Sunday, September 30, 2018

Monday's News Links

[BloombergQ] U.S. Stocks, Loonie, Peso Climb on Nafta: Markets Wrap

[Reuters] Canadian dollar hits four-month high as U.S., Canada reach NAFTA deal

[Reuters] Canada, U.S. reach deal to save NAFTA as trilateral trade pact

[Reuters] Trump: Canada, Mexico trade pact 'great deal' for all sides

[Reuters] U.S. housing market faces '5-percent' test

[Reuters] Turkish manufacturing slides to 9-year low, economists see evidence of recession

[Reuters] China cancels security talks with United States

[BloombergQ] Australia's Property Downturn Chalks Up One-Year Anniversary

[NYT] Lines Before Dawn, Violence and ‘No Trust’: China’s Health Care Crisis

[WSJ] U.S. and Canada Reach Nafta Deal

[WSJ] Wall Street’s Biggest Business Braces for Lackluster Third-Quarter Results

[WSJ] Red Ink Floods IPO Market

[WSJ] China’s Economy Losing Steam as Trade Conflict With U.S. Intensifies

[FT] Policymakers share blame for the shadow banking boom

[FT] Ten years on, fresh trading risks seem to be emerging

[FT] Alternatives to Libor begin to make an impact

[BloombergSub] Skyrocketing Deficit? So What, Says New Washington Consensus

Sunday Evening Links

[BloombergQ] Asian Stocks See a Muted Start; Oil Ticks Higher: Markets Wrap

[BloombergQ] President Trump's Nafta Deal With Canada Is Close

[Reuters] Japan business mood sours, trade woes cloud outlook: tankan

[Reuters] Argentina nears new currency swap deal with China: central bank

Sunday's News Links

[Reuters] Trump calls Saudi's King to discuss oil supplies

[BloombergQ] JPMorgan Says U.S.-China Tariffs to Go All Out, Lowers Yuan Call

[Reuters] China to cut import tariffs on wide range of products

[Reuters] China factory sector hurt in September as trade frictions bite

[Reuters] Lebanon bond rout ramps up currency concerns, pressure for fiscal reform

[NYT] Housing Market Slows, as Rising Prices Outpace Wages

[NYT] China Censors Bad Economic News Amid Signs of Slower Growth

[WSJ] The Rising Costs of Hurricanes

Friday, September 28, 2018

Weekly Commentary: Portending an Interesting Q4

"Those who do not learn history are doomed to repeat it." I'll add that those that learn the wrong lessons from Bubbles are doomed to face greater future peril. The ten-year anniversary of the financial crisis has generated interesting discussion, interviews and scores of articles. I can't help but to see much of the analysis as completely missing the critical lessons that should have been garnered from such a harrowing experience. For many, a quite complex financial breakdown essentially boils down to a single flawed policy decision: a Lehman Brothers bailout would have averted - or at least significantly mitigated - crisis dynamics.

I was interested to listen Friday (Bloomberg TV interview) to former Treasury Secretary Hank Paulson's thoughts after a decade of contemplation.

Bloomberg's David Westin: "It's been ten years, as you know, since the great financial crisis that you stepped into. Tell us the main way in which the financial system is different today than what you faced when you came into the Treasury?"

Former Treasury Secretary Hank Paulson: "Well, it's very, very different today. So, let's talk about what I faced. What I faced was a situation where going back decades the government had really failed the American people, because the financial system had not kept pace with the modern financial markets. The protections that were put in place after the Great Depression to deal with panics were focused on banks - protecting depositors with deposit insurance. Meanwhile, the financial markets changed. And when I arrived (2006), half or more of the Credit was flowing outside of the banking system. And we didn't have the oversight we needed. We didn't have the regulatory authorities to deal with a run, and this was a situation where there was a great deal of leverage. There was a great deal of risk. Today, when you look at it, we see a situation where the banks are better capitalized. We have much better regulatory oversight. I think there are fewer gaps. I think we have a better set of authorities. There is less of what I would call 'dry tinder' - there's less excesses. So, I think there is less risk, although these things are unpredictable of having any kind of a major financial crisis, on the one hand. And there are some important new authorities. But some of the things we relied very heavily on have been taken away. So, I wish we had a few more protections."

"…The thing I would be most concerned about are some of the authorities we used to stop the panic. The Exchange Stabilization Fund at Treasury we used to guarantee the money markets. Remember there was a run on the three and one-half trillion money markets, and the money markets were funding short-term borrowings for many of the biggest companies in the world. So when the money markets began to implode, the commercial paper market dried up. If these big companies started cutting back on their funding, this would have moved very quickly to their suppliers, to smaller industrial companies. It could have been disastrous. We stepped in and we used the Exchange Stabilization Fund to guarantee the money markets. We no longer have that authority."

Mr. Paulson is surely accurate in stating the government "really failed the American people," though I doubt future historians will see this failure having concluded with the 2008 crisis. Finance had fundamentally changed, and the regulatory framework failed to adapt. As Paulson said, Credit expansion (and finance more generally) had moved outside of traditional bank lending, but Washington had not constructed adequate safeguards and resolution mechanisms in the event of a panic.

While not inaccurate, this line of analysis misses the greater point - the critical lesson that went unheeded: It was "activist" government policy-making over an extended period that played a decisive role in the rapid expansion of non-traditional finance. Federal Reserve policymaking evolved to aggressively incentivize risk-taking and leveraged speculation. The government-sponsored enterprises (GSE) evolved from guarantors of mortgages to massive quasi-central banks, with unlimited access to cheap money market finance supporting enormous balance sheets and market backstop operations. Between the Fed and GSEs, unprecedented Washington "activism" created a backdrop conducive to a "wild west" derivatives marketplace ballooning to the hundreds of Trillions.

It is true that "we didn't have the oversight we needed." But the much greater issue was that Washington had become actively involved in promoting cheap Credit, abundant liquidity, and inflated securities and asset markets. Washington partnered with Wall Street to fundamentally and momentously change system-wide risk intermediation and resource allocation.

What's missing in the 10-year crisis anniversary dialogue is a more comprehensive discussion of several decades of serial booms and busts, including the factors behind the 1987 stock market crash; the late-eighties boom and bust; the S&L crisis; the 1994 bond market rout; the 1995 Mexico collapse; the 1997 "Asian Tiger" collapse; the 1998 implosion of Russia and Long-Term Capital Management; the 2000 collapse of the "tech" Bubble; the 2001 crisis in Brazil; the 2002 U.S. corporate debt crisis; the 2002 collapse of the Argentine peso and so on.

I have for a long time now argued that "unfettered" contemporary finance is dangerously unstable. I believe it has become only more unsound - and perilous - over time. Here in the U.S., it was easy to disregard the spectacular boom and bust dynamics that were wreaking havoc throughout numerous overseas economies (heck, they worked to keep U.S. rates and market yields low!). "The Maestro" and his monetary magic had everything under control. Things, however, finally came home to roost in 2008. The mighty U.S. was not immune after all. Indeed, years of government interventions, manipulations and market backstops ensured the accumulation of excesses and structural maladjustment to the point of risking financial collapse.

To focus on Lehman as the critical factor in the crisis is to disregard the true culprit, the intoxicating amalgamation of contemporary finance and "activist" government monetary management. As always, Credit is self-reinforcing. I (among others) have argued that Credit is inherently unstable, with today's unconstrained contemporary Credit remarkably unstable. Asset inflation is the most dangerous form of inflation, as "Wall Street" market-based finance and modern central banking doctrine specifically champion rising securities and asset prices. What is more, government and central bank promotion of asset inflation guaranteed that leveraged speculation evolved into a dominant force throughout global finance.

For more than nine years, I've argued that responses (U.S. and international) to the 2008 crisis unleashed the "global government finance Bubble." I believe speculative leverage is a greater global issue today than even in 2008. This leveraging has become integral to global liquidity, liquidity that fueled precarious booms in China, throughout the emerging markets and even in Europe. Furthermore, this global liquidity has over the past decade been "recycled" into Bubble U.S. securities markets, illustrated by the massive (Fed's Z.1) "Rest of World" flows into U.S. financial assets.

The "global savings glut" thesis was popular back during the mortgage finance Bubble period. We were to believe a persistent surplus of "savings" over "investment" explained low market yields and overly abundant marketplace liquidity. Yet "savings" is not going to suddenly disappear. Liquidity created in the process of expanding speculative leverage, on the other hand, can evaporate almost instantly in the event of an acute bout of de-risking/deleveraging. And if this liquidity had evolved into a prevailing source of finance for the asset markets and real economy, an abrupt change in market perceptions will have profound ramifications for both financial and economic stability. Most critically, the longer speculation-related liquidity has fueled the markets and economy, the deeper the structural impact and the greater the subsequent dislocation when this liquidity source is interrupted.

It was imperative for policymakers to make fundamental post-crisis changes to their approach with incentive structures, incentives that had fomented progressively more systemic financial and economic Bubbles. That was the key lesson from the crisis - one that went unheeded. Policymakers instead moved aggressively in the opposite direction: Their market interventions and manipulations became only more extreme. The upshot has been historic Bubbles around the globe, stocks and bonds and across asset markets more generally.

The issue in 2008 was not Lehman as much as it was tens of Trillions of leveraged securities holdings and derivatives whose value had been inflated by a confluence of speculation, leverage, liquidity overabundance and market misperceptions. This self-reinforcing liquidity backdrop had not only inflated the value of mortgage-related securities, it had inflated the value of the underlying collateral (home prices). This liquidity was also being recycled through the securities markets more generally, in particular inflating the prices of U.S. equities and corporate Credit.

This powerful dynamic of liquidity excess and rising asset prices propelled an unprecedented degree of sophisticated risk intermediation and derivatives trading that worked to distort, disguise and inflate various risks. Market risk perceptions became utterly distorted. These factors fundamentally loosened mortgage Credit and system Credit Availability more generally. The resulting massive expansion of mortgage Credit, ultra-easy financial conditions and resulting asset inflation (inflated perceived wealth) stoked both spending and investment.

Importantly, the critical factors fomenting the mortgage finance Bubble were all made more powerful by post-crisis policy responses: The amount and impact of leveraged speculation and resulting liquidity excess; endemic asset inflation; derivatives-related masking and distorting of risk; deep-seated distortions to both the financial and economic structure. Similar dynamics to those that fueled previous U.S. market and economic Bubbles now encompass the world.

Bubble markets remained largely oblivious to risk heading right into the 2008 crisis. There was no appreciation for how vulnerable the liquidity backdrop had become to abrupt change. After all, the GSEs and Fed had for years cultivated the perception of impenetrable market liquidity backstops. And this misperception incentivized risk-taking - aggressive speculation, leveraging, risk intermediation and derivative strategies - that basically ensured acute vulnerability to a bout of de-risking/deleveraging. Sure, Lehman could have been bailed out. But that would have only ensured an even more extended period of ("terminal") excess and a more perilous crisis.

I appreciate Hank Paulson's focus on the critical role played by non-bank Credit in the crisis. But when discussing how the system has become sounder post-crisis, he falls back on the standard "the banks are better capitalized." We are to have faith that system stability has benefitted from better oversight and regulation - that policymakers learned from history.

Market were blindsided in 2008. There was a complete lack of appreciation for how distortions at the "periphery" - in particular Trillions of risky mortgage loans, securities, derivatives and speculative leverage - had late in the cycle come to provide the marginal source of finance fueling increasingly maladjusted financial and economic structures. There was no understanding of how unstable finance had nurtured acute fragility - no appreciation for how the inevitable eruption of risk aversion at the "periphery" would over time imperil stability at the "core."

There are today ominous parallels. In 2007 and well into 2008, it was "subprime doesn't matter." Today, "EM doesn't matter. China doesn't matter. Tariffs don't matter. Debt doesn't matter." Corporate earnings, tax cuts, deregulation and technological prowess ensure the robust U.S. economy will remain immune to global financial and economic issues. The powerful "core" is invulnerable to a weak "periphery," much as the highly liquid and resilient market in "AAA" was (right into the fall of 2008) perceived unaffected by faltering lower-tier securities. There is the current misperception that global "whatever it takes" ensures liquid and robust securities markets.

I have posited that the global Bubble has been pierced at the "periphery." Global financial conditions have tightened, although there is the typical ebb and flow between risk aversion and risk embracement (fear and greed). It's my view that unprecedented speculative leverage has accumulated throughout global markets and that the destabilizing process of "de-risking/deleveraging" has commenced in the emerging markets. The first phase of this process has seen faltering liquidity at the "periphery" spur additional speculative flows to the "core." Increasingly, however, I would expect global de-leveraging to have negative ramifications for risk-taking and liquidity more generally.

It's worth noting Friday's 26 bps surge in Italian 10-year yields. Italy's yields were up as much as 35 bps intraday (to a four-year high 3.26%) before settling somewhat lower. Italian bank stocks sank 3.7% in Friday trading, this after Italy's populist government appeared to agree on a 2019 budget deficit of 2.4% (above the anticipated 2.0% ceiling). Why such a forceful reaction (considering U.S. deficits will likely soon approach 5% of GDP)?

I'm thinking back to when subprime issues began afflicting the "Alt A" (less than prime) mortgage market. Current market focus has turned to Italy - a heavily indebted sovereign borrower increasingly vulnerable to a tightening of global financial conditions; a prime beneficiary of loose finance on the upside, now at risk as a marginal borrower in a shifting liquidity backdrop. From my analytical perspective, Italy is a key player as we monitor for crisis dynamics gravitating from the "Periphery" to the "Periphery of the Core."

The ECB's "whatever it takes" policy approach has incentivized leveraged speculation, especially at the Eurozone's relatively higher-yielding periphery. A Friday Bloomberg headline: "Sovereign-Bank 'Doom Loop' Haunts Rattled Italian Markets." Italy's banks are not alone in holding leveraged bets on Italian debt. It's been too easy for the leveraged speculating community to borrow at negative rates (i.e. short German two-year debt at negative 54 bps) and profit from the spread. Italian debt has surely been one of the most popular "carry trade" speculations in the world, perhaps also financed with interest-free borrowings from Japan. Meanwhile, funds have likely flowed into Italian debt from Japan, with savers and institutions alike reaching for yields. And, now remembering back 20 years, leveraged derivatives bets on Italian debt played a role in the 1998 (Russia/LTCM) crisis.

If, as I suspect, the global risk-taking and liquidity backdrop is changing, "marginal" borrowers such as Italy will be viewed in different light. Yields are rising, which means the value of EM and Italian debt is declining. When these securities offered rising prices and stable spreads, risk embracement saw self-reinforcing speculative leveraging and attendant liquidity abundance. And as wonderful and enduring as this dynamic appears on the upside, speculative leverage is inevitably problematic on the downside. Lower bond prices (higher yields) force a reduction in leverage, which can lead to a self-reinforcing "Risk Off" contraction of marketplace liquidity.

Interestingly, the euro declined 1.2% this week, with the Swiss franc down a notable 2.3%. Key Eastern European currencies (Czech koruna, Bulgarian lev, Romanian leu and Hungarian forint) fell between 1% and 2%. The week provided a reminder of how Italian debt worries can spark worry for Italian banks, European banking, the euro and Eastern European economies.

Worries about Europe spur the U.S. dollar, with a stronger American currency reminding the world of festering EM issues. The Argentine peso sank 9.9% this week. For the most part, however, global markets ended the third quarter with a semblance of stability.

A bloody Friday in Italian debt certainly wasn't going to tarnish a big quarter for U.S. equities. The S&P500 returned 7.7% for the quarter, lagging the Nasdaq100's 8.6%. The Nasdaq Telecom index jumped 11.7%, and the Biotechs (BTK) surged 13.2%. The NYSE Healthcare Index gained 12.7%. The Dow Transports rose 10.0%, with the DJIA up 9.0%.

It may have been subtle, but there was some quarter-end market action that might just portend an interesting Q4. There was the 32 bps one-week surge in Italian yields, along with the 8.3% drop in Italian bank stocks. The European (STOXX600) Bank index was down 3.0% in the final week of the quarter, with Japan's TOPIX Bank Index dropping 2.0%. Curiously, especially with Treasury yields trading at highs for the quarter, U.S. Bank stocks (BKX) sank 4.7% this week. The Broker/Dealers were down 3.1%. There was, as well, the return of concern for tightening global dollar funding markets. The fourth quarter starts Monday, with various indicators pointing toward an important tightening of financial conditions.

As I chronicle history's greatest financial Bubble, I'll take note of this week's developments in the Judge Kavanaugh Supreme Court confirmation hearings. Thursday's hearings were nothing short of incredible - incredibly dramatic, emotional, tragic and disturbing. Our country is being torn apart - and the tearing has turned more unambiguous and heinous. Ramifications for what is unfolding in society, politics and geopolitics are as profound as they are far-reaching. But with stocks right at all-time highs, what's to fret about…

It was a week that pitted Democrats and Republicans in Washington, with vitriol and differences that appear more irreconcilable than ever before. There was also President Trump speaking at the United Nations, with world representatives either laughing "with" or "at" the leader of the free world. And it's this confluence of division, contempt and hostility in the face of an increasingly fragile global Bubble that has me deeply concerned. A global crisis in the current backdrop would make 2008 seem like a walk in the park.

I'll conclude with an astute observation from Bloomberg's David Westin:

Westin: "You lost some of the legal provisions that you described. What about political? Because one of the things you had going for you - and I know it was difficult and was not all in a straight line - but through that crisis you got Congress, you had a President, even with low approval ratings, to really back you. Do we still have that same political capital - or political competence - given what happened last time?"

Paulson: "That's really a key question…"

For the Week:

The S&P500 slipped 0.5% (up 9.0% y-t-d), and the Dow declined 1.1% (up 7.0%). The Utilities fell 0.8% (down 0.4%). The Banks sank 4.7% (down 1.7%), and the Broker/Dealers fell 3.1% (up 0.2%). The Transports declined 1.3% (up 7.2%). The S&P 400 Midcaps fell 1.1% (up 6.3%), and the small cap Russell 2000 lost 0.9% (up 10.5%). The Nasdaq100 advanced 1.3% (up 19.2%). The Semiconductors declined 1.2% (up 9.1%). The Biotechs surged another 3.4% (up 27.4%). With bullion down $7, the HUI gold index fell 1.3% (down 26.6%).

Three-month Treasury bill rates ended the week at 2.15%. Two-year government yields added two bps to 2.82% (up 94bps y-t-d). Five-year T-note yields were little changed at 2.95% (up 75bps). Ten-year Treasury yields were unchanged at 3.06% (up 66bps). Long bond yields added a basis point to 3.21% (up 47bps). Benchmark Fannie Mae MBS yields slipped a basis point to 3.81% (up 82bps).

Greek 10-year yields jumped 10 bps to 4.15% (up 8bps y-t-d). Ten-year Portuguese yields added a basis point to 1.88% (down 7bps). Italian 10-year yields surged 32 bps to 3.15% (up 113bps). Spain's 10-year yields were unchanged at 1.50% (down 7bps). German bund yields gained one basis point to 0.47% (up 7bps). French yields gained three bps to 0.80% (up 2bps). The French to German 10-year bond spread widened about two to 33 bps. U.K. 10-year gilt yields increased two bps to 1.57% (up 38bps). U.K.'s FTSE equities index increased 0.3% (down 2.3%).

Japan's Nikkei 225 equities index rose 1.0% (up 6.0% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.13% (up 8bps). France's CAC40 was little changed (up 3.4%). The German DAX equities index fell 1.5% (down 5.2%). Spain's IBEX 35 equities index dropped 2.1% (down 6.5%). Italy's FTSE MIB index sank 3.8% (down 5.2%). EM equities were mixed. Brazil's Bovespa index was little changed (up 3.8%), while Mexico's Bolsa increased 0.3% (up 0.3%). South Korea's Kospi index gained 0.2% (down 5.0%). India's Sensex equities index dropped 1.7% (up 6.4%). China's Shanghai Exchange rose 0.9% (down 14.7%). Turkey's Borsa Istanbul National 100 index jumped 2.0% (down 13.3%). Russia's MICEX equities index rose 2.0% (up 17.3%).

Investment-grade bond funds saw inflows of $1.781 billion, while junk bond funds had outflows of $1.569 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose seven bps to 4.72% (up 73bps y-o-y). Fifteen-year rates gained five bps to 4.16% (up 72bps). Five-year hybrid ARM rates increased five bps to 3.97% (up 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.81% (up 66bps).

Federal Reserve Credit last week declined $11.9bn to $4.161 TN. Over the past year, Fed Credit contracted $262bn, or 5.9%. Fed Credit inflated $1.351 TN, or 48%, over the past 308 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $12.5bn last week to $3.439 TN. "Custody holdings" were up $67bn y-o-y, or 2.0%.

M2 (narrow) "money" supply rose $18bn last week to $14.248 TN. "Narrow money" gained $554bn, or 4.0%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits dropped $44.8bn, while Savings Deposits rose $53bn. Small Time Deposits gained $3.7bn. Retail Money Funds added $3.0bn.

Total money market fund assets gained $18bn to $2.883 TN. Money Funds gained $143bn y-o-y, or 5.2%.

Total Commercial Paper rose $7.9bn to $1.082 TN. CP gained $23bn y-o-y, or 2.2%.

Currency Watch:

The U.S. dollar index rallied 1.0% to 95.132 (up 3.3% y-t-d). For the week on the upside, the South African rand increased 1.3%, the Mexican peso 0.6%, the South Korean won 0.6%, and the Canadian dollar 0.1%. For the week on the downside, the Swiss franc declined 2.3%, the euro 1.2%, the Swedish krona 1.1%, the New Zealand dollar 1.0%, the Japanese yen 1.0%, the Australian dollar 0.9%, the British pound 0.3% and the Singapore dollar 0.2%. The Chinese renminbi declined 0.17% versus the dollar this week (down 5.27% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.6% (up 9.9% y-t-d). Spot Gold slipped 0.5% to $1,193 (down 8.5%). Silver rallied 2.5% to $14.712 (down 14.2%). Crude surged another $2.47 to $73.25 (up 21%). Gasoline jumped 3.4% (up 16%), and Natural Gas gained 1.0% (up 2%). Copper fell 1.8% (down 15%). Wheat dropped 2.4% (up 19%). Corn slipped 0.3% (up 2%).

Trump Administration Watch:

September 23 - CNBC (Javier E. David): "With the world's two largest economies opening a new front in their multibillion dollar bilateral trade dispute, the risk has risen sharply that the U.S. will eventually slap tariffs on all imports from China, Goldman Sachs said… President Donald Trump ordered a new raft of surcharges on around $200 billion worth of Chinese goods last week, with China retaliating with $60 billion in U.S. goods. Last year, the world's largest economy absorbed more than $500 billion worth of goods from China… 'Following President Trump's threat of further escalation, we now think the probability that all imports from China will ultimately be subject to tariffs has risen to 60%,' the bank's analysts wrote…"

September 24 - Bloomberg (Joanna Ossinger): "JPMorgan… strategists are starting to make forecast and strategy changes around the potential that President Donald Trump gets so overconfident in the robust economy and markets that he makes a 'major miscalculation.' The worry is that 'U.S. economic and equity market resilience despite tariffs will embolden the President on all geopolitical fronts -- autos, Nafta and particularly Iran -- and thus risk a major miscalculation from sanctions that are tough to calibrate,' strategists led by John Normand wrote…"

September 23 - New York Times (Cecilia Kang): "President Trump says his trade war with China will protect America's dominance and derail Beijing's plan for technological and economic supremacy. But as the fight kicks into high gear this week, American tech and telecom companies are warning that the industry's growing reliance on products made and assembled in China means they are more likely to be casualties, not victors, in the skirmish. Mr. Trump's next round of tariffs on $200 billion worth of Chinese goods goes into effect on Monday, hitting thousands of consumer products from handbags to refrigerators to bicycles. The tariffs will also hit the tech and telecom companies that provide much of the gear that powers the internet, mobile networks, data storage and other technology. United States customs will begin collecting a tax on circuit boards, semiconductors, cell tower radios, modems and other products made and assembled in China and exported into America. Those tariffs, Intel warned in a letter last month, are 'a game changer for the American consumer.'"

September 25 - Wall Street Journal (Vivian Salama): "President Trump criticized international organizations and alliances as unaccountable and defended his administration's hard-line trade policies, urging fellow world leaders… to chart their own paths toward sovereignty. Mr. Trump, speaking to the United Nations General Assembly, offered a more subdued, but equally defiant performance to his first U.N. address last year, saying that he won't entertain trade deals that aren't fair and reciprocal, and don't stand to benefit the American people. 'We will not allow our workers to be victimized, our companies to be cheated and our wealth to be plundered and transferred,' he said. 'America will never apologize for protecting our citizens.'"

September 25 - Reuters (David Lawder): "U.S. President Donald Trump's top trade official said… that changing China's economic policies to become more market-oriented 'is not going to be easy' even with tariffs now in place on $250 billion worth of Chinese goods. U.S. Trade Representative Robert Lighthizer, in rare public remarks at the Concordia Summit, said 'endless dialogues' with the Chinese government over decades had 'failed miserably' in changing Beijing's policies, so the Trump administration decided to try direct pressure with tariffs… Lighthizer repeated his views that China's intellectual property practices and non-market industrial subsidies that have resulted in excess production capacity would put the future of the U.S. economy and its high-technology industries at risk. 'We changed the paradigm, we have tariffs in place, and the president is not going let this go long, where you take intellectual property where you have a forced transfer of intellectual property, where you treat American companies and farmers and ranchers poorly,' he added."

September 24 - CNBC (Kate Rooney): "Establishing a new trade deal with China could be significantly tougher than it was with Mexico, according to one of President Trump's top advisors. 'The challenge is, they've engaged in so many egregious practices that it's far more difficult to make a deal with China than it would be with Mexico,' Peter Navarro, director of the National Trade Council at the White House, said… The former economics professor and author of 'The Coming China Wars,' has been notoriously hawkish on trade. Navarro said the goal now is structural realignment where all countries the U.S. trades with engage in 'free, fair, and reciprocal' agreements."

September 26 - Reuters (Yara Bayoumy and Michelle Nichols): "U.S. President Donald Trump… accused China of seeking to meddle in the Nov. 6 U.S. congressional elections, saying Beijing did not want his Republican Party to do well because of his pugnacious stance on trade. 'China has been attempting to interfere in our upcoming 2018 election, coming up in November. Against my administration,' Trump told a U.N. Security Council meeting…"

September 22 - Reuters (Christopher Bing): "The White House has drafted an executive order that would push federal antitrust and law enforcement agencies to probe the business practices of social media and other internet companies, according to Bloomberg. It is unclear whether the order will be signed by President Donald Trump. The order has yet to be reviewed by other government agencies and remains in its preliminary stages…"

September 26 - Bloomberg (Jenny Leonard, Jennifer Jacobs and Jennifer Epstein): "President Donald Trump announced he has reached an agreement with Japanese Prime Minister Shinzo Abe to open trade talks between the two nations. Trump said he expected the talks will come to a 'satisfactory conclusion' as he spoke to reporters… 'It can only be better for the United States, because it couldn't get any worse than what has happened over the years' Trump added… The U.S. and Japan want to address bilateral trade in goods during the first phase of the talks over the next few months, U.S. Trade Representative Robert Lighthizer said…"

Federal Reserve Watch:

September 26 - Bloomberg (Christopher Condon and Craig Torres): "Federal Reserve officials raised interest rates and cemented expectations for another hike this year as they reaffirmed that a strong U.S. economy will probably warrant further gradual increases well into 2019. The quarter-point hike boosted the benchmark federal funds rate to a target range of 2% to 2.25%. The move reflected an upbeat assessment of the economy that was identical to the central bank's last policy statement eight weeks ago… 'This gradual return to normal is helping to sustain this strong economy,' Chairman Jerome Powell told reporters Wednesday following a two-day meeting of the Federal Open market Committee…"

September 26 - Bloomberg (Craig Torres and Jeanna Smialek): "The White House's latest pick for the Federal Reserve Board was deliberately chosen for her financial stability expertise and knowledge of the Fed system to round out a board of monetary policy experts and Wall-Street savvy lawyers. President Donald Trump plans to nominate Nellie Liang, a Ph.D. economist who ran the Fed's financial stability unit until her retirement last year. It's a timely choice as some credit markets are showing signs of aggressive risk-taking. Liang's long study of that topic was a key factor in the winning the nod… The news of her intended nomination broke Sept. 20. Financial conditions are heating up with some credit markets showing signs of overheating. The Fed's gradual pace of interest rate increases, combined with low interest rates globally, has supported a reach for yield that has weakened standards among some lenders."

September 25 - New York Times (Binyamin Appelbaum): "One of the most perplexing questions about the nation's economic recovery is why a tight labor market has not translated into faster wage growth. Part of the answer appears to be that American workers are receiving a growing share of compensation in the form of benefits rather than wages. The average worker received 32% of total compensation in benefits including bonuses, paid leave and company contributions to insurance and retirement plans in the second quarter of 2018. That was up from 27% in 2000… The rising cost of health insurance accounts for only about one-third of the trend. And the data do not include the increased prevalence of non-monetary benefits like flexible hours or working from home, or perks like gyms and 'summer Fridays.'"

U.S. Bubble Watch:

September 25 - New York Times (Nelson D. Schwartz): "The federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or children's programs. The run-up in borrowing costs is a one-two punch brought on by the need to finance a fast-growing budget deficit, worsened by tax cuts and steadily rising interest rates that will make the debt more expensive. With less money coming in and more going toward interest, political leaders will find it harder to address pressing needs like fixing crumbling roads and bridges or to make emergency moves like pulling the economy out of future recessions. Within a decade, more than $900 billion in interest payments will be due annually… Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50% more than in 2017, according to the Congressional Budget Office."

September 25 - Reuters (Lucia Mutikani): "U.S. consumer confidence surged to an 18-year high in September as households grew more upbeat about the labor market, pointing to sustained strength in the economy despite an increasingly bitter trade dispute between the United States and China… The Conference Board said its consumer confidence index increased to a reading of 138.4 this month from an upwardly revised 134.7 in August. That was the best reading since September 2000 and the index is not too far from an all-time high of 144.7 reached that year."

September 23 - Financial Times (John Authers and Brooke Fox): "Ten years on from the collapse of Lehman Brothers, are we any safer? The answer, at best, is only a qualified 'yes'. Excessive leverage in the banking systems of the US and the eurozone drove that crisis. Those risks have reduced, although Europe's banks, which entered the financial crisis in much worse shape, face serious problems and remain vulnerable to political shocks. But the risk did not go away. It moved. Pension funds have taken on many of the risks that were once held by banks. Low bond yields, which make it more expensive to guarantee an income, have forced them to take extra risks. They now hold assets, such as hedge fund and private equity investments, with much concealed leverage. And many companies have transferred the risk of bad investment performance from their shareholders to savers - and savers are not usually well-equipped to deal with them. The result: the risk of a sudden banking collapse, which almost happened 10 years ago, has reduced. But the risk of social crisis, as people enter retirement without enough money, is rising."

September 27 - Reuters (Lucia Mutikani): "New orders for key U.S.-made capital goods fell in August after four straight months of strong gains and the goods trade deficit widened sharply, prompting some economists to significantly lower their economic growth estimates for the third quarter… The goods trade deficit rose $3.8 billion to $75.8 billion in August. Exports of goods fell 1.6% to $137.9 billion, weighed down by a 9.5% plunge in shipments of food, feeds and beverages."

September 25 - CNBC (Olick): "Home prices are still rising, but the pace of the gains continues to slow, as potential homebuyers hit an affordability wall and sellers cave to the new reality. Home prices rose 6% annually in July, down from the 6.2% gain in June, according to the S&P Corelogic Case-Shiller national index. The 20-city index rose 5.9% annually, down from 6.4% in June. The 10-city index rose 5.5% annually, down from 6.0% the previous month. 'Rising homes prices are beginning to catch up with housing,' says David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices."

September 26 - CNBC (Diana Olick): "Buying a home is getting more and more expensive, thanks to sharp increases in both prices and mortgage rates. That is juicing demand for apartment rentals and, in turn, pushing rents higher. Rents in the third quarter of this year were up 2.9% compared with a year ago, according to RealPage, a real estate analytics firm. That's up from 2.5% annual growth in the second quarter."

September 26 - Reuters (Lucia Mutikani): "Sales of new U.S. single-family homes rebounded in August after two straight monthly declines, but the underlying trend still pointed to a weakening housing market against the backdrop of rising mortgage rates and higher home prices. …New home sales rebounded 3.5% to a seasonally adjusted annual rate of 629,000 units last month. July's sales pace was revised down to 608,000 units from the previously reported 627,000 units."

September 27 - Reuters (Nick Carey): "U.S. auto sales in September likely fell 6% from the same month last year as dealerships felt the mixed impact of hurricanes both this year and in 2017, industry consultants J.D. Power and LMC Automotive said…"

September 23 - Wall Street Journal (Michael Rapoport and Theo Francis): "Last December's tax overhaul is boosting corporate profits in more ways than one. The legislation lowered companies' tax bills, improving their earnings. But the change has also helped them fund record stock buybacks-a move that makes their results appear even better, by boosting the per-share earnings they highlight for investors. S&P 500 companies bought back a record $189 billion of their own shares in the first quarter, and a similar number-if not more-is expected for the second quarter, according to S&P Dow Jones Indices. By contrast, S&P 500 buybacks totaled no more than $137 billion in any of the six quarters before the tax overhaul."

September 26 - CNBC (Jeff Cox): "After consecutive quarters of near-record profit growth, companies are starting to lower expectations. With third-quarter earnings right around the corner, S&P 500 companies are cutting their outlooks at levels not seen since the first quarter of 2016, when corporate America was in a profits recession. In all, 98 companies have offered guidance - 74 have provided a negative outlook, meaning they expect earnings to come in below Wall Street estimates, while just 24 have been positive, according to FactSet."

September 21 - Wall Street Journal (Leslie Scism and Erin Ailworth): "After a week of heavy rains and record flooding, initial estimates for the damage that Florence wrought on the Carolinas rank the storm among history's top hurricanes… Moody's Analytics… estimated the economic cost of Florence to be between $38 billion and $50 billion including damage to property, vehicle losses, and lost output. At the upper end of that range, Florence would rank seventh among the biggest storms, just after Hurricane Andrew in 1992…"

China Watch:

September 24 - Reuters (Yawen Chen and Ben Blanchard): "A senior Chinese official said… it is difficult to proceed with trade talks with the United States while Washington is putting 'a knife to China's neck', a day after both sides heaped fresh tariffs on each other's goods. When the talks can restart would depend on the 'will' of the United States, Vice Commerce Minister Wang Shouwen said… 'Now that the United States has adopted such a huge trade restriction measure ... how can the negotiations proceed? It's not an equal negotiation,' Wang said, stressing the United States has abandoned its mutual understanding with China."

September 23 - Bloomberg: "Producers in China are already under stress even ahead of implementation of U.S. tariffs, as indicated by an explosion in corporate borrowing that isn't being captured by official government statistics, according to the China Beige Book. 'Manufacturing is under fire. The sector's multi-year rally has given way to declining revenue and sharply declining profit growth,' CBB International said in a report. 'Critically, manufacturing's plight is occurring before any meaningful American tariffs have been imposed. Absent a fall trade deal, this situation will likely deteriorate. The pace of borrowing -- at 41% of firms, the highest since 2012 -- sure smells a lot like panic."

September 24 - Bloomberg: "Surging interbank rates. A shock jump in the currency. Hong Kong's decade-long liquidity party suddenly appears to be ending, and that can only be bad news for its expensive property market. The one-month rate known as Hibor rose 28 bps on Monday, the most since December 2008. That followed the biggest jump in the Hong Kong dollar in 15 years at the end of last week. The chance of local banks raising the so-called prime rate, which caps the cost of some mortgages, is 'extremely high,' Financial Secretary Paul Chan said. That hasn't happened since 2006. A currency peg with the U.S., open financial borders and a booming economy meant Hong Kong property was one of the greatest beneficiaries of ultra-low lending costs in the wake of the global financial crisis. Home prices rose more than 170% in the past decade making the city the world's least affordable."

September 24 - Bloomberg: "China's debt-laden developers face a potentially devastating blow to their biggest source of financing, as authorities consider putting an end to the practice of selling apartments before they are finished. Guangdong's provincial housing authority is considering scrapping so-called pre-sales… The system allows developers to receive the entire sale proceeds upfront before construction has finished, which they then use to finance further land purchases and developments. The overhaul would threaten to remove the biggest funding channel for developers, after authorities tightened other financing options from bond sales to borrowing from shadow banks. Such a move would place further strain on the sector, which is facing a record $23 billion maturity wall in the first quarter of 2019."

September 26 - Financial Times (Gabriel Wildau and Edward White): "China's household debt reached a record high last year, adding to worries the burden of debt services could weigh on long-term consumer spending and drag on growth in the world's second-largest economy. The country's ratio of household debt to gross domestic product hit an all-time high of 49.1% in 2017, marking an increase of nearly 20 percentage points over the past five years, German insurer Allianz said in its latest global wealth report. 'This amounts to an increase of 30 percentage points in just 10 years - no other country saw its private debt burden rising so fast,' Allianz said, with the caveat that 'China needed to catch up to some extent, as Chinese private households only obtained access to bank loans in 2003'."

September 23 - Financial Times (Gabriel Wildau and Yizhen Jia): "Chinese local governments are flooding the debt market with a new type of bond, lining up $200bn in issuance designed to fund infrastructure investment as Beijing seeks to stimulate a slowing economy. China's parliament in March approved a quota of Rmb1.35tn ($197bn) for issuance of 'special-purpose' bonds for 2018, more than the combined quotas for the previous two years. But until recently, actual issuance was sluggish as local governments were under pressure to cut borrowing. As part of a slate of economic stimulus measures announced in late July, China's cabinet instructed local governments to accelerate issuance of such securities…"

September 26 - Wall Street Journal (Lingling Wei and Bob Davis): "DuPont Co. suspected its onetime partner in China was getting hold of its prized chemical technology, and spent more than a year fighting in arbitration trying to make it stop. Then, 20 investigators from China's antitrust authority showed up. For four days this past December, they fanned out through DuPont's Shanghai offices, demanding passwords to the company's world-wide research network… Investigators printed documents, seized computers and intimidated employees, accompanying some to the bathroom. Beijing leans on an array of levers to pry technology from American companies-sometimes coercively so, say businesses and the U.S. government. Interviews with dozens of corporate and government officials on both sides of the Pacific, and a review of regulatory and other documents, reveal how systemic and methodical Beijing's extraction of technology has become-and how unfair Chinese officials consider the complaints."

EM Watch:

September 24 - Bloomberg (Klaus Wille): "Asian family offices' love of emerging markets may prove painful in 2018. Family offices in the region have the highest allocation globally to equities in developing markets, according to the 2018 Global Family Office Report published… by UBS Group AG and Campden Wealth… 'Family offices are favoring higher risk, more illiquid investments in the pursuit of alpha,' the report said. 'And with developing-market equities grabbing an average return of 38% and developed-market equities 23%, this asset class deserves the spotlight.'"

Central Bank Watch:

September 26 - Reuters (Swati Pandey and Vatsal Srivastava): "China, Taiwan and New Zealand sat tight after the Federal Reserve's latest rate hike, but Indonesia and the Philippines pulled the trigger on Thursday to prop up their battered currencies and temper risks to inflation and financial stability."

September 24 - Wall Street Journal (Tom Fairless): "European Central Bank President Mario Draghi said the bank would push ahead with plans to phase out easy money as wages and inflation pick up across the Eurozone… Speaking at the European Parliament…, Mr. Draghi delivered an upbeat assessment of the region's economy and confirmed a plan, announced in June, to end the ECB's €2.5 trillion ($2.94 trillion) bond-buying program in December. 'Households' disposable income in the euro area is currently growing at the highest rates observed in the last 10 years,' Mr. Draghi said."

September 23 - Reuters (Michael Shields): "The European Central Bank should speed up its exit from 'crisis-mode' monetary policy, ECB policymaker Ewald Nowotny said…, reiterating his hawkish line about the timing of potential rate hikes. The ECB is due to end its money-printing program at the end of this year after pumping 2.6 trillion euros ($3.05 trillion) into the bond market and has hinted at a rate hike late next year if euro zone inflation accelerates gently. Nowotny, governor of Austria's central bank, questioned the wisdom of waiting nearly a year before adjusting borrowing costs. 'We are in a really very good economic situation ...I think the normalization should perhaps take place somewhat more quickly,' he told Austrian broadcaster ORF…"

September 24 - Reuters (Leika Kihara): "A few Bank of Japan board members said the central bank must consider more seriously the potential dangers of ultra-easy policy, such as the negative impact on the country's banking system, minutes of their policy meeting in July showed… Some in the nine-member board also worried whether the BOJ could trigger a spike in long-term interest rates by allowing bond yields to move more flexibly around its zero percent target."

Europe Watch:

September 27 - Financial Times (Miles Johnson and Kate Allen): "Italy's coalition government is making a last-minute push to ensure its expensive election promises are included in new spending targets that risk increasing the country's budget deficit beyond the comfort level of Brussels and financial markets. Luigi Di Maio, deputy prime minister and leader of the country's anti-establishment Five Star party, said… that the budget framework would be a 'courageous measure for the people', and suggested that he had not yet agreed on a fixed number for Italy's budget deficit as a percentage of its economic output ahead of an important cabinet meeting."

September 27 - Bloomberg: "German inflation unexpectedly accelerated to a four-month high, suggesting the rate in the euro area will rise further above the European Central Bank's goal. Consumer prices rose an annual 2.2% in September, exceeding the median estimate in a Bloomberg survey and the 1.9% reached in August."

Global Bubble Watch:

September 25 - Financial Times (Colby Smith): "A few things actually have changed since the financial crisis. Banks, for example, are no longer the primary suppliers of international credit. A new report by the Bank of International Settlements (BIS) shows that after the crisis, borrowers began to fund themselves through debt issuance instead. But because most of this debt is dollar-denominated, much of what's new has ended up affirming something very old: the world wants US dollars…The BIS - the bank for central banks - finds that debt securities, not bank loans, have driven the surge in global liquidity since 2010. Between the turn of the century and 2008, bank loans' share of global GDP doubled to 20%. But after a sharp contraction following the crash, bank loans have flatlined. One debt replaced another, and since then, international debt securities have grown. As of the first quarter of 2018, debt securities make up roughly 57% of total international credit, up from 48% in the first quarter of 2008."

September 23 - Reuters (Saikat Chatterjee): "International debt issuance has soared in recent years as financing conditions improve, with dollar-denominated bonds beating bank debt as the most popular funding tool a decade after the global financial crisis… International credit, defined as bank loans and debt securities like bonds, has soared to 38% of the global economy in the first quarter of 2018, compared with 33% three years ago, according to a quarterly report by the Bank of International Settlements… Dollar lending to non-bank emerging markets have more than doubled to around $3.7 trillion since the 2008 crisis. A similar amount has been borrowed through currency swaps, according to the BIS."

September 25 - Reuters (Karen Lema and Enrico Dela Cruz): "Developing Asia could grow more slowly than previously thought next year as the U.S.-China trade war inflicts damage on the region's export-reliant economies, the Asian Development Bank (ADB) said… Tightening global liquidity could also weigh on business activity by pushing up borrowing costs, while capital outflows are also a risk. The Manila-based institution kept its 2018 economic growth estimate for the region at 6.0% in an update of its Asian Development Outlook. But it trimmed next year's forecast to 5.8% from 5.9%..."

Fixed Income Bubble Watch:

September 24 - Reuters (Kate Duguid): "The $37 billion in new supply of 2-year Treasury notes on Monday were sold at the highest yield at auction since June 2008 to the weakest demand since December 2008. Demand was lackluster despite low prices, notching the yield on the 2-year note up to 2.817% on Monday after the Treasury Department sale. The high yield at auction was 2.829%, the highest since June 2008 at 2.922%..."

September 25 - Bloomberg (Adam Tempkin): "One of the most popular mortgage-bond trades since the financial crisis is going out of fashion as rising rates punish down-on-their-luck borrowers. So-called 'scratch and dent' mortgages -- which are tied to borrowers that fell behind or began repaying their debts after a default -- accounted for the largest piece of the U.S. residential mortgage-backed securities market without government backing over the last decade. But rising rates make it harder for homeowners to refinance their mortgages, potentially lengthening how long it will take them to pay off that loan. This means bond buyers could get stuck with these non-performing loan and re-performing loan mortgage securities for more time than they anticipated. And investors are taking a step back, pushing yields higher. 'There are higher rates across the board, which has a fairly negative impact because it impedes the ability of the borrower to refinance out of their properties, and is also deadly for bond duration,' said Neil Aggarwal, senior portfolio manager and head of trading at Semper Capital."

Geopolitics Watch:

September 26 - Reuters (Idrees Ali): "The U.S. military flew B-52 bombers in the vicinity of the South China Sea this week, U.S. officials told Reuters, a move that is likely to cause anger in Beijing amid heightened tensions between the two countries."

September 25 - Wall Street Journal (Nancy A. Youssef and Gordon Lubold): "The Chinese government denied a U.S. Navy ship permission for a port visit to Hong Kong in October, U.S. military officials said, a decision issued as Beijing also canceled a high-level naval meeting in the U.S. The rebuffs come as tensions build between the two countries over a range of military and economic differences. Last week, the State Department imposed sanctions on a Chinese military agency for buying Russia's SU-35 combat aircraft and S-400 surface-to-air missile system, leading China to formally complain to the U.S. ambassador and acting defense attaché."

September 22 - Reuters (David Stanway and Lesley Wroughton): "China summoned the U.S. ambassador in Beijing and postponed joint military talks in protest against a U.S. decision to sanction a Chinese military agency and its director for buying Russian fighter jets and a surface-to-air missile system… China's Defence Ministry said… it would recall navy chief Shen Jinlong from a visit to the United States and postpone planned talks in Beijing between Chinese and U.S. military officials that had been set for next week."

September 24 - Reuters (Mohammad Zargham): "The U.S. State Department has approved the sale to Taiwan of spare parts for F-16 fighter planes and other military aircraft worth up to $330 million, prompting China to warn… that the move jeopardized Sino-U.S. cooperation. U.S. military sales to self-ruled Taiwan, which China claims as its territory, is an irritant in the relations between the world's two largest economies."

September 23 - Associated Press: "Iran's President Hassan Rouhani said… that an unnamed U.S.-allied country in the Persian Gulf was behind an attack on a military parade that killed 25 people and wounded around 70. Rouhani did not identify those behind Saturday's attack, which was claimed by an Arab separatist group… 'All of those small mercenary countries that we see in this region are backed by America. It is Americans who instigate them and provide them with necessary means to commit these crimes,' Rouhani said."

September 25 - Reuters (Steve Holland and Parisa Hafezi): "U.S. President Donald Trump and Iranian President Hassan Rouhani exchanged taunts at the United Nations General Assembly… with Trump vowing more sanctions against Tehran and Rouhani suggesting his American counterpart suffers from a 'weakness of intellect.' Trump used his annual address to the United Nations to attack Iran's 'corrupt dictatorship,' praise last year's bogeyman North Korea and lay down a defiant message that he will reject globalism and protect American interests. But much of his 35-minute address was aimed squarely at Iran, which the United States accuses of harboring nuclear ambitions and fomenting instability in the Middle East through its support for militant groups in Syria, Lebanon and Yemen. 'Iran's leaders sow chaos, death and destruction,' Trump told the gathering... 'They do not respect their neighbors or borders or the sovereign rights of nations.'"

September 25 - Reuters (Parisa Hafezi): "Turkish President Tayyip Erdogan said… that his country could not remain silent over the use of sanctions as weapons while it is in a bitter standoff with the United States over the fate of an American evangelical Christian pastor detained by Ankara… 'None of us can remain silent to the arbitrary cancellation of commercial agreements and the use of economic sanctions as weapons,' Erdogan said in a speech to the United Nations General Assembly."

Thursday, September 27, 2018

Friday's News Links

[BloombergQ] Stocks Decline as Budget Fear Sparks Italian Rout: Markets Wrap

[Reuters] Italy budget worries hit European markets

[Reuters] Oil prices edge up amid uncertainty over fallout from Iran sanctions

[Reuters] U.S. consumer spending increases steadily in August

[Reuters] Italy raises deficit target, defies EU and rattles markets

[BloombergQ] Goldman Sees Italy Junk Risk Leading to ‘Sudden Stop’ of Capital

[BloombergQ] Euro-Area Inflation Rate Climbs Above 2 Percent on Energy

[Reuters] Global M&A volume flattens in third quarter as trade tensions loom

[BloombergQ] Emerging Asia Feels Pain as Fed Tightening Ripples Across Region

[BloombergQ] China’s Belt and Road Is Buckling

[WSJ] Emerging Markets’ Double Whammy: Expensive Oil, Weak Currencies

[WSJ] Inflation Rears Its Head in China

[WSJ, Feldstein] Another Recession Is Looming

[FT] Italian bank shares stung by surge in government bond yields

[FT] Global M&A activity hits record level

[FT] Prospect of rate rises precipitates bond fund outflows

[FT] India’s corporate debt traders suffer crisis of confidence

Thursday Afternoon Links

[Reuters] Wall Street pushed higher by Apple, Amazon

[Reuters] Fed chief Powell signals central bank is done with signaling

[CNBC] Bay Area home sales tank 10 percent in August — to the slowest pace in 7 years

[CNBC] These are the world's biggest property bubbles as ranked by UBS

[WSJ] In a Strong Economy, the Fed Doesn’t Want to Hold Your Hand

Wednesday, September 26, 2018

Thursday's News LInks

[BloombergQ] U.S. Stocks Rally With Dollar; Euro Falls on Italy: Markets Wrap

[Reuters] Italy budget uncertainty returns to haunt Europe

[Reuters] U.S. second-quarter GDP growth unrevised at 4.2 percent

[Reuters] U.S. core capital goods orders fall; goods trade deficit widens

[Reuters] U.S. September auto sales seen down 6 percent: J.D. Power and LMC

[Reuters] After Fed, Philippines, Indonesia seen hiking rates; NZ holds the line

[BloombergQ] The Fed Is Taking Off The Training Wheels

[BloombergQ] U.S. Has No Plan to Use Oil Reserve to Curb Prices, Rick Perry Says

[CNBC] Another round of Trump tariffs could mean 'economic shock waves' for China

[BloombergQ] German Inflation Unexpectedly Accelerates to Four-Month High

[Reuters] China demands U.S. 'dispel obstacles' to military ties and stop slander

[WSJ] Accommodative or Not, Rates Are Going Up

[FT] Italy’s government makes last-minute push on spending

[FT] Why the Italian budget matters to Europe’s bond market

[FT] China’s private debt reaches record high: report

Wednesday Evening Links

[Reuters] Wall Street ends lower after late sell-off of gains

[CNBC] US Treasury yields fall after Federal Reserve hikes interest rates

[BloombergQ] Fed Raises Rates and Says More Coming, Brushing Off Trump Jabs

[CNBC] Fed hikes interest rates, raises its economic outlook and drops 'accommodative' language

[CNBC] Here's what changed in the new Fed statement

[CNBC] Apartment rents are suddenly rising faster, reversing year-long trend

[CNBC] Companies are warning about declining profits, which could mean trouble for this bull market

[Reuters] Trump accuses China of 2018 election meddling; Beijing rejects charge

[Reuters] U.S. flies bombers over South China Sea amid heightened tensions with Beijing

[WSJ] Fed Raises Interest Rates, Signals One More Increase This Year

[WSJ] Large Investors Dive Into Risky Loan Securities

Tuesday, September 25, 2018

Wednesday's News Links

[BloombergQ] Stocks Steady Before Fed; Dollar Rises With Bonds: Markets Wrap

[Reuters] Fed likely to raise rates, possibly end 'accommodative' policy era

[Reuters] U.S. new home sales rebound in August, but trend softening

[Reuters] China senior diplomat says Beijing, Washington must avoid Cold War mentality

[BloombergQ] Trump Plans Trade Talks With Japan That Will Include Cars, Sources Say

[BloombergQ] Why This Woman Is Trump’s Latest Pick for the Fed

[Reuters] U.S.-China trade war dims Asia's 2019 growth outlook: ADB

[BloombergQ] It's Asia's Turn as Worst Hit Nations Set to Hike Rates

[WSJ] Federal Reserve Readies Third Interest-Rate Increase of 2018

[WSJ] How China Systematically Pries Technology From U.S. Companie

[FT] China state groups gobble up struggling private companies

[FT] ECB warns US most at risk from trade war escalation

Tuesday Evening Links

[Reuters] S&P 500 dips as chip stocks and utilities tumble

[CNBC] Fed expected to raise interest rates and signal more hikes are coming

[MarketWatch] Here’s how the Fed’s statement, dot plot and forecast may shift

[Reuters] U.S. trade chief says China policy change 'not going to be easy'

[Reuters] Trump criticizes Iran as 'corrupt dictatorship' in U.N. speech

[Reuters] Turkey cannot remain silent over use of sanctions as 'weapons': Erdogan

[CNBC] Trump's $250 billion in China tariffs are now in effect—here's what could get more expensive

[NYT] As Debt Rises, the Government Will Soon Spend More on Interest Than on the Military

[NYT] One Reason for Slow Wage Growth? More Benefits

[WSJ] At U.N., Trump Defends His Administration’s Hard-Line Trade Policies

[WSJ] Oil Continues to Soar on Supply Concerns

Monday, September 24, 2018

Tuesday's News Links

[BloombergQ] Stocks Climb, Bonds Fall as Risk Appetite Rebounds: Markets Wrap

[Reuters] Oil hits four-year peak after OPEC+ shows no sign of turning on the taps

[CNBC] Rates rise as Fed set to begin two-day meeting; 10-year Treasury yield hits highest since May

[Reuters] U.S. consumer confidence surges in September

[CNBC] Home prices rise at a slower rate in July: S&P Case-Shiller

[Reuters] China says U.S. putting 'knife to its neck', hard to proceed on trade

[Reuters] China says trade war to 'certainly' hurt U.S. exporters, create opportunities to others

[Reuters] Some BOJ policymakers urged greater focus on dangers of prolonged easing: July minutes

[BloombergQ] Ultra-Wealthy Asian Families’ Love of Emerging Markets May Prove Painful

[Reuters] U.S. approves $330 million military sale to Taiwan

[WSJ] U.S. Government Bonds Fall Ahead of Fed Meeting

[WSJ] ECB’s Draghi Says Rising Wages, Inflation Support Phasing Out of Easy Money

[WSJ] Everything Looked Great for the Dollar Recently, So Why Didn’t It Go Up?

[WSJ] China Denies U.S. Navy Ship’s Request for Hong Kong Visit

[FT] Since the crisis, a preference for debt markets over bank loans

Monday Evening Links

[Reuters] Wall Street drops on trade worries, Rosenstein news

[Reuters] Weakest demand, highest yield since 2008 at U.S. 2-year auction

[Reuters] Oil prices surge as Saudis, Russia won't open spigots

[CNBC] Navarro: China engages in so many 'egregious practices,' it's tougher to get a trade deal

[CNBC] New Chinese tariffs are about to make your home renovation more expensive

[CNBC] Why it matters whether Trump fires Rosenstein or he resigns

[Reuters] Oil market hears echoes of 2007/8: Kemp

[BloombergQ] Italy's Credibility in Doubt as Pimco, Aberdeen Dodge Bonds

[NYT] Trump’s Tariffs May Hurt, but Quitting China Is Hard to Do

[WSJ] China Says Trump Administration Is a Trade Bully as New Tariffs Take Effect

Sunday, September 23, 2018

Monday's News Links

[BloombergQ] Stocks Slip as Trade Talks Falter; Oil Climbs: Markets Wrap

[CNBC] Euro rises sharply as ECB's Draghi views tighter labor market

[BloombergQ] Oil Rises Near 2-Month High as OPEC Stops Short of Pledging More

[Reuters] China says U.S. trying to force it to submit on trade as new tariffs kick in

[Reuters] Fed hikes give cash appeal; stocks no longer only game in town

[Reuters] New U.S., China tariffs set to take effect, no compromise in sight

[BloombergQ, El-Erian] What to Expect From the Fed This Week

[BloombergQ] Trump's Overconfidence May Bring 'Major Miscalculation': JPMorgan

[BloombergQ] The Global Economy Is Vulnerable and Central Banks Aren’t Ready

[BloombergQ] China Developers' Funding Source at Risk in Sales Crackdown

[BloombergQ] China’s Racing to the Top in Income Inequality

[BloombergQ] Hong Kong's Surging Dollar Sends a Warning on Housing Market

[BloombergQ] Gold Set to Soar Above $1,300, Bank of America Says

[NYT] Trump’s China Fight Puts U.S. Tech in the Cross Hairs

[WSJ] Year of the Pricey Pig: Investors Fret About Chinese Inflation

[WSJ] Bad Calls Hurt Junk Borrowers In a Once-Hot Emerging Market

[FT] The legacy of Lehman Brothers is a global pensions mess

[FT] A protracted trade war has trenchant repercussions for China

Sunday Evening Links

[CNBC] Risk is rising that all of imports from China could be hit with US tariffs, Goldman Sachs says

[BloombergQ] White House draft order directs probes into tech giants: Bloomberg

[Reuters] Bonds beat bank debt, dollar king for borrowers a decade after crisis: BIS

[FT] Why investors should worry about rising wages

Sunday's News Links

[Reuters] Asian firms shuffle production around the region as China tariffs hit

[Reuters] Nowotny urges ECB to speed pace of policy normalization

[CNBC] OPEC, Russia rebuff Trump's call for immediate boost to oil output

[AP] Iran's president blames US after attack on military parade

[WSJ] More Voters Want Democrats to Control Congress, New Poll Shows

[WSJ] Companies Buy Earnings Gains by Buying Back Stock

[WSJ] Moody’s Pegs Florence’s Economic Cost at $38 Billion to $50 Billion

[FT] China floods debt market with new bond to boost infrastructure

Friday, September 21, 2018

Weekly Commentary: Q2 2018 Z.1 Flow of Funds

Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $2.283 TN during the second quarter. While this was down from Q1's booming SAAR $3.681 TN, it nonetheless puts first-half Credit growth at an almost $3.0 TN pace. Annual NFD growth has exceeded $2.0 TN only one year in the past decade (2016's $2.739 TN). NFD expanded $2.509 TN in 2007, second lonely to 2004's record $2.910 TN.

NFD ended Q2 at a record $50.710 TN, up $2.674 TN over the past four quarters and $4.868 TN over two years. NFD has increased $15.65 TN, or 45%, since the end of 2008. NFD ended the quarter at 248% of GDP. This compares to 231% at the end of 2007 and 189% to end 1999. It's worth noting that Q2 y-o-y GDP growth of 5.4% was the strongest since Q2 2006.

The historic federal government borrowing binge runs unabated. Federal debt rose SAAR $1.186 TN during Q2, huge borrowings yet down from Q1's blistering SAAR $2.828 TN. For the quarter, Federal Expenditures were up 6.0% y-o-y, while Federal Receipts were down 2.0%. Over the past year, outstanding Treasury Securities increased $1.292 TN to a record $17.091 TN. Since the end of 2007, Treasuries have ballooned $11.040 TN, or 182%.

But let's not forget the government-sponsored enterprises (GSEs). Agency Securities expanded SAAR $236bn during Q2 to a record $8.962 TN. Over the past year, Agency Securities jumped $295 billion, with a two-year jump of $638 billion. This has been the strongest GSE growth in more than a decade. Combined Treasury and GSE Securities expanded to 128% of GDP (vs. 92% at the end of '07 and 80% in 2000).

Total Debt Securities expanded SAAR $1.579 TN during the quarter. Washington continues to completely dominate securities issuance. Federal government accounted for SAAR $1.186 TN, the GSEs SAAR $80 billion, and Agency/GSE-MBS SAAR $161 billion. With net corporate debt issuance grinding to a halt during the quarter, little wonder corporate Credit spreads remain compressed.

And while overall Bank Assets posted a marginal decline during the quarter, this was fully explained by the contraction of "Reserves at the Federal Reserve." Bank "Loans" expanded SAAR $504 billion, the strongest growth in a year. Security Broker/Dealer Assets expanded SAAR $199 billion, also the biggest gain since Q2 '17. The largest Broker/Dealer asset gains were in "Security Repurchase Agreements" (SAAR $88bn) and Treasury Securities (SAAR $133bn).

Total (home, commercial and farm) Mortgages expanded SAAR $557 billion during the quarter. First-half growth in Total Mortgages is running just below 2017's $576 billion pace, the strongest expansion since 2007. Commercial Mortgages expanded SAAR $201 billion, one of the strongest quarters since the crisis. The Fed's Z.1 report recently created a category "Loans," which combines mortgages, other bank loans and consumer credit. "Loans" expanded SAAR $1.028 TN during Q2. This was just below 2017's $1.041 billion increase, the strongest annual gain since 2007.

And while lending has recovered strongly since the crisis, the greatest inflation has been in the securities markets. Total Debt Securities (TDS) were up $2.111 TN over the past year to a record $43.982 TN. TDS ended the quarter at 215% of GDP, after beginning the nineties near 130%, ending 1999 at 157%, and closing out 2007 at 200%. Total Equities jumped $5.141 TN over the past four quarters to a record $48.414 TN. Total Equites ended the period at 237% of GDP, after ending the eighties at about 70%, the nineties at 193% and 2007 at 172%. Total (Debt and Equities) Securities jumped $7.251 TN over the past four quarters to a record $92.396 TN, or 453% of GDP. This compares to about 200% to begin the '90s, 350% to end 1999 and 373% to conclude 2007.

The rapidly inflating Household Balance Sheet remains fundamental to Bubble Analysis. Household Assets jumped another $2.323 TN during the quarter to a record $122.657 TN. Household Assets jumped $8.628 TN over the past four quarters (7.6%) and $17.076 TN over two years (16.2%). The one-year gain in Assets lags only 2013's $10.669 TN, while the two-year gain is unmatched. By asset category, Financial Assets jumped $1.697 TN during Q2, and Real Estate assets rose $559 billion. Financial Assets were up $6.468 TN over four quarters and $12.978 TN over two years. For comparison, Household Financial Assets rose $3.923 TN in Bubble year 1999. The pre-crisis record annual gain was 2004's $5.000 TN.

With Household Liabilities increasing $132 billion, Household Net Worth (assets less liabilities) surged another $2.191 TN during Q2 to a record $106.929 TN. Household Net Worth inflated $8.106 TN over the past four quarters and $16.035 TN in two years. It's extraordinary to see $2.0 TN quarterly growth in Net Worth over eight quarters. Comparing previous peak two-year periods, the 1998-99 period saw Net Worth jump $8.208 TN and the 2004-05 period $13.232 TN. "Uncharted waters," as they say.

Household Assets ended Q2 at a record 601% of GDP. Household Net Worth ended the quarter at a record 522% of GDP. For comparison, Net Worth-to-GDP ended the seventies at 342%, the ("decade of greed") eighties at 378%, Bubble Year 1999 at 447%, and Bubble Year 2007 at 473%. The ratio of Household Financial Assets-to-GDP ended Q2 at a record 430%. This compares to 363% in 1999 and 379% in 2007. It's worth adding that total Household Equities holdings (Equities and Mutual Funds) ended the quarter at 132% of GDP, up from cyclical peaks 117% during Q1 2000 and 103% in Q3 2007. Total Equities-to-GDP was at 33% to end 1985 and 47% to end the eighties. Equities-to-GDP dropped to a cyclical low 59% in 2002 and 53% in 2009. Equities to GDP averaged about 77% over the past 44 years.

International flows to U.S. asset markets continue to play an integral role in fueling the U.S. Bubble. Rest of World (ROW) holdings of U.S. Financial Assets rose SAAR $467 billion during Q2 to a record $27.480 TN. ROW holdings have surged $13.325 TN since the crisis, almost doubling the 2008 level. ROW holdings jumped $3.214 TN in just the past six quarters, extraordinary growth with parallels to the surge in ROW holdings in the manic 2006/07 period. ROW holdings began the 2000s at $5.640 TN, or 57% of GDP. ROW holdings ended Q2 2018 at 135% of GDP.

ROW holdings expanded $2.782 TN in 2017. Holdings increased only (nominal) $433 billion during 2018's first half. ROW U.S. Corporate Bond holdings declined during Q2, while Treasuries were little changed. I don't believe it is mere coincidence that ROW flows to U.S. securities markets ebbed as global financial conditions tightened. Recall that U.S. 10-year yields jumped to 3.13% mid-quarter, before reversing sharply on EM market tumult.

Ten-year Treasury yields closed Friday trading at 3.06%, the high since May 17th. Safe haven bids for Treasuries and the dollar have waned of late. For the most part, EM has somewhat stabilized. But the Fed will likely raise rates again next Wednesday, returning the markets' focus to U.S. rate prospects.

It's still early innings for EM travails. Liquidity tends to ebb and flow with greed and fear, as crisis conditions unfold over time. It's been quite a short squeeze backdrop in U.S. equities the past several months. This week saw some decent squeezes in global markets. The Argentine peso jumped almost 7% this week, with the South African rand up 4.3% and the Brazilian real gaining 3.1%. Brazil's Bovespa equities index surged 5.3% and Turkish stocks rallied 3.4%. The Shanghai Composite jumped 4.3%. Hong Kong's Hang Seng Financial index recovered 5.6%. Japan's TOPIX Bank Index surged 6.6%. European bank stocks rallied 4.1%. Italian stocks were up 3.1%, while Italian 10-year yields dropped 15 bps. Copper jumped 8.0%, and crude surged 2.6%.

Booming U.S. securities markets bolster the case for the Fed sticking with "normalization." This week's squeeze notwithstanding, higher U.S. rates boost the odds of another round of EM de-risking/de-leveraging - and a further tightening of global financial conditions. Such a backdrop would be conducive to tighter conditions at the "periphery" coming closer to penetrating the "core." The Q2 Z.1 report indicated waning international liquidity flows into U.S. securities markets.

For the Week:

The S&P500 gained 0.8% (up 9.6% y-t-d), and the Dow jumped 2.3% (up 8.2%). The Utilities fell 1.5% (up 0.4%). The Banks rose 2.3% (up 3.1%), and the Broker/Dealers added 0.7% (up 3.4%). The Transports slipped 0.3% (up 8.7%). The S&P 400 Midcaps dipped 0.3% (up 7.4%), and the small cap Russell 2000 declined 0.5% (up 11.5%). The Nasdaq100 declined 0.2% (up 17.7%). The Semiconductors added 0.4% (up 10.4%). The Biotechs gained 1.3% (up 23.3%). With bullion up $6, the HUI gold index rallied 3.9% (down 25.7%).

Three-month Treasury bill rates ended the week at 2.12%. Two-year government yields increased two bps to 2.80% (up 92bps y-t-d). Five-year T-note yields rose four bps to 2.95% (up 74bps). Ten-year Treasury yields jumped seven bps to 3.06% (up 66bps). Long bond yields rose seven bps to 3.20% (up 46bps). Benchmark Fannie Mae MBS yields gained five bps to 3.82% (up 82bps).

Greek 10-year yields slipped two bps to 4.05% (down 3bps y-t-d). Ten-year Portuguese yields added a basis point to 1.87% (down 7bps). Italian 10-year yields dropped 15 bps to 2.83% (up 81bps). Spain's 10-year yields increased one basis point to 1.50% (down 7bps). German bund yields added a basis point to 0.46% (up 4bps). French yields increased one basis point to 0.78% (down 1bp). The French to German 10-year bond spread was unchanged at 32 bps. U.K. 10-year gilt yields rose two bps to 1.55% (up 36bps). U.K.'s FTSE equities index surged 2.5% (down 2.6%).

Japan's Nikkei 225 equities index jumped 3.4% (up 4.9% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.13% (up 9bps). France's CAC40 rose 2.6% (up 3.4%). The German DAX equities index jumped 2.5% (down 3.8%). Spain's IBEX 35 equities index gained 2.4% (down 4.5%). Italy's FTSE MIB index rallied 3.1% (down 1.4%). EM equities were mostly higher. Brazil's Bovespa index surged 5.3% (up 4.0%), while Mexico's Bolsa slipped 0.5% (unchanged). South Korea's Kospi index increased 0.9% (down 5.2%). India's Sensex equities index fell 3.3% (up 8.2%). China's Shanghai Exchange recovered 4.3% (down 15.4%). Turkey's Borsa Istanbul National 100 index jumped 3.4% (down 15%). Russia's MICEX equities index rose 2.8% (up 15%).

Investment-grade bond funds saw inflows of $1.017 billion, and junk bond funds had inflows of $967 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained five bps to 4.65% (up 66bps y-o-y). Fifteen-year rates rose five bps to 4.11% (up 67bps). Five-year hybrid ARM rates slipped a basis point to 3.92% (up 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rate up 17 bps to 4.83% (up 68bps).

Federal Reserve Credit last week increased $2.7bn to $4.173 TN. Over the past year, Fed Credit contracted $252bn, or 5.7%. Fed Credit inflated $1.362 TN, or 48%, over the past 307 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.3bn last week to $3.426 TN. "Custody holdings" were up $50bn y-o-y, or 1.5%.

M2 (narrow) "money" supply declined $15.7bn last week to $14.230 TN. "Narrow money" gained $523bn, or 3.8%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits sank $93bn, while Savings Deposits jumped $71.3bn. Small Time Deposits increased $3.1bn. Retail Money Funds were little changed.

Total money market fund assets declined $15.8bn to $2.866 TN. Money Funds gained $141bn y-o-y, or 5.2%.

Total Commercial Paper gained $7.3bn to $1.074 TN. CP gained $31bn y-o-y, or 2.9%.

Currency Watch:

September 18 - Reuters (Kevin Yao): "China will not stoop to competitive devaluation of its currency, Premier Li Keqiang stressed, hours after China hit back, with a softer punch than the one landed by the United States, in an escalating tariff war between the world's largest economies. Addressing a World Economic Forum event in the port city of Tianjin…, Li did not directly mention the trade conflict but said talk of Beijing deliberately weakening its currency was 'groundless.' 'One-way depreciation of the yuan brings more harm than benefits for China,' he said. 'China will never go down the road of relying on yuan depreciation to stimulate exports.' China will not do that to chase 'thin profits' and 'a few small bucks'."

The U.S. dollar index declined 0.7% to 94.22 (up 2.3% y-t-d). For the week on the upside, the South African rand increased 4.3%, the Brazilian real 3.1%, the Swedish krona 2.6%, the New Zealand dollar 2.1%, the Australian dollar 1.9%, the Norwegian krone 1.3%, the euro 1.1%, the Swiss franc 1.0%, the Canadian dollar 0.9%, the Singapore dollar 0.8%, the Mexican peso 0.3%, and the South Korean won 0.1%. For the week on the downside, the Japanese yen declined 0.5%. The Chinese renminbi increased 0.15% versus the dollar this week (down 5.11% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 2.0% (up 7.1% y-t-d). Spot Gold recovered 0.5% to $1,199 (down 8.0%). Silver rallied 1.5% to $14.359 (down 16.2%). Crude jumped $1.79 to $70.78 (up 17%). Gasoline rose 2.4% (up 12%), and Natural Gas surged 7.6% (up 1%). Copper surged 8.0% (down 13%). Wheat gained 1.6% (up 22%). Corn rose 1.6% (2%).

Trump Administration Watch:

September 21 - Bloomberg (Mike Dorning, Jenny Leonard and Mark Niquette): "U.S. President Donald Trump continued to hit out at China days after announcing another round of tariffs, signaling the trade war won't end any time soon. 'It's time to take a stand on China,' Trump said in an interview… 'We have no choice. It's been a long time. They're hurting us.'"

September 18 - Financial Times (James Politi and Demetri Sevastopulo): "President Donald Trump's preference for aggressively confronting China on trade had been apparent ever since the collapse of high-level talks between Washington and Beijing in May. But Monday's decision to impose tariffs on $200bn of Chinese imports brought the hostilities with China to an entirely new level, leaving little room for any settlement. 'It is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country… My administration will not remain idle when those interests are under attack.'"

September 17 - Bloomberg (Christopher Balding): "As the trade war between the U.S. and China drags on with new tariffs and no end in sight, we need to ask ourselves: What do they want? A fundamental objective for both is to become less reliant on the other. The trade war should thus be reframed as a conscious uncoupling. Behind the rhetoric from both sides lies a profound distrust. U.S. suspicion stems from two specific issues. China is increasingly seen as a national security threat that fails to play by the rules. The Trump administration's stance has spurred debate over whether it was a mistake to allow admittance of a highly protectionist Communist country to the World Trade Organization… For its part, the government of Xi Jinping is concerned about China's dependence on U.S. technology and finished manufactured products. The focus of its Made In China 2025 plan is to shift Chinese consumption of high-tech products away from foreign, specifically American, manufacturers and toward domestic companies."

September 18 - Financial Times (Gideon Rachman): "They don't call them trade wars for nothing. The latest round of tit-for-tat trade sanctions between the US and China is driven by the same emotions of fear and pride that lead real wars to break out. One country makes an aggressive move, so the other feels obliged to respond in kind. Both sides fear that if they back down, they will lose face in the eyes of the world and of their own people. The Trump administration's view is that China has been 'cheating' on trade for decades. But instead of responding to the first round of US tariffs, imposed in July, with concessions, the Chinese reacted with tariffs of their own. So now President Donald Trump is imposing further tariffs of 10% on an extra $200bn-worth of Chinese exports. Predictably, rather than backing down, the Chinese have promised to respond to this latest round of measures with more tariffs on American goods. Following the logic of escalation, Mr Trump has pledged that will trigger yet more US tariffs - possibly at a higher rate of 25% - covering essentially all Chinese exports to America. Both sides are willing to risk a trade war because they think they have a good chance of winning."

September 18 - New York Times (Jim Tankersley and Alan Rappeport): "The Trump administration seems confident that consumers will not feel pain from its escalating trade war with China. 'Because it's spread over thousands and thousands of products, nobody's going to actually notice it at the end of the day,' Commerce Secretary Wilbur Ross told CNBC… But a pain-free trade war with China is nearly impossible. For American consumers, prices have already risen on some products that the administration targeted for tariffs this year - most notably, washing machines, which were subjected to steep tariffs in January."

September 18 - CNBC (Matthew J. Belvedere): "Commerce Secretary Wilbur Ross said… that new U.S. tariffs on China are aimed at modifying Beijing's behavior and leveling the playing field for American companies competing there. Ross appeared on CNBC the morning after the administration announced that President Donald Trump will impose 10% tariffs on $200 billion worth of Chinese imports, with those duties rising to 25% at the end of the year… Ross said… regarding the expected move, that China is 'out of bullets' to retaliate because its imports to the U.S. are nearly four times larger than the U.S. exports to China."

September 17 - CNBC (Kate Rooney): "Top White House Economic Advisor Larry Kudlow said while the administration needs to be tougher on spending, growth from recent tax cuts should fix the issue. 'If you grow rapidly you're going to have lesser deficits. Growth solves a lot of problems,' Kudlow said at the Economic Club of New York… 'The gap is principally spending too much.' Thanks to an uptick in gross domestic product, or GDP, after tax cuts, Kudlow said the U.S. has 'just about paid for two thirds of the total tax cuts.'"

September 17 - Reuters (Chris Prentice and David Lawder): "A top economic adviser to President Donald Trump said… he expects U.S. budget deficits of about 4% to 5% of the country's economic output for the next one to two years, adding that there would likely be an effort in 2019 to cut spending on entitlement programs. 'We have to be tougher on spending,' White House economic adviser Larry Kudlow said…, adding that government spending was the reason for the wider budget deficits, not the Republican-led tax cuts activated this year."

September 16 - New York Times (Alexandra Stevenson, Kate Kelly and Keith Bradsher): "When President Bill Clinton deliberated whether he should loosen trade barriers against China, Wall Street helped plead Beijing's case. When Presidents George W. Bush and Barack Obama talked tough about labeling China as a currency manipulator, Wall Street urged restraint - and both presidents backed down. Today, China is hoping that Wall Street will once again use its political heft to soothe tempers in Washington. But as President Trump ratchets up the trade war with Beijing, Wall Street's words are falling on deaf ears. Senior Wall Street executives met in Beijing on Sunday with current and former Chinese officials and bankers at a hastily organized session to find ways to strengthen financial ties between the United States and China."

September 19 - The Hill (Niv Elis): "Weeks before the midterm elections, conservatives in the House are gaining little traction on fiscal issues as Congress passed one spending bill after another in bipartisan votes. It's a significant shift from the last few years, when the House Freedom Caucus often threw a wrench into appropriations plans with demands to cut mandatory spending and advance other conservative priorities. 'It's a little bit frustrating right now,' said Rep. Mark Walker, the chairman of the Republican Study Committee (RSC), the largest GOP caucus in the House."

Federal Reserve Watch:

September 21 - Reuters (Howard Schneider): "Unemployment near a 20-year low screams at the U.S. Federal Reserve to raise interest rates or risk a too-hot economy. The bond market, not far from a state that typically precedes a recession, says not so fast. The decision of which to heed looms large when the Fed's interest-rate setters meet next week. Which path they follow will begin to define whether Chairman Jerome Powell engineers a sustained, recession-free era of full employment, or spoils the party with interest rate increases that prove too much for the economy to swallow. New Fed staff research and Powell's own remarks seem to put more weight on the risks of super-tight labor markets, which could mean a shift up in the Fed's rate outlook and a tougher tone in its rhetoric."

September 19 - CNBC (Jeff Cox): "When the Federal Reserve gathers next week, markets likely will be looking past a widely expected rate hike and toward the direction the central bank will chart ahead. A quarter-point increase in the Fed's benchmark funds rate is already baked in the cake. That will take the funds target to 2% to 2.25%, where it last was more than 10 years ago. The mystery for investors will be how officials view the future, particularly at a time when they've been making public statements that seem to indicate a difference of opinion over how aggressive policy needs to be as the economy ignites."

September 19 - Reuters (Steve Holland and Howard Schneider): "U.S. President Donald Trump intends to nominate former Federal Reserve economist Nellie Liang to the U.S. central bank's board of governors, the White House said… Earlier, two White House officials speaking on condition of anonymity told Reuters that Liang has a strong background on financial and monetary stability, including crisis response, and is considered a good fit for the Fed board."

U.S. Bubble Watch:

September 18 - Nextgov (Frank Konkel): "The federal government is primed to spend as much as $300 billion in the final quarter of fiscal 2018 as agencies rush to obligate money appropriated by Congress before Sept. 30 or return it to the Treasury Department. The spending spree is the product of the omnibus budget agreement signed six months late in March coupled with funding increases of $80 billion for defense and $63 billion for civilian agencies. The shortened time frame left procurement officials scrambling to find ways to spend the money. Through August, defense and civilian agencies obligated some $300 billion in contracts. But to spend all the money appropriated to them by Congress, they may have to obligate well over $200 billion more in the final quarter of fiscal 2018… 'It is not impossible for this to happen, but it is unprecedented for that high of a percentage to be obligated to contracts for a fiscal quarter,' David Berteau, president of the Professional Services Council, told Nextgov. 'You'd have to spend almost 50% of the yearly total in three months.'"

September 18 - Bloomberg (Shobhana Chandra): "President Donald Trump's decision to impose tariffs on an additional $200 billion of imports from China drags the biggest part of the U.S. economy into the thick of the trade war, threatening to deliver a more direct hit to growth. The 10% tariffs… affect everyday items including food, furniture, and clothing, making grocery shopping and holiday gifts potentially pricier. That broadens the trade fallout more directly into the realm of household spending, which accounts for about 70% of the U.S. economy."

September 20 - Reuters (Rishika Chatterjee and Nivedita Balu): "Walmart Inc said that it may hike prices of products if the Trump administration imposes a tariff on Chinese imports, according to a letter the company wrote to U.S. Trade Representative Robert Lighthizer… Walmart, the world's largest retailer, in its letter said the tariff would impact prices of everything from food products to beverages and personal care items."

September 18 - Wall Street Journal (Te-Ping Chen and Eric Morath): "U.S. employers are boosting benefits-including bonuses and vacation time-at a faster pace than salaries, a move that gives them more flexibility to dial back that compensation if the economy turns sour. The cost of benefits for private-sector employers rose 3% in June from a year earlier, while the cost of wages and salaries advanced 2.7%... The benefit gain was driven by a nearly 12% increase in bonuses and other forms of supplemental pay. Paid leave, including vacation time, rose 4% in June from a year earlier… 'Bonuses and supplemental pay speak to labor market conditions, and workers are in a good spot to get a little more,' said Ryan Sutton, a district president for staffing agency Robert Half. 'Companies are still reluctant to move base wages up too much. It's a lot harder to take that away than bonuses.'"

September 18 - CNBC (Thomas Franck): "Former White House economic advisor Gary Cohn said President Donald Trump will work with Congress to pass a massive debt-fueled infrastructure bill if Democrats take control of the House of Representatives in November. 'If the Democrats win the House I will be shocked if the first thing they don't do is infrastructure,' Cohn said… 'I think they'll do a trillion dollars, trillion and a half dollars of infrastructure, and the president will sign it.' 'Another trillion dollars of debt, here we come,' he added. A perennial issue for Washington lawmakers, the national debt is expected to rise to $28.7 trillion from $15.7 trillion over the next decade, according to the Congressional Budget Office."

September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution."

September 19 - CNBC (Jeff Cox): "The 'Great Bull' market that came after the financial crisis is dead due to slowing economic growth, rising interest rates and too much debt, according to a Bank of America Merrill Lynch analysis. In its place will be one that features lower returns, the bulk of which will be concentrated in assets that suffered during the recovery, Michael Hartnett, BofAML's chief investment strategist, said: 'The Great Bull Dead: end of excess liquidity = end of excess returns,' Hartnett said. The liquidity reference is to central banks that have pumped in $12 trillion worth in various easing programs that have seen 713 interest rate cuts around the world…"

September 17 - Reuters (Anna Irrera and Svea Herbst-Bayliss): "Gary Cohn, the former economic adviser to U.S. President Donald Trump, gave a ringing endorsement of Wall Street bankers on Monday, arguing that borrowers were just as responsible for the 2007-2009 financial crisis as lenders and ridiculing rules intended to make the system stronger in its aftermath. In a wide-ranging conversation at an event hosted by Reuters Breakingviews…, Cohn's comments mostly tracked the sentiment of Wall Street bankers and other wealthy Americans who have felt unfairly maligned for the mortgage market's collapse and the economic downturn that ensued… Defending his fellow bankers, who are often blamed for causing and worsening the crisis, Cohn said borrowers played a hand in their financial disasters as well. 'Who broke the law? I just want to know who you think broke the law,' said Cohn. 'Was the waitress in Las Vegas who had six houses leveraged at 100% with no income, was she reckless and stupid? Or was the banker reckless and stupid?'"

September 19 - Bloomberg (Riley Griffin): "As U.S. household debt rises and wages stagnate, millions of Americans are thinking about tapping into home equity to keep up with day-to-day expenses. Twenty-four million homeowners believe borrowing against home equity is an acceptable way to cover regular bills, according to a report… Cash-strapped millennials, low earners and the less educated were most likely to think home equity offered an appropriate solution to ordinary bills. 'Regular household bills should be funded by a regular household income, not home equity,' said Greg McBride, chief financial analyst at 'Wage growth has been elusive, but rising household expenses have not. And now home equity is being seen as a lifeline for those who are strapped for money with little wiggle room.'"

September 17 - Reuters (Laila Kearney): "While U.S. states' financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report… Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said. 'In their fight against recessions, budget reserves are what states send to the frontline,' the report said. 'They are an internal source of immediate liquidity and can provide transitional funding to agencies before budget cuts take effect.' States face worse revenue shortfalls in the next recession compared with the Great Recession, S&P said. That is because states rely more heavily on personal income taxes as a percentage of general fund revenues now than a decade ago, with the taxes currently contributing a combined 55% to the funds compared with 49% in 2008, S&P said."

September 20 - Financial Times (Diana Olick): "After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest. In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1% and less than 50%."

September 17 - Wall Street Journal (Paul J. Davies): "People in the Carolinas are about to rediscover the difference between the damage a storm causes and what is covered by insurance. Hurricane Florence weakened considerably as it moved over the U.S. coast over the weekend, lessening its speed and causing much less wind damage than had been feared earlier last week. However, heavy rain and severe flooding have arrived, bringing tragedy in their wake. The problem is that while wind damage is well covered by insurers and reinsurers, flood damage is absent from most homeowner policies and is typically an optional cover in commercial policies."

September 20 - Wall Street Journal (Katherine Clarke): "Entertainers Beyoncé and Jay-Z and billionaire hedge-fund executive Ken Griffin have something in common: They are among a small but growing number of ultraluxury home buyers who are borrowing tens of millions of dollars for home purchases. The trend bucks the tradition of the ultrawealthy paying cash for their super-pricey homes. Mortgage experts attribute the shift toward so-called 'superjumbo loans' over the past couple of years to rising real-estate prices across the country and the historically low interest rate environment, which encourages wealthy buyers to borrow against their real estate to free up cash to invest elsewhere."

China Watch:

September 18 - Reuters (Kevin Yao): "Maintaining China's steady growth is increasingly difficult amid significant changes in the external environment, but China will not resort to massive stimulus, Premier Li Keqiang said… China has ample policy tools to cope with difficulties and challenges, and it will keep macro-economic policies steady, Li said in a speech at the World Economic Forum in Tianjin."

September 18 - CNBC (Tae Kim): "China said it will institute new tariffs on U.S. goods worth $60 billion on Sept. 24, according to a Reuters report. The media outlet said the Asian country's tariff rate on a list of 5,207 U.S. products will range between 5% and 10%."

September 18 - Financial Times (Tom Mitchell and Gabriel Wildau): "When Donald Trump declared on Monday that he would impose punitive tariffs on about half of all Chinese exports to the US, it was a moment that President Xi Jinping had long believed would never come. For two years after Mr Trump emerged as a force to be reckoned in the 2016 US presidential campaign, Mr Xi and his lieutenants clung to precedent for comfort. While American presidential candidates routinely bashed China on the campaign trail, once in the White House they played down differences with their geopolitical rival. As Mr Xi said at his first meeting with Mr Trump in the spring of 2017: 'We have a thousand reasons to get US-China relations right, and not one reason to spoil them.' Mr Xi's administration began to appreciate this year that Mr Trump intended to practise as president what he had preached as a candidate."

September 16 - Reuters (Michael Martina, Ryan Woo, Christian Shepherd and Susan Heavey): "China will not be content to only play defense in an escalating trade war with the United States, a widely read Chinese tabloid warned… The Global Times, which is published by the ruling Communist Party's People's Daily, wrote in an editorial: 'It is nothing new for the U.S. to try to escalate tensions so as to exploit more gains at the negotiating table.' 'We are looking forward to a more beautiful counter-attack and will keep increasing the pain felt by the U.S.,' the… column said. Besides retaliating with tariffs, China could also restrict export of goods, raw materials and components core to U.S. manufacturing supply chains, former finance minister Lou Jiwei told a Beijing forum…"

September 18 - CNBC (Patti Domm): "China's holdings of U.S. Treasury bills, notes and bonds dropped to a six month low of $1.171 trillion in July, from $1.178 trillion in June. The data is closely watched, since dumping Treasury securities is viewed as one way China could retaliate against the U.S. in an ongoing trade dispute… China is the biggest holder of U.S. Treasurys, followed by Japan. Japan's holdings rose to $1.04 trillion from $1.03 trillion in June… Strategists say China is much more likely to retaliate against U.S. tariffs by slapping its own tariffs on American goods… Some market pros believe China would use its currency as a weapon before it would dump Treasurys."

September 18 - Reuters (Jamie McGeever): "One of the foundations upon which the economic and financial relationship between the United States and China over the past 15 years has been built is the assumption that Beijing won't sell its vast holdings of U.S. Treasuries. The financial damage to both countries, and the potential fallout beyond the monetary effect, would be so profound that it simply wouldn't happen, so the theory goes. Disregarding this would be the economic superpower equivalent of the Cold War's 'mutually assured destruction' doctrine. But with trade tensions between the two countries escalating dramatically, it may no longer be a total long shot. It's a scenario being contemplated now more than at any point in recent years…"

September 19 - Financial Times (Jamie Powell): "Name the following Chinese company: It boasts an enterprise value of $145bn. In the first half of the year it generated $44bn of revenues and $4.5bn of profits, paying out half in dividends. It has $98bn of debt, $44bn of it due within the next twelve months. The answer is China Evergrande, a real estate kraken with tentacles stretching across China. It does all things property including development, investment, management and construction, along with a host of smaller ventures in technology, finance and healthcare. That reach makes some of the numbers mind boggling, particularly when it comes to the company's debt. For instance, it paid $4.2bn of interest over the first six months of 2018... In part that's because Evergrande pays a lot to borrow: its average financing cost of 8.3% is the highest of peers, which pay an average 5.9% interest rate…"

September 20 - Bloomberg: "China's government plans to outlaw foreign TV shows in prime time and to limit imported content in fast-growing streaming platforms. The rules released Sept. 20 extend restrictions that have for years narrowed access to non-Chinese programming to curb what officials have characterized as negative influences on viewers. The National Radio and Television Administration proposal will also limit air time for foreign content and cap the participation of talent from outside the country."

EM Watch:

September 19 - Reuters (Walter Bianchi and Scott Squires): "Argentina's gross domestic product contracted 4.2% in the second quarter of 2018 from the same period last year and 3.9% from the prior quarter… Sky-high interest rates have shut off growth in the recession-hit country while failing to bolster its beleaguered peso currency, which has slumped more than 52% against the dollar so far this year."

September 20 - Financial Times (Laura Pitel and Jonathan Wheatley): "Turkey's finance minister has slashed the country's economic growth targets and promised to cut public spending by nearly $10bn as the country tries to rebuild shattered market confidence and find a way out of a currency crisis. Investors welcomed the decision by Berat Albayrak, who was put in charge of the economy two months ago by his father-in-law, President Recep Tayyip Erdogan, to reduce growth projections to 3.8% in 2018 and 2.3% in 2019. The previous target was 5.5% for both years. But some were sceptical about the credibility of a proposal to reduce the budget deficit to 1.9% of gross domestic product this year and 1.8%in 2019. They voiced disappointment, too, over the absence of a strategy to support Turkish banks, which face mounting bad loans."

September 17 - Bloomberg (Asli Kandemir, Taylan Bilgic, Ercan Ersoy and Kerim Karakaya): "The Turkish government will unveil measures to help banks tackle the expected pile-up of bad loans resulting from the lira's plunge and soaring interest rates, according to people with knowledge of the matter. The plan will seek to mitigate the need for capital injections and propose transferring non-performing loans to a state-designated entity… Lenders have been struggling to deal with a rising number of restructurings after the lira dropped 40% against the dollar this year…"

September 19 - Financial Times (Laura Pitel and Funja Guler): "Little more than a year ago, the head of the Turkish construction company Sur Yapi was opening a glitzy new shopping centre in the western city of Bursa, thanking a crowd of local dignitaries assembled on its immaculate plaza. But Turkey's economic turmoil has turned that celebratory mood into a memory as shopping malls, once a symbol of the country's economic boom, find themselves at the sharp end of a currency crisis. Sur Yapi recently faced a tenants' revolt in the Bursa mall as a group of shops pulled down their shutters in protest at the growing burden of rents that were indexed to the euro… Thousands of companies, including Sur Yapi, took advantage of foreign currency loans to fund their investments, but are now grappling with the fallout from a slide in the Turkish lira."

September 20 - Bloomberg (Aashika Suresh): "It's little wonder that debt defaults by key Indian shadow bank Infrastructure Leasing & Financial Services Ltd. have shocked credit traders: not only are nonpayments rare in the country, but the conglomerate is a major player in the market.IL&FS's outstanding debentures and commercial paper accounted for 1% and 2%, respectively, of India's domestic corporate debt market as of March 31, according to Moody's… The liquidity problems at IL&FS are raising concern about broader fallout among Indian lenders, already struggling to clean up more than $210 billion of stressed debt on their balance sheets. And the group's complex corporate structure makes problems worse -- it has 169 subsidiaries, associates and joint ventures."

September 21 - Financial Times (Chloe Cornish): "The cost of insurance on Lebanese sovereign bonds has soared in recent weeks, reflecting concerns about the sustainability of the country's debt burden as its economy slows and faces a potential cash crunch. Like many emerging markets, rising global interest rates are swelling Lebanon's external financing costs as the economy's growth rate slows to 1.3% this year. The country has the world's third highest debt-to-GDP ratio at 150%, a legacy of borrowing from public markets to rebuild after its devastating civil war."

Central Bank Watch:

September 18 - Wall Street Journal (Tom Fairless): "The race to succeed Mario Draghi as European Central Bank president presents Germany with a stark choice: Back the country's own candidate, a foe of Mr. Draghi's 2.5-trillion-euro bond-buying program, or concede that once-unorthodox monetary tools are here to stay. Germany's central bank, long a powerful voice in the global fight against inflation, has grown out of sync in the postfinancial crisis era of stagnant prices and wages, with its greatly expanded role for central banks and outside-the-box policies. 'Perhaps the sands have shifted,' said Stefan Gerlach, former deputy governor of Ireland's central bank. 'Having been on the wrong side of history, at least as it appears now, has not helped the Germans.' Now, with the jockeying among European capitals already under way, Berlin must decide in the coming months whether to endorse Jens Weidmann, president of Germany's central bank, who has likened printing money to the devil and testified against Mr. Draghi's crisis-era bond program in a German court."

September 17 - CNBC (Eustance Huang): "Borrowing costs remain too low today and it's 'hurting our savers,' said Allianz CEO Oliver Bäte. 'European money is too cheap and that leads to misallocation of assets,' Bäte told CNBC's Nancy Hungerford… 'We still have a lot of mismanagement in the central bank side.' Bäte said schemes such as the European Central Bank's 'ultra-loose' monetary policy - which has been in place since the global financial crisis of 2008 - will 'just make money cheaper for over indebted governments.' He said it was not helping the economy, and just makes it easier for people to borrow money."

Europe Watch:

September 21 - Financial Times (Laura Hughes and George Parker): "A defiant Theresa May on Friday accused EU leaders of failing to show "respect" to Britain and threw down the gauntlet to Brussels to shift its position or risk a breakdown in Brexit negotiations and a no deal exit. In a statement delivered in Downing Street in front of two union flags, Mrs May said Britain stood ready to leave the EU without a deal and admitted Brexit negotiations had run into the sand. 'We are at an impasse… It is not acceptable to simply reject the other side's proposals without a detailed explanation and counter-proposals. I will not overturn the result of the referendum nor will I break up my country.'"

Global Bubble Watch:

September 16 - Reuters (Andrea Shalal): "Governments cannot completely prevent a repeat of events like the 2008 global financial crisis even though regulations have been tightened since the collapse of Lehman Brothers a decade ago, Germany's top central banker told Bild newspaper. Bundesbank President Jen Weidmann said German banks were not only victims of the 2008 financial crisis, but many institutions had also taken on more risk than they could ultimately carry. Regulations had been tightened since then, but it would be 'an illusion' to think that governments could completely avert such crises, he said."

September 20 - Bloomberg (William Horobin): "The global economy is shrouded in 'high uncertainty' as the outlook for emerging markets deteriorates sharply and trade tensions intensify, the Organization for Economic Cooperation and Development said. The gloomy analysis has pushed the Paris-based institution to cut its global growth forecasts for this year and next with particularly sharp revisions for Turkey, Argentina, South Africa and Brazil. Since its last economic forecasts in May, the OECD said differences between economies have widened, confidence has fallen, and business surveys across the world point to a slowdown. 'Global growth is hitting a plateau,' its chief economist, Laurence Boone, said…"

September 18 - Reuters (Gayatri Suroyo): "Confidence among Asian companies slumped to the weakest in almost three years in the third quarter as businesses feared blowback from a worsening global trade war, a Thomson Reuters/INSEAD survey showed. Representing the six-month outlook of 104 firms, the… Asian Business Sentiment Index fell to 58 for the July-September quarter, its lowest since the fourth quarter of 2015, from 74 three months before."

September 18 - Reuters (Jacob Gronholt-Pedersen and Teis Jensen): "Danske Bank's chief executive Thomas Borgen resigned on Wednesday after an investigation revealed payments totaling 200 billion euros ($234bn) through its small Estonian branch, many of which the bank said were suspicious. The Danish bank detailed compliance and control failings amid growing calls for a European Union crackdown on financial crime after a series of money laundering scandals which have attracted the attention of U.S. authorities."

September 18 - Bloomberg (Satyajit Das): "Markets have served a timely reminder of the latent risk from derivatives - the wild beasts of finance. Ten years after the collapse of Lehman Brothers… a private trader and one of Norway's richest men suffered 114 million euros ($132.6 million) of losses on energy-futures positions traded on Nasdaq. The default ate through around two-thirds of Nasdaq's mutual default fund, using up several layers of protection. Members of the clearing house must now make substantial cash contributions to rebuild that cushion. Given derivative-market and counterparty credit risk of $13 trillion, the losses were relatively small and the risk was contained. Yet the event nonetheless raises concerns about the system's ability to withstand defaults by one or more major market participants, for which losses could potentially be much greater."

September 17 - Bloomberg (Jeanna Smialek, Shobhana Chandra and Enda Curran): "Workers in the world's richest countries are getting their biggest pay bump in a decade, a step toward solving a labor market puzzle that's unnerving central bankers. As shrinking unemployment in the U.S., Japan and euro zone finally forces companies to lift wages to retain and attract staff, JPMorgan... reckons pay growth in advanced economies hit 2.5% in the second quarter, the most since the eve of 2009's worldwide recession. The bank predicts wages will accelerate to near 3% next year."

September 20 - Bloomberg (Shawna Kwan): "There's expensive, and then there's Hong Kong property expensive. A four-bedroom house in the exclusive Peak neighborhood has hit the market for an eye-watering HK$3.5 billion ($446 million), which would make it the most expensive home sold in the city, if not the world. Villa Les Cedres, a 188-year-old, 14-bedroom mansion in the south of France, was last year listed for 350 million euros ($409 million). Don't expect a palatial estate though. The modestly-sized house at 24 Middle Gap Road sits on 16,330 square-feet of land, or just over a third of an acre, and comes with a swimming pool, parking for two cars and some dated 1990s decor."

Fixed Income Bubble Watch:

September 21 - Bloomberg (Brian Chappatta): "Bond investors often say that 'No one wants to be a forced seller.' And that makes perfect sense: If you need to sell during a rout, no matter the price, you're going to take a big hit. But it should be equally as scary to be a forced buyer. Increasingly, that's what happening in the U.S. high-yield corporate bond market. With ample cash and little new supply to purchase, investors have pushed the average spread on junk debt down to just 3.15 percentage points, close to the narrowest since 2007... As recently as 2016, that gap was more than twice as wide."

September 21 - Bloomberg (Misyrlena Egkolfopoulou and Sally Bakewell): "Money managers, eager for assets whose yields rise as the Federal Reserve hikes rates, snatched up some of the year's biggest leveraged loan offerings this week. Some caution that investors may be buying at the wrong time… Retail investors have poured cash into funds that buy loans, with $282 million of inflows into mutual funds and exchange traded funds in the week ended Sept. 12, the 10th straight week of money coming in, according to Lipper data. Pension funds have also been big buyers of credit products Broadly…"

September 18 - Wall Street Journal (Sam Goldfarb and Soma Biswas): "One of the largest-ever sales of speculative-grade debt was completed with ease on Tuesday, a sign of the favorable environment for U.S. borrowers at a time of robust economic growth and strong demand from investors. The $13.5 billion sale-which a Blackstone Group LP-led investor group is using to acquire a 55% stake in a Thomson Reuters Corp. data business called Refinitiv-comprised $9.25 billion of loans and $4.25 billion of secured and unsecured bonds, with different pieces denominated in U.S. dollars and euros."