Friday, August 31, 2018

Weekly Commentary: Unassailable

I've been here before and, candidly, it's not much fun. Lodged in my mind this week was the brilliant quote from the 19th century German philosopher Arthur Schopenhauer: "All truth passes through three stages: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident."

It's fascinating how it all works. Looking back, there was definitely a Bubble in 1999. Clearly, 2007 was one huge Bubble. Everything is obvious in hindsight, and most look back now and contend it was pretty conspicuous even at the time. Having toiled through both prolonged Bubble periods - arguing against deeply embedded bullish conventional wisdom - I can attest to the fact that the Bubble viewpoint was violently opposed at the late stages of both cycles.

I don't feel I'm venturing out on a limb to predict that some years into the future the 2018 Bubble backdrop will be recalled as rather self-evident. Years of experimental "whatever it takes" global monetary stimulus (rates, QE and market manipulation) nurtured excess and imbalances on an unparalleled global scale. EM borrowed excessively, too much denominated in foreign (U.S. dollar!) currencies. The Federal Reserve (all central banks) held rates too low for much too long. Prices for virtually all asset classes were inflated to dangerous extremes.

The resulting Tech Bubble 2.0 dwarfed the earlier nineties version, culminating in a global technology arms race. China was a historic Bubble of reckless proportions. Protectionism and Trade wars were a scourge for markets and global growth. Unsound "money" fueled populism. In the end, the backdrop created a cauldron of deepening geopolitical animosities and flashpoints.

During the mortgage finance Bubble period, Chairman Greenspan was fond of claiming there was no national Bubble - specifically because all real estate markets were local. Missing in the analysis was the recognition that mortgage finance had evolved into very much a national market. The GSEs, MBS, subprime ABS, the repo market, derivatives, structured finance ("Wall Street finance", more generally), the hedge funds, and money management more broadly - were all crucial to a national market of progressively loose finance.

Centralized finance linked seemingly disparate housing markets, securities markets, asset classes, financial systems and national economies. It evolved into a comprehensive Bubble of mispriced finance on both national and international scales, which over time led to deepening structural impairment to both financial systems and real economies.

Recently, a period of calm have many believing the worst of EM instabilities has passed. But this week saw the Argentine peso collapse 16.3% (down 49.5% y-t-d). The Turkish lira sank 8.2% (down 41.9%). The Colombian peso declined 3.3%, the Chilean peso 3.2%, the South African rand 3.0%, the Mexican peso 0.9% and the Indian rupee 1.5%. Italian yields jumped eight bps to 3.24% (spread to bunds at 5-yr highs!). Greek yields jumped 24 bps (4.37%) and Portuguese yields rose 10 bps (1.92%). After somewhat of a respite, "Risk Off" was back for more.

In a sign of the times, investors remain extraordinarily bullish - even on the emerging markets. EM travails are "idiosyncratic" - individual instances of Current Account Deficits and borrowing excessively in foreign currencies. By and large, the EM selloff has created value and buying opportunities. All markets are local; the notion of a global Bubble is asinine.

Most unfortunately, the Bubble is real, and it is decidedly global. It has been fueled by an unprecedented international boom in central bank Credit and sovereign debt. Underpinned by government finance and central bank liquidity backstops, over-liquefied markets accommodated unprecedented global corporate debt issuance. A comprehensive boom in global finance was fueled by a massive global leveraged speculating community, an international boom in derivatives trading and securities finance, along with a globalized market in ETFs and other passive indexed products.

Global market prices have been inflated by synchronized artificially low short-term interest rates, along with liquidity excess, again, on a globalized basis. Finance has been grossly mispriced systemically around the world.

Here in the U.S., the bullish consensus view holds that a faltering EM doesn't matter. The U.S. economy is strong and largely immune to global factors. Profits are booming. Prospects are unequivocally positive. The mindset is uncomfortably reminiscent of the "subprime doesn't matter" blather heading right into a devastating crisis. It's worth recalling that U.S. GDP exceeded 2% in 2007's 2nd, 3rd and 4th quarters, with Q4's 2.5% expansion the strongest in a year.

Things look just rotten a market bottoms. They appear splendid at tops. It's worth adding a little color from the perspective of George Soros' "reflexivity". So long as bullish perceptions sustain inflated market prices and unmatched perceived wealth, along with "animal spirits" and strong economic activity more generally, resulting "fundamentals" will tend to confirm the optimistic viewpoint.

Chuck Prince was still dancing in the summer of 2007. Everyone was locked into the dance party, as the market disregarded the subprime fiasco while rallying to record highs in mid-October 2007. By the end of 2007, few were interested in hearing another word about the Bubble. The analysis was violently opposed: Washington had it all well under control. I needed to get a life.

Our reading of financial history has left us with the impression that financial manias are replete with crazy speculators running around in fits of irrational greed and excess. I hold the view that Bubbles are much more about fits of deceptively rational behavior. The "Oracle of Omaha," 88 years young Thursday, can drink Coke and preach the virtue of buying stocks for the long-term. Who today would take exception with such an irrefutable truth?

Mr. Buffett, along with virtually everyone, was blindsided by the 2008 crisis. This should matter but doesn't. Amazingly, another crisis is viewed these days as an opportunity rather than a risk. Stocks, as they always do, will come roaring back. The last crisis was only an issue for those that lacked conviction and sold stocks in an irrational panic.

At this point, the bullish view that stocks must be bought and held for the long-term has surpassed rational. It's Unassailable. Your price entry point matters little - the global backdrop even less. Politics little, geopolitics less. Holding cash is stupid, shorting much worse. Indeed, to not bet confidently on the U.S. for the long-term is an act of self-destructive irrationality. A risk-based approach, to be sure, would lead to irrational decisions. It's been proven - repeatedly. Don't sell.

I believe we're nearing the end of an historic multi-decade Bubble. Risk is incredibly high, a view that has by now been thoroughly discredited. A key factor boosting risk is the overwhelming consensus view that risk is virtually nonexistent. In stark contrast, I believe this protracted period of serial boom and bust cycles has led to the accumulation of financial and economic distortions and deep structural impairment.

Determined central banks and governments have resolved a series of busts with only more powerful booms. At his point, this ensures that few contemplate a scenario where policymakers are without the capacity to sustain robust markets and economic growth.

Risk-takers have gravitated to the top - in the markets, in company management, in venture capital, at banks, and generally throughout the economy. Those attentive to risk have been pushed aside - investors, speculator, managers and entrepreneurs. Trillions have flowed into "passive" investment strategies, essentially a bet on an index over active risk management. Based on (recent) historical performance, taking a passive approach is perfectly rational. But one must ignore the reality that the Trillions that flowed into this strategy ensure latent risk of an abrupt shift in market perceptions.

There is today a perception of invincibility that goes significantly beyond 1999 and 2007. It has more in common with my reading of the history from the late-twenties Bubble period. "New Era." "Permanent plateau of prosperity." And at the end, "Everyone was prepared to hold their ground. But the ground gave way." There were worries throughout the twenties period. By 1929, it was a case of acute worry fatigue. Inflation psychology dominated a deeply distorted marketplace. Stated more simply, there was too much money to be made. Greed dominated.

And let's not miss a fundamental aspect from the "Roaring Twenties" period. The Fed was perceived to have things under control. It was a young central bank doing exciting new - and captivating - things. The perception that enlightened Fed operations had eliminated crisis risk in reality greatly exacerbated the risk of financial and economic calamity. For the current long cycle, central banks are anything but fledgling institutions. They have, however, adopted new and captivating doctrine and (whatever it takes) stimulus measures.

I am expecting EM contagion at the "periphery" to make its way to the "core." This is in stark contrast to the consensus market view: Idiosyncratic instability in select emerging economies ensures greater financial flows to outperforming U.S. equities and fixed-income markets. Global risks ensure the Fed concludes "normalization" well before rates turn restrictive, thus working to reduce risk for U.S. financial markets and the juggernaut U.S. economy.

It won't be viewed as such by historians, but in real time the complacent bullish view is rational. Complacency, after all, has repeatedly paid off handsomely. Never failed. The Fed and global central bankers will clearly do whatever it takes to avoid another financial crisis. They successfully responded to mounting stress in 2012 (epicenter Europe) and again in late-2015/early-2016 (epicenter China) that, in hindsight, hardly even required a policy response. Again, to bet against central bank control would at this point appear irrational.

The Nasdaq Composite traded down to 4,210 in February 2016. The index closed Friday at 8,110, some 93% higher (up 209% from 2012 lows!). Global central banks moved to adopt aggressive "whatever it takes" stimulus measures in late-2012. When global market stress reemerged in late-2015, the BOJ and ECB boosted liquidity injection operations (and market interventions) while the Fed postponed rate "normalization." Meanwhile, Beijing implemented a number of fiscal and monetary stimulus measures. Some might see parallels to Benjamin Strong's 1927 "coup de whisky."

What's my point? Today's monetary backdrop is much different than the EM episode back in 2016. Instead of rapidly expanding, central bank liquidity is on the verge of contracting. Moreover, I would posit that the amount of central bank liquidity necessary to stabilize markets increases as market prices inflate. And this is where the proverbial analytical rubber meets the road: market players have come to have absolute faith in the efficacy of policy responses, unappreciative of crucial changes in both market structure and the liquidity backdrop.

So long as confidence holds at the "core" and speculation runs unabated, underlying fragilities remain concealed. But its wildness lies in wait - growing, strengthening and expanding, surreptitiously.

There are parallels to 2007 - as well as to the Q1 2000 (along with 1998!). The great nineties bull market culminated in a final short squeeze and derivatives-related melt-up. Options strategies had become popular both for speculating on higher prices and betting on a bursting Bubble. As they are today, the big technology stocks were at the epicenter of speculative excess, squeezes and derivative trading activity. Writing calls had become popular, often part of sophisticated options trading strategies.

When the market during Q1 2000 went into speculative blow-off mode, speculators that were caught short call options on the big tech names were forced to aggressively buy stocks into a final self-reinforcing melt-up. And, again with parallels to today's market backdrop, this melt-up occurred right into deteriorating fundamental prospects. For at least now, I know this line of analysis will either be ridiculed or violently opposed.

For the Week:

The S&P500 gained 0.9% (up 8.5% y-t-d), and the Dow added 0.7% (up 5.0%). The Utilities slipped 0.7% (up 0.4%). The Banks were little changed (up 3.2%), and the Broker/Dealers increased 0.8% (up 4.6%). The Transports added 0.2% (up 6.5%). The S&P 400 Midcaps rose 0.5% (up 7.6%), and the small cap Russell 2000 gained 0.9% (up 13.4%). The Nasdaq100 advanced 2.3% (up 19.7%). The Semiconductors gained 1.8% (up 11.8%). The Biotechs jumped 3.6% (up 26.4%). With bullion declining $5, the HUI gold index fell 2.4% (down 25.8%).

Three-month Treasury bill rates ended the week at 2.06%. Two-year government yields added a basis point to 2.63% (up 74bps y-t-d). Five-year T-note yields rose three bps to 2.74% (up 53bps). Ten-year Treasury yields gained five bps to 2.86% (up 46bps). Long bond yields increased six bps to 3.02% (up 28bps). Benchmark Fannie Mae MBS yields rose five bps to 3.62% (up 62bps).

Greek 10-year yields jumped 20 bps to 4.37% (up 29bps y-t-d). Ten-year Portuguese yields rose 10 bps to 1.92% (down 2bps). Italian 10-year yields gained another eight bps to 3.24% (up 122bps). Spain's 10-year yields rose eight bps to 1.47% (down 9bps). German bund yields declined two bps to 0.33% (down 10bps). French yields slipped a basis point to 0.68% (down 10bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields jumped 15 bps to 1.43% (up 24bps). U.K.'s FTSE equities index fell 1.9% (down 3.3%).

Japan's Nikkei 225 equities index gained 1.2% (up 0.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 6bps). France's CAC40 slipped 0.5% (up 1.8%). The German DAX equities index dipped 0.2% (down 4.3%). Spain's IBEX 35 equities index fell 2.0% (down 6.4%). Italy's FTSE MIB index dropped 2.3% (down 6.4%). EM equities were mixed. Brazil's Bovespa index increased 0.5% (up 0.4%), while Mexico's Bolsa declined 0.2% (up 0.4%). South Korea's Kospi index rose 1.3% (down 5.9%). India’s Sensex equities index gained 1.0% (up 13.5%). China’s Shanghai Exchange slipped 0.2% (down 17.6%). Turkey's Borsa Istanbul National 100 index rose 2.8% (down 19.6%). Russia's MICEX equities index jumped 2.9% (up 11.2%).

Investment-grade bond funds saw inflows of $2.253 billion, and junk bond funds had inflows of $97 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 4.52% (up 70bps y-o-y). Fifteen-year rates slipped a basis point to 3.97% (up 85bps). Five-year hybrid ARM rates rose three bps to 3.85% (up 71bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.59% (up 60bps).

Federal Reserve Credit last week declined $4.2bn to $4.186 TN. Over the past year, Fed Credit contracted $235bn, or 5.3%. Fed Credit inflated $1.375 TN, or 49%, over the past 304 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $0.8bn last week to $3.429 TN. "Custody holdings" were up $88bn y-o-y, or 2.6%.

M2 (narrow) "money" supply increased $11.8bn last week to a record $14.215 TN. "Narrow money" gained $532bn, or 3.9%, over the past year. For the week, Currency increased $4.6bn. Total Checkable Deposits fell $18.4bn, while Savings Deposits rose $18.1bn. Small Time Deposits gained $5.1bn. Retail Money Funds increased $2.2bn.

Total money market fund assets were little changed at $2.864 TN. Money Funds gained $153bn y-o-y, or 5.6%.

Total Commercial Paper declined $3.0bn to $1.064 TN. CP gained $71bn y-o-y, or 7.1%.

Currency Watch:

August 29 - Bloomberg (Katherine Greifeld and Tian Chen): "Turnover in the offshore yuan has reached unprecedented levels, spurred by U.S. President Donald Trump's broadsides against Chinese currency practices and the protracted trade dispute between the world's two biggest economies. On the FX trading platform of Cboe Global Markets, average daily volume in dollar-offshore yuan jumped to a record $1.7 billion in July, from $421 million a year earlier."

The U.S. dollar index was little changed at 95.099 (up 3.2% y-t-d). For the week on the upside, the Swiss franc increased 1.5%, the Brazilian real 1.2%, the British pound 0.9%, the South Korean won 0.6%, the Japanese yen 0.2%, and the Norwegian krone 0.1%. For the week on the downside, the South African rand declined 3.0%, the Australian dollar 1.9%, the Mexican peso 0.9%, the New Zealand dollar 0.7%, the Singapore dollar 0.5%, the Swedish krona 0.5%, the euro 0.2%, and the Canadian dollar 0.1%. The Chinese renminbi declined 0.31% versus the dollar this week (down 4.75% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.2% (up 6.1% y-t-d). Spot Gold slipped 0.4% to $1,201 (down 7.8%). Silver lost 2.3% to $14.557 (down 15.1%). Crude rose $1.28 to $69.80 (up 16%). Gasoline increased 1.1% (up 11%), while Natural Gas was little changed (down 1%). Copper fell 1.5% (down 19%). Wheat rallied 1.7% (up 28%). Corn added 0.6% (up 4%).

Trump Administration Watch:

August 31 - Bloomberg (Jennifer Jacobs, Shawn Donnan, Andrew Mayeda and Saleha Mohsin): "President Donald Trump wants to move ahead with a plan to impose tariffs on $200 billion in Chinese imports as soon as a public-comment period concludes next week, according to six people familiar with the matter. Asked to confirm the plan in an interview with Bloomberg News in the Oval Office on Thursday, Trump smiled and said it was 'not totally wrong.' He also criticized management of the yuan, saying China has devalued its currency in response to a recent slowdown in economic growth."

August 30 - Bloomberg (John Micklethwait, Margaret Talev, and Jennifer Jacobs): "President Donald Trump said he would pull out of the World Trade Organization if it doesn't treat the U.S. better, targeting a cornerstone of the international trading system. 'If they don't shape up, I would withdraw from the WTO,' Trump said Thursday in an Oval Office interview with Bloomberg News. Trump said the agreement establishing the body 'was the single worst trade deal ever made.'"

August 26 - Bloomberg (Michael Schuman): "With the latest round of trade talks between the U.S. and China ending in a predictable stalemate, one thing has become clear: The Trump administration's approach to these negotiations has made it all but impossible for Chinese President Xi Jinping to make a deal. Until that changes, there's no end in sight for the tariff-for-tariff tussle between the two countries… The White House seems to misunderstand a crucial fact about modern China. As Xi has tightened his grip on power, China's economic and diplomatic initiatives have become closely associated with him personally. In foreign policy, Xi has sold himself as the champion of China's global interests and the man to stand up to the West and restore the country to its former glory. At home, Xi has promised the 'Chinese Dream,' a prosperous future with boundless new opportunities. But this carefully crafted image comes with two downsides. First, Xi must avoid any potentially humiliating setbacks on the world stage, especially any inflicted by a Western power. Second, he must keep China's economy growing, generating jobs and raising incomes."

August 27 - CNBC (Huileng Tan): "The U.S. and China will continue their standoff in the ongoing trade war as there is just not 'enough pain' yet for either side to back off, an expert said… 'I think we are in for a prolonged period of continuing escalating tensions,' said Deborah Elms, the executive director at the Asian Trade Centre… One problem is that 'both sides think they have the upper hand in this debate,' Elms told CNBC's 'Capital Connection.' Her comments came after the U.S. and China slapped new tariffs on each other last Thursday and their two-day meeting ended with no major breakthrough."

August 29 - Bloomberg (Toluse Olorunnipa and Jennifer Epstein): "President Donald Trump accused China of undermining U.S. efforts to pressure North Korea into giving up its nuclear weapons, indicating his trade war with Beijing is starting to exacerbate geopolitical tensions. 'North Korea is under tremendous pressure from China because of our major trade disputes with the Chinese Government,' Trump said in a series of tweets… 'At the same time, we also know that China is providing North Korea with considerable aid, including money, fuel, fertilizer and various other commodities. This is not helpful!' China fired back…, saying it's policies on North Korea 'are clear, consistent and stable.'"

August 26 - CNBC (Weizhen Tan): "Besieged by increasing legal concerns, U.S. President Donald Trump is thought to be looking to shore up his political position ahead of the midterm elections in November. One way to do so could be to distract voters from the problems at home by shifting the focus to the ongoing trade war with China, analysts said. In other words, the U.S. may be on the verge of escalating the conflict between the world's two largest economies."

August 27 - CNBC (Jeff Daniels): "With some U.S. farm products getting slammed by retaliatory tariffs, the Trump administration is prepared to start its emergency plan for agriculture right after Labor Day in a 'three-pronged approach' that will initially include about $6 billion in aid. The U.S. Department of Agriculture said… it is authorized to provide up to $12 billion in aid to the agricultural industry."

August 29 - Bloomberg (Kathleen Hunter and Ben Brody): "President Donald Trump warned Alphabet Inc.'s Google, Facebook Inc. and Twitter Inc. 'better be careful' after he accused the search engine earlier in the day of rigging results to give preference to negative news stories about him. Trump told reporters… that the three technology companies 'are treading on very, very troubled territory,' as he added his voice to a growing chorus of conservatives who claim internet companies favor liberal viewpoints. 'This is a very serious situation-will be addressed!' Trump said in a tweet... The President's comments came the morning after a Fox Business TV segment that said Google favored liberal news outlets in search results about Trump. Trump provided no substantiation for his claim."

August 28 - Bloomberg (Brendan Murray and Liz Capo McCormick): "Treasury Secretary Steven Mnuchin said he's 'not at all concerned' about the convergence of short- and long-term market interest rates at a time when some investors are worried the flattening yield curve signals a U.S. recession is coming. Having a flat curve is something the Treasury is 'perfectly content with,' given the government's issuance of long-term debt, he said… Mnuchin also said he doesn't view the curve as a predictor of economic growth."

Federal Reserve Watch:

August 26 - Reuters (Ann Saphir and Howard Schneider): "Federal Reserve Chair Jerome Powell has begun putting his stamp on the U.S. central bank as someone who will rely more on data-informed judgment and less on some of the models and theoretical values that have shaped the Fed's course in recent years but that Powell has said can be false guides. In doing so he may be laying the groundwork for a longer-than-expected rate-increase cycle, as discussion intensifies among policymakers about what level of borrowing costs is appropriate in an economy that is nearly back to full health. In addition, the full stimulative effects of President Donald Trump's tax cuts and increased government spending may not yet have presented themselves."

August 27 - Financial Times (Joachim Fels): "Damned if they keep raising, damned if they don't. Federal Reserve chair Jay Powell and his colleagues face a difficult choice over the next few months - and it is one that could have unpleasant ramifications whatever they decide. The first option for the Fed's Open Market Committee is that it continues to deliver on the current plan: raise rates again next month and stick to the guidance of four additional rate increases by the end of 2019. This can be easily justified by the US economy's progress towards the central bank's dual objectives… However, the Fed is not only the US central bank but also the pacemaker for the global credit cycle. Courtesy of ultra-low US interest rates, quantitative easing and a relatively weak dollar following the global financial crisis, borrowers within the US and, even more so beyond, have piled into dollar-denominated debt. According to BIS data, dollar credit to non-bank borrowers outside the US doubled to $11.5tn since the financial crisis. Within this, dollar debt in emerging markets surged from about $1.5tn 10 years ago to $3.7tn this March."

August 29 - Reuters (Howard Schneider): "The U.S. Federal Reserve should be ready to lift interest rates for a longer period or even more quickly than currently expected to insure against a jump in inflation in a U.S. economy operating in the vicinity of full employment. That is the message that has been percolating up from senior central bank staff economists to policymakers including Fed Chair Jerome Powell in research that has helped inform a subtle shift in how Powell plans to steer policy… The latest example emerged this week from staff economist Robert Tetlow, who argued that uncertainty about the stability of inflation expectations should be met with a strong response to ensure that one round of price increases does not touch off further rounds as inflationary psychology takes hold."

August 29 - Bloomberg (Liz Capo McCormick): "Goldman Sachs… is telling traders to be wary of reading Federal Reserve Chairman Jerome Powell's comments last week as dovish for the path of interest rates. Ten-year Treasury yields fell Friday on Powell's speech at the Kansas City Fed's annual policy symposium, when he said 'there does not seem to be an elevated risk of overheating.' What's more, the maturity's spread over two-year yields is close to the lowest since 2007. Goldman rates strategists lowered their year-end 10-year yield forecast last week on the back of a slower rebound in term premium. Yet in a report Monday, Goldman economists emphasized Powell's nod to a recent Fed study that indicated it would be ill-advised for the central bank to ignore low unemployment. That emboldened the Goldman economists to reiterate their call for two more rate hikes in 2018 and four next year."

U.S. Bubble Watch:

August 28 - CNBC (Michael Sheetz): "Consumer confidence rose in August to its highest level since October 2000, building on July's solid result. The Conference Board's index climbed to 133.4 in August, despite expectations… that it would fall to 126.7. The measure rose slightly last month to 127.4, up from 127.1 in June… 'Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018,' Lynn Franco, director of economic indicators at The Conference Board, said…"

August 26 - Financial Times (Sam Fleming): "Moves by US companies to shift the cost of President Donald Trump's tariffs to their customers risk complicating monetary policy decisions as the Federal Reserve seeks to keep inflation steady, the central bank's policymakers have warned. Raphael Bostic, president of the Atlanta Fed, told the Financial Times that he believed the US was at an 'inflection point', where higher tariffs on products such as steel and aluminium would start to be felt by consumers. 'An increasing number of firms are telling us that they are going to start passing the cost increases through and they will be reflected in final goods prices… Businesses have told me that they have been able to absorb a fair amount of the price increases to date but that their ability to do that is diminishing."

August 30 - Bloomberg (Xin En Lee): "Profits are crucial to the growth of any company, but some of the biggest names in business today have yet to make money. Publicly-listed companies like electric carmaker Tesla and music streaming firm Spotify make billions in losses. Likewise, ride-hailing firm Uberlost $4.5 billion last year, but is gearing up for a highly anticipated public listing… Investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000. Last year, 76% of the companies that listed were unprofitable in the year before their initial public offerings… That's lower than the 81% recorded in 2000, but still far higher than the four-decade average of 38%."

August 30 - Bloomberg (Andrew Galbraith): "Investors are stomaching the lowest premium in more than a decade for taking on more risk in the US commercial property market, as a humming American economy encourages money managers to reach for higher returns. The difference between the return on the safest slices of commercial mortgage-backed securities - a pool of mortgages bundled into a bond - and the riskier slices has dropped to its lowest level since the build-up to the financial crisis… A combination of an expanding US economy and the ongoing hunt for yield is driving investors' willingness to assume more exposure to potential losses without greater compensation. For some it is another sign that a nearly decade-old credit cycle maybe approaching a turning point."

August 30 - Reuters (Lucia Mutikani): "U.S. consumer spending increased solidly in July, pointing to strong economic growth early in the third quarter, while a measure of underlying inflation hit the Federal Reserve's 2% target for the third time this year. …Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after advancing by the same margin in June… The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2% after edging up 0.1% in June. That lifted the year-on-year increase in the so-called core PCE price index to 2.0% from 1.9% in June. The core PCE index is the Fed's preferred inflation measure. It hit the U.S. central bank's 2% inflation target in March for the first time since April 2012."

August 28 - CNBC (Diana Olick): "Homebuyers are pulling back, and prices are finally following. Home prices are still rising, but the gains are shrinking. In June, prices nationally rose 6.2% year over year, according to the S&P CoreLogic Case-Shiller Indices. That is down from the 6.4% annual gain in May. Home prices in the nation's 10 largest housing markets rose 6% annually, down from 6.2% in the previous month. In the 20 largest markets, prices were up 6.3%, down from 6.5% in May."

August 27 - Bloomberg (Prashant Gopal): "Here's why the U.S. housing market is cooling: Prices are just too high. Starter homes are now more costly to purchase than at any time since 2008, when the last boom came to a crashing halt. In the second quarter, first-time buyers needed almost 23% of their income to afford a typical entry-level home, up from 21% a year earlier, according to an analysis by the National Association of Realtors."

August 28 - Bloomberg (Alex Tanzi): "Rising property values and record household wealth is allowing homeowners to use their homes as ATMs. In more than two-thirds of refinancing loans last quarter, homeowners pulled equity to finance consumer spending, property improvements and pay off other debts."

August 28 - CNBC (Jillian D'Onfro): "Alphabet's self-driving cars are annoying their neighbors in Chandler, Arizona. More than a dozen locals who work near Waymo's office gave The Information the same unequivocal assessment of the cars, which reportedly struggle to cross a T-intersection there: 'I hate them.' One woman said that she almost hit one of the company's minivans because it suddenly stopped while trying to make a right turn, while another man said that he gets so frustrated waiting for the cars to cross the intersection that he has illegally driven around them. The anecdotes highlight how challenging it can be for self-driving cars, which are programmed to drive conservatively, to master situations that human drivers can handle with relative ease - like merging or finding a gap in traffic to make a turn."

August 26 - Financial Times (Robin Wigglesworth): "The US student loan burden has swelled past $1.5tn despite actual lending volumes falling for more than half a decade, as struggling students fall behind on their payment plans and debt relief programmes fail to offer sufficient succour. The overall size of US student debt has grown by $500bn since the 2010-11 academic year, according to a report by S&P Global…"

August 27 - MarketWatch (Alessandra Malito): "Young adulthood can be a thrilling time for those living on their own for the first time, balancing schoolwork and a job, and paying for necessities. But many don't know how to manage all of this. About a third of young adults (32%) were considered 'financially precarious,' meaning they had few money management skills and little income stability, according to a University of Illinois study. Another 36% of participants were considered financially 'at risk' because they had an unexpected drop in income within the year and had no savings to support themselves. They also didn't have enough to pay for a $2,000 emergency."

August 29 - Wall Street Journal (Gregory Zuckerman): "A biotech boom is fueling renewed interest in a group that has been out of favor: Wall Street analysts. Investment banks Leerink Partners LLC, Cantor Fitzgerald & Co. and Jefferies Group LLC have lured top-name biotech analysts from large banks with guaranteed pay packages worth $3 million or more and contracts extending as long as three or four years… In turn, banks including Morgan Stanley and Citigroup Inc. have hiked pay to similar levels to retain top analysts. Hiring executives say compensation for less-senior analysts also has climbed…"

August 28 - Bloomberg (Ivan Levingston): "The number of candidates who passed the third and final level of the Chartered Financial Analyst exam in June rose to 56%, the highest success rate in 12 years. An all-time high of 35,518 people took the final test required for the certification... More than three-quarters of people who took the 2006 exam passed."

August 28 - Bloomberg (Eric Boston): "Two-thirds of California's beaches may be washed away by the end of the century, according to the state's latest forecast. California's fourth statewide climate assessment details the increasingly dire impact of climate change, including rising seas, climbing temperatures, more land lost to wildfires and extreme water shortages. It was issued Monday, the day before lawmakers moved to require all the state's electricity to come from wind, solar and other clean sources by 2045… Without significant efforts to curb greenhouse gas emissions, the average annual maximum daily temperature is expected to increase 5.6 to 8.8 degrees Fahrenheit (3.1 to 4.9 degrees Celsius) by 2100. The impact will be felt far sooner."

China Watch:

August 30 - Bloomberg (Andrew Galbraith): "Twitter comments by U.S. President Donald Trump accusing China of hacking former presidential candidate Hillary Clinton's email server are an attempt to cast China as a 'scapegoat', the official China Daily said… The strongly worded editorial also took aim at Trump directly, commenting: 'To the thinking person, there are few things more disconcerting than a tweet by the U.S. president as they initially seem to accord to reality but then quickly turn into messages from some alternative universe.'"

August 27 - Reuters (Winni Zhou and John Ruwitch): "China's central bank on Monday lifted its official yuan midpoint more than expected to 6.8508 per dollar after it re-introduced a counter-cyclical factor to its daily fixing mechanism to support the currency… China's central bank said on Friday that it was adjusting its methodology for fixing the yuan's daily midpoint in order to keep the currency market stable, amid broad dollar strength and ongoing trade tensions between Washington and Beijing."

August 29 - Reuters (Stella Qiu): "China's economy is facing increasing risks in the second half of the year and policymakers need to step up efforts to hit key development goals, the head of the state planning agency warned, as U.S. trade tensions intensify. 'Targets in economic growth, employment, inflation and exports and imports can be achieved through effort,' He Lifeng told the standing committee of the National People's Congress…"

August 30 - Bloomberg: "The biggest banks on Earth really want the world to know how much they're paying attention to risk. China's six largest lenders, which control a combined $16 trillion of assets, mentioned the word almost 1,900 times in their first-half earnings announcements, up about 9% from the same period of 2017, according to data compiled by Bloomberg. Bank of China Ltd. said it achieved 'new breakthroughs in risk mitigation,' while China Construction Bank Corp. touted its 'stringent risk management.' Industrial & Commercial Bank of China Ltd., the world's biggest lender by assets, said… that it will 'adopt well-targeted solutions to put all types of risks under control.'"

August 26 - Reuters (Yawen Chen, Se Young Lee and Ryan Woo): "China's investment growth, already at record lows, may weaken even further in the future and authorities should step up fiscal and financial measures to give it a boost, the state planner said… Fixed-asset investment (FAI) in the first seven months of the year grew at the slowest pace on record since early 1996, after a long crackdown on illegal local government borrowing to finance vanity projects."

EM Watch:

August 30 - Bloomberg (Marcus Ashworth): "The difficulties for emerging markets have entered a new phase. What were once clearly country-specific crises, well contained within their borders, are bleeding across the world. To stem the slide in its currency Argentina raised its key rate to a whopping 60% on Thursday, but the peso was still 30% weaker from Monday. Though Turkey is no closer to solving its many problems, it's hard to see why the lira needed to fall 4% on Thursday. Explanations that this is due to the resignation of one of the central bank's four deputy governors don't convince - he's only gone to take another government job."

August 28 - Financial Times (Colby Smith and Charles Newbery): "Argentina may have reluctantly fallen back into the embrace of the International Monetary Fund, but the biggest aid package in history has not managed to inoculate the country from an onslaught of market pain. Many investors felt reassured when Argentina received a $50bn credit line from the IMF in June and President Mauricio Macri followed through on mandated reforms to slash the fiscal deficit and tame inflation. Yet the recent turmoil in emerging markets has since muddied the outlook and called into question how Argentina will meet its $82bn financing needs for this year and next, while navigating a looming recession and rising consumer prices ahead of a presidential election in 2019."

August 30 - Bloomberg (Netty Ismail and Filipe Pacheco): "August has historically been a cruel month for emerging markets. By one measure, this year's has been the worst on record. A Bloomberg currency index that tracks carry-trade returns from eight emerging markets, funded by short positions in the dollar, has slumped about 6% since end-July, set for its biggest August drop since Bloomberg started compiling the data in 1999… Turkey's lira, Argentina's peso, Brazil's real and South Africa's rand were the hardest hit developing-nation units, cutting returns for investors who borrow where interest rates are low to buy higher-yielding assets."

August 25 - Reuters (Tuvan Gumrukcu): "The commitment and determination of Turks is the guarantee needed to combat attacks on Turkey's economy, President Tayyip Erdogan said on Saturday, in his first comments on the currency crisis in days… Erdogan has cast the rapid deterioration of the lira as an 'economic war' and accused Washington of targeting Turkey over the fate of Andrew Brunson, an American pastor being tried in Turkey on terrorism charges that he denies."

August 27 - Bloomberg (Selcan Hacaoglu): "Turkey's President Recep Tayyip Erdogan will meet with Russian and Iranian leaders in Iran next week to discuss developments in Syria and how to deal with radical Islamic groups who control the last major opposition holdout there. Erdogan's Sept. 7 sitdown with Russian President Vladimir Putin and Iranian President Hassan Rouhani in the northwest city of Tabriz comes at a critical juncture in Syria's civil war and at a time when U.S.-Turkish relations are badly strained."

August 29 - Reuters: "Dollar-denominated bonds issued by selected Turkish banks fell on Wednesday after Moody's sounded the alarm about the sector, while Turkey's finance minister was reported as saying he saw no big risk to the economy or financial system. Yapi Kredi's 2024 Eurobond slipped 1.5 cents to 72 cents in the dollar according to Tradeweb, while Garanti's 2027 issue was down 1.9 cents at 68."

Global Bubble Watch:

August 25 - Bloomberg (Satyajit Das): "Over the past decade, a lot of capital has flowed into emerging markets thanks in part to excessive liquidity in advanced economies. This money has often found its way into risky or suspect investment structures. Should a crisis strike… investors in these markets will be exposed to risks that they simply aren't prepared for. One problem is that investors have piled into familiar carry trades, either directly or via funds. They've purchased high-yielding emerging-market securities and then, as returns have fallen, resorted to more adventurous strategies to boost income. Japanese retail investors, for example, are exposed to funds known as double-deckers, which purchase high-yield debt, then swap the income flows from the bond into a currency with high interest rates."

August 29 - Financial Times (Philip Stephens): "The legacy of the global financial crisis might have been a re-imagination of the market economy. Anything goes could have made way for something a little closer to everyone gains. The eloquent speeches and bold pledges that followed the crash - think Barack Obama, Gordon Brown, Angela Merkel and the rest - held out just such a prospect. Instead we have ended up with Donald Trump, Brexit and beggar-thy-neighbour nationalism. The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers - liberal democracy and open international borders. The culprits, who include bankers, central bankers and regulators, politicians and economists, have shrugged off responsibility. The world has certainly changed, but not in the ordered, structured way that would have been the hallmark of intelligent reform. After a decade of stagnant incomes and fiscal austerity, no one can be surprised that those most hurt by the crash's economic consequences are supporting populist uprisings against elites. Across rich democracies, significant segments of the population have come to reject laissez-faire economics and the open frontiers of globalisation."

Central Bank Watch:

August 28 - Financial Times (Kate Allen and Keith Fray): "Central banks that have engaged in a mass programme of bond-buying in a bid to stimulate the global economy have seen the size of their balance sheets begin to fall for the first time in a decade… The assets on leading central banks' balance sheets now equate to 31% of their governments' debt, marginally down from 32% last year… The Bank of Japan's holdings are proportionately the largest, amounting to 35% of outstanding Japanese government debt; the European Central Bank's assets equate to a quarter of outstanding eurozone government bonds, while the US Federal Reserve holds assets equivalent to 10% of the country's debt. FT research shows that the world's biggest central banks now hold $15.3tn of assets, of which about two-thirds comprises government bonds - one dollar in every five of the $49tn outstanding debt owed by their governments."

Europe Watch:

August 29 - Bloomberg (Kate Allen): "Italian banks' net purchases of their own government's debt have slowed, after hitting record levels earlier this year as foreign investors fled the market and dumped their holdings. Financial institutions in Italy bought a net €4bn of Italian government debt in July…, down from €14bn in June and €28bn in May, when the Italian bond market saw a sharp sell-off amid political turmoil. Overall in the second quarter of 2018, domestic financial institutions increased their net holdings of the government's debt by more than €40bn, the largest amount since the height of the eurozone debt crisis in 2012."

August 29 - Bloomberg (Lorenzo Totaro): "Government representative are said to be calling on the ECB to pass a new program of bond purchases in order to shield Italy's debt from financial speculation and avoid a rating downgrade, La Stampa reports citing an unnamed official. The new QE-styled program could also have a different name if needed…"

August 28 - Bloomberg (James Hirai and Todd White): "Three months after the political imbroglio around forming a populist government roiled Italian assets, bond investors are contemplating a fresh hurdle: its first budget, due next month. The big risk is that the euroskeptic Five Star Movement-League coalition breaks the 3% deficit limit set under European Union rules, putting the country on a collision course with the bloc. That's got traders hunting a variety of strategies, from selling bond futures to buying Euribor options, to guard against the kind of market meltdown seen at the end of May. For hedge funds, 'the big one is futures, and the other one is to repo the bond itself,' according to Jason Guthrie, the… head of capital markets for… WisdomTree Europe. 'That's the primary way people take short positions' on Italy's bonds, said Guthrie…"

Japan Watch:

August 29 - Bloomberg (Chikafumi Hodo): "Japan's benchmark bonds recorded no trades on Wednesday, less than a month after the central bank sought to enliven the world's second-biggest debt market by relaxing yield control. That's the seventh instance this year when the debt didn't change hands, though the first since July 31 when the Bank of Japan said it will allow the 10-year yield to deviate by as much as 0.2 percentage points around zero percent… While Hitoshi Suzuki, a BOJ board member, said Wednesday the central bank still needs more time to decide if the policy tweak… is sufficient, consensus has emerged among regional banks and insurance companies that more needs to be done as trading returns to abysmal levels."

Fixed Income Bubble Watch:

August 29 - CNBC (Robert Ferris): "Moody's downgraded Ford's credit rating to one notch above junk bond status Wednesday and warned that it could be further cut as the Detroit automaker struggles overseas and invests an estimated $11 billion on a turnaround plan. The second-largest U.S. auto manufacturer is facing weakening profit margins in North America, a retrenching business in China, and losses in South America and Europe, at least some of which could continue to worsen, Moody's said… The investments are necessary, but it will take several years before that translates to better performance, Moody's said."

August 29 - Bloomberg (Heather Perlberg and Sally Bakewell): "Fortress Investment Group LLC is boosting its offerings to investors betting on one of the debt market's hottest corners. The investment manager is expanding its private credit effort with a direct-lending fund; another that buys debt linked to real estate, aircraft leases and other assets; and one that invests in intellectual property, according to people… Money managers including Blackstone Group LP's GSO Capital Partners and BlackRock Inc. are also broadening their offerings amid the influx. The rush into these less-regulated corners of the debt market has raised some concern that lenders are taking too much risk…"

August 29 - Bloomberg (Claire Boston): "Investors led by Blackstone Group LP will start marketing $8 billion of risky corporate loans next week to fund their buyout of Thomson Reuters Corp.'s financial-and-risk operations, according to people with knowledge of the matter. It would be the biggest leveraged loan offering of the year."

Leveraged Speculation Watch:

August 26 - Wall Street Journal (Laurence Fletcher): "Following trends in financial markets was once one of the most profitable investment strategies around. Now the approach is being battered as cheap replica funds crowd into the space. Performance among the roughly $300 billion in hedge funds that largely use so-called trend-following strategies has been abysmal. An investor buying into these funds at the start of 2011, for instance, and holding through July this year would have lost 3.4% on average, according to HFR. Over the same period the S&P 500 is up 124%. 'It's like a lot of industries,' said Matthew Beddall, founder of investment firm Havelock London. 'As it's been successful more people have got involved. Now you can buy a book on Amazon on how to code trend-following.'"

August 29 - Bloomberg (Eric Lam and Matt Turner): "Short positions against the so-called FAANG group of the largest U.S. technology stocks have surged by more than 40% in the past year as investors bet against some of the biggest drivers of the global bull market. Bearish investors have shorted about $37 billion worth of stocks in the group, which comprises Facebook Inc., Apple Inc., Inc., Netflix Inc. and Google parent Alphabet Inc., up 42% from a year ago. Amazon leads the way with almost $10 billion in short interest… 'Tech stocks have had a large run-up in price this year,' Ihor Dusaniwsky, head of research at S3 Partners, said… 'The greater the rise, the greater the fall so they are being targeted as the stocks to short. With the bull market possibly entering the backstretch, portfolio managers are bracing for a selloff and increasing their overall market short exposure.'"

Geopolitical Watch:

August 28 - Bloomberg (Henry Meyer and Ilya Arkhipov): "Russia is to hold its biggest military maneuvers since the height of the Cold War next month, mobilizing about 300,000 troops and including the participation of thousands of soldiers from China, Defense Minister Sergei Shoigu said. The Vostok-2018 exercises in Russia's eastern and central military districts… from Sept. 11-15 will involve almost a third of the country's soldiers, making them the largest since 1981... Some 1,000 aircraft and both the Northern and Pacific fleets will be deployed. 'Imagine 36,000 tanks and armored personnel carriers all moving at the same time,' the defense minister said. 'This will all be tested under conditions as close as possible to war.'"

August 26 - Reuters (Hayoung Choi and Josh Smith): "North Korea's state-controlled newspaper… accused the United States of 'double-dealing' and 'hatching a criminal plot' against Pyongyang, after Washington abruptly canceled a visit by Secretary of State Mike Pompeo. Negotiations have been all but deadlocked since U.S. President Donald Trump's summit with North Korean leader Kim Jong Un in Singapore in June."

August 27 - Bloomberg (Tim Kelly): "Japan said… North Korea still posed a dire threat to its security despite a halt to ballistic missile tests and a pledge by leader Kim Jong Un to denuclearize the Korean peninsula. 'North Korea's military activities pose the most serious and pressing threat our nation has faced,' said an annual white paper published by Japan's Ministry of Defence."

Thursday, August 30, 2018

Friday's News Links

[Reuters] Global shares extend falls on Trump trade threats

[Reuters] Italian bond market on edge ahead of ratings verdict

[CNBC] 'Urgency' for Asia Pacific mega trade deal as the US mulls $200 billion tariffs on China

[Reuters] Trump tweets are 'messages from some alternative universe': China Daily

[BloombergQ] Trump Says He Has No Regrets Over Appointing Fed Chair Powell

[BloombergQ] This Emerging Market Selloff Looks Contagious

[Reuters] China August factory pick up surprises, but export orders fall again

[BloombergQ] Here Are All the Highlights From Trump’s Oval Office Interview

[BloombergQ] U.S. and China Need to Compromise on Trade, and Soon

[Reuters] Exclusive: Iran moves missiles to Iraq in warning to enemies

[WSJ] Brazil’s Sky-High Lending Rates Hurt Consumers—and Economic Growth

[FT] Why currency markets are so worried about Argentina

[FT, Tett] Have we learnt the lessons of the financial crisis?

[FT] Risk taking in US commercial property market runs hot

Thursday Afternoon Links

[BloombergQ] U.S. Stocks Fall on Trump Plan for China Tariffs: Markets Wrap

[CNBC] Argentina's central bank hikes rates to 60% as the currency collapses

[Reuters] Yields fall on Trump tariff report, emerging markets uncertainty

[Reuters] Trump ready to ratchet up China trade war with more tariffs: report

[CNBC] Trump threatens to withdraw from World Trade Organization

[MarketWatch] Argentina, Turkey currency carnage keep emerging markets in spotlight

[Reuters] Italian/German bond yield spread reaches widest since 2013

[BloombergSub] China Banks Managing $16 Trillion Can't Stop Talking About Risk

[FT] Argentina is stricken by a crisis of confidence

Wednesday, August 29, 2018

Thursday's News Links

[Reuters] Stock market's advance grinds to a halt on China concerns

[CNBC] Turkish lira sinks after reports that a key central bank member could resign

[CNBC] Argentina's currency crashes to an all-time low as it asks the IMF for emergency funds

[Reuters] U.S. consumer spending increases strongly; inflation rising

[BloombergQ] Emerging-Market Carry Traders Have Their Worst August on Record

[BloombergQ] Emerging-Market Wobbles to Test Whether Asia Really Is Safer

[CNBC] The Fed may finally see the change in inflation trend it's been looking for 

[CNBC] No profit? No problem. Investors keep snapping up loss-making companies

[BloombergQ] A Month on, BOJ's Tweaks Prove Too Little for Moribund Bonds

[BloombergQ] Trump Blames China for Stalled Nuclear Talks With North Korea

[WSJ] Fresh Stress Grips Weakest Emerging-Market Currencies

[WSJ] Biotech Boom Built Wall Street’s $3 Million Analyst

[FT] John Law, the gambler who revolutionised French finance

[FT] Populism is the true legacy of the global financial crisis

Wednesday Evening Links

[BloombergQ] Technology Shares Surge as U.S. Stocks Pad Records: Markets Wrap

[Reuters] Fed staff research anchors subtle shift that could lead rates higher

[BloombergQ] Short Bets on World’s Biggest Tech Stocks Surge to $37 Billion

[CNBC] Pending home sales fall for seventh straight month in July

[CNBC] Moody's downgrades Ford's credit rating to one notch above junk bond status

[Reuters] Argentina burns reserves to support peso, asks for early IMF funds

[BloombergQ] Argentina Asks IMF to Quicken Payments From $50 Billion Line

[BloombergSub] Argentine Bond Risk Soars With Investors Losing Faith in Macri Era

[FT] Trump says China actions ‘not helpful’ in denuclearising N Korea

Tuesday, August 28, 2018

Wednesday's News Links

[Reuters] Global stocks slip as uncertainty over NAFTA nags

[Reuters] Turkish bank bonds fall after Moody's warning, FinMin comments

[Reuters] Italian bond yields fall on report govt may ask ECB for support

[Reuters] Canada, U.S. set for second day of NAFTA talks amid growing optimism

[Reuters] U.S. second-quarter GDP growth revised up to 4.2 percent

[CNBC] Weekly mortgage applications decline, even as rates slip

[Reuters] China's state planner head says economy faces increased risks in second half

[BloombergQ] Biggest Leveraged Loan of 2018 Hits Market for Reuters Buyout

[BloombergQ] Italy Bond Traders Aren’t Sitting and Waiting for the Next Storm

[BloombergQ] How Chinese Technology Grew to Rival Silicon Valley

[CNBC] 'I hate them': Locals reportedly frustrated with Alphabet's self-driving cars

[BloombergQ] Fire-Plagued California Facing More Climate-Change Risks

[WSJ] U.S. GDP Growth Revised Up in Second Quarter

[FT] Italian banks’ bond purchases slow after hitting a record

[BloombergSub] Melt-Up on the Mind as Relentless U.S. Stocks Approach Euphoria

[BloombergSub] Who Will Be the Next ECB President?

Tuesday Evening Links

[Reuters] Wall Street ekes out gains as Canada takes trade spotlight

[CNBC] Consumer confidence pops in August to highest level since October 2000

[BloombergQ] Your Dovish Take on Powell Is Wrong, Goldman Tells Bond Traders

[BloombergQ] Trump Warns Tech Giants to ‘Be Careful,’ Claiming They Rig Searches

[BloombergQ] Americans Are Using Their Homes as ATMs, Again

[Reuters] North Korea tells U.S. denuclearization talks may fall apart: CNN

[FT] Argentina finds it harder to stick to IMF bailout plan

Monday, August 27, 2018

Tuesday's News Links

[BloombergQ] Stocks Climb After U.S. Mexico Deal; Dollar Drops: Markets Wrap

[Reuters] Turkish lira weakens against dollar, minister warns on sanctions

[Reuters] Oil touches seven-week highs after signs of tighter supply

[Reuters] China raises yuan mid-point most in 15 months, spurs dollar buying

[CNBC] Home price gains slow down in June: S&P Case-Shiller

[CNBC] The US-Mexico trade deal may be bad news for China

[BloombergQ] Mnuchin Isn’t Worried About the Yield Curve

[Reuters] Trump called off Pompeo's North Korea visit after belligerent letter: report

[BloombergQ] Russia to Stage Biggest Military Exercises Since Cold War

[Reuters] Japan says North Korea still poses a dire threat to its security

[NYT] The Trump Tax Cuts Were Supposed to Depress Housing Prices. They Haven’t.

[WSJ] China Suddenly Has Trouble Building Things

[WSJ] Global Car Sales Hit Speed Bump as Demand Slows and Trade Tensions Loom

[FT] Central banks’ balance sheets start to shrink

[FT] Lula is by far the preferred candidate of most Brazilians

[BloombergSub] Early Indicators Show China's Economy Weakening Again in August

[BloombergSub] Didi Backlash Sounds a Warning for China's Unicorns

Monday Evening Links

[Reuters] Wall Street rises on U.S.-Mexico trade deal

[Reuters] Dollar drops to four-week low as U.S.-Mexico trade deal dims safe-haven appeal

[Reuters] U.S., Mexico reach NAFTA deal, turning up pressure on Canada

[CNBC] Trump administration farm bailout to provide $6 billion in initial relief

[BloombergQ] Starter-Home Affordability Hits a Decade Low

[MarketWatch] Most young Americans are living on the edge financially

[WSJ] Yield Curve Suggests Rising, But Still Low, Risk Of Recession, San Francisco Fed Says

Sunday, August 26, 2018

Monday's News Links

[Reuters] World stocks at highest in over two weeks, China's yuan rallies

[Reuters] Turkish lira slides nearly 5 percent as U.S. stand-off back in focus

[Reuters] Dollar softens as Powell disappoints bulls, Mexican peso up on NAFTA hopes

[Reuters] China sets yuan fix stronger than expected, revives 'X' factor

[CNBC] US-China trade war is poised to intensify: 'Both sides think they have the upper hand'

[CNBC] A battered Trump may escalate the US-China trade war ahead of midterms

[Reuters] China says investment may weaken further, to make 'good use' of fiscal policy

[BloombergQ] Turkey's Erdogan to Meet Russia, Iran Leaders as U.S. Ties Sour

[WSJ] Reporter’s Notebook: Ten Years After the Crisis, Jackson Hole Symposium Is a Quieter Affair

[FT] Jay Powell and the Fed face ‘dollar doom loop’ dilemma

Sunday Evening Links

[BloombergQ] Asian Stocks Set for Gains; Yuan Holds Rise on PBOC: Market Wrap

[BloombergQ] Turkish Lira Whipsaws as Traders Return From Holiday Break

[Reuters] Mexico, U.S. likely 'hours' away from agreement on NAFTA: minister

[Axios] The coming yearlong U.S. trade war with China

[BloombergQ, Das] Are Emerging Markets Ready for a Crisis?

[BloombergQ] Trump Paints Xi Into a Corner

[WSJ] At Fed’s Jackson Hole Retreat, Central Bankers Eye New Economic Risks

[FT] Fed officials see consumer costs as tariffs bite

[FT] US student debt balloons past $1.5tn

[FT] The Chinese model is failing Africa

Sunday's News Links

[Reuters] Powell sets Fed's course with data-based judgment

[BloombergQ] Fed Keeps Its Cool at Jackson Hole Despite Pressure From Trump

[Reuters] North Korea newspaper blasts 'double-dealing' U.S. after Pompeo's trip canceled

[WSJ] The Big Hedge-Fund Strategy That Isn’t Working

[FT] Battle stations: Asia’s arms race hots up

Friday, August 24, 2018

Weekly Commentary: Powell, Greenspan and Whatever it Takes

Fed Chairman Powell is in a tough spot, one made no easier now that he's on the receiving end of disapproving presidential tweets. The global Bubble has begun to falter, which only exacerbates divergences between various markets and economies. The U.S. is booming, while China struggles and EM economies now stumble into the dark downside of an epic cycle. The U.S. economy and markets beckon for tighter financial conditions, while higher U.S. rates pose significant danger to fragile global markets already confronting a major tightening of financial conditions.

Powell played it safe in Jackson Hole. I imagine he'd have preferred to sit this one out. As such, his presentation was too heavy on rationalization and justification. The FOMC is trapped in Greenspan-style "baby steps," and it is curious that the Fed Chairman would choose to praise Alan Greenspan for his nineties policy approach:

"Under Chairman Greenspan's leadership, the committee converged on a risk-management strategy that can be distilled into a simple request: 'Let's wait one more meeting; if there are clearer signs of inflation, we will commence tightening.' Meeting after meeting, the committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined."

If the Greenspan Fed had in fact adopted a "risk management strategy," it was a failed attempt. It's too easy these days to disregard the highly disruptive boom and bust cycles that have been prominent in U.S. and global markets (and economies) over recent decades. And here we are today, the Federal Reserve still accommodating Bubble Dynamics because of its failure to respond to financial developments and contain excess back in the nineties.

The bursting of the nineties "tech" and corporate debt Bubbles spurred the Greenspan Fed to slash rates to 1% by June 2003. At that time, double-digit mortgage Credit was already fueling self-reinforcing home price inflation. Short rates were then "baby stepped" upward until June 2004 and remained below 4% all the way into late-2005. The lesson not learned from that episode was that small, gradual telegraphed rate increases are ineffective in the face of an inflating Bubble. Such a policy course ensured a progressive loosening of financial conditions when tightening was clearly required from a risk management perspective.

Accommodating the nineties Bubble basically ensured the Greenspan Fed would later adopt even more aggressive post-Bubble accommodation. Indeed, the Fed specifically targeted mortgage finance as the source of reflationary Credit. This greatly compounded the fateful error from earlier in the Greenspan era: nurturing market-based Credit and financial speculation in response to banking system impairment following the collapse of late-eighties ("decade of greed") Bubbles.

The financial world changed momentously during the nineties. Out with the staid bank loan, in with dynamic market-based finance: Asset-backed securities, MBS, GSE Credit, money-market funds, derivatives and Wall Street "structured finance". In with repurchase agreements ("repos") and essentially unlimited cheap market-based securities Credit. In short, out with reserve and capital requirements that traditionally restrained Credit growth; in with unfettered asset-based finance the likes the world had never experienced.

From Powell's opening paragraph: "Fifteen years ago, during the period now referred to as the Great Moderation, the topic of this symposium was 'Adapting to a Changing Economy.' In opening the proceedings, then-Chairman Alan Greenspan famously declared that 'uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.'"

The Fed and global central banks never successfully adapted to the new paradigm they themselves had championed. Unfettered market-based and speculative finance beckoned for more stringent monetary management. Yet the Fed, fretting the instability and associated uncertainties, erred on the side of easy "money." And, despite it all, this error compounds to this day.

The "great moderation" period saw powerful inflation dynamics take hold throughout the securities and asset markets, at home and abroad. This new finance had a strong inflationary bias that created a propensity for inflating powerful Bubbles. Asset inflation and Bubbles emerged as the most consequential form of inflation, yet central banks were too content to take Credit for the so-called "great moderation" in consumer price inflation (that clearly had much more to do with profound changes in finance, technologies, globalization and the nature of economic output - rather than effective monetary management).

As the nineties unfolded, policy focused on the "real economy sphere" - the New Paradigm, electrifying technological innovation and the so-called "productivity miracle" - along with various measures omnipotent central bankers would employ to support such obviously constructive advancements. Policymakers should have instead been fixated on momentous "financial sphere" developments, and how the associated structural loosening of financial conditions warranted a counterbalance of tighter monetary policy and a more stringent regulatory regime.

Adopting the view that the New Paradigm favored a more permissive approach to monetary management, Greenspan got it dreadfully wrong. In the end, perhaps the most consequential analysis in the history of central banking was deeply flawed. The "maestro's" asymmetrical monetary policy approach was instrumental in bolstering inflationary psychology throughout the markets, with the Greenspan "put" repeatedly resuscitating vulnerable Bubbles. All the while, huge infrastructure was being erected to support the worldwide enterprise of financial speculation, and the Greenspan Fed gave an enthusiastic thumbs up.

Ironically, the free-market ideologue sowed the seeds for unsound markets increasingly incapable of self-correction and adjustment. Asset inflation: the most dangerous form of inflation specifically because there are powerful constituencies beholden to it and essentially none in opposition.

In the sixties, Alan Greenspan was said to have explained to his fellow Ayn Rand colleagues that the Great Depression was the result of the Federal Reserve repeatedly placing "coins in the fuse box." Ironically, Greenspan initiated a process that has seen the Fed and global central bankers resorting to coins to circumvent market forces for going on three decades - culminating with "whatever it takes" directing the one-way, free-flow of "money" into the securities markets.

I try to cut Chairman Powell some slack. I understand he's trapped in gradualism and flawed central bank doctrine, more generally. But I was hoping he would over time initiate a retreat from the Greenspan/Bernanke/Yellen market "put." Powell: "I am confident that the FOMC would resolutely 'do whatever it takes' should inflation expectations drift materially up or down or should crisis again threaten." Why is this language necessary on a day with the S&P500 and Nasdaq trading to all-time highs?

Bond yields (and the dollar) dropped on the release of Powell's speech. The market essentially presumes zero probability of the Fed ever aggressively tightening policy under any circumstance. Aggressive cuts and market support, well that's an altogether different story. I would argue that the prospect for a return of aggressive QE and zero rates is fundamental to ongoing extraordinarily low market yields along with the flat yield curve. Greenspan's "asymmetrical" globally on steroids.

Low yields clearly support price Bubbles in equities, real estate and asset markets more generally. And the longer Bubbles inflate the more confident speculators become that future "activist" policy measures will bolster bond and fixed-income prices. The comprehensive "whatever it takes" central banking "put" provides unprecedented Bubble support - and, I would argue, amounts to yet another highly destabilizing and dangerous policy error. The egregious masquerading as conventional mainstream. To be sure, the problem with discretionary monetary policy is that one mistake invariably leads to bigger - and inevitably much bigger - mistakes.

"Changing Market Structures and Implications for Monetary Policy" is the theme for the 2018 Jackson Hole symposium. Pro-Bubble central bank monetary policy doctrine has for much too long been instrumental in fostering unstable market structures. Chairman Powell missed an opportunity to dial back the "whatever it takes" central bank approach to backstopping unsound securities markets. It's been a full decade since the crisis, for heaven's sake.

The nineties were on my mind throughout the week. An odd coincidence that Powell's Jackson Hole presentation harkened back to Alan Greenspan and the nineties. In what is being called "the longest bull market in history," the duration of the current bull run this week surpassed the previous record, October 1990 through March 2000.

One person's record bull is another's greatest Bubble. GSE Credit and corporate debt were key sources of fuel for the nineties Bubble. And each bursting Bubble is to be reflated by a more formidable Bubble inflation. The post-nineties reflation was led by booming mortgage finance, much of it of the (money-like) "AAA" GSE and Wall Street structured finance ilk. The 2008 collapse of this much grander Bubble provoked unprecedented reflationary measures. This historic reflation went to the very foundation of global finance, sovereign debt and central bank Credit. It has corrupted the very heart of contemporary "money."

The problem with "money" is that it enjoys insatiable demand, creating the potential for extraordinarily dangerous Bubbles. "Whatever it takes" has deeply perverted market structure across the globe. Myriad risks have been inflated and totally distorted. Today's market view holds that central bankers will not tolerate a crisis. Perceived risk remains extraordinarily low, as illustrated by Friday's closing VIX price of 11.99. But true underlying risk is sky high and rising - market, economic, policy, political and geopolitical. Market structure and global imbalances, among others, are accidents in the making.

When this Bubble bursts, there will be no new source of "money" sufficient to fuel the next round of reflation. It's sovereign debt and central bank Credit for the duration. In the meantime, loose monetary policy will continue to accommodate an unprecedented expansion of government borrowings. As EM is now recognizing, the market mechanism for disciplining profligate borrowers doesn't function until it's too late. While the global Bubble falters at the periphery (Brazilian real down 4.7% this week!), boom-time excesses run unabated at the core.

Powell: "Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses."

A risk management approach would be working to extricate extreme central bank "activism" from the markets. Financial markets should stand on their own; the market mechanism needs to be operable. But rates, once again, remain too accommodative. Moreover, this is no time to be reminiscing about Alan Greenspan or trumpeting "whatever it takes." A missed opportunity Chairman Powell - and an important one at that.

For the Week:

The S&P500 gained 0.9% (up 7.5% y-t-d), and the Dow added 0.5% (up 4.3%). The Utilities declined 1.6% (up 1.1%). The Banks added 0.2% (up 3.3%), and the Broker/Dealers increased 0.2% (up 3.7%). The Transports gained 0.5% (up 6.3%). The S&P 400 Midcaps jumped 1.2% (up 7.1%), and the small cap Russell 2000 surged 1.9% (up 12.4%). The Nasdaq100 advanced 1.5% (up 17.0%). The Semiconductors rallied 4.0% (up 9.8%). The Biotechs rose 1.4% (up 21.9%). With bullion gaining $21, the HUI gold index recovered 3.1% (down 23.7%).

Three-month Treasury bill rates ended the week at 2.05%. Two-year government yields rose four bps to 2.62% (up 74bps y-t-d). Five-year T-note yields slipped three bps to 2.71% (up 51bps). Ten-year Treasury yields declined five bps to 2.81% (up 40bps). Long bond yields dropped six bps to 2.96% (up 22bps). Benchmark Fannie Mae MBS yields declined three bps to 3.57% (up 57bps).

Greek 10-year yields dropped 15 bps to 4.16% (up 9bps y-t-d). Ten-year Portuguese yields declined three bps to 1.82% (down 12bps). Italian 10-year yields gained three bps to 3.15% (up 114bps). Spain's 10-year yields declined six bps to 1.39% (down 17bps). German bund yields rose four bps to 0.35% (down 8bps). French yields gained two bps to 0.69% (down 10bps). The French to German 10-year bond spread narrowed two to 34 bps. U.K. 10-year gilt yields rose four bps to 1.28% (up 9bps). U.K.'s FTSE equities index increased 0.3% (down 1.4%).

Japan's Nikkei 225 equities index rallied 1.5% (down 0.7% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.10% (up 5bps). France's CAC40 jumped 1.6% (up 2.3%). The German DAX equities index rose 1.5% (down 4.0%). Spain's IBEX 35 equities index jumped 1.8% (down 4.5%). Italy's FTSE MIB index rallied 1.6% (down 5.1%). EM equities were mostly higher. Brazil's Bovespa index increased 0.3% (down 0.2%), and Mexico's Bolsa jumped 2.8% (up 0.6%). South Korea's Kospi index ralllied 2.1% (down 7.1%). India’s Sensex equities index gained 0.8% (up 12.3%). China’s Shanghai Exchange recovered 2.3% (down 17.5%). Turkey's Borsa Istanbul National 100 index gained 1.6% (down 21.8%). Russia's MICEX equities index rose 1.1% (up 8.1%).

Investment-grade bond funds saw inflows of $2.678 billion, and junk bond funds had inflows of $344 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped two bps to 4.51% (up 65bps y-o-y). Fifteen-year rates declined three bps to 3.98% (up 82bps). Five-year hybrid ARM rates dropped five bps to 3.82% (up 65bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.52% (up 49bps).

Federal Reserve Credit last week dropped $27.2bn to $4.190 TN. Over the past year, Fed Credit contracted $228bn, or 4.8%. Fed Credit inflated $1.379 TN, or 49%, over the past 303 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.5bn last week to $3.430 TN. "Custody holdings" were up $100bn y-o-y, or 3.0%.

M2 (narrow) "money" supply jumped $54.5bn last week to $14.203 TN. "Narrow money" gained $559bn, or 4.1%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits rose $39.2bn, and Savings Deposits gained $5.5bn. Small Time Deposits added $1.7bn. Retail Money Funds gained $5.5bn.

Total money market fund assets added $3.7bn to $2.864 TN. Money Funds gained $129bn y-o-y, or 4.7%.

Total Commercial Paper jumped $11.9bn to $1.067 TN. CP gained $68bn y-o-y, or 6.9%.

Currency Watch:

The U.S. dollar index fell 1.0% to 95.163 (up 3.3% y-t-d). For the week on the upside, the South African rand increased 3.5%, the euro 1.6%, the Norwegian krone 1.5%, the Swiss franc 1.3%, the British pound 0.8%, the South Korean won 0.5%, the New Zealand dollar 0.5%, the Singapore dollar 0.4%, the Canadian dollar 0.3%, the Swedish krona 0.3%, and the Australian dollar 0.2%. For the week on the downside, the Brazilian real declined 4.7%, the Japanese yen 0.7% and the Mexican peso 0.1%. The Chinese renminbi rallied 0.98% versus the dollar this week (down 4.46% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.2% (up 3.8% y-t-d). Spot Gold jumped 1.8% to $1,206 (down 7.5%). Silver gained 0.8% to $14.895 (down 13.1%). Crude recovered $2.60 to $68.52 (up 13%). Gasoline surged 5.0% (up 16%), while Natural Gas declined 1.1% (down 1%). Copper rallied 2.5% (down 18%). Wheat sank 7.5% (up 26%). Corn fell 4.2% (up 3%).

Trump Administration Watch:

August 23 - CNBC (John Melloy): "President Donald Trump said the stock market would plummet if he were to be removed from office. 'If I ever got impeached, I think the market would crash. I think everybody would be very poor,' the president said in a Fox News interview… 'Because without this thinking, you would see numbers that you wouldn't believe in reverse,' Trump said, pointing at his head. 'I got rid of regulations. The tax cut was a tremendous thing.' The stock market has had little reaction so far to Trump's renewed legal troubles this week with two former advisors now guilty of criminal acts and one implicating him directly."

August 22 - Bloomberg (Toluse Olorunnipa): "President Donald Trump said China's economy is no longer on a swift pace to be larger than the U.S., a comment likely to stoke concerns in Beijing that his administration wants to contain the Asian nation's rise. Speaking at a rally in West Virginia…, Trump noted that China's market was 'way down' even while saying he has 'tremendous respect' for the country. He added that various trade talks would take time… 'When I came we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time,' Trump said. 'That's not going to happen anymore. 'I want to be their friend,' he added. 'But we had to do things that we had to do.'"

August 21 - CNBC (Mike Calia): "President Donald Trump said Tuesday night that the U.S. would slap a 25% tariff on cars coming from the European Union. The president's statement came hours after The Wall Street Journal reported that Commerce Secretary Wilbur Ross said he had postponed an August timeline to publish a report on auto tariffs. 'We're going to put a 25% tax on every car that comes into the United States from the European Union,' Trump said at a campaign rally…"

August 22 - Reuters (Michael Martina and David Lawder): "The United States and China escalated their acrimonious trade war on Thursday, implementing punitive 25% tariffs on $16 billion worth of each other's goods, even as mid-level officials from both sides resumed talks in Washington. The world's two largest economies have now slapped tit-for-tat tariffs on a combined $100 billion of products since early July, with more in the pipeline, adding to risks to global economic growth. China's Commerce Ministry said Washington was 'remaining obstinate'…"

August 21 - Bloomberg (Kathleen Hunter): "Donald Trump has never shied away from expressing an opinion about people who've been part of his inner circle - criticizing Attorney General Jeff Sessions, while offering qualified support to his former campaign chairman, Paul Manafort. Now Federal Reserve Chairman Jerome Powell is in his sights. Like Sessions and others, the fact that Trump hired Powell isn't insulating him from public fault-finding. Nor is a long-held practice of presidents considering the central bank above the fray. Trump on Friday lamented Powell's job performance to wealthy Republicans at a Hamptons fundraiser, telling them that he'd expected a cheap-money chairman and was disappointed with the Fed's interest-rate increases."

August 20 - Reuters (Jeff Mason and Steve Holland): "U.S. President Donald Trump said on Monday he was 'not thrilled' with the Federal Reserve under his own appointee, Chairman Jerome Powell, for raising interest rates and said the U.S. central bank should do more to help him to boost the economy… American presidents have rarely criticized the Fed in recent decades because its independence has been seen as important for economic stability. Trump has departed from this past practice and said he would not shy from future criticism should the Fed keep lifting rates."

August 21 - Reuters (Bozorgmehr Sharafedin and Dan Williams): "Iran warned… it would hit U.S. and Israeli targets if it were attacked by the United States after President Donald Trump's security adviser said Washington would exert maximum pressure on Tehran going beyond economic sanctions… U.S. National Security Adviser John Bolton told Reuters the return of U.S. sanctions was having a strong effect on Iran's economy and popular opinion. 'There should not be any doubt that the United States wants this resolved peacefully, but we are fully prepared for any contingency that Iran creates,' Bolton said…"

Federal Reserve Watch:

August 22 - CNBC (Jeff Cox): "Federal Reserve Chairman Jerome Powell is resolved to keep the central bank independent despite ongoing criticism from President Donald Trump, according to Sen. Tim Scott. Powell 'reinforced the fact that their goal is to [address] unemployment, our economy, and that is their only objective,' the South Carolina Republican told The Washington Post. Scott said he asked Powell 'specifically about the independence of the Fed' and was assured it would not be compromised. The report comes as Trump has stepped up his critiques of Fed monetary policy."

August 22 - Reuters (Jason Lange): "Federal Reserve officials discussed raising interest rates soon to counter excessive economic strength but also examined how global trade disputes could batter businesses and households, minutes of the U.S. central bank's last policy meeting showed… 'Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation,' according to the minutes."

August 23 - Reuters (Ann Saphir): "The Federal Reserve should raise U.S. interest rates further this year and probably next year as well, despite President Donald Trump's displeasure at tighter policy, Kansas City Federal Reserve Bank President Esther George said… 'Based on what I see today, I think two more rate hikes could be appropriate,' along with several more next year as the Fed aims to move interest rates to a neutral setting of about 3%, George told Bloomberg TV."

August 22 - Reuters (Ann Saphir): "With the U.S. economy at full employment and inflation at the Federal Reserve's 2% goal, the U.S. central bank should press on with its plan for gradual interest rate hikes at least for the next nine to 12 months, a policymaker said… Only once short-term rates reach a 'neutral' level where they are neither stimulating nor braking the economy should the central bank potentially stop raising rates and figure out what to do next, Dallas Fed President Robert Kaplan said in an essay."

August 20 - Wall Street Journal (Nick Timiraos): "Federal Reserve officials left many important questions unanswered when they decided last year to begin shrinking the central bank's $4.5 trillion portfolio of mostly mortgage and Treasury securities. They are now beginning an internal debate to answer one of the most important of those questions: What exactly will this portfolio look like when they are done shrinking it? The Fed has decided it wants to hold primarily Treasury securities rather than mortgage securities once it is done. But it hasn't worked out what the mix of those Treasury securities will look like. Will it be mostly very short-term bills? Or will it include a hefty share of longer-term bonds? The difference is critical."

August 22 - Bloomberg (Liz Capo McCormick): "Donald Trump may want to watch what he wishes for. If Federal Reserve boss Jerome Powell does what the president wants, American assets could lose their appeal as a global haven. Strategists warn that more than just the central bank's credibility would be hurt if the Fed were to put the brakes on monetary policy tightening. Trump would get his desire for a weaker dollar, but rising inflation expectations would dent the perceived safety of U.S. assets and eventually boost longer-term financing costs for the government and American consumers. On the other hand, global liquidity and growth could receive a lift, at least initially, and emerging markets that have been maligned by Trump could benefit. While few expect the Fed to acquiesce to the pressure, Trump's policy jawboning has been persistent enough for investors to start factoring its effects into their trading calculus."

U.S. Bubble Watch:

August 19 - Financial Times (Andrew Edgecliffe-Johnson): "Blue-chip US companies are confident they can pass on rising costs to their customers and protect record profit margins as inflationary pressure is offset by buoyant business and consumer sentiment. Cost inflation has been a recurring theme of US second-quarter earnings announcements from companies in industries as diverse as retail and industrial equipment. Executives have pointed to a combination of higher freight and labour costs with increased prices for raw materials, some of which has been driven by the Trump administration's tariffs on imported steel and aluminium, and by other countries' retaliatory tariffs on US goods. "

August 22 - Bloomberg Businessweek (Steve Matthews, Matthew Boesler and Jeanna Smialek): "America's labor market is a jigsaw puzzle whose pieces don't quite fit together. Unemployment has plummeted to 3.9%, the lowest level since the early 2000s. Earnings calls are replete with chief executive officers bemoaning employee shortages. Small businesses are also feeling the pinch. In a July survey by the National Federation of Independent Business, 37% of owners reported at least one vacancy, and more than half said there were few or no qualified candidates for the job."

August 22 - Reuters (Jason Lange): "U.S. home sales fell for a fourth straight month in July as a shortage of properties on the market pushed up house prices, likely sidelining some potential buyers. …Existing home sales fell 0.7% to a seasonally adjusted annual rate of 5.34 million units last month… Existing home sales, which make up about 90% of U.S. home sales, fell 1.5% from a year ago in July. Sales have been stymied by an acute shortages of homes on the market for several months, although… inventory showed signs of stabilizing last month. There were 1.92 million homes on the market in July, unchanged from a year earlier. It was the first month in three years in which inventory did not fall on a year-on-year basis…"¬

August 23 - Reuters: "Sales of new U.S. single-family homes unexpectedly fell in July to a nine-month low in a sign the housing market was cooling and could give less support to the overall economy. …New home sales decreased 1.7% to a seasonally adjusted annual rate of 627,000 units last month, the lowest level since October 2017. June's sales pace was revised up to 638,000 units from the previously reported 631,000 units."

August 22 - Bloomberg (Katia Dmitrieva): "Scarce supplies of U.S. homes for sale are propping up prices and pushing some buyers to the sidelines, leading to fewer transactions -- but not for those with big budgets. Deals for the most expensive properties jumped to a record share of the U.S. total in the last two months… Existing single-family homes with a price tag of at least $1 million made up 3.7% of all transactions in July and 3.8% in June, the highest in data starting in 2013. Sales in the category rose 16.2% in July from a year earlier, faster than the five cheaper price groups…"

August 23 - Wall Street Journal (Heather Gillers): "Chicago tried to lower its pension deficit with budget cuts, benefit reductions and tax increases. Now the third-largest U.S. city is considering a controversial new fix: more debt. Finance Chief Carole Brown said she would decide in the next week whether to endorse a $10 billion taxable bond offering that would be used to help close Chicago's $28 billion pension funding gap. If the proposal is accepted by Mayor Rahm Emanuel and approved by the City Council, it would become the biggest pension obligation bond ever issued by a U.S. city. The bet is that Chicago can earn more investing the proceeds than it paid to issue the new debt, setting an example for other large governments wrestling with sizable pension deficits."

August 18 - Wall Street Journal (Ryan Dezember): "Freddie Mac is expanding its role in financing one of Wall Street's postcrisis success stories: the booming business of investing in single-family rental houses. The government-backed mortgage-financing firm this month guaranteed a $509 million loan that helped Front Yard Residential Corp. , an acquirer of rental homes, buy a rival. It also backed a $7.8 million loan that enabled Promise Homes Co., a midsize Atlanta landlord, to buy 117 houses in Southeastern working-class neighborhoods. The… company already is the country's largest backer of apartment loans. The deals announced this month are part of its push to finance more rental-home purchases as investors are eager to put money to work in rental markets…"

August 23 - Bloomberg (John Gittelsohn): "Fewer stock pickers are beating their indexes, with value managers among the worst performers. Just 36% of actively managed stock funds topped indexes in the year through June, down from 43% in 2017, according to a Morningstar Inc. report. Pickers of value stocks saw their success rates drop as much as 27 percentage points compared with the prior year."

August 20 - Wall Street Journal (Josh Barbanel): "Sales of the most expensive New York apartments fell sharply in the first half of the year, but many sellers have adjusted by cutting asking prices to make deals, brokers said. 'This is simply a market that is adjusting itself to chronic overpricing relative to buyers' perception of value,' said Kirk Henckels, a broker and vice chairman of Stribling & Associates… Overall sales of apartments priced at $5 million or more fell by 31% during the first half of the year, compared with the same period in 2017, according to a luxury market report by Stribling."

China Watch:

August 19 - Reuters (Tom Daly and Muyu Xu): "China's banking and insurance regulator has asked financial institutions to give more support to infrastructure investment, importers and exporters, and creditworthy companies experiencing temporary problems."

August 20 - CNBC (Evelyn Cheng): "China's hot real estate market remains a challenge for authorities trying to maintain stable economic growth in the face of trade tensions with the U.S. In fact, property is the country's biggest risk in the next 12 months, much greater than the trade war, according to Larry Hu, head of greater China economics at Macquarie. He said he is especially watching whether the real estate market in lower-tier, or smaller, cities will see a downturn in prices or housing starts after recent sharp increases. Real estate investment accounts for about two-thirds of Chinese household assets, according to wealth manager Noah Holdings. The property market also plays a significant role in local government revenues, bank loans and corporate investment."

August 21 - Reuters (Elias Glenn and Stella Qiu): "China's central bank said… that it will not resort to strong stimulus to support the slowing economy but will keep liquidity reasonably ample and offer more help to companies which are having trouble obtaining financing. Officials also reiterated that China will not use the yuan as a weapon to deal with trade frictions, a day after U.S. President Donald Trump told Reuters Beijing was manipulating its currency in response to U.S tariffs on imported Chinese goods."

August 19 - Financial Times (Edward White): "The contraction of shadow banking activity in China is expected to moderate in the second half of the year, in a further sign of policy easing as Beijing seeks to boost economic growth. Shadow banking, which refers to higher-risk non-bank financial products and lending, has been decreasing in China amid tighter regulation aimed at curbing runaway debt levels. According to Moody's, shadow banking assets as a share of China's gross domestic product dropped to 73% at the end of June, from 79% 12 months earlier and a peak of 87% in late 2016. That reflected a fall of Rmb2.7tn in the first six months of the year, to Rmb62.9tn. However, regulators are now 'taking a more gradualist approach in response to slower domestic credit growth and a more challenging external environment', said Moody's Asia Pacific managing director Michael Taylor."

August 23 - Bloomberg (Lianting Tu, Narae Kim and Carrie Hong): "China's town builders may have gotten some respite after the government took steps to ensure adequate funding for them, but their weaker peers may still suffer, analysts say. That's because these local government financing vehicles now need to repay the pile of debt that was sold over the last few years to support economic growth. Domestic maturities average 340 billion yuan ($49bn) each quarter through to the April-June period of 2019… That's 40% higher than the average in 2017. The maturities will peak in the first quarter next year, the data show."

August 23 - Reuters (Hallie Gu and Josephine Mason): "China's grain imports plunged in July after Beijing imposed hefty tariffs on shipments from the United States as part of its trade conflict and as rising international prices curbed buying… China brought in 220,000 tonnes of sorghum in July, down 62.5% from 588,364 tonnes a year ago…"

August 20 - Reuters (Chen Aizhu and Florence Tan): "Chinese buyers of Iranian oil are starting to shift their cargoes to vessels owned by National Iranian Tanker Co. for nearly all of their imports to keep supply flowing amid the re-imposition of economic sanctions by the United States. The shift demonstrates that China, Iran's biggest oil customer, wants to keep buying Iranian crude despite the sanctions, which were put back after the United States withdrew in May from a 2015 agreement to halt Iran's nuclear program. The United States is trying to halt Iranian oil exports…"

August 21 - Wall Street Journal (Shen Hong): "Chinese banks are taking on new risks as they scramble to lure savers, turning a previously obscure line of business into a $1 trillion industry. The explosion marks the latest effort by lenders to circumvent Beijing's campaign against financial risk, and to head off rising competition from the lightly regulated shadow-banking sector and upstart high-tech rivals… It also reflects an old struggle in a country where banks can't freely set their own interest rates. Structured deposits offer higher returns than regular savings accounts and are tied to bets on assets from currencies to gold. They have been around for years, but the sums outstanding have soared recently. In July they stood at a record 9.71 trillion yuan ($1.42 trillion), up 52% in a year… Banks aren't competing only with one another for funds, which they need to extend more loans; savers also are switching to more attractive options, such as high-yielding wealth-management products, and to money-market funds…"

August 20 - Financial Times (Sherry Fei Ju and Hudson Lockett): "Monthly rent in Beijing has risen by about a quarter in 2018, according to a research report that has stoked criticism from many of the millions of tenants who live in China's capital. A research report issued by property search engine Zhuge showed rental costs up 25.6% year on year at the end of July, with some areas seeing a rise of nearly 40%, says the report."

EM Watch:

August 20 - Reuters (Ilaria Polleschi and Gavin Jones): "President Tayyip Erdogan appealed to Turks' religious and patriotic feelings ahead of a major Muslim holiday on Monday, promising they would not be brought 'to their knees' by an economic crisis that has battered the lira currency."

August 22 - Reuters (Anthony Boadle and Brad Brooks): "The popularity of imprisoned former Brazilian president Luiz Inacio Lula da Silva's has grown strongly despite his corruption conviction, an election poll on Wednesday showed, a result that rattled markets and raised the possibility that Lula's running mate could ultimately become the next occupant of the country's presidential palace. Investors reacted unfavorably to the poll…"

August 21 - Bloomberg (Eduardo Thomson and Fabiola Zerpa): "Venezuelan President Nicolas Maduro carried out one of the greatest currency devaluations in history over the weekend -- a 95% plunge that will test the capacity of an already beleaguered population to stomach even more pain. One likely outcome is that inflation, which already was forecast to reach 1 million percent this year, will get fresh fuel from the measures. Prices are currently rising at an annualized rate of 108,000%, according to Bloomberg's Café con Leche index. A massive exodus of Venezuelans fleeing the crisis to neighboring countries will likely increase and with it, tensions and restrictions like the ones seen over the past few days."

August 19 - PTI News: "India's current account deficit is expected to widen to 2.8% of the gross domestic product in this financial year, according to a Nomura report. With rising oil prices, depreciating rupee and outflow of portfolio investments, there are concerns that the current account deficit might rise in the current fiscal, it said. 'Overall, we expect the current account deficit to widen to 2.8% of GDP in financial year 2019 from 1.9% in financial year 2018,' the Japanese financial services major said. 'The balance of payment funding to remain a challenge in the ongoing financial year as the basic balance of payment is negative and portfolio flows also remain negative,' it said."

Global Bubble Watch:

August 21 - Bloomberg (Carolynn Look): "Jens Weidmann, a top candidate to lead the European Central Bank next year, said policy makers must be willing to act if needed to prevent financial imbalances. While arguing that monetary officials should have only one mandate -- price stability -- and generally let national authorities in the euro area handle tasks such as reining in asset prices, he acknowledged that those macroprudential tools are still poorly understood. 'Should monetary policy remain completely passive if financial imbalances were to build up? In my view, this would be a mistake,' Weidmann, who heads Germany's Bundesbank, said at a conference… 'As we have witnessed, financial crises have a considerable impact on macroeconomic outcomes and, ultimately, central banks' ability to guarantee price stability.'"

August 20 - Bloomberg (Nisha Gopalan): "Doors are slamming shut in the developed world not just to Chinese investment in technology but potentially to a wave of acquisitions with a tech element, as diverse as smart heaters and robotic lawnmowers. President Donald Trump last week signed an update to legislation for the Committee on Foreign Investment in the U.S. that broadened the inter-agency vetting committee group's scope to encompass even minority and passive investments in three areas: critical technology, infrastructure, and businesses that handle personal data. This tightening of the rules has been happening for some time, but it's now explicit… China's challenges aren't limited to a more protectionist U.S., or to similar stances in Australia and Canada. Europe, the favored destination of late, is getting a lot tougher."

August 21 - Bloomberg (Shuli Ren): "China's willingness to extend credit has transformed it into the best friend of emerging markets. But there are reasons to believe the flow of easy money may suddenly dry up - just as distressed economies from Argentina and Venezuela to Turkey and Pakistan look to Beijing for a lifeline that would be less onerous than an International Monetary Fund bailout. In the last decade, China made more than $62 billion of loans to Venezuela, where hyperinflation prompted the government to devalue the bolivar by 95% at the weekend… China has also signed currency swaps with 32 counterparties since 2009. While mainly aimed at facilitating trade in the yuan, these arrangements also served to boost foreign-exchange reserves at troubled partners."

August 20 - New York Times (Hannah Beech): "In the world's most vital maritime chokepoint, through which much of Asian trade passes, a Chinese power company is investing in a deepwater port large enough to host an aircraft carrier. Another state-owned Chinese company is revamping a harbor along the fiercely contested South China Sea. Nearby, a rail network mostly financed by a Chinese government bank is being built to speed Chinese goods along a new Silk Road. And a Chinese developer is creating four artificial islands that could become home to nearly three-quarters of a million people… Each of these projects is being built in Malaysia, a Southeast Asian democracy at the heart of China's effort to gain global influence. But where Malaysia once led the pack in courting Chinese investment, it is now on the front edge of a new phenomenon: a pushback against Beijing as nations fear becoming overly indebted for projects that are neither viable nor necessary - except in their strategic value to China or use in propping up friendly strongmen."

August 22 - Wall Street Journal (Suryatapa Bhattacharya and Saumya Vaishampayan): "Turkey's financial trouble has claimed some distant victims: small investors in Japan, who have dabbled in emerging-market assets to escape superlow domestic returns. The upset illustrates the appetite for risk among an army of punters often dubbed 'Mrs. Watanabe,' after the stereotypical Japanese homemaker. Last year, Deutsche Bank researchers said these buyers had fueled a rally in bitcoin and made up half of global foreign-exchange trading using borrowed money. Individuals have snapped up Uridashi, high-yielding bonds marketed to households that are frequently denominated in foreign currencies like the lira, Brazilian real and South African rand."

Central Bank Watch:

August 23 - Bloomberg (Carolynn Look and Birgit Jennen): "The European Central Bank's expansive monetary-policy stance is out of touch with the euro area's economic upturn, making it all the more important for the institution to begin changing course, according to Governing Council member Jens Weidmann. Weidmann, who is also the president of Germany's Bundesbank, argued in Berlin on Thursday that with inflation heading toward the ECB's goal, it's 'time to begin exiting the very expansionary monetary policy and the non-standard measures, especially considering their possible side effects.'"

August 23 - Financial Times (Claire Jones): "The European Central Bank has become increasingly confident that it can wean the eurozone off some of its crisis-era support without endangering the region's economy. According to minutes… from the July 26 meeting of the bank's governing council, the eurozone was set to grow at a 'solid pace', with the risks to the outlook 'broadly balanced' despite the threat of a global trade war. The ECB remains on track to end its €2.5tn quantitative easing programme by the end of 2018."

August 19 - Reuters (Frank Siebelt and Andrea Shalal): "The European Central Bank is on course towards a less expansive monetary policy, and the projected inflation rate of 1.7% for 2020 is in line with its medium term stability goals, the head of Germany's Bundesbank said… 'After the latest decisions, a normalisation of monetary policy is foreseeable, Weidmann told the newspaper, adding that interest rates would likely edge up as a result."

Europe Watch:

August 23 - Financial Times (Claire Jones): "The race for the top job for the European Central Bank looks wide open. Jens Weidmann, president of Germany's Bundesbank, is considered by many to be favourite. But reports that Angela Merkel would prefer a German at the top of the Commission, rather than push for him to succeed Mario Draghi in November 2019, would appear to dent his chances substantially. Handelsblatt… reported… that the German chancellor was prepared to sacrifice Mr Weidmann in order to ensure someone from Berlin will succeed Jean-Claude Juncker as Commission President after the European Parliamentary elections next June."

August 20 - Reuters (Daren Butler): "Italian Deputy Prime Minister Matteo Salvini said… the government will stand up any against market attacks or debt downgrades that may come its way… 'This government wants to help Italians and I think it isn't liked by many ...representatives of finance and technocracy that wanted to exploit Italy and obtain cheaply the last companies left in this country,' Salvini told reporters… 'They won't manage it and so we will resist against (rises in bond) spreads, speculation, (debt) downgrades and attacks.'"

August 19 - Financial Times (Claire Jones): "A prominent member of Italy's coalition government has called for the European Central Bank to hold fire on withdrawing its crisis-era stimulus measures, in a sign of Rome's concern that the country's borrowing costs will shoot up after the bank ends purchases of government debt this year. Giancarlo Giorgetti, the Italian cabinet undersecretary, indicated that he wanted the ECB to continue buying fresh bonds - including Italian government debt - under its quantitative easing programme should markets launch a speculative attack on Italy. '[Bank president Mario] Draghi and the ECB have played a very important role over the years, and I hope that the quantitative easing programme will continue,' said Mr Giorgetti…"

August 19 - Euromoney (Jeremy Weltman): "With a viscous cycle of rising trade protectionism and inflation slowing economic growth, a gross debt burden totalling 130% of GDP and a populist-left government planning to increase budget spending, a recipe is forming for financial distress, especially if factoring in [Italy's] fragile banking system. Bank stability is one of five economic risk factors included in Euromoney's country risk survey, and it remains a concern for Europe generally, according to analysts, despite stronger economies, and tighter capitalization and liquidity requirements since the global financial crisis: Italy remains the biggest concern of all, from a systemic risk perspective, with a high level of non-performing loans and rating decisions due over the next few weeks."

Japan Watch:

August 17 - Reuters (Tomo Uetake): "Japan's central bank appears to be growing more comfortable with larger declines in the country's stock prices, a sign it may have begun in the share market what analysts describe as 'stealth tapering' of its massive monetary stimulus. The Bank of Japan refrained from buying stocks on two days this week when the Topix index was down more than 0.4% by midday, a departure from a previous pattern in which it bought exchange-traded funds (ETFs) on days when the index fell more than 0.2%. The BOJ already has a precedent of stealth tapering in its bond buying and similar moves in its stock market operations come after it said last month it would make its asset purchases 'more flexible'."

Fixed Income Bubble Watch:

August 22 - Bloomberg (Liz Capo McCormick): "Moody's… last week published an in-depth look at U.S. leveraged loans. And it seems the more the analysts dug in, the more alarmed they became. Yes, the nearly $1.4 trillion market can take comfort in a low 3.4% default rate that Moody's projects will only get lower, most likely dropping to 2.2% over the next year. But that's largely where the good news ends. In its report, the credit-rating firm is emphatic that when the credit cycle takes a turn for the worse, leveraged-loan investors will be in for a rude awakening, even compared with the financial crisis. The loans have become popular in recent years because they carry floating interest rates, which better shield buyers from losses as the Federal Reserve tightens monetary policy. They've also been promoted as a safer alternative to high-yield bonds because they're usually backed by collateral. It's all led to an explosion in popularity, particularly through collateralized loan obligations…"

August 22 - Wall Street Journal (Daniel Kruger): "A robust August rally in the Treasury market is foiling one of Wall Street's most popular trades, a bet that solid U.S. economic growth, rising inflation and eroding government finances will compel investors around the world to sell bonds. A record number of hedge funds and other speculative investors are betting on lower U.S. government bond prices and higher yields… The bets on lower prices, or 'shorts' in traders' parlance, however, have been squeezed by this month's price rise in Treasurys, which has pushed the yield on the 10-year note to 2.83%."

August 23 - Reuters: "The U.S. Treasury Department on Thursday sold $14 billion of five-year Treasury Inflation Protected Securities at a yield of 0.724%, the highest yield since October 2009…"

Leveraged Speculation Watch:

August 21 - Bloomberg (Dani Burger): "Choppy markets around the world are hurting one of Wall Street's hottest quantitative trades, belying its status as a port in the storm. The commodity train wreck, emerging-market turmoil and shifts in government bonds have created a wave of turbulence for risk-parity funds, a strategy first popularized by Ray Dalio that weighs exposures according to volatility measures. Two-month realized price swings for the investing style hit the highest in more than two years last week, before easing. And it's the second-worst performing portfolio tracked by JPMorgan… so far this year.... Beloved by math whizzes and increasingly adopted by the mom-and-pop crowd, the leveraged strategy has boomed in the post-crisis era driven by diversification-minded algorithms, and faith in the hedging power of bonds."

August 22 - Bloomberg (Yakob Peterseil): "Call it the volatility trade, squared. As macro shocks hit global markets, a complex strategy that bets the gap between stock winners and losers will grow is spreading across hedge funds, real-money managers and even private banks. The so-called dispersion trades offer a way to play a slew of market themes, everything from splits among tech stocks to the prey and predators of the M&A boom and the trade-war fallout. Known as a short-correlation bet, it pairs a long and short position in equity options to profit from diverging prices. Those betting economic shifts will separate the wheat from the chaff with renewed vigor can earn steady returns… The exotic investing strategy typically only falters when tracked shares move together."

August 20 - Financial Times (Adam Samson): "Hedge funds have boosted their bullish bets on the buck to the highest level since late 2015, according to newly released data that highlight the upbeat sentiment of investors towards the US dollar. Net long positions among leveraged funds rose $1.8bn to $30.8bn in the week to August 14, according to a BMO Capital Markets analysis of data from the US Commodity Futures Trading Commission."

Geopolitical Watch:

August 21 - Newsweek (Tom O'Connor): "Germany's top diplomat has argued that Europe should create a new system for financial transactions that would exclude the U.S., which has abandoned a nuclear deal with Iran and threatened sanctions against those who stood by it. Germany has joined European allies France and U.K. along with Russia and China in backing the 2015 nuclear accord that President Donald Trump withdrew from in May, triggering new U.S. sanctions on nations doing business with Iran. In an op-ed… by Germany's Handelsblatt business newspaper, German Foreign Minister Heiko Maas hailed the strong post-World War II ties traditionally enjoyed by Washington and Berlin, but he warned, 'Where the U.S. crosses red lines, we as Europeans must counterbalance-as hard as that is.' 'It is therefore essential that we strengthen European autonomy by setting up payment channels independent of the U.S.A., creating a European Monetary Fund and building an independent Swift system,' Maas wrote."

August 17 - Reuters (Ben Blanchard): "China's Defence Ministry has lodged a complaint with the United States about a Pentagon report that said China's military was likely training for strikes against the United States and its allies, saying it was 'pure guesswork'. The assessment, at a time of heightened U.S.-China tensions over trade, was contained in an annual report that highlighted China's efforts to increase its global influence, with defense spending that the Pentagon estimated exceeded $190 billion in 2017."