Friday, March 9, 2018

Weekly Commentary: Q4 2017 Z.1 Flow of Funds

So much uncertainty in the world these days. Some things, however, we know with certitude: U.S. Debt, the value of the securities markets and Household Net Worth do grow to the sky. The Fed’s latest Z.1 report documents another quarter of inflating Credit, markets and perceived wealth – three additional months of history’s greatest Bubble.

Total (non-financial and financial) U.S. System borrowings jumped a nominal $495 billion during the quarter and $2.630 TN in 2017 to a record $68.591 TN. Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $1.407 TN during 2017’s fourth quarter to a record $49.050 TN (’17 growth of $1.793 TN). Credit growth slowed from Q3’s SAAR $3.007 TN and Q2’s SAAR $1.921 TN, while it was closely in line with Q4 2016’s SAAR $1.435 TN. NFD as a percentage of GDP ended 2017 at 249%. This compares to 230% to end 2007 and 179% in 1999.

By major category for the quarter, Household Debt expanded SAAR $790 billion, a notable acceleration from Q3’s $516 billion and Q2’s $573 billion. For perspective, one must go back to 2007’s $946 billion to see annual growth exceeding Q4’s pace of Household borrowings. For 2017, total Household Borrowings expanded $604 billion, up from 2016’s $510 billion, ‘15’s $403 billion, ‘14’s $402 billion, ‘13’s $241 billion, and ‘12’s $266 billion. Household Borrowings contracted $51 billion in ’11 and $61 billion in ’10.

And while Household Mortgage borrowings increased to SAAR $302 billion (from Q3’s $282bn), the surge in Household Borrowings was led by a record SAAR $292 billion jump in (non-mortgage) Consumer Credit. Consumer Credit rose SAAR $134 billion in Q3 and SAAR $229 billion in Q4 2016. It’s worth noting that Consumer Credit growth posted its previous cycle peak at $181 billion in Q3 2007.

Total Corporate Credit growth slowed markedly during Q4 to SAAR $520 billion, down from Q3’s SAAR $840 billion, Q2’s $808 billion and Q1’s $815 billion – but was ahead of Q4 ‘16’s $314 billion. Total Corporate Borrowings expanded $746 billion in 2017, up from ‘16’s $710 billion but below ‘15’s $819 billion.

Federal government borrowings slowed sharply during the fourth quarter, with massive debt issuance pushed into Q1 ’18. For calendar year 2017, federal borrowings dropped to $447 billion from ‘16’s $843 billion. 2018 federal borrowings will be enormous.

On a percentage basis, Non-Financial Debt growth slowed to 3.8% in 2017, down from ‘16’s 4.6%. But this slowdown was chiefly related to a halving of the growth in federal borrowings to 2.8% from 5.6%. Household Debt expanded at a 4.1% pace, up from ‘16’s 3.6% to the strongest growth since 2007’s 7.1%.

The Domestic Financial Sector expanded nominal $1.832 TN during the quarter to a record $97.041 TN. During the quarter, Agency/GSE securities gained SAAR $302 billion, Corporate & Foreign Bonds SAAR $517 billion, Fed Funds & Repo SAAR $486 billion and Loans SAAR $898 billion.

Bank (Private Depository Institutions) Assets increased nominal $204 billion, or 4.4% annualized, during Q4 to a record $18.925 TN. Bank Loans jumped nominal $167 billion, or 6.3% annualized, to $10.776 TN. Bank Assets were up $852 billion in 2017 (4.5%), an increase from 2016’s $712 billion (3.9%).

From a more conventional perspective, growth in U.S. “money” and Credit doesn’t appear all that remarkable. Yet asset-based lending has quietly gained significant momentum. Total Mortgage Credit jumped $573 billion in 2017 (Q4 SAAR $625bn), the strongest expansion since 2007. Q4 multifamily mortgage growth was the strongest in years. Agency Securities gained nominal $337 billion (3.9%) in 2017 to a record $8.857 TN, with a two-year gain of $688 billion. It’s anything but clear why the GSEs should be growing rapidly at this point. Broker/Dealer Assets jumped nominal $116 billion during Q4 (15% annualized) to $2.229 TN, an almost three-year high. Broker/Dealer assets expanded $206 billion in 2017, the largest expansion since 2010’s $235 billion. Exchange-traded Funds (ETF) expanded $263 billion during Q4 to $3.400 TN. ETFs expanded $876 billion, or 34.7% in 2017, with a two-year gain of $1.300 TN, or 62%.

After beginning 2008 at $6.051 Trillion (42% of GDP), Treasury Securities ended 2017 at $16.431 TN (83% of GDP). Treasury and Agency Securities combined for $25.288 TN, or 128% of GDP. It’s a staggering amount of so-called “risk free” securities underpinning the entire financial system. Also “staggering” and “underpinning,” global finance pouring into U.S. securities markets is unrelenting. It's become a primary source of fuel sustaining the Bubble.

Rest of World (ROW) increased holdings of U.S. financial assets by a nominal $646 billion during Q4. For perspective, this is more than triple the Q4 expansion of bank loans. This put 2017 ROW growth at a record $2.817 TN, up from ‘16’s $1.182 TN and surpassing ‘13’s $2.174 TN and ‘06’s $2.125 TN. ROW now holds a record $11.456 TN of U.S. debt securities, $7.888 TN of equites and mutual funds, $737 billion of Repos and $4.699 TN of Foreign Direct Investment. Since the end of 2008, ROW holdings have increased $13.342 TN, or 97%, to end 2017 at a record $27.042 TN. ROW holdings began the nineties at $1.738 TN and ended that decade at $5.621 TN.

Total outstanding Debt Securities (TDS) expanded nominal $441 billion during Q4 to a record $42.826 TN. TDS gained $1.537 TN in 2017, after increasing $1.543 TN in ’16. TDS has increased $11.88 TN, or 38%, since the end of 2008. TDS as a percent of GDP remained constant during Q4 at 217%, after ending 2007 at 200%.

Total Equities Securities (TES) jumped $2.285 TN during Q4 to a record $45.825 TN. TES rose $7.403 TN during 2017, or 19.3%. Since the end of ’08, TES has surged $30.587 TN, or 201%. As a percentage of GDP, TES ended 2017 at a record 232%. This compares to cycle peaks 181% to end Q3 ’07 and 202% during Q1 2000. It’s worth mentioning as well that TES as a percentage of GDP didn’t recover to 100% until Q3 ’95 (106% in 1968). TES as a percentage of GDP ended 1970 at 77%, 1975 at 50%, 1980 at 52%, 1985 at 52%, and 1990 at 59%.

Total (Debt and Equities) Securities ended 2017 at a record $88.651 TN. Total Securities surged to a record 449% of GDP, up from 429% to conclude 2016. For perspective, Total Securities to GDP peaked at 379% ($55.3TN) during Q3 2007 and 359% ($36.0TN) at cycle highs in Q1 2000. Total Securities as a percent of GDP ended 1970 at 148%, 1975 at 122%, 1980 at 128%, 1985 at 155%, 1990 at 189%, and 1995 at 262%.

Massive inflows of international finance have been integral to the U.S. securities market Bubble. Inflating securities and asset prices have inflated perceived household wealth, a dynamic fundamental to the U.S. Bubble Economy.

Household Assets jumped nominal $2.284 TN during Q4 to a record $114.395 TN, with a one-year gain of $7.760 TN and two-year rise of $13.514 TN. For the quarter, Real Estate increased $511 billion to a record $27.848 TN. Financial Assets jumped $1.699 TN in Q4 to a record $80.395 TN, with total equities up $972 billion to $26.562 TN.

With Household Liabilities up $209 billion to $15.650 TN, Household Net Worth jumped $2.076 TN during the quarter to a record $98.746 TN. Household Net Worth inflated $7.162 TN during 2017 to a record 500% of GDP. For comparison, Net Worth to GDP ended 2007 at 459% and 1999 at 445%. Net Worth to GDP ended 1970 at 357%, 1975 at 342%, 1980 at 359%, 1985 at 350%, 1990 at 367% and 1995 at 381%.

I define a Bubble as a self-reinforcing but inevitably unsustainable inflation. Household Net Worth at 500% of GDP is not sustainable. I believe it is unsustainable because I don’t believe Total Securities at 449% of GDP is sustainable. And current securities values are unsustainable because the current financial structure is not sustainable.

Too large a percentage of new Credit creation is financing overvalued assets (securities and real estate, in particular), leaving this key source of liquidity vulnerable to asset price reversals. Too much of the new Credit is Treasury and government-related securities that are grossly mispriced in the marketplace. Moreover, enormous foreign-sourced inflows are having a major (if unappreciated) impact on marketplace liquidity. I suspect that a significant portion of these inflows are related to global QE and, somewhat less directly, to speculative leveraging (“carry trades,” etc.). These sources of liquidity are increasingly vulnerable to central bank “normalization,” higher funding costs and rising global yields.

For the Week:

The S&P500 rallied 3.5% (up 4.2% y-t-d), and the Dow recovered 3.3% (up 2.5%). The Utilities increased 0.7% (down 7.2%). The Banks jumped 3.8% (up 8.8%), and the Broker/Dealers surged 6.8% (up 13.7%). The Transports rose 3.9% (up 1.2%). The S&P 400 Midcaps rallied 3.8% (up 2.6%), and the small cap Russell 2000 surged 4.2% (up 4.0%). The Nasdaq100 jumped 4.2% (up 11.0%). The Semiconductors surged 4.9% (up 14.2%). The Biotechs rose 4.7% (up 15.4%). With bullion about unchanged, the HUI gold index was little changed (down 10.1%).

Three-month Treasury bill rates ended the week to 1.63%. Two-year government yields added two bps to 2.26% (up 38bps y-t-d). Five-year T-note yields rose three bps to 2.65% (up 44bps). Ten-year Treasury yields were up three bps to 2.89% (up 49bps). Long bond yields added two bps to 3.16% (up 42bps).

Greek 10-year yields fell 17 bps to 4.16% (up 9bps y-t-d). Ten-year Portuguese yields dropped 12 bps to 1.86% (down 8bps). Italian 10-year yields gained four bps to 2.01% (unchanged). Spain's 10-year yields fell 11 bps to 1.44% (down 13bps). German bund yields were little changed at 0.65% (up 22bps). French yields declined three bps to 0.89% (up 11bps). The French to German 10-year bond spread narrowed three to 24 bps. U.K. 10-year gilt yields added two bps to 1.49% (up 30bps). U.K.'s FTSE equities index rallied 2.2% (down 6%).

Japan's Nikkei 225 equities index gained 1.4% (down 5.7% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.05% (up 1bp). France's CAC40 rallied 2.7% (down 0.7%). The German DAX equities index recovered 3.6% (down 4.4%). Spain's IBEX 35 equities index rose 1.6% (down 3.6%). Italy's FTSE MIB index surged 3.8% (up 4.1%). EM markets were mostly higher. Brazil's Bovespa index increased 0.7% (up 13.0%), and Mexico's Bolsa gained 2.1% (down 1.6%). South Korea's Kospi index rose 2.4% (down 0.3%). India’s Sensex equities index fell 2.2% (down 2.2%). China’s Shanghai Exchange gained 1.6% (unchanged). Turkey's Borsa Istanbul National 100 index was unchanged (up 1.4%). Russia's MICEX equities index rose 1.0% (up 9.6%).

Investment-grade funds saw outflows of $740 million, and junk bond funds had outflows of $525 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained three bps to 4.46%, the high since January 2014 (up 25bps y-o-y). Fifteen-year rates rose four bps to 3.94% (up 52bps). Five-year hybrid ARM rates added a basis point to 3.63% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.59% (up 23bps).

Federal Reserve Credit last week declined $11.8bn to $4.354 TN. Over the past year, Fed Credit contracted $63.3bn, or 1.5%. Fed Credit inflated $1.544 TN, or 55%, over the past 279 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $22.0bn last week to $3.440 TN. "Custody holdings" were up $258bn y-o-y, or 8.1%.

M2 (narrow) "money" supply jumped $32.1bn last week to a record $13.875 TN. "Narrow money" expanded $535bn, or 4.0%, over the past year. For the week, Currency increased $4.2bn. Total Checkable Deposits rose $11.5bn, and savings Deposits gained $15.9bn. Small Time Deposits and Retail Money Funds were little changed.

Total money market fund assets rose $14.3bn to $2.857 TN. Money Funds gained $168bn y-o-y, or 6.3%.

Total Commercial Paper added $1.7bn to $1.094 TN. CP gained $130bn y-o-y, or 13.4%.

Currency Watch:

March 6 – South China Morning Post (Alun John): “A senior Hong Kong Monetary Authority official said… that while the Hong Kong dollar had reached its weakest level in more than 30 years, this valuation was ‘well within the design of the system’… The Hong Kong dollar touched new lows against the US dollar, …one US dollar was worth 7.8337 Hong Kong dollars, its lowest level in 33 years…The Hong Kong dollar is pegged to the US dollar, and its value is permitted to fluctuate between 7.75 to 7.85 Hong Kong dollars to one US dollar.”

March 6 – Bloomberg (Katherine Greifeld and Liz McCormick): “In foreign-exchange markets, investors aren’t waiting to find out if all the tariff threats being thrown around lead to a full-blown trade war. Some money managers have begun piling into traditional havens like the yen; others are trimming currency exposure altogether; and even those who’re betting not much will come from the row are hedging just in case. The concern is that President Donald Trump’s plan to impose steel and aluminum tariffs will trigger a wave of retaliatory levies that derail the worldwide economic expansion… ‘Currencies can be very small but sharp objects, where a little exposure can have a large impact,’ said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle Investments. ‘So you could see more and more managers just not really stick their neck out as it relates to FX exposure.’”

The U.S. dollar index added 0.2% to 90.093 (down 2.2% y-o-y). For the week on the upside, the Mexican peso increased 1.1%, the Australian dollar 1.1%, the South Korean won 1.0%, the South African rand 0.9%, the New Zealand dollar 0.6%, the Canadian dollar 0.6%, the British pound 0.4%, the Singapore dollar 0.3%, and the Norwegian krone 0.2%. For the week on the downside, the Swiss franc declined 1.5%, the Japanese yen 1.0%, the Brazilian real 0.1% and the euro 0.1%. The Chinese renminbi increased 0.17% versus the dollar this week (up 2.72% y-t-d).

Commodities Watch:

March 6 – Bloomberg (Jessica Summers): “U.S. crude production is poised to accelerate this year, reaching the highest annual average on record. The Energy Information Administration boosted its output forecasts for 2018 and 2019, and said that production would top 11 million barrels a day in October… The forecast comes as U.S. shale producers met with OPEC officials for a dinner on the sidelines of the CERAWeek by IHS Markit conference in Houston… OPEC Secretary General Mohammad Barkindo told Bloomberg after the dinner that he wasn’t worried about U.S. production growth because ‘demand is very robust, very strong.’”

The Goldman Sachs Commodities Index increased 0.6% (up 0.4% y-t-d). Spot Gold was little changed at $1,323 (up 1.6%). Silver gained 0.9% to $16.608 (down 3.1%). Crude recovered 79 cents to $62.04 (up 2.7%). Gasoline added 0.2% (up 6%), and Natural Gas gained 1.4% (down 8%). Copper increased 0.4% (down 5%). Wheat dropped 2.2% (up 15%). Corn rose 1.4% (up 11%).

Market Dislocation Watch:

March 6 – CNBC (Jeff Cox): “February's brutally volatile market saw investors flee U.S. stocks in near-record numbers, and they're only slowly coming back. Funds that focus on domestic equities saw investors withdraw $41.1 billion during the month, according to… TrimTabs, which said it was the third most in the market data firm's records. Global funds went in the other direction, attracting $17.9 billion even though stock markets abroad fared even worse than in the U.S. Outflows were evenly distributed between exchange-traded funds (-$19.6bn) and mutual funds (-$21.5bn)…”

March 6 – Bloomberg (Sid Verma): “Investors appear to be paring exposure to U.S. bonds as selloff pressure endures in the world’s largest debt market. The biggest fixed-income exchange-traded fund -- the iShares Core U.S. Aggregate Bond ETF, ticker AGG -- was hit by a record $798 million outflow Monday, the largest one-day withdrawal since its September 2003 inception. Expectations that President Donald Trump’s tough talk on tariffs would fail to spur strongly protectionist outcomes fed risk appetite during Monday’s trading, sending 10-year Treasury yields toward 2.90%.”

March 5 – Bloomberg (Dani Burger): “Finding shelter from stormy markets is getting harder than ever. Major asset classes have been trending together to levels rarely seen over the past decade and, more often than not, that trend has been down. Investors who enjoyed easy gains as markets rose in sync in the past six months are struggling to find securities that move in opposition, leaving them exposed to losses even if they’re diversified. Once immune to geopolitics, proposed U.S. tariffs have sent global stock markets lower. But bonds aren’t offering much of a fallback option, as reflationary threats and hawkish central banks hobble returns. Hoping commodities will provide a haven? Too bad. Crude and copper futures are extending losses after a hefty February decline…”

Trump Administration Watch:

March 6 – Bloomberg (Andrew Mayeda and Jennifer Jacobs): “The Trump administration is considering clamping down on Chinese investments in the U.S. and imposing tariffs on a broad range of its imports to punish Beijing for its alleged theft of intellectual property, according to people familiar with the matter. An announcement following an investigation by the U.S. Trade Representative’s office into China’s IP practices is expected in the coming weeks, potentially handing President Donald Trump further cause to impose trade restrictions… ‘The U.S. is acting swiftly on intellectual property theft. We cannot allow this to happen as it has for many years!’ Trump said in a Twitter post… In an earlier tweet, he said China has been asked to develop a plan to reduce their ‘massive trade deficit with the United States.’”

March 6 – Bloomberg (Toluse Olorunnipa): “President Donald Trump reiterated his commitment to levying tariffs on steel and aluminum, saying that the U.S. has poor trading conditions with other nations, including those in the European Union. ‘When we’re behind every single country, trade wars aren’t so bad,’ Trump said… ‘The trade war hurts them, not us.’ Trump said that the E.U. has been ‘particularly tough’ on U.S. products, yet is able to sell its own goods such as cars to Americans. Trump warned that he would impose a 25% penalty on European car imports if the bloc carried out a threat to retaliate against the metals tariffs… ‘We have to straighten this out. We really have no choice,’ Trump said.”

March 7 – Bloomberg (Jonathan Stearns): “The European Union mounted a last-ditch push to stop U.S. President Donald Trump from triggering tariffs on foreign steel and aluminum, vowing a ‘firm’ response and warning of widespread damage from a trans-Atlantic trade war. ‘I truly hope that this will not happen,’ EU Trade Commissioner Cecilia Malmstrom told reporters… ‘A trade war has no winners.’ The EU intends to hit a range of U.S. goods with punitive tariffs in retaliation for Trump’s pledges to impose a 25% duty on foreign steel and a 10% levy on imported aluminum. His plan is based on a national-security argument that Malmstrom called ‘alarming’ and ‘deeply unjust.’”

March 5 – Wall Street Journal (Siobhan Hughes and William Mauldin): “House Speaker Paul Ryan warned… that President Donald Trump’s plan to impose tariffs on steel and aluminum imports could trigger a trade war, as the president sought to wrest economic concessions from Canada and Mexico by turning up pressure on the proposal. Mr. Trump’s evolving trade policy drew harsh criticism from congressional Republicans, who said they are concerned the president’s new threats will provoke retaliation rather than draw concessions. ‘We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,’ said a spokeswoman for Mr. Ryan…”

March 4 – Reuters (Lesley Wroughton and Sharay Angulo): “Mexican and U.S. officials pushed… to speed up NAFTA negotiations, with the United States floating the idea of reaching an agreement ‘in principle’ in coming weeks to avoid political headwinds later this year. U.S. Trade Representative Robert Lighthizer, showing impatience at the slow pace of the talks, said Mexico’s presidential election and the looming expiry of a congressional negotiating authorization in July put the onus on the United States, Mexico and Canada to come up with a plan soon. ‘We probably have a month, or a month and a half, or something to get an agreement in principle,’ Lighthizer told reporters…”

March 5 – Reuters (Jeff Mason and Christine Kim): “Feeling the pressure of sanctions, North Korea seems ‘sincere’ in its apparent willingness to halt nuclear tests if it held denuclearization talks with the United States, President Donald Trump said… as U.S., South Korean and Japanese officials voiced skepticism about any discussions.”

March 6 – Reuters (Susan Cornwell and Jeff Mason): “Economic nationalists appeared to gain the upper hand in a White House battle over trade with the resignation of Donald Trump’s top economic adviser, Gary Cohn, on Tuesday in a move that could ramp up protectionist measures that risk igniting a global trade war… He had told Trump that markets would slump on a tariffs threat and was regarded as a bulwark of economic orthodoxy in an administration whose protectionist policies have sparked alarm among U.S. legislators and in governments around the world. Cohn’s resignation came after Trump said he was sticking with plans to impose hefty tariffs on steel and aluminum imports. While the measures on their own are relatively small, the risk is that an emboldened Trump administration will push ahead with a full-scale economic confrontation with China.”

March 8 – Reuters (David Chance and Roberta Rampton): “An economist who believes that Chinese goods are literally poisoning Americans, advocates ending Washington’s ‘One China’ policy and says trade deals have weakened the United States economically with the connivance of U.S. business has emerged as the big winner from renewed turmoil in the White House. While Peter Navarro says he is not in the running to replace Trump’s top economic adviser Gary Cohn…, he will be a big winner from the departure of a person seen as a bulwark against economic protectionism… He has publicly backed Trump’s proposed steel and aluminum tariffs in a series of media appearances after being out of the public eye for months. Navarro has endorsed withdrawal from the North American Free Trade Agreement as well as from a trade deal with South Korea. He believes the World Trade Organization allows unfair tax practices like value added tax that penalize American business.”

March 6 – New York Times (Cecilia Kang and Alan Rappeport): “As the United States and China look to protect their national security needs and economic interests, the fight between the two financial superpowers is increasingly focused on a single area: technology. The clash erupted in public on Tuesday after the United States government, citing national security concerns, called for a full investigation into a hostile bid to buy the American chip stalwart Qualcomm… The proposed acquisition by the Singapore-based Broadcom would have been the largest deal in technology history, creating a major force in the development of the computer chips that power smartphones and many internet-connected devices. But a government panel said the takeover could weaken Qualcomm and give its Chinese rivals an advantage. ‘China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover,’ a United States Treasury official wrote in a letter calling for a review of the deal. The fight over technology is redefining the rules of engagement in an era when national security and economic power are closely intertwined.”

U.S. Bubble Watch:

March 7 – Reuters (Lucia Mutikani): “The U.S. trade deficit increased to a more than nine-year high in January, with the shortfall with China widening sharply, suggesting that President Donald Trump’s ‘America First’ trade policies aimed at eradicating the deficit will likely fail. The trade gap continues to widen a year into the Trump presidency. Trump, who claims that the United States is being taken advantage of by its trading partners, has imposed tariffs on imports of some goods and threatened punitive measures on others to shield domestic industries from competition. The protectionist measures have sparked fears of a trade war… The Commerce Department said… the trade deficit jumped 5.0% to $56.6 billion. That was the highest level since October 2008 and exceeded… expectations… Part of the rise in the trade gap in January reflected higher commodity prices. The politically sensitive goods trade deficit with China surged 16.7% to $36.0 billion, the highest since September 2015.”

March 5 – Wall Street Journal (Spencer Jakab): “…The U.S. trade balance may be much worse than it looks. The reason is the boom in U.S. energy production has dramatically reduced the need for oil imports. The U.S. trade deficit in goods and services was $566 billion last year, and in December widened to its highest since 2008. The annual deficit with China alone climbed to $375.2 billion. It would have been much worse without energy. Since 2007 net trade in three major categories of petroleum and related products plus natural gas has improved by $233 billion.”

March 7 – CNBC (Jeff Cox): “Job creation saw another powerful month in February, with companies adding 235,000 positions, ADP and Moody's Analytics reported… Growth actually decelerated slightly, as January posted an upwardly revised 244,000 from the initially reported 234,000. February marked the fourth month in a row that private payrolls hit 200,000 or better. ‘The job market is red hot and threatens to overheat,’ Mark Zandi, chief economist at Moody's, said… ‘With government spending increases and tax cuts, growth is set to accelerate.’”

March 4 – Wall Street Journal (AnnaMaria Andriotis): “Small banks have been fighting for a bigger piece of the credit-card market in search of higher returns. Now, they’re contending with rising losses. Missed payments on credit cards at small banks have risen sharply over the past year, a sign that their cardholders are taking on more debt than they can handle. Their charge-off rate, or the share of outstanding card balances written off as a loss after consumers failed to pay, hit 7.2% in the fourth quarter, up from 4.5% a year ago…”

March 7 – Reuters (Lucia Mutikani): “U.S. unit labor costs increased faster than initially thought in the fourth quarter amid weak worker productivity, but the trend pointed to a gradual increase in inflation. The Labor Department said… that unit labor costs, the price of labor per single unit of output, rose at a 2.5% annualized rate in the last quarter instead of increasing at a 2.0% pace as reported last month.”

March 7 – Wall Street Journal (Laura Kusisto): “The economy is booming, take-home pay is rising and millennials are getting married and having children. Despite all those homebuying catalysts, this could be one of the weakest spring selling seasons in recent years. The culprits: rising mortgage rates, a tax bill that reduces the incentives for homeownership and a growing weariness among first-buyers being priced out of the market—all of which are expected to damp demand for homes this year. The next few months are a critical test of the housing market, as buyers look to get into contract on a home before summer vacations and the new school year. About 40% of the year’s sales take place from March through June…”

March 5 – New York Times (Nellie Bowles): “In search of reasonable rent, the middle-class backbone of San Francisco — maitre d's, teachers, bookstore managers, lounge musicians, copywriters and merchandise planners — are engaging in an unusual experiment in communal living: They are moving into dorms. Shared bathrooms at the end of the hall and having no individual kitchen or living room is becoming less weird for some of the city's workers thanks to Starcity, a new development company that is expressly creating dorms for many of the non-tech population. Starcity has already opened three properties with 36 units. It has nine more in development and a wait list of 8,000 people.”

Federal Reserve Watch:

March 6 – CNBC (Jeff Cox): “Raising interest rates now gives the U.S. the best chance to keep pushing the economy forward, Dallas Fed President Robert Kaplan said… In that light, Kaplan said he favors three rate hikes this year, a sentiment reflected in markets that nevertheless have been wary that the central bank may get more aggressive should the improving economy start generating more noticeable inflation. ‘It's three for this year. I think we should get started sooner rather than later, though,’ he said…”

March 5 – Reuters (Pete Schroeder): “The chief regulator for the U.S. Federal Reserve said Monday the nation’s regulators are actively considering a significant rewrite of the ‘Volcker Rule.’ Fed Vice Chair for Supervision Randal Quarles told bankers gathered in Washington that regulators want to make ‘material changes’ to streamline and simplify several aspects of the ban on certain bank trading, put in place after the 2007-2009 financial crisis. His comments are the most explicit endorsement yet of regulators rewriting one of the central post-crisis rules, which bans banks from making profit-seeking trades on their own account.”

March 6 – Bloomberg (Jeanna Smialek and Christopher Condon): “Federal Reserve Governor Lael Brainard, one of the central bank’s most ardent doves, sounded optimistic about the U.S. economy’s outlook and suggested the pace of monetary policy tightening may need to accelerate. ‘The macro environment today is the mirror image of the environment we confronted a couple of years ago,’ Brainard told the Money Marketeers of New York University… ‘In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true.’”

China Watch:

March 6 – Financial Times (Matthew C Klein): “The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s — are not encouraging. Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding… Chinese households, however, are quickly catching up. This is bad news… As of mid-2017, Chinese households had debts worth about 106% of their disposable incomes. For perspective, Americans currently have debts worth about 105% of their disposable incomes… The difference is that American indebtedness has been basically flat the past few years after steady declines since 2007. Chinese households have been experiencing rapid income growth by rich-country standards for a long time, but their debts have grown far faster… Since the start of 2007, Chinese disposable household income has grown about 12% each year on average, while Chinese household debt has grown about 23% each year on average. The cumulative effect is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. The mismatch has been getting worse recently…”

March 8 – Reuters (Elias Glenn): “China’s exports unexpectedly surged at the fastest pace in three years in February, suggesting both its economy and global growth remain resilient even as trade relations with the United States rapidly deteriorate. China’s February exports rose 44.5% from a year earlier, far more than analysts’ median forecast for a 13.6% increase and January’s 11.1% gain…”

March 4 – Bloomberg: “China stepped up its push to curb financial risk, cutting its budget deficit target for the first time since 2012 and setting a growth goal of around 6.5% that omitted last year’s aim for a faster pace if possible. The deficit target… was lowered to 2.6% of gross domestic product from 3% in the past two years. The 6.5% goal is consistent with President Xi Jinping’s promise to deliver a ‘moderately prosperous’ society by 2020. Policy makers dropped a target for M2 money supply growth, saying it’s expected to expand at similar pace to last year. Authorities reiterated prior language saying prudent monetary policy will remain neutral this year and that they’ll ensure liquidity at a reasonable and stable level.”

March 6 – Bloomberg: “China is attempting to pull off an unusual fiscal feat: Cut taxes, boost spending and shrink the deficit, all with a slowing economy. Premier Li Keqiang… announced the first budget deficit goal reduction since 2012, to 2.6% of gross domestic product from 3%. He also pledged tax cuts of 800 billion yuan ($126bn) for companies and individuals and set a 6.5% annual economic growth target… In the context of China’s multi-year effort to slow debt growth, a tighter fiscal budget sends a powerful signal -- even the state is tightening its belt.”

March 6 – Reuters (Philip Wen): “China must strengthen regulatory oversight and control the overall amount of money supply to guard against mounting financial risks in the economy, a top economic official said… Yang Weimin, the deputy director of the Office of the Central Leading Group on Financial and Economic Affairs, said the ‘extremely arduous’ task was necessary to head off the financial risks in the Chinese economy that were becoming ‘progressively visible’, according to the Securities Times business newspaper.”

March 6 – Bloomberg (Keith Zhai): “Chinese President Xi Jinping is preparing to extend a sweeping government overhaul that would give the Communist Party greater control over everything from financial services to manufacturing to entertainment in the world’s second-largest economy, two people familiar with the matter said. The changes are part of a proposed ‘CPC leadership system’ approved by the party on Feb. 28… Details of that document, which called for merging more than a dozen state agencies, are due to be revealed by March 17 when the National People’s Congress -- China’s rubber-stamp legislature -- votes on the plan.”

March 4 – Bloomberg: “China said that it would increase coordination of monetary policy, macroprudential monitoring and financial supervision, the strongest signal yet that top leaders gathering in Beijing this week plan to unveil an overhaul of economic authorities. The financial supervision system will be improved to ensure financial stability and prevent systemic risk, the official Xinhua News Agency reported…, citing a decision by a Communist Party committee on deepening government reform.”

March 6 – Bloomberg (Alfred Cang): “Just six months ago, CEFC called itself China’s largest private oil and gas company, with 50,000 employees and revenue of more than $40 billion. That’s when it agreed to buy a $9 billion stake in Russian state energy giant Rosneft PJSC following a series of deals elsewhere -- a spree that spawned speculation over how the previously obscure firm managed to make its mark on the international stage so quickly. Now, it’s being hit by a slew of bad news. Chairman Ye Jianming is said to have been investigated by authorities, it’s reported to have been taken over by an arm of the Shanghai government and the company’s bonds have posted record declines. All that’s raised questions about the status of the Rosneft deal, which is yet to close. CEFC is also said to have missed paying $63 million for an oil-trading joint venture.”

Central Bank Watch:

March 8 – Financial Times (Claire Jones and Michael Hunter): “The European Central Bank has taken a significant step towards ending its crisis-era economic stimulus measures, dropping an explicit commitment to expand its bond-buying programme if the current eurozone expansion sputters. As often with the ECB, the important policy shift was couched in a minor change in wording in its post-governing council meeting statement…, where it took out language vowing to intervene more aggressively in bond markets should growth disappoint. But the change in its ‘easing bias’ marked one of the final steps Mario Draghi… must go through before winding up a programme launched three years ago… It also comes amid a global effort by central banks to return to pre-crisis policymaking, a shift that has unnerved financial markets accustomed to cheap money pumped into the system by years of massive emergency stimulus from the ECB, US Federal Reserve and Bank of Japan.”

March 4 – Bloomberg (Enda Curran and Toru Fujioka): “The end of the easy money era which spanned the global economy for the last decade came into even sharper focus as the Bank of Japan gave fresh insight into when it might slow its stimulus program. Governor Haruhiko Kuroda’s remarks… that the central bank will start thinking about how to complete its unprecedented easing around the fiscal year starting April 2019 was the clearest signal yet that a conclusion might be in sight to emergency support for the Japanese economy. While Kuroda’s statement in response to questions from lawmakers was in some ways stating the obvious… the significance is that he’s put down a marker in public that he can be held to.”

March 8 – Financial Times (Claire Jones and Guy Chazan): “On the face of it, it looks an easy choice for Germany. More than at any other point in the history of monetary union Berlin has the clout — and a willing candidate in Bundesbank chief Jens Weidmann — to secure the presidency of the European Central Bank. But officials in the eurozone’s largest and most powerful economy are still hesitating whether to risk political capital on a campaign to anoint one of their own as Mario Draghi’s successor. The fear is that they will have to bend too much to Paris and Rome’s vision of European monetary union in return. ‘The price can’t be too high,’ said one German official. ‘The question is what political and economic benefit it brings to Germany.’”

Global Bubble Watch:

March 4 – Financial Times (Caroline Binham): “‘Shadow banking’ grew by nearly 8% globally to more than $45tn on a conservative measure after international rulemakers were able to include detailed data from China and Luxembourg for the first time. Shadow banking — the parts of the financial system that perform banklike functions such as lending but do not have the same safeguards — accounted for 13% of total global financial assets, according to the Financial Stability Board, the international group of policymakers and regulators that makes recommendations to the G20.”

March 6 – Wall Street Journal (Paul J. Davies): “Tax cuts and economic growth are spurring a spending spree by U.S. companies on deal making as well as share buybacks. But with some deals being done at big earnings multiples, companies and their investors may find they haven’t spent wisely when the dust eventually settles… Mergers and acquisitions announced by U.S. acquirers so far in 2018 are running at the highest dollar volume since the first two months of 2000, according to Dealogic… More than $325 billion worth of bids have been launched so far in 2018…, with all-cash offers outstripping all-share offers by three-to-one in dollar terms, highlighting the continued availability of cheap debt as well as the income boost to come from tax cuts.”

Europe Watch:

March 5 – Financial Times (James Politi): “Italian voters put their country on a potential collision course with the EU after delivering sweeping gains for populist and Eurosceptic parties in a general election that marked the biggest political upheaval in Europe since the Brexit vote in 2016. With Italy on course for a hung parliament, the populist Five Star Movement and anti-immigration Northern League party are likely to take a leading role in complex talks to form the next government. The outcome of protracted negotiations is likely to see Italy clash with Brussels on everything from budget rules to immigration. The governing centre-left Democratic party suffered a crushing defeat, forcing Matteo Renzi, leader and former prime minister, to resign while Silvio Berlusconi’s Forza Italia lost its leadership of the centre-right coalition.”

March 5 – Wall Street Journal (Eric Sylvers and Marcus Walker): “Italy entered a period of political instability… after national elections boosted populists but failed to produce a winner with enough support to patch together a parliamentary majority. Sunday’s two big winners—the 5 Star Movement and a center-right coalition including former Premier Silvio Berlusconi and the anti-immigrant League—each claimed Monday to have won enough support to earn the right to try to form a government. But with neither group having won an outright majority, Italy is likely to face weeks or months of consultations among the parties.”

March 6 – Reuters (Thomas Escritt and Michelle Martin): “Germany’s Social Democrats (SPD) decisively backed another coalition with Chancellor Angela Merkel’s conservatives on Sunday, clearing the way for a new government in Europe’s largest economy after months of political uncertainty. Two thirds of the membership voted ‘yes’ to the deal in a ballot — a wider margin than many had expected. That means Merkel could be sworn in for a fourth term as early as the middle of the month, in a repeat of the grand coalition that has governed since 2013.”

Japan Watch:

March 6 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s central bank chief said… a future exit from ultra-easy monetary policy would need to be ‘very gradual’, in comments analysts described as a bid to temper expectations about a near-term end to crisis-mode stimulus. Bank of Japan Governor Haruhiko Kuroda startled markets last week when he told lawmakers that the central bank could consider exiting easy policy if his inflation target was met in fiscal 2019 as projected… ‘When the BOJ exits, it will be a very gradual process ... so as not to trigger a spike in long-term interest rates or a disruption in financial markets,’ Kuroda said…”

EM Bubble Watch:

March 5 – Financial Times (Jonathan Wheatley): “…Across the emerging world, businesses, households and governments loaded up on an estimated $40tn of cheap debt during the decade of loose monetary policy in the developed world that followed the global financial crisis. Now that period is nearing its end, and as the US continues its ‘normalisation’ of monetary policy… several analysts have questioned whether the emerging world’s debt pile is sustainable. ‘The premise on which lenders keep lending to borrowers as they become more indebted is that the backdrop will stay benign,’ says Sonja Gibbs, senior director for global capital markets at the… Institute of International Finance… With political uncertainty on the rise around the world, she says, ‘it feels more like there is the potential for events to trigger volatility in emerging markets than it has done for some time’.”

March 8 – Bloomberg (Justin Villamil and Taylan Bilgic): “Turkey’s credit rating was cut further into junk by Moody’s… on an erosion of institutional strength as well as more risk of external shocks and geopolitical risks. The lira weakened. Moody’s lowered the rating one notch to Ba2, two levels below investment grade… Moody’s analyst Kristin Lindow said… That leaves the nation on par with Brazil, Croatia and Costa Rica. The government of President Recep Tayyip Erdogan appears focused on short-term measures, undermining effective monetary policy and economic reform, Lindow wrote.”

Leveraged Speculator Watch:

March 6 – Bloomberg (Dani Burger): “A decades-old $350 billion pocket of quantitative money management may have met its match in February’s choppy markets -- and it could get worse from here. Some quant investors are concerned that the most popular trend-following commodity trading advisers, more widely known as CTAs, are ill-equipped to handle a new era of steeper declines and sudden volatility spikes. The strategy, which rides price trends across asset classes, fell 6.4% in February, the worst month since 2001, according to a Societe General basket of the 20 largest managers…. Many programs that were built on data from nine years of relative market calm are breaking down, according to Quest Partners’s Nigol Koulajian.”

March 4 – Bloomberg (Klaus Wille): “The PruLev Global Macro Fund gave up almost one-third of last year’s 52% gain in February, after being caught out by the return of volatility. The fund, the world’s best performer last year among macro funds with assets of more than $100 million, lost 16%, mainly from stock bets…”

Geopolitical Watch:

March 6 – Bloomberg (David Tweed and Adrian Leung): “As lawmakers meet this week to cement Xi Jinping’s power at home, China’s president is also looking to boost his country’s military might abroad. He’s overhauled China’s military to challenge U.S. supremacy in the Indo-Pacific, most visibly with a plan to put half-a-dozen aircraft carriers in the world’s oceans. Still, Xi has a problem: He needs bases around the world to refuel and repair his global fleet. So far, China only has one overseas military base, compared with dozens for the U.S., which also has hundreds of smaller installations. In recent years China has stepped up efforts to challenge the U.S.’s military presence in the South China Sea, developing missiles to deter American warships and reclaiming land to build bases on the disputed Spratly Islands. It also started sending submarines and frigates into the Indian Ocean, opened its first overseas base in Djibouti and invested in ports around the region that could one day be used for military purposes.”

March 4 – Reuters (Pete Schroeder): “China said… that it would never tolerate any separatist schemes for self-ruled Taiwan and would safeguard China’s territorial integrity with the aim of ‘reunification’ with an island it considers its sacred territory. Premier Li Keqiang issued the warning in a speech at the opening of the annual session of China’s parliament, his stern words coming amid mounting Chinese anger over a U.S. bill that seeks to raise official contacts between Washington and Taipei.”

Friday Evening Links

[Reuters] High-performance U.S. tech stocks drive Nasdaq to record high

[Reuters] China says U.S. soybeans 'prime target' over tariffs: trade group

[AP] California bullet train costs soar to $77 billion, opening delayed

[WSJ] Jobs Report Was No Fairy Tale

[FT] US jobs surge gives green light to Fed rate rises