Saturday, May 26, 2018

Weekly Commentary: Unfolding Instability Thesis

Interestingly, financial crises over the ages have often unfolded during autumn. Early economic thinkers pondered and debated the sources of instability and the root cause of recurring economic cycles. Even in relatively primitive economic systems, money and Credit played a leading role. I admit to finding "trade cycle" analysis intriguing. Even in a simple agrarian economic structure, farmers would borrow for the spring planting season and repay loans later in the fall. This Credit Cycle played prominently, with monetary abundance and associated economic boom in the spring and summer followed by tightening and vulnerability as bank lending books contracted after harvest.

Trade cycle and monetary analysis from the British economist Ralph Hawtrey (1879-1975) has over the years resonated:

"The general rise of prices will involve a proportional increase of borrowing to finance a given output of goods, over and above the increase necessitated by the increase in output. This increase of borrowing, meaning an increase in the volume of credit, will further stimulate trade. Where will the process end? In the case of the curtailment of credit the self-interest of the bankers and the distress of the merchants combined to restore the creation of credits…but in the case of the expansion of credits there is no such corrective influence at work. An indefinite expansion of credit seems to be in the immediate interest of merchants and bankers alike. The continuous and progressive rise of prices makes it profitable to hold goods in stock…thus the merchant and the banker share between them a larger rate of profit on a larger turnover... The greater the amount of credit created, the greater will be the amount of purchasing power and the better the market for the sales of all kinds of goods. The better the market the greater the demand for credit. Thus an increase in the supply of credit itself stimulates the demand for credit…" (Hawtrey, "Currency and Credit").

"Mr. Hawtrey's theory explains why there were not merely small oscillations around the equilibrium, but big swings of the pendulum in the one or the other direction. The reason is the cumulative, self-sustaining nature of the process of expansion and contraction. The equilibrium line is like a razor's edge. The slightest deviation involves the risk of further movement away from equilibrium…the expansion could go on indefinitely, if there were no limits to the increase in the quantity of money" (Gottfried Haberler, "Prosperity and Depression").

In Hawtrey's analysis, "dealers" borrowed to finance inventories of goods and commodities. This borrowing activity created the marginal monetary flow and purchasing power within the economic system. Credit flows were fundamental to the monetary forces sustaining the economic cycle. Hawtrey appreciated that Credit and the "flow of money" were inherently self-reinforcing, hence unstable. During upcycles, Credit begets additional Credit; monetary excess begets further destabilizing excess. Eventually, the monetary expansion comes to an end and a painful downside to the cycle becomes unavoidable. At least that's the way it used to work.

Hawtrey would find today's financial architecture unrecognizable: unfettered finance on a global basis; near zero and even negative interest rates; open-ended QE and ballooning central bank balance sheets; central bank manipulation of bond yields and asset prices; highly leveraged securities holdings and a derivatives marketplace to the tune of hundreds of Trillions.

While Hawtrey's "dealers" were financing goods inventories, contemporary "dealers" - the central banks, banks, hedge funds and leveraged speculators, derivatives operators, GSEs, etc. - finance inventories of securities. Instead of banks (restrained by reserve and capital requirements) lending against goods inventories, boundless global "money" markets finance unfathomable speculative securities holdings. Going back now at least 25 years, the financing of securities holdings has been the marginal source of liquidity fueling recurring asset Bubbles and economic cycles. This monetary structure has been acutely unstable. Over time, worsening instability fostered increasingly intrusive central bank command over the cost of finance, marketplace liquidity and securities market pricing more generally.

Audience question from a Friday panel discussion at a Swedish Riksbank event: "Imaging you're traveling into the future - 25 years. What would you expect to receive when you are evaluated 25 years into the future regarding the present period of unconventional policy methods?"

Bank of England governor Mark Carney: "Great question to ask. Terrible question to answer… Those who are marking our exam papers will start with our objectives. And we'll see how well we achieved our objectives. So, starting with whether we've achieved our inflation target and, subject to that, reduced unwarranted volatility in output and employment. And the steps we have taken on the financial side - the effectiveness of those will be revealed by 25 years down the road. They will have been properly tested in a way that, obviously, everyone in this room cannot truly mark that exam paper right now."

I doubt future analysts and historians looking back in 25 years will have much interest in whether inflation targets were achieved or the policy effects on unemployment rates and GDP. Contemporary central bankers will instead be judged by the impact a decade plus of extreme monetary measures had on Financial Stability. Sure, unprecedented monetary stimulus reflated securities markets, asset prices, perceived wealth and economic activity. But did it nurture sustainable Financial Stability - or instead only create more systemic and perilous global financial and economic Bubbles? I believe the answer lies foremost in the global dimensions of speculative leverage.

My view holds that prolonged experimental policy stimulus has been a boon for global securities leveraged speculation. The scope of today's Bubble is unprecedented; the monetary role of securities finance upon the maladjusted and unbalanced global economy unparalleled. The Bubble in EM has gone miles beyond 1997. The Bubble in China is truly epic. I suspect a staggering amount of "carry trade" leverage has accumulated globally over this protracted speculative cycle. ECB policies have clearly spurred leveraged speculation throughout euro zone bond markets, especially the unsound periphery. Eastern Europe as well? There is surely massive leverage in U.S. Credit, most likely having played a prevailing role in the booming investment-grade corporate marketplace.

We're in the stage of the cycle where things look good. In the U.S., in particular, the New Era and New Paradigm mentality has taken deep root. The economy appears robust, bolstered by fantastic technological advancement and scientific development. The underlying instability of finance goes unrecognized; the global nature of Bubble Dynamics unappreciated. Meanwhile, markets again this week provided confirmation of the Unfolding Instability Thesis.

Italian 10-year yields surged 23 bps this week to 2.46%, the high since October 2014. In only three weeks, Italian two-year yields have jumped 79 bps to 0.46%. Portuguese 10-year yields rose eight bps this week to 1.95%, a three-month high. Spanish yields traded above 1.5% in Monday trading, the high going back to early March.

This month's almost 70 bps spike in Italian 10-year yields is alarming. I would argue this week's 17 bps drop in German 10-year yields (to 41bps) is more problematic for markets more generally. The Italian to German 10-year yields spread widened 40 bps in just one week. The Portuguese to German spread widened 25 bps this week, with the Spanish to German 10-year spread 19 bps wider. The Italian to German two-year yield spread has widened 78 bps in two weeks.

It was a rough week for those short German bunds (or even French bonds) to finance leveraged holdings in European periphery debt. Pain in this popular (Crowded?) trade follows on the heels of painful losses in various EM "carry trades." The Turkish lira dropped another 4.7% this week. And while Latin American currencies for the most part rallied this week, Eastern European currencies were notably weak. The Hungarian forint dropped 1.5%, the Polish zloty 1.4%, the Czech koruna 1.4%, the Bulgarian lev 1.1% and the Romanian leu 1.0%. How much leveraged has accumulated in higher-yielding European EM debt?

After trading at 3.08% in Tuesday trading, 10-year Treasury yields reversed course and closed the week down 12 bps to 2.93%. Minutes from the early-May FOMC meeting were released Wednesday afternoon. The minutes were generally viewed as dovish, with the Fed tolerant of inflation rising above target and "uncertainty surrounding trade issues could damp business sentiment and spending."

Bond markets have been anxiously anticipating some hint from the Federal Reserve that unstable global markets could slow the path of rate increases. They seemed to discern as much embedded in the minutes. The Treasury rally alleviated some off the selling pressure on EM bonds. At the same time, the upheaval in Italian and European debt markets appeared a significant escalation in global de-risking/de-leveraging dynamics. Sentiment with respect to global economic prospects has begun to deteriorate.

Japan's Nikkei stock index dropped 2.1% this week, and the Shanghai Composite fell 1.6%. A paralyzing truckers' strike in Brazil further eroded sentiment. Brazilian stocks sank 5.0% this week. European equities were under pressure as well. Italian stocks sank 4.5%, and Spanish equities fell 2.8%. European banks were slammed 4.1%, led by an 8.1% drop in the Italian bank index. Japan's Topix Bank index fell 4.1%, and Hong Kong's Hang Seng Financials were down 1.7%. U.S. stocks outperformed, not unhelpful to the rising dollar (up 0.7% this week). Curiously, crude was slammed 5.3%, much of the losses coming late in the week.

The euro dropped 1.0% this week to the lowest level since last November, adding fuel to the destabilizing dollar rally.

May 23 - New York Times (Jason Horowitz): "The populist parties that won Italy's elections two months ago by demonizing the political establishment, the European Union and illegal migrants in often vulgar terms were granted the go-ahead… to form a government, crystallizing some of the biggest fears of Europe's leaders, who were already bracing for turbulence. The rapid ascent of populists in Italy - the birthplace of Fascism, a founding member of the European Union, and the bloc's fourth-largest economy - shattered the nation's decades-old party system. It also gave fresh energy to the nationalist impulses tugging at the Continent and moved the greatest threat to the European Union's cohesion from newer member states on the periphery, such as Hungary and Poland, to its very core. After 80 days of arduous talks, President Sergio Mattarella gave a mandate to form a government to the parties' consensus pick for prime minister, Giuseppe Conte, a little-known lawyer with no government experience."

If uncertainties associated with the new Italian government weren't enough, Spain continues to fester.

May 25 - Financial Times (Michael Stothard): "The risk of early elections in Spain rose dramatically on Friday after two opposition parties threatened motions of no-confidence against the government in response to a damning court ruling in a graft case involving members of the ruling People's Party. Spanish stocks fell and bond yields rose after Socialist leader Pedro Sanchez said that he had tabled a vote of no confidence to topple the government. The liberal Ciudadanos party said it would table its own motion if new elections are not called. This comes as dozens of people related to the ruling centre-right PP, including a former treasurer, were convicted on Thursday of a range of crimes related to the use of an illegal slush fund that helped finance party election campaigns between 1999 and 2005… The judge said that the testimony of prime minister Mariano Rajoy and other party officials that they knew nothing was 'not credible'."

On a global basis, risk aversion is taking hold. De-risking/De-leveraging Dynamics have gained momentum. Liquidity abundance has begun to wane; financial conditions globally are beginning to tighten. This ensures markets will now assume a different approach with risk. So long as risk embracement and resulting liquidity abundance were commanding global markets, EM and Italian fragilities were inconsequential. The same could be said for vulnerabilities in regions, countries, governmental entities, sectors, corporations and businesses around the globe. Rather suddenly, however, prospects for risk aversion, Credit tightening and illiquidity will have newly mindful markets keen to sidestep the weakened, the fragile and the sickly. It may at this point be subtle, but it's also quite a sea change.

The past decade of stimulus-induced bull markets has been occasionally interrupted by bouts of "Risk Off." Granted, these spells proved short-lived. Central bankers - through talk and/or more aggressive stimulus measures - quickly extinguished nascent Fear. Most of all, zero rates and massive and unrelenting QE reinforced Greed. And this went on for way too long. Faith in central banking was further emboldened, ensuring an upsurge in speculative leveraging the world over.

My long-held view is that central bank measures to guarantee buoyant and liquid markets in the end ensure a liquidity crisis. The perception that central banks will always backstop liquidity has incentivized a degree of speculative leverage - and resulting monetary flows - that virtually guarantees financial and economic dislocation.

The world is now on contagion watch. More and more, De-risking/Deleveraging Dynamics are encroaching on Greed. The Fed is raising rates, and global central banks are winding down QE. A shrinking pool of new QE liquidity confronts a rapidly expanding pool of speculative holding liquidations.

I don't expect the Powell Fed to turn hawkish. Indeed, if things unfold as I expect the Fed will surely turn more cautious with rate hikes. But I also believe the new Chairman would rather not come quickly to the market's defense. Markets are long overdue for removing the training wheels. Interestingly, John Authers' Friday evening FT article was titled "Lack of 'Powell Put' Tightens Financial Conditions." Akin to Italy's debt load, the true status of the Fed (and global central banker) put will be a greater concern now that financial conditions have begun to tighten and asset markets have turned more vulnerable.


For the Week:

The S&P500 added 0.3% (up 1.8% y-t-d), and the Dow increased 0.2% (up 0.1%). The Utilities jumped 3.2% (down 4.9%). The Banks declined 0.5% (down 0.5%), and the Broker/Dealers slipped 0.3% (up 10.9%). The Transports jumped 1.6% (up 2.7%). The S&P 400 Midcaps added 0.2% (up 2.4%), while the small cap Russell 2000 was unchanged (up 6.0%). The Nasdaq100 rallied 1.4% (up 8.8%). The Semiconductors surged 3.4% (up 11.0%). The Biotechs declined 0.5% (up 10.8%). With bullion up $9, the HUI gold index recovered 1.4% (down 6.3%).

Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields fell seven bps to 2.48% (up 59bps y-t-d). Five-year T-note yields dropped 12 bps to 2.77% (up 56bps). Ten-year Treasury yields sank 12 bps to 2.93% (up 53bps). Long bond yields fell 11 bps to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields dropped 12 bps to 3.64% (up 64bps).

Greek 10-year yields fell 13 bps to 4.37% (up 30bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.95% (up 1bp). Italian 10-year yields surged another 23 bps to 2.46% (up 45bps). Spain's 10-year yields added two bps to 1.47% (down 10bps). German bund yields sank 17 bps to 0.41% (down 2bps). French yields fell 12 bps to 0.71% (down 7bps). The French to German 10-year bond spread widened five to 30 bps. U.K. 10-year gilt yields dropped 18 bps to 1.32% (up 13bps). U.K.'s FTSE equities index slipped 0.6% (up 0.6%).

Japan's Nikkei 225 equities dropped 2.1% (down 1.4% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 lost 1.3% (up 4.3%). The German DAX equities index fell 1.1% (up 0.2%). Spain's IBEX 35 equities index sank 2.8% (down 2.2%). Italy's FTSE MIB index was pounded 4.5% (up 2.5%). EM equities were mostly lower. Brazil's Bovespa index sank 5.0% (up 3.3%), and Mexico's Bolsa declined 1.3% (down 8.6%). South Korea's Kospi index was little changed (down 0.3%). India’s Sensex equities index added 0.2% (up 2.5%). China’s Shanghai Exchange dropped 1.6% (down 5.0%). Turkey's Borsa Istanbul National 100 index gained 0.8% (down 10.5%). Russia's MICEX equities declined 0.9% (up 9.3%).

Investment-grade bond funds saw inflows of $2.529 billion, and junk bond funds had inflows of $261 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps to 4.66% (up 71bps y-o-y). Fifteen-year rates jumped seven bps to 4.15% (up 96bps). Five-year hybrid ARM rates gained five bps to 3.87% (up 80bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.70% (up 64bps).

Federal Reserve Credit last week declined $15.4bn to $4.299 TN. Over the past year, Fed Credit contracted $135.7bn, or 3.1%. Fed Credit inflated $1.488 TN, or 53%, over the past 290 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.8bn last week to a five-month low $3.382 TN. "Custody holdings" were up $138bn y-o-y, or 4.3%.

M2 (narrow) "money" supply jumped $27.1bn last week to a record $13.999 TN. "Narrow money" gained $513bn, or 3.8%, over the past year. For the week, Currency increased $3.7bn. Total Checkable Deposits rose $33.6bn, while savings Deposits declined $16.0bn. Small Time Deposits gained $3.5bn. Retail Money Funds added $2.3bn.

Total money market fund assets added $1.3bn to $2.826 TN. Money Funds gained $177bn y-o-y, or 6.7%.

Total Commercial Paper surged $22.8bn to $1.092 TN. CP gained $104bn y-o-y, or 10.6%.

Currency Watch:

The U.S. dollar index gained 0.7% to 94.258 (up 2.3% y-t-d). For the week on the upside, the Brazilian real increased 2.3%, the South African rand 2.1%, the Mexican peso 2.1%, the Japanese yen 1.3%, the Swiss franc 0.7%, the Australian dollar 0.5%, the New Zealand dollar 0.1% and the Singapore dollar 0.1%. For the week on the downside, the British pound declined 1.2%, the euro 1.0%, the Canadian dollar 0.7%, the Norwegian krone 0.7% and the Swedish krona 0.2%. The Chinese renminbi declined 0.18% versus the dollar this week (up 1.80% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.5% (up 11.1% y-t-d). Spot Gold increased 0.7% to $1,302 (down 0.1%). Silver recovered 0.4% to $16.52 (down 3.6%). Crude was slammed $3.78 to $67.50 (up 12%). Gasoline dropped 2.8% (up 21%), while Natural Gas gained 2.9% (down 1%). Copper increased 0.4% (down 7%). Wheat surged 4.8% (up 27%). Corn gained 0.9% (up 16%).

Market Dislocation Watch:

May 23 - Financial Times (Roger Blitz): "Turkey's currency collapse is adding fuel to a widespread retreat in emerging market forex. Much of the weakness is in Central and Eastern Europe. Poland's zloty has fallen 1%, while the Hungarian forint and the Czech koruna are also sharply lower. But Asian EM currencies, which have largely resisted dollar strength in recent weeks, started succumbing to the pressure, including the Korean won, down 0.5%, the Singapore dollar and the Taiwanese dollar."

May 21 - Bloomberg (Luke Kawa): "The Italian government's borrowing costs have surged to inauspicious territory. The nation is getting punished in the bond market as the incoming populist government coalition seems ready to boost spending without much regard for European Union budget strictures and mulls the potential creation of assets tantamount to a parallel currency. The result: An Italian note maturing in February 2028 now yields 10 bps more than a euro-denominated sovereign from Indonesia due four months later."

May 24 - Reuters (Sujata Rao and Saikat Chatterjee): "Goldman Sachs said… that any systemic spillovers from Italian political risks into peripheral Europe could push the euro down against the dollar by 'around five big figures.' The prospect of a coalition government between the anti-establishment 5-Star Movement and far-right League, bent on big spending plans that would put Italy on a collision course with the European Union, have rattled markets in the past week. 'Should this become a more systemic event...we estimate that EUR/USD could fall by around 5 big figures,' the U.S. bank said in a note…"

Trump Administration Watch:

May 23 - New York Times (Ana Swanson): "President Trump has asked for a sweeping trade investigation into whether autos imported into the United States pose a threat to national security, a move that could ultimately result in tariffs on foreign-made cars and further strain relations with global allies. …The Commerce Department said it had begun an investigation 'following a conversation' with Mr. Trump. The announcement followed a statement from the president, in which he said he had instructed the commerce secretary, Wilbur Ross, to investigate imports of cars, trucks and auto parts 'to determine their effects on America's national security.' 'Core industries such as automobiles and automotive parts are critical to our strength as a nation,' Mr. Trump said."

May 24 - Wall Street Journal (Sean McLain in Tokyo, William Boston and Trefor Moss): "President Donald Trump's push to impose painful tariffs on auto imports has put close U.S. allies in the crosshairs of a global trade row that is creating uncertainty among auto makers, investors and governments. Shares of some of the biggest international auto makers… which have big exposure to the U.S., fell Thursday, a day after the U.S. Commerce Department launched a probe into whether it could raise tariffs to up to 25% on auto imports on the basis of national security. The probe adds to a battle over steel tariffs and, again, pitches the U.S. against three of its closest military allies-Japan, South Korea and Germany. All are major car exporters."

May 24 - Bloomberg (Chris Reiter): "U.S. President Donald Trump's threat to levy tariffs on imported vehicles aims at the heart of Germany's export-led economy, further straining relations between the two long-standing allies. While Trump didn't specifically point to Germany when calling for an investigation into protections for the U.S. auto industry on national security grounds, he didn't have to. Past statements have made clear that he resents the country's trade surplus, which amounted to 14.2 billion euros ($16.7bn) last year for Germany's auto industry."

May 23 - Reuters (James Oliphant and Lisa Lambert): "U.S. President Donald Trump… railed against Mexico and Canada's efforts in renegotiating the North American Free Trade Agreement (NAFTA), saying both of the United States' neighbors had been very difficult. 'NAFTA is very difficult. Mexico has been very difficult to deal with. Canada has been very difficult to deal with ... but I will tell you that in the end we win,' Trump told reporters…"

May 24 - Reuters (Susan Heavey): "U.S. President Donald Trump has signaled a new direction in U.S.-China trade talks and said any deal would need 'a different structure,' fueling uncertainty over current negotiations. In an early Wednesday morning post on Twitter, Trump said the current track appeared 'too hard to get done' and cited difficulties such as verification, but he gave no other details about what he or his administration was looking for amid ongoing negotiations."

May 24 - Bloomberg (Jenny Leonard and Saleha Mohsin): "President Donald Trump is backing away from the trade agreement the U.S. just announced with Beijing, under pressure from China hawks among his supporters and in Congress who have assailed the accord as a capitulation. 'Our Trade Deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion,' Trump said… After boasting of the deal's benefits for farmers in tweets on Monday, Trump first indicated on Tuesday he was having second thoughts as some of his loyalists publicly criticized the agreement. Asked if he was pleased with the direction of his administration's negotiations with China, Trump told reporters 'no, not really.' He later added, 'they're a start.'"

May 19 - Wall Street Journal (Bob Davis and Lingling Wei): "A last-ditch effort by the Trump administration failed to get China to accept its demand for a $200 billion cut in the U.S. bilateral trade deficit, as Chinese officials resisted committing to any specific targets after two days of contentious negotiations. The two days of deliberations in Washington ended with both sides arguing all night on Friday over what to say in a joint statement… The Chinese had come willing to step up purchases of U.S. merchandise as a measure to narrow China's $375 billion trade advantage. But U.S. negotiators pushed the Chinese delegates to approve a specific target of $200 billion in additional Chinese purchases. The Chinese refused any such target in specific dollar amounts, and the matter is now in the hands of President Donald Trump and President Xi Jinping, the people said."

May 22 - Wall Street Journal (Kate O'Keeffe and Bob Davis): "Lawmakers are moving to thwart Trump administration efforts to ease restrictions on Chinese telecommunications giant ZTE Corp. and other sensitive technology, citing fears the positions would compromise national security in the latest twist in trade negotiations between the world's largest economies. The Senate Banking Committee unanimously approved legislation… that would tighten national-security reviews of Chinese technology deals by the interagency Committee on Foreign Investment in the U.S., strengthen export controls and prohibit the Trump administration from lifting stiff penalties imposed on ZTE."

May 24 - CNBC (Stephanie Landsman): "One of Wall Street's top Asia experts isn't ruling out a U.S.-China trade war. According to Yale University senior fellow Stephen Roach, the threat is still real, and it could take a big bite out of stocks. 'The bottom line is China has been one of President Trump's core economic issues, and I'd be surprised if he just capitulates on this,' Roach told CNBC's 'Trading Nation'… 'We have to look at the risk of some type of trade tensions very seriously.' Roach, who was Morgan Stanley Asia chairman for five years, said it's hard to have confidence in White House trade policy when Trump administration officials are constantly changing their minds."

May 22 - CNBC (Tom DiChristopher): "Secretary of State Mike Pompeo has announced a list of a dozen demands that Iran must meet before the United States lifts punishing sanctions against the country. However, the list is a non-starter and raises the specter of a prolonged standoff in the world's busiest oil exporting region. Pompeo articulated the list at the conservative Heritage Foundation… The address clarified the U.S. playbook for containing Iran following President Donald Trump's announcement that he will abandon a 2015 nuclear deal with Iran and restore sanctions on the Iranian economy, including its lifeblood oil industry."

May 23 - Wall Street Journal (Ryan Tracy and Andrew Ackerman): "Ten days after his inauguration, President Donald Trump promised to 'do a big number' on the Dodd-Frank law that tightened rules on financial firms after the 2008 crisis. Behind the scenes, his then top economic adviser and a powerful senator settled on a less ambitious plan. And in recent weeks, Mr. Trump called a senior House lawmaker, urging him to move forward despite objections from Republicans who wanted broader changes. The strategy to seek modest Dodd-Frank changes… paid dividends on Tuesday: The House of Representatives by 258-159 approved the resulting bipartisan legislation…"

May 22 - Reuters (Jeff Mason and Eric Beech): "U.S. President Donald Trump said… he will propose new tax cuts sometime prior to November, when Republicans look to retain their control of the U.S. Congress in midterm elections. Trump said he would meet with Republican Representative Kevin Brady, chairman of the tax-writing House Ways and Means Committee, about the proposal."

EM Bubble Watch:

May 22 - Bloomberg (Enda Curran and Lianting Tu): "Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due. Some $249 billion needs to be repaid or refinanced through next year… That's a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default. Even since the 2013 taper tantrum, the group's dollar debt has climbed in excess of $1 trillion -- more than the combined size of the Mexican and Thai economies…"

May 23 - Financial Times (Laura Pitel): "The few remaining market-friendly members of Recep Tayyip Erdogan's economic team were notably silent as the Turkish lira plummeted to record lows this week. As warnings of a full-blown currency crisis have increased in the run-up to crucial presidential and parliamentary elections, it was the president's son-in-law who was left to speak out. Berat Albayrak said… that the beleaguered lira was the victim of an 'operation' of 'overseas origins' aimed at bringing down the government. That Mr Albayrak has become one of the president's closest confidants in recent years is a symbol of the growing siege mentality at the presidential palace. Analysts and officials say that over the 15 years that Mr Erdogan has dominated Turkish politics, threats both real and imagined have forced him to retreat into an inner circle of people who tell him only what he wants to hear. 'His advisers are a bunch of idiots and sycophants,' says one Turkish official. 'He no longer listens to sensible advice.'"

May 24 - Bloomberg (Ugur Yilmaz): "Every market analyst in Turkey knows who Mert Ulker is: He's the expert who was fired as research chief at one of the country's biggest brokerages for publishing speculation that President Recep Tayyip Erdogan might have staged the failed 2016 coup to tighten his grip on power. He's now a cautionary tale. With Erdogan just weeks away from elections likely to cement his near-absolute authority, barely a word of criticism creeps into research published by strategists and economists based in Turkey - not even after Erdogan's threat to force the central bank to cut interest rates sent the lira into freefall. 'Each time I am about to write a bearish comment, my managers and colleagues remind me of what happened to Mert Ulker,' said one analyst who works at a state-run financial institution in Istanbul…"

May 24 - Bloomberg (Sabrina Valle): "Eight anxious hours. That's how long it took the chief executive officer of Petrobras to decide that he must break a promise to investors to help contain the growing chaos from a Brazilian trucker strike. For the first time in three years, Petrobras agreed to sell fuel below market prices in a move based purely on politics. The reaction? Truckers rejected the move and shares in the state-controlled oil producer tumbled the most in a year. Pedro Parente's actions Wednesday came after what started as a routine labor dispute became a logistical crisis spanning Latin America's largest economy. Flights were canceled at some airports amid fuel shortages. Buses were idled in Rio de Janeiro, where the company is based. Supermarkets were beginning to limit purchases in fear of coming shortages."

May 21 - Bloomberg (Rieka Rahadiana and Tassia Sipahutar): "Indonesia's central bank pledged to continue its intervention in the currency and bonds market to ease volatility, and said it will boost forex liquidity as the rupiah slumped to a fresh 31-month low. Bank Indonesia will hold three forex swap auctions to ensure sufficient liquidity in the interbank market… The bank, which usually holds two auctions a week, has been holding additional sales to ensure the market is well supplied, he said."

Federal Reserve Watch:

May 23 - CNBC (Jeff Cox): "Federal Reserve officials would be content to let inflation briefly run above their 2% target as the economy continues to recover, according to minutes from the central bank's most recent meeting. Following the May 1-2 session, the policymaking Federal Open Market Committee said it wasn't raising rates yet but added the word 'symmetric' to describe its inflation goal. Market participants since have puzzled over what the change in language might imply. The summary… indicates a substantial level of debate over how the Fed should approach inflation. The minutes also pointed to an interest rate hike at the June meeting amid debate over how close the Fed might be getting to the end of this rate-hiking cycle."

U.S. Bubble Watch:

May 24 - Bloomberg (Alex Tanzi): "National home values have increased 8.7% since last April to a median value of $215,600, according to Zillow. Newly released data from the Federal Housing Finance Agency confirm the widespread gains seen by Zillow… The FHFA report shows first-quarter home prices rose 6.9% from a year earlier. Annual appreciation surpassed 10% in Nevada (13.7%), Washington (13.1%), Idaho (11.1%), Colorado (10.6%). The rise in home prices has allowed more people to take cash-out of the homes when they refinance. Refinancing, where the home owner took additional cash out, rose to 61% in the first quarter -- the highest rate seen since the third quarter of 2008…"

May 22 - CNBC (Jeff Cox): "Investors and policymakers have gone looking for inflation over the past decade and largely have come up empty. It could, however, come barreling at them soon like an 18-wheeler. Multiple signs of inflation in freight-related industries are at or near historical highs, in what could be an early sign that price pressures are building and ready to reverberate around the economy. Freight marketplace DAT keeps track of supply and demand in the freight industry through a bulletin board that matches companies with loads to be delivered to the vehicles that will take the goods to the marketplace… Recent readings show demand for vehicles skyrocketing, a sign that generally points to inflationary pressures building up in the supply chain."

May 22 - Reuters (Pete Schroeder): "U.S. banks reported $56 billion in profits in the first quarter, up 27.5% from a year earlier, as institutions began to take advantage of a lower effective tax rate… Over 70% of U.S. banks reported growth in year-over-year earnings, as the industry enjoyed higher net operating revenue amid a significantly lower corporate tax rate, according to the regulator. Net interest income was up 8.5% to $131.3 billion."

May 21 - Bloomberg (Saleha Mohsin and David McLaughlin): "Treasury Secretary Steven Mnuchin urged the Justice Department to review the power that large technology firms such as Google have over the American economy, the latest U.S. official to back antitrust scrutiny of the industry. A '60 Minutes' segment on Sunday devoted to assertions that Alphabet Inc.'s Google wields a destructive monopoly in online search hammered home the notion of the company's dominance during a time of heightened public concern with technology giants… 'These issues deserve to be reviewed carefully,' Mnuchin said… 'These are issues the Justice Department needs to look at seriously, not for any one company, but as these technology companies have a greater and greater impact on the economy.'"

May 24 - Wall Street Journal (Nour Malas): "The Silicon Valley cities that are home to Google and Apple Inc. are considering the kind of per-employee tax that Seattle recently drew criticism for imposing. Mountain View, Calif., and nearby Cupertino are both weighing possible ballot measures this fall. Officials said the taxes could raise money to help manage local problems tied to rapid growth, including traffic and a need for affordable housing. 'We are pursuing a more aggressive agenda to respond to our housing and transportation crises, which have both gotten significantly worse in the last year,' said Rod Sinks, the vice mayor of Cupertino, where Apple is based."

May 20 - Financial Times (Rana Foroohar): "Financial crises always start the same way. Loose monetary policy leads to an increase in debt and a rise in risk-taking. Over-confident financiers, lax regulators and politicians desperate to please voters operate in this toxic environment until a bubble eventually bursts, taking the financial system down with it. I am not saying we are heading for this fate in the very near future. But it is worth noting that this coming week the US Congress may very well pass a bill to rollback the post-financial crisis-era Dodd-Frank reforms. This is happening at a time when interest rates have been at historic lows for nearly 10 years, public and private debt is at record levels, consumer debt loads and subprime defaults are rising, and politicians are looking to throw a bit more kerosene on the economy to seduce voters in the run-up to November's midterm elections."

May 23 - Bloomberg (Joe Light): "Two U.S. senators who have played key roles in trying to advance housing-finance reform are acknowledging the legislative efforts to end government control of Fannie Mae and Freddie Mac are dead, at least for now. Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia commented on the status of the two companies… Corker and Warner tried to develop a bill that would have largely preserved the operations of Fannie and Freddie while opening the market to new competition. That effort foundered after failing to win support from progressives, who wanted to preserve the companies' affordable-housing mandates… 'My sense is that these institutions may well stay in conservatorship for some time,' Corker said…"

May 22 - Bloomberg (Shelly Hagan): "U.S. consumers are more devoted to their mobile phones than their automobiles. The sea change has taken place over the last few years as mobile devices become an integral tool not just for communication with loved ones or employers, but also everything from banking to dating to watching TV and listening to music. As cars grow relatively less important, borrowers struggling to pay back their loans on time are increasingly prioritizing payments on the latest iPhone instead of making sure they hold on to their pickup or coupe."

May 23 - Reuters (Richard Leong): "U.S. applications on mortgages to refinance an existing home fell to their lowest level in 17-1/2 years as some 30-year borrowing costs climbed to their highest levels in over seven years, the Mortgage Bankers Association said…"

China Watch:

May 20 - Reuters (Li Zheng, Ma Rong and Kevin Yao): "China will 'actively and steadily' deleverage and tackle financial risks, sources said…, citing the country's five-year plan (2016-2020) for the financial sector. China will boost the role of price-based monetary policy targets with interest rates as core, according to two sources with knowledge of the matter and a document seen by Reuters."

May 23 - Reuters (Andreas Rinke and Ben Blanchard): "China said… it would 'open its door wider' to German businesses, giving a warm reception to visiting Chancellor Angela Merkel, who has wooed Beijing to counterbalance trade threats from U.S. President Donald Trump. Germany and China, two exporting nations that run large trade surpluses with the United States, have found themselves in Trump's firing line and are scrambling to preserve the multi-lateral order on which their prosperity rests. Merkel faces a delicate balancing act on the trip to show Chinese-German solidarity over trade and the Iran nuclear deal without harming ties with long-term ally Washington."

Central Bank Watch:

May 24 - Bloomberg (Alessandro Speciale): "European Central Bank officials with memories of Greece's brinkmanship aren't about to blink as they face another populist government from a country many times its size. In the same month that the… institution potentially closed the book on its involvement with the Greek debt crisis, its guardians have been keeping a nervous eye on Italy. Populists there are trying to form a coalition government with euro-skeptic tendencies and spending promises of as much as 126 billion euros ($147bn) a year. With the biggest debt burden in the euro zone, such pledges in Italy have unsettled bond markets scarred by the European sovereign crisis of recent years. For the ECB, which spearheaded efforts to contain that turmoil, the prospect of a wayward government at the helm of the region's third-biggest economy is a political nightmare for officials who will insist on euro-zone members sticking to the rules of monetary union."

May 24 - Financial Times (Claire Jones): "The eurozone's central bankers want to maintain 'a steady hand' as they continue to plan for the removal of their crisis-era stimulus in the face of concern that the slowdown in growth may prove more than a blip. The bank also warned that it needed to strengthen its message on government spending in the face of events in Italy. After a bumper 2017, growth in the opening months of this year has been slower in the eurozone. Most economists view the setback as temporary..."

May 24 - Financial Times (Claire Jones): "The European Central Bank has warned the eurozone's more heavily indebted member states that loosening their fiscal policy could cause investors to offload their bonds. The warning comes just hours after Italy's president blessed a coalition composed of two anti-establishment parties that have made higher fiscal spending a cornerstone of their mandate the right to form a government. The ECB said… to mark the release of its latest edition of its Financial Stablity Review: 'A deteriorating growth environment or a loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment towards some euro area sovereign issuers.'"

Global Bubble Watch:

May 22 - Financial Times (Robin Wigglesworth): "Every morning, Wayne Wicker goes to the gym and watches CNBC to catch up on the financial news. Lately, one particular theme dominates the broadcasting agenda. 'There seems to be a new merger on CNBC every day,' noted Mr Wicker, the chief investment officer at ICMA-RC… 'It's a pretty spectacular trend.' Indeed, the overall volume of mergers and acquisitions globally has reached nearly $2tn already this year, according to Dealogic, on track to beat the post-crisis high of 2015. However, M&A splurges tend to be a classic late-cycle harbinger. The acquisitions boom has already left US companies with record amounts of debt on their balance sheets, and the quality of that debt… has deteriorated."

May 24 - Bloomberg (Lianting Tu and Narae Kim): "Debt issuers in the Asian dollar-bond market are learning the wisdom behind the old adage 'if at first you don't succeed, try, try again.' In a twist hardly thinkable during the record sales of last year, investors balked at two investment-grade Chinese companies' offerings last week. Increasing strains thanks to the appreciating dollar and steady increase in benchmark Treasury yields are shaking up this near-$1 trillion market…"

May 21 - Financial Times (Attracta Mooney): "Chinese investors have been big buyers of international property for years, helping to boost real estate markets globally as they ploughed money into so-called trophy assets. However, last year the country tightened capital controls on foreign property purchases. As a result, Chinese cross-border real estate investment in the first quarter of 2018 was the lowest in three years, as outflows fell 27% year-on-year to $5.6bn for the period. Now institutional investors are grappling with what this tightening of policy means for commercial property markets around the world and whether the retreat of Chinese buyers will push down prices."

Europe Watch:

May 23 - CNN (Andrea Mammone and Federico Finchelstein): "Italy is set to create its most anti-establishment government since the end of fascism in 1945. The Five Star Movement's leader, Luigi Di Maio, and Matteo Salvini's Northern League met with Italy's President, Sergio Mattarella, and put forward Giuseppe Conte -- a law professor with no political experience -- as their proposed candidate for prime minister The formation of a new cabinet under Conte's leadership could take a while yet, but one thing is sure: Italy -- and the rest of Europe -- is a long way from stemming the anti-establishment surge that's been plaguing the continent in recent years Some pundits believe that the 'modern barbarians' are literally at the gate of Rome."

May 25 - Financial Times (Jessica Dye): "Italy's political uncertainty has prompted Moody's to put the country's rating on review for a possible downgrade. Moody's said that Italy's Baa2 rating - two notches above non-investment grade, or junk, status - was at risk due to two key factors: the potential for its fiscal strength to crumble under the new coalition government's plans, and the chance that current efforts at structural reform will falter, or that past reforms could be undone."

May 25 - Bloomberg (Maria Tadeo and Esteban Duarte): "Spanish Prime Minister Mariano Rajoy said he aims to see out the rest of his four-year term after the opposition called a vote of no-confidence in his scandal-plagued administration. 'As far as it's in my power, it is evident that I want the legislature to last four years,' Rajoy said Friday… 'That is good. It gives certainty, it gives security, it allows you to govern with a degree of calmness.' The Socialists, the biggest opposition group, called a vote to oust Rajoy's minority administration after the National Court convicted former officials from the governing party of running a multi million-euro racket on his watch. The anti-establishment group Podemos backed the motion, while Ciudadanos said the prime minister's position has become 'unsustainable' and demanded a snap election."

Fixed Income Bubble Watch:

May 21 - Bloomberg (Cecile Gutscher): "You need to rifle through 18 years of history to find selloffs that compare to the one corporate bond investors are now enduring. Debt of American companies just posted their third-worst 100-day returns since 2000, according to a JPMorgan Chase & Co. index, as tighter monetary conditions leave their mark on high-quality bonds with longer maturities. With negative returns likely to scare off retail investors, the outlook for the asset class looks grim, JPMorgan strategists said in a Friday note. But they find a silver lining: the highest yields in almost five years are likely to discourage new bond supply, which would at least help the technical picture. The selloff in corporate credit is now on par with the routing emerging markets. A Bloomberg Barclays index of U.S. investment-grade credit is down 3.9 percent so far this year, while dollar bonds of developing nations have declined at about the same clip."

May 25 - Bloomberg (Tracy Alloway and Cecile Gutscher): "The C-C-Craze for some of the riskiest corporate credits has gone too far, according to Goldman Sachs… While U.S. investment-grade bonds that are most sensitive to moves in borrowing costs have been hit hard this year, investors continue to pile into debt sold by some of the weakest junk-rated companies. Bonds in the CCC category -- just two notches above default -- have returned a whopping 330 bps in total this year… That outperformance has helped push spreads on the Bank of America Merrill Lynch gauge of CCC rated debt to below 700 bps earlier this week -- the smallest premium since July 2014. Meanwhile, Goldman's preferred valuation measure of corporate credit, which subtracts their projected expected-loss rates from current spreads, shows U.S. high-yield obligations are now mispriced for even the most benign scenarios."

May 25 - Bloomberg (Sally Bakewell): "Wall Street's hottest debt market is approaching hyperdrive. Investors haven't been able to get enough of the repackaged corporate loans known as collateralized loan obligations. That intense demand is allowing the money managers that put these securities together to sell off pieces of CLOs that by law they previously had to hang on to. These sales are the crest of what could be a $7 billion wave of such deals. The frenzied buying isn't limited to older securities -- Wells Fargo & Co. is forecasting that there will be a record $150 billion of new U.S. CLOs issued this year. Moody's… can't keep up with the demand for its services, and is taking around a month more to rate the securities than it needed before. That strong demand is allowing managers to sell CLOs with weaker protections, and it's making the leveraged loans that get bundled into the securities riskier too. Investors are buying CLOs because they are seen as safe: they offer protection against rising interest rates and against losses if loans default."

Japan Watch:

May 21 - Reuters (Stanley White and Leika Kihara): "The Bank of Japan… won approval from influential members of the government's leading advisory panel for its decision to abandon the timeframe it had set for meeting its inflation target… In its quarterly outlook report, the BOJ ditched its forecast for when inflation will reach 2%, saying this will dispel the notion that the central bank is obliged to ease policy if it pushes back this forecast."

May 24 - Bloomberg (Christopher Anstey): "When Tadashi Kikugawa arrived on the Japanese bond desk at Fuji Bank in 1988 after finishing a college degree in physics, he had to get to grips with a market with 'huge' fluctuations. Trades worth $1 billion in one shot weren't unusual, he says, and they would often send yields seesawing. Fast forward three decades and the market for Japanese government bonds -- JGBs -- is very different. Gone are the days of wild swings, and sometimes the market doesn't move at all. On one Tuesday in March there wasn't a single trade in the benchmark 10-year Japanese government bond. 'That was very sad," Kikugawa said... "We used to say that volatility was your friend. There's no friend anymore.'"

Geopolitical Watch:

May 18 - Reuters (David Stanway and Winni Zhou): "China's air force has landed bombers on islands and reefs in the South China Sea as part of a training exercise in the disputed region, it said… It said the pilot of the H-6K bomber conducted assault training on a designated sea target and then carried out take-offs and landings at an airport in the area, describing the exercise as preparation for 'the West Pacific and the battle for the South China Sea'."

May 23 - CNBC (Holly Ellyatt): "Diplomatic tensions and the 'aggressive policy' of the U.S. toward Moscow are of more concern than economic sanctions, the president and chairman of one of Russia's largest lenders said… 'What concerns me more than any economic sanctions, that for the first time since the Cuban (missile) crisis - people, at least in Russia and probably in America also, have started to feel that there is more danger of World War III,' Andrei Kostin, the president and chairman of Russia's VTB Bank told CNBC's Geoff Cutmore… 'There is a recent public opinion poll (in) Russia (that) showed that 55% of Russians now believe or think that World War III is possible because of the aggressive policy of the United States,' he added."