Friday, March 15, 2019

Weekly Commentary: No One Knows How Monetary Policy Works

My interest was piqued by a Friday Bloomberg article (Ben Holland), “The Era of Cheap Money Shows No One Knows How Monetary Policy Works.” “Monetary policy is supposed to work like this: cut interest rates, and you’ll encourage businesses and households to borrow, invest and spend. It’s not really playing out that way. In the cheap-money era, now into its second decade in most of the developed world (and third in Japan), there’s been plenty of borrowing. But it’s been governments doing it.”

I remember when the Fed didn’t even announce changes in rate policy. Our central bank would adjust interest rates by measured bank reserve additions/subtractions that would impact the interbank lending market. Seventies inflation forced Paul Volcker to push short-term interest-rates as high as 20% in early-1980 to squeeze inflation out of the system.

Federal Reserve policymaking changed profoundly under the authority of Alan Greenspan. Policy rates had already dropped down to 6.75% by the time Greenspan took charge in August 1987. Ending 1979 at 13.3%, y-o-y CPI inflation had dropped below 2% by the end of 1986. Treasury bond yields were as high as 13.8% in May 1984. But by August 1986 – yields were down to 6.9% - having dropped almost 700 bps in 27 months.

Lower market yields and economic recovery were absolute boon for equities. The S&P500 returned 22.6% in 1983, 5.2% in 1984, 31.5% in 1985, 22% in 1986 – and another 41.5% for 1987 through August 25th. Markets had evolved into a speculative bubble.

One could pinpointing the start of the great Credit Bubble back with the 70’s inflation. For my purposes, I date its inception at the 1987 stock market crash. At the time, many were drawing parallels between the 1987 and 1929 market crashes – including dire warnings of deflation risk – warnings that have continued off and on for more than three decades.

The Greenspan Fed made a bold post-crash pronouncement: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” In hindsight, this was the beginning of central banking losing control.

The S&P500 returned 16.6% in 1988 and 31.7% in 1989 - the crash quickly forgotten. Not forgotten was the assurance that the Fed would be there as a market liquidity backdrop. GDP expanded at a blistering 7% pace in Q4 1987 – expanding 5.1% for the year. GDP accelerated to 6.9% in 1988. Instead of deflation and depression, the late-eighties saw one heck of a boom. As silly as it sounds these days, the eighties used to be called the “decade of greed.”

The decade’s sinking rates, collapsing bond yields, booming securities markets and the Fed’s liquidity assurances all contributed to what evolved into a three-decade proliferation of non-bank financial intermediation – money market funds, bond funds, repurchase agreements, asset-backed securities, mortgage-backed securities, junk bonds, corporate credit, the government-sponsored enterprises and derivatives (to name the most obvious).

Eighties’ (especially late-decade) excess came back to haunt the financial system and economy in 1990/91. The Savings and Loan fiasco had morphed from a few billion dollars issue to a several hundred billion serious problem. And following the collapse of real estate bubbles on both coasts, the U.S. banking system was left severely impaired. And similar to the period after the ’87 crash, there were more dire warnings of deflation and depression.

Following up on his post-crash promise to keep markets liquid, Alan Greenspan took another giant policy leap - orchestrating a steep yield curve. By dropping short-term rates to an at the time incredible 3% - banks could borrow fed funds and invest in government debt yielding 8% - magically replenishing depleted capital.

This maneuver empowered the rebuilding of banking system capital outside of deficit-busting Washington bailouts. Importantly, this was also a godsend for the nascent hedge fund community that was overjoyed to borrow at 3% and leverage in higher-yielding credit instruments – confident that the Fed would be there to backstop system liquidity in the event of trouble. Ditto for Wall Street derivatives and prop-trading desks.

They surely didn’t realize it at the time, but our central bank had begun sliding down a most slippery slope: The Fed had created unprecedented incentives for leveraged speculation. And there was so much resulting demand for debt securities to lever that a shortage developed. Wall Street securitization and derivatives machines went into overdrive to meet demand. By 1993, debt markets had evolved into a dangerous speculative bubble.

On February 4th 1994, the Fed took a so-called baby-step, raising rates 25 bps to 3.25%. After beginning February at 5.6%, 10-year Treasury yields quickly traded to 6% after the rate increase – and were up to 7.5% in May and 8.0% by November. The wheels almost came off, as the leveraged speculators were forced to deleverage. To the great long-term benefit of leveraged speculation, it would be the last time in decades that the Fed would move forcefully to tighten financial conditions.

The Fed conveniently looked the other way in 1994 as GSE holdings surged an (at the time) unprecedented $150 billion, their buying accommodating hedge fund and Wall Street firm liquidations. The GSEs stealthily operating as quasi-central banks worked so well that they boosted buying to $305 billion during tumultuous 1998 and another $317 billion in 1999. I doubt we’ll ever have an answer: Did the Greenspan Fed simply not appreciate of the effects of this massive GSE credit creation – or did they clandestinely support it?

The Federal Reserve certainly promoted the Mexican bailout, an aggressive policy maneuver that stoked the Asian Tiger bubbles (devastating collapses coming in 1997). Then in the fall of 1998 – with the simultaneous collapses of Russia and the hedge fund Long-Term Capital Management (LTCM) bringing the global financial system to the precipice – the Fed helped orchestrate a bailout of LTCM. In the dozen years since Volcker, the Greenspan Fed had made incredible strides in “activist” policymaking. In 1987, the early-nineties, 1995 and again in 1998, the Fed was content to use new tools and assume new power in the name of fighting deflation and depression risks. Speculative finance turned more powerful at every turn.

With Wall Street finance booming, GSE liquidity bubbling and Greenspan market backstopping, extraordinary tailwinds saw Nasdaq almost double in 1999. I thought the Bubble burst in 2000/2001, and I believe the Fed did as well. Then Federal Reserve and Washington establishment panicked with the U.S. corporate debt market in 2002 at the brink of serious dislocation. The prevailing theoretical expert on reflationary policymaking, Dr. Ben Bernanke, joined the Federal Reserve Board of Governors in 2002 - and replaced Greenspan in February 2006.

Greenspan had profoundly changed central banking. Bernanke, with his radical monetary views including the “government printing press” and “helicopter money,” took things to a whole new level. Greenspan was happy to manipulate rates, yield curves, market perceptions and incentives for leveraged speculation - all in the name of developing a powerful new monetary transmission mechanism. Dr. Bernanke was ready to add aggressive use of the Fed’s balance sheet to Greenspan’s toolkit. But in 2002, 3% short rates and just Bernanke’s talk of where the Fed was headed were sufficient to initiate a mortgage finance Bubble (that would see mortgage Credit more than double in six years).

I believe the Fed willfully used mortgage Credit and home price inflation to reflate system Credit. There were certainly vocal Wall Street analysts egging them on. This was a momentous error in analysis and judgement – with only bigger mistakes to come. The bursting of this Bubble in 2008 unleashed Bernanke and global central bankers’ experiment with directly inflating markets with central bank liquidity. The Bernanke Fed and others moved deliberately to force savers out of safety and into inflating risk markets. Low rates and central bank purchases unleashed governments to issue debt like never before.

Draghi’s 2012 “whatever it takes” battle cry ensured that increasingly speculative markets would envision “QE infinity” and decades of loose finance. Bernanke the next year further emboldened speculative market psychology with his proclamation that the Fed was ready to “push back against a tightening of financial conditions.” When markets faltered on China worries in early-2016, the "investment" community came to believe central banks and governments everywhere had adopted “whatever it takes” – certainly including Beijing (powerful monetary and fiscal stimulus), Europe (unprecedented ECB QE), Japan (unprecedented QE) and the Fed (postponement of policy normalization).

Global markets went to parabolic speculative excess. From February 2016 lows to 2018 highs, the Nasdaq Composite surged 93% and the small cap Russell 2000 jumped 85%. Over this period, the S&P500 gained 62%, Japan’s Nikkei 63% and Germany’s DAX 57%.

And while the notion that “deficits don’t matter” had been gaining adherents since QE commenced in 2008, by late-2016 it had essentially regressed to The Crowd convinced “deficits will never matter.” The election of Donald Trump ushered in a replay of “guns and butter” – tax cuts (huge cuts for corporations) and a boost of military spending to go with a steady upswing in entitlement spending. Infrastructure spending, why not?

What unfolded was a complete breakdown in discipline - in central banking, in Washington borrowing and spending, and throughout highly speculative markets. And I do believe the new Fed Chairman had hopes of normalizing Fed policymaking, letting the markets begin stand on their own, and commencing the long-delayed process of system normalization. Pressure – markets and otherwise – became too much to bear. Fed U-Turn, January 4, 2019 – immediately transmitted globally.

So, returning to the Bloomberg article in the opening paragraph: No one has a clue how monetary policy works anymore – transmission mechanisms, financial and economic system reactions and long-term consequences. The world is in completely uncharted territory.

We saw in December how abruptly markets can turn illiquid and approach dislocation. And we have witnessed beginning in January just how quickly speculation can be resuscitated and excess reignited. Those that believed central bankers would quickly cave have been emboldened – as have the believers that Beijing has things well under control with as many levers to pull as needed.

The Bank of Japan doubled its balance sheet to $5 TN in four years – with no end in sight. The ECB wound down its $2.6 TN QE program in December, and just last week announced that it would begin implementing additional stimulus measures. Understandably, markets believe Fed balance sheet “normalization” will end soon – with “balloonization” commencing at any point the markets demand it.

March 12 – CNBC (Yun Li): “After a stellar rebound, Jeffrey Gundlach still thinks stocks are in a bear market. ‘The stock market was and still is in a bear market,’ the founder and chief executive officer of Doubleline Capital said… He also said stocks could go negative again in 2019.”

I struggle somewhat with the traditional “bear” and “bull” market terminology in the current backdrop. It looked like a “bear” in December, while the market has performed rather bullishly in the initial months of 2019. But I still believe the global Bubble was pierced in 2018. But we’re dealing with a unique – I would suggest deviant – global market structure. There’s this massive pool of speculative, trend-following finance. Hedge funds, ETFs and such. There is, as well, a colossal derivatives complex – for speculating, leveraging and hedging. When markets begin turning risk averse, De-Risking/Deleveraging Dynamics can quickly push increasingly illiquid markets to the breaking-point.

But this structure also creates the potential for destabilizing short squeezes and the unwind of hedges to spark powerful rallies. And these rallies can in short order entice the mammoth pool of trend-following finance to jump aboard. Who these days can afford to miss a rally?

I would furthermore argue that more than ever before, the Financial Sphere is driving the Real Economy Sphere. As we’ve seen over the past couple of months, risk market rallies can spur a rather dramatic loosening of financial conditions. There has been a recovery in household perceived wealth and an attendant resurgence in consumer confidence and spending.

The bulls see Goldilocks as far as the eye can see. Sure nice to have the once-in-a-lifetime crisis out of the way back in 2008. And good to have this cycle’s correction wrapped up in December. Central banks got our backs. “Deficits don’t matter,” and recessions and crisis are things of the past. An election year coming up is good. China has too much to lose not to keep their boom going.

At least from the perspective of my analytical framework – things continue to follow the worst-case scenario. What started with Greenspan, expanded dramatically with Bernanke, spread globally through the entire central bank community, further escalated by Draghi’s “whatever it takes” and Kuroda’s “it takes everything”, to yet further emboldened by Powell’s U-Turn and the accompanying flock of dovish central banks worldwide.

The heart of the issue is that monetary policy has come to chiefly function through a massive global infrastructure of speculative finance. Over the past three decades, things evolved from monetary policy operating subtly to encourage/discourage bank lending at the margin - to central banks expressly working to ensure that Trillions of levered holdings and perhaps tens of Trillions of speculative positions don’t face risk aversion and liquidation.

Speculative finance became the marginal source of liquidity for markets and economies generally. This all appears almost magical when the markets are rising, but in reality it's a highly unstable situation. We’re at the stage of the cycle where there is an incredible excess of finance that is speculative in character, while speculative market psychology ("animal spirits") has become deeply emboldened. The upshot is a bipolar world: too much risk-embracing finance chasing inflating markets, ensuring excessively loose financial conditions; or, when risk aversion hits, intense de-risking/deleveraging quickly leading to illiquidity, faltering markets and an abrupt tightening of financial conditions. There’s little middle-ground.

The entire notion of some so-called “neutral rate” is delusional. With markets so highly speculative and market-based finance dictating financial conditions, what policy rate would today equate with stable markets and economic conditions? Good luck with that.

It’s similar to the issue faced in 2007, although today’s global backdrop has closer parallels to 1929. Speculative finance and asset Bubbles run amok, while economic prospects dim. And nowhere are such dynamics more at play than in China.

March 14 – Financial Times (Hudson Lockett): “The cost of new housing in China's major cities rose more quickly in February… Prices for new housing across 70 large cities rose 10.4% year on year in January… That marked the equal-quickest gain in 21 months. Every city saw average home prices rise compared to a year ago except Xiamen, where they stood unchanged… The latest reading marks a nine-month run of quickening price gains across major cities. That is good news for top officials gathering in Beijing this week for the National People's Congress, as China’s property sector is estimated to account for 15% of the country's gross domestic product, or closer to 30% if related industries are included.”

March 10 – Bloomberg: “China’s credit growth slowed in February after a seasonal surge the previous month, with the net development in the first two months of the year signaling continued recovery in credit supply. Aggregate financing was 703 billion yuan ($105bn) in February…, compared with an estimated 1.3 trillion yuan in a Bloomberg survey. Broad M2 money supply gained 8.0%, matching its slowest-ever expansion… Financial institutions offered 885.8 billion yuan of new loans in February, versus a projected 950 billion yuan.”

Combining a booming January and a less-than-expected February, China Aggregate Financing increased $794 billion – 25% greater than the comparable 2018 expansion. Total Aggregate Financing jumped $3.025 TN over the past year (10.1%), with growth down somewhat from the comparable year ago period. And while “shadow bank” instruments continue to stagnate, bank loans grow like gangbusters.

China New Loans were up $2.46 TN over the past year, or 13.4%. Over the past three months, New Loans expanded $773 billion, or 15.5% annualized. Consumer Loans actually suffered a small contraction in February (after a record January), the first decline since February 2016. For the past year, Consumer Loans expanded $1.06 TN, or 17.1%. Consumer Loans expanded 42% over two years, 77% over three years and 139% in five years. What a Bubble.

For the Week:

The S&P500 surged 2.9% (up 12.6% y-t-d), and the Dow rose 1.6% (up 10.8%). The Utilities gained 1.8% (up 10.7%). The Banks jumped 2.6% (up 16.6%), and the Broker/Dealers rose 3.1% (up 10.7%). The Transports increased 1.9% (up 12.4%). The S&P 400 Midcaps rose 1.9% (up 14.0%), and the small cap Russell 2000 gained 2.1% (up 15.2%). The Nasdaq100 jumped 4.2% (up 15.4%). The Semiconductors surged 5.6% (up 20.5%). The Biotechs jumped 5.9% (up 21.9%). While bullion increasing $4, the HUI gold index declined 0.4% (up 5.5%).

Three-month Treasury bill rates ended the week at 2.39%. Two-year government yields declined three bps to 2.44% (down 5bps y-t-d). Five-year T-note yields fell four bps to 2.40% (down 12bps). Ten-year Treasury yields slipped four bps to 2.59% (down 10bps). Long bond yields fell six bps to 3.01% (unchanged). Benchmark Fannie Mae MBS yields dropped six bps to 3.32% (down 18bps).

Greek 10-year yields increased three bps to 3.79% (down 56bps y-t-d). Ten-year Portuguese yields declined four bps to 1.31% (down 40bps). Italian 10-year yields slipped one basis point to 2.50% (down 25bps). Spain's 10-year yields jumped 14 bps to 1.19% (down 23bps). German bund yields added two bps to 0.08% (down 16bps). French yields rose five bps to 0.46% (down 25bps). The French to German 10-year bond spread widened three to 38 bps. U.K. 10-year gilt yields increased two bps to 1.21% (down 7bps). U.K.'s FTSE equities index jumped 1.7% (up 7.4% y-t-d).

Japan's Nikkei 225 equities index rose 2.0% (up 7.2% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.03% (down 4bps y-t-d). France's CAC40 surged 3.3% (up 14.3%). The German DAX equities index jumped 2.0% (up 10.7%). Spain's IBEX 35 equities index rose 2.3% (up 9.4%). Italy's FTSE MIB index gained 2.7% (up 14.9%). EM equities traded higher. Brazil's Bovespa index surged 4.0% (up 12.8%), and Mexico's Bolsa gained 1.5% (up 1.4%). South Korea's Kospi index rose 1.8% (up 6.6%). India's Sensex equities index surged 3.7% (up 5.4%). China's volatile Shanghai Exchange gained 1.7% (up 21.2%). Turkey's Borsa Istanbul National 100 index rose 1.7% (up 13.2%). Russia's MICEX equities index was about unchanged (up 5.0%).

Investment-grade bond funds saw inflows of $3.295 billion, and junk bond funds posted inflows of $1.040 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 10 bps to a 13-month low 4.35% (down 13bps y-o-y). Fifteen-year rates fell seven bps to 3.76% (down 14bps). Five-year hybrid ARM rates declined three bps to 3.84% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 10 bps to a one-year low 4.30% (down 27bps).

Federal Reserve Credit last week increased $2.5bn to $3.932 TN. Over the past year, Fed Credit contracted $428bn, or 9.8%. Fed Credit inflated $1.121 TN, or 40%, over the past 331 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $6.2bn last week to $3.472 TN. "Custody holdings" gained $20bn y-o-y, or 0.6%.

M2 (narrow) "money" supply added $11.0bn last week to $14.490 TN. "Narrow money" gained $585bn, or 4.2%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $31.5bn, while Savings Deposits fell $28.9bn. Small Time Deposits gained $4.2bn. Retail Money Funds added $1.5bn.

Total money market fund assets were little changed at $3.112 TN. Money Funds rose $292bn y-o-y, or 10.3%.

Total Commercial Paper declined $5.4bn to $1.062 TN. CP declined $19bn y-o-y, or 1.8%.
Currency Watch:

March 12 – Bloomberg (Richard Frost, Benjamin Purvis and Tian Chen): “Hong Kong’s de facto central bank intervened to defend the local currency’s peg against the dollar for the second time in days. The Hong Kong Monetary Authority bought HK$3.925 billion ($500 million) of local currency…, after the Hong Kong dollar fell to the weak end of its HK$7.75-HK$7.85 trading band. It also purchased $192 million worth at the end of last week… The move will reduce the aggregate balance, a measure of interbank liquidity, to HK$70.9 billion on March 14.”

The U.S. dollar index declined 0.7% to 96.595 (up 0.4% y-t-d). For the week on the upside, the Norwegian krone increased 2.8%, the Swedish krona 2.2%, the British pound 2.1%, the Mexican peso 1.5%, the Brazilian real 1.4%, the euro 0.8%, the New Zealand dollar 0.6%, the Swiss franc 0.6%, the Canadian dollar 0.6%, the Australian dollar 0.6%, the Singapore dollar 0.4%, and the South African rand 0.3%. For the week on the downside, the Japanese yen declined 0.3% and the South Korean won 0.1%. The Offshore Chinese renminbi increased 0.11% versus the dollar this week (up 2.45% y-t-d).

Commodities Watch:

March 12 – Financial Times (Henry Sanderson): “China’s push to boost its gold holdings could see the country challenge Russia as the most aggressive buyer of the precious metal this year. The country’s central bank, the People’s Bank of China, has bought about 32 tonnes of gold in the past three months. If it keeps purchasing at that rate, China would surpass Russia and Kazakhstan, leading buyers in 2018 which have tapered their acquisitions recently. China is the world’s biggest gold producer but its gold reserves, at just under $80bn, make up a fraction of its total foreign exchange reserves of more than $3tn… That 3% share, for example, compares with 19% for Russia.”

The Goldman Sachs Commodities Index jumped 2.5% (up 15.5% y-t-d). Spot Gold added 0.3% to $1,302 (up 1.6%). Silver slipped 0.2% to $15.324 (down 1.4%). Crude jumped $2.45 to $58.52 (up 29%). Gasoline rose 3.1% (up 43%), while Natural Gas dropped 2.4% (down 5%). Copper increased 0.4% (up 11%). Wheat surged 5.2% (down 8%). Corn increased 0.7% (down 1%).

Trump Administration Watch:

March 11 – Bloomberg (Katia Dmitrieva): “President Donald Trump’s newest budget forecasts the U.S. fiscal deficit surpassing $1 trillion this year and staying above that level until 2022. The fiscal 2020 proposal sees the deficit expanding to $1.1 trillion for 2019 and 2020, when Trump will run for re-election. The shortfall is seen narrowing slightly to $1.07 trillion in 2012 and $1.05 trillion in 2022…”

March 13 – Associated Press (Kevin Freking): “President Donald Trump… dangled the prospect of walking away from a new trade deal with China if it’s not to his liking, just as he cut short his summit with North Korea’s Kim Jong Un… Trump spoke on the state of negotiations with China shortly before meeting with Republican senators on trade issues. He spoke optimistically of the U.S. and China being able to reach an agreement, declaring that ‘China has not been doing well. We’ve been doing unbelievably well.’”

March 12 – Financial Times (James Politi): “US President Donald Trump’s trade chief has warned that negotiations to end the tariff war with China were at risk of failing, saying ‘major, major issues’ needed to be resolved before an agreement was reached, and he could not ‘predict success at this point’. Speaking before the Senate finance committee…, Robert Lighthizer, the US trade representative, said that talks with Beijing had intensified and probably entered their ‘final weeks’, as the two countries haggle over structural reforms and enforcement provisions. But Mr Lighthizer indicated that a deal could not be taken for granted. ‘We’re either going to have a good result or we’re going to have a bad result before too long, but I’m not setting a specific timeframe and it’s not up to me,’ Mr Lighthizer said. ‘I’ll work as hard as I can, and the president will tell me when the time is up, or the Chinese will,’ he added.”

March 13 – Bloomberg (Jennifer Epstein): “Gary Cohn, the former head of President Donald Trump’s National Economic Council, said the U.S. is ‘desperate right now’ for a trade pact with China as negotiators from both countries seek to reach a deal. ‘The president needs a win,’ Cohn said… Cohn’s comments stand in contrast to statements from Trump that he’s in no rush for an agreement and is prepared to walk away from negotiations.”

March 11 – Associated Press (Lisa Mascaro): “President Donald Trump proposed a record $4.7 trillion budget…, pushing the federal deficit past $1 trillion but counting on optimistic growth, accounting shuffles and steep domestic cuts to bring future spending into balance in 15 years. Reviving his border wall fight with Congress, Trump wants more than $8 billion for the barrier with Mexico, and he’s also asking for a big boost in military spending. That’s alongside steep cuts in health care and economic support programs for the poor that Democrats — and even some Republicans — will oppose. Trump called his plan a bold next step for a nation experiencing ‘an economic miracle.’ House Speaker Nancy Pelosi called his cuts ‘cruel and shortsighted ... a roadmap to a sicker, weaker America.’”

March 10 – Reuters (Roberta Rampton): “President Donald Trump will propose in his fiscal 2020 budget on Monday that the U.S. Congress cut non-defense spending by 5% while boosting spending on the military, veterans’ healthcare and border security, the White House budget office said…”

March 12 – Wall Street Journal (Jeremy Page, Kate O’Keeffe and Rob Taylor): “A new front has opened in the battle between the U.S. and China over control of global networks that deliver the internet. This one is beneath the ocean. While the U.S. wages a high-profile campaign to exclude China’s Huawei Technologies Co. from next-generation mobile networks over fears of espionage, the company is embedding itself into undersea cable networks that ferry nearly all of the world’s internet data. About 380 active submarine cables—bundles of fiber-optic lines that travel oceans on the seabed—carry about 95% of intercontinental voice and data traffic, making them critical for the economies and national security of most countries. Current and former security officials in the U.S. and allied governments now worry that these cables are increasingly vulnerable to espionage or attack and say the involvement of Huawei potentially enhances China’s capabilities.”

March 8 – Wall Street Journal (Andrew Ackerman): “What was supposed to be Volcker 2.0—a more industry-friendly version of postcrisis Wall Street trading restrictions—could be replaced with a third try by regulators. Faced with industry ire over a proposal released last year, Trump-appointed financial regulators are leaning toward redoing it… The Volcker rule limits banks’ ability to make trading bets with their own money, a practice known as proprietary trading. No final decisions have been made to scrap the May 2018 proposal and to start anew on the rule, the people said. Still, staffers at banking regulators were preparing to make recommendations to senior policy makers in the coming days or weeks.”

Federal Reserve Watch:

March 10 – Reuters (Howard Schneider): “Federal Reserve Chairman Jerome Powell said… the U.S. central bank does ‘not feel any hurry’ to change the level of interest rates again as it watches how a slowing global economy affects local conditions in the United States. Rates are currently ‘appropriate,’ Powell said in a wide-ranging interview with CBS’s 60 Minutes news show in which he called the current rate level ‘appropriate’ and ‘roughly neutral,’ meaning it is neither stimulating or curbing the economy.”

U.S. Bubble Watch:

March 10 – Associated Press (Andrew Taylor): “The federal budget deficit is ballooning on President Donald Trump’s watch and few in Washington seem to care. And even if they did, the political dynamics that enabled bipartisan deficit-cutting deals decades ago has disappeared, replaced by bitter partisanship and chronic dysfunction. That’s the reality that will greet Trump’s latest budget… Like previous spending blueprints, Trump’s plan for the 2020 budget year will propose cuts to many domestic programs favored by lawmakers in both parties but leave alone politically popular retirement programs such as Medicare and Social Security… It’s put deficit hawks in a gloomy mood. ‘The president doesn’t care. The leadership of the Democratic Party doesn’t care,’ said former Sen. Judd Gregg, R-N.H. ‘And social media is in stampede mode.’”

March 14 – Reuters (Lucia Mutikani): “U.S. import prices increased by the most in nine months in February, but the trend remained weak, with prices declining for a third straight month on an annual basis. …Import prices rose 0.6% last month, the biggest gain since May, boosted by increases in the costs of fuels and consumer goods…”

March 13 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods rose by the most in six months in January and shipments increased, pointing to strong business spending on equipment at the start of the year. …Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rebounded 0.8%, the biggest gain since July.”¬

March 13 – Reuters (Lucia Mutikani): “U.S. construction spending surged in January, with investment in public projects rising to a more than eight-year high, which could boost economic growth estimates for the first quarter. …Construction spending jumped 1.3%, the largest increase since last April, after a revised 0.8% drop in December.”

March 11 – Bloomberg (Matthew Boesler): “U.S. households in February reduced their expectations for inflation to the lowest level in 18 months, according to a Federal Reserve Bank of New York survey of consumer expectations. The median respondent to the New York Fed’s monthly study reported an expected inflation rate of 2.8% in three years’ time, down from 3% the month before…”

March 10 – Wall Street Journal (Michael Wursthorn): “Investors are snapping up shares of companies with weak earnings, a sign many have shaken off last year’s jitters and are ready to re-embrace riskier stocks in pursuit of outsize gains. Through the first two months of 2019, shares of companies with low earnings stability over the past 10 years have climbed more than those with steadier profits, according to… Bank of America Merrill Lynch. Top performers include communications, energy and utility stocks… many of which have more than doubled in value since Jan. 1 to push major indexes within striking distance of their records. Investors’ willingness to plow into riskier stocks that have less stable earnings recovered after the Federal Reserve’s recent pause on raising rates and growing optimism about U.S.-China trade negotiations, analysts said.”

March 12 – CNBC (Yun Li): “The so-called bond king Jeffrey Gundlach is not shy when it come to rebuking the increasingly popular theory backed by progressives — the Modern Monetary Theory. ‘MMT is a crackpot idea... sounds good for a first grader,’ the founder and chief executive officer of Doubleline Capital said in an investor webcast… He said the theory is ‘complete nonsense’ being used to justify a socialist program. The notion behind MMT is that as long as the Federal Reserve can keep interest rates low without sparking inflation, the national debt and budget deficit won’t be an issue.”

China Watch:

March 14 – Bloomberg (Jenny Leonard, Jennifer Jacobs and Jeffrey Black): “A meeting between President Donald Trump and President Xi Jinping to sign an agreement to end their trade war won’t occur this month and is more likely to happen in April at the earliest, three people familiar with the matter said. Despite claims of progress in talks by both sides, a hoped-for summit at Trump’s Mar-a-Lago resort will now take place at the end of April if it happens at all…”

March 13 – Financial Times (Gabriel Wildau): “China’s banking regulator issued new guidelines… designed to encourage banks to increase loans to small businesses, as Beijing seeks to remedy financing bottlenecks in order to promote growth amid an economic slowdown. Economists have blamed a scarcity of financing for small, privately owned businesses for a recent slowdown in economic growth. Such groups have suffered disproportionately from a campaign to curb financial risk, which sharply reduced off-balance-sheet lending on which private groups relied. But banks have been wary of lending to smaller companies because default rates are higher on average.”

March 11 – Reuters (Brenda Goh): “China may increase its tolerance for non-performing loans at small companies in order to help spur their growth, the state-backed Securities Times newspaper quoted a senior official from the banking regulator as saying…”

March 10 – Reuters (Yifan Qiu, Pei Li and Ryan Woo): “China’s factory-gate inflation in February stayed flat from a month earlier, while gains in consumer prices slipped to the lowest level in more than a year as muted price pressures point to lacklustre demand in the world’s second-largest economy. The inflation data is the latest indication of slowing demand in China, as factory surveys also point to dwindling export orders amid a protracted U.S.-Sino trade war.”

March 13 – Reuters (Lusha Zhang and Stella Qiu): “Growth in China’s industrial output fell to a 17-year low in the first two months of the year, pointing to further weakness in the world’s second-biggest economy… Industrial output rose 5.3% in January-February…, less than expected and the slowest pace since early 2002.”

March 13 – Reuters (Yawen Chen, Min Zhang and Kevin Yao): “China’s property investment accelerated in the first two months of the year driven by strong demand in its hinterland and defying a decline in sales, government curbs in bigger markets and a broader economic slowdown… It rose 11.6% in January-February from a year earlier, up from the 9.5% growth reported for the 2018 full year…”

March 11 – Bloomberg (Anjani Trivedi): “Investors are at it again, sorting through the heap of China’s credit data. Last month’s aggregate social-financing numbers… show the flow of new credit in (and around) the financial system fell 41% in February from a year earlier. Retail loans posted their largest monthly drop on record. Companies continued to struggle with working-capital financing; bonds were the main channel of funding. Looking for signals of economic recovery in such noisy data is a fool’s errand. Just a month earlier, the same figure surged 51%. The total stock of debt across the system remains 205.6 trillion yuan ($30.6 trillion) and is still growing at 10%, just below the average in previous years.”

March 12 – Reuters (Yawen Chen and Ryan Woo): “Staring at an array of floor plans in a showroom packed with models of apartment blocks set to go up in the northwestern city of Yanan, the young couple was faced with a tough decision. Even as housing prices in places like Beijing and Shanghai have shown signs of cooling, they remain red hot in many small cities like Yanan, putting pressure on prospective buyers… Easy credit policies and official intervention in property markets are fuelling those price surges, raising fears that local governments may be creating the sorts of housing bubbles and debt burdens that Beijing has vowed to crack down on.”

Central Bank Watch:

March 13 – Bloomberg (Enda Curran and Toru Fujioka): “Central bankers searching for options to fight the next downturn should look to Japan, where policy makers are gathering for a regular review of the world’s most epic monetary stimulus program. The Bank of Japan’s two-decade journey from zero interest rates to massive asset purchases, negative rates and yield-curve control demonstrates a combination of tools that can be used to sustain stimulus -- along with the huge damage that piles up when it drags on too long. As global economic growth wanes, Europe doles out a fresh round of easing and the U.S., Canada, Britain and Australia put rate hikes on hold, economists are asking what more can be done with scant room to lower borrowing costs and already swollen balance sheets. ‘Whether central banks like it or not, there is little choice than to venture further with ‘creative’ new strategies to reflate inflation expectations,’ said Ben Emons, managing director of global macro strategy at Medley Global Advisors…”

Brexit Watch:

March 14 – Bloomberg (Tim Ross): “U.K. Prime Minister Theresa May enjoyed a rare good day in Parliament, fighting off her opponents and winning the endorsement of British politicians to seek to delay Brexit day. The result on Thursday means her Brexit plan -- which has twice been rejected by huge majorities in the House of Commons - is still in play. The House of Commons voted 412 to 202 to support May’s motion, which as well as calling for a delay also reveals May’s strategy for getting her unpopular deal approved. She is offering members of Parliament a choice between backing her deal and delivering Brexit with a short delay, or risk being trapped in a long extension with terms set by the bloc.”

Europe Watch:

March 11 – Reuters (Abhinav Ramnarayan): “Euro zone bond yields dipped on Monday after German industrial production fell in January, adding weight to market bets on a slowing European economy and the European Central Bank’s dovish policy stance. Industrial output data showed that Europe’s largest economy is still suffering from trade frictions and unease about Brexit after narrowly avoiding recession last year. ‘We have had a lot of sentiment indicators pointing to this, but industrial production is hard data and it is really cementing the impression that the European economy is slowing down,’ Mizuho rates strategist Antoine Bouvet said.”

March 14 – Financial Times (Davide Ghiglione, Rachel Sanderson and James Kynge): “Italy is considering borrowing from China-led Asian Infrastructure Investment Bank as part of plans to become the first G7 country to endorse Beijing’s contentious Belt and Road global investment programme. The two countries are planning to ‘explore all opportunities for co-operation’ in Italy and ‘third countries’, according to the five-page draft accord… The wide-ranging agreement would span areas including politics, transport, logistics and infrastructure projects.”

EM Watch:

March 12 – Financial Times (Paul Callan, Bassem Bendary and Yohann Sequeira): “The developing world could be heading towards a new debt crisis. Public debt in emerging markets now averages 50% of gross domestic product, the highest level since the 1980s. More than 80% of developing countries have increased their public debt in the past five years. The number of developing countries whose public debt level is rated as ‘unsustainable’ or ‘high-risk’ is now 32, more than double the number in 2013. Most of the media’s attention has focused on Chinese loans that add to developing country debts. But China is not the only lender contributing to the looming crisis: the majority of new loans to at-risk, low-income and lower-middle-income countries have come from other sources, including other countries and multilateral institutions such as the World Bank and regional development banks.”

March 11 – Financial Times (Laura Pitel): “Turkey’s president Recep Tayyip Erdogan is confronting his first recession in a decade as he prepares for local elections that will test his party’s grip on the country’s largest cities. Growth contracted by 2.4% in last year’s fourth quarter compared with the previous quarter, when it fell 1.6%... As a result, Turkey’s economy grew at 2.6% for the whole of last year, from 7.4% in 2017. The last time Turkey faced a recession… under Mr Erdogan’s watch was in 2008 and 2009 in the wake of the US subprime mortgage crisis.”

March 11 – Financial Times (Colby Smith): “The inevitable has arrived: Turkey is in recession. For the first time in a decade… By all accounts, it was just a matter of time. Since last summer's currency crisis, which saw the lira lose 40% of its value until its central bank finally heeded to economic orthodoxy in September and raised interest rates, Turkey's economy has rebalanced, and hard… GDP has since shrunk 3% year-over-year, with seasonally adjusted GDP decreasing by 2.4% on a quarterly basis, the slowest since the global financial crisis.”

Global Bubble Watch:

March 13 – CNBC (Jeff Cox): “Global debt has jumped since the financial crisis, though one ratings agency thinks that it poses significantly less danger than the last time around. Corporate, government and household indebtedness rose to $178 trillion as of June 2018, a 50% increase from a decade ago, according to figures S&P Global Ratings… The expansion was especially acute at the government level, which stood at $62.4 trillion, or 77% higher than it did before the public borrowing binge began. ‘Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness,’ S&P Global Ratings credit analyst Terry Chan said… ‘Although another credit downturn may be inevitable, we don’t believe it will be as bad as the 2008-2009 global financial crisis.’”

March 11 – Bloomberg (Fergal O'Brien): “The global economy’s sharp loss of speed through 2018 has left the pace of expansion the weakest since the global financial crisis a decade ago, according to Bloomberg Economics. Its new GDP tracker puts world growth at 2.1% on a quarter-on-quarter annualized basis, down from about 4% in the middle of last year. While there’s a chance that the economy may find a foothold and arrest the slowdown, ‘the risk is that downward momentum will be self-sustaining,’ say economists Dan Hanson and Tom Orlik.

March 13 – Bloomberg (Adam Haigh): “Last October, the world’s stock of negative-yielding debt had tumbled by more than half from its record high as investors adjusted to the end of super-loose monetary policy. Now it’s soaring again after the dovish pivots around the world. The Bloomberg Barclays Global Aggregate Negative-Yielding Debt Index has increased in value by well over $3 trillion since its low five months back, to $9.3 trillion… That’s still below the all-time record of $12.2 trillion in June 2016.”

March 10 – Wall Street Journal (Avantika Chilkoti): “Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy. Germany’s 10-year government bonds, known as bunds, yielded as little as 0.04% on Friday, a microscopic return for investors and the lowest level since October 2016 when the region was still emerging from a protracted sovereign-debt crisis… The European Central Bank slashed its growth forecasts for this year to 1.1% from 1.7% and all but ruled out raising its benchmark interest rate, currently negative, before the start of next decade at the earliest.”

March 14 – Bloomberg (Erik Hertzberg): “Canadian home values fell last year for the first time in three decades amid falling prices in some of the country’s priciest markets, even as debt burdens increased. The value of residential real estate in Canada held by households dropped C$30 billion ($22.5bn) in the fourth quarter to C$5.10 trillion… The 0.6% decline is the first decrease in country-wide home values in data going back to 1990.”

March 10 – Reuters (Roberta Rampton): “The boom in Australian home prices and building over the past decade or so was primarily driven by lower real interest rates, while strong migration tended to lift rents, according to a study paper from the country’s central bank… At their peak, prices in Sydney more than doubled between 2008 and 2017, but have since fallen back by around 10%.”

Fixed-Income Bubble Watch:

March 11 – Bloomberg (Luke Kawa): “That sound you’ve been hearing is U.S. credit investors breathing a large sigh of relief. The sum of all fears among those buying investment-grade and high-yield debt has sunk to its lowest level since 2014, according to Bank of America’s March survey of fund managers -- even as the Federal Reserve Bank of Dallas warns about poor liquidity and the Bank for International Settlements frets about damaging downgrades. ‘The most notable change in our fresh survey of U.S. credit investors is that most concerns have declined notably from December and January,’ write analysts led by Hans Mikkelsen…”

Leveraged Speculator Watch:

March 12 – Bloomberg (Justina Lee): “When it comes to slicing and dicing equities based on their factors, the strategy beloved by quants is exhibiting symptoms of sickness. The challenge is diagnosing how serious it is. This month, Neuberger Berman will become the latest big name to close a fund based on factor investing, which uses characteristics like quality and value to bet which stocks will outperform over time. The decision follows a similar move by Columbia Threadneedle in December. It’s anecdotal, sure, but it’s adding up to an increasingly gloomy picture across the industry and re-energizing a debate about the effectiveness of such strategies. One of the most popular factors, momentum, has extended a miserable 2018 into this year. Value, another key style, has gone nowhere.”

Geopolitical Watch:

March 12 – CNBC (Tom DiChristopher): “The United States will continue to do whatever it takes to rid Venezuela of disputed leader Nicolas Maduro, Secretary of State Mike Pompeo told CNBC... ‘As the president said, every option is on the table to deliver to the Venezuelan people the democracy they deserve. And then ultimately we’ll build back an economy where they can again have the wealth that they have under their own feet,’ Pompeo said…, referring to Venezuela’s vast oil reserves.”

March 12 – Reuters (Vivian Sequera and Deisy Buitrago): “Venezuela ordered American diplomats on Tuesday to leave within 72 hours after President Nicolas Maduro accused U.S. counterpart Donald Trump of cyber ‘sabotage’ that plunged the South American country into its worst blackout on record.”

March 14 – Reuters (Joyce Lee and David Brunnstrom): “North Korea is considering suspending talks with the United States and may rethink a freeze on missile and nuclear tests unless Washington makes concessions, a senior diplomat said on Friday, according to news reports from the North’s capital… North Korean Vice Foreign Minister Choe Son Hui blamed top U.S. officials for the breakdown of last month’s summit between Kim and U.S. President Donald Trump in Hanoi… ‘We have no intention to yield to the U.S. demands (at the Hanoi summit) in any form, nor are we willing to engage in negotiations of this kind,’ TASS quoted Choe… ‘I want to make it clear that the gangster-like stand of the U.S. will eventually put the situation in danger…’”

March 12 – Wall Street Journal (Gordon Lubold and Dustin Volz): “The Navy and its industry partners are ‘under cyber siege’ by Chinese hackers and others who have stolen national security secrets in recent years, exploiting critical weaknesses that threaten the U.S.’s standing as the world’s top military power, an internal Navy review concluded. The assessment… depicts a branch of the armed forces under relentless cyberattack by foreign adversaries and struggling in its response to the scale and sophistication of the problem. Drawing from extensive research and interviews with senior officials across the Trump administration, the tone of the review is urgent and at times dire, offering a rare, unfiltered look at the military’s cybersecurity liabilities.”

March 13 – Bloomberg (Nick Wadhams): “Secretary of State Michael Pompeo said China was in a ‘league of its own’ as a human-rights violator over a campaign that’s put hundreds of thousands of Uighurs and other Muslims in reeducation camps, an unusually blunt U.S. critique of the country’s abuses. Presenting the State Department’s annual report on global human rights practices, Pompeo said… that China had interred more than 1 million Uighurs, ethnic Kazakhs and other Muslims in camps ‘designed to erase their religious and ethnic identities.’”