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.’”

Thursday, December 7, 2017

Thursday Afternoon Links

[Reuters] Wall Street higher as technology stocks gain ground

[Bloomberg] U.S. Household Wealth Hit Record $96.9 Trillion Last Quarter

[BusinessWeek] The GOP Must Crack These Four Tax Bill Disagreements

[Bloomberg] U.S. Consumer Borrowing Increases by Most in Nearly a Year

[Bloomberg] U.S. Small Firms' Investment Hits Highest Since 1989

[Bloomberg] ETF Investors Are Ditching Corporate Credit for Treasury Bonds

[Reuters] Bitcoin flirts with $16,000, alarm bells ring louder

[FT] Self-driving finance could turn into a runaway train

Thursday's News Links

[Bloomberg] U.S. Stocks Snap Losing Streak as Crude Rebounds: Markets Wrap

[Bloomberg] Commodities Crumble Again as China Alarm Bells Sink Metals

[CNBC] Bitcoin tops $15,000, surging more than $3,000 in less than 36 hours

[Bloomberg] Trump’s Middle-Class Tax Pledges Go Unfulfilled in Senate Bill

[Reuters] BOJ chief signals chance of rate hikes, warns of risks of easing

[Bloomberg] The Great Credit Party Is Almost Over, Societe Generale Says

[Bloomberg] Warning Signs Keep Sprouting Up Over HNA's Mounting Debt Costs

[CNBC] China's financial system has three important 'tensions,' the IMF says

[Bloomberg] In China's Strange Bull Market, Most Stocks Are Retreating

[Bloomberg] China's Banks Need More Capital After Credit Boom, IMF Says

[Bloomberg] Goldman, BlackRock, and Blackstone: Will They Still Rule Wall Street in 10 Years?

[Reuters] North Korea says U.S. threats make war unavoidable on Korean peninsula: KCNA

[CNBC] US ambassador casts doubt on whether American athletes will attend Winter Olympics

[WSJ] Family Businesses Worry the Tax Overhaul Will Hurt Them

Wednesday, December 6, 2017

Wednesday Evening Links

[Bloomberg] Asian Stocks Poised to Stem Losses; Dollar Gains: Markets Wrap

[CNBC] Trump: Government shutdown 'could happen' Saturday

[Reuters] S&P says U.S. fiscal loosening could spell ratings action

[Bloomberg] Bond Traders Home In on Inflation Mystery as the Key to Winning 2018

[Reuters] Bitcoin zooms above $13,000 to record high on relentless demand

[NYT] China Says It’s Open for Business. Foreign Firms Find It’s Not That Simple.

[WSJ] Wall Street Tells Frackers to Stop Counting Barrels, Start Making Profits

[WSJ] Socialism, Capitalism Seen in New Light by Younger Americans

[FT] Just how much money did the ECB lose on its Steinhoff investment?

Wednesday's News Links

[Bloomberg] U.S. Stocks Avoid Worst of Selloff as Bonds Climb: Markets Wrap

[Reuters] House tax positions begin to emerge ahead of talks with Senate

[CNBC] Here's what the Senate's tax bill means for your wallet

[Bloomberg] This Little-Known Tax Proposal Takes Aim at Your Trading Account

[Bloomberg] Wall Street Has No Idea What's Going to Happen to Credit Markets in 2018

[Bloomberg] The 2018 Outlook for Major Central Banks

[Bloomberg] Da Vinci and 702 Rate Cuts Make BofA Bearish on Markets in 2018

[Bloomberg] Copper Is Flashing Red as Stockpiles and Spreads Point Bearish

[CNBC] Chinese private fund assets hit a staggering $1.63 trillion

[Reuters] B-1B bomber joins U.S.-South Korea drills as tensions escalate

[WSJ] California Republicans Push to Preserve Income-Tax Deduction

[FT] US yield curve flattens at fastest pace since financial crisis

[FT] End of an era for irrational complacency in markets

[FT] Hunt for yield spurs return of esoteric crisis-era debt instrument

Tuesday, December 5, 2017

Tuesday Evening Links

[Bloomberg] U.S. Stocks Drop as Dollar Climbs With Treasuries: Markets Wrap

[CNBC] House GOP leaders slam a last-minute business tax addition to the Senate tax bill

[Reuters] British PM May faces pressure to soften Brexit divorce after EU exit deal crumbles

[CNBC] Stock market ETFs are attracting a record-setting level of investor cash

[Bloomberg] It Looks Like Another Rough Year for the Dollar in 2018

[WSJ] Aetna’s Outgoing CEO Set to Reap About $500 Million if CVS Deal Closes

Tuesday's News Links

[Bloomberg] U.S. Tech Shares Rebound as Metals Fall With Pound: Markets Wrap

[Bloomberg] U.S. Trade Deficit Is Widest Since January

[Bloomberg] Growth in U.S. Service Industries Cools From a 12-Year High

[Bloomberg] State Street Says Short-Volatility Trades Are Storing Up Trouble

[Bloomberg] Senate Bill ‘Bombshell’ Could Raise Taxes on Tech

[BusinessWeek] China’s Infrastructure Binge Is Set for a Major Slowdown

[Bloomberg] Anglo-Saxon Capitalism Gets the Blame for Financial Crises

[CNBC] Stock market's crazy Monday could be a warning

[Bloomberg] Bitcoin is a 'dangerous speculative bubble,' Yale expert says

[Bloomberg] HNA's Units Are on a Borrowing Spree, Swallowing High Rates

[CNBC] North Korea's nuclear ambitions at 'dangerous point,' and could threaten China's market rally, Stephen Roach warns

[FT] The Trump bear market for bonds is fast arriving

[WSJ] Companies Push to Repeal AMT After Senate’s Last-Minute Move to Keep It Alive

Sunday, December 3, 2017

Monday's News Links

[Bloomberg] Tech Slides as Tax Plan Buoys Dow, S&P 500, Dollar: Markets Wrap

[Politico] Congress faces frantic week with possible shutdown, taxes, Russia

[Bloomberg] Congress Talks Tax Deal as Trump Signals Corporate Rate Retreat

[Bloomberg] What We Know About Corporate Winners and Losers in U.S. Tax Bill

[Reuters] Fed rate hike expected next week, three hikes expected in 2018: Reuters poll

[Reuters] Hidden peril awaits China's banks as property binge fuels mortgage fraud frenzy

[NikkeiAR] BOJ's trim of bond purchases hints at 'stealth tapering'

[Bloomberg] Citi Stays Bullish on Commodities While Warning of Risk in China

[Bloomberg] BlackRock and Vanguard Are Less Than a Decade Away From Managing $20 Trillion

[WSJ] Tax Overhaul Marked by Blinding Speed

[WSJ] Why Central Banks Continue to Put Asset Prices Out of Whack

[WSJ] Passage of Senate Tax Bill Puts R&D Tax Credit in Doubt

[FT] Debt redemption wave of $1tn looms in 2018

Sunday Evening Links

[Reuters] Dollar, stock futures gain on U.S. tax cut progress

[Bloomberg] Asian Banks See Funding Costs Rise, Making for Challenging 2018

[CNBC] Tax reform could hit certain states harder than others

[Reuters] South Korea, U.S. kick off largest air exercise amid North Korean warnings

[WSJ] Overseas Investors (Finally) Join the U.S. Stock-Market Party

Sunday's News Links

[Reuters] Greece, lenders reach deal on reforms under bailout review

[Reuters] Turkey's Erdogan says businessmen moving assets abroad are 'traitors'

[FT] Big six US banks add $170bn to trading firepower

Saturday, December 2, 2017

Saturday's News Links

[Bloomberg] Senate Passes Major Business, Individual Cuts: Tax Debate Update

[Bloomberg] The Biggest Sticking Points Between Senate and House Tax Bills

[Reuters] Fear of missing out keeps investors in stocks despite risks

[Reuters] China airs 'strong dissatisfaction' over U.S. statement to WTO: Xinhua

[WSJ] Senate Passes Sweeping Revision of U.S. Tax Code

[WSJ] Top Fed Official Sees No Need for Fiscal Stimulus at Time of Solid Growth

Weekly Commentary: China Initiating a Global Bear Market?

Chair Yellen is widely lauded for her accomplishments at the Federal Reserve. For the most part, her four-year term at the helm boils down to four (likely soon to be five) little rate hikes over 24 months. Most lavishing praise upon Janet Yellen believe she calibrated “tightenings” adeptly and successfully. Yet financial conditions have obviously remained much too loose for far too long. This predicament was conspicuous in the markets this week. A test of a North Korean ICBM that could reach the entire U.S. modestly pressured equities for about five minutes – then back to the races.

Bubble Dynamics are in full force. The Dow gained 674 points this week. The Banks were up 5.8%, the Broker/Dealers gained 4.5% and the Transports jumped 5.9%. The Semiconductors were hit 5.6%.  Bitcoin traded as high (US spot) as $11,434 and as low as $9,009 in wild Wednesday trading. Curiously, the VIX traded up 15% this week to 11.43.

It used to be that markets would fret the Fed falling “behind the curve,” fearing central bankers would be compelled to employ more aggressive tightening measures. Not these days. Any fear of central bank-imposed tightening is long gone. There is little fear of anything.

I recall writing similar comments back with the Bush tax cuts: “I’m as much for lower taxes as anyone. Yet I question the end results when tax cuts exacerbate late-stage Bubble excess.” And I seriously question the merits of aggressively slashing corporate tax rates when the federal government is $20 TN in debt. One of these days the bond market is going to wake up and impose some much need fiscal discipline. In a different era, the Treasury market would be forcing some realism upon Washington politicians (and central bankers).

Moreover, there’s a paramount issue that goes completely undiscussed.  It’s presumed that lower taxes will spur economic growth and resulting booming tax receipts – that tax cuts will prove largely self-financing. Yet this fanciful notion ignores a critically important unknown: What role will the financial markets play? As we saw in the last downturn, faltering Bubble markets weigh heavily on both economic growth and government finances. I would go so far as to suggest that never has our nation’s fiscal prospects been as dependent on ongoing equities, bond market and real estate inflation.

Nine years of extreme monetary and fiscal stimulus fueled quite a boom. Interest rates were pegged way too low for too long. The seemingly obvious risk now is that market yields surprise to the upside. Despite the boom and artificially suppressed debt service costs, the federal government has nonetheless posted ongoing large budget deficits. I never bought into the late-nineties notion that budget surpluses were sustainable – that our nation would soon pay down all its debt. It was all a seductive Bubble Illusion.

Today’s delusion is so much more spectacular. I’m all for efforts to revitalize the U.S. manufacturing and export sectors. But to continue to aggressively employ system-wide fiscal and monetary stimulus at this late cycle stage comes with great risk. I’m surprised the bond market remains so sanguine. There’s a (not low probability) scenario that has consumer and producer inflation surprising on the upside, interest rates and market yields surprising on the upside, the stock market buckling to the downside, and fiscal deficits exploding to the unmanageable. The Powel Fed would confront serious challenges (in contrast to the cakewalk enjoyed by Yellen).

November 27 – CNBC (Jeff Cox): “Concern over stock market values is growing at the Fed, with one official worrying that waiting too long to tighten policy could have more serious effects later. In an essay released Monday, Dallas Fed President Robert Kaplan warned about ‘excesses’ in the economy, pointing specifically to stocks and the government debt. The S&P 500 market cap is at 135% of GDP, the highest since 1999-2000, just as the dot-com bubble was about to pop, the central banker said. ‘I am aware that, as excesses build, we are more vulnerable to reversals which have the potential to cause a rapid tightening in financial conditions, which in turn, can lead to a slowing in economic activity,’ Kaplan wrote. ‘Measures of stock market volatility are historically low. We have now gone 12 months without a 3% correction in the U.S. market.,’ he added. ‘This is extraordinarily unusual.’”

November 29 – Reuters (Ann Saphir): “The Federal Reserve should keep raising interest rates over the next couple of years, including about four times between now and the end of 2018, San Francisco Federal Reserve President John Williams said… ‘From today, four rate hikes through the end of next year is still kind of my base view,’ Williams told reporters… Williams rotates into a voting spot on the Fed’s policysetting panel next year. ‘We need to get from here to roughly 2.5% fed funds rate over the next couple of years.’”

One regional Fed president addressing stock market excesses and another talking four additional rate hikes before the end of next year. Whether monitoring the securities markets or economic data, the case for actual interest rate normalization gets stronger by the week. It’s worth noting that October New Home Sales blew away estimates to reach a 10-year high. Housing inventory remains tight and builders are getting gear up. A stronger-than-expected November reading from the Conference Board pushed Consumer Confidence to a new 17-year high. Q3 GDP was revised up to 3.3% annualized. The manufacturing sector remains strong and auto sales resilient (above 17 million SAAR).

Ten-year Treasury yields traded as high as 2.43% Thursday afternoon. Five-year yields rose to 2.17% Thursday, the high going back to March 2011. Longer Treasury yields have for the most part ignored the almost 50 bps rise in two-year yields over the past several months. It was interesting to watch 10-year Treasury yields sink a quick 10 bps Friday morning on reports of Michael Flynn’s plea agreement (and the Dow’s immediate 380 point decline). While stocks have grown content to disregard risk, Treasury bonds seem to embrace the Bubble Thesis - and trade as if trouble is right around the corner.

And speaking of trouble… U.S. markets fixated on tax cuts have been all too happy to ignore developments in China. Officials are taking an increasingly aggressive posture in reining in lending. In particular, Beijing is targeting the enormous “wealth-management product” complex and the booming Internet lending industry. Liquidity has tightened, especially within the corporate bond market (“Worst China Bond Rout Since 2013”). Are Chinese officials finally getting serious about their Credit Bubble? (See "China Watch" below)

The Shanghai Composite was down another 1.1% this week, with a 3.9% drop since the highs on November 14. China’s CSI index lost 2.6% this week. Chinese growth and tech stocks have been under notable pressure for two weeks. Yet equities weakness was not limited to China. South Korean stocks fell 2.7% this week, and India’s equities lost 2.5%. Both Brazilian and Russian equities were hit for 2.6%. The emerging markets, in general, notably underperformed this week. European equities were also under pressure again. Could it be that Credit tightening in China is initiating a global bear market, only Bubbling U.S. equities haven’t figured it out yet?

November 24 – Reuters (Gaurav S Dogra): “For years China’s top officials have touted their ambitious policy priority to wean the world’s second-largest economy off high levels of debt, but there is not much to show for it. On the contrary, a Reuters analysis shows the debt pile at Chinese firms has been climbing in that time, with levels at the end of September growing at the fastest pace in four years. The build-up has continued even as policymakers roll out a series of measures to end the explosive growth of debt, including persuading state firms and local governments to prune borrowing and tighter rules and monitoring of banks’ short-term borrowing… Reuters analysis of 2,146 China listed firms showed their total debt at the end of September jumped 23% from a year ago, the highest pace of growth since 2013. The analysis covered three-fifths of the country’s listed firms…”

For the Week:

The S&P500 rose 1.5% (up 18.0% y-t-d), and the Dow jumped 2.9% (up 22.6%). The Utilities gained 0.9% (up 15.4%). The Banks surged 5.8% (up 14.0%), and the Broker/Dealers jumped 4.5% (up 26.5%). The Transports surged 5.9% (up 12.6%). The S&P 400 Midcaps advanced 1.9% (up 14.1%), and the small cap Russell 2000 gained 1.2% (up 13.3%). The Nasdaq100 declined 1.1% (up 30.3%). The Semiconductors sank 6.2% (up 38.9%). The Biotechs added 0.9% (up 38.4%). With bullion down $8, the HUI gold index fell 1.2% (up 1.9%).

Three-month Treasury bill rates ended the week at 124 bps. Two-year government yields increased three bps to 1.77% (up 58bps y-t-d). Five-year T-note yields gained five bps to 2.11% (up 19bps). Ten-year Treasury yields rose two bps to 2.36% (down 8bps). Long bond yields were unchanged at 2.76% (down 30bps).

Greek 10-year yields rose seven bps to 5.37% (down 165bps y-t-d). Ten-year Portuguese yields declined six bps to 1.88% (down 186bps). Italian 10-year yields dropped 10 bps to 1.72% (down 10bps). Spain's 10-year yields fell seven bps to 1.42% (up 4bps). German bund yields were down six bps to 0.31% (up 10bps). French yields dropped nine bps to 0.61% (down 7bps). The French to German 10-year bond spread narrowed three to 30 bps. U.K. 10-year gilt yields dipped two bps to 1.23% (down 2bps). U.K.'s FTSE equities dropped 1.5% (up 2.2%).

Japan's Nikkei 225 equities index gained 1.5% (up 19.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.035% (down 1bp). France's CAC40 fell 1.4% (up 9.3%). The German DAX equities index dropped 1.5% (up 12.0%). Spain's IBEX 35 equities index added 0.3% (up 7.8%). Italy's FTSE MIB index fell 1.4% (up 14.9%). EM markets were mostly lower. Brazil's Bovespa index sank 2.6% (up 20.0%), and Mexico's Bolsa fell 1.4% (up 3.6%). India’s Sensex equities index dropped 2.5% (up 23.3%). China’s Shanghai Exchange lost 1.1% (up 6.9%). Turkey's Borsa Istanbul National 100 index declined 1.1% (up 33.8%). Russia's MICEX equities index sank 2.6% (down 5.7%).

Junk bond mutual funds saw inflows of $310 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped two bps to 3.90% (down 18bps y-o-y). Fifteen-year rates fell two bps to 3.30% (down 4bps). Five-year hybrid ARM rates jumped 10 bps to 3.32% (up 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.13% (up 4bps).

Federal Reserve Credit last week declined $4.1bn to $4.406 TN. Over the past year, Fed Credit fell $5.0bn. Fed Credit inflated $1.587 TN, or 56%, over the past 264 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $15.0bn last week to $3.387 TN. "Custody holdings" were up $261bn y-o-y, or 8.3%.

M2 (narrow) "money" supply slipped $3.9bn last week to $13.774 TN. "Narrow money" expanded $595bn, or 4.5%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits rose $15.2bn, while Savings Deposits dropped $19.6bn. Small Time Deposits were little changed. Retail Money Funds dipped $1.8bn.

Total money market fund assets jumped $38.1bn to $2.799 TN. Money Funds rose $80bn y-o-y, or 2.9%.

Total Commercial Paper rose $14.2bn to $1.043 TN. CP gained $119bn y-o-y, or 12.9%.

Currency Watch:

The U.S. dollar index was little changed at 92.885 (down 9.3% y-t-d). For the week on the upside, the South African rand increased 3.1%, the British pound 1.1%, the Swiss franc 0.3%, the New Zealand dollar 0.2% and the Canadian dollar 0.2%. For the week on the downside, the Norwegian krone declined 1.9%, the Swedish krona 0.8%, the Brazilian real 0.8%, the Japanese yen 0.6%, the Mexican peso 0.4%, the euro 0.3%, and the South Korean won 0.1%. The Chinese renminbi declined 0.22% versus the dollar this week (up 5.0% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.4% (up 7.8% y-t-d). Spot Gold declined 0.6% to $1,281 (up 11.1%). Silver sank 4.1% to $16.388 (up 2.6%). Crude declined 59 cents to $58.36 (up 8.4%). Gasoline dropped 2.6% (up 4%), while Natural Gas surged 8.8% (down 18%). Copper dropped 3.1% (up 23%). Wheat rallied 0.9% (up 8%). Corn gained 1.1% (up 2%).

Trump Administration Watch:

November 28 – Reuters (Josh Smith): “North Korea said on Wednesday it had successfully tested a new type of intercontinental ballistic missile (ICBM), called Hwasong-15, that could reach all of the U.S. mainland… “If (today‘s) numbers are correct, then if flown on a standard trajectory rather than this lofted trajectory, this missile would have a range of more than 13,000 km (8,100 miles),” the U.S.-based Union of Concerned Scientists said… That would suggest that all of the continental United States including Washington D.C. and New York could be theoretically within range of a North Korean missile.”

December 1 – Wall Street Journal (Richard Rubin, Siobhan Hughes and Kristina Peterson): “The Senate was poised to pass sweeping revisions to the U.S. tax code early 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 tax rate from 35% to 20%, reshape international business tax rules and temporarily lower individual rates. 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, punching a sizable hole in the 2010 Affordable Care Act.”

December 1 – New York Times (Michael D. Shear and Adam Goldman): “President Trump’s former national security adviser, Michael T. Flynn, pleaded guilty on Friday to lying to the F.B.I. about conversations with the Russian ambassador last December, becoming the first senior White House official to cut a cooperation deal in the special counsel’s wide-ranging inquiry into election interference.”

November 28 – Financial Times (Shawn Donnan): “The Trump administration launched a fresh trade attack against China on Tuesday, with Washington initiating an anti-dumping investigation against a major trading partner for the first time in more than a quarter century. The move to ‘self-initiate’ an anti-dumping investigation into imports of aluminium sheeting from China marks the first time since 1985 that the US Commerce Department has launched its own investigation without a formal request from industry. The last case was brought by the Reagan administration against Japanese semiconductor imports… A parallel investigation launched on Tuesday into illegal subsidies given to the Chinese sheet industry marks the first time since a 1991 Canadian lumber case that the Commerce Department has self-initiated a probe into subsidies. ‘President [Donald] Trump made it clear from day one that unfair trade practices will not be tolerated under this administration,’ said Wilbur Ross, the US Secretary of Commerce. ‘Today’s action shows that we intend to make good on that promise to the American people.’”

November 29 – Reuters: “Opposition has grown among Americans to a Republican tax plan before the U.S. Congress, with 49% of people who were aware of the measure saying they opposed it, up from 41% in October, according to a Reuters/Ipsos poll…”

China Watch:

November 27 – Wall Street Journal (Anjani Trivedi): “Beijing is coming to grips with its Wild West-like financial system—not a moment too soon, many would argue. The jittery market reaction shows just how delicate that operation is going to be. The timing isn’t coincidental. Xi Jinping has solidified his hold on the Chinese government following the recent party congress, giving him leeway to tackle the country’s deep-seated economic problems. Its most serious effort yet to tame the financial system’s risks are the result. The focus of the recent rule changes is China’s 60 trillion yuan (around $9 trillion) asset-management industry. Regulators have homed in on China’s vast sea of so-called wealth- and asset-management products, the highly leveraged products that banks have sold to their customers in recent years, which in turn have fueled frothy domestic bond, stock and commodity markets.”

November 26 – Bloomberg: “It’s been the worst month for China’s local corporate notes in two years. And it might just be the start, as the nation’s top bond fund manager says yield premiums could rise further in 2018. President Xi Jinping is stepping up efforts to trim the world’s largest corporate debt burden, after emerging even more powerful from the Communist Party’s twice-a-decade congress in October. Financial institutions are hoarding cash amid expectations the government will announce more measures to curb leverage, and that is pushing up borrowing costs in the money market.”

November 30 – Wall Street Journal (Shen Hong): “A widening gap between official and market interest rates in China is making it harder for Beijing to use a key policy tool to manage the world’s second-largest economy. Short-term interest rates in China’s money market have persistently been above those set by the central bank in the past year, as investors and banks spooked by the government’s crackdown on the country’s high levels of leverage have charged more to lend both to each other and external borrowers… The interest rate the People’s Bank of China sets on its benchmark seven-day repurchase agreements, its de facto policy rate, has stayed unchanged at 2.45% since March. Meanwhile the corresponding repurchase agreements, or repo, rate that banks charge each other for their own seven-day loans, has risen to 2.93%...”

November 24 – Reuters (Shu Zhang and Josephine Mason): “The National Internet Finance Association of China issued a risk warning letter late on Friday telling ‘unqualified institutions’ to immediately stop offering loans as Beijing steps up a crackdown on the micro-loan sector to fend off financial risks. The 1 trillion yuan ($151.5bn) short-term, unsecured lending sector, known as ‘cash loan’ in China, has been accused of charging exorbitant interest rates and violent debt collection practices.”

Federal Reserve Watch:

November 29 – Bloomberg (Christopher Condon): “The U.S. economy grew at a modest to moderate pace through mid-November as price pressures strengthened and the labor market tightened… The central bank’s Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks through Nov. 17, said business contacts also reported a brightening view as they look ahead. The findings could help bolster the case for an interest-rate increase when policy makers next meet in two weeks.”

November 29 – CNBC (Jeff Cox): “Federal Reserve Chair Janet Yellen said the central bank is concerned with growth getting out of hand and thus is committed to continuing to raise rates in a gradual manner. ‘We don't want to cause a boom-bust condition in the economy,’ Yellen told Congress in her semiannual testimony Wednesday.”

U.S. Bubble Watch:

November 27 – Bloomberg (Sho Chandra): “U.S. purchases of new homes unexpectedly advanced in broad fashion last month, reaching the strongest pace in a decade and offering an encouraging signal for residential construction… Single-family home sales rose 6.2% m/m to 685k annualized pace (est. 627k), the highest since Oct. 2007. Supply of homes at current sales rate fell to 4.9 months, the smallest since July 2016.”

November 28 – Bloomberg (Patrick Clark): “U.S. consumer confidence unexpectedly improved in November to a fresh 17-year high, a sign Americans are growing more confident about the economy and labor market… Confidence index rose to 129.5 (est. 124), the best since November 2000, from a revised 126.2 in October… Consumer expectations gauge advanced to 113.3, the strongest reading since September 2000, from 109.”

November 27 – Reuters (Richa Naidu): “Black Friday and Thanksgiving online sales in the United States surged to record highs as shoppers bagged deep discounts and bought more on their mobile devices, heralding a promising start to the key holiday season… U.S. retailers raked in a record $7.9 billion in online sales on Black Friday and Thanksgiving, up 17.9% from a year ago, according to Adobe Analytics…”

November 29 – Bloomberg (Sho Chandra): “The U.S. economy’s growth rate last quarter was revised upward to the fastest in three years on stronger investment from businesses and government agencies than previously estimated… Gross domestic product grew at a 3.3% annualized rate (est. 3.2%), revised from 3%; fastest since 3Q 2014… Business-equipment spending rose at a 10.4% pace, a three-year high, revised from 8.6%; reflects transportation gear.”

November 29 – Bloomberg (Camila Russo, Olga Kharif, and Lily Katz): “Bitcoin plunged as much as 20% hours after a rally past $11,000 generated a surge in traffic at online exchanges that led to intermittent outages. The plunge capped a wild day for the largest cryptocurrency that included a breakneck advance to a high of $11,434 before the reversal took it as low as $9,009.”

November 24 – Bloomberg (Lu Wang): “As Wall Street equity forecasters discharge their annual duty of predicting another up year for the S&P 500 Index, it’s worth taking a moment to notice what would be accomplished should that projection come true. At 2,800, the average estimate of nine strategists tracked by Bloomberg points not only to another year of all-time highs, but also an extension of a bull market that would make it the longest ever recorded. Born in the depths of the financial crisis, the advance that started in March 2009 is nine months away from surpassing the 1990-2000 run from the dot-com era.”

November 29 – Bloomberg (Patrick Clark): “The shortage of listings that has defined the U.S. home sales market in recent years will begin to ease in the second half of 2018, according to a new report, but not before setting a record for consecutive months of decline. Increased inventory will help slow price appreciation, especially at higher price points, according to… That will come as welcome news after the S&P CoreLogic Case-Shiller 20-city index this week showed that prices rose 6.2% in September from a year earlier, the largest increase in more than three years. Inventory has decreased on a year-over-year basis in each of the past 29 months… The longest streak on record is 30 months.”

November 27 – Bloomberg (Joanna Ossinger): “New York City could lose some of its highest-income residents if the tax bill making its way through the U.S. Congress becomes law, according to estimates from Goldman Sachs… Initial analysis suggests that the legislation ‘could eventually lower the number of top-income earners in New York City’ by 2% to 4%, Goldman economists led by Jan Hatzius wrote… The trigger would be a provision that restricts the ability of taxpayers to deduct the levies they pay to state and local authorities, which would disproportionately hit locations with relatively high rates. Home prices across the U.S. might also decline by 1% to 3%.”

November 27 – Bloomberg (Brian K Sullivan): “This year’s U.S. Atlantic hurricane season is officially the most expensive ever, racking up $202.6 billion in damages since the formal start on June 1. The costs tallied by disaster modelers Chuck Watson and Mark Johnson surpass anything they’ve seen in previous years. That shouldn’t come as a complete surprise: In late August, Hurricane Harvey slammed into the Gulf Coast, wreaking havoc upon the heart of America’s energy sector. Then Irma struck Florida, devastating the Caribbean islands on the way. Hurricane Maria followed shortly after, wiping out power to all of Puerto Rico.”

Central Banker Watch:

November 30 – Bloomberg (Alessandro Speciale and Catherine Bosley): “Central banks concerned about the effects of raising rates too fast shouldn’t underestimate the risks of delaying action, the general manager of the Bank for International Settlements said. ‘Postponing normalization too much also has risks,’ [said] Jaime Caruana… ‘Why? Because there is more risk-taking and it’s difficult to know where the risk-taking will go.’”

November 29 – Bloomberg (Jiyeun Lee and Hooyeon Kim): “The Bank of Korea raised its benchmark interest rate for the first time since 2011, marking a likely turning point for Asian central banks. The region faces rising pressure to increase borrowing costs after the Federal Reserve began tightening at the end of 2015 and today’s move in Seoul is the first hike of a benchmark rate by a major central bank in Asia since 2014. Governor Lee Ju-yeol said during a news conference that the decision to raise the seven-day repurchase rate to 1.5% was meant to prevent financial imbalances.”

Global Bubble Watch:

November 29 – Bloomberg (Sofia Horta E Costa): “A prolonged bull market across stocks, bonds and credit has left a measure of average valuation at the highest since 1900, a condition that at some point is going to translate into pain for investors, according to Goldman Sachs… ‘It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring ’20s and the Golden ’50s,’ Goldman Sachs International strategists including Christian Mueller-Glissman wrote… ‘All good things must come to an end’ and ‘there will be a bear market, eventually’ they said.”

November 29 – Bloomberg (Sofia Horta E Costa): “Investors may only have seven months left to savor a bull run that has added $27 trillion to global equity markets this year, say Credit Suisse Group AG strategists. While they predict economic growth and steady profits will help add another 6% to the MSCI All-Country World Index by mid-2018, stocks are unlikely to push any higher after that. Risks that could make the second half ‘more difficult’ include a flare-up in junk debt markets, China’s tightening policy and accelerating wages in the U.S, according to a Nov. 28 note.”

November 27 – Bloomberg (Kana Nishizawa, Lianting Tu, and Narae Kim): “The selloff in China’s debt market is a precursor for what global bond traders can expect as reflation gets underway, according to Sean Darby, chief global strategist of Jefferies Group LLC’s Hong Kong unit. While declines in Chinese debt have been exacerbated by a crackdown on shadow banking and attempts to curb corporate borrowing, Darby says global yields are set to follow suit as markets start to price in tighter monetary policy by central banks and as China exports inflation. China ‘was the first one really to reflate from 2016,’ Darby told Bloomberg… ‘Expansion of essentially quantitative easing by the People’s Bank of China is in one sense also being reversed as the yield starts to shift upwards.”

November 30 – Bloomberg (Brian Chappatta): “For all the hullabaloo around the flattening U.S. yield curve in November, the 10-year yield is still on track for its least turbulent month in almost four decades. The note’s yield, which serves as a benchmark for everything from U.S. mortgages to borrowing costs for municipalities, fell in November to as low as 2.3% and topped out at 2.41%. That’s the narrowest range since 1979. Even with volatility largely suppressed, the rate has swung about 32 bps on average every month over the past five years.”

November 28 – Bloomberg (Andrew Janes): “There’s ‘somewhat of a numbness’ to risk among investors right now that’s reminiscent of pre-crisis periods in the past, according to Olivier d’Assier, head of applied research for Asia Pacific at Axioma Inc. …d’Assier… points to the lack of reaction to the recent jump in the Chicago Board Options Exchange’s SPX Volatility Index. The gauge, known as the VIX index, surged from 10.18% at the end of October to as high as 14.51% on Nov. 15, a three-month intraday high. ‘A couple of years ago, when there was a 6, 9, 10% increase in the VIX Index, everybody panicked,’ he said. But ‘nobody cared, everybody jumped in’ when the measure shot up this month, d’Assier said.”

Fixed Income Bubble Watch:

November 27 – Financial Times (Joe Rennison and Robert Smith): “Investors are driving a revival of structured credit products that were a hallmark of the boom years before the financial crisis, as slumbering global bond yields spur a greater tolerance of risk in the search for returns. The sale of collateralised loan obligations — bonds that group together leveraged loans made to companies — has already past $100bn of new issuance for 2017, well ahead of the $60bn sold over the same period in 2016 and approaching the post-crisis record of $124bn set in 2014. Traders and analysts say foreign investors out of Asia and Europe, alongside domestic insurance companies, generally favour senior CLO tranches… Global pension funds and hedge funds are said to be driving demand for riskier tranches that promise a higher return than current fixed returns available from owning US high-yield bonds.”

Europe Watch:

November 28 – Financial Times (Shawn Donnan): “The ramifications of the European Central Bank’s massive bond purchases in recent years register acutely for insurance companies and pension funds alongside other traditional buyers of top tier debt. Over the past three years, the ECB’s bond purchases have sucked more than €2tn of debt out of Europe’s publicly traded markets, and an estimated €760bn, or nearly a third, of these bonds are triple A rated… Joe McConnell, a portfolio manager in the global liquidity group at JPMorgan Asset Management, argues that there has been no issue ‘getting fully invested’ but that returns have been clearly affected. ‘The main impact of QE has been driving yields lower,’ he said, adding that the yields on ‘pretty much everything’ in the money market universe are negative. Alongside a reduction in the outstanding universe of highly-rated assets, the sheer volume of purchases has placed huge downward pressure on bond yields. In turn, that leaves investors having to accept higher levels of credit and interest rate risk in order to generate reasonable returns.”

November 29 – Bloomberg (Alessandro Speciale): “German inflation accelerated more than anticipated in November, in a sign that robust growth in Europe’s largest economy may be translating into higher prices. Consumer prices rose an annual 1.8%... That’s faster than October’s 1.5% and beats the 1.7% median forecast…”

Japan Watch:

November 26 – Financial Times (Gavyn Davies): “The five year term of Bank of Japan Governor Kuroda will end in April 2018. As one of Prime Minister Abe’s key lieutenants, it had been widely assumed that he will be reappointed to a second term, and that his aggressive programme of monetary expansion will be maintained at least until inflation has over-shot the Bank’s 2% target. This had become one of the fixed points in consensus expectations for global asset prices in 2018. Last week, however, these strong assumptions came into question for the first time. The yen rose as investors paid attention to Governor Kuroda’s recent speech in Zurich, which specifically noted some of the risks associated with the policy commitment to fix the 10 year government bond yield at zero… This was followed by some hawkish press ‘guidance’, allegedly from within the central bank. Then, new BoJ Board member Hitoshi Suzuki followed the Governor with a much clearer signal that this so-called Yield Curve Control (YCC) could be watered down next year. If so, it would be the first sign of that the central bank may be contemplating the normalisation of interest rates, albeit with Japanese characteristics.”

November 27 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Bank of Japan Governor Haruhiko Kuroda said… that a ‘reversal rate,’ or the level where interest rate cuts by a central bank could hurt the economy, helps the BOJ understand the appropriate shape of the yield curve. ‘It’s a theory that helps us understand the appropriate shape of the yield curve,’ Kuroda told parliament… Kuroda referred to an academic study on the reversal rate in a speech earlier this month, adding to recent growing signals from the BOJ that it could edge away from crisis-mode stimulus earlier than expected.”

November 27 – Financial Times (Robin Harding): “Japanese companies are scouring the country for workers and offering more attractive permanent contracts as they struggle to overcome the worst labour shortages in 40 years. Companies across a range of sectors — from construction to aged care — have warned in recent days that a lack of staff is starting to hit their business. The hiring difficulties highlight Japan’s declining population and the strength of its economy after five years of economic stimulus… ‘Delays to construction projects are becoming chronic,’ said Motohiro Nagashima, president of Toli Corporation, one of Japan’s biggest makers of floor coverings.”

Emerging Market Watch:

November 29 – Financial Times (Kate Allen): “Emerging market countries, banks and companies are selling long-dated debt in record volumes as investors’ search for yield pushes them to expand their appetite for risk. With markets set to remain open for business for another couple of weeks before winding down to year-end, syndicated sales of paper with maturities of 10 years and more has hit a record high in emerging economies, topping $500bn for the first time according to… Dealogic… Around a third of the total finance raised came from sovereigns and related entities, while 37% came from EM corporates and a quarter from financial institutions… Ultra-low interest rates in developed economies have channelled a wave of money towards higher-yielding assets, pushing up prices in EMs.”

November 28 – Wall Street Journal (Patrick Clark): “The debt woes of one of India’s leading wireless carriers Reliance Communications Ltd. have deepened this week thanks to an unlikely new source of pressure—a leading state-owned Chinese bank. It emerged late Monday that China Development Bank, a policy bank which often helps fund Chinese companies’ investments overseas, had late last week filed a petition for Reliance… to be declared insolvent. The move is highly unusual. Only once before in recent times has a foreign lender requested an Indian company to be declared insolvent. However, China Development Bank is one of RCom’s biggest lenders, having invested some $2 billion in the company’s debt since 2010.”

Leveraged Speculation Watch:

November 30 – Financial Times (Robin Wigglesworth): “A divergence in performance among quantitative hedge funds has caught the eye of investors. In a year where many such funds that surf market trends have disappointed, some of their more daring cousins have clocked up juicy returns trading everything from electricity to cheese prices. Computer-powered trend-following hedge funds… have enjoyed robust inflows in recent years… But their performance has been mediocre recently, gaining about 2% on average this year, according to a Société Générale index. However, a batch of hedge funds that trade less liquid, more exotic markets have clocked up attractive double-digit returns. These vehicles eschew mainstream markets and attempt to ride trends in areas such as Brazilian and Czech interest rate derivatives, natural gas, uranium funds and even cheese and milk contracts.”