Friday, March 31, 2017

Weekly Commentary: Q1: Sure Bets That Weren’t

An intriguing first quarter. The year began with bullish exuberance for the Trump policy agenda. With the GOP finally in control of Washington, there was now little in the way of healthcare reform, tax cuts/reform, infrastructure spending and a full-court press against regulation. As Q1 drew to a close, by most accounts our new Executive Branch is a mess - the old Washington swamp as stinky a morass as ever. And, in spite of it all, the global bull market marched on undeterred. Everyone’s still dancing. From my perspective, there’s confirmation that the risk market rally has been more about rampant global liquidity excess and speculative Market Dynamics than prospects for U.S. policy change.

It’s not as if market developments unfolded as anticipated. Key “Trump trades” stumbled – longs and shorts across various markets. The overly Crowded king dollar faltered, with the Dollar Index down 2.0% during Q1. The Mexican peso reversed course and ended the quarter up 10.6% versus the dollar, at the top of the global currency leaderboard. The Japanese yen - another popular short and a key funding instrument for global carry trades – jumped 5% . China’s renminbi gained 0.84% versus the dollar. WSJ headline: “A Soaring Dollar and Falling Yuan: The Sure Bets That Weren’t”

Shorting Treasuries was another Trump Trade Sure Bet That Wasn’t. And while 10-year yields jumped to a high of 2.63% on March 13, yields ended the quarter down six bps from yearend to 2.39%. Despite a less dovish Fed, a hike pushed forward to March, and even talk of shrinking the Federal Reserve’s balance sheet - bond yields were notably sticky. Corporate debt enjoyed a solid quarter. Investment grade bonds (LQD) gained 1.2% during the quarter, with high-yield (HYG) returning 2.3%.

The S&P500 gained 5.5% during Q1. And while most were positioned bullishly, I suspect many hedge funds (and fund managers generally) will be disappointed with Q1 performance. There was considerable Trump Trade enthusiasm for the higher beta small caps and broader market. Badly lagging the S&P500, it took a 2.3% rise in the final week of the quarter to see the small cap Russell 2000 rise 2.1% in Q1. The mid caps (MID) were only somewhat better, rising 3.6%.

Technology stocks had been low on the list of Trump Trades going into the quarter, perhaps helping to explain a gangbuster Q1 in the markets. The popular QQQ ETF (Nasdaq100) returned 12.0% during Q1. The Morgan Stanley High Tech index rose 13.5%, and the Semiconductors jumped 11.6%. The Biotechs (BTK) surged 16.0%.

A Trump Trade darling entering 2017, the financials struggled during Q1. March’s 4.0% decline reduced the bank stocks’ (BKX) Q1 gain to an unimpressive 0.3%. Somewhat lagging the S&P500, the broker/dealers (XBD) posted a 5.4% Q1 advance. The NYSE Financial Index gained 3.7%, while the Nasdaq Bank Index dropped 3.1%.

King dollar bullishness had investors underweight the emerging markets (EM) going into 2017. A weakening dollar coupled with huge January Chinese Credit growth helped spur a decent EM short squeeze. Outperformance then attracted the performance-chasing Crowd. By the end of March, EM (EEM up 12.5%) had enjoyed the best quarter in five years (from FT).

March 31 – Financial Times: “Capital flows to emerging markets have continued to surge ahead after a strong start to the year, with cross-border portfolio flows in March at their highest monthly level since January 2015 and broad capital flows to China turning positive in February for the first time in almost three years, according to the Institute of International Finance. The IIF… said flows from non-resident investors into EM bonds and equities were an estimated $29.8bn in March, up from $17.2bn in February…”

A Bloomberg headline from the final day of the quarter: “Rupee Caps Best First Quarter Since 1975 Amid $12 Billion Inflow.” India’s equities (Sensex) posted an 11.2% Q1 gain. A short squeeze also helped Turkish stocks (Borsa Istanbul) to a 13.8% first quarter rise. Latin American equities enjoyed a spectacular start to 2017. Stocks rose 6.4% in Mexico, 8.0% in Brazil, 15.2% in Chile and 19.2% in Argentina. With the notable exception of Russia, Eastern Europe’s equities also enjoyed a solid Q1.

March 31 – Bloomberg (Lilian Karunungan): “All of Asia’s emerging-market currencies, apart from the Philippine peso, strengthened this quarter as optimism over the region’s economic outlook lured inflows. India’s rupee led the advance in March. Regional equities had their best three months since 2010.”

Chinese stocks for the most part posted a solid Q1, with the Shanghai Composite gaining 3.8%. China’s growth-oriented ChiNext index declined 2.8%. Stocks gained 6.0% in Taiwan, 6.6% in South Korea, 5.1% in Indonesia, 6.0% in Malaysia, 6.9% in the Philippines and 8.6% in Vietnam.

Europe lavished in boundless free "money."  Germany’s DAX equites index jumped 7.3% and Frances’s CAC40 gained 5.4%, yet bigger gains were enjoyed in the Periphery. Spanish stocks surged 11.9%. The Italian Mid Cap index surged 17.5%. Portuguese stocks rose 8.1%.

The quarter, however, was not kind to European periphery sovereign debt. Notably, Italian 10-year yields jumped 51 bps. Spanish and French yields rose 29 bps, and Portuguese yields gained 23 bps. With German bund yields rising only 12 bps, European debt spreads widened meaningfully.

For the most part, Bubbling equities markets only exacerbated already extremely loose global financial conditions. First quarter U.S. high-grade debt issuance jumped to $393bn, up 9% from last year’s record pace. Led by record U.S. corporate debt sales, debt issuance boomed around the globe.

March 30 – Financial Times (James Kynge and Thomas Hale): “Emerging market countries sold record levels of government debt in the first quarter of this year, taking advantage of a surge in optimism towards the developing world as trade grows at its fastest rate for seven years and inflationary pressures ebb. Data from Dealogic, a research firm, show that sovereign bond sales from emerging markets rose to $69.6bn in the first three months of the year, an increase of 48 per cent from a year ago and a record amount for a single quarter. Corporate bond sales by companies in developing countries also surged, rising 135% year on year in the first quarter to $105bn…”

March 21 – Dealogic (Olga Tarabrina): “Global M&A volume has reached $705.0bn in 2017 YTD, surpassing $700bn in a YTD period for the first time since 2007 ($903.5bn). Of this, a total of 125 $1bn+ deals, worth $454.9bn, have been announced so far this year, compared to only 94 deals (totaling $260.3bn) 5 years ago. $10bn+ deals account for $167.2bn of the total this year… US-based companies are on top of the heap of cross-border deals, with $95.8 billion in announced acquisitions so far – “the highest YTD level on record.’ … For the first quarter, ‘14 times EBITDA is what the Dealogic figures show as the median EBITDA multiple,’ explained Dealogic’s head of M&A Research, Chunshek Chan. ‘That’s something we really haven’t seen over the course of the data that we have. Historically, we’ve been bouncing between 10 and 12 times, sometimes even 13 times. So 14 times EBITDA is certainly a premium to pay for acquisitions.’”

Various indicators of bullish market sentiment went to extremes. An incredible $124bn flooded into ETFs during the first two months of the year. Margin debt jumped to an all-time high ($528bn) in February, although this pales in comparison to the amount of leverage embedded in derivative trades.

March 31 – Bloomberg (Cecile Vannucci): “Just a week ago, it looked as if the dormant CBOE Volatility Index was awakening. Fast-forward five days, and the gauge known as the VIX is closing in on its lowest quarterly average since the final months of 2006. The measure has lost 18% this year through Thursday as the S&P 500 Index climbed 5.8%.”

March 28 – Bloomberg (Vince Golle): “Americans haven’t been this upbeat about the U.S. stock market since 2000, according to the Conference Board’s latest consumer confidence report… More than 47% of respondents said they expect equities to move higher in the next 12 months, the largest share since January 2000.”

March 23 – CNBC (Evelyn Cheng): “Investor sentiment jumped to a 16-year high in the first quarter, according to the latest Wells Fargo/Gallup Investor and Retirement Optimism Index. The index… rose 30 points to hit 126 in the first quarter… The last time the optimism index was higher was during the tech bubble in November 2000, when the index was at 130.”

The U.S. economy appeared to struggle during the quarter to keep up with booming confidence. University of Michigan Consumer Confidence - Current Conditions jumped to the highest level since July 2005. The Conference Board consumer confidence index surged to the highest level since December 2000. Small business confidence rose to the highest level since 2004.

On the other side of the world, China’s Credit-induced boom caught some momentum. Led by January’s record $545bn expansion of Total Social Financing, total Chinese Credit growth likely exceeded $1.0 TN during Q1. No surprise then that GDP was said to be tracking 6.8% annualized during the quarter. China’s Manufacturing index (PMI) ended the quarter at the strongest level in almost five years. And it’s no surprise that continued timid “tightening” measures have thus far had minimal impact. There were, however, bouts of instability in China’s Wild West money market that portend trouble ahead.

March 31 – China Money Network (Li Dongmei): “China’s announced outbound M&A deals totaled US$23.8 billion during the first three months of 2017, a drop of 75% from US$95.1 billion recorded during same period a year ago, as tightened regulatory controls on capital outflows limited Chinese companies' ability to invest outside of the borders.”

The confluence of a weaker dollar, booming Chinese and global Credit, and latent financial fragilities provided precious metals a nice shine throughout Q1. Palladium jumped 17.1%, silver 14.2%, Gold 8.4% and Platinum 5.2%. The HUI (NYSE Arca Gold Bugs Index) jumped 8.2%. Bloomberg headline: “Metals Enjoy Longest Rally in Seven Years as Low Rates Lure Cash.”

There was yet another facet of the Trump Rally that faded as the quarter wore on: The notion of a fortuitous handoff from monetary stimulus to fiscal policy. Markets were supposed to begin “normalizing.” As central banks pulled back from market dominance, stock picking and active management were to grab some of their advantage lost to the passive index Crowd. We’ll wait to see the percentage of hedge fund and mutual fund managers that beat the SPY for the quarter.

As a market analyst, I saw during Q1 the unprecedented Crowded Trade Phenomenon deepen further. Way too much “money” playing the securities market game – became only more so. And while a strong quarterly gain in the indexes is celebrated by the bullish Crowd, the undercurrents must be troubling to many.

The reality is that too much “money” spoils the game. When everyone is Crowded on one side of the king dollar trade, the boat rocks over. When the Crowd gets short the yen, it’s squeeze higher. Short the metals, here comes a squeeze. Heavily long the banks (slam dunk trade), watch out below. Underweight the emerging markets, the Crowd is forced to chase a big rally. Long the small caps versus the big caps, and the Crowd has no choice but to unwind the trade and jump aboard the S&P500 index. Run long/short strategies with similar factors to everyone else, and the Crowd is left pulling its hair out. Most importantly, focus on risk and you had no chance of outperforming the market or the passive “investing” Crowd.

And it’s “funny” how this all works nowadays. Inflation has turned up, while central bank monetary stimulus is being turned down. Shorting Treasuries (and sovereign debt) should be a Sure Bet. Yet there’s this Lurking Financial Fragility issue, the Elephant in the Market. So, the bigger global Bubbles inflate, the greater the systemic vulnerability to rising market yields (among other things). Yet the more susceptible risk market Bubbles become to trouble the greater the safe haven bid - and the more downward pressure on market yields. Artificially low yields then work to spur speculation and excess, exacerbating global Bubbles and associated fragilities.

All the “money” slushing around in markets dominated by Deviant Market Dynamics continues to make it difficult for most active managers to perform. And the biggest consequence of this troubling market dilemma? Just more enormous self-reinforcing Bubble flows into ETF index products. For the most part, investors are pleased with Q1 returns. What’s not appreciated is the amount of risk that must be accepted to continue playing this game.

March 27 – Financial Times (Miles Johnson): “Hedge fund managers may be criticised for their recent returns but they have consistently displayed a razor sharp sense of timing when it comes to picking when to sell their own businesses. When Och-Ziff, the… hedge fund founded by the former Goldman Sachs trader Daniel Och, decided to sell equity to the public markets it did so near the top of the market in late 2007. Investors in that pre-crisis deal… have since lost more than 90% of their money… So what is to be made of the timing of last week’s news that Eric Mindich has decided to shut his $7bn Eton Park hedge fund and return money to investors from what he called a ‘position of relative strength’? The closure of Eton Park has a symbolic resonance on Wall Street. Once the youngest partner in the history of Goldman Sachs, Mr Mindich left the bank in 2004 to set up Eton Park. It became one of the largest launches in the history of the hedge fund industry and, emboldened by his and others’ success, a whole generation tried to follow him.”

And thanks for checking out our final of four short videos, Tactical Short Episode IV, “The Time is Now" at

For the Week:

The S&P500 increased 0.8% (up 5.5% y-t-d), and the Dow added 0.3% (up 4.6%). The Utilities fell 1.3% (up 5.0%). The Banks recovered 1.3% (up 0.3%), and the Broker/Dealers rallied 2.0% (up 5.2%). The Transports jumped 2.1% (up 0.8%). The S&P 400 Midcaps rose 1.5% (up 3.6%), and the small cap Russell 2000 rallied 2.3% (up 2.1%). The Nasdaq100 gained 1.3% (up 11.8%), and the Morgan Stanley High Tech index rose 1.2% (up 13.5%). The Semiconductors increased 0.7% (up 11.6%). The Biotechs advanced 1.6% (up 16.0%). Though bullion gained $6, the HUI gold index declined 1.0% (up 8.2%).

Three-month Treasury bill rates ended the week at 74 bps. Two-year government yields were unchanged at 1.26% (up 7bps y-t-d). Five-year T-note yields slipped two bps to 1.92% (down 1 bp). Ten-year Treasury yields declined two bps to 2.39% (down 6bps). Long bond yields were unchanged at 3.01% (down 6bps).

Greek 10-year yields sank 41 bps to 6.9% (down 12bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 3.98% (up 23bps). Italian 10-year yields jumped nine bps to 2.32% (up 51bps). Spain's 10-year yields declined three bps to 1.67% (up 29bps). German bund yields dropped eight bps to 0.33% (up 12bps). French yields declined two bps to 0.97% (up 29bps). The French to German 10-year bond spread widened six to 64 bps. U.K. 10-year gilt yields fell six bps to 1.14% (down 10bps). U.K.'s FTSE equities index slipped 0.2% (up 2.5%).

Japan's Nikkei 225 equities index dropped 1.8% (down 1.1% y-t-d). Japanese 10-year "JGB" yields added about a basis point to 0.07% (up 3bps). The German DAX equities index rose 2.1% (up 7.2%). Spain's IBEX 35 equities index advanced 1.5% (up 11.9%). Italy's FTSE MIB index gained 1.5% (up 6.5%). EM equities were mixed. Brazil's Bovespa index rallied 1.8% (up 7.9%). Mexico's Bolsa lost 1.1% (up 6.4%). South Korea's Kospi slipped 0.4% (up 6.6%). India’s Sensex equities index added 0.7% (up 11.2%). China’s Shanghai Exchange declined 1.4% (up 3.8%). Turkey's Borsa Istanbul National 100 index dropped 1.6% (up 13.8%). Russia's MICEX equities index sank 2.2% (down 10.6%).

Junk bond mutual funds saw outflows of $249 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank nine bps to 4.14% (up 43bps y-o-y). Fifteen-year rates declined five bps to 3.39% (up 41bps). The five-year hybrid ARM rate fell six bps to 3.18% (up 28bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.23% (up 47bps).

Federal Reserve Credit last week was little changed at $4.436 TN. Over the past year, Fed Credit fell $8.2bn (down 0.2%). Fed Credit inflated $1.626 TN, or 58%, over the past 229 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $4.8bn last week to $3.207 TN. "Custody holdings" were down $53.4bn y-o-y, or 1.6%.

M2 (narrow) "money" supply last week increased $2.5bn to a record $13.405 TN. "Narrow money" expanded $834bn, or 6.6%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits dropped $11.5bn, while Savings Deposits gained $6.8bn. Small Time Deposits were little changed. Retail Money Funds rose $5.1bn.

Total money market fund assets were about unchanged at $2.654 TN. Money Funds fell $112bn y-o-y (4.0%).

Total Commercial Paper jumped $18.2bn to $983.7bn. CP declined $117bn y-o-y, or 10.6%.

Currency Watch:

March 27 – Wall Street Journal (Ira Iosebashvili): “The dollar fell to its lowest level Monday since November amid rising doubts that the White House will be able to push through promised tax cuts and infrastructure spending after failing to repeal the Affordable Care Act last week. The Wall Street Journal Dollar Index, which gauges the U.S. currency against a basket of 16 others, was recently down 0.4% to 89.65, its lowest level since November 11.”

The U.S. dollar index rallied 0.7% to 100.35 (down 2.0% y-t-d). For the week on the upside, the British pound increased 0.6%, the Canadian dollar 0.5%, the South Korean won 0.4%, the Mexican peso 0.2%, the Singapore dollar 0.1% and the Australian dollar 0.1%. For the week on the downside, the South African rand declined 7.3%, the Swedish krona 1.8%, the euro 1.4%, the Norwegian krone 1.2%, the Swiss franc 1.1%, the Brazilian real 0.5% and the New Zealand dollar 0.3%. The Chinese yuan was little changed versus the dollar this week (up 0.84% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.7% (down 2.6% y-t-d). Spot Gold added 0.5% to $1,249 (up 8.4%). Silver jumped 2.7% to $18.26 (up 14.2%). Crude recovered $2.63 to $50.60 (down 6%). Gasoline surged 6.1% (up 2%), and Natural Gas rose 3.7% (down 15%). Copper increased 0.8% (up 6%). Wheat added 0.4% (up 5%). Corn gained 2.2% (up 4%).

Trump Administration Watch:

March 30 – Reuters (Susan Cornwell and Amanda Becker): “U.S. President Donald Trump lashed out… at Republican conservatives who helped torpedo healthcare legislation he backed, escalating a feud within his party that jeopardizes the new administration's legislative agenda. Trump threatened to try to defeat members of the Freedom Caucus - a bloc of conservative Republicans in the House of Representatives - in next year's congressional elections if they continued to defy him. ‘The Freedom Caucus will hurt the entire Republican agenda if they don't get on the team, & fast. We must fight them, & Dems, in 2018!’ Trump wrote on Twitter… He later singled out three Freedom Caucus members by name…”

March 31 – CNBC (Matthew J. Belvedere): “The United States will no longer bow to the rest of the world on trade because President Donald Trump plans to act, Commerce Secretary Wilbur Ross told CNBC… ‘We are in a trade war. We have been for decades. The only difference is that our troops are finally coming to the rampart. We didn’t end up with a trade deficit accidentally,’ he said, warning about the consequences of doing nothing. Ross…argued… that the shortfalls are the result of bad trade deals and other countries actively seeking surpluses. ‘Our trade deficit overall is about $500 billion a year,’ Ross said. ‘Quite miraculously, that also equals the net trade surplus with the rest of the world.’”

March 28 – Associated Press (Andrew Taylor): “The fundamentals of tax overhaul were strong some 30 years ago. A popular president, Republican Ronald Reagan, pushed the landmark 1986 measure. Powerful and experienced congressional leaders shepherded the legislation with bipartisan support. Key players had established, trusting relationships. The situation facing President Donald Trump features none of those advantages. His party is divided and his congressional leadership is weakened after the health care debacle. Key players are inexperienced. Trump has record low approval ratings. Republicans who control all of Washington are planning on going it alone, without help from Democrats. Now, there isn't even basic agreement on what revising the tax code is. Trump is promising ‘massive tax relief for the middle class.’”

March 27 – Wall Street Journal (Justin Lahart): “Any investors who think the failure of health-care reform was somehow a positive because it cleared the way for tax reform may be about to be rapidly disabused of that notion. Optimism on taxes is sharply at odds with the complexity and controversy that has met every effort of reform. Indeed, the rifts among congressional Republicans exposed by the health care battle might just get deeper. Ever since President Donald Trump was elected, investors have used a tax-reform plan House Republicans drew up last year as their lodestar. The plan, championed by Speaker Paul Ryan, calls for a reduction in the corporate tax rate to 20% from 35%. To help pay for that plan, it includes a border adjustment tax that would levy goods imported into the U.S.”

March 27 – Wall Street Journal (Kristina Peterson and Siobhan Hughes): “President Donald Trump and GOP leaders enter their next big battle facing stubborn opposition in both parties that increases Republicans’ worries that they will need more Democratic support than previously expected to avert a government shutdown by the end of April. It is a sign of the new reality in Washington after Mr. Trump and House Speaker Paul Ryan failed to persuade the House’s most conservative Republicans, as well as centrists, to back a bill to replace the Affordable Care Act. The failure derailed the GOP leadership and the new administration’s top legislative priority and has put unexpected questions before both parties about their paths forward. For Republicans leaders, the main challenge is the House Freedom Caucus, an alliance of the most conservative Republicans who successfully defied the White House to sink the health bill.”

March 28 – Bloomberg (Billy House and Erik Wasson): “Republican leaders are eager to avoid a government shutdown but the demise of their Obamacare repeal could leave some conservatives spoiling for a fight that raises the odds of a standoff. The House Freedom Caucus… says Republicans have yet to notch a significant victory, despite controlling both chambers of Congress and the White House. One top promise they and other conservatives had to hoped to deliver on with the Obamacare repeal was defunding Planned Parenthood over its provision of abortions. Now, their next chance comes with a spending measure needed to keep the government operating after April 28, when current funding runs out.”

March 29 – Wall Street Journal (William Mauldin): “The Trump administration appears poised to cement China’s unfavorable status in trade cases, making Chinese goods eligible for higher U.S. tariffs well into the future. U.S. officials are preparing a review of China’s ‘market-economy status’ under the World Trade Organization, according to official documents… The review is expected to be announced as early as this week, just days before a high-stakes meeting between President Xi Jinping and President Donald Trump.”

March 30 – Associated Press (Michael Cohen): “President Donald Trump is predicting ‘a very difficult’ meeting next week with Chinese President Xi Jinping, citing trade deficits and lost jobs. Hours after both governments announced an April 6-7 summit between the economic powerhouses in Florida, Trump sought to set expectations by tweeting: ‘The meeting next week with China will be a very difficult one in that we can no longer have massive trade deficits and job losses. American companies must be prepared to look at other alternatives.’”

March 31 – Wall Street Journal (Chun Han Wong): “China signaled little inclination to make concessions on trade with the U.S. after President Donald Trump warned of a difficult meeting with Chinese leader Xi Jinping at next week’s bilateral summit. ‘China doesn’t intentionally seek trade surpluses,’ Vice Foreign Minister Zheng Zeguang said… He said that imbalances in China-U.S. trade are mainly the result of global industrial trends, as well as disparities in the two countries’ economic structures and development.”

March 27 – Politico (Ben White and Nancy Cook): “The fight for the direction of Donald Trump’s presidency between the Goldman Sachs branch of the West Wing and hardcore conservatives is spilling into the Treasury Department, threatening Trump’s next agenda item of overhauling the tax code. Conservatives inside and outside Treasury say the new secretary, former Goldman Sachs banker, movie producer and Democratic donor Steven Mnuchin, is assembling a team that is too liberal and too detached from the core of Trump’s ‘Make America Great Again’ platform of ripping up trade deals, gutting the Dodd-Frank banking rules and generally rejecting ‘globalism’ in all its forms. The ideological divide has been brewing for weeks inside the White House as a result of appointing a raft of top advisers with radically different worldviews. The battle at Treasury is simply an extension of that brutal fight…”

March 27 – Financial Times (Shawn Donnan and Sam Fleming): “Conservative economist Allan Meltzer has railed against the World Bank and the International Monetary Fund for decades and in Donald Trump’s nomination of a former protegee he sees hope that Washington may finally be heeding his calls for reform. While Mr Trump’s naming this month of Adam Lerrick as the next assistant secretary for international finance at the Treasury has yielded a nervous reaction inside both the IMF and the World Bank, Mr Meltzer is effusive. ‘There is not to my knowledge a person in the world better qualified for that job,’ he says. Mr Lerrick, a former investment banker, served as Mr Meltzer’s top adviser on a 1990s congressional commission examining the role of the two institutions in the global economy. The ‘Meltzer Commission’ report that Mr Lerrick went on to help draft called for a more limited IMF that focuses exclusively on plugging the short-term liquidity needs of countries facing crises rather than protracted bailouts. It also recommended that the World Bank scale back its activities…”

March 30 – Reuters (David Shepardson): “U.S. Transportation Secretary Elaine Chao said the Trump administration would unveil a $1 trillion infrastructure plan later this year, but she did not offer details of funding for projects. Chao said… the infrastructure initiative would include ‘a strategic, targeted program of investment valued at $1 trillion over 10 years. The proposal will cover more than transportation infrastructure, it will include energy, water and potentially broadband and veterans hospitals as well.’”

China Bubble Watch:

March 29 – Wall Street Journal (Shen Hong): “Money markets are often described as the financial system’s plumbing: When they work—which is most of the time—hardly anyone notices, but when they get blocked up, it creates quite a stink. That’s why China’s massive money market—where banks and other financial institutions borrowed some $6.4 trillion from each other last month alone to fund their daily needs—is becoming one of the world’s most important markets to watch. China’s central bank has raised key interest rates twice since early February. That immediately pushed funding costs to the highest in two years, hitting smaller banks that have come to rely on the market particularly hard. Last week, some small rural banks failed to make good on short-term loans from other lenders… The volume of interbank lending, usually uncollateralized, hit a record with the equivalent of $34 trillion in loans last year, nearly 100 times the amount of lending in 2002… Turnover in the repo market surged to the equivalent of $216 trillion last year, around 24 times its volume a decade ago.”

March 31 – Bloomberg: “Chinese banks are taking on an unprecedented amount of short-term financing. Yield-starved investors are lapping it up amid assumptions of state support, unperturbed by a lack of collateral and warnings from rating companies. That’s fueling concern among some analysts that government backing for the nation’s lenders is distorting one of the world’s largest debt markets and increasing risks in the event of cash crunches, even after Premier Li Keqiang vowed to give market forces greater sway. Banks have issued a record 5.2 trillion yuan ($754.6bn) this quarter of so-called negotiable certificates of deposit (NCDs) that mostly mature within a year, up 44% from the three months ended Dec.31…”

March 31 – Bloomberg (Robin Ganguly): “China’s short-term money-market rates climbed across the board, with the one-week cost rising to the most expensive level in almost two years. The seven-day repurchase rate jumped 36 bps to 3.17%, the highest since April 7, 2015. The 14-day cost added 20 bps to 4.94%, extending its advance after reaching the highest since March 2015 on Thursday. The rates rose as the People’s Bank of China refrained from conducting reverse-repurchase agreements for the sixth day in a row, saying that there is a high level of liquidity in the banking system.”

March 28 – Bloomberg: “Turmoil at a small Chinese dairy company is shedding rare light on the final destination for some of the country’s estimated $8 trillion of shadow banking loans. Jilin Jiutai Rural Commercial Bank Corp., a major creditor to embattled China Huishan Dairy Holdings Co., said… it has extended a total of 1.35 billion yuan ($196 million) in credit to the dairy producer, including 750 million yuan through the purchase of investment receivables from a finance lease company. Investment receivables -- a category that can include using wealth-management products, asset-management plans and trust-beneficiary rights to disguise what are in effect loans -- allow banks to reduce the amount of cash they need to set aside for capital and provisions for loan losses.”

March 30 – Reuters (Meg Shen and Lee Chyen Yee): “China's economy, the world's second largest, will likely expand 6.8% in the first quarter of 2017, the official Xinhua agency quoted a government think tank as saying… The expected pace is on par with the 6.8% growth logged in the fourth quarter, which was better than market expectations due to higher government spending and record bank lending.”

March 31 – Bloomberg: “China’s official factory gauge climbed to the highest in almost five years, the latest evidence of increasing momentum in the world’s second-largest economy. The manufacturing purchasing managers index increased to 51.8 in March…”

March 30 – Reuters: “Growth in China’s services sector accelerated in March at the fastest pace in nearly three years, an official survey showed… The official non-manufacturing Purchasing Managers' Index (PMI) stood at 55.1, compared with the previous month's reading of 54.2…”

March 28 – Reuters (Jun Yang): “The ever-closer relationship between Chinese companies and banks can be a toxic mix. A growing number of companies in the People's Republic are buying into local lenders that need to raise capital. The interdependence is risky. One danger is that banks lend to their corporate shareholders on more lenient terms than to regular borrowers, regardless of credit risks. That concern sparked a selloff in Jilin Jiutai Rural Commercial Bank’s stock on Monday, the first trading day following an 85% plunge in the market value of shareholder China Huishan Dairy. The milk group’s chairman controls the company through an entity that also owns more than 15% of Jilin Jiutai's Hong Kong-listed stock. The lender in turn is Huishan’s second-largest creditor, with some $262 million on the line, according to Caixin.”

Global Bubble Watch:

March 31 – Financial Times (Katie Martin): “Investors might need to chuck out their text books, because markets seem set to move in unpredictable and potentially painful ways. That’s the warning from Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, in his widely-read quarterly market wrap. ‘It ain’t a normal cycle,’ he and Jared Woodward write. After all, central banks around the world have cut interest rates 679 times and bought $14.2bn since the collapse of Lehman Brothers. ‘Normalization’ from a 5,000-year low in rates, 70-year low in G7 fiscal stimulus, 35-year high in the US-German rate differential, an all-time high US stocks vs. [the rest of the world], a 75-year low in bank stocks is unlikely to be peaceful; long gold in anticipation of potential manias, panics, crashes.’”

March 26 – Financial Times (Gavyn Davies): “One of the most dramatic monetary interventions in recent years has been the unprecedented surge in global central bank balance sheets. This form of ‘money printing’ has not had the inflationary effect predicted by pessimists, but there is still deep unease among some central bankers about whether these bloated balance sheets should be accepted as part of the ‘new normal’. There are concerns that ultra large balance sheets carry with them long term risks of inflation, and financial market distortions. In recent weeks, there have been debates within the FOMC and the ECB Governing Council about balance sheet strategy, and it is likely that there will be important new announcements from both these central banks before the end of 2017. Meanwhile, the PBOC balance sheet has been drifting downwards because of the large scale currency intervention that has been needed to prevent a rapid devaluation in the renminbi. Only the Bank of Japan seems likely to persist with policies that will extend the balance sheet markedly further after 2017.”

March 28 – Bloomberg (Andrea Wong): “A high-risk corner of the $5.1 trillion-a-day currency market has become the collateral damage of the dollar selloff. Whipsawed by the greenback and confronted by U.S. policy confusion, carry trades were supposed to be a rare bright spot for investors who want to stay away from the world’s biggest reserve currency. Under the strategy, you borrow in low-rate alternatives such as the yen, and buy high-yielding peers like the Mexican peso… Practitioners of the carry trade are learning there’s no hiding from the dollar’s influence. Growing doubts about the outlook for U.S. policy following the failed attempt at health-care reform not only led to a weaker dollar, it also caused investors to pile into havens such as the yen and the euro -- the funding currencies carry traders sell as part of the strategy. The Japanese currency gained 2.2% against the dollar this month, while the euro rose 2.7%.”

March 28 – Bloomberg (Narae Kim and Sid Verma): “Talk about risk-on: the demand for higher-yielding securities is proving so strong that Papua New Guinea, one of Asia’s poorest nations, is contemplating a debut issue of dollar bonds. The southwest Pacific nation plans to raise $500 million in five-year bonds… The country would join Mongolia among sub-investment grade issuers in 2017. Sales of high-yield bonds total almost $15 billion so far this year… It’s part of a broader trend of enduring strength in emerging markets that are weathering the U.S. Federal Reserve’s monetary tightening cycle with aplomb. Concerns about trade wars and the potential renewed decline of commodity prices have been set aside for now, with the long-awaited end of the global bond bull market seeming to be on hold.”

Fixed Income Bubble Watch:

March 27 – Reuters (Nick Carey): “As U.S. auto sales have peaked, competition to finance car loans is set to intensify and drive increased credit risk for auto lenders, Moody’s… said… ‘The combination of plateauing auto sales, growing negative equity from consumers and lenders' willingness to offer flexible loan terms is a significant credit risk for lenders,’ Jason Grohotolski, a senior credit officer at Moody’s… told Reuters. Motor vehicle sales have boomed in the years since the Great Recession.”

Brexit Watch:

March 29 – Bloomberg (Tim Ross and Jonathan Stearns): “U.K. Prime Minister Theresa May struck a conciliatory tone toward the European Union as she coupled her demand for divorce with a request for a sweeping free-trade deal encompassing financial services. In a six-page letter submitted… to EU President Donald Tusk, May formally triggered two years of likely contentious talks that will end with Britain breaking ties with its largest trading partner after more than four decades. May sought to smooth over tensions from the start by calling on both sides to negotiate ‘constructively and respectfully,’ saying that she wants the bloc to ‘succeed and prosper.’”

ECB Watch:

March 30 – Reuters (Thomas Escritt and Balazs Koranyi): “The European Central Bank needs to stick to its already laid out policy path, several policymakers argued…, although a top conservative urged them to leave the door open to a more rapid reduction in stimulus. Economic growth is gaining momentum and the euro zone may be on its best economic run in a decade. But inflation is still not moving decisively higher, the policymakers argued, hinting at little appetite for now to amend the ECB's policy stance. The comments gel with Reuters report on Wednesday that policymakers are wary of making any new change to their policy message after small tweaks this month upset investors… With inflation at a four-year high, critics of the ECB, particularly in Germany, have called on the bank to start winding down its unprecedented stimulus measures…”

March 29 – Wall Street Journal (Tom Fairless): “The European Central Bank’s recent moves mark the first steps in winding down its aggressive monetary stimulus and the bank could soon take fresh steps toward an exit if economic data remain strong, a top ECB official said. Klaas Knot, who sits on the ECB’s rate-setting committee as governor of the Dutch central bank, said policy makers were increasingly optimistic about the strength of the economic recovery under way in the 19-nation eurozone. He said the ECB would likely start winding down its massive bond-purchase program within the next 12 months, and suggested it could even raise interest rates in parallel.”

March 27 – Reuters (Balazs Koranyi, Andreas Framke and Francesco Canepa): “Germany’s two representatives on the European Central Bank's main policy-making body called… for it to prepare to wind down its aggressive stimulus policy as soon as economic conditions allow it. The comments by Bundesbank president Jens Weidmann and by Sabine Lautenschlaeger, who represents the ECB's supervisory arm on the bank's executive board, highlight Germany's impatience with the direction the ECB has taken under president Mario Draghi. They also reveal the rift between themselves and supporters of the ECB's current policy of ultra-low interest rates and massive bond buying, which was defended on Monday separately by the central bank's chief economist Peter Praet and by Belgian central bank governor Jan Smets. ‘I would like to see a less expansive stance,’ Jens Weidmann, who sits on the ECB's Governing Council, said…”

March 25 – Reuters (Francesco Canepa): “The European Central Bank’s next policy moves and the order they come in are still up in the air and might even include a rate hike or sales of bonds, a director at Germany's central bank said. Joachim Wuermeling's comments signal Germany’s impatience with the ECB's ultra-easy policy as inflation in the bloc rebounds and raise new questions about the bank's policy plan… The ECB has said it would keep buying bonds until at least the end of the year and keep interest rates at current record low levels or even cut them until ‘well past’ that point. ‘The forward guidance of the ECB council now presumes that interest rate hikes are currently to be expected at the earliest after the end of net monetary policy purchases,’ Wuermeling told an audience… ‘But here too, everything is in flux.’”

March 28 – Financial Times (Mehreen Khan): “The European Central Bank improperly veered into political activity during the eurozone crisis and should withdraw from the ‘troika’ of international bailout monitors, according to anti-corruption watchdog Transparency International. In a review of the central bank’s actions, carried out in co-operation with ECB officials, the report called on the ECB to be placed under greater scrutiny by EU institutions, saying its mandate to ensure price stability in the eurozone had been pushed to ‘breaking point’ in tackling the crisis. ‘The ECB’s accountability framework is not appropriate for the far-reaching political decisions taken by the governing council,’ said the report written by Benjamin Braun, an economist at Harvard.”

Europe Watch:

March 31 – Bloomberg (Carolynn Look and Stu Metzler): “German unemployment fell by the most since 2011, pushing joblessness to a record low as Europe’s largest economy powers ahead. The number of people out of work slid by a seasonally adjusted 30,000 to 2.6 million in March, and the rate dropped to 5.8% from 5.9%...”

March 28 – Wall Street Journal (James Mackintosh): “Politics has been a big driver of markets, but investors may be worrying about the wrong politics. Squabbling over health care hurts the chance of a big U.S. tax cut, and the neurotic can find plenty to fear in the French presidential election. Much less attention has been paid to the biggest political threat on the horizon for investors: Italy. Italian elections are events investors have learned to disregard after 44 governments in 50 years. The next election might be different, thanks to the potential for a nasty three-way feedback loop between populist politics, the European Central Bank and the bond market.”

Federal Reserve Watch:

March 31 – Reuters (Jonathan Spicer): “The Federal Reserve could begin shrinking its $4.5-trillion balance sheet as soon as this year, earlier than most economists expect, New York Fed President William Dudley said… in the central bank's most definitive comments on the question that looms over financial markets. The hawkish-sounding assertion temporarily pushed the dollar lower and raised yields on longer-dated bonds, and added Dudley's influential voice to at least three other officials at the Fed eyeing a prompt end to a crisis-era policy. ‘It wouldn't surprise me if some time later this year or some time in 2018, should the economy perform in line with our expectations, that we will start to gradually let the securities mature rather than reinvesting them,’ Dudley, a close ally of Fed Chair Janet Yellen, said…”

March 31 – Bloomberg (Matthew Boesler): “For two decades, William Dudley has led a charge to change the way central bankers think about how they steer their economies through the booms and busts of financial markets. As president of the Federal Reserve Bank of New York, he’s showing them during the current tightening cycle what he’s been talking about all along. Dudley’s contribution has been, in a nutshell, to get policy makers more focused on swings in the stock market and how they affect the economy. Inspired by the Bank of Canada in the mid-1990s, he’s been developing an idea ever since that could encourage the Fed to speed up -- or slow down -- the pace of interest-rate increases, depending on market movements. ‘I don’t think we are removing the punch bowl, yet. We’re just adding a bit more fruit juice,’ Dudley said Thursday…”

March 31 – Wall Street Journal (Eric Morath and Jeffrey Sparshott): “An important measure of inflation exceeded the Federal Reserve’s target for a 2% annual gain for the first time in nearly five years. The personal-consumption expenditures price index, which is the Fed’s preferred inflation gauge, rose a seasonally adjusted 0.1% in February from the prior month and climbed 2.1% from a year earlier… It was the strongest annual gain for the price measure since March 2012.”

March 30 – Reuters (Svea Herbst-Bayliss): “The U.S. Federal Reserve should raise interest rates three more times this year due to the strength of the economy, Boston Fed President Eric Rosengren said… ‘The base case (for 2017) would be four tightenings, reflecting the strength of the economy that I believe justifies more regular normalization of interest rates,’ Rosengren said…”

March 28 – Reuters (Jason Lange): “A Republican-controlled committee of lawmakers approved a bill… to allow a congressional audit of Federal Reserve monetary policy, a proposal Fed policymakers have opposed and which faces an uncertain path to final approval. Democrats uniformly spoke against the proposal during a meeting of the House of Representatives Committee on Oversight and Government Reform, suggesting the bill would face stronger resistance than in the past.”

U.S. Bubble Watch:

March 28 – Reuters (Lucia Mutikani and Dan Burns): “U.S. consumer confidence surged to a more than 16-year high in March amid growing labor market optimism while the goods trade deficit narrowed sharply in February, indicating the economy was regaining momentum after faltering at the start of the year… Robust consumer confidence and rising household wealth from the home price gains suggest a recent slowdown in consumer spending, which has hurt growth, is likely temporary. ‘We think that real consumption will firm moving forward,’ said Daniel Silver, an economist at JP Morgan…”

March 28 – Bloomberg (Michelle Jamrisko): “Home prices in 20 U.S. cities climbed in the 12 months through January at the fastest pace since July 2014, while nationwide the increase in property values also accelerated, according to S&P CoreLogic Case-Shiller… 20-city property values index rose 5.7% from January 2016 after increasing 5.5% in the year through December. National home-price gauge increased 5.9% in the 12 months through January…”

March 27 – Bloomberg (Vince Golle): “The paucity of houses on the market remains a nagging hurdle for those Americans interested in trading up or looking to take their first step into homeownership. With a limited number of property listings amid solid demand, sellers have little reason to reduce asking prices. From December through February, less than four months’ supply of existing houses were on the market, compared with a post-recession high of about 12 months’ worth in mid-2010… Yes, interested sellers take their homes off the market during the winter, but such a lean supply over a similar time frame has never been recorded in about two decades of data.”

Japan Watch:

March 30 – Bloomberg (Toru Fujioka and Keiko Ujikane): “Japan’s core consumer prices rose slightly for a second month in February, while the jobless rate dropped to the lowest level since 1994. Consumer prices excluding fresh food climbed 0.2% in February from a year earlier, registering the first back-to-back gains since late 2015.”

EM Watch:

March 30 – Reuters (Adam Haigh): “The first quarter is ending, and the tally is in: emerging markets are winning hands down. Developing-market equities have handed investors a 12.4% return this year, twice that of developed stocks, for their best start to a year since 2012. A gauge of local-currency emerging-nation bonds is up 7.4%, more than three times as much as the Bloomberg Barclays global fixed-income index.”

March 30 – Bloomberg (Michael Cohen): “South African President Jacob Zuma faced a widening public backlash from senior members of the ruling African National Congress including his deputy, Cyril Ramaphosa, the morning after he fired his finance minister and made sweeping cabinet changes. ‘I have made my views known and there are quite a number of other colleagues and comrades who are unhappy about the situation, particularly the removal of the minister of finance,’ Ramaphosa said… He called Zuma’s reasons for removing Pravin Gordhan ‘unacceptable.’”

March 31 – Bloomberg (Jonathan Spicer): “Venezuela lurched closer to full-blown crisis Friday when the nation’s top prosecutor, a long-time ally of the ruling socialist party, labeled unconstitutional the Supreme Court’s move to usurp the power of the opposition-led National Assembly. Small, sporadic protests flared up across the country, jittery investors dumped the government’s bonds and opposition leaders sought to capitalize on the chaos by calling on the military to ‘restore’ constitutional order.”

Leveraged Speculation Watch:

March 29 – Wall Street Journal (Saumya Vaishampayan): “Many of the trades that seemed sure bets at the start of 2017 have already flopped in the first quarter. Investors’ high expectations about what President Donald Trump would be able to achieve in office, reflected in the ‘Trump trade,’ have moderated. In addition, trades have been upended by surprisingly good global economic data. The Eurekahedge Macro Hedge Fund Index, which shows the performance of funds that wager on big economic trends, has returned 0.5% so far this year, versus 3.4% in all of 2016. ‘There’s been quite a shift in sentiment about what the U.S. administration will do,’ said Mitul Kotecha, head of Asia macro strategy at Barclays…”

Geopolitical Watch:

March 30 – Reuters (Ben Blanchard): “China's Defence Ministry said… it was futile for Taiwan to think it could use arms to prevent unification, as the self-ruled democratic island looks to fresh arms sales by the United States amid what it sees as a growing Chinese threat. China has never renounced the use of force to bring under its control what it deems a wayward province, and Taiwan's defense ministry says China has more than 1,000 missiles directed at the island. The Trump administration is crafting a big new arms package for Taiwan that could include advanced rocket systems and anti-ship missiles to defend against China…”

March 30 – Reuters (Ben Blanchard): “There was ‘no such thing’ as man-made islands in the disputed South China Sea, China's Defence Ministry said…, and reiterated that any building work was mainly for civilian purposes. China, which claims most of the resource-rich region, has carried out land reclamation and construction on several islands in the Spratly archipelago, parts of which are also claimed by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. The building has included airports, harbors and other facilities…”

March 30 – Wall Street Journal (Yaroslav Trofimov): “Turkey expected a honeymoon with President Donald Trump. Instead, it increasingly looks like Ankara and Washington are heading for a squabble, if not a divorce. For now, President Recep Tayyip Erdogan has bitten his tongue and avoided attacking the Trump administration with the kind of inflammatory statements that he routinely hurls at European and regional leaders. The White House, too, has kept largely mum about Turkish affairs… Yet, on several key issues of this complicated relationship between the two North Atlantic Treaty Organization allies, a head-on collision with potentially unpredictable consequences seems more and more possible.”

March 29 – New York Times (Ben Hubbard and Michael R. Gordon): “The United States launched more airstrikes in Yemen this month than during all of last year. In Syria, it has airlifted local forces to front-line positions and has been accused of killing civilians in airstrikes. In Iraq, American troops and aircraft are central in supporting an urban offensive in Mosul, where airstrikes killed scores of people on March 17. Two months after the inauguration of President Trump, indications are mounting that the United States military is deepening its involvement in a string of complex wars in the Middle East that lack clear endgames… On display are some of the first indications of how complicated military operations are continuing under a president who has vowed to make the military ‘fight to win.’”

Friday Afternoon Links

[Bloomberg] U.S. Stocks Meander on Last Day of Stellar Quarter: Markets Wrap

[Reuters] Oil retreats, set to become worst-performing asset in first quarter

[Reuters] Fed signals it could promptly start shedding bonds from portfolio this year

[Bloomberg] Venezuela Crisis Deepens, Bonds Sink as Maduro Ally Pushes Back

[Reuters] Top Venezuela official breaks with government, protests escalate

[CNBC] The looming budget disaster, in four charts

[Forbes] Proof That Mr. Market Is Losing His Mind

[CNBC] From a $200,000 Aston Martin sports car to $1,000 an hour escorts, Wall Street spending is up

[NYT] Caution Signals Are Blinking for the Trump Bull Market

[FT] ‘It ain’t a normal cycle’, BAML reminds investors

Thursday, March 30, 2017

Tactical Short Video Part IV: The Time is Now

The Latest Video: The Time is Now

More on My New MWM Endeavor and Videos

Friday's News Links

[Bloomberg] Global Stocks Drop on Final Day of Stellar Quarter: Markets Wrap

[Reuters] Dollar edges up but heads for worst quarter in a year

[Bloomberg]  U.S. Personal Spending Cools as Inflation Reaches Fed's Goal

[CNBC] Commerce's Wilbur Ross warns the US is already in a trade war

[Reuters] Trump to order trade abuses study, improve import duty collection

[Bloomberg] How the Yellen Fed Got Religion Over the Stock Market and Policy

[Bloomberg] Calmest Market in More Than Decade on VIX Quarterly Drop: Chart

[Bloomberg] Euro-Area Inflation Slows More Than Predicted on Oil, Food

[Bloomberg] ECB's Coeure Says Forward Guidance Could Change, Just Not Yet

[Bloomberg] German Unemployment Slides to Record Low as Economy Booms

[Bloomberg] China Manufacturing Gauge Climbs to Highest in Almost Five Years

[Reuters] China March service sector growth fastest in nearly 3 years-official PMI

[Bloomberg] Japan Inflation Registers First Back-to-Back Rise Since 2015

[Bloomberg] Zuma Faces Widening Backlash After South African Cabinet Purge

[Bloomberg] Trump Predicts 'Very Difficult' Meeting With China's Leader

[Reuters] Republican disarray deepens as Trump attacks rebel conservatives

[WSJ] Consumer Inflation Tops Fed’s Target

[WSJ] China Digs In on Trade as Trump Warns of ‘Very Difficult’ Summit

[FT] Political risk stalks booming Silicon Valley

Thursday Evening Links

[Reuters] Wall Street rises, aided by growth data; Nasdaq ends at record

[Bloomberg] Fed's Dudley Says Fiscal Stimulus Outlook Shifts Risks to Upside

[Bloomberg] Mexico Raises Rate as Inflation Hits Highest Since Recession

[Bloomberg] Draghi's German Problem May Fizzle as ECB Sticks to Its Plan

[Bloomberg] JPMorgan economist sees Fed shrinking balance sheet starting 2018

[FT] Upbeat mood drives record emerging market sovereign debt sales

Wednesday, March 29, 2017

Thursday's News Links

[Bloomberg] Stocks Rise, Treasuries Fall as Dollar Fluctuates: Markets Wrap

[Bloomberg] U.S. Fourth-Quarter Growth Revised Upward to 2.1% on Consumption

[Reuters] ECB policymakers want to stick to plan, one calls for flexibility

[Reuters] Trump, conservatives try to put aside bitterness to cut tax deal

[Reuters] Clouds over Trump tax plan may curb appetite for U.S. stocks

[Reuters] Trump to unveil $1 trillion infrastructure plan in 2017: official

[Bloomberg] PBOC Seen Raising Money Rates Twice in 2017 to Cut Leverage

[Bloomberg] Bull Run in Emerging Markets Starts to Make the Bears Salivate

[Bloomberg] Big China Banks Cut Bad Loans as Profits Beat Forecasts

[Reuters] Exclusive: South Africa's Zuma considers stepping down early in deal to oust Gordhan

[WSJ] Trump Administration Signals It Would Seek Mostly Modest Changes to Nafta

[WSJ] Trump Administration Lays Groundwork to Keep Big Tariffs on Chinese Goods

[WSJ] Margin Debt Hit All-Time High in February

[WSJ] ECB’s Knot Says Central Bank Could Soon Start Unwinding Stimulus

[Reuters] China says 'no such thing' as man-made islands in South China Sea

[WSJ] U.S. War Footprint Grows in Middle East, With No Endgame in Sight

[WSJ] U.S., Turkey Set on a Collision Course

[Reuters] China says weapons won't stop unification with Taiwan

Wednesday Evening Links

[Reuters] Fed's Rosengren says sees three further rate hikes this year

[Reuters] Market's vision of Brexit is too rosy

[Reuters] China's first-quarter GDP growth seen at 6.8 percent: government think tank

Tuesday, March 28, 2017

Wednesday's News Links

[Bloomberg] U.S. Stocks Fluctuate as Pound Slips on Brexit: Markets Wrap

[Bloomberg] Asia Stocks Outside Japan Rise, Oil Extends Gains: Markets Wrap

[Bloomberg] Brexit Begins as EU's Tusk Receives Divorce Papers from U.K.

[Bloomberg] Huishan Turmoil Highlights China's $8 Trillion Shadow Loan Risk

[BBC] Brexit: What do businesses want from Article 50 talks?

[Bloomberg] Rising tide of euroskepticism could force EU to adopt tough stance on Brexit

[Reuters] Spooked by yield rise, ECB wary of changing message again - sources

[Bloomberg] The Dollar Bond Party Comes to Frontier Markets

[WSJ] Republicans’ Tough Call on Taxes: Quick, Short Yardage or Hail Mary?

[WSJ] A Soaring Dollar and Falling Yuan: The Sure Bets That Weren’t

[WSJ] Why China’s Financial Plumbing Is Getting Clogged

[WSJ] Swipe by Swipe, Chinese Smartphone Users Flock to Risky Investments

[FT] US debt markets heat up after brief drought

[FT] Why the Swiss are crossing their fingers the ECB tapers soon

Tuesday Evening Links

[Bloomberg] U.S. Stocks Rebound With Banks as Crude Advances: Markets Wrap

[Reuters] Consumer confidence hits 16-year high; house prices rise

[Bloomberg] Americans Haven't Been This Optimistic About Stocks for Nearly Two Decades

[Reuters] U.S. House committee approves bill to increase scrutiny of Fed

[Reuters] China’s growing corporate-bank nexus is toxic mix

[Bloomberg] Brexit Means Brexit: What the Key Players Said

[NYT] 5 Reasons Trump’s Promised Tax Overhaul Won’t Be So Easy

Monday, March 27, 2017

Tuesday's News Links

[Bloomberg] U.S. Stocks Fluctuate With Dollar as Selloff Eases: Markets Wrap

[Bloomberg] Home Prices in 20 U.S. Cities Rise at Fastest Pace Since 2014

[CNBC] Risk of correction ‘quite high’ but won’t kill bull market, says Goldman Sachs strategist

[Bloomberg] After GOP Health Failure, Next Battle Could Shut Down Government

[AP] Tax Overhaul Effort Lacks Advantages Reagan Enjoyed in 1986

[Bloomberg] Unreachable Huishan Executive Exposes China Debt, Bank Risks

[Reuters] South Africa's Gordhan returns, says 'let's wait and see' on sacking

[Bloomberg] Rand Sinks After Zuma Considers Firing Finance Chief

[Reuters] German rate setters call for preparing end of ECB's easy policy

[Reuters] ECB board members lay out diverging policy views

[WSJ] Congress Gears Up for Fight Over Spending After Failure of Health-Care Bill

[WSJ] If Stocks Wobble, Will Bonds Be There To Absorb the Blow?

[WSJ] Time to Redo the Math on Tax Reform Prospects

[WSJ] After GOP Bill’s Failure, Health-Law Lawsuit Takes Center Stage

[WSJ] Dollar Falls to Lowest Level Since November

[FT] Hedge fund closures hold nuggets for stock market investors

[FT] ECB criticised for overstepping mandate in eurozone crisis

Monday Evening Links

[Bloomberg] Risk Rout Eases as U.S. Stocks, Dollar Trim Losses: Markets Wrap

[Bloomberg] The Biggest Risk From the Dollar's Drop May Not Be What You Would Guess

[Bloomberg] America's Housing Inventory Problem, Explained in Four Charts

[CNBC] Here are the nation’s healthiest—and unhealthiest—housing markets

[Bloomberg] How China's Bank Behemoths Make Money on the Debt War

[Bloomberg] Earliest China Data Show Strong March Activity, Brighter Outlook

[Reuters] Bundesbank's Weidmann calls for "less expansive" ECB policy

[WSJ] Time to Redo the Math on Tax Reform Prospects

[WSJ] Forget Trump v. Congress. The Real Political Danger’s Still in Europe

[FT] Critic of World Bank and IMF eyed for key role at Treasury

Sunday, March 26, 2017

Monday's News Links

[Bloomberg] Dollar, Equities Slide as Trump Trade Shows Cracks: Markets Wrap

[Reuters] Dollar hits lowest since November as Trump trade deflates

[Bloomberg] Oil Drops as Producers Say They Need More Time to Cut Stockpiles

[CNBC] Asian markets drop, led by Tokyo, as dollar weakens following Trump health-care failure

[Bloomberg] These Charts Show Alarm Bells Ringing on the Trump Trade

[Reuters] Plateau in U.S. auto sales heightens risk for lenders: Moody's

[CNBC] There is no debt ceiling crisis, at least for now

[Bloomberg] Fed Has Room for More Rate Increases in 2017, Lockhart Says

[Bloomberg] Momentum Builds for Yen to Break 110

[Bloomberg] Huishan Dairy Fallout Spreads as Chinese Bank's Stock Falls

[Politico] Internal White House battles spill into Treasury

[WSJ] Dow Poised for Longest Losing Streak Since 2011

[FT] The end of global QE is fast approaching

Sunday Evening Links

[CNBC] Trump lashes out at conservatives for health care bill's failure as GOP infighting grows

[Bloomberg] Trump Lashes Out at Republicans for Defeat of Health Bill

[NYT] More Than Obamacare Repeal, Small Businesses Want Congress to Rein In Costs

Sunday's News Links

[Reuters] OPEC, non-OPEC to look at extending oil-output cut by six months

[Forbes] Passing Tax Reform Will Be As Difficult As Repealing Obamacare

[WSJ] Republicans’ Tax Overhaul Could Face Its Own Slings and Arrows

[WSJ] With GOP Plan Dead, Trump Weighs Other Ways to Reshape Health Care

[FT] Will US healthcare failure shake investor confidence?

[CNBC/NYT] North Korea’s rising ambition seen in bid to breach global banks

[Reuters] Hong Kong chooses new Beijing-backed leader amid political tension

Friday, March 24, 2017

Tactical Short Video Part III: Our Investment Process

The Latest: Video III

More on My New MWM Endeavor and Videos

Weekly Commentary: Discussions on the Fed Put

Market focus this week turned to troubled healthcare legislation, with the GOP Friday pulling the vote on the repeal of Obamacare. This “Republican Catastrophe” (Drudge ran with a Hindenburg photo) provided a timely reminder that Grand Old Party control over the presidency and both houses of congress doesn’t make it any easier to come to a consensus for governing a deeply-divided country. The reality is that it’s a highly fractious world, nation, Washington and Republican party – and the election made it only more so. Perhaps Monday’s sell-off was an indication that reality has begun to seep back into the marketplace. If repealing Obamacare is tough, just wait for tax reform and the debt limit.

CNBC’s Joe Kernen (March 20, 2017): “For a guy that was there trying to deal with the housing Bubble - that would be the other thing that people would bring up to you. That you don’t know what low rates are really doing. You don’t know where the next dislocation is going to be. You’re not seeing a lot of benefits from zero, and who knows if you might be inflating something somewhere that comes home to roost in the future. That’s probably what they’d say: ‘You must know there’s nothing on the horizon then.’”

Neel Kashkari, Minneapolis Federal Reserve Bank president: “It’s a very fair question and people point to the stock market’s been booming. And my response to those folks is, we care about asset price movements if we think a correction could lead to financial instability or financial crisis. If you think about the tech Bubble - the tech Bubble burst. It was not good for the economy – obviously it hurt. But there was no risk of a financial collapse, not like the housing Bubble. So, the difference is the housing market has so much debt underneath it. It’s much more dangerous if there’s a correction. If equity markets drop, it’s going to be painful for investors. But there’s so little debt relative to housing, it doesn’t look like it has a risk of leading to any kind of financial crisis. So, our job is to let the markets adjust.”

Less than an hour later Kashkari appeared on Bloomberg Television: “Some people have said we should be raising rates because markets are getting hot – and the stock market keeps climbing. I think we should only pay attention to markets if we believe it could lead to financial instability. So, go back to the tech Bubble, when tech burst it was painful for the economy; it was painful for investors. But it did not lead to any kind of economic collapse or financial instability. So, if stock markets fall it’ll hurt investors. But that’s not the Fed’s job. The Fed’s job is not to protect stock market investors. We have to pay attention to potential financial instability risks, and the fact is there’s a lot more debt underlying the housing market than underlying the stock market. That’s why the housing bust was painful for the economy. A stock market correction will probably be a lot less painful.”

Neel Kashkari these days provides interesting subject matter. It’s no coincidence that he’s been discussing shrinking the Fed’s balance sheet while also addressing the “Fed put” in the stock market. I’m sure Kashkari and the FOMC would prefer that market participants were less cocksure that the Fed stands ready to backstop the markets. Too late for that.

Fed officials are not blind. They monitor stock prices and corporate debt issuance; they see residential and commercial real estate market values. Years of ultra-low rates have inflated Bubbles throughout commercial real estate – anything providing a yield – in excess of those going into 2008. Upper-end residential prices are significantly stretched across the country, also surpassing 2007. They see Silicon Valley and a Tech Bubble 2.0, with myriad excesses that in many respects put 1999 to shame. I’ll assume that the Fed is concerned with the amount of leverage and excess that has accumulated in bond and Credit markets over the past eight years of extreme monetary stimulus.

The Fed is locked into a gradualist approach when it comes to normalizing rate policy. At the same time, they must of late recognize that speculative markets might readily brush aside Fed “tightening” measures. This might help to explain why the Fed’s balance sheet is suddenly in play. And it’s not just Kashkari. From Bloomberg: “Fed’s Kaplan Says MBS and Treasuries Should Both Be Rolled Off” and “Bullard Says Fed in Good Position to Allow Balance Sheet to Fall.” From Reuters: “Cleveland Fed President Says She Supports Reducing the Balance Sheet.” From Barron’s: “Fed's Williams: Balance Sheet Shrinkage Could Begin Late this Year.” And my favorite: “Fed’s Kashkari: Everyone on FOMC ‘Very Interested’ in Balance Sheet Policy.”

I struggle taking comments from Fed officials at face value. Kashkari shares a similar revisionist view of the Tech Bubble experience to that of Ben Bernanke, Alan Greenspan and others: Basically, it was no big deal – implying that Bubbles generally don’t have to be big deals. They somehow banished 2002 from their memories.

The Fed collapsed fed funds from 6.50% in December 2000 to an extraordinarily low 1.75% by the end of 2001. In the face of an escalating corporate debt crisis, the Fed took the unusual step of cutting rates another 50 bps in November 2002. Alarmingly, corporate Credit was failing to respond to traditional monetary policy measures (despite being aggressively applied). Ford in particular faced severe funding issues, though the entire corporate debt market was confronting liquidity issues. Recall that the S&P500 dropped 23.4% in 2002. The small caps lost 21.6%. The Nasdaq 100 (NDX) sank 37.6%, falling to 795 (having collapsed from a March 2000 high of 4,816). No financial instability?

Years later it’s easy to downplay consequences of the bursting “tech” Bubble. Yet there were fears of a deflationary spiral and the Fed running out of ammo. It was this backdrop in which Dr. Bernanke introduced unconventional measures in two historic speeches, the November 21, 2002, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” and the November 8, 2002, “On Milton Friedman’s Ninetieth Birthday.”

I revisit history in an attempt at distinguishing reality from misperceptions. Of course the Fed will generally dismiss the consequences of Bubbles. They’re not going to aggressively embark on reflationary policies while espousing the dangers of asset price and speculative Bubbles. Instead, they have painted the “housing Bubble” as some egregious debt mountain aberration. And paraphrasing Kashkari, since today’s stock market has nowhere as much debt as housing had in 2007, there’s little to worry about from a crisis and financial instability perspective.

Well, if only that were the case. Debt is a critical issue, and there’s a whole lot more of it than back in 2008. Yet when it comes to fragility and financial crises, market misperceptions and distortions play fundamental roles. And there’s a reason why each bursting Bubble and resulting policy-induced reflation ensures a more precarious Bubble: Not only does the amount of debt continue to inflate, each increasingly intrusive policy response elicits a greater distorting impact on market perceptions.

I doubt Fed governor Bernanke actually anticipated that the Fed would have to resort to “helicopter money” and the “government printing press” when he introduced such extreme measures in his 2002 speeches. Yet seeing that the Fed was willing to push its monetary experiment in such a radical direction played a momentous role in reversing the 2002 corporate debt crisis, in the process stoking the fledgling mortgage finance Bubble. And the Bernanke Fed surely thought at the time that doubling its balance sheet during the 2008/09 crisis was a one-time response to a once-in-a-lifetime financial dislocation. I’ll assume they were sincere with their 2011 “exit strategy,” yet only a few short years later they’d again double the size of their holdings.

From a friendly email received over the weekend: “I think the Bernanke doctrine ended up being wildly successful beyond anyone’s imaginings, even Dr. Ben’s.” This insightful reader’s comment is reflective of the positive view markets these days (at record highs) hold of “activist” central bank management. It may have taken a while, but it all eventually gained the appearance of a miraculous undertaking – reminiscent of “New Era” hype from the late-nineties. “Money” printing works – and all the agonizing over unintended consequences proved sorely misguided!

So easy to forget how we got here. We’re a few months from the nine-year anniversary of the 2008 crisis, yet there’s still huge ongoing global QE and rates not far from zero. It’s a monetary inflation beyond anyone’s imaginings, even Dr. Ben’s. To say “the jury’s still out” is a gross understatement.

There’s a counter argument that stimulus measures and monetary inflation got completely away from Dr. Bernanke - and global central banks more generally. Today, peak global monetary stimulus equates with peak securities market values and peak optimism – all having been powerfully self-reinforcing (“reflexivity”). Global debt continues to expand rapidly, led by exceedingly risky late-cycle Credit growth out of China. I suspect that unprecedented amounts of speculative leverage have accumulated globally, led by excesses in cross-currency “carry trades” and derivatives. “Money” continues to flood into global risk markets, inflating prices and expectations. Worse yet, excesses over (going on) nine years have seen an unprecedented expansion of perceived money-like government and central bank Credit (the heart of contemporary “money” and Credit). Meanwhile, global rates have barely budged from zero.

Despite assertions to the contrary, the bursting of the “tech” Bubble unleashed significant financial instability. To orchestrate reflation, the Fed marshaled a major rate collapse, which worked to stoke already robust mortgage Credit growth. The collapse in telecom debt, an unwind of market-based speculative leverage and the rapid slowdown in corporate borrowings was over time more than offset by a rapid expansion in housing debt and enormous growth in mortgage-related speculative leverage (MBS, ABS, derivatives).

Understandably, Kashkari and the Fed would prefer today to ween markets off the notion of a “Fed put.” It’s just not going to resonate. Markets will not buy into the comparison of the current backdrop to the “tech” Bubble period. The notion that today’s securities markets operate without major instability risk is at odds with reality.

Markets are keenly aware that the Fed’s balance sheet will be the Federal Reserve’s only viable tool come the next period of serious de-risking/de-leveraging. At the same time, Fed officials clearly want to counter the now deeply-embedded perception of a “Fed put” – that the Federal Reserve remains eager to counter fledgling “Risk Off” dynamics. And while it’s not surprising that markets hear Kashkari’s comments and yawn, things will turn interesting during the next bout of market turbulence. Expect the Fed to move hesitantly when coming to the markets’ defense, a dynamic that significantly raises the potential for the next “Risk Off” to attain problematic momentum. It’s been awhile.

March 20 – Financial Times (Robin Wigglesworth): “On Wall Street, bad ideas rarely die. They often go into hibernation until resurrected in a new form. And portfolio insurance — a leading contributor to the 1987 ‘Black Monday’ crash — is, for some, making a return to markets. Institutional investors are allocating billions of dollars to ‘risk mitigation’ or ‘crisis risk offset’ programmes that are designed to act as a counterweight when markets are in turmoil. They mostly comprise long-maturity government bonds and trend-following hedge funds, which tend to do well when equities plummet. But some analysts and fund managers worry that if taken to extremes, allocations to trend-following ‘commodity trading advisors’ hedge funds, in particular, could play the same role as an investment concept called portfolio insurance did in 1987, when it was blamed for aggravating the worst US stock market collapse in history. ‘There’s a big portfolio insurance industry that no one is talking about . . . CTAs are dangerously close to portfolio insurance,’ argues Robert Hillman, the head of Neuron Advisors…”

Writing flood insurance during a drought is an alluringly profitable endeavor. The “Fed put” has encouraged Trillions to flow into the risk markets. Trillions of “money” have gravitated to “passive” trend-following securities market products and structures. Yet the most dangerous Fed-induced market distortions may lurk within market hedging strategies. The above Financial Times article ran under the headline “Rise in New Form of ‘Portfolio Insurance’ Sparks Fears.” Fear is appropriate. To what degree has it become commonplace to seek profits “writing” various types of market “insurance” in a yield-hungry world confident in the central bank “put.” How much “dynamic hedging” and derivative-related selling waits to overwhelm the markets in the event of a precipitous market sell-off (concurrent with fear the Fed has stepped back from its market backstopping operations)?

The speculative bull market confronted some Washington reality this week. The S&P500 declined 1.4%, the worst showing in months. The banks (BKX) were slammed 4.7%, with the broker/dealers (XBD) down 4.3%. The broader market was under pressure, with the mid-caps down 2.1% and the small caps 2.7%. It’s worth noting the banks, transports and small caps are now all down y-t-d. Curiously, bank stocks underperformed globally. Japan’s Topic Bank index was hit 3.5%. The Hong Kong Financial index fell 1.3%, and Europe’s STOXX 600 Bank index lost 0.9%.

Ten-year Treasury yields dropped nine bps to a one-month low (2.41%), as sovereign yields declined across the globe. Just when the speculators were comfortably short European periphery bonds, Spanish 10-year yields sank 19 bps, Italian yields fell 13 bps and Portuguese yields dropped 15 bps. Crude prices traded this week to the low since November. The GSCI Commodities Index declined to almost four-month lows. Time again to pay attention to China? This week saw a “super selloff” in Chinese iron ore markets. Copper fell 2.2%, and the commodities currencies (Australia, Canada, Brazil) underperformed. Meanwhile, precious metals outperformed, with gold up 1.2% and silver rising 2.1%.

March 23 – Financial Times (Gabriel Wildau): “China’s financial system suffered a cash crunch this week as new regulations designed to curb shadow banking caused big lenders to hoard funds, highlighting the danger of unintended consequences from official moves to lower their debt. Analysts have warned of rising risks from banks’ increased reliance on volatile short-term funding rather than customer deposits to fund loans and other investments. If money market interest rates spike in times of stress, institutions can be forced to dump assets in order to meet payments due to creditors. Tightening liquidity prompted the seven-day bond repurchase rate to hit a three-year high of 9.5% on Tuesday, versus an average of below 3% since the beginning of 2014.”

March 21 – Bloomberg: “This week’s squeeze in Chinese money markets is proving especially painful for the country’s shadow banks. While interbank borrowing rates have climbed across the board, the surge has been unusually steep for non-bank institutions, including securities companies and investment firms. They’re now paying what amounts to a record premium for short-term funds relative to large Chinese banks… ‘It’s more expensive and difficult for non-bank financial institutions to get funding in the market,’ said Becky Liu, …head of China macro strategy at Standard Chartered Plc. ‘Bigger lenders who have access to regulatory funding are not lending much of the money out.’”

March 23 – Wall Street Journal (Shen Hong): “A new specter is haunting China’s financial system: the negotiable certificate of deposit. An explosion in banks’ use of the bondlike loans, whose durations range from a month to a year, is testing Beijing’s resolve to cure the economy of its addiction to debt-fueled growth and investment booms. As authorities push up key short-term interest rates in their campaign to deflate asset bubbles swelled by borrowed money, the interest rates charged on these NCDs is rising so fast that it is starting to expose banks to the risk of investment losses and abrupt funding squeezes. This is causing worries about a potential repeat of the crippling cash crunch of 2013. ‘NCDs carry a lot of risk, and if not handled properly they could lead to a systemwide liquidity crisis,’ said Liu Dongliang, senior analyst at China Merchants Bank. Banks, mostly small or midsize ones, have been raising record sums via NCDs, selling 4.4 trillion yuan ($639bn) worth this year, 65% more than in the same period of 2016.”

The risk of financial accident in China has anything but dissipated. The People’s Bank of China this week injected large amounts of liquidity to stem a brewing funding crisis in the inter-bank lending market, only then to reverse course back to tightened policy later in the week. Over recent years, each effort to restrain excess in one area has been matched by heightened excess popping out in another. In general, financial conditions have remained too loose for too long – leading to recent Credit growth in the neighborhood of $3.5 TN annualized. Efforts to rely on targeted tightening measures have proved ineffective.

It appears there is now heightened pressure on Chinese monetary authorities to tighten system-wide financial conditions. The stress that befell the vulnerable corporate bond market over recent months is now pressuring small and medium sized banks with problematic exposure to short-term “money-market” borrowings. There were also further indications this week of “shadow banking” vulnerability.

I’ve never felt comfortable that Chinese authorities appreciate the types of risks that have been mounting beneath the surface of their massively expanding Credit system. Global markets seemed attentive a year ago, but concerns have since been swept away by the notion of the all-powerful “China put” conjoining with the steadfast “Fed put.” These types of market perceptions create tremendous inherent fragility.

And thanks for checking out our third of four short videos, Tactical Short Episode III, “Our Investment Process" at

For the Week:

The S&P500 declined 1.4% (up 4.7% y-t-d), and the Dow fell 1.5% (up 4.2%). The Utilities gained 1.3% (up 6.4%). The Banks were slammed 4.7% (down 1.0%), and the Broker/Dealers were whacked 4.3% (up 3.1%). The Transports dropped 2.4% (down 1.3%). The S&P 400 Midcaps fell 2.1% (up 2.0%), and the small cap Russell 2000 sank 2.7% (down 0.2%). The Nasdaq100 dipped 0.8% (up 10.3%), and the Morgan Stanley High Tech index declined 0.8% (up 12.1%). The Semiconductors were unchanged (up 10.8%). The Biotechs fell 1.7% (up 14.1%). With bullion up $14, the HUI gold index jumped 1.9% (up 9.3%).

Three-month Treasury bill rates ended the week at 75 bps. Two-year government yields declined six bps to 1.26% (up 7bps y-t-d). Five-year T-note yields fell seven bps to 1.95% (up 2bps). Ten-year Treasury yields dropped nine bps to 2.41% (down 3bps). Long bond yields fell 10 bps to 3.01% (down 5bps).

Greek 10-year yields were little changed at 7.31% (up 29bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 4.13% (up 39bps). Italian 10-year yields fell 13 bps to 2.22% (up 41bps). Spain's 10-year yields sank 19 bps to 1.69% (up 31bps). German bund yields slipped three bps to 0.40% (up 20bps). French yields dropped 12 bps to 0.99% (up 31bps). The French to German 10-year bond spread narrowed nine to 59 bps. U.K. 10-year gilt yields declined five bps to 1.20% (down 4bps). U.K.'s FTSE equities index fell 1.2% (up 2.7%).

Japan's Nikkei 225 equities index declined 1.3% (up 0.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.065% (up 3bps). The German DAX equities index dipped 0.3% (up 5.1%). Spain's IBEX 35 equities index added 0.6% (up 10.2%). Italy's FTSE MIB index increased 0.6% (up 5.0%). EM equities were mixed. Brazil's Bovespa index declined 0.6% (up 6.0%). Mexico's Bolsa gained 1.0% (up 7.5%). South Korea's Kospi added 0.2% (up 7.0%). India’s Sensex equities index declined 0.8% (up 10.5%). China’s Shanghai Exchange rose 1.0% (up 5.3%). Turkey's Borsa Istanbul National 100 index was little changed (up 15.7%). Russia's MICEX equities index was about unchanged (down 8.6%).

Junk bond mutual funds saw inflows of $736 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell seven bps to 4.23% (up 52bps y-o-y). Fifteen-year rates declined six bps to 3.44% (up 48bps). The five-year hybrid ARM rate slipped four bps to 3.24% (up 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 21 bps to 4.22% (up 41bps).

Federal Reserve Credit last week expanded $7.7bn to $4.436 TN. Over the past year, Fed Credit fell $14.5bn (down 0.3%). Fed Credit inflated $1.625 TN, or 58%, over the past 228 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $14.0bn last week to $3.212 TN. "Custody holdings" were down $44.4bn y-o-y, or 1.4%.

M2 (narrow) "money" supply last week surged $55.5bn to a record $13.403 TN. "Narrow money" expanded $869bn, or 6.9%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits jumped $70.4bn, while Savings Deposits fell $19.9bn. Small Time Deposits were little changed. Retail Money Funds gained $3.0bn.

Total money market fund assets dropped $23.3bn to $2.654 TN. Money Funds fell $98bn y-o-y (3.6%).

Total Commercial Paper added $3.6bn to $965.7bn. CP declined $124bn y-o-y, or 11.4%.

Currency Watch:

The U.S. dollar index declined 0.7% to 99.63 (down 2.7% y-t-d).  For the week on the upside, the South African rand increased 2.4%, the Mexican peso 1.7%, the Japanese yen 1.2%, the South Korean won 0.8%, the Swiss franc 0.7%, the British pound 0.6%, the euro 0.6%, the Swedish krona 0.3%, the Singapore dollar 0.2% and the New Zealand dollar 0.2%. For the week on the downside, the Australian dollar declined 1.1%, the Brazilian real 0.6%, the Canadian dollar 0.2% and the Norwegian krone 0.2%. The Chinese yuan gained 0.29% versus the dollar this week (up 0.89% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index fell 1.3% (down 5.1% y-t-d). Spot Gold gained 1.2% to $1,243 (up 7.9%). Silver jumped 2.1% to $17.78 (up 11.2%). Crude lost 81 cents to $47.97 (down 11%). Gasoline increased 0.4% (down 4%), and Natural Gas jumped 4.3% (down 18%). Copper fell 2.2% (up 5%). Wheat dropped 2.6% (up 4%). Corn sank 3.1% (up 1%).

Trump Administration Watch:

March 24 – Bloomberg (Billy House and Steven T. Dennis): “House Republicans abandoned their efforts to repeal and partially replace Obamacare after President Donald Trump and Speaker Paul Ryan couldn’t wrangle enough votes, raising doubts about their ability to deliver on the rest of their agenda. Trump and Ryan together own the defeat of this health-care bill. Both had pledged to deliver on a seven-year GOP promise to undo the Affordable Care Act… ‘I will not sugarcoat this: This is a disappointing day for us,’ Ryan told reporters… ‘But it is not the end of the story.’ Neither Ryan nor Trump could ultimately win over rebellious party conservatives or moderates unnerved about the bill’s potential effects.”

March 19 – New York Times (Landon Thomas Jr.): “For nearly 20 years, Adam Lerrick, a conservative economist, has been a vocal scold of global organizations like the International Monetary Fund, arguing that such institutions burn through taxpayer money and foster an insular culture of elitism, bailouts and scant accountability. Now, Mr. Lerrick, a former investment banker and a visiting scholar at the right-leaning American Enterprise Institute, is set to get a chance to turn philosophy into policy, after the announcement last week that President Trump intended to nominate him as deputy under secretary of the Treasury for international finance. The selection of Mr. Lerrick, who is well known in global financial circles for his evangelical opposition to bailouts for banks, countries and investors, underscores how Mr. Trump’s economic team is turning to critics of global economic policy as it seeks to reverse decades of Washington consensus.”

March 20 – New York Times (Keith Bradsher): “A Jeep Wrangler can cost $30,000 more in China than in the United States — and the reasons illustrate a growing point of tension between the two countries. Manufactured in Toledo, Ohio, the Wrangler is a descendant of the jeeps that were used by American forces in World War II. Equipped with a 3.6-liter engine and a five-speed automatic transmission, the Rubicon edition of the Wrangler has a suggested retail price of $40,530 in the United States. But in China, the same vehicle would set a buyer back by a hefty $71,000, mostly because of taxes that Beijing charges on every car, minivan and sport utility vehicle that is made in another country and brought to China’s shores. Those taxes on imported cars have become a growing area of friction between the United States and China.”

March 19 – CNBC (Nyshka Chandran): “The White House is planning to confront Beijing over perceived injustices in its automobile industry, Axios News reported… President Donald Trump's team, including chief strategist Steve Bannon and National Trade Council director Peter Navarro, finds Chinese policy on U.S. car imports ‘unacceptable’ and are currently working on a negotiation strategy, Axios said.”

March 21 – Reuters (Amanda Becker): “An overhaul of Fannie Mae and Freddie Mac is highly unlikely to make it into this year's legislative calendar, Congressional staffers say, possibly shifting the new administration's immediate focus to allowing the mortgage financing institutions' to rebuild depleted capital… Congressional staffers say the Senate Banking Committee has begun weekly bipartisan staff briefings on Freddie and Fannie reforms, but it is starting from scratch. The House Financial Services Committee is focused on other legislation, such as renewing the flood insurance program and rolling back parts of the Dodd-Frank financial reform, pushing the mortgage giants' revamp down the to-do list, they say.”

March 19 – CNBC (Andreas Rinke): “German Defense Minister Ursula von der Leyen… rejected U.S. President Donald Trump's claim that Germany owes NATO and the United States ‘vast sums’ of money for defense. ‘There is no debt account at NATO,’ von der Leyen said…, adding that it was wrong to link the alliance's target for members to spend 2% of their economic output on defense by 2024 solely to NATO.”

China Bubble Watch:

March 22 – Wall Street Journal (Lingling Wei): “China’s central bank faces an increasingly tough balancing act, trying to contain asset bubbles and steady the yuan without triggering a cash crunch and stifling growth. The People’s Bank of China has tightened hold on credit in recent weeks, part of government efforts to rein in financial risks. The shift has pushed up short-term borrowing costs; this week the closely watched three-month interest rates at which banks lend to each other reached levels not seen in nearly two years. ‘The rising rates have made it much more expensive for small banks to borrow,’ said one trader. ‘There were people begging for liquidity.’ On Monday, some small, rural banks failed to make good on short-term funds borrowed from other lenders…”

March 21 – Bloomberg: “China’s central bank injected hundreds of billions of yuan into the financial system after some smaller lenders failed to make debt payments in the interbank market, according to people familiar with the matter. Tuesday’s injections followed missed interbank payments on Monday, the people said… The institutions that missed payments included rural commercial banks… One said a borrower failed to repay an overnight repo of less than 50 million yuan ($7.3 million). China’s smaller lenders faced tighter liquidity this week as benchmark money market rates climbed to the highest level since April 2015…”

March 21 – Bloomberg: “China’s plan to tighten rules governing the use of corporate notes as collateral for short-term loans is fueling concern that yield hunters may face losses. China Securities Depository and Clearing Corp., which oversees notes in the nation’s smaller exchange-traded market, plans to allow financial institutions to use only AAA rated company securities as collateral for short-term loans, people familiar with the matter said… The plan will make bonds rated below that level less liquid, likely driving up yield premiums, according to analysts at Guotai Junan Securities Co. and SWS Research Co.”

March 22 – Financial Times (Yuan Yang and Jennifer Hughes): “When Li Keqiang, China’s premier, told the National People’s Congress this month that the government was worried about ‘high leverage in non-financial Chinese firms’, finance directors of the country’s property developers must have winced. Balanced between their reliance on ballooning debt markets, which Beijing wants to bring under control, and a housing boom that authorities want to cool, developers have defied predictions of collapse for years… ‘China’s more heavily indebted developers are living on a knife’s edge,’ says Andrew Collier, managing director of Orient Capital Research… Real estate developers are facing a funding squeeze just as they are entering their first downturn in three years. House prices rose 40% in big cities last year but have stalled in 2017.”

March 20 – Financial Times (Gabriel Wildau): “Big Chinese cities have launched a new round of lending curbs and purchase restrictions in an effort to cool overheated property markets, as official media warn that some have veered towards a bubble. Sky-high prices in cities including Beijing, Shanghai and Shenzhen are stoking anger, even among relatively well-off professionals. Meanwhile, controlling financial risk has emerged as the dominant economic policy theme for 2017. At the conclusion of the annual session of China’s rubber-stamp parliament last week, the government pledged to ‘contain excessive home price rises in hot markets’.”

March 20 – Wall Street Journal (Ian Talley): “Investment by Chinese state-owned companies is resurgent, surpassing private investment growth as Beijing tries to fuel its slowing economy. But by backing investment by state firms, China’s government risks a financial reckoning that could injure world’s second-largest economy and is giving the Trump administration another reason to pressure Beijing on its economic policies. Investment growth by state-owned companies surged to nearly 25% last year, eclipsing the roughly 3% growth recorded by the private sector.”

Global Bubble Watch:

March 19 – Wall Street Journal (Ian Talley, Tom Fairless and Andrea Thomas): “World finance chiefs struggled during a weekend of tense talks to find common ground on boosting trade in a global economy that is finally showing faint signs of momentum. U.S. Treasury Secretary Steven Mnuchin, rejecting a concerted effort by rivals here, got finance officials to drop a disavowal of protectionism from a closely watched policy statement issued by the Group of 20… For Washington, the watered-down language that emerged in their communiqué ensures the U.S. can still use sanctions or other policy tools to punish trade partners and thwart economic policies the Trump administration believes to be unfair.”

March 20 – Bloomberg (Michael Heath): “Australia’s central bank highlighted threats in the property market and an acceleration of domestic household debt even as it lent credence to the global reflation story. ‘Data continued to suggest that there had been a build-up of risks associated with the housing market,’ the Reserve Bank of Australia said in minutes… ‘Growth in household debt had been faster than that in household income.’ The RBA’s warning comes as the economic divide in Australia sharpens with house prices more than doubling in Sydney since 2009 and Melbourne’s similarly surging as investors tap cheap money. Meanwhile in the west, the heart of an unwinding mining-investment boom, property prices are falling…”

Fixed Income Bubble Watch:

March 20 – Financial Times (Joe Rennison, Eric Platt and Nicole Bullock): “Investors are preparing for renewed turmoil in the high-flying US equity market as key measures of volatility across asset classes have eased in the wake of this month’s Federal Reserve meeting. Against the backdrop of slumbering implied volatility for equities, commodities, bonds and currencies, some investors have sought insurance against the risk of an unexpected stock market shock. That has propelled the CBOE’s Skew index, which reflects market tail risk, or the chance of a dramatic slump in the S&P 500, to its highest level since the UK voted to leave the EU in June.”

March 20 – Bloomberg (Sid Verma): “U.S. equity and debt markets have ridden a reflationary wave this year, thanks to optimism over the momentum of the U.S. economy. However, some key gauges for growth sit awkwardly with this narrative. Nominal yields on five-year Treasuries are negative when adjusted for the price outlook. And on Treasury Inflation Protected Securities five years forward, a metric the Federal Reserve uses to gauge long-term inflation expectations, the rate projected for 2022 is falling. Real rates, which have generally moved in lockstep with real gross domestic product, are some two percentage points below what’s implied by the momentum of the U.S. economy, an unsustainable divergence, according to Deutsche Bank AG. ‘We see real rates as extremely misvalued if not in a bubble,’ Deutsche Bank analysts, led by Chief Global Strategist Binky Chadha, wrote…”

March 20 – Bloomberg (Chris Bryant and Andrea Felsted): “Companies have been on a borrowing binge, but you wouldn’t always know the full scale of their liabilities by looking at the balance sheet. This makes it hard for investors to compare businesses that fund their activities in different ways. Happily though, that's about to change. How come? The answer is buried in the notes to financial statements... It’s here that companies have parked about $3 trillion in operating lease obligations… For non-financial companies, those obligations equate to more than one quarter of their long-term (on-balance sheet) debt. Operating leases are actually pretty similar to debt. They represent money companies will be obliged to cough up in future to rent things like planes, ships and retail floor space.”

Brexit Watch:

March 21 – Reuters (William James, Elizabeth Piper and Gabriela Baczynska): “Prime Minister Theresa May will trigger Britain’s divorce proceedings with the European Union on March 29, launching two years of negotiations that will reshape the future of the country and Europe. May's government said her permanent envoy to the EU had informed European Council President Donald Tusk of the date when Britain intends to invoke Article 50 of its Lisbon Treaty - the mechanism for starting its exit after a referendum last June in which Britons voted by a 52-48% margin to leave the bloc.”

Europe Watch:

March 20 – Reuters (Andreas Framke): “Money created by the European Central Bank to shore up euro zone growth and inflation is piling up in Germany as investors are reluctant to venture outside the bloc's strongest economy, Bundesbank data showed… A large amount of the money printed by the ECB to buy bonds is landing in German bank accounts, often held by foreign investors, and staying there. This is pushing up the Bundesbank's net credit with the ECB's Target 2 system for settling cross-border payments in the euro zone, which rose to a record high of 814 billion euros in February. In the same month, Italy's Target 2 liabilities hit an all-time high of 386.1 billion euros, which the Bank of Italy blamed on factors including Italians investing their savings abroad and the ECB's bond purchases.”

March 20 – Bloomberg (Alessandro Speciale): “European Central Bank Governing Council member Ignazio Visco said the central bank could step away from its commitment to keep interest rates low for a long time after quantitative easing stops. While the ECB’s current guidance foresees that borrowing costs will stay at current or lower levels ‘for an extended period’ and won’t rise until ‘well past’ the end of bond-buying, the Bank of Italy governor said this period ‘could’ be shortened.”

March 21 – Reuters (Crispian Balmer): “Italy's anti-establishment 5-Star Movement, benefiting from a split in the ruling Democratic Party (PD) and divisions in the center-right, has built a strong lead over its rivals, an opinion poll showed… The Ipsos poll… put the 5-Star, which wants a referendum on Italy's membership of the euro, on 32.3% - its highest ever reading and 5.5 points ahead of the PD, which was on 26.8%. The survey suggests that the 5-Star is likely to emerge as the largest group in national elections due by early 2018…”

Federal Reserve Watch:

March 19 – CNBC (Javier E. David): “It’s often said that good things come to those who wait — but a bloated $4.5 trillion balance sheet might be a notable exception to that rule. With the Federal Reserve facing a Herculean conundrum in unwinding its crisis-era monetary policy — and a likely leadership transition on the horizon — Goldman Sachs suggested on Saturday the central bank could move early to reduce the vast sums of government and mortgage-backed securities (MBS) it holds on its books. In a research note to clients, the bank pointed to the likelihood that President Donald Trump may ‘reshape the leadership’ of the Federal Open Market Committee (FOMC)… as the terms of Fed Chair Janet Yellen and Vice Chair Stanley Fischer expire in early 2018. ‘This could be important for balance sheet policy because many Republican-leaning economists have criticized quantitative easing (QE) and have expressed a preference for rapid balance sheet rundown, perhaps even through asset sales,’ wrote Daan Struyven, a Goldman economist.”

March 20 – Bloomberg (Liz McCormick, Matt Scully, and Edward Bolingbroke): “As far as bond buyers go, the Federal Reserve is pretty laid-back. Even as the central bank amassed trillions of dollars of debt to prop up the economy following the financial crisis, it didn’t hedge its holdings or worry about gains and losses that might keep ordinary investors up at night. This extreme buy-and-hold stance has had an incredible calming effect on the bond market. Volatility has plummeted to lows rarely seen in recent memory. But all that is now poised to change. With interest rates on the rise, analysts say the Fed could start shrinking its unprecedented $1.75 trillion position in mortgage-backed securities by year-end. That’s likely to leave more in the hands in private investors and result in increased hedging activity, a practice that has historically exacerbated swings in the Treasury market.”

March 21 – Reuters (Jonathan Spicer): “The run-up in U.S. real estate prices could potentially amplify any future economic downturn, a Federal Reserve official said…, urging regulators globally to consider tools beyond interest rates that could help cool the sector. A sharp downturn in U.S. residential and commercial property prices in 2007 and 2008 rocked banks that were highly leveraged in the sector, sparking the global financial crisis and deep recession. With the economic recovery now well under way, bank holdings of commercial and apartment mortgages rose 9% and 12%, respectively, in the past year. Eric Rosengren, president of the Boston Fed and an influential financial regulator at the U.S. central bank, said the ‘sharp’ rise in apartment prices in particular may signal financial instabilities that interest rates, which are only gradually rising, may not be able to contain.”

March 21 – Bloomberg (Oliver Renick): “Federal Reserve Bank of Cleveland President Loretta Mester called for the U.S. central bank to continue with gradual interest-rate increases and begin shrinking its $4.5 trillion balance sheet this year if the economy continues to improve. ‘If economic conditions evolve as I anticipate, I would be comfortable changing our reinvestment policy this year,’ Mester said… ‘Ending reinvestments is a first step toward reducing the size of the balance sheet and returning its composition to primarily Treasury securities over time.”

U.S. Bubble Watch:

March 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit unexpectedly fell in the fourth quarter, hitting its lowest level in more than a year, as an increase in the primary income surplus offset a soybean-driven drop in exports. The Commerce Department said… the current account deficit, which measures the flow of goods, services and investments into and out of the country, fell 3.1% to $112.4 billion, the lowest since the second quarter of 2015… The fourth-quarter current account deficit represented 2.4% of gross domestic product… For all of 2016 the current account deficit totaled $481.2 billion, a 3.9% increase from 2015. That represented 2.6% of GDP, unchanged from 2015.”

March 21 – Wall Street Journal (Anjani Trivedi): “The U.S. car-financing market is flashing worrying signals. And the big Japanese car makers will take the first hits. Car-lease volumes in the U.S. have risen rapidly over the past two years for Japan’s big three car makers. Toyota Motor, Honda Motor and Nissan Motor have been among the most aggressive this cycle, with close to 30% of sales coming from lease transactions for all three, according to Jefferies. For Ford Credit, for instance, the rate is rising but still at 22%. The problem so far isn’t with customers defaulting on leases but with the recovery value the finance companies get when they sell the vehicles after the lease term.”

March 19 – Financial Times (Adam Samson and Nicole Bullock): “The US corporate profit outlook has dimmed in recent weeks, with analysts paring back their forecasts, in a fresh sign of the risks facing the Wall Street rally that has powered equities to record peaks. Earnings for companies listed on the S&P 500 index, the main US stock barometer, are predicted to rise 9% in the first quarter, FactSet data show. While the rate marks a significant uptick from the 4.9% notched in the final three months of 2016, it represents a reduction from the 12.3% expected at the start of this year. The weaker estimates come at a time when stocks are trading near record highs.”

March 18 – Financial Times (Chris Flood): “Exchange traded funds have attracted the biggest inflow of money in the first two months of the year on record, heightening concerns that ETF buying is fuelling an unsustainable price bubble in the US stock market. Investors across the world ploughed $131bn into these index-tracking funds in the first two months of 2017, according to ETFGI… This follows a record-breaking year in 2016, when ETF managers gathered more than $390bn in new cash.”

March 20 – Bloomberg (Dani Burger): “They call them smart-beta funds, but there are plenty of critics who say they’re anything but smart. What they certainly are is popular: investors have poured more than $430 billion into them over the past decade. The hope is that they deliver the kinds of market-beating returns that pricey hedge funds have long dangled before rich investors, but at index-fund fee levels. The fear is that it’s become yet another way for investors to buy into a bubble.”

March 20 – Wall Street Journal (Theo Francis and Joann S. Lublin): “Pay raises are back in style in the corner office, wiping out cuts from a year earlier and pushing CEO compensation to new highs amid a surging stock market. Median pay for the chief executives of 104 of the biggest American companies rose 6.8% for fiscal 2016 to $11.5 million, on track to set a postrecession record, according to a Wall Street Journal analysis.”

March 21 – Reuters (Ankit Ajmera and Nathan Layne): “Sears Holdings Corp, once the largest U.S. retailer, warned… about its ability to continue as a going concern after years of losses and declining sales. ‘Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern,’ Sears said… The company said an inability to generate additional liquidity might limit its access to new merchandise or its ability to procure services. Continued operating losses also could restrict access to new funds under its domestic credit agreement, according to the filing.”

March 23 – Bloomberg (Gabrielle Coppola and Matt Scully): “Since the auto industry’s near-death experience, sales have come roaring back -- last year, a record 17.55 million vehicles moved off U.S. dealer lots. A secret ingredient? Consumer debt, and plenty of it. But things are starting to look a little trickier, as passenger car sales are dropping, overall vehicle sales have plateaued and the Federal Reserve has started to raise borrowing costs. Add to that rising default rates and faster depreciation of used car values, and there’s new anxiety simmering over the state of the U.S. auto finance market. Is there an auto loan bubble?”

March 23 – Reuters (Nandita Bose and Richa Naidu): “Suppliers to Sears… told Reuters they are doubling down on defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances. The company's disclosure turned the focus to its vendors as tension is expected to mount ahead of the key fourth-quarter selling season amid rising concern about a potential bankruptcy, they said. The storied American retailer, whose roots date back to 1886, said on Tuesday that ‘substantial doubt exists related to the company's ability to continue as a going concern.’”

Japan Watch:

March 21 – Bloomberg (Connor Cislo): “Japan’s exports rose for a third consecutive month in February as strengthening global demand continued to help the nation’s moderate economic recovery. The increase was the biggest in two years, reflecting the timing of Lunar New Year holidays in Asia. Exports rose 11.3% from a year earlier (median estimate 10.1%)…”

Leveraged Speculation Watch:

March 21 – Wall Street Journal (Alexander Osipovich): “The flash boys aren’t as flashy as they used to be. High-speed trading gained notoriety after Michael Lewis’s 2014 book ‘Flash Boys.’ These days, the industry is struggling with another problem: It is having trouble making money. HFT firms use computers to buy and sell stocks, bonds or other financial assets in fractions of a second. The once-lucrative business is now fighting unfavorable market conditions, brutal competition and rising costs. Revenues at HFT firms from U.S. equities trading were an estimated $1.1 billion last year, down from $7.2 billion in 2009…”

Geopolitical Watch:

March 20 – Reuters (Kevin Yao): “China's government has been seeking advice from its think-tanks and policy advisers on how to counter potential trade penalties from U.S. President Donald Trump, getting ready for the worst… The policy advisers believe the Trump administration is most likely to impose higher tariffs on targeted sectors where China has a big surplus with the United States, such as steel and furniture, or on state-owned firms. China could respond with actions such as finding alternative suppliers of agriculture products or machinery and manufactured goods, while cutting its exports of consumer staples such as mobile phones or laptops, they said.”