Credit Bubble Bulletin

Friday, March 15, 2019

Weekly Commentary: No One Knows How Monetary Policy Works

My interest was piqued by a Friday Bloomberg article (Ben Holland), “The Era of Cheap Money Shows No One Knows How Monetary Policy Works.” “Monetary policy is supposed to work like this: cut interest rates, and you’ll encourage businesses and households to borrow, invest and spend. It’s not really playing out that way. In the cheap-money era, now into its second decade in most of the developed world (and third in Japan), there’s been plenty of borrowing. But it’s been governments doing it.”

I remember when the Fed didn’t even announce changes in rate policy. Our central bank would adjust interest rates by measured bank reserve additions/subtractions that would impact the interbank lending market. Seventies inflation forced Paul Volcker to push short-term interest-rates as high as 20% in early-1980 to squeeze inflation out of the system.

Federal Reserve policymaking changed profoundly under the authority of Alan Greenspan. Policy rates had already dropped down to 6.75% by the time Greenspan took charge in August 1987. Ending 1979 at 13.3%, y-o-y CPI inflation had dropped below 2% by the end of 1986. Treasury bond yields were as high as 13.8% in May 1984. But by August 1986 – yields were down to 6.9% - having dropped almost 700 bps in 27 months.

Lower market yields and economic recovery were absolute boon for equities. The S&P500 returned 22.6% in 1983, 5.2% in 1984, 31.5% in 1985, 22% in 1986 – and another 41.5% for 1987 through August 25th. Markets had evolved into a speculative bubble.

One could pinpointing the start of the great Credit Bubble back with the 70’s inflation. For my purposes, I date its inception at the 1987 stock market crash. At the time, many were drawing parallels between the 1987 and 1929 market crashes – including dire warnings of deflation risk – warnings that have continued off and on for more than three decades.

The Greenspan Fed made a bold post-crash pronouncement: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” In hindsight, this was the beginning of central banking losing control.

The S&P500 returned 16.6% in 1988 and 31.7% in 1989 - the crash quickly forgotten. Not forgotten was the assurance that the Fed would be there as a market liquidity backdrop. GDP expanded at a blistering 7% pace in Q4 1987 – expanding 5.1% for the year. GDP accelerated to 6.9% in 1988. Instead of deflation and depression, the late-eighties saw one heck of a boom. As silly as it sounds these days, the eighties used to be called the “decade of greed.”

The decade’s sinking rates, collapsing bond yields, booming securities markets and the Fed’s liquidity assurances all contributed to what evolved into a three-decade proliferation of non-bank financial intermediation – money market funds, bond funds, repurchase agreements, asset-backed securities, mortgage-backed securities, junk bonds, corporate credit, the government-sponsored enterprises and derivatives (to name the most obvious).

Eighties’ (especially late-decade) excess came back to haunt the financial system and economy in 1990/91. The Savings and Loan fiasco had morphed from a few billion dollars issue to a several hundred billion serious problem. And following the collapse of real estate bubbles on both coasts, the U.S. banking system was left severely impaired. And similar to the period after the ’87 crash, there were more dire warnings of deflation and depression.

Following up on his post-crash promise to keep markets liquid, Alan Greenspan took another giant policy leap - orchestrating a steep yield curve. By dropping short-term rates to an at the time incredible 3% - banks could borrow fed funds and invest in government debt yielding 8% - magically replenishing depleted capital.

This maneuver empowered the rebuilding of banking system capital outside of deficit-busting Washington bailouts. Importantly, this was also a godsend for the nascent hedge fund community that was overjoyed to borrow at 3% and leverage in higher-yielding credit instruments – confident that the Fed would be there to backstop system liquidity in the event of trouble. Ditto for Wall Street derivatives and prop-trading desks.

They surely didn’t realize it at the time, but our central bank had begun sliding down a most slippery slope: The Fed had created unprecedented incentives for leveraged speculation. And there was so much resulting demand for debt securities to lever that a shortage developed. Wall Street securitization and derivatives machines went into overdrive to meet demand. By 1993, debt markets had evolved into a dangerous speculative bubble.

On February 4th 1994, the Fed took a so-called baby-step, raising rates 25 bps to 3.25%. After beginning February at 5.6%, 10-year Treasury yields quickly traded to 6% after the rate increase – and were up to 7.5% in May and 8.0% by November. The wheels almost came off, as the leveraged speculators were forced to deleverage. To the great long-term benefit of leveraged speculation, it would be the last time in decades that the Fed would move forcefully to tighten financial conditions.

The Fed conveniently looked the other way in 1994 as GSE holdings surged an (at the time) unprecedented $150 billion, their buying accommodating hedge fund and Wall Street firm liquidations. The GSEs stealthily operating as quasi-central banks worked so well that they boosted buying to $305 billion during tumultuous 1998 and another $317 billion in 1999. I doubt we’ll ever have an answer: Did the Greenspan Fed simply not appreciate of the effects of this massive GSE credit creation – or did they clandestinely support it?

The Federal Reserve certainly promoted the Mexican bailout, an aggressive policy maneuver that stoked the Asian Tiger bubbles (devastating collapses coming in 1997). Then in the fall of 1998 – with the simultaneous collapses of Russia and the hedge fund Long-Term Capital Management (LTCM) bringing the global financial system to the precipice – the Fed helped orchestrate a bailout of LTCM. In the dozen years since Volcker, the Greenspan Fed had made incredible strides in “activist” policymaking. In 1987, the early-nineties, 1995 and again in 1998, the Fed was content to use new tools and assume new power in the name of fighting deflation and depression risks. Speculative finance turned more powerful at every turn.

With Wall Street finance booming, GSE liquidity bubbling and Greenspan market backstopping, extraordinary tailwinds saw Nasdaq almost double in 1999. I thought the Bubble burst in 2000/2001, and I believe the Fed did as well. Then Federal Reserve and Washington establishment panicked with the U.S. corporate debt market in 2002 at the brink of serious dislocation. The prevailing theoretical expert on reflationary policymaking, Dr. Ben Bernanke, joined the Federal Reserve Board of Governors in 2002 - and replaced Greenspan in February 2006.

Greenspan had profoundly changed central banking. Bernanke, with his radical monetary views including the “government printing press” and “helicopter money,” took things to a whole new level. Greenspan was happy to manipulate rates, yield curves, market perceptions and incentives for leveraged speculation - all in the name of developing a powerful new monetary transmission mechanism. Dr. Bernanke was ready to add aggressive use of the Fed’s balance sheet to Greenspan’s toolkit. But in 2002, 3% short rates and just Bernanke’s talk of where the Fed was headed were sufficient to initiate a mortgage finance Bubble (that would see mortgage Credit more than double in six years).

I believe the Fed willfully used mortgage Credit and home price inflation to reflate system Credit. There were certainly vocal Wall Street analysts egging them on. This was a momentous error in analysis and judgement – with only bigger mistakes to come. The bursting of this Bubble in 2008 unleashed Bernanke and global central bankers’ experiment with directly inflating markets with central bank liquidity. The Bernanke Fed and others moved deliberately to force savers out of safety and into inflating risk markets. Low rates and central bank purchases unleashed governments to issue debt like never before.

Draghi’s 2012 “whatever it takes” battle cry ensured that increasingly speculative markets would envision “QE infinity” and decades of loose finance. Bernanke the next year further emboldened speculative market psychology with his proclamation that the Fed was ready to “push back against a tightening of financial conditions.” When markets faltered on China worries in early-2016, the "investment" community came to believe central banks and governments everywhere had adopted “whatever it takes” – certainly including Beijing (powerful monetary and fiscal stimulus), Europe (unprecedented ECB QE), Japan (unprecedented QE) and the Fed (postponement of policy normalization).

Global markets went to parabolic speculative excess. From February 2016 lows to 2018 highs, the Nasdaq Composite surged 93% and the small cap Russell 2000 jumped 85%. Over this period, the S&P500 gained 62%, Japan’s Nikkei 63% and Germany’s DAX 57%.

And while the notion that “deficits don’t matter” had been gaining adherents since QE commenced in 2008, by late-2016 it had essentially regressed to The Crowd convinced “deficits will never matter.” The election of Donald Trump ushered in a replay of “guns and butter” – tax cuts (huge cuts for corporations) and a boost of military spending to go with a steady upswing in entitlement spending. Infrastructure spending, why not?

What unfolded was a complete breakdown in discipline - in central banking, in Washington borrowing and spending, and throughout highly speculative markets. And I do believe the new Fed Chairman had hopes of normalizing Fed policymaking, letting the markets begin stand on their own, and commencing the long-delayed process of system normalization. Pressure – markets and otherwise – became too much to bear. Fed U-Turn, January 4, 2019 – immediately transmitted globally.

So, returning to the Bloomberg article in the opening paragraph: No one has a clue how monetary policy works anymore – transmission mechanisms, financial and economic system reactions and long-term consequences. The world is in completely uncharted territory.

We saw in December how abruptly markets can turn illiquid and approach dislocation. And we have witnessed beginning in January just how quickly speculation can be resuscitated and excess reignited. Those that believed central bankers would quickly cave have been emboldened – as have the believers that Beijing has things well under control with as many levers to pull as needed.

The Bank of Japan doubled its balance sheet to $5 TN in four years – with no end in sight. The ECB wound down its $2.6 TN QE program in December, and just last week announced that it would begin implementing additional stimulus measures. Understandably, markets believe Fed balance sheet “normalization” will end soon – with “balloonization” commencing at any point the markets demand it.

March 12 – CNBC (Yun Li): “After a stellar rebound, Jeffrey Gundlach still thinks stocks are in a bear market. ‘The stock market was and still is in a bear market,’ the founder and chief executive officer of Doubleline Capital said… He also said stocks could go negative again in 2019.”

I struggle somewhat with the traditional “bear” and “bull” market terminology in the current backdrop. It looked like a “bear” in December, while the market has performed rather bullishly in the initial months of 2019. But I still believe the global Bubble was pierced in 2018. But we’re dealing with a unique – I would suggest deviant – global market structure. There’s this massive pool of speculative, trend-following finance. Hedge funds, ETFs and such. There is, as well, a colossal derivatives complex – for speculating, leveraging and hedging. When markets begin turning risk averse, De-Risking/Deleveraging Dynamics can quickly push increasingly illiquid markets to the breaking-point.

But this structure also creates the potential for destabilizing short squeezes and the unwind of hedges to spark powerful rallies. And these rallies can in short order entice the mammoth pool of trend-following finance to jump aboard. Who these days can afford to miss a rally?

I would furthermore argue that more than ever before, the Financial Sphere is driving the Real Economy Sphere. As we’ve seen over the past couple of months, risk market rallies can spur a rather dramatic loosening of financial conditions. There has been a recovery in household perceived wealth and an attendant resurgence in consumer confidence and spending.

The bulls see Goldilocks as far as the eye can see. Sure nice to have the once-in-a-lifetime crisis out of the way back in 2008. And good to have this cycle’s correction wrapped up in December. Central banks got our backs. “Deficits don’t matter,” and recessions and crisis are things of the past. An election year coming up is good. China has too much to lose not to keep their boom going.

At least from the perspective of my analytical framework – things continue to follow the worst-case scenario. What started with Greenspan, expanded dramatically with Bernanke, spread globally through the entire central bank community, further escalated by Draghi’s “whatever it takes” and Kuroda’s “it takes everything”, to yet further emboldened by Powell’s U-Turn and the accompanying flock of dovish central banks worldwide.

The heart of the issue is that monetary policy has come to chiefly function through a massive global infrastructure of speculative finance. Over the past three decades, things evolved from monetary policy operating subtly to encourage/discourage bank lending at the margin - to central banks expressly working to ensure that Trillions of levered holdings and perhaps tens of Trillions of speculative positions don’t face risk aversion and liquidation.

Speculative finance became the marginal source of liquidity for markets and economies generally. This all appears almost magical when the markets are rising, but in reality it's a highly unstable situation. We’re at the stage of the cycle where there is an incredible excess of finance that is speculative in character, while speculative market psychology ("animal spirits") has become deeply emboldened. The upshot is a bipolar world: too much risk-embracing finance chasing inflating markets, ensuring excessively loose financial conditions; or, when risk aversion hits, intense de-risking/deleveraging quickly leading to illiquidity, faltering markets and an abrupt tightening of financial conditions. There’s little middle-ground.

The entire notion of some so-called “neutral rate” is delusional. With markets so highly speculative and market-based finance dictating financial conditions, what policy rate would today equate with stable markets and economic conditions? Good luck with that.

It’s similar to the issue faced in 2007, although today’s global backdrop has closer parallels to 1929. Speculative finance and asset Bubbles run amok, while economic prospects dim. And nowhere are such dynamics more at play than in China.

March 14 – Financial Times (Hudson Lockett): “The cost of new housing in China's major cities rose more quickly in February… Prices for new housing across 70 large cities rose 10.4% year on year in January… That marked the equal-quickest gain in 21 months. Every city saw average home prices rise compared to a year ago except Xiamen, where they stood unchanged… The latest reading marks a nine-month run of quickening price gains across major cities. That is good news for top officials gathering in Beijing this week for the National People's Congress, as China’s property sector is estimated to account for 15% of the country's gross domestic product, or closer to 30% if related industries are included.”

March 10 – Bloomberg: “China’s credit growth slowed in February after a seasonal surge the previous month, with the net development in the first two months of the year signaling continued recovery in credit supply. Aggregate financing was 703 billion yuan ($105bn) in February…, compared with an estimated 1.3 trillion yuan in a Bloomberg survey. Broad M2 money supply gained 8.0%, matching its slowest-ever expansion… Financial institutions offered 885.8 billion yuan of new loans in February, versus a projected 950 billion yuan.”

Combining a booming January and a less-than-expected February, China Aggregate Financing increased $794 billion – 25% greater than the comparable 2018 expansion. Total Aggregate Financing jumped $3.025 TN over the past year (10.1%), with growth down somewhat from the comparable year ago period. And while “shadow bank” instruments continue to stagnate, bank loans grow like gangbusters.

China New Loans were up $2.46 TN over the past year, or 13.4%. Over the past three months, New Loans expanded $773 billion, or 15.5% annualized. Consumer Loans actually suffered a small contraction in February (after a record January), the first decline since February 2016. For the past year, Consumer Loans expanded $1.06 TN, or 17.1%. Consumer Loans expanded 42% over two years, 77% over three years and 139% in five years. What a Bubble.

For the Week:

The S&P500 surged 2.9% (up 12.6% y-t-d), and the Dow rose 1.6% (up 10.8%). The Utilities gained 1.8% (up 10.7%). The Banks jumped 2.6% (up 16.6%), and the Broker/Dealers rose 3.1% (up 10.7%). The Transports increased 1.9% (up 12.4%). The S&P 400 Midcaps rose 1.9% (up 14.0%), and the small cap Russell 2000 gained 2.1% (up 15.2%). The Nasdaq100 jumped 4.2% (up 15.4%). The Semiconductors surged 5.6% (up 20.5%). The Biotechs jumped 5.9% (up 21.9%). While bullion increasing $4, the HUI gold index declined 0.4% (up 5.5%).

Three-month Treasury bill rates ended the week at 2.39%. Two-year government yields declined three bps to 2.44% (down 5bps y-t-d). Five-year T-note yields fell four bps to 2.40% (down 12bps). Ten-year Treasury yields slipped four bps to 2.59% (down 10bps). Long bond yields fell six bps to 3.01% (unchanged). Benchmark Fannie Mae MBS yields dropped six bps to 3.32% (down 18bps).

Greek 10-year yields increased three bps to 3.79% (down 56bps y-t-d). Ten-year Portuguese yields declined four bps to 1.31% (down 40bps). Italian 10-year yields slipped one basis point to 2.50% (down 25bps). Spain's 10-year yields jumped 14 bps to 1.19% (down 23bps). German bund yields added two bps to 0.08% (down 16bps). French yields rose five bps to 0.46% (down 25bps). The French to German 10-year bond spread widened three to 38 bps. U.K. 10-year gilt yields increased two bps to 1.21% (down 7bps). U.K.'s FTSE equities index jumped 1.7% (up 7.4% y-t-d).

Japan's Nikkei 225 equities index rose 2.0% (up 7.2% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.03% (down 4bps y-t-d). France's CAC40 surged 3.3% (up 14.3%). The German DAX equities index jumped 2.0% (up 10.7%). Spain's IBEX 35 equities index rose 2.3% (up 9.4%). Italy's FTSE MIB index gained 2.7% (up 14.9%). EM equities traded higher. Brazil's Bovespa index surged 4.0% (up 12.8%), and Mexico's Bolsa gained 1.5% (up 1.4%). South Korea's Kospi index rose 1.8% (up 6.6%). India's Sensex equities index surged 3.7% (up 5.4%). China's volatile Shanghai Exchange gained 1.7% (up 21.2%). Turkey's Borsa Istanbul National 100 index rose 1.7% (up 13.2%). Russia's MICEX equities index was about unchanged (up 5.0%).

Investment-grade bond funds saw inflows of $3.295 billion, and junk bond funds posted inflows of $1.040 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 10 bps to a 13-month low 4.35% (down 13bps y-o-y). Fifteen-year rates fell seven bps to 3.76% (down 14bps). Five-year hybrid ARM rates declined three bps to 3.84% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 10 bps to a one-year low 4.30% (down 27bps).

Federal Reserve Credit last week increased $2.5bn to $3.932 TN. Over the past year, Fed Credit contracted $428bn, or 9.8%. Fed Credit inflated $1.121 TN, or 40%, over the past 331 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $6.2bn last week to $3.472 TN. "Custody holdings" gained $20bn y-o-y, or 0.6%.

M2 (narrow) "money" supply added $11.0bn last week to $14.490 TN. "Narrow money" gained $585bn, or 4.2%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $31.5bn, while Savings Deposits fell $28.9bn. Small Time Deposits gained $4.2bn. Retail Money Funds added $1.5bn.

Total money market fund assets were little changed at $3.112 TN. Money Funds rose $292bn y-o-y, or 10.3%.

Total Commercial Paper declined $5.4bn to $1.062 TN. CP declined $19bn y-o-y, or 1.8%.
Currency Watch:

March 12 – Bloomberg (Richard Frost, Benjamin Purvis and Tian Chen): “Hong Kong’s de facto central bank intervened to defend the local currency’s peg against the dollar for the second time in days. The Hong Kong Monetary Authority bought HK$3.925 billion ($500 million) of local currency…, after the Hong Kong dollar fell to the weak end of its HK$7.75-HK$7.85 trading band. It also purchased $192 million worth at the end of last week… The move will reduce the aggregate balance, a measure of interbank liquidity, to HK$70.9 billion on March 14.”

The U.S. dollar index declined 0.7% to 96.595 (up 0.4% y-t-d). For the week on the upside, the Norwegian krone increased 2.8%, the Swedish krona 2.2%, the British pound 2.1%, the Mexican peso 1.5%, the Brazilian real 1.4%, the euro 0.8%, the New Zealand dollar 0.6%, the Swiss franc 0.6%, the Canadian dollar 0.6%, the Australian dollar 0.6%, the Singapore dollar 0.4%, and the South African rand 0.3%. For the week on the downside, the Japanese yen declined 0.3% and the South Korean won 0.1%. The Offshore Chinese renminbi increased 0.11% versus the dollar this week (up 2.45% y-t-d).

Commodities Watch:

March 12 – Financial Times (Henry Sanderson): “China’s push to boost its gold holdings could see the country challenge Russia as the most aggressive buyer of the precious metal this year. The country’s central bank, the People’s Bank of China, has bought about 32 tonnes of gold in the past three months. If it keeps purchasing at that rate, China would surpass Russia and Kazakhstan, leading buyers in 2018 which have tapered their acquisitions recently. China is the world’s biggest gold producer but its gold reserves, at just under $80bn, make up a fraction of its total foreign exchange reserves of more than $3tn… That 3% share, for example, compares with 19% for Russia.”

The Goldman Sachs Commodities Index jumped 2.5% (up 15.5% y-t-d). Spot Gold added 0.3% to $1,302 (up 1.6%). Silver slipped 0.2% to $15.324 (down 1.4%). Crude jumped $2.45 to $58.52 (up 29%). Gasoline rose 3.1% (up 43%), while Natural Gas dropped 2.4% (down 5%). Copper increased 0.4% (up 11%). Wheat surged 5.2% (down 8%). Corn increased 0.7% (down 1%).

Trump Administration Watch:

March 11 – Bloomberg (Katia Dmitrieva): “President Donald Trump’s newest budget forecasts the U.S. fiscal deficit surpassing $1 trillion this year and staying above that level until 2022. The fiscal 2020 proposal sees the deficit expanding to $1.1 trillion for 2019 and 2020, when Trump will run for re-election. The shortfall is seen narrowing slightly to $1.07 trillion in 2012 and $1.05 trillion in 2022…”

March 13 – Associated Press (Kevin Freking): “President Donald Trump… dangled the prospect of walking away from a new trade deal with China if it’s not to his liking, just as he cut short his summit with North Korea’s Kim Jong Un… Trump spoke on the state of negotiations with China shortly before meeting with Republican senators on trade issues. He spoke optimistically of the U.S. and China being able to reach an agreement, declaring that ‘China has not been doing well. We’ve been doing unbelievably well.’”

March 12 – Financial Times (James Politi): “US President Donald Trump’s trade chief has warned that negotiations to end the tariff war with China were at risk of failing, saying ‘major, major issues’ needed to be resolved before an agreement was reached, and he could not ‘predict success at this point’. Speaking before the Senate finance committee…, Robert Lighthizer, the US trade representative, said that talks with Beijing had intensified and probably entered their ‘final weeks’, as the two countries haggle over structural reforms and enforcement provisions. But Mr Lighthizer indicated that a deal could not be taken for granted. ‘We’re either going to have a good result or we’re going to have a bad result before too long, but I’m not setting a specific timeframe and it’s not up to me,’ Mr Lighthizer said. ‘I’ll work as hard as I can, and the president will tell me when the time is up, or the Chinese will,’ he added.”

March 13 – Bloomberg (Jennifer Epstein): “Gary Cohn, the former head of President Donald Trump’s National Economic Council, said the U.S. is ‘desperate right now’ for a trade pact with China as negotiators from both countries seek to reach a deal. ‘The president needs a win,’ Cohn said… Cohn’s comments stand in contrast to statements from Trump that he’s in no rush for an agreement and is prepared to walk away from negotiations.”

March 11 – Associated Press (Lisa Mascaro): “President Donald Trump proposed a record $4.7 trillion budget…, pushing the federal deficit past $1 trillion but counting on optimistic growth, accounting shuffles and steep domestic cuts to bring future spending into balance in 15 years. Reviving his border wall fight with Congress, Trump wants more than $8 billion for the barrier with Mexico, and he’s also asking for a big boost in military spending. That’s alongside steep cuts in health care and economic support programs for the poor that Democrats — and even some Republicans — will oppose. Trump called his plan a bold next step for a nation experiencing ‘an economic miracle.’ House Speaker Nancy Pelosi called his cuts ‘cruel and shortsighted ... a roadmap to a sicker, weaker America.’”

March 10 – Reuters (Roberta Rampton): “President Donald Trump will propose in his fiscal 2020 budget on Monday that the U.S. Congress cut non-defense spending by 5% while boosting spending on the military, veterans’ healthcare and border security, the White House budget office said…”

March 12 – Wall Street Journal (Jeremy Page, Kate O’Keeffe and Rob Taylor): “A new front has opened in the battle between the U.S. and China over control of global networks that deliver the internet. This one is beneath the ocean. While the U.S. wages a high-profile campaign to exclude China’s Huawei Technologies Co. from next-generation mobile networks over fears of espionage, the company is embedding itself into undersea cable networks that ferry nearly all of the world’s internet data. About 380 active submarine cables—bundles of fiber-optic lines that travel oceans on the seabed—carry about 95% of intercontinental voice and data traffic, making them critical for the economies and national security of most countries. Current and former security officials in the U.S. and allied governments now worry that these cables are increasingly vulnerable to espionage or attack and say the involvement of Huawei potentially enhances China’s capabilities.”

March 8 – Wall Street Journal (Andrew Ackerman): “What was supposed to be Volcker 2.0—a more industry-friendly version of postcrisis Wall Street trading restrictions—could be replaced with a third try by regulators. Faced with industry ire over a proposal released last year, Trump-appointed financial regulators are leaning toward redoing it… The Volcker rule limits banks’ ability to make trading bets with their own money, a practice known as proprietary trading. No final decisions have been made to scrap the May 2018 proposal and to start anew on the rule, the people said. Still, staffers at banking regulators were preparing to make recommendations to senior policy makers in the coming days or weeks.”

Federal Reserve Watch:

March 10 – Reuters (Howard Schneider): “Federal Reserve Chairman Jerome Powell said… the U.S. central bank does ‘not feel any hurry’ to change the level of interest rates again as it watches how a slowing global economy affects local conditions in the United States. Rates are currently ‘appropriate,’ Powell said in a wide-ranging interview with CBS’s 60 Minutes news show in which he called the current rate level ‘appropriate’ and ‘roughly neutral,’ meaning it is neither stimulating or curbing the economy.”

U.S. Bubble Watch:

March 10 – Associated Press (Andrew Taylor): “The federal budget deficit is ballooning on President Donald Trump’s watch and few in Washington seem to care. And even if they did, the political dynamics that enabled bipartisan deficit-cutting deals decades ago has disappeared, replaced by bitter partisanship and chronic dysfunction. That’s the reality that will greet Trump’s latest budget… Like previous spending blueprints, Trump’s plan for the 2020 budget year will propose cuts to many domestic programs favored by lawmakers in both parties but leave alone politically popular retirement programs such as Medicare and Social Security… It’s put deficit hawks in a gloomy mood. ‘The president doesn’t care. The leadership of the Democratic Party doesn’t care,’ said former Sen. Judd Gregg, R-N.H. ‘And social media is in stampede mode.’”

March 14 – Reuters (Lucia Mutikani): “U.S. import prices increased by the most in nine months in February, but the trend remained weak, with prices declining for a third straight month on an annual basis. …Import prices rose 0.6% last month, the biggest gain since May, boosted by increases in the costs of fuels and consumer goods…”

March 13 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods rose by the most in six months in January and shipments increased, pointing to strong business spending on equipment at the start of the year. …Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rebounded 0.8%, the biggest gain since July.”¬

March 13 – Reuters (Lucia Mutikani): “U.S. construction spending surged in January, with investment in public projects rising to a more than eight-year high, which could boost economic growth estimates for the first quarter. …Construction spending jumped 1.3%, the largest increase since last April, after a revised 0.8% drop in December.”

March 11 – Bloomberg (Matthew Boesler): “U.S. households in February reduced their expectations for inflation to the lowest level in 18 months, according to a Federal Reserve Bank of New York survey of consumer expectations. The median respondent to the New York Fed’s monthly study reported an expected inflation rate of 2.8% in three years’ time, down from 3% the month before…”

March 10 – Wall Street Journal (Michael Wursthorn): “Investors are snapping up shares of companies with weak earnings, a sign many have shaken off last year’s jitters and are ready to re-embrace riskier stocks in pursuit of outsize gains. Through the first two months of 2019, shares of companies with low earnings stability over the past 10 years have climbed more than those with steadier profits, according to… Bank of America Merrill Lynch. Top performers include communications, energy and utility stocks… many of which have more than doubled in value since Jan. 1 to push major indexes within striking distance of their records. Investors’ willingness to plow into riskier stocks that have less stable earnings recovered after the Federal Reserve’s recent pause on raising rates and growing optimism about U.S.-China trade negotiations, analysts said.”

March 12 – CNBC (Yun Li): “The so-called bond king Jeffrey Gundlach is not shy when it come to rebuking the increasingly popular theory backed by progressives — the Modern Monetary Theory. ‘MMT is a crackpot idea... sounds good for a first grader,’ the founder and chief executive officer of Doubleline Capital said in an investor webcast… He said the theory is ‘complete nonsense’ being used to justify a socialist program. The notion behind MMT is that as long as the Federal Reserve can keep interest rates low without sparking inflation, the national debt and budget deficit won’t be an issue.”

China Watch:

March 14 – Bloomberg (Jenny Leonard, Jennifer Jacobs and Jeffrey Black): “A meeting between President Donald Trump and President Xi Jinping to sign an agreement to end their trade war won’t occur this month and is more likely to happen in April at the earliest, three people familiar with the matter said. Despite claims of progress in talks by both sides, a hoped-for summit at Trump’s Mar-a-Lago resort will now take place at the end of April if it happens at all…”

March 13 – Financial Times (Gabriel Wildau): “China’s banking regulator issued new guidelines… designed to encourage banks to increase loans to small businesses, as Beijing seeks to remedy financing bottlenecks in order to promote growth amid an economic slowdown. Economists have blamed a scarcity of financing for small, privately owned businesses for a recent slowdown in economic growth. Such groups have suffered disproportionately from a campaign to curb financial risk, which sharply reduced off-balance-sheet lending on which private groups relied. But banks have been wary of lending to smaller companies because default rates are higher on average.”

March 11 – Reuters (Brenda Goh): “China may increase its tolerance for non-performing loans at small companies in order to help spur their growth, the state-backed Securities Times newspaper quoted a senior official from the banking regulator as saying…”

March 10 – Reuters (Yifan Qiu, Pei Li and Ryan Woo): “China’s factory-gate inflation in February stayed flat from a month earlier, while gains in consumer prices slipped to the lowest level in more than a year as muted price pressures point to lacklustre demand in the world’s second-largest economy. The inflation data is the latest indication of slowing demand in China, as factory surveys also point to dwindling export orders amid a protracted U.S.-Sino trade war.”

March 13 – Reuters (Lusha Zhang and Stella Qiu): “Growth in China’s industrial output fell to a 17-year low in the first two months of the year, pointing to further weakness in the world’s second-biggest economy… Industrial output rose 5.3% in January-February…, less than expected and the slowest pace since early 2002.”

March 13 – Reuters (Yawen Chen, Min Zhang and Kevin Yao): “China’s property investment accelerated in the first two months of the year driven by strong demand in its hinterland and defying a decline in sales, government curbs in bigger markets and a broader economic slowdown… It rose 11.6% in January-February from a year earlier, up from the 9.5% growth reported for the 2018 full year…”

March 11 – Bloomberg (Anjani Trivedi): “Investors are at it again, sorting through the heap of China’s credit data. Last month’s aggregate social-financing numbers… show the flow of new credit in (and around) the financial system fell 41% in February from a year earlier. Retail loans posted their largest monthly drop on record. Companies continued to struggle with working-capital financing; bonds were the main channel of funding. Looking for signals of economic recovery in such noisy data is a fool’s errand. Just a month earlier, the same figure surged 51%. The total stock of debt across the system remains 205.6 trillion yuan ($30.6 trillion) and is still growing at 10%, just below the average in previous years.”

March 12 – Reuters (Yawen Chen and Ryan Woo): “Staring at an array of floor plans in a showroom packed with models of apartment blocks set to go up in the northwestern city of Yanan, the young couple was faced with a tough decision. Even as housing prices in places like Beijing and Shanghai have shown signs of cooling, they remain red hot in many small cities like Yanan, putting pressure on prospective buyers… Easy credit policies and official intervention in property markets are fuelling those price surges, raising fears that local governments may be creating the sorts of housing bubbles and debt burdens that Beijing has vowed to crack down on.”

Central Bank Watch:

March 13 – Bloomberg (Enda Curran and Toru Fujioka): “Central bankers searching for options to fight the next downturn should look to Japan, where policy makers are gathering for a regular review of the world’s most epic monetary stimulus program. The Bank of Japan’s two-decade journey from zero interest rates to massive asset purchases, negative rates and yield-curve control demonstrates a combination of tools that can be used to sustain stimulus -- along with the huge damage that piles up when it drags on too long. As global economic growth wanes, Europe doles out a fresh round of easing and the U.S., Canada, Britain and Australia put rate hikes on hold, economists are asking what more can be done with scant room to lower borrowing costs and already swollen balance sheets. ‘Whether central banks like it or not, there is little choice than to venture further with ‘creative’ new strategies to reflate inflation expectations,’ said Ben Emons, managing director of global macro strategy at Medley Global Advisors…”

Brexit Watch:

March 14 – Bloomberg (Tim Ross): “U.K. Prime Minister Theresa May enjoyed a rare good day in Parliament, fighting off her opponents and winning the endorsement of British politicians to seek to delay Brexit day. The result on Thursday means her Brexit plan -- which has twice been rejected by huge majorities in the House of Commons - is still in play. The House of Commons voted 412 to 202 to support May’s motion, which as well as calling for a delay also reveals May’s strategy for getting her unpopular deal approved. She is offering members of Parliament a choice between backing her deal and delivering Brexit with a short delay, or risk being trapped in a long extension with terms set by the bloc.”

Europe Watch:

March 11 – Reuters (Abhinav Ramnarayan): “Euro zone bond yields dipped on Monday after German industrial production fell in January, adding weight to market bets on a slowing European economy and the European Central Bank’s dovish policy stance. Industrial output data showed that Europe’s largest economy is still suffering from trade frictions and unease about Brexit after narrowly avoiding recession last year. ‘We have had a lot of sentiment indicators pointing to this, but industrial production is hard data and it is really cementing the impression that the European economy is slowing down,’ Mizuho rates strategist Antoine Bouvet said.”

March 14 – Financial Times (Davide Ghiglione, Rachel Sanderson and James Kynge): “Italy is considering borrowing from China-led Asian Infrastructure Investment Bank as part of plans to become the first G7 country to endorse Beijing’s contentious Belt and Road global investment programme. The two countries are planning to ‘explore all opportunities for co-operation’ in Italy and ‘third countries’, according to the five-page draft accord… The wide-ranging agreement would span areas including politics, transport, logistics and infrastructure projects.”

EM Watch:

March 12 – Financial Times (Paul Callan, Bassem Bendary and Yohann Sequeira): “The developing world could be heading towards a new debt crisis. Public debt in emerging markets now averages 50% of gross domestic product, the highest level since the 1980s. More than 80% of developing countries have increased their public debt in the past five years. The number of developing countries whose public debt level is rated as ‘unsustainable’ or ‘high-risk’ is now 32, more than double the number in 2013. Most of the media’s attention has focused on Chinese loans that add to developing country debts. But China is not the only lender contributing to the looming crisis: the majority of new loans to at-risk, low-income and lower-middle-income countries have come from other sources, including other countries and multilateral institutions such as the World Bank and regional development banks.”

March 11 – Financial Times (Laura Pitel): “Turkey’s president Recep Tayyip Erdogan is confronting his first recession in a decade as he prepares for local elections that will test his party’s grip on the country’s largest cities. Growth contracted by 2.4% in last year’s fourth quarter compared with the previous quarter, when it fell 1.6%... As a result, Turkey’s economy grew at 2.6% for the whole of last year, from 7.4% in 2017. The last time Turkey faced a recession… under Mr Erdogan’s watch was in 2008 and 2009 in the wake of the US subprime mortgage crisis.”

March 11 – Financial Times (Colby Smith): “The inevitable has arrived: Turkey is in recession. For the first time in a decade… By all accounts, it was just a matter of time. Since last summer's currency crisis, which saw the lira lose 40% of its value until its central bank finally heeded to economic orthodoxy in September and raised interest rates, Turkey's economy has rebalanced, and hard… GDP has since shrunk 3% year-over-year, with seasonally adjusted GDP decreasing by 2.4% on a quarterly basis, the slowest since the global financial crisis.”

Global Bubble Watch:

March 13 – CNBC (Jeff Cox): “Global debt has jumped since the financial crisis, though one ratings agency thinks that it poses significantly less danger than the last time around. Corporate, government and household indebtedness rose to $178 trillion as of June 2018, a 50% increase from a decade ago, according to figures S&P Global Ratings… The expansion was especially acute at the government level, which stood at $62.4 trillion, or 77% higher than it did before the public borrowing binge began. ‘Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness,’ S&P Global Ratings credit analyst Terry Chan said… ‘Although another credit downturn may be inevitable, we don’t believe it will be as bad as the 2008-2009 global financial crisis.’”

March 11 – Bloomberg (Fergal O'Brien): “The global economy’s sharp loss of speed through 2018 has left the pace of expansion the weakest since the global financial crisis a decade ago, according to Bloomberg Economics. Its new GDP tracker puts world growth at 2.1% on a quarter-on-quarter annualized basis, down from about 4% in the middle of last year. While there’s a chance that the economy may find a foothold and arrest the slowdown, ‘the risk is that downward momentum will be self-sustaining,’ say economists Dan Hanson and Tom Orlik.

March 13 – Bloomberg (Adam Haigh): “Last October, the world’s stock of negative-yielding debt had tumbled by more than half from its record high as investors adjusted to the end of super-loose monetary policy. Now it’s soaring again after the dovish pivots around the world. The Bloomberg Barclays Global Aggregate Negative-Yielding Debt Index has increased in value by well over $3 trillion since its low five months back, to $9.3 trillion… That’s still below the all-time record of $12.2 trillion in June 2016.”

March 10 – Wall Street Journal (Avantika Chilkoti): “Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy. Germany’s 10-year government bonds, known as bunds, yielded as little as 0.04% on Friday, a microscopic return for investors and the lowest level since October 2016 when the region was still emerging from a protracted sovereign-debt crisis… The European Central Bank slashed its growth forecasts for this year to 1.1% from 1.7% and all but ruled out raising its benchmark interest rate, currently negative, before the start of next decade at the earliest.”

March 14 – Bloomberg (Erik Hertzberg): “Canadian home values fell last year for the first time in three decades amid falling prices in some of the country’s priciest markets, even as debt burdens increased. The value of residential real estate in Canada held by households dropped C$30 billion ($22.5bn) in the fourth quarter to C$5.10 trillion… The 0.6% decline is the first decrease in country-wide home values in data going back to 1990.”

March 10 – Reuters (Roberta Rampton): “The boom in Australian home prices and building over the past decade or so was primarily driven by lower real interest rates, while strong migration tended to lift rents, according to a study paper from the country’s central bank… At their peak, prices in Sydney more than doubled between 2008 and 2017, but have since fallen back by around 10%.”

Fixed-Income Bubble Watch:

March 11 – Bloomberg (Luke Kawa): “That sound you’ve been hearing is U.S. credit investors breathing a large sigh of relief. The sum of all fears among those buying investment-grade and high-yield debt has sunk to its lowest level since 2014, according to Bank of America’s March survey of fund managers -- even as the Federal Reserve Bank of Dallas warns about poor liquidity and the Bank for International Settlements frets about damaging downgrades. ‘The most notable change in our fresh survey of U.S. credit investors is that most concerns have declined notably from December and January,’ write analysts led by Hans Mikkelsen…”

Leveraged Speculator Watch:

March 12 – Bloomberg (Justina Lee): “When it comes to slicing and dicing equities based on their factors, the strategy beloved by quants is exhibiting symptoms of sickness. The challenge is diagnosing how serious it is. This month, Neuberger Berman will become the latest big name to close a fund based on factor investing, which uses characteristics like quality and value to bet which stocks will outperform over time. The decision follows a similar move by Columbia Threadneedle in December. It’s anecdotal, sure, but it’s adding up to an increasingly gloomy picture across the industry and re-energizing a debate about the effectiveness of such strategies. One of the most popular factors, momentum, has extended a miserable 2018 into this year. Value, another key style, has gone nowhere.”

Geopolitical Watch:

March 12 – CNBC (Tom DiChristopher): “The United States will continue to do whatever it takes to rid Venezuela of disputed leader Nicolas Maduro, Secretary of State Mike Pompeo told CNBC... ‘As the president said, every option is on the table to deliver to the Venezuelan people the democracy they deserve. And then ultimately we’ll build back an economy where they can again have the wealth that they have under their own feet,’ Pompeo said…, referring to Venezuela’s vast oil reserves.”

March 12 – Reuters (Vivian Sequera and Deisy Buitrago): “Venezuela ordered American diplomats on Tuesday to leave within 72 hours after President Nicolas Maduro accused U.S. counterpart Donald Trump of cyber ‘sabotage’ that plunged the South American country into its worst blackout on record.”

March 14 – Reuters (Joyce Lee and David Brunnstrom): “North Korea is considering suspending talks with the United States and may rethink a freeze on missile and nuclear tests unless Washington makes concessions, a senior diplomat said on Friday, according to news reports from the North’s capital… North Korean Vice Foreign Minister Choe Son Hui blamed top U.S. officials for the breakdown of last month’s summit between Kim and U.S. President Donald Trump in Hanoi… ‘We have no intention to yield to the U.S. demands (at the Hanoi summit) in any form, nor are we willing to engage in negotiations of this kind,’ TASS quoted Choe… ‘I want to make it clear that the gangster-like stand of the U.S. will eventually put the situation in danger…’”

March 12 – Wall Street Journal (Gordon Lubold and Dustin Volz): “The Navy and its industry partners are ‘under cyber siege’ by Chinese hackers and others who have stolen national security secrets in recent years, exploiting critical weaknesses that threaten the U.S.’s standing as the world’s top military power, an internal Navy review concluded. The assessment… depicts a branch of the armed forces under relentless cyberattack by foreign adversaries and struggling in its response to the scale and sophistication of the problem. Drawing from extensive research and interviews with senior officials across the Trump administration, the tone of the review is urgent and at times dire, offering a rare, unfiltered look at the military’s cybersecurity liabilities.”

March 13 – Bloomberg (Nick Wadhams): “Secretary of State Michael Pompeo said China was in a ‘league of its own’ as a human-rights violator over a campaign that’s put hundreds of thousands of Uighurs and other Muslims in reeducation camps, an unusually blunt U.S. critique of the country’s abuses. Presenting the State Department’s annual report on global human rights practices, Pompeo said… that China had interred more than 1 million Uighurs, ethnic Kazakhs and other Muslims in camps ‘designed to erase their religious and ethnic identities.’”

Friday Evening Links

[Bloomberg] Tech shares, trade optimism push Wall Street higher

[Bloomberg] U.S. Consumer Sentiment Exceeds Forecasts on Income Optimism

[Reuters] U.S. manufacturing sector slowing as economy loses steam

[Bloomberg] The Era of Cheap Money Shows No One Knows How Monetary Policy Works

[Bloomberg] Fed Puts Inflation Expectations at Heart of Major Policy Review

[Bloomberg] China Reveals the Fiscal Tricks Needed to Deliver Record Tax Cut

[Bloomberg] Draghi Makes Sure Stimulus Lives On Even After He Leaves the ECB

Thursday, March 14, 2019

Friday's News Links

[Reuters] Global stocks rise on renewed trade hopes, set for best week since January

[AP] Premier: China needs ‘strong measures’ to support economy

[Reuters] Central banks stuck in holding pattern

[Bloomberg] China Growth Mystery Scares Global Economy in Weakest Shape in Years

[Bloomberg] Junk Debt Investors Win Few Breaks on ‘Worst Ever’ Covenants

[Bloomberg] Hong Kong Seen Spending Billions More to Defend Currency Peg

[Reuters] Premier Li says China opposes Taiwan independence

[Reuters] North Korea may suspend nuclear talks with 'gangster-like' U.S.: diplomat

[WSJ] $10 Billion Corporate Debt Sale Highlights Credit Market’s Recovery

[FT] China new house prices pick up pace in February

[FT] Italy eyes loans from China’s development bank for projects

Thursday Evening Links

[Reuters] S&P 500 slips amid U.S.-China trade uncertainty

[BBC] Brexit: MPs vote by 412 to 202 to seek delay to EU departure

[Reuters] U.S.-China trade talks progressing quickly: Trump, Mnuchin

[CNBC] US new home sales declined 6.9 percent in January

[Reuters] U.S. data underscores slowing growth, muted inflation

[Bloomberg] The College Admissions Scandal Presses Our ‘Unfairness’ Button

[Bloomberg] Gulati's Hedge Fund Becomes Victim of Too-Calm Markets

[NYT] China’s Slowdown Already Hit Its Factories. Now Its Offices Are Hurting, Too.

Wednesday, March 13, 2019

Thursday's News Links

[Reuters] Wall Street dips on trade uncertainty, weak new home sales data

[AP] World stocks rise ahead of vote to push Brexit back

[CNBC] China and US to reportedly push back Trump-Xi meeting to at least April

[Reuters] U.S. import prices post largest gain in nine months

[AP] Trump raises possibility of walking away from China deal

[Reuters] China industrial output growth falls to 17-yr low, but investment picks up

[Reuters] China's Jan-Feb property investment accelerates despite cooling sales

[Bloomberg] Cohn Says U.S. Is ‘Desperate’ to Sign Trade Agreement With China

[Bloomberg] Why Japan’s Massive Stimulus Still Isn’t Enough

[Bloomberg] Canadian Housing Slump Deepens With First Drop in Values in Decades

[Bloomberg] Negative-Yielding Bonds Top $9 Trillion as Growth Worries Return

[WSJ] Investors Embrace Riskier Sectors as Stocks Extend Rebound

[WSJ] GE Warns of Falling Profits, $2 Billion Cash Burn in 2019

Wednesday Evening Links

[Reuters] Wall Street indexes pare gains as Trump says U.S. to ground some Boeing 737s

[Reuters] Trump says he is in no rush to complete China trade deal

[Reuters] U.S. grounds 737 MAX jets, Boeing shares fall again

[AP] The Latest: British lawmakers reject leaving EU with no deal

[Bloomberg] U.S. Calls Out China’s ‘Remarkably Awful’ Human Rights Abuses

Tuesday, March 12, 2019

Wednesday's News Links

[Reuters] Wall Street lifted by benign economic data, gains in Boeing

[Reuters] U.S. producer prices rise less than expected in February

[Reuters] U.S. core capital goods orders post biggest gain in six months

[Reuters] U.S. construction spending posts biggest increase in nine months

[Reuters] U.S. mortgage applications rise as loan costs fall

[AP] More nations ground Boeing 737 Max 8s after Ethiopia crash

[CNBC] Jeffrey Gundlach says the stock market was and still is in a bear market

[Reuters] Brexit crisis deepens as lawmakers to vote on no-deal exit

[Bloomberg] Hong Kong Peg Defense Hits $692 Million as Weakness Persists

[Bloomberg] As Fed Ponders a New Lever, Here's Wall Street's View

[Bloomberg] Quant Funds Hit By Misfiring Strategies

[Reuters] Party on: Real estate booms in cradle of China's Communist revolution

[CNBC] Jeffrey Gundlach says the theory of unlimited deficit spending is a ‘crackpot idea’

[CNBC] Every option on the table to deliver democracy to Venezuela, Sec of State Pompeo says

[WSJ] America’s Undersea Battle With China for Control of the Global Internet Grid

[WSJ] How GE Built Up and Wrote Down $22 Billion in Assets

[WSJ] Navy, Industry Partners Are ‘Under Cyber Siege’ by Chinese Hackers, Review Asserts

[FT] Donald Trump’s trade chief warns that China talks could fail

[FT] China tells banks to increase lending to small businesses

Tuesday Evening Links

[Reuters] S&P, Nasdaq rise on tame inflation data; Dow felled by Boeing

[Reuters] Treasuries-Yields fall after benign U.S. inflation data, Brexit woes

[BBC] Brexit: MPs reject Theresa May's deal by 149 votes

[Reuters] No more talks planned with EU on Brexit for now - May's spokesman

[Reuters] U.S. trade representative hopes U.S., China in final weeks of talks

[CNBC] Global debt is up 50% over the past decade, but S&P still says next crisis won't be as bad

[Reuters] Venezuela gives U.S. diplomats 72 hours to leave, blames Trump for blackout

Monday, March 11, 2019

Tuesday's News Links

[Reuters] S&P, Nasdaq extend gains after inflation data

[Reuters] U.S. consumer prices post first rise in four months

[Reuters] China may increase tolerance for small firms' bad loans-Securities Times

[Reuters] Brexit hangs in the balance as parliament to vote on May's tweaked deal

[Reuters] U.S. transport chief: 'tight time frame' for $1 trillion infrastructure boost

[AP] Trump proposes record spending, trillion-dollar deficit

[AP] Highlights of Trump’s $4.7 trillion budget request

[Bloomberg] Fear of Trump Walking on Xi Haunts China as Trade Talks Near End

[Bloomberg] What China's $30 Trillion Credit Pile Doesn’t Tell You

[Bloomberg] India’s Inflation Quickens as Focus Shifts to April Rate Cut

[AP] Chaos spreads in Venezuela after days without power

[FT] Emerging markets face a new debt crisis; Chinese lending is not the only cause

[FT] China doubles down on gold in shift away from dollar

[FT] Why ‘Japanification’ looms for the sluggish eurozone

Monday Evening Links

[CNBC] Asia markets rise; pound jumps as Theresa May secures Brexit concession

[Reuters] Wall Street climbs with tech; Boeing off day's lows

[AP] Boeing’s stock takes a hit as more Max 8 planes are grounded

[Reuters] Treasuries-U.S. yields up as risk appetite rises; focus on more supply

[BBC] Brexit: We have secured what MPs asked for, says May

[Bloomberg] Sum of All U.S. Credit Fears Sinks to Almost Five-Year Low

[Bloomberg] U.S. Inflation Expectations Slide Amid Heightened Focus From Fed

[AP] The Latest: Budget official defends economic forecast

[CNBC] Why rising wages could push the Fed toward more rate hikes yet

[Reuters] China may increase tolerance for small firms' bad loans-Securities Times

[Reuters] Venezuelan blackout hits oil exports, residents scramble for food

[WSJ] White House Proposes $4.7 Trillion Budget for Fiscal 2020

[WSJ] Deutsche Bank’s Arranged Marriage Gets Shove From ECB

[FT] Turkey's recession has been a long time coming

[FT] Theresa May is truly cornered this time

Sunday, March 10, 2019

Saturday, March 9, 2019

Saturday's News Links

[Reuters] China says working with U.S. day and night to get trade deal

[AP] As budget deficit balloons, few in Washington seem to care

[Reuters] Fed's Powell says no immediate policy responses needed to economy

[Reuters] China's Feb producer inflation flat amid lacklustre demand, consumer inflation eases

[Reuters] Deutsche Bank management board agrees to Commerzbank merger talks: source

[Reuters] Venezuela's Guaido to lead rally as blackout lingers

[NYT] The Bull Market Began 10 Years Ago. Why Aren’t More People Celebrating?

[WSJ] Fed Chief Says No Need to Change Interest Rates at Present

[WSJ] Regulators Eye Another Rewrite of Volcker Trading Restrictions

[FT] Jay Powell sets ‘high bar’ for change to Federal Reserve inflation strategy

Friday, March 8, 2019

Weekly Commentary: Q4 2018 Z.1 "Flow of Funds"

I’ve been anxiously awaiting the Fed’s Q4 2018 Z.1 “Flow of Funds” report. It provided the first comprehensive look at how this period’s market instability affected various sectors within the financial system. From ballooning Broker/Dealer balance sheets to surging “repo” lending to record Bank loan growth – it’s chock-full of intriguing data. All in all, and despite a Q4 slowdown, 2018 posted the strongest Credit growth since before the crisis – led, of course, by our spendthrift federal government.

Non-Financial Debt (NFD) rose $2.524 TN during 2018 (5.1%), exceeding 2007’s $2.478 TN and second only to 2004’s $2.915 TN growth. NFD closed 2018 at a record 253% of GDP, compared to 230% to end of 2007 and 189% to conclude the nineties. By major category, Federal borrowings expanded $1.258 TN during the year, up from 2017’s $599 billion, and the strongest growth since 2010’s $1.646 TN. Year-over-year growth in Total Household borrowings slowed ($488bn vs. $570bn), led by a drop in Home Mortgages ($285bn vs. $312bn). Total Corporate borrowings slowed to $532 billion from 2017’s $769 billion. Foreign U.S. borrowings declined to $207 billion from 2017’s $389 billion.

On a percentage basis, NFD increased 4.51% in 2018, up from 2017’s 4.10%. Federal debt grew 7.58%, almost double 2017’s 3.74%, to the strongest percentage growth since 2012 (10.12%). Household debt growth slowed to 3.22% (from 3.90%), with Mortgage borrowings up 2.83% (from 3.19%) and Consumer Credit growth easing slightly to 4.88% (from 5.04%). Total Corporate Debt growth slowed meaningfully from 2017’s 5.71% to 3.69%.

For Q4, on a seasonally-adjusted and annualized basis (SAAR), Non-Financial Debt (NFD) expanded $1.390 TN, the slowest expansion since Q4 2016 (SAAR $941bn). This is largely explained by the sharp drop-off in Federal borrowings (SAAR $444bn vs. Q3’s SAAR $1.180 TN).

Outstanding Treasury Securities ended 2018 at a record $17.842 TN, up $1.411 TN (8.6%) for the year to 85% of GDP. Treasuries have surged $11.791 TN, or 195%, since the end of 2007. Agency Securities (debt and MBS) rose $245 billion during 2018 to a record $9.113 TN (2yr gain $592bn). In total, Treasury and Agency Securities surged $1.656 TN last year – accounting for a full two-thirds of total Non-Financial Debt growth. Combined Treasury and Agency debt ended 2018 at a record $26,955 TN, or 129% of GDP (vs. 2007’s $14.685 TN, or 92%).

Broker/Dealer assets surged nominal $165 billion, or 21% annualized, during the quarter, the biggest quarterly gain since Q1 2010. For the year, Broker/Dealer assets jumped $262 billion (8.4%) to $3.359 TN, the largest annual increase since 2007. Debt Securities holdings jumped by $147 billion during Q4, led by a $162 billion increase in Treasuries to $251 billion (more than doubling y-o-y).

The Household Balance Sheet remains a key Bubble manifestation, during the quarter providing a hint of how quickly perceived household wealth will evaporate during a bear market. Household Assets dropped $3.056 TN during Q4 to $120.9 TN, led by a $3.883 TN decline in total equities holdings (Equities and Mutual Funds). And with Liabilities increasing $133 billion during Q4, Household Net Worth fell $3.190 TN (the largest drop since Q4 2008’s $3.835 TN) to $104.869 TN. Household Real Estate holdings rose $279 billion during the quarter and were up $1.319 TN for 2018.

As large as Q4’s drop in Net Worth was, it erased only somewhat less than the previous six month’s gain. For all of 2018, Household Net Worth increased $1.876 TN, with a gain of $47.586 TN, or 65%, since the end of 2008. With equities already regaining the majority of Q4 losses, I don’t want to read too much into Q4 ratios. But it’s worth noting that Net Worth as a percentage of GDP dropped to 512% from Q3’s record 523% - yet remains significantly above previous cycle peaks (484% in Q1 2007 and 435% to end 1999).

The Rest of World (ROW) balance sheet is also fundamental to Bubble Analysis. For the year, ROW U.S. asset holdings declined $192 billion, the first drop since 2008. And while ROW holdings of total Equities declined $650 billion (mostly on lower prices), Corporate Debt fell $283 billion (also largest drop since 2008). Notable as well, ROW Treasury holdings declined $63bn (to $6.222 TN) in 2018 after jumping $282 billion in 2017.

Q4 market instability left its mark on Z.1 data. Broker/Dealer Assets surged SAAR $544 billion ($165bn nominal), the biggest quarterly gain since Q1 2010. Broker/Dealer Treasury holdings jumped nominal $162 billion (SAAR $685bn), the largest rise since the unstable global backdrop of Q4 2011. The Asset “Security Repurchase Agreements” (Repos) jumped nominal $150 billion (SAAR $602bn) to $1.315 TN, the high since Q4 2013. This was the largest gain since tumultuous Q3 2011. Repo Liabilities jumped $213bn (SAAR $851bn) to $1.698 TN – the high since Q1 2014. Q4’s Repo Liabilities increase was the largest going all the way back to Q1 2010.

The full category “Federal Funds & Securities Repurchase Agreements” ballooned $317 billion (SAAR $1.235 TN), the largest gain since Q1 2010. Fed Funds and Repo ended 2018 at $3.881 TN – an almost five-year high. Ballooning “repo” Assets and Liabilities – and Broker/Dealer balance sheets more generally – reflected Q4 market instability and illiquidity.

I’ll infer that the Broker/Dealer community was being called upon to provide liquidity – both through purchasing securities and offering securities Credit to the marketplace (leveraged speculating community, in particular). They were also forced to warehouse leveraged loans and such -awaiting the return of buyers. Moreover, it’s a fair assumption that major trading/liquidity issues were unfolding throughout the derivatives marketplace.

It’s worth noting that Goldman Sachs Credit default swap (5yr CDS) prices ended Q3 at 61 bps. Prices finished 2018 at 106 bps and then spiked to as high as 129 bps on January 3rd – the high since Q1 2016’s China/market tumult. After ending Q3 at 55 bps, Morgan Stanley CDS traded to 106 bps on January 3rd. Over this period, JP Morgan CDS jumped from 40 bps to as high as 78 bps, and Bank of America Merrill Lynch CDS spiked from 45 bps to 83 bps. Investment-grade corporate CDS also traded to highs since 2016, as did junk bond spreads. As I espoused at the time, there’s no mystery why Chairman Powell orchestrated his abrupt U-Turn on January 4th. The system was rapidly approaching the de-risking/deleveraging/derivatives dislocation/market illiquidity precipice.

It wasn’t only the Broker/Dealers and “repo” market that experienced noteworthy quarters. Bank Assets jumped nominal $267 billion, or 5.7% annualized, to a record $19.299 TN. Robust Bank growth was led by a record $263 billion (SAAR $868bn) surge in Loans (almost 10% annualized), surpassing the previous high ($260bn) back in the Bubble heyday Q3 2007. In addition, Bank “repo” assets (lending against securities) jumped a record $161 billion (SAAR $643bn) to $703 billion (high since Q3 ’08). Meanwhile, Debt Securities holdings rose $129 billion (SAAR $286bn), the biggest increase since Q1 2012 (ending the year at a record $4.304 TN). During the quarter, Banks added aggressively to Treasuries (up SAAR $246bn) and Agency- GSE-backed Securities (up SAAR $187bn), while liquidating Corporate Bonds (down SAAR $121bn). Between Broker/Dealer and Bank buying, there’s no mystery surrounding the Q4 collapse in Treasury yields.

Speaking of collapsing yields: German bund yields dropped 11 bps this week to 0.065%, trading to the lowest yields since October 2016. French yields sank 17 bps to 0.41% - also a low since 2016. Italian yields dropped 23 bps this week to 2.50%, the low since July.

March 7 – Reuters (Francesco Canepa, Frank Siebelt and Balazs Koranyi): “European Central Bank President Mario Draghi caught even dovish rate-setters off guard by pushing… for unexpectedly generous stimulus after forecasts showed a large drop in economic growth, four sources familiar with the discussion said. At its policy meeting, the ECB delayed its first post-crisis rate hike into 2020 and offered banks more ultra-cheap loans…”

Yet sinking yields weren’t limited to Europe. Ten-year Treasury yields dropped 12 bps to 2.63% - with yields now down five bps for the year. Japan’s JGB yields declined three bps to negative 0.3%, near early-January market instability lows.

The wide – and widening – divergence between booming risk markets and more than resilient safe haven sovereign bond prices narrowed just a bit this week. The Shanghai Composite was slammed 4.4% Friday (reducing y-t-d gains to 19.1%) on fears Beijing is increasingly alarmed by speculative securities markets. They should be. More dismal data (i.e. February exports down 16.6%) – along with indications that the U.S./China trade deal is not the done deal many have been presuming – pressured markets from China to the U.S. Mixed signals – i.e. paltry February job gains (20k) in the face of a stronger-than-expected ISM Non-Manufacturing index – provide little clarity regarding underlying U.S. economic momentum.

For the most part, markets have been mesmerized by a flock of dovish global central bankers – while ignoring gathering storm clouds. Yet Z.1 data are a reminder of how quickly the markets buckled back in the fourth quarter. By now, I’ll assume the vigorous short squeeze and unwind of hedges have pretty much run their course. It has me pondering the next leg down in the unfolding bear market.

At some point, it’s not going to be as easy for central bankers and Beijing to reverse faltering markets. A big surge in Broker/Dealer assets, “repo” and bank lending would prove problematic if, instead of recovering, markets continue sinking into illiquidity. Financial conditions would tighten dramatically. No junk – or investment-grade issuance. Q4 ETF outflows and derivative issues offered a hint of what’s to come. Foreign buyers have been losing interest in U.S. securities. And definitely don’t rule out a quick $10 TN drop in Household Net Worth – with attendant major economic ramifications. Silly me. Annual $2.0 Trillion federal deficits effortlessly monetized by our accommodating central bank will cure all ills – financial, economic, social, geopolitical and otherwise. Global policymakers will regret becoming so adept at stoking speculative excess.

For the Week:

The S&P500 fell 2.2% (up 9.4% y-t-d), and the Dow dropped 2.2% (up 9.1%). The Utilities increased 0.7% (up 8.8%). The Banks lost 3.1% (up 13.6%), and the Broker/Dealers sank 5.6% (up 7.4%). The Transports fell 3.3% (up 10.3%). The S&P 400 Midcaps dropped 3.4% (up 11.9%), and the small cap Russell 2000 sank 4.3% (up 12.9%). The Nasdaq100 declined 1.9% (up 10.8%). The Semiconductors fell 3.3% (up 14.1%). The Biotechs sank 5.4% (up 15.2%). With a volatile bullion gaining $5, the HUI gold index recovered 3.2% (up 5.9%).

Three-month Treasury bill rates ended the week at 2.39%. Two-year government yields dropped nine bps to 2.46% (down 3bps y-t-d). Five-year T-note yields sank 13 bps to 2.43% (down 8bps). Ten-year Treasury yields fell 12 bps to 2.63% (down 5bps). Long bond yields dropped 11 bps to 3.01% (unchanged). Benchmark Fannie Mae MBS yields sank 15 bps to 3.38% (down 12bps).

Greek 10-year yields rose 13 bps to 3.76% (down 59bps y-t-d). Ten-year Portuguese yields fell 14 bps to 1.35% (down 37bps). Italian 10-year yields sank 23 bps to 2.50% (down 24bps). Spain's 10-year yields dropped 15 bps to 1.05% (down 37bps). German bund yields fell 11 bps to 0.07% (down 17bps). French yields sank 17 bps to 0.41% (down 30bps). The French to German 10-year bond spread narrowed six to 34 bps. U.K. 10-year gilt yields dropped 11 bps to 1.19% (down 9bps). U.K.'s FTSE equities index was little changed (up 5.6% y-t-d).

Japan's Nikkei 225 equities index fell 2.7% (up 5.1% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.03% (down 4bps y-t-d). France's CAC40 slipped 0.6% (up 10.6%). The German DAX equities index declined 1.2% (up 8.5%). Spain's IBEX 35 equities index fell 1.5% (up 6.9%). Italy's FTSE MIB index declined 1.0% (up 11.8%). EM equities were mostly lower. Brazil's Bovespa index increased 0.8% (up 8.5%), while Mexico's Bolsa dropped 2.4% (down 0.1%). South Korea's Kospi index fell 2.6% (up 4.7%). India's Sensex equities index gained 1.7% (up 1.7%). China's volatile Shanghai Exchange declined 0.8% (up 19.1%). Turkey's Borsa Istanbul National 100 index dropped 1.7% (up 11.2%). Russia's MICEX equities index was little changed (up 5.0%).

Investment-grade bond funds saw inflows of $1.993 billion, while junk bond funds posted outflows of $1.907 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.41% (down 5bps y-o-y). Fifteen-year rates gained six bps to 3.83% (down 11bps). Five-year hybrid ARM rates increased three bps to 3.87% (up 24bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.40% (down 19bps).

Federal Reserve Credit last week declined $10.6bn to $3.929 TN. Over the past year, Fed Credit contracted $425bn, or 9.8%. Fed Credit inflated $1.118 TN, or 40%, over the past 330 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $23.6bn last week to $3.466 TN. "Custody holdings" gained $25.6bn y-o-y, or 0.7%.

M2 (narrow) "money" supply rose $16.5bn last week to $14.480 TN. "Narrow money" gained $604bn, or 4.4%, over the past year. For the week, Currency declined $0.4bn. Total Checkable Deposits dropped $19.2bn, while Savings Deposits jumped $30.2bn. Small Time Deposits added $1.9bn. Retail Money Funds gained $4.0bn.

Total money market fund assets surged $33.9bn to $3.113 TN. Money Funds rose $256bn y-o-y, or 9.0%.

Total Commercial Paper declined $3.4bn to $1.067 TN. CP declined $26.4bn y-o-y, or 2.4%.

Currency Watch:

March 8 – Bloomberg (Tian Chen and Katherine Greifeld): “Hong Kong’s de facto central bank bought the local dollar for the first time since August after the city’s exchange rate fell to the weak end of its trading band against the greenback. The Hong Kong Monetary Authority spent HK$1.507 billion ($192 million)…”

The U.S. dollar index gained 0.8% to 97.306 (up 1.2% y-t-d). For the week on the upside, the Japanese yen increased 0.7% and the New Zealand dollar added 0.1%. For the week on the downside, the Brazilian real declined 2.3%, the Norwegian krone 2.1%, the Swedish krona 1.8%, the South African rand 1.5%, the British pound 1.4%, the euro 1.1%, the Mexican peso 1.1%, the South Korean won 1.0%, the Canadian dollar 0.9%, the Swiss franc 0.9%, the Australian dollar 0.5% and the Singapore dollar 0.3%. The Offshore Chinese renminbi declined 0.23% versus the dollar this week (up 2.08% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was little changed (up 12.7% y-t-d). Spot Gold recovered 0.4% to $1,298 (up 1.2%). Silver rallied 0.6% to $15.349 (down 1.2%). Crude increased 27 cents to $56.07 (up 24%). Gasoline surged 4.1% (up 38%), while Natural Gas added 0.2% (down 3%). Copper declined 1.3% (up 10%). Wheat sank 3.9% (down 13%). Corn dropped 2.3% (down 3%).

Trump Administration Watch:

March 7 – Bloomberg (Saleha Mohsin and Emily Barrett): “President Donald Trump wants the stock market to celebrate if he strikes a trade deal with China. Investors may struggle to deliver. The outcome of the talks could fall short of the definitive resolution of trade tensions that equities investors have priced in. Instead, the most likely scenario is an accord with few details, or a paucity of specifics on which tariffs will stay and which may go. Or, as Secretary of State Michael Pompeo pointed out this week, Trump could walk away from the table during a meeting with China’s Xi Jinping -- as he did with North Korea’s Kim Jong Un -- potentially taking trade tension to a new level. The reality is that trade friction could remain a fixture of American policy.”

March 5 – Reuters (Susan Heavey): “U.S. President Trump will reject a U.S.-China trade deal that is not perfect, but the United States would still keep working on an agreement, U.S. Secretary of State Mike Pompeo said… ‘Things are in a good place, but it’s got to be right,’ Pompeo told Sinclair Broadcasting Group…”

March 8 – Wall Street Journal (Lingling Wei, Jeremy Page and Bob Davis): “A U.S.-China trade accord is facing a new roadblock, as Chinese officials balk at committing to a presidential summit until the two countries have a firm deal in hand, according to people familiar with Beijing’s thinking. A week ago, the sides appeared to be closing in on a draft accord. But Chinese leaders were taken aback by President Trump’s failed meeting in Vietnam with North Korean leader Kim Jong Un… Mr. Trump’s decision to break off those talks and walk away sparked concern that China’s President Xi Jinping could be pressured with take-it-or-leave-it demands at a potential summit at Mr. Trump’s Mar-a-Lago estate in Florida late this month, these people said. As a result, China wants a summit to be more of a signing ceremony than a final negotiating session that could break down…”

March 6 – Associated Press (Josh Boak and Christopher Rugaber): “The world’s two largest economies are locked in negotiations that may soon produce a deal to suspend their trade war. Yet despite signals from Chinese and U.S. officials that some truce could be forthcoming, there are few signs of any truly transformed trade relationship. Beijing’s longstanding policy of subsidizing its own businesses and charges that it illicitly obtains U.S. technology remain key obstacles to any meaningful U.S.-China trade deal. In the meantime, the government said… that the trade deficit in goods with China… hit a record $419.2 billion last year.”

March 5 – Associated Press (Martin Crutsinger): “The federal government recorded a budget surplus in January. But so far this budget year, the total deficit is 77% higher than the same period a year ago. The… deficit for the first four months of this budget year, which began Oct. 1, totaled $310.3 billion. That’s up from a deficit of $175.7 billion in the same period a year ago… The higher deficit reflected greater spending in areas such as Social Security, defense and interest payments on the national debt. Meanwhile, the government collected lower taxes from individuals and corporations…”

March 6 – Reuters (Lucia Mutikani): “The U.S. goods trade deficit surged to a record high in 2018 as strong domestic demand fueled by lower taxes pulled in imports, despite the Trump administration’s ‘America First’ policies, including tariffs, aimed at shrinking the trade gap. President Donald Trump is pursuing a protectionist trade agenda to shield U.S. manufacturing from what he says is unfair foreign competition. Trump, who has dubbed himself ‘the tariff man,’ pledged on both the campaign trail and as president to reduce the deficit by shutting out more unfairly traded imports and renegotiating free trade agreements. The Commerce Department said… that a 12.4% jump in the goods deficit in December had contributed to the record $891.3 billion goods trade shortfall last year. The overall trade deficit surged 12.5% to $621.0 billion in 2018, the largest since 2008.”

March 1 – Reuters (David Lawder and Alexandra Alper): “The Trump administration filed another salvo at the World Trade Organization…, saying U.S. trade policy was not going to be dictated by the international body and defending its use of tariffs to pressure China and other trade partners. A report drawn up by the U.S. Trade Representative outlining the White House’s trade agenda for 2019 said the United States will continue to use the… WTO to challenge what it sees as unfair practices. However, ‘the United States remains an independent nation, and our trade policy will be made here – not in Geneva. We will not allow the WTO Appellate Body and dispute settlement system to force the United States into a straitjacket of obligations to which we never agreed,’ the report said.’”

Federal Reserve Watch:

March 3 – Reuters (Katanga Johnson and Steve Holland): “President Donald Trump… renewed criticism of the Federal Reserve and said the U.S. central bank’s tight monetary policy was contributing to a strong dollar and hurting the United States’ competitiveness. ‘We have a gentleman that likes a very strong dollar at the Fed,’ Trump said at the annual Conservative Political Action Conference… ‘I want a strong dollar, but I want a dollar that’s great for our country not a dollar that is so strong that it is prohibitive for us to be dealing with other nations.’”

March 3 – Bloomberg (Saleha Mohsin): “President Donald Trump’s attempts to blame Federal Reserve Chairman Jerome Powell for any hiccups in the U.S. economy have made a comeback -- this time directed at his conservative base as he gears up for a tough 2020 re-election campaign… Trump may be lining up his hand-picked choice to lead the Fed as a scapegoat in case his trade and tax policies don’t succeed: firing off a series of tweets, interviews and off-the-cuff remarks -- unprecedented for an American president -- that have at times shaken financial markets.”

March 3 – Financial Times (Gavyn Davies): “The US Federal Reserve has announced that it will conduct a root and branch review of its monetary policy framework in the next 18 months. The results could be of first order importance for financial markets, especially the bond market. Richard Clarida, the Fed’s vice-chairman said last month that the motivation was not any great dissatisfaction with the present policy. Both of the twin objectives — maximum employment and stable prices — were close to target. Instead, the Federal Open Market Committee seems concerned that inflation is failing to respond to recovering economic activity, implying that it might be difficult to cope with even lower inflation when the economy next enters a recession.”

March 6 – Bloomberg (Matthew Boesler): “The Federal Reserve can afford to ‘wait’ and watch incoming data amid a slowdown in U.S. economic growth before making another monetary policy move, said New York Fed President John Williams. ‘The base case outlook is looking good, but various uncertainties continue to loom large,’ Williams said… ‘Therefore, we can afford to be flexible and wait for the data to guide our approach.’ Fed officials have signaled they’re undecided about whether they will continue raising interest rates this year…”

March 6 – Reuters (Michelle Price and Pete Schroeder): “The U.S. Federal Reserve said… it would no longer flunk banks based on operational or risk management lapses during its annual health check of the country’s domestic banks. The ‘qualitative’ portion of the 2019 test, however, will still apply to the U.S. subsidiaries of five foreign banks subject to the annual exam. The move, which is a big win for major banks, such as Goldman Sachs…, Morgan Stanley and JP Morgan, Bank of America and Citigroup, forms part of a broader effort by the Fed to overhaul its annual ‘stress-testing’ process…”

March 5 – Wall Street Journal (Michael S. Derby): “Dallas Federal Reserve leader Robert Kaplan said the rising level of borrowing by nonfinancial companies is something that is increasingly on his radar screen… ‘I will continue to closely monitor the level, growth and credit quality of corporate debt. Vigilance is warranted as these issues have the potential to impact corporate investment and spending plans,’ Mr. Kaplan said in an essay… Mr. Kaplan said he was sensitive to the issue of corporate debt because its growth comes at a time where U.S. government borrowing also has increased. ‘An elevated level of corporate debt, along with the high level of U.S. government debt, is likely to mean that the U.S. economy is much more interest rate sensitive than it has been historically,’ he wrote.”

U.S. Bubble Watch:

March 5 – Reuters (Andrea Ricci): “The U.S. federal government posted a $9 billion surplus in January… Analysts polled by Reuters had expected a $25 billion surplus for the month. The Treasury said federal spending in January was $331 billion, up 6% from the same month in 2018, while receipts were $340 billion, down 6% compared to January 2018. The deficit for the fiscal year to date was $310 billion, compared with $176 billion in the comparable period the year earlier. When adjusted for calendar effects, the budget was in balance in January 2019, compared with a $30 billion surplus the prior year.”

March 6 – Wall Street Journal (Paul Kiernan and Josh Zumbrun): “The U.S. trade deficit in goods hit a record in 2018, defying President Trump’s efforts to narrow the gap, as imports jumped and some exports, including soybeans and other farm products, got hammered by retaliation against U.S. trade policies. The deficit in goods grew 10% last year to $891.3 billion, the widest on record… U.S. trade gaps with China and Mexico, already the nation’s largest, reached new records. The picture looked less dire when services including tourism, higher education and banking are counted, though this deficit still deteriorated markedly. With services included, the trade gap grew 12% last year to $621 billion, the widest since 2008.”

March 8 – Reuters (Lucia Mutikani): “U.S. employment growth almost stalled in February, with the economy creating only 20,000 jobs, adding to signs of a sharp slowdown in economic activity in the first quarter. The meager payroll gains… were the weakest since September 2017, with a big drop in the weather-sensitive construction industry. They also reflected a decline in hiring by retailers and utility companies as well as the transportation and warehousing sector, which is experiencing a shortage of drivers.”

March 5 – Associated Press: “U.S. service companies grew in February at the fastest pace in three months, rebounding after a decline in January. The Institute for Supply Management, an association of purchasing managers, reported Tuesday that its service index rose to 59.7 percent last month, up from 56.7 % in January. The January reading was the lowest since July 2018…”

March 6 – Reuters (Howard Schneider): “Slowing global growth and the 35-day partial federal government shutdown weighed on the U.S. economy in the first weeks of 2019, but it continued growing amid still-tight labor markets, the Federal Reserve reported… ‘Economic activity continued to expand in late January and February,’ even as concerns took root at the U.S. central bank about a possible slowdown, the Fed said in its… ‘Beige Book’ compendium of anecdotes compiled from industry and business contacts around the country. The pace of growth was ‘slight-to-moderate’ in 10 of the Fed’s 12 districts, with those in Philadelphia and St. Louis reporting ‘flat economic conditions.’”

March 5 – KRON (Alexa Mae Asperin): “Welcome to the Bay Area -- where you (mostly, your rent) can only go up from here! If you thought rent in San Francisco couldn't get any higher -- you were very wrong. Apparently San Francisco rent has reached a new peak of $3,690, according to home and apartment rental app Zumper. That's also a rise of nearly 9% from the same time last year, the survey found…”

March 3 – Bloomberg (Sophie Alexander and Tom Maloney): “Kylie Jenner, the founder of Kylie Cosmetics, has become the world’s youngest self-made billionaire after her company signed an exclusive partnership with Ulta Beauty Inc. Jenner, 21, is worth $1.02 billion, according to the Bloomberg Billionaires Index, which assumes that she owns 90% of her company and ascribes the rest to her mother Kris, who takes a management fee in exchange for handling public relations and finance. Forbes, relying on a different methodology, reported earlier Tuesday that Jenner had achieved the milestone.”

China Watch:

March 7 – New York Times (Keith Bradsher and Ana Swanson): “President Trump says he is optimistic that a landmark trade deal with China is close. Chinese officials are not so sure. The two sides in recent weeks agreed to the broad outlines of an agreement that would roll back tariffs in both countries… The trade deal looks like a good one for Beijing, since it would largely spare the government from making substantive changes to its economy. But some of the biggest details — like the enforcement mechanism to ensure China complies and the timing for the removal of tariffs — still haven’t been hammered out. Beijing officials are wary that the final terms may be less favorable, especially given Mr. Trump’s propensity for last-minute changes…”

March 6 – Bloomberg: “China won’t make big concessions to the U.S. in order to seal a trade deal, former finance minister Lou Jiwei said…, calling some U.S. demands for change ‘unreasonable.’ ‘China’s concessions probably won’t be very big because a lot of their demands are what we already plan to reform,’ Lou, who was finance minister until 2016 and now runs the social security fund, said… Some U.S. demands are ‘just nitpicking,’ he said.”

March 5 – Wall Street Journal (Lingling Wei): “‘Made in China 2025,’ a government-led industrial program at the center of the contentious U.S.-China trade dispute, is officially gone—but in name only. During a nearly 100-minute speech to China’s legislature…, Premier Li Keqiang dropped any reference to the plan that the Trump administration has criticized as a subsidy-stuffed program to make China a global technology leader at the expense of the U.S. The policy had been a highlight of Mr. Li’s State-of-the-Nation-like address for three years running. Instead, Mr. Li said the government would promote advanced manufacturing. He ticked off a list of emerging industries to nurture—next-generation information technology, high-end equipment, biomedicine and new-energy automobiles—that were also in ‘Made in China 2025’ and with a similar goal: ‘Buy China.’”

March 5 – Bloomberg (Lu Wang and Melissa Karsh): “China needs to brace for a ‘tough economic battle ahead,’ in the words of its premier. It’s a struggle on two main fronts: there’s U.S. President Donald Trump and his demands to cut away support for state firms or face lingering tariffs, while at home there’s the tussle to help struggling private firms without ramping up debt to even more unsustainable levels. The plan to navigate those challenges was laid out Tuesday…, with Premier Li Keqiang giving himself and President Xi Jinping some wriggle room by lowering the economic growth target for 2019 to a range of 6 to 6.5%, down from ‘about’ 6.5% last year… In all, Li rolled out tax cuts worth almost 2 trillion yuan ($298bn) and pledged further stimulus ahead. While that emphasis on stronger fiscal policy can be seen as a loosening from last year’s vow to curb financial risks and trim the budget, the overall goal is still to buffer the economy without letting debt accelerate once more.”

March 8 – Bloomberg (Sofia Horta e Costa): “It started with a single sell rating on one stock. By the time China’s exchanges shut on Friday, equity investors were sitting on $345 billion of losses and the realization that Beijing is in no mood for another bubble. The bearish call on shares of a state-owned insurer, delivered by analysts at China’s biggest state-owned brokerage, was widely interpreted as a sign that the government wants this year’s world-beating surge in Chinese stocks to slow down. The Shanghai Composite Index tumbled 4.4%, snapping an eight-week winning streak…”

March 8 – Reuters (Samuel Shen and John Ruwitch): “China’s banking watchdog has punished two lenders for illegally channeling money into the stock market, the official Securities Times said on Friday, a possible signal that this year’s sharp share gains are prompting regulators to tight supervision.”

March 7 – Reuters (Stella Qiu and Ryan Woo): “China’s exports tumbled the most in three years in February while imports fell for a third straight month, pointing to a further slowdown in the economy and stirring talk of a ‘trade recession’, despite a spate of support measures… February exports fell 20.7% from a year earlier, the largest decline since February 2016…”

March 3 – Bloomberg: “China’s worst car-market slump in a generation is forcing manufacturers and dealers to resort to generous discounts and loan offers to lure buyers, as the slowdown hits automakers’ profits. Incentives and reductions equivalent to more than 10% of the sticker price are now commonplace and interest-free loan offers abound as carmakers and dealerships struggle to bring buyers back to showrooms… But buyers aren’t biting, with car sales continuing to decline this year after the first annual drop in more than two decades.”

March 5 – Wall Street Journal (Nathaniel Taplin): “Li Keqiang, China’s premier, has a few ideas for 2019: keep overall debt growth in check, cut taxes, accelerate government bond issuance, and boost lending to small businesses. If that sounds like a lot to ask—and contradictory—it is. Some of these goals will fall by the wayside. Getting banks to lend more to small businesses without overall credit growth accelerating will be near impossible. And significantly higher government debt sales will require more banking system liquidity to keep rates from rising… That means more monetary easing: probably not a 2015-like flood, but definitely a rising tide. Beijing rightly recognizes that its two previous rounds of stimulus in the past decade, funded largely off the government’s books through state bank loans to state-owned enterprises, created a lot of bad debt for the buck.”

March 4 – Reuters (Zhang Min and Lusha Zhang): “China set a 2019 budget deficit target that’s higher than last year’s ratio and said its fiscal policy would be more ‘proactive and effective’. The Ministry of Finance said… that it is targeting a budget deficit of 2.8% of gross domestic product (GDP) for this year, compared with 2018’s 2.6% target.”

March 4 – Bloomberg: “China signaled it may be open to loosening controls over the housing market, after President Xi Jinping’s mantra that property isn’t for speculation was omitted from a key report to the National People’s Congress. Xi’s famous vow that ‘houses are built to be inhabited, not for speculation’ didn’t appear in Premier Li Keqiang’s work report delivered Tuesday to the annual parliamentary gathering… Dropping the wording, which became ubiquitous after Xi used it in a speech in 2017, may spur speculation that the government will tolerate an easing of property curbs as it grapples with a sharp economic slowdown.”

March 5 – Financial Times (Don Weinland): “Chinese property developers have rushed back to the market for US dollar debt in the first two months of the year, more than doubling issuance to a record $19bn while stoking unease over rising leverage. Among the issuers are some of China’s most heavily indebted groups, such as Evergrande, Vanke Real Estate and Country Garden. As of last year, Evergrande alone had accrued nearly $100bn in debt. China’s property sector is a pillar of the country’s economy… As growth wanes, developers are raising more money than they need to roll over existing borrowings, amplifying concerns for the stability of the market. ‘Chinese developers have kicked the can down the road,’ S&P Global Ratings analyst Aeon Liang said in a report…”

March 3 – Bloomberg: “China’s sputtering growth has turned cash-strapped local government financing vehicles into darlings of the bond market. Just a couple of years ago, local government borrowing units’ debt was on everyone’s top worry list as authorities vowed to cut state backing for those platforms. Now, policy makers have again turned to them to carry out infrastructure projects to resuscitate the sluggish economy. Their resurgence to national importance status has underpinned the big rush into LGFV bonds. The bullish wave has pushed down yields on LGFVs’ debentures to below those of similarly rated corporate bonds, with the negative spread now just shy of the record reached in August 2016.”

March 4 – Bloomberg (Shuli Ren): “Investors trying to gauge how much appetite China has for stimulus should ignore official targets and look at local government bond issues instead… In reality, though, Beijing has found a new way to finance its spending, off the books and under the radar for outside observers. Special purpose bonds are the new fad. Just like debt issued by local-government financing vehicles, or LGFVs, these aren’t included in the balance sheets of municipal authorities… China tiptoed into these bonds in 2015, when Beijing was starting to phase out LGFVs… By the end of 2018, the country had amassed 7.4 trillion yuan ($1.1 trillion) of such bonds…”

March 7 – Reuters (Ben Blanchard): “China’s ruling Communist Party is ramping up calls for political loyalty in a year of sensitive anniversaries, warning against ‘erroneous thoughts’ as officials fall over themselves to pledge allegiance to President Xi Jinping and his philosophy. This year is marked by some delicate milestones: 30 years since the bloody crackdown on pro-democracy demonstrators in and around Tiananmen Square; 60 years since the Dalai Lama fled from Tibet into exile; and finally, on Oct. 1, 70 years since the founding of Communist China… ‘This year is the 70th anniversary of the founding of new China,’ Xi told legislators… ‘Maintaining sustained, healthy economic development and social stability is a mission that is extremely arduous.’”

Central Bank Watch:

March 5 – Bloomberg (Catherine Bosley): “The Bank for International Settlements cited recent volatility as another instance of the ‘extraordinarily tight’ relationship between policy makers and financial markets that it has questioned in the past. Economics chief Claudio Borio said the linkages in part explain the Federal Reserve’s decision to put interest-rate hikes on hold. He doesn’t criticize the decision, …but also says that as ‘central banks and financial markets dance locked in this embrace, it is sometimes hard to tell their steps apart.’ ‘Financial markets scrutinize central banks’ every word and deed, taking them as the cue for their ups and downs and seeking perennial comfort. Central banks, in turn, scrutinize financial markets to better understand what the future holds for the economy, as markets both reflect and influence activity -- a complex and delicate task.’”

March 7 – Financial Times (Martin Sandbu): “Here is one measure of the extraordinary period of monetary policy we live in: Thursday’s announcements by the European Central Bank mean Mario Draghi is now certain to complete his eight years as the bank’s president without ever having raised interest rates. He started his tenure by reversing the rises put in by his predecessor Jean-Claude Trichet. He will end it in November with rates remaining at their current record lows, which the ECB now promises to keep in place until the end of 2019 at the earliest. That is not the only dovish shift in Frankfurt. The ECB also reconfirmed it would keep constant the amount of financial securities it had acquired as part of its quantitative easing programme until well after interest rates begin to rise — which, given the interest rate announcement, amounts to a delay for when ‘quantitative tightening’ will finally start.”

March 5 – Reuters (Leika Kihara): “Bank of Japan board member Yutaka Harada said… the central bank would need to step up stimulus ‘without delay’ if risks to the economy threatened its efforts to hit its inflation target. But Harada, a vocal advocate of aggressive stimulus, warned it would be hard to affect public perceptions of future price moves with monetary policy alone.”

Brexit Watch:

March 6 – Reuters (Gabriela Baczynska): “Talks with Britain on amending its divorce deal with the European Union have made no headway and no swift solution is in sight, EU officials said…, a week before British lawmakers must vote on the plan to avoid a chaotic Brexit… ‘Things are not looking good,’ one diplomat said after EU negotiators briefed envoys on the previous evening’s talks... Another described the mood as ‘downbeat,’ although Brussels insiders were divided on whether May might yet accept an EU offer by next week — or risk an 11th-hour crisis at a summit on March 22.”

Europe Watch:

March 3 – Financial Times (Stephen Morris, David Crow and Olaf Storbeck): “On an uncharacteristically bright early February day in London, German finance minister Olaf Scholz and his deputy Jörg Kukies spent the afternoon holed up in a series of discreet meetings at their embassy… Amid the chandeliers, Teutonic tapestries and silver service… the duo quizzed a succession of investment bankers from the likes of Goldman Sachs and Bank of America on the issue consuming the German finance sector. Not the slowing economy. Not Brexit. But what can be done to revive Deutsche Bank? And could a merger with Commerzbank save them both? Since the financial crisis, the condition of the two 149-year-old Frankfurt-based lenders has become parlous.”

EM Watch:

March 5 – Financial Times (Colby Smith): “As if muddling through a humanitarian crisis and a sharpening political stand-off between authoritarian Nicolás Maduro and opposition leader Juan Guaidó weren’t bad enough, Venezuela will soon have to wade through what is said to be one of the messiest debt restructurings in history. What will make Venezuela’s forthcoming debt workout so difficult to resolve is not just the amount of IOUs sitting on its balance sheet, but the diversity of its creditor base. Like most metrics in Venezuela, these exact figures are difficult to come by. A new report by the Institute of International Finance (IIF) tries to address this… According to Sergei Lanau, the chief economist at IIF, Venezuela’s external debt has more than doubled in the last decade, from about $60bn in 2007 to roughly $160bn in 2018.”

March 4 – Reuters (Nevzat Devranoglu): “Turkey's economy shrank 2.7% in the fourth quarter, dragging full-year growth down to a below-forecast 2.55%, according to a Reuters poll…, and pulling the country towards recession after a currency crisis. The lira tumbled almost 30% against the dollar last year, driving annual inflation up to a 15-year peak of more than 25% in October.”

March 3 – Financial Times (Edward White): “South Korean manufacturing production slumped to its worst level in nearly four years in February…, in the latest sign of the downturn in global trade hitting economies across Asia. The Nikkei-Markit manufacturing purchasing managers’ index fell to 47.2 last month, from 48.3 in January…”

March 3 – Financial Times (Hudson Lockett): “A survey of Taiwan’s manufacturing sector has yielded the worst reading in three and a half years, with contraction sharpening as export orders tumbled at the fastest rate since November 2011 amid trade war and growth concerns. The Nikkei-Markit manufacturing purchasing managers’ index for Taiwan fell to 46.3 in February…”

March 4 – Reuters (Daina Beth Solomon, Dave Graham and David Alire Garcia): “Ratings agency Standard & Poor’s (S&P)… slashed the credit rating for Mexico’s national oil company Petroleos Mexicanos, or Pemex, piling more pressure on the government to tighten up the debt-laden oil firm’s finances. S&P followed the Pemex cut with lower credit outlooks for a range of major Mexican financial institutions and companies… The agency’s moves highlight overall concerns with the Mexican government’s debt load and spending plans… Mexican President Andres Manuel Lopez Obrador has in the past dismissed ratings agencies’ assessments, and he has repeatedly pledged to revive Pemex, which had financial debt of nearly $106 billion at the end of 2018.”

March 3 – Bloomberg (Michelle Jamrisko): “Seven of the top 10 most polluted cities in the world are in India, according to a new study showing South Asia’s battle with deteriorating air quality and the economic toll it’s expected to take worldwide. Gurugram, located southwest of India’s capital New Delhi, led all cities in pollution levels in 2018, even as its score improved from the previous year, according to data released by IQAir AirVisual and Greenpeace. Three other Indian cities joined Faisalabad, Pakistan, in the top five.”

Global Bubble Watch:

March 4 – CNBC (Michael Santoli): “As the 10th anniversary of the climactic March 2009 market bottom arrives this week, many observers are focusing on all the ways this period since the global financial crisis has been extraordinary. The worst economic shock in 75 years felled huge financial institutions, roiled international alliances and ushered in the most aggressive central bank stimulus efforts ever seen, with zero or negative interest rates and purchases of trillions in securities the norm worldwide. Yet perhaps more striking is how very typical this decade has been for stock market investors. Since the S&P 500 sank briefly to 666 on March 6, 2009, and reached its closing low of 676 three days later…”

March 8 – Reuters (Marc Jones): “A $10 billion wipeout over the last week has compounded the worst start to a year for equity flows since 2008, Bank of America Merrill Lynch strategists said… Citing data from flow-tracker EPFR, BAML’s analysts calculated that just over $60 billion has now been yanked out of equities this year. Almost $80 billion has been pulled from developed markets, while $18.5 billion has gone into emerging markets. They added that last week also saw the fourth-biggest inflow on record into ‘investment grade’ bonds at $9.5 billion and that ‘Europe = Japan’ - a reference to long-term anemic growth and low interest rates - was now the most consensus trade in the world by their calculations.”

March 5 – Reuters (Swati Pandey): “Australia’s top central banker sounded sanguine about a sharp slowdown in the country’s property market saying it was unlikely to derail momentum even as data showed the $1.3 trillion economy hit an airpocket last quarter. Domestic activity slowed sharply in the second half of last year…, with gross domestic product (GDP) rising 0.2% in the December quarter following a sub-par 0.3% in the previous three-month period. Annual GDP rose a below-trend 2.3%, the slowest pace since mid-2017…”

Fixed-Income Bubble Watch:

March 5 – Bloomberg (Thomas Beardsworth): “Swollen stocks of corporate debt in the riskiest investment-grade category leave markets vulnerable to a rout if economic weakness triggers bouts of rating downgrades, according to the Bank for International Settlements. Investment-grade bonds classed BBB by ratings firms – one step above junk status -- have proved popular with funds bound by their own rules to hold only low-risk securities. While central banks pursued cheap money policies in the years after the financial crisis, such bonds offered tempting yields while still falling into the low-risk category that made them eligible holdings. In 2018, BBB-rated bonds accounted for about 45% of U.S. and European mutual fund portfolios, up from 20 percent in 2010, according to the BIS.”

Leveraged Speculator Watch:

March 5 – Wall Street Journal (Gabriel T. Rubin): “The standard-setters for the derivatives industry plan to limit the use of a product sold to insure against corporate defaults, following disputes over whether some companies engineered a default to trigger payouts to investors. The proposal by the International Swaps and Derivatives Association is intended to block moves similar to one made between Blackstone Group and Hovnanian Enterprises Inc. Last year, Hovnanian moved to default on its debts to produce a payout to Blackstone’s GSO Capital Partners LP. Hovnanian was healthy enough to meet its payment obligations, prompting a campaign by regulators to get the parties to back down from the arrangement before it was completed.”

March 6 – Financial Times (Laurence Fletcher): “Hedge funds betting on big moves in global currency, bond and stock markets have not enjoyed the best of times of late. These so-called global macro funds are famous for swashbuckling bets such as George Soros’s $1bn profit wagering against the pound in 1992, or successful punts on US bond yields tumbling during the financial crisis. But the reality over much of the past decade has been far less thrilling. An index of mostly macro funds run by data group HFR, for instance, has lost money in two of the past six years, and in the remaining four its biggest gain has been just 5.2%. Funds such as Moore Capital, Graham Capital and H2O are among those that have suffered losses in recent years.”

March 5 – Bloomberg (Lu Wang and Melissa Karsh): “All year, evidence has built that professional money managers reformed their ways after last quarter’s equity rout. Hedge funds stepped back from the market. They put more faith in their stock-picking skills. In one regard, though, equity managers haven’t changed much. It’s their propensity to all own the same thing. That can be seen in a measure of crowdedness in the market that’s higher than it’s been in two years. Goldman Sachs assesses the trend by counting how many companies are among the 50 most-owned by hedge funds and mutual funds alike… Right now it’s 13, the most since early 2017.”

Geopolitical Watch:

March 7 – Financial Times (Rachel Sanderson and Davide Ghiglione): “Giovanni Tria, economy minister in Italy’s anti-establishment, Eurosceptic coalition, took to a stage in Rome before Christmas to praise China’s Belt and Road investment push. The Chinese initiative was creating ‘a circle of virtuous, satisfying and diffuse growth’, Mr Tria told an audience that included former prime ministers Romano Prodi and Enrico Letta, as well as ex-Chinese foreign ministry official Li Baodong. ‘The BRI is a train that Italy cannot afford to miss,’ Mr Tria said at the event, part of the influential Boao Forum.”