Friday, March 17, 2017

Weekly Commentary: Another Missed Opportunity

March 16 – Financial Times (Robin Wigglesworth, Joe Rennison and Nicole Bullock): “When Romeo impatiently hankered after Juliet, the sage friar Lawrence dispensed some valuable advice: ‘Wisely and slow; they stumble that run fast.’ It is a dictum the Federal Reserve clearly intends to live by, despite the improving economic outlook. There have been rising murmurs in financial markets that after years of the Fed being too optimistic on the economy, inflation and interest rates, it is now behind the curve. But on Wednesday the US central bank sent a clear message to markets that it is not in a hurry to tighten monetary policy.”

Yes, markets had begun fretting a bit that a sense of urgency might be taking hold within the Federal Reserve. But the FOMC’s two-day meeting came and went, and chair Yellen conveyed business as usual. Policy would remain accommodative for “some time.” The focus remains resolutely on a gradualist approach, with Yellen stating that three hikes a year would be consistent with gradualism. And three baby-step hikes a year would place short rates at 3.0% in early 2020 (the Fed’s “dot plot” sees 3% likely in 2019). It’s not obvious 3% short rates three years from now will provide much restraint on anything. As such, the Fed is off to a rocky start in its attempt to administer rate normalization and a resulting tightening of financial conditions.

Yellen also suggested that the committee would not be bothered by inflation overshooting the Fed’s 2.0% target: “…The Fed is not inclined to overreact to the possibility that inflation could drift slightly — and in the Fed’s view temporarily — above 2% in the coming months.” There would also be no reassessment of economic prospects based on President Trump’s agenda of tax cuts, infrastructure spending and deregulation. “We have plenty of time to see what happens.” Moreover, the Yellen Fed did not signal that it is any closer to articulating a strategy for reducing its enormous balance sheet.

Bloomberg had the most apt headlines: “Yellen Calms Fears Fed’s Policy Trigger Finger Is Getting Itchy;” “Yellen Faces New Conundrum as Conditions Defy Hike;” “The Market Is Acting Like the Fed Cut Rates.”

Ten-year Treasury yields dropped 11 bps on FOMC Wednesday to 2.49%, the “largest one-day drop since June.” Even two-year yields declined a meaningful eight bps to 1.30%. The dollar index fell 1.0%, with gold surging almost $22. The GSCI commodities index rose more than 1%. EM advanced, with emerging equities (EEM) jumping 2.6% to the high since July, 2015.

I think back to the last successful Fed tightening cycle. Well, I actually don’t recall one. Instead it’s been serial loose financial conditions and resulting recurring booms and busts. And, once again, the Fed seeks to gradually raise rates without upsetting the markets. Yellen: “I think if you compare it with any previous tightening cycle, I remember when rates were raised at every meeting, starting in mid-2004. And I think people thought that was a gradual pace, measured pace. And we’re certainly not envisioning something like that.” Heaven forbid…

In her press conference, Yellen again addressed the “neutral rate” – “The neutral level of the federal funds rate, namely the level of the federal funds rate, that we keep the economy operating on an even keel. That is a rate where we neither are pressing on the brake nor pushing down on the accelerator. That level of interest rates is quite low.”

Yellen may not believe the Fed is “pushing down on the accelerator,” yet the truck is racing down the mountain.

March 14 – Bloomberg (Claire Boston): “Companies are issuing bonds in the U.S. at the fastest pace ever… Investment-grade firms are on track to complete the busiest first quarter for debt sales since at least 1999. Firms… have pushed new issues to more than $360 billion so far in 2017, closing in on the previous record of $381 billion from 2009… That puts bond sales 14% ahead of last year’s record pace… High-yield bond offerings have also roared back after a plunge in commodity prices muted new issues last year. Junk-rated firms have sold more than $72 billion in 2017 through Monday, compared with $41.7 billion in the first quarter of 2016.”

March 16 – Bloomberg (Sid Verma and Julie Verhage): “Financial markets are telling Janet Yellen there’s more work to be done -- or else. While the Federal Reserve chair raised interest rates by 25 bps as expected Wednesday, the outlook was less hawkish than market participants foresaw, with projections for the medium-term tightening cycle largely unchanged… ‘Our financial conditions index eased by an estimated 14 bps on the day -- about 2.3 standard deviations and the equivalent of almost one full cut in the funds rate -- and is now considerably easier than in early December, despite two funds rate hikes in the meantime,’ Goldman Chief Economist Jan Hatzius and team wrote…”

The Nasdaq Composite is up almost 10%, and there’s still two weeks remaining in the first quarter. The Nasdaq 100 (NDX) has gained 11.2% q-t-d, with the Morgan Stanley High Tech Index up 13.1%. Unprecedented U.S. debt issuance could see quarterly debt sales approach a staggering $400bn. And it’s not only an American phenomenon. EEM (EM equities) enjoys a 13% q-t-d gain. Basically, stocks have posted solid early-2017 gains around the world. Corporate bond markets are booming globally. A highly speculative marketplace was delighted chair Yellen examined the current extraordinary backdrop and envisaged “even keel.”

Markets some time ago moved beyond even keel. I’ll point back to chairman Bernanke’s 2013 (“flash crash”) comment that the Fed was prepared to “push back against a tightening of financial conditions.” That was the most explicit signal yet that the Federal Reserve would backstop the financial markets to the point of guarding against even a modest “Risk Off” dynamic. Markets have hardly looked back since. Indeed, Bernanke and Yellen took “asymmetrical” (ease aggressively, “tighten” timidly) so far beyond the Maestro Greenspan. It will now be virtually impossible to convince overheated markets of a return to a more even keel policy approach.

There’s a major problem with delegating to the securities markets the critical function of governing financial conditions: loose financial conditions beget inflating asset markets. Asset inflation then begets speculation, higher asset prices, greater speculative excess and only looser financial conditions. And, to be sure, things turn especially unstable late in the speculative cycle.

Fed policies, from Greenspan to Bernanke to Yellen, provided huge competitive advantages to bullish speculative long positions. And especially since 2013 – and particularly with the global policy response to last year’s market instability – the “bears” have been basically crushed into submission/oblivion. Everyone has been forced to jump aboard the bull market. This has led to a momentous supply/demand imbalance throughout the securities markets. Too much “money” has been flooding into the markets, while an atypical dynamic ensures a dearth of willing sellers. This powerful market dislocation has granted the bulls the luxury of easily pushing the market higher with little resistance from would be sellers.

Wednesday trading saw a recurring dynamic. The prospect of a hawkish FOMC meeting outcome created the risk of event-driven market instability. The hedging of risk going into this meeting created yet another opportunity to punish those on the wrong side of trades. And it’s the unwind of hedges/shorts that (for the umpteenth time) provided buying power for higher bond and equities prices. Sellers of securities – bearish traders, risk-conscious hedgers or derivative players – at this stage of the market cycle have an extraordinarily low pain threshold. The market is steeply tilted to the benefit of one side – the long side. The bulls enjoy “strong hands” – while the much-depleted ranks of weakling “bears” have about the feeblest little “weak hands” imaginable.

And the reality of the situation is that this anomalous backdrop has a profound impact on general financial conditions. Over recent decades, securities markets evolved to assume the dominant position in Credit creation, hence for system financial conditions more generally. And, now, market dislocation creates extreme – and self-reinforcing – loose financial conditions. In the face of an alarming list of potential risks, the risk markets donned blinders and embarked on a speculative blow-off.

It’s no coincidence that markets – sovereign bonds last year and risk assets currently – have demonstrated a proclivity for “melt-up” dynamics in the face of mounting global risks. For years now, and reminiscent of the late-twenties, the fragile backdrop has ensured that central bankers cling tightly to their extraordinary monetary stimulus and market backstop measures.

Markets were beginning to feel a little anxious that the Fed might actually acknowledge market excess. Perhaps booming markets were behind the Fed’s determination to move in March rather than wait until May. And I’ll assume that the committee believed pressing for an earlier rate increase would be interpreted in the markets as a more forceful “tightening.” It’s just not going to work that away. Overheated markets at this point will dismiss timid measures. Central banker measures have for too long rewarded greed and punished fear. Greed has grown to dominate, and greed scoffs at central bank gradualism.

The problem today is that years of ultra-loose monetary conditions have ensured everyone is crowded on the same bullish side of the boat. Tipping the vessel at this point will be chaotic, and the Fed clearly doesn’t want to be the instigator. Meanwhile, timid little baby-step increases only ensure more problematic market Bubbles and general financial excess.

It’s now an all-too-familiar Bubble Dynamic. The greater the Bubble inflates, the more impervious it becomes to cautious “tightening” measures. And the longer the accommodative backdrop fuels only more precarious Bubble Dynamics, the more certain it becomes that central bankers will approach monetary tightening timidly. Yellen confirmed to the markets Wednesday that the Fed would remain timid – still focused on some theoretical “neutral rate” and seemingly oblivious to conspicuous financial market excess. The fixation remains on consumer prices that are running just a tad under its 2% target.  Meanwhile, runaway securities market inflation is completely disregarded.

Yellen: “So at present, I see monetary policy as accommodative. Namely the current level of the federal funds rate is below that neutral rate, but not very far below the neutral rate.”

At this point, is not apparent what it would take for the Yellen Fed to change its view. It’s worth mentioning new Minneapolis Federal Reserve Bank President Neel Kashkari’s lone dissent. From Reuters: “‘The announcement of our balance sheet plan could trigger somewhat tighter monetary conditions,’ Kashkari said, resulting in the equivalent of a rate hike of unknown size. ‘After it has been published and the market response is understood, we can return to using the federal funds rate as our primary policy tool, with the balance sheet normalization under way in the background.’”

Kashkari has a point with his focus on the balance sheet. From my perspective, reducing the size of the Fed’s balance sheet would likely prove a more effective mechanism for removing accommodation than baby-step rate increases. Somehow the Fed needs to convince the markets that again boosting the Fed’s balance sheet is completely off the table. The markets believe that QE policy has simply been placed on hold, with open-ended “money” printing available the day the markets demand a liquidity backstop. The Fed should take the opportunity to ween the market off the dangerous perception that QE is available to ensure the extinction of bear markets and recessions. It’s this momentous market perception that works to ensure baby-step rate increases have no restraining impact on Bubble Dynamics.

The Fed let Another Opportunity Slip Away. One of these days the bond market may mount a protest. European periphery bonds were none too impressive this week. With German yields declining five bps this week, spreads widened across the board. And the dollar… It’s worth noting the yen gained 1.9% this week.  And almost $5.7bn flowed out of junk bond funds.

And thanks for checking out our second of four videos, Tactical Short Episode II, “A Solution to the Credit Bubble" at

For the Week:

The S&P500 added 0.2% (up 6.2% y-t-d), and the Dow increased 0.1% (up 5.8%). The Utilities rallied 1.2% (up 5.0%). The Banks fell 1.4% (up 3.9%), while the Broker/Dealers gained 1.6% (up 7.7%). The Transports fell 1.6% (up 1.1%). The S&P 400 Midcaps rose 1.2% (up 4.2%), and the small cap Russell 2000 recovered 1.9% (up 2.5%). The Nasdaq100 increased 0.4% (up 11.2%), and the Morgan Stanley High Tech index advanced 1.5% (up 13.1%). The Semiconductors gained 1.3% (up 10.8%). The Biotechs declined 1.2% (up 16.1%). With bullion jumping $25, the HUI gold index rallied 4.7% (up 7.2%).

Three-month Treasury bill rates ended the week at 71 bps. Two-year government yields declined four bps to 1.32% (up 13bps y-t-d). Five-year T-note yields jumped eight bps to 2.02% (up 9bps). Ten-year Treasury yields rose seven bps to 2.50% (up 6bps). Long bond yields fell six bps to 3.11% (up 4bps).

Greek 10-year yields jumped 21 bps to 7.30% (up 28bps y-t-d). Ten-year Portuguese yields surged 23 bps to 4.29% (up 54bps). Italian 10-year yields slipped a basis point to 2.36% (up 55bps). Spain's 10-year yields declined a basis point to 1.88% (up 50bps). German bund yields fell five bps to 0.44% (up 23bps). French yields dipped a basis point to 1.11% (up 43bps). The French to German 10-year bond spread widened four to 67 bps. U.K. 10-year gilt yields added a basis point to 1.24% (up one bp). U.K.'s FTSE equities index rallied 1.1% (up 3.9%).

Japan's Nikkei 225 equities index slipped 0.4% (up 2.1% y-t-d). Japanese 10-year "JGB" yields fell a basis point to 0.08% (up 4bps). The German DAX equities index gained 1.1% (up 5.3%). Spain's IBEX 35 equities index surged 2.4% (up 9.6%). Italy's FTSE MIB index jumped 2.1% (up 4.4%). EM equities were mostly higher. Brazil's Bovespa index slipped 0.7% (up 6.6%). Mexico's Bolsa surged 3.2% (up 6.5%). South Korea's Kospi advanced 3.2% (up 6.8%). India’s Sensex equities index rose 2.4% (up 11.4%). China’s Shanghai Exchange added 0.8% (up 4.3%). Turkey's Borsa Istanbul National 100 index rose 1.0% (up 15.8%). Russia's MICEX equities index rallied 3.2% (down 8.8%).

Junk bond mutual funds saw huge outflows of $5.68 billion (from Lipper), the largest weekly outflow since August 2014 (from Bloomberg's Rizal Tupaz).

Freddie Mac 30-year fixed mortgage rates rose nine bps to an 11-week high 4.30% (up 57bps y-o-y). Fifteen-year rates gained eight bps to 3.50% (up 51bps). The five-year hybrid ARM rate increased five bps to 3.28% (up 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rate up seven bps to 4.43% (up 59bps).

Federal Reserve Credit last week increased $7.8bn to $4.428 TN. Over the past year, Fed Credit declined $17.8bn (down 0.4%). Fed Credit inflated $1.618 TN, or 57%, over the past 227 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $15.4bn last week to $3.198 TN. "Custody holdings" were down $54.1bn y-o-y, or 1.7%.

M2 (narrow) "money" supply last week declined $5.0bn to $13.348 TN. "Narrow money" expanded $837bn, or 6.7%, over the past year. For the week, Currency increased $2.9bn. Total Checkable Deposits fell $20.2bn, while Savings Deposits expanded $11.6bn. Small Time Deposits and Retail Money Funds were little changed.

Total money market fund assets fell $11.6bn to $2.677 TN. Money Funds fell $90bn y-o-y (3.2%).

Total Commercial Paper slipped $1.8bn to $962bn. CP declined $135bn y-o-y, or 12.3%.

Currency Watch:

The U.S. dollar index fell 0.9% to 100.3 (down 2.1% y-t-d). For the week on the upside, the South African rand increased 3.6%, the Mexican peso 2.8%, the South Korean won 2.3%, the Australian dollar 2.2%, the Swedish krona 2.0%, the British pound 1.9%, the Japanese yen 1.9%, the Brazilian real 1.6%, the Norwegian krone 1.4%, the New Zealand dollar 1.4%, the Swiss franc 1.3%, the Canadian dollar 0.9%, the Singapore dollar 0.8% and the euro 0.6%. The Chinese yuan added 0.1% versus the dollar this week (up 0.6% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index recovered 0.8% (down 3.9% y-t-d). Spot Gold rallied 2.0% to $1,229 (up 6.7%). Silver jumped 2.9% to $17.41 (up 9.0%). Crude recovered 29 cents to $48.78 (down 9%). Gasoline was little changed (down 4%), while Natural Gas fell 2.0% (down 21%). Copper recovered 3.7% (up 7%). Wheat declined 1.0% (up 7%). Corn gained 0.9% (up 4%).

Trump Administration Watch:

March 13 – Bloomberg (Anna Edney, Zachary Tracer, and Anna Edgerton): “House Speaker Paul Ryan doesn’t plan to make major changes to Republicans’ plan to replace Obamacare, according to a GOP aide, but the White House says it’s talking with members of Congress who want to amend the legislation. ‘We’ve always stated a willingness,’ Sean Spicer, White House spokesman, told reporters… ‘Part of the reason we’re engaging with these individuals is to hear their ideas.’… House Republicans are in a bind following a Congressional Budget Office estimate showing that 14 million Americans could lose their insurance next year under the GOP Obamacare-replacement plan. The CBO gave a dire picture of the bill’s effects heading into the 2018 congressional elections.”

March 12 – Wall Street Journal (William Mauldin and Jacob M. Schlesinger): “Republican lawmakers are showing increasing resistance to President Donald Trump’s trade agenda, worried that his plans could hurt exports from their states and undermine longstanding U.S. alliances. The concerns indicate that the biggest threat to Mr. Trump’s trade policy—which emphasizes new bilateral deals and a tougher stance against countries blamed for violating trade rules—is coming from his own party. The opposition from Republicans… stands to complicate Mr. Trump’s efforts to overhaul… Nafta, and tackle alleged trade violations in China.”

China Bubble Watch:

March 14 – Bloomberg: “China home sales remained resilient in the first two months of the year, signaling policy makers are struggling to check the booming housing market. The value of new homes sold rose 23% to 912 billion yuan ($132bn) in January and February compared with the first two months of 2016… Sales rose 17% in December… ‘Sales were a lot stronger than expected,’ said Larry Hu, head of China economics at Macquarie Securities… ‘Buyers in third- and fourth-tier cities chased gains, eyeing similar price surges in top cities.’”

March 14 – Bloomberg: “China’s economy started the year on a firm footing as its old growth engines gathered pace, with home sales remaining resilient and steel and aluminum rebounding as prices rallied. Industrial production climbed 6.3% from year earlier in January and February combined… Retail sales advanced 9.5% in the first two months, missing economists forecasts as auto sales dropped after a tax increase on small-engine cars…”

March 14 – Reuters (Yawen Chen and Elias Glenn): “China's property sales surged in the first two months of the year despite government measures to cool the market, though growth in real estate investment showed signs of easing… Property sales by area rose 25.1% year-on-year in January and February. That was above the 22.5% annual gain in 2016, which was the strongest annual growth in seven years thanks to a property boom in top-tier cities.”

March 12 – New York Times (Keith Bradsher): “China struck $225 billion in deals to acquire companies abroad last year, a record-breaking number that signaled to the world that Chinese business leaders were hot to haggle. Now, China — with a worried eye on the money leaving its borders — is telling some of its companies to cool it down. On Saturday, in the strongest public signal yet that Beijing was changing course, China's commerce minister castigated what he called ‘blind and irrational investment. …Zhong Shan, the minister, said officials planned to intensify supervision of what he called a small number of companies. ‘Some enterprises have already paid the price,’ said Mr. Zhong, a protégé of President Xi Jinping. ‘Some even have had a negative impact on our national image.’”

Global Bubble Watch:

March 15 – CBC News: “Debt levels continue to hit record highs in this country, but Canadians' net worth is also rising as the value of assets increases… The much publicized debt-to-income ratio — how much we owe, compared to how much we earn — inched up to 167.3% in the fourth quarter of 2016, a new high… ‘The debt-to-income ratio was up 2.4 percentage points in 2016 overall, marking the fastest annual growth since 2010,’ TD Bank economist Diana Petramala observed… ‘Gains in real estate asset values, however, helped keep most other ratios of indebtedness stable.’”

Fixed Income Bubble Watch:

March 13 – Bloomberg (Matt Scully): “Social Finance Inc.’s online borrowers are defaulting at higher rates than underwriters for one of its bond deals had expected, the latest sign that an industry that hoped to upend banking is now getting tripped up by bad loans. Losses on the company’s personal loans were high enough to breach key levels known as ‘triggers’ last month on a bond deal issued in 2015 and backed by the loans, according to analysts at Morgan Stanley. If defaults keep rising, investors in bonds could end up missing out on expected interest payments. Other online lenders have had similar trouble with defaults and triggers recently, which has broadly made it more expensive for the startups to fund their businesses.”

March 15 – Bloomberg (Rebecca Spalding): “Puerto Rico general-obligation bonds fell after the federal oversight board approved a financial recovery plan that will cover less than a quarter of the debt payments coming due, underscoring the deep concessions the island plans to seek from investors. The price of securities due in 2035, among the most actively traded, dropped 5% to an average of 67.5 cents on the dollar Tuesday to the lowest in two months…”

March 14 – CNBC (Claire Boston): “Things are about to get even harder for distressed retail chains thanks to rising interest rates. After years of low rates fueled a private equity ‘feasting’ on retail firms, the number of troubled chains has tripled over the past six years, and is now at its highest level since the Great Recession. Moody's… says that 19 of these companies have ‘well over’ $3.7 billion in debt that matures over the next five years. Roughly 30% of that total is due by the end of next year. The timing for higher rates couldn't be worse. Revenue continues to tumble as the debt maturities swell.”

March 12 – Bloomberg (Carrie Hong): “The tide may slowly be turning for Chinese bonds. Citigroup Inc. said… it will include onshore Chinese debt in some of its gauges, while the central bank pledged to create a ‘more convenient and friendly environment’ for foreign investors. This follows a recent measure to allow currency hedging for bonds, a move seen as one of many efforts needed to lower barriers… Foreign ownership of Chinese onshore bonds fell to 1.3% last year even as outstanding notes surged 32% to 64 trillion yuan ($9.3 trillion)…”

Brexit Watch:

March 13 – AFP (Alice Ritchie and Mark McLaughlin): “Parliament gave its approval… for Prime Minister Theresa May to start Britain's withdrawal from the European Union, even as Scotland signalled its opposition by announcing plans for a fresh independence vote. The House of Lords rejected a last-ditch attempt to amend a bill empowering May to begin Brexit, paving the way for it to become law… The prime minister could then trigger Article 50 of the EU's Lisbon Treaty at any time, starting two years of talks that will end with Britain becoming the first country to leave the bloc.”

March 13 – Bloomberg (Rodney Jefferson): “Scotland is headed for another vote on independence, opening a new front in the Brexit battle and raising the prospect of the U.K. breaking up after leaving the European Union. First Minister Nicola Sturgeon said… she plans to start the legal process for a referendum to be held by the spring of 2019. The announcement comes as the U.K. prepares to trigger Brexit negotiations, which Scotland’s semi-autonomous government opposes after the nation voted to stay in the EU.”

Europe Watch:

March 16 – Reuters (Anthony Deutsch and Toby Sterling): “EU leaders lined up… to congratulate Dutch Prime Minister Mark Rutte on beating far-rightist Geert Wilders in the first of a series of European elections this year in which populist insurgent parties are hoping to rock the establishment. The center-right prime minister had trailed in opinion polls for much of the campaign but emerged the clear victor of Wednesday's election, albeit with fewer seats than before. Wilders… won a third more seats than at the last election but was thwarted in his bid to become the biggest party.”

March 15 – Reuters (Ercan Gurses and Humeyra Pamuk): “Turkish President Tayyip Erdogan… warned the Netherlands that he could take further steps in a deepening diplomatic row, while a government spokesman in Ankara said economic sanctions could be coming. Incensed by Dutch and German government bans on his ministers from speaking to rallies of overseas Turks, Erdogan also accused German Chancellor Angela Merkel of siding with the Netherlands in the fight between the NATO allies. Turkey suspended high-level diplomatic relations with the Netherlands…, banning the Dutch ambassador from the country and preventing diplomatic flights from landing in Turkey or using its airspace.”

Federal Reserve Watch:

March 15 – Bloomberg (Rich Miller, Christopher Condon, and Jeanna Smialek): “Federal Reserve Chair Janet Yellen sought to reassure investors that the central bank’s latest interest-rate increase wasn’t a paradigm shift to a trigger-happy policy driven by fears of faster inflation. Speaking to reporters after the Fed’s quarter percentage-point move…, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2% goal and that it intended to keep its policy accommodative for ‘some time.’ ‘The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said. As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said… Today’s decision ‘does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy…’”

March 14 – Financial Times (Alistair Gray and Robin Wigglesworth): “Janet Yellen is facing questions over how the Federal Reserve will reverse an important part of its crisis recovery effort as housing experts caution the central bank risks rattling the $9tn market for US mortgage-backed bonds. Fed officials have put markets on notice that they are thinking about reducing the central bank’s $1.76tn portfolio of mortgage-backed securities, amassed through its crisis-fighting quantitative easing programme, but have so far provided few details… Fed policymakers are widely expected to raise interest rates by another quarter point, but investors and analysts are also anxiously awaiting any further clues on what the US central bank plans to do with its $4.5tn balance sheet.”

March 15 – New York Times (Eduardo Porter): “Is the Fed at risk for real this time? Throughout American history, few institutions have inspired such persistent mistrust among voters and their elected officials as the mysterious authority that determines the value of their money… Since its inception in 1913, the Federal Reserve has been alternately accused of either making money too scarce and expensive or making it too plentiful and cheap… The pressing question for this era of populist policy making and popular anger is whether the Federal Reserve as we know it — arcane and academic, with the autonomy to set monetary policy as it sees fit — will survive the tension this time. Given the ferocious discontent with the ‘establishment’ stoked by Mr. Trump among his angry electoral base, the threat against the Fed this time seems of a higher order.”

March 15 – CNBC (Yen Nee Lee): “Interest rates in the United States should have hit normal levels of around 3% by now given that the Federal Reserve has achieved all of its targets, a former Fed governor said… Speaking to CNBC's ‘Street Signs’ after the U.S. central bank increased its benchmark rate by a quarter point to a target range of 0.75% to 1%, Robert Heller reiterated his opinion that the Fed should have moved quicker to guide rates higher. Heller served on the Fed's board from 1986 to 1989… ‘We have very low unemployment rate of 4.7%, we have inflation roughly at 2%, so rates should be normal now. And normal…would be at 3%. Instead, we are below 1%,’ he said.”

U.S. Bubble Watch:

March 17 – Bloomberg (Prashant Gopal): “The winning bidder of a Grand Rapids, Michigan, house has been offered almost $20,000 to hand his purchase contract to another buyer. An agent in Nashville, Tennessee, got a property for his client by cold-calling local homeowners. Near Columbus, Ohio, it took a teacher five tries to secure a deal. It’s the 2017 U.S. spring home-selling season, and listings are scarcer than they’ve ever been. Bidding wars common in perennially hot markets like the San Francisco Bay area, Denver and Boston are now also prevalent in the once slow-and-steady heartland, sending prices higher and sparking desperation among buyers across the country. ‘Homebuyers are going to find this spring that, in a lot of markets, the inventory of homes priced and sized at price levels they were hoping for will be very limited,’ said Thomas Lawler, a former Fannie Mae economist… ‘Unlikely places are getting significantly tighter.’”

March 12 – Bloomberg (Paul Davidson): “Riskier borrowers are making up a growing share of new mortgages, pushing up delinquencies modestly and raising concerns about an eventual spike in defaults… The trend is centered around home loans guaranteed by the Federal Housing Administration that typically require down payments of just 3% to 5%... The FHA-backed loans are increasingly being offered by non-bank lenders with more lenient credit standards than banks… ‘We have a situation where home prices are high relative to average hourly earnings and we're pushing 5%-down mortgages, and that's a bad idea,’ says Hans Nordby, chief economist of real estate research firm CoStar.”

March 17 – Bloomberg (Michelle Jamrisko): “Consumer confidence rose in March as Americans were more satisfied than any time in 16 years with the current state of their finances and the economy, while remaining sharply divided along party lines about the outlook. The University of Michigan said… that its preliminary index of sentiment increased to 97.6 from 96.3 in February…. The index of current conditions jumped three points to 114.5, the highest reading since November 2000.”

March 15 – Bloomberg (Sho Chandra): “The U.S. cost of living rose in February, while prices increased from a year ago by the most since March 2012… The consumer-price index climbed 0.1% from the previous month after a 0.6% January advance that was the largest in nearly four years… Compared with February 2016, the CPI was up 2.7%...”

March 14 – Bloomberg (Sho Chandra): “U.S. producer prices rose more than forecast in February, while costs increased from a year earlier by the most since March 2012, signaling inflation is picking up… Producer-price index climbed 0.3% from January (forecast was for 0.1 percent gain) after 0.6% jump that was the biggest since September 2012… PPI increased 2.2% from February 2016…”

March 15 – Bloomberg (Sho Chandra): “Confidence among U.S. homebuilders is the strongest since the mid-2000s housing boom as sales prospects improve despite rising mortgage rates… Builder sentiment gauge rose to 71 in March, the highest since June 2005, from an unrevised 65 in February…”

March 16 – Bloomberg (Sho Chandra): “Beginning construction of U.S. houses climbed to a four-month high in February, led by the strongest pace of single-family homebuilding in nearly a decade. Residential starts advanced 3% to a 1.29 million annualized rate… Construction of one-family dwellings rose 6.5% to an 872,000 pace, the fastest since October 2007.”

March 13 – Reuters (Patrick Rucker): “Leading Wall Street firms should segment their riskiest businesses into holding companies that better shield taxpayers from a future bailout, a leading U.S. bank regulator said… Tom Hoenig, vice-chair of the Federal Deposit Insurance Corporation (FDIC), pitched his idea to bankers attending an industry conference as a more palatable alternative to the regulatory regime which has existed since the Dodd-Frank financial legislation was enacted after the 2007-2008 financial crisis. Hoenig said that law has proved burdensome for all banks and has given those that are too big to fail a competitive advantage.”

Japan Watch:

March 15 – Bloomberg (Toru Fujioka): “The Bank of Japan kept its unprecedented monetary easing program unchanged on Thursday, just hours after the Federal Reserve raised its key interest rate, increasing the policy divergence between the two central banks. The BOJ said that it would keep two key rates at current levels and maintain the pace of its asset purchases.”

March 12 – Bloomberg (Masaki Kondo): “The Bank of Japan’s bond-purchase plan for March puts policy makers on track to miss an annual target, leaving investors debating whether they’re witnessing a stealth tapering. Calculations based on the plan released Feb. 28 suggest a net 66 trillion yen ($575bn) of purchases if the March pace were to be sustained over the following 11 months. That’s 18% less than the official target of expanding holdings by 80 trillion yen a year.”

EM Watch:

March 14 – Bloomberg (Lianting Tu, Narae Kim, and Anurag Joshi): “With a resounding domestic political victory behind him, Indian Prime Minister Narendra Modi turns attention back to policies this week. One area key to watch for investors: progress on resolving a mountain of bad debt that’s restraining the private economy... Key to that shortfall has been a decline in credit exacerbated by the lack of a national plan to clean out non-performing loans. ‘Loan growth has been falling and remains anemic by historical standards as a result of the banks’ asset-quality challenges,’ said Swee-Ching Lim, a portfolio manager at Western Asset Management… ‘This lack of credit growth will likely continue to be a headwind’ for India’s economy, he said.”

Leveraged Speculation Watch:

March 17 – Bloomberg (Simone Foxman): “More hedge funds closed in 2016 than in any year since the financial crisis… Liquidations totaled 1,057 last year, the most since 2008, according to… Hedge Fund Research Inc. Though assets managed by the industry rose slightly to $3.02 trillion during 2016, at the end of the year there were 9,893 funds managing that cash, including funds of hedge funds -- the fewest since 2012. The data rounds out a sobering year for hedge funds, which have come under fire from pension funds objecting to their high fees and poor performance. The average fund hasn’t beat the S&P 500 Total Return Index, a measure that includes reinvested dividends, since 2008.”

March 15 – Bloomberg (Beth Jinks, Manuel Baigorri, Katherine Burton, and Katia Porzecanski): “Bill Ackman was used to the question: how could he stick with a loser like Valeant? But here it was again, this time over lunch with investors and bankers in London on Feb. 28. And there was Ackman, defending a signature investment that, on paper, had cost his clients billions. Yes, Valeant’s share price had cratered. But he insisted to attendees that the drug company’s turnaround prospects were bright, according to people with knowledge of the meeting. So much for that… News that his Pershing Square Capital Management fund had sold its entire stake at a monumental loss was greeted with equal parts shock and relish. In finally selling, the firm lost more than $4 billion…”

Geopolitical Watch:

March 17 – Bloomberg (Nick Wadhams and Kanga Kong): “Secretary of State Rex Tillerson said the U.S. is considering ‘all options’ to counter North Korea’s nuclear threat while criticizing China over moves to block a missile-defense system on the peninsula. In some of his most detailed comments yet on North Korea, Tillerson ruled out a negotiated freeze of its nuclear weapons program and called for a wider alliance to counter Kim Jong Un’s regime. He also left the military option on the table if the North Korean threat gets too large. ‘If they elevate the threat of their weapons programs to a level that we believe requires action, that option is on the table,’ Tillerson told reporters…”

March 14 – Reuters (Hongji Kim and Sang-gyu Lim): “As the USS Carl Vinson plowed through seas off South Korea on Tuesday, rival North Korea warned the United States of ‘merciless’ attacks if the carrier infringes on its sovereignty or dignity during U.S.-South Korean drills. F-18 fighter jets took off from the flight deck of the nuclear-powered carrier in a dramatic display of U.S. firepower amid rising tension with the North, which has alarmed its neighbors with two nuclear tests and a series of missile launches since last year.”

March 13 – Reuters (Tim Kelly and Nobuhiro Kubo): “Japan plans to dispatch its largest warship on a three-month tour through the South China Sea beginning in May, three sources said, in its biggest show of naval force in the region since World War Two. China claims almost all the disputed waters and its growing military presence has fueled concern in Japan and the West… The Izumo helicopter carrier, commissioned only two years ago, will make stops in Singapore, Indonesia, the Philippines and Sri Lanka before joining the Malabar joint naval exercise with Indian and U.S. naval vessels in the Indian Ocean in July.”

March 16 – Reuters: “China… pledged a firm response if Japan stirs up trouble in the South China Sea, after Reuters reported on a Japanese plan to send its largest warship to the disputed waters. The Izumo helicopter carrier… will make stops in Singapore, Indonesia, the Philippines and Sri Lanka before joining the Malabar joint naval exercise with Indian and U.S. naval vessels in the Indian Ocean in July… The trip would be Japan's biggest show of naval force in the region since World War Two. ‘If Japan persists in taking wrong actions, and even considers military interventions that threaten China's sovereignty and security... then China will inevitably take firm responsive measures,’ Foreign Ministry spokeswoman Hua Chunying said…”

March 15 – Reuters (J.R. Wu): “China's accelerated military development and recent activity by its military aircraft and ships around Taiwan pose an increased threat to the self-ruled island, according to a Taiwanese government defense report… The 2017 Quadrennial Defence Review (QDR) also highlights the uncertainty over the future strategic direction of the United States in the region, the impact of Japan flexing its military capabilities and ‘conflict crisis’ potential in the disputed South China Sea. ‘The recent activity of Chinese jets and ships around Taiwan shows the continued rise in (China's) military threat capabilities,’ highlighting the importance of Taiwan's need to defend itself, the review will say.”

March 15 – Bloomberg (Adela Lin and Ting Shi): “Taiwan plans to raise military spending by about 50% next year as President Tsai Ing-wen attempts to offset China’s growing might and support the local defense industry. Military expenditures are targeted to rise to 3% of gross domestic product next year, up from about 2% this year, Minister of National Defense Feng Shih-kuan said… Taiwan plans to develop indigenous ships, airplanes, weapons and unmanned aerial vehicles, he told lawmakers in Taipei.”

Friday Afternoon Links

[Reuters] Wall Street edges lower as financial stocks drag

[Bloomberg] Consumer Sentiment in U.S. Rises as Household Finances Improve

[Bloomberg] Fed's Kashkari Explains Dissent, Urges Balance-Sheet Plan

[Bloomberg] More Hedge Funds Shut Last Year Than Any Time Since the 2008 Crisis

[CNBC] China lashes out as South Korea puts an American anti-missile system in place

[WSJ] Global Bonds: Risking a Rude Central-Bank Awakening

[WSJ] Rising U.S. Rates Could Mean Hard Fall for Some Currencies

[FT, Tett] A blind spot masks the danger signs in finance