Credit Bubble Bulletin

We're rapidly Approaching the 10-year Anniversary of the 2008 financial crisis. Exactly one decade ago to the day (September 7, 2008), Fannie Mae and Freddie Mac were placed into government receivership. And for at least a decade, there has been nothing more than talk of reforming the government-sponsored-enterprises.

It's worth noting that total GSE (MBS and debt) Securities ended Q3 2008 at $8.070 TN, having about doubled from year 2000. The government agencies were integral to the mortgage finance Bubble - fundamental to liquidity excess, pricing distortions (finance and housing), general financial market misperceptions and the misallocation of resources. GSE Securities did contract post-crisis, reaching a low of $7.544 TN during Q1 2012. Since then, with crisis memories fading and new priorities appearing, GSE Securities expanded $1.341 TN to a record $8.874 TN. Of that growth, $970 billion has come during the past three years, as financial markets boomed and the economy gathered momentum. A lesson not learned.

Scores of lessons from the crisis went unheeded. The Financial Times' Gillian Tett was the star journalist from the mortgage finance Bubble period. I read with keen interest her piece this week, "Five Surprising Outcomes of the Financial Crisis - We Learnt the Dangers Posed by 'Too Big to Fail' Banks but Now They Are Even bigger."

Tett's article is worthy of extended excerpts: "What are these surprises? Start with the issue of debt. Ten years ago, investors and financial institutions re-learnt the hard way that excess leverage can be dangerous. So it seemed natural to think that debt would decline, as chastened lenders and borrowers ran scared. Not so. The American mortgage market did experience deleveraging. So did the bank and hedge fund sectors. But overall global debt has surged: last year it was 217% of gross domestic product, nearly 40 percentage points higher - not lower - than 2007."

A second surprise is the size of banks. The knock-on effects of the Lehman bankruptcy made clear the dangers posed by 'too big to fail' financial institutions with extreme concentrations of market power and risks. Unsurprisingly, there were calls to break them up. The big beasts are even bigger: at the last count America's top five banks controlled 47% of banking assets, compared with 44% in 2007, and the top 1% of mutual funds have 45% of assets."

A third counter-intuitive development is the relative power of American finance. In 2008, the crisis seemed to be a 'made in America' saga: US subprime mortgages and Wall Street financial engineering were at the root of the meltdown. So it seemed natural to presume that American finance might be subsequently humbled. Not so. American investment banks today eclipse their European rivals in almost every sense… and the financial centres of New York and Chicago continue to swell…"

Then there is the issue of non-bank financial companies. A decade ago, investors discovered the world of 'shadow banks', when they learnt that a vast hidden ecosystem of opaque investment vehicles posed systemic risks. Regulators pledged to clamp down. So did the shadow banks shrink? Not quite: a conservative definition of the shadow bank sector suggests that it is now $45tn in size, controlling 13% of the world's financial assets, up from $28tn in 2010. A regulatory clampdown on the banks has only pushed more activity to the shadows."

A fifth issue to ponder is the post-crisis retribution. Back when lenders were falling over by the dozens, it seemed natural to presume that some bankers would end up in jail. After all, there were hundreds of prosecutions after the US savings and loans scandals of the 1980s. But while banks have been hit with fines in the past decade, totalling more than $321bn, (almost) the only financiers who have done jail time are those who committed crimes that were not directly linked to the crisis, such as traders who rigged the Libor rate."

The FT's Martin Wolf weighed in with, "Why So Little Has Changed Since the Financial Crash." I greatly respect Gillian Tett's insight. Martin Wolf is exceptionally knowledgeable and an esteemed journalist, but I don't hold his perspective in the same high regard.

Wolf: "So what happened after the global financial crisis? Have politicians and policymakers tried to get us back to the past or go into a different future? The answer is clear: it is the former… After the crisis of 2008, they wanted to go back to a better version of the past in financial regulation. In both cases, all else was to stay the way it was."

Wolfe: "The financial crisis was a devastating failure of the free market that followed a period of rising inequality within many countries. Yet, contrary to what happened in the 1970s, policymakers have barely questioned the relative roles of government and markets."

I've never viewed the 2008 fiasco as a "failure of the free markets." It was instead an abject failure of policymaking - of government policy and central bank doctrine and methods. At its roots, the crisis was the inevitable consequence of unsound money and Credit - finance that over time became increasingly unstable specifically because of government intervention and manipulation. "Activist" central banks were manipulating the price of finance and the quantity and allocation of Credit, along with increasingly heavy-handed interventions to backstop dysfunctional markets.

The crisis was a predictable failure of inflationism. Sure, it's reasonable to blame the reckless behavior of Wall Street. But risk-taking, leveraging, speculation and chicanery were all incentivized by policy measures employed to inflate both asset prices and the general price level.

Instead of crisis focusing attention on the root causes of perilous financial and economic fragilities, it was a panicked backdrop conducive to only more egregious government and central bank intervention. Rather than exhaustive discussions of the roles played by "The Maestro's" "asymmetric" market-friendly policy approach, Bernanke's pledge of "helicopter money," and central bank "puts" in inflating the Bubble, Dr. Bernanke was the superhero figure with the smarts, determination and academic creed to reflate the securities markets for the good of all humanity. It was a grand illusion: Enlightened inflationism was viewed as the solution - and not the core problem that it was. And inflationists - including the FT's Martin Wolf - cheered on zero/negative rates, Trillions of QE and the resulting inflation of the greatest Bubble in human history.

It became common to compare 2008 to 1929, and we were darn lucky that chairman Bernanke had trained his entire academic career to ensure a different outcome. This comparison continued for some years, 2009 to 1930, 2011 to 1932, and so on. I never bought into this line of analysis. As it turns out, 2008 did not mark a major inflection point in finance, in policymaking or in economic structure. I would argue that the unprecedented reflation merely extended the cycle, with essentially the same policy doctrine, financial apparatus and market structure that ensured the previous crisis. Same cycle, but just a much more comprehensive Bubble, across markets and economies on a global scale - and on powerful steroids.

It's popular to blame the rise of populism on the financial crisis. I believe the issue is more about economic structure. It is interesting to note that back in 2006, at the height of the U.S. Credit expansion, manufacturing jobs actually contracted during the year. The financial backdrop ensured that it was much easier to generate profits lending money, in structured finance and speculating in the markets than it was producing goods in the U.S. Productive investment (and manufacturing employment) has bounced back somewhat in recent years. Yet post-crisis inflationism has only widened the gap between real economic investment and the easy returns available from asset inflation, securities trading and financial engineering.

It's very much a minority view. But I believe we'd be in a much better place today had we not reflated the previous Bubble. It was a mistake to aggressively promote securities market inflation, once again incentivizing financial speculation; once again favoring the Financial Sphere over the Real Economy Sphere. Such favoritism specifically favors segments of the economy and population over others. The ongoing financial incentive structure foments financial and economic instability (ensuring a more outlandish and protracted cycle of central bank inflationism).

Warren Buffett is known for his focus on ensuring the right incentives are in place. Few have benefitted more from central bank-created incentives and securities market favoritism - along with inflationism more generally. I would add that no investor's reputation has gained as much from crisis policymaking. If there is a paramount investment truth today, it's that we all must invest for the long-term like the great Warren Buffett. Buy and hold, never try to time the market - but simply invest in America for the long-term. It's a sure thing.

As part of 10-year crisis anniversary coverage, the Wall Street Journal interviewed Buffett. The title of the video was enticing: "Warren Buffett Explains the 2008 Financial Crisis.

Buffett: "In 2008, you had something close to a bubble in home real estate. Fifty million people had mortgages roughly at that time, out of 75 million homeowners. When that bubble burst, it hit home to probably 40% of the households in the country - these people that had mortgages on their houses. Fear spread in the month of September 2008 at a rate that was like a tsunami."

WSJ: Who do you hold responsible for that?

"Bubbles are always hard to ascertain the originators of it. There really aren't originators. Everybody got caught in. Some were foolish, some were crooked - some were both. But you had a mass illusion that it could go on forever. You had Wall Street firms participating. Mortgage originators participating. But you had the public participating. It was a lot of fun. It was like Cinderella going to the party. We were all going to turn and buy some pumpkins at midnight, but nobody wanted to leave until one minute to midnight. And the rush for the door couldn't be handled."

WSJ: For you, what were the lessons you learned in 2008?

"I didn't really learn any new lessons in 2008 or 2009. I had emphasized to me some of the things that I'd always believed. That you do need somebody who can say 'do whatever it takes.' The U.S. government had to do the right things - not perfect things - but generally the right things starting in September. And they did a fantastic job, actually, of getting the train back on the tracks. There was still damage for a long period thereafter. But it was really important to have fast action at that time. We were very fortunate we had the leaders we did. If we'd had people that would have waited for all the information to be right, or for committees to work - that sort of thing - it would have been far, far worse. People talk about a fog of war, but there's a fog of panic too. And during that panic you're getting inaccurate information, you're hearing rumors. If you wait until you know everything, it's too late."

…I can understand how people that lost their houses or lost their jobs - whatever may have happened to them - feel that there must be somebody out there that was profiting from this that did it doing some things that should send them to jail. The people that ran most of the institutions - the big institutions that got in trouble - probably shouldn't name names - they went away rich. They may have been disgraced to some degree, but they went away rich. So I don't think the incentive system has been improved a lot from what it was ten years ago."

WSJ: What could the next crisis look like?

"If I knew what the next crisis would look like, I might be a little helpful in stopping it. But there will be other crises. There's no way of knowing, when we're in a situation like we were in the fall of 2008, when or precisely how it will end. You know the United States will come back. The factories don't disappear. The farm land doesn't disappear. The skills of the people don't disappear. But you had a system which was going to put them in an idle position - or could do it - there's no way to know how far it was going to go.

"What's left from the crisis is pretty much memories. The tracks are still there. The train in still there. But we had a big interruption in 2008 and nine - and now the train has been running pretty darn well. We've shown that America can't be stopped."

I find Buffett's comments disappointing. For someone with his experience and intelligence, it seems there should be deeper insight regarding the forces behind such a major financial crisis. For me, it's reminiscent of the mindset at the market top in the late-twenties. And, of course, the factories, farms and human skills didn't disappear after the Great Crash. America wasn't stopped. But the financial apparatus that inflated to extraordinary excess during the boom came to a grinding halt, with momentous ramifications for economies, societies and geopolitics. In contrast to 2008, that crash and the resulting crisis in confidence - in the markets, in finance, in policymaking and in the real economy - concluded the cycle.

Hopefully the bullish consensus view is correct. But the current backdrop sure seems late cycle - "permanent plateau" - manic wishful thinking to me. This whole buy and hold and ignore risk delirium - the product of decades of "activist" central banks jamming too many "coins in the fuse box" - espoused by the great market oracle Warren Buffett - is a trap. It's been awhile since investors have experienced a protracted bear market. Central bankers have too quickly come to the markets' defense. The next crisis could prove much more difficult to manage. Long-term investors, convinced to hold tight, may find it's a long time before they see these securities prices again.

The way I see it, a lot of faith has been placed in enhanced bank supervision, larger bank capital buffers and the almighty power of "whatever it takes" central banking. But despite the propaganda, irresponsible bank lending was not the root cause of 2008 fragilities. It was dysfunctional financial markets, replete with mispricing, misperceptions, rank speculation, leverage and resource misallocation. It was a massive and unwieldy derivatives marketplace. It was the view that the securities and derivatives markets were too big to fail - that central banks could ensure uninterrupted liquid and robust markets.

And this is where critical lessons went unlearned and, as a consequence, where danger lurks today. From my vantage point, all the previous key forces fomenting latent fragilities are greater today than a decade ago. From a global perspective, unsound "money" and Credit back in 2008 appears pristine in comparison. And if you think populism, nationalism, socialism and mayhem are on the rise, just wait until this global Bubble bursts.

For the Week:

The S&P500 declined 1.0% (up 7.4% y-t-d), and the Dow slipped 0.2% (up 4.8%). The Utilities gained 1.1% (up 1.5%). The Banks dipped 0.3% (up 2.9%), and the Broker/Dealers fell 2.0% (up 2.5%). The Transports added 0.4% (up 6.9%). The S&P 400 Midcaps declined 0.9% (up 6.7%), and the small cap Russell 2000 fell 1.6% (up 11.6%). The Nasdaq100 dropped 2.9% (up 16.2%). The Semiconductors lost 2.9% (up 8.6%). The Biotechs fell 3.7% (up 21.7%). With bullion down $5, the HUI gold index sank 4.9% (down 29.2%).

Three-month Treasury bill rates ended the week at 2.09%. Two-year government yields jumped eight bps to 2.70% (up 82bps y-t-d). Five-year T-note yields rose eight bps to 2.82% (up 61bps). Ten-year Treasury yields gained eight bps to 2.94% (up 53bps). Long bond yields rose eight bps to 3.10% (up 36bps). Benchmark Fannie Mae MBS yields jumped nine bps to 3.71% (up 71bps).

Greek 10-year yields fell 10 bps to 4.27% (up 19bps y-t-d). Ten-year Portuguese yields dipped two bps to 1.90% (down 4bps). Italian 10-year yields dropped 20 bps to 3.04% (up 102bps). Spain's 10-year yields slipped a basis point to 1.46% (down 11bps). German bund yields rose six bps to 0.39% (down 4bps). French yields gained four bps to 0.72% (down 7bps). The French to German 10-year bond spread narrowed two to 33 bps. U.K. 10-year gilt yields increased three bps to 1.46% (up 27bps). U.K.'s FTSE equities index fell 2.1% (down 5.3%).

Japan's Nikkei 225 equities index declined 2.4% (down 2.0% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 7bps). France's CAC40 dropped 2.9% (down 1.1%). The German DAX equities index sank 3.3% (down 7.4%). Spain's IBEX 35 equities index fell 2.4% (down 8.7%). Italy's FTSE MIB index rallied 0.9% (down 6.4%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.3% (unchanged), while Mexico's Bolsa declined 1.2% (down 0.8%). South Korea's Kospi index fell 1.8% (down 7.5%). India’s Sensex equities index declined 0.7% (up 12.7%). China’s Shanghai Exchange dipped 0.8% (down 18.3%). Turkey's Borsa Istanbul National 100 index increased 0.6% (down 19.1%). Russia's MICEX equities index fell 1.0% (up 10.1%).

Investment-grade bond funds saw outflows of $297 million, and junk bond funds had outflows of $639 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 4.54% (up 76bps y-o-y). Fifteen-year rates increased two bps to 3.99% (up 91bps). Five-year hybrid ARM rates jumped eight bps to 3.93% (up 78bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.59% (up 58bps).

Federal Reserve Credit last week declined $16.4bn to $4.169 TN. Over the past year, Fed Credit contracted $228bn, or 5.2%. Fed Credit inflated $1.358 TN, or 48%, over the past 305 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $0.2bn last week to $3.429 TN. "Custody holdings" were up $84bn y-o-y, or 2.5%.

M2 (narrow) "money" supply surged $33.1bn last week to a record $14.248 TN. "Narrow money" gained $558bn, or 4.1%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits jumped $24.7bn, and Savings Deposits added $1.6bn. Small Time Deposits were little changed. Retail Money Funds gained $4.3bn.

Total money market fund assets jumped $17.3bn to $2.881 TN. Money Funds gained $159bn y-o-y, or 5.8%.

Total Commercial Paper added $1.6bn to $1.066 TN. CP gained $41bn y-o-y, or 4.0%.

Currency Watch:

The U.S. dollar index added 0.3% to 95.365 (up 3.5% y-t-d). For the week on the upside, the Swedish krona increased 1.3%. For the week on the downside, the South African rand declined 3.6%, the New Zealand dollar 1.3%, the Mexican peso 1.2%, the Australian dollar 1.1%, the Canadian dollar 0.9%, the South Korean won 0.9%, the Norwegian krone 0.8%, the Singapore dollar 0.5%, the euro 0.4%, the British pound 0.3%, and the Brazilian real 0.1%. The Chinese renminbi declined 0.18% versus the dollar this week (down 4.93% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 1.8% (up 4.2% y-t-d). Spot Gold slipped 0.4% to $1,196 (down 8.2%). Silver sank 2.7% to $14.17 (down 17%). Crude fell $2.05 to $67.75 (up 12%). Gasoline lost 1.4% (up 10%), and Natural Gas sank 4.8% (down 6%). Copper dropped 1.8% (down 21%). Wheat sank 6.3% (up 20%). Corn added 0.5% (up 5%).

Trump Administration Watch:

September 7 - Wall Street Journal (Vivian Salama): "President Trump said Friday that tariffs on another $267 billion in Chinese goods are ready to go and could be rolled out on short notice, reinforcing earlier threats and signaling no end in sight for the growing trade dispute. Speaking aboard Air Force One en route to Fargo, N.D., Mr. Trump said the tariffs would be in addition to the $200 billion in tariffs on Chinese goods the administration has been preparing, which he said will "take place very soon, depending on what happens." 'I hate to say this, but behind that there is another $267 billion ready to go on short notice if I want,' he added. 'That changes the equation.'"

September 2 - Bloomberg (John Micklethwait): "To the outside world, Donald Trump is in a bit of a bind. Prosecutors are creeping closer, with his own lawyer, Michael Cohen, cooperating. It looks like the Republican president will lose control of the House to Democrats in midterm elections, potentially unleashing an impeachment effort. He's still losing staff -- this week, the White House counsel. His legislative agenda is stalled. And businesses are terrified by the prospect of a trade war, especially with an ever-more-powerful China. Surely it is only a matter of time before he must retreat. The view of the man sitting behind the Resolute desk in the Oval Office could not be more different. The president of the United States awards himself an A-plus. He is presiding over an economic boom. The Robert Mueller investigation is 'illegal,' and impeachment isn't possible because they can't "impeach somebody that's doing a great job," he said… 'The level of love' at his rallies 'is just a beautiful thing to watch.'"

September 5 - CNBC (Sara Salinas): "U.S. Attorney General Jeff Sessions will meet with state attorneys general later this month to discuss concerns that tech companies 'may be hurting competition and intentionally stifling the free exchange of ideas on their platforms,' the Department of Justice said… The proposed meeting between the country's top prosecutor and state officials is the first major signal of potential antitrust action against Silicon Valley and follows recent claims by President Donald Trump of political bias and censorship by major social media firms. Last month, Trump said Facebook, Twitter and Google were 'treading on very, very troubled territory and they have to be careful.' He's also said the companies could be engaging in antitrust behaviors…"

September 1 - Reuters (Lesley Wroughton): "U.S. President Donald Trump said on Saturday there was no need to keep Canada in the North American Free Trade Agreement and warned Congress not to meddle with the trade negotiations or he would terminate the trilateral trade pact altogether. 'There is no political necessity to keep Canada in the new NAFTA deal. If we don't make a fair deal for the U.S. after decades of abuse, Canada will be out,' Trump said on Twitter."

September 6 - Bloomberg (Shawn Donnan and Jeff Kearns): "The numbers are not looking good for a president who has made reducing the U.S. trade deficit one of his main economic goals. Worse still, signs are emerging that President Donald Trump's trade wars are starting to hit economic growth, not just at home but around the world. New data… showed the U.S. trade deficit in July widening at its fastest rate since 2015 as monthly deficits with China and the European Union both hit new records. In the year so far, the U.S.'s overall goods and services deficit is up by $22 billion, or 7%, versus the same period last year."

Federal Reserve Watch:

September 6 - Reuters (Lindsay Dunsmuir): "The Federal Reserve will likely have to raise interest rates past the neutral rate to keep the economy on a sustainable growth path and inflation around target, according to Chicago Federal Reserve Bank President Charles Evans. 'Given the outlook today, I believe this will entail moving policy first toward a neutral setting and then likely a bit beyond neutral,' Evans said in a speech…"

U.S. Bubble Watch:

September 4 - CNBC (Hugh Son): "Sudden, severe stock sell-offs sparked by lightning-fast machines. Unprecedented actions by central banks to shore up asset prices. Social unrest not seen in the U.S. in half a century. That's how J.P. Morgan Chase's head quant, Marko Kolanovic, envisions the next financial crisis. The forces that have transformed markets in the last decade, namely the rise of computerized trading and passive investing, are setting up conditions for potentially violent moves once the current bull market ends, according to a report from Kolanovic… His note is part of a 168-page mega-report, written for the 10th anniversary of the 2008 financial crisis, with perspectives from 48 of the bank's analysts and economists."

September 4 - Reuters (Lucia Mutikani): "U.S. manufacturing activity accelerated to more than a 14-year high in August, boosted by a surge in new orders, but increasing bottlenecks in the supply chain because of a robust economy and import tariffs could restrain further growth… The ISM said its index of national factory activity jumped to 61.3 last month, the best reading since May 2004, from 58.1 in July."

September 6 - Reuters (Lucia Mutikani): "The number of Americans filing new claims for unemployment aid fell to near a 49-year low last week and private payrolls rose steadily in August, pointing to sustained labor market strength that should continue to underpin economic growth… This likely keeps the Federal Reserve on track to raise interest rates this month for the third time this year. 'The economy is in overdrive with jobless claims at lows not seen since the 1960s, and this gives the Fed the green light to raise interest rates later this month and take away some of the economy's punch,' said Chris Rupkey, chief economist at MUFG…"

September 6 - Reuters (Laila Kearney): "Some of the largest U.S. cities spent more on pension payments and other fixed costs in fiscal 2017 than the year before, and those expenses are likely to continue to weigh on budgets, according to an annual report released by S&P Global Ratings… On average, for the largest 15 cities in the country, public employee pensions, debt and other retirement benefits made up 26% of expenditures compared with 25% in fiscal 2016, S&P said…"

China Watch:

September 1 - Reuters (Andrew Galbraith): "A Chinese Communist Party journal said… that the country may experience near-term pain from trade friction with the United States, including a negative impact on financial stability, but China's stable growth trend would not change. A commentary in the ideological journal Qiushi, or Seeking Truth, warned that trade and economic friction between Washington and Beijing could undermine 'China's economic growth, financial stability, trade and investment, employment and people's livelihoods,' particularly in industries exposed to tariff action by the United States."

September 2 - CNBC (Huileng Tan): "A private manufacturing survey hit a 14-month low in August as the Caixin/Markit Purchasing Manager's Index (PMI) came in at 50.6 - the weakest since June 2017. Although output continued to expand, new orders rose at their slowest pace since May 2017… In particular, export sales fell for the fifth straight month. Overall confidence was low in August, 'with a number of panelists citing concerns over the impact of the ongoing China-U.S. trade war and relatively subdued market conditions,' added the release."

September 5 - Bloomberg: "A rapidly spreading African swine fever in pigs has become a risk for China's bond investors, who're worried that the disease will quicken inflation and deepen a note sell-off. That's adding to concerns of the supply deluge of municipal bonds that analysts expect may siphon funds away from the inter-bank bond market. Average yields on China's local top-rated corporate notes have climbed 39 bps in the last four weeks to 4.44%… 'Bond investors are quite sensitive to any inflation concerns,' said Wang Wenhuan, fixed-income analyst from Huachuang Securities Co. 'The sudden occurrence of the swine fever, together with flood and rising housing rentals in major cities will definitely curb sentiment on the bond market.'"

September 3 - Financial Times (Ben Bland): "Steve Madden is shifting handbag production to Cambodia, Vietnam is sucking up some production for Hoover-maker Techtronic Industries and Google's hardware maker Flex is seeking new production centres from Mexico to Malaysia. The escalating US-China trade war is pushing China-based manufacturers and their US clients to rethink the complex and extensive supply chains that bind the world's two biggest economies together. 'While China will remain an important part of our global manufacturing platform for the next decade, we have accelerated the ramp-up in other low-cost countries and the US,' said Joseph Galli, chief executive of Techtronic… 'The focus on Vietnam in the short term is offsetting the future tariff impact we might see in the US.'"

September 5 - Bloomberg: "The new hot thing for Chinese savers is about as old and boring as it gets. Bank deposits, shunned for years by the nation's return-hungry masses, are suddenly looking attractive again as higher-yielding investments prove riskier than many had anticipated. China's household deposits rose in July at the fastest annual rate in a year -- an influx that analysts say may accelerate after the nation's stock market sank at the quickest pace worldwide, hundreds of peer-to-peer lending platforms shuttered and companies defaulted on their debt at an unprecedented rate. 'People around me are all asking the same question: Where is the safe place to put our hard-earned savings?' said Anna Teng, a 30-year-old marketing manager in Shanghai who's been shifting her assets into deposits after losing about 20% on her equity investments since May and falling victim to a fraudulent P2P lending platform. 'The time that you could easily earn 10% without worrying about risk is gone,' Teng said. 'What I'm asking for now is to preserve the principal.'"

EM Watch:

September 4 - Reuters (Daina Beth Solomon and Hugh Bronstein): "Argentina's government said on Tuesday it hoped the International Monetary Fund would agree in the second half of September to a deal giving the country more financial support as it seeks to escape a deepening economic crisis. Economy Minister Nicolas Dujovne met IMF chief Christine Lagarde in Washington and both said they were working together to improve a $50 billion standby finance deal agreed with the IMF's executive board in June."

August 31 - Financial Times (Benedict Mander, Sam Fleming, Colby Smith and Robin Wigglesworth): "As Christine Lagarde sits down for talks with Argentina's finance minister on Tuesday, both sides will be painfully aware of what is at stake, not only for the country's crisis-stricken economy but for the International Monetary Fund itself. Memories of the Fund's involvement in Argentina in the lead-up to the 2001 economic collapse run bitter and deep in the country, making the current involvement of the IMF… hugely sensitive. Members of the opposition fantasise about President Mauricio Macri fleeing the presidential palace in a helicopter - just as the president did last time an IMF programme failed in Argentina before its 2001 crisis. Mr Macri knows his own political survival is on the line as the currency plummets and interest rates soar."

September 4 - Reuters (Ali Kucukgocmen and David Dolan): "Turkey's central bank signalled on Monday it would take action against 'significant risks' to price stability, a rare move to calm financial markets after inflation surged to its highest in nearly a decade and a half. The comments, seen as presaging an interest rate increase at the bank's next meeting on Sept. 13, underscore the volatile outlook for prices amid a currency crisis. The lira has lost 40% of its value against the dollar this year, driving up the cost of goods from potatoes to petrol and sparking alarm about the impact on the wider economy."

September 6 - Bloomberg (Colleen Goko): "South Africa's risk premium widened at a faster rate since the beginning of August than the emerging-market average, suggesting local risks are exacting an added cost amid a broad sell-off of developing-nation assets. The premium investors demand to hold South African debt rather than U.S. Treasuries… has climbed 63 bps since the beginning of August to 336, the highest level since November 2016… The emerging-market premium increased 43 bps in the same period. A cocktail of negative economic news, political risks and falling commodity prices accelerated a slide in South Africa's rand and bonds sparked by crises in Turkey and Argentina and escalating trade tensions between the U.S. and China."

September 5 - Reuters (Mfuneko Toyana): "A surprise economic recession has brought a sharp focus on South Africa's shrinking revenue and mounting debt pile and could intensify a bond sell-off at a time the assets are reeling from nervousness over Turkey's economic woes. Investors have dumped South African bonds since August as an emerging markets sell-off picked up pace driven by concerns over the Turkish central bank's ability to rein in double-digit inflation, which has surged to nearly 18%."

September 6 - Bloomberg (Anirban Nag): "India's rupee owes its tag of Asia's worst-performing currency this year to the selloff sweeping emerging markets. There's more pain in store from beyond its borders. While foreign currency debt has zoomed, various external vulnerability indicators paint a rather mixed picture, according to the Reserve Bank of India's annual report. Indeed, data due as early as next week will probably show the nation's current-account deficit widened in the June quarter to 2.6% of gross domestic product, the highest in 4 1/2 years."

September 4 - Financial Times (Michael Mackenzie): "Emerging markets are a diverse group based on their respective economic stories. But as investors look to cut their exposure to the asset class, EM stress is rising with the risk that current selling pressure intensifies and fuels a bigger slide across the sector. A good proxy of contagion is the relationship between EM currencies. FX correlations for EMs have risen sharply this year, but remain shy of the peak set in early 2016… EM government and corporate bond yields have risen sharply in recent months, but they currently sit below the highs of early 2016 when China sparked a global growth scare."

September 5 - Reuters (Ricardo Brito and Lisandra Paraguassu): "Brazil's federal police have recommended to prosecutors that President Michel Temer be charged with taking bribes and money laundering, according to a police document reviewed… by Reuters. The investigation involves 10 million reais ($2.41 million) in illicit funds Temer's Brazilian Democratic Party allegedly received from construction firm Odebrecht in 2014…"

September 1 - BBC: "Brazil's top electoral court has ruled that jailed former President Luiz Inácio Lula da Silva cannot run as a candidate in the presidential election because of his corruption conviction... Lula, 72, was leading in polls ahead of the vote despite serving a 12-year jail term for accepting a bribe. His legal team has said they will appeal against the court's decision."

Global Bubble Watch:

September 3 - Washington Post (David J. Lynch): "Ten years after the worst financial panic since the 1930s, growing debt burdens in key developing economies are fueling fears of a new crisis that could spread far beyond the disruption sweeping Turkey. The loss of investor confidence in the Turkish lira… is only a preview of debt problems that could engulf countries such as Brazil, South Africa, Russia and Indonesia, some economists say. 'Turkey is not the last one,' said Sebnem Kalemli-Ozcan, an economics professor at the University of Maryland. 'Turkey is the beginning.' For now, few experts think that a broader crisis is imminent, though Argentina this week asked the International Monetary Fund to accelerate a planned $50 billion rescue as the peso crashed to a historic low. But the danger of a financial contagion that could hit Americans by crushing U.S. exports and sending the stock market plunging should be taken more seriously in light of a massive increase in global debt since the 2008 downturn… Total debt is a whopping $169 trillion, up from $97 trillion on the eve of the Great Recession, according to the McKinsey Global Institute."

September 6 - Bloomberg (Alfred Liu): "New York has lost its crown as home to the most ultra-rich people, beaten out by the rising tide of extreme wealth in Asia. Hong Kong surpassed the Big Apple as the city with the highest population of people worth at least $30 million… The former British colony saw its number of ultra-wealthy increase 31% last year, to about 10,000, research firm Wealth-X found, higher than the nearly 9,000-strong population of the U.S.'s largest city. Tokyo came third, while Paris beat out London to take the European crown as Brexit weighed down the U.K. capital. The number of ultra-rich worldwide rose 13% last year, according to Wealth-X, totaling about 256,000 people with combined assets of $31.5 trillion. Asia saw the fastest growth, driven by mainland China and Hong Kong…"

September 6 - Bloomberg (Christopher Condon): "A decade after the global crisis with financial systems 'safer but not safe enough,' the regulatory pendulum has begun to swing back toward looser oversight, International Monetary Fund Managing Director Christine Lagarde warned. In a blog post…, Lagarde offered a short-list of concerns over lingering vulnerabilities in the global financial system. She said too many banks, especially in Europe, remain weak and require more capital, while the increased size and complexity of institutions means 'too-big-to-fail' remains a problem. 'Perhaps most worryingly of all, policy makers are facing substantial pressure from industry to roll back post-crisis regulations,' she wrote."

September 5 - Financial Times (Jamie Smyth): "Maggie Lu is one of thousands of borrowers hit by a credit squeeze, which has abruptly ended Australia's housing boom and poses a risk to one of the world's most successful economies. 'I got pre-approval for a mortgage last year but couldn't find a house we could afford before it lapsed,' said the mother of two… 'Prices are falling but now my bank will only agree a mortgage worth A$170,000 [US$120,000] less than the level agreed last year. So we are stuck.' Economists cite tighter credit and unaffordable prices as the reason for the biggest fall in Sydney property prices for nine years. New figures this week show Sydney prices have fallen 5.6% over the past year, while the national market fell 2%."

Central Bank Watch:

September 6 - Bloomberg (Kati Pohjanpalo and Piotr Skolimowski): "In the tussle between the euro zone's north and south, Erkki Liikanen may boast just the right credentials to become the next president of the European Central Bank. The former governor of Finland's central bank is the new frontrunner in a Bloomberg survey of economists on who'll succeed Mario Draghi in November 2019. His chief selling point, as the ECB prepares to unwind years of monetary stimulus, might be as a compromise candidate. The next president will need to balance the demands of nations such as Germany that want to end crisis-era stimulus as soon as possible, and those like Italy nervous that their economies will crippled by a lack of monetary support... 'Given the north-south antagonisms in the euro area, Liikanen could be a good choice for the position,' said Lauri Vaittinen, head of investment solutions at Mandatum Life… 'He hasn't taken extreme stances on any of the ECB's unconventional measures. He's a very good candidate.'"

Europe Watch:

September 5 - Financial Times (Miles Johnson and Mehreen Khan): "Since Italy's coalition government took power, its first budget plans have loomed as the likely trigger for a showdown between Rome and Brussels. The anti-establishment Five Star party and anti-migrant League campaigned on a platform of expensive policies such as a flat tax reform and a universal basic income, ambitions that seemed likely to collide with a European Commission deeply nervous about Italy's vast debt pile. Yet on Wednesday Matteo Salvini, leader of the anti-migrant League party and the man increasingly viewed as the dominant partner in the coalition, delivered arguably his most reassuring words about public spending since taking power."

September 4 - Reuters (Steve Scherer): "Party leaders in the Italian coalition government signaled they will seek leeway from the EU to increase next year's budget deficit, heading on a collision course with the European Commission and investors who want it cut. Following Fitch agency's decision to lower the outlook on Italy's debt rating on Friday, neither Matteo Salvini nor Luigi Di Maio - the heads of the League and 5-Star Movement respectively - backed away from promises to reduce taxes and boost welfare spending."

September 2 - Financial Times (Kate Allen): "Italy has less than three months to raise the bulk of its remaining annual financing needs - amounting to about €63bn in fresh debt - as its bond sales programme lags behind those of other big eurozone sovereigns. The nation, which has been hit by a series of sharp bond market sell-offs since late May, has secured less than three-quarters of its total planned 2018 debt sales to meet bond redemptions and its net increase in borrowing…"

September 2 - Financial Times (Wolfgang Münchau): "The meeting last week between Viktor Orban and Matteo Salvini was more than just the beginning of a beautiful friendship. The anti-immigration partnership formed by the Hungarian prime minister and Italy's interior minister is formidable because it could form the germ of a new coalition… The electoral arithmetic of the European Parliament makes it impossible for any one or even two party groups to form a majority. But if the nationalists do well in next year's election, they might end up in a position to forge an unofficial coalition. Mr Orban's Fidesz is a member of the European People's party, the largely pro-European centre-right group in the European Parliament. Mr Salvini's League is part of the Movement for a Europe of Nations and Freedom, which includes Marine Le Pen's renamed National Rally."

Fixed Income Bubble Watch:

September 5 - Bloomberg (Elizabeth Campbell): "Chicago bonds fell to the lowest since May after Mayor Rahm Emanuel unexpectedly announced… that he won't run for re-election next year, raising uncertainty for investors who praised the two-term incumbent's steps to stabilize the junk-rated city's finances. Taxable debt due in 2042… traded at an average of 89.8 cents on the dollar on Wednesday, the lowest since May and down from… 92 cents last week. That's pushed the yield up to 6.3%..."

Leveraged Speculation Watch:

September 2 - Bloomberg (Yakob Peterseil): "Battle-ready investors on the prowl to hedge a looming reversal in the global debt cycle are embracing weapons familiar to Mom and Pop -- and falling out of love with complex derivatives. For hedge funds and asset managers, the preferred way to shield credit risks is now the humble exchange-traded bond fund, according to a survey of 60 managers from Greenwich Associates… ETFs edged out credit-default swaps -- at the single-name and index level -- and were second only to corporate bonds themselves as a way for professionals to access fixed income. Institutional investors are rubbing shoulders alongside the retail crowd in what has swelled to become a $634 billion market in the U.S. alone."

September 6 - Bloomberg (Vincent Bielski and Saijel Kishan): "Millennium Management has shut down a quant hedge fund founded by two acclaimed physicists that suffered only one losing year since it began trading in the early 1990s. The closing of Prediction Company, which Millennium bought in 2013, came as a surprise to employees because the firm was profitable… The hedge fund was started by Doyne Farmer and Norm Packard, who were known for their seminal work in developing chaos theory, and managed about $4 billion at its peak. Izzy Englander's Millennium shuttered Prediction, a statistical arbitrage fund, at a time when that strategy is struggling to make money. Returns for the approach are down less than 1% so far this year…"

Geopolitical Watch:

September 6 - Bloomberg (Selcan Hacaoglu): "Syrian troops are preparing an offensive against the last remaining rebel bastion, an assault that could draw in the U.S., displace hundreds of thousands of civilians and cement President Bashar al-Assad's hold over the country after seven years of war. The attack on the northwest province of Idlib is expected soon. It comes after Assad's forces, backed by Russian and Iranian allies, retook the southern provinces of Suwaida and Daraa, the cradle of the 2011 revolt to topple him. With an estimated half a million people killed in the conflict, the president is now on the cusp of completing a remarkable rebound, after his fate seemed so uncertain just three years ago."

Friday Evening Links

[Reuters] Wall Street drops on tariff worries, with Apple in crosshairs

[BloombergQ] Trump Threatens Tariffs on Another $267 Billion of Chinese Imports

[Reuters] Trump ups ante on China, threatens duties on nearly all its imports

[Reuters] No more neutral rate? The shine comes off the Fed's r-star

[Reuters] Fed's Kaplan sees 2019 as decision time on rate hike path

[Reuters] Apple says U.S. tariffs on China would hit 'wide range' of products

[WSJ] Strong Economy Drove Wages Higher in August as Hiring Heats Up

[WSJ] Trump Says He’s Preparing Tariffs on Further $267 Billion in Chinese Imports

[FT] Emerging markets: Argentina creaks under extreme stress

Thursday, September 6, 2018

Friday's News Links

[Reuters] Wall Street opens lower as robust jobs raise rate hike fears

[Reuters] Yields rise as data shows higher wage pressures

[Reuters] U.S. job growth surges; annual wage growth largest since 2009

[BloombergQ] What Economists Are Saying Ahead of the August U.S. Jobs Report

[BloombergQ] Trump Says He Wants Shutdown Over Wall, But Not Before Election

[Reuters] Fed likely to need to hike rates 'a bit beyond neutral': Evans

[Reuters] Republicans could limit SALT impact in new tax legislation

[BloombergQ] Fannie-Freddie Plan Unveiled as House Takes Fresh Stab at Reform

[Reuters] Major Chinese paper warns Britain on trade talks after warship sail-by

[Reuters] Brazil presidential election plunged into chaos after front-runner stabbed

[WSJ] Chances Fade for U.S.-China Trade Deal

[WSJ] Fed’s Williams Says Yield Curve Not Deciding Factor in Setting Rates

[WSJ] How Banks Lost the Battle for Power on Wall Street

[FT] Corporate debt outflows surge

[FT] The next financial crisis won’t come from a ‘known unknown’

Thursday Evening Links

[BloombergQ] U.S. Technology Shares Drop, Treasuries Gain: Markets Wrap

[CNBC] House GOP's second phase of tax reform aims to make individual cuts permanent, boost retirement savings

[Reuters] U.S.-Canada trade talks restart, tackle 'final' issues

[FT, Tett] Five surprising outcomes of the 2008 financial crisis

[FT] Turkey’s currency crisis triggers a sense of déjà vu

Wednesday, September 5, 2018

Thursday's News Links

[Reuters] Tech weakness, trade jitters hit S&P, Nasdaq

[Reuters] Oil prices fall on emerging market woes, looming tariff deadline

[Reuters] Trump says not ready to make trade deal with China

[Reuters] China warns of retaliation if U.S. slaps new tariffs

[Reuters] As next round of U.S. tariffs on China looms, both sides dig in

[Reuters] U.S. jobless claims fall to near 49-year low

[BloombergQ] Lagarde Says World Finance Not Safe Enough 10 Years After Lehman

[BloombergQ] Powell Must Answer the Question Greenspan Raised 20 Years Ago

[BloombergQ] Things Are Not Going to Plan in Trump's U.S. Trade Deficit Wars

[Reuters] Spending on fixed costs rise for largest U.S. cities: S&P

[Reuters] Brazil police ask that President Temer face fresh corruption charges: document

[BloombergQ] Meet the ‘Edgy’ Man Who Could Replace Mario Draghi

[BloombergQ] Assad Readies Last Major Showdown Of Syria War

[NYT] What Jack Dorsey and Sheryl Sandberg Taught Congress and Vice Versa

[WSJ] Asian Junk Bonds Can’t Catch a Break

Wednesday Evening Links

[Reuters] Nasdaq slumps as Facebook, Twitter weigh on tech stocks

[Reuters] Bond sell-off to deepen as South Africa slips into recession

[Reuters] U.S. Congress grills Facebook, Twitter over foreign bids to tilt politics

[CNBC] Sessions getting serious about tech company crackdown, will meet with state attorneys general

[FT] Italy heads for budget showdown with EU

[FT] Australia’s property boom ends as credit squeeze begins

Tuesday, September 4, 2018

Wednesday's News Links

[Reuters] Emerging markets and equities reel as dollar flexes muscles

[Reuters] U.S. trade deficit rises to five-month high on declining exports

[Reuters] Canada to stick to guns at NAFTA talks despite Trump pressure

[CNBC] Weekly mortgage applications are stuck in a rut as rates rise

[Reuters] Crisis-hit Argentina hopes for improved IMF deal this month

[CNBC] JP Morgan's top quant warns next crisis to have flash crashes and social unrest not seen in 50 years

[BloombergQ] Emerging-Market Contagion Fears Rotate From Currencies to Stocks

[BloombergQ] Emerging-Market Contagion Fear Sparks Deepening Rout: Inside EM

[BloombergQ] Rupee Woes Set to Deepen as India Braces for External Headwinds

[WSJ] U.S., Canada Face Tough Issues as They Resume Nafta Talks

[FT] Emerging market sell-off spreads beyond Turkey and Argentina

[FT] A house, the subprime crisis and the rise of private equity

[FT] China’s policy choices crucial for global financial stability

Monday, September 3, 2018

Tuesday's News Links

[BloombergQ] Stocks Pare Drop on ISM Data; EM Assets Wobble: Markets Wrap

[Reuters] Emerging market woes mount as dollar hits the boosters

[Reuters] Dollar rises across the board as trade tensions support

[Reuters] Treasuries -Yields rise as investors prepare for corporate debt supply

[Reuters] U.S. factory activity races to 14-year high in August

[BloombergQ] Judgment Day Awaits For Plan To Avert Argentine Economic Crisis

[CNBC] The emerging market crisis is back. And this time it's serious

[BloombergQ] Chinese Bonds Feel the Chill as Deadly Swine Fever Spreads

[WashingtonPost/SN] Global debt soars, along with fears of crisis ahead

[NYT] The Next Financial Crisis Lurks Underground

[WSJ] Economy Gives Fed No Reason for Pause

[FT] Emerging markets under stress as FX correlations rise sharply

Sunday, September 2, 2018

Monday's News Links

[Reuters] World stocks slip for third day as trade, emerging market worries bite

[Reuters] Dollar edges higher on escalating global trade tensions

[Reuters] Turkey's central bank promises action after inflation surges to 18 pct

[Reuters] Factories feeling the pinch from escalating trade conflict

[CNBC] Another weak data point shows China's economy is 'now facing relatively obvious downward pressure'

[Reuters] China August manufacturing growth slows to 14-month low: Caixin PMI

[Reuters] Italy on collision course with EU over deficit

[Reuters] Global stocks still hooked on buybacks; trade war snaring more bulls: Reuters poll

[BloombergQ] Turkey Missed Its Chance to Stop This Emergency

[BloombergQ] Local Risks Worsen South Africa's Pain Amid Emerging-Market Rout

[CNBC] Global trade tensions are likely to get even worse after the US midterms, expert says

[BloombergQ] Australia House Prices Fall for 11th Month as Downturn Deepens

[WSJ] Stocks’ Return to Records Paves Way for Volatile Autumn

[WSJ] Companies Ramp Up Worker-Retraining Efforts

[FT] Sino-US trade war prompts rethink on supply chains

[FT] Argentine currency crisis spreads to politics

Sunday's News Links

[Reuters] Trump says Canada not needed in NAFTA deal, warns Congress not to interfere

[Reuters] May stands firm on her Brexit plan, but scepticism persists

[WSJ] Trump Says ‘Canada Will Be Out’ Without ‘Fair Deal’ on Nafta

[FT] Bond market faces Italian debt supply test

[FT] Europe’s nationalists are on the march

Saturday, September 1, 2018

Saturday's News Links

[CNBC] September is always a tough month for stocks but this year there are even more hazards

[Reuters] China Party journal warns of trade war's impact on financial stability

[BloombergQ] Trump Doubles Down on Donald Trump: John Micklethwait

[BBC] Lula: Brazil's jailed ex-leader barred from presidential race by electoral court

[WSJ] U.S., Canada Pass Friday Deadline With No Nafta Deal

[FT] IMF wrestles with history in tackling Argentine peso crisis

[FT] Have we seen a peak in passive investing for the US?

Friday, August 31, 2018

Weekly Commentary: Unassailable

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For the Week:

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

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

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

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

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

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

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

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

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

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

Currency Watch:

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

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

Commodities Watch:

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

Trump Administration Watch:

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

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

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

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

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

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

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

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

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

Federal Reserve Watch:

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

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

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

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

U.S. Bubble Watch:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

China Watch:

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

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

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

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

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

EM Watch:

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

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

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

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

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

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

Global Bubble Watch:

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

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

Central Bank Watch:

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

Europe Watch:

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

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

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

Japan Watch:

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

Fixed Income Bubble Watch:

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

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

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

Leveraged Speculation Watch:

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

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

Geopolitical Watch:

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

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

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

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