Friday, September 7, 2018

Weekly Commentary: Approaching the 10-year Anniversary

We're rapidly Approaching the 10-year Anniversary of the 2008 financial crisis. Exactly one decade ago to the day (September 7, 2008), Fannie Mae and Freddie Mac were placed into government receivership. And for at least a decade, there has been nothing more than talk of reforming the government-sponsored-enterprises.

It's worth noting that total GSE (MBS and debt) Securities ended Q3 2008 at $8.070 TN, having about doubled from year 2000. The government agencies were integral to the mortgage finance Bubble - fundamental to liquidity excess, pricing distortions (finance and housing), general financial market misperceptions and the misallocation of resources. GSE Securities did contract post-crisis, reaching a low of $7.544 TN during Q1 2012. Since then, with crisis memories fading and new priorities appearing, GSE Securities expanded $1.341 TN to a record $8.874 TN. Of that growth, $970 billion has come during the past three years, as financial markets boomed and the economy gathered momentum. A lesson not learned.

Scores of lessons from the crisis went unheeded. The Financial Times' Gillian Tett was the star journalist from the mortgage finance Bubble period. I read with keen interest her piece this week, "Five Surprising Outcomes of the Financial Crisis - We Learnt the Dangers Posed by 'Too Big to Fail' Banks but Now They Are Even bigger."

Tett's article is worthy of extended excerpts: "What are these surprises? Start with the issue of debt. Ten years ago, investors and financial institutions re-learnt the hard way that excess leverage can be dangerous. So it seemed natural to think that debt would decline, as chastened lenders and borrowers ran scared. Not so. The American mortgage market did experience deleveraging. So did the bank and hedge fund sectors. But overall global debt has surged: last year it was 217% of gross domestic product, nearly 40 percentage points higher - not lower - than 2007."

A second surprise is the size of banks. The knock-on effects of the Lehman bankruptcy made clear the dangers posed by 'too big to fail' financial institutions with extreme concentrations of market power and risks. Unsurprisingly, there were calls to break them up. The big beasts are even bigger: at the last count America's top five banks controlled 47% of banking assets, compared with 44% in 2007, and the top 1% of mutual funds have 45% of assets."

A third counter-intuitive development is the relative power of American finance. In 2008, the crisis seemed to be a 'made in America' saga: US subprime mortgages and Wall Street financial engineering were at the root of the meltdown. So it seemed natural to presume that American finance might be subsequently humbled. Not so. American investment banks today eclipse their European rivals in almost every sense… and the financial centres of New York and Chicago continue to swell…"

Then there is the issue of non-bank financial companies. A decade ago, investors discovered the world of 'shadow banks', when they learnt that a vast hidden ecosystem of opaque investment vehicles posed systemic risks. Regulators pledged to clamp down. So did the shadow banks shrink? Not quite: a conservative definition of the shadow bank sector suggests that it is now $45tn in size, controlling 13% of the world's financial assets, up from $28tn in 2010. A regulatory clampdown on the banks has only pushed more activity to the shadows."

A fifth issue to ponder is the post-crisis retribution. Back when lenders were falling over by the dozens, it seemed natural to presume that some bankers would end up in jail. After all, there were hundreds of prosecutions after the US savings and loans scandals of the 1980s. But while banks have been hit with fines in the past decade, totalling more than $321bn, (almost) the only financiers who have done jail time are those who committed crimes that were not directly linked to the crisis, such as traders who rigged the Libor rate."

The FT's Martin Wolf weighed in with, "Why So Little Has Changed Since the Financial Crash." I greatly respect Gillian Tett's insight. Martin Wolf is exceptionally knowledgeable and an esteemed journalist, but I don't hold his perspective in the same high regard.

Wolf: "So what happened after the global financial crisis? Have politicians and policymakers tried to get us back to the past or go into a different future? The answer is clear: it is the former… After the crisis of 2008, they wanted to go back to a better version of the past in financial regulation. In both cases, all else was to stay the way it was."

Wolfe: "The financial crisis was a devastating failure of the free market that followed a period of rising inequality within many countries. Yet, contrary to what happened in the 1970s, policymakers have barely questioned the relative roles of government and markets."

I've never viewed the 2008 fiasco as a "failure of the free markets." It was instead an abject failure of policymaking - of government policy and central bank doctrine and methods. At its roots, the crisis was the inevitable consequence of unsound money and Credit - finance that over time became increasingly unstable specifically because of government intervention and manipulation. "Activist" central banks were manipulating the price of finance and the quantity and allocation of Credit, along with increasingly heavy-handed interventions to backstop dysfunctional markets.

The crisis was a predictable failure of inflationism. Sure, it's reasonable to blame the reckless behavior of Wall Street. But risk-taking, leveraging, speculation and chicanery were all incentivized by policy measures employed to inflate both asset prices and the general price level.

Instead of crisis focusing attention on the root causes of perilous financial and economic fragilities, it was a panicked backdrop conducive to only more egregious government and central bank intervention. Rather than exhaustive discussions of the roles played by "The Maestro's" "asymmetric" market-friendly policy approach, Bernanke's pledge of "helicopter money," and central bank "puts" in inflating the Bubble, Dr. Bernanke was the superhero figure with the smarts, determination and academic creed to reflate the securities markets for the good of all humanity. It was a grand illusion: Enlightened inflationism was viewed as the solution - and not the core problem that it was. And inflationists - including the FT's Martin Wolf - cheered on zero/negative rates, Trillions of QE and the resulting inflation of the greatest Bubble in human history.

It became common to compare 2008 to 1929, and we were darn lucky that chairman Bernanke had trained his entire academic career to ensure a different outcome. This comparison continued for some years, 2009 to 1930, 2011 to 1932, and so on. I never bought into this line of analysis. As it turns out, 2008 did not mark a major inflection point in finance, in policymaking or in economic structure. I would argue that the unprecedented reflation merely extended the cycle, with essentially the same policy doctrine, financial apparatus and market structure that ensured the previous crisis. Same cycle, but just a much more comprehensive Bubble, across markets and economies on a global scale - and on powerful steroids.

It's popular to blame the rise of populism on the financial crisis. I believe the issue is more about economic structure. It is interesting to note that back in 2006, at the height of the U.S. Credit expansion, manufacturing jobs actually contracted during the year. The financial backdrop ensured that it was much easier to generate profits lending money, in structured finance and speculating in the markets than it was producing goods in the U.S. Productive investment (and manufacturing employment) has bounced back somewhat in recent years. Yet post-crisis inflationism has only widened the gap between real economic investment and the easy returns available from asset inflation, securities trading and financial engineering.

It's very much a minority view. But I believe we'd be in a much better place today had we not reflated the previous Bubble. It was a mistake to aggressively promote securities market inflation, once again incentivizing financial speculation; once again favoring the Financial Sphere over the Real Economy Sphere. Such favoritism specifically favors segments of the economy and population over others. The ongoing financial incentive structure foments financial and economic instability (ensuring a more outlandish and protracted cycle of central bank inflationism).

Warren Buffett is known for his focus on ensuring the right incentives are in place. Few have benefitted more from central bank-created incentives and securities market favoritism - along with inflationism more generally. I would add that no investor's reputation has gained as much from crisis policymaking. If there is a paramount investment truth today, it's that we all must invest for the long-term like the great Warren Buffett. Buy and hold, never try to time the market - but simply invest in America for the long-term. It's a sure thing.

As part of 10-year crisis anniversary coverage, the Wall Street Journal interviewed Buffett. The title of the video was enticing: "Warren Buffett Explains the 2008 Financial Crisis.

Buffett: "In 2008, you had something close to a bubble in home real estate. Fifty million people had mortgages roughly at that time, out of 75 million homeowners. When that bubble burst, it hit home to probably 40% of the households in the country - these people that had mortgages on their houses. Fear spread in the month of September 2008 at a rate that was like a tsunami."

WSJ: Who do you hold responsible for that?

"Bubbles are always hard to ascertain the originators of it. There really aren't originators. Everybody got caught in. Some were foolish, some were crooked - some were both. But you had a mass illusion that it could go on forever. You had Wall Street firms participating. Mortgage originators participating. But you had the public participating. It was a lot of fun. It was like Cinderella going to the party. We were all going to turn and buy some pumpkins at midnight, but nobody wanted to leave until one minute to midnight. And the rush for the door couldn't be handled."

WSJ: For you, what were the lessons you learned in 2008?

"I didn't really learn any new lessons in 2008 or 2009. I had emphasized to me some of the things that I'd always believed. That you do need somebody who can say 'do whatever it takes.' The U.S. government had to do the right things - not perfect things - but generally the right things starting in September. And they did a fantastic job, actually, of getting the train back on the tracks. There was still damage for a long period thereafter. But it was really important to have fast action at that time. We were very fortunate we had the leaders we did. If we'd had people that would have waited for all the information to be right, or for committees to work - that sort of thing - it would have been far, far worse. People talk about a fog of war, but there's a fog of panic too. And during that panic you're getting inaccurate information, you're hearing rumors. If you wait until you know everything, it's too late."

…I can understand how people that lost their houses or lost their jobs - whatever may have happened to them - feel that there must be somebody out there that was profiting from this that did it doing some things that should send them to jail. The people that ran most of the institutions - the big institutions that got in trouble - probably shouldn't name names - they went away rich. They may have been disgraced to some degree, but they went away rich. So I don't think the incentive system has been improved a lot from what it was ten years ago."

WSJ: What could the next crisis look like?

"If I knew what the next crisis would look like, I might be a little helpful in stopping it. But there will be other crises. There's no way of knowing, when we're in a situation like we were in the fall of 2008, when or precisely how it will end. You know the United States will come back. The factories don't disappear. The farm land doesn't disappear. The skills of the people don't disappear. But you had a system which was going to put them in an idle position - or could do it - there's no way to know how far it was going to go.

"What's left from the crisis is pretty much memories. The tracks are still there. The train in still there. But we had a big interruption in 2008 and nine - and now the train has been running pretty darn well. We've shown that America can't be stopped."

I find Buffett's comments disappointing. For someone with his experience and intelligence, it seems there should be deeper insight regarding the forces behind such a major financial crisis. For me, it's reminiscent of the mindset at the market top in the late-twenties. And, of course, the factories, farms and human skills didn't disappear after the Great Crash. America wasn't stopped. But the financial apparatus that inflated to extraordinary excess during the boom came to a grinding halt, with momentous ramifications for economies, societies and geopolitics. In contrast to 2008, that crash and the resulting crisis in confidence - in the markets, in finance, in policymaking and in the real economy - concluded the cycle.

Hopefully the bullish consensus view is correct. But the current backdrop sure seems late cycle - "permanent plateau" - manic wishful thinking to me. This whole buy and hold and ignore risk delirium - the product of decades of "activist" central banks jamming too many "coins in the fuse box" - espoused by the great market oracle Warren Buffett - is a trap. It's been awhile since investors have experienced a protracted bear market. Central bankers have too quickly come to the markets' defense. The next crisis could prove much more difficult to manage. Long-term investors, convinced to hold tight, may find it's a long time before they see these securities prices again.

The way I see it, a lot of faith has been placed in enhanced bank supervision, larger bank capital buffers and the almighty power of "whatever it takes" central banking. But despite the propaganda, irresponsible bank lending was not the root cause of 2008 fragilities. It was dysfunctional financial markets, replete with mispricing, misperceptions, rank speculation, leverage and resource misallocation. It was a massive and unwieldy derivatives marketplace. It was the view that the securities and derivatives markets were too big to fail - that central banks could ensure uninterrupted liquid and robust markets.

And this is where critical lessons went unlearned and, as a consequence, where danger lurks today. From my vantage point, all the previous key forces fomenting latent fragilities are greater today than a decade ago. From a global perspective, unsound "money" and Credit back in 2008 appears pristine in comparison. And if you think populism, nationalism, socialism and mayhem are on the rise, just wait until this global Bubble bursts.

For the Week:

The S&P500 declined 1.0% (up 7.4% y-t-d), and the Dow slipped 0.2% (up 4.8%). The Utilities gained 1.1% (up 1.5%). The Banks dipped 0.3% (up 2.9%), and the Broker/Dealers fell 2.0% (up 2.5%). The Transports added 0.4% (up 6.9%). The S&P 400 Midcaps declined 0.9% (up 6.7%), and the small cap Russell 2000 fell 1.6% (up 11.6%). The Nasdaq100 dropped 2.9% (up 16.2%). The Semiconductors lost 2.9% (up 8.6%). The Biotechs fell 3.7% (up 21.7%). With bullion down $5, the HUI gold index sank 4.9% (down 29.2%).

Three-month Treasury bill rates ended the week at 2.09%. Two-year government yields jumped eight bps to 2.70% (up 82bps y-t-d). Five-year T-note yields rose eight bps to 2.82% (up 61bps). Ten-year Treasury yields gained eight bps to 2.94% (up 53bps). Long bond yields rose eight bps to 3.10% (up 36bps). Benchmark Fannie Mae MBS yields jumped nine bps to 3.71% (up 71bps).

Greek 10-year yields fell 10 bps to 4.27% (up 19bps y-t-d). Ten-year Portuguese yields dipped two bps to 1.90% (down 4bps). Italian 10-year yields dropped 20 bps to 3.04% (up 102bps). Spain's 10-year yields slipped a basis point to 1.46% (down 11bps). German bund yields rose six bps to 0.39% (down 4bps). French yields gained four bps to 0.72% (down 7bps). The French to German 10-year bond spread narrowed two to 33 bps. U.K. 10-year gilt yields increased three bps to 1.46% (up 27bps). U.K.'s FTSE equities index fell 2.1% (down 5.3%).

Japan's Nikkei 225 equities index declined 2.4% (down 2.0% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 7bps). France's CAC40 dropped 2.9% (down 1.1%). The German DAX equities index sank 3.3% (down 7.4%). Spain's IBEX 35 equities index fell 2.4% (down 8.7%). Italy's FTSE MIB index rallied 0.9% (down 6.4%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.3% (unchanged), while Mexico's Bolsa declined 1.2% (down 0.8%). South Korea's Kospi index fell 1.8% (down 7.5%). India’s Sensex equities index declined 0.7% (up 12.7%). China’s Shanghai Exchange dipped 0.8% (down 18.3%). Turkey's Borsa Istanbul National 100 index increased 0.6% (down 19.1%). Russia's MICEX equities index fell 1.0% (up 10.1%).

Investment-grade bond funds saw outflows of $297 million, and junk bond funds had outflows of $639 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 4.54% (up 76bps y-o-y). Fifteen-year rates increased two bps to 3.99% (up 91bps). Five-year hybrid ARM rates jumped eight bps to 3.93% (up 78bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.59% (up 58bps).

Federal Reserve Credit last week declined $16.4bn to $4.169 TN. Over the past year, Fed Credit contracted $228bn, or 5.2%. Fed Credit inflated $1.358 TN, or 48%, over the past 305 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $0.2bn last week to $3.429 TN. "Custody holdings" were up $84bn y-o-y, or 2.5%.

M2 (narrow) "money" supply surged $33.1bn last week to a record $14.248 TN. "Narrow money" gained $558bn, or 4.1%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits jumped $24.7bn, and Savings Deposits added $1.6bn. Small Time Deposits were little changed. Retail Money Funds gained $4.3bn.

Total money market fund assets jumped $17.3bn to $2.881 TN. Money Funds gained $159bn y-o-y, or 5.8%.

Total Commercial Paper added $1.6bn to $1.066 TN. CP gained $41bn y-o-y, or 4.0%.

Currency Watch:

The U.S. dollar index added 0.3% to 95.365 (up 3.5% y-t-d). For the week on the upside, the Swedish krona increased 1.3%. For the week on the downside, the South African rand declined 3.6%, the New Zealand dollar 1.3%, the Mexican peso 1.2%, the Australian dollar 1.1%, the Canadian dollar 0.9%, the South Korean won 0.9%, the Norwegian krone 0.8%, the Singapore dollar 0.5%, the euro 0.4%, the British pound 0.3%, and the Brazilian real 0.1%. The Chinese renminbi declined 0.18% versus the dollar this week (down 4.93% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 1.8% (up 4.2% y-t-d). Spot Gold slipped 0.4% to $1,196 (down 8.2%). Silver sank 2.7% to $14.17 (down 17%). Crude fell $2.05 to $67.75 (up 12%). Gasoline lost 1.4% (up 10%), and Natural Gas sank 4.8% (down 6%). Copper dropped 1.8% (down 21%). Wheat sank 6.3% (up 20%). Corn added 0.5% (up 5%).

Trump Administration Watch:

September 7 - Wall Street Journal (Vivian Salama): "President Trump said Friday that tariffs on another $267 billion in Chinese goods are ready to go and could be rolled out on short notice, reinforcing earlier threats and signaling no end in sight for the growing trade dispute. Speaking aboard Air Force One en route to Fargo, N.D., Mr. Trump said the tariffs would be in addition to the $200 billion in tariffs on Chinese goods the administration has been preparing, which he said will "take place very soon, depending on what happens." 'I hate to say this, but behind that there is another $267 billion ready to go on short notice if I want,' he added. 'That changes the equation.'"

September 2 - Bloomberg (John Micklethwait): "To the outside world, Donald Trump is in a bit of a bind. Prosecutors are creeping closer, with his own lawyer, Michael Cohen, cooperating. It looks like the Republican president will lose control of the House to Democrats in midterm elections, potentially unleashing an impeachment effort. He's still losing staff -- this week, the White House counsel. His legislative agenda is stalled. And businesses are terrified by the prospect of a trade war, especially with an ever-more-powerful China. Surely it is only a matter of time before he must retreat. The view of the man sitting behind the Resolute desk in the Oval Office could not be more different. The president of the United States awards himself an A-plus. He is presiding over an economic boom. The Robert Mueller investigation is 'illegal,' and impeachment isn't possible because they can't "impeach somebody that's doing a great job," he said… 'The level of love' at his rallies 'is just a beautiful thing to watch.'"

September 5 - CNBC (Sara Salinas): "U.S. Attorney General Jeff Sessions will meet with state attorneys general later this month to discuss concerns that tech companies 'may be hurting competition and intentionally stifling the free exchange of ideas on their platforms,' the Department of Justice said… The proposed meeting between the country's top prosecutor and state officials is the first major signal of potential antitrust action against Silicon Valley and follows recent claims by President Donald Trump of political bias and censorship by major social media firms. Last month, Trump said Facebook, Twitter and Google were 'treading on very, very troubled territory and they have to be careful.' He's also said the companies could be engaging in antitrust behaviors…"

September 1 - Reuters (Lesley Wroughton): "U.S. President Donald Trump said on Saturday there was no need to keep Canada in the North American Free Trade Agreement and warned Congress not to meddle with the trade negotiations or he would terminate the trilateral trade pact altogether. 'There is no political necessity to keep Canada in the new NAFTA deal. If we don't make a fair deal for the U.S. after decades of abuse, Canada will be out,' Trump said on Twitter."

September 6 - Bloomberg (Shawn Donnan and Jeff Kearns): "The numbers are not looking good for a president who has made reducing the U.S. trade deficit one of his main economic goals. Worse still, signs are emerging that President Donald Trump's trade wars are starting to hit economic growth, not just at home but around the world. New data… showed the U.S. trade deficit in July widening at its fastest rate since 2015 as monthly deficits with China and the European Union both hit new records. In the year so far, the U.S.'s overall goods and services deficit is up by $22 billion, or 7%, versus the same period last year."

Federal Reserve Watch:

September 6 - Reuters (Lindsay Dunsmuir): "The Federal Reserve will likely have to raise interest rates past the neutral rate to keep the economy on a sustainable growth path and inflation around target, according to Chicago Federal Reserve Bank President Charles Evans. 'Given the outlook today, I believe this will entail moving policy first toward a neutral setting and then likely a bit beyond neutral,' Evans said in a speech…"

U.S. Bubble Watch:

September 4 - CNBC (Hugh Son): "Sudden, severe stock sell-offs sparked by lightning-fast machines. Unprecedented actions by central banks to shore up asset prices. Social unrest not seen in the U.S. in half a century. That's how J.P. Morgan Chase's head quant, Marko Kolanovic, envisions the next financial crisis. The forces that have transformed markets in the last decade, namely the rise of computerized trading and passive investing, are setting up conditions for potentially violent moves once the current bull market ends, according to a report from Kolanovic… His note is part of a 168-page mega-report, written for the 10th anniversary of the 2008 financial crisis, with perspectives from 48 of the bank's analysts and economists."

September 4 - Reuters (Lucia Mutikani): "U.S. manufacturing activity accelerated to more than a 14-year high in August, boosted by a surge in new orders, but increasing bottlenecks in the supply chain because of a robust economy and import tariffs could restrain further growth… The ISM said its index of national factory activity jumped to 61.3 last month, the best reading since May 2004, from 58.1 in July."

September 6 - Reuters (Lucia Mutikani): "The number of Americans filing new claims for unemployment aid fell to near a 49-year low last week and private payrolls rose steadily in August, pointing to sustained labor market strength that should continue to underpin economic growth… This likely keeps the Federal Reserve on track to raise interest rates this month for the third time this year. 'The economy is in overdrive with jobless claims at lows not seen since the 1960s, and this gives the Fed the green light to raise interest rates later this month and take away some of the economy's punch,' said Chris Rupkey, chief economist at MUFG…"

September 6 - Reuters (Laila Kearney): "Some of the largest U.S. cities spent more on pension payments and other fixed costs in fiscal 2017 than the year before, and those expenses are likely to continue to weigh on budgets, according to an annual report released by S&P Global Ratings… On average, for the largest 15 cities in the country, public employee pensions, debt and other retirement benefits made up 26% of expenditures compared with 25% in fiscal 2016, S&P said…"

China Watch:

September 1 - Reuters (Andrew Galbraith): "A Chinese Communist Party journal said… that the country may experience near-term pain from trade friction with the United States, including a negative impact on financial stability, but China's stable growth trend would not change. A commentary in the ideological journal Qiushi, or Seeking Truth, warned that trade and economic friction between Washington and Beijing could undermine 'China's economic growth, financial stability, trade and investment, employment and people's livelihoods,' particularly in industries exposed to tariff action by the United States."

September 2 - CNBC (Huileng Tan): "A private manufacturing survey hit a 14-month low in August as the Caixin/Markit Purchasing Manager's Index (PMI) came in at 50.6 - the weakest since June 2017. Although output continued to expand, new orders rose at their slowest pace since May 2017… In particular, export sales fell for the fifth straight month. Overall confidence was low in August, 'with a number of panelists citing concerns over the impact of the ongoing China-U.S. trade war and relatively subdued market conditions,' added the release."

September 5 - Bloomberg: "A rapidly spreading African swine fever in pigs has become a risk for China's bond investors, who're worried that the disease will quicken inflation and deepen a note sell-off. That's adding to concerns of the supply deluge of municipal bonds that analysts expect may siphon funds away from the inter-bank bond market. Average yields on China's local top-rated corporate notes have climbed 39 bps in the last four weeks to 4.44%… 'Bond investors are quite sensitive to any inflation concerns,' said Wang Wenhuan, fixed-income analyst from Huachuang Securities Co. 'The sudden occurrence of the swine fever, together with flood and rising housing rentals in major cities will definitely curb sentiment on the bond market.'"

September 3 - Financial Times (Ben Bland): "Steve Madden is shifting handbag production to Cambodia, Vietnam is sucking up some production for Hoover-maker Techtronic Industries and Google's hardware maker Flex is seeking new production centres from Mexico to Malaysia. The escalating US-China trade war is pushing China-based manufacturers and their US clients to rethink the complex and extensive supply chains that bind the world's two biggest economies together. 'While China will remain an important part of our global manufacturing platform for the next decade, we have accelerated the ramp-up in other low-cost countries and the US,' said Joseph Galli, chief executive of Techtronic… 'The focus on Vietnam in the short term is offsetting the future tariff impact we might see in the US.'"

September 5 - Bloomberg: "The new hot thing for Chinese savers is about as old and boring as it gets. Bank deposits, shunned for years by the nation's return-hungry masses, are suddenly looking attractive again as higher-yielding investments prove riskier than many had anticipated. China's household deposits rose in July at the fastest annual rate in a year -- an influx that analysts say may accelerate after the nation's stock market sank at the quickest pace worldwide, hundreds of peer-to-peer lending platforms shuttered and companies defaulted on their debt at an unprecedented rate. 'People around me are all asking the same question: Where is the safe place to put our hard-earned savings?' said Anna Teng, a 30-year-old marketing manager in Shanghai who's been shifting her assets into deposits after losing about 20% on her equity investments since May and falling victim to a fraudulent P2P lending platform. 'The time that you could easily earn 10% without worrying about risk is gone,' Teng said. 'What I'm asking for now is to preserve the principal.'"

EM Watch:

September 4 - Reuters (Daina Beth Solomon and Hugh Bronstein): "Argentina's government said on Tuesday it hoped the International Monetary Fund would agree in the second half of September to a deal giving the country more financial support as it seeks to escape a deepening economic crisis. Economy Minister Nicolas Dujovne met IMF chief Christine Lagarde in Washington and both said they were working together to improve a $50 billion standby finance deal agreed with the IMF's executive board in June."

August 31 - Financial Times (Benedict Mander, Sam Fleming, Colby Smith and Robin Wigglesworth): "As Christine Lagarde sits down for talks with Argentina's finance minister on Tuesday, both sides will be painfully aware of what is at stake, not only for the country's crisis-stricken economy but for the International Monetary Fund itself. Memories of the Fund's involvement in Argentina in the lead-up to the 2001 economic collapse run bitter and deep in the country, making the current involvement of the IMF… hugely sensitive. Members of the opposition fantasise about President Mauricio Macri fleeing the presidential palace in a helicopter - just as the president did last time an IMF programme failed in Argentina before its 2001 crisis. Mr Macri knows his own political survival is on the line as the currency plummets and interest rates soar."

September 4 - Reuters (Ali Kucukgocmen and David Dolan): "Turkey's central bank signalled on Monday it would take action against 'significant risks' to price stability, a rare move to calm financial markets after inflation surged to its highest in nearly a decade and a half. The comments, seen as presaging an interest rate increase at the bank's next meeting on Sept. 13, underscore the volatile outlook for prices amid a currency crisis. The lira has lost 40% of its value against the dollar this year, driving up the cost of goods from potatoes to petrol and sparking alarm about the impact on the wider economy."

September 6 - Bloomberg (Colleen Goko): "South Africa's risk premium widened at a faster rate since the beginning of August than the emerging-market average, suggesting local risks are exacting an added cost amid a broad sell-off of developing-nation assets. The premium investors demand to hold South African debt rather than U.S. Treasuries… has climbed 63 bps since the beginning of August to 336, the highest level since November 2016… The emerging-market premium increased 43 bps in the same period. A cocktail of negative economic news, political risks and falling commodity prices accelerated a slide in South Africa's rand and bonds sparked by crises in Turkey and Argentina and escalating trade tensions between the U.S. and China."

September 5 - Reuters (Mfuneko Toyana): "A surprise economic recession has brought a sharp focus on South Africa's shrinking revenue and mounting debt pile and could intensify a bond sell-off at a time the assets are reeling from nervousness over Turkey's economic woes. Investors have dumped South African bonds since August as an emerging markets sell-off picked up pace driven by concerns over the Turkish central bank's ability to rein in double-digit inflation, which has surged to nearly 18%."

September 6 - Bloomberg (Anirban Nag): "India's rupee owes its tag of Asia's worst-performing currency this year to the selloff sweeping emerging markets. There's more pain in store from beyond its borders. While foreign currency debt has zoomed, various external vulnerability indicators paint a rather mixed picture, according to the Reserve Bank of India's annual report. Indeed, data due as early as next week will probably show the nation's current-account deficit widened in the June quarter to 2.6% of gross domestic product, the highest in 4 1/2 years."

September 4 - Financial Times (Michael Mackenzie): "Emerging markets are a diverse group based on their respective economic stories. But as investors look to cut their exposure to the asset class, EM stress is rising with the risk that current selling pressure intensifies and fuels a bigger slide across the sector. A good proxy of contagion is the relationship between EM currencies. FX correlations for EMs have risen sharply this year, but remain shy of the peak set in early 2016… EM government and corporate bond yields have risen sharply in recent months, but they currently sit below the highs of early 2016 when China sparked a global growth scare."

September 5 - Reuters (Ricardo Brito and Lisandra Paraguassu): "Brazil's federal police have recommended to prosecutors that President Michel Temer be charged with taking bribes and money laundering, according to a police document reviewed… by Reuters. The investigation involves 10 million reais ($2.41 million) in illicit funds Temer's Brazilian Democratic Party allegedly received from construction firm Odebrecht in 2014…"

September 1 - BBC: "Brazil's top electoral court has ruled that jailed former President Luiz Inácio Lula da Silva cannot run as a candidate in the presidential election because of his corruption conviction... Lula, 72, was leading in polls ahead of the vote despite serving a 12-year jail term for accepting a bribe. His legal team has said they will appeal against the court's decision."

Global Bubble Watch:

September 3 - Washington Post (David J. Lynch): "Ten years after the worst financial panic since the 1930s, growing debt burdens in key developing economies are fueling fears of a new crisis that could spread far beyond the disruption sweeping Turkey. The loss of investor confidence in the Turkish lira… is only a preview of debt problems that could engulf countries such as Brazil, South Africa, Russia and Indonesia, some economists say. 'Turkey is not the last one,' said Sebnem Kalemli-Ozcan, an economics professor at the University of Maryland. 'Turkey is the beginning.' For now, few experts think that a broader crisis is imminent, though Argentina this week asked the International Monetary Fund to accelerate a planned $50 billion rescue as the peso crashed to a historic low. But the danger of a financial contagion that could hit Americans by crushing U.S. exports and sending the stock market plunging should be taken more seriously in light of a massive increase in global debt since the 2008 downturn… Total debt is a whopping $169 trillion, up from $97 trillion on the eve of the Great Recession, according to the McKinsey Global Institute."

September 6 - Bloomberg (Alfred Liu): "New York has lost its crown as home to the most ultra-rich people, beaten out by the rising tide of extreme wealth in Asia. Hong Kong surpassed the Big Apple as the city with the highest population of people worth at least $30 million… The former British colony saw its number of ultra-wealthy increase 31% last year, to about 10,000, research firm Wealth-X found, higher than the nearly 9,000-strong population of the U.S.'s largest city. Tokyo came third, while Paris beat out London to take the European crown as Brexit weighed down the U.K. capital. The number of ultra-rich worldwide rose 13% last year, according to Wealth-X, totaling about 256,000 people with combined assets of $31.5 trillion. Asia saw the fastest growth, driven by mainland China and Hong Kong…"

September 6 - Bloomberg (Christopher Condon): "A decade after the global crisis with financial systems 'safer but not safe enough,' the regulatory pendulum has begun to swing back toward looser oversight, International Monetary Fund Managing Director Christine Lagarde warned. In a blog post…, Lagarde offered a short-list of concerns over lingering vulnerabilities in the global financial system. She said too many banks, especially in Europe, remain weak and require more capital, while the increased size and complexity of institutions means 'too-big-to-fail' remains a problem. 'Perhaps most worryingly of all, policy makers are facing substantial pressure from industry to roll back post-crisis regulations,' she wrote."

September 5 - Financial Times (Jamie Smyth): "Maggie Lu is one of thousands of borrowers hit by a credit squeeze, which has abruptly ended Australia's housing boom and poses a risk to one of the world's most successful economies. 'I got pre-approval for a mortgage last year but couldn't find a house we could afford before it lapsed,' said the mother of two… 'Prices are falling but now my bank will only agree a mortgage worth A$170,000 [US$120,000] less than the level agreed last year. So we are stuck.' Economists cite tighter credit and unaffordable prices as the reason for the biggest fall in Sydney property prices for nine years. New figures this week show Sydney prices have fallen 5.6% over the past year, while the national market fell 2%."

Central Bank Watch:

September 6 - Bloomberg (Kati Pohjanpalo and Piotr Skolimowski): "In the tussle between the euro zone's north and south, Erkki Liikanen may boast just the right credentials to become the next president of the European Central Bank. The former governor of Finland's central bank is the new frontrunner in a Bloomberg survey of economists on who'll succeed Mario Draghi in November 2019. His chief selling point, as the ECB prepares to unwind years of monetary stimulus, might be as a compromise candidate. The next president will need to balance the demands of nations such as Germany that want to end crisis-era stimulus as soon as possible, and those like Italy nervous that their economies will crippled by a lack of monetary support... 'Given the north-south antagonisms in the euro area, Liikanen could be a good choice for the position,' said Lauri Vaittinen, head of investment solutions at Mandatum Life… 'He hasn't taken extreme stances on any of the ECB's unconventional measures. He's a very good candidate.'"

Europe Watch:

September 5 - Financial Times (Miles Johnson and Mehreen Khan): "Since Italy's coalition government took power, its first budget plans have loomed as the likely trigger for a showdown between Rome and Brussels. The anti-establishment Five Star party and anti-migrant League campaigned on a platform of expensive policies such as a flat tax reform and a universal basic income, ambitions that seemed likely to collide with a European Commission deeply nervous about Italy's vast debt pile. Yet on Wednesday Matteo Salvini, leader of the anti-migrant League party and the man increasingly viewed as the dominant partner in the coalition, delivered arguably his most reassuring words about public spending since taking power."

September 4 - Reuters (Steve Scherer): "Party leaders in the Italian coalition government signaled they will seek leeway from the EU to increase next year's budget deficit, heading on a collision course with the European Commission and investors who want it cut. Following Fitch agency's decision to lower the outlook on Italy's debt rating on Friday, neither Matteo Salvini nor Luigi Di Maio - the heads of the League and 5-Star Movement respectively - backed away from promises to reduce taxes and boost welfare spending."

September 2 - Financial Times (Kate Allen): "Italy has less than three months to raise the bulk of its remaining annual financing needs - amounting to about €63bn in fresh debt - as its bond sales programme lags behind those of other big eurozone sovereigns. The nation, which has been hit by a series of sharp bond market sell-offs since late May, has secured less than three-quarters of its total planned 2018 debt sales to meet bond redemptions and its net increase in borrowing…"

September 2 - Financial Times (Wolfgang Münchau): "The meeting last week between Viktor Orban and Matteo Salvini was more than just the beginning of a beautiful friendship. The anti-immigration partnership formed by the Hungarian prime minister and Italy's interior minister is formidable because it could form the germ of a new coalition… The electoral arithmetic of the European Parliament makes it impossible for any one or even two party groups to form a majority. But if the nationalists do well in next year's election, they might end up in a position to forge an unofficial coalition. Mr Orban's Fidesz is a member of the European People's party, the largely pro-European centre-right group in the European Parliament. Mr Salvini's League is part of the Movement for a Europe of Nations and Freedom, which includes Marine Le Pen's renamed National Rally."

Fixed Income Bubble Watch:

September 5 - Bloomberg (Elizabeth Campbell): "Chicago bonds fell to the lowest since May after Mayor Rahm Emanuel unexpectedly announced… that he won't run for re-election next year, raising uncertainty for investors who praised the two-term incumbent's steps to stabilize the junk-rated city's finances. Taxable debt due in 2042… traded at an average of 89.8 cents on the dollar on Wednesday, the lowest since May and down from… 92 cents last week. That's pushed the yield up to 6.3%..."

Leveraged Speculation Watch:

September 2 - Bloomberg (Yakob Peterseil): "Battle-ready investors on the prowl to hedge a looming reversal in the global debt cycle are embracing weapons familiar to Mom and Pop -- and falling out of love with complex derivatives. For hedge funds and asset managers, the preferred way to shield credit risks is now the humble exchange-traded bond fund, according to a survey of 60 managers from Greenwich Associates… ETFs edged out credit-default swaps -- at the single-name and index level -- and were second only to corporate bonds themselves as a way for professionals to access fixed income. Institutional investors are rubbing shoulders alongside the retail crowd in what has swelled to become a $634 billion market in the U.S. alone."

September 6 - Bloomberg (Vincent Bielski and Saijel Kishan): "Millennium Management has shut down a quant hedge fund founded by two acclaimed physicists that suffered only one losing year since it began trading in the early 1990s. The closing of Prediction Company, which Millennium bought in 2013, came as a surprise to employees because the firm was profitable… The hedge fund was started by Doyne Farmer and Norm Packard, who were known for their seminal work in developing chaos theory, and managed about $4 billion at its peak. Izzy Englander's Millennium shuttered Prediction, a statistical arbitrage fund, at a time when that strategy is struggling to make money. Returns for the approach are down less than 1% so far this year…"

Geopolitical Watch:

September 6 - Bloomberg (Selcan Hacaoglu): "Syrian troops are preparing an offensive against the last remaining rebel bastion, an assault that could draw in the U.S., displace hundreds of thousands of civilians and cement President Bashar al-Assad's hold over the country after seven years of war. The attack on the northwest province of Idlib is expected soon. It comes after Assad's forces, backed by Russian and Iranian allies, retook the southern provinces of Suwaida and Daraa, the cradle of the 2011 revolt to topple him. With an estimated half a million people killed in the conflict, the president is now on the cusp of completing a remarkable rebound, after his fate seemed so uncertain just three years ago."

Friday Evening Links

[Reuters] Wall Street drops on tariff worries, with Apple in crosshairs

[BloombergQ] Trump Threatens Tariffs on Another $267 Billion of Chinese Imports

[Reuters] Trump ups ante on China, threatens duties on nearly all its imports

[Reuters] No more neutral rate? The shine comes off the Fed's r-star

[Reuters] Fed's Kaplan sees 2019 as decision time on rate hike path

[Reuters] Apple says U.S. tariffs on China would hit 'wide range' of products

[WSJ] Strong Economy Drove Wages Higher in August as Hiring Heats Up

[WSJ] Trump Says He’s Preparing Tariffs on Further $267 Billion in Chinese Imports

[FT] Emerging markets: Argentina creaks under extreme stress