Tuesday, September 18, 2018

Tuesday Evening Links

[Reuters] Wall Street rises as blow from new tariffs less than feared

[MarketWatch] 10-year Treasury note yield extends climb above 3%

[Reuters] As trade war escalates, China's US Treasury holdings back in focus: McGeever

[Reuters] China's US Treasury holdings just fell to six-month low amid escalating trade war

[Nextgov] ‘Unprecedented’ Government Spending Spree Picks Up Speed

[CNBC] 'Another trillion in debt, here we come': Cohn sees Trump working with Democrats on infrastructure

[NYT] Consumers Will Increasingly Feel Pain From Trump’s Trade War. Here’s Why.

[WSJ] ECB Succession Race Tests German Faith in Bundesbank Model

[WSJ] Benefit Gains Exceed Wage Growth, New Labor Data Show

[WSJ] Giant Debt Offer Shows Appetite for Low-Rated Companies

[FT] China prepares to dig in its heels in face of US tariff pressure

[FT] White House hawks ratchet up trade hostilities with China

[BloombergSub] China Cuts U.S. Treasury Holdings as Trade War Starts Heating Up

Tuesday's News Links

[BloombergQ] Stocks Shrug Off New Tariffs; Treasuries Yield 3%: Markets Wrap

[CNBC] China says new tariffs on US goods worth $60 billion effective Sept. 24

[Reuters] China says Trump forces its hand, will retaliate against new U.S. tariffs

[BloombergQ] Trump’s Tariffs Will Make Food and Clothes Pricier for Americans

[CNBC] Commerce Secretary Wilbur Ross: China is 'out of bullets' to retaliate against Trump's new tariffs

[Bloomberg, Das] The Risk of Derivatives Isn’t Gone. It’s Merely Morphed.

[CNBC] There's still a lot of central bank 'mismanagement,' says Allianz CEO

[Reuters] 'Who broke the law?' Cohn says in defending Wall Street's role in crisis

[Reuters] Israel indirectly to blame for downing of plane over Syria, Russia says

[WSJ] Chinese Officials Scramble to Respond to Trump’s New Tariffs

[WSJ] Buyback ‘Blackout’ to Test U.S. Stock Market

[WSJ] Florence Is a Tragedy for Homeowners, Not Insurers

[FT] Explained: Donald Trump’s $200bn of new tariffs on China

[FT] The US, China and the logic of trade confrontation

[FT, Weber] Preventive measures will not stop the next financial crisis

Monday, September 17, 2018

Monday Evening Links

[CNBC] Stock futures drop following new US tariffs on China 

[SCMP] Donald Trump hits China with US$200 billion more in tariffs, once again escalating trade war

[CNBC] Trump will slap 10% tariffs on $200 billion in Chinese goods — and they will go to 25% at year end

[CNBC] Trade war could become currency war depending on how China fights back

[BloombergQ] Stocks Pressured on Fresh Trade Fears; Dollar Dips: Markets Wrap

[BloombergQ] China to Cancel Talks If Trump Moves Ahead With Tariffs, Sources Say

[Reuters] Trump adviser eyes entitlement cuts to plug U.S. budget gaps

[CNBC] Kudlow says White House aware of the rising deficit, but economic 'growth solves a lot of problems'

[CNBC] Former Trump economic advisor Gary Cohn: Jamie Dimon would make a 'phenomenal president'

[Reuters] Most U.S. states lack reserves to weather next recession: S&P

[Reuters] Chancellor: The legacy of ultralow interest rates

[WSJ] Trump Announces New Tariffs on Chinese Imports

Monday's News Links

[BloombergQ] Stocks Fall as Trade Fears Return; Dollar Slips: Markets Wrap

[BloombergQ] Turkish Lira Slides as Isbank Fallout Dilutes Rate-Hike Support

[Reuters] U.S. 10-year yield hits highest in four months

[BloombergQ] China’s Stocks Drop to Lowest Level in Nearly Four Years

[BloombergQ] China-U.S. Tariff Talks at Risk After Trump's Latest Threats, WSJ Reports

[Reuters] China won't just play defense in trade war, Global Times says

[CNBC] Monetary policy is directly responsible for economic and financial stability

[BloombergQ] A Roadmap for the Great U.S.-China Divorce

[CNBC] The next crisis could be triggered by the US-China trade war, interest rates: Sovereign wealth chief

[BloombergQ] Turkey Planning Help for Banks on Anticipation of Bad Loans

[BloombergQ] World’s Richest Economies Enjoy Biggest Pay Raise in a Decade

[BloombergQ, El-Erian] Central Banks Strike Back

[NYT] As Trump’s Trade War Mounts, China’s Wall Street Allies Lose Clout

[WSJ] Big Storms Leave Small Marks on the U.S. Economy

[FT] China prepares for new phase of Trump-led trade war

[FT] How US banks took over the financial world 

[BloombergSub] One of China's Wildest Housing Markets Is Broken

Sunday, September 16, 2018

Sunday Evening Links

[BloombergQ] Asia Stocks Face Drop as Trade Concerns Resurface: Markets Wrap

[Reuters] China may reject new trade talks if more tariffs imposed: WSJ

[Reuters] 'Illusion' to think states can completely prevent financial crises: Weidmann

[CNBC] US-China trade war could cause a bear market, stress test shows

[WSJ] U.S. and China Ramp Up Trade Threats

[WSJ] Trump Promised a Rush of Repatriated Cash, But Company Responses Are Modest

[FT] Can macro policy easing still rescue China?

Just the Facts: September 16, 2018

For the Week:

The S&P500 gained 1.2% (up 8.7% y-t-d), and the Dow added 0.9% (up 5.8%). The Utilities increased 0.4% (up 1.9%). The Banks dropped 2.1% (up 0.8%), and the Broker/Dealers added 0.3% (up 2.8%). The Transports jumped 2.0% (up 9.0%). The S&P 400 Midcaps gained 1.0% (up 7.7%), and the small cap Russell 2000 rose 0.5% (up 12.1%). The Nasdaq100 advanced 1.6% (up 18.0%). The Semiconductors gained 1.2% (up 9.9%). The Biotechs were about unchanged (up 21.7%). While bullion slipped $3, the HUI gold index recovered 0.9% (down 28.5%).

Three-month Treasury bill rates ended the week at 2.10%. Two-year government yields rose eight bps to 2.78% (up 89bps y-t-d). Five-year T-note yields gained eight bps to 2.90% (up 70bps). Ten-year Treasury yields rose six bps to 3.00% (up 59bps). Long bond yields added three bps to 3.13% (up 39bps). Benchmark Fannie Mae MBS yields gained six bps to 3.77% (up 77bps).

Greek 10-year yields dropped 20 bps to 4.07% (down 1bp y-t-d). Ten-year Portuguese yields declined five bps to 1.86% (down 9bps). Italian 10-year yields fell five bps to 2.98% (up 97bps). Spain's 10-year yields added two bps to 1.49% (down 8bps). German bund yields rose six bps to 0.45% (up 2bps). French yields rose five bps to 0.77% (down 2bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields rose seven bps to 1.53% (up 34bps). U.K.'s FTSE equities index increased 0.4% (down 5.0%).

Japan's Nikkei 225 equities index surged 3.5% (up 1.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.12% (up 7bps). France's CAC40 gained 1.9% (up 0.8%). The German DAX equities index rose 1.4% (down 6.1%). Spain's IBEX 35 equities index rallied 2.1% (down 6.8%). Italy's FTSE MIB index rose 2.1% (down 4.4%). EM equities were mixed. Brazil's Bovespa index fell 1.3% (down 1.3%), while Mexico's Bolsa gained 1.3% (up 0.5%). South Korea's Kospi index jumped 1.6% (down 6.0%). India's Sensex equities index declined 0.8% (up 11.8%). China's Shanghai Exchange fell 0.8% (down 18.9%). Turkey's Borsa Istanbul National 100 index rallied 1.6% (down 17.8%). Russia's MICEX equities index recovered 1.7% (up 11.9%).

Investment-grade bond funds saw inflows of $3.127 billion, while junk bond funds had outflows of $862 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.60% (up 61bps y-o-y). Fifteen-year rates rose seven bps to 4.06% (up 62bps). Five-year hybrid ARM rates were unchanged at 3.93% (up 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.66% (up 51bps).

Federal Reserve Credit last week increased $1.2bn to $4.171 TN. Over the past year, Fed Credit contracted $247bn, or 5.6%. Fed Credit inflated $1.360 TN, or 48%, over the past 306 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.0bn last week to $3.422 TN. "Custody holdings" were up $49.4bn y-o-y, or 1.5%.

M2 (narrow) "money" supply slipped $1.7bn last week to $14.246 TN. "Narrow money" gained $564bn, or 4.1%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits surged $134bn, while Savings Deposits sank $149bn. Small Time Deposits increased $5.2bn. Retail Money Funds gained $5.8bn.

Total money market fund assets were little changed at $2.881 TN. Money Funds gained $142bn y-o-y, or 5.2%.

Total Commercial Paper added $1.3bn to $1.067 TN. CP gained $44bn y-o-y, or 4.2%.

Currency Watch:

The U.S. dollar index % to 95.3 (up % y-t-d). For the week on the upside, the Norwegian krone increased 2.4%, the Mexican peso 2.3%, the South African rand 2.0%, the British pound 1.2%, the Canadian dollar 1.0%, the Australian dollar 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.6%, the Singapore dollar 0.3%, the Swiss franc 0.1% and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.8% and the Japanese yen 1.0%. The Chinese renminbi declined 0.35% versus the dollar this week (down 5.25% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 0.7% (up 5.0% y-t-d). Spot Gold slipped 0.2% to $1,194 (down 8.4%). Silver slipped 0.2% to $14.142 (down 17.5%). Crude rallied $1.24 to $68.99 (up 14%). Gasoline was little changed (up 10%), while Natural Gas slipped 0.3% (down 6%). Copper increased 0.9% (down 20%). Wheat was about unchanged (up 20%). Corn fell 4.2% (unchanged).

Trump Administration Watch:

September 14 - Reuters (Jeff Mason): "U.S. President Donald Trump has directed aides to proceed with tariffs on about another $200 billion of Chinese goods, despite Treasury Secretary Steven Mnuchin's attempts to restart trade talks with China, a source familiar with the matter said on Friday. The timing for activating the additional tariffs was unclear."

September 7 - Bloomberg (Zainab Fattah): "China's trade surplus with the United States widened to a record in August even as the country's export growth slowed slightly… The politically sensitive surplus hit $31.05 billion in August, up from $28.09 billion in July, customs data showed on Saturday, surpassing the previous record set in June. Over the first eight months of the year, China's surplus with its largest export market has risen nearly 15%..."

September 10 - Bloomberg (Jennifer Epstein and Shannon Pettypiece): "President Donald Trump made a sweeping decision in August 2017 that could have rocked the global economy: the U.S. would pull out of Nafta, the World Trade Organization, and its trade deal with South Korea. Alarmed, Trump's top staffers scrambled to stop him, according to Bob Woodward's new book, 'Fear.' …Then-top economic adviser Gary Cohn and staff secretary Rob Porter pulled chief of staff John Kelly into the Oval Office to convince Trump to back down. Soon, Secretary of State Rex Tillerson and Defense Secretary James Mattis were brought into the fold and painted a dire picture of the national security and economic consequences of such a move. The president acquiesced -- but only temporarily."

Federal Reserve Watch:

September 12 - Financial Times (Sam Fleming): "The Federal Reserve may raise interest rates above its estimates of their longer-term level, a senior US policymaker said, as the central bank responds to strong growth and the extra lift provided by tax cuts and higher public spending. Lael Brainard, a member of the Federal Reserve's board of governors, said that with government stimulus providing 'tailwinds to demand' over the next two years, she expected the Fed to boost short-term rates above current estimates of the longer-run rate. Fed policymakers put the median estimate of the longer-run rate at just under 3% in their most recent round of forecasts. Ms Brainard argued in favour of further tightening in part because her estimate of the short-term neutral rate - which keeps output growing at a time of full employment and stable inflation - was rising… 'It appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate,' Ms Brainard said. 'These developments raise the prospect that, at some point, the Committee's setting of the federal funds rate will exceed current estimates of the longer-run federal funds rate.'"

September 12 - Bloomberg (Jeanna Smialek): "Federal Reserve officials expect to lift the central bank's benchmark interest rate a total of four times in 2018, based on their economic projections. Markets are increasingly becoming believers. Policy makers have already lifted borrowing costs twice this year, and their projections indicate another two quarter-point moves by the end of 2018. The implied yield on January fed funds futures… climbed to an unprecedented 2.36%, indicating around 44 bps of additional tightening by the end of December. The first 25 bps of this is priced as a near certainty for the Federal Open Market Committee's meeting later this month, based on the October fed funds contract."

September 10 - Financial Times (Sam Fleming and Robin Wigglesworth): "The clock is ticking. As the Federal Reserve presides over the steady shrinking of its multi-trillion dollar balance sheet, investors are urging policymakers to push forward long-awaited decisions over just how large the central bank's portfolio will ultimately need to be to keep monetary policy running smoothly and the banking sector well-stocked with safe assets. Jay Powell, the Fed chairman, has lined up a debate for this autumn. But as the reduction in the balance sheet accelerates into 2019 the market is looking for much clearer signs from the Fed on its future framework for steering the markets. Some analysts worry the Fed risks shrinking its balance sheet too much. The Fed confronts two big, intertwined decisions. Does it want to stick with its current system for setting interest rates, or revert to something similar to the framework it used before the financial crisis? And how big a balance sheet is it willing to carry to execute monetary policy?"

September 13 - MarketWatch (Gregg Robb): "Three of the Fed's 12 districts - St. Louis, Philadelphia and Kansas City - reported weaker growth in August, according to the Federal Reserve's latest Beige Book… While the overall U.S. economy expanded at a 'moderate pace,' trade concerns and a lack of workers delayed projects. There were also 'some signs of a deceleration' in prices of final goods and services. What happened: Shortages of workers and possible additional trade tariffs continued to be the biggest worries for businesses, they said. Worker shortages spread from trucking and high-skilled sectors to lower-skilled sectors like restaurants and retailers… Concerns about trade seen over the summer have now morphed into some businesses deciding to 'scale back or postpone capital investment.' While businesses were trying to pass along cost hikes to customers, their input costs were still rising more rapidly than their selling prices. A few districts reported increased inflation expectations."

September 13 - Reuters (Lucia Mutikani): "U.S. consumer prices rose less than expected in August as increases in gasoline and rents were offset by declines in healthcare and apparel costs, and underlying inflation pressures also appeared to be slowing… Labor market strength was reinforced by other data… showing the number of Americans filing for unemployment aid dropped last week to near a 49-year low. 'With labor market conditions tight, wage growth accelerating and input prices being pushed up by capacity constraints and recently imposed tariffs, there is plenty of upward pressure on prices,' said Paul Ashworth, chief U.S. economist at Capital Economics…"

September 13 - Reuters: "U.S. Federal Reserve officials tout a decade of falling unemployment as among their major victories in fighting the economic crisis of 2007 to 2009. Now they are beginning to worry they have been too successful. When unemployment falls as low as it is currently, Boston Federal Reserve bank President Eric Rosengren said in a new paper released Thursday as part of a review of Fed policy, recession has inevitably followed, with the central bank showing no success in fine-tuning the economy to a stable rest at full employment."

U.S. Bubble Watch:

September 11 - MarketWatch (Steve Goldstein): "The numbers: The U.S. budget deficit in August was $211 billion, nearly double the gap during the year-ago month, the Congressional Budget Office estimated… Adjusted for shifts in the timing of payments that otherwise would have occurred on a weekend of holiday, the deficit would have grown by 19%... What happened: Excluding timing shifts, outlays grew 8%, as the net interest on public debt jumped 25%, defense spending jumped 10%, outlays for Social Security grew 5%, and outlays for Medicare benefits rose 7%... Receipts fell by 3%, with corporate taxes dropping by $5 billion, while revenue from income and payroll taxes rose marginally."

September 11 - CNBC (John Melloy): "U.S. small business optimism surged to a record in August as the tax cuts and deregulation efforts of President Donald Trump and the Republican-led Congress led to more sales, hiring and investment, according to a survey by the National Federation of Independent Business. The NFIB Small Business Optimism Index jumped to 108.8 last month, the highest level ever recorded in the survey's 45-year history and above the previous record of 108 in 1983… The August figure was up from a 107.9 reading in July."

September 13 - Wall Street Journal (Janet Adamy and Paul Overberg): "American incomes rose and poverty declined for the third consecutive year in 2017, according to census figures… that suggest more Americans are benefiting from the robust economy. The new data… show that median household income increased to $61,372 last year, up 1.8% when adjusted for inflation. There were 39.7 million people in poverty last year, and that rate dropped 0.4 percentage point to its lowest level since 2006. The number of people working full time year round increased by 2.4 million in 2017. Incomes have grown 10.4% in the past three years, and last year's figure was the highest on record."

September 14 - New York Times (Patricia Cohen): "Americans' household earnings are finally stretching back to their pre-recession heights. But feeling secure and comfortable isn't only a measure of how much money you have. It's also a measure of how much you have compared with others. For many, that is one reason that recent financial progress may seem overshadowed by the gains they've missed out on and a needling sense that they've lost ground. As new research illustrates, two groups in particular have stalled: whites without a college degree, and blacks and Hispanics with one. Both are being far outpaced by college-educated whites. 'America has been a story of getting ahead, of progress,' said Morris P. Fiorina, a political scientist at Stanford University. 'There's been no story of progress - for them.'"

September 11 - Reuters (Lucia Mutikani): "U.S. job openings surged to a record high in July and more Americans voluntarily quit their jobs, pointing to sustained labor market strength and confidence that could soon spur faster wage growth. The Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS… also suggested a further tightening in labor market conditions, with employers appearing to increasingly have trouble finding suitable workers."

September 11 - Wall Street Journal (Bob Tita): "Workers at two of the biggest U.S. steelmakers are demanding higher compensation as tariffs on foreign metal push prices and profits to their highest point in years in a buoyant economy. Leaders for some 30,000 members of the United Steelworkers union say United States Steet Corp. and ArcelorMittal SA aren't passing those benefits to their workers, who have gone without raises in recent years even as wages have started to climb more broadly."

September 13 - Reuters (Michelle Conlin and Robin Respaut): "The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve. But… about 5.1 million …U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn. As of June 30, nearly one in 10 American homes with mortgages were 'seriously' underwater, according to… ATTOM Data Solutions, meaning that their market values were at least 25% lower than the balance remaining on their mortgages. It is an improvement from 2012, when… severe negative equity topped out at 29%, or 12.8 million homes. Still, it is double the rate considered healthy by real estate analysts. 'These are the housing markets that the recovery forgot,' said Daren Blomquist, a senior vice president at ATTOM."

China Watch:

September 14 - Bloomberg: "Chinese state media warned the nation shouldn't expect a quick resolution of its trade dispute with the U.S., as there have been no signs that President Donald Trump has changed his thinking. While it is good to talk, China should be aware that there may not be a deal anytime soon, according to an editorial published… in Global Times, a tabloid run by the official People's Daily. The newspaper said Washington is still taking a tough attitude. The U.S. will only engage in serious discussions if it believes additional tariffs won't bring more benefits, or if public opinion in the U.S. harms Trump's approval rating… Trump tweeting that he isn't under pressure to make a deal with China has stoked concern that the U.S. president isn't serious about a possible new round of trade talks between the two nations. China's commerce ministry said… it welcomed a U.S. offer of talks and that both sides were working on the details. The U.S. proposal to talk could be 'deceptive,' warned the China Daily…"

September 12 - Reuters (Kevin Yao and Fang Cheng): "Chinese banks made fewer new loans in August than expected, highlighting problems facing the central bank as it tries to boost credit to smaller companies facing weaker demand at home and shrinking export orders… Chinese banks extended 1.28 trillion yuan ($186.40bn) in net new yuan loans in August, according to… the People's Bank of China (PBOC)… Analysts polled by Reuters had predicted an August tally of 1.3 trillion yuan, down from July's 1.45 trillion yuan but nearly 20% more than the same month last year. 'Financing demand is relatively weak as firms are unwilling to borrow,' said Luo Yunfeng, chief analyst at Merchants Securities in Beijing."

September 15 - Bloomberg: "China's economic momentum weakened again in August, presenting its policy makers with a test of nerve as they prepare for a potential new round of trade talks with their U.S. counterparts. Fixed-asset investment growth in the first eight months slowed to the lowest pace since at least 1999 and infrastructure investment rose just 4.2%, the weakest expansion since the data series started in 2014… A slowing economy gives China a weaker hand ahead of possible new trade talks the two sides are discussing, adding to the risk of a deeper slowdown should U.S. President Donald Trump pull the trigger on tariffs on an additional $200 billion of Chinese goods… Investment rose 5.3% year-on-year in the first eight months, compared with an estimated 5.6%... August industrial production expanded 6.1%, meeting estimates. Retail sales expanded 9% last month from a year earlier, accelerating from an 8.8% pace in July."

September 14 - Wall Street Journal (Stephen Wilmot): "Car sales in China have shifted into reverse, but figuring how exposed the world's biggest auto makers are to the world's biggest car market is almost impossible. Most major car makers have done very well in China… Nissan and Volkswagen get nearly a quarter of their pretax profit from those businesses, and General Motors isn't far behind. What the car companies don't tell investors is how much they earn from exports, royalties and parts sales in China, which can be significant and aren't fully disclosed… After years of rapid growth, the Chinese market is far larger than its counterparts in the West, with more than 24 million cars sold last year compared with roughly 17 million in the U.S. and 15 million in the European Union. But sales fell 7% in August compared with a year earlier…"

September 12 - Bloomberg (Lianting Tu): "S&P Global Ratings lowered its credit ratings by one notch on seven Chinese local government financing vehicles as it believes the likelihood of local government support 'could weaken over time.' The firm said Wednesday morning the rating moves also reflected the gradual weakening of those financing platforms' roles and links with their local-government parents. Moody's… also cut its scores on five LGFVs… as it sees 'reduced likelihood of support for the sector as a whole.' Fitch Ratings took similar actions in June. China has repeatedly said LGFVs must take responsibility to repay their own debts."

EM Watch:

September 14 - Bloomberg (Andrey Biryukov, Anna Andrianova and Olga Tanas): "Russia's central bank unexpectedly raised interest rates for the first time since 2014, following its counterparts across emerging economies as inflation risks mount with a slumping currency and threats of U.S. sanctions. Policy makers said they'll 'consider the necessity of further increases' after lifting their benchmark to 7.5%, a level last seen in March, from 7.25%... Governor Elvira Nabiullina… said easing may not resume for more than a year. 'The quick monetary-policy response will limit the growth of inflationary risks in the future and create the conditions for easing policy by the end of 2019 or the first half of 2020,' Nabiullina told reporters… Further tightening isn't inevitable, but it can't be ruled out, she said."

September 11 - New York Times (Matt Phillips): "Cratering currencies, rising inflation, jumpy investors: A financial panic is again gripping some of the world's developing economies. The sharp sell-off of emerging market currencies, stocks and bonds seems to stand in stark contrast to the United States, where a nearly decade-long bull market continues amid buoyant economic conditions. Higher interest rates in the United States and a stronger dollar rebalance the risks and rewards for investors the world over, and act as a kind of financial magnet, pulling them out of riskier investments. When we've seen this before - in the Mexican peso crisis of 1994, the Thai baht collapse of 1997 and the Russian default of 1998 - investors had to contend with spillover of trouble from one country to others, dragging down economic growth or causing market stress."

September 11 - Financial Times (James Politi and Sam Fleming): "Christine Lagarde has warned that the escalating US-China trade war could deliver a 'shock' to already struggling emerging markets, raising the prospect that a crisis ripping through Argentina and Turkey could spread across the developing world. The IMF managing director told the Financial Times that her staff does not yet see 'contagion' spreading to multiple countries beyond those currently fighting investor flight. But she warned that 'these things could change rapidly' and cited the 'uncertainty [and] lack of confidence already produced by the threats against trade, even before it materialises', as one of the main dangers facing the developing world."

September 13 - Wall Street Journal (David Gauthier-Villars and Jon Sindreu): "Turkey's central bank sharply raised interest rates-defying President Recep Tayyip Erdogan's demand to cut them-in an attempt to counter the country's economic problems and reverse growing investor aversion to emerging-market economies. The central bank increased its main interest rate to 24% from 17.75%..., citing concerns over price stability and saying it would maintain a tight monetary-policy stance until the inflation outlook improves significantly. The turmoil in Turkey has rattled global markets in recent weeks and comes at a precarious time for developing economies around the world, just as investors have started to cast doubt on how long the current period of synchronized global growth can last."

September 14 - Bloomberg (Onur Ant): "Turkey's President Recep Tayyip Erdogan resumed his criticism of the nation's central bank a day after it announced the biggest rate hike of his rule. 'It's currently my phase of patience but there is a limit to this patience,' Erdogan told members of his ruling AK Party… He restated his opinion that higher rates won't help to slow inflation and warned that his restraint won't last forever. The central bank was responding to repeated calls for a rate increase, Erdogan said, and responded with a 'quite' big hike. Turkey would see the 'results of the independence' of the regulator, he said."

September 13 - Financial Times (Laura Pitel): "Two hours before Turkey's central bank unveiled a critical interest rate decision, Recep Tayyip Erdogan took to a stage in Ankara and delivered a classic tirade. The Turkish president, notorious for his opposition to high interest rates, lambasted the central bank and decried interest rates as 'a tool of exploitation'. Yet shortly afterwards, an institution that had come to be seen as almost irrelevant by international investors shocked the markets by sharply increasing its benchmark rate to 24%. Analysts were left wondering what happened. 'Is this something they cooked up together with Erdogan? Or is it something they decided independently?' asked Nora Neuteboom, an economist at the Dutch bank ABN Amro."

September 12 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan appointed himself chairman of Turkey's sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction. Zafer Sonmez, head of Turkey and Africa for Malaysia's government investment vehicle Khazanah Nasional Bhd, was named general manager. Treasury and Finance Minister Berat Albayrak, Erdogan's son-in-law, will also sit on the board, according to a decree…"

Global Bubble Watch:

September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution. By packaging slices of the market into tradeable vehicles, ETFs became the go-to instrument for professionals seeking instant, liquid exposure to markets around the world. Mom-and-pop savers, meanwhile, got a cheap, transparent way to buy companies for the long haul. But in remaking financial markets in their image, ETFs have fueled a fear that indexed investing will trigger the next crisis."

September 11 - Bloomberg (Satyajit Das): "Slowing global trade is evidence of how emerging-market stresses are being transmitted to advanced economies. The real concern of contagion remains financial linkages, though. Since 2009, non-resident gross flows into EM financial assets - loans, debt and equity securities - have averaged around $1 trillion annually, although the figure has been volatile. Total outstanding exposure, which remains opaque, may be around 50% of GDP in advanced economies. The main driver has been accommodative monetary policy of developed-world central banks and the lure of higher returns. Despite reductions, bank cross-border lending constitutes around half of the exposure. U.K., European, Japanese and Chinese banks are particularly vulnerable… Spanish banks have substantial amounts at risk in Turkey and South America. China's risks via loans to EM borrowers as part of the Belt and Road initiative are also significant. Investors make up the bulk of the remaining exposure."

September 14 - Reuters (Scott Squires): "Trade and investment ministers from G20 countries meeting in Argentina said there was an 'urgent need' to improve the World Trade Organization, a joint statement said on Friday. With U.S. President Donald Trump readying tariffs on another $200 billion in Chinese goods, the ministers said they were 'stepping up the dialogue' on international trade disputes, according to the statement issued at the summit."

September 10 - Bloomberg (Onur Ant): "Turkey's finance chief said the imposition of sanctions by the U.S. on the Middle East's largest economy was politically motivated, and called on other nations to form a united front against such actions. U.S. President Donald Trump used sanctions and tariffs to sabotage the Turkish economy, Treasury and Finance Minister Berat Albayrak said… Apart from a short-term currency impact, Turkish economic fundamentals had proved resilient, he said. The rallying cry from Turkey's top economy official, who is also the son-in-law of President Recep Tayyip Erdogan, ratchets up the rhetoric between Ankara and Washington."

September 10 - Bloomberg (Andreo Calonzo and Ian Sayson): "U.S. President Donald Trump is to blame for surging consumer prices in the Philippines after he sparked a trade war with China, said Rodrigo Duterte, head of the Southeast Asian country where inflation has reached a nine-year high. 'This inflation under my watch, believe or not, started when America' under Trump imposed duties on Chinese goods, which prompted retaliation, Duterte said… 'When America raised (tariff) rates and interest rates, everything went up.'"

Fixed Income Bubble Watch:

September 14 - CNBC (Thomas Franck and Alexandra Gibbs): "The yield on the benchmark 10-year Treasury note topped 3% on Friday for the first time since Aug. 2. Yields have been steadily rising since the start of September as expectations for economic growth creep higher. Traders pointed to a revision in the retail sales figures out on Friday as the reason for the latest push higher in rates."

Leveraged Speculation Watch:

September 11 - Bloomberg (Katherine Burton, Melissa Karsh and Sam Dodge): "You'd be forgiven for thinking the hedge fund industry might be starting to rebound. Industry assets are at a record $3.2 trillion this year, and a brand-new firm just brought in an unprecedented $8 billion. But the reality isn't so rosy. Inflows into funds, on the whole, are non-existent and the number of startups has slowed to levels not seen for nearly two decade. Once high-flying powerhouses run by David Einhorn, Bill Ackman and Alan Howard are mere shadows of their former glory after posting years of returns that ranged from uninspiring to downright awful. John Paulson has crashed so badly and seen assets plummet so far that he's largely left managing his own money. Overall, firms' assets are barely growing. Net inflows since the end of 2016 have equaled just $7.8 billion."

September 14 - Bloomberg (Melissa Karsh and Lu Wang): "Already stung by a defensive stance on U.S. stocks, the smart money is only getting more cautious. Hedge funds' net leverage, a measure of the industry's risk appetite, has fallen to the lowest level this year after a brief bounce in late August, client data compiled by Morgan Stanley showed. At 49%, the ratio is down from a peak of more than 60% in March. Hedge funds' reluctance to increase equity exposure underscores a growing skepticism about the durability of the S&P 500 Index's outperformance against equity markets in the rest of the world. Wall Street strategists this month have been sounding warnings about U.S. stocks, with Morgan Stanley lowering its recommendation and Goldman Sachs flagging the danger of a potential bear market should a full-blown trade war erupt."

Geopolitical Watch:

September 10 - Financial Times (Henry Foy): "Hundreds of Russian and Chinese tanks, attack helicopters, fighter jets and thousands of soldiers will this week fight side by side in the biggest war games in Russia since 1981, in a show of strength and friendship between Asia's two largest military powers. Russia's biggest military exercise since the cold war, and its first to be conducted with a country not from the former Soviet bloc, is the strongest sign yet of the deepening strategic bond between Moscow and Beijing… Involving 300,000 troops and close to 40,000 vehicles, the seven-day 'Vostok' war games will coincide with talks between Vladimir Putin and Xi Jinping in Vladivostok…, amid a concerted effort by Russia to pivot east and embrace its powerful neighbour."

September 11 - Bloomberg (Andrew Osburn): "Russia began its biggest war games since the fall of the Soviet Union… close to its border with China, mobilising 300,000 troops in a show of force that will include joint exercises with the Chinese army. China and Russia have staged joint drills before but not on such a large scale, and the Vostok-2018 (East-2018) exercise signals closer military ties as well as sending an unspoken reminder to Beijing that Moscow is able and ready to defend its sparsely populated far east."

September 10 - Bloomberg (Zainab Fattah): "The U.S. Navy is conducting exercises this month to ensure its readiness to guarantee freedom of movement through Persian Gulf and Red Sea waterways amid escalating threats from Iran to disrupt shipping across important choke points. The exercises, with regional and global allies, are part of the U.S. 5th Fleet Theater Counter Mine and Maritime Security Exercise…"

Sunday's News Links

[Reuters] Trump 'likely' to announce new China tariffs as early as Monday: source

[BloombergQ] Japan’s Abe Says He Told Trump It’s Dangerous to Play With FX

[Reuters] London mayor calls for second referendum on Brexit

[WSJ] Trump to Announce New Tariffs on $200 Billion in Chinese Imports

[FT] Financial sector remains an impenetrable black box

Friday, September 14, 2018

Spent a great day and evening with clients at the annual McAlvany Wealth Management Conference.  CBB back next week.  Hoping to post a "Just the Facts" tomorrow.  Thanks!  doug

Friday Evening Links

[BloombergQ] Stocks Decline as Trump Said to Proceed on Tariffs: Markets Wrap

[CNBC] US 10-year Treasury yield tops 3% for first time since early August

[Reuters] Trump readies tariffs on $200 billion more Chinese goods despite talks: source

[CNBC] Nobel Prize winner Shiller sees 'bad times in the stock market' ahead

[CNBC] The next crisis is still lurking in the financial system: 'We never addressed the root cause'

Friday's News Links

[Reuters] Trade hopes, tech, and Turkey bolster world stocks

[Reuters] Russia Surprises With First Rate Hike Since 2014, Boosting Ruble

[Reuters] Millions of Americans still trapped in debt-logged homes ten years after crisis

[BloombergQ] We Never Learned From Lehman

[BloombergQ] Hedge Funds Trim Leverage in Sign of Caution on U.S. Stocks

[BloombergQ] China's State Media Warns Against Expecting a Lot in Trade Talks

[Reuters] China says world trade system not perfect, needs reform

[BloombergQ] China's Investment Slowdown Worsens as Industry, Retail Hold Up

[BloombergQ] Erdogan Says His Patience on Central Bank Policy Has Limits

[WSJ] The Tricky Part of the Fed’s Next Rate Increases

[WSJ] No Lehman Repeat, but a Great Opportunity to Lose Money Is Coming Anyway

[WSJ] Turkey Takes Action on Strained Economy With Big Rate Rise

[WSJ] Car Makers Have a Lot to Lose From China’s Slowdown

[FT] Erdogan leaves cloud of uncertainty over central bank autonomy

Wednesday, September 12, 2018

Wednesday Evening Links

[BloombergQ] Tech Decline Overrides U.S.-China Trade Optimism: Markets Wrap

[Reuters] U.S. officials have reached out to China for new trade talks: sources

[MarketWatch] Fed’s Beige Book finds pockets of weaker growth

[Reuters] China Aug new loans fall as cooling economy makes both banks, borrowers wary

[BloombergQ] Dalio Says U.S. Two Years From Downturn 

[WSJ] U.S. Proposing New Round of Trade Talks With China

[WSJ] Why Florence Is Dangerous for Insurers

[WSJ] Median Household Income Rose 1.8% in 2017, Census Bureau Figures Show

[FT] Fed’s Brainard says short-term rates may rise above longer-term estimates


Wednesday's News Links

[BloombergQ] Stocks Mixed as Euro, Pound Fall; Bonds Advance: Markets Wrap

[Reuters] Asia stocks slip to 14-month lows on simmering trade worries

[Reuters] Italian bond yields rise as tensions over budget resurface

[Reuters] Trade war takes a heavy toll on Chinese stocks, and investors

[Reuters] U.S. producer prices post first drop in one-and-half years

[BloombergQ] Markets See Highest Chance Yet of Two More Fed Hikes in 2018

[CNBC] Rates are about to hit a key level that could cause trouble for stocks

[CNBC] The Fed is trying to finally get back to 'normal' after the crisis, but skeptics doubt it truly can

[BloombergQ] PBOC Resumes Injections After 15-Day Halt Drives Up Money Rates

[BloombergQ] Argentina Holds Rate At World-High 60 Percent To Fight Inflation

[BloombergQ] Erdogan Names Himself Turkey Wealth Fund Chairman in Shakeup

[BloombergQ] How Merkel Might Name Draghi's Successor as a Consolation Prize

[Reuters] Russia starts biggest war games since Soviet fall near China

[NYT] As Elkhart, Ind., Goes, So Goes the Nation, and Elkhart Is Nervous

[NYT] Emerging Markets Are Busting, Again

[WSJ] The Epicenter of the Housing Bust Is Booming Again. (That’s a Warning Sign.)

Tuesday, September 11, 2018

Tuesday Evening Links

[Reuters] Tech, energy stocks lift Wall Street

[Reuters] Oil rises more than 2 percent as U.S. sanctions on Iran squeeze supply

[CNBC] Two-year Treasury yield rises to highest since 2008

[MarketWatch] U.S. budget deficit widens to fifth-highest ever, CBO reports

[Reuters] Impending $144 billion in new supply boosts yields

[Reuters] Record U.S. job openings, quits rate boost wage growth outlook

[Reuters] Atlanta Fed cuts U.S. third-quarter GDP view below 4 percent

[FT] Lagarde warns of US-China trade war ‘shock’ to emerging markets

Tuesday's News Links

[Reuters] Wall Street flat, tech boost softens trade war fears

[Reuters] World stocks hit by trade strain, Brexit talk supports sterling









Monday, September 10, 2018

Monday Evening Links

[CNBC] Asia markets poised for cautious open amid possible second meeting between Kim and Trump

[Reuters] S&P, Nasdaq edge higher after recent losses but Apple drags

[Reuters] House Republicans propose more tax cuts as elections near

[NYT] Between Trump and Brussels, Trade Talks Face Myriad Challenges

[NYT] China Sees Hints of a Past Threat: Inflation

Monday's News Links

[Reuters] Europe leads fightback after Asian shares floored again

[BloombergQ] Chinese Shares Slide Near 2016 Low as Trump's Trade Threat Grows

[Reuters] Oil prices climb as U.S. drilling stalls, Iran sanctions loom

[Reuters] China vows to respond if U.S. takes new steps on trade

[Reuters] China's August producer inflation eases, points to more pressure on economy

[Reuters] Japan second-quarter GDP posts fastest growth since 2016 on stronger-than-expected capex

[BloombergQ] Emerging-Markets Calm Is Likely to Give Way to More Volatility

[Reuters] Sweden faces political impasse after far-right election gains

[WSJ] Stronger U.S. economy may warrant 'restrictive' rates: Boston Fed's Rosengren

[WSJ] The 5G Race: China and U.S. Battle to Control World’s Fastest Wireless Internet

[WSJ] Borrowers Struggle to Raise Funds as Emerging Markets Tumble

[WSJ] Federal Reserve Considers a New Tool to Avert Crises

[WSJ] U.S. Says Syria Plans Gas Attack in Rebel Stronghold

[FT] America, China and the route to all-out trade war

[FT] Seven countries at risk of exchange rate crises: Nomura

[FT] Federal Reserve faces key decisions as balance sheet shrinks

[FT] Chinese soldiers join Russia’s largest military exercise since cold war

Saturday, September 8, 2018

Saturday's News Links

[Reuters] China's record trade surplus with U.S. adds fuel to trade war fire

[BloombergQ] Turkey Calls for Global Resistance to U.S. Economic Attacks

[BloombergQ] Duterte Blames Trump for Soaring Consumer Prices

[Reuters] Russian and Syrian jets pound Idlib province after summit

Weekly Commentary: Approaching the 10-year Anniversary

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

WSJ: Who do you hold responsible for that?

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

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

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

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


WSJ: What could the next crisis look like?

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

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



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

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

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

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


For the Week:

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

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

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

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

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

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

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

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

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

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

Currency Watch:

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

Commodities Watch:

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

Trump Administration Watch:

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

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

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

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

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

Federal Reserve Watch:

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

U.S. Bubble Watch:

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

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

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

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

China Watch:

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

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

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

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

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

EM Watch:

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

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

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

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

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

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

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

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

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

Global Bubble Watch:

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

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

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

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

Central Bank Watch:

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

Europe Watch:

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

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

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

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

Fixed Income Bubble Watch:

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

Leveraged Speculation Watch:

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

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

Geopolitical Watch:

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