Friday, April 6, 2018

Weekly Commentary: Market Realities

Please join me and David McAlvany for the MWM Tactical Short Second-Quarter 2018 Conference Call: "Market Structure, Trump Tariffs, Higher Rates… Markets at a Precipice?" Thursday, April 19th, at 4:30pm EST (2:30pm MST): Click here to register:

Markets have grown well-versed at disregarding structural issues. I'm still amazed at what the marketplace was willing to ignore throughout the mortgage finance Bubble period: A doubling of mortgage Credit in just about six years; California's housing market out of control by 2005; $1.0 TN of subprime CDS in 2006; the unprecedented growth in leveraged securities holdings and so on. Unrelenting Trade and Current Account Deficits. Didn't the excesses of the cycle ensure a crash?

For those of us who have studied financial history, 2002-2008 financial follies pale in comparison to "Roaring Twenties" excess that unfolded without ramifications in the eyes of the securities markets - well, that is, until the Great Crash. What today's markets have chosen to overlook - and what people have come to believe - are even more astounding.

Excesses over the past (almost) decade have been in the "Roaring Twenties" caliber: Prolonged, deeply structural and accompanied by epic misperceptions. And there's no mystery why markets regress into a dysfunctional mechanism that hears no evil, sees no evil and speaks no evil. Given time (and ample "money" and Credit), asset inflation trumps worry; greed concurs fear.

Prolonged Bubble Dynamics ensure everyone eventually gets aboard the great bull market. Once on the ride, a myopic optimistic view takes on a life of its own, crushing dissent in the process. And the deeper the structural deficiencies - the more resolute central bankers will be with ongoing accommodation. Especially during periods of central bank activism (the current cycle and the "Roaring Twenties" topping the list), structural deficiencies over time turn bullish for asset prices and financial speculation.

Structural U.S. Trade and Current Account Deficits are a root cause of much that afflicts the world economy these days. At $57.6 billion, February's U.S. trade deficit was the largest since 2008. At $154bn, Q4 '17's Current Account Deficit was the biggest going back to Q3 2008. Even in the depth of economic recession, the U.S. in 2009 ran a Current Account Deficit of $384 billion. Indicative of historic structural maladjustment, the U.S. has not posted a quarterly Current Account surplus since 1991. This was only possible because of Federal Reserve activism.

Incessant U.S. monetary inflation overwhelmed the world with dollar balances, with the process of inflating the world's reserve currency unleashing synchronized monetary inflation and Bubbles around the globe. The U.S. has deindustrialized, shifting to a financial, consumption and services-based economic structure. These and related powerful forces have fomented intractable financial and economic fragilities, wealth inequality, social discontent and geopolitical instability.

Inflating securities markets have distorted perceptions. Just ignore President Trump's blustering tariff rhetoric - it's all an "art of the deal" negotiating tactic. They'll get to the negotiating table and come to terms. Economic fundamentals are robust; a glorious earnings seasons starts soon. Trump will turn pragmatic and back down. China will make some concessions, enough for both sides to save face. The President surely won't push this to the point of causing a problem for the great bull market.

In reality, the China issue goes far beyond trade. The Chinese have been working diligently for years now to attain superpower status - to supplant U.S. global hegemony and achieve their rightful destiny. With the extravagant assistance of U.S. trade and loose finance more generally, China has enjoyed essentially limitless resources to invest in world class manufacturing capabilities, global trade dominance, technological prowess and a formidable military complex. Is the U.S. to simply cede global power and influence to Beijing without even mustering a stab at countermeasures? The President and others believe strongly that something must be done after years of Washington neglect.

It's no coincidence that the past decade has seen the parallel ascent of the strongman central banker (i.e. Bernanke, Draghi, Kuroda…) and the strongman autocrat (i.e. Putin, Xi, Trump, Erdogan, Sisi, Duterte - to name just a few). Putin and Xi, in particular, have gone to extraordinary measures to secure domestic power and global influence. Xi has taken firm control of Beijing, while Beijing has placed even tighter reins on domestic "markets," finance and the overall Chinese economy.

China and Russia have solidified close economic and military bonds. They have also worked intensively to develop strategic trade, financial and economic institutions and relationships outside the purview of U.S. dominance. The U.S. has spent the past decade printing "money," inflating asset prices, stoking consumption and reveling in quite a financial mania. Others - our principal competitors - have been in intense preparation. For what is not at this point clear.

I'll assume China would today prefer the status quo. They're in no hurry for a confrontation - economic or otherwise. It would suit their objectives to pursue the steady, disciplined execution of their long-term strategy. China be willing to make limited concessions - but there will be no backing down. Zero sign of weakness; no inclination to give in to Trump. Willing to fight "at any cost." The strongman Xi, having recently accomplished an incredible power grab domestically, will not shy away from the opportunity to demonstrate his power on the global stage. And he'll enjoy overwhelming domestic support when confronting the U.S. "bully."

For the Chinese, the impetus of "Trump tariffs" goes way beyond trade. The Trump administration seeks to rein in China's global superpower ambitions. China always claims it will "never succumb to external pressure." At last, they have attained the power to back up the bravado. Better to move decisively to bloody Trump's nose wrestling over trade. After all, there are bigger battles brewing on the horizon: Taiwan, the South China Sea, global resources, new technologies, military superiority, etc.

One could make the argument that the Chinese Bubble creates the type of acute financial and economic fragility that dictates a cautious approach from Beijing. The counterargument is that there are advantages domestically - and ample historical precedent - for villainizing foreigners. The great Chinese "meritocracy" has badly mismanaged key aspects of financial and economic development - the steep costs of which will surface when the Bubble finally succumbs. Why not pin blame on foreigners (the U.S. and Japan, in particular) determined to unjustly undermine China's phenomenal progress?

President Trump, as well, has justification for not backing down. For years, China has abused its trading relationship with the U.S. (and others). The Chinese have in recent decades fragrantly stolen industrial and military secrets, technologies, and intellectual property. Comprehensive and sophisticated efforts to misappropriate have paid fantastic dividends - with meager cost and consequence. Akin to the North Korean situation, past administrations (of both parties) have talked tough, negotiated diffidently, acquiesced and, in the end, empowered serious threats to United States security. Stock prices notwithstanding, the President would not be a crazy lunatic for believing our country has been left with no other option: something must be done.

Both sides likely believe their adversary has more to lose. President Trump can bluster "my trade deficit is bigger than yours." With his Thursday evening statement of "an additional $100 billion of tariffs," the Chinese will rather quickly run out of U.S. imports to list for potential reciprocal treatment. The Trump administration likely sees the robust U.S. economy on stronger footing than China's, and the U.S. banking sector relatively well positioned to deal with some adversity.

After taking extraordinary control measures over its financial system and economy, Beijing surely believes the U.S. has more to lose from the standpoint of securities markets tumult. Beijing also believes much of the world will have sympathetic ears to their protests against Trump's overhanded threats of tariffs and trade wars. China can try to claim the moral high ground, which will not sit well in the Oval Office.

After opening Wednesday's session down 500 points, the DJIA rallied almost 1,100 points in about eight hours of trading. Administration officials (notably Wilbur Ross and Larry Kudlow) adeptly walked back market fears of an unfolding trade war. It's all a negotiating tactic. These efforts - along with the market rally - were crushed by the President's Thursday evening "additional $100 billion…" pronouncement. Larry Kudlow said he learned of the new tariff list Thursday night. Friday afternoon from "The Hill": "President Trump's new top economic adviser Larry Kudlow joked Friday that he's 'gotta beat' former communications director Anthony Scaramucci's 11-day tenure in the White House."

The markets have been willing to overlook structural issues along with White House chaos. Market participants have remained composed: Tax cuts coupled with conviction that the threat of sinking stock prices will keep the President from doing anything too destabilizing. Such remarkable composure appeared at risk during Friday trading. There was no attempt at walking back the President's statement. The "additional $100 billion" may have been a negotiating tactic, but no longer can it be taken for granted that the President is fixated on stock prices. Was Trump incensed by the Chinese response, his team's approach to damage control - or both?

This is a President increasingly willing to "go off script," "call his own shots" and relish being "unhinged." And rather suddenly the unpredictability and unconventionality of the President on matters of momentous importance do matter to the stock market.

Does President Trump believe the long-overdue confrontation against abusive Chinese trade and business tactics takes precedence over short-term stock market performance? For good reason, the markets are increasingly fearful he might.

The conventional view holds that the economy drives the securities markets. In reality, and after several decades of financial innovation and policy activism, the securities markets lead economic performance like never before. This is where structural issues can suddenly and unexpectedly play a decisive role.

Milton Friedman and others referred to the 1920s as the "golden age of capitalism." Were financial and economic structural underpinnings robust in the late-twenties, only to be undercut by the failure of the Federal Reserve to respond (with money printing) forcefully to the 1929 stock market crash and associated bank capital shortfalls? Or, instead, had underlying structures become progressively impaired by a prolonged period of Terminal Phase (financial and economic) Bubble excess? Was the Great Crash inevitable - an historic inflection point marking the commencement of an unavoidable adjustment process: the fusing of what had become an epic divide between inflated market perceptions and deflating financial, economic, social and geopolitical prospects.

April 5 - MarketWatch (Mark DeCambre): "Vanguard founder Jack Bogle has been around the block. The 88-year-old investing titan, who is basically the father of passive investing, says this renewed regime of volatility in stocks is uncanny… 'I have never seen a market this volatile to this extent in my career. Now that's only 66 years, so I shouldn't make too much about it, but you're right: I've seen two 50% declines, I've seen a 25% decline in one day and I've never seen anything like this before.'"

For the Week:

The S&P500 declined 1.4% (down 2.6% y-t-d), and the Dow slipped 0.7% (down 3.2%). The Utilities were about unchanged (down 4.6%). The Banks lost 1.3% (down 1.5%), and the Broker/Dealers declined 0.9% (up 5.6%). The Transports dropped 2.4% (down 4.4%). The S&P 400 Midcaps fell 1.3% (down 2.4%), and the small cap Russell 2000 declined 1.1% (down 1.4%). The Nasdaq100 dropped 2.2% (up 0.6%). The Semiconductors sank 4.8% (up 1.0%). The Biotechs fell 5.5% (up 0.8%). With bullion up $9, the HUI gold index rallied 1.2% (down 7.7%).

Three-month Treasury bill rates ended the week at 1.68%. Two-year government yields were unchanged at 2.27% (up 38bps y-t-d). Five-year T-note yields added two bps to 2.59% (up 38bps). Ten-year Treasury yields rose three bps to 2.77% (up 37bps). Long bond yields rose four bps to 3.02% (up 28bps).

Greek 10-year yields sank 30 bps to 3.99% (down 9bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.69% (down 25bps). Italian 10-year yields were unchanged at 1.79% (down 23bps). Spain's 10-year yields gained seven bps to 1.23% (down 34bps). German bund yields were unchanged at 0.50% (up 7bps). French yields added two bps to 0.74% (down 5bps). The French to German 10-year bond spread widened two to 24 bps. U.K. 10-year gilt yields rose five bps to 1.40% (up 21bps). U.K.'s FTSE equities index gained 1.8% (down 6.6%).

Japan's Nikkei 225 equities index increased 0.5% (down 5.3% y-t-d). Japanese 10-year "JGB" yields were about unchanged at 0.05% (unchanged). France's CAC40 rose 1.8% (down 1.0%). The German DAX equities index gained 1.2% (down 5.2%). Spain's IBEX 35 equities index increased 0.9% (down 3.6%). Italy's FTSE MIB index jumped 2.3% (up 4.9%). EM equities were mixed. Brazil's Bovespa index slipped 0.6% (up 11.0%), while Mexico's Bolsa surged 3.9% (down 2.9%). South Korea's Kospi index dipped 0.7% (down 1.5%). India’s Sensex equities index rose 2.0% (down 1.3%). China’s Shanghai Exchange fell 1.2% (down 5.3%). Turkey's Borsa Istanbul National 100 index dipped 0.2% (down 0.5%). Russia's MICEX equities added 0.5% (up 8.1%).

Investment-grade bond funds saw inflows of $1.554 billion, while junk bond funds suffered outflows of $573 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell four bps to 4.40% (up 30bps y-o-y). Fifteen-year rates declined three bps to 3.87% (up 51bps). Five-year hybrid ARM rates dropped four bps to 3.62% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.49% (up 30bps).

Federal Reserve Credit last week declined $5.5bn to $4.352 TN. Over the past year, Fed Credit contracted $83.0bn, or 1.9%. Fed Credit inflated $1.541 TN, or 55%, over the past 283 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $6.4bn last week to $3.438 TN. "Custody holdings" were up $223bn y-o-y, or 7.0%.

M2 (narrow) "money" supply jumped $34.8bn last week to a record $13.936 TN. "Narrow money" gained $534bn, or 4.0%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits slipped $1.1bn, while savings Deposits rose $31.7bn. Small Time Deposits increased $0.9bn. Retail Money Funds added $1.0bn.

Total money market fund assets added $3.1bn to $2.832 TN. Money Funds gained $184bn y-o-y, or 7.0%.

Total Commercial Paper contracted $13.7bn to $1.048 TN. CP gained $55.1bn y-o-y, or 5.6%.

Currency Watch:

The U.S. dollar index was little changed at 90.108 (down 2.2% y-o-y). For the week on the upside, the Canadian dollar increased 0.9%, the British pound 0.6%, the New Zealand dollar 0.4%, the Norwegian krone 0.1% and the Australian dollar 0.1%. For the week on the downside, the Brazilian real declined 1.8%, the South African rand 1.6%, the Japanese yen 0.6%, the Mexican peso 0.6%, the Swedish krona 0.6%, the Swiss franc 0.5%, the euro 0.4%, and the Singapore dollar 0.3%. The Chinese renminbi declined 0.44% versus the dollar this week (up 3.23% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.0% (up 0.3% y-t-d). Spot Gold gained 0.7% to $1,334 (up 2.3%). Silver increased 0.6% to $16.362 (down 4.6%). Crude sank $2.88 to $62.06 (up 3%). Gasoline dropped 3.3% (up 9%), and Natural Gas fell 1.2% (down 9%). Copper gained 1.1% (down 7%). Wheat surged 4.7% (up 11%). Corn jumped 2.4% (up 13%).

Market Dislocation Watch:

April 5 - CNBC (Kellie Ell): "UBS Financial Services Managing Director Art Cashin said this year's market volatility reminds him of the 1987 stock market crash. 'It's a good deal more volatile than almost anything else you've seen,' said Cashin, who began his career at Thomson McKinnon in 1959. 'It is unfortunately reminiscent of some of the volatility we saw in '87,' he said…"

April 4 - Bloomberg (Gregory Calderone): "A survey of Morgan Stanley prime brokerage clients shows that U.S. equity long-short gross leverage on a weighted average basis is back to post-crisis highs and at the highest levels since technology, media and telecommunications growth stocks tanked in March 2014. Net exposures remain higher than the beginning of the year at 51%. The technology sector is still 37% of that total… Away from hedge funds, total technology exposure by exchange-traded funds is about 31%, the highest since September 2014, and the over-weighting of technology increased recently."

April 2 - Bloomberg (Sarah Ponczek): "Trend-following momentum stocks are starting the second quarter the same way they ended the first -- with little momentum. The iShares Edge MSCI USA Momentum Factor ETF, ticker MTUM, fell 3.2% Monday, more than the 2.2% decline in the S&P 500 Index. It's the exchange-traded fund's seventh drop of more than 2% in a single day this year. In 2017, a loss of that magnitude never happened. '[Momentum] was the strongest part of the market for the last two to three years -- now they're the weakest part,' said Paul Nolte, a portfolio manager at Kingsview Asset Management…"

April 2 - Bloomberg (Rachel Evans): "So much for a quiet session in U.S. stock markets. With the Cboe Volatility Index rising the most in more than a week amid an equity-market rout, three of Monday's 10 most-traded exchange-traded products bet on higher volatility… The VelocityShares Daily 2x VIX Short Term ETN, ticker TVIX, was the third-most traded ETP of the day, lagging only State Street Corp.'s SPY and the PowerShares QQQ. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) was No. 6, while the ProShares Ultra VIX Short-Term Futures (UVXY) -- which seeks to return 1.5 times a volatility gauge -- saw the seventh-largest volume."

April 3 - Bloomberg (Dani Burger): "Fear of missing out has turned into fear of getting caught. In a sign of the times, a strategy that buys the most heavily-traded U.S. stocks was the worst-performing among 10 quantitative factors tracked by Bloomberg on Monday. In fact, the market-neutral gauge has declined for the past three weeks, its biggest slump since March 2017. That the most actively-traded shares are now the market's worst performers may be a sign that fast-money investors who jumped on the bandwagon in technology stocks are the same ones driving the selling."

Trump Administration Watch:

April 4 - Bloomberg: "Chinese state media hailed their leaders' quick counteroffensive in the brewing trade war with the U.S. and said America would learn a 'painful lesson' by tangling with China. The articles and editorials across the Communist Party's media stable came even as the country started a long holiday weekend. They emphasized that China was acting only in self-defense, and that the Trump administration's move to levy a 25% tariff on about 1,300 types of Chinese imports was opposed by many in the U.S. 'As China deploys its counterattack, the pleasure that the U.S. achieved from those tariffs will now cause them suffering as their financial and political gains diminish to zero,' the Global Times wrote… The tabloid, which sometimes takes more hawkish positions, has run five editorials on the trade issue since Monday."

April 6 - Bloomberg (Lyubov Pronina): "China called on the European Union to aid the Asian nation in rejecting protectionism from the U.S. and upholding the international trade order. China and the EU 'need to stand up together with a clear-cut position against protectionism, and need to work with each other to uphold the rules-based multilateral trade order,' Zhang Ming, the head of the Chinese Mission to the EU, said… Recent U.S. actions go 'completely against the fundamental principles and values of the World Trade Organization,' he said."

April 3 - CNBC (Liz Moyer and Jacob Pramuk): "President Donald Trump unveiled a list Tuesday of Chinese imports his administration aims to target as part of a crackdown on what the president deems unfair trade practices. Sectors covered by the proposed tariffs include products used for robotics, information technology, communication technology and aerospace. The U.S. Trade Representative, which announced the list, says it targets products that benefit China's industrial plans 'while minimizing the impact on the U.S. economy.' Specifically, it takes aim at China policies that 'coerce' American companies from transferring technology and intellectual property to local Chinese companies."

April 4 - Financial Times: "The good news is that both sides still have time to back down. Neither the latest round of tariffs proposed by the Trump administration (a 25% levy on $50bn-worth of industrial and technology products) nor the retaliatory move China announced on Wednesday (a matching 25% on $50bn-worth of soyabeans, cars, chemicals and other products) have been imposed yet. The US has said it will consult with businesses for a month before instituting the tariffs. China has indicated it will wait for the US. The bad news is that, according to US president Donald Trump's team, the two sides were already at the negotiating table, and purportedly making progress, before the latest escalations were announced. And there is reason to think that there may not be much regress from here, given the conflicting objectives and preconceptions of the two nations."

April 2 - Bloomberg (Eric Martin): "The Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks. The White House wants leaders from Canada and Mexico to join in unveiling the broad outlines of an updated pact at the Summit of the Americas that begins April 13, while technical talks to hammer out the finer details and legal text could continue…"

April 5 - CNBC (Jeff Daniels): "Fears of an expanded trade war with China are spreading across the farm economy after Beijing announced it might slap a 25% tariff on American soybeans and other farm products. Affected agricultural products also include U.S. corn, beef, cotton, tobacco, sorghum and orange juice. However, China's Ministry of Commerce is targeting not only U.S. agriculture but other items such as automobiles on its wide-ranging list of more than 100 American products."

Federal Reserve Watch:

April 3 - Bloomberg (Jeanna Smialek): "John Williams would have preferred one of his 20 pairs of tennis shoes. The U.S. central banker has a set for every occasion. But a recent Friday found the incoming Federal Reserve Bank of New York president in dress loafers, speaking to bankers and entrepreneurs at the City Club in Los Angeles. Currently San Francisco Fed chief, he delivered a rare blend of economics dissertation and stand-up comedy… The style differences are about to gain a wider audience as the Californian takes the helm of the New York Fed, one of the most powerful positions in global central banking that sits at the intersection of Wall Street and the economy. His nonconformity is relevant to the future of Fed policy, because it extends to his economics. While he's a centrist when it comes to interest rates, Williams made a name for himself from within the Fed system by poking holes in central bank doctrine. His pet project lately centers on convincing his colleagues to rewrite their entire inflation approach ahead of the next recession."

April 2 - Reuters (Karen Brettell): "The New York Federal Reserve launched a benchmark U.S. rate on Tuesday to potentially replace Libor, and market participants hope it will prove more reliable after a long and complex switchover. The Secured Overnight Financing Rate (SOFR) set at 1.80%. SOFR is based on the overnight Treasury repurchase agreement market, which trades around $800 billion in volume daily. Publishing the rate is the first step in a multi-year plan to transition more derivatives away from the London interbank offered rate (Libor), which regulators say poses systemic risks if it ceases publication."

April 3 - CNBC (Jeff Cox): "Even with this year's correction, stocks and other assets are still high by historical standards, Fed Governor Lael Brainard said… Brainard became the latest central bank official to express caution about the level of the 9-year-old bull market. 'Valuations in a broad set of markets appear elevated relative to historical norms, even after taking into account recent movements,' Brainard said during a speech… Prices for multi-family homes and commercial real estate also have risen, while capitalization rates, a key determinant for how properties are performing value wise, 'have reached historical lows,' she added."

U.S. Bubble Watch:

April 5 - Bloomberg (Katia Dmitrieva): "The U.S. trade deficit widened by more than forecast to a fresh nine-year high in February amid broad-based demand for imports, ahead of Trump administration tariffs that have raised the specter of a trade war. The gap increased 1.6% in February to $57.6 billion, compared with the median estimate of economists for $56.8 billion… It was the sixth straight month with a wider deficit, the longest streak since 2000. Imports and exports both registered gains of 1.7%..."

April 1 - Bloomberg (Vince Golle): "More American consumers than at any time in 27 years are convinced that it's better to make big purchases now because retailer discounts and deals won't be around much longer. Some 21%, the largest share since November 1990, said in March that conditions to buy appliances, electronics and other household durable goods are currently 'good' because prices won't fall further, according to the University of Michigan's latest survey of consumer sentiment. 'When asked about buying conditions, the appeal of low prices has largely disappeared,' Richard Curtin, director of the Michigan survey, said… 'For durables, it has been replaced by favoring buying in advance of anticipated price increases.'"

April 5 - USA Today (Paul Davidson): "This spring home-buying season should be a coming-out party for Millennials, many of whom are finally ready to make a purchase after hunkering down for years in their parents' basements or expensive apartments. The only problem: Much of the food at the party is gone, and what's left is priced like caviar. Although solid job and income growth is emboldening many prospective home buyers, record low housing supplies are driving up prices and curbing sales, especially for Millennials looking to buy starter homes. 'For home buyers, this is shaping up to be one of the most difficult years in recent memory,' says Ralph McLaughlin, chief economist of Veritas Urbis Economics, which studies the housing market."

April 5 - Bloomberg (Vince Golle): "Small-business owners in the U.S. are becoming more aggressive with their pay packages as the tight job market makes it difficult to attract talent. The National Federation of Independent Business said… a net 33% of small firms raised compensation in March, the largest share since November 2000, as hiring plans picked up."

April 4 - MarketWatch (Andrea Riquier): "As interest rates rise, fewer households refinance their mortgages. And the refinances that do get done are often very different than those initiated during low-rate periods. 'When rates are low, the primary goal of refinancing is to reduce the monthly payment,' wrote researchers for the Urban Institute… 'But when rates are high, borrowers have no incentive to refinance for rate reasons. Those who still refinance tend to be driven more by their desire to cash out.' 'Cashing out' is shorthand for taking out a new mortgage that's bigger than the remaining balance on the old one and using the money that makes up the difference for discretionary purchases. As of the fourth quarter of last year, the share of all refinances that were cash-outs rose to the highest since 2008…"

April 2 - Bloomberg (John Lippert and Jamie Butters): "The American consumers who were stretching themselves to buy or lease a new car are starting to go missing from showrooms. Rising interest rates and new-vehicle prices are squeezing shoppers with shaky credit and tight budgets out of the market. In the first two months of this year, sales were flat among the highest-rated borrowers, while deliveries to those with subprime scores slumped 9%, according to J.D. Power. The researcher's data highlights what's happening beneath the surface of a U.S. auto market in its second year of decline after a historic run of gains."

April 2 - Bloomberg (Luke Kawa and Lu Wang): "The stock market's missing a key participant as the second quarter kicks off with a rout. Corporate America is stuck on the sidelines as the S&P 500 Index plunges to its lowest level since early February. That's to comply with regulations under which companies refrain from discretionary stock buybacks for about five weeks before reporting earnings through the 48 hours that follow. So, with first-quarter reporting season kicking into high gear in two weeks, companies must sit on their hands while the market fizzles. The timing of discretionary buybacks has gained traction in recent years with corporate appetite dwarfing all other investors as the biggest source of demand for U.S. stocks… S&P 500 firms have bought back almost $4 trillion of their own shares since the bull market began nine years ago…"

April 3 - Bloomberg (Elizabeth Campbell): "Illinois's finances are so troubled that investors can make nearly as much money betting on the worst-rated U.S. state as they can on the American Dream mall project, perhaps the most despised structure in New Jersey. An unfinished, multicolored hulk in the Meadowlands beside the Turnpike, former Governor Chris Christie called it 'the ugliest damn building in New Jersey, and maybe America.' Yet bondholders are asking to get paid nearly as much to own Illinois's debt as they are demanding in return for holding the long-delayed mall's unrated revenue bonds… The yield on Illinois general-obligation bonds that mature in 2028 averaged 4.5% in March…"

April 2 - Bloomberg (Oshrat Carmiel): "Home sales in Manhattan plunged by the most since the recession as buyers at all price levels drove hard bargains and were in no rush to close deals. Sales of all condos and co-ops fell 25% in the first quarter from a year earlier to 2,180, according to… appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the biggest annual decline since the second quarter of 2009, when Manhattan's property market froze in the wake of Lehman Brothers Holdings Inc.'s bankruptcy filing and the global financial crisis that followed. The drop in sales spanned from the highest reaches of the luxury market to workaday studios and one-bedrooms."

China Watch:

April 6 - Associated Press (Jill Colvin and Gillian Wong): "China's government vowed Friday to 'counterattack with great strength' if President Donald Trump goes ahead with plans to raise U.S. tariffs on an additional $100 billion worth of Chinese goods and said negotiations were impossible under current conditions. Trump's surprise move Thursday to instruct the U.S. trade representative to consider additional tariffs came a day after Beijing said it would tax $50 billion in American products, including soybeans and small aircraft, in response to a U.S. move this week to impose tariffs on $50 billion in Chinese imports… In Beijing, a Commerce Ministry spokesman said China doesn't want a trade war - but isn't afraid to fight one. 'If the U.S. side announces the list of products for $100 billion in tariffs, the Chinese side has fully prepared and will without hesitation counterattack with great strength,' spokesman Gao Feng said."

April 5 - New York Times (Steven Lee Myers): "China's leaders sound supremely confident that they can win a trade war with President Trump. The state news media has depicted him as a reckless bully intent on undermining the global trading system, while presenting the Chinese government as a fair-minded champion of free trade. And China's leader, Xi Jinping, has used the standoff to reinforce the Communist Party's message that the United States is determined to stop China's rise - but that it no longer can. China is already too strong, its economy too big. 'China is not afraid of a trade war,' the vice minister of finance, Zhu Guangyao, declared at a news conference to discuss possible countermeasures. More than once, he cited the history of the 'new China' - which began its extraordinary economic revival four decades ago - as evidence that it would 'never succumb to external pressure.'"

April 5 - Reuters (Michael Martina and Susan Heavey): "It took China just 11 hours to retaliate against the United States for proposing tariffs on some 1,300 Chinese products, but Chinese officials are holding back on taking aim at their largest American import: government debt. In a tit-for-tat response to the Trump administration's plan for 25% duties on $50 billion of Chinese imports, China hit back with its own list of similar duties on key American imports including soybeans, planes, cars, beef and chemicals… China held around $1.17 trillion of Treasuries as of the end of January, making it the largest of America's foreign creditors and the No. 2 overall owner of U.S. government bonds after the Federal Reserve. Any move by China to chop its Treasury portfolio could inflict significant harm on U.S. finances and global investors, driving bond yields higher and making it more costly to finance the federal government."

April 5 - Reuters (Michael Martina and Susan Heavey): "China would win any trade war with the United States, the country's state media said on Thursday, as U.S. officials sought to ease market jitters over escalating tensions between the world's two biggest economies. After Washington and Beijing targeted each other with planned steep tariffs, Chinese state media declared that the country never surrendered to external pressure and would prevail in any tit-for-tat on trade. In Washington, U.S. officials publicly encouraged negotiations as a way to ease or avert punishing tariffs and get the two countries off a trade war footing."

April 2 - Bloomberg: "China's biggest lenders are increasingly using short-term financing to meet demand for loans, in a development that could push up money-market rates. The banks are rushing to sell negotiable certificates of deposit, an instrument that sounds like a saving account but is actually more like a bond. Issuance of these by the five largest lenders more than doubled to 424 billion yuan ($68bn) in the first quarter from a previous record in the three months ended Sept. 30… Banks are taking this approach as deposit growth dwindles and the government curbs the sale of wealth management products. While new lending in China rose to an all-time high of 2.9 trillion yuan in January, deposits increased at the slowest pace ever last year and WMPs rose just 1.7%."

March 30 - Bloomberg: "A gauge of activity at China's manufacturers posted its first gain since November, as factories recovered from a seasonal dip at the start of the year and export demand shrugged off threats of a trade war. The manufacturing purchasing managers index rose to 51.5 in March versus the 50.6 estimate in Bloomberg's survey and 50.3 last month. The non-manufacturing PMI, covering services and construction, stood at 54.6… compared with 54.4 in February."

April 2 - Reuters: "Regional offices of China's banking regulator have begun inspections of banks' loans to large clients, two sources with knowledge of the development told Reuters… The move comes amid a wide-ranging crackdown on risk in China's financial sector that has netted top regulatory officials for corruption and curbed abuses in shadow banking. Local banking regulatory bureaus have been asked to select a company at random, check the value of loans taken by it at the end of 2017, all new credit last year, the number of lending entities and the level of soured debt…"

April 1 - Financial Times (Emily Feng): "Thousands of online lenders could be facing extinction as China rolls out a new licensing framework, amid complaints about a lack of clarity on how the regime will work. The peer-to-peer, or P2P, lending sector is braced for a second regulatory crackdown as a new 'record filing' system kicks off in April. But with the first batch of approvals expected by the end of the month, lenders say they are still in the dark on the filing process itself. 'No one even knows what this record filing form looks like yet,' said Spencer Li, a vice-president at online lending platform Fincera. P2P platforms match borrowers with investors online. China's P2P lending industry recorded transactions valued at $445bn in 2017…"

Central Bank Watch:

April 4 - Bloomberg (Toru Fujioka and Masahiro Hidaka): "The Bank of Japan is likely to raise its yield target within a year, according to the central bank's former chief economist, who says inflation is accelerating faster than expected. The BOJ will adjust its target for 10-year government bond yields after gains in consumer prices excluding fresh food and energy reach 1%, said Hideo Hayakawa, who left the BOJ in 2013 after more than three decades. This 'core core' inflation gauge is now at 0.5%."

Global Bubble Watch:

April 4 - Bloomberg (Chikako Mogi and Takako Taniguchi): "The ripple effects from Libor's surge have traveled as far as regional Japan. As the benchmark for U.S. borrowing costs climbs, it becomes more expensive to hedge dollar-denominated investments back into yen. That's prompted the country's regional banks to reduce overseas holdings to the lowest in more than three years… The higher hedging costs, a re-ignition of bullish sentiment toward the yen and increased scrutiny from the Financial Services Agency have prompted a reassessment, according to three money managers at the lenders… Foreign securities, mostly bonds with some stocks, held by the lenders shrank more than 9% in February to 9.5 trillion yen ($89 billion), the lowest since November 2014…"

March 30 - Wall Street Journal (Ira Iosebashvili, Amrith Ramkumar and Daniel Kruger): "Investments that typically serve as havens in times of stress are moving in strange ways, highlighting the unsettled condition of financial markets as they head into the second quarter. The dollar and the yen have both strengthened recently, which is typical when investors are looking to unwind risk. But other assets that usually rally for similar flight-to-safety reasons haven't fared so well. Gold, the Swiss franc and Treasurys have fallen since the Dow Jones Industrial Average slumped 9.4% from its Jan. 26 high. That divergence is confounding analysts and investors. It marks a stark reversal from other recent periods of market disruption in 2011 and late 2015-early 2016."

April 3 - Wall Street Journal (Jean Eaglesham and Coulter Jones): "When the messaging app Telegram set out to raise billions of dollars this year for a project to launch a cryptocurrency, it shunned the stock market and instead invited a select group of firms to invest in its virtual coins. These investors would be backing a project yet to be built. Little was known about the private company's ownership or finances. Even so, 81 investors stepped forward to pour in $850 million, with other financing rounds still to come. It was a mark of the dramatic rise of private capital markets, which have leapfrogged public markets to become the most popular way for companies to raise money… Private markets have 'reshaped the financial landscape,' said Jason Thomas, director of research at private-equity firm Carlyle Group LP. 'The growth of private capital is across the economy.' … At least $2.4 trillion was raised privately in the U.S. last year. That widened a gap that emerged in 2011 with the public markets, which raised $2.1 trillion…"

Fixed-Income Bubble Watch:

April 5 - Financial Times (Michael Mackenzie): "A key lesson of the financial crisis was that the credit market matters more than others. Equities and credit have endured a tough year so far as global trade tension, the gradual unwinding of central bank support and the risk of a regulatory hand around the throat of the tech sector, leave investors wary. Several measures of the credit market are flashing amber. The Markit CDX index - an indicator of what investors must pay to insure against a default in the US investment-grade market - is back up at levels previously seen a year ago. There has been a bigger breakdown in US high yield, the speculative area of the debt market."

April 3 - Bloomberg (Brian W Smith): "The high-grade bond market has turned from borrower paradise to borrower ... purgatory. Investors have forced investment grade-bond issuers in the U.S. to pony up more money to sell top-notch bonds over the past month. After paying little in so-called new issue concessions, borrowers are now regularly forking over a premium of more than 10 bps as more investors become choosy about the debt they buy. This is a major shift that has put buyers in the driver's seat after companies paid almost nothing to sell a massive amount of debt over the last two years."

April 1 - Wall Street Journal (Asjylyn Loder and Sam Goldfarb): "The exodus from junk-rated debt funds accelerated in the first quarter as rising interest rates cut into investors' appetite for taking on greater credit risk. Investors in the first three months of 2018 yanked $6.5 billion from the five largest exchange-traded funds that invest in bonds issued by less creditworthy companies… March was the fifth consecutive month of outflows from high-yield ETFs."

Japan Watch:

April 3 - CNBC (David Reid): "The Bank of Japan (BOJ) is currently discussing how to exit its massive stimulus program, but it's too early to reveal any of the details. That was the statement made by Governor Haruhiko Kuroda to Japanese lawmakers in parliament Tuesday. 'Internally we're conducting various discussions,' said Kuroda…, when asked about an exit strategy from its easy monetary policy. However, he quickly noted that Japanese inflation was still running well below target. He added that any 'open talk' of tapering or ending its stimulus would confuse markets."

EM Bubble Watch:

April 1 - Financial Times (Kate Allen): "Emerging market investors are showing signs of caution as the hefty pace of debt sales by companies, banks and governments has combined with a negative performance for bond prices since the start of the year. EM syndicated borrowing totalled $382bn in the year to March 23, according to… Dealogic - just $35bn below the record amount issued in the first quarter of 2017. Once last week's deals are finalised, banks expect a record total. 'We are set for a record-breaking Q1,' said Nick Darrant, executive director of fixed income syndicate at JPMorgan. Persistent dollar weakness has buoyed dealmaking in recent months, but flows of money into EM are slowing…"

April 3 - Bloomberg (Natasha Doff): "There's a flipside to the market's biggest 'pain' trade against the dollar: emerging-market gains. Foreign holdings of local-currency debt of developing nations have swelled to near a record $745 billion, according to… Deutsche Bank AG. With much of their buying at the expense of the greenback, according to this metric investors have never been so exposed to a sudden turnaround in the U.S. currency. The trade has been lucrative, handing investors returns of more than 13% in the past year and a 4.7% gain in the first quarter as most risk assets succumbed to losses."

Leveraged Speculator Watch:

April 5 - CNBC (Thomas Franck): "Bill Ackman has seen his hedge fund's assets cut more than in half from their peak above $20 billion in 2015 as institutional investors flee Pershing Square's abysmal returns amid a roaring bull market. Most of the outside investors have departed as restrictions have lifted, a person familiar with the matter told CNBC. The defectors include longtime partner Blackstone Group. Pushing them out the door is an 8.6% negative return this year through the end of March, which followed a 4% losing return in 2017."

Geopolitical Watch:

April 2 - Reuters (Jeanny Kao): "Taiwan's government said… that China was stirring up its media to threaten the self-ruled island after a major state-run newspaper said China should issue an international arrest warrant for Taiwan's premier for his comments on independence. Taiwan is one of China's most sensitive issues. The island is claimed by Beijing as its sacred territory and China has never renounced the use of force to bring under Chinese control what it considers to be a wayward province."

April 5 - Reuters (Michelle Nichols): "Russia told Britain at the United Nations Security Council on Thursday that 'you're playing with fire and you'll be sorry' over its accusations that Moscow was to blame for poisoning a former Russian spy and his daughter."

Friday Evening Links

[Bloomberg] Stocks Tumble More Than 2% on Trump Trade Jabs: Markets Wrap

[CNBC] Treasury Secretary Mnuchin says there is the possibility of a trade war with China, but that's not the objective

[CNBC] Top Trump economic advisor Larry Kudlow: I just found out about new China tariffs 'last night'

[The Hill] Kudlow jokes he’s ‘gotta beat’ Scaramucci's White House tenure

[Bloomberg] Fed Chairman Powell Unravels Inflation Riddle

[CNBC] Fed Chair Powell says growth has picked up enough to justify rate hikes

[CNBC] Powell: 'Tariffs can push up prices' but 'too early to say' what impact will be

[The Hill] Deficit nears $600 billion in first half of 2018

[NYT] Powell Touts Economy’s Strength in First Speech as Fed Chief

[WSJ] The Architect of Trump’s Threatened China Trade War