[Reuters] Wall St. Week Ahead: May be time for growth to run out of gas
[AP] US and China extend trade talks; Xi-Trump meeting may follow
[Reuters] Fed's policy pause sets stage for broad overhaul
[CNBC] Warren Buffett wants to make an 'elephant-sized' purchase, but says 'prices are sky-high'
[Reuters] Chancellor: A 300-year lesson in bubble inflation
[Reuters] Global Sovereign Debt to Jump to $50 Trillion - S&P Global
[Bloomberg] A Surprise China Debt Default Upends Assumptions on Official Aid
Saturday, February 23, 2019
Friday, February 22, 2019
Weekly Commentary: Dudley on Debt and MMT
December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”
There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”
And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy. John Williams, the New York Fed president, said on Friday that persistently soft inflation readings over recent years could damage the Fed’s ability to convince the general public it will hit its 2% goal. Central banks in other major economies are likely to face similar problems, he warned… Persistent shortfalls relative to the Fed’s 2% target have already helped prompt officials to shelve plans for further rate rises. But they are also thinking more broadly about the US central bank’s inflation mandate… Officials are debating new approaches which could sometimes lead them to deliberately aim for above-target inflation. Richard Clarida, the Fed’s vice-chairman, said on Friday the central bank will be open-minded about these new ideas…”
Markets are raging and crazy talk is proliferating – and it’s already time to commence another momentous election cycle. Bill Dudley must have felt compelled to opine:
“People from across the political spectrum are challenging a bit of long-held conventional wisdom: that if the U.S. government runs big, sustained budget deficits, its mounting debts will eventually cause grievous harm to the economy. They have a point — but it is important not to push that point too far. The arguments come in different forms. Some mainstream economists — such as Olivier Blanchard, former chief economist at the International Monetary Fund –- note that sovereign debt is more manageable in a world where economic growth exceeds governments’ very low borrowing costs. On the more extreme end, proponents of Modern Monetary Theory argue that because the U.S. borrows in its own currency, it can always just print more dollars to cover its obligations.” Bill Dudley, former President of the New York Federal Reserve Bank, Bloomberg Opinion, February 19, 2019
Mr. Dudley surely appreciates the precarious state of things. “Deficits don’t matter.” Rebuild infrastructure; universal healthcare; universal basic income; reverse climate change; free college tuition; strong military; and low taxes. Where’s all the money to come from? Borrow a ton of it for sure. And, depending on your political affiliation, soak the rich.
Dudley: “Turning first to Blanchard, I agree that deficit spending looks less problematic than in the past. The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate. This is easier to do now because the long-run nominal growth rate (around 3.5-4.0%) is well above the U.S. government’s borrowing cost (around 2.5%). So the government has some leeway: The debt can grow at nearly 4% per year, or 1.0% to 1.5% net of interest expense, without increasing the debt-to-GDP ratio. The low level of interest rates might help explain why markets have proven more tolerant of large, persistent budget deficits around the world, with Japan the most notable example.”
Could it be that markets are “more tolerant of large, persistent deficits around the world” specifically because of historic and far-reaching changes in central bank doctrine and policies? A decade ago, no one contemplated central banks purchasing more than $16 TN of government debt securities. Only a nutcase would have pondered ten years of near zero – or even negative – interest rates (and $10 TN of negative-yielding bonds). “Whatever it takes” central banking? Crazy talk.
These days, markets believe that central banks will be willing and able to purchase unlimited quantities of government bonds to ensure that yields remain low and markets highly liquid. No crisis necessary. Indeed, markets have been convinced without a doubt that central bankers will do whatever it takes to ensure no crises, bear markets or recessions.
The reality is that global central banks have fundamentally inflated the price of government debt, while systematically altering market risk perceptions. And, yes, it has made deficit spending appear much less problematic. As illustrated most starkly in Japan, on an ongoing basis governments issue enormous quantities of debt instruments without markets demanding one iota of risk premium. Heck, the bigger the deficit (and heightened systemic risk) the lower risk premiums. It’s all astonishing, entertaining - and has turned almost comical. But it has seriously become the greatest market distortion in history – today viewed as “business as usual.” And, importantly, with “risk free” sovereign debt the foundation of global finance, distortions in prices and risk perceptions encompass securities markets (and asset markets more generally) around the globe.
“The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate.” Okay, except that for a decade now debt has been expanding more rapidly than GDP - for what is now among the longest expansions on record. And I strongly caution against extrapolating 3.5-4.0% economic growth into the future. A scenario of 5% to 7% debt growth, with zero to 2% real GDP expansion, is not only not unreasonable, it’s realistic. And let’s not disregard demographics and the projected surge in entitlement spending. Truth be told, we’re now a mere garden-variety bear market and recession away from Fiscal Armageddon. At some point, markets may even place a risk premium on Treasury debt. Interest payments on federal borrowings are projected at $364 billion in fiscal 2019. Factoring only a small increase in market yields, debt service is projected to more than double by 2018. In the event of a deep recession and another round of bailouts, annual deficits approaching $2.0 TN are not crazy talk.
Dudley: “How and when the government spends the money also matters. Infrastructure investment, for example, can actually pay for itself by boosting the economy’s productive capacity. This is particularly relevant in the U.S., where dilapidated roads, ports and other public works desperately need an upgrade. (Imagine the benefits of a second rail tunnel between New York City and New Jersey.) Deficit spending in recessions can also be self-funding, because it engages unused resources — for example, by employing people whose abilities and skills would otherwise be wasted.”
The past decade has seen an incredible expansion of federal debt. To come out of such a period with “dilapidated roads, ports and other public works” does not instill confidence that funds have been – or ever will be – spent wisely.
Dudley: “Yet Modern Monetary Theory goes one big step further. It suggests that a government like the U.S. needn’t worry about debt at all. As long as it borrows in its own currency, there is no risk of default or bankruptcy. It can spend as much as it wants on any projects, such as education and health care, and just create additional IOUs to cover the cost.”
Like Dudley, I have few kind words for Modern Monetary Theory (MMT). I basically liken it to crackpot theories that have haunted monetary stability throughout history. Every great monetary inflation is replete with deeply flawed notions, justifications and rationalizations. But that MMT seems even remotely reasonable these days is owed directly to “activist” central banking - and the perception that central bank rate manipulation and the unlimited purchase of securities ensure forever low market yields and endless demand for government obligations.
It’s now been almost a decade since I began warning of the incipient “global government finance Bubble.” In true Epic Bubble form, after a decade of unprecedented expansion of government and central bank Credit, there’s a deeply embedded market perception that basically no amount of supply will impact the price of so-called “risk free” debt. And it’s precisely this perilous delusion that ensures an eventual crisis of confidence.
Today’s crackpot theories hold that central banks can continue to suppress interest rates and stimulate financial markets so long as consumer price inflation remains muted. It’s the old “money” as a “medium of exchange” focus that has led to scores of fantastic booms followed certainly by devastating collapses. The infamous monetary theorist John Law and his experiment in paper money were celebrated in France – that is until the spectacular 1720 collapse of his scheme and the attendant Mississippi Bubble. It literally took generations for trust in banking to return. Contemporary central banking is both the architect and enabler of crackpot theories. The celebration, today seemingly everlasting, will prove tragically transitory.
“Money” as a “Store of Value.” It is delusional to believe that endless issuance of non-productive Credit will not at some point significantly impact the value of these instruments. And the more central bankers manipulate the debt markets, the greater the issuance. Arguably, one of the greatest costs associated with the ongoing experiment in “activist” monetary management is the bevy of market distortions that promote the rapid expansion of government and other non-productive debt.
Moreover, central banks injecting “money” directly into – and furthermore supporting – securities markets is an allocation of Credit predominantly benefitting the wealthy. Sure, there’s some “trickle down.” The unemployment rate is historically low and jobs are more plentiful. By now, however, it should be abundantly clear that employment gains do not abrogate a system that has evolved to distribute wealth so inequitably – or the perception that the system is rigged for the benefit of the wealthy.
Even with gainful employment, many see the system as hopelessly unfair. The Fed can now feign trepidation for CPI missing its 2% inflation objective. Yet tens of millions struggle making ends meet against constantly inflating costs (including housing, healthcare and tuition). We’re now clearly on a trajectory for risking a crisis of confidence in financial assets and our institutions more generally.
Dudley: “Alas, there is no free lunch. For one, the economy might not have enough resources — in the form of workers and industrial capacity — to meet the combined demand from the government and the private sector. The result would be inflation, as too much money chased too few goods and services.”
That it has the appearance of a “free lunch” is at the heart of the quandary. And it’s not that “the result would be inflation.” Indeed, the result is and has been inflation, just not the typical variety. The prevailing source of monetary inflation is central banks injecting new “money” into the securities markets, while essentially promising liquid and levitated markets. The upshot is too much “money” chasing financial market returns. Monetary Disorder. Booms and Busts. Unmanageable Speculation. Intractable Resources Misallocation. Economic Maladjustment and Global Imbalances
The dilemma today - as it’s been with great inflationary episodes throughout history – is that inflation becomes deeply ingrained and halting it too painful. Policymakers refuse to accept mistakes and change directions. Instead, there is denial and the irresistibility of rationalization and justification. Throughout the devastating Weimar hyperinflation, Germany’s central bank refused to accept that they were the party of primary responsibility – but instead rationalized the bank was being forced to respond to outside forces. Today’s great global inflation is characterized by contrasting dynamics, but some of the devastating consequences of failing to recognize the essence of the problem are all too similar. Markets. Social. Political. Economic. Geopolitical.
For the Week:
The S&P500 rose 0.6% (up 11.4% y-t-d), and the Dow added 0.6% (up 11.6%). The Utilities jumped 2.8% (up 8.3%). The Banks increased 0.6% (up 16.6%), and the Broker/Dealers rose 1.4% (up 13.7%). The Transports added 0.2% (up 15.5%). The S&P 400 Midcaps gained 1.0% (up 16.3%), and the small cap Russell 2000 jumped 1.3% (up 17.9%). The Nasdaq100 increased 0.5% (up 12.0%). The Semiconductors advanced 1.0% (up 18.1%). The Biotechs declined 1.4% (up 16.8%). With bullion adding $7, the HUI gold index surged 3.9% (up 8.6%).
Three-month Treasury bill rates ended the week at 2.40%. Two-year government yields declined two bps to 2.50% (up 1bp y-t-d). Five-year T-note yields slipped two bps to 2.47% (down 4bps). Ten-year Treasury yields dipped a basis point to 2.65% (down 3bps). Long bond yields increased two bps to 3.01% (unchanged). Benchmark Fannie Mae MBS yields fell four bps to 3.40% (down 9bps).
Greek 10-year yields slipped a basis point to 3.80% (down 55bps y-t-d). Ten-year Portuguese yields fell eight bps to 1.49% (down 23bps). Italian 10-year yields gained five bps to 2.85% (up 11bps). Spain's 10-year yields dropped six bps to 1.18% (down 24bps). German bund yields were little changed at 0.10% (down 14bps). French yields declined two bps to 0.52% (down 19bps). The French to German 10-year bond spread narrowed two to 42 bps. U.K. 10-year gilt yields were unchanged at 1.16% (down 12bps). U.K.'s FTSE equities index declined 0.8% (up 6.7% y-t-d).
Japan's Nikkei 225 equities index jumped 2.5% (up 7.0% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.04% (down 4bps y-t-d). France's CAC40 gained 1.2% (up 10.3%). The German DAX equities index rose 1.4% (up 8.5%). Spain's IBEX 35 equities index increased 0.9% (up 7.8%). Italy's FTSE MIB index added 0.2% (up 10.6%). EM equities were higher. Brazil's Bovespa index added 0.4% (up 11.4%), and Mexico's Bolsa jumped 1.7% (up 5.0%). South Korea's Kospi index gained 1.6% (up 9.3%). India's Sensex equities index added 0.2% (down 0.5%). China's Shanghai Exchange surged 4.5% (up 12.4%). Turkey's Borsa Istanbul National 100 index increased 0.5% (up 13.1%). Russia's MICEX equities index was little changed (up 5.5%).
Investment-grade bond funds saw inflows of $1.953 billion, and junk bond funds posted inflows of $284 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined two bps to a one-year low 4.35% (down 5bps y-o-y). Fifteen-year rates fell three bps to 3.78% (down 7bps). Five-year hybrid ARM rates dropped four bps to 3.84% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.35% (down 1bps).
Federal Reserve Credit last week dropped $36.5bn to $3.952 TN. Over the past year, Fed Credit contracted $417bn, or 9.5%. Fed Credit inflated $1.141 TN, or 41%, over the past 328 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.1bn last week to $3.432 TN. "Custody holdings" increased $19bn y-o-y, or 0.6%.
M2 (narrow) "money" supply added $6.7bn last week to a record $14.488 TN. "Narrow money" gained $640bn, or 4.6%, over the past year. For the week, Currency was little changed. Total Checkable Deposits fell $27.9bn, while Savings Deposits jumped $32.9bn. Small Time Deposits increased $2.2bn. Retail Money Funds were about unchanged.
Total money market fund assets declined $7.9bn to $3.072 TN. Money Funds gained $228bn y-o-y, or 8.0%.
Total Commercial Paper was little changed at $1.061 TN. CP declined $34bn y-o-y, or 3.1%.
Currency Watch:
The U.S. dollar index declined 0.4% to 96.507 (up 0.3% y-t-d). For the week on the upside, the British pound increased 1.3%, the Canadian dollar 0.8%, the South African rand 0.6%, the Mexican peso 0.6%, the Swiss franc 0.5%, the Singapore dollar 0.4%, the euro 0.4%, the South Korean won 0.3%, and the Norwegian krone 0.3%. For the week on the downside, the Brazilian real declined 1.2%, the Swedish krona 0.7%, the New Zealand dollar 0.3%, the Japanese yen 0.2% and the Australian dollar 0.2%. The Offshore Chinese renminbi gained 0.89% versus the dollar this week (up 2.45% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.4% (up 14.7% y-t-d). Spot Gold added 0.5% to $1,328 (up 3.6%). Silver jumped 1.7% to $16.012 (up 3.0%). Crude rose another $1.67 to $57.26 (up 26%). Gasoline gained 2.4% (up 24%), and Natural Gas rose 3.5% (down 8%). Copper surged 5.3% (up 12%). Wheat fell 3.0% (down 2%). Corn increased 0.5% (up 3%).
Market Dislocation Watch:
February 18 – Wall Street Journal (Daniel Kruger): “Investors around the globe are effectively paying governments to hold more than $11 trillion of their bonds, a fresh sign of ebbing economic confidence in Europe and Japan. Negative-yielding government bonds outstanding through mid-January have risen 21% since October, reversing a steady decline that took place over the course of 2017 and much of last year, according to… Bank of America Merrill Lynch. While the stock of negative-yielding debt still remains below its 2016 high, the proliferation of these bonds… underscores the uncertainty over the growth prospects in much of the developed world. ‘Europe is an absolute quagmire,’ said Matt Freund, co-chief investment officer at Calamos Investments. ‘There are significant headwinds that we’ve been talking about for a long time—now they’re showing up in the numbers.’”
Trump Administration Watch:
February 18 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump said… that trade talks with China were going well and suggested he was open to pushing off the deadline to complete negotiations, saying March 1 was not a ‘magical’ date. Tariffs on $200 billion worth of Chinese imports are scheduled to rise to 25% from 10% by March 1 if the world’s two largest economies do not settle their trade dispute, but Trump has suggested several times that he would be open to postponing the deadline. ‘They are very complex talks. They’re going very well,’ Trump told reporters... ‘I can’t tell you exactly about timing, but the date is not a magical date. A lot of things can happen.’”
February 19 – Bloomberg (Michael Schuman): “Optimism that the U.S. and China can reach a trade deal is rising, with another round of intensive negotiations in Washington this week. What buoyant investors are ignoring, however, is that the talks have become a test of strength between the world’s two great powers -- or, more accurately, a test of how accurate each nation’s sense of its own strength is. The inconvenient fact is that neither country possesses the power to impose its will on the other. The U.S. is not on its own capable of compelling Chinese leaders to do its bidding, nor is China strong enough to shun the Western world. Until they face up to that reality, they’ll never be able to reach a lasting accommodation.”
February 18 – Reuters (Steve Holland): “U.S. President Donald Trump… warned members of Venezuela’s military who remain loyal to socialist President Nicolas Maduro that they are risking their future and their lives and urged them to allow humanitarian aid into the country. Speaking to a cheering crowd mostly of Venezuelan and Cuban immigrants in Miami, Trump said if the Venezuelan military continues supporting Maduro, ‘you will find no safe harbor, no easy exit and no way out. You’ll lose everything.’”
February 18 – Reuters: “U.S. President Donald Trump has promised European Commission President Jean-Claude Juncker that he will not impose additional import tariffs on European cars for the time being, Juncker was quoted… as saying… A confidential U.S. Commerce Department report sent to Trump over the weekend is widely expected to clear the way for him to threaten tariffs of up to 25% on imported autos and auto parts by designating the imports a national security threat. ‘Trump gave me his word that there won't be any car tariffs for the time being. I view this commitment as something you can rely on,’ Juncker told the German daily Stuttgarter Zeitung…”
Federal Reserve Watch:
February 20 – Reuters (Ann Saphir, Jason Lange and Trevor Hunnicutt): “The Federal Reserve… signaled they will soon lay out a plan to stop letting go of $4 trillion in bonds and other assets, but policymakers are still debating how long their newly adopted ‘patient’ stance on U.S. rates policy will last. For now, policymakers see little risk to leaving interest rates alone while they take time to assess rising risks, including a global slowdown, according to the Fed’s minutes from their Jan. 29-30 meeting…”
February 20 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve officials widely favored ending the runoff of the central bank’s balance sheet this year while expressing uncertainty over whether they would raise interest rates again in 2019, minutes of their January meeting showed. ‘Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year,’ according to the record of the Federal Open Market Committee’s Jan. 29-30 gathering…”
February 19 – Reuters (Howard Schneider, Jonathan Spicer, Trevor Hunnicutt): “New York Fed President John Williams… said he was comfortable with the level U.S. interest rates are at now and that he sees no need to raise them again unless economic growth or inflation shifts to an unexpectedly higher gear… ‘I don’t think that it would take a big change, but it would be a different outlook either for growth or inflation’ to return to hiking rates, Williams… a key voice on rate policy, told Reuters.”
February 19 – Reuters (Jason Lange): “The U.S. Federal Reserve may need to raise interest rates in 2019 but it could still end its efforts to trim its massive bond portfolio before the end of the year, Cleveland Federal Reserve President Loretta Mester said… Mester’s comments are an example of the complexity of the U.S. central bank’s efforts to establish new norms for setting monetary policy at a time when the economic outlook appears increasingly uncertain… ‘I would think that we probably have to raise interest rates a little bit later this year,’ Mester told reporters…”
February 21 – CNBC (Jeff Cox): “The Federal Reserve is likely near the end of interest rate increases and the program to reduce the bonds it holds on its balance sheet, St. Louis Fed President James Bullard said… ‘I think the message from my point of view is the normalization process in the United States is coming to an end,’ the central bank official told CNBC... Bullard added that he thinks rates are actually too high now but acknowledged that his view is in the minority on the policymaking Federal Open Market Committee.”
U.S. Bubble Watch:
February 21 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods unexpectedly fell in December amid declining demand for machinery and primary metals, pointing to a further slowdown in business spending on equipment that could crimp economic growth. The moderation in business investment was also underscored by another report… showing a measure of factory activity in the mid-Atlantic region contracted in February for the first time since May 2016… Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.7%. Data for November was revised down to show these so-called core capital goods orders falling 1.0%...”
February 21 – Bloomberg (Jeff Kearns and Katia Dmitrieva): “Sales of previously owned U.S. homes fell to the weakest pace since November 2015, indicating that the housing market remained in a slowdown despite a drop in mortgage rates. Contract closings decreased 1.2% in January from the prior month to an annual rate of 4.94 million…, below economists’ estimates for 5 million. The median sales price rose 2.8% from a year ago, the smallest increase since February 2012, while the inventory of available homes saw a sixth straight increase.”
February 19 – Financial Times (John Plender): “We know that changes in the household sector balance sheet, particularly in relation to the balance between savings and consumption, matter greatly for the real economy. That said, what is unusual at present is that the exposure of US household balance sheets to the stock market is running at record levels. This is an under-acknowledged part of the explanation for the recent weakening of economic data and especially the spectacular decline in retail sales. As TS Lombard, a research firm, points out, share prices are not the only determinant of spending but they count more than they used to because equities make up a bigger percentage of household net worth than real estate for only the third time since the end of the second world war. An important difference in the current cycle compared with the previous two occasions is that so much of the increase in ownership reflects net purchases as opposed to simply being the passive result of a valuation uplift in a strong bull market.”
February 19 – MarketWatch (Andrea Riquier): “The National Association of Home Builders’ monthly confidence index jumped 4 points to a seasonally adjusted reading of 62 in February… The February gain was the second in a row and put the sentiment index, which some economists view as an early read on the pace of residential construction, back to its mid-autumn level. It easily beat the Econoday consensus forecast of a one-point increase.”
February 16 – Bloomberg (Alexandre Tanzi): “Student-loan delinquencies surged last year, hitting consecutive records of $166.3 billion in the third quarter and $166.4 billion in the fourth. Bloomberg calculated the dollar amounts from the Federal Reserve Bank of New York’s quarterly household-debt report… That percentage has remained around 11% since mid-2012, but the total increased to a record $1.46 trillion by December 2018, and unpaid student debt also rose to the highest ever.”
February 18 – Reuters (Ishita Chigilli Palli): “U.S. discount retailer Payless ShoeSource Inc on Monday filed for voluntary Chapter 11 bankruptcy protection for the second time, along with its North American subsidiaries, and said it would wind down all North American stores by the end of May. The retailer will close about 2,500 stores in North America starting from the end of March and wind down its e-commerce operations.”
China Watch:
February 18 – Associated Press (Joe McDonald): “China’s government… accused the United States of trying to block its industrial development after Vice President Mike Pence said Chinese equipment poses a threat to countries that are rolling out next-generation mobile communications… The U.S. government is trying to ‘fabricate an excuse for suppressing the legitimate development’ of Chinese enterprises, said a foreign ministry spokesman, Geng Shuang. He accused the United States of using ‘political means’ to interfere in economic activity, ‘which is hypocritical, immoral and unfair bullying.’”
February 20 – Reuters (Ben Blanchard): “The United States should respect China’s right to develop and become prosperous, the Chinese government’s top diplomat told a visiting U.S. delegation, reiterating that the country’s doors to the outside world would open wider… ‘Just like the United States, China also has the right to development, and the Chinese people also have the right to have a good life,’ the foreign ministry paraphrased Wang as saying…”¬¬
February 21 – Financial Times (Gabriel Wildau): “A rare public spat has erupted between Chinese premier Li Keqiang and the central bank after he expressed concern about record credit expansion in January, a result of monetary stimulus intended to support flagging economic growth. Since assuming the premiership in 2013 alongside President Xi Jinping, Mr Li has been a consistent critic of the large-scale stimulus that their predecessors launched in response to the 2008 financial crisis, which economists said led to wasteful investment and a dangerous increase in debt. Analysts said Mr Li’s latest comments reflected concern his credibility would suffer if the government was seen as backsliding on its commitment to avoid heavy-handed stimulus.”
February 20 – Reuters (Kevin Yao, Lee Chyenyee and Twinnie Siu): “China has not and will not change its prudent monetary policy and will not resort to ‘flood-like’ stimulus, Premier Li Keqiang said… Market speculation is growing over whether authorities will take more aggressive policy steps after recent weak data. ‘I reiterate that the prudent monetary policy has not changed and will not change. We are determined not to engage in ‘flood-like’ stimulus,’ Li said at a cabinet meeting…”
February 20 – Reuters (Kevin Yao): “China’s central bank is not yet ready to cut benchmark interest rates to spur the slowing economy, despite cooling inflation and a stronger yuan, which have fanned market expectations of such a move, policy sources told Reuters. But the People’s Bank of China (PBOC) is likely to cut market-based rates and further lower banks’ reserve ratios (RRR) to boost credit growth and reduce firms’ borrowing costs… ‘We cannot rule out a (benchmark) rate cut, but we still need to watch economic data for a few months,’ one said. ‘There is no sufficient reason for cutting benchmark rates if we look at the huge amount of new loans in January.’”
February 19 – Financial Times (Gabriel Wildau and Yizhen Jia): “Pity the Chinese state-owned bank trying to obey ever-changing instructions from policymakers in Beijing. For years, banks preferred to lend to giant state-owned enterprises — both because of the implicit government guarantee that such debt has traditionally carried, and because SOEs were seen as national champions that deserved support. But now the script is shifting as China’s economy slows. Many foreign investors are focused on the impact of the trade dispute with the US, but the effect of a domestic crackdown on shadow banking — which has closed off access to credit for privately owned companies that relied on non-bank channels — is probably more important. Private companies generate 60% of China’s economic growth and 90% of new jobs, according to an industry association… That is why China’s cabinet last week issued guidelines urging banks, among other intermediaries, to step in to the void to increase support for private companies.”
February 18 – Associated Press (Joe McDonald): “China’s auto sales fell for an eighth month in January, extending a painful decline for the biggest global market as demand cooled amid a slowing economy and tariffs standoff with the U.S. Purchases of sedans, SUVs and minivans fell 15% from a year earlier to just over 2 million vehicles, according… the China Association of Automobile Manufacturers. Cooling growth and trade tensions with Washington are prompting jittery buyers to put off purchases.”
February 18 – Financial Times (Don Weinland): “Police in China have stepped up a crackdown on peer-to-peer lenders, freezing Rmb10bn ($1.5bn) across 380 companies and dispatching teams across Asia in pursuit of financial fugitives. The operation, called ‘Fox Hunt’ …detained 62 people in 16 countries including Cambodia and Thailand. So-called P2P lending — a $120bn business that connects private lenders with borrowers online — was once a thriving industry in China, with little government oversight over thousands of companies that rapidly opened shop. Business leaders often touted the market as one that regulators had left largely untouched, in order to promote innovation.”
February 18 – Financial Times (Don Weinland): “Property developers have found a new play on the Chinese market: buying up the soured debts of their rivals. The property market is a linchpin of China’s economy. A slowdown in sales and falling prices in some large cities have sparked concerns of a deeper downturn if economic growth continues to stutter. Demand for homes, despite recent monetary policy easing, has been muted… China’s economic slowdown has also resulted in record sales of bad debt, with Rmb1.75tn ($259bn) in non-performing loans sold off to distressed asset investors last year… Within that mountain of debt, loans backed by property have become a hot commodity on the market for bad assets, often fetching prices far higher than loans that have other assets as collateral. Property developers are among the most indebted companies in China, with Rmb385bn in bonds set to mature in 2019.”
February 19 – Financial Times (David Bond): “Chinese hackers have increased attacks on global telecoms companies in the past year, suggesting an escalation in Beijing’s cyber espionage operations as the US pushes allies to block Huawei from future 5G networks. According to… CrowdStrike, the… cyber security company that first attributed the 2016 hack on the US Democratic National Committee to Russia, 2018 saw an overall increase in Chinese cyber attacks, especially against US targets. The company said the increase was explained by growing tensions over trade between Washington and Beijing but added that the specific targeting of telecoms companies worldwide pointed to a wider surge in spying by Chinese state-backed cyber warriors.”
February 18 – Bloomberg: “At least 11 Chinese cities have eased restrictions on residency-permits this year, potentially giving their ailing property markets a boost. The moves are seen as part of a ‘stealth easing’ of property curbs that have helped keep a lid on housing prices. New-home prices rose at the slowest pace in eight months in December, the most recent data show. While combating property speculation is one of President Xi Jinping’s signature policies, a deepening economic slowdown is prompting some city governments to loosen the screws.”
February 16 – Reuters (Eric Lam): “The trade war between the U.S. and China and slowing retail sales dragged Hong Kong’s economic growth down at the end of last year, with exports showing almost ‘zero growth.’ Gross domestic product in the fourth quarter was ‘less than 1.5%,’ according to… Financial Secretary Paul Chan. The ‘significant slowdown’ was well below the 2.9% seen in the previous three months.”
Central Bank Watch:
February 19 – Wall Street Journal (Joseph Wallace and Pat Minczeski): “Market participants are growing confident that the European Central Bank will soon try to boost the eurozone’s ailing economy by rebooting its program of ultracheap long-term loans to the banking system. The ECB’s Governing Council meets early next month against a backdrop of slowing growth across the region. The downturn comes at a time when the central bank has already used some of its firepower to boost the economy, having ended its €2.6 trillion ($2.9 trillion) bond-buying program in December—although it is still reinvesting the proceeds from maturing assets. Its key interest rate stands at minus 0.4%, where it is expected to stay into 2020. The most feasible action the ECB could take would be to pump cheap credit into commercial banks at unusually long maturities.”
February 21 – Bloomberg (Piotr Skolimowski): “European Central Bank officials are setting up their meeting in two weeks as a key session to decide if the euro-area slowdown is bad enough to warrant action. Policy makers have demanded that analysis on long-term loans for banks is done quickly, though they haven’t fully committed to implementing a new round of funding. Given that more than 700 billion euros ($795bn) of existing loans will mature next year, they said they’ll give ‘some consideration’ to the issue.”
February 18 – Bloomberg (Henry Hoenig): “In a rare explicit coupling of policy and the yen, Governor Haruhiko Kuroda said the Bank of Japan would have to consider additional stimulus if the exchange rate affected Japan’s inflation and economy. He was responding to a lawmaker’s question about the BOJ’s options if the yen rose further… Speaking to parliament…, Kuroda said the BOJ’s options included lowering bond yields and increasing asset purchases.”
Brexit Watch:
February 20 – Reuters (Richard Leong): “Fitch Ratings said… it may downgrade the United Kingdom’s ‘AA’ debt rating based on growing uncertainty about the negotiations between Britain and the European Union over the nation’s departure from the economic bloc next month.”
EM Watch:
February 19 – Bloomberg (Asli Kandemir): “Turkey’s government is making cheap credit a key part of its campaign, pushing banks to take on greater risks in an economy that’s already teetering on the brink of recession. President Recep Tayyip Erdogan’s administration is urging state-owned lenders to extend cheap loans to industries spanning agriculture to soccer clubs and help consumers pay off their credit cards or get below-market interest rates on mortgages. The government hopes this will force other banks to come to the party after they pulled back on extending credit to deal with billions of dollars in debt-restructuring requests and a growing pile of bad loans.”
February 18 – Bloomberg (Ugur Yilmaz and Cagan Koc): “Turkey cut the amount of cash lenders are required to hold in reserves for the first time in six months as the central bank tries to rouse credit growth without signaling a more drastic change in its tight policy stance. With its crisis-level monetary settings on hold for three consecutive meetings, the central bank announced over the weekend that it’s lowering reserve-ratio requirements.”
February 20 – Financial Times (Joseph Cotterill): “South Africa has unveiled the largest bailout in the country’s history for Eskom, the struggling state power monopoly, whose financial troubles have pushed it to the brink of collapse and caused rolling national blackouts. The government will inject R69bn ($4.8bn) over three years to stabilise Eskom’s $30bn debt as it attempts a turnround, …South Africa’s finance minister, said… The risk of a collapse at Eskom is a serious threat to South Africa’s already stretched public finances as its debt is mostly state-guaranteed. Without a plan to control Eskom’s rising costs, a bailout could also imperil the country’s last remaining investment-grade credit rating, with Moody’s.”
February 20 – Bloomberg (Michael Cohen and Gordon Bell): “The sorry state of South Africa’s state power utility starkly illustrates just how far the country slipped during former President Jacob Zuma’s scandal-marred rule and the enormity of the task of rebuilding the nation’s stricken finances. From the heady days of the 2000s, when growth topped 5% a year, the economy has struggled through two recessions, and debt ratios have tripled. There have been almost daily revelations of state corruption, the nation's final investment-grade rating is hanging by a thread and budget surpluses have turned to ever-widening shortfalls.”
February 19 – Bloomberg (Subhadip Sircar): “India is struggling to sell its bonds at recent auctions, and that’s even before Prime Minister Narendra Modi embarks upon a record borrowing program. Underwriters rescued a longer-tenor bond sale on Friday following poor buying support that’s seen the bid-to-cover ratio -- a gauge of demand -- drift lower in the last two auctions from levels seen in January. Concerns about an over-supply of longer maturity bonds have increased after the government on Feb. 1 said it plans to borrow almost $100 billion for the year starting April 1”
Global Bubble Watch:
February 17 – New York Times (Steven Erlanger and Katrin Bennhold): “European leaders have long been alarmed that President Trump’s words and Twitter messages could undo a trans-Atlantic alliance that had grown stronger over seven decades. They had clung to the hope that those ties would bear up under the strain. But in the last few days of a prestigious annual security conference in Munich, the rift between Europe and the Trump administration became open, angry and concrete, diplomats and analysts say. A senior German official… shrugged his shoulders and said: ‘No one any longer believes that Trump cares about the views or interests of the allies. It’s broken.’”
February 16 – Bloomberg (Marc Champion): “If China and the U.S. are in the midst of a divorce, Europeans look increasingly like the children. That was the impression given by a series of back-to-back appearances on Saturday, from U.S. Vice President Mike Pence, Chinese politburo member Yang Jiechi, Russian Foreign Minister Sergei Lavrov and German Chancellor Angela Merkel. The speeches put growing great power rivalries on display, but with Europe more the object of a custody battle than a participant. Speaking at the annual Munich Security Conference, Yang looked like he was trying to drive a wedge between the U.S. and its European Union allies… He spent much of his speech extolling the virtues of cooperation, international organizations and free trade, popular in Europe, and attacked the dangers of ‘protectionism,’ as well as ‘hegemony and power politics.’ The U.S. wasn’t named, but the target was clear.”
February 19 – Reuters (Tom Miles): “A quarterly leading indicator of world merchandise trade slumped to its lowest reading in nine years…, which should put policymakers on guard for a sharper slowdown if trade tensions continue, the World Trade Organization said… The WTO’s quarterly outlook indicator, a composite of seven drivers of trade, showed a reading of 96.3, the weakest since March 2010 and down from 98.6 in November. A reading below 100 signals below-trend growth in trade.”
February 18 – Bloomberg (Denise Wee): “Asia’s dollar bond markets have staged a blistering rally this year, but for a group of borrowers that sit on the cusp of a junk rating, there’s no relief in sight. As worsening global macro-economic conditions put firms under pressure, concerns over so-called fallen angels, or investment-grade companies that are cut to junk, are mounting in Asia and globally. Man Group Plc, the world’s largest publicly traded hedge fund manager, warned investors in December of the ‘astonishing bubble’ in BBB level debt.”
February 18 – Bloomberg (Daniel Moss): “A new bestseller might be in the offing. If the public could get its hands on it, that is. The Reserve Bank of Australia's board spent a chunk of its interest-rate meeting this month digesting a paper on the housing slump and what it foretells for that famous 27-year growth streak. Consideration of the paper, revealed in minutes of the RBA's Feb. 5 conclave…, may explain a lot… But few things are of as much interest for the local economy or dominate public airwaves like the housing industry. It's a national obsession…. Prices are down from their 2017 peaks in Sydney and Melbourne by 12% and 9%... In the minutes, the RBA called drops in Perth and Darwin ‘significant.’ The word ‘housing’ appears in the minutes more than 30 times, about three times as many as the word ‘China’…”
February 20 – Bloomberg (Jason Scott): “A generation of young Australians priced out of the property market and frustrated at a widening wealth divide could prove pivotal in triggering a change of government in May. The main opposition Labor party has made tackling the growing gap between so-called baby boomers and millennials a key plank of its campaign to win office for the first time since 2013. The center-left party, which is leading Prime Minister Scott Morrison’s government in opinion polls, is pledging to curb tax breaks for property investors that helped drive home prices beyond the reach of many Australians.”
February 20 – Wall Street Journal (Jenny Strasburg and Gretchen Morgenson): “Deutsche Bank AG racked up a loss of $1.6 billion over nearly a decade on a complex municipal-bond investment that it bought in the runup to the 2008 financial crisis, and failed to confront head-on even as markets were upended and regulations tightened. The loss… represents one of Deutsche Bank’s largest ever from a single wager—roughly quadruple its entire 2018 profit—and ranks as one of the banking industry’s biggest soured bets in the last decade.”
Europe Watch:
February 19 – Reuters (Sara Rossi and Emilio Parodi): “Italy’s tax police have carried out a seizure order for more than 700 million euros ($794 million) as part of a probe targeting the country’s top four banks over alleged fraudulent diamond sales, two sources close to the matter said…”
Japan Watch:
February 20 – Reuters (Balazs Koranyi and Tom Sims): “Japan’s exports posted their biggest decline in more than two years as China-bound shipments tumbled, fuelling concerns about slowing global demand as the business mood sours and orders for the country’s machinery goods fell sharply. …Japan’s exports fell 8.4% year-on-year in January, a bigger decline than the 5.5% fall expected… It was the sharpest annual decline since October 2016…”
February 17 – Reuters (Stanley White): “Overseas orders for Japanese machinery posted their biggest tumble in more than a decade in December, as trade frictions dented global supply chain demand and manufacturers predicted further declines in orders this quarter. …Core machinery orders, considered a leading indicator of capital expenditure, fell 0.1% month-on-month in December… Highlighting bigger concerns about the external environment, however, was a 21.9% month-on-month slump in orders from overseas, the biggest fall since November 2007.”
February 17 – Reuters (Leika Kihara): “Japan must ramp up fiscal spending with debt bank-rolled by the central bank, the Bank of Japan’s former deputy governor Kikuo Iwata said, a controversial proposal that highlights the BOJ’s challenge as it tries to reignite an economy after years of sub-par growth. Iwata, an architect of the BOJ’s massive bond-buying programme dubbed ‘quantitative and qualitative easing’ (QQE), warned that inflation will miss the central bank’s 2% target without stronger measures to boost consumption.”
Fixed-Income Bubble Watch:
February 17 – Financial Times (Joe Rennison): “Companies across America are turning to the secured bond market for funding, as the Federal Reserve’s decision to hit the pause button on further interest rate rises has reduced the appeal of previously red-hot loans. Already indebted or lowly rated companies were heavy users of the loan market for much of last year, as investors flocked to financial products whose returns rose in tandem with rising interest rates. However, the prospect that US rate increases have peaked weakens the allure of loans… Instead, investors are putting more money into corporate bonds, which typically offer fixed returns that are more attractive in a world in which rates are likely to flatline — or even fall — over the next year.”
February 18 – Wall Street Journal (Telis Demos and Sam Goldfarb): “Corporate borrowers were in a tough spot for a few weeks in January. Things had been looking up after the December market swoon, but there were problems in a part of the market that serves junk-rated companies. Then Japan’s farms and fisheries came to the rescue. Norinchukin Bank, a 95-year-old bank that holds around $600 billion in deposits from Japan’s agricultural and fishing collectives, has amassed a significant share of the estimated $700 billion global market for collateralized loan obligations, or CLOs—complex investment vehicles that buy more than half of U.S. loans to junk-rated companies. The privately held bank’s $62 billion CLO portfolio is larger than those of either of the two biggest U.S. bank buyers, Wells Fargo & Co. and JPMorgan… The CLO market has roughly doubled in size since 2014, helping to fuel the growth of corporate debt to historic levels.”
Geopolitical Watch:
February 21 – Reuters (Andrew Osborn): “President Vladimir Putin has said that Russia is militarily ready for a Cuban Missile-style crisis if the United States wanted one, and that his country currently has the edge when it comes to a first nuclear strike. The Cuban Missile Crisis erupted in 1962 when Moscow responded to a U.S. missile deployment in Turkey by sending ballistic missiles to Cuba, sparking a standoff that brought the world to the brink of nuclear war. More than five decades on, tensions are rising again over Russian fears that the United States might deploy intermediate-range nuclear missiles in Europe, as a landmark Cold War-era arms-control treaty unravels.”
February 20 – Wall Street Journal (Ann M. Simmons): “President Vladimir Putin warned Russia would aim new advanced weapons against the U.S. should it deploy intermediate-range missiles in Europe, raising the stakes after the breakdown of a Cold War-era nuclear treaty. Mr. Putin said Russia wasn’t seeking confrontation with the U.S. and wouldn’t make the first move to deploy the missiles. But if Washington has such plans once it abandons the 1987 Intermediate-range Nuclear Forces Treaty, this ‘will be a serious threat to us’ and Russia will be ‘forced to provide for mirror and symmetrical actions,’ he said. Although Mr. Putin indicated that he remained open to nuclear arms control talks if the U.S. were to initiate them, his rhetoric and revelation of imminent plans to launch Russia’s first unmanned nuclear submarine signaled there was no turning back on abandoning the agreement and heightened the risk of a new arms race.”
February 19 – Wall Street Journal (Bojan Pancevski and Sara Germano): “The German government is leaning toward letting Huawei Technologies Co. participate in building the nation’s high-speed internet infrastructure, several German officials said, the latest sign of ambivalence among U.S. allies over Washington’s push to ostracize the Chinese tech giant as a national security risk. A small group of ministries reached a preliminary agreement two weeks ago that still needs formal approval by the full cabinet and parliament, officials said.”
February 19 – Reuters (Yimou Lee): “Taiwan will not accept any deal that destroys its sovereignty and democracy, President Tsai Ing-wen said… after the island’s opposition KMT party said it could sign a peace deal with China if it wins a presidential election next year. China claims self-ruled and proudly democratic Taiwan as its own and has vowed to bring the island, which it regards as sacred territory, under Beijing’s control, by force if necessary.”
February 15 – Reuters: “Iran warned neighboring Pakistan… it would ‘pay a heavy price’ for allegedly harboring militants who killed 27 of its elite Revolutionary Guards in a suicide bombing near the border earlier this week… Revolutionary Guards chief Major General Mohammad Ali Jafari also accused Tehran’s regional rival Saudi Arabia and the United Arab Emirates of supporting militant Sunni groups that attack Iranian forces, saying they could face ‘reprisal operations.’”
There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”
And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy. John Williams, the New York Fed president, said on Friday that persistently soft inflation readings over recent years could damage the Fed’s ability to convince the general public it will hit its 2% goal. Central banks in other major economies are likely to face similar problems, he warned… Persistent shortfalls relative to the Fed’s 2% target have already helped prompt officials to shelve plans for further rate rises. But they are also thinking more broadly about the US central bank’s inflation mandate… Officials are debating new approaches which could sometimes lead them to deliberately aim for above-target inflation. Richard Clarida, the Fed’s vice-chairman, said on Friday the central bank will be open-minded about these new ideas…”
Markets are raging and crazy talk is proliferating – and it’s already time to commence another momentous election cycle. Bill Dudley must have felt compelled to opine:
“People from across the political spectrum are challenging a bit of long-held conventional wisdom: that if the U.S. government runs big, sustained budget deficits, its mounting debts will eventually cause grievous harm to the economy. They have a point — but it is important not to push that point too far. The arguments come in different forms. Some mainstream economists — such as Olivier Blanchard, former chief economist at the International Monetary Fund –- note that sovereign debt is more manageable in a world where economic growth exceeds governments’ very low borrowing costs. On the more extreme end, proponents of Modern Monetary Theory argue that because the U.S. borrows in its own currency, it can always just print more dollars to cover its obligations.” Bill Dudley, former President of the New York Federal Reserve Bank, Bloomberg Opinion, February 19, 2019
Mr. Dudley surely appreciates the precarious state of things. “Deficits don’t matter.” Rebuild infrastructure; universal healthcare; universal basic income; reverse climate change; free college tuition; strong military; and low taxes. Where’s all the money to come from? Borrow a ton of it for sure. And, depending on your political affiliation, soak the rich.
Dudley: “Turning first to Blanchard, I agree that deficit spending looks less problematic than in the past. The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate. This is easier to do now because the long-run nominal growth rate (around 3.5-4.0%) is well above the U.S. government’s borrowing cost (around 2.5%). So the government has some leeway: The debt can grow at nearly 4% per year, or 1.0% to 1.5% net of interest expense, without increasing the debt-to-GDP ratio. The low level of interest rates might help explain why markets have proven more tolerant of large, persistent budget deficits around the world, with Japan the most notable example.”
Could it be that markets are “more tolerant of large, persistent deficits around the world” specifically because of historic and far-reaching changes in central bank doctrine and policies? A decade ago, no one contemplated central banks purchasing more than $16 TN of government debt securities. Only a nutcase would have pondered ten years of near zero – or even negative – interest rates (and $10 TN of negative-yielding bonds). “Whatever it takes” central banking? Crazy talk.
These days, markets believe that central banks will be willing and able to purchase unlimited quantities of government bonds to ensure that yields remain low and markets highly liquid. No crisis necessary. Indeed, markets have been convinced without a doubt that central bankers will do whatever it takes to ensure no crises, bear markets or recessions.
The reality is that global central banks have fundamentally inflated the price of government debt, while systematically altering market risk perceptions. And, yes, it has made deficit spending appear much less problematic. As illustrated most starkly in Japan, on an ongoing basis governments issue enormous quantities of debt instruments without markets demanding one iota of risk premium. Heck, the bigger the deficit (and heightened systemic risk) the lower risk premiums. It’s all astonishing, entertaining - and has turned almost comical. But it has seriously become the greatest market distortion in history – today viewed as “business as usual.” And, importantly, with “risk free” sovereign debt the foundation of global finance, distortions in prices and risk perceptions encompass securities markets (and asset markets more generally) around the globe.
“The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate.” Okay, except that for a decade now debt has been expanding more rapidly than GDP - for what is now among the longest expansions on record. And I strongly caution against extrapolating 3.5-4.0% economic growth into the future. A scenario of 5% to 7% debt growth, with zero to 2% real GDP expansion, is not only not unreasonable, it’s realistic. And let’s not disregard demographics and the projected surge in entitlement spending. Truth be told, we’re now a mere garden-variety bear market and recession away from Fiscal Armageddon. At some point, markets may even place a risk premium on Treasury debt. Interest payments on federal borrowings are projected at $364 billion in fiscal 2019. Factoring only a small increase in market yields, debt service is projected to more than double by 2018. In the event of a deep recession and another round of bailouts, annual deficits approaching $2.0 TN are not crazy talk.
Dudley: “How and when the government spends the money also matters. Infrastructure investment, for example, can actually pay for itself by boosting the economy’s productive capacity. This is particularly relevant in the U.S., where dilapidated roads, ports and other public works desperately need an upgrade. (Imagine the benefits of a second rail tunnel between New York City and New Jersey.) Deficit spending in recessions can also be self-funding, because it engages unused resources — for example, by employing people whose abilities and skills would otherwise be wasted.”
The past decade has seen an incredible expansion of federal debt. To come out of such a period with “dilapidated roads, ports and other public works” does not instill confidence that funds have been – or ever will be – spent wisely.
Dudley: “Yet Modern Monetary Theory goes one big step further. It suggests that a government like the U.S. needn’t worry about debt at all. As long as it borrows in its own currency, there is no risk of default or bankruptcy. It can spend as much as it wants on any projects, such as education and health care, and just create additional IOUs to cover the cost.”
Like Dudley, I have few kind words for Modern Monetary Theory (MMT). I basically liken it to crackpot theories that have haunted monetary stability throughout history. Every great monetary inflation is replete with deeply flawed notions, justifications and rationalizations. But that MMT seems even remotely reasonable these days is owed directly to “activist” central banking - and the perception that central bank rate manipulation and the unlimited purchase of securities ensure forever low market yields and endless demand for government obligations.
It’s now been almost a decade since I began warning of the incipient “global government finance Bubble.” In true Epic Bubble form, after a decade of unprecedented expansion of government and central bank Credit, there’s a deeply embedded market perception that basically no amount of supply will impact the price of so-called “risk free” debt. And it’s precisely this perilous delusion that ensures an eventual crisis of confidence.
Today’s crackpot theories hold that central banks can continue to suppress interest rates and stimulate financial markets so long as consumer price inflation remains muted. It’s the old “money” as a “medium of exchange” focus that has led to scores of fantastic booms followed certainly by devastating collapses. The infamous monetary theorist John Law and his experiment in paper money were celebrated in France – that is until the spectacular 1720 collapse of his scheme and the attendant Mississippi Bubble. It literally took generations for trust in banking to return. Contemporary central banking is both the architect and enabler of crackpot theories. The celebration, today seemingly everlasting, will prove tragically transitory.
“Money” as a “Store of Value.” It is delusional to believe that endless issuance of non-productive Credit will not at some point significantly impact the value of these instruments. And the more central bankers manipulate the debt markets, the greater the issuance. Arguably, one of the greatest costs associated with the ongoing experiment in “activist” monetary management is the bevy of market distortions that promote the rapid expansion of government and other non-productive debt.
Moreover, central banks injecting “money” directly into – and furthermore supporting – securities markets is an allocation of Credit predominantly benefitting the wealthy. Sure, there’s some “trickle down.” The unemployment rate is historically low and jobs are more plentiful. By now, however, it should be abundantly clear that employment gains do not abrogate a system that has evolved to distribute wealth so inequitably – or the perception that the system is rigged for the benefit of the wealthy.
Even with gainful employment, many see the system as hopelessly unfair. The Fed can now feign trepidation for CPI missing its 2% inflation objective. Yet tens of millions struggle making ends meet against constantly inflating costs (including housing, healthcare and tuition). We’re now clearly on a trajectory for risking a crisis of confidence in financial assets and our institutions more generally.
Dudley: “Alas, there is no free lunch. For one, the economy might not have enough resources — in the form of workers and industrial capacity — to meet the combined demand from the government and the private sector. The result would be inflation, as too much money chased too few goods and services.”
That it has the appearance of a “free lunch” is at the heart of the quandary. And it’s not that “the result would be inflation.” Indeed, the result is and has been inflation, just not the typical variety. The prevailing source of monetary inflation is central banks injecting new “money” into the securities markets, while essentially promising liquid and levitated markets. The upshot is too much “money” chasing financial market returns. Monetary Disorder. Booms and Busts. Unmanageable Speculation. Intractable Resources Misallocation. Economic Maladjustment and Global Imbalances
The dilemma today - as it’s been with great inflationary episodes throughout history – is that inflation becomes deeply ingrained and halting it too painful. Policymakers refuse to accept mistakes and change directions. Instead, there is denial and the irresistibility of rationalization and justification. Throughout the devastating Weimar hyperinflation, Germany’s central bank refused to accept that they were the party of primary responsibility – but instead rationalized the bank was being forced to respond to outside forces. Today’s great global inflation is characterized by contrasting dynamics, but some of the devastating consequences of failing to recognize the essence of the problem are all too similar. Markets. Social. Political. Economic. Geopolitical.
For the Week:
The S&P500 rose 0.6% (up 11.4% y-t-d), and the Dow added 0.6% (up 11.6%). The Utilities jumped 2.8% (up 8.3%). The Banks increased 0.6% (up 16.6%), and the Broker/Dealers rose 1.4% (up 13.7%). The Transports added 0.2% (up 15.5%). The S&P 400 Midcaps gained 1.0% (up 16.3%), and the small cap Russell 2000 jumped 1.3% (up 17.9%). The Nasdaq100 increased 0.5% (up 12.0%). The Semiconductors advanced 1.0% (up 18.1%). The Biotechs declined 1.4% (up 16.8%). With bullion adding $7, the HUI gold index surged 3.9% (up 8.6%).
Three-month Treasury bill rates ended the week at 2.40%. Two-year government yields declined two bps to 2.50% (up 1bp y-t-d). Five-year T-note yields slipped two bps to 2.47% (down 4bps). Ten-year Treasury yields dipped a basis point to 2.65% (down 3bps). Long bond yields increased two bps to 3.01% (unchanged). Benchmark Fannie Mae MBS yields fell four bps to 3.40% (down 9bps).
Greek 10-year yields slipped a basis point to 3.80% (down 55bps y-t-d). Ten-year Portuguese yields fell eight bps to 1.49% (down 23bps). Italian 10-year yields gained five bps to 2.85% (up 11bps). Spain's 10-year yields dropped six bps to 1.18% (down 24bps). German bund yields were little changed at 0.10% (down 14bps). French yields declined two bps to 0.52% (down 19bps). The French to German 10-year bond spread narrowed two to 42 bps. U.K. 10-year gilt yields were unchanged at 1.16% (down 12bps). U.K.'s FTSE equities index declined 0.8% (up 6.7% y-t-d).
Japan's Nikkei 225 equities index jumped 2.5% (up 7.0% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.04% (down 4bps y-t-d). France's CAC40 gained 1.2% (up 10.3%). The German DAX equities index rose 1.4% (up 8.5%). Spain's IBEX 35 equities index increased 0.9% (up 7.8%). Italy's FTSE MIB index added 0.2% (up 10.6%). EM equities were higher. Brazil's Bovespa index added 0.4% (up 11.4%), and Mexico's Bolsa jumped 1.7% (up 5.0%). South Korea's Kospi index gained 1.6% (up 9.3%). India's Sensex equities index added 0.2% (down 0.5%). China's Shanghai Exchange surged 4.5% (up 12.4%). Turkey's Borsa Istanbul National 100 index increased 0.5% (up 13.1%). Russia's MICEX equities index was little changed (up 5.5%).
Investment-grade bond funds saw inflows of $1.953 billion, and junk bond funds posted inflows of $284 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined two bps to a one-year low 4.35% (down 5bps y-o-y). Fifteen-year rates fell three bps to 3.78% (down 7bps). Five-year hybrid ARM rates dropped four bps to 3.84% (up 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.35% (down 1bps).
Federal Reserve Credit last week dropped $36.5bn to $3.952 TN. Over the past year, Fed Credit contracted $417bn, or 9.5%. Fed Credit inflated $1.141 TN, or 41%, over the past 328 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.1bn last week to $3.432 TN. "Custody holdings" increased $19bn y-o-y, or 0.6%.
M2 (narrow) "money" supply added $6.7bn last week to a record $14.488 TN. "Narrow money" gained $640bn, or 4.6%, over the past year. For the week, Currency was little changed. Total Checkable Deposits fell $27.9bn, while Savings Deposits jumped $32.9bn. Small Time Deposits increased $2.2bn. Retail Money Funds were about unchanged.
Total money market fund assets declined $7.9bn to $3.072 TN. Money Funds gained $228bn y-o-y, or 8.0%.
Total Commercial Paper was little changed at $1.061 TN. CP declined $34bn y-o-y, or 3.1%.
Currency Watch:
The U.S. dollar index declined 0.4% to 96.507 (up 0.3% y-t-d). For the week on the upside, the British pound increased 1.3%, the Canadian dollar 0.8%, the South African rand 0.6%, the Mexican peso 0.6%, the Swiss franc 0.5%, the Singapore dollar 0.4%, the euro 0.4%, the South Korean won 0.3%, and the Norwegian krone 0.3%. For the week on the downside, the Brazilian real declined 1.2%, the Swedish krona 0.7%, the New Zealand dollar 0.3%, the Japanese yen 0.2% and the Australian dollar 0.2%. The Offshore Chinese renminbi gained 0.89% versus the dollar this week (up 2.45% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.4% (up 14.7% y-t-d). Spot Gold added 0.5% to $1,328 (up 3.6%). Silver jumped 1.7% to $16.012 (up 3.0%). Crude rose another $1.67 to $57.26 (up 26%). Gasoline gained 2.4% (up 24%), and Natural Gas rose 3.5% (down 8%). Copper surged 5.3% (up 12%). Wheat fell 3.0% (down 2%). Corn increased 0.5% (up 3%).
Market Dislocation Watch:
February 18 – Wall Street Journal (Daniel Kruger): “Investors around the globe are effectively paying governments to hold more than $11 trillion of their bonds, a fresh sign of ebbing economic confidence in Europe and Japan. Negative-yielding government bonds outstanding through mid-January have risen 21% since October, reversing a steady decline that took place over the course of 2017 and much of last year, according to… Bank of America Merrill Lynch. While the stock of negative-yielding debt still remains below its 2016 high, the proliferation of these bonds… underscores the uncertainty over the growth prospects in much of the developed world. ‘Europe is an absolute quagmire,’ said Matt Freund, co-chief investment officer at Calamos Investments. ‘There are significant headwinds that we’ve been talking about for a long time—now they’re showing up in the numbers.’”
Trump Administration Watch:
February 18 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump said… that trade talks with China were going well and suggested he was open to pushing off the deadline to complete negotiations, saying March 1 was not a ‘magical’ date. Tariffs on $200 billion worth of Chinese imports are scheduled to rise to 25% from 10% by March 1 if the world’s two largest economies do not settle their trade dispute, but Trump has suggested several times that he would be open to postponing the deadline. ‘They are very complex talks. They’re going very well,’ Trump told reporters... ‘I can’t tell you exactly about timing, but the date is not a magical date. A lot of things can happen.’”
February 19 – Bloomberg (Michael Schuman): “Optimism that the U.S. and China can reach a trade deal is rising, with another round of intensive negotiations in Washington this week. What buoyant investors are ignoring, however, is that the talks have become a test of strength between the world’s two great powers -- or, more accurately, a test of how accurate each nation’s sense of its own strength is. The inconvenient fact is that neither country possesses the power to impose its will on the other. The U.S. is not on its own capable of compelling Chinese leaders to do its bidding, nor is China strong enough to shun the Western world. Until they face up to that reality, they’ll never be able to reach a lasting accommodation.”
February 18 – Reuters (Steve Holland): “U.S. President Donald Trump… warned members of Venezuela’s military who remain loyal to socialist President Nicolas Maduro that they are risking their future and their lives and urged them to allow humanitarian aid into the country. Speaking to a cheering crowd mostly of Venezuelan and Cuban immigrants in Miami, Trump said if the Venezuelan military continues supporting Maduro, ‘you will find no safe harbor, no easy exit and no way out. You’ll lose everything.’”
February 18 – Reuters: “U.S. President Donald Trump has promised European Commission President Jean-Claude Juncker that he will not impose additional import tariffs on European cars for the time being, Juncker was quoted… as saying… A confidential U.S. Commerce Department report sent to Trump over the weekend is widely expected to clear the way for him to threaten tariffs of up to 25% on imported autos and auto parts by designating the imports a national security threat. ‘Trump gave me his word that there won't be any car tariffs for the time being. I view this commitment as something you can rely on,’ Juncker told the German daily Stuttgarter Zeitung…”
Federal Reserve Watch:
February 20 – Reuters (Ann Saphir, Jason Lange and Trevor Hunnicutt): “The Federal Reserve… signaled they will soon lay out a plan to stop letting go of $4 trillion in bonds and other assets, but policymakers are still debating how long their newly adopted ‘patient’ stance on U.S. rates policy will last. For now, policymakers see little risk to leaving interest rates alone while they take time to assess rising risks, including a global slowdown, according to the Fed’s minutes from their Jan. 29-30 meeting…”
February 20 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve officials widely favored ending the runoff of the central bank’s balance sheet this year while expressing uncertainty over whether they would raise interest rates again in 2019, minutes of their January meeting showed. ‘Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year,’ according to the record of the Federal Open Market Committee’s Jan. 29-30 gathering…”
February 19 – Reuters (Howard Schneider, Jonathan Spicer, Trevor Hunnicutt): “New York Fed President John Williams… said he was comfortable with the level U.S. interest rates are at now and that he sees no need to raise them again unless economic growth or inflation shifts to an unexpectedly higher gear… ‘I don’t think that it would take a big change, but it would be a different outlook either for growth or inflation’ to return to hiking rates, Williams… a key voice on rate policy, told Reuters.”
February 19 – Reuters (Jason Lange): “The U.S. Federal Reserve may need to raise interest rates in 2019 but it could still end its efforts to trim its massive bond portfolio before the end of the year, Cleveland Federal Reserve President Loretta Mester said… Mester’s comments are an example of the complexity of the U.S. central bank’s efforts to establish new norms for setting monetary policy at a time when the economic outlook appears increasingly uncertain… ‘I would think that we probably have to raise interest rates a little bit later this year,’ Mester told reporters…”
February 21 – CNBC (Jeff Cox): “The Federal Reserve is likely near the end of interest rate increases and the program to reduce the bonds it holds on its balance sheet, St. Louis Fed President James Bullard said… ‘I think the message from my point of view is the normalization process in the United States is coming to an end,’ the central bank official told CNBC... Bullard added that he thinks rates are actually too high now but acknowledged that his view is in the minority on the policymaking Federal Open Market Committee.”
U.S. Bubble Watch:
February 21 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods unexpectedly fell in December amid declining demand for machinery and primary metals, pointing to a further slowdown in business spending on equipment that could crimp economic growth. The moderation in business investment was also underscored by another report… showing a measure of factory activity in the mid-Atlantic region contracted in February for the first time since May 2016… Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.7%. Data for November was revised down to show these so-called core capital goods orders falling 1.0%...”
February 21 – Bloomberg (Jeff Kearns and Katia Dmitrieva): “Sales of previously owned U.S. homes fell to the weakest pace since November 2015, indicating that the housing market remained in a slowdown despite a drop in mortgage rates. Contract closings decreased 1.2% in January from the prior month to an annual rate of 4.94 million…, below economists’ estimates for 5 million. The median sales price rose 2.8% from a year ago, the smallest increase since February 2012, while the inventory of available homes saw a sixth straight increase.”
February 19 – Financial Times (John Plender): “We know that changes in the household sector balance sheet, particularly in relation to the balance between savings and consumption, matter greatly for the real economy. That said, what is unusual at present is that the exposure of US household balance sheets to the stock market is running at record levels. This is an under-acknowledged part of the explanation for the recent weakening of economic data and especially the spectacular decline in retail sales. As TS Lombard, a research firm, points out, share prices are not the only determinant of spending but they count more than they used to because equities make up a bigger percentage of household net worth than real estate for only the third time since the end of the second world war. An important difference in the current cycle compared with the previous two occasions is that so much of the increase in ownership reflects net purchases as opposed to simply being the passive result of a valuation uplift in a strong bull market.”
February 19 – MarketWatch (Andrea Riquier): “The National Association of Home Builders’ monthly confidence index jumped 4 points to a seasonally adjusted reading of 62 in February… The February gain was the second in a row and put the sentiment index, which some economists view as an early read on the pace of residential construction, back to its mid-autumn level. It easily beat the Econoday consensus forecast of a one-point increase.”
February 16 – Bloomberg (Alexandre Tanzi): “Student-loan delinquencies surged last year, hitting consecutive records of $166.3 billion in the third quarter and $166.4 billion in the fourth. Bloomberg calculated the dollar amounts from the Federal Reserve Bank of New York’s quarterly household-debt report… That percentage has remained around 11% since mid-2012, but the total increased to a record $1.46 trillion by December 2018, and unpaid student debt also rose to the highest ever.”
February 18 – Reuters (Ishita Chigilli Palli): “U.S. discount retailer Payless ShoeSource Inc on Monday filed for voluntary Chapter 11 bankruptcy protection for the second time, along with its North American subsidiaries, and said it would wind down all North American stores by the end of May. The retailer will close about 2,500 stores in North America starting from the end of March and wind down its e-commerce operations.”
China Watch:
February 18 – Associated Press (Joe McDonald): “China’s government… accused the United States of trying to block its industrial development after Vice President Mike Pence said Chinese equipment poses a threat to countries that are rolling out next-generation mobile communications… The U.S. government is trying to ‘fabricate an excuse for suppressing the legitimate development’ of Chinese enterprises, said a foreign ministry spokesman, Geng Shuang. He accused the United States of using ‘political means’ to interfere in economic activity, ‘which is hypocritical, immoral and unfair bullying.’”
February 20 – Reuters (Ben Blanchard): “The United States should respect China’s right to develop and become prosperous, the Chinese government’s top diplomat told a visiting U.S. delegation, reiterating that the country’s doors to the outside world would open wider… ‘Just like the United States, China also has the right to development, and the Chinese people also have the right to have a good life,’ the foreign ministry paraphrased Wang as saying…”¬¬
February 21 – Financial Times (Gabriel Wildau): “A rare public spat has erupted between Chinese premier Li Keqiang and the central bank after he expressed concern about record credit expansion in January, a result of monetary stimulus intended to support flagging economic growth. Since assuming the premiership in 2013 alongside President Xi Jinping, Mr Li has been a consistent critic of the large-scale stimulus that their predecessors launched in response to the 2008 financial crisis, which economists said led to wasteful investment and a dangerous increase in debt. Analysts said Mr Li’s latest comments reflected concern his credibility would suffer if the government was seen as backsliding on its commitment to avoid heavy-handed stimulus.”
February 20 – Reuters (Kevin Yao, Lee Chyenyee and Twinnie Siu): “China has not and will not change its prudent monetary policy and will not resort to ‘flood-like’ stimulus, Premier Li Keqiang said… Market speculation is growing over whether authorities will take more aggressive policy steps after recent weak data. ‘I reiterate that the prudent monetary policy has not changed and will not change. We are determined not to engage in ‘flood-like’ stimulus,’ Li said at a cabinet meeting…”
February 20 – Reuters (Kevin Yao): “China’s central bank is not yet ready to cut benchmark interest rates to spur the slowing economy, despite cooling inflation and a stronger yuan, which have fanned market expectations of such a move, policy sources told Reuters. But the People’s Bank of China (PBOC) is likely to cut market-based rates and further lower banks’ reserve ratios (RRR) to boost credit growth and reduce firms’ borrowing costs… ‘We cannot rule out a (benchmark) rate cut, but we still need to watch economic data for a few months,’ one said. ‘There is no sufficient reason for cutting benchmark rates if we look at the huge amount of new loans in January.’”
February 19 – Financial Times (Gabriel Wildau and Yizhen Jia): “Pity the Chinese state-owned bank trying to obey ever-changing instructions from policymakers in Beijing. For years, banks preferred to lend to giant state-owned enterprises — both because of the implicit government guarantee that such debt has traditionally carried, and because SOEs were seen as national champions that deserved support. But now the script is shifting as China’s economy slows. Many foreign investors are focused on the impact of the trade dispute with the US, but the effect of a domestic crackdown on shadow banking — which has closed off access to credit for privately owned companies that relied on non-bank channels — is probably more important. Private companies generate 60% of China’s economic growth and 90% of new jobs, according to an industry association… That is why China’s cabinet last week issued guidelines urging banks, among other intermediaries, to step in to the void to increase support for private companies.”
February 18 – Associated Press (Joe McDonald): “China’s auto sales fell for an eighth month in January, extending a painful decline for the biggest global market as demand cooled amid a slowing economy and tariffs standoff with the U.S. Purchases of sedans, SUVs and minivans fell 15% from a year earlier to just over 2 million vehicles, according… the China Association of Automobile Manufacturers. Cooling growth and trade tensions with Washington are prompting jittery buyers to put off purchases.”
February 18 – Financial Times (Don Weinland): “Police in China have stepped up a crackdown on peer-to-peer lenders, freezing Rmb10bn ($1.5bn) across 380 companies and dispatching teams across Asia in pursuit of financial fugitives. The operation, called ‘Fox Hunt’ …detained 62 people in 16 countries including Cambodia and Thailand. So-called P2P lending — a $120bn business that connects private lenders with borrowers online — was once a thriving industry in China, with little government oversight over thousands of companies that rapidly opened shop. Business leaders often touted the market as one that regulators had left largely untouched, in order to promote innovation.”
February 18 – Financial Times (Don Weinland): “Property developers have found a new play on the Chinese market: buying up the soured debts of their rivals. The property market is a linchpin of China’s economy. A slowdown in sales and falling prices in some large cities have sparked concerns of a deeper downturn if economic growth continues to stutter. Demand for homes, despite recent monetary policy easing, has been muted… China’s economic slowdown has also resulted in record sales of bad debt, with Rmb1.75tn ($259bn) in non-performing loans sold off to distressed asset investors last year… Within that mountain of debt, loans backed by property have become a hot commodity on the market for bad assets, often fetching prices far higher than loans that have other assets as collateral. Property developers are among the most indebted companies in China, with Rmb385bn in bonds set to mature in 2019.”
February 19 – Financial Times (David Bond): “Chinese hackers have increased attacks on global telecoms companies in the past year, suggesting an escalation in Beijing’s cyber espionage operations as the US pushes allies to block Huawei from future 5G networks. According to… CrowdStrike, the… cyber security company that first attributed the 2016 hack on the US Democratic National Committee to Russia, 2018 saw an overall increase in Chinese cyber attacks, especially against US targets. The company said the increase was explained by growing tensions over trade between Washington and Beijing but added that the specific targeting of telecoms companies worldwide pointed to a wider surge in spying by Chinese state-backed cyber warriors.”
February 18 – Bloomberg: “At least 11 Chinese cities have eased restrictions on residency-permits this year, potentially giving their ailing property markets a boost. The moves are seen as part of a ‘stealth easing’ of property curbs that have helped keep a lid on housing prices. New-home prices rose at the slowest pace in eight months in December, the most recent data show. While combating property speculation is one of President Xi Jinping’s signature policies, a deepening economic slowdown is prompting some city governments to loosen the screws.”
February 16 – Reuters (Eric Lam): “The trade war between the U.S. and China and slowing retail sales dragged Hong Kong’s economic growth down at the end of last year, with exports showing almost ‘zero growth.’ Gross domestic product in the fourth quarter was ‘less than 1.5%,’ according to… Financial Secretary Paul Chan. The ‘significant slowdown’ was well below the 2.9% seen in the previous three months.”
Central Bank Watch:
February 19 – Wall Street Journal (Joseph Wallace and Pat Minczeski): “Market participants are growing confident that the European Central Bank will soon try to boost the eurozone’s ailing economy by rebooting its program of ultracheap long-term loans to the banking system. The ECB’s Governing Council meets early next month against a backdrop of slowing growth across the region. The downturn comes at a time when the central bank has already used some of its firepower to boost the economy, having ended its €2.6 trillion ($2.9 trillion) bond-buying program in December—although it is still reinvesting the proceeds from maturing assets. Its key interest rate stands at minus 0.4%, where it is expected to stay into 2020. The most feasible action the ECB could take would be to pump cheap credit into commercial banks at unusually long maturities.”
February 21 – Bloomberg (Piotr Skolimowski): “European Central Bank officials are setting up their meeting in two weeks as a key session to decide if the euro-area slowdown is bad enough to warrant action. Policy makers have demanded that analysis on long-term loans for banks is done quickly, though they haven’t fully committed to implementing a new round of funding. Given that more than 700 billion euros ($795bn) of existing loans will mature next year, they said they’ll give ‘some consideration’ to the issue.”
February 18 – Bloomberg (Henry Hoenig): “In a rare explicit coupling of policy and the yen, Governor Haruhiko Kuroda said the Bank of Japan would have to consider additional stimulus if the exchange rate affected Japan’s inflation and economy. He was responding to a lawmaker’s question about the BOJ’s options if the yen rose further… Speaking to parliament…, Kuroda said the BOJ’s options included lowering bond yields and increasing asset purchases.”
Brexit Watch:
February 20 – Reuters (Richard Leong): “Fitch Ratings said… it may downgrade the United Kingdom’s ‘AA’ debt rating based on growing uncertainty about the negotiations between Britain and the European Union over the nation’s departure from the economic bloc next month.”
EM Watch:
February 19 – Bloomberg (Asli Kandemir): “Turkey’s government is making cheap credit a key part of its campaign, pushing banks to take on greater risks in an economy that’s already teetering on the brink of recession. President Recep Tayyip Erdogan’s administration is urging state-owned lenders to extend cheap loans to industries spanning agriculture to soccer clubs and help consumers pay off their credit cards or get below-market interest rates on mortgages. The government hopes this will force other banks to come to the party after they pulled back on extending credit to deal with billions of dollars in debt-restructuring requests and a growing pile of bad loans.”
February 18 – Bloomberg (Ugur Yilmaz and Cagan Koc): “Turkey cut the amount of cash lenders are required to hold in reserves for the first time in six months as the central bank tries to rouse credit growth without signaling a more drastic change in its tight policy stance. With its crisis-level monetary settings on hold for three consecutive meetings, the central bank announced over the weekend that it’s lowering reserve-ratio requirements.”
February 20 – Financial Times (Joseph Cotterill): “South Africa has unveiled the largest bailout in the country’s history for Eskom, the struggling state power monopoly, whose financial troubles have pushed it to the brink of collapse and caused rolling national blackouts. The government will inject R69bn ($4.8bn) over three years to stabilise Eskom’s $30bn debt as it attempts a turnround, …South Africa’s finance minister, said… The risk of a collapse at Eskom is a serious threat to South Africa’s already stretched public finances as its debt is mostly state-guaranteed. Without a plan to control Eskom’s rising costs, a bailout could also imperil the country’s last remaining investment-grade credit rating, with Moody’s.”
February 20 – Bloomberg (Michael Cohen and Gordon Bell): “The sorry state of South Africa’s state power utility starkly illustrates just how far the country slipped during former President Jacob Zuma’s scandal-marred rule and the enormity of the task of rebuilding the nation’s stricken finances. From the heady days of the 2000s, when growth topped 5% a year, the economy has struggled through two recessions, and debt ratios have tripled. There have been almost daily revelations of state corruption, the nation's final investment-grade rating is hanging by a thread and budget surpluses have turned to ever-widening shortfalls.”
February 19 – Bloomberg (Subhadip Sircar): “India is struggling to sell its bonds at recent auctions, and that’s even before Prime Minister Narendra Modi embarks upon a record borrowing program. Underwriters rescued a longer-tenor bond sale on Friday following poor buying support that’s seen the bid-to-cover ratio -- a gauge of demand -- drift lower in the last two auctions from levels seen in January. Concerns about an over-supply of longer maturity bonds have increased after the government on Feb. 1 said it plans to borrow almost $100 billion for the year starting April 1”
Global Bubble Watch:
February 17 – New York Times (Steven Erlanger and Katrin Bennhold): “European leaders have long been alarmed that President Trump’s words and Twitter messages could undo a trans-Atlantic alliance that had grown stronger over seven decades. They had clung to the hope that those ties would bear up under the strain. But in the last few days of a prestigious annual security conference in Munich, the rift between Europe and the Trump administration became open, angry and concrete, diplomats and analysts say. A senior German official… shrugged his shoulders and said: ‘No one any longer believes that Trump cares about the views or interests of the allies. It’s broken.’”
February 16 – Bloomberg (Marc Champion): “If China and the U.S. are in the midst of a divorce, Europeans look increasingly like the children. That was the impression given by a series of back-to-back appearances on Saturday, from U.S. Vice President Mike Pence, Chinese politburo member Yang Jiechi, Russian Foreign Minister Sergei Lavrov and German Chancellor Angela Merkel. The speeches put growing great power rivalries on display, but with Europe more the object of a custody battle than a participant. Speaking at the annual Munich Security Conference, Yang looked like he was trying to drive a wedge between the U.S. and its European Union allies… He spent much of his speech extolling the virtues of cooperation, international organizations and free trade, popular in Europe, and attacked the dangers of ‘protectionism,’ as well as ‘hegemony and power politics.’ The U.S. wasn’t named, but the target was clear.”
February 19 – Reuters (Tom Miles): “A quarterly leading indicator of world merchandise trade slumped to its lowest reading in nine years…, which should put policymakers on guard for a sharper slowdown if trade tensions continue, the World Trade Organization said… The WTO’s quarterly outlook indicator, a composite of seven drivers of trade, showed a reading of 96.3, the weakest since March 2010 and down from 98.6 in November. A reading below 100 signals below-trend growth in trade.”
February 18 – Bloomberg (Denise Wee): “Asia’s dollar bond markets have staged a blistering rally this year, but for a group of borrowers that sit on the cusp of a junk rating, there’s no relief in sight. As worsening global macro-economic conditions put firms under pressure, concerns over so-called fallen angels, or investment-grade companies that are cut to junk, are mounting in Asia and globally. Man Group Plc, the world’s largest publicly traded hedge fund manager, warned investors in December of the ‘astonishing bubble’ in BBB level debt.”
February 18 – Bloomberg (Daniel Moss): “A new bestseller might be in the offing. If the public could get its hands on it, that is. The Reserve Bank of Australia's board spent a chunk of its interest-rate meeting this month digesting a paper on the housing slump and what it foretells for that famous 27-year growth streak. Consideration of the paper, revealed in minutes of the RBA's Feb. 5 conclave…, may explain a lot… But few things are of as much interest for the local economy or dominate public airwaves like the housing industry. It's a national obsession…. Prices are down from their 2017 peaks in Sydney and Melbourne by 12% and 9%... In the minutes, the RBA called drops in Perth and Darwin ‘significant.’ The word ‘housing’ appears in the minutes more than 30 times, about three times as many as the word ‘China’…”
February 20 – Bloomberg (Jason Scott): “A generation of young Australians priced out of the property market and frustrated at a widening wealth divide could prove pivotal in triggering a change of government in May. The main opposition Labor party has made tackling the growing gap between so-called baby boomers and millennials a key plank of its campaign to win office for the first time since 2013. The center-left party, which is leading Prime Minister Scott Morrison’s government in opinion polls, is pledging to curb tax breaks for property investors that helped drive home prices beyond the reach of many Australians.”
February 20 – Wall Street Journal (Jenny Strasburg and Gretchen Morgenson): “Deutsche Bank AG racked up a loss of $1.6 billion over nearly a decade on a complex municipal-bond investment that it bought in the runup to the 2008 financial crisis, and failed to confront head-on even as markets were upended and regulations tightened. The loss… represents one of Deutsche Bank’s largest ever from a single wager—roughly quadruple its entire 2018 profit—and ranks as one of the banking industry’s biggest soured bets in the last decade.”
Europe Watch:
February 19 – Reuters (Sara Rossi and Emilio Parodi): “Italy’s tax police have carried out a seizure order for more than 700 million euros ($794 million) as part of a probe targeting the country’s top four banks over alleged fraudulent diamond sales, two sources close to the matter said…”
Japan Watch:
February 20 – Reuters (Balazs Koranyi and Tom Sims): “Japan’s exports posted their biggest decline in more than two years as China-bound shipments tumbled, fuelling concerns about slowing global demand as the business mood sours and orders for the country’s machinery goods fell sharply. …Japan’s exports fell 8.4% year-on-year in January, a bigger decline than the 5.5% fall expected… It was the sharpest annual decline since October 2016…”
February 17 – Reuters (Stanley White): “Overseas orders for Japanese machinery posted their biggest tumble in more than a decade in December, as trade frictions dented global supply chain demand and manufacturers predicted further declines in orders this quarter. …Core machinery orders, considered a leading indicator of capital expenditure, fell 0.1% month-on-month in December… Highlighting bigger concerns about the external environment, however, was a 21.9% month-on-month slump in orders from overseas, the biggest fall since November 2007.”
February 17 – Reuters (Leika Kihara): “Japan must ramp up fiscal spending with debt bank-rolled by the central bank, the Bank of Japan’s former deputy governor Kikuo Iwata said, a controversial proposal that highlights the BOJ’s challenge as it tries to reignite an economy after years of sub-par growth. Iwata, an architect of the BOJ’s massive bond-buying programme dubbed ‘quantitative and qualitative easing’ (QQE), warned that inflation will miss the central bank’s 2% target without stronger measures to boost consumption.”
Fixed-Income Bubble Watch:
February 17 – Financial Times (Joe Rennison): “Companies across America are turning to the secured bond market for funding, as the Federal Reserve’s decision to hit the pause button on further interest rate rises has reduced the appeal of previously red-hot loans. Already indebted or lowly rated companies were heavy users of the loan market for much of last year, as investors flocked to financial products whose returns rose in tandem with rising interest rates. However, the prospect that US rate increases have peaked weakens the allure of loans… Instead, investors are putting more money into corporate bonds, which typically offer fixed returns that are more attractive in a world in which rates are likely to flatline — or even fall — over the next year.”
February 18 – Wall Street Journal (Telis Demos and Sam Goldfarb): “Corporate borrowers were in a tough spot for a few weeks in January. Things had been looking up after the December market swoon, but there were problems in a part of the market that serves junk-rated companies. Then Japan’s farms and fisheries came to the rescue. Norinchukin Bank, a 95-year-old bank that holds around $600 billion in deposits from Japan’s agricultural and fishing collectives, has amassed a significant share of the estimated $700 billion global market for collateralized loan obligations, or CLOs—complex investment vehicles that buy more than half of U.S. loans to junk-rated companies. The privately held bank’s $62 billion CLO portfolio is larger than those of either of the two biggest U.S. bank buyers, Wells Fargo & Co. and JPMorgan… The CLO market has roughly doubled in size since 2014, helping to fuel the growth of corporate debt to historic levels.”
Geopolitical Watch:
February 21 – Reuters (Andrew Osborn): “President Vladimir Putin has said that Russia is militarily ready for a Cuban Missile-style crisis if the United States wanted one, and that his country currently has the edge when it comes to a first nuclear strike. The Cuban Missile Crisis erupted in 1962 when Moscow responded to a U.S. missile deployment in Turkey by sending ballistic missiles to Cuba, sparking a standoff that brought the world to the brink of nuclear war. More than five decades on, tensions are rising again over Russian fears that the United States might deploy intermediate-range nuclear missiles in Europe, as a landmark Cold War-era arms-control treaty unravels.”
February 20 – Wall Street Journal (Ann M. Simmons): “President Vladimir Putin warned Russia would aim new advanced weapons against the U.S. should it deploy intermediate-range missiles in Europe, raising the stakes after the breakdown of a Cold War-era nuclear treaty. Mr. Putin said Russia wasn’t seeking confrontation with the U.S. and wouldn’t make the first move to deploy the missiles. But if Washington has such plans once it abandons the 1987 Intermediate-range Nuclear Forces Treaty, this ‘will be a serious threat to us’ and Russia will be ‘forced to provide for mirror and symmetrical actions,’ he said. Although Mr. Putin indicated that he remained open to nuclear arms control talks if the U.S. were to initiate them, his rhetoric and revelation of imminent plans to launch Russia’s first unmanned nuclear submarine signaled there was no turning back on abandoning the agreement and heightened the risk of a new arms race.”
February 19 – Wall Street Journal (Bojan Pancevski and Sara Germano): “The German government is leaning toward letting Huawei Technologies Co. participate in building the nation’s high-speed internet infrastructure, several German officials said, the latest sign of ambivalence among U.S. allies over Washington’s push to ostracize the Chinese tech giant as a national security risk. A small group of ministries reached a preliminary agreement two weeks ago that still needs formal approval by the full cabinet and parliament, officials said.”
February 19 – Reuters (Yimou Lee): “Taiwan will not accept any deal that destroys its sovereignty and democracy, President Tsai Ing-wen said… after the island’s opposition KMT party said it could sign a peace deal with China if it wins a presidential election next year. China claims self-ruled and proudly democratic Taiwan as its own and has vowed to bring the island, which it regards as sacred territory, under Beijing’s control, by force if necessary.”
February 15 – Reuters: “Iran warned neighboring Pakistan… it would ‘pay a heavy price’ for allegedly harboring militants who killed 27 of its elite Revolutionary Guards in a suicide bombing near the border earlier this week… Revolutionary Guards chief Major General Mohammad Ali Jafari also accused Tehran’s regional rival Saudi Arabia and the United Arab Emirates of supporting militant Sunni groups that attack Iranian forces, saying they could face ‘reprisal operations.’”
Thursday, February 21, 2019
Friday's News Links
[Reuters] Global shares up, Aussie dollar rebounds, Brent hits 2019 high
[Reuters] Gold heads for second weekly gain on growth concerns
[Reuters] U.S., China haggle over toughest issues in trade war talks
[Reuters] A Fed pivot, born of volatility, missteps, and new economic reality
[Bloomberg] Fresh Slowdown in China Home Prices Turns Spotlight on Beijing
[Bloomberg] U.S. Student-Loan Delinquencies Hit Record
[AP] At Kraft Heinz, a fed investigation and a $15.4B write-down
[AP] China bars millions from travel for ‘social credit’ offenses
[WSJ] U.S. Bets on China’s Special Envoy in Trade Talks
[WSJ] How Fast 5G Mobile Internet Feels
[FT] Slow-inflation conundrum prompts rethink at the Fed
[FT] China home price growth climbs to 19-month high
[FT] No-deal sets the stage for Brexit’s biggest negotiations
[FT] Why investors in India are still spooked by the shadows
[Reuters] Gold heads for second weekly gain on growth concerns
[Reuters] U.S., China haggle over toughest issues in trade war talks
[Reuters] A Fed pivot, born of volatility, missteps, and new economic reality
[Bloomberg] Fresh Slowdown in China Home Prices Turns Spotlight on Beijing
[Bloomberg] U.S. Student-Loan Delinquencies Hit Record
[AP] At Kraft Heinz, a fed investigation and a $15.4B write-down
[AP] China bars millions from travel for ‘social credit’ offenses
[WSJ] U.S. Bets on China’s Special Envoy in Trade Talks
[WSJ] How Fast 5G Mobile Internet Feels
[FT] Slow-inflation conundrum prompts rethink at the Fed
[FT] China home price growth climbs to 19-month high
[FT] No-deal sets the stage for Brexit’s biggest negotiations
[FT] Why investors in India are still spooked by the shadows
Thursday Evening LInks
[Reuters] Wall St. breaks run of gains as economic data disappoints
[Reuters] U.S. existing home sales fall sharply to three-year low
[Reuters] U.S. business spending on equipment weakening
[Reuters] J.P. Morgan cuts U.S. first-quarter GDP growth view to 1.5 percent
[Reuters] Weak U.S. data underscore growing headwinds to economy
[Reuters] Not there yet but closer: Britain and EU haggle over Brexit compromise
[Reuters] U.S.-based leveraged loan funds extend cash withdrawals: Lipper
[Bloomberg] Life Insurers’ CLO Investments Could Pose Big Risks, Fitch Says
[Reuters] Mexican central bank flags Pemex risks to economy -minutes
[Reuters] ECB's Nowotny says EU should agree to issue joint eurobonds
[NYT] U.S. Wrangles China for Firm Commitments as Trade Talks Continue
[WSJ] U.S. Campaign Against Huawei Runs Aground in an Exploding Tech Market
[FT] China restrictions on Australian coal imports alarm markets
[Reuters] U.S. existing home sales fall sharply to three-year low
[Reuters] U.S. business spending on equipment weakening
[Reuters] J.P. Morgan cuts U.S. first-quarter GDP growth view to 1.5 percent
[Reuters] Weak U.S. data underscore growing headwinds to economy
[Reuters] Not there yet but closer: Britain and EU haggle over Brexit compromise
[Reuters] U.S.-based leveraged loan funds extend cash withdrawals: Lipper
[Bloomberg] Life Insurers’ CLO Investments Could Pose Big Risks, Fitch Says
[Reuters] Mexican central bank flags Pemex risks to economy -minutes
[Reuters] ECB's Nowotny says EU should agree to issue joint eurobonds
[NYT] U.S. Wrangles China for Firm Commitments as Trade Talks Continue
[WSJ] U.S. Campaign Against Huawei Runs Aground in an Exploding Tech Market
[FT] China restrictions on Australian coal imports alarm markets
Wednesday, February 20, 2019
Thursday's News Links
[Reuters] Wall Street dragged down by healthcare stocks, weak economic data
[Reuters] U.S. core capital goods orders unexpectedly fall in December
[Reuters] Exclusive: U.S., China sketch outlines of deal to end trade war - sources
[Bloomberg] U.S., China Are Working on Multiple Memorandums for Trade Deal
[Reuters] Exclusive: China central bank sees benchmark rate cut as last resort, may use other tools - sources
[CNBC] Fed's Bullard: Rate hikes, balance sheet reduction 'coming to an end'
[Reuters] Fitch may cut UK's 'AA' rating on Brexit uncertainty
[Bloomberg] Housing Dream Turned Nightmare Spurs a Backlash in Australia
[Bloomberg] Major Chinese Port Bans Australian Coal Imports, Report Says
[Bloomberg] ECB Urged Swift Analysis, No Hasty Decision on New Lending
[AP] Minutes show Fed officials noted number of rising threats
[Reuters] Putin to U.S.: I'm ready for another Cuban Missile crisis if you want one
[WSJ] The U.S. and China Fear Their Leaders Will Cave In on Trade Battle
[FT] Chinese premier in rare spat with central bank
[FT] Why are Eurozone countries still so indebted?
[Reuters] U.S. core capital goods orders unexpectedly fall in December
[Reuters] Exclusive: U.S., China sketch outlines of deal to end trade war - sources
[Bloomberg] U.S., China Are Working on Multiple Memorandums for Trade Deal
[Reuters] Exclusive: China central bank sees benchmark rate cut as last resort, may use other tools - sources
[CNBC] Fed's Bullard: Rate hikes, balance sheet reduction 'coming to an end'
[Reuters] Fitch may cut UK's 'AA' rating on Brexit uncertainty
[Bloomberg] Housing Dream Turned Nightmare Spurs a Backlash in Australia
[Bloomberg] Major Chinese Port Bans Australian Coal Imports, Report Says
[Bloomberg] ECB Urged Swift Analysis, No Hasty Decision on New Lending
[AP] Minutes show Fed officials noted number of rising threats
[Reuters] Putin to U.S.: I'm ready for another Cuban Missile crisis if you want one
[WSJ] The U.S. and China Fear Their Leaders Will Cave In on Trade Battle
[FT] Chinese premier in rare spat with central bank
[FT] Why are Eurozone countries still so indebted?
Wednesday Evening Links
[Reuters] Wall St. ends higher after Fed minutes
[Reuters] Fed flags end to balance sheet runoff, patience on rates
[CNBC] Fed expects to end balance sheet reduction by the end of the year, minutes say
[Bloomberg] Fed Minutes Show Officials Unsure on Need for Rate Hikes in 2019
[Reuters] U.S. money market assets post biggest drop in 2 months -iMoneyNet
[Bloomberg] South Africa’s Troubled Utility Reveals Country’s Fatal Flaws
[WSJ] Fed Prepares to End Balance Sheet Runoff Later This Year
[WSJ] Deutsche Bank Lost $1.6 Billion on a Bond Bet
[Reuters] Fed flags end to balance sheet runoff, patience on rates
[CNBC] Fed expects to end balance sheet reduction by the end of the year, minutes say
[Bloomberg] Fed Minutes Show Officials Unsure on Need for Rate Hikes in 2019
[Reuters] U.S. money market assets post biggest drop in 2 months -iMoneyNet
[Bloomberg] South Africa’s Troubled Utility Reveals Country’s Fatal Flaws
[WSJ] Fed Prepares to End Balance Sheet Runoff Later This Year
[WSJ] Deutsche Bank Lost $1.6 Billion on a Bond Bet
Tuesday, February 19, 2019
Wednesday's News Links
[Reuters] Wall St. muted with focus on trade talks, Fed minutes
[Reuters] Palladium breaks $1,500 barrier for first time; gold also rises
[Reuters] Oil near 2019 highs amid OPEC cuts, U.S. sanctions
[Reuters] Amid trade talks, China urges U.S. to respect its right to develop, prosper
[CNBC] New US tariffs on Chinese goods will be 'catastrophic' for global stocks: China media
[Reuters] ECB to discuss new round of loans to banks soon, Praet says
[Reuters] Japan's exports fall most in two years as China shipments weaken
[Reuters] China will not change prudent monetary policy: Premier Li
[Bloomberg] Global Recession Fears Are Suddenly Stalking the Credit Market
[Bloomberg] Why the U.S. and China Can’t Make a Deal
[Bloomberg] South Africa's Worsening Economic and Fiscal Outlook in Charts
[AFP] US debt hits record under Trump, Republicans mum
[Bloomberg] Weak Bond Auctions Flash Warning on India's Record Debt Sales
[Bloomberg] Erdogan Makes Cheap Loans a Central Plank in Campaign Trail
[CNBC] Putin threatens to target US if it deploys missiles in nearby European countries
[Reuters] Taiwan says will not accept any deal that destroys democracy
[WSJ] How Long Will Fed’s Rate Pause Last? Minutes Could Yield Clues
[WSJ] Markets Warm to the Prospect of an ECB Funding Boost for Banks
[WSJ] Putin Ratchets Up Nuclear Warning Against U.S.
[FT] Why banks are wary of Beijing plea to back private companies
[FT] South Africa plots $5bn bailout of state-owned power company
[Reuters] Palladium breaks $1,500 barrier for first time; gold also rises
[Reuters] Oil near 2019 highs amid OPEC cuts, U.S. sanctions
[Reuters] Amid trade talks, China urges U.S. to respect its right to develop, prosper
[CNBC] New US tariffs on Chinese goods will be 'catastrophic' for global stocks: China media
[Reuters] ECB to discuss new round of loans to banks soon, Praet says
[Reuters] Japan's exports fall most in two years as China shipments weaken
[Reuters] China will not change prudent monetary policy: Premier Li
[Bloomberg] Global Recession Fears Are Suddenly Stalking the Credit Market
[Bloomberg] Why the U.S. and China Can’t Make a Deal
[Bloomberg] South Africa's Worsening Economic and Fiscal Outlook in Charts
[AFP] US debt hits record under Trump, Republicans mum
[Bloomberg] Weak Bond Auctions Flash Warning on India's Record Debt Sales
[Bloomberg] Erdogan Makes Cheap Loans a Central Plank in Campaign Trail
[CNBC] Putin threatens to target US if it deploys missiles in nearby European countries
[Reuters] Taiwan says will not accept any deal that destroys democracy
[WSJ] How Long Will Fed’s Rate Pause Last? Minutes Could Yield Clues
[WSJ] Markets Warm to the Prospect of an ECB Funding Boost for Banks
[WSJ] Putin Ratchets Up Nuclear Warning Against U.S.
[FT] Why banks are wary of Beijing plea to back private companies
[FT] South Africa plots $5bn bailout of state-owned power company
Tuesday Evening Links
[Reuters] Asia stocks up slightly, eyes on U.S.-China talks, Fed minutes
[Reuters] Gold prices hold at 10-month highs; markets await Fed minutes
[Reuters] Wall Street edges higher on Amazon, Walmart gains; trade talks in focus
[Reuters] Trump says March 1 deadline for China trade talks not 'magical' date
[Reuters] Exclusive: Fed's Williams says new economic outlook necessary for rate hikes
[Reuters] U.S. wants pledge for stable Chinese yuan as talks resume: report
[MarketWatch] Home builder confidence jumps in February to four-month high
[Reuters] Italian police seize assets from four banks in diamonds probe: source
[WSJ] Trump Eases Off Hard Deadline for China Tariffs
[FT] For stocks, it’s corporate buying that really matters
[FT] Chinese hackers increase attacks on telecoms companies
[Reuters] Gold prices hold at 10-month highs; markets await Fed minutes
[Reuters] Wall Street edges higher on Amazon, Walmart gains; trade talks in focus
[Reuters] Trump says March 1 deadline for China trade talks not 'magical' date
[Reuters] Exclusive: Fed's Williams says new economic outlook necessary for rate hikes
[Reuters] U.S. wants pledge for stable Chinese yuan as talks resume: report
[MarketWatch] Home builder confidence jumps in February to four-month high
[Reuters] Italian police seize assets from four banks in diamonds probe: source
[WSJ] Trump Eases Off Hard Deadline for China Tariffs
[FT] For stocks, it’s corporate buying that really matters
[FT] Chinese hackers increase attacks on telecoms companies
Monday, February 18, 2019
Tuesday's News Links
[Reuters] Wall St. subdued with U.S.-China trade talks in focus
[Reuters] Treasuries -Yields fall with FOMC, U.S.-China trade talks in view
[Reuters] Treasuries -Yields fall with FOMC, U.S.-China trade talks in view
[Reuters] Palladium at record high, closes in on $1,500; gold gains
[AP] China’s economy czar heading to Washington for trade talks
[Reuters] Fed's Mester says rates likely will need to rise a bit
[Reuters] WTO warns of global trade slowdown as indicator hits nine-year low
[AP] China’s economy czar heading to Washington for trade talks
[Reuters] Fed's Mester says rates likely will need to rise a bit
[Reuters] WTO warns of global trade slowdown as indicator hits nine-year low
[Reuters] Payless ShoeSource files for Chapter 11 bankruptcy protection
[AP] China auto sales fall in January for eighth month
[AP] China auto sales fall in January for eighth month
[Reuters] Trump urges Venezuelan military to abandon Maduro or 'lose everything'
[AP] Survey points to no rebound for slowing Germany economy
[Bloomberg] Kuroda Says Stronger Yen Could Force BOJ's Hand on Stimulus
[AP] Survey points to no rebound for slowing Germany economy
[Bloomberg] Kuroda Says Stronger Yen Could Force BOJ's Hand on Stimulus
Monday Evening Links
[Reuters] Asian shares hover near four-month high, buoyed by trade optimism
[Bloomberg] Stocks, Commodities Climb as Trade Optimism Builds: Markets Wrap
[Reuters] Oil gains as investors grow optimistic over OPEC output deal
[Reuters] Brazil markets fall as Cabinet scandal shadows pension overhaul
[Reuters] New round of U.S.-China trade talks begins Tuesday
[Reuters] EU says it will react swiftly if Trump hits it with car tariffs
[Reuters] Auto industry lines up against possible U.S. tariffs
[Bloomberg] Turkey Cuts the Amount of Cash Banks Need to Hold
[FT] Chinese police launch dragnet for peer-to-peer lenders
[FT] China developers snap up distressed real estate debt
[FT] We need to talk about Bunds
[Bloomberg] Stocks, Commodities Climb as Trade Optimism Builds: Markets Wrap
[Reuters] Oil gains as investors grow optimistic over OPEC output deal
[Reuters] Brazil markets fall as Cabinet scandal shadows pension overhaul
[Reuters] New round of U.S.-China trade talks begins Tuesday
[Reuters] EU says it will react swiftly if Trump hits it with car tariffs
[Reuters] Auto industry lines up against possible U.S. tariffs
[Bloomberg] Turkey Cuts the Amount of Cash Banks Need to Hold
[FT] Chinese police launch dragnet for peer-to-peer lenders
[FT] China developers snap up distressed real estate debt
[FT] We need to talk about Bunds
Sunday, February 17, 2019
Monday's News Links
[Reuters] World stocks lifted to 2-1/2 month highs by trade optimism
[Reuters] U.S. agency submits auto tariff probe report to White House
[AP] China accuses US of trying to block its tech development
[AP] EU to react swiftly if Trump slaps tariffs on EU cars
[Reuters] Architect of BOJ stimulus calls for big fiscal spending backed by c.bank
[Reuters] Seven lawmakers quit UK Labour Party citing Brexit 'betrayal', anti-Semitism
[AP] China seizes $1.5 billion in online lending crackdown
[WSJ] Negative Yields Mount Along With Europe’s Problems
[WSJ] Munich Conference Highlights a Divided U.S.
[FT] Federal Reserve nears decisions on its asset portfolio
[FT] US secured bond sales jump as red-hot loans cool
[FT] German export machine braces for global shocks
[FT] Angry words in Munich speak to fraying Atlanticism
[Reuters] U.S. agency submits auto tariff probe report to White House
[AP] China accuses US of trying to block its tech development
[AP] EU to react swiftly if Trump slaps tariffs on EU cars
[Reuters] Architect of BOJ stimulus calls for big fiscal spending backed by c.bank
[Reuters] Seven lawmakers quit UK Labour Party citing Brexit 'betrayal', anti-Semitism
[AP] China seizes $1.5 billion in online lending crackdown
[WSJ] Negative Yields Mount Along With Europe’s Problems
[WSJ] Munich Conference Highlights a Divided U.S.
[FT] Federal Reserve nears decisions on its asset portfolio
[FT] US secured bond sales jump as red-hot loans cool
[FT] German export machine braces for global shocks
[FT] Angry words in Munich speak to fraying Atlanticism
Sunday Evening Links
[Reuters] Asia shares up on optimism over trade talks, stimulus
[Reuters] Gold at 2-week highs; trade talk hopes whet risk-appetite
[Reuters] Oil hits three-month high on OPEC cuts, U.S. sanctions on Iran, Venezuela
[Reuters] Japan's machinery orders slump as trade frictions bite
[Reuters] Gold at 2-week highs; trade talk hopes whet risk-appetite
[Reuters] Oil hits three-month high on OPEC cuts, U.S. sanctions on Iran, Venezuela
[Reuters] Japan's machinery orders slump as trade frictions bite
Sunday's News Links
[Bloomberg] Central Bankers Take to Stage as Dovish Outlooks Spread
[AP] In Brexit limbo, UK veers between high anxiety, grim humor
[Bloomberg] Hong Kong's Growth Halved in Fourth Quarter as Trade War Hit
[CNBC] A big change in accounting will put $3 trillion in liabilities on corporate balance sheets
[Reuters] Recent data suggest weakening euro zone, ECB's Rehn tells paper
[Yahoo Finance] Gundlach: Last year's market selloff was just a 'taste of things to come'
[Bloomberg] U.S. Student Debt in ‘Serious Delinquency’ Tops $166 Billion
[Bloomberg] China, Russia Join for Push to Split U.S. From Allies
[NYT] Rift Between Trump and Europe Is Now Open and Angry
[WSJ] New White House, Congressional Spending Fights on the Horizon
[AP] In Brexit limbo, UK veers between high anxiety, grim humor
[Bloomberg] Hong Kong's Growth Halved in Fourth Quarter as Trade War Hit
[CNBC] A big change in accounting will put $3 trillion in liabilities on corporate balance sheets
[Reuters] Recent data suggest weakening euro zone, ECB's Rehn tells paper
[Yahoo Finance] Gundlach: Last year's market selloff was just a 'taste of things to come'
[Bloomberg] U.S. Student Debt in ‘Serious Delinquency’ Tops $166 Billion
[Bloomberg] China, Russia Join for Push to Split U.S. From Allies
[NYT] Rift Between Trump and Europe Is Now Open and Angry
[WSJ] New White House, Congressional Spending Fights on the Horizon
Saturday, February 16, 2019
Saturday's News Links
[Reuters] U.S.-China trade talks to resume next week, Trump hints at extension
[Reuters] U.S. President Trump to get update on China trade talks
[AP] Trump’s new trade decision: Impose tariffs on imported cars?
[Reuters] Pence chastises EU, rejects Merkel's call to work with Russia
[Reuters] Iran says Pakistan to 'pay high price' over attack, warns Saudi
[WSJ] China’s Property Market, Once a Lifeline, Now Carries Economic Risks
[Reuters] U.S. President Trump to get update on China trade talks
[AP] Trump’s new trade decision: Impose tariffs on imported cars?
[Reuters] Pence chastises EU, rejects Merkel's call to work with Russia
[Reuters] Iran says Pakistan to 'pay high price' over attack, warns Saudi
[WSJ] China’s Property Market, Once a Lifeline, Now Carries Economic Risks
Friday, February 15, 2019
Weekly Commentary: No Holds Barred
The world is now fully embroiled in a most precarious period. I wonder if the Fed is comfortable seeing the markets dash skyward – the small caps up 16.4% y-t-d, Banks 15.9%, Transports 15.2%, Biotechs 18.5% and the Semiconductors 17.0%. Or, perhaps, they’re quickly coming to recognize that they are now fully held hostage by market Bubbles.
Similarly, I ponder how Beijing feels about January’s booming Credit data – Aggregate Financing up $685 billion in a month. Do officials appreciate that they are completely held captive by history’s greatest Credit Bubble? I have argued that Bubbles have become a fundamental geopolitical device – a stratagem. The situation has regressed to a veritable global Financial Arms Race. As China/U.S. trade negotiations seemingly head down the homestretch, each side must believe that rallying domestic markets beget negotiating power. Meanwhile, emboldened global markets behave as if they have attained power surpassing mighty militaries and even nuclear arsenals.
February 15 – Reuters (Kevin Yao and Judy Hua): “China’s banks made the most new loans on record in January - totaling 3.23 trillion yuan ($477bn) - as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy. Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share. But they have also faced months of pressure from regulators to step up lending, particularly to cash-starved smaller firms. Net new yuan lending last month was far more than expected and eclipsed the last high of 2.9 trillion yuan in January 2018. Analysts… had predicted new loans of 2.8 trillion yuan, more than double the level seen in December.”
China's January new bank loans were 11.4% higher than the previous record from January 2018 – and 15% above estimates. Bank Loans expanded an imprudent $821 billion over the past three months alone, a full 20% above the comparable period from one year ago. Total Bank Loans expanded 13.4% over the past year; 28% in two years; 45% in three years; 91% in five years; and an incredible 323% during the past decade.
Led by bubbling bank lending, China’s Aggregate Financing expanded a record $685 billion during January. Flood gates wide open. While typically a big month for Chinese lending, January’s growth in Aggregate Financing was 50% above January 2018. It’s worth noting that the growth in Aggregate Financing over the past six months ran 7% above the comparable year ago period (and equates to an annualized pace of $3.7 TN). Consumer (largely mortgage) Loans expanded a record $146 billion for the month, 10% greater than the previous record from January 2018. Consumer loans expanded 18% over the past year; 43% in two years; 77% in three; and 140% in five years.
It’s too fitting: as the long-standing global superpower and ascending superpower are locked in tortuous negotiations, their respective financial power centers – securities markets in the U.S. and state-directed bank lending in China – rage. No Holds Barred.
“The reason I’m giving the central bank an “F” is look at what’s happening in China and Asia… Look at what’s happening in Europe from the economic perspective. The U.S. stimulated at full employment with our tax cuts. That stimulus is about to wear off. What I worry about is the last three recessions we’ve had in the U.S. we’ve cut rates 500 bps. Now we can only cut them 225 or 250. And a week or two ago the San Francisco Fed put out a white paper about the benefits of negative interest rates. I hope that’s not where we’re going, but we can only cut rates about 225/250 bps to be at zero. So, this point of normalization should have happened long ago – not now. They were really late in the cycle in raising rates and now they’re stuck. So when we get into even a small recession, I don’t think we have the arrows in the quiver. And so let’s hope that we learned something from Japan and Europe about negative interest rates. They destroy the banking sectors and they have not helped their economies whatsoever…” Kyle Bass, Hayman Capital Management, appearing on Bloomberg Television, February 11, 2019
Seeing eye-to-eye with Kyle Bass, it has become difficult not to be thinking ahead to the next recession. And while Chinese Credit and ongoing aggressive global monetary stimulus can no doubt prolong the “Terminal Phase” of this most protracted worldwide boom, this comes at a steep price.
Between July 2007 and December 2008, the Fed collapsed fed funds 500 bps. At least as important, 10-year Treasury yields sank about 300 bps during this period (520bps to 213bps). After ending June 2007 at 6.26%, benchmark Fannie Mae MBS yields closed out 2008 at 3.89%.
The Fed retained significant firepower to counter the bursting of the mortgage finance Bubble. Between August 2007 and March 2009, benchmark 30-year mortgage rates sank from about 6.70% to 4.85%. Importantly, by collapsing rates and purchasing large quantities of mortgage-backed securities, the Fed orchestrated a major mortgage refinancing boom. This, along with scores of government-assistance programs, allowed tens of millions of indebted homeowners to significantly reduce monthly mortgage payments. In particular, millions of higher-risk borrowers were able to replace old high-rate subprime mortgages for prime mortgages with dramatically lower payments.
At 4.37%, 30-year conventional mortgage rates are today already below the lowest levels from 2009. And with the vast majority of borrows over recent years having refinanced at historically low mortgage rates, there’s limited prospects for reduced monthly payments to dampen financial burdens during the next recession.
Worse yet, student loan debt has more than doubled since the crisis. And when the next recession hits, there will be record amounts of auto and Credit card debt.
February 12 – Reuters (Jonathan Spicer): “Some red flags emerged for the U.S. economy late last year as credit card inquiries fell, student-loan delinquencies remained high and riskier borrowers drove home automobiles, according to a report that could signal a downturn is on the horizon. The U.S. household debt and credit report… by the Federal Reserve Bank of New York, showed that the overall debt shouldered by Americans edged up to a record $13.5 trillion in the fourth quarter of 2018. It has risen consistently since 2013, when debt bottomed out after the last recession. While mortgage debt, by far the largest slice, slipped for the first time in two years, other forms of borrowing rose including that of credit cards, which at $870 billion matched its pre-crisis peak in 2008.”
Auto lending, in particular, has gone through a protracted – arguably unprecedented – period of loose lending.
February 12 – Washington Post (Heather Long): “A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported…, even more than during the wake of the financial crisis era. Economists warn this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills. ‘The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market,’ economists at the New York Fed wrote… A car loan is typically the first payment people make because a vehicle is critical to getting to work, and someone can live in a car if all else fails. When car loan delinquencies rise, it is a sign of significant duress among low-income and working-class Americans.”
February 13 – CNBC (Sarah O'Brien): “As Americans' appetite for new cars continues unabated, an advocacy group is sounding the alarm over the growing level of auto debt carried by U.S. consumers. In a report…, U.S. PIRG warns that the continuing rise in auto debt is putting many consumers in a financially vulnerable position, which could worsen during an economic downturn… ‘More and more people are buying too much car for what they can afford,’ said Ed Mierzwinski, senior director of U.S. PIRG's federal consumer program. The group's new report delves into the financial implications and policy-related aspects of Americans' reliance on cars. It shows that the aggregate amount of auto debt that consumers carry — roughly $1.27 trillion — is 75% more than the amount owed at the end of 2009… Overall, auto debt accounts for about 9% of total U.S. consumer debt, up from 6% in late 2011… Among subprime borrowers — those with credit scores below 620— the delinquency rate was 16.3% in mid-2018. In 2015, that figure was 12.4%... The average price of a new vehicle is now about $37,100, compared with $27,573 five years ago… As of January, the average amount financed was $31,707 and the average loan length had reached 69.1 months, up from 61 in 2010…”
And from the PIRG report: “The rise in automobile debt since the Great Recession leaves millions of Americans financially vulnerable — especially in the event of an economic downturn… Of all auto loans issued in the first two quarters of 2017, 42% carried a term of six years or longer, compared to just 26% in 2009… Many car buyers ‘roll over’ the unpaid portion of a car loan into a loan on a new vehicle, increasing their financial vulnerability… At the end of 2017, almost a third of all traded-in vehicles carried negative equity, with these vehicles being underwater by an average of $5,100… The increase in higher-cost ‘subprime’ loans has extended auto ownership to many households with low credit scores… In 2016, lending to borrowers with subprime and deep subprime credit scores made up as much as 26% of all auto loans originated.”
When it comes to Bubbles, the more conspicuous the less likely they are to be deeply systemic. The “tech” Bubble was obvious, yet the most egregious excess was contained within the technology sector. The mortgage finance Bubble was much more systemic, with excesses spread about and not as apparent. I believe today’s Super “Tech” Bubble is much more systemic than back in 2000. And while subprime is not the critical issue it was for the previous Bubble, I would argue that excess in many key housing markets is comparable. Commercial real estate on a national basis is likely more vulnerable today than in 2007, and the same could be said for some regional housing markets (i.e. greater “Silicon Valley”, Los Angeles, Seattle, Portland, Atlanta, etc.). Today’s Bubble in leveraged lending and M&A is greater than 2006/2007. The Bubble in corporate Credit dwarfs that from the mortgage finance Bubble period. Excesses throughout the securities markets phenomenally exceed those from the prior Bubble period. Moreover, I suspect the current level of derivatives-related speculative leverage could be multiples of 2007.
February 13 – Associated Press (Martin Crutsinger): “The government surpassed a dubious milestone this week: Its debt topped $22 trillion — that’s trillion, with a ‘t’ — for the first time. Piles of federal debt have been growing ever higher for years, fueled by accumulating annual deficits, which themselves have been driven by tax cuts, government spending increases and the mounting costs of Medicare and Social Security and interest on the debt itself.”
Thinking Ahead to the Next Recession, we should be deeply concerned about our nation’s tenuous fiscal position. To see deficits approaching 5% of GDP - with unemployment and interest rates at such historically low levels - should have us all fearful. Of course deficits matter. After ending 2007 at $8.056 TN, federal Liabilities (from Fed’s Z.1) surged $11.86 TN, or 147%, to end Q3 2018 at $19.918 TN. Over this period, outstanding Treasury Securities jumped $11.367 TN, or 188%, to $17.418 TN. And after ending 2007 at $7.40 TN, Agency Securities increased $1.62 TN, or 22%, to $9.02 TN. Over this period, combined Treasury and Agency securities almost doubled to $26.44 TN, expanding from 92% to 128% of GDP.
During the last crisis, the collapse in rates and market yields significantly mitigated the Treasury's debt service burden. This ensured an outsized percentage of huge deficit spending went to bolster the real economy, with relatively less to debt holders. Come the next recession, already huge deficits will expand much larger, likely with only meager benefits from lower borrowing costs. Worse yet, there’s a scenario where fiscal recklessness finally provokes some market backlash. At some point, out of control deficits could be compounded by rising market yields – central bank stimulus notwithstanding.
And we definitely cannot ponder the next recession without taking a global view. Since the last crisis, global Credit Bubbles have become highly synchronized, securities markets atypically synchronized, and economies uncommonly synchronized. Synchronization also applies within the markets – equities, investment-grade and “junk” corporate Credit, sovereign debt, M&A - “developed” and “developing.” Global asset prices – certainly including real estate – notably synchronized. When it comes to a synchronized global policy response, keep in mind that ECB and BOJ policy rates are basically at zero – with little evidence of benefits from negative rates. The ECB just ended QE, while the BOJ just keeps printing. With little effective ammo, policymakers exploit what they can to sustain the Bubble and hold fragilities at bay.
To be sure, today’s backdrop overshadows the world’s predicament heading into 2008/09. China and EM, in particular, were in the midst of powerful expansions in 2008 – burgeoning Bubbles readily resuscitated post-U.S. crisis. Fueled by China’s massive stimulus, the emerging markets became the “growth locomotive” pulling the entire global economy away from a downward spiral. Pondering the future, it is not at all clear how a vigorous downward spiral is repelled come the next crisis.
Policymakers continue to throw enormous stimulus at global markets and economies. Instead of stabilization, we’ve witnessed ongoing Bubble inflation and intensifying Monetary Disorder. And the more Bubbles inflate, the greater the underlying financial and economic fragilities – and the quicker the Fed was to conclude “normalization” and China was to, once again, aggressively spur lending.
What worries me most is that underlying instability and vulnerabilities have policymakers resolved to abrogate bear markets and recessions. Extraordinary measures continue to be taken to nullify business and market cycles, with apparently no appreciation for how vital adjustments and corrections are to sound financial and economic systems. Worst of all, structurally maladjusted and highly speculative global markets are emboldened as never before. Party like it’s twenty nineteen – with global financial, economic and geopolitical backdrops uncomfortably reminiscent of ninety years ago.
For the Week:
The S&P500 rose 2.5% (up 10.7% y-t-d), and the Dow jumped 3.1% (up 11.0%). The Utilities slipped 0.1% (up 5.3%). The Banks rallied 3.0% (up 15.9%), and the Broker/Dealers gained 2.8% (up 12.1%). The Transports surged 3.8% (up 15.2%). The S&P 400 Midcaps jumped 3.3% (up 15.1%), and the small cap Russell 2000 surged 4.2% (up 16.4%). The Nasdaq100 advanced 2.1% (up 11.5%). The Semiconductors jumped 3.7% (up 17.0%). The Biotechs surged 4.4% (up 18.5%). Though bullion added $7, the HUI gold index declined 0.6% (up 4.6%).
Three-month Treasury bill rates ended the week at 2.37%. Two-year government yields rose five bps to 2.52% (up 3bps y-t-d). Five-year T-note yields gained five bps to 2.49% (down 2bps). Ten-year Treasury yields added three bps to 2.66% (down 2bps). Long bond yields increased a basis point to 2.99% (down 2bps). Benchmark Fannie Mae MBS yields rose four bps to 3.45% (down 5bps).
Greek 10-year yields sank 20 bps to 3.80% (down 54bps y-t-d). Ten-year Portuguese yields declined nine bps to 1.56% (down 15bps). Italian 10-year yields fell 16 bps to 2.80% (up 6bps). Spain's 10-year yields added a basis point to 1.24% (down 18bps). German bund yields increased one basis point to 0.10% (down 14bps). French yields were little changed at 0.54% (down 17bps). The French to German 10-year bond spread narrowed one to 44 bps. U.K. 10-year gilt yields increased a basis point to 1.16% (down 12bps). U.K.'s FTSE equities index jumped 2.3% (up 7.6% y-t-d).
Japan's Nikkei 225 equities index rallied 2.8% (up 4.4% y-t-d). Japanese 10-year "JGB" yields added one basis point to negative 0.02% (down 2bps y-t-d). France's CAC40 surged 3.9% (up 8.9%). The German DAX equities index recovered 3.6% (up 7.0%). Spain's IBEX 35 equities index rose 3.0% (up 6.8%). Italy's FTSE MIB index surged 4.4% (up 10.3%). EM equities were mostly higher. Brazil's Bovespa index gained 2.3% (up 11.0%), while Mexico's Bolsa slipped 0.4% (up 3.2%). South Korea's Kospi index increased 0.9% (up 7.6%). India's Sensex equities index dropped 2.0% (down 0.7%). China's Shanghai Exchange jumped 2.5% (up 7.6%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 12.5%). Russia's MICEX equities index dipped 0.5% (up 5.6%).
Investment-grade bond funds saw inflows of $1.889 billion, and junk bond funds posted inflows of $728 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined four bps to a one-year low 4.37% (down 1bp y-o-y). Fifteen-year rates dipped three bps to 3.81% (down 3bps). Five-year hybrid ARM rates fell three bps to 3.88% (up 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 4.42% (down 13bps).
Federal Reserve Credit last week increased $2.3bn to $3.989 TN. Over the past year, Fed Credit contracted $396bn, or 9.0%. Fed Credit inflated $1.178 TN, or 42%, over the past 327 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.427 TN. "Custody holdings" increased $28.2bn y-o-y, or 0.8%.
M2 (narrow) "money" supply fell $31.3bn last week to $14.480 TN. "Narrow money" gained $623bn, or 4.5%, over the past year. For the week, Currency was about unchanged. Total Checkable Deposits jumped $48.2bn, while Savings Deposits dropped $82.8bn. Small Time Deposits rose $3.0bn. Retail Money Funds added $0.5bn.
Total money market fund assets gained $16.6bn to $3.080 TN. Money Funds gained $251bn y-o-y, or 8.9%.
Total Commercial Paper increased $3.8bn to $1.061 TN. CP declined $57bn y-o-y, or 5.1%.
Currency Watch:
The U.S. dollar index increased 0.3% to 96.904 (up 0.8% y-t-d). For the week on the upside, the New Zealand dollar increased 1.9%, the Brazilian real 0.8%, the Australian dollar 0.8%, and the Canadian dollar 0.3%. For the week on the downside, the South African rand declined 3.2%, the Mexican peso 0.9%, the Japanese yen 0.7%, the Swiss franc 0.5%, the South Korean won 0.4%, the British pound 0.4%, the euro 0.2% and the Swedish krona 0.1%. The Offshore Chinese renminbi declined 0.41% versus the dollar this week (up 1.55% y-t-d).
Commodities Watch:
February 12 – Bloomberg (Ranjeetha Pakiam): “China is adding to its gold reserves again, boosting holdings for a second month and reinforcing an outlook from bulls including Goldman Sachs… that central-bank buying will likely remain strong this year. The People’s Bank of China raised holdings to 59.94 million ounces, or about 1,864 metric tons, by the end of January from 59.56 million ounces a month earlier... In tonnage terms, it added about 11.8 tons last month after taking in just under 10 tons in December, which was the first time the PBOC had boosted its hoard since October 2016.”
The Goldman Sachs Commodities Index jumped 3.8% (up 13.1% y-t-d). Spot Gold added 0.5% to $1,322 (up 3.0%). Silver slipped 0.4% to $15.743 (up 1.3%). Crude surged $2.87 to $55.59 (up 22%). Gasoline jumped 8.7% (up 21%), and Natural Gas gained 1.6% (down 11%). Copper declined 0.4% (up 6%). Wheat dropped 2.0% (up 1%). Corn rose 2.3% (up 2%).
Market Dislocation Watch:
February 10 – Financial Times (Stephen Morris, Robert Smith and Olaf Storbeck): “Deutsche Bank has had to pay the highest financing rates on the euro debt market for a leading international bank this year, in a further sign of the German lender’s uphill struggle to reduce its funding costs. The bank raised eyebrows last week when it sold a total of €3.6bn in euro-denominated debt, paying 180 bps over the benchmark for a two-year bond, a steep rate for short-term funding. It also paid 230bp over the benchmark on a seven-year bond, a higher rate than domestic Spanish lender CaixaBank… For decades, cheap financing had been the cornerstone of Deutsche’s competitive advantage, with its perception as a ‘de facto’ extension of the German state guaranteeing rock-bottom funding costs that helped it break into the top ranks of global investment banking.”
February 11 – Wall Street Journal (Gunjan Banerji): “More investors are selling options in a bid to boost returns, a shift that traders say is helping to tamp down market volatility now—but potentially at the expense of greater turbulence later. Assets at mutual and exchange-traded funds that focus on systematically selling options have swelled by about 50% in the past five years to $15.7 billion in 2018, according to… Tayfun Icten, a senior analyst at Morningstar… Options-selling strategies center on collecting a small premium from the buyer in exchange for a promise to buy or sell shares at a specified price by a certain date. The strategy’s popularity highlights investors’ willingness to take on risks to pick up small gains, a ‘reach for yield’ behavior… The growth of options-selling trades has also been fueled by so-called structured products, investments packaged with derivatives…”
February 11 – Wall Street Journal (Daniel Kruger and Telis Demos): “Recent volatility in the market for overnight cash loans is raising concerns about a new benchmark that could set interest rates for trillions of dollars in mortgages and corporate debt. The cost to borrow cash overnight spiked late last year in part of the market for repurchase agreements, where lenders such as money-market funds make short-term loans to bond brokers, often using government debt as collateral. The ‘repo’ rate topped out above 6% in intraday trading on Dec. 31 before settling at an all-time high of 5.149%, according to JPMorgan. That has investors and bankers paying close attention to developments in this obscure yet vital part of the debt market, because repo trades are a key component of a new borrowing benchmark designed by the Federal Reserve Bank of New York. That benchmark, called SOFR, for the secured overnight financing rate, is considered the leading candidate to replace the fading London interbank offered rate…”
February 12 – Bloomberg (John Gittelsohn): “If stock-pickers are becoming an endangered species, this may be the latest sign. Investors now have more money in large-cap equity funds tracking indexes than in actively run funds of the same type. The lines crossed in the fourth quarter, according to… Morningstar Inc. Passive mutual funds, exchange-traded funds and so-called smart beta funds in the sector held $2.93 trillion in assets as of Dec. 31, compared with $2.84 trillion on the active side… Only 24% of all active funds -- those holding stocks, bonds or real estate -- outperformed their average passive rival over the 10 years through December, according to a Morningstar analysis of 4,600 U.S. funds with $12.8 trillion.”
Trump Administration Watch:
February 15 – Bloomberg (Alyza Sebenius and Andrew Mayeda): “President Donald Trump hailed progress made in trade talks with China this week, saying he may extend a tariff truce and take steps to sell a potential deal with opposition lawmakers. Trump’s comments signal the two sides may be approaching a deal after two days of high-level talks in Beijing. The two countries said they are working toward an initial written agreement, and will continue negotiations next week in Washington. The U.S. has threatened to more than double tariffs on $200 billion of Chinese goods if there’s no deal by March 1. ‘It’s going extremely well,’ Trump said…”
February 15 – Bloomberg (Justin Sink and Margaret Talev): “President Donald Trump said… he’ll declare a national emergency on the U.S. southern border in a bid to unlock more money to build his proposed wall, a day after agreeing to sign legislation providing about $1.4 billion for the controversial project. In unscripted remarks Friday morning, Trump depicted the declaration as ordinary but also said he expected it to be challenged in court. He predicted he’d eventually prevail, but conceded: ‘I didn’t need to do this.’ ‘I just want to get it done faster,’ he said of the wall. Combined with spending legislation Trump also intends to sign Friday or Saturday, the move will free up about $8 billion for the wall…”
February 12 – New York Times (Keith Bradsher): “When China joined the World Trade Organization, the global fraternity of cross-border commerce, it promised to open itself up to foreigners in lucrative businesses like banking, telecommunications and electronic-payment processing. More than 17 years later, China’s telecommunications industry remains firmly under government control. Only recently did China say it would allow foreign companies to own their own bank businesses here. And after nearly two decades of legal fights, China is still reviewing the applications of Visa and Mastercard to get into the country’s payment-processing market. The broken promises hang over Robert Lighthizer, the United States trade representative, and Treasury Secretary Steven Mnuchin as they arrive in Beijing for two days of talks to end a trade war between the United States and China.”
February 14 – Bloomberg (Elizabeth Dexheimer): “President Trump’s pick to lead Fannie Mae and Freddie Mac’s regulator said he wants to work with lawmakers on a housing-finance overhaul that’s needed to avoid devastating taxpayer losses in the event of a future crisis. Federal Housing Finance Agency nominee Mark Calabria told members of the Senate Banking Committee… that he agrees on the need for Congress to play a leading role in making major changes involving the two mortgage giants, which have been under U.S. control since 2008… ‘We need an open, competitive market,’ Calabria said… at a confirmation hearing on his bid to become FHFA’s director. ‘There is certainly a part of me that has a suspicion of monopolies and duopolies,’ he said…”
Federal Reserve Watch:
February 14 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are zeroing in on a strategy to end the wind-down of their $4 trillion asset portfolio as soon as this year, which would conclude an effort to drain stimulus from the financial system earlier than they had once anticipated. Fed officials could finalize more details of their strategy, including whether to slow the pace of shrinking their bondholdings, at their policy meeting next month… The process ‘probably should come to an end later this year,’ Fed governor Lael Brainard said… Cleveland Fed President Loretta Mester… said they would wrap up the planning at coming meetings.”
February 12 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell said the U.S. economy looks strong, but the central bank is continuing to find ways to fight poverty. Speaking… in Mississippi, Powell said the central bank is looking at a number of ways to help rural communities, with a particular focus on banking and finance for areas of need. ‘Today, data at the national level show a strong economy. Unemployment is near a half-century low, and economic output is growing at a solid pace. But we know that prosperity has not been felt as much in some areas, including many rural places,’ he said…”
February 12 – Reuters (Jason Lange): “Kansas City Federal Reserve Bank President Esther George… said she supported a pause in interest rate increases so that the Fed could assess how much its past hikes have slowed the economy. ‘Let’s step back and see what happens,’ George told an audience…, describing her support for the U.S. central bank’s move last month to signal it was not preparing more rate increases for now. George, who is a voter this year on the Fed’s interest rate policy decisions, was until recently an outspoken advocate for tighter monetary policy.”
February 12 – Reuters (Lucia Mutikani): “U.S. job openings surged to a record high in December, led by vacancies in the construction and accommodation and food services sectors, strengthening analysts’ views that the economy was running out of workers. While the release of the Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS, …underscored labor market strength, there are worries the shortage of workers could hurt an economic expansion that has lasted 9-1/2 years and is the second longest on record… Job openings, a measure of labor demand, increased by 169,000 to a seasonally adjusted 7.3 million in December, the highest reading since the series started in 2000. That lifted the job openings rate to 4.7% from 4.6% in November.”
U.S. Bubble Watch:
February 13 – Bloomberg (Katia Dmitrieva): “The U.S. budget deficit widened to $319 billion in the first three months of the government’s fiscal year as spending increased and revenue was little changed… The shortfall grew by 42% between the October to December period, compared with the same three months the previous year… Receipts climbed by 0.2% to $771.2 billion, while spending was up 9.6% to $1.1 trillion.”
February 13 – Wall Street Journal (Kate Davidson): “Federal tax revenue declined 0.4% in 2018, the first full calendar year under the new tax law, despite robust economic growth and the lowest unemployment rate in nearly five decades. …Federal revenue totaled $3.33 trillion last year, while federal spending totaled $4.2 trillion, a 4.4% increase from the previous year. That pushed the U.S. budget gap up to $873 billion for the 12 months that ended in December, compared with $680.8 billion during the same period a year earlier—a 28.2% increase. Last year was the highest deficit for a calendar year since 2012.”
February 8 – Washington Post (Christopher Ingraham): “The 400 richest Americans – the top 0.00025% of the population – have tripled their share of the nation’s wealth since the early 1980s, according to a new working paper on wealth inequality by University of California at Berkeley economist Gabriel Zucman. Those 400 Americans own more of the country’s riches than the 150 million adults in the bottom 60% of the wealth distribution, who saw their share of the nation’s wealth fall from 5.7% in 1987 to 2.1% in 2014… Overall, Zucman finds that ‘U.S. wealth concentration seems to have returned to levels last seen during the Roaring Twenties.’”
February 14 – Reuters: “U.S. retail sales recorded their biggest drop in more than nine years in December as receipts fell across the board, suggesting a sharp slowdown in economic activity at the end of 2018. …Retail sales tumbled 1.2%, the largest decline since September 2009 when the economy was emerging from recession… Economists polled by Reuters had forecast retail sales increasing 0.2% in December. Retail sales in December rose 2.3% from a year ago.”
February 14 – Reuters (Melissa Fares): “U.S. holiday spending in 2018 grew a lower-than-expected 2.9% to $707.5 billion, the National Retail Federation said…, citing turmoil over trade policy and the recent government shutdown as having hurt the industry.”
February 12 – Reuters (Lucia Mutikani): “U.S. small business optimism tumbled last month to its lowest level since President Donald Trump’s election more than two years ago amid growing uncertainty over the economic outlook. The National Federation of Independent Business said… its Small Business Optimism Index dropped 3.2 points to 101.2 in January, the weakest reading since November 2016.”
February 14 – Reuters: “U.S. producer prices fell for a second straight month in January, leading to the smallest annual increase in 1-1/2 years… The Labor Department said… its producer price index for final demand dipped 0.1% last month as the cost of energy products and food fell. The PPI dipped 0.1% in December. In the 12 months through January, the PPI rose 2.0%. That was the smallest gain since July 2017…”
February 10 – Wall Street Journal (Aisha Al-Muslim): “Makers of household staples from diapers to toilet paper are set to raise prices again this year after already hiking prices in 2018, hoping to offset higher commodity costs and boost profits. Church & Dwight Co. recently increased prices for about one-third of its products, including Arm & Hammer cat litter and baking soda, and some OxiClean cleaning products. ‘The good news is that competitors are raising [prices] in those categories as we speak,’ Church & Dwight Chief Executive Matthew Farrell said…”
February 15 – Reuters (Josephine Mason and Helen Reid): “The outlook for Wall Street earnings has deteriorated significantly in recent months, data shows, raising the risk that companies in the United States may slip into recession before its economy does - with Europe close behind. Analysts on average expect the S&P 500’s first-quarter earnings per share to drop 0.3% year-on-year, according to I/B/E/S Refinitiv data. That’s a big drop from the 8.2% rise expected as recently as October and would mark the first contraction in U.S. company earnings in three years. Analysts have also made deep cuts to forecasts for the rest of the year.”
February 12 – Reuters (Trevor Hunnicutt): “California Governor Gavin Newsom said… the state will dramatically scale back a planned $77.3 billion high-speed rail project that has faced cost hikes, delays and management concerns, but will finish a smaller section of the line. ‘Let’s be real. The current project, as planned, would cost too much and respectfully take too long. There’s been too little oversight and not enough transparency,’ Newsom said… Newsom said the state will complete a 119-mile (191 km) high-speed rail link between Merced and Bakersfield in the state’s Central Valley. In March 2018, the state forecast the costs had jumped by $13 billion to $77 billion and warned that the costs could be as much as $98.1 billion.”
February 14 – Associated Press: “U.S. long-term mortgage rates fell this week to a 12-month low, an enticement for prospective homebuyers in the upcoming season. Mortgage buyer Freddie Mac said… the average rate on the benchmark 30-year, fixed-rate mortgage declined to 4.37% from 4.41% last week. The key 30-year home borrowing rate averaged 4.38% a year ago.”
February 13 – Reuters (David Morgan, Sinead Carew, Stephen Culp and Trevor Hunnicutt): “Republican U.S. Senator Marco Rubio said… he will soon introduce legislation that would tax corporate stock buybacks like dividends, aiming to spur business investment, create more jobs and boost wages.”
February 12 – Bloomberg (Danielle Moran, Claire Ballentine and Martin Z. Braun): “Illinois needs $134 billion and may hold a yard sale to raise it. Governor J.B. Pritzker, a Democrat who took office last month, is turning to business experts to figure out how to chip away at the massive debt in the state’s employee retirement system that’s left the government’s credit rating dangling just one step above junk. Among the options it will weigh: How to use the state’s other assets -- like buildings and roads --- to pump more money into the pensions.”
February 10 – Wall Street Journal (Nicole Friedman): “Californians who want to insure their homes against the next wildfire are paying a price for two years of record-breaking blazes. Home-insurance companies in the Golden State are canceling some policies, refusing to sell new ones in certain areas and applying for rate increases as they look to reduce wildfire risk. ‘It’s getting harder and harder to find someone to write [insurance for] any given particular piece of property,’ said Bob Anderson, co-owner of Fromarc Insurance Agency… Insurers including State Farm and Allstate Corp. have filed to raise home-insurance rates in the past six months. The California FAIR Plan, the state insurer of last resort, said it would implement an average 20.3% price increase in April…”
February 14 – Wall Street Journal (Keiko Morris, Konrad Putzier and Josh Barbanel): “Amazon.com Inc.’s announcement that it is ditching plans for a corporate headquarters in New York City stunned real-estate speculators, developers and renters who had rushed into the Long Island City neighborhood to be near the new HQ2. Only three months ago, the prospect that the giant retailer would locate a headquarters in New York City and create 25,000 new jobs set off a real-estate frenzy that the borough of Queens had never experienced. Open houses for Long Island City condos were overflowing. Brokers said customers made offers via text messages on units, site unseen. Developers with office space in Long Island jockeyed to attract the thousands of workers that were expected, and local residents cheered the promise that new restaurants, fashion boutiques and other new stores would flood the retail-starved neighborhood.”
China Watch:
February 12 – Bloomberg (Sofia Horta e Costa): “Beijing is walking a tightrope between reviving its downbeat equity market and engineering another bubble. China’s securities regulator has started to remove many of the curbs designed to keep out speculators, signaling an end to the highly restrictive era that started when a boom in the country’s stocks turned to bust in 2015. The result has been an intensifying appetite for risk not seen in years. A gauge of small cap stocks has surged almost 11% over the past four trading days, the most since 2016. While investors and index providers have called on China to scale back restrictions barring the use of short-selling, leverage and derivatives, critics caution that the misuse of those tools could be dangerous. The concern is that taking deregulation too far may encourage the whirlwind trading that has fueled two massive bubbles in the past decade.”
February 13 – CNBC (Huileng Tan): “China… reported exports and imports data for January that easily topped expectations. That better-than-expected news comes as Beijing's trade dispute with the U.S. and other factors lead investors to worry that China's economy — long an engine of global growth — may be facing a sharp slowdown. Those concerns were compounded last month when China's customs data showed exports and imports both fell surprisingly in December… Dollar-denominated exports for the month rose 9.1% from a year ago… China's exports in January were expected to have contracted 3.2% from a year earlier… January dollar-denominated imports, meanwhile, fell 1.5% on-year, which was far better than expectations of a 10% decline from a year earlier…”
February 11 – Bloomberg: “Two large Chinese borrowers missed payment deadlines this month, underscoring the risks piling up in a credit market that’s witnessing the most company failures on record. China Minsheng Investment Group Corp., a private investment group with interests in renewable energy and real estate, hasn’t returned money to bondholders that it had pledged to repay on Feb. 1… And Wintime Energy Co., which defaulted last year, didn’t honor part of a restructured debt repayment plan last week… The developments are significant because both companies were big borrowers, and their problems accessing financing suggest that government efforts to smooth over cracks in the $11 trillion bond market aren’t benefiting all firms. If China Minsheng ends up defaulting, it may rank alongside Wintime Energy as one of China’s biggest failures, with 232 billion yuan ($34.3bn) of debt as of June 30…”
February 13 – Bloomberg: “It was supposed to be China’s answer to JPMorgan... But less than five years after China Minsheng Investment Group Corp. embarked on plans to become a financial colossus, the company has instead turned into a symbol of the turmoil sweeping China’s once-vaunted private sector. CMIG shocked investors when it missed a bond payment on Jan. 29, and markets remain jittery about the company even after it scraped together enough cash to repay the overdue note on Thursday. CMIG’s liquidity crunch, caused by what analysts have described as a combination of mismanagement and tighter lending conditions in China, underscores a sometimes overlooked risk to the global economy in the era of Trump, Brexit, and trade wars. As China reins in the shadow-banking system that supported its private sector with cheap credit for more than half a decade, companies that were meant to be pillars of the nation’s growth miracle are proving surprisingly fragile…”
February 11 – Reuters (Shu Zhang): “The collapse in China of a complex web of debt guarantees involving several private firms highlights risks in its financial system and opens up a potentially hazardous front for an economy in the grip of its slowest growth in nearly three decades. It is the last thing Beijing needs as it tries to fight off intensifying pressure on growth from a months-long trade dispute with the United States. Yet, as the government steps up economic support measures and moves to loosen gummed-up funding, it might be inadvertently inflaming financial risks with its call on state banks to sharply boost lending to the private sector. The warning bells are already sounding in the once-prosperous eastern city of Dongying, a hub for oil refining and heavy industry in Shandong province. Here, at least 28 private companies are seeking to restructure their debts and avoid bankruptcy, mainly due to souring loans that they guaranteed for other firms…”
February 15 – Bloomberg: “China’s current account surplus continued to decline, with the changing structure of the economy and trade pushing it to its lowest since 2004. The current-account balance in 2018 was $49 billion…”
February 11 – Financial Times (Tom Hancock): “Chinese consumer spending growth over the lunar new year slowed compared with last year in the latest sign that shoppers were feeling the effects of China’s decelerating economy. Chinese people spent Rmb1.01tn ($149bn) on restaurants and shopping over the week-long new year holiday — a peak period for retail, dining and movie watching… That was an increase of 8.5% from last year, a sharp drop from 2018’s year-on-year growth of 10.2% and the slowest rate of growth since such data were first tracked, in 2005.”
February 14 – Reuters (Stella Qiu and Ryan Woo): “China’s factory-gate inflation slowed for a seventh straight month in January to its weakest pace since September 2016, raising concerns the world’s second-biggest economy may see the return of deflation as domestic demand cools. Consumer inflation, meanwhile, eased in January from December to a 12-month low due to slower gains in food prices… China’s producer price index (PPI) in January rose a meagre 0.1% from a year earlier… On a monthly basis, producer prices have already been falling over the past three months.”
February 12 – Bloomberg: “China’s most recent plans to support banks’ capital raising may enable lenders to advance a record amount of new loans in 2019, according to China International Capital Corp. Credit growth this year may reach the same pace of 13.5% in 2018, while new loans are likely to exceed last year’s 16.2 trillion yuan, CICC analysts led by Victor Wang wrote…”
February 12 – Bloomberg (Yang Yang, Henry Chan, Sun Choi and Sida Liu): “China’s residential mortgage-backed securities issuance more than tripled in 2018, just as the nation’s household debt to disposable income ratio exceeds that of the U.S… Issuance of debt backed by Chinese mortgages has risen to 584 billion yuan ($87bn) in 2018 from 171 billion yuan in 2017 and 6.8 billion yuan in 2014.”
February 11 – Reuters (David Stanway): “Air pollution in 39 major northern Chinese cities rose 16% on the year in January…, with surging industrial activity making it increasingly unlikely they will meet their winter emissions targets. Average concentrations of small, hazardous particles known as PM2.5 in two major northern Chinese emissions control zones climbed 16% from a year earlier to 114 micrograms per cubic meter…”
Central Bank Watch:
February 10 – Reuters (Dhara Ranasinghe): “Cheap bank loans, a form of stimulus first launched by the ECB during the global financial crisis, look set to make a comeback in coming months and investors anticipate shorter term loans with a variable rate to allow the central bank flexibility. It’s just two months since the European Central Bank wrapped up its 2.6 trillion euro ($2.9 trillion) bond-buying scheme, but with euro zone growth at four-year lows and other global central banks already backtracking on policy tightening, bond market expectations of ECB action are on the rise. That’s expected to take the shape of a loan package for banks — known as Long Term Refinancing Operations (LTROs) or the more targeted TLTROs.”
February 10 – Financial Times (Miles Johnson): “Italy’s coalition government is in sharp disagreement over protecting the independence of the Bank of Italy, after senior politicians threatened to remove its leadership. Matteo Salvini, head of the anti-immigrant League party, said the central bank and Consob, the country’s stock market regulator, should be ‘reduced to zero, more than changing one or two people’ and that ‘fraudsters’ who inflicted losses on Italian savers should ‘end up in prison for a long time’. The comments drew a strong response from Giovanni Tria, Italy’s economy minister, who said… that independence of the Bank of Italy ‘must be defended’.”
February 9 – Reuters (Riccardo Bastianello): “Italy’s populist leaders… promised to replace top officials at the country’s central bank, who they said must pay for failing to prevent a spate of banking scandals in which thousands lost their savings… ‘The management of the Bank of Italy and (market watchdog) Consob have to be completely cleared out,’ League chief Matteo Salvini told a gathering of former clients of small northern banks wound down in 2017. ‘We are here because those who should have supervised didn’t supervise.’”
February 13 – Reuters (Kaori Kaneko): “Bank of Japan Governor Haruhiko Kuroda said… that it was his responsibility to achieve the central bank’s 2% inflation target by persistently continuing its stimulus policy. Speaking to a lower house budget committee, Kuroda also said he would closely examine the central bank’s stimulus policy so that it would not cause side effects.”
February 13 – Reuters (Jana Randow): “New Zealand’s central bank… retained the possibility of a rate cut in the face of rising economic risks, but its broadly neutral policy tone disappointed doves and sent the local dollar rallying to one week highs. The Reserve Bank of New Zealand (RBNZ) left the official cash rate (OCR) at a record-low 1.75%, where it has been since November 2016.”
Brexit Watch:
February 12 – Bloomberg (Tim Ross and Ian Wishart): “Theresa May and the European Union are heading for a high-stakes, last-minute gamble that will decide whether the U.K. leaves the bloc with or without a deal, people familiar with both sides said. On March 21 -- just a week before Britain is due to exit the EU -- the prime minister will have the chance to win a late concession from European leaders at a summit in Brussels, the people said. The bloc is unlikely to offer sweeteners much sooner in case the U.K. side asks for even more, according to one of the individuals, who asked not to be named.”
EM Watch:
February 14 – Bloomberg (Colleen Goko): “South Africa’s rand is back on its perch as the world’s most volatile currency as investors price in the risk of a credit-rating downgrade while awaiting details of the government’s rescue plan for the state-owned electricity company. The currency fell for a second day… to levels last seen in early January, and bond yields rose to their highest this year after President Cyril Ramaphosa said little to reassure investors about a turnaround plan for Eskom Holdings SOC Ltd. The rand’s three-month implied volatility climbed for a ninth day, overtaking the Turkish lira, as traders anticipate wider price swings in the run-up to elections in May.”
February 13 – Bloomberg (Janice Kew): “South Africans are accustomed to government mismanagement and corruption. They’ve suffered for years from periodic blackouts at state-owned power utility Eskom Holdings SOC Ltd., seen money flow out of the national airline and are routinely asked to pay off cops who’ve pulled them over. The latest scandal, though, has the potential to reach wider and deeper. It’s about whether the company that manages $150 billion of retirement funds for more than 1.2 million government workers has invested its money properly—a question that could touch every taxpayer in Africa’s most industrialized economy.”
February 14 – Bloomberg (Cagan Koc): “The economic fallout from Turkey’s currency crash last summer just kept on getting worse toward the end of the year. Industrial production capped 2018 with its biggest plunge since June 2009 following three months in contraction… Led by a double-digit fall in manufacturing, output dropped an annual 9.8% in December. Industry fared worse than every estimate…”
February 13 – Financial Times (Laura Pitel and Funja Guler): “Recep Tayyip Erdogan, Turkey’s president, has ordered that food, dubbed ‘people’s vegetables’, be sold at heavily discounted prices as he vows to step up a fight against food ‘terrorism’ while containing public anger over rising prices.”
February 10 – Bloomberg (Andy Mukherjee): “It’s time India’s policy makers acknowledged the real problem facing the country’s shadow banks. What they are experiencing is no longer a vanilla liquidity shortage; the entire industry has crashed against a wall of mistrust. On the other side of that wall are a clutch of wealthy property developers and their middle-class customers, as well as teeming multitudes of poor. Everyone is at risk. A crisis of confidence has made financiers’ own borrowing costs jump. The excess yield over government securities that the bond market is demanding from double A-rated firms is three standard deviations higher than the five-year average.”
Global Bubble Watch:
February 11 – Financial Times (Robert Smith): “In John Kenneth Galbraith’s seminal history of the Wall Street crash of 1929, the economist coined the term ‘the bezzle’ to describe the amount of undiscovered embezzlement lurking in the financial system. When times are good, people are trusting and eager to make more money, so the bezzle expands. When the cycle turns, however, vigilance returns and the bezzle shrinks. Between the crime and its discovery, there is a period when the embezzler has his gains but the victim is yet to experience loss. Mr Galbraith described this interlude as a ‘net increase in psychic wealth’. Europe’s credit markets for years enjoyed a net increase in psychic wealth, courtesy of the European Central Bank’s quantitative easing programme, which from 2016 saw the central bank lend direct to large companies by investing in their bonds. While carried out by well-meaning technocrats, rather than the swindling stock promoters so vividly brought to life in the pages of The Great Crash, the market is due a reckoning all the same.”
February 11 – Financial Times (Simon Mundy and Kathrin Hille): “Crowned with a soaring blue archway, the four-lane China-Maldives Friendship Bridge loops over 2km of the Indian Ocean to connect the Maldivian capital with its international airport and the fast-growing artificial island of Hulhumale. Opened last year, the bridge was the flagship project in a surge of Chinese investment into the Maldives under former president Abdulla Yameen, who left office in November after a shock election defeat… But while China has portrayed its Maldivian projects as an example of how its Belt and Road Initiative can drive development in smaller countries, the new government in Male is taking a darker view. It claims that Mr Yameen’s administration saddled the country with vast debts — owed principally to China — through inflated investment contracts which involved personal gain for corrupt Maldivian officials.”
February 10 – Wall Street Journal (Andrew Ackerman): “Global regulators must revamp the way they assess new threats to the financial system, as the tide of postcrisis rules crests and the financial sector evolves, a top Federal Reserve official… ‘We cannot be complacent and assume that we are safe from all shocks,’ Fed governor Randal Quarles, the central bank’s point man on regulation, said… Mr. Quarles chairs the Financial Stability Board, a panel of international policy makers established in 2009 to overhaul global financial regulations.”
February 13 – Bloomberg (Marcus Ashworth): “How to lose friends and alienate investors. Spain’s biggest bank, Banco Santander SA, chose to wait until the last available moment to tell holders that it wasn’t going to redeem a particular 1.5 billion euro ($1.7bn) bond after all. The note in question was a so-called Additional Tier 1 (an AT1 or CoCo for short) and it’s accepted practice in the market to call these bonds on their redemption date. Santander’s decision may make sense for the lender from a purely economic perspective (it’s cheaper right now just to keep the AT1 running rather than issue a replacement), but it’s an incredibly cavalier way to treat investors.”
February 11 – Bloomberg (Sarah Husband): “Collateralized loan obligations in Europe are facing the toughest conditions since early 2016 as they struggle with higher funding costs and a scarcity of loans. This could curtail issuance from these funds and curb demand for loan assets. CLOs account for around half the investor base for leveraged loans. A slowdown in CLO formation could force borrowers to pay higher spreads on their loans…”
February 11 – Bloomberg: “Apple Inc.’s Chinese smartphone shipments plummeted an estimated 20% in 2018’s final quarter, underscoring the scale of the iPhone maker’s retreat in the world’s largest mobile device arena against local rivals like Huawei Technologies Co. The domestic market contracted 9.7% in the quarter, but Apple declined at about twice that pace, research firm IDC said…”
Europe Watch:
February 11 – Project Syndicate (George Soros): “Europe is sleepwalking into oblivion, and the people of Europe need to wake up before it is too late. If they don’t, the European Union will go the way of the Soviet Union in 1991. Neither our leaders nor ordinary citizens seem to understand that we are experiencing a revolutionary moment, that the range of possibilities is very broad, and that the eventual outcome is thus highly uncertain. Most of us assume that the future will more or less resemble the present, but this is not necessarily so. In a long and eventful life, I have witnessed many periods of what I call radical disequilibrium. We are living in such a period today. The next inflection point will be the elections for the European Parliament in May 2019.”
February 12 – Reuters (Alastair Macdonald): “Italian Prime Minister Giuseppe Conte called… for a less austere European Union more in tune with popular demands for economic growth, but he faced a barrage of criticism after his keynote speech in the EU legislature… ‘The powerful opposition that the European people, in its various forms, is demonstrating in the face of the elites speaks to our consciences and reminds us that politics, too assertive on economic rationales, has not done its homework and has given up on its mission,’ Conte told the assembled lawmakers.”
February 13 – Bloomberg (Jana Randow): “Euro-area industrial production fell more than twice as much as forecast in December, raising further questions over the state of the bloc’s economy. The 0.9% drop -- more than twice the 0.4% forecast -- was driven by declines in capital and non-durable consumer goods production. From a year earlier, output plunged the most since 2009, when the economy was dealing with the fallout from the financial crisis.”
February 13 – Reuters (Paul Carrel): “Germany’s economy stalled in the final quarter of last year, just skirting recession as fallout from global trade disputes and Brexit put the brakes on a decade of expansion amid signs that exports will stay subdued for the time being. Gross domestic product in Europe’s biggest economy was unchanged for the quarter…”
February 11 – Financial Times (Miles Johnson): “Matteo Salvini has raised the possibility of wresting control of Italy’s sizeable gold reserves away from the country’s central bank in the latest in a series of threats to the independence of the Bank of Italy by Rome’s populist coalition. ‘The gold is the property of the Italian people, not of anyone else,’ Mr Salvini, deputy prime minister and leader of the League party, said… The comments came after he called for the removal of the leadership of the Bank of Italy for failing to prevent the country’s banking crisis, prompting Giovanni Tria, economy minister, to defend the independence of the central bank.”
Similarly, I ponder how Beijing feels about January’s booming Credit data – Aggregate Financing up $685 billion in a month. Do officials appreciate that they are completely held captive by history’s greatest Credit Bubble? I have argued that Bubbles have become a fundamental geopolitical device – a stratagem. The situation has regressed to a veritable global Financial Arms Race. As China/U.S. trade negotiations seemingly head down the homestretch, each side must believe that rallying domestic markets beget negotiating power. Meanwhile, emboldened global markets behave as if they have attained power surpassing mighty militaries and even nuclear arsenals.
February 15 – Reuters (Kevin Yao and Judy Hua): “China’s banks made the most new loans on record in January - totaling 3.23 trillion yuan ($477bn) - as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy. Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share. But they have also faced months of pressure from regulators to step up lending, particularly to cash-starved smaller firms. Net new yuan lending last month was far more than expected and eclipsed the last high of 2.9 trillion yuan in January 2018. Analysts… had predicted new loans of 2.8 trillion yuan, more than double the level seen in December.”
China's January new bank loans were 11.4% higher than the previous record from January 2018 – and 15% above estimates. Bank Loans expanded an imprudent $821 billion over the past three months alone, a full 20% above the comparable period from one year ago. Total Bank Loans expanded 13.4% over the past year; 28% in two years; 45% in three years; 91% in five years; and an incredible 323% during the past decade.
Led by bubbling bank lending, China’s Aggregate Financing expanded a record $685 billion during January. Flood gates wide open. While typically a big month for Chinese lending, January’s growth in Aggregate Financing was 50% above January 2018. It’s worth noting that the growth in Aggregate Financing over the past six months ran 7% above the comparable year ago period (and equates to an annualized pace of $3.7 TN). Consumer (largely mortgage) Loans expanded a record $146 billion for the month, 10% greater than the previous record from January 2018. Consumer loans expanded 18% over the past year; 43% in two years; 77% in three; and 140% in five years.
It’s too fitting: as the long-standing global superpower and ascending superpower are locked in tortuous negotiations, their respective financial power centers – securities markets in the U.S. and state-directed bank lending in China – rage. No Holds Barred.
“The reason I’m giving the central bank an “F” is look at what’s happening in China and Asia… Look at what’s happening in Europe from the economic perspective. The U.S. stimulated at full employment with our tax cuts. That stimulus is about to wear off. What I worry about is the last three recessions we’ve had in the U.S. we’ve cut rates 500 bps. Now we can only cut them 225 or 250. And a week or two ago the San Francisco Fed put out a white paper about the benefits of negative interest rates. I hope that’s not where we’re going, but we can only cut rates about 225/250 bps to be at zero. So, this point of normalization should have happened long ago – not now. They were really late in the cycle in raising rates and now they’re stuck. So when we get into even a small recession, I don’t think we have the arrows in the quiver. And so let’s hope that we learned something from Japan and Europe about negative interest rates. They destroy the banking sectors and they have not helped their economies whatsoever…” Kyle Bass, Hayman Capital Management, appearing on Bloomberg Television, February 11, 2019
Seeing eye-to-eye with Kyle Bass, it has become difficult not to be thinking ahead to the next recession. And while Chinese Credit and ongoing aggressive global monetary stimulus can no doubt prolong the “Terminal Phase” of this most protracted worldwide boom, this comes at a steep price.
Between July 2007 and December 2008, the Fed collapsed fed funds 500 bps. At least as important, 10-year Treasury yields sank about 300 bps during this period (520bps to 213bps). After ending June 2007 at 6.26%, benchmark Fannie Mae MBS yields closed out 2008 at 3.89%.
The Fed retained significant firepower to counter the bursting of the mortgage finance Bubble. Between August 2007 and March 2009, benchmark 30-year mortgage rates sank from about 6.70% to 4.85%. Importantly, by collapsing rates and purchasing large quantities of mortgage-backed securities, the Fed orchestrated a major mortgage refinancing boom. This, along with scores of government-assistance programs, allowed tens of millions of indebted homeowners to significantly reduce monthly mortgage payments. In particular, millions of higher-risk borrowers were able to replace old high-rate subprime mortgages for prime mortgages with dramatically lower payments.
At 4.37%, 30-year conventional mortgage rates are today already below the lowest levels from 2009. And with the vast majority of borrows over recent years having refinanced at historically low mortgage rates, there’s limited prospects for reduced monthly payments to dampen financial burdens during the next recession.
Worse yet, student loan debt has more than doubled since the crisis. And when the next recession hits, there will be record amounts of auto and Credit card debt.
February 12 – Reuters (Jonathan Spicer): “Some red flags emerged for the U.S. economy late last year as credit card inquiries fell, student-loan delinquencies remained high and riskier borrowers drove home automobiles, according to a report that could signal a downturn is on the horizon. The U.S. household debt and credit report… by the Federal Reserve Bank of New York, showed that the overall debt shouldered by Americans edged up to a record $13.5 trillion in the fourth quarter of 2018. It has risen consistently since 2013, when debt bottomed out after the last recession. While mortgage debt, by far the largest slice, slipped for the first time in two years, other forms of borrowing rose including that of credit cards, which at $870 billion matched its pre-crisis peak in 2008.”
Auto lending, in particular, has gone through a protracted – arguably unprecedented – period of loose lending.
February 12 – Washington Post (Heather Long): “A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported…, even more than during the wake of the financial crisis era. Economists warn this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills. ‘The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market,’ economists at the New York Fed wrote… A car loan is typically the first payment people make because a vehicle is critical to getting to work, and someone can live in a car if all else fails. When car loan delinquencies rise, it is a sign of significant duress among low-income and working-class Americans.”
February 13 – CNBC (Sarah O'Brien): “As Americans' appetite for new cars continues unabated, an advocacy group is sounding the alarm over the growing level of auto debt carried by U.S. consumers. In a report…, U.S. PIRG warns that the continuing rise in auto debt is putting many consumers in a financially vulnerable position, which could worsen during an economic downturn… ‘More and more people are buying too much car for what they can afford,’ said Ed Mierzwinski, senior director of U.S. PIRG's federal consumer program. The group's new report delves into the financial implications and policy-related aspects of Americans' reliance on cars. It shows that the aggregate amount of auto debt that consumers carry — roughly $1.27 trillion — is 75% more than the amount owed at the end of 2009… Overall, auto debt accounts for about 9% of total U.S. consumer debt, up from 6% in late 2011… Among subprime borrowers — those with credit scores below 620— the delinquency rate was 16.3% in mid-2018. In 2015, that figure was 12.4%... The average price of a new vehicle is now about $37,100, compared with $27,573 five years ago… As of January, the average amount financed was $31,707 and the average loan length had reached 69.1 months, up from 61 in 2010…”
And from the PIRG report: “The rise in automobile debt since the Great Recession leaves millions of Americans financially vulnerable — especially in the event of an economic downturn… Of all auto loans issued in the first two quarters of 2017, 42% carried a term of six years or longer, compared to just 26% in 2009… Many car buyers ‘roll over’ the unpaid portion of a car loan into a loan on a new vehicle, increasing their financial vulnerability… At the end of 2017, almost a third of all traded-in vehicles carried negative equity, with these vehicles being underwater by an average of $5,100… The increase in higher-cost ‘subprime’ loans has extended auto ownership to many households with low credit scores… In 2016, lending to borrowers with subprime and deep subprime credit scores made up as much as 26% of all auto loans originated.”
When it comes to Bubbles, the more conspicuous the less likely they are to be deeply systemic. The “tech” Bubble was obvious, yet the most egregious excess was contained within the technology sector. The mortgage finance Bubble was much more systemic, with excesses spread about and not as apparent. I believe today’s Super “Tech” Bubble is much more systemic than back in 2000. And while subprime is not the critical issue it was for the previous Bubble, I would argue that excess in many key housing markets is comparable. Commercial real estate on a national basis is likely more vulnerable today than in 2007, and the same could be said for some regional housing markets (i.e. greater “Silicon Valley”, Los Angeles, Seattle, Portland, Atlanta, etc.). Today’s Bubble in leveraged lending and M&A is greater than 2006/2007. The Bubble in corporate Credit dwarfs that from the mortgage finance Bubble period. Excesses throughout the securities markets phenomenally exceed those from the prior Bubble period. Moreover, I suspect the current level of derivatives-related speculative leverage could be multiples of 2007.
February 13 – Associated Press (Martin Crutsinger): “The government surpassed a dubious milestone this week: Its debt topped $22 trillion — that’s trillion, with a ‘t’ — for the first time. Piles of federal debt have been growing ever higher for years, fueled by accumulating annual deficits, which themselves have been driven by tax cuts, government spending increases and the mounting costs of Medicare and Social Security and interest on the debt itself.”
Thinking Ahead to the Next Recession, we should be deeply concerned about our nation’s tenuous fiscal position. To see deficits approaching 5% of GDP - with unemployment and interest rates at such historically low levels - should have us all fearful. Of course deficits matter. After ending 2007 at $8.056 TN, federal Liabilities (from Fed’s Z.1) surged $11.86 TN, or 147%, to end Q3 2018 at $19.918 TN. Over this period, outstanding Treasury Securities jumped $11.367 TN, or 188%, to $17.418 TN. And after ending 2007 at $7.40 TN, Agency Securities increased $1.62 TN, or 22%, to $9.02 TN. Over this period, combined Treasury and Agency securities almost doubled to $26.44 TN, expanding from 92% to 128% of GDP.
During the last crisis, the collapse in rates and market yields significantly mitigated the Treasury's debt service burden. This ensured an outsized percentage of huge deficit spending went to bolster the real economy, with relatively less to debt holders. Come the next recession, already huge deficits will expand much larger, likely with only meager benefits from lower borrowing costs. Worse yet, there’s a scenario where fiscal recklessness finally provokes some market backlash. At some point, out of control deficits could be compounded by rising market yields – central bank stimulus notwithstanding.
And we definitely cannot ponder the next recession without taking a global view. Since the last crisis, global Credit Bubbles have become highly synchronized, securities markets atypically synchronized, and economies uncommonly synchronized. Synchronization also applies within the markets – equities, investment-grade and “junk” corporate Credit, sovereign debt, M&A - “developed” and “developing.” Global asset prices – certainly including real estate – notably synchronized. When it comes to a synchronized global policy response, keep in mind that ECB and BOJ policy rates are basically at zero – with little evidence of benefits from negative rates. The ECB just ended QE, while the BOJ just keeps printing. With little effective ammo, policymakers exploit what they can to sustain the Bubble and hold fragilities at bay.
To be sure, today’s backdrop overshadows the world’s predicament heading into 2008/09. China and EM, in particular, were in the midst of powerful expansions in 2008 – burgeoning Bubbles readily resuscitated post-U.S. crisis. Fueled by China’s massive stimulus, the emerging markets became the “growth locomotive” pulling the entire global economy away from a downward spiral. Pondering the future, it is not at all clear how a vigorous downward spiral is repelled come the next crisis.
Policymakers continue to throw enormous stimulus at global markets and economies. Instead of stabilization, we’ve witnessed ongoing Bubble inflation and intensifying Monetary Disorder. And the more Bubbles inflate, the greater the underlying financial and economic fragilities – and the quicker the Fed was to conclude “normalization” and China was to, once again, aggressively spur lending.
What worries me most is that underlying instability and vulnerabilities have policymakers resolved to abrogate bear markets and recessions. Extraordinary measures continue to be taken to nullify business and market cycles, with apparently no appreciation for how vital adjustments and corrections are to sound financial and economic systems. Worst of all, structurally maladjusted and highly speculative global markets are emboldened as never before. Party like it’s twenty nineteen – with global financial, economic and geopolitical backdrops uncomfortably reminiscent of ninety years ago.
For the Week:
The S&P500 rose 2.5% (up 10.7% y-t-d), and the Dow jumped 3.1% (up 11.0%). The Utilities slipped 0.1% (up 5.3%). The Banks rallied 3.0% (up 15.9%), and the Broker/Dealers gained 2.8% (up 12.1%). The Transports surged 3.8% (up 15.2%). The S&P 400 Midcaps jumped 3.3% (up 15.1%), and the small cap Russell 2000 surged 4.2% (up 16.4%). The Nasdaq100 advanced 2.1% (up 11.5%). The Semiconductors jumped 3.7% (up 17.0%). The Biotechs surged 4.4% (up 18.5%). Though bullion added $7, the HUI gold index declined 0.6% (up 4.6%).
Three-month Treasury bill rates ended the week at 2.37%. Two-year government yields rose five bps to 2.52% (up 3bps y-t-d). Five-year T-note yields gained five bps to 2.49% (down 2bps). Ten-year Treasury yields added three bps to 2.66% (down 2bps). Long bond yields increased a basis point to 2.99% (down 2bps). Benchmark Fannie Mae MBS yields rose four bps to 3.45% (down 5bps).
Greek 10-year yields sank 20 bps to 3.80% (down 54bps y-t-d). Ten-year Portuguese yields declined nine bps to 1.56% (down 15bps). Italian 10-year yields fell 16 bps to 2.80% (up 6bps). Spain's 10-year yields added a basis point to 1.24% (down 18bps). German bund yields increased one basis point to 0.10% (down 14bps). French yields were little changed at 0.54% (down 17bps). The French to German 10-year bond spread narrowed one to 44 bps. U.K. 10-year gilt yields increased a basis point to 1.16% (down 12bps). U.K.'s FTSE equities index jumped 2.3% (up 7.6% y-t-d).
Japan's Nikkei 225 equities index rallied 2.8% (up 4.4% y-t-d). Japanese 10-year "JGB" yields added one basis point to negative 0.02% (down 2bps y-t-d). France's CAC40 surged 3.9% (up 8.9%). The German DAX equities index recovered 3.6% (up 7.0%). Spain's IBEX 35 equities index rose 3.0% (up 6.8%). Italy's FTSE MIB index surged 4.4% (up 10.3%). EM equities were mostly higher. Brazil's Bovespa index gained 2.3% (up 11.0%), while Mexico's Bolsa slipped 0.4% (up 3.2%). South Korea's Kospi index increased 0.9% (up 7.6%). India's Sensex equities index dropped 2.0% (down 0.7%). China's Shanghai Exchange jumped 2.5% (up 7.6%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 12.5%). Russia's MICEX equities index dipped 0.5% (up 5.6%).
Investment-grade bond funds saw inflows of $1.889 billion, and junk bond funds posted inflows of $728 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined four bps to a one-year low 4.37% (down 1bp y-o-y). Fifteen-year rates dipped three bps to 3.81% (down 3bps). Five-year hybrid ARM rates fell three bps to 3.88% (up 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 4.42% (down 13bps).
Federal Reserve Credit last week increased $2.3bn to $3.989 TN. Over the past year, Fed Credit contracted $396bn, or 9.0%. Fed Credit inflated $1.178 TN, or 42%, over the past 327 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.427 TN. "Custody holdings" increased $28.2bn y-o-y, or 0.8%.
M2 (narrow) "money" supply fell $31.3bn last week to $14.480 TN. "Narrow money" gained $623bn, or 4.5%, over the past year. For the week, Currency was about unchanged. Total Checkable Deposits jumped $48.2bn, while Savings Deposits dropped $82.8bn. Small Time Deposits rose $3.0bn. Retail Money Funds added $0.5bn.
Total money market fund assets gained $16.6bn to $3.080 TN. Money Funds gained $251bn y-o-y, or 8.9%.
Total Commercial Paper increased $3.8bn to $1.061 TN. CP declined $57bn y-o-y, or 5.1%.
Currency Watch:
The U.S. dollar index increased 0.3% to 96.904 (up 0.8% y-t-d). For the week on the upside, the New Zealand dollar increased 1.9%, the Brazilian real 0.8%, the Australian dollar 0.8%, and the Canadian dollar 0.3%. For the week on the downside, the South African rand declined 3.2%, the Mexican peso 0.9%, the Japanese yen 0.7%, the Swiss franc 0.5%, the South Korean won 0.4%, the British pound 0.4%, the euro 0.2% and the Swedish krona 0.1%. The Offshore Chinese renminbi declined 0.41% versus the dollar this week (up 1.55% y-t-d).
Commodities Watch:
February 12 – Bloomberg (Ranjeetha Pakiam): “China is adding to its gold reserves again, boosting holdings for a second month and reinforcing an outlook from bulls including Goldman Sachs… that central-bank buying will likely remain strong this year. The People’s Bank of China raised holdings to 59.94 million ounces, or about 1,864 metric tons, by the end of January from 59.56 million ounces a month earlier... In tonnage terms, it added about 11.8 tons last month after taking in just under 10 tons in December, which was the first time the PBOC had boosted its hoard since October 2016.”
The Goldman Sachs Commodities Index jumped 3.8% (up 13.1% y-t-d). Spot Gold added 0.5% to $1,322 (up 3.0%). Silver slipped 0.4% to $15.743 (up 1.3%). Crude surged $2.87 to $55.59 (up 22%). Gasoline jumped 8.7% (up 21%), and Natural Gas gained 1.6% (down 11%). Copper declined 0.4% (up 6%). Wheat dropped 2.0% (up 1%). Corn rose 2.3% (up 2%).
Market Dislocation Watch:
February 10 – Financial Times (Stephen Morris, Robert Smith and Olaf Storbeck): “Deutsche Bank has had to pay the highest financing rates on the euro debt market for a leading international bank this year, in a further sign of the German lender’s uphill struggle to reduce its funding costs. The bank raised eyebrows last week when it sold a total of €3.6bn in euro-denominated debt, paying 180 bps over the benchmark for a two-year bond, a steep rate for short-term funding. It also paid 230bp over the benchmark on a seven-year bond, a higher rate than domestic Spanish lender CaixaBank… For decades, cheap financing had been the cornerstone of Deutsche’s competitive advantage, with its perception as a ‘de facto’ extension of the German state guaranteeing rock-bottom funding costs that helped it break into the top ranks of global investment banking.”
February 11 – Wall Street Journal (Gunjan Banerji): “More investors are selling options in a bid to boost returns, a shift that traders say is helping to tamp down market volatility now—but potentially at the expense of greater turbulence later. Assets at mutual and exchange-traded funds that focus on systematically selling options have swelled by about 50% in the past five years to $15.7 billion in 2018, according to… Tayfun Icten, a senior analyst at Morningstar… Options-selling strategies center on collecting a small premium from the buyer in exchange for a promise to buy or sell shares at a specified price by a certain date. The strategy’s popularity highlights investors’ willingness to take on risks to pick up small gains, a ‘reach for yield’ behavior… The growth of options-selling trades has also been fueled by so-called structured products, investments packaged with derivatives…”
February 11 – Wall Street Journal (Daniel Kruger and Telis Demos): “Recent volatility in the market for overnight cash loans is raising concerns about a new benchmark that could set interest rates for trillions of dollars in mortgages and corporate debt. The cost to borrow cash overnight spiked late last year in part of the market for repurchase agreements, where lenders such as money-market funds make short-term loans to bond brokers, often using government debt as collateral. The ‘repo’ rate topped out above 6% in intraday trading on Dec. 31 before settling at an all-time high of 5.149%, according to JPMorgan. That has investors and bankers paying close attention to developments in this obscure yet vital part of the debt market, because repo trades are a key component of a new borrowing benchmark designed by the Federal Reserve Bank of New York. That benchmark, called SOFR, for the secured overnight financing rate, is considered the leading candidate to replace the fading London interbank offered rate…”
February 12 – Bloomberg (John Gittelsohn): “If stock-pickers are becoming an endangered species, this may be the latest sign. Investors now have more money in large-cap equity funds tracking indexes than in actively run funds of the same type. The lines crossed in the fourth quarter, according to… Morningstar Inc. Passive mutual funds, exchange-traded funds and so-called smart beta funds in the sector held $2.93 trillion in assets as of Dec. 31, compared with $2.84 trillion on the active side… Only 24% of all active funds -- those holding stocks, bonds or real estate -- outperformed their average passive rival over the 10 years through December, according to a Morningstar analysis of 4,600 U.S. funds with $12.8 trillion.”
Trump Administration Watch:
February 15 – Bloomberg (Alyza Sebenius and Andrew Mayeda): “President Donald Trump hailed progress made in trade talks with China this week, saying he may extend a tariff truce and take steps to sell a potential deal with opposition lawmakers. Trump’s comments signal the two sides may be approaching a deal after two days of high-level talks in Beijing. The two countries said they are working toward an initial written agreement, and will continue negotiations next week in Washington. The U.S. has threatened to more than double tariffs on $200 billion of Chinese goods if there’s no deal by March 1. ‘It’s going extremely well,’ Trump said…”
February 15 – Bloomberg (Justin Sink and Margaret Talev): “President Donald Trump said… he’ll declare a national emergency on the U.S. southern border in a bid to unlock more money to build his proposed wall, a day after agreeing to sign legislation providing about $1.4 billion for the controversial project. In unscripted remarks Friday morning, Trump depicted the declaration as ordinary but also said he expected it to be challenged in court. He predicted he’d eventually prevail, but conceded: ‘I didn’t need to do this.’ ‘I just want to get it done faster,’ he said of the wall. Combined with spending legislation Trump also intends to sign Friday or Saturday, the move will free up about $8 billion for the wall…”
February 12 – New York Times (Keith Bradsher): “When China joined the World Trade Organization, the global fraternity of cross-border commerce, it promised to open itself up to foreigners in lucrative businesses like banking, telecommunications and electronic-payment processing. More than 17 years later, China’s telecommunications industry remains firmly under government control. Only recently did China say it would allow foreign companies to own their own bank businesses here. And after nearly two decades of legal fights, China is still reviewing the applications of Visa and Mastercard to get into the country’s payment-processing market. The broken promises hang over Robert Lighthizer, the United States trade representative, and Treasury Secretary Steven Mnuchin as they arrive in Beijing for two days of talks to end a trade war between the United States and China.”
February 14 – Bloomberg (Elizabeth Dexheimer): “President Trump’s pick to lead Fannie Mae and Freddie Mac’s regulator said he wants to work with lawmakers on a housing-finance overhaul that’s needed to avoid devastating taxpayer losses in the event of a future crisis. Federal Housing Finance Agency nominee Mark Calabria told members of the Senate Banking Committee… that he agrees on the need for Congress to play a leading role in making major changes involving the two mortgage giants, which have been under U.S. control since 2008… ‘We need an open, competitive market,’ Calabria said… at a confirmation hearing on his bid to become FHFA’s director. ‘There is certainly a part of me that has a suspicion of monopolies and duopolies,’ he said…”
Federal Reserve Watch:
February 14 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are zeroing in on a strategy to end the wind-down of their $4 trillion asset portfolio as soon as this year, which would conclude an effort to drain stimulus from the financial system earlier than they had once anticipated. Fed officials could finalize more details of their strategy, including whether to slow the pace of shrinking their bondholdings, at their policy meeting next month… The process ‘probably should come to an end later this year,’ Fed governor Lael Brainard said… Cleveland Fed President Loretta Mester… said they would wrap up the planning at coming meetings.”
February 12 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell said the U.S. economy looks strong, but the central bank is continuing to find ways to fight poverty. Speaking… in Mississippi, Powell said the central bank is looking at a number of ways to help rural communities, with a particular focus on banking and finance for areas of need. ‘Today, data at the national level show a strong economy. Unemployment is near a half-century low, and economic output is growing at a solid pace. But we know that prosperity has not been felt as much in some areas, including many rural places,’ he said…”
February 12 – Reuters (Jason Lange): “Kansas City Federal Reserve Bank President Esther George… said she supported a pause in interest rate increases so that the Fed could assess how much its past hikes have slowed the economy. ‘Let’s step back and see what happens,’ George told an audience…, describing her support for the U.S. central bank’s move last month to signal it was not preparing more rate increases for now. George, who is a voter this year on the Fed’s interest rate policy decisions, was until recently an outspoken advocate for tighter monetary policy.”
February 12 – Reuters (Lucia Mutikani): “U.S. job openings surged to a record high in December, led by vacancies in the construction and accommodation and food services sectors, strengthening analysts’ views that the economy was running out of workers. While the release of the Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS, …underscored labor market strength, there are worries the shortage of workers could hurt an economic expansion that has lasted 9-1/2 years and is the second longest on record… Job openings, a measure of labor demand, increased by 169,000 to a seasonally adjusted 7.3 million in December, the highest reading since the series started in 2000. That lifted the job openings rate to 4.7% from 4.6% in November.”
U.S. Bubble Watch:
February 13 – Bloomberg (Katia Dmitrieva): “The U.S. budget deficit widened to $319 billion in the first three months of the government’s fiscal year as spending increased and revenue was little changed… The shortfall grew by 42% between the October to December period, compared with the same three months the previous year… Receipts climbed by 0.2% to $771.2 billion, while spending was up 9.6% to $1.1 trillion.”
February 13 – Wall Street Journal (Kate Davidson): “Federal tax revenue declined 0.4% in 2018, the first full calendar year under the new tax law, despite robust economic growth and the lowest unemployment rate in nearly five decades. …Federal revenue totaled $3.33 trillion last year, while federal spending totaled $4.2 trillion, a 4.4% increase from the previous year. That pushed the U.S. budget gap up to $873 billion for the 12 months that ended in December, compared with $680.8 billion during the same period a year earlier—a 28.2% increase. Last year was the highest deficit for a calendar year since 2012.”
February 8 – Washington Post (Christopher Ingraham): “The 400 richest Americans – the top 0.00025% of the population – have tripled their share of the nation’s wealth since the early 1980s, according to a new working paper on wealth inequality by University of California at Berkeley economist Gabriel Zucman. Those 400 Americans own more of the country’s riches than the 150 million adults in the bottom 60% of the wealth distribution, who saw their share of the nation’s wealth fall from 5.7% in 1987 to 2.1% in 2014… Overall, Zucman finds that ‘U.S. wealth concentration seems to have returned to levels last seen during the Roaring Twenties.’”
February 14 – Reuters: “U.S. retail sales recorded their biggest drop in more than nine years in December as receipts fell across the board, suggesting a sharp slowdown in economic activity at the end of 2018. …Retail sales tumbled 1.2%, the largest decline since September 2009 when the economy was emerging from recession… Economists polled by Reuters had forecast retail sales increasing 0.2% in December. Retail sales in December rose 2.3% from a year ago.”
February 14 – Reuters (Melissa Fares): “U.S. holiday spending in 2018 grew a lower-than-expected 2.9% to $707.5 billion, the National Retail Federation said…, citing turmoil over trade policy and the recent government shutdown as having hurt the industry.”
February 12 – Reuters (Lucia Mutikani): “U.S. small business optimism tumbled last month to its lowest level since President Donald Trump’s election more than two years ago amid growing uncertainty over the economic outlook. The National Federation of Independent Business said… its Small Business Optimism Index dropped 3.2 points to 101.2 in January, the weakest reading since November 2016.”
February 14 – Reuters: “U.S. producer prices fell for a second straight month in January, leading to the smallest annual increase in 1-1/2 years… The Labor Department said… its producer price index for final demand dipped 0.1% last month as the cost of energy products and food fell. The PPI dipped 0.1% in December. In the 12 months through January, the PPI rose 2.0%. That was the smallest gain since July 2017…”
February 10 – Wall Street Journal (Aisha Al-Muslim): “Makers of household staples from diapers to toilet paper are set to raise prices again this year after already hiking prices in 2018, hoping to offset higher commodity costs and boost profits. Church & Dwight Co. recently increased prices for about one-third of its products, including Arm & Hammer cat litter and baking soda, and some OxiClean cleaning products. ‘The good news is that competitors are raising [prices] in those categories as we speak,’ Church & Dwight Chief Executive Matthew Farrell said…”
February 15 – Reuters (Josephine Mason and Helen Reid): “The outlook for Wall Street earnings has deteriorated significantly in recent months, data shows, raising the risk that companies in the United States may slip into recession before its economy does - with Europe close behind. Analysts on average expect the S&P 500’s first-quarter earnings per share to drop 0.3% year-on-year, according to I/B/E/S Refinitiv data. That’s a big drop from the 8.2% rise expected as recently as October and would mark the first contraction in U.S. company earnings in three years. Analysts have also made deep cuts to forecasts for the rest of the year.”
February 12 – Reuters (Trevor Hunnicutt): “California Governor Gavin Newsom said… the state will dramatically scale back a planned $77.3 billion high-speed rail project that has faced cost hikes, delays and management concerns, but will finish a smaller section of the line. ‘Let’s be real. The current project, as planned, would cost too much and respectfully take too long. There’s been too little oversight and not enough transparency,’ Newsom said… Newsom said the state will complete a 119-mile (191 km) high-speed rail link between Merced and Bakersfield in the state’s Central Valley. In March 2018, the state forecast the costs had jumped by $13 billion to $77 billion and warned that the costs could be as much as $98.1 billion.”
February 14 – Associated Press: “U.S. long-term mortgage rates fell this week to a 12-month low, an enticement for prospective homebuyers in the upcoming season. Mortgage buyer Freddie Mac said… the average rate on the benchmark 30-year, fixed-rate mortgage declined to 4.37% from 4.41% last week. The key 30-year home borrowing rate averaged 4.38% a year ago.”
February 13 – Reuters (David Morgan, Sinead Carew, Stephen Culp and Trevor Hunnicutt): “Republican U.S. Senator Marco Rubio said… he will soon introduce legislation that would tax corporate stock buybacks like dividends, aiming to spur business investment, create more jobs and boost wages.”
February 12 – Bloomberg (Danielle Moran, Claire Ballentine and Martin Z. Braun): “Illinois needs $134 billion and may hold a yard sale to raise it. Governor J.B. Pritzker, a Democrat who took office last month, is turning to business experts to figure out how to chip away at the massive debt in the state’s employee retirement system that’s left the government’s credit rating dangling just one step above junk. Among the options it will weigh: How to use the state’s other assets -- like buildings and roads --- to pump more money into the pensions.”
February 10 – Wall Street Journal (Nicole Friedman): “Californians who want to insure their homes against the next wildfire are paying a price for two years of record-breaking blazes. Home-insurance companies in the Golden State are canceling some policies, refusing to sell new ones in certain areas and applying for rate increases as they look to reduce wildfire risk. ‘It’s getting harder and harder to find someone to write [insurance for] any given particular piece of property,’ said Bob Anderson, co-owner of Fromarc Insurance Agency… Insurers including State Farm and Allstate Corp. have filed to raise home-insurance rates in the past six months. The California FAIR Plan, the state insurer of last resort, said it would implement an average 20.3% price increase in April…”
February 14 – Wall Street Journal (Keiko Morris, Konrad Putzier and Josh Barbanel): “Amazon.com Inc.’s announcement that it is ditching plans for a corporate headquarters in New York City stunned real-estate speculators, developers and renters who had rushed into the Long Island City neighborhood to be near the new HQ2. Only three months ago, the prospect that the giant retailer would locate a headquarters in New York City and create 25,000 new jobs set off a real-estate frenzy that the borough of Queens had never experienced. Open houses for Long Island City condos were overflowing. Brokers said customers made offers via text messages on units, site unseen. Developers with office space in Long Island jockeyed to attract the thousands of workers that were expected, and local residents cheered the promise that new restaurants, fashion boutiques and other new stores would flood the retail-starved neighborhood.”
China Watch:
February 12 – Bloomberg (Sofia Horta e Costa): “Beijing is walking a tightrope between reviving its downbeat equity market and engineering another bubble. China’s securities regulator has started to remove many of the curbs designed to keep out speculators, signaling an end to the highly restrictive era that started when a boom in the country’s stocks turned to bust in 2015. The result has been an intensifying appetite for risk not seen in years. A gauge of small cap stocks has surged almost 11% over the past four trading days, the most since 2016. While investors and index providers have called on China to scale back restrictions barring the use of short-selling, leverage and derivatives, critics caution that the misuse of those tools could be dangerous. The concern is that taking deregulation too far may encourage the whirlwind trading that has fueled two massive bubbles in the past decade.”
February 13 – CNBC (Huileng Tan): “China… reported exports and imports data for January that easily topped expectations. That better-than-expected news comes as Beijing's trade dispute with the U.S. and other factors lead investors to worry that China's economy — long an engine of global growth — may be facing a sharp slowdown. Those concerns were compounded last month when China's customs data showed exports and imports both fell surprisingly in December… Dollar-denominated exports for the month rose 9.1% from a year ago… China's exports in January were expected to have contracted 3.2% from a year earlier… January dollar-denominated imports, meanwhile, fell 1.5% on-year, which was far better than expectations of a 10% decline from a year earlier…”
February 11 – Bloomberg: “Two large Chinese borrowers missed payment deadlines this month, underscoring the risks piling up in a credit market that’s witnessing the most company failures on record. China Minsheng Investment Group Corp., a private investment group with interests in renewable energy and real estate, hasn’t returned money to bondholders that it had pledged to repay on Feb. 1… And Wintime Energy Co., which defaulted last year, didn’t honor part of a restructured debt repayment plan last week… The developments are significant because both companies were big borrowers, and their problems accessing financing suggest that government efforts to smooth over cracks in the $11 trillion bond market aren’t benefiting all firms. If China Minsheng ends up defaulting, it may rank alongside Wintime Energy as one of China’s biggest failures, with 232 billion yuan ($34.3bn) of debt as of June 30…”
February 13 – Bloomberg: “It was supposed to be China’s answer to JPMorgan... But less than five years after China Minsheng Investment Group Corp. embarked on plans to become a financial colossus, the company has instead turned into a symbol of the turmoil sweeping China’s once-vaunted private sector. CMIG shocked investors when it missed a bond payment on Jan. 29, and markets remain jittery about the company even after it scraped together enough cash to repay the overdue note on Thursday. CMIG’s liquidity crunch, caused by what analysts have described as a combination of mismanagement and tighter lending conditions in China, underscores a sometimes overlooked risk to the global economy in the era of Trump, Brexit, and trade wars. As China reins in the shadow-banking system that supported its private sector with cheap credit for more than half a decade, companies that were meant to be pillars of the nation’s growth miracle are proving surprisingly fragile…”
February 11 – Reuters (Shu Zhang): “The collapse in China of a complex web of debt guarantees involving several private firms highlights risks in its financial system and opens up a potentially hazardous front for an economy in the grip of its slowest growth in nearly three decades. It is the last thing Beijing needs as it tries to fight off intensifying pressure on growth from a months-long trade dispute with the United States. Yet, as the government steps up economic support measures and moves to loosen gummed-up funding, it might be inadvertently inflaming financial risks with its call on state banks to sharply boost lending to the private sector. The warning bells are already sounding in the once-prosperous eastern city of Dongying, a hub for oil refining and heavy industry in Shandong province. Here, at least 28 private companies are seeking to restructure their debts and avoid bankruptcy, mainly due to souring loans that they guaranteed for other firms…”
February 15 – Bloomberg: “China’s current account surplus continued to decline, with the changing structure of the economy and trade pushing it to its lowest since 2004. The current-account balance in 2018 was $49 billion…”
February 11 – Financial Times (Tom Hancock): “Chinese consumer spending growth over the lunar new year slowed compared with last year in the latest sign that shoppers were feeling the effects of China’s decelerating economy. Chinese people spent Rmb1.01tn ($149bn) on restaurants and shopping over the week-long new year holiday — a peak period for retail, dining and movie watching… That was an increase of 8.5% from last year, a sharp drop from 2018’s year-on-year growth of 10.2% and the slowest rate of growth since such data were first tracked, in 2005.”
February 14 – Reuters (Stella Qiu and Ryan Woo): “China’s factory-gate inflation slowed for a seventh straight month in January to its weakest pace since September 2016, raising concerns the world’s second-biggest economy may see the return of deflation as domestic demand cools. Consumer inflation, meanwhile, eased in January from December to a 12-month low due to slower gains in food prices… China’s producer price index (PPI) in January rose a meagre 0.1% from a year earlier… On a monthly basis, producer prices have already been falling over the past three months.”
February 12 – Bloomberg: “China’s most recent plans to support banks’ capital raising may enable lenders to advance a record amount of new loans in 2019, according to China International Capital Corp. Credit growth this year may reach the same pace of 13.5% in 2018, while new loans are likely to exceed last year’s 16.2 trillion yuan, CICC analysts led by Victor Wang wrote…”
February 12 – Bloomberg (Yang Yang, Henry Chan, Sun Choi and Sida Liu): “China’s residential mortgage-backed securities issuance more than tripled in 2018, just as the nation’s household debt to disposable income ratio exceeds that of the U.S… Issuance of debt backed by Chinese mortgages has risen to 584 billion yuan ($87bn) in 2018 from 171 billion yuan in 2017 and 6.8 billion yuan in 2014.”
February 11 – Reuters (David Stanway): “Air pollution in 39 major northern Chinese cities rose 16% on the year in January…, with surging industrial activity making it increasingly unlikely they will meet their winter emissions targets. Average concentrations of small, hazardous particles known as PM2.5 in two major northern Chinese emissions control zones climbed 16% from a year earlier to 114 micrograms per cubic meter…”
Central Bank Watch:
February 10 – Reuters (Dhara Ranasinghe): “Cheap bank loans, a form of stimulus first launched by the ECB during the global financial crisis, look set to make a comeback in coming months and investors anticipate shorter term loans with a variable rate to allow the central bank flexibility. It’s just two months since the European Central Bank wrapped up its 2.6 trillion euro ($2.9 trillion) bond-buying scheme, but with euro zone growth at four-year lows and other global central banks already backtracking on policy tightening, bond market expectations of ECB action are on the rise. That’s expected to take the shape of a loan package for banks — known as Long Term Refinancing Operations (LTROs) or the more targeted TLTROs.”
February 10 – Financial Times (Miles Johnson): “Italy’s coalition government is in sharp disagreement over protecting the independence of the Bank of Italy, after senior politicians threatened to remove its leadership. Matteo Salvini, head of the anti-immigrant League party, said the central bank and Consob, the country’s stock market regulator, should be ‘reduced to zero, more than changing one or two people’ and that ‘fraudsters’ who inflicted losses on Italian savers should ‘end up in prison for a long time’. The comments drew a strong response from Giovanni Tria, Italy’s economy minister, who said… that independence of the Bank of Italy ‘must be defended’.”
February 9 – Reuters (Riccardo Bastianello): “Italy’s populist leaders… promised to replace top officials at the country’s central bank, who they said must pay for failing to prevent a spate of banking scandals in which thousands lost their savings… ‘The management of the Bank of Italy and (market watchdog) Consob have to be completely cleared out,’ League chief Matteo Salvini told a gathering of former clients of small northern banks wound down in 2017. ‘We are here because those who should have supervised didn’t supervise.’”
February 13 – Reuters (Kaori Kaneko): “Bank of Japan Governor Haruhiko Kuroda said… that it was his responsibility to achieve the central bank’s 2% inflation target by persistently continuing its stimulus policy. Speaking to a lower house budget committee, Kuroda also said he would closely examine the central bank’s stimulus policy so that it would not cause side effects.”
February 13 – Reuters (Jana Randow): “New Zealand’s central bank… retained the possibility of a rate cut in the face of rising economic risks, but its broadly neutral policy tone disappointed doves and sent the local dollar rallying to one week highs. The Reserve Bank of New Zealand (RBNZ) left the official cash rate (OCR) at a record-low 1.75%, where it has been since November 2016.”
Brexit Watch:
February 12 – Bloomberg (Tim Ross and Ian Wishart): “Theresa May and the European Union are heading for a high-stakes, last-minute gamble that will decide whether the U.K. leaves the bloc with or without a deal, people familiar with both sides said. On March 21 -- just a week before Britain is due to exit the EU -- the prime minister will have the chance to win a late concession from European leaders at a summit in Brussels, the people said. The bloc is unlikely to offer sweeteners much sooner in case the U.K. side asks for even more, according to one of the individuals, who asked not to be named.”
EM Watch:
February 14 – Bloomberg (Colleen Goko): “South Africa’s rand is back on its perch as the world’s most volatile currency as investors price in the risk of a credit-rating downgrade while awaiting details of the government’s rescue plan for the state-owned electricity company. The currency fell for a second day… to levels last seen in early January, and bond yields rose to their highest this year after President Cyril Ramaphosa said little to reassure investors about a turnaround plan for Eskom Holdings SOC Ltd. The rand’s three-month implied volatility climbed for a ninth day, overtaking the Turkish lira, as traders anticipate wider price swings in the run-up to elections in May.”
February 13 – Bloomberg (Janice Kew): “South Africans are accustomed to government mismanagement and corruption. They’ve suffered for years from periodic blackouts at state-owned power utility Eskom Holdings SOC Ltd., seen money flow out of the national airline and are routinely asked to pay off cops who’ve pulled them over. The latest scandal, though, has the potential to reach wider and deeper. It’s about whether the company that manages $150 billion of retirement funds for more than 1.2 million government workers has invested its money properly—a question that could touch every taxpayer in Africa’s most industrialized economy.”
February 14 – Bloomberg (Cagan Koc): “The economic fallout from Turkey’s currency crash last summer just kept on getting worse toward the end of the year. Industrial production capped 2018 with its biggest plunge since June 2009 following three months in contraction… Led by a double-digit fall in manufacturing, output dropped an annual 9.8% in December. Industry fared worse than every estimate…”
February 13 – Financial Times (Laura Pitel and Funja Guler): “Recep Tayyip Erdogan, Turkey’s president, has ordered that food, dubbed ‘people’s vegetables’, be sold at heavily discounted prices as he vows to step up a fight against food ‘terrorism’ while containing public anger over rising prices.”
February 10 – Bloomberg (Andy Mukherjee): “It’s time India’s policy makers acknowledged the real problem facing the country’s shadow banks. What they are experiencing is no longer a vanilla liquidity shortage; the entire industry has crashed against a wall of mistrust. On the other side of that wall are a clutch of wealthy property developers and their middle-class customers, as well as teeming multitudes of poor. Everyone is at risk. A crisis of confidence has made financiers’ own borrowing costs jump. The excess yield over government securities that the bond market is demanding from double A-rated firms is three standard deviations higher than the five-year average.”
Global Bubble Watch:
February 11 – Financial Times (Robert Smith): “In John Kenneth Galbraith’s seminal history of the Wall Street crash of 1929, the economist coined the term ‘the bezzle’ to describe the amount of undiscovered embezzlement lurking in the financial system. When times are good, people are trusting and eager to make more money, so the bezzle expands. When the cycle turns, however, vigilance returns and the bezzle shrinks. Between the crime and its discovery, there is a period when the embezzler has his gains but the victim is yet to experience loss. Mr Galbraith described this interlude as a ‘net increase in psychic wealth’. Europe’s credit markets for years enjoyed a net increase in psychic wealth, courtesy of the European Central Bank’s quantitative easing programme, which from 2016 saw the central bank lend direct to large companies by investing in their bonds. While carried out by well-meaning technocrats, rather than the swindling stock promoters so vividly brought to life in the pages of The Great Crash, the market is due a reckoning all the same.”
February 11 – Financial Times (Simon Mundy and Kathrin Hille): “Crowned with a soaring blue archway, the four-lane China-Maldives Friendship Bridge loops over 2km of the Indian Ocean to connect the Maldivian capital with its international airport and the fast-growing artificial island of Hulhumale. Opened last year, the bridge was the flagship project in a surge of Chinese investment into the Maldives under former president Abdulla Yameen, who left office in November after a shock election defeat… But while China has portrayed its Maldivian projects as an example of how its Belt and Road Initiative can drive development in smaller countries, the new government in Male is taking a darker view. It claims that Mr Yameen’s administration saddled the country with vast debts — owed principally to China — through inflated investment contracts which involved personal gain for corrupt Maldivian officials.”
February 10 – Wall Street Journal (Andrew Ackerman): “Global regulators must revamp the way they assess new threats to the financial system, as the tide of postcrisis rules crests and the financial sector evolves, a top Federal Reserve official… ‘We cannot be complacent and assume that we are safe from all shocks,’ Fed governor Randal Quarles, the central bank’s point man on regulation, said… Mr. Quarles chairs the Financial Stability Board, a panel of international policy makers established in 2009 to overhaul global financial regulations.”
February 13 – Bloomberg (Marcus Ashworth): “How to lose friends and alienate investors. Spain’s biggest bank, Banco Santander SA, chose to wait until the last available moment to tell holders that it wasn’t going to redeem a particular 1.5 billion euro ($1.7bn) bond after all. The note in question was a so-called Additional Tier 1 (an AT1 or CoCo for short) and it’s accepted practice in the market to call these bonds on their redemption date. Santander’s decision may make sense for the lender from a purely economic perspective (it’s cheaper right now just to keep the AT1 running rather than issue a replacement), but it’s an incredibly cavalier way to treat investors.”
February 11 – Bloomberg (Sarah Husband): “Collateralized loan obligations in Europe are facing the toughest conditions since early 2016 as they struggle with higher funding costs and a scarcity of loans. This could curtail issuance from these funds and curb demand for loan assets. CLOs account for around half the investor base for leveraged loans. A slowdown in CLO formation could force borrowers to pay higher spreads on their loans…”
February 11 – Bloomberg: “Apple Inc.’s Chinese smartphone shipments plummeted an estimated 20% in 2018’s final quarter, underscoring the scale of the iPhone maker’s retreat in the world’s largest mobile device arena against local rivals like Huawei Technologies Co. The domestic market contracted 9.7% in the quarter, but Apple declined at about twice that pace, research firm IDC said…”
Europe Watch:
February 11 – Project Syndicate (George Soros): “Europe is sleepwalking into oblivion, and the people of Europe need to wake up before it is too late. If they don’t, the European Union will go the way of the Soviet Union in 1991. Neither our leaders nor ordinary citizens seem to understand that we are experiencing a revolutionary moment, that the range of possibilities is very broad, and that the eventual outcome is thus highly uncertain. Most of us assume that the future will more or less resemble the present, but this is not necessarily so. In a long and eventful life, I have witnessed many periods of what I call radical disequilibrium. We are living in such a period today. The next inflection point will be the elections for the European Parliament in May 2019.”
February 12 – Reuters (Alastair Macdonald): “Italian Prime Minister Giuseppe Conte called… for a less austere European Union more in tune with popular demands for economic growth, but he faced a barrage of criticism after his keynote speech in the EU legislature… ‘The powerful opposition that the European people, in its various forms, is demonstrating in the face of the elites speaks to our consciences and reminds us that politics, too assertive on economic rationales, has not done its homework and has given up on its mission,’ Conte told the assembled lawmakers.”
February 13 – Bloomberg (Jana Randow): “Euro-area industrial production fell more than twice as much as forecast in December, raising further questions over the state of the bloc’s economy. The 0.9% drop -- more than twice the 0.4% forecast -- was driven by declines in capital and non-durable consumer goods production. From a year earlier, output plunged the most since 2009, when the economy was dealing with the fallout from the financial crisis.”
February 13 – Reuters (Paul Carrel): “Germany’s economy stalled in the final quarter of last year, just skirting recession as fallout from global trade disputes and Brexit put the brakes on a decade of expansion amid signs that exports will stay subdued for the time being. Gross domestic product in Europe’s biggest economy was unchanged for the quarter…”
February 11 – Financial Times (Miles Johnson): “Matteo Salvini has raised the possibility of wresting control of Italy’s sizeable gold reserves away from the country’s central bank in the latest in a series of threats to the independence of the Bank of Italy by Rome’s populist coalition. ‘The gold is the property of the Italian people, not of anyone else,’ Mr Salvini, deputy prime minister and leader of the League party, said… The comments came after he called for the removal of the leadership of the Bank of Italy for failing to prevent the country’s banking crisis, prompting Giovanni Tria, economy minister, to defend the independence of the central bank.”
February 15 – Wall Street Journal (Giovanni Legorano): “Spanish Prime Minister Pedro Sánchez called snap general elections for late April, bringing the curtain down early on a short-lived government and pitching Spain into a vote that is likely to produce a fragmented legislature and could showcase the rising strength of a new, hard-right party. Mr. Sánchez, who heads the only established center-left party running a major European country, invoked snap parliamentary elections for April 28… The decision followed Mr. Sanchez’s failure… to secure parliamentary approval of this year’s budget after he lost critical support from Catalan separatist parties. The April elections… could usher in a period of protracted instability, as no obvious parliamentary majority seems set to emerge from the vote.”
February 10 – Reuters (Ingrid Melander and Guillermo Martinez): “Tens of thousands of people waving Spain’s red-and-yellow flag demonstrated in Madrid on Sunday to oppose any concessions by the government to Catalan pro-independence parties and to call for early elections. Demonstrators chanting ‘Spain! Spain!’ and ‘We want to vote!’ filled the Plaza de Colon in the city center in the largest protest Socialist Prime Minister Pedro Sanchez has faced in eight months in office.”
Japan Watch:
February 10 – Financial Times (Kana Inagaki and Leo Lewis): “Japan Inc’s third-quarter profits fell at the sharpest rate since the 2011 Fukushima earthquake and tsunami as companies faced an abrupt slowdown in China’s economy owing to the US trade dispute. Following years of robust growth under Prime Minister Shinzo Abe’s pro-business economic policies, Japanese companies were also hit by global growth fears that have also affected technology giants such as Apple and Intel. A series of downgrades in annual profit forecasts by Nidec, Panasonic, Fanuc and other manufacturers were accompanied by warnings about the lack of clarity about when a recovery would happen.”
Fixed-Income Bubble Watch:
February 11 – Financial Times (Megan Greene and Dwight Scott): “Leveraged loans, which are extended to corporate borrowers with relatively high debt levels, carry more risk and pay more interest as the US Federal Reserve raises rates. They are secured with underlying collateral and when lenders line up for repayment, leveraged loans are usually given priority over lower rated bonds known as high yield credit… The asset class has more than doubled since 2010 to more than $1tn at the end of 2018. Highly leveraged loan deals (when debt is more than five times earnings before interest, tax, depreciation and amortisation) account for about half of new US corporate debt. That growth is partly a result of securitisation. Roughly half of investor demand today comes from packaging loans into collateralised loan obligations, or CLOs, and slicing them into different tranches of risk. Rising demand has shifted the balance of power from investors to borrowers… According to Moody’s, about 25% of the leveraged loan market was considered ‘covenant-lite’ before the global financial crisis. Now that figure is 80%.”
Leveraged Speculation Watch:
February 11 – CNBC (Jeff Cox): “Hedge fund manager Paul Tudor Jones issued a call for more responsible investing, saying that the craze over stock buybacks is causing troubling social ills. ‘I think we've got a mania going on in buybacks and a mania going on in terms of shareholder primacy,’ Jones told CNBC's Bob Pisani… He added that the focus solely on shareholder profits has helped cause major wealth disparities and is a departure from the way corporate boards used to behave. ‘Things have been different and can be different again, and if they're not I'm really nervous about what the ultimate social consequences are in this country,’ he said. U.S. companies bought back more than $1 trillion of their own shares in 2018…”
February 8 – Financial Times (Katie Martin): “Computer-driven funds must stick with their strategies after a tough year in 2018, said Andrew Dyson, chief executive of QMA. Mr Dyson, who leads the quant unit of PGIM, Prudential Financial’s funds arm, said underlying market conditions were no great threat to quantitative investment strategies. ‘The much bigger risk is that we lose confidence and row back… That’s the biggest psychological risk.’ Quant funds as a whole lost 5.6% last year, according to data from HFR.”
Geopolitical Watch:
February 10 – Reuters (Lesley Wroughton and Gergely Szakacs): “U.S. Secretary of State Mike Pompeo cautioned allies… against deploying equipment from Chinese telecoms giant Huawei on their soil, saying it would make it more difficult for Washington to ‘partner alongside them’. The United States and its Western allies believe Huawei Technologies’ apparatus could be used for espionage, and see its expansion into central Europe as a way to gain a foothold in the EU market. Washington is concerned in particular about the expansion of Huawei, the world’s biggest maker of telecoms equipment, in Hungary and Poland.”
February 10 – Bloomberg (Hal Brands): “The political crisis in Venezuela has pitted the U.S. against a dictator who refuses to leave office. But the crisis has a broader significance: It shows that Latin America has again become an arena in which rival great powers struggle for influence and advantage. As the U.S. faces surging geopolitical rivalry around the world, its position is also coming under pressure in its own backyard. The region has been the focus of global competition before, of course, from the Spanish-Portuguese rivalry of the 15th and 16th centuries to the Cold War between Washington and Moscow. But after the fall of the Soviet Union, Latin America seemed — for a time, at least — to have become a geopolitics-free zone. The retreat and disintegration of the Soviet Union left the U.S. with no challenger for predominant regional influence.”
February 9 – Wall Street Journal (Josh Chin): “The global internet is splitting in two. One side, championed in China, is a digital landscape where mobile payments have replaced cash. Smartphones are the devices that matter, and users can shop, chat, bank and surf the web with one app. The downsides: The government reigns absolute, and it is watching—you may have to communicate with friends in code. And don’t expect to access Google or Facebook. On the other side, in much of the world, the internet is open to all. Users can say what they want, mostly, and web developers can roll out pretty much anything. People accustomed to China’s version complain this other internet can seem clunky… The two zones are beginning to clash with the advent of the superfast new generation of mobile technology called 5G.”
February 9 – Reuters (Abhirup Roy and Ben Blanchard): “China’s foreign ministry… condemned Indian Prime Minister Narendra Modi’s visit to the disputed northeastern border state of Arunachal Pradesh, saying it ‘resolutely opposes’ activities by Indian leaders in the region. Modi’s visit was part of a series of public meetings in the region aimed at garnering support for his Hindu nationalist Bharatiya Janata Party ahead of Indian elections due by May.”
February 10 – Reuters (Ingrid Melander and Guillermo Martinez): “Tens of thousands of people waving Spain’s red-and-yellow flag demonstrated in Madrid on Sunday to oppose any concessions by the government to Catalan pro-independence parties and to call for early elections. Demonstrators chanting ‘Spain! Spain!’ and ‘We want to vote!’ filled the Plaza de Colon in the city center in the largest protest Socialist Prime Minister Pedro Sanchez has faced in eight months in office.”
Japan Watch:
February 10 – Financial Times (Kana Inagaki and Leo Lewis): “Japan Inc’s third-quarter profits fell at the sharpest rate since the 2011 Fukushima earthquake and tsunami as companies faced an abrupt slowdown in China’s economy owing to the US trade dispute. Following years of robust growth under Prime Minister Shinzo Abe’s pro-business economic policies, Japanese companies were also hit by global growth fears that have also affected technology giants such as Apple and Intel. A series of downgrades in annual profit forecasts by Nidec, Panasonic, Fanuc and other manufacturers were accompanied by warnings about the lack of clarity about when a recovery would happen.”
Fixed-Income Bubble Watch:
February 11 – Financial Times (Megan Greene and Dwight Scott): “Leveraged loans, which are extended to corporate borrowers with relatively high debt levels, carry more risk and pay more interest as the US Federal Reserve raises rates. They are secured with underlying collateral and when lenders line up for repayment, leveraged loans are usually given priority over lower rated bonds known as high yield credit… The asset class has more than doubled since 2010 to more than $1tn at the end of 2018. Highly leveraged loan deals (when debt is more than five times earnings before interest, tax, depreciation and amortisation) account for about half of new US corporate debt. That growth is partly a result of securitisation. Roughly half of investor demand today comes from packaging loans into collateralised loan obligations, or CLOs, and slicing them into different tranches of risk. Rising demand has shifted the balance of power from investors to borrowers… According to Moody’s, about 25% of the leveraged loan market was considered ‘covenant-lite’ before the global financial crisis. Now that figure is 80%.”
Leveraged Speculation Watch:
February 11 – CNBC (Jeff Cox): “Hedge fund manager Paul Tudor Jones issued a call for more responsible investing, saying that the craze over stock buybacks is causing troubling social ills. ‘I think we've got a mania going on in buybacks and a mania going on in terms of shareholder primacy,’ Jones told CNBC's Bob Pisani… He added that the focus solely on shareholder profits has helped cause major wealth disparities and is a departure from the way corporate boards used to behave. ‘Things have been different and can be different again, and if they're not I'm really nervous about what the ultimate social consequences are in this country,’ he said. U.S. companies bought back more than $1 trillion of their own shares in 2018…”
February 8 – Financial Times (Katie Martin): “Computer-driven funds must stick with their strategies after a tough year in 2018, said Andrew Dyson, chief executive of QMA. Mr Dyson, who leads the quant unit of PGIM, Prudential Financial’s funds arm, said underlying market conditions were no great threat to quantitative investment strategies. ‘The much bigger risk is that we lose confidence and row back… That’s the biggest psychological risk.’ Quant funds as a whole lost 5.6% last year, according to data from HFR.”
Geopolitical Watch:
February 10 – Reuters (Lesley Wroughton and Gergely Szakacs): “U.S. Secretary of State Mike Pompeo cautioned allies… against deploying equipment from Chinese telecoms giant Huawei on their soil, saying it would make it more difficult for Washington to ‘partner alongside them’. The United States and its Western allies believe Huawei Technologies’ apparatus could be used for espionage, and see its expansion into central Europe as a way to gain a foothold in the EU market. Washington is concerned in particular about the expansion of Huawei, the world’s biggest maker of telecoms equipment, in Hungary and Poland.”
February 10 – Bloomberg (Hal Brands): “The political crisis in Venezuela has pitted the U.S. against a dictator who refuses to leave office. But the crisis has a broader significance: It shows that Latin America has again become an arena in which rival great powers struggle for influence and advantage. As the U.S. faces surging geopolitical rivalry around the world, its position is also coming under pressure in its own backyard. The region has been the focus of global competition before, of course, from the Spanish-Portuguese rivalry of the 15th and 16th centuries to the Cold War between Washington and Moscow. But after the fall of the Soviet Union, Latin America seemed — for a time, at least — to have become a geopolitics-free zone. The retreat and disintegration of the Soviet Union left the U.S. with no challenger for predominant regional influence.”
February 9 – Wall Street Journal (Josh Chin): “The global internet is splitting in two. One side, championed in China, is a digital landscape where mobile payments have replaced cash. Smartphones are the devices that matter, and users can shop, chat, bank and surf the web with one app. The downsides: The government reigns absolute, and it is watching—you may have to communicate with friends in code. And don’t expect to access Google or Facebook. On the other side, in much of the world, the internet is open to all. Users can say what they want, mostly, and web developers can roll out pretty much anything. People accustomed to China’s version complain this other internet can seem clunky… The two zones are beginning to clash with the advent of the superfast new generation of mobile technology called 5G.”
February 9 – Reuters (Abhirup Roy and Ben Blanchard): “China’s foreign ministry… condemned Indian Prime Minister Narendra Modi’s visit to the disputed northeastern border state of Arunachal Pradesh, saying it ‘resolutely opposes’ activities by Indian leaders in the region. Modi’s visit was part of a series of public meetings in the region aimed at garnering support for his Hindu nationalist Bharatiya Janata Party ahead of Indian elections due by May.”
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