Saturday, September 1, 2018

Weekly Commentary: Unassailable

I've been here before and, candidly, it's not much fun. Lodged in my mind this week was the brilliant quote from the 19th century German philosopher Arthur Schopenhauer: "All truth passes through three stages: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident."

It's fascinating how it all works. Looking back, there was definitely a Bubble in 1999. Clearly, 2007 was one huge Bubble. Everything is obvious in hindsight, and most look back now and contend it was pretty conspicuous even at the time. Having toiled through both prolonged Bubble periods - arguing against deeply embedded bullish conventional wisdom - I can attest to the fact that the Bubble viewpoint was violently opposed at the late stages of both cycles.

I don't feel I'm venturing out on a limb to predict that some years into the future the 2018 Bubble backdrop will be recalled as rather self-evident. Years of experimental "whatever it takes" global monetary stimulus (rates, QE and market manipulation) nurtured excess and imbalances on an unparalleled global scale. EM borrowed excessively, too much denominated in foreign (U.S. dollar!) currencies. The Federal Reserve (all central banks) held rates too low for much too long. Prices for virtually all asset classes were inflated to dangerous extremes.

The resulting Tech Bubble 2.0 dwarfed the earlier nineties version, culminating in a global technology arms race. China was a historic Bubble of reckless proportions. Protectionism and Trade wars were a scourge for markets and global growth. Unsound "money" fueled populism. In the end, the backdrop created a cauldron of deepening geopolitical animosities and flashpoints.

During the mortgage finance Bubble period, Chairman Greenspan was fond of claiming there was no national Bubble - specifically because all real estate markets were local. Missing in the analysis was the recognition that mortgage finance had evolved into very much a national market. The GSEs, MBS, subprime ABS, the repo market, derivatives, structured finance ("Wall Street finance", more generally), the hedge funds, and money management more broadly - were all crucial to a national market of progressively loose finance.

Centralized finance linked seemingly disparate housing markets, securities markets, asset classes, financial systems and national economies. It evolved into a comprehensive Bubble of mispriced finance on both national and international scales, which over time led to deepening structural impairment to both financial systems and real economies.

Recently, a period of calm have many believing the worst of EM instabilities has passed. But this week saw the Argentine peso collapse 16.3% (down 49.5% y-t-d). The Turkish lira sank 8.2% (down 41.9%). The Colombian peso declined 3.3%, the Chilean peso 3.2%, the South African rand 3.0%, the Mexican peso 0.9% and the Indian rupee 1.5%. Italian yields jumped eight bps to 3.24% (spread to bunds at 5-yr highs!). Greek yields jumped 24 bps (4.37%) and Portuguese yields rose 10 bps (1.92%). After somewhat of a respite, "Risk Off" was back for more.

In a sign of the times, investors remain extraordinarily bullish - even on the emerging markets. EM travails are "idiosyncratic" - individual instances of Current Account Deficits and borrowing excessively in foreign currencies. By and large, the EM selloff has created value and buying opportunities. All markets are local; the notion of a global Bubble is asinine.

Most unfortunately, the Bubble is real, and it is decidedly global. It has been fueled by an unprecedented international boom in central bank Credit and sovereign debt. Underpinned by government finance and central bank liquidity backstops, over-liquefied markets accommodated unprecedented global corporate debt issuance. A comprehensive boom in global finance was fueled by a massive global leveraged speculating community, an international boom in derivatives trading and securities finance, along with a globalized market in ETFs and other passive indexed products.

Global market prices have been inflated by synchronized artificially low short-term interest rates, along with liquidity excess, again, on a globalized basis. Finance has been grossly mispriced systemically around the world.

Here in the U.S., the bullish consensus view holds that a faltering EM doesn't matter. The U.S. economy is strong and largely immune to global factors. Profits are booming. Prospects are unequivocally positive. The mindset is uncomfortably reminiscent of the "subprime doesn't matter" blather heading right into a devastating crisis. It's worth recalling that U.S. GDP exceeded 2% in 2007's 2nd, 3rd and 4th quarters, with Q4's 2.5% expansion the strongest in a year.

Things look just rotten a market bottoms. They appear splendid at tops. It's worth adding a little color from the perspective of George Soros' "reflexivity". So long as bullish perceptions sustain inflated market prices and unmatched perceived wealth, along with "animal spirits" and strong economic activity more generally, resulting "fundamentals" will tend to confirm the optimistic viewpoint.

Chuck Prince was still dancing in the summer of 2007. Everyone was locked into the dance party, as the market disregarded the subprime fiasco while rallying to record highs in mid-October 2007. By the end of 2007, few were interested in hearing another word about the Bubble. The analysis was violently opposed: Washington had it all well under control. I needed to get a life.

Our reading of financial history has left us with the impression that financial manias are replete with crazy speculators running around in fits of irrational greed and excess. I hold the view that Bubbles are much more about fits of deceptively rational behavior. The "Oracle of Omaha," 88 years young Thursday, can drink Coke and preach the virtue of buying stocks for the long-term. Who today would take exception with such an irrefutable truth?

Mr. Buffett, along with virtually everyone, was blindsided by the 2008 crisis. This should matter but doesn't. Amazingly, another crisis is viewed these days as an opportunity rather than a risk. Stocks, as they always do, will come roaring back. The last crisis was only an issue for those that lacked conviction and sold stocks in an irrational panic.

At this point, the bullish view that stocks must be bought and held for the long-term has surpassed rational. It's Unassailable. Your price entry point matters little - the global backdrop even less. Politics little, geopolitics less. Holding cash is stupid, shorting much worse. Indeed, to not bet confidently on the U.S. for the long-term is an act of self-destructive irrationality. A risk-based approach, to be sure, would lead to irrational decisions. It's been proven - repeatedly. Don't sell.

I believe we're nearing the end of an historic multi-decade Bubble. Risk is incredibly high, a view that has by now been thoroughly discredited. A key factor boosting risk is the overwhelming consensus view that risk is virtually nonexistent. In stark contrast, I believe this protracted period of serial boom and bust cycles has led to the accumulation of financial and economic distortions and deep structural impairment.

Determined central banks and governments have resolved a series of busts with only more powerful booms. At his point, this ensures that few contemplate a scenario where policymakers are without the capacity to sustain robust markets and economic growth.

Risk-takers have gravitated to the top - in the markets, in company management, in venture capital, at banks, and generally throughout the economy. Those attentive to risk have been pushed aside - investors, speculator, managers and entrepreneurs. Trillions have flowed into "passive" investment strategies, essentially a bet on an index over active risk management. Based on (recent) historical performance, taking a passive approach is perfectly rational. But one must ignore the reality that the Trillions that flowed into this strategy ensure latent risk of an abrupt shift in market perceptions.

There is today a perception of invincibility that goes significantly beyond 1999 and 2007. It has more in common with my reading of the history from the late-twenties Bubble period. "New Era." "Permanent plateau of prosperity." And at the end, "Everyone was prepared to hold their ground. But the ground gave way." There were worries throughout the twenties period. By 1929, it was a case of acute worry fatigue. Inflation psychology dominated a deeply distorted marketplace. Stated more simply, there was too much money to be made. Greed dominated.

And let's not miss a fundamental aspect from the "Roaring Twenties" period. The Fed was perceived to have things under control. It was a young central bank doing exciting new - and captivating - things. The perception that enlightened Fed operations had eliminated crisis risk in reality greatly exacerbated the risk of financial and economic calamity. For the current long cycle, central banks are anything but fledgling institutions. They have, however, adopted new and captivating doctrine and (whatever it takes) stimulus measures.

I am expecting EM contagion at the "periphery" to make its way to the "core." This is in stark contrast to the consensus market view: Idiosyncratic instability in select emerging economies ensures greater financial flows to outperforming U.S. equities and fixed-income markets. Global risks ensure the Fed concludes "normalization" well before rates turn restrictive, thus working to reduce risk for U.S. financial markets and the juggernaut U.S. economy.

It won't be viewed as such by historians, but in real time the complacent bullish view is rational. Complacency, after all, has repeatedly paid off handsomely. Never failed. The Fed and global central bankers will clearly do whatever it takes to avoid another financial crisis. They successfully responded to mounting stress in 2012 (epicenter Europe) and again in late-2015/early-2016 (epicenter China) that, in hindsight, hardly even required a policy response. Again, to bet against central bank control would at this point appear irrational.

The Nasdaq Composite traded down to 4,210 in February 2016. The index closed Friday at 8,110, some 93% higher (up 209% from 2012 lows!). Global central banks moved to adopt aggressive "whatever it takes" stimulus measures in late-2012. When global market stress reemerged in late-2015, the BOJ and ECB boosted liquidity injection operations (and market interventions) while the Fed postponed rate "normalization." Meanwhile, Beijing implemented a number of fiscal and monetary stimulus measures. Some might see parallels to Benjamin Strong's 1927 "coup de whisky."

What's my point? Today's monetary backdrop is much different than the EM episode back in 2016. Instead of rapidly expanding, central bank liquidity is on the verge of contracting. Moreover, I would posit that the amount of central bank liquidity necessary to stabilize markets increases as market prices inflate. And this is where the proverbial analytical rubber meets the road: market players have come to have absolute faith in the efficacy of policy responses, unappreciative of crucial changes in both market structure and the liquidity backdrop.

So long as confidence holds at the "core" and speculation runs unabated, underlying fragilities remain concealed. But its wildness lies in wait - growing, strengthening and expanding, surreptitiously.

There are parallels to 2007 - as well as to the Q1 2000 (along with 1998!). The great nineties bull market culminated in a final short squeeze and derivatives-related melt-up. Options strategies had become popular both for speculating on higher prices and betting on a bursting Bubble. As they are today, the big technology stocks were at the epicenter of speculative excess, squeezes and derivative trading activity. Writing calls had become popular, often part of sophisticated options trading strategies.

When the market during Q1 2000 went into speculative blow-off mode, speculators that were caught short call options on the big tech names were forced to aggressively buy stocks into a final self-reinforcing melt-up. And, again with parallels to today's market backdrop, this melt-up occurred right into deteriorating fundamental prospects. For at least now, I know this line of analysis will either be ridiculed or violently opposed.


For the Week:

The S&P500 gained 0.9% (up 8.5% y-t-d), and the Dow added 0.7% (up 5.0%). The Utilities slipped 0.7% (up 0.4%). The Banks were little changed (up 3.2%), and the Broker/Dealers increased 0.8% (up 4.6%). The Transports added 0.2% (up 6.5%). The S&P 400 Midcaps rose 0.5% (up 7.6%), and the small cap Russell 2000 gained 0.9% (up 13.4%). The Nasdaq100 advanced 2.3% (up 19.7%). The Semiconductors gained 1.8% (up 11.8%). The Biotechs jumped 3.6% (up 26.4%). With bullion declining $5, the HUI gold index fell 2.4% (down 25.8%).

Three-month Treasury bill rates ended the week at 2.06%. Two-year government yields added a basis point to 2.63% (up 74bps y-t-d). Five-year T-note yields rose three bps to 2.74% (up 53bps). Ten-year Treasury yields gained five bps to 2.86% (up 46bps). Long bond yields increased six bps to 3.02% (up 28bps). Benchmark Fannie Mae MBS yields rose five bps to 3.62% (up 62bps).

Greek 10-year yields jumped 20 bps to 4.37% (up 29bps y-t-d). Ten-year Portuguese yields rose 10 bps to 1.92% (down 2bps). Italian 10-year yields gained another eight bps to 3.24% (up 122bps). Spain's 10-year yields rose eight bps to 1.47% (down 9bps). German bund yields declined two bps to 0.33% (down 10bps). French yields slipped a basis point to 0.68% (down 10bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields jumped 15 bps to 1.43% (up 24bps). U.K.'s FTSE equities index fell 1.9% (down 3.3%).

Japan's Nikkei 225 equities index gained 1.2% (up 0.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 6bps). France's CAC40 slipped 0.5% (up 1.8%). The German DAX equities index dipped 0.2% (down 4.3%). Spain's IBEX 35 equities index fell 2.0% (down 6.4%). Italy's FTSE MIB index dropped 2.3% (down 6.4%). EM equities were mixed. Brazil's Bovespa index increased 0.5% (up 0.4%), while Mexico's Bolsa declined 0.2% (up 0.4%). South Korea's Kospi index rose 1.3% (down 5.9%). India’s Sensex equities index gained 1.0% (up 13.5%). China’s Shanghai Exchange slipped 0.2% (down 17.6%). Turkey's Borsa Istanbul National 100 index rose 2.8% (down 19.6%). Russia's MICEX equities index jumped 2.9% (up 11.2%).

Investment-grade bond funds saw inflows of $2.253 billion, and junk bond funds had inflows of $97 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 4.52% (up 70bps y-o-y). Fifteen-year rates slipped a basis point to 3.97% (up 85bps). Five-year hybrid ARM rates rose three bps to 3.85% (up 71bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.59% (up 60bps).

Federal Reserve Credit last week declined $4.2bn to $4.186 TN. Over the past year, Fed Credit contracted $235bn, or 5.3%. Fed Credit inflated $1.375 TN, or 49%, over the past 304 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $0.8bn last week to $3.429 TN. "Custody holdings" were up $88bn y-o-y, or 2.6%.

M2 (narrow) "money" supply increased $11.8bn last week to a record $14.215 TN. "Narrow money" gained $532bn, or 3.9%, over the past year. For the week, Currency increased $4.6bn. Total Checkable Deposits fell $18.4bn, while Savings Deposits rose $18.1bn. Small Time Deposits gained $5.1bn. Retail Money Funds increased $2.2bn.

Total money market fund assets were little changed at $2.864 TN. Money Funds gained $153bn y-o-y, or 5.6%.

Total Commercial Paper declined $3.0bn to $1.064 TN. CP gained $71bn y-o-y, or 7.1%.

Currency Watch:

August 29 - Bloomberg (Katherine Greifeld and Tian Chen): "Turnover in the offshore yuan has reached unprecedented levels, spurred by U.S. President Donald Trump's broadsides against Chinese currency practices and the protracted trade dispute between the world's two biggest economies. On the FX trading platform of Cboe Global Markets, average daily volume in dollar-offshore yuan jumped to a record $1.7 billion in July, from $421 million a year earlier."

The U.S. dollar index was little changed at 95.099 (up 3.2% y-t-d). For the week on the upside, the Swiss franc increased 1.5%, the Brazilian real 1.2%, the British pound 0.9%, the South Korean won 0.6%, the Japanese yen 0.2%, and the Norwegian krone 0.1%. For the week on the downside, the South African rand declined 3.0%, the Australian dollar 1.9%, the Mexican peso 0.9%, the New Zealand dollar 0.7%, the Singapore dollar 0.5%, the Swedish krona 0.5%, the euro 0.2%, and the Canadian dollar 0.1%. The Chinese renminbi declined 0.31% versus the dollar this week (down 4.75% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.2% (up 6.1% y-t-d). Spot Gold slipped 0.4% to $1,201 (down 7.8%). Silver lost 2.3% to $14.557 (down 15.1%). Crude rose $1.28 to $69.80 (up 16%). Gasoline increased 1.1% (up 11%), while Natural Gas was little changed (down 1%). Copper fell 1.5% (down 19%). Wheat rallied 1.7% (up 28%). Corn added 0.6% (up 4%).

Trump Administration Watch:

August 31 - Bloomberg (Jennifer Jacobs, Shawn Donnan, Andrew Mayeda and Saleha Mohsin): "President Donald Trump wants to move ahead with a plan to impose tariffs on $200 billion in Chinese imports as soon as a public-comment period concludes next week, according to six people familiar with the matter. Asked to confirm the plan in an interview with Bloomberg News in the Oval Office on Thursday, Trump smiled and said it was 'not totally wrong.' He also criticized management of the yuan, saying China has devalued its currency in response to a recent slowdown in economic growth."

August 30 - Bloomberg (John Micklethwait, Margaret Talev, and Jennifer Jacobs): "President Donald Trump said he would pull out of the World Trade Organization if it doesn't treat the U.S. better, targeting a cornerstone of the international trading system. 'If they don't shape up, I would withdraw from the WTO,' Trump said Thursday in an Oval Office interview with Bloomberg News. Trump said the agreement establishing the body 'was the single worst trade deal ever made.'"

August 26 - Bloomberg (Michael Schuman): "With the latest round of trade talks between the U.S. and China ending in a predictable stalemate, one thing has become clear: The Trump administration's approach to these negotiations has made it all but impossible for Chinese President Xi Jinping to make a deal. Until that changes, there's no end in sight for the tariff-for-tariff tussle between the two countries… The White House seems to misunderstand a crucial fact about modern China. As Xi has tightened his grip on power, China's economic and diplomatic initiatives have become closely associated with him personally. In foreign policy, Xi has sold himself as the champion of China's global interests and the man to stand up to the West and restore the country to its former glory. At home, Xi has promised the 'Chinese Dream,' a prosperous future with boundless new opportunities. But this carefully crafted image comes with two downsides. First, Xi must avoid any potentially humiliating setbacks on the world stage, especially any inflicted by a Western power. Second, he must keep China's economy growing, generating jobs and raising incomes."

August 27 - CNBC (Huileng Tan): "The U.S. and China will continue their standoff in the ongoing trade war as there is just not 'enough pain' yet for either side to back off, an expert said… 'I think we are in for a prolonged period of continuing escalating tensions,' said Deborah Elms, the executive director at the Asian Trade Centre… One problem is that 'both sides think they have the upper hand in this debate,' Elms told CNBC's 'Capital Connection.' Her comments came after the U.S. and China slapped new tariffs on each other last Thursday and their two-day meeting ended with no major breakthrough."

August 29 - Bloomberg (Toluse Olorunnipa and Jennifer Epstein): "President Donald Trump accused China of undermining U.S. efforts to pressure North Korea into giving up its nuclear weapons, indicating his trade war with Beijing is starting to exacerbate geopolitical tensions. 'North Korea is under tremendous pressure from China because of our major trade disputes with the Chinese Government,' Trump said in a series of tweets… 'At the same time, we also know that China is providing North Korea with considerable aid, including money, fuel, fertilizer and various other commodities. This is not helpful!' China fired back…, saying it's policies on North Korea 'are clear, consistent and stable.'"

August 26 - CNBC (Weizhen Tan): "Besieged by increasing legal concerns, U.S. President Donald Trump is thought to be looking to shore up his political position ahead of the midterm elections in November. One way to do so could be to distract voters from the problems at home by shifting the focus to the ongoing trade war with China, analysts said. In other words, the U.S. may be on the verge of escalating the conflict between the world's two largest economies."

August 27 - CNBC (Jeff Daniels): "With some U.S. farm products getting slammed by retaliatory tariffs, the Trump administration is prepared to start its emergency plan for agriculture right after Labor Day in a 'three-pronged approach' that will initially include about $6 billion in aid. The U.S. Department of Agriculture said… it is authorized to provide up to $12 billion in aid to the agricultural industry."

August 29 - Bloomberg (Kathleen Hunter and Ben Brody): "President Donald Trump warned Alphabet Inc.'s Google, Facebook Inc. and Twitter Inc. 'better be careful' after he accused the search engine earlier in the day of rigging results to give preference to negative news stories about him. Trump told reporters… that the three technology companies 'are treading on very, very troubled territory,' as he added his voice to a growing chorus of conservatives who claim internet companies favor liberal viewpoints. 'This is a very serious situation-will be addressed!' Trump said in a tweet... The President's comments came the morning after a Fox Business TV segment that said Google favored liberal news outlets in search results about Trump. Trump provided no substantiation for his claim."

August 28 - Bloomberg (Brendan Murray and Liz Capo McCormick): "Treasury Secretary Steven Mnuchin said he's 'not at all concerned' about the convergence of short- and long-term market interest rates at a time when some investors are worried the flattening yield curve signals a U.S. recession is coming. Having a flat curve is something the Treasury is 'perfectly content with,' given the government's issuance of long-term debt, he said… Mnuchin also said he doesn't view the curve as a predictor of economic growth."

Federal Reserve Watch:

August 26 - Reuters (Ann Saphir and Howard Schneider): "Federal Reserve Chair Jerome Powell has begun putting his stamp on the U.S. central bank as someone who will rely more on data-informed judgment and less on some of the models and theoretical values that have shaped the Fed's course in recent years but that Powell has said can be false guides. In doing so he may be laying the groundwork for a longer-than-expected rate-increase cycle, as discussion intensifies among policymakers about what level of borrowing costs is appropriate in an economy that is nearly back to full health. In addition, the full stimulative effects of President Donald Trump's tax cuts and increased government spending may not yet have presented themselves."

August 27 - Financial Times (Joachim Fels): "Damned if they keep raising, damned if they don't. Federal Reserve chair Jay Powell and his colleagues face a difficult choice over the next few months - and it is one that could have unpleasant ramifications whatever they decide. The first option for the Fed's Open Market Committee is that it continues to deliver on the current plan: raise rates again next month and stick to the guidance of four additional rate increases by the end of 2019. This can be easily justified by the US economy's progress towards the central bank's dual objectives… However, the Fed is not only the US central bank but also the pacemaker for the global credit cycle. Courtesy of ultra-low US interest rates, quantitative easing and a relatively weak dollar following the global financial crisis, borrowers within the US and, even more so beyond, have piled into dollar-denominated debt. According to BIS data, dollar credit to non-bank borrowers outside the US doubled to $11.5tn since the financial crisis. Within this, dollar debt in emerging markets surged from about $1.5tn 10 years ago to $3.7tn this March."

August 29 - Reuters (Howard Schneider): "The U.S. Federal Reserve should be ready to lift interest rates for a longer period or even more quickly than currently expected to insure against a jump in inflation in a U.S. economy operating in the vicinity of full employment. That is the message that has been percolating up from senior central bank staff economists to policymakers including Fed Chair Jerome Powell in research that has helped inform a subtle shift in how Powell plans to steer policy… The latest example emerged this week from staff economist Robert Tetlow, who argued that uncertainty about the stability of inflation expectations should be met with a strong response to ensure that one round of price increases does not touch off further rounds as inflationary psychology takes hold."

August 29 - Bloomberg (Liz Capo McCormick): "Goldman Sachs… is telling traders to be wary of reading Federal Reserve Chairman Jerome Powell's comments last week as dovish for the path of interest rates. Ten-year Treasury yields fell Friday on Powell's speech at the Kansas City Fed's annual policy symposium, when he said 'there does not seem to be an elevated risk of overheating.' What's more, the maturity's spread over two-year yields is close to the lowest since 2007. Goldman rates strategists lowered their year-end 10-year yield forecast last week on the back of a slower rebound in term premium. Yet in a report Monday, Goldman economists emphasized Powell's nod to a recent Fed study that indicated it would be ill-advised for the central bank to ignore low unemployment. That emboldened the Goldman economists to reiterate their call for two more rate hikes in 2018 and four next year."

U.S. Bubble Watch:

August 28 - CNBC (Michael Sheetz): "Consumer confidence rose in August to its highest level since October 2000, building on July's solid result. The Conference Board's index climbed to 133.4 in August, despite expectations… that it would fall to 126.7. The measure rose slightly last month to 127.4, up from 127.1 in June… 'Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018,' Lynn Franco, director of economic indicators at The Conference Board, said…"

August 26 - Financial Times (Sam Fleming): "Moves by US companies to shift the cost of President Donald Trump's tariffs to their customers risk complicating monetary policy decisions as the Federal Reserve seeks to keep inflation steady, the central bank's policymakers have warned. Raphael Bostic, president of the Atlanta Fed, told the Financial Times that he believed the US was at an 'inflection point', where higher tariffs on products such as steel and aluminium would start to be felt by consumers. 'An increasing number of firms are telling us that they are going to start passing the cost increases through and they will be reflected in final goods prices… Businesses have told me that they have been able to absorb a fair amount of the price increases to date but that their ability to do that is diminishing."

August 30 - Bloomberg (Xin En Lee): "Profits are crucial to the growth of any company, but some of the biggest names in business today have yet to make money. Publicly-listed companies like electric carmaker Tesla and music streaming firm Spotify make billions in losses. Likewise, ride-hailing firm Uberlost $4.5 billion last year, but is gearing up for a highly anticipated public listing… Investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000. Last year, 76% of the companies that listed were unprofitable in the year before their initial public offerings… That's lower than the 81% recorded in 2000, but still far higher than the four-decade average of 38%."

August 30 - Bloomberg (Andrew Galbraith): "Investors are stomaching the lowest premium in more than a decade for taking on more risk in the US commercial property market, as a humming American economy encourages money managers to reach for higher returns. The difference between the return on the safest slices of commercial mortgage-backed securities - a pool of mortgages bundled into a bond - and the riskier slices has dropped to its lowest level since the build-up to the financial crisis… A combination of an expanding US economy and the ongoing hunt for yield is driving investors' willingness to assume more exposure to potential losses without greater compensation. For some it is another sign that a nearly decade-old credit cycle maybe approaching a turning point."

August 30 - Reuters (Lucia Mutikani): "U.S. consumer spending increased solidly in July, pointing to strong economic growth early in the third quarter, while a measure of underlying inflation hit the Federal Reserve's 2% target for the third time this year. …Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after advancing by the same margin in June… The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2% after edging up 0.1% in June. That lifted the year-on-year increase in the so-called core PCE price index to 2.0% from 1.9% in June. The core PCE index is the Fed's preferred inflation measure. It hit the U.S. central bank's 2% inflation target in March for the first time since April 2012."

August 28 - CNBC (Diana Olick): "Homebuyers are pulling back, and prices are finally following. Home prices are still rising, but the gains are shrinking. In June, prices nationally rose 6.2% year over year, according to the S&P CoreLogic Case-Shiller Indices. That is down from the 6.4% annual gain in May. Home prices in the nation's 10 largest housing markets rose 6% annually, down from 6.2% in the previous month. In the 20 largest markets, prices were up 6.3%, down from 6.5% in May."

August 27 - Bloomberg (Prashant Gopal): "Here's why the U.S. housing market is cooling: Prices are just too high. Starter homes are now more costly to purchase than at any time since 2008, when the last boom came to a crashing halt. In the second quarter, first-time buyers needed almost 23% of their income to afford a typical entry-level home, up from 21% a year earlier, according to an analysis by the National Association of Realtors."

August 28 - Bloomberg (Alex Tanzi): "Rising property values and record household wealth is allowing homeowners to use their homes as ATMs. In more than two-thirds of refinancing loans last quarter, homeowners pulled equity to finance consumer spending, property improvements and pay off other debts."

August 28 - CNBC (Jillian D'Onfro): "Alphabet's self-driving cars are annoying their neighbors in Chandler, Arizona. More than a dozen locals who work near Waymo's office gave The Information the same unequivocal assessment of the cars, which reportedly struggle to cross a T-intersection there: 'I hate them.' One woman said that she almost hit one of the company's minivans because it suddenly stopped while trying to make a right turn, while another man said that he gets so frustrated waiting for the cars to cross the intersection that he has illegally driven around them. The anecdotes highlight how challenging it can be for self-driving cars, which are programmed to drive conservatively, to master situations that human drivers can handle with relative ease - like merging or finding a gap in traffic to make a turn."

August 26 - Financial Times (Robin Wigglesworth): "The US student loan burden has swelled past $1.5tn despite actual lending volumes falling for more than half a decade, as struggling students fall behind on their payment plans and debt relief programmes fail to offer sufficient succour. The overall size of US student debt has grown by $500bn since the 2010-11 academic year, according to a report by S&P Global…"

August 27 - MarketWatch (Alessandra Malito): "Young adulthood can be a thrilling time for those living on their own for the first time, balancing schoolwork and a job, and paying for necessities. But many don't know how to manage all of this. About a third of young adults (32%) were considered 'financially precarious,' meaning they had few money management skills and little income stability, according to a University of Illinois study. Another 36% of participants were considered financially 'at risk' because they had an unexpected drop in income within the year and had no savings to support themselves. They also didn't have enough to pay for a $2,000 emergency."

August 29 - Wall Street Journal (Gregory Zuckerman): "A biotech boom is fueling renewed interest in a group that has been out of favor: Wall Street analysts. Investment banks Leerink Partners LLC, Cantor Fitzgerald & Co. and Jefferies Group LLC have lured top-name biotech analysts from large banks with guaranteed pay packages worth $3 million or more and contracts extending as long as three or four years… In turn, banks including Morgan Stanley and Citigroup Inc. have hiked pay to similar levels to retain top analysts. Hiring executives say compensation for less-senior analysts also has climbed…"

August 28 - Bloomberg (Ivan Levingston): "The number of candidates who passed the third and final level of the Chartered Financial Analyst exam in June rose to 56%, the highest success rate in 12 years. An all-time high of 35,518 people took the final test required for the certification... More than three-quarters of people who took the 2006 exam passed."

August 28 - Bloomberg (Eric Boston): "Two-thirds of California's beaches may be washed away by the end of the century, according to the state's latest forecast. California's fourth statewide climate assessment details the increasingly dire impact of climate change, including rising seas, climbing temperatures, more land lost to wildfires and extreme water shortages. It was issued Monday, the day before lawmakers moved to require all the state's electricity to come from wind, solar and other clean sources by 2045… Without significant efforts to curb greenhouse gas emissions, the average annual maximum daily temperature is expected to increase 5.6 to 8.8 degrees Fahrenheit (3.1 to 4.9 degrees Celsius) by 2100. The impact will be felt far sooner."

China Watch:

August 30 - Bloomberg (Andrew Galbraith): "Twitter comments by U.S. President Donald Trump accusing China of hacking former presidential candidate Hillary Clinton's email server are an attempt to cast China as a 'scapegoat', the official China Daily said… The strongly worded editorial also took aim at Trump directly, commenting: 'To the thinking person, there are few things more disconcerting than a tweet by the U.S. president as they initially seem to accord to reality but then quickly turn into messages from some alternative universe.'"

August 27 - Reuters (Winni Zhou and John Ruwitch): "China's central bank on Monday lifted its official yuan midpoint more than expected to 6.8508 per dollar after it re-introduced a counter-cyclical factor to its daily fixing mechanism to support the currency… China's central bank said on Friday that it was adjusting its methodology for fixing the yuan's daily midpoint in order to keep the currency market stable, amid broad dollar strength and ongoing trade tensions between Washington and Beijing."

August 29 - Reuters (Stella Qiu): "China's economy is facing increasing risks in the second half of the year and policymakers need to step up efforts to hit key development goals, the head of the state planning agency warned, as U.S. trade tensions intensify. 'Targets in economic growth, employment, inflation and exports and imports can be achieved through effort,' He Lifeng told the standing committee of the National People's Congress…"

August 30 - Bloomberg: "The biggest banks on Earth really want the world to know how much they're paying attention to risk. China's six largest lenders, which control a combined $16 trillion of assets, mentioned the word almost 1,900 times in their first-half earnings announcements, up about 9% from the same period of 2017, according to data compiled by Bloomberg. Bank of China Ltd. said it achieved 'new breakthroughs in risk mitigation,' while China Construction Bank Corp. touted its 'stringent risk management.' Industrial & Commercial Bank of China Ltd., the world's biggest lender by assets, said… that it will 'adopt well-targeted solutions to put all types of risks under control.'"

August 26 - Reuters (Yawen Chen, Se Young Lee and Ryan Woo): "China's investment growth, already at record lows, may weaken even further in the future and authorities should step up fiscal and financial measures to give it a boost, the state planner said… Fixed-asset investment (FAI) in the first seven months of the year grew at the slowest pace on record since early 1996, after a long crackdown on illegal local government borrowing to finance vanity projects."

EM Watch:

August 30 - Bloomberg (Marcus Ashworth): "The difficulties for emerging markets have entered a new phase. What were once clearly country-specific crises, well contained within their borders, are bleeding across the world. To stem the slide in its currency Argentina raised its key rate to a whopping 60% on Thursday, but the peso was still 30% weaker from Monday. Though Turkey is no closer to solving its many problems, it's hard to see why the lira needed to fall 4% on Thursday. Explanations that this is due to the resignation of one of the central bank's four deputy governors don't convince - he's only gone to take another government job."

August 28 - Financial Times (Colby Smith and Charles Newbery): "Argentina may have reluctantly fallen back into the embrace of the International Monetary Fund, but the biggest aid package in history has not managed to inoculate the country from an onslaught of market pain. Many investors felt reassured when Argentina received a $50bn credit line from the IMF in June and President Mauricio Macri followed through on mandated reforms to slash the fiscal deficit and tame inflation. Yet the recent turmoil in emerging markets has since muddied the outlook and called into question how Argentina will meet its $82bn financing needs for this year and next, while navigating a looming recession and rising consumer prices ahead of a presidential election in 2019."

August 30 - Bloomberg (Netty Ismail and Filipe Pacheco): "August has historically been a cruel month for emerging markets. By one measure, this year's has been the worst on record. A Bloomberg currency index that tracks carry-trade returns from eight emerging markets, funded by short positions in the dollar, has slumped about 6% since end-July, set for its biggest August drop since Bloomberg started compiling the data in 1999… Turkey's lira, Argentina's peso, Brazil's real and South Africa's rand were the hardest hit developing-nation units, cutting returns for investors who borrow where interest rates are low to buy higher-yielding assets."

August 25 - Reuters (Tuvan Gumrukcu): "The commitment and determination of Turks is the guarantee needed to combat attacks on Turkey's economy, President Tayyip Erdogan said on Saturday, in his first comments on the currency crisis in days… Erdogan has cast the rapid deterioration of the lira as an 'economic war' and accused Washington of targeting Turkey over the fate of Andrew Brunson, an American pastor being tried in Turkey on terrorism charges that he denies."

August 27 - Bloomberg (Selcan Hacaoglu): "Turkey's President Recep Tayyip Erdogan will meet with Russian and Iranian leaders in Iran next week to discuss developments in Syria and how to deal with radical Islamic groups who control the last major opposition holdout there. Erdogan's Sept. 7 sitdown with Russian President Vladimir Putin and Iranian President Hassan Rouhani in the northwest city of Tabriz comes at a critical juncture in Syria's civil war and at a time when U.S.-Turkish relations are badly strained."

August 29 - Reuters: "Dollar-denominated bonds issued by selected Turkish banks fell on Wednesday after Moody's sounded the alarm about the sector, while Turkey's finance minister was reported as saying he saw no big risk to the economy or financial system. Yapi Kredi's 2024 Eurobond slipped 1.5 cents to 72 cents in the dollar according to Tradeweb, while Garanti's 2027 issue was down 1.9 cents at 68."

Global Bubble Watch:

August 25 - Bloomberg (Satyajit Das): "Over the past decade, a lot of capital has flowed into emerging markets thanks in part to excessive liquidity in advanced economies. This money has often found its way into risky or suspect investment structures. Should a crisis strike… investors in these markets will be exposed to risks that they simply aren't prepared for. One problem is that investors have piled into familiar carry trades, either directly or via funds. They've purchased high-yielding emerging-market securities and then, as returns have fallen, resorted to more adventurous strategies to boost income. Japanese retail investors, for example, are exposed to funds known as double-deckers, which purchase high-yield debt, then swap the income flows from the bond into a currency with high interest rates."

August 29 - Financial Times (Philip Stephens): "The legacy of the global financial crisis might have been a re-imagination of the market economy. Anything goes could have made way for something a little closer to everyone gains. The eloquent speeches and bold pledges that followed the crash - think Barack Obama, Gordon Brown, Angela Merkel and the rest - held out just such a prospect. Instead we have ended up with Donald Trump, Brexit and beggar-thy-neighbour nationalism. The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers - liberal democracy and open international borders. The culprits, who include bankers, central bankers and regulators, politicians and economists, have shrugged off responsibility. The world has certainly changed, but not in the ordered, structured way that would have been the hallmark of intelligent reform. After a decade of stagnant incomes and fiscal austerity, no one can be surprised that those most hurt by the crash's economic consequences are supporting populist uprisings against elites. Across rich democracies, significant segments of the population have come to reject laissez-faire economics and the open frontiers of globalisation."

Central Bank Watch:

August 28 - Financial Times (Kate Allen and Keith Fray): "Central banks that have engaged in a mass programme of bond-buying in a bid to stimulate the global economy have seen the size of their balance sheets begin to fall for the first time in a decade… The assets on leading central banks' balance sheets now equate to 31% of their governments' debt, marginally down from 32% last year… The Bank of Japan's holdings are proportionately the largest, amounting to 35% of outstanding Japanese government debt; the European Central Bank's assets equate to a quarter of outstanding eurozone government bonds, while the US Federal Reserve holds assets equivalent to 10% of the country's debt. FT research shows that the world's biggest central banks now hold $15.3tn of assets, of which about two-thirds comprises government bonds - one dollar in every five of the $49tn outstanding debt owed by their governments."

Europe Watch:

August 29 - Bloomberg (Kate Allen): "Italian banks' net purchases of their own government's debt have slowed, after hitting record levels earlier this year as foreign investors fled the market and dumped their holdings. Financial institutions in Italy bought a net €4bn of Italian government debt in July…, down from €14bn in June and €28bn in May, when the Italian bond market saw a sharp sell-off amid political turmoil. Overall in the second quarter of 2018, domestic financial institutions increased their net holdings of the government's debt by more than €40bn, the largest amount since the height of the eurozone debt crisis in 2012."

August 29 - Bloomberg (Lorenzo Totaro): "Government representative are said to be calling on the ECB to pass a new program of bond purchases in order to shield Italy's debt from financial speculation and avoid a rating downgrade, La Stampa reports citing an unnamed official. The new QE-styled program could also have a different name if needed…"

August 28 - Bloomberg (James Hirai and Todd White): "Three months after the political imbroglio around forming a populist government roiled Italian assets, bond investors are contemplating a fresh hurdle: its first budget, due next month. The big risk is that the euroskeptic Five Star Movement-League coalition breaks the 3% deficit limit set under European Union rules, putting the country on a collision course with the bloc. That's got traders hunting a variety of strategies, from selling bond futures to buying Euribor options, to guard against the kind of market meltdown seen at the end of May. For hedge funds, 'the big one is futures, and the other one is to repo the bond itself,' according to Jason Guthrie, the… head of capital markets for… WisdomTree Europe. 'That's the primary way people take short positions' on Italy's bonds, said Guthrie…"

Japan Watch:

August 29 - Bloomberg (Chikafumi Hodo): "Japan's benchmark bonds recorded no trades on Wednesday, less than a month after the central bank sought to enliven the world's second-biggest debt market by relaxing yield control. That's the seventh instance this year when the debt didn't change hands, though the first since July 31 when the Bank of Japan said it will allow the 10-year yield to deviate by as much as 0.2 percentage points around zero percent… While Hitoshi Suzuki, a BOJ board member, said Wednesday the central bank still needs more time to decide if the policy tweak… is sufficient, consensus has emerged among regional banks and insurance companies that more needs to be done as trading returns to abysmal levels."

Fixed Income Bubble Watch:

August 29 - CNBC (Robert Ferris): "Moody's downgraded Ford's credit rating to one notch above junk bond status Wednesday and warned that it could be further cut as the Detroit automaker struggles overseas and invests an estimated $11 billion on a turnaround plan. The second-largest U.S. auto manufacturer is facing weakening profit margins in North America, a retrenching business in China, and losses in South America and Europe, at least some of which could continue to worsen, Moody's said… The investments are necessary, but it will take several years before that translates to better performance, Moody's said."

August 29 - Bloomberg (Heather Perlberg and Sally Bakewell): "Fortress Investment Group LLC is boosting its offerings to investors betting on one of the debt market's hottest corners. The investment manager is expanding its private credit effort with a direct-lending fund; another that buys debt linked to real estate, aircraft leases and other assets; and one that invests in intellectual property, according to people… Money managers including Blackstone Group LP's GSO Capital Partners and BlackRock Inc. are also broadening their offerings amid the influx. The rush into these less-regulated corners of the debt market has raised some concern that lenders are taking too much risk…"

August 29 - Bloomberg (Claire Boston): "Investors led by Blackstone Group LP will start marketing $8 billion of risky corporate loans next week to fund their buyout of Thomson Reuters Corp.'s financial-and-risk operations, according to people with knowledge of the matter. It would be the biggest leveraged loan offering of the year."

Leveraged Speculation Watch:

August 26 - Wall Street Journal (Laurence Fletcher): "Following trends in financial markets was once one of the most profitable investment strategies around. Now the approach is being battered as cheap replica funds crowd into the space. Performance among the roughly $300 billion in hedge funds that largely use so-called trend-following strategies has been abysmal. An investor buying into these funds at the start of 2011, for instance, and holding through July this year would have lost 3.4% on average, according to HFR. Over the same period the S&P 500 is up 124%. 'It's like a lot of industries,' said Matthew Beddall, founder of investment firm Havelock London. 'As it's been successful more people have got involved. Now you can buy a book on Amazon on how to code trend-following.'"

August 29 - Bloomberg (Eric Lam and Matt Turner): "Short positions against the so-called FAANG group of the largest U.S. technology stocks have surged by more than 40% in the past year as investors bet against some of the biggest drivers of the global bull market. Bearish investors have shorted about $37 billion worth of stocks in the group, which comprises Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., up 42% from a year ago. Amazon leads the way with almost $10 billion in short interest… 'Tech stocks have had a large run-up in price this year,' Ihor Dusaniwsky, head of research at S3 Partners, said… 'The greater the rise, the greater the fall so they are being targeted as the stocks to short. With the bull market possibly entering the backstretch, portfolio managers are bracing for a selloff and increasing their overall market short exposure.'"

Geopolitical Watch:

August 28 - Bloomberg (Henry Meyer and Ilya Arkhipov): "Russia is to hold its biggest military maneuvers since the height of the Cold War next month, mobilizing about 300,000 troops and including the participation of thousands of soldiers from China, Defense Minister Sergei Shoigu said. The Vostok-2018 exercises in Russia's eastern and central military districts… from Sept. 11-15 will involve almost a third of the country's soldiers, making them the largest since 1981... Some 1,000 aircraft and both the Northern and Pacific fleets will be deployed. 'Imagine 36,000 tanks and armored personnel carriers all moving at the same time,' the defense minister said. 'This will all be tested under conditions as close as possible to war.'"

August 26 - Reuters (Hayoung Choi and Josh Smith): "North Korea's state-controlled newspaper… accused the United States of 'double-dealing' and 'hatching a criminal plot' against Pyongyang, after Washington abruptly canceled a visit by Secretary of State Mike Pompeo. Negotiations have been all but deadlocked since U.S. President Donald Trump's summit with North Korean leader Kim Jong Un in Singapore in June."

August 27 - Bloomberg (Tim Kelly): "Japan said… North Korea still posed a dire threat to its security despite a halt to ballistic missile tests and a pledge by leader Kim Jong Un to denuclearize the Korean peninsula. 'North Korea's military activities pose the most serious and pressing threat our nation has faced,' said an annual white paper published by Japan's Ministry of Defence."