Credit Bubble Bulletin

Sunday, March 12, 2017

Saturday, March 11, 2017

My New Endeavor

MWM Tactical Short Video with Doug Noland

Saturday's News Links

[Bloomberg] Trump's Firing of Manhattan Prosecutor Shows Escalating Battle

[Bloomberg] Merkel to Warn Trump That U.S. Tax Changes May Spark Retaliation

[The Hill] Obstacles mount for tax reform

[Reuters] Some bank bulls grow wary on policy uncertainty

[Bloomberg] Turkey's Erdogan Calls Dutch `Fascists' After Minister Grounded

[Spiegel] Assad's Control Erodes as Warlords Gain Upper Hand

[Washington Post] As North Korea’s arsenal grows, experts see heightened risk of ‘miscalculation’

[FT] White House civil war breaks out over trade

Friday, March 10, 2017

Weekly Commentary: Unparalleled Credit and Global Yields

New Fed Q4 Z.1 Credit and flow data was out this week. For the first time since 2007, annual Total Non-Financial Debt (NFD) growth exceeded $2.0 TN – a bogey I’ve used as a rough estimate of sufficient new Credit to fuel self-reinforcing reflation. Based on some nebulous “neutral rate,” the Fed rationalizes that it’s not behind the curve. Robust “money” and Credit growth argues otherwise. A Bloomberg headline from earlier in the week: “Taylor Rule Suggests Fed is About 12 Hikes Behind.”

Though not so boisterous of late, there’s been recurring talk of “deleveraging” – “beautiful” and otherwise – since the crisis. Let’s update some numbers: Total Non-Financial Debt (NFD) ended 2008 at $35.065 TN, or a then record 238% of GDP. NFD ended 2016 at a record $47.307 TN, an unprecedented 255% of GDP. In the eight years since the crisis, NFD has increased $12.243 TN, or 35%. Including Financial Sector (that excludes the Fed) and Foreign U.S. borrowings, Total U.S. Debt has increased $11.422 TN to a record $66.079 TN, or 356% of GDP. It’s worth adding that the $2.337 TN post-crisis contraction in Financial Sector borrowings was more than offset by the surge in Federal Reserve liabilities.

For 2016, NFD expanded $2.117 TN, up from 2015’s $1.929 TN - to the strongest growth since 2007’s record $2.501 TN. Household borrowings increased $521bn, up from 2015’s $384bn, to the strongest pace since 2007’s $947bn. Household mortgage borrowings jumped to $248bn, up from 2015’s $129bn. On the back of an unusually weak Q4, total Business borrowings declined to $724bn last year from 2015’s $812bn (strongest since ‘07’s $1.117 TN).

The Bubble in Federal obligations runs unabated. Federal debt jumped $843bn in 2016, up from 2015’s $725bn increase to the strongest growth since 2013’s $857bn. It’s worth noting that after ending 2007 at $6.074 TN, outstanding Treasury debt has inflated more than 160% to $16.0 TN. As a percentage of GDP, Treasury debt increased from 42% to end 2007 to 86% to close out last year.

Yet Treasury is not Washington’s only aggressive creditor. GSE Securities jumped a notable $352bn in 2016 to a record $8.521 TN, the largest annual increase since 2008. In quite a resurgence, GSE Securities increased almost $1.0 TN over the past four years. Treasury and GSE Securities (federal finance) combined to increase $1.194 TN in 2016 to $24.504 TN, or 132% of GDP. For comparison, at the end of 2007 Treasury and Agency Securities combined for $13.449 TN, or 93% of GDP.

The unprecedented amount of system-wide debt is so enormous that the annual percentage gains no longer appear as alarming. Non-Financial Debt expanded 4.7% in 2016, up from 2015’s 4.4%. Total Household Debt expanded 3.6%, with Total Business borrowings up 5.6%. Financial Sector borrowings expanded 2.9% last year, the strongest expansion since 2008.

Securities markets remain the centerpiece of this long reflationary cycle. Total (debt and equities) Securities jumped $1.50 TN during Q4 to a record $80.344 TN, with a one-year rise of $4.80 TN. As a percentage of GDP, Total Securities increased to 426% from the year ago 415%. For comparison, Total Securities peaked at $55.3 TN during Q3 2007, or 379% of GDP. At the previous Q1 2000 cycle peak, Total Securities had reached $36.0 TN, or 359% of GDP.

The Household Balance Sheet also rather conspicuously illuminates Bubble Dynamics. Household Assets surged $6.0 TN during 2016 to a record $107.91 TN ($9.74 TN 2-yr gain). This compares to the peak Q3 2007 level of $81.9 TN and $70.0 TN to end 2008. Q4 alone saw Household Assets inflate $2.192 TN, with Financial Assets up $1.589 TN and real estate gaining $557bn.

With Household Liabilities increasing $473bn over the past year, Household Net Worth (assets minus liabilities) inflated a notable $5.518 TN in 2016 to a record $92.805 TN. As a percentage of GDP, Net Worth rose to a record 492%. For comparison, Household Net Worth-to-GDP ended 1999 at 435% ($43.1 TN) and 2007 at 453% ($66.5 TN). Net Worth fell to a cycle low 378% of GDP ($54.4TN) in Q1 2009. In terms of Credit Bubble momentum, it’s notable that Net Worth inflated over $2.0 TN in both Q3 and Q4.

March 5 – Bloomberg: “China’s credit engine will keep humming this year, adding the rough equivalent of Germany’s annual economic output to its already massive stock of total social financing, according to estimates derived from the nation’s 2017 targets. Adding higher equity market financing and about 5 trillion yuan ($725bn) worth of local government bond swaps to the official credit growth target of 12%, analysts at UBS Group AG see TSF expansion of 14.8% this year. They calculate that’s equal to a whopping 23 trillion yuan, or $3.3 trillion, addition to the amount of total credit already swishing around the world’s second-largest economy.”

UBS analysts forecast (above) $3.3 TN of 2017 Chinese Total Social Financing (TSF). And with TSF excluding national government deficit spending, let’s add another $300bn and presume 2017 Chinese system Credit growth of around $3.6 TN. As such, it’s possible that China and the U.S. could combine for Credit growth approaching an Unparalleled $6.0 TN. There are, as well, indications of an uptick in lending in the euro zone, and Credit conditions for the most part remain loose throughout EM. Importantly, the inflationary biases that have gained momentum in asset and securities markets and, increasingly, in consumer prices and corporate profits provide a tailwind for Credit expansion.

March 9 – Bloomberg (Hugh Son, Jennifer Surane, and Francine Lacqua): “Jamie Dimon said President Trump’s economic agenda has ignited U.S. business and consumer confidence and he expects at least some of the administration’s proposals to be enacted. ‘It seems like he’s woken up the animal spirits,’ Dimon, chairman and chief executive officer of JPMorgan Chase & Co., said Thursday… Confidence has ‘skyrocketed because it’s a growth agenda,’ Dimon said, adding that he’s not overly concerned about the possibility of a correction in equities markets…”

There are any number of developments that could bring this global Credit party to an end, including a spike in yields and resulting speculative de-leveraging. U.S. Credit expansion did slow meaningfully in Q4. With Business borrowings dropping to 2.6% (Q3 6.3%) and federal debt growth sinking to 2.9% (Q3 8.2%), NFD growth dropped to 2.9% from Q3’s 5.8%. But both should bounce back strongly in Q1. We’ve already seen a huge surge in corporate debt issuance. And it would be atypical if Credit growth failed to respond to surging stock prices and business confidence, loose financial conditions and strengthening inflation trends. And with the nation’s most influential commercial banker talking “animal spirits,” I’ll assume Jamie Dimon is currently observing generally robust demand for Credit.

Ten-year Treasury yields touched 2.61% during Thursday’s session, the high since 2014 (and above Bill Gross’s 2.60% bear market bogey). Five-year yields closed the week up nine bps to 2.10%, an almost six-year high. Finishing the week at the highest level since 2008, two-year Treasury yields jumped five bps this week to 1.36%.

Rising yields aren’t just a U.S. phenomenon. This week saw yields trade to at least one-year highs in Canada, France, Germany, Italy, Spain, Netherlands, Sweden, Norway, Denmark, Belgium, Switzerland, Japan, Australia, New Zealand, South Korea, Israel and China. Italian yields surged 27 bps this week to the high since November 2014. Spanish 10-year yields jumped 21 bps to 1.89%, the high since November 2015. French yields rose 18 bps to 1.12%, the high since July 2015. German yields rose 13 bps this week to 0.49%, the highest level since January 2016.

There’s a huge question as to how much leverage has accumulated globally throughout this Bubble period. Thus far, deleveraging fears have been held in check by the fundamental backdrop, faith in ultra-dovish central bankers and the ongoing enormous QE from the BOJ and ECB. This week saw the first indication that the ECB is preparing to back away from its extreme monetary stimulus.

March 10 – Financial Times (Mehreen Khan): “It has been nearly seven years but investors are finally beginning to focus on the prospect of a tightening in monetary policy for the eurozone. A subtle shift in the signalling from European Central Bank president Mario Draghi this week has pushed up the probability of a December 2017 rate rise to more than 50% from just odds of a tenth at the start of the month. Despite not changing much of its formal language about being ready to provide more monetary medicine to the eurozone, Mr Draghi declared victory over the deflation risks that had prompted the ECB to begin its trillion euro bond-buying programme two years ago… ‘There is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance,’ Mr Draghi told journalists… Analysts judged the remarks to be the start of a gradual shift in the ECB’s forward guidance on interest rate rises…”

March 10 – Bloomberg (Jana Randow and Alessandro Speciale): “European Central Bank policy makers considered the question of whether interest rates could rise before their bond-buying program comes to an end, according to people familiar with the matter. Governing Council members meeting on March 9 exchanged views on ways of communicating and sequencing an exit from unconventional stimulus, euro-area central-bank officials said, asking not to be identified…”

Crude dropped 9.1% ($4.84) this week, closing below $50 for the first time in three months. Fearing the impact lower energy prices have on leveraged energy-related borrowers, the high-yield sector experienced abrupt and meaningful outflows this week. Lipper had high-yield fund outflows surging to $2.12 billion ($2.8bn high-yield corporate outflows from EPFR).

March 10 - Bloomberg: “Exchange-traded funds focused on U.S corporate junk bonds saw net outflows of $2.8 billion in the week…, 6% of assets and the second-largest outflow in 12 months… The Bloomberg Barclays U.S. Corporate High Yield bond index is almost 25% allocated to energy and materials issuers. The index’s option-adjusted spread to Treasuries jumped 24 bps last week from a two-year low 344 bps.”

A timely reminder: It’s that combination of rising sovereign yields and widening Credit spreads that risks sparking de-risking/de-leveraging dynamics. So far the investment grade corporate debt market has remained bulletproof. Simultaneous losses in highly-correlated stocks, bonds and commodities would be problematic for “risk parity” and similar leveraged strategies. Considering that global bond yields are flirting with an upside breakout, complacency seems rather deeply embedded. Analyzing Credit trends, it's clear that monetary policy and global yields have barely even begun the long and treacherous path toward normalization.

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For the Week:

The S&P500 slipped 0.4% (up 6.0% y-t-d), and the Dow declined 0.5% (up 5.8%). The Utilities fell 1.2% (up 3.8%). The Banks declined 1.0% (up 5.4%), and the Broker/Dealers fell 1.3% (up 6.0%). The Transports were hit 2.1% (up 2.7%). The S&P 400 Midcaps lost 1.6% (up 3.0%), and the small cap Russell 2000 dropped 2.1% (up 0.6%). The Nasdaq100 added 0.2% (up 10.7%), and the Morgan Stanley High Tech index increased 0.5% (up 11.4%). The Semiconductors advanced 1.8% (up 9.4%). The Biotechs added 0.5% (up 17.5%). With bullion down $30, the HUI gold index dropped 2.6% (up 2.4%).

Three-month Treasury bill rates ended the week at a nine-year high 73 bps. Two-year government yields rose five bps to 1.36% (up 17bps y-t-d). Five-year T-note yields gained nine bps to 2.10% (up 17bps). Ten-year Treasury yields jumped 10 bps to 2.58% (up 13bps). Long bond yields rose nine bps to 3.32% (up 25bps).

Greek 10-year yields jumped 14 bps to 7.09% (up 7bps y-t-d). Ten-year Portuguese yields rose 12 bps to 4.06% (up 31bps). Italian 10-year yields surged 27 bps to 2.37% (up 56bps). Spain's 10-year yields jumped 21 bps to 1.89% (up 51bps). German bund yields gained 13 bps to 0.49% (up 28bps). French yields jumped 18 bps to 1.12% (up 44bps). The French to German 10-year bond spread widened five to 63 bps. U.K. 10-year gilt yields increased five bps to 1.23% (unchanged). U.K.'s FTSE equities index slipped 0.4% (up 2.8%).

Japan's Nikkei 225 equities index increased 0.7% (up 2.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.09% (up 5bps). The German DAX equities index dipped 0.5% (up 4.2%). Spain's IBEX 35 equities index jumped 2.1% (up 7.0%). Italy's FTSE MIB index was unchanged (up 2.2%). EM equities were mostly lower. Brazil's Bovespa index dropped 3.2% (up 7.4%). Mexico's Bolsa declined 0.7% (up 3.2%). South Korea's Kospi rallied 0.9% (up 3.5%). India’s Sensex equities index increased 0.4% (up 8.7%). China’s Shanghai Exchange slipped 0.2% (up 3.5%). Turkey's Borsa Istanbul National 100 index was little changed (up 14.7%). Russia's MICEX equities index sank 4.0% (down 11.6%).

Junk bond mutual funds saw outflows jump to a notable $2.119 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to an eight-week high 4.21% (up 53bps y-o-y). Fifteen-year rates rose 10 bps to 3.42% (up 46bps). The five-year hybrid ARM rate gained nine bps to 3.23% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 4.36% (up 58bps).

Federal Reserve Credit last week declined $6.0bn to $4.421 TN. Over the past year, Fed Credit fell $20.7bn (down 0.5%). Fed Credit inflated $1.610 TN, or 57%, over the past 226 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.6bn last week to $3.182 TN. "Custody holdings" were down $72bn y-o-y, or 2.2%.

M2 (narrow) "money" supply last week surged $50.8bn to a record $13.353 TN. "Narrow money" expanded $841bn, or 6.7%, over the past year. For the week, Currency increased $7.4bn. Total Checkable Deposits declined $7.7bn, while Savings Deposits jumped $49.7bn. Small Time Deposits were little changed. Retail Money Funds added $1.3bn.

Total money market fund assets gained $10.1bn to $2.688 TN. Money Funds fell $118bn y-o-y (4.2%).

Total Commercial Paper declined $7.4bn to $964bn. CP declined $121bn y-o-y, or 11.1%.

Currency Watch:

March 6 – Wall Street Journal (Shen Hong): “A subtle change to Beijing’s familiar language on its exchange-rate policy suggests that China’s leadership is preparing for more volatile currency moves this year, as global political and economic uncertainties mount. In his annual keynote speech to China’s National People’s Congress on Sunday, Premier Li Keqiang dropped a pledge he had made in similar speeches in the past three years to ensure that the yuan ‘remains generally stable at an appropriate and balanced level.’ The removal of the phrase suggests China’s government is ready to tolerate further declines in the yuan’s value against the dollar, as signs grow that the U.S. Federal Reserve is readying for a series of interest-rate increases this year.”

March 7 – Bloomberg: “China’s foreign-currency reserves unexpectedly halted a seven-month losing streak, rising in February amid tighter controls on capital outflows and a rally in the yuan. The stockpile increased by $6.9 billion to $3.005 trillion last month… ‘Strict capital controls have taken effect, as it has reduced outflows and helped market sentiment on the yuan,’ said Zhao Yang, Hong Kong-based chief China economist at Nomura… ‘Reserves still face pressures, as the nation won’t want to keep tight capital controls in place for the medium term as they create difficulties for firms and thus weigh on the economy.’”

The U.S. dollar index slipped 0.3% to 101.25 (down 1.1% y-t-d). For the week on the upside, the euro increased 0.5%. For the week on the downside, the Norwegian krone declined 2.0%, the New Zealand dollar 1.5%, the South African rand 1.2%, the British pound 1.0%, the Brazilian real 0.8%, the Australian dollar 0.7%, the Canadian dollar 0.7%, the Japanese yen 0.7%, the Mexican peso 0.5%, the Swedish krona 0.3%, the Swiss franc 0.3%, the Singapore dollar 0.1% and the South Korean won 0.1%.

Commodities Watch:

The Goldman Sachs Commodities Index sank 4.6% (down 4.6% y-t-d). Spot Gold dropped 2.4% to $1,205 (up 4.6%). Silver fell 4.6% to $16.92 (up 5.9%). Crude sank $4.84 to $48.49 (down 9.9%). Gasoline fell 3.2% (down 4%), while Natural Gas rallied 6.4% (down 20%). Copper dropped 3.8% (up 4%). Wheat fell 2.9% (up 8%). Corn dropped 4.3% (up 4%).

Trump Administration Watch:

March 8 – Wall Street Journal (Richard Rubin): “A fight is brewing among congressional Republicans over whether a planned tax overhaul should pay for itself. The plan favored by House Speaker Paul Ryan (R., Wis.) and Senate Majority Leader Mitch McConnell (R., Ky.) aims to be revenue-neutral: Lowering taxes without increasing the deficit—though their math comes with some caveats. But President Donald Trump hasn’t signed onto that budgetary straitjacket, and some lawmakers are sympathetic to the idea of dumping the revenue-neutral goal. ‘Revenue neutrality shouldn’t necessarily be a constraint,’ said Sen. Pat Toomey (R., Pa.) ‘The primary goal should be maximizing growth and thereby increasing the income for Pennsylvania families.’”

China Bubble Watch:

March 9 – Bloomberg: “China’s broadest measure of new credit moderated in February as shadow banking activities slumped, signaling policy makers are making good on pledges to cut leverage and deflate asset bubbles. Aggregate financing was 1.15 trillion yuan ($166bn), compared with a median estimate of 1.45 trillion yuan… New yuan loans stood at 1.17 trillion yuan versus median estimate of 950 billion yuan. M2 money supply increased 11.1% versus median estimate of 11.4%.”

March 9 – Bloomberg: “China’s producer prices surged at the fastest pace since 2008, further lifting the outlook for global reflation as manufacturers in the exporter to the world look to pass on higher costs. Producer price index rose 7.8% last month from a year earlier, compared with… 6.9% in January…”

March 8 – Bloomberg: “China’s imports surged in February from a year earlier with the nation posting a rare trade deficit as exports slipped. Analysts said seasonal factors mostly explain the swings. Imports soared 38.1% in U.S. dollar terms… Exports dropped 1.3%... Trade deficit was $9.15 billion, the first negative reading in three years. That compared with projections for a $27 billion surplus…”

March 5 – Bloomberg: “Premier Li Keqiang struck an upbeat note on China’s slowing expansion and rising debt Sunday even as he flagged the specter of ‘graver’ internal and external challenges ahead. Systemic risk is under control and economic fundamentals remain sound enough for the government to set a 2017 growth target of ‘around 6.5%, or higher if possible,’ Li said… Li warned of profound changes in the international political and economic landscape with rising protectionism and deglobalization, and said policy makers must be fully alert to building domestic risks from shadow banking to bond defaults and internet finance.”

March 6 – Wall Street Journal (Mark Magnier): “China is embracing tried-and-true economic-growth drivers, betting it can contain rising financial risks without making painful overhauls in what is shaping up to be a sensitive political year… Mr. Li made clear even one notch below 6.5% would be a disappointment and that the rate should be higher, if possible. The Communist Party has made growth a priority over economic and financial restructuring in advance of a party congress at the end of the year that will name China’s leaders for the next five years—and there is little tolerance for instability that could disrupt President Xi Jinping’s second-term mandate.”

March 5 – Reuters (Kevin Yao and Xiaochong Zhang): “China has cut its growth target this year as the world's second-largest economy pushes through painful reforms to address a rapid build-up in debt, and erects a ‘firewall’ against financial risks. China aims to expand its economy by around 6.5%, Premier Li Keqiang said… China set a target of 6.5 to 7% last year and ultimately achieved 6.7% growth, supported by record bank loans, a speculative housing boom and billions in government investment.”

March 5 – CNBC (Leslie Shaffer): “China's leaders may be touting efforts to offer foreign investors a level playing field, but on the ground, protectionism appears to be growing, Germany's ambassador to China told CNBC. ‘It doesn't matter which trading partner you talk to – be it the Japanese or the U.S. or neighboring countries or European countries. They all feel the same, that there's a growing protectionism here,’ Michael Clauss, the German ambassador to China, told CNBC… ‘The service sector is basically off limits. Many companies that would like to produce here in China and build a factory and start producing are forced into going in a joint venture… It's also frequently they're asked to transfer technology, which is against the rules of the WTO. And the tendency seems to be growing. That's the complaint we get from German businesspeople.’”

March 4 – New York Times (Kevin Yao and Xiaochong Zhang): “For years, China’s president, Xi Jinping, has talked the talk of economic reform. In January, he dazzled business executives in Davos, Switzerland, with a defense of international trade. Last month, he urged officials to ‘seize hold of reform and make it an even bigger priority.’ And the annual meeting of China’s legislature, starting Sunday, appears sure to echo that theme. But as Mr. Xi nears the end of his first five-year term as Communist Party leader, his record has not lived up to the bold statements, critics say. The question now is whether he was ever really serious about taking the painful steps needed to repair the economy, or merely paying lip service to reform to justify his tightening grip on power.”

March 5 – Financial Times (Gabriel Wildau): “China’s banking system has surpassed that of the eurozone to become the world’s largest by assets… ‘The massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks,’ said Eswar Prasad, economist at Cornell University and former China head of the International Monetary Fund. Chinese bank assets hit $33tn at the end of 2016, versus $31tn for the eurozone, $16tn for the US and $7tn for Japan. The value of China’s banking system is more than 3.1 times the size of the country’s annual economic output, compared with 2.8 times for the eurozone and its banks.”

March 8 – Bloomberg: “China’s central bank plans to apply a stricter method for assessing banks’ capital as part of efforts to contain financial-sector risks, people with knowledge of the matter said… China has put a new priority on containing financial-sector risks, including steps to control its rapidly expanding shadow banking sector. Regulators are drawing up measures to curb the nation’s $8.7 trillion of asset-management products, which include investments in bonds and risky off-balance-sheet lending by banks. Earlier this year, the central bank ordered the nation’s lenders to strictly control loans during the first quarter, especially their mortgage lending…”

March 8 – Bloomberg: “Chinese corporate chiefs are turning vocal critics of the nation’s capital controls as the pile of scrapped deals grows. While the restrictions have helped alleviate pressure on the yuan, they’ve also curbed overseas acquisitions. Executives in Beijing during the National People’s Congress bemoaned the measures, saying they’re derailing expansion abroad -- a key tenet of China’s long-term economic ambitions… The complaints reflect a tumble in foreign deals, with the $19 billion of acquisitions abroad announced by Chinese companies so far this year amounting to a 74% drop from a year ago…”

Global Bubble Watch:

March 7 – Bloomberg (Mark Deen): “The global economy may not be strong enough to withstand risks from increased trade barriers, overblown stock markets or potential currency volatility, according to the Organisation for Economic Cooperation and Development. While forecasting a pickup in growth this year and next, it said the pace is still too slow and warned there’s much that could derail it. The OECD expects global expansion to reach 3.3% this year, up from 3% in 2016… ‘We have acceleration but I’m concerned about this really soft foundation to the recovery,’ OECD Chief Economist Catherine Mann said… ‘We still have this slow, sluggish productivity growth and persistent inequality. Put those together and it’s hard to see the robust consumption and investment profile you need to really get things going.’”

Fixed Income Bubble Watch:

March 7 – Bloomberg (Brian Chappatta): “From traders in the $13.9 trillion U.S. Treasury market to those dealing currencies around the globe, signs are mounting that there’s little in the pipeline for them to get worked up about in the days ahead. Ever since Donald Trump gave his speech to a joint session of Congress last week and Federal Reserve officials including New York Fed President William Dudley ramped up odds of an interest-rate hike this month, volatility metrics across the board have plunged. The Merrill Lynch Option Volatility Estimate index, a gauge of expected price swings in U.S. debt, fell on Monday to the lowest level since October. Similarly, JPMorgan’s Global FX Volatility index dropped to the lowest since the U.S. election.”

March 7 – Bloomberg (Allison McNeely): “The market for high-yield mining and energy debt is suffering from the some of the same issues that sparked the 2008 crisis as investors turn a blind eye to poor credit in their desperation for fatter returns, according to an executive with one of Canada’s largest hedge funds. Fund managers are snapping up lower-quality debt in a bid to outperform their competitors and retail investors don’t understand the underlying credit risk, particularly in exchange-traded funds, said Rick Rule, chief executive officer of Sprott U.S. Holdings… ‘It wouldn’t take anything at all to have the same circumstance occur in mining and energy junk debt that happened in mortgage securities,’ Rule said… ‘Remember that nothing precipitously changed in the housing market in 2008. It’s just that people began to do the arithmetic.’”

Europe Watch:

March 6 – Financial Times (Izabella Kaminska): “Err. Awkward. ‘TARGET2 (T2) balances are again on the rise. Since early 2015, the T2 balances of euro area national central banks (NCBs) have risen steadily, in some cases exceeding the levels seen during the sovereign debt crisis… However, unlike then, record T2 balances should be viewed as a benign by-product of the decentralised implementation of the asset purchase programme (APP) rather than as a sign of renewed capital flight.’ That’s from the latest BIS Quarterly Review. It’s awkward because, for those who can remember, back in 2012 an exceptionally heated debate erupted about the importance and/or non importance of growing Target2 extremes. On team ‘not important’ was every mainstream analyst, economist, the ECB and most of civil Western society. On team ‘important/alarming’, meanwhile, there was…well, only one man: Hans Werner Sinn.”

March 6 – Bloomberg (Yalman Onaran): “Banks in the euro zone, flush with new deposits, have turned few of them into loans to companies and consumers. Instead they’ve parked most of the money at the European Central Bank, where they’re paying billions of euros for the privilege of keeping it there. Since June 2014, when the ECB cut rates below zero, deposits at euro-zone banks have jumped by 802 billion euros ($848bn)… Lending to nonfinancial companies and consumers in the currency area rose by 169 billion euros over the same period, while deposits at the ECB in excess of required reserves soared by 1.1 trillion euros.”

March 8 – Bloomberg (Gregory Viscusi): “The old order is fading in France. Every election since Charles de Gaulle founded the Fifth Republic more than half a century ago has seen at least one of the major parties in the presidential runoff and most have featured both. With Republicans and Socialists consumed by infighting and voters thoroughly fed up, polls suggest that neither will make it this year. For the past month, survey after survey has projected a decider between Emmanuel Macron, a 39-year-old rookie who doesn’t even have a party behind him, and Marine Le Pen, who’s been ostracized throughout her career because of her party’s history of racism. ‘We’ve gone as far as we can go with a certain way of doing politics,’ said Brice Teinturier, head of the Ipsos polling company and author of a book on voters’ disillusionment. ‘Everyone feels the system is blocked.’”

U.S. Bubble Watch:

March 8 – Wall Street Journal (Corrie Driebusch and Aaron Kuriloff): “Stocks are hitting record after record as investors bet the U.S. economy will soon be booming. But that hasn’t changed the woeful environment for some retirees. The Dow Jones Industrial Average has tripled since it bottomed out during the financial crisis eight years ago. Meanwhile, men and women who expected to live off income from certificates of deposit or municipal bonds have gotten no relief as interest rates remain low. To compensate, many have turned to riskier assets… The fall in interest rates since the financial crisis cost U.S. savers almost $1 trillion in lost income from savings accounts, CDs and bonds from the start of 2008 through 2015…”

March 10 – Wall Street Journal (Chris Dieterich and Ben Eisen): “Corporate executives are buying their own firms’ shares at the slowest pace in at least 29 years, the latest sign of uncertainty as the bull market in U.S. stocks enters its ninth year. Share purchases and sales by executives are parsed by investors searching for signals about what insiders expect from the market. Sales can show wariness about valuations, while purchases can signal confidence that more gains lie ahead. Insider buyers have been scant. There were a total of 279 insider buyers in January, the lowest number going back to 1988… Meanwhile, the number of sellers has been above average, pushing a ratio of buyers to sellers in February to its lowest since 1988.”

March 8 – Reuters (Lucia Mutikani): “The U.S. trade deficit jumped to a near five-year high in January as rising oil prices helped to push up the import bill… President Donald Trump took office with a pledge to boost annual economic growth to 4% and renegotiate trade deals in favor of the United States. Trump blames U.S. trade policy for the loss of American factory jobs and the import-driven surge in the trade gap could intensify the debate on a cross-border tax… The Commerce Department said on Tuesday the trade gap increased 9.6% to $48.5 billion, also buoyed by imports of cell phones and automobiles. That was the highest level since March 2012.”

March 7 – Bloomberg (Joseph Ciolli): “Here’s another way of thinking about how far stocks have come in nine years. Relative to balances in money market funds and cash among mutual fund managers, the value of global equities is the highest in almost two decades. That observation courtesy of Ned Davis Research, which framed the comparison as an indication ‘cash is underweight’ in Planet Earth’s asset portfolio. Another way of describing it is that equities have risen so much from the depths of the financial crisis that their value is blotting out everything else to an extent not seen since the dot-com bubble… At the end of January, the ratio of global equity values to money-market assets sat close to 10, the lowest reading since 1998… Since peaking in 2009, the multiple fell sharply throughout the bull market, with much of the slope reflecting the inflation of share prices. They’ve more than tripled to $26 trillion, while money market assets have fallen 31% to $2.7 trillion.”

March 9 – MarketWatch (Jeffry Bartash): “The price of imports rose in February for the third month in a row, and in a potentially worrisome sign, the increase spread beyond oil into other industrial and consumer goods… Over the past year, import prices have climbed 4.6%, registering the biggest 12-month gain since early 2012.”

Japan Watch:

March 6 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda is running short of time to lay out an exit strategy from the bank's massive stimulus, with just months before the departure of two key board members who want to slow an unsustainable pace of bond purchases. Takehiro Sato and Takahide Kiuchi have been thorns in Kuroda's side since he launched his radical monetary experiment in 2013, consistently warning of the demerits of the BOJ's huge asset purchases and dissenting to many proposals to ramp up stimulus. With inflation still stagnant and economic recovery fragile, Kuroda has no plan to tighten monetary policy any time soon. But he wants to ensure the BOJ's stimulus programme is made sustainable by laying the grounds for a gradual slowdown in its bond purchases, sources familiar with the BOJ's thinking say.”

EM Watch:

March 8 – CNBC (Karen Gilchrist): “Brazil's economy has fallen further into its worst ever recession, contracting by 3.6% in 2016 and pressure is mounting on policymakers to stimulate growth. The former Latin American powerhouse recorded a steeper-than-expected decline of 0.9%... in the final quarter of last year, intensifying the economic contraction that has imbued Brazil for eight consecutive quarters – the longest period of decline on record for the country. Brazil's economy is now 8% smaller than it was in December 2014. The two-year slump has hit almost all economic sectors, causing unemployment to rise 12.6%...”

Geopolitical Watch:

March 7 – New York Times (Gerry Mullany and Chris Buckley): “The United States said… that it had begun deploying an advanced and contentious missile defense system in South Korea, prompting China to warn of a new atomic arms race in a region increasingly on edge over North Korea’s drive to build a nuclear arsenal. The American announcement came a day after the simultaneous launch of four missiles by North Korea into waters off the Japanese coast, which Pyongyang said was a drill for striking American bases in Japan… Hours later, North Korea further unnerved the region by declaring it was blocking all Malaysians from leaving its soil…”

Friday Afternoon Links

[Bloomberg] U.S. Stocks Rise, Dollar Falls as Data Back Hike: Markets Wrap

[Bloomberg] ECB Said to Have Discussed If Rates Can Rise Before QE Ends

[Bloomberg] Yellen Claim Fed Isn't Behind Curve Challenged by Robust Hiring

[Bloomberg] U.S. Subprime Auto Loan Losses Reach Highest Level Since the Financial Crisis

[Reuters] China corporate debt levels excessively high, no quick fix: central bank governor

[Bloomberg] Oil's Plunge Below $50 Sends Options Trading Into a Frenzy

[NYT] Oil Price Drop Triggers a ‘Herd Mentality’ of Selling

Thursday, March 9, 2017

Friday's News Links

[Bloomberg] U.S. Stocks Rise With Treasuries Amid Jobs Data: Markets Wrap

[Bloomberg] U.S. Jobs, Wages Show Solid Gains in Trump's First Full Month

[Reuters] Traders keep bets on three Fed rate hikes in 2017

[Reuters] South Korea court removes President Park from office over scandal

[Reuters] G20 plan to stave off debt crises stalls as no country takes lead

[Bloomberg] Warning Signs Flash on Best Emerging-Market Stock Gain Since 2012

[WSJ] America Can’t Escape the Debt Vortex

[WSJ] Corporate Insiders Haven’t Been This Uninterested in Buying Stocks Since Ronald Reagan Was President

[WSJ] Stock Buybacks Are So Yesterday

[FT] Risky US corporate debt loses shine

[FT] ECB rate rise expectations leap after Draghi signals

[Reuters] Cruise control: China squeezes South Korea as boats and planes stay away

[Reuters] China stealth jet enters service, navy building 'first class' fleet

[WSJ] Fukushima Mysteries Rattle Japan’s Nuclear Industry

Thursday Evening Links

[Bloomberg] Treasuries Slump Worsens Before Jobs as Oil Drops: Markets Wrap

[Reuters] Oil drops to lowest since OPEC deal, U.S. crude below $50/bbl

[Bloomberg] Gold Slides Below $1,200 in Longest Losing Run Since October

[Bloomberg] Tsipras Faces Fight as Greek Opposition Won't Back New Measures

[Bloomberg] China's `Stable, Solid' Yuan Faces Five Key Threats This Year

[NYT] As E.C.B. Charts Economic Course, Politics Complicate the Picture

[Bloomberg] The OPEC Deal Is Facing Its Biggest Test

[Bloomberg] U.S. Consumer Comfort Just Reached Its Highest Level in a Decade

Wednesday, March 8, 2017

Thursday's News Links

[Bloomberg] Euro Rallies as Draghi Optimism Saps Bond Strength: Markets Wrap

[Bloomberg] ECB Keeps Bond-Buying, Rates Unchanged Amid Inflation Flare-Up

[Reuters] China February producer inflation fastest in nearly nine years as commodities surge

[MarketWatch] U.S. import prices surge again, but this time it isn’t oil

[Bloomberg] China Factory Prices Extend Surge in February, Lifting Reflation Outlook

[Bloomberg] China Plans Stricter Bank Capital Rules to Contain Risks

[Bloomberg] China Money Supply Growth Slows Amid Campaign to Contain Risk

[Bloomberg] Enter Berlusconi: A Man, a Ban, and His Plan to Restore the Lira

[Bloomberg] Manhattan Rents Fall for Every Apartment Size, Even Studios

[NYT] Profitable Companies, No Taxes: Here’s How They Did It

[WSJ] Americans Are Richer Than Ever, But They Don’t Feel That Way

[WSJ] Trump Begins to Map Out $1 Trillion Infrastructure Plan

[FT] Risk of faster US interest rate cycle looms

[FT] Goldman Sachs’ lessons from the ‘quant quake’

Wednesday Evening Links

[Reuters] Oil falls 4 percent as U.S. stocks build for 9th straight week

[Bloomberg] Oil Slumps to Lowest This Year as Traders Focus on Record Supply

[Bloomberg] A Freakish Calm Surrounds the Eight-Year Bull Market

[Bloomberg] China Factory-Gate Inflation May Spike Most Since 2008: Chart

[Reuters] U.S. says 'all options on table' to deal with North Korea

[Reuters] U.S. general says Russia deploys cruise missile, threatens NATO

[WSJ] GOP Health Bill Goes to House Committees as Opposition Mounts

Tuesday, March 7, 2017

Wednesday's News Links

[Bloomberg] Treasuries On Worst Run Since '12 as Dollar Jumps: Markets Wrap

[Bloomberg] ADP Says Companies in U.S. Hired the Most in Almost Three Years

[Bloomberg] Mnuchin’s Treasury Staff Picks Stall as White House Scrutinizes Tweets

[Bloomberg] Doctor, Hospital Groups Line Up Against GOP Health Proposal

[Bloomberg] China's Imports Surge in February, While Exports Miss Estimates

[Reuters] China tries cure by committee for corporate debt hangover

[CNBC] Brazil tumbles deeper into its worst ever depression

[Bloomberg] French Insurgents Thrust Establishment Aside in Crucial Vote

[NYT] WikiLeaks Reignites Tensions Between Silicon Valley and Spy Agencies

[WSJ] Stocks Have Tripled Since Crisis, but Low Rates Are Still Squeezing Savers

[WSJ] Republicans Disagree on How—and Whether—to Pay for Tax Cuts

[WSJ] Central Banks Ratchet Up Reserves

[WSJ] Going Dutch: What Elections in the Netherlands Could Mean for Markets

Tuesday Evening Links

[Reuters] Wall Street pares losses as techs offset pharma decline

[Reuters] U.S. trade deficit jumps to five-year high on imports

[Bloomberg] Conservatives Savage GOP Obamacare Plan Despite Trump Praise

[Reuters] Fed to make sequential hikes until 'something breaks,' Gundlach says

[Reuters] Confronted by market doubts, Federal Reserve drove March rate rise expectations

[Bloomberg] Fed Takes Fear Out of Markets as Volatility Plunges in Bonds, FX

[Bloomberg] Cash Dwindles to Two-Decade Low in Global Investor Portfolio

[Bloomberg] Rising European Bank Deposits Wind Up at ECB as Lending Sputters

[Bloomberg] Trouble Brewing in High-Yield Debt, Commodity Investor Warns

[NYT] The Huge January Trade Deficit Shows Trump’s Hard Job Ahead

[WSJ] Brazil, Widening the Hunt for Corruption, Finds It Under Every Rock

Monday, March 6, 2017

Tuesday's News Links

[Bloomberg] U.S. Stocks Retreat; Dollar Steady as Metals Slide: Markets Wrap

[Bloomberg] China Reserves Post First Gain Since June Amid Capital Curbs

[CNBC] House GOP releases plan to repeal, replace Obamacare

[Reuters] BOJ Kuroda faces bond buying dilemma as his sceptics head out

[Bloomberg] OECD Sees Lots to Worry About in the Global Economic Outlook

[Bloomberg] Hedge Funds Gird for Stock Selloff as Valuations Rattle Nerves

[Bloomberg] China Currency Manipulation Could Be Just What Trump Needs

[Bloomberg] When China's Got a Gripe it Can Turn a Billion People Against You

[Bloomberg] China's Capital Controls Trigger a Backlash After Scrapped Deals

[Bloomberg] Brazil Economy Contracts More Than Expected in Fourth Quarter

[NYT] China Warns of Arms Race After U.S. Deploys Missile Defense in South Korea

Monday Evening Links

[Bloomberg] Stocks Retreat With Treasuries as Dollar Advances: Markets Wrap

[Bloomberg] Here Are the Top China-U.S. Trade Flashpoints as Trump Readies Case

[CNBC] Why the Fed's almost-certain rate hike is an even bigger deal than normal

[WSJ] What China’s Premier Left Unsaid Raises Speculation About Yuan

Sunday, March 5, 2017

Monday's News Links

[Bloomberg] Stocks Rally Stalls; Euro Falls on French Politics: Markets Wrap

[Bloomberg] French Bonds Decline as Juppe Stays Out of Presidential Race

[Bloomberg] China's Credit Target Implies Adding Entire German GDP This Year

[Reuters] From politics to policy: bond markets count down to ECB

[Reuters] Chinese vice finance minister: Global economy challenged by uncertainty about Trump, Fed

[CNBC] Protectionism in China is growing, German ambassador to mainland says

[Bloomberg] Reflation Trade Still in Vogue After Stock Gains, JPMorgan Says

[Reuters] North Korea fires four ballistic missiles into sea near Japan

[WSJ] Conservative Groups Jeopardize GOP Plan to Repeal Affordable Care Act

[FT] So turns out Target2 imbalances in 2012 WERE a big deal

[WSJ] In Transition Year, Politics Drives China’s Economic Agenda

[WSJ] Everything the Market Thinks About Inflation Might Be Wrong

Sunday Evening Links

[Bloomberg] America's Treasuries Revolution in Limbo With Mnuchin in Charge

[Bloomberg] Coming Home to Roost: Chinese Property Investors Head for U.S. Exit

[Bloomberg] China's Li Walks Knife Edge on Growth as ‘Graver’ Risks Loom

[FT] Market questions: how frothy are equities and junk bonds?

[FT] China overtakes eurozone as world’s biggest bank system

Saturday, March 4, 2017

Sunday's News Links

[Reuters] China cuts growth target as it pushes through reforms, builds 'firewall' against risks

[Bloomberg] China Sets Growth Target of About 6.5% Amid Pledges to Ease Risk

[Reuters] South Korea says to act against China's discrimination against South Korean firms

[NYT] Xi Jinping’s Failed Promises Dim Hopes for Economic Change in 2nd Term

[WSJ] China’s Premier Maps Out Cautious Economic Course

Saturday's News Links

[Reuters] Trump administration to propose 'dramatic reductions' in foreign aid

[Reuters] Deutsche Bank board to discuss capital hike on Sunday: sources

[WSJ] Asia’s Promise Gives Way to Its Growing List of Troubles

Friday, March 3, 2017

Weekly Commentary: Reality vs. The Neutral Rate

How about a cursory look at recent economic data: February’s 57.7 ISM Manufacturing reading was the strongest since August 2014. New Orders at 65.1 matched the strongest level (Dec. 2013) since 2009. Prices Paid at 68 was only slightly below January’s 69, the strongest since 2011. February’s ISM Non-Manufacturing Index rose to 57.6, the highest since October 2015 (58.1). Auto sales in February were just below record levels. Last week’s Initial Jobless Claims (223,000) were the lowest since March 1973. Weekly mortgage purchase applications bounced back to near seven-year highs. Trade deficits are running at the widest level since before the crisis.

The PCE (Personal Consumption Expenditure) Deflator was up 0.4% in January, increasing y-o-y gains to 1.9%. This matched the highest y-o-y reading in almost five years. Core PCE was up 0.3% for the month, pushing y-o-y gains to 1.7%.

The Conference Board’s February Consumer Confidence reading rose to the highest level since July 2001. At 133.4, the Conference Board Present Situation index jumped to the high since July 2007 - and is now only five points away from a 15-year high. Personal Income added 0.4% in January, increasing y-o-y income growth to 4.0%.

After incredible 2016 inflows of $305 billion, Vanguard has attracted flows of $80 billion in just the first two months of the year.

March 3 – Wall Street Journal (Asjylyn Loder): “Investors poured $62.9 billion into exchange-traded funds in February, pushing the year-to-date world-wide tally to $124 billion, the fastest start of any year in the history of the ETF industry, according to… BlackRock Inc. U.S. ETFs accounted for $44 billion of that, pushing assets in U.S. funds to almost $2.8 trillion. Most of the money went to cheap, index-tracking ETFs…”

February 28 – Bloomberg (Sid Verma and Oliver Renick): “You can thank the little guy for Dow 20,000. That’s the takeaway from data tracking money flows into and out of stocks, according to… JPMorgan… The telltale sign retail investors are behind the longest string of U.S. stock highs in decades? An $83 billion surge of cash into passive strategies so far this year amid a $15 billion withdrawal from actively managed funds. That’s on top of evidence that institutional traders have backed away, the bank says.”

March 3 – Bloomberg (George Caliendo and Michael Hyler): “U.S. investment grade corporate bond sales totaled more than $281 billion in the first two months of the year, the most in at least 10 years. Exxon Mobil Corp is among the companies that could keep issuance at a record pace in the first quarter of 2017.”

They’ve really gone and done it this time. The Fed had cut rates from 8.25% in 1990 to a cycle low 3.0% in September 1992. Ignoring a policy-induced speculative bubble inflating throughout the bond and mortgage derivatives markets, the Greenspan Fed waited to begin normalizing rates until February 1994. In 2001, Fed funds began the year at 6.50% and were then slashed to only 1.00% by June 2003. The Fed didn’t take its first baby-step until June 2004, after several years of double-digit mortgage Credit growth and a mortgage finance Bubble that had gathered powerful momentum.

The current remarkable cycle has brought new meaning to the phrase “Behind the Curve.” Rates were cut from 5.25% starting back in September 2007. By December 2008, they had been slashed to zero (to 25bps), with the DJIA ending the year at 8,876. Now, with the DJIA at 21,000, Fed funds sit at only 0.75%. Rates have budged little off zero despite record securities prices, record corporate bond issuance, record home prices and a 4.8% unemployment rate.

While Q4 data will be out soon, it appears that 2016 posted the largest Credit growth since 2007. Through the first three quarters of 2016, non-financial Credit expanded at an annualized pace of just under $2.4 TN, not far off 2007’s record $2.503 TN. For comparison, non-financial debt expanded $1.259 TN in ‘09, $1.589 TN in ‘10, $1.309 TN in ‘11, $1.916 TN in ‘12, $1.545 TN in ‘13, $1.807 TN in ’14 and $1.931 TN in ‘15.

The strongest Credit expansion in years is led by robust growth in consumer Credit, corporate debt and federal borrowings. Even mortgage Credit has picked up to the fastest pace since 2007, after years in the doldrums. In my parlance, years of accelerating Credit expansion have engendered self-reinforcing inflationary biases throughout the economy, most notably in securities, real estate and asset prices more generally. Increasingly, however, rising incomes have begun fueling some inflationary pressure even in the consumer price arena.

U.S. Credit growth and economic activity had attained sufficient self-sustaining momentum by 2014 and 2015 for the Fed to have launched so-called “normalization.” It was a major policy blunder not to have this process well underway by 2016. The Fed basically disregarded domestic considerations as it postponed rate adjustments after its single December 2015 baby-step.

The faltering Chinese Bubble from a year ago held sway, not only with respect to Fed policy but for the ECB and BOJ as well. A Chinese bust clearly had major ramifications for the global inflationary backdrop. Yet there’s always that thin line between a bursting Bubble and the acquiescence of irrepressible “Terminal Phase” excess. As it turned out, rather than a disinflationary shock catalyst for a susceptible world, China’s aggressive reflationary measures ensured record 2016 Credit expansion and attendant upside inflationary pressures at home and abroad. China's historic Credit Bubble is ongoing, and it’s pulling global inflationary dynamics along for the ride.

From the conclusion of Janet Yellen’s Friday Afternoon speech – “From Adding Accommodation to Scaling It Back:” “We [support continued growth… in pursuit of our… mandates], as I have noted, with an eye always on the risks. To that end, we realize that waiting too long to scale back some of our support could potentially require us to raise rates rapidly sometime down the road, which in turn could risk disrupting financial markets and pushing the economy into recession. Having said that, I currently see no evidence that the Federal Reserve has fallen behind the curve, and I therefore continue to have confidence in our judgment that a gradual removal of accommodation is likely to be appropriate.”

Of course chair Yellen is not about to conceded that the Fed has fallen “Behind the Curve.” Her speech, however, was heavy on rationalizing and justifying why the FOMC has been incredibly reluctant to begin normalizing policy.

“Gauging the current stance of monetary policy requires arriving at a judgment of what would constitute a neutral policy stance at a given time. A useful concept in this regard is the neutral ‘real’ federal funds rate, defined as the level of the federal funds rate that, when adjusted for inflation, is neither expansionary nor contractionary when the economy is operating near its potential. In effect, a ‘neutral’ policy stance is one where monetary policy neither has its foot on the brake nor is pressing down on the accelerator…”

“In the Committee's most recent projections last December, most FOMC participants assessed the longer-run value of the neutral real federal funds rate to be in the vicinity of 1%...”

“It is difficult to say just how low the current neutral rate is because assessments of the effect of post-recession headwinds on the current level of the neutral real rate are subject to a great deal of uncertainty. Some recent estimates of the current value of the neutral real federal funds rate stand close to zero percent...”

“In 2015, the unemployment rate fell significantly faster than we generally had anticipated in 2014. However, a series of unanticipated global developments beginning in the second half of 2014--including a prolonged decline in oil prices, a sizable appreciation of the dollar, and financial market turbulence emanating from abroad--ended up having adverse implications for the outlook for inflation and economic activity in the United States, prompting the FOMC to remove monetary policy accommodation at a slower pace than we had anticipated in mid-2014…”

Future historians will be unimpressed with the Fed’s whole line of “Neutral Rate” analysis. It’s certainly reminiscent of chairman Greenspan’s late-nineties foray into the New Economy’s “faster speed limit” -- as rationalization for evading the tough action necessary to rein in excessively loose monetary conditions and resulting speculative asset markets. Yellen presented a reasonably comprehensive analysis of Fed thinking, yet her Friday speech does not include the either the word “Credit” or “money.” Regrettably, it’s the same flawed theoretical framework that has gotten the Fed – along with the rest of us - in repeated trouble for the past three decades.

Ten-year bond yields were 5.6% when the Fed moved to tighten policy in February 1994. Yields then shot all the way to 8.0% into early November. The Fed took from that experience the notion that it must clearly signal to the markets that rate increases will be gradual and quite measured. This fundamentally altered how the bond market responds to Fed policy changes. Indeed, a case can be made that since ’94 the Fed has avoided measures that would actually tighten financial conditions.

Ten-year yields were at 4.7% when the Fed initiated tightening measures (at 1.25%) in May 2004, before ending the year at 4.2%. Fed funds were up to 5.25% by June ’06, though 10-year bond yields had increased to just over 5%. Bond yields then began 2007 at 4.7%, market rates sufficiently low to ensure quite loose financial conditions and prolong the dangerous Bubble.

Ten-year yields closed Friday trading at 2.48%. Clearly, the bond market has little fear of Fed tightening measures. At this point, the backdrop is showing similarities to the 2004-2007 Bubble period where Fed rate increases couldn’t keep up with rising inflationary biases – in securities and asset prices, as well as throughout the real economy.

The Fed’s focus on some abstract “Neutral Rate” is foolhardy central banking, especially when it comes at the expense of analysis of Credit and monetary factors. For a central bank supposedly “data dependent”, how are the markets to gauge and interpret such a nebulous theoretical concept (other than as rationalization for disregarding asset inflation and bubbles)?

What was the “Neutral Rate” one year ago, with China in trouble, global markets faltering, crude at about $40 and CPI measures pointing downward? How about today, with record global Credit growth, booming markets, crude at $53 and CPI trends pointing almost straight up? The ISM Prices Paid index was 33.5 in January 2016 – the low since 2009. By January 2017 it had more than doubled to 69, the highest in almost six years. “Neutral Rate” has no practical policy relevance in a period of such monetary and price disorder.

The Fed surely hopes to offload some of their tightening work to the financial markets. So far, ebullient markets seem rather determined to sustain ultra-loose financial conditions. If inflationary forces have finally gathered self-reinforcing momentum, dillydallying several years to get Fed funds up to three or four percent is not going to cut it. It seems obvious that the Fed has fallen way Behind the Curve. And this may be irrelevant to markets currently, though this phase will pass. It’s sure disconcerting to see the public throw “money” at equity index products at this stage of the market cycle. The Fed has cultivated the misperception that it’s a whole lot safer than buying Bubble technology stocks in 1999 or Bubble equities and houses in 2007.

For the Week:

The S&P500 gained 0.7% (up 6.4% y-t-d), and the Dow increased 0.9% (up 6.3%). The Utilities slipped 0.3% (up 5.1%). The Banks jumped 2.0% (up 6.5%), while the Broker/Dealers dipped 0.2% (up 7.4%). The Transports gained 0.7% (up 5.0%). The S&P 400 Midcaps added 0.2% (up 4.8%), while the small cap Russell 2000 was unchanged (up 2.7%). The Nasdaq100 added 0.6% (up 10.5%), while the Morgan Stanley High Tech index declined 0.6% (up 10.9%). The Semiconductors were little changed (up 7.4%). The Biotechs surged 6.2% (up 16.9%). With bullion down $23, the HUI gold index sank 7.1% (up 7.1%).

Three-month Treasury bill rates ended the week at a nine-year high 70 bps. Two-year government yields jumped 16 bps to 1.31% (up 12bps y-t-d). Five-year T-note yields surged 20 bps to 2.01% (up 8bps). Ten-year Treasury yields jumped 17 bps to 2.48% (up 3bps). Long bond yields rose 17 bps to 3.22% (up 16bps).

Greek 10-year yields dropped 12 bps to 6.95% (down 7bps y-t-d). Ten-year Portuguese yields were unchanged at 3.94% (up 19bps). Italian 10-year yields declined nine bps to 2.10% (up 29bps). Spain's 10-year yields dipped two bps to 1.68% (up 30bps). German bund yields jumped 17 bps to 0.36% (up 15bps). French yields added a basis point to 0.94% (up 26bps). The French to German 10-year bond spread narrowed 17 to 58 bps. U.K. 10-year gilt yields rose 11 bps to 1.19% (down 5bps). U.K.'s FTSE equities index jumped 1.8% (up 3.2%).

Japan's Nikkei 225 equities index rallied 1.0% (up 1.9% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.08% (up 4bps). The German DAX equities index jumped 1.9% (up 4.8%). Spain's IBEX 35 equities index surged 3.6% (up 4.8%). Italy's FTSE MIB index recovered 5.7% (up 2.2%). EM equities were mixed. Brazil's Bovespa index added 0.2% (up 10.9%). Mexico's Bolsa increased 0.8% (up 3.9%). South Korea's Kospi declined 0.7% (up 2.6%). India’s Sensex equities index slipped 0.2% (up 8.3%). China’s Shanghai Exchange fell 1.1% (up 3.7%). Turkey's Borsa Istanbul National 100 index rose 1.7% (up 14.8%). Russia's MICEX equities index dropped 1.7% (down 7.9%).

Junk bond mutual funds saw outflows of $240 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell six bps to a three-month low 4.10% (up 46bps y-o-y). Fifteen-year rates dropped five bps to 3.32% (up 38bps). The five-year hybrid ARM rate slipped two bps to 3.14% (up 30bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up two bps to 4.30% (up 56bps).

Federal Reserve Credit last week expanded $3.0bn to $4.427 TN. Over the past year, Fed Credit declined $12.6bn (down 0.3%). Fed Credit inflated $1.616 TN, or 57%, over the past 225 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $5.7bn last week to $3.176 TN. "Custody holdings" were down $75.3bn y-o-y, or 2.3%.

M2 (narrow) "money" supply last week gained $10.7bn to a record $13.302 TN. "Narrow money" expanded $805bn, or 6.4%, over the past year. For the week, Currency declined $0.8bn. Total Checkable Deposits jumped $34.5bn, while Savings Deposits fell $20.9bn. Small Time Deposits added $1.9bn. Retail Money Funds declined $3.9bn.

Total money market fund assets added $1.6bn to $2.678 TN. Money Funds fell $126bn y-o-y (4.5%).

Total Commercial Paper increased $4.1bn to $971.3bn. CP declined $112bn y-o-y, or 10.3%.

Currency Watch:

The U.S. dollar index increased 0.4% to 101.54 (down 0.8% y-t-d). For the week on the upside, the Mexican peso increased 2.1%, the Swedish krona 0.6% and the euro 0.6%. For the week on the downside, the New Zealand dollar declined 2.5%, the Canadian dollar 2.2%, the South Korean won 2.1%, the Japanese yen 1.7%, the Australian dollar 1.0%, the South African rand 0.6%, the Norwegian krone 0.5%, the Singapore dollar 0.4% and the Brazilian real 0.2%. The Chinese yuan declined 0.4% versus the dollar this week (up 0.7% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 0.8% (unchanged y-t-d). Spot Gold lost 1.8% to $1,235 (up 7%). Silver sank 3.6% to $17.74 (up 11%). Crude declined 66 cents to $53.33 (down 1%). Gasoline fell 4.8% (down 1%), while Natural Gas gained 1.4% (down 24%). Copper was unchanged (up 7%). Wheat gained 1.2% (up 11%). Corn jumped 2.7% (up 8%).

Trump Administration Watch:

February 27 – Politico (Rachael Bade, Sarah Ferris and Shane Goldmacher): “Congressional Republicans… panned Donald Trump’s call to finance a military buildup by slashing domestic agencies and ignoring entitlement programs — undermining the president’s budget even before it’s been finalized. The consternation spanned the party’s ranks just one day before Trump addresses Congress for his first time Tuesday evening: House GOP fiscal hawks said it was ludicrous to think they’d pass a budget that did not address ballooning costs in Medicare and Social Security, the main drivers of the national debt. Pragmatic-minded GOP appropriators scratched their heads over where Trump would siphon off $54 billion in domestic cuts. And GOP defense hawks said the Pentagon budget boost doesn’t go nearly far enough.”

February 28 – Wall Street Journal (Michael C. Bender): “One day after his budget team promised dollar-for-dollar cuts to offset a request for more military spending, President Donald Trump said… the additional money he is seeking for the defense budget would be paid for by a surge in tax collections sparked by the improving economy. ‘The money is going to come from a revved-up economy,’ Mr. Trump said… ‘I mean, you look at the kind of numbers we’re doing, we were probably GDP of a little more than 1%. And if I can get that up to three, maybe more, we have a whole different ballgame.”

March 1 – Bloomberg (Andrew Mayeda): “The U.S. isn’t bound by decisions made at the World Trade Organization, President Donald Trump’s administration said in outlining a new trade agenda that promises to root out unfair practices by foreign countries. America plans to defend its ‘national sovereignty over trade policy,’ the Office of the U.S. Trade Representative said in an annual document laying out the president’s trade agenda. Under the terms of its entry into the WTO, the U.S. didn’t abandon its trade rights, according to the document, obtained by Bloomberg News and titled ‘2017 Trade Policy Agenda.’”

China Bubble Watch:

March 1 – Bloomberg: “China’s banking regulator outlined wide-ranging efforts to rein in financial risks, including clamping down on shadow lending and curbing funding for property speculation. Guo Shuqing, three days on the job as chairman of the China Banking Regulatory Commission, said he will coordinate with other financial authorities, including the central bank, to plug loopholes in regulations for cross-market financial products and update rules that no longer fit with banks’ current business and risk management. ‘Banks, trusts, fund-management firms, brokerages and insurers all have asset-management operations, but because they have different regulators and are subject to different rules, there’s been some chaos,’ Guo said…”

February 28 – Reuters (Kevin Yao): “China plans to target broad money supply growth of around 12% in 2017, slightly lower than last year's goal, policy sources said, signaling a bid to contain debt risks while keeping growth on track. Under its new ‘prudent and neutral’ policy, the People's Bank of China (PBOC) has adopted a modest tightening bias in a bid to cool torrid credit expansion, though it is treading cautiously to avoid hurting the economy. The M2 growth target was endorsed by leaders at the closed-door Central Economic Work Conference in December…”

February 25 – Reuters (Shu Zhang and Matthew Miller): “Guo Shuqing, who is stepping down as governor of Shandong province to take control of China's banking regulator, returns to Beijing at a decisive moment for the country's financial system following years of breakneck economic growth. The immediate challenge for the new chairman of the ChinaBanking Regulatory Commission (CRBC) is formidable - Guo must vigorously address troubled lending in the country's 232 trillion yuan ($34 trillion) banking sector and implement tougher measures to control lightly regulated shadow banking activities.”

February 26 – Reuters: “China will focus on stable development of its capital markets this year, but will press ahead to further open its markets to foreign companies, the top securities regulator said… ‘We will not waver from reforms (to make China's capital markets) more market-based, law-based and international,’ Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), told a news conference… Chinese regulators have turned their sights on controlling risks in financial markets as speculative activity and leverage in the economy rise, with the securities regulator vowing to clear out "abnormal phenomena" from capital markets. The CSRC recently pledged to target ‘barbaric’ leveraged buyouts and to restrict excessive fundraising by some listed companies, with a focus on private share placements.”

March 2 – New York Times (Sui-Lee Wee): “Mao once branded capitalists enemies of the Chinese people. In the era of President Xi Jinping, those capitalists are billionaire lawmakers — and they’re getting even wealthier. The combined fortune of the wealthiest members of China’s Parliament and its advisory body amounts to $500 billion, just below the annual economic output of Sweden. Among that group of 209 entrepreneurs and business tycoons, the 100 richest saw their net worth rise 64% in the four years since Mr. Xi took power…”

February 27 – Financial Times (Jennifer Hughes and Don Weinland): “Chinese companies have borrowed more money from the international bond market than from domestic investors so far this year, breaking with tradition as authorities in Beijing focus on curbing capital outflows. Banks and other corporate borrowers have been quietly encouraged to raise money offshore in other currencies, limiting the need for Chinese companies to sell renminbi to finance overseas investments. Borrowing more outside the mainland also allows for the possibility companies will remit some of the cash back home, bolstering the Chinese currency in the process. Led by banks and property developers, corporate China has raised $26.1bn from offshore bond sales compared with $21bn at home, according to Dealogic.”

March 2 – Reuters (Elias Glenn): “China's factory activity expanded for the eighth straight month in February as export orders picked up, a private survey showed…, giving authorities more room to tackle financial risks in the economy as debt continues to rise. The Caixin/Markit Manufacturing Purchasing Managers' index (PMI) rose to 51.7 on a seasonally adjusted basis, up from 51.0 in January and beating analysts' forecasts of 50.8.”

February 28 – Wall Street Journal (Jacky Wong): “China’s housing-market party is winding down for now, and the country’s biggest developer could have a painful hangover. China Evergrande Group, the poster child for an overleveraged industry, proved again its debt-fueled ambitions haven't yet been reached. According to a filing Tuesday, total borrowings have risen to 565 billion yuan ($82.2bn) as of mid-January, a 48% increase from its June level. Netted out of cash, Evergrande is the most indebted real-estate company globally… The developer, which also owns a soccer club and a plastic-surgery hospital, intends to raise 30 billion yuan by selling stakes in its major subsidiary.”

February 27 – Financial Times (Tom Hancock): “Bankruptcy cases surged in China last year, indicating growing economic stress as well as progress in the ruling Communist party’s efforts to use the country’s courts to deal with indebted ‘zombie’ companies and reduce industrial overcapacity. Chinese courts accepted 5,665 bankruptcy cases in 2016, an increase of 54% from the year before… About 3,600 of those cases were resolved, with 85% of the resolved cases resulting in liquidation. ‘It is linked to getting rid of zombie companies and making the economy more efficient,’ said Susan Finder, law scholar in residence at Peking University’s Shenzhen Graduate School.”

February 27 – Financial Times (Don Weinland): “Has China’s crackdown on capital flight claimed its biggest name to date? The fate of a $1bn deal struck in November by Dalian Wanda, the Chinese real estate and entertainment giant, is in doubt. People with knowledge of Wanda’s buyout of the US’s Dick Clark Productions, the company behind the Golden Globe Awards, said last week that it was struggling to get approval to move money offshore, putting the transaction at risk. Wanda’s deal could survive if approvals come in time, people close to the matter said. But the delay highlights a shift in Beijing’s economic priorities.”

Global Bubble Watch:

March 1 – Reuters (Saikat Chatterjee): “Asian factories extended a global manufacturing revival as activity picked up steam in February… Manufacturing surveys for Asia, including for its two biggest economies China and Japan, showed a broadly positive impulse for exports in a welcome sign for many of the companies tapped into the global supply chain. ‘Encouragingly, the data indicated that the current upturn in demand remains broad-based across both domestic and international markets, while a further steep increase in purchasing activity raises the prospect of continued production growth in coming months,’ said Annabel Fiddes, economist at IHS Markit…”

February 28 – Bloomberg (Simon Ballard): “The moment of truth for debt markets beckons. Given the extent to which monetary stimulus in Europe has helped to compress corporate bond spreads and flatten the credit curve, fears may grow over the coming months as to how investors will react to the end of the monetary backstop bid. That will depend on the speed of any reversal. The Bank of England bought 7.4 billion pounds ($9.2 billion) of corporate bonds in the five months through Feb. 22.”

March 3 – Bloomberg (Katia Dmitrieva): “Toronto home prices jumped more than 20% in February for the sixth straight month as listings dried up, pushing the price of a suburban house beyond C$1 million ($750,000) for the first time, according to the city’s real estate board. The average home in Canada’s biggest city… climbed 28% to C$875,983 last month from the prior year as active listings were cut in half to 5,400.”

March 1 – Bloomberg (Emily Cadman): “Dwelling values in Australia’s largest city rose at the fastest annual pace in 14-years in February as record-low interest rates outweighed regulatory efforts to avert a housing bubble. Average values in Sydney surged by 18.4%, the biggest jump since December 2002 when the nation was at the tail-end of the early 2000’s housing boom, according to… CoreLogic…”

Greece Watch:

February 26 – Reuters (Michelle Martin): “Greece must not be granted a ‘bail in’ that would involve creditors taking a loss on their loans, Germany's deputy finance minister said…, reiterating the German government's opposition to debt relief for Athens. ‘There must not be a bail-in,’ Jens Spahn told German broadcaster Deutschlandfunk… ‘We think it is very, very likely that we will come to an agreement with the International Monetary Fund that does not require a haircut,’ he said, referring to losses that Greece's creditors would have to take if debt was written off.”

Europe Watch:

March 2 – Bloomberg (Maria Tadeo and Lorenzo Totaro): “Euro-area inflation accelerated to the fastest pace since January 2013, providing fresh arguments to those calling for an exit from the European Central Bank’s monetary stimulus program. Consumer prices rose 2% in February from a year earlier… In a sign of further increases ahead, producer-price growth jumped to the highest in almost five years, rising 3.5% in January on annual basis…”

March 1 – Reuters (Balazs Koranyi): “Euro zone inflation is likely to be sharply higher in 2017 than projected but will still dip towards the end of the year, Bundesbank president Jens Weidmann said…, arguing that accommodative monetary policy remains appropriate. With inflation surging on higher oil prices, and criticism of the European Central Bank (ECB) mounting in Germany ahead of September's elections, pressure has increased on the ECB to at least start a discussion about when and how it would scale back its extraordinary stimulus measures… Weidmann stopped short of calling for any particular measures but argued that keeping borrowing costs low for too long risked getting budgets addicted to cheap cash, making eventual tightening even harder. ‘Monetary policy has to avoid the markets' perception that the central bank is only willing to counter downward pressure on financial markets with an accommodative policy stance but refrains from tightening the reins in times of higher price stability risks due to the fear of triggering market turbulences,’ he said.”

March 1 – Reuters (Michael Nienaber): “German inflation, a politically- and emotionally-charged issue for consumers heading for the polls later this year, soared to its highest level in four-and-a-half years in February, bounding past the European Central Bank's euro zone target. Manufacturing was also reported as growing at the strongest rate since 2011, in a further sign that Europe's biggest economy is firing on all cylinders. The inflation data nonetheless triggered fresh calls from Germany for an end to the ECB's loose monetary policy, particularly with the federal election set for September.”

March 1 – Bloomberg (Alessandro Speciale): “Euro-area manufacturing accelerated for a sixth month in February amid signs that inflation pressures may be starting to build as factories struggle to keep up with demand. A Purchasing Managers’ Index climbed to 55.4, IHS Markit said… Companies raised output charges at the fastest pace in more than five years as higher commodity prices and a weaker euro drove up costs, while suppliers took longer to fill orders…”

February 28 – Bloomberg (Stefania Spezzati): “France’s bonds may suffer the most if there is a greater-than-expected populist election victory in Netherlands in March, one month before the country’s own presidential vote. The French securities have recovered in February after falling in recent months, as anti-euro candidate Marine Le Pen leads polls for a first round in April but is seeing fading momentum in surveys for a second-round runoff in May. The anti-EU Dutch Freedom Party, or PVV, is forecast in polls to become the largest in parliament and a big victory would again unsettle nerves among investors in euro-area government bonds.”

Federal Reserve Watch:

February 28 – Reuters (Ann Saphir and Jonathan Spicer): “A handful of Federal Reserve policymakers on Tuesday jolted markets into higher expectations for a March U.S. interest rate increase, with comments that suggested rate-setters are worried about waiting too long in the face of pending economic stimulus... New York Fed President William Dudley, among the most influential U.S. central bankers, said on CNN that the case for tightening monetary policy ‘has become a lot more compelling’ since the election of President Donald Trump and a Republican-controlled Congress. John Williams, president of the San Francisco Fed, said that with the economy at full employment, inflation headed higher, and upside risks from potential tax cuts waiting in the wings, ‘I personally don’t see any need to delay’ raising rates. ‘In my view, a rate increase is very much on the table for serious consideration at our March meeting.’”

February 28 – Wall Street Journal (Ben Leubsdorf): “U.S. inflation is closing in on the Federal Reserve’s long elusive 2% annual target, the latest evidence of firming price pressures that could bolster the case for the central bank to raise short-term interest rates as soon as this month. The personal-consumption-expenditures price index, which is the Fed’s preferred inflation gauge, rose a seasonally adjusted 0.4% in January from the prior month and climbed 1.9% from a year earlier… Excluding the often volatile categories of food and energy, prices rose 0.3% from December and 1.7% compared with January 2016.”

March 1 – Bloomberg (Christopher Condon and Matthew Boesler): “One of the Federal Reserve’s biggest skeptics about the strength of the global expansion signaled the U.S. economy may be strong enough to withstand an interest-rate increase soon, as key policy makers coalesce around tightening at their next meeting in mid-March. ‘Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path,’ Fed Governor Lael Brainard said... ‘We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing and risks to the outlook are as close to balanced as they have been in some time.’”

U.S. Bubble Watch:

March 1 – CNBC (Jeff Cox): “Forget the dot-com boom with its ‘irrational exuberance’ and the real estate bubble that was supposed to be invincible: Current market sentiment eclipses all of that. In fact, bullishness has never been this high going all the way back to 1987. That's through three rousing bull markets, a couple of crashes, the ‘Great Moderation’ of the 1990s and all sorts of other history-making events. A market that was supposed to flounder this year under a new president instead has taken off, and investors are pumped. Bullishness is at 63.1% of market professionals responding to the latest Investors Intelligence survey. That's the highest level since the year of the infamous ‘Black Monday’ Oct. 19, 1987, crash that sent the U.S. market down nearly 23% in one day.”

March 2 – Financial Times (Robin Wigglesworth): “The number of US exchange traded funds has passed the 2,000 mark, as providers churn out an array of increasingly esoteric products that target investment ‘themes’ from evangelical values to entrepreneurship and marijuana — with a Trump ETF possibly waiting in the wings. Passive investment funds have continued to suck in record amounts of money this year, despite the improving performance by traditional asset managers.”

March 3 – Bloomberg (Sid Verma): “Hedge the inauguration, bet the presidency. That’s the mantra of investors diving into the U.S. stock rally with only modest downside protection despite a gale of headwinds, from elevated corporate leverage and Federal Reserve rate hikes to U.S. policy risks. Data from Goldman Sachs… show investors have discarded hedges bought in the first leg of the global rally -- between the November election and the end of last year – as they rush headlong into risk. ‘Our indicator is now in-line with its most complacent level in the past six years, suggesting investors are generally unhedged across both equities and credit,’ derivatives strategists at Goldman, led by John Marshall, wrote…”

March 1 – Financial Times (Robin Wigglesworth): “President Donald Trump wants corporate America to invest more in factories, but since the financial crisis more companies have preferred to hoover up their own shares. Yet have buybacks provided bang for their buck? There have been many critics of the recent corporate buyback bonanza, with figures from former US vice-president Joe Biden to BlackRock founder Larry Fink contending companies have eschewed growth-boosting investments in favour of short-term share repurchases, increasingly financing them with cheap debt rather than earnings. But perhaps the most notable thing about the buyback spree — more than $2tn of shares have been repurchased in the past five years — is how it has arguably provided only a modest boost to equity prices, at least compared to the scale of the purchases.”

March 2 – Bloomberg (Tom Metcalf): “Snap Inc.’s Evan Spiegel and Bobby Murphy each added $1.6 billion to his fortune Thursday after shares in the photo-sharing mobile app closed at $24.48, 44% above their listing price. Investor appetite for the first technology listing of the year boosted the net worth of each co-founder to $5.3 billion, propelling Spiegel, 26, and Murphy, 28, up more than 150 places on the Bloomberg Billionaires Index…”

February 28 – Bloomberg (Austin Weinstein): “Consumer confidence unexpectedly increased in February to the highest level since July 2001 as Americans grew more upbeat about present and future conditions, according to… the… Conference Board. Confidence index advanced to 114.8 (forecast was 111) from a revised 111.6 in January. Present conditions gauge increased to 133.4, the highest since July 2007, from 130…”

March 2 – Bloomberg (Patricia Laya): “The fewest Americans in almost 44 years filed applications to collect unemployment benefits last week, indicating the job market continues to power forward. Jobless claims fell by 19,000 to 223,000 in the week ended Feb. 25, the fewest since March 1973…”

February 28 – CNBC (Elizabeth Gurdus): “Low inventory and mortgage rates pushed home-price gains to a 30-month high in December, according to the S&P/Case-Shiller U.S. National Home Price Index. The index, which measures all nine U.S. census divisions, found that home prices rose 5.8% year over year, up from November's 5.6% annual gain. The December rise was the highest annual increase since June 2014, when it rose 6.3% vs. to June 2013.”

February 28 – Financial Times (Adam Samson): “The US equities market as a whole has gotten off to their most tranquil start this year since the mid-1960s, although a look under the hood shows ‘major disturbances happening on a stock level,’ according to new research from JPMorgan… Over the first two months of the year, the S&P 500 has not posted a gain or loss of greater than 1%, the first time this has occurred since 1966… Underscoring the sense of calm on Wall Street, the Vix index, a measure of expected S&P 500 volatility over the next month, has hovered between 10 – 12 since mid-January, far below the average of 19.6 since 1990…”

February 26 – Wall Street Journal (Aaron Back): “Lending growth has recently been slowing in the U.S., a potentially ominous economic signal… Total loans and leases by U.S. commercial banks are currently rising at an annual pace of about 5%, based on weekly seasonally adjusted data from the Federal Reserve. That is down from a 6.4% pace for all of last year and peak rates of around 8% in mid-2016. The deceleration has been broad-based across business, real estate and consumer lending and is at odds with the idea of a stronger economy and rising sentiment. The slowdown has been particularly stark in commercial and industrial lending, which was growing at around 10% in the first half of last year, but is now up just 5.7% from a year earlier.”

February 28 – Bloomberg (Gabrielle Coppola): “For the first time in his 37 years working at New Jersey car dealerships, Larry Kull had to rent extra space to store unsold new Honda vehicles -- one of the latest signs that the record U.S. auto market is cooling. Across dealer lots in America, inventory is piling up as automakers produce more cars than are being bought. Dealers had about 85 days worth of cars and trucks on hand at the beginning of February -- about 22 days more than at the beginning of 2017 and eight days more than a year earlier, according to Automotive News Data Center.”

February 26 – CNBC (Stephanie Landsman): “The man often hailed as the original 'Dr. Doom' is warning investors that the U.S. stock market is vulnerable to a seismic sell-off—one that could start any time in a very unassuming way. Marc Faber, the editor of ‘The Gloom, Boom & Doom Report,’ predicted the rally's disruption won't be caused by any single catalyst. His argument: Stocks are very overbought and sentiment is way too bullish for the so-called Trump rally to continue. ‘Very simply, the market starts to go down. As it goes down, it will start triggering selling, and then it will be like an avalanche,’ said Faber recently on ‘Futures Now.’ ‘I would underweight U.S. stocks.’”

Japan Watch:

February 28 – Financial Times (Robin Harding and Elaine Moore): “The Bank of Japan published detailed schedules of planned asset purchases for the first time on Tuesday as it seeks to prove its commitment to a zero per cent cap on 10-year government bond yields. Japan’s central bank said it will buy a minimum of ¥1.375tn and a maximum of ¥2.175tn of government bonds during March… Setting out the purchase plan in advance makes it less likely that the BoJ will skip an auction — a common subject of market speculation as the central bank accumulates an ever larger share of outstanding government bonds through its programme of monetary easing.”

Leveraged Speculation Watch:

February 28 – Bloomberg: “Hedge funds are raising their exposure to commodities as prices rally and investors respond to macro shifts including the prospect of accelerating inflation under U.S. President Donald Trump, according to Citigroup Inc. ‘After two years of scaling back exposure to commodities, the fund community finally appears to be growing interested in the sector again,’ the bank’s analysts including Aakash Doshi and David Wilson wrote… They attributed record net-long positions… in markets including Comex copper and Nymex crude oil, at least partly to increased allocation of fund money.”

Geopolitical Watch:

March 3 – Reuters (Adam Jourdan): “South Korean firms are being squeezed in China, in suspected retaliation for Seoul's deployment of a U.S. missile defense system, highlighting the tools China can deploy to hit back at the corporate interests of trade partners it disagrees with. The chill facing Korea Inc, from cosmetics and supermarket chains to autos and tourism, points to a potential risk for American companies… In China, state media and grassroots political groups have led angry calls to boycott popular Korean products. Photos on social media and local news websites showed crowds vandalizing a Hyundai Motor Co. car, and some Chinese tourism firms moved to cancel Korean tours.”

February 25 – Reuters (Ben Blanchard and Michael Martina): “The PLA Navy is likely to secure significant new funding in China's upcoming defense budget as Beijing seeks to check U.S. dominance of the high seas and step up its own projection of power around the globe… Now, with President Donald Trump promising a U.S. shipbuilding spree and unnerving Beijing with his unpredictable approach on hot button issues including Taiwan and the South and East China Seas, China is pushing to narrow the gap with the U.S. Navy. ‘It's opportunity in crisis,’ said a Beijing-based Asian diplomat, of China's recent naval moves. ‘China fears Trump will turn on them eventually as he's so unpredictable and it's getting ready."

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