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’

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 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.’”

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…”

Thursday, December 14, 2017

Thursday Evening Links

[Bloomberg] Dollar Eyes Weekly Drop on Tax; Asia Stocks Fall: Markets Wrap

[CNBC] Marco Rubio opposes current GOP tax plan; Mike Lee is undecided

[Bloomberg] Central Banks Want World to Party On as They Remove Punch Bowl

[Reuters] Mexico's central bank hikes interest rate on inflation risks

[Bloomberg] Confidence Among Japan’s Manufacturers Rises to a Decade High

[Reuters] ECB's Draghi sidelines critics to keep money taps wide open

[Reuters] While focus is on North Korea, China continues South China Sea buildup: think tank

[WSJ] Several Republican Senators Press for Late Changes in Tax Bill

Thursday's News Links

[Bloomberg] U.S. Stocks Rise, Euro Slips on ECB Inflation View: Markets Wrap

[Bloomberg] U.S. Retail Sales Jump More Than Forecast in Broad Advance

[Reuters] U.S. import prices surge in November

[Bloomberg] Two GOP Senators Slam Tax Cuts for Rich, But How Will They Vote?

[Bloomberg] ECB Keeps Policy Unchanged as Investors Seek Economic Update

[Bloomberg] Euro-Area Activity Surges as Manufacturing Posts Record Growth

[Bloomberg] PBOC Raises Market Borrowing Costs in Surprise Move After Fed

[Reuters] Investors pour cash into U.S. shale despite questions on returns

[Bloomberg] Debt-Laden HNA Met With Chinese Banks for 2018 Financing Talks

[Bloomberg] China's Home Sales Reverse Declines for Biggest Gain in 5 Months

[Bloomberg] Italy's Enron Moment? Crackdown Leaves Power Market in Turmoil

[Bloomberg] Global Bonds Enjoy Final Lift Before European `Tsunami' Retreats

[Bloomberg] The Story Behind Putin's Mistrust of the West

[NYT] The Global Economy Is Partying Like It’s 2008

[WSJ] House, Senate Republicans Reach Deal on Final Tax Bill

[WSJ] A Christmastime Tax Cut for Some, a Lump of Coal for Others

[WSJ] China Firms Ditch Bonds for Banks in Search for Funds

Wednesday, December 13, 2017

Wednesday Evening Links

[Bloomberg] Asia Stocks Mixed; Dollar Steady on Fed's Outlook: Markets Wrap

[Bloomberg] Fed Raises Rates While Sticking to Three-Hike Outlook for 2018

[Reuters] U.S. Republicans craft tax deal, final votes seen next week

[BBC] Brexit bill: Government loses key vote after Tory rebellion

[Reuters] Italian bonds, bank stocks hit as prospect of March election reignites political uncertainty

[CNBC] House, Senate leaders reach tentative deal on sweeping tax bill

[Bloomberg] Fed, ECB and China Pose Key Dangers for Asia's Dollar-Bond Boom

[Bloomberg] Steinhoff to Restate 2016 Results as Financial Scandal Grows

[Bloomberg] Bond Traders See the Fed's ‘Third Mandate’ Driving Rates Higher

[Bloomberg] U.S. Finds Allies to Challenge China’s Trade Tactics

[CNBC] Gundlach: Tax plan could have some' unintended consequences,' hurt junk bond market

[Bloomberg] Scientists Are Linking This Extreme Weather to Man-Made Warming

[WSJ] Nearly 5 Million Americans in Default on Student Loans

Wednesday's News Links

[Bloomberg] U.S. Stocks Gain, Dollar Weakens on Price Data: Markets Wrap

[Bloomberg] U.S. Inflation Picks Up on Energy Costs; Core Gauge Slows

[Bloomberg] Fed 2018 Dots in Focus for Yellen Swan Song: Decision Day Guide

[Reuters] With rate hike in the bag, Fed may hint at Trump effect on economy

[CNBC] Doug Jones' apparent win makes the GOP's tax reform push even more urgent

[Reuters] Crucial details of Republican tax plan in flux as deal deadline looms

[Reuters] U.S., EU, Japan slam market distortion in swipe at China

[Bloomberg] The Whole World Is Paying the Price for Cleaner Air in China

[CNBC] China's economy set to slow sharply in 2018, ADB warns

[Bloomberg] Euro-Area Economy Fuels Strongest Jobs Growth in a Decade: Chart

[Bloomberg] Emerging Markets Shrug Off Crises For Best Gains in Eight Years

[WSJ] Federal Reserve Expected to Raise Rates

[WSJ] GOP Bridging Divide in House, Senate Tax Plans

[FT] Fed’s failure to tighten financial conditions a cause for concern

[WSJ] Democratic Victory in Alabama Stirs GOP Anxiety Over Midterm Elections

Tuesday, December 12, 2017

Tuesday Evening Links

[Bloomberg] Asia Stocks Mixed, Dollar Steady Before FOMC, ECB: Markets Wrap

[Reuters] U.S. government posts $139 billion deficit in November

[Bloomberg] For the First Time in Nine Months, the Market Expects Two Fed Hikes in 2018

[Bloomberg] ‘Buy the Dip’ Has Never Been More Popular in U.S. Stocks

[CNBC] Druckenmiller: Central banks are financial world's 'Darth Vader,' creating exploding asset bubbles

[Reuters] EU, U.S., Japan to slam WTO countries flooding global markets

[WSJ] A Faster Pace of Fed Rate Increases Could Rattle Markets

[FT] Bank of Japan normalisation: too soon to consider?

Tuesday's News Links

[Bloomberg] Stocks Push Higher as Oil Rises; Dollar Steadies: Markets Wrap

[Reuters] Oil hits two-year-and-a-half year high on pipeline shutdown

[Reuters] U.S. producer prices rise strongly, point to firming inflation

[CNBC] How the Fed could surprise the markets at Yellen's farewell meeting

[Bloomberg] Optimism Among U.S. Small Businesses Jumps to Highest Since 1983

[Politico] GOP lawmakers struggle to close gaps in tax plan

[Reuters] U.S., EU, Japan to join forces on Chinese excess capacity: source

[Reuters] Risks lurk as yen keeps BOJ from faster tapering despite stronger economy

[Reuters] Unfettered building, scant oversight add to cost of hurricanes in U.S.

[Reuters] Japan air force drills with U.S. bombers, stealth fighters near Korean peninsula

[WSJ] As the Fed Deliberates, Amazon Is Making Its Job More Difficult

[WSJ] With California Wildfires, Insurers’ Losses Keep Spiraling Higher

Monday, December 11, 2017

Monday Evening Links

[Bloomberg] Asian Stocks to Climb as U.S. Hits Fresh Records: Markets Wrap

[Reuters] China's banks dole out record credit in 2017 as Nov loans blow past forecasts

[Bloomberg] How China's Debt Crackdown Could Start Weighing on the Economy

[Bloomberg] U.S. Firms Say Sales Outlook, Not Taxes, to Drive Spending

[Bloomberg] Surging Debt Will Make Asian Central Banks Cautious on Rates

[Bloomberg] Initial Coin Offerings on Record Pace Even With Crackdown

[CNBC] People are taking out mortgages to buy bitcoin, says securities regulator

Monday's News Links

[Bloomberg] U.S. Stocks Rise Despite NYC Explosion; Gold Falls: Markets Wrap

[Bloomberg] Bitcoin Futures Start With a Bang as Gain Trips Circuit Breakers

[Reuters] Powell faces early test of policy view as tax cuts near approval

[Bloomberg] The Middle Class Might Not Even Notice If the GOP Cuts Their Taxes

[Bloomberg] Investors Told to Brace for Steepest Rate Hikes Since 2006

[Bloomberg] China Credit Growth Exceeds Estimates as Funding Remains Buoyant

[Bloomberg] Chinese Regulator Cracks Down on Booming Hedge-Fund Industry

[Businessweek] Small Banks, Big Worry

[Reuters] Exclusive: Contenders emerge for No.2 Fed job, search to narrow

[WSJ] Small Investors Face Steeper Tax Bill Under Senate Proposal

[WSJ] The New Face of Treasury Auctions

[WSJ] Another Sign of Frothy Markets: Blank-Check Boom

[WSJ] Upper East Side Townhouse in Contract for a Record $80 Million

[WSJ] China’s Clean Energy Future Has a $1.2 Trillion Problem

[FT] Congress tax cuts put the heat on Fed hiking cycle

[FT] North Korea says US naval blockade would be ‘declaration of war’

Saturday, December 9, 2017

Saturday's News Links

[Bloomberg] With the U.S. Going Rogue, World Fumbles for New Trade Consensus

[Bloomberg] China Factory Inflation Eases as Consumer Prices Remain Subdued

[Bloomberg] Steinhoff Seeks to Defuse Accounting Scandal

[FT] Pool of negative yielding bonds tops $11tn in November

Weekly Commentary: Q3 2017 Flow of Funds

In nominal dollars, Total U.S. System (Non-Financial, Financial and Foreign) borrowings expanded $1.007 TN during the third quarter to a record $68.012 TN. Total Non-Financial Debt (NFD) rose a nominal $732 billion during the quarter to a record $48.635 TN. It’s worth noting that NFD has expanded 46% since ending 2007 at $33.26 TN.

Total Non-Financial Debt expanded at a seasonally-adjusted and annualized rate (SAAR) of $2.954 TN during Q3, the strongest Credit growth since Q4 2015. As has often been the case over the past nine years, Washington led the Credit expansion. Federal borrowings jumped to SAAR $1.656 TN, the strongest in seven quarters. Total Business borrowings expanded SAAR $751 billion, up from Q2’s $692 billion. Total Household debt growth slipped slightly q/q to $550 billion.

On a percentage basis, Non-Financial Debt expanded at a 6.2% rate during Q3, accelerating from Q2’s 3.8%, Q1’s 1.7% and Q4 2016’s 3.1%. Federal borrowings grew at a 10.3% pace, Total Business at 5.4% and Total Household debt expanded at a rate of 3.7%.

To the naked eye, percentage debt growth figures for the most part don’t appear alarming. But there’s several unusual factors to keep in mind. First, the outstanding stock of debt has grown so enormous that huge Credit expansions (such as Q3’s) don’t register as large percentage gains. Second, overall system debt growth continues to be restrained by historically low interest-rates and market yields. Debt simply is not being compounded as it would in a normal rate environment. And third, it’s a global Bubble and a large proportion of global Credit growth is occurring in China, Asia and the emerging markets. U.S. securities markets continue to be a big target of international flows.

With global Bubble Dynamics a dominant characteristic of this cycle, it’s appropriate to place Rest of World (ROW) data near the top of Flow of Funds analysis. ROW holdings of U.S. Financial Assets jumped $724 billion (nominal) during the quarter to a record $26.347 TN. This puts growth over the most recent three quarters at a staggering $2.124 TN (16% annualized). What part of these flows has been associated with ongoing rapid expansion of global central bank Credit? It’s worth recalling that ROW holdings ended 2007 at $14.705 TN and 1999 at $5.639 TN. As a percentage of GDP, ROW holdings of U.S. Financial Assets ended 1999 at 57%, 2007 at 100%, and Q3 2017 at a record 135%.

ROW holdings increased a seasonally-adjusted and annualized (SAAR) $1.657 TN during the quarter. ROW holdings of U.S. Debt Securities increased SAAR $956 billion during Q3, led by a SAAR $749 billion jump in Treasuries. Corporate Bond holdings rose SAAR $204 billion. Holdings of Equities and Mutual Fund Shares increased SAAR $114.9 billion during the quarter. Direct Foreign Investment rose SAAR $305 billion. Big numbers.

Meanwhile, the Fed’s Domestic Financial Sectors category expanded assets SAAR $2.841 TN during Q3 to a record $95.213 TN. In nominal dollars, the Financial Sector boosted assets a notable $5.085 TN over the past three quarters, almost 8% annualized growth. Notably, the sector’s holdings of Debt Securities surged a nominal $775 billion in three quarters to a record $25.425 TN. Pension Funds were a huge buyer of Treasuries during the quarter (SAAR $1.075 TN). Over the past three quarters, the Financial Sector boosted holdings of Corporate & Foreign Bonds by nominal $427 billion to $8.026 TN. More very big numbers.

Banks (“Private Depository Institutions”) expanded loan portfolios by SAAR $509 billion during Q3, the strongest expansion in a year. I still see analysis referring to tepid bank lending. And while loan growth has appeared less than boom-like, at least part of this is explained by booming capital markets. Corporate bond issuance has remained near record pace, and there has been as well even a surge in Open Market Paper (“commercial paper”) borrowings.

One doesn’t have to look much beyond the booming Rest of World and Domestic Financial Sector to explain ongoing over-liquefied securities markets. The numbers confirm a historic financial Bubble.

Total Equities Securities jumped $1.229 TN during the quarter to a record $43.969 TN, with a one-year gain of $5.923 TN (16.4%). Equities jumped to a record 224% of GDP, compared to 181% at the end of Q3 2007 and 202% to end 1999. Debt Securities gained $171 billion during Q3 to a record $42.385 TN, with a one-year gain of $1.080 TN. At 217% of GDP, Debt Securities remain just below the record 223% recorded in 2013.

This puts Total (Debt & Equities) Securities up $1.400 TN during the quarter to a record $86.080 TN. Total Securities inflated $7.003 TN, or 9.1%, over the past year. Total Securities experienced cycle tops of $55.261 TN during Q3 2007 and $36.017 TN to end March 2000. Total Securities ended Q3 2017 at a record 441% of GDP. This outshines the previous cycle peaks of 379% for Q3 2007 and 359% at Q1 2000. One more way to look at post-crisis securities market inflation: Total Securities ended Q3 $30.819 TN, or 56%, higher than the previous cycle peak in Q3 2007.

There’s no doubt that financial sector leveraging and foreign flows (especially through the purchase of U.S. securities) continue to play an integral role in the U.S. Bubble. Inflating asset prices and resulting bubbling U.S. Household Net Worth are instrumental in fueling the overall U.S. Bubble Economy.

Household Sector Assets inflated $1.920 TN during Q3 to a record $112.360 TN. And with Household Liabilities little changed at $15.241 TN, Household Net Worth expanded $1.922 TN during the quarter to a record $97.119 TN. Household Net Worth ended September at a record 498% of GDP. This is up from the 378% Q1 2009 trough level. It also surpasses the cycle peaks of 478% back in Q1 2007 and 435% in Q4 1999.

For the quarter by Household Asset category, Financial Asset holdings increased $1.449 TN to a record $78.854 TN. Real Estate holdings gained $411 billion to a record $27.428 TN. Household Net Worth increased $7.389 TN over the past year and $11.870 TN over two years. Household Net Worth has now increased 78% from Q1 2009 lows.

As we think ahead to 2018, the question becomes how vulnerable U.S. securities markets are to waning QE and reduced central bank Credit expansion. Inflating a Bubble creates vulnerability to any slowdown in underlying Credit and attendant financial flows. And it’s the final parabolic speculative blow-off that seals a Bubble's fate. It ensures market dependency to unusually large and inevitably unsustainable flows. The Fed’s latest Z.1 report does a nice job of illuminating the historic scope of the U.S. securities Bubble. U.S. securities markets have been on the receiving end of extraordinary international flows, while inflating securities and asset prices have spurred rapid financial sector expansion.


For the Week:

The S&P500 added 0.4% (up 18.4% y-t-d), and the Dow increased 0.4% (up 23.1%). The Utilities declined 0.9% (up 14.3%). The Banks jumped 1.9% (up 16.2%), and the Broker/Dealers rose 1.5% (up 28.4%). The Transports advanced 2.1% (up 15.0%). The S&P 400 Midcaps slipped 0.2% (up 13.9%), and the small cap Russell 2000 declined 1.0% (up 12.1%). The Nasdaq100 was little changed (up 30.4%).The Semiconductors fell 1.6% (up 36.6%). The Biotechs slipped 0.5% (up 37.6%).With bullion sinking $32, the HUI gold index dropped 4.7% (down 2.8%).

Three-month Treasury bill rates ended the week at 125 bps. Two-year government yields added two bps to 1.80% (up 61bps y-t-d). Five-year T-note yields increased three bps to 2.14% (up 21bps). Ten-year Treasury yields added a basis point to 2.38% (down 7bps). Long bond yields increased one basis point to 2.77% (down 30bps).

Greek 10-year yields sank 89 bps to an eight-year low 4.47% (down 255bps y-t-d). Ten-year Portuguese yields fell eight bps to 1.81% (down 194bps). Italian 10-year yields declined six bps to 1.65% (down 5bps). Spain's 10-year yields slipped two bps to 1.40% (up 2bps). German bund yields were little changed at 0.31% (up 10bps). French yields rose three bps to 0.63% (down 5bps). The French to German 10-year bond spread widened three to 32 bps. U.K. 10-year gilt yields rose five bps to 1.28% (up 4bps). U.K.'s FTSE equities rallied 1.3% (up 3.5%).

Japan's Nikkei 225 equities index was about unchanged (up 19.3% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.05% (up 1bp). France's CAC40 recovered 1.5% (up 11.0%). The German DAX equities index jumped 2.3% (up 14.6%). Spain's IBEX 35 equities index rose 2.3% (up 10.4%). Italy's FTSE MIB index surged 3.0% (up 18.4%). EM markets were mixed. Brazil's Bovespa index increased 0.6% (up 20.8%), and Mexico's Bolsa gained 0.7% (up 4.2%). South Korea's Kospi index declined 0.5% (up 21.6%). India’s Sensex equities index rose 1.3% (up 24.9%). China’s Shanghai Exchange declined 0.8% (up 6.0%). Turkey's Borsa Istanbul National 100 index surged 4.2% (up 38.1%). Russia's MICEX equities index was unchanged (down 5.7%).

Junk bond mutual funds saw inflows of $216 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose four bps to 3.94% (down 19bps y-o-y). Fifteen-year rates jumped six bps to 3.36% (unchanged). Five-year hybrid ARM rates increased three bps to 3.35% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up two bps to 4.15% (up 1bp).

Federal Reserve Credit last week declined $9.3bn to $4.397 TN. Over the past year, Fed Credit fell $12.9bn. Fed Credit inflated $1.577 TN, or 56%, over the past 265 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $2.9bn last week to $3.390 TN. "Custody holdings" were up $251bn y-o-y, or 8.0%.

M2 (narrow) "money" supply surged $35.1bn last week to a record $13.810 TN. "Narrow money" expanded $630bn, or 4.8%, over the past year. For the week, Currency increased $1.6bn. Total Checkable Deposits added $3.1bn, and Savings Deposits jumped $26.9bn. Small Time Deposits were little changed. Retail Money Funds gained $3.0bn.

Total money market fund assets gained $8.4bn to $2.807 TN. Money Funds rose $71bn y-o-y, or 2.6%.

Total Commercial Paper jumped $9.9bn to $1.053 TN. CP gained $117bn y-o-y, or 12.5%.

Currency Watch:

The U.S. dollar index gained 1.1% to 93.901 (down 8.3% y-t-d). For the week on the upside, the South African rand increased 0.5%. For the week on the downside, the Swiss franc declined 1.7%, the Mexican peso 1.6%, the Australian dollar 1.4%, the Canadian dollar 1.3%, the Japanese yen 1.2%, the Swedish krona 1.1%, the Brazilian real 1.1%, the euro 1.0%, the South Korean won 1.0%, the British pound 0.7%, the New Zealand dollar 0.6%, the Singapore dollar 0.5% and the Norwegian krone 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 4.90% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.1% (up 5.5% y-t-d). Spot Gold fell 2.5% to $1,249 (up 8.4%). Silver sank 3.4% to $15.823 (down 1.0%). Crude dropped $1.00 to $57.36 (up 6%). Gasoline declined 1.4% (up 3%), and Natural Gas sank 9.4% (down 26%). Copper lost 3.7% (up 19%). Wheat fell 4.4% (up 3%). Corn dropped 1.7% (unchanged).

Trump Administration Watch:

December 2 – Wall Street Journal (Richard Rubin and Siobhan Hughes): “The Senate passed sweeping revisions to the U.S. tax code past midnight Saturday after Republicans navigated a thicket of internal divisions over deficits and other issues to place their imprint on the economy. The bill, which included about $1.4 trillion in tax cuts, would lower the corporate rate to 20% from 35%, reshape international business tax rules and temporarily lower individual taxes. It also touched other Republican goals, including opening the Arctic National Wildlife Refuge to oil drilling and repealing the mandate that individuals purchase health insurance, which would punch a sizable hole in the 2010 Affordable Care Act. But some objectives, such as repealing the alternative minimum tax, fell by the wayside in last-minute wrangling.”

December 7 – Bloomberg (Toluse Olorunnipa): “Lawmakers have made -- and then retracted -- pledges that their planned overhaul bill wouldn’t raise taxes on any middle-class families. Trump and his top aides have said the changes won’t cut taxes for the highest earners, statements that are demonstrably false. And all of them argue that the proposed tax cuts, estimated to reduce federal revenue by more than $1.4 trillion, won’t increase federal deficits, an assertion that’s been contradicted by Congress’s official tax scorekeeper. ‘The challenge is that there were a lot of promises made that can’t live comfortably with each other,’ said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget. ‘The biggest loser in all this was their commitment to fiscal discipline, which went away as fast as you can blink.’”

December 4 – Financial Times (Ed Crooks): “Planned changes to the US tax system threaten to cut sharply the value of business tax credits used to encourage research and development and other investment spending, sparking protests from the technology industry. As Republicans in the Senate sought to limit the cost of their tax bill shortly before voting to approve it at 2am on Saturday, they decided to retain the corporate Alternative Minimum Tax, which sets a limit on how far companies can use credits to reduce their tax bills. The threat to the value of the credits has emerged as one of many potential unintended consequences of a wholesale upheaval of the tax system that is passing through Congress at speed.”

December 4 – Wall Street Journal (Theo Francis and Richard Rubin): “Technology, banking and other industries mounted a new round of lobbying Monday to save a wide range of tax breaks following the last-minute switch in the federal tax overhaul by the U.S. Senate. The Senate on Saturday decided to keep a corporate alternative minimum tax, or AMT, a move that gave the senators $40 billion over a decade to use on other priorities… The move blindsided CEOs and business groups, who acted quickly on Monday to try to persuade legislators to kill or modify the provision…”

December 5 – Wall Street Journal (Richard Rubin and Siobhan Hughes): “Though the House and Senate have voted to repeal the deduction for state income taxes in Republican tax overhaul plans, it isn’t dead yet. California Republicans are pushing for an income-tax deduction in the final tax bill being worked out by lawmakers in a House-Senate conference committee on tax legislation. ‘There’s a lot of things that Californians are working on and why we said we’d move the process forward, looking to be able to make those fixes,’ House Majority Leader Kevin McCarthy (R., Calif.) told reporters… In November, 11 of the 14 California Republicans in the House voted for the tax bill; New Jersey and New York GOP members, with similarly high state taxes, were much more willing to vote no. The House will need to vote again, and Republicans need 217 votes to guarantee passage if no Democrats vote for the bill.”

December 7 – Wall Street Journal (Siobhan Hughes): “Family-owned businesses including grocery stores, craft shops, small manufacturers and others are worried tax legislation in Congress could leave them at a disadvantage to big corporations and other competitors. At issue for these businesses is their structure as trusts, established to preserve an enterprise for succeeding generations, protect against estate taxes or a divorcing spouse or other claimants who might try to seize a stake. Some family-owned firms say the Senate version of the tax bill holds risks for them because it excludes trusts from a new tax deduction. Family-owned businesses are a slice of the universe of ‘pass through’ companies—partnerships, limited liability companies and S Corporations—that pay taxes through individual rather than corporate returns.”

December 4 – Financial Times (Sam Fleming): “Even as US stocks roared higher on Monday in response to the passage of the Senate tax bill many analysts were expressing deep scepticism about the notion that the overhaul will transform an economy that is already running close to full employment. Kent Smetters, a former Bush administration official who oversees the Penn Wharton Budget Model, said he expects at most a 0.1 percentage point uplift to annual growth rates over the course of 10 years as a result of the legislation. The long-run impact on trend growth will be negligible, he added, as the extra debt amassed as a result of lost revenue weighs on the economy. ‘It is not a significant boost,’ he said.”

December 6 – Reuters (Daniel Flynn and Aluisio Alves): “Proposed U.S. tax cuts would increase the federal deficit and looser fiscal policy could prompt negative action on U.S. credit ratings unless Washington addresses long-term budgetary issues, the head of sovereign ratings at S&P Global said… While Congress has yet to agree upon a final version of the tax package, Moritz Kraemer, S&P’s sovereign global chief rating officer, told Reuters… that the cuts appeared more likely to stoke inflation rather than significantly boost growth in a U.S. economy already running at full capacity.”

China Watch:

December 6 – Reuters (Yen Nee Lee): “An almost two-year long study of the Chinese financial system by the International Monetary Fund found three major tensions that could derail the world's second-largest economy. Those tensions emerged as China moves away from its role as the world's factory to a more modern, consumer-driven economy, the IMF said. The financial sector is critical in facilitating that transition, but in the process it evolved into a more complicated and debt-laden system. ‘The system's increasing complexity has sown financial stability risks,’ the fund said in the 2017 China Financial Sector Stability Assessment report… The first tension in China's financial system… is the rapid build-up in risky credit that was partly due to the strong political pressures banks face to keep non-viable companies open, rather than letting them fail… The overall debt-to-GDP ratio in the Asian economic giant grew from around 180% in 2011 to 255.9% by the second quarter of 2017... The second tension identified by the IMF is that risky lending has moved away from banks to the less-regulated parts of the financial system, commonly known as the ‘shadow banking’ sector… And the third issue identified by the international organization is that there's been a rash of ‘moral hazard and excessive risk-taking’ because of the mindset that the government will bail out troubled state-owned enterprises and local government financing vehicles…”

December 4 – Reuters (Engen Tham, Claire Jim and Yawen Chen): “Gravity-defying property prices in China have spawned widespread home-loan fraud as buyers fear missing out on what seems like a sure bet. Real estate agents, valuation companies and banks themselves are party to the scam. When Zhu Chenxia bought a flat early last year from Lei Yarong in the up-market Nanshan district of China’s southern metropolis of Shenzhen, the two women drew up three purchase agreements to cover the deal. Only one was genuine. In the legitimate contract, Zhu agreed to pay Lei 6.49 million yuan (about $980,000) for the 96-square-meter apartment near the city’s border with Hong Kong… With the help of her property agent, Zhu cooked up a second contract with Lei that overstated the value of the flat at 7 million yuan. This one was for the bank. If Zhu had presented her lender with the true purchase price, she would only have been entitled to borrow up to 70% of that amount… Chinese regulations stipulate that first-home buyers in some major cities must make a down payment of at least 30%...”

December 4 – Bloomberg: “Units of HNA Group Co. are stepping up fundraising in the local bond market even as borrowing costs soar, adding to concerns about the Chinese conglomerate’s debt burden. Yunnan Lucky Air Co., a unit of Hainan Airlines Holding Co. -- HNA’s flag carrier -- sold a 270-day yuan bond to yield 8.2% last week, the highest coupon rate ever for the Yunnan airline. Tianjin Airlines Co., another subsidiary of Hainan Airlines, issued similar-maturity notes at the highest coupon rate in five years in November. While surging onshore bond yields last month forced Chinese companies to cancel the most bond offerings since April, HNA’s units didn’t slow their pace of financing… The accelerated fundraising suggests a need for money and may hurt the conglomerate’s credit profile, according to credit research firm Bondcritic Ltd.”

December 6 – Bloomberg: “HNA Group Co., one of China’s most indebted companies, is facing increasing difficulties raising funds as scrutiny mounts over the acquisitive conglomerate’s surging borrowing costs. In the past week, S&P Global Ratings and Fitch Ratings have voiced concerns about at least four companies because of their ties with HNA. Separately, group flagship Hainan Airlines Holding Co. canceled a bond sale, another unit scrapped a share offering and HNA subsidiaries have been paying some of their highest borrowing costs ever. The setbacks add to the pressures piling up at the largest shareholder of Deutsche Bank AG as the Chinese conglomerate stares at about $28 billion in short-term debt at a time the company is unable to earn enough profits to cover its interest payments.”

December 8 – Bloomberg: “China’s trade engine remained in high gear with a surprise export surge accompanied by further acceleration in imports that signals robust demand in the domestic economy. Exports rose 12.3% in November in dollar terms, the customs administration said Friday, exceeding all economist estimates in a Bloomberg survey where the median estimate was for a 5.3% rise. Imports also beat projections with a 17.7% increase, widening the trade surplus to $40.2 billion.”

December 2 – Reuters (Andrew Galbraith): “China’s Ministry of Commerce (MOFCOM) has expressed ‘strong dissatisfaction and firm opposition’ to a statement by the United States to the World Trade Organization (WTO) that it opposes granting China market economy status, Xinhua reported… The U.S. and the European Union argue that Beijing’s pervasive role in the Chinese economy distorts and prevents market determination of domestic prices.”

December 6 – Bloomberg: “China’s banks should increase their capital buffers to protect against any sudden economic downturn following a credit boom, the International Monetary Fund said. In its first comprehensive assessment of China’s financial system since 2011, the IMF recommended ‘a gradual and targeted increase in bank capital.’ In a worst-case scenario, IMF stress tests suggested the country’s lenders would face a capital shortfall equivalent to 2.5% of China’s gross domestic product -- about $280 billion in 2016 -- together with ballooning soured loans. Overall, 27 of 33 banks stress-tested by the fund, covering about three quarters of China’s banking-system assets, were under-capitalized by at least one measure.”

December 6 – CNBC (Evelyn Cheng): “China's private fund industry is growing rapidly as the country's wealthy increasingly turn toward money managers. Assets under management of Chinese private funds rose 28% over the first 10 months of the year, to 10.77 trillion yuan ($1.63 trillion)… The funds target high-net-worth individuals, a group that has grown rapidly in China. The number of Chinese with at least 10 million yuan (roughly $1.5 million) in investible assets has multiplied more than eight times within a decade, to 1.6 million in 2016…”

Federal Reserve Watch:

December 1 – Wall Street Journal (Nick Timiraos): “A top Federal Reserve official said that he sees a ‘reasonable case’ to raise short-term interest rates this month and that any new fiscal stimulus approved by lawmakers in Washington could shape the central bank’s expectations for additional rate increases next year. New York Fed President William Dudley said… that any effort to make the tax code less complex ‘makes sense.’ But with the economy expanding solidly and the unemployment rate at a low level of 4.1%, Fed policy makers will be watching closely to see whether any tax changes might cause the economy to overheat. ‘It would be a reasonable question to ask, is this the best time to apply fiscal stimulus, when the economy’s already close to full employment?’ he said. ‘It’s probably not the best time.’”

U.S. Bubble Watch:

December 6 – Wall Street Journal (Eli Stokols): “John Della Volpe, who has been polling millennials for 17 years, stood before about 150 students in a gleaming new center at Elon University this fall in search of an answer. In his 2016 survey for Harvard University’s Institute of Politics, 42% of younger Americans said they support capitalism, and only 19% identified themselves as capitalists. While this was a new question in his survey, the low percentage of young people embracing capitalism surprised him… ‘Maybe it had to do with the ‘American Dream,’ and how capitalism was correlated with it, but a lot of young people don’t believe in it anymore,’ said Ana Garcia, a junior at the Elon event. ‘We don’t trust capitalism because we don’t see ourselves getting ahead.’”

December 5 – Bloomberg (Sho Chandra): “The U.S. trade deficit widened in October to a nine-month high on record imports that reflect steady domestic demand… Gap increased 8.6% to $48.7b (est. $47.5b) from revised $44.9b in prior month that was wider than previously reported.”

December 5 – CNBC (Jeff Cox): “A market that already has broken a multitude of records is about to set another one — this time for cash poured into stock-based funds. Equity exchange-traded funds are on track to pull in $300 billion this year, after another solid showing in November. The month saw $30.6 billion in inflows, taking the running total for 2017 up to just shy of $294 billion, according to State Street… For perspective, that would bring the total inflows for stock-based ETFs alone to more than the entire $3.4 trillion industry has ever taken in during a year. A market that has seen 64 record closing highs for the Dow industrials is also seeing plenty of participation from investors.”

December 7 – Wall Street Journal (Bradley Olson and Lynn Cook): “Twelve major shareholders in U.S. shale-oil-and-gas producers met this September in a Midtown Manhattan high-rise with a view of Times Square to discuss a common goal, getting those frackers to make money for a change. In the months since, shareholders have put the screws to shale executives in ways that are changing the financial calculus of hydraulic fracturing and could ripple through the global oil market. In the past decade, the shale-fracking revolution has made the U.S. the world’s largest oil-and-gas producer and reshaped markets. Yet shale has been a lousy bet for most investors. Since 2007, shares in an index of U.S. producers have fallen 31%..., while the S&P 500 rose 80%. Energy companies in that time have spent $280 billion more than they generated from operations on shale investments, according to… Evercore ISI.”

December 7 – Bloomberg (Matthew Boesler): “Blame Corporate America for a reluctance to invest. Small businesses aren’t holding back. Capital expenditures by non-financial, non-corporate U.S. businesses -- typically smaller firms -- rose to 2.35% of gross domestic product in the third quarter, the most since 1989, according to… the Federal Reserve. Meanwhile, larger companies are only investing to the tune of 9.15% of GDP -- well below levels that prevailed in the previous two expansions, and even earlier in this expansion.”

December 4 – Bloomberg (Rachel Evans, Sabrina Willmer, Nick Baker, and Brandon Kochkodin): “Imagine a world in which two asset managers call the shots, in which their wealth exceeds current U.S. GDP and where almost every hedge fund, government and retiree is a customer. It’s closer than you think. BlackRock Inc. and Vanguard Group — already the world’s largest money managers — are less than a decade from managing a total of $20 trillion, according to Bloomberg News calculations. Amassing that sum will likely upend the asset management industry, intensify their ownership of the largest U.S. companies and test the twin pillars of market efficiency and corporate governance. None other than Vanguard founder Jack Bogle, widely regarded as the father of the index fund, is raising the prospect that too much money is in too few hands, with BlackRock, Vanguard and State Street Corp. together owning significant stakes in the biggest U.S. companies.”

December 5 – Wall Street Journal (Dana Mattioli, Anna Wilde Mathews and Nathan Becker): “Aetna Inc. Chief Executive Mark T. Bertolini is set to pocket roughly half a billion dollars when he leaves his company if it successfully merges with CVS Health Corp. If the $69 billion deal between the pharmacy chain and health insurer goes through, Mr. Bertolini stands to reap a generous exit payment and benefit from a sizable increase in the value of the stock and rights he owns… His combined payout is expected to be about $500 million… Most of Mr. Bertolini’s projected payout is tied to stock or rights he already held that jump in value with the deal. At the agreed-upon $207-a-share deal price, more than $230 million is expected to come from already-vested stock-appreciation rights Mr. Bertolini holds for Aetna shares.”

Central Banker Watch:

December 4 – Nikkei Asian Review (Tatsuya Goto): “The Bank of Japan is slowing the supply of money, arousing speculation that it is paving the way for a trimming of its ultra-easy monetary policy. The supply of funds to the market in November showed an increase of 51.7 trillion yen ($458bn), effectively the smallest annual pace of growth since the BOJ introduced easing of ‘a different dimension’ in April 2013. The central bank is steadily shifting the focus of its easing policy to controlling interest rates, away from ‘quantitative’ measures, as prices have doggedly refused to rise.”

Global Bubble Watch:

December 6 – Financial Times (Joe Rennison): “The difference between short-dated and longer-dated US Treasury yields has narrowed at its fastest pace since 2008, as investors anticipate a quicker rate of policy tightening from the Federal Reserve next year. The difference between two- and 10-year yields has fallen 33 bps to just 52 bps over the past 30 days, while the difference between five- and 30-year yields has fallen 34 bps, surpassing declines prompted by the European sovereign debt crisis in 2011 and reaching a pace last seen during the financial crisis, according to analysts at Citi.”

December 5 – Financial Times (John Plender): “Ten years after the crisis, volatility and fear have disappeared from markets. A synchronous global expansion coupled with persistently loose monetary policy produced a Goldilocks era for asset prices, culminating in fantastic returns in 2017. Will it last for another year? The short answer is: we have reasons to be cautious. Several macro analysts have called this an environment of rational exuberance. Volatility and asset prices are justifiably low, they say, given healthy macroeconomic conditions. Instead, we believe markets may be in a period of irrational complacency. The signs are widespread. Yields on European junk bonds have fallen below US Treasuries. Emerging market countries with a history of default, such as Argentina, have issued 100-year bonds. Facebook, Amazon, Apple, Netflix and Snapchat together are worth more than the whole German Dax. Banks are again marketing CDOs. Cash-park assets including property, art, collectibles and cryptocurrencies are soaring in a parabolic fashion, like life rafts in a sea of central bank liquidity. Not only have asset prices soared, volatility is at rock bottom too: the S&P 500 index just experienced the lowest amount of swings in the last 50 years.”

December 3 – Bloomberg (Mariko Ishikawa and Annie Lee): “It’s been a borrower’s market for a long time, in Asian syndicated loans as in the rest of the dollar universe. But Asia-Pacific lenders are facing increasing funding pressures, and a handful are aiming to pass those costs along -- in another sign that the beginning of the end of ultra-easy money may be coming. Half of the 50 banks in a Bloomberg News survey have experienced an increase in funding cost of as much as 20 bps over the past few months.”

December 7 – Reuters (Jemima Kelly and Gertrude Chavez-Dreyfuss): “Bitcoin rocketed to a lifetime high just shy of $16,000 (11,922.50 pounds) on Thursday after climbing some 60% in just over a week, intensifying the debate about whether the cryptocurrency is in a bubble about to burst. The largest U.S. cryptocurrency exchange struggled to keep up with record traffic as the price surged, with an upcoming launch of the first bitcoin futures contract further fuelling investor interest. Proponents say bitcoin is a good medium of exchange and a way to store value, much like a precious metal.”

December 5 – Bloomberg (Natasha Doff): “The chief investment officer of State Street Global Advisors is sounding the alarm bell on short volatility trades. The billions of dollars backing bets that volatility in the stock market will keep sinking lower is ‘storing up trouble’ for the future, according to Richard Lacaille, CIO of the $2.4 trillion asset manager. Investors will scramble to cover their short positions in the event of a rapid reversal, he said. Even as the CBOE Volatility Index has plunged to its lowest level on record this year, investors have continued to pile money into exchange-traded products that short the gauge.”

December 3 – Financial Times (Ben McLannahan): “Big Wall Street banks have begun to rebuild their trading arsenals under the lighter-touch regime of Donald Trump, who has promised to rip up Obama-era rules designed to rein in risk-taking. The likes of Goldman Sachs and Morgan Stanley spent the years since the crisis winnowing their inventories of stocks and bonds held for trading, as new constraints on capital, and new rules such as the Volcker ban on proprietary trades, bit hard. But over the past nine months the trading arsenals of the big six banks have grown by more than $170bn, bringing the total to $1.71tn, the highest level since the end of 2012…”

Fixed Income Bubble Watch:

December 7 – Bloomberg (Carolina Wilson and Dani Burger): “Investors in exchange-traded funds are done with corporate bonds. At least that’s what you see in the recent flow numbers. Almost $1.4 billion has fled three popular debt ETFs over the past two days… Among them is the largest ETF tracking high-yield bonds, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which recorded outflows of $715 million, the most since a three-week selloff over a month ago. But that fund isn’t alone. The iShares investment grade corporate bond ETF known as LQD saw $424 million of outflows over those two days. And the iShares 1-3 Year Credit Bond Fund, ticker CSJ, saw its largest pullback since June 2014…”

December 5 – Financial Times (Eric Platt): “Nothing helps illustrate the hunt for yield by investors than the re-emergence of an esoteric financial instrument popular in the run-up to the financial crisis. The return of so-called pay-in-kind toggle notes, known as Piks, have caught the attention of investors after the second-largest deal in the US since the financial crisis was wrapped up last month. The $1.3bn offering from MultiPlan, a healthcare technology company, was all the more surprising given the relative absence of toggle notes this year. Such securities allow companies to make interest payments with either cash or more debt, a scenario that duly registered during 2008 when many companies fell into stress and ‘toggled’ interest payments from cash to extra debt. But in the current climate of meagre fixed-rate yields and low risk premiums, Pik toggles have proven an alluring option as they pay a yield nearly twice as much as the average junk bond…”

December 4 – Financial Times (John Plender): “With Donald Trump set to sign off on the Republican tax package by Christmas, it seems almost certain that the president will be definitively putting an end to the 36-year bull market in US government bonds. With hindsight, we can identify the inflection point as July 5 last year when 10-year Treasuries closed at a rock-bottom yield of 1.37%. The economist Paul Schmelzing, in a paper for the Bank of England that charts the risk-free rate back to the 13th century, points out that this is without historical precedent.”

December 6 – Bloomberg (Chris Anstey and Narae Kim): “The great credit party that’s taken yield premiums in major markets down around lowest in a decade is probably months away from an end, as central banks normalize monetary policy and the economic outlook softens, Societe Generale SA predicts. ‘We expect next year to be a transition year, when the ultra-low yield environment finally starts to lose its grip,’ Societe Generale credit strategists Juan Esteban Valencia and Guy Stear wrote… ‘The U.S. and the eurozone are heading for an economic slowdown in 2019, and given the rising levels of corporate leverage, this should have an impact on credit.’”

December 3 – Financial Times (Kate Allen): “A $1tn wave of fixed-income debt is set to mature in Europe, the Middle East and Africa in the coming year, posing a significant challenge for investors searching for returns… The debt was raised by investment-grade companies, sovereigns and financial institutions in the aftermath of the financial crisis, when bond yields were much higher than they are now. More than half of the redemptions will be bonds issued by financial institutions, according to… MUFG, with nearly a third coming from corporate issuers and the remainder from sovereigns and related entities.”

Brexit Watch:

December 8 – Financial Times (Alex Barker and Jim Brundsden): “Britain has reached a historic deal on its EU exit terms, enshrining special rights for 4m citizens and paying €40bn to €60bn in a hard-fought Brexit divorce settlement that clears the way for trade talks next year. Theresa May, the UK prime minister, and Jean-Claude Juncker, the European Commission president, met in Brussels early on Friday to sign off a 15-page ‘progress report’ that will allow EU negotiators to recommend opening a second phase of talks on post-Brexit relations.”

December 5 – Reuters (Guy Faulconbridge and Kate Holton): “Hours after a Brexit deal collapsed, British Prime Minister Theresa May came under pressure on Tuesday from opposition parties and even some allies to soften the EU divorce by keeping Britain in the single market and customs union after Brexit. May’s ministers said they were confident they would soon secure an exit deal, though opponents scolded the prime minister for a chaotic day in Brussels which saw a choreographed attempt to showcase the progress of Brexit talks collapse at the last minute.”

Japan Watch:

December 4 – Financial Times (Leo Lewis): “The first time the Bank of Japan governor, Haruhiko Kuroda, dropped the phrase ‘reversal rate’ into a speech in mid-November in Zurich, currency traders blinked but took it in their stride. The term — referring to a level of interest rates so low it stops stimulating the economy because banks become unprofitable and stop lending — was new to many, left the BoJ’s intentions heavily open to interpretation… But when the governor used the same words again two weeks later — this time in the Japanese parliament — it no longer felt quite so safe to dismiss the idea that Mr Kuroda was signalling something…”

December 7 – Reuters (Leika Kihara and Stanley White): “Japan’s central bank governor said… changes in the economy and financial system could trigger a hike in the bank’s yield targets, a key monetary policy lever, offering the strongest signal to date it may edge away from crisis-mode stimulus. Haruhiko Kuroda also said the Bank of Japan was ‘very mindful’ of the health of regional banks hurt by its ultra-loose monetary policy, in his first such acknowledgment that the measures of recent years could jeopardize financial stability. While it was too early to discuss specifics of an exit, he said the BOJ’s future communication would focus on how to remove quantitative easing without disrupting financial markets.”

December 8 – Bloomberg (Yoshiaki Nohara): “Japan’s economy expanded a faster-than-expected 2.5% in the third quarter, as a nearly year-long recovery in exports helped fuel business investment. The Japanese economy has grown for seven straight quarters, which now registers as its longest expansion since the mid-1990s…”

Emerging Market Watch:

December 3 – Reuters (Tuvan Gumrukcu): “Turkish President Tayyip Erdogan said… businessmen who attempted to move assets abroad were ‘traitors’, and called on his cabinet to block any such moves. ‘I am seeing signals, news that some businessmen are trying to move their assets abroad, and I call on firstly my cabinet from here to never allow this exit for any of them because these people are traitors,’ Erdogan said.”

Geopolitics Watch:

December 6 – Reuters (Soyoung Kim and Heekyong Yang): “Two U.S. B-1B heavy bombers joined large-scale combat drills over South Korea on Thursday amid warnings from North Korea that the exercises and U.S. threats have made the outbreak of war ‘an established fact.’ The annual U.S.-South Korean ‘Vigilant Ace’ exercises feature 230 aircraft, including some of the most advanced U.S. stealth warplanes, and come a week after North Korea tested its most powerful intercontinental ballistic missile (ICBM) to date… North Korea’s foreign ministry blamed the drills and ‘confrontational warmongering’ by U.S. officials for making war inevitable. ‘The remaining question now is: when will the war break out?... We do not wish for a war but shall not hide from it.’”

December 6 – CNBC (Sam Meredith): “A senior U.S. official has cast doubt over whether U.S. athletes will able to compete at the 2018 Winter Olympics in South Korea amid heightened tensions with the North. U.S. Ambassador to the United Nations, Nikki Haley, said the prospect of U.S. athletes participating in February was an ‘open question.’”