Credit Bubble Bulletin

Tuesday, November 22, 2016

Wednesday's News Links

[Bloomberg] Dollar Gains as Data Bolster Rate Outlook; Treasuries Decline

[Reuters] Euro zone bond yields rise on report ECB will act to reduce scarcity

[Bloomberg] Gold Falls Below $1,200 as Stock Markets Boom, Fed Set to Raise

[Bloomberg] Sales of New U.S. Homes Declined to Four-Month Low in October

[Reuters] U.S. durable goods orders rebound, shipments rising

[Bloomberg] Mutual Funds See Massive Variations In Performance Following Trump's Win

[Bloomberg] Euro-Area Economic Growth Gathers Pace as Orders and Prices Rise

[Reuters] Cooling growth pulls China's yuan down to third place in global trade finance: SWIFT

[Bloomberg] How Apple Lost China to Two Unknown Local Smartphone Makers

[Reuters] Turkey's Erdogan rails against high interest rates on eve of central bank meeting

[Bloomberg, Gilbert] Bond Market Is Right to Worry About Italian Vote

[FT] Trump bond sell-off deals blow to ECB buying

[FT] Renminbi’s record weakness flies below the radar

[WSJ] Sectors Go Wild: S&P 500 Correlations Crumble

[WSJ] China Has Warned of Retaliation if U.S. Levies Tariffs, Commerce Secretary Says

[WSJ] Fed Minutes Will Offer Some Insight Despite Major Shifts

[Washington Post] These maps show how Russia has Europe spooked

Tuesday Evening Links

[Bloomberg] Asian Shares Set for More Gains With Japan Shut as Bonds Retreat

[Bloomberg] U.S. Stocks Climb to Record Highs as Dow Tops 19,000; Oil Falls

[Bloomberg] Trump Looks to Put Stamp on Fed in First Months of Presidency

[Bloomberg] Why Italy’s Bank Problem Challenges the Rule Book: QuickTake Q&A

[Bloomberg] Goldman: Hedge Funds Are Poised to Get Beaten for the Eighth Year Straight

[Reuters] Russia rejects U.S. criticism of Kaliningrad missile deployment

[Reuters] From soldiers to midwives, Turkey dismisses 15,000 more after coup bid

[NYT, Irwin] What Will Trump Trade Policy Actually Look Like? Three Possibilities

[FT] Virtu calls on US regulator to examine risks of ETFs

Monday, November 21, 2016

Tuesday's News Links

[Bloomberg] Stocks Rise Around the World as Crude Oil, Metals Extend Advance

[Bloomberg] U.S. Existing Home Sales Climb to Highest Since Early 2007

[Bloomberg] Asian Stocks Rise for Second Day as Commodities Rally With Won

[Bloomberg] PBOC Boosts Yuan Fixing After 12-Day Drop to Weakest Since 2008

[Bloomberg] Fed Hike Is Certainty for Bond Traders as Market Odds Reach 100%

[Bloomberg] Emerging Asia Sees $11 Billion Outflow on Dollar’s Rally

[Opalesque] Hedge funds continue to see asset outflows in October, YTD outflows at $77m

[Reuters] Japan PM says TPP trade pact meaningless without U.S.

[Reuters] Euro zone nations turn to hedge funds to meet borrowing needs

[Bloomberg] $100 Billion Chinese-Made City Near Singapore 'Scares the Hell Out of Everybody'

[Bloomberg] Trump Outlines Top Plans Amid Business Scrutiny, Press Tension

[NYT] Investors Make Bullish Bet on Trump, and an Era of Tax Cuts and Spending

[WSJ] Donald Trump Poised to Pressure Mexico on Trade

[FT] European Central Bank faces a Trump quandary

[WSJ] European Companies Happily Take ECB’s Cheap Cash, but Don’t Spend It

Monday Evening Links

[Bloomberg] S&P 500, Dow, Nasdaq, Russell 2000 Hit Record Highs as Oil Jumps

[Bloomberg] China May Face Yuan Float if Capital Controls Fail

[Bloomberg] Three Charts Signal Dark December for Slumping China Bond Market

[Bloomberg] How India's Cash Chaos Is Shaking Everyone From Families to Banks

[Reuters] Top ECB officials pledge continued support to euro zone economy

[Bloomberg] 2017 is when a decade of global monetary easing ends, says BAML

[Reuters] Hedge funds slow to adjust champagne tastes to beer budgets

[FT] Tail risks wagging the dog with Wall Street fear gauge

[FT] EU to retaliate against US bank capital rules

Sunday, November 20, 2016

Saturday, November 19, 2016

Saturday's News Links

[Spiegel] A Turning Point for Globalization - Inequality, Market Chaos and Angry Voters

[CNBC/NYT] Italy’s Banks Are in a Slow-Motion Crisis. And Europe May Pay.

[NYT] Showdown Looms as U.S. Questions Chinese Deal for Aixtron

Friday, November 18, 2016

Weekly Commentary: As Exciting as the 1930s

“One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics.” “The Memoirs of Herbert Hoover - The Great Depression 1929-1941”

There are few apt comparisons to today’s extraordinary backdrop. Late in the “Roaring Twenties” period offers the closest parallel – the global nature of vulnerabilities and faltering booms; policymaker confusion and increasing ineffectiveness; fundamental deterioration in the face of impenetrable speculative impulses. It was by 1929 deeply embedded in speculator psyche that the enlightened Federal Reserve would never allow a market or economic collapse.

Top Federal Reserve officials (Yellen, Dudley, Bullard) this week suggested that Trump policies specifically target productivity. It must be a tough pill to swallow for the Fed to admit that their policies have succeeded in stimulating Credit growth and record securities prices, while coming up dreadfully short with respect to productivity gains.

By the late 1920s it had become an objective of the Federal Reserve to stimulate productive Credit. While there was deepening concern for market speculation, the weakened economic backdrop had the Fed determined to support ongoing Credit expansion.

An increasingly entrenched speculative Bubble had over years fomented financial and economic fragilities. Meanwhile, the Federal Reserve’s focus on the increasingly vulnerable economy worked to underpin speculator enthusiasm. Even as the fundamental backdrop turned alarming, a manic inflationary psychology grew only more powerfully entrenched in the marketplace. In the end, efforts to promote productive Credit fatefully prolonged the life of “Terminal Phase” Bubble excess.

November 13 – Bloomberg: “China’s new home sales growth slowed in October from a year earlier, suggesting the push by policy makers to rein in runaway prices is getting traction. The value of homes sold rose 38% to 941 billion yuan ($138bn) last month from a year earlier… The increase compares with a 61% gain the previous month. Slower home sales have helped moderate credit growth. New medium- and long-term household loans, mostly residential mortgages, stood at 489.1 billion yuan in October, down from 571.3 billion yuan in September…”

Chinese policymaking – confronting the Fed’s late-twenties (and Japan’s late-eighties) dilemma – badly flounders. Timid efforts to rein in its apartment Bubble were ineffective. This led to bolder moves to tighten mortgage Credit, which ironically spurred a speculative rotation and resulting equities Bubble. When the stock market Bubble burst, reflationary efforts then stoked spectacular real estate (mortgage Credit and prices) inflation. More recent efforts to cool the housing Bubble fueled major blow-off speculative excess throughout the Chinese bond market. Efforts to bolster a waning economic boom will see record Credit expansion this year approaching $3.0 TN.

It’s this global perspective of ongoing rapid Credit and unwieldy liquidity expansion in the face of waning economic prospects that helps explain the Trump Market Phenomenon. Only time will tell if President Trump is the second coming of Ronald Reagan. It’s worth noting that 10-year Treasury yields were around 12% for the Reagan inauguration (on the way to almost 16% by Sept. ’81). While starting to trend lower, CPI was still running about 10%. The S&P500 was trading at 135, just starting to crawl out of a prolonged bear market.

I’m all for responsible deregulation in the real economy. The financial sector is a different story. Count me skeptical that there will be some incredible wave of financial deregulation that will spur the golden age of financial stocks and a prosperity renaissance. The Reagan era of deregulation coincided with momentous financial innovation.

We’re now into the third decade of what has been a period of monumental financial innovation. It’s worth noting some key sector metrics from the now multi-decade financial transformation. When President Reagan came into office, the Fed’s balance sheet (from Z.1) was at $174 billion – compared to Q2 2016’s $4.524 TN. Money Market fund assets were only $76 billion (vs. $2.703 TN); Mutual Funds $656 billion (vs. $13.209 TN); Closed-End & Exchange-Trade Funds $7 billion (vs. $2.491 TN); GSE’s assets $175 billion (vs. $6.568 TN); Agency- & GSE-Backed Mortgage Pools $100 billion (vs. $1.844 TN); Asset-backed Securities $0 (vs. $1.285 TN); REITs $3 billion (vs. $1.021 TN); Security Brokers/Dealers $78 billion (vs. $3.117 TN); Funding Corps $3 billion (vs. $1.618 TN); Fed Funds & Security Repos $152 billion (vs. $3.769 TN).

Even more amazingly, Total Debt Securities have inflated from $2.0 TN to $40.581 TN. Outstanding Treasury Securities have grown from $736 billion to $15.385 TN. Agency- and GSE-Backed Securities from $191 billion to $8.324 TN. Total Mortgages have increased from $1.458 TN to $13.974 TN. Corporate & Foreign Bonds have expanded from $511 billion to $12.030 TN, with Corporate Equities ballooning from $1.495 TN to $36.112 TN.

Notably, Household Net Worth stood at $8.9 TN, or about 300% of GDP, to end 1980. By the end of Q2 2016, Household Net Worth had inflated to $85.3 TN, or near a record 463% of GDP. While continued craziness can be expected to dominate the prolonged Terminal Phase of this multi-decade Bubble, I highly doubt we’re at the cusp of some deregulation-induced financial resurgence. Been there; done that.

When analyzing today’s markets, we need to keep a few things in perspective. One, global central bankers continue to provide market liquidity (QE) to the tune of about $2.0 TN annualized. Second, Chinese Credit is expanding at a record pace of about $3.0 TN annualized, with significant ongoing “capital” flight. Years of this unprecedented liquidity backdrop have fundamentally altered the way markets function (as we’ve again been reminded).

Over the past three months, 10-year Treasury yields have surged 82 bps (to 2.36%). UK yields have jumped 90 bps, and Canadian yields have advanced 54 bps (1.57%). German yields have risen 35 bps (27 bps), while French yield have jumped 62 bps (75bps). Italian yields have surged 102 bps (2.09%).

In the face of surging yields, U.S. stocks have run to record highs. Most global equities indices rallied as bond prices sank. However, without the $2.0 TN of ongoing QE the world would be much less hospitable. Instead of the typical bond-induced de-risking/de-leveraging episode pressuring stocks and risk assets more generally, a very different dynamic has evolved: Rising bond yields instead spur a frantic rotation into equities. QE has numbed fear, while impelling speculation.

Let’s take this one step further. When it became apparent that a Trump win would not trigger the anticipated intense bout of “Risk Off,” markets immediately erupted into a speculative melee. Where were the shorts trapped? What stocks, sectors and markets? Where were the hedge funds over- and underweight? How were the long/short funds positioned? What about the quants and CTAs? Risk parity? What ETFs would be liquidated? Most importantly, how to quickly get in front of the wave of (self-reinforcing) finance that would be rotating out of the old favorites and into newly fashionable sector ETFs?

November 14 – CNBC (Jeff Cox): “On the day Donald Trump won the presidency and the two days after last week, investors poured the most money into stock-based exchange-traded funds that they have in nine years… In the week leading up to the election, short-term money was scrambling to hedge for a Trump victory, and the momentum hit a crescendo after the election and in the immediate aftermath. Equity-based ETFs took in $22.6 billion, or about 1.6% of total assets, from Tuesday through Thursday, according to… TrimTabs.”

November 16 – Bloomberg (Luke Kawa): “In the week following the election, the Financial Select Sector SPDR exchange-traded fund amassed $4.9 billion of inflows — a record, and more than it accumulated in the past three years. This ETF has stakes in major U.S. financial institutions… President-elect Donald Trump's victory has spurred a steepening of the yield curve fueled by rising term and inflation premiums, as investors move to price-in both his fiscal policies and the vast amount of uncertainty surrounding them.”

There’s an astounding amount of “money” on the move throughout the now colossal ETF complex. Inflows of $22.6 billion in three days? Three years of flows into a popular financial ETF in a single week? And the bull story holds that after Trillions flowed into bond funds (and bond proxies), the great rotation will now see at least a Trillion flow into popular equity ETFs. Buy now to ensure one gets ahead of the great wall of liquidity about to inundate the market.

Incredibly, weak bond prices have become key to the equities bull story. And with equities bubbling, monetary policy now arouses little angst. The market almost celebrates that the Fed will raise rates next month. Fears of a Fed-rate hike induced EM tantrum are these days nonexistent.

With $2.0 Trillion of QE greasing the wheels of speculation, market participants glare at faltering EM bonds and see a more terrific rotation to “core” (king dollar) equities. Yields are recently up more than 100 bps in Mexico and Brazil, and only somewhat less in Turkey, Malaysia, Indonesia, Poland, Hungary and elsewhere. Yields were up another 20 bps this week in Malaysia, 28 bps in the Philippines and 13 bps in Mexico. EM currencies have been under intense pressure. This week saw the Colombian peso drop 4.7%, the Turkish lira 3.6%, the Polish zloty 2.9%, the Malaysian ringgit 2.8%, the Czech Koruna 2.5%, the Hungarian forint 2.5%, the Bulgarian lev 2.5% and the Romanian leu 2.4%. And few these days see any reason not to pile into U.S. financial and industrial stocks.

Not only have U.S. equities become firmly detached from reality, market participants are clearly in the mood to disregard risk. Look beyond the near-term and one sees a very different world upon the conclusion of the QE experiment. At the minimum, it’s a highly uncertain global financial and economic backdrop. Not only will bubbling equities be pulling “money” from faltering bond funds. Booming stocks would also likely accelerate what has been a slow-motion “tightening” cycle. In the meantime, king dollar will spur the next phase of the EM bursting Bubble. There is simply way too much complacency with regard to troubling developments unfolding in global bond markets, China, Japan, Europe and EM.

November 18 – CNBC (Berkeley Lovelace Jr.): “Donald Trump's controversial top advisor Steve Bannon said the Trump administration would build an entirely new political movement, one greater than the ‘Reagan revolution’… ‘The conservatives are going to go crazy,’ Bannon said. ‘I'm the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it's the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We're just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement

If “negative interest rates throughout the world” is the key to the new Administration’s economic plans, they’d better not waste any time. Many would surely like to call a mulligan on the previous eight years of experimental QE. There’s endless things to spend near-zero interest borrowings on – new infrastructure among them. Just rebuild everything – like China.

But too much was borrowed and spent on stock buybacks, M&A and all varieties of financial engineering. The experiment has left the global economy maladjusted and vulnerable. Bonds have been the centerpiece of a historic speculative Bubble throughout global securities markets. It would be comforting to believe that inflation is dead and buried, and that global QE can expand $2.0 TN annually forever, and that Chinese Credit expansion can grow year-after-year to eternity.

Yet that’s just not the way unsound finance works. We’ve experienced a multi-decade Credit inflation of epic proportions. At this juncture, I would bet on consequences coming home to roost - rather than unending free money (to finance economic renaissance) as far as the eye can see. And, while we’re pondering the future, let’s hope for something other than “As Exciting as the 1930s.”

For the Week:

The S&P500 gained 0.8% (up 6.7% y-t-d), and the Dow added 0.1% (up 8.3%). The Utilities were unchanged (up 6.8%). The Banks rose another 3.7% (up 17.3%), and the Broker/Dealers surged 5.1% (up 13.2%). The Transports jumped 3.2% (up 17.9%). The broader market again outperformed. The S&P 400 Midcaps advanced 2.7% (up 14.8%), and the small cap Russell 2000 jumped 2.6% (up 15.8%). The Nasdaq100 gained 1.2% (up 4.7%), and the Morgan Stanley High Tech index rose 1.7% (up 12%). The Semiconductors surged 4.2% (up 31.5%). The Biotechs slipped 0.2% (down 11.6%). Though bullion was down $20, the HUI gold index recovered 1.1% (up 63.8%).

Three-month Treasury bill rates ended the week at 43 bps. Two-year government yields jumped 15 bps to 1.07% (up 2bps y-t-d). Five-year T-note yields surged 24 bps to 1.80% (up 5bps). Ten-year Treasury yields rose 20 bps to 2.35% (up 10bps). Long bond yields increased nine bps to 3.03% (up one basis point).

Greek 10-year yields declined 10 bps to 6.93% (down 39bps y-t-d). Ten-year Portuguese yields surged 37 bps to 3.82% (up 130bps). Italian 10-year yields gained another seven bps to 2.09% (up 50bps). Spain's 10-year yields jumped 12 bps to 1.59% (down 18bps). German bund yields declined four bps to 0.27% (down 35bps). French yields added a basis point to 0.75% (down 24bps). The French to German 10-year bond spread widened another five to 48 bps. U.K. 10-year gilt yields rose nine bps to 1.45% (down 51bps). U.K.'s FTSE equities index gained 0.7% (up 8.5%).

Japan's Nikkei 225 equities index jumped 3.4% (down 5.6% y-t-d). Japanese 10-year "JGB" yields gained six bps to 0.02% (down 24bps y-t-d). The German DAX equities index was little changed (down 0.7%). Spain's IBEX 35 equities index slipped 0.2% (down 9.7%). Italy's FTSE MIB index dropped 3.3% (down 24.1%). EM equities were mixed. Brazil's Bovespa index rallied 1.3% (up 38.3%). Mexico's Bolsa dropped 1.4% (up 3.2%). South Korea's Kospi dipped 0.5% (up 0.7%). India’s Sensex equities index fell 2.5% (up 0.1%). China’s Shanghai Exchange was little changed (down 9.8%). Turkey's Borsa Istanbul National 100 index increased 0.6% (up 5.5%). Russia's MICEX equities index added 0.3% (up 15.7%).

Junk bond mutual funds saw outflows surge to $2.28 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates surged 37 bps to a near 2016 high 3.94% (down 3bps y-o-y). Fifteen-year rates rose 25 bps to 3.14% (down 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 28 bps to 4.01% (up 4bps).

Federal Reserve Credit last week expanded $5.1bn to $4.420 TN. Over the past year, Fed Credit contracted $41bn (0.9%). Fed Credit inflated $1.609 TN, or 57%, over the past 210 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $8.0bn last week to close to a six-year low $3.119 TN. "Custody holdings" were down $189bn y-o-y, or 5.7%.

M2 (narrow) "money" supply last week fell $20.6bn to $13.163 TN. "Narrow money" expanded $926bn, or 7.6%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits declined $47.4bn, while Savings Deposits jumped rose $17.7bn. Small Time Deposits were little changed. Retail Money Funds expanded $9.0bn.

Total money market fund assets added $3.3bn to a 10-week high $2.686 TN. Money Funds declined $25bn y-o-y (0.9%).

Total Commercial Paper gained $4.7bn to $912bn. CP declined $153bn y-o-y, or 14.4%.

Currency Watch:

November 16 – Bloomberg (Jessica Brice and Isabella Cota): “At the beginning of the year, most currency forecasters agreed: The peso was grossly undervalued. Estimates compiled by Bloomberg at the time put it on course for the biggest gain among major currencies… Yet as 2016 draws to a close, the peso isn’t an emerging-market standout. Instead it’s the world’s worst performer. Battered by events far beyond its borders—such as the U.K.’s Brexit referendum—the currency tumbled 6% against the U.S. dollar this year through Nov. 8. And then Donald Trump was elected president of the U.S. Overnight, the peso plunged more than 13%, surpassing 20 per dollar for the first time. Mexico’s peso was worth less than a nickel. It will likely end the year posting its fourth annual decline.”

The U.S. dollar index jumped 2.2% to 101.21 (up 2.6% y-t-d). For the week on the upside, the Mexican peso increased 1.0%, the Brazilian real 0.6% and the Canadian dollar 0.3%. For the week on the downside, the Japanese yen declined 3.8%, the Australian dollar 2.8%, the euro 2.5%, the Danish krone 2.4%, the Norwegian krone 2.4%, the Swiss franc 2.2%, the Swedish krona 2.2%, the British pound 2.0%, the New Zealand dollar 1.7%, the South Korean won 1.7%, the Singapore dollar 1.0%, and the South African rand 0.6%. The Chinese yuan declined 1.1% versus the dollar (down 5.7%).

Commodities Watch:

The Goldman Sachs Commodities Index gained 2.4% (up 15.4% y-t-d). Spot Gold declined 1.6% to $1,208 (up 13.8%). Silver sank 4.1% to $16.65 (up 21%). Crude rallied $2.28 to $45.69 (up 23%). Gasoline rose 2.6% (up 5%), and Natural Gas rallied 8.3% (up 22%). Copper gave back 1.2% (up 16%). Wheat jumped 5.5% (down 10%). Corn rose 3.9% (down 2%).

China Bubble Watch:

November 15 – Bloomberg: “Add another credit indicator to the financial warning signs flashing in China. The adjusted loan-to-deposit ratio, which includes a range of off-balance sheet items and is an indicator of the banking system’s ability to weather stress, climbed to 80% as of June 30, according to S&P Global Ratings. For some smaller lenders, the ratio has already topped 100%... S&P’s adjusted measure is rising much faster than the official loan-to-deposit ratio as banks pile into off-balance sheet lending, sidestepping government efforts to rein in credit.”

November 13 – Dow Jones: “Growth in housing sales stayed steady in China in the first 10 months of year, but slowed for the month of October alone, after a slew of cities cracked down on their overheated property markets. Housing sales rose 42.6% in the first 10 months of the year from the same period a year earlier…”

Europe Watch:

November 18 – Financial Times (Mehreen Khan): “Italian government bonds are set to suffer their worst month since the height of the eurozone crisis as nerves build in the run up to crucial referendum next month. Italy’s 10-year bond yield has risen 49 bps this month, as most polls show prime minister Matteo Renzi is set to be on the losing side of a vote on constitutional reform in another sign of rising anti-establishment sentiment in the continent. It marks the biggest sell off in Italian benchmark debt since May 2012.”

November 18 – Bloomberg (Chiara Albanese and Giovanni Salzano): “The final rush of public opinion polls before Italy’s referendum next month showed voters are leaning toward turning down the constitutional reforms. Four polls published Friday showed the ‘No’ camp in the lead, in a trend that has been predominant for several weeks. As of Saturday, there will be a blackout period making it illegal to publish public opinion polls on the Dec. 4 vote.”

November 16 – Reuters (Jamie McGeever): “The euro zone has withstood several crises since 2008 that have thrown the 19-nation bloc's very existence into doubt, centered on its fractured economy, bond market, banking system and, of course, Greece. But for financial markets, the biggest test may be to come and some investors are dusting off strategies on how to navigate an unraveling of the euro zone - or even the European Union itself - and the turbulence that would unleash. Elections in France, Germany and The Netherlands next year, as well next month's Italian constitutional referendum, are flashpoints that could ignite brewing political discontent across the continent.”

November 17 – Reuters (Michelle Martin and Joseph Nasr): “The European Union is in danger of breaking apart unless France and Germany, in particular, work harder to stimulate growth and employment and heed citizens' concerns, French Prime Minister Manuel Valls said in the German capital… Valls said the two countries, for decades the axis around which the EU revolved, had to help refocus the bloc to tackle an immigration crisis, a lack of solidarity between member states, Britain's looming exit, and terrorism.”

November 18 – CNBC (Silvia Amaro): “The President of the European Central Bank has highlighted his concerns over how much the region's economies rely on accommodative monetary policy. Mario Draghi told the European Banking Congress… that the recent increase in prices is mainly driven by the low financing conditions, and as such, the ECB is ready to continue with the current monetary policy stance. ‘Despite the uplift to prices provided by the gradual closing of the output gap, a sustained adjustment in the path of inflation still relies on the continuation of the current, unprecedented financing conditions… It is for this reason that we remain committed to preserving the very substantial degree of monetary accommodation, which is necessary to secure a sustained convergence of inflation towards level below, but close to, 2% over the medium-term,’ Draghi said.”

November 18 – Bloomberg (Nicholas Comfort and Steven Arons): “The European Central Bank’s corporate bond purchases have sliced into debt-trading volumes and caused investors to misjudge the risk of some credit holdings, according to Deutsche Bank AG Chief Executive Officer John Cryan. ‘The impact of buying up corporate bonds is that we see, in our bank, bond-trading volumes down something like three-quarters,’ Cryan said... ‘And there has absolutely been no price discovery now in corporate bonds, so we don’t really know the price of credit, which is a dangerous situation.’”

November 14 – Reuters (Silvia Aloisi and Stephen Jewkes): “Ailing Italian lender Monte dei Paschi di Siena on Monday announced the terms of a planned debt-to-equity conversion, a key plank of a rescue scheme aimed at averting the bank being wound down. The bank said the voluntary debt swap offer would target 4.289 billion euros ($4.6bn) of subordinated bonds… The debt-to-equity swap is a crucial leg of a 5 billion euro ($5.4bn) rescue plan aimed at meeting regulators' concerns about the bank's capital position and bad loans.”

November 17 – Reuters (Marc Jones): “Italy will not bend its budget plans to meet European Commission demands, an economic adviser to the country's prime minister Matteo Renzi said... Italy and five other countries are at risk of breaking European Union budget discipline rules with their 2017 draft budgets…”

Brexit Watch:

November 15 – Reuters (Guy Faulconbridge): “Britain has no overall strategy for leaving the European Union and splits in Prime Minister Theresa May's cabinet could delay a clear negotiating position for six months, according to a leaked Deloitte memo… The document was written by consultants at Deloitte and leaked to The Times newspaper… It casts Britain's top team in a chaotic light: May is trying to control key Brexit questions herself while her senior ministers are divided and the civil service is in turmoil.”

Fixed-Income Bubble Watch:

November 18 – Bloomberg (Wes Goodman and Anchalee Worrachate): “Bonds around the world headed for their steepest two-week loss in at least 26 years as President-elect Donald Trump sends inflation expectations surging. The Bloomberg Barclays Global Aggregate Index has fallen 4% in the period through Thursday. It’s the biggest two-week rout in the data, which go back to 1990.”

November 16 – Financial Times (Mehreen Khan and Thomas Hale): “Global inflation expectations have soared to their highest level in 12 years according to a survey of fund managers, raising fears the world economy could be heading into a period of ‘stagflation’. In the wake of the election of Donald Trump as US president and a sell-off in sovereign bonds, investors surveyed by Bank of America Merrill Lynch reported their highest inflation expectations since 2004… With the new Republican president sent to splurge on tax cuts and higher government spending, 85% of money managers said they expected a pick up in inflation from the 70% reported last month.”

November 13 – Wall Street Journal (Timothy W. Martin, Georgi Kantchev and Kosaku Narioka): “Central bankers lowered interest rates to near zero or below to try to revive their gasping economies. In the process, though, they have put in jeopardy the pensions of more than 100 million government workers and retirees around the globe. In Costa Mesa, Calif., Mayor Stephen Mensinger is worried retirement payments will soon eat up all the city’s cash. In Amsterdam, language teacher Frans van Leeuwen is angry his pension now will be less than what his father received, despite 30 years of contributions. In Tokyo, ex-government worker Tadakazu Kobayashi no longer has enough income from pension checks to buy new clothes. Managers handling trillions of dollars in government-run pension funds never expected rates to stay this low for so long. Now, the world is starved for the safe, profitable bonds that pension funds have long needed to survive.”

November 16 – Bloomberg (Sarah McGregor): “China’s holdings of U.S. Treasuries declined to the lowest level in four years, as the world’s second-largest economy runs down its reserves to support the yuan. The biggest foreign holder of U.S. government debt had $1.16 trillion in bonds, notes and bills in September, down $28.1 billion from the prior month… That’s the lowest level since September 2012. The portfolio of Japan, the largest holder after China, fell for a second straight month, down $7.6 billion to $1.14 trillion. The Treasury holdings of oil-producing Saudi Arabia declined for an eighth straight month, to $89.4 billion.”

November 16 – Wall Street Journal (Peter Grant): “Defaults are rising in a key corner of the commercial real-estate debt market just as borrowing costs are set to jump, raising the likelihood of a slowdown of the $11 trillion U.S. commercial property sector in 2017. A financial crisis-era regulation is about to take effect that is expected to make some commercial real-estate borrowing more expensive and complicated, analysts said… More than 5.6% of some $390 billion worth of commercial property mortgages that have been packaged into securities was more than 60 days late in payment in September, according to Moody’s… That was up from a 4.6% delinquency rate earlier this year.”

November 14 – Bloomberg (Phil Kuntz): “The market value of the world’s negative-yielding bonds plunged 14% last week to $8.7 trillion as investors dumped government debt at a record clip after Donald Trump’s upset win stoked speculation that his ambitious fiscal plan would flood the market with new Treasuries and boost inflation.”

November 17 – Financial Times (Eric Platt): “Global debt issuance surpassed $6tn this week, buoyed by a deluge of corporate bond sales after the US election, Dealogic data shows. Bond offerings stand roughly 9% below the record $6.6tn of debt sold over the course of 2006… Debt offerings are up 8% from a year earlier and stand at least 2% above of every year through November 16.”

Global Bubble Watch:

November 17 – Financial Times (Eric Platt): “The pace of global debt sales this year is running at a record level, surpassing $6tn this week, as companies from Pfizer to MasterCard rush to lock in borrowing costs on fears that a Donald Trump stimulus package will send interest rates even higher. A flurry of new sales this week caps a tumultuous period for bond investors, who are counting more than $1.5tn of losses, as yields have jumped on sovereign and corporate debt following Mr Trump’s victory last week.”

November 13 – Financial Times (Robin Wigglesworth): “The election of Donald Trump represents a ‘tectonic shift’ for global economics and politics, and will help kill the three-decade bond market rally, according to Henry Kaufman, the original ‘Dr Doom’. The former Salomon Brothers chief economist gained his gloomy moniker by correctly calling the last bond bear market in the 1970s, and is now predicting another one, as Mr Trump will probably fire a massive slug of inflationary government spending and reshape the Federal Reserve in a hawkish way in the coming years. ‘We have already seen a burst higher in long-term interest rates … I would say the secular trend is going to be upwards now,’ he told the FT. ‘Secular swings are hard to forecast, but the secular sweep downwards in interest rates is over, and we are about to have a gentle swing upwards.’”

November 13 – Financial Times (Nicholas Megaw): “Sluggish economic growth and a shift to fiscal stimulus measures such as those proposed by Donald Trump are bad for global creditworthiness, Moody’s has warned, as it reported that the proportion of countries with a ‘negative’ credit outlook has climbed to its highest level since 2012. Some 26% of countries rated by Moody’s now have a ‘negative’ outlook, up from 17% at the end of last year. In its annual Global Sovereign Outlook report, the ratings agency said the global outlook for sovereign ratings for the next 12 to 18 months is negative, blaming a combination of low growth, spending plans that will increase public debt, and ‘rising political and geopolitical risks’.”

November 18 – Financial Times (Nathalie Thomas): “The number of companies that have defaulted on theirs bonds has notched up to 146 for the year so far, the highest level seen at this point in the calendar since the financial crisis, according to… Standard & Poor’s. The US oil and gas sector accounts for the largest number of defaults by industry, as they continue to struggle in a climate of weak oil prices…”

November 13 – Bloomberg (Alex Sherman and Jonathan Browning): “Chinese buyers keen to continue 2016’s rapid dealmaking under a Donald Trump presidency are being given one piece of advice: Wait and see. Bankers and lawyers are already counseling some Chinese clients to hit the pause button until Trump clarifies his stance on cross-border deals for U.S. targets, according to three advisers to Chinese clients… Acquisitive Chinese companies have led a blockbuster year of dealmaking in 2016, accounting for about $225 billion of overseas purchases this year…”

November 17 – Bloomberg (Katya Kazakina): “Claude Monet’s grain stack painting fetched a record $81.4 million for the artist on Wednesday after a 14-minute bidding war. The 1891 canvas, ‘Meule,’ lifted Christie’s Impressionist and modern art evening sale to $246.3 million, a 69% jump from the similar auction a year ago. Christie’s also held a special auction last year of 20th century art, ‘The Artist’s Muse,’ which hauled in almost half a billion dollars.”

U.S. Bubble Watch:

November 17 – Bloomberg (Kevin Buckland and Shigeki Nozawa): “U.S. mortgage rates skyrocketed to a 10-month high as investors reacted to Donald Trump’s presidential election win by pulling money out of the bond market, driving up yields that guide home loans. The average rate for a 30-year fixed mortgage was 3.94%, up from 3.57% last week and the highest since January…”

November 16 – Bloomberg (Vince Golle): “Mortgage applications in the U.S. slumped last week after the sharpest increase in borrowing costs since mid-2013, signaling tougher sledding for the housing market. The Mortgage Bankers Association’s index of purchase and refinancing applications dropped 9.2% in the period ended Nov. 11 to 436.3, the lowest level since January. The average rate on a 30-year fixed loan soared 18 bps, the most since June 2013, to 3.95%.”

November 17 – Bloomberg (Sho Chandra): “U.S. new-home construction jumped to a nine-year high in October as an outsized advance in the number of apartment projects accompanied a strong pickup for single-family housing. Residential starts surged 25.5% to a 1.32 million annualized rate, the fastest since August 2007 and exceeding the highest projection in a Bloomberg survey…”

November 14 – CNBC (Diana Olick): “More selling in U.S. bond markets Monday pushed mortgage rates to a psychological breaking point. The average contract rate on the popular 30-year fixed mortgage hit 4%, according to Mortgage News Daily… Rates have now moved nearly a half a percentage point higher since Donald Trump was elected president. ‘The situation on the ground is panicked. Damage control,’ said Matthew Graham, chief operating officer of Mortgage News Daily. ‘People were trying to lock loans quickly last week and are now facing a tough choice to lock today or hope for a bounce. Many hoped for a bounce last week heading into the long weekend and we obviously didn't get it.’”

November 15 – Bloomberg (Matt Scully): “A group of online consumer loans that were packaged into bonds is going bad faster than lenders and bond underwriters had expected, the latest sign that some startups that aimed to revolutionize the banking industry underestimated the risk they were taking. Delinquencies and defaults are reaching key levels known as ‘triggers’ for at least four different sets of bonds. Breaching those levels will force lenders or underwriters to start paying down the bonds early. Avant Inc. and its underwriters, for example, are going to have to begin to repay three of its asset-backed notes…”

November 16 – Reuters (Dave McKinney): “The financial condition of Illinois’ five state pension systems worsened during 2016 with unfunded liabilities growing to a record-setting $129.8 billion… The nearly 17% surge was the result of lowered long-range investment return assumptions by four of the five pension systems and poor investment returns during 2016… The combined funded ratio of the five pension systems dropped from 41% in fiscal 2015, a level that put Illinois in a tie with Kentucky for the lowest-funded state pension system in the country. Illinois’ new funded ratio now stands at 37.6%...”

November 14 – CNBC (Arjun Kharpal): “Apple iPhones and other U.S. goods could suffer sales hits in China if President-elect Donald Trump goes through with his ‘naïve’ plan of slapping a large import tariff on Chinese products, a state-backed newspaper warned… During his election campaign this year, Trump spoke of a 45% import tariff on all Chinese goods… Should any such policy come into effect, China will take a ‘tit-for-tat approach’, according to an opinion piece in the Global Times, a newspaper backed by the Communist party. ‘A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.,’ the Global Times article read.”

November 16 – Bloomberg (Elizabeth Dexheimer): “House Financial Services Committee Chairman Jeb Hensarling said he’s willing to tweak his plan to overhaul the Dodd-Frank Act before reintroducing it to Congress early next year. The committee is ‘interested in working on a 2.0 version,’ Hensarling said… ‘Advice and counsel is welcome.’ The Texas Republican’s comments come amid speculation that his Choice Act could serve as a blueprint for how Donald Trump overhauls financial reforms enacted after the 2008 economic crisis. During the event, Hensarling said the committee has been in ‘fairly constant dialogue’ with Trump’s transition team about his legislation…”

November 14 – New York Times (Matthew Goldstein): “The presidential campaign that just ended was notable for a lack of debate about housing — in particular the uneven state of the United States mortgage market nine years since the start of the financial crisis. Neither… Trump nor … Clinton spent much time discussing housing policy… And neither candidate laid out a plan for dealing with the two biggest engines in the mortgage market — Fannie Mae and Freddie Mac — which remain under a controversial federal government conservatorship. Laurie Goodman, a longtime housing industry guru on Wall Street and now with a Washington research organization, said she did not think federal legislators would make it a priority to address the fates of Fannie and Freddie — two government-sponsored entities that were rescued by the Treasury eight years ago with a $187 billion taxpayer bailout.”

Federal Reserve Watch:

November 17 – CNBC (Jeff Cox): “Fed Chair Janet Yellen on Thursday made her strongest comments to date in favor for a policy tightening in December, telling Congress an increase could be ‘appropriate relatively soon’… ‘Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals" on inflation and jobs, Yellen said. "Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.’”

Japan Watch:

November 17 – Bloomberg (Kevin Buckland and Shigeki Nozawa): “The Bank of Japan said no bids were placed at its first operations when it offered to buy bonds at a fixed rate, a tool it introduced when deciding in September it would seek to control the yield curve. Japanese government bonds advanced on Thursday as the central bank said it would carry out two operations… Each received zero bids… A selloff in Japanese bonds had threatened to test Governor Haruhiko Kuroda’s determination to keep yields stable with unlimited debt purchases -- a weapon he had so far kept in reserve.”

November 14 – Reuters (Leika Kihara): “Japanese policymakers are starting to see fiscal stimulus as the most likely next step to spark economic growth given the central bank's dwindling monetary ammunition and uncertainty over the agenda of U.S. president-elect Donald Trump. The market turbulence caused by Trump's victory has unnerved policymakers, and offers an opportunity for lawmakers favoring bigger fiscal spending to press their case, with another supplementary budget for this year a possible first step… ‘Fiscal reform is important, but it's true uncertainties surrounding Japan's economy are increasing. That's why it's very important to come up with an effective fiscal policy,’ said Masahiko Shibayama, an adviser to Prime Minister Shinzo Abe.”

EM Watch:

November 17 – Bloomberg (Nacha Cattan and Eric Martin): “Mexico’s central bank raised borrowing costs for the fourth time this year after Donald Trump’s election dragged the peso to never-before-seen levels of more than 20 per dollar, boosting the risk of faster inflation. Policy makers increased the key rate a half point to 5.25% Thursday, the highest level since 2009.”

November 17 – Bloomberg (Anirban Nag and Anto Antony): “From keeping Indian defense jets on the ready to transfer cash from mints, to banks knocking on the doors of religious institutions to access smaller change, Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation… Unaccounted money makes up nearly a fourth of the economy.”

November 17 – Reuters (Rodrigo Viga Gaier and Alonso Soto): “The former governor of Rio de Janeiro state was arrested… as part of a corruption investigation linked to a World Cup project and other works worth billions of dollars, in a blow to Brazil's ruling party that may fuel political instability. Federal prosecutors accused Sergio Cabral, 53, of leading a criminal organization that took 224 million reais ($66 million) in bribes from construction firms in exchange for infrastructure contracts from 2007 to 2014…”

Leveraged Speculator Watch:

November 15 – Bloomberg (Phil Kuntz): “About five years ago, Kentucky started investing some of its public-employee pension money with hedge funds. Sure, fees were high but the funds came with the lure of high returns and could serve as a buffer if the market tanked. By early November, Kentucky officials had had enough. They voted to start yanking $800 million from hedge funds… Disappointing returns were certainly a factor. But another reason was the public’s perception of hedge funds as highly risky and run by guys with penthouses and yachts, said David Peden, chief investment officer for Kentucky’s $16 billion portfolio. That was poison at a time when taxpayers were being asked to fork over more to close a 60% gap in pension liabilities… Kentucky is one of the latest among America’s biggest investors -- pensions, endowments and foundations -- that are souring on hedge funds after a 15-year romance.”

November 14 – New York Times (Alexandra Stevenson): “Every five minutes a satellite captures images of China’s biggest cities from space. Thousands of miles away in California, a computer looks at the shadows of the buildings in the images and draws a conclusion: China’s real estate boom is slowing. Traders at BlackRock, the money management giant, then use the data to help choose whether to buy or sell the stocks of Chinese developers. ‘The machine is able to deal with some of the very complex decisions,’ said Jeff Shen, co-chief investment officer at Scientific Active Equity, BlackRock’s quantitative trading, or quant, arm… The future star of the hedge fund industry is not the next William A. Ackman, Carl C. Icahn or George Soros. Rather, it is a computer like the one at Scientific Active Equity, which sifts through data like satellite images from China every day.”

Geopolitical Watch:

November 17 – Reuters (Greg Torode): “A U.S. congressional panel has warned of an ‘alarming’ rise in China's interference in Hong Kong, noting fears over the former British colony's continued role as a global financial hub. In its annual report to Congress on Wednesday, the bipartisan U.S.-China Economic and Security Review Commission highlights the ‘chilling’ abduction and detention of five booksellers based in Hong Kong as well as pressure on media and academic freedoms.”

November 16 – Reuters (Denny Thomas and David Lawder): “U.S. lawmakers should take action to ban China's state-owned firms from acquiring U.S. companies, a congressional panel charged with monitoring security and trade links between Washington and Beijing said… In its annual report to Congress, the U.S.-China Economic and Security Review Commission said the Chinese Communist Party has used state-backed enterprises as the primary economic tool to advance and achieve its national security objectives.”