trillion. Commodity ETF assets shrank over 10% to $127 billion during the period. Mark-to-market losses have taken a toll, despite $21 billion of inflows. Commodity prices have plunged almost 50% since December 2010, as gauged on the Bloomberg Commodity Index.”
December 27 – Financial Times (Kenan Machado and Saumya Vaishampayan): “Worldwide mergers and acquisitions activity has exceeded $3tn for the fourth consecutive year, extending an unprecedented wave of dealmaking that bankers say is set to accelerate in 2018. The final month of 2017 was capped by three blockbuster transactions sparked by companies taking action against the threat of disruption from the likes of Amazon, Facebook and Netflix, which are using their size and scale to push into new sectors. …The US’s biggest drugstore chain CVS Health agreed to acquire healthcare insurer Aetna for about $69bn. Meanwhile, Amazon’s effect on retail worldwide prompted Australia’s billionaire Lowy family to sell its global shopping centre business Westfield to France’s Unibail-Rodamco for $24.7bn.”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “The richest people on earth became $1 trillion richer in 2017, more than four times last year’s gain, as stock markets shrugged off economic, social and political divisions to reach record highs. The 23% increase on the Bloomberg Billionaires Index, a daily ranking of the world’s 500 richest people, compares with an almost 20% increase for both the MSCI World Index and Standard & Poor’s 500 Index.”
December 27 – Wall Street Journal (Christopher Whittall): “Hellman & Friedman LLC and other investors sought last month to borrow money in the loan market to finance a takeover. The U.S. private-equity firm offered a yield of about 3%, but few of the protections once considered routine. Still, the investors bought. Rampant demand for leveraged loans is allowing private-equity firms to water down legal safeguards for investors. Many lawyers and bankers increasingly worry that such changes could result in higher losses for investors during the next downturn, as creditors find themselves with less protection… Investors are clamoring for leveraged loans as years of low interest rates and central banks’ bond buying have pushed down returns elsewhere. Trillions of dollars of sovereign debt, primarily in Europe, continue to sport negative yields… With ‘far too much cash trying to find too few homes,’ private-equity firms ‘can be more aggressive and lenders will take it,’ said Adam Freeman, a partner at Linklaters LLP.”
December 26 – Wall Street Journal (Sam Goldfarb and Nigel Chiwaya): “By almost any measure, corporate borrowers had it easy in 2017. Yields on corporate debt, which fall as prices rise, began the year at very low levels and ended the year even lower. Investors bought up pretty much every type of debt instrument, from investment-grade bonds to collateralized loan obligations. Many analysts expect more of the same in the early part of 2018. A test could come later in the year, as combined net bond-buying by the Federal Reserve and European Central Bank is expected to turn negative, removing a key support for fixed-income markets.”
December 27 – Financial Times (Nicole Bullock, Robert Smith and Emma Dunkley): “Global exchanges attracted the largest number of listings since the financial crisis this year, with a resurgence of activity in the US and a record number of Chinese deals belying concerns that companies are cooling to the idea of public ownership. Almost 1,700 companies floated in 2017, an increase of 44% over 2016 and the most initial public offerings since 2007, according to Dealogic. Proceeds rose 44% to $196bn, the largest amount since 2014, which had been boosted by Alibaba’s $25bn listing. In the US companies raised $49bn — double the $24bn of listings in 2016, which was the worst year for IPOs in more than a decade. European listings rose more than 40% and China marked a record number of deals, which helped to boost the global deal count.”
Fixed Income Watch:
December 27 – Bloomberg (Edward Bolingbroke and Brian Chappatta): “The U.S. yield curve is getting one final flattening push before calling it a year. The spread between the yields on 2-year and 10-year Treasuries narrowed to just 50.6 bps Wednesday, close to the decade low reached on Dec. 6. While a small part of the more than six-basis-point narrowing is a function of the market shifting to a new benchmark 2-year note, the move is nonetheless one of the biggest single-session shifts of 2017. The gap between 5-year and 30-year yields also contracted as long bonds staged their biggest advance since September.”
Europe Watch:
December 29 – Reuters (Joseph Nasr): “German inflation hit its highest level in five years in 2017, initial data showed on Friday, sowing the seeds of more discord among rate setters at the European Central Bank, where some policymakers want to stop pouring money into the euro zone. Consumer prices harmonized to make them compatible with inflation data in other European Union countries rose by 1.6% year-on-year in December, compared to the 1.4% forecast by analysts polled by Reuters.”
Japan Watch:
December 26 – Bloomberg (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… it was important to scrutinize whether economic expansion was leading to excessive risk-taking in financial markets. ‘In the current recovery phase, there are no signs of excessively bullish expectations in asset markets and financial institutions’ behavior. But financial developments warrant close attention,’ he said…”
December 25 – Bloomberg (Yuko Takeo): “Japanese inflation unexpectedly picked up in November but prices are still rising at less than half the rate targeted by the central bank. The tightest job market in decades got even tighter. Core consumer prices, which exclude fresh food, increased 0.9% in November from a year earlier (estimate 0.8%). The unemployment rate fell to 2.7%.”
Emerging Market Watch:
December 27 – New York Times (Kirk Semple and Clifford Krauss): “A general with no energy experience has been installed as the head of the state oil company. Arrests, firings and desperate emigration have gutted top talent. Oil facilities are crumbling, while production is plummeting. As the rest of the oil-producing world recovers on the back of stronger energy prices, Venezuela is getting worse, the result of dysfunctional management, rampant corruption and the country’s crippling economic crisis. The deepening troubles at the state oil company, the country’s economic mainstay, threaten to further destabilize a nation and government facing a dire recession, soaring inflation and unbridled crime, as well as food and medicine shortages.”
Leveraged Speculation Watch:
December 26 - CNBC (Tae Kim): “Greenlight Capital's David Einhorn, who is known for his prescient short bets against stocks like Lehman Brothers, shared the top reasons for his stellar hedge fund career. The billionaire hedge fund manager was asked what he believed is the most important factor for his investing success during an Oxford Union event last month. ‘If I had to pick one, I think it is critical thinking skill. It's the ability to look at a situation and see it for what it is, which isn't necessarily what is presented to you,’ Einhorn said. ‘And when something makes sense to figure out what makes sense. And when something doesn't make sense to question it, to challenge it, to look at it from a different way, to often come to the opposite conclusion.’”
Geopolitical Watch:
December 24 – Wall Street Journal (Michael R. Gordon): “President Donald Trump’s decision to provide Javelin antitank missiles to Ukraine reflects the broad assessment of his national security advisers that the shipment of defensive lethal arms is needed to raise the cost to Russia of its aggression in the conflict-ridden country and provide the West with fresh leverage in negotiations over its future. But the decision is also noteworthy for those trying to divine where the White House may be headed next year in its policy toward the Kremlin. While Mr. Trump has talked about improving relations with Russian President Vladimir Putin, he went along with aides who see Moscow as a revisionist power that is prepared to upend the post-Cold War order, and one that needs to be deterred.”
December 23 – Reuters (Ben Blanchard and Hyonhee Shin): “The latest U.N. sanctions against North Korea are an act of war and tantamount to a complete economic blockade against it, North Korea’s foreign ministry said on Sunday, threatening to punish those who supported the measure."
December 28 – Financial Times (Charles Clover): “With international attention this year diverted by North Korea, China has been quietly making geopolitical gains further south. Throughout 2017, Beijing has been equipping its artificial islands in the contested waters of the South China Sea for potential military use. Aerial photos published by the Center for Strategic and International Studies… show new construction on islands built by China, which now bristle with bunkers, aircraft hangars and shelters for radar, aircraft, warships and artillery. The new infrastructure leaves China in a position to station fighter jets and warships on the outcrops in 2018, and to make ambitious claims to territorial waters and airspace around them if Beijing chooses, say analysts.”
