[Bloomberg] Digital Coins Resume Selloff as Recovery Fizzles
[Bloomberg] The Year in Money
[Reuters] North Korea says new U.N. sanctions an act of war
[WSJ] Spending, Deficit Concerns Arise With New Tax Law
Sunday, December 24, 2017
Saturday, December 23, 2017
Saturday's News Links
[Reuters] Oil producers to discuss exit plans from cuts once market near balance: Russia
[CNBC] California's monster Thomas fire becomes largest-ever wildfire in state history
[Spiegel] Merkel's Difficult Road to a Coalition
[WSJ] One Thing Tax Overhaul Won’t Do? Simplify Corporate Taxes
[PeakProsperity] Dave Collum's Year in Review
[CNBC] California's monster Thomas fire becomes largest-ever wildfire in state history
[Spiegel] Merkel's Difficult Road to a Coalition
[WSJ] One Thing Tax Overhaul Won’t Do? Simplify Corporate Taxes
[PeakProsperity] Dave Collum's Year in Review
Friday, December 22, 2017
Weekly Commentary: Epic Stimulus Overload
Ten-year Treasury yields jumped 13 bps this week to 2.48%, the high going back to March. German bund yields rose 12 bps to 0.42%. U.S. equities have been reveling in tax reform exuberance. Bonds not so much. With unemployment at an almost 17-year low 4.1%, bond investors have so far retained incredible faith in global central bankers and the disinflation thesis.
Between tax legislation and cryptocurrencies, there’s been little interest in much else. As for tax cuts, it’s an inopportune juncture in the cycle for aggressive fiscal stimulus. And for major corporate tax reduction more specifically, with boom-time earnings and the loosest Credit conditions imaginable, it’s Epic Stimulus Overload. History will look back at this week - ebullient Republicans sharing the podium and cryptocurrency/blockchain trading madness - and ponder how things got so crazy.
From my analytical vantage point, the nation’s housing markets have been about the only thing holding the U.S. economy back from full-fledged overheated status. Sales have been solid and price inflation steady. And while construction has recovered significantly from the 2009/2010 trough, housing starts remain at about 60% of 2004-2005 period peak levels. It takes some time for residential construction to attain take-off momentum. Well, liftoff may have finally arrived. As long as mortgage rates remain so low, we should expect ongoing housing upside surprises. An already strong inflationary bias is starting to Bubble. Is the Fed paying attention?
December 22 – Reuters: “Sales of new U.S. single-family homes unexpectedly rose in November, hitting their highest level in more than 10 years, driven by robust demand across the country. The Commerce Department said… new home sales jumped 17.5% to a seasonally adjusted annual rate of 733,000 units last month. That was the highest level since July 2007… New home sales surged 26.6% from a year ago.”
And from Bloomberg’s Shobhana Chandra: “…The number of [new] properties sold in which construction hadn’t yet started increased almost 43% to 258,000 in November, the most since December 2006… Supply of homes at current sales rate fell to 4.6 months from 5.4 months.”
December 20 - Bloomberg (Shobhana Chandra): “Sales of previously owned U.S. homes rose in November to an almost 11-year high, indicating demand picked up momentum heading into the end of the year… The results show broad strength, with particular firmness in the upper-end market where inventory conditions are ‘markedly better,’ the group said. Forty-four percent of homes sold in November were on the market for less than a month. At the current pace, it would take 3.4 months to sell the homes on the market, the lowest in records to 1999 and down from 3.9 months in the prior month.”
December 19 – Bloomberg (Sho Chandra): “Groundbreaking on single-family homes proceeded in November at the strongest pace in a decade, driving U.S. housing starts to a faster-than-estimated rate… Single-family starts jumped 5.3% to 930,000, highest since Sept. 2007; South and West regions also were 10-year highs. The latest results make it more likely that residential construction spending -- which subtracted from economic growth in the second and third quarters -- will add to the pace of U.S. expansion in the October-December period, which is already shaping up as a solid quarter.”
U.S. and global growth surprised on the upside in 2017, explained by monetary conditions that somehow became only more extraordinarily loose. The Fed, with its dovish approach to three baby-step hikes, failed to tighten conditions. Led by the Bank of Japan and the European Central Bank, it was another year of massive global QE. Meanwhile, Chinese “tightening” measures couldn’t restrain record Credit growth. At the “periphery,” EM were the recipients of huge financial flows, spurring domestic Credit systems and economies around the globe. It’s been a huge year for Credit on a global scale.
December 19 – Financial Times (Eric Platt and Robin Wigglesworth): “A borrowing binge by companies and governments has reached a new high this year, providing bumper fees for Wall Street but raising questions ahead of a year of expected tightening of cheap money by the world’s most important central banks in 2018. Blue-chip corporate borrowers such as AT&T and Microsoft have led the way, as companies accounted for more than 55% of the $6.8tn raised in 2017 through bond sales organised by banks, according to… Dealogic. Countries from Argentina to Saudi Arabia also took advantage of an almost decade of low interest rates in developed economies, which forced investors to chase returns in the bonds of emerging market governments and their companies. ‘In 2017, there was such an influx of capital coming into high-quality fixed income. It’s a demand-fuelled story,’ said Gene Tannuzzo, a portfolio manager with Columbia Threadneedle. ‘If you are a sovereign or corporate, with interest rates where they are, you are supposed to borrow now.’”
Bloomberg’s Michael McKee: “Is the bond market telling the President he’s wrong about the potential for increasing the growth rate of the United States.”
Federal Reserve Bank of Minneapolis President Neel Kashkari: “Well, I think the bond market is saying a couple things to me. One, inflation expectations are drifting lower. They have drifted lower, and that’s in large part, I believe, because of the Fed – because we’ve been sending these hawkish signals by raising interest rates in a low inflation environment. Second, I think the markets are also pricing in a lower neutral real interest rate. So the interest rate that balances savings and investment in the economy is set by broader economic forces. It’s been trending down over the last few decades. I think markets are embracing that concept and pricing in a lower, what we call “r-star”, which then caps where bond yields are, and at the same time can explain some of the appreciation in the equities markets, as they’re discounting cash flows at a lower rate. So those are the signals that I take away from the bond market right now.”
Bloomberg’s David Westin: “…If you had your way, if you went from what the Fed is predicting now - three [rate] increases next year - to one, or maybe none, what would happen to the long-end of the yield curve, in your view?”
Kashkari: “In my view, I think that would take off some of the downward – the disinflationary pressure that I think the committee is putting on the long-end of the curve. In my view, by raising rates in a low inflation environment we are sending a signal that our 2% inflation target is not a target. We’re sending a signal that it’s a ceiling – that we’re not going to allow inflation to creep above 2%. And I think that’s putting pressure on the long end of the curve. If you look at how we’ve behaved – not at what we’ve said – we say it’s a target not a ceiling. If you look at how we’ve behaved over the past five or six years, we’ve been treating 2% as a ceiling. I think markets have figured that out and they’re pricing that in. So to me, the Fed is pushing up the front end with our rate increases and pushing down the long end by sending this very hawkish signal about the outlook for inflation.”
“Very hawkish signal”? It’s been a while since radical dovishness was an impediment to career advancement at the Federal Reserve (or prospering thereafter).
Between tax legislation and cryptocurrencies, there’s been little interest in much else. As for tax cuts, it’s an inopportune juncture in the cycle for aggressive fiscal stimulus. And for major corporate tax reduction more specifically, with boom-time earnings and the loosest Credit conditions imaginable, it’s Epic Stimulus Overload. History will look back at this week - ebullient Republicans sharing the podium and cryptocurrency/blockchain trading madness - and ponder how things got so crazy.
From my analytical vantage point, the nation’s housing markets have been about the only thing holding the U.S. economy back from full-fledged overheated status. Sales have been solid and price inflation steady. And while construction has recovered significantly from the 2009/2010 trough, housing starts remain at about 60% of 2004-2005 period peak levels. It takes some time for residential construction to attain take-off momentum. Well, liftoff may have finally arrived. As long as mortgage rates remain so low, we should expect ongoing housing upside surprises. An already strong inflationary bias is starting to Bubble. Is the Fed paying attention?
December 22 – Reuters: “Sales of new U.S. single-family homes unexpectedly rose in November, hitting their highest level in more than 10 years, driven by robust demand across the country. The Commerce Department said… new home sales jumped 17.5% to a seasonally adjusted annual rate of 733,000 units last month. That was the highest level since July 2007… New home sales surged 26.6% from a year ago.”
And from Bloomberg’s Shobhana Chandra: “…The number of [new] properties sold in which construction hadn’t yet started increased almost 43% to 258,000 in November, the most since December 2006… Supply of homes at current sales rate fell to 4.6 months from 5.4 months.”
December 20 - Bloomberg (Shobhana Chandra): “Sales of previously owned U.S. homes rose in November to an almost 11-year high, indicating demand picked up momentum heading into the end of the year… The results show broad strength, with particular firmness in the upper-end market where inventory conditions are ‘markedly better,’ the group said. Forty-four percent of homes sold in November were on the market for less than a month. At the current pace, it would take 3.4 months to sell the homes on the market, the lowest in records to 1999 and down from 3.9 months in the prior month.”
December 19 – Bloomberg (Sho Chandra): “Groundbreaking on single-family homes proceeded in November at the strongest pace in a decade, driving U.S. housing starts to a faster-than-estimated rate… Single-family starts jumped 5.3% to 930,000, highest since Sept. 2007; South and West regions also were 10-year highs. The latest results make it more likely that residential construction spending -- which subtracted from economic growth in the second and third quarters -- will add to the pace of U.S. expansion in the October-December period, which is already shaping up as a solid quarter.”
U.S. and global growth surprised on the upside in 2017, explained by monetary conditions that somehow became only more extraordinarily loose. The Fed, with its dovish approach to three baby-step hikes, failed to tighten conditions. Led by the Bank of Japan and the European Central Bank, it was another year of massive global QE. Meanwhile, Chinese “tightening” measures couldn’t restrain record Credit growth. At the “periphery,” EM were the recipients of huge financial flows, spurring domestic Credit systems and economies around the globe. It’s been a huge year for Credit on a global scale.
December 19 – Financial Times (Eric Platt and Robin Wigglesworth): “A borrowing binge by companies and governments has reached a new high this year, providing bumper fees for Wall Street but raising questions ahead of a year of expected tightening of cheap money by the world’s most important central banks in 2018. Blue-chip corporate borrowers such as AT&T and Microsoft have led the way, as companies accounted for more than 55% of the $6.8tn raised in 2017 through bond sales organised by banks, according to… Dealogic. Countries from Argentina to Saudi Arabia also took advantage of an almost decade of low interest rates in developed economies, which forced investors to chase returns in the bonds of emerging market governments and their companies. ‘In 2017, there was such an influx of capital coming into high-quality fixed income. It’s a demand-fuelled story,’ said Gene Tannuzzo, a portfolio manager with Columbia Threadneedle. ‘If you are a sovereign or corporate, with interest rates where they are, you are supposed to borrow now.’”
Bloomberg’s Michael McKee: “Is the bond market telling the President he’s wrong about the potential for increasing the growth rate of the United States.”
Federal Reserve Bank of Minneapolis President Neel Kashkari: “Well, I think the bond market is saying a couple things to me. One, inflation expectations are drifting lower. They have drifted lower, and that’s in large part, I believe, because of the Fed – because we’ve been sending these hawkish signals by raising interest rates in a low inflation environment. Second, I think the markets are also pricing in a lower neutral real interest rate. So the interest rate that balances savings and investment in the economy is set by broader economic forces. It’s been trending down over the last few decades. I think markets are embracing that concept and pricing in a lower, what we call “r-star”, which then caps where bond yields are, and at the same time can explain some of the appreciation in the equities markets, as they’re discounting cash flows at a lower rate. So those are the signals that I take away from the bond market right now.”
Bloomberg’s David Westin: “…If you had your way, if you went from what the Fed is predicting now - three [rate] increases next year - to one, or maybe none, what would happen to the long-end of the yield curve, in your view?”
Kashkari: “In my view, I think that would take off some of the downward – the disinflationary pressure that I think the committee is putting on the long-end of the curve. In my view, by raising rates in a low inflation environment we are sending a signal that our 2% inflation target is not a target. We’re sending a signal that it’s a ceiling – that we’re not going to allow inflation to creep above 2%. And I think that’s putting pressure on the long end of the curve. If you look at how we’ve behaved – not at what we’ve said – we say it’s a target not a ceiling. If you look at how we’ve behaved over the past five or six years, we’ve been treating 2% as a ceiling. I think markets have figured that out and they’re pricing that in. So to me, the Fed is pushing up the front end with our rate increases and pushing down the long end by sending this very hawkish signal about the outlook for inflation.”
“Very hawkish signal”? It’s been a while since radical dovishness was an impediment to career advancement at the Federal Reserve (or prospering thereafter).
Central bankers over recent decades have repeatedly found excuses for leaving monetary policy too loose for too long. In the face of history’s greatest expansion of global debt, central bankers have since the early nineties justified loose monetary policy by pointing to deflation risk. When the economy and markets were turning increasingly overheated in the late-nineties, chairman Greenspan claimed a New Paradigm of technological advancement presented the U.S. economy with a faster speed limit. When the post-tech Bubble reflation was spurring record Credit growth and rampant mortgage excess, Dr. Bernanke and others proffered the “global saving glut” thesis. Apparently, it was out of the Fed’s hands.
Now we have a historically low “r-star” “neutral rate” – and Fed hawkishness supposedly pressuring long-term yields lower. I really struggle with the notion that the Fed has been hawkish “over the past five or six years.” Do global central bankers not appreciate that decades of loose finance have been a major force behind disinflationary pressures? Moreover, employing open-ended QE fundamentally altered expectations and market pricing for sovereign debt and long-term financial assets. With myriad Bubbles flourishing around the globe, debt markets now price in QE forever. I believe global long-term yields would move sharply higher in the event of a stunning outbreak of central bank hawkishness.
December 18 – Wall Street Journal (Michael C. Bender): “Declaring that ‘economic security is national security,’ President Donald Trump aimed to reframe a national debate over his domestic economic and trade policies by thrusting them into a national-security context. ‘Economic vitality, growth and prosperity at home is absolutely necessary for American power and influence abroad,’ Mr. Trump said… as he unveiled his new national security strategy. ‘Any nation that trades away its prosperity for security will end up losing both.’ Recounting a year of stock-market gains and unemployment-rate decreases, Mr. Trump alleged that his predecessors prioritized nation building abroad over economic growth at home. He said his new national security strategy… provided a needed contrast, and included plans for cutting taxes, rebuilding roads and bridges and building a wall along the U.S.-Mexico border.”
December 20 – New York Times (Keith Bradsher): “It’s Xi Jinping’s economy now, and he isn’t too worried about debt. China signaled its economic priorities on Wednesday at the end of a meeting of top Communist Party economic leaders with a statement indicating that President Xi is fully in charge. Labeled ‘Xi Jinping Thought on Socialist Economy With Chinese Characteristics,’ the statement called for trimming industrial overcapacity, controlling the supply of money and other moves that have been staples of China’s other recent declarations. Barely mentioned: China’s surging debt. Despite downgrades this year by two international credit rating firms and warnings from institutions like the International Monetary Fund, the statement issued at the conclusion of the Central Economic Work Conference called for controlling borrowing by local governments, but it otherwise glossed over a vast borrowing splurge in recent years, driven in large part by Chinese companies.”
Now we have a historically low “r-star” “neutral rate” – and Fed hawkishness supposedly pressuring long-term yields lower. I really struggle with the notion that the Fed has been hawkish “over the past five or six years.” Do global central bankers not appreciate that decades of loose finance have been a major force behind disinflationary pressures? Moreover, employing open-ended QE fundamentally altered expectations and market pricing for sovereign debt and long-term financial assets. With myriad Bubbles flourishing around the globe, debt markets now price in QE forever. I believe global long-term yields would move sharply higher in the event of a stunning outbreak of central bank hawkishness.
December 18 – Wall Street Journal (Michael C. Bender): “Declaring that ‘economic security is national security,’ President Donald Trump aimed to reframe a national debate over his domestic economic and trade policies by thrusting them into a national-security context. ‘Economic vitality, growth and prosperity at home is absolutely necessary for American power and influence abroad,’ Mr. Trump said… as he unveiled his new national security strategy. ‘Any nation that trades away its prosperity for security will end up losing both.’ Recounting a year of stock-market gains and unemployment-rate decreases, Mr. Trump alleged that his predecessors prioritized nation building abroad over economic growth at home. He said his new national security strategy… provided a needed contrast, and included plans for cutting taxes, rebuilding roads and bridges and building a wall along the U.S.-Mexico border.”
December 20 – New York Times (Keith Bradsher): “It’s Xi Jinping’s economy now, and he isn’t too worried about debt. China signaled its economic priorities on Wednesday at the end of a meeting of top Communist Party economic leaders with a statement indicating that President Xi is fully in charge. Labeled ‘Xi Jinping Thought on Socialist Economy With Chinese Characteristics,’ the statement called for trimming industrial overcapacity, controlling the supply of money and other moves that have been staples of China’s other recent declarations. Barely mentioned: China’s surging debt. Despite downgrades this year by two international credit rating firms and warnings from institutions like the International Monetary Fund, the statement issued at the conclusion of the Central Economic Work Conference called for controlling borrowing by local governments, but it otherwise glossed over a vast borrowing splurge in recent years, driven in large part by Chinese companies.”
President Trump is now wedded to the U.S. Bubble. President Xi Jinping is wedded to the Chinese Bubble. I’ve posited a global “Arms Race in Bubbles.” With Trump in charge and the Republicans now pushing through aggressive stimulus, perhaps Chinese officials are rethinking the geopolitical risks associated with efforts to rein in their Bubble excess.
It’s been a long time coming. Yet I wouldn’t be surprised if this week’s jump in yields proves the start of something. Tax cuts coupled with an increasingly overheated economy creates a backdrop conducive to upside inflation surprises. Nice pop in commodities this week. And look at the housing data! And what if Beijing indulges yet another year of double-digit Credit growth in 2018? And while on the topic of 2018, what are the prospects for the Trump Administration turning its attention to trade competitor China? It’s another campaign promise and where things could turn really interesting.
For a moment, ponder this: an overheated U.S. economy, a surprising uptick in worker compensation and rising import costs. It’s been awhile since bond investors had to be concerned with anything other than (predictively dovish) monetary policy. “R-star” trending down forever? Remember when the bond market used to intimidate?
It’s been a long time coming. Yet I wouldn’t be surprised if this week’s jump in yields proves the start of something. Tax cuts coupled with an increasingly overheated economy creates a backdrop conducive to upside inflation surprises. Nice pop in commodities this week. And look at the housing data! And what if Beijing indulges yet another year of double-digit Credit growth in 2018? And while on the topic of 2018, what are the prospects for the Trump Administration turning its attention to trade competitor China? It’s another campaign promise and where things could turn really interesting.
For a moment, ponder this: an overheated U.S. economy, a surprising uptick in worker compensation and rising import costs. It’s been awhile since bond investors had to be concerned with anything other than (predictively dovish) monetary policy. “R-star” trending down forever? Remember when the bond market used to intimidate?
For the Week:
The S&P500 added 0.3% (up 19.9% y-t-d), and the Dow increased 0.4% (up 25.3%). The Utilities sank 4.5% (up 8.6%). The Banks rose 1.6% (up 17.6%), and the Broker/Dealers gained 1.4% (up 30.3%). The Transports rallied 2.7% (up 18.0%). The S&P 400 Midcaps gained 0.9% (up 14.7%), and the small cap Russell 2000 rose 0.8% (up 13.7%). The Nasdaq100 was unchanged (up 32.9%).The Semiconductors advanced 1.6% (up 40.2%). The Biotechs rose 0.7% (up 36.7%). With bullion up $20, the HUI gold index jumped 4.9% (up 3.6%).
Three-month Treasury bill rates ended the week at 130 bps. Two-year government yields rose five bps to 1.89% (up 70bps y-t-d). Five-year T-note yields jumped 10 bps to 2.25% (up 32bps). Ten-year Treasury yields rose 13 bps to 2.48% (up 4bps). Long bond yields gained 14 bps to 2.83% (down 23bps).
Greek 10-year yields rose 15 bps to 4.08% (down 294bps y-t-d). Ten-year Portuguese yields were little changed at 1.84% (down 191bps). Italian 10-year yields rose 10 bps to 1.91% (up 10bps). Spain's 10-year yields slipped two bps to 1.47% (up 9bps). German bund yields jumped 12 bps to 0.42% (up 22bps). French yields rose 11 bps to 0.74% (up 6bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields gained nine bps to 1.24% (up 1bp). U.K.'s FTSE equities jumped 1.4% (up 6.3%).
Japan's Nikkei 225 equities index rallied 1.5% (up 19.8% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 increased 0.3% (up 10.3%). The German DAX equities index slipped 0.2% (up 13.9%). Spain's IBEX 35 equities index added 0.3% (up 8.9%). Italy's FTSE MIB index recovered 0.5% (up 15.5%). EM markets were mixed. Brazil's Bovespa index surged 3.6% (up 24.8%), and Mexico's Bolsa added 0.6% (up 6.0%). South Korea's Kospi index fell 1.7% (up 20.4%). India’s Sensex equities index gained 1.4% (up 27.5%). China’s Shanghai Exchange gained 0.9% (up 6.2%). Turkey's Borsa Istanbul National 100 index rose 1.6% (up 42.2%). Russia's MICEX equities index dropped 1.9% (down 5.8%).
Junk bond mutual funds saw outflows of $1.112 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.94% (down 36bps y-o-y). Fifteen-year rates rose two bps to 3.38% (down 14bps). Five-year hybrid ARM rates gained three bps to 3.39% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 21bps).
Federal Reserve Credit last week increased $7.5bn to $4.408 TN. Over the past year, Fed Credit fell $15.3bn. Fed Credit inflated $1.589 TN, or 56%, over the past 267 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $12.0bn last week to $3.373 TN. "Custody holdings" were up $201bn y-o-y, or 6.3%.
M2 (narrow) "money" supply surged $60.7bn last week to a record $13.866 TN. "Narrow money" expanded $695bn, or 5.3%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits gained $5.2bn, and Savings Deposits jumped $48.4bn. Small Time Deposits were unchanged. Retail Money Funds rose $4.6bn.
Total money market fund assets dropped $21.2bn to $2.820 TN. Money Funds rose $107bn y-o-y, or 3.9%.
Total Commercial Paper jumped $28.9bn to a 19-month high $1.079 TN. CP gained $113bn y-o-y, or 11.7%.
Currency Watch:
The U.S. dollar index slipped 0.6% to 93.347 (down 8.8% y-t-d). For the week on the upside, the South African rand increased 3.8%, the Swedish krona 2.2%, the Canadian dollar 1.1%, the euro 1.0%, the South Korean won 0.9%, the Australian dollar 0.8%, the Norwegian krone 0.8%, the New Zealand dollar 0.4%, the Singapore dollar 0.4%, the British pound 0.3%, and the Swiss franc 0.3%. For the week on the downside, the Mexican peso declined 3.2%, the Brazilian real 1.1% and the Japanese yen 0.6%. The Chinese renminbi gained 0.49% versus the dollar this week (up 5.59% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.3% (up 7.7% y-t-d). Spot Gold rose 1.6% to $1,275 (up 10.7%). Silver surged 2.4% to $16.444 (up 2.9%). Crude gained $1.17 to $58.47 (up 9%). Gasoline surged 6.5% (up 6%), and Natural Gas gained 2.1% (down 29%). Copper advanced 3.3% (up 29%). Wheat gained 1.6% (up 4%). Corn rose 1.3% (unchanged).
Trump Administration Watch:
December 22 – Wall Street Journal (Louise Radnofsky): “President Donald Trump signed a sweeping tax overhaul bill into law in the Oval Office on Friday morning, as well as a spending bill to keep the government open through mid-January. Congress this week passed a tax bill that represents the most far-reaching overhaul of the U.S. tax system in decades, reducing the corporate tax rate to its lowest point since 1939 and cutting individual taxes for most households next year.”
December 19 – Bloomberg (Liz McCormick and Katherine Greifeld): “With the U.S. about to sell the most debt in eight years, Treasury Secretary Steven Mnuchin may find himself relying on a buyer base that needs to see higher yields before loading up. Government debt sales are set to more than double in 2018, lifting net issuance to $1.3 trillion, the most since 2010… With the Federal Reserve shrinking its bond holdings and deficits poised to swell even before taking into account the tax overhaul, all signs point to higher financing costs. The challenge for Mnuchin is that some analysts predict buying by central banks -- a pillar of support this year -- may fade, in part as international-reserve growth stabilizes.”
December 21 – Politico (Kevin Robillard, Nancy Cook and Cristiano Lima): “Conservative groups are planning a multimillion-dollar effort to sell the GOP’s tax cut law, hoping the American electorate can learn to love the party’s signature — but massively unpopular — legislative achievement. ‘We have a public that distrusts anything coming out of Washington, especially anything from the majority party,’ said Tim Phillips, president of Americans for Prosperity…. ‘We have a job that's not that hard. We have to make sure people understand the benefits they're going to receive from this legislation.’”
December 18 – Reuters (Dustin Volz): “The Trump administration has publicly blamed North Korea for unleashing the so-called WannaCry cyber attack that crippled hospitals, banks and other companies across the globe earlier this year. ‘The attack was widespread and cost billions, and North Korea is directly responsible,’ Tom Bossert, homeland security adviser to President Donald Trump, wrote…”
China Watch:
December 19 – Wall Street Journal (Lingling Wei): “As China prepares to unveil its economic blueprint for 2018, people familiar with the plan say it will show that Beijing is finding it hard to cut debt without jeopardizing growth. In the blueprint to be unveiled on Wednesday, past talk of bringing down debt, the priority for the past two years, is gone in favor of a pledge to just control the rise in borrowing, according to these people. The softening of the goal, decided earlier this month by the Communist Party’s top leadership, is an official acknowledgment of how hard it is for Beijing to wean the economy off debt-driven growth. ‘Let’s face it,’ said an official involved in policy discussions, ‘it’s not realistic to reduce leverage when the whole economy relies on banks for financing.’”
The S&P500 added 0.3% (up 19.9% y-t-d), and the Dow increased 0.4% (up 25.3%). The Utilities sank 4.5% (up 8.6%). The Banks rose 1.6% (up 17.6%), and the Broker/Dealers gained 1.4% (up 30.3%). The Transports rallied 2.7% (up 18.0%). The S&P 400 Midcaps gained 0.9% (up 14.7%), and the small cap Russell 2000 rose 0.8% (up 13.7%). The Nasdaq100 was unchanged (up 32.9%).The Semiconductors advanced 1.6% (up 40.2%). The Biotechs rose 0.7% (up 36.7%). With bullion up $20, the HUI gold index jumped 4.9% (up 3.6%).
Three-month Treasury bill rates ended the week at 130 bps. Two-year government yields rose five bps to 1.89% (up 70bps y-t-d). Five-year T-note yields jumped 10 bps to 2.25% (up 32bps). Ten-year Treasury yields rose 13 bps to 2.48% (up 4bps). Long bond yields gained 14 bps to 2.83% (down 23bps).
Greek 10-year yields rose 15 bps to 4.08% (down 294bps y-t-d). Ten-year Portuguese yields were little changed at 1.84% (down 191bps). Italian 10-year yields rose 10 bps to 1.91% (up 10bps). Spain's 10-year yields slipped two bps to 1.47% (up 9bps). German bund yields jumped 12 bps to 0.42% (up 22bps). French yields rose 11 bps to 0.74% (up 6bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields gained nine bps to 1.24% (up 1bp). U.K.'s FTSE equities jumped 1.4% (up 6.3%).
Japan's Nikkei 225 equities index rallied 1.5% (up 19.8% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.048% (up 1bp). France's CAC40 increased 0.3% (up 10.3%). The German DAX equities index slipped 0.2% (up 13.9%). Spain's IBEX 35 equities index added 0.3% (up 8.9%). Italy's FTSE MIB index recovered 0.5% (up 15.5%). EM markets were mixed. Brazil's Bovespa index surged 3.6% (up 24.8%), and Mexico's Bolsa added 0.6% (up 6.0%). South Korea's Kospi index fell 1.7% (up 20.4%). India’s Sensex equities index gained 1.4% (up 27.5%). China’s Shanghai Exchange gained 0.9% (up 6.2%). Turkey's Borsa Istanbul National 100 index rose 1.6% (up 42.2%). Russia's MICEX equities index dropped 1.9% (down 5.8%).
Junk bond mutual funds saw outflows of $1.112 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.94% (down 36bps y-o-y). Fifteen-year rates rose two bps to 3.38% (down 14bps). Five-year hybrid ARM rates gained three bps to 3.39% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 21bps).
Federal Reserve Credit last week increased $7.5bn to $4.408 TN. Over the past year, Fed Credit fell $15.3bn. Fed Credit inflated $1.589 TN, or 56%, over the past 267 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $12.0bn last week to $3.373 TN. "Custody holdings" were up $201bn y-o-y, or 6.3%.
M2 (narrow) "money" supply surged $60.7bn last week to a record $13.866 TN. "Narrow money" expanded $695bn, or 5.3%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits gained $5.2bn, and Savings Deposits jumped $48.4bn. Small Time Deposits were unchanged. Retail Money Funds rose $4.6bn.
Total money market fund assets dropped $21.2bn to $2.820 TN. Money Funds rose $107bn y-o-y, or 3.9%.
Total Commercial Paper jumped $28.9bn to a 19-month high $1.079 TN. CP gained $113bn y-o-y, or 11.7%.
Currency Watch:
The U.S. dollar index slipped 0.6% to 93.347 (down 8.8% y-t-d). For the week on the upside, the South African rand increased 3.8%, the Swedish krona 2.2%, the Canadian dollar 1.1%, the euro 1.0%, the South Korean won 0.9%, the Australian dollar 0.8%, the Norwegian krone 0.8%, the New Zealand dollar 0.4%, the Singapore dollar 0.4%, the British pound 0.3%, and the Swiss franc 0.3%. For the week on the downside, the Mexican peso declined 3.2%, the Brazilian real 1.1% and the Japanese yen 0.6%. The Chinese renminbi gained 0.49% versus the dollar this week (up 5.59% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.3% (up 7.7% y-t-d). Spot Gold rose 1.6% to $1,275 (up 10.7%). Silver surged 2.4% to $16.444 (up 2.9%). Crude gained $1.17 to $58.47 (up 9%). Gasoline surged 6.5% (up 6%), and Natural Gas gained 2.1% (down 29%). Copper advanced 3.3% (up 29%). Wheat gained 1.6% (up 4%). Corn rose 1.3% (unchanged).
Trump Administration Watch:
December 22 – Wall Street Journal (Louise Radnofsky): “President Donald Trump signed a sweeping tax overhaul bill into law in the Oval Office on Friday morning, as well as a spending bill to keep the government open through mid-January. Congress this week passed a tax bill that represents the most far-reaching overhaul of the U.S. tax system in decades, reducing the corporate tax rate to its lowest point since 1939 and cutting individual taxes for most households next year.”
December 19 – Bloomberg (Liz McCormick and Katherine Greifeld): “With the U.S. about to sell the most debt in eight years, Treasury Secretary Steven Mnuchin may find himself relying on a buyer base that needs to see higher yields before loading up. Government debt sales are set to more than double in 2018, lifting net issuance to $1.3 trillion, the most since 2010… With the Federal Reserve shrinking its bond holdings and deficits poised to swell even before taking into account the tax overhaul, all signs point to higher financing costs. The challenge for Mnuchin is that some analysts predict buying by central banks -- a pillar of support this year -- may fade, in part as international-reserve growth stabilizes.”
December 21 – Politico (Kevin Robillard, Nancy Cook and Cristiano Lima): “Conservative groups are planning a multimillion-dollar effort to sell the GOP’s tax cut law, hoping the American electorate can learn to love the party’s signature — but massively unpopular — legislative achievement. ‘We have a public that distrusts anything coming out of Washington, especially anything from the majority party,’ said Tim Phillips, president of Americans for Prosperity…. ‘We have a job that's not that hard. We have to make sure people understand the benefits they're going to receive from this legislation.’”
December 18 – Reuters (Dustin Volz): “The Trump administration has publicly blamed North Korea for unleashing the so-called WannaCry cyber attack that crippled hospitals, banks and other companies across the globe earlier this year. ‘The attack was widespread and cost billions, and North Korea is directly responsible,’ Tom Bossert, homeland security adviser to President Donald Trump, wrote…”
China Watch:
December 19 – Wall Street Journal (Lingling Wei): “As China prepares to unveil its economic blueprint for 2018, people familiar with the plan say it will show that Beijing is finding it hard to cut debt without jeopardizing growth. In the blueprint to be unveiled on Wednesday, past talk of bringing down debt, the priority for the past two years, is gone in favor of a pledge to just control the rise in borrowing, according to these people. The softening of the goal, decided earlier this month by the Communist Party’s top leadership, is an official acknowledgment of how hard it is for Beijing to wean the economy off debt-driven growth. ‘Let’s face it,’ said an official involved in policy discussions, ‘it’s not realistic to reduce leverage when the whole economy relies on banks for financing.’”
December 17 – Reuters: “Growth in China's new home prices sustained its momentum in November, with increases seen in provincial centres and smaller cities in a sign policymakers may need to step up curbs to rein in speculation in the property market. China's housing market boom has lasted more than two years, giving the economy a major boost but stirring fears of a property bubble, with the government taking stern measures to curtail speculative buying.”
December 18 – Bloomberg: “Bond cancellations at Chinese conglomerate HNA Group Co.’s units are spreading, fueling concerns about financing strains after borrowing costs soared to records. The third such scrapped financing plan this month came Tuesday, as Tianjin Airlines Co. said it had set aside a planned offering of 1 billion yuan ($151 million) of 270-day notes… Concerns about financial strains at HNA Group are growing after a debt-fueled $40 billion acquisition spree across six continents that invited scrutiny from regulators across the globe.”
December 19 – Bloomberg (Alfred Liu): “A Chinese biotech company defaulted on a loan tied to an asset-management product, after the nation’s regulators last month moved to tighten supervision and break an implicit guarantee that’s driven investment into such vehicles… Shandong Longlive Bio-technology Co. failed to repay the first 138 million yuan ($20.9 million) installment on a 227 million yuan loan from Zhonghai Trust Co. on Dec. 7… The majority of the missed payment was packaged into an asset-management product issued by Datong Securities Co. Chinese President Xi Jinping and his top economic deputies have vowed to make controlling financial risks their foremost priority, a pledge renewed at the Communist Party’s twice-a-decade leadership congress in October.”
December 20 – Bloomberg (Richard Frost): “China’s campaign to cut risk in the financial sector this year has helped make the nation’s stock market the most divided on record. As investors worried about the impact of rising funding costs for companies, they rushed into the safest of stocks -- large-cap firms, mostly state-owned. The result is a performance gap of 27 percentage points between the FTSE China A50 Index of China’s biggest companies and the 1,400-member Shanghai Composite Index, the widest margin since at least 2003.”
Federal Reserve Watch:
December 17 – Bloomberg (Joanna Ossinger): “Investors have been underestimating the importance of U.S. economic growth for Federal Reserve policy, and giving too much relative emphasis to inflation and wage data that have tended to disappoint expectations, according to Goldman Sachs… If it starts looking more likely that U.S. growth will stay above its potential rate, that could boost the chances of a labor-market overheating that quickens the pace of Fed rate increases, Goldman economists led by Jan Hatzius wrote in a Dec. 17 note.”
December 21 – CNBC (Steve Liesman): “Larry Lindsey, a former top economic advisor to President George W. Bush and a one-time Federal Reserve governor, is being considered for the Fed vice chairman job, according to sources. The White House is looking for monetary policy expertise for the position, according to the sources and Lindsey would fit that bill. He was a governor of the central bank from 1991 to 1997.”
U.S. Bubble Watch:
December 18 – Wall Street Journal (Andrew Ackerman and Nick Timiraos): “Mortgage-finance giants Fannie Mae and Freddie Mac are here to stay. Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down... Bipartisan Senate legislation set to be introduced in early 2018 marks the clearest sign of this reversal and shows how the companies, entering their 10th year under federal control, have proven too risky to attempt replacing. The housing market has seen strong demand in recent years, driven in part by steady access for many Americans to 4% or lower 30-year fixed-rate mortgages, thanks in part to a government backstop of the companies.”
December 22 – Bloomberg (Manuel Baigorri): “Just as most people are packing up for Christmas, dealmakers across the world are rushing to finish up a slew of transactions in industries ranging from consumer to telecom and health care to gambling. Companies have announced about $361 billion of mergers and acquisitions this month, making it the busiest December in at least 12 years…”
December 20 – Bloomberg Businessweek (Stephen Gandel): “Some have been warning recently that a crash in leveraged loans, one of Wall Street's hottest debt markets, could do investors a lot more damage than in the past. Investors, though, show little signs of concern. Indeed, money has continued to race into leveraged loans. U.S. companies have raised nearly $1.4 trillion in the relatively risky lending market this year, up 46% from a year ago… The yield on the average leveraged loan was 5.4% at the end of November, which is nearly the same as it was in the month a year earlier.”
December 19 – CNBC (Steve Liesman): “Buoyant American attitudes on the economy look set to show up in plentiful, record-setting holiday spending this season. The CNBC All-America Survey found that average holiday spending intentions will top $900 for the first time in the 12-year history of the poll, eclipsing last year's estimate of $702 by a wide margin. The survey of 800 Americans nationwide… found a surge in the percentage of Americans planning to spend more than $1,000, to 29% from 24%.”
December 21 – Bloomberg (Arie Shapira and Kailey Leinz): “There’s a new leader in the sweepstakes for the zaniest name change in the crypto craze. Long Island Iced Tea Corp. shares rose as much as 289% after the unprofitable… company rebranded itself Long Blockchain Corp. It’s the latest in a near-daily phenomenon sweeping the stock market, where obscure microcap companies reorient to focus on some aspect of the mania sparked by bitcoin’s 1,500% rally this year. Long Blockchain, whose business has been selling non-alcoholic beverages, says it will now seek to partner with or invest in companies that develop the decentralized ledgers known as blockchain, the technology that underpins bitcoin.”
December 18 – Financial Times (Nicole Bullock and Robin Wigglesworth): “When shares in a company led by a self-styled ‘global techno entrepreneur’ and ‘financial wizard’ increase 10-fold on news that it has acquired a digital currency business, the echoes of the dotcom bubble are too loud to ignore. Analysts and investors said the excitement around bitcoin and blockchain technology was now reminiscent of the period almost two decades ago, when adding dotcom to a company name could drive a buying frenzy. The latest example was the surging share price of LongFin, a business specialising in trade finance that went public on Nasdaq... When it announced, just two days later, that it was buying a blockchain-related venture called Ziddu.com, LongFin shares jumped more than 1,000% — in a move that even its own founder called ‘unwarranted’.”
December 17 –New York Times (Matthew Goldstein): “Puerto Rico has had an awful decade — and it’s about to get worse. First came a brutal 10-year recession and financial crisis that drove businesses from this island and left 44% of the population impoverished. Then, in September, Hurricane Maria, a powerful Category 4 storm, shredded buildings, wrecked the electrical power grid and possibly led to more than 1,000 deaths. Now Puerto Rico is bracing for another blow: a housing meltdown that could far surpass the worst of the foreclosure crisis that devastated Phoenix, Las Vegas, Southern California and South Florida… If the current numbers hold, Puerto Rico is headed for a foreclosure epidemic that could rival what happened in Detroit... About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages.”
December 17 – Financial Times (Alistair Gray and Oliver Ralph): “Insurers are braced for another multi-billion-dollar loss from the fires in southern California, capping what is already shaping up to be one of the costliest ever years for the industry. Adam Kamins, senior economist at Moody’s Analytics, estimates that losses from the Thomas Fire alone — the most serious of several in the region — would come in at about $1.5bn. That could rise sharply depending on how much it spreads. The ultimate losses will depend in large part on winds in the coming days. Insurers already face claims of more than $100bn from a string of natural disasters this year, including hurricanes in the Caribbean and southern US, earthquakes in Mexico and wildfires in northern California in October.”
December 21 – Bloomberg (Gabrielle Coppola and Claire Boston): “Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out. A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.”
Central Banker Watch:
December 19 – Bloomberg (Jana Randow and Paul Gordon): “European Central Bank policy maker Jens Weidmann reiterated his call for a definite end-date for the institution’s bond-buying program, a refrain that looks likely to gain traction among his colleagues next year. Saying that domestic price pressures should strengthen as wage growth improves, he said they are ‘therefore on track toward our definition of price stability.’ While policy makers meeting last week reaffirmed their commitment to buy debt until September ‘or beyond,’ officials including at least half the six-member Executive Board have signaled they’re willing to rein in expectations for another extension… ‘A faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable,’ Weidmann, who also heads Germany’s Bundesbank, told reporters…”
December 20 – Reuters (Simon Johnson and Daniel Dickson): “Sweden's central bank took its first baby steps toward reversing ultra-loose policy on Wednesday, holding rates unchanged and ending net new bond purchases. Coupons and maturing bonds will be reinvested, however, and the balance sheet will swell temporarily. As a result the central bank's holdings of government bonds will increase temporarily in 2018 and the beginning of 2019. ‘We are slowly normalising, but with emphasis on slowly,’ Governor Stefan Ingves told reporters.”
Global Bubble Watch:
December 21 – Bloomberg (Sid Verma): “Lowflation drove global markets to dizzying highs this year. Inflation could drive them off a cliff. The risk for 2018 is that consumer price growth stages a comeback, roiling investor portfolios and corporate profits, according to investors and strategists. The consequent return of higher real interest rates would imperil bullish market psychology more than you might think. ‘A significant inflation shock would be just about the worst thing that could happen to today’s investment portfolios,’ Ben Inker, head of asset allocation at… Grantham Mayo Van Otterloo & Co., wrote… ‘Unlike most of history, it seems plausible that a meaningful inflation increase from here would impose worse losses on portfolios than a depression.’”
December 20 – Reuters (Stanley White): “Business confidence among Asian companies rose in October-December to the highest in almost seven years due to robust consumption and global trade… The Thomson Reuters/INSEAD Asian Business Sentiment Index .TRIABS RACSI, representing the six-month outlook of 94 firms, rose to 78 for the December quarter from 69 three months before.”
December 20 – Bloomberg (John Bowker, Renee Bonorchis, and Franz Wild): “It could wind up being South Africa’s version of the Enron accounting scandal. Furniture retailer Steinhoff International Holdings NV captivated investors by growing into a global force, latterly under its billionaire chairman, Christo Wiese. Now it’s drawing attention for all the wrong reasons. Shares in Steinhoff crashed 80% in two days after the company reported accounting irregularities that stretch back to 2016. Wiese has stepped down, Chief Executive Officer Markus Jooste has resigned and the company is looking for leniency from its creditors.”
December 19 – Bloomberg (Renee Bonorchis): “Embattled furniture retailer Steinhoff International Holdings NV was pushed to the brink of collapse after it said lenders have started to cut off support in the wake of an accounting scandal that destroyed most of its value in a matter of days. As the owner of Conforama in France and Mattress Firm in the U.S. seeks a lifeline, it’s still unable to assess the magnitude of financial irregularities disclosed two weeks ago…”
December 20 – Bloomberg (Kana Nishizawa and Narae Kim): “It was a year for bitcoin, technology stocks and the power consolidation of China’s Xi Jinping. Those were some of the most popular topics for people boning up on issues important to finance and business through Google searches in 2017.”
Fixed Income Watch:
December 22 – Financial Times (Robin Wigglesworth): “No one knows when the US credit cycle will keel over. But when it eventually does, the outcome is likely to be unusually nasty, brutish and protracted. The US corporate bond market has been on fire this year, with companies raising a record $1.14tn of debt. Even junk-rated companies enjoy average borrowing costs of less than 6%. That might look miserly, but corporate debt has been a welcome oasis of yield in a desert where close to $10tn of sovereign bonds still trade with negative interest rates. Yet when the economy inevitably turns, this oasis might look more like a sinkhole. Many creditors are likely to face more severe losses than they have in the past, and more arduous debt workouts. The debt boom has been accompanied by a sharp deterioration of the legal protection offered to creditors, as borrowers have taken advantage of desperate investors to weaken or scrap ‘covenants’ designed to help insulate lenders from financial shenanigans.”
Europe Watch:
December 22 – Bloomberg (Esteban Duarte, Maria Tadeo, Charles Penty, and Vidya N Root): “Spanish Prime Minister Mariano Rajoy is meeting with allies this morning to plot his next move after a drubbing in Thursday’s Catalan election that saw separatists reclaim control of the regional assembly. Rajoy headed to a 9:30 a.m. cabinet meeting in Madrid and planned to sit down with his People’s Party leadership later in the day, with the resurgent Catalan independence campaign at the top of the agenda. The PP lost eight of its 11 seats in the region’s parliament as ousted President Carles Puigdemont’s party confounded projections to become the biggest group in a three-way separatist bloc.”
Japan Watch:
December 18 – Bloomberg: “Bond cancellations at Chinese conglomerate HNA Group Co.’s units are spreading, fueling concerns about financing strains after borrowing costs soared to records. The third such scrapped financing plan this month came Tuesday, as Tianjin Airlines Co. said it had set aside a planned offering of 1 billion yuan ($151 million) of 270-day notes… Concerns about financial strains at HNA Group are growing after a debt-fueled $40 billion acquisition spree across six continents that invited scrutiny from regulators across the globe.”
December 19 – Bloomberg (Alfred Liu): “A Chinese biotech company defaulted on a loan tied to an asset-management product, after the nation’s regulators last month moved to tighten supervision and break an implicit guarantee that’s driven investment into such vehicles… Shandong Longlive Bio-technology Co. failed to repay the first 138 million yuan ($20.9 million) installment on a 227 million yuan loan from Zhonghai Trust Co. on Dec. 7… The majority of the missed payment was packaged into an asset-management product issued by Datong Securities Co. Chinese President Xi Jinping and his top economic deputies have vowed to make controlling financial risks their foremost priority, a pledge renewed at the Communist Party’s twice-a-decade leadership congress in October.”
December 20 – Bloomberg (Richard Frost): “China’s campaign to cut risk in the financial sector this year has helped make the nation’s stock market the most divided on record. As investors worried about the impact of rising funding costs for companies, they rushed into the safest of stocks -- large-cap firms, mostly state-owned. The result is a performance gap of 27 percentage points between the FTSE China A50 Index of China’s biggest companies and the 1,400-member Shanghai Composite Index, the widest margin since at least 2003.”
Federal Reserve Watch:
December 17 – Bloomberg (Joanna Ossinger): “Investors have been underestimating the importance of U.S. economic growth for Federal Reserve policy, and giving too much relative emphasis to inflation and wage data that have tended to disappoint expectations, according to Goldman Sachs… If it starts looking more likely that U.S. growth will stay above its potential rate, that could boost the chances of a labor-market overheating that quickens the pace of Fed rate increases, Goldman economists led by Jan Hatzius wrote in a Dec. 17 note.”
December 21 – CNBC (Steve Liesman): “Larry Lindsey, a former top economic advisor to President George W. Bush and a one-time Federal Reserve governor, is being considered for the Fed vice chairman job, according to sources. The White House is looking for monetary policy expertise for the position, according to the sources and Lindsey would fit that bill. He was a governor of the central bank from 1991 to 1997.”
U.S. Bubble Watch:
December 18 – Wall Street Journal (Andrew Ackerman and Nick Timiraos): “Mortgage-finance giants Fannie Mae and Freddie Mac are here to stay. Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down... Bipartisan Senate legislation set to be introduced in early 2018 marks the clearest sign of this reversal and shows how the companies, entering their 10th year under federal control, have proven too risky to attempt replacing. The housing market has seen strong demand in recent years, driven in part by steady access for many Americans to 4% or lower 30-year fixed-rate mortgages, thanks in part to a government backstop of the companies.”
December 22 – Bloomberg (Manuel Baigorri): “Just as most people are packing up for Christmas, dealmakers across the world are rushing to finish up a slew of transactions in industries ranging from consumer to telecom and health care to gambling. Companies have announced about $361 billion of mergers and acquisitions this month, making it the busiest December in at least 12 years…”
December 20 – Bloomberg Businessweek (Stephen Gandel): “Some have been warning recently that a crash in leveraged loans, one of Wall Street's hottest debt markets, could do investors a lot more damage than in the past. Investors, though, show little signs of concern. Indeed, money has continued to race into leveraged loans. U.S. companies have raised nearly $1.4 trillion in the relatively risky lending market this year, up 46% from a year ago… The yield on the average leveraged loan was 5.4% at the end of November, which is nearly the same as it was in the month a year earlier.”
December 19 – CNBC (Steve Liesman): “Buoyant American attitudes on the economy look set to show up in plentiful, record-setting holiday spending this season. The CNBC All-America Survey found that average holiday spending intentions will top $900 for the first time in the 12-year history of the poll, eclipsing last year's estimate of $702 by a wide margin. The survey of 800 Americans nationwide… found a surge in the percentage of Americans planning to spend more than $1,000, to 29% from 24%.”
December 21 – Bloomberg (Arie Shapira and Kailey Leinz): “There’s a new leader in the sweepstakes for the zaniest name change in the crypto craze. Long Island Iced Tea Corp. shares rose as much as 289% after the unprofitable… company rebranded itself Long Blockchain Corp. It’s the latest in a near-daily phenomenon sweeping the stock market, where obscure microcap companies reorient to focus on some aspect of the mania sparked by bitcoin’s 1,500% rally this year. Long Blockchain, whose business has been selling non-alcoholic beverages, says it will now seek to partner with or invest in companies that develop the decentralized ledgers known as blockchain, the technology that underpins bitcoin.”
December 18 – Financial Times (Nicole Bullock and Robin Wigglesworth): “When shares in a company led by a self-styled ‘global techno entrepreneur’ and ‘financial wizard’ increase 10-fold on news that it has acquired a digital currency business, the echoes of the dotcom bubble are too loud to ignore. Analysts and investors said the excitement around bitcoin and blockchain technology was now reminiscent of the period almost two decades ago, when adding dotcom to a company name could drive a buying frenzy. The latest example was the surging share price of LongFin, a business specialising in trade finance that went public on Nasdaq... When it announced, just two days later, that it was buying a blockchain-related venture called Ziddu.com, LongFin shares jumped more than 1,000% — in a move that even its own founder called ‘unwarranted’.”
December 17 –New York Times (Matthew Goldstein): “Puerto Rico has had an awful decade — and it’s about to get worse. First came a brutal 10-year recession and financial crisis that drove businesses from this island and left 44% of the population impoverished. Then, in September, Hurricane Maria, a powerful Category 4 storm, shredded buildings, wrecked the electrical power grid and possibly led to more than 1,000 deaths. Now Puerto Rico is bracing for another blow: a housing meltdown that could far surpass the worst of the foreclosure crisis that devastated Phoenix, Las Vegas, Southern California and South Florida… If the current numbers hold, Puerto Rico is headed for a foreclosure epidemic that could rival what happened in Detroit... About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages.”
December 17 – Financial Times (Alistair Gray and Oliver Ralph): “Insurers are braced for another multi-billion-dollar loss from the fires in southern California, capping what is already shaping up to be one of the costliest ever years for the industry. Adam Kamins, senior economist at Moody’s Analytics, estimates that losses from the Thomas Fire alone — the most serious of several in the region — would come in at about $1.5bn. That could rise sharply depending on how much it spreads. The ultimate losses will depend in large part on winds in the coming days. Insurers already face claims of more than $100bn from a string of natural disasters this year, including hurricanes in the Caribbean and southern US, earthquakes in Mexico and wildfires in northern California in October.”
December 21 – Bloomberg (Gabrielle Coppola and Claire Boston): “Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out. A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.”
Central Banker Watch:
December 19 – Bloomberg (Jana Randow and Paul Gordon): “European Central Bank policy maker Jens Weidmann reiterated his call for a definite end-date for the institution’s bond-buying program, a refrain that looks likely to gain traction among his colleagues next year. Saying that domestic price pressures should strengthen as wage growth improves, he said they are ‘therefore on track toward our definition of price stability.’ While policy makers meeting last week reaffirmed their commitment to buy debt until September ‘or beyond,’ officials including at least half the six-member Executive Board have signaled they’re willing to rein in expectations for another extension… ‘A faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable,’ Weidmann, who also heads Germany’s Bundesbank, told reporters…”
December 20 – Reuters (Simon Johnson and Daniel Dickson): “Sweden's central bank took its first baby steps toward reversing ultra-loose policy on Wednesday, holding rates unchanged and ending net new bond purchases. Coupons and maturing bonds will be reinvested, however, and the balance sheet will swell temporarily. As a result the central bank's holdings of government bonds will increase temporarily in 2018 and the beginning of 2019. ‘We are slowly normalising, but with emphasis on slowly,’ Governor Stefan Ingves told reporters.”
Global Bubble Watch:
December 21 – Bloomberg (Sid Verma): “Lowflation drove global markets to dizzying highs this year. Inflation could drive them off a cliff. The risk for 2018 is that consumer price growth stages a comeback, roiling investor portfolios and corporate profits, according to investors and strategists. The consequent return of higher real interest rates would imperil bullish market psychology more than you might think. ‘A significant inflation shock would be just about the worst thing that could happen to today’s investment portfolios,’ Ben Inker, head of asset allocation at… Grantham Mayo Van Otterloo & Co., wrote… ‘Unlike most of history, it seems plausible that a meaningful inflation increase from here would impose worse losses on portfolios than a depression.’”
December 20 – Reuters (Stanley White): “Business confidence among Asian companies rose in October-December to the highest in almost seven years due to robust consumption and global trade… The Thomson Reuters/INSEAD Asian Business Sentiment Index .TRIABS RACSI, representing the six-month outlook of 94 firms, rose to 78 for the December quarter from 69 three months before.”
December 20 – Bloomberg (John Bowker, Renee Bonorchis, and Franz Wild): “It could wind up being South Africa’s version of the Enron accounting scandal. Furniture retailer Steinhoff International Holdings NV captivated investors by growing into a global force, latterly under its billionaire chairman, Christo Wiese. Now it’s drawing attention for all the wrong reasons. Shares in Steinhoff crashed 80% in two days after the company reported accounting irregularities that stretch back to 2016. Wiese has stepped down, Chief Executive Officer Markus Jooste has resigned and the company is looking for leniency from its creditors.”
December 19 – Bloomberg (Renee Bonorchis): “Embattled furniture retailer Steinhoff International Holdings NV was pushed to the brink of collapse after it said lenders have started to cut off support in the wake of an accounting scandal that destroyed most of its value in a matter of days. As the owner of Conforama in France and Mattress Firm in the U.S. seeks a lifeline, it’s still unable to assess the magnitude of financial irregularities disclosed two weeks ago…”
December 20 – Bloomberg (Kana Nishizawa and Narae Kim): “It was a year for bitcoin, technology stocks and the power consolidation of China’s Xi Jinping. Those were some of the most popular topics for people boning up on issues important to finance and business through Google searches in 2017.”
Fixed Income Watch:
December 22 – Financial Times (Robin Wigglesworth): “No one knows when the US credit cycle will keel over. But when it eventually does, the outcome is likely to be unusually nasty, brutish and protracted. The US corporate bond market has been on fire this year, with companies raising a record $1.14tn of debt. Even junk-rated companies enjoy average borrowing costs of less than 6%. That might look miserly, but corporate debt has been a welcome oasis of yield in a desert where close to $10tn of sovereign bonds still trade with negative interest rates. Yet when the economy inevitably turns, this oasis might look more like a sinkhole. Many creditors are likely to face more severe losses than they have in the past, and more arduous debt workouts. The debt boom has been accompanied by a sharp deterioration of the legal protection offered to creditors, as borrowers have taken advantage of desperate investors to weaken or scrap ‘covenants’ designed to help insulate lenders from financial shenanigans.”
Europe Watch:
December 22 – Bloomberg (Esteban Duarte, Maria Tadeo, Charles Penty, and Vidya N Root): “Spanish Prime Minister Mariano Rajoy is meeting with allies this morning to plot his next move after a drubbing in Thursday’s Catalan election that saw separatists reclaim control of the regional assembly. Rajoy headed to a 9:30 a.m. cabinet meeting in Madrid and planned to sit down with his People’s Party leadership later in the day, with the resurgent Catalan independence campaign at the top of the agenda. The PP lost eight of its 11 seats in the region’s parliament as ousted President Carles Puigdemont’s party confounded projections to become the biggest group in a three-way separatist bloc.”
Japan Watch:
December 19 – Reuters: “The Bank of Japan's holdings of government debt rose to a record in July-September under its quantitative easing programme, which could deepen concerns its policy framework is unsustainable. The BOJ held a record 445 trillion yen ($3.94 trillion) in government debt at the end of September, up 7.6% from the same period a year earlier… The central bank held 40.9% of all government debt at the end of September, also the highest on record.”
December 21 – Bloomberg (Toru Fujioka): “The Bank of Japan left policy settings unchanged in the final meeting of 2017, retaining its unprecedented monetary stimulus as it waits for a pickup in stubbornly low inflation. With Japan’s economy continuing to grow at a healthy pace, and inflation at least moving in the right direction, there is little pressure on the BOJ adjust its interest-rate and asset-purchase targets any time soon. This sets it apart from its global counterparts, with the Federal Reserve hiking interest rates and the European Central Bank moving closer toward policy normalization.”
December 22 – Reuters (Tetsushi Kajimoto): “Japanese Prime Minister Shinzo Abe’s cabinet endorsed a record $860 billion budget for fiscal 2018 on Friday, opting to keep the economy on a sustained recovery with aggressive monetary stimulus and putting fiscal reforms on the back burner again… The budget - a record high for the sixth year - got a boost from snowballing welfare spending to respond to a fast-ageing population and a record military outlay amid regional tensions related to North Korea.”
December 17 – Bloomberg (James Mayger and Masahiro Hidaka): “The pace at which the Bank of Japan is expanding its massive hoard of bonds will continue to slow in 2018, according to the majority of economists surveyed… The central bank will increase its Japanese government bond holdings by about 44 trillion yen ($392bn) next year, according to the average estimate… That’s well below the BOJ’s 80 trillion yen annual guideline and a considerable drop from the 61 trillion yen increase that was seen in the 12 months through the end of November… Under Governor Haruhiko Kuroda, the BOJ has come to dominate the government bond market in Japan, owning more than 40% of outstanding debt and depressing volatility and interest rates.”
December 18 – Reuters (Tetsushi Kajimoto and Stanley White): “Japan’s government revised up its growth projections for the current and next fiscal years, forecasting the economy to expand 1.9% and 1.8% respectively on the back of steady improvement in domestic demand, the Cabinet Office said…”
Emerging Market Watch:
December 19 – Bloomberg (Natasha Doff): “It’s one of the most crowded trades for good reason. But dizzying returns and a surge of inflows have put emerging markets on a narrow precipice. After several false starts, economists are predicting next year will finally be the one in which borrowing costs get a significant leg-up. The International Monetary Fund is warning it could mark the tipping point for emerging-market bond funds sitting on the biggest annual inflows since the financial crisis… Investors piled into emerging-market bond funds this year as central banks delayed curbing monetary stimulus that’s pumped liquidity to developing economies over the past decade.”
Geopolitical Watch:
December 21 – Bloomberg (Nyshka Chandran): “When it comes to territorial disputes in Asia, the South China Sea typically commands the bulk of attention. But the East China Sea, a lesser-known hotbed of tensions, might be more likely to trigger an international conflict. ‘Despite the lower profile, the dispute in the East China Sea may carry greater risk of drawing the United States into conflict with China than the various disputes in the South China Sea,’ Ryan Hass, David M. Rubenstein Fellow at Brooking's foreign policy program, wrote… Both China and Japan lay claim to a set of islands in the East China Sea that cover around 81,000 square miles. Called Senkaku in Tokyo and Diaoyu in Beijing, the area is near major shipping routes and rich in energy reserves.”
December 21 – Bloomberg (Toru Fujioka): “The Bank of Japan left policy settings unchanged in the final meeting of 2017, retaining its unprecedented monetary stimulus as it waits for a pickup in stubbornly low inflation. With Japan’s economy continuing to grow at a healthy pace, and inflation at least moving in the right direction, there is little pressure on the BOJ adjust its interest-rate and asset-purchase targets any time soon. This sets it apart from its global counterparts, with the Federal Reserve hiking interest rates and the European Central Bank moving closer toward policy normalization.”
December 22 – Reuters (Tetsushi Kajimoto): “Japanese Prime Minister Shinzo Abe’s cabinet endorsed a record $860 billion budget for fiscal 2018 on Friday, opting to keep the economy on a sustained recovery with aggressive monetary stimulus and putting fiscal reforms on the back burner again… The budget - a record high for the sixth year - got a boost from snowballing welfare spending to respond to a fast-ageing population and a record military outlay amid regional tensions related to North Korea.”
December 17 – Bloomberg (James Mayger and Masahiro Hidaka): “The pace at which the Bank of Japan is expanding its massive hoard of bonds will continue to slow in 2018, according to the majority of economists surveyed… The central bank will increase its Japanese government bond holdings by about 44 trillion yen ($392bn) next year, according to the average estimate… That’s well below the BOJ’s 80 trillion yen annual guideline and a considerable drop from the 61 trillion yen increase that was seen in the 12 months through the end of November… Under Governor Haruhiko Kuroda, the BOJ has come to dominate the government bond market in Japan, owning more than 40% of outstanding debt and depressing volatility and interest rates.”
December 18 – Reuters (Tetsushi Kajimoto and Stanley White): “Japan’s government revised up its growth projections for the current and next fiscal years, forecasting the economy to expand 1.9% and 1.8% respectively on the back of steady improvement in domestic demand, the Cabinet Office said…”
Emerging Market Watch:
December 19 – Bloomberg (Natasha Doff): “It’s one of the most crowded trades for good reason. But dizzying returns and a surge of inflows have put emerging markets on a narrow precipice. After several false starts, economists are predicting next year will finally be the one in which borrowing costs get a significant leg-up. The International Monetary Fund is warning it could mark the tipping point for emerging-market bond funds sitting on the biggest annual inflows since the financial crisis… Investors piled into emerging-market bond funds this year as central banks delayed curbing monetary stimulus that’s pumped liquidity to developing economies over the past decade.”
Geopolitical Watch:
December 21 – Bloomberg (Nyshka Chandran): “When it comes to territorial disputes in Asia, the South China Sea typically commands the bulk of attention. But the East China Sea, a lesser-known hotbed of tensions, might be more likely to trigger an international conflict. ‘Despite the lower profile, the dispute in the East China Sea may carry greater risk of drawing the United States into conflict with China than the various disputes in the South China Sea,’ Ryan Hass, David M. Rubenstein Fellow at Brooking's foreign policy program, wrote… Both China and Japan lay claim to a set of islands in the East China Sea that cover around 81,000 square miles. Called Senkaku in Tokyo and Diaoyu in Beijing, the area is near major shipping routes and rich in energy reserves.”
Friday Evening Links
[Reuters] Wall Street wanes ahead of holiday; Catalan vote hits euro, Spanish stocks
[Bloomberg] U.S. Consumers’ Holiday Merriment Comes at the Expense of Their Savings
[WSJ] Analysis: How Consensus for Corporate Rate Cut Turned Into Partisan Tax Brawl
[FT] S&P 500 set to break record with ‘perfect’ calendar year
[Bloomberg] U.S. Consumers’ Holiday Merriment Comes at the Expense of Their Savings
[WSJ] Analysis: How Consensus for Corporate Rate Cut Turned Into Partisan Tax Brawl
[FT] S&P 500 set to break record with ‘perfect’ calendar year
Thursday, December 21, 2017
Friday's News Links
[Reuters] Wall Street little changed as Nike weighs
[Reuters] U.S. new home sales race to more than 10-year high in November
[Bloomberg] U.S. Consumer Spending Tops Forecasts as Inflation Accelerates
[Reuters] Strong U.S. consumer, business spending bolster fourth quarter growth picture
[Bloomberg] Catalan Separatists Cheer Puigdemont as Rajoy Handed a Drubbing
[Reuters] Japan's record financial year 2018 budget puts fiscal discipline in doubt
[CNBC] Bitcoin falls by more than $3,000, dropping through $13,000 mark
[Bloomberg] December's $361 Billion Deal Haul Is the Busiest in a Decade
[Politico] Republicans plan mega marketing push to sell unpopular tax plan
[Politico] Republicans warn Trump of 2018 bloodbath
[CNBC] China's using cheap debt to 'bend other countries to its will,' academic says
[NYT] China Shrugs Off Debt Worries as Xi Takes Firmer Economic Grip
[WSJ] China’s HNA Faces Calls for Probe in U.S.
[FT] Corporate debt boom will come to a nasty end
[FT] Hidden gyrations underpin 2017 global fund flows
[FT] Moments when central banks turned markets in 2017
[FT] Biggest market trades that lit up 2017
[WSJ] Watch Out VIX: Nasdaq Amps Up Volatility Game
[Reuters] U.S. new home sales race to more than 10-year high in November
[Bloomberg] U.S. Consumer Spending Tops Forecasts as Inflation Accelerates
[Reuters] Strong U.S. consumer, business spending bolster fourth quarter growth picture
[Bloomberg] Catalan Separatists Cheer Puigdemont as Rajoy Handed a Drubbing
[Reuters] Japan's record financial year 2018 budget puts fiscal discipline in doubt
[CNBC] Bitcoin falls by more than $3,000, dropping through $13,000 mark
[Bloomberg] December's $361 Billion Deal Haul Is the Busiest in a Decade
[Politico] Republicans plan mega marketing push to sell unpopular tax plan
[Politico] Republicans warn Trump of 2018 bloodbath
[CNBC] China's using cheap debt to 'bend other countries to its will,' academic says
[NYT] China Shrugs Off Debt Worries as Xi Takes Firmer Economic Grip
[WSJ] China’s HNA Faces Calls for Probe in U.S.
[FT] Corporate debt boom will come to a nasty end
[FT] Hidden gyrations underpin 2017 global fund flows
[FT] Moments when central banks turned markets in 2017
[FT] Biggest market trades that lit up 2017
[WSJ] Watch Out VIX: Nasdaq Amps Up Volatility Game
Wednesday, December 20, 2017
Thursday's News Links
[Reuters] Wall Street higher as investors await tax-cut benefits
[CNBC] House unveils 'clean' spending bill to fund the government through January 19
[Bloomberg] An Inflation Breakout Would Be Worse for Markets Than a Depression
[Bloomberg] Subprime Auto Defaults Are Soaring, and PE Firms Have No Way Out
[CNBC] Art Cashin's outlook for 2018: China, the Fed and bitcoin among his biggest worries for the new year
[Reuters] U.S. third-quarter economic growth trimmed; jobless claims rise
[Bloomberg] BOJ Maintains Stimulus as Inflation Lags Behind Growth
[Bloomberg] Are There Any Stock Bears Left in America?
[Bloomberg] Long Island Iced Tea Soars 500% After Changing Its Name to Long Blockchain
[CNBC] A second territorial dispute in Asia could be more dangerous than the South China Sea
[WSJ] For Heavily Indebted Firms Like Dell, Tax Bill Delivers a Downside
[FT] Self-driving cars face a new test: snow
[CNBC] House unveils 'clean' spending bill to fund the government through January 19
[Bloomberg] An Inflation Breakout Would Be Worse for Markets Than a Depression
[Bloomberg] Subprime Auto Defaults Are Soaring, and PE Firms Have No Way Out
[CNBC] Art Cashin's outlook for 2018: China, the Fed and bitcoin among his biggest worries for the new year
[Reuters] U.S. third-quarter economic growth trimmed; jobless claims rise
[Bloomberg] BOJ Maintains Stimulus as Inflation Lags Behind Growth
[Bloomberg] Are There Any Stock Bears Left in America?
[Bloomberg] Long Island Iced Tea Soars 500% After Changing Its Name to Long Blockchain
[CNBC] A second territorial dispute in Asia could be more dangerous than the South China Sea
[WSJ] For Heavily Indebted Firms Like Dell, Tax Bill Delivers a Downside
[FT] Self-driving cars face a new test: snow
Wednesday Evening Links
[Bloomberg] Bonds Tumble, Equities Mixed as Tax Bill Passes: Markets Wrap
[MarketWatch] 10 things you need to know about the new tax law
[Bloomberg] Bitcoin, Bubbles and Tech: Google's Top Finance Searches of 2017
[Bloomberg] The Outlook for Tech Stocks Grows Dimmer for 2018
[Bloomberg] Leveraged Loans Face Less Cushion in a Crash
[MarketWatch] 10 things you need to know about the new tax law
[Bloomberg] Bitcoin, Bubbles and Tech: Google's Top Finance Searches of 2017
[Bloomberg] The Outlook for Tech Stocks Grows Dimmer for 2018
[Bloomberg] Leveraged Loans Face Less Cushion in a Crash
Tuesday, December 19, 2017
Wednesday's News Links
[Bloomberg] Treasuries Down, Stocks Up as Tax Bill Progresses: Markets Wrap
[Bloomberg] Oil Gains on Signals U.S. Stockpiles Fell More Than Expected
[Bloomberg] Senate Passes U.S. Tax Overhaul Putting Trump on Brink of Big Win
[Bloomberg] U.S. Sales of Existing Homes Climb to an Almost 11-Year High
[Bloomberg] China Turning Screws on Leverage Creates Record Divide in Stocks
[Bloomberg] HNA's Mounting Bond Cancellations Add to Funding Concerns
[Reuters] Swedish central bank starts down road toward normalising policy
[Bloomberg] Market’s Focus Turns to Kuroda's Plan for 2018
[Bloomberg] What the Largest Tax Overhaul in 30 Years Means for Companies
[CNBC] Bitcoin is biggest bubble of them all, and it’s the Fed’s fault, says Ron Paul
[Reuters] Asia firms' sentiment rises to highest in almost seven years: Thomson Reuters/INSEAD
[Reuters] Bank of Japan's record Q3 JGB holdings cast doubt on unwinding QE
[Bloomberg] The Biggest Housing Bubble of Them All Might Be Norwegian
[WSJ] Over Golf and an Airport Chat, Trump and GOP Hashed Out a Historic Tax Plan
[WSJ] Tax Cuts to Test GOP’s Economic Pledges
[WSJ] Congress Is on Brink of Tax Overhaul
[FT] Forget stocks, it’s the bond market that could feel US tax cuts
[Bloomberg] Oil Gains on Signals U.S. Stockpiles Fell More Than Expected
[Bloomberg] Senate Passes U.S. Tax Overhaul Putting Trump on Brink of Big Win
[Bloomberg] U.S. Sales of Existing Homes Climb to an Almost 11-Year High
[Bloomberg] China Turning Screws on Leverage Creates Record Divide in Stocks
[Bloomberg] HNA's Mounting Bond Cancellations Add to Funding Concerns
[Reuters] Swedish central bank starts down road toward normalising policy
[Bloomberg] Market’s Focus Turns to Kuroda's Plan for 2018
[Bloomberg] What the Largest Tax Overhaul in 30 Years Means for Companies
[CNBC] Bitcoin is biggest bubble of them all, and it’s the Fed’s fault, says Ron Paul
[Reuters] Asia firms' sentiment rises to highest in almost seven years: Thomson Reuters/INSEAD
[Reuters] Bank of Japan's record Q3 JGB holdings cast doubt on unwinding QE
[Bloomberg] The Biggest Housing Bubble of Them All Might Be Norwegian
[WSJ] Over Golf and an Airport Chat, Trump and GOP Hashed Out a Historic Tax Plan
[WSJ] Tax Cuts to Test GOP’s Economic Pledges
[WSJ] Congress Is on Brink of Tax Overhaul
[FT] Forget stocks, it’s the bond market that could feel US tax cuts
Tuesday Evening Links
[Bloomberg] Stocks, Treasuries Down as House Passes Tax Law: Markets Wrap
[Bloomberg] House Passes Sweeping Tax Cuts, Moving Trump Closer to Major Win
[Bloomberg] U.S. Treasury Sales Are About to Double 2018. Who's Buying?
[CNBC] China is reportedly having second thoughts about cracking down on country's ballooning debt
[WSJ] China, Seeking Growth, Softens Focus on Cutting Debt
[FT] Stimulus surge drives waves of speculation in Asia
[Bloomberg] House Passes Sweeping Tax Cuts, Moving Trump Closer to Major Win
[Bloomberg] U.S. Treasury Sales Are About to Double 2018. Who's Buying?
[CNBC] China is reportedly having second thoughts about cracking down on country's ballooning debt
[WSJ] China, Seeking Growth, Softens Focus on Cutting Debt
[FT] Stimulus surge drives waves of speculation in Asia
Monday, December 18, 2017
Tuesday's News Links
[Bloomberg] Stocks Mixed as Euro Climbs; Treasuries Decline: Markets Wrap
[Bloomberg] U.S. Single-Family Housing Starts Rise to Highest in a Decade
[CNBC] Holiday spending on track to be highest in at least 12 years: CNBC survey
[Reuters] Central banks, trade and bubbles threaten the 2018 status quo
[Bloomberg] IMF Warns One of Most Crowded Bond Trades Near Tipping Point
[CNBC] Congress plays Santa for the stock market this year with a mega tax package
[Bloomberg] ECB's Weidmann Predicts Wage Gains as He Seeks End Date for QE
[Bloomberg] China Default Tied to Asset-Management Product Flags Risks
[Bloomberg] Steinhoff Says Credit Facilities Increasingly Being Withdrawn
[Bloomberg] Why South Africa's Steinhoff Could Be Next Enron: QuickTake Q&A
[Reuters] Japan upgrades GDP growth forecast, CPI seen far below BOJ target
[FT] Republicans face backlash over last-minute tax bill provisions
[FT] Blockchain fervour evokes memories of dotcom bubble
[FT] Companies drive borrowing binge to record $6.8tn in 2017
[Bloomberg] U.S. Single-Family Housing Starts Rise to Highest in a Decade
[CNBC] Holiday spending on track to be highest in at least 12 years: CNBC survey
[Reuters] Central banks, trade and bubbles threaten the 2018 status quo
[Bloomberg] IMF Warns One of Most Crowded Bond Trades Near Tipping Point
[CNBC] Congress plays Santa for the stock market this year with a mega tax package
[Bloomberg] ECB's Weidmann Predicts Wage Gains as He Seeks End Date for QE
[Bloomberg] China Default Tied to Asset-Management Product Flags Risks
[Bloomberg] Steinhoff Says Credit Facilities Increasingly Being Withdrawn
[Bloomberg] Why South Africa's Steinhoff Could Be Next Enron: QuickTake Q&A
[Reuters] Japan upgrades GDP growth forecast, CPI seen far below BOJ target
[FT] Republicans face backlash over last-minute tax bill provisions
[FT] Blockchain fervour evokes memories of dotcom bubble
[FT] Companies drive borrowing binge to record $6.8tn in 2017
Monday Evening Links
[Bloomberg] Asian Stocks Hold Gains, Bond Yields Head Higher: Markets Wrap
[Bloomberg] GOP Tax Bill Hands Biggest Benefits to Top Earners, Study Says
[WSJ] Middle Class Gets 10% of Republican Tax Cut
[WSJ] Money Markets Are Going Haywire, Blame the Government
[WSJ] Trump Lays Out World View in Which Economic Strength Bolsters Security
[WSJ] China’s HNA Group Seeking Sale of $6 Billion in Overseas Property
[Reuters] U.S. says North Korea 'directly responsible' for 'WannaCry' cyber attack
[Bloomberg] GOP Tax Bill Hands Biggest Benefits to Top Earners, Study Says
[WSJ] Middle Class Gets 10% of Republican Tax Cut
[WSJ] Money Markets Are Going Haywire, Blame the Government
[WSJ] Trump Lays Out World View in Which Economic Strength Bolsters Security
[WSJ] China’s HNA Group Seeking Sale of $6 Billion in Overseas Property
[Reuters] U.S. says North Korea 'directly responsible' for 'WannaCry' cyber attack
Sunday, December 17, 2017
Monday's News Links
[Bloomberg] Stocks Gain on U.S. Tax Plan; Treasuries Decline: Markets Wrap
[Reuters] Republicans confident tax bill to become law this week
[Bloomberg] Market's Extreme Calm Will Likely Become a Thing of the Past
[Bloomberg] HNA Liquidity in Question as Citic Bank Cites Repayment ‘Issues'
[Bloomberg] The Mysterious Chinese Company Worrying the World
[Bloomberg] Goldman Says Growth Is Bigger Fed-Hike Factor Than Market Thinks
[CNBC] Broken bonds: The role Wall Street played in wiping out Puerto Ricans' savings
[Reuters] Steady China home price growth in November as smaller city gains rise
[Bloomberg] It Took Five Decades to Build Steinhoff. It Cratered in Two Days
[Reuters] Trump in strategy document to cite China, Russia as competitors
[WSJ] GOP Tax Bill Would Set Up Years of Challenges
[FT] Low volatility will extract a price from investors
[Reuters] Republicans confident tax bill to become law this week
[Bloomberg] Market's Extreme Calm Will Likely Become a Thing of the Past
[Bloomberg] HNA Liquidity in Question as Citic Bank Cites Repayment ‘Issues'
[Bloomberg] The Mysterious Chinese Company Worrying the World
[Bloomberg] Goldman Says Growth Is Bigger Fed-Hike Factor Than Market Thinks
[CNBC] Broken bonds: The role Wall Street played in wiping out Puerto Ricans' savings
[Reuters] Steady China home price growth in November as smaller city gains rise
[Bloomberg] It Took Five Decades to Build Steinhoff. It Cratered in Two Days
[Reuters] Trump in strategy document to cite China, Russia as competitors
[WSJ] GOP Tax Bill Would Set Up Years of Challenges
[FT] Low volatility will extract a price from investors
Sunday Evening Links
[Bloomberg] Asia Stocks Gain on U.S. Tax Plans, Bonds Retreat: Markets Wrap
[Bloomberg] BOJ's Massive Bond Holdings Pace Seen Expanding Even More Slowly in 2018
[WSJ] Government Shifts Gears on Fannie Mae, Freddie Mac
[FT] Wildfires in California add to ‘horrific year’ of disaster losses
[Bloomberg] BOJ's Massive Bond Holdings Pace Seen Expanding Even More Slowly in 2018
[WSJ] Government Shifts Gears on Fannie Mae, Freddie Mac
[FT] Wildfires in California add to ‘horrific year’ of disaster losses
Sunday's News Links
[Reuters] No. 2 U.S. Senate Republican expects tax bill will pass, eyes Tuesday
[NYT] What’s in the Tax Bill, and How It Will Affect You
[WSJ] The Fast and the Financed: China’s Well-Funded Auto Startups Race to Overtake Tesla
[FT] Bank of Japan meeting to end active month for central banks
[NYT] What’s in the Tax Bill, and How It Will Affect You
[WSJ] The Fast and the Financed: China’s Well-Funded Auto Startups Race to Overtake Tesla
[FT] Bank of Japan meeting to end active month for central banks
Saturday, December 16, 2017
Saturday's News Links
[Bloomberg] GOP Charges to Tax-Cut Finish Line
[Bloomberg] GOP Tax Plan Sets Higher Rate Than Expected on Offshore Earnings
[Bloomberg] Merkel Ally Draws Red Line in Talks
[NYT] The Next Crisis for Puerto Rico: A Crush of Foreclosures
[WSJ] GOP Is Poised to Pass Sweeping Tax Overhaul
[FT] Trump to accuse China of ‘economic aggression’
[Bloomberg] GOP Tax Plan Sets Higher Rate Than Expected on Offshore Earnings
[Bloomberg] Merkel Ally Draws Red Line in Talks
[NYT] The Next Crisis for Puerto Rico: A Crush of Foreclosures
[WSJ] GOP Is Poised to Pass Sweeping Tax Overhaul
[FT] Trump to accuse China of ‘economic aggression’
Friday, December 15, 2017
Weekly Commentary: Chronicling for Posterity
Janet Yellen’s Wednesday news conference was her final as Fed chair. Dr. Yellen has a long and distinguished career as an economist and public servant. Her four-year term at the helm of the Federal Reserve is almost universally acclaimed. History, however, will surely treat her less kindly. Yellen has been a central figure in inflationist dogma and a fateful global experiment in radical monetary stimulus. In her four years at the helm, the Yellen Fed failed to tighten financial conditions despite asset inflation and speculative excess beckoning for policy normalization.
Ben Bernanke has referred to the understanding of the forces behind the Great Depression as “the holy grail of economics.” When today’s historic global Bubble bursts, the “grail” quest will shift to recent decades. Yellen’s comments are worthy of chronicling for posterity.
CNBC’s Steve Liesman: “Every day it seems we look at the stock market, it goes up triple digits in the Dow Jones. To what extent are there concerns at the Federal Reserve about current market valuations? And do they now or should they, do you think, if we keep going on the trajectory, should that animate monetary policy?"
Chair Yellen: “OK, so let me start, Steve, with the stock market generally. I mean, of course, the stock market has gone up a great deal this year. And we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that’s worth pointing out.
But economists are not great at knowing what appropriate valuations are; we don’t have a terrific record. And the fact that those valuations are high doesn’t mean that they’re necessarily overvalued. We are in a -- I mentioned this in my opening statement and we've talked about this repeatedly - likely a low interest rate environment, lower than we’ve had in past decades. And if that turns out to be the case, that’s a factor that supports higher valuations, where enjoying solid economic growth with low inflation and the risks in the global economy look more balanced than they have in many years.
So, I think what we need to and are trying to think through is if there were an adjustment in asset valuations, the stock market, what impact would that have on the economy? And would it provoke financial stability concerns? And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system. And we’re not seeing some worrisome buildup in leverage or credit growth at excessive levels. So, this is something that the FOMC pays attention to. But if you ask me is this a significant factor shaping monetary policy now, well it’s on the list of risks. It’s not a major factor.”
Reuter’s Howard Schneider: “So you mentioned in response to Steve's question that asset valuations, you didn't think, were on the high-priority risk list right now. So I’m wondering what do you think is on that risk list? And more broadly, what have you left undone? You’ve gotten high marks for bringing the economy back towards its goals, but are there things that are going to nag you when you walk out of here in February, and say, ‘Really, I wish I’d seen this to completion’? I mean, we’re not doing negative interest rates. We’re not doing inflation framework. What’s at the top of the to-do list that you are not getting to see to bring to ground here?”
Yellen: “So you asked about the risk list. There are always risks that affect the outlook. We tend to focus, in our own evaluation, on economic risks. And we’ve characterized them as balanced, and I think they are balanced. I can always give you a list of, you know, potential troubles, international developments that could result in downside economic risk.
But look, at the moment the U.S. economy is performing well. The growth that we’re seeing it’s not based on, for example, an unsustainable buildup of debt, as we had in the run-up to the financial crisis. The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time. So I feel good about the economic outlook…
As I mentioned, I think the financial system is on much sounder footing, and that we have done a great deal to put in place greater capital, liquidity, and so forth that make it less crisis-prone, and that has been an important objective. What’s on my undone list, you ask? We have a 2% symmetric inflation objective, and for a number of years now, inflation has been running under 2%, and I consider it an important priority to make sure that inflation doesn’t chronically undershoot our 2% objective. And I want to see it move up to 2%. So most of my colleagues and I do believe that it’s being held down by transitory factors, but there’s work undone there in the sense we need to see it move up in line with our objective.”
Bloomberg’s Mike McKee: “…Do you think that there is any Fed blame or complicity in the flattening of the yield curve, and are you worried that there might be some sort of policy mistake built into that that could slow the economy?”
Yellen: “The yield curve has flattened some as we’ve raised short rates. The flattening curve mainly reflects higher short-term rates. The yield curve is not currently inverted, and I would say that the current slope is well within its historical range. Now there is a strong correlation historically between yield curve inversions and recessions. But let me emphasize that correlation is not causation. And I think that there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed. One reason for that is that long-term interest rates generally embody two factors: One is the expected average value of short rates over, say, ten years. And the second piece of it is a so-called term premium that often reflects things like inflation and inflation risk. Typically, the term premium historically has been positive. So when the yield curve has inverted historically, it meant that short-term rates were well above average expected short rates over the longer run – so with a positive term premium that’s what it means. And typically that means that monetary policy is restrictive – sometimes quite restrictive. And some of those recessions were situations in which the Fed was consciously tightening monetary policy because inflation was high and trying to slow the economy. Well, right now the term premium is estimated to be quite low – close to zero. And that means that structurally – and this could be true going forward – that the yield curve is likely to be flatter than it’s been in the past. And so it could more easily invert if the Fed were to even move to a slightly restrictive policy stance – could see an inversion with a zero term premium. So, I think the fact the term premium is so low and the yield curve is generally flatter is an important factor to consider.”
The yield curve has become, once again, a critical Bubble issue. Recall Alan Greenspan’s “conundrum.” The Greenspan Fed raised short-term rates 350 bps (June ’04 to January ’06) yet 10-year Treasury yields barely budged (around 4.5%). After trading as high as 273 bps in 2003, the spread between two-year and 10-year Treasuries ended 2004 at 115 bps and 2005 at about flat. The yield curve inverted as much as 18 bps in November 2006.
Keep in mind that system Credit was expanding by record amounts, fueled by years of compounding double-digit annual mortgage Credit growth. Annual Total Non-Financial Debt (NFD) growth averaged $760 billion during the decade of the nineties. By 2002, NFD was up to $1.346 TN and accelerating rapidly. NFD expanded $1.654 TN in 2003, $2.115 TN in 2004, $2.291 TN in 2005, $2.416 TN in 2006 and $2.509 TN in 2007. Clearly, a flat or inverting yield curve was not explained by restrictive monetary policies.
The fundamental issue was not so much that market yields were not rising in response to Fed “tightening” measures. Rather, why were borrowing rates not increasing in the face of unprecedented demand for Credit? How had the price of finance become completely disconnected from underlying demand? And, critically, why was the Credit system not self-adjusting and correcting, but instead fueling a runaway mortgage finance Bubble?
Arguing asset price valuations back in the 2004 to 2007 Bubble period was as futile as it is today. It was the yield curve that signaled something was seriously amiss. The so-called “conundrum” needed serious contemplation, not clever self-serving rationalization and justification (i.e. “global savings glut”). Moreover, the anomalous yield curve was providing important corroboration of anomalous Credit growth data.
Finance had been fundamentally altered. Contemporary Credit systems, increasingly dominated by market-based finance, were essentially operating with unlimited supply. Somehow, a rapid doubling of mortgage Credit in just over six years neither stressed the supply of Credit nor evoked higher risk premiums. Instead of self-correction, this new financial apparatus was a self-reinforcing Bubble machine. The system had badly malfunctioned, though the ugly reality remained camouflaged until later in 2008. In the meantime, it flaunted a pretense of being both phenomenal and sustainable.
The yield curve has again flattened significantly in 2017. The two-year to 10-year Treasury spread ended Friday’s session at 51 bps, down from the 125 bps to start the year, to the narrowest spread since the heydays of Bubble excess back in 2007. Short-rates have risen, the economy has gathered momentum and prospects for an uptick in inflation have increased. What’s behind the replay of the “conundrum”?
On one point, I concur with chair Yellen: “I think there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed.” But I would posit that this change evolved over recent cycles, as central bankers took an increasingly activist role in the economy and, most importantly, throughout the financial markets.
I would argue that the yield curve flattened in’06 and ’07 specifically because of Bubble Dynamics in mortgage Credit coupled with Bernanke’s previous professing on “helicopter money” and the government printing press. Dr. Bernanke, a radical inflationist, had become a powerful force in Federal Reserve policymaking. Bond markets back then discerned mortgage finance Bubble unsustainability, while deftly anticipating the Federal Reserve’s crisis response. The bursting Bubble saw the formal unveiling of the new central bank modus operandi: slash short rates to at least zero; aggressively inject liquidity into the markets through long-term debt purchases; manipulate long-term market yields much lower while telegraphing unwavering liquidity support.
The Fed and conventional thinking are comfortable with the view that today’s flat yield curves (low long-term yields) signal ongoing disinflationary pressures. The talk is of an extraordinarily low “neutral rate” that, conveniently, necessitates ongoing aggressive monetary accommodation. Apparently, financial stability concerns remain undeserving of the Fed’s “risk list”, so long as core consumer prices remain (slightly) below the 2% target.
December 13 – Reuters (John Ruwitch and Winni Zhou): “Financiers keep pouring cash into the shale oil sector, providing producers with a path to keep U.S. output rising through the middle of the next decade. The United States is on track to deliver up to 80% of the world’s oil production gains through 2025, the International Energy Agency estimates, increases fueled in part by easy access to capital. Rising U.S. production is undermining OPEC’s attempts to curb global supply and boost prices, forcing the oil cartel to continue restraining output through the end of 2018. Hedge funds and private equity firms have given producers a range of new and traditional financial levers they can pull as needed to keep shale rigs drilling…”
In so many ways, years of loose finance have spurred over-investment and attendant downward pricing pressures. Shale finance is only one of the more visible examples. Importantly, excess cheap finance and investment have evolved into powerful global phenomena. One has only to point to the runaway Credit boom - and resulting manufacturing overcapacity in China (and Asia more generally) - to come to the rather obvious conclusion that activist monetary management/accommodation can foment downward pricing pressures.
These days, central bankers from around the globe sing from the same hymn sheet. The inflation backdrop demands ongoing stimulus. The yield curve is “within its historical range”. “The financial system is on much sounder footing.” There’s “less to lose sleep about.” “When we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system. And we’re not seeing some worrisome buildup in leverage or credit growth at excessive levels.” When it comes to mounting risk throughout global securities and derivative markets, it’s hear no evil, see and speak none either. It’s worth highlighting an exchange from Mario Draghi’s Thursday press conference”
Question: “What kind of discussions have been going on within the governing council about possible bubbles in sectors of the market or economy – and how exiting the asset purchase plan could impact those bubbles?”
Mario Draghi: “We always discuss financial stability issues, and we certainly closely monitor the financial stability risks that may emerge from a situation where we had very, very low interest rates for a long period of time; abundant liquidity for a long period of time. So, the ground is fertile for these risks. At the same time, we are not seeing systemically important financial stability risks. We see the local spots where valuations tend to be over-stretched. But also, as soon as you ask this question, one should also ask the question ‘How’s leverage?’ Because a bubble is also the outcome of two components. So how’s leverage behaving? And there, differently from other parts of the world, we don’t see leverage – for the private sector going up, as for the whole of the Eurozone. As a matter of fact, debt to GDP or debt to value of assets – depending on the yardstick – continues to decrease…”
My response: Proclaiming a lack of “private sector” leveraging is disingenuous when the greatest sources of systemic leverage throughout this long cycle have been ballooning central bank and government balance sheets. It recalls how pristine government finance was an important facet of the last cycle’s bull story. Meanwhile, massive leveraging by the private and financial sectors was behind the mirage of responsible fiscal management.
As for Draghi’s “local spots” of “over-stretched” valuations, could he be referring to Italian 10-year yields at 1.80% or Spain at 1.49%? Or perhaps Greece at 3.89%, or Portugal at 1.76%. Or could it be German 10-year yields at 0.29%, or perhaps German two-year yields at negative seven bps. And then there’s French 10-year yields at 0.62%, Switzerland at negative 0.24%, Finland at 0.45%, Ireland at 0.48%, Belgium at 0.49%, Netherlands at 0.40%, Austria at 0.45% or Slovenia at 0.69%.
It’s reminiscent of chairman Greenspan’s declaration that you won't have a national real estate Bubble because all real estate markets are local. The flaw in the maestro’s thinking was his apparent disregard for the Bubble throughout mortgage finance – very much on a systemic, national basis. Today’s Bubble is in finance on a systemic, global basis – most prominent in government, central bank and securities finance – developed, EM and, importantly, all things China. Leveraging galore – with the associated Bubble finance utterly “fungible.”
December 13 – Bloomberg (Chris Anstey): “European investors have been plowing so much capital abroad they’ve taken up about half the boom in U.S. corporate debt in recent years, but now that liquidity tap is poised to be shut off, according to Oxford Economics. ‘The global debt issuance boom is likely to lose steam, given the extent to which it has relied on the support of European investors,’ Guillermo Tolosa, an economic adviser to Oxford Economics in London who has worked at the International Monetary Fund, wrote… ‘Issuers better seize the opportunities while they last.’ European Central Bank asset purchases took up so great a supply of bonds that it pushed euro area investors into markets abroad, to the tune of 400 billion euros ($473bn) a year over the past three years, Oxford Economics estimates.”
It’s simply difficult to believe that these central bankers fail to recognize what have evolved into deeply systemic risks. They know they’re trapped, but in denial – right? Then again, complacent central bankers have a history of being blindsided. Clearly, they’re determined to cling to flawed doctrine. I’ve always believed conventional thinking has it wrong: The great risk is not deflation but runaway Credit Bubbles. And very serious problems unfold when the risk of a bursting Bubble ensures that policymakers rationalize, justify - and sit back and do nothing.
December 12 – CNBC (Tae Kim): “Stanley Druckenmiller believes the overly easy monetary policies by global central banks will have disastrous consequences. ‘The way you create deflation is you create an asset bubble. If I was 'Darth Vader' of the financial world and decided I'm going to do this nasty thing and create deflation, I would do exactly what the central banks are doing now,’ he told CNBC's Kelly Evans… ‘Misallocate resources [with low interest rates], create an asset bubble and then deal with the consequences down the road,’ he said. The investor noted how this boom-and-bust cycle has happened time and time again. ‘Deflation just doesn't appear out of nowhere and it doesn't happen because you are near the zero bound. Every serious deflation I've looked at is preceded by an asset bubble and then it bursts,’ he said. ‘Think about the '20s, a big asset bubble that burst, you have the Depression. Think about Japan. Asset bubble in the '80s. It burst. You have the consequences follow. Think about 2008, 2009.’”
For the Week:
The S&P500 gained 0.9% (up 19.5% y-t-d), and the Dow rose 1.3% (up 24.7%). The Utilities slipped 0.5% (up 13.7%). The Banks dipped 0.4% (up 15.8%), while the Broker/Dealers were little changed (up 28.4%). The Transports were about unchanged (up 14.9%). The S&P 400 Midcaps slipped 0.2% (up 13.6%), while the small cap Russell 2000 recovered 0.6% (up 12.8%). The Nasdaq100 jumped 1.9% (up 33.0%). The Semiconductors rose 1.0% (up 38.0%). The Biotechs declined 1.4% (up 35.7%). With bullion regaining $6, the HUI gold index rallied 1.6% (down 1.2%).
Three-month Treasury bill rates ended the week at 129 bps. Two-year government yields rose four bps to 1.84% (up 65bps y-t-d). Five-year T-note yields added a basis point to 2.15% (up 23bps). Ten-year Treasury yields slipped two bps to 2.35% (down 9bps). Long bond yields fell eight bps to 2.68% (down 38bps).
Greek 10-year yields dropped 54 bps to 3.93% (down 309bps y-t-d). Ten-year Portuguese yields added three bps to 1.84% (down 191bps). Italian 10-year yields jumped 16 bps to 1.81% (unchanged). Spain's 10-year yields rose nine bps to 1.49% (up 11bps). German bund yields declined a basis point to 0.30% (up 10bps). French yields were unchanged at 0.63% (down 5bps). The French to German 10-year bond spread widened one to 33 bps. U.K. 10-year gilt yields sank 13 bps to 1.15% (down 9bps). U.K.'s FTSE equities gained 1.3% (up 4.9%).
Japan's Nikkei 225 equities index fell 1.1% (up 18.0% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.046% (up 1bp). France's CAC40 declined 0.9% (up 10.0%). The German DAX equities index slipped 0.4% (up 14.1%). Spain's IBEX 35 equities index dropped 1.7% (up 8.5%). Italy's FTSE MIB index sank 3.0% (up 14.9%). EM markets were mixed. Brazil's Bovespa index dipped 0.2% (up 20.6%), while Mexico's Bolsa gained 1.1% (up 5.3%). South Korea's Kospi index added 0.7% (up 22.5%). India’s Sensex equities index increased 0.6% (up 25.7%). China’s Shanghai Exchange declined 0.7% (up 5.2%). Turkey's Borsa Istanbul National 100 index rose 1.3% (up 39.9%). Russia's MICEX equities index declined 0.2% (down 4.0%).
Junk bond mutual funds saw outflows of $922 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.93% (down 23bps y-o-y). Fifteen-year rates were unchanged at 3.36% (down 1bp). Five-year hybrid ARM rates added a basis point to 3.36% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 4bps).
Federal Reserve Credit last week expanded $4.2bn to $4.401 TN. Over the past year, Fed Credit fell $16.6bn. Fed Credit inflated $1.581 TN, or 56%, over the past 266 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.5bn last week to $3.385 TN. "Custody holdings" were up $232bn y-o-y, or 7.4%.
M2 (narrow) "money" supply dipped $4.0bn last week to $13.806 TN. "Narrow money" expanded $638bn, or 4.8%, over the past year. For the week, Currency slipped $0.4bn. Total Checkable Deposits rose $20.7bn, while Savings Deposits dropped $23.2bn. Small Time Deposits were little changed. Retail Money Funds declined $0.9bn.
Total money market fund assets jumped $33.76bn to a seven-year high $2.841 TN. Money Funds rose $108bn y-o-y, or 4.0%.
Total Commercial Paper declined $2.9bn to $1.050 TN. CP gained $100bn y-o-y, or 10.5%.
Currency Watch:
The U.S. dollar index was little changed at 93.932 (down 8.3% y-t-d). For the week on the upside, the South African rand increased 4.33%, the New Zealand dollar 2.1%, the Australian dollar 1.8%, the Japanese yen 0.8%, the South Korean won 0.4%, and the Singapore dollar 0.3%. For the week on the downside, the Norwegian krone declined 1.1%, the Mexican peso 1.0%, the Swedish krona 0.7%, the British pound 0.5%, the Brazilian real 0.3%, the euro 0.2% and the Canadian dollar 0.1%. The Chinese renminbi increased 0.17% versus the dollar this week (up 5.08% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was little changed (up 5.3% y-t-d). Spot Gold recovered 0.6% to $1,255 (up 9.0%). Silver rallied 1.5% to $16.063 (up 1%). Crude slipped six cents to $57.30 (up 6%). Gasoline dropped 3.6% (down 1%), and Natural Gas sank 5.8% (down 30%). Copper surged 5.2% (up 25%). Wheat slipped 0.2% (up 3%). Corn fell 1.5% (down 1%).
Trump Administration Watch:
December 14 – Wall Street Journal (Richard Rubin): “The tax bill moving through Congress is about 500 pages long, containing enough paper to wrap lots of Christmas presents for boys and girls across the land. The gifts in the text are tax cuts—more than $1.4 trillion of them over the next decade—scattered throughout a bill that Republican lawmakers are striving to make into law next week. The centerpiece of the plan is a lower corporate tax rate that will help domestic retailers, who are chief among businesses that pay close to the 35% corporate tax rate in effect now. Not everyone will benefit. The GOP plan also takes away some longstanding tax breaks, including the ability for individuals to fully deduct their state and local taxes. That’s going to be a problem for upper-middle-class wage-earners in high-tax states such as New York and California. The plan would add nearly $1.5 trillion to the nation’s budget deficits over the next decade, according to the Joint Committee on Taxation…”
December 10 – Financial Times (Bryan Harris): “North Korea has criticised a proposed US naval blockade, saying such a move would constitute another ‘declaration of war’. The fiery comments in the state-run Rodong Sinmun newspaper came a day before the US, South Korea and Japan launched rocket tracking drills on Monday aimed at improving detection and monitoring of the reclusive regime’s ballistic missile tests.”
December 13 – Wall Street Journal (Dante Chinni): “Democrat Doug Jones’s improbable victory in one of the nation’s reddest states is sure to fuel Republican anxieties about next year’s midterm elections, as it offers more evidence that Democrats in the era of President Donald Trump are eager to vote, while GOP voter turnout is muted. Mr. Jones eked out a narrow win in his U.S. Senate race due to high turnout among African-Americans, who overwhelmingly backed the Democrat, and low turnout in the largely white, rural counties that Republicans have counted on as a large part of their base.”
December 13 – Reuters (Eliana Raszewski and Luc Cohen): “The United States, European Union and Japan vowed… to work together to fight market-distorting trade practices and policies that have fueled excess production capacity, naming several key features of China’s economic system. In a joint statement that did not single out China or any other country, the three economic powers said they would work within the World Trade Organization and other multilateral groups to eliminate unfair competitive conditions caused by subsidies, state-owned enterprises, ‘forced’ technology transfer and local content requirements. The move was a rare show of solidarity with the United States at a World Trade Organization meeting…”
China Watch:
December 11 – Bloomberg: “China’s broadest gauge of new credit and an index of loan growth both exceeded projections, signaling that a government push against leverage hasn’t crimped lending. Aggregate financing stood at 1.6 trillion yuan ($242bn) in November…, compared with an estimated 1.25 trillion yuan in a Bloomberg survey and 1.04 trillion yuan the prior month… The broad M2 money supply increased 9.1%, exceeding projections and rising from the 8.8% record low in October.”
Ben Bernanke has referred to the understanding of the forces behind the Great Depression as “the holy grail of economics.” When today’s historic global Bubble bursts, the “grail” quest will shift to recent decades. Yellen’s comments are worthy of chronicling for posterity.
CNBC’s Steve Liesman: “Every day it seems we look at the stock market, it goes up triple digits in the Dow Jones. To what extent are there concerns at the Federal Reserve about current market valuations? And do they now or should they, do you think, if we keep going on the trajectory, should that animate monetary policy?"
Chair Yellen: “OK, so let me start, Steve, with the stock market generally. I mean, of course, the stock market has gone up a great deal this year. And we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that’s worth pointing out.
But economists are not great at knowing what appropriate valuations are; we don’t have a terrific record. And the fact that those valuations are high doesn’t mean that they’re necessarily overvalued. We are in a -- I mentioned this in my opening statement and we've talked about this repeatedly - likely a low interest rate environment, lower than we’ve had in past decades. And if that turns out to be the case, that’s a factor that supports higher valuations, where enjoying solid economic growth with low inflation and the risks in the global economy look more balanced than they have in many years.
So, I think what we need to and are trying to think through is if there were an adjustment in asset valuations, the stock market, what impact would that have on the economy? And would it provoke financial stability concerns? And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system. And we’re not seeing some worrisome buildup in leverage or credit growth at excessive levels. So, this is something that the FOMC pays attention to. But if you ask me is this a significant factor shaping monetary policy now, well it’s on the list of risks. It’s not a major factor.”
Reuter’s Howard Schneider: “So you mentioned in response to Steve's question that asset valuations, you didn't think, were on the high-priority risk list right now. So I’m wondering what do you think is on that risk list? And more broadly, what have you left undone? You’ve gotten high marks for bringing the economy back towards its goals, but are there things that are going to nag you when you walk out of here in February, and say, ‘Really, I wish I’d seen this to completion’? I mean, we’re not doing negative interest rates. We’re not doing inflation framework. What’s at the top of the to-do list that you are not getting to see to bring to ground here?”
Yellen: “So you asked about the risk list. There are always risks that affect the outlook. We tend to focus, in our own evaluation, on economic risks. And we’ve characterized them as balanced, and I think they are balanced. I can always give you a list of, you know, potential troubles, international developments that could result in downside economic risk.
But look, at the moment the U.S. economy is performing well. The growth that we’re seeing it’s not based on, for example, an unsustainable buildup of debt, as we had in the run-up to the financial crisis. The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time. So I feel good about the economic outlook…
As I mentioned, I think the financial system is on much sounder footing, and that we have done a great deal to put in place greater capital, liquidity, and so forth that make it less crisis-prone, and that has been an important objective. What’s on my undone list, you ask? We have a 2% symmetric inflation objective, and for a number of years now, inflation has been running under 2%, and I consider it an important priority to make sure that inflation doesn’t chronically undershoot our 2% objective. And I want to see it move up to 2%. So most of my colleagues and I do believe that it’s being held down by transitory factors, but there’s work undone there in the sense we need to see it move up in line with our objective.”
Bloomberg’s Mike McKee: “…Do you think that there is any Fed blame or complicity in the flattening of the yield curve, and are you worried that there might be some sort of policy mistake built into that that could slow the economy?”
Yellen: “The yield curve has flattened some as we’ve raised short rates. The flattening curve mainly reflects higher short-term rates. The yield curve is not currently inverted, and I would say that the current slope is well within its historical range. Now there is a strong correlation historically between yield curve inversions and recessions. But let me emphasize that correlation is not causation. And I think that there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed. One reason for that is that long-term interest rates generally embody two factors: One is the expected average value of short rates over, say, ten years. And the second piece of it is a so-called term premium that often reflects things like inflation and inflation risk. Typically, the term premium historically has been positive. So when the yield curve has inverted historically, it meant that short-term rates were well above average expected short rates over the longer run – so with a positive term premium that’s what it means. And typically that means that monetary policy is restrictive – sometimes quite restrictive. And some of those recessions were situations in which the Fed was consciously tightening monetary policy because inflation was high and trying to slow the economy. Well, right now the term premium is estimated to be quite low – close to zero. And that means that structurally – and this could be true going forward – that the yield curve is likely to be flatter than it’s been in the past. And so it could more easily invert if the Fed were to even move to a slightly restrictive policy stance – could see an inversion with a zero term premium. So, I think the fact the term premium is so low and the yield curve is generally flatter is an important factor to consider.”
The yield curve has become, once again, a critical Bubble issue. Recall Alan Greenspan’s “conundrum.” The Greenspan Fed raised short-term rates 350 bps (June ’04 to January ’06) yet 10-year Treasury yields barely budged (around 4.5%). After trading as high as 273 bps in 2003, the spread between two-year and 10-year Treasuries ended 2004 at 115 bps and 2005 at about flat. The yield curve inverted as much as 18 bps in November 2006.
Keep in mind that system Credit was expanding by record amounts, fueled by years of compounding double-digit annual mortgage Credit growth. Annual Total Non-Financial Debt (NFD) growth averaged $760 billion during the decade of the nineties. By 2002, NFD was up to $1.346 TN and accelerating rapidly. NFD expanded $1.654 TN in 2003, $2.115 TN in 2004, $2.291 TN in 2005, $2.416 TN in 2006 and $2.509 TN in 2007. Clearly, a flat or inverting yield curve was not explained by restrictive monetary policies.
The fundamental issue was not so much that market yields were not rising in response to Fed “tightening” measures. Rather, why were borrowing rates not increasing in the face of unprecedented demand for Credit? How had the price of finance become completely disconnected from underlying demand? And, critically, why was the Credit system not self-adjusting and correcting, but instead fueling a runaway mortgage finance Bubble?
Arguing asset price valuations back in the 2004 to 2007 Bubble period was as futile as it is today. It was the yield curve that signaled something was seriously amiss. The so-called “conundrum” needed serious contemplation, not clever self-serving rationalization and justification (i.e. “global savings glut”). Moreover, the anomalous yield curve was providing important corroboration of anomalous Credit growth data.
Finance had been fundamentally altered. Contemporary Credit systems, increasingly dominated by market-based finance, were essentially operating with unlimited supply. Somehow, a rapid doubling of mortgage Credit in just over six years neither stressed the supply of Credit nor evoked higher risk premiums. Instead of self-correction, this new financial apparatus was a self-reinforcing Bubble machine. The system had badly malfunctioned, though the ugly reality remained camouflaged until later in 2008. In the meantime, it flaunted a pretense of being both phenomenal and sustainable.
The yield curve has again flattened significantly in 2017. The two-year to 10-year Treasury spread ended Friday’s session at 51 bps, down from the 125 bps to start the year, to the narrowest spread since the heydays of Bubble excess back in 2007. Short-rates have risen, the economy has gathered momentum and prospects for an uptick in inflation have increased. What’s behind the replay of the “conundrum”?
On one point, I concur with chair Yellen: “I think there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed.” But I would posit that this change evolved over recent cycles, as central bankers took an increasingly activist role in the economy and, most importantly, throughout the financial markets.
I would argue that the yield curve flattened in’06 and ’07 specifically because of Bubble Dynamics in mortgage Credit coupled with Bernanke’s previous professing on “helicopter money” and the government printing press. Dr. Bernanke, a radical inflationist, had become a powerful force in Federal Reserve policymaking. Bond markets back then discerned mortgage finance Bubble unsustainability, while deftly anticipating the Federal Reserve’s crisis response. The bursting Bubble saw the formal unveiling of the new central bank modus operandi: slash short rates to at least zero; aggressively inject liquidity into the markets through long-term debt purchases; manipulate long-term market yields much lower while telegraphing unwavering liquidity support.
The Fed and conventional thinking are comfortable with the view that today’s flat yield curves (low long-term yields) signal ongoing disinflationary pressures. The talk is of an extraordinarily low “neutral rate” that, conveniently, necessitates ongoing aggressive monetary accommodation. Apparently, financial stability concerns remain undeserving of the Fed’s “risk list”, so long as core consumer prices remain (slightly) below the 2% target.
December 13 – Reuters (John Ruwitch and Winni Zhou): “Financiers keep pouring cash into the shale oil sector, providing producers with a path to keep U.S. output rising through the middle of the next decade. The United States is on track to deliver up to 80% of the world’s oil production gains through 2025, the International Energy Agency estimates, increases fueled in part by easy access to capital. Rising U.S. production is undermining OPEC’s attempts to curb global supply and boost prices, forcing the oil cartel to continue restraining output through the end of 2018. Hedge funds and private equity firms have given producers a range of new and traditional financial levers they can pull as needed to keep shale rigs drilling…”
In so many ways, years of loose finance have spurred over-investment and attendant downward pricing pressures. Shale finance is only one of the more visible examples. Importantly, excess cheap finance and investment have evolved into powerful global phenomena. One has only to point to the runaway Credit boom - and resulting manufacturing overcapacity in China (and Asia more generally) - to come to the rather obvious conclusion that activist monetary management/accommodation can foment downward pricing pressures.
These days, central bankers from around the globe sing from the same hymn sheet. The inflation backdrop demands ongoing stimulus. The yield curve is “within its historical range”. “The financial system is on much sounder footing.” There’s “less to lose sleep about.” “When we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system. And we’re not seeing some worrisome buildup in leverage or credit growth at excessive levels.” When it comes to mounting risk throughout global securities and derivative markets, it’s hear no evil, see and speak none either. It’s worth highlighting an exchange from Mario Draghi’s Thursday press conference”
Question: “What kind of discussions have been going on within the governing council about possible bubbles in sectors of the market or economy – and how exiting the asset purchase plan could impact those bubbles?”
Mario Draghi: “We always discuss financial stability issues, and we certainly closely monitor the financial stability risks that may emerge from a situation where we had very, very low interest rates for a long period of time; abundant liquidity for a long period of time. So, the ground is fertile for these risks. At the same time, we are not seeing systemically important financial stability risks. We see the local spots where valuations tend to be over-stretched. But also, as soon as you ask this question, one should also ask the question ‘How’s leverage?’ Because a bubble is also the outcome of two components. So how’s leverage behaving? And there, differently from other parts of the world, we don’t see leverage – for the private sector going up, as for the whole of the Eurozone. As a matter of fact, debt to GDP or debt to value of assets – depending on the yardstick – continues to decrease…”
My response: Proclaiming a lack of “private sector” leveraging is disingenuous when the greatest sources of systemic leverage throughout this long cycle have been ballooning central bank and government balance sheets. It recalls how pristine government finance was an important facet of the last cycle’s bull story. Meanwhile, massive leveraging by the private and financial sectors was behind the mirage of responsible fiscal management.
As for Draghi’s “local spots” of “over-stretched” valuations, could he be referring to Italian 10-year yields at 1.80% or Spain at 1.49%? Or perhaps Greece at 3.89%, or Portugal at 1.76%. Or could it be German 10-year yields at 0.29%, or perhaps German two-year yields at negative seven bps. And then there’s French 10-year yields at 0.62%, Switzerland at negative 0.24%, Finland at 0.45%, Ireland at 0.48%, Belgium at 0.49%, Netherlands at 0.40%, Austria at 0.45% or Slovenia at 0.69%.
It’s reminiscent of chairman Greenspan’s declaration that you won't have a national real estate Bubble because all real estate markets are local. The flaw in the maestro’s thinking was his apparent disregard for the Bubble throughout mortgage finance – very much on a systemic, national basis. Today’s Bubble is in finance on a systemic, global basis – most prominent in government, central bank and securities finance – developed, EM and, importantly, all things China. Leveraging galore – with the associated Bubble finance utterly “fungible.”
December 13 – Bloomberg (Chris Anstey): “European investors have been plowing so much capital abroad they’ve taken up about half the boom in U.S. corporate debt in recent years, but now that liquidity tap is poised to be shut off, according to Oxford Economics. ‘The global debt issuance boom is likely to lose steam, given the extent to which it has relied on the support of European investors,’ Guillermo Tolosa, an economic adviser to Oxford Economics in London who has worked at the International Monetary Fund, wrote… ‘Issuers better seize the opportunities while they last.’ European Central Bank asset purchases took up so great a supply of bonds that it pushed euro area investors into markets abroad, to the tune of 400 billion euros ($473bn) a year over the past three years, Oxford Economics estimates.”
It’s simply difficult to believe that these central bankers fail to recognize what have evolved into deeply systemic risks. They know they’re trapped, but in denial – right? Then again, complacent central bankers have a history of being blindsided. Clearly, they’re determined to cling to flawed doctrine. I’ve always believed conventional thinking has it wrong: The great risk is not deflation but runaway Credit Bubbles. And very serious problems unfold when the risk of a bursting Bubble ensures that policymakers rationalize, justify - and sit back and do nothing.
December 12 – CNBC (Tae Kim): “Stanley Druckenmiller believes the overly easy monetary policies by global central banks will have disastrous consequences. ‘The way you create deflation is you create an asset bubble. If I was 'Darth Vader' of the financial world and decided I'm going to do this nasty thing and create deflation, I would do exactly what the central banks are doing now,’ he told CNBC's Kelly Evans… ‘Misallocate resources [with low interest rates], create an asset bubble and then deal with the consequences down the road,’ he said. The investor noted how this boom-and-bust cycle has happened time and time again. ‘Deflation just doesn't appear out of nowhere and it doesn't happen because you are near the zero bound. Every serious deflation I've looked at is preceded by an asset bubble and then it bursts,’ he said. ‘Think about the '20s, a big asset bubble that burst, you have the Depression. Think about Japan. Asset bubble in the '80s. It burst. You have the consequences follow. Think about 2008, 2009.’”
For the Week:
The S&P500 gained 0.9% (up 19.5% y-t-d), and the Dow rose 1.3% (up 24.7%). The Utilities slipped 0.5% (up 13.7%). The Banks dipped 0.4% (up 15.8%), while the Broker/Dealers were little changed (up 28.4%). The Transports were about unchanged (up 14.9%). The S&P 400 Midcaps slipped 0.2% (up 13.6%), while the small cap Russell 2000 recovered 0.6% (up 12.8%). The Nasdaq100 jumped 1.9% (up 33.0%). The Semiconductors rose 1.0% (up 38.0%). The Biotechs declined 1.4% (up 35.7%). With bullion regaining $6, the HUI gold index rallied 1.6% (down 1.2%).
Three-month Treasury bill rates ended the week at 129 bps. Two-year government yields rose four bps to 1.84% (up 65bps y-t-d). Five-year T-note yields added a basis point to 2.15% (up 23bps). Ten-year Treasury yields slipped two bps to 2.35% (down 9bps). Long bond yields fell eight bps to 2.68% (down 38bps).
Greek 10-year yields dropped 54 bps to 3.93% (down 309bps y-t-d). Ten-year Portuguese yields added three bps to 1.84% (down 191bps). Italian 10-year yields jumped 16 bps to 1.81% (unchanged). Spain's 10-year yields rose nine bps to 1.49% (up 11bps). German bund yields declined a basis point to 0.30% (up 10bps). French yields were unchanged at 0.63% (down 5bps). The French to German 10-year bond spread widened one to 33 bps. U.K. 10-year gilt yields sank 13 bps to 1.15% (down 9bps). U.K.'s FTSE equities gained 1.3% (up 4.9%).
Japan's Nikkei 225 equities index fell 1.1% (up 18.0% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.046% (up 1bp). France's CAC40 declined 0.9% (up 10.0%). The German DAX equities index slipped 0.4% (up 14.1%). Spain's IBEX 35 equities index dropped 1.7% (up 8.5%). Italy's FTSE MIB index sank 3.0% (up 14.9%). EM markets were mixed. Brazil's Bovespa index dipped 0.2% (up 20.6%), while Mexico's Bolsa gained 1.1% (up 5.3%). South Korea's Kospi index added 0.7% (up 22.5%). India’s Sensex equities index increased 0.6% (up 25.7%). China’s Shanghai Exchange declined 0.7% (up 5.2%). Turkey's Borsa Istanbul National 100 index rose 1.3% (up 39.9%). Russia's MICEX equities index declined 0.2% (down 4.0%).
Junk bond mutual funds saw outflows of $922 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.93% (down 23bps y-o-y). Fifteen-year rates were unchanged at 3.36% (down 1bp). Five-year hybrid ARM rates added a basis point to 3.36% (up 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.15% (down 4bps).
Federal Reserve Credit last week expanded $4.2bn to $4.401 TN. Over the past year, Fed Credit fell $16.6bn. Fed Credit inflated $1.581 TN, or 56%, over the past 266 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.5bn last week to $3.385 TN. "Custody holdings" were up $232bn y-o-y, or 7.4%.
M2 (narrow) "money" supply dipped $4.0bn last week to $13.806 TN. "Narrow money" expanded $638bn, or 4.8%, over the past year. For the week, Currency slipped $0.4bn. Total Checkable Deposits rose $20.7bn, while Savings Deposits dropped $23.2bn. Small Time Deposits were little changed. Retail Money Funds declined $0.9bn.
Total money market fund assets jumped $33.76bn to a seven-year high $2.841 TN. Money Funds rose $108bn y-o-y, or 4.0%.
Total Commercial Paper declined $2.9bn to $1.050 TN. CP gained $100bn y-o-y, or 10.5%.
Currency Watch:
The U.S. dollar index was little changed at 93.932 (down 8.3% y-t-d). For the week on the upside, the South African rand increased 4.33%, the New Zealand dollar 2.1%, the Australian dollar 1.8%, the Japanese yen 0.8%, the South Korean won 0.4%, and the Singapore dollar 0.3%. For the week on the downside, the Norwegian krone declined 1.1%, the Mexican peso 1.0%, the Swedish krona 0.7%, the British pound 0.5%, the Brazilian real 0.3%, the euro 0.2% and the Canadian dollar 0.1%. The Chinese renminbi increased 0.17% versus the dollar this week (up 5.08% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index was little changed (up 5.3% y-t-d). Spot Gold recovered 0.6% to $1,255 (up 9.0%). Silver rallied 1.5% to $16.063 (up 1%). Crude slipped six cents to $57.30 (up 6%). Gasoline dropped 3.6% (down 1%), and Natural Gas sank 5.8% (down 30%). Copper surged 5.2% (up 25%). Wheat slipped 0.2% (up 3%). Corn fell 1.5% (down 1%).
Trump Administration Watch:
December 14 – Wall Street Journal (Richard Rubin): “The tax bill moving through Congress is about 500 pages long, containing enough paper to wrap lots of Christmas presents for boys and girls across the land. The gifts in the text are tax cuts—more than $1.4 trillion of them over the next decade—scattered throughout a bill that Republican lawmakers are striving to make into law next week. The centerpiece of the plan is a lower corporate tax rate that will help domestic retailers, who are chief among businesses that pay close to the 35% corporate tax rate in effect now. Not everyone will benefit. The GOP plan also takes away some longstanding tax breaks, including the ability for individuals to fully deduct their state and local taxes. That’s going to be a problem for upper-middle-class wage-earners in high-tax states such as New York and California. The plan would add nearly $1.5 trillion to the nation’s budget deficits over the next decade, according to the Joint Committee on Taxation…”
December 11 – Bloomberg (Sahil Kapur): “A funny thing happened when Congress approved a tax cut for the middle class eight years ago: Most Americans didn’t notice. The 2009 economic-stimulus bill contained a one-year tax break worth $800 for married couples in 95% of working households -- a little over $15 a week. A February 2010 poll found that just 12% said their taxes had been reduced. More than half, 53%, said they saw no change. A remarkable 24% thought their taxes had increased. ‘Virtually nobody believed they got a tax cut,’ said Jared Bernstein, an economist who worked in former President Barack Obama’s White House.”
December 10 – Financial Times (Bryan Harris): “North Korea has criticised a proposed US naval blockade, saying such a move would constitute another ‘declaration of war’. The fiery comments in the state-run Rodong Sinmun newspaper came a day before the US, South Korea and Japan launched rocket tracking drills on Monday aimed at improving detection and monitoring of the reclusive regime’s ballistic missile tests.”
December 13 – Wall Street Journal (Dante Chinni): “Democrat Doug Jones’s improbable victory in one of the nation’s reddest states is sure to fuel Republican anxieties about next year’s midterm elections, as it offers more evidence that Democrats in the era of President Donald Trump are eager to vote, while GOP voter turnout is muted. Mr. Jones eked out a narrow win in his U.S. Senate race due to high turnout among African-Americans, who overwhelmingly backed the Democrat, and low turnout in the largely white, rural counties that Republicans have counted on as a large part of their base.”
December 13 – Reuters (Eliana Raszewski and Luc Cohen): “The United States, European Union and Japan vowed… to work together to fight market-distorting trade practices and policies that have fueled excess production capacity, naming several key features of China’s economic system. In a joint statement that did not single out China or any other country, the three economic powers said they would work within the World Trade Organization and other multilateral groups to eliminate unfair competitive conditions caused by subsidies, state-owned enterprises, ‘forced’ technology transfer and local content requirements. The move was a rare show of solidarity with the United States at a World Trade Organization meeting…”
China Watch:
December 11 – Bloomberg: “China’s broadest gauge of new credit and an index of loan growth both exceeded projections, signaling that a government push against leverage hasn’t crimped lending. Aggregate financing stood at 1.6 trillion yuan ($242bn) in November…, compared with an estimated 1.25 trillion yuan in a Bloomberg survey and 1.04 trillion yuan the prior month… The broad M2 money supply increased 9.1%, exceeding projections and rising from the 8.8% record low in October.”
December 11 – Reuters (Kevin Yao): “Bank lending in China hit a fresh record after a much stronger-than-expected surge in credit in November, even as authorities step up efforts to reduce risks in the financial system from a rapid build-up in debt. Chinese banks extended 1.12 trillion yuan ($169.27bn) in net new yuan loans in November…, well above analysts’ expectations… The November credit splurge brought China’s total new lending so far this year to 12.94 trillion yuan, more than Italy’s GDP and exceeding 2016’s record 12.65 trillion yuan with one month left to go.”
December 13 – Reuters (John Ruwitch and Winni Zhou): “China’s central bank nudged money market interest rates upward on Thursday just hours after the Federal Reserve raised the U.S. benchmark, as Beijing seeks to prevent destabilizing capital outflows without hurting economic growth… The People’s Bank of China called it a ‘normal market reaction’ to the Fed that would keep interest rate expectations reasonable and help with the deleveraging campaign.”
December 13 – Bloomberg: “China’s new home sales rebounded in November, climbing the most in five months. Sales by value, excluding affordable housing, increased 12.4% from a year earlier to 1.02 trillion yuan ($151bn)…”
December 11 – Wall Street Journal (Nathaniel Taplin): “In the West, bad children get coal in their Christmas stockings. In China, everyone gets coal, as consumption peaks during the winter-heating season. Its leaders want to change this. In line with President Xi Jinping’s recent call for a ‘better life’ for Chinese citizens, coal power curbs this winter are rolling across northern China. China’s green push has a problem, however. Electric power is the country’s most indebted sector, with total debt of 7.8 trillion yuan ($1.2 trillion) at the end of 2016… A good chunk of that is sunk into coal power plants with the capacity to produce more than one billion kilowatts of electricity, roughly three times the coal power capacity of the U.S.”
December 13 – Bloomberg (Denise Wee and Carrie Hong): “Debt-laden Chinese conglomerate HNA Group Co. met with Chinese lenders for talks on financing next year, after borrowing costs surged in recent weeks and prompted some units to scrap bond offerings. Representatives from eight Chinese banks’ branches in the southeastern province of Hainan, where HNA is based, met with the group Wednesday on providing credit support in 2018, the company said…”
December 14 – Wall Street Journal (Shen Hong): “Chinese companies are turning away from capital markets and heading back to state-owned banks to raise cash, in a reversal of Beijing’s previous efforts to modernize the way the corporate sector in the world’s No. 2 economy is funded. China’s bond and stock markets have provided about a quarter of all financing for companies in the past two years. This year, that proportion is down to just 6.6%...”
December 10 – Bloomberg: “China’s securities regulator is cracking down on the fast-growing hedge-fund industry, investigating 10 cases of alleged wrongdoing. Officials are probing private fund practices including market manipulation, misappropriation of client funds, insider trading and trading by managers using their personal accounts, the China Securities Regulatory Commission said… Some funds used the Hong Kong-Shanghai stock connect to manipulate prices and some employees sought personal gain by exploiting the hedging mechanism for stock index futures, it said.”
Federal Reserve Watch:
December 13 – Financial Times (Sam Fleming): “The Federal Reserve lifted short-term interest rates for a third time this year and predicted more increases to follow in the new year as Janet Yellen prepares to hand over the chair amid robust hiring and surging financial markets. The US central bank’s Federal Open Market Committee increased the target range for the federal funds rate by a quarter point to 1.25-1.5%. Policymakers’ median forecast was for another three quarter-point increases in 2018 and two in 2019, even as they acknowledged inflation is continuing to undershoot their target. Two policymakers – Charles Evans of Chicago and Neel Kashkari of Minneapolis — dissented…”
December 12 – Wall Street Journal (Ben Eisen, Daniel Kruger and Chelsey Dulaney): “Investors have greeted the Federal Reserve’s recent string of interest rate increases with some of the most docile market conditions in years, a sign that they could be in for a shock if the central bank decides to ramp up the pace of rate rises next year. The Goldman Sachs Financial Conditions Index, a widely-watched measure of how easily money and credit flow through the economy via financial markets, was this month at its lowest level since 2014. Financial conditions are now looser than they were before the Fed began lifting rates in 2015.”
U.S. Bubble Watch:
December 12 – Reuters (Lucia Mutikani): “U.S. producer prices rose in November as gasoline prices surged and the cost of other goods increased, leading to the largest annual gain in nearly six years. The fairly strong report… suggested a broad acceleration in wholesale price pressures, which could assuage concerns among some Federal Reserve officials over persistently low inflation. ‘This demand-led price push from higher commodity prices is a classic early warning signal that consumer goods will also see increasing inflationary pressures,’ said Chris Rupkey, chief economist at MUFG… The Labor Department said its producer price index for final demand increased 0.4% last month, advancing by the same margin for three straight months. In the 12 months through November, the PPI shot up 3.1%.”
December 14 – Reuters: “U.S. import prices surged in November amid an increase in the cost of imported petroleum products, leading to the largest year-on-year increase in seven months. The Labor Department said… that import prices jumped 0.7% last month after a downwardly revised 0.1% gain in October… In the 12 months through November, import prices advanced 3.1%...”
December 12 – Bloomberg (Vince Golle): “Optimism among small companies in the U.S. advanced last month to the highest level in more than 34 years as owners became more upbeat about future economic conditions and sales prospects, according to a National Federation of Independent Business survey… The small-business optimism index showed all but two of the 10 components increased from a month earlier, including a record net 24% share of small-business owners who said they plan to add jobs.”
December 11 – Wall Street Journal (Paul J. Davies): “Would you invest in a company that couldn’t tell you what its business was going to be? Some would, in fact they are doing so in record amounts. Blank-check companies, otherwise known as special purpose acquisition companies, or SPACs, are listed companies that raise money from investors to go and buy a company as yet unidentified… Investing blind looks to be as high-risk as it sounds. This year, there have been almost $14 billion worth of new listed shares in blank-check companies, a record, outstripping 2007’s $12.3 billion global issuance, and giving it all a peak-of-the-markets feel. Between 2007 and 2017, listings were fewer and issuance averaged less than $3 billion a year.”
December 13 – Wall Street Journal (Josh Mitchell): “The number of Americans severely behind on payments on federal student loans reached roughly 4.6 million in the third quarter, a doubling from four years ago, despite a historically long stretch of U.S. job creation and steady economic growth. In the third quarter alone, the count of such defaulted borrowers—defined by the government as those who haven’t made a payment in at least a year—grew by nearly 274,000…”
December 12 – Wall Street Journal (Nicole Friedman): “Raging wildfires in Southern California could push the amount of insured losses this year from natural disasters to a record. Insurers and reinsurers are already on track for one of the largest ever industrywide losses from natural catastrophes. Hurricanes Harvey, Irma and Maria, along with two Mexican earthquakes, caused between $66 billion and $111 billion in damage, according to estimates from catastrophe-modeling firms. Wildfires in California in October caused $9.4 billion in insurance claims, the state insurance commissioner said last week. Insurers haven’t yet estimated the scope of damage from the fires in Southern California.”
December 12 – Reuters (Lindsay Dunsmuir): “The U.S. government reported a $139 billion deficit in November… That compared with a budget deficit of $137 billion in the same month last year… The deficit for the fiscal year to date was $202 billion, compared to a deficit of $183 billion in the comparable period for fiscal 2017.”
December 11 – Wall Street Journal (Katherine Clarke): “A roughly 20,000-square-foot mansion with its own red velvet movie theater and panic room is in contract for about $80 million... If it closes for that price, the property would become the most expensive townhouse ever sold in New York City, according to appraiser Jonathan Miller. The current record was set in 2006, when financier J. Christopher Flowers paid $53 million for the Harkness mansion on East 75th Street, Mr. Miller said.”
Central Banker Watch:
December 15 - NewEurope: "On Thursday the European Central Bank (ECB) raised growth and inflation projections, but Mario Draghi remains committed to cheap liquidity. Employment is surging in the Eurozone and growth remains on track for a fifth successive year. Growth in the Eurozone is projected to be 2.4% for 2017 and 2.3% for 2018. However, Eurozone inflation in 2017 is expected to be a meagre 1.4% and will remain below the 2% target beyond 2020. The forecast for 2020 is 1.7%. ...ECB’s President Mario Draghi noted that with current projections there was still need for 'ample stimulus,' or at least until September 2018."
Global Bubble Watch:
December 13 – New York Times (Desmond Lachman): “In late 2008, at a meeting with academics at the London School of Economics, Queen Elizabeth II asked why no one seemed to have anticipated the world’s worst financial crisis in the postwar period. The so-called Great Recession, which had begun in late 2008 and would run until mid-2009, was set off by the sudden collapse of sky-high prices for housing and other assets — something that is obvious in retrospect but that, nevertheless, no one seemed to see coming. Are we about to make the same mistake? All too likely, yes. Certainly, the American economy is doing well, and emerging economies are picking up steam. But global asset prices are once again rising rapidly above their underlying value — in other words, they are in a bubble. Considering the virtual silence among economists about the danger they pose, one has to wonder whether in a year or two, when those bubbles eventually burst, the queen will not be asking the same sort of question. This silence is all the more surprising considering how much more pervasive bubbles are today than they were 10 years ago. While in 2008 bubbles were largely confined to the American housing and credit markets, they are now to be found in almost every corner of the world economy.”
December 12 – Bloomberg: “2017 is set to go down as the year when easy monetary policy and budding global growth came together to deliver blockbuster returns for the world’s emerging markets. Currencies and stocks in developing economies are on track for their biggest rallies in eight years as even the riskiest markets shrugged off various crises and threats to deliver gains for investors. Bonds, too, have had a good run, with local-currency emerging-market debt returning the most since 2012 amid the loose policy environment.”
December 11 – Bloomberg: “Years of cheap money across Asia have left a legacy of surging debt that will force the region’s central bankers to be cautious when they eventually follow in the footsteps of South Korea by raising interest rates. In South Korea… household debt has ballooned to about 150% of disposable income. It’s an even larger 194% in Australia. In China, it’s companies feeling the strain with corporate debt equating to about 160% of gross domestic product. Years of unprecedented stimulus have swollen the Bank of Japan’s balance sheet to almost the size of the economy. Given the 2% inflation target is still in the distance, a tightening of monetary policy remains a long way off, so that debt pile is set to keep on swelling.”
December 12 – Bloomberg (Luke Kawa): “‘Buy the dip’ has never been so popular. The practice of treating any and all pullbacks in risk assets as opportunities to accumulate more has become entrenched in global equity markets, especially in the U.S., according to analysts at Bank of America Merrill Lynch. ‘Investors no longer fear shocks but love them,’ a team led by global equity derivatives researcher Nitin Saksena wrote… ‘Since 2013, central banks have stepped in (or communicated that they may step in) to protect markets, leaving investors confident enough to ‘buy-the-dip.’’”
December 10 – Bloomberg (David Goodman): “Wall Street economists are telling investors to brace for the biggest tightening of monetary policy in more than a decade. With the world economy heading into its strongest period since 2011, Citigroup Inc. and JPMorgan… predict average interest rates across advanced economies will climb to at least 1% next year in what would be the largest increase since 2006. As for the quantitative easing that marks its 10th anniversary in the U.S. next year, Bloomberg Economics predicts net asset purchases by the main central banks will fall to a monthly $18 billion at the end of 2018, from $126 billion in September, and turn negative during the first half of 2019.”
December 10 – Bloomberg (Rob Urban, Camila Russo, and Yuji Nakamura): “Bitcoin has landed on Wall Street. Futures on the world’s most popular cryptocurrency surged as much as 26% in their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts designed to calm the market. Initial volume exceeded dealers’ expectations, while traffic on Cboe’s website was so heavy that it caused delays and temporary outages… ‘It is rare that you see something more volatile than bitcoin, but we found it: bitcoin futures,’ said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.”
December 11 – CNBC (Michelle Fox): “Bitcoin is in the ‘mania’ phase, with some people even borrowing money to get in on the action, securities regulator Joseph Borg told CNBC… ‘We've seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,’ said Borg, president of the North American Securities Administrators Association… ‘This is not something a guy who's making $100,000 a year, who's got a mortgage and two kids in college ought to be invested in.’”
December 13 – Reuters (John Ruwitch and Winni Zhou): “China’s central bank nudged money market interest rates upward on Thursday just hours after the Federal Reserve raised the U.S. benchmark, as Beijing seeks to prevent destabilizing capital outflows without hurting economic growth… The People’s Bank of China called it a ‘normal market reaction’ to the Fed that would keep interest rate expectations reasonable and help with the deleveraging campaign.”
December 13 – Bloomberg: “China’s new home sales rebounded in November, climbing the most in five months. Sales by value, excluding affordable housing, increased 12.4% from a year earlier to 1.02 trillion yuan ($151bn)…”
December 11 – Wall Street Journal (Nathaniel Taplin): “In the West, bad children get coal in their Christmas stockings. In China, everyone gets coal, as consumption peaks during the winter-heating season. Its leaders want to change this. In line with President Xi Jinping’s recent call for a ‘better life’ for Chinese citizens, coal power curbs this winter are rolling across northern China. China’s green push has a problem, however. Electric power is the country’s most indebted sector, with total debt of 7.8 trillion yuan ($1.2 trillion) at the end of 2016… A good chunk of that is sunk into coal power plants with the capacity to produce more than one billion kilowatts of electricity, roughly three times the coal power capacity of the U.S.”
December 13 – Bloomberg (Denise Wee and Carrie Hong): “Debt-laden Chinese conglomerate HNA Group Co. met with Chinese lenders for talks on financing next year, after borrowing costs surged in recent weeks and prompted some units to scrap bond offerings. Representatives from eight Chinese banks’ branches in the southeastern province of Hainan, where HNA is based, met with the group Wednesday on providing credit support in 2018, the company said…”
December 14 – Wall Street Journal (Shen Hong): “Chinese companies are turning away from capital markets and heading back to state-owned banks to raise cash, in a reversal of Beijing’s previous efforts to modernize the way the corporate sector in the world’s No. 2 economy is funded. China’s bond and stock markets have provided about a quarter of all financing for companies in the past two years. This year, that proportion is down to just 6.6%...”
December 10 – Bloomberg: “China’s securities regulator is cracking down on the fast-growing hedge-fund industry, investigating 10 cases of alleged wrongdoing. Officials are probing private fund practices including market manipulation, misappropriation of client funds, insider trading and trading by managers using their personal accounts, the China Securities Regulatory Commission said… Some funds used the Hong Kong-Shanghai stock connect to manipulate prices and some employees sought personal gain by exploiting the hedging mechanism for stock index futures, it said.”
Federal Reserve Watch:
December 13 – Financial Times (Sam Fleming): “The Federal Reserve lifted short-term interest rates for a third time this year and predicted more increases to follow in the new year as Janet Yellen prepares to hand over the chair amid robust hiring and surging financial markets. The US central bank’s Federal Open Market Committee increased the target range for the federal funds rate by a quarter point to 1.25-1.5%. Policymakers’ median forecast was for another three quarter-point increases in 2018 and two in 2019, even as they acknowledged inflation is continuing to undershoot their target. Two policymakers – Charles Evans of Chicago and Neel Kashkari of Minneapolis — dissented…”
December 12 – Wall Street Journal (Ben Eisen, Daniel Kruger and Chelsey Dulaney): “Investors have greeted the Federal Reserve’s recent string of interest rate increases with some of the most docile market conditions in years, a sign that they could be in for a shock if the central bank decides to ramp up the pace of rate rises next year. The Goldman Sachs Financial Conditions Index, a widely-watched measure of how easily money and credit flow through the economy via financial markets, was this month at its lowest level since 2014. Financial conditions are now looser than they were before the Fed began lifting rates in 2015.”
U.S. Bubble Watch:
December 12 – Reuters (Lucia Mutikani): “U.S. producer prices rose in November as gasoline prices surged and the cost of other goods increased, leading to the largest annual gain in nearly six years. The fairly strong report… suggested a broad acceleration in wholesale price pressures, which could assuage concerns among some Federal Reserve officials over persistently low inflation. ‘This demand-led price push from higher commodity prices is a classic early warning signal that consumer goods will also see increasing inflationary pressures,’ said Chris Rupkey, chief economist at MUFG… The Labor Department said its producer price index for final demand increased 0.4% last month, advancing by the same margin for three straight months. In the 12 months through November, the PPI shot up 3.1%.”
December 14 – Reuters: “U.S. import prices surged in November amid an increase in the cost of imported petroleum products, leading to the largest year-on-year increase in seven months. The Labor Department said… that import prices jumped 0.7% last month after a downwardly revised 0.1% gain in October… In the 12 months through November, import prices advanced 3.1%...”
December 12 – Bloomberg (Vince Golle): “Optimism among small companies in the U.S. advanced last month to the highest level in more than 34 years as owners became more upbeat about future economic conditions and sales prospects, according to a National Federation of Independent Business survey… The small-business optimism index showed all but two of the 10 components increased from a month earlier, including a record net 24% share of small-business owners who said they plan to add jobs.”
December 11 – Wall Street Journal (Paul J. Davies): “Would you invest in a company that couldn’t tell you what its business was going to be? Some would, in fact they are doing so in record amounts. Blank-check companies, otherwise known as special purpose acquisition companies, or SPACs, are listed companies that raise money from investors to go and buy a company as yet unidentified… Investing blind looks to be as high-risk as it sounds. This year, there have been almost $14 billion worth of new listed shares in blank-check companies, a record, outstripping 2007’s $12.3 billion global issuance, and giving it all a peak-of-the-markets feel. Between 2007 and 2017, listings were fewer and issuance averaged less than $3 billion a year.”
December 13 – Wall Street Journal (Josh Mitchell): “The number of Americans severely behind on payments on federal student loans reached roughly 4.6 million in the third quarter, a doubling from four years ago, despite a historically long stretch of U.S. job creation and steady economic growth. In the third quarter alone, the count of such defaulted borrowers—defined by the government as those who haven’t made a payment in at least a year—grew by nearly 274,000…”
December 12 – Wall Street Journal (Nicole Friedman): “Raging wildfires in Southern California could push the amount of insured losses this year from natural disasters to a record. Insurers and reinsurers are already on track for one of the largest ever industrywide losses from natural catastrophes. Hurricanes Harvey, Irma and Maria, along with two Mexican earthquakes, caused between $66 billion and $111 billion in damage, according to estimates from catastrophe-modeling firms. Wildfires in California in October caused $9.4 billion in insurance claims, the state insurance commissioner said last week. Insurers haven’t yet estimated the scope of damage from the fires in Southern California.”
December 12 – Reuters (Lindsay Dunsmuir): “The U.S. government reported a $139 billion deficit in November… That compared with a budget deficit of $137 billion in the same month last year… The deficit for the fiscal year to date was $202 billion, compared to a deficit of $183 billion in the comparable period for fiscal 2017.”
December 11 – Wall Street Journal (Katherine Clarke): “A roughly 20,000-square-foot mansion with its own red velvet movie theater and panic room is in contract for about $80 million... If it closes for that price, the property would become the most expensive townhouse ever sold in New York City, according to appraiser Jonathan Miller. The current record was set in 2006, when financier J. Christopher Flowers paid $53 million for the Harkness mansion on East 75th Street, Mr. Miller said.”
Central Banker Watch:
December 15 - NewEurope: "On Thursday the European Central Bank (ECB) raised growth and inflation projections, but Mario Draghi remains committed to cheap liquidity. Employment is surging in the Eurozone and growth remains on track for a fifth successive year. Growth in the Eurozone is projected to be 2.4% for 2017 and 2.3% for 2018. However, Eurozone inflation in 2017 is expected to be a meagre 1.4% and will remain below the 2% target beyond 2020. The forecast for 2020 is 1.7%. ...ECB’s President Mario Draghi noted that with current projections there was still need for 'ample stimulus,' or at least until September 2018."
Global Bubble Watch:
December 13 – New York Times (Desmond Lachman): “In late 2008, at a meeting with academics at the London School of Economics, Queen Elizabeth II asked why no one seemed to have anticipated the world’s worst financial crisis in the postwar period. The so-called Great Recession, which had begun in late 2008 and would run until mid-2009, was set off by the sudden collapse of sky-high prices for housing and other assets — something that is obvious in retrospect but that, nevertheless, no one seemed to see coming. Are we about to make the same mistake? All too likely, yes. Certainly, the American economy is doing well, and emerging economies are picking up steam. But global asset prices are once again rising rapidly above their underlying value — in other words, they are in a bubble. Considering the virtual silence among economists about the danger they pose, one has to wonder whether in a year or two, when those bubbles eventually burst, the queen will not be asking the same sort of question. This silence is all the more surprising considering how much more pervasive bubbles are today than they were 10 years ago. While in 2008 bubbles were largely confined to the American housing and credit markets, they are now to be found in almost every corner of the world economy.”
December 12 – Bloomberg: “2017 is set to go down as the year when easy monetary policy and budding global growth came together to deliver blockbuster returns for the world’s emerging markets. Currencies and stocks in developing economies are on track for their biggest rallies in eight years as even the riskiest markets shrugged off various crises and threats to deliver gains for investors. Bonds, too, have had a good run, with local-currency emerging-market debt returning the most since 2012 amid the loose policy environment.”
December 11 – Bloomberg: “Years of cheap money across Asia have left a legacy of surging debt that will force the region’s central bankers to be cautious when they eventually follow in the footsteps of South Korea by raising interest rates. In South Korea… household debt has ballooned to about 150% of disposable income. It’s an even larger 194% in Australia. In China, it’s companies feeling the strain with corporate debt equating to about 160% of gross domestic product. Years of unprecedented stimulus have swollen the Bank of Japan’s balance sheet to almost the size of the economy. Given the 2% inflation target is still in the distance, a tightening of monetary policy remains a long way off, so that debt pile is set to keep on swelling.”
December 12 – Bloomberg (Luke Kawa): “‘Buy the dip’ has never been so popular. The practice of treating any and all pullbacks in risk assets as opportunities to accumulate more has become entrenched in global equity markets, especially in the U.S., according to analysts at Bank of America Merrill Lynch. ‘Investors no longer fear shocks but love them,’ a team led by global equity derivatives researcher Nitin Saksena wrote… ‘Since 2013, central banks have stepped in (or communicated that they may step in) to protect markets, leaving investors confident enough to ‘buy-the-dip.’’”
December 10 – Bloomberg (David Goodman): “Wall Street economists are telling investors to brace for the biggest tightening of monetary policy in more than a decade. With the world economy heading into its strongest period since 2011, Citigroup Inc. and JPMorgan… predict average interest rates across advanced economies will climb to at least 1% next year in what would be the largest increase since 2006. As for the quantitative easing that marks its 10th anniversary in the U.S. next year, Bloomberg Economics predicts net asset purchases by the main central banks will fall to a monthly $18 billion at the end of 2018, from $126 billion in September, and turn negative during the first half of 2019.”
December 10 – Bloomberg (Rob Urban, Camila Russo, and Yuji Nakamura): “Bitcoin has landed on Wall Street. Futures on the world’s most popular cryptocurrency surged as much as 26% in their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts designed to calm the market. Initial volume exceeded dealers’ expectations, while traffic on Cboe’s website was so heavy that it caused delays and temporary outages… ‘It is rare that you see something more volatile than bitcoin, but we found it: bitcoin futures,’ said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.”
December 11 – CNBC (Michelle Fox): “Bitcoin is in the ‘mania’ phase, with some people even borrowing money to get in on the action, securities regulator Joseph Borg told CNBC… ‘We've seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,’ said Borg, president of the North American Securities Administrators Association… ‘This is not something a guy who's making $100,000 a year, who's got a mortgage and two kids in college ought to be invested in.’”
Europe Watch:
December 14 – Bloomberg (Piotr Skolimowski): “Economic momentum in the euro area unexpectedly accelerated to the fastest pace in almost seven years as manufacturing posted record growth at the end of 2017. A composite Purchasing Managers’ Index rose to 58 in December from 57.5 in November, IHS Markit said… An index for Germany, the region’s biggest economy, jumped to the highest since 2011.”
December 13 – Reuters (Fanny Potkin): “Italy’s 10-year bond yield rose and Milan-listed bank shares fell on Wednesday following on prospects the country will hold a national election in March, raising concerns about political stability in the euro zone’s third biggest economy. Italy’s parliament will be dissolved between Christmas and the New Year with national elections probably set for March 4, a parliamentary source in contact with the president’s office said…”
December 13 – Bloomberg (Kelly Gilblom and Chiara Albanese): “Italy’s power industry is in the throes of the biggest shakeup since it opened to competition almost two decades ago after rising prices and a regulatory crackdown unmasked risky practices and spurred losses. Two of the country’s energy providers are liquidating, forcing thousands of customers… to find new suppliers, often at higher rates. The disruption is unlikely to stop there. ‘In the next few months we will see three things: bankruptcies, mergers and CEOs losing their jobs,’ said Gianfranco Sorasio, chief executive officer of power supplier eVISO Srl. ‘The Italian energy market is shaking.’”
Japan Watch:
December 12 – Financial Times (Roger Blitz): “Most forecasters thought they could dismiss the Bank of Japan from their 2018 lists of central banks to watch. Amid talk of a retreat from quantitative easing, the BoJ looked nailed on to maintain its ‘yield curve control’ policy, putting off the idea of tightening until long into the future. That was until a few weeks ago when Haruhiko Kuroda, the bank governor, started to muse about the impact of its ultra-low rates policy on the economy, comments that sparked market interest and drove the yen higher. All too predictably, the governor has rowed back from those remarks. The policy has not changed, he said in a speech last Thursday, arguing that yield curve control was designed to be ‘highly sustainable’. So, is that it? Was it a miscommunication, kite-flying beloved of policymakers, or something more meaningful?”
December 11 – Reuters (Leika Kihara): “Regardless of a return to solid economic growth, the risk of sharp appreciation in the yen means Japan’s central bank would be in no rush to exit its ultra-loose monetary policy, say sources familiar with the bank’s thinking. Stubbornly low inflation would also make the Bank of Japan hesitant to taper its huge crisis-mode stimulus programme and shift away from rock-bottom interest rates too quickly.”
Leveraged Speculation Watch:
December 15 – Bloomberg (Katherine Burton): “John Griffin told investors he’s closing his $6 billion Blue Ridge Capital, ending a three-decade career in hedge funds as the eight-year bull market weighs on his industry. ‘This can be a humbling business, and many times we were tested, especially on the short side, but we have remained committed to the long-short portfolio strategy that has been our founding philosophy since we launched over 21 years ago,’ Griffin wrote…”
December 14 – Bloomberg (Piotr Skolimowski): “Economic momentum in the euro area unexpectedly accelerated to the fastest pace in almost seven years as manufacturing posted record growth at the end of 2017. A composite Purchasing Managers’ Index rose to 58 in December from 57.5 in November, IHS Markit said… An index for Germany, the region’s biggest economy, jumped to the highest since 2011.”
December 13 – Reuters (Fanny Potkin): “Italy’s 10-year bond yield rose and Milan-listed bank shares fell on Wednesday following on prospects the country will hold a national election in March, raising concerns about political stability in the euro zone’s third biggest economy. Italy’s parliament will be dissolved between Christmas and the New Year with national elections probably set for March 4, a parliamentary source in contact with the president’s office said…”
December 13 – Bloomberg (Kelly Gilblom and Chiara Albanese): “Italy’s power industry is in the throes of the biggest shakeup since it opened to competition almost two decades ago after rising prices and a regulatory crackdown unmasked risky practices and spurred losses. Two of the country’s energy providers are liquidating, forcing thousands of customers… to find new suppliers, often at higher rates. The disruption is unlikely to stop there. ‘In the next few months we will see three things: bankruptcies, mergers and CEOs losing their jobs,’ said Gianfranco Sorasio, chief executive officer of power supplier eVISO Srl. ‘The Italian energy market is shaking.’”
Japan Watch:
December 12 – Financial Times (Roger Blitz): “Most forecasters thought they could dismiss the Bank of Japan from their 2018 lists of central banks to watch. Amid talk of a retreat from quantitative easing, the BoJ looked nailed on to maintain its ‘yield curve control’ policy, putting off the idea of tightening until long into the future. That was until a few weeks ago when Haruhiko Kuroda, the bank governor, started to muse about the impact of its ultra-low rates policy on the economy, comments that sparked market interest and drove the yen higher. All too predictably, the governor has rowed back from those remarks. The policy has not changed, he said in a speech last Thursday, arguing that yield curve control was designed to be ‘highly sustainable’. So, is that it? Was it a miscommunication, kite-flying beloved of policymakers, or something more meaningful?”
December 11 – Reuters (Leika Kihara): “Regardless of a return to solid economic growth, the risk of sharp appreciation in the yen means Japan’s central bank would be in no rush to exit its ultra-loose monetary policy, say sources familiar with the bank’s thinking. Stubbornly low inflation would also make the Bank of Japan hesitant to taper its huge crisis-mode stimulus programme and shift away from rock-bottom interest rates too quickly.”
Leveraged Speculation Watch:
December 15 – Bloomberg (Katherine Burton): “John Griffin told investors he’s closing his $6 billion Blue Ridge Capital, ending a three-decade career in hedge funds as the eight-year bull market weighs on his industry. ‘This can be a humbling business, and many times we were tested, especially on the short side, but we have remained committed to the long-short portfolio strategy that has been our founding philosophy since we launched over 21 years ago,’ Griffin wrote…”
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