Friday, July 20, 2018

Weekly Commentary: Intimidate Nobody

Strangely perhaps, but late in the week my thoughts returned to James Carville's 1992 comment: "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."

Things have changed so profoundly since then, though I get no sense that many appreciate the momentous ramifications. It seems like ancient history - the bond market king of imposing discipline. Bonds maintained an intimidating watchful eye. No crazy stuff - from politicians, central bankers or corporate managements. The bond market of old would have little tolerance for $1.0 TN deficits, QE or a prolonged boom in BBB corporate debt issuance. Contemporary markets seem to have only a burgeoning desire to tolerate.

July 19 - Reuters (Trevor Hunnicutt and Saqib Iqbal Ahmed): "Donald Trump's comments that a strong dollar 'puts us at a disadvantage' caused an instant fall in the greenback on Thursday and marked another example of the U.S. president commenting directly - and sometimes contradictorily - on the country's currency. Talking directly about the dollar is a break with typical practice by U.S. presidents, who are wary of being seen as interfering directly with financial markets… 'There are certain comments most presidents wouldn't make,' said Michael O'Rourke, chief market strategist at JonesTrading. 'They'd defer monetary policy to the Fed and the dollar to the Treasury secretary. But Donald Trump is not most presidents.'"

July 19 - CNBC (Jeff Cox): "President Donald Trump's move to criticize the Federal Reserve is almost without precedent in a nation that places a high priority on the independence of monetary policy. Almost all of Trump's predecessors steered clear of Fed critiques in the interest of making sure that interest rates were set to whatever was best for the economy and not to boost anyone's political fortunes. The Trump administration, of course, has been anything but typical, and the Trump comments, if anything, were consistent with a president who cares little for convention and is willing to speak his mind on virtually anything. 'Somebody would say, 'Oh, maybe you shouldn't say that as president,' Trump said… 'I couldn't care less what they say, because my views haven't changed.'"

July 19 - Bloomberg (Christopher Condon, Craig Torres and Jeanna Smialek): "President Donald Trump criticized the Federal Reserve's interest-rate increases, breaking with more than two decades of White House tradition of avoiding comments on monetary policy out of respect for the independence of the U.S. central bank. 'I'm not thrilled' the Fed is raising borrowing costs and potentially slowing the economy, he said... 'I don't like all of this work that we're putting into the economy and then I see rates going up.' The dollar relinquished gains from earlier in the day and Treasury yields dropped following the president's remarks."

The 1992 bond market would have recoiled from even the notion of a U.S. President criticizing the Fed, talking down the dollar or kicking sand in the faces of both allies and major foreign holders of our debt. Considering the backdrop, heightened discussion of market complacency is understandable - and long overdue. Why do today's markets - bonds and otherwise - not respond as they would have traditionally? Why has the idea of markets actually imposing discipline turned into such a humorless joke? Discipline? Heck, there's not even a reaction.

From the Fed's Z.1, Total (Debt and Equity) Securities ended this year's first quarter at a record $89.0 TN, or 446% of GDP. For comparison, Total Securities began 1992 at $13.3 TN, or 215% of GDP - only to end the nineties at 360% of GDP ($34.8TN). The Greenspan Federal Reserve championed a historic shift to "activist" central bank management of "market"-based finance. Pure genius and indeed miraculous. The economy would massively expand the supply of Credit and equities - and no amount of new supply would slow the dramatic inflation in securities prices. Policymakers found themselves with this all-powerful new lever for wealth formulation.

This New Age market finance proved highly unstable. No worries; the Fed would loosen financial conditions with only the wink of a rate cut, as a captive audience of speculators eager to leverage debt securities fixated on every policy twitch. The GSEs were also there to provide increasingly speculative markets a New Age liquidity backstop, with their ballooning balance sheets a harbinger of what was to come from the Federal Reserve and global central bank community. If Fed rate cuts and massive GSE liquidity don't suffice, there's always government deficit spending and bailouts.

The Federal Reserve and Washington thoroughly abused market-based finance. Along the way, unsound "money" and deeply flawed policy doctrine ensured markets turned increasingly dysfunctional. Not only did they not provide a disciplining mechanism, they became a complicit tool to Washington's power grab. The Treasury market essentially became a bet on prospective monetary policy easing. And as Bubble Dynamics increasingly commanded stock and real estate prices, Treasury bonds essentially became the go-to instrument for betting on (or hedging against) bursting Bubbles. "Excess begets excess." This was especially the case after Dr. Bernanke trumpeted the benefits of "helicopter money" and the "government printing press".

Long before the financial crisis, I argued that "activist" central banking was on a very slippery slope. The evolution of New Age Finance took a giant leap with chairman Bernanke's implementation of zero rates and QE. The Fed's move to reflate the system through inflated market prices essentially ended the securities markets as mechanisms of self-adjustment and correction. Market discipline was dead. Today, financial markets now chiefly operate as a tool of government ("government finance quasi-Capitalism").

This complex story turned only more convoluted as the world moved aggressively to adopt U.S.-style policies and, not to be left hopelessly behind, market-based finance. Are the profound changes in monetary management and the rise of the "strongman" politician mere coincidence? I would imagine Greenspan and Bernanke quietly abhor the rise of populism. Do they feel any sense of responsibility?

With central bankers so celebrated for blatantly manipulating markets, of course politicians, dictators and the like would insist on getting a piece of the action. Inflating financial markets became essential to power - economic, political and geopolitical. And as finance became integral to economic growth and the global power play, why not use financial sanctions or the threat of financial repercussions to dictate nation-state behavior? And, over time, attaining financial wealth became an absolute prerequisite for wielding geopolitical power and influence.

The old military variety appears almost feeble standing next to the contemporary Financial Arms Race. And if you seek dominance - domestically, regionally and/or internationally - you had better get a tight rein on the securities markets - whether you're in Washington, Ankara, Moscow or Beijing. Beijing (and it's "national team") moved ahead in this regard, but it would appear Washington is today keen to play catch up. As market-based finance has commandeered the world, the centers of global power have moved to take command of the markets.

July 17 - Wall Street Journal (Nick Timiraos): "Federal Reserve Chairman Jerome Powell delivered an upbeat assessment of the economy and said it justified continued interest rate increases. But he opened the door to a potential policy shift and outlined risks if escalating trade tensions result in permanently higher tariffs. Mr. Powell has mostly sidestepped recent questions on trade policy because he says it is outside of the Fed's responsibilities. He offered words of caution Tuesday… 'In general, countries that have remained open to trade, that haven't erected barriers including tariffs, have grown faster. They've had higher incomes, higher productivity,' said Mr. Powell. 'And countries that have gone in a more protectionist direction have done worse.' Mr. Powell affirmed the Fed's plans to continue with gradual rate increases…"

I'd be curious to know if it was Chairman Powell's trade comments that provoked the first presidential criticism of the Federal Reserve since Richard Nixon. My hunch would be that the administration is crafting a strategy to direct blame at the Federal Reserve in the event the stock market begins to unravel. I cringed Thursday when Larry Kudlow called out Chinese President Xi as personally responsible for the lack of fruitful Chinese trade negotiations. Count me quite skeptical that this kind of pressure will prove an adept negotiating ploy.

This game of chicken is turning more dangerous, and perhaps the administration is preparing to scapegoat the Federal Reserve. I personally find the denigration of U.S. institutions most regrettable. The Fed down the road will have enough problems maintaining public trust and confidence. And with short rates not yet even above 2%, the thought that the Fed is already getting pulled into the muck creates a very uncomfortable feeling. My unease only worsened with the President's strong dollar "puts us at a disadvantage" comment.

Am I the only one that finds it ironic that Russia recently dumped most of its Treasury holdings? The administration seems to save its vitriol for countries with large holdings our of debt instruments. Call me old fashioned, but I suggest treating one's creditors with at least a modicum of respect. Ten-year Treasury yields jumped seven bps Friday, as the dollar was being pressured by the President's comments. If the administration has begun buckling in for a dicey game of chicken, it would be wishful thinking not to contemplate Treasuries and the dollar as possible collateral damage.

It was another extraordinary week. I'll leave it to others to get political. Looking at recent developments, one would see strong support for the view that the President is imploding. Or, one wouldn't see… Either way, he appears emboldened and certainly in no mood for backing down on anything. Markets just take it all in - and exhale calmly. Securities markets have grown fond of disruption (will tend to keep central bankers in check). The threat of a trade war is tolerable - so long as we don't see an actual smash up. Seems reasonable to assume they're not completely reckless, doesn't it? The President is, after all, keen for higher markets, as are leaders around the globe. Markets are keen to accommodate.

July 20 - CNBC (Tae Kim): "President Donald Trump said the stock market rally since his election victory gives him the opportunity to be more aggressive in his trade war with China and other countries. 'This is the time. You know the expression we're playing with the bank's money,' he told CNBC's Joe Kernen… The president has a big cushion. The S&P 500 is up 31% since Trump's win on Election Day, Nov. 8, 2016, through Thursday… Trump added the market would likely be much higher if he didn't escalate the trade issues with China and the rest of the world. 'We are being taking advantage of and I don't like it,' he said. 'I would have a higher stock market right now. … It could be 80% [since the election] if I didn't want to do this.'"

"Still dancing" - spoken infamously in the Summer of 2007. Summer 2018: "We're playing with the bank's money." "The bank's money" as in "the house's" money at a casino? Or "the bank's money" as in central bank "money"? Either way, it's apparently worth risking…

I'm fond of saying how crazy things get near the end of Bubbles. Convinced this is History's Greatest Bubble, I've been anticipating a pretty astonishing variety of "crazy." Watching this all unfold with increasing trepidation, I sense an important line has been crossed. It's time to retire "crazy" - find a replacement that conjures up something more foreboding - more disturbing. And markets, well, they're seemingly fine with it all; at times almost giddy. And that's the fundamental problem: Dysfunctional markets continue to promote incredibly risky policy behavior - the polar (bear) opposite of imposing discipline.

The central banks' "slippery slope" has led us to an ominous place. "Strongmen" now believe it's within their domain to dictate the markets, interest rates and currency levels. All the while, it's regressed into an unprecedented global Bubble replete with a Global Financial Arms Race. Markets trade as if they fully expect all governments to absolutely, at all cost, safeguard their respective financial wealth (i.e. Bubbles). Remember "the West will never allow a Russian collapse"? And "Washington will never allow a housing bust"? Global policymakers will never allow another major crisis. Well, let's see how this game of chicken between President Trump and President/General Secretary Xi plays out.

For the Week:

The S&P500 was little changed (up 4.8% y-t-d), while the Dow added 0.2% (up 1.4%). The Utilities declined 0.5% (down 0.9%). The Banks jumped 2.3% (up 0.2%), and the Broker/Dealers rose 1.9% (up 5.3%). The Transports gained 1.8% (up 1.2%). The S&P 400 Midcaps were little changed (up 5.1%), while the small cap Russell 2000 added 0.6% (up 10.5%). The Nasdaq100 slipped 0.3% (up 14.9%). The Semiconductors rose 1.4% (up 8.5%). The Biotechs were about unchanged (up 21.1%). With bullion down $9, the HUI gold index declined 0.9% (down 10.6%).

Three-month Treasury bill rates ended the week at 1.93%. Two-year government yields added a basis point to 2.59% (up 71bps y-t-d). Five-year T-note yields rose four bps to 2.77% (up 56bps). Ten-year Treasury yields gained seven bps to 2.89% (up 49bps). Long bond yields jumped nine bps to 3.03% (up 29bps). Benchmark Fannie Mae MBS yields rose five bps to 3.61% (up 62bps).

Greek 10-year yields increased two bps to 3.85% (down 23bps y-t-d). Ten-year Portuguese yields gained five bps to 1.78% (down 16bps). Italian 10-year yields rose four bps to 2.59% (up 57bps). Spain's 10-year yields gained five bps to 1.31% (down 25bps). German bund yields added three bps to 0.37% (down 6bps). French yields jumped six bps to 0.68% (down 11bps). The French to German 10-year bond spread widened three to 31 bps. U.K. 10-year gilt yields fell four bps to 1.23% (up 4bps). U.K.'s FTSE equities index added 0.2% (down 0.1%).

Japan's Nikkei 225 equities index increased 0.4% (down 0.3% y-t-d). Japanese 10-year "JGB" yields slipped one basis point to 0.035% (down 1bp). France's CAC40 declined 0.6% (up 1.6%). The German DAX equities index dipped 0.2% (down 2.8%). Spain's IBEX 35 equities index was little changed (down 3.2%). Italy's FTSE MIB index declined 0.4% (down 0.3%). EM equities were mixed. Brazil's Bovespa index rallied 2.6% (up 2.8%), and Mexico's Bolsa gained 1.0% (down 0.9%). South Korea's Kospi index declined 0.9% (down 7.2%). India’s Sensex equities index was about unchanged (up 7.2%). China’s Shanghai Exchange was little changed (down 14.5%). Turkey's Borsa Istanbul National 100 index recovered 4.7% (down 18.4%). Russia's MICEX equities index sank 4.2% (up 6.5%).

Investment-grade bond funds saw inflows of $2.021 billion, and junk bond funds had inflows of $260 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.52% (up 56bps y-o-y). Fifteen-year rates declined two bps to 4.00% (up 77bps). Five-year hybrid ARM rates added a basis point to 3.87% (up 66bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.54% (up 48bps).

Federal Reserve Credit last week increased $5.4bn to $4.256 TN. Over the past year, Fed Credit contracted $184bn, or 4.1%. Fed Credit inflated $1.445 TN, or 51%, over the past 298 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $2.2bn last week to $3.408 TN. "Custody holdings" were up $88.4bn y-o-y, or 2.7%.

M2 (narrow) "money" supply declined $11.8bn last week to $14.128 TN. "Narrow money" gained $526bn, or 3.9%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits rose $18.6bn, while Savings Deposits dropped $24.8bn. Small Time Deposits added $2.4bn. Retail Money Funds increased $1.0bn.

Total money market fund assets declined $5.0bn to $2.846 TN. Money Funds gained $229bn y-o-y, or 8.7%.

Total Commercial Paper dropped $12.6bn to $1.062 TN. CP gained $92bn y-o-y, or 9.5%.

Currency Watch:

The U.S. dollar index slipped 0.2% to 94.476 (up 2.6% y-t-d). For the week on the upside, the Brazilian real increased 2.2%, the Swiss franc 1.0%, the Japanese yen 0.9%, the New Zealand dollar 0.8%, the euro 0.3%, the Swedish krona 0.3%, the Singapore dollar 0.2% and the Canadian dollar 0.1%. For the week on the downside, the South African rand declined 1.0%, the South Korean won 0.9%, the Norwegian krone 0.8%, the Mexican peso 0.7%, the British pound 0.7% and the Australian dollar 0.1%. The Chinese renminbi fell 1.15% versus the dollar this week (down 3.88% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.2% (up 3.4% y-t-d). Spot Gold slipped 0.8% to $1,232 (down 5.5%). Silver lost 1.7% to $15.549 (down 9.3%). Crude dropped $2.75 to $68.26 (up 13%). Gasoline dropped 1.8% (up 15%), while Natural Gas increased 0.2% (down 7%). Copper declined another 0.7% (down 17%). Wheat rallied 3.8% (up 21%). Corn recovered 4.0% (up 5%).

Trump Administration Watch:

July 20 - CNBC (Jeff Cox): "President Donald Trump has indicated that he is willing to slap tariffs on every Chinese good imported to the U.S. should the need arise. 'I'm ready to go to 500,' the president told CNBC's Joe Kernen… The reference is to the dollar amount of Chinese imports the U.S. accepted in 2017 - $505.5 billion to be exact, compared with the $129.9 billion the U.S. exported to China… Thus far in the burgeoning trade war, the U.S. has slapped tariffs on just $34 billion of Chinese products, which China met with retaliatory duties… Trump's comments point to a willingness to push the envelope as far as the U.S. needs to get Chinese tariff concessions, along with a pledge to stop allegedly stealing American technology."

July 18 - CNBC (Michael Sheetz): "President Donald Trump's top economic advisor Larry Kudlow said China trade talks have stalled… 'I do not think President Xi has any intention of following through on any of the discussions we've made and I think the President is so dissatisfied with China on these so-called talks that he is keeping the pressure on and I support that,' Kudlow said. Kudlow pointed to the gap between U.S. and Chinese tariffs, saying 'our average tariff is about' 2.5% while 'China's average tariff is about 14%.' 'Here's my solution, and the president agrees with this: Lower your barriers,' Kudlow said. 'We will export like crazy.' Kudlow added that President XI of China himself is 'holding the game up' but that overall the country would like to make a deal."

July 18 - CNBC (Brian Schwartz): "Steve Bannon, former top advisor to Donald Trump, said Wednesday that the U.S. has been embroiled in a trade conflict with China for decades. 'We're at war with China,' Bannon said, praising Trump for taking on the Chinese. 'We're winning.' Bannon was speaking at CNBC's Delivering Alpha… His appearance comes on the heels of a provocative statement he gave to CNBC on Tuesday in which he said Trump knows he needs to 'unite the West against the rise of a totalitarian China.' For Bannon, the war against China can only end in one way and that's with the U.S. as victors. 'How it ends is in victory. Victory is when they give all full access to their markets,' he said. Bannon says his message is still heard within the White House."

July 19 - CNBC (Mike Calia): "Peter Navarro, one of President Donald Trump's top trade advisors, said… that China is in a 'zero-sum game' with the rest of the world when it comes to trade. Talking to CNBC's Joe Kernen…, he argued that the U.S. needs to protect its interests in rapidly developing technologies. 'This is our future,' Navarro said, citing artificial intelligence, robotics and high-tech industries - all of which are Chinese priorities for the next decade, as well. 'Unfortunately, it's a zero-sum game now between China and the rest of the world, and what we need to do as a country is to work with the rest of the world' to ensure prosperity and high stock markets, he said."

July 20 - CNBC (Tae Kim): "President Donald Trump criticized the Federal Reserve's monetary policy again. 'The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?' Trump said Friday on social media. Trump's latest comments come a day after his initial critical remarks about the Fed were revealed…"

July 20 - Wall Street Journal (Nick Timiraos and Harriet Torry): "President Donald Trump escalated his criticism of the Federal Reserve Friday, saying in a tweet that its efforts to raise short-term interest rates hurt the U.S. economic expansion, and he accused China and the European Union of manipulating their currencies to hurt the U.S. on trade. The tweets came shortly after CNBC broadcast an interview with Mr. Trump in which the president said he was prepared to raise U.S. tariffs on $500 billion worth of imports from China as part of his push to narrow U.S. trade deficits with China. In the same interview he said he wasn't happy about Fed rate increases. The president had previously been silent about Fed policy, in keeping with a long tradition…"

July 18 - Wall Street Journal (Chester Dawson and Joshua Zumbrun): "President Donald Trump stood by his threats to levy sweeping tariffs on automobile imports as a way to extract concessions from trading partners, despite opposition from the industry and discontent in Congress with the White House's proposal. Resistance to the tariffs is strong and growing. A coalition of foreign and domestic auto companies, along with auto dealers and auto-parts makers, released a letter on Wednesday urging Mr. Trump to refrain from the tariffs. A bipartisan group of 149 House members also urged the president not to move forward with the tariffs. Auto unions were among the few industry players offering qualified support for the tariffs."

July 18 - Reuters (Roberta Rampton and Lisa Lambert): "President Donald Trump said… the United States may hammer out a trade deal with Mexico, and then do a separate one with Canada later, sowing fresh doubts about the future of the North American Free Trade Agreement (NAFTA). 'We have had very good sessions with Mexico and with the new president of Mexico, who won overwhelmingly, and we're doing very well on our trade agreement,' Trump said…"

Federal Reserve Watch:

July 17 - Bloomberg (Craig Torres and Christopher Condon): "The Federal Open Market Committee, the Fed panel that sets interest rates, 'believes that -- for now -- the best way forward is to keep gradually raising the federal funds rate,' Powell said in prepared testimony before the Senate Banking Committee. 'We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses,' Powell said… 'On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective.'"

July 18 - Bloomberg (Katia Dmitrieva and Christopher Condon): "The U.S. economic expansion rolled along and labor markets tightened in June and early July, even as tariffs heightened concern among manufacturers and boosted some producer prices, a Federal Reserve survey showed. The central bank's Beige Book economic report… said 10 of the districts reported 'moderate or modest' growth. 'Manufacturers in all districts expressed concern about tariffs and in many districts reported higher prices and supply disruptions that they attributed to the new trade policies… All districts reported that labor markets were tight and many said that the inability to find workers constrained growth.'"

July 17 - Wall Street Journal (Michael S. Derby): "Federal Reserve Bank of Kansas City President Esther George said… more rate rises are needed, and she warned there may be signs of looming stress inside the financial system. 'Gradual further increases in our policy rate will be necessary to return policy to a neutral stance, although there is considerable uncertainty about exactly how far or fast we need to go,' Ms. George said…"

July 17 - Financial Times (Gillian Tett and Joe Rennison): "It would be a mistake to think that the unexpected flattening of the US yield curve signals a looming recession, Ben Bernanke, the former chairman of the Federal Reserve has warned… 'Historically the inversion of the yield curve has been a good [sign] of economic downturns [but] this time it may not,' because the normal market signals have been distorted by, 'regulatory changes and quantitative easing in other jurisdictions', he said, speaking with former treasury secretaries Hank Paulson and Timothy Geithner at an event to discuss lessons from the 2008 financial crisis. 'Everything we see in terms of the near-term outlook for the economy is quite strong,' he added."

U.S. Bubble Watch:

July 18 - Wall Street Journal (Nick Timiraos): "The Trump administration expects annual budget deficits to rise nearly $100 billion more than previously forecast in each of the next three years, pushing the federal deficit above $1 trillion starting next year. The revisions… reflect the cost of federal spending increases agreed to earlier this year and higher interest payments. The budget proposal released in February showed annual deficits totaling $7.1 trillion over 10 years. The latest revisions increase these cumulative deficits by $926 billion, to $8 trillion."

July 19 - Reuters (Lucia Mutikani): "The number of Americans filing for unemployment benefits dropped to a more than 48-1/2-year low last week as the labor market strengthens further, but trade tensions are casting a shadow over the economy's outlook."

July 17 - Wall Street Journal (Nigel Chiwaya and Lauren Pollock): "U.S. stock-trading volumes have tumbled this month, despite escalating trade tensions with China, a cooling global growth outlook and fears about the impact of rising interest rates. Activity peaked in February as the stock and bond markets swooned. But volumes since then have been relatively muted, with the number of shares changing hands across the New York Stock Exchange and Nasdaq falling on Friday to the lowest level for a full trading session this year."

July 16 - Wall Street Journal (Justin Lahart and Aaron Back): "Sure, Americans are spending more, but where are they getting the money? Retail sales were solid in June, rising 0.5% from a month earlier… More important, May's gain was revised to a strong 1.3% from 0.8%, with nearly every category of spending higher. The data added to evidence that the economy is growing rapidly. Following the sales report, economists at Barclays pushed their estimate of second-quarter gross-domestic-product growth to 5.2% from 5%. The personal saving rate-the share of after-tax income that doesn't get spent-was previously reported at 3.2% in May versus 3.8% a year earlier, and it seems likely it will be revised even lower."

July 18 - Reuters (Ivan Levingston): "Rising uncertainty in markets didn't stop the biggest U.S. banks from hauling in record revenue from investment banking. Wall Street's largest firms posted a surprise jump in advisory and underwriting fees that took their total to $8.54 billion. That, along with better-than-expected trading gains and the lowest level of bad loans in almost a decade, led the six biggest U.S. lenders to report second-quarter earnings that mostly surpassed estimates."

July 18 - Financial Times (Robin Wigglesworth): "Inflows into technology-focused funds have surpassed the $20bn mark for the year so far, despite rising concerns among some fund managers that the 'tech trade' is overextended. Global equity funds dedicated to technology stocks took in another $673m in the week ending July 18 - the 12th straight week of inflows, bringing the total for 2018 to $20.3bn, according to EPFR. That eclipses the $18.3bn raised in 2017 as a whole, which was a record for a calendar year."

July 19 - Bloomberg (Jeanna Smialek): "American businesses want to keep trucking along, but they're running into a persistent roadblock: A driver shortage amid high demand for freight services. The Federal Reserve's July Beige Book, a collection of anecdotes from across the Fed's regional bank districts, showed 25 mentions of 'truck' or 'trucking,' up from just 10 a year earlier. For months, businesses have been expressing anxiety on earnings calls about rising shipping costs and capacity constraints in the trucking industry as a hot economy stokes demand."

July 18 - Reuters (Lucia Mutikani): "U.S. homebuilding fell to a nine-month low in June and permits for future construction declined for a third straight month, dealing a blow to the housing market as it struggles with a dearth of properties available for sale. 'We're seeing pressure on both sides of the market, from increasingly expensive inputs on the supply side to prices that are charging ahead of wage growth on the demand side, and the result is that neither builders nor buyers can keep up,' said John Pataky, executive vice president at TIAA Bank…"

July 17 - Wall Street Journal (Keiko Morris): "Student housing, manufactured homes and industrial property were the top performing commercial real-estate sectors in the past 12 months, according to new data from Green Street Advisors… The Commercial Property Price Index was at 100 in August 2007, its pre-2008 crash high. It hit a low of 61.2 in May 2009. Since then, the index more than doubled as the improving economy pushed rents and occupancies higher and demand strengthened from yield-hungry investors who could borrow money easily due to low interest rates."

July 16 - Financial Times (Javier Espinoza): "Private equity groups are raising money at the fastest rate in more than a decade. Buyout executives are rushing to tap investor demand just as fears grow of a market correction. The average time PE funds, including those investing in infrastructure and real estate, are taking to raise money has fallen to 12 months - from almost two years in 2010 - the quickest pace since at least 2006, according to an analysis by Pitchbook, a data provider. But the figures also show there are fewer funds raising cash from investors in the US - from 328 in 2014 to 271 last year and 111 by the end of June this year."

China Watch:

July 18 - Bloomberg: "China accused American officials of making false accusations as it fired back against a claim Xi Jinping is blocking talks with the U.S. over the trade war between both nations. The rebuke from China's foreign ministry highlights the deepening impasse between the world's two biggest economies over allegations of unfair trade. 'In front of the whole world some U.S. officials are turning facts on their head and making false accusations,' Chinese foreign ministry spokeswoman Hua Chunying said… 'This is beyond the imagination of most people and is shocking.'"

July 19 - Bloomberg: "China's banks are being offered cash and given instructions to boost lending, adding to evidence of a shift toward greater official support for the economy. The banking and insurance regulator has asked financial institutions to 'earnestly implement' plans to help reduce financing costs for small firms, saying big lenders should 'take the lead'… Meanwhile, the People's Bank of China plans to use its Medium-term Lending Facility to encourage bank loans and investment in lower-rated corporate debt, according to China Business News… 'We have seen strong indications that Beijing could be shifting from mere policy-easing measures to a new round of stimulus to avert a credit squeeze and economic growth slowdown,' Lu Ting, chief China economist at Nomura… wrote…"

July 19 - Bloomberg: "Chinese companies are facing a reality check after years of ramping up debt. The deleveraging campaign that President Xi Jinping began in 2016 to curb risks in the nation's financial markets has cracked down on shadow financing and tightened rules on asset management. As a result, firms are having a tough time raising new funds to repay existing debt, leading to a record amount of bond defaults this year… Chinese companies have been piling on debt for at least a decade, ever since the leadership team under Xi's predecessor unleashed a record borrowing binge in response to the global financial crisis. Corporate debt to GDP ratio surged to a record 160% at the end of 2017 from 101% 10 years earlier. Xi and his lieutenants have vowed to deflate asset bubbles by, among other steps, reining in excessive corporate borrowing."

July 15 - Bloomberg: "China's economic expansion slowed in line with expectations… Gross domestic product increased 6.7% in the second quarter from a year earlier. That was the slowest pace since 2016 and down slightly from the 6.8% pace in the previous quarter. Investment growth and industrial output also slowed in June. Industrial output rose 6% last month from a year earlier, versus the forecast of 6.5%... Retail sales increased 9% in June, compared with the forecast 8.8%. Fixed-asset investment climbed 6% in the first six months, the same as forecast. The urban monthly surveyed unemployment rate stood at 4.8% at end-June."

July 16 - Reuters (Yawen Chen and Se Young Lee): "China's new home prices accelerated to their fastest pace in almost two years in June, with buyer demand in bigger cities resilient in the face of fresh curbs against speculation, a sign more restrictions may be needed. Average new home prices in China's 70 major cities rose 1% in June from a month earlier, higher than the previous month's reading of 0.7%... The monthly growth was the highest since October 2016 and marks 38 straight months of price gains."

July 17 - Financial Times (Henny Sender): "International Investors are too fixated on trade tension between the US and China. Instead, they would do well to take heed as Beijing continues a war against non-bank lenders and fintech companies that is tightening liquidity and spooking investors in mainland China. Money remains tight on the mainland even as financial stability has replaced deleveraging as the official order of the day. Speaking at the Lujiazui forum in Shanghai at the end of June, Guo Shuqing, the head of the China Banking and Insurance Regulatory Commission, warned that there would be more corporate defaults in China, adding that it would actually be a good thing as a sign of market discipline. There are already signs that companies are finding it harder to roll over debt and refinance loans, as interest rates rise and earnings slide. There have been 22 corporate defaults this year…"

July 17 - Financial Times (James Kynge): "A majority of Chinese consumers would be prepared to boycott US goods in the event of a trade war with Washington, a survey has found, signalling the high stakes in the escalating trade conflict… The survey found that 54% of 2,000 respondents in 300 cities across China would 'probably' or 'definitely' stop buying US-branded goods 'in the event of a trade war'. Just 13% said they would not. The remaining 33% said they were unsure or did not at present buy US branded goods…"

July 16 - Financial Times (Don Weinland): "Investors have warned of growing systemic risks in China's $1.09tn money market fund industry, as funds buy up bank credit despite a surge in bad debt this year. Comparably high yields and low risk at Chinese money market funds in recent years have made the industry a favourite among retail investors in the country. Assets under management have grown from Rmb600bn at the end of 2012 to an estimated Rmb7.3tn ($1.09TN) in March, making it the second-largest market in the world after the US."

July 20 - Bloomberg: "The shakeout in China's $192 billion peer-to-peer lending industry is accelerating at a rapid clip. At least 118 platforms have failed this month through early Friday, according to Shanghai-based Yingcan Group, whose tally for July stood at 57 just three days ago. The number of failures, which includes platforms that have halted operations or come under police investigation, is already the highest in two years with more than a week left in the month. China's clampdown on financial risk has weighed on P2P platforms for the past two years, but the pressure has intensified in recent months after the country's credit markets tightened and the banking regulator issued an unusual warning to savers that they should be prepared to lose all their money in high-yield products."

July 16 - New York Times (Li Yuan): "Wang Shidong and his two partners were still finishing graduate school two years ago when they raised $45 million in less than two months to start a venture capital fund. His wife, an elementary-school teacher in their home village, was 'terrified' that he got to manage so much money… Things are different this year. After three months and visits with more than 90 potential investors all over China, Mr. Wang and his partners raised only $3 million for a second fund. In June, they shut down the firm. Their fund, East Zhang Hangzhou Investment Management Ltd., was one of nearly 10,000 founded over the past three years amid a technology gold rush powered in part by China's government-guided economic growth engine. Now they have become the latest sign that China's engine is slowing down."

July 18 - Financial Times (Louise Lucas): "In China, a national identity card is required for almost everything, from buying a train ticket, to opening a bank account to using an internet cafĂ©. They are also now part of a pioneering experiment in the use of facial recognition technology. In a scheme that started last year in the southern city of Guangzhou, the Chinese government is allowing users of WeChat to link their ID cards to the ubiquitous social media app created by tech titan Tencent… The pilot project, due to be rolled out around the country, highlights one of the most intriguing aspects of China's headlong push into the world of artificial intelligence and other frontier technologies: the relationship between the Chinese Communist party and the country's ambitious and enormous tech companies."

EM Watch:

July 19 - Wall Street Journal (Manju Dalal and Mike Bird): "Asia's junk-bond market, anxious over China's debt problem, is showing cracks after years of rampant growth. Falling prices for below-investment-grade Asian bonds have sent yields sharply higher, leaving creditors nursing big paper losses and clouding the prospects for refinancing maturing debt… When 2018 began, interest rates on dollar-denominated Asian junk bonds broadly matched the global market, according to ICE Bank of America Merrill Lynch indexes. Now the yield on the Asian index-representing $138.1 billion in government and corporate debt-runs nearly 2 percentage points above the world average, having recently topped 9%."

Global Bubble Watch:

July 16 - Wall Street Journal (Julie Wernau): "Companies in the emerging world are on a dollar-debt diet. Issuance of dollar-denominated bonds from emerging-market companies is down 14% year-to-date versus the same period last year, according to Dealogic. Local currency debt is on the rise, up 4% year-to-date versus the same period last year, as corporates turn inward for financing amid widespread selling among foreign investors. The decline comes as rising U.S. interest rates are lifting borrowing costs for emerging markets… That's sparked big selloffs in the currencies of countries like Argentina, Hungary, Turkey, Poland and Chile, making it more difficult for them to pay back dollar debts. Corporate defaults in emerging markets have tripled so far in 2018, according to S&P Global Ratings… Dollar-debt issuances among corporates in the emerging world reached a record high in 2017, according to Dealogic. Hard currency debt in emerging markets peaked in the first quarter of 2018 at $5.5 trillion, with corporates accounting for 78% of that…"

July 17 - Reuters (Stephanie Nebehay): "The credibility and survival of the World Trade Organization (WTO) is under 'serious threat' as major economies put up protectionist barriers, independent experts warned… The report issued by the Bertelsmann Foundation comes amid a deepening trade dispute between China and the United States which has engulfed other major trading partners."

July 18 - Wall Street Journal (Asjylyn Loder): "The deluge of money flooding into and out of passive investments can have a very active effect on stock prices, new research says. The report, from the data and research arm of S&P Global Inc., a major provider of financial-market indexes, is the latest salvo in a long-running debate about the pressure index funds exert on the stocks and bonds they are meant to track. The resurgence of market turbulence this year intensified concerns that an exodus from index funds could trigger an avalanche of forced selling. Assets in passive funds that try to match the market rather than beat it have quintupled in the past decade to $6.9 trillion… Exchange-traded funds… have been linked in recent years to unusual price swings in oil, Japanese equities and high-yield debt."

July 17 - Wall Street Journal (Dan Gallagher): "By being so big and still growing so fast, the world's largest technology companies are in uncharted territory. But pulling that off has been expensive-and will be getting even more so. Combined annual revenue for the world's five largest companies by market value already tops the gross domestic product of 90% of the world's countries… But the cost to generate that growth is going upward as well-at a faster clip. Combined spending on research and development is expected to rise 24% in 2018, while capital expenditures for the five are expected to surge by 48% compared with last year. For Big Tech, these expenses reflect the rising costs of running their current businesses while also developing new ones to stay more competitive…"

July 15 - Financial Times (Chris Flood): "State Street suffered net outflows of more than $7bn from its exchange traded fund arm in June as fears about a global trade war blunted growth across the ETF industry in the first half of 2018… This has led to a marked slowdown in new business for asset managers globally. Worldwide inflows into ETFs (funds and products) dropped to $223bn in the first half of 2018, down more than a third on the same period last year… The sharp decline in growth comes after four consecutive years of record inflows into ETFs, which have attracted the bulk of new money in the global asset management industry."

July 16 - Bloomberg (Andrew Mayeda): "Escalating trade tensions are threatening to derail a global upswing that's already losing momentum amid weaker-than-expected growth in Europe and Japan as financial markets seem complacent to the mounting risks, the International Monetary Fund warned. The IMF kept its global forecast unchanged Monday in the latest update to its Global Economic Outlook. The world economy will grow 3.9% this year and next… The pace this year would be the fastest since 2011."

July 19 - Bloomberg (Brian Louis): "Wildfires, hurricanes, tornadoes, hail storms, Nor'easters and mudslides. A string of disasters has pummeled the biggest U.S. insurers over the past year, and the second quarter was no exception. Allstate Corp. estimated its pretax catastrophe losses at $906 million for the period, the most in a year, and Travelers Cos. reported its sixth-straight quarter in which such costs rose above $300 million. The series of tragic weather events 'exceeded our historical experience and our expectations,' Travelers Chief Executive Officer Alan Schnitzer said…, after reciting a list of catastrophes that struck the U.S. 'We haven't seen a string like that in the last decade.'"

Europe Watch:

July 16 - Reuters: "Germany's foreign minister said on Monday Europe could not rely on Donald Trump and needed to close ranks after the U.S. president called the European Union a 'foe' with regard to trade. 'We can no longer completely rely on the White House,' Heiko Maas told the Funke newspaper group. 'To maintain our partnership with the USA we must readjust it. The first clear consequence can only be that we need to align ourselves even more closely in Europe.' He added: 'Europe must not let itself be divided however sharp the verbal attacks and absurd the tweets may be.'"

July 17 - New York Times (Jack Ewing): "President Trump is inciting a trade war, undermining NATO and painting Europe as a foe. It's no wonder, then, that the European Union is looking elsewhere for friends. On Tuesday in Tokyo, it signed its largest trade deal ever, a pact with Japan that will slash customs duties on products like European wine and cheese, while gradually reducing tariffs on cars. The agreement will cover a quarter of the global economy - by some measures the largest free-trade area in the world - and is the latest in a string of efforts either concluded or in the works with countries like Australia, Vietnam and even China. The deal with Japan, and the others being negotiated, point to a more assertive Europe, one that is looking past the frosty ties with the United States…"

July 20 - Bloomberg (John Ainger): "Italian bonds and stocks fell on concern that Finance Minister Giovanni Tria, whose appointment brought a relative calm to the nation's markets, may be forced to step down. Short-end Italian bonds led the declines after La Repubblica reported that the country's populist leaders were united in battle against Tria over nominations for the leadership of state lender CDP. Five Star Movement leader Luigi Di Maio and League chief Matteo Salvini were said to have gone so far as to 'threaten unofficially to use the weapon of seeking Giovanni Tria's resignation.'"

July 18 - Reuters (Foo Yun Chee): "European antitrust regulators fined Google a record 4.34 billion euro ($5bn)… and ordered it to stop using its popular Android mobile operating system to block rivals, a ruling which the U.S. tech company said it would appeal."

Japan Watch:

July 19 - Bloomberg (Connor Cislo and Emi Nobuhiro): "If the U.S. imposes tariffs on cars it can expect a stronger response from Japan than when it slapped levies on steel and aluminum shipments. That's the message from an interview… with Japanese Trade Minister Hiroshige Seko. Japan and the European Union are already working together to address President Donald Trump's protectionist trade policies, and need to cooperate even more closely on threatened auto tariffs, Seko said in Tokyo."

Fixed Income Bubble Watch:

July 19 - New York Times (Matt Phillips): "In the world of finance, there is one number that arguably matters more than any other. You can find it in the small print on adjustable-rate mortgages and private student loans, it is the basis for enormous corporate loans, and it underpins nearly $200 trillion of derivatives contracts. But it is on the way out, and Wall Street has not worked out how to replace it. The number in question is called Libor, which is short for the London interbank offered rate. Published daily, Libor is an interest rate benchmark, or the basis for many other interest rates. If you have heard of it, that might be because it was at the center of a market-manipulation scandal that resulted in jail time for some traders and billions of dollars in fines for many banks."

Leveraged Speculator Watch:

July 19 - Bloomberg (Melissa Karsh): "Investors pulled about $3 billion from hedge funds in the second quarter, the first quarterly outflow since early 2017. Macro hedge funds led net outflows in the period, with $2.8 billion leaving the strategy, according to… Hedge Fund Research Inc. The outflows were offset by equity hedge funds, which saw inflows of $2.4 billion."

July 19 - Financial Times (Robin Wigglesworth): "In November 2016, Vincent Deluard, a strategist at brokerage INTL FCStone, constructed a basket of stocks that failed to qualify for any of the five popular 'smart beta' exchange traded funds, vehicles that aim to beat the market over time by tilting towards a specific investment factor… Yet Mr Deluard's 'dumb beta' portfolio of 207 stocks has narrowly outperformed the smart beta ETF basket since then… Several popular investment factors have suffered a stinker this year, hammering the performance of many funds that surf them. But this is part of a broader, dismal picture for the 'quantitative' investment industry. Quant equity funds have lost 1% this year, while quant macro funds have fallen 4.2%...Given the soaring investor interest in algorithm-powered investment strategies in recent years, this is unquestionably disappointing."