Saturday, September 23, 2017

Weekly Commentary: Q2 2017 Z.1 Report

I found the Fed’s latest (Q2) Z.1 report particularly interesting. It brought back memories. In general, debt growth was steady and rather uninteresting. As such, it would be reasonable to equate the seemingly placid Credit backdrop with an extraordinarily long period of low securities market volatility. Yet there’s another dynamic to contemplate (and carefully monitor). Below the surface the financial sector is turning increasingly unstable. Latent financial instability has begun to surface. And, sure enough, acute monetary disorder ensured that securities markets succumbed to speculative blow-off dynamics.

Q2 2017 Non-Financial Debt (NFD) expanded at a 3.8% rate, up from Q1’s 1.7% and Q4’s 3.1%. Household Debt growth increased from a 3.4% rate to 3.7%. Home Mortgage Debt expanded at a 2.8% rate, down from Q1’s 3.4%. Consumer Credit slowed to 4.6% from 5.2%. Total Business Debt growth slowed to 5.3% from Q1’s 6.1%. After contracting at a 2.6% rate during Q1, Q2 saw Federal borrowings increase at a 3.6% rate.

With system debt having inflated for decades now, today’s percentage changes don’t do justice. Plus, with interest rates so low, interest compounds much less than in the past – thus working to restrain overall debt expansion. But let’s examine nominal data. On a seasonally-adjusted and annualized (SAAR) basis, Non-Financial Debt expanded at a $1.813 TN pace during Q2 (up from Q1’s $794bn). This compares to annual growth of $2.095 TN in 2016, $1.958 TN in 2015, $1.792 TN in 2014 and $1.547 TN in 2013.

Total Household borrowings increased SAAR $542 billion during Q2. For comparison, Household borrowings expanded $510 billion in 2016, $403 billion in ‘15, $400 billion in ‘14, $241 billion in ’13 and $265 billion in ‘12. Household borrowings contracted in 2011 ($51bn) and 2010 ($60bn).

Total Business borrowings slowed to SAAR $724 billion, down from Q1’s $817 billion. Borrowings nonetheless remain robust, tracking above 2016 annual borrowings of $711 billion and not far below 2015’s $820 billion (strongest since 2007).

On a year-on-year basis, the Federal government borrowings have shown the largest slowdown. This won’t last. Federal Government Liabilities ended Q2 at a record $18.651 TN, up from $8.056 TN to end 2007. As a percentage of GDP, Federal Liabilities have increased from 55% to 97%. Outstanding Treasury securities ended Q2 at $15.798 TN, up 160% from the $6.051 TN to end 2007. Somehow there is still talk of “deleveraging” in the face of one of the great bouts of government indebtedness.

Meanwhile, outstanding Agency- and GSE-Backed Securities ended Q2 at a record $8.667 TN. One of these decades there may even be GSE “reform.” GSE Securities increased $95 billion during the quarter, $343 billion over the past year and $888 billion over three years. Amazingly, with Fannie and Freddie remitting (accounting) profits back to the Treasury, the government sponsored enterprises these days have no meaningful capital base (Z.1 has GSE assets less liabilities at a paltry $6.0bn).

Complacency may come easy to those viewing relatively modest annual percentage growth in household, corporate and federal debt. Indeed, most at this point completely dismiss the Credit Bubble hypothesis. Yet there is plenty of support for The Bubble Thesis buried throughout the Fed’s Z.1 report.

Let’s start with the Fed’s “Financial Sector” category. Total Financial Assets expanded nominal $1.411 TN during the quarter to $93.61 TN, this following Q1’s gain of $1.997 TN (strongest since Q1 2012). Financial Sector growth is on pace for the largest gain since 2007. Notable expansions included the SAAR $797 billion gain in “Federal Funds and Security Repos,” SAAR $899 billion rise in “Loans”, and SAAR $1.573 TN jump in Financial Sector “Miscellaneous Assets.”

The Security Broker/Dealers expanded Financial Assets SAAR $567 billion during Q1. The quarter saw the strongest growth since Q1 2010. “Security Repurchase Agreements” jumped SAAR $263 billion, with Debt Securities up SAAR $154 billion. On the Liability side, Security Repurchase Agreements surged SAAR $329 billion and Corporate Debt Securities rose SAAR $144 billion.

The explosive growth of the ETF complex runs unabated, as detailed in Fed data. ETF assets surged a nominal $170 billion during the quarter (24% annualized) to a record $2.944 TN. Total assets were up $715 billion y-o-y, or 32%. Interestingly, when ranked by “investment objective,” World Equities led the way during Q2. World Equities assets expanded $77 billion (53% annualized) during Q2 and were up $195 billion, or 42%, y-o-y. U.S. Equities gained $55.6 billion during Q2 and were up $429 billion, or 33% y-o-y. Taxable Bond funds attracted $34 billion during the quarter, with assets up $95 billion y-o-y.

Further indications of “Hot Money” On the Move: Bank “Holding Companies” saw Financial Assets jump SAAR $903 billion during the quarter. Financial Assets of “Funding Corporations” dropped SAAR $492 billion during Q2. Net Interbank Assets dropped SAAR $663 billion during Q2, after surging SAAR $1.582 TN during Q1 and declining SAAR $649 billion in Q4 2016. While Financial Sector Debt Securities holdings were relatively flat (up SAAR $31bn), a “risk on” dynamic was apparent with a SAAR $403 billion decline in Treasuries largely offset by a SAAR $308 billion increase in Corporate & Foreign Bonds. On the Liability side, “Federal Funds & Repo” jumped SAAR $698 billion and “Miscellaneous Liabilities” rose SAAR $662 billion.

Speaking of “hot money”… Rest of World (ROW) saw “Net Acquisition of (U.S.) Financial Assets” surge SAAR $1.916 TN, this following Q1’s gain of SAAR $1.515 TN. In nominal dollars, ROW holdings of U.S. Financial Assets surged $1.336 TN during the first-half to a record $25.559 TN. At this pace, the growth in ROW holdings will easily surpass 2006’s record $2.143 TN. By category during Q2, ROW Debt Securities holdings jumped SAAR $1.214 TN, with U.S. Corporate bonds up SAAR $584 billion. Foreign Direct Investment increased SAAR $299 billion, a significant slowdown from the 2015/2016 pace.

September 17 – Reuters (Saikat Chatterjee): “Global debt may be under-reported by around $13 trillion because traditional accounting practices exclude foreign exchange derivatives used to hedge international trade and foreign currency bonds, the BIS said… Bank for International Settlements researchers said it was hard to assess the risk this ‘missing’ debt poses, but that the main worry was a liquidity crunch like the one that seized FX swap and forwards markets during the financial crisis. The $13 trillion unaccounted-for exposure exceeds the on-balance-sheet debt of $10.7 trillion that data shows was owed by firms and governments outside the United States at end-March. The fact these FX derivatives do not appear on financial and non-financial institutions’ balance sheets under current accounting rules means little is known about where the debt lies. ‘The debt remains obscured from view,’ Claudio Borio, head of the BIS’s monetary and economic department…”

I hold the view that nontransparent derivative trading and associated leverage have been integral to the global government finance Bubble. QE and currency devaluation strategies created extraordinary opportunities for “carry trade” leveraged speculation. I believe enormous amounts of finance have been created in the process of shorting select currencies, most notably near-zero rate euro and yen securities. A large chunk of “money” flowed to “king dollar” U.S. securities markets, easily offsetting the (late-2014) termination of Federal Reserve QE. It is likely that huge flows are not being captured in Fed data – the Rest of World Z.1 data in particular. It was helpful to see the BIS put a $13 TN estimate on debt/leverage associated with unaccounted for foreign-exchange derivatives.

Recall that 10-year Treasury yields traded as low as 1.36% in July 2016, only to reverse sharply to as high as 2.60% near year-end. I believe fear of a disorderly unwind of leveraged holdings was behind the Fed’s decision to back away from rate “normalization.” When the Fed then signaled that rate hikes had largely run their course, the veritable speculation floodgates were pushed wide open.

The value of U.S. Equities jumped a nominal $1.50 TN during Q2 to a record $42.23 TN. Over the past four quarters U.S. Equities have jumped $6.182 TN, or 17.1%. For perspective, Equities rose about $3.9 TN in 1999 and $3.5 TN in 2006. The Q2 value of Equities was 67% higher than at the close of 2007. Equities ended Q2 2017 at a record 219% of GDP. Equities had cycle peaks of 181% of GDP during Q3 2007 and 202% to end Q1 2000. Equities were at 50% of GDP in 1975 and ended the eighties at 67%.

Total Debt Securities ended Q2 at a record $41.502 TN, up $85 billion for the quarter and $977 billion y-o-y. Debt Securities-to-GDP slipped a basis point to 216% (began the ‘90s at 130% and ended the decade at 157%). This puts Total Securities at $83.733 TN, or a record 435% of GDP. Previous cycle peaks were 379% in Q3 2007 and 359% during Q1 2000.

Policy-induced asset inflation has profoundly impacted Household Net Worth – or what I would refer to as “perceived wealth.” Indeed, the bloated Household balance sheet remains a primary Bubble manifestation. Household (& Nonprofits) assets ended Q2 at a record $111.4 TN, up $1.844 TN for the quarter and $8.660 TN (8.4%) over four quarters. Liabilities increased $146 billion during the quarter and $467 billion y-o-y – to $15.219 TN. Fundamental to the ongoing Bubble, Household Net Worth (assets less liabilities) jumped $1.698 TN during Q2 to a record $96.196 TN. Net Worth surged a staggering $8.193 TN over the past year (now 42% higher than the 2007 peak). For perspective, Net Worth jumped $4.894 TN during 1999 and dropped $10.240 TN during 2008. As a percentage of GDP, Household Net Worth reached 500% for the first time during Q2, up from cycle peaks of 473% in 2007 and 435% in 1999.

I’ll have more comments about the Fed meeting next week. It was interesting to see chair Yellen refer to an inflation “mystery.” There was nothing too surprising with the Fed’s plan to reduce its balance sheet holdings. For good reason, the markets assume the Federal Reserve won’t get too far into balance sheet “normalization” before it suffers a change of heart. Recall that our central bank more than doubled holdings after scrapping its 2011 “exit strategy” before it even got started.

I would add that bull markets create their own liquidity. And so long as “risk on” is fueled by self-reinforcing speculative leveraging, the marketplace would easily accommodate small portfolio sales from the Federal Reserve. It’s an altogether different story, however, when “Risk Off” materializes. De-risking/de-leveraging dynamics could rather abruptly emerge from hiding. That’s when the markets will sorely miss – and beckon for more - QE.


For the Week:

The S&P500 was little changed (up 11.8% y-t-d), while the Dow added 0.4% (up 13.1%). The Utilities dropped 2.7% (up 9.0%). The Banks jumped 3.4% (up 5.7%), and the Broker/Dealers rose 3.0% (up 14%). The Transports gained 1.7% (up 7.3%). The S&P 400 Midcaps rose 0.8% (up 6.5%), and the small cap Russell 2000 increased 1.3% (up 6.9%). The Nasdaq100 declined 0.9% (up 22%).The Semiconductors added 0.3% (up 26.8%). The Biotechs slipped 0.3% (up 35.5%). With bullion down $23, the HUI gold index fell 3.6% (up 9.4%).

Three-month Treasury bill rates ended the week at 100 bps. Two-year government yields jumped five bps to a nine-year high 1.43% (up 24bps y-t-d). Five-year T-note yields rose five bps to 1.86% (down 7bps). Ten-year Treasury yields gained five bps to 2.25% (down 19bps). Long bond yields added a basis point to 2.78% (down 29bps).

Greek 10-year yields rose 10 bps to 5.50% (down 152bps y-t-d). Ten-year Portuguese yields sank 37 to 2.44% (down 131bps). Italian 10-year yields increased three bps to 2.11% (up 30bps). Spain's 10-year yields increased two bps to 1.63% (up 25bps). German bund yields added a basis point to 0.45% (up 24bps). French yields gained two bps to 0.73% (up 5bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields rose five bps to 1.36% (up 12bps). U.K.'s FTSE equities index rallied 1.3% (up 2.3%).

Japan's Nikkei 225 equities index jumped 1.9% (up 6.2% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.03% (down 1bp). France's CAC40 gained 1.3% (up 8.6%). The German DAX equities index added 0.6% (up 9.7%). Spain's IBEX 35 equities index was little changed (up 10.2%). Italy's FTSE MIB index jumped 1.4% (up 17.1%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 25.2%), while Mexico's Bolsa gained 0.8% (up 10.2%). South Korea's Kospi was about unchanged (up 17.9%). India’s Sensex equities index fell 1.1% (up 19.9%). China’s Shanghai Exchange was unchanged (up 8.0%). Turkey's Borsa Istanbul National 100 index dropped 3.4% (up 33.3%). Russia's MICEX equities index was little changed (down 8.1%).

Junk bond mutual funds saw inflows of $866 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps to 3.83% (up 35bps y-o-y). Fifteen-year rates gained five bps to 3.13% (up 37bps). The five-year hybrid ARM rate added four bps to 3.17% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up nine bps to 4.09% (up 46bps).

Federal Reserve Credit last week expanded $7.5bn to $4.425 TN. Over the past year, Fed Credit declined $1.3bn. Fed Credit inflated $1.614 TN, or 57%, over the past 254 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.0bn last week to $3.376 TN (near 2015 high). "Custody holdings" were up $226bn y-o-y, or 7.2%.

M2 (narrow) "money" supply last week jumped $25.5bn to a record $13.694 TN. "Narrow money" expanded $682bn, or 5.2%, over the past year. For the week, Currency increased $4.3bn. Total Checkable Deposits gained $8.9bn, and Savings Deposits expanded $10.9bn. Small Time Deposits rose $2.9bn. Retail Money Funds slipped $1.5bn.

Total money market fund assets declined $14.6bn to $2.724 TN. Money Funds increased $54bn y-o-y, or 2.0%.

Total Commercial Paper jumped $20.3bn to a one-year high $1.044 TN. CP gained $101bn y-o-y, or 10.7%.

Currency Watch:

The U.S. dollar index gained 0.3% to 92.171 (down 10.0% y-t-d). For the week on the upside, the Norwegian krone increased 0.7%, the New Zealand dollar 0.4% and the euro 0.1%. On the downside, the Canadian dollar declined 1.1%, the Japanese yen 1.0%, the Swiss franc 0.9%, the South African rand 0.7%, the British pound 0.7%, the Australian dollar 0.5%, the Mexican peso 0.5%, the Brazilian real 0.4%, the South Korean won 0.4%, the Swedish krona 0.2% and the Singapore dollar 0.1%. The Chinese renminbi declined 0.57% versus the dollar this week (up 5.39% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.5% (down 0.1% y-t-d). Spot Gold declined 1.7% to $1,297 (up 12.6%). Silver sank 4.1% to $16.984 (up 6.3%). Crude gained 77 cents to $50.66 (down 6%). Gasoline increased 0.4% (unchanged), while Natural Gas dropped 2.1% (down 21%). Copper slipped 0.2% (up 17%). Wheat was little changed (up 10%). Corn declined 0.4% (unchanged).

Trump Administration Watch:

September 18 – Reuters (Steve Holland and Jeff Mason): “U.S. President Donald Trump escalated his standoff with North Korea over its nuclear challenge…, threatening to ‘totally destroy’ the country of 26 million people and mocking its leader, Kim Jong Un, as a ‘rocket man.’ In a hard-edged speech to the United Nations General Assembly, Trump offered a grim portrait of a world in peril, adopted a more confrontational approach to solving global challenges from Iran to Venezuela, and gave an unabashed defense of U.S. sovereignty. ‘The United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea,’ Trump told the 193-member world body… As loud, startled murmurs filled the hall, Trump described Kim in an acid tone, saying, ‘Rocket man is on a suicide mission for himself and his regime.’”

September 22 – CNN (Joshua Berlinger and Zahra Ullah): “North Korea could test a powerful nuclear weapon over the Pacific Ocean in response to US President Donald Trump's threats of military action, the country's foreign minister has warned. Ri Yong Ho spoke to reporters in New York shortly after North Korean leader Kim Jong Un made an unprecedented televised statement, accusing Trump of being ‘mentally deranged.’”

September 17 – Axios (Jonathan Swan): “Forget DACA or tax reform. One topic consumes the vast majority of President Trump's inner circle: North Korea. Contrary to the president's breezy tweet this morning, in which he refers to Kim Jong-un as ‘Rocket Man,’ top administration officials have a dark view of how this plays out. They believe the confrontation with Pyongyang's portly dictator will define Trump's first term in office. The consensus view among Trump, Mattis and McMaster, according to several officials…, is that this conflict is heading towards two options, both with high risks: escalated confrontation with China and the military option.”

September 18 – Bloomberg (Ben Steverman and Suzanne Woolley): “Here’s what we know about the details of the tax reform plan: almost nothing. Powerful lawmakers are promising at least a framework for the overhaul by the end of the month. The broad goals are lower rates for corporations and individuals, a simpler tax code with fewer brackets, and the elimination of the estate tax and the alternative-minimum tax. Sound good? Beware. If you save for retirement or itemize your tax deductions, you could end up paying thousands of dollars more after tax reform than you do now. To help pay for promised cuts, President Donald Trump and Republicans in Congress are trying to raise revenue elsewhere. And the best place to get this money may be the millions of Americans who use deductions and other such strategies to lower their tax bills. Upper-middle-class taxpayers in particular could face a triple whammy. On the table are limits on—or even the elimination of—three of their favorite tax perks: deductions for mortgage interest and for state and local taxes and the ability to make pre-tax 401(k) retirement contributions.”

September 19 – Reuters (David Morgan): “U.S. Senate Republicans have reached a tentative budget deal that could allow tax reform legislation to eliminate as much as $1.5 trillion in revenues over 10 years through tax cuts, raising the odds that their planned tax overhaul would expand the federal deficit. Two members of the Senate Budget Committee, Republicans Pat Toomey and Bob Corker, announced the formal agreement late on Tuesday, but their joint news release did not provide dollar figures for revenue reduction or tax cuts. The prospective tax cuts are part of closed-door talks among 12 Senate Budget Committee Republicans who are drafting a fiscal 2018 budget measure needed to help the 100-member Senate pass a tax overhaul with as few as 51 Republicans votes and prevent Democrats from blocking the legislation.”

September 19 – Politico (Adam Cancyrn): “Republicans hoping to jam a last-minute Obamacare repeal plan through the Senate are confronting a rising tide of opposition as health care groups, patient advocates and even some red-state governors join forces against a bill they worry would upend the nation’s health care system. The wide-ranging backlash threw the GOP’s repeal push into fresh doubt on Tuesday, even as White House officials and Senate Republican leaders insist they are on the verge of winning the 50 votes needed to dismantle Obamacare under a reconciliation bill that expires in two weeks.”

September 21 – Reuters (Bozorgmehr Sharafedin): “Iran will strengthen its missile capabilities and will not seek any country’s permission, President Hassan Rouhani said… in a snub to demands from U.S. President Donald Trump. Rouhani was speaking at a military parade where an Iranian news agency said one of the weapons on display was a new ballistic missile with range of 2,000 km (1,200 miles), capable of carrying several warheads.”

China Bubble Watch:

September 17 – Bloomberg (Ben Steverman and Suzanne Woolley): “Home prices rose in fewer Chinese cities last month and declined in some of the nation’s hottest markets... New-home prices… gained in 46 of 70 cities tracked by the government in August, compared with 56 in July, the National Bureau of Statistics said… That was the smallest number of increases since January. Prices fell in 18 cities from the previous month and were unchanged in six. Developers’ stocks rose on the prospect that Chinese leaders would feel less pressure to roll out additional property restrictions…”

September 19 – Bloomberg: “Chinese property developers face a wall of local bonds that investors can force them to pay off next year ahead of schedule, just as rising interest rates raise the risk that more note holders may opt to do so. Investors have an option to offload 250 billion yuan ($38bn) of such notes in 2018… As China’s government pushes companies to trim excessive borrowing, financing costs in the nation’s credit markets have jumped this year. That’s left about 72% of the 137 local real estate bonds with put options that can be exercised next year in the money, meaning their current secondary-market yields are higher than coupon rates…”

September 19 – Bloomberg: “China’s most indebted developer is the latest firm to feel the heat amid a drive by regulators to rein in risks in the financial system. China Huarong Asset Management Co., a state-owned entity…, asked units to temporarily suspend new project financing to Sunac China Holdings… While Huarong says it’s not acting on instructions from regulators, the email noted authorities are paying more attention to Sunac’s high debt load and aggressive acquisition strategy. Sunac shares closed 2.8% lower… The shares have advanced 467% this year to rank among the world’s top performing stocks.”

September 21 – Bloomberg (Enda Curran and Alfred Liu): “Foreigners predicting doom for China’s banks have got it all wrong, according to James Stent, who spent more than a decade serving on the boards of two Chinese lenders. Instead of falling into a debt-fueled crisis, China’s banks are able to stave off trouble because of the willingness of the government to throw money at problems in order to ensure financial stability, Stent argues. ‘As one Chinese banker who works for an American bank said to me: ‘In the West, money flees problems; in China, money flows to problems to solve them,’ said Stent…”

Central Bank Watch:

September 19 – Bloomberg (Fergal O'Brien): “Brexit, which prompted Mark Carney to cut U.K. interest rates for the first time in seven years in 2016, is now pushing in the other direction. In a speech in Washington…, the Bank of England governor said while the decision to leave the European Union has slowed growth, it’s also cut the economy’s potential. That reduced ‘speed limit’ -- as he has described it -- increases the chance of overheating and partly explains why the Monetary Policy Committee now says it may need to raise rates soon.”

Global Bubble Watch:

September 17 – Reuters (Marc Jones): “The conundrum of stubbornly low inflation despite a pick-up in global growth and continued monetary stimulus is a ‘trillion dollar’ question, the umbrella body for the world’s leading central banks said… The Bank for International Settlements (BIS) said in its latest quarterly report that cheap borrowing rates and the rare simultaneous expansion of advanced and developing economies are driving financial markets higher, with signs of ‘exuberance’ starting to re-emerge. U.S. corporate debt is much higher than before the financial crisis and a drop in the premiums investors demand for riskier lending has boosted sales of so-called covenant-lite bonds offering high yields. The BIS said this raises a question over the potential for another crisis if there is a significant rise in interest rates.”

September 21 – Financial Times (Jennifer Hughes): “Mention the creation of the eurodollar market these days and be prepared to feel like a financial fossil. International markets as we know them are so established that referring to their development from dollars held overseas in the 1960s feels quaint. But the reason to bring up such a piece of ancient history is to ask whether Asia-Pacific is having an equivalent ‘Asiadollar’ moment. Sales of dollar bonds in the region have rocketed this year, with $359bn issued so far, according to Dealogic, already surpassing 2016’s full-year record. Sales are also more than double their levels in 2010, which was arguably the last time when Asia’s largely emerging market bonds were an international investor darling.”

September 19 – Bloomberg (Mikael Holter and Sveinung Sleire): “Norway’s sovereign wealth fund hit $1 trillion for the first time…, driven higher by climbing stock markets and a weaker U.S. dollar… ‘I don’t think anyone expected the fund to ever reach $1 trillion when the first transfer of oil revenue was made in May 1996,’ Yngve Slyngstad, chief executive officer of the fund, said… ‘Reaching $1 trillion is a milestone, and the growth in the fund’s market value has been stunning.’”

Fixed-Income Bubble Watch:

September 19 – Bloomberg (Sid Verma): “Beneath the tranquil surface of U.S. credit markets, bearish winds are blowing. Issuer and sector-specific risks are increasing while the pile of debt trading at distressed levels is rising -- evidence the post-crisis debt bull-run is peaking. That’s the alarm sounded by Wall Street arch-bears Morgan Stanley after a deep dive into the shifting credit landscape in recent months… One warning sign: The face-value of high-yield debt trading at distressed levels has risen by about $30 billion from March to mid-September… Another: The dispersion between credit spreads -- the degree to which bonds are priced according to issuer and sector-specific risks -- is slowly rising. That underscores increasing credit concerns that are masked at the index level…”

September 18 – Bloomberg (Tracy Alloway): “What’s in a word? A lot when it comes to the term ‘liquidity.’ For years, academics, investors and regulators have sparred over the meaning of liquidity, and the degree to which it’s said to have deteriorated in the marketplace. For many, it’s simply the ability to sell an asset without significantly affecting its price. To others it’s the hallmark of a healthy market, or the symptom of a disease brought on by ‘easy money’ provided by central banks… To Aleksander Kocic, derivatives strategist at Deutsche Bank AG, it’s something that has turned the world of fixed income on its head -- transmuting an age-old principle of debt and converting the world’s biggest market into something theoretically far more risky. ‘Liquidity transforms the risk of default (the ability that the debtor may not be able to pay back his debt) into the risk that the securities representing the debt find no purchasers,’ he wrote… ‘It replaces responsibility with salability.’”

Federal Reserve Watch:

September 19 – CNBC (Jeff Cox): “The Federal Reserve is on the cusp of reversing the most ambitious monetary stimulus program in world history amid questions over how much impact it really delivered. There's little question that the program, known as quantitative easing or ‘money printing,’ boosted the stock market. The three iterations of QE between November 2008 and October 2014 each saw big boosts to the market, with a cumulative S&P 500 gain from beginning to end, including the various down periods between each leg, of about 140%. The economic impacts, though, are less clear… In fact, one of the Fed's own economists recently penned a report indicating that QE has come up short of its goals. ‘Evaluating the effects of monetary policy is difficult, even in the case of conventional interest rate policy,’ St. Louis Fed economist Stephen D. Williamson wrote. ‘With respect to QE, there are good reasons to be skeptical that it works as advertised, and some economists have made a good case that QE is actually detrimental.’”

September 21 – CNBC (Patti Domm): “Kevin Warsh, a former Fed governor, is increasingly seen as the replacement for Fed Chair Janet Yellen, who has not been shy about putting herself at odds with President Donald Trump's views on banking deregulation. ‘It makes sense … [Warsh] has some ties to the Trump people,’ said Horizon Investment's chief global strategist Greg Valliere. ‘I would say that Yellen's chances have faded because of that speech at Jackson Hole. I think Trump wants somebody that's anti-regulation, and she's clearly not.’ … Warsh, long seen as a candidate for Fed chair, has been gaining momentum in the betting markets, and in the minds of Fed watchers, after White House top economist Gary Cohn fell out of the top slot.”

September 18 – Financial Times (Sam Fleming): “Ron Paul, at least, has no regrets. The former Texas Congressman is one of the most prominent voices among those Americans who have long been deeply suspicious of the US central bank and its power to print money. When he ran for president in 2012, he assailed then Federal Reserve chairman Ben Bernanke for debasing the currency and risking an inflationary upsurge by pumping trillions of dollars into the financial system. ‘We don’t have prices in the consumer market going up like in the 1970s but we should not be surprised if that happens,’ says Mr Paul… Elsewhere, certainty is harder to come by. As the Fed meets in Washington tomorrow, US central bankers, and their counterparts across the world, are genuinely flummoxed by recent low inflation readings. Despite a recovery that is now the third-longest on record, America is trapped not in a 1970s-style, double-digit inflationary upsurge, but a slow-inflation quandary… The uncertain outlook has confounded Fed policymakers just as the central bank prepares for a leadership overhaul in the new year.”

U.S. Bubble Watch:

September 19 – Reuters (Lucia Mutikani): “The U.S. current account deficit jumped to its highest level since 2008 in the second quarter amid a decline in both secondary and primary income. …The current account deficit, which measures the flow of goods, services and investments into and out of the country, increased to $123.1 billion from a downwardly revised $113.5 billion in the first quarter. That was the highest level since the fourth quarter of 2008. Economists… had forecast the current account deficit slipping to $115.1 billion from a previously reported $116.8 billion shortfall.”

September 21 – Reuters (Barbara Kollmeyer): “Now that the Fed has finally started to peel off the quantitative-tightening Band-Aid, things should start getting back to normal. That's a good one, given no one really knows what normal is these days… We’re diving right into our call of the day, which comes from Jim Rogers. In a sweeping interview with RealVision TV, the veteran investor warns another bear market is coming, and that it will be ‘horrendous, the worst.’ It’s the level of debt across global economies that will be to blame, he says. And retail investors who have been piling into exchange-traded funds will be particularly vulnerable to that next big mauling. For those ETF owners — who are all in on easy S&P plays right now — here’s his message: ‘When we have the bear market, a lot of people are going to find that, ‘Oh my God, I own an ETF, and they collapsed. It went down more than anything else.’ And the reason it will go down more than anything else is because that’s what everybody owns,’ he says.”

September 18 – Bloomberg (Daniel Taub): “The typical student debt load for millennials in the U.S. is $41,200, surpassing their median annual income of $38,800. One impact of that burden: first-time home purchases are being delayed by seven years. That’s according to survey results released… by the National Association of Realtors and the nonprofit group American Student Assistance. Only a fifth of millennial respondents own a home, with 83% of non-owners citing student debt as the reason they aren’t buying.”

September 20 – Wall Street Journal (Heather Gillers): “When Aurora, Ill., closed its books in December, about $150 million disappeared from the city’s bottom line. The Chicago suburb of 200,000 people hadn’t become poorer. Instead, for the first time it recorded on its balance sheet the full cost of health care promised to public employees once they retire. States and cities around the country will soon book similar losses because of new, widely followed accounting guidelines that apply to most governments starting in fiscal 2018. The adjustments will show that U.S. states as a group have promised hundreds of billions more in retiree health benefits than they have saved up. The shortfall amounts to $645 billion, according to… The Pew Charitable Trusts based on 2015 data. That is in addition to the $1.1 trillion states need to pay for future pension benefits…”

September 19 – Reuters (Lucia Mutikani): “U.S. import prices recorded their biggest increase in seven months in August as the cost of petroleum surged and there were also signs of a pickup in underlying imported inflation. The Labor Department said… that import prices jumped 0.6% last month, the biggest gain since January, after a downwardly revised 0.1% dip in July.”

September 18 – Wall Street Journal (AnnaMaria Andriotis, Michael Rapoport and Robert McMillan): “On March 8, researchers at Cisco Systems Inc. reported an online security flaw that allowed hackers to break into servers around the internet. Cisco urged users to upgrade their systems immediately with a newly issued fix. Equifax Inc. was among the companies using the flawed software. On Friday, it said its technology experts at the time worked to identify and patch vulnerable systems… From about mid-May to July 30, hackers ransacked vast troves of information at the credit-reporting company. The breach potentially exposed about 143 million Americans’ personal information…”

Europe Watch:

September 22 – Reuters (Jonathan Cable): “Euro zone private businesses ended the third quarter with much stronger growth than predicted, bolstered by manufacturers, who had their best month since early 2011… IHS Markit’s euro zone Flash Composite Purchasing Managers’ Index for September, seen as a good guide to economic growth, bounced to 56.7 from August’s 55.7, comfortably above the 50 level that separates growth from contraction. September’s reading was above all expectations…”

September 20 – Reuters (Raquel Castillo and Sam Edwards): “Spanish police raided Catalan government offices and arrested officials… to halt a banned referendum on independence, an action the regional president said meant Madrid had effectively taken over his administration. Hundreds of protesters gathered outside the regional government offices in the center of Barcelona’s tourist district, waving the red-and-yellow Catalan flag and chanting ‘Occupying forces out’ and ‘Where is Europe?’. ‘The Spanish state has by all rights intervened in Catalonia’s government and has established emergency rule,’ Catalan President Carles Puigdemont said in a televised address.”

September 21 – Reuters (Julien Toyer and Sam Edwards): “The Catalan regional leader… said he would press on with an Oct. 1 referendum on a split from Spain, flouting a court ban, as tens of thousands gathered for a second day on the streets of Barcelona demanding the right to vote. Catalan leader Carles Puigdemont said he had contingency plans in place to ensure the vote would go ahead, directly defying Madrid and pushing the country closer to political crisis. Spain’s Constitutional Court banned the vote earlier this month after Prime Minister Mariano Rajoy said it violated Spain’s 1978 constitution…”

September 16 – Reuters (Karolina Tagaris): “Greece should not put off agreed bailout reforms or it could ‘complicate’ an upcoming bailout review by its foreign creditors, a European Central Bank official said… Greece’s third bailout review is expected to begin in October with bad loans, the 2018 budget, the energy market and privatizations among the main issues, the ECB’s mission chief in Greece, Francesco Drudi, told Greek newspaper Proto Thema. ‘If any major backtracking or delays occur in the implementation of the key deliverables due so far, this could complicate the completion of the review,’ Drudi said. ‘Unfortunately, a number of parliamentary bills adopted after the conclusion of the second review may not be in line with program commitments and will have to be assessed by our teams,’ he said.”

Brexit Watch:

September 19 – Bloomberg (Cat Rutter Pooley and Jill Ward): “Bank of England Governor Mark Carney has 200 billion reasons to keep an eye on consumer borrowing and he’s about to find out just how concerned he should be. With household credit rising five times faster than earnings, alarm bells are ringing and regulators have fast-tracked part of their annual stress tests to get an insight into the resilience of banks to a sharp jump in defaults. Carney and his Financial Policy Committee will have that crucial information when they gather for their quarterly meetings this week. Unsecured debt totaled 202 billion pounds ($274bn) in July, the highest since 2008, having risen by almost 10% over the past year.”

Japan Watch:

September 19 – Bloomberg (Chikako Mogi and Saburo Funabiki): “After spending a year trying to prevent benchmark yields from rising above zero percent, the Bank of Japan now faces the challenge of stopping them from falling too low. Japan’s 10-year yield has gone from a one-year high in February to slipping below the BOJ’s targeted zero percent level earlier this month amid a bout of global risk aversion stemming from North Korea tensions. While the central bank has cut back on its debt purchases three times since mid-August, strategists question if that will be enough should global bonds keep rallying. ‘I am worried about yields falling too low, which would be risky,’ said Yusuke Ikawa, Japan strategist at BNP Paribas… ‘The more the BOJ owns bonds, the more downward pressure it puts on yields. The bank will likely continue gradually scaling back purchases, but it can’t reduce outstanding debt holdings under its monetary base expansion policy.’”

September 19 – Bloomberg (Connor Cislo): “Japanese exports and imports surged in August, with both beating expectations as a recovery in trade appeared to gain momentum. Exports rose 18.1% from a year earlier (forecast +14.3%), the biggest increase since November 2013.”

EM Bubble Watch:

September 20 – Bloomberg (Ksenia Galouchko): “Investors sold the foreign debt of Russia’s private banks on Wednesday as the prospect of the second bailout of a major lender in less than a month fanned concern that cracks in the industry are spreading. The yield on Credit Bank of Moscow’s October 2027 Eurobond jumped 57 bps to 8.93%, the most since the debt was sold in March… The rescue appeal to regulators by B&N Bank, owned by billionaire Mikhail Gutseriev and his nephew, comes on the heels of Otkritie Bank’s bailout, where officials have warned that subordinated debt may be written off.”

Geopolitical Watch:

September 19 – Reuters (Ben Blanchard): “Stability is an absolute principle that needs to be dealt with using ‘strong hands’, Chinese President Xi Jinping has told security officials ahead of next month’s key Congress of the ruling Communist Party. The stability-obsessed party brooks no challenge to its rule and always steps up security ahead of important meetings. Those working in the public security sector should improve their political awareness and maintain the authority and unified leadership of the party, Xi said…”

Thursday, September 21, 2017

Thursday Evening Links

[Bloomberg] Asia Stocks to Fall as U.S. Retreats, Metals Drop: Markets Wrap

[Bloomberg] Trump Expands Sanctions on North Korea, Adding Economic Pressure

[Bloomberg] The New Fed Team Will Inherit Inflation Miss That's Mystifying Yellen

[CNBC] Janet Yellen is suddenly in a dead heat with Kevin Warsh to lead The Fed — Here's one reason why

[Reuters] U.S. household net worth rises again in second quarter 2017

[Bloomberg] Debt Continues to Haunt Ailing Retailers

[CNBC, Bove] The Fed's 'out of control' balance sheet is a major threat

[Reuters] Catalan leader presses on with banned vote on split from Spain

[WSJ] $2 Trillion Later, Does the Fed Even Know if Quantitative Easing Worked?

[FT] Charts that matter: Fed policymakers’ forecasts diverge from Fed funds futures

Thursday's News Links

[Bloomberg] U.S. Stocks Slip as Treasuries Rise With Dollar: Markets Wrap

[Bloomberg] Three Bond Market Lessons From the Toys ‘R’ Us Debt Drama

[Bloomberg] Home Prices Soar in Disaster-Prone Areas

[Bloomberg] Japan's Central Bank Keeps Policy Unchanged Amid Unexpected Dissent

[Reuters] S&P downgrades China, says rising debt is stoking economic, financial risks

[Bloomberg] China's Dangerous House Price Boom Is Spreading

[Reuters] Corporate debt may take bigger slice of QE pie as ECB tapers

[Reuters] China says North Korean situation more serious by the day

[WSJ] Key Takeaways From the September Fed Meeting

[FT] Markets start to take Fed tightening seriously

[FT] Janet Yellen refuses to be derailed by low-inflation mystery

[WSJ] Wall Street’s Newest Puzzle: What Passive Buying and Selling Means for Individual Stocks

[FT] Thirst for oil returns in wealthy nations

Wednesday, September 20, 2017

Wednesday Evening Links

[Bloomberg] Fed to Shrink Assets Next Month, Boost Rates by Year-End

[Bloomberg] Dollar Climbs, Bonds Slide as Fed Sees 2017 Hike: Markets Wrap

[Bloomberg] Yellen Brushes Aside Inflation ‘Mystery’ While Fed Eyes Rate Hike

[Bloomberg] The Fed's New Dot Plot After Its September Rate Meeting

[CNBC] How Trump can pull out of the Iran nuclear deal and what it means for markets

[Bloomberg] Ten Cities Tell the Tale of China's Spreading Real-Estate Risk

[Bloomberg] Soaring Food Prices Spice Up Asia's Inflation Outlook

[Reuters] Russia hit by second bailout as B&N Bank seeks central bank aid

[Reuters] Russian central bank in talks to bail out big private lender

[WSJ] Fed to Start Paring Holdings, Keeps December Rate Rise on the Table

Wednesday's News Links

[Bloomberg] Stocks Slip, Bonds Climb With Oil as Fed Nears: Markets Wrap

[Bloomberg] Fed to Pack Up Crisis Tool, Debate Next Hike: Decision-Day Guide

[CNBC] Fed is taking a major step away from its Great Recession policy

[CNBC] Fed economist: 'No evidence that QE works' as central bank starts unwinding program

[Bloomberg] It’s Not Just Toys ‘R’ Us. More Credit Weak Spots Emerge

[Politico] Backlash throws last-ditch Obamacare repeal effort into doubt

[El-Erian] Opinion: The global economy is starting to create lose-lose situations

[Bloomberg] China's Under-the-Radar Bond Boom May Be Next Risk Target

[Bloomberg] Yuan Fix Is Back in the Spotlight

[Reuters] Police arrest high-ranking Catalan officials in raids

[Bloomberg] It's Bailout-Review Time in Greece and Markets Are Wary - Again

[Bloomberg] Japan's Exports Jump 18% in Biggest Gain in Almost 4 Yea

[Bloomberg] Carney's 200 Billion Reasons to Fret About Consumer Debt

[Reuters] China's Xi demands 'strong hands' to maintain stability ahead of Congress

[Reuters] Exclusive: From Russia with fuel - North Korean ships may be undermining sanctions

[WSJ] States Need $645 Billion to Pay Full Health-Care Costs

Tuesday, September 19, 2017

Tuesday Evening Links

[Bloomberg] U.S. Stocks at Records, Dollar Weaker as Fed Meets: Markets Wrap

[Reuters] For sizzling markets, questions loom as Fed edges back

[Reuters] Senate Republicans weigh tax cuts, deficit expansion

[Reuters] If threatened, U.S. will 'totally destroy' North Korea, Trump vows

[FT] Nobody seems to know why there’s no US inflation

[FT] Central Bank Quantitative Easing as an Emerging Political Liability

Tuesday's News Links

[Bloomberg] Stocks Mixed Ahead of Fed; Euro Gains, Oil Rises: Markets Wrap

[SCMP] Yuan weakens sharply after PBOC sets fixing at two-week low; all eyes on Fed

[Reuters] U.S. current account widens sharply in second quarter

[Bloomberg] U.S. Housing Starts Steady, Permits Rise Ahead of Hurricanes

[Reuters] U.S. import prices post biggest gain in seven months

[Bloomberg] Toys 'R' Us Files for Bankruptcy in Richmond, Virginia

[Bloomberg] The U.S. Will Act on North Korea Missiles That Pose a Threat, Mattis Says

[Reuters] Borrowing bonds may get harder as Fed pares holdings

[Bloomberg] Having Stopped Yields Rising, BOJ Now Finds Them Falling Too Low

[Bloomberg] Huarong Suspends New Loans to Developer Sunac

[Bloomberg] Weakest China Developers Menaced by $38 Billion in Bond Puts

[Bloomberg] The World’s Biggest Wealth Fund Hits $1 Trillion

[WSJ] Trump to Push Nationalist Policy at U.N.

[WSJ] The Fed, a Decade After the Crisis, Is About to Embark on the Great Unwinding

[WSJ] The Fed’s Long March to Normal

[WSJ] Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero

[FT] America’s inflation enigma continues to confound

[FT] ‘Buyback trade’ fizzles as stock repurchases slow

Saturday, September 16, 2017

Saturday's News Links

[Reuters] Fed meeting could trigger stock sector rotation

[Reuters] Rising credit card delinquencies to add to U.S. banks' worries

[Reuters] North Korea says seeking military 'equilibrium' with U.S.

[FT] China the difficult bargain for investors and politicians alike

Weekly Commentary: Monetary Disorder

Global Credit, Bubble and market analysis is turning more interesting.

China August Credit data were out Friday. Total (aggregate) Social Financing jumped to 1.48 TN yuan ($225bn), up from July’s 1.22 TN and above the 1.28 TN estimate. New Loans were reported at a much stronger-than-expected 1.09 TN (estimates 750bn yuan), up from July’s 825bn. New loans expanded 13.2% y-o-y. Through August, Total Social Financing is running 18% above 2016’s record pace. Total system Credit growth (“social financing” plus govt. borrowings) appears on track to surpass $4.0 TN. While “shadow banking” has of late been restrained by tighter regulation, household (largely real estate) borrowings remain exceptionally strong.

It was the weaker Chinese economic data that made the headlines this week. Retail sales (up 10.1% y-o-y), industrial production (up 6.0%) and fixed investment (up 7.8%) were all somewhat below estimates. At the same time – and I would argue more importantly - Chinese inflation is running hotter than forecast. Considering the scope of the ongoing Credit expansion, inflationary pressures should come as no surprise.

September 10 – Bloomberg: “Inflationary pressure emanating from the factory to the world is proving more resilient than economists have anticipated. China’s producer-price inflation accelerated to 6.3% in August from a year earlier, exceeding all but one of 38 estimates… That data… followed 5.5% readings in the prior three months… The surprise strength gives support for global inflation spanning from metals to fuel and shows the effects of resilient domestic demand and reduced supplies of some commodities.”

Up 1.8% y-o-y, Chinese August CPI was the strongest since January. This follows last week’s stronger-than-expected import data. China is demonstrating classic signs of a Credit-induced Bubble economy – one where domestic Credit excesses are seeping into the global inflationary backdrop through commodities and some modest upward pressure on goods and services prices.

It’s now only about a month until the (10/18) start of the National Congress of the Communist Party of China. Financial stability will be a primary focus, though I question whether the party appreciates how unstable things have become. Chinese officials have dabbled with myriad (“macro prudential”) tightening measures. For the most part, stop and go policies have attempted to balance mounting financial risks against a determination to meet growth targets. Fatefully, policymakers have been willing to accommodate ever-expanding Credit expansion. And for how much longer?

At this late stage of the cycle, Beijing’s bid to direct finance into productive economic investment will surely achieve about the same results as similar desires during the late-twenties U.S. Bubble period. Officials at some point will need to bite the bullet and rein in system Credit.

It’s the nature of Credit Bubbles that risk rises exponentially during “Terminal Phase” excess. In simple terms, the quantity of new Credit expands greatly while quality deteriorates rapidly. A hypothetical chart of systemic risk – that had been rising left to right steadily for years - takes a moon shot. A surge in risky mortgage Credit fuels unsustainable real estate inflation, while business borrowings expand rapidly from entities that will struggle with solvency issues as soon as the Bubble falters. The real economy suffers deep maladjustment that remains largely masked so long as rampant Credit growth (and self-reinforcing asset inflation) runs unabated.

Global policymakers have delusions of controlling Bubble Dynamics. Or should I say that the appearance of being able to manage Bubbles creates the complacency necessary for immense, out-of-control Bubble inflations. A dangerous notion took hold that, rather than permitting Bubbles to burst, they will simply be inflated away. Surely part of the underlying angst affecting central bankers (from Washington to Frankfurt to Tokyo to Beijing) these days is the realization that they indeed do not control inflation dynamics. Instead of inflating consumer prices so as to catch up with inflated asset prices, their reflationary measures are exacerbating price instabilities and inflationary divergences.

A key aspect of global Bubble analysis is that inflationary policymaking and resulting monetary disorder have badly distorted economic and financial structures. QE and other monetary inflation were supposed to rectify the dilemma of insufficient “aggregate demand.” Yet all this “money” and Credit sloshing around the global system is creating dangerous market contortions, destabilizing speculation and ubiquitous price Bubbles. China’s financial system is straining under the burden of intermediating $4.0 TN of 2017 Credit growth into perceived “money-like” instruments (that folks are willing to hold).

September 13 – Wall Street Journal (Yifan Xie and Chuin-Wei Yap): “In just four years, a money-market fund created by an affiliate of China’s Alibaba Group… has become the world’s largest, providing millions of the country’s savers a high-returning place to park their money. Now, it is facing pressure from regulators to slow down. Fueled by contributions from some 370 million account holders, the fund, known as Yu’e Bao—which means ‘leftover treasure’—has grown rapidly to manage $211 billion in assets. It is more than twice the size of the next largest money-market fund, a U.S. dollar liquidity fund managed by J.P. Morgan… Yu’e Bao’s assets doubled in the past year alone, and the fund now makes up a quarter of China’s money-market mutual fund industry.”

A Yu’e Bao investor provided the salient point from the above WSJ article: “I am not too concerned about what Alibaba does with my money since it’s too big to collapse.” Yu’e Bao these days provides an enticing return of 4.02%, compared to 1.50% for one-year bank deposits and a 3.6% yield on 10-year government debt. “The fund invests most of its money in certificates of deposits issued by Chinese state-owned or state-supported banks.” So, this massive (circuitous) flow of funds to Chinese banks provides liquidity to fund late-cycle lending, including to China’s booming population of “zombie” corporations and uneconomic ventures and enterprises.

September 4 – Financial Times (Gabriel Wildau): “China will impose tighter regulation on ‘systemically important’ money-market mutual funds, potentially forcing Ant Financial’s popular fund to de-risk its portfolio and reduce yields for investors. MMFs have exploded in popularity in recent years, as Chinese investors seek high-yielding alternatives to bank deposits. Total assets reached Rmb5.48tn ($848bn) at the end of June… But analysts warn that even as Chinese investors shift en masse from bank deposits to MMFs, the funds are not subject to the same capital and liquidity regulations as banks.”

The first Chinese mutual fund opened in 2003. Assets were only about $20bn to begin 2013 but have since swelled to $848bn. From the WSJ: “Investors continue to pile in. In July alone, another $114 billion flowed into Chinese money-market funds…”

For investors in Chinese money market funds, various bank liabilities, local government debt, corporate Credit and real estate, confidence is higher than ever that Beijing will not tolerate a crisis. And whether it’s money market assets, Chinese bank negotiable certificate of deposit borrowings, “repo” financing or “shadow banking” more generally, China confronts an unprecedented (and rapidly escalating) risk intermediation problem. For too long Beijing has nurtured the financial alchemy necessary to transform progressively risky Credit into perceived safe and liquid instruments. There will be no unobtrusive approach to reining in the beast.

Before I segue from China, it’s worth noting that China’s currency declined almost 1% this week, a sharp reversal after a rally that saw the renminbi appreciate almost 7% versus the dollar y-t-d. Beijing’s efforts to stabilize its currency proved too successful. I ponder how much “hot money” has over recent months been enticed by China’s combination of high yields and an appreciating renminbi – and what this week’s currency policy adjustment might mean for speculative flows.

September 10 – Wall Street Journal (Lingling Wei): “China is reversing a range of measures it had put in place to support its currency, a response to a recent surge in the value of the yuan that has hurt Chinese exporters and added to the country’s economic headwinds. Starting Monday, the People’s Bank of China will scrap a two-year-old rule that made it more expensive for traders to bet the yuan will fall in value... The move, which ends a deposit requirement on trades called currency forwards, will make it less expensive for companies and investors to buy dollars while selling the yuan. That would put some pressure on the currency to decline, traders and analysts said. The step will ‘fend off macro-financial risks,’ said the central bank notice…”

On the subject of China, unstable Bubble Finance and newfound regulator zeal, how about bitcoin?

September 15 – Bloomberg (Olga Kharif and Belinda Cao): “Bitcoin’s meteoric summertime surge risks coming to a painful end as Chinese policy makers move to restrict trading amid growing warnings of a market bubble. The biggest cryptocurrency dropped as much as 40% since reaching a record high of $4,921 on Sept. 1, cutting about $20 billion in market value. The collapse extended to as much as 30% this week since China began sending stronger signals of a clampdown on Sept. 8, making this the biggest five-day decline since January 2015, when it traded at around $200.”

Historians will surely look back at this period and struggle to understand why global central bankers after all these years were so reticent in reducing extraordinary monetary stimulus. Bitcoin and the cryptocurrencies have gone parabolic. U.S. and global equities grind further into record territory; global bond prices are indicative of one of history’s greatest financial Bubbles; real estate prices continue to inflate in most markets globally; debt issuance is on record pace and financial conditions remain incredibly loose virtually everywhere.

A few – not necessarily market-friendly - headlines worth pondering: “UK inflation rate rises to 2.9%”; “Euro zone wage growth surges, making ECB taper more likely”; “Bank of Canada open to alternatives to inflation target”; “Inflation data prompt rethink on US rates”; “Inflation is heating up with some help from the hurricanes”.

Recent inflation readings have generally surprised on the upside, including those in China, UK, U.S. and India. The GSCI commodities index gained 2.2% this week to trade to highs since April. Crude (WTI) was back above $50 this week. While down this week, industrial metals have been on fire. Meanwhile, Harvey and Irma will now make U.S. economic and inflation analysis even more of a challenge. Interestingly, market probabilities for the Fed to boost rates again before year-end have increased to almost 50%.

Global bond markets have begun taking notice. UK yields surged a notable 32 bps this week to 1.32%, near a seven-month high. Ten-year yields were up 10 bps in Canada to an almost three-year high. Australian 10-year yields were up 16 bps to 2.74%, near the high since March. Sweden saw yields jump 13 bps to 0.85%, the high since January 2016. German bund yields rose 12 bps to 0.43%.

Ten-year Treasury yields rose 15 bps this week to 2.20%. Two-year Treasury yields jumped 12 bps to 1.38%, quickly closing in on early-July’s multi-year high of 1.41%. Five-year Treasuries were under heavy selling pressure, with yields jumping 17 bps to 1.81%. Meanwhile, currency trading continues to indicate underlying instability. Two currencies popular in speculative trading strategies – the Japanese yen and British pound – both posted big moves this week. The pound surged 3.0%, while the yen sank 2.7%.

September option expiration helped U.S. equities push higher into record territory. There was likely a decent amount of hedging (North Korea, Trump, etc.) in September derivatives. Then we saw hurricane Irma bearing down on Florida, with the potential for a catastrophic direct hit on Miami. Markets were also concerned that North Korea might follow up the previous week’s nuclear test with another ICBM launch on Saturday. When worst fears failed to materialize over the weekend, equities rallied big on Monday as hedges and short positions were unwound.

The fact that markets continue to so readily disregard risk is consistent with Bubble Dynamics. We’ve seen it all before – except never on a such an all-encompassing, multi-asset class and global basis. I would argue that bond yields have been held artificially low by a combination of complacent central bankers, mounting geopolitical risks, Trump uncertainties and the general view that equities and risk markets have become increasingly vulnerable. There is at least some indication that global central bankers are becoming a little less complacent.


For the Week:

The S&P500 gained 1.6% (up 11.7% y-t-d), and the Dow rose 2.2% (up 12.7%). The Utilities slipped 0.3% (up 12.0%). The Banks surged 4.0% (up 2.2%), and the Broker/Dealers jumped 3.3% (up 10.6%). The Transports gained 1.7% (up 5.6%). The S&P 400 Midcaps jumped 2.0% (up 5.6%), and the small cap Russell 2000 rose 2.3% (up 5.5%). The Nasdaq100 increased 1.3% (up 23.1%).The Semiconductors surged 4.9% (up 26.5%). The Biotechs dipped 0.3% (up 35.8%). With bullion down $26, the HUI gold index sank 4.5% (up 13.5%).

Three-month Treasury bill rates ended the week at 101 bps. Two-year government yields jumped 12 bps to 1.38% (up 19bps y-t-d). Five-year T-note yields surged 17 bps to 1.81% (down 12bps). Ten-year Treasury yields rose 15 bps to 2.20% (down 24bps). Long bond yields gained 10 bps to 2.77% (down 30bps).

Greek 10-year yields slipped three bps to 5.40% (down 163bps y-t-d). Ten-year Portuguese yields were unchanged at 2.80% (down 94bps). Italian 10-year yields jumped 12 bps to 2.08% (up 27bps). Spain's 10-year yields rose six bps to 1.61% (up 23bps). German bund yields jumped 12 bps to 0.43% (up 23bps). French yields rose nine bps to 0.71% (up 3bps). The French to German 10-year bond spread narrowed three to 28 bps. U.K. 10-year gilt yields surged 32 bps to 1.31% (up 7bps). U.K.'s FTSE equities index dropped 2.2% (up 7.5%).

Japan's Nikkei 225 equities index surged 3.3% (up 4.2% y-t-d). Japanese 10-year "JGB" yields increased three bps 0.03% (down 1bp). France's CAC40 rose 2.0% (up 7.2%). The German DAX equities index rallied 1.7% (up 9.0%). Spain's IBEX 35 equities index advanced 1.9% (up 10.3%). Italy's FTSE MIB index jumped 2.1% (up 15.6%). EM equities were mixed. Brazil's Bovespa index surged 3.7% (up 25.8%), while Mexico's Bolsa slipped 0.3% (up 9.4%). South Korea's Kospi rose 1.8% (up 17.7%). India’s Sensex equities index gained 1.8% (up 21.2%). China’s Shanghai Exchange dipped 0.3% (up 8.1%). Turkey's Borsa Istanbul National 100 index declined 0.7% (up 37.9%). Russia's MICEX equities index increased 1.0% (down 8.0%).

Junk bond mutual funds saw outflows of $96 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at a 2017 low 3.78% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.08% (up 31bps). The five-year hybrid ARM rate declined two bps to 3.13% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.00% (up 38bps).

Federal Reserve Credit last week expanded $4.8bn to $4.417 TN. Over the past year, Fed Credit declined $5.9bn. Fed Credit inflated $1.607 TN, or 57%, over the past 253 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose another $6.6bn last week to $3.372 TN. "Custody holdings" were up $208bn y-o-y, or 6.6%.

M2 (narrow) "money" supply last week declined $7.2bn to $13.669 TN. "Narrow money" expanded $685bn, or 5.3%, over the past year. For the week, Currency was little changed. Total Checkable Deposits declined $14.3bn, while Savings Deposits increased $5.2bn. Small Time Deposits added $2.8bn. Retail Money Funds slipped $0.9bn.

Total money market fund assets gained $16.8bn to $2.739 TN. Money Funds increased $80bn y-o-y, or 3.0%.

Total Commercial Paper jumped $16.2bn to $1.024 TN. CP gained $60bn y-o-y, or 6.2%.

Currency Watch:

The U.S. dollar index rallied 0.6% to 91.872 (down 10.3% y-t-d). For the week on the upside, the British pound increased 3.0%, the New Zealand dollar 0.5% and the Mexican peso 0.3%. On the downside, the Japanese yen declined 2.7%, the South African rand 1.7%, the Swiss franc 1.7%, the Norwegian krone 1.4%, the euro 0.8%, the Brazilian real 0.8%, the Australian dollar 0.7%, the Swedish krona 0.4%, the South Korean won 0.4%, the Canadian dollar 0.3% and the Singapore dollar 0.3%. The Chinese renminbi declined 0.9% versus the dollar this week (up 6.0% y-t-d).

Commodities Watch:

September 11 – Bloomberg (Thomas Biesheuvel): “The price of one of the most critical materials for the Western world’s economy and defenses is spiking faster than any major commodity. Tungsten, used to harden steel in ballistic missiles and in drill bits, has surged more than 50% in the last two months amid growing concern about supply cutbacks in China, where about 80% of the metal comes from.”

The Goldman Sachs Commodities Index gained 2.2% (down 0.6% y-t-d). Spot Gold dropped 2.0% to $1,320 (up 14.6%). Silver fell 2.3% to $17.701 (up 10.8%). Crude surged $2.41 to $49.89 (down 7%). Gasoline increased 0.9% (down 1%), and Natural Gas jumped 4.6% (down 19%). Copper fell 3.0% (up 18%). Wheat rallied 2.6% (up 10%). Corn slipped 0.6% (up 1%).

Trump Administration Watch:


September 11 – Bloomberg (Sahil Kapur): “The White House said President Donald Trump cut a short-term debt ceiling and government spending deal with Democrats to clear the deck for a major tax bill. But the agreement could be complicating tax efforts by eroding trust within his own party. Not only has the deal sowed doubt among the GOP about its unpredictable president, but it’s also driving a wedge between Republicans and their leaders in Congress, just as the party is desperate to deliver on one of its top priorities.”

September 12 – Politico (Colin Wilhelm and Aaron Lorenzo): “Congressional Republicans came back to Washington ready and eager to work on tax reform, but they’re still missing one thing: a plan. That’s triggered frustration among rank-and-file lawmakers who feel pressure from President Donald Trump to pass a tax reform bill but have seen no plans and worry they’ll be backed into a corner on legislation they haven’t even seen, much like they were with the failed Obamacare repeal earlier this summer. ‘This time around there is no room for error. This has got to be a home run,’ Rep. Dave Brat (R-Va.) said... ‘I would hope everyone wants to know what’s in it before you vote on it. That’s the old [Nancy] Pelosi joke on health care, it turned into a colossal joke. ‘You’ll find out what’s in it after we pass it.’"

September 13 – Politico (Nancy Cook and Rachael Bade): “Conservative lawmakers and strategists have deep concerns that Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn — the administration’s two key leaders on tax reform — don’t have the know-how or political credibility to push a major GOP tax overhaul through Congress this fall. Neither man has ever worked in or with the legislative branch. They lack inside knowledge about how to navigate Congress at an especially fractious time. Cohn remains a registered Democrat; Mnuchin is a Republican, but he also has a long history of donating to the other party. Those Democratic connections have been magnified in the wake of the president’s sudden debt-ceiling deal with Chuck Schumer and Nancy Pelosi…”

September 13 – CNBC (Jacob Pramuk): “President Donald Trump… claimed rich Americans ‘will not be gaining at all’ from the tax reform plan that Republicans hope to pass this year. ‘I think the wealthy will be pretty much where they are. ... If they have to go higher, they'll go higher, frankly,’ the president said during an afternoon meeting with bipartisan members of Congress amid a recent string of outreach to Democrats. GOP congressional leaders are working to draft tax legislation and aim to introduce it in the coming weeks.”

September 13 – Bloomberg: “President Donald Trump blocked a Chinese-backed investor from buying Lattice Semiconductor Corp., casting a cloud over Chinese deals seeking U.S. security clearance and spurring a call for fairness from Beijing. It was just the fourth time in a quarter century that a U.S. president has ordered a foreign takeover of an American firm stopped on national-security concerns… The spurned buyer, Canyon Bridge Capital Partners LLC, is a private-equity firm backed by a Chinese state-owned asset manager. The Trump administration has maintained a tough stance against Chinese takeovers of American businesses even as it seeks China’s help to resolve the North Korean nuclear crisis.”

September 12 – Financial Times (Demetri Sevastopulo and Katrina Manson): “The Trump administration has warned China that the US will target Chinese banks unless Beijing takes much stronger measures to impose economic pain on North Korea by reducing trade and financial transactions with the regime in Pyongyang. Marshall Billingslea, a top Treasury official, told Congress… that the US had not seen sufficient evidence that China was willing to curb North Korean revenue flows and ‘expunge North Korean illicit actors’ from its banking system. He said the Trump administration would continue to work with China to maximise pressure on North Korea, but would ‘not hesitate to act unilaterally’… Donald Trump… described the latest UN sanctions as ‘a very small step’ that were ‘not a big deal’. He added that while it was nice to get a unanimous vote, ‘those sanctions are nothing compared to ultimately what will have to happen’.”

September 13 – Bloomberg (Saleha Mohsin and Arit John): “Treasury Secretary Steven Mnuchin warned the U.S. may impose additional sanctions on China -- potentially cutting off access to the U.S. financial system -- if it doesn’t follow through on a fresh round of United Nations restrictions against North Korea… ‘If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system -- and that’s quite meaningful,’ Mnuchin said…”

September 11 – Reuters (Jonathan Landay, Arshad Mohammed, Steve Holland): “President Donald Trump is weighing a strategy that could allow more aggressive U.S. responses to Iran’s forces, its Shi‘ite Muslim proxies in Iraq and Syria, and its support for militant groups, according to six current and former U.S. officials. The proposal was prepared by Defense Secretary Jim Mattis, Secretary of State Rex Tillerson, national security adviser H.R. McMaster and other top officials, and presented to Trump at a National Security Council meeting on Friday…”

China Bubble Watch:

September 11 – CNBC (Rebecca Ungarino): “The Chinese National Congress is set to meet in mid-October, and some predict the session will have wide-reaching implications for global markets and the economy. Discussions around the growth of the country's debt in recent years will be particularly consequential, said Chad Morganlander, portfolio manager at Washington Crossing Advisors. ‘One critical thing to watch is how they rebalance their economy. Over the course of the last five years, you've actually seen nonfinancial debt in China increase by roughly $14 trillion, which is pretty close to 90 to 100% growth. That growth rate is not sustainable,’ Morganlander said… This apparent mountain of debt has created ‘financial fragility’ across China, he said, and the country's Communist party would like to ‘decelerate’ that growth rate. ‘Unfortunately, that rebalancing does have major implications on U.S. markets and foreign markets,’ he said…”

September 13 – Bloomberg: “The pace of China’s economic expansion unexpectedly cooled further last month after a lackluster July, as factory output, investment and retail sales all slowed. Industrial output rose 6.0% from a year earlier in August, versus a median projection of 6.6% and July’s 6.4%. That’s the slowest pace this year. Retail sales expanded 10.1% from a year earlier, versus a projection of 10.5% and 10.4% in July, also the slowest reading in 2017. Fixed-asset investment in urban areas rose 7.8% in the first eight months of the year over the same period in 2016, compared with a forecast 8.2% rise. That’s the slowest since 1999.”

September 13 – Bloomberg: “China’s home sales last month grew at the slowest pace in almost three years amid regulatory moves to rein in prices. The value of new homes sold rose 3.8% to 807 billion yuan ($123bn) in August from a year earlier… That compares with a 4.3% jump a month earlier, and is the slowest increase since November 2014. China’s leaders are determined to cool rising home prices across China, imposing buying restrictions to rein in demand.”

September 11 – Bloomberg: “Foreigners have been slow to warm to China’s domestic bond market, the world’s third-largest by value. A look at the latest corporate default may explain why. Wuyang Construction Group Co., a builder in the eastern province of Zhejiang, defaulted on two put-able notes totaling 1.36 billion yuan ($209 million) last month. Bondholders are now up in arms, claiming… that the company didn’t disclose a raft of transgressions in sale documents for the bonds, which were sold in 2015… The incident is a good example of the teething problems China is seeing as it works to develop its $9 trillion bond market -- made more accessible to offshore investors via a connect with Hong Kong in July.”

September 13 – Wall Street Journal (Shen Hong): “Foreign investors last month more than tripled their holdings of a popular short-term debt instrument issued by Chinese banks—reflecting both the attraction of a rising yuan and a growing risk appetite… Central banks and sovereign-wealth funds were big buyers, according to a Shanghai-based banker at a global bank… NCDs—effectively high-yielding bonds, generally with maturities of a month to a year—have become extremely popular with Chinese banks, especially smaller lenders, since their launch in late 2013. But as concerns have grown that banks are issuing them as a tool for leveraged investment rather than to meet genuine refinancing needs, they have drawn heightened scrutiny from Chinese regulators, who recently imposed a partial ban.”

September 10 – Bloomberg: “China will set a deadline for automakers to end sales of fossil-fuel-powered vehicles, becoming the biggest market to do so in a move that will accelerate the push into the electric car market led by companies including BYD Co. and BAIC Motor Corp. Xin Guobin, the vice minister of industry and information technology, said the government is working with other regulators on a timetable to end production and sales… The world’s second-biggest economy, which has vowed to cap its carbon emissions by 2030 and curb worsening air pollution, is the latest to join countries such as the U.K. and France seeking to phase out vehicles using gasoline and diesel.”

September 11 – Bloomberg (Fion Li): “Hong Kong’s Financial Secretary Paul Chan warned potential buyers to be careful buying property in the world’s most expensive housing market, as moves by the Federal Reserve to unwind its balance sheet may shrink money supply. Chan warned in June that Hong Kong’s property market is in a ‘dangerous situation’ and vulnerable to a correction. Hong Kong Chief Executive Carrie Lam describes housing as citizens’ No. 1 concern and recently set up a task force on increasing land supply as she tries to rein in ever-escalating prices… Hong Kong home prices, the least affordable in the world, have surged 21% in the 12 months through June 30…”

Central Bank Watch:

September 14 – Bloomberg (Lucy Meakin and Jill Ward): “Signaling that inflation is overtaking Brexit-related slowdown as an economic risk, Bank of England policy makers said they’re headed toward raising interest rates for the first time in more than a decade. The pound surged and gilt yields jumped as investors anticipated rates may increase as soon as November, far earlier than the previous consensus. That came after the BOE revealed that for a majority of policy makers, ‘some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target.’”

September 12 – Bloomberg (Lucy Meakin): “U.K. inflation is on the rise again, accelerating more than forecast in August after the biggest surge in clothes prices in almost three decades. The jump to 2.9% from 2.6% in July puts the spotlight squarely back on one of the most prominent economic repercussions of the Brexit vote in 2016. The pound has fallen 11% against the dollar since the referendum, boosting import costs and feeding through to prices for everyday household items. The annual inflation rate has never been higher since 2012 and helped push Bloomberg’s Brexit barometer to the lowest since June.”

Global Bubble Watch:


September 12 – Bloomberg (Chris Anstey): “Banks from China, Japan and Canada have overseen a surge in overseas lending since the financial crisis, helping to cushion a deep slide in cross-border capital flows thanks especially to a retreat by European banks, according to the McKinsey Global Institute. While the stock of global foreign holdings -- including loans, equities, bonds and foreign direct investment -- has remained about the same since 2007 at 183% of world GDP, gross flows of capital across borders have plunged 65%. Much of that has been due to European banks refocusing on their domestic markets as the euro crisis and new capital rules took hold, McKinsey said… Key exceptions have been banks in China and Japan, which have funded their countries’ companies abroad…”

September 13 – Bloomberg (Pooja Thakur Mahrotri): “Prices of office, retail and industrial properties in most global cities have reached records since the global financial crisis, with values in Hong Kong tripling over the past decade, according to a survey by Real Capital Analytics Inc. With the exception of a handful of cities such as Amsterdam, Chicago, Tokyo and Washington, prices in the other cities have fully recovered and gone on to set new records… Prices in Manhattan and London’s West End have almost doubled…”

September 10 – Financial Times (Robin Wigglesworth): “At the peak of the South Sea Bubble three centuries ago, a wag famously poked fun at the craze by issuing a prospectus for ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’. Cryptocurrency mania has now arguably reached the same stage. This summer an unknown software developer launched what he termed the ‘Useless Ethereum Token’, an ‘initial coin offering’ of a variant of a cryptocurrency whose popularity rivals that of the more famous bitcoin. But this was the ‘world’s first 100% honest’ ICO, he promised, and was admirably transparent about its purpose. ‘You’re literally giving your money to someone on the internet and getting completely useless tokens in return,’ he wrote on the UET website. ‘There are no ‘whitepapers’, no ‘products’, and no ‘experts’. It’s just you, me, your hard-earned Ether, and my shopping list.’ The ICO raised more than $200,000, according to the backer.”

September 13 – Bloomberg (Hugh Son, Hannah Levitt, and Brian Louis): “JPMorgan… Chief Executive Officer Jamie Dimon said he would fire any employee trading bitcoin for being ‘stupid.’ The cryptocurrency ‘won’t end well,’ he told an investor conference…, predicting it will eventually blow up. ‘It’s a fraud’ and ‘worse than tulip bulbs.’ If a JPMorgan trader began trading in bitcoin, he said, ‘I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.’”

September 10 – Bloomberg (Emily Cadman): “Here’s something else for policy makers to worry about as they attempt to engineer a soft landing in Australia’s property market. The country’s lenders could be sitting on A$500 billion ($402bn) of ‘liar loans,’ or mortgages obtained on inaccurate financial information, according to an estimate from UBS… A survey by the firm of 907 Australians who took out a mortgage in the last 12 months found only 67% stated their application was ‘completely factual and accurate,’ down from 72% the previous year. The most common inaccuracies were overstating income and understating living expenses, the survey found.”

Federal Reserve Watch:

September 13 – Bloomberg (Matthew Boesler): “Former Federal Reserve Chairman Alan Greenspan, in year nine of a U.S. economic expansion, conceded in 1999 that patience was sometimes a better policy than his doctrine of preemptive interest-rate moves because ‘the future at times can be too opaque to penetrate.’ For some Fed officials, these days look like one of those times to wait for clarity. Faith in preemption -- the Greenspan-era strategy of setting of monetary policy based on forecasts to get ahead of where the economy was going -- is beginning to falter among some officials. That’s because in the current expansion’s ninth year, inflation isn’t accelerating as they predicted for reasons that aren’t yet understood, even as the labor market tightens and global growth improves. ‘The conventional wisdom did not work in the 1990s and it is not working now,’ said Allen Sinai, chief executive officer of Decision Economics…”

U.S. Bubble Watch:

September 13 – Reuters (Lindsay Dunsmuir): “The U.S. government recorded a $108 billion deficit in August, the Treasury Department said… That compared with a budget deficit of $107 billion the same month one year… The deficit for the fiscal year to date was $674 billion, compared to $619 billion in the same period of fiscal 2016. On an adjusted basis, the fiscal-year-to-date deficit was $705 billion last month versus $619 billion in the year-earlier period.”

September 14 – Bloomberg (Sho Chandra): “Inflation may finally be getting back on track to reach the Federal Reserve’s goal, as the U.S. cost of living accelerated following a weak stretch of readings… Consumer-price index increased 0.4% m/m (est. 0.3% gain) after 0.1% rise the prior month; rose 1.9% y/y (est. 1.8%). Excluding food and energy, so-called core CPI rose 0.2% m/m (matching est.) after rising 0.1%; up 1.7% y/y (est. 1.6%) after 1.7% advance. Increase in core index driven by biggest gain in shelter since 2005.”

September 13 – CNBC (Diana Olick): “Homebuyers are clamoring to capitalize on the lowest interest rates in almost a year, driving total mortgage application volume 9.9% higher last week… After declining for weeks, mortgage applications to purchase a home jumped 11% for the week and were 7% higher than a year ago.”

September 13 – Bloomberg (Sho Chandra): “Rising U.S. wholesale prices in August reflect the biggest jump in energy costs since January, while underlying inflation remained contained… Producer-price index rose 0.2% m/m (est. 0.3% rise) after 0.1% drop the previous month. PPI rose 2.4% y/y after 1.9% gain in prior 12-month period.”

September 14 – CNBC (Jeff Cox): “Professional investors are at their most pessimistic since before the election of President Donald Trump, despite a bull market that continues to roll along. The Investors Intelligence survey, which gauges the sentiment of investing newsletter authors, showed bullishness at 47.1%, a decline of 2.4 percentage points from last week. That's the lowest level since just before Trump's win back in November and comes as bearishness has risen to 20.2%, which is a high since the election. As recently as July the bulls were above 60%, with a 2017 peak of 63.1 in late February. Bearishness had been in a range between 16.5% and 18.3% for most of the year…”

Europe Watch:


September 14 – Financial Times (Marcello Minenna): “The euro area’s Target2 (T2) balances have continued to diverge. As of June 2017, Italy owes €430bn to the rest of the eurosystem and Spain owes €377bn, while Germany’s claims on the eurosystem are worth €835bn. Recent research has linked the launch of the European Central Bank’s quantitative easing with the resumption of the T2 divergence process in the euro area, after a period (2012-2014) of relative reduction. The ECB itself believes that QE has been the main driver of the T2 balances. In an official bulletin the ECB highlights the linear relationship between liquidity injected into European financial systems through the purchase of government bonds and the corresponding increase in T2 balances. For Italy, Portugal, and Spain, the effect has been to increase T2 obligations… While QE has had the opposite effect in Germany, the Netherlands and Finland…”

Japan Watch:

September 11 – Bloomberg (Chikako Mogi and Takako Taniguchi): “Japan’s regional banks are turning toward private equity, hedge funds and real estate in search of higher returns as regulatory concerns restrict ownership of foreign bonds. Alternative assets was the favored choice of investment for five lenders, according to a Bloomberg survey… Foreign bonds was picked by three respondents, while none of the lenders said they found Japanese government debt attractive given depressed yields. Japanese banks are following the nation’s largest insurance companies in considering more alternative assets as choices narrow with the Bank of Japan committed to holding down the benchmark bond yield at around zero percent.”

EM Bubble Watch:

September 12 – Bloomberg (Archana Chaudhary): “India’s August inflation rate accelerated to the fastest since March, exceeding expectations ahead of the central bank’s policy review in October. Consumer price inflation quickened to 3.36% in August…”

Geopolitical Watch:

September 13 – Reuters (Jack Kim, Kiyoshi Takenaka): “A North Korean state agency threatened… to use nuclear weapons to ‘sink’ Japan and reduce the United States to ‘ashes and darkness’ for supporting a U.N. Security Council resolution and sanctions over its latest nuclear test. The Korea Asia-Pacific Peace Committee, which handles the North’s external ties and propaganda, also called for the breakup of the Security Council, which it called ‘a tool of evil’ made up of ‘money-bribed’ countries that move at the order of the United States. ‘The four islands of the archipelago should be sunken into the sea by the nuclear bomb of Juche. Japan is no longer needed to exist near us,’ the committee said…”

September 13 – Reuters (Johan Ahlander): “Neutral Sweden has launched its biggest war games in two decades with support from NATO countries, drilling 19,000 troops after years of spending cuts that have left the country fearful of Russia’s growing military strength. On the eve of Russia’s biggest maneuvers since 2013, which NATO says will be greater than the 13,000 troops Moscow says are involved, Sweden will simulate an attack from the east on the Baltic island of Gotland… ‘The security situation has taken a turn for the worse,’ Micael Byden, the commander of the Swedish Armed Forces, said during a presentation of the three-week-long exercise.”