Friday, May 4, 2018

Weekly Commentary: Old Roach Motel

One hundred and six months. The current expansion, having emerged in the aftermath of the collapse of the mortgage finance Bubble, is now the second-longest on record (lagging only the 120-month 1990's Bubble period). The unemployment rate dropped to 3.9% last month, the lowest level since the 3.8% print in April 2000. Corporate earnings are at unprecedented levels and stock prices only somewhat below records. Home prices in most markets are at all-time highs. U.S. GDP is forecast to expand 2.8% this year, just below 2015's (2.9%) 12-year high.

We should be leery of prolonged expansions. The longer a boom, the greater the opportunity for deep-rooted structural impairment. Back in 2013, I proposed the concept of "Government Finance Quasi-Capitalism." This was updating previously updated Hyman Minsky analysis. Minsky's "Stages of Development of Capitalist Finance" seems especially relevant these days:

Minsky: "In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure… To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures."

Minsky saw the evolution of capitalist finance as having developed in four stages: Commercial Capitalism, Finance Capitalism, Managerial Capitalism and Money Manager Capitalism. "These stages are related to what is financed and who does the proximate financing - the structure of relations among businesses, households, the government and finance." (CBB 12/28/2001 "Financial Arbitrage Capitalism")

Late in his life, Minsky was increasingly concerned with the transmutation of Money Manager Capitalism: "The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy… Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits… A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market..."

Proffering "Financial Arbitrage Capitalism," I first updated Minsky's analysis back in 2001. Noting Minsky's "financial structure is a central determinant of the behavior of a capitalist economy," I had become convinced that a fundamentally new power center had evolved within the financial system.

With the activist Greenspan Federal Reserve pegging short-rates and guaranteeing market liquidity, a new regime of enterprising financial speculation was unleashed. At the same time, Washington's GSE's had become powerful market operators with the capacity to issue seemingly endless quantities of "AAA" securities, while providing central bank-like ("buyers of first and last resort") market liquidity backstops.

"Wall Street Alchemy" was transforming risky loans into money-like marketable securities ("Moneyness of Credit"). These securities provided the fuel for aggressive leveraging by the hedge fund community and Wall Street proprietary trading desks. This sophisticated Financial Structure profoundly bolstered Credit Availability and growth, while also fueling pernicious asset inflation, stoking over-consumption and, over time, fundamentally altering the nature of investment, resource allocation and Economic Structure.

Financial Arbitrage Capitalism proved a powerful if relatively transitory Stage of Capitalistic Development. The mortgage finance Bubble collapse ushered in the latest phase of government and central bank control over Financial Structure and Capitalistic Development.

It's now been almost a decade of unprecedented monetary and fiscal stimulus - ten years of central bank command over the financial markets. Over time, markets became progressively less attentive to risk, including business cycle cyclicality, financial excess and instability. Bear markets and recessions had been prohibited. Basically, no amount of excess was concerning. And, importantly, the magical concoction of extremely low rates and extremely big deficit spending would ensure a corporate profits bonanza as far as the eye can see.

May 2 - Bloomberg (Shannon D. Harrington and Erik Schatzker): "Greg Lippmann, who helped design the trade against subprime mortgages that became known as the Big Short, says the next financial tremors will come from corporate debt. The former Deutsche Bank AG trader who now oversees about $3 billion at his LibreMax Capital LLC said… that corporate debt and equities will face the biggest pain when the next downturn comes. Investments linked to consumer debt, unlike the last crisis, will be relatively safe because companies have been the ones gorging the most on the ultra cheap interest rates during the past decade. 'If the first quarter's volatility is a harbinger of something bigger, I think that you're going to see a lot more trouble in the corporate market and the equity market than the structured products market,' Lippmann said on the sidelines of the Milken Institute Global Conference… 'The consumer is in much better shape than corporates. Consumers are less levered than they were pre-crisis. Corporates are more levered than they were pre-crisis, and I think structured products are not going to be the epicenter.'"

I also doubt that structured products will be at the epicenter of the next crisis. Subprime, mortgage Credit, and Wall Street Alchemy were the nexus for Financial Arbitrage Capitalism period excess. Government Finance Quasi Capitalism fundamentally altered the prevailing Financial Structure financing what is now one of the U.S. history's longest expansions.

Financial Arbitrage Capitalism altered perceptions, market behavior and Financial Structure in one (critical) segment of the marketplace. In particular, it incentivized leveraged speculation by the hedge fund community and Wall Street trading desks. This had profound ramifications for consumer Credit availability and borrowing. The overall surge in system Credit growth imparted structural effects throughout the financial markets and economy. Latent fragilities emerged with the collapse of mortgage Credit growth.

Notably, though with some obvious exceptions, corporate balance sheets were not in terrible shape when crisis hit. After all, years of historic mortgage Credit growth had funneled cash to corporate America, as well as to the U.S. Treasury. Washington was well-positioned in 2008 for a robust crisis response.

Fannie and Freddie were nationalized, with zero impact on the perceived creditworthiness of Treasury obligations. The Fed immediately slashed rates to zero. This incited a refinancing boom, significantly reducing household debt service costs. Large quantities of previously higher risk mortgages were refinanced into top-rated GSE securities, many surely making their way onto the Fed's ballooning balance sheet. Especially with the failure of Lehman and AIG, structured finance was generally in disarray. But the limited number of operators in this space made the situation manageable for the Federal Reserve and Treasury. There were only limited issues with money market funds, and for the most part the U.S. mutual fund complex was outside the worst of the fray.

I would argue that the current Government Finance Quasi Capitalism stage has created much deeper and problematic financial and economic structural maladjustment. As has been said, "Capitalism without failure is like heaven without hell." A decade of aggressive policy activism worked its magic.

The old notion of one-decision stocks morphed into One-Decision Markets: Just buy and hold - your favorite equities or Credit index. Analysis Not Required. Central bankers will ensure the trajectory of stock prices remains up. The Fed's commitment to liquid and continuous markets has never been as rock solid. There will be no panic selling of stocks, and no destabilizing spike in market yields. And with rates at or near zero, there has never been such powerful incentives to buy risk assets (stocks, corporate Credit, EM, etc.). The perception of liquidity and safety ("Moneyness of Risk Assets") ensured a wall of liquidity would inundate funds holding equities, corporate bonds and EM securities. Amazingly, ETF assets grew almost 10-fold since 2008, in one of history's most spectacular speculative financial flow episodes.

May 3 - Financial Times (Joe Rennison and Ben McLannahan): "An important shift in how companies finance themselves has reached a milestone. The leveraged loan market has officially become a $1tn asset class and is catching up fast with US high yield or junk bonds. Since 2010, the leveraged loan market has doubled in size from $500bn while US high yield has expanded $250bn to $1.1tn, according to Bank of America Merrill Lynch. The growth in loans reflects a post-financial crisis shift away from being a 'private bank-loan model to a thriving syndicated market with hundreds of participants' that has coincided with retail money flowing into the market, says the bank. Money has continued to pour into loan funds, where interest rates are floating and adjust higher as the Federal Reserve tightens policy. That kind of demand has helped fund and drive a record era for merger and acquisitions. 'A higher proportion of capital raised today goes towards LBOs [leveraged buyouts] and acquisitions than was the case in 2010,' says BofA, noting how half of money raised since 2016 has reflected M&A, up from a level of 30 to 40% at the beginning of the cycle."

Indicative of the altered Financial Structure, Government Finance Quasi Capitalism ensured a more than doubling of the leveraged loan market (since 2010) to $1.1 TN. "Retail money flowing into the market." Indeed, the proliferation of ETF products has ensured the flow of retail money in abundance to all corners of the risk markets - corporate Credit and equities in particular. Indirectly perhaps, but retail flows are these days helping fuel record M&A. And let's not forget the "short vol" funds and other complex derivatives strategies. And especially during periods of dollar weakness, performance chasing flows have deluged EM. It's been heavenly, or at least financial nirvana. And the massive "retail" flows into global risk assets remain oblivious to now rapidly mounting risks.

Going back centuries, the "money market" has traditionally been at the financial crisis epicenter. From traditional bank runs to the 2008 run on Lehman's repurchase agreements, it's the panic liquidation of previously perceived safe and liquid instruments that can instantly spark illiquidity and crisis. Money has special attributes to be coveted and safeguarded. To purposely bestow the perception of moneyness upon risk assets - across asset classes on a global basis - is one of the great transgressions in the history of central bank monetary management.

I would add that the proliferation of tantalizing new technologies makes this cycle all the more perilous. Massive prolonged speculative financial flows throughout a period of alluring technological innovation ensures malinvestment and deep structural impairment. Historical revisionism paints the 1920's as the "golden age of Capitalism," brought to a catastrophic conclusion by the Fed's negligent post-crash failure to inflate the money supply. In reality, it was a historic period of misperceptions - misperceptions as to the capabilities of Federal Reserve, Wall Street, financial innovation and technological advancement. It all came home to roost.

The "Roaring Twenties" episode was a confluence of colossal financial flows and historic technological development that ensured epic structural maladjustment and attendant latent fragilities. Unappreciated, especially late in the cycle, was the harsh reality that the finance fueling the boom was increasingly unsound, unstable and unsustainable. When speculative flows inevitably reversed, everything came tumbling down - everywhere.

Few companies have benefitted from Government Finance Quasi Capitalism as much as For years, markets afforded Amazon virtually free money. The company would readily borrow billions, invest aggressively and not worry a lick about profitability. With current market capitalization of $767 billion, things have worked out fantastically for the company, their employees and shareholders. It's worked out pretty well for consumers as well, but at the expense of traditional retailers across the country.

My issue is not with, but with today's thousands of wannabes. Just raise "capital" and spend as aggressively as possible. Profitability and cash-flows are a concern for some day out in the future. What matters is a clever idea, growth, market share and dominance the quicker the better. It's a financial, market and business backdrop that has fostered an Arm's Race Mentality - online retail and services, the cloud, AI and quantum computing, blockchain, 5G, cybersecurity, Internet of Things, electric automobiles, battery technologies and alternative energy, autonomous vehicles, biotech and pharmaceuticals, automation and robotics, nanotechnology, and on and on.

It's somewhat reminiscent of 1999, but on such a grander scale that the two periods are hardly comparable. The late-twenties is more pertinent: the proliferation of exciting technologies and innovation; lavishly over-liquefied securities markets; faith in policymakers and a general disregard for risk. In 1929, there was essentially no recognition of downside risk. A long boom had convinced about everyone that financial and economic underpinnings were sound. Similar to today, little attention was paid to the soundness of the finance underpinning the boom.

During the mortgage finance Bubble period, there was some recognition of how the system was "privatizing profits and socializing losses." And that's exactly how it played out during the crisis, with expensive bailouts, massive deficit spending and crazy central bank monetization. I would expect the next crisis to have disparate and more problematic dynamics.

At this point, an abrupt reversal of "retail" flows from the risk markets will pose a potentially greater systemic challenge than the previous crisis of confidence in structured finance. Not only have retail flows come to play a major financing role throughout corporate America, I would expect the sophisticated leveraged speculating community to move quickly to get ahead of ("front-run") outflows as they begin to materialize. Moreover, there are these gargantuan derivatives markets that are expected to function as an insurance marketplace. Rather quickly, liquidity will become a serious systemic issue across the securities and derivatives markets. Financial conditions might tighten dramatically almost overnight, abruptly interrupting plans for tens of thousands of negative cash-flow enterprises across the country - big and small. That's when Financial and Economic Structure will matter mightily.

A decade of Government Finance Quasi Capitalism has deeply engrained the view that enlightened central bankers and spendthrift governments have together tamed the business cycle. Bear markets and recessions were conveniently removed from the calculus. It's accepted as gospel that myriad risks have been fundamentally downgraded. In reality, the socialism of finance has annulled the capacity of markets to self-adjust and correct. Pressure just keeps building.

The upshot has been highly unstable Bubble flows - into the securities markets, intermediated through perceived safe and liquid investment vehicles into business enterprises on increasingly fragile footing - on an unprecedented scale. On a global basis (again with parallels to the 1920's), Bubble dynamics have ensured that financial and real resources have for years been poorly allocated, with maladjustment and imbalances now greatly in excess of those prior to the 2008 crisis.

I have posited that the February blowup of "short vol" marked a critical juncture for the global Bubble - the initial round of market instability that would set in motion de-risking and de-leveraging dynamics and waning global liquidity. I'll suggest that global markets have commenced round two. The dollar index jumped another 1.1% this week, as stress intensifies in the emerging markets. The Argentine peso sank 6.1% this week, as Argentina's central bank hiked rates 675 bps (to 40%) to support its collapsing currency. The Turkish lira dropped 4.5% to a record low, as 10-year yields surged to almost 14%. The Mexican peso dropped 3.4%, the Polish zloty 2.4% and the Brazilian real 2.0%. Stocks were down 4.7% in Argentina, 4.7% in Turkey, 3.8% in Brazil and 2.7% in Mexico.

EM stress somewhat supported Treasuries and safe haven sovereign debt more generally this week. Weak EM likely spurred some unwind of global "carry trade" leverage, with negative ramifications for EM currencies, equities and bonds - and global liquidity more generally. There also appeared to be an unwind of long EM/short "developed" trading dynamic, which might help explain this week's rally in European equities (that spilled over into U.S. equities Friday). If nothing else, EM is illuminating how abruptly speculative flows tend to reverse course - and the newfound proclivity for Crowded Trades to Morph into Liquidity Traps. The Old Roach Motel.

For the Week:

The S&P500 slipped 0.2% (down 0.4% y-t-d), and the Dow dipped 0.2% (down 1.8%). The Utilities declined 0.6% (down 2.8%). The Banks fell 1.7% (down 0.2%), and the Broker/Dealers dropped 1.3% (up 7.7%). The Transports lost 1.7% (down 2.3%). The S&P 400 Midcaps added 0.3% (down 0.2%), and the small cap Russell 2000 gained 0.6% (down 2.0%). The Nasdaq100 jumped 1.7% (up 5.8%). The Semiconductors surged 3.1% (up 3.5%). The Biotechs fell 1.6% (up 6.2%). With bullion down $8, the HUI gold index slipped 0.4% (down 5.7%).

Three-month Treasury bill rates ended the week at 1.79%. Two-year government yields added a basis point to 2.50% (up 61bps y-t-d). Five-year T-note yields slipped two bps 2.79% (up 58bps). Ten-year Treasury yields declined one basis point to 2.95% (up 54bps). Long bond yields were unchanged at 3.12% (up 38bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.64% (up 65bps).

Greek 10-year yields jumped 20 bps to 4.10% (up 3bps y-t-d). Ten-year Portuguese yields rose five bps to 1.71% (down 24bps). Italian 10-year yields gained six bps to 1.80% (down 22bps). Spain's 10-year yields rose four bps to 1.30% (down 27bps). German bund yields declined three bps to 0.54% (up 12bps). French yields slipped one basis point to 0.78% (unchanged). The French to German 10-year bond spread widened two to 24 bps. U.K. 10-year gilt yields fell five bps to 1.40% (up 21bps). U.K.'s FTSE equities index gained 0.9% (down 1.6%).

Japan's Nikkei 225 equities was little changed (down 1.3% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.045% (unchanged). France's CAC40 increased 0.6% (up 3.8%). The German DAX equities index jumped 1.9% (down 0.8%). Spain's IBEX 35 equities index rose 1.8% (up 0.6%). Italy's FTSE MIB index surged 1.7% (up 11.4%). EM equities were mostly under pressure. Brazil's Bovespa index sank 3.8% (up 8.8%), and Mexico's Bolsa fell 2.7% (down 4.8%). South Korea's Kospi index declined 1.2% (down 0.2%). India’s Sensex equities index slipped 0.2% (up 2.5%). China’s Shanghai Exchange recovered 0.3% (down 6.5%). Turkey's Borsa Istanbul National 100 index fell 4.7% (down 11.0%). Russia's MICEX equities declined 0.5% (up 8.5%).

Investment-grade bond funds saw inflows of $997 million, and junk bond funds posted inflows of $526 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to 4.55% (up 53bps y-o-y). Fifteen-year rates added a basis point to 4.03% (up 76bps). Five-year hybrid ARM rates fell five bps to 3.69% (up 56bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.71% (up 57bps).

Federal Reserve Credit last week dropped $17.7bn to $4.326 TN. Over the past year, Fed Credit contracted $106.1bn, or 2.4%. Fed Credit inflated $1.515 TN, or 54%, over the past 287 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $4.2bn last week to a 10-week low $3.408 TN. "Custody holdings" were up $192bn y-o-y, or 6.0%.

M2 (narrow) "money" supply expanded $16.1bn last week to a record $13.964 TN. "Narrow money" gained $524bn, or 3.9%, over the past year. For the week, Currency increased $3.4bn. Total Checkable Deposits jumped $25.0bn, while savings Deposits fell $17.7bn. Small Time Deposits gained $3.2bn. Retail Money Funds added $2.3bn.

Total money market fund assets rose $7.6bn to $2.800 TN. Money Funds gained $156bn y-o-y, or 5.9%.

Total Commercial Paper declined $3.3bn to $1.053 TN. CP gained $61bn y-o-y, or 6.1%.

Currency Watch:

The U.S. dollar index rose 1.1% to 92.566 (up 0.5% y-t-d). For the week on the downside, the Mexican peso declined 3.4%, the Brazilian real 2.0%, the British pound 1.8%, the Swedish krona 1.7%, the euro 1.4%, the South African rand 1.4%, the Norwegian krone 1.2%, the Swiss franc 1.2%, the New Zealand dollar 0.9%, the Singapore dollar 0.8%, the Australian dollar 0.6%, the Canadian dollar 0.1%, the Japanese yen 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.48% versus the dollar this week (up 2.26% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.3% (up 8.4% y-t-d). Spot Gold slipped 0.6% to $1,315 (up 0.9%). Silver was little changed at $16.519 (down 3.7%). Crude jumped $1.62 to $69.72 (up 15%). Gasoline slipped 0.6% (up 18%), and Natural Gas dropped 2.2% (down 8%). Copper increased 0.5% (down 7%). Wheat surged 5.6% (up 23%). Corn gained 1.9% (up 16%).

Market Dislocation Watch:

May 3 - Reuters (Marc Jones): "Stress levels rose in emerging markets on Thursday as Argentina's peso and Turkey's lira slumped to record lows in what looked like classic currency attacks and shares fell for a third day. The pressure was widespread against the backdrop of a rising dollar and global borrowing rates and after more unpredictable behaviour on metal export tariffs from U.S. President Donald Trump's administration towards Brazil overnight. It combined to push MSCI's 24-country emerging market stocks index towards a three-month low though tensions were highest in foreign exchange markets."

Trump Administration Watch:

May 2 - Wall Street Journal (John D. McKinnon): "The Trump administration is considering executive action that would restrict some Chinese companies' ability to sell telecommunications equipment in the U.S., based on national-security concerns, said several people familiar with the matter. The move, if it happens, would represent a significant escalation of a growing feud between the U.S. and China over tech and telecommunications. The affected firms likely would include Huawei Technologies Co. and ZTE Corp. , two of the world's leading telecommunications equipment makers. They have found themselves increasingly in an international crossfire. Pentagon officials said this week that they are moving to halt the sale of phones made by the two companies on U.S. military bases around the world."

May 3 - Bloomberg: "Donald Trump's attempt to stem China's technological advance could already be backfiring. His counterpart, President Xi Jinping, has responded to tech-focused pressure from Washington, including a ban on a leading Chinese telecoms company buying American parts, by vowing to pour even more resources into research and achieve home-grown breakthroughs. He urged China last week to 'cast aside illusions' it could rely on others for help. As Trump's team continue talks in Beijing Friday armed with complaints about China's industrial strategy and trade surplus, the hosts said their technological advancement goal isn't on the table. The mix of Trump's tariff threats and the realization that the U.S. wants to stunt its Made in China 2025 development plan -- aimed at dominating industries from transport to robotics -- complicates prospects for detente."

April 30 - New York Times (Ana Swanson and Keith Bradsher): "It sounds like something out of a science fiction movie: In April, China is said to have tested an invisibility cloak that would allow ordinary fighter jets to suddenly vanish from radar screens. This advancement, which could prove to be a critical intelligence breakthrough, is one that American officials fear China may have gained in part from a Chinese researcher who roused suspicions while working on a similar technology at a Duke University laboratory in 2008. The researcher, who was investigated by the F.B.I. but never charged with a crime, ultimately returned to China, became a billionaire and opened a thriving research institute that worked on some projects related to those he studied at Duke. The Trump administration, concerned about China's growing technological prowess, is considering strict measures to block Chinese citizens from performing sensitive research at American universities and research institutes over fears they may be acquiring intellectual secrets… The White House is discussing whether to limit the access of Chinese citizens to the United States, including restricting certain types of visas available to them and greatly expanding rules pertaining to Chinese researchers who work on projects with military or intelligence value at American companies and universities."

May 1 - New York Times (Thomas L. Friedman): "With the arrival in Beijing this week of America's top trade negotiators, you might think that the U.S. and China are about to enter high-level talks to avoid a trade war and that this is a story for the business pages. Think again. This is one for the history books. Five days of meetings in Beijing with Chinese, U.S. and European government officials and business leaders made it crystal clear to me that what's going on right now is nothing less than a struggle to redefine the rules governing the economic and power relations of the world's oldest and newest superpowers - America and China. This is not a trade tiff. 'This is a defining moment for U.S.-China relations,' said Ruan Zongze, executive vice president of the Chinese Foreign Ministry's research institute. 'This is about a lot more than trade and tariffs. This is about the future.'"

May 2 - Financial Times (Yukon Huang): "A high-level US negotiating team will arrive in Beijing later this week to talk about trade and technology wars. These discussions are not really about trade. America has been running trade deficits for forty years, long before China even became a major trading nation. As many experts have noted, America's trade deficits are driven largely by its low savings rates and this has little to do with China. The team's reported request for China to cut its bilateral deficit with the US by $100bn is illogical conceptually and in its practicality. This economic war is more about protecting America's technological edge."

May 1 - Wall Street Journal (William Mauldin and Ben Eisen): "The Trump administration has set the stage for weeks of heightened tension between the U.S. and its trading partners as administration officials race to meet self-imposed deadlines to complete a series of high-stakes negotiations with China, Mexico, Canada and Europe. A U.S. trade delegation left… for China hoping to glean trade concessions from Beijing, while earlier in the day U.S. Trade Representative Robert Lighthizer confirmed, after months of wrangling with Mexico and Canada, a mid-May deadline for the renegotiation of the North American Free Trade Agreement. And the administration set a new June 1 deadline to come to an agreement with European officials on steel and aluminum tariffs. The developments position May as a crucial month for President Donald Trump to fulfill a campaign promise to rewrite the rules of trade, with the aim of reducing U.S. deficits and protecting American workers."

April 30 - Bloomberg (Saleha Mohsin and Randall Woods): "U.S. Treasury Secretary Steven Mnuchin said he's unconcerned about the bond market's ability to absorb rising government debt after his department said it borrowed a record amount for the first quarter. 'It's a very large, robust market -- it's the most liquid market in the world, and there is a lot of supply," he said… 'But I think the market can easily handle it.' Earlier on Monday the Treasury said net borrowing totaled $488 billion from January through March, a record for that period and about $47 billion more than it had previously estimated…"

April 29 - New York Times (Jack Ewing and Ana Swanson): "A few weeks ago, it felt as if a trade war pitting the United States against allies like Australia, Canada and the European Union was over before it even began. The Trump administration dispensed so many temporary exemptions to steel and aluminum tariffs that many countries figured the threats were just political theater. But with only days left before the exemptions expire and punitive tariffs take effect, it's dawning on foreign leaders that decades of warm relations with the United States carry little weight with a president dismissive of diplomatic norms and hostile toward the ground rules of international trade. What began as a way to protect American steel and aluminum jobs has since become a cudgel that the Trump administration is using to extract concessions in other areas, including car exports to Europe or negotiations to revise the North American Free Trade Agreement with Mexico and Canada."

May 1 - New York Times (Jack Ewing): "American allies did not bother to conceal their annoyance… with the Trump administration's last-minute decision to delay punitive aluminum and steel tariffs by a month, in their view leaving a sword of Damocles hanging over the global economy. In Europe, the reprieve was seen not as an act of conciliation or generosity but instead as another 30 days of precarious limbo that will disrupt supply networks and undermine what has been an unusually strong period of growth. European leaders, normally circumspect, are openly irritated that President Trump's protectionist assault is aimed at them despite decades of military alliance and shared values."

April 28 - Reuters (Amanda Becker and Lucia Mutikani): "U.S. President Donald Trump on Saturday threatened to shut down the federal government in September if Congress did not provide more funding to build a wall on the border with Mexico. 'That wall has started, we have 1.6 billion (dollars),' Trump said at a campaign rally… 'We come up again on September 28th and if we don't get border security we will have no choice, we will close down the country because we need border security.'"

April 28 - Reuters (Lesley Wroughton and Ori Lewis): "The United States is deeply concerned by Iran's 'destabilizing and malign activities', new Secretary of State Mike Pompeo said after meeting Israeli Prime Minister Benjamin Netanyahu… The former CIA director was speaking on a flying visit to the region, where he had earlier in the day met with Saudi King Salman in Riyadh and stressed the need for unity among Gulf allies as Washington aims to muster support for new sanctions against Iran to curb its missile program."

May 3 - Bloomberg (Shobhana Chandra): "The U.S.-China trade deficit has gotten even wider. President Donald Trump says that's the wrong direction, which is why he's dispatched a posse of high-level officials to Beijing in hopes of hammering out a better deal. The merchandise trade gap with China widened by 16% to $91.1 billion in the first three months of the year… China is America's biggest trading partner so far this year, compared with the first quarter of 2017, when Canada held the top spot."

Federal Reserve Watch:

May 2 - Financial Times (Sam Fleming): "The Federal Reserve signalled it is getting more confident in the inflation outlook as it prepares for further increases in short-term interest rates in the coming months. The US central bank said that price growth has moved close to its target and is likely to stay there in the medium term as it held short-term rates unchanged at 1.5 to 1.75%. Policymakers dropped language in previous post-meeting statements that said they were closely monitoring inflation. 'Inflation on a 12-month basis is expected to run near the Committee's symmetric 2% objective over the medium term,' officials said, adding that the risks to the outlook were 'roughly balanced'. The central bank on Wednesday said it still expected growth to continue at a moderate pace and labour market conditions to remain 'strong'."

U.S. Bubble Watch:

May 2 - CNBC (Diana Olick): "Home prices have been rising steadily since the recession, but the gains are suddenly accelerating as spring demand heats up in an already highly lean and competitive market. Prices surged 7% higher in March compared with a year ago, according to CoreLogic. That is the biggest gain since May 2014. All 50 states saw home values increase, and prices are now higher than they were at the peak of the last housing boom, although that does not account for inflation. 'High demand and limited supply have pushed home prices above where they were in early 2006,' said Frank Nothaft, chief economist at CoreLogic. 'New construction still lags historically normal levels, keeping upward pressure on prices.'"

April 30 - Bloomberg (Katia Dmitrieva): "U.S. consumer spending picked up in March while the Federal Reserve's preferred inflation gauge hit the central bank's 2% target for the first time in a year, reinforcing the outlook for further interest-rate hikes. Purchases rose 0.4% from the prior month, matching estimates, after being little changed in February… The price gauge linked to consumption rose 2% from a year earlier after 1.7% in February; excluding food and energy, which officials see as a better gauge of underlying trends, it was up 1.9%."

May 2 - CNN Money (Matt Egan): "Mysteriously low inflation padded Corporate America's bottom line for years. Now soaring commodity prices and steadily rising wages threaten to ding record profits. Major companies including Caterpillar (CAT), Halliburton and Harley-Davidson warned in recent weeks of rising costs for everything from steel and crude oil to trucking. President Trump's steel and aluminum tariffs are adding to the pricing headaches. America's factories have been grappling with inflation this year. Prices for manufacturers have increased for five straight months to the highest since 2011, according to the Institute for Supply Management. Labor shortages and transportation delays are even making it harder for some factories to deliver their products on time. 'We expect steel and other commodity costs to be a headwind all year,' Bradley Halverson, Caterpillar's chief financial officer, told analysts…"

April 30 - Wall Street Journal (David Harrison and Shayndi Raice): "Jobs at the paper mills and safe manufacturers on this stretch of the Great Miami River mostly dried up by the early 2000s, leaving behind closed factories and an abandoned downtown. Today, a spruced-up waterfront, loft apartments and help-wanted signs give the appearance of economic renewal. All that's missing are workers-and that has prompted a novel experiment. Relocate to Hamilton and the city promises $5,000 to help pay student loans. Pack up for Grant County, Ind., and claim $5,000 toward buying a home. Settle in North Platte, Neb., and the chamber of commerce will hold a ceremony in your honor to present an even bigger check. In this new phase of the U.S. economy, one marked by a shortage of workers rather than jobs, civic leaders in Hamilton and elsewhere are asking themselves: Why not pay people to move here?"

May 1 - Reuters (Max Bower): "The size of fund financing loans is increasing along with banks' exposure to the US$400bn market as managers raise ever-larger funds, but the wall of cash pouring into the sector is also encouraging smaller debt funds to leverage portfolios to maintain returns. Up to 50 banks are now competing to offer subscription lines of up to €2bn to support multi-billion dollar private equity funds, but fund financing specialists are also seeing rising demand for Net Asset Value (NAV) lines from smaller debt funds, including direct lenders, CLOs and real estate funds. Fund financing is one of the fastest growing areas of the syndicated loan market…"

May 2 - Financial Times (Joe Rennison and Ben McLannahan): "Lenders in America's $1.2tn car-loan market are extending terms for as long as eight years, meaning they face a greater risk of defaults and meagre recovery values. Banks and non-banks have entered the market in recent years, looking to increase exposure to a sector that was resilient during the financial crisis. But analysts fear that many have relaxed terms for borrowers too much, particularly in the subprime segment, where losses have historically been much greater. Also, monthly repayments for borrowers have hit an all-time high… The average term on new car loans stood at 67 months - or five and a half years - at the end of 2017, according to… the Federal Reserve Bank of New York, having steadily risen since 2008."

May 3 - Bloomberg (Suzanne Woolley): "American retirees are healthier and wealthier than ever. But wiser? A new report throws a little doubt on that notion. Money manager United Income analyzed data from sources, including the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the Census Bureau, the Internal Revenue Service, and the Centers for Disease Control, to examine the changing the lives of American retirees. One of every six retirees in the U.S. is a millionaire (if you include the value of their homes), according to the new report. Their average wealth has risen more than 100% since 1989, to $752,000, and the share of those who are millionaires has doubled."

April 30 - CNBC (Thomas Franck): "Goldman Sachs' David Solomon said the bank now employs thousands of engineers in its effort to stay on the cutting edge of financial technology. Keeping up in modern finance 'requires a lot of investment,' said Solomon, president and next in line to be CEO at the firm… Companies such as Goldman need to answer questions like 'how to hold on to your legacy businesses but create an environment that's conducive' to innovation, he added. The chief operating officer added that Goldman Sachs has hired about 9,000 engineers to help ensure that the bank keeps up with peers in the age of modern banking. For a company with just over 36,000 employees, the bank's influx of computer engineers now represents approximately 25% of its entire workforce."

April 30 - Reuters (Amanda Becker): "Republican U.S. Senator Marco Rubio… told the Economist magazine there is 'no evidence whatsoever' the law significantly helped American workers. 'There is still a lot of thinking on the right that if big corporations are happy, they're going to take the money they're saving and reinvest it in American workers,' Rubio said… 'In fact, they bought back shares, a few gave out bonuses; there's no evidence whatsoever that the money's been massively poured back into the American worker.'"

China Watch:

April 30 - New York Times (Keith Bradsher): "China will refuse to discuss President Trump's two toughest trade demands when American negotiators arrive in Beijing this week, people involved in Chinese policymaking say, potentially forcing Washington to escalate the dispute or back down. The Chinese government is publicly calling for flexibility on both sides. But senior Beijing officials do not plan to discuss the Trump administration's two biggest demands: a mandatory $100 billion cut in America's $375 billion annual trade deficit with China and curbs on Beijing's $300 billion plan to bankroll the country's industrial upgrade into advanced technologies such as artificial intelligence, semiconductors, electric cars and commercial aircraft. The reason: Beijing feels its economy has become big enough and resilient enough to stand up to the United States."

May 3 - Bloomberg (Saleha Mohsin and Andrew Mayeda): "Chinese finance officials had high expectations entering the first major meeting with new American counterparts last summer. President Donald Trump had feted Chinese President Xi Jinping at his Mar-a-Lago resort a few months earlier, suggesting the two nations would enjoy warmer ties than his campaign-trail attacks had implied. Those hopes were dashed by Trump's Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross nearly as soon as the July 19 talks began. Mnuchin told his visitors that he wouldn't sign a traditional joint statement to end the meeting. Nor would there be a joint news conference, a ritual moment relished by the Chinese. Ross, a longstanding China hawk, proceeded to lecture the foreign delegation. The meeting ended in confusion, accelerating a downward spiral in economic ties with China."

Central Bank Watch:

May 3 - Wall Street Journal (Ryan Dube and Julie Wernau): "Argentina's central bank unexpectedly raised interest rates for the third time in eight days Friday in an attempt to prop up its faltering currency, as the country finds itself once again battling a financial crisis. The central bank raised its main interest rate by 6.75 percentage points, following increases of 3 percentage points on Thursday and last Friday. The moves helped stabilize the peso Friday, but with a policy rate now at 40%, the prospects for economic growth are more uncertain."

Global Bubble Watch:

April 30 - Financial Times (Eric Platt and Arash Massoudi): "The feverish tide of takeover activity accelerated on Monday as companies confirmed more than $120bn of tie-ups, including transformational deals in the telecoms, energy and retail industries on both sides of the Atlantic. A total of a dozen transactions greater than $100m in value were announced over the 24-hour period, adding to the record clip of dealmaking in 2018, which now sits at $1.7tn, beating the pace of pre-financial crisis highs, according to Dealogic. Financial and legal advisers said the rapid rate of mergers and acquisitions is likely to continue, as companies feel emboldened by global economic growth, high stock prices and the continued availability of cheap borrowing."

April 30 - Financial Times (Robin Wigglesworth): "Investors are starting to see a pattern in the bond-equity relationship that could have profound and worrying implications for their portfolios. The rare combination of equity and bond prices falling at the same time has become more frequent of late. Since 2000 there have only been 57 trading days where the S&P 500 lost 0.5% or more and the 30-year US Treasury bond yield also rose 3 bps or more, according to Morgan Stanley. But there were a handful of such days in just the last month. While US stocks have regained their footing in April and inflation data out on Monday calmed the bond market, both the S&P 500 and Bloomberg Barclays Aggregate, a popular bond index, lost more than 1% in the first quarter - only the fourth time this has occurred in the past three decades."

April 29 - Financial Times (Amin Rajan): "'The paradox of liquidity is that it disappears as soon as one is in serious need of it,' says Pascal Blanqué in The Economic and Financial Order. He pulls no punches when reviewing the weakness of modern portfolio theory, the guiding star of investors. The theory holds that liquidity - the ability to execute sizeable securities transactions rapidly, at low cost and with limited effect on prices - will always be there. Reality shows otherwise. Because not all asset classes are readily exchangeable at a given time, Mr Blanqué, the chief investment officer of Amundi Asset Management, proposes a refinement: putting liquidity at the heart of asset allocation. His analysis is timely as markets have turned cyclical again. Concern centres on a shift in bond markets on both sides of the Atlantic."

May 3 - Bloomberg (Natalie Wong and Erik Hertzberg): "Toronto home sales are off to the worst start in nine years, as tougher rules for mortgage qualifications and rising interest rates continue to push buyers out of the market. Sales fell for four straight months on a seasonally adjusted basis, with the fewest transactions to start a year since the 2009 recession…"

Fixed Income Bubble Watch:

April 30 - Wall Street Journal (Daniel Kruger): "Foreign investors' appetite this year for U.S. debt hasn't grown at the same pace as the government's borrowing needs, which some analysts worry could push bond yields higher and eventually threaten to slow economic growth. Investors in a broad category known as 'indirect bidders,' which includes both mutual funds and foreign investors, have been winning the smallest percentage of the bonds they've bid for since 2011… The average percentage of the auctions won by this group fell for the first time since 2012, a decline some analysts attribute to both lower demand from investors outside the U.S. and their recent tendency to post less-aggressive bids. The behavior of these bidders is crucial for the ability of the U.S. to fund itself, at a time when the budget deficit is forecast to surpass $1 trillion by 2020 and remain above that level for the foreseeable future. Foreign investors currently hold about 43% of U.S. government debt, the lowest since November 2016…"

May 3 - Bloomberg (Yakob Peterseil and Cecile Gutscher): "The leveraged loan market just achieved something it hasn't been able to do since 2008 -- moved within $100 billion of the U.S. high-yield bond market. Fueled by demand from collateralized loan obligations and retail investors eager for protection against rising interest rates, the amount of leveraged loans outstanding has doubled since 2010 to more than $1 trillion, according to… Bank of America Merrill Lynch that cites S&P Global Market Intelligence data. There's around $1.1 trillion parked in high-yield bonds, which have increased by less than a quarter in the same period. 'While the syndicated loan market has been around since the turn of the century, its popularity has seen an unparalleled surge in this credit cycle,' BAML strategists Neha Khoda and Oleg Melentyev wrote…"

EM Bubble Watch:

May 2 - Reuters (Marc Jones): "The recent run up in the dollar and global borrowing costs has led to the first monthly outflow of foreign money from poorer 'emerging' economies since 2016, estimates compiled by the Institute of International Finance show. A new IIF report said the rising pressure from the dollar and bond yields has exhumed 'the ghost of tantrums past' and caused a $0.5 billion outflow when combining figures from EM stocks funds and bond funds."

May 3 - Bloomberg (Carolina Millan and Patrick Gillespie): "Argentina hiked interest rates for the second time in less than a week to stem the peso's sharp decline, a tactic that many investors say will again bring only temporary relief. The central bank raised its key interest rate to 33.25%... The peso has fallen more than 5% since Friday, when the bank raised borrowing costs by the same amount at a surprise meeting."

May 3 - Bloomberg (Eric Martin): "Mexico's debt rose to the riskiest in almost a year after leftist presidential front-runner Andres Manuel Lopez Obrador widened his lead ahead of the July 1 vote. The cost to protect Mexico's bonds against default for five years has jumped by more than a fifth since mid-January after Lopez Obrador opened up a lead of almost 20 points over his closest rival, Ricardo Anaya... The cost jumped to 1.21 percentage point on Thursday. A close at that level would be the highest since last May, when investors balked at President Donald Trump's threat to quit the North American Free Trade Agreement."

Geopolitical Watch:

May 3 - Reuters (Steve Holland and Arshad Mohammed): "U.S. President Donald Trump has all but decided to withdraw from the 2015 Iran nuclear accord by May 12 but exactly how he will do so remains unclear, two White House officials and a source familiar with the administration's internal debate said… There is a chance Trump might choose to keep the United States in the international pact under which Iran agreed to curb its nuclear program in return for sanctions relief, in part because of 'alliance maintenance' with France and to save face for French President Emmanuel Macron… A decision by Trump to end U.S. sanctions relief would all but sink the agreement and could trigger a backlash by Iran, which could resume its nuclear arms program or 'punish' U.S. allies in Syria, Iraq, Yemen and Lebanon, diplomats said."

May 3 - Reuters (Parisa Hafezi): "Iran's foreign minister said… U.S. demands to change its 2015 nuclear agreement with world powers were unacceptable as a deadline set by President Donald Trump for Europeans to 'fix' the deal loomed. Trump has warned that unless European allies rectify the 'terrible flaws' in the international accord by May 12, he will refuse to extend U.S. sanctions relief for the oil-producing Islamic Republic."

April 28 - Reuters (Polina Devitt): "Russia, Turkey and Iran need to help Syria's government clear its country of terrorists, Russian Foreign Minister Sergei Lavrov said… He was speaking at a meeting in Moscow with his counterparts from Turkey and Iran."

May 2 - CNBC (Amanda Macias): "China has quietly installed anti-ship cruise missiles and surface-to-air missile systems on three of its fortified outposts west of the Philippines in the South China Sea, a move that allows Beijing to further project its power in the hotly disputed waters… Intelligence assessments say the missile platforms were moved to the outposts in the Spratly Islands within the past 30 days, according to sources… The placement of the defensive weapons also comes on the heels of China's recent South China Sea installation of military jamming equipment, which disrupts communications and radar systems. By all accounts, the new coastal defense systems represent a significant addition to Beijing's military portfolio in one of the most contested regions in the world."