Friday, November 8, 2019

Weekly Commentary: Extraordinary Monetary Disorder

M2 money supply has increased $796 billion y-t-d to $15.245 TN. With two months to go, 2019 M2 growth is on track to easily exceed 2016’s record $854 billion expansion. Recent M2 growth is nothing short of spectacular. M2 has jumped $329 billion in ten weeks, about an 11.5% annualized pace. Over 26 weeks, M2 surged $677 billion, or 9.3% annualized. One must go all the way back to the restart of QE in late 2012 to see a comparable surge in the money supply. Since the end of 2008, M2 has inflated $7.027 TN, or 86%.

Money Market Fund Assets (MMFA) have similarly exploded this year. Total MMFA have increased $517 billion year-to-date (to $3.555 TN), an almost 20% annualized rate. Like M2, six-month growth in MMFA has been extraordinary: expansion of $472 billion, or 35% annualized.

With MMFA at the highest level since 2009, bullish market pundits salivate at the thought of a wall of liquidity coming out of cash holdings to chase a surging equities marketplace. A Tuesday Wall Street Journal article (Ira Iosebashvili) is typical: “Ready to Boost Stocks: Investors’ Multitrillion Cash Hoard: Nervous investors have socked $3.4 trillion away in cash. But stocks are rising and their nerves are calming, leading bulls to view the huge cash pile as a sign that markets have room to go higher.”

And while MMFA are back to the 2009 level, it is worth pondering that money fund growth hasn’t been this robust since 2007. After ending April 2006 at $2.031 TN, money fund assets began growing rapidly, ending 2006 at $2.382 TN. And after expanding $154 billion, or 13% annualized, during 2007’s first-half, things went a little haywire. MMFA proceeded to surge $1.000 TN, or 53% annualized, over the next nine months. Recall that subprime erupted in the summer of 2007, with equities stumbling before regaining composure to trade to all-time highs in October.

August 17, 2007: The FOMC’s extraordinary inter-meeting policy adjustment: “To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 bps reduction in the primary credit rate to 5-3/4%…” The FOMC then cut Fed funds 50 bps on September 18th, then another 25 bps both on October 31st and December 11th. The FOMC then slashed rates 75 bps in an unscheduled meeting on January 22, 2008 - and another 50 bps on January 30th and another 75 bps on March 18th (to 2.00%).

Conventional thinking has it that market instability and risk aversion were behind the surge in MMFA. Yet there was also a notable acceleration of M2 money supply growth. After expanding at a 5.5% rate during 2007’s first-half, money supply growth surged to a 7.1% pace over the subsequent nine months.

2007 was a period of Extraordinary Monetary Disorder that manifested into acute market instability. Despite the dislocation that engulfed high-risk mortgage finance, Wall Street finance was “still dancing” right through the summer of 2007. Not only did stock prices ignore subprime ramifications, crude oil prices went on a moonshot – surging from about $70 mid-year to a high of $96 in November. After trading as low as 161 in August, the Bloomberg Commodities Index jumped as much as 15% to trade to 186 in November. By June 2008, Monetary Disorder saw crude spike above $140, with the Bloomberg Commodities index almost reaching 240.

My long-held view is the Fed’s aggressive monetary stimulus in 2007 was a major contributor to late-cycle “Terminal Phase Excess” – and resulting Extraordinary Monetary Disorder - that came home to roost during the 2008 crisis. After trading as high as 5.30% in early June 2007, ten-year Treasury yields were 100 bps lower just three months later. Ten-year yields ended 2007 just above 4.00% and were then as low as 3.31% by mid-March – a full 200 bps below yields from nine months earlier.

I believe a surge in speculative leverage played an instrumental role in the expansion of marketplace liquidity – that flowed into a rapid expansion of MMFA as well as M2 money supply. It’s worth noting the Fed’s Z.1 “Fed Funds and Repo” category posted Extraordinary growth during this period. After ending 2006 at $3.858 TN, “repos” increased $799 billion over five quarters to $4.657 TN (end of Q1 ’08).

Wall Street was indeed “still dancing” hard through the end of 2007. The Fed moved to bolster the economy in the face of heightened financial instability. The impact of stimulus measures on the real economy is debatable. My own view is that late-cycle stimulus is problematic, as it tends to stoke already overheated sectors and exacerbate imbalances and maladjustment. The stimulus impact on finance should be indisputable. The upshot of deploying stimulus in a backdrop of market speculation is dangerous speculative Bubbles.

With the enormous growth of M2 and MMFA during 2007 and into 2008, how was it possible for markets to turn disastrously illiquid in the fall of 2008? Because the monetary expansion was being fueled by a precarious expansion of the “repo” market and speculative securities finance more generally. While markets – Treasuries, corporate Credit, equities, crude and commodities – were being fueled by what appeared sustainable liquidity abundance, the source of this underlying monetary stimulus was acutely unstable speculative leveraging. And as the Fed cut rates, yields collapsed, stocks shot skyward and commodities went on a moonshot - the self-reinforcing nature of speculative excess (and leverage) fomenting acute Monetary Disorder.

Speculative blow-offs are a late-cycle phenomenon. Over the course of a boom cycle, financial innovation gathers momentum. The most aggressive risk-takers have proved the most successful, in the process attracting huge assets under management. The laggards come under intense pressure to chase performance with riskier portfolios. Out of necessity, caution is thrown to the wind. Between new instruments, products and strategies, market structure adapts to an environment of heightened risk-taking and leverage. In short, a speculative marketplace takes on a strong inflationary bias (upward price impulses). In such a backdrop, central bank monetary stimulus is extraordinarily potent – perhaps not so much for a late-cycle economic cycle, though remarkably so for a ripened speculative cycle susceptible to “melt-up” dynamics.

I have posited that late-cycle dynamics turn increasingly precarious due to the widening divergence between a faltering economic Bubble and runaway speculative market Bubbles. This was certainly the case in the second-half of 2007 and into 2008. I believe this dynamic has been more powerful, more global and much more problematic over the past year.

The Shanghai Composite is up 18.9% y-t-d, the CSI 300 32.0% and the ChiNext index 36.8%, despite economic deterioration and heightened risk. Chinese apartment prices continue to inflate at double-digit rates, as ongoing rapid Credit growth increasingly feeds asset inflation as the real economy struggles. Germany’s DAX equities index enjoys a 2019 gain of 25.3%, France’s CAC40 24.5% and Italy’s MIB 28.4%, in the face of economic stagnation. ECB stimulus measures have fueled a historic bond market Bubble and formidable equities Bubble, while the real economy barely treads water. Stocks in Russia are up 25.5%, Brazil 22.5%, Taiwan 19.0% and Turkey 13.0%, as EM keys off booming global liquidity excess while disregarding mounting risks. Here at home, the S&P500 has gained 23.4%, the Nasdaq Composite 27.7% and the Semiconductors 50.4%, as the Fed’s “insurance” rate cuts stoke speculative excess.

By the time the collapsing mortgage finance Bubble finally (after several close calls) triggered a run on Lehman money market liabilities (inciting major deleveraging), the system was acutely fragile. “Blow-off” speculative excess had stoked inflation across the asset markets, price distortions increasingly vulnerable to any interruption in the flow of market liquidity. Yet it went much beyond interruption, as the abrupt reversal of speculative leverage caused a collapse in market liquidity. I believe 2007’s excesses - spurred by Fed stimulus measures that fueled speculative “blow-offs” and gaping divergences between market Bubbles and the vulnerable real economy – sowed the seeds for an unavoidable crisis. Rate cuts only exacerbated late-cycle excess that later worsened financial and economic dislocations.

I have that same uncomfortable feeling I had in 2007 – just a lot worse. The global financial system is self-destructing. Reckless monetary policies have inflamed late-cycle excess. I believe the scope of speculative leverage is much greater these days – on a global basis. The Fed in 2007 (and into ’08) extended a dangerous mortgage finance Bubble. Central bankers these days are prolonging catastrophic global financial and economic Bubbles. The global economy is much more fragile today, with a faltering Chinese Bubble posing an Extraordinary risk. Highly synchronized global financial Bubbles are a risk much beyond 2008. Moreover, central bankers have used precious resources to sustain Bubbles, ensuring much greater fragilities will be countered by limited policy capabilities.

We will now await the catalyst for an inevitable bout of de-risking/deleveraging. There might be a few Lehmans lurking out there – in Asia if I was placing odds. China remains an accident in the making, with another ominous week in Chinese Credit (see “China Watch”). And near the top of my list of possible catalysts would be a surge in global yields. Sinking bond prices are problematic for highly leveraged holdings. Indeed, it is no coincidence that “repo” market issues erupted the week following a sharp upward reversal in market yields.

It was a notably rough week for global bond markets. Ten-year Treasury yields surged 23 bps to 1.94% (high since July 31). German bund yields rose 12 bps to negative 0.26% (high since July 12). Japanese yields jumped 13 bps to negative 0.05% (high since May 22). Italian yields surged 20 bps to 1.19%, and Greek yields rose 13 bps to 1.30%. Brazilian (real) 10-year yields surged 30 bps. Eastern European bonds, in particular, were under heavy selling pressure.

It’s worth noting bond prices are down sharply since last week’s Fed rate cut. Meanwhile, stock prices have continued to melt up. One could similarly argue that the expanding Fed balance sheet has been benefiting equities - bonds not so much. In general, monetary stimulus tends to inflate the asset class with the strongest inflationary bias. Bond prices peaked two months ago. And bonds have good reason these days to fret aggressive global monetary stimulus. Booming stock markets and resulting loose financial conditions underpin growth and inflationary pressures.

November 9 – Bloomberg: “China’s consumer inflation rose to a seven-year high last month on the back of rising pork prices, complicating policy makers’ decision on whether to further ease funding for the country’s weakening industrial sector. The consumer price index rose 3.8% in October from a year earlier, up from 3% in the previous month.”

A negative print (down 0.3%) for Q3 Nonfarm Productivity and Unit Labor Costs up 3.6% are supportive of inflationary pressures here in the U.S. But it’s massive supply as far as the eye can see that must have the Treasury market on edge. The uncomfortable reality of a highly levered marketplace, with downward pressure on prices and a fiscal deficit approaching 5% of GDP. Yet negative fundamentals can be ignored so long as China’s Bubbles are about to implode. But with a trade deal somewhat postponing China’s day of reckoning – while holding additional global monetary stimulus at bay – the bond market risk versus reward calculus loses much of its appeal.

It’s possible that a de-risking/deleveraging cycle commenced in early-September. The Fed’s eight-week $270 billion balance sheet expansion accommodated some deleveraging. But at some point the Fed will apparently settle into $60 billion monthly T-bill purchases – that won’t be much help in a de-risking environment. Stocks are fired up at the prospect of a year-end melt-up. The surprise would be a global bond market beat down – the downside of Extraordinary Monetary Disorder.

For the Week:

The S&P500 gained 0.9% (up 23.4% y-t-d), and the Dow rose 1.2% (up 18.7%). The Utilities sank 3.7% (up 17.1%). The Banks surged 3.7% (up 27.9%), and the Broker/Dealers jumped 1.9% (up 15.5%). The Transports rose 3.1% (up 20.7%). The S&P 400 Midcaps increased 0.8% (up 20.2%), and the small cap Russell 2000 added 0.6% (up 18.6%). The Nasdaq100 advanced 1.2% (up 30.4%). The Semiconductors surged another 2.8% (up 50.3%). The Biotechs gained 1.2% (up 8.6%). With bullion sinking $55, the HUI gold index dropped 6.5% (up 27.5%).

Three-month Treasury bill rates ended the week at 1.5125%. Two-year government yields jumped 12 bps to 1.68% (down 81bps y-t-d). Five-year T-note yields surged 20 bps to 1.75% (down 77bps). Ten-year Treasury yields rose 23 bps to 1.94% (down 74bps). Long bond yields surged 24 bps to 2.425% (down 59bps). Benchmark Fannie Mae MBS yields rose 18 bps to 2.805% (down 69bps).

Greek 10-year yields jumped 13 bps to 1.30% (down 310bps y-t-d). Ten-year Portuguese yields rose 12 bps to 0.32% (down 140bps). Italian 10-year yields surged 20 bps to 1.19% (down 155bps). Spain's 10-year yields rose 11 bps to 0.39% (down 103bps). German bund yields jumped 12 bps to negative 0.26% (down 51bps). French yields increased nine bps to 0.02% (down 69bps). The French to German 10-year bond spread narrowed three to 28 bps. U.K. 10-year gilt yields jumped 13 bps to 0.79% (down 49bps). U.K.'s FTSE equities index increased 0.8% (up 9.4% y-t-d).

Japan's Nikkei Equities Index rose 2.4% (up 16.9% y-t-d). Japanese 10-year "JGB" yields surged 13 bps to negative 0.05% (down 5bps y-t-d). France's CAC40 jumped 2.2% (up 24.5%). The German DAX equities index rose 2.1% (up 25.3%). Spain's IBEX 35 equities index increased 0.7% (up 10.0%). Italy's FTSE MIB index surged 2.6% (up 28.4%). EM equities were mixed to higher. Brazil's Bovespa index declined 0.5% (up 18.3%), and Mexico's Bolsa slipped 0.3% (up 5.0%). South Korea's Kospi index jumped 1.8% (up 4.7%). India's Sensex equities index increased 0.4% (up 11.8%). China's Shanghai Exchange added 0.2% (up 18.9%). Turkey's Borsa Istanbul National 100 index surged 4.8% (up 13.0%). Russia's MICEX equities index jumped 1.5% (up 25.5%).

Investment-grade bond funds saw inflows of $2.289 billion, while junk bond funds posted outflows of $574 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.69% (down 125bps y-o-y). Fifteen-year rates fell six bps to 3.13% (down 120bps). Five-year hybrid ARM rates declined four bps to 3.39% (down 75bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 4.12% (down 73bps).

Federal Reserve Credit last week surged $33.8bn to $4.000 TN, with a seven-week gain of $276bn. Over the past year, Fed Credit contracted $102bn, or 2.5%. Fed Credit inflated $1.189 Trillion, or 42%, over the past 365 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.8bn last week to $3.419 TN. "Custody holdings" increased $3.8bn y-o-y, or 0.1%.

M2 (narrow) "money" supply jumped $39.6bn last week to a record $15.245 TN. "Narrow money" gained $981bn, or 6.9%, over the past year. For the week, Currency increased $5.2bn. Total Checkable Deposits slipped $7.1bn, while Savings Deposits rose $35.4bn. Small Time Deposits dipped $2.4bn. Retail Money Funds gained $8.6bn.

Total money market fund assets surged $42.5bn to $3.555 TN. Money Funds gained $674bn y-o-y, or 23.4%.

Total Commercial Paper gained $6.8bn to $1.120 TN. CP was up $36.2bn, or 3.3% year-over-year.

Currency Watch:

November 5 – Reuters (Alun John): “China’s digital currency will create a ‘horse race’ when it is launched as commercial banks and other institutions compete to provide the best services using the new form of money, a central bank official said… China is preparing to be the first country to roll out a digitized domestic currency, a development that is being closely watched by the world’s financial services industries, though few details are currently available.”

The U.S. dollar index gained 1.3% to 98.353 (up 2.3% y-t-d). For the week on the upside, the South African rand increased 1.2%, the South Korean won 0.7% and the Mexican peso 0.1%. On the downside, the Brazilian real declined 4.2%, the New Zealand dollar 1.5%, the Swedish krona 1.4%, the British pound 1.3%, the euro 1.3%, the Swiss franc 1.2%, the Japanese yen 1.0%, the Canadian dollar 0.7%, the Australian dollar 0.6%, the Norwegian krone 0.5% and the Singapore dollar 0.1%. The Chinese renminbi increased 0.59% versus the dollar this week (down 1.68% y-t-d).

Commodities Watch:

November 4 – Reuters (Peter Hobson): “A slew of investment in gold-backed exchange traded funds (ETFs) offset a decline in purchases of jewellery, bars and coins to push global gold demand slightly higher in the third quarter, the World Gold Council (WGC) said… The world's appetite for gold was 1,107.9 tonnes over July-September, 3% more than in the same period last year, the WGC said… That took demand in the first three quarters to 3,317.5 tonnes - the most for any January-to-September period since 2016, it said.”

The Bloomberg Commodities Index declined 0.9% this week (up 3.8% y-t-d). Spot Gold dropped 3.7% to $1,459 (up 13.8%). Silver sank 6.8% to $16.823 (up 8.3%). WTI crude rose $1.04 to $57.24 (up 26%). Gasoline declined 1.3% (up 23%), while Natural Gas jumped 2.8% (down 5%). Copper rose 1.1% (up 2%). Wheat fell 1.1% (up 1%). Corn sank 3.1% (up 1%).

Market Instability Watch:

November 7 – Wall Street Journal (Michael S. Derby): “The New York Fed added $115.14 billion to financial markets via temporary operations on Thursday. The liquidity additions came in two parts. One was an overnight repurchase agreement with eligible banks totaling $80.14 billion, and the other was via a $35 billion 14-day repo. Eligible banks didn’t take all the liquidity offered by the Fed in the one-day operations, but in submitting $41.15 billion in Treasurys and mortgages for the latter operation, their interest in securing liquidity exceeded what the Fed was willing to provide on Thursday.”

November 5 – Reuters (Justina Lee): “Equity investors have been building their defenses for months. Now the bulwark is being dismantled in a rapid rotation out of winning haven trades and into riskier plays. Thank the prospect of a U.S.-China deal and improving economic data. Bond yields are jumping again, debt-like equities are down, and volatile stocks from small-caps to cyclical companies are back in favor… The value strategy of buying cheap stocks has staged a comeback, beating typically expensive shares with high growth prospects. The former also tends to do better when the yield curve is steepening, in part because that signals a brighter economic outlook favoring the more cyclically oriented value cohort.”

November 4 – Bloomberg (Sarah Ponczek): “As American equities continue marching to new highs, a popular quantitative investment strategy is having one of its worst days of the bull market. The momentum factor, which bets that recent winners will keep on winning, dropped almost 1% Monday as the S&P 500 added to its record. A Bloomberg pure momentum portfolio that strips out any extra effect from sector composition fell the most since Sept. 10, when the strategy was in the midst of its worst unwind in a decade. An equivalent measure of value, or a style that focuses on cheap stocks, was one of the best performing factors…”

November 6 – Bloomberg (Ksenia Galouchko): “The market optimism that has fueled a switch into cheaper and more volatile stocks may bring one of this year’s soaring quant trades back down to earth. Until recently, European low-volatility shares were a market favorite, with exchange-traded funds linked to the strategy showing record inflows last quarter. But as a budding U.S.-China trade deal boosts optimism on growth, money is flowing into shares that tend to see bigger swings such as value and cyclical names -- at the expense of defensive bets trading at rich valuations. ‘The low-volatility factor is at risk,’ said Inigo Fraser Jenkins, head of global quantitative strategy at Sanford C. Bernstein. ‘There has been a big shift over the last month, we think more portfolio managers will position into the value strategy instead.’”

November 6 – Wall Street Journal (Gunjan Banerji): “Earnings season has driven explosive moves for some stocks. Poor liquidity is likely exacerbating the swings. Declining liquidity—roughly, how easy or difficult it is to trade shares of different companies—over the past two years has stoked volatility around earnings, Goldman Sachs… analysts wrote… Basically, lower liquidity translates to higher volatility, they said. When liquidity for shares of an individual company is lower than usual ahead of earnings, stocks move 12% more than normal the day of earnings, the analysts wrote. On the other hand, stocks with better liquidity move 4% less than normal, they wrote. ‘The relationship between liquidity and volatility has gained increasing significance,’ Goldman analysts wrote. ‘Broad measures of liquidity have shown high predictive power when estimating forward volatility metrics.’”

Trump Administration Watch:

November 7 – Reuters (Yawen Chen and Jeff Mason): “China and the United States have agreed to roll back tariffs on each others’ goods as part of the first phase of a trade deal, officials from both sides said on Thursday, offering a new sign of progress despite ongoing divisions about the months-long dispute. The Chinese commerce ministry, without laying out a timetable, said the two countries had agreed to cancel the tariffs in phases. A U.S. official… confirmed the planned rollback as part of a ‘phase one’ trade agreement that President Donald Trump and President Xi Jinping are aiming to sign before the end of the year.”

November 6 – Bloomberg: “The U.S. and China have agreed to roll back tariffs on each other’s goods in phases as they work toward a deal between the two sides, both sides said. ‘In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement,’ China’s Ministry of Commerce spokesman Gao Feng said... White House economic adviser Larry Kudlow later… confirmed the advance in negotiations. ‘If there’s a phase one trade deal, there are going to be tariff agreements and concessions,’ he told Bloomberg.”

November 7 – Financial Times (Sun Yu): “An agreement between the United States and China to roll back existing tariffs as part of a ‘phase one’ trade deal faces fierce internal opposition in the White House and from outside advisers, multiple sources familiar with the talks said. The idea of a tariff rollback was not part of the original October ‘handshake’ deal between Chinese Vice Premier Liu He and U.S. President Donald Trump, the sources said… But there is a divide within the administration over whether rolling back tariffs will give away U.S. leverage in the negotiations… The Chinese Communist Party is trying to ‘re-trade’ the agreement, said Stephen Bannon, former White House adviser. He added that rolling back earlier tariffs ‘goes against the grain’ of the original October agreement. ‘There’s nothing that Trump hates more’ than someone backtracking on a deal, he said.”

November 6 – Reuters (David Brunnstrom and Matt Spetalnick): “A meeting between U.S. President Donald Trump and Chinese President Xi Jinping to sign a long-awaited interim trade deal could be delayed until December as discussions continue over terms and venue, a senior official of the Trump administration told Reuters…. The official, who spoke on condition of anonymity, said it was still possible the ‘phase one’ agreement aimed at ending a damaging trade war would not be reached, but a deal was more likely than not.”

November 4 – Bloomberg (Natnicha Chuwiruch and Philip Heijmans): “Most Southeast Asian leaders skipped a summit on Monday with U.S. representatives after President Donald Trump decided to avoid the annual meetings for a second straight year. Leaders from Thailand, Laos and Vietnam were the only ones to show up from the 10-member Association of Southeast Asian Nations for the summit with National Security Adviser Robert O’Brien, who was leading the U.S. delegation.”

November 4 – Bloomberg (Alex Harris): “The Federal Reserve is keeping a close eye on economic data as it ‘assesses the appropriate path’ for monetary policy, but the central bank and traders in financial markets may find their vision blurred if Washington gridlock spurs yet another government shutdown later this month. Previous closure episodes… have caused disruptions to the release of major economic indicators such as the gross domestic product report and trade figures. With temporary funding measures due to expire Nov. 21, there’s a risk that could happen again if lawmakers and the administration don’t reach an agreement.”

November 6 – Reuters (Pete Schroeder): “A group of U.S. lawmakers introduced legislation… that would block a federal retirement fund from investing in Chinese stocks. The group, led by Republican Senator Marco Rubio, say the bill is aimed at reversing a decision to allow federal employees and military service members to invest their retirement savings in a fund that includes China-listed stocks. Amid heightened U.S.-China trade tensions and efforts to limit the flow of U.S. capital to Chinese companies because of security concerns, Rubio and other senators described that move as ‘short-sighted,’ saying it amounts to ‘effectively funding the Chinese government and Communist Party’s efforts to undermine U.S. economic and national security.’”

November 4 – Reuters (Valerie Volcovici): “The Trump administration said… it filed paperwork to withdraw the United States from the Paris Agreement, the first formal step in a one-year process to exit the global pact to fight climate change. The move is part of a broader strategy by President Donald Trump to reduce red tape on American industry, but comes at a time scientists and many world governments urge rapid action to avoid the worst impacts of global warming.”

Federal Reserve Watch:

November 4 – Wall Street Journal (Michael S. Derby): “The New York Fed’s efforts to calm short-term markets and keep them placid is working well, a top central bank staffer… Lorie Logan, who is the acting leader of the Markets Desk at the New York Fed and oversees how the central bank implements changes in monetary policy, was commenting on the central bank’s substantial interventions into short-term markets… The Fed has been intervening in financial markets by providing substantial amounts of short-term liquidity via what are repurchase agreements, where the Fed takes in on a short-term basis Treasurys, agency debt and mortgage-backed bonds in exchange for loans of cash to eligible banks. These temporary additions restarted in mid-September for the first time in over a decade, and on some days, they have seen the Fed adding over $100 billion to markets.”

November 4 – Bloomberg (Benjamin Purvis and Alex Harris): “A key Federal Reserve official… made the case for the central bank’s program of buying only the shortest-dated Treasuries to ensure the banking system has enough reserves. But she signaled an openness to make changes if they’re needed to keep markets calm. By confining itself to bills, the central bank can help maintain the supply of reserves while limiting the impact on financial conditions, said Lorie Logan, who oversees market operations at the Federal Reserve Bank of New York. She also noted that the market for bills is particularly deep and liquid, and that the Fed at present doesn’t own much in that part of the curve. ‘So far, reserve management purchase operations have proceeded smoothly,’ she said… But she also noted that the Fed ‘is prepared to adjust the pace and other parameters of the reserve management purchases as necessary’ and that the Fed would be monitoring the market closely.”

November 5 – Reuters (Lindsay Dunsmuir): “Conflicting signals make it difficult to get a handle on the true health of the U.S. economy and reducing uncertainty for businesses would provide a shot in the arm to growth, Richmond Fed Reserve Bank President Thomas Barkin said… ‘The strength of consumption and the labor market might be saying ‘hold’ or even ‘raise rates,’ while the softness of investment, inflation and the bond market might be saying ‘lower rates,’ Barkin said…”

U.S. Bubble Watch:

November 5 – Associated Press: “U.S. service companies grew at a faster pace in October after sinking to a three-year low in September. The Institute for Supply Management… reported… its service index grew to 54.7% last month, up from 52.6% in September… Measures of sales, new orders and employment all rebounded from the previous month. The service sector, which accounts for more than two-thirds of U.S. economic activity, has been expanding for 117 straight months, according to the survey-based ISM index.”

November 4 – Reuters (Viktoria Dendrinou): “Loan officers at U.S. banks reported keeping lending standards for business loans mostly unchanged in the third quarter but they tightened the terms for commercial real estate loans, a Federal Reserve survey showed… The officers also said they were seeing weaker demand for business loans from firms but that interest in most commercial real estate loans changed little. ‘Major shares of banks that reported reasons for tightening standards or terms on (business) loans cited a less favorable or more uncertain outlook; a reduced tolerance for risk; and a worsening of industry-specific problems as important reasons,’ the U.S. central bank said…”

November 5 – CNBC (Jeff Cox): “The U.S. trade deficit with its global partners contracted to $52.5 billion in September as the White House continued its efforts to close the gap in goods and services… The deficit was slightly above expectations of $52.2 billion… August’s shortfall was just over $55 billion. As the administration continues its efforts to close the first phase of a tariff deal with China, the trade balance remains 13.1% higher from the $46.4 billion level when President Donald Trump took office.”

November 6 – Reuters (Jason Lange): “American workers were unexpectedly less productive during the third quarter, with growth in their output failing to keep up with hours worked. …Nonfarm productivity, which measures hourly output per worker, fell at a 0.3% annualized rate between July and September, the biggest decline in almost four years. The last drop that was sharper was in the fourth quarter of 2015… Unit labor costs, the price of labor per single unit of output, rose at a 3.6% rate in the third quarter.”

November 7 – Bloomberg (Prashant Gopal): “Home-price growth is accelerating again. Give credit to this year’s plunge in mortgage rates. In the third quarter, the median price of an existing single-family home in the U.S. was $280,200, up 5.1% from a year earlier… By comparison, the annual gain in the second quarter was 4.3%.”

November 3 – Wall Street Journal (Laura Kusisto): “U.S. homeowners are staying in their residences much longer than before, keeping a glut of housing inventory off the market, which helps explain why home sales have been sputtering. Homeowners nationwide are remaining in their homes typically 13 years, five years longer than they did in 2010, according to… Redfin. When owners don’t trade up to a larger home for a growing family or downsize when children leave, it plugs up the market for buyers coming behind them. ‘If people aren’t moving on, there just are fewer and fewer homes available for new home buyers,’ said Daryl Fairweather, Redfin’s chief economist.”

November 7 – Bloomberg (Katia Dmitrieva): “U.S. consumer credit rose in September at the slowest rate since mid-2018 as Americans carried smaller credit-card balances. Total credit increased $9.5 billion, less than forecast, after a revised $17.8 billion gain in August… Borrowing increased at a 2.8% annualized rate, the slowest since June 2018.”

November 6 – Bloomberg (Noah Buhayar and Christopher Cannon): “California, the land of golden dreams, has become America’s worst housing nightmare. Recent wildfires have only heightened the stakes for a state that can’t seem to build enough new homes. The median price for a house now tops $600,000, more than twice the national level. The state has four of the country’s five most expensive residential markets—Silicon Valley, San Francisco, Orange County and San Diego. (Los Angeles is seventh.) The poverty rate, when adjusted for the cost of living, is the worst in the nation. California accounts for 12% of the U.S. population, but a quarter of its homeless population… ‘Broadly speaking, there is no solution to the California housing crisis without the construction of millions of new houses,’ said David Garcia, policy director for the Terner Center for Housing Innovation at the University of California, Berkeley.”

November 5 – Wall Street Journal (Heather Gillers): “As the bull market enters its 11th year, state and local pension plans are piling on risk, as they try to make up shortfalls. Public plans had a median 47.3% of their assets in U.S. equities at the end of the third quarter, according to database Wilshire Trust Universe Comparison Service. That is more than they have had since 2007 and up from 44.1% a year earlier. Taking on more exposure to stocks is a riskier bet… Those risks can translate to consequences in a decline: Big hits to pension funds’ stock portfolios during the financial crisis were followed by a wave of benefit cuts for government workers hired since then. Retirement systems that manage money for firefighters, police officers, teachers and other public workers are banking on market returns of 7% or more to help cover shortfalls. State and local pension plans have about $4.4 trillion in assets…, $4.2 trillion less than the value of promised future benefits.”

November 3 – Financial Times (Chris Flood): “General Electric’s recent decision to freeze retirement benefits for 20,000 employees provides the latest unwelcome illustration of the problems confronting millions of US workers battling to secure a decent income in old age. The pain felt by GE’s employees is shared by more than half a million workers across multiple US industries that also face cuts to pension benefits… GE’s pension obligations stood at $91.8bn at the end of last year, significantly higher than the industrial conglomerate’s $66bn market value on December 31.”

November 6 – CNBC (Maggie Fitzgerald): “In the past two weeks, McDonald’s and Under Armour lost their CEOs, continuing the record-setting pace of exits this year by the heads of U.S. businesses. October marked the highest month on record with 172 chief executives leaving their posts, according to… Challenger, Gray & Christmas. CEO departures hit a record high for the year through October, with 1,332 U.S. based companies announcing CEO departures. The firm started tracking CEO departures in 2002, a period that includes the financial crisis. This year is on pace to have the most departures on record.”

November 3 – CNBC (Mack Hogan): “Rolls-Royce, Bentley, Lamborghini and Maserati have long histories of building high-end, exclusive cars for wealthy clients. All four, though, have introduced SUVs in recent years to help claim their share of the rapidly expanding market. It’s working. The Rolls-Royce Cullinan, Bentley Bentayga, Lamborghini Urus and Maserati Levante have all been triumphant successes for their respective brands…. Especially among younger buyers, general manager Dan Ricci says demand for high-end SUVs has been unbelievable. When the Rolls-Royce Cullinan… launched, people were willing to pay even more than the car’s $325,000 base price for early order slots. ‘That was kind of crazy,’ Ricci told CNBC. ‘There were people offering like $100,000 over sticker to sell some of these orders.’”

November 5 – Bloomberg (Patrick Clark and Gillian Tan): “Ohana Real Estate Investors has reached a deal to sell the Montage Beverly Hills, a five-star hotel in the heart of the California city’s luxury shopping district, people with knowledge of the matter said. The seller has taken a deposit from a Middle Eastern buyer on the 201-room property at a price of more than $2 million a key…”

China Watch:

November 5 – Wall Street Journal (Bingyan Wang, Liyan Qi and Stephanie Yang): “Thirty floors above the showroom of a Chinese developer, a 29-year-old woman stood on a small rooftop ledge about 8 feet off the rooftop itself, threatening to jump and declaring that her recent home purchase had ruined her life. Ms. Hou… was one in a group of angry home buyers who had gathered at a real estate sales office in Tianjin… on Saturday, demanding their money back for half-constructed apartments that had now dropped in price. In recent years, Chinese officials have tightened financing to developers and rules on lending for home buyers in an effort to cool a buying frenzy and runaway prices. The government has delivered a consistent message: Apartments are for living, not for speculation.”

November 4 – Bloomberg: “China’s central bank has finally helped put the brakes on the downward spiral in government debt. While Tuesday’s 5 bps reduction in the cost of one-year loans to banks was largely symbolic, it was the first such move since 2016. That was enough to soothe nerves in a market that’s been walloped by the prospect of tighter liquidity in the financial system. The relief was apparent: China’s benchmark 10-year yield dropped the most since August, while bond futures rose as much as 0.41%. The cost on 12-month interest rate swaps fell the most in a month. But skeptics say the reduction doesn’t represent a direct cut in borrowing costs to the economy, showing Beijing is sticking to its prudent approach to stimulus amid a spike in inflation.”

November 5 – Financial Times (Sun Yu and Tom Hancock): “The dozens of abandoned, unfinished buildings in the central business district of Kaifeng, a city of 5m in central China, are a telling symbol of the country’s stuttering efforts to stimulate its economy — and the dwindling effect it is having on global growth. Previous slowdowns, most notably in 2008-09 and 2015-16, saw the ruling Communist party approve huge lending programmes to spur construction, reviving the domestic economy and boosting global demand. But although growth has this year slowed to its lowest level for three decades, posing a substantial drag on the global economy, Beijing’s policy response has been limited to measures such as tax reforms, cuts to bank reserve requirements and tweaks to local government bond issuance… China’s central bank describes its stimulus policy as ‘targeted’ at specific sectors, rather than what it calls the ‘flood-like’ easing of previous slowdowns.”

November 5 – New York Times (Keith Bradsher): “Xi Jinping, China’s top leader, broadly endorsed free-trade principles and promised to welcome foreign investment in a speech…, but a setback with India and a lack of details toward ending the punishing trade war with the United States are testing Beijing’s ability to prove it can make a deal. Speaking at the opening of the second annual China International Import Expo in Shanghai, Mr. Xi indirectly criticized the Trump administration when he briefly denounced unilateralism. ‘Economic globalization is a historical trend,’ he said, comparing the momentum to the world’s great rivers. ‘Although there are sometimes some waves going backward, and even though there are many shoals, the rivers are rushing forward and no one can stop them.’”

November 7 – Bloomberg: “Signs of stress within China’s legion of small banks are cropping up across the country. On Thursday, Guangdong Nanyue Bank made a rare decision to skip early redemption on its local tier-two bond without giving a reason, sparking fresh concern about its financial strength. Two other banks have faced runs at some branches in recent days… Many other lenders are embarking on efforts to bolster capital. The drumbeat of news is heightening investor concerns about China’s more-than 3,000 small banks, many of which are coping with a mountain of bad loans and a government crackdown on risky funding practices. To prevent panic, authorities are considering a package of measures to shore up any cracks in the world’s largest banking system -- a complex challenge.”

November 7 – New York Times (Alexandra Stevenson and Cao Li): “One bank failed. A second and third were bailed out. Worried depositors of two more banks then rushed to pull out their savings for fear of losing them in a spectacular failure. These stumbles, which have occurred in quick succession since May, would stir fears of a financial meltdown had they happened in the United States. But this is China, where the government is trying to suppress any potential panic while the country’s banking system goes through a painful but much needed cleanup. The latest in China’s series of banking woes came this week when a city in the country’s northeast urged depositors in a local bank to ‘avoid unnecessary losses by withdrawing cash blindly,’… More than a hundred police officers were dispatched to six bank branches… They arrested four people for what people described as ‘publicly spreading rumors on the internet.’”

November 7 – Financial Times (Sun Yu): “A spate of bank runs has highlighted the growing challenges facing China’s financial sector, with local lenders particularly vulnerable due to the slowing economy and a crackdown on shadow banking. This week, police in Yingkou, a city of 2.5m people in the north-eastern province of Liaoning, arrested nine residents for posting ‘inappropriate remarks’ on social media that Yingkou Yanhai Bank, a local lender, was in a ‘deep financial crisis’. The online comments prompted local residents to flock to the bank’s branches to withdraw their savings. ‘Everyone says YYB is running into trouble,’ said a Yingkou resident. ‘There must be an element of truth in it.’ The incident follows a bank run last week in Yichuan, a city in the central province of Henan, in which depositors withdrew their savings after news that the lender’s president was under investigation.”

November 6 – Bloomberg: “Chinese authorities are considering a sweeping package of measures to shore up smaller lenders, escalating efforts to contain one of the biggest risks facing the world’s largest banking system. Problematic banks with less than 100 billion yuan ($14bn) of assets would be urged to merge or restructure under a plan being discussed by financial regulators, people familiar with the matter said. Local governments would be held responsible for dealing with troubled lenders, with the central bank providing liquidity support if necessary… China has more than 3,000 small banks, many of which are struggling to cope with mounting bad loans and a government crackdown on risky funding practices. Authorities have so far taken a piecemeal steps to stabilize the industry, seizing control of one bank in May and orchestrating bailouts for two others. President Xi Jinping’s government is now laying the groundwork for a more comprehensive solution.”

November 7 – Bloomberg: “China Minsheng Investment Group Corp. once sought to be the nation’s version of JPMorgan… Instead it’s the country’s biggest dollar bond defaulter this year. With $2 billion of debt maturing in 2020, the company is scrambling to raise cash… One of the largest private investment companies in China, the group was set up by 59 non-state companies in 2014 with a mandate to help Chinese private enterprise expand globally. The company posted 24.7 billion yuan ($3.5bn) in revenue in the nine months through September 2018, and had 233 billion yuan in total liabilities at that point…”

November 4 – Bloomberg (Ina Zhou): “China’s private companies have been hit disproportionately hard as the economy slows, with their default rate doubling to 12% this year, compared with 1.5% for the overall domestic bond market, according to China International Capital Corp. Since the first onshore bond default in 2014, 93 private firms have defaulted on 278.7b yuan ($39.7bn) bonds as of Oct. 29, compared to their outstanding onshore bonds of 2.4 trillion yuan, CICC said…The private company default rate in China was 6.2% last year and close to 2% in 2017, it said.”

November 8 – Bloomberg (Ellen Milligan and Jonathan Browning): “Three Chinese banks are suing the brother of Asia’s richest man in a London court for failing to pay back $680 million in defaulted loans. The Mumbai branch of Industrial & Commercial Bank of China Ltd., China Development Bank and the Export-Import Bank of China agreed to loan $925.2 million to Anil Ambani’s firm Reliance Communications Ltd. in 2012 on condition that he provide a personal guarantee, ICBC’s lawyer Bankim Thanki told the court.”

November 6 – Wall Street Journal (Zhou Wei and Serena Ng): “In the trenches of China’s debt-addled economy, the government has made a startling decision: Let companies fail. That has left creditors angry, debtors fighting to save their businesses and judges on a mission to promote the benefits of bankruptcy. After years of pumping out financial support to keep the economy humming and workers happy, China has embarked on a debt reckoning. Beijing is building a bankruptcy system to take on a significant pickup in corporate defaults. The country now has more than 90 U.S.-style specialized bankruptcy courts to help sort through a morass of corporate debt that, until recently, would have been swallowed by state banks and other creditors.”

November 4 – Bloomberg (Hong Shen and Ina Zhou): “A selloff in dollar bonds issued by two Chinese university-backed companies has revived concerns about the finances of such firms, as well as the strength of state support. In the past week, investors have dumped dollar debt issued by subsidiaries of Tsinghua University and Peking University, the country’s top two tertiary institutions, pushing prices to record lows. The financial woes affecting the two companies, one of them a leading semiconductor producer, highlight the risk arising from the murky regulatory oversight of a relatively obscure corner in China Inc. The plunge shows a worrying loss of confidence for companies such as Tsinghua Unigroup Co., which is tasked with helping President Xi Jinping achieve his goal of challenging the U.S.’s global dominance in technology.”

November 7 – Bloomberg: “A small Chinese lender made a rare decision to skip early redemption on its local tier-two bond, sparking fresh concern on the country’s smaller lenders as non-performing loans rise amid an economic slowdown. Guangdong Nanyue Bank Co, based in the coastal province in Southeast China, said it won’t exercise an early redemption on its 1.5 billion yuan ($215 million) 6% tier-two bond next month…”

November 7 – Reuters (Lusha Zhang and Ryan Woo): “China’s exports and imports contracted less than expected in October, providing some relief for the economy as Beijing tries to reach a partial trade deal with Washington… China’s October exports fell for the third straight month, down 0.9% from a year earlier…, less than a 3.9% fall forecast in a Reuters poll and September’s 3.2% contraction… China’s imports shrank for the sixth consecutive month, though the 6.4% drop was smaller than an expected 8.9% and September’s 8.5% decline.”

November 7 – Bloomberg: “China’s car-market gloom continued in October as the traditional post-holiday demand peak failed to materialize, leaving automakers with few easy answers to attract buyers back to showrooms. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles dropped 6% from a year earlier to 1.87 million units… The decline was the 16th in the past 17 months…”

November 4 – Bloomberg: “Beijing is getting ready for another gray winter after China eased air quality targets, signaling the government is focusing on bolstering slowing growth at the expense of cleaner air. In September, the government eased its target for a key air quality indicator in northern China, including industrial areas surrounding the capital. It is seeking a 4% drop in concentrations of deadly PM 2.5 particles in the October-to-March period from a year earlier, lower than the 5.5% decline it sought in an earlier draft of pollution-control goals.”

November 5 – Reuters (John Geddie and Kate Lamb): “The Chinese Communist Party said… it would ‘perfect’ the system for choosing the leader of Hong Kong after months of anti-government protests, as police in the ex-British colony fired water cannon to break up a Guy Fawkes-themed march. The party said… it would support its ‘special administrative region’ of Hong Kong, which returned to China in 1997, and not tolerate any ‘separatist behavior’ either there or in neighboring Macau, an ex-Portuguese colony that was handed back to Chinese rule two years later.”

Central Banking Watch:

November 3 – Reuters (Howard Schneider, Francesco Canepa and Leika Kihara): “A concentrated burst of interest rate cutting and other measures to loosen global financial conditions by the world’s central bankers looks to have largely run its course, and policymakers now appear content to wait and see if their handiwork staves off a deeper slowdown in the months ahead. Led by the U.S. Federal Reserve’s nearly yearlong pivot away from a tightening bias, rate setters from Australia to Brazil and the euro zone to the Philippines have lowered borrowing costs in recent months to blunt the headwinds from global trade tensions headlined by the standoff between Washington and Beijing. It is an easing wave that appears to have crested for now.”

Brexit Watch:

November 3 – Reuters (William Schomberg): “Britain’s state spending will head back to levels not seen since the 1970s if the two main political parties in the Dec. 12 election make good on their promises, a think-tank said… After a decade of tight controls on the budget to fix the damage wrought by the financial crisis, Prime Minister Boris Johnson’s ruling Conservative Party and the opposition Labour Party are both wooing voters with spending plans.”

November 4 – Reuters (Stephen Addison and Alistair Smout): “Britain will impose an immediate moratorium on fracking, the government announced on Saturday, saying the controversial gas extraction technique risked causing too much disruption to local communities through earth tremors. The move could win support for Prime Minister Boris Johnson’s Conservatives in constituencies in northern England where fracking had been planned, but was dismissed by the opposition Labour party as a ‘stunt’ ahead of December’s election.”

EM Watch:

November 7 – Bloomberg (Rahul Satija): “Moody’s… said it doesn’t expect the credit squeeze among Indian shadow lenders to be resolved quickly, and warned that the squeeze may actually worsen and add to risks in the already flagging economy. ‘Stress among non-bank financial institutions. with the possibility of a more severe credit crunch that would affect credit supply, both directly and indirectly through linkages with non-banks and banks, adds to the downside risks to the medium-term growth outlook,’ the ratings company said… It cut India’s outlook to negative, the first step toward a downgrade.”

November 4 – Reuters (Daina Beth Solomon): “Argentina’s debt is a problem that the incoming administration must resolve, its president-elect, Alberto Fernandez, said… Speaking on his first overseas trip as the next president…, Fernandez criticized the debt load his administration will inherit. ‘The speed with which debt was taken on and the characteristics of the debt were impressive, because the debt is very large and it must be met in the very short term,’ he said.”

Europe Watch:

November 6 – Associated Press (Sylvie Corbet): “When France’s president wants to carry European concerns to the world stage to find solutions for climate change, trade tensions or Iran’s nuclear ambitions, he no longer calls Washington. He flies to Beijing. President Emmanuel Macron’s visit to China this week suggests that the United States risks being sidelined on the global stage under President Donald Trump. One moment spoke volumes: Chinese President Xi Jinping sampling French wines, which Trump’s administration recently slapped with heavy new tariffs. Macron portrayed himself as an envoy for the whole European Union, conveying the message that the bloc has largely given up on Trump, who doesn’t hide his disdain for multilateralism.”

November 7 – Bloomberg (Viktoria Dendrinou): “The European Commission cut its euro-area growth and inflation outlook amid global trade tensions and policy uncertainty, warning that the bloc’s economic resilience won’t last forever. The EU’s executive arm sees economic momentum remaining muted through 2021, forecasting an expansion of 1.2% for that year. At 1.3%, inflation is projected to remain well below the European Central Bank goal of just below 2% over the medium term.”

November 5 – Reuters (Andreas Rinke): “Former German finance minister Wolfgang Schaeuble told Reuters… he expects new European Central Bank President Christine Lagarde to implement a ‘very sensible’ monetary policy that respects the limits of the ECB’s mandate. The comments by Schaeuble, a fierce critic of the ECB’s ultra-loose monetary policy of sub-zero interest rates and bond-buying programs, highlight Lagarde’s challenge in healing a rift between euro zone members left by her predecessor Mario Draghi.”

Global Bubble Watch:

November 6 – Bloomberg (Pavel Alpeyev and Takahiko Hyuga): “Masayoshi Son struck a defiant tone after his SoftBank Group Corp. reported an enormous loss from investments in money-losing startups WeWork and Uber Technologies Inc. The Japanese billionaire paced a stage in Tokyo… showing off dozens of slides that he argued demonstrate the promise of his deal-making. He began by flashing a slide of newspaper headlines and mocking reports that SoftBank or WeWork or both would end up going bankrupt… SoftBank recorded an operating loss of 704.4 billion yen ($6.5bn) after writedowns in WeWork and other investments, the Japanese company’s first such loss in 14 years. The $100 billion Vision Fund, the unprecedented investment fund that had been producing big profits, lost 970.3 billion yen. ‘Today’s earnings are a mess,’ Son said. ‘It’s red all over.’”

November 3 – Bloomberg (Michael Heath): “Australia’s monetary policy easing has driven interest rates down to levels where they could be doing more harm than good for the economy. The central bank could be bumping up against the ‘reversal interest rate,’ a level at which accommodative policy begins to produce unintended consequences. The clearest sign of that is the slide in consumer sentiment since the Reserve Bank began lowering rates in June, particularly after the ensuing July and October cuts.”

November 7 – Wall Street Journal (Avantika Chilkoti and Caitlin Ostroff): “Some pension-fund managers are venturing further into unusual investment territory as this year’s plunge in bond yields makes it even harder to find decent long-term returns. Funds are dabbling in riskier asset classes, including private markets, real-estate projects, infrastructure financing and direct lending. Some are making riskier fixed-income bets, buying volatile assets such as 100-year Argentine government bonds. Others are going farther afield, investing in greenhouses and waste management… The giant pools of retirement money are under pressure to take on more risk following decades of declining interest rates that have chipped away at returns from their traditional bond-heavy portfolios… Pension funds’ allocations to alternative asset classes rose to 26% in 2018 in the U.S., U.K., Japan, Australia, Canada, Switzerland and the Netherlands, from 19% in 2008, according to… Thinking Ahead Institute…”

Fixed-Income Bubble Watch:

November 5 – Bloomberg (Rich Miller): “U.S. financial regulators led by the Treasury’s Steven Mnuchin and the Federal Reserve’s Jerome Powell have been put on notice about the risk of an economically damaging cash crunch in the $11 trillion home mortgage market. Behind the concern aired recently at the Financial Stability Oversight Council headed by Secretary Mnuchin: The rapid growth of so-called shadow banks in the origination and servicing of home loans, especially riskier ones. ‘There is a real weakness here,’ said University of California, Berkeley professor Nancy Wallace, who co-authored a 2018 paper entitled ‘Liquidity Crises in the Mortgage Market’… ‘Many of these firms are financially fragile.’ That’s because they’re dependent on short-term bank credit lines that could be pulled at times of financial stress.”

November 4 – Bloomberg (Claire Boston): “The subprime mortgage-backed bond may be dead in America a decade after it helped trigger the global financial crisis, but a security with some of the same high-risk characteristics is starting to take off. It’s called the non-qualified mortgage -- basically a loan granted to borrowers whose checkered financial record made them ineligible for conventional mortgages. Lenders have bundled more than $18 billion worth of these loans into bonds this year that they then sold to investors, a 44% increase from 2018 and the most for any year since the securities became common post-crisis. This surge in issuance of non-QM bonds, as they’re called, comes just as some initial indications of delinquency rates on the loans are starting to emerge. The short answer: They’re high. About 3% to 5% in some bonds… That’s multiples of the current 0.7% delinquency rate on Fannie Mae loans.”

Geopolitical Watch:

November 6 – Reuters (Yimou Lee and Fabian Hamacher): “Beijing could resort to military conflict with self-ruled Taiwan to divert domestic pressure if a slowdown in the world’s second largest economy amid trade war threatens the legitimacy of the Chinese Communist Party, the island’s foreign minister has said… Taiwan’s Foreign Minister Joseph Wu drew attention to China’s slowing economy amid its bitter trade war with the United States. ‘If the internal stability is a very serious issue, or economic slowdown has become a very serious issue for the top leaders to deal with, that is the occasion that we need to be very careful,’ Wu said…”

November 7 – Reuters (Daren Butler): “Turkish President Tayyip Erdogan accused the United States and Russia… of failing to fulfill their part of a deal for Kurdish militia to leave a Syrian region bordering Turkey, and said he would raise this with President Donald Trump next week… Erdogan is set to discuss implementation in talks with Trump in Washington on Nov. 13. Turkish officials confirmed… the visit would go ahead, after a phone call between the leaders. ‘While we hold these talks, those who promised us that the YPG... would withdraw from here within 120 hours have not achieved this,’ Erdogan said…”

November 7 – Reuters (Francois Murphy): “The United Nations nuclear watchdog and Western powers… strongly criticized Iran for preventing one of the agency’s inspectors from leaving the country last week. The U.S. envoy to the International Atomic Energy Agency said detaining the inspector was an ‘outrageous provocation’ by Iran and the agency itself said it was unacceptable.”

November 4 – Reuters (Andrea Shalal): “The United States risks becoming increasingly isolated unless it works with allies to oppose China’s predatory economic policies, according to a new report that maps out a comprehensive strategy of U.S. ‘partial disengagement’ from China. The report by the non-profit, non-partisan National Bureau of Asian Research calls for a four-part strategy to counter economic and security risks posed by China, including urgent moves to boost information-sharing and cooperation with allies.”

November 3 – Reuters (Patpicha Tanakasempipat and Liz Lee): “A U.S. envoy denounced Chinese ‘intimidation’ in the South China Sea at a summit of Southeast Asian leaders on Monday and said they should not be bullied into giving up their resources by what he compared to a conquest. The raised rhetoric from White House National Security Adviser Robert O’Brien at the Association of Southeast Asian Nations (ASEAN) meeting in Bangkok drew a rebuke from China… ‘Beijing has used intimidation to try to stop ASEAN nations from exploiting the off-shore resources, blocking access to 2.5 trillion dollars of oil and gas reserves alone,’ O’Brien told the ASEAN-U.S. summit…”

Friday Evening Links

[Reuters] S&P 500 posts fifth week of gains as Wall St. hits records

[MarketWatch] 10-year Treasury yield sees biggest weekly jump in around a month

[AP] Trump pushes back on reports US will remove China tariffs

[Bloomberg] Trump Sows Doubt on Trade Talks With Pushback on Tariff Unwind

[Bloomberg] Repo Fragility Exacerbated by a Hot New Corner of Funding Market

[Bloomberg] Get Ready as ‘Beta-Chasing’ Stock Managers Try to Make Up Ground