Credit Bubble Bulletin : 08/10/18

The Turkish lira sank 13.7% in chaotic Friday trading. The lira's 21.0% "worst week in 17 years" collapse pushed y-t-d losses to 41.1%. Turkish 10-year yields spiked to almost 21%, before retreating somewhat. After beginning the year at 155, Turkey sovereign credit default swaps (CDS) spiked 166 bps during Friday trading (up 199 bps for the week) to 437 bps (high since Feb. 2009).

EM Contagion Effects gained momentum this week. Friday trading saw the Argentine peso hit 3.8% and the South African rand sink 2.7%. For the week, the Argentine peso fell 6.6%, the South African rand 5.5%, the Brazilian real 4.0%, the Hungarian forint 2.2%, the Romanian leu 2.1%, the Polish zloty 2.2% and the Mexican peso 1.8%. On the (local) bond yield front, 10-year yields in Brazil jumped 66 bps, Russia 40 bps, Hungary 15 bps and South Africa 13 bps. As global "hot money" frets faltering liquidity and the next shoe to drop, Brazilian equities sank 5.9% (as Brazil sovereign CDS jumped 24 bps to 237 bps).

August 10 - Bloomberg (Lionel Laurent): "Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country's assets at an alarming pace, saying: 'They have got dollars, we have got our people, our right, our Allah.' European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time."

Fears of contagion this week were not limited to the emerging markets. With significant exposure to Turkey, European bank stocks were slammed in Friday trading. Unicredit sank 4.7% and ING Groep fell 4.3%. The big German banks, Deutsche Bank and Commerzbank, dropped 4.1% and 3.5%. European Banks (STOXX600) fell 1.9% Friday.

August 10 - Financial Times (Claire Jones, Ayla Jean Yackley and Martin Arnold): "The eurozone's chief financial watchdog has become concerned about the exposure of some of the currency area's biggest lenders to Turkey - chiefly BBVA, UniCredit and BNP Paribas - in light of the lira's dramatic fall… According to cross-border banking statistics from the Bank for International Settlements, local lenders, including foreign-owned subsidiaries, have dollar claims worth $148bn, up from $36bn in 2006 and euro claims worth $110bn. Spanish banks are owed $83.3bn by Turkish borrowers, French banks are owed $38.4bn and Italian lenders $17bn in a mix of local and foreign currencies. Banks' Turkish subsidiaries tend to lend in local currency."

The above FT article was written prior to Friday's currency collapse. As Contagion gathers momentum at the "periphery," the "core" is indicating heightened vulnerability. European fragilities are again rising to the surface. Italy's MIB 35 stock index dropped 2.5% in Friday trading. Germany's DAX fell 2.0%.

Safe haven buying saw German 10-year yields fall six bps to 0.31%. Italian 10-year yields jumped 9 bps Friday to 2.98%, as the Italian to German 10-year yield spread widened 15 bps. For the week, this spread widened 16 to 268 bps, the widest since the May spike to 290 bps (which was the wide since 2013). Elsewhere in the European "periphery," Greek spreads (to bunds) widened 22 bps (to 387 bps) this week and Portuguese spreads widened nine bps (to 146 bps).

August 10 - Financial Times (Daniel Dombey): "Some analysts have long seen Turkey as a 'quantitative easing play' - a country that benefited from developed economies' huge asset purchase schemes. But as US and eurozone quantitative easing becomes history - at least for this economic cycle - the funds that Turkey needs are getting harder to come by. Those funds are far from negligible. An ABN Amro report on Thursday said investors were worried Turkey would not be able to finance its annual external financing requirement of about $218bn - which includes funds needed to maintain Turkish companies' foreign-denominated debt as well as the country's hefty current account deficit."

Turkey is the poster child for systems that for a decade have luxuriated in abundant cheap global liquidity. Once again, dysfunctional global finance furnished plentiful rope for economies to hang themselves. A spectacular Turkish borrowing binge fueled a formidable Bubble. A spending boom, ongoing low savings and persistent Current Account Deficits (surpassing 6% this year) have been for years financed with cheap international (chiefly dollar) finance. Turkish corporations have more than doubled foreign-denominated borrowings since the crisis to over $200 billion, approaching 50% of GDP. Inflation is running at 15% but poised to go much higher.

Turkey now faces funding requirements (current acct deficit and maturing debt) of over $200 billion over the next year in the face of an acute "hot money" exodus. It's untenable. The situation has evolved into a full-fledged crisis of confidence, which typically foreshadows the violent end to a country's existing financial and economic structure.

In ways, Turkey's crisis resembles previous bursting EM Bubble episodes: too much cheap international "hot money" financing an unsound boom, replete with excessive spending and malinvestment. The protracted nature of Turkey's Bubble ensured deep structural maladjustment. Today, the Turkish "economic miracle," as many before it, is exposed in harsh terms. The reversal of speculative flows has illuminating latent fragilities and an unsound currency. The banking system and scores of corporate borrowers of dollar-denominated debt are at the brink of insolvency. Suddenly, the whole Bubble is coming crashing down. Similar scenarios recurred in absolute dismal fashion throughout the nineties.

August 10 - Xinhua (China's official state-run press agency): "Turkish President Recep Tayyip Erdogan urged on Friday his nation to change all savings in U.S. dollar and gold into Turkish lira. [The] Dollar will not block our way. Let's respond them with our national currency,' Erdogan said in his address to crowds… 'Change your dollars and gold under the mattress to the local currency,' he added. The Turkish president described the campaign as a "national struggle" in response to 'those who declared economic war' against Turkey. Meanwhile, Erdogan ascribed the current 'economic problems' to 'artificial financial instability waves' stoked by foreign actors, rather than structural issues involving employment or the banking system. He also blamed foreign meddling in Turkey's economy because of 'some bilateral disagreements,' hinting at the tension between Turkey and the United States."

I fear Erdogan pinpointing sinister foreign forces behind Turkey's problems will garner adherent elsewhere - with measures from the U.S. administration stoking conspiracy suspicions. Calls for Turks to sell dollars and gold to support the lira recalls South Korean citizens donating their gold to help the government stabilize the Korean won (and service an IMF loan) back in 1997/98. We'll see if Turkey's population can match the extraordinary patriotism demonstrated by the South Koreans - and if so, whether it will even matter.

Typically, market expectations would have Turkey immediately commencing negotiations with the IMF (didn't take Argentina long). Yet these are neither normal times nor is Recep Erdogan a typical head of state. In this age of the strongman leader, bowing to the demands of an institution domiciled in Washington (while backing down to Trump) may be unacceptable in Ankara and throughout Turkey.

From the FT (Ayla Jean Yackley and Demetri Sevastopulo): "Mr Erdogan urged Turks to stand firm and defend their currency. 'If there is anyone who has dollars, euros or gold under the pillow, he should go and convert this at the bank,' Mr Erdogan said. He also held talks by telephone with Russian president Vladimir Putin to discuss economic and commercial ties."

Putin will lend a sympathetic ear. For some time now, the strongman Russian president has assailed U.S. dominance over global financial and economic institutions and arrangements. Putin's outrage was surely further elevated this week with the imposition of additional U.S. sanctions.

August 10 - Politico (Emily Goldberg): "Russian Prime Minister Dmitry Medvedev warned Friday that his nation could retaliate against the United States' newly issued economic sanctions, saying it would consider any action against its banks an act of economic war. 'I would not like to comment on talks about future sanctions, but I can say one thing: If some ban on banks' operations or on their use of one or another currency follows, it would be possible to clearly call it a declaration of economic war… And it would be necessary, it would be needed to react to this war economically, politically, or, if needed, by other means. And our American friends need to understand this…'"

The Russian ruble declined 1.4% Friday and was down 6.4% for the week (down 14.8% y-t-d). Russian 10-year (ruble) yields increased eight bps Friday and surged 40 bps for the week to the high since December 2016. Russian dollar-denominated yields jumped 32 bps this week to multi-year highs (5.14%). Moscow must be feeling under assault - and increasingly bereft of patience.

To have the strongmen of Turkey and Russia speaking the same language ("economic war") in the midst of currency and market turmoil is noteworthy, to say the least. A three-way conference call with China's president Xi would be only fitting. Might as well tie in the Iranians and others.

Donald J. Trump - 5:47 AM - 10 Aug 2018: "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!"

Those are fighting words. Teetering at the edge, a presidential tweet Nudges Turkey Over the Cliff. I cringed. Leaders around the world surely recoiled. Does President Trump appreciate the consequences and ramifications of a destabilizing currency crisis in a world of lurking financial, economic and geopolitical fragilities? Our President is tough, enthralled with disruption and clearly sending a message. But does he appreciate the extent to which he is playing with fire?

The world order is fraying before our eyes - and, for many, the impulse is to revel. Careful what you wish for. I'll assume recent events push forward the move to develop financial and economic institutions outside of the U.S. sphere of influence. In recent years, Putin has surely been preaching to his close comrade Xi Jinping that the U.S. is a hostile and untrustworthy rival. At least publicly, Beijing had remained non-aligned, content to foster a non-adversarial relationship with the U.S. Much has changed. The world is now on a trajectory that will shatter pretenses - the façade is being unmasked.

Bloomberg Friday headline: "Trump Embraces Market Pain With Little Concern for Contagion."

The dollar index gained 1.2% this week to a 13-month high. With Turkey now in full-fledged crisis, the unfolding EM de-risking/de-leveraging dynamic attained important momentum this week. Meanwhile, the U.S. vs. China trade war further escalated. President Trump admitted that playing hardball is "my thing." The Chinese invoked "American trade blackmail"; "waving the stick of hegemony everywhere"; "playing double-faced tactics" and "mobster mentality" (to name but a few). Perhaps heightened global market instability will have the Trump administration backing down from their hardline approach with China. I seriously doubt that U.S. unilateral actions in dealing with Turkey, Russia and Iran will inspire a softening in Beijing's resolve.

Turkey, a nation of 80 million, is a long-time U.S. ally and NATO member. The U.S. Air Force has significant operations at the Incirlik Air Base, and Turkey was a staging ground for major U.S. military operations including the two gulf wars and, more recently, in Syria. I see the unfolding financial, economic and geopolitical crisis in Turkey as an ominous development for a region sliding into an intractable geopolitical maelstrom.

Despite Friday's decline, the S&P500 ended the week a little more than 1% below all-time highs. With Treasuries enjoying safe haven demand - and visions of jittery Fed officials glued to Bloomberg screens, longing to conclude rate hikes - there's still little worrying the bulls. But the global backdrop is now in a state of transformation - and not for the better. And on various fronts this became increasingly apparent this week.

When I began posting the CBB almost twenty years ago, my focus was on "money," Credit and the U.S. boom. I didn't anticipate geopolitical developments would some day play a role in my analysis. But I also never contemplated a global Bubble of today's dimensions and characteristics.

I never imagined how an explosion of government debt and central bank Credit would be used so recklessly to inflate intertwined Bubbles spanning the globe. Never did I contemplate how this new age global "system" (already highly unstable two decades ago) would be nurtured, backstopped and resuscitated into today's monstrosity. I never could have envisioned how the U.S. would run huge Current Account Deficits for another 20 years and still maintain such command over a dollar-based global financial apparatus. Who would have believed a global financial arms race was even possible - especially amidst such escalating animosity and hostility?

This is a strange period. It's strange here at home - in society, in politics and in the markets. It is strange globally. The unprecedented nature of what we see at home, abroad and in the markets provides a lot of leeway with interpretation and analysis. Somehow, there's a dominant contingent that believes the U.S. is on the right course - that the economic boom will accelerate, markets will, as they always do, continue to rise. The future is bright, all the polarization and social angst notwithstanding. Markets offer unassailable confirmation.

It would be great if the optimists were right. But this was a week that corroborated a much darker interpretation of developments. A decade of unrelenting easy "money" and booming finance has masked a metastasis of festering issues - financial, economic, social and geopolitical. And we're now only a more general bursting of the global financial Bubble away from having to simultaneously face a bevy of very serious issues. As they tend to do, developments can seem to move at glacial pace - and then, rather suddenly, they can be more akin to lava.

As I have posited repeatedly and expounded in more detail last week, the global Bubble has been pierced at the "periphery." I also believe the backdrop is now conducive to contagion at the "periphery" (finally) gravitating toward the "core." The Turkey-induced risk aversion that erupted this week in European equities (bank shares!) is an important escalation in "Periphery to Core Crisis Dynamics." "Risk off" is gaining a firm foothold, and global financial conditions now tighten by the week. Market pundits expect cooler heads in Ankara and Washington to prevail over the weekend. If not, it could intensify what was already a particularly long and hot summer.

I lost a dear friend, mentor and teacher this past week. Gordy Ringoen gave me my first opportunity in the money-management industry back in 1990. In my bio, I refer to Gordy as "one of the most brilliant individuals I've met." He was also one of the kindest and most generous individuals you'll ever meet. To know Gordy (and his family) was to love him (them). I spoke to Gordy for the final time a few weeks back. Downplaying his fragile health, he was upbeat and excited to chat about the state of the world. Gordy and I shared deep concerns for how things were unfolding at home and abroad. His deeply analytical mind hadn't lost a beat.

But Gordy was most electrified when discussing a trip to the Shakespearean Festival with his wonderful wife Carole and grandkids Jenn and Joe. Gordy so loved his family (Carole, Jenn, Joe, son Todd and daughter-in-law Sue). And, being Gordy, he ended the conversation suggesting what a great experience it would be to take our ten-year old to the festival - and offering to send us tickets. Gordy will be so missed by many. Meeting Gordy changed my life, and I will be forever grateful. A great man.

Sadly, we also recently lost another great man at the very top of my list of individuals I most respect and admire. Tom Dulcich lost his battle with cancer. Tom was a devoted family man, a preeminent attorney and recipient of the prestigious "Significant Sig" award from the Sigma Chi Fraternity (along with an impressive list of lifetime achievements). An avid Oregon Duck fan, Columbia River salmon fisherman and all-around great guy, Tom will be dearly missed by so many. Like the Ringoens, you won't find a finer group than the Dulcich family.

For the Week:

The S&P500 slipped 0.2% (up 6.0% y-t-d), and the Dow declined 0.6% (up 2.4%). The Utilities fell 0.7% (up 0.1%). The Banks declined 1.1% (up 2.3%), while the Broker/Dealers were little changed (up 2.9%). The Transports were about unchanged (up 4.5%). The S&P 400 Midcaps dipped 0.2% (up 5.0%), while the small cap Russell 2000 gained 0.8% (up 9.9%). The Nasdaq100 added 0.2% (up 15.8%). The Semiconductors dropped 1.9% (up 8.1%). The Biotechs jumped 1.5% (up 21.6%). With bullion down $2, the HUI gold index sank 2.9% (down 16.8%).

Three-month Treasury bill rates ended the week at 2.01%. Two-year government yields declined four bps to 2.61% (up 72bps y-t-d). Five-year T-note yields fell seven bps to 2.75% (up 54bps). Ten-year Treasury yields dropped eight bps to 2.87% (up 47bps). Long bond yields fell six bps to 3.03% (up 29bps). Benchmark Fannie Mae MBS yields dropped seven bps to 3.60% (up 60bps).

Greek 10-year yields jumped 13 bps to 4.19% (up 11bps y-t-d). Ten-year Portuguese yields were unchanged at 1.78% (down 17bps). Italian 10-year yields rose seven bps to 2.99% (up 98bps). Spain's 10-year yields slipped a basis point to 1.41% (down 16bps). German bund yields dropped nine bps to 0.32% (down 11bps). French yields fell seven bps to 0.67% (down 12bps). The French to German 10-year bond spread widened two to 35 bps. U.K. 10-year gilt yields dropped nine bps to 1.24% (up 5bps). U.K.'s FTSE equities index was little changed (down 0.3%).

Japan's Nikkei 225 equities index fell 1.0% (down 2.1% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.10% (up 5bps). France's CAC40 declined 1.2% (up 1.9%). The German DAX equities index dropped 1.5% (down 3.8%). Spain's IBEX 35 equities index lost 1.4% (down 4.4%). Italy's FTSE MIB index dropped 2.2% (down 3.5%). EM equities were mostly under pressure. Brazil's Bovespa index sank 5.9% (up 0.1%), and Mexico's Bolsa fell 1.9% (down 2.0%). South Korea's Kospi index slipped 0.2% (down 7.5%). India’s Sensex equities index gained 0.8% (up 11.2%). China’s Shanghai Exchange rallied 2.0% (down 15.5%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 17.7%). Russia's MICEX equities index fell 1.0% (up 7.8%).

Investment-grade bond funds saw inflows of $2.804 billion, and junk bond funds had inflows of $828 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.59% (up 69bps y-o-y). Fifteen-year rates declined three bps to 4.05% (up 87bps). Five-year hybrid ARM rates fell three bps to 3.90% (up 76bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.59% (up 56bps).

Federal Reserve Credit last week declined $14.8bn to $4.218 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.407 TN, or 50%, over the past 301 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.0bn last week to $3.442 TN. "Custody holdings" were up $101bn y-o-y, or 3.0%.

M2 (narrow) "money" supply was little changed last week at a record $14.156 TN. "Narrow money" gained $528bn, or 3.9%, over the past year. For the week, Currency increased $1.6bn. Total Checkable Deposits slipped $1.1bn, and Savings Deposits declined $2.5bn. Small Time Deposits rose $2.5bn. Retail Money Funds were little changed.

Total money market fund assets gained $13bn to $2.864 TN. Money Funds gained $171bn y-o-y, or 6.3%.

Total Commercial Paper expanded $5.2bn to $1.072 TN. CP gained $97bn y-o-y, or 10.3%.

Currency Watch:

August 7 - Wall Street Journal (Shen Hong): "The yuan's recent slide has been dramatic. Without some discreet expectations management on Beijing's part, it could have been even more striking. Traders at four major financial institutions in Shanghai said the People's Bank of China has shifted away from traditional intervention, or selling billions of dollars to buy yuan, instead acting through lower-profile foreign-exchange swaps. 'The PBOC is guiding people's expectations in the forward market as it doesn't want to waste money in the spot market. Without action in the forward market, the yuan's depreciation could have been far worse,' said Suan Teck Kin, an economist at United Overseas Bank."

The U.S. dollar index jumped 1.2% to 96.357 (up 4.6% y-t-d). For the week on the downside, the South African rand declined 5.5%, the Brazilian real 4.0%, the New Zealand dollar 2.3%, the Swedish krona 2.1%, the British pound 1.9%, the Mexican peso 1.8%, the Australian dollar 1.4%, the euro 1.3%, the Norwegian krone 1.2%, the Canadian dollar 1.1%, the Singapore dollar 0.6%, the Swiss franc 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.28% versus the dollar this week (down 4.96% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.3% (up 3.6% y-t-d). Spot Gold dipped 0.2% to $1,212 (down 7.0%). Silver fell 1.1% to $15.295 (down 10.8%). Crude declined 86 cents to $67.63 (up 12%). Gasoline fell 1.3% (up 14%), while Natural Gas jumped 3.2% (unchanged). Copper declined 0.8% (down 17%). Wheat fell 1.8% (up 33%). Corn dropped 3.3% (up 6%).

Trump Administration Watch:

August 4 - Bloomberg (Margaret Talev): "President Donald Trump defended his use of tariffs that have inflamed tensions with China and Europe, telling an audience of diehard supporters… that playing hardball on trade is 'my thing.' 'We have really rebuilt China, and it's time that we rebuild our own country now,' Trump said Saturday during about an hour of free-wheeling remarks at a rally outside Columbus, Ohio. He added that Chinese stocks are down, weakening that nation's bargaining power in the escalating trade war… 'Every country on earth wants to take wealth out of the U.S., always to our detriment,' Trump tweeted, 'I say, as they come, Tax them.'"

August 8 - The Hill (Niv Elis): "The federal deficit jumped 20% in the first 10 months of the 2018 fiscal year, the Congressional Budget Office (CBO) reported… Spending outpaced revenue between the beginning of the fiscal year, on Oct. 1, and July by $682 billion, $116 billion more than over the same period in the last fiscal year… The CBO projects that the deficit will reach $793 billion by the end of the year and approach $1 trillion next year. White House estimates have the deficit surpassing $1 trillion in 2019. Budget watchers have warned that interest payments - the amount the Treasury has to pay just to service the debt - are slated to become the fastest-growing annual expenditure."

August 7 - New York Times (Jim Tankersley): "President Trump has a new plan for how to pay down the national debt: Taxing American consumers and businesses when they buy certain goods from countries subject to his tariffs. Math is not on his side. Mr. Trump contended over the weekend that the tariffs his administration has imposed on steel, aluminum and a variety of imported Chinese goods will soon begin to generate sufficient revenue to reduce the federal debt… For this fiscal year, the Congressional Budget Office projects the federal budget deficit will be $800 billion. Mr. Trump's own Office of Management and Budget projects the deficit will top $1 trillion in 2019. That means that to pay down any of the debt - let alone 'large amounts' - tariffs will need to bring in at least $800 billion this year."

August 7 - Reuters (Babak Dehghanpisheh and Peter Graff): "Companies doing business with Iran will be barred from the United States, President Donald Trump said…, as new U.S. sanctions took effect despite pleas from Washington's allies… 'These are the most biting sanctions ever imposed, and in November they ratchet up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less!' Trump tweeted…"

Federal Reserve Watch:

August 9 - Bloomberg (Matthew Boesler): "The Federal Reserve may need to raise interest rates to 'somewhat restrictive' levels to combat the effects of recent fiscal stimulus on the U.S. economy, said Chicago Fed President Charles Evans in hawkish comments from one of the central bank's most reliable doves. 'If inflation continues to be on the order of 2, 2.2% -- I'm not expecting it to get as high as 2.5 -- that suggests only a modest amount of restrictiveness above our neutral rate might be called for in 2020,' Evans told reporters…"

August 8 - Reuters (Jason Lange): "The U.S. economy is strong enough to warrant further interest rate increases by the Federal Reserve, Richmond Fed President Thomas Barkin said… In a speech on the U.S. economy, Barkin argued that the Fed's benchmark interest rate was below normal levels, a suggestion that Fed policy was still stimulating economic growth…"

U.S. Bubble Watch:

August 8 - Bloomberg (Lananh Nguyen): "Investors had better start paying more attention to November's U.S. midterm elections, according to Standard Chartered Plc. As the campaign for control of Congress enters a crucial phase, Republicans defending seats in some of the most competitive races in the House of Representatives have more cash on hand than their Democratic challengers, a Bloomberg tabulation of Federal Election Commission reports shows. But polls, turnout and fundraising show Democrats have a credible shot at winning the House in November. Should Democrats regain majorities in the House or even the Senate, it could put them in a position to step up scrutiny of President Donald Trump's administration and might raise the likelihood of Congressional gridlock that slows the president's policy initiatives."

August 6 - Reuters (Lindsay Dunsmuir): "Loan officers at U.S. banks reported easing lending standards for business loans for firms of all sizes while keeping terms for commercial real estate loans almost unchanged in the second quarter, a Federal Reserve survey showed… The officers also said they were seeing stronger demand for business loans from small firms and weaker interest in commercial real estate loans. 'Notably, almost all domestic banks that reportedly eased standards or terms on [business] loans over the past three months cited increased competition from other lenders as a reason for easing,' the U.S. central bank said…"

August 8 - Reuters (Lucia Mutikani): "U.S. job openings held near record highs in June amid a modest decline in hiring, pointing to further tightening labor market conditions, which economists hope will soon spur faster wage growth… 'The labor market continues to run hot and this guarantees that more rate hikes are on the way,' said Chris Rupkey, chief economist at MUFG… 'Fed officials are increasingly skeptical that this economy requires any monetary policy support whatsoever.'"

August 9 - Wall Street Journal (Jennifer Smith): "Empty trucks are so hard to come by right now that Dean Foods Co., one of North America's largest milk suppliers, cut its full-year earnings outlook in part because it simply can't move its goods for anything close to what it expected to pay this year. 'Industry capacity for truck drivers remains extremely tight. This is driving third-party hauling rates to record levels, up 26% versus prior year,' Chief Executive Ralph Scozzafava said… The warning from the… dairy processor puts Dean in a growing line of U.S. businesses struggling with the tightest freight market in recent memory. Distribution channels that carry goods to retailers, factories and consumers are struggling to keep up the fast-growing U.S. economy as more companies caution that the strains in the transport sector are holding back their ability to grow."

August 7 - New York Times (Jamie Condliffe): "American companies are set to hand a record amount back to shareholders in the coming quarters. Corporate boards have authorized the repurchase of $754 billion of stock so far this year, up 80% from the same period last year, according to a Goldman Sachs report. And that figure could reach a record $1 trillion by the end of the year."

August 8 - Reuters (Richard Leong): "U.S. mortgage application activity decreased to its lowest in 2-1/2 years last week as loan requests to refinance an existing home fell to their weakest level since December 2000… MBA's measure on loan applications to buy a home, a proxy on future housing activity, fell 2% to 233.1 in the latest week, which was the lowest since 225.5 in the week of Feb. 16."

August 8 - Wall Street Journal (Laura Kusisto): "Western states experienced the sharpest decline for existing-home sales in the second quarter, a sign that rising prices, higher mortgage rates and, to a limited extent, the new tax law are weighing on pricier markets. Existing-home sales in the western region, including California, Washington and Arizona, declined 4.1% in the second quarter compared with the first quarter... Sales in the Northeast were unchanged from the first quarter, while sales in the more affordable Midwest and South rose 1.6% and declined 2.7%, respectively."

August 5 - Financial Times (Chris Flood): "US private equity managers have extracted $400bn in fees and expenses from investors since 2006 but on average they failed to beat the returns from an S&P 500 tracker fund… The findings are an analysis by Oxford Saïd Business School… Pension funds and other institutional investors hunting better returns after the 2007-08 financial crisis ramped up allocations to illiquid private equity strategies. This created a gold rush for managers such as Blackstone, KKR, Apollo, Carlyle and CVC Capital. Investors, however, have difficulty in assessing value for money because of complex and opaque agreements that allow private equity managers to charge multiple layers of hidden fees. About $2tn in new cash was raised from investors by US private equity managers between 2006 and the end of 2015."

August 7 - Wall Street Journal (Anne Tergesen): "The rate at which Americans age 65 and older are filing for bankruptcy has more than tripled since 1991 amid reductions in the social safety net and a shift away from pensions, according to a new study. 'Older Americans are more likely than ever to find themselves in bankruptcy court, seeking protection from creditors,' said the study written by academics at institutions including the University of Idaho and University of Illinois. It also said that among Americans in bankruptcy, the percentage of older people 'has never been higher.' The study, titled 'Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society,' found that between 2013 and 2016, the average rate at which 65- to 74-year-old Americans filed for bankruptcy increased to 3.6 out of every 1,000 individuals from a rate of 1.2 per 1,000 in 1991."

China Watch:

August 8 - Wall Street Journal (Yoko Kubota): "Beijing warned it would match the Trump administration step for step should it move ahead with new tariffs on Chinese imports, as trade data showed the country is shoring up its economy for a long trade conflict with the U.S. China's Ministry of Commerce… criticized the U.S.'s plan to impose new 25% tariffs on $16 billion in Chinese goods on Aug. 23, and released an updated list of items it would target with similar tariffs… 'This is very unreasonable,' the ministry said. 'In order to defend China's rightful interests and the multilateral trade system, China has to retaliate as necessary.' …State media… said that China will get through this storm, and those placing tariffs on it would end up hurting themselves, without resolving economic imbalances. 'Some people selfishly swim against the tide and act against morality, wantonly raising the barrier of tariffs and waving the stick of hegemony everywhere,' said the editorial…"

August 7 - CNBC (Huileng Tan): "China's state media continued its aggressive rhetoric against U.S. President Donald Trump's administration, accusing Washington of being 'double-faced' amid an ongoing trade dispute. 'Pointing China with (sic) gun and artillery and then asking for a talk, the U.S. showed zero sincerity,' said the People's Daily newspaper… 'Washington is playing double-faced tactics in the ongoing trade war,' the official newspaper of the Chinese Communist Party said in its editorial… 'From $50 billion, to $200 billion and then the proposed $500 billion, from 10% to 25%, Washington's tariff game has been seen through by China,' it added. The U.S. is using 'carrot-and-stick diplomacy to bully China into unilateral trade concessions,' but any move to 'defeat China' will be futile, said the People's Daily. The Communist Party paper said that Beijing would overcome the American 'trade blackmail,' adding: 'China will not surrender to the US, nor could it ignore the trade war. The only way is to face it and win it.'"

August 8 - Reuters (Ryan Woo and David Lawder): "China is slapping additional tariffs of 25% on $16 billion worth of U.S. imports from fuel and steel products to autos and medical equipment, the Chinese commerce ministry said, as the world's largest economies escalated their trade dispute. The tariffs will be activated on Aug. 23, the ministry said, the same day that the United States plans to begin collecting 25% extra in tariffs on $16 billion of Chinese goods."

August 8 - The Hill (Brenda Goh): "Chinese state media on Thursday accused the United States of a 'mobster mentality' in its move to implement additional tariffs on Chinese goods, and warned Beijing had all the necessary means to fight back."

August 7 - CNBC (Arjun Kharpal): "Apple has benefited from cheap labor and a strong supply chain in China and needs to share more of its profit with the Chinese people or face 'anger and nationalist sentiment' amid the ongoing trade war, an article in the state-backed People's Daily warned… But the continuing trade war between the U.S. and China could leave Apple and other U.S. firms vulnerable as 'bargaining chips' for Beijing, according to the article. 'The eye-catching success achieved in the Chinese market may provoke nationalist sentiment if U.S. President Donald Trump's recently adopted protectionist measures hit Chinese companies hard,' the People's Daily said."

August 9 - Reuters (Ben Blanchard and Kevin Yao): "A growing trade war with the United States is causing rifts within China's Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government. President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party. A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources…"

August 7 - Wall Street Journal (James Kynge): "China's leader, Xi Jinping, has called it the 'project of the century' and said it will usher in a 'golden age' of globalisation. With Beijing-backed projects in 78 countries, the 'Belt and Road Initiative' (BRI) is one of the world's most ambitious development programmes. But critics fear it could become the conduit through which some of China's debt problems are transmitted overseas. A series of controversies that have flared in countries as far apart as Pakistan, Sri Lanka, Laos, Malaysia, Montenegro and others are all related to debt sustainability - either because of the perceived inability of countries to handle outsized debts to China, or because some Beijing-funded infrastructure projects do not appear likely to justify their price tag. 'Disconnects between the creditworthiness of a project or a country and the size of the loans that China offers have led to project delays, political turmoil and allegations of wrongdoing in contract award procedures,' said Andrew Davenport, chief operating officer at RWR Advisory Group…"

August 8 - Bloomberg: "Chinese car sales slumped for a second consecutive month as a slowing economy and a tit-for-tat trade war with the U.S. kept consumers away from showrooms. Retail sales of cars, SUVs and multipurpose vehicles fell 5.4% to 1.6 million units in July… That compares with a 3.7% drop in June and trimmed the year-to-date growth in the world's biggest automobile market to 2%. China's economy is showing signs of weakness as a weakening yuan and a slump in stocks cost the country its rank as the world's second-biggest equity market."

August 8 - Bloomberg: "China is increasing its monitoring of indebted state-owned enterprises by creating watch lists and setting alarm levels, underscoring that the government hasn't abandoned the goal of controlling borrowing. The government will set two debt thresholds for state-owned firms -- one level would trigger alarms and the other would require higher regulatory attention… With the economy slowing and trade tensions rising, officials are now placing more emphasis on curbing debt at state firms and in parts of the property market."

August 5 - Financial Times (Tom Hancock and Wang Xueqiao): "Struggling to find well-paid work after arriving in Shanghai as a graduate from a middle-ranked Chinese university, Tom Wang turned to another source to fund his spending: credit cards… To cover repayments and keep spending, Mr Wang took on more debt - borrowing Rmb60,000 over four credit cards - before turning to online lenders for a further Rmb70,000. Interest payments 'snowballed' to Rmb1,500 a month, he said. Mr Wang is part of a generation of young consumers who have rejected the thrifty habits of their elders and become used to spending with borrowed money. Outstanding consumer loans - used for vehicle purchases, holidays, household renovations and buying expensive household goods - in China grew nearly 40% last year to reach Rmb6.8tn, according to Chinese investment bank CICC."

August 5 - Financial Times: "In 2009 China launched probably the biggest ever peacetime stimulus, issuing debt to fund an investment programme amounting to 12.5% of gross domestic product. It aimed to offset the impact of the 2008 global financial crisis, which had clobbered the country's export markets and thrown tens of millions of workers out of their jobs within a few months. China's actions then spurred a recovery in emerging markets that eventually helped restore the world's economic equilibrium. But… the debts incurred now rank as Beijing's greatest economic frailty. Its ratio of gross debt to GDP surged from about 171% before the crisis to 299% this year… Its corporate sector is the world's most indebted, and its most highly leveraged. A huge and loosely regulated shadow finance system conceals eruptive risks. Small and medium-sized banks, which have doubled in size over the past decade to account for 43% of total banking assets, are riddled with risky funding models and a few have already had to be bailed out."

August 5 - Financial Times (Gabriel Wildau and Yizhen Jia): "Chinese alternative asset managers have become the latest casualty of the country's crackdown on debt and financial risk, with a record number of private equity and hedge funds dissolving in recent months as new regulations limit their fundraising. In the first six months of this year, the Asset Management Association of China (Amac) - a government-controlled industry body - 'lost contact' with 163 private fund institutions, more than 70% of the total for which contact was lost for 2017. The 'lost contact' designation refers to private funds that have failed to renew their registration status with the association every three months as required."

EM Watch:

August 5 - Financial Times (Colby Smith): "Turkey's lira is one of the worst-performing currencies this year. In the last 12 months, it has weakened some 40% against the dollar and now hovers near all-time lows. A slide of this magnitude is especially worrisome when it comes to repaying debt that's denominated in non-domestic, 'hard' currencies like the dollar or the euro. Emerging-market borrowers in Asia and Latin America learned this lesson in the 1990s. Turkey's private sector apparently has not. Through May 2019, the country's banks and corporations have billions of dollars of hard-currency debt coming due. Here is HSBC's Melis Metiner on the repayment schedule… According to Metiner, banks are scheduled to repay $51bn over the next year, while the remaining $18.5bn sits on non-financial corporate balance sheets. These bills are coming due at a time when corporate indebtedness sits at 62% of GDP, half of which is denominated in foreign currencies (dollars and euros, mostly)."

August 7 - Bloomberg (Selcuk Gokoluk): "Turkey has replaced Argentina as the year's worst performer in local-currency bonds and the carry trade following the lira's plunge to a record. Losses for both nations far exceed the 4.7% average decline in emerging market local-currency debt in 2018. Investors holding lira-denominated bonds have lost 38% in dollar terms as the securities plunged 8% in just one week, while Argentina's losses stabilized at 36%..."

August 9 - Reuters (Andrew Osborn): "The Turkish lira sank to a record low as concern about souring relations with the U.S. and runaway inflation outweighed the nation's plans to stem a market rout. The lira sank about 4%, while the iShares MSCI Turkey ETF extended a two-day plunge. The currency had initially pared losses after the government set a growth target of less than 4%, down from 5.5%. The move represents Treasury and Finance Minister Berat Albayrak's first whack at fixing the $880 billion economy's vulnerabilities since a market meltdown sparked by last week's U.S. sanctions."

August 8 - Bloomberg (Pablo Gonzalez): "Argentina's century bonds fell to a record and the peso sunk to a two-week low as concern grows that a widening graft scandal will derail government efforts to shore up the economy. Yields on the overseas debt due in 2117 edged up to 9.14% early Wednesday, bringing the increase to 0.18 percentage point since July 31, when journalists at La Nacion newspaper published the findings of an investigation into more than a decade of alleged corruption under former President Cristina Fernandez de Kirchner and her late husband."

Global Bubble Watch:

August 7 - Bloomberg (Dani Burger and Sid Verma): "From excess to scarcity, a liquidity crunch has climbed to the top of the credit market's wall of worry -- a volte face from June when debt investors fretted bubbles. Angst over 'vanishing' liquidity is now the chief concern among credit buyers in Europe, according to Bank of America's client survey this month. Late-cycle worries, European political risk and sharp price moves this year -- particularly in Italy -- are feeding fears money managers will be unable to relinquish their positions in the next downturn. 'It's not trade wars or an equity market correction that look to be keeping credit investors up at night,' Bank of America strategists, led by Barnaby Martin, wrote… 'The concern is a more pervasive rush for the exit at some point in the future.'"

August 8 - Reuters (Jamie McGeever): "Financial market volatility is slumping across the board to historically - or, dangerously - low levels, potentially fanning the flames for a repeat of February's 'volmageddon' explosion that sparked a 10% correction in U.S. and world stocks. Then, major bond and currency markets remained reasonably insulated from the turmoil that swept through equities. They may not be so lucky next time around, because positioning in some cases is even more extreme than it is in stocks. A breakdown of how speculative investors like hedge funds are positioned across U.S. futures markets shows that short VIX positions as a share of overall open interest are higher now than they were just before that record surge in February."

August 6 - Wall Street Journal (Manju Dalal): "Beijing's softening stance on deleveraging and defaults has helped fuel a mini-revival across Asia's credit markets, pushing up bond prices in recent weeks and sparking debt issuance. Issuers from China to South Korea and India sold about $9.2 billion in new U.S. dollar bonds during the week… New deals had nearly ground to a halt in early July over fears of rising defaults among Chinese borrowers."

Europe Watch:

August 8 - Wall Street Journal (Laurence Norman and Drew Hinshaw): "The European Union has spent nearly $1 trillion to unify the continent by delivering highways and trains into places where there were once gravel paths. In current dollars, that is over eight times the Marshall Plan that rebuilt Europe after World War II. The EU has bought airports and bridges, trams and swimming pools. It has repaired castles and medieval churches. It hasn't bought love. To the vexation of European leaders, some of the biggest recipients of funding are now hotbeds of discontent, brimming with voters disquieted by the cultural and political pressures that have accompanied European integration, and threatening the bloc's cohesion."

Fixed Income Bubble Watch:

August 8 - The Hill (Niv Elis): "The amount of debt the federal government owes could be double the size of the entire U.S. economy in the next 30 years, according to a new report from the Congressional Budget Office (CBO). Debt would surpass an unprecedented 200% of gross domestic product (GDP) by 2048 under any of three scenarios explored by the CBO in its report…, while the nation's economy would be smaller than under current projections."

August 7 - Bloomberg (Margaret Talev): "Not content with a previous warning investors should brace for U.S. yields of 4%, Jamie Dimon went one further at the weekend, suggesting 5% was a distinct possibility. The JPMorgan Chase & Co. chief executive officer said Saturday people should be prepared to deal with the benchmark 10-year bond yield at 5% or higher. 'I think rates should be 4% today,' Dimon said... 'You better be prepared to deal with rates 5% or higher - it's a higher probability than most people think.'"

Geopolitical Watch:

August 3 - Bloomberg (Nicholas Wadhams and Jason Koutsoukis): "U.S. Secretary of State Michael Pompeo warned against easing up on sanctions until North Korea gives up its nuclear weapons, drawing a rebuke from the regime that underscored how far apart the two sides remain almost two months after their leaders met in Singapore. Back in Singapore for a regional security forum, Pompeo… called out Russia and China, highlighting reports that they are violating United Nations Security Council resolutions restricting trade with North Korea. 'We expect the Russians and all countries to abide by the UN Security Council resolutions and enforce sanctions on North Korea,' Pompeo said. 'Any violation that detracts from the world's goal of finally fully denuclearizing North Korea would be something that America would take very seriously.'"

August 8 - Reuters (Ben Blanchard and Michelle Martin): "China and Germany defended their business ties with Iran… in the face of President Donald Trump's warning that any companies trading with the Islamic Republic would be barred from the United States. The comments from Beijing and Berlin signaled growing anger from partners of the United States, which reimposed strict sanctions against Iran…, over its threat to penalize businesses from third countries that continue to operate there. 'China has consistently opposed unilateral sanctions and long-armed jurisdiction,' the Chinese foreign ministry said."

August 6 - Wall Street Journal (Asa Fitch and Aresu Eqbali): "Iranians are hoarding gold as a safeguard against a collapsing local currency and soaring cost of living as the U.S. is poised to impose economic sanctions on Iran, pushing the metal's price to records in Tehran. On Tuesday… the Trump administration is set to bring back a first wave of restrictions that had been waived under the Iran nuclear deal, an Obama-era agreement that gave Iran sanctions relief in exchange for curbs on its nuclear program."

August 7 - Financial Times (Andrew England and Simeon Kerr): "Since Mohammed bin Salman's swift rise to heir apparent last year, the young Saudi crown prince has earned a reputation for assertiveness as he seeks to shake up the conservative kingdom. Under his watch, the authorities have arrested powerful members of Prince Mohammed's own family and launched a sweeping crackdown against voices of dissent. Riyadh has also been at the forefront of a regional embargo against Qatar; alleged to have detained and forced the brief resignation of Lebanon's prime minister; and quarrelled with Germany over criticism of Saudi Arabia's interventionist foreign policy. But the country's extraordinary row with Canada and the bellicose language emanating from Riyadh this week still came as a shock to the kingdom's western allies and long-time Saudi watchers."

Credit Bubble Bulletin

Pages

Friday, August 10, 2018

Weekly Commentary: Turkey (Nudged Over the Cliff)

Friday Evening Links