[MarketWatch] Beneath the glow of stock-market records, darkly bearish trends are lurking
[CNBC] While big bills have failed, Wall Street sees opportunity in Trump's massive deregulation movement
[Bloomberg] Beijing For Small-Scale Military Offensive Against India: Chinese Daily
Saturday, August 5, 2017
Friday, August 4, 2017
Weekly Commentary: Data and a Carefree Bond Market
July non-farm payrolls gained 209,000 versus estimates of 180,000. June payrolls were revised 9,000 higher to 231,000. It’s worth noting that manufacturing added 16,000 jobs (est. 5,000) in July, the strongest gains since March. So far in 2017, manufacturing employment has been expanding at the briskest pace in years, with y-t-d gains of 82,000 dwarfing comparable 2016’s zero and 2015’s 12,000. The unemployment rate dipped a tenth in July to 4.3%. Unemployment bottomed at 4.4% during the previous cycle low back in 2007. In fact, the unemployment rate has not been lower than the July level since February 2001.
The recent narrative holds that the economy has been in an extended “soft patch”. In general, economic data have somewhat missed expectations. “US Car Sales Continue to Skid, Drop 5.7% in July.” The decline in automobile sales was viewed as confirmation of a slowing manufacturing sector. Ongoing travails in retail also support the view of economic stagnation. The labor participation rate remains a dismal 62.9%.
The narrative of a weakening in both economic activity and inflationary pressures serves the markets well. With Fed funds now near the Federal Reserve’s “neutral rate,” rate normalization has apparently about run its course. Even after Friday’s stronger-than-expected job gains, the market places the probability of another 2017 hike at less than 40%. What could be more bullish than so-called rate “normalization” that avoids any tightening of financial conditions whatsoever? The Carefree Bond Market has been cruising along the PCH with the top down in a slick new autonomous sports car.
It’s my view that U.S. and global economic maladjustment has become extreme after years of policy-induced monetary disorder. The U.S. economy is structurally unsound, though this grim reality remains well-masked by the artistry of low rates, liquidity over-abundance, inflated securities markets and record household net worth. More succinctly, deep structural impairment ensures central bankers remain wedded to loose financial conditions.
On a more cyclical basis, however, economic activity is not that weak. Data aggregation definitely smooths an extraordinarily unbalanced economy, with some segments booming and others mired in stagnation. And, importantly, ongoing monetary stimulus will do anything but resolve imbalances and structural maladjustment. At this point in the cycle – after nine years of historic monetary stimulus - the Fed should focus policy attention on cyclical indicators and err on the side of reducing accommodation. There are perilous risks associated with pushing a structurally marred economic system to the limits.
July average earnings were up 0.3% m-o-m, with one-year gains of 2.5%. Tepid wage growth is viewed as a major factor keeping inflation (CPI) stubbornly below the Fed’s 2.0% target. Yet stagnant wages are clearly a structural issue. U.S. manufacturing workers must compete against labor from around the globe. Less appreciated, the massive U.S. service sector – that flourished in the backdrop of deindustrialization, aggressive monetary stimulus and asset inflation – has created tens of millions of low skill jobs. Moreover, it is increasingly difficult for the overbuilt service sector (i.e. retail, restaurant, hotels, etc.) to afford higher compensation expenses. And let’s not forget the enormous cost – and ongoing inflation – in healthcare and insurance.
Over recent months, there has been some focus on the divergence between robust “soft” and lagging “hard” data. The Bloomberg Consumer Comfort Index rose last month to 49.6, a level just below the previous cycle peak in 2006/07. One must go all the way back to 2001 to beat 2017 readings for the Bloomberg Weekly National Economy Index. July’s 113.4 reading for the University of Michigan Current Economic Conditions Index was the highest since July 2005 - and the second highest going all the way back to November 2000. Last month’s 147.8 reading for the Conference Board Consumer Confidence Present Situation Index was the highest since July 2001. The CEO Confidence Index has declined only slightly from the March level - which was the highest going back to December 2004.
These various confidence indices - in conjunction with a 4.3% unemployment rate and stock prices surging further into uncharted record territory - would have traditionally been viewed as indications of loose monetary conditions. But the Yellen Fed has hung its hat on the consumer price index (and, to a lesser extent, wage growth). And it matters little to the Fed that inflation is clearly a global structural issue – one arguably associated with a prolonged period of monetary mismanagement.
And it’s not as if “hard” data is all that weak. July’s 56.3 reading in the PMI Manufacturing Index compares to 52.3 from one year ago. Looking back to 2007, the high that year was 52.6 – with the 2006 peak (February) at 55.8. June Durable Goods Orders (up 6.5%) surprised on the upside. And Q2 GDP rose to 2.6%, up from Q1’s 1.2%. The Atlanta Fed forecasts 4% Q3 GDP growth.
And despite all the talk of heightened disinflationary pressures, the ISM Manufacturing Price Index jumped seven points in July to 62. The ISM Non-Manufacturing Price index rose 3.6 points in July to 55.7. Crude and most commodities have rallied sharply over the past six weeks, certainly bolstered by dollar weakness.
A lot of attention has been paid recently to weakening auto sales. July sales were reported at a weaker-than-expected (seasonally adjusted and annualized) 16.69 million units. This compares unfavorably to the year ago pace of 17.75 million. But before we get too carried away, sales averaged 16.35 million annualized during the 2006-2007 period. In fact, July sales were just slightly below the monthly average from the eight-years 2000-2007. Sure, sales have moderated from the 2015-2016 boom – a period stoked by booming subprime lending. But, for now, I don’t see the slowing auto sector as part of a general downturn in economic activity.
Housing starts jumped back in June to a stronger-than-expected 1.215 million pace. This was the strongest reading since February and compares to the year earlier 1.190 million. Over recent months, housing starts have been running at the strongest level since 2007. Building permits also popped higher in June. Existing Home Sales are running at the highest level since early 2007. At $263,800, June Median Existing Home Prices were a record and compare to the year ago $247,600. The supply of inventory at 4.3 months of sales, while up from January’s extreme 3.5 reading, remains significantly below the average 6.0 months over the period going back to 1999. The Case-Shiller National Price index increased to a record 190.61 in May (up 5.6% y-o-y).
Friday’s smaller-than-expected Trade Deficit was the result of a 1.2% m-o-m jump in exports (up 5.8% y-o-y), to the strongest level since December 2014. U.S. exports have recovered strongly from the 2015/16 pullback, reflecting a global trade revival. The jump in U.S. exports is consistent with recent data from China, Europe, Japan and elsewhere.
For now, it’s difficult for me to take a negative short-term view on U.S. economic activity so long as the housing and export sectors continue to boom. It’s remains a Bubble Economy and, while vulnerable, the Bubble is still expanding.
At this point, the bond market is content to disregard a lot of data, that is, so long as there are no upside surprises in consumer price indices or wages (the two data sets stuck deepest in the structural muck). This works to keep market yields artificially depressed – and mortgage rates extraordinarily low. With after-tax borrowing costs remaining significantly below the rate of housing appreciation (in many areas), the backdrop is favorable for a strengthening of an already potent housing market inflationary bias. The unusually low levels of housing inventory – and an expanding list of overheated local markets – coupled with the Fed’s fixation on CPI sow the seeds for Housing Bubble 2.0.
August 1 – Bloomberg (Alfred Liu): “China has made progress in slowing leverage in the economy, but still needs to do more with the total amount of financing expected to rise 13% this year, according to Autonomous Research analyst Charlene Chu. Total outstanding credit is expected to grow to 223 trillion yuan ($33 trillion) by December from 196.8 trillion yuan at the end of 2016, analysis by Chu shows. The estimated increase will be lower than last year’s 19% gain as the government’s campaign against leverage starts to bite, she said. Her estimates are far higher than the latest official figure of 167 trillion yuan in June, which she says doesn’t accurately represent the true state of financing as it doesn’t include items like local government bond issuance and some forms of off-balance sheet lending.”
Charlene Chu is one of the preeminent analysts of Chinese Credit. She currently forecasts almost $4.0 TN of Chinese Credit growth this year, with total Credit approaching 300% of GDP. It’s somewhat of a challenge to be negative on short-term global GDP trends with record Chinese Credit expansion, enormous ongoing global QE and booming securities markets. At the same time, there’s a strong case that we’re getting awfully close to peak QE, peak Chinese Credit and peak global securities Bubble. Things would get more interesting if economic data begins to surprise on the upside, forcing the Fed and other central banks to again rethink the meaning of “normalization”. That would awaken bonds. July payrolls could have been a start.
For the Week:
The S&P500 added 0.2% (up 10.6% y-t-d), and the Dow gained 1.2% (up 11.8%). The Utilities rose 1.3% (up 9.8%). The Banks jumped 2.1% (up 5.9%), and the Broker/Dealers added 0.2% (up 14.2%). The Transports increased 0.5% (up 2.6%). The S&P 400 Midcaps declined 0.6% (up 5.5%), and the small cap Russell 2000 fell 1.2% (up 4.1%). The Nasdaq100 slipped 0.2% (up 21.3%), while the Morgan Stanley High Tech index was unchanged (up 25.4%). The Semiconductors declined 1.2% (up 19.1%). The Biotechs fell 1.0% (up 28.4%). With bullion down $11, the HUI gold index dropped 2.3% (up 5.2%).
Three-month Treasury bill rates ended the week at 105 bps. Two-year government yields were unchanged at 1.35% (up 16bps y-t-d). Five-year T-note yields slipped two bps to 1.82% (down 11bps). Ten-year Treasury yields declined three bps to 2.26% (down 18bps). Long bond yields fell five bps to 2.84% (down 22bps).
Greek 10-year yields rose eight bps to 5.41% (down 161bps y-t-d). Ten-year Portuguese yields fell six bps to 2.87% (down 88bps). Italian 10-year yields dropped 10 bps to 2.02% (up 21bps). Spain's 10-year yields declined four bps to 1.48% (up 10bps). German bund yields dropped seven bps to 0.47% (up 26bps). French yields fell six bps to 0.75% (up 7bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields declined four bps to 1.18% (down 6bps). U.K.'s FTSE equities index rallied 1.9% (up 5.2%).
Japan's Nikkei 225 equities index was unchanged (up 4.4% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.065% (up 3bps). France's CAC40 gained 1.4% (up 7.0%). The German DAX equities index recovered 1.1% (up 7.1%). Spain's IBEX 35 equities index gained 1.2% (up 14%). Italy's FTSE MIB index surged 2.4% (up 14%). EM equities were mostly higher. Brazil's Bovespa index rose 2.1% (up 11.1%), and Mexico's Bolsa added 0.2% (up 12.5%). South Korea's Kospi slipped 0.2% (up 18.2%). India’s Sensex equities index was unchanged (up 21.4%). China’s Shanghai Exchange increased 0.3% (up 5.1%). Turkey's Borsa Istanbul National 100 index gained 0.8% (up 38.9%). Russia's MICEX equities index rose 0.8% (down 12.5%).
Junk bond mutual funds saw inflows of $195 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.93% (up 50bps y-o-y). Fifteen-year rates slipped two bps to 3.18% (up 44bps). The five-year hybrid ARM rate declined three bps to 3.15% (up 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.05% (up 43bps).
Federal Reserve Credit last week declined $9.2bn to $4.426 TN. Over the past year, Fed Credit contracted $8.7bn. Fed Credit inflated $1.615 TN, or 58%, over the past 247 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.0bn last week to $3.333 TN. "Custody holdings" were up $113bn y-o-y, or 3.5%.
M2 (narrow) "money" supply last week rose $12.2bn to a record $13.620 TN. "Narrow money" expanded $727bn, or 5.6%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits jumped $55.9bn, while Savings Deposits slumped $44.9bn. Small Time Deposits gained $2.6bn. Retail Money Funds declined $2.9bn.
Total money market fund assets jumped $20.47bn to $2.660 TN. Money Funds fell $78.3bn y-o-y (2.9%).
Total Commercial Paper declined $8.2bn to $969.6bn. CP declined $57bn y-o-y, or 5.5%.
Currency Watch:
August 1 – Financial Times (Jennifer Hughes): “The Hong Kong dollar has fallen to its weakest level since the China-inspired turmoil of January 2016 as abundant liquidity continues to create a widening interest rate gap with the US. The move pushed the Hong Kong currency further into the weaker half of its tightly pegged trading range against the US dollar — in a shift from its position for most of the past decade of trading near the stronger end. Wednesday’s weakness took the currency to HK$7.8171 against the greenback — a level not seen since January 2016 when fears about China’s weakening economy sent shockwaves through global markets.”
The U.S. dollar index recovered 0.3% to 93.542 (down 8.7% y-t-d). For the week on the upside, the euro increased 0.2%. On the downside, the South African rand declined 3.1%, the Canadian dollar 1.7%, the New Zealand dollar 1.4%, the Australian dollar 0.8%, the British pound 0.7%, the Mexican peso 0.6%, the Swiss franc 0.4%, the Norwegian krone 0.4%, the Swedish krona 0.3%, the Singapore dollar 0.3%, and the South Korean won 0.2%. The Chinese renminbi added 0.12% versus the dollar this week (up 3.21% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.5% (down 3.5% y-t-d). Spot Gold declined 0.9% to $1,259 (up 19.2%). Silver dropped 2.7% to $16.252 (up 1.7%). Crude slipped 13 cents to $49.58 (down 8%). Gasoline fell 1.8% (down 2%), and Natural Gas sank 5.7% (down 26%). Copper added 0.3% (up 15%). Wheat sank 5.5% (up 12%). Corn lost 1.8% (up 8%).
Trump Administration Watch:
August 3 – Wall Street Journal (Del Quentin Wilber and Byron Tau): “Special Counsel Robert Mueller has impaneled a grand jury in Washington to investigate Russia’s interference in the 2016 elections, a sign that his inquiry is growing in intensity and entering a new phase, according to people familiar with the matter. The grand jury, which began its work in recent weeks, signals that Mr. Mueller’s inquiry will likely continue for months. Mr. Mueller is investigating Russia’s efforts to influence the 2016 election and whether President Donald Trump’s campaign or associates colluded with the Kremlin as part of that effort.”
August 1 – New York Times (Keith Bradsher): “The Trump administration is preparing a broad move against China over trade, according to people with knowledge of its plans, amid growing worries in the United States over a Chinese government-led effort to make the country a global leader in microchips, electric cars and other crucial technologies of the future. The move, which could come in the next several days, signals a shift by the administration away from its emphasis on greater cooperation between Washington and Beijing, in part because administration officials have become frustrated by China's reluctance to confront North Korea over its nuclear and ballistic missile programs. The two sides have also struggled in trade negotiations despite claiming modest progress earlier this year, while American companies have complained they face pressure to share trade secrets with Chinese partners. The trade case will focus on alleged Chinese violations of American intellectual property, according to three people with a detailed knowledge of the administration's plans.”
July 31 – Wall Street Journal (Gerald F. Seib): “When folks here in Washington end a summer filled with White House hijinks and an epic but inconclusive health-care debate, they will look up and discover something unsettling: The world has become a more dangerous place while everybody has been distracted. That’s most obviously true in North Korea, where its rogue weapons program has leapt so far forward that the nation now has a missile with the range to reach much of the U.S…. Meanwhile, American relations with China, the country most able to cooperate in slowing down Pyongyang, are deteriorating amid presidential recriminations—delivered via Twitter—about Beijing’s behavior. Relations with Russia are sliding backward as well… Both sides agree that ties now are at their lowest point since the Cold War.”
July 30 – Wall Street Journal (Siobhan Hughes and Thomas M. Burton): “President Donald Trump’s tumultuous past week has widened rifts in his party, between those who vocally support the president’s combative style and others who bridle at it, according to interviews… Mr. Trump has long been a polarizing force among members of his party, but for the first several months of his tenure, the GOP was largely united by a shared desire to make the most of his election and the party’s total control of the government for the first time in a decade. After a week that included the president attacking his attorney general, the collapse of a GOP health bill, a surprise effort to bar transgender people in the military and a White House staff shakeup, divisions that were largely set aside at the start of 2017 have emerged anew.”
August 2 – Reuters (David Lawder and Lesley Wroughton): “Three top Democratic senators, in a rare show of bipartisanship, on Wednesday urged U.S. President Donald Trump to stand up to China as he prepares to launch an inquiry into Beijing's intellectual property and trade practices in coming days. Senate Democratic leader Chuck Schumer pressed the Republican president to skip the investigation and go straight to trade action against China. ‘We should certainly go after them,’ said Schumer in a statement. Senators Ron Wyden of Oregon and Sherrod Brown of Ohio also urged Trump to rein in China.”
July 30 – Wall Street Journal (Kate Davidson): “Republicans are leaving town for an August recess after a failed attempt to repeal the Affordable Care Act. When they return in September, they’ll have just 12 working days to avert another big problem. In a letter to lawmakers Friday, U.S. Treasury Secretary Steven Mnuchin said the federal borrowing limit, or debt ceiling, needed to be raised by Sept. 29 or the government risked running out of money to pay its bills. The Treasury Department has been employing cash-conservation measures since March, when borrowing hit the formal ceiling of nearly $20 trillion.”
China Bubble Watch:
July 30 – New York Times (Chris Buckley): “China’s president, Xi Jinping, has opened a public campaign to deepen his grip on power in a coming leadership shake-up, using a huge military parade on Sunday, speeches and propaganda, along with a purge in the past week, to warn officials to back him as the nation’s most powerful leader in two decades. Wearing his mottled green uniform as commander in chief of the People’s Liberation Army, Mr. Xi watched as 12,000 troops marched and tanks, long-range missile launchers, jet fighters and other new weapons drove or flew past in impeccable arrays. Mao famously said political power comes from the barrel of a gun, and Mr. Xi signaled that he, too, was counting on the military to stay ramrod loyal while he chooses a new leading lineup to be unveiled at a Communist Party congress in the autumn.”
August 2 – Bloomberg: “President Xi Jinping’s top economic adviser commissioned a study earlier this year to see how China could avoid the fate of Japan’s epic bust in the 1990s and decades of stagnation that followed. The report covered a wide range of topics, from the Plaza Accord on currency to a real-estate bubble to demographics that made Japan the oldest population in Asia… While details are scarce, the person revealed one key recommendation that policy makers have since implemented: The need to curtail a global buying spree by some of the nation’s biggest private companies. Communist Party leaders discussed Japan’s experience in a Politburo meeting on April 26… State media came alive afterward, with reports trumpeting Xi’s warning that financial stability is crucial in economic growth.”
August 1 – BloombergBusinessweek (Kevin Hamlin): “For the past couple of years, Chinese companies roamed the world in an unprecedented $343 billion cross-border takeover spree. Among the splashiest deals: Dalian Wanda Group, whose founder, Wang Jianlin, is China’s second-richest executive, bought Hollywood production and finance company Legendary Entertainment for $3.5 billion in 2016. Anbang Insurance Group bought the Waldorf Astoria. Fosun International Ltd. purchased Club Méditerranée SA and Cirque du Soleil. But as the binge seemed ready to go on, China’s banking regulator in June ordered lenders to scrutinize their exposure to four high-flying private conglomerates that have announced $75 billion-plus in deals at home and abroad since the start of 2016: Dalian Wanda, Anbang, Fosun, and aviation and shipping giant HNA Group Co.”
August 1 – Bloomberg: “China’s crusade against capital outflows and leverage has ensnared some of the nation’s largest property investors, including Anbang Insurance Group Co… The crackdown is rippling across the world, and will likely spur an 84% slump in Chinese overseas property investment this year, and a further 18% drop in 2018, according to… Morgan Stanley. The most vulnerable real-estate markets are those in the U.S., U.K., Hong Kong and Australia, with office properties the most exposed, analysts including economist Robin Xing wrote. Manhattan is a particular worry, with about 30% of transactions in the borough that’s home to Wall Street involving Chinese parties in 2017.”
August 1 – Bloomberg: “China’s foreign-exchange regulator is examining how some of the country’s biggest dealmakers used their domestic assets as collateral to get loans overseas, people familiar with the matter said. The State Administration of Foreign Exchange recently began reviewing loan guarantees for Anbang Insurance Group Co., Dalian Wanda Group Co., Fosun International Ltd., HNA Group Co. and the Chinese owner of the AC Milan soccer team, the people said…”
July 31 – Reuters (Kevin Yao): “China's central bank will continue to force financial institutions to cut debt but ensure the process is smooth and orderly to limit its impact on market liquidity, an assistant central bank governor said… Higher short-term funding costs, driven by a regulatory crackdown on banks' riskier financing, have started to spill over into the real economy, a risk to economic stability ahead of a five-yearly leadership transition later this year. The drive to force financial institutions to deleverage… could affect the stability in market supply and demand of funding, Zhang Xiaohui wrote in the bank's China Finance magazine.”
July 31 – Reuters (Elias Glenn): “Growth in China's manufacturing quickened in July, a private survey showed on Tuesday, as output and new orders rose at the fastest pace since February on strong export sales. But even as firms boosted purchasing in anticipation of more business, employment levels at factories fell at the fastest pace in 10 months and a reading on business outlook was the lowest since last August… The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) rose to 51.1 in July… well ahead of the 50.4 in June which was also the median figure forecast…”
July 31 – Financial Times (Yuan Yang): “Multinationals in China are bracing to be cut off from the global internet as Beijing begins to shut down their only way of accessing uncensored foreign content. Companies offering virtual private network services, which bypass the country’s ‘Great Firewall’, have had their operations closed or obstructed in recent weeks — a blow to foreign groups that rely on VPN services to connect their staff to services such as Google-provided email and uncensored news. International companies are now preparing for an extended crackdown, according to Carolyn Bigg, senior lawyer at DLA Piper in Hong Kong. ‘The time for businesses to ignore these restrictions is over. The environment is changing weekly at the moment,’ she said.”
August 2 – Financial Times (Gabriel Wildau): “China’s finance ministry has acknowledged that public-private partnerships for infrastructure investment have become a vehicle for ‘disguised borrowing’ by local governments, as Beijing targets systemic risk from rising regional debt. The central government has sought to rein in runaway debt at local governments, a legacy of China’s post-2008 economic stimulus. But local officials have continued to exploit loopholes in local borrowing rules to keep infrastructure projects cashed up. The clampdown on PPP investment could add to growth headwinds for China’s economy. Infrastructure comprised 21.2% of urban fixed-asset investment in the first half — the highest share since 2010.”
July 30 – Financial Times (Louise Lucas and Sherry Fei Ju): “China’s pending regulatory crackdown on the $120bn peer-to-peer lending industry has claimed its first scalp before it has even begun, with one of the biggest players saying it will wind up its business in an industry full of bad loans and no profits. P2P lending, in which borrowers are matched with investors via online platforms, has mushroomed in the past five years, with China boasting more than 2,100 such platforms, but so too have scandals. Last year was marked by multibillion-dollar scams in China and a governance scandal that rocked New York-listed LendingClub. Beijing this month said it would delay regulations that will bar online lenders from guaranteeing principal or interest on loans they facilitate, cap the size of loans at Rmb1m for individuals and Rmb5m for companies, and force lenders to use custodian banks — a requirement only a fraction of the industry has met so far.”
Europe Watch:
July 29 – Reuters (Joseph Nasr): “The European Central Bank should start thinking about how it wants to return to normal monetary policy and when it wants to wind down it bond purchases, governing council member Sabine Lautenschlaeger said… ‘The expansionary monetary policy has both advantages and side effects. As time passes, the positive effects get weaker and the risks increase,’ she told the Mannheimer Morgen newspaper. ‘So it's important to prepare for the exit in good time. What's crucial in that context is a stable trend in the rate of inflation towards our objective of just under 2%. It's not quite there yet.’”
August 1 – Bloomberg (Catherine Bosley): “The euro-area economy expanded apace in the second quarter, a sign the bloc’s upswing is becoming increasingly robust and self-sustaining. Gross domestic product in the 19-country region rose 0.6% in the three months through June, after increasing 0.5% at the start of the year.”
August 3 – Bloomberg (Nikos Chrysoloras): “Public support for the euro rose to a 12-year high among citizens of the currency bloc, according to the… latest Eurobarometer survey… Almost three-quarters of respondents in the poll support the ‘economic and monetary union with one single currency, the euro,’ the highest reading since the fall of 2004. Adding to signs of increasing optimism, against the backdrop of a strengthening economic recovery, 56% of Europeans are now confident about the future of the EU -- an increase of six percentage points from fall 2016.”
Central Bank Watch:
August 3 – Bloomberg (David Goodman and Jill Ward): “Mark Carney said Brexit is casting the biggest shadow over the U.K.’s economic outlook, as his confidence in an orderly departure from the European Union starts to fade. The Bank of England governor’s comments follow slow progress in the initial round of exit talks after Prime Minister Theresa May lost her parliamentary majority in June. Carney said that there’s only so much monetary policy can do as the central bank cut its forecasts for economic growth and wages.”
Global Bubble Watch:
August 4 – Bloomberg (Theophilos Argitis): “Canada’s labor market continued its stellar performance in July, with the jobless rate falling to the lowest since before the financial crisis. The unemployment rate fell to 6.3%, the lowest since October 2008, as the labor market added another 10,900 jobs during the month, Statistics Canada reported from Ottawa. The total increase over the past year of 387,600 is the biggest 12-month gain since 2007.”
August 2 – Bloomberg (Katia Dmitrieva and Erik Hertzberg): “Home prices in Canada’s largest city posted their biggest monthly drop in at least 17 years in July and sales plunged as government efforts to cool the market and the near-collapse of a mortgage lender made buyers leery. The benchmark Toronto property price, which tracks a typical home over time, dropped 4.6% to C$773,000 ($613,000) from June.”
Fixed Income Bubble Watch:
August 2 – Wall Street Journal (Paul J. Davies): “The last financial crisis cleared out an alphabet soup of complex credit products. One type, however, has returned in droves in recent years, although popularity is now threatening their viability. This product is collateralized loan obligations, or CLOs, which buy portfolios of risky, leveraged loans often used by private-equity firms in buyouts. In the U.S., new CLO volumes have outstripped pre-crisis totals since 2014, while Europe is catching up to its previous levels fast. But returns from the loans they buy are getting squeezed as money from retail and institutional investors rushes in alongside CLOs to snap up loans. That could bring CLOs to a painful halt again.”
Federal Reserve Watch:
July 30 – Financial Times (Lena Komileva): “The US Federal Reserve raised rates for the third time in six months in June, even though inflation had stayed below its 2% target for much of the past decade. Why? The justification lies with the return to ‘economic normalisation’ (a more normal US growth and credit cycle), a reflationary global environment and easy financial conditions all combining to banish the extreme ‘tail risks’ of a deflationary slump that followed the financial crisis. Yet markets have been reluctant to heed the call of a return to more normal monetary conditions. Having lagged behind the Fed’s rate tightening and the discussion on shrinking its balance sheet this year, investors are still uncertain about the chances of another — well telegraphed — rate rise this year. A less than 40% probability is attached to this in the fed fund futures market. “
August 2 – Reuters (Richard Leong and Jonathan Spicer): “St. Louis Federal Reserve James Bullard is opposed to further U.S. interest rate increases by the central bank and warned that more hikes could hinder domestic inflation from achieving the Fed's 2-% goal… ‘Given the inflation outlook, which has deteriorated in 2017, I would not support further moves in the near term,’ Bullard told Market News… ‘It's possible data will turn around, but we'll have to see. I think for now we should remain on pause.’”
August 2 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Cleveland President Loretta Mester is keeping the faith that weak inflation will bounce back, even as she lowers her estimate for where unemployment begins to trigger higher prices. ‘My suspicion is it’s the idiosyncratic factors, it’s transitory and that the factors pushing down inflation are going to dissipate over time,’ Mester told reporters… ‘I still have a forecast for a gradual increase in inflation back to 2% over time.’”
August 2 – Wall Street Journal (Nick Timiraos): “Eric Rosengren, president of the Federal Reserve Bank of Boston, said increasingly tight labor markets should keep the U.S. central bank on its path to gradually raise rates and start slowly shrinking its portfolio of bonds and other assets, despite a surprising pause in inflation pressures this spring. In an interview, Mr. Rosengren said he sees ‘some reasonable risk’ that the unemployment rate drops below 4% in the next two years. ‘In my own view, that would not be sustainable,’ he said.”
U.S. Bubble Watch:
August 1 – CNBC (Diana Olick): “Home price gains are accelerating again, and in some cities those values are overheating. Four of the nation's largest cities are now considered overvalued, according to CoreLogic. Home prices in Denver, Houston, Miami and the Washington, D.C., metropolitan area now exceed sustainable levels. To determine if a market is overvalued, CoreLogic compares current prices to their long-run, sustainable levels, which are supported by local economic fundamentals like disposable income… ‘With no end to the escalation in sight, affordability is rapidly deteriorating nationally,’ said Frank Martell, president and CEO of CoreLogic.”
August 1 – Wall Street Journal (Sarah Krouse): “The fortunes of Wall Street’s cheapest and priciest funds are diverging fast. Exchange-traded funds held $1 trillion more in investor money than hedge funds globally for the first time ever at the end of June… Assets in ETFs, which trade on exchanges like stocks, first surpassed the amount of money in hedge funds two years ago and have continued to swell. Market-mimicking funds like ETFs have been helped by fresh market highs… Those gains have prodded investors already losing faith in star stock and bond pickers to plow even more money into the ultra low-cost funds.”
July 31 – CNBC (Fred Imbert): “Investors may be in for disappointing market returns in the decade to come with valuations at levels this high, if history is any indication. Analysts at Goldman Sachs Asset Management pointed out that annualized returns on the S&P 500 10 years out were in the single digits or negative 99% of the time when starting with valuations at current levels. In a chart, they point out that the S&P's cyclically adjusted price-to-earnings ratio (CAPE) is currently around its highest historical levels. CAPE is a widely followed valuation metric developed by Nobel Prize winners John Campbell and Robert Shiller.”
August 1 – CNBC (Tae Kim): “Mutual funds are piling into technology stocks to a record level, according to… Bank of America Merrill Lynch. But the overweighting may not be bullish for the sector going forward. In July ‘large cap active managers have yet again increased their positioning in tech, setting another record overweight of 25% (+5.8 percentage points) relative to the benchmark,’ strategist Savita Subramanian wrote… ‘This record overweight has helped managers beat their benchmarks so far this year, as tech continues to outperform all other sectors.’”
August 1 – Reuters (Joseph White and Paul Lienert): “U.S. carmakers said… they continued to slash low-margin sales to daily rental fleets in July as the overall pace of U.S. car and light truck sales fell for the fifth straight month. The annualized pace of U.S. car and light truck sales in July fell to 16.73 million vehicles, down from 17.8 million vehicles a year earlier…”
July 31 – Wall Street Journal (AnnaMaria Andriotis): “Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy. The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers… had increases for the quarter.”
EM Bubble Watch:
August 2 – Wall Street Journal (Julie Wernau and Carolyn Cui): “Investors have been bracing for a Venezuela debt default for more than a year, but fallout from the country’s widely criticized election last weekend could prove to be the tipping point. The government and state-owned oil company Petróleos de Venezuela SA, also known as PdVSA, together owe $5 billion in principal and interest payments due between now and the end of the year… The country has $725 million due this month alone… The problem: Venezuela only has about $3 billion of its foreign reserves in cash, according to S&P Global Ratings. That means the country is dependent on oil exports to make up the difference.”
July 31 – CNBC (Lucia Kassai, Laura Blewitt, and Nathan Crooks): “The specter of tighter U.S. sanctions is pushing up the perception that Venezuela is getting closer to defaulting on its bonds. Venezuela is awaiting possible further restrictions after the U.S., its largest trading partner, sanctioned President Nicolas Maduro after he held elections Sunday for a new assembly that will rewrite the constitution. U.S. Treasury Secretary Steven Mnuchin said in announcing the measures, including freezing Maduro’s assets in the U.S., that additional sanctions were ‘on the table.’”
July 29 – Reuters (Girish Gupta): “In a portend of steepening inflation in crisis-stricken Venezuela, money supply surged 10% in just one week earlier this month, its largest single-week rise in a quarter of a century. Venezuela is undergoing a major economic crisis, with millions suffering food shortages, monthly wages worth only the tens of U.S. dollars, and soaring inflation…”
August 2 – Bloomberg (Jeanette Rodrigues): “Business conditions in India have deteriorated the most since the global financial crisis as the roll out of a nationwide sales tax disrupted supply and distribution links just months after Prime Minister Narendra Modi’s cash ban roiled markets. The Nikkei India Composite PMI Output Index fell to 46 in July from 52.7 in June, the steepest drop since March 2009… Activity in the key services sector plunged to 45.9 from 53.1 -- the lowest since September 2013 -- after data showed manufacturing slumped the most since 2009.”
Leveraged Speculation Watch:
August 3 – Bloomberg (Simone Foxman): “Billionaire Paul Singer is warning of a growing and menacing threat: passive investing. ‘Passive investing is in danger of devouring capitalism,’ Singer wrote... ‘What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.’ Almost $500 billion flowed from active to passive funds in the first half of 2017. The founder of Elliott Management Corp. contends that passive strategies, which buy a variety of securities to match the overall performance of an index, aren’t truly ‘investing’ and that index fund providers don’t have incentive to push companies to change for the better and create shareholder value.”
August 3 – Bloomberg (Nishant Kumar, Javier Blas, and Suzy Waite): “If an oil trader so good that he was known as “God” can’t win in today’s markets, it’s hard to imagine who can. Andy Hall is closing down his main hedge fund after big losses in the first half of the year, according to people with knowledge of the matter. His flagship Astenbeck Master Commodities Fund II lost almost 30% through June… The capitulation of one of the best-known figures in the commodities industry comes after muted oil prices wrong-footed traders from Goldman Sachs Group Inc. to BP Plc’s in-house trading unit.”
August 1 – Bloomberg (Nishant Kumar and Suzy Waite): “Europe is on a mini-streak with hedge-fund investors as the prospect of faster economic growth and fading political risk help restore confidence in the region. Money pools investing across Europe attracted additional capital for the second straight month in June, following a 12-month stretch in which almost $16 billion was pulled out, according to… eVestment. The continent’s success contrasts with Asia and the U.S., where investors have pulled money from hedge funds.”
August 1 – Bloomberg (Saijel Kishan): “Paul Tudor Jones’ investors are increasingly deserting him. The billionaire macro manager who helped give rise to the hedge fund industry saw clients pull about 15% of their assets from his main fund in the second quarter… That’s left client assets at about $3.6 billion, almost half the value a year ago. The withdrawals are a blow to Jones… and exemplify the asset bleed hurting the biggest names in the business, including Alan Howard and John Paulson… Macro hedge funds have posted their worst first half since 2013, losing 0.7%, and on average returned about 1% annually in the past five years, according to Hedge Fund Research Inc.”
Geopolitical Watch:
July 31 – Reuters (Philip Wen and Ben Blanchard): “China loves peace but will never compromise on defending its sovereignty, President Xi Jinping said… while marking 90 years since the founding of the People's Liberation Army. China has rattled nerves around Asia and globally with its increasingly assertive stance in territorial disputes in the East and South China Seas and an ambitious military modernization plan. Relations with self-ruled Taiwan have also worsened since Tsai Ing-wen from the pro-independence Democratic Progressive Party won presidential elections there last year. China considers Taiwan a wayward province, to be brought under Beijing's control by force if necessary.”
August 2 – Financial Times (Emily Feng and Leo Lewis): “Xi Jinping has warned that China will not tolerate any infringement of its sovereignty or territory, in a speech delivered as the country finds itself embroiled in several territorial disputes with neighbours. ‘We will never seek aggression or expansion but we have the confidence to defeat all invasions,’ the Chinese president said in an hour-long speech on the 90th anniversary of the founding of the country’s army. ‘We will never allow any people, organisation or political party to split any part of Chinese territory out of the country.’ His comments came as Japan mounted a formal diplomatic protest to demand that China stop its renewed drilling operations in the East China Sea.”
August 4 – Associated Press: “Beijing is intensifying its warnings to Indian troops to get out of a contested region high in the Himalayas where China, India and Bhutan meet, saying China's ‘restraint has its limits’ and publicizing live-fire drills in Tibet. Indian troops entered the area in the Doklam Plateau in June after New Delhi's ally, Bhutan, complained a Chinese military construction party was building a road inside Bhutan's territory.”
July 31 – Reuters (Ben Blanchard and Elias Glenn): “China hit back on Monday after U.S. President Donald Trump tweeted he was ‘very disappointed’ in China following North Korea's latest missile test, saying the problem did not arise in China and that all sides need to work for a solution. China has become increasingly frustrated with American and Japanese criticism that it should do more to rein in Pyongyang. China is North Korea's closest ally, but Beijing, too, is angry with its continued nuclear and missile tests.”
July 29 – Reuters (James Pearson and Michelle Nichols): “The United States flew two supersonic B-1B bombers over the Korean peninsula in a show of force on Sunday and the U.S. ambassador to the United Nations said China, Japan and South Korea needed to do more after Pyongyang's latest missile tests. North Korea said it conducted another successful test of an intercontinental ballistic missiles (ICBM) on Friday that proved its ability to strike America's mainland, drawing a sharp warning from U.S. President Donald Trump. Trump's ambassador to the United Nations Nikki Haley said… that the United States was ‘done talking’ about North Korea, which was ‘not only a U.S. problem.’”
July 29 – Reuters (Babak Dehghanpisheh): “The Iranian Revolutionary Guards said… that U.S. Navy ships came close to their vessels in the Gulf and shot flares. The USS Nimitz and an accompanying warship drew close to a rocket-bearing Iranian vessel on Friday and sent out a helicopter near a number of Guards vessels… ‘The Americans made a provocative and unprofessional move by issuing a warning and shooting flares at vessels ...,’ the statement said. ‘Islam’s warriors, without paying attention to this unconventional and unusual behaviour from the American vessels, continued their mission in the area and the aircraft carrier and accompanying battleship left the area.’”
July 31 – Wall Street Journal (Julian E. Barnes, Laurence Norman and Felicia Schwartz): “The U.S. Pentagon and State Department have devised plans to supply Ukraine with antitank missiles and other weaponry and are seeking White House approval, U.S. officials said, as Kiev battles Russia-backed separatists and ties between Moscow and Washington fray. American military officials and diplomats say the arms, which they characterized as defensive, are meant to deter aggressive actions by Moscow, which the U.S. and others say has provided tanks and other sophisticated armaments as well as military advisers to rebels fighting the Kiev government.”
The recent narrative holds that the economy has been in an extended “soft patch”. In general, economic data have somewhat missed expectations. “US Car Sales Continue to Skid, Drop 5.7% in July.” The decline in automobile sales was viewed as confirmation of a slowing manufacturing sector. Ongoing travails in retail also support the view of economic stagnation. The labor participation rate remains a dismal 62.9%.
The narrative of a weakening in both economic activity and inflationary pressures serves the markets well. With Fed funds now near the Federal Reserve’s “neutral rate,” rate normalization has apparently about run its course. Even after Friday’s stronger-than-expected job gains, the market places the probability of another 2017 hike at less than 40%. What could be more bullish than so-called rate “normalization” that avoids any tightening of financial conditions whatsoever? The Carefree Bond Market has been cruising along the PCH with the top down in a slick new autonomous sports car.
It’s my view that U.S. and global economic maladjustment has become extreme after years of policy-induced monetary disorder. The U.S. economy is structurally unsound, though this grim reality remains well-masked by the artistry of low rates, liquidity over-abundance, inflated securities markets and record household net worth. More succinctly, deep structural impairment ensures central bankers remain wedded to loose financial conditions.
On a more cyclical basis, however, economic activity is not that weak. Data aggregation definitely smooths an extraordinarily unbalanced economy, with some segments booming and others mired in stagnation. And, importantly, ongoing monetary stimulus will do anything but resolve imbalances and structural maladjustment. At this point in the cycle – after nine years of historic monetary stimulus - the Fed should focus policy attention on cyclical indicators and err on the side of reducing accommodation. There are perilous risks associated with pushing a structurally marred economic system to the limits.
July average earnings were up 0.3% m-o-m, with one-year gains of 2.5%. Tepid wage growth is viewed as a major factor keeping inflation (CPI) stubbornly below the Fed’s 2.0% target. Yet stagnant wages are clearly a structural issue. U.S. manufacturing workers must compete against labor from around the globe. Less appreciated, the massive U.S. service sector – that flourished in the backdrop of deindustrialization, aggressive monetary stimulus and asset inflation – has created tens of millions of low skill jobs. Moreover, it is increasingly difficult for the overbuilt service sector (i.e. retail, restaurant, hotels, etc.) to afford higher compensation expenses. And let’s not forget the enormous cost – and ongoing inflation – in healthcare and insurance.
Over recent months, there has been some focus on the divergence between robust “soft” and lagging “hard” data. The Bloomberg Consumer Comfort Index rose last month to 49.6, a level just below the previous cycle peak in 2006/07. One must go all the way back to 2001 to beat 2017 readings for the Bloomberg Weekly National Economy Index. July’s 113.4 reading for the University of Michigan Current Economic Conditions Index was the highest since July 2005 - and the second highest going all the way back to November 2000. Last month’s 147.8 reading for the Conference Board Consumer Confidence Present Situation Index was the highest since July 2001. The CEO Confidence Index has declined only slightly from the March level - which was the highest going back to December 2004.
These various confidence indices - in conjunction with a 4.3% unemployment rate and stock prices surging further into uncharted record territory - would have traditionally been viewed as indications of loose monetary conditions. But the Yellen Fed has hung its hat on the consumer price index (and, to a lesser extent, wage growth). And it matters little to the Fed that inflation is clearly a global structural issue – one arguably associated with a prolonged period of monetary mismanagement.
And it’s not as if “hard” data is all that weak. July’s 56.3 reading in the PMI Manufacturing Index compares to 52.3 from one year ago. Looking back to 2007, the high that year was 52.6 – with the 2006 peak (February) at 55.8. June Durable Goods Orders (up 6.5%) surprised on the upside. And Q2 GDP rose to 2.6%, up from Q1’s 1.2%. The Atlanta Fed forecasts 4% Q3 GDP growth.
And despite all the talk of heightened disinflationary pressures, the ISM Manufacturing Price Index jumped seven points in July to 62. The ISM Non-Manufacturing Price index rose 3.6 points in July to 55.7. Crude and most commodities have rallied sharply over the past six weeks, certainly bolstered by dollar weakness.
A lot of attention has been paid recently to weakening auto sales. July sales were reported at a weaker-than-expected (seasonally adjusted and annualized) 16.69 million units. This compares unfavorably to the year ago pace of 17.75 million. But before we get too carried away, sales averaged 16.35 million annualized during the 2006-2007 period. In fact, July sales were just slightly below the monthly average from the eight-years 2000-2007. Sure, sales have moderated from the 2015-2016 boom – a period stoked by booming subprime lending. But, for now, I don’t see the slowing auto sector as part of a general downturn in economic activity.
Housing starts jumped back in June to a stronger-than-expected 1.215 million pace. This was the strongest reading since February and compares to the year earlier 1.190 million. Over recent months, housing starts have been running at the strongest level since 2007. Building permits also popped higher in June. Existing Home Sales are running at the highest level since early 2007. At $263,800, June Median Existing Home Prices were a record and compare to the year ago $247,600. The supply of inventory at 4.3 months of sales, while up from January’s extreme 3.5 reading, remains significantly below the average 6.0 months over the period going back to 1999. The Case-Shiller National Price index increased to a record 190.61 in May (up 5.6% y-o-y).
Friday’s smaller-than-expected Trade Deficit was the result of a 1.2% m-o-m jump in exports (up 5.8% y-o-y), to the strongest level since December 2014. U.S. exports have recovered strongly from the 2015/16 pullback, reflecting a global trade revival. The jump in U.S. exports is consistent with recent data from China, Europe, Japan and elsewhere.
For now, it’s difficult for me to take a negative short-term view on U.S. economic activity so long as the housing and export sectors continue to boom. It’s remains a Bubble Economy and, while vulnerable, the Bubble is still expanding.
At this point, the bond market is content to disregard a lot of data, that is, so long as there are no upside surprises in consumer price indices or wages (the two data sets stuck deepest in the structural muck). This works to keep market yields artificially depressed – and mortgage rates extraordinarily low. With after-tax borrowing costs remaining significantly below the rate of housing appreciation (in many areas), the backdrop is favorable for a strengthening of an already potent housing market inflationary bias. The unusually low levels of housing inventory – and an expanding list of overheated local markets – coupled with the Fed’s fixation on CPI sow the seeds for Housing Bubble 2.0.
August 1 – Bloomberg (Alfred Liu): “China has made progress in slowing leverage in the economy, but still needs to do more with the total amount of financing expected to rise 13% this year, according to Autonomous Research analyst Charlene Chu. Total outstanding credit is expected to grow to 223 trillion yuan ($33 trillion) by December from 196.8 trillion yuan at the end of 2016, analysis by Chu shows. The estimated increase will be lower than last year’s 19% gain as the government’s campaign against leverage starts to bite, she said. Her estimates are far higher than the latest official figure of 167 trillion yuan in June, which she says doesn’t accurately represent the true state of financing as it doesn’t include items like local government bond issuance and some forms of off-balance sheet lending.”
Charlene Chu is one of the preeminent analysts of Chinese Credit. She currently forecasts almost $4.0 TN of Chinese Credit growth this year, with total Credit approaching 300% of GDP. It’s somewhat of a challenge to be negative on short-term global GDP trends with record Chinese Credit expansion, enormous ongoing global QE and booming securities markets. At the same time, there’s a strong case that we’re getting awfully close to peak QE, peak Chinese Credit and peak global securities Bubble. Things would get more interesting if economic data begins to surprise on the upside, forcing the Fed and other central banks to again rethink the meaning of “normalization”. That would awaken bonds. July payrolls could have been a start.
For the Week:
The S&P500 added 0.2% (up 10.6% y-t-d), and the Dow gained 1.2% (up 11.8%). The Utilities rose 1.3% (up 9.8%). The Banks jumped 2.1% (up 5.9%), and the Broker/Dealers added 0.2% (up 14.2%). The Transports increased 0.5% (up 2.6%). The S&P 400 Midcaps declined 0.6% (up 5.5%), and the small cap Russell 2000 fell 1.2% (up 4.1%). The Nasdaq100 slipped 0.2% (up 21.3%), while the Morgan Stanley High Tech index was unchanged (up 25.4%). The Semiconductors declined 1.2% (up 19.1%). The Biotechs fell 1.0% (up 28.4%). With bullion down $11, the HUI gold index dropped 2.3% (up 5.2%).
Three-month Treasury bill rates ended the week at 105 bps. Two-year government yields were unchanged at 1.35% (up 16bps y-t-d). Five-year T-note yields slipped two bps to 1.82% (down 11bps). Ten-year Treasury yields declined three bps to 2.26% (down 18bps). Long bond yields fell five bps to 2.84% (down 22bps).
Greek 10-year yields rose eight bps to 5.41% (down 161bps y-t-d). Ten-year Portuguese yields fell six bps to 2.87% (down 88bps). Italian 10-year yields dropped 10 bps to 2.02% (up 21bps). Spain's 10-year yields declined four bps to 1.48% (up 10bps). German bund yields dropped seven bps to 0.47% (up 26bps). French yields fell six bps to 0.75% (up 7bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields declined four bps to 1.18% (down 6bps). U.K.'s FTSE equities index rallied 1.9% (up 5.2%).
Japan's Nikkei 225 equities index was unchanged (up 4.4% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.065% (up 3bps). France's CAC40 gained 1.4% (up 7.0%). The German DAX equities index recovered 1.1% (up 7.1%). Spain's IBEX 35 equities index gained 1.2% (up 14%). Italy's FTSE MIB index surged 2.4% (up 14%). EM equities were mostly higher. Brazil's Bovespa index rose 2.1% (up 11.1%), and Mexico's Bolsa added 0.2% (up 12.5%). South Korea's Kospi slipped 0.2% (up 18.2%). India’s Sensex equities index was unchanged (up 21.4%). China’s Shanghai Exchange increased 0.3% (up 5.1%). Turkey's Borsa Istanbul National 100 index gained 0.8% (up 38.9%). Russia's MICEX equities index rose 0.8% (down 12.5%).
Junk bond mutual funds saw inflows of $195 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.93% (up 50bps y-o-y). Fifteen-year rates slipped two bps to 3.18% (up 44bps). The five-year hybrid ARM rate declined three bps to 3.15% (up 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.05% (up 43bps).
Federal Reserve Credit last week declined $9.2bn to $4.426 TN. Over the past year, Fed Credit contracted $8.7bn. Fed Credit inflated $1.615 TN, or 58%, over the past 247 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.0bn last week to $3.333 TN. "Custody holdings" were up $113bn y-o-y, or 3.5%.
M2 (narrow) "money" supply last week rose $12.2bn to a record $13.620 TN. "Narrow money" expanded $727bn, or 5.6%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits jumped $55.9bn, while Savings Deposits slumped $44.9bn. Small Time Deposits gained $2.6bn. Retail Money Funds declined $2.9bn.
Total money market fund assets jumped $20.47bn to $2.660 TN. Money Funds fell $78.3bn y-o-y (2.9%).
Total Commercial Paper declined $8.2bn to $969.6bn. CP declined $57bn y-o-y, or 5.5%.
Currency Watch:
August 1 – Financial Times (Jennifer Hughes): “The Hong Kong dollar has fallen to its weakest level since the China-inspired turmoil of January 2016 as abundant liquidity continues to create a widening interest rate gap with the US. The move pushed the Hong Kong currency further into the weaker half of its tightly pegged trading range against the US dollar — in a shift from its position for most of the past decade of trading near the stronger end. Wednesday’s weakness took the currency to HK$7.8171 against the greenback — a level not seen since January 2016 when fears about China’s weakening economy sent shockwaves through global markets.”
The U.S. dollar index recovered 0.3% to 93.542 (down 8.7% y-t-d). For the week on the upside, the euro increased 0.2%. On the downside, the South African rand declined 3.1%, the Canadian dollar 1.7%, the New Zealand dollar 1.4%, the Australian dollar 0.8%, the British pound 0.7%, the Mexican peso 0.6%, the Swiss franc 0.4%, the Norwegian krone 0.4%, the Swedish krona 0.3%, the Singapore dollar 0.3%, and the South Korean won 0.2%. The Chinese renminbi added 0.12% versus the dollar this week (up 3.21% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.5% (down 3.5% y-t-d). Spot Gold declined 0.9% to $1,259 (up 19.2%). Silver dropped 2.7% to $16.252 (up 1.7%). Crude slipped 13 cents to $49.58 (down 8%). Gasoline fell 1.8% (down 2%), and Natural Gas sank 5.7% (down 26%). Copper added 0.3% (up 15%). Wheat sank 5.5% (up 12%). Corn lost 1.8% (up 8%).
Trump Administration Watch:
August 3 – Wall Street Journal (Del Quentin Wilber and Byron Tau): “Special Counsel Robert Mueller has impaneled a grand jury in Washington to investigate Russia’s interference in the 2016 elections, a sign that his inquiry is growing in intensity and entering a new phase, according to people familiar with the matter. The grand jury, which began its work in recent weeks, signals that Mr. Mueller’s inquiry will likely continue for months. Mr. Mueller is investigating Russia’s efforts to influence the 2016 election and whether President Donald Trump’s campaign or associates colluded with the Kremlin as part of that effort.”
August 1 – New York Times (Keith Bradsher): “The Trump administration is preparing a broad move against China over trade, according to people with knowledge of its plans, amid growing worries in the United States over a Chinese government-led effort to make the country a global leader in microchips, electric cars and other crucial technologies of the future. The move, which could come in the next several days, signals a shift by the administration away from its emphasis on greater cooperation between Washington and Beijing, in part because administration officials have become frustrated by China's reluctance to confront North Korea over its nuclear and ballistic missile programs. The two sides have also struggled in trade negotiations despite claiming modest progress earlier this year, while American companies have complained they face pressure to share trade secrets with Chinese partners. The trade case will focus on alleged Chinese violations of American intellectual property, according to three people with a detailed knowledge of the administration's plans.”
July 31 – Wall Street Journal (Gerald F. Seib): “When folks here in Washington end a summer filled with White House hijinks and an epic but inconclusive health-care debate, they will look up and discover something unsettling: The world has become a more dangerous place while everybody has been distracted. That’s most obviously true in North Korea, where its rogue weapons program has leapt so far forward that the nation now has a missile with the range to reach much of the U.S…. Meanwhile, American relations with China, the country most able to cooperate in slowing down Pyongyang, are deteriorating amid presidential recriminations—delivered via Twitter—about Beijing’s behavior. Relations with Russia are sliding backward as well… Both sides agree that ties now are at their lowest point since the Cold War.”
July 30 – Wall Street Journal (Siobhan Hughes and Thomas M. Burton): “President Donald Trump’s tumultuous past week has widened rifts in his party, between those who vocally support the president’s combative style and others who bridle at it, according to interviews… Mr. Trump has long been a polarizing force among members of his party, but for the first several months of his tenure, the GOP was largely united by a shared desire to make the most of his election and the party’s total control of the government for the first time in a decade. After a week that included the president attacking his attorney general, the collapse of a GOP health bill, a surprise effort to bar transgender people in the military and a White House staff shakeup, divisions that were largely set aside at the start of 2017 have emerged anew.”
August 2 – Reuters (David Lawder and Lesley Wroughton): “Three top Democratic senators, in a rare show of bipartisanship, on Wednesday urged U.S. President Donald Trump to stand up to China as he prepares to launch an inquiry into Beijing's intellectual property and trade practices in coming days. Senate Democratic leader Chuck Schumer pressed the Republican president to skip the investigation and go straight to trade action against China. ‘We should certainly go after them,’ said Schumer in a statement. Senators Ron Wyden of Oregon and Sherrod Brown of Ohio also urged Trump to rein in China.”
July 30 – Wall Street Journal (Kate Davidson): “Republicans are leaving town for an August recess after a failed attempt to repeal the Affordable Care Act. When they return in September, they’ll have just 12 working days to avert another big problem. In a letter to lawmakers Friday, U.S. Treasury Secretary Steven Mnuchin said the federal borrowing limit, or debt ceiling, needed to be raised by Sept. 29 or the government risked running out of money to pay its bills. The Treasury Department has been employing cash-conservation measures since March, when borrowing hit the formal ceiling of nearly $20 trillion.”
China Bubble Watch:
July 30 – New York Times (Chris Buckley): “China’s president, Xi Jinping, has opened a public campaign to deepen his grip on power in a coming leadership shake-up, using a huge military parade on Sunday, speeches and propaganda, along with a purge in the past week, to warn officials to back him as the nation’s most powerful leader in two decades. Wearing his mottled green uniform as commander in chief of the People’s Liberation Army, Mr. Xi watched as 12,000 troops marched and tanks, long-range missile launchers, jet fighters and other new weapons drove or flew past in impeccable arrays. Mao famously said political power comes from the barrel of a gun, and Mr. Xi signaled that he, too, was counting on the military to stay ramrod loyal while he chooses a new leading lineup to be unveiled at a Communist Party congress in the autumn.”
August 2 – Bloomberg: “President Xi Jinping’s top economic adviser commissioned a study earlier this year to see how China could avoid the fate of Japan’s epic bust in the 1990s and decades of stagnation that followed. The report covered a wide range of topics, from the Plaza Accord on currency to a real-estate bubble to demographics that made Japan the oldest population in Asia… While details are scarce, the person revealed one key recommendation that policy makers have since implemented: The need to curtail a global buying spree by some of the nation’s biggest private companies. Communist Party leaders discussed Japan’s experience in a Politburo meeting on April 26… State media came alive afterward, with reports trumpeting Xi’s warning that financial stability is crucial in economic growth.”
August 1 – BloombergBusinessweek (Kevin Hamlin): “For the past couple of years, Chinese companies roamed the world in an unprecedented $343 billion cross-border takeover spree. Among the splashiest deals: Dalian Wanda Group, whose founder, Wang Jianlin, is China’s second-richest executive, bought Hollywood production and finance company Legendary Entertainment for $3.5 billion in 2016. Anbang Insurance Group bought the Waldorf Astoria. Fosun International Ltd. purchased Club Méditerranée SA and Cirque du Soleil. But as the binge seemed ready to go on, China’s banking regulator in June ordered lenders to scrutinize their exposure to four high-flying private conglomerates that have announced $75 billion-plus in deals at home and abroad since the start of 2016: Dalian Wanda, Anbang, Fosun, and aviation and shipping giant HNA Group Co.”
August 1 – Bloomberg: “China’s crusade against capital outflows and leverage has ensnared some of the nation’s largest property investors, including Anbang Insurance Group Co… The crackdown is rippling across the world, and will likely spur an 84% slump in Chinese overseas property investment this year, and a further 18% drop in 2018, according to… Morgan Stanley. The most vulnerable real-estate markets are those in the U.S., U.K., Hong Kong and Australia, with office properties the most exposed, analysts including economist Robin Xing wrote. Manhattan is a particular worry, with about 30% of transactions in the borough that’s home to Wall Street involving Chinese parties in 2017.”
August 1 – Bloomberg: “China’s foreign-exchange regulator is examining how some of the country’s biggest dealmakers used their domestic assets as collateral to get loans overseas, people familiar with the matter said. The State Administration of Foreign Exchange recently began reviewing loan guarantees for Anbang Insurance Group Co., Dalian Wanda Group Co., Fosun International Ltd., HNA Group Co. and the Chinese owner of the AC Milan soccer team, the people said…”
July 31 – Reuters (Kevin Yao): “China's central bank will continue to force financial institutions to cut debt but ensure the process is smooth and orderly to limit its impact on market liquidity, an assistant central bank governor said… Higher short-term funding costs, driven by a regulatory crackdown on banks' riskier financing, have started to spill over into the real economy, a risk to economic stability ahead of a five-yearly leadership transition later this year. The drive to force financial institutions to deleverage… could affect the stability in market supply and demand of funding, Zhang Xiaohui wrote in the bank's China Finance magazine.”
July 31 – Reuters (Elias Glenn): “Growth in China's manufacturing quickened in July, a private survey showed on Tuesday, as output and new orders rose at the fastest pace since February on strong export sales. But even as firms boosted purchasing in anticipation of more business, employment levels at factories fell at the fastest pace in 10 months and a reading on business outlook was the lowest since last August… The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) rose to 51.1 in July… well ahead of the 50.4 in June which was also the median figure forecast…”
July 31 – Financial Times (Yuan Yang): “Multinationals in China are bracing to be cut off from the global internet as Beijing begins to shut down their only way of accessing uncensored foreign content. Companies offering virtual private network services, which bypass the country’s ‘Great Firewall’, have had their operations closed or obstructed in recent weeks — a blow to foreign groups that rely on VPN services to connect their staff to services such as Google-provided email and uncensored news. International companies are now preparing for an extended crackdown, according to Carolyn Bigg, senior lawyer at DLA Piper in Hong Kong. ‘The time for businesses to ignore these restrictions is over. The environment is changing weekly at the moment,’ she said.”
August 2 – Financial Times (Gabriel Wildau): “China’s finance ministry has acknowledged that public-private partnerships for infrastructure investment have become a vehicle for ‘disguised borrowing’ by local governments, as Beijing targets systemic risk from rising regional debt. The central government has sought to rein in runaway debt at local governments, a legacy of China’s post-2008 economic stimulus. But local officials have continued to exploit loopholes in local borrowing rules to keep infrastructure projects cashed up. The clampdown on PPP investment could add to growth headwinds for China’s economy. Infrastructure comprised 21.2% of urban fixed-asset investment in the first half — the highest share since 2010.”
July 30 – Financial Times (Louise Lucas and Sherry Fei Ju): “China’s pending regulatory crackdown on the $120bn peer-to-peer lending industry has claimed its first scalp before it has even begun, with one of the biggest players saying it will wind up its business in an industry full of bad loans and no profits. P2P lending, in which borrowers are matched with investors via online platforms, has mushroomed in the past five years, with China boasting more than 2,100 such platforms, but so too have scandals. Last year was marked by multibillion-dollar scams in China and a governance scandal that rocked New York-listed LendingClub. Beijing this month said it would delay regulations that will bar online lenders from guaranteeing principal or interest on loans they facilitate, cap the size of loans at Rmb1m for individuals and Rmb5m for companies, and force lenders to use custodian banks — a requirement only a fraction of the industry has met so far.”
Europe Watch:
July 29 – Reuters (Joseph Nasr): “The European Central Bank should start thinking about how it wants to return to normal monetary policy and when it wants to wind down it bond purchases, governing council member Sabine Lautenschlaeger said… ‘The expansionary monetary policy has both advantages and side effects. As time passes, the positive effects get weaker and the risks increase,’ she told the Mannheimer Morgen newspaper. ‘So it's important to prepare for the exit in good time. What's crucial in that context is a stable trend in the rate of inflation towards our objective of just under 2%. It's not quite there yet.’”
August 1 – Bloomberg (Catherine Bosley): “The euro-area economy expanded apace in the second quarter, a sign the bloc’s upswing is becoming increasingly robust and self-sustaining. Gross domestic product in the 19-country region rose 0.6% in the three months through June, after increasing 0.5% at the start of the year.”
August 3 – Bloomberg (Nikos Chrysoloras): “Public support for the euro rose to a 12-year high among citizens of the currency bloc, according to the… latest Eurobarometer survey… Almost three-quarters of respondents in the poll support the ‘economic and monetary union with one single currency, the euro,’ the highest reading since the fall of 2004. Adding to signs of increasing optimism, against the backdrop of a strengthening economic recovery, 56% of Europeans are now confident about the future of the EU -- an increase of six percentage points from fall 2016.”
Central Bank Watch:
August 3 – Bloomberg (David Goodman and Jill Ward): “Mark Carney said Brexit is casting the biggest shadow over the U.K.’s economic outlook, as his confidence in an orderly departure from the European Union starts to fade. The Bank of England governor’s comments follow slow progress in the initial round of exit talks after Prime Minister Theresa May lost her parliamentary majority in June. Carney said that there’s only so much monetary policy can do as the central bank cut its forecasts for economic growth and wages.”
Global Bubble Watch:
August 4 – Bloomberg (Theophilos Argitis): “Canada’s labor market continued its stellar performance in July, with the jobless rate falling to the lowest since before the financial crisis. The unemployment rate fell to 6.3%, the lowest since October 2008, as the labor market added another 10,900 jobs during the month, Statistics Canada reported from Ottawa. The total increase over the past year of 387,600 is the biggest 12-month gain since 2007.”
August 2 – Bloomberg (Katia Dmitrieva and Erik Hertzberg): “Home prices in Canada’s largest city posted their biggest monthly drop in at least 17 years in July and sales plunged as government efforts to cool the market and the near-collapse of a mortgage lender made buyers leery. The benchmark Toronto property price, which tracks a typical home over time, dropped 4.6% to C$773,000 ($613,000) from June.”
Fixed Income Bubble Watch:
August 2 – Wall Street Journal (Paul J. Davies): “The last financial crisis cleared out an alphabet soup of complex credit products. One type, however, has returned in droves in recent years, although popularity is now threatening their viability. This product is collateralized loan obligations, or CLOs, which buy portfolios of risky, leveraged loans often used by private-equity firms in buyouts. In the U.S., new CLO volumes have outstripped pre-crisis totals since 2014, while Europe is catching up to its previous levels fast. But returns from the loans they buy are getting squeezed as money from retail and institutional investors rushes in alongside CLOs to snap up loans. That could bring CLOs to a painful halt again.”
Federal Reserve Watch:
July 30 – Financial Times (Lena Komileva): “The US Federal Reserve raised rates for the third time in six months in June, even though inflation had stayed below its 2% target for much of the past decade. Why? The justification lies with the return to ‘economic normalisation’ (a more normal US growth and credit cycle), a reflationary global environment and easy financial conditions all combining to banish the extreme ‘tail risks’ of a deflationary slump that followed the financial crisis. Yet markets have been reluctant to heed the call of a return to more normal monetary conditions. Having lagged behind the Fed’s rate tightening and the discussion on shrinking its balance sheet this year, investors are still uncertain about the chances of another — well telegraphed — rate rise this year. A less than 40% probability is attached to this in the fed fund futures market. “
August 2 – Reuters (Richard Leong and Jonathan Spicer): “St. Louis Federal Reserve James Bullard is opposed to further U.S. interest rate increases by the central bank and warned that more hikes could hinder domestic inflation from achieving the Fed's 2-% goal… ‘Given the inflation outlook, which has deteriorated in 2017, I would not support further moves in the near term,’ Bullard told Market News… ‘It's possible data will turn around, but we'll have to see. I think for now we should remain on pause.’”
August 2 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Cleveland President Loretta Mester is keeping the faith that weak inflation will bounce back, even as she lowers her estimate for where unemployment begins to trigger higher prices. ‘My suspicion is it’s the idiosyncratic factors, it’s transitory and that the factors pushing down inflation are going to dissipate over time,’ Mester told reporters… ‘I still have a forecast for a gradual increase in inflation back to 2% over time.’”
August 2 – Wall Street Journal (Nick Timiraos): “Eric Rosengren, president of the Federal Reserve Bank of Boston, said increasingly tight labor markets should keep the U.S. central bank on its path to gradually raise rates and start slowly shrinking its portfolio of bonds and other assets, despite a surprising pause in inflation pressures this spring. In an interview, Mr. Rosengren said he sees ‘some reasonable risk’ that the unemployment rate drops below 4% in the next two years. ‘In my own view, that would not be sustainable,’ he said.”
U.S. Bubble Watch:
August 1 – CNBC (Diana Olick): “Home price gains are accelerating again, and in some cities those values are overheating. Four of the nation's largest cities are now considered overvalued, according to CoreLogic. Home prices in Denver, Houston, Miami and the Washington, D.C., metropolitan area now exceed sustainable levels. To determine if a market is overvalued, CoreLogic compares current prices to their long-run, sustainable levels, which are supported by local economic fundamentals like disposable income… ‘With no end to the escalation in sight, affordability is rapidly deteriorating nationally,’ said Frank Martell, president and CEO of CoreLogic.”
August 1 – Wall Street Journal (Sarah Krouse): “The fortunes of Wall Street’s cheapest and priciest funds are diverging fast. Exchange-traded funds held $1 trillion more in investor money than hedge funds globally for the first time ever at the end of June… Assets in ETFs, which trade on exchanges like stocks, first surpassed the amount of money in hedge funds two years ago and have continued to swell. Market-mimicking funds like ETFs have been helped by fresh market highs… Those gains have prodded investors already losing faith in star stock and bond pickers to plow even more money into the ultra low-cost funds.”
July 31 – CNBC (Fred Imbert): “Investors may be in for disappointing market returns in the decade to come with valuations at levels this high, if history is any indication. Analysts at Goldman Sachs Asset Management pointed out that annualized returns on the S&P 500 10 years out were in the single digits or negative 99% of the time when starting with valuations at current levels. In a chart, they point out that the S&P's cyclically adjusted price-to-earnings ratio (CAPE) is currently around its highest historical levels. CAPE is a widely followed valuation metric developed by Nobel Prize winners John Campbell and Robert Shiller.”
August 1 – CNBC (Tae Kim): “Mutual funds are piling into technology stocks to a record level, according to… Bank of America Merrill Lynch. But the overweighting may not be bullish for the sector going forward. In July ‘large cap active managers have yet again increased their positioning in tech, setting another record overweight of 25% (+5.8 percentage points) relative to the benchmark,’ strategist Savita Subramanian wrote… ‘This record overweight has helped managers beat their benchmarks so far this year, as tech continues to outperform all other sectors.’”
August 1 – Reuters (Joseph White and Paul Lienert): “U.S. carmakers said… they continued to slash low-margin sales to daily rental fleets in July as the overall pace of U.S. car and light truck sales fell for the fifth straight month. The annualized pace of U.S. car and light truck sales in July fell to 16.73 million vehicles, down from 17.8 million vehicles a year earlier…”
July 31 – Wall Street Journal (AnnaMaria Andriotis): “Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy. The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers… had increases for the quarter.”
EM Bubble Watch:
August 2 – Wall Street Journal (Julie Wernau and Carolyn Cui): “Investors have been bracing for a Venezuela debt default for more than a year, but fallout from the country’s widely criticized election last weekend could prove to be the tipping point. The government and state-owned oil company Petróleos de Venezuela SA, also known as PdVSA, together owe $5 billion in principal and interest payments due between now and the end of the year… The country has $725 million due this month alone… The problem: Venezuela only has about $3 billion of its foreign reserves in cash, according to S&P Global Ratings. That means the country is dependent on oil exports to make up the difference.”
July 31 – CNBC (Lucia Kassai, Laura Blewitt, and Nathan Crooks): “The specter of tighter U.S. sanctions is pushing up the perception that Venezuela is getting closer to defaulting on its bonds. Venezuela is awaiting possible further restrictions after the U.S., its largest trading partner, sanctioned President Nicolas Maduro after he held elections Sunday for a new assembly that will rewrite the constitution. U.S. Treasury Secretary Steven Mnuchin said in announcing the measures, including freezing Maduro’s assets in the U.S., that additional sanctions were ‘on the table.’”
July 29 – Reuters (Girish Gupta): “In a portend of steepening inflation in crisis-stricken Venezuela, money supply surged 10% in just one week earlier this month, its largest single-week rise in a quarter of a century. Venezuela is undergoing a major economic crisis, with millions suffering food shortages, monthly wages worth only the tens of U.S. dollars, and soaring inflation…”
August 2 – Bloomberg (Jeanette Rodrigues): “Business conditions in India have deteriorated the most since the global financial crisis as the roll out of a nationwide sales tax disrupted supply and distribution links just months after Prime Minister Narendra Modi’s cash ban roiled markets. The Nikkei India Composite PMI Output Index fell to 46 in July from 52.7 in June, the steepest drop since March 2009… Activity in the key services sector plunged to 45.9 from 53.1 -- the lowest since September 2013 -- after data showed manufacturing slumped the most since 2009.”
Leveraged Speculation Watch:
August 3 – Bloomberg (Simone Foxman): “Billionaire Paul Singer is warning of a growing and menacing threat: passive investing. ‘Passive investing is in danger of devouring capitalism,’ Singer wrote... ‘What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.’ Almost $500 billion flowed from active to passive funds in the first half of 2017. The founder of Elliott Management Corp. contends that passive strategies, which buy a variety of securities to match the overall performance of an index, aren’t truly ‘investing’ and that index fund providers don’t have incentive to push companies to change for the better and create shareholder value.”
August 3 – Bloomberg (Nishant Kumar, Javier Blas, and Suzy Waite): “If an oil trader so good that he was known as “God” can’t win in today’s markets, it’s hard to imagine who can. Andy Hall is closing down his main hedge fund after big losses in the first half of the year, according to people with knowledge of the matter. His flagship Astenbeck Master Commodities Fund II lost almost 30% through June… The capitulation of one of the best-known figures in the commodities industry comes after muted oil prices wrong-footed traders from Goldman Sachs Group Inc. to BP Plc’s in-house trading unit.”
August 1 – Bloomberg (Nishant Kumar and Suzy Waite): “Europe is on a mini-streak with hedge-fund investors as the prospect of faster economic growth and fading political risk help restore confidence in the region. Money pools investing across Europe attracted additional capital for the second straight month in June, following a 12-month stretch in which almost $16 billion was pulled out, according to… eVestment. The continent’s success contrasts with Asia and the U.S., where investors have pulled money from hedge funds.”
August 1 – Bloomberg (Saijel Kishan): “Paul Tudor Jones’ investors are increasingly deserting him. The billionaire macro manager who helped give rise to the hedge fund industry saw clients pull about 15% of their assets from his main fund in the second quarter… That’s left client assets at about $3.6 billion, almost half the value a year ago. The withdrawals are a blow to Jones… and exemplify the asset bleed hurting the biggest names in the business, including Alan Howard and John Paulson… Macro hedge funds have posted their worst first half since 2013, losing 0.7%, and on average returned about 1% annually in the past five years, according to Hedge Fund Research Inc.”
Geopolitical Watch:
July 31 – Reuters (Philip Wen and Ben Blanchard): “China loves peace but will never compromise on defending its sovereignty, President Xi Jinping said… while marking 90 years since the founding of the People's Liberation Army. China has rattled nerves around Asia and globally with its increasingly assertive stance in territorial disputes in the East and South China Seas and an ambitious military modernization plan. Relations with self-ruled Taiwan have also worsened since Tsai Ing-wen from the pro-independence Democratic Progressive Party won presidential elections there last year. China considers Taiwan a wayward province, to be brought under Beijing's control by force if necessary.”
August 2 – Financial Times (Emily Feng and Leo Lewis): “Xi Jinping has warned that China will not tolerate any infringement of its sovereignty or territory, in a speech delivered as the country finds itself embroiled in several territorial disputes with neighbours. ‘We will never seek aggression or expansion but we have the confidence to defeat all invasions,’ the Chinese president said in an hour-long speech on the 90th anniversary of the founding of the country’s army. ‘We will never allow any people, organisation or political party to split any part of Chinese territory out of the country.’ His comments came as Japan mounted a formal diplomatic protest to demand that China stop its renewed drilling operations in the East China Sea.”
August 4 – Associated Press: “Beijing is intensifying its warnings to Indian troops to get out of a contested region high in the Himalayas where China, India and Bhutan meet, saying China's ‘restraint has its limits’ and publicizing live-fire drills in Tibet. Indian troops entered the area in the Doklam Plateau in June after New Delhi's ally, Bhutan, complained a Chinese military construction party was building a road inside Bhutan's territory.”
July 31 – Reuters (Ben Blanchard and Elias Glenn): “China hit back on Monday after U.S. President Donald Trump tweeted he was ‘very disappointed’ in China following North Korea's latest missile test, saying the problem did not arise in China and that all sides need to work for a solution. China has become increasingly frustrated with American and Japanese criticism that it should do more to rein in Pyongyang. China is North Korea's closest ally, but Beijing, too, is angry with its continued nuclear and missile tests.”
July 29 – Reuters (James Pearson and Michelle Nichols): “The United States flew two supersonic B-1B bombers over the Korean peninsula in a show of force on Sunday and the U.S. ambassador to the United Nations said China, Japan and South Korea needed to do more after Pyongyang's latest missile tests. North Korea said it conducted another successful test of an intercontinental ballistic missiles (ICBM) on Friday that proved its ability to strike America's mainland, drawing a sharp warning from U.S. President Donald Trump. Trump's ambassador to the United Nations Nikki Haley said… that the United States was ‘done talking’ about North Korea, which was ‘not only a U.S. problem.’”
July 29 – Reuters (Babak Dehghanpisheh): “The Iranian Revolutionary Guards said… that U.S. Navy ships came close to their vessels in the Gulf and shot flares. The USS Nimitz and an accompanying warship drew close to a rocket-bearing Iranian vessel on Friday and sent out a helicopter near a number of Guards vessels… ‘The Americans made a provocative and unprofessional move by issuing a warning and shooting flares at vessels ...,’ the statement said. ‘Islam’s warriors, without paying attention to this unconventional and unusual behaviour from the American vessels, continued their mission in the area and the aircraft carrier and accompanying battleship left the area.’”
July 31 – Wall Street Journal (Julian E. Barnes, Laurence Norman and Felicia Schwartz): “The U.S. Pentagon and State Department have devised plans to supply Ukraine with antitank missiles and other weaponry and are seeking White House approval, U.S. officials said, as Kiev battles Russia-backed separatists and ties between Moscow and Washington fray. American military officials and diplomats say the arms, which they characterized as defensive, are meant to deter aggressive actions by Moscow, which the U.S. and others say has provided tanks and other sophisticated armaments as well as military advisers to rebels fighting the Kiev government.”
Thursday, August 3, 2017
Friday's News Links
[Bloomberg] Dollar Rises, Treasuries Slide on Strong Jobs Data: Markets Wrap
[Bloomberg] Payroll Gain of 209,000, Wage Pickup Show U.S. Labor Strength
[Bloomberg] The Jobs Numbers: Who’s Hiring in America—and Who’s Not
[Reuters] U.S. trade deficit narrows as exports hit 2-1/2-year high
[Reuters] U.S. businesses fear Trump mishandling of China IP, trade probe
[Bloomberg] Corporate Employers Flee Pensions With Gap Topping $375 Billion
[CNBC] Greenspan: Bond bubble about to break because of 'abnormally low' interest rates
[Reuters] Exclusive: China regulators plan to crack down further on overseas deals
[CNBC/SCMP] Chinese firms say profit margins 'squeezed to extreme' by rising costs
[Bloomberg] Canadian Job Market Runs Hot With Unemployment at 9-Year Low
[Bloomberg] China Warns Indian Troops to Get Out of Contested Region
[FT] Currencies face uncertain August amid central bank normalisation
[Bloomberg] Payroll Gain of 209,000, Wage Pickup Show U.S. Labor Strength
[Bloomberg] The Jobs Numbers: Who’s Hiring in America—and Who’s Not
[Reuters] U.S. trade deficit narrows as exports hit 2-1/2-year high
[Reuters] U.S. businesses fear Trump mishandling of China IP, trade probe
[Bloomberg] Corporate Employers Flee Pensions With Gap Topping $375 Billion
[CNBC] Greenspan: Bond bubble about to break because of 'abnormally low' interest rates
[Reuters] Exclusive: China regulators plan to crack down further on overseas deals
[CNBC/SCMP] Chinese firms say profit margins 'squeezed to extreme' by rising costs
[Bloomberg] Canadian Job Market Runs Hot With Unemployment at 9-Year Low
[Bloomberg] China Warns Indian Troops to Get Out of Contested Region
[FT] Currencies face uncertain August amid central bank normalisation
Thursday Evening Links
[Bloomberg] U.S. Stocks Fall, Bonds Gain on Russia Probe News: Markets Wrap
[Bloomberg] Is Loan Growth Set to Speed Up or Is It Slowing? Analysts Differ
[Bloomberg] Jobs in U.S. Haven't Been This Hard to Fill Since 2000
[Bloomberg] Euro Credit Returns Could Be Wiped Out in Just a Few Days
[Bloomberg] Paul Singer Says Passive Investing Is ‘Devouring Capitalism’
[CNBC] Hedge funds lose more than half a billion on wrong-way bet against Tesla
[Bloomberg] The Oil Trader Known as ‘God’ Is Closing Down His Main Hedge Fund
[CNBC] Special counsel Robert Mueller's Russia probe heats up
[WSJ] Special Counsel Robert Mueller Impanels Washington Grand Jury in Russia Probe
[Bloomberg] Is Loan Growth Set to Speed Up or Is It Slowing? Analysts Differ
[Bloomberg] Jobs in U.S. Haven't Been This Hard to Fill Since 2000
[Bloomberg] Euro Credit Returns Could Be Wiped Out in Just a Few Days
[Bloomberg] Paul Singer Says Passive Investing Is ‘Devouring Capitalism’
[CNBC] Hedge funds lose more than half a billion on wrong-way bet against Tesla
[Bloomberg] The Oil Trader Known as ‘God’ Is Closing Down His Main Hedge Fund
[CNBC] Special counsel Robert Mueller's Russia probe heats up
[WSJ] Special Counsel Robert Mueller Impanels Washington Grand Jury in Russia Probe
Wednesday, August 2, 2017
Thursday's News LInks
[Bloomberg] U.S. Stocks Mixed Near Records, Pound Drops on BOE: Markets Wrap
[Bloomberg] Decline in Jobless Claims Shows U.S. Labor Demand Remains Robust
[Bloomberg] Carney Says Brexit to Take Toll on Growth as BOE Cuts Forecasts
[Bloomberg] Euro-Area Optimism at 12-Year High as Economy Recovers
[Reuters] In rare bipartisan display, Democrats back Trump on China trade probe
[CNBC] Trump may be about to wallop global trade as we know it, but markets don't seem to understand
[Bloomberg] China's Fear of Japan-Style Economic Bust Drives Crackdown on Deals, Says Source
[Bloomberg] India's PMI Plunges Most Since 2009 as New Tax Roils Economy
[Bloomberg] Toronto Home Prices Suffer Worst Monthly Decline in 17 Years
[WSJ] ‘Summer Bummer’ for Manhattan Luxury-Apartment Sales
[FT] ECB reinvestment flows are ‘silent stimulus’ for the eurozone
[Bloomberg] Decline in Jobless Claims Shows U.S. Labor Demand Remains Robust
[Bloomberg] Carney Says Brexit to Take Toll on Growth as BOE Cuts Forecasts
[Bloomberg] Euro-Area Optimism at 12-Year High as Economy Recovers
[Reuters] In rare bipartisan display, Democrats back Trump on China trade probe
[CNBC] Trump may be about to wallop global trade as we know it, but markets don't seem to understand
[Bloomberg] China's Fear of Japan-Style Economic Bust Drives Crackdown on Deals, Says Source
[Bloomberg] India's PMI Plunges Most Since 2009 as New Tax Roils Economy
[Bloomberg] Toronto Home Prices Suffer Worst Monthly Decline in 17 Years
[WSJ] ‘Summer Bummer’ for Manhattan Luxury-Apartment Sales
[FT] ECB reinvestment flows are ‘silent stimulus’ for the eurozone
Wednesday Evening Links
[Bloomberg] Asia Stocks to Start Mixed as Stellar Run Assessed: Markets Wrap
[Reuters] Equities weaken after Dow breaks 22,000; dollar soft
[Reuters] Fed's Bullard opposes more U.S. rate hikes: Market News International
[Bloomberg] Fed's Mester Expects Inflation to Rebound From One-Time Factors
[Reuters] Banking regulator kicks off Volcker Rule rewrite process
[WSJ] Rosengren: Tight Labor Markets Justify Fed Plans to Keep Raising Rates
[FT] China admits to disguised fiscal borrowing risk
[FT] China warns neighbours over territorial disputes
[Reuters] Equities weaken after Dow breaks 22,000; dollar soft
[Reuters] Fed's Bullard opposes more U.S. rate hikes: Market News International
[Bloomberg] Fed's Mester Expects Inflation to Rebound From One-Time Factors
[Reuters] Banking regulator kicks off Volcker Rule rewrite process
[WSJ] Rosengren: Tight Labor Markets Justify Fed Plans to Keep Raising Rates
[FT] China admits to disguised fiscal borrowing risk
[FT] China warns neighbours over territorial disputes
Tuesday, August 1, 2017
Wednesday's News Links
[Bloomberg] U.S. Stocks, Dollar Retreat as Apple Bolsters Dow: Markets Wrap
[Reuters] U.S. private sector adds 178,000 jobs in July: ADP
[CNBC/NYT] Trump administration is said to prepare broad trade case against China
[Bloomberg] Some Republicans Are Frustrated With Lack of Detail in GOP Tax Plan
[Bloomberg] How China’s Risk Crackdown Will Hit Manhattan’s Property Market
[Bloomberg] China Isn't Excited About iPhones Any More
[BloombergBusinessweek] Can Xi Jinping Defuse China’s Debt Bomb?
[CNBC] Chinese state media: Trump is 'wrong' when he says we can fix the North Korea problem
[WSJ] U.S. Plans Trade Measures Against China
[WSJ] Venezuelan Default Fears Rise With Billions in Debt Coming Due Soon
[FT] Hong Kong dollar peg slips to weakest in 19 months
[Reuters] U.S. private sector adds 178,000 jobs in July: ADP
[CNBC/NYT] Trump administration is said to prepare broad trade case against China
[Bloomberg] Some Republicans Are Frustrated With Lack of Detail in GOP Tax Plan
[Bloomberg] How China’s Risk Crackdown Will Hit Manhattan’s Property Market
[Bloomberg] China Isn't Excited About iPhones Any More
[BloombergBusinessweek] Can Xi Jinping Defuse China’s Debt Bomb?
[CNBC] Chinese state media: Trump is 'wrong' when he says we can fix the North Korea problem
[WSJ] U.S. Plans Trade Measures Against China
[WSJ] Venezuelan Default Fears Rise With Billions in Debt Coming Due Soon
[FT] Hong Kong dollar peg slips to weakest in 19 months
Tuesday Evening Links
[CNBC] Apple jumps 6% to record high after earnings beat estimates
[Reuters] Dow at record on strong earnings; Apple earnings awaited
[Bloomberg] Oil Drops as Market Awaits Confirmation of Steady Supply Decline
[Bloomberg] U.S. auto sales fall in July as carmakers slash rental fleet sales
[Bloomberg] Toyota, Nissan, Honda Beat U.S. Estimates as Local Brands Suffer
[CNBC, Olick] Four major US cities ring housing bubble alarm
[Bloomberg] China Needs to Act on $33 Trillion of Credit, Analyst Chu Says
[CNBC] Investors are more crowded into tech stocks than ever before
[Bloomberg] Paul Tudor Jones Clients Pull 15% From Main Hedge Fund
[WSJ] How Risky Loans Are Kept Afloat in Alphabet Soup
[Reuters] Venezuela seizes opposition leaders Lopez, Ledezma from homes
[Reuters] Dow at record on strong earnings; Apple earnings awaited
[Bloomberg] Oil Drops as Market Awaits Confirmation of Steady Supply Decline
[Bloomberg] U.S. auto sales fall in July as carmakers slash rental fleet sales
[Bloomberg] Toyota, Nissan, Honda Beat U.S. Estimates as Local Brands Suffer
[CNBC, Olick] Four major US cities ring housing bubble alarm
[Bloomberg] China Needs to Act on $33 Trillion of Credit, Analyst Chu Says
[CNBC] Investors are more crowded into tech stocks than ever before
[Bloomberg] Paul Tudor Jones Clients Pull 15% From Main Hedge Fund
[WSJ] How Risky Loans Are Kept Afloat in Alphabet Soup
[Reuters] Venezuela seizes opposition leaders Lopez, Ledezma from homes
Monday, July 31, 2017
Tuesday's News Links
[Bloomberg] Stocks Gain as Earnings, Data Boost Confidence: Markets Wrap
[Bloomberg] Americans' Spending Barely Grew in June as Incomes Stagnated
[Bloomberg] U.S. Auto Market Slump Persists
[Reuters] China factory activity accelerates in July on strong export orders: Caixin PMI
[Bloomberg] Euro-Area Economy Steams Ahead as ECB Waits for Inflation
[Bloomberg] China Forex Regulator Is Examining Top Dealmakers, Sources Say
[Reuters] Anbang denies regulators told it to sell overseas assets
[Bloomberg] Europe Becomes Hedge-Fund Hotspot as Economic Recovery Takes Off
[Bloomberg] 1MDB Misses $603 Million Payment to Abu Dhabi Sovereign Wealth Fund
[NYT] Debt-Ridden Chinese Giant Now a Shadow of Its Former Size
[WSJ] ETFs Now Have $1 Trillion More Than Hedge Funds
[WSJ] Auto Lender’s Risks Larger Than They Appear
[FT] Investors hedge against sharp stock market correction
[Reuters] President Xi says China loves peace but won't compromise on sovereignty
[WSJ] As Washington Churns, the World Grows More Dangerous
[Bloomberg] Americans' Spending Barely Grew in June as Incomes Stagnated
[Bloomberg] U.S. Auto Market Slump Persists
[Reuters] China factory activity accelerates in July on strong export orders: Caixin PMI
[Bloomberg] Euro-Area Economy Steams Ahead as ECB Waits for Inflation
[Bloomberg] China Forex Regulator Is Examining Top Dealmakers, Sources Say
[Reuters] Anbang denies regulators told it to sell overseas assets
[Bloomberg] Europe Becomes Hedge-Fund Hotspot as Economic Recovery Takes Off
[Bloomberg] 1MDB Misses $603 Million Payment to Abu Dhabi Sovereign Wealth Fund
[NYT] Debt-Ridden Chinese Giant Now a Shadow of Its Former Size
[WSJ] ETFs Now Have $1 Trillion More Than Hedge Funds
[WSJ] Auto Lender’s Risks Larger Than They Appear
[FT] Investors hedge against sharp stock market correction
[Reuters] President Xi says China loves peace but won't compromise on sovereignty
[WSJ] As Washington Churns, the World Grows More Dangerous
Monday Evening Links
[Bloomberg] Asia Stocks Point Lower as Yen, Euro Extend Gains: Markets Wrap
[Bloomberg] U.S. Stocks Limp to the Finish of a Healthy July: Markets Wrap
[Bloomberg] Chicago Pension Bills Soar as City Pays Up to Keep Funds Solvent
[CNBC] History says there's a 99% chance stock market returns will be subpar from here
[Bloomberg] Potential U.S. Oil Sanctions Boost Risk of Venezuela Default
[Bloomberg] Greenspan Sees Return of Stagflation Unseen Since 1970s
[FT] Trump tax reform plan heads into quagmire
[FT] Multinationals in China brace for online crackdown
[WSJ] Pentagon Offers Plan to Arm Ukraine
[Bloomberg] U.S. Stocks Limp to the Finish of a Healthy July: Markets Wrap
[Bloomberg] Chicago Pension Bills Soar as City Pays Up to Keep Funds Solvent
[CNBC] History says there's a 99% chance stock market returns will be subpar from here
[Bloomberg] Potential U.S. Oil Sanctions Boost Risk of Venezuela Default
[Bloomberg] Greenspan Sees Return of Stagflation Unseen Since 1970s
[FT] Trump tax reform plan heads into quagmire
[FT] Multinationals in China brace for online crackdown
[WSJ] Pentagon Offers Plan to Arm Ukraine
Sunday, July 30, 2017
Monday's News Links
[Bloomberg] U.S. Stocks Mixed, Dollar Gains as Treasuries Slip: Markets Wrap
[Bloomberg] Republicans Face Tough Choice: Repeal Obamacare or Cut Taxes
[Bloomberg] Inflation Hits Low Bar Draghi Set as Stimulus Debate Gets Closer
[Reuters] China central bank to ensure smooth, orderly deleveraging, assistant governor says
[Bloomberg] China Factory PMI Suggests Economic Momentum Dialed Back in July
[Reuters] Exclusive: MSCI warns Chinese companies about suspending trading of shares
[Bloomberg] China Asks Waldorf Owner Anbang to Sell Assets Abroad, Sources Say
[Reuters] China hits back at Trump criticism over North Korea
[CNBC] Mysterious craters blowing out of Russia could mean trouble for the whole planet
[WSJ] Late Credit-Card Payments Stoke Fears for Banks
[WSJ] Donald Trump Deepens GOP Divide
[FT] You are too complacent, central bankers warn markets
[FT] Trump’s rift widens with Republicans
[FT] One of China’s biggest P2P lenders quits ahead of clampdown
[Bloomberg] Republicans Face Tough Choice: Repeal Obamacare or Cut Taxes
[Bloomberg] Inflation Hits Low Bar Draghi Set as Stimulus Debate Gets Closer
[Reuters] China central bank to ensure smooth, orderly deleveraging, assistant governor says
[Bloomberg] China Factory PMI Suggests Economic Momentum Dialed Back in July
[Reuters] Exclusive: MSCI warns Chinese companies about suspending trading of shares
[Bloomberg] China Asks Waldorf Owner Anbang to Sell Assets Abroad, Sources Say
[Reuters] China hits back at Trump criticism over North Korea
[CNBC] Mysterious craters blowing out of Russia could mean trouble for the whole planet
[WSJ] Late Credit-Card Payments Stoke Fears for Banks
[WSJ] Donald Trump Deepens GOP Divide
[FT] You are too complacent, central bankers warn markets
[FT] Trump’s rift widens with Republicans
[FT] One of China’s biggest P2P lenders quits ahead of clampdown
Saturday, July 29, 2017
Sunday's News Links
[CNBC] Trump expresses frustration with China over North Korea, hints at retaliation
[Reuters] Real estate booms in China's small cities, but construction outpaces demand
[Reuters] U.S. flies bombers over Korean peninsula after North Korea missile test
[NYT] China Shows Off Military Might, and Xi Jinping Puts Rivals on Notice
[Spiegel] Pro-Russian Separatists Harden Split from Ukraine
[Reuters] Real estate booms in China's small cities, but construction outpaces demand
[Reuters] U.S. flies bombers over Korean peninsula after North Korea missile test
[NYT] China Shows Off Military Might, and Xi Jinping Puts Rivals on Notice
[Spiegel] Pro-Russian Separatists Harden Split from Ukraine
Saturday's News Links
[Reuters] ECB should think about when it wants to wind down bond buys: Lautenschlaeger
[Reuters] Venezuela money supply surges 10 percent in one week, fastest in 25 years
[WSJ] The Great Transatlantic Bond Divergence Unwind
[Reuters] Iran says new tensions between Revolutionary Guards and U.S. Navy
[Reuters] Venezuela money supply surges 10 percent in one week, fastest in 25 years
[WSJ] The Great Transatlantic Bond Divergence Unwind
[Reuters] Iran says new tensions between Revolutionary Guards and U.S. Navy
Friday, July 28, 2017
Weekly Commentary: Five Years of Whatever It Takes
July 25 – Bloomberg (Paul Gordon and Carolynn Look): “Five years ago today, Mario Draghi was talking about bumblebees. The European Central Bank president’s speech in London on July 26, 2012, became instantly famous because of his pledge to do ‘whatever it takes’ to save the euro. But for all the power and clarity of that phrase, he started his remarks more obliquely. ‘The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now -- and I think people ask ‘how come?’-- probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis.’ At the time, the currency bloc was being buffeted by soaring bond yields in peripheral nations as speculators bet the union’s fundamental flaws would rip it apart. Draghi’s answer was to state unequivocally that the immediate crisis fell under the ECB’s responsibility and he would deal with it. ‘The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’ That pledge was followed by a program to buy the debt of stressed countries in return for structural reforms, and in that respect the words alone proved to be enough. Yield spreads collapsed even though the program has never been tapped.”
This week marks the five-year anniversary of Draghi’s “whatever it takes.” I remember the summer of 2012 as if it were yesterday. From the Bubble analysis perspective, it was a Critical Juncture – for financial markets and risk perceptions, for policy and for the global economy. Italian 10-year yields hit 6.60% on July 24, 2012. On that same day, Spain saw yields surge to 7.62%. Italian banks were in freefall, while European bank stocks (STOXX600) were rapidly approaching 2009 lows. Having risen above 55 in 2011, Deutsche Bank traded at 23.23 on July 25, 2012.
It was my view at the time that the “European” crisis posed a clear and immediate threat to the global financial system. A crisis of confidence in Italian debt (and Spanish and “periphery” debt) risked a crisis of confidence in European banks – and a loss of confidence in European finance risked dismantling the euro monetary regime.
Derivatives markets were in the crosshairs back in 2012. A crisis of confidence in European debt and the euro would surely have tested the derivatives marketplace to the limits. Moreover, with the big European banks having evolved into dominant players in derivatives trading (taking share from U.S. counterparts after the mortgage crisis), counter-party issues were at the brink of becoming a serious global market problem. It’s as well worth mentioning that European banks were major providers of finance for emerging markets.
From the global government finance Bubble perspective, Draghi’s “whatever it takes” was a seminal development. The Bernanke Fed employed QE measures during the 2008 financial crisis to accommodate deleveraging and stabilize dislocated markets. Mario Draghi leapfrogged (helicopter) Bernanke, turning to open-ended QE and other extreme measures to preserve euro monetary integration. No longer would QE be viewed as a temporary crisis management tool. And just completely disregard traditional monetary axiom that central banks should operate as lender of last resort in the event of temporary illiquidity – but must avoid propping up the insolvent. “Whatever it takes” advocates covert bailouts for whomever and whatever a small group of central bankers chooses – illiquid, insolvent, irredeemable or otherwise. Now five years after the first utterance of “whatever it takes,” the Draghi ECB is still pumping out enormous amounts of “money” on a monthly basis (buying sovereigns and corporates) with rates near zero.
Keep in mind that while “whatever it takes” first radiated from Draghi’s lips, markets soon surmised that the ECB president was speaking on behalf of the cadre of leading global central bankers. After all, ECB (desperate) measures were followed promptly by the return of QE by the Federal Reserve, the Bank of Japan, the Swiss National Bank and others. It’s worth mentioning that the Fed’s balance sheet totaled about $2.8 TN in July 2012, only to rise to $4.4 TN by September 2014. Amazingly, Bank of Japan assets have expanded about three-fold since 2012 to approach $5.0 TN.
Going back to 2002, the burst “tech” Bubble was evolving into a full-fledged U.S. corporate debt crisis. Back then Fed governor Bernanke’s talk of “helicopter money” and the “government printing press” profoundly altered market dynamics. It may not have at the time been loud and clear. But putting markets on notice that the Fed was contemplating extraordinary reflationary measures was a far-reaching development for corporate debt. Facing a liquidity crisis in 2002, Ford bonds had become a popular short in the marketplace. Almost single-handedly, Dr. Bernanke’s speeches proved a catalyst for the speculating community reversing the Ford (and corporate debt) bond short - and then going long. The impact on general market liquidity was profound. And with the corporate debt crisis resolved there was nothing to hold back the burgeoning mortgage finance Bubble.
What “Helicopter Ben” accomplished with U.S. corporate bonds, “Super Mario” surpassed with Trillions of European sovereign, corporate and financial debt. Italian bond yields ended 2012 at 4.5%, down 210 bps from July highs. Spain’s 10-yields declined about 250 bps to 5.00% in less than six months. “Whatever it takes” almost immediately transformed Italian and Spanish debt from favored shorts to about the most enticing speculative long securities anywhere in the world.
Draghi’s utterance ‘The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,’ was a direct declaration to speculators with short positions in the euro currency, along with shorts in Italian, Spanish and periphery debt. Immediately Cover Your Shorts and Go Long. Five years on, Italian yields hover around 2.10% and Spanish yields sit at about 1.50% - emblematic of arguably one of history’s most spectacular securities market mispricings. European bank stocks have gained better than 50%. Draghi not only bloodied the shorts, be ensured spectacular profits for those levered long European debt – and the riskier the Credit the greater the reward.
Central bankers should not be in the business of playing favorites in the markets. So how did it get to the point where they seek to incentivize longs (levered and otherwise) while routinely punishing the shorts? Because central bankers followed the Bernanke Fed into a policy course of using rising securities and asset prices as a reflationary mechanism for the overall economy. As we’ve witnessed now for going on a decade, that’s a slippery slope. Adopt pro-Bubble policies and there will be no turning back. Inflate an epic Bubble and you own it for the duration.
“The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does.” The euro flew and it soared incredibly high, trading above 1.50 to the dollar in early-2008. As fundamentally flawed as the euro monetary experiment has been, it has been buoyed by the fundamentally weaker dollar. The euro flew on the back of highly speculative flows, much of it flowing from an overcharged U.S. Credit system. U.S. monetary policy had been too loose for too long. Unstable finance has been nurtured for what seems like an eternity. The U.S. exported its Credit Bubble to the world.
Going all the way back to the late-nineties, Italy and the European periphery were a leveraged speculator community darling. Indeed, the Euro Convergence Trade granted huge profits to the hedge fund community. The egregious amounts of leverage employed (directly and through derivatives) was illuminated with the 1998 implosion of Long-Term Capital Management (LTCM).
The LTCM fiasco contributed to an 18-month bear market that saw the euro trade down to 0.87 vs. the dollar in early 2002. With Dr. Bernanke and his radical theories on reflationary policymaking arriving on the scene in 2002, it’s no coincidence that the euro then embarked on a multiyear rally. The euro traded up to 1.00 late in 2002, 1.20 in 2003, 1.35 in 2004, 1.45 in 2007 and 1.58 in 2008. It’s furthermore no coincidence that Italian bond prices tracked the euro higher. After trading at 5.5% in the first-half of 2002, Italian yields dropped to 3.22% by October 2005. Greek bonds followed an almost identical trajectory, as both already highly-indebted nations took full advantage of the market’s insatiable demand for European peripheral debt.
Draghi has lately grown accustomed to patting himself on the back. He saved the euro. He saved Europe’s big banks. He kept Greece and Italy in the euro currency. His policies have spurred European economic recovery. But Draghi and global central bankers also inflated history’s greatest speculative Bubble. Celebration will be in order only if policies can be normalized without the whole thing coming crashing down.
July 25 – BloombergBusinessweek (Jana Randow): “Euro-area governments have saved almost 1 trillion euros ($1.16 trillion) in interest payments since 2008 as record-low European Central Bank rates depress bond yields at a time when state treasurers are also reducing debt. That’s according to calculations by Germany’s Bundesbank, which is urging finance ministers in the 19-nation region to make provisions for when interest rates start to rise. Italy, the world’s third-most indebted country, has benefited most, with savings exceeding 10% of gross domestic product.”
Italy has been the biggest beneficiary of collapsing market yields. The problem is that its debt load still expanded to a distressing 130% of GDP. Italy remains only a jump in yields away from trouble, and I suspect this helps explain why Draghi has been so reticent to pull back on the stimulus throttle. After trading below 1.90% in mid-June, Italian yields surged to 2.33% earlier this month as markets began to contemplate global central bankers moving toward concerted normalization.
The FOMC this week confirmed the dovishness of Yellen’s testimony before congress. Apparently, over the past month Fed rate “normalization” has been scaled back to perhaps one more hike this year – and that could be about it. And I just don’t buy the Fed’s recent fixation on below target inflation (GSCI Commodities Index up 4.2% this week on further dollar weakness!).
Something has raised concerns at the FOMC. Could it be European debt markets, with ECB stimulus to be significantly reduced in the months ahead. Or perhaps it’s China and Beijing's determination to rein in some financial excess. EM and all their dollar-denominated debt? Maybe a dysfunctional Washington has supplanted international developments on the worry list – or, understandably, it could be a combination of things.
At least for the week, global markets lost a bit of their recent swagger. While Boeing helped push the Dow to yet another record high, the S&P500 ended the week little changed. The broader market underperformed. The highflying technology stocks were unimpressive in the face of generally robust earnings. The VIX rose to 10.29, with some volatility beginning to seep into stock trading. Commodities caught a big bid, while bond yields began moving north again. The currencies remain unsettled.
Thinking back five years, U.S. markets at the time were incredibly complacent. The risk of crisis in Europe was downplayed: Policymakers had it all under control. Sometime later, the Financial Times - in a fascinating behind-the-scenes exposé - confirmed the gravity of the situation and how frazzled European leaders were at the brink of losing control. Yet central bankers, once again, saved the day – further solidifying their superhero status.
I’m convinced five years of “whatever it takes” took the global government finance Bubble deeper into perilous uncharted territory. Certainly, markets are more complacent than ever, believing central bankers are fully committed to prolonging indefinitely the securities bull market. Meanwhile, leverage, speculative excess and trend-following flows have had an additional five years to accumulate. Market distortions – including valuations, deeply embedded complacency, and Trillions of perceived safe securities – have become only further detached from reality. And the longer all this unstable finance flows freely into the real economy, the deeper the structural maladjustment.
For the Week:
The S&P500 was about unchanged (up 10.4% y-t-d), while the Dow jumped 1.2% (up 10.5%). The Utilities slipped 0.3% (up 8.4%). The Banks added 0.5% (up 3.7%), and the Broker/Dealers rose 1.0% (up 14.0%). The Transports dropped 2.6% (up 2.0%). The S&P 400 Midcaps declined 0.7% (up 6.1%), and the small cap Russell 2000 dipped 0.5% (up 5.3%). The Nasdaq100 slipped 0.2% (up 21.5%), and the Morgan Stanley High Tech index fell 0.8% (up 25.5%). The Semiconductors dropped 1.3% (up 20.6%). The Biotechs declined 1.0% (up 29.7%). With bullion up $15, the HUI gold index rallied 2.3% (up 7.7%).
Three-month Treasury bill rates ended the week at 106 bps. Two-year government yields added a basis point to 1.35% (up 16bps y-t-d). Five-year T-note yields increased three bps to 1.83% (down 9bps). Ten-year Treasury yields rose five bps to 2.29% (down 16bps). Long bond yields jumped nine bps to 2.90% (down 17bps).
Greek 10-year yields rose 11 bps to 5.33% (down 170bps y-t-d). Ten-year Portuguese yields added two bps to 2.93% (down 82bps). Italian 10-year yields gained five bps to 2.12% (up 31bps). Spain's 10-year yields rose seven bps to 1.53% (up 15bps). German bund yields increased four bps to 0.54% (up 34bps). French yields rose five bps to 0.81% (up 13bps). The French to German 10-year bond spread widened one to 27 bps. U.K. 10-year gilt yields gained four bps to 1.22% (down 2bps). U.K.'s FTSE equities index fell 1.1% (up 3.2%).
Japan's Nikkei 225 equities index declined 0.7% (up 4.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.08% (up 4bps). France's CAC40 gained 0.3% (up 5.5%). The German DAX equities index declined 0.6% (up 5.9%). Spain's IBEX 35 equities index rallied 1.1% (up 12.7%). Italy's FTSE MIB index rose 1.1% (up 11.4%). EM equities were mixed. Brazil's Bovespa index gained 1.3% (up 8.7%), while Mexico's Bolsa declined 0.7% (up 12.2%). South Korea's Kospi sank 2.0% (up 18.5%). India’s Sensex equities index added 0.9% (up 21.3%). China’s Shanghai Exchange increased 0.5% (up 4.8%). Turkey's Borsa Istanbul National 100 index rose 0.8% (up 37.8%). Russia's MICEX equities index slipped 0.4% (down 14.2%).
Junk bond mutual funds saw outflows of $21 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined four bps to 3.92% (up 44bps y-o-y). Fifteen-year rates slipped three bps to 3.20% (up 42bps). The five-year hybrid ARM rate fell three bps to 3.18% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.11% (up 42bps).
Federal Reserve Credit last week declined $5.1bn to $4.435 TN. Over the past year, Fed Credit added $0.4bn. Fed Credit inflated $1.625 TN, or 58%, over the past 246 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $6.0bn last week to $3.325 TN. "Custody holdings" were up $105bn y-o-y, or 3.3%.
M2 (narrow) "money" supply last week gained $6.0bn to a record $13.608 TN. "Narrow money" expanded $740bn, or 5.8%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits dropped $50.2bn, while Savings Deposits jumped $52.1bn. Small Time Deposits added $1.3bn. Retail Money Funds were little changed.
Total money market fund assets jumped $23.28bn to $2.640 TN. Money Funds fell $75bn y-o-y (2.8%).
Total Commercial Paper gained $7.4bn to $978bn. CP declined $49bn y-o-y, or 4.7%.
Currency Watch:
The U.S. dollar index declined 0.6% to 93.26 (down 8.9% y-t-d). For the week on the upside, the Swedish krona increased 1.5%, the Norwegian krone 1.3%, the British pound 1.1%, the Australian dollar 0.9%, the Canadian dollar 0.9%, the New Zealand dollar 0.8%, the euro 0.8%, the Singapore dollar 0.4%, the Japanese yen 0.4% and the Brazilian real 0.4%. On the downside, the Swiss franc declined 2.4%, the South African rand 0.8%, the Mexican peso 0.7% and the South Korean won 0.3%. The Chinese renminbi gained 0.44% versus the dollar this week (up 3.09% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 4.2% (down 3.0% y-t-d). Spot Gold gained 1.2% to $1,270 (up 10.2%). Silver rose 1.4% to $16.695 (up 4.5%). Crude surged $3.94 to $49.71 (down 8%). Gasoline surged 7.2% (unchanged), while Natural Gas declined 1.0% (down 21%). Copper jumped 5.6% (up 15%). Wheat dropped 3.7% (up 18%). Corn fell 1.4% (up 10%).
Trump Administration Watch:
July 27 – Bloomberg (Sahil Kapur and Erik Wasson): “The House is set to leave for its August recess without having taken the first essential step to overhauling the U.S. tax code: agreeing on a 2018 budget resolution. Disputes among House Republicans over spending levels and the controversial border-adjusted tax proposal are preventing Speaker Paul Ryan from winning enough support to schedule a floor vote on the budget that a House panel approved last week. With House members planning to leave Washington Friday for a five-week recess, the lack of a budget is raising doubts that a tax rewrite -- one of President Donald Trump’s top priorities -- can get done this year, or even before the 2018 elections. ‘Clearly, no budget, no tax reform,’ said the House’s chief tax writer, Representative Kevin Brady, a Texas Republican.”
July 25 – Bloomberg (Erik Wasson and Roxana Tiron): “House Republicans this week are increasing the possibility of a government shutdown in October by moving forward with a $788 billion spending bill that complies with President Donald Trump’s demands to boost the military, reduce clean-energy programs and fund a wall on the U.S.-Mexico border. Those priorities, especially $1.6 billion in wall funding, guarantee House and Senate Democratic leaders will oppose the bill. Trump has urged his Republican supporters in Congress to fight, saying in May that a ‘good’ shutdown may be needed to advance his agenda. Republicans are trying to demonstrate unity after months of division over major legislation, including a repeal of Obamacare.”
July 24 – Bloomberg (Alex Harris): “The Treasury Department got a clear message from investors that they’re starting to get concerned another showdown over the U.S. debt ceiling may get ugly. The government’s auction Monday of $39 billion of three-month bills attracted the lowest demand of any other sale of the securities since June 2009. The bills, which mature around when the Treasury is estimated to run out of money unless lawmakers agree to extend the statutory limit on the nation’s borrowing, were sold at a rate of 1.18%, the highest since October 2008.”
July 27 – Bloomberg (Margaret Talev): “White House chief strategist Steve Bannon supports paying for middle-class tax cuts with a new top rate of 44% for Americans who make more than $5 million a year, according to a person familiar… It’s unclear whether President Donald Trump would support the move, which would bring the top rate, currently 39.6%, to the highest level in 30 years. Trump has said he’s focused on tax changes that would help the middle class, but an analysis this month of the tax outline the White House released in April shows it would mostly benefit top earners.”
July 25 – Reuters (John Benny): “A final decision on a steel trade policy may have to wait until other top-priority issues on his agenda get addressed, U.S. President Donald Trump told the Wall Street Journal… The administration would take time in making a decision on whether to block steel imports… Trump had previously initiated a 'Section 232' review of the U.S. steel industry that allows for the imposition of tariffs or quotas on imports if they are found to threaten national security. The law, which has been used twice before - to investigate oil in 1999 and iron and steel in 2001 - allows the president to impose restrictions on imports for reasons of national security.”
China Bubble Watch:
July 23 – New York Times (Keith Bradsher and Sui-Lee Wee): “Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about ‘gray rhinos’ — large and visible problems in the economy that are ignored until they start moving fast. The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires. Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a ‘gray rhinoceros,’ without naming specific companies.”
July 24 – New York Times (David Barboza): “The acquisitive Chinese conglomerate HNA Group moved to allay concerns about its ownership structure… by releasing a statement showing that its biggest shareholder had recently shifted from a mysterious businessman to a foundation it set up in New York. The company said that its largest shareholder, a private businessman in China named Guan Jun, had recently donated his 30% stake in the company to HNA’s charitable organization, the Hainan Cihang Charity Foundation. Combined with the 22.8% stake held by HNA’s sister charity in China, HNA says it is now 52% owned by the Cihang foundations.”
July 23 – Bloomberg: “Several Chinese banks that helped fund HNA Group Co.’s global acquisition spree are losing their appetite for financing the company, according to people familiar with the matter. Three of the banks have decided to stop extending new loans to HNA, said the people… One made the decision early this year, the second acted a couple of months ago and the third moved recently, the people said. A fourth bank trimmed its exposure to the company over the past few months and reduced the size of a credit line, one of the people said, without providing further details.”
July 25 – Bloomberg (Laurence Arnold and Prudence Ho): “For a company regularly in the news for its frequent and wide-ranging acquisitions, China’s HNA Group Co. remains shrouded in mystery. Chinese and American government officials are seeking more information about the company’s ownership -- though for very different reasons -- and the European Central Bank may open a review of its own. Once a little-known airline operator, the company took on billions of dollars in debt as it made more than $40 billion of acquisitions over six continents since the start of 2016. With interests in tourism, logistics and financial services, it’s now the biggest shareholder of such well-known names as Hilton Worldwide Holdings Inc. and Deutsche Bank AG.”
July 23 – Wall Street Journal (Lingling Wei and Chao Deng): “China’s government reined in one of its brashest conglomerates with the approval of President Xi Jinping, according to people with knowledge of the action—a mark that the broader government clampdown on large private companies comes right from the top of China’s leadership. The measures, with President Xi’s previously unreported approval last month, bar state-owned banks from making new loans to property giant Dalian Wanda Group to help fuel its foreign expansion. The cutoff in bank financing for the company’s foreign investments highlights Beijing’s changing view of a series of Wanda’s recent overseas acquisitions as irrational and overpriced, these people say.”
July 22 – New York Times (Paul Mozur and Carolyn Zhang): “Facebook is the world’s largest social network, with more than two billion users. LinkedIn was sold to Microsoft for $26 billion last year. And Apple is Apple, the most valuable company in the world. In most local markets, it would be a surprise if any one of these companies were floundering. But in China, the real shock is that their troubles no longer surprise anyone. Just in the past few weeks, Facebook had one of its most popular apps blocked by the Chinese government. LinkedIn… had its local boss step down amid tepid results in the country. And Apple announced a billion-dollar investment to comply with local law as it continued to watch Chinese demand for its iPhones fade. This summer of challenge for the three companies offers a broad illustration of just how varied the obstacles have become for foreign companies in China. They also show in stark terms why this vast market has been frustratingly difficult for outsiders.”
July 25 – Reuters (Ryan Woo, Kevin Yao and Stella Qiu): “All major Chinese enterprises owned by the central government will be turned into limited liability companies or joint-stock firms by the end of the year as part of reforms aimed at overhauling their unwieldy structures. Beijing is trying to revive China's bloated state-owned sector and create ‘bigger and stronger’ conglomerates capable of competing on the global stage. Restructuring state-owned enterprises (SOEs) will separate government administration from management of day-to-day business operations, one step toward greater efficiency.”
Europe Watch:
July 27 – Bloomberg (Alessandro Speciale): “Germany’s grip over the euro area’s financial institutions is getting firmer. With the reappointment… of Werner Hoyer as president of the European Investment Bank, Germany’s hold over three key roles for the region’s economy was reaffirmed. A fourth one -- by far the most important -- could follow. Bundesbank President Jens Weidmann is a frequently mentioned candidate to replace Italy’s Mario Draghi when his term as European Central Bank’s president runs out in October 2019… Further complicating the succession talks will be the large number of European posts coming up for grabs in the next two years, as well as French President’s Emmanuel Macron stated intention of creating a euro-area finance minister.”
July 24 Financial Times (Michael Hunter): “Could zombies be keeping Mario Draghi awake at night? Investors remain highly sensitive to the outlook for the start of the reduction, or tapering, of the European Central Bank’s €60bn monthly stimulus spending. As the scrutiny of the ECB president’s every utterance continues, there is some eye-catching analysis from Bank of America Merrill Lynch on what could be an important factor in his thinking on tapering. It points toward so-called ‘zombie’ companies, or those that depend on ultra-loose monetary policy for credit provision. ‘Although corporate leverage has helpfully declined over the last few years, we still find that 9% of firms have very weak interest coverage metrics in Europe,’ says the bank’s Barnaby Martin, credit strategist. The research defines a zombie company as one with an interest coverage ratio ‘at or below 1 times’ earnings.”
July 25 – Reuters (Paul Carrel and Irene Preisinger): “German business morale hit a record high in July as ‘euphoric’ manufacturers, shrugging off the impact of a strong euro, anticipated a surge in already robust exports from Europe's biggest economy. The Munich-based Ifo economic institute said… its business climate index, based on a monthly survey of some 7,000 firms, hit its third record high in as many months with a rise to 116.0 from 115.2 in June.”
Central Bank Watch:
July 24 – Bloomberg (Tanvir Sandhu): “The European Central Bank has given the green light to summer carry trades as volatility remains contained and the policy meetings in September and October are likely reserved to outline further details on quantitative easing, buying more time for carry, Bloomberg strategist Tanvir Sandhu writes. Italian bonds offer one of the most attractive carry and rolldown across European government bonds, with the five-year bucket three-month carry and roll at 16 bps and one-year at 70 bps. That compares with one-year of 30 bps for 10-year bunds and 42 bps for bonos. Given that carry trades are implicitly short volatility, two-year Italy stands out as the most attractive on a vol-adjusted basis. Since earning the full carry and rolldown assumes an unchanged yield curve, adjusting for volatility will provide a more realistic indicator of profitability.”
Global Bubble Watch:
July 22 – Financial Times (Chris Flood): “Vanguard is closing in on BlackRock’s title as the world’s largest asset manager after pulling in more than $1bn a day of investor money since the start of the year. The two heavyweights of the investment industry are attracting unprecedented inflows into their low-cost exchange traded funds amid rising investor dissatisfaction with the high fees and poor performance of active managers that strive to beat the market. Investors ploughed $215bn into Vanguard’s funds in the first six months of the year, far outpacing new business growth for BlackRock, which pulled in $168bn over the same period.”
July 26 – Financial Times (Eric Platt): “Investor enthusiasm for corporate debt has neared levels not seen since before the start of the credit crisis, in a deepening endorsement of a global economic recovery that has already propelled US stock markets to record heights. In several parts of the US bond markets, companies are now able to raise money at a lower cost, relative to government bonds, than they have for the past decade… ‘This is a continuation of this hunt for yield that you have seen for the last couple of years,’ said Brian Kennedy, a portfolio manager with Loomis Sayles. ‘Between the economic backdrop, lack of yield around the world and the buyers out of Asia and Europe, the investment grade and high-yield markets are the sweet spots for people who want yield.’”
July 23 – Financial Times (Laura Noonan): “The men running two of Wall Street’s biggest banks saw the value of their shareholdings rise by a combined $314m in 2016 as stock market prices rocketed in the aftermath of Donald Trump’s election as US president. But while Jamie Dimon and Lloyd Blankfein each enjoyed $150m-plus rises in the value of their stock and options in JPMorgan Chase and Goldman Sachs, respectively, the average gains for the other 18 best-paid chief executives at international banks last year was $4m.”
July 25 – Reuters (Gertrude Chavez-Dreyfuss and Anna Irrera): “Wall Street's main regulator said on Tuesday that initial coin offerings (ICOs), a means of crowdfunding for blockchain technology companies, should be subject to the same safeguards required in traditional securities sales. ICOs have become a bonanza for digital currency entrepreneurs, allowing them to raise millions quickly by creating and selling digital ‘tokens’ with no regulatory oversight. But the Securities and Exchange Commission (SEC) has said that the tokens can be considered securities, and therefore, may need to be registered unless a valid exemption applies.”
Fixed Income Bubble Watch:
July 23 – Financial Times (Attracta Mooney): “Investors piled more than $355bn into bond funds in the first five months of 2017 despite concerns that the fixed-income market is set for an unprecedented shake-up as central banks shift towards normalising monetary policy. The surge of money has put fixed-income funds on course to beat 2016’s full-year inflows of $375bn… The net inflows are already larger than the amount of money invested in fixed income funds over the entire 2013 and 2015. The biggest winners this year include Pimco’s income fund, T Rowe Price’s new income fund that invests in US bonds, and a Vanguard index fund investing in global fixed income. These products have had inflows of between $4bn and $27bn since the start of the year.”
July 23 – Financial Times (Attracta Mooney): “Bob Michele, a bond fund veteran, is more worried than he has ever been. The head of global fixed income at JPMorgan Asset Management, the US fund house, has spent almost four decades investing in bonds. The 57-year-old… is gearing up for the most demanding period of his career. ‘The next 18 months are going to be incredibly challenging. I am not an equity investor, but I can just imagine how equity investors felt in 1999, during the dotcom bubble,’ he says… The Nasdaq Composite, the index, lost 78% of its value in the 18 months after the tech bubble collapsed. Mr Michele, like many fixed-income investors, is acutely worried about how central banks’ retreat from monetary easing will affect the bond market.”
Federal Reserve Watch:
July 25 – Wall Street Journal (Kate Davidson): “President Donald Trump is considering renominating Janet Yellen as Federal Reserve chairwoman but also views his economic adviser Gary Cohn as a top candidate, he told The Wall Street Journal… Mr. Trump reiterated that he thinks Ms. Yellen is doing a good job and he has ‘a lot of respect for her,’ and said she is still in the running to serve a second four-year term as leader of the central bank. But he said he also is considering replacing Ms. Yellen with Mr. Cohn, who became Mr. Trump’s National Economic Council director after a 26-year career at Goldman Sachs…”
July 23 – Reuters (Marius Zaharia): “In September 2015, the U.S. Federal Reserve cited risks from China as a key reason for delaying its first interest rate hike in a decade. A wall of Chinese debt maturing in the next few years could jolt the country back into the U.S. central bank's policy deliberations. Two years ago, it was a collapse in Chinese stocks, a surprise yuan devaluation and shrinking foreign exchange reserves that roiled financial markets that delayed the Fed, but it did raise rates three months later and has tightened further since. Now, some see risks emerging in China's dollar-denominated bonds that could give the Fed greater pause for thought as it raises rates, even as other central banks signal a shift from ultra-easy policy. To be sure, Fed officials have not publicly flagged China's debt as a major risk in their policy discussions. However, debt analysts point to the possibility of another September 2015 moment in which the Fed takes its cues from concerns about China.”
July 23 – Financial Times (Gavyn Davies): “Janet Yellen, in an unusually ebullient mood, suggested last month that there may not be a repeat of the Global Financial Crash (GFC) ‘in our lifetimes’. Given the extreme severity of the GFC, that is perhaps a fairly easy hurdle for the central bankers to clear. As a result of the co-ordinated efforts of Basel III and the Financial Stability Board under Mark Carney, the fault lines in the pre-2008 financial architecture have been largely repaired. A more difficult question is whether the current phase of rising markets, which began in 2009, will end because financial asset prices implode under their own weight. There may not be a complete collapse of the entire financial system this time, but there could still be a very unpleasant bear market for investors to endure. It is clear from the latest Fed minutes that ‘a few’ members of the FOMC are more worried about the risk of financial instability than Chair Yellen, but even they seem reluctant to tighten monetary or prudential policy unless the Fed’s dual mandate, aimed at low inflation and maximum employment, is under threat.”
July 26 – Bloomberg (Craig Torres): “Federal Reserve officials said they would begin running off their $4.5 trillion balance sheet ‘relatively soon’ and left their benchmark policy rate unchanged as they assess progress toward their inflation goal. The start of balance-sheet normalization -- possibly as soon as September -- is another policy milestone in an economic recovery now in its ninth year. The Fed bought trillions of dollars of securities to lower long-term borrowing costs after cutting the main interest rate to zero in December 2008.”
U.S. Bubble Watch:
July 25 – Reuters (Lucia Mutikani): “U.S consumer confidence jumped to a near 16-year high in July amid optimism over the labor market while house prices maintained their upward trend in May, which could boost consumer spending after recent sluggishness… ‘This brightens the outlook for the economy as we enter the second half of the year,’ said Chris Rupkey, chief economist at MUFG... ‘We expect Fed officials will continue with their gradual pace of rate hikes secure in the knowledge that a confident consumer means that more spending is on the way.’”
July 26 – Bloomberg (Patricia Laya): “The U.S. housing market is stabilizing near 10-year highs, according to government data Wednesday that showed sales of new homes were slightly less than forecast. Single-family home sales increased 0.8% m/m to 610k annualized pace (est. 615k). Median sales price fell 3.4% y/y to $310,800. Supply of homes crept up to 5.4 months from 5.3 months; 272,000 new houses were on market at end of June.”
July 25 – Bloomberg (Patricia Laya): “Steady price gains in 20 U.S. cities in May indicate that a tight supply of properties paired with increased demand is boosting home values, according… S&P CoreLogic Case-Shiller… 20-city property values index increased 5.7% y/y (est. 5.8%). National price gauge advanced 5.6% y/y. An shortage of listings is still behind the rapid appreciation of home prices, particularly in high-demand areas such as Portland, Oregon, and Seattle, where values have surpassed pre-recession peaks.”
July 27 – Wall Street Journal (Michael Wursthorn): “Wall Street brokerages are pushing customers to take out billions of dollars in loans backed by stocks and bonds, a trend that yields lucrative fees for the firms but poses risks for borrowers. Executives at Morgan Stanley earlier this month highlighted these loans to individuals as a big growth area and revenue driver, saying the loans helped expand the bank’s overall wealth lending by about $3.5 billion, or 6%, in the second quarter. On Thursday, Goldman Sachs… took a step toward growing its securities-based lending business through a new partnership with Fidelity Investments. For brokerages, these so-called securities-backed loans have become a reliable source of revenue in the years since the financial crisis as firms have begun moving away from a business model of charging commissions for trading to a system of fees based on assets under management.”
Japan Watch:
July 24 – Bloomberg (Andy Sharp): “Former Defense Minister Shigeru Ishiba overtook scandal-hit Prime Minister Shinzo Abe as the best person to lead Japan, an opinion poll showed… Ishiba was seen as the most appropriate choice for prime minister by 20.4% of respondents to the poll conducted by the Sankei newspaper and FNN TV network, while 19.7% picked Abe. In a similar survey in December, Ishiba’s 10.9% lagged behind the 34.5% who favored Abe.”
July 25 – Reuters (Tetsushi Kajimoto): “The two new members of the Bank of Japan's policy board said… that the central bank should continue efforts to achieve its 2% inflation goal and it was premature to debate an exit from its massive monetary stimulus. Goushi Kataoka, a 44-year-old former economist… and an advocate of massive money printing, said he wants to see the price goal achieved quickly although he cannot say when that can be. The other new board member, Hitoshi Suzuki, a 63-year-old former deputy president of Bank of Tokyo-Mitsubishi UFJ… said it was ‘dangerous’ to markets to debate an exit from the stimulus now.”
EM Bubble Watch:
July 24 – Bloomberg (Natasha Doff): “The rapid growth of a BlackRock Inc. exchange-traded fund that tracks emerging-market debt is causing jitters among investors. The iShares JP Morgan EM Local Government Bond ETF, ticker IEML, has doubled in size this year, mopping up more than $3 billion of inflows as investors reach for average yields as high as 4.72% in developing economies. The risk is that if the carry trade unwinds, as tends to happen eventually, investors could race for the exit all at once and send the fund tumbling.”
July 24 – Wall Street Journal (Carolyn Cui): “Venezuelan bond prices tumbled to their lowest levels of the year as default fears grew following U.S. President Donald Trump’s threat to impose sanctions on the country. State-owned oil producer Petróleos de Venezuela SA’s bonds due in November fell 2.9% late in New York trading Monday and have tumbled 7.6% over the past six sessions, now at their lowest levels since December… The government’s bonds due in 2038 were down 10% during the period after falling 4.3% on Monday.”
Leveraged Speculation Watch:
July 26 – Bloomberg (Katia Porzecanski): “Paulson & Co., the investment firm that shot to fame betting on the collapse of the U.S. housing market, is closing its 2-year-old long-short equity fund in an effort to shift strategies after a steep drop in assets. ‘We are re-focusing the funds on our core areas of expertise in merger arbitrage and distressed credit, where our assets have been growing,’ founder John Paulson said in a letter to investors… ‘We thank the long-short team for their efforts on behalf of the company.’”
Geopolitical Watch:
July 26 – Bloomberg (Stepan Kravchenko): “Russia threatened to retaliate against new sanctions passed by the U.S. House of Representatives, saying they made it all but impossible to achieve the Trump administration’s goal of improved relations. The measures push U.S.-Russia ties into uncharted territory and ‘don’t leave room for the normalization of relations’ in the foreseeable future, Deputy Foreign Minister Sergei Ryabkov said… Hope ‘is dying’ for improved relations because the scale of ‘the anti-Russian consensus in Congress makes dialogue impossible and for a long time,’ Konstantin Kosachyov, chairman of the international affairs committee in Russia’s upper house of parliament, said… Russia should prepare a response to the sanctions that’s ‘painful for the Americans,’ he said.”
July 25 – CNBC (Nyshka Chandran): “The rivalry between India and China is heating up as the heavyweight economies face territorial tensions on both land and sea. A fierce border standoff in Bhutan's Doklam region — triggered by a Chinese road construction project in a disputed area and a Bhutanese request for Indian help — is now entering its second month with soldiers from both sides engaged in skirmishes. But a new confrontation in the relationship is arising as New Delhi is growing concerned about a Chinese naval presence in its own backyard: the Indian Ocean. ‘As the [Doklam] crisis stretches on, China is likely to seek ways to pressure India, both on the border and elsewhere, and this will compound the cycle of competition that is already well underway,’ Shashank Joshi, research fellow at the Royal United Services Institute, said…”
July 24 – South China Morning Post (David Barboza): “China… issued its strongest warning yet to India over their month-long border dispute, saying Beijing would protect its sovereignty ‘at all costs’. Observers believe that China's stepping up of its rhetoric, which came before a high-level security meeting that involves both Chinese and Indian security officials, gives Beijing more bargaining power in the talks with New Delhi. Defence ministry spokesman Wu Qian also said that China planned to strengthen its ‘targeted deployment and exercises’ along the disputed border, and that India should ‘have no illusions’ about its military's capabilities or commitment.”
July 24 – Reuters (Michael Martina and Matthew Tostevin): “China’s Foreign Ministry has urged a halt to oil drilling in a disputed part of the South China Sea, where Spanish oil company Repsol had been operating in cooperation with Vietnam. Drilling began in mid-June in Vietnam's Block 136/3… The block lies inside the U-shaped 'nine-dash line' that marks the vast area that China claims in the sea and overlaps what it says are its own oil concessions. Foreign Ministry spokesman Lu Kang said China had indisputable sovereignty over the Spratly Islands, which China calls the Nansha islands, and jurisdiction over the relevant waters and seabed.”
This week marks the five-year anniversary of Draghi’s “whatever it takes.” I remember the summer of 2012 as if it were yesterday. From the Bubble analysis perspective, it was a Critical Juncture – for financial markets and risk perceptions, for policy and for the global economy. Italian 10-year yields hit 6.60% on July 24, 2012. On that same day, Spain saw yields surge to 7.62%. Italian banks were in freefall, while European bank stocks (STOXX600) were rapidly approaching 2009 lows. Having risen above 55 in 2011, Deutsche Bank traded at 23.23 on July 25, 2012.
It was my view at the time that the “European” crisis posed a clear and immediate threat to the global financial system. A crisis of confidence in Italian debt (and Spanish and “periphery” debt) risked a crisis of confidence in European banks – and a loss of confidence in European finance risked dismantling the euro monetary regime.
Derivatives markets were in the crosshairs back in 2012. A crisis of confidence in European debt and the euro would surely have tested the derivatives marketplace to the limits. Moreover, with the big European banks having evolved into dominant players in derivatives trading (taking share from U.S. counterparts after the mortgage crisis), counter-party issues were at the brink of becoming a serious global market problem. It’s as well worth mentioning that European banks were major providers of finance for emerging markets.
From the global government finance Bubble perspective, Draghi’s “whatever it takes” was a seminal development. The Bernanke Fed employed QE measures during the 2008 financial crisis to accommodate deleveraging and stabilize dislocated markets. Mario Draghi leapfrogged (helicopter) Bernanke, turning to open-ended QE and other extreme measures to preserve euro monetary integration. No longer would QE be viewed as a temporary crisis management tool. And just completely disregard traditional monetary axiom that central banks should operate as lender of last resort in the event of temporary illiquidity – but must avoid propping up the insolvent. “Whatever it takes” advocates covert bailouts for whomever and whatever a small group of central bankers chooses – illiquid, insolvent, irredeemable or otherwise. Now five years after the first utterance of “whatever it takes,” the Draghi ECB is still pumping out enormous amounts of “money” on a monthly basis (buying sovereigns and corporates) with rates near zero.
Keep in mind that while “whatever it takes” first radiated from Draghi’s lips, markets soon surmised that the ECB president was speaking on behalf of the cadre of leading global central bankers. After all, ECB (desperate) measures were followed promptly by the return of QE by the Federal Reserve, the Bank of Japan, the Swiss National Bank and others. It’s worth mentioning that the Fed’s balance sheet totaled about $2.8 TN in July 2012, only to rise to $4.4 TN by September 2014. Amazingly, Bank of Japan assets have expanded about three-fold since 2012 to approach $5.0 TN.
Going back to 2002, the burst “tech” Bubble was evolving into a full-fledged U.S. corporate debt crisis. Back then Fed governor Bernanke’s talk of “helicopter money” and the “government printing press” profoundly altered market dynamics. It may not have at the time been loud and clear. But putting markets on notice that the Fed was contemplating extraordinary reflationary measures was a far-reaching development for corporate debt. Facing a liquidity crisis in 2002, Ford bonds had become a popular short in the marketplace. Almost single-handedly, Dr. Bernanke’s speeches proved a catalyst for the speculating community reversing the Ford (and corporate debt) bond short - and then going long. The impact on general market liquidity was profound. And with the corporate debt crisis resolved there was nothing to hold back the burgeoning mortgage finance Bubble.
What “Helicopter Ben” accomplished with U.S. corporate bonds, “Super Mario” surpassed with Trillions of European sovereign, corporate and financial debt. Italian bond yields ended 2012 at 4.5%, down 210 bps from July highs. Spain’s 10-yields declined about 250 bps to 5.00% in less than six months. “Whatever it takes” almost immediately transformed Italian and Spanish debt from favored shorts to about the most enticing speculative long securities anywhere in the world.
Draghi’s utterance ‘The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,’ was a direct declaration to speculators with short positions in the euro currency, along with shorts in Italian, Spanish and periphery debt. Immediately Cover Your Shorts and Go Long. Five years on, Italian yields hover around 2.10% and Spanish yields sit at about 1.50% - emblematic of arguably one of history’s most spectacular securities market mispricings. European bank stocks have gained better than 50%. Draghi not only bloodied the shorts, be ensured spectacular profits for those levered long European debt – and the riskier the Credit the greater the reward.
Central bankers should not be in the business of playing favorites in the markets. So how did it get to the point where they seek to incentivize longs (levered and otherwise) while routinely punishing the shorts? Because central bankers followed the Bernanke Fed into a policy course of using rising securities and asset prices as a reflationary mechanism for the overall economy. As we’ve witnessed now for going on a decade, that’s a slippery slope. Adopt pro-Bubble policies and there will be no turning back. Inflate an epic Bubble and you own it for the duration.
“The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does.” The euro flew and it soared incredibly high, trading above 1.50 to the dollar in early-2008. As fundamentally flawed as the euro monetary experiment has been, it has been buoyed by the fundamentally weaker dollar. The euro flew on the back of highly speculative flows, much of it flowing from an overcharged U.S. Credit system. U.S. monetary policy had been too loose for too long. Unstable finance has been nurtured for what seems like an eternity. The U.S. exported its Credit Bubble to the world.
Going all the way back to the late-nineties, Italy and the European periphery were a leveraged speculator community darling. Indeed, the Euro Convergence Trade granted huge profits to the hedge fund community. The egregious amounts of leverage employed (directly and through derivatives) was illuminated with the 1998 implosion of Long-Term Capital Management (LTCM).
The LTCM fiasco contributed to an 18-month bear market that saw the euro trade down to 0.87 vs. the dollar in early 2002. With Dr. Bernanke and his radical theories on reflationary policymaking arriving on the scene in 2002, it’s no coincidence that the euro then embarked on a multiyear rally. The euro traded up to 1.00 late in 2002, 1.20 in 2003, 1.35 in 2004, 1.45 in 2007 and 1.58 in 2008. It’s furthermore no coincidence that Italian bond prices tracked the euro higher. After trading at 5.5% in the first-half of 2002, Italian yields dropped to 3.22% by October 2005. Greek bonds followed an almost identical trajectory, as both already highly-indebted nations took full advantage of the market’s insatiable demand for European peripheral debt.
Draghi has lately grown accustomed to patting himself on the back. He saved the euro. He saved Europe’s big banks. He kept Greece and Italy in the euro currency. His policies have spurred European economic recovery. But Draghi and global central bankers also inflated history’s greatest speculative Bubble. Celebration will be in order only if policies can be normalized without the whole thing coming crashing down.
July 25 – BloombergBusinessweek (Jana Randow): “Euro-area governments have saved almost 1 trillion euros ($1.16 trillion) in interest payments since 2008 as record-low European Central Bank rates depress bond yields at a time when state treasurers are also reducing debt. That’s according to calculations by Germany’s Bundesbank, which is urging finance ministers in the 19-nation region to make provisions for when interest rates start to rise. Italy, the world’s third-most indebted country, has benefited most, with savings exceeding 10% of gross domestic product.”
Italy has been the biggest beneficiary of collapsing market yields. The problem is that its debt load still expanded to a distressing 130% of GDP. Italy remains only a jump in yields away from trouble, and I suspect this helps explain why Draghi has been so reticent to pull back on the stimulus throttle. After trading below 1.90% in mid-June, Italian yields surged to 2.33% earlier this month as markets began to contemplate global central bankers moving toward concerted normalization.
The FOMC this week confirmed the dovishness of Yellen’s testimony before congress. Apparently, over the past month Fed rate “normalization” has been scaled back to perhaps one more hike this year – and that could be about it. And I just don’t buy the Fed’s recent fixation on below target inflation (GSCI Commodities Index up 4.2% this week on further dollar weakness!).
Something has raised concerns at the FOMC. Could it be European debt markets, with ECB stimulus to be significantly reduced in the months ahead. Or perhaps it’s China and Beijing's determination to rein in some financial excess. EM and all their dollar-denominated debt? Maybe a dysfunctional Washington has supplanted international developments on the worry list – or, understandably, it could be a combination of things.
At least for the week, global markets lost a bit of their recent swagger. While Boeing helped push the Dow to yet another record high, the S&P500 ended the week little changed. The broader market underperformed. The highflying technology stocks were unimpressive in the face of generally robust earnings. The VIX rose to 10.29, with some volatility beginning to seep into stock trading. Commodities caught a big bid, while bond yields began moving north again. The currencies remain unsettled.
Thinking back five years, U.S. markets at the time were incredibly complacent. The risk of crisis in Europe was downplayed: Policymakers had it all under control. Sometime later, the Financial Times - in a fascinating behind-the-scenes exposé - confirmed the gravity of the situation and how frazzled European leaders were at the brink of losing control. Yet central bankers, once again, saved the day – further solidifying their superhero status.
I’m convinced five years of “whatever it takes” took the global government finance Bubble deeper into perilous uncharted territory. Certainly, markets are more complacent than ever, believing central bankers are fully committed to prolonging indefinitely the securities bull market. Meanwhile, leverage, speculative excess and trend-following flows have had an additional five years to accumulate. Market distortions – including valuations, deeply embedded complacency, and Trillions of perceived safe securities – have become only further detached from reality. And the longer all this unstable finance flows freely into the real economy, the deeper the structural maladjustment.
For the Week:
The S&P500 was about unchanged (up 10.4% y-t-d), while the Dow jumped 1.2% (up 10.5%). The Utilities slipped 0.3% (up 8.4%). The Banks added 0.5% (up 3.7%), and the Broker/Dealers rose 1.0% (up 14.0%). The Transports dropped 2.6% (up 2.0%). The S&P 400 Midcaps declined 0.7% (up 6.1%), and the small cap Russell 2000 dipped 0.5% (up 5.3%). The Nasdaq100 slipped 0.2% (up 21.5%), and the Morgan Stanley High Tech index fell 0.8% (up 25.5%). The Semiconductors dropped 1.3% (up 20.6%). The Biotechs declined 1.0% (up 29.7%). With bullion up $15, the HUI gold index rallied 2.3% (up 7.7%).
Three-month Treasury bill rates ended the week at 106 bps. Two-year government yields added a basis point to 1.35% (up 16bps y-t-d). Five-year T-note yields increased three bps to 1.83% (down 9bps). Ten-year Treasury yields rose five bps to 2.29% (down 16bps). Long bond yields jumped nine bps to 2.90% (down 17bps).
Greek 10-year yields rose 11 bps to 5.33% (down 170bps y-t-d). Ten-year Portuguese yields added two bps to 2.93% (down 82bps). Italian 10-year yields gained five bps to 2.12% (up 31bps). Spain's 10-year yields rose seven bps to 1.53% (up 15bps). German bund yields increased four bps to 0.54% (up 34bps). French yields rose five bps to 0.81% (up 13bps). The French to German 10-year bond spread widened one to 27 bps. U.K. 10-year gilt yields gained four bps to 1.22% (down 2bps). U.K.'s FTSE equities index fell 1.1% (up 3.2%).
Japan's Nikkei 225 equities index declined 0.7% (up 4.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.08% (up 4bps). France's CAC40 gained 0.3% (up 5.5%). The German DAX equities index declined 0.6% (up 5.9%). Spain's IBEX 35 equities index rallied 1.1% (up 12.7%). Italy's FTSE MIB index rose 1.1% (up 11.4%). EM equities were mixed. Brazil's Bovespa index gained 1.3% (up 8.7%), while Mexico's Bolsa declined 0.7% (up 12.2%). South Korea's Kospi sank 2.0% (up 18.5%). India’s Sensex equities index added 0.9% (up 21.3%). China’s Shanghai Exchange increased 0.5% (up 4.8%). Turkey's Borsa Istanbul National 100 index rose 0.8% (up 37.8%). Russia's MICEX equities index slipped 0.4% (down 14.2%).
Junk bond mutual funds saw outflows of $21 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined four bps to 3.92% (up 44bps y-o-y). Fifteen-year rates slipped three bps to 3.20% (up 42bps). The five-year hybrid ARM rate fell three bps to 3.18% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.11% (up 42bps).
Federal Reserve Credit last week declined $5.1bn to $4.435 TN. Over the past year, Fed Credit added $0.4bn. Fed Credit inflated $1.625 TN, or 58%, over the past 246 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $6.0bn last week to $3.325 TN. "Custody holdings" were up $105bn y-o-y, or 3.3%.
M2 (narrow) "money" supply last week gained $6.0bn to a record $13.608 TN. "Narrow money" expanded $740bn, or 5.8%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits dropped $50.2bn, while Savings Deposits jumped $52.1bn. Small Time Deposits added $1.3bn. Retail Money Funds were little changed.
Total money market fund assets jumped $23.28bn to $2.640 TN. Money Funds fell $75bn y-o-y (2.8%).
Total Commercial Paper gained $7.4bn to $978bn. CP declined $49bn y-o-y, or 4.7%.
Currency Watch:
The U.S. dollar index declined 0.6% to 93.26 (down 8.9% y-t-d). For the week on the upside, the Swedish krona increased 1.5%, the Norwegian krone 1.3%, the British pound 1.1%, the Australian dollar 0.9%, the Canadian dollar 0.9%, the New Zealand dollar 0.8%, the euro 0.8%, the Singapore dollar 0.4%, the Japanese yen 0.4% and the Brazilian real 0.4%. On the downside, the Swiss franc declined 2.4%, the South African rand 0.8%, the Mexican peso 0.7% and the South Korean won 0.3%. The Chinese renminbi gained 0.44% versus the dollar this week (up 3.09% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 4.2% (down 3.0% y-t-d). Spot Gold gained 1.2% to $1,270 (up 10.2%). Silver rose 1.4% to $16.695 (up 4.5%). Crude surged $3.94 to $49.71 (down 8%). Gasoline surged 7.2% (unchanged), while Natural Gas declined 1.0% (down 21%). Copper jumped 5.6% (up 15%). Wheat dropped 3.7% (up 18%). Corn fell 1.4% (up 10%).
Trump Administration Watch:
July 27 – Bloomberg (Sahil Kapur and Erik Wasson): “The House is set to leave for its August recess without having taken the first essential step to overhauling the U.S. tax code: agreeing on a 2018 budget resolution. Disputes among House Republicans over spending levels and the controversial border-adjusted tax proposal are preventing Speaker Paul Ryan from winning enough support to schedule a floor vote on the budget that a House panel approved last week. With House members planning to leave Washington Friday for a five-week recess, the lack of a budget is raising doubts that a tax rewrite -- one of President Donald Trump’s top priorities -- can get done this year, or even before the 2018 elections. ‘Clearly, no budget, no tax reform,’ said the House’s chief tax writer, Representative Kevin Brady, a Texas Republican.”
July 25 – Bloomberg (Erik Wasson and Roxana Tiron): “House Republicans this week are increasing the possibility of a government shutdown in October by moving forward with a $788 billion spending bill that complies with President Donald Trump’s demands to boost the military, reduce clean-energy programs and fund a wall on the U.S.-Mexico border. Those priorities, especially $1.6 billion in wall funding, guarantee House and Senate Democratic leaders will oppose the bill. Trump has urged his Republican supporters in Congress to fight, saying in May that a ‘good’ shutdown may be needed to advance his agenda. Republicans are trying to demonstrate unity after months of division over major legislation, including a repeal of Obamacare.”
July 24 – Bloomberg (Alex Harris): “The Treasury Department got a clear message from investors that they’re starting to get concerned another showdown over the U.S. debt ceiling may get ugly. The government’s auction Monday of $39 billion of three-month bills attracted the lowest demand of any other sale of the securities since June 2009. The bills, which mature around when the Treasury is estimated to run out of money unless lawmakers agree to extend the statutory limit on the nation’s borrowing, were sold at a rate of 1.18%, the highest since October 2008.”
July 27 – Bloomberg (Margaret Talev): “White House chief strategist Steve Bannon supports paying for middle-class tax cuts with a new top rate of 44% for Americans who make more than $5 million a year, according to a person familiar… It’s unclear whether President Donald Trump would support the move, which would bring the top rate, currently 39.6%, to the highest level in 30 years. Trump has said he’s focused on tax changes that would help the middle class, but an analysis this month of the tax outline the White House released in April shows it would mostly benefit top earners.”
July 25 – Reuters (John Benny): “A final decision on a steel trade policy may have to wait until other top-priority issues on his agenda get addressed, U.S. President Donald Trump told the Wall Street Journal… The administration would take time in making a decision on whether to block steel imports… Trump had previously initiated a 'Section 232' review of the U.S. steel industry that allows for the imposition of tariffs or quotas on imports if they are found to threaten national security. The law, which has been used twice before - to investigate oil in 1999 and iron and steel in 2001 - allows the president to impose restrictions on imports for reasons of national security.”
China Bubble Watch:
July 23 – New York Times (Keith Bradsher and Sui-Lee Wee): “Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about ‘gray rhinos’ — large and visible problems in the economy that are ignored until they start moving fast. The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires. Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a ‘gray rhinoceros,’ without naming specific companies.”
July 24 – New York Times (David Barboza): “The acquisitive Chinese conglomerate HNA Group moved to allay concerns about its ownership structure… by releasing a statement showing that its biggest shareholder had recently shifted from a mysterious businessman to a foundation it set up in New York. The company said that its largest shareholder, a private businessman in China named Guan Jun, had recently donated his 30% stake in the company to HNA’s charitable organization, the Hainan Cihang Charity Foundation. Combined with the 22.8% stake held by HNA’s sister charity in China, HNA says it is now 52% owned by the Cihang foundations.”
July 23 – Bloomberg: “Several Chinese banks that helped fund HNA Group Co.’s global acquisition spree are losing their appetite for financing the company, according to people familiar with the matter. Three of the banks have decided to stop extending new loans to HNA, said the people… One made the decision early this year, the second acted a couple of months ago and the third moved recently, the people said. A fourth bank trimmed its exposure to the company over the past few months and reduced the size of a credit line, one of the people said, without providing further details.”
July 25 – Bloomberg (Laurence Arnold and Prudence Ho): “For a company regularly in the news for its frequent and wide-ranging acquisitions, China’s HNA Group Co. remains shrouded in mystery. Chinese and American government officials are seeking more information about the company’s ownership -- though for very different reasons -- and the European Central Bank may open a review of its own. Once a little-known airline operator, the company took on billions of dollars in debt as it made more than $40 billion of acquisitions over six continents since the start of 2016. With interests in tourism, logistics and financial services, it’s now the biggest shareholder of such well-known names as Hilton Worldwide Holdings Inc. and Deutsche Bank AG.”
July 23 – Wall Street Journal (Lingling Wei and Chao Deng): “China’s government reined in one of its brashest conglomerates with the approval of President Xi Jinping, according to people with knowledge of the action—a mark that the broader government clampdown on large private companies comes right from the top of China’s leadership. The measures, with President Xi’s previously unreported approval last month, bar state-owned banks from making new loans to property giant Dalian Wanda Group to help fuel its foreign expansion. The cutoff in bank financing for the company’s foreign investments highlights Beijing’s changing view of a series of Wanda’s recent overseas acquisitions as irrational and overpriced, these people say.”
July 22 – New York Times (Paul Mozur and Carolyn Zhang): “Facebook is the world’s largest social network, with more than two billion users. LinkedIn was sold to Microsoft for $26 billion last year. And Apple is Apple, the most valuable company in the world. In most local markets, it would be a surprise if any one of these companies were floundering. But in China, the real shock is that their troubles no longer surprise anyone. Just in the past few weeks, Facebook had one of its most popular apps blocked by the Chinese government. LinkedIn… had its local boss step down amid tepid results in the country. And Apple announced a billion-dollar investment to comply with local law as it continued to watch Chinese demand for its iPhones fade. This summer of challenge for the three companies offers a broad illustration of just how varied the obstacles have become for foreign companies in China. They also show in stark terms why this vast market has been frustratingly difficult for outsiders.”
July 25 – Reuters (Ryan Woo, Kevin Yao and Stella Qiu): “All major Chinese enterprises owned by the central government will be turned into limited liability companies or joint-stock firms by the end of the year as part of reforms aimed at overhauling their unwieldy structures. Beijing is trying to revive China's bloated state-owned sector and create ‘bigger and stronger’ conglomerates capable of competing on the global stage. Restructuring state-owned enterprises (SOEs) will separate government administration from management of day-to-day business operations, one step toward greater efficiency.”
Europe Watch:
July 27 – Bloomberg (Alessandro Speciale): “Germany’s grip over the euro area’s financial institutions is getting firmer. With the reappointment… of Werner Hoyer as president of the European Investment Bank, Germany’s hold over three key roles for the region’s economy was reaffirmed. A fourth one -- by far the most important -- could follow. Bundesbank President Jens Weidmann is a frequently mentioned candidate to replace Italy’s Mario Draghi when his term as European Central Bank’s president runs out in October 2019… Further complicating the succession talks will be the large number of European posts coming up for grabs in the next two years, as well as French President’s Emmanuel Macron stated intention of creating a euro-area finance minister.”
July 24 Financial Times (Michael Hunter): “Could zombies be keeping Mario Draghi awake at night? Investors remain highly sensitive to the outlook for the start of the reduction, or tapering, of the European Central Bank’s €60bn monthly stimulus spending. As the scrutiny of the ECB president’s every utterance continues, there is some eye-catching analysis from Bank of America Merrill Lynch on what could be an important factor in his thinking on tapering. It points toward so-called ‘zombie’ companies, or those that depend on ultra-loose monetary policy for credit provision. ‘Although corporate leverage has helpfully declined over the last few years, we still find that 9% of firms have very weak interest coverage metrics in Europe,’ says the bank’s Barnaby Martin, credit strategist. The research defines a zombie company as one with an interest coverage ratio ‘at or below 1 times’ earnings.”
July 25 – Reuters (Paul Carrel and Irene Preisinger): “German business morale hit a record high in July as ‘euphoric’ manufacturers, shrugging off the impact of a strong euro, anticipated a surge in already robust exports from Europe's biggest economy. The Munich-based Ifo economic institute said… its business climate index, based on a monthly survey of some 7,000 firms, hit its third record high in as many months with a rise to 116.0 from 115.2 in June.”
Central Bank Watch:
July 24 – Bloomberg (Tanvir Sandhu): “The European Central Bank has given the green light to summer carry trades as volatility remains contained and the policy meetings in September and October are likely reserved to outline further details on quantitative easing, buying more time for carry, Bloomberg strategist Tanvir Sandhu writes. Italian bonds offer one of the most attractive carry and rolldown across European government bonds, with the five-year bucket three-month carry and roll at 16 bps and one-year at 70 bps. That compares with one-year of 30 bps for 10-year bunds and 42 bps for bonos. Given that carry trades are implicitly short volatility, two-year Italy stands out as the most attractive on a vol-adjusted basis. Since earning the full carry and rolldown assumes an unchanged yield curve, adjusting for volatility will provide a more realistic indicator of profitability.”
Global Bubble Watch:
July 22 – Financial Times (Chris Flood): “Vanguard is closing in on BlackRock’s title as the world’s largest asset manager after pulling in more than $1bn a day of investor money since the start of the year. The two heavyweights of the investment industry are attracting unprecedented inflows into their low-cost exchange traded funds amid rising investor dissatisfaction with the high fees and poor performance of active managers that strive to beat the market. Investors ploughed $215bn into Vanguard’s funds in the first six months of the year, far outpacing new business growth for BlackRock, which pulled in $168bn over the same period.”
July 26 – Financial Times (Eric Platt): “Investor enthusiasm for corporate debt has neared levels not seen since before the start of the credit crisis, in a deepening endorsement of a global economic recovery that has already propelled US stock markets to record heights. In several parts of the US bond markets, companies are now able to raise money at a lower cost, relative to government bonds, than they have for the past decade… ‘This is a continuation of this hunt for yield that you have seen for the last couple of years,’ said Brian Kennedy, a portfolio manager with Loomis Sayles. ‘Between the economic backdrop, lack of yield around the world and the buyers out of Asia and Europe, the investment grade and high-yield markets are the sweet spots for people who want yield.’”
July 23 – Financial Times (Laura Noonan): “The men running two of Wall Street’s biggest banks saw the value of their shareholdings rise by a combined $314m in 2016 as stock market prices rocketed in the aftermath of Donald Trump’s election as US president. But while Jamie Dimon and Lloyd Blankfein each enjoyed $150m-plus rises in the value of their stock and options in JPMorgan Chase and Goldman Sachs, respectively, the average gains for the other 18 best-paid chief executives at international banks last year was $4m.”
July 25 – Reuters (Gertrude Chavez-Dreyfuss and Anna Irrera): “Wall Street's main regulator said on Tuesday that initial coin offerings (ICOs), a means of crowdfunding for blockchain technology companies, should be subject to the same safeguards required in traditional securities sales. ICOs have become a bonanza for digital currency entrepreneurs, allowing them to raise millions quickly by creating and selling digital ‘tokens’ with no regulatory oversight. But the Securities and Exchange Commission (SEC) has said that the tokens can be considered securities, and therefore, may need to be registered unless a valid exemption applies.”
Fixed Income Bubble Watch:
July 23 – Financial Times (Attracta Mooney): “Investors piled more than $355bn into bond funds in the first five months of 2017 despite concerns that the fixed-income market is set for an unprecedented shake-up as central banks shift towards normalising monetary policy. The surge of money has put fixed-income funds on course to beat 2016’s full-year inflows of $375bn… The net inflows are already larger than the amount of money invested in fixed income funds over the entire 2013 and 2015. The biggest winners this year include Pimco’s income fund, T Rowe Price’s new income fund that invests in US bonds, and a Vanguard index fund investing in global fixed income. These products have had inflows of between $4bn and $27bn since the start of the year.”
July 23 – Financial Times (Attracta Mooney): “Bob Michele, a bond fund veteran, is more worried than he has ever been. The head of global fixed income at JPMorgan Asset Management, the US fund house, has spent almost four decades investing in bonds. The 57-year-old… is gearing up for the most demanding period of his career. ‘The next 18 months are going to be incredibly challenging. I am not an equity investor, but I can just imagine how equity investors felt in 1999, during the dotcom bubble,’ he says… The Nasdaq Composite, the index, lost 78% of its value in the 18 months after the tech bubble collapsed. Mr Michele, like many fixed-income investors, is acutely worried about how central banks’ retreat from monetary easing will affect the bond market.”
Federal Reserve Watch:
July 25 – Wall Street Journal (Kate Davidson): “President Donald Trump is considering renominating Janet Yellen as Federal Reserve chairwoman but also views his economic adviser Gary Cohn as a top candidate, he told The Wall Street Journal… Mr. Trump reiterated that he thinks Ms. Yellen is doing a good job and he has ‘a lot of respect for her,’ and said she is still in the running to serve a second four-year term as leader of the central bank. But he said he also is considering replacing Ms. Yellen with Mr. Cohn, who became Mr. Trump’s National Economic Council director after a 26-year career at Goldman Sachs…”
July 23 – Reuters (Marius Zaharia): “In September 2015, the U.S. Federal Reserve cited risks from China as a key reason for delaying its first interest rate hike in a decade. A wall of Chinese debt maturing in the next few years could jolt the country back into the U.S. central bank's policy deliberations. Two years ago, it was a collapse in Chinese stocks, a surprise yuan devaluation and shrinking foreign exchange reserves that roiled financial markets that delayed the Fed, but it did raise rates three months later and has tightened further since. Now, some see risks emerging in China's dollar-denominated bonds that could give the Fed greater pause for thought as it raises rates, even as other central banks signal a shift from ultra-easy policy. To be sure, Fed officials have not publicly flagged China's debt as a major risk in their policy discussions. However, debt analysts point to the possibility of another September 2015 moment in which the Fed takes its cues from concerns about China.”
July 23 – Financial Times (Gavyn Davies): “Janet Yellen, in an unusually ebullient mood, suggested last month that there may not be a repeat of the Global Financial Crash (GFC) ‘in our lifetimes’. Given the extreme severity of the GFC, that is perhaps a fairly easy hurdle for the central bankers to clear. As a result of the co-ordinated efforts of Basel III and the Financial Stability Board under Mark Carney, the fault lines in the pre-2008 financial architecture have been largely repaired. A more difficult question is whether the current phase of rising markets, which began in 2009, will end because financial asset prices implode under their own weight. There may not be a complete collapse of the entire financial system this time, but there could still be a very unpleasant bear market for investors to endure. It is clear from the latest Fed minutes that ‘a few’ members of the FOMC are more worried about the risk of financial instability than Chair Yellen, but even they seem reluctant to tighten monetary or prudential policy unless the Fed’s dual mandate, aimed at low inflation and maximum employment, is under threat.”
July 26 – Bloomberg (Craig Torres): “Federal Reserve officials said they would begin running off their $4.5 trillion balance sheet ‘relatively soon’ and left their benchmark policy rate unchanged as they assess progress toward their inflation goal. The start of balance-sheet normalization -- possibly as soon as September -- is another policy milestone in an economic recovery now in its ninth year. The Fed bought trillions of dollars of securities to lower long-term borrowing costs after cutting the main interest rate to zero in December 2008.”
U.S. Bubble Watch:
July 25 – Reuters (Lucia Mutikani): “U.S consumer confidence jumped to a near 16-year high in July amid optimism over the labor market while house prices maintained their upward trend in May, which could boost consumer spending after recent sluggishness… ‘This brightens the outlook for the economy as we enter the second half of the year,’ said Chris Rupkey, chief economist at MUFG... ‘We expect Fed officials will continue with their gradual pace of rate hikes secure in the knowledge that a confident consumer means that more spending is on the way.’”
July 26 – Bloomberg (Patricia Laya): “The U.S. housing market is stabilizing near 10-year highs, according to government data Wednesday that showed sales of new homes were slightly less than forecast. Single-family home sales increased 0.8% m/m to 610k annualized pace (est. 615k). Median sales price fell 3.4% y/y to $310,800. Supply of homes crept up to 5.4 months from 5.3 months; 272,000 new houses were on market at end of June.”
July 25 – Bloomberg (Patricia Laya): “Steady price gains in 20 U.S. cities in May indicate that a tight supply of properties paired with increased demand is boosting home values, according… S&P CoreLogic Case-Shiller… 20-city property values index increased 5.7% y/y (est. 5.8%). National price gauge advanced 5.6% y/y. An shortage of listings is still behind the rapid appreciation of home prices, particularly in high-demand areas such as Portland, Oregon, and Seattle, where values have surpassed pre-recession peaks.”
July 27 – Wall Street Journal (Michael Wursthorn): “Wall Street brokerages are pushing customers to take out billions of dollars in loans backed by stocks and bonds, a trend that yields lucrative fees for the firms but poses risks for borrowers. Executives at Morgan Stanley earlier this month highlighted these loans to individuals as a big growth area and revenue driver, saying the loans helped expand the bank’s overall wealth lending by about $3.5 billion, or 6%, in the second quarter. On Thursday, Goldman Sachs… took a step toward growing its securities-based lending business through a new partnership with Fidelity Investments. For brokerages, these so-called securities-backed loans have become a reliable source of revenue in the years since the financial crisis as firms have begun moving away from a business model of charging commissions for trading to a system of fees based on assets under management.”
Japan Watch:
July 24 – Bloomberg (Andy Sharp): “Former Defense Minister Shigeru Ishiba overtook scandal-hit Prime Minister Shinzo Abe as the best person to lead Japan, an opinion poll showed… Ishiba was seen as the most appropriate choice for prime minister by 20.4% of respondents to the poll conducted by the Sankei newspaper and FNN TV network, while 19.7% picked Abe. In a similar survey in December, Ishiba’s 10.9% lagged behind the 34.5% who favored Abe.”
July 25 – Reuters (Tetsushi Kajimoto): “The two new members of the Bank of Japan's policy board said… that the central bank should continue efforts to achieve its 2% inflation goal and it was premature to debate an exit from its massive monetary stimulus. Goushi Kataoka, a 44-year-old former economist… and an advocate of massive money printing, said he wants to see the price goal achieved quickly although he cannot say when that can be. The other new board member, Hitoshi Suzuki, a 63-year-old former deputy president of Bank of Tokyo-Mitsubishi UFJ… said it was ‘dangerous’ to markets to debate an exit from the stimulus now.”
EM Bubble Watch:
July 24 – Bloomberg (Natasha Doff): “The rapid growth of a BlackRock Inc. exchange-traded fund that tracks emerging-market debt is causing jitters among investors. The iShares JP Morgan EM Local Government Bond ETF, ticker IEML, has doubled in size this year, mopping up more than $3 billion of inflows as investors reach for average yields as high as 4.72% in developing economies. The risk is that if the carry trade unwinds, as tends to happen eventually, investors could race for the exit all at once and send the fund tumbling.”
July 24 – Wall Street Journal (Carolyn Cui): “Venezuelan bond prices tumbled to their lowest levels of the year as default fears grew following U.S. President Donald Trump’s threat to impose sanctions on the country. State-owned oil producer Petróleos de Venezuela SA’s bonds due in November fell 2.9% late in New York trading Monday and have tumbled 7.6% over the past six sessions, now at their lowest levels since December… The government’s bonds due in 2038 were down 10% during the period after falling 4.3% on Monday.”
Leveraged Speculation Watch:
July 26 – Bloomberg (Katia Porzecanski): “Paulson & Co., the investment firm that shot to fame betting on the collapse of the U.S. housing market, is closing its 2-year-old long-short equity fund in an effort to shift strategies after a steep drop in assets. ‘We are re-focusing the funds on our core areas of expertise in merger arbitrage and distressed credit, where our assets have been growing,’ founder John Paulson said in a letter to investors… ‘We thank the long-short team for their efforts on behalf of the company.’”
Geopolitical Watch:
July 26 – Bloomberg (Stepan Kravchenko): “Russia threatened to retaliate against new sanctions passed by the U.S. House of Representatives, saying they made it all but impossible to achieve the Trump administration’s goal of improved relations. The measures push U.S.-Russia ties into uncharted territory and ‘don’t leave room for the normalization of relations’ in the foreseeable future, Deputy Foreign Minister Sergei Ryabkov said… Hope ‘is dying’ for improved relations because the scale of ‘the anti-Russian consensus in Congress makes dialogue impossible and for a long time,’ Konstantin Kosachyov, chairman of the international affairs committee in Russia’s upper house of parliament, said… Russia should prepare a response to the sanctions that’s ‘painful for the Americans,’ he said.”
July 25 – CNBC (Nyshka Chandran): “The rivalry between India and China is heating up as the heavyweight economies face territorial tensions on both land and sea. A fierce border standoff in Bhutan's Doklam region — triggered by a Chinese road construction project in a disputed area and a Bhutanese request for Indian help — is now entering its second month with soldiers from both sides engaged in skirmishes. But a new confrontation in the relationship is arising as New Delhi is growing concerned about a Chinese naval presence in its own backyard: the Indian Ocean. ‘As the [Doklam] crisis stretches on, China is likely to seek ways to pressure India, both on the border and elsewhere, and this will compound the cycle of competition that is already well underway,’ Shashank Joshi, research fellow at the Royal United Services Institute, said…”
July 24 – South China Morning Post (David Barboza): “China… issued its strongest warning yet to India over their month-long border dispute, saying Beijing would protect its sovereignty ‘at all costs’. Observers believe that China's stepping up of its rhetoric, which came before a high-level security meeting that involves both Chinese and Indian security officials, gives Beijing more bargaining power in the talks with New Delhi. Defence ministry spokesman Wu Qian also said that China planned to strengthen its ‘targeted deployment and exercises’ along the disputed border, and that India should ‘have no illusions’ about its military's capabilities or commitment.”
July 24 – Reuters (Michael Martina and Matthew Tostevin): “China’s Foreign Ministry has urged a halt to oil drilling in a disputed part of the South China Sea, where Spanish oil company Repsol had been operating in cooperation with Vietnam. Drilling began in mid-June in Vietnam's Block 136/3… The block lies inside the U-shaped 'nine-dash line' that marks the vast area that China claims in the sea and overlaps what it says are its own oil concessions. Foreign Ministry spokesman Lu Kang said China had indisputable sovereignty over the Spratly Islands, which China calls the Nansha islands, and jurisdiction over the relevant waters and seabed.”
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