[Bloomberg] Dollar, Equities Slide as Trump Trade Shows Cracks: Markets Wrap
[Reuters] Dollar hits lowest since November as Trump trade deflates
[Bloomberg] Oil Drops as Producers Say They Need More Time to Cut Stockpiles
[CNBC] Asian markets drop, led by Tokyo, as dollar weakens following Trump health-care failure
[Bloomberg] These Charts Show Alarm Bells Ringing on the Trump Trade
[Reuters] Plateau in U.S. auto sales heightens risk for lenders: Moody's
[CNBC] There is no debt ceiling crisis, at least for now
[Bloomberg] Fed Has Room for More Rate Increases in 2017, Lockhart Says
[Bloomberg] Momentum Builds for Yen to Break 110
[Bloomberg] Huishan Dairy Fallout Spreads as Chinese Bank's Stock Falls
[Politico] Internal White House battles spill into Treasury
[WSJ] Dow Poised for Longest Losing Streak Since 2011
[FT] The end of global QE is fast approaching
Sunday, March 26, 2017
Sunday's News Links
[Reuters] OPEC, non-OPEC to look at extending oil-output cut by six months
[Forbes] Passing Tax Reform Will Be As Difficult As Repealing Obamacare
[WSJ] Republicans’ Tax Overhaul Could Face Its Own Slings and Arrows
[WSJ] With GOP Plan Dead, Trump Weighs Other Ways to Reshape Health Care
[FT] Will US healthcare failure shake investor confidence?
[CNBC/NYT] North Korea’s rising ambition seen in bid to breach global banks
[Reuters] Hong Kong chooses new Beijing-backed leader amid political tension
[Forbes] Passing Tax Reform Will Be As Difficult As Repealing Obamacare
[WSJ] Republicans’ Tax Overhaul Could Face Its Own Slings and Arrows
[WSJ] With GOP Plan Dead, Trump Weighs Other Ways to Reshape Health Care
[FT] Will US healthcare failure shake investor confidence?
[CNBC/NYT] North Korea’s rising ambition seen in bid to breach global banks
[Reuters] Hong Kong chooses new Beijing-backed leader amid political tension
Saturday, March 25, 2017
Saturday's News Links
[Bloomberg] GOP Eyes Tax Overhaul -- And Lessons From Health-Care Failure
[Reuters] ECB's next policy moves are in flux: Bundesbank
[Spiegel] Europe Prepares for Tough Brexit Negotiations
[WSJ] Republicans Turn Eyes to Tax Overhaul After Health-Care Bill Falls Short
[WSJ] Donald Trump’s Need Now: Find a Governing Coalition
[Reuters] ECB's next policy moves are in flux: Bundesbank
[Spiegel] Europe Prepares for Tough Brexit Negotiations
[WSJ] Republicans Turn Eyes to Tax Overhaul After Health-Care Bill Falls Short
[WSJ] Donald Trump’s Need Now: Find a Governing Coalition
Friday, March 24, 2017
Weekly Commentary: Discussions on the Fed Put
Market focus this week turned to troubled healthcare legislation, with the GOP Friday pulling the vote on the repeal of Obamacare. This “Republican Catastrophe” (Drudge ran with a Hindenburg photo) provided a timely reminder that Grand Old Party control over the presidency and both houses of congress doesn’t make it any easier to come to a consensus for governing a deeply-divided country. The reality is that it’s a highly fractious world, nation, Washington and Republican party – and the election made it only more so. Perhaps Monday’s sell-off was an indication that reality has begun to seep back into the marketplace. If repealing Obamacare is tough, just wait for tax reform and the debt limit.
CNBC’s Joe Kernen (March 20, 2017): “For a guy that was there trying to deal with the housing Bubble - that would be the other thing that people would bring up to you. That you don’t know what low rates are really doing. You don’t know where the next dislocation is going to be. You’re not seeing a lot of benefits from zero, and who knows if you might be inflating something somewhere that comes home to roost in the future. That’s probably what they’d say: ‘You must know there’s nothing on the horizon then.’”
Neel Kashkari, Minneapolis Federal Reserve Bank president: “It’s a very fair question and people point to the stock market’s been booming. And my response to those folks is, we care about asset price movements if we think a correction could lead to financial instability or financial crisis. If you think about the tech Bubble - the tech Bubble burst. It was not good for the economy – obviously it hurt. But there was no risk of a financial collapse, not like the housing Bubble. So, the difference is the housing market has so much debt underneath it. It’s much more dangerous if there’s a correction. If equity markets drop, it’s going to be painful for investors. But there’s so little debt relative to housing, it doesn’t look like it has a risk of leading to any kind of financial crisis. So, our job is to let the markets adjust.”
Less than an hour later Kashkari appeared on Bloomberg Television: “Some people have said we should be raising rates because markets are getting hot – and the stock market keeps climbing. I think we should only pay attention to markets if we believe it could lead to financial instability. So, go back to the tech Bubble, when tech burst it was painful for the economy; it was painful for investors. But it did not lead to any kind of economic collapse or financial instability. So, if stock markets fall it’ll hurt investors. But that’s not the Fed’s job. The Fed’s job is not to protect stock market investors. We have to pay attention to potential financial instability risks, and the fact is there’s a lot more debt underlying the housing market than underlying the stock market. That’s why the housing bust was painful for the economy. A stock market correction will probably be a lot less painful.”
Neel Kashkari these days provides interesting subject matter. It’s no coincidence that he’s been discussing shrinking the Fed’s balance sheet while also addressing the “Fed put” in the stock market. I’m sure Kashkari and the FOMC would prefer that market participants were less cocksure that the Fed stands ready to backstop the markets. Too late for that.
Fed officials are not blind. They monitor stock prices and corporate debt issuance; they see residential and commercial real estate market values. Years of ultra-low rates have inflated Bubbles throughout commercial real estate – anything providing a yield – in excess of those going into 2008. Upper-end residential prices are significantly stretched across the country, also surpassing 2007. They see Silicon Valley and a Tech Bubble 2.0, with myriad excesses that in many respects put 1999 to shame. I’ll assume that the Fed is concerned with the amount of leverage and excess that has accumulated in bond and Credit markets over the past eight years of extreme monetary stimulus.
The Fed is locked into a gradualist approach when it comes to normalizing rate policy. At the same time, they must of late recognize that speculative markets might readily brush aside Fed “tightening” measures. This might help to explain why the Fed’s balance sheet is suddenly in play. And it’s not just Kashkari. From Bloomberg: “Fed’s Kaplan Says MBS and Treasuries Should Both Be Rolled Off” and “Bullard Says Fed in Good Position to Allow Balance Sheet to Fall.” From Reuters: “Cleveland Fed President Says She Supports Reducing the Balance Sheet.” From Barron’s: “Fed's Williams: Balance Sheet Shrinkage Could Begin Late this Year.” And my favorite: “Fed’s Kashkari: Everyone on FOMC ‘Very Interested’ in Balance Sheet Policy.”
I struggle taking comments from Fed officials at face value. Kashkari shares a similar revisionist view of the Tech Bubble experience to that of Ben Bernanke, Alan Greenspan and others: Basically, it was no big deal – implying that Bubbles generally don’t have to be big deals. They somehow banished 2002 from their memories.
The Fed collapsed fed funds from 6.50% in December 2000 to an extraordinarily low 1.75% by the end of 2001. In the face of an escalating corporate debt crisis, the Fed took the unusual step of cutting rates another 50 bps in November 2002. Alarmingly, corporate Credit was failing to respond to traditional monetary policy measures (despite being aggressively applied). Ford in particular faced severe funding issues, though the entire corporate debt market was confronting liquidity issues. Recall that the S&P500 dropped 23.4% in 2002. The small caps lost 21.6%. The Nasdaq 100 (NDX) sank 37.6%, falling to 795 (having collapsed from a March 2000 high of 4,816). No financial instability?
Years later it’s easy to downplay consequences of the bursting “tech” Bubble. Yet there were fears of a deflationary spiral and the Fed running out of ammo. It was this backdrop in which Dr. Bernanke introduced unconventional measures in two historic speeches, the November 21, 2002, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” and the November 8, 2002, “On Milton Friedman’s Ninetieth Birthday.”
I revisit history in an attempt at distinguishing reality from misperceptions. Of course the Fed will generally dismiss the consequences of Bubbles. They’re not going to aggressively embark on reflationary policies while espousing the dangers of asset price and speculative Bubbles. Instead, they have painted the “housing Bubble” as some egregious debt mountain aberration. And paraphrasing Kashkari, since today’s stock market has nowhere as much debt as housing had in 2007, there’s little to worry about from a crisis and financial instability perspective.
Well, if only that were the case. Debt is a critical issue, and there’s a whole lot more of it than back in 2008. Yet when it comes to fragility and financial crises, market misperceptions and distortions play fundamental roles. And there’s a reason why each bursting Bubble and resulting policy-induced reflation ensures a more precarious Bubble: Not only does the amount of debt continue to inflate, each increasingly intrusive policy response elicits a greater distorting impact on market perceptions.
I doubt Fed governor Bernanke actually anticipated that the Fed would have to resort to “helicopter money” and the “government printing press” when he introduced such extreme measures in his 2002 speeches. Yet seeing that the Fed was willing to push its monetary experiment in such a radical direction played a momentous role in reversing the 2002 corporate debt crisis, in the process stoking the fledgling mortgage finance Bubble. And the Bernanke Fed surely thought at the time that doubling its balance sheet during the 2008/09 crisis was a one-time response to a once-in-a-lifetime financial dislocation. I’ll assume they were sincere with their 2011 “exit strategy,” yet only a few short years later they’d again double the size of their holdings.
CNBC’s Joe Kernen (March 20, 2017): “For a guy that was there trying to deal with the housing Bubble - that would be the other thing that people would bring up to you. That you don’t know what low rates are really doing. You don’t know where the next dislocation is going to be. You’re not seeing a lot of benefits from zero, and who knows if you might be inflating something somewhere that comes home to roost in the future. That’s probably what they’d say: ‘You must know there’s nothing on the horizon then.’”
Neel Kashkari, Minneapolis Federal Reserve Bank president: “It’s a very fair question and people point to the stock market’s been booming. And my response to those folks is, we care about asset price movements if we think a correction could lead to financial instability or financial crisis. If you think about the tech Bubble - the tech Bubble burst. It was not good for the economy – obviously it hurt. But there was no risk of a financial collapse, not like the housing Bubble. So, the difference is the housing market has so much debt underneath it. It’s much more dangerous if there’s a correction. If equity markets drop, it’s going to be painful for investors. But there’s so little debt relative to housing, it doesn’t look like it has a risk of leading to any kind of financial crisis. So, our job is to let the markets adjust.”
Less than an hour later Kashkari appeared on Bloomberg Television: “Some people have said we should be raising rates because markets are getting hot – and the stock market keeps climbing. I think we should only pay attention to markets if we believe it could lead to financial instability. So, go back to the tech Bubble, when tech burst it was painful for the economy; it was painful for investors. But it did not lead to any kind of economic collapse or financial instability. So, if stock markets fall it’ll hurt investors. But that’s not the Fed’s job. The Fed’s job is not to protect stock market investors. We have to pay attention to potential financial instability risks, and the fact is there’s a lot more debt underlying the housing market than underlying the stock market. That’s why the housing bust was painful for the economy. A stock market correction will probably be a lot less painful.”
Neel Kashkari these days provides interesting subject matter. It’s no coincidence that he’s been discussing shrinking the Fed’s balance sheet while also addressing the “Fed put” in the stock market. I’m sure Kashkari and the FOMC would prefer that market participants were less cocksure that the Fed stands ready to backstop the markets. Too late for that.
Fed officials are not blind. They monitor stock prices and corporate debt issuance; they see residential and commercial real estate market values. Years of ultra-low rates have inflated Bubbles throughout commercial real estate – anything providing a yield – in excess of those going into 2008. Upper-end residential prices are significantly stretched across the country, also surpassing 2007. They see Silicon Valley and a Tech Bubble 2.0, with myriad excesses that in many respects put 1999 to shame. I’ll assume that the Fed is concerned with the amount of leverage and excess that has accumulated in bond and Credit markets over the past eight years of extreme monetary stimulus.
The Fed is locked into a gradualist approach when it comes to normalizing rate policy. At the same time, they must of late recognize that speculative markets might readily brush aside Fed “tightening” measures. This might help to explain why the Fed’s balance sheet is suddenly in play. And it’s not just Kashkari. From Bloomberg: “Fed’s Kaplan Says MBS and Treasuries Should Both Be Rolled Off” and “Bullard Says Fed in Good Position to Allow Balance Sheet to Fall.” From Reuters: “Cleveland Fed President Says She Supports Reducing the Balance Sheet.” From Barron’s: “Fed's Williams: Balance Sheet Shrinkage Could Begin Late this Year.” And my favorite: “Fed’s Kashkari: Everyone on FOMC ‘Very Interested’ in Balance Sheet Policy.”
I struggle taking comments from Fed officials at face value. Kashkari shares a similar revisionist view of the Tech Bubble experience to that of Ben Bernanke, Alan Greenspan and others: Basically, it was no big deal – implying that Bubbles generally don’t have to be big deals. They somehow banished 2002 from their memories.
The Fed collapsed fed funds from 6.50% in December 2000 to an extraordinarily low 1.75% by the end of 2001. In the face of an escalating corporate debt crisis, the Fed took the unusual step of cutting rates another 50 bps in November 2002. Alarmingly, corporate Credit was failing to respond to traditional monetary policy measures (despite being aggressively applied). Ford in particular faced severe funding issues, though the entire corporate debt market was confronting liquidity issues. Recall that the S&P500 dropped 23.4% in 2002. The small caps lost 21.6%. The Nasdaq 100 (NDX) sank 37.6%, falling to 795 (having collapsed from a March 2000 high of 4,816). No financial instability?
Years later it’s easy to downplay consequences of the bursting “tech” Bubble. Yet there were fears of a deflationary spiral and the Fed running out of ammo. It was this backdrop in which Dr. Bernanke introduced unconventional measures in two historic speeches, the November 21, 2002, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” and the November 8, 2002, “On Milton Friedman’s Ninetieth Birthday.”
I revisit history in an attempt at distinguishing reality from misperceptions. Of course the Fed will generally dismiss the consequences of Bubbles. They’re not going to aggressively embark on reflationary policies while espousing the dangers of asset price and speculative Bubbles. Instead, they have painted the “housing Bubble” as some egregious debt mountain aberration. And paraphrasing Kashkari, since today’s stock market has nowhere as much debt as housing had in 2007, there’s little to worry about from a crisis and financial instability perspective.
Well, if only that were the case. Debt is a critical issue, and there’s a whole lot more of it than back in 2008. Yet when it comes to fragility and financial crises, market misperceptions and distortions play fundamental roles. And there’s a reason why each bursting Bubble and resulting policy-induced reflation ensures a more precarious Bubble: Not only does the amount of debt continue to inflate, each increasingly intrusive policy response elicits a greater distorting impact on market perceptions.
I doubt Fed governor Bernanke actually anticipated that the Fed would have to resort to “helicopter money” and the “government printing press” when he introduced such extreme measures in his 2002 speeches. Yet seeing that the Fed was willing to push its monetary experiment in such a radical direction played a momentous role in reversing the 2002 corporate debt crisis, in the process stoking the fledgling mortgage finance Bubble. And the Bernanke Fed surely thought at the time that doubling its balance sheet during the 2008/09 crisis was a one-time response to a once-in-a-lifetime financial dislocation. I’ll assume they were sincere with their 2011 “exit strategy,” yet only a few short years later they’d again double the size of their holdings.
From a friendly email received over the weekend: “I think the Bernanke doctrine ended up being wildly successful beyond anyone’s imaginings, even Dr. Ben’s.” This insightful reader’s comment is reflective of the positive view markets these days (at record highs) hold of “activist” central bank management. It may have taken a while, but it all eventually gained the appearance of a miraculous undertaking – reminiscent of “New Era” hype from the late-nineties. “Money” printing works – and all the agonizing over unintended consequences proved sorely misguided!
So easy to forget how we got here. We’re a few months from the nine-year anniversary of the 2008 crisis, yet there’s still huge ongoing global QE and rates not far from zero. It’s a monetary inflation beyond anyone’s imaginings, even Dr. Ben’s. To say “the jury’s still out” is a gross understatement.
There’s a counter argument that stimulus measures and monetary inflation got completely away from Dr. Bernanke - and global central banks more generally. Today, peak global monetary stimulus equates with peak securities market values and peak optimism – all having been powerfully self-reinforcing (“reflexivity”). Global debt continues to expand rapidly, led by exceedingly risky late-cycle Credit growth out of China. I suspect that unprecedented amounts of speculative leverage have accumulated globally, led by excesses in cross-currency “carry trades” and derivatives. “Money” continues to flood into global risk markets, inflating prices and expectations. Worse yet, excesses over (going on) nine years have seen an unprecedented expansion of perceived money-like government and central bank Credit (the heart of contemporary “money” and Credit). Meanwhile, global rates have barely budged from zero.
Despite assertions to the contrary, the bursting of the “tech” Bubble unleashed significant financial instability. To orchestrate reflation, the Fed marshaled a major rate collapse, which worked to stoke already robust mortgage Credit growth. The collapse in telecom debt, an unwind of market-based speculative leverage and the rapid slowdown in corporate borrowings was over time more than offset by a rapid expansion in housing debt and enormous growth in mortgage-related speculative leverage (MBS, ABS, derivatives).
Understandably, Kashkari and the Fed would prefer today to ween markets off the notion of a “Fed put.” It’s just not going to resonate. Markets will not buy into the comparison of the current backdrop to the “tech” Bubble period. The notion that today’s securities markets operate without major instability risk is at odds with reality.
Markets are keenly aware that the Fed’s balance sheet will be the Federal Reserve’s only viable tool come the next period of serious de-risking/de-leveraging. At the same time, Fed officials clearly want to counter the now deeply-embedded perception of a “Fed put” – that the Federal Reserve remains eager to counter fledgling “Risk Off” dynamics. And while it’s not surprising that markets hear Kashkari’s comments and yawn, things will turn interesting during the next bout of market turbulence. Expect the Fed to move hesitantly when coming to the markets’ defense, a dynamic that significantly raises the potential for the next “Risk Off” to attain problematic momentum. It’s been awhile.
March 20 – Financial Times (Robin Wigglesworth): “On Wall Street, bad ideas rarely die. They often go into hibernation until resurrected in a new form. And portfolio insurance — a leading contributor to the 1987 ‘Black Monday’ crash — is, for some, making a return to markets. Institutional investors are allocating billions of dollars to ‘risk mitigation’ or ‘crisis risk offset’ programmes that are designed to act as a counterweight when markets are in turmoil. They mostly comprise long-maturity government bonds and trend-following hedge funds, which tend to do well when equities plummet. But some analysts and fund managers worry that if taken to extremes, allocations to trend-following ‘commodity trading advisors’ hedge funds, in particular, could play the same role as an investment concept called portfolio insurance did in 1987, when it was blamed for aggravating the worst US stock market collapse in history. ‘There’s a big portfolio insurance industry that no one is talking about . . . CTAs are dangerously close to portfolio insurance,’ argues Robert Hillman, the head of Neuron Advisors…”
Writing flood insurance during a drought is an alluringly profitable endeavor. The “Fed put” has encouraged Trillions to flow into the risk markets. Trillions of “money” have gravitated to “passive” trend-following securities market products and structures. Yet the most dangerous Fed-induced market distortions may lurk within market hedging strategies. The above Financial Times article ran under the headline “Rise in New Form of ‘Portfolio Insurance’ Sparks Fears.” Fear is appropriate. To what degree has it become commonplace to seek profits “writing” various types of market “insurance” in a yield-hungry world confident in the central bank “put.” How much “dynamic hedging” and derivative-related selling waits to overwhelm the markets in the event of a precipitous market sell-off (concurrent with fear the Fed has stepped back from its market backstopping operations)?
The speculative bull market confronted some Washington reality this week. The S&P500 declined 1.4%, the worst showing in months. The banks (BKX) were slammed 4.7%, with the broker/dealers (XBD) down 4.3%. The broader market was under pressure, with the mid-caps down 2.1% and the small caps 2.7%. It’s worth noting the banks, transports and small caps are now all down y-t-d. Curiously, bank stocks underperformed globally. Japan’s Topic Bank index was hit 3.5%. The Hong Kong Financial index fell 1.3%, and Europe’s STOXX 600 Bank index lost 0.9%.
Ten-year Treasury yields dropped nine bps to a one-month low (2.41%), as sovereign yields declined across the globe. Just when the speculators were comfortably short European periphery bonds, Spanish 10-year yields sank 19 bps, Italian yields fell 13 bps and Portuguese yields dropped 15 bps. Crude prices traded this week to the low since November. The GSCI Commodities Index declined to almost four-month lows. Time again to pay attention to China? This week saw a “super selloff” in Chinese iron ore markets. Copper fell 2.2%, and the commodities currencies (Australia, Canada, Brazil) underperformed. Meanwhile, precious metals outperformed, with gold up 1.2% and silver rising 2.1%.
March 23 – Financial Times (Gabriel Wildau): “China’s financial system suffered a cash crunch this week as new regulations designed to curb shadow banking caused big lenders to hoard funds, highlighting the danger of unintended consequences from official moves to lower their debt. Analysts have warned of rising risks from banks’ increased reliance on volatile short-term funding rather than customer deposits to fund loans and other investments. If money market interest rates spike in times of stress, institutions can be forced to dump assets in order to meet payments due to creditors. Tightening liquidity prompted the seven-day bond repurchase rate to hit a three-year high of 9.5% on Tuesday, versus an average of below 3% since the beginning of 2014.”
March 21 – Bloomberg: “This week’s squeeze in Chinese money markets is proving especially painful for the country’s shadow banks. While interbank borrowing rates have climbed across the board, the surge has been unusually steep for non-bank institutions, including securities companies and investment firms. They’re now paying what amounts to a record premium for short-term funds relative to large Chinese banks… ‘It’s more expensive and difficult for non-bank financial institutions to get funding in the market,’ said Becky Liu, …head of China macro strategy at Standard Chartered Plc. ‘Bigger lenders who have access to regulatory funding are not lending much of the money out.’”
March 23 – Wall Street Journal (Shen Hong): “A new specter is haunting China’s financial system: the negotiable certificate of deposit. An explosion in banks’ use of the bondlike loans, whose durations range from a month to a year, is testing Beijing’s resolve to cure the economy of its addiction to debt-fueled growth and investment booms. As authorities push up key short-term interest rates in their campaign to deflate asset bubbles swelled by borrowed money, the interest rates charged on these NCDs is rising so fast that it is starting to expose banks to the risk of investment losses and abrupt funding squeezes. This is causing worries about a potential repeat of the crippling cash crunch of 2013. ‘NCDs carry a lot of risk, and if not handled properly they could lead to a systemwide liquidity crisis,’ said Liu Dongliang, senior analyst at China Merchants Bank. Banks, mostly small or midsize ones, have been raising record sums via NCDs, selling 4.4 trillion yuan ($639bn) worth this year, 65% more than in the same period of 2016.”
The risk of financial accident in China has anything but dissipated. The People’s Bank of China this week injected large amounts of liquidity to stem a brewing funding crisis in the inter-bank lending market, only then to reverse course back to tightened policy later in the week. Over recent years, each effort to restrain excess in one area has been matched by heightened excess popping out in another. In general, financial conditions have remained too loose for too long – leading to recent Credit growth in the neighborhood of $3.5 TN annualized. Efforts to rely on targeted tightening measures have proved ineffective.
It appears there is now heightened pressure on Chinese monetary authorities to tighten system-wide financial conditions. The stress that befell the vulnerable corporate bond market over recent months is now pressuring small and medium sized banks with problematic exposure to short-term “money-market” borrowings. There were also further indications this week of “shadow banking” vulnerability.
So easy to forget how we got here. We’re a few months from the nine-year anniversary of the 2008 crisis, yet there’s still huge ongoing global QE and rates not far from zero. It’s a monetary inflation beyond anyone’s imaginings, even Dr. Ben’s. To say “the jury’s still out” is a gross understatement.
There’s a counter argument that stimulus measures and monetary inflation got completely away from Dr. Bernanke - and global central banks more generally. Today, peak global monetary stimulus equates with peak securities market values and peak optimism – all having been powerfully self-reinforcing (“reflexivity”). Global debt continues to expand rapidly, led by exceedingly risky late-cycle Credit growth out of China. I suspect that unprecedented amounts of speculative leverage have accumulated globally, led by excesses in cross-currency “carry trades” and derivatives. “Money” continues to flood into global risk markets, inflating prices and expectations. Worse yet, excesses over (going on) nine years have seen an unprecedented expansion of perceived money-like government and central bank Credit (the heart of contemporary “money” and Credit). Meanwhile, global rates have barely budged from zero.
Despite assertions to the contrary, the bursting of the “tech” Bubble unleashed significant financial instability. To orchestrate reflation, the Fed marshaled a major rate collapse, which worked to stoke already robust mortgage Credit growth. The collapse in telecom debt, an unwind of market-based speculative leverage and the rapid slowdown in corporate borrowings was over time more than offset by a rapid expansion in housing debt and enormous growth in mortgage-related speculative leverage (MBS, ABS, derivatives).
Understandably, Kashkari and the Fed would prefer today to ween markets off the notion of a “Fed put.” It’s just not going to resonate. Markets will not buy into the comparison of the current backdrop to the “tech” Bubble period. The notion that today’s securities markets operate without major instability risk is at odds with reality.
Markets are keenly aware that the Fed’s balance sheet will be the Federal Reserve’s only viable tool come the next period of serious de-risking/de-leveraging. At the same time, Fed officials clearly want to counter the now deeply-embedded perception of a “Fed put” – that the Federal Reserve remains eager to counter fledgling “Risk Off” dynamics. And while it’s not surprising that markets hear Kashkari’s comments and yawn, things will turn interesting during the next bout of market turbulence. Expect the Fed to move hesitantly when coming to the markets’ defense, a dynamic that significantly raises the potential for the next “Risk Off” to attain problematic momentum. It’s been awhile.
March 20 – Financial Times (Robin Wigglesworth): “On Wall Street, bad ideas rarely die. They often go into hibernation until resurrected in a new form. And portfolio insurance — a leading contributor to the 1987 ‘Black Monday’ crash — is, for some, making a return to markets. Institutional investors are allocating billions of dollars to ‘risk mitigation’ or ‘crisis risk offset’ programmes that are designed to act as a counterweight when markets are in turmoil. They mostly comprise long-maturity government bonds and trend-following hedge funds, which tend to do well when equities plummet. But some analysts and fund managers worry that if taken to extremes, allocations to trend-following ‘commodity trading advisors’ hedge funds, in particular, could play the same role as an investment concept called portfolio insurance did in 1987, when it was blamed for aggravating the worst US stock market collapse in history. ‘There’s a big portfolio insurance industry that no one is talking about . . . CTAs are dangerously close to portfolio insurance,’ argues Robert Hillman, the head of Neuron Advisors…”
Writing flood insurance during a drought is an alluringly profitable endeavor. The “Fed put” has encouraged Trillions to flow into the risk markets. Trillions of “money” have gravitated to “passive” trend-following securities market products and structures. Yet the most dangerous Fed-induced market distortions may lurk within market hedging strategies. The above Financial Times article ran under the headline “Rise in New Form of ‘Portfolio Insurance’ Sparks Fears.” Fear is appropriate. To what degree has it become commonplace to seek profits “writing” various types of market “insurance” in a yield-hungry world confident in the central bank “put.” How much “dynamic hedging” and derivative-related selling waits to overwhelm the markets in the event of a precipitous market sell-off (concurrent with fear the Fed has stepped back from its market backstopping operations)?
The speculative bull market confronted some Washington reality this week. The S&P500 declined 1.4%, the worst showing in months. The banks (BKX) were slammed 4.7%, with the broker/dealers (XBD) down 4.3%. The broader market was under pressure, with the mid-caps down 2.1% and the small caps 2.7%. It’s worth noting the banks, transports and small caps are now all down y-t-d. Curiously, bank stocks underperformed globally. Japan’s Topic Bank index was hit 3.5%. The Hong Kong Financial index fell 1.3%, and Europe’s STOXX 600 Bank index lost 0.9%.
Ten-year Treasury yields dropped nine bps to a one-month low (2.41%), as sovereign yields declined across the globe. Just when the speculators were comfortably short European periphery bonds, Spanish 10-year yields sank 19 bps, Italian yields fell 13 bps and Portuguese yields dropped 15 bps. Crude prices traded this week to the low since November. The GSCI Commodities Index declined to almost four-month lows. Time again to pay attention to China? This week saw a “super selloff” in Chinese iron ore markets. Copper fell 2.2%, and the commodities currencies (Australia, Canada, Brazil) underperformed. Meanwhile, precious metals outperformed, with gold up 1.2% and silver rising 2.1%.
March 23 – Financial Times (Gabriel Wildau): “China’s financial system suffered a cash crunch this week as new regulations designed to curb shadow banking caused big lenders to hoard funds, highlighting the danger of unintended consequences from official moves to lower their debt. Analysts have warned of rising risks from banks’ increased reliance on volatile short-term funding rather than customer deposits to fund loans and other investments. If money market interest rates spike in times of stress, institutions can be forced to dump assets in order to meet payments due to creditors. Tightening liquidity prompted the seven-day bond repurchase rate to hit a three-year high of 9.5% on Tuesday, versus an average of below 3% since the beginning of 2014.”
March 21 – Bloomberg: “This week’s squeeze in Chinese money markets is proving especially painful for the country’s shadow banks. While interbank borrowing rates have climbed across the board, the surge has been unusually steep for non-bank institutions, including securities companies and investment firms. They’re now paying what amounts to a record premium for short-term funds relative to large Chinese banks… ‘It’s more expensive and difficult for non-bank financial institutions to get funding in the market,’ said Becky Liu, …head of China macro strategy at Standard Chartered Plc. ‘Bigger lenders who have access to regulatory funding are not lending much of the money out.’”
March 23 – Wall Street Journal (Shen Hong): “A new specter is haunting China’s financial system: the negotiable certificate of deposit. An explosion in banks’ use of the bondlike loans, whose durations range from a month to a year, is testing Beijing’s resolve to cure the economy of its addiction to debt-fueled growth and investment booms. As authorities push up key short-term interest rates in their campaign to deflate asset bubbles swelled by borrowed money, the interest rates charged on these NCDs is rising so fast that it is starting to expose banks to the risk of investment losses and abrupt funding squeezes. This is causing worries about a potential repeat of the crippling cash crunch of 2013. ‘NCDs carry a lot of risk, and if not handled properly they could lead to a systemwide liquidity crisis,’ said Liu Dongliang, senior analyst at China Merchants Bank. Banks, mostly small or midsize ones, have been raising record sums via NCDs, selling 4.4 trillion yuan ($639bn) worth this year, 65% more than in the same period of 2016.”
The risk of financial accident in China has anything but dissipated. The People’s Bank of China this week injected large amounts of liquidity to stem a brewing funding crisis in the inter-bank lending market, only then to reverse course back to tightened policy later in the week. Over recent years, each effort to restrain excess in one area has been matched by heightened excess popping out in another. In general, financial conditions have remained too loose for too long – leading to recent Credit growth in the neighborhood of $3.5 TN annualized. Efforts to rely on targeted tightening measures have proved ineffective.
It appears there is now heightened pressure on Chinese monetary authorities to tighten system-wide financial conditions. The stress that befell the vulnerable corporate bond market over recent months is now pressuring small and medium sized banks with problematic exposure to short-term “money-market” borrowings. There were also further indications this week of “shadow banking” vulnerability.
I’ve never felt comfortable that Chinese authorities appreciate the types of risks that have been mounting beneath the surface of their massively expanding Credit system. Global markets seemed attentive a year ago, but concerns have since been swept away by the notion of the all-powerful “China put” conjoining with the steadfast “Fed put.” These types of market perceptions create tremendous inherent fragility.
And thanks for checking out our third of four short videos, Tactical Short Episode III, “Our Investment Process" at https://vimeo.com/209211415
For the Week:
The S&P500 declined 1.4% (up 4.7% y-t-d), and the Dow fell 1.5% (up 4.2%). The Utilities gained 1.3% (up 6.4%). The Banks were slammed 4.7% (down 1.0%), and the Broker/Dealers were whacked 4.3% (up 3.1%). The Transports dropped 2.4% (down 1.3%). The S&P 400 Midcaps fell 2.1% (up 2.0%), and the small cap Russell 2000 sank 2.7% (down 0.2%). The Nasdaq100 dipped 0.8% (up 10.3%), and the Morgan Stanley High Tech index declined 0.8% (up 12.1%). The Semiconductors were unchanged (up 10.8%). The Biotechs fell 1.7% (up 14.1%). With bullion up $14, the HUI gold index jumped 1.9% (up 9.3%).
Three-month Treasury bill rates ended the week at 75 bps. Two-year government yields declined six bps to 1.26% (up 7bps y-t-d). Five-year T-note yields fell seven bps to 1.95% (up 2bps). Ten-year Treasury yields dropped nine bps to 2.41% (down 3bps). Long bond yields fell 10 bps to 3.01% (down 5bps).
Greek 10-year yields were little changed at 7.31% (up 29bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 4.13% (up 39bps). Italian 10-year yields fell 13 bps to 2.22% (up 41bps). Spain's 10-year yields sank 19 bps to 1.69% (up 31bps). German bund yields slipped three bps to 0.40% (up 20bps). French yields dropped 12 bps to 0.99% (up 31bps). The French to German 10-year bond spread narrowed nine to 59 bps. U.K. 10-year gilt yields declined five bps to 1.20% (down 4bps). U.K.'s FTSE equities index fell 1.2% (up 2.7%).
Japan's Nikkei 225 equities index declined 1.3% (up 0.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.065% (up 3bps). The German DAX equities index dipped 0.3% (up 5.1%). Spain's IBEX 35 equities index added 0.6% (up 10.2%). Italy's FTSE MIB index increased 0.6% (up 5.0%). EM equities were mixed. Brazil's Bovespa index declined 0.6% (up 6.0%). Mexico's Bolsa gained 1.0% (up 7.5%). South Korea's Kospi added 0.2% (up 7.0%). India’s Sensex equities index declined 0.8% (up 10.5%). China’s Shanghai Exchange rose 1.0% (up 5.3%). Turkey's Borsa Istanbul National 100 index was little changed (up 15.7%). Russia's MICEX equities index was about unchanged (down 8.6%).
Junk bond mutual funds saw inflows of $736 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell seven bps to 4.23% (up 52bps y-o-y). Fifteen-year rates declined six bps to 3.44% (up 48bps). The five-year hybrid ARM rate slipped four bps to 3.24% (up 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 21 bps to 4.22% (up 41bps).
Federal Reserve Credit last week expanded $7.7bn to $4.436 TN. Over the past year, Fed Credit fell $14.5bn (down 0.3%). Fed Credit inflated $1.625 TN, or 58%, over the past 228 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $14.0bn last week to $3.212 TN. "Custody holdings" were down $44.4bn y-o-y, or 1.4%.
M2 (narrow) "money" supply last week surged $55.5bn to a record $13.403 TN. "Narrow money" expanded $869bn, or 6.9%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits jumped $70.4bn, while Savings Deposits fell $19.9bn. Small Time Deposits were little changed. Retail Money Funds gained $3.0bn.
Total money market fund assets dropped $23.3bn to $2.654 TN. Money Funds fell $98bn y-o-y (3.6%).
Total Commercial Paper added $3.6bn to $965.7bn. CP declined $124bn y-o-y, or 11.4%.
Currency Watch:
The U.S. dollar index declined 0.7% to 99.63 (down 2.7% y-t-d). For the week on the upside, the South African rand increased 2.4%, the Mexican peso 1.7%, the Japanese yen 1.2%, the South Korean won 0.8%, the Swiss franc 0.7%, the British pound 0.6%, the euro 0.6%, the Swedish krona 0.3%, the Singapore dollar 0.2% and the New Zealand dollar 0.2%. For the week on the downside, the Australian dollar declined 1.1%, the Brazilian real 0.6%, the Canadian dollar 0.2% and the Norwegian krone 0.2%. The Chinese yuan gained 0.29% versus the dollar this week (up 0.89% y-t-d).
And thanks for checking out our third of four short videos, Tactical Short Episode III, “Our Investment Process" at https://vimeo.com/209211415
For the Week:
The S&P500 declined 1.4% (up 4.7% y-t-d), and the Dow fell 1.5% (up 4.2%). The Utilities gained 1.3% (up 6.4%). The Banks were slammed 4.7% (down 1.0%), and the Broker/Dealers were whacked 4.3% (up 3.1%). The Transports dropped 2.4% (down 1.3%). The S&P 400 Midcaps fell 2.1% (up 2.0%), and the small cap Russell 2000 sank 2.7% (down 0.2%). The Nasdaq100 dipped 0.8% (up 10.3%), and the Morgan Stanley High Tech index declined 0.8% (up 12.1%). The Semiconductors were unchanged (up 10.8%). The Biotechs fell 1.7% (up 14.1%). With bullion up $14, the HUI gold index jumped 1.9% (up 9.3%).
Three-month Treasury bill rates ended the week at 75 bps. Two-year government yields declined six bps to 1.26% (up 7bps y-t-d). Five-year T-note yields fell seven bps to 1.95% (up 2bps). Ten-year Treasury yields dropped nine bps to 2.41% (down 3bps). Long bond yields fell 10 bps to 3.01% (down 5bps).
Greek 10-year yields were little changed at 7.31% (up 29bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 4.13% (up 39bps). Italian 10-year yields fell 13 bps to 2.22% (up 41bps). Spain's 10-year yields sank 19 bps to 1.69% (up 31bps). German bund yields slipped three bps to 0.40% (up 20bps). French yields dropped 12 bps to 0.99% (up 31bps). The French to German 10-year bond spread narrowed nine to 59 bps. U.K. 10-year gilt yields declined five bps to 1.20% (down 4bps). U.K.'s FTSE equities index fell 1.2% (up 2.7%).
Japan's Nikkei 225 equities index declined 1.3% (up 0.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.065% (up 3bps). The German DAX equities index dipped 0.3% (up 5.1%). Spain's IBEX 35 equities index added 0.6% (up 10.2%). Italy's FTSE MIB index increased 0.6% (up 5.0%). EM equities were mixed. Brazil's Bovespa index declined 0.6% (up 6.0%). Mexico's Bolsa gained 1.0% (up 7.5%). South Korea's Kospi added 0.2% (up 7.0%). India’s Sensex equities index declined 0.8% (up 10.5%). China’s Shanghai Exchange rose 1.0% (up 5.3%). Turkey's Borsa Istanbul National 100 index was little changed (up 15.7%). Russia's MICEX equities index was about unchanged (down 8.6%).
Junk bond mutual funds saw inflows of $736 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell seven bps to 4.23% (up 52bps y-o-y). Fifteen-year rates declined six bps to 3.44% (up 48bps). The five-year hybrid ARM rate slipped four bps to 3.24% (up 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 21 bps to 4.22% (up 41bps).
Federal Reserve Credit last week expanded $7.7bn to $4.436 TN. Over the past year, Fed Credit fell $14.5bn (down 0.3%). Fed Credit inflated $1.625 TN, or 58%, over the past 228 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $14.0bn last week to $3.212 TN. "Custody holdings" were down $44.4bn y-o-y, or 1.4%.
M2 (narrow) "money" supply last week surged $55.5bn to a record $13.403 TN. "Narrow money" expanded $869bn, or 6.9%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits jumped $70.4bn, while Savings Deposits fell $19.9bn. Small Time Deposits were little changed. Retail Money Funds gained $3.0bn.
Total money market fund assets dropped $23.3bn to $2.654 TN. Money Funds fell $98bn y-o-y (3.6%).
Total Commercial Paper added $3.6bn to $965.7bn. CP declined $124bn y-o-y, or 11.4%.
Currency Watch:
The U.S. dollar index declined 0.7% to 99.63 (down 2.7% y-t-d). For the week on the upside, the South African rand increased 2.4%, the Mexican peso 1.7%, the Japanese yen 1.2%, the South Korean won 0.8%, the Swiss franc 0.7%, the British pound 0.6%, the euro 0.6%, the Swedish krona 0.3%, the Singapore dollar 0.2% and the New Zealand dollar 0.2%. For the week on the downside, the Australian dollar declined 1.1%, the Brazilian real 0.6%, the Canadian dollar 0.2% and the Norwegian krone 0.2%. The Chinese yuan gained 0.29% versus the dollar this week (up 0.89% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index fell 1.3% (down 5.1% y-t-d). Spot Gold gained 1.2% to $1,243 (up 7.9%). Silver jumped 2.1% to $17.78 (up 11.2%). Crude lost 81 cents to $47.97 (down 11%). Gasoline increased 0.4% (down 4%), and Natural Gas jumped 4.3% (down 18%). Copper fell 2.2% (up 5%). Wheat dropped 2.6% (up 4%). Corn sank 3.1% (up 1%).
Trump Administration Watch:
March 24 – Bloomberg (Billy House and Steven T. Dennis): “House Republicans abandoned their efforts to repeal and partially replace Obamacare after President Donald Trump and Speaker Paul Ryan couldn’t wrangle enough votes, raising doubts about their ability to deliver on the rest of their agenda. Trump and Ryan together own the defeat of this health-care bill. Both had pledged to deliver on a seven-year GOP promise to undo the Affordable Care Act… ‘I will not sugarcoat this: This is a disappointing day for us,’ Ryan told reporters… ‘But it is not the end of the story.’ Neither Ryan nor Trump could ultimately win over rebellious party conservatives or moderates unnerved about the bill’s potential effects.”
March 19 – New York Times (Landon Thomas Jr.): “For nearly 20 years, Adam Lerrick, a conservative economist, has been a vocal scold of global organizations like the International Monetary Fund, arguing that such institutions burn through taxpayer money and foster an insular culture of elitism, bailouts and scant accountability. Now, Mr. Lerrick, a former investment banker and a visiting scholar at the right-leaning American Enterprise Institute, is set to get a chance to turn philosophy into policy, after the announcement last week that President Trump intended to nominate him as deputy under secretary of the Treasury for international finance. The selection of Mr. Lerrick, who is well known in global financial circles for his evangelical opposition to bailouts for banks, countries and investors, underscores how Mr. Trump’s economic team is turning to critics of global economic policy as it seeks to reverse decades of Washington consensus.”
March 20 – New York Times (Keith Bradsher): “A Jeep Wrangler can cost $30,000 more in China than in the United States — and the reasons illustrate a growing point of tension between the two countries. Manufactured in Toledo, Ohio, the Wrangler is a descendant of the jeeps that were used by American forces in World War II. Equipped with a 3.6-liter engine and a five-speed automatic transmission, the Rubicon edition of the Wrangler has a suggested retail price of $40,530 in the United States. But in China, the same vehicle would set a buyer back by a hefty $71,000, mostly because of taxes that Beijing charges on every car, minivan and sport utility vehicle that is made in another country and brought to China’s shores. Those taxes on imported cars have become a growing area of friction between the United States and China.”
March 19 – CNBC (Nyshka Chandran): “The White House is planning to confront Beijing over perceived injustices in its automobile industry, Axios News reported… President Donald Trump's team, including chief strategist Steve Bannon and National Trade Council director Peter Navarro, finds Chinese policy on U.S. car imports ‘unacceptable’ and are currently working on a negotiation strategy, Axios said.”
March 21 – Reuters (Amanda Becker): “An overhaul of Fannie Mae and Freddie Mac is highly unlikely to make it into this year's legislative calendar, Congressional staffers say, possibly shifting the new administration's immediate focus to allowing the mortgage financing institutions' to rebuild depleted capital… Congressional staffers say the Senate Banking Committee has begun weekly bipartisan staff briefings on Freddie and Fannie reforms, but it is starting from scratch. The House Financial Services Committee is focused on other legislation, such as renewing the flood insurance program and rolling back parts of the Dodd-Frank financial reform, pushing the mortgage giants' revamp down the to-do list, they say.”
March 19 – CNBC (Andreas Rinke): “German Defense Minister Ursula von der Leyen… rejected U.S. President Donald Trump's claim that Germany owes NATO and the United States ‘vast sums’ of money for defense. ‘There is no debt account at NATO,’ von der Leyen said…, adding that it was wrong to link the alliance's target for members to spend 2% of their economic output on defense by 2024 solely to NATO.”
China Bubble Watch:
March 22 – Wall Street Journal (Lingling Wei): “China’s central bank faces an increasingly tough balancing act, trying to contain asset bubbles and steady the yuan without triggering a cash crunch and stifling growth. The People’s Bank of China has tightened hold on credit in recent weeks, part of government efforts to rein in financial risks. The shift has pushed up short-term borrowing costs; this week the closely watched three-month interest rates at which banks lend to each other reached levels not seen in nearly two years. ‘The rising rates have made it much more expensive for small banks to borrow,’ said one trader. ‘There were people begging for liquidity.’ On Monday, some small, rural banks failed to make good on short-term funds borrowed from other lenders…”
March 21 – Bloomberg: “China’s central bank injected hundreds of billions of yuan into the financial system after some smaller lenders failed to make debt payments in the interbank market, according to people familiar with the matter. Tuesday’s injections followed missed interbank payments on Monday, the people said… The institutions that missed payments included rural commercial banks… One said a borrower failed to repay an overnight repo of less than 50 million yuan ($7.3 million). China’s smaller lenders faced tighter liquidity this week as benchmark money market rates climbed to the highest level since April 2015…”
March 21 – Bloomberg: “China’s plan to tighten rules governing the use of corporate notes as collateral for short-term loans is fueling concern that yield hunters may face losses. China Securities Depository and Clearing Corp., which oversees notes in the nation’s smaller exchange-traded market, plans to allow financial institutions to use only AAA rated company securities as collateral for short-term loans, people familiar with the matter said… The plan will make bonds rated below that level less liquid, likely driving up yield premiums, according to analysts at Guotai Junan Securities Co. and SWS Research Co.”
March 22 – Financial Times (Yuan Yang and Jennifer Hughes): “When Li Keqiang, China’s premier, told the National People’s Congress this month that the government was worried about ‘high leverage in non-financial Chinese firms’, finance directors of the country’s property developers must have winced. Balanced between their reliance on ballooning debt markets, which Beijing wants to bring under control, and a housing boom that authorities want to cool, developers have defied predictions of collapse for years… ‘China’s more heavily indebted developers are living on a knife’s edge,’ says Andrew Collier, managing director of Orient Capital Research… Real estate developers are facing a funding squeeze just as they are entering their first downturn in three years. House prices rose 40% in big cities last year but have stalled in 2017.”
March 20 – Financial Times (Gabriel Wildau): “Big Chinese cities have launched a new round of lending curbs and purchase restrictions in an effort to cool overheated property markets, as official media warn that some have veered towards a bubble. Sky-high prices in cities including Beijing, Shanghai and Shenzhen are stoking anger, even among relatively well-off professionals. Meanwhile, controlling financial risk has emerged as the dominant economic policy theme for 2017. At the conclusion of the annual session of China’s rubber-stamp parliament last week, the government pledged to ‘contain excessive home price rises in hot markets’.”
March 20 – Wall Street Journal (Ian Talley): “Investment by Chinese state-owned companies is resurgent, surpassing private investment growth as Beijing tries to fuel its slowing economy. But by backing investment by state firms, China’s government risks a financial reckoning that could injure world’s second-largest economy and is giving the Trump administration another reason to pressure Beijing on its economic policies. Investment growth by state-owned companies surged to nearly 25% last year, eclipsing the roughly 3% growth recorded by the private sector.”
Global Bubble Watch:
March 19 – Wall Street Journal (Ian Talley, Tom Fairless and Andrea Thomas): “World finance chiefs struggled during a weekend of tense talks to find common ground on boosting trade in a global economy that is finally showing faint signs of momentum. U.S. Treasury Secretary Steven Mnuchin, rejecting a concerted effort by rivals here, got finance officials to drop a disavowal of protectionism from a closely watched policy statement issued by the Group of 20… For Washington, the watered-down language that emerged in their communiqué ensures the U.S. can still use sanctions or other policy tools to punish trade partners and thwart economic policies the Trump administration believes to be unfair.”
March 20 – Bloomberg (Michael Heath): “Australia’s central bank highlighted threats in the property market and an acceleration of domestic household debt even as it lent credence to the global reflation story. ‘Data continued to suggest that there had been a build-up of risks associated with the housing market,’ the Reserve Bank of Australia said in minutes… ‘Growth in household debt had been faster than that in household income.’ The RBA’s warning comes as the economic divide in Australia sharpens with house prices more than doubling in Sydney since 2009 and Melbourne’s similarly surging as investors tap cheap money. Meanwhile in the west, the heart of an unwinding mining-investment boom, property prices are falling…”
Fixed Income Bubble Watch:
March 20 – Financial Times (Joe Rennison, Eric Platt and Nicole Bullock): “Investors are preparing for renewed turmoil in the high-flying US equity market as key measures of volatility across asset classes have eased in the wake of this month’s Federal Reserve meeting. Against the backdrop of slumbering implied volatility for equities, commodities, bonds and currencies, some investors have sought insurance against the risk of an unexpected stock market shock. That has propelled the CBOE’s Skew index, which reflects market tail risk, or the chance of a dramatic slump in the S&P 500, to its highest level since the UK voted to leave the EU in June.”
March 20 – Bloomberg (Sid Verma): “U.S. equity and debt markets have ridden a reflationary wave this year, thanks to optimism over the momentum of the U.S. economy. However, some key gauges for growth sit awkwardly with this narrative. Nominal yields on five-year Treasuries are negative when adjusted for the price outlook. And on Treasury Inflation Protected Securities five years forward, a metric the Federal Reserve uses to gauge long-term inflation expectations, the rate projected for 2022 is falling. Real rates, which have generally moved in lockstep with real gross domestic product, are some two percentage points below what’s implied by the momentum of the U.S. economy, an unsustainable divergence, according to Deutsche Bank AG. ‘We see real rates as extremely misvalued if not in a bubble,’ Deutsche Bank analysts, led by Chief Global Strategist Binky Chadha, wrote…”
March 20 – Bloomberg (Chris Bryant and Andrea Felsted): “Companies have been on a borrowing binge, but you wouldn’t always know the full scale of their liabilities by looking at the balance sheet. This makes it hard for investors to compare businesses that fund their activities in different ways. Happily though, that's about to change. How come? The answer is buried in the notes to financial statements... It’s here that companies have parked about $3 trillion in operating lease obligations… For non-financial companies, those obligations equate to more than one quarter of their long-term (on-balance sheet) debt. Operating leases are actually pretty similar to debt. They represent money companies will be obliged to cough up in future to rent things like planes, ships and retail floor space.”
Brexit Watch:
March 21 – Reuters (William James, Elizabeth Piper and Gabriela Baczynska): “Prime Minister Theresa May will trigger Britain’s divorce proceedings with the European Union on March 29, launching two years of negotiations that will reshape the future of the country and Europe. May's government said her permanent envoy to the EU had informed European Council President Donald Tusk of the date when Britain intends to invoke Article 50 of its Lisbon Treaty - the mechanism for starting its exit after a referendum last June in which Britons voted by a 52-48% margin to leave the bloc.”
Europe Watch:
March 20 – Reuters (Andreas Framke): “Money created by the European Central Bank to shore up euro zone growth and inflation is piling up in Germany as investors are reluctant to venture outside the bloc's strongest economy, Bundesbank data showed… A large amount of the money printed by the ECB to buy bonds is landing in German bank accounts, often held by foreign investors, and staying there. This is pushing up the Bundesbank's net credit with the ECB's Target 2 system for settling cross-border payments in the euro zone, which rose to a record high of 814 billion euros in February. In the same month, Italy's Target 2 liabilities hit an all-time high of 386.1 billion euros, which the Bank of Italy blamed on factors including Italians investing their savings abroad and the ECB's bond purchases.”
March 20 – Bloomberg (Alessandro Speciale): “European Central Bank Governing Council member Ignazio Visco said the central bank could step away from its commitment to keep interest rates low for a long time after quantitative easing stops. While the ECB’s current guidance foresees that borrowing costs will stay at current or lower levels ‘for an extended period’ and won’t rise until ‘well past’ the end of bond-buying, the Bank of Italy governor said this period ‘could’ be shortened.”
March 21 – Reuters (Crispian Balmer): “Italy's anti-establishment 5-Star Movement, benefiting from a split in the ruling Democratic Party (PD) and divisions in the center-right, has built a strong lead over its rivals, an opinion poll showed… The Ipsos poll… put the 5-Star, which wants a referendum on Italy's membership of the euro, on 32.3% - its highest ever reading and 5.5 points ahead of the PD, which was on 26.8%. The survey suggests that the 5-Star is likely to emerge as the largest group in national elections due by early 2018…”
Federal Reserve Watch:
March 19 – CNBC (Javier E. David): “It’s often said that good things come to those who wait — but a bloated $4.5 trillion balance sheet might be a notable exception to that rule. With the Federal Reserve facing a Herculean conundrum in unwinding its crisis-era monetary policy — and a likely leadership transition on the horizon — Goldman Sachs suggested on Saturday the central bank could move early to reduce the vast sums of government and mortgage-backed securities (MBS) it holds on its books. In a research note to clients, the bank pointed to the likelihood that President Donald Trump may ‘reshape the leadership’ of the Federal Open Market Committee (FOMC)… as the terms of Fed Chair Janet Yellen and Vice Chair Stanley Fischer expire in early 2018. ‘This could be important for balance sheet policy because many Republican-leaning economists have criticized quantitative easing (QE) and have expressed a preference for rapid balance sheet rundown, perhaps even through asset sales,’ wrote Daan Struyven, a Goldman economist.”
March 20 – Bloomberg (Liz McCormick, Matt Scully, and Edward Bolingbroke): “As far as bond buyers go, the Federal Reserve is pretty laid-back. Even as the central bank amassed trillions of dollars of debt to prop up the economy following the financial crisis, it didn’t hedge its holdings or worry about gains and losses that might keep ordinary investors up at night. This extreme buy-and-hold stance has had an incredible calming effect on the bond market. Volatility has plummeted to lows rarely seen in recent memory. But all that is now poised to change. With interest rates on the rise, analysts say the Fed could start shrinking its unprecedented $1.75 trillion position in mortgage-backed securities by year-end. That’s likely to leave more in the hands in private investors and result in increased hedging activity, a practice that has historically exacerbated swings in the Treasury market.”
March 21 – Reuters (Jonathan Spicer): “The run-up in U.S. real estate prices could potentially amplify any future economic downturn, a Federal Reserve official said…, urging regulators globally to consider tools beyond interest rates that could help cool the sector. A sharp downturn in U.S. residential and commercial property prices in 2007 and 2008 rocked banks that were highly leveraged in the sector, sparking the global financial crisis and deep recession. With the economic recovery now well under way, bank holdings of commercial and apartment mortgages rose 9% and 12%, respectively, in the past year. Eric Rosengren, president of the Boston Fed and an influential financial regulator at the U.S. central bank, said the ‘sharp’ rise in apartment prices in particular may signal financial instabilities that interest rates, which are only gradually rising, may not be able to contain.”
March 21 – Bloomberg (Oliver Renick): “Federal Reserve Bank of Cleveland President Loretta Mester called for the U.S. central bank to continue with gradual interest-rate increases and begin shrinking its $4.5 trillion balance sheet this year if the economy continues to improve. ‘If economic conditions evolve as I anticipate, I would be comfortable changing our reinvestment policy this year,’ Mester said… ‘Ending reinvestments is a first step toward reducing the size of the balance sheet and returning its composition to primarily Treasury securities over time.”
U.S. Bubble Watch:
March 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit unexpectedly fell in the fourth quarter, hitting its lowest level in more than a year, as an increase in the primary income surplus offset a soybean-driven drop in exports. The Commerce Department said… the current account deficit, which measures the flow of goods, services and investments into and out of the country, fell 3.1% to $112.4 billion, the lowest since the second quarter of 2015… The fourth-quarter current account deficit represented 2.4% of gross domestic product… For all of 2016 the current account deficit totaled $481.2 billion, a 3.9% increase from 2015. That represented 2.6% of GDP, unchanged from 2015.”
March 21 – Wall Street Journal (Anjani Trivedi): “The U.S. car-financing market is flashing worrying signals. And the big Japanese car makers will take the first hits. Car-lease volumes in the U.S. have risen rapidly over the past two years for Japan’s big three car makers. Toyota Motor, Honda Motor and Nissan Motor have been among the most aggressive this cycle, with close to 30% of sales coming from lease transactions for all three, according to Jefferies. For Ford Credit, for instance, the rate is rising but still at 22%. The problem so far isn’t with customers defaulting on leases but with the recovery value the finance companies get when they sell the vehicles after the lease term.”
March 19 – Financial Times (Adam Samson and Nicole Bullock): “The US corporate profit outlook has dimmed in recent weeks, with analysts paring back their forecasts, in a fresh sign of the risks facing the Wall Street rally that has powered equities to record peaks. Earnings for companies listed on the S&P 500 index, the main US stock barometer, are predicted to rise 9% in the first quarter, FactSet data show. While the rate marks a significant uptick from the 4.9% notched in the final three months of 2016, it represents a reduction from the 12.3% expected at the start of this year. The weaker estimates come at a time when stocks are trading near record highs.”
March 18 – Financial Times (Chris Flood): “Exchange traded funds have attracted the biggest inflow of money in the first two months of the year on record, heightening concerns that ETF buying is fuelling an unsustainable price bubble in the US stock market. Investors across the world ploughed $131bn into these index-tracking funds in the first two months of 2017, according to ETFGI… This follows a record-breaking year in 2016, when ETF managers gathered more than $390bn in new cash.”
March 20 – Bloomberg (Dani Burger): “They call them smart-beta funds, but there are plenty of critics who say they’re anything but smart. What they certainly are is popular: investors have poured more than $430 billion into them over the past decade. The hope is that they deliver the kinds of market-beating returns that pricey hedge funds have long dangled before rich investors, but at index-fund fee levels. The fear is that it’s become yet another way for investors to buy into a bubble.”
March 20 – Wall Street Journal (Theo Francis and Joann S. Lublin): “Pay raises are back in style in the corner office, wiping out cuts from a year earlier and pushing CEO compensation to new highs amid a surging stock market. Median pay for the chief executives of 104 of the biggest American companies rose 6.8% for fiscal 2016 to $11.5 million, on track to set a postrecession record, according to a Wall Street Journal analysis.”
March 21 – Reuters (Ankit Ajmera and Nathan Layne): “Sears Holdings Corp, once the largest U.S. retailer, warned… about its ability to continue as a going concern after years of losses and declining sales. ‘Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern,’ Sears said… The company said an inability to generate additional liquidity might limit its access to new merchandise or its ability to procure services. Continued operating losses also could restrict access to new funds under its domestic credit agreement, according to the filing.”
March 23 – Bloomberg (Gabrielle Coppola and Matt Scully): “Since the auto industry’s near-death experience, sales have come roaring back -- last year, a record 17.55 million vehicles moved off U.S. dealer lots. A secret ingredient? Consumer debt, and plenty of it. But things are starting to look a little trickier, as passenger car sales are dropping, overall vehicle sales have plateaued and the Federal Reserve has started to raise borrowing costs. Add to that rising default rates and faster depreciation of used car values, and there’s new anxiety simmering over the state of the U.S. auto finance market. Is there an auto loan bubble?”
March 23 – Reuters (Nandita Bose and Richa Naidu): “Suppliers to Sears… told Reuters they are doubling down on defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances. The company's disclosure turned the focus to its vendors as tension is expected to mount ahead of the key fourth-quarter selling season amid rising concern about a potential bankruptcy, they said. The storied American retailer, whose roots date back to 1886, said on Tuesday that ‘substantial doubt exists related to the company's ability to continue as a going concern.’”
Japan Watch:
March 21 – Bloomberg (Connor Cislo): “Japan’s exports rose for a third consecutive month in February as strengthening global demand continued to help the nation’s moderate economic recovery. The increase was the biggest in two years, reflecting the timing of Lunar New Year holidays in Asia. Exports rose 11.3% from a year earlier (median estimate 10.1%)…”
Leveraged Speculation Watch:
March 21 – Wall Street Journal (Alexander Osipovich): “The flash boys aren’t as flashy as they used to be. High-speed trading gained notoriety after Michael Lewis’s 2014 book ‘Flash Boys.’ These days, the industry is struggling with another problem: It is having trouble making money. HFT firms use computers to buy and sell stocks, bonds or other financial assets in fractions of a second. The once-lucrative business is now fighting unfavorable market conditions, brutal competition and rising costs. Revenues at HFT firms from U.S. equities trading were an estimated $1.1 billion last year, down from $7.2 billion in 2009…”
Geopolitical Watch:
March 20 – Reuters (Kevin Yao): “China's government has been seeking advice from its think-tanks and policy advisers on how to counter potential trade penalties from U.S. President Donald Trump, getting ready for the worst… The policy advisers believe the Trump administration is most likely to impose higher tariffs on targeted sectors where China has a big surplus with the United States, such as steel and furniture, or on state-owned firms. China could respond with actions such as finding alternative suppliers of agriculture products or machinery and manufactured goods, while cutting its exports of consumer staples such as mobile phones or laptops, they said.”
The Goldman Sachs Commodities Index fell 1.3% (down 5.1% y-t-d). Spot Gold gained 1.2% to $1,243 (up 7.9%). Silver jumped 2.1% to $17.78 (up 11.2%). Crude lost 81 cents to $47.97 (down 11%). Gasoline increased 0.4% (down 4%), and Natural Gas jumped 4.3% (down 18%). Copper fell 2.2% (up 5%). Wheat dropped 2.6% (up 4%). Corn sank 3.1% (up 1%).
Trump Administration Watch:
March 24 – Bloomberg (Billy House and Steven T. Dennis): “House Republicans abandoned their efforts to repeal and partially replace Obamacare after President Donald Trump and Speaker Paul Ryan couldn’t wrangle enough votes, raising doubts about their ability to deliver on the rest of their agenda. Trump and Ryan together own the defeat of this health-care bill. Both had pledged to deliver on a seven-year GOP promise to undo the Affordable Care Act… ‘I will not sugarcoat this: This is a disappointing day for us,’ Ryan told reporters… ‘But it is not the end of the story.’ Neither Ryan nor Trump could ultimately win over rebellious party conservatives or moderates unnerved about the bill’s potential effects.”
March 19 – New York Times (Landon Thomas Jr.): “For nearly 20 years, Adam Lerrick, a conservative economist, has been a vocal scold of global organizations like the International Monetary Fund, arguing that such institutions burn through taxpayer money and foster an insular culture of elitism, bailouts and scant accountability. Now, Mr. Lerrick, a former investment banker and a visiting scholar at the right-leaning American Enterprise Institute, is set to get a chance to turn philosophy into policy, after the announcement last week that President Trump intended to nominate him as deputy under secretary of the Treasury for international finance. The selection of Mr. Lerrick, who is well known in global financial circles for his evangelical opposition to bailouts for banks, countries and investors, underscores how Mr. Trump’s economic team is turning to critics of global economic policy as it seeks to reverse decades of Washington consensus.”
March 20 – New York Times (Keith Bradsher): “A Jeep Wrangler can cost $30,000 more in China than in the United States — and the reasons illustrate a growing point of tension between the two countries. Manufactured in Toledo, Ohio, the Wrangler is a descendant of the jeeps that were used by American forces in World War II. Equipped with a 3.6-liter engine and a five-speed automatic transmission, the Rubicon edition of the Wrangler has a suggested retail price of $40,530 in the United States. But in China, the same vehicle would set a buyer back by a hefty $71,000, mostly because of taxes that Beijing charges on every car, minivan and sport utility vehicle that is made in another country and brought to China’s shores. Those taxes on imported cars have become a growing area of friction between the United States and China.”
March 19 – CNBC (Nyshka Chandran): “The White House is planning to confront Beijing over perceived injustices in its automobile industry, Axios News reported… President Donald Trump's team, including chief strategist Steve Bannon and National Trade Council director Peter Navarro, finds Chinese policy on U.S. car imports ‘unacceptable’ and are currently working on a negotiation strategy, Axios said.”
March 21 – Reuters (Amanda Becker): “An overhaul of Fannie Mae and Freddie Mac is highly unlikely to make it into this year's legislative calendar, Congressional staffers say, possibly shifting the new administration's immediate focus to allowing the mortgage financing institutions' to rebuild depleted capital… Congressional staffers say the Senate Banking Committee has begun weekly bipartisan staff briefings on Freddie and Fannie reforms, but it is starting from scratch. The House Financial Services Committee is focused on other legislation, such as renewing the flood insurance program and rolling back parts of the Dodd-Frank financial reform, pushing the mortgage giants' revamp down the to-do list, they say.”
March 19 – CNBC (Andreas Rinke): “German Defense Minister Ursula von der Leyen… rejected U.S. President Donald Trump's claim that Germany owes NATO and the United States ‘vast sums’ of money for defense. ‘There is no debt account at NATO,’ von der Leyen said…, adding that it was wrong to link the alliance's target for members to spend 2% of their economic output on defense by 2024 solely to NATO.”
China Bubble Watch:
March 22 – Wall Street Journal (Lingling Wei): “China’s central bank faces an increasingly tough balancing act, trying to contain asset bubbles and steady the yuan without triggering a cash crunch and stifling growth. The People’s Bank of China has tightened hold on credit in recent weeks, part of government efforts to rein in financial risks. The shift has pushed up short-term borrowing costs; this week the closely watched three-month interest rates at which banks lend to each other reached levels not seen in nearly two years. ‘The rising rates have made it much more expensive for small banks to borrow,’ said one trader. ‘There were people begging for liquidity.’ On Monday, some small, rural banks failed to make good on short-term funds borrowed from other lenders…”
March 21 – Bloomberg: “China’s central bank injected hundreds of billions of yuan into the financial system after some smaller lenders failed to make debt payments in the interbank market, according to people familiar with the matter. Tuesday’s injections followed missed interbank payments on Monday, the people said… The institutions that missed payments included rural commercial banks… One said a borrower failed to repay an overnight repo of less than 50 million yuan ($7.3 million). China’s smaller lenders faced tighter liquidity this week as benchmark money market rates climbed to the highest level since April 2015…”
March 21 – Bloomberg: “China’s plan to tighten rules governing the use of corporate notes as collateral for short-term loans is fueling concern that yield hunters may face losses. China Securities Depository and Clearing Corp., which oversees notes in the nation’s smaller exchange-traded market, plans to allow financial institutions to use only AAA rated company securities as collateral for short-term loans, people familiar with the matter said… The plan will make bonds rated below that level less liquid, likely driving up yield premiums, according to analysts at Guotai Junan Securities Co. and SWS Research Co.”
March 22 – Financial Times (Yuan Yang and Jennifer Hughes): “When Li Keqiang, China’s premier, told the National People’s Congress this month that the government was worried about ‘high leverage in non-financial Chinese firms’, finance directors of the country’s property developers must have winced. Balanced between their reliance on ballooning debt markets, which Beijing wants to bring under control, and a housing boom that authorities want to cool, developers have defied predictions of collapse for years… ‘China’s more heavily indebted developers are living on a knife’s edge,’ says Andrew Collier, managing director of Orient Capital Research… Real estate developers are facing a funding squeeze just as they are entering their first downturn in three years. House prices rose 40% in big cities last year but have stalled in 2017.”
March 20 – Financial Times (Gabriel Wildau): “Big Chinese cities have launched a new round of lending curbs and purchase restrictions in an effort to cool overheated property markets, as official media warn that some have veered towards a bubble. Sky-high prices in cities including Beijing, Shanghai and Shenzhen are stoking anger, even among relatively well-off professionals. Meanwhile, controlling financial risk has emerged as the dominant economic policy theme for 2017. At the conclusion of the annual session of China’s rubber-stamp parliament last week, the government pledged to ‘contain excessive home price rises in hot markets’.”
March 20 – Wall Street Journal (Ian Talley): “Investment by Chinese state-owned companies is resurgent, surpassing private investment growth as Beijing tries to fuel its slowing economy. But by backing investment by state firms, China’s government risks a financial reckoning that could injure world’s second-largest economy and is giving the Trump administration another reason to pressure Beijing on its economic policies. Investment growth by state-owned companies surged to nearly 25% last year, eclipsing the roughly 3% growth recorded by the private sector.”
Global Bubble Watch:
March 19 – Wall Street Journal (Ian Talley, Tom Fairless and Andrea Thomas): “World finance chiefs struggled during a weekend of tense talks to find common ground on boosting trade in a global economy that is finally showing faint signs of momentum. U.S. Treasury Secretary Steven Mnuchin, rejecting a concerted effort by rivals here, got finance officials to drop a disavowal of protectionism from a closely watched policy statement issued by the Group of 20… For Washington, the watered-down language that emerged in their communiqué ensures the U.S. can still use sanctions or other policy tools to punish trade partners and thwart economic policies the Trump administration believes to be unfair.”
March 20 – Bloomberg (Michael Heath): “Australia’s central bank highlighted threats in the property market and an acceleration of domestic household debt even as it lent credence to the global reflation story. ‘Data continued to suggest that there had been a build-up of risks associated with the housing market,’ the Reserve Bank of Australia said in minutes… ‘Growth in household debt had been faster than that in household income.’ The RBA’s warning comes as the economic divide in Australia sharpens with house prices more than doubling in Sydney since 2009 and Melbourne’s similarly surging as investors tap cheap money. Meanwhile in the west, the heart of an unwinding mining-investment boom, property prices are falling…”
Fixed Income Bubble Watch:
March 20 – Financial Times (Joe Rennison, Eric Platt and Nicole Bullock): “Investors are preparing for renewed turmoil in the high-flying US equity market as key measures of volatility across asset classes have eased in the wake of this month’s Federal Reserve meeting. Against the backdrop of slumbering implied volatility for equities, commodities, bonds and currencies, some investors have sought insurance against the risk of an unexpected stock market shock. That has propelled the CBOE’s Skew index, which reflects market tail risk, or the chance of a dramatic slump in the S&P 500, to its highest level since the UK voted to leave the EU in June.”
March 20 – Bloomberg (Sid Verma): “U.S. equity and debt markets have ridden a reflationary wave this year, thanks to optimism over the momentum of the U.S. economy. However, some key gauges for growth sit awkwardly with this narrative. Nominal yields on five-year Treasuries are negative when adjusted for the price outlook. And on Treasury Inflation Protected Securities five years forward, a metric the Federal Reserve uses to gauge long-term inflation expectations, the rate projected for 2022 is falling. Real rates, which have generally moved in lockstep with real gross domestic product, are some two percentage points below what’s implied by the momentum of the U.S. economy, an unsustainable divergence, according to Deutsche Bank AG. ‘We see real rates as extremely misvalued if not in a bubble,’ Deutsche Bank analysts, led by Chief Global Strategist Binky Chadha, wrote…”
March 20 – Bloomberg (Chris Bryant and Andrea Felsted): “Companies have been on a borrowing binge, but you wouldn’t always know the full scale of their liabilities by looking at the balance sheet. This makes it hard for investors to compare businesses that fund their activities in different ways. Happily though, that's about to change. How come? The answer is buried in the notes to financial statements... It’s here that companies have parked about $3 trillion in operating lease obligations… For non-financial companies, those obligations equate to more than one quarter of their long-term (on-balance sheet) debt. Operating leases are actually pretty similar to debt. They represent money companies will be obliged to cough up in future to rent things like planes, ships and retail floor space.”
Brexit Watch:
March 21 – Reuters (William James, Elizabeth Piper and Gabriela Baczynska): “Prime Minister Theresa May will trigger Britain’s divorce proceedings with the European Union on March 29, launching two years of negotiations that will reshape the future of the country and Europe. May's government said her permanent envoy to the EU had informed European Council President Donald Tusk of the date when Britain intends to invoke Article 50 of its Lisbon Treaty - the mechanism for starting its exit after a referendum last June in which Britons voted by a 52-48% margin to leave the bloc.”
Europe Watch:
March 20 – Reuters (Andreas Framke): “Money created by the European Central Bank to shore up euro zone growth and inflation is piling up in Germany as investors are reluctant to venture outside the bloc's strongest economy, Bundesbank data showed… A large amount of the money printed by the ECB to buy bonds is landing in German bank accounts, often held by foreign investors, and staying there. This is pushing up the Bundesbank's net credit with the ECB's Target 2 system for settling cross-border payments in the euro zone, which rose to a record high of 814 billion euros in February. In the same month, Italy's Target 2 liabilities hit an all-time high of 386.1 billion euros, which the Bank of Italy blamed on factors including Italians investing their savings abroad and the ECB's bond purchases.”
March 20 – Bloomberg (Alessandro Speciale): “European Central Bank Governing Council member Ignazio Visco said the central bank could step away from its commitment to keep interest rates low for a long time after quantitative easing stops. While the ECB’s current guidance foresees that borrowing costs will stay at current or lower levels ‘for an extended period’ and won’t rise until ‘well past’ the end of bond-buying, the Bank of Italy governor said this period ‘could’ be shortened.”
March 21 – Reuters (Crispian Balmer): “Italy's anti-establishment 5-Star Movement, benefiting from a split in the ruling Democratic Party (PD) and divisions in the center-right, has built a strong lead over its rivals, an opinion poll showed… The Ipsos poll… put the 5-Star, which wants a referendum on Italy's membership of the euro, on 32.3% - its highest ever reading and 5.5 points ahead of the PD, which was on 26.8%. The survey suggests that the 5-Star is likely to emerge as the largest group in national elections due by early 2018…”
Federal Reserve Watch:
March 19 – CNBC (Javier E. David): “It’s often said that good things come to those who wait — but a bloated $4.5 trillion balance sheet might be a notable exception to that rule. With the Federal Reserve facing a Herculean conundrum in unwinding its crisis-era monetary policy — and a likely leadership transition on the horizon — Goldman Sachs suggested on Saturday the central bank could move early to reduce the vast sums of government and mortgage-backed securities (MBS) it holds on its books. In a research note to clients, the bank pointed to the likelihood that President Donald Trump may ‘reshape the leadership’ of the Federal Open Market Committee (FOMC)… as the terms of Fed Chair Janet Yellen and Vice Chair Stanley Fischer expire in early 2018. ‘This could be important for balance sheet policy because many Republican-leaning economists have criticized quantitative easing (QE) and have expressed a preference for rapid balance sheet rundown, perhaps even through asset sales,’ wrote Daan Struyven, a Goldman economist.”
March 20 – Bloomberg (Liz McCormick, Matt Scully, and Edward Bolingbroke): “As far as bond buyers go, the Federal Reserve is pretty laid-back. Even as the central bank amassed trillions of dollars of debt to prop up the economy following the financial crisis, it didn’t hedge its holdings or worry about gains and losses that might keep ordinary investors up at night. This extreme buy-and-hold stance has had an incredible calming effect on the bond market. Volatility has plummeted to lows rarely seen in recent memory. But all that is now poised to change. With interest rates on the rise, analysts say the Fed could start shrinking its unprecedented $1.75 trillion position in mortgage-backed securities by year-end. That’s likely to leave more in the hands in private investors and result in increased hedging activity, a practice that has historically exacerbated swings in the Treasury market.”
March 21 – Reuters (Jonathan Spicer): “The run-up in U.S. real estate prices could potentially amplify any future economic downturn, a Federal Reserve official said…, urging regulators globally to consider tools beyond interest rates that could help cool the sector. A sharp downturn in U.S. residential and commercial property prices in 2007 and 2008 rocked banks that were highly leveraged in the sector, sparking the global financial crisis and deep recession. With the economic recovery now well under way, bank holdings of commercial and apartment mortgages rose 9% and 12%, respectively, in the past year. Eric Rosengren, president of the Boston Fed and an influential financial regulator at the U.S. central bank, said the ‘sharp’ rise in apartment prices in particular may signal financial instabilities that interest rates, which are only gradually rising, may not be able to contain.”
March 21 – Bloomberg (Oliver Renick): “Federal Reserve Bank of Cleveland President Loretta Mester called for the U.S. central bank to continue with gradual interest-rate increases and begin shrinking its $4.5 trillion balance sheet this year if the economy continues to improve. ‘If economic conditions evolve as I anticipate, I would be comfortable changing our reinvestment policy this year,’ Mester said… ‘Ending reinvestments is a first step toward reducing the size of the balance sheet and returning its composition to primarily Treasury securities over time.”
U.S. Bubble Watch:
March 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit unexpectedly fell in the fourth quarter, hitting its lowest level in more than a year, as an increase in the primary income surplus offset a soybean-driven drop in exports. The Commerce Department said… the current account deficit, which measures the flow of goods, services and investments into and out of the country, fell 3.1% to $112.4 billion, the lowest since the second quarter of 2015… The fourth-quarter current account deficit represented 2.4% of gross domestic product… For all of 2016 the current account deficit totaled $481.2 billion, a 3.9% increase from 2015. That represented 2.6% of GDP, unchanged from 2015.”
March 21 – Wall Street Journal (Anjani Trivedi): “The U.S. car-financing market is flashing worrying signals. And the big Japanese car makers will take the first hits. Car-lease volumes in the U.S. have risen rapidly over the past two years for Japan’s big three car makers. Toyota Motor, Honda Motor and Nissan Motor have been among the most aggressive this cycle, with close to 30% of sales coming from lease transactions for all three, according to Jefferies. For Ford Credit, for instance, the rate is rising but still at 22%. The problem so far isn’t with customers defaulting on leases but with the recovery value the finance companies get when they sell the vehicles after the lease term.”
March 19 – Financial Times (Adam Samson and Nicole Bullock): “The US corporate profit outlook has dimmed in recent weeks, with analysts paring back their forecasts, in a fresh sign of the risks facing the Wall Street rally that has powered equities to record peaks. Earnings for companies listed on the S&P 500 index, the main US stock barometer, are predicted to rise 9% in the first quarter, FactSet data show. While the rate marks a significant uptick from the 4.9% notched in the final three months of 2016, it represents a reduction from the 12.3% expected at the start of this year. The weaker estimates come at a time when stocks are trading near record highs.”
March 18 – Financial Times (Chris Flood): “Exchange traded funds have attracted the biggest inflow of money in the first two months of the year on record, heightening concerns that ETF buying is fuelling an unsustainable price bubble in the US stock market. Investors across the world ploughed $131bn into these index-tracking funds in the first two months of 2017, according to ETFGI… This follows a record-breaking year in 2016, when ETF managers gathered more than $390bn in new cash.”
March 20 – Bloomberg (Dani Burger): “They call them smart-beta funds, but there are plenty of critics who say they’re anything but smart. What they certainly are is popular: investors have poured more than $430 billion into them over the past decade. The hope is that they deliver the kinds of market-beating returns that pricey hedge funds have long dangled before rich investors, but at index-fund fee levels. The fear is that it’s become yet another way for investors to buy into a bubble.”
March 20 – Wall Street Journal (Theo Francis and Joann S. Lublin): “Pay raises are back in style in the corner office, wiping out cuts from a year earlier and pushing CEO compensation to new highs amid a surging stock market. Median pay for the chief executives of 104 of the biggest American companies rose 6.8% for fiscal 2016 to $11.5 million, on track to set a postrecession record, according to a Wall Street Journal analysis.”
March 21 – Reuters (Ankit Ajmera and Nathan Layne): “Sears Holdings Corp, once the largest U.S. retailer, warned… about its ability to continue as a going concern after years of losses and declining sales. ‘Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern,’ Sears said… The company said an inability to generate additional liquidity might limit its access to new merchandise or its ability to procure services. Continued operating losses also could restrict access to new funds under its domestic credit agreement, according to the filing.”
March 23 – Bloomberg (Gabrielle Coppola and Matt Scully): “Since the auto industry’s near-death experience, sales have come roaring back -- last year, a record 17.55 million vehicles moved off U.S. dealer lots. A secret ingredient? Consumer debt, and plenty of it. But things are starting to look a little trickier, as passenger car sales are dropping, overall vehicle sales have plateaued and the Federal Reserve has started to raise borrowing costs. Add to that rising default rates and faster depreciation of used car values, and there’s new anxiety simmering over the state of the U.S. auto finance market. Is there an auto loan bubble?”
March 23 – Reuters (Nandita Bose and Richa Naidu): “Suppliers to Sears… told Reuters they are doubling down on defensive measures, such as reducing shipments and asking for better payment terms, to protect against the risk of nonpayment as the company warned about its finances. The company's disclosure turned the focus to its vendors as tension is expected to mount ahead of the key fourth-quarter selling season amid rising concern about a potential bankruptcy, they said. The storied American retailer, whose roots date back to 1886, said on Tuesday that ‘substantial doubt exists related to the company's ability to continue as a going concern.’”
Japan Watch:
March 21 – Bloomberg (Connor Cislo): “Japan’s exports rose for a third consecutive month in February as strengthening global demand continued to help the nation’s moderate economic recovery. The increase was the biggest in two years, reflecting the timing of Lunar New Year holidays in Asia. Exports rose 11.3% from a year earlier (median estimate 10.1%)…”
Leveraged Speculation Watch:
March 21 – Wall Street Journal (Alexander Osipovich): “The flash boys aren’t as flashy as they used to be. High-speed trading gained notoriety after Michael Lewis’s 2014 book ‘Flash Boys.’ These days, the industry is struggling with another problem: It is having trouble making money. HFT firms use computers to buy and sell stocks, bonds or other financial assets in fractions of a second. The once-lucrative business is now fighting unfavorable market conditions, brutal competition and rising costs. Revenues at HFT firms from U.S. equities trading were an estimated $1.1 billion last year, down from $7.2 billion in 2009…”
Geopolitical Watch:
March 20 – Reuters (Kevin Yao): “China's government has been seeking advice from its think-tanks and policy advisers on how to counter potential trade penalties from U.S. President Donald Trump, getting ready for the worst… The policy advisers believe the Trump administration is most likely to impose higher tariffs on targeted sectors where China has a big surplus with the United States, such as steel and furniture, or on state-owned firms. China could respond with actions such as finding alternative suppliers of agriculture products or machinery and manufactured goods, while cutting its exports of consumer staples such as mobile phones or laptops, they said.”
Friday Afternoon Links
[Bloomberg] GOP Cancels Health-Care Vote as House GOP Balks at Bill
[Bloomberg] Stocks Fall, Bonds Rise as Health Vote Pulled: Markets Wrap
[Bloomberg] Dollar Drops to Fresh Low on Uncertainty About Health-Care Vote
[Bloomberg] Oil Drops for Week on U.S. Supplies Before OPEC, Allies Meet
[Bloomberg] Stocks Fall, Bonds Rise as Health Vote Pulled: Markets Wrap
[Bloomberg] Dollar Drops to Fresh Low on Uncertainty About Health-Care Vote
[Bloomberg] Oil Drops for Week on U.S. Supplies Before OPEC, Allies Meet
Thursday, March 23, 2017
Friday's News Links
[Bloomberg] U.S. Stocks, Bonds Rise as Health Bill Captivates: Markets Wrap
[Reuters] Risky House healthcare vote to test Trump's negotiating skills
[CNBC] Health Care Vote Showdown: Republicans Look to Go Big or Go Home
[Reuters] U.S. fund investors pull back from 'Trump trade'
[Reuters] Trump preparing orders to review trade deals, procurement: officials
[Reuters] Some Fed policymakers eye shrinking balance sheet this year
[Reuters] All drill, no frack: U.S. shale leaves thousands of wells unfinished
[Reuters] Euro zone economy sparkles, lights way for ECB pull-back
[Reuters] BOJ chief Kuroda says 'no reason' to withdraw stimulus now
[Reuters] China c.bank urges tighter mortgage checks, no fake divorces
[Reuters] Britain to fire starting gun on Brexit talks
[Bloomberg] The Controversial Chinese Economist Uncovering Tough Truths
[WSJ] China Money Market Jittery After PBOC Cash Splash Dries Up
[NYT] Climate Change May Be Intensifying China’s Smog Crisis
[WSJ] Trump Says If Vote on Health-Care Bill Fails, Obamacare Stays
[FT] Shadow bank crackdown prompts China cash crunch
[FT] US stock funds record largest outflows since Brexit vote
[Reuters] Risky House healthcare vote to test Trump's negotiating skills
[CNBC] Health Care Vote Showdown: Republicans Look to Go Big or Go Home
[Reuters] U.S. fund investors pull back from 'Trump trade'
[Reuters] Trump preparing orders to review trade deals, procurement: officials
[Reuters] Some Fed policymakers eye shrinking balance sheet this year
[Reuters] All drill, no frack: U.S. shale leaves thousands of wells unfinished
[Reuters] Euro zone economy sparkles, lights way for ECB pull-back
[Reuters] BOJ chief Kuroda says 'no reason' to withdraw stimulus now
[Reuters] China c.bank urges tighter mortgage checks, no fake divorces
[Reuters] Britain to fire starting gun on Brexit talks
[Bloomberg] The Controversial Chinese Economist Uncovering Tough Truths
[WSJ] China Money Market Jittery After PBOC Cash Splash Dries Up
[NYT] Climate Change May Be Intensifying China’s Smog Crisis
[WSJ] Trump Says If Vote on Health-Care Bill Fails, Obamacare Stays
[FT] Shadow bank crackdown prompts China cash crunch
[FT] US stock funds record largest outflows since Brexit vote
Thursday Evening Links
[Reuters] Trump dealt blow on healthcare plan as House puts off vote
[Bloomberg] U.S. Assets Little Changed Amid Health Vote Delay: Markets Wrap
[CNBC] White House presented Freedom Caucus with 'final offer' on Obamacare replacement
[Reuters] Fed's Williams says three or four rate hikes this year makes sense: WSJ
[Bloomberg] Hedge Fund Eton Park Is Shutting Down After a Decade
[WSJ] GOP Lawmakers Say No Deal Yet on Health Bill
[NYT] Eton Park to Shut Down as $3 Trillion Hedge Fund Industry Faces Turmoil
[FT] Germany’s Schäuble moves away from federalist EU vision
[FT] The ECB risks wrong turnings as it exits emergency measures
[Bloomberg] U.S. Assets Little Changed Amid Health Vote Delay: Markets Wrap
[CNBC] White House presented Freedom Caucus with 'final offer' on Obamacare replacement
[Reuters] Fed's Williams says three or four rate hikes this year makes sense: WSJ
[Bloomberg] Hedge Fund Eton Park Is Shutting Down After a Decade
[WSJ] GOP Lawmakers Say No Deal Yet on Health Bill
[NYT] Eton Park to Shut Down as $3 Trillion Hedge Fund Industry Faces Turmoil
[FT] Germany’s Schäuble moves away from federalist EU vision
[FT] The ECB risks wrong turnings as it exits emergency measures
Wednesday, March 22, 2017
Thursday's News Links
[Bloomberg] Stocks Mixed, Treasuries Gain as Health Vote Looms: Markets Wrap
[Bloomberg] U.S. New-Home Sales Climbed to a Seven-Month High in February
[Bloomberg] Why America's Auto Debt Boom Fuels Bubble Talk: QuickTake Q&A
[Bloomberg] Banks Take $252 Billion Free ECB Cash With QE Exit in Mind
[Bloomberg] Greek Deposits Bleeding Drama Resumes Amid Bailout Uncertainty
[CNBC] Republican Health Care Vote: Everything You Need to Know
[CNBC] Chances of passing Obamacare replacement bill improve amid talk of changes to plan, as House awaits CBO score
[Bloomberg] Abe's Wife Accused of Giving Envelope of Cash in Japan Scandal
[WSJ] Health Vote’s Outcome Carries High Stakes for Trump Presidency
[WSJ] Republican Leaders Weigh Deal to Round Up Health Bill Holdouts
[WSJ] Chinese Banks Sweat as Liquidity Crunch Looms
[Reuters] China says U.S. should respect China's air defense zone
[Bloomberg] U.S. New-Home Sales Climbed to a Seven-Month High in February
[Bloomberg] Why America's Auto Debt Boom Fuels Bubble Talk: QuickTake Q&A
[Bloomberg] Banks Take $252 Billion Free ECB Cash With QE Exit in Mind
[Bloomberg] Greek Deposits Bleeding Drama Resumes Amid Bailout Uncertainty
[CNBC] Republican Health Care Vote: Everything You Need to Know
[CNBC] Chances of passing Obamacare replacement bill improve amid talk of changes to plan, as House awaits CBO score
[Bloomberg] Abe's Wife Accused of Giving Envelope of Cash in Japan Scandal
[WSJ] Health Vote’s Outcome Carries High Stakes for Trump Presidency
[WSJ] Republican Leaders Weigh Deal to Round Up Health Bill Holdouts
[WSJ] Chinese Banks Sweat as Liquidity Crunch Looms
[Reuters] China says U.S. should respect China's air defense zone
Wednesday Evening Links
[Bloomberg] Yen Gains to Weigh on Japan Stocks as Bonds Rise: Markets Wrap
[Bloomberg] U.S. Stocks Rise as Rout Eases; Bonds, Gold Climb: Markets Wrap
[CNBC] Here’s why the GOP is coming up short on votes to repeal Obamacare
[Bloomberg] Reflation Trade Hangs in the Balance as Health Care Vote Looms
[Reuters] Trump Tantrum looms on Wall Street if healthcare effort stalls
[CNBC] A Donald Trump vs. Janet Yellen clash is getting closer to happening
[Bloomberg] China’s Love Affair With Leverage Is Tricky to Break, PBOC Finds
[Reuters] With Sears' future in doubt, vendors begin pulling back
[FT] Debt piles add to risk for China’s property groups
[Bloomberg] U.S. Stocks Rise as Rout Eases; Bonds, Gold Climb: Markets Wrap
[CNBC] Here’s why the GOP is coming up short on votes to repeal Obamacare
[Bloomberg] Reflation Trade Hangs in the Balance as Health Care Vote Looms
[Reuters] Trump Tantrum looms on Wall Street if healthcare effort stalls
[CNBC] A Donald Trump vs. Janet Yellen clash is getting closer to happening
[Bloomberg] China’s Love Affair With Leverage Is Tricky to Break, PBOC Finds
[Reuters] With Sears' future in doubt, vendors begin pulling back
[FT] Debt piles add to risk for China’s property groups
Tuesday, March 21, 2017
Wednesday's News Links
[Bloomberg] Stocks Retreat, Bonds Gain as Trump Trade Wobbles: Markets Wrap
[Bloomberg] Oil Tightens Its Noose Around Currency Market as Rout Deepens
[Reuters] Markets fret as Trump agenda shows signs of cracks
[Reuters] Hot U.S. real estate a potential red flag: Fed's Rosengren
[Reuters] Fannie, Freddie revamp plan unlikely this year, dividends in focus
[Reuters] Sears warns of 'going concern' doubts
[Bloomberg] China Shadow Banks Hit by Record Premium for One-Week Cash
[Bloomberg] China's New Bond Rules Seen Threatening Losses for Yield Hunters
[Bloomberg] Iron Ore Takes a Battering as Bear Market Engulfs China Futures
[Bloomberg] PBOC Said to Inject Funds After Missed Interbank Payments
[Bloomberg] Japanese Exports Jump Most in Two Years, Led by Sales to China
[WSJ] For China’s Central Bank, an Increasingly Difficult Balancing Act
[WSJ] ETF Trading Glitch Fuels Worries Over Modern Markets
[Bloomberg] Oil Tightens Its Noose Around Currency Market as Rout Deepens
[Reuters] Markets fret as Trump agenda shows signs of cracks
[Reuters] Hot U.S. real estate a potential red flag: Fed's Rosengren
[Reuters] Fannie, Freddie revamp plan unlikely this year, dividends in focus
[Reuters] Sears warns of 'going concern' doubts
[Bloomberg] China Shadow Banks Hit by Record Premium for One-Week Cash
[Bloomberg] China's New Bond Rules Seen Threatening Losses for Yield Hunters
[Bloomberg] Iron Ore Takes a Battering as Bear Market Engulfs China Futures
[Bloomberg] PBOC Said to Inject Funds After Missed Interbank Payments
[Bloomberg] Japanese Exports Jump Most in Two Years, Led by Sales to China
[WSJ] For China’s Central Bank, an Increasingly Difficult Balancing Act
[WSJ] ETF Trading Glitch Fuels Worries Over Modern Markets
Tuesday Evening Links
[Bloomberg] Asia Stocks Set to Follow U.S. Selloff; Bonds Gain: Markets Wrap
[Bloomberg] U.S. Stocks Drop Most in 2017, Treasuries Advance: Markets Wrap
[Reuters] Dollar loses more ground; yen up on safe-haven demand
[Bloomberg] Pillar of Trump Rally Fractures as Banks Sink Most Since Brexit
[Reuters] Markets fret as Trump agenda shows signs of cracks
[Bloomberg] Fed's Mester Favors Starting to Shrink Balance Sheet This Year
[Reuters] U.S. bank stocks fall as investor hope wanes for policy boosts
[Bloomberg] Failure to Repeal Obamacare Would Endanger Tax-Cut Goals, Some in GOP Warn
[Bloomberg] Dollar Bulls Are Throwing in the Towel as Trump Wagers Evaporate
[NY Post, Crudele] $20 trillion debt deserves as much attention as Dow hitting 20,000
[Bloomberg] Retailers Stare Into the Darkness, But It Keeps Getting Darker
[Bloomberg] Record Number of Fund Managers Say U.S. Equities Are Overvalued
[FT] Italy is falling out of love with Europe
[Bloomberg] U.S. Stocks Drop Most in 2017, Treasuries Advance: Markets Wrap
[Reuters] Dollar loses more ground; yen up on safe-haven demand
[Bloomberg] Pillar of Trump Rally Fractures as Banks Sink Most Since Brexit
[Reuters] Markets fret as Trump agenda shows signs of cracks
[Bloomberg] Fed's Mester Favors Starting to Shrink Balance Sheet This Year
[Reuters] U.S. bank stocks fall as investor hope wanes for policy boosts
[Bloomberg] Failure to Repeal Obamacare Would Endanger Tax-Cut Goals, Some in GOP Warn
[Bloomberg] Dollar Bulls Are Throwing in the Towel as Trump Wagers Evaporate
[NY Post, Crudele] $20 trillion debt deserves as much attention as Dow hitting 20,000
[Bloomberg] Retailers Stare Into the Darkness, But It Keeps Getting Darker
[Bloomberg] Record Number of Fund Managers Say U.S. Equities Are Overvalued
[FT] Italy is falling out of love with Europe
Monday, March 20, 2017
Tuesday's News Links
[Bloomberg] U.S. Stocks, Dollar Slump as Reflation Trade Fades: Markets Wrap
[Reuters] U.S. current account shrinks in fourth quarter
[Bloomberg] Emerging Markets Are on a Tear
[Bloomberg] RBA Warns Over Aussie Housing Risks as Global Reflation Emerges
[Reuters] Tillerson no-show at NATO renews European disquiet about Trump
[Reuters] Exclusive: Trump administration weighing broad sanctions on North Korea - U.S. official
[Bloomberg] Macron on Top After First Presidential Debate of French Race
[Reuters] Italy's 5-Star builds strong lead over Renzi's PD in polls
[WSJ] High-Frequency Traders Fall on Hard Times
[WSJ] Used-Car Prices Put Auto Finance in a Pickle
[FT] China steps up battle against property bubble
[FT] Rise in new form of ‘portfolio insurance’ sparks fears
[FT] Placid markets mask investor fear that equity turmoil looms
[WSJ] With the World’s Most Billionaires, China Has Its Own Populism Problem
[WSJ] Beijing Revs Up State Inc.
[Reuters] U.S. current account shrinks in fourth quarter
[Bloomberg] Emerging Markets Are on a Tear
[Bloomberg] RBA Warns Over Aussie Housing Risks as Global Reflation Emerges
[Reuters] Tillerson no-show at NATO renews European disquiet about Trump
[Reuters] Exclusive: Trump administration weighing broad sanctions on North Korea - U.S. official
[Bloomberg] Macron on Top After First Presidential Debate of French Race
[Reuters] Italy's 5-Star builds strong lead over Renzi's PD in polls
[WSJ] High-Frequency Traders Fall on Hard Times
[WSJ] Used-Car Prices Put Auto Finance in a Pickle
[FT] China steps up battle against property bubble
[FT] Rise in new form of ‘portfolio insurance’ sparks fears
[FT] Placid markets mask investor fear that equity turmoil looms
[WSJ] With the World’s Most Billionaires, China Has Its Own Populism Problem
[WSJ] Beijing Revs Up State Inc.
Monday Evening Links
[Bloomberg] U.S. Stocks Retreat, Bonds Rise as Dollar Slips: Markets Wrap
[Bloomberg] Interest Rates After Inflation May Be a Real Bubble
[Bloomberg] Kashkari Emerges as Opposing Voice as Fed Shows Optimism
[Bloomberg] The Four Biggest U.S. Banks Top $1 Trillion
[Bloomberg] Why Not Everyone Thinks Smart Beta's a Smart Idea: QuickTake Q&A
[WSJ] The Fed Is Stuck in the Past With Its Forecasts of the Future
[NYT] China’s Taxes on Imported Cars Feed Trade Tensions With U.S.
[Bloomberg] Interest Rates After Inflation May Be a Real Bubble
[Bloomberg] Kashkari Emerges as Opposing Voice as Fed Shows Optimism
[Bloomberg] The Four Biggest U.S. Banks Top $1 Trillion
[Bloomberg] Why Not Everyone Thinks Smart Beta's a Smart Idea: QuickTake Q&A
[WSJ] The Fed Is Stuck in the Past With Its Forecasts of the Future
[NYT] China’s Taxes on Imported Cars Feed Trade Tensions With U.S.
Sunday, March 19, 2017
Monday's News Links
[Bloomberg] U.S. Stocks Fluctuate, Bonds Rise as Dollar Slips: Markets Wrap
[Bloomberg] Dollar Hits Fresh Four-Month Low as Traders Follow Recent Trends
[Reuters] UK PM May to trigger Brexit on March 29: spokesman
[Bloomberg] First Skirmish of G-20 Sets Scene for Battle of Trade Ideas
[Bloomberg] Bond Market Calm Is Threatened by Fed's $1.75 Trillion MBS Shift
[Bloomberg] Say Hello to $3 Trillion in Forgotten Debt
[Bloomberg] Yellen's Shadow Looms Large Over China Central Bank Policy
[Bloomberg] Yellen Surprises Hedge Funds Who Cut Gold Wagers Before Rally
[CNBC] US to confront China over 'unacceptable' auto policies: Report
[Reuters] China prepares to counter any U.S. trade penalties: sources
[Reuters] China regulates fund outsourcing business in fresh move to curb shadow banking: Sec Times
[Bloomberg] Visco Says ECB Could Reduce Gap Between QE End and Rate Hike
[Reuters] ECB money piles up in Germany as investors wary of risk - Bundesbank
[Reuters] Germany's Merkel and Japan's Abe urge free trade with jabs at U.S.
[CNBC] Saudi Arabia and China just hit the 'next level' for strategic collaboration, Saudi CEO says
[NYT] Choice of I.M.F. Critic Highlights Trump’s Reversal of Global Policy
[NYT] Hedge Fund Titan’s Surefire Bet Turns Into a $4 Billion Loss
[WSJ] Divisions on Trade Dominate G-20 Global Summit
[WSJ] Bond-Yield Rebound Poses a Threat to Stock Rally
[WSJ] It’s Good to Be a CEO, Again: Stocks Rise, and So Does Pay
[FT] Outlook for US corporate profits dims
[Bloomberg] Dollar Hits Fresh Four-Month Low as Traders Follow Recent Trends
[Reuters] UK PM May to trigger Brexit on March 29: spokesman
[Bloomberg] First Skirmish of G-20 Sets Scene for Battle of Trade Ideas
[Bloomberg] Bond Market Calm Is Threatened by Fed's $1.75 Trillion MBS Shift
[Bloomberg] Say Hello to $3 Trillion in Forgotten Debt
[Bloomberg] Yellen's Shadow Looms Large Over China Central Bank Policy
[Bloomberg] Yellen Surprises Hedge Funds Who Cut Gold Wagers Before Rally
[CNBC] US to confront China over 'unacceptable' auto policies: Report
[Reuters] China prepares to counter any U.S. trade penalties: sources
[Reuters] China regulates fund outsourcing business in fresh move to curb shadow banking: Sec Times
[Bloomberg] Visco Says ECB Could Reduce Gap Between QE End and Rate Hike
[Reuters] ECB money piles up in Germany as investors wary of risk - Bundesbank
[Reuters] Germany's Merkel and Japan's Abe urge free trade with jabs at U.S.
[CNBC] Saudi Arabia and China just hit the 'next level' for strategic collaboration, Saudi CEO says
[NYT] Choice of I.M.F. Critic Highlights Trump’s Reversal of Global Policy
[NYT] Hedge Fund Titan’s Surefire Bet Turns Into a $4 Billion Loss
[WSJ] Divisions on Trade Dominate G-20 Global Summit
[WSJ] Bond-Yield Rebound Poses a Threat to Stock Rally
[WSJ] It’s Good to Be a CEO, Again: Stocks Rise, and So Does Pay
[FT] Outlook for US corporate profits dims
Saturday, March 18, 2017
Sunday's News Links
[Reuters] Markets welcome G20's FX stance, wary on trade split
[CNBC] How a possible Yellen departure could spark a fire under the Fed to cut its $4.5 trillion balance sheet
[Reuters] Head of China's industry ministry says country right to limit market access
[WSJ] Treasury’s Mnuchin Fends Off Push to Reject Protectionism
[WSJ] Retail Store ‘Bubble’ Has Burst and CEOs Search for Answers
[FT] Record-breaking 2017 for ETFs fuels fears of stock market bubble
[Reuters] Germany rejects Trump's claim it owes NATO and U.S. 'vast sums' for defense
[Bloomberg] North Korea Tests New High-Thrust Rocket Engine
[FT] Tillerson trip fails to narrow US-China differences
[CNBC] How a possible Yellen departure could spark a fire under the Fed to cut its $4.5 trillion balance sheet
[Reuters] Head of China's industry ministry says country right to limit market access
[WSJ] Treasury’s Mnuchin Fends Off Push to Reject Protectionism
[WSJ] Retail Store ‘Bubble’ Has Burst and CEOs Search for Answers
[FT] Record-breaking 2017 for ETFs fuels fears of stock market bubble
[Reuters] Germany rejects Trump's claim it owes NATO and U.S. 'vast sums' for defense
[Bloomberg] North Korea Tests New High-Thrust Rocket Engine
[FT] Tillerson trip fails to narrow US-China differences
Saturday's News Links
[Bloomberg] G-20 Drops Anti-Protectionist Pledge as Trump Stance Goes Global
[Washington Post] New rifts emerge as Trump administration rejects free trade statement at G-20 meeting
[NYT] Shadow Lending Threatens China’s Economy, Officials Warn
[Reuters] Former U.S. officials say 'complex' relationship with China needs 'fresh start'
[Bloomberg] China Pushes Back on U.S. Talk of ‘All Options’ Over North Korea
[Washington Post] Common bonds aside, Trump and Merkel show little rapport
[BBC] Rex Tillerson urged to be 'cool-headed' over North Korea
[Wall Street Journal] Gap Between Fed-Funds, Overnight Treasury Repo Rates Holds
[Washington Post] New rifts emerge as Trump administration rejects free trade statement at G-20 meeting
[NYT] Shadow Lending Threatens China’s Economy, Officials Warn
[Reuters] Former U.S. officials say 'complex' relationship with China needs 'fresh start'
[Bloomberg] China Pushes Back on U.S. Talk of ‘All Options’ Over North Korea
[Washington Post] Common bonds aside, Trump and Merkel show little rapport
[BBC] Rex Tillerson urged to be 'cool-headed' over North Korea
[Wall Street Journal] Gap Between Fed-Funds, Overnight Treasury Repo Rates Holds
Friday, March 17, 2017
Weekly Commentary: Another Missed Opportunity
March 16 – Financial Times (Robin Wigglesworth, Joe Rennison and Nicole Bullock): “When Romeo impatiently hankered after Juliet, the sage friar Lawrence dispensed some valuable advice: ‘Wisely and slow; they stumble that run fast.’ It is a dictum the Federal Reserve clearly intends to live by, despite the improving economic outlook. There have been rising murmurs in financial markets that after years of the Fed being too optimistic on the economy, inflation and interest rates, it is now behind the curve. But on Wednesday the US central bank sent a clear message to markets that it is not in a hurry to tighten monetary policy.”
Yes, markets had begun fretting a bit that a sense of urgency might be taking hold within the Federal Reserve. But the FOMC’s two-day meeting came and went, and chair Yellen conveyed business as usual. Policy would remain accommodative for “some time.” The focus remains resolutely on a gradualist approach, with Yellen stating that three hikes a year would be consistent with gradualism. And three baby-step hikes a year would place short rates at 3.0% in early 2020 (the Fed’s “dot plot” sees 3% likely in 2019). It’s not obvious 3% short rates three years from now will provide much restraint on anything. As such, the Fed is off to a rocky start in its attempt to administer rate normalization and a resulting tightening of financial conditions.
Yellen also suggested that the committee would not be bothered by inflation overshooting the Fed’s 2.0% target: “…The Fed is not inclined to overreact to the possibility that inflation could drift slightly — and in the Fed’s view temporarily — above 2% in the coming months.” There would also be no reassessment of economic prospects based on President Trump’s agenda of tax cuts, infrastructure spending and deregulation. “We have plenty of time to see what happens.” Moreover, the Yellen Fed did not signal that it is any closer to articulating a strategy for reducing its enormous balance sheet.
Bloomberg had the most apt headlines: “Yellen Calms Fears Fed’s Policy Trigger Finger Is Getting Itchy;” “Yellen Faces New Conundrum as Conditions Defy Hike;” “The Market Is Acting Like the Fed Cut Rates.”
Ten-year Treasury yields dropped 11 bps on FOMC Wednesday to 2.49%, the “largest one-day drop since June.” Even two-year yields declined a meaningful eight bps to 1.30%. The dollar index fell 1.0%, with gold surging almost $22. The GSCI commodities index rose more than 1%. EM advanced, with emerging equities (EEM) jumping 2.6% to the high since July, 2015.
I think back to the last successful Fed tightening cycle. Well, I actually don’t recall one. Instead it’s been serial loose financial conditions and resulting recurring booms and busts. And, once again, the Fed seeks to gradually raise rates without upsetting the markets. Yellen: “I think if you compare it with any previous tightening cycle, I remember when rates were raised at every meeting, starting in mid-2004. And I think people thought that was a gradual pace, measured pace. And we’re certainly not envisioning something like that.” Heaven forbid…
In her press conference, Yellen again addressed the “neutral rate” – “The neutral level of the federal funds rate, namely the level of the federal funds rate, that we keep the economy operating on an even keel. That is a rate where we neither are pressing on the brake nor pushing down on the accelerator. That level of interest rates is quite low.”
Yellen may not believe the Fed is “pushing down on the accelerator,” yet the truck is racing down the mountain.
March 14 – Bloomberg (Claire Boston): “Companies are issuing bonds in the U.S. at the fastest pace ever… Investment-grade firms are on track to complete the busiest first quarter for debt sales since at least 1999. Firms… have pushed new issues to more than $360 billion so far in 2017, closing in on the previous record of $381 billion from 2009… That puts bond sales 14% ahead of last year’s record pace… High-yield bond offerings have also roared back after a plunge in commodity prices muted new issues last year. Junk-rated firms have sold more than $72 billion in 2017 through Monday, compared with $41.7 billion in the first quarter of 2016.”
March 16 – Bloomberg (Sid Verma and Julie Verhage): “Financial markets are telling Janet Yellen there’s more work to be done -- or else. While the Federal Reserve chair raised interest rates by 25 bps as expected Wednesday, the outlook was less hawkish than market participants foresaw, with projections for the medium-term tightening cycle largely unchanged… ‘Our financial conditions index eased by an estimated 14 bps on the day -- about 2.3 standard deviations and the equivalent of almost one full cut in the funds rate -- and is now considerably easier than in early December, despite two funds rate hikes in the meantime,’ Goldman Chief Economist Jan Hatzius and team wrote…”
The Nasdaq Composite is up almost 10%, and there’s still two weeks remaining in the first quarter. The Nasdaq 100 (NDX) has gained 11.2% q-t-d, with the Morgan Stanley High Tech Index up 13.1%. Unprecedented U.S. debt issuance could see quarterly debt sales approach a staggering $400bn. And it’s not only an American phenomenon. EEM (EM equities) enjoys a 13% q-t-d gain. Basically, stocks have posted solid early-2017 gains around the world. Corporate bond markets are booming globally. A highly speculative marketplace was delighted chair Yellen examined the current extraordinary backdrop and envisaged “even keel.”
Markets some time ago moved beyond even keel. I’ll point back to chairman Bernanke’s 2013 (“flash crash”) comment that the Fed was prepared to “push back against a tightening of financial conditions.” That was the most explicit signal yet that the Federal Reserve would backstop the financial markets to the point of guarding against even a modest “Risk Off” dynamic. Markets have hardly looked back since. Indeed, Bernanke and Yellen took “asymmetrical” (ease aggressively, “tighten” timidly) so far beyond the Maestro Greenspan. It will now be virtually impossible to convince overheated markets of a return to a more even keel policy approach.
There’s a major problem with delegating to the securities markets the critical function of governing financial conditions: loose financial conditions beget inflating asset markets. Asset inflation then begets speculation, higher asset prices, greater speculative excess and only looser financial conditions. And, to be sure, things turn especially unstable late in the speculative cycle.
Fed policies, from Greenspan to Bernanke to Yellen, provided huge competitive advantages to bullish speculative long positions. And especially since 2013 – and particularly with the global policy response to last year’s market instability – the “bears” have been basically crushed into submission/oblivion. Everyone has been forced to jump aboard the bull market. This has led to a momentous supply/demand imbalance throughout the securities markets. Too much “money” has been flooding into the markets, while an atypical dynamic ensures a dearth of willing sellers. This powerful market dislocation has granted the bulls the luxury of easily pushing the market higher with little resistance from would be sellers.
Wednesday trading saw a recurring dynamic. The prospect of a hawkish FOMC meeting outcome created the risk of event-driven market instability. The hedging of risk going into this meeting created yet another opportunity to punish those on the wrong side of trades. And it’s the unwind of hedges/shorts that (for the umpteenth time) provided buying power for higher bond and equities prices. Sellers of securities – bearish traders, risk-conscious hedgers or derivative players – at this stage of the market cycle have an extraordinarily low pain threshold. The market is steeply tilted to the benefit of one side – the long side. The bulls enjoy “strong hands” – while the much-depleted ranks of weakling “bears” have about the feeblest little “weak hands” imaginable.
And the reality of the situation is that this anomalous backdrop has a profound impact on general financial conditions. Over recent decades, securities markets evolved to assume the dominant position in Credit creation, hence for system financial conditions more generally. And, now, market dislocation creates extreme – and self-reinforcing – loose financial conditions. In the face of an alarming list of potential risks, the risk markets donned blinders and embarked on a speculative blow-off.
It’s no coincidence that markets – sovereign bonds last year and risk assets currently – have demonstrated a proclivity for “melt-up” dynamics in the face of mounting global risks. For years now, and reminiscent of the late-twenties, the fragile backdrop has ensured that central bankers cling tightly to their extraordinary monetary stimulus and market backstop measures.
Markets were beginning to feel a little anxious that the Fed might actually acknowledge market excess. Perhaps booming markets were behind the Fed’s determination to move in March rather than wait until May. And I’ll assume that the committee believed pressing for an earlier rate increase would be interpreted in the markets as a more forceful “tightening.” It’s just not going to work that away. Overheated markets at this point will dismiss timid measures. Central banker measures have for too long rewarded greed and punished fear. Greed has grown to dominate, and greed scoffs at central bank gradualism.
The problem today is that years of ultra-loose monetary conditions have ensured everyone is crowded on the same bullish side of the boat. Tipping the vessel at this point will be chaotic, and the Fed clearly doesn’t want to be the instigator. Meanwhile, timid little baby-step increases only ensure more problematic market Bubbles and general financial excess.
It’s now an all-too-familiar Bubble Dynamic. The greater the Bubble inflates, the more impervious it becomes to cautious “tightening” measures. And the longer the accommodative backdrop fuels only more precarious Bubble Dynamics, the more certain it becomes that central bankers will approach monetary tightening timidly. Yellen confirmed to the markets Wednesday that the Fed would remain timid – still focused on some theoretical “neutral rate” and seemingly oblivious to conspicuous financial market excess. The fixation remains on consumer prices that are running just a tad under its 2% target. Meanwhile, runaway securities market inflation is completely disregarded.
Yellen: “So at present, I see monetary policy as accommodative. Namely the current level of the federal funds rate is below that neutral rate, but not very far below the neutral rate.”
At this point, is not apparent what it would take for the Yellen Fed to change its view. It’s worth mentioning new Minneapolis Federal Reserve Bank President Neel Kashkari’s lone dissent. From Reuters: “‘The announcement of our balance sheet plan could trigger somewhat tighter monetary conditions,’ Kashkari said, resulting in the equivalent of a rate hike of unknown size. ‘After it has been published and the market response is understood, we can return to using the federal funds rate as our primary policy tool, with the balance sheet normalization under way in the background.’”
Kashkari has a point with his focus on the balance sheet. From my perspective, reducing the size of the Fed’s balance sheet would likely prove a more effective mechanism for removing accommodation than baby-step rate increases. Somehow the Fed needs to convince the markets that again boosting the Fed’s balance sheet is completely off the table. The markets believe that QE policy has simply been placed on hold, with open-ended “money” printing available the day the markets demand a liquidity backstop. The Fed should take the opportunity to ween the market off the dangerous perception that QE is available to ensure the extinction of bear markets and recessions. It’s this momentous market perception that works to ensure baby-step rate increases have no restraining impact on Bubble Dynamics.
The Fed let Another Opportunity Slip Away. One of these days the bond market may mount a protest. European periphery bonds were none too impressive this week. With German yields declining five bps this week, spreads widened across the board. And the dollar… It’s worth noting the yen gained 1.9% this week. And almost $5.7bn flowed out of junk bond funds.
And thanks for checking out our second of four videos, Tactical Short Episode II, “A Solution to the Credit Bubble" at https://vimeo.com/208529287
Yes, markets had begun fretting a bit that a sense of urgency might be taking hold within the Federal Reserve. But the FOMC’s two-day meeting came and went, and chair Yellen conveyed business as usual. Policy would remain accommodative for “some time.” The focus remains resolutely on a gradualist approach, with Yellen stating that three hikes a year would be consistent with gradualism. And three baby-step hikes a year would place short rates at 3.0% in early 2020 (the Fed’s “dot plot” sees 3% likely in 2019). It’s not obvious 3% short rates three years from now will provide much restraint on anything. As such, the Fed is off to a rocky start in its attempt to administer rate normalization and a resulting tightening of financial conditions.
Yellen also suggested that the committee would not be bothered by inflation overshooting the Fed’s 2.0% target: “…The Fed is not inclined to overreact to the possibility that inflation could drift slightly — and in the Fed’s view temporarily — above 2% in the coming months.” There would also be no reassessment of economic prospects based on President Trump’s agenda of tax cuts, infrastructure spending and deregulation. “We have plenty of time to see what happens.” Moreover, the Yellen Fed did not signal that it is any closer to articulating a strategy for reducing its enormous balance sheet.
Bloomberg had the most apt headlines: “Yellen Calms Fears Fed’s Policy Trigger Finger Is Getting Itchy;” “Yellen Faces New Conundrum as Conditions Defy Hike;” “The Market Is Acting Like the Fed Cut Rates.”
Ten-year Treasury yields dropped 11 bps on FOMC Wednesday to 2.49%, the “largest one-day drop since June.” Even two-year yields declined a meaningful eight bps to 1.30%. The dollar index fell 1.0%, with gold surging almost $22. The GSCI commodities index rose more than 1%. EM advanced, with emerging equities (EEM) jumping 2.6% to the high since July, 2015.
I think back to the last successful Fed tightening cycle. Well, I actually don’t recall one. Instead it’s been serial loose financial conditions and resulting recurring booms and busts. And, once again, the Fed seeks to gradually raise rates without upsetting the markets. Yellen: “I think if you compare it with any previous tightening cycle, I remember when rates were raised at every meeting, starting in mid-2004. And I think people thought that was a gradual pace, measured pace. And we’re certainly not envisioning something like that.” Heaven forbid…
In her press conference, Yellen again addressed the “neutral rate” – “The neutral level of the federal funds rate, namely the level of the federal funds rate, that we keep the economy operating on an even keel. That is a rate where we neither are pressing on the brake nor pushing down on the accelerator. That level of interest rates is quite low.”
Yellen may not believe the Fed is “pushing down on the accelerator,” yet the truck is racing down the mountain.
March 14 – Bloomberg (Claire Boston): “Companies are issuing bonds in the U.S. at the fastest pace ever… Investment-grade firms are on track to complete the busiest first quarter for debt sales since at least 1999. Firms… have pushed new issues to more than $360 billion so far in 2017, closing in on the previous record of $381 billion from 2009… That puts bond sales 14% ahead of last year’s record pace… High-yield bond offerings have also roared back after a plunge in commodity prices muted new issues last year. Junk-rated firms have sold more than $72 billion in 2017 through Monday, compared with $41.7 billion in the first quarter of 2016.”
March 16 – Bloomberg (Sid Verma and Julie Verhage): “Financial markets are telling Janet Yellen there’s more work to be done -- or else. While the Federal Reserve chair raised interest rates by 25 bps as expected Wednesday, the outlook was less hawkish than market participants foresaw, with projections for the medium-term tightening cycle largely unchanged… ‘Our financial conditions index eased by an estimated 14 bps on the day -- about 2.3 standard deviations and the equivalent of almost one full cut in the funds rate -- and is now considerably easier than in early December, despite two funds rate hikes in the meantime,’ Goldman Chief Economist Jan Hatzius and team wrote…”
The Nasdaq Composite is up almost 10%, and there’s still two weeks remaining in the first quarter. The Nasdaq 100 (NDX) has gained 11.2% q-t-d, with the Morgan Stanley High Tech Index up 13.1%. Unprecedented U.S. debt issuance could see quarterly debt sales approach a staggering $400bn. And it’s not only an American phenomenon. EEM (EM equities) enjoys a 13% q-t-d gain. Basically, stocks have posted solid early-2017 gains around the world. Corporate bond markets are booming globally. A highly speculative marketplace was delighted chair Yellen examined the current extraordinary backdrop and envisaged “even keel.”
Markets some time ago moved beyond even keel. I’ll point back to chairman Bernanke’s 2013 (“flash crash”) comment that the Fed was prepared to “push back against a tightening of financial conditions.” That was the most explicit signal yet that the Federal Reserve would backstop the financial markets to the point of guarding against even a modest “Risk Off” dynamic. Markets have hardly looked back since. Indeed, Bernanke and Yellen took “asymmetrical” (ease aggressively, “tighten” timidly) so far beyond the Maestro Greenspan. It will now be virtually impossible to convince overheated markets of a return to a more even keel policy approach.
There’s a major problem with delegating to the securities markets the critical function of governing financial conditions: loose financial conditions beget inflating asset markets. Asset inflation then begets speculation, higher asset prices, greater speculative excess and only looser financial conditions. And, to be sure, things turn especially unstable late in the speculative cycle.
Fed policies, from Greenspan to Bernanke to Yellen, provided huge competitive advantages to bullish speculative long positions. And especially since 2013 – and particularly with the global policy response to last year’s market instability – the “bears” have been basically crushed into submission/oblivion. Everyone has been forced to jump aboard the bull market. This has led to a momentous supply/demand imbalance throughout the securities markets. Too much “money” has been flooding into the markets, while an atypical dynamic ensures a dearth of willing sellers. This powerful market dislocation has granted the bulls the luxury of easily pushing the market higher with little resistance from would be sellers.
Wednesday trading saw a recurring dynamic. The prospect of a hawkish FOMC meeting outcome created the risk of event-driven market instability. The hedging of risk going into this meeting created yet another opportunity to punish those on the wrong side of trades. And it’s the unwind of hedges/shorts that (for the umpteenth time) provided buying power for higher bond and equities prices. Sellers of securities – bearish traders, risk-conscious hedgers or derivative players – at this stage of the market cycle have an extraordinarily low pain threshold. The market is steeply tilted to the benefit of one side – the long side. The bulls enjoy “strong hands” – while the much-depleted ranks of weakling “bears” have about the feeblest little “weak hands” imaginable.
And the reality of the situation is that this anomalous backdrop has a profound impact on general financial conditions. Over recent decades, securities markets evolved to assume the dominant position in Credit creation, hence for system financial conditions more generally. And, now, market dislocation creates extreme – and self-reinforcing – loose financial conditions. In the face of an alarming list of potential risks, the risk markets donned blinders and embarked on a speculative blow-off.
It’s no coincidence that markets – sovereign bonds last year and risk assets currently – have demonstrated a proclivity for “melt-up” dynamics in the face of mounting global risks. For years now, and reminiscent of the late-twenties, the fragile backdrop has ensured that central bankers cling tightly to their extraordinary monetary stimulus and market backstop measures.
Markets were beginning to feel a little anxious that the Fed might actually acknowledge market excess. Perhaps booming markets were behind the Fed’s determination to move in March rather than wait until May. And I’ll assume that the committee believed pressing for an earlier rate increase would be interpreted in the markets as a more forceful “tightening.” It’s just not going to work that away. Overheated markets at this point will dismiss timid measures. Central banker measures have for too long rewarded greed and punished fear. Greed has grown to dominate, and greed scoffs at central bank gradualism.
The problem today is that years of ultra-loose monetary conditions have ensured everyone is crowded on the same bullish side of the boat. Tipping the vessel at this point will be chaotic, and the Fed clearly doesn’t want to be the instigator. Meanwhile, timid little baby-step increases only ensure more problematic market Bubbles and general financial excess.
It’s now an all-too-familiar Bubble Dynamic. The greater the Bubble inflates, the more impervious it becomes to cautious “tightening” measures. And the longer the accommodative backdrop fuels only more precarious Bubble Dynamics, the more certain it becomes that central bankers will approach monetary tightening timidly. Yellen confirmed to the markets Wednesday that the Fed would remain timid – still focused on some theoretical “neutral rate” and seemingly oblivious to conspicuous financial market excess. The fixation remains on consumer prices that are running just a tad under its 2% target. Meanwhile, runaway securities market inflation is completely disregarded.
Yellen: “So at present, I see monetary policy as accommodative. Namely the current level of the federal funds rate is below that neutral rate, but not very far below the neutral rate.”
At this point, is not apparent what it would take for the Yellen Fed to change its view. It’s worth mentioning new Minneapolis Federal Reserve Bank President Neel Kashkari’s lone dissent. From Reuters: “‘The announcement of our balance sheet plan could trigger somewhat tighter monetary conditions,’ Kashkari said, resulting in the equivalent of a rate hike of unknown size. ‘After it has been published and the market response is understood, we can return to using the federal funds rate as our primary policy tool, with the balance sheet normalization under way in the background.’”
Kashkari has a point with his focus on the balance sheet. From my perspective, reducing the size of the Fed’s balance sheet would likely prove a more effective mechanism for removing accommodation than baby-step rate increases. Somehow the Fed needs to convince the markets that again boosting the Fed’s balance sheet is completely off the table. The markets believe that QE policy has simply been placed on hold, with open-ended “money” printing available the day the markets demand a liquidity backstop. The Fed should take the opportunity to ween the market off the dangerous perception that QE is available to ensure the extinction of bear markets and recessions. It’s this momentous market perception that works to ensure baby-step rate increases have no restraining impact on Bubble Dynamics.
The Fed let Another Opportunity Slip Away. One of these days the bond market may mount a protest. European periphery bonds were none too impressive this week. With German yields declining five bps this week, spreads widened across the board. And the dollar… It’s worth noting the yen gained 1.9% this week. And almost $5.7bn flowed out of junk bond funds.
And thanks for checking out our second of four videos, Tactical Short Episode II, “A Solution to the Credit Bubble" at https://vimeo.com/208529287
For the Week:
The S&P500 added 0.2% (up 6.2% y-t-d), and the Dow increased 0.1% (up 5.8%). The Utilities rallied 1.2% (up 5.0%). The Banks fell 1.4% (up 3.9%), while the Broker/Dealers gained 1.6% (up 7.7%). The Transports fell 1.6% (up 1.1%). The S&P 400 Midcaps rose 1.2% (up 4.2%), and the small cap Russell 2000 recovered 1.9% (up 2.5%). The Nasdaq100 increased 0.4% (up 11.2%), and the Morgan Stanley High Tech index advanced 1.5% (up 13.1%). The Semiconductors gained 1.3% (up 10.8%). The Biotechs declined 1.2% (up 16.1%). With bullion jumping $25, the HUI gold index rallied 4.7% (up 7.2%).
Three-month Treasury bill rates ended the week at 71 bps. Two-year government yields declined four bps to 1.32% (up 13bps y-t-d). Five-year T-note yields jumped eight bps to 2.02% (up 9bps). Ten-year Treasury yields rose seven bps to 2.50% (up 6bps). Long bond yields fell six bps to 3.11% (up 4bps).
Greek 10-year yields jumped 21 bps to 7.30% (up 28bps y-t-d). Ten-year Portuguese yields surged 23 bps to 4.29% (up 54bps). Italian 10-year yields slipped a basis point to 2.36% (up 55bps). Spain's 10-year yields declined a basis point to 1.88% (up 50bps). German bund yields fell five bps to 0.44% (up 23bps). French yields dipped a basis point to 1.11% (up 43bps). The French to German 10-year bond spread widened four to 67 bps. U.K. 10-year gilt yields added a basis point to 1.24% (up one bp). U.K.'s FTSE equities index rallied 1.1% (up 3.9%).
Japan's Nikkei 225 equities index slipped 0.4% (up 2.1% y-t-d). Japanese 10-year "JGB" yields fell a basis point to 0.08% (up 4bps). The German DAX equities index gained 1.1% (up 5.3%). Spain's IBEX 35 equities index surged 2.4% (up 9.6%). Italy's FTSE MIB index jumped 2.1% (up 4.4%). EM equities were mostly higher. Brazil's Bovespa index slipped 0.7% (up 6.6%). Mexico's Bolsa surged 3.2% (up 6.5%). South Korea's Kospi advanced 3.2% (up 6.8%). India’s Sensex equities index rose 2.4% (up 11.4%). China’s Shanghai Exchange added 0.8% (up 4.3%). Turkey's Borsa Istanbul National 100 index rose 1.0% (up 15.8%). Russia's MICEX equities index rallied 3.2% (down 8.8%).
Junk bond mutual funds saw huge outflows of $5.68 billion (from Lipper), the largest weekly outflow since August 2014 (from Bloomberg's Rizal Tupaz).
Freddie Mac 30-year fixed mortgage rates rose nine bps to an 11-week high 4.30% (up 57bps y-o-y). Fifteen-year rates gained eight bps to 3.50% (up 51bps). The five-year hybrid ARM rate increased five bps to 3.28% (up 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rate up seven bps to 4.43% (up 59bps).
Federal Reserve Credit last week increased $7.8bn to $4.428 TN. Over the past year, Fed Credit declined $17.8bn (down 0.4%). Fed Credit inflated $1.618 TN, or 57%, over the past 227 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $15.4bn last week to $3.198 TN. "Custody holdings" were down $54.1bn y-o-y, or 1.7%.
M2 (narrow) "money" supply last week declined $5.0bn to $13.348 TN. "Narrow money" expanded $837bn, or 6.7%, over the past year. For the week, Currency increased $2.9bn. Total Checkable Deposits fell $20.2bn, while Savings Deposits expanded $11.6bn. Small Time Deposits and Retail Money Funds were little changed.
Total money market fund assets fell $11.6bn to $2.677 TN. Money Funds fell $90bn y-o-y (3.2%).
Total Commercial Paper slipped $1.8bn to $962bn. CP declined $135bn y-o-y, or 12.3%.
Currency Watch:
The U.S. dollar index fell 0.9% to 100.3 (down 2.1% y-t-d). For the week on the upside, the South African rand increased 3.6%, the Mexican peso 2.8%, the South Korean won 2.3%, the Australian dollar 2.2%, the Swedish krona 2.0%, the British pound 1.9%, the Japanese yen 1.9%, the Brazilian real 1.6%, the Norwegian krone 1.4%, the New Zealand dollar 1.4%, the Swiss franc 1.3%, the Canadian dollar 0.9%, the Singapore dollar 0.8% and the euro 0.6%. The Chinese yuan added 0.1% versus the dollar this week (up 0.6% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index recovered 0.8% (down 3.9% y-t-d). Spot Gold rallied 2.0% to $1,229 (up 6.7%). Silver jumped 2.9% to $17.41 (up 9.0%). Crude recovered 29 cents to $48.78 (down 9%). Gasoline was little changed (down 4%), while Natural Gas fell 2.0% (down 21%). Copper recovered 3.7% (up 7%). Wheat declined 1.0% (up 7%). Corn gained 0.9% (up 4%).
Trump Administration Watch:
March 13 – Bloomberg (Anna Edney, Zachary Tracer, and Anna Edgerton): “House Speaker Paul Ryan doesn’t plan to make major changes to Republicans’ plan to replace Obamacare, according to a GOP aide, but the White House says it’s talking with members of Congress who want to amend the legislation. ‘We’ve always stated a willingness,’ Sean Spicer, White House spokesman, told reporters… ‘Part of the reason we’re engaging with these individuals is to hear their ideas.’… House Republicans are in a bind following a Congressional Budget Office estimate showing that 14 million Americans could lose their insurance next year under the GOP Obamacare-replacement plan. The CBO gave a dire picture of the bill’s effects heading into the 2018 congressional elections.”
March 12 – Wall Street Journal (William Mauldin and Jacob M. Schlesinger): “Republican lawmakers are showing increasing resistance to President Donald Trump’s trade agenda, worried that his plans could hurt exports from their states and undermine longstanding U.S. alliances. The concerns indicate that the biggest threat to Mr. Trump’s trade policy—which emphasizes new bilateral deals and a tougher stance against countries blamed for violating trade rules—is coming from his own party. The opposition from Republicans… stands to complicate Mr. Trump’s efforts to overhaul… Nafta, and tackle alleged trade violations in China.”
China Bubble Watch:
March 14 – Bloomberg: “China home sales remained resilient in the first two months of the year, signaling policy makers are struggling to check the booming housing market. The value of new homes sold rose 23% to 912 billion yuan ($132bn) in January and February compared with the first two months of 2016… Sales rose 17% in December… ‘Sales were a lot stronger than expected,’ said Larry Hu, head of China economics at Macquarie Securities… ‘Buyers in third- and fourth-tier cities chased gains, eyeing similar price surges in top cities.’”
March 14 – Bloomberg: “China’s economy started the year on a firm footing as its old growth engines gathered pace, with home sales remaining resilient and steel and aluminum rebounding as prices rallied. Industrial production climbed 6.3% from year earlier in January and February combined… Retail sales advanced 9.5% in the first two months, missing economists forecasts as auto sales dropped after a tax increase on small-engine cars…”
March 14 – Reuters (Yawen Chen and Elias Glenn): “China's property sales surged in the first two months of the year despite government measures to cool the market, though growth in real estate investment showed signs of easing… Property sales by area rose 25.1% year-on-year in January and February. That was above the 22.5% annual gain in 2016, which was the strongest annual growth in seven years thanks to a property boom in top-tier cities.”
March 12 – New York Times (Keith Bradsher): “China struck $225 billion in deals to acquire companies abroad last year, a record-breaking number that signaled to the world that Chinese business leaders were hot to haggle. Now, China — with a worried eye on the money leaving its borders — is telling some of its companies to cool it down. On Saturday, in the strongest public signal yet that Beijing was changing course, China's commerce minister castigated what he called ‘blind and irrational investment. …Zhong Shan, the minister, said officials planned to intensify supervision of what he called a small number of companies. ‘Some enterprises have already paid the price,’ said Mr. Zhong, a protégé of President Xi Jinping. ‘Some even have had a negative impact on our national image.’”
Global Bubble Watch:
March 15 – CBC News: “Debt levels continue to hit record highs in this country, but Canadians' net worth is also rising as the value of assets increases… The much publicized debt-to-income ratio — how much we owe, compared to how much we earn — inched up to 167.3% in the fourth quarter of 2016, a new high… ‘The debt-to-income ratio was up 2.4 percentage points in 2016 overall, marking the fastest annual growth since 2010,’ TD Bank economist Diana Petramala observed… ‘Gains in real estate asset values, however, helped keep most other ratios of indebtedness stable.’”
Fixed Income Bubble Watch:
March 13 – Bloomberg (Matt Scully): “Social Finance Inc.’s online borrowers are defaulting at higher rates than underwriters for one of its bond deals had expected, the latest sign that an industry that hoped to upend banking is now getting tripped up by bad loans. Losses on the company’s personal loans were high enough to breach key levels known as ‘triggers’ last month on a bond deal issued in 2015 and backed by the loans, according to analysts at Morgan Stanley. If defaults keep rising, investors in bonds could end up missing out on expected interest payments. Other online lenders have had similar trouble with defaults and triggers recently, which has broadly made it more expensive for the startups to fund their businesses.”
March 15 – Bloomberg (Rebecca Spalding): “Puerto Rico general-obligation bonds fell after the federal oversight board approved a financial recovery plan that will cover less than a quarter of the debt payments coming due, underscoring the deep concessions the island plans to seek from investors. The price of securities due in 2035, among the most actively traded, dropped 5% to an average of 67.5 cents on the dollar Tuesday to the lowest in two months…”
March 14 – CNBC (Claire Boston): “Things are about to get even harder for distressed retail chains thanks to rising interest rates. After years of low rates fueled a private equity ‘feasting’ on retail firms, the number of troubled chains has tripled over the past six years, and is now at its highest level since the Great Recession. Moody's… says that 19 of these companies have ‘well over’ $3.7 billion in debt that matures over the next five years. Roughly 30% of that total is due by the end of next year. The timing for higher rates couldn't be worse. Revenue continues to tumble as the debt maturities swell.”
March 12 – Bloomberg (Carrie Hong): “The tide may slowly be turning for Chinese bonds. Citigroup Inc. said… it will include onshore Chinese debt in some of its gauges, while the central bank pledged to create a ‘more convenient and friendly environment’ for foreign investors. This follows a recent measure to allow currency hedging for bonds, a move seen as one of many efforts needed to lower barriers… Foreign ownership of Chinese onshore bonds fell to 1.3% last year even as outstanding notes surged 32% to 64 trillion yuan ($9.3 trillion)…”
Brexit Watch:
March 13 – AFP (Alice Ritchie and Mark McLaughlin): “Parliament gave its approval… for Prime Minister Theresa May to start Britain's withdrawal from the European Union, even as Scotland signalled its opposition by announcing plans for a fresh independence vote. The House of Lords rejected a last-ditch attempt to amend a bill empowering May to begin Brexit, paving the way for it to become law… The prime minister could then trigger Article 50 of the EU's Lisbon Treaty at any time, starting two years of talks that will end with Britain becoming the first country to leave the bloc.”
March 13 – Bloomberg (Rodney Jefferson): “Scotland is headed for another vote on independence, opening a new front in the Brexit battle and raising the prospect of the U.K. breaking up after leaving the European Union. First Minister Nicola Sturgeon said… she plans to start the legal process for a referendum to be held by the spring of 2019. The announcement comes as the U.K. prepares to trigger Brexit negotiations, which Scotland’s semi-autonomous government opposes after the nation voted to stay in the EU.”
Europe Watch:
March 16 – Reuters (Anthony Deutsch and Toby Sterling): “EU leaders lined up… to congratulate Dutch Prime Minister Mark Rutte on beating far-rightist Geert Wilders in the first of a series of European elections this year in which populist insurgent parties are hoping to rock the establishment. The center-right prime minister had trailed in opinion polls for much of the campaign but emerged the clear victor of Wednesday's election, albeit with fewer seats than before. Wilders… won a third more seats than at the last election but was thwarted in his bid to become the biggest party.”
March 15 – Reuters (Ercan Gurses and Humeyra Pamuk): “Turkish President Tayyip Erdogan… warned the Netherlands that he could take further steps in a deepening diplomatic row, while a government spokesman in Ankara said economic sanctions could be coming. Incensed by Dutch and German government bans on his ministers from speaking to rallies of overseas Turks, Erdogan also accused German Chancellor Angela Merkel of siding with the Netherlands in the fight between the NATO allies. Turkey suspended high-level diplomatic relations with the Netherlands…, banning the Dutch ambassador from the country and preventing diplomatic flights from landing in Turkey or using its airspace.”
Federal Reserve Watch:
March 15 – Bloomberg (Rich Miller, Christopher Condon, and Jeanna Smialek): “Federal Reserve Chair Janet Yellen sought to reassure investors that the central bank’s latest interest-rate increase wasn’t a paradigm shift to a trigger-happy policy driven by fears of faster inflation. Speaking to reporters after the Fed’s quarter percentage-point move…, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2% goal and that it intended to keep its policy accommodative for ‘some time.’ ‘The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said. As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said… Today’s decision ‘does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy…’”
March 14 – Financial Times (Alistair Gray and Robin Wigglesworth): “Janet Yellen is facing questions over how the Federal Reserve will reverse an important part of its crisis recovery effort as housing experts caution the central bank risks rattling the $9tn market for US mortgage-backed bonds. Fed officials have put markets on notice that they are thinking about reducing the central bank’s $1.76tn portfolio of mortgage-backed securities, amassed through its crisis-fighting quantitative easing programme, but have so far provided few details… Fed policymakers are widely expected to raise interest rates by another quarter point, but investors and analysts are also anxiously awaiting any further clues on what the US central bank plans to do with its $4.5tn balance sheet.”
March 15 – New York Times (Eduardo Porter): “Is the Fed at risk for real this time? Throughout American history, few institutions have inspired such persistent mistrust among voters and their elected officials as the mysterious authority that determines the value of their money… Since its inception in 1913, the Federal Reserve has been alternately accused of either making money too scarce and expensive or making it too plentiful and cheap… The pressing question for this era of populist policy making and popular anger is whether the Federal Reserve as we know it — arcane and academic, with the autonomy to set monetary policy as it sees fit — will survive the tension this time. Given the ferocious discontent with the ‘establishment’ stoked by Mr. Trump among his angry electoral base, the threat against the Fed this time seems of a higher order.”
March 15 – CNBC (Yen Nee Lee): “Interest rates in the United States should have hit normal levels of around 3% by now given that the Federal Reserve has achieved all of its targets, a former Fed governor said… Speaking to CNBC's ‘Street Signs’ after the U.S. central bank increased its benchmark rate by a quarter point to a target range of 0.75% to 1%, Robert Heller reiterated his opinion that the Fed should have moved quicker to guide rates higher. Heller served on the Fed's board from 1986 to 1989… ‘We have very low unemployment rate of 4.7%, we have inflation roughly at 2%, so rates should be normal now. And normal…would be at 3%. Instead, we are below 1%,’ he said.”
The S&P500 added 0.2% (up 6.2% y-t-d), and the Dow increased 0.1% (up 5.8%). The Utilities rallied 1.2% (up 5.0%). The Banks fell 1.4% (up 3.9%), while the Broker/Dealers gained 1.6% (up 7.7%). The Transports fell 1.6% (up 1.1%). The S&P 400 Midcaps rose 1.2% (up 4.2%), and the small cap Russell 2000 recovered 1.9% (up 2.5%). The Nasdaq100 increased 0.4% (up 11.2%), and the Morgan Stanley High Tech index advanced 1.5% (up 13.1%). The Semiconductors gained 1.3% (up 10.8%). The Biotechs declined 1.2% (up 16.1%). With bullion jumping $25, the HUI gold index rallied 4.7% (up 7.2%).
Three-month Treasury bill rates ended the week at 71 bps. Two-year government yields declined four bps to 1.32% (up 13bps y-t-d). Five-year T-note yields jumped eight bps to 2.02% (up 9bps). Ten-year Treasury yields rose seven bps to 2.50% (up 6bps). Long bond yields fell six bps to 3.11% (up 4bps).
Greek 10-year yields jumped 21 bps to 7.30% (up 28bps y-t-d). Ten-year Portuguese yields surged 23 bps to 4.29% (up 54bps). Italian 10-year yields slipped a basis point to 2.36% (up 55bps). Spain's 10-year yields declined a basis point to 1.88% (up 50bps). German bund yields fell five bps to 0.44% (up 23bps). French yields dipped a basis point to 1.11% (up 43bps). The French to German 10-year bond spread widened four to 67 bps. U.K. 10-year gilt yields added a basis point to 1.24% (up one bp). U.K.'s FTSE equities index rallied 1.1% (up 3.9%).
Japan's Nikkei 225 equities index slipped 0.4% (up 2.1% y-t-d). Japanese 10-year "JGB" yields fell a basis point to 0.08% (up 4bps). The German DAX equities index gained 1.1% (up 5.3%). Spain's IBEX 35 equities index surged 2.4% (up 9.6%). Italy's FTSE MIB index jumped 2.1% (up 4.4%). EM equities were mostly higher. Brazil's Bovespa index slipped 0.7% (up 6.6%). Mexico's Bolsa surged 3.2% (up 6.5%). South Korea's Kospi advanced 3.2% (up 6.8%). India’s Sensex equities index rose 2.4% (up 11.4%). China’s Shanghai Exchange added 0.8% (up 4.3%). Turkey's Borsa Istanbul National 100 index rose 1.0% (up 15.8%). Russia's MICEX equities index rallied 3.2% (down 8.8%).
Junk bond mutual funds saw huge outflows of $5.68 billion (from Lipper), the largest weekly outflow since August 2014 (from Bloomberg's Rizal Tupaz).
Freddie Mac 30-year fixed mortgage rates rose nine bps to an 11-week high 4.30% (up 57bps y-o-y). Fifteen-year rates gained eight bps to 3.50% (up 51bps). The five-year hybrid ARM rate increased five bps to 3.28% (up 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rate up seven bps to 4.43% (up 59bps).
Federal Reserve Credit last week increased $7.8bn to $4.428 TN. Over the past year, Fed Credit declined $17.8bn (down 0.4%). Fed Credit inflated $1.618 TN, or 57%, over the past 227 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $15.4bn last week to $3.198 TN. "Custody holdings" were down $54.1bn y-o-y, or 1.7%.
M2 (narrow) "money" supply last week declined $5.0bn to $13.348 TN. "Narrow money" expanded $837bn, or 6.7%, over the past year. For the week, Currency increased $2.9bn. Total Checkable Deposits fell $20.2bn, while Savings Deposits expanded $11.6bn. Small Time Deposits and Retail Money Funds were little changed.
Total money market fund assets fell $11.6bn to $2.677 TN. Money Funds fell $90bn y-o-y (3.2%).
Total Commercial Paper slipped $1.8bn to $962bn. CP declined $135bn y-o-y, or 12.3%.
Currency Watch:
The U.S. dollar index fell 0.9% to 100.3 (down 2.1% y-t-d). For the week on the upside, the South African rand increased 3.6%, the Mexican peso 2.8%, the South Korean won 2.3%, the Australian dollar 2.2%, the Swedish krona 2.0%, the British pound 1.9%, the Japanese yen 1.9%, the Brazilian real 1.6%, the Norwegian krone 1.4%, the New Zealand dollar 1.4%, the Swiss franc 1.3%, the Canadian dollar 0.9%, the Singapore dollar 0.8% and the euro 0.6%. The Chinese yuan added 0.1% versus the dollar this week (up 0.6% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index recovered 0.8% (down 3.9% y-t-d). Spot Gold rallied 2.0% to $1,229 (up 6.7%). Silver jumped 2.9% to $17.41 (up 9.0%). Crude recovered 29 cents to $48.78 (down 9%). Gasoline was little changed (down 4%), while Natural Gas fell 2.0% (down 21%). Copper recovered 3.7% (up 7%). Wheat declined 1.0% (up 7%). Corn gained 0.9% (up 4%).
Trump Administration Watch:
March 13 – Bloomberg (Anna Edney, Zachary Tracer, and Anna Edgerton): “House Speaker Paul Ryan doesn’t plan to make major changes to Republicans’ plan to replace Obamacare, according to a GOP aide, but the White House says it’s talking with members of Congress who want to amend the legislation. ‘We’ve always stated a willingness,’ Sean Spicer, White House spokesman, told reporters… ‘Part of the reason we’re engaging with these individuals is to hear their ideas.’… House Republicans are in a bind following a Congressional Budget Office estimate showing that 14 million Americans could lose their insurance next year under the GOP Obamacare-replacement plan. The CBO gave a dire picture of the bill’s effects heading into the 2018 congressional elections.”
March 12 – Wall Street Journal (William Mauldin and Jacob M. Schlesinger): “Republican lawmakers are showing increasing resistance to President Donald Trump’s trade agenda, worried that his plans could hurt exports from their states and undermine longstanding U.S. alliances. The concerns indicate that the biggest threat to Mr. Trump’s trade policy—which emphasizes new bilateral deals and a tougher stance against countries blamed for violating trade rules—is coming from his own party. The opposition from Republicans… stands to complicate Mr. Trump’s efforts to overhaul… Nafta, and tackle alleged trade violations in China.”
China Bubble Watch:
March 14 – Bloomberg: “China home sales remained resilient in the first two months of the year, signaling policy makers are struggling to check the booming housing market. The value of new homes sold rose 23% to 912 billion yuan ($132bn) in January and February compared with the first two months of 2016… Sales rose 17% in December… ‘Sales were a lot stronger than expected,’ said Larry Hu, head of China economics at Macquarie Securities… ‘Buyers in third- and fourth-tier cities chased gains, eyeing similar price surges in top cities.’”
March 14 – Bloomberg: “China’s economy started the year on a firm footing as its old growth engines gathered pace, with home sales remaining resilient and steel and aluminum rebounding as prices rallied. Industrial production climbed 6.3% from year earlier in January and February combined… Retail sales advanced 9.5% in the first two months, missing economists forecasts as auto sales dropped after a tax increase on small-engine cars…”
March 14 – Reuters (Yawen Chen and Elias Glenn): “China's property sales surged in the first two months of the year despite government measures to cool the market, though growth in real estate investment showed signs of easing… Property sales by area rose 25.1% year-on-year in January and February. That was above the 22.5% annual gain in 2016, which was the strongest annual growth in seven years thanks to a property boom in top-tier cities.”
March 12 – New York Times (Keith Bradsher): “China struck $225 billion in deals to acquire companies abroad last year, a record-breaking number that signaled to the world that Chinese business leaders were hot to haggle. Now, China — with a worried eye on the money leaving its borders — is telling some of its companies to cool it down. On Saturday, in the strongest public signal yet that Beijing was changing course, China's commerce minister castigated what he called ‘blind and irrational investment. …Zhong Shan, the minister, said officials planned to intensify supervision of what he called a small number of companies. ‘Some enterprises have already paid the price,’ said Mr. Zhong, a protégé of President Xi Jinping. ‘Some even have had a negative impact on our national image.’”
Global Bubble Watch:
March 15 – CBC News: “Debt levels continue to hit record highs in this country, but Canadians' net worth is also rising as the value of assets increases… The much publicized debt-to-income ratio — how much we owe, compared to how much we earn — inched up to 167.3% in the fourth quarter of 2016, a new high… ‘The debt-to-income ratio was up 2.4 percentage points in 2016 overall, marking the fastest annual growth since 2010,’ TD Bank economist Diana Petramala observed… ‘Gains in real estate asset values, however, helped keep most other ratios of indebtedness stable.’”
Fixed Income Bubble Watch:
March 13 – Bloomberg (Matt Scully): “Social Finance Inc.’s online borrowers are defaulting at higher rates than underwriters for one of its bond deals had expected, the latest sign that an industry that hoped to upend banking is now getting tripped up by bad loans. Losses on the company’s personal loans were high enough to breach key levels known as ‘triggers’ last month on a bond deal issued in 2015 and backed by the loans, according to analysts at Morgan Stanley. If defaults keep rising, investors in bonds could end up missing out on expected interest payments. Other online lenders have had similar trouble with defaults and triggers recently, which has broadly made it more expensive for the startups to fund their businesses.”
March 15 – Bloomberg (Rebecca Spalding): “Puerto Rico general-obligation bonds fell after the federal oversight board approved a financial recovery plan that will cover less than a quarter of the debt payments coming due, underscoring the deep concessions the island plans to seek from investors. The price of securities due in 2035, among the most actively traded, dropped 5% to an average of 67.5 cents on the dollar Tuesday to the lowest in two months…”
March 14 – CNBC (Claire Boston): “Things are about to get even harder for distressed retail chains thanks to rising interest rates. After years of low rates fueled a private equity ‘feasting’ on retail firms, the number of troubled chains has tripled over the past six years, and is now at its highest level since the Great Recession. Moody's… says that 19 of these companies have ‘well over’ $3.7 billion in debt that matures over the next five years. Roughly 30% of that total is due by the end of next year. The timing for higher rates couldn't be worse. Revenue continues to tumble as the debt maturities swell.”
March 12 – Bloomberg (Carrie Hong): “The tide may slowly be turning for Chinese bonds. Citigroup Inc. said… it will include onshore Chinese debt in some of its gauges, while the central bank pledged to create a ‘more convenient and friendly environment’ for foreign investors. This follows a recent measure to allow currency hedging for bonds, a move seen as one of many efforts needed to lower barriers… Foreign ownership of Chinese onshore bonds fell to 1.3% last year even as outstanding notes surged 32% to 64 trillion yuan ($9.3 trillion)…”
Brexit Watch:
March 13 – AFP (Alice Ritchie and Mark McLaughlin): “Parliament gave its approval… for Prime Minister Theresa May to start Britain's withdrawal from the European Union, even as Scotland signalled its opposition by announcing plans for a fresh independence vote. The House of Lords rejected a last-ditch attempt to amend a bill empowering May to begin Brexit, paving the way for it to become law… The prime minister could then trigger Article 50 of the EU's Lisbon Treaty at any time, starting two years of talks that will end with Britain becoming the first country to leave the bloc.”
March 13 – Bloomberg (Rodney Jefferson): “Scotland is headed for another vote on independence, opening a new front in the Brexit battle and raising the prospect of the U.K. breaking up after leaving the European Union. First Minister Nicola Sturgeon said… she plans to start the legal process for a referendum to be held by the spring of 2019. The announcement comes as the U.K. prepares to trigger Brexit negotiations, which Scotland’s semi-autonomous government opposes after the nation voted to stay in the EU.”
Europe Watch:
March 16 – Reuters (Anthony Deutsch and Toby Sterling): “EU leaders lined up… to congratulate Dutch Prime Minister Mark Rutte on beating far-rightist Geert Wilders in the first of a series of European elections this year in which populist insurgent parties are hoping to rock the establishment. The center-right prime minister had trailed in opinion polls for much of the campaign but emerged the clear victor of Wednesday's election, albeit with fewer seats than before. Wilders… won a third more seats than at the last election but was thwarted in his bid to become the biggest party.”
March 15 – Reuters (Ercan Gurses and Humeyra Pamuk): “Turkish President Tayyip Erdogan… warned the Netherlands that he could take further steps in a deepening diplomatic row, while a government spokesman in Ankara said economic sanctions could be coming. Incensed by Dutch and German government bans on his ministers from speaking to rallies of overseas Turks, Erdogan also accused German Chancellor Angela Merkel of siding with the Netherlands in the fight between the NATO allies. Turkey suspended high-level diplomatic relations with the Netherlands…, banning the Dutch ambassador from the country and preventing diplomatic flights from landing in Turkey or using its airspace.”
Federal Reserve Watch:
March 15 – Bloomberg (Rich Miller, Christopher Condon, and Jeanna Smialek): “Federal Reserve Chair Janet Yellen sought to reassure investors that the central bank’s latest interest-rate increase wasn’t a paradigm shift to a trigger-happy policy driven by fears of faster inflation. Speaking to reporters after the Fed’s quarter percentage-point move…, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2% goal and that it intended to keep its policy accommodative for ‘some time.’ ‘The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said. As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said… Today’s decision ‘does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy…’”
March 14 – Financial Times (Alistair Gray and Robin Wigglesworth): “Janet Yellen is facing questions over how the Federal Reserve will reverse an important part of its crisis recovery effort as housing experts caution the central bank risks rattling the $9tn market for US mortgage-backed bonds. Fed officials have put markets on notice that they are thinking about reducing the central bank’s $1.76tn portfolio of mortgage-backed securities, amassed through its crisis-fighting quantitative easing programme, but have so far provided few details… Fed policymakers are widely expected to raise interest rates by another quarter point, but investors and analysts are also anxiously awaiting any further clues on what the US central bank plans to do with its $4.5tn balance sheet.”
March 15 – New York Times (Eduardo Porter): “Is the Fed at risk for real this time? Throughout American history, few institutions have inspired such persistent mistrust among voters and their elected officials as the mysterious authority that determines the value of their money… Since its inception in 1913, the Federal Reserve has been alternately accused of either making money too scarce and expensive or making it too plentiful and cheap… The pressing question for this era of populist policy making and popular anger is whether the Federal Reserve as we know it — arcane and academic, with the autonomy to set monetary policy as it sees fit — will survive the tension this time. Given the ferocious discontent with the ‘establishment’ stoked by Mr. Trump among his angry electoral base, the threat against the Fed this time seems of a higher order.”
March 15 – CNBC (Yen Nee Lee): “Interest rates in the United States should have hit normal levels of around 3% by now given that the Federal Reserve has achieved all of its targets, a former Fed governor said… Speaking to CNBC's ‘Street Signs’ after the U.S. central bank increased its benchmark rate by a quarter point to a target range of 0.75% to 1%, Robert Heller reiterated his opinion that the Fed should have moved quicker to guide rates higher. Heller served on the Fed's board from 1986 to 1989… ‘We have very low unemployment rate of 4.7%, we have inflation roughly at 2%, so rates should be normal now. And normal…would be at 3%. Instead, we are below 1%,’ he said.”
U.S. Bubble Watch:
March 17 – Bloomberg (Prashant Gopal): “The winning bidder of a Grand Rapids, Michigan, house has been offered almost $20,000 to hand his purchase contract to another buyer. An agent in Nashville, Tennessee, got a property for his client by cold-calling local homeowners. Near Columbus, Ohio, it took a teacher five tries to secure a deal. It’s the 2017 U.S. spring home-selling season, and listings are scarcer than they’ve ever been. Bidding wars common in perennially hot markets like the San Francisco Bay area, Denver and Boston are now also prevalent in the once slow-and-steady heartland, sending prices higher and sparking desperation among buyers across the country. ‘Homebuyers are going to find this spring that, in a lot of markets, the inventory of homes priced and sized at price levels they were hoping for will be very limited,’ said Thomas Lawler, a former Fannie Mae economist… ‘Unlikely places are getting significantly tighter.’”
March 12 – Bloomberg (Paul Davidson): “Riskier borrowers are making up a growing share of new mortgages, pushing up delinquencies modestly and raising concerns about an eventual spike in defaults… The trend is centered around home loans guaranteed by the Federal Housing Administration that typically require down payments of just 3% to 5%... The FHA-backed loans are increasingly being offered by non-bank lenders with more lenient credit standards than banks… ‘We have a situation where home prices are high relative to average hourly earnings and we're pushing 5%-down mortgages, and that's a bad idea,’ says Hans Nordby, chief economist of real estate research firm CoStar.”
March 17 – Bloomberg (Michelle Jamrisko): “Consumer confidence rose in March as Americans were more satisfied than any time in 16 years with the current state of their finances and the economy, while remaining sharply divided along party lines about the outlook. The University of Michigan said… that its preliminary index of sentiment increased to 97.6 from 96.3 in February…. The index of current conditions jumped three points to 114.5, the highest reading since November 2000.”
March 15 – Bloomberg (Sho Chandra): “The U.S. cost of living rose in February, while prices increased from a year ago by the most since March 2012… The consumer-price index climbed 0.1% from the previous month after a 0.6% January advance that was the largest in nearly four years… Compared with February 2016, the CPI was up 2.7%...”
March 14 – Bloomberg (Sho Chandra): “U.S. producer prices rose more than forecast in February, while costs increased from a year earlier by the most since March 2012, signaling inflation is picking up… Producer-price index climbed 0.3% from January (forecast was for 0.1 percent gain) after 0.6% jump that was the biggest since September 2012… PPI increased 2.2% from February 2016…”
March 15 – Bloomberg (Sho Chandra): “Confidence among U.S. homebuilders is the strongest since the mid-2000s housing boom as sales prospects improve despite rising mortgage rates… Builder sentiment gauge rose to 71 in March, the highest since June 2005, from an unrevised 65 in February…”
March 17 – Bloomberg (Prashant Gopal): “The winning bidder of a Grand Rapids, Michigan, house has been offered almost $20,000 to hand his purchase contract to another buyer. An agent in Nashville, Tennessee, got a property for his client by cold-calling local homeowners. Near Columbus, Ohio, it took a teacher five tries to secure a deal. It’s the 2017 U.S. spring home-selling season, and listings are scarcer than they’ve ever been. Bidding wars common in perennially hot markets like the San Francisco Bay area, Denver and Boston are now also prevalent in the once slow-and-steady heartland, sending prices higher and sparking desperation among buyers across the country. ‘Homebuyers are going to find this spring that, in a lot of markets, the inventory of homes priced and sized at price levels they were hoping for will be very limited,’ said Thomas Lawler, a former Fannie Mae economist… ‘Unlikely places are getting significantly tighter.’”
March 12 – Bloomberg (Paul Davidson): “Riskier borrowers are making up a growing share of new mortgages, pushing up delinquencies modestly and raising concerns about an eventual spike in defaults… The trend is centered around home loans guaranteed by the Federal Housing Administration that typically require down payments of just 3% to 5%... The FHA-backed loans are increasingly being offered by non-bank lenders with more lenient credit standards than banks… ‘We have a situation where home prices are high relative to average hourly earnings and we're pushing 5%-down mortgages, and that's a bad idea,’ says Hans Nordby, chief economist of real estate research firm CoStar.”
March 17 – Bloomberg (Michelle Jamrisko): “Consumer confidence rose in March as Americans were more satisfied than any time in 16 years with the current state of their finances and the economy, while remaining sharply divided along party lines about the outlook. The University of Michigan said… that its preliminary index of sentiment increased to 97.6 from 96.3 in February…. The index of current conditions jumped three points to 114.5, the highest reading since November 2000.”
March 15 – Bloomberg (Sho Chandra): “The U.S. cost of living rose in February, while prices increased from a year ago by the most since March 2012… The consumer-price index climbed 0.1% from the previous month after a 0.6% January advance that was the largest in nearly four years… Compared with February 2016, the CPI was up 2.7%...”
March 14 – Bloomberg (Sho Chandra): “U.S. producer prices rose more than forecast in February, while costs increased from a year earlier by the most since March 2012, signaling inflation is picking up… Producer-price index climbed 0.3% from January (forecast was for 0.1 percent gain) after 0.6% jump that was the biggest since September 2012… PPI increased 2.2% from February 2016…”
March 15 – Bloomberg (Sho Chandra): “Confidence among U.S. homebuilders is the strongest since the mid-2000s housing boom as sales prospects improve despite rising mortgage rates… Builder sentiment gauge rose to 71 in March, the highest since June 2005, from an unrevised 65 in February…”
March 16 – Bloomberg (Sho Chandra): “Beginning construction of U.S. houses climbed to a four-month high in February, led by the strongest pace of single-family homebuilding in nearly a decade. Residential starts advanced 3% to a 1.29 million annualized rate… Construction of one-family dwellings rose 6.5% to an 872,000 pace, the fastest since October 2007.”
March 13 – Reuters (Patrick Rucker): “Leading Wall Street firms should segment their riskiest businesses into holding companies that better shield taxpayers from a future bailout, a leading U.S. bank regulator said… Tom Hoenig, vice-chair of the Federal Deposit Insurance Corporation (FDIC), pitched his idea to bankers attending an industry conference as a more palatable alternative to the regulatory regime which has existed since the Dodd-Frank financial legislation was enacted after the 2007-2008 financial crisis. Hoenig said that law has proved burdensome for all banks and has given those that are too big to fail a competitive advantage.”
Japan Watch:
March 15 – Bloomberg (Toru Fujioka): “The Bank of Japan kept its unprecedented monetary easing program unchanged on Thursday, just hours after the Federal Reserve raised its key interest rate, increasing the policy divergence between the two central banks. The BOJ said that it would keep two key rates at current levels and maintain the pace of its asset purchases.”
March 12 – Bloomberg (Masaki Kondo): “The Bank of Japan’s bond-purchase plan for March puts policy makers on track to miss an annual target, leaving investors debating whether they’re witnessing a stealth tapering. Calculations based on the plan released Feb. 28 suggest a net 66 trillion yen ($575bn) of purchases if the March pace were to be sustained over the following 11 months. That’s 18% less than the official target of expanding holdings by 80 trillion yen a year.”
EM Watch:
March 14 – Bloomberg (Lianting Tu, Narae Kim, and Anurag Joshi): “With a resounding domestic political victory behind him, Indian Prime Minister Narendra Modi turns attention back to policies this week. One area key to watch for investors: progress on resolving a mountain of bad debt that’s restraining the private economy... Key to that shortfall has been a decline in credit exacerbated by the lack of a national plan to clean out non-performing loans. ‘Loan growth has been falling and remains anemic by historical standards as a result of the banks’ asset-quality challenges,’ said Swee-Ching Lim, a portfolio manager at Western Asset Management… ‘This lack of credit growth will likely continue to be a headwind’ for India’s economy, he said.”
Leveraged Speculation Watch:
March 17 – Bloomberg (Simone Foxman): “More hedge funds closed in 2016 than in any year since the financial crisis… Liquidations totaled 1,057 last year, the most since 2008, according to… Hedge Fund Research Inc. Though assets managed by the industry rose slightly to $3.02 trillion during 2016, at the end of the year there were 9,893 funds managing that cash, including funds of hedge funds -- the fewest since 2012. The data rounds out a sobering year for hedge funds, which have come under fire from pension funds objecting to their high fees and poor performance. The average fund hasn’t beat the S&P 500 Total Return Index, a measure that includes reinvested dividends, since 2008.”
March 15 – Bloomberg (Beth Jinks, Manuel Baigorri, Katherine Burton, and Katia Porzecanski): “Bill Ackman was used to the question: how could he stick with a loser like Valeant? But here it was again, this time over lunch with investors and bankers in London on Feb. 28. And there was Ackman, defending a signature investment that, on paper, had cost his clients billions. Yes, Valeant’s share price had cratered. But he insisted to attendees that the drug company’s turnaround prospects were bright, according to people with knowledge of the meeting. So much for that… News that his Pershing Square Capital Management fund had sold its entire stake at a monumental loss was greeted with equal parts shock and relish. In finally selling, the firm lost more than $4 billion…”
Geopolitical Watch:
March 17 – Bloomberg (Nick Wadhams and Kanga Kong): “Secretary of State Rex Tillerson said the U.S. is considering ‘all options’ to counter North Korea’s nuclear threat while criticizing China over moves to block a missile-defense system on the peninsula. In some of his most detailed comments yet on North Korea, Tillerson ruled out a negotiated freeze of its nuclear weapons program and called for a wider alliance to counter Kim Jong Un’s regime. He also left the military option on the table if the North Korean threat gets too large. ‘If they elevate the threat of their weapons programs to a level that we believe requires action, that option is on the table,’ Tillerson told reporters…”
March 14 – Reuters (Hongji Kim and Sang-gyu Lim): “As the USS Carl Vinson plowed through seas off South Korea on Tuesday, rival North Korea warned the United States of ‘merciless’ attacks if the carrier infringes on its sovereignty or dignity during U.S.-South Korean drills. F-18 fighter jets took off from the flight deck of the nuclear-powered carrier in a dramatic display of U.S. firepower amid rising tension with the North, which has alarmed its neighbors with two nuclear tests and a series of missile launches since last year.”
March 13 – Reuters (Tim Kelly and Nobuhiro Kubo): “Japan plans to dispatch its largest warship on a three-month tour through the South China Sea beginning in May, three sources said, in its biggest show of naval force in the region since World War Two. China claims almost all the disputed waters and its growing military presence has fueled concern in Japan and the West… The Izumo helicopter carrier, commissioned only two years ago, will make stops in Singapore, Indonesia, the Philippines and Sri Lanka before joining the Malabar joint naval exercise with Indian and U.S. naval vessels in the Indian Ocean in July.”
March 16 – Reuters: “China… pledged a firm response if Japan stirs up trouble in the South China Sea, after Reuters reported on a Japanese plan to send its largest warship to the disputed waters. The Izumo helicopter carrier… will make stops in Singapore, Indonesia, the Philippines and Sri Lanka before joining the Malabar joint naval exercise with Indian and U.S. naval vessels in the Indian Ocean in July… The trip would be Japan's biggest show of naval force in the region since World War Two. ‘If Japan persists in taking wrong actions, and even considers military interventions that threaten China's sovereignty and security... then China will inevitably take firm responsive measures,’ Foreign Ministry spokeswoman Hua Chunying said…”
March 15 – Reuters (J.R. Wu): “China's accelerated military development and recent activity by its military aircraft and ships around Taiwan pose an increased threat to the self-ruled island, according to a Taiwanese government defense report… The 2017 Quadrennial Defence Review (QDR) also highlights the uncertainty over the future strategic direction of the United States in the region, the impact of Japan flexing its military capabilities and ‘conflict crisis’ potential in the disputed South China Sea. ‘The recent activity of Chinese jets and ships around Taiwan shows the continued rise in (China's) military threat capabilities,’ highlighting the importance of Taiwan's need to defend itself, the review will say.”
March 15 – Bloomberg (Adela Lin and Ting Shi): “Taiwan plans to raise military spending by about 50% next year as President Tsai Ing-wen attempts to offset China’s growing might and support the local defense industry. Military expenditures are targeted to rise to 3% of gross domestic product next year, up from about 2% this year, Minister of National Defense Feng Shih-kuan said… Taiwan plans to develop indigenous ships, airplanes, weapons and unmanned aerial vehicles, he told lawmakers in Taipei.”
March 13 – Reuters (Patrick Rucker): “Leading Wall Street firms should segment their riskiest businesses into holding companies that better shield taxpayers from a future bailout, a leading U.S. bank regulator said… Tom Hoenig, vice-chair of the Federal Deposit Insurance Corporation (FDIC), pitched his idea to bankers attending an industry conference as a more palatable alternative to the regulatory regime which has existed since the Dodd-Frank financial legislation was enacted after the 2007-2008 financial crisis. Hoenig said that law has proved burdensome for all banks and has given those that are too big to fail a competitive advantage.”
Japan Watch:
March 15 – Bloomberg (Toru Fujioka): “The Bank of Japan kept its unprecedented monetary easing program unchanged on Thursday, just hours after the Federal Reserve raised its key interest rate, increasing the policy divergence between the two central banks. The BOJ said that it would keep two key rates at current levels and maintain the pace of its asset purchases.”
March 12 – Bloomberg (Masaki Kondo): “The Bank of Japan’s bond-purchase plan for March puts policy makers on track to miss an annual target, leaving investors debating whether they’re witnessing a stealth tapering. Calculations based on the plan released Feb. 28 suggest a net 66 trillion yen ($575bn) of purchases if the March pace were to be sustained over the following 11 months. That’s 18% less than the official target of expanding holdings by 80 trillion yen a year.”
EM Watch:
March 14 – Bloomberg (Lianting Tu, Narae Kim, and Anurag Joshi): “With a resounding domestic political victory behind him, Indian Prime Minister Narendra Modi turns attention back to policies this week. One area key to watch for investors: progress on resolving a mountain of bad debt that’s restraining the private economy... Key to that shortfall has been a decline in credit exacerbated by the lack of a national plan to clean out non-performing loans. ‘Loan growth has been falling and remains anemic by historical standards as a result of the banks’ asset-quality challenges,’ said Swee-Ching Lim, a portfolio manager at Western Asset Management… ‘This lack of credit growth will likely continue to be a headwind’ for India’s economy, he said.”
Leveraged Speculation Watch:
March 17 – Bloomberg (Simone Foxman): “More hedge funds closed in 2016 than in any year since the financial crisis… Liquidations totaled 1,057 last year, the most since 2008, according to… Hedge Fund Research Inc. Though assets managed by the industry rose slightly to $3.02 trillion during 2016, at the end of the year there were 9,893 funds managing that cash, including funds of hedge funds -- the fewest since 2012. The data rounds out a sobering year for hedge funds, which have come under fire from pension funds objecting to their high fees and poor performance. The average fund hasn’t beat the S&P 500 Total Return Index, a measure that includes reinvested dividends, since 2008.”
March 15 – Bloomberg (Beth Jinks, Manuel Baigorri, Katherine Burton, and Katia Porzecanski): “Bill Ackman was used to the question: how could he stick with a loser like Valeant? But here it was again, this time over lunch with investors and bankers in London on Feb. 28. And there was Ackman, defending a signature investment that, on paper, had cost his clients billions. Yes, Valeant’s share price had cratered. But he insisted to attendees that the drug company’s turnaround prospects were bright, according to people with knowledge of the meeting. So much for that… News that his Pershing Square Capital Management fund had sold its entire stake at a monumental loss was greeted with equal parts shock and relish. In finally selling, the firm lost more than $4 billion…”
Geopolitical Watch:
March 17 – Bloomberg (Nick Wadhams and Kanga Kong): “Secretary of State Rex Tillerson said the U.S. is considering ‘all options’ to counter North Korea’s nuclear threat while criticizing China over moves to block a missile-defense system on the peninsula. In some of his most detailed comments yet on North Korea, Tillerson ruled out a negotiated freeze of its nuclear weapons program and called for a wider alliance to counter Kim Jong Un’s regime. He also left the military option on the table if the North Korean threat gets too large. ‘If they elevate the threat of their weapons programs to a level that we believe requires action, that option is on the table,’ Tillerson told reporters…”
March 14 – Reuters (Hongji Kim and Sang-gyu Lim): “As the USS Carl Vinson plowed through seas off South Korea on Tuesday, rival North Korea warned the United States of ‘merciless’ attacks if the carrier infringes on its sovereignty or dignity during U.S.-South Korean drills. F-18 fighter jets took off from the flight deck of the nuclear-powered carrier in a dramatic display of U.S. firepower amid rising tension with the North, which has alarmed its neighbors with two nuclear tests and a series of missile launches since last year.”
March 13 – Reuters (Tim Kelly and Nobuhiro Kubo): “Japan plans to dispatch its largest warship on a three-month tour through the South China Sea beginning in May, three sources said, in its biggest show of naval force in the region since World War Two. China claims almost all the disputed waters and its growing military presence has fueled concern in Japan and the West… The Izumo helicopter carrier, commissioned only two years ago, will make stops in Singapore, Indonesia, the Philippines and Sri Lanka before joining the Malabar joint naval exercise with Indian and U.S. naval vessels in the Indian Ocean in July.”
March 16 – Reuters: “China… pledged a firm response if Japan stirs up trouble in the South China Sea, after Reuters reported on a Japanese plan to send its largest warship to the disputed waters. The Izumo helicopter carrier… will make stops in Singapore, Indonesia, the Philippines and Sri Lanka before joining the Malabar joint naval exercise with Indian and U.S. naval vessels in the Indian Ocean in July… The trip would be Japan's biggest show of naval force in the region since World War Two. ‘If Japan persists in taking wrong actions, and even considers military interventions that threaten China's sovereignty and security... then China will inevitably take firm responsive measures,’ Foreign Ministry spokeswoman Hua Chunying said…”
March 15 – Reuters (J.R. Wu): “China's accelerated military development and recent activity by its military aircraft and ships around Taiwan pose an increased threat to the self-ruled island, according to a Taiwanese government defense report… The 2017 Quadrennial Defence Review (QDR) also highlights the uncertainty over the future strategic direction of the United States in the region, the impact of Japan flexing its military capabilities and ‘conflict crisis’ potential in the disputed South China Sea. ‘The recent activity of Chinese jets and ships around Taiwan shows the continued rise in (China's) military threat capabilities,’ highlighting the importance of Taiwan's need to defend itself, the review will say.”
March 15 – Bloomberg (Adela Lin and Ting Shi): “Taiwan plans to raise military spending by about 50% next year as President Tsai Ing-wen attempts to offset China’s growing might and support the local defense industry. Military expenditures are targeted to rise to 3% of gross domestic product next year, up from about 2% this year, Minister of National Defense Feng Shih-kuan said… Taiwan plans to develop indigenous ships, airplanes, weapons and unmanned aerial vehicles, he told lawmakers in Taipei.”
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