Friday, December 7, 2018

Weekly Commentary: Q3 2018 Z.1 and THE Cycle Peak

Total Non-Financial Debt (NFD) expanded at a 4.4% annual rate during Q3 to a record $51.324 TN. Since the end of 2008, NFD has increased $16.3 TN, or 46%. Q3’s NFD growth rate was down from Q2’s 5.2% and Q1’s 6.3% - and lower as well than Q3 2017’s 4.9%. Total Household borrowings accelerated to 3.4% growth from Q2’s 2.9%, led by a jump in Consumer Credit growth (5.4% from 3.7%). Household Mortgages expanded at a 3.1% pace, up from Q2’s 2.7% and the year ago 2.9%.

Evidence of tighter financial conditions, Total Business borrowings slowed markedly. After Q2’s 6.9% rate (strongest since Q1 ’16), Total Business debt growth slowed to 3.9%. The expansion of Corporate (a component of Business) borrowings slowed markedly, from 7.2% to 4.1%. State & Local government debt contracted at a 1.4% pace (Q2 -0.38%). Winning the Piggy Borrower contest, perennially, was our federal government. Federal borrowings expanded at a 6.8% pace, down slightly from Q2.

Yet percentage growth rates don’t do justice late in a Credit Cycle. Outstanding Treasuries expanded $1.187 TN over the past four quarters (7.3%) and $1.774 TN over eight quarters (11.3%). On a seasonally-adjusted and annualized rate basis (SAAR), Q3 federal borrowings expanded $1.180 TN, almost the same as Q2. So far in 2018, federal debt has expanded the most since 2010.

It’s also worth noting that Federal borrowings this year have accounted for in excess of half of Total Non-Financial Debt growth (Q3 SAAR $1.180 TN of SAAR $2.228 TN). Total Household borrowings expanded SAAR $516 billion (mortgage SAAR $314 billion and Consumer Credit SAAR $210 billion) during Q3. Total Business borrowings expanded SAAR $575 billion, with Corporate borrowings increasing SAAR $389 billion. Foreign U.S. borrowings grew SAAR $292 billion.

Outstanding Treasury Securities ended Q3 at $17.419 TN, having now inflated 188% ($11.367TN) since the end of 2007. Treasuries ended the quarter at 84% of GDP, up from 41% at the conclusion of ’07. And let’s not overlook the government-sponsored enterprises (GSEs). Outstanding Agency Securities (debt and MBS) surpassed $9.0 TN for the first time during Q3, expanding $263 billion, or 3.0%, over the past year. Total Treasuries and Agency Securities ended the quarter at a record $26.439 TN (up $1.450TN y-o-y), or 128% of GDP.

Total outstanding Debt Securities jumped nominal $433 billion during the quarter to a record $44.455 TN, with one-year growth of $1.850 TN. Debt Securities ended Q3 at 215% of GDP, up from 200% and 157% to end 2007 and 1999. Equities Securities increased nominal $2.269 TN during Q3 to a record $50.602 TN (one-year growth $5.493TN). Equities Securities ended the quarter at a record 245% of GDP versus 172% at the end of 2007 ('99=202%). Total (Debt and Equities) Securities increased nominal $2.701 TN during Q3, and $7.344 TN in four quarters, to a record $95.057 TN. Total Securities ended the quarter at a record 460% of GDP. This compares to previous cycle peaks 379% (Q3 ’07) and 359% (Q1 ’00).

Securities market inflation continued to inflate Household Assets during the quarter, while the Bubble in Household Net Worth remains fundamental to the U.S. Bubble Economy. Household Assets increased nominal $2.238 TN during Q3 to a record $124.934 TN. Household Assets increased $8.810 TN (7.6%) over the past year. Household Liabilities gained $167 billion during the quarter ($539bn y-o-y) to a record $15.895 TN.

Household Net Worth (Assets less Liabilities) expanded $2.070 TN during the quarter ($8.271 TN y-o-y) to a record $109.039 TN. It’s worth noting that Net Worth surged $15.795 TN, or 16.9%, over two years (Assets up $16.810 TN, or 15.5%, less Liabilities up $1.015 TN, or 6.8%). Household Net Worth ended the quarter at a record 528% of GDP, up from the year ago 514% and Q3 2016’s 498%. Household Net Worth to GDP set previous cycle peaks at 484% (Q1 ‘07) and 435% (Q4 ‘99).

Still, most would dismissively ask, where’s the Bubble? Well, Household Net Worth has inflated $50 TN (85%) since the end of 2008, which certainly has supported elevated confidence, spending and economic activity. And it’s clear that booming securities markets have been integral to the record expansion in Household perceived wealth. So, what have been the driving forces behind bubbling markets?

Rest of World (ROW) holdings of U.S. Financial Assets jumped nominal $558 billion during Q3 to a record $28.087 TN. ROW holdings were up $1.598 TN over the past year and $3.830 TN over seven quarters. ROW holdings increased to a record 136% of GDP, up from 100% ($14.646 TN) to end 2007 and 57% ($5.639 TN) to conclude 1999. Where in the world has all this “money” been coming from? Sustainable? Reversible?

ROW holdings of U.S. Debt Securities increased nominal $44 billion during Q3 to $11.218 TN, following contractions in Q2 (nominal -$113bn) and Q1 (nominal -$120bn). Treasury holdings added nominal $11 billion and Agencies $20 billion. U.S. Corporate Bonds gained nominal $13 billion. In contrast, ROW holdings of Total U.S. Equities (Corporate Equities and Mutual Fund Shares) jumped nominal $529 billion during the quarter and $1.426 TN over the past year – to a record $8.343 TN (vs. previous cycle peak $3.225 TN in Q4 ’07).

The jump in Equities holdings masks a pivotal slowdown in ROW purchases of U.S. Debt Securities. Though purchases were positive during Q3, ROW holdings of U.S. Debt Securities actually contracted nominal $190 billion during the first three quarters of 2018. This contraction in ROW U.S. Debt Securities holdings is in stark contrast to 2017’s gain of $747 billion and the $324 billion increase in 2016.

The y-t-d contraction in ROW U.S. Debt Securities is largely explained by a $174 billion contraction in U.S. Corporate Bonds. To put this into perspective, ROW increased Corporate Bond holdings by $442 billion in 2017 and $348 billion in 2016. Indeed, ROW U.S. Corporate Bond holdings surged $1.383 TN in the six years 2012 through 2017. It’s worth noting as well that after increasing $282 billion in 2017, ROW Treasury holdings contracted $62 billion in the first three quarters of 2018.

I would posit that tightening global finance – in particular, the de-risking/deleveraging dynamic that took hold in the speculator community – contributed to waning international demand for U.S. Corporate Bonds. At the same time, EM outflows and pressure on EM central banks to support faltering currencies led to sharply lower international demand for Treasuries (not to mention geopolitical frictions). Overall, it points to an important inflection point in international financial flows into U.S. securities markets. For much of the year, major flows into outperforming U.S. equities helped to conceal adverse repercussions. With U.S. equities succumbing to de-risking/deleveraging, markets generally will now confront momentous changes in the liquidity backdrop.

If the market liquidity environment has indeed transitioned, the lackluster growth in U.S. Bank credit now becomes a more pressing issue. Bank (“Private Depository Institutions”) Loans expanded nominal $96.5 billion during Q3, down from Q2’s $174 billion and Q3 2017’s $112 billion. On a SAAR basis, Bank Loans increased $393 billion during Q3 (only two weaker quarters in the past five years). Mortgage loans expanded SAAR $153 billion, the slowest growth in four years, and down from Q2’s SAAR $193 billion, Q1’s SAAR $204 billion, and Q4 ‘17’s SAAR $224 billion. Bank’s Consumer Credit continued to swell, expanding SAAR $127 billion. Non-mortgage and consumer Loans “Not Elsewhere Classified” expanded SAAR $114 billion, a notable drop from Q2’s SAAR $279 billion.

Security Broker/Dealer holdings increased nominal $56 billion to $3.194 TN, up from Q2’s $47 billion increase and the strongest growth since Q2 ’17. Most of the gain was explained by increases in Security Repurchase Agreements and Miscellaneous Assets. Debt Securities holdings actually contracted nominal $11 billion (Treasuries down $30bn).

The confluence of the powerful global tightening of financial conditions, a significant decline in ROW debt purchases, the slowdown in bank lending and the now tenuous backdrop in the equities marketplace creates an extraordinarily fragile backdrop. Moreover, the current quarter has experienced a sharp slowdown in junk bond issuance and leveraged lending. What’s more, significant deleveraging has commenced in U.S. equities. Overall, it points to a troubling liquidity backdrop for both the markets and the U.S. economy, more generally.

I’ll add that “Periphery to Core Crisis Dynamics” are coming home to roost. Keep in mind that the initial faltering Global Bubble phase – de-risking/deleveraging at the “Periphery” – worked to exacerbated flows to - and speculative excess at - the “Core.” The huge increase in ROW Equities holdings is emblematic of speculative “blow-off” dynamics right in the face of rapidly deteriorating fundamental prospects. It recalls heightened systemic fragilities created by dysfunctional market dynamics in early-2000 and, even more so, in the second-half of 2007.

At this point, I’ll posit a (not unlikely) possible scenario. De-risking/deleveraging exposes problematic underlying speculative leverage in both equities and corporate Credit. A sharp tightening of corporate Credit conditions weighs on debt issuance and business borrowing more generally. Tighter finance and sinking equities prices engender some reassessment regarding the rationale for aggressive stock buyback programs. Further weighing on inflated market valuations, the rapidly deteriorating backdrop will also provoke some overdue rethink on the M&A front.

Meanwhile, the vast chasm between elevated consumer confidence and fading economic prospects will have to narrow. Household Net Worth has inflated $20 TN, or about 100% of GDP, in just the past three years ($50 TN since the end of ’08!). This surge in perceived wealth spurred consumption and boosted auto and home purchases (along with boats, campers, timeshares, cruises, etc.) After stoking discretionary and luxury spending, it’s reasonable to begin anticipating a problematic change in spending patterns.

There are many aspects of the unfolding downturn that go unappreciated. I worry about deep economic structural maladjustment. How many thousands of uneconomic enterprises have propagated from all the easy finance and surging asset prices? I have deep concern for Silicon Valley. If the unfolding trade and cold war with China wasn’t enough, they’re about to get the rug pulled out from under them by the financial markets. How much perceived wealth will be lost in a bursting Bubble of inflated technology shares and private business equity, compounded by a deflating Bubble in wildly inflated real estate prices surrounding the tech hubs? I fear a complete lack of understanding and preparation.

It’s difficult not to see the arrest of a top Huawei executive on the same day as the Trump/Xi summit as an ominous development. The CFO and daughter of the founder of one of China’s most powerful international technology conglomerates faces fraud charges and possible extradition to the U.S. In China, outrage. Sure, there was a weird level of ambiguity regarding the true gains from Saturday’s U.S./China trade meeting. But to see global markets convulse on the arrest of a Chinese executive rather starkly illuminates the acute fragilities the world now confronts.

Ten-year Treasury yields dropped 14 bps this week to 2.85%. German bund yields fell six bps to 0.25%. Not to be outdone, 10-year Japanese JGB yields declined three bps to 0.06%. No signs of confidence in the soundness of the global financial system from those three. Safe havens showed a pulse this week. Gold jumped $26 to an almost five-month high $1,248. The Japanese yen gained 0.8% and the Swiss franc increased 0.6%.

It was curious to see the U.S. dollar under some selling pressure (dollar index down 0.7% this week). But, then again… If our asset markets (i.e. stocks, fixed-income, real estate…) are as vulnerable as I believe and the American economy as maladjusted, there’s a credible bear case against the U.S. currency to ponder. We’ve certainly done our level best to swamp the world with dollars over recent decades.

A dollar break would really catch the speculator community (and investors) positioned poorly. It’s reached the point that NOTHING can be taken for granted in these chaotic financial markets. Which portends something really important: ongoing pressure to de-risk and deleverage. Why do I have the feeling I’ll be using Q3 2018 Z.1 data for Household Net Worth (along with both Equities and Total Securities to GDP, etc.) as THE Cycle Peak for years (decades?) to come?

For the Week:

The S&P500 sank 4.6% (down 1.5% y-t-d), and the Dow fell 4.5% (down 1.3%). The Utilities gained 1.2% (up 5.6%). The Banks sank 8.2% (down 12.6%), and the Broker/Dealers were hit 6.0% (down 6.9%). The Transports were hammered 8.0% (down 6.2%). The S&P 400 Midcaps dropped 5.2% (down 6.3%), and the small cap Russell 2000 fell 5.6% (down 5.7%). The Nasdaq100 dropped 4.8% (up 3.4%). The Semiconductors lost 6.6% (down 7.6%). The Biotechs fell 6.0% (up 5.8%). With bullion jumping $26, the HUI gold index rallied 6.1% (down 20%).

Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields declined seven bps to 2.71% (up 83bps y-t-d). Five-year T-note yields dropped 12 bps to 2.69% (up 48bps). Ten-year Treasury yields sank 14 bps to 2.85% (up 44bps). Long bond yields fell 15 bps to 3.14% (up 40bps). Benchmark Fannie Mae MBS yields sank 15 bps to 3.71% (up 71bps).

Greek 10-year yields declined four bps to 4.21% (up 14bps y-t-d). Ten-year Portuguese yields dipped three bps to 1.80% (down 14bps). Italian 10-year yields dropped eight bps to 3.13% (up 112bps). Spain's 10-year yields declined five bps to 1.45% (down 12bps). German bund yields fell six bps to 0.25% (down 18bps). French yields were unchanged at 0.69% (down 10bps). The French to German 10-year bond spread widened six to 44 bps. U.K. 10-year gilt yields sank 10 bps to 1.27% (up 8bps). U.K.'s FTSE equities index fell 2.9% (down 11.8%).

Japan's Nikkei 225 equities index dropped 3.0% (down 4.8% y-t-d). Japanese 10-year "JGB" yields declined three bps to 0.06% (up 1bp). France's CAC40 sank 3.8% (down 9.4%). The German DAX equities index dropped 4.2% (down 16.5%). Spain's IBEX 35 equities index lost 2.9% (down 12.2%). Italy's FTSE MIB index declined 2.3% (down 14.2%). EM equities generally outperformed "developed" markets. Brazil's Bovespa index declined 1.6% (up 15.3%), while Mexico's Bolsa recovered 0.3% (down 15.2%). South Korea's Kospi index fell 1.0% (down 15.9%). India's Sensex equities index slipped 1.4% (up 4.7%). China's Shanghai Exchange gained 0.7% (down 21.2%). Turkey's Borsa Istanbul National 100 index fell 1.8% (down 18.8%). Russia's MICEX equities index rose 1.6% (up 15.2%).

Investment-grade bond funds saw outflows of $1.268 billion, and junk bond funds posted outflows of $829 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell six bps to 4.75% (up 81bps y-o-y). Fifteen-year rates declined four bps to 4.21% (up 85bps). Five-year hybrid ARM rates fell five bps to 4.07% (up 72bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.60% (up 45bps).

Federal Reserve Credit last week declined $16.1bn to $4.048 TN. Over the past year, Fed Credit contracted $349bn, or 7.9%. Fed Credit inflated $1.237 TN, or 44%, over the past 317 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.404 TN. "Custody holdings" were up $13.8bn y-o-y, or 0.4%.

M2 (narrow) "money" supply rose $19.8bn last week to a record $14.334 TN. "Narrow money" gained $523bn, or 3.8%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits were little changed, while Savings Deposits gained $13.1bn. Small Time Deposits added $2.2bn. Retail Money Funds increased $3.4bn.

Total money market fund assets dropped $34.5bn to $2.909 TN. Money Funds gained $102bn y-o-y, or 3.6%.

Total Commercial Paper fell $15.5bn to $1.075 TN. CP rose $22.5bn y-o-y, or 2.1%.

Currency Watch:

The U.S. dollar index declined 0.7% to 96.514 (up 4.8% y-t-d). For the week on the upside, the Norwegian krone increased 1.3%, the Japanese yen 0.8%, the Swedish krona 0.7%, the Swiss franc 0.6%, the euro 0.6%, the Mexican peso 0.5%, the Singapore dollar 0.2% and the South Korean won 0.1%. For the week on the downside, the South African rand declined 2.1%, the Australian dollar 1.3%, the Brazilian real 1.1%, the Canadian dollar 0.2%, the British pound 0.2% and the New Zealand dollar 0.1%. The Chinese renminbi rallied 1.25% versus the dollar this week (down 5.35% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.0% (down 5.9% y-t-d). Spot Gold surged $26 to $1,248 (down 4.2%). Silver jumped 3.1% to $14.696 (down 14.3%). Crude recovered $1.89 to $52.61 (down 13%). Gasoline surged 6.2% (down 17%), while Natural Gas fell 3.3% (up 52%). Copper declined 1.2% (down 16%). Wheat jumped 3.0% (up 24%). Corn gained 2.1% (up 10%).

Market Dislocation Watch:

December 4 – Bloomberg (Stephen Spratt and Edward Bolingbroke): “The rally in Treasuries went into overdrive Tuesday, threatening to upend the legion of investors who are betting against longer-maturity bonds. Thirty-year futures rose as much as 2 15/32 and outperformed on the curve, sending yields plunging as much as 12 bps. Open interest in the contract dropped for a fourth day Monday, suggesting traders who had taken bearish directional bets were already feeling the jitters before the latest plunge in stocks.”

December 6 – Bloomberg (Marcus Ashworth): “Falling yields on German government debt is the sign of a classic ‘risk-off’ mentality. As fear grows, investors plump for safety. But where’s the crisis in Europe? Yields on 10-year bunds have fallen steadily by 30 bps in the past two months. And German notes out to eight years are now in negative territory.”

December 5 – Bloomberg (Katherine Burton and Hema Parmar): “Billionaires Ken Griffin, Izzy Englander and Steve Cohen posted monthly losses in November that rank among their worst ever as stock hedge funds dumped holdings at a rate not seen since the financial crisis. Griffin’s Citadel lost about 3% last month, its poorest showing since the first quarter of 2016. Englander’s Millennium Management slid 2.8%, its third-worst month on record. Cohen’s Point72 Asset Management dropped about 5%, largely wiping out its 2018 gains… These firms market themselves as steady money makers because their stock managers tend to run portfolios with a roughly equal weighting of longs and shorts, or small net exposure in either a bullish or bearish direction… To control risk, individual portfolio managers are typically forced to sell positions after relatively small losses. To make money under those constraints, the firms employ heavy leverage. Citadel, Point72 and Millennium together hold less than $100 billion in net assets, but that sum swells to almost half a trillion dollars when borrowed money is included.”

November 30 – Financial Times (Adam Samson and Robin Wigglesworth): “Investors pulled more than $5bn from funds investing in corporate bonds in the past week, as the credit market heads for its worst year since the financial crisis a decade ago and concerns mount over the outlook for 2019.”

December 5 – Bloomberg (Elena Popina): “Market statisticians are falling over each other in 2018 to describe the pain being felt across asset classes. One venerable shop frames it this way: Things haven’t been this bad since Richard Nixon’s presidency. Ned Davis Research puts markets into eight big asset classes — everything from bonds to U.S. and international stocks to commodities. And not a single one of them is on track to post a return this year of more than 5%, a phenomenon last observed in 1972, according to Ed Clissold, a strategist at the firm.”

Trump Administration Watch:

December 2 – CNBC (David Reid): “President Donald Trump has told reporters on Air Force One that a trade deal brokered with China is one of the largest ever made. After meeting at the G-20 summit in Argentina, Trump and Chinese President Xi Jinping have agreed a temporary stop to their bilateral trade disagreement, striking a deal to hold off on any additional tariffs on each other’s goods after January 1. ‘It’s an incredible deal. It goes down, certainly, if it happens, it goes down as one of the largest deals ever made,’ Trump said…”

December 5 – Bloomberg (Editorial Board): “On the same day Donald Trump and Xi Jinping struck a trade war truce in Argentina, some 7,000 miles away Canadian authorities made an arrest that now threatens to make the U.S.-China conflict much worse. The U.S. is seeking the extradition of Wanzhou Meng, chief financial officer of Huawei Technologies Co., after convincing Canada to arrest her on Dec. 1. Canada confirmed she was in custody shortly after the Globe and Mail reported she had been arrested in connection with violating sanctions against Iran. China promptly reacted with outrage after the news broke, demanding that both countries move to free Meng. Later, the foreign ministry said it was waiting for details on why she was arrested, and said trade talks should continue.”

December 5 – CNBC (Huileng Tan): “The arrest of Huawei’s global chief financial officer in Canada, reportedly related to a violation of U.S. sanctions, will corrode trade negotiations between Washington and Beijing, risk consultancy Eurasia Group said… ‘Beijing is likely to react angrily to this latest arrest of a Chinese citizen in a third country for violating U.S. law,’ Eurasia analysts wrote. In fact, Global Times — a hyper-nationalistic tabloid tied to the Chinese Communist Party — responded to the arrest by posting on Twitter a statement about trade war escalation it attributed to an expert ‘close to the Chinese Ministry of Commerce.’ ‘China should be fully prepared for an escalation in the #tradewar with the US, as the US will not ease its stance on China, and the recent arrest of the senior executive of #Huawei is a vivid example,’ said the statement, paired with a photo of opposing fists with Chinese and American flags superimposed upon them.”

December 3 – Reuters (David Lawder): “U.S. Trade Representative Robert Lighthizer will lead negotiations with China over tariffs, market access and structural changes to intellectual property practices over the next 90 days…, potentially signaling a harder U.S. line… Lighthizer leading the talks marks a shift from the administration’s previous approach to China trade talks that had been largely led by U.S. Treasury Secretary Steven Mnuchin. Lighthizer, an experienced trade negotiator and having just completed a new agreement with Canada and Mexico, is one of the administration’s most vocal China critics.”

December 2 – CNBC (Evelyn Cheng): “While both the U.S. and China called this weekend’s meeting on trade very successful, many Chinese-language state media left out references to a 90-day condition for both sides to agree on issues such as technology transfer. While it’s typical for there to be some daylight between governments’ spin about bilateral meetings, a host of differences between the Chinese and the American version of events points to a potentially challenging road ahead for any negotiations. Another apparent discrepancy comes from Chinese Foreign Minister Wang Yi, who remarked that the two countries will work toward eliminating tariffs. A White House Press Secretary statement…, for its part, did not include that point.”

December 3 – Financial Times (Courtney Weaver): “Steven Mnuchin… has warned China to avoid ‘soft commitments’ in a new round of trade talks expected to follow a ceasefire deal reached at the weekend between presidents Donald Trump and Xi Jinping. In a telephone interview with the Financial Times after the truce was sealed…, Mr Mnuchin urged Beijing to flesh out pledges made in Buenos Aires in negotiations over the next three months. ‘There’s a 100% unanimous view on our economic team that this needs to be a real agreement… These can’t be soft commitments from China. There need to be specific dates, specific action items,” he added.”

December 4 – Reuters (Doina Chiacu): “U.S. President Donald Trump on Tuesday held out the possibility of an extension of the 90-day trade truce with China but warned he would revert to tariffs if the two sides could not resolve their differences. Trump said his team of trade advisers led by China trade hawk U.S. Trade Representative Robert Lighthizer would determine whether a ‘REAL deal’ with Beijing was possible. ‘If it is, we will get it done,’ Trump wrote in a Twitter post. ‘But if not remember, I am a Tariff Man.’”

December 4 – CNBC (Yen Nee Lee): “U.S. President Donald Trump, in a Twitter post on Tuesday evening, said America is going to have a ‘REAL DEAL’ or ‘no deal at all’ with China. Trump said if the two countries cannot agree on a deal, the U.S. will proceed with ‘major Tariffs’ against Chinese products. ‘Ultimately, I believe, we will be making a deal — either now or into the future,’ the president said.”

December 4 – Bloomberg (Shawn Donnan): “President Donald Trump’s advisers are scrambling to explain a trade deal he claimed he’d struck with China to reduce tariffs on U.S. cars exported to the country -- an agreement that doesn’t exist on paper and still hasn’t been confirmed in Beijing. In the day after Trump announced the deal in a two-sentence Twitter post, the White House provided no additional information. Meanwhile, China hasn’t formulated its response because bureaucrats are awaiting the return home of President Xi Jinping, according to three officials who were briefed but declined to be named as the matter isn’t public. Questioned about the agreement on Monday, Treasury Secretary Steven Mnuchin and Trump’s top economic adviser, Larry Kudlow, dialed back expectations and added qualifiers.”

December 4 – Wall Street Journal (Vivian Salama): “Trump administration officials said they planned to take a tough stand in their 90-day trade negotiations with China or impose further tariffs, as optimism over a truce gave way to uncertainties about how the two sides could find agreement on a wide range of issues. Having emphasized last weekend the possibilities for a wide-ranging deal, President Trump and other officials switched their focus to issues they want to see addressed and the consequences of not reaching an accord in a time frame that China initially didn’t acknowledge. Mr. Trump, in a series of tweets Tuesday morning, said he expected to see China start buying more U.S. agricultural exports immediately…”

December 3 – Reuters (Jeff Mason and David Shepardson): “White House economic adviser Larry Kudlow said… the Trump administration wants to end subsidies for electric cars and other items, including renewable energy sources… ‘As a matter of our policy, we want to end all of those subsidies,’ Kudlow said. ‘And by the way, other subsidies that were imposed during the Obama administration, we are ending, whether it’s for renewables and so forth.’”

December 6 – Bloomberg (Sarah Ponczek): “Stocks go south and President Donald Trump goes quiet. Since his election, Trump has tweeted about the stock market more than 35 times. Yet since Nov. 12, his social media account has been mum on the wild vacillations in U.S. equities.”

Federal Reserve Watch:

December 3 – Bloomberg (Christopher Condon and Jeanna Smialek): “Federal Reserve Vice Chairman Richard Clarida said the U.S. central bank will defend both sides of its inflation target and cautioned investors against thinking the Fed would act to halt a sharp market decline. ‘I don’t really think of it as a useful way to describe what the current Federal Reserve is doing,’ he said… when asked about the concept of a ‘Powell Put’ in an interview with Tom Keene on Bloomberg Television.”

December 4 – MarketWatch (Greg Robb): “The U.S. economy will stay strong in 2019 and inflation will tick up above 2% and so the U.S. central bank should continue to raise interest rates gradually, New York Fed President John Williams said… ‘Given this outlook of strong growth, strong labor market and inflation near our goal and taking account all the various risks around the outlook, I do expect further gradual increases in interest rates will best sponsor a sustained economic expansion,’ Williams said… The Fed’s last policy statement used the word ‘strong’ five times in describing the U.S. economy, he noted.”

December 3 – Reuters (Howard Schneider): “Federal Reserve vice chairman Randal Quarles said the Fed’s increasing ‘data dependence’ does not mean it will react to every rise or fall in economic statistics or markets, but only to ‘significant changes in direction.’ …’We should be data dependent but not reacting to every wavering of the needle across the dial...We have described in all the communications tools a path that is pretty clear,’ Quarles said. ‘We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction.’”

December 3 – Financial Times (Courtney Weaver): “President Donald Trump was taking a ‘dangerous’ path by attacking Jay Powell and legislation might be needed to protect the Federal Reserve chairman, a bipartisan pair of US senators has warned. Republican Jeff Flake… and Democrat Chris Coons… said… that the US president could attempt to take a similar approach to Mr Powell as he did to former attorney-general Jeff Sessions, whom he sacked after the midterm elections. The pair floated the idea of legislation to preserve the Fed’s independence after Mr Trump complained that he was not being ‘accommodated’ by Mr Powell and that he was ‘unhappy’ with his selection of chairman.”

U.S. Bubble Watch:

December 6 – Financial Times (Matthew Rocco): “The US trade deficit hit its widest level in a decade in October as the nation registered a record amount of imports and a decline in exports to China. The… gap between US imports and exports grew 1.7% month-over-month to $55.5bn, the most since October 2008 and the fifth straight month of deficit expansion.”

December 5 – Reuters (Jason Lange, Howard Schneider and by Ann Saphir): “Tariff-driven price increases have spread more broadly through the U.S. economy, though on balance inflation has risen at a modest pace in most parts of the country, the Federal Reserve said… The U.S. central bank’s ‘Beige Book’ report… also said that the economy appeared to be growing modestly to moderately. While a wide range of businesses cited concerns about the effects of a trade war between the United States and China, firms continued to hire and reported bumping up benefits and pay to compete for an increasingly scarce labor pool.”

December 6 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods recorded their biggest drop in more than a year in October and business spending on equipment appeared to be softening, suggesting a slowdown in activity in the manufacturing sector. Factory goods orders fell 2.1% amid a decline in demand for a range of goods…”

December 4 – Wall Street Journal (Esther Fung): “Chinese investors unloaded more than $1 billion in U.S. real estate in the third quarter, extending their recent retreat from hotels, office buildings and other foreign property under pressure from Beijing to reduce debt and curb money sent abroad… That was the second straight quarter in which Chinese were net sellers of U.S. commercial real estate. The second quarter marked the first time these investors sold more U.S. property than they bought during a quarter since 2008.”

China Watch:

December 5 – Financial Times (Tom Mitchell): “Beijing and Washington on Wednesday sought to reassure shaken financial markets their trade ceasefire could lead to a lasting peace after a global sell-off exposed widespread investor fears that a G20 deal lacked any substantive agreement. In its first comments since the weekend truce between Xi Jinping, the Chinese president, and Donald Trump, his US counterpart, China’s government said it was ‘confident’ a comprehensive agreement could be reached before a tariff freeze expires in three months. Mr Trump hailed the ‘very strong signals’ from Beijing, and sought to pin the days-long silence from Chinese leaders, which helped spook markets, to ‘their long trip, including stops’ from the G20 in Argentina. ‘Not to sound naive or anything, but I believe President Xi meant every word of what he said at our long and hopefully historic meeting,’ Mr Trump wrote on Twitter.”

December 4 – CNBC (Kate Rooney): “China is reportedly confused by the Trump administration’s version of what happened in Buenos Aires. After the key meeting between President Donald Trump and Chinese President Xi Jinping, officials from Beijing are ‘puzzled and irritated’ by the Trump administration’s behavior, The Washington Post reported…, citing a former U.S. government official who has been in contact with the Chinese officials. ‘You don’t do this with the Chinese. You don’t triumphantly proclaim all their concessions in public. It’s just madness,’ the former official, who asked for anonymity to describe confidential discussions, told the Post.”

December 3 – Financial Times (Emily Feng and Kathrin Hille): “Xi Jinping, the Chinese president, visited a memory chip plant in the city of Wuhan earlier this year. In a white lab coat, he made an unexpectedly sentimental remark, comparing a computer chip to a human heart: ‘No matter how big a person is, he or she can never be strong without a sound and strong heart’. China’s ambitions to be a leader in next-generation technology, such as artificial intelligence, rest on whether or not it can design and manufacture cutting-edge chips, and Mr Xi has pledged $150bn to build up the sector. But China’s plan has alarmed the US, and chips… have become the central battlefield in the trade war… And it is a battle in which China has a very visible Achilles heel… The $412bn global semiconductor industry rests on the shoulders of just six equipment companies, three of them US-based. Together, the companies make nearly all of the crucial hardware and software tools needed to manufacture chips, meaning an American export ban would choke off China’s access to the basic tools needed to make their latest chip designs. ‘You cannot build a semiconductor facility without using the big major equipment companies, none of which are Chinese,’ said Brett Simpson, the founder of Arete Research… ‘If you fight a war with no guns you’re going to lose. And they don’t have the guns.’”

December 2 – Financial Times (James Kynge): “One of the motivations behind China’s historic decision to open its economy 40 years ago was the need to attract foreign direct investment. Strong inflows followed and helped transform the Chinese economy. But these are now starting to be eclipsed by a newer font of capital that is surging into the country’s financial markets. The shift in focus from direct investment into factories and offices towards portfolio flows into stocks and bonds reveals much about how China is changing — and how it is starting to exert greater influence over the world’s financial system… Foreign asset managers, sovereign wealth funds and central banks have increased their total holdings of Chinese domestic stocks and bonds — denominated in renminbi — to $462.2bn at the end of September, up by $122.5bn from a year ago…”

December 5 – Bloomberg: “China’s escalating crackdown on peer-to-peer lending could hardly have come at a worse time for the country’s slumping car market. P2P platforms, many of which are likely to wind down under a Chinese plan to shrink the industry, facilitated 248 billion yuan ($36bn) of auto loans in 2017, or more than a fifth of the total… P2P auto lending dropped 20% in the first half of this year…, and may shrink even further as policy makers push small- and medium-sized operators to close.”

December 4 – Bloomberg (Anjani Trivedi): “As compelling as the $1.4 trillion pile of distressed assets in China looks, there are few reasons to think foreign investors will walk away with substantial winnings. Prices are falling again after a blockbuster 2017, when a wave of domestic institutional money pushed distressed debt values to almost 80 cents on the dollar from 30. This partly reflects new supply and partly a crackdown on the shadow-banking system that previously allowed investors to finance purchases of nonperforming loans, according to Dinny McMahon of Macro Polo… of the Paulson Institute. About 3,000 local investment funds, well versed in the ground rules of Chinese nonperforming assets, have backed off for now. Returns on distressed assets have fallen as their quality deteriorates.”

Brexit Watch:

December 4 – BBC: “Theresa May has suffered three Brexit defeats in the Commons as she set out to sell her EU deal to sceptical MPs. Ministers have agreed to publish the government’s full legal advice on the deal after MPs found them in contempt of Parliament for issuing a summary. And MPs backed calls for the Commons to have a direct say in what happens if the PM's deal is rejected next Tuesday. Mrs May said MPs had a duty to deliver on the 2016 Brexit vote and the deal on offer was an ‘honourable compromise’. She was addressing the Commons at the start of a five-day debate on her proposed agreement on the terms of the UK's withdrawal and future relations with the EU. The agreement has been endorsed by EU leaders but must also be backed by the UK Parliament if it is to come into force. MPs will decide whether to reject or accept it on Tuesday 11 December.”

December 5 – Reuters (William James and Elizabeth Piper): “Prime Minister Theresa May’s Brexit deal came under fire from allies and opponents alike on Wednesday after the government was forced to publish legal advice showing the United Kingdom could be locked indefinitely in the European Union’s orbit. After a string of humiliating parliamentary defeats for May the day before cast new doubt over her ability to get a deal approved, U.S. investment bank J.P. Morgan said the chances of Britain calling off Brexit altogether had increased.”

EM Watch:

December 1 – Reuters (Sharay Angulo and Anthony Esposito): “Veteran leftist Andres Manuel Lopez Obrador took office as Mexican president…, vowing to see off a ‘rapacious’ elite in a country struggling with corruption, chronic poverty and gang violence on the doorstep of the United States. Backed by a gigantic Mexican flag, the 65-year-old took the oath of office in the lower house of Congress, pledging to bring about a ‘radical’ rebirth of Mexico to overturn what he called a disastrous legacy of decades of ‘neo-liberal’ governments. ‘The government will no longer be a committee at the service of a rapacious minority,’ said the new president… Nor would the government, he said, be a ‘simple facilitator of pillaging, as it has been.’”

December 1 – Bloomberg (Jose Orozco): “Venezuela devalued its Dicom foreign exchange rate by more than 40% to 171.67 sovereign bolivars per dollar from 96.84 in an auction on Friday, one day after President Nicolas Maduro ordered a minimum wage increase… Maduro ordered a 150% increase in the monthly minimum wage, the sixth hike this year… Maduro has raised the minimum wage 25 times since he took office in 2013…”

Central Bank Watch:

December 4 – Reuters (Francesco Canepa and Balazs Koranyi): “European Central Bank policymakers are debating ways to wean the euro zone off years of easy money, floating ideas such as a new kind of multi-year loans and staggered increases in interest rates… The ECB will have a difficult task over the next couple of years: dialing back its unprecedented stimulus without hurting a banking sector still deeply divided along national lines. Conversations with five sources on or close to the ECB’s policymaking body showed rate-setters were beginning to come up with ideas to ease the transition, including raising only the interest rate on bank deposits at first and offering multi-year loans at floating rates on a permanent basis.”

December 4 – Bloomberg (Piotr Skolimowski and Jana Randow): “The European Central Bank shouldn’t waste any time in normalizing monetary policy if the economic situation in the euro area allows for it, according to Bundesbank President Jens Weidmann. …Weidmann warned that maintaining very loose monetary conditions carries risks and could lead to excesses in the financial system. The end of net asset purchases -- which economists expect to be announced at the ECB’s Dec. 13 meeting -- is only the first step on a long road of paring back stimulus, he said. ‘It’s clear that the next steps in normalization will depend on how the data develops,’ Weidmann said. ‘But I am convinced that we shouldn’t lose time unnecessarily.’”

Italy Watch:

December 4 – Financial Times (Kate Allen): “Italian companies and banks are on track to sell the smallest amount of debt in a year since the financial crisis, underlining how ructions in the country’s sovereign bonds have rippled out across the private sector. As the capital markets wind down into the end of the year, companies and banks domiciled in Italy have sold $77bn of bonds in 2018… That is the lowest amount raised in the first 11 months of the year since 2008 and down more than a quarter on the same period last year. This week, rating agency Standard & Poor’s warned that continued wrangling between Brussels and Rome over the budget proposed by Italy’s populist government ‘could result in higher funding costs for the private sector, including banks’ and ‘constrain banks’ progress in their recovery, which is just halfway through’.”

December 4 – Reuters (Valentina Za): “Italian Economy Minister Giovanni Tria is considering resigning once parliament approved the 2019 budget… Citing people in direct contact with the minister, Corriere said Tria had not made up his mind yet and could stay on despite his increasing isolation within the government.”

Global Bubble Watch:

December 2 – Financial Times (Kate Allen): “The amount of dollar-denominated debt sold by companies and banks has hit its lowest level in two-and-a-half years as the impact of the currency’s appreciation ripples through the bond markets. Dollar-denominated bond sales by companies and financial institutions in developed economies dipped to $1.4tn in the six months to October, down 14% on the previous six-month period to their lowest level since April 2016… Investors had previously benefited from the favourable arbitrage available by swapping the dollar back into other currencies, but the greenback’s strengthening over the course of this year has eroded its relative attractiveness, undermining bond sellers’ incentive to price in dollars.”

December 1 – Bloomberg (Raymond Colitt, Josh Wingrove and Jennifer Epstein): “Leaders of the world’s largest economies agreed the global system of rules that’s underpinned trade for decades is flawed, in a post-summit statement… that the White House quickly claimed as a win for Donald Trump’s protectionist agenda. The Group of 20 communique was the culmination of days of round-the-clock talks. Some officials said just having a statement was a good result, given intense wrangling over issues like trade, migration and climate. Still, the watered-down language suggests further tests ahead for advocates of globalization and institutions like the World Trade Organization.”

December 1 – New York Times (Peter S. Goodman): “Only a few months ago, the world’s fortunes appeared increasingly robust. For the first time since the wealth-destroying agony of the global financial crisis, every major economy was growing in unison. So much for all that. The global economy is now palpably weakening, even as most countries are still grappling with the damage from that last downturn. Many nations are mired in stagnation or sliding that way. Oil prices are falling and factory orders are diminishing… Companies are warning of disappointing profits, sending stock markets into a frenetic bout of selling that reinforces the slowdown. Germany and Japan have both contracted in recent months. China is slowing more than experts anticipated.”

December 2 – Reuters (Jonathan Cable and Leika Kihara): “Global economic prospects appear gloomy as year-end approaches after factory activity and export orders weakened in November, prompting analysts to predict no quick rebound amid persistent global trade tensions. In a sign that corporate sentiment is taking a hit from the worries over protectionism, manufacturing activity slipped in November in countries as varied as France, Germany, Indonesia and South Korea, IHS Markit Purchasing Managers’ Indexes showed…”

December 2 – Financial Times (Hudson Lockett): “A drop in new orders helped push South Korea’s manufacturing sector into contraction after just two months of expansion, according to an industry survey. The Nikkei-Markit manufacturing purchasing managers’ index for South Korea dropped to 48.6 in November…”

December 2 – Financial Times (Edward White): “A gauge of activity in Taiwan’s manufacturing sector fell to its lowest level in three years last month amid a worsening outlook for the country’s exports. The Nikkei Taiwan Manufacturing purchasing managers’ index was 48.4 in November, down from 48.7 in October…”

December 6 – Bloomberg (Edward Bolingbroke): “Aggressive bull-flattening move across the eurodollar strip produces record volumes in the December 2019 contract, surpassing previous levels reached in May. Shortly after 12pm ET, a total of 1.202 million EDZ9 contracts have changed hands vs. around 600k in EDH9, the next most traded; volumes across EDZ9 up to 12pm ET ran at around 270% of 10-day average…”

Fixed Income Bubble Watch:

December 6 – Bloomberg (Kelsey Butler, Davide Scigliuzzo and Jeannine Amodeo): “JPMorgan… sold a loan tied to the takeover of a provider of private jet flights at one of the U.S. credit market’s steepest discounts this year after struggling to unload the debt. The $210 million term loan -- to fund Vista Global Holding Ltd.’s purchase of XOJET Inc. -- had gone unsold since it was first marketed to investors in the middle of October, forcing Vista Global and its bank JPMorgan to cut the size and sweeten terms... The sale priced Tuesday at a discount of 93 cents on the dollar, down from initial talk of 99.5 cents.”

Leveraged Speculation Watch:

December 1 – Financial Times (Jennifer Thompson and Laurence Fletcher): “Buoyed by growing interest from institutional investors, 2018 was supposed to be the comeback year for hedge funds. It has not worked out that way. Stalling global equity markets, compounded by sharp sell-offs in February and October, have thrown the $3.31tn sector off course. Investors pulled a net $10.1bn from hedge funds in the year to October, according to eVestment…”

December 5 – Financial Times (Laurence Fletcher and Lindsay Fortado): “Some of the hedge fund industry’s biggest names, including Millennium Management and Steve Cohen’s Point72 Asset Management, suffered sharp losses in November, even as equity markets bounced back. While the S&P 500 index rose 2.9% last month after October’s 7.9% fall, some hedge funds fared worse in the face of wild swings in energy markets and big moves in equity market sectors such as technology… The losses cap a bruising period for hedge funds, which on average were down 4.9% this year to the end of November, according to the data group HFR.”

December 4 – Bloomberg (Bei Hu): “Last year’s boom has turned to bust for Asia-focused hedge funds. Eleven percent of funds tracked by Eurekahedge Pte. lost at least 20% in the first 10 months of the year. And almost 72% of those that posted double-digit gains in 2017 -- the best year for regional funds since 2009 -- are in the red this year. The sudden reversal of fortune is making it harder for Asian hedge funds to shake off their image as beta-chasers -- those that can only make money in a rising market. The stock-heavy nature of the industry – 64% of assets are controlled by equity-focused managers -- hasn’t helped as rising interest rates and trade and political tensions sparked widespread selloffs.”

Geopolitics Watch:

December 4 – CNBC (Amanda Macias): “Secretary of State Mike Pompeo announced… that the United States is prepared to withdraw from a crucial weapons treaty signed by the world’s two biggest nuclear powers. Pompeo offered Russia an ultimatum: come into compliance in 60 days or the United States will leave the Intermediate-Range Nuclear Forces, or INF, Treaty. Russia, Pompeo said, has developed ‘multiple battalions of the SSC-8 missiles,’ a move that falls outside of the Cold War-era arms agreement.”

December 5 – Bloomberg (Hal Brands): “Sometimes a handshake can mean quite a lot. Richard Nixon’s outstretched hand to Zhou Enlai in 1972 marked the end of a quarter-century of Chinese-American estrangement. The decidedly bro-ey handshake between Russia’s Vladimir Putin and Saudi Arabia’s Mohammad bin Salman at the G-20 summit last week was also laden with symbolism. That handshake was, no doubt, a pointed reminder to Washington that the Saudis are willing to explore other geopolitical options if the U.S. gets tough in response to the assassination of the journalist Jamal Khashoggi. Yet it was also indicative of a broader trend that is reshaping global politics. Day by day, it becomes increasingly clear that a central fault line… in world affairs is the struggle between liberal and illiberal forms of government. And as this happens, geopolitical alignments are shifting in subtle but momentous ways. In particular, the bonds between the U.S. and many of its authoritarian allies are weakening, as those countries find that they have less in common ideologically with America than with its revisionist rivals.”

December 5 – Reuters (Christopher Bing): “Hackers behind a massive breach at hotel group Marriott International Inc left clues suggesting they were working for a Chinese government intelligence gathering operation, according to sources familiar with the matter. Marriott said last week that a hack that began four years ago had exposed the records of up to 500 million customers in its Starwood hotels reservation system.”

Friday Evening Links

[BloombergQ] U.S. Stocks Tumble With Tech Sinking on Trade Woes: Markets Wrap

[Reuters] Gold hits 5-month peak as U.S. jobs data tempers rate hike views

[CNBC] Huawei executive’s arrest puts more pressure on Trump and Xi as they grapple over the global order

[Reuters] Fed policymakers signal turning point on U.S. rate-hike path

[BloombergQ] Kudlow Says He Expects Fed Pause for ‘Quite Some Time’ After December Hike

[Reuters] Trump praises China talks; aides downplay friction over Huawei arrest

[Reuters] As Brexit crunch nears, campaign for new referendum gathers pace

[WSJ] American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned