Friday, December 29, 2017

Weekly Commentary: A Phenomenal Year

2017 was phenomenal in so many ways. The year will be remembered for a tumultuous first year of the Trump Presidency, the passage of major tax legislation and seemingly endless stock market records. It was a year of synchronized global growth and stock bull markets, along with record low market volatility. It was the year of parabolic moves in bitcoin and cryptocurrencies. “Blockchain the Future of Money.”

Yet none of the above is worthy of Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.

Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.

Coming into 2017, there was some concern for a tightening of financial conditions. U.S. unemployment was below 5% and consumer price inflation was on the rise. A U.S. tightening cycle was expected to support the dollar, while a strong greenback risked pressuring currencies and liquidity conditions in China and EM generally. As the year progressed, however, it became apparent that seemingly nothing would budge the Fed from their commitment to an ultra-dovish gradualist approach to rate “normalization”.

And with virtually all assets experiencing price inflation at multiples of financing costs (short-term rates and market yields), financial conditions only loosened further as the Yellen Fed hesitantly took three little baby-steps (boosting rates a mere 75 bps). A 70 bps 2017 jump in the two-year did not inhibit a four bps decline in 10-year Treasury yields. Of course, the flattening yield curve was interpreted as a warning against further Fed “tightening”. In reality, historically low global bond yields were an indication of extraordinarily loose financial conditions, along with perceptions that central bankers would ensure finance remained loose for years to come.

December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”

December 20 – (Drew Voros): “As of last Thursday, the amount of new assets flowing into U.S.-listed ETFs totaled $466 billion, putting the milestone of $500 billion in new assets for the year closer into view, which would be almost double the previous annual record of new ETF assets. What’s more, combined with performance, the asset inflows grew the ETF market to $3.4 trillion—almost $1 trillion bigger than where the market sat a short year ago.”

December 28 – Bloomberg (Patrick Clark): “Your home may not have made the same gains as stocks or bitcoin, but it still was a robust year for the U.S. housing market. The value of the entire U.S. housing stock increased by 6.5% -- or $2 trillion -- in 2017, according to… Zillow. All homes in the country are now worth a cumulative $31.8 trillion. The gain in home values was the fastest since 2013…”

December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10% lower than the next-closest year. It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.”

When the Fed initially adopted crisis-period QE to reliquefy financial markets, they were clearly on a slippery slope. After the Fed in 2011 revealed its “exit strategy,” I titled a CBB “No Exit.” What I did not anticipate was that the Fed would in a few years again more than double balance sheet holdings to $4.5 TN. In 2012, with Draghi proclaiming “whatever it takes,” I wrote that it was a “pretty good wallop of the can down the road.” I never thought it possible that the Germans would tolerate year-after-year of massive ECB monetary inflation. Yet when I ponder a historic failure of central bankers to tighten conditions in 2017, my thoughts return to chairman Bernanke’s 2013 “the Fed is prepared to push back against a tightening of financial conditions.”

The epic untold story of 2017: markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.

As such, booming equities put no pressure on bond prices. Market concern for a destabilizing fixed-income deleveraged episode disappeared. Indeed, the greater the risk asset Bubble the more certain the bond market became of an inevitable redeployment of QE measures. And with bond markets well under control and confidence in central bank market liquidity backstops running high, why wouldn’t the cost of market insurance sink to record lows? Writing flood insurance during a drought. Moreover, with cheap insurance so readily available, why not push the risk-taking envelope? Build lavishly along the beautiful coastline.

Throughout the markets, speculative forces became only more deeply entrenched and powerfully self-reinforcing. It was a veritable tsunami of “money” into passive equity index, corporate bond and EM ETFs. Why not? Markets are going up, while active managers might adjust to the risk backdrop and underperform index products. It was a year where it never seemed so patently rational to uphold faith in central banking and “invest” in “the market”.

Markets are dominated by Greed and Fear. When central banks banish the latter, one’s left with an overabundance of the former. I chuckle these days when thinking back to the late-eighties as “the decade of greed.” And when it comes to The Year of Greed, most would think of “still dancing” 2007 or “dotcom” 1999. But in terms of global excess across various asset classes, ’99 or ’07 Can’t Hold a Candle to 2017. Booming equities, strong returns in fixed income and still about $10 TN of global sovereign debt sporting negative yields. Phenomenal.

The S&P500 returned 21.8% (price and dividends). The DJIA surged 25.1%. The Nasdaq100 gained 31.5% and the Nasdaq Composite rose 28.2%. Facebook rose 53.4%, 56.0%, Apple 46.1%, Netflix 55.1%, Google/Alphabet 32.9% and Microsoft 37.7%. Tesla jumped 45.7%, Micron Technology 87.6%, and Nvidia 81.3%. The Nasdaq Computer Index gained 38.8%. The Semiconductors (SOX) rose 38.2%, and the Biotechs (BTK) jumped 37.2%. The Homebuilders (XHB) gained 32.7%. The Broker/Dealers (XBD) gained 29.2% and the Banks (BKX) rose 16.3%. Bank of America gained 33.6%, Citigroup 25.1% and JPMorgan 23.9%.

Globally, Japan’s Nikkei gained 19.1%. Asia bubbled. Major indices were up 21.8% in South Korea, 27.9% in India, 36% in Hong Kong, 20% in Indonesia, 48% in Vietnam, 18% in Singapore, 22% in China (CSI 300), 15% in Taiwan and 14% in Thailand. In Europe, Germany’s DAX gained 12.5%, Italy’s MIB 13.6%, and Franc’s CAC 40 9.3%. Notable EM gains included Turkey’s 47.6%, Poland’s 23.2%, Hungary’s 23.0%, Brazil’s 26.9%, Chile’s 34.0% and Argentina’s 77.7%,

This has been going on for so long now that it’s all accepted as normal. Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.

Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.

I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.

Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a Phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.

Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.

And for those interested, please mark your calendars for January 18th, 4:30 pm Eastern (2:30 pm Mountain) for the Tactical Short Q4 Conference Call.  Call details to follow.

For the Week:

The S&P500 declined 0.4% (2017 gain 19.4%), and the Dow slipped 0.1% (up 25.1%). The Utilities recovered 0.3% (up 9.0%). The Banks fell 1.1% (up 16.3%), and the Broker/Dealers declined 0.8% (up 29.2%). The Transports declined 0.6% (up 17.3%). The S&P 400 Midcaps slipped 0.2% (up 14.5%), and the small cap Russell 2000 declined 0.5% (up 13.1%). The Nasdaq100 fell 1.1% (up 31.5%).The Semiconductors dropped 1.4% (up 38.2%). The Biotechs added 0.5% (up 37.3%). With bullion surging $28, the HUI gold index gained 1.8% (up 5.5%).

Three-month Treasury bill rates ended the week at 135 bps. Two-year government yields dipped about a basis point to 1.89% (up 70bps y-t-d). Five-year T-note yields declined four bps to 2.21% (up 28bps). Ten-year Treasury yields fell eight bps to 2.41% (down 4bps). Long bond yields dropped nine bps to 2.74% (down 33bps).

Greek 10-year yields were little changed at 4.07% (down 295bps in 2017). Ten-year Portuguese yields jumped 11 bps to 1.94% (down 180bps). Italian 10-year yields rose 10 bps to 2.02% (up 20bps). Spain's 10-year yields gained 10 bps to 1.57% (up 19bps). German bund yields added a basis point to 0.43% (up 22bps). French yields rose four bps to 0.79% (up 11bps). The French to German 10-year bond spread widened three to 36 bps. U.K. 10-year gilt yields declined five bps to 1.19% (down 5bps). U.K.'s FTSE equities gained 1.3% (up 7.6%).

Japan's Nikkei 225 equities index declined 0.6% (up 19.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 fell 1.0% (up 9.3%). The German DAX equities index dropped 1.2% (up 12.5%). Spain's IBEX 35 equities index lost 1.4% (up 7.4%). Italy's FTSE MIB index dropped 1.6% (up 13.6%). EM markets were mostly higher. Brazil's Bovespa index rose 1.6% (up 26.8%), and Mexico's Bolsa jumped 2.0% (up 8.1%). South Korea's Kospi index gained 1.1% (up 21.8%). India’s Sensex equities index added 0.3% (up 27.9%). China’s Shanghai Exchange increased 0.3% (up 6.6%). Turkey's Borsa Istanbul National 100 index surged 3.8% (up 47.6%). Russia's MICEX equities index gained 0.3% (down 5.5%).

Junk bond mutual funds saw outflows of $240 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased five bps to 3.99% (down 33bps y-o-y). Fifteen-year rates gained six bps to 3.44% (down 11bps). Five-year hybrid ARM rates rose eight bps to 3.47% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 22bps).

Federal Reserve Credit last week expanded $9.4bn to $4.418 TN. Over the past year, Fed Credit declined $9.5bn. Fed Credit inflated $1.607 TN, or 57%, over the past 268 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.7bn last week to $3.362 TN. "Custody holdings" were up $182bn y-o-y, or 5.7%.

M2 (narrow) "money" supply slipped $2.9bn last week to $13.863 TN. "Narrow money" expanded $686bn, or 5.2%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits dropped $56.4bn, while Savings Deposits jumped $50.4bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.

Total money market fund assets jumped $9.4bn to $2.842 TN. Money Funds gained $113bn y-o-y, or 4.1%.

Total Commercial Paper added $1.0bn to a 19-month high $1.080 TN. CP gained $93bn y-o-y, or 9.4%.

Currency Watch:

The U.S. dollar index declined 1.3% to 92.124 (down 10.0% y-t-d). For the week on the upside, the South African rand increased 1.9%, the Swedish krona 1.6%, the Swiss franc 1.4%, the Norwegian krone 1.4%, the Australian dollar 1.3%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.1%, the New Zealand dollar 1.1%, the Brazilian real 0.9%, the South Korean won 0.9%, the Singapore dollar 0.6%, the Japanese yen 0.5% and the Mexican peso 0.5%. The Chinese renminbi gained 1.08% versus the dollar this week (up 6.73% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index surged 3.1% (up 11.0% y-t-d). Spot Gold gained 2.2% to $1,303 (up 13.1%). Silver surged 4.3% to $17.145 (up 7.3%). Crude jumped $1.95 to $60.42 (up 12%). Gasoline advanced 1.9% (up 8%), and Natural Gas surged 10.7% (down 21%). Copper added 1.9% (up 32%). Wheat increased 0.5% (up 5%). Corn slipped 0.4% (unchanged).

Trump Administration Watch:

December 24 – Wall Street Journal (Kristina Peterson): “While many Republicans celebrated the recent passage of their tax overhaul, some worry the party’s year in control of Congress and the White House has done little to rein in federal spending. Fiscal restraint has been a watchword for the party for decades. But various actions this year, including the tax rewrite, are expected to add to the federal deficit, with spending likely to increase in 2018. ‘Most of the drive upward has not been on the Democratic side, which is disheartening,’ Sen. Bob Corker (R., Tenn.) said. ‘It’s been on the Republican side.’ The new tax law, which President Donald Trump signed Friday, will add just under $1.5 trillion to the federal budget deficit over 10 years, according to the nonpartisan Congressional Budget Office.”

December 28 – Reuters (David Brunnstrom and Susan Heavey): “U.S. President Donald Trump… said he had ‘been soft’ on China on trade issues and said he was not happy that China had allowed oil shipments to go into North Korea. ‘I have been soft on China because the only thing more important to me than trade is war,’ Trump said… Earlier on Thursday, Trump said on Twitter that China has been ‘caught’ allowing oil into North Korea and said such moves would prevent “a friendly solution” to the crisis over Pyongyang’s nuclear program.”

China Watch:

December 28 – Reuters (Li Zheng): “China’s banking regulator will further tighten the screws on the trust industry next year, two sources with direct knowledge of the matter said, as Beijing steps up a campaign to clampdown on the country’s shadow banking sector. Trusts have been a key part of China’s shadow banking sector, which helps channel deposits into risky investments via products often designed to dodge capital or investment regulations.”

December 28 – Bloomberg: “The last day of a bitter year for China’s non-bank borrowers is proving to be especially painful: they’re now paying a record premium for short-term funds. As interbank lending rates climbed on Friday due to banks hoarding cash for year-end regulatory checks, the increase was especially significant for non-bank financial institutions, such as securities and insurance companies. A measure of what they’re paying for seven-day funds relative to costs for big Chinese banks surged to the highest level ever. The funding cost gap is reflected in the spread between China’s seven-day repurchase rate fixing and the weighted average rate, which expanded to almost 3 percentage points…”

December 27 – Bloomberg: “Recent economic data offer a ‘warning for 2018’ now that Chinese leaders are less motivated to prop up growth in the wake of their Congress in October, according to the China Beige Book. ‘Incentives to ensure the economy was growing smartly at the time of the Communist Party Congress do not apply as next year wears on,’ CBB president Leland Miller and chief economist Derek Scissors said… Fourth-quarter results already show some signs of a transition to slower growth, according to a private survey by CBB International, which collects anecdotal accounts similar to those in the Federal Reserve’s Beige Book.”

December 26 – Financial Times (Emily Feng): “Felix Tao still remembers how thrilled he was to receive one of his biggest orders: a Rmb1.6m ($244,000) deal to supply phone parts to Le Mobile, the mobile phone subsidiary of tech conglomerate LeEco. Almost two years later, however, the young supplier from the coastal province of Shandong says he is still waiting to be paid… The unravelling of LeEco, the tech group that once aimed to be the Tesla and Netflix of China, has devolved into a chaotic scramble for cash, providing a case study case into the shakiness of the country’s nascent corporate bankruptcy regime. This has sweeping implications for the country’s ability to allocate and manage debt. A dysfunctional bankruptcy system has allowed China’s insolvent businesses to continue with little pressure to restructure. It has also discouraged investors and banks from properly pricing credit risk into their lending, which spells trouble for a country with $18tn in corporate debt, equal to 169% of gross domestic product..”

December 24 – Bloomberg: “A Chinese central bank official said China should allow local governments to go bankrupt to help rein in regional authorities’ excessive borrowing. A case like the bankruptcy of Detroit would convince investors that the central government is really determined to dispel beliefs of an implicit guarantee for regional authorities, Xu Zhong, head of research bureau at the People’s Bank of China, wrote... Just a couple of days ago, China’s finance ministry pledged to break the ‘illusion’ that Beijing would bail out local governments’ hidden debt. Their calls for limiting local borrowings are in line with central government’s financial policy for 2018. President Xi Jinping said earlier this month that a priority for next year is to ‘effectively’ control leverage and prevent major risks.”

December 26 – Financial Times (Gabriel Wildau and Yizhen Jia): “Chinese stockholders are ramping up borrowing against shares, driving revenue for securities houses but creating risk of a chain reaction in the event of a sharp market downturn. Shareholders in 317 Shanghai and Shenzhen-listed companies had pledged shares worth at least 40% of those companies by December 18, up from 224 companies on the same date a year earlier, according to Wind Info. Share-pledging is especially common for small and mid-cap companies, where a single shareholder often owns a large stake. Controlling shareholders sometimes reinvest the proceeds into company projects or buy additional company shares on the secondary market to boost the share price. ‘Companies use ‘market-value management’ to push up the share price, pledge the shares to brokers and then take the money and run,’ said Hao Hong, head of research at Bocom International in Hong Kong.”

December 27 – Financial Times (Emma Dunkley): “A record number of companies have listed in mainland China this year as the market prepares to open the floodgates to foreign investment in the next six months. More than 400 companies floated in 2017 on the Shenzhen and Shanghai stock exchanges to reach the milestone, according to data from EY. A flurry of small and medium-sized enterprises have listed in mainland China this year, assisted by a streamlined process as exchanges have attempted to work through a backlog of applications, EY said.”

Federal Reserve Watch:

December 28 – CNBC (Rebecca Ungarino): “As equity markets in the U.S. look to cap off a stunning year full of record winning streaks, all-time highs and strong returns across multiple asset classes, investors are left wondering: What will 2018 hold? The ‘single most important’ trade for the market next year will lie not in the stock market, but rather in Fed funds futures, said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. The strategist told CNBC's ‘Trading Nation’ …that the apparent divergence between the Federal Reserve's expectations for interest rates' direction and the market's expectations for its tightening path will be of the utmost importance as 2018 unfolds.”

U.S. Bubble Watch:

December 28 – Bloomberg (Alexandre Tanzi): “The total value of all homes in the United States rose 6.5% in 2017 to $31.8 trillion, according to Zillow. Renters paid a record $485.6 billion this year. The Los Angeles and New York markets each account for more than 8% of the overall value of U.S. housing stock, worth $2.7 trillion and $2.6 trillion, respectively. The San Francisco market follows at $1.4 trillion and the Washington D.C. housing market is valued at just under $1 trillion.”

December 28 – Bloomberg (Katia Dmitrieva): “The U.S. merchandise trade deficit reached a more than two-year high in November, while inventories at wholesalers and retailers increased, according to… the Commerce Department. Goods-trade gap grew to $69.7b (est. $67.9b), the widest since March 2015… Exports of goods rose 3% to $133.7b on increased shipments of automobiles and consumer and capital goods Imports increased 2.7% to a record $203.4b.”

December 28 – Wall Street Journal (Kenan Machado and Saumya Vaishampayan): “Being passive can leave you with too much of a good thing. Investors who loaded up on U.S. and Asian stock-index funds might be surprised to learn just what they own now: technology stocks—a lot of them. Led by Apple Inc., Facebook Inc. and their peers, the weighing of technology stocks in the S&P 500 index has climbed to 23.8% as of Dec. 26, from 20.8% at the end of last year, according to S&P Dow Jones Indices. Three years ago, tech stocks had a 19.7% weighting in the widely used U.S. stock market benchmark, which is currently tracked by funds with more than $2 trillion in assets.”

December 26 – Bloomberg (Katia Dmitrieva): “Housing prices in 20 U.S. cities accelerated more than forecast in October, rising by the most since mid-2014 as lean inventories continued to prop up values amid steady demand, S&P CoreLogic Case-Shiller data showed… 20-city property values index increased 6.4% y/y (est. 6.3%), the biggest gain since July 2014. National home-price gauge rose 6.2% y/y, the most since June 2014… All 20 cities in the index showed year-over-year gains, led by a 12.7% increase in Seattle and a 10.2% advance in Las Vegas.”

December 26 – Reuters (Eric M. Johnson, Richa Naidu): “The U.S. holiday shopping season is on track to break sales records on the back of surging consumer confidence and increased use of mobile devices, presenting an unexpected boon for retailers and the delivery companies they rely on. The holiday shopping season, a crucial period for retailers that can account for up to 40% of annual sales, brought record-breaking online and in-store spending this year of more than $800 billion, according to Mastercard Inc’s analytics arm. Stakes are particularly high this year for traditional retailers that have invested heavily in technology and free delivery and returns, determined to stay relevant in a market increasingly dominated by Inc.”

December 26 – Bloomberg (Alex Barinka): “IPO cheerleaders gave a collective sigh of relief in 2017 -- a comeback year for U.S. listings. Conditions were ripe for initial public offerings. Broader equity markets continued to rise, with the S&P 500 Index up almost 20% since the start of the year as December winds to a close. Meanwhile, the year’s volatility averaged less than the lowest point of all of 2016. Forty-nine percent more companies went public this year than last.”

December 27 – Financial Times (Jennifer Thompson): “Smart beta funds have hit the $1tn of assets milestone, testifying to the increasing popularity of the investment strategy. A hybrid between active and passive investment management, smart beta funds take a passive strategy but modify it according to one or more factors, such as favouring cheaper stocks or screening them according to dividend payouts, in order to generate better returns. Also known as strategic beta or factor investing, the funds’ growth has coincided with increasing criticism of the high fees charged by traditional active managers as well as heightened scrutiny of their performance.”

December 29 – Financial Times (Joe Rennison): “Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007… The boom in auto ABS comes as other structured credit products, such as deals backed by leveraged loans or credit card debt, have also seen a glut of issuance. Demand is being driven by investors who are seeking alternative assets as the premiums offered on corporate bonds and loans continue to decline. That investor appetite has helped push down the cost of funding for borrowers with less than pristine credit ratings.”

December 26 – Financial Times (Gregory Meyer): “Robots may one day steer trucks across America. But in winter 2017, US trucking companies are confronting a shortage of human drivers. Rates to hire long-distance trucks have soared as rising freight volumes and robust retail sales during the festive season drive up demand, just as a strong US jobs market makes drivers harder to come by… The ratio of loads in need of movement to trucks available is this month expected to be the highest on record, according to DAT, an online trucking bulletin board. There is ‘very little, if any, excess capacity in the system’, said Avery Vise of FTR, a consultancy. The situation could push up the cost of consumer goods.”

December 28 – Bloomberg (Brian K Sullivan and Jim Efstathiou Jr): “In the year that President Donald Trump pulled out of the Paris accord and downplayed global warming as a security threat, the U.S. received a harsh reminder of the perils of the rise in the planet’s temperature: a destructive rash of hurricanes, fires and floods. The country recorded 15 weather events costing $1 billion or more each through early October, one short of the record 16 in 2011, according to the federal government’s National Centers for Environmental Information in Asheville, North Carolina. And the tally doesn’t include the recent wildfires in southern California.”

Global Bubble Watch:

December 28 – Bloomberg Intelligence (Dragos Ailoae): “Global fixed-income ETF assets under management have climbed 380% since December 2010 to about $746 billion. That’s on net issuance of $567 billion of shares as of Dec. 20. By comparison, equities-focused ETF assets grew 250% to $3.2 trillion. Commodity ETF assets shrank over 10% to $127 billion during the period. Mark-to-market losses have taken a toll, despite $21 billion of inflows. Commodity prices have plunged almost 50% since December 2010, as gauged on the Bloomberg Commodity Index.”

December 27 – Financial Times (Kenan Machado and Saumya Vaishampayan): “Worldwide mergers and acquisitions activity has exceeded $3tn for the fourth consecutive year, extending an unprecedented wave of dealmaking that bankers say is set to accelerate in 2018. The final month of 2017 was capped by three blockbuster transactions sparked by companies taking action against the threat of disruption from the likes of Amazon, Facebook and Netflix, which are using their size and scale to push into new sectors. …The US’s biggest drugstore chain CVS Health agreed to acquire healthcare insurer Aetna for about $69bn. Meanwhile, Amazon’s effect on retail worldwide prompted Australia’s billionaire Lowy family to sell its global shopping centre business Westfield to France’s Unibail-Rodamco for $24.7bn.”

December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “The richest people on earth became $1 trillion richer in 2017, more than four times last year’s gain, as stock markets shrugged off economic, social and political divisions to reach record highs. The 23% increase on the Bloomberg Billionaires Index, a daily ranking of the world’s 500 richest people, compares with an almost 20% increase for both the MSCI World Index and Standard & Poor’s 500 Index.”

December 27 – Wall Street Journal (Christopher Whittall): “Hellman & Friedman LLC and other investors sought last month to borrow money in the loan market to finance a takeover. The U.S. private-equity firm offered a yield of about 3%, but few of the protections once considered routine. Still, the investors bought. Rampant demand for leveraged loans is allowing private-equity firms to water down legal safeguards for investors. Many lawyers and bankers increasingly worry that such changes could result in higher losses for investors during the next downturn, as creditors find themselves with less protection… Investors are clamoring for leveraged loans as years of low interest rates and central banks’ bond buying have pushed down returns elsewhere. Trillions of dollars of sovereign debt, primarily in Europe, continue to sport negative yields… With ‘far too much cash trying to find too few homes,’ private-equity firms ‘can be more aggressive and lenders will take it,’ said Adam Freeman, a partner at Linklaters LLP.”

December 26 – Wall Street Journal (Sam Goldfarb and Nigel Chiwaya): “By almost any measure, corporate borrowers had it easy in 2017. Yields on corporate debt, which fall as prices rise, began the year at very low levels and ended the year even lower. Investors bought up pretty much every type of debt instrument, from investment-grade bonds to collateralized loan obligations. Many analysts expect more of the same in the early part of 2018. A test could come later in the year, as combined net bond-buying by the Federal Reserve and European Central Bank is expected to turn negative, removing a key support for fixed-income markets.”

December 27 – Financial Times (Nicole Bullock, Robert Smith and Emma Dunkley): “Global exchanges attracted the largest number of listings since the financial crisis this year, with a resurgence of activity in the US and a record number of Chinese deals belying concerns that companies are cooling to the idea of public ownership. Almost 1,700 companies floated in 2017, an increase of 44% over 2016 and the most initial public offerings since 2007, according to Dealogic. Proceeds rose 44% to $196bn, the largest amount since 2014, which had been boosted by Alibaba’s $25bn listing. In the US companies raised $49bn — double the $24bn of listings in 2016, which was the worst year for IPOs in more than a decade. European listings rose more than 40% and China marked a record number of deals, which helped to boost the global deal count.”

Fixed Income Watch:

December 27 – Bloomberg (Edward Bolingbroke and Brian Chappatta): “The U.S. yield curve is getting one final flattening push before calling it a year. The spread between the yields on 2-year and 10-year Treasuries narrowed to just 50.6 bps Wednesday, close to the decade low reached on Dec. 6. While a small part of the more than six-basis-point narrowing is a function of the market shifting to a new benchmark 2-year note, the move is nonetheless one of the biggest single-session shifts of 2017. The gap between 5-year and 30-year yields also contracted as long bonds staged their biggest advance since September.”

Europe Watch:

December 29 – Reuters (Joseph Nasr): “German inflation hit its highest level in five years in 2017, initial data showed on Friday, sowing the seeds of more discord among rate setters at the European Central Bank, where some policymakers want to stop pouring money into the euro zone. Consumer prices harmonized to make them compatible with inflation data in other European Union countries rose by 1.6% year-on-year in December, compared to the 1.4% forecast by analysts polled by Reuters.”

Japan Watch:

December 26 – Bloomberg (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… it was important to scrutinize whether economic expansion was leading to excessive risk-taking in financial markets. ‘In the current recovery phase, there are no signs of excessively bullish expectations in asset markets and financial institutions’ behavior. But financial developments warrant close attention,’ he said…”

December 25 – Bloomberg (Yuko Takeo): “Japanese inflation unexpectedly picked up in November but prices are still rising at less than half the rate targeted by the central bank. The tightest job market in decades got even tighter. Core consumer prices, which exclude fresh food, increased 0.9% in November from a year earlier (estimate 0.8%). The unemployment rate fell to 2.7%.”

Emerging Market Watch:

December 27 – New York Times (Kirk Semple and Clifford Krauss): “A general with no energy experience has been installed as the head of the state oil company. Arrests, firings and desperate emigration have gutted top talent. Oil facilities are crumbling, while production is plummeting. As the rest of the oil-producing world recovers on the back of stronger energy prices, Venezuela is getting worse, the result of dysfunctional management, rampant corruption and the country’s crippling economic crisis. The deepening troubles at the state oil company, the country’s economic mainstay, threaten to further destabilize a nation and government facing a dire recession, soaring inflation and unbridled crime, as well as food and medicine shortages.”

Leveraged Speculation Watch:

December 26 - CNBC (Tae Kim): “Greenlight Capital's David Einhorn, who is known for his prescient short bets against stocks like Lehman Brothers, shared the top reasons for his stellar hedge fund career. The billionaire hedge fund manager was asked what he believed is the most important factor for his investing success during an Oxford Union event last month. ‘If I had to pick one, I think it is critical thinking skill. It's the ability to look at a situation and see it for what it is, which isn't necessarily what is presented to you,’ Einhorn said. ‘And when something makes sense to figure out what makes sense. And when something doesn't make sense to question it, to challenge it, to look at it from a different way, to often come to the opposite conclusion.’”

Geopolitical Watch:

December 24 – Wall Street Journal (Michael R. Gordon): “President Donald Trump’s decision to provide Javelin antitank missiles to Ukraine reflects the broad assessment of his national security advisers that the shipment of defensive lethal arms is needed to raise the cost to Russia of its aggression in the conflict-ridden country and provide the West with fresh leverage in negotiations over its future. But the decision is also noteworthy for those trying to divine where the White House may be headed next year in its policy toward the Kremlin. While Mr. Trump has talked about improving relations with Russian President Vladimir Putin, he went along with aides who see Moscow as a revisionist power that is prepared to upend the post-Cold War order, and one that needs to be deterred.”

December 23 – Reuters (Ben Blanchard and Hyonhee Shin): “The latest U.N. sanctions against North Korea are an act of war and tantamount to a complete economic blockade against it, North Korea’s foreign ministry said on Sunday, threatening to punish those who supported the measure."

December 28 – Financial Times (Charles Clover): “With international attention this year diverted by North Korea, China has been quietly making geopolitical gains further south. Throughout 2017, Beijing has been equipping its artificial islands in the contested waters of the South China Sea for potential military use. Aerial photos published by the Center for Strategic and International Studies… show new construction on islands built by China, which now bristle with bunkers, aircraft hangars and shelters for radar, aircraft, warships and artillery. The new infrastructure leaves China in a position to station fighter jets and warships on the outcrops in 2018, and to make ambitious claims to territorial waters and airspace around them if Beijing chooses, say analysts.”

Friday Evening Links

[Bloomberg] U.S. Stocks Pare 2017 Gain as Dollar Weakens: Markets Wrap

[Bloomberg] Commodities End 2017 With a Bang in Longest Rally on Record

[Bloomberg] Gold Had Its Best Year Since 2010

[Bloomberg] A 2018 Wild Card That's Not Priced In: China-U.S. Trade Tension

[Reuters] Exclusive: Russian tankers fueled North Korea via transfers at sea - sources

[WSJ] The Year Everything Went Up: Markets in 18 Charts

Thursday, December 28, 2017

Friday's News Links

[Bloomberg] U.S. Stocks Mixed, Euro Seeks Best Year Since '03: Markets Wrap

[Reuters] U.S. oil prices climb to highest since mid-2015 on surprise output drop

[CNBC] Fed could surprise markets with more interest rate hikes than expected

[Bloomberg] Commodities Ending 2017 With a Bang in Longest Rally on Record

[Reuters] Dilemma for ECB as German inflation hits five-year high

[Bloomberg] Six Charts Show Gold's Bulls and Bears Have Plenty to Chew Over

[Bloomberg] China Shadow Banks Pay Record Premium for Cash as Squeeze Bites

[Reuters] China targets trust industry next year in fight against shadow banking: sources

[CNBC] China asks itself a tough question: Can it accept slower growth?

[Reuters] The year in U.S. markets in five graphs

[Reuters] Trump says China's stance on North Korea influences his trade policy

[CNBC] Trump threatens China, says Russia inquiry makes America 'look very bad'

[WSJ] Another Record Inflow For ETFs in 2017

[WSJ] Berlusconi Poised to Play Pivotal Role in Italian Vote

[FT] Watch 10-year Treasury yields for signs of danger in 2018

[FT] Securitised auto loans hit post-financial crisis high

[FT] Beijing bolsters its islands in the South China Sea

Thursday Afternoon Links

[Reuters] World stocks rally with surge in metals prices, U.S. dollar retreats

[Bloomberg] Homes in U.S. Gained $2 Trillion in Value This Year, Zillow Says

[Bloomberg] Italy's President Dissolves Parliament, Triggering Elections

[Nikkei Asian Review] China Drives Asia's Record International Bond Issuances For 2017 - Dealogic

[Nikkei Asian Review] Asia led 2017's global rise in IPOs as China's prowess grows

[CNBC] Trump sends a warning after report of Chinese oil sales to North Korea

Wednesday, December 27, 2017

Thursday's News Links

[Bloomberg] Dollar, Treasuries Decline as Stocks Edge Higher: Markets Wrap

[Reuters] Gold hits 1-month high as dollar weakens further

[Reuters] Oil prices near 2015 highs on tight market

[Bloomberg] Bitcoin Tumbles Over Exchange-Closure Fears

[Bloomberg] U.S. Merchandise Trade Gap Widens to Largest Since 2015

[Bloomberg] U.S. Renters Paid a Record High $485.6 Billion in 2017: Zillow

[Reuters] China's leaders fret over debts lurking in shadow banking system

[CNBC] The 'single most important' trade in 2018 could be a tug of war between the Fed and the market

[Bloomberg] It’s Been One of the Worst Years Ever for Billion-Dollar U.S. Weather Disasters

[Bloomberg] Japan Industrial Production, Retail Sales Rise in November

[Bloomberg] Steinhoff Downgraded Deeper Into Junk at Moody's as Risks Rise

[CNBC] It looks like the India-China rivalry is spreading to another front

[NYT] Once a Cash Cow, Venezuela’s Oil Company Now Verges on Collapse

[WSJ] The Growing Peril of Index Funds: Too Much Tech

[FT] Global M&A exceeds $3tn for fourth straight year

[WSJ] Tillerson Discusses Conflict Zones in Call With Russia

[WSJ] With the New Tax Law, CPAs Enjoy Sudden Popularity

[FT] Italy braces for election test

Wednesday Evening Links

[Bloomberg] U.S. Stocks Rise, Treasuries Gain as Dollar Falls: Markets Wrap

[Bloomberg] Flattening U.S. Yield Curve Nears Decade Lows in Final 2017 Push

[Reuters] U.S. holiday sales set to break records in surprise boon to retail

[CNBC] When the economic news is this good, history shows the gains are smaller for stocks

[Bloomberg] Five Key Challenges Xi Jinping Faces in 2018

[NYT] In a Complex Tax Bill, Let the Hunt for Loopholes Begin

Tuesday, December 26, 2017

Wednesday News Links

[Bloomberg] U.S. Stocks Rise With Treasuries as Dollar Falls: Markets Wrap

[Bloomberg] Copper Rallies to Three-Year High as China Plant Halts Output

[Bloomberg] China Beige Book Sees Signs of Shift to Slower Growth Already

[Bloomberg] China Industrial Profit Growth Slows as Factory Inflation Eases

[Bloomberg] Emerging Markets' Dream Run Could See a Reality Check in 2018

[Bloomberg] World's Wealthiest Became $1 Trillion Richer in 2017

[Bloomberg] Betting Against Boredom: A Field Guide to 2018 Volatility Trades

[WSJ] A Banner Year for Corporate Debt

[WSJ] White House Considers Former Bush-Era Economists for Fed No. 2 Job

[WSJ] Can Central Banks Keep Control of Interest Rates?

[WSJ] Yield-Starved Investors Giving In to the Demands of Bond Sellers

[FT] Number of IPOs at highest since financial crisis

[FT] China IPOs hit record number in mainland markets

[FT] China share pledges soar as founders seek new borrowing tools

[FT] Unravelling of LeEco leaves creditors scrambling for cash

[FT] Smart beta funds pass $1tn in assets

Tuesday Evening Links

[Bloomberg] Oil Surges Past $59 as Apple Drags on Tech Stocks: Markets Wrap

[Bloomberg] U.S. IPOs Bounce Back: Five Key Measures of 2017's Listings

[Bloomberg] Five Years of Abenomics: The Good, the Bad and the Sluggish

[Washington Post] America's trade wars are heating up as U.S. firms sue for relief from foreign competitors

[FT] Driver shortage sends truck haulage rates higher

Monday, December 25, 2017

Tuesday's News Links

[Bloomberg] Apple Drags Down Tech Shares as Gold, Oil Advance: Markets Wrap

[Bloomberg] Oil at Three-Week High Amid Reports of Libya Oil Pipe Explosion

[Bloomberg] Home Prices in 20 U.S. Cities Increase by Most Since 2014

[Bloomberg] U.S. IPOs Bounce Back: Five Key Measures of 2017's Listings

[Bloomberg] iPhone X Shipment Forecasts Cut by Analysts Citing Tepid Demand

[CNBC] Amazon celebrates 'biggest holiday' as Prime members surge

[Reuters] BOJ Kuroda: Must watch for excessive risk-taking in markets

[Bloomberg] Japan Inflation Picks Up in November But Still Below Target

[Reuters] Japan's household spending jumps but BOJ seen keeping stimulus

[CNBC] Billionaire David Einhorn says the key to investing success is ‘critical thinking’

[CNBC] 2017 — a year of disaster

[NYT] China’s New Lenders Collect Invasive Data and Offer Billions. Beijing Is Worried.

[WSJ] Are Central Bankers About to Lose Control?

[WSJ] Retailers Feel Shoppers’ Christmas Cheer

Monday's News Links

[Bloomberg] U.S. Dollar Rises With Ruble Amid Holiday Lull: Markets Wrap

[Bloomberg] China Signals Slower Growth Is Acceptable to Tackle Debt, Smog

[Bloomberg] China Central Bank Official Says Bankruptcy May Benefit the Country

[Bloomberg] Analysts Cut IPhone X Shipment Forecasts, Citing Lukewarm Demand

[WSJ] U.S. Decision to Send Lethal Arms to Ukraine Signals Tougher Stance on Russia

Friday, December 22, 2017

Weekly Commentary: Epic Stimulus Overload

Ten-year Treasury yields jumped 13 bps this week to 2.48%, the high going back to March. German bund yields rose 12 bps to 0.42%. U.S. equities have been reveling in tax reform exuberance. Bonds not so much. With unemployment at an almost 17-year low 4.1%, bond investors have so far retained incredible faith in global central bankers and the disinflation thesis.

Between tax legislation and cryptocurrencies, there’s been little interest in much else. As for tax cuts, it’s an inopportune juncture in the cycle for aggressive fiscal stimulus. And for major corporate tax reduction more specifically, with boom-time earnings and the loosest Credit conditions imaginable, it’s Epic Stimulus Overload. History will look back at this week - ebullient Republicans sharing the podium and cryptocurrency/blockchain trading madness - and ponder how things got so crazy.

From my analytical vantage point, the nation’s housing markets have been about the only thing holding the U.S. economy back from full-fledged overheated status. Sales have been solid and price inflation steady. And while construction has recovered significantly from the 2009/2010 trough, housing starts remain at about 60% of 2004-2005 period peak levels. It takes some time for residential construction to attain take-off momentum. Well, liftoff may have finally arrived. As long as mortgage rates remain so low, we should expect ongoing housing upside surprises. An already strong inflationary bias is starting to Bubble. Is the Fed paying attention?

December 22 – Reuters: “Sales of new U.S. single-family homes unexpectedly rose in November, hitting their highest level in more than 10 years, driven by robust demand across the country. The Commerce Department said… new home sales jumped 17.5% to a seasonally adjusted annual rate of 733,000 units last month. That was the highest level since July 2007… New home sales surged 26.6% from a year ago.”

And from Bloomberg’s Shobhana Chandra: “…The number of [new] properties sold in which construction hadn’t yet started increased almost 43% to 258,000 in November, the most since December 2006… Supply of homes at current sales rate fell to 4.6 months from 5.4 months.”

December 20 - Bloomberg (Shobhana Chandra): “Sales of previously owned U.S. homes rose in November to an almost 11-year high, indicating demand picked up momentum heading into the end of the year… The results show broad strength, with particular firmness in the upper-end market where inventory conditions are ‘markedly better,’ the group said. Forty-four percent of homes sold in November were on the market for less than a month. At the current pace, it would take 3.4 months to sell the homes on the market, the lowest in records to 1999 and down from 3.9 months in the prior month.”

December 19 – Bloomberg (Sho Chandra): “Groundbreaking on single-family homes proceeded in November at the strongest pace in a decade, driving U.S. housing starts to a faster-than-estimated rate… Single-family starts jumped 5.3% to 930,000, highest since Sept. 2007; South and West regions also were 10-year highs. The latest results make it more likely that residential construction spending -- which subtracted from economic growth in the second and third quarters -- will add to the pace of U.S. expansion in the October-December period, which is already shaping up as a solid quarter.”

U.S. and global growth surprised on the upside in 2017, explained by monetary conditions that somehow became only more extraordinarily loose. The Fed, with its dovish approach to three baby-step hikes, failed to tighten conditions. Led by the Bank of Japan and the European Central Bank, it was another year of massive global QE. Meanwhile, Chinese “tightening” measures couldn’t restrain record Credit growth. At the “periphery,” EM were the recipients of huge financial flows, spurring domestic Credit systems and economies around the globe. It’s been a huge year for Credit on a global scale.

December 19 – Financial Times (Eric Platt and Robin Wigglesworth): “A borrowing binge by companies and governments has reached a new high this year, providing bumper fees for Wall Street but raising questions ahead of a year of expected tightening of cheap money by the world’s most important central banks in 2018. Blue-chip corporate borrowers such as AT&T and Microsoft have led the way, as companies accounted for more than 55% of the $6.8tn raised in 2017 through bond sales organised by banks, according to… Dealogic. Countries from Argentina to Saudi Arabia also took advantage of an almost decade of low interest rates in developed economies, which forced investors to chase returns in the bonds of emerging market governments and their companies. ‘In 2017, there was such an influx of capital coming into high-quality fixed income. It’s a demand-fuelled story,’ said Gene Tannuzzo, a portfolio manager with Columbia Threadneedle. ‘If you are a sovereign or corporate, with interest rates where they are, you are supposed to borrow now.’”

Bloomberg’s Michael McKee: “Is the bond market telling the President he’s wrong about the potential for increasing the growth rate of the United States.

Federal Reserve Bank of Minneapolis President Neel Kashkari: “Well, I think the bond market is saying a couple things to me. One, inflation expectations are drifting lower. They have drifted lower, and that’s in large part, I believe, because of the Fed – because we’ve been sending these hawkish signals by raising interest rates in a low inflation environment. Second, I think the markets are also pricing in a lower neutral real interest rate. So the interest rate that balances savings and investment in the economy is set by broader economic forces. It’s been trending down over the last few decades. I think markets are embracing that concept and pricing in a lower, what we call “r-star”, which then caps where bond yields are, and at the same time can explain some of the appreciation in the equities markets, as they’re discounting cash flows at a lower rate. So those are the signals that I take away from the bond market right now.

Bloomberg’s David Westin: “…If you had your way, if you went from what the Fed is predicting now - three [rate] increases next year - to one, or maybe none, what would happen to the long-end of the yield curve, in your view?”

Kashkari: “In my view, I think that would take off some of the downward – the disinflationary pressure that I think the committee is putting on the long-end of the curve. In my view, by raising rates in a low inflation environment we are sending a signal that our 2% inflation target is not a target. We’re sending a signal that it’s a ceiling – that we’re not going to allow inflation to creep above 2%. And I think that’s putting pressure on the long end of the curve. If you look at how we’ve behaved – not at what we’ve said – we say it’s a target not a ceiling. If you look at how we’ve behaved over the past five or six years, we’ve been treating 2% as a ceiling. I think markets have figured that out and they’re pricing that in. So to me, the Fed is pushing up the front end with our rate increases and pushing down the long end by sending this very hawkish signal about the outlook for inflation.

“Very hawkish signal”? It’s been a while since radical dovishness was an impediment to career advancement at the Federal Reserve (or prospering thereafter).

Central bankers over recent decades have repeatedly found excuses for leaving monetary policy too loose for too long. In the face of history’s greatest expansion of global debt, central bankers have since the early nineties justified loose monetary policy by pointing to deflation risk. When the economy and markets were turning increasingly overheated in the late-nineties, chairman Greenspan claimed a New Paradigm of technological advancement presented the U.S. economy with a faster speed limit. When the post-tech Bubble reflation was spurring record Credit growth and rampant mortgage excess, Dr. Bernanke and others proffered the “global saving glut” thesis. Apparently, it was out of the Fed’s hands.

Now we have a historically low “r-star” “neutral rate” – and Fed hawkishness supposedly pressuring long-term yields lower. I really struggle with the notion that the Fed has been hawkish “over the past five or six years.” Do global central bankers not appreciate that decades of loose finance have been a major force behind disinflationary pressures? Moreover, employing open-ended QE fundamentally altered expectations and market pricing for sovereign debt and long-term financial assets. With myriad Bubbles flourishing around the globe, debt markets now price in QE forever. I believe global long-term yields would move sharply higher in the event of a stunning outbreak of central bank hawkishness.

December 18 – Wall Street Journal (Michael C. Bender): “Declaring that ‘economic security is national security,’ President Donald Trump aimed to reframe a national debate over his domestic economic and trade policies by thrusting them into a national-security context. ‘Economic vitality, growth and prosperity at home is absolutely necessary for American power and influence abroad,’ Mr. Trump said… as he unveiled his new national security strategy. ‘Any nation that trades away its prosperity for security will end up losing both.’ Recounting a year of stock-market gains and unemployment-rate decreases, Mr. Trump alleged that his predecessors prioritized nation building abroad over economic growth at home. He said his new national security strategy… provided a needed contrast, and included plans for cutting taxes, rebuilding roads and bridges and building a wall along the U.S.-Mexico border.”

December 20 – New York Times (Keith Bradsher): “It’s Xi Jinping’s economy now, and he isn’t too worried about debt. China signaled its economic priorities on Wednesday at the end of a meeting of top Communist Party economic leaders with a statement indicating that President Xi is fully in charge. Labeled ‘Xi Jinping Thought on Socialist Economy With Chinese Characteristics,’ the statement called for trimming industrial overcapacity, controlling the supply of money and other moves that have been staples of China’s other recent declarations. Barely mentioned: China’s surging debt. Despite downgrades this year by two international credit rating firms and warnings from institutions like the International Monetary Fund, the statement issued at the conclusion of the Central Economic Work Conference called for controlling borrowing by local governments, but it otherwise glossed over a vast borrowing splurge in recent years, driven in large part by Chinese companies.”

President Trump is now wedded to the U.S. Bubble. President Xi Jinping is wedded to the Chinese Bubble. I’ve posited a global “Arms Race in Bubbles.” With Trump in charge and the Republicans now pushing through aggressive stimulus, perhaps Chinese officials are rethinking the geopolitical risks associated with efforts to rein in their Bubble excess.

It’s been a long time coming. Yet I wouldn’t be surprised if this week’s jump in yields proves the start of something. Tax cuts coupled with an increasingly overheated economy creates a backdrop conducive to upside inflation surprises. Nice pop in commodities this week. And look at the housing data! And what if Beijing indulges yet another year of double-digit Credit growth in 2018? And while on the topic of 2018, what are the prospects for the Trump Administration turning its attention to trade competitor China? It’s another campaign promise and where things could turn really interesting.

For a moment, ponder this: an overheated U.S. economy, a surprising uptick in worker compensation and rising import costs. It’s been awhile since bond investors had to be concerned with anything other than (predictively dovish) monetary policy. “R-star” trending down forever? Remember when the bond market used to intimidate?

For the Week:

The S&P500 added 0.3% (up 19.9% y-t-d), and the Dow increased 0.4% (up 25.3%). The Utilities sank 4.5% (up 8.6%). The Banks rose 1.6% (up 17.6%), and the Broker/Dealers gained 1.4% (up 30.3%). The Transports rallied 2.7% (up 18.0%). The S&P 400 Midcaps gained 0.9% (up 14.7%), and the small cap Russell 2000 rose 0.8% (up 13.7%). The Nasdaq100 was unchanged (up 32.9%).The Semiconductors advanced 1.6% (up 40.2%). The Biotechs rose 0.7% (up 36.7%). With bullion up $20, the HUI gold index jumped 4.9% (up 3.6%).

Three-month Treasury bill rates ended the week at 130 bps. Two-year government yields rose five bps to 1.89% (up 70bps y-t-d). Five-year T-note yields jumped 10 bps to 2.25% (up 32bps). Ten-year Treasury yields rose 13 bps to 2.48% (up 4bps). Long bond yields gained 14 bps to 2.83% (down 23bps).

Greek 10-year yields rose 15 bps to 4.08% (down 294bps y-t-d). Ten-year Portuguese yields were little changed at 1.84% (down 191bps). Italian 10-year yields rose 10 bps to 1.91% (up 10bps). Spain's 10-year yields slipped two bps to 1.47% (up 9bps). German bund yields jumped 12 bps to 0.42% (up 22bps). French yields rose 11 bps to 0.74% (up 6bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields gained nine bps to 1.24% (up 1bp). U.K.'s FTSE equities jumped 1.4% (up 6.3%).

Japan's Nikkei 225 equities index rallied 1.5% (up 19.8% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 increased 0.3% (up 10.3%). The German DAX equities index slipped 0.2% (up 13.9%). Spain's IBEX 35 equities index added 0.3% (up 8.9%). Italy's FTSE MIB index recovered 0.5% (up 15.5%). EM markets were mixed. Brazil's Bovespa index surged 3.6% (up 24.8%), and Mexico's Bolsa added 0.6% (up 6.0%). South Korea's Kospi index fell 1.7% (up 20.4%). India’s Sensex equities index gained 1.4% (up 27.5%). China’s Shanghai Exchange gained 0.9% (up 6.2%). Turkey's Borsa Istanbul National 100 index rose 1.6% (up 42.2%). Russia's MICEX equities index dropped 1.9% (down 5.8%).

Junk bond mutual funds saw outflows of $1.112 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.94% (down 36bps y-o-y). Fifteen-year rates rose two bps to 3.38% (down 14bps). Five-year hybrid ARM rates gained three bps to 3.39% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 21bps).

Federal Reserve Credit last week increased $7.5bn to $4.408 TN. Over the past year, Fed Credit fell $15.3bn. Fed Credit inflated $1.589 TN, or 56%, over the past 267 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $12.0bn last week to $3.373 TN. "Custody holdings" were up $201bn y-o-y, or 6.3%.

M2 (narrow) "money" supply surged $60.7bn last week to a record $13.866 TN. "Narrow money" expanded $695bn, or 5.3%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits gained $5.2bn, and Savings Deposits jumped $48.4bn. Small Time Deposits were unchanged. Retail Money Funds rose $4.6bn.

Total money market fund assets dropped $21.2bn to $2.820 TN. Money Funds rose $107bn y-o-y, or 3.9%.

Total Commercial Paper jumped $28.9bn to a 19-month high $1.079 TN. CP gained $113bn y-o-y, or 11.7%.

Currency Watch:

The U.S. dollar index slipped 0.6% to 93.347 (down 8.8% y-t-d). For the week on the upside, the South African rand increased 3.8%, the Swedish krona 2.2%, the Canadian dollar 1.1%, the euro 1.0%, the South Korean won 0.9%, the Australian dollar 0.8%, the Norwegian krone 0.8%, the New Zealand dollar 0.4%, the Singapore dollar 0.4%, the British pound 0.3%, and the Swiss franc 0.3%. For the week on the downside, the Mexican peso declined 3.2%, the Brazilian real 1.1% and the Japanese yen 0.6%. The Chinese renminbi gained 0.49% versus the dollar this week (up 5.59% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.3% (up 7.7% y-t-d). Spot Gold rose 1.6% to $1,275 (up 10.7%). Silver surged 2.4% to $16.444 (up 2.9%). Crude gained $1.17 to $58.47 (up 9%). Gasoline surged 6.5% (up 6%), and Natural Gas gained 2.1% (down 29%). Copper advanced 3.3% (up 29%). Wheat gained 1.6% (up 4%). Corn rose 1.3% (unchanged).

Trump Administration Watch:

December 22 – Wall Street Journal (Louise Radnofsky): “President Donald Trump signed a sweeping tax overhaul bill into law in the Oval Office on Friday morning, as well as a spending bill to keep the government open through mid-January. Congress this week passed a tax bill that represents the most far-reaching overhaul of the U.S. tax system in decades, reducing the corporate tax rate to its lowest point since 1939 and cutting individual taxes for most households next year.”

December 19 – Bloomberg (Liz McCormick and Katherine Greifeld): “With the U.S. about to sell the most debt in eight years, Treasury Secretary Steven Mnuchin may find himself relying on a buyer base that needs to see higher yields before loading up. Government debt sales are set to more than double in 2018, lifting net issuance to $1.3 trillion, the most since 2010… With the Federal Reserve shrinking its bond holdings and deficits poised to swell even before taking into account the tax overhaul, all signs point to higher financing costs. The challenge for Mnuchin is that some analysts predict buying by central banks -- a pillar of support this year -- may fade, in part as international-reserve growth stabilizes.”

December 21 – Politico (Kevin Robillard, Nancy Cook and Cristiano Lima): “Conservative groups are planning a multimillion-dollar effort to sell the GOP’s tax cut law, hoping the American electorate can learn to love the party’s signature — but massively unpopular — legislative achievement. ‘We have a public that distrusts anything coming out of Washington, especially anything from the majority party,’ said Tim Phillips, president of Americans for Prosperity…. ‘We have a job that's not that hard. We have to make sure people understand the benefits they're going to receive from this legislation.’”

December 18 – Reuters (Dustin Volz): “The Trump administration has publicly blamed North Korea for unleashing the so-called WannaCry cyber attack that crippled hospitals, banks and other companies across the globe earlier this year. ‘The attack was widespread and cost billions, and North Korea is directly responsible,’ Tom Bossert, homeland security adviser to President Donald Trump, wrote…”

China Watch:

December 19 – Wall Street Journal (Lingling Wei): “As China prepares to unveil its economic blueprint for 2018, people familiar with the plan say it will show that Beijing is finding it hard to cut debt without jeopardizing growth. In the blueprint to be unveiled on Wednesday, past talk of bringing down debt, the priority for the past two years, is gone in favor of a pledge to just control the rise in borrowing, according to these people. The softening of the goal, decided earlier this month by the Communist Party’s top leadership, is an official acknowledgment of how hard it is for Beijing to wean the economy off debt-driven growth. ‘Let’s face it,’ said an official involved in policy discussions, ‘it’s not realistic to reduce leverage when the whole economy relies on banks for financing.’”

December 17 – Reuters: “Growth in China's new home prices sustained its momentum in November, with increases seen in provincial centres and smaller cities in a sign policymakers may need to step up curbs to rein in speculation in the property market. China's housing market boom has lasted more than two years, giving the economy a major boost but stirring fears of a property bubble, with the government taking stern measures to curtail speculative buying.”

December 18 – Bloomberg: “Bond cancellations at Chinese conglomerate HNA Group Co.’s units are spreading, fueling concerns about financing strains after borrowing costs soared to records. The third such scrapped financing plan this month came Tuesday, as Tianjin Airlines Co. said it had set aside a planned offering of 1 billion yuan ($151 million) of 270-day notes… Concerns about financial strains at HNA Group are growing after a debt-fueled $40 billion acquisition spree across six continents that invited scrutiny from regulators across the globe.”

December 19 – Bloomberg (Alfred Liu): “A Chinese biotech company defaulted on a loan tied to an asset-management product, after the nation’s regulators last month moved to tighten supervision and break an implicit guarantee that’s driven investment into such vehicles… Shandong Longlive Bio-technology Co. failed to repay the first 138 million yuan ($20.9 million) installment on a 227 million yuan loan from Zhonghai Trust Co. on Dec. 7… The majority of the missed payment was packaged into an asset-management product issued by Datong Securities Co. Chinese President Xi Jinping and his top economic deputies have vowed to make controlling financial risks their foremost priority, a pledge renewed at the Communist Party’s twice-a-decade leadership congress in October.”

December 20 – Bloomberg (Richard Frost): “China’s campaign to cut risk in the financial sector this year has helped make the nation’s stock market the most divided on record. As investors worried about the impact of rising funding costs for companies, they rushed into the safest of stocks -- large-cap firms, mostly state-owned. The result is a performance gap of 27 percentage points between the FTSE China A50 Index of China’s biggest companies and the 1,400-member Shanghai Composite Index, the widest margin since at least 2003.”

Federal Reserve Watch:

December 17 – Bloomberg (Joanna Ossinger): “Investors have been underestimating the importance of U.S. economic growth for Federal Reserve policy, and giving too much relative emphasis to inflation and wage data that have tended to disappoint expectations, according to Goldman Sachs… If it starts looking more likely that U.S. growth will stay above its potential rate, that could boost the chances of a labor-market overheating that quickens the pace of Fed rate increases, Goldman economists led by Jan Hatzius wrote in a Dec. 17 note.”

December 21 – CNBC (Steve Liesman): “Larry Lindsey, a former top economic advisor to President George W. Bush and a one-time Federal Reserve governor, is being considered for the Fed vice chairman job, according to sources. The White House is looking for monetary policy expertise for the position, according to the sources and Lindsey would fit that bill. He was a governor of the central bank from 1991 to 1997.”

U.S. Bubble Watch:

December 18 – Wall Street Journal (Andrew Ackerman and Nick Timiraos): “Mortgage-finance giants Fannie Mae and Freddie Mac are here to stay. Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down... Bipartisan Senate legislation set to be introduced in early 2018 marks the clearest sign of this reversal and shows how the companies, entering their 10th year under federal control, have proven too risky to attempt replacing. The housing market has seen strong demand in recent years, driven in part by steady access for many Americans to 4% or lower 30-year fixed-rate mortgages, thanks in part to a government backstop of the companies.”

December 22 – Bloomberg (Manuel Baigorri): “Just as most people are packing up for Christmas, dealmakers across the world are rushing to finish up a slew of transactions in industries ranging from consumer to telecom and health care to gambling. Companies have announced about $361 billion of mergers and acquisitions this month, making it the busiest December in at least 12 years…”

December 20 – Bloomberg Businessweek (Stephen Gandel): “Some have been warning recently that a crash in leveraged loans, one of Wall Street's hottest debt markets, could do investors a lot more damage than in the past. Investors, though, show little signs of concern. Indeed, money has continued to race into leveraged loans. U.S. companies have raised nearly $1.4 trillion in the relatively risky lending market this year, up 46% from a year ago… The yield on the average leveraged loan was 5.4% at the end of November, which is nearly the same as it was in the month a year earlier.”

December 19 – CNBC (Steve Liesman): “Buoyant American attitudes on the economy look set to show up in plentiful, record-setting holiday spending this season. The CNBC All-America Survey found that average holiday spending intentions will top $900 for the first time in the 12-year history of the poll, eclipsing last year's estimate of $702 by a wide margin. The survey of 800 Americans nationwide… found a surge in the percentage of Americans planning to spend more than $1,000, to 29% from 24%.”

December 21 – Bloomberg (Arie Shapira and Kailey Leinz): “There’s a new leader in the sweepstakes for the zaniest name change in the crypto craze. Long Island Iced Tea Corp. shares rose as much as 289% after the unprofitable… company rebranded itself Long Blockchain Corp. It’s the latest in a near-daily phenomenon sweeping the stock market, where obscure microcap companies reorient to focus on some aspect of the mania sparked by bitcoin’s 1,500% rally this year. Long Blockchain, whose business has been selling non-alcoholic beverages, says it will now seek to partner with or invest in companies that develop the decentralized ledgers known as blockchain, the technology that underpins bitcoin.”

December 18 – Financial Times (Nicole Bullock and Robin Wigglesworth): “When shares in a company led by a self-styled ‘global techno entrepreneur’ and ‘financial wizard’ increase 10-fold on news that it has acquired a digital currency business, the echoes of the dotcom bubble are too loud to ignore. Analysts and investors said the excitement around bitcoin and blockchain technology was now reminiscent of the period almost two decades ago, when adding dotcom to a company name could drive a buying frenzy. The latest example was the surging share price of LongFin, a business specialising in trade finance that went public on Nasdaq... When it announced, just two days later, that it was buying a blockchain-related venture called, LongFin shares jumped more than 1,000% — in a move that even its own founder called ‘unwarranted’.”

December 17 –New York Times (Matthew Goldstein): “Puerto Rico has had an awful decade — and it’s about to get worse. First came a brutal 10-year recession and financial crisis that drove businesses from this island and left 44% of the population impoverished. Then, in September, Hurricane Maria, a powerful Category 4 storm, shredded buildings, wrecked the electrical power grid and possibly led to more than 1,000 deaths. Now Puerto Rico is bracing for another blow: a housing meltdown that could far surpass the worst of the foreclosure crisis that devastated Phoenix, Las Vegas, Southern California and South Florida… If the current numbers hold, Puerto Rico is headed for a foreclosure epidemic that could rival what happened in Detroit... About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages.”

December 17 – Financial Times (Alistair Gray and Oliver Ralph): “Insurers are braced for another multi-billion-dollar loss from the fires in southern California, capping what is already shaping up to be one of the costliest ever years for the industry. Adam Kamins, senior economist at Moody’s Analytics, estimates that losses from the Thomas Fire alone — the most serious of several in the region — would come in at about $1.5bn. That could rise sharply depending on how much it spreads. The ultimate losses will depend in large part on winds in the coming days. Insurers already face claims of more than $100bn from a string of natural disasters this year, including hurricanes in the Caribbean and southern US, earthquakes in Mexico and wildfires in northern California in October.”

December 21 – Bloomberg (Gabrielle Coppola and Claire Boston): “Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out. A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.”

Central Banker Watch:

December 19 – Bloomberg (Jana Randow and Paul Gordon): “European Central Bank policy maker Jens Weidmann reiterated his call for a definite end-date for the institution’s bond-buying program, a refrain that looks likely to gain traction among his colleagues next year. Saying that domestic price pressures should strengthen as wage growth improves, he said they are ‘therefore on track toward our definition of price stability.’ While policy makers meeting last week reaffirmed their commitment to buy debt until September ‘or beyond,’ officials including at least half the six-member Executive Board have signaled they’re willing to rein in expectations for another extension… ‘A faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable,’ Weidmann, who also heads Germany’s Bundesbank, told reporters…”

December 20 – Reuters (Simon Johnson and Daniel Dickson): “Sweden's central bank took its first baby steps toward reversing ultra-loose policy on Wednesday, holding rates unchanged and ending net new bond purchases. Coupons and maturing bonds will be reinvested, however, and the balance sheet will swell temporarily. As a result the central bank's holdings of government bonds will increase temporarily in 2018 and the beginning of 2019. ‘We are slowly normalising, but with emphasis on slowly,’ Governor Stefan Ingves told reporters.”

Global Bubble Watch:

December 21 – Bloomberg (Sid Verma): “Lowflation drove global markets to dizzying highs this year. Inflation could drive them off a cliff. The risk for 2018 is that consumer price growth stages a comeback, roiling investor portfolios and corporate profits, according to investors and strategists. The consequent return of higher real interest rates would imperil bullish market psychology more than you might think. ‘A significant inflation shock would be just about the worst thing that could happen to today’s investment portfolios,’ Ben Inker, head of asset allocation at… Grantham Mayo Van Otterloo & Co., wrote… ‘Unlike most of history, it seems plausible that a meaningful inflation increase from here would impose worse losses on portfolios than a depression.’”

December 20 – Reuters (Stanley White): “Business confidence among Asian companies rose in October-December to the highest in almost seven years due to robust consumption and global trade… The Thomson Reuters/INSEAD Asian Business Sentiment Index .TRIABS RACSI, representing the six-month outlook of 94 firms, rose to 78 for the December quarter from 69 three months before.”

December 20 – Bloomberg (John Bowker, Renee Bonorchis, and Franz Wild): “It could wind up being South Africa’s version of the Enron accounting scandal. Furniture retailer Steinhoff International Holdings NV captivated investors by growing into a global force, latterly under its billionaire chairman, Christo Wiese. Now it’s drawing attention for all the wrong reasons. Shares in Steinhoff crashed 80% in two days after the company reported accounting irregularities that stretch back to 2016. Wiese has stepped down, Chief Executive Officer Markus Jooste has resigned and the company is looking for leniency from its creditors.”

December 19 – Bloomberg (Renee Bonorchis): “Embattled furniture retailer Steinhoff International Holdings NV was pushed to the brink of collapse after it said lenders have started to cut off support in the wake of an accounting scandal that destroyed most of its value in a matter of days. As the owner of Conforama in France and Mattress Firm in the U.S. seeks a lifeline, it’s still unable to assess the magnitude of financial irregularities disclosed two weeks ago…”

December 20 – Bloomberg (Kana Nishizawa and Narae Kim): “It was a year for bitcoin, technology stocks and the power consolidation of China’s Xi Jinping. Those were some of the most popular topics for people boning up on issues important to finance and business through Google searches in 2017.”

Fixed Income Watch:

December 22 – Financial Times (Robin Wigglesworth): “No one knows when the US credit cycle will keel over. But when it eventually does, the outcome is likely to be unusually nasty, brutish and protracted. The US corporate bond market has been on fire this year, with companies raising a record $1.14tn of debt. Even junk-rated companies enjoy average borrowing costs of less than 6%. That might look miserly, but corporate debt has been a welcome oasis of yield in a desert where close to $10tn of sovereign bonds still trade with negative interest rates. Yet when the economy inevitably turns, this oasis might look more like a sinkhole. Many creditors are likely to face more severe losses than they have in the past, and more arduous debt workouts. The debt boom has been accompanied by a sharp deterioration of the legal protection offered to creditors, as borrowers have taken advantage of desperate investors to weaken or scrap ‘covenants’ designed to help insulate lenders from financial shenanigans.”

Europe Watch:

December 22 – Bloomberg (Esteban Duarte, Maria Tadeo, Charles Penty, and Vidya N Root): “Spanish Prime Minister Mariano Rajoy is meeting with allies this morning to plot his next move after a drubbing in Thursday’s Catalan election that saw separatists reclaim control of the regional assembly. Rajoy headed to a 9:30 a.m. cabinet meeting in Madrid and planned to sit down with his People’s Party leadership later in the day, with the resurgent Catalan independence campaign at the top of the agenda. The PP lost eight of its 11 seats in the region’s parliament as ousted President Carles Puigdemont’s party confounded projections to become the biggest group in a three-way separatist bloc.”

Japan Watch:

December 19 – Reuters: “The Bank of Japan's holdings of government debt rose to a record in July-September under its quantitative easing programme, which could deepen concerns its policy framework is unsustainable. The BOJ held a record 445 trillion yen ($3.94 trillion) in government debt at the end of September, up 7.6% from the same period a year earlier… The central bank held 40.9% of all government debt at the end of September, also the highest on record.”

December 21 – Bloomberg (Toru Fujioka): “The Bank of Japan left policy settings unchanged in the final meeting of 2017, retaining its unprecedented monetary stimulus as it waits for a pickup in stubbornly low inflation. With Japan’s economy continuing to grow at a healthy pace, and inflation at least moving in the right direction, there is little pressure on the BOJ adjust its interest-rate and asset-purchase targets any time soon. This sets it apart from its global counterparts, with the Federal Reserve hiking interest rates and the European Central Bank moving closer toward policy normalization.”

December 22 – Reuters (Tetsushi Kajimoto): “Japanese Prime Minister Shinzo Abe’s cabinet endorsed a record $860 billion budget for fiscal 2018 on Friday, opting to keep the economy on a sustained recovery with aggressive monetary stimulus and putting fiscal reforms on the back burner again… The budget - a record high for the sixth year - got a boost from snowballing welfare spending to respond to a fast-ageing population and a record military outlay amid regional tensions related to North Korea.”

December 17 – Bloomberg (James Mayger and Masahiro Hidaka): “The pace at which the Bank of Japan is expanding its massive hoard of bonds will continue to slow in 2018, according to the majority of economists surveyed… The central bank will increase its Japanese government bond holdings by about 44 trillion yen ($392bn) next year, according to the average estimate… That’s well below the BOJ’s 80 trillion yen annual guideline and a considerable drop from the 61 trillion yen increase that was seen in the 12 months through the end of November… Under Governor Haruhiko Kuroda, the BOJ has come to dominate the government bond market in Japan, owning more than 40% of outstanding debt and depressing volatility and interest rates.”

December 18 – Reuters (Tetsushi Kajimoto and Stanley White): “Japan’s government revised up its growth projections for the current and next fiscal years, forecasting the economy to expand 1.9% and 1.8% respectively on the back of steady improvement in domestic demand, the Cabinet Office said…”

Emerging Market Watch:

December 19 – Bloomberg (Natasha Doff): “It’s one of the most crowded trades for good reason. But dizzying returns and a surge of inflows have put emerging markets on a narrow precipice. After several false starts, economists are predicting next year will finally be the one in which borrowing costs get a significant leg-up. The International Monetary Fund is warning it could mark the tipping point for emerging-market bond funds sitting on the biggest annual inflows since the financial crisis… Investors piled into emerging-market bond funds this year as central banks delayed curbing monetary stimulus that’s pumped liquidity to developing economies over the past decade.”

Geopolitical Watch:

December 21 – Bloomberg (Nyshka Chandran): “When it comes to territorial disputes in Asia, the South China Sea typically commands the bulk of attention. But the East China Sea, a lesser-known hotbed of tensions, might be more likely to trigger an international conflict. ‘Despite the lower profile, the dispute in the East China Sea may carry greater risk of drawing the United States into conflict with China than the various disputes in the South China Sea,’ Ryan Hass, David M. Rubenstein Fellow at Brooking's foreign policy program, wrote… Both China and Japan lay claim to a set of islands in the East China Sea that cover around 81,000 square miles. Called Senkaku in Tokyo and Diaoyu in Beijing, the area is near major shipping routes and rich in energy reserves.”