Credit Bubble Bulletin

Friday, October 5, 2018

Weekly Commentary: Contemporary Finance's Defect

October 3 - CNBC (Jeff Cox): "Federal Reserve Chairman Jerome Powell said the central bank has a ways to go yet before it gets interest rates to where they are neither restrictive nor accommodative. In a question and answer session Wednesday with Judy Woodruff of PBS, Powell said the Fed no longer needs the policies that were in place that pulled the economy out of the financial crisis malaise. 'The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don't need those anymore. They're not appropriate anymore… Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral… 'We may go past neutral, but we're a long way from neutral at this point, probably.'"

Market bulls grimaced. Powell: "We may go past neutral, but we're a long way from neutral at this point…" CNBC's Jim Cramer called it "amateurish." Chairman Powell was certainly candid, something shockingly unusual for a Fed chair. So atypical was his candor, the Chairman was misconstrued as a novice unschooled in the art of modern central banking.

The bottom line is the Fed waited much too long to begin normalizing monetary policy. Moreover, they pre-committed to an extremely gradual path of rates increases. This policy approach essentially ensured that so-called "tightening" measures would fail to tighten financial conditions. Over-liquefied and speculative markets were content to look right through them, confident that cheap liquidity and easy Credit conditions would run unabated. Clearly, stock gains in the multiple thousands of basis points easily counteracted a couple hundred basis point increase in short-term borrowing costs.

I'll add that this issue of a so-called "neutral" rate only confused the issue. What Fed funds target rate would be just right, neither stimulating nor restricting? Well, in this age of market-based finance, market dynamics have a profound effect on economic performance. "Risk on" in the marketplace ensures strong wealth effects, readily available cheap finance for spending and investment, and easy Credit Availability (throughout the economy) more generally. On the other hand, "Risk Off" would see a tightening of financial conditions, tighter Credit, diminished perceived wealth and more restrictive spending and investing.

Perhaps there's a view that a "neutral" policy would be a target rate that balances "Risk on" and "Risk Off." In a policy paper perhaps, but that's not the way markets function in the real world. In reality, if financial conditions remain too loose for too long, powerful Speculative Dynamics take hold. And once inflation psychology takes deep root in the asset markets, the commanding spell will be broken only from the shock of much tighter financial conditions and painful losses. "Housing prices only go up." "Buy and Hold. Stocks for the long-term."

There's further pertinent monetary policy analysis. Back in 2013, chairman Bernanke resorted to "the Fed will push back against a tightening of financial conditions." It received little attention at the time, but it was a fateful declaration. The backdrop was one where the Fed had employed extraordinary policy measures, inflating securities markets as its primary post-crisis stimulus mechanism. It was Bernanke paddling ever deeper into uncharted waters, explicitly signaling to the markets that the Federal Reserve was ready to respond to an equities market pullback with additional monetary stimulus. This was a game changer for market perceptions and played a major role in exacerbating Bubble Dynamics.

For years now, markets have been operating under the presumption that the Fed would immediately pull back from "normalization" in the event of fledgling risk aversion and/or stock market weakness. Chairman Powell on Wednesday afternoon threw the proverbial monkey wrench into this central market perception.

September's 3.7% Unemployment Rate was the lowest since December 1969. Year-over-year Average Hourly Earnings came in at 2.8% and are poised to soon surpass 3% for the first time since April 2009. The ISM Non-Manufacturing Index jumped three points to the strongest reading since August 1997. The ISM Employment component surged almost six points to 62.4, the highest level in data going back to 1997.

Federal Reserve Bank of Chicago president Charles Evans (on Bloomberg TV): "I think that my own take on a neutral longer run funds rate is 2.75%. So, I think getting policy up to us slightly restrictive setting, 3%, 3.25% would be consistent with the strong economy and good inflation that we're looking at."

When even the most perennially dovish Federal Reserve president uses the word "restrictive" and discusses taking the Fed funds up another 100 bps, one has to take notice.

It took a while, but central bankers have become less complacent with respect to inflation risks. For too long they have been fixated on deflation, in spite of the greatest securities and asset market inflation the world has ever experienced. Clearly, the Fed didn't see a 3.7% unemployment rate coming. More importantly, they never anticipated massive late-cycle fiscal stimulus. A booming economy and Trillion dollar deficits? No way. Way.

They were blindsided by the rise of tariffs and protectionism. To be sure, the Fed today has no way to gauge the economic and inflationary consequences associated with a prolonged trade war with China. Rather suddenly, there's a murky future out there that has Fed officials fretting inflation making a dazzling revival on their watch.

All of a sudden, 2% short rates seem incongruous with a booming economy, rising price pressures and the risk of a trade-related inflationary shock. And if central bankers are now on edge, markets better be on edge. This is new and awkward. But what about faltering EM and slowing global growth? All the overcapacity in China and globally?

Well, there is now a not unlikely scenario of faltering markets concurrent with some stubborn inflationary pressures. The GSCI commodities Index was up another 1.7% this week, with WTI jumping past $74. Confidence that any tightening of financial conditions (i.e. weak equities) would be met with resolute measures from the Fed (and global central banks) is increasingly dubious. Ten-year Treasury yields jumped this week to highs since 2011.

I continue to think back to the nineties. And to know where I'm coming from, I was convinced that finance had fundamentally changed in the nineties. No one, it seemed, was paying any attention. I would share my analysis with market professionals, academics, journalists and even Federal Reserve officials and the response was some variation of "Doug, you don't understand." After all these years, this most critical of issues remains unsolved.

I began posting the CBB analysis back in 1999, on a weekly basis attempting to explain what had changed; what was still changing; and what might be some of the momentous ramifications associated with the combination of unfettered "Wall Street finance" and "activist" central bank monetary management.

It was not until 2007, when Pimco's Paul McCulley coined the term "shadow banking," that some began to take some notice. But with the following year's "greatest financial crisis since the Great Depression," desperation saw the focus shift to extreme monetary stimulus and basically using any means possible to reflate the securities markets and Credit more generally. It was not only that concerns for the inherent instability of contemporary market-based finance were pushed to the side. This high-powered finance machine was the centerpiece of central bank reflationary policymaking - around the world.

In an early CBB, I resorted to my CPA training and went through (in painful detail) a series of debit and Credit journal entries to demonstrate how the GSEs would borrow in the money markets to purchase MBS in the marketplace, and how this "liquidity" could be "recycled" back through the money markets and borrowed again and again. In short, the GSEs would issue new short-term liabilities (IOUs) in exchange for "immediately available funds" (IAF). The IAF provided the purchasing power for MBS, with the GSE's transferring these funds to the MBS seller. The seller would then deposit these IAF right back into the money market, where the GSE's (or others) could borrow them repeatedly (exchanging additional short-term IOUs for IAF).

This was akin to the old bank deposit multiplier (fractional reserve banking) but with zero reserve requirements. Traditionally, a bank might lend 80% of a new $100 deposit (20% reserve requirement), with this loan creating $80 of new funds that would be deposited at other institutions (where the next bank could lend 80% of the $80 deposit, then the next 80% of $64 and so on).

I argued that contemporary non-bank market-based finance, operating outside of bank reserve requirements, created an "infinite multiplier effect." And I posited that "unfettered finance" essentially changed everything (market dynamics, policy, saving & investment, economic structure, etc.) In particular, "money" would circulate freely throughout the securities markets, inflating asset prices and incentivizing speculation. In particular, there was essentially unlimited cheap finance available for securities speculation, ensuring price Bubbles inflated by self-reinforcing speculative leverage. "Money" could be borrowed in, for example, the "repo" market to purchase securities, where the proceeds from the sale would be recycled right back into the money markets where it would be available to borrow again and again without limit.

It amounted to the greatest transformation in financial and market structure in history, all backstopped by the "activist" Federal Reserve and global central bankers. It was a New Era - a New Paradigm - that worked miraculously until its 2008 malfunction risked bringing down the global financial system. Most importantly, this incredible system of ever-expanding speculative leverage, seemingly endless liquidity and powerful asset Bubbles has a fundamental Defect: it doesn't function in reverse (with deleveraging). Yet rather than addressing what went so terribly wrong in 2008, global central banks resuscitated and then bolstered this deviant financial apparatus, sending it on its merry way to reflate global markets and economies.

The past decade has seen similar dynamics to the mortgage finance Bubble period: expanding leverage and liquidity spinning around the system, promoting self-reinforcing securities and asset inflation. The big difference during this cycle has been its unprecedented global scale. Central bankers and market bulls are fond of asserting that leverage is not an issue these days. Yet the most egregious leverage throughout this cycle has been in central bank and sovereign balance sheets. Liquidity created in the expansion of central bank balance sheets, in particular, circulated through the securities and funding markets where it has been "recycled" again and again…

A few examples: A hedge fund borrows at zero in Japan to lever in a higher-yielding dollar denominated EM debt "carry trade." This new liquidity flows into an EM banking system, where it is exchanged for local currency by the domestic central bank. The EM central bank then exchanges these dollar balances for U.S. Treasury bonds in the marketplace. The seller of Treasuries, say a hedge fund, then uses the proceeds from this short sale to leverage U.S. corporate debt. The corporate treasurer then uses the proceeds from the debt issue to repurchase equity shares, creating liquidity in the marketplace for the purchase of U.S. equities or even international shares - where it can begin the cycle anew.

Example 2: The ECB, expanding its liabilities, creates "money" to purchase Italian bonds in the marketplace. The seller transfers the sales proceeds to one of the large German banks where it is held on deposit. The German bank then uses this liquidity to purchase U.S. agency securities from a U.S. broker/dealer that had previously acquired these GSE-issued securities with short-term money market "repo" financing. This "repo" loan is repaid, creating money market liquidity to finance other securities speculations. Or instead, the German bank (rather than holding deposits) buys short-term German debt from a hedge fund happy to short these securities at negative yields (borrow at negative interest-rates) to finance holdings of higher-yielding instruments in the U.S.

Example 3: An Asian hedge fund shorts (sells) one-year Singapore sovereign debt at 1.88% and uses the proceeds to purchase Chinese corporate debt yielding 10%. A Chinese bank swaps the Singapore dollars into U.S. dollars, and then deposits these funds with the People's Bank of China (PBOC). The PBOC then exchanges these U.S. dollar balances for purchasing Treasuries. The U.S. Treasury then uses this "money" to service its debts, liquidity that will then be available to purchase additional securities in the marketplace (or, perhaps, "money" to spend on imported Chinese goods, where the dollars make their way to the PBOC and then back into the Treasury market).

Example 4: A U.S. pension fund shorts (sells) Treasuries to finance higher-yielding dollar-denominated EM debt. The pension fund buys bonds directly from a EM government, with the EM central bank exchanging local currency for dollar balances. The EM central bank then uses these dollars to purchase Treasuries, recycling liquidity right back to U.S. securities markets. The seller of Treasuries, a hedge fund operating an "all weather" strategy, uses the proceeds from shorting Treasuries to finance a leveraged portfolio of stocks, fixed-income, EM securities and commodities - "recycling" this liquidity right back into U.S. and global financial markets.

Just a few basic examples of how various leveraged strategies fuel abundant liquidity flows around the globe. I suspect some of the greatest leverage is associated with sophisticated derivatives strategies - cross currency "swaps," myriad bond "carry trades," the proliferation of equities option strategies and ETF arbitrage, to name but a few. And as market prices rise and leverage increases, self-reinforcing liquidity abundance feeds the perception that the party can last indefinitely.

The amount of global speculative leverage that has accumulated over the past (almost) decade is impossible to know. There is no transparency. Most assume it's not an issue. We'll know more over the coming months, but there is ample support for the view of unprecedented global speculative excess - across regions, countries and asset classes. I have posited that the global Bubble has been pierced at the "Periphery," and that contagion effects have begun gravitating to the "Core." This week offered additional confirmation of this thesis.

Let's begin at the "Periphery." A period of relative EM instability came to an end. The South African rand sank 4.3% this week, with the Chilean peso down 3.0% and the Colombian peso falling 2.0%. Asian currencies were under notable pressure, with the South Korean won down 1.9%, the Indonesian rupiah 1.8%, the Indian rupee 1.7%, and the Thai baht 1.6%. The Russian ruble declined 1.6%, the Polish zloty 1.3% and the Turkish lira 1.3%. As for major equities indices, stocks in both Turkey and India sank 5.1%. Equities fell 4.4% in Taiwan and 3.7% in South Korea. Argentine stocks sank 9.8%, with Mexico down 2.9%.

As much as currencies and stocks were under pressure, the more ominous EM moves were in bond markets. Ten-year (local) sovereign yields surged 33 bps in Indonesia, 26 bps in Russia, 21 bps in South Africa, and 14 bps in Hungary. Dollar-denominated EM debt provided no safe haven. Venezuela's 10-year dollar yields surged 70 bps to 38.55%; Argentina's 64 bps to 9.90%; and Turkey's 52 bps to 7.86%. Ten-year dollar yields jumped 19 bps in Indonesia, 19 bps in Chile, 18 bps in Russia, 17 bps in Mexico and 14 bps in Colombia.

How were markets faring at the "Periphery of the Core"? Italian 10-year yields surged another 28 bps to 3.42%, the high going back to March 2014. Italian bank stocks were hit another 4.7%, bringing 2018 losses to 19.2%. Contagion saw Greek yields jump 33 bps to 4.45%, with Greece's major equities indices down 5.0%. European bank stocks fell another 1.9% this week. Equities indices were down 2.4% in France and 2.6% in the UK. UK yields jumped 15 bps to the high since January 2016.

It was as if the dam finally broke. Ten-year Treasury yields jumped 17 bps this week to 3.23% (high since May 2011). Interestingly, long-bond yields were under even more pressure, as yields rose 20 bps to 3.41% (high since July '14). Mortgage securities fell under intense pressure, with benchmark MBS yields jumping 20 bps - surpassing 4.00% for the first time since July 2011. The old mortgage duration problem: When rates jump, borrowers are less likely to refinance their mortgages or upgrade to new homes. Investment-grade corporate debt was under pressure as well, with the LQD ETF declining 1.7% to a multi-year low.

The DJIA traded to a record high Wednesday before reality began to set in. The S&P500 also reached all-time highs in Wednesday trading before selling took over. The broader market was under heavy selling pressure.

It certainly had the appearance of incipient fear of tightening financial conditions - contagion having made important headway from the "Periphery" to the "Core." If, as it appears, global "Risk Off" is attaining some momentum, my thoughts return to Contemporary Finance's Defect: it doesn't function in reverse.

For the Week:

The S&P500 declined 1.0% (up 7.9% y-t-d), while the Dow was little changed (up 7.0%). The Utilities rallied 1.8% (up 1.5%). The Banks recovered 1.6% (down 0.1%), and the Broker/Dealers rallied 3.4% (up 3.7%). The Transports fell 1.5% (up 5.6%). The S&P 400 Midcaps dropped 2.6% (up 3.5%), and the small cap Russell 2000 sank 3.8% (up 6.3%). The Nasdaq100 fell 3.0% (up 15.7%). The Semiconductors dropped 3.7% (up 5.0%). The Biotechs sank 3.8% (up 22.5%). With bullion gaining $10, the HUI gold index rallied 1.7% (down 2%).

Three-month Treasury bill rates ended the week at 2.17%. Two-year government yields rose seven bps to 2.89% (up 100bps y-t-d). Five-year T-note yields gained 12 bps to 3.07% (up 86bps). Ten-year Treasury yields jumped 17 bps to 3.23% (up 83bps). Long bond yields surged 20 bps to 3.41% (up 66bps). Benchmark Fannie Mae MBS yields jumped 20 bps to 4.01% (up 101bps).

Greek 10-year yields surged 33 bps to 4.48% (up 41bps y-t-d). Ten-year Portuguese yields rose six bps to 1.94% (unchanged). Italian 10-year yields jumped 28 bps to 3.42% (up 141bps). Spain's 10-year yields gained eight bps to 1.58% (up 1bp). German bund yields rose 10 bps to 0.57% (up 15bps). French yields gained 10 bps to 0.91% (up 12bps). The French to German 10-year bond spread was little changed at 34 bps. U.K. 10-year gilt yields jumped 15 bps to 1.72% (up 53bps). U.K.'s FTSE equities index dropped 2.6% (down 4.8%).

Japan's Nikkei 225 equities index declined 1.4% (up 4.5% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.155% (up 11bps). France's CAC40 fell 2.4% (up 0.9%). The German DAX equities index declined 1.1% (down 6.2%). Spain's IBEX 35 equities index lost 1.4% (down 7.9%). Italy's FTSE MIB index dropped 1.8% (down 6.9%). EM equities were mostly lower. Brazil's Bovespa index surged 3.8% (up 7.7%), while Mexico's Bolsa sank 2.9% (down 2.6%). South Korea's Kospi index dropped 3.2% (down 8.1%). India's Sensex equities index sank 5.1% (up 0.9%). China's Shanghai Exchange was closed for holiday (down 14.7%). Turkey's Borsa Istanbul National 100 index dropped 5.1% (down 17.7%). Russia's MICEX equities index declined 1.0% (up 16.2%).

Investment-grade bond funds saw inflows of $1.222 billion, and junk bond funds had inflows of $1.389 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 4.71% (up 72bps y-o-y). Fifteen-year rates slipped one basis point to 4.15% (up 71bps). Five-year hybrid ARM rates rose four bps to 4.01% (up 83bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.78% (up 63bps).

Federal Reserve Credit last week declined $15.6bn to $4.146 TN. Over the past year, Fed Credit contracted $274bn, or 6.2%. Fed Credit inflated $1.335 TN, or 47%, over the past 309 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $2.4bn last week to $3.436 TN. "Custody holdings" were up $70bn y-o-y, or 2.1%.

M2 (narrow) "money" supply rose $17.7bn last week to a record $14.266 TN. "Narrow money" gained $557bn, or 4.1%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits gained $3.8bn, and Savings Deposits increased $9.8bn. Small Time Deposits added $2.7bn. Retail Money Funds slipped $0.9bn.

Total money market fund assets fell $11.7bn to $2.872 TN. Money Funds gained $131bn y-o-y, or 4.8%.

Total Commercial Paper surged $18bn to $1.100 TN. CP gained $31bn y-o-y, or 2.9%.

Currency Watch:

The U.S. dollar index added 0.5% to 95.624 (up 3.8% y-t-d). For the week on the upside, the Brazilian real increased 5.5% and the British pound gained 0.7%. For the week on the downside, the South African rand declined 4.3%, the New Zealand dollar 2.7%, the Australian dollar 2.4%, the Swedish krona 1.9%, the South Korean won 1.9%, the Norwegian krone 1.3%, the Singapore dollar 1.1%, the Swiss franc 1.0%, the euro 0.7%, the Mexican peso 0.6%, and the Canadian dollar 0.2%. The offshore Chinese renminbi declined 0.27% versus the dollar this week (down 5.52% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 1.7% (up 11.7% y-t-d). Spot Gold rallied 0.9% to $1,203 (down 7.7%). Silver gained 1.5% to $14.649 (down 14.6%). Crude rose another $1.09 to $74.34 (up 23%). Gasoline was little changed (up 16%), while Natural Gas surged 4.5% (up 6%). Copper declined 1.5% (down 16%). Wheat gained 2.4% (up 22%). Corn rose 3.4% (up 5%).

Trump Administration Watch:

October 2 - CNBC (Sri Jegarajah): "Using trade deals with Canada, Mexico and South Korea as leverage, Washington looks set to sharpen its hard line trade policy against China and what it deems unfair trade practices from Beijing, strategists told CNBC. Though some experts have said a tariff-impacted slowdown in Chinese economic activity may make Beijing more willing to agree to a deal, many still maintain China won't back down and will respond to further U.S. escalation by raising regulatory obstacles to U.S. businesses operating in the mainland."

October 1 - Reuters (Steve Holland and David Lawder): "President Donald Trump… touted a new trade deal with Canada and Mexico as a win for U.S. workers while investors breathed a sigh of relief that the key pillars of NAFTA had survived his hardball strategy to reshape global commerce. Washington and Ottawa reached an agreement… after weeks of tense bilateral talks to update the 1994 North American Free Trade Agreement. The United States had forged a separate trade deal with Mexico… in August. The new agreement, called the United States-Mexico-Canada Agreement (USMCA), is aimed at bringing more jobs into the United States, with Canada and Mexico accepting more restrictive commerce with the United States, their main export customer."

September 30 - Bloomberg (Christopher Anstey): "With little prospect of a restart for U.S.-China trade talks, JPMorgan… now expects an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade. 'JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25% U.S. tariffs on all Chinese goods in 2019,' JPMorgan strategists including John Normand wrote… While growth forecasts for both the U.S. and China aren't much affected, thanks in part to Chinese stimulus measures, 'a weaker yuan becomes part of the new equilibrium,' they wrote."

October 3 - AFP: "The bitter trade dispute between China and the US is increasingly spilling into the military domain, with a risky incident in the South China Sea highlighting the dangers of souring relations. In what the US Navy has called an 'unsafe and unprofessional' encounter, a Chinese warship sailed within just 45 yards of a US destroyer Sunday as it passed by Chinese-claimed features in the South China Sea, forcing the American vessel to take evasive action."

September 30 - Bloomberg (Ben Holland and Jeanna Smialek): "With its plaintive call for balanced budgets, the fiscal hawk once pervaded Washington. But it's getting harder to spot one. That's because of President Donald Trump, and the equal-and-opposite reaction he's provoked on the U.S. left. Trump is proving as indifferent to fiscal orthodoxy as to any other kind. The spending measure he signed on Friday, along with the one approved in March and December's tax bill, amount to the biggest stimulus outside recessions since the 1960s. They sailed through a House led by the supposedly hawkish Paul Ryan, who's due to step down in January without much progress on his goal of reining in so-called entitlements like social security -- an illustration of how Republican deficit scolds are in retreat. On the Democratic side, the reaction that's firing up the grassroots isn't 'How could you do that?'' It's: ' Why can't we do that?' … In both parties, deficit spenders are gaining ground… 'The tax cuts really set off a spiral of irresponsible justifications for not caring about fiscal responsibility,' says Maya MacGuineas, president of the CRFB."

Federal Reserve Watch:

October 3 - Financial Times (Chris Giles): "The US economy has reached a 'normal' stage of the economic cycle without any further need for monetary policymakers to be accommodative with interest rates or provide long-term guidance to markets, a Federal Reserve official has said. Speaking to the Financial Times in London, Charles Evans, who will be a voting member of the Fed's policy committee next year, said there was probably a need for a period of tight monetary policy to slow the economy a little and keep inflation under control."

October 2 - Reuters (Howard Schneider and Jonathan Spicer): "U.S. Federal Reserve Chairman Jerome Powell… hailed a 'remarkably positive outlook' for the U.S. economy that he feels is on the verge of a 'historically rare' era of ultra-low unemployment and tame prices for the foreseeable future. It is a view, he said, based on how a changed economy is operating today, with businesses and households immunized by strong central bank policy from the inflationary psychology that caused unemployment, inflation and interest rates to swing wildly in the 1960s and 1970s. It is an outlook that includes an economic performance 'unique in modern U.S. data,' with unemployment of below 4% expected for at least two more years and inflation remaining modest even as wages rise."

October 2 - CNBC (Jeff Cox): "Federal Reserve policymakers have been able to stave off sharply higher inflation even with low unemployment by managing expectations, central bank Chairman Jerome Powell said… Should those attitudes change, Powell said in a speech, the Fed won't hesitate to respond. 'From the standpoint of contingency planning, our course is clear: Resolutely conduct policy consistent with the [Federal Open Market Committee's] symmetric 2% inflation objective, and stand ready to act with authority if expectations drift materially up or down,' he told the National Association for Business Economics… 'What is more likely, in my view, is that many factors, including better conduct of monetary policy over the past few decades, have greatly reduced, but not eliminated, the effects that tight labor markets have on inflation,' he said."

October 1 - Bloomberg (Christopher Condon): "Federal Reserve Bank of Boston President Eric Rosengren said the U.S. central bank should keep raising its benchmark interest rate until it's reached 'mildly restrictive' territory. With a strong labor market expected to become tighter, he said, economic imbalances, including inflationary pressures, will continue to mount. 'Federal Reserve policy makers will likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance,' Rosengren said… Such a policy 'is fully consistent with a forecast of GDP growth above potential that leads to further tightening of labor markets, and inflation mildly overshooting the Federal Reserve's 2% target.'"

October 1 - Reuters (Howard Schneider): "The tight U.S. labor market may be good for workers, allowing them to jump between jobs more easily and coax higher wages from their boss. But it may also pitch the economy toward unexpected inflation or other problems if it remains as low as the Federal Reserve anticipates, Boston Federal Reserve president Eric Rosengren said… in remarks defending the case for continued interest rate increases by the Federal Reserve."

October 1 - Bloomberg (Timothy A Duy): "The Federal Reserve's 'r-star' has gone full supernova. New York Federal Reserve President John Williams, its key proponent, made clear in a speech late Friday that the neutral interest rate is no longer a guiding star for monetary policy. This means a federal funds rate in the range of what is considered neutral has no special significance as far as policy is concerned. That is hawkish relative to any expectations that the Fed would pause as policy rates approach a level that neither stimulates nor restricts the economy… Williams's attachment to r-star cannot be overstated. At a professional level, it has been a key element of his research agenda. As recently as May he said that for 'the moment, r-star continues to shine brightly, guiding monetary policy, but hold steady, low on the horizon.'"

U.S. Bubble Watch:

October 3 - CNBC (Fred Imbert): "The U.S. services sector expanded last month at its fastest pace on record, according to… the Institute for Supply Management. The ISM non-manufacturing index rose to 61.6 last month. That is the highest level since the index was created in 2008… The index jumped from 58.5 in August. 'The non-manufacturing sector has had two consecutive months of strong growth since the 'cooling off' in July. Overall, respondents remain positive about business conditions and the current and future economy,' said Anthony Nieves, ISM chair… However, 'concerns remain about capacity, logistics and the uncertainty with global trade.'"

October 3 - CNBC (Jeff Cox): "Job growth surged in September to its highest level in seven months as the economy put up another show of strength, according to… ADP and Moody's Analytics. Private companies added 230,000 more positions for the month, the best level since the 241,000 jobs added in February and well ahead of the 168,000 jobs added in August… Construction grew by 34,000 as goods-producing industries overall contributed 46,000 to the final count. 'This labor market is rip-roaring hot,' Mark Zandi, chief economist at Moody's Analytics, told CNBC. 'The risk that this economy overheats is very high, and this is one more piece of evidence of that.'"

October 3 - Wall Street Journal (Anna Wilde Mathews): "The average cost of employer health coverage offered to workers rose to nearly $20,000 for a family plan this year, according to a new survey, capping years of increases… Annual premiums rose 5% to $19,616 for an employer-provided family plan in 2018, according to the yearly poll of employers by the nonprofit Kaiser Family Foundation. Employers, seeking to blunt the cost of premiums, also continued to boost the deductibles that workers must pay out of their pockets before insurance kicks in."

October 1 - Wall Street Journal (Corrie Driebusch and Maureen Farrell): "Stock investors are welcoming money-losing companies into the public markets this year with open arms. About 83% of U.S.-listed initial public offerings in 2018's first three quarters involve companies that lost money in the 12 months leading up to their debut, according to… University of Florida finance professor Jay Ritter. That is the highest proportion on record, according to Mr. Ritter, an IPO expert whose data goes back to 1980. Some analysts and market watchers are concerned. They see similarities with the dot-com bubble of nearly two decades ago that left many investors with enormous losses. The prior high-water mark for money-losing companies going public was 2000, when 81% of stock-market debutantes were unprofitable… Investors' tolerance for red ink has been rewarded so far in 2018. Stocks of money-losing companies listing in the U.S. soared 36% on average from their IPO price through Thursday."

October 1 - Reuters (Richard Leong): "The U.S. housing market, already struggling with tight inventory and rising building costs, faces a fresh headwind as 30-year mortgage rates rise close to the 5% threshold for the first time in years. Even as home prices have climbed steadily thanks largely to a lack of supply of homes for sale, housing affordability has remained relatively stable thanks to historically low borrowing costs. But that is changing."

September 29 - New York Times (Ben Casselman): "By nearly any measure, this city is booming. The unemployment rate is below 3%. There is so much construction that a local newspaper started a 'crane watch' feature. Seemingly every week brings headlines about companies bringing high-paying jobs to the area. Yet, Denver's once-soaring housing market has run into turbulence. Sales and construction activity have slowed in recent months. Houses that would once have drawn a frenzy of offers are sitting on the market for days or weeks. Selling prices are rising more slowly, and asking prices are being slashed to attract buyers. Similar slowdowns have hit New York, Seattle and even San Francisco, cities that until recently ranked among the nation's hottest housing markets. The specifics vary, but economists, real estate agents and home builders say the core issue is the same: Home buyers are reaching a breaking point after years of breakneck price increases that far exceeded income gains."

October 1 - Bloomberg (Oshrat Carmiel): "It's been a rough year for Manhattan's home sellers, and they're not about to catch a break any time soon. In the three months through September, purchases dropped 11% from a year earlier to 2,987 -- the fourth straight quarter with a decline, according to… Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Listings piled on to the market at an even greater rate, climbing 13% to 6,925 homes, the most for a third quarter since 2011. A surging stock market typically fuels buyer bullishness on Manhattan real estate -- but not this time."

October 2 - Bloomberg (Oshrat Carmiel): "Rent or buy? It's a common debate among people shopping for a home in New York City. And many owners trying to find takers for their properties are appealing to both sides of it. The number of homes simultaneously listed for sale and for rent in New York jumped 51% this year through Sept. 1 -- to 1,087 -- as owners try to get the best price at a time when both markets are weakening, according to data compiled by StreetEasy. They're not exactly offering bargains. Owners of the simultaneously listed homes are seeking to sell them for a median of $1.395 million, or 24% higher than a year earlier for similar properties, the firm said. The owners are seeking a median monthly rent of $4,800 for those same properties, a 14% increase."

October 3 - Bloomberg (Lily Katz): "U.S. regional malls suffered their biggest increase in vacancies in almost a decade as retailers continue to shutter locations with no end in sight. The vacancy rate rose to 9.1% in the third quarter from 8.6% in the prior three-month period, Reis Inc. said in a report, citing closures by Sears Holdings Corp. and Bon-Ton Stores Inc. The average asking rent fell for the first time since 2011, dropping 0.3% to $43.25 a square foot."

China Watch:

September 30 - Wall Street Journal (Liyan Qi and Lingling Wei): "An intensifying trade brawl with the U.S. is starting to take a heavier toll on China's economy, as weakening foreign demand and sluggish domestic consumption cause Chinese manufacturers to significantly scale back production. The manufacturing slowdown, detailed in reports released Sunday, raises the prospect that China's leaders will step up economic stimulus measures to prop up growth. The new data showed that privately owned makers of cars, machinery and other products stopped expanding in September, as export orders dropped the most in more than two years. At the same time, output by large, state-owned manufacturers continued to weaken."

October 2 - Wall Street Journal (Dominique Fong): "Apartment rental prices are soaring across China, posing a new challenge to Chinese authorities and compounding the threat of sky-high housing prices to the economy. Rental prices for apartments are accelerating by double digits in 30 of China's biggest, most vibrant cities. In Beijing, rents are up as much as 21% from a year ago, while in the south-central megacity of Chengdu they have climbed more than 30%... This surge is an unintended consequence of Beijing's efforts to cool off the housing market by steering more home buyers into the rental market… For China's government, the sudden rise in rents poses a new financial risk, as well as a social problem."

September 29 - Reuters (Josephine Mason, Hallie Gu, Ben Blanchard and Kevin Yao): "China's central bank pledged to maintain its 'prudent and neutral' monetary policy and to use multiple tools to keep liquidity ample, as the world's second-biggest economy comes under increasing pressure from a heated trade dispute with the United States."

September 30 - Reuters (Maximilian Heath): "Argentina has 'nearly closed' a new currency swap deal with China that will add the equivalent of $9 billion to the South American country's reserves, the central bank said… Argentina and China first agreed to a swap program in 2009 to boost the South American country's dwindling reserves under former President Cristina Fernandez."

October 1 - Financial Times (Emily Feng): "Beijing will not renew significant cuts on steel production and coal use aimed at improving air quality this winter, as policymakers look to boost China's economic performance in the midst of the country's trade war with the US. The curbs - a rare restriction imposed on industries where state enterprises are prevalent - were meant to target airborne pollution, which worsens during the winter as much of the country's northern cities are heated with coal-fired power."

September 28 - New York Times (Sui-Lee Wee and Li Yuan): "China has long made it clear that reporting on politics, civil society and sensitive historical events is forbidden. Increasingly, it wants to keep negative news about the economy under control, too. A government directive sent to journalists in China… named six economic topics to be 'managed,' according to a copy of the order… reviewed by The New York Times. The list of topics includes: Worse-than-expected data that could show the economy is slowing; Local government debt risks; The impact of the trade war with the United States. Signs of declining consumer confidence. The risks of stagflation, or rising prices coupled with slowing economic growth. 'Hot-button issues to show the difficulties of people's lives.'"

EM Watch:

October 2 - Bloomberg (Onur Ant): "Turkey's consumer inflation climbed to one of the highest levels since President Recep Tayyip Erdogan came to power 15 years ago, spurring calls for higher interest rates to rein in prices. The inflation rate rose for a sixth month to 24.5% in September from a year earlier… The monthly rate was 6.3%, driven by an across-the-board spike provoked by the lira's meltdown. Treasury and Finance Minister Berat Albayrak blamed hoarders and speculators, and predicted inflation would stop quickening in October. Wednesday's inflation report puts monetary policy makers in a bind. The central bank raised borrowing costs last month to their highest level in nearly two decades, yet prices are gaining at their fastest pace since June 2003."

October 2 - Wall Street Journal (Andrew Peaple): "Spotting new 'Lehman moments' has become a pastime for global market watchers since 2008. The latest supposed sighting is in India, where the government this week summarily replaced the board of Infrastructure Leasing & Financial Services-a nonbank lender that regulators have deemed systemically important, and which has recently roiled local markets after defaulting on a string of debts. The story may not herald the collapse of India's financial system. But it raises fresh-and serious-questions about its underlying health. IL&FS's core problem is a classic asset-liability mismatch. Though it invests in infrastructure projects with long payback periods, it has become ever more reliant on short-term funding… Some of the company's projects are now in trouble… That's left it struggling to service its $12.6 billion debt pile…"

October 1 - Reuters (Ezgi Erkoyun and Orhan Coskun): "Turkish manufacturing activity slid to its lowest level in nine years in September, a business survey showed…, in what economists said was among the clearest signs yet that Turkey was headed for a deep recession after months of currency turmoil."

October 2 - Reuters (Anthony Boadle): "Brazil's far-right presidential candidate Jair Bolsonaro is polling ahead of leftist Workers Party rival Fernando Haddad for the expected runoff in this month's election, a Datafolha opinion poll showed… In a simulated second-round vote, the poll found Bolsonaro would get 44% support, beating Haddad's 42%... If no candidate wins a majority in the first round on Sunday, the election will be decided in a second-round run-off on Oct. 28 between the two top vote-getters."

October 3 - Bloomberg (Anirban Nag): "A crisis at one of India's biggest infrastructure financiers is the latest example of how the end of an easy money era is causing strain in the world's fastest-growing economy. Rising borrowing costs are putting pressure on lenders like Infrastructure Leasing & Financial Services Ltd. -- whose recent debt defaults rocked financial markets in India and sparked fears of a contagion -- as well as on debt-focused mutual funds that are liquidating holdings. There's more pain to come as global interest rates rise and the Reserve Bank of India proceeds with its own tightening…"

October 1 - Bloomberg (Liau Y-Sing): "Indonesia's rupiah weakened past 15,000 per dollar for the first time in 20 years as sentiment toward emerging-nation assets soured and oil prices jumped. The currency has tumbled almost 10% this year as rising U.S. interest rates have boosted the dollar and Indonesia's current-account deficit has left the economy exposed to the financial turmoil that afflicted Turkey and Argentina. Crude prices have almost tripled since February 2016, ratcheting up the cost of imports."

September 30 - Reuters (Lisa Barrington and Karin Strohecker): "Lebanon's worst bond market shock in a decade has raised doubts about whether the country's banks are willing and able to continue to bankroll the government, raising pressure on Beirut to step up reforms or risk a destabilizing currency crisis."

Central Bank Watch:

October 2 - Bloomberg: "Global central banks are gradually withdrawing easy monetary policy a decade since they began racing to the rescue of a world economy skidding into recession. The Federal Reserve's benchmark is now the highest since 2008 and officials are signaling another hike in December and more in 2019. Emerging markets from Argentina to India have acted to defend their currencies. All told, 10 of the 22 central banks monitored in Bloomberg Economics' quarterly outlook raised interest rates since the start of July. Seven are predicted to do so again before the end of this year. That's not to say global policy is tight and there is a sense of divergence among the big policy makers. The European Central Bank will buy assets until December and pledges not to increase rates before the summer. The Bank of Japan continues to deliver massive stimulus and the People's Bank of China is alert to weakening growth."

October 3 - CNBC (Weizhen Tan): "The rupee's plunge into record-low territory this year is unlikely to slow - even if India's central bank hikes its rate this week, according to experts… Analysts largely expect India, Asia's third-largest economy, to raise its benchmark rate by 25 bps at its meeting this week, with more increases to come this and next year. But while an interest rate hike would normally be expected to support a currency, the rupee 'is in for continued losses ahead,' according to Prakash Sakpal, vice president of research at Dutch bank ING."

Italy Watch:

October 2 - Reuters (Gavin Jones): "Italy defied pressure from Brussels and its euro zone partners on Tuesday to water down ambitious budget plans, threatening to sue EU officials it said were to blame for a deepening sell-off on Rome's financial markets… 'We are not turning back from the 2.4% target... We will not backtrack by a millimeter,' Luigi Di Maio, deputy prime minister and leader of the anti-establishment 5-Star Movement, said on RTL radio."

October 4 - Reuters (Jan Strupczewski): "Senior European Union officials believe Italy risks facing a massive debt restructuring task - and one that would hit its own citizens hardest - unless it backs down in its unprecedented challenge to Brussels' budget rules. Italy's 2.3 trillion euro national debt dwarfs that of Greece and the euro zone bailout fund would not be able to cope with the costs of supporting its government in a crisis. Any such crisis could threaten the euro itself, seen by many as the EU's greatest achievement."

October 3 - Bloomberg (Kevin Costelloe and Andrew Davis): "Italy's populist government will offer some concessions to fend off European Union pressure about its public finances, committing to reduce its budget deficit targets in 2020 and 2021, while sticking to its guns for next year, Corriere della Sera newspaper reported. The government will maintain its plan for a shortfall of 2.4% of gross domestic product for 2019, while reducing the targeted gap to 2.2% and 2% for the two successive years respectively, according to Corriere. The government had originally said it would aim for 2.4% for all three years."

October 2 - Wall Street Journal (Avantika Chilkoti and Georgi Kantchev): "A deepening selloff of Italian bonds and banks has revived concerns over the 'doom loop' between weak lenders and fragile government finances. Italian banks have large portfolios of the country's bonds and the recent fall in their value will have eroded the sector's capital cushion, which is needed to protect it from future financial shocks. During the sovereign debt crisis earlier this decade, a selloff in government bonds raised concerns about the banks that held them which, in turn, added to worries about the country's economic strength. But this year, Italian banks have loaded up on even more of the country's bonds, even as other eurozone countries have whittled down their portfolios."

October 3 - Financial Times (Miles Johnson in Rome and Jim Brunsden): "As Italy's populist coalition government prepares to submit its draft budget to the European Commission this month all eyes are on the possibility of a dangerous confrontation with Brussels and financial markets. While Luigi Di Maio, leader of the Five Star Movement, and Matteo Salvini, leader of the League, have said they will resist outside attempts to change their plans, senior European figures have warned Rome that their expensive policies are likely to be in breach of budget rules… The Italian government said last week that its plans would see the country's budget deficit for next year rise to 2.4% of gross domestic product. Giovanni Tria, Italy's technocratic economy minister, has said the deficit will come down in 2020 and 2021. But the economic assumptions behind these estimates are likely to be as important in deciding the commission's reaction as the figure itself."

October 1 - Bloomberg (Lorenzo Totaro, Viktoria Dendrinou, and Nikos Chrysoloras): "Italian Finance Minister Giovanni Tria's effort to promote his government's new fiscal strategy ended in failure on Monday, with the head of the European Commission warning of a Greek-style crisis and the nation's bonds dropping to their weakest level in more than four years. 'Recent announcements by the Italian government have raised concerns about its budgetary course,' Mario Centeno, the Portuguese finance minister, said… Dutch Finance Minister Wopke Hoekstra went further, saying 'I'm somewhat less optimistic after having talked to my colleagues than beforehand.'"

Europe Watch:

October 3 - Financial Times (Martin Arnold and Kerin Hope): "Some of Greece's biggest banks suffered steep share price falls on Wednesday as investors worried they may not have enough capital to meet fresh targets on reducing their large portfolios of bad debts. Shares in Piraeus Bank, the country's largest lender by assets, dropped more than 20%, cutting its market capitalisation to less than €600m."

Japan Watch:

September 30 - Reuters (Leika Kihara and Tetsushi Kajimoto): "Rising raw material costs and a string of natural disasters that disrupted production sapped business confidence among Japan's big manufacturers in the September quarter, a central bank survey showed…, taking it to the lowest in more than a year."

Global Bubble Watch:

September 30 - Financial Times (Patrick Jenkins): "Black pots and kettles spring to mind. Over the past couple of weeks, three different policymakers from the European Central Bank have spoken in concerned tones about the risks posed to the financial system by the growing role of 'shadow banking'. Ten years after the world was rocked by an unprecedented banking crisis, policymakers are sounding the alarm about the spread of risk out of the now more regulated banks and into the 'shadows' where asset managers, insurers and others carry out banklike business. First came Mario Draghi, ECB president. …He pointed out that the non-bank financial sector in the EU now harboured €42tn, or 40%, of the region's entire financial system… Next came François Villeroy de Galhau, the Banque de France governor, who cited the same figures but added a touch of politics by blaming 'the big investment funds, they are partly American'… Finally, last week, Peter Praet, the ECB's chief economist, told a Financial Times conference that he was particularly worried about 'the degree of leverage in the financial system . . . because of the shadow banking system'."

October 3 - Reuters (Weizhen Tan): "'Irresponsible fiscal policy' is on the rise as governments increasingly try to appeal to angry voters, according to a chief investment officer overseeing international macroeconomic trends. …Michael Hasenstab, chief investment officer at Templeton Global Macro… called the trend a response to populism… and emphasized that political risk had become a pressing investment consideration. 'One of the main factors that we look at throughout emerging markets and the developed markets, take Italy for example, is the rise of populism leading to irresponsible fiscal policy. Probably one of the most important political variables we have to look at,' Hasenstab told CNBC…"

September 30 - Bloomberg (Matthew Burgess): "Australia's property slump has reached the one-year mark as the nation's two major cities have become the biggest drag. National dwelling values dropped 0.5% last month, weighed by declines in Sydney and Melbourne, according to CoreLogic… Prices in the two east coast cities, which make up more than half of the national value of housing, have fallen 6.1% and 3.4% respectively from a year earlier… Values have fallen greatest among the most expensive properties as lenders curb their appetite for high debt to income ratio lending…"

Fixed Income Bubble Watch:

October 3 - Bloomberg (Christopher Anstey and Gowri Gurumurthy): "Risk premiums on U.S. junk-rated bonds have tumbled to the lowest level since the start of the global financial crisis… A dearth of fresh supply, as well as continued investor inflows and rising U.S. government-debt yields, helped push the yield spread on sub-investment grade U.S. bonds over benchmark Treasuries to 3.09 percentage points Monday -- the lowest since July 2007. Issuance of new corporate debt is about 30% lower this year than in the same period of 2017, and is running at the slowest pace since 2009. Against that, the largest junk bond ETF recorded its biggest one-day inflow on record Monday."

Leveraged Speculation Watch:

October 3 - Wall Street Journal (Juliet Chung): "Boston hedge fund Highfields Capital Management is returning billions in client money and converting into a family office, founder Jonathan Jacobson told investors... The decision to return money to investors would mark one of the largest hedge fund closings in recent history. Mr. Jacobson started the $12.1 billion stock-trading firm in 1998… About $9.5 billion of Highfields' assets are outside client money. 'Done correctly, money management is an all-consuming, 24/7 pursuit… After three-and-a-half decades of sitting in front of a screen, I realized I am ready for a change,' Mr. Jacobson, 57 years old, wrote… Mr. Jacobson's decision to return money… is the latest closure by a high-profile manager during a tough period for hedge funds. This year through August, stock hedge funds on average returned 2.3% compared with a 10% return for the S&P 500…"

Geopolitics Watch:

September 29 - Wall Street Journal (Farnaz Fassihi and Chris Gordon): "Top diplomatic officials from China and Russia admonished the U.S. on an array of issues ranging from multilateral agreements to sanctions policy at the United Nations on Friday, portraying Washington as stepping back from world commitments while their own countries were expanding global engagement. Russian Foreign Minister Sergei Lavrov and Chinese Foreign Minister Wang Yi were among the speakers scheduled near the end of a week of addresses by world leaders at the U.N. General Assembly."

October 4 - CNN (Barbara Starr): "The US Navy's Pacific Fleet has drawn up a classified proposal to carry out a global show of force as a warning to China and to demonstrate the US is prepared to deter and counter their military actions, according to several US defense officials. The draft proposal from the Navy is recommending the US Pacific Fleet conduct a series of operations during a single week in November. The goal is to carry out a highly focused and concentrated set of exercises involving US warships, combat aircraft and troops to demonstrate that the US can counter potential adversaries quickly on several fronts."

October 2 - Reuters (Robin Emmott): "Russia must halt its covert development of a banned cruise missile system or the United States will seek to destroy it before it becomes operational, Washington's envoy to NATO said… The United States believes Russia is developing a ground-launched system in breach of a Cold War treaty that could allow Russia to launch a nuclear strike on Europe at short notice, but Moscow has consistently denied any such violation."

October 1 - Reuters (Ben Blanchard and David Stanway): "China expressed anger… after a U.S. Navy destroyer sailed near islands claimed by China in the disputed South China Sea, saying it resolutely opposed an operation that it called a threat to its sovereignty. Beijing and Washington are locked in a trade war in which they have imposed increasingly severe rounds of tariffs on each other's imports. A U.S. official… said the destroyer the USS Decatur traveled within 12 nautical miles of Gaven and Johnson Reefs in the Spratly Islands…"

October 1 - Wall Street Journal (Gordon Lubold and Jeremy Page): "U.S. military officials complained… that a Chinese warship harassed a U.S. Navy vessel as it sailed through the South China Sea, adding to a growing roster of disputes between the two countries in a sudden escalation of tensions. The ship complaint comes as the latest episode between Washington and Beijing after a year-long trade and tariff war has spilled over into political conflict and military strains between the rival powers. Rhetoric has risen markedly in the past week, with President Trump charging at the United Nations last week that China had meddled in U.S. elections by purchasing misleading newspaper ads designed to look like news articles that criticize Trump administration policies."

October 4 - Reuters (Idrees Ali and Robin Emmott): "U.S. Defense Secretary Jim Mattis said… that Russia's violation of an arms control treaty was 'untenable' and unless it changed course the United States would respond. The United States believes Russia is developing a ground-launched system in breach of a Cold War treaty, known as the Intermediate-Range Nuclear Forces Treaty (INF), that could allow Moscow to launch a nuclear strike on Europe at short notice."

Friday Evening Links

[Reuters] Wall Street slides as bond yields climb on jobs data

[BloombergQ] China Slams Brakes on U.S. Crude Oil Imports

[Reuters] Speculators net long U.S. dollar bets highest since Dec. 2016 -CFTC data

[Reuters] A disciple of Brazil's dictatorship moves closer to the presidency

[BloombergQ] Asian Cities Challenge U.S. Dominance in Venture Capital

[WSJ] The Achilles’ Heel for Italy’s Populists: Weak Banks

[WSJ] OPEC’s Wildcards Could Push Oil to $100

[FT] Bond market sell-off weighs on stocks

Thursday, October 4, 2018

Friday's News Links

[BloombergQ] Treasuries Drop on Jobs Data, Tech Selloff Resumes: Markets Wrap

[Reuters] Red October rumbles on ahead of U.S. jobs data

[Reuters] Shares in Chinese tech firms tumble, Lenovo plunges over 20 percent

[Reuters] U.S. job growth slows; unemployment rate falls to 3.7 percent

[Reuters] U.S. trade deficit jumps to six-month high in August

[Reuters] ECB's Draghi met Italian president to discuss budget: source

[Reuters] Italy's Salvini attacks Juncker, hopes for change in 2019

[MarketWatch] Bond-market bloodbath likely to hit mortgage rates soon — another test for the housing market

[CNBC] Mattress Firm, largest US mattress retailer, files for Chapter 11 bankruptcy protection

[Reuters] Japan household spending posts biggest rise in three years, signals steady recovery

[NYT] With 8 Years of Job Gains, Unemployment Is Lowest Since 1969

[WSJ] Trump Aims to Model New Trade Deals on Revised Nafta

[WSJ] Banks Are Italy’s Weak Spot as Rome Picks Fight With EU

[FT] Rising rates are not all good news for US banks

Thursday Evening Links

[Reuters] Wall St. ends down as bond yields rise further

[Reuters] Emerging Markets-Surging U.S. bond yields hit Latam currencies, stocks

[Reuters] Italy dismisses concern the EU will reject its budget plan

[Reuters] Investors pull most cash in 2 years from U.S. Treasury funds -Lipper

[CNBC] Booming US economy may soon be the 'strongest since 1999', Kevin Warsh says

[BloombergQ] U.S. Small-Business Fighting for Staff Push Pay Gains to Record

[CNBC] We may be in the early stages of a 'persistent rise' in interest rates, says Jim Grant

[Reuters] DoubleLine's Gundlach: 30-year U.S. Treasury signals higher bond yields

[BloombergQ] The Biggest Risk That Markets Ignore

[BloombergQ] The Untold Tale Behind Modi's Shock Takeover of a Risky Lender

[Reuters] U.S. vice president accuses China of campaign to undermine Trump

[Reuters] West accuses 'pariah state' Russia of global hacking campaign

[Reuters] Brazil presidential campaign ends with debate ahead of Sunday vote

[WSJ] You Should Worry More About Italy’s Bond Market

Wednesday, October 3, 2018

Thursday's News Links

[BloombergQ] U.S. Stocks Extend Losses, Treasuries Hold Steady: Markets Wrap

[Reuters] Dollar and global bonds track surge in Treasury yields, stocks sag

[BloombergQ] China's Holiday Week Only Gets Worse as Stocks Slump With Yuan

[Reuters] U.S. weekly jobless claims drop to near 49-year low

[BloombergQ] Powell Says Fed May Lift Rates to Levels That Restrain Growth

[Reuters] 'Complete insanity' of Italy debt plans may lead to huge restructuring -euro officials

[BloombergQ] The Bond Market Has Gone Soft

[CNBC] 'Irresponsible fiscal policy' is a major concern in the current political climate, says CIO

[CNBC] Chinese spy chips are found in hardware used by Apple, Amazon, Bloomberg says; Apple, AWS say no way

[BloombergQ] Get Ready For Trade War Pain to Spread Through Asia

[BloombergQ] Asia’s Private-Bank Party Is Good While It Lasts

[BloombergQ] Pimco Warns Australia's Property Slump Threatens Banks, Economy

[BloombergQ] The Easy Money Era Is Over in India

[CNN] US Navy proposing major show of force to warn China

[Reuters] Pence to tell China: We will not be intimidated in South China Sea

[Reuters] Pentagon chief says Russian violation of key arms control treaty 'untenable'

[NYT] Private Businesses Built Modern China. Now the Government Is Pushing Back.

[NYT] Pence Speech to String Together a Narrative of Chinese Aggression

[WSJ] Anxiety Starts to Grow in Junk-Bond Market

[FT] Sovereign bond sell-off spreads worldwide

[FT] ECB retreat on easing ripples out to US bond market

[BloombergSub] The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies

Wednesday Evening Links

[Reuters] Financials lift Wall Street, but rate worry caps gains

[CNBC] Rates are surging with 10-year, 30-year Treasury yields touching multiyear highs

[Reuters] Treasuries-Yields hit decade highs as case for Dec rate hike mounts

[Reuters] Powell says we're 'a long way' from neutral on interest rates, indicating more hikes are coming

[Reuters] U.S. services sector activity hits 21-year high; hiring accelerates

[CNBC] The oil market 'fever' might push prices toward $100 before it breaks

[CNBC] Mortgage fraud is getting worse as more people lie about their income to qualify for loans

[AFP] Amid trade spat, US-China military tensions soar

[WSJ] Treasury Yields Rise to Multiyear Highs After Strong Data

[WSJ] Employer-Provided Health Insurance Approaches $20,000 a Year

[WSJ] The $500 Million Central Bank Heist—and How It Was Foiled

[WSJ] An Unusual Year for Haven Assets Continues

[WSJ] Hedge Fund Highfields Capital To Return Money to Clients

[FT] Treasury sell-off builds as yields eye biggest rise since 2016 election

[FT] US junk debt provides strong returns despite broader woes

[FT] Fed official says US ready for return to tight monetary policy

[FT] Greek bank shares slide on bad debt worries

Tuesday, October 2, 2018

Wednesday's News LInks

[BloombergQ] U.S. Stocks Head for Records, Treasuries Slide: Markets Wrap

[Reuters] Italy budget concession hopes switch risk sentiment back on

[BloombergQ] Turkish Assets Tumble as Inflation Puts Policy in the Spotlight

[CNBC] India's rupee sinks to record lows. Its central bank isn't expected to save it

[CNBC] 'Rip-Private payrolls grew by 230,000 in Sept, vs 185,000 expected: ADP

[CNBC] ISM non-manufacturing index hits 61.6 in September, vs. 58 estimate

[BloombergQ] Italy to Bow to EU and Cut Deficit to 2% in 2021, Corriere Says

[BloombergQ] When It Comes To Rates, What Are Central Banks Going To Do Next?

[Reuters] Federal Reserve prepares for next crisis, bets it will begin like the last

[Reuters] Fed's Barkin cites Brexit, political crisis as potential economic shocks

[BloombergQ] New Yorkers Are Listing Their Homes for Both Sale and Rent

[BloombergQ] How China's Peer-to-Peer Lending Crash Is Destroying Lives

[BloombergQ] Turkish Inflation Near Record High in Erdogan Era on Lira

[BloombergQ] A Moment Of Truth For NBFCs...And For The System

[WSJ] New Nafta Shows Limits of ‘America First’

[WSJ] Companies Lure New Workers With College Coaching, Student Debt Repayment

[WSJ] China to Raise Billions in U.S. Dollar Debt as Trade Tensions Persist

[FT] Why the US-China stand-off is bad for investors

[FT] Italy’s budget fight: the next steps for Rome and Brussels

Tuesday Evening Links

[Reuters] Dow closes at record but Facebook drags on S&P, Nasdaq

[Reuters] PRECIOUS-Gold jumps as equity sell-off triggers safe-haven bids

[Reuters] Powell: U.S. outlook 'remarkably positive' with low unemployment, tame inflation

[CNBC] Powell pledges the Fed will 'act with authority' if inflation spikes

[Reuters] September a 'tale of two hurricanes' for U.S. new car sales

[Reuters] Brazil poll shows far-right Bolsonaro beating leftist in run-off

[WSJ] Investors Fear Italian ‘Doom Loop’ as Bond Selloff Deepens

[FT] Fed chair Powell defends cautious approach to lifting rates

Monday, October 1, 2018

Tuesday's News Links

[BloombergQ] U.S. Stocks Slip as Dollar Gains With Crude Oil: Markets Wrap

[BloombergQ] Italian Assets Suffer Fresh Blow as Borghi Evokes `Own Currency'

[BloombergQ] Oil Surges To Highest Since 2014 As Global Supply Concerns Mount

[BloombergQ] Rupiah Slides To Lowest Point Against Dollar Since 1998

[Reuters] Defiant Italy says no turning back on budget despite EU 'threats'

[CNBC] Trump's trade victories mean the White House can now 'focus all its ire on China'

[Reuters] Boston Fed's Rosengren: Job market too tight for too long poses risks

[BloombergQ] Manhattan Home Sales Tumble in a Market Clogged With Listings

[CNBC] Shadow banking crisis may push India's central bank to leave the rupee stranded

[BloombergQ] Duy: The Fed’s No Longer Guided by Concept of Neutral Rates

[Reuters] China condemns U.S. for South China Sea freedom of navigation operation

[Reuters] U.S. would destroy banned Russian warheads if necessary: NATO envoy

[WSJ] Fed Rethinks How to Define a Big Bank

[WSJ] China’s Property-Market Woes Deepen With Rising Rents

[WSJ] A Big Problem in the Shadows for India’s Financial System

[WSJ] Pentagon Says Chinese Ship Harassed a U.S. Vessel

[FT] Volatility is no sideshow for Italian bond investors

[FT] Beijing axes coal and steel production curbs as economy slows

[BloombergSub] Euro Chiefs Dismayed by Italy's Budget as Juncker Evokes Greece

Monday Evening Links

[Reuters] NAFTA replacement deal lifts Dow, S&P; Nasdaq negative

[CNBC] Here are some key differences between Trump's new trade deal and NAFTA

[Reuters] Trump says too soon to talk with China on trade

[Reuters] European, Asian factory growth sputters on weakening exports, Americas mixed

[BloombergQ] Fed's Rosengren Favors Hiking Until Rates ‘Mildly Restrictive’

[CNBC] This bull market run has echoes of the late 1920s, Nobel Prize-winning economist Shiller says

[WSJ] Ten Things to Know About the Nafta Deal

[WSJ] New Trade Deal Sets Stage for Contest With China

[WSJ] Fed’s Rosengren Says ‘Mildly Restrictive’ Monetary Policy Likely

[WSJ] Italy’s Bonds Fall Further on Budget Concerns

[FT] US-Mexico-Canada deal greeted with relief rather than enthusiasm

Sunday, September 30, 2018

Saturday, September 29, 2018

Saturday's News Links

[Reuters] Fed's 'neutral rate' guru downplays theory as rates rise

[BloombergQ] China to Keep Prudent, Neutral Monetary Policy, PBOC Says

[Reuters] China central bank says will maintain ample liquidity as trade row threatens economy

[Reuters] Argentina raises reserve requirements for banks to curb inflation

[BloombergQ] Italy's Tria May Quit After Budget Approval, Messaggero Says

[WSJ] China, Russia Criticize U.S. in U.N. Remarks

Friday, September 28, 2018

Weekly Commentary: Portending an Interesting Q4

"Those who do not learn history are doomed to repeat it." I'll add that those that learn the wrong lessons from Bubbles are doomed to face greater future peril. The ten-year anniversary of the financial crisis has generated interesting discussion, interviews and scores of articles. I can't help but to see much of the analysis as completely missing the critical lessons that should have been garnered from such a harrowing experience. For many, a quite complex financial breakdown essentially boils down to a single flawed policy decision: a Lehman Brothers bailout would have averted - or at least significantly mitigated - crisis dynamics.

I was interested to listen Friday (Bloomberg TV interview) to former Treasury Secretary Hank Paulson's thoughts after a decade of contemplation.

Bloomberg's David Westin: "It's been ten years, as you know, since the great financial crisis that you stepped into. Tell us the main way in which the financial system is different today than what you faced when you came into the Treasury?"

Former Treasury Secretary Hank Paulson: "Well, it's very, very different today. So, let's talk about what I faced. What I faced was a situation where going back decades the government had really failed the American people, because the financial system had not kept pace with the modern financial markets. The protections that were put in place after the Great Depression to deal with panics were focused on banks - protecting depositors with deposit insurance. Meanwhile, the financial markets changed. And when I arrived (2006), half or more of the Credit was flowing outside of the banking system. And we didn't have the oversight we needed. We didn't have the regulatory authorities to deal with a run, and this was a situation where there was a great deal of leverage. There was a great deal of risk. Today, when you look at it, we see a situation where the banks are better capitalized. We have much better regulatory oversight. I think there are fewer gaps. I think we have a better set of authorities. There is less of what I would call 'dry tinder' - there's less excesses. So, I think there is less risk, although these things are unpredictable of having any kind of a major financial crisis, on the one hand. And there are some important new authorities. But some of the things we relied very heavily on have been taken away. So, I wish we had a few more protections."

"…The thing I would be most concerned about are some of the authorities we used to stop the panic. The Exchange Stabilization Fund at Treasury we used to guarantee the money markets. Remember there was a run on the three and one-half trillion money markets, and the money markets were funding short-term borrowings for many of the biggest companies in the world. So when the money markets began to implode, the commercial paper market dried up. If these big companies started cutting back on their funding, this would have moved very quickly to their suppliers, to smaller industrial companies. It could have been disastrous. We stepped in and we used the Exchange Stabilization Fund to guarantee the money markets. We no longer have that authority."

Mr. Paulson is surely accurate in stating the government "really failed the American people," though I doubt future historians will see this failure having concluded with the 2008 crisis. Finance had fundamentally changed, and the regulatory framework failed to adapt. As Paulson said, Credit expansion (and finance more generally) had moved outside of traditional bank lending, but Washington had not constructed adequate safeguards and resolution mechanisms in the event of a panic.

While not inaccurate, this line of analysis misses the greater point - the critical lesson that went unheeded: It was "activist" government policy-making over an extended period that played a decisive role in the rapid expansion of non-traditional finance. Federal Reserve policymaking evolved to aggressively incentivize risk-taking and leveraged speculation. The government-sponsored enterprises (GSE) evolved from guarantors of mortgages to massive quasi-central banks, with unlimited access to cheap money market finance supporting enormous balance sheets and market backstop operations. Between the Fed and GSEs, unprecedented Washington "activism" created a backdrop conducive to a "wild west" derivatives marketplace ballooning to the hundreds of Trillions.

It is true that "we didn't have the oversight we needed." But the much greater issue was that Washington had become actively involved in promoting cheap Credit, abundant liquidity, and inflated securities and asset markets. Washington partnered with Wall Street to fundamentally and momentously change system-wide risk intermediation and resource allocation.

What's missing in the 10-year crisis anniversary dialogue is a more comprehensive discussion of several decades of serial booms and busts, including the factors behind the 1987 stock market crash; the late-eighties boom and bust; the S&L crisis; the 1994 bond market rout; the 1995 Mexico collapse; the 1997 "Asian Tiger" collapse; the 1998 implosion of Russia and Long-Term Capital Management; the 2000 collapse of the "tech" Bubble; the 2001 crisis in Brazil; the 2002 U.S. corporate debt crisis; the 2002 collapse of the Argentine peso and so on.

I have for a long time now argued that "unfettered" contemporary finance is dangerously unstable. I believe it has become only more unsound - and perilous - over time. Here in the U.S., it was easy to disregard the spectacular boom and bust dynamics that were wreaking havoc throughout numerous overseas economies (heck, they worked to keep U.S. rates and market yields low!). "The Maestro" and his monetary magic had everything under control. Things, however, finally came home to roost in 2008. The mighty U.S. was not immune after all. Indeed, years of government interventions, manipulations and market backstops ensured the accumulation of excesses and structural maladjustment to the point of risking financial collapse.

To focus on Lehman as the critical factor in the crisis is to disregard the true culprit, the intoxicating amalgamation of contemporary finance and "activist" government monetary management. As always, Credit is self-reinforcing. I (among others) have argued that Credit is inherently unstable, with today's unconstrained contemporary Credit remarkably unstable. Asset inflation is the most dangerous form of inflation, as "Wall Street" market-based finance and modern central banking doctrine specifically champion rising securities and asset prices. What is more, government and central bank promotion of asset inflation guaranteed that leveraged speculation evolved into a dominant force throughout global finance.

For more than nine years, I've argued that responses (U.S. and international) to the 2008 crisis unleashed the "global government finance Bubble." I believe speculative leverage is a greater global issue today than even in 2008. This leveraging has become integral to global liquidity, liquidity that fueled precarious booms in China, throughout the emerging markets and even in Europe. Furthermore, this global liquidity has over the past decade been "recycled" into Bubble U.S. securities markets, illustrated by the massive (Fed's Z.1) "Rest of World" flows into U.S. financial assets.

The "global savings glut" thesis was popular back during the mortgage finance Bubble period. We were to believe a persistent surplus of "savings" over "investment" explained low market yields and overly abundant marketplace liquidity. Yet "savings" is not going to suddenly disappear. Liquidity created in the process of expanding speculative leverage, on the other hand, can evaporate almost instantly in the event of an acute bout of de-risking/deleveraging. And if this liquidity had evolved into a prevailing source of finance for the asset markets and real economy, an abrupt change in market perceptions will have profound ramifications for both financial and economic stability. Most critically, the longer speculation-related liquidity has fueled the markets and economy, the deeper the structural impact and the greater the subsequent dislocation when this liquidity source is interrupted.

It was imperative for policymakers to make fundamental post-crisis changes to their approach with incentive structures, incentives that had fomented progressively more systemic financial and economic Bubbles. That was the key lesson from the crisis - one that went unheeded. Policymakers instead moved aggressively in the opposite direction: Their market interventions and manipulations became only more extreme. The upshot has been historic Bubbles around the globe, stocks and bonds and across asset markets more generally.

The issue in 2008 was not Lehman as much as it was tens of Trillions of leveraged securities holdings and derivatives whose value had been inflated by a confluence of speculation, leverage, liquidity overabundance and market misperceptions. This self-reinforcing liquidity backdrop had not only inflated the value of mortgage-related securities, it had inflated the value of the underlying collateral (home prices). This liquidity was also being recycled through the securities markets more generally, in particular inflating the prices of U.S. equities and corporate Credit.

This powerful dynamic of liquidity excess and rising asset prices propelled an unprecedented degree of sophisticated risk intermediation and derivatives trading that worked to distort, disguise and inflate various risks. Market risk perceptions became utterly distorted. These factors fundamentally loosened mortgage Credit and system Credit Availability more generally. The resulting massive expansion of mortgage Credit, ultra-easy financial conditions and resulting asset inflation (inflated perceived wealth) stoked both spending and investment.

Importantly, the critical factors fomenting the mortgage finance Bubble were all made more powerful by post-crisis policy responses: The amount and impact of leveraged speculation and resulting liquidity excess; endemic asset inflation; derivatives-related masking and distorting of risk; deep-seated distortions to both the financial and economic structure. Similar dynamics to those that fueled previous U.S. market and economic Bubbles now encompass the world.

Bubble markets remained largely oblivious to risk heading right into the 2008 crisis. There was no appreciation for how vulnerable the liquidity backdrop had become to abrupt change. After all, the GSEs and Fed had for years cultivated the perception of impenetrable market liquidity backstops. And this misperception incentivized risk-taking - aggressive speculation, leveraging, risk intermediation and derivative strategies - that basically ensured acute vulnerability to a bout of de-risking/deleveraging. Sure, Lehman could have been bailed out. But that would have only ensured an even more extended period of ("terminal") excess and a more perilous crisis.

I appreciate Hank Paulson's focus on the critical role played by non-bank Credit in the crisis. But when discussing how the system has become sounder post-crisis, he falls back on the standard "the banks are better capitalized." We are to have faith that system stability has benefitted from better oversight and regulation - that policymakers learned from history.

Market were blindsided in 2008. There was a complete lack of appreciation for how distortions at the "periphery" - in particular Trillions of risky mortgage loans, securities, derivatives and speculative leverage - had late in the cycle come to provide the marginal source of finance fueling increasingly maladjusted financial and economic structures. There was no understanding of how unstable finance had nurtured acute fragility - no appreciation for how the inevitable eruption of risk aversion at the "periphery" would over time imperil stability at the "core."

There are today ominous parallels. In 2007 and well into 2008, it was "subprime doesn't matter." Today, "EM doesn't matter. China doesn't matter. Tariffs don't matter. Debt doesn't matter." Corporate earnings, tax cuts, deregulation and technological prowess ensure the robust U.S. economy will remain immune to global financial and economic issues. The powerful "core" is invulnerable to a weak "periphery," much as the highly liquid and resilient market in "AAA" was (right into the fall of 2008) perceived unaffected by faltering lower-tier securities. There is the current misperception that global "whatever it takes" ensures liquid and robust securities markets.

I have posited that the global Bubble has been pierced at the "periphery." Global financial conditions have tightened, although there is the typical ebb and flow between risk aversion and risk embracement (fear and greed). It's my view that unprecedented speculative leverage has accumulated throughout global markets and that the destabilizing process of "de-risking/deleveraging" has commenced in the emerging markets. The first phase of this process has seen faltering liquidity at the "periphery" spur additional speculative flows to the "core." Increasingly, however, I would expect global de-leveraging to have negative ramifications for risk-taking and liquidity more generally.

It's worth noting Friday's 26 bps surge in Italian 10-year yields. Italy's yields were up as much as 35 bps intraday (to a four-year high 3.26%) before settling somewhat lower. Italian bank stocks sank 3.7% in Friday trading, this after Italy's populist government appeared to agree on a 2019 budget deficit of 2.4% (above the anticipated 2.0% ceiling). Why such a forceful reaction (considering U.S. deficits will likely soon approach 5% of GDP)?

I'm thinking back to when subprime issues began afflicting the "Alt A" (less than prime) mortgage market. Current market focus has turned to Italy - a heavily indebted sovereign borrower increasingly vulnerable to a tightening of global financial conditions; a prime beneficiary of loose finance on the upside, now at risk as a marginal borrower in a shifting liquidity backdrop. From my analytical perspective, Italy is a key player as we monitor for crisis dynamics gravitating from the "Periphery" to the "Periphery of the Core."

The ECB's "whatever it takes" policy approach has incentivized leveraged speculation, especially at the Eurozone's relatively higher-yielding periphery. A Friday Bloomberg headline: "Sovereign-Bank 'Doom Loop' Haunts Rattled Italian Markets." Italy's banks are not alone in holding leveraged bets on Italian debt. It's been too easy for the leveraged speculating community to borrow at negative rates (i.e. short German two-year debt at negative 54 bps) and profit from the spread. Italian debt has surely been one of the most popular "carry trade" speculations in the world, perhaps also financed with interest-free borrowings from Japan. Meanwhile, funds have likely flowed into Italian debt from Japan, with savers and institutions alike reaching for yields. And, now remembering back 20 years, leveraged derivatives bets on Italian debt played a role in the 1998 (Russia/LTCM) crisis.

If, as I suspect, the global risk-taking and liquidity backdrop is changing, "marginal" borrowers such as Italy will be viewed in different light. Yields are rising, which means the value of EM and Italian debt is declining. When these securities offered rising prices and stable spreads, risk embracement saw self-reinforcing speculative leveraging and attendant liquidity abundance. And as wonderful and enduring as this dynamic appears on the upside, speculative leverage is inevitably problematic on the downside. Lower bond prices (higher yields) force a reduction in leverage, which can lead to a self-reinforcing "Risk Off" contraction of marketplace liquidity.

Interestingly, the euro declined 1.2% this week, with the Swiss franc down a notable 2.3%. Key Eastern European currencies (Czech koruna, Bulgarian lev, Romanian leu and Hungarian forint) fell between 1% and 2%. The week provided a reminder of how Italian debt worries can spark worry for Italian banks, European banking, the euro and Eastern European economies.

Worries about Europe spur the U.S. dollar, with a stronger American currency reminding the world of festering EM issues. The Argentine peso sank 9.9% this week. For the most part, however, global markets ended the third quarter with a semblance of stability.

A bloody Friday in Italian debt certainly wasn't going to tarnish a big quarter for U.S. equities. The S&P500 returned 7.7% for the quarter, lagging the Nasdaq100's 8.6%. The Nasdaq Telecom index jumped 11.7%, and the Biotechs (BTK) surged 13.2%. The NYSE Healthcare Index gained 12.7%. The Dow Transports rose 10.0%, with the DJIA up 9.0%.

It may have been subtle, but there was some quarter-end market action that might just portend an interesting Q4. There was the 32 bps one-week surge in Italian yields, along with the 8.3% drop in Italian bank stocks. The European (STOXX600) Bank index was down 3.0% in the final week of the quarter, with Japan's TOPIX Bank Index dropping 2.0%. Curiously, especially with Treasury yields trading at highs for the quarter, U.S. Bank stocks (BKX) sank 4.7% this week. The Broker/Dealers were down 3.1%. There was, as well, the return of concern for tightening global dollar funding markets. The fourth quarter starts Monday, with various indicators pointing toward an important tightening of financial conditions.

As I chronicle history's greatest financial Bubble, I'll take note of this week's developments in the Judge Kavanaugh Supreme Court confirmation hearings. Thursday's hearings were nothing short of incredible - incredibly dramatic, emotional, tragic and disturbing. Our country is being torn apart - and the tearing has turned more unambiguous and heinous. Ramifications for what is unfolding in society, politics and geopolitics are as profound as they are far-reaching. But with stocks right at all-time highs, what's to fret about…

It was a week that pitted Democrats and Republicans in Washington, with vitriol and differences that appear more irreconcilable than ever before. There was also President Trump speaking at the United Nations, with world representatives either laughing "with" or "at" the leader of the free world. And it's this confluence of division, contempt and hostility in the face of an increasingly fragile global Bubble that has me deeply concerned. A global crisis in the current backdrop would make 2008 seem like a walk in the park.

I'll conclude with an astute observation from Bloomberg's David Westin:

Westin: "You lost some of the legal provisions that you described. What about political? Because one of the things you had going for you - and I know it was difficult and was not all in a straight line - but through that crisis you got Congress, you had a President, even with low approval ratings, to really back you. Do we still have that same political capital - or political competence - given what happened last time?"

Paulson: "That's really a key question…"

For the Week:

The S&P500 slipped 0.5% (up 9.0% y-t-d), and the Dow declined 1.1% (up 7.0%). The Utilities fell 0.8% (down 0.4%). The Banks sank 4.7% (down 1.7%), and the Broker/Dealers fell 3.1% (up 0.2%). The Transports declined 1.3% (up 7.2%). The S&P 400 Midcaps fell 1.1% (up 6.3%), and the small cap Russell 2000 lost 0.9% (up 10.5%). The Nasdaq100 advanced 1.3% (up 19.2%). The Semiconductors declined 1.2% (up 9.1%). The Biotechs surged another 3.4% (up 27.4%). With bullion down $7, the HUI gold index fell 1.3% (down 26.6%).

Three-month Treasury bill rates ended the week at 2.15%. Two-year government yields added two bps to 2.82% (up 94bps y-t-d). Five-year T-note yields were little changed at 2.95% (up 75bps). Ten-year Treasury yields were unchanged at 3.06% (up 66bps). Long bond yields added a basis point to 3.21% (up 47bps). Benchmark Fannie Mae MBS yields slipped a basis point to 3.81% (up 82bps).

Greek 10-year yields jumped 10 bps to 4.15% (up 8bps y-t-d). Ten-year Portuguese yields added a basis point to 1.88% (down 7bps). Italian 10-year yields surged 32 bps to 3.15% (up 113bps). Spain's 10-year yields were unchanged at 1.50% (down 7bps). German bund yields gained one basis point to 0.47% (up 7bps). French yields gained three bps to 0.80% (up 2bps). The French to German 10-year bond spread widened about two to 33 bps. U.K. 10-year gilt yields increased two bps to 1.57% (up 38bps). U.K.'s FTSE equities index increased 0.3% (down 2.3%).

Japan's Nikkei 225 equities index rose 1.0% (up 6.0% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.13% (up 8bps). France's CAC40 was little changed (up 3.4%). The German DAX equities index fell 1.5% (down 5.2%). Spain's IBEX 35 equities index dropped 2.1% (down 6.5%). Italy's FTSE MIB index sank 3.8% (down 5.2%). EM equities were mixed. Brazil's Bovespa index was little changed (up 3.8%), while Mexico's Bolsa increased 0.3% (up 0.3%). South Korea's Kospi index gained 0.2% (down 5.0%). India's Sensex equities index dropped 1.7% (up 6.4%). China's Shanghai Exchange rose 0.9% (down 14.7%). Turkey's Borsa Istanbul National 100 index jumped 2.0% (down 13.3%). Russia's MICEX equities index rose 2.0% (up 17.3%).

Investment-grade bond funds saw inflows of $1.781 billion, while junk bond funds had outflows of $1.569 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose seven bps to 4.72% (up 73bps y-o-y). Fifteen-year rates gained five bps to 4.16% (up 72bps). Five-year hybrid ARM rates increased five bps to 3.97% (up 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.81% (up 66bps).

Federal Reserve Credit last week declined $11.9bn to $4.161 TN. Over the past year, Fed Credit contracted $262bn, or 5.9%. Fed Credit inflated $1.351 TN, or 48%, over the past 308 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $12.5bn last week to $3.439 TN. "Custody holdings" were up $67bn y-o-y, or 2.0%.

M2 (narrow) "money" supply rose $18bn last week to $14.248 TN. "Narrow money" gained $554bn, or 4.0%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits dropped $44.8bn, while Savings Deposits rose $53bn. Small Time Deposits gained $3.7bn. Retail Money Funds added $3.0bn.

Total money market fund assets gained $18bn to $2.883 TN. Money Funds gained $143bn y-o-y, or 5.2%.

Total Commercial Paper rose $7.9bn to $1.082 TN. CP gained $23bn y-o-y, or 2.2%.

Currency Watch:

The U.S. dollar index rallied 1.0% to 95.132 (up 3.3% y-t-d). For the week on the upside, the South African rand increased 1.3%, the Mexican peso 0.6%, the South Korean won 0.6%, and the Canadian dollar 0.1%. For the week on the downside, the Swiss franc declined 2.3%, the euro 1.2%, the Swedish krona 1.1%, the New Zealand dollar 1.0%, the Japanese yen 1.0%, the Australian dollar 0.9%, the British pound 0.3% and the Singapore dollar 0.2%. The Chinese renminbi declined 0.17% versus the dollar this week (down 5.27% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.6% (up 9.9% y-t-d). Spot Gold slipped 0.5% to $1,193 (down 8.5%). Silver rallied 2.5% to $14.712 (down 14.2%). Crude surged another $2.47 to $73.25 (up 21%). Gasoline jumped 3.4% (up 16%), and Natural Gas gained 1.0% (up 2%). Copper fell 1.8% (down 15%). Wheat dropped 2.4% (up 19%). Corn slipped 0.3% (up 2%).

Trump Administration Watch:

September 23 - CNBC (Javier E. David): "With the world's two largest economies opening a new front in their multibillion dollar bilateral trade dispute, the risk has risen sharply that the U.S. will eventually slap tariffs on all imports from China, Goldman Sachs said… President Donald Trump ordered a new raft of surcharges on around $200 billion worth of Chinese goods last week, with China retaliating with $60 billion in U.S. goods. Last year, the world's largest economy absorbed more than $500 billion worth of goods from China… 'Following President Trump's threat of further escalation, we now think the probability that all imports from China will ultimately be subject to tariffs has risen to 60%,' the bank's analysts wrote…"

September 24 - Bloomberg (Joanna Ossinger): "JPMorgan… strategists are starting to make forecast and strategy changes around the potential that President Donald Trump gets so overconfident in the robust economy and markets that he makes a 'major miscalculation.' The worry is that 'U.S. economic and equity market resilience despite tariffs will embolden the President on all geopolitical fronts -- autos, Nafta and particularly Iran -- and thus risk a major miscalculation from sanctions that are tough to calibrate,' strategists led by John Normand wrote…"

September 23 - New York Times (Cecilia Kang): "President Trump says his trade war with China will protect America's dominance and derail Beijing's plan for technological and economic supremacy. But as the fight kicks into high gear this week, American tech and telecom companies are warning that the industry's growing reliance on products made and assembled in China means they are more likely to be casualties, not victors, in the skirmish. Mr. Trump's next round of tariffs on $200 billion worth of Chinese goods goes into effect on Monday, hitting thousands of consumer products from handbags to refrigerators to bicycles. The tariffs will also hit the tech and telecom companies that provide much of the gear that powers the internet, mobile networks, data storage and other technology. United States customs will begin collecting a tax on circuit boards, semiconductors, cell tower radios, modems and other products made and assembled in China and exported into America. Those tariffs, Intel warned in a letter last month, are 'a game changer for the American consumer.'"

September 25 - Wall Street Journal (Vivian Salama): "President Trump criticized international organizations and alliances as unaccountable and defended his administration's hard-line trade policies, urging fellow world leaders… to chart their own paths toward sovereignty. Mr. Trump, speaking to the United Nations General Assembly, offered a more subdued, but equally defiant performance to his first U.N. address last year, saying that he won't entertain trade deals that aren't fair and reciprocal, and don't stand to benefit the American people. 'We will not allow our workers to be victimized, our companies to be cheated and our wealth to be plundered and transferred,' he said. 'America will never apologize for protecting our citizens.'"

September 25 - Reuters (David Lawder): "U.S. President Donald Trump's top trade official said… that changing China's economic policies to become more market-oriented 'is not going to be easy' even with tariffs now in place on $250 billion worth of Chinese goods. U.S. Trade Representative Robert Lighthizer, in rare public remarks at the Concordia Summit, said 'endless dialogues' with the Chinese government over decades had 'failed miserably' in changing Beijing's policies, so the Trump administration decided to try direct pressure with tariffs… Lighthizer repeated his views that China's intellectual property practices and non-market industrial subsidies that have resulted in excess production capacity would put the future of the U.S. economy and its high-technology industries at risk. 'We changed the paradigm, we have tariffs in place, and the president is not going let this go long, where you take intellectual property where you have a forced transfer of intellectual property, where you treat American companies and farmers and ranchers poorly,' he added."

September 24 - CNBC (Kate Rooney): "Establishing a new trade deal with China could be significantly tougher than it was with Mexico, according to one of President Trump's top advisors. 'The challenge is, they've engaged in so many egregious practices that it's far more difficult to make a deal with China than it would be with Mexico,' Peter Navarro, director of the National Trade Council at the White House, said… The former economics professor and author of 'The Coming China Wars,' has been notoriously hawkish on trade. Navarro said the goal now is structural realignment where all countries the U.S. trades with engage in 'free, fair, and reciprocal' agreements."

September 26 - Reuters (Yara Bayoumy and Michelle Nichols): "U.S. President Donald Trump… accused China of seeking to meddle in the Nov. 6 U.S. congressional elections, saying Beijing did not want his Republican Party to do well because of his pugnacious stance on trade. 'China has been attempting to interfere in our upcoming 2018 election, coming up in November. Against my administration,' Trump told a U.N. Security Council meeting…"

September 22 - Reuters (Christopher Bing): "The White House has drafted an executive order that would push federal antitrust and law enforcement agencies to probe the business practices of social media and other internet companies, according to Bloomberg. It is unclear whether the order will be signed by President Donald Trump. The order has yet to be reviewed by other government agencies and remains in its preliminary stages…"

September 26 - Bloomberg (Jenny Leonard, Jennifer Jacobs and Jennifer Epstein): "President Donald Trump announced he has reached an agreement with Japanese Prime Minister Shinzo Abe to open trade talks between the two nations. Trump said he expected the talks will come to a 'satisfactory conclusion' as he spoke to reporters… 'It can only be better for the United States, because it couldn't get any worse than what has happened over the years' Trump added… The U.S. and Japan want to address bilateral trade in goods during the first phase of the talks over the next few months, U.S. Trade Representative Robert Lighthizer said…"

Federal Reserve Watch:

September 26 - Bloomberg (Christopher Condon and Craig Torres): "Federal Reserve officials raised interest rates and cemented expectations for another hike this year as they reaffirmed that a strong U.S. economy will probably warrant further gradual increases well into 2019. The quarter-point hike boosted the benchmark federal funds rate to a target range of 2% to 2.25%. The move reflected an upbeat assessment of the economy that was identical to the central bank's last policy statement eight weeks ago… 'This gradual return to normal is helping to sustain this strong economy,' Chairman Jerome Powell told reporters Wednesday following a two-day meeting of the Federal Open market Committee…"

September 26 - Bloomberg (Craig Torres and Jeanna Smialek): "The White House's latest pick for the Federal Reserve Board was deliberately chosen for her financial stability expertise and knowledge of the Fed system to round out a board of monetary policy experts and Wall-Street savvy lawyers. President Donald Trump plans to nominate Nellie Liang, a Ph.D. economist who ran the Fed's financial stability unit until her retirement last year. It's a timely choice as some credit markets are showing signs of aggressive risk-taking. Liang's long study of that topic was a key factor in the winning the nod… The news of her intended nomination broke Sept. 20. Financial conditions are heating up with some credit markets showing signs of overheating. The Fed's gradual pace of interest rate increases, combined with low interest rates globally, has supported a reach for yield that has weakened standards among some lenders."

September 25 - New York Times (Binyamin Appelbaum): "One of the most perplexing questions about the nation's economic recovery is why a tight labor market has not translated into faster wage growth. Part of the answer appears to be that American workers are receiving a growing share of compensation in the form of benefits rather than wages. The average worker received 32% of total compensation in benefits including bonuses, paid leave and company contributions to insurance and retirement plans in the second quarter of 2018. That was up from 27% in 2000… The rising cost of health insurance accounts for only about one-third of the trend. And the data do not include the increased prevalence of non-monetary benefits like flexible hours or working from home, or perks like gyms and 'summer Fridays.'"

U.S. Bubble Watch:

September 25 - New York Times (Nelson D. Schwartz): "The federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or children's programs. The run-up in borrowing costs is a one-two punch brought on by the need to finance a fast-growing budget deficit, worsened by tax cuts and steadily rising interest rates that will make the debt more expensive. With less money coming in and more going toward interest, political leaders will find it harder to address pressing needs like fixing crumbling roads and bridges or to make emergency moves like pulling the economy out of future recessions. Within a decade, more than $900 billion in interest payments will be due annually… Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50% more than in 2017, according to the Congressional Budget Office."

September 25 - Reuters (Lucia Mutikani): "U.S. consumer confidence surged to an 18-year high in September as households grew more upbeat about the labor market, pointing to sustained strength in the economy despite an increasingly bitter trade dispute between the United States and China… The Conference Board said its consumer confidence index increased to a reading of 138.4 this month from an upwardly revised 134.7 in August. That was the best reading since September 2000 and the index is not too far from an all-time high of 144.7 reached that year."

September 23 - Financial Times (John Authers and Brooke Fox): "Ten years on from the collapse of Lehman Brothers, are we any safer? The answer, at best, is only a qualified 'yes'. Excessive leverage in the banking systems of the US and the eurozone drove that crisis. Those risks have reduced, although Europe's banks, which entered the financial crisis in much worse shape, face serious problems and remain vulnerable to political shocks. But the risk did not go away. It moved. Pension funds have taken on many of the risks that were once held by banks. Low bond yields, which make it more expensive to guarantee an income, have forced them to take extra risks. They now hold assets, such as hedge fund and private equity investments, with much concealed leverage. And many companies have transferred the risk of bad investment performance from their shareholders to savers - and savers are not usually well-equipped to deal with them. The result: the risk of a sudden banking collapse, which almost happened 10 years ago, has reduced. But the risk of social crisis, as people enter retirement without enough money, is rising."

September 27 - Reuters (Lucia Mutikani): "New orders for key U.S.-made capital goods fell in August after four straight months of strong gains and the goods trade deficit widened sharply, prompting some economists to significantly lower their economic growth estimates for the third quarter… The goods trade deficit rose $3.8 billion to $75.8 billion in August. Exports of goods fell 1.6% to $137.9 billion, weighed down by a 9.5% plunge in shipments of food, feeds and beverages."

September 25 - CNBC (Olick): "Home prices are still rising, but the pace of the gains continues to slow, as potential homebuyers hit an affordability wall and sellers cave to the new reality. Home prices rose 6% annually in July, down from the 6.2% gain in June, according to the S&P Corelogic Case-Shiller national index. The 20-city index rose 5.9% annually, down from 6.4% in June. The 10-city index rose 5.5% annually, down from 6.0% the previous month. 'Rising homes prices are beginning to catch up with housing,' says David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices."

September 26 - CNBC (Diana Olick): "Buying a home is getting more and more expensive, thanks to sharp increases in both prices and mortgage rates. That is juicing demand for apartment rentals and, in turn, pushing rents higher. Rents in the third quarter of this year were up 2.9% compared with a year ago, according to RealPage, a real estate analytics firm. That's up from 2.5% annual growth in the second quarter."

September 26 - Reuters (Lucia Mutikani): "Sales of new U.S. single-family homes rebounded in August after two straight monthly declines, but the underlying trend still pointed to a weakening housing market against the backdrop of rising mortgage rates and higher home prices. …New home sales rebounded 3.5% to a seasonally adjusted annual rate of 629,000 units last month. July's sales pace was revised down to 608,000 units from the previously reported 627,000 units."

September 27 - Reuters (Nick Carey): "U.S. auto sales in September likely fell 6% from the same month last year as dealerships felt the mixed impact of hurricanes both this year and in 2017, industry consultants J.D. Power and LMC Automotive said…"

September 23 - Wall Street Journal (Michael Rapoport and Theo Francis): "Last December's tax overhaul is boosting corporate profits in more ways than one. The legislation lowered companies' tax bills, improving their earnings. But the change has also helped them fund record stock buybacks-a move that makes their results appear even better, by boosting the per-share earnings they highlight for investors. S&P 500 companies bought back a record $189 billion of their own shares in the first quarter, and a similar number-if not more-is expected for the second quarter, according to S&P Dow Jones Indices. By contrast, S&P 500 buybacks totaled no more than $137 billion in any of the six quarters before the tax overhaul."

September 26 - CNBC (Jeff Cox): "After consecutive quarters of near-record profit growth, companies are starting to lower expectations. With third-quarter earnings right around the corner, S&P 500 companies are cutting their outlooks at levels not seen since the first quarter of 2016, when corporate America was in a profits recession. In all, 98 companies have offered guidance - 74 have provided a negative outlook, meaning they expect earnings to come in below Wall Street estimates, while just 24 have been positive, according to FactSet."

September 21 - Wall Street Journal (Leslie Scism and Erin Ailworth): "After a week of heavy rains and record flooding, initial estimates for the damage that Florence wrought on the Carolinas rank the storm among history's top hurricanes… Moody's Analytics… estimated the economic cost of Florence to be between $38 billion and $50 billion including damage to property, vehicle losses, and lost output. At the upper end of that range, Florence would rank seventh among the biggest storms, just after Hurricane Andrew in 1992…"

China Watch:

September 24 - Reuters (Yawen Chen and Ben Blanchard): "A senior Chinese official said… it is difficult to proceed with trade talks with the United States while Washington is putting 'a knife to China's neck', a day after both sides heaped fresh tariffs on each other's goods. When the talks can restart would depend on the 'will' of the United States, Vice Commerce Minister Wang Shouwen said… 'Now that the United States has adopted such a huge trade restriction measure ... how can the negotiations proceed? It's not an equal negotiation,' Wang said, stressing the United States has abandoned its mutual understanding with China."

September 23 - Bloomberg: "Producers in China are already under stress even ahead of implementation of U.S. tariffs, as indicated by an explosion in corporate borrowing that isn't being captured by official government statistics, according to the China Beige Book. 'Manufacturing is under fire. The sector's multi-year rally has given way to declining revenue and sharply declining profit growth,' CBB International said in a report. 'Critically, manufacturing's plight is occurring before any meaningful American tariffs have been imposed. Absent a fall trade deal, this situation will likely deteriorate. The pace of borrowing -- at 41% of firms, the highest since 2012 -- sure smells a lot like panic."

September 24 - Bloomberg: "Surging interbank rates. A shock jump in the currency. Hong Kong's decade-long liquidity party suddenly appears to be ending, and that can only be bad news for its expensive property market. The one-month rate known as Hibor rose 28 bps on Monday, the most since December 2008. That followed the biggest jump in the Hong Kong dollar in 15 years at the end of last week. The chance of local banks raising the so-called prime rate, which caps the cost of some mortgages, is 'extremely high,' Financial Secretary Paul Chan said. That hasn't happened since 2006. A currency peg with the U.S., open financial borders and a booming economy meant Hong Kong property was one of the greatest beneficiaries of ultra-low lending costs in the wake of the global financial crisis. Home prices rose more than 170% in the past decade making the city the world's least affordable."

September 24 - Bloomberg: "China's debt-laden developers face a potentially devastating blow to their biggest source of financing, as authorities consider putting an end to the practice of selling apartments before they are finished. Guangdong's provincial housing authority is considering scrapping so-called pre-sales… The system allows developers to receive the entire sale proceeds upfront before construction has finished, which they then use to finance further land purchases and developments. The overhaul would threaten to remove the biggest funding channel for developers, after authorities tightened other financing options from bond sales to borrowing from shadow banks. Such a move would place further strain on the sector, which is facing a record $23 billion maturity wall in the first quarter of 2019."

September 26 - Financial Times (Gabriel Wildau and Edward White): "China's household debt reached a record high last year, adding to worries the burden of debt services could weigh on long-term consumer spending and drag on growth in the world's second-largest economy. The country's ratio of household debt to gross domestic product hit an all-time high of 49.1% in 2017, marking an increase of nearly 20 percentage points over the past five years, German insurer Allianz said in its latest global wealth report. 'This amounts to an increase of 30 percentage points in just 10 years - no other country saw its private debt burden rising so fast,' Allianz said, with the caveat that 'China needed to catch up to some extent, as Chinese private households only obtained access to bank loans in 2003'."

September 23 - Financial Times (Gabriel Wildau and Yizhen Jia): "Chinese local governments are flooding the debt market with a new type of bond, lining up $200bn in issuance designed to fund infrastructure investment as Beijing seeks to stimulate a slowing economy. China's parliament in March approved a quota of Rmb1.35tn ($197bn) for issuance of 'special-purpose' bonds for 2018, more than the combined quotas for the previous two years. But until recently, actual issuance was sluggish as local governments were under pressure to cut borrowing. As part of a slate of economic stimulus measures announced in late July, China's cabinet instructed local governments to accelerate issuance of such securities…"

September 26 - Wall Street Journal (Lingling Wei and Bob Davis): "DuPont Co. suspected its onetime partner in China was getting hold of its prized chemical technology, and spent more than a year fighting in arbitration trying to make it stop. Then, 20 investigators from China's antitrust authority showed up. For four days this past December, they fanned out through DuPont's Shanghai offices, demanding passwords to the company's world-wide research network… Investigators printed documents, seized computers and intimidated employees, accompanying some to the bathroom. Beijing leans on an array of levers to pry technology from American companies-sometimes coercively so, say businesses and the U.S. government. Interviews with dozens of corporate and government officials on both sides of the Pacific, and a review of regulatory and other documents, reveal how systemic and methodical Beijing's extraction of technology has become-and how unfair Chinese officials consider the complaints."

EM Watch:

September 24 - Bloomberg (Klaus Wille): "Asian family offices' love of emerging markets may prove painful in 2018. Family offices in the region have the highest allocation globally to equities in developing markets, according to the 2018 Global Family Office Report published… by UBS Group AG and Campden Wealth… 'Family offices are favoring higher risk, more illiquid investments in the pursuit of alpha,' the report said. 'And with developing-market equities grabbing an average return of 38% and developed-market equities 23%, this asset class deserves the spotlight.'"

Central Bank Watch:

September 26 - Reuters (Swati Pandey and Vatsal Srivastava): "China, Taiwan and New Zealand sat tight after the Federal Reserve's latest rate hike, but Indonesia and the Philippines pulled the trigger on Thursday to prop up their battered currencies and temper risks to inflation and financial stability."

September 24 - Wall Street Journal (Tom Fairless): "European Central Bank President Mario Draghi said the bank would push ahead with plans to phase out easy money as wages and inflation pick up across the Eurozone… Speaking at the European Parliament…, Mr. Draghi delivered an upbeat assessment of the region's economy and confirmed a plan, announced in June, to end the ECB's €2.5 trillion ($2.94 trillion) bond-buying program in December. 'Households' disposable income in the euro area is currently growing at the highest rates observed in the last 10 years,' Mr. Draghi said."

September 23 - Reuters (Michael Shields): "The European Central Bank should speed up its exit from 'crisis-mode' monetary policy, ECB policymaker Ewald Nowotny said…, reiterating his hawkish line about the timing of potential rate hikes. The ECB is due to end its money-printing program at the end of this year after pumping 2.6 trillion euros ($3.05 trillion) into the bond market and has hinted at a rate hike late next year if euro zone inflation accelerates gently. Nowotny, governor of Austria's central bank, questioned the wisdom of waiting nearly a year before adjusting borrowing costs. 'We are in a really very good economic situation ...I think the normalization should perhaps take place somewhat more quickly,' he told Austrian broadcaster ORF…"

September 24 - Reuters (Leika Kihara): "A few Bank of Japan board members said the central bank must consider more seriously the potential dangers of ultra-easy policy, such as the negative impact on the country's banking system, minutes of their policy meeting in July showed… Some in the nine-member board also worried whether the BOJ could trigger a spike in long-term interest rates by allowing bond yields to move more flexibly around its zero percent target."

Europe Watch:

September 27 - Financial Times (Miles Johnson and Kate Allen): "Italy's coalition government is making a last-minute push to ensure its expensive election promises are included in new spending targets that risk increasing the country's budget deficit beyond the comfort level of Brussels and financial markets. Luigi Di Maio, deputy prime minister and leader of the country's anti-establishment Five Star party, said… that the budget framework would be a 'courageous measure for the people', and suggested that he had not yet agreed on a fixed number for Italy's budget deficit as a percentage of its economic output ahead of an important cabinet meeting."

September 27 - Bloomberg: "German inflation unexpectedly accelerated to a four-month high, suggesting the rate in the euro area will rise further above the European Central Bank's goal. Consumer prices rose an annual 2.2% in September, exceeding the median estimate in a Bloomberg survey and the 1.9% reached in August."

Global Bubble Watch:

September 25 - Financial Times (Colby Smith): "A few things actually have changed since the financial crisis. Banks, for example, are no longer the primary suppliers of international credit. A new report by the Bank of International Settlements (BIS) shows that after the crisis, borrowers began to fund themselves through debt issuance instead. But because most of this debt is dollar-denominated, much of what's new has ended up affirming something very old: the world wants US dollars…The BIS - the bank for central banks - finds that debt securities, not bank loans, have driven the surge in global liquidity since 2010. Between the turn of the century and 2008, bank loans' share of global GDP doubled to 20%. But after a sharp contraction following the crash, bank loans have flatlined. One debt replaced another, and since then, international debt securities have grown. As of the first quarter of 2018, debt securities make up roughly 57% of total international credit, up from 48% in the first quarter of 2008."

September 23 - Reuters (Saikat Chatterjee): "International debt issuance has soared in recent years as financing conditions improve, with dollar-denominated bonds beating bank debt as the most popular funding tool a decade after the global financial crisis… International credit, defined as bank loans and debt securities like bonds, has soared to 38% of the global economy in the first quarter of 2018, compared with 33% three years ago, according to a quarterly report by the Bank of International Settlements… Dollar lending to non-bank emerging markets have more than doubled to around $3.7 trillion since the 2008 crisis. A similar amount has been borrowed through currency swaps, according to the BIS."

September 25 - Reuters (Karen Lema and Enrico Dela Cruz): "Developing Asia could grow more slowly than previously thought next year as the U.S.-China trade war inflicts damage on the region's export-reliant economies, the Asian Development Bank (ADB) said… Tightening global liquidity could also weigh on business activity by pushing up borrowing costs, while capital outflows are also a risk. The Manila-based institution kept its 2018 economic growth estimate for the region at 6.0% in an update of its Asian Development Outlook. But it trimmed next year's forecast to 5.8% from 5.9%..."

Fixed Income Bubble Watch:

September 24 - Reuters (Kate Duguid): "The $37 billion in new supply of 2-year Treasury notes on Monday were sold at the highest yield at auction since June 2008 to the weakest demand since December 2008. Demand was lackluster despite low prices, notching the yield on the 2-year note up to 2.817% on Monday after the Treasury Department sale. The high yield at auction was 2.829%, the highest since June 2008 at 2.922%..."

September 25 - Bloomberg (Adam Tempkin): "One of the most popular mortgage-bond trades since the financial crisis is going out of fashion as rising rates punish down-on-their-luck borrowers. So-called 'scratch and dent' mortgages -- which are tied to borrowers that fell behind or began repaying their debts after a default -- accounted for the largest piece of the U.S. residential mortgage-backed securities market without government backing over the last decade. But rising rates make it harder for homeowners to refinance their mortgages, potentially lengthening how long it will take them to pay off that loan. This means bond buyers could get stuck with these non-performing loan and re-performing loan mortgage securities for more time than they anticipated. And investors are taking a step back, pushing yields higher. 'There are higher rates across the board, which has a fairly negative impact because it impedes the ability of the borrower to refinance out of their properties, and is also deadly for bond duration,' said Neil Aggarwal, senior portfolio manager and head of trading at Semper Capital."

Geopolitics Watch:

September 26 - Reuters (Idrees Ali): "The U.S. military flew B-52 bombers in the vicinity of the South China Sea this week, U.S. officials told Reuters, a move that is likely to cause anger in Beijing amid heightened tensions between the two countries."

September 25 - Wall Street Journal (Nancy A. Youssef and Gordon Lubold): "The Chinese government denied a U.S. Navy ship permission for a port visit to Hong Kong in October, U.S. military officials said, a decision issued as Beijing also canceled a high-level naval meeting in the U.S. The rebuffs come as tensions build between the two countries over a range of military and economic differences. Last week, the State Department imposed sanctions on a Chinese military agency for buying Russia's SU-35 combat aircraft and S-400 surface-to-air missile system, leading China to formally complain to the U.S. ambassador and acting defense attaché."

September 22 - Reuters (David Stanway and Lesley Wroughton): "China summoned the U.S. ambassador in Beijing and postponed joint military talks in protest against a U.S. decision to sanction a Chinese military agency and its director for buying Russian fighter jets and a surface-to-air missile system… China's Defence Ministry said… it would recall navy chief Shen Jinlong from a visit to the United States and postpone planned talks in Beijing between Chinese and U.S. military officials that had been set for next week."

September 24 - Reuters (Mohammad Zargham): "The U.S. State Department has approved the sale to Taiwan of spare parts for F-16 fighter planes and other military aircraft worth up to $330 million, prompting China to warn… that the move jeopardized Sino-U.S. cooperation. U.S. military sales to self-ruled Taiwan, which China claims as its territory, is an irritant in the relations between the world's two largest economies."

September 23 - Associated Press: "Iran's President Hassan Rouhani said… that an unnamed U.S.-allied country in the Persian Gulf was behind an attack on a military parade that killed 25 people and wounded around 70. Rouhani did not identify those behind Saturday's attack, which was claimed by an Arab separatist group… 'All of those small mercenary countries that we see in this region are backed by America. It is Americans who instigate them and provide them with necessary means to commit these crimes,' Rouhani said."

September 25 - Reuters (Steve Holland and Parisa Hafezi): "U.S. President Donald Trump and Iranian President Hassan Rouhani exchanged taunts at the United Nations General Assembly… with Trump vowing more sanctions against Tehran and Rouhani suggesting his American counterpart suffers from a 'weakness of intellect.' Trump used his annual address to the United Nations to attack Iran's 'corrupt dictatorship,' praise last year's bogeyman North Korea and lay down a defiant message that he will reject globalism and protect American interests. But much of his 35-minute address was aimed squarely at Iran, which the United States accuses of harboring nuclear ambitions and fomenting instability in the Middle East through its support for militant groups in Syria, Lebanon and Yemen. 'Iran's leaders sow chaos, death and destruction,' Trump told the gathering... 'They do not respect their neighbors or borders or the sovereign rights of nations.'"

September 25 - Reuters (Parisa Hafezi): "Turkish President Tayyip Erdogan said… that his country could not remain silent over the use of sanctions as weapons while it is in a bitter standoff with the United States over the fate of an American evangelical Christian pastor detained by Ankara… 'None of us can remain silent to the arbitrary cancellation of commercial agreements and the use of economic sanctions as weapons,' Erdogan said in a speech to the United Nations General Assembly."