Friday, February 15, 2019

Weekly Commentary: No Holds Barred

The world is now fully embroiled in a most precarious period. I wonder if the Fed is comfortable seeing the markets dash skyward – the small caps up 16.4% y-t-d, Banks 15.9%, Transports 15.2%, Biotechs 18.5% and the Semiconductors 17.0%. Or, perhaps, they’re quickly coming to recognize that they are now fully held hostage by market Bubbles.

Similarly, I ponder how Beijing feels about January’s booming Credit data – Aggregate Financing up $685 billion in a month. Do officials appreciate that they are completely held captive by history’s greatest Credit Bubble? I have argued that Bubbles have become a fundamental geopolitical device – a stratagem. The situation has regressed to a veritable global Financial Arms Race. As China/U.S. trade negotiations seemingly head down the homestretch, each side must believe that rallying domestic markets beget negotiating power. Meanwhile, emboldened global markets behave as if they have attained power surpassing mighty militaries and even nuclear arsenals.

February 15 – Reuters (Kevin Yao and Judy Hua): “China’s banks made the most new loans on record in January - totaling 3.23 trillion yuan ($477bn) - as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy. Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share. But they have also faced months of pressure from regulators to step up lending, particularly to cash-starved smaller firms. Net new yuan lending last month was far more than expected and eclipsed the last high of 2.9 trillion yuan in January 2018. Analysts… had predicted new loans of 2.8 trillion yuan, more than double the level seen in December.”

China's January new bank loans were 11.4% higher than the previous record from January 2018 – and 15% above estimates. Bank Loans expanded an imprudent $821 billion over the past three months alone, a full 20% above the comparable period from one year ago. Total Bank Loans expanded 13.4% over the past year; 28% in two years; 45% in three years; 91% in five years; and an incredible 323% during the past decade.

Led by bubbling bank lending, China’s Aggregate Financing expanded a record $685 billion during January. Flood gates wide open. While typically a big month for Chinese lending, January’s growth in Aggregate Financing was 50% above January 2018. It’s worth noting that the growth in Aggregate Financing over the past six months ran 7% above the comparable year ago period (and equates to an annualized pace of $3.7 TN). Consumer (largely mortgage) Loans expanded a record $146 billion for the month, 10% greater than the previous record from January 2018. Consumer loans expanded 18% over the past year; 43% in two years; 77% in three; and 140% in five years.

It’s too fitting: as the long-standing global superpower and ascending superpower are locked in tortuous negotiations, their respective financial power centers – securities markets in the U.S. and state-directed bank lending in China – rage. No Holds Barred.

“The reason I’m giving the central bank an “F” is look at what’s happening in China and Asia… Look at what’s happening in Europe from the economic perspective. The U.S. stimulated at full employment with our tax cuts. That stimulus is about to wear off. What I worry about is the last three recessions we’ve had in the U.S. we’ve cut rates 500 bps. Now we can only cut them 225 or 250. And a week or two ago the San Francisco Fed put out a white paper about the benefits of negative interest rates. I hope that’s not where we’re going, but we can only cut rates about 225/250 bps to be at zero. So, this point of normalization should have happened long ago – not now. They were really late in the cycle in raising rates and now they’re stuck. So when we get into even a small recession, I don’t think we have the arrows in the quiver. And so let’s hope that we learned something from Japan and Europe about negative interest rates. They destroy the banking sectors and they have not helped their economies whatsoever…” Kyle Bass, Hayman Capital Management, appearing on Bloomberg Television, February 11, 2019

Seeing eye-to-eye with Kyle Bass, it has become difficult not to be thinking ahead to the next recession. And while Chinese Credit and ongoing aggressive global monetary stimulus can no doubt prolong the “Terminal Phase” of this most protracted worldwide boom, this comes at a steep price.

Between July 2007 and December 2008, the Fed collapsed fed funds 500 bps. At least as important, 10-year Treasury yields sank about 300 bps during this period (520bps to 213bps). After ending June 2007 at 6.26%, benchmark Fannie Mae MBS yields closed out 2008 at 3.89%.

The Fed retained significant firepower to counter the bursting of the mortgage finance Bubble. Between August 2007 and March 2009, benchmark 30-year mortgage rates sank from about 6.70% to 4.85%. Importantly, by collapsing rates and purchasing large quantities of mortgage-backed securities, the Fed orchestrated a major mortgage refinancing boom. This, along with scores of government-assistance programs, allowed tens of millions of indebted homeowners to significantly reduce monthly mortgage payments. In particular, millions of higher-risk borrowers were able to replace old high-rate subprime mortgages for prime mortgages with dramatically lower payments.

At 4.37%, 30-year conventional mortgage rates are today already below the lowest levels from 2009. And with the vast majority of borrows over recent years having refinanced at historically low mortgage rates, there’s limited prospects for reduced monthly payments to dampen financial burdens during the next recession.

Worse yet, student loan debt has more than doubled since the crisis. And when the next recession hits, there will be record amounts of auto and Credit card debt.

February 12 – Reuters (Jonathan Spicer): “Some red flags emerged for the U.S. economy late last year as credit card inquiries fell, student-loan delinquencies remained high and riskier borrowers drove home automobiles, according to a report that could signal a downturn is on the horizon. The U.S. household debt and credit report… by the Federal Reserve Bank of New York, showed that the overall debt shouldered by Americans edged up to a record $13.5 trillion in the fourth quarter of 2018. It has risen consistently since 2013, when debt bottomed out after the last recession. While mortgage debt, by far the largest slice, slipped for the first time in two years, other forms of borrowing rose including that of credit cards, which at $870 billion matched its pre-crisis peak in 2008.”

Auto lending, in particular, has gone through a protracted – arguably unprecedented – period of loose lending.

February 12 – Washington Post (Heather Long): “A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported…, even more than during the wake of the financial crisis era. Economists warn this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills. ‘The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market,’ economists at the New York Fed wrote… A car loan is typically the first payment people make because a vehicle is critical to getting to work, and someone can live in a car if all else fails. When car loan delinquencies rise, it is a sign of significant duress among low-income and working-class Americans.”

February 13 – CNBC (Sarah O'Brien): “As Americans' appetite for new cars continues unabated, an advocacy group is sounding the alarm over the growing level of auto debt carried by U.S. consumers. In a report…, U.S. PIRG warns that the continuing rise in auto debt is putting many consumers in a financially vulnerable position, which could worsen during an economic downturn… ‘More and more people are buying too much car for what they can afford,’ said Ed Mierzwinski, senior director of U.S. PIRG's federal consumer program. The group's new report delves into the financial implications and policy-related aspects of Americans' reliance on cars. It shows that the aggregate amount of auto debt that consumers carry — roughly $1.27 trillion — is 75% more than the amount owed at the end of 2009… Overall, auto debt accounts for about 9% of total U.S. consumer debt, up from 6% in late 2011… Among subprime borrowers — those with credit scores below 620— the delinquency rate was 16.3% in mid-2018. In 2015, that figure was 12.4%... The average price of a new vehicle is now about $37,100, compared with $27,573 five years ago… As of January, the average amount financed was $31,707 and the average loan length had reached 69.1 months, up from 61 in 2010…”

And from the PIRG report: “The rise in automobile debt since the Great Recession leaves millions of Americans financially vulnerable — especially in the event of an economic downturn… Of all auto loans issued in the first two quarters of 2017, 42% carried a term of six years or longer, compared to just 26% in 2009… Many car buyers ‘roll over’ the unpaid portion of a car loan into a loan on a new vehicle, increasing their financial vulnerability… At the end of 2017, almost a third of all traded-in vehicles carried negative equity, with these vehicles being underwater by an average of $5,100… The increase in higher-cost ‘subprime’ loans has extended auto ownership to many households with low credit scores… In 2016, lending to borrowers with subprime and deep subprime credit scores made up as much as 26% of all auto loans originated.”

When it comes to Bubbles, the more conspicuous the less likely they are to be deeply systemic. The “tech” Bubble was obvious, yet the most egregious excess was contained within the technology sector. The mortgage finance Bubble was much more systemic, with excesses spread about and not as apparent. I believe today’s Super “Tech” Bubble is much more systemic than back in 2000. And while subprime is not the critical issue it was for the previous Bubble, I would argue that excess in many key housing markets is comparable. Commercial real estate on a national basis is likely more vulnerable today than in 2007, and the same could be said for some regional housing markets (i.e. greater “Silicon Valley”, Los Angeles, Seattle, Portland, Atlanta, etc.). Today’s Bubble in leveraged lending and M&A is greater than 2006/2007. The Bubble in corporate Credit dwarfs that from the mortgage finance Bubble period. Excesses throughout the securities markets phenomenally exceed those from the prior Bubble period. Moreover, I suspect the current level of derivatives-related speculative leverage could be multiples of 2007.

February 13 – Associated Press (Martin Crutsinger): “The government surpassed a dubious milestone this week: Its debt topped $22 trillion — that’s trillion, with a ‘t’ — for the first time. Piles of federal debt have been growing ever higher for years, fueled by accumulating annual deficits, which themselves have been driven by tax cuts, government spending increases and the mounting costs of Medicare and Social Security and interest on the debt itself.”

Thinking Ahead to the Next Recession, we should be deeply concerned about our nation’s tenuous fiscal position. To see deficits approaching 5% of GDP - with unemployment and interest rates at such historically low levels - should have us all fearful. Of course deficits matter. After ending 2007 at $8.056 TN, federal Liabilities (from Fed’s Z.1) surged $11.86 TN, or 147%, to end Q3 2018 at $19.918 TN. Over this period, outstanding Treasury Securities jumped $11.367 TN, or 188%, to $17.418 TN. And after ending 2007 at $7.40 TN, Agency Securities increased $1.62 TN, or 22%, to $9.02 TN. Over this period, combined Treasury and Agency securities almost doubled to $26.44 TN, expanding from 92% to 128% of GDP.

During the last crisis, the collapse in rates and market yields significantly mitigated the Treasury's debt service burden. This ensured an outsized percentage of huge deficit spending went to bolster the real economy, with relatively less to debt holders. Come the next recession, already huge deficits will expand much larger, likely with only meager benefits from lower borrowing costs. Worse yet, there’s a scenario where fiscal recklessness finally provokes some market backlash. At some point, out of control deficits could be compounded by rising market yields – central bank stimulus notwithstanding.

And we definitely cannot ponder the next recession without taking a global view. Since the last crisis, global Credit Bubbles have become highly synchronized, securities markets atypically synchronized, and economies uncommonly synchronized. Synchronization also applies within the markets – equities, investment-grade and “junk” corporate Credit, sovereign debt, M&A - “developed” and “developing.” Global asset prices – certainly including real estate – notably synchronized. When it comes to a synchronized global policy response, keep in mind that ECB and BOJ policy rates are basically at zero – with little evidence of benefits from negative rates. The ECB just ended QE, while the BOJ just keeps printing. With little effective ammo, policymakers exploit what they can to sustain the Bubble and hold fragilities at bay.

To be sure, today’s backdrop overshadows the world’s predicament heading into 2008/09. China and EM, in particular, were in the midst of powerful expansions in 2008 – burgeoning Bubbles readily resuscitated post-U.S. crisis. Fueled by China’s massive stimulus, the emerging markets became the “growth locomotive” pulling the entire global economy away from a downward spiral. Pondering the future, it is not at all clear how a vigorous downward spiral is repelled come the next crisis.

Policymakers continue to throw enormous stimulus at global markets and economies. Instead of stabilization, we’ve witnessed ongoing Bubble inflation and intensifying Monetary Disorder. And the more Bubbles inflate, the greater the underlying financial and economic fragilities – and the quicker the Fed was to conclude “normalization” and China was to, once again, aggressively spur lending.

What worries me most is that underlying instability and vulnerabilities have policymakers resolved to abrogate bear markets and recessions. Extraordinary measures continue to be taken to nullify business and market cycles, with apparently no appreciation for how vital adjustments and corrections are to sound financial and economic systems. Worst of all, structurally maladjusted and highly speculative global markets are emboldened as never before. Party like it’s twenty nineteen – with global financial, economic and geopolitical backdrops uncomfortably reminiscent of ninety years ago.

For the Week:

The S&P500 rose 2.5% (up 10.7% y-t-d), and the Dow jumped 3.1% (up 11.0%). The Utilities slipped 0.1% (up 5.3%). The Banks rallied 3.0% (up 15.9%), and the Broker/Dealers gained 2.8% (up 12.1%). The Transports surged 3.8% (up 15.2%). The S&P 400 Midcaps jumped 3.3% (up 15.1%), and the small cap Russell 2000 surged 4.2% (up 16.4%). The Nasdaq100 advanced 2.1% (up 11.5%). The Semiconductors jumped 3.7% (up 17.0%). The Biotechs surged 4.4% (up 18.5%). Though bullion added $7, the HUI gold index declined 0.6% (up 4.6%).

Three-month Treasury bill rates ended the week at 2.37%. Two-year government yields rose five bps to 2.52% (up 3bps y-t-d). Five-year T-note yields gained five bps to 2.49% (down 2bps). Ten-year Treasury yields added three bps to 2.66% (down 2bps). Long bond yields increased a basis point to 2.99% (down 2bps). Benchmark Fannie Mae MBS yields rose four bps to 3.45% (down 5bps).

Greek 10-year yields sank 20 bps to 3.80% (down 54bps y-t-d). Ten-year Portuguese yields declined nine bps to 1.56% (down 15bps). Italian 10-year yields fell 16 bps to 2.80% (up 6bps). Spain's 10-year yields added a basis point to 1.24% (down 18bps). German bund yields increased one basis point to 0.10% (down 14bps). French yields were little changed at 0.54% (down 17bps). The French to German 10-year bond spread narrowed one to 44 bps. U.K. 10-year gilt yields increased a basis point to 1.16% (down 12bps). U.K.'s FTSE equities index jumped 2.3% (up 7.6% y-t-d).

Japan's Nikkei 225 equities index rallied 2.8% (up 4.4% y-t-d). Japanese 10-year "JGB" yields added one basis point to negative 0.02% (down 2bps y-t-d). France's CAC40 surged 3.9% (up 8.9%). The German DAX equities index recovered 3.6% (up 7.0%). Spain's IBEX 35 equities index rose 3.0% (up 6.8%). Italy's FTSE MIB index surged 4.4% (up 10.3%). EM equities were mostly higher. Brazil's Bovespa index gained 2.3% (up 11.0%), while Mexico's Bolsa slipped 0.4% (up 3.2%). South Korea's Kospi index increased 0.9% (up 7.6%). India's Sensex equities index dropped 2.0% (down 0.7%). China's Shanghai Exchange jumped 2.5% (up 7.6%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 12.5%). Russia's MICEX equities index dipped 0.5% (up 5.6%).

Investment-grade bond funds saw inflows of $1.889 billion, and junk bond funds posted inflows of $728 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined four bps to a one-year low 4.37% (down 1bp y-o-y). Fifteen-year rates dipped three bps to 3.81% (down 3bps). Five-year hybrid ARM rates fell three bps to 3.88% (up 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 4.42% (down 13bps).

Federal Reserve Credit last week increased $2.3bn to $3.989 TN. Over the past year, Fed Credit contracted $396bn, or 9.0%. Fed Credit inflated $1.178 TN, or 42%, over the past 327 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.427 TN. "Custody holdings" increased $28.2bn y-o-y, or 0.8%.

M2 (narrow) "money" supply fell $31.3bn last week to $14.480 TN. "Narrow money" gained $623bn, or 4.5%, over the past year. For the week, Currency was about unchanged. Total Checkable Deposits jumped $48.2bn, while Savings Deposits dropped $82.8bn. Small Time Deposits rose $3.0bn. Retail Money Funds added $0.5bn.

Total money market fund assets gained $16.6bn to $3.080 TN. Money Funds gained $251bn y-o-y, or 8.9%.

Total Commercial Paper increased $3.8bn to $1.061 TN. CP declined $57bn y-o-y, or 5.1%.

Currency Watch:

The U.S. dollar index increased 0.3% to 96.904 (up 0.8% y-t-d). For the week on the upside, the New Zealand dollar increased 1.9%, the Brazilian real 0.8%, the Australian dollar 0.8%, and the Canadian dollar 0.3%. For the week on the downside, the South African rand declined 3.2%, the Mexican peso 0.9%, the Japanese yen 0.7%, the Swiss franc 0.5%, the South Korean won 0.4%, the British pound 0.4%, the euro 0.2% and the Swedish krona 0.1%. The Offshore Chinese renminbi declined 0.41% versus the dollar this week (up 1.55% y-t-d).

Commodities Watch:

February 12 – Bloomberg (Ranjeetha Pakiam): “China is adding to its gold reserves again, boosting holdings for a second month and reinforcing an outlook from bulls including Goldman Sachs… that central-bank buying will likely remain strong this year. The People’s Bank of China raised holdings to 59.94 million ounces, or about 1,864 metric tons, by the end of January from 59.56 million ounces a month earlier... In tonnage terms, it added about 11.8 tons last month after taking in just under 10 tons in December, which was the first time the PBOC had boosted its hoard since October 2016.”

The Goldman Sachs Commodities Index jumped 3.8% (up 13.1% y-t-d). Spot Gold added 0.5% to $1,322 (up 3.0%). Silver slipped 0.4% to $15.743 (up 1.3%). Crude surged $2.87 to $55.59 (up 22%). Gasoline jumped 8.7% (up 21%), and Natural Gas gained 1.6% (down 11%). Copper declined 0.4% (up 6%). Wheat dropped 2.0% (up 1%). Corn rose 2.3% (up 2%).

Market Dislocation Watch:

February 10 – Financial Times (Stephen Morris, Robert Smith and Olaf Storbeck): “Deutsche Bank has had to pay the highest financing rates on the euro debt market for a leading international bank this year, in a further sign of the German lender’s uphill struggle to reduce its funding costs. The bank raised eyebrows last week when it sold a total of €3.6bn in euro-denominated debt, paying 180 bps over the benchmark for a two-year bond, a steep rate for short-term funding. It also paid 230bp over the benchmark on a seven-year bond, a higher rate than domestic Spanish lender CaixaBank… For decades, cheap financing had been the cornerstone of Deutsche’s competitive advantage, with its perception as a ‘de facto’ extension of the German state guaranteeing rock-bottom funding costs that helped it break into the top ranks of global investment banking.”

February 11 – Wall Street Journal (Gunjan Banerji): “More investors are selling options in a bid to boost returns, a shift that traders say is helping to tamp down market volatility now—but potentially at the expense of greater turbulence later. Assets at mutual and exchange-traded funds that focus on systematically selling options have swelled by about 50% in the past five years to $15.7 billion in 2018, according to… Tayfun Icten, a senior analyst at Morningstar… Options-selling strategies center on collecting a small premium from the buyer in exchange for a promise to buy or sell shares at a specified price by a certain date. The strategy’s popularity highlights investors’ willingness to take on risks to pick up small gains, a ‘reach for yield’ behavior… The growth of options-selling trades has also been fueled by so-called structured products, investments packaged with derivatives…”

February 11 – Wall Street Journal (Daniel Kruger and Telis Demos): “Recent volatility in the market for overnight cash loans is raising concerns about a new benchmark that could set interest rates for trillions of dollars in mortgages and corporate debt. The cost to borrow cash overnight spiked late last year in part of the market for repurchase agreements, where lenders such as money-market funds make short-term loans to bond brokers, often using government debt as collateral. The ‘repo’ rate topped out above 6% in intraday trading on Dec. 31 before settling at an all-time high of 5.149%, according to JPMorgan. That has investors and bankers paying close attention to developments in this obscure yet vital part of the debt market, because repo trades are a key component of a new borrowing benchmark designed by the Federal Reserve Bank of New York. That benchmark, called SOFR, for the secured overnight financing rate, is considered the leading candidate to replace the fading London interbank offered rate…”

February 12 – Bloomberg (John Gittelsohn): “If stock-pickers are becoming an endangered species, this may be the latest sign. Investors now have more money in large-cap equity funds tracking indexes than in actively run funds of the same type. The lines crossed in the fourth quarter, according to… Morningstar Inc. Passive mutual funds, exchange-traded funds and so-called smart beta funds in the sector held $2.93 trillion in assets as of Dec. 31, compared with $2.84 trillion on the active side… Only 24% of all active funds -- those holding stocks, bonds or real estate -- outperformed their average passive rival over the 10 years through December, according to a Morningstar analysis of 4,600 U.S. funds with $12.8 trillion.”

Trump Administration Watch:

February 15 – Bloomberg (Alyza Sebenius and Andrew Mayeda): “President Donald Trump hailed progress made in trade talks with China this week, saying he may extend a tariff truce and take steps to sell a potential deal with opposition lawmakers. Trump’s comments signal the two sides may be approaching a deal after two days of high-level talks in Beijing. The two countries said they are working toward an initial written agreement, and will continue negotiations next week in Washington. The U.S. has threatened to more than double tariffs on $200 billion of Chinese goods if there’s no deal by March 1. ‘It’s going extremely well,’ Trump said…”

February 15 – Bloomberg (Justin Sink and Margaret Talev): “President Donald Trump said… he’ll declare a national emergency on the U.S. southern border in a bid to unlock more money to build his proposed wall, a day after agreeing to sign legislation providing about $1.4 billion for the controversial project. In unscripted remarks Friday morning, Trump depicted the declaration as ordinary but also said he expected it to be challenged in court. He predicted he’d eventually prevail, but conceded: ‘I didn’t need to do this.’ ‘I just want to get it done faster,’ he said of the wall. Combined with spending legislation Trump also intends to sign Friday or Saturday, the move will free up about $8 billion for the wall…”

February 12 – New York Times (Keith Bradsher): “When China joined the World Trade Organization, the global fraternity of cross-border commerce, it promised to open itself up to foreigners in lucrative businesses like banking, telecommunications and electronic-payment processing. More than 17 years later, China’s telecommunications industry remains firmly under government control. Only recently did China say it would allow foreign companies to own their own bank businesses here. And after nearly two decades of legal fights, China is still reviewing the applications of Visa and Mastercard to get into the country’s payment-processing market. The broken promises hang over Robert Lighthizer, the United States trade representative, and Treasury Secretary Steven Mnuchin as they arrive in Beijing for two days of talks to end a trade war between the United States and China.”

February 14 – Bloomberg (Elizabeth Dexheimer): “President Trump’s pick to lead Fannie Mae and Freddie Mac’s regulator said he wants to work with lawmakers on a housing-finance overhaul that’s needed to avoid devastating taxpayer losses in the event of a future crisis. Federal Housing Finance Agency nominee Mark Calabria told members of the Senate Banking Committee… that he agrees on the need for Congress to play a leading role in making major changes involving the two mortgage giants, which have been under U.S. control since 2008… ‘We need an open, competitive market,’ Calabria said… at a confirmation hearing on his bid to become FHFA’s director. ‘There is certainly a part of me that has a suspicion of monopolies and duopolies,’ he said…”

Federal Reserve Watch:

February 14 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are zeroing in on a strategy to end the wind-down of their $4 trillion asset portfolio as soon as this year, which would conclude an effort to drain stimulus from the financial system earlier than they had once anticipated. Fed officials could finalize more details of their strategy, including whether to slow the pace of shrinking their bondholdings, at their policy meeting next month… The process ‘probably should come to an end later this year,’ Fed governor Lael Brainard said… Cleveland Fed President Loretta Mester… said they would wrap up the planning at coming meetings.”

February 12 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell said the U.S. economy looks strong, but the central bank is continuing to find ways to fight poverty. Speaking… in Mississippi, Powell said the central bank is looking at a number of ways to help rural communities, with a particular focus on banking and finance for areas of need. ‘Today, data at the national level show a strong economy. Unemployment is near a half-century low, and economic output is growing at a solid pace. But we know that prosperity has not been felt as much in some areas, including many rural places,’ he said…”

February 12 – Reuters (Jason Lange): “Kansas City Federal Reserve Bank President Esther George… said she supported a pause in interest rate increases so that the Fed could assess how much its past hikes have slowed the economy. ‘Let’s step back and see what happens,’ George told an audience…, describing her support for the U.S. central bank’s move last month to signal it was not preparing more rate increases for now. George, who is a voter this year on the Fed’s interest rate policy decisions, was until recently an outspoken advocate for tighter monetary policy.”

February 12 – Reuters (Lucia Mutikani): “U.S. job openings surged to a record high in December, led by vacancies in the construction and accommodation and food services sectors, strengthening analysts’ views that the economy was running out of workers. While the release of the Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS, …underscored labor market strength, there are worries the shortage of workers could hurt an economic expansion that has lasted 9-1/2 years and is the second longest on record… Job openings, a measure of labor demand, increased by 169,000 to a seasonally adjusted 7.3 million in December, the highest reading since the series started in 2000. That lifted the job openings rate to 4.7% from 4.6% in November.”

U.S. Bubble Watch:

February 13 – Bloomberg (Katia Dmitrieva): “The U.S. budget deficit widened to $319 billion in the first three months of the government’s fiscal year as spending increased and revenue was little changed… The shortfall grew by 42% between the October to December period, compared with the same three months the previous year… Receipts climbed by 0.2% to $771.2 billion, while spending was up 9.6% to $1.1 trillion.”

February 13 – Wall Street Journal (Kate Davidson): “Federal tax revenue declined 0.4% in 2018, the first full calendar year under the new tax law, despite robust economic growth and the lowest unemployment rate in nearly five decades. …Federal revenue totaled $3.33 trillion last year, while federal spending totaled $4.2 trillion, a 4.4% increase from the previous year. That pushed the U.S. budget gap up to $873 billion for the 12 months that ended in December, compared with $680.8 billion during the same period a year earlier—a 28.2% increase. Last year was the highest deficit for a calendar year since 2012.”

February 8 – Washington Post (Christopher Ingraham): “The 400 richest Americans – the top 0.00025% of the population – have tripled their share of the nation’s wealth since the early 1980s, according to a new working paper on wealth inequality by University of California at Berkeley economist Gabriel Zucman. Those 400 Americans own more of the country’s riches than the 150 million adults in the bottom 60% of the wealth distribution, who saw their share of the nation’s wealth fall from 5.7% in 1987 to 2.1% in 2014… Overall, Zucman finds that ‘U.S. wealth concentration seems to have returned to levels last seen during the Roaring Twenties.’”

February 14 – Reuters: “U.S. retail sales recorded their biggest drop in more than nine years in December as receipts fell across the board, suggesting a sharp slowdown in economic activity at the end of 2018. …Retail sales tumbled 1.2%, the largest decline since September 2009 when the economy was emerging from recession… Economists polled by Reuters had forecast retail sales increasing 0.2% in December. Retail sales in December rose 2.3% from a year ago.”

February 14 – Reuters (Melissa Fares): “U.S. holiday spending in 2018 grew a lower-than-expected 2.9% to $707.5 billion, the National Retail Federation said…, citing turmoil over trade policy and the recent government shutdown as having hurt the industry.”

February 12 – Reuters (Lucia Mutikani): “U.S. small business optimism tumbled last month to its lowest level since President Donald Trump’s election more than two years ago amid growing uncertainty over the economic outlook. The National Federation of Independent Business said… its Small Business Optimism Index dropped 3.2 points to 101.2 in January, the weakest reading since November 2016.”

February 14 – Reuters: “U.S. producer prices fell for a second straight month in January, leading to the smallest annual increase in 1-1/2 years… The Labor Department said… its producer price index for final demand dipped 0.1% last month as the cost of energy products and food fell. The PPI dipped 0.1% in December. In the 12 months through January, the PPI rose 2.0%. That was the smallest gain since July 2017…”

February 10 – Wall Street Journal (Aisha Al-Muslim): “Makers of household staples from diapers to toilet paper are set to raise prices again this year after already hiking prices in 2018, hoping to offset higher commodity costs and boost profits. Church & Dwight Co. recently increased prices for about one-third of its products, including Arm & Hammer cat litter and baking soda, and some OxiClean cleaning products. ‘The good news is that competitors are raising [prices] in those categories as we speak,’ Church & Dwight Chief Executive Matthew Farrell said…”

February 15 – Reuters (Josephine Mason and Helen Reid): “The outlook for Wall Street earnings has deteriorated significantly in recent months, data shows, raising the risk that companies in the United States may slip into recession before its economy does - with Europe close behind. Analysts on average expect the S&P 500’s first-quarter earnings per share to drop 0.3% year-on-year, according to I/B/E/S Refinitiv data. That’s a big drop from the 8.2% rise expected as recently as October and would mark the first contraction in U.S. company earnings in three years. Analysts have also made deep cuts to forecasts for the rest of the year.”

February 12 – Reuters (Trevor Hunnicutt): “California Governor Gavin Newsom said… the state will dramatically scale back a planned $77.3 billion high-speed rail project that has faced cost hikes, delays and management concerns, but will finish a smaller section of the line. ‘Let’s be real. The current project, as planned, would cost too much and respectfully take too long. There’s been too little oversight and not enough transparency,’ Newsom said… Newsom said the state will complete a 119-mile (191 km) high-speed rail link between Merced and Bakersfield in the state’s Central Valley. In March 2018, the state forecast the costs had jumped by $13 billion to $77 billion and warned that the costs could be as much as $98.1 billion.”

February 14 – Associated Press: “U.S. long-term mortgage rates fell this week to a 12-month low, an enticement for prospective homebuyers in the upcoming season. Mortgage buyer Freddie Mac said… the average rate on the benchmark 30-year, fixed-rate mortgage declined to 4.37% from 4.41% last week. The key 30-year home borrowing rate averaged 4.38% a year ago.”

February 13 – Reuters (David Morgan, Sinead Carew, Stephen Culp and Trevor Hunnicutt): “Republican U.S. Senator Marco Rubio said… he will soon introduce legislation that would tax corporate stock buybacks like dividends, aiming to spur business investment, create more jobs and boost wages.”

February 12 – Bloomberg (Danielle Moran, Claire Ballentine and Martin Z. Braun): “Illinois needs $134 billion and may hold a yard sale to raise it. Governor J.B. Pritzker, a Democrat who took office last month, is turning to business experts to figure out how to chip away at the massive debt in the state’s employee retirement system that’s left the government’s credit rating dangling just one step above junk. Among the options it will weigh: How to use the state’s other assets -- like buildings and roads --- to pump more money into the pensions.”

February 10 – Wall Street Journal (Nicole Friedman): “Californians who want to insure their homes against the next wildfire are paying a price for two years of record-breaking blazes. Home-insurance companies in the Golden State are canceling some policies, refusing to sell new ones in certain areas and applying for rate increases as they look to reduce wildfire risk. ‘It’s getting harder and harder to find someone to write [insurance for] any given particular piece of property,’ said Bob Anderson, co-owner of Fromarc Insurance Agency… Insurers including State Farm and Allstate Corp. have filed to raise home-insurance rates in the past six months. The California FAIR Plan, the state insurer of last resort, said it would implement an average 20.3% price increase in April…”

February 14 – Wall Street Journal (Keiko Morris, Konrad Putzier and Josh Barbanel): “ Inc.’s announcement that it is ditching plans for a corporate headquarters in New York City stunned real-estate speculators, developers and renters who had rushed into the Long Island City neighborhood to be near the new HQ2. Only three months ago, the prospect that the giant retailer would locate a headquarters in New York City and create 25,000 new jobs set off a real-estate frenzy that the borough of Queens had never experienced. Open houses for Long Island City condos were overflowing. Brokers said customers made offers via text messages on units, site unseen. Developers with office space in Long Island jockeyed to attract the thousands of workers that were expected, and local residents cheered the promise that new restaurants, fashion boutiques and other new stores would flood the retail-starved neighborhood.”

China Watch:

February 12 – Bloomberg (Sofia Horta e Costa): “Beijing is walking a tightrope between reviving its downbeat equity market and engineering another bubble. China’s securities regulator has started to remove many of the curbs designed to keep out speculators, signaling an end to the highly restrictive era that started when a boom in the country’s stocks turned to bust in 2015. The result has been an intensifying appetite for risk not seen in years. A gauge of small cap stocks has surged almost 11% over the past four trading days, the most since 2016. While investors and index providers have called on China to scale back restrictions barring the use of short-selling, leverage and derivatives, critics caution that the misuse of those tools could be dangerous. The concern is that taking deregulation too far may encourage the whirlwind trading that has fueled two massive bubbles in the past decade.”

February 13 – CNBC (Huileng Tan): “China… reported exports and imports data for January that easily topped expectations. That better-than-expected news comes as Beijing's trade dispute with the U.S. and other factors lead investors to worry that China's economy — long an engine of global growth — may be facing a sharp slowdown. Those concerns were compounded last month when China's customs data showed exports and imports both fell surprisingly in December… Dollar-denominated exports for the month rose 9.1% from a year ago… China's exports in January were expected to have contracted 3.2% from a year earlier… January dollar-denominated imports, meanwhile, fell 1.5% on-year, which was far better than expectations of a 10% decline from a year earlier…”

February 11 – Bloomberg: “Two large Chinese borrowers missed payment deadlines this month, underscoring the risks piling up in a credit market that’s witnessing the most company failures on record. China Minsheng Investment Group Corp., a private investment group with interests in renewable energy and real estate, hasn’t returned money to bondholders that it had pledged to repay on Feb. 1… And Wintime Energy Co., which defaulted last year, didn’t honor part of a restructured debt repayment plan last week… The developments are significant because both companies were big borrowers, and their problems accessing financing suggest that government efforts to smooth over cracks in the $11 trillion bond market aren’t benefiting all firms. If China Minsheng ends up defaulting, it may rank alongside Wintime Energy as one of China’s biggest failures, with 232 billion yuan ($34.3bn) of debt as of June 30…”

February 13 – Bloomberg: “It was supposed to be China’s answer to JPMorgan... But less than five years after China Minsheng Investment Group Corp. embarked on plans to become a financial colossus, the company has instead turned into a symbol of the turmoil sweeping China’s once-vaunted private sector. CMIG shocked investors when it missed a bond payment on Jan. 29, and markets remain jittery about the company even after it scraped together enough cash to repay the overdue note on Thursday. CMIG’s liquidity crunch, caused by what analysts have described as a combination of mismanagement and tighter lending conditions in China, underscores a sometimes overlooked risk to the global economy in the era of Trump, Brexit, and trade wars. As China reins in the shadow-banking system that supported its private sector with cheap credit for more than half a decade, companies that were meant to be pillars of the nation’s growth miracle are proving surprisingly fragile…”

February 11 – Reuters (Shu Zhang): “The collapse in China of a complex web of debt guarantees involving several private firms highlights risks in its financial system and opens up a potentially hazardous front for an economy in the grip of its slowest growth in nearly three decades. It is the last thing Beijing needs as it tries to fight off intensifying pressure on growth from a months-long trade dispute with the United States. Yet, as the government steps up economic support measures and moves to loosen gummed-up funding, it might be inadvertently inflaming financial risks with its call on state banks to sharply boost lending to the private sector. The warning bells are already sounding in the once-prosperous eastern city of Dongying, a hub for oil refining and heavy industry in Shandong province. Here, at least 28 private companies are seeking to restructure their debts and avoid bankruptcy, mainly due to souring loans that they guaranteed for other firms…”

February 15 – Bloomberg: “China’s current account surplus continued to decline, with the changing structure of the economy and trade pushing it to its lowest since 2004. The current-account balance in 2018 was $49 billion…”

February 11 – Financial Times (Tom Hancock): “Chinese consumer spending growth over the lunar new year slowed compared with last year in the latest sign that shoppers were feeling the effects of China’s decelerating economy. Chinese people spent Rmb1.01tn ($149bn) on restaurants and shopping over the week-long new year holiday — a peak period for retail, dining and movie watching… That was an increase of 8.5% from last year, a sharp drop from 2018’s year-on-year growth of 10.2% and the slowest rate of growth since such data were first tracked, in 2005.”

February 14 – Reuters (Stella Qiu and Ryan Woo): “China’s factory-gate inflation slowed for a seventh straight month in January to its weakest pace since September 2016, raising concerns the world’s second-biggest economy may see the return of deflation as domestic demand cools. Consumer inflation, meanwhile, eased in January from December to a 12-month low due to slower gains in food prices… China’s producer price index (PPI) in January rose a meagre 0.1% from a year earlier… On a monthly basis, producer prices have already been falling over the past three months.”

February 12 – Bloomberg: “China’s most recent plans to support banks’ capital raising may enable lenders to advance a record amount of new loans in 2019, according to China International Capital Corp. Credit growth this year may reach the same pace of 13.5% in 2018, while new loans are likely to exceed last year’s 16.2 trillion yuan, CICC analysts led by Victor Wang wrote…”

February 12 – Bloomberg (Yang Yang, Henry Chan, Sun Choi and Sida Liu): “China’s residential mortgage-backed securities issuance more than tripled in 2018, just as the nation’s household debt to disposable income ratio exceeds that of the U.S… Issuance of debt backed by Chinese mortgages has risen to 584 billion yuan ($87bn) in 2018 from 171 billion yuan in 2017 and 6.8 billion yuan in 2014.”

February 11 – Reuters (David Stanway): “Air pollution in 39 major northern Chinese cities rose 16% on the year in January…, with surging industrial activity making it increasingly unlikely they will meet their winter emissions targets. Average concentrations of small, hazardous particles known as PM2.5 in two major northern Chinese emissions control zones climbed 16% from a year earlier to 114 micrograms per cubic meter…”

Central Bank Watch:

February 10 – Reuters (Dhara Ranasinghe): “Cheap bank loans, a form of stimulus first launched by the ECB during the global financial crisis, look set to make a comeback in coming months and investors anticipate shorter term loans with a variable rate to allow the central bank flexibility. It’s just two months since the European Central Bank wrapped up its 2.6 trillion euro ($2.9 trillion) bond-buying scheme, but with euro zone growth at four-year lows and other global central banks already backtracking on policy tightening, bond market expectations of ECB action are on the rise. That’s expected to take the shape of a loan package for banks — known as Long Term Refinancing Operations (LTROs) or the more targeted TLTROs.”

February 10 – Financial Times (Miles Johnson): “Italy’s coalition government is in sharp disagreement over protecting the independence of the Bank of Italy, after senior politicians threatened to remove its leadership. Matteo Salvini, head of the anti-immigrant League party, said the central bank and Consob, the country’s stock market regulator, should be ‘reduced to zero, more than changing one or two people’ and that ‘fraudsters’ who inflicted losses on Italian savers should ‘end up in prison for a long time’. The comments drew a strong response from Giovanni Tria, Italy’s economy minister, who said… that independence of the Bank of Italy ‘must be defended’.”

February 9 – Reuters (Riccardo Bastianello): “Italy’s populist leaders… promised to replace top officials at the country’s central bank, who they said must pay for failing to prevent a spate of banking scandals in which thousands lost their savings… ‘The management of the Bank of Italy and (market watchdog) Consob have to be completely cleared out,’ League chief Matteo Salvini told a gathering of former clients of small northern banks wound down in 2017. ‘We are here because those who should have supervised didn’t supervise.’”

February 13 – Reuters (Kaori Kaneko): “Bank of Japan Governor Haruhiko Kuroda said… that it was his responsibility to achieve the central bank’s 2% inflation target by persistently continuing its stimulus policy. Speaking to a lower house budget committee, Kuroda also said he would closely examine the central bank’s stimulus policy so that it would not cause side effects.”

February 13 – Reuters (Jana Randow): “New Zealand’s central bank… retained the possibility of a rate cut in the face of rising economic risks, but its broadly neutral policy tone disappointed doves and sent the local dollar rallying to one week highs. The Reserve Bank of New Zealand (RBNZ) left the official cash rate (OCR) at a record-low 1.75%, where it has been since November 2016.”

Brexit Watch:

February 12 – Bloomberg (Tim Ross and Ian Wishart): “Theresa May and the European Union are heading for a high-stakes, last-minute gamble that will decide whether the U.K. leaves the bloc with or without a deal, people familiar with both sides said. On March 21 -- just a week before Britain is due to exit the EU -- the prime minister will have the chance to win a late concession from European leaders at a summit in Brussels, the people said. The bloc is unlikely to offer sweeteners much sooner in case the U.K. side asks for even more, according to one of the individuals, who asked not to be named.”

EM Watch:

February 14 – Bloomberg (Colleen Goko): “South Africa’s rand is back on its perch as the world’s most volatile currency as investors price in the risk of a credit-rating downgrade while awaiting details of the government’s rescue plan for the state-owned electricity company. The currency fell for a second day… to levels last seen in early January, and bond yields rose to their highest this year after President Cyril Ramaphosa said little to reassure investors about a turnaround plan for Eskom Holdings SOC Ltd. The rand’s three-month implied volatility climbed for a ninth day, overtaking the Turkish lira, as traders anticipate wider price swings in the run-up to elections in May.”

February 13 – Bloomberg (Janice Kew): “South Africans are accustomed to government mismanagement and corruption. They’ve suffered for years from periodic blackouts at state-owned power utility Eskom Holdings SOC Ltd., seen money flow out of the national airline and are routinely asked to pay off cops who’ve pulled them over. The latest scandal, though, has the potential to reach wider and deeper. It’s about whether the company that manages $150 billion of retirement funds for more than 1.2 million government workers has invested its money properly—a question that could touch every taxpayer in Africa’s most industrialized economy.”

February 14 – Bloomberg (Cagan Koc): “The economic fallout from Turkey’s currency crash last summer just kept on getting worse toward the end of the year. Industrial production capped 2018 with its biggest plunge since June 2009 following three months in contraction… Led by a double-digit fall in manufacturing, output dropped an annual 9.8% in December. Industry fared worse than every estimate…”

February 13 – Financial Times (Laura Pitel and Funja Guler): “Recep Tayyip Erdogan, Turkey’s president, has ordered that food, dubbed ‘people’s vegetables’, be sold at heavily discounted prices as he vows to step up a fight against food ‘terrorism’ while containing public anger over rising prices.”

February 10 – Bloomberg (Andy Mukherjee): “It’s time India’s policy makers acknowledged the real problem facing the country’s shadow banks. What they are experiencing is no longer a vanilla liquidity shortage; the entire industry has crashed against a wall of mistrust. On the other side of that wall are a clutch of wealthy property developers and their middle-class customers, as well as teeming multitudes of poor. Everyone is at risk. A crisis of confidence has made financiers’ own borrowing costs jump. The excess yield over government securities that the bond market is demanding from double A-rated firms is three standard deviations higher than the five-year average.”

Global Bubble Watch:

February 11 – Financial Times (Robert Smith): “In John Kenneth Galbraith’s seminal history of the Wall Street crash of 1929, the economist coined the term ‘the bezzle’ to describe the amount of undiscovered embezzlement lurking in the financial system. When times are good, people are trusting and eager to make more money, so the bezzle expands. When the cycle turns, however, vigilance returns and the bezzle shrinks. Between the crime and its discovery, there is a period when the embezzler has his gains but the victim is yet to experience loss. Mr Galbraith described this interlude as a ‘net increase in psychic wealth’. Europe’s credit markets for years enjoyed a net increase in psychic wealth, courtesy of the European Central Bank’s quantitative easing programme, which from 2016 saw the central bank lend direct to large companies by investing in their bonds. While carried out by well-meaning technocrats, rather than the swindling stock promoters so vividly brought to life in the pages of The Great Crash, the market is due a reckoning all the same.”

February 11 – Financial Times (Simon Mundy and Kathrin Hille): “Crowned with a soaring blue archway, the four-lane China-Maldives Friendship Bridge loops over 2km of the Indian Ocean to connect the Maldivian capital with its international airport and the fast-growing artificial island of Hulhumale. Opened last year, the bridge was the flagship project in a surge of Chinese investment into the Maldives under former president Abdulla Yameen, who left office in November after a shock election defeat… But while China has portrayed its Maldivian projects as an example of how its Belt and Road Initiative can drive development in smaller countries, the new government in Male is taking a darker view. It claims that Mr Yameen’s administration saddled the country with vast debts — owed principally to China — through inflated investment contracts which involved personal gain for corrupt Maldivian officials.”

February 10 – Wall Street Journal (Andrew Ackerman): “Global regulators must revamp the way they assess new threats to the financial system, as the tide of postcrisis rules crests and the financial sector evolves, a top Federal Reserve official… ‘We cannot be complacent and assume that we are safe from all shocks,’ Fed governor Randal Quarles, the central bank’s point man on regulation, said… Mr. Quarles chairs the Financial Stability Board, a panel of international policy makers established in 2009 to overhaul global financial regulations.”

February 13 – Bloomberg (Marcus Ashworth): “How to lose friends and alienate investors. Spain’s biggest bank, Banco Santander SA, chose to wait until the last available moment to tell holders that it wasn’t going to redeem a particular 1.5 billion euro ($1.7bn) bond after all. The note in question was a so-called Additional Tier 1 (an AT1 or CoCo for short) and it’s accepted practice in the market to call these bonds on their redemption date. Santander’s decision may make sense for the lender from a purely economic perspective (it’s cheaper right now just to keep the AT1 running rather than issue a replacement), but it’s an incredibly cavalier way to treat investors.”

February 11 – Bloomberg (Sarah Husband): “Collateralized loan obligations in Europe are facing the toughest conditions since early 2016 as they struggle with higher funding costs and a scarcity of loans. This could curtail issuance from these funds and curb demand for loan assets. CLOs account for around half the investor base for leveraged loans. A slowdown in CLO formation could force borrowers to pay higher spreads on their loans…”

February 11 – Bloomberg: “Apple Inc.’s Chinese smartphone shipments plummeted an estimated 20% in 2018’s final quarter, underscoring the scale of the iPhone maker’s retreat in the world’s largest mobile device arena against local rivals like Huawei Technologies Co. The domestic market contracted 9.7% in the quarter, but Apple declined at about twice that pace, research firm IDC said…”

Europe Watch:

February 11 – Project Syndicate (George Soros): “Europe is sleepwalking into oblivion, and the people of Europe need to wake up before it is too late. If they don’t, the European Union will go the way of the Soviet Union in 1991. Neither our leaders nor ordinary citizens seem to understand that we are experiencing a revolutionary moment, that the range of possibilities is very broad, and that the eventual outcome is thus highly uncertain. Most of us assume that the future will more or less resemble the present, but this is not necessarily so. In a long and eventful life, I have witnessed many periods of what I call radical disequilibrium. We are living in such a period today. The next inflection point will be the elections for the European Parliament in May 2019.”

February 12 – Reuters (Alastair Macdonald): “Italian Prime Minister Giuseppe Conte called… for a less austere European Union more in tune with popular demands for economic growth, but he faced a barrage of criticism after his keynote speech in the EU legislature… ‘The powerful opposition that the European people, in its various forms, is demonstrating in the face of the elites speaks to our consciences and reminds us that politics, too assertive on economic rationales, has not done its homework and has given up on its mission,’ Conte told the assembled lawmakers.”

February 13 – Bloomberg (Jana Randow): “Euro-area industrial production fell more than twice as much as forecast in December, raising further questions over the state of the bloc’s economy. The 0.9% drop -- more than twice the 0.4% forecast -- was driven by declines in capital and non-durable consumer goods production. From a year earlier, output plunged the most since 2009, when the economy was dealing with the fallout from the financial crisis.”

February 13 – Reuters (Paul Carrel): “Germany’s economy stalled in the final quarter of last year, just skirting recession as fallout from global trade disputes and Brexit put the brakes on a decade of expansion amid signs that exports will stay subdued for the time being. Gross domestic product in Europe’s biggest economy was unchanged for the quarter…”

February 11 – Financial Times (Miles Johnson): “Matteo Salvini has raised the possibility of wresting control of Italy’s sizeable gold reserves away from the country’s central bank in the latest in a series of threats to the independence of the Bank of Italy by Rome’s populist coalition. ‘The gold is the property of the Italian people, not of anyone else,’ Mr Salvini, deputy prime minister and leader of the League party, said… The comments came after he called for the removal of the leadership of the Bank of Italy for failing to prevent the country’s banking crisis, prompting Giovanni Tria, economy minister, to defend the independence of the central bank.”

February 15 – Wall Street Journal (Giovanni Legorano): “Spanish Prime Minister Pedro Sánchez called snap general elections for late April, bringing the curtain down early on a short-lived government and pitching Spain into a vote that is likely to produce a fragmented legislature and could showcase the rising strength of a new, hard-right party. Mr. Sánchez, who heads the only established center-left party running a major European country, invoked snap parliamentary elections for April 28… The decision followed Mr. Sanchez’s failure… to secure parliamentary approval of this year’s budget after he lost critical support from Catalan separatist parties. The April elections… could usher in a period of protracted instability, as no obvious parliamentary majority seems set to emerge from the vote.”

February 10 – Reuters (Ingrid Melander and Guillermo Martinez): “Tens of thousands of people waving Spain’s red-and-yellow flag demonstrated in Madrid on Sunday to oppose any concessions by the government to Catalan pro-independence parties and to call for early elections. Demonstrators chanting ‘Spain! Spain!’ and ‘We want to vote!’ filled the Plaza de Colon in the city center in the largest protest Socialist Prime Minister Pedro Sanchez has faced in eight months in office.”

Japan Watch:

February 10 – Financial Times (Kana Inagaki and Leo Lewis): “Japan Inc’s third-quarter profits fell at the sharpest rate since the 2011 Fukushima earthquake and tsunami as companies faced an abrupt slowdown in China’s economy owing to the US trade dispute. Following years of robust growth under Prime Minister Shinzo Abe’s pro-business economic policies, Japanese companies were also hit by global growth fears that have also affected technology giants such as Apple and Intel. A series of downgrades in annual profit forecasts by Nidec, Panasonic, Fanuc and other manufacturers were accompanied by warnings about the lack of clarity about when a recovery would happen.”

Fixed-Income Bubble Watch:

February 11 – Financial Times (Megan Greene and Dwight Scott): “Leveraged loans, which are extended to corporate borrowers with relatively high debt levels, carry more risk and pay more interest as the US Federal Reserve raises rates. They are secured with underlying collateral and when lenders line up for repayment, leveraged loans are usually given priority over lower rated bonds known as high yield credit… The asset class has more than doubled since 2010 to more than $1tn at the end of 2018. Highly leveraged loan deals (when debt is more than five times earnings before interest, tax, depreciation and amortisation) account for about half of new US corporate debt. That growth is partly a result of securitisation. Roughly half of investor demand today comes from packaging loans into collateralised loan obligations, or CLOs, and slicing them into different tranches of risk. Rising demand has shifted the balance of power from investors to borrowers… According to Moody’s, about 25% of the leveraged loan market was considered ‘covenant-lite’ before the global financial crisis. Now that figure is 80%.”

Leveraged Speculation Watch:

February 11 – CNBC (Jeff Cox): “Hedge fund manager Paul Tudor Jones issued a call for more responsible investing, saying that the craze over stock buybacks is causing troubling social ills. ‘I think we've got a mania going on in buybacks and a mania going on in terms of shareholder primacy,’ Jones told CNBC's Bob Pisani… He added that the focus solely on shareholder profits has helped cause major wealth disparities and is a departure from the way corporate boards used to behave. ‘Things have been different and can be different again, and if they're not I'm really nervous about what the ultimate social consequences are in this country,’ he said. U.S. companies bought back more than $1 trillion of their own shares in 2018…”

February 8 – Financial Times (Katie Martin): “Computer-driven funds must stick with their strategies after a tough year in 2018, said Andrew Dyson, chief executive of QMA. Mr Dyson, who leads the quant unit of PGIM, Prudential Financial’s funds arm, said underlying market conditions were no great threat to quantitative investment strategies. ‘The much bigger risk is that we lose confidence and row back… That’s the biggest psychological risk.’ Quant funds as a whole lost 5.6% last year, according to data from HFR.”

Geopolitical Watch:

February 10 – Reuters (Lesley Wroughton and Gergely Szakacs): “U.S. Secretary of State Mike Pompeo cautioned allies… against deploying equipment from Chinese telecoms giant Huawei on their soil, saying it would make it more difficult for Washington to ‘partner alongside them’. The United States and its Western allies believe Huawei Technologies’ apparatus could be used for espionage, and see its expansion into central Europe as a way to gain a foothold in the EU market. Washington is concerned in particular about the expansion of Huawei, the world’s biggest maker of telecoms equipment, in Hungary and Poland.”

February 10 – Bloomberg (Hal Brands): “The political crisis in Venezuela has pitted the U.S. against a dictator who refuses to leave office. But the crisis has a broader significance: It shows that Latin America has again become an arena in which rival great powers struggle for influence and advantage. As the U.S. faces surging geopolitical rivalry around the world, its position is also coming under pressure in its own backyard. The region has been the focus of global competition before, of course, from the Spanish-Portuguese rivalry of the 15th and 16th centuries to the Cold War between Washington and Moscow. But after the fall of the Soviet Union, Latin America seemed — for a time, at least — to have become a geopolitics-free zone. The retreat and disintegration of the Soviet Union left the U.S. with no challenger for predominant regional influence.”

February 9 – Wall Street Journal (Josh Chin): “The global internet is splitting in two. One side, championed in China, is a digital landscape where mobile payments have replaced cash. Smartphones are the devices that matter, and users can shop, chat, bank and surf the web with one app. The downsides: The government reigns absolute, and it is watching—you may have to communicate with friends in code. And don’t expect to access Google or Facebook. On the other side, in much of the world, the internet is open to all. Users can say what they want, mostly, and web developers can roll out pretty much anything. People accustomed to China’s version complain this other internet can seem clunky… The two zones are beginning to clash with the advent of the superfast new generation of mobile technology called 5G.”

February 9 – Reuters (Abhirup Roy and Ben Blanchard): “China’s foreign ministry… condemned Indian Prime Minister Narendra Modi’s visit to the disputed northeastern border state of Arunachal Pradesh, saying it ‘resolutely opposes’ activities by Indian leaders in the region. Modi’s visit was part of a series of public meetings in the region aimed at garnering support for his Hindu nationalist Bharatiya Janata Party ahead of Indian elections due by May.”

Friday Afternoon LInks

[Reuters] Wall Street rallies on U.S.-China trade optimism

[Reuters] Oil prices rise 2 percent on signs of further Saudi tightening

[Reuters] U.S.-China trade talks to resume next week, Trump hints at extension

[Reuters] U.S. mortgage delinquencies hit 18-year low in Q4 2018 -MBA

[WSJ] Trump Declares Emergency, Plans to Allot Billions in Additional Wall Funds