Saturday, June 15, 2019

Weekly Commentary: Q1 2019 Z.1 "Flow of Funds"

Total Non-Financial Debt (NFD) expanded (nominal) $721 billion (strongest growth since Q2 ’18) during the quarter to a record $52.579 TN. NFD expanded $2.504 TN, or 5.0%, year-on-year. For perspective, annual NFD growth averaged $1.602 TN over the decade 2008-2017. NFD expanded $2.432 TN in 2006 and $2.478 TN in 2007. NFD has now expanded $17.514 TN, or 50%, since the end of 2008.

Financial sector debt expanded $127 billion during the quarter ($368bn y-o-y) to $16.444 TN, and Foreign U.S. borrowings increased $130 billion ($88bn y-o-y) to $4.051 TN. Total (NFD, Financial and Foreign) System debt expanded $978 billion during the quarter to a record $73.073 TN. Going all the way back to Q4 2017, Q1’s system-wide Credit expansion was second only to Q1 ‘18’s $1.002 TN.

Total Credit grew at a 5.6% rate during the quarter, up from Q4’s 2.72% to the strongest pace since Q1 2018’s 6.51%. Federal government borrowings jumped to an 8.57% rate, up from Q4’s 2.50% to the strongest pace since Q1 ‘18’s 13.38%. Total Corporate borrowings accelerated to a 6.62% pace, up from Q4’s 3.88% to the strongest rate since Q2 2017. Non-Financial Corporate borrowings jumped to a 7.58% pace (from Q4’s 3.35%), the briskest rate since Q1 2016. Total Household Borrowings slowed to a 2.33% pace (from Q4’s 2.82%), with Household Mortgages and Consumer Credit expanding 2.43% and 4.34%. The Domestic Financial Sector increased borrowings at a 3.28% pace, up from Q4’s 2.71%.

At seasonally-adjusted and annualized rates (SAAR), total system Credit expanded $2.884 TN during Q1, double Q1 to the strongest pace since Q1 2018’s SAAR $3.207 TN. Federal borrowings surged SAAR $1.531 TN (up from Q4’s SAAR $444bn). Total Corporate borrowings expanded SAAR $1.014 TN, the strongest since Q1 2016’s SAAR $1.150 TN. Household borrowings grew SAAR $363 billion (mortgage SAAR $252bn, Consumer Credit SAAR $174bn), the weakest pace since Q1 2016’s SAAR $334 billion. Financial Sector debt expanded SAAR $535 billion, the strongest rate since Q3 2016’s SAAR $557 billion.

Q1 Federal Expenditures were up 5.9% y-o-y to SAAR $4.659 TN, while Federal Receipts increased 3.9% y-o-y to $3.564 TN. State & Local Expenditures were up 2.4% y-o-y to SAAR $2.862 TN, with Receipts up 3.0% to $2.641 TN.

Bank (“Private Depository Institutions”) Assets rose nominal $103 billion during the quarter to a record $19.296 TN. For Q1, Loans were little changed at $11.270 TN, while Debt Securities jumped $83.3 billion to a record $4.384 TN. Over four quarters, Loans expanded $535 billion, or 5.0%, while Debt Securities expanded $167 billion, or 4.0%.

Broker/Dealer Assets slipped $5.6 billion during the quarter to $3.353 TN. Over four quarters, Broker/Dealer Assets gained $262 billion, or 8.5%. It appears growth was isolated in off-balance sheet vehicles (also helping to explain Q1’s tepid bank Loan growth). Wall Street “Funding Corps” jumped $88 billion during Q1 (SAAR $255bn!) to $1.518 TN. Fed Funds & Repo surged $136 billion to $4.032 TN, the high going back to Q4 2012. Fed Funds & Repo jumped $538 billion, or 15.4%, over the past year.

Money Market Fund Assets gained $41 billion during Q1 to $3.079 TN (high since Q4 ’09), with a four-quarter gain of $286 billion, or 10.2%.

Retail sales have bounced back over recent months, recovering from a weak start to 2019 and poor end to 2018. It’s not surprising that household spending tracks the fortunes of the bloated Household Balance Sheet. Household (& Non-Profits) Assets surged $4.697 TN during Q1 to a record $124.694 TN. And with Liabilities expanding just $5.9 billion, Household Net Worth surged $4.691 TN – the strongest ever quarterly increase in Net Worth (2nd place Q4 ‘99’s $3.114 TN). Household Net Worth jumped to 516% of GDP, just below the record 522% from Q3 2018. This compares to peak ratios 484% in Q1 2007 and 444% during Q1 2000.

On the back of the strong recovery in stock prices, Household Financial Asset holdings surged $4.238 TN to a record $88.895 TN, or 422% of GDP. This ratio compares to peaks 379% during Q3 2017 and 359% during Q1 2000. Financial Assets were up $3.218 TN over the past four quarters. House price inflation also continues to boost household perceived wealth. Household Real Estate holdings rose $387 billion during the quarter to a record $29.551 TN, with a four-quarter gain of $1.263 TN.

Rest of World (ROW) also benefitted from the big Q1 equities recovery. ROW holdings of U.S. Assets jumped $1.372 TN during the quarter – the largest ever quarterly gain - to a record $28.570 TN. ROW holdings have almost doubled since the cycle peak $14.705 TN back in Q1 2008. Over this period, ROW holdings jumped from 100% to 136% of GDP. ROW Equities (Equities and Mutual Funds) rose $838 billion during the quarter to a record $8.187 TN. Debt Securities rose $381 billion (strongest gain since Q3 2010) to a record $11.548 TN, led by a $208 billion increase in Treasuries holdings (to $6.474 TN).

The market now prices in a 21% probability of a rate cut at next week’s FOMC meeting, with an 86% probability for a cut by the July 31st meeting. I have previously addressed the unprecedented nature of commencing a Fed easing cycle with the unemployment rate at 3.6%, financial conditions loose and stocks near all-time highs. Add to this list system Credit expansion near the strongest in a decade. It’s incredible that the Fed would reduce rates in the current backdrop, but markets are sure trying to force the Fed’s hands. That highly speculative markets have come to have such sway over the Federal Reserve (and global central banking) is indicative of the precarious nature of late-cycle market and policy dynamics.

The predicament is illuminated rather poignantly in Z.1 data. When “risk off” took hold during Q4, Non-Financial Debt growth dropped to SAAR $1.404 TN from Q3’s SAAR $2.300 TN. In short, that’s insufficient new Credit to sustain financial and economic Bubbles. Net Issuance of Debt Securities sank from Q3’s SAAR $1.808 TN to Q4’s SAAR $412 billion – with Corporate & Foreign Bonds sinking from SAAR $411 billion to SAAR negative $125 billion.

But the Fed’s January 4th dovish U-turn opened the “risk on” floodgates. Debt Securities expanded SAAR $1.783 TN in Q1, with Corporate & Foreign Bonds expanding SAAR $588 billion. Loose financial conditions powered equities higher, ensuring rapidly inflating Household Net Worth. After suffering a record $3.960 TN quarterly drop during Q4, Household Net Worth jumped a quarterly record $4.691 TN during Q1.

Financial and economic Systems have evolved to become acutely unstable. Market-based Credit so dominates system Credit expansion that “risk on”/“risk off” speculative dynamics now exert an acutely destabilizing impact on financial conditions, Credit expansion, securities prices, Household Net Worth and economic performance. In this highly speculative market environment, “risk on” ensures loose financial conditions, Credit and speculative excess, and vigorous market inflation, while exacerbating economic maladjustment.

When “risk on” invariably succumbs to “risk off,” financial conditions abruptly tighten, debt issuance tanks, system Credit growth drops sharply, markets turn illiquid, Bubbles falter, equities prices sink, Household Net Worth deflates, and the Bubble Economy commences a downward spiral. Worse yet, these dynamics are a global phenomenon.

Is the Fed really about to further feed “risk on”, stoking Bubble excess in the process? I’ll assume the Powell Fed would rather sit this one out. They are, of course, ready to respond in the event of “risk off.” But at this speculative blow-off Bubble phase, things tend to unwind really quickly. Global bonds appreciate the acute fragility and are priced for rate cuts and aggressive QE deployment.

The global yield collapse is not so much in response to economic weakness and trade war risks. The global financial system is an accident in the making. China is an accident in the making. Markets are demanding: “Give us rate cuts and prepare for aggressive QE - or we’ll give you central bankers the type of vicious market dislocation you are not prepared to contend with!” The Fed is faced with the Hobson Choice of either stoking the Bubble or waiting for incipient “risk off” - and hoping it possesses the firepower to hold things together. Markets bet confidently the Fed lacks the fortitude to wait.


For the Week:

The S&P500 increased 0.5% (up 15.2% y-t-d), and the Dow added 0.4% (up 11.8%). The Utilities gained 1.1% (up 14.7%). The Banks rose 1.1% (up 12.2%), while the Broker/Dealers declined 0.6% (up 10.5%). The Transports jumped 1.6% (up 12.4%). The S&P 400 Midcaps added 0.4% (up 14.2%), and the small cap Russell 2000 gained 0.5% (up 12.9%). The Nasdaq100 rose 0.8% (up 18.2%). The Semiconductors declined 1.6% (up 17.4%). The Biotechs fell 0.9% (up 6.4%). With bullion little changed, the HUI gold index jumped 2.8% (up 8.2%).

Three-month Treasury bill rates ended the week at 2.13%. Two-year government yields slipped a basis point to 1.84% (down 65bps y-t-d). Five-year T-note yields declined two bps to 1.83% (down 68bps). Ten-year Treasury yields were unchanged at 2.08% (down 62bps). Long bond yields added one basis point to 2.59% (down 43bps). Benchmark Fannie Mae MBS yields jumped 12 bps to 2.87% (down 62bps).

Greek 10-year yields dropped 11 bps to 2.70% (down 170bps y-t-d). Ten-year Portuguese yields slipped a basis point to 0.61% (down 111bps). Italian 10-year yields declined one basis point to 2.35% (down 39bps). Spain's 10-year yields fell five bps to 0.50% (down 92bps). German bund yields were little changed at negative 0.255% (down 50bps). French yields added a basis point to 0.09% (down 62bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields rose three bps to 0.85% (down 43bps). U.K.'s FTSE equities index added 0.2% (up 9.2% y-t-d).

Japan's Nikkei Equities Index gained 1.1% (up 5.5% y-t-d). Japanese 10-year "JGB" yields declined one basis point to negative 0.13% (down 13bps y-t-d). France's CAC40 was little changed (up 13.5%). The German DAX equities index added 0.4% (up 14.6%). Spain's IBEX 35 equities index declined 0.5% (up 7.7%). Italy's FTSE MIB index rose 1.2% (up 12.5%). EM equities were mixed. Brazil's Bovespa index added 0.2% (up 7.7%), while Mexico's Bolsa declined 0.4% (up 3.6%). South Korea's Kospi index gained 1.1% (up 2.7%). India's Sensex equities index fell 0.4% (up 9.4%). China's Shanghai Exchange rallied 1.9% (up 15.6%). Turkey's Borsa Istanbul National 100 index dropped 3.2% (down 0.5%). Russia's MICEX equities index increased 0.4% (up 15.6%).

Investment-grade bond funds saw inflows of $4.021 billion, and junk bond funds posted inflows of $1.718 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.82% (down 80bps y-o-y). Fifteen-year rates declined two bps to 3.26% (down 81bps). Five-year hybrid ARM rates slipped a basis point to 3.51% (down 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up two bps to 4.17% (down 44bps).

Federal Reserve Credit last week increased $1.9bn to $3.810 TN. Over the past year, Fed Credit contracted $472bn, or 11.0%. Fed Credit inflated $999 billion, or 36%, over the past 345 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $17.7bn last week to $3.461 TN. "Custody holdings" rose $59.6bn y-o-y, or 1.8%.

M2 (narrow) "money" supply jumped another $28.4bn last week to a record $14.687 TN. "Narrow money" rose $603bn, or 4.3%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits surged $99.8bn, while Savings Deposits sank $99.8bn. Small Time Deposits added $1.3bn. Retail Money Funds rose $5.9bn.

Total money market fund assets gained $8.9bn to $3.172 TN. Money Funds gained $346bn y-o-y, or 12.3%.

Total Commercial Paper dipped $1.2bn to $1.099 TN. CP was down $10.3bn y-o-y, or 0.9%.

Currency Watch:

June 11 – Bloomberg (Tian Chen and Livia Yap): “China’s central bank is making it clear to yuan bears that short-term declines are no sure thing, especially in the run up to a crucial meeting at the end of this month. The People’s Bank of China set its daily reference rate for the currency at higher than market watchers expected for a 10th straight day…, the longest run since September. The strong bias on Tuesday was the largest since Bloomberg began releasing fixing forecasts in August 2017. The central banks also announced plans to sell bonds in Hong Kong in June -- which would support the offshore rate.”

The U.S. dollar index gained 1.1% to 97.572 (up 1.4% y-t-d). For the week on the upside, the Mexican peso increased 2.4% and the South African rand gained 0.9%. For the week on the downside, the New Zealand dollar declined 2.6%, the Australian dollar 1.8%, the British pound 1.2%, the Swiss franc 1.1%, the euro 1.1%, the Canadian dollar 1.1%, the Norwegian krone 1.0%, the Swedish krona 1.0%, the Singapore dollar 0.7%, the Brazilian real 0.4%, the Japanese yen 0.3% and the South Korean won 0.3%. The Chinese renminbi declined 0.23% versus the dollar this week (down 0.68% y-t-d).

Commodities Watch:

June 9 – Financial Times (Alice Woodhouse and Hudson Lockett): “China increased its gold purchases for the sixth month running in May, taking its total reserves to 1,916 tonnes, while the country’s foreign exchange holdings defied expectations for a fall. The People’s Bank of China bought 15.6 tonnes of the precious metal last month, according to the central bank. The country has accumulated 74 tonnes of the precious metal since the end of November, when it initially began ramping up purchases, according to Refinitiv data. The value of its reserves have risen to $79.8bn as US-China trade tensions have rumbled on.”

The Bloomberg Commodities Index rallied 0.9% this week (up 1.1% y-t-d). Spot Gold was little changed at $1,342 (up 4.6%). Silver fell 1.5% to $14.803 (down 4.7%). WTI crude dropped $1.48 to $52.51 (up 16%). Gasoline slipped 0.4% (up 31%), while Natural Gas recovered 2.1% (down 19%). Copper was little changed (unchanged). Wheat surged 6.7% (up 7%). Corn jumped 9.0% (up 21%).

Market Instability Watch:

June 9 – Wall Street Journal (Joe Wallace): “Gold is on its longest winning streak in almost a year and a half, the latest signal that investors are preparing for the Federal Reserve to lower interest rates amid signs of a slowdown in economic growth. The safe-haven metal rose for eight consecutive trading sessions through Friday, its longest run since January 2018. Prices tend to increase when investors are growing anxious about the U.S. economy and seeking more stable alternatives to stocks, oil and other risky assets.”

June 11 – Bloomberg (Tian Chen and Amy Li): “Hong Kong stocks tumbled and the currency soared as interbank interest rates jumped amid protests that closed roads in the city’s financial district. The Hang Seng Index fell 1.7% at the close, with local property developers among the biggest losers, while the Hong Kong dollar strengthened as much as much as 0.26%, the largest gain in seven months. The one-month interbank borrowing cost, known as Hibor, rose 29 bps to about 2.42%, the highest since 2008.”

June 14 – Reuters (Greg Torode, James Pomfret and Sumeet Chatterjee): “Some Hong Kong tycoons have started moving personal wealth offshore as concern deepens over a local government plan to allow extraditions of suspects to face trial in China for the first time, according to financial advisers, bankers and lawyers familiar with such transactions… ‘It’s started. We’re hearing others are doing it, too, but no-one is going to go on parade that they are leaving,’ the adviser said. ‘The fear is that the bar is coming right down on Beijing’s ability to get your assets in Hong Kong. Singapore is the favored destination.’”

June 10 – Financial Times (Hudson Lockett and Robin Harding): “If China’s renminbi slips past Rmb7 a dollar — ‘cracking seven’ in trader talk — it would take the currency to a level of weakness not seen since the depths of the global financial crisis 11 years ago. It would also breach a widely recognised floor that China’s central bank has previously defended during bouts of sharp depreciation last year and in 2016. The defence mounted in 2016, in which China was forced to burn through some of its foreign exchange reserves, spending as much as $107bn in a single month, followed a shock devaluation from the previous August that marked the currency’s biggest one-day drop in decades.”

June 12 – Financial Times (Adam Samson): “Germany has sold medium-term Bunds at the lowest yield on record in the latest sign of how the uncertain outlook for Europe’s economy has depressed borrowing costs. The country auctioned 10-year Bunds at a yield of minus 0.24%... The yield was well below the minus 0.07% at the previous 10-year auction in late May. The previous trough of minus 0.11% was recorded in 2016.”

June 10 – Bloomberg (Robert Brand): “Foreign investors dumped the most South African bonds on record on Friday amid concern the government will have to increase borrowing to rescue the state-owned electricity company, Eskom Holdings SOC Ltd. Non-residents sold a net 9.6 billion rand ($644 million) securities, the most since Bloomberg started compiling the data in 1996… The country’s current-account deficit is among the widest in emerging markets and the outflows threaten to weigh on its currency, which has already weakened more than 5% over the past month.”

Trump Administration Watch:

June 11 – Bloomberg (Justin Sink): “President Donald Trump said he’s personally holding up a trade deal with China and that he won’t complete the agreement unless Beijing returns to terms negotiated earlier in the year. ‘It’s me right now that’s holding up the deal,’ Trump said… ‘And we’re going to either do a great deal with China or we’re not going to do a deal at all.’”

June 10 – New York Times (Ana Swanson and Jeanna Smialek): “President Trump has concluded his tariff threat worked and forced Mexico to stop the flow of migrants. On Monday, he pivoted back to his trade fight with China and vowed to hit Beijing with more tariffs if it did not accede to America’s trade demands. ‘The China deal’s going to work out,’ Mr. Trump said… ‘You know why? Because of tariffs. Because right now China is getting absolutely decimated by companies that are leaving China, going to other countries, including our own, because they don’t want to pay the tariffs.’”

June 11 – Reuters (Michael Martina, Susan Heavey and Chris Prentice): “U.S. President Donald Trump… defended the use of tariffs as part of his trade strategy while China vowed a tough response if the United States insists on escalating trade tensions amid ongoing negotiations… ‘Tariffs are a great negotiating tool,’ Trump tweeted, one day after saying he was ready to impose another round of punitive tariffs on China… Trump has repeatedly said he is getting ready to meet Xi at the summit in Osaka, Japan, at the end of June, but China has not confirmed it. Chinese Foreign Ministry spokesman Geng Shuang again would not be drawn into confirming a Xi-Trump meeting at G20… ‘China does not want to fight a trade war, but we are not afraid of fighting a trade war,’ he said… ‘If the United States only wants to escalate trade frictions, we will resolutely respond and fight to the end.’”

June 11 – Bloomberg (Shawn Donnan): “President Donald Trump is eager to crow about the economic weapon he wielded against Mexico to win concessions on immigration: ‘Tariffs are a great negotiating tool,’ he declared… Now, Trump says, it’s China’s turn to cower. Yet to visit China these days is to encounter the limits of his punch-them-in-the-nose strategy. Even as Trump threatens to raise import duties to painful levels, 10 days of meetings with Chinese officials, academics, entrepreneurs and venture capitalists revealed a nation rewriting its relationship with the U.S. and preparing to ride out a trade war. Trump is seeking to increase pressure on Xi Jinping, his Chinese counterpart, before this month’s G-20 summit, but Trump may already have pushed too far. Last month, Xi exhorted his countrymen to a second Long March, an echo of Mao’s seminal strategy to preserve the communist revolution. What Xi didn’t say was that the new march… is already underway. ‘This is definitely an inflection point,’ said Tom Liu, chief executive officer of Shanghai-based data company ChinaScope Financial Ltd. ‘People are seeing an indefinite trade shock.’ And they are planning for it.”

June 14 – Wall Street Journal (Courtney McBride, Rory Jones, Benoit Faucon and Costas Paris): “The U.S. blamed Iran for attacks on two tankers in the Gulf of Oman on Thursday, saying the assaults were the latest in a series of hostile actions meant to disrupt the flow of oil. ‘Taken as a whole, these unprovoked attacks present a clear threat to international peace and security, a blatant assault on the freedom of navigation, and an unacceptable campaign of escalating tension by Iran,’ Secretary of State Mike Pompeo said, vowing the U.S. would defend itself and its partners.”

June 9 – Reuters (Sabine Siebold and Francois Murphy): “Iran has followed through on a threat to accelerate its production of enriched uranium, the head of the U.N. atomic watchdog said on Monday, departing from his usual guarded language to say he was worried about increasing tension.”

June 11 – Associated Press (Martin Crutsinger): “President Donald Trump complained… that President Xi Jinping enjoys a major advantage in the U.S.-China trade war in that he controls China’s central bank while Trump must deal with a Federal Reserve that is ‘very destructive to us.’ Trump made clear in an interview with CNBC his frustration with a system that provides political independence for America’s central bank — something most economists see as vital to its credibility. Trump noted that China’s president, by contrast, is essentially also head of the Chinese central bank. ‘He can do whatever he wants,’ Trump said… Trump also complained that even though he selected four of the Fed’s five board members, including elevating Jerome Powell to chairman, ‘We have people on the Fed that really weren’t, you know, they’re not my people.’”

June 11 – CNBC (Fred Imbert): “President Donald Trump said… that the U.S. dollar is at a disadvantage compared with other major currencies like the euro as central banks keep interest rates low while the Federal Reserve’s rates are higher by comparison. ‘The Euro and other currencies are devalued against the dollar, putting the U.S. at a big disadvantage,’ Trump tweeted, adding the Fed doesn’t have ‘a clue.’ … Trump also told CNBC’s Joe Kernen… that the Fed ‘made a big mistake: They raised interest rates far too fast.’”

June 11 – Reuters (David Brunnstrom): “The United States said… it was gravely concerned about proposed amendments to Hong Kong laws that would allow suspects to be extradited to mainland China and warned that such a move could jeopardize the special status Washington affords the territory. State Department spokeswoman Morgan Ortagus told a regular news briefing ‘the continued erosion of the ‘one country, two systems’ framework puts at risk Hong Kong’s long-established special status in international affairs.’ Another State Department official said Ortagus was referring the United States–Hong Kong Policy Act of 1992, which establishes the legal framework by which Washington accords Hong Kong special treatment distinct from the rest of China for purposes of U.S. domestic law.”

June 12 – Reuters (Steve Holland and Timothy Gardner): “President Donald Trump said… he was considering sanctions over Russia’s Nord Stream 2 natural gas pipeline project — which the United States has told European companies to avoid — and warned Germany against being dependent on Russia for the fuel. ‘We’re protecting Germany from Russia and Russia is getting billions and billions of dollars from Germany,’ Trump told reporters at an appearance with Polish President Andrzej Duda…”

June 9 – CNBC (Natasha Turak): “The White House has had no problem leveraging American economic heft to bring other countries to heel on issues that aren’t related to the economy — and it may continue to do so, Treasury Secretary Steven Mnuchin indicated to CNBC… …Mnuchin defended the president’s mixing of trade and non-trade issues — something that’s drawn criticism from outside commentators. Asked if trade could again be used as a weapon in non-trade disputes, Mnuchin said, ‘I think it’s very important that we have all these tools, that we use them. And President Trump has really done a great job at using these tools.’”

June 12 – Wall Street Journal (Aaron Back): “The Trump administration’s plan to reform housing finance is gaining in clarity, but it remains decidedly hazy. Mark Calabria has gotten off to a vocal start since being appointed head of the Federal Housing Finance Agency. He is calling on Congress to pass reforms to Fannie Mae and Freddie Mac while at the same time threatening to move ahead unilaterally. The twin companies have been under government control, with explicit financial backing from the U.S. Treasury, for more than a decade. Getting them out of that situation without disrupting the housing market is tricky. Certainly a coordinated approach between the White House and Congress would be best. This would likely include an explicit government guarantee for the mortgage-backed securities issued by the companies. If Congress continues to drag its feet, though, it remains uncertain how much the Trump administration is prepared to do on its own.”

Federal Reserve Watch:

June 10 – CNBC (Thomas Franck): “President Donald Trump criticized the Federal Reserve… for raising interest rates too quickly and giving the Chinese an upper hand in trade negotiations. ‘They devalue their currency, they have for years: It’s put them at a tremendous competitive advantage. And we don’t have that advantage because we have a Fed that doesn’t lower interest rates,’ Trump told CNBC’s Joe Kernen… ‘We should be entitled to have a fair playing field, but even without a fair playing field — because our Fed is very, very disruptive to us — even without a fair playing field we are winning.’”

June 10 – Reuters (Ann Saphir): “The Federal Reserve will more likely than not leave interest rates unchanged this year, defying expectations now built into financial markets for several rate cuts, a Goldman Sachs economist told investors in a note… ‘Although it is a close call, we still expect the FOMC to keep the funds rate unchanged in the remainder of the year,’ economist Jan Hatzius wrote… Fed Chair Jerome Powell’s promise to act ‘as appropriate’ was not meant to signal a rate cut, he said, but was merely meant to show the U.S. central bank was not tone deaf to rising trade tensions.”

June 12 – CNN (Rich Barbieri): “Martin Feldstein, one of the most influential economists of his generation and adviser to presidents of both political parties, died Tuesday at the age of 79. Feldstein was a professor of economics at Harvard University for five decades, an expert on taxes and a leading advocate of supply-side economics. He was a mentor to conservative thinkers and respected by Democrats. Many of his students went on to play important roles in the field. Between 1982 and 1984, Feldstein served as chairman of the Council of Economic Advisers and chief economic adviser for President Ronald Reagan. Later he was an adviser to Republican President George W. Bush, and then Democratic President Barack Obama. For many years, Feldstein headed the respected National Bureau of Economic Research, or NBER.”

U.S. Bubble Watch:

June 12 – Bloomberg (Sarah McGregor): “The U.S. budget deficit widened to $738.6 billion in the first eight months of the fiscal year, a $206 billion increase from a year earlier, despite a revenue boost from President Donald Trump’s tariffs on imported merchandise. The shortfall was 38.8% more than the same period a year ago… So far in the fiscal year that began Oct. 1, a revenue increase of 2.3% hasn’t kept pace with a 9.3% rise in spending.”

June 12 – Reuters (Jason Lange): “Washington posted a $208 billion budget deficit in May as a modest increase in revenues failed to make up for higher spending on the military and social welfare programs like Medicare… The deficit was the highest ever for the month of May and wider than the average forecast of $185.5 billion… Government spending rose to $440 billion, up 21% from May of 2018. Receipts increased to $232 billion, up 7% from the same month last year… The deficit for the fiscal year to date was $739 billion, compared with $532 billion in the comparable period the year earlier.”

June 12 – CNSNews (Jason Lange): “For the first time in the history of the United States, the federal government has spent more than $3 trillion in the first eight months of the fiscal year… The record $3,013,541,000,000 that the federal government spent in October through May of fiscal 2019 was $181,157,920,000 more than the previous record of $2,832,383,080,000… that the federal government spent in October through May of fiscal 2009… Even with the second highest tax revenues ever collected in the first eight months of the fiscal year, the federal government still ran a deficit for those eight months of $738,639,000,000.”

June 11 – New York Times (Matt Phillips): “A decade after reckless home lending nearly destroyed the financial system, the business of making risky loans is back. This time the money is bypassing the traditional, and heavily regulated, banking system and flowing through a growing network of businesses that stepped in to provide loans to parts of the economy that banks abandoned after 2008. It’s called shadow banking, and it is a key source of the credit that drives the American economy. With almost $15 trillion in assets, the shadow-banking sector in the United States is roughly the same size as the entire banking system of Britain, the world’s fifth-largest economy. In certain areas — including mortgages, auto lending and some business loans — shadow banks have eclipsed traditional banks, which have spent much of the last decade pulling back on lending in the face of stricter regulatory standards aimed at keeping them out of trouble.”

June 11 – Reuters (Lucia Mutikani): “Underlying U.S. producer prices increased solidly for a second straight month in May, boosted by a surge in the cost of hotel accommodation and gains in portfolio management service fees… ‘There is no evidence of falling inflation in this report,’ said John Ryding, chief economist at RDQ Economics… Producer prices excluding food, energy and trade services rose 0.4% last month, matching April’s gain, the government said. The so-called core PPI increased 2.3% in the 12 months through May…”

June 12 – CNBC (Jeff Cox): “The trade war and global slowdown are combining to trigger a sharp drawdown in profits for U.S. multinational companies. Companies that derive more than half their sales outside the U.S. are expected to see a 9.3% slump in second-quarter earnings as the reporting season looms about a month away, according to FactSet estimates that see the S&P 500 broadly reporting a 2.3% decline. That means big companies like Apple and Boeing that have far-flung operations and count on business and lower costs from other countries as a big ingredient in their recipe for success. Of the S&P 500′s 11 sectors, information technology is expected to see the biggest drop-off in earnings at 11.8%.”

June 11 – Wall Street Journal (Rolfe Winkler): “Silicon Valley startup Pilot AI Labs Inc. signed a Chinese-backed venture-capital firm as its first big investor in 2015. By last summer, Pilot AI wanted it gone. The U.S. startup hoped to sell more of its artificial-intelligence software to the U.S. government after working with the Pentagon… and worried its effort could be hurt by the investor’s ties to China’s government. The chairman of the Chinese-backed investor, Digital Horizon Capital, was asked to sell back its stake… He angrily refused. Chinese investors were once embraced in Silicon Valley both for their pocketbooks and their access to one of the world’s largest and trickiest markets. Today, they are suddenly less welcome. Since late last year, amid rising U.S.-China tensions, venture firms with China ties have been dialing back their U.S. investments… Some American venture firms are dumping their Chinese limited partners or walling them off with special structures. And some U.S. startups that have taken significant Chinese money are keeping the investments quiet or trying to push their Chinese investors out to avoid scrutiny.”

June 12 – New York Times (Martha C. White): “A new battlefront has opened in the trade war between the United States and China: the $1.6 trillion American travel industry. A Los Angeles hotel long popular with Chinese travelers saw a 23% decline in visits last year and another 10% so far this year. In New York City, spending by Chinese tourists, who spend nearly twice as much as other foreign visitors, fell 12% in the first quarter. And in San Francisco, busloads of Chinese tourists were once a mainstay of one fine jewelry business; over the last few years, the buses stopped coming. Figures from the Commerce Department’s National Travel and Tourism Office show a sharp decline in the number of tourists from China last year. Industry professionals worry that the drop-off is picking up speed this year, affecting not just airlines, hotels and restaurants, but also retailers and attractions like amusement parks and casinos.”

June 10 – Financial Times (Matthew Rocco): “US corporations’ cash pile has receded from a record high, according to… Moody’s…, as companies put more of their dollars to use in the wake of tax cuts championed by President Donald Trump. Moody’s said… the 928 non-financial companies that it rates held $1.69tn in cash and liquid investments as of December 2018, a 15.2% drop from an all-time high of $1.99tn a year earlier. Spending on capital investments, dividends, share buybacks and acquisitions each set record highs in the year following the passage of the Tax Cuts and Jobs Act, which included measures that lowered the corporate tax rate and reduced the tax hit on earnings repatriated from foreign subsidiaries.”

June 13 – Bloomberg (Ben Steverman): “One of the toughest problems retirees face is making sure their money lasts as long as they do. From the U.S. to Europe, Australia and Japan, retirement account balances aren’t increasing fast enough to cover rising life expectancy, the World Economic Forum warns… The result could be workers outliving their savings by as much as a decade or more. ‘The size of the gap is such that it requires action’ from policymakers, employers and individuals, said report co-author Han Yik… Unless more is done, older people will either need to get by on less or postpone retirement, he said. ‘You either spend less or you make more.’ In the U.S., the forum calculates that 65-year-olds have enough savings to cover just 9.7 years of retirement income. That leaves the average American man with a gap of 8.3 years. Women, who live longer, face a 10.9-year gap.”

June 12 – New York Times (Jeff Sommer): “A slow-moving crisis is approaching for Social Security, threatening to undermine a central pillar in the retirement of tens of millions of Americans. Next year, for the first time since 1982, the program must start drawing down its assets in order to pay retirees all of the benefits they have been promised, according to the latest government projections. Unless a political solution is reached, Social Security’s so-called trust funds are expected to be depleted within about 15 years. Then, something that has been unimaginable for decades would be required under current law: Benefit checks for retirees would be cut by about 20% across the board.”

June 9 – Wall Street Journal (Sharon Nun): “The American South spent much of the past century trying to overcome its position as the country’s poorest and least-developed region, with considerable success: By the 2009 recession it had nearly caught up economically with its northern and western neighbors. That trend has now reversed. Since 2009, the South’s convergence has turned to divergence, as the region recorded the country’s slowest growth in output and wages, the lowest labor-force participation rate and the highest unemployment rate.”

China Watch:

June 13 – Reuters (Yawen Chen and Ryan Woo): “China’s commerce ministry said… Beijing will not yield to any ‘maximum pressure’ from Washington, and any attempt by the United States to force China into accepting a trade deal will fail. China will not make concessions on matters of principle, ministry spokesman Gao Feng told reporters…”

June 9 – Reuters (Josh Horwitz): “China is preparing to curb some technology exports to the United States, the chief editor of China’s Global Times newspaper said… If enacted, the measures suggest Beijing would retaliate over U.S. restrictions imposed on Shenzhen-based Huawei Technologies Co Ltd due to what Washington said were national security issues. In a tweet, the pro-CCP paper’s editor-in-chief Hu Xijin said that China ‘is building a management mechanism to protect China’s key technologies.’”

June 8 – New York Times (Kate Conger): “The Chinese government this past week summoned major tech companies including Microsoft and Dell from the United States and Samsung of South Korea, to warn that they could face dire consequences if they cooperate with the Trump administration’s ban on sales of key American technology to Chinese companies, according to people familiar… Held on Tuesday and Wednesday, the meetings came soon after Beijing’s announcement that it was assembling a list of ‘unreliable’ companies and individuals. That list was widely seen as a way of hitting back at the Trump administration for its decision to cut off Huawei…”

June 11 – Bloomberg: “By now, Xi Jinping is used to Donald Trump’s tariff threats. But the U.S. president’s latest ultimatum is personal, and the Chinese leader’s response could have far-reaching consequences for his political future. Trump on Monday said he could impose tariffs ‘much higher than 25%’ on $300 billion in Chinese goods if Xi doesn’t meet him at the upcoming Group of 20 summit in Japan. China’s foreign ministry… declined Tuesday to say whether the meeting would take place. The brinkmanship puts Xi -- China’s strongest leader in decades -- in perhaps the toughest spot of his six-year presidency. If Xi caves to Trump’s threats, he risks looking weak at home. If he declines the meeting, he must accept the economic costs that come with Trump possibly extending the trade conflict through the 2020 presidential elections.”

June 11 – South China Morning Post (Kristin Huang and Lee Jeong-ho): “The United States has been accused of demanding ‘enormous, even hundreds’ of changes to Chinese laws to protect intellectual property, according to a Chinese government adviser, who said it was a key factor in the collapse of the trade talks. Shi Yinhong, a prominent international relations scholar from Renmin University, said the gap between the two sides was widening as Washington demanded a strong enforcement mechanism while Beijing wanted more leeway. He said China could only agree to a ‘relatively weak enforcement mechanism’ without too much scrutiny and there should not be automatic penalties for violating the agreement.”

June 12 – Financial Times (Tom Hancock): “Car manufacturers in China saw their sales fall by nearly a fifth last month as consumers in the world’s largest vehicle market remained reluctant to purchase due to new emissions rules and concerns about the economy. Key passenger vehicles sales fell 17.4 % in May compared with the same month last year, following a 17.7% decline in April… In the overall market, vehicle sales fell 16.4% in May, their fastest year-on-year decline on record, mainly due to a sharp drop in sales of commercial vehicles such as buses and trucks, which fell 11.8%...”

June 14 – Bloomberg: “China’s industrial output growth slowed to the weakest pace since 2002 and investment decelerated, highlighting the headwinds the economy is facing as it grapples with the U.S. tariff war. Industrial output rose 5% from a year earlier, while fixed-asset investment expanded 5.6% in the first five months. Both were slower than in April and below expectations. Retail sales was a bright spot, expanding 8.6% compared to May last year, partly because a longer May Day holiday encouraged more tourism and spending.”

June 11 – Reuters (Stella Qiu and Ryan Woo): “China’s factory inflation slowed in May as faltering manufacturing hit demand, reinforcing worries about cooling growth in the world’s second-largest economy, while a surge in food prices could add to consumer grievances about living costs. The slowdown was driven by declines in industrial commodities prices and was in line with the downbeat factory activity seen in May… China’s producer price index (PPI) in May rose 0.6% year-on-year…, in line with analyst expectations and lower than a 0.9% uptick in April.”

June 9 – CNBC (Yen Nee Lee): “China said… its overall trade surplus was $41.65 billion last month, significantly more than expected as the trade impasse between Washington and Beijing drags on… The larger trade surplus came as the country’s dollar-denominated exports surprisingly increased last month, while imports came in worse than expected. …Exports in May inched up 1.1% year-on-year, while imports fell 8.5% during the same period.”

June 10 – Bloomberg: “A Chinese state-owned insurer is providing credit protection for a local banks’ short-term debt issue, in a rare move to shore up investor confidence in the nation’s smaller banks, following the first government seizure of a lender in more than two decades. China Bond Insurance Co. is insuring Bank of Jinzhou Co.’s planned issuance of 2 billion yuan ($289 million) negotiable certificates of deposits, a commonly used instrument to raise short-term debt in the local market… People’s Bank of China will provide the funds needed to insure the debt… Chinese authorities are looking to calm market jitters about the stability of the nation’s small and mid-sized banks after the seizure of Baoshang Bank Co. whose creditors are likely to face potential losses. Investor concerns further intensified after Bank of Jinzho’s auditors quit last month…”

June 13 – Bloomberg: “For most of the last six years, Xi Jinping has been largely free to define the terms of his rule. But with challenges piling up from the U.S. trade war to mass protests in Hong Kong, his presidency is increasingly being dictated by events. This week alone, President Donald Trump threatened to hike tariffs if China’s leader fails to meet with him at the Group of 20 meeting in Japan; hundreds of thousands of protesters rallied against an extradition law in Hong Kong; and signs emerged that China’s economy is struggling, with manufacturing slipping and an 8.5% decline in imports indicating slowing domestic demand. Assailed on all sides, Xi’s travails amount to one of the most difficult periods to date of his six-year presidency. How he responds is a matter for business, finance and economies globally, since whichever course Xi takes could have far-reaching consequences for his legitimacy at home and his ability to assert China’s interests abroad.”

June 10 – Bloomberg: “China’s central bank may continue to support medium and small-sized banks with various tools such as targeted reserve ratio cut, standing lending facility, medium-term lending facility, re-lending and re-discounting, China Securities Journal says in a front-page commentary. PBOC will consider using the tools because of the need to stabilize liquidity supply and interbank businesses toward the end of the second quarter.”

June 9 – Reuters (Ben Blanchard): “‘Foreign forces’ are trying to hurt China by creating chaos in Hong Kong over an extradition bill that has prompted mass protests in the former British colony, an official Chinese newspaper said… The China Daily said in an editorial the bill was much-needed legislation. ‘Any fair-minded person would deem the amendment bill a legitimate, sensible and reasonable piece of legislation that would strengthen Hong Kong’s rule of law and deliver justice,’ it said.”

June 8 – Bloomberg (Carol Zhong and Fion Li): “Hong Kong’s Beijing-backed government faced new pressure to withdraw legislation easing extraditions to China after hundreds of thousands of people turned out to oppose the measure, leading to clashes with police into the early-morning hours. White-clad demonstrators, many chanting for Hong Kong Chief Executive Carrie Lam’s resignation, choked 3 kilometers (1.9 miles) of central city boulevards for hours Sunday as they marched to the local government headquarters. Organizers put the turnout at 1.03 million…, while police estimated 240,000 participants at the rally’s peak.”

June 9 – Associated Press (Ken Moritsugu): “China is creating a system to protect its technology, according to state media, as the U.S. restricts the access of Chinese companies to American technology in a spiraling trade dispute. The People’s Daily newspaper said… the system will build a strong firewall to strengthen the nation’s ability to innovate and to accelerate the development of key technologies. ‘China ... will never allow certain countries to use China’s technology to contain China’s development and suppress Chinese enterprises,’ the main paper of the ruling Communist Party said, without directly referring to the United States.”

Central Banking Watch:

June 14 – Reuters (Andrey Ostroukh and Elena Fabrichnaya): “The Russian central bank cut its key interest rate on Friday and said one or two more cuts were possible later this year as Russia faces sluggish economic growth and slowing inflation. The central bank trimmed the key rate to 7.50% from 7.75%, lowering the cost of lending for the first time since March 2018 and returning its level before the previous rate increase, in December.”

June 11 – Reuters (Anne Kauranen): “A global trade war is unlikely to subside any time soon and the European Central Bank is ready to use any of its instruments to prop up confidence and growth in the currency bloc, Finnish central bank chief Olli Rehn said… The ECB last week gave the euro zone a fresh boost with cheap funding for banks and ECB President Mario Draghi said the bank was ready to consider a wider range of measures to prop up inflation… Elaborating on Draghi’s point, Rehn, a potential successor to Draghi, suggested there were no taboos and that besides a rate cut or more bond buys, further tweaks to interest rate guidance and a multi-tier deposit rate were also on the table.”

Brexit Watch:

June 13 – Reuters (Elizabeth Piper, Kylie MacLellan and William James): “Boris Johnson, who has pledged to deliver Brexit on Oct. 31, surged closer to power on Thursday, winning by far the most support from Conservative lawmakers in the first round of the contest to replace Prime Minister Theresa May.”

June 11 – Reuters (Gabriela Baczynska): “The stalled EU-UK divorce treaty will not change with the arrival of a new prime minister in London, the outgoing head of the European Union’s executive said… European Commission President Jean-Claude Juncker reiterated the EU’s refusal to renegotiate as many of the Conservative Party candidates vying to replace Prime Minister Theresa May said they would seek a new agreement. ‘I have the impression for months now that the interest for the British political society is how to replace PM May, not how to find an agreement with the EU,’ Juncker said…”

Europe Watch:

June 10 – Financial Times (Marcello Minenna): “Italy is the only country across the eurozone not to really benefit from the big rally in government bonds this year. The main culprit? The risk of exiting the eurozone, which is reflected in a permanent increase in Rome’s cost of borrowing. If we look across bonds of 10-year maturities, the effects of the rebalancing of portfolios towards sovereign bonds are impressive. The yield on the German Bund is about 45 bp lower than the turn of the year, pushing it into negative territory, while the French equivalent has lost 60bp. In Spain, bond yields are about 85bp lower, while even Greece is down about 160bp. But for Italian bonds, there is a loss of just 40bp or so, from already-high levels.”

June 11 – Financial Times (Rebecca Spang): “Desperate times result in desperate monetary measures. During the French revolutionary and Napoleonic wars, the Bank of England suspended payments for over two decades. US greenbacks (national fiat paper) were first created to pay for the American Civil War. The outbreak of the first world war closed the London and New York stock exchanges. Now Italy’s governing coalition is talking of issuing low-denomination, non-interest-bearing treasury bills (so-called mini-BOTs) — to circulate alongside euros. Proponents argue the Italian economy needs more money and that the public-spending cuts and tax increases the EU insists upon will only make matters worse. As a member of the euro, Italy cannot legally issue its own currency. But if the government paid its creditors in mini-BOTs — and if it agreed to take them back again as payment for taxes or train tickets — then total liquidity could increase without expansion of the official money supply.”

Japan Watch:

June 12 – Reuters (Parisa Hafezi): “Japanese Prime Minister Shinzo Abe warned of unintended clashes in the crisis-hit Middle East after meeting the Iranian president in Tehran…, amid a brewing confrontation between Iran and the United States. As a U.S. ally that also has good diplomatic relations with Iran, Japan could be in a unique position to mediate between the Islamic Republic and the United States. ‘Armed conflict needs to be prevented at all costs. Peace and stability in the Middle East is indispensable not only for this region but for global prosperity. No one is hoping for war,’ the Japanese leader said.”

June 9 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan can deliver more big monetary stimulus if necessary, but needs to take care with its side effects on the financial system, said Governor Haruhiko Kuroda. The BOJ will ease further if momentum toward its 2% inflation target is lost, Kuroda said… The governor emphasized that the BOJ doesn’t need to act now, citing the health of the economy.”

EM Watch:

June 13 – Financial Times (Laura Pitel): “Turkey has launched a criminal investigation into two Bloomberg journalists over a story published at the height of a currency crisis that struck the country last summer. Prosecutors are seeking a jail term of between two and five years for the Istanbul-based reporters, their company said… Kerim Karakaya and Fercan Yalinkilic are accused of seeking to undermine Turkey’s economic stability for a story, published in August, about the impact of a sharp plunge in the value of Turkish lira on the country’s banking sector.”

June 12 – Bloomberg (Andrew Rosati and Patricia Laya): “Venezuela said it will introduce large-denomination bolivar notes as hyperinflation erases the currency’s value and complicates the most ordinary purchases in the crisis-ravaged nation. On Wednesday, the country’s central bank posted a statement… saying it would begin circulating the new 10,000, 20,000 and 50,000 bills to make payments ‘more efficient’ and ‘facilitate business transactions’ without providing further details.”

June 10 – Reuters (David Stanway): “The Chinese financial news website wallstreetcn.com said it has been shut down to undergo ‘rectification’ amid a wider crackdown by the Chinese authorities on websites and news providers. Wallstreetcn.com announced on its official Twitter-like Weibo account on Monday night that its website and app had been taken down following a request from the authorities.”

Global Bubble Watch:

June 11 – Bloomberg (Emily Barrett): “Bond markets around the globe are acting like central-bank rate cuts are only a rubber-stamp away from becoming a reality. Just look at the size and scope of the recent rally, which has dragged down yields across the curve. For example, the aggregate rate on longer-maturity sovereign debt ended last week at 1.18%, a level last seen two weeks before Donald Trump was elected U.S. president… That’s despite repeated assurance from Federal Reserve policy makers that they will be ‘patient’ in making their next move. ‘It’s almost a new form of bond market vigilante-ism,” Michael Purves, chief global strategist at Weeden & Co., told Bloomberg… Markets ‘seem to be almost taunting the Fed here,’ he said.”

June 9 – Bloomberg (Enda Curran, Toru Fujioka and Xiaoqing Pi): “As central banks show increasing alarm about the world economy and a willingness to increase stimulus, finance ministers from the Group of 20 nations made little progress in curing the main threat of deepening trade tensions. Talks in the port city of Fukuoka, Japan, opened with some rare good news as President Donald Trump reversed his plans to hit Mexico with tariffs. But the U.S.-China impasse showed no signs of easing, which officials recognized in their concluding statement by noting that trade tensions have ‘intensified.’ U.S. Treasury Secretary Steven Mnuchin tweeted that he had a ‘candid’ and ‘constructive’ talk on trade issues with People’s Bank of China Governor Yi Gang. China’s Finance Minister Liu Kun described protectionism as a ‘crucial challenge’ and called on all sides to defend the rules-based multilateral system.”

June 9 – Reuters (Leika Kihara and Stanley White): “Bank of Japan Governor Haruhiko Kuroda said on Sunday the Group of 20 finance leaders reaffirmed their commitment to use all policy tools if risks to their economies materialise.”

June 11 – CNBC (Weizhen Tan): “China’s lending to other countries, often shrouded in secrecy, is thought to be higher than the amounts that are officially tracked, resulting in much ‘hidden debt.’ That growing debt problem could spark a worse-than-expected slowdown, among other problems, experts warn. The lack of transparency would also affect investors who are considering bonds issued by those countries, or organizations such as the International Monetary Fund (IMF) which are helping those countries with their debts, according to Carmen Reinhart, a professor… at Harvard University. …She said: ‘China’s rise as a global creditor has also meant that there are a lot of hidden debts. That is, countries that had borrowed from China but this borrowing is not reported by the IMF, by the World Bank.’ ‘So there is a tendency to think these countries had lower debt levels than what they actually have,’ she concluded.”

Fixed-Income Bubble Watch:

June 11 – Bloomberg (Sally Bakewell and Thomas Beardsworth): “The steady drumbeat of warnings over the surge in risky corporate borrowing is growing louder and louder. Time and again, regulators in the U.S. and Europe have pointed to the hazards of businesses taking on too much debt. At issue is the $1.3 trillion leveraged lending market, composed of high-yield loans from firms with some of the weakest finances. While Federal Reserve and European Central Bank officials have drawn attention to these heavily indebted companies and the deteriorating standards of loans bundled into securities called CLOs, most regulators are careful to say a repeat of 2008 is unlikely because investors… hold most of the debt. Yet that’s created a new, and potentially more dangerous, kind of risk. Precisely because roughly 85% of leveraged loans are held by non-banks, regulators are largely in the dark when it comes to pinpointing where the risks lie… More and more, critics are questioning whether regulators like the Fed have a handle on the problem or the right tools to contain the fallout.”

June 10 – Bloomberg (Carolina Wilson and Vildana Hajric): “Short-termism is taking on a whole new meaning in the U.S. bond market. Debt investors can’t get enough of securities with less than 12 months to maturity, thanks to an increasingly uncertain outlook... Exchange-traded funds that invest in ultra-short bonds attracted a record $4.1 billion last week… Meanwhile, ETFs of one-to-three year notes lost the most cash in a year.”

Geopolitical Watch:

June 11 – Reuters (Tom Miles and Stephanie Nebehay): “The world is going through a profound crisis and could be on the brink of a time of war, French President Emmanuel Macron said in a speech…, calling for a global effort to address the dangers of inequality, unchecked technology and climate change… ‘I think that chaos is here. And I think it is our generation’s responsibility not to wait for a new war but to look at the world as it is,’ Macron said. ‘I believe that today we are on the brink, if we don’t take care, of a time of war. And that war is present in our democracies - it’s the profound crisis we’re going through. We can choose to be sleepwalkers. But if we want true progress we need to make some serious commitments,’ he said.”

June 12 – Wall Street Journal (Natasha Khan, John Lyons and Mike Bird): “A standoff over China’s encroachment on this city’s legal autonomy deepened, with hundreds of police firing tear gas and rubber bullets at protesters, as the financial center’s Beijing-backed government showed no signs of yielding during a second day of widespread demonstrations. Wednesday’s protest, which followed a mass demonstration by as many as a million people on Sunday, is the biggest outbreak of public unrest in years and comes as the administration of President Xi Jinping of China moves to bring the former British colony closer to the mainland. At issue is a widely unpopular bill that would allow extradition of alleged criminals to China from Hong Kong, which critics fear will be abused by Beijing for political ends. Mass protests in 2003 and 2012 forced the government to back away from proposed laws on national security and patriotic education in schools.”

June 11 – Bloomberg (Ben Bland): “Hong Kong is facing an existential threat. A vast protest on Sunday reflects the culmination of angst over changes that are undermining the foundations of the Chinese city’s economic prosperity and its distinct identity. How the impasse is resolved has implications not only for this former British colony and global financial center, but for the future of relations between China and the Western democratic world. When the U.K. handed back control of Hong Kong to China in 1997, Beijing promised the city that it could maintain an independent legal system, democratic freedoms and a ‘high degree of autonomy’ for at least 50 years. This ‘One Country, Two Systems’ formula has underpinned the city’s success because it allowed Hong Kong to maintain access to global markets as a separate, law-abiding and free-trading member of the World Trade Organization. But as President Xi Jinping has concentrated more power than any Chinese leader since Mao Zedong, Hong Kong’s autonomy – and therefore its economic raison d'etre – has come under ever greater threat.”

June 14 – Reuters (Polina Ivanova): “The Middle East situation requires closer ties between Iran and Russia, Iranian President Hassan Rouhani said at a China-led security bloc summit on Friday, according to the Russian state news agency RIA. Rouhani earlier said U.S. actions pose a serious threat to stability in the Middle East after Washington accused Iran of attacks on oil tankers on a key shipping route.”

June 13 – Bloomberg (Adela Lin and Chinmei Sung): “China’s heavy-handed tactics in Hong Kong could be also hurting its cause in neighboring Taiwan. In recent weeks, Taiwan’s China-skeptic president, Tsai Ing-wen, has come out strongly against Hong Kong’s controversial proposal to allow extraditions with the mainland. The criticism has not only won Tsai praise from democracy advocates in Hong Kong, it’s helped her recover from a local election defeat last year that threatened to scuttle her bid for a second term.”

June 10 – Bloomberg: “It was Beijing’s decision almost 30 years ago to make rare earths a strategic material, and ban foreigners from mining them, that helped pave the way for China to elbow aside the U.S. as the world’s leading producer. In the intervening period, as China tightened control of domestic output of rare earths -- a broad group of 17 elements used in everything from electric vehicles to military hardware -- the U.S. all but surrendered to China’s dominance of the sector. With China now accounting for 70% of global production, and only one U.S. mine in operation, American industries outside of defense have ‘no immediate avenues’ to break their reliance on China for supply of rare earth elements, according to Citigroup Inc.”

June 12 – Reuters (Andrew Osborn and Maria Tsvetkova): “President Vladimir Putin said relations between Moscow and Washington were getting worse and worse, noting in an interview… that the current U.S. administration had imposed dozens of sanctions on Russia… ‘They (our relations) are going downhill, they are getting worse and worse,’ Putin told the Mir TV channel…”

June 11 – Reuters (Daren Butler): “Turkey said… a U.S. House of Representatives’ resolution condemning Ankara’s purchase of Russian defense systems and urging potential sanctions was unacceptably threatening.”