Friday, December 28, 2018

Weekly Commentary: Thoughts on Liquidity

“Money” challenged - and often confounded - economic thinkers for centuries. It functions both as a “medium of exchange” and “unit of account.” Simple enough. Too often the focus has been how to use money to stimulate economic activity and achieve political gains. From my perspective, money’s importance rests with its fundamental roles as a “Store of Value” and as the bedrock of financial systems. Unsound money has been a root cause of a lot of turmoil throughout history – including the monetary fiasco that collapsed in 2008. Yet concerns for the soundness of contemporary “money” these days are viewed as hopelessly archaic.

My thinking on contemporary “money” has been adapted from a much earlier focus on money’s “preciousness.” Traditionally, money was precious either because it was made of or backed by gold/precious metals. It retained preciousness only so long as its quantity remained carefully contained. Throughout history, the value of “paper money” has invariably moved inversely to the quantity issued – fits and starts, enthusiasm and revulsion and, too often, a path to worthlessness.

Today, “money” is largely electronic/digitized IOUs/Credit – but a special kind of Credit. Money is a perceived safe and liquid store of (nominal) value. This perception assures essentially insatiable demand. Unlimited demand creates a powerful propensity for over-issuance. Historically, monetary inflation ensured the Scourge of Inflationism. Monetary excess distorted flows to goods markets, setting in motion problematic inflationary dynamics in incomes, spending patterns and economic structure.

Despite money’s critical role within an economy, a consensus view on how best to define, monitor and manage the “money supply” escaped both the economics community and policymakers more generally. Too often, politics and ideology muddied already murky analytical waters. What is money these days, and how best to manage monetary matters? Does anyone even care – so long as the securities markets are strong?

If issues surrounding “money” aren’t confusing enough, how about this thing we refer to as “Liquidity.” As we wrap up a wild year in global markets, it would be fitting to label 2018 “The Year of Liquidity.” The year began with a bang, as liquidity inundated the emerging markets. It’s easy to forget that the Shanghai Composite jumped 5.3% in January. Brazil’s Ibovespa surged 11.1% in January and was up almost 15% by late February. The emerging market ETF (EEM) had jumped 10.5% by January 26th. South Korea’s KOSPI index rose 4.0% in January, and India’s Sensex gained almost 6%.

One could reasonably assert that “Liquidity” was in great abundance – in EM and global markets well into 2018. “Money” was flowing readily into the emerging markets, although it would be more accurate to state “finance” was flowing. Speculative Credit was most certainly expanding rapidly, as “carry trades” and a multitude of derivatives strategies funneled newly generated purchasing power into “developing” markets and economies. To be sure, the perception of a world awash in “Liquidity” ensured a problematic buildup of speculative leverage.

In general, free-flowing Credit is inherently self-reinforcing and validating (ongoing expansion supporting the perceived creditworthiness of the existing Credit structure) – hence unstable. Credit for securities speculation – speculative leveraging – is acutely unstable. The expansion of speculative Credit creates a flow of buying power, or Liquidity, that inflates securities prices and engenders only greater demand for speculative Credit. Resulting Liquidity abundance fosters confidence that markets will continue to boom skyward. “Money” everywhere.

The expansion of GSE Credit was key to the perception of Liquidity abundance early in the mortgage finance Bubble period. The expansion of GSE liabilities generated a powerful flow of buying power/Liquidity into the marketplace. Moreover, the ability and willingness to aggressively expand GSE Credit in the event of heightened market stress fostered the perception that a governmental quasi-central bank entity was available to backstop system liquidity when needed. By late in the cycle, a booming Credit expansion was creating such a prodigious flow of Liquidity that markets had little concern that fraud at the GSEs essentially eliminated their capacity to backstop market Liquidity.

Simplifying the analysis, we can consider four key – and interrelated - elements to market “Liquidity.” First, the actual purchasing power (i.e. deposits, money market funds, etc.) available to purchase securities. Second, the ease of availability of speculative Credit for the leveraging of securities. Third, the willingness and capacity of market-makers and operators to accumulate holdings in the face of intense selling pressure. And, fourth, the perception of Liquidity flows that could be injected into the system in the event of market instability and illiquidity risk (GSE backstop bid during the mortgage finance Bubble - and central bank QE throughout the global government finance Bubble).

M1 money supply ended last week at $3.736 TN, with M2 at $14.415 TN. M2 is a rather straightforward calculation adding Currency, Deposits (checking/saving/small time/other) and Retail Money Market Funds. The Federal Reserve in the past calculated M3, a broader measure of money (adding large time deposits, institutional money funds and repurchase agreements). Long arguing that broad “money” was analytically superior to the narrow aggregates, I nonetheless lost no sleep when the Fed discontinued publishing M3 (still too narrow!). Our analytical frameworks should strive to incorporate the broadest view of “money,” Credit and “finance,” although the broader the view taken the more challenging the analysis.

I would posit that some time ago Liquidity completely supplanted the monetary aggregates as the key focal point for market flow analysis. Unfortunately, there is no quantity of “Liquidity” to measure and tabulate. I am not familiar with an adequate definition or even common understanding. The concept of contemporary “money” has proved highly problematic for the economics community. Yet Liquidity makes “money” appear quite straightforward. If it can’t be defined or calculated, it’s certainly not worthy of inclusion in econometric models.  Liquidity Disregarded.

Liquidity is an amalgam of real financial flows and intangible market perceptions. There is no aggregate that would signal whether Liquidity is either expanding or contracting. Even if overall Liquidity is viewed as either abundant or deficient, there would still be widely divergent Liquidity manifestations for individual sectors, markets, countries and regions. And how can seeming Liquidity overabundance so briskly transform into illiquidity?

“Money supply” was an invaluable tool for gauging system “Liquidity” back when bank liabilities (i.e. deposits) were the prevailing mechanism for money and Credit expansion. Analysis has changed profoundly with the adoption globally of non-bank market-based Credit. I have argued that market-based Credit is highly unstable – speculative Credit perilously so. I would contend that “Liquidity” is typically steady but at times highly erratic. So long as the global Credit boom is ongoing, speculative Credit expands, and markets remain stable, the perception of Liquidity abundance ensures ample purchasing power to sustain the bull market. But the Wildness Lies in Wait.

For years now, global central bank policies have been fundamental to the perception of uninterrupted Liquidity abundance. Chairman Bernanke’s zero rates and QE measures caused a historic flow of purchasing power (Liquidity) into stock and fixed-income funds. This evolved into a momentous shift of financial flows into “passive” risk market strategies (perceived as low-risk and, often, money-like). Ultra-low rates and the belief that central banks were backstopping market Liquidity fundamentally altered both the flow of Liquidity and, over time, the structure of the marketplace.

The flow of Trillions into ETF and other “passive” strategies changed the nature of global leveraged speculation. Not only were the leveraged speculators incentivized by near zero (and even negative) borrowing costs and confidence in the central bank Liquidity backstop, they were now emboldened by the predictability of huge “retail” flows (domestic and international) into stock and fixed-income funds. Booming flows into equities and bonds fundamentally loosened financial conditions on an unprecedented global basis.

Loose finance stoked asset inflation, booming M&A and buybacks, all conducive to economic expansion and surging corporate profits. Liquidity circulating briskly throughout both the Financial and Economic Spheres bolstered the perception of an endless Liquidity boom. Booming securities markets fueled U.S. consumption and ongoing huge trade deficits, dollar Liquidity flowing out to the world - only to be recycled right back into U.S. securities and asset markets (i.e. EM central bank Treasury/agency purchases, hedge funds borrowing in offshore markets to leverage in U.S. securities, Chinese buying U.S. Treasuries and real estate, etc.). Meanwhile, booming global markets and the ease of “investing” passively through the ETF complex stoked unprecedented U.S. flows to global markets – once again generating a flow of global Liquidity that would be readily “recycled” back into U.S. markets.

Early CBBs introduced the concept of the “infinite multiplier effect.” Contemporary finance (largely devoid of capital and reserve requirements) left the old fractional reserve banking deposit “money multiplier” in the dust. The flow of purchasing power/Liquidity would circulate and recirculate, in the process fueling both unfettered Credit expansion and asset inflation. The global government finance Bubble period – with its zero rates, Trillions of new “money,” and central bank liquidity backstops – has seen the “infinite multiplier” at work on an unprecedented global scale. Liquidity created by the central banks, as well as through massive government debt expansion and leveraged speculation, has circulated freely on a global basis, inflating securities/asset prices, stoking economic expansion and promoting a self-reinforcing perception of endless Liquidity.

For the most part, contemporary market Liquidity is not real. It’s primarily a market perception. It’s based on the view that financial flows into markets will remain positive and, on those rare occasions when they’re not, central banks will step in and ensure “money” flows unabated into the financial markets. It’s based on confidence and faith - in contemporary central banking, in market structure, in the derivatives complex, in modern technologies and ingenuity. It’s based on the view that global Credit will continue to expand, premised on confidence that Beijing will ensure ongoing Credit expansion and that U.S. Credit is fundamentally robust. It’s based on the overarching belief that global finance is fundamentally sound, policymakers possess acumen and enlightenment, central bank power is boundless, and the global economy is on solid footing.

I believe the February blow-up of “short vol” strategies was a key initial crack in the global Bubble. Huge speculative excess had accumulated in a major market used for acquiring protection against market declines – writing “flood insurance” during a protracted central bank-induced drought. Abrupt market losses and illiquidity changed the risk/reward calculus for “selling” market “insurance” – reducing the supply and increasing the price of protection. Not long after, indications of fledgling risk aversion began to beset the global “Periphery.” EM Liquidity began to wane, an especially problematic dynamic following a speculative blow-off period. As EM flows reversed, de-risking/deleveraging dynamics took hold. Liquidity that seemed so abundant early in the year suddenly disappeared, replaced by faltering markets, dislocation and fear of expanding market illiquidity throughout the “Periphery.”

On a global basis, the Liquidity backdrop had changed momentously. For the first time in several years, a significant de-risking/deleveraging dynamic was unfolding without the benefit of huge central bank QE liquidity injections. Rapid currency collapses in Turkey and Argentina signaled a critical global Liquidity inflection point. And as de-risking/deleveraging gained momentum, Contagion became a major concern. China and Asia, the epicenter of Liquidity excesses over this cycle, saw their currencies, equities and bonds fall under significant pressure. Dollar-denominated debt, having so flourished during Liquidity abundance, was suddenly facing sinking prices and Liquidity issues. The shifting Liquidity backdrop was also manifesting in the colossal international derivatives markets (i.e. currency, swaps and fixed-income).

Market perceptions with regard to international Liquidity changed meaningfully. The same could not be said for the U.S. If anything, expectations for ongoing Liquidity abundance became only more deeply ingrained. Keep in mind that the Federal Reserve concluded QE operations in 2014. With the bull market having not missed a beat, it was widely believed that QE was irrelevant for the U.S. Not appreciated was the major role QE was having on international Liquidity, with “money” created by the ECB, BOJ and others finding its way into U.S. securities markets and the American economy. This year’s instability at the “Periphery” initially exacerbated flows to “Core” U.S. markets, pushing already highly speculative markets into Melt-Up Dynamics.

From a Liquidity perspective, speculative blow-offs are highly problematic. A bout of manic buying and leveraging culminates in highly elevated and unsustainable prices and financial flows. The perception of Liquidity abundance sows the seeds of its own destruction. When prices inevitably reverse, the onset of de-risking/deleveraging dynamics ensures a highly problematic Liquidity environment.

When The Crowd is fully on board, who is left to buy? When the leveraged speculating community reverses course, who but central banks have the capacity to accommodate deleveraging? If a significant segment of the marketplace moves to hedge market risk, where is the wherewithal to shoulder such risk? And let’s not overlook the critical issue of market risk shifting to speculators and traders that expect to dynamically-hedge option risk written/sold in the marketplace (planning, when necessary, to establish short positions in a declining marketplace). Current Market Structure ensures serious Liquidity issues upon the inevitable bursting of speculative Bubbles. Who wants to get in front of the algos?

Progressively more reckless central bank measures over the past decade have been necessary to promote the perception of ample and sustainable Liquidity. But with Crisis Dynamics having recently afflicted the “Core,” it is difficult for me not to see a Liquidity environment fundamentally altered. Confidence has taken a significant hit. I believe the leveraged speculating community has been impaired, with outflows and general risk aversion ensuring ongoing de-risking/deleveraging. Similarly, with confidence in “passive” (stock, fixed-income, international) ETF strategies now badly shaken, it's difficult to envisage a return to booming industry inflows. And with derivatives players stung by abrupt market losses and a spike in volatility (option premiums), I expect we’ve passed a critical inflection point in the pricing and availability of market protection.

The backdrop points to an inhospitable Liquidity backdrop. Serious market structural issues have bubbled to the surface, issues market participants either haven’t appreciated or simply believed would be readily rectify by central banks before confidence was impacted. The orientation of powerful financial flows has been upset. Hedging and derivatives markets have dislocated. The great fallacy of “moneyness” for risky stocks, bonds and derivatives is being laid bare.

Importantly, I view speculative Credit as the marginal source of global Liquidity. I believe a historic Bubble in securities and derivatives-related Credit has been pierced. This Bubble was fueled by years of zero/negative rates and Trillions of central bank "money". As we saw this week, bear market rallies tend to be ferocious. And when a short squeeze and unwind of hedges is in play, surging prices will spur hope that the sell-off has run its course and that Liquidity has returned to the markets.

It’s just not going to be that simple. Global markets face serious structural issues years and decades in the making. Hopefully markets can avoid crashes and make necessary adjustments over an extended period of time. For a while now, I’ve feared a scenario where illiquidity becomes a systemic global issue. From closely analyzing previous booms and bust episodes, things often prove even worse than I expect.

For the Week:

The S&P500 rallied 2.9% (down 7.0% y-t-d), and the Dow gained 2.7% (down 6.7%). The Utilities fell 1.8% (down 0.3%). The Banks gained 3.2% (down 20.2%), and the Broker/Dealers recovered 3.9% (down 11.3%). The Transports rose 2.6% (down 14.2%). The S&P 400 Midcaps increased 2.2% (down 13.4%), and the small cap Russell 2000 jumped 3.5% (down 12.9%). The Nasdaq100 recovered 3.9% (down 1.7%). The Semiconductors surged 4.2% (down 8.4%). The Biotechs jumped 4.7% (down 2.3%). With bullion jumping $25, the HUI gold index increased 1.1% (down 17.8%).

Three-month Treasury bill rates ended the week at 2.32%. Two-year government yields dropped 12 bps to 2.52% (up 63bps y-t-d). Five-year T-note yields declined eight bps to 2.56% (up 35bps). Ten-year Treasury yields fell seven bps to 2.72% (up 31bps). Long bond yields slipped a basis point to 3.02% (up 28bps). Benchmark Fannie Mae MBS yields dropped nine bps to 3.53% (up 53bps).

Greek 10-year yields added two bps to 4.35% (up 27bps y-t-d). Ten-year Portuguese yields gained three bps to 1.72% (down 22bps). Italian 10-year yields fell nine bps to 2.74% (up 73bps). Spain's 10-year yields added a basis point to 1.42% (down 15bps). German bund yields slipped one basis point to 0.24% (down 19bps). French yields gained a basis point to 0.71% (down 8bps). The French to German 10-year bond spread widened two to 47 bps. U.K. 10-year gilt yields fell five bps to 1.27% (up 8bps). U.K.'s FTSE equities index increased 0.2% (down 12.4%).

Japan's Nikkei 225 equities index declined 0.8% (down 12.1% y-t-d). Japanese 10-year "JGB" yields fell four bps to 0.00% (down 5bps). France's CAC40 slipped 0.3% (down 11.9%). The German DAX equities index declined 0.7% (down 18.3%). Spain's IBEX 35 equities index fell 0.7% (down 15.4%). Italy's FTSE MIB index slipped 0.4% (down 16.1%). EM equities were mixed. Brazil's Bovespa index jumped 2.6% (up 15.0%), while Mexico's Bolsa was little changed (down 16.0%). South Korea's Kospi index declined 1.0% (down 17.3%). India's Sensex equities index gained 0.9% (up 5.9%). China's Shanghai Exchange declined 0.9% (down 24.6%). Turkey's Borsa Istanbul National 100 index fell 1.6% (down 21.6%). Russia's MICEX equities index increased 0.5% (up 11.8%).

Investment-grade bond funds saw outflows of $4.416 billion, and junk bond funds posted outflows of $3.938 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell seven bps to a four-month low 4.55% (up 56bps y-o-y). Fifteen-year rates declined six bps to 4.01% (up 57bps). Five-year hybrid ARM rates added two bps to 4.00% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to a ten-month low 4.42% (up 27bps).

Federal Reserve Credit last week declined $4.1bn to $4.044 TN. Over the past year, Fed Credit contracted $374bn, or 8.5%. Fed Credit inflated $1.233 TN, or 44%, over the past 320 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $6.3bn last week to $3.397 TN. "Custody holdings" rose $35bn y-o-y, or 1.0%.

M2 (narrow) "money" supply slipped $8.2bn last week to $14.415 TN. "Narrow money" gained $566bn, or 4.1%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dropped $82.9bn, while Savings Deposits jumped $61.6bn. Small Time Deposits gained $5.0bn. Retail Money Funds rose $6.6bn.

Total money market fund assets jumped $30.3bn to $3.039 TN. Money Funds gained $193bn y-o-y, or 6.8%.

Total Commercial Paper dropped $18.7bn to near an eight-month low $1.056 TN. CP declined $24bn y-o-y, or 2.2%.

Currency Watch:

The U.S. dollar index declined 0.6% to 96.402 (up 4.6% y-t-d). For the week on the upside, the South African rand increased 1.5%, the Mexican peso 1.4%, the Swiss franc 0.9%, the Japanese yen 0.9%, the Norwegian krone 0.7%, the euro 0.6%, the Brazilian real 0.6%, the South Korean won 0.6%, the Singapore dollar 0.6%, the Swedish krona 0.5%, the British pound 0.4% and the Australian dollar 0.1%. For the week on the downside, the Canadian dollar declined 0.3% and the New Zealand dollar dipped 0.2%. The Chinese renminbi increased 0.41% versus the dollar this week (down 5.41% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.4% (down 15.2% y-t-d). Spot Gold jumped $25 to $1,281 (down 1.7%). Silver surged 5.0% to $15.436 (down 10%). Crude slipped 26 cents to $45.33 (down 25%). Gasoline recovered 0.6% (down 26%), while Natural Gas sank 13.4% (up 12%). Copper increased 0.3% (down 19%). Wheat declined 0.5% (up 20%). Corn fell 0.8% (up 7%).

Market Dislocation Watch:

December 25 – Wall Street Journal (Gregory Zuckerman, Rachael Levy, Nick Timiraos and Gunjan Banerji): “Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast. That market has grown up during the long bull run, and hasn’t until now been seriously tested by a prolonged downturn… Today, quantitative hedge funds, or those that rely on computer models rather than research and intuition, account for 28.7% of trading in the stock market, according to data from Tabb Group--a share that’s more than doubled since 2013… Add to that passive funds, index investors, high-frequency traders, market makers, and others who aren’t buying because they have a fundamental view of a company’s prospects, and you get to around 85% of trading volume, according to Marko Kolanovic of JP Morgan . ‘Electronic traders are wreaking havoc in the markets,’ says Leon Cooperman… [from] Omega Advisors. Behind the models employed by quants are algorithms, or investment recipes, that automatically buy and sell based on pre-set inputs… ‘The speed and magnitude of the move probably are being exacerbated by the machines and model-driven trading,’ says Neal Berger, who runs Eagle’s View Asset Management… ‘Human beings tend not to react this fast and violently.’”

December 26 – Reuters (Charles Stein): “Investors are bailing out of mutual funds as if it were 2008. Mutual funds suffered redemptions of $56.2 billion in the week ended Dec. 19. That’s the biggest outflow since the week ended Oct. 15, 2008, according to… the Investment Company Institute. And the numbers over the last several weeks have only gotten worse…”

December 26 – Reuters (Trevor Hunnicutt): “U.S. fund investors battered bond markets with the biggest withdrawals in seven weeks and snatched the most cash from foreign stocks since mid-2015 as the Federal Reserve hiked interest rates, Investment Company Institute (ICI) data showed… Some $12.2 billion tumbled from U.S.-based bond funds during the week ended Dec. 19…”

December 24 – Bloomberg (Christopher DeReza): “U.S. investment-grade bond spreads widened every day last week to end Friday at 148 bps, the highest since July 2016.”

December 24 – Bloomberg (Kelsey Butler): “The Markit CDX North America High Yield Index dropped 0.20% to 100.84 -- lowest since March 8, 2016… amid plunging equity and oil markets.”

December 26 – Reuters (Richard Leong): “A barometer of overall demand for U.S. five-year Treasury note supply on Wednesday declined to its weakest in nearly 9-1/2 years with the note being sold at a yield at its lowest level since March… The ratio of bids to the amount of five-year notes came in at 2.09, the lowest reading since July 2009.”

December 26 – Wall Street Journal (Dawn Lim): “The investor pullback from the asset-management industry in 2018 is the most severe since the last financial crisis, a sign that doubts about the direction of global markets are intensifying. Net inflows for U.S. mutual and exchange-traded funds in the first 11 months of the year fell to $237 billion, according to… Morningstar. That was down 62% from the year-ago period, the steepest decline since 2008. Asset managers attracted a record $629.5 billion in net flows during the same period in 2017, a boom year for the industry.”

December 26 – Reuters (Trevor Hunnicutt): “U.S. fund investors battered bond markets with the biggest withdrawals in seven weeks and snatched the most cash from foreign stocks since mid-2015 as the Federal Reserve hiked interest rates, Investment Company Institute (ICI) data showed… Some $12.2 billion tumbled from U.S.-based bond funds during the week ended Dec. 19…”

December 27 – Bloomberg (Sarah Ponczek): “Exchange-traded fund investors who use factor-based products to juice returns or protect themselves from wild swings will probably look back on 2018 as the year when nothing worked. ETFs that promised everything from defensive characteristics like low volatility to more aggressive strategies such as growth and momentum suffered this year, with the largest funds for each factor tracked by Bloomberg set to end in the red. And as equity market performance took a marked shift from gung-ho to risk averse in the second half of the year, the leader-board for performance and flows has experienced a makeover.”

December 26 – Bloomberg (Vildana Hajric and Carolina Wilson): “Investors are fleeing the largest exchange-traded fund tracking U.S. financial stocks at the fastest monthly pace on record, having withdrawn more than $3.5 billion from it through Dec. 24. Outflows from the $21 billion Financial Select SPDR Fund, or XLF, are driving the record $9.2 billion that’s been pulled from all ETFs tracking financials this year.”

December 24 – Reuters: “Japanese government bond yields hit multi-month lows on Tuesday, with the benchmark 10-year yield hitting zero percent, as U.S. political chaos engulfed global financial markets causing the worst day for Tokyo stock prices in more than two years. Demand for the safety of government bonds increased as investors have grown increasingly nervous about the political outlook in the United States in addition to concerns about a global economic slowdown.”

December 26 – Reuters (Lewis Krauskopf): “The Dow Jones Industrial Average surged more than 1,000 points for the first time on Wednesday, leading a broad Wall Street rebound after a report that holiday sales were the strongest in years helped mollify concerns about the health of the economy. Following Wall Street’s worst-ever Christmas Eve drop in the previous session, the advance was also fueled by investors’ reversing bets against a wide range of stocks. By the close, the Dow, S&P 500 and Nasdaq had notched their largest daily percentage gains in nearly a decade… The Dow Jones Industrial Average rose 1,086.25 points, or 4.98%, to 22,878.45, the S&P 500 gained 116.6 points, or 4.96%, to 2,467.7, and the Nasdaq Composite added 361.44 points, or 5.84%, to 6,554.36.”

December 26 – Reuters (Saqib Iqbal Ahmed and Lewis Krauskopf): “One notable factor in Wall Street’s monster rally on Wednesday was a record gain in an index of stocks that have the largest bets placed against them by market contrarians. The Thomson Reuters United States Most Shorted Index rose 6%, the biggest percentage rise in its six-year history, as some investors moved to cover bearish bets on the 51 stocks in the index…”

Trump Administration Watch:

December 21 – Bloomberg (Jennifer Jacobs, Saleha Mohsin and Margaret Talev): “President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell as his frustration with the central bank chief intensified following this week’s interest-rate hike and months of stock-market losses, according to four people familiar with the matter. Advisers close to Trump aren’t convinced he would move against Powell and are hoping that the president’s latest bout of anger will dissipate over the holidays… Some of Trump’s advisers have warned him that firing Powell would be a disastrous move.”

December 24 – Reuters (Saleha Mohsin, Lananh Nguyen and Jennifer Jacobs): “Treasury Secretary Steven Mnuchin looked to quash big-bank worries over plunging stock markets and reports that President Donald Trump might move on his Federal Reserve chief by assuring the financial community on Sunday that market liquidity is in good shape. Some market participants, however, questioned why Mnuchin answered a question that no one was asking. Even after recent market losses, a liquidity squeeze or fresh financial crisis hadn’t been on the market’s mind. Mnuchin’s assertion of ample liquidity risked raising doubts. Mnuchin tweeted late Sunday afternoon that he’d called the chief executive officers of the nation’s six largest banks and that those chiefs ‘confirmed they have ample liquidity available for lending to consumer, business markets, and all other market operations.’”

December 24 – Reuters (Jason Lange): “The Trump administration is arranging a phone call on Monday with top regulators to discuss financial markets amid a rout on Wall Street. Treasury Secretary Steven Mnuchin will host the call with the president’s Working Group on Financial Markets, known colloquially as the ‘Plunge Protection team.’”

December 24 – Reuters (Andrew Mayeda and Mike Dorning): “President Donald Trump renewed his attacks on the Federal Reserve, commenting publicly on the central bank for the first time following last week’s interest-rate hike and reports he has discussed firing Chairman Jerome Powell. ‘The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders,’ Trump said in a tweet Monday. ‘The Fed is like a powerful golfer who can’t score because he has no touch - he can’t putt!’”

December 26 – Associated Press: “President Donald Trump says parts of the government will stay shut as long as Democrats refuse to build more barriers on the U.S.-Mexico border, seemingly dashing hope for a Christmas miracle that would soon allow several departments to reopen and employees to return to work. Asked when the government would reopen, Trump said: ‘I can’t tell you when the government’s going to be open. I can tell you it’s not going to be open until we have a wall or fence, whatever they’d like to call it.’ ‘I’ll call it whatever they want but it’s all the same thing,’ he said…”

December 26 – Reuters (Makini Brice): “President Donald Trump on Tuesday expressed confidence in Treasury Secretary Steven Mnuchin amid worries over a weakening economy and a stock market slump, but repeated his criticism of the U.S. Federal Reserve, saying it has raised interest rates too quickly. Speaking to reporters in the Oval Office… Trump also said U.S. companies were ‘the greatest in the world’ and presented a ‘tremendous’ buying opportunity. Asked if he has confidence in Mnuchin, Trump said: ‘Yes, I do. Very talented guy. Very smart person,’ he said. His comments came after Mnuchin on Monday held a conference call with U.S. regulators to discuss plunging U.S. stock markets.”

December 26 – Reuters (Eric Beech): “A U.S. trade team will travel to Beijing the week of Jan. 7 to hold talks with Chinese officials, Bloomberg reported… The delegation will be led by Deputy U.S. Trade Representative Jeffrey Gerrish and will include David Malpass, Treasury under secretary for international affairs, Bloomberg said.”

December 21 – Reuters (Makina Brice and Jason Lange): “The United States and China might not reach a trade deal at the close of a 90-day negotiating window unless Beijing can agree to a profound overhaul of its economic policies, White House trade adviser Peter Navarro said. In an interview with Japanese business daily Nikkei published on Friday, Navarro said it would be ‘difficult’ to strike a deal without China being ready for a full overhaul of its policies for trade and industry.”

December 22 – Wall Street Journal (Nick Timiraos): “President Trump hasn’t suggested firing Federal Reserve Chairman Jerome Powell and doesn’t believe he has the authority to do so, Treasury Secretary Steven Mnuchin said Saturday. Mr. Trump has been furious over the Fed’s decision to raise interest rates this past week, say people familiar with the matter, and he is also unhappy over the central bank’s effort to shrink its holdings of bonds acquired after the 2008 financial crisis. ‘I think the increasing of interest rates and the shrinking of the Fed portfolio is an absolutely terrible thing to do at this time, especially in light of my major trade negotiations which are ongoing,’ Mr. Trump said in a statement to Mr. Mnuchin that the Treasury secretary posted on Twitter.”

December 26 – Reuters (Trevor Hunnicutt): “The head of the U.S. Federal Reserve faces no risk of losing his job and President Donald Trump is happy with his Treasury secretary, a White House official said in an apparent attempt to calm Wall Street nerves frayed by Trump’s criticism of the Fed. Asked on Wednesday if Fed Chairman Jerome Powell’s job was safe, White House economic adviser Kevin Hassett told reporters: ‘Yes, of course, 100%.’”

December 26 – Reuters (David Shepardson and Diane Bartz): “President Donald Trump is considering an executive order in the new year to declare a national emergency that would bar U.S. companies from using telecommunications equipment made by China’s Huawei and ZTE, three sources familiar with the situation told Reuters. It would be the latest step by the Trump administration to cut Huawei Technologies and ZTE… out of the U.S. market. The United States alleges that the two companies work at the behest of the Chinese government and that their equipment could be used to spy on Americans.”

Federal Reserve Watch:

December 26 – Bloomberg (Alyza Sebenius): “President Donald Trump won’t try to fire Federal Reserve Chairman Jerome Powell, a top White House economic adviser said. Kevin Hassett, chairman of the White House Council of Economic Advisers, told reporters “yes, of course, a hundred percent” on Wednesday after he was asked whether Powell’s job is safe. Hassett also said that U.S. banks aren’t facing a liquidity crisis.”

December 24 – Wall Street Journal (Michael S. Derby): “Four veteran Federal Reserve officials—most of whom have signaled support for more interest-rate increases—will step into the limelight in 2019 as they become voters on the central bank’s rate-setting committee. That status prompts greater scrutiny of their views because they will be taking an official and public stand by voting on monetary policy—and will have the opportunity to directly dissent to Federal Open Market Committee decisions and detail their objections. The turnover comes at an uncertain time for the central bank…”

U.S. Bubble Watch:

December 25 – Wall Street Journal (Jessica Menton): “Investors are running out of places to hide as the stock-market rout accelerates. The S&P 500 and the Dow Jones Industrial Average have slumped 19% from their recent highs… The technology-heavy Nasdaq Composite, the Russell 2000 index of small-capitalization stocks and the Dow Jones Transportation Average have already breached those levels… Only the defensive sectors of the S&P 500—utilities, real estate, health care and consumer staples—that are known for their steady dividend payments have avoided such steep declines, for now. All are down at least 9% from their highs. ‘I haven’t seen managers this shell-shocked and confused in a very long time,’ said Robert Duggan, senior portfolio manager at… SkyBridge Capital. ‘People have been heading for the exits and selling their positions over the last two weeks.’”

December 25 – Wall Street Journal (Sarah Nassauer): “Shoppers delivered the strongest holiday sales increase for U.S. retailers in six years… Total U.S. retail sales, excluding automobiles, rose 5.1% between Nov. 1 and Dec. 24 from a year earlier, according to Mastercard SpendingPulse, which tracks both online and in-store spending with all forms of payment. Overall, U.S. consumers spent over $850 billion this holiday season, according to Mastercard.”

December 26 – Bloomberg (Molly Schuetz): “ Inc. reported a record-breaking holiday season as shoppers loaded their online baskets with items from Echo speakers to Calvin Klein clothes, suggesting consumer optimism isn’t being deterred by a tumbling stock market. The internet retailer said ‘tens of millions of people worldwide’ signed up for its Prime service… In the U.S. alone, more than 1 billion items were shipped for free using Prime…”

December 26 – Bloomberg (Jeff Kearns): “The Federal Reserve Bank of Richmond’s manufacturing gauge fell by a record as shipments and new orders weakened, the fourth district bank factory index to drop this month and the latest evidence that President Donald Trump’s trade war is becoming a greater headwind for U.S. producers.”

December 26 – Associated Press: “U.S. home price growth slowed in October, a likely consequence of higher mortgage rates having worsened affordability and causing sales to fall. The S&P CoreLogic Case-Shiller 20-city home price index rose 5% from a year earlier, down from an annual gain of 5.2% in September. That’s down from a 5.5% yearly gain in the previous month.”

December 23 – Wall Street Journal (Laura Kusisto): “A long rally in the housing market stumbled in 2018 and looks poised to slow further, another headwind for a U.S. economic expansion already contending with choppy financial markets and global trade tensions. The recent decline in home sales reflects a lack of inventory and the rising cost of homes… Home prices are now at all-time highs and inventory levels in recent months have begun climbing back from their lowest level in three decades. Rising mortgage rates, which nearly touched 5% late this year as they climbed to their highest level in more than seven years, are the latest blow. ‘Suddenly the light turned off in the second half of the year, with sales tumbling down and inventory rising,’ said Lawrence Yun, chief economist at the National Association of Realtors.”

December 23 – Financial Times (Ed Crooks): “All industrial revolutions need two things: technology and finance. The US shale revolution was made possible by the advances in horizontal drilling and hydraulic fracturing that allowed oil and gas to be released from previously unyielding rocks. But the industry’s financing was equally important in turning those innovations into a production boom that has shaken the world… Often they use derivatives to hedge some or all of their revenues, giving lenders confidence in their ability to make interest payments if oil and gas prices fall. For most of the shale boom, that financial infrastructure has been underpinned by the low interest rates and quantitative easing that followed the financial crisis. The surge in US oil production has been a result of monetary stimulus, just as much as the tech start-up boom and the rise in the S&P 500 have been.”

December 23 – Reuters (Devika Krishna Kumar and Jennifer Hiller): “U.S. shale producers are slamming the brakes on next year’s drilling with crude prices off 40% and mounting fears of oversupply, paring budgets that in some cases were set only weeks earlier. The reversal is alarming because blistering growth in shale fields has propelled U.S. crude output 16% to about 10.9 million barrels per day for 2018, above Saudi Arabia and Russia. Production has been expected to rise 11% more in 2019 as large oil firms and independents added wells this year.”

December 26 – Bloomberg (James Tarmy): “Ten people (or companies, or people masquerading as companies) spent a combined half-billion dollars on their Manhattan apartments this year. Impressive as it might seem, the numbers are down significantly from the previous three years. The highest point in the market, which this year was represented by a $73.8 million duplex penthouse in a new tower designed by Robert Stern, was down 26% from the 2014 high. (That year a penthouse on 57th street with views of Central Park sold for just over $100 million.) Moreover, in the last 12 months, eight out of the top 10 sales were heavily discounted—one apartment at 157 West 57th street took a $17 million price cut before it found a buyer.”

China Watch:

December 26 – Bloomberg: “China enters trade talks said to begin early next month in Beijing having made concerted efforts to end the standoff with the U.S., and also unsure it’s done enough. Since Presidents Xi Jinping and Donald Trump came to a temporary truce almost a month ago, China’s removed a retaliatory duty on U.S. automobiles and is drafting a law to prevent forced technology transfers. It’s also slashed import tariffs on more than 700 products and began buying U.S. crude oil, liquefied natural gas and soybeans again. Officials have been in constant contact with the U.S. to try to determine what else is needed to move things forward in January… It appears to Chinese officials that the U.S. itself isn’t clear on what it wants, said the people…”

December 27 – Bloomberg: “China’s economy is deteriorating and risks heading for a much weaker 2019 as plentiful borrowing by state and private firms is failing to boost growth, according to the China Beige Book. Borrowing was strong for a third consecutive quarter in the final three months, contradicting the mainstream view that risk-averse lenders want nothing to do with capital-starved firms, according to CBB International… State-owned and large companies borrowed more often but private firms and small- and medium-size enterprises continued to borrow at elevated levels and loan rejection rates remained close to an all-time low, it said. ‘The problem isn’t lack of borrowing, it’s that plentiful borrowing isn’t boosting growth,’ said CBB… ‘CBB numbers show firms borrowing already, yet not investing. They are paying bills or otherwise cushioning cash flow problems while economic growth continues to slow.’”

December 22 – Reuters (Philip Wen): “The head of China’s top economic planning agency said it would roll out more supportive measures to boost the economy especially in the advanced manufacturing sector, state media reported on Saturday. China will vigorously support the private sector and resolve the financing difficulties of private firms, the official Xinhua news agency quoted National Development and Reform Commission chairman He Lifeng as saying…”

December 26 – Bloomberg: “Chinese authorities are studying plans to help banks replenish capital as they look to continue with their crackdown on financial risk without hurting credit growth. The move to promote sales of perpetual bonds as soon as possible comes as new regulations on asset management force banks to absorb off-balance-sheet debts. Swelling soured loans and a slump in share prices are making it harder for banks to raise money. Stronger capital buffers also put the banks in a position to increase lending to private companies and help meet the government’s vow to support the struggling sector.”

December 24 – Reuters: “Business confidence among entrepreneurs in China worsened in the fourth quarter compared with the previous one, and was at the lowest since the second quarter of 2017, according to a survey by the People’s Bank of China… The entrepreneurs’ confidence index dropped to 67.8% in the fourth quarter, 3.4 percentage points lower than in the third quarter… A separate PBOC survey of urban households showed a decline in the number of respondents believing housing prices will continue to rise in the next quarter.”

December 25 – Financial Times (Lucy Hornby and Archie Zhang): “Shanghai office worker Jin Linglan had just put a downpayment on a car when she realised her savings were gone. Like many prosperous Chinese, Ms Jin invested in financial products that promised a high rate of return. And, like many of her fellow investors, she has made the painful discovery that her money has been swallowed up by the recurring defaults in China’s shadow banking market. The losses absorbed by middle class families in a nation famous for its diligent savers have taken a quiet financial and emotional toll. Many of the failures have been peer-to-peer lending platforms. Outstanding peer-to-peer loans in China topped Rmb1.2tn ($174bn) in the first quarter this year, before sliding to about Rmb800bn as hundreds of peer-to-peer platforms shut, according to… Moody’s.”

December 26 – Reuters (Stella Qiu, Min Zhang and Ryan Woo): “Earnings at China’s industrial firms in November dropped for the first time in nearly three years, as slackening external and domestic demand left businesses facing more strain in 2019 in a sign of rising risks to the world’s second-largest economy. The gloomy data points to a further loss of economic momentum as a trade dispute with the United States piles pressure on China’s vast manufacturing sector and as firms, bracing for a tough year ahead, shelve their investment plans, executives say.”

December 27 – Bloomberg (Alfred Cang): “China is the latest victim of the wild swings in oil prices that have roiled trading firms across the globe this year. Two top officials at Unipec, one of the country’s most powerful trading companies, were suspended this week following losses on bets related to oil prices in the second half of the year… Trading companies from Azerbaijan to Russia and the U.S. have been forced to overhaul their strategy, restructure operations or cut jobs in a year when oil surged to a 2014 high and then dramatically tumbled into a bear market within a matter of weeks.”

Global Bubble Watch:

December 25 – Wall Street Journal (Trefor Moss): “A downturn in China’s car market has wrong-footed some of the world’s biggest auto makers, saddling them with factories they no longer need and that are costly to retool. Ford Motor Co., Peugeot SA and Hyundai Motor Co. especially mistimed recent expansions, opening new plants just as the seemingly unstoppable growth of China’s auto market went into reverse… At a Ford plant, workers’ shifts have been reduced to a few days a month… Now these auto makers face a painful dilemma: Abandon those big investments, or invest even more to turn around dying plants at an uncertain time in a crucial market. ‘Looking back, it wasn’t the right choice’ to build new factories, said Paul Gong, an auto analyst at UBS Group AG . ‘No one was willing to predict that they might ever lose market share in China.’”

December 26 – Wall Street Journal (Jean Eaglesham and Dave Michaels): “About a year ago, Charles and Claudia Wildes maxed out their credit cards and invested more than $40,000 in a hot new digital currency, just as the crypto mania peaked. Now, all that money is gone—a small part of the billions investors lost as cryptocurrencies plunged in recent months. But the Wildeses’ losses aren’t just because of bad timing: The digital coin they bought, called BitConnect, was one of many alleged frauds pervading the market. The Securities and Exchange Commission is investigating BitConnect, people close to the probe said…”

Japan Watch:

December 25 – Reuters (Tetsushi Kajimoto): “A Japanese official said… that volatility was rising in the currency market and the government stands ready to take necessary steps if the market becomes too erratic. ‘Volatility is rising. Each country shares the G7/G20 view that excess volatility and disorderly moves are undesirable for the economy,’ Masatsugu Asakawa, vice finance minister for international affairs, told reporters.”

Leveraged Speculation Watch:

December 27 – Bloomberg (Saijel Kishan and Shelly Hagan): “It has been yet another year to forget in the world of hedge funds. Hardly a month went by without news of the high-fee money managers -- young and old, running large and small shops, big and little-known names -- shutting down. Many struggled to navigate markets marked by violent stock swings and slumping oil prices, others decided to restructure their firms to make riskier or longer-term bets, while some said they simply had enough of trading. Now as the year comes to a close, the $3.2 trillion industry is headed for its worst annual performance since 2011… About 444 funds shuttered in the first nine months of the year, the data provider said. That’s well below the record 1,471 liquidations during the 2008 financial crisis.”

Geopolitical Watch:

December 26 – Associated Press (Vladimir Isachenkov): “Russian President Vladimir Putin oversaw a test… of a new hypersonic glide vehicle, declaring that the weapon is impossible to intercept and will ensure Russia's security for decades to come. Speaking to Russia's top military brass after watching the live feed of the launch of the Avangard vehicle from the Defense Ministry's control room, Putin said the successful test was a ‘great success’ and an ‘excellent New Year's gift to the nation.’ The test comes amid bitter tensions in Russia-U.S. relations, which have sunk to their lowest level since the Cold War times…”

December 26 – Bloomberg (Henry Meyer and Stepan Kravchenko): “Russia warned the U.S. against any effort to influence the royal succession in Saudi Arabia, offering its support to embattled Saudi Crown Prince Mohammed bin Salman, who’s under continuing pressure over the killing of a government critic. President Vladimir Putin’s envoy to the Middle East said Prince Mohammed has every right to inherit the throne when the ailing 82-year-old King Salman dies. ‘Of course we are against interference. The Saudi people and leadership must decide such questions themselves,’ Mikhail Bogdanov… ‘The King made a decision and I can’t even imagine on what grounds someone in America will interfere in such an issue and think about who should rule Saudi Arabia, now or in the future. This is a Saudi matter.’”

Friday Evening Links

[Reuters] Wall Street rally pauses, but stocks mint weekly gain

[Reuters] Gold holds near 6-month high on softer dollar, tumultuous stocks

[Reuters] Treasuries-U.S. 10-year yield hits 10-month lows amid Wall St volatility

[CNBC] Wild swings, a government shutdown and Fed fears: Stocks wrap up 2 weeks of ‘disturbing’ moves

[Reuters] Sears Chair Lampert makes $4.6 billion bid to keep retailer alive: sources

[WSJ] A Trump-Powell Meeting: Chance of Rapprochement Fraught With Risks—for Both Sides

Thursday, December 27, 2018

Friday's News LInks

[Reuters] World stocks at one-week highs as Wall Street extends rebound

[Reuters] Oil prices slip toward 18-month lows ahead of New Year

[Reuters] Dollar LIBOR posts biggest weekly fall since May

[Reuters] King dollar's reign faces challenges in 2019

[Reuters] Japan factory output falls, sales slow as risks to economy rise

[Reuters] Syrian surprise: How Trump's phone call changed the war

[FT] Investors flee risky US corporate debt

[FT] Trades of 2018: the good, the bad and the wrongfooted

[FT] Economic causes of a bad year for active investors

[FT] Macron v Salvini: the battle over Europe’s political future

[BloombergSub] ‘Completely Bizarre’ Stock Moves Leave Traders Scratching Heads

[BloombergSub] China Has the World's Worst Stock Market With $2.4 Trillion Loss

Thursday Evening Links

[Reuters] Asia stocks edge up as Wall St. extends comeback rally

[Reuters] Wall Street roars back late to keep rally going

[Reuters] Oil prices drop as U.S. stock markets retreat

[Reuters] Schumer: Democrats, Republicans far apart on U.S. government funding

[CNBC] Government shutdown likely to extend into next year as Trump and Congress fail to break border wall stalemate

[Reuters] Drop in U.S. consumer confidence stokes fears of economic slowdown

[CNBC] Sears may be down to its last 24 hours. Iconic retailer likely liquidates if no bid comes in tomorrow

[CNBC] Saudi king shakes up Cabinet in the wake of Khashoggi crisis

[WSJ] The Investment That Cost Apple $9 Billion in 2018

[WSJ] Time Is Running Out for Unprofitable Chinese Startups

[FT] Tett: Expect more turbulence from Trump’s Fed fight

[FT] Tax cuts one year on: ‘we are on a very unstable fiscal path’

[BloombergSub] December Early Indicators Show China Slowed for a Seventh Month

Wednesday, December 26, 2018

Thursday's News Links

[Reuters] Dramatic stock market rally runs out of steam

[Reuters] Stocks tumble after Wall Street's dramatic surge

[Reuters] Oil slips back toward 18-month lows on oversupply

[Reuters] Exclusive: White House considers new year executive order to bar Huawei, ZTE purchases

[Reuters] Most shorted stocks log record gain as Wall Street surges

[Reuters] U.S. Commerce Department won't publish economic data during shutdown: WSJ

[Reuters] China's industrial profits suffer first annual drop in three years, piles pressure on economy

[FT] China’s middle class hit by shadow banking defaults

[BloombergSub] China Heads Into Trade Talks Bracing for More U.S. Demands

[BloombergSub] Billions in Buybacks No Match for Bears With Stocks Cratering

[BloombergSub] Traders Face New Landscape With Powell at Microphone After Every Fed Meeting

[BloombergSub] Asian Debt Defaults Are Expected to Rise

[BloombergSub] Omega, Jabre Capital Among Hedge Fund Casualties in Dismal 2018

Wednesday Evening Links

[Reuters] Stocks and oil rebound after pre-holiday thumping

[Reuters] Dow notches record point surge in dramatic rebound

[Reuters] Oil surges 8 percent after steep slide; growth fears still weigh

[Reuters] U.S. trade delegation to travel to China week of January 7 for talks -Bloomberg

[Reuters] Bid-to-cover at U.S. 5-year auction weakest since 2009

[BloombergQ] Fund Investors Pull $56 Billion in Biggest Exit Since 2008

[Reuters] U.S. fund investors sold most bonds in seven weeks on Fed hike: ICI

[BloombergQ] Richmond Fed Factory Gauge Falls Most Ever as Shipments Drop

[CNBC] Pretty much everybody on Wall Street thinks the market will rally in 2019

[BloombergSub] Insider Stock Buying Surges to 8-Year High

[WSJ] ETFs, Mutual Funds See Sudden Drop in Money Flowing In

[FT] New year, old problems for Italy’s banking sector

Tuesday, December 25, 2018

Wednesday's News Links

[BloombergQ] U.S. Stocks Rebound From Bear Brink; Crude Rises: Markets Wrap

[Reuters] Stocks higher after four sessions of sharp declines

[BloombergQ] Oil Rises After Breaching $50 as Market Chaos Cloaks OPEC+ Cuts

[Reuters] Fed chair’s job is not in jeopardy, White House economic adviser says

[Reuters] Trump praises Treasury Secretary Mnuchin but hits Fed again on rate rises

[CNBC] Trump digs in heels on government shutdown: ‘It’s not going to be open until we have a wall’

[BloombergQ] Home Price Gains in 20 U.S. Cities Slow for a Seventh Month

[AP] US home price growth slowed in October

[BloombergQ] $5.6 Trillion Asia Stock Loss Has Traders on Edge of Their Seats

[BloombergQ] China Studying Plans to Boost Bank Capital Amid Lending Push

[BloombergQ] Russia Warns U.S. Against Interfering in Saudi Royal Succession

[WSJ] Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

[WSJ] Crypto Craze Drew Them In; Fraud, in Many Cases, Emptied Their Pockets

[WSJ] China’s Car Slump Leaves Foreign Auto Makers With Idle Factories

[WSJ] U.S. Holiday Retail Sales Are Strongest in Years, Early Data Show

Tuesday's News Links

[Reuters] Dollar slips to four-month low vs. yen amid turmoil in Washington

[Reuters] 10-year JGB yield hits zero for first time since Sept 2017 as risk-off dominates

[Reuters] Japan's top currency official says govt ready to act to curb yen volatility

[WSJ] Bearing Down: With Bull Run in Jeopardy, Investors Find Few Havens

Sunday, December 23, 2018

Monday's News Links

[BloombergQ] Stocks Hit 20-Month Low as D.C. Turmoil Weighs: Markets Wrap

[Reuters] Markets far from merry as stock losses extend into seventh day

[Reuters] Dollar weakens on government shutdown concerns, weaker stocks

[Reuters] Gold rises as US political uncertainty breeds risk-aversion

[CNBC] Trump resumes attack on the Fed as markets sink again

[BloombergQ] Mnuchin Bid to Calm Markets Risks Making Bad Situation Worse

[Project Syndicate] Stephen Roach: In Defense of the Fed

[BloombergQ] Trump-Powell Battle Would Span Three Arenas Where Everyone Loses

[CNBC] Look to the two remaining Fed board nominees for clues about Trump-Powell battle

[Reuters] China fourth-quarter business confidence index lowest since second quarter of 2017: central bank survey

[WSJ] Global Stocks Fall on Treasury Department Comments

[WSJ] Four New Voters to Join Fed’s Key Panel Amid Rate-Increase Uncertainty

[FT] Steven Mnuchin sparks unease with unusual effort to reassure markets

Sunday Evening Links

[Reuters] Index futures little changed ahead of holiday-shortened week

[Reuters] Asia cautious amid U.S. political uncertainty

[Reuters] Oil eases on oversupply concerns ahead of holiday

[Reuters] Gold rises as investors shy away from risk amid US political uncertainty

[BloombergQ] Mnuchin Called Top U.S. Bank Executives on Market Stability

[Reuters] Top Trump official calls bankers, will convene 'Plunge Protection Team'

[Reuters] Trump advisers have discussed arranging meeting with Fed's Powell: WSJ

[BloombergQ] China Still Has a Treasure Chest of Overseas Real Estate to Sell

[NYT] Stock Market Rout Has Trump Fixated on Fed Chair Powell

[WSJ] Trump Administration Warns Shutdown Could Last Into January

[FT] US faces risk of shutdown running into new year

Sunday's News Links

[CNBC] Treasury Secretary Mnuchin moves to quell firestorm, says Trump never suggested firing Fed Chairman Powell despite ‘absolute terrible’ policy

[CNBC] US government shutdown appears set to continue until Thursday as fight over Trump’s border wall stalls spending talks

[BloombergQ] Tough Year for Treasuries Ends With $131 Billion Auction Blitz

[Reuters] China says it held second vice ministerial call with U.S. on trade

[Reuters] Oil producers to have extra meeting if output cuts 'not enough': UAE

[Reuters] U.S. shale producers hit the brakes on 2019 spending

[Reuters] Italy's 2019 budget wins Senate approval amid outcry

[WSJ] Trump Administration Warns Shutdown Could Last Into January

[WSJ] Trump Won’t Try to Fire Fed Chairman Powell, Treasury Secretary Says

[WSJ] Once Hot Housing Market Likely to Cool Further in 2019

[FT] US shale’s financial blanket at risk of wearing thin in 2019

Friday, December 21, 2018

Weekly Commentary: Powell Federal Reserve Lowers “Fed Put” Strike Price

I have little confidence history will get this right. Today’s overwhelming consensus view holds that Powell this week committed a major policy blunder. After his early-October “we’re a long way from neutral” “rookie mistake”, he has followed with a rate increase right in the throes of a stock market sell-off, Credit market instability and mounting global and domestic economic risk. He stated the Fed’s balance sheet runoff was stuck on autopilot, even as stunned market participants fret illiquidity. Moreover, Powell disappointed skittish markets heading right into December quadruple-witch options expiration – in the face of an impending government shutdown. How times have changed.

There was irony in Alan Greenspan joining Bloomberg’s Tom Keene Wednesday for live coverage of the FOMC policy decision. It was, after all, the original “Greenspan put” that morphed over Bernanke’s and Yellen’s terms into the interminable “Fed put.” Markets this week were desperate for confirmation that the Powell Fed would uphold the tradition of pacifying the markets and, when needed, invoking the Federal Reserve backstop. Markets were prepared to begrudgingly tolerate a rate increase. But the marketplace demanded evidence – an explicit signal - that the FOMC recognized the gravity of market developments and was prepared to intervene. Chairman Powell didn’t share the markets’ agenda.

Our Federal Reserve Chairman should be commended. Under extraordinary pressure, Mr. Powell and the FOMC didn’t buckle.

Expiration for the aged “Fed put” was long past due. For too long it has been integral to precarious Bubble Dynamics. It has promoted speculation and speculative leverage. It is indispensable to a derivatives complex that too often distorts, exacerbates and redirects risk. The “Fed put” has been integral to momentous market misperceptions, distortions and structural maladjustment. It has been fundamental to the precarious “moneyness of risk assets,” the momentous misconception key to Trillions flowing freely into ETFs and other passive “investment” products and strategies. The "Fed put" was central to a prolonged financial Bubble that over time imparted major structural impairment upon the U.S. Bubble Economy.

Moreover, prolonged U.S. financial and economic Bubbles were fundamental to Bubbles inflating on an unprecedented global scale. The “Fed put” morphed into a disastrous global “policymaker put” phenomenon. If not for the “Fed put,” never would there have been the audaciousness to set forth on “whatever it takes.” And the greater asset Bubbles inflated the more convinced everyone became that central banks and governments (certainly including Beijing!) had everything under control - and would in no terms tolerate a bust.

There is never a good time to pierce a Bubble. There definitely is no cure, so it’s a central banker and policymaker imperative to avoid supporting a backdrop conducive to Bubble Dynamics. There was never going to be a convenient time to end the “Fed put.” Implicit backstops and guarantees are problematic that way. Washington throughout the mortgage finance Bubble period was content with the markets’ view that the Treasury would backstop GSE obligations. No one was willing to rock the boat during the boom. Critical lesson not learned.

As for the Fed’s market “put”, it proved a challenge for Chairman Powell to distance the Federal Open Market Committee (FOMC) from an implicit backstop the Federal Reserve repeatedly employed starting all the way back with the 1987 stock market crash (evolving from liquidity assurances to Trillions of “whatever it takes” liquidity injections and zero rates in a non-crisis backdrop). The new Chairman intimated that he preferred the Fed move in a different direction, subtlety easily lost with the focus on communicating policy continuity. It was only when the markets were under acute pressure that participants would comprehend the seriousness of a subtle but momentous change in the Fed’s approach. That day came Wednesday.

December 21 – CNBC (Kate Rooney): “Federal Reserve Bank of New York President John Williams told CNBC on Friday the Fed is open to reconsidering its views on rate hikes next year. ‘We are listening, there are risks to that outlook that maybe the economy will slow further,’ Williams told Steve Liesman… Williams said despite this week’s forecasts, the central bank is not ‘sitting there saying we know for sure what’s going to happen’ in 2019. ‘What we’re going to be doing going into next year is reassessing our views on the economy, listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views,’ he said.”

The Dow rallied 350 points in Friday morning trading on comments from (NY Fed President) John Williams. Yet another rally to evaporate. By that time, the damage had been done. Confidence had been shaken. Fear had completely supplanted Greed. And, to be sure, it’s not a market structure especially resistant to waning confidence. Indeed, acute fragilities are being laid bare. Bubbles don’t work in reverse. Crisis Dynamics have engulfed the “Core,” and I’ll leave it at that for this week.

I’ve always had serious issues with central banks promoting the perception that they would eagerly backstop market liquidity. Liquidity is a fundamental market risk – that can’t be permanently transformed, transferred or mitigated. It’s a precarious proposition to promote the belief that contemporary central banks - with unlimited capacity to create liquidity - will do “whatever it takes” to ensure highly liquid markets. Nevertheless, it’s extremely challenging to convey to market participants, central bankers, politicians and the general public why central banks aggressively underpinning the markets over the long-term promotes pernicious instability for the markets, real economies and humanity more generally.

The implicit “Fed put” seemed so innocuous when things looked good – so long as the Bubble was inflating. For going on a decade, Bubble Analysis has appeared a pathetic waste of time. Suddenly, cracks appear, confidence wanes, liquidity disappears, credit falters - and ramifications are anything but subtle: so much teeters on the markets’ perception of the efficacy of central bank market backstops. The world today hangs in the balance – markets, economies, politics and geopolitics. One of the greatest risks associated with the global government finance Bubble has been a crisis of confidence in policymaking.

It was inevitable the “Fed put” would turn problematic. The more explicit central backstops become, the more market distortions promote self-reinforcing speculative excess and Bubbles. The greater the scope of Bubbles, the more deeply manic markets become convinced that central bankers won’t allow the good times to end. Importantly, speculation and leverage will invariably expand beyond the expected capacity of liquidity backstops. This is why “whatever it takes” and “QE infinity” were so reckless. There became essentially no degree of excess that troubled the marketplace. It degenerated into a complete malfunctioning of the market mechanism.

I certainly don’t believe the “Fed put” is dead. The Powell Fed just meaningfully lowered the “strike price.” They’ll be forced to respond, but only after the market has suffered significant impairment. To the markets’ horror, the bursting Bubble will pass the point of no return before our central bank is compelled to aggressively defend the marketplace.

As painful as this process will become, and as deeply distressing it will be to see so many hopes, dreams and expectations crushed, the Powell Fed is taking the best approach. The Bubble would have inevitably burst. Indeed, the global Bubble has been deflating since earlier in the year. That the U.S. “Terminal Phase” of Bubble excess continued even as the global Bubble faltered created a perilous divergence that would end badly. It’s ending now - badly. The miserable downside would have only been worse had the Fed stepped in, bolstered the markets once again and extended the “Terminal Phase.”

It would have been the easy decision for Powell to just pull a Greenspan, Bernanke or Yellen. Just give the markets what they want and silence the temper tantrum. The three preceding Fed chairs invariably acted in the interest of sustaining or resuscitating Bubble Dynamics. In my view, at least two of the three seemed preoccupied with their own reputations and legacies.

In an age seemingly bereft of statesmen, Jay Powell is one. He will fall under only more intense pressure and criticism. This good man will be pilloried and blamed for a predicament decades in the making. Clearly, he’s the targeted presidential fall guy. History will surely be merciless, and it’s all unfair. I worry about a lot of things these days, including how our nation will attract talented and decent individuals into public service – especially now that they will be needed more than ever. We’re heading into challenging and unsettling times. Somehow our nation must to come together and support our institutions and responsible public servants.

For the Week:

The S&P500 sank 7.1% (down 9.6% y-t-d), and the Dow fell 6.9% (down 9.2%). The Utilities declined 4.3% (up 1.5%). The Banks fell 6.3% (down 22.7%), and the Broker/Dealers lost 5.7% (down 14.5%). The Transports dropped 6.7% (down 16.4%). The S&P 400 Midcaps fell 7.0% (down 15.2%), and the small cap Russell 2000 sank 8.4% (down 15.9%). The Nasdaq100 fell 8.3% (down 5.5%). The Semiconductors lost 6.5% (down 12.1%). The Biotechs sank 10.9% (down 6.7%). With bullion jumping $17.60, the HUI gold index rose 2.5% (down 18.6%).

Three-month Treasury bill rates ended the week at 2.33%. Two-year government yields declined nine bps to 2.64% (up 76bps y-t-d). Five-year T-note yields fell nine bps to 2.64% (up 43bps). Ten-year Treasury yields dropped 10 bps to 2.79% (up 39bps). Long bond yields fell 11 bps to 3.03% (up 29bps). Benchmark Fannie Mae MBS yields dropped 13 bps to 3.62% (up 63bps).

Greek 10-year yields rose 11 bps to 4.33% (up 26bps y-t-d). Ten-year Portuguese yields increased two bps to 1.69% (down 26bps). Italian 10-year yields dropped 11 bps to 2.83% (up 82bps). Spain's 10-year yields slipped a basis point to 1.40% (down 17bps). German bund yields were unchanged at 0.25% (down 18bps). French yields declined two bps to 0.70% (down 9bps). The French to German 10-year bond spread narrowed two to 45 bps. U.K. 10-year gilt yields rose eight bps to 1.32% (up 13bps). U.K.'s FTSE equities index declined 1.8% (down 12.6%).

Japan's Nikkei 225 equities index sank 5.7% (down 11.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.05% (unchanged). France's CAC40 fell 3.3% (down 11.6%). The German DAX equities index declined 2.1% (down 17.7%). Spain's IBEX 35 equities index fell 3.7% (down 14.8%). Italy's FTSE MIB index dropped 2.7% (down 15.8%). EM equities were mixed to lower. Brazil's Bovespa index declined 2.0% (up 12.2%), while Mexico's Bolsa added 0.4% (down 16%). South Korea's Kospi index slipped 0.4% (down 16.5%). India's Sensex equities index declined 0.6% (up 4.9%). China's Shanghai Exchange dropped 3.0% (down 23.9%). Turkey's Borsa Istanbul National 100 index gained 1.5% (down 20.4%). Russia's MICEX equities index declined 0.8% (up 11.3%).

Investment-grade bond funds saw outflows of $3.927 billion, and junk bond funds posted outflows of $789 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped one basis point to a four-month low 4.62% (up 68bps y-o-y). Fifteen-year rates were unchanged at 4.07% (up 69bps). Five-year hybrid ARM rates fell six bps to 3.98% (up 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 10 bps to a ten-month low 4.46% (up 31bps).

Federal Reserve Credit last week declined $0.5bn to $4.048 TN. Over the past year, Fed Credit contracted $360bn, or 8.2%. Fed Credit inflated $1.237 TN, or 44%, over the past 319 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $18.7bn last week to $3.403 TN. "Custody holdings" rose $30.5bn y-o-y, or 0.9%.

M2 (narrow) "money" supply jumped $28.5bn last week to a record $14.423 TN. "Narrow money" gained $582bn, or 4.2%, over the past year. For the week, Currency increased $1.3bn. Total Checkable Deposits fell $16.8bn, while Savings Deposits surged $49.2bn. Small Time Deposits gained $4.8bn. Retail Money Funds declined $10.3bn.

Total money market fund assets increased $5.6bn to $3.008 TN. Money Funds gained $187bn y-o-y, or 6.6%.

Total Commercial Paper dropped $15.8bn to $1.074 TN. CP declined $4.4bn y-o-y, or 0.4%.

Currency Watch:

December 17 – Bloomberg (Chris Anstey): “China’s exchange rate is likely to get more volatile in time as the country pushes greater international use of the yuan, according to Goldman Sachs… While the yuan-internationalization campaign hit a setback as China tightened regulation of capital flows in the wake of a messy 2015 devaluation, there’s increasing pressure for policy makers to take up the initiative again, economists including MK Tang wrote… China’s current account will tip into deficit in coming years, in the view of many strategists, as its increasingly large economy continues to grow faster than the rest of the world. In financing that deficit, China could reduce risks if it acquired funding in its own currency -- much like the U.S. does now, and unlike more vulnerable countries such as Brazil, Goldman noted.”

The U.S. dollar index declined 0.5% to 96.956 (up 5.2% y-t-d). For the week on the upside, the Japanese yen increased 2.0%, the Mexican peso 1.5%, the South Korean won 0.7%, the euro 0.6%, the British pound 0.5%, the Swiss franc 0.4%, the Brazilian real 0.4%, the Swedish krona 0.2% and the Singapore dollar 0.2%. For the week on the downside, the Australian dollar declined 1.8%, the Norwegian krone 1.7%, the South African rand 1.7%, the Canadian dollar 1.6% and the New Zealand dollar 1.0%. The Chinese renminbi was little changed versus the dollar this week (down 5.79% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index sank 6.3% (down 14.0% y-t-d). Spot Gold gained $17.60 to $1,256 (down 3.6%). Silver increased 0.4% to $14.702 (down 14.2%). Crude sank $5.61 to $45.59 (down 25%). Gasoline fell 8.1% (down 27%), and Natural Gas slipped 0.3% (up 29%). Copper dropped 3.2% (down 19%). Wheat fell 3.0% (up 20%). Corn declined 1.6% (up 8%).

Market Dislocation Watch:

December 21 – CNBC (Thomas Franck): “Stocks plunged again on Friday, sending the Dow Jones Industrial Average to its worst week since the financial crisis in 2008, down nearly 7%. The Nasdaq Composite Index closed in a bear market and the S&P 500 was on the brink of one itself, down nearly 18% from its record earlier this year.”

December 16 – Financial Times (Eric Platt, Colby Smith and Joe Rennison): “US credit markets are grinding to a halt with fund managers refusing to bankroll buyouts and investors shunning high-yield bond sales as rising interest rates and market volatility weigh on sentiment. Not a single company has borrowed money through the $1.2tn US high-yield corporate bond market this month. If that drought persists, it would be the first month since November 2008 that not a single high-yield bond priced in the market, according to data providers Informa and Dealogic. In the leveraged loan market, two transactions were postponed last week after Barclays, Deutsche Bank, UBS and Wells Fargo failed to find buyers for the debt packages, a rarity in what has been one of the hottest corners of credit markets this year.”

December 21 – Bloomberg (Davide Scigliuzzo and Sally Bakewell): “A rout in the once-hot market for risky corporate loans has some of Wall Street’s largest banks stuck with at least $1.6 billion of unwanted leveraged buyout debt. Banks including Barclays Plc, Goldman Sachs… and Bank of America… -- among the top providers of loans for LBOs -- have struggled in recent weeks to sell loans they’ve agreed to make for private equity deals, as concerns about the global economic outlook spurred investors to flee risky assets. At least four loan sales for buyouts and acquisitions have failed to clear the market so far this month, forcing the banks to keep the debt on their books…”

December 17 – Bloomberg (Lisa Lee): “Some of the biggest buyers of company loans are scaling back, and it’s hurting the market for buyout debt. Money managers that buy loans and repackage them into bonds have cut back on their activity. Sales of the rebundled loans, known as collateralized loan obligations, dropped 25% in the first half of December from the same period last year, after falling 10% in November. The firms that issue CLOs buy about half the loans made to junk-rated companies. As demand from these money managers has waned, not to mention buying from retail investors, prices for leveraged loans have reached their lowest levels in more than two years.”

December 15 – New York Times (Matt Phillips): “Stocks? Messy. Bonds? Meh. Commodities? Not pretty. Most years, financial markets are a mixed bag. A bad year for risky investments, like stocks, might be a great one for safe bets like government bonds. Or, if worries about inflation are hurting bond investments, commodities like gold tend to do well. Not this year. For the first time in decades, every major type of investment has fared poorly, as the outlook for economic growth and corporate profits is dampened by rising trade tensions and interest rates. Stocks around the world are getting pummeled, while commodities and bonds are tumbling — all of which have left investors with few places to put their money.”

December 18 – Bloomberg (Donal Griffin, Jennifer Surane and Cathy Chan): “Citigroup Inc. faces losses of as much as $180 million on loans made to an Asian hedge fund whose foreign-exchange wagers went awry, prompting board-level discussions and a business shakeup, according to a person briefed on the matter. The hedge fund, managed by a unit of GF Holdings (Hong Kong) Corp., and Citigroup are in discussions on the positions and how they should be valued… The situation is fluid and the eventual losses may end up being smaller depending on how the trades are unwound, one of the people said.”

Trump Administration Watch:

December 21 – Bloomberg (Daniel Flatley, Erik Wasson, Steven T. Dennis and Laura Litvan): “Parts of the U.S. government began shutting down on Saturday for the third time this year after a bipartisan spending deal collapsed over President Donald Trump’s demands for more money to build a wall along the U.S.-Mexico border. Trump scuttled an agreement that would have kept the government open until February after coming under heavy criticism from conservative talk show hosts and some allies in the House because the measure didn’t include the $5 billion he wanted for the wall. While negotiations to resolve the impasse are underway, it’s not clear whether parts of the government will remain shuttered for days or weeks. Ending the shutdown -- which affects nine of 15 federal departments and dozens of agencies -- requires Democratic leaders and Trump to reach a compromise, which so far has been elusive as both sides hardened their positions.”

December 18 – Bloomberg (David Lawder): “The United States and China are planning to hold meetings in January to ‘document an agreement’ on trade, U.S. Treasury Secretary Steven Mnuchin told Bloomberg… Mnuchin was quoted as saying the two sides had held several phone conversations in recent weeks, and were planning further formal talks.”

December 18 – Reuters (Susan Heavey): “U.S. President Donald Trump on Tuesday further sought to pressure the Federal Reserve as the central bank prepared to start its two-day policy meeting, warning the Fed’s board not to ‘make yet another mistake’ ahead of an expected interest rate hike… Trump, who has made the economy a key part of his political platform, has repeatedly criticized the Fed and its chairman, Jerome Powell. ‘Don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!’ Trump wrote.”

December 17 – Wall Street Journal (Alex Leary and Nick Timiraos): “President Trump argued Monday on Twitter that it was ‘incredible’ that Federal Reserve policy members were considering raising interest rates again, continuing his public campaign against tighter monetary policy… ‘It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike,’ Mr. Trump tweeted. ‘Take the Victory!’”

December 18 – Bloomberg (Tom Schoenberg, Chris Dolmetsch and Jennifer Epstein): “The U.S. Justice Department announced indictments accusing Chinese officials of coordinating a decade-long espionage campaign to steal intellectual property and other data from dozens of companies, adding to tensions amid the trade war between the two nations. Two Chinese nationals, Zhu Hua and Zhang Shilong, were accused… of coordinating with state security officials in an ‘extensive’ hacking campaign, allegedly infiltrating 45 U.S. companies and government agencies… Secretary of State Michael Pompeo and Homeland Security Secretary Kirstjen Nielsen said… they were ‘concerned’ that the alleged operation violated a 2015 agreement China made with the U.S. to stop supporting cyber theft of intellectual property and trade secrets.”

December 18 – Bloomberg (Saleha Mohsin, Elizabeth Dexheimer and Craig Torres): “The Trump administration wants to work with Congress on freeing Fannie Mae and Freddie Mac from government control, though it’s considering pursuing some changes on its own, Treasury Secretary Steven Mnuchin said… ‘I would like to get them out of conservatorship,’ Mnuchin said during a roundtable interview at Bloomberg’s Washington office. ‘My preference would be to do something that has bipartisan legislative support.’ … Fannie and Freddie have spent more than a decade under the government’s thumb with no end in sight. The U.S. took over the mortgage-finance giants during the 2008 financial crisis, eventually injecting them with $187.5 billion as the housing market tanked. The companies have since become profitable again, and have paid about $279 billion to the U.S. Treasury in dividends that don’t count as repayment.”

Federal Reserve Watch:

December 19 – Financial Times (Sam Fleming): “If bruised US equity investors were expecting Jay Powell to come to their rescue at the final Federal Reserve policy meeting of the year, they were sorely mistaken. The Fed chairman ploughed ahead on Wednesday with the fourth quarter-point interest rate rise in 2018 and brushed aside calls for the central bank to slow its balance sheet reduction programme. Weeks of market volatility had caused financial conditions to tighten only ‘a little bit’, he said at a press conference. The economy, he added, no longer needed any monetary support. The resulting stock market slide — the S&P 500 dropped as much as 2.3%, marking the worst fall following a Fed rate rise since 1994 — will have come as unwelcome news to a central bank that has been an unwitting contributor to volatility in recent months.”

December 16 – Reuters (Howard Schneider): “Whatever the acronym, when the U.S. Federal Reserve dropped its policy rate to near zero on Dec. 16, 2008, to counter a full-scale economic crisis, it ushered in what the central bank’s chairman at the time, Ben Bernanke, called ‘the end of the old regime.’ A decade later, the full impact and import of that move are still not fully clear. But the Fed was never the same. The decision to move to zero ushered in wholesale changes to how the Fed works, from its building a massive balance sheet to adopting an explicit 2% inflation target and holding regular post-meeting press conferences. A new body of research continues to explore the likelihood that trips to the ‘effective lower bound’ will become common.”

December 20 – Bloomberg (Mohamed A. El-Erian): “Resisting unusual pressure from both politicians and notable market participants, Federal Reserve Chairman Jerome Powell and his colleagues on the Open Market Committee on Wednesday raised interest rates by 25 bps and slowed the path for future hikes by less than markets hoped. In doing so, the central bank reaffirmed that its focus remains firmly domestic and economic. But the markets’ reaction suggested the move was seen as heightening concerns about a policy mistake, rather than responsible policy making. This, and what’s likely to play out over the next few weeks, illustrates a bigger phenomenon: the threat that the Fed and other central banks are increasingly in a no-win situation, due to factors mostly outside their control.”

December 18 – Bloomberg (Jeff Kearns): “Selling in U.S. stocks has an ominous historical comparison for Federal Reserve officials debating an interest-rate increase this week. The last time the S&P 500 Index fell this much in the period between two policy gatherings was the collapse of investment bank Lehman Brothers Holdings Inc. in 2008… The S&P 500 has declined 9.3% from the Fed’s last meeting on Nov. 8 through Monday’s close. That’s the biggest intra-meeting slump since the 18.8% plunge between its Sept. 16, 2008, meeting, a day after Lehman filed for bankruptcy, and a special gathering announced on Oct. 8.”

U.S. Bubble Watch:

December 19 – Reuters (Jason Lange): “The U.S. current account deficit increased in the third quarter as imports surged, the Commerce Department said… in a report that also showed U.S. firms brought into the United States $92.7 billion in repatriated earnings. …The current account deficit, which measures the flow of goods, services and investments into and out of the country, widened to $124.8 billion, or 2.4% of national economic output, in the July-September period. Analysts polled by Reuters had expected the current account deficit to widen to $124.3 billion.”

December 18 – CNBC (Bob Pisani): “It’s official: This is an all-time record year for corporate stock buybacks. Announced buybacks for 2018 are now at $1.1 trillion. And companies are using their authorizations. About $800 billion of stock has already been bought back, leaving about $300 billion yet to be purchased. We’ve seen buyback announcements recently from Lowe’s, Pfizer, and Facebook, but in the last few days, as stocks have moved to new lows, companies are picking up the pace of activity.”

December 17 – Reuters (Manojna Maddipatla and Daniel Wiessner): “Shares of U.S. health insurers, hospitals and healthcare companies fell on Monday in the aftermath of a ruling by a federal judge in Texas that the Affordable Care Act (ACA), commonly called Obamacare, was unconstitutional.”

December 17 – Bloomberg (Scott Lanman): “Factories in New York state reported a sharp slowdown in business, sending a Federal Reserve index tumbling this month to a 19-month low and adding to signs U.S. economic growth is moderating. The New York Fed’s Empire State manufacturing index fell 12.4 points to 10.9…”

December 17 – Reuters (Imani Moise): “As U.S. bank stocks tanked this month over fears of an impending recession, industry executives downplayed concerns to colleagues, analysts and journalists, arguing that the economy is in great shape. But looking behind headline numbers showing healthy loan books, problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards, according to federal data reviewed by Reuters. Lenders are also starting to cut relationships with customers who seem too risky.”

December 18 – Wall Street Journal (Corrie Driebusch): “The reign of the unicorn IPO has commenced. Investors gripe that highly valued tech companies are eschewing the public markets and opting to remain private for longer. But in 2018, to little fanfare, 38 tech and internet companies valued at $1 billion or more at the time of their IPO listed shares in the U.S., the most to do so since the height of the dot-com boom in 2000, according to Dealogic. That is expected to rise next year, according to bankers and fund managers who follow the IPO market. In 2019 some of the hottest names among the tech unicorns, including Uber Technologies Inc., Lyft Inc. and Slack Technologies Inc. are considering IPOs.”

December 17 – Bloomberg (Ros Krasny): “The number of Americans expecting the U.S. economy to get worse in the next year is at its highest point since 2013, a national NBC/Wall Street Journal poll shows… Overall, 28% of Americans said the economy will get better in the next year, while 33% predict it will get worse, according to the survey… Those numbers were essentially reversed from January, when 35% said the economy would get better and 20% said it would get worse.”

December 19 – Reuters (Lucia Mutikani): “U.S. home sales unexpectedly rose in November, but recorded their biggest annual decline in 7-1/2 years as the housing market remained mired in weakness amid higher mortgage rates which have made home purchases more expensive… ‘The trend in housing is clearly slowing as affordability takes a bite,’ said Jennifer Lee, a senior economist at BMO Capital Markets… The National Association of Realtors said existing home sales increased 1.9% to a seasonally adjusted annual rate of 5.32 million units last month… Sales have now increased for two straight months.”

December 18 – Bloomberg (Romy Varghese): “States collected more than $1 trillion in tax revenue in fiscal 2018, a record, while the growth rate is unlikely to be sustained, according to… the Tax Policy Center. Tally increased by 7.8% from 2017: Growth in income tax driven by timing decisions responding to the federal tax overhaul passed last December: States still face large fiscal challenges and uncertainties from tax changes…”

China Watch:

December 21 – Bloomberg: “China’s top policy makers confirmed that more monetary and fiscal support will be rolled out in 2019, as the world’s second-largest economy grapples with a slowdown that’s yet to show signs of ending. ‘Significant’ cuts to taxes and fees will be enacted in 2019 and while monetary policy will remain ‘prudent,’ officials will strike an ‘appropriate’ balance between tightening and loosening, according to a statement published after the annual Economic Work Conference… The statement signals that China is ratcheting up the limited, targeted stimulus approach used during 2018, though still stopping short of the all-out support that would pressure the currency and hobble efforts to contain debt.”

December 20 – Wall Street Journal (Nathaniel Taplin): “‘What we should and can reform, we will resolutely reform. What shouldn’t be reformed and cannot be reformed, we will resolutely refrain from changing.’ Not the tone optimists had been hoping for from Chinese President Xi Jinping, speaking this week 40 years after the launch of Deng Xiaoping’s ‘reform and opening up’ policy, which ignited China’s economic miracle… Given the severe stress China’s private sector is under, with bond defaults at an all-time high and huge amounts of equity pledged as collateral for loans, Mr. Xi’s speech was remarkably light on signals that Beijing is committed to turning things around for private companies. The speech did urge ‘unwavering’ support for the private economy, but only after calling for ‘strengthening and developing the state-controlled economy.’”

December 17 – Reuters (Evelyn Cheng): “Chinese President Xi Jinping addressed his nation Tuesday morning in Beijing to commemorate the 40th anniversary of China’s ‘reform and opening up’ — and he struck a relatively defiant tone in response to international calls for changes to his country’s economy. His remarks focused on how China’s Communist Party guided the nation to its economic success and emphasized the country’s right to pursue its own path going forward. In an address that lasted nearly 1 1/2 hours, Xi did not mention trade tensions with the U.S. and made only passing reference to market-oriented reform goals that previous speeches have discussed in detail… ‘No one is in a position to dictate to the Chinese people what should or should not be done,’ Xi said in Mandarin Chinese during the speech, according to an official translation…”

December 17 – Reuters (Stephanie Nebehay): “China said on Monday that the Trump administration’s trade measures on items from steel to intellectual property taken under the guise national security were ‘bringing back to life the ghost of unilateralism’.

December 17 – Bloomberg (Shuli Ren): “If you’re impressed by Masayoshi Son’s $100 billion Vision Fund, China’s $856 billion in ‘guidance funds’ will blow your mind. The country is quickly becoming a major player in the venture capital world. This year, Chinese investors are involved in over $90 billion worth of deals, second only to the U.S. and up from only $11.5 billion five years ago.”

December 17 – Bloomberg: “China’s cleanup of its shadow-banking system is fueling a record number of liquidations in its $1.9 trillion mutual fund market. More than 600 funds have been closed this year, surpassing all liquidations in the previous 12 years combined… It’s also more than triple the total last year, representing a sharp rise in closures for a mutual fund market that has grown more than five-fold since 2011 in assets under management. China’s crackdown on entrusted loans, the No. 2 source of shadow banking, as well as an ailing stock market have contributed to the record liquidations…”

Brexit Watch:

December 20 – Reuters (Kylie MacLellan and William James): “British ministers are divided over the government’s next steps if Prime Minister Theresa May’s Brexit deal with the European Union is not approved by parliament next month. With just under 100 days until Britain is due to leave the EU on March 29, deep divisions in parliament have raised the chances of leaving without a deal and increased calls for a second referendum to break the deadlock. Work and Pensions Secretary Amber Rudd said… there would be a ‘plausible argument’ for another referendum if parliament failed to reach a consensus on the way forward, something May has repeatedly ruled out.”

December 20 – Reuters (Andy Bruce and William Schomberg): “The Bank of England said on Thursday that Brexit uncertainty had ‘intensified considerably’ over the last month but falling oil prices were likely to push inflation below its 2% target soon, helping to support the economy. All nine of its rate-setters voted to keep them at 0.75% as expected. But there were signs of unease about the turmoil surrounding Britain’s divorce from the European Union.”

Global Bubble Watch:

December 19 – Financial Times (James Politi): “At a congressional hearing last week, David Malpass, the top US Treasury official on international affairs, issued a thinly disguised warning that might have seemed unthinkable just a few years ago: the World Bank and other bastions of the US-led international economic order are at risk of being captured by Chinese influence. China had made ‘substantial inroads’ into the multilateral development banks that were ‘worrisome’, Mr Malpass told members of the House financial services committee. ‘We are, therefore, working with allies and like-minded countries to guide the MDBs away from what could be viewed as endorsement of China’s geopolitical ambitions.’ Mr Malpass’s comments highlighted the extent to which the World Bank and other multilateral lenders are in danger of becoming ensnared in the economic and strategic confrontation between Washington and Beijing. ‘It’s not going to put any of these banks in a good place to have these two big countries duking it out in the midst of their lending programmes,’ said Mary Lovely, an economics professor at Syracuse University and a fellow at the Peterson Institute for International Economics… ‘They may be forced to choose.’”

December 16 – Bloomberg (Alex Harris and Katherine Greifeld): “Non-U.S. banks have amassed dollar-denominated liabilities that are about as big as they were during the global financial crisis. Yet changes to how they obtain dollars make it hard to tell if funding risks have increased or lessened. Foreign institutions from Europe to the Asia-Pacific and the Americas have boosted the proportion of dollar funding they do in their home countries rather than through U.S.-based branches and subsidiaries, according to a paper from the Bank for International Settlements… At the same time though, cross-border flows account for just over half of their dollar liabilities and U.S. residents provide a bigger share of dollar funding than is actually raised in America, it says.”

December 17 – Reuters (Stephanie Nebehay): “The European Union said… the World Trade Organization (WTO) was mired in a ‘deep crisis and the United States is at its epicenter’, and it called on the Trump administration to put forward concrete reform proposals.”

December 17 – Reuters (Elizabeth Dilts and A. Ananthalakshmi): “Malaysia on Monday filed criminal charges against Goldman Sachs Group Inc related to its dealings with the sovereign wealth fund 1MDB, and Goldman Sachs fired back that the previous Malaysian government had lied to the investment bank.”

Central Bank Watch:

December 18 – Bloomberg (Suttinee Yuvejwattana): “Thailand’s central bank raised its benchmark interest rate for the first time since 2011, joining peers in the region in tightening monetary policy this year. Five of the seven committee members at the meeting voted to raise the one-day bond repurchase rate to 1.75% from 1.5%...”

Europe Watch:

December 18 – Reuters (Geert De Clercq and Gilles Guillaume): “French ‘yellow vest’ protesters occupied highway toll booths, setting a number on fire and causing transport chaos in parts of the country just days before the Christmas holidays getaway. France’s biggest toll road operator, Vinci Autoroutes, said there were demonstrations at about 40 sites along its network and that some highway intersections had been damaged, notably in tourist towns such as Avignon, Orange, Perpignan and Agde.”

December 16 – Reuters (Matthias Blamont): “France’s budget deficit is likely to overshoot the European Union’s limit of 3% of GDP next year and reach 3.4%, National Assembly president Richard Ferrand told… Le Journal du Dimanche. France is expected to break the deficit ceiling after President Emmanuel Macron made concessions to anti-government protesters earlier this month, blowing a 10 billion euro ($11bn) hole in the budget.”

Italy Watch:

December 19 – Financial Times (Miles Johnson): “The truce struck between Brussels and Rome’s populist coalition government… has allowed both sides to save face, avoiding a political stand-off. However, the concerns raised by the EU Commission and financial markets about the Italian economy are likely to resurface, analysts say. Rome has agreed to trim its budget deficit target for 2019 from 2.4% to 2% of gross domestic product mostly by delaying the implementation of some of its most expansionary measures. Welfare handouts for the poor, Five Star’s flagship ‘Citizens’ Income,’ will be delayed, as will a plan to unwind pension reforms dating back to Italy’s last financial crisis in 2011. The coalition has also conceded that economic growth for 2019 will be 1%, from 1.5% previously. Meanwhile, the commission said it had secured a commitment from the Italian government to increase value added tax if the country’s public finances deteriorate in 2020 and 2021.”

Japan Watch:

December 17 – Reuters (Stanley White): “Japan’s government revised down its forecasts for economic growth and consumer prices for the current and next fiscal years as natural disasters and weakening export demand weighed on the economy… Japan’s government revised down its forecasts for economic growth and consumer prices for the current and next fiscal years as natural disasters and weakening export demand weighed on the economy…”

December 18 – Reuters (Tetsushi Kajimoto): “Japan’s export growth slowed to a crawl in November as shipments to the United States and China weakened sharply, in a sign slowing external demand and a Sino-U.S. trade dispute may leave the world’s third-largest economy underpowered over the next year. The 0.1% year-on-year rise in exports undershot a 1.8% annual increase expected by economists in a Reuters poll, and was well below a 8.2% jump in October. In volume terms, exports fell 1.9% in the year to November.”

Fixed Income Bubble Watch:

December 17 – Bloomberg (Andrew Mayeda and Katherine Greifeld): “China’s holdings of U.S. Treasuries fell to the lowest in a year-and-a-half, as its foreign currency reserves declined and the yuan weakened near a key symbolic level. China’s holdings of notes, bills and bonds dropped for a fifth straight month to $1.14 trillion in October, from $1.15 trillion in September… That’s the lowest level since May 2017. China remains the biggest foreign creditor, followed by Japan, whose holdings slipped by $9.5 billion to $1.02 trillion.”

December 20 – Bloomberg (Adam Tempkin): “A record amount of collateralized loan obligations will be eligible to be reset or refinanced next month, potentially putting more pressure on prices. But the concerns may be for naught as the malaise weighing on credit markets could derail part of the push. More than $52 billion of CLOs originally issued in 2017 and 2018 could be refinanced or reset in January… However, if spreads remain near the widest levels in over a year, the exercise may be unprofitable for many managers. ‘Generally speaking, execution of refi/reset/re-issue can be more challenging compared to new-issue in a volatile environment,’ JPMorgan analysts Rishad Ahluwalia and Heather Rochford wrote…”

December 19 – Wall Street Journal (Gunjan Banerji and Heather Gillers): “U.S. cities and counties are using fewer ratings to assess the risks of the bonds they sell, providing investors with just one opinion on an increasing amount of new debt. Roughly 25% of the dollar value of all municipal debt issued this year carried a single grade from one of the major ratings firms, according to Municipal Market Analytics data… If that percentage holds through the end of the year, it would be the highest since the research firm began tracking the data in 2006. For the riskiest debt, the single-grade ratio by dollar volume was 37%. Municipal officials and advisers said fewer ratings help cities trim expenses and save time when they borrow… Bond issuers typically pay rating firms to issue a report. But some analysts said opting for one grade from a single firm puts smaller investors at a disadvantage as less information circulates through the $3.8 trillion municipal market.”

December 19 – Wall Street Journal (Gretchen Morgenson and Andrew Scurria): “A legal dispute over the handling of insurance contracts on Sears Holdings Corp.’s debt is putting the effectiveness of such instruments in doubt and raising questions about fairness in the bankruptcy process. Holders of credit-default swaps which insured against Sears’s collapse contend a debt auction related to the swaps didn’t generate top dollar for Sears and its creditors as required in bankruptcy. Instead, these investors say in court filings, the auction rewarded a hedge fund that had sold credit insurance on the company: Cyrus Capital Partners, which is allied with Edward S. Lampert, who has run Sears for 13 years. The retailer’s debt auction is being challenged in bankruptcy court; a hearing on the dispute is scheduled for Thursday in White Plains, N.Y. The legal battle is the latest example of the credit-default-swaps market working counter to investors’ expectations.”

Leveraged Speculation Watch:

December 18 – Bloomberg (Erik Schatzker and Katherine Burton): “Billionaire Stan Druckenmiller is glad he’s no longer in the hedge fund business now that algorithmic and quantitative trading have taken over markets. ‘I made 30% a year for 30 years. Now, we aren’t even in the same zip code, much less the same state,’ he quipped of his recent returns in an interview with Bloomberg Television. Druckenmiller, 65, explained that his investment process has always involved divining so-called market signals. But quantitative funds, which now account for $1 trillion in assets, have muted or even silenced those cues, making it a lot less clear what’s behind price moves.”

December 17 – Reuters (Rachael Levy): “Hedge funds raised record amounts of money for new launches in 2018, but they are having a harder time turning that bounty into profits. Startups attracted $28 billion during the first half of 2018, according to Absolute Return, the highest total since the publisher began tracking the figures in 2004. Roughly $18 billion went to three hedge-fund firms run by Steven A. Cohen, Michael Gelband and Dan Sundheim. Some clients say all three funds have either lost money or earned only modest profits thus far in 2018.”

Geopolitical Watch:

December 20 – Reuters (Polina Nikolskaya and Andrew Osborn): “President Vladimir Putin… accused the United States of raising the risk of nuclear war by threatening to spurn a key arms control treaty and refusing to hold talks about another pact that expires soon. In a news conference that lasted more than three hours, Putin also backed U.S. President Donald Trump’s decision to pull troops out of Syria, said British Prime Minister Theresa May had no choice but to implement Brexit and that Western democracy was under serious strain.”

December 17 – Bloomberg (Nour Al Ali): “North Korea told the U.S. that sanctions and pressure -- as evident from the past -- won’t work to force the country into action on its nuclear program. ‘The U.S. should realize before it is too late that ‘maximum pressure’ would not work against us and take a sincere approach to implementing the Singapore DPRK-U.S. Joint Statement,’ the country’s state-run Korean Central News Agency said Sunday…”

December 19 – Reuters (Jeongmin Kim and Josh Smith): “Any deal for North Korea to give up its nuclear arsenal must include ‘completely removing the nuclear threats of the U.S.’, North Korean state media said…, in one of the clearest explanations of how North Korea sees denuclearization. U.S. President Donald Trump and North Korean leader Kim Jong Un issued a statement after a historic meeting in Singapore in June reaffirming the North’s commitment to ‘work toward complete denuclearization of the Korean Peninsula’ and including U.S. guarantees of security to North Korea. Conflicting or vague views of what exactly ‘denuclearization’ means, however, have complicated negotiations that now appear stalled.”