Friday, August 24, 2018

Weekly Commentary: Powell, Greenspan and Whatever it Takes

Fed Chairman Powell is in a tough spot, one made no easier now that he's on the receiving end of disapproving presidential tweets. The global Bubble has begun to falter, which only exacerbates divergences between various markets and economies. The U.S. is booming, while China struggles and EM economies now stumble into the dark downside of an epic cycle. The U.S. economy and markets beckon for tighter financial conditions, while higher U.S. rates pose significant danger to fragile global markets already confronting a major tightening of financial conditions.

Powell played it safe in Jackson Hole. I imagine he'd have preferred to sit this one out. As such, his presentation was too heavy on rationalization and justification. The FOMC is trapped in Greenspan-style "baby steps," and it is curious that the Fed Chairman would choose to praise Alan Greenspan for his nineties policy approach:

"Under Chairman Greenspan's leadership, the committee converged on a risk-management strategy that can be distilled into a simple request: 'Let's wait one more meeting; if there are clearer signs of inflation, we will commence tightening.' Meeting after meeting, the committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined."

If the Greenspan Fed had in fact adopted a "risk management strategy," it was a failed attempt. It's too easy these days to disregard the highly disruptive boom and bust cycles that have been prominent in U.S. and global markets (and economies) over recent decades. And here we are today, the Federal Reserve still accommodating Bubble Dynamics because of its failure to respond to financial developments and contain excess back in the nineties.

The bursting of the nineties "tech" and corporate debt Bubbles spurred the Greenspan Fed to slash rates to 1% by June 2003. At that time, double-digit mortgage Credit was already fueling self-reinforcing home price inflation. Short rates were then "baby stepped" upward until June 2004 and remained below 4% all the way into late-2005. The lesson not learned from that episode was that small, gradual telegraphed rate increases are ineffective in the face of an inflating Bubble. Such a policy course ensured a progressive loosening of financial conditions when tightening was clearly required from a risk management perspective.

Accommodating the nineties Bubble basically ensured the Greenspan Fed would later adopt even more aggressive post-Bubble accommodation. Indeed, the Fed specifically targeted mortgage finance as the source of reflationary Credit. This greatly compounded the fateful error from earlier in the Greenspan era: nurturing market-based Credit and financial speculation in response to banking system impairment following the collapse of late-eighties ("decade of greed") Bubbles.

The financial world changed momentously during the nineties. Out with the staid bank loan, in with dynamic market-based finance: Asset-backed securities, MBS, GSE Credit, money-market funds, derivatives and Wall Street "structured finance". In with repurchase agreements ("repos") and essentially unlimited cheap market-based securities Credit. In short, out with reserve and capital requirements that traditionally restrained Credit growth; in with unfettered asset-based finance the likes the world had never experienced.

From Powell's opening paragraph: "Fifteen years ago, during the period now referred to as the Great Moderation, the topic of this symposium was 'Adapting to a Changing Economy.' In opening the proceedings, then-Chairman Alan Greenspan famously declared that 'uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.'"

The Fed and global central banks never successfully adapted to the new paradigm they themselves had championed. Unfettered market-based and speculative finance beckoned for more stringent monetary management. Yet the Fed, fretting the instability and associated uncertainties, erred on the side of easy "money." And, despite it all, this error compounds to this day.

The "great moderation" period saw powerful inflation dynamics take hold throughout the securities and asset markets, at home and abroad. This new finance had a strong inflationary bias that created a propensity for inflating powerful Bubbles. Asset inflation and Bubbles emerged as the most consequential form of inflation, yet central banks were too content to take Credit for the so-called "great moderation" in consumer price inflation (that clearly had much more to do with profound changes in finance, technologies, globalization and the nature of economic output - rather than effective monetary management).

As the nineties unfolded, policy focused on the "real economy sphere" - the New Paradigm, electrifying technological innovation and the so-called "productivity miracle" - along with various measures omnipotent central bankers would employ to support such obviously constructive advancements. Policymakers should have instead been fixated on momentous "financial sphere" developments, and how the associated structural loosening of financial conditions warranted a counterbalance of tighter monetary policy and a more stringent regulatory regime.

Adopting the view that the New Paradigm favored a more permissive approach to monetary management, Greenspan got it dreadfully wrong. In the end, perhaps the most consequential analysis in the history of central banking was deeply flawed. The "maestro's" asymmetrical monetary policy approach was instrumental in bolstering inflationary psychology throughout the markets, with the Greenspan "put" repeatedly resuscitating vulnerable Bubbles. All the while, huge infrastructure was being erected to support the worldwide enterprise of financial speculation, and the Greenspan Fed gave an enthusiastic thumbs up.

Ironically, the free-market ideologue sowed the seeds for unsound markets increasingly incapable of self-correction and adjustment. Asset inflation: the most dangerous form of inflation specifically because there are powerful constituencies beholden to it and essentially none in opposition.

In the sixties, Alan Greenspan was said to have explained to his fellow Ayn Rand colleagues that the Great Depression was the result of the Federal Reserve repeatedly placing "coins in the fuse box." Ironically, Greenspan initiated a process that has seen the Fed and global central bankers resorting to coins to circumvent market forces for going on three decades - culminating with "whatever it takes" directing the one-way, free-flow of "money" into the securities markets.

I try to cut Chairman Powell some slack. I understand he's trapped in gradualism and flawed central bank doctrine, more generally. But I was hoping he would over time initiate a retreat from the Greenspan/Bernanke/Yellen market "put." Powell: "I am confident that the FOMC would resolutely 'do whatever it takes' should inflation expectations drift materially up or down or should crisis again threaten." Why is this language necessary on a day with the S&P500 and Nasdaq trading to all-time highs?

Bond yields (and the dollar) dropped on the release of Powell's speech. The market essentially presumes zero probability of the Fed ever aggressively tightening policy under any circumstance. Aggressive cuts and market support, well that's an altogether different story. I would argue that the prospect for a return of aggressive QE and zero rates is fundamental to ongoing extraordinarily low market yields along with the flat yield curve. Greenspan's "asymmetrical" globally on steroids.

Low yields clearly support price Bubbles in equities, real estate and asset markets more generally. And the longer Bubbles inflate the more confident speculators become that future "activist" policy measures will bolster bond and fixed-income prices. The comprehensive "whatever it takes" central banking "put" provides unprecedented Bubble support - and, I would argue, amounts to yet another highly destabilizing and dangerous policy error. The egregious masquerading as conventional mainstream. To be sure, the problem with discretionary monetary policy is that one mistake invariably leads to bigger - and inevitably much bigger - mistakes.

"Changing Market Structures and Implications for Monetary Policy" is the theme for the 2018 Jackson Hole symposium. Pro-Bubble central bank monetary policy doctrine has for much too long been instrumental in fostering unstable market structures. Chairman Powell missed an opportunity to dial back the "whatever it takes" central bank approach to backstopping unsound securities markets. It's been a full decade since the crisis, for heaven's sake.

The nineties were on my mind throughout the week. An odd coincidence that Powell's Jackson Hole presentation harkened back to Alan Greenspan and the nineties. In what is being called "the longest bull market in history," the duration of the current bull run this week surpassed the previous record, October 1990 through March 2000.

One person's record bull is another's greatest Bubble. GSE Credit and corporate debt were key sources of fuel for the nineties Bubble. And each bursting Bubble is to be reflated by a more formidable Bubble inflation. The post-nineties reflation was led by booming mortgage finance, much of it of the (money-like) "AAA" GSE and Wall Street structured finance ilk. The 2008 collapse of this much grander Bubble provoked unprecedented reflationary measures. This historic reflation went to the very foundation of global finance, sovereign debt and central bank Credit. It has corrupted the very heart of contemporary "money."

The problem with "money" is that it enjoys insatiable demand, creating the potential for extraordinarily dangerous Bubbles. "Whatever it takes" has deeply perverted market structure across the globe. Myriad risks have been inflated and totally distorted. Today's market view holds that central bankers will not tolerate a crisis. Perceived risk remains extraordinarily low, as illustrated by Friday's closing VIX price of 11.99. But true underlying risk is sky high and rising - market, economic, policy, political and geopolitical. Market structure and global imbalances, among others, are accidents in the making.

When this Bubble bursts, there will be no new source of "money" sufficient to fuel the next round of reflation. It's sovereign debt and central bank Credit for the duration. In the meantime, loose monetary policy will continue to accommodate an unprecedented expansion of government borrowings. As EM is now recognizing, the market mechanism for disciplining profligate borrowers doesn't function until it's too late. While the global Bubble falters at the periphery (Brazilian real down 4.7% this week!), boom-time excesses run unabated at the core.

Powell: "Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses."

A risk management approach would be working to extricate extreme central bank "activism" from the markets. Financial markets should stand on their own; the market mechanism needs to be operable. But rates, once again, remain too accommodative. Moreover, this is no time to be reminiscing about Alan Greenspan or trumpeting "whatever it takes." A missed opportunity Chairman Powell - and an important one at that.

For the Week:

The S&P500 gained 0.9% (up 7.5% y-t-d), and the Dow added 0.5% (up 4.3%). The Utilities declined 1.6% (up 1.1%). The Banks added 0.2% (up 3.3%), and the Broker/Dealers increased 0.2% (up 3.7%). The Transports gained 0.5% (up 6.3%). The S&P 400 Midcaps jumped 1.2% (up 7.1%), and the small cap Russell 2000 surged 1.9% (up 12.4%). The Nasdaq100 advanced 1.5% (up 17.0%). The Semiconductors rallied 4.0% (up 9.8%). The Biotechs rose 1.4% (up 21.9%). With bullion gaining $21, the HUI gold index recovered 3.1% (down 23.7%).

Three-month Treasury bill rates ended the week at 2.05%. Two-year government yields rose four bps to 2.62% (up 74bps y-t-d). Five-year T-note yields slipped three bps to 2.71% (up 51bps). Ten-year Treasury yields declined five bps to 2.81% (up 40bps). Long bond yields dropped six bps to 2.96% (up 22bps). Benchmark Fannie Mae MBS yields declined three bps to 3.57% (up 57bps).

Greek 10-year yields dropped 15 bps to 4.16% (up 9bps y-t-d). Ten-year Portuguese yields declined three bps to 1.82% (down 12bps). Italian 10-year yields gained three bps to 3.15% (up 114bps). Spain's 10-year yields declined six bps to 1.39% (down 17bps). German bund yields rose four bps to 0.35% (down 8bps). French yields gained two bps to 0.69% (down 10bps). The French to German 10-year bond spread narrowed two to 34 bps. U.K. 10-year gilt yields rose four bps to 1.28% (up 9bps). U.K.'s FTSE equities index increased 0.3% (down 1.4%).

Japan's Nikkei 225 equities index rallied 1.5% (down 0.7% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.10% (up 5bps). France's CAC40 jumped 1.6% (up 2.3%). The German DAX equities index rose 1.5% (down 4.0%). Spain's IBEX 35 equities index jumped 1.8% (down 4.5%). Italy's FTSE MIB index rallied 1.6% (down 5.1%). EM equities were mostly higher. Brazil's Bovespa index increased 0.3% (down 0.2%), and Mexico's Bolsa jumped 2.8% (up 0.6%). South Korea's Kospi index ralllied 2.1% (down 7.1%). India’s Sensex equities index gained 0.8% (up 12.3%). China’s Shanghai Exchange recovered 2.3% (down 17.5%). Turkey's Borsa Istanbul National 100 index gained 1.6% (down 21.8%). Russia's MICEX equities index rose 1.1% (up 8.1%).

Investment-grade bond funds saw inflows of $2.678 billion, and junk bond funds had inflows of $344 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped two bps to 4.51% (up 65bps y-o-y). Fifteen-year rates declined three bps to 3.98% (up 82bps). Five-year hybrid ARM rates dropped five bps to 3.82% (up 65bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.52% (up 49bps).

Federal Reserve Credit last week dropped $27.2bn to $4.190 TN. Over the past year, Fed Credit contracted $228bn, or 4.8%. Fed Credit inflated $1.379 TN, or 49%, over the past 303 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.5bn last week to $3.430 TN. "Custody holdings" were up $100bn y-o-y, or 3.0%.

M2 (narrow) "money" supply jumped $54.5bn last week to $14.203 TN. "Narrow money" gained $559bn, or 4.1%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits rose $39.2bn, and Savings Deposits gained $5.5bn. Small Time Deposits added $1.7bn. Retail Money Funds gained $5.5bn.

Total money market fund assets added $3.7bn to $2.864 TN. Money Funds gained $129bn y-o-y, or 4.7%.

Total Commercial Paper jumped $11.9bn to $1.067 TN. CP gained $68bn y-o-y, or 6.9%.

Currency Watch:

The U.S. dollar index fell 1.0% to 95.163 (up 3.3% y-t-d). For the week on the upside, the South African rand increased 3.5%, the euro 1.6%, the Norwegian krone 1.5%, the Swiss franc 1.3%, the British pound 0.8%, the South Korean won 0.5%, the New Zealand dollar 0.5%, the Singapore dollar 0.4%, the Canadian dollar 0.3%, the Swedish krona 0.3%, and the Australian dollar 0.2%. For the week on the downside, the Brazilian real declined 4.7%, the Japanese yen 0.7% and the Mexican peso 0.1%. The Chinese renminbi rallied 0.98% versus the dollar this week (down 4.46% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.2% (up 3.8% y-t-d). Spot Gold jumped 1.8% to $1,206 (down 7.5%). Silver gained 0.8% to $14.895 (down 13.1%). Crude recovered $2.60 to $68.52 (up 13%). Gasoline surged 5.0% (up 16%), while Natural Gas declined 1.1% (down 1%). Copper rallied 2.5% (down 18%). Wheat sank 7.5% (up 26%). Corn fell 4.2% (up 3%).

Trump Administration Watch:

August 23 - CNBC (John Melloy): "President Donald Trump said the stock market would plummet if he were to be removed from office. 'If I ever got impeached, I think the market would crash. I think everybody would be very poor,' the president said in a Fox News interview… 'Because without this thinking, you would see numbers that you wouldn't believe in reverse,' Trump said, pointing at his head. 'I got rid of regulations. The tax cut was a tremendous thing.' The stock market has had little reaction so far to Trump's renewed legal troubles this week with two former advisors now guilty of criminal acts and one implicating him directly."

August 22 - Bloomberg (Toluse Olorunnipa): "President Donald Trump said China's economy is no longer on a swift pace to be larger than the U.S., a comment likely to stoke concerns in Beijing that his administration wants to contain the Asian nation's rise. Speaking at a rally in West Virginia…, Trump noted that China's market was 'way down' even while saying he has 'tremendous respect' for the country. He added that various trade talks would take time… 'When I came we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time,' Trump said. 'That's not going to happen anymore. 'I want to be their friend,' he added. 'But we had to do things that we had to do.'"

August 21 - CNBC (Mike Calia): "President Donald Trump said Tuesday night that the U.S. would slap a 25% tariff on cars coming from the European Union. The president's statement came hours after The Wall Street Journal reported that Commerce Secretary Wilbur Ross said he had postponed an August timeline to publish a report on auto tariffs. 'We're going to put a 25% tax on every car that comes into the United States from the European Union,' Trump said at a campaign rally…"

August 22 - Reuters (Michael Martina and David Lawder): "The United States and China escalated their acrimonious trade war on Thursday, implementing punitive 25% tariffs on $16 billion worth of each other's goods, even as mid-level officials from both sides resumed talks in Washington. The world's two largest economies have now slapped tit-for-tat tariffs on a combined $100 billion of products since early July, with more in the pipeline, adding to risks to global economic growth. China's Commerce Ministry said Washington was 'remaining obstinate'…"

August 21 - Bloomberg (Kathleen Hunter): "Donald Trump has never shied away from expressing an opinion about people who've been part of his inner circle - criticizing Attorney General Jeff Sessions, while offering qualified support to his former campaign chairman, Paul Manafort. Now Federal Reserve Chairman Jerome Powell is in his sights. Like Sessions and others, the fact that Trump hired Powell isn't insulating him from public fault-finding. Nor is a long-held practice of presidents considering the central bank above the fray. Trump on Friday lamented Powell's job performance to wealthy Republicans at a Hamptons fundraiser, telling them that he'd expected a cheap-money chairman and was disappointed with the Fed's interest-rate increases."

August 20 - Reuters (Jeff Mason and Steve Holland): "U.S. President Donald Trump said on Monday he was 'not thrilled' with the Federal Reserve under his own appointee, Chairman Jerome Powell, for raising interest rates and said the U.S. central bank should do more to help him to boost the economy… American presidents have rarely criticized the Fed in recent decades because its independence has been seen as important for economic stability. Trump has departed from this past practice and said he would not shy from future criticism should the Fed keep lifting rates."

August 21 - Reuters (Bozorgmehr Sharafedin and Dan Williams): "Iran warned… it would hit U.S. and Israeli targets if it were attacked by the United States after President Donald Trump's security adviser said Washington would exert maximum pressure on Tehran going beyond economic sanctions… U.S. National Security Adviser John Bolton told Reuters the return of U.S. sanctions was having a strong effect on Iran's economy and popular opinion. 'There should not be any doubt that the United States wants this resolved peacefully, but we are fully prepared for any contingency that Iran creates,' Bolton said…"

Federal Reserve Watch:

August 22 - CNBC (Jeff Cox): "Federal Reserve Chairman Jerome Powell is resolved to keep the central bank independent despite ongoing criticism from President Donald Trump, according to Sen. Tim Scott. Powell 'reinforced the fact that their goal is to [address] unemployment, our economy, and that is their only objective,' the South Carolina Republican told The Washington Post. Scott said he asked Powell 'specifically about the independence of the Fed' and was assured it would not be compromised. The report comes as Trump has stepped up his critiques of Fed monetary policy."

August 22 - Reuters (Jason Lange): "Federal Reserve officials discussed raising interest rates soon to counter excessive economic strength but also examined how global trade disputes could batter businesses and households, minutes of the U.S. central bank's last policy meeting showed… 'Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation,' according to the minutes."

August 23 - Reuters (Ann Saphir): "The Federal Reserve should raise U.S. interest rates further this year and probably next year as well, despite President Donald Trump's displeasure at tighter policy, Kansas City Federal Reserve Bank President Esther George said… 'Based on what I see today, I think two more rate hikes could be appropriate,' along with several more next year as the Fed aims to move interest rates to a neutral setting of about 3%, George told Bloomberg TV."

August 22 - Reuters (Ann Saphir): "With the U.S. economy at full employment and inflation at the Federal Reserve's 2% goal, the U.S. central bank should press on with its plan for gradual interest rate hikes at least for the next nine to 12 months, a policymaker said… Only once short-term rates reach a 'neutral' level where they are neither stimulating nor braking the economy should the central bank potentially stop raising rates and figure out what to do next, Dallas Fed President Robert Kaplan said in an essay."

August 20 - Wall Street Journal (Nick Timiraos): "Federal Reserve officials left many important questions unanswered when they decided last year to begin shrinking the central bank's $4.5 trillion portfolio of mostly mortgage and Treasury securities. They are now beginning an internal debate to answer one of the most important of those questions: What exactly will this portfolio look like when they are done shrinking it? The Fed has decided it wants to hold primarily Treasury securities rather than mortgage securities once it is done. But it hasn't worked out what the mix of those Treasury securities will look like. Will it be mostly very short-term bills? Or will it include a hefty share of longer-term bonds? The difference is critical."

August 22 - Bloomberg (Liz Capo McCormick): "Donald Trump may want to watch what he wishes for. If Federal Reserve boss Jerome Powell does what the president wants, American assets could lose their appeal as a global haven. Strategists warn that more than just the central bank's credibility would be hurt if the Fed were to put the brakes on monetary policy tightening. Trump would get his desire for a weaker dollar, but rising inflation expectations would dent the perceived safety of U.S. assets and eventually boost longer-term financing costs for the government and American consumers. On the other hand, global liquidity and growth could receive a lift, at least initially, and emerging markets that have been maligned by Trump could benefit. While few expect the Fed to acquiesce to the pressure, Trump's policy jawboning has been persistent enough for investors to start factoring its effects into their trading calculus."

U.S. Bubble Watch:

August 19 - Financial Times (Andrew Edgecliffe-Johnson): "Blue-chip US companies are confident they can pass on rising costs to their customers and protect record profit margins as inflationary pressure is offset by buoyant business and consumer sentiment. Cost inflation has been a recurring theme of US second-quarter earnings announcements from companies in industries as diverse as retail and industrial equipment. Executives have pointed to a combination of higher freight and labour costs with increased prices for raw materials, some of which has been driven by the Trump administration's tariffs on imported steel and aluminium, and by other countries' retaliatory tariffs on US goods. "

August 22 - Bloomberg Businessweek (Steve Matthews, Matthew Boesler and Jeanna Smialek): "America's labor market is a jigsaw puzzle whose pieces don't quite fit together. Unemployment has plummeted to 3.9%, the lowest level since the early 2000s. Earnings calls are replete with chief executive officers bemoaning employee shortages. Small businesses are also feeling the pinch. In a July survey by the National Federation of Independent Business, 37% of owners reported at least one vacancy, and more than half said there were few or no qualified candidates for the job."

August 22 - Reuters (Jason Lange): "U.S. home sales fell for a fourth straight month in July as a shortage of properties on the market pushed up house prices, likely sidelining some potential buyers. …Existing home sales fell 0.7% to a seasonally adjusted annual rate of 5.34 million units last month… Existing home sales, which make up about 90% of U.S. home sales, fell 1.5% from a year ago in July. Sales have been stymied by an acute shortages of homes on the market for several months, although… inventory showed signs of stabilizing last month. There were 1.92 million homes on the market in July, unchanged from a year earlier. It was the first month in three years in which inventory did not fall on a year-on-year basis…"¬

August 23 - Reuters: "Sales of new U.S. single-family homes unexpectedly fell in July to a nine-month low in a sign the housing market was cooling and could give less support to the overall economy. …New home sales decreased 1.7% to a seasonally adjusted annual rate of 627,000 units last month, the lowest level since October 2017. June's sales pace was revised up to 638,000 units from the previously reported 631,000 units."

August 22 - Bloomberg (Katia Dmitrieva): "Scarce supplies of U.S. homes for sale are propping up prices and pushing some buyers to the sidelines, leading to fewer transactions -- but not for those with big budgets. Deals for the most expensive properties jumped to a record share of the U.S. total in the last two months… Existing single-family homes with a price tag of at least $1 million made up 3.7% of all transactions in July and 3.8% in June, the highest in data starting in 2013. Sales in the category rose 16.2% in July from a year earlier, faster than the five cheaper price groups…"

August 23 - Wall Street Journal (Heather Gillers): "Chicago tried to lower its pension deficit with budget cuts, benefit reductions and tax increases. Now the third-largest U.S. city is considering a controversial new fix: more debt. Finance Chief Carole Brown said she would decide in the next week whether to endorse a $10 billion taxable bond offering that would be used to help close Chicago's $28 billion pension funding gap. If the proposal is accepted by Mayor Rahm Emanuel and approved by the City Council, it would become the biggest pension obligation bond ever issued by a U.S. city. The bet is that Chicago can earn more investing the proceeds than it paid to issue the new debt, setting an example for other large governments wrestling with sizable pension deficits."

August 18 - Wall Street Journal (Ryan Dezember): "Freddie Mac is expanding its role in financing one of Wall Street's postcrisis success stories: the booming business of investing in single-family rental houses. The government-backed mortgage-financing firm this month guaranteed a $509 million loan that helped Front Yard Residential Corp. , an acquirer of rental homes, buy a rival. It also backed a $7.8 million loan that enabled Promise Homes Co., a midsize Atlanta landlord, to buy 117 houses in Southeastern working-class neighborhoods. The… company already is the country's largest backer of apartment loans. The deals announced this month are part of its push to finance more rental-home purchases as investors are eager to put money to work in rental markets…"

August 23 - Bloomberg (John Gittelsohn): "Fewer stock pickers are beating their indexes, with value managers among the worst performers. Just 36% of actively managed stock funds topped indexes in the year through June, down from 43% in 2017, according to a Morningstar Inc. report. Pickers of value stocks saw their success rates drop as much as 27 percentage points compared with the prior year."

August 20 - Wall Street Journal (Josh Barbanel): "Sales of the most expensive New York apartments fell sharply in the first half of the year, but many sellers have adjusted by cutting asking prices to make deals, brokers said. 'This is simply a market that is adjusting itself to chronic overpricing relative to buyers' perception of value,' said Kirk Henckels, a broker and vice chairman of Stribling & Associates… Overall sales of apartments priced at $5 million or more fell by 31% during the first half of the year, compared with the same period in 2017, according to a luxury market report by Stribling."

China Watch:

August 19 - Reuters (Tom Daly and Muyu Xu): "China's banking and insurance regulator has asked financial institutions to give more support to infrastructure investment, importers and exporters, and creditworthy companies experiencing temporary problems."

August 20 - CNBC (Evelyn Cheng): "China's hot real estate market remains a challenge for authorities trying to maintain stable economic growth in the face of trade tensions with the U.S. In fact, property is the country's biggest risk in the next 12 months, much greater than the trade war, according to Larry Hu, head of greater China economics at Macquarie. He said he is especially watching whether the real estate market in lower-tier, or smaller, cities will see a downturn in prices or housing starts after recent sharp increases. Real estate investment accounts for about two-thirds of Chinese household assets, according to wealth manager Noah Holdings. The property market also plays a significant role in local government revenues, bank loans and corporate investment."

August 21 - Reuters (Elias Glenn and Stella Qiu): "China's central bank said… that it will not resort to strong stimulus to support the slowing economy but will keep liquidity reasonably ample and offer more help to companies which are having trouble obtaining financing. Officials also reiterated that China will not use the yuan as a weapon to deal with trade frictions, a day after U.S. President Donald Trump told Reuters Beijing was manipulating its currency in response to U.S tariffs on imported Chinese goods."

August 19 - Financial Times (Edward White): "The contraction of shadow banking activity in China is expected to moderate in the second half of the year, in a further sign of policy easing as Beijing seeks to boost economic growth. Shadow banking, which refers to higher-risk non-bank financial products and lending, has been decreasing in China amid tighter regulation aimed at curbing runaway debt levels. According to Moody's, shadow banking assets as a share of China's gross domestic product dropped to 73% at the end of June, from 79% 12 months earlier and a peak of 87% in late 2016. That reflected a fall of Rmb2.7tn in the first six months of the year, to Rmb62.9tn. However, regulators are now 'taking a more gradualist approach in response to slower domestic credit growth and a more challenging external environment', said Moody's Asia Pacific managing director Michael Taylor."

August 23 - Bloomberg (Lianting Tu, Narae Kim and Carrie Hong): "China's town builders may have gotten some respite after the government took steps to ensure adequate funding for them, but their weaker peers may still suffer, analysts say. That's because these local government financing vehicles now need to repay the pile of debt that was sold over the last few years to support economic growth. Domestic maturities average 340 billion yuan ($49bn) each quarter through to the April-June period of 2019… That's 40% higher than the average in 2017. The maturities will peak in the first quarter next year, the data show."

August 23 - Reuters (Hallie Gu and Josephine Mason): "China's grain imports plunged in July after Beijing imposed hefty tariffs on shipments from the United States as part of its trade conflict and as rising international prices curbed buying… China brought in 220,000 tonnes of sorghum in July, down 62.5% from 588,364 tonnes a year ago…"

August 20 - Reuters (Chen Aizhu and Florence Tan): "Chinese buyers of Iranian oil are starting to shift their cargoes to vessels owned by National Iranian Tanker Co. for nearly all of their imports to keep supply flowing amid the re-imposition of economic sanctions by the United States. The shift demonstrates that China, Iran's biggest oil customer, wants to keep buying Iranian crude despite the sanctions, which were put back after the United States withdrew in May from a 2015 agreement to halt Iran's nuclear program. The United States is trying to halt Iranian oil exports…"

August 21 - Wall Street Journal (Shen Hong): "Chinese banks are taking on new risks as they scramble to lure savers, turning a previously obscure line of business into a $1 trillion industry. The explosion marks the latest effort by lenders to circumvent Beijing's campaign against financial risk, and to head off rising competition from the lightly regulated shadow-banking sector and upstart high-tech rivals… It also reflects an old struggle in a country where banks can't freely set their own interest rates. Structured deposits offer higher returns than regular savings accounts and are tied to bets on assets from currencies to gold. They have been around for years, but the sums outstanding have soared recently. In July they stood at a record 9.71 trillion yuan ($1.42 trillion), up 52% in a year… Banks aren't competing only with one another for funds, which they need to extend more loans; savers also are switching to more attractive options, such as high-yielding wealth-management products, and to money-market funds…"

August 20 - Financial Times (Sherry Fei Ju and Hudson Lockett): "Monthly rent in Beijing has risen by about a quarter in 2018, according to a research report that has stoked criticism from many of the millions of tenants who live in China's capital. A research report issued by property search engine Zhuge showed rental costs up 25.6% year on year at the end of July, with some areas seeing a rise of nearly 40%, says the report."

EM Watch:

August 20 - Reuters (Ilaria Polleschi and Gavin Jones): "President Tayyip Erdogan appealed to Turks' religious and patriotic feelings ahead of a major Muslim holiday on Monday, promising they would not be brought 'to their knees' by an economic crisis that has battered the lira currency."

August 22 - Reuters (Anthony Boadle and Brad Brooks): "The popularity of imprisoned former Brazilian president Luiz Inacio Lula da Silva's has grown strongly despite his corruption conviction, an election poll on Wednesday showed, a result that rattled markets and raised the possibility that Lula's running mate could ultimately become the next occupant of the country's presidential palace. Investors reacted unfavorably to the poll…"

August 21 - Bloomberg (Eduardo Thomson and Fabiola Zerpa): "Venezuelan President Nicolas Maduro carried out one of the greatest currency devaluations in history over the weekend -- a 95% plunge that will test the capacity of an already beleaguered population to stomach even more pain. One likely outcome is that inflation, which already was forecast to reach 1 million percent this year, will get fresh fuel from the measures. Prices are currently rising at an annualized rate of 108,000%, according to Bloomberg's Café con Leche index. A massive exodus of Venezuelans fleeing the crisis to neighboring countries will likely increase and with it, tensions and restrictions like the ones seen over the past few days."

August 19 - PTI News: "India's current account deficit is expected to widen to 2.8% of the gross domestic product in this financial year, according to a Nomura report. With rising oil prices, depreciating rupee and outflow of portfolio investments, there are concerns that the current account deficit might rise in the current fiscal, it said. 'Overall, we expect the current account deficit to widen to 2.8% of GDP in financial year 2019 from 1.9% in financial year 2018,' the Japanese financial services major said. 'The balance of payment funding to remain a challenge in the ongoing financial year as the basic balance of payment is negative and portfolio flows also remain negative,' it said."

Global Bubble Watch:

August 21 - Bloomberg (Carolynn Look): "Jens Weidmann, a top candidate to lead the European Central Bank next year, said policy makers must be willing to act if needed to prevent financial imbalances. While arguing that monetary officials should have only one mandate -- price stability -- and generally let national authorities in the euro area handle tasks such as reining in asset prices, he acknowledged that those macroprudential tools are still poorly understood. 'Should monetary policy remain completely passive if financial imbalances were to build up? In my view, this would be a mistake,' Weidmann, who heads Germany's Bundesbank, said at a conference… 'As we have witnessed, financial crises have a considerable impact on macroeconomic outcomes and, ultimately, central banks' ability to guarantee price stability.'"

August 20 - Bloomberg (Nisha Gopalan): "Doors are slamming shut in the developed world not just to Chinese investment in technology but potentially to a wave of acquisitions with a tech element, as diverse as smart heaters and robotic lawnmowers. President Donald Trump last week signed an update to legislation for the Committee on Foreign Investment in the U.S. that broadened the inter-agency vetting committee group's scope to encompass even minority and passive investments in three areas: critical technology, infrastructure, and businesses that handle personal data. This tightening of the rules has been happening for some time, but it's now explicit… China's challenges aren't limited to a more protectionist U.S., or to similar stances in Australia and Canada. Europe, the favored destination of late, is getting a lot tougher."

August 21 - Bloomberg (Shuli Ren): "China's willingness to extend credit has transformed it into the best friend of emerging markets. But there are reasons to believe the flow of easy money may suddenly dry up - just as distressed economies from Argentina and Venezuela to Turkey and Pakistan look to Beijing for a lifeline that would be less onerous than an International Monetary Fund bailout. In the last decade, China made more than $62 billion of loans to Venezuela, where hyperinflation prompted the government to devalue the bolivar by 95% at the weekend… China has also signed currency swaps with 32 counterparties since 2009. While mainly aimed at facilitating trade in the yuan, these arrangements also served to boost foreign-exchange reserves at troubled partners."

August 20 - New York Times (Hannah Beech): "In the world's most vital maritime chokepoint, through which much of Asian trade passes, a Chinese power company is investing in a deepwater port large enough to host an aircraft carrier. Another state-owned Chinese company is revamping a harbor along the fiercely contested South China Sea. Nearby, a rail network mostly financed by a Chinese government bank is being built to speed Chinese goods along a new Silk Road. And a Chinese developer is creating four artificial islands that could become home to nearly three-quarters of a million people… Each of these projects is being built in Malaysia, a Southeast Asian democracy at the heart of China's effort to gain global influence. But where Malaysia once led the pack in courting Chinese investment, it is now on the front edge of a new phenomenon: a pushback against Beijing as nations fear becoming overly indebted for projects that are neither viable nor necessary - except in their strategic value to China or use in propping up friendly strongmen."

August 22 - Wall Street Journal (Suryatapa Bhattacharya and Saumya Vaishampayan): "Turkey's financial trouble has claimed some distant victims: small investors in Japan, who have dabbled in emerging-market assets to escape superlow domestic returns. The upset illustrates the appetite for risk among an army of punters often dubbed 'Mrs. Watanabe,' after the stereotypical Japanese homemaker. Last year, Deutsche Bank researchers said these buyers had fueled a rally in bitcoin and made up half of global foreign-exchange trading using borrowed money. Individuals have snapped up Uridashi, high-yielding bonds marketed to households that are frequently denominated in foreign currencies like the lira, Brazilian real and South African rand."

Central Bank Watch:

August 23 - Bloomberg (Carolynn Look and Birgit Jennen): "The European Central Bank's expansive monetary-policy stance is out of touch with the euro area's economic upturn, making it all the more important for the institution to begin changing course, according to Governing Council member Jens Weidmann. Weidmann, who is also the president of Germany's Bundesbank, argued in Berlin on Thursday that with inflation heading toward the ECB's goal, it's 'time to begin exiting the very expansionary monetary policy and the non-standard measures, especially considering their possible side effects.'"

August 23 - Financial Times (Claire Jones): "The European Central Bank has become increasingly confident that it can wean the eurozone off some of its crisis-era support without endangering the region's economy. According to minutes… from the July 26 meeting of the bank's governing council, the eurozone was set to grow at a 'solid pace', with the risks to the outlook 'broadly balanced' despite the threat of a global trade war. The ECB remains on track to end its €2.5tn quantitative easing programme by the end of 2018."

August 19 - Reuters (Frank Siebelt and Andrea Shalal): "The European Central Bank is on course towards a less expansive monetary policy, and the projected inflation rate of 1.7% for 2020 is in line with its medium term stability goals, the head of Germany's Bundesbank said… 'After the latest decisions, a normalisation of monetary policy is foreseeable, Weidmann told the newspaper, adding that interest rates would likely edge up as a result."

Europe Watch:

August 23 - Financial Times (Claire Jones): "The race for the top job for the European Central Bank looks wide open. Jens Weidmann, president of Germany's Bundesbank, is considered by many to be favourite. But reports that Angela Merkel would prefer a German at the top of the Commission, rather than push for him to succeed Mario Draghi in November 2019, would appear to dent his chances substantially. Handelsblatt… reported… that the German chancellor was prepared to sacrifice Mr Weidmann in order to ensure someone from Berlin will succeed Jean-Claude Juncker as Commission President after the European Parliamentary elections next June."

August 20 - Reuters (Daren Butler): "Italian Deputy Prime Minister Matteo Salvini said… the government will stand up any against market attacks or debt downgrades that may come its way… 'This government wants to help Italians and I think it isn't liked by many ...representatives of finance and technocracy that wanted to exploit Italy and obtain cheaply the last companies left in this country,' Salvini told reporters… 'They won't manage it and so we will resist against (rises in bond) spreads, speculation, (debt) downgrades and attacks.'"

August 19 - Financial Times (Claire Jones): "A prominent member of Italy's coalition government has called for the European Central Bank to hold fire on withdrawing its crisis-era stimulus measures, in a sign of Rome's concern that the country's borrowing costs will shoot up after the bank ends purchases of government debt this year. Giancarlo Giorgetti, the Italian cabinet undersecretary, indicated that he wanted the ECB to continue buying fresh bonds - including Italian government debt - under its quantitative easing programme should markets launch a speculative attack on Italy. '[Bank president Mario] Draghi and the ECB have played a very important role over the years, and I hope that the quantitative easing programme will continue,' said Mr Giorgetti…"

August 19 - Euromoney (Jeremy Weltman): "With a viscous cycle of rising trade protectionism and inflation slowing economic growth, a gross debt burden totalling 130% of GDP and a populist-left government planning to increase budget spending, a recipe is forming for financial distress, especially if factoring in [Italy's] fragile banking system. Bank stability is one of five economic risk factors included in Euromoney's country risk survey, and it remains a concern for Europe generally, according to analysts, despite stronger economies, and tighter capitalization and liquidity requirements since the global financial crisis: Italy remains the biggest concern of all, from a systemic risk perspective, with a high level of non-performing loans and rating decisions due over the next few weeks."

Japan Watch:

August 17 - Reuters (Tomo Uetake): "Japan's central bank appears to be growing more comfortable with larger declines in the country's stock prices, a sign it may have begun in the share market what analysts describe as 'stealth tapering' of its massive monetary stimulus. The Bank of Japan refrained from buying stocks on two days this week when the Topix index was down more than 0.4% by midday, a departure from a previous pattern in which it bought exchange-traded funds (ETFs) on days when the index fell more than 0.2%. The BOJ already has a precedent of stealth tapering in its bond buying and similar moves in its stock market operations come after it said last month it would make its asset purchases 'more flexible'."

Fixed Income Bubble Watch:

August 22 - Bloomberg (Liz Capo McCormick): "Moody's… last week published an in-depth look at U.S. leveraged loans. And it seems the more the analysts dug in, the more alarmed they became. Yes, the nearly $1.4 trillion market can take comfort in a low 3.4% default rate that Moody's projects will only get lower, most likely dropping to 2.2% over the next year. But that's largely where the good news ends. In its report, the credit-rating firm is emphatic that when the credit cycle takes a turn for the worse, leveraged-loan investors will be in for a rude awakening, even compared with the financial crisis. The loans have become popular in recent years because they carry floating interest rates, which better shield buyers from losses as the Federal Reserve tightens monetary policy. They've also been promoted as a safer alternative to high-yield bonds because they're usually backed by collateral. It's all led to an explosion in popularity, particularly through collateralized loan obligations…"

August 22 - Wall Street Journal (Daniel Kruger): "A robust August rally in the Treasury market is foiling one of Wall Street's most popular trades, a bet that solid U.S. economic growth, rising inflation and eroding government finances will compel investors around the world to sell bonds. A record number of hedge funds and other speculative investors are betting on lower U.S. government bond prices and higher yields… The bets on lower prices, or 'shorts' in traders' parlance, however, have been squeezed by this month's price rise in Treasurys, which has pushed the yield on the 10-year note to 2.83%."

August 23 - Reuters: "The U.S. Treasury Department on Thursday sold $14 billion of five-year Treasury Inflation Protected Securities at a yield of 0.724%, the highest yield since October 2009…"

Leveraged Speculation Watch:

August 21 - Bloomberg (Dani Burger): "Choppy markets around the world are hurting one of Wall Street's hottest quantitative trades, belying its status as a port in the storm. The commodity train wreck, emerging-market turmoil and shifts in government bonds have created a wave of turbulence for risk-parity funds, a strategy first popularized by Ray Dalio that weighs exposures according to volatility measures. Two-month realized price swings for the investing style hit the highest in more than two years last week, before easing. And it's the second-worst performing portfolio tracked by JPMorgan… so far this year.... Beloved by math whizzes and increasingly adopted by the mom-and-pop crowd, the leveraged strategy has boomed in the post-crisis era driven by diversification-minded algorithms, and faith in the hedging power of bonds."

August 22 - Bloomberg (Yakob Peterseil): "Call it the volatility trade, squared. As macro shocks hit global markets, a complex strategy that bets the gap between stock winners and losers will grow is spreading across hedge funds, real-money managers and even private banks. The so-called dispersion trades offer a way to play a slew of market themes, everything from splits among tech stocks to the prey and predators of the M&A boom and the trade-war fallout. Known as a short-correlation bet, it pairs a long and short position in equity options to profit from diverging prices. Those betting economic shifts will separate the wheat from the chaff with renewed vigor can earn steady returns… The exotic investing strategy typically only falters when tracked shares move together."

August 20 - Financial Times (Adam Samson): "Hedge funds have boosted their bullish bets on the buck to the highest level since late 2015, according to newly released data that highlight the upbeat sentiment of investors towards the US dollar. Net long positions among leveraged funds rose $1.8bn to $30.8bn in the week to August 14, according to a BMO Capital Markets analysis of data from the US Commodity Futures Trading Commission."

Geopolitical Watch:

August 21 - Newsweek (Tom O'Connor): "Germany's top diplomat has argued that Europe should create a new system for financial transactions that would exclude the U.S., which has abandoned a nuclear deal with Iran and threatened sanctions against those who stood by it. Germany has joined European allies France and U.K. along with Russia and China in backing the 2015 nuclear accord that President Donald Trump withdrew from in May, triggering new U.S. sanctions on nations doing business with Iran. In an op-ed… by Germany's Handelsblatt business newspaper, German Foreign Minister Heiko Maas hailed the strong post-World War II ties traditionally enjoyed by Washington and Berlin, but he warned, 'Where the U.S. crosses red lines, we as Europeans must counterbalance-as hard as that is.' 'It is therefore essential that we strengthen European autonomy by setting up payment channels independent of the U.S.A., creating a European Monetary Fund and building an independent Swift system,' Maas wrote."

August 17 - Reuters (Ben Blanchard): "China's Defence Ministry has lodged a complaint with the United States about a Pentagon report that said China's military was likely training for strikes against the United States and its allies, saying it was 'pure guesswork'. The assessment, at a time of heightened U.S.-China tensions over trade, was contained in an annual report that highlighted China's efforts to increase its global influence, with defense spending that the Pentagon estimated exceeded $190 billion in 2017."