[Bloomberg] Stocks Decline as Korea Tensions Flare; Euro Gains: Markets Wrap
[Bloomberg] Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal
[Bloomberg] Mobius Foresees Cryptocurrency Crackdown Sparking a Rush to Gold
[Bloomberg] China’s Oil Lifeline to North Korea Targeted After Nuclear Blast
[Bloomberg] With Nuke Test, Kim Also Threatens China's Surging Assets
[Reuters] Mattis warns of 'massive military response,' but is vague on when it would happen
[Reuters] South Korea, U.S. plan more drills after North Korea nuclear test rattles globe
[Reuters] South Korea warns that North may launch ICBM after nuclear test
[Reuters] Sharp differences over labor surface at NAFTA talks in Mexico
[Reuters] All the president's men: China's politburo line-up a measure of Xi's power
[Reuters] Russia says U.S. actions towards its consulates are 'state hooliganism'
[WSJ] Investors Hedge Their Bets Entering Choppiest Season for Markets
[FT] China regulators target ‘systemic risk’ from money-market funds
[FT] Currency traders on edge as ECB meeting looms
Sunday, September 3, 2017
Sunday Evening Links
[Bloomberg] S&P 500 Index Futures Decline Following North Korea Nuclear Test
[Bloomberg] Yen Leads Haven Assets Higher as North Korea Tests Hydrogen Bomb
[CNBC] Trump hints at stopping trade with countries that do business with North Korea after nuclear test
[Reuters] Funding battle looms as Texas governor sees Harvey damage up to $180 billion
[WSJ] North Korea Claims Test of Hydrogen Bomb for Long-Range Missile a Success
[Bloomberg] Yen Leads Haven Assets Higher as North Korea Tests Hydrogen Bomb
[CNBC] Trump hints at stopping trade with countries that do business with North Korea after nuclear test
[Reuters] Funding battle looms as Texas governor sees Harvey damage up to $180 billion
[WSJ] North Korea Claims Test of Hydrogen Bomb for Long-Range Missile a Success
Sunday's News Links
[Reuters] North Korea says conducts hydrogen bomb test, Trump calls it a 'rogue nation'
[Reuters] Russia: U.S. closure of diplomatic sites a 'blatantly hostile act'
[CNBC] Italy’s finance chief says the euro zone still faces problems – even in Germany
[Bloomberg] Rajan Warned Modi Against Cash Ban, New Book Shows
[Reuters] Russia: U.S. closure of diplomatic sites a 'blatantly hostile act'
[CNBC] Italy’s finance chief says the euro zone still faces problems – even in Germany
[Bloomberg] Rajan Warned Modi Against Cash Ban, New Book Shows
Saturday, September 2, 2017
Saturday's News Links
[Bloomberg] Bond Market Braces for Debt-Limit Fight Entering Its Final Round
[Bloomberg] America’s Manufacturers and Builders Are On a Tear
[Reuters] Current euro level not a threat for European firms: Moscovici
[WSJ] U.S. to Challenge China With More Patrols in Disputed Waters
[WSJ] U.S., Mexico Spar on Nafta
[WSJ] Houston Residents Return Home to Scary Reality: No Insurance Coverage
[Bloomberg] America’s Manufacturers and Builders Are On a Tear
[Reuters] Current euro level not a threat for European firms: Moscovici
[WSJ] U.S. to Challenge China With More Patrols in Disputed Waters
[WSJ] U.S., Mexico Spar on Nafta
[WSJ] Houston Residents Return Home to Scary Reality: No Insurance Coverage
Friday, September 1, 2017
Weekly Commentary: Strong Data and Conspicuous Bubble Excess
Analysis surrounding economic data is especially interesting these days. As always, there’s ample opportunity to pick and choose data points to support a particular perspective. I hold the view that economic activity is generally more robust than given credit for (especially in bond markets). The analytical community for the most part downplays economic strength. No reason to stir the Fed or the fixed-income markets. Besides, these days most economic data have minimal market impact. Beyond reports on consumer inflation and wage growth, little seems to garner much interest from Federal Reserve officials.
U.S. Manufacturing payrolls increased 36,000 (estimate 8k) in August, the strongest monthly gain since March 2012. Moreover, July growth was revised up 10,000 to 26,000. One must look all the way back to the 2010 recovery for a stronger two-month period of manufacturing job gains. And while overall August payroll gains (156k) lagged expectations (180k), it’s worth mentioning the much stronger number out of ADP. At 236,600 jobs added, August ADP was the strongest since March (255k). One must go back many years to find a stronger August report from ADP.
The US ISM Manufacturing index was reported Friday at a stronger-than-expected 58.8, the highest reading since April 2011. Prices Paid remained unchanged at an elevated 62, with Production up slightly to 61. New Orders were little changed at 60.3. Notably, Employment jumped 4.7 points to 59.9, the strongest reading since June 2011. Manufacturing strength was broad-based, with 14 of 18 industries reporting growth for the month. A Bloomberg article quoted Timothy Fiore, chairman of ISM’s factory survey committee: “Really, really strong month for manufacturing… We’re seeing a significant expansion.” And with an estimated 500,000 vehicles to be scrapped after hurricane Harvey, the auto manufactures no longer face much of an inventory issue. Ford and GM gained about 5% in three sessions.
A headline from a couple weeks back: “Japan Is Now the Fastest-Growing Economy in the G7.” With 4% annualized growth, and the “longest expansion in more than a decade,” the Japanese economy unexpectedly moved to the top of the growth leaderboard. It was short-lived. Canada’s GDP was reported Thursday at a stronger-than-expected 4.5% annualized (y-o-y up 5.3%), the strongest growth since Q3 2011. The expansion was broad-based, with Household Consumption up 4.6% and Exports surging 9.6%.
September 1 – Bloomberg (Carolynn Look): “In a month traditionally reserved for time at the beach, euro-area factories increased output at one of the fastest rates since 2011. A Purchasing Managers’ Index for manufacturing climbed to 57.4 in August from 56.6 in July, IHS Markit said… A surge in export orders, paired with robust domestic demand, put pressure on capacity and forced companies to take on more workers.”
The JPMorgan Markit Economics global manufacturing index rose 0.4 to 53.1, the highest reading since may 2011. Germany’s PMI jumped to 59.3, just below multi-year highs. UK’s manufacturing PMI rose to 56.9 vs. a 55.0 estimate.
Data out of China continues to confirm (Credit-induced) expansion. The Caixin China Manufacturing PMI increased 0.5 to 51.6 in August, the strongest reading since February. Export Orders rose to the highest level since 2010. It’s worth noting that India (51.2), Mexico (52.2) and Brazil (50.9) all posted stronger manufacturing PMIs.
“Soft” data remain robust. “U.S. Consumer Confidence at Second-Highest Level Since 2000.” Conference Board August consumer confidence increased to a stronger-than-expected 122.9. Present Conditions rose to 151.2, the strongest reading since July 2001. European economic confidence jumped to the highest level since the summer of 2007. Meanwhile, German CPI rose to a stronger-than-expected 1.8% in August.
Ten-year Treasury yields rose five bps Friday to 2.17%. For the most part, however, global bond yields have reacted little to stronger-than-expected data. Treasury yields traded as low as 2.10% Friday morning on weaker nonfarm payrolls along with reports out of Frankfurt that the ECB may not have its final plan for winding down QE together until December.
To be sure, global central bankers have brought new meaning to the phrase “behind the curve.” Expectations have the ECB taking a gradualist approach to winding down bond purchases. Who knows if rates will ever be returned to a semblance of a reasonable level. Here at home, despite a 3.0% GDP print and a 4.4% unemployment rate, the market sees the Fed likely done raising rates for 2017 (36% odds of rate hike before year-end). And there’s still no end in sight for the Bank of Japan’s incredible securities purchase program.
The stronger the global economy the more fixated central banks are on CPI. They define “price stability” as a steady 2% rise in an aggregate of consumer prices – even though it’s obvious that relatively stable CPI is not reflective of financial stability or overall pricing dynamics throughout the financial markets and economy. Somehow it’s gotten to the point where central bankers are determined to prolong a radical experiment in monetary inflation, with slightly below target CPI as justification.
The focus should instead be on the stability of prices more generally, certainly including securities and asset prices. It seems rather inarguable. Central bankers should incorporate a broad mosaic of indicators of financial conditions. These would include money and Credit growth, securities market risk premiums, debt issuance and asset market trends, along with indications of speculative leveraging, destabilizing flows, risk embracement, aggressive risk intermediation and other excesses.
Alan Greenspan fashioned an asymmetrical approach to rate adjustment: slash them aggressively in the event of de-risking/de-leveraging in the markets, while raising them cautiously to ensure that markets are not at risk from tightening financial conditions. This was a Godsend to financial speculation. The Bernanke Fed took things a giant leap deeper. The Fed was prepared to push back against any tightening of financial conditions. “Asymmetrical” doesn’t do justice. In the event of ongoing ultra-loose financial conditions and resulting asset price instability, the Fed (and their central bank compatriots) can sit back and completely disregard escalating monetary disorder (while clasping hands and repeating “CPI below target”).
Things turn crazy late in Bubble episodes – especially, as we’re witnessing, in the “Granddaddy of All Bubbles.”
August 23 – Financial Times (Joe Rennison): “Hedge funds are embracing an esoteric credit product widely blamed for exacerbating the financial crisis a decade ago, as low volatility and near record prices for corporate debt tempt them into riskier areas to seek higher returns… The surge in activity reflects the effort by investors to generate a higher rate of return during a period of historically low volatility in credit markets, compounded by low fixed rate yields… Tranches with less exposure to defaults might only offer a 0.3 to 0.5% annual return but investors ‘lever’ the position by paying only a proportion of the deal value as collateral. While that increases the risk of safer tranches, investors are using less leverage than was case before the financial crisis, traders say. Leverage up to 20 times is now typical, pushing returns above 5%.”
August 28 – Wall Street Journal (Christopher Whittall and Mike Bird): “The synthetic CDO, a villain of the global financial crisis, is back. A decade ago, investors’ bad bets on collateralized debt obligations helped fuel the crisis. Billed as safe, they turned out to be anything but. Now, more investors are returning to CDOs—and so are concerns that excess is seeping into the aging bull market… Desperate for something that pays better than basic government bonds, insurance companies, asset managers and affluent investors are scooping up investments like synthetic CDOs, bankers say, which had largely become the preserve of hedge funds after 2008… The fastest growth this year has come in credit—the epicenter of the 2007-08 crisis. The top 12 global investment banks had around $1.5 billion in revenue in structured credit in the first quarter, according to Coalition, more than doubling since the first quarter of 2016. Structured equities are largest overall, a business dominated by sales of derivatives linked to moves in stock prices, with revenue of $5 billion in the first quarter.”
According to Dealogic, U.S. corporate debt sales have surpassed $1.2 TN y-t-d and remain on record pace. How much is demand for these debt securities driven by the popularity of various structured finance vehicles, including a rejuvenated CDO marketplace? How much leverage is accumulating when “up to 20 times is now typical” for “safe” tranches? How have years of ultra-loose monetary policy, along with Fed’s assurances to “push back” against any tightening of financial conditions, distorted the entire structure of the corporate debt marketplace?
Friday from the Financial Times (Kadhim Shubber), under the headline “This is What Watching a Bubble Feels Like… Behold the Madness:”
“’The OMG token sale, which raised $25 million, took place in July and initially one OMG token was worth around $0.27. Today, the value is at more than $11, giving a return of more than 40X to anyone who bought in at the ICO stage. Qtum raised $15.6 million worth of crypto in March. Its QTUM token was worth $0.30 initially, but today that price is above $17.’ That’s via TechCrunch, which says OMG and Qtum are the first initial coin offerings to breach a $1bn market cap. It dubs them ‘ICO unicorns’. Apparently the price rises are a ‘massive respectable return for those who speculated’. Never mind that ‘neither company has an actual product in the market right now’.”
August 29 – Bloomberg (Sho Chandra): “Unless you’ve been living under a rock, you’re probably aware that bitcoin and a number of other digital currencies have seen some pretty crazy runs this year. Bitcoin, the best-known digital currency, has surged 358%. While staggering, lesser-known competitors have seen even bigger gains, such as the more than 4,000% increase for ethereum. Bespoke Investment Group contrasted the rise in bitcoin with infamous bubbles such as the tech market in the late nineties. There’s almost no comparison. Tech stocks rose just over 1,000% over the entire course of their bubble, and bitcoin is already up more than twice that.”
August 30 – Bloomberg: “The rise of initial coin offerings in China has disrupted the social economic order and poses a financial risk, a domestic trade group said. Institutions have misled investors to raise funds through ICOs, the National Internet Finance Association of China, an organization endorsed by the State Council and top finance and banking watchdog, said… Unauthorized by regulators, some of the ICOs are suspected of fraud, illegal equity offerings and fundraising, the group said… ‘ICO projects have unclear assets, no investor suitability standards and gravely lack information disclosure and therefore have relatively high risks,’ the association said. ‘Investors should keep a clear mind, stay on high alert for frauds and report any wrongdoings to the police department.’”
The unfolding cryptocurrency Bubble has been feeding off ultra-loose financial conditions and a mindset of speculation that has become deeply entrenched (from years of free “money”). It’s become a full-fledged mania, although its significance will be downplayed by those pointing to the relatively small scope of the market. While not quite as outrageous, there are myriad indicators pointing to precariously loose monetary conditions and late-stage Bubble Excess (where market cap is quite meaningful).
Biotech stocks (BTK) surged 9.0% this week, pushing y-t-d gains to 37.7%. The Nasdaq Biotech index (PE 107) this week saw 10 stocks (out of 160) gain better than 20% and 43 rise double-digits. About any company in the process of developing a new cancer treatment saw its stock soar.
Biotech is not alone in indicating Bubble danger. The Morgan Stanley High Tech Index surged 2.6% this week to new all-time highs, boosting y-t-d gains to 28.7%. The Semiconductor index jumped 3.6%, increasing 2017 gains to 23.5%. The Nasdaq Composite rose 2.7% (up 19.6% y-t-d) and the Nasdaq100 advanced 2.8% (up 23.1%).
August 29 – CNBC (Andrea Riquier): “U.S. home price growth picked up steam in June as strong demand continued to buoy the market. The S&P/Case-Shiller 20-city index rose a seasonally adjusted 5.7% in the three-month period ending in June, compared with a year ago, the same rate of change as in May. The national index rose 5.8%, compared with a year ago, up from a 5.7% annual increase in May. Nine cities had stronger annual price growth in June than in May, and western metros remained on top, with annual price gains ranging from 13.4% in Seattle to 7.7% in Dallas. Seattle prices are rising so rapidly that they have left No. 2 Portland in the dust.”
I may be biased by what I see locally – and by generally overheated housing markets along the entire West Coast - but I believe a powerful inflationary bias and Bubble Dynamics have taken hold in many markets around the country. This is an important consequence of timid central bankers and low bond yields. Recent housing sales have somewhat disappointed, but this has likely been impacted by the lack of inventory in strong markets. It’s taking time for builders to catch up with robust demand (homebuilder index up 13.8% y-t-d).
There is ample support for the global Bubble thesis. Emerging market equities (EEM) rose this week to three-year highs. Brazil’s 1.2% rise increased y-t-d gains to 19.4%. India’s almost 1% gain took y-t-d returns to 19.8%. So far this year, stocks in Turkey have gained 41%, Poland 26%, Hungary 17.9%, Romania 14.6%, Hong Kong 27.1%, South Korea 16.4%, Taiwan 14.5%, Indonesia 10.7%, Philippines 16.3%, Vietnam 18.6%, Mexico 11.9%, Argentina 40%, Chile 24.6% and South Africa 13.9%.
In any other environment, surging securities and asset prices coupled with synchronized global economic momentum would see bond prices under pressure. But with global central bankers fixated on consumer price indices and the bond market confident in inflation dynamics, fixed income has been about as comfortable as one could imagine.
Perhaps central bankers have just decided to sit back and let these Bubbles run. I hold out some hope that they will recognize their predicament and begin to signal a desire to get back to the process of “normalization.” We’re at the late phase of the Bubble - where bond markets are sniffing out trouble (bursting Bubbles and mounting geopolitical risks). But it’s the bond market’s keen sense of smell that keeps yields artificially low, ensuring exactly the loose financial conditions necessary to sustain perilous late-stage Bubble excess.
A Thursday Bloomberg headline: “The Bond Market’s Biggest Rally of 2017 Amazes Traders.” By Friday afternoon fixed income did seem to be awakening somewhat to reality. Also from Bloomberg: “Junk Bonds Face Wave of Supply Just as Investors Turn Sour.” It’s interesting to ponder how the world might change when investors turn sour on corporate Credit and fixed-income more generally. It may not these days be the most conspicuous of Bubbles – but it’s surely among the biggest and with the most far-reaching consequences.
For the Week:
The S&P500 gained 1.4% (up 10.6% y-t-d), and the Dow increased 0.8% (up 11.3%). The Utilities declined 0.7% (up 11.3%). The Banks slipped 0.6% (up 2.1%), while the Broker/Dealers added 0.7% (up 11.2%). The Transports jumped 2.4% (up 3.5%). The S&P 400 Midcaps rallied 1.7% (up 4.6%), and the small cap Russell 2000 recovered 2.6% (up 4.2%). The Nasdaq100 jumped 2.8% (up 23.1%), and the Morgan Stanley High Tech index advanced 2.7% (up 28.7%). The Semiconductors rose 3.6% (up 23.5%). The Biotechs surged 9.0% (up 37.7%). With bullion up $34, the HUI gold index jumped 5.9% (up 16.9%).
Three-month Treasury bill rates ended the week at 98 bps. Two-year government yields added a basis point to 1.34% (up 15bps y-t-d). Five-year T-note yields slipped two bps to 1.74% (down 19bps). Ten-year Treasury yields were little changed at 2.17% (down 28bps). Long bond yields rose three bps to 2.78% (down 29bps).
Greek 10-year yields were little changed at 5.48% (down 154bps y-t-d). Ten-year Portuguese yields declined three bps to 2.84% (down 91bps). Italian 10-year yields slipped two bps to 2.08% (up 27bps). Spain's 10-year yields dipped a basis point to 1.60% (up 22bps). German bund yields were unchanged at 0.38% (up 18bps). French yields declined one basis point to 0.69% (up 1bp). The French to German 10-year bond spread narrowed one to 31 bps. U.K. 10-year gilt yields were little changed at 1.06% (down 18bps). U.K.'s FTSE equities index added 0.5% (up 4.1%).
U.S. Manufacturing payrolls increased 36,000 (estimate 8k) in August, the strongest monthly gain since March 2012. Moreover, July growth was revised up 10,000 to 26,000. One must look all the way back to the 2010 recovery for a stronger two-month period of manufacturing job gains. And while overall August payroll gains (156k) lagged expectations (180k), it’s worth mentioning the much stronger number out of ADP. At 236,600 jobs added, August ADP was the strongest since March (255k). One must go back many years to find a stronger August report from ADP.
The US ISM Manufacturing index was reported Friday at a stronger-than-expected 58.8, the highest reading since April 2011. Prices Paid remained unchanged at an elevated 62, with Production up slightly to 61. New Orders were little changed at 60.3. Notably, Employment jumped 4.7 points to 59.9, the strongest reading since June 2011. Manufacturing strength was broad-based, with 14 of 18 industries reporting growth for the month. A Bloomberg article quoted Timothy Fiore, chairman of ISM’s factory survey committee: “Really, really strong month for manufacturing… We’re seeing a significant expansion.” And with an estimated 500,000 vehicles to be scrapped after hurricane Harvey, the auto manufactures no longer face much of an inventory issue. Ford and GM gained about 5% in three sessions.
A headline from a couple weeks back: “Japan Is Now the Fastest-Growing Economy in the G7.” With 4% annualized growth, and the “longest expansion in more than a decade,” the Japanese economy unexpectedly moved to the top of the growth leaderboard. It was short-lived. Canada’s GDP was reported Thursday at a stronger-than-expected 4.5% annualized (y-o-y up 5.3%), the strongest growth since Q3 2011. The expansion was broad-based, with Household Consumption up 4.6% and Exports surging 9.6%.
September 1 – Bloomberg (Carolynn Look): “In a month traditionally reserved for time at the beach, euro-area factories increased output at one of the fastest rates since 2011. A Purchasing Managers’ Index for manufacturing climbed to 57.4 in August from 56.6 in July, IHS Markit said… A surge in export orders, paired with robust domestic demand, put pressure on capacity and forced companies to take on more workers.”
The JPMorgan Markit Economics global manufacturing index rose 0.4 to 53.1, the highest reading since may 2011. Germany’s PMI jumped to 59.3, just below multi-year highs. UK’s manufacturing PMI rose to 56.9 vs. a 55.0 estimate.
Data out of China continues to confirm (Credit-induced) expansion. The Caixin China Manufacturing PMI increased 0.5 to 51.6 in August, the strongest reading since February. Export Orders rose to the highest level since 2010. It’s worth noting that India (51.2), Mexico (52.2) and Brazil (50.9) all posted stronger manufacturing PMIs.
“Soft” data remain robust. “U.S. Consumer Confidence at Second-Highest Level Since 2000.” Conference Board August consumer confidence increased to a stronger-than-expected 122.9. Present Conditions rose to 151.2, the strongest reading since July 2001. European economic confidence jumped to the highest level since the summer of 2007. Meanwhile, German CPI rose to a stronger-than-expected 1.8% in August.
Ten-year Treasury yields rose five bps Friday to 2.17%. For the most part, however, global bond yields have reacted little to stronger-than-expected data. Treasury yields traded as low as 2.10% Friday morning on weaker nonfarm payrolls along with reports out of Frankfurt that the ECB may not have its final plan for winding down QE together until December.
To be sure, global central bankers have brought new meaning to the phrase “behind the curve.” Expectations have the ECB taking a gradualist approach to winding down bond purchases. Who knows if rates will ever be returned to a semblance of a reasonable level. Here at home, despite a 3.0% GDP print and a 4.4% unemployment rate, the market sees the Fed likely done raising rates for 2017 (36% odds of rate hike before year-end). And there’s still no end in sight for the Bank of Japan’s incredible securities purchase program.
The stronger the global economy the more fixated central banks are on CPI. They define “price stability” as a steady 2% rise in an aggregate of consumer prices – even though it’s obvious that relatively stable CPI is not reflective of financial stability or overall pricing dynamics throughout the financial markets and economy. Somehow it’s gotten to the point where central bankers are determined to prolong a radical experiment in monetary inflation, with slightly below target CPI as justification.
The focus should instead be on the stability of prices more generally, certainly including securities and asset prices. It seems rather inarguable. Central bankers should incorporate a broad mosaic of indicators of financial conditions. These would include money and Credit growth, securities market risk premiums, debt issuance and asset market trends, along with indications of speculative leveraging, destabilizing flows, risk embracement, aggressive risk intermediation and other excesses.
Alan Greenspan fashioned an asymmetrical approach to rate adjustment: slash them aggressively in the event of de-risking/de-leveraging in the markets, while raising them cautiously to ensure that markets are not at risk from tightening financial conditions. This was a Godsend to financial speculation. The Bernanke Fed took things a giant leap deeper. The Fed was prepared to push back against any tightening of financial conditions. “Asymmetrical” doesn’t do justice. In the event of ongoing ultra-loose financial conditions and resulting asset price instability, the Fed (and their central bank compatriots) can sit back and completely disregard escalating monetary disorder (while clasping hands and repeating “CPI below target”).
Things turn crazy late in Bubble episodes – especially, as we’re witnessing, in the “Granddaddy of All Bubbles.”
August 23 – Financial Times (Joe Rennison): “Hedge funds are embracing an esoteric credit product widely blamed for exacerbating the financial crisis a decade ago, as low volatility and near record prices for corporate debt tempt them into riskier areas to seek higher returns… The surge in activity reflects the effort by investors to generate a higher rate of return during a period of historically low volatility in credit markets, compounded by low fixed rate yields… Tranches with less exposure to defaults might only offer a 0.3 to 0.5% annual return but investors ‘lever’ the position by paying only a proportion of the deal value as collateral. While that increases the risk of safer tranches, investors are using less leverage than was case before the financial crisis, traders say. Leverage up to 20 times is now typical, pushing returns above 5%.”
August 28 – Wall Street Journal (Christopher Whittall and Mike Bird): “The synthetic CDO, a villain of the global financial crisis, is back. A decade ago, investors’ bad bets on collateralized debt obligations helped fuel the crisis. Billed as safe, they turned out to be anything but. Now, more investors are returning to CDOs—and so are concerns that excess is seeping into the aging bull market… Desperate for something that pays better than basic government bonds, insurance companies, asset managers and affluent investors are scooping up investments like synthetic CDOs, bankers say, which had largely become the preserve of hedge funds after 2008… The fastest growth this year has come in credit—the epicenter of the 2007-08 crisis. The top 12 global investment banks had around $1.5 billion in revenue in structured credit in the first quarter, according to Coalition, more than doubling since the first quarter of 2016. Structured equities are largest overall, a business dominated by sales of derivatives linked to moves in stock prices, with revenue of $5 billion in the first quarter.”
According to Dealogic, U.S. corporate debt sales have surpassed $1.2 TN y-t-d and remain on record pace. How much is demand for these debt securities driven by the popularity of various structured finance vehicles, including a rejuvenated CDO marketplace? How much leverage is accumulating when “up to 20 times is now typical” for “safe” tranches? How have years of ultra-loose monetary policy, along with Fed’s assurances to “push back” against any tightening of financial conditions, distorted the entire structure of the corporate debt marketplace?
Friday from the Financial Times (Kadhim Shubber), under the headline “This is What Watching a Bubble Feels Like… Behold the Madness:”
“’The OMG token sale, which raised $25 million, took place in July and initially one OMG token was worth around $0.27. Today, the value is at more than $11, giving a return of more than 40X to anyone who bought in at the ICO stage. Qtum raised $15.6 million worth of crypto in March. Its QTUM token was worth $0.30 initially, but today that price is above $17.’ That’s via TechCrunch, which says OMG and Qtum are the first initial coin offerings to breach a $1bn market cap. It dubs them ‘ICO unicorns’. Apparently the price rises are a ‘massive respectable return for those who speculated’. Never mind that ‘neither company has an actual product in the market right now’.”
August 29 – Bloomberg (Sho Chandra): “Unless you’ve been living under a rock, you’re probably aware that bitcoin and a number of other digital currencies have seen some pretty crazy runs this year. Bitcoin, the best-known digital currency, has surged 358%. While staggering, lesser-known competitors have seen even bigger gains, such as the more than 4,000% increase for ethereum. Bespoke Investment Group contrasted the rise in bitcoin with infamous bubbles such as the tech market in the late nineties. There’s almost no comparison. Tech stocks rose just over 1,000% over the entire course of their bubble, and bitcoin is already up more than twice that.”
August 30 – Bloomberg: “The rise of initial coin offerings in China has disrupted the social economic order and poses a financial risk, a domestic trade group said. Institutions have misled investors to raise funds through ICOs, the National Internet Finance Association of China, an organization endorsed by the State Council and top finance and banking watchdog, said… Unauthorized by regulators, some of the ICOs are suspected of fraud, illegal equity offerings and fundraising, the group said… ‘ICO projects have unclear assets, no investor suitability standards and gravely lack information disclosure and therefore have relatively high risks,’ the association said. ‘Investors should keep a clear mind, stay on high alert for frauds and report any wrongdoings to the police department.’”
The unfolding cryptocurrency Bubble has been feeding off ultra-loose financial conditions and a mindset of speculation that has become deeply entrenched (from years of free “money”). It’s become a full-fledged mania, although its significance will be downplayed by those pointing to the relatively small scope of the market. While not quite as outrageous, there are myriad indicators pointing to precariously loose monetary conditions and late-stage Bubble Excess (where market cap is quite meaningful).
Biotech stocks (BTK) surged 9.0% this week, pushing y-t-d gains to 37.7%. The Nasdaq Biotech index (PE 107) this week saw 10 stocks (out of 160) gain better than 20% and 43 rise double-digits. About any company in the process of developing a new cancer treatment saw its stock soar.
Biotech is not alone in indicating Bubble danger. The Morgan Stanley High Tech Index surged 2.6% this week to new all-time highs, boosting y-t-d gains to 28.7%. The Semiconductor index jumped 3.6%, increasing 2017 gains to 23.5%. The Nasdaq Composite rose 2.7% (up 19.6% y-t-d) and the Nasdaq100 advanced 2.8% (up 23.1%).
August 29 – CNBC (Andrea Riquier): “U.S. home price growth picked up steam in June as strong demand continued to buoy the market. The S&P/Case-Shiller 20-city index rose a seasonally adjusted 5.7% in the three-month period ending in June, compared with a year ago, the same rate of change as in May. The national index rose 5.8%, compared with a year ago, up from a 5.7% annual increase in May. Nine cities had stronger annual price growth in June than in May, and western metros remained on top, with annual price gains ranging from 13.4% in Seattle to 7.7% in Dallas. Seattle prices are rising so rapidly that they have left No. 2 Portland in the dust.”
I may be biased by what I see locally – and by generally overheated housing markets along the entire West Coast - but I believe a powerful inflationary bias and Bubble Dynamics have taken hold in many markets around the country. This is an important consequence of timid central bankers and low bond yields. Recent housing sales have somewhat disappointed, but this has likely been impacted by the lack of inventory in strong markets. It’s taking time for builders to catch up with robust demand (homebuilder index up 13.8% y-t-d).
There is ample support for the global Bubble thesis. Emerging market equities (EEM) rose this week to three-year highs. Brazil’s 1.2% rise increased y-t-d gains to 19.4%. India’s almost 1% gain took y-t-d returns to 19.8%. So far this year, stocks in Turkey have gained 41%, Poland 26%, Hungary 17.9%, Romania 14.6%, Hong Kong 27.1%, South Korea 16.4%, Taiwan 14.5%, Indonesia 10.7%, Philippines 16.3%, Vietnam 18.6%, Mexico 11.9%, Argentina 40%, Chile 24.6% and South Africa 13.9%.
In any other environment, surging securities and asset prices coupled with synchronized global economic momentum would see bond prices under pressure. But with global central bankers fixated on consumer price indices and the bond market confident in inflation dynamics, fixed income has been about as comfortable as one could imagine.
Perhaps central bankers have just decided to sit back and let these Bubbles run. I hold out some hope that they will recognize their predicament and begin to signal a desire to get back to the process of “normalization.” We’re at the late phase of the Bubble - where bond markets are sniffing out trouble (bursting Bubbles and mounting geopolitical risks). But it’s the bond market’s keen sense of smell that keeps yields artificially low, ensuring exactly the loose financial conditions necessary to sustain perilous late-stage Bubble excess.
A Thursday Bloomberg headline: “The Bond Market’s Biggest Rally of 2017 Amazes Traders.” By Friday afternoon fixed income did seem to be awakening somewhat to reality. Also from Bloomberg: “Junk Bonds Face Wave of Supply Just as Investors Turn Sour.” It’s interesting to ponder how the world might change when investors turn sour on corporate Credit and fixed-income more generally. It may not these days be the most conspicuous of Bubbles – but it’s surely among the biggest and with the most far-reaching consequences.
For the Week:
The S&P500 gained 1.4% (up 10.6% y-t-d), and the Dow increased 0.8% (up 11.3%). The Utilities declined 0.7% (up 11.3%). The Banks slipped 0.6% (up 2.1%), while the Broker/Dealers added 0.7% (up 11.2%). The Transports jumped 2.4% (up 3.5%). The S&P 400 Midcaps rallied 1.7% (up 4.6%), and the small cap Russell 2000 recovered 2.6% (up 4.2%). The Nasdaq100 jumped 2.8% (up 23.1%), and the Morgan Stanley High Tech index advanced 2.7% (up 28.7%). The Semiconductors rose 3.6% (up 23.5%). The Biotechs surged 9.0% (up 37.7%). With bullion up $34, the HUI gold index jumped 5.9% (up 16.9%).
Three-month Treasury bill rates ended the week at 98 bps. Two-year government yields added a basis point to 1.34% (up 15bps y-t-d). Five-year T-note yields slipped two bps to 1.74% (down 19bps). Ten-year Treasury yields were little changed at 2.17% (down 28bps). Long bond yields rose three bps to 2.78% (down 29bps).
Greek 10-year yields were little changed at 5.48% (down 154bps y-t-d). Ten-year Portuguese yields declined three bps to 2.84% (down 91bps). Italian 10-year yields slipped two bps to 2.08% (up 27bps). Spain's 10-year yields dipped a basis point to 1.60% (up 22bps). German bund yields were unchanged at 0.38% (up 18bps). French yields declined one basis point to 0.69% (up 1bp). The French to German 10-year bond spread narrowed one to 31 bps. U.K. 10-year gilt yields were little changed at 1.06% (down 18bps). U.K.'s FTSE equities index added 0.5% (up 4.1%).
Japan's Nikkei 225 equities index gained 1.2% (up 3.0% y-t-d). Japanese 10-year "JGB" yields declined two bps 0.00% (down 4bps). France's CAC40 increased 0.4% (up 5.4%). The German DAX equities index slipped 0.2% (up 5.8%). Spain's IBEX 35 equities index dipped 0.2% (up 10.4%). Italy's FTSE MIB index gained 0.5% (up 13.6%). EM equities were mixed. Brazil's Bovespa index rose 1.2% (up 19.4%), while Mexico's Bolsa declined 0.6% (up 11.9%). South Korea's Kospi fell 0.9% (up 16.3%). India’s Sensex equities index added 0.9% (up 19.8%). China’s Shanghai Exchange rose 1.1% (up 8.5%). Turkey's Borsa Istanbul National 100 index increased 0.2% (up 40.8%). Russia's MICEX equities index jumped 1.6% (down 9.9%).
Junk bond mutual funds saw outflows of $277 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined four bps to a 2017 low 3.82% (up 36bps y-o-y). Fifteen-year rates were down four bps to 3.12% (up 35bps). The five-year hybrid ARM rate slipped three bps to 3.14% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 3.99% (up 42bps).
Federal Reserve Credit last week dropped $11.1bn to $4.414 TN. Over the past year, Fed Credit declined $4.6bn. Fed Credit inflated $1.603 TN, or 57%, over the past 251 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $3.3bn last week to an almost two-year high $3.345 TN. "Custody holdings" were up $157bn y-o-y, or 4.9%.
M2 (narrow) "money" supply last week surged $39.6bn to a record $13.668 TN. "Narrow money" expanded $695bn, or 5.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits jumped $57.4bn, while Savings Deposits fell $34.4bn. Small Time Deposits added $2.3bn. Retail Money Funds gained $12.8bn.
Total money market fund assets dropped $19.7bn to $2.716 TN. Money Funds declined $8.1bn y-o-y.
Total Commercial Paper surged $27bn to a one-year high $1.023 TN. CP gained $42bn y-o-y, or 4.3%.
Currency Watch:
August 27 – Bloomberg (Justina Lee): “With the dollar languid in the absence of supportive rate-hike rhetoric from Jackson Hole, the People’s Bank of China set the strongest yuan fixing in a year on Monday, exceeding the average forecast of 18 traders and analysts… The signal that Chinese policy makers are comfortable with yuan strength saw the currency trade below 6.65 per dollar onshore, a level the yuan seemed to have stalled at following a hefty advance. The currency is the best performer in Asia this month, and shows no signs of slowing down.”
The U.S. dollar index was little changed at 92.814 (down 9.4% y-t-d). For the week on the upside, the Canadian dollar increased 0.7%, the South African rand 0.6%, the Brazilian real 0.6%, the Australian dollar 0.5%, the British pound 0.5%, and the South Korean won 0.5%. On the downside, the New Zealand dollar declined 1.2%, the Mexican peso 1.1%, the Swiss franc 0.8%, the Japanese yen 0.8%, the Norwegian krone 0.6%, the euro 0.5%, the Swedish krona 0.4% and the Singapore dollar 0.1%. The Chinese renminbi jumped 1.34% versus the dollar this week (up 5.89% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.9% (down 3.0% y-t-d). Spot Gold jumped 2.6% to $1,325 (up 15%). Silver surged 4.0% to $17.816 (up 11.5%). Crude fell 58 cents to $47.29 (down 12%). Gasoline surged 4.9% (up 5%), and Natural Gas jumped 6.2% (down 18%). Copper rose 2.0% (up 24%). Wheat added 0.8% (up 8%). Corn increased 0.5% (up 1%).
Trump Administration Watch:
August 28 – Bloomberg (Sahil Kapur): “President Donald Trump is planning to kick off one of the most important sales pitches of his presidency this week -- getting Americans fired up about rewriting the U.S. tax code. But there’s no plan to sell. Basic questions remain unanswered. Will the changes be permanent or temporary? How will individual tax brackets be set? What rate will corporations and small businesses pay? Instead of providing details that could help build support for a bill, the president will largely rely on the same talking points he and his advisers have highlighted since January: The middle class deserves a tax cut and businesses need changes to help them compete with global rivals. Treasury Secretary Steven Mnuchin -- who earlier predicted having a tax bill done by August -- revealed the enormity of the task ahead on Friday: He didn’t commit to completing it by year’s end. ‘They’re nowhere. They’re just nowhere,’ said Henrietta Treyz, a tax analyst with Veda Partners and former Senate tax staffer. ‘I see them putting these ideas out as though they’re making progress, but they are the same regurgitated ideas we’ve been talking about for 20 years that have never gotten past the white-paper stage.’”
August 30 – Reuters (James Oliphant): “U.S. President Donald Trump made his first major tax reform speech on Wednesday, but in a long list of thank yous he did not mention Gary Cohn, the White House point man on taxes who traveled with Trump to the event. At a manufacturing company in Springfield, Missouri, Trump reiterated his longstanding call for slashing the U.S. corporate tax rate to 15% from 35% at a time when lawmakers believe they could be lucky to bring it down to 25%.”
August 29 – CNBC (Ylan Mui): “Conservatives are beginning to draw battle lines in next month's fight over raising the nation's borrowing limit, setting the stage for a showdown that could rattle the markets. North Carolina Rep. Mark Walker, head of the influential Republican Study Committee, said this week that any increase in the federal debt ceiling should be paired with more stringent eligibility requirements for Medicaid. The committee is still considering whether to seek other spending reforms as well and will discuss their priorities with GOP leadership next week. But the committee represents more than half of the Republican lawmakers in the House — endangering any bill that does not have its full support. ‘We're very aware and understand the ramifications, and we want to make sure that we don't default,’ Walker told CNBC. ‘But at some point … we have to look at specific reforms to make sure that we're being fiscally responsible.’”
August 30 – Wall Street Journal (Vipal Monga): “Republican plans to scale back tax deductions on companies’ interest payments risk pushing more borrowing overseas, say analysts and market participants, eroding the competitive advantage of the $6.053 trillion U.S. corporate-bond market. Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, said this month that he wanted to curtail companies’ capacity to deduct net interest payments from taxable income to pay for tax cuts. The comments virtually ensure the topic will feature prominently in the coming tax debate, which is expected to begin in earnest after Labor Day. White House officials and top House Republicans say they are optimistic about finishing a major tax bill this year, but they have a long way to go.”
August 28 – Financial Times (Demetri Sevastopulo and Shawn Donnan): “Donald Trump last month rejected a Chinese proposal to cut steel overcapacity despite it being endorsed by some of his top advisers, as he urged them instead to find ways to impose tariffs on imports from China. One week after the July G20 summit in Hamburg, at which Mr Trump criticised China for flooding the world market with cheap steel, Beijing proposed cutting steel overcapacity by 150m tonnes by 2022. But Mr Trump twice rejected the deal, according to several people familiar with the internal debate. The offer came the week before US and Chinese officials held a high-level economic dialogue that had been set up by Mr Trump and Chinese president Xi Jinping in April. Wilbur Ross, US commerce secretary, endorsed the deal and brought it to Mr Trump, but the president rejected the proposal.”
China Bubble Watch:
August 31 – Bloomberg: “For most of the year, there’s been an oft-repeated refrain among China-watchers. Whispered in private meetings with clients or loudly spoken by confident brokers, it goes something like this: ‘Don’t worry about the economy or markets in 2017 -- Beijing won’t let anything bad happen ahead of the Communist Party Congress.’ Much less clear is what happens after the gathering, a once-in-five years conclave now scheduled to convene on Oct. 18 in Beijing. Now that the dates -- a secret until late Thursday -- are known, the narrative will need to evolve, with what takes place at the meeting of some 2,300 delegates key to determining China’s course over the next five years.”
August 29 – Bloomberg: “Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS… Smaller rust-belt banks… have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said. Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default…”
August 30 – Bloomberg (Prudence Ho): “HNA Group Co.’s financing costs more than doubled during the first half of the year, signaling the conglomerate’s $45-billion-plus acquisition spree since 2015 is catching up with the company. The diversified group, which in recent years bought large stakes in companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG, saw such expenses surge to 14.2 billion yuan ($2.1bn) from 6.47 billion yuan a year earlier… Based on Bloomberg calculations, earnings before interest and taxes were insufficient to cover those costs, a rarity for a company of HNA’s size -- even in China.”
Brexit Watch:
August 29 – Bloomberg (Ian Wishart and Nikos Chrysoloras): “European Commission President Jean-Claude Juncker joined the bloc’s chief negotiator in lashing out at the U.K. for failing to prepare for Brexit talks, as the third round of negotiations looked set to produce little progress. ‘I’ve read all the position papers produced by Her Majesty’s government and none of them is satisfactory,’ Juncker said… as talks between the U.K. and the EU resumed. ‘There is still an enormous amount of issues that remain to be settled.’ The stage had already been set for an intense round of negotiations after chief negotiator Michel Barnier and Brexit Secretary David Davis met on Monday for the first time since July and candidly aired their frustration at each other’s approaches.”
Central Bank Watch:
August 30 – Bloomberg (Piotr Skolimowski): “German inflation accelerated more than economists predicted as European Central Bank officials prepare to discuss paring back stimulus. The rate rose to 1.8% in August from 1.5% in July… In Spain, energy prices propelled consumer inflation to 2% in August…”
August 27 – Bloomberg (Brett Miller and Kathleen Hays): “Bank of Japan Governor Haruhiko Kuroda said that despite some signs of reduced liquidity, the market for Japanese government bonds is ‘functioning quite well’ and actually makes it easier for the BOJ to manage yields with fewer purchases. ‘Since JGBs remaining in the market is going to decline, that means that with one unit of JGB purchase, the impact on the interest rate could be bigger,’ Kuroda said… ‘So that in coming months there will be less and less need to purchase JGBs in order to maintain the yield curve.’”
Global Bubble Watch:
August 27 – Bloomberg (Ben Bartenstein): “More investors are joining the cast of Wall Street veterans from Jeff Gundlach to Ray Dalio in warning that risky assets are overvalued. They point to rising global turmoil underscored by the recent terrorist attacks in Barcelona and the racially charged violence in Charlottesville, Virginia, as well as valuations that no longer compensate for potential flareups in North Korea and Venezuela. That’s not to mention the unpredictability in the U.S., where President Donald Trump is feuding with members of Congress before a critical vote to increase the country’s debt ceiling. Among the assets under scrutiny are emerging-market bonds, which for only the third time in history are yielding less than U.S. junk debt.”
August 31 – Bloomberg (Theophilos Argitis): “Canada’s economy unexpectedly accelerated at a 4.5% pace in the second quarter -- tops among Group of Seven countries -- led by the biggest binge in household spending since before the 2008-2009 global recession. Annualized growth was the fastest in six years and topped the 3.7% average forecast from economists. The expansion surpassed the 3.7% first quarter growth rate…”
Fixed Income Bubble Watch:
August 29 – CNBC (Jeff Cox): “Unless something dramatic happens, the Federal Reserve won't be hiking interest rates again until well into 2018, according to current market predictions. Fed funds futures — contracts that indicate where the market thinks the central bank's benchmark rate will be — point to no further moves until at least next June, and possibly a good deal later. Futures indicate that the Fed will approve just one increase between now and the end of next year.”
Federal Reserve Watch:
August 29 – Bloomberg (Sho Chandra): “John Williams, president of the San Francisco Fed, was the latest US policymaker to reiterate that the Federal Reserve is intent on making the unwinding of its $4.5tn balance sheet as boring as possible. The European Central Bank has been making similar noises ahead of an expected tapering of its bond-buying plan. Thus far, markets have agreed. Rather than a re-run of the 2013 ‘taper tantrum’ that hammered markets when the central bank first talked about stopping its purchases, bond yields have sagged lower this year, while the stock market has hit fresh records… Yet murmurs are rising that investors are underestimating the potential impact of the combination of both the Fed and the ECB simultaneously scaling back their monetary stimulus programmes. Indeed, some now reckon this is the single-biggest danger confronting markets this autumn and into next year.”
August 27 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Cleveland President Loretta Mester urged her colleagues to look past recent weak inflation data and to stick to their gradual pace of lifting interest rates, with one more increase projected before the end of this year. ‘There’s some risk that if we wait too long we can find ourselves in a bad spot,’ Mester said… on the sidelines of the Fed’s annual retreat in Jackson Hole, Wyoming. ‘We have to move policy a little bit before we get to the goals or else we’re going to get behind.’”
U.S. Bubble Watch:
August 30 – Bloomberg (Sho Chandra): “U.S. second-quarter growth was revised upward to the fastest pace in two years on stronger household spending and a bigger gain in business investment, putting the economy on a stronger track… Gross domestic product rose at a 3% annualized rate from prior quarter (est. 2.7%); revised from initial estimate of 2.6%. Consumer spending, biggest part of the economy, grew 3.3% (est. 3%), most since second quarter of 2016 and revised from 2.8%. Nonresidential fixed investment rose 6.9%, revised from initial increase of 5.2%.”
August 29 – CNBC (Diana Olick): “Not only are home prices continuing to rise, but the gains are accelerating. Couple that with record-low supply of homes for sale, and you would think demand would fall off. So far, it has not. Bidding wars are to be expected with most offers, especially in larger metropolitan areas and their suburbs. ‘It's a new normal in the housing market,’ wrote Cheryl Young, senior economist at Trulia… ‘Ever rising prices being met by insatiable demand.’ The supply of homes for sale at the end of July was 9% lower compared with July of 2016… Homes are selling faster and faster each month… Builders are shifting somewhat to lower-priced products but really continue to concentrate on move-up homes, which is not helping the shortage.”
August 29 – Bloomberg (Sho Chandra): “A pickup in consumer confidence to the second-highest level since late 2000 provide a basis for steady gains in spending, according to… the… Conference Board. Confidence index rose to 122.9 (est. 120.7) from downwardly revised 120 in July. Present conditions measure increased to 151.2, highest since July 2001, from 145.4.”
Junk bond mutual funds saw outflows of $277 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined four bps to a 2017 low 3.82% (up 36bps y-o-y). Fifteen-year rates were down four bps to 3.12% (up 35bps). The five-year hybrid ARM rate slipped three bps to 3.14% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 3.99% (up 42bps).
Federal Reserve Credit last week dropped $11.1bn to $4.414 TN. Over the past year, Fed Credit declined $4.6bn. Fed Credit inflated $1.603 TN, or 57%, over the past 251 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $3.3bn last week to an almost two-year high $3.345 TN. "Custody holdings" were up $157bn y-o-y, or 4.9%.
M2 (narrow) "money" supply last week surged $39.6bn to a record $13.668 TN. "Narrow money" expanded $695bn, or 5.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits jumped $57.4bn, while Savings Deposits fell $34.4bn. Small Time Deposits added $2.3bn. Retail Money Funds gained $12.8bn.
Total money market fund assets dropped $19.7bn to $2.716 TN. Money Funds declined $8.1bn y-o-y.
Total Commercial Paper surged $27bn to a one-year high $1.023 TN. CP gained $42bn y-o-y, or 4.3%.
Currency Watch:
August 27 – Bloomberg (Justina Lee): “With the dollar languid in the absence of supportive rate-hike rhetoric from Jackson Hole, the People’s Bank of China set the strongest yuan fixing in a year on Monday, exceeding the average forecast of 18 traders and analysts… The signal that Chinese policy makers are comfortable with yuan strength saw the currency trade below 6.65 per dollar onshore, a level the yuan seemed to have stalled at following a hefty advance. The currency is the best performer in Asia this month, and shows no signs of slowing down.”
The U.S. dollar index was little changed at 92.814 (down 9.4% y-t-d). For the week on the upside, the Canadian dollar increased 0.7%, the South African rand 0.6%, the Brazilian real 0.6%, the Australian dollar 0.5%, the British pound 0.5%, and the South Korean won 0.5%. On the downside, the New Zealand dollar declined 1.2%, the Mexican peso 1.1%, the Swiss franc 0.8%, the Japanese yen 0.8%, the Norwegian krone 0.6%, the euro 0.5%, the Swedish krona 0.4% and the Singapore dollar 0.1%. The Chinese renminbi jumped 1.34% versus the dollar this week (up 5.89% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.9% (down 3.0% y-t-d). Spot Gold jumped 2.6% to $1,325 (up 15%). Silver surged 4.0% to $17.816 (up 11.5%). Crude fell 58 cents to $47.29 (down 12%). Gasoline surged 4.9% (up 5%), and Natural Gas jumped 6.2% (down 18%). Copper rose 2.0% (up 24%). Wheat added 0.8% (up 8%). Corn increased 0.5% (up 1%).
Trump Administration Watch:
August 28 – Bloomberg (Sahil Kapur): “President Donald Trump is planning to kick off one of the most important sales pitches of his presidency this week -- getting Americans fired up about rewriting the U.S. tax code. But there’s no plan to sell. Basic questions remain unanswered. Will the changes be permanent or temporary? How will individual tax brackets be set? What rate will corporations and small businesses pay? Instead of providing details that could help build support for a bill, the president will largely rely on the same talking points he and his advisers have highlighted since January: The middle class deserves a tax cut and businesses need changes to help them compete with global rivals. Treasury Secretary Steven Mnuchin -- who earlier predicted having a tax bill done by August -- revealed the enormity of the task ahead on Friday: He didn’t commit to completing it by year’s end. ‘They’re nowhere. They’re just nowhere,’ said Henrietta Treyz, a tax analyst with Veda Partners and former Senate tax staffer. ‘I see them putting these ideas out as though they’re making progress, but they are the same regurgitated ideas we’ve been talking about for 20 years that have never gotten past the white-paper stage.’”
August 30 – Reuters (James Oliphant): “U.S. President Donald Trump made his first major tax reform speech on Wednesday, but in a long list of thank yous he did not mention Gary Cohn, the White House point man on taxes who traveled with Trump to the event. At a manufacturing company in Springfield, Missouri, Trump reiterated his longstanding call for slashing the U.S. corporate tax rate to 15% from 35% at a time when lawmakers believe they could be lucky to bring it down to 25%.”
August 29 – CNBC (Ylan Mui): “Conservatives are beginning to draw battle lines in next month's fight over raising the nation's borrowing limit, setting the stage for a showdown that could rattle the markets. North Carolina Rep. Mark Walker, head of the influential Republican Study Committee, said this week that any increase in the federal debt ceiling should be paired with more stringent eligibility requirements for Medicaid. The committee is still considering whether to seek other spending reforms as well and will discuss their priorities with GOP leadership next week. But the committee represents more than half of the Republican lawmakers in the House — endangering any bill that does not have its full support. ‘We're very aware and understand the ramifications, and we want to make sure that we don't default,’ Walker told CNBC. ‘But at some point … we have to look at specific reforms to make sure that we're being fiscally responsible.’”
August 30 – Wall Street Journal (Vipal Monga): “Republican plans to scale back tax deductions on companies’ interest payments risk pushing more borrowing overseas, say analysts and market participants, eroding the competitive advantage of the $6.053 trillion U.S. corporate-bond market. Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, said this month that he wanted to curtail companies’ capacity to deduct net interest payments from taxable income to pay for tax cuts. The comments virtually ensure the topic will feature prominently in the coming tax debate, which is expected to begin in earnest after Labor Day. White House officials and top House Republicans say they are optimistic about finishing a major tax bill this year, but they have a long way to go.”
August 28 – Financial Times (Demetri Sevastopulo and Shawn Donnan): “Donald Trump last month rejected a Chinese proposal to cut steel overcapacity despite it being endorsed by some of his top advisers, as he urged them instead to find ways to impose tariffs on imports from China. One week after the July G20 summit in Hamburg, at which Mr Trump criticised China for flooding the world market with cheap steel, Beijing proposed cutting steel overcapacity by 150m tonnes by 2022. But Mr Trump twice rejected the deal, according to several people familiar with the internal debate. The offer came the week before US and Chinese officials held a high-level economic dialogue that had been set up by Mr Trump and Chinese president Xi Jinping in April. Wilbur Ross, US commerce secretary, endorsed the deal and brought it to Mr Trump, but the president rejected the proposal.”
China Bubble Watch:
August 31 – Bloomberg: “For most of the year, there’s been an oft-repeated refrain among China-watchers. Whispered in private meetings with clients or loudly spoken by confident brokers, it goes something like this: ‘Don’t worry about the economy or markets in 2017 -- Beijing won’t let anything bad happen ahead of the Communist Party Congress.’ Much less clear is what happens after the gathering, a once-in-five years conclave now scheduled to convene on Oct. 18 in Beijing. Now that the dates -- a secret until late Thursday -- are known, the narrative will need to evolve, with what takes place at the meeting of some 2,300 delegates key to determining China’s course over the next five years.”
August 29 – Bloomberg: “Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS… Smaller rust-belt banks… have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said. Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default…”
August 30 – Bloomberg (Prudence Ho): “HNA Group Co.’s financing costs more than doubled during the first half of the year, signaling the conglomerate’s $45-billion-plus acquisition spree since 2015 is catching up with the company. The diversified group, which in recent years bought large stakes in companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG, saw such expenses surge to 14.2 billion yuan ($2.1bn) from 6.47 billion yuan a year earlier… Based on Bloomberg calculations, earnings before interest and taxes were insufficient to cover those costs, a rarity for a company of HNA’s size -- even in China.”
Brexit Watch:
August 29 – Bloomberg (Ian Wishart and Nikos Chrysoloras): “European Commission President Jean-Claude Juncker joined the bloc’s chief negotiator in lashing out at the U.K. for failing to prepare for Brexit talks, as the third round of negotiations looked set to produce little progress. ‘I’ve read all the position papers produced by Her Majesty’s government and none of them is satisfactory,’ Juncker said… as talks between the U.K. and the EU resumed. ‘There is still an enormous amount of issues that remain to be settled.’ The stage had already been set for an intense round of negotiations after chief negotiator Michel Barnier and Brexit Secretary David Davis met on Monday for the first time since July and candidly aired their frustration at each other’s approaches.”
Central Bank Watch:
August 30 – Bloomberg (Piotr Skolimowski): “German inflation accelerated more than economists predicted as European Central Bank officials prepare to discuss paring back stimulus. The rate rose to 1.8% in August from 1.5% in July… In Spain, energy prices propelled consumer inflation to 2% in August…”
August 27 – Bloomberg (Brett Miller and Kathleen Hays): “Bank of Japan Governor Haruhiko Kuroda said that despite some signs of reduced liquidity, the market for Japanese government bonds is ‘functioning quite well’ and actually makes it easier for the BOJ to manage yields with fewer purchases. ‘Since JGBs remaining in the market is going to decline, that means that with one unit of JGB purchase, the impact on the interest rate could be bigger,’ Kuroda said… ‘So that in coming months there will be less and less need to purchase JGBs in order to maintain the yield curve.’”
Global Bubble Watch:
August 27 – Bloomberg (Ben Bartenstein): “More investors are joining the cast of Wall Street veterans from Jeff Gundlach to Ray Dalio in warning that risky assets are overvalued. They point to rising global turmoil underscored by the recent terrorist attacks in Barcelona and the racially charged violence in Charlottesville, Virginia, as well as valuations that no longer compensate for potential flareups in North Korea and Venezuela. That’s not to mention the unpredictability in the U.S., where President Donald Trump is feuding with members of Congress before a critical vote to increase the country’s debt ceiling. Among the assets under scrutiny are emerging-market bonds, which for only the third time in history are yielding less than U.S. junk debt.”
August 31 – Bloomberg (Theophilos Argitis): “Canada’s economy unexpectedly accelerated at a 4.5% pace in the second quarter -- tops among Group of Seven countries -- led by the biggest binge in household spending since before the 2008-2009 global recession. Annualized growth was the fastest in six years and topped the 3.7% average forecast from economists. The expansion surpassed the 3.7% first quarter growth rate…”
Fixed Income Bubble Watch:
August 29 – CNBC (Jeff Cox): “Unless something dramatic happens, the Federal Reserve won't be hiking interest rates again until well into 2018, according to current market predictions. Fed funds futures — contracts that indicate where the market thinks the central bank's benchmark rate will be — point to no further moves until at least next June, and possibly a good deal later. Futures indicate that the Fed will approve just one increase between now and the end of next year.”
Federal Reserve Watch:
August 29 – Bloomberg (Sho Chandra): “John Williams, president of the San Francisco Fed, was the latest US policymaker to reiterate that the Federal Reserve is intent on making the unwinding of its $4.5tn balance sheet as boring as possible. The European Central Bank has been making similar noises ahead of an expected tapering of its bond-buying plan. Thus far, markets have agreed. Rather than a re-run of the 2013 ‘taper tantrum’ that hammered markets when the central bank first talked about stopping its purchases, bond yields have sagged lower this year, while the stock market has hit fresh records… Yet murmurs are rising that investors are underestimating the potential impact of the combination of both the Fed and the ECB simultaneously scaling back their monetary stimulus programmes. Indeed, some now reckon this is the single-biggest danger confronting markets this autumn and into next year.”
August 27 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Cleveland President Loretta Mester urged her colleagues to look past recent weak inflation data and to stick to their gradual pace of lifting interest rates, with one more increase projected before the end of this year. ‘There’s some risk that if we wait too long we can find ourselves in a bad spot,’ Mester said… on the sidelines of the Fed’s annual retreat in Jackson Hole, Wyoming. ‘We have to move policy a little bit before we get to the goals or else we’re going to get behind.’”
U.S. Bubble Watch:
August 30 – Bloomberg (Sho Chandra): “U.S. second-quarter growth was revised upward to the fastest pace in two years on stronger household spending and a bigger gain in business investment, putting the economy on a stronger track… Gross domestic product rose at a 3% annualized rate from prior quarter (est. 2.7%); revised from initial estimate of 2.6%. Consumer spending, biggest part of the economy, grew 3.3% (est. 3%), most since second quarter of 2016 and revised from 2.8%. Nonresidential fixed investment rose 6.9%, revised from initial increase of 5.2%.”
August 29 – CNBC (Diana Olick): “Not only are home prices continuing to rise, but the gains are accelerating. Couple that with record-low supply of homes for sale, and you would think demand would fall off. So far, it has not. Bidding wars are to be expected with most offers, especially in larger metropolitan areas and their suburbs. ‘It's a new normal in the housing market,’ wrote Cheryl Young, senior economist at Trulia… ‘Ever rising prices being met by insatiable demand.’ The supply of homes for sale at the end of July was 9% lower compared with July of 2016… Homes are selling faster and faster each month… Builders are shifting somewhat to lower-priced products but really continue to concentrate on move-up homes, which is not helping the shortage.”
August 29 – Bloomberg (Sho Chandra): “A pickup in consumer confidence to the second-highest level since late 2000 provide a basis for steady gains in spending, according to… the… Conference Board. Confidence index rose to 122.9 (est. 120.7) from downwardly revised 120 in July. Present conditions measure increased to 151.2, highest since July 2001, from 145.4.”
August 30 – Bloomberg (Katherine Chiglinsky): “Hurricane Harvey could cause $70 billion to $90 billion in economic losses from wind, storm surge and flood damage, most of it in the Houston metropolitan area, according to risk-modeling company RMS. The majority of those losses will be uninsured… The final tally of damages could rise as the flooding continues, the company said.”
August 29 – CNBC (Phil LeBeau): “They seem to be in almost every picture or video of flooded neighborhoods in and around Houston. There are scores of cars and trucks with water up to their windows and in some cases over the hood and roof. In fact, the flooding is so extensive, Cox Automotive estimates a half-million vehicles may wind up in the scrap yard. ‘This is worse than Hurricane Sandy,’ said Jonathan Smoke, chief economist for Cox Automotive. ‘Sandy was bad, but the flooding with Hurricane Harvey could impact far more vehicles.’”
August 27 – Financial Times (Ben McLannahan): “Wall Street analysts have been urging investors all year to buy stocks in the big US banks. But Wall Street itself is not listening. Executives and board members at the top six US banks have been consistent sellers of their own banks’ shares this year… Insiders at the big six banks by assets — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — have in total sold a net 9.32m shares on the open market since the turn of the year. Even excluding Warren Buffett’s big dumping of shares in Wells in April… sales by insiders outnumber purchases by about 14 to one.”
August 29 – Bloomberg: “Insurers got burned badly in the 2008 financial crisis. So almost a decade later, BlackRock Inc scoured the industry's $5 trillion in US investments to figure out how they would fare if markets crash so hard again. The answer: Worse. The world's largest money manager mined regulatory filings of more than 500 insurance companies and modeled their portfolios in a similar downturn. Their stockpiles… would drop by 11% on average… That's significantly steeper, BlackRock estimates, than the group's ‘mark-to-market’ losses during the depths of the crisis. The reason is pretty simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets…”
Europe Watch:
August 31 – Bloomberg (Catherine Bosley): “Inflation in the euro area picked up more than economists predicted though underlying cost pressures failed to accelerate, underscoring the European Central Bank’s struggle for price stability just days before officials debate the future of their stimulus program. Consumer prices rose 1.5% in August after 1.3% in July… That’s the highest reading in four months…”
August 26 – Reuters (Sudip Kar-Gupta): “Most French voters are now dissatisfied with Emmanuel Macron’s performance, a poll showed on Sunday, a dramatic decline for a president who basked in a landslide election victory less than four months ago. The poll, conducted by Ifop for newspaper Le Journal du Dimanche (JDD), showed Macron’s ‘dissatisfaction rating’ rising to 57%, from 43% in July.”
Geopolitical Watch:
August 30 – BBC: “North Korea says its firing of a missile over Japan was ‘the first step’ of military operations in the Pacific, signalling plans for more launches. State media also repeated threats to the US Pacific island of Guam, which it called ‘an advanced base of invasion’. The missile launched on Tuesday crossed Japan's northern Hokkaido island, triggering public alerts to take cover, before landing in the sea. The UN Security Council has unanimously condemned North Korea for its actions. Meeting late on Tuesday…, the council called the launch ‘outrageous’, demanding North Korea cease all missile testing.”
August 28 – CNBC (Justina Crabtree): “North Korea's provocative launch of a missile through Japanese airspace came quickly following strong warnings from South Korea that its military was gearing up to hit North Korea back hard if necessary. South Korea and Japan condemned the latest Tuesday's launch in strong terms. While Japanese Prime Minister Shinzo Abe said the missile was an unprecedented, serious and grave threat to his country, South Korean President Moon Jae-in ordered a show of ‘overwhelming’ force against Pyongyang.”
August 29 – Reuters (Jack Kim and Kaori Kaneko): “South Korean and Japanese jets joined exercises with two supersonic U.S. B-1B bombers above and near the Korean peninsula on Thursday, two days after North Korea fired a missile over Japan, sharply raising tension. The drills, involving four U.S. stealth F-35B jets as well as South Korean and Japanese fighter jets, came at the end of annual joint U.S.-South Korea military exercises focused mainly on computer simulations.”
August 29 – Reuters (Parisa Hafezi): “Iran has dismissed a U.S. demand for United Nations nuclear inspectors to visit its military bases as ‘merely a dream’. It also said the International Atomic Energy Agency (IAEA) was unlikely to agree anyway. The U.S. ambassador to the United Nations, Nikki Haley, last week pressed the IAEA to seek access to Iranian military bases to ensure that they were not concealing activities banned by the 2015 nuclear deal reached between Iran and six major powers. U.S. President Donald Trump has called the nuclear pact… ‘the worst deal ever’. In April, he ordered a review of whether a suspension of nuclear sanctions on Iran was in the U.S. interest.”
August 29 – CNBC (Phil LeBeau): “They seem to be in almost every picture or video of flooded neighborhoods in and around Houston. There are scores of cars and trucks with water up to their windows and in some cases over the hood and roof. In fact, the flooding is so extensive, Cox Automotive estimates a half-million vehicles may wind up in the scrap yard. ‘This is worse than Hurricane Sandy,’ said Jonathan Smoke, chief economist for Cox Automotive. ‘Sandy was bad, but the flooding with Hurricane Harvey could impact far more vehicles.’”
August 27 – Financial Times (Ben McLannahan): “Wall Street analysts have been urging investors all year to buy stocks in the big US banks. But Wall Street itself is not listening. Executives and board members at the top six US banks have been consistent sellers of their own banks’ shares this year… Insiders at the big six banks by assets — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — have in total sold a net 9.32m shares on the open market since the turn of the year. Even excluding Warren Buffett’s big dumping of shares in Wells in April… sales by insiders outnumber purchases by about 14 to one.”
August 29 – Bloomberg: “Insurers got burned badly in the 2008 financial crisis. So almost a decade later, BlackRock Inc scoured the industry's $5 trillion in US investments to figure out how they would fare if markets crash so hard again. The answer: Worse. The world's largest money manager mined regulatory filings of more than 500 insurance companies and modeled their portfolios in a similar downturn. Their stockpiles… would drop by 11% on average… That's significantly steeper, BlackRock estimates, than the group's ‘mark-to-market’ losses during the depths of the crisis. The reason is pretty simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets…”
Europe Watch:
August 31 – Bloomberg (Catherine Bosley): “Inflation in the euro area picked up more than economists predicted though underlying cost pressures failed to accelerate, underscoring the European Central Bank’s struggle for price stability just days before officials debate the future of their stimulus program. Consumer prices rose 1.5% in August after 1.3% in July… That’s the highest reading in four months…”
August 26 – Reuters (Sudip Kar-Gupta): “Most French voters are now dissatisfied with Emmanuel Macron’s performance, a poll showed on Sunday, a dramatic decline for a president who basked in a landslide election victory less than four months ago. The poll, conducted by Ifop for newspaper Le Journal du Dimanche (JDD), showed Macron’s ‘dissatisfaction rating’ rising to 57%, from 43% in July.”
Geopolitical Watch:
August 30 – BBC: “North Korea says its firing of a missile over Japan was ‘the first step’ of military operations in the Pacific, signalling plans for more launches. State media also repeated threats to the US Pacific island of Guam, which it called ‘an advanced base of invasion’. The missile launched on Tuesday crossed Japan's northern Hokkaido island, triggering public alerts to take cover, before landing in the sea. The UN Security Council has unanimously condemned North Korea for its actions. Meeting late on Tuesday…, the council called the launch ‘outrageous’, demanding North Korea cease all missile testing.”
August 28 – CNBC (Justina Crabtree): “North Korea's provocative launch of a missile through Japanese airspace came quickly following strong warnings from South Korea that its military was gearing up to hit North Korea back hard if necessary. South Korea and Japan condemned the latest Tuesday's launch in strong terms. While Japanese Prime Minister Shinzo Abe said the missile was an unprecedented, serious and grave threat to his country, South Korean President Moon Jae-in ordered a show of ‘overwhelming’ force against Pyongyang.”
August 29 – Reuters (Jack Kim and Kaori Kaneko): “South Korean and Japanese jets joined exercises with two supersonic U.S. B-1B bombers above and near the Korean peninsula on Thursday, two days after North Korea fired a missile over Japan, sharply raising tension. The drills, involving four U.S. stealth F-35B jets as well as South Korean and Japanese fighter jets, came at the end of annual joint U.S.-South Korea military exercises focused mainly on computer simulations.”
August 29 – Reuters (Parisa Hafezi): “Iran has dismissed a U.S. demand for United Nations nuclear inspectors to visit its military bases as ‘merely a dream’. It also said the International Atomic Energy Agency (IAEA) was unlikely to agree anyway. The U.S. ambassador to the United Nations, Nikki Haley, last week pressed the IAEA to seek access to Iranian military bases to ensure that they were not concealing activities banned by the 2015 nuclear deal reached between Iran and six major powers. U.S. President Donald Trump has called the nuclear pact… ‘the worst deal ever’. In April, he ordered a review of whether a suspension of nuclear sanctions on Iran was in the U.S. interest.”
Thursday, August 31, 2017
Friday's News Links
[Bloomberg] Stocks Rise, Dollar Falls After Weak Jobs Number: Markets Wrap
[Bloomberg] Payrolls in U.S. Rise 156,000; Wages Also Below Forecasts
[Bloomberg] ECB May Not Have Final QE Plan Ready Until December
[Bloomberg] Junk Bonds Face Wave of Supply Just as Investors Turn Sour
[Reuters] China August factory activity picks up to six-month high as orders surge: Caixin PMI
[Bloomberg] Harvey's Made the World's Most Important Chemical a Rare Commodity
[Bloomberg] Bank Of Japan's Break From Battling the Yield Curve May Soon End
[Bloomberg] This May Be China's Most Debt-Strapped Developer
[Bloomberg] ECB's Nowotny Sees No Need to Overdramatize Euro Appreciation
[Bloomberg] European Equity Funds Post Biggest Outflow in Six Months
[Reuters] Xi's power on parade as China party congress looms
[Reuters] Putin warns North Korea situation on verge of 'large-scale conflict'
[Bloomberg] Payrolls in U.S. Rise 156,000; Wages Also Below Forecasts
[Bloomberg] ECB May Not Have Final QE Plan Ready Until December
[Bloomberg] Junk Bonds Face Wave of Supply Just as Investors Turn Sour
[Reuters] China August factory activity picks up to six-month high as orders surge: Caixin PMI
[Bloomberg] Harvey's Made the World's Most Important Chemical a Rare Commodity
[Bloomberg] Bank Of Japan's Break From Battling the Yield Curve May Soon End
[Bloomberg] This May Be China's Most Debt-Strapped Developer
[Bloomberg] ECB's Nowotny Sees No Need to Overdramatize Euro Appreciation
[Bloomberg] European Equity Funds Post Biggest Outflow in Six Months
[Reuters] Xi's power on parade as China party congress looms
[Reuters] Putin warns North Korea situation on verge of 'large-scale conflict'
Thursday Evening Links
[Reuters] U.S. data sends stocks higher; yields slip
[Reuters] ECB unease over firmer euro risks slowing asset purchase exit -sources
[CNBC] Hurricane Harvey will likely be most expensive natural disaster in US history: AccuWeather
[Bloomberg] U.S. Consumer Comfort Rises a Seventh Week to Fresh 16-Year High
[Bloomberg] U.S. Pending Home Sales Unexpectedly Fall on Lean Inventory
[Bloomberg] The Bond Market's Biggest Rally of 2017 Amazes Traders
[Reuters] 'Safe-haven euro could complicate ECB plan to roll back stimulus
[Reuters] Atlanta Fed trims U.S. Q3 GDP growth view to 3.3 pct
[Reuters] ECB unease over firmer euro risks slowing asset purchase exit -sources
[CNBC] Hurricane Harvey will likely be most expensive natural disaster in US history: AccuWeather
[Bloomberg] U.S. Consumer Comfort Rises a Seventh Week to Fresh 16-Year High
[Bloomberg] U.S. Pending Home Sales Unexpectedly Fall on Lean Inventory
[Bloomberg] The Bond Market's Biggest Rally of 2017 Amazes Traders
[Reuters] 'Safe-haven euro could complicate ECB plan to roll back stimulus
[Reuters] Atlanta Fed trims U.S. Q3 GDP growth view to 3.3 pct
Wednesday, August 30, 2017
Thursday's News Links
[Bloomberg] Stocks Gain on Growth Outlook; Dollar Extends Run: Markets Wrap
[Bloomberg] U.S. Consumer Spending, Incomes Signal Stable Second-Half Start
[Bloomberg] Gold Is Winning New Fans
[Reuters] Trump touts tax reform, overlooks White House aide Cohn
[Bloomberg] Euro-Area Inflation Gathers Pace as ECB Weighs Future Stimulus
[Bloomberg] Canada's Economy Surges 4.5% on Consumer Spending
[Bloomberg] Markets Are About to Find Out What China's Leadership Reshuffle Means
[Bloomberg] China Factory Gauge Shows Robust Economy as Price Outlook Surges
[Bloomberg] Initial Coin Offerings Draw Fraud Warning From China Trade Group
[Reuters] U.S. bombers drill over Korean peninsula after latest North Korea launch
[FT] ‘Nonprime has a nice ring to it’: the return of the high-risk mortgage
[Bloomberg] U.S. Consumer Spending, Incomes Signal Stable Second-Half Start
[Bloomberg] Gold Is Winning New Fans
[Reuters] Trump touts tax reform, overlooks White House aide Cohn
[Bloomberg] Euro-Area Inflation Gathers Pace as ECB Weighs Future Stimulus
[Bloomberg] Canada's Economy Surges 4.5% on Consumer Spending
[Bloomberg] Markets Are About to Find Out What China's Leadership Reshuffle Means
[Bloomberg] China Factory Gauge Shows Robust Economy as Price Outlook Surges
[Bloomberg] Initial Coin Offerings Draw Fraud Warning From China Trade Group
[Reuters] U.S. bombers drill over Korean peninsula after latest North Korea launch
[FT] ‘Nonprime has a nice ring to it’: the return of the high-risk mortgage
Wednesday Evening Links
[Bloomberg] U.S. Stocks, Dollar Advance on Growth Optimism: Markets Wrap
[Bloomberg] Harvey Damages Could Cost Up to $90 Billion
[CNBC, Olick] Harvey hits mortgages as flood-stricken homeowners are unlikely to pay
[Bloomberg] HNA’s Financing Costs Soar After Shopping Spree
[WSJ] New Worry in ‘Repo’: Just One Bank for $3.5 Trillion Market
[Bloomberg] Harvey Damages Could Cost Up to $90 Billion
[CNBC, Olick] Harvey hits mortgages as flood-stricken homeowners are unlikely to pay
[Bloomberg] HNA’s Financing Costs Soar After Shopping Spree
[WSJ] New Worry in ‘Repo’: Just One Bank for $3.5 Trillion Market
Tuesday, August 29, 2017
Wednesday's News Links
[Bloomberg] Dollar Rises, Treasuries Fall on Growth Optimism: Markets Wrap
[Bloomberg] Gasoline Hits 2-Year High as Harvey Shuts Biggest U.S. Refinery
[Bloomberg] U.S. Second-Quarter Growth Revised to 3% in Momentum Boost
[Bloomberg] Companies in U.S. Add More Jobs Than Forecast, ADP Data Show
[Bloomberg] From Stocks to Bonds, the Bear-Market Signals Are Multiplying
[Bloomberg] 'Apocalyptic' Flooding Has Harvey's Damages Rising by the Hour
[CNBC] A half-million flooded cars and trucks could be scrapped after Harvey
[Bloomberg] German Inflation Accelerates as ECB Prepares to Debate Stimulus
[Bloomberg] China's $2 Trillion of Shadow Lending Throws Focus on Rust Belt
[Reuters] U.N. condemns 'outrageous' North Korea missile launch, Pyongyang says more to come
[BBC] North Korea: 'Japan missile was first step in Pacific operation'
[WSJ] Republican Tax Plan Poses Risk to U.S. Bond Market
[Bloomberg] Gasoline Hits 2-Year High as Harvey Shuts Biggest U.S. Refinery
[Bloomberg] U.S. Second-Quarter Growth Revised to 3% in Momentum Boost
[Bloomberg] Companies in U.S. Add More Jobs Than Forecast, ADP Data Show
[Bloomberg] From Stocks to Bonds, the Bear-Market Signals Are Multiplying
[Bloomberg] 'Apocalyptic' Flooding Has Harvey's Damages Rising by the Hour
[CNBC] A half-million flooded cars and trucks could be scrapped after Harvey
[Bloomberg] German Inflation Accelerates as ECB Prepares to Debate Stimulus
[Bloomberg] China's $2 Trillion of Shadow Lending Throws Focus on Rust Belt
[Reuters] U.N. condemns 'outrageous' North Korea missile launch, Pyongyang says more to come
[BBC] North Korea: 'Japan missile was first step in Pacific operation'
[WSJ] Republican Tax Plan Poses Risk to U.S. Bond Market
Tuesday Evening Links
[Reuters] Global stocks, dollar and yields slip on North Korea jitters; gold up
[CNBC] Conservatives draw battle lines in debt-ceiling fight
[CNBC] Market thinks Fed could hold off on rate hikes for another year — at least
[CNBC, Olick] Buyers 'fight over scraps' in ever-pricier housing
[CNBC] Warning signs appear to crop up beneath market’s surface
[Bloomberg] U.S. Consumer Confidence at Second-Highest Level Since 2000
[Bloomberg] Here's Why the Yen Remains a Safe Haven After a Rocket Passes Over Japan
[Bloomberg] Bitcoin's Epic Rise Leaves Late-1990s Tech Bubble in the Dust
[FT] Investors wary of central bankers’ soothing taper talk
[CNBC] Conservatives draw battle lines in debt-ceiling fight
[CNBC] Market thinks Fed could hold off on rate hikes for another year — at least
[CNBC, Olick] Buyers 'fight over scraps' in ever-pricier housing
[CNBC] Warning signs appear to crop up beneath market’s surface
[Bloomberg] U.S. Consumer Confidence at Second-Highest Level Since 2000
[Bloomberg] Here's Why the Yen Remains a Safe Haven After a Rocket Passes Over Japan
[Bloomberg] Bitcoin's Epic Rise Leaves Late-1990s Tech Bubble in the Dust
[FT] Investors wary of central bankers’ soothing taper talk
Monday, August 28, 2017
Tuesday's News Links
[Bloomberg] U.S. Stocks Pare Losses as Korea Concern Eases: Markets Wrap
[Bloomberg] Gold Jumps on Haven Demand as N. Korea Lobs Missile Across Japan
[Reuters] Trump says 'all options on the table' after North Korea fires missile over Japan
[Bloomberg] This Is How North Korea's Latest Salvo Coursed Through Markets
[CNBC] 'Unprecedented, serious and significant threat': Japan's prime minister on North Korea missile launch
[CNBC] South Korean President Moon tells military to toughen up, orders show of 'overwhelming' force
[MarketWatch] Home price gains were hot in June as Seattle sizzled, Case-Shiller says
[Bloomberg] BlackRock Finds $5 Trillion Industry Is Now Riskier Than in '08
[Bloomberg] EU's Juncker Slams U.K. on Brexit as Fractious Talks Resume
[FT] Trump rejected China steel offer his officials backed
[Reuters] Iran rejects U.S. demand for U.N. inspector visit to military sites
[Bloomberg] Gold Jumps on Haven Demand as N. Korea Lobs Missile Across Japan
[Reuters] Trump says 'all options on the table' after North Korea fires missile over Japan
[Bloomberg] This Is How North Korea's Latest Salvo Coursed Through Markets
[CNBC] 'Unprecedented, serious and significant threat': Japan's prime minister on North Korea missile launch
[CNBC] South Korean President Moon tells military to toughen up, orders show of 'overwhelming' force
[MarketWatch] Home price gains were hot in June as Seattle sizzled, Case-Shiller says
[Bloomberg] BlackRock Finds $5 Trillion Industry Is Now Riskier Than in '08
[Bloomberg] EU's Juncker Slams U.K. on Brexit as Fractious Talks Resume
[FT] Trump rejected China steel offer his officials backed
[Reuters] Iran rejects U.S. demand for U.N. inspector visit to military sites
Monday Evening Links
[Bloomberg] Stocks Mixed as Harvey Roils Texas; Gasoline Gains: Markets Wrap
[Bloomberg] North Korea Appears to Have Fired Missile Toward Japan: NHK
[CNBC] Harvey could overwhelm federal flood insurance program
[Bloomberg] Treasury Is Putting Pressure on Congress to Fix the Debt Ceiling
[Reuters] U.S. goods trade deficit widens in July; retail inventories fall
[Bloomberg] North Korea Appears to Have Fired Missile Toward Japan: NHK
[CNBC] Harvey could overwhelm federal flood insurance program
[Bloomberg] Treasury Is Putting Pressure on Congress to Fix the Debt Ceiling
[Reuters] U.S. goods trade deficit widens in July; retail inventories fall
Sunday, August 27, 2017
Monday's News Links
[Bloomberg] Stocks Rise as Traders Weigh Harvey; Gold Climbs: Markets Wrap
[Reuters] U.S. gasoline futures surge as Harvey swamps Texas, euro holds at 2-1/2-year high
[Bloomberg] `Tragedy of Epic Proportions' Looms as Harvey Pounds Houston
[Reuters] Houston crippled by catastrophic flooding, with more rain on the way
[Bloomberg] Hurricane Harvey Shuts Two of the Largest U.S. Ports
[Reuters] Texas flood damage from Harvey may match Katrina - insurance group
[Bloomberg] Harvey's Cost Reaches Catastrophe as Modelers See Many Uninsured
[Bloomberg] Cohn or Yellen? Bond Traders Say Same Difference
[Bloomberg] Trump’s Pivot to Taxes Is Fraught With ‘Pitfalls Everywhere’
[Bloomberg] Amazon's Opening Salvo in Grocery Price War Hits Bond Market
[Bloomberg] Wall Street Vets From Dalio to Gundlach Warn on Emerging Markets
[Bloomberg] China's Central Bank Is Embracing a Supercharged Yuan
[Bloomberg] Wanda Bonds Fall on Reports of Chairman Wang Stopped at Airport
[WSJ] Energy Firms Brace for Harvey Fallout
[WSJ] In a Blast From a Financial Crisis Past, Synthetic CDOs Are Back
[Reuters] U.S. gasoline futures surge as Harvey swamps Texas, euro holds at 2-1/2-year high
[Bloomberg] `Tragedy of Epic Proportions' Looms as Harvey Pounds Houston
[Reuters] Houston crippled by catastrophic flooding, with more rain on the way
[Bloomberg] Hurricane Harvey Shuts Two of the Largest U.S. Ports
[Reuters] Texas flood damage from Harvey may match Katrina - insurance group
[Bloomberg] Harvey's Cost Reaches Catastrophe as Modelers See Many Uninsured
[Bloomberg] Cohn or Yellen? Bond Traders Say Same Difference
[Bloomberg] Trump’s Pivot to Taxes Is Fraught With ‘Pitfalls Everywhere’
[Bloomberg] Amazon's Opening Salvo in Grocery Price War Hits Bond Market
[Bloomberg] Wall Street Vets From Dalio to Gundlach Warn on Emerging Markets
[Bloomberg] China's Central Bank Is Embracing a Supercharged Yuan
[Bloomberg] Wanda Bonds Fall on Reports of Chairman Wang Stopped at Airport
[WSJ] Energy Firms Brace for Harvey Fallout
[WSJ] In a Blast From a Financial Crisis Past, Synthetic CDOs Are Back
Sunday Evening Links
[Reuters] Euro surges to two-and-a-half-year high after Draghi comments, oil up after Harvey
[Bloomberg] Central Bankers Shun Policy Clues as Trade Pervades Jackson Hole
[Bloomberg] Kuroda Cautions That Japan Can't Keep Current Growth Rate
[Bloomberg] Kuroda Sees Yield-Curve Control Allowing BOJ to Buy Fewer JGBs
[Bloomberg] Fed's Mester Says Keep Up the ‘Gradual’ Pace on Rate Hikes
[Axios] Exclusive: Trump vents in Oval Office, "I want tariffs. Bring me some tariffs!"
[CNBC] Major refineries are shutting down in the wake of Harvey flooding
[Bloomberg] Harvey Unloads Severe Flooding Across Heart of U.S. Energy
[Bloomberg] Early China Data Show Diverging Sentiment, Stable Growth Outlook
[Bloomberg] China Money Rate Confusion Shows How PBOC Keeps Traders on Edge
[Bloomberg] Central Bankers Shun Policy Clues as Trade Pervades Jackson Hole
[Bloomberg] Kuroda Cautions That Japan Can't Keep Current Growth Rate
[Bloomberg] Kuroda Sees Yield-Curve Control Allowing BOJ to Buy Fewer JGBs
[Bloomberg] Fed's Mester Says Keep Up the ‘Gradual’ Pace on Rate Hikes
[Axios] Exclusive: Trump vents in Oval Office, "I want tariffs. Bring me some tariffs!"
[CNBC] Major refineries are shutting down in the wake of Harvey flooding
[Bloomberg] Harvey Unloads Severe Flooding Across Heart of U.S. Energy
[Bloomberg] Early China Data Show Diverging Sentiment, Stable Growth Outlook
[Bloomberg] China Money Rate Confusion Shows How PBOC Keeps Traders on Edge
Saturday, August 26, 2017
Sunday's News Links
[Bloomberg] Harvey's Second Act Could Drive Up Economic Damage for Texas
[WSJ] Hurricane Harvey Threatens Largest Flood Insurer: The Government
[NYT, Morgenson] Shut Down the Government, and This Time, Investors Will Care
[Reuters] Most French now dissatisfied with Macron, poll shows
[FT] Wall St’s top bankers sell own groups’ shares as Trump hopes fade
[WSJ] Hurricane Harvey Threatens Largest Flood Insurer: The Government
[NYT, Morgenson] Shut Down the Government, and This Time, Investors Will Care
[Reuters] Most French now dissatisfied with Macron, poll shows
[FT] Wall St’s top bankers sell own groups’ shares as Trump hopes fade
Friday, August 25, 2017
Weekly Commentary: Yellen in Jackson Hole
“A resilient financial system is critical to a dynamic global economy -- the subject of this conference. A well-functioning financial system facilitates productive investment and new business formation and helps new and existing businesses weather the ups and downs of the business cycle.” Janet Yellen, “Financial Stability a Decade after the Onset of the Crisis,” August 25, 2017
I would add that a well-functioning financial system is critical to long-term social, political and geopolitical stability. Importantly, well-functioning finance would have mechanisms that promote adjustment and self-correction. This is fundamental to market-based systems. I would argue that this is also a basic premise of sound money and finance. Sound finance would neither suppress market volatility nor work to repeal business cycles - but would instead have inherent characteristics that counteract protracted market and economic excess.
For starters, I question whether a so-called “resilient financial system” is necessarily a sound one. As we have witnessed, obtrusive government measures can dictate “resilience” – in terms of extended sanguine backdrops free from volatility, risk aversion and crisis. Yet this type of resilience fosters excesses that can inevitably end with a financial and economic crash.
Ten years ago most would have argued forcefully that the system at the time was resilient. Chair Yellen argues in her Jackson Hole paper that myriad regulatory changes have created a much more resilient financial system and economy. Her long speech highlights a laundry list of measures put in place since the crisis. Much to my liking, 22 footnotes include references to even Minsky, Kindleberger and Charles Mackay.
There was also footnote #2: “A contemporaneous perspective on subprime mortgage market developments at this time is provided in Ben S. Bernanke (2007), "The Subprime Mortgage Market," speech delivered… May 17 (2007).”
Looking back, chairman Bernanke presented a knowledgeable understanding of the subprime industry in 2007. His deeply flawed understanding of the macro backdrop was captured in a single sentence: “In general, mortgage credit quality has been very solid in recent years.”
Total mortgage Credit had doubled in less than seven years. Indicators of excess were everywhere. Inflation psychology had taken deep root throughout the nation’s housing markets, with California housing prices spiraling ever higher. The inflationary backdrop ensured a proliferation of new mortgage products that kept the game going with low monthly payments for prime and subprime borrower alike.
As someone who chronicled the mortgage finance Bubble in its entirety on a weekly basis, it was all too conspicuous. This was the most important market for finance (mortgages) and the real economy (housing and home-related) – that was dominated by the thinly capitalized GSE with their implied federal backing. It was a sophisticated financial scheme. Measures going back to the Greenspan era (bolstered by “helicopter Ben” musings) convinced the markets that the Fed would respond aggressively to avert market crisis. Surely, Washington would never allow a housing bust. It would simply be too devastating. In an irony of recent Bubbles, the greater they inflate the more convinced markets become that officials will not permit a bust.
What might explain Bernanke’s indifference to unprecedented mortgage and housing risks? Well, his policy doctrine was at the heart of the problem: Dr. Bernanke had been a leading proponent for using mortgage finance to reflate the system after the bursting of the “tech” Bubble.
Yellen: “Repeating a familiar pattern, the ‘madness of crowds’ had contributed to a bubble, in which investors and households expected rapid appreciation in house prices. The long period of economic stability beginning in the 1980s had led to complacency about potential risks, and the buildup of risk was not widely recognized. …A self-reinforcing loop developed, …as investors sought ways to gain exposure to the rising prices of assets linked to housing and the financial sector. As a result, securitization and the development of complex derivatives products distributed risk across institutions in ways that were opaque and ultimately destabilizing. In response, policymakers around the world have put in place measures to limit a future buildup of similar vulnerabilities.”
As I’ve written in the past, I understand why officials did what they did back in the autumn of 2008. Clearly, they were not about to sit back and watch the system collapse. They would also not settle for mere stabilization. Their epic mistake was to push forward with aggressive reflationary policies – a global monetary inflation regime to which they remain entrapped nine years later. While post-“tech” Bubble reflation focused on mortgage Credit and housing, post-mortgage finance Bubble reflationary measures went much farther: reflate risk assets (equities, corporate debt and housing), collapse market yields and force savers out of the safety of deposits and money funds. It was the same flawed doctrine that had nurtured the “worst crisis since the Great Depression” – but on a much grander scale.
If there was the “madness of crowds” then, how about these days with Trillions flowing into passive ETFs, record corporate debt issuance, record securities and home prices, a proliferation of cryptocurrencies and a bubbling derivatives marketplace. So long as the Fed targets higher asset prices while repeatedly providing liquidity backstops, a culture of speculation becomes only more deeply entrenched.
Yellen’s speech makes repeated mention of “too big to fail” – and how policy measures have dealt with this leading element of the previous crisis. In reality, central bankers have ensured that “too big to fail” moral hazard has mushroomed from an issue with respect to large financial institutions to a critical facet afflicting global securities and derivatives market pricing.
Yellen’s speech, “Financial Stability a Decade after the Onset of the Crisis,” somehow doesn’t address the historic experiment with quantitative easing (QE). There’s no mention of the Fed (and global central banks) repeatedly responding to incipient market instability (with QE, an extension of monetary stimulus, or a postponement of “normalization”). The powerful doctrine of the Fed “pushing back against a tightening of financial conditions” is omitted from the discussion. The Fed chair largely avoids monetary policy altogether.
Bernanke had his “mortgage credit quality has been very solid…” For Yellen, it’s “evidence shows that reforms since the crisis have made the financial system substantially safer.” If the Yellen Fed believed as much, I doubt rates would be at 1.25% and their balance sheet would remain ballooned at $4.4 TN.
Yellen: “Investors have recognized the progress achieved toward ending too-big-to-fail… Credit default swaps for the large banks also suggest that market participants assign a low probability to the distress of a large U.S. banking firm.”
I would caution against calling out low bank CDS prices as evidence of progress toward ending too-big-to-fail. CDS is atypically low across the spectrum of corporate borrowers. Indeed, sovereign CDS pricing is unusually inexpensive around the globe despite a huge run up in debt loads (Italy 148bps!). And then there’s the historically low VIX that astute analysts argue has been disregarding risk. Low risk premiums across various asset classes - at home and abroad - are consistent with market perceptions that central bankers are committed to liquidity backstopping necessary to safeguard against another crisis. “Too big to fail” has never had such momentous market impacts.
Yellen: “Our more resilient financial system is better prepared to absorb, rather than amplify, adverse shocks, as has been illustrated during periods of market turbulence in recent years. Enhanced resilience supports the ability of banks and other financial institutions to lend, thereby supporting economic growth through good times and bad.”
Resilience over recent years has clearly been associated with concerted open-ended QE from all the world’s leading central banks. It would also appear that chair Yellen overly emphasizes traditional banking when referencing the “financial system.” “Banks are safer. The risk of runs owing to maturity transformation is reduced.”
It’s worth recalling that traditional bank runs were not much of an issue during the previous crisis. Traditional old Market Panic was. As they will do, long periods of market greed erupted into fear and panic. The acute issue was “repo” financing of large institutions financing MBS holdings – along with what a Wall Street liquidity crisis meant for the pricing of mortgage-related finance and the functioning of derivatives more generally. Investor panic was sparked by the loss of faith in the safety and liquidity of repo “money.” Yet the overriding issue remained the mispricing of Trillions of MBS and mortgage-related securities and derivatives. I’ve always argued that a repricing of mortgage debt – and risk more generally – was inevitable, and that major financial and economic repercussions were unavoidable. Bubbles are not forever.
There is no doubt in my mind that today’s issue of securities mispricing dwarfs the mortgage finance Bubble period. I also believe latent derivatives market-related instability (i.e. market “insurance”) also likely exceeds pre-2008 crisis levels. Less clear is where an acute liquidity episode could initially manifest. Lehman and the cadre of leveraged speculators borrowing in the short-term repo market to finance long duration mortgage securities was rather egregious.
Financial crisis typically erupts in the “money” markets. This is where risk is perceived to be minimal, yet it is at the same time the domain of aggressive risk intermediation that works to distort overall market dynamics. Throughout the mortgage finance Bubble period, “Wall Street Alchemy” transformed progressively riskier mortgages into endless perceived safe and liquid “money”-like instruments – “The Moneyness of Credit,” with the “repo” market at the epicenter of perilous risk distortions.
I have argued that unparalleled Fed and global central bank inflationary measures molded the “Moneyness of Risk Assets”. In particular, central bank backing ensured that inflating markets in equities and corporate Credit came to be perceived as low-risk stores of value. And with the proliferation of (perceived liquid) fund choices available in the marketplace (ETFs in particular), central banks coupled with Wall Street Alchemy achieved the incredible: the transformation of high-risk securities - with ever-rising prices - into perceived “money”-like instruments.
Returning to the above opening paragraph extracted from Yellen’s speech, I believe it is important to contemplate whether market resilience has been due to sound financial system structure or instead because of central bank-induced market distortions and liquidity backstops. If the latter, it is critical to appreciate that this extended period of “resiliency” has ensured cumulative financial distortions and Bubble Economy Maladjustment – on an unparalleled global scale. With tens of Trillions of mispriced securities globally, a painful bout of repricing is unavoidable.
We’ll see how resilient “the financial system” proves to be come the unmasking of risk market liquidity and safety misperceptions. It’s a curious discussion of “Financial Stability a Decade after the Onset of the Crisis,” that glosses over near zero rates, unending QE, Trillions of global debt securities trading with negative yields and the extraordinary expansion of the ETF complex. It recalls Alan Greenspan’s speeches - the reasoned analysis along with the intrigue of what went unsaid. For me, it’s disingenuous and lacks credibility.
For the Week:
The S&P500 increased 0.7% (up 9.1% y-t-d), and the Dow rose 0.6% (up 10.4%). The Utilities gained 1.1% (up 12%). The Banks advanced 1.0% (up 2.3%), and the Broker/Dealers rallied 1.1% (up 10.5%). The Transports increased 0.4% (up 1.0%). The S&P 400 Midcaps gained 1.0% (up 2.9%), and the small cap Russell 2000 recovered 1.4% (up 1.4%). The Nasdaq100 added 0.5% (up 19.7%), and the Morgan Stanley High Tech index rose 1.2% (up 25.5%). The Semiconductors gained 0.8% (up 19.2%). The Biotechs surged 2.6% (up 26.3%). With bullion up $7, the HUI gold index jumped 2.4% (up 10.3%).
Three-month Treasury bill rates ended the week at 99 bps. Two-year government yields gained three bps to 1.33% (up 14bps y-t-d). Five-year T-note yields were unchanged at 1.76% (down 17bps). Ten-year Treasury yields declined three bps to 2.17% (down 28bps). Long bond yields fell three bps to 2.75% (down 32bps).
Greek 10-year yields fell nine bps to 5.49% (down 153bps y-t-d). Ten-year Portuguese yields jumped 10 bps to 2.87% (down 88bps). Italian 10-year yields rose seven bps to 2.10% (up 29bps). Spain's 10-year yields increased five bps to 1.61% (up 23bps). German bund yields slipped three bps to 0.38% (up 18bps). French yields declined two bps to 0.70% (up 1bp). The French to German 10-year bond spread widened one to 32 bps. U.K. 10-year gilt yields fell four bps to 1.05% (down 18bps). U.K.'s FTSE equities index rose 1.1% (up 3.6%).
Japan's Nikkei 225 equities index was little changed (up 1.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.02% (down 2bps). France's CAC40 slipped 0.2% (up 5.0%). The German DAX equities index was unchanged (up 6.0%). Spain's IBEX 35 equities index declined 0.4% (up 10.6%). Italy's FTSE MIB index dipped 0.3% (up 13.1%). EM equities were higher. Brazil's Bovespa index surged 3.4% (up 18%), and Mexico's Bolsa added 0.6% (up 12.6%). South Korea's Kospi gained 0.9% (up 17.4%). India’s Sensex equities index added 0.2% (up 18.7%). China’s Shanghai Exchange jumped 1.9% (up 7.3%). Turkey's Borsa Istanbul National 100 index rose 2.4% (up 40.5%). Russia's MICEX equities index rose 2.5% (down 11.4%).
Junk bond mutual funds saw outflows of $1.01 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped three bps to 3.86% (up 43bps y-o-y). Fifteen-year rates were unchanged at 3.16% (up 42bps). The five-year hybrid ARM rate added a basis point to 3.17% (up 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.03% (up 46bps).
Federal Reserve Credit last week declined $5.4bn to $4.426 TN. Over the past year, Fed Credit declined $13.0bn. Fed Credit inflated $1.614 TN, or 58%, over the past 250 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.0bn last week to $3.342 TN. "Custody holdings" were up $135bn y-o-y, or 4.2%.
M2 (narrow) "money" supply last week expanded $11.5bn to a record $13.629 TN. "Narrow money" expanded $691bn, or 5.3%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $62bn, while Savings Deposits fell $59.2bn. Small Time Deposits gained $3.7bn. Retail Money Funds added $2.7bn.
Total money market fund assets jumped $29.65bn to a 2017 high $2.736 TN. Money Funds added $1.1bn y-o-y.
Total Commercial Paper rose $9.0bn to $996.5bn. CP declined $7.4bn y-o-y, or 0.7%.
Currency Watch:
The U.S. dollar index declined 0.7% to 92.74 (down 9.4% y-t-d). For the week on the upside, the Norwegian krone increased 2.0%, the Swedish krona 1.9%, the euro 1.4%, the South Korean won 1.2%, the Canadian dollar 0.8%, the Swiss franc 0.8%, the Mexican peso 0.5%, the Singapore dollar 0.5% and the British pound 0.1%. On the downside, the New Zealand dollar declined 1.0%, the Brazilian real 0.4% and the Japanese yen 0.2%. The Chinese renminbi gained 0.36% versus the dollar this week (up 4.49% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.4% (down 4.9% y-t-d). Spot Gold added 0.6% to $1,291 (up 12.1%). Silver rose 0.8% to $17.132 (up 7.2%). Crude fell 64 cents to $47.87 (down 11.1%). Gasoline jumped 2.6% (unchanged), while Natural Gas was little changed (down 23%). Copper surged 3.2% (up 22%). Wheat dropped 1.6% (up 7%). Corn sank 3.3% (unchanged).
Trump Administration Watch:
August 25 – Financial Times (Demetri Sevastopulo, Shawn Donnan and Gillian Tett): “Donald Trump will launch a major push on tax reform next week with a speech in Missouri, as the president shifts focus to fiscal policy in an effort to secure a badly needed first big legislative victory by the end of the year. Gary Cohn, head of the White House national economic council, told the Financial Times that the speech… would be the first in a series of addresses designed to convince the US public about the need to revamp a tax system that has remained largely unchanged for three decades. ‘Starting next week, the president’s agenda and calendar is going to revolve around tax reform,’ Mr Cohn said… ‘He will start being on the road making major addresses justifying the reasoning for tax reform and why we need it in the US.’”
August 23 – Reuters (Steve Holland and Dave Graham): “President Donald Trump delivered an angry and forceful defense of his response to the violence in Charlottesville, Virginia, declaring at a campaign-style rally of supporters in Phoenix that the news media had distorted his position. Addressing thousands of supporters… at the Phoenix Convention Center, Trump accused major media organizations of being ‘dishonest” and of failing ‘to report that I spoke out forcefully against hatred, bigotry.’ Trump spent more than 20 minutes of a 75-minute speech delivering a selective account of his handling of the violence in Charlottesville, where he overlooked his initial statement blaming ‘many sides,’ as well his subsequent remarks that there were good people marching alongside the white supremacists.”
August 23 – Wall Street Journal (Kristina Peterson and Siobhan Hughes): “President Donald Trump’s threat to shut down the government if Congress doesn’t approve funding for a wall along the Mexico border raised alarm among some GOP lawmakers, injecting new volatility into an already uncertain political climate this fall. Lawmakers returning to Washington in early September have a dozen days with both the House and Senate in session before the government’s current funding expires on Oct. 1. Lawmakers from both parties had expected Congress to pass a stopgap two- or three-month spending bill, but Mr. Trump’s remarks raised fresh questions about the path forward. The GOP president said… that he was prepared to dig in over his request for $1.6 billion toward the border wall, one of his signature campaign promises.”
August 23 – Reuters: “Credit ratings agency Fitch Ratings… said a failure by U.S. officials to raise the federal debt ceiling in a timely manner would prompt it to review the U.S. sovereign rating, ‘with potentially negative implications.’ Fitch, which currently assigns the United States its highest rating — ‘AAA’ — said in a statement that the prioritization of debt service payments over other government obligations, should the debt ceiling not be raised, ‘may not be compatible with 'AAA' status.’ Without the ability to sell more debt, the government is expected to run out of cash, possibly in early October, and faces the risk of not paying the interest and principal on its debt on time.”
August 20 – Financial Times (Shawn Donnan): “The Trump administration has decided to push hard for tax reform and dial down a controversial national security investigation into steel imports in a bid to swing Republican support behind the president after the turmoil of recent weeks, according to senior officials. They said that former marine general John Kelly, the new chief of staff, was leading efforts to restore order to the White House and reassure Republican leaders alarmed by Donald Trump’s equivocal reaction to white nationalist-fueled violence in Virginia last week and the subsequent open criticism from business leaders.”
August 23 – Reuters (Steve Holland and Dave Graham): “U.S. President Donald Trump warned… he might terminate the NAFTA trade treaty with Mexico and Canada after three-way talks failed to bridge deep differences. The United States, Canada and Mexico wrapped up their first round of talks on Sunday to revamp the trade pact with little sign of a breakthrough coming. Trump reopened negotiations of the 1994 treaty out of concern U.S. economic interests were suffering. ‘Personally, I don't think we can make a deal. I think we’ll probably end up terminating NAFTA at some point,’ Trump said… Suggesting a termination might help jumpstart the negotiations, Trump said: ‘I personally don’t think you can make a deal without a termination.’”
August 22 – Bloomberg (Sahil Kapur): “A growing number of key congressional Republicans are considering a controversial maneuver that would allow for about $450 billion of tax cuts without offsets, according to four congressional aides… Under the proposal, the GOP would not account for things like expiring tax breaks when gauging the budgetary impact of tax legislation -- giving tax writers more room for cuts. Senate budget and tax panels are discussing the move to a ‘current policy’ baseline -- instead of the standard ‘current law’ baseline… The chief House tax writer, Kevin Brady, also signaled openness to the approach last month, saying it would lead to deeper tax cuts. The switch would risk a backlash from Democrats and deficit hawks.”
August 22 – CNBC (Christine Wang): “President Donald Trump and Senate Majority Leader Mitch McConnell haven't spoken to each other in weeks, The New York Times reported… The newspaper said that one phone call between the president and the Kentucky Republican devolved into a ‘profane shouting match.’ Relations between the two men have been conspicuously tense. Trump has repeatedly slammed McConnell on Twitter, blaming him for the failure of the GOP's attempts to repeal and replace the Affordable Care Act.”
August 19 – Wall Street Journal (Michael C. Bender and Peter Nicholas): “President Donald Trump ousted chief strategist Steve Bannon on Friday, as newly minted Chief of Staff John Kelly sought to bring order to an administration riven by infighting and power struggles, and increasingly at odds with congressional leaders. Mr. Bannon’s departure marked the fourth senior official in five weeks—and sixth in seven months—to leave the Trump administration… A former investment banker and media executive, Mr. Bannon was most closely aligned with the president’s ‘America First’ agenda, which he described as economic nationalism.”
China Bubble Watch:
August 23 – Bloomberg: “China keeps tightening the screws in its campaign to reduce the mountain of debt. The latest curbs landed late Wednesday, with the banking watchdog targeting wealth-management products that have more than tripled in the past four years amid low deposit rates and curbs on financing to overheated industries. Lenders will need to record all WMP sales starting Oct. 20, after some ‘misled’ consumers or sold them without regulators’ permission. While the consensus is that China still has a long way to go when it comes to actual deleveraging, it seems to have at least reined in the credit-growth beast, with WMPs plateauing since the crackdown was intensified in April.”
August 19 – Reuters (Ma Rong and John Ruwitch): “China will strengthen oversight of arbitrage that takes advantage of uncoordinated regulations and increase penalties to try to prevent structural risks from getting out of control, a senior central banker said. Yin Yong, deputy governor of the People's Bank of China, told a conference… six forms of arbitrage were problematic. He said they involved differing maturities, credit conditions, investment liquidity, exchange rates, capital and information. ‘These six forms of malicious regulatory arbitrage, which circumvent the regulatory system and its arrangements, and take advantage of the incompleteness of regulation, could result in risks to the entire financial system getting out of control,’ he said. Chinese financial regulators have adopted a slew of ‘de-risking’ measures this year in the face of ballooning debt and have ramped up efforts to unearth hidden problems that could become systemic threats.”
August 23 – Reuters (Yawen Chen and Elias Glenn): “China will use all necessary means to defend the interests of the country and its companies against a U.S. trade investigation, a spokesman for the Ministry of Commerce said… The ministry… expressed ‘strong dissatisfaction’ with the U.S. launch of the probe into China's alleged theft of U.S. intellectual property, calling it ‘irresponsible’. The probe is the Trump administration's first direct measure against Chinese trade practices, which the White House and U.S. business groups say are bruising American industry.”
August 22 – Wall Street Journal (Yifan Xie and Biman Mukherji): “China metal prices tumbled Wednesday as sentiment was battered by fresh warnings that the recent steel rally was unsustainable, the latest move by regulators to tame volatility in the futures market. The main steel-rebar futures contract in Shanghai snapped a four-day rally to trade down 4.9% by midday Wednesday at 3,744 yuan ($562) a metric ton…, while hot-rolled coil futures tumbled 5.3% to 3,828 yuan a ton. On the Dalian Commodity Exchange, iron-ore futures fell 4.5% to 574.5 yuan a ton, after soaring more than 20% over the past four sessions.”
Central Bank Watch:
August 22 – BBC: “European Central Bank President Mario Draghi has said unconventional policies like quantitative easing (QE) have been a success both sides of the Atlantic. QE was introduced as an emergency measure during the financial crisis to pump money directly into the financial system and keep banks lending. A decade later, the stimulus policies are still in place, but he said they have ‘made the world more resilient’… Central bankers, including Mr Draghi, are meeting in Jackson Hole, Wyoming, later this week, where they are expected to discuss how to wind back QE without hurting the economy. On Monday, a former UK Treasury official likened the stimulus to ‘heroin’ because it has been so difficult to wean the UK, US and eurozone economies off it.”
Global Bubble Watch:
August 22 – Financial Times (Laurence Mutkin): “Since the financial crisis erupted in 2008, a significant source of demand in the world’s largest bond markets has been central banks. The quantitative easing policies that institutions, including the US Federal Reserve, European Central Bank and Bank of Japan, have adopted to resist deflationary pressures unleashed by the crisis have consisted mostly of buying government bonds. A decade on, the threat of deflation has faded (at least for now) and so the pace of bond buying by central banks, which has already moderated, is set to fall sharply next year if the ECB and the Fed announce the changes to their QE policies in coming months. Given the very low levels of yields, this poses a significant threat to the pricing of bonds — and possibly of other financial assets too. The ECB and the BoJ are continuing their QE programmes, printing money to buy more bonds every month, and the Fed and the Bank of England — although no longer increasing their balance sheets — are still reinvesting the proceeds of maturing bonds previously bought under their programmes.”
August 21 – Bloomberg (Jean-Michel Paul): “Quantitative easing, which saw major central banks buying government bonds outright and quadrupling their balance sheets since 2008 to $15 trillion, has boosted asset prices across the board. That was the aim: to counter a severe economic downturn and to save a financial system close to the brink. Little thought, however, was put into the longer-term consequences of these actions. From 2008 to 2015, the nominal value of the global stock of investable assets has increased by about 40%, to over $500 trillion from over $350 trillion. Yet the real assets behind these numbers changed little, reflecting, in effect, the asset-inflationary nature of quantitative easing. The effects of asset inflation are as profound as those of the better-known consumer inflation.”
August 20 – Financial Times (John Authers and Claire Manibog): “The Great Financial Crisis did not turn into a second Great Depression, merely a Great Recession. Asset prices quickly recovered. But did the desperate measures taken then create new bubbles? Quantitative easing… left investors with cash that they had little choice but to put into risky assets. Critics complained that this was ‘printing money,’ and would lead to currency debasement. The havens were traditional stores of value that took on the acronym SWAG: silver, wine, art and gold. By 2012, SWAG assets had formed a bubble. But it deflated as inflation fears receded and confidence in governments returned. Bricks and mortar offered another haven — particularly for those nervous that their countries might not always tolerate their wealth.”
August 22 – Bloomberg (Sid Verma and Cecile Gutscher): “HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle. Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop. ‘Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,’ Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote… His bank’s model shows assets across the world are the least correlated in almost a decade…”
August 24 – Bloomberg (Robert Brand and Cormac Mullen): “Political instability, money problems and economic growth still top the list of threats to global markets. It’s just that the main players have swapped roles, according to Eurasia Group. ‘For much of the post-crisis period, U.S. money, Chinese growth, and European politics have mattered most’ to investors, …director of global strategy at Eurasia, Karthik Sankaran, wrote… ‘But developments over the past year suggest that markets should be paying attention to U.S. politics, European growth, and Chinese money.’”
Federal Reserve Watch:
August 24 – Bloomberg (Jeanna Smialek and Alessandro Speciale): “Federal Reserve Bank of Kansas City President Esther George said if U.S. economic data hold up, there will probably be an opportunity to raise interest rates again in 2017. ‘I’ll be looking at the data in the next few weeks as we get ready for the September meeting, and see whether that still makes sense,’ George said… ‘Based on what I see today, I think there’s still opportunity to do that,’ she told Bloomberg Television’s Mike McKee…”
U.S. Bubble Watch:
August 23 – Bloomberg (Suzanne Woolley): “In a perfect world, the largest expenses in retirement would be for fun things like travel and entertainment. In the real world, retiree health-care costs can take an unconscionably big bite out of savings. A 65-year-old couple retiring this year will need $275,000 to cover health-care costs throughout retirement, Fidelity Investments said in its annual cost estimate… That stunning number is about 6% higher than it was last year… You might think that number looks high. At 65, you’re eligible for Medicare, after all. But monthly Medicare premiums for Part B (which covers doctor’s visits, surgeries, and more) and Part D (drug coverage) make up 35% of Fidelity’s estimate. The other 65% is the cost-sharing, in and out of Medicare, in co-payments and deductibles, as well as out-of-pocket payments for prescription drugs.”
August 22 – Reuters (Herbert Lash): “The sale price of high-end condominiums in Manhattan's most expensive neighborhood averaged $14.1 million in the 12 months through June, with one unit going for $65.7 million… The unit, at 432 Park Avenue, billed as the tallest residential tower in the Americas, was one of three at the Midtown East building that were in the top-five most expensive condominium sales in Manhattan, an analysis by CityRealty said. The analysis examined sale prices and what was paid per square foot in an index the realty company has created to gauge investment performance for what it considers the top 100 condominium buildings in Manhattan. The average price per square foot rose 9% to $2,788 in the 12-month period ended June 30…”
Europe Watch:
August 23 – Reuters (Shrutee Sarkar): “Euro zone business growth maintained a solid clip in August, driven by the best manufacturing performance in 6-1/2 years despite a strong euro, easily offsetting a mild slowdown in services growth… Taken together with a mild pickup in price pressures, the data is likely to support expectations that the European Central Bank will proceed later this year with making plans to scale back its multi-billion euro monthly asset purchases.”
August 20 – Financial Times (Kate Allen and Claire Jones): “The European Central Bank may have little choice but to wind down its €2tn bond-buying programme next year — whether eurozone inflation picks up, or not. An improving eurozone economy already led the ECB to scale back its purchases by €20bn a month to €60bn in April, sharpening expectations that policymakers will set out a timeline for further tapering in the next couple of months… While traders will try to glean any indication of the ECB’s intentions, Mr Draghi faces a dilemma of his own: the central bank is running out of bonds to buy. Its own rules restrict it to only purchasing a third of each country’s debt in circulation, and the supply of German Bunds and Portuguese debt in particular is starting to run thin. ‘The 33% issuer limit in Bunds presets a course of [purchase programme] exit, no matter the inflation outlook,’ says Harvinder Sian, a Citigroup analyst.”
August 21 – Financial Times (Izabella Kaminska): “Talk of a domestic parallel currency being introduced in Italy is not new. But it has been reinvigorated this week because of an interview with Silvio Berlusconi (a longstanding proponent of the idea) in Italian publication Libero Quotidiano, where he argues the introduction of a national parallel currency will help Italy regain monetary sovereignty in a way that later supports domestic demand.”
Japan Watch:
August 20 – Reuters (Tetsushi Kajimoto and Izumi Kakagawa): “Confidence at Japanese manufacturers rose in August to its highest level in a decade led by producers of industrial materials, a Reuters poll showed, in a further sign of broadening economic recovery.”
EM Bubble Watch:
August 20 – Bloomberg Businessweek (Anurag Joshi and Anto Antony): “Defaults on bonds and syndicated loans of Indian companies are at a record of almost $2 billion so far this year, compared with $494 million for all of 2016… State Bank of India, the nation’s largest lender by assets, surprised investors this month when it reported bad loans had risen to 10% after the acquisition of smaller lenders. The government’s injection of funds in August into a state-owned bank at risk of missing a coupon payment is beneficial for bondholders but creates a moral hazard by taking pressure of lenders to manage their capital pro-actively, according to Fitch…”
Leveraged Speculation Watch:
August 23 – Financial Times (Joe Rennison): “Hedge funds are embracing an esoteric credit product widely blamed for exacerbating the financial crisis a decade ago, as low volatility and near record prices for corporate debt tempt them into riskier areas to seek higher returns. The market for ‘bespoke tranches’ — bundles of credit default swaps that are tied to the risk of corporate defaults — has more than doubled in the first seven months of 2017. Traders in this opaque, over-the-counter market estimate there has been issuance of $20bn to $30bn this year, compared to $15bn in the whole of 2016 and $10bn in 2015… The surge in activity reflects the effort by investors to generate a higher rate of return during a period of historically low volatility in credit markets, compounded by low fixed rate yields.”
Geopolitical Watch:
August 22 – Reuters (Christine Kim): “North Korean leader Kim Jong Un has ordered more solid-fuel rocket engines…, as he pursues nuclear and missile programs amid a standoff with Washington, but there were signs of tension easing. The report carried by the KCNA news agency lacked the traditionally robust threats against the United States after weeks of unbridled acrimony, and U.S. President Donald Trump expressed optimism about a possible improvement in relations. ‘I respect the fact that he is starting to respect us,’ Trump said of Kim at a raucous campaign rally in Phoenix, Arizona. ‘And maybe - probably not, but maybe - something positive can come about,’ he said.”
August 22 – Reuters (David Brunnstrom and Doina Chiacu): “The United States… imposed new North Korea-related sanctions, targeting Chinese and Russian firms and individuals for supporting Pyongyang's weapons programs, but stopped short of an anticipated focus on Chinese banks. The U.S. Treasury designated six Chinese-owned entities, one Russian, one North Korean and two based in Singapore. They included a Namibia-based subsidiary of a Chinese company and a North Korean entity operating in Namibia. The sanctions also targeted six individuals - four Russians, one Chinese and one North Korean.”
August 21 – Reuters (Ben Blanchard and Doug Busvine): “China laid the blame at India's door… for an altercation along their border in the western Himalayas involving soldiers from both of the Asian giants. Both countries' troops have been embroiled in an eight-week-long standoff on the Doklam plateau in another part of the remote Himalayan region near their disputed frontier. Last week, a source in New Delhi, who had been briefed on the military situation on the border, said soldiers foiled a bid by a group of Chinese troops to enter Indian territory in Ladakh, near Pangong lake.”
August 23 – Reuters (Andrew Osborn): “Russian nuclear-capable strategic bombers have flown a rare mission around the Korean Peninsula at the same time as the United States and South Korea conduct joint military exercises that have infuriated Pyongyang. Russia, which has said it is strongly against any unilateral U.S. military action on the peninsula, said Tupolev-95MS bombers, code named ‘Bears’ by NATO, had flown over the Pacific Ocean, the Sea of Japan, the Yellow Sea and the East China Sea, prompting Japan and Seoul to scramble jets to escort them.”
August 22 – Reuters (Yeganeh Torbati): “The United States suggested… it could cut U.S. aid to Pakistan or downgrade Islamabad's status as a major non-NATO ally to pressure the South Asian nation to do more to help it with the war in Afghanistan. A day after President Donald Trump committed to an open-ended conflict in Afghanistan and singled out Pakistan for harboring Afghan Taliban insurgents and other militants, U.S. Secretary of State Rex Tillerson said Washington's relationship with Pakistan would depend on its help against terrorism… U.S. officials are frustrated by what they see as Pakistan's reluctance to act against groups such as the Afghan Taliban and the Haqqani network that they believe exploit safe haven on Pakistani soil to launch attacks on neighboring Afghanistan.”
I would add that a well-functioning financial system is critical to long-term social, political and geopolitical stability. Importantly, well-functioning finance would have mechanisms that promote adjustment and self-correction. This is fundamental to market-based systems. I would argue that this is also a basic premise of sound money and finance. Sound finance would neither suppress market volatility nor work to repeal business cycles - but would instead have inherent characteristics that counteract protracted market and economic excess.
For starters, I question whether a so-called “resilient financial system” is necessarily a sound one. As we have witnessed, obtrusive government measures can dictate “resilience” – in terms of extended sanguine backdrops free from volatility, risk aversion and crisis. Yet this type of resilience fosters excesses that can inevitably end with a financial and economic crash.
Ten years ago most would have argued forcefully that the system at the time was resilient. Chair Yellen argues in her Jackson Hole paper that myriad regulatory changes have created a much more resilient financial system and economy. Her long speech highlights a laundry list of measures put in place since the crisis. Much to my liking, 22 footnotes include references to even Minsky, Kindleberger and Charles Mackay.
There was also footnote #2: “A contemporaneous perspective on subprime mortgage market developments at this time is provided in Ben S. Bernanke (2007), "The Subprime Mortgage Market," speech delivered… May 17 (2007).”
Looking back, chairman Bernanke presented a knowledgeable understanding of the subprime industry in 2007. His deeply flawed understanding of the macro backdrop was captured in a single sentence: “In general, mortgage credit quality has been very solid in recent years.”
Total mortgage Credit had doubled in less than seven years. Indicators of excess were everywhere. Inflation psychology had taken deep root throughout the nation’s housing markets, with California housing prices spiraling ever higher. The inflationary backdrop ensured a proliferation of new mortgage products that kept the game going with low monthly payments for prime and subprime borrower alike.
As someone who chronicled the mortgage finance Bubble in its entirety on a weekly basis, it was all too conspicuous. This was the most important market for finance (mortgages) and the real economy (housing and home-related) – that was dominated by the thinly capitalized GSE with their implied federal backing. It was a sophisticated financial scheme. Measures going back to the Greenspan era (bolstered by “helicopter Ben” musings) convinced the markets that the Fed would respond aggressively to avert market crisis. Surely, Washington would never allow a housing bust. It would simply be too devastating. In an irony of recent Bubbles, the greater they inflate the more convinced markets become that officials will not permit a bust.
What might explain Bernanke’s indifference to unprecedented mortgage and housing risks? Well, his policy doctrine was at the heart of the problem: Dr. Bernanke had been a leading proponent for using mortgage finance to reflate the system after the bursting of the “tech” Bubble.
Yellen: “Repeating a familiar pattern, the ‘madness of crowds’ had contributed to a bubble, in which investors and households expected rapid appreciation in house prices. The long period of economic stability beginning in the 1980s had led to complacency about potential risks, and the buildup of risk was not widely recognized. …A self-reinforcing loop developed, …as investors sought ways to gain exposure to the rising prices of assets linked to housing and the financial sector. As a result, securitization and the development of complex derivatives products distributed risk across institutions in ways that were opaque and ultimately destabilizing. In response, policymakers around the world have put in place measures to limit a future buildup of similar vulnerabilities.”
As I’ve written in the past, I understand why officials did what they did back in the autumn of 2008. Clearly, they were not about to sit back and watch the system collapse. They would also not settle for mere stabilization. Their epic mistake was to push forward with aggressive reflationary policies – a global monetary inflation regime to which they remain entrapped nine years later. While post-“tech” Bubble reflation focused on mortgage Credit and housing, post-mortgage finance Bubble reflationary measures went much farther: reflate risk assets (equities, corporate debt and housing), collapse market yields and force savers out of the safety of deposits and money funds. It was the same flawed doctrine that had nurtured the “worst crisis since the Great Depression” – but on a much grander scale.
If there was the “madness of crowds” then, how about these days with Trillions flowing into passive ETFs, record corporate debt issuance, record securities and home prices, a proliferation of cryptocurrencies and a bubbling derivatives marketplace. So long as the Fed targets higher asset prices while repeatedly providing liquidity backstops, a culture of speculation becomes only more deeply entrenched.
Yellen’s speech makes repeated mention of “too big to fail” – and how policy measures have dealt with this leading element of the previous crisis. In reality, central bankers have ensured that “too big to fail” moral hazard has mushroomed from an issue with respect to large financial institutions to a critical facet afflicting global securities and derivatives market pricing.
Yellen’s speech, “Financial Stability a Decade after the Onset of the Crisis,” somehow doesn’t address the historic experiment with quantitative easing (QE). There’s no mention of the Fed (and global central banks) repeatedly responding to incipient market instability (with QE, an extension of monetary stimulus, or a postponement of “normalization”). The powerful doctrine of the Fed “pushing back against a tightening of financial conditions” is omitted from the discussion. The Fed chair largely avoids monetary policy altogether.
Bernanke had his “mortgage credit quality has been very solid…” For Yellen, it’s “evidence shows that reforms since the crisis have made the financial system substantially safer.” If the Yellen Fed believed as much, I doubt rates would be at 1.25% and their balance sheet would remain ballooned at $4.4 TN.
Yellen: “Investors have recognized the progress achieved toward ending too-big-to-fail… Credit default swaps for the large banks also suggest that market participants assign a low probability to the distress of a large U.S. banking firm.”
I would caution against calling out low bank CDS prices as evidence of progress toward ending too-big-to-fail. CDS is atypically low across the spectrum of corporate borrowers. Indeed, sovereign CDS pricing is unusually inexpensive around the globe despite a huge run up in debt loads (Italy 148bps!). And then there’s the historically low VIX that astute analysts argue has been disregarding risk. Low risk premiums across various asset classes - at home and abroad - are consistent with market perceptions that central bankers are committed to liquidity backstopping necessary to safeguard against another crisis. “Too big to fail” has never had such momentous market impacts.
Yellen: “Our more resilient financial system is better prepared to absorb, rather than amplify, adverse shocks, as has been illustrated during periods of market turbulence in recent years. Enhanced resilience supports the ability of banks and other financial institutions to lend, thereby supporting economic growth through good times and bad.”
Resilience over recent years has clearly been associated with concerted open-ended QE from all the world’s leading central banks. It would also appear that chair Yellen overly emphasizes traditional banking when referencing the “financial system.” “Banks are safer. The risk of runs owing to maturity transformation is reduced.”
It’s worth recalling that traditional bank runs were not much of an issue during the previous crisis. Traditional old Market Panic was. As they will do, long periods of market greed erupted into fear and panic. The acute issue was “repo” financing of large institutions financing MBS holdings – along with what a Wall Street liquidity crisis meant for the pricing of mortgage-related finance and the functioning of derivatives more generally. Investor panic was sparked by the loss of faith in the safety and liquidity of repo “money.” Yet the overriding issue remained the mispricing of Trillions of MBS and mortgage-related securities and derivatives. I’ve always argued that a repricing of mortgage debt – and risk more generally – was inevitable, and that major financial and economic repercussions were unavoidable. Bubbles are not forever.
There is no doubt in my mind that today’s issue of securities mispricing dwarfs the mortgage finance Bubble period. I also believe latent derivatives market-related instability (i.e. market “insurance”) also likely exceeds pre-2008 crisis levels. Less clear is where an acute liquidity episode could initially manifest. Lehman and the cadre of leveraged speculators borrowing in the short-term repo market to finance long duration mortgage securities was rather egregious.
Financial crisis typically erupts in the “money” markets. This is where risk is perceived to be minimal, yet it is at the same time the domain of aggressive risk intermediation that works to distort overall market dynamics. Throughout the mortgage finance Bubble period, “Wall Street Alchemy” transformed progressively riskier mortgages into endless perceived safe and liquid “money”-like instruments – “The Moneyness of Credit,” with the “repo” market at the epicenter of perilous risk distortions.
I have argued that unparalleled Fed and global central bank inflationary measures molded the “Moneyness of Risk Assets”. In particular, central bank backing ensured that inflating markets in equities and corporate Credit came to be perceived as low-risk stores of value. And with the proliferation of (perceived liquid) fund choices available in the marketplace (ETFs in particular), central banks coupled with Wall Street Alchemy achieved the incredible: the transformation of high-risk securities - with ever-rising prices - into perceived “money”-like instruments.
Returning to the above opening paragraph extracted from Yellen’s speech, I believe it is important to contemplate whether market resilience has been due to sound financial system structure or instead because of central bank-induced market distortions and liquidity backstops. If the latter, it is critical to appreciate that this extended period of “resiliency” has ensured cumulative financial distortions and Bubble Economy Maladjustment – on an unparalleled global scale. With tens of Trillions of mispriced securities globally, a painful bout of repricing is unavoidable.
We’ll see how resilient “the financial system” proves to be come the unmasking of risk market liquidity and safety misperceptions. It’s a curious discussion of “Financial Stability a Decade after the Onset of the Crisis,” that glosses over near zero rates, unending QE, Trillions of global debt securities trading with negative yields and the extraordinary expansion of the ETF complex. It recalls Alan Greenspan’s speeches - the reasoned analysis along with the intrigue of what went unsaid. For me, it’s disingenuous and lacks credibility.
For the Week:
The S&P500 increased 0.7% (up 9.1% y-t-d), and the Dow rose 0.6% (up 10.4%). The Utilities gained 1.1% (up 12%). The Banks advanced 1.0% (up 2.3%), and the Broker/Dealers rallied 1.1% (up 10.5%). The Transports increased 0.4% (up 1.0%). The S&P 400 Midcaps gained 1.0% (up 2.9%), and the small cap Russell 2000 recovered 1.4% (up 1.4%). The Nasdaq100 added 0.5% (up 19.7%), and the Morgan Stanley High Tech index rose 1.2% (up 25.5%). The Semiconductors gained 0.8% (up 19.2%). The Biotechs surged 2.6% (up 26.3%). With bullion up $7, the HUI gold index jumped 2.4% (up 10.3%).
Three-month Treasury bill rates ended the week at 99 bps. Two-year government yields gained three bps to 1.33% (up 14bps y-t-d). Five-year T-note yields were unchanged at 1.76% (down 17bps). Ten-year Treasury yields declined three bps to 2.17% (down 28bps). Long bond yields fell three bps to 2.75% (down 32bps).
Greek 10-year yields fell nine bps to 5.49% (down 153bps y-t-d). Ten-year Portuguese yields jumped 10 bps to 2.87% (down 88bps). Italian 10-year yields rose seven bps to 2.10% (up 29bps). Spain's 10-year yields increased five bps to 1.61% (up 23bps). German bund yields slipped three bps to 0.38% (up 18bps). French yields declined two bps to 0.70% (up 1bp). The French to German 10-year bond spread widened one to 32 bps. U.K. 10-year gilt yields fell four bps to 1.05% (down 18bps). U.K.'s FTSE equities index rose 1.1% (up 3.6%).
Japan's Nikkei 225 equities index was little changed (up 1.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.02% (down 2bps). France's CAC40 slipped 0.2% (up 5.0%). The German DAX equities index was unchanged (up 6.0%). Spain's IBEX 35 equities index declined 0.4% (up 10.6%). Italy's FTSE MIB index dipped 0.3% (up 13.1%). EM equities were higher. Brazil's Bovespa index surged 3.4% (up 18%), and Mexico's Bolsa added 0.6% (up 12.6%). South Korea's Kospi gained 0.9% (up 17.4%). India’s Sensex equities index added 0.2% (up 18.7%). China’s Shanghai Exchange jumped 1.9% (up 7.3%). Turkey's Borsa Istanbul National 100 index rose 2.4% (up 40.5%). Russia's MICEX equities index rose 2.5% (down 11.4%).
Junk bond mutual funds saw outflows of $1.01 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped three bps to 3.86% (up 43bps y-o-y). Fifteen-year rates were unchanged at 3.16% (up 42bps). The five-year hybrid ARM rate added a basis point to 3.17% (up 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.03% (up 46bps).
Federal Reserve Credit last week declined $5.4bn to $4.426 TN. Over the past year, Fed Credit declined $13.0bn. Fed Credit inflated $1.614 TN, or 58%, over the past 250 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.0bn last week to $3.342 TN. "Custody holdings" were up $135bn y-o-y, or 4.2%.
M2 (narrow) "money" supply last week expanded $11.5bn to a record $13.629 TN. "Narrow money" expanded $691bn, or 5.3%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $62bn, while Savings Deposits fell $59.2bn. Small Time Deposits gained $3.7bn. Retail Money Funds added $2.7bn.
Total money market fund assets jumped $29.65bn to a 2017 high $2.736 TN. Money Funds added $1.1bn y-o-y.
Total Commercial Paper rose $9.0bn to $996.5bn. CP declined $7.4bn y-o-y, or 0.7%.
Currency Watch:
The U.S. dollar index declined 0.7% to 92.74 (down 9.4% y-t-d). For the week on the upside, the Norwegian krone increased 2.0%, the Swedish krona 1.9%, the euro 1.4%, the South Korean won 1.2%, the Canadian dollar 0.8%, the Swiss franc 0.8%, the Mexican peso 0.5%, the Singapore dollar 0.5% and the British pound 0.1%. On the downside, the New Zealand dollar declined 1.0%, the Brazilian real 0.4% and the Japanese yen 0.2%. The Chinese renminbi gained 0.36% versus the dollar this week (up 4.49% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.4% (down 4.9% y-t-d). Spot Gold added 0.6% to $1,291 (up 12.1%). Silver rose 0.8% to $17.132 (up 7.2%). Crude fell 64 cents to $47.87 (down 11.1%). Gasoline jumped 2.6% (unchanged), while Natural Gas was little changed (down 23%). Copper surged 3.2% (up 22%). Wheat dropped 1.6% (up 7%). Corn sank 3.3% (unchanged).
Trump Administration Watch:
August 25 – Financial Times (Demetri Sevastopulo, Shawn Donnan and Gillian Tett): “Donald Trump will launch a major push on tax reform next week with a speech in Missouri, as the president shifts focus to fiscal policy in an effort to secure a badly needed first big legislative victory by the end of the year. Gary Cohn, head of the White House national economic council, told the Financial Times that the speech… would be the first in a series of addresses designed to convince the US public about the need to revamp a tax system that has remained largely unchanged for three decades. ‘Starting next week, the president’s agenda and calendar is going to revolve around tax reform,’ Mr Cohn said… ‘He will start being on the road making major addresses justifying the reasoning for tax reform and why we need it in the US.’”
August 23 – Reuters (Steve Holland and Dave Graham): “President Donald Trump delivered an angry and forceful defense of his response to the violence in Charlottesville, Virginia, declaring at a campaign-style rally of supporters in Phoenix that the news media had distorted his position. Addressing thousands of supporters… at the Phoenix Convention Center, Trump accused major media organizations of being ‘dishonest” and of failing ‘to report that I spoke out forcefully against hatred, bigotry.’ Trump spent more than 20 minutes of a 75-minute speech delivering a selective account of his handling of the violence in Charlottesville, where he overlooked his initial statement blaming ‘many sides,’ as well his subsequent remarks that there were good people marching alongside the white supremacists.”
August 23 – Wall Street Journal (Kristina Peterson and Siobhan Hughes): “President Donald Trump’s threat to shut down the government if Congress doesn’t approve funding for a wall along the Mexico border raised alarm among some GOP lawmakers, injecting new volatility into an already uncertain political climate this fall. Lawmakers returning to Washington in early September have a dozen days with both the House and Senate in session before the government’s current funding expires on Oct. 1. Lawmakers from both parties had expected Congress to pass a stopgap two- or three-month spending bill, but Mr. Trump’s remarks raised fresh questions about the path forward. The GOP president said… that he was prepared to dig in over his request for $1.6 billion toward the border wall, one of his signature campaign promises.”
August 23 – Reuters: “Credit ratings agency Fitch Ratings… said a failure by U.S. officials to raise the federal debt ceiling in a timely manner would prompt it to review the U.S. sovereign rating, ‘with potentially negative implications.’ Fitch, which currently assigns the United States its highest rating — ‘AAA’ — said in a statement that the prioritization of debt service payments over other government obligations, should the debt ceiling not be raised, ‘may not be compatible with 'AAA' status.’ Without the ability to sell more debt, the government is expected to run out of cash, possibly in early October, and faces the risk of not paying the interest and principal on its debt on time.”
August 20 – Financial Times (Shawn Donnan): “The Trump administration has decided to push hard for tax reform and dial down a controversial national security investigation into steel imports in a bid to swing Republican support behind the president after the turmoil of recent weeks, according to senior officials. They said that former marine general John Kelly, the new chief of staff, was leading efforts to restore order to the White House and reassure Republican leaders alarmed by Donald Trump’s equivocal reaction to white nationalist-fueled violence in Virginia last week and the subsequent open criticism from business leaders.”
August 23 – Reuters (Steve Holland and Dave Graham): “U.S. President Donald Trump warned… he might terminate the NAFTA trade treaty with Mexico and Canada after three-way talks failed to bridge deep differences. The United States, Canada and Mexico wrapped up their first round of talks on Sunday to revamp the trade pact with little sign of a breakthrough coming. Trump reopened negotiations of the 1994 treaty out of concern U.S. economic interests were suffering. ‘Personally, I don't think we can make a deal. I think we’ll probably end up terminating NAFTA at some point,’ Trump said… Suggesting a termination might help jumpstart the negotiations, Trump said: ‘I personally don’t think you can make a deal without a termination.’”
August 22 – Bloomberg (Sahil Kapur): “A growing number of key congressional Republicans are considering a controversial maneuver that would allow for about $450 billion of tax cuts without offsets, according to four congressional aides… Under the proposal, the GOP would not account for things like expiring tax breaks when gauging the budgetary impact of tax legislation -- giving tax writers more room for cuts. Senate budget and tax panels are discussing the move to a ‘current policy’ baseline -- instead of the standard ‘current law’ baseline… The chief House tax writer, Kevin Brady, also signaled openness to the approach last month, saying it would lead to deeper tax cuts. The switch would risk a backlash from Democrats and deficit hawks.”
August 22 – CNBC (Christine Wang): “President Donald Trump and Senate Majority Leader Mitch McConnell haven't spoken to each other in weeks, The New York Times reported… The newspaper said that one phone call between the president and the Kentucky Republican devolved into a ‘profane shouting match.’ Relations between the two men have been conspicuously tense. Trump has repeatedly slammed McConnell on Twitter, blaming him for the failure of the GOP's attempts to repeal and replace the Affordable Care Act.”
August 19 – Wall Street Journal (Michael C. Bender and Peter Nicholas): “President Donald Trump ousted chief strategist Steve Bannon on Friday, as newly minted Chief of Staff John Kelly sought to bring order to an administration riven by infighting and power struggles, and increasingly at odds with congressional leaders. Mr. Bannon’s departure marked the fourth senior official in five weeks—and sixth in seven months—to leave the Trump administration… A former investment banker and media executive, Mr. Bannon was most closely aligned with the president’s ‘America First’ agenda, which he described as economic nationalism.”
China Bubble Watch:
August 23 – Bloomberg: “China keeps tightening the screws in its campaign to reduce the mountain of debt. The latest curbs landed late Wednesday, with the banking watchdog targeting wealth-management products that have more than tripled in the past four years amid low deposit rates and curbs on financing to overheated industries. Lenders will need to record all WMP sales starting Oct. 20, after some ‘misled’ consumers or sold them without regulators’ permission. While the consensus is that China still has a long way to go when it comes to actual deleveraging, it seems to have at least reined in the credit-growth beast, with WMPs plateauing since the crackdown was intensified in April.”
August 19 – Reuters (Ma Rong and John Ruwitch): “China will strengthen oversight of arbitrage that takes advantage of uncoordinated regulations and increase penalties to try to prevent structural risks from getting out of control, a senior central banker said. Yin Yong, deputy governor of the People's Bank of China, told a conference… six forms of arbitrage were problematic. He said they involved differing maturities, credit conditions, investment liquidity, exchange rates, capital and information. ‘These six forms of malicious regulatory arbitrage, which circumvent the regulatory system and its arrangements, and take advantage of the incompleteness of regulation, could result in risks to the entire financial system getting out of control,’ he said. Chinese financial regulators have adopted a slew of ‘de-risking’ measures this year in the face of ballooning debt and have ramped up efforts to unearth hidden problems that could become systemic threats.”
August 23 – Reuters (Yawen Chen and Elias Glenn): “China will use all necessary means to defend the interests of the country and its companies against a U.S. trade investigation, a spokesman for the Ministry of Commerce said… The ministry… expressed ‘strong dissatisfaction’ with the U.S. launch of the probe into China's alleged theft of U.S. intellectual property, calling it ‘irresponsible’. The probe is the Trump administration's first direct measure against Chinese trade practices, which the White House and U.S. business groups say are bruising American industry.”
August 22 – Wall Street Journal (Yifan Xie and Biman Mukherji): “China metal prices tumbled Wednesday as sentiment was battered by fresh warnings that the recent steel rally was unsustainable, the latest move by regulators to tame volatility in the futures market. The main steel-rebar futures contract in Shanghai snapped a four-day rally to trade down 4.9% by midday Wednesday at 3,744 yuan ($562) a metric ton…, while hot-rolled coil futures tumbled 5.3% to 3,828 yuan a ton. On the Dalian Commodity Exchange, iron-ore futures fell 4.5% to 574.5 yuan a ton, after soaring more than 20% over the past four sessions.”
Central Bank Watch:
August 22 – BBC: “European Central Bank President Mario Draghi has said unconventional policies like quantitative easing (QE) have been a success both sides of the Atlantic. QE was introduced as an emergency measure during the financial crisis to pump money directly into the financial system and keep banks lending. A decade later, the stimulus policies are still in place, but he said they have ‘made the world more resilient’… Central bankers, including Mr Draghi, are meeting in Jackson Hole, Wyoming, later this week, where they are expected to discuss how to wind back QE without hurting the economy. On Monday, a former UK Treasury official likened the stimulus to ‘heroin’ because it has been so difficult to wean the UK, US and eurozone economies off it.”
Global Bubble Watch:
August 22 – Financial Times (Laurence Mutkin): “Since the financial crisis erupted in 2008, a significant source of demand in the world’s largest bond markets has been central banks. The quantitative easing policies that institutions, including the US Federal Reserve, European Central Bank and Bank of Japan, have adopted to resist deflationary pressures unleashed by the crisis have consisted mostly of buying government bonds. A decade on, the threat of deflation has faded (at least for now) and so the pace of bond buying by central banks, which has already moderated, is set to fall sharply next year if the ECB and the Fed announce the changes to their QE policies in coming months. Given the very low levels of yields, this poses a significant threat to the pricing of bonds — and possibly of other financial assets too. The ECB and the BoJ are continuing their QE programmes, printing money to buy more bonds every month, and the Fed and the Bank of England — although no longer increasing their balance sheets — are still reinvesting the proceeds of maturing bonds previously bought under their programmes.”
August 21 – Bloomberg (Jean-Michel Paul): “Quantitative easing, which saw major central banks buying government bonds outright and quadrupling their balance sheets since 2008 to $15 trillion, has boosted asset prices across the board. That was the aim: to counter a severe economic downturn and to save a financial system close to the brink. Little thought, however, was put into the longer-term consequences of these actions. From 2008 to 2015, the nominal value of the global stock of investable assets has increased by about 40%, to over $500 trillion from over $350 trillion. Yet the real assets behind these numbers changed little, reflecting, in effect, the asset-inflationary nature of quantitative easing. The effects of asset inflation are as profound as those of the better-known consumer inflation.”
August 20 – Financial Times (John Authers and Claire Manibog): “The Great Financial Crisis did not turn into a second Great Depression, merely a Great Recession. Asset prices quickly recovered. But did the desperate measures taken then create new bubbles? Quantitative easing… left investors with cash that they had little choice but to put into risky assets. Critics complained that this was ‘printing money,’ and would lead to currency debasement. The havens were traditional stores of value that took on the acronym SWAG: silver, wine, art and gold. By 2012, SWAG assets had formed a bubble. But it deflated as inflation fears receded and confidence in governments returned. Bricks and mortar offered another haven — particularly for those nervous that their countries might not always tolerate their wealth.”
August 22 – Bloomberg (Sid Verma and Cecile Gutscher): “HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle. Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop. ‘Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,’ Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote… His bank’s model shows assets across the world are the least correlated in almost a decade…”
August 24 – Bloomberg (Robert Brand and Cormac Mullen): “Political instability, money problems and economic growth still top the list of threats to global markets. It’s just that the main players have swapped roles, according to Eurasia Group. ‘For much of the post-crisis period, U.S. money, Chinese growth, and European politics have mattered most’ to investors, …director of global strategy at Eurasia, Karthik Sankaran, wrote… ‘But developments over the past year suggest that markets should be paying attention to U.S. politics, European growth, and Chinese money.’”
Federal Reserve Watch:
August 24 – Bloomberg (Jeanna Smialek and Alessandro Speciale): “Federal Reserve Bank of Kansas City President Esther George said if U.S. economic data hold up, there will probably be an opportunity to raise interest rates again in 2017. ‘I’ll be looking at the data in the next few weeks as we get ready for the September meeting, and see whether that still makes sense,’ George said… ‘Based on what I see today, I think there’s still opportunity to do that,’ she told Bloomberg Television’s Mike McKee…”
U.S. Bubble Watch:
August 23 – Bloomberg (Suzanne Woolley): “In a perfect world, the largest expenses in retirement would be for fun things like travel and entertainment. In the real world, retiree health-care costs can take an unconscionably big bite out of savings. A 65-year-old couple retiring this year will need $275,000 to cover health-care costs throughout retirement, Fidelity Investments said in its annual cost estimate… That stunning number is about 6% higher than it was last year… You might think that number looks high. At 65, you’re eligible for Medicare, after all. But monthly Medicare premiums for Part B (which covers doctor’s visits, surgeries, and more) and Part D (drug coverage) make up 35% of Fidelity’s estimate. The other 65% is the cost-sharing, in and out of Medicare, in co-payments and deductibles, as well as out-of-pocket payments for prescription drugs.”
August 22 – Reuters (Herbert Lash): “The sale price of high-end condominiums in Manhattan's most expensive neighborhood averaged $14.1 million in the 12 months through June, with one unit going for $65.7 million… The unit, at 432 Park Avenue, billed as the tallest residential tower in the Americas, was one of three at the Midtown East building that were in the top-five most expensive condominium sales in Manhattan, an analysis by CityRealty said. The analysis examined sale prices and what was paid per square foot in an index the realty company has created to gauge investment performance for what it considers the top 100 condominium buildings in Manhattan. The average price per square foot rose 9% to $2,788 in the 12-month period ended June 30…”
Europe Watch:
August 23 – Reuters (Shrutee Sarkar): “Euro zone business growth maintained a solid clip in August, driven by the best manufacturing performance in 6-1/2 years despite a strong euro, easily offsetting a mild slowdown in services growth… Taken together with a mild pickup in price pressures, the data is likely to support expectations that the European Central Bank will proceed later this year with making plans to scale back its multi-billion euro monthly asset purchases.”
August 20 – Financial Times (Kate Allen and Claire Jones): “The European Central Bank may have little choice but to wind down its €2tn bond-buying programme next year — whether eurozone inflation picks up, or not. An improving eurozone economy already led the ECB to scale back its purchases by €20bn a month to €60bn in April, sharpening expectations that policymakers will set out a timeline for further tapering in the next couple of months… While traders will try to glean any indication of the ECB’s intentions, Mr Draghi faces a dilemma of his own: the central bank is running out of bonds to buy. Its own rules restrict it to only purchasing a third of each country’s debt in circulation, and the supply of German Bunds and Portuguese debt in particular is starting to run thin. ‘The 33% issuer limit in Bunds presets a course of [purchase programme] exit, no matter the inflation outlook,’ says Harvinder Sian, a Citigroup analyst.”
August 21 – Financial Times (Izabella Kaminska): “Talk of a domestic parallel currency being introduced in Italy is not new. But it has been reinvigorated this week because of an interview with Silvio Berlusconi (a longstanding proponent of the idea) in Italian publication Libero Quotidiano, where he argues the introduction of a national parallel currency will help Italy regain monetary sovereignty in a way that later supports domestic demand.”
Japan Watch:
August 20 – Reuters (Tetsushi Kajimoto and Izumi Kakagawa): “Confidence at Japanese manufacturers rose in August to its highest level in a decade led by producers of industrial materials, a Reuters poll showed, in a further sign of broadening economic recovery.”
EM Bubble Watch:
August 20 – Bloomberg Businessweek (Anurag Joshi and Anto Antony): “Defaults on bonds and syndicated loans of Indian companies are at a record of almost $2 billion so far this year, compared with $494 million for all of 2016… State Bank of India, the nation’s largest lender by assets, surprised investors this month when it reported bad loans had risen to 10% after the acquisition of smaller lenders. The government’s injection of funds in August into a state-owned bank at risk of missing a coupon payment is beneficial for bondholders but creates a moral hazard by taking pressure of lenders to manage their capital pro-actively, according to Fitch…”
Leveraged Speculation Watch:
August 23 – Financial Times (Joe Rennison): “Hedge funds are embracing an esoteric credit product widely blamed for exacerbating the financial crisis a decade ago, as low volatility and near record prices for corporate debt tempt them into riskier areas to seek higher returns. The market for ‘bespoke tranches’ — bundles of credit default swaps that are tied to the risk of corporate defaults — has more than doubled in the first seven months of 2017. Traders in this opaque, over-the-counter market estimate there has been issuance of $20bn to $30bn this year, compared to $15bn in the whole of 2016 and $10bn in 2015… The surge in activity reflects the effort by investors to generate a higher rate of return during a period of historically low volatility in credit markets, compounded by low fixed rate yields.”
Geopolitical Watch:
August 22 – Reuters (Christine Kim): “North Korean leader Kim Jong Un has ordered more solid-fuel rocket engines…, as he pursues nuclear and missile programs amid a standoff with Washington, but there were signs of tension easing. The report carried by the KCNA news agency lacked the traditionally robust threats against the United States after weeks of unbridled acrimony, and U.S. President Donald Trump expressed optimism about a possible improvement in relations. ‘I respect the fact that he is starting to respect us,’ Trump said of Kim at a raucous campaign rally in Phoenix, Arizona. ‘And maybe - probably not, but maybe - something positive can come about,’ he said.”
August 22 – Reuters (David Brunnstrom and Doina Chiacu): “The United States… imposed new North Korea-related sanctions, targeting Chinese and Russian firms and individuals for supporting Pyongyang's weapons programs, but stopped short of an anticipated focus on Chinese banks. The U.S. Treasury designated six Chinese-owned entities, one Russian, one North Korean and two based in Singapore. They included a Namibia-based subsidiary of a Chinese company and a North Korean entity operating in Namibia. The sanctions also targeted six individuals - four Russians, one Chinese and one North Korean.”
August 21 – Reuters (Ben Blanchard and Doug Busvine): “China laid the blame at India's door… for an altercation along their border in the western Himalayas involving soldiers from both of the Asian giants. Both countries' troops have been embroiled in an eight-week-long standoff on the Doklam plateau in another part of the remote Himalayan region near their disputed frontier. Last week, a source in New Delhi, who had been briefed on the military situation on the border, said soldiers foiled a bid by a group of Chinese troops to enter Indian territory in Ladakh, near Pangong lake.”
August 23 – Reuters (Andrew Osborn): “Russian nuclear-capable strategic bombers have flown a rare mission around the Korean Peninsula at the same time as the United States and South Korea conduct joint military exercises that have infuriated Pyongyang. Russia, which has said it is strongly against any unilateral U.S. military action on the peninsula, said Tupolev-95MS bombers, code named ‘Bears’ by NATO, had flown over the Pacific Ocean, the Sea of Japan, the Yellow Sea and the East China Sea, prompting Japan and Seoul to scramble jets to escort them.”
August 22 – Reuters (Yeganeh Torbati): “The United States suggested… it could cut U.S. aid to Pakistan or downgrade Islamabad's status as a major non-NATO ally to pressure the South Asian nation to do more to help it with the war in Afghanistan. A day after President Donald Trump committed to an open-ended conflict in Afghanistan and singled out Pakistan for harboring Afghan Taliban insurgents and other militants, U.S. Secretary of State Rex Tillerson said Washington's relationship with Pakistan would depend on its help against terrorism… U.S. officials are frustrated by what they see as Pakistan's reluctance to act against groups such as the Afghan Taliban and the Haqqani network that they believe exploit safe haven on Pakistani soil to launch attacks on neighboring Afghanistan.”
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