Saturday, October 21, 2017

Saturday's News Links

[Reuters] Trump expected to pressure China's Xi to rein in North Korea: officials

[Reuters] Spain will sack Catalan government, call regional election

[Bloomberg] Taylor Has Complex History to Overcome If Picked as Fed Chair

[Bloomberg] Yellen Defends Legacy Amid Uncertainty Over Fed Leadership

[Reuters] Turkish banks could face big U.S. fines over Iran: report

[WSJ] Trump Signals Yellen Still a Top Candidate for Fed Job After Meeting This Week

[FT] Yellen says Fed might turn to QE in another downturn

Weekly Commentary: Arms Race in Bubbles

The week left me with an uneasy feeling. There were a number of articles noting the 30-year anniversary of the 1987 stock market crash. I spent “Black Monday” staring at a Telerate monitor as a treasury analyst at Toyota’s US headquarters in Southern California. If I wasn’t completely in love with the markets and macro analysis by that morning, there was no doubt about it by bedtime. Enthralling.

As writers noted this week, there were post-’87 crash economic depression worries. In hindsight, those fears were misplaced. Excesses had not progressed over years to the point of causing deep financial and economic structural maladjustment. Looking back today, 1987 was much more the beginning of a secular financial boom rather than the end. The crash offered a signal – a warning that went unheeded. Disregarding warnings has been in a stable trend now for three decades.

Alan Greenspan’s assurances of ample liquidity – and the Fed and global central bankers’ crisis-prevention efforts for some time following the crash – ensured fledgling financial excesses bounced right back and various Bubbles hardly missed a beat. Importantly, financial innovation and speculation accelerated momentously. Wall Street had been emboldened – and would be repeatedly.

The crash also marked the genesis of government intervention in the markets that would evolve into the previously unimaginable: negative short-term rates, manipulated bond yields, central bank support throughout the securities markets, Trillions upon Trillions of central bank monetization and the perception of open-ended securities market liquidity backstops around the globe. Greenspan was the forefather of the powerful trifecta: Team Bernanke, Kuroda and Draghi. Ask the bond market back in 1987 to contemplate massive government deficit spending concurrent with near zero global sovereign yields – the response would have been “inconceivable.”

Articles this week posed the question, “Could an ’87 Crash Happen Again.” There should be no doubt – that is unless the nature of markets has been thoroughly transformed. Yes, there are now circuit breakers and other mechanisms meant to arrest panic selling. At the same time, there are so many more sources of potential self-reinforcing selling these days compared to portfolio insurance back in 1987. Today’s derivatives markets – where various strains of writing market insurance (“flood insurance during a drought”) have become a consistent and popular money maker – make 1987’s look itsy bitsy.

The record $3.15 TN hedge fund industry barely existed in 1987. The $4.1 TN ETF complex didn’t exist at all. To be sure, the amount of trend-following finance dominating present-day global markets is unprecedented. Moreover, the structure of contemporary finance has already (repeatedly) proven itself conducive to financial dislocation. Over the years – and especially post-2008 reflation – boom and bust dynamics have turned only more forceful. Central bank fixation on countering the bust has precariously propelled the latest boom.

The ’87 crisis response fatefully unleashed the “Terminal Phase” of Japanese Bubble excess – the consequences of which persist to this day. Decades of exceptional development flushed away with a few years of recklessness. In China, officials over the years claimed to have learned from the dismal Japanese Bubble experience. Clearly, they did not. The 2008 crisis was multiples of 1987. The recent post-crisis reflation, as well, has been at an incredibly grander and prolonged scale. This has ensured that China’s Bubble and “Terminal Phase” have inflated so far beyond Japan’s eighties fiasco.

Bubble mirage had Japan’s economy and banking system poised to lead the world. Now it’s China. In contrast to Japan’s beleaguered post-Bubble political class, China’s communist party won’t have to agonize over elections.

China faces extremely serious issues – and I’ll assume enlightened Chinese communist party officials are not oblivious. Beijing was the leading culprit behind my disquiet this week. Most focused elsewhere. The Trump administration’s tax package made initial headway in the Senate. There was also market-friendly reporting that Federal Reserve governor “Jay” Powell may be Trump’s leading candidate for Fed chairman. With securities markets rising ever higher into record territory, who cares about some communist party gathering? Heck, is communism even pertinent in today’s tantalizing New Age? Did you see those cryptocurrencies this week?

Chinese President Xi Jinping has a plan. China will be the world’s super power. The great communist party, with its progressive system of meritocracy, is the only mechanism to adroitly guide Chinese “new era” development. And President Xi is the master – the modern-day Emperor – with the depth of experience, the vision, the charisma, the power to ensure China’s rightful place on the world stage. He embodies the benevolent dictator for the masses; the resolute commander for an increasingly hostile world; the deity to guide and protect an insecure society. Spooky stuff.

October 20 – Financial Times (Tom Mitchel): “‘Government, military, society and schools — north, south, east and west — the party is leader of all,’ Mr Xi proclaimed in a three-and-a-half hour speech… to the party congress. Next week the congress will appoint a new Politburo Standing Committee stacked with Xi loyalists. One person who advises senior officials attributes Mr Xi’s now seemingly unassailable dominance of Chinese politics to a Machiavellian insight. ‘Because of the economic prosperity of the reform era, almost everyone in officialdom was corrupted,’ he says. ‘Xi used this fact as leverage to scare everyone. They have to follow him because everyone is vulnerable. All you have to do is investigate them.’ In his marathon address to the congress this week, Mr Xi positioned himself not just as modern China’s third great leader after Mao and Deng, but also the heir to a glorious Communist tradition stretching back to Russia’s Bolsheviks. ‘A hundred years ago, the salvos of the October Revolution brought Marxism-Leninism to China,’ Mr Xi said, noting that the Chinese Communist party was founded just four years later. ‘From that moment on, the Chinese people have had in the party a backbone for their pursuit of national independence and liberation, prosperity and happiness.’ According to Mr Xi’s arc of history, China is only three decades away from resuming its traditional and rightful place as the world’s dominant economic and cultural power, with the US caught in a downward spiral accelerated by Mr Trump’s election.”

Xi’s speech was said to have left young devotees sobbing (and previous leadership yawning and checking their watches). Xi is moving aggressively forward with a consolidation of power – assiduously crafting a cult of leadership. He has shrewdly perched his government’s skill and competence up on a high pedestal, with its leader the unassailable “man now regarded as China’s great centraliser and most powerful ruler since Mao Zedong, the party’s revolutionary hero.”

October 17 – Bloomberg (Ting Shi): “President Xi Jinping warned of ‘severe’ challenges while laying out a road map to turn China into a leading global power by 2050, as he kicked off a twice-a-decade party gathering expected to cement his influence into the next decade. In a speech that ran for more than three hours on Wednesday, Xi declared victory over ‘many difficult, long overdue problems’ since he took power in 2012. He said China would continue opening its doors to foreign businesses, defend against systemic risks, deepen state-run enterprise reform, strengthen financial sector regulation and better coordinate fiscal and monetary policy. ‘Right now both China and the world are in the midst of profound and complex changes,’ Xi said. ‘China is still in an important period of strategic opportunity for development. The prospects are very bright, but the challenges are very severe.’”

Xi and Chinese leadership are battening down the hatches. Recall that less than two years ago the Chinese Bubble was at the brink. It was Xi and his “national team” that took incredible measures to reverse a dynamic of collapsing markets and exodus from the Chinese currency. In short, confronting an inconveniently timed bust, they resorted to stoking their historic Bubble. Why not – everyone else has gotten away with it.

The upshot has been two additional (fateful) years of rapidly inflating apartment prices and economic maladjustment. There has been as well a couple more years of historic compounding Credit growth. It was only fitting that Xi’s overstated exultation elicited a shot of sobriety from China’s respected central bank chief (from his catbird seat).

October 19 – Financial Times (Gabriel Wildau): “China’s central bank governor has warned in unusually stark language of the risks from excessive debt and speculative investment, as he used the Communist party congress to caution that the country’s fast-growing economy faced a possible ‘Minsky moment’. ‘When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified,’ Zhou Xiaochuan, governor of the People’s Bank of China, said at a meeting on the sidelines of the Communist party gathering in Beijing. ‘If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.’”

Credit growth accelerated into the communist party congress. Chinese Total Social Financing (total non-governmental Credit) expanded a stronger-than-expected $277 billion during September. Year-to-date Total Social Financing growth of $2.375 TN is running 16.3% above last year’s record pace. Lending was led by booming demand for household real estate purchases. Total Chinese Credit could surpass $4.0 TN in 2017, easily outdoing U.S. Credit growth at the height of our mortgage finance bubble. Despite all the talk about excessive debt levels and the need for deleveraging, Chinese officials have yet to get their arms around a historic credit bubble.

Xi spoke of a focus on financial stability. His comment, “Houses are built to be inhabited, not for speculation,” reiterates official concern for housing prices. Past efforts to counteract apartment inflation with added supply failed to dampen enthusiasm for speculating on ever higher prices. At this late stage of such a prolonged Bubble, only harsh medicine will suffice. Prices will need to fall and speculation punished for the spell to be broken.

Bubbles are always about a redistribution and destruction of wealth. Its unparalleled global scope makes the current Bubble is so concerning. Xi now owns the Chinese Bubble, and there would appear little prospect that he’ll ever be willing to take responsibility for the damage wrought. Fingers will be pointed directly at foreigners, foremost the U.S. and Japan.

I believe the global government finance Bubble - history’s greatest financial boom - will conclude this long Credit cycle going back to the conclusion of WWW II. As the “granddaddy of Bubbles,” it is fitting that things turn really crazy during an exceptionally prolonged “Terminal Phase.” We’re at the point where no one is willing to risk bursting the Bubble, certainly not timid central bankers.

There’s so much at stake. Importantly, from the global Bubble perspective, a faltering Bubble would risk surrendering power on the global stage. Xi certainly doesn’t seem willing to see a faltering China retreat from global ascendency. The same can be said for Shinzo Abe in Japan. Here at home, making America great again gets no easier with a bursting Bubble. And while there’s no President of Europe, Mario Draghi has assumed the role of defender of European resurgence with an interminable windfall of free “money.”

It’s all quite unsettling. Global finance has run completely amok. This has been unfolding for so long now that few are concerned. Most revel in asset inflation drunkenness. Instead of safeguarding sound finance and stable money – the bedrock of civil societies and peaceful global relationships - governments and central banks around the world are harboring Bubble excesses like never before. This ensures catastrophic consequences when Bubbles burst. It has reached the point where these Bubbles have become part and parcel to global power, with countries not willing to risk being left behind. It’s as if it has become An Arms Race in Bubbles.

Three decades of serial booms and busts begat An Age of Government Strongmen – and weak central bankers. It would only be fitting for President Trump to opt for the milquetoast Jerome Powell to shepherd Fed inflationist doctrine, perhaps even trying to placate his base with a slot on the FOMC for John Taylor. Apparently, there are more urgent fights these days than reform at the Federal Reserve. Everywhere, it seems, various fights are taking precedence over stable finance. It just makes one dread the kind of conflicts that could break out when this historic global financial boom buckles. But, then, who on earth cares? The Dow is mere days away from 24,000, and Bitcoin is surely poised to make a run to $10,000!

For the Week:

The S&P500 gained 0.9% (up 15.0% y-t-d), and the Dow jumped 2.0% (up 18.0%). The Utilities rose 1.6% (up 12.8%). The Banks rallied 2.3% (up 10.2%), while the Broker/Dealers were little changed (up 20.0%). The Transports added 0.4% (up 10.3%). The S&P 400 Midcaps gained 0.9% (up 10.5%), and the small cap Russell 2000 added 0.4% (up 11.2%). The Nasdaq100 increased 0.3% (up 25.6%). The Semiconductors rose 1.0% (up 35.8%). The Biotechs slipped 0.4% (up 38.0%). With bullion sinking $24, the HUI gold index fell 2.6% (up 8.3%).

Three-month Treasury bill rates ended the week at 109 bps. Two-year government yields rose eight bps to 1.58% (up 39bps y-t-d). Five-year T-note yields jumped 12 bps to 2.02% (up 9bps). Ten-year Treasury yields gained 11 bps to 2.39% (down 6bps). Long bond yields rose nine bps to 2.90% (down 17bps).

Greek 10-year yields were little changed at 5.51% (down 152bps y-t-d). Ten-year Portuguese yields declined three bps to 2.31% (down 144bps). Italian 10-year yields fell four bps to 2.04% (up 23bps). Spain's 10-year yields gained five bps to 1.66% (up 28bps). German bund yields rose five bps to 0.45% (up 25bps). French yields gained five bps to 0.86% (up 18bps). The French to German 10-year bond spread was little changed at 41 bps. U.K. 10-year gilt yields slipped four bps to 1.33% (up 10bps). U.K.'s FTSE equities slipped 0.2% (up 5.3%).

Japan's Nikkei 225 equities index jumped 1.4% (up 12.3% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.075% (up 4bps). France's CAC40 added 0.4% (up 10.5%). The German DAX equities index was about unchanged (up 13.2%). Spain's IBEX 35 equities index slipped 0.3% (up 9.3%). Italy's FTSE MIB index dipped 0.3% (up 16.2%). EM equities were mostly lower. Brazil's Bovespa index declined 0.8% (up 26.8%), while Mexico's Bolsa was little changed (up 9.5%). India’s Sensex equities index slipped 0.1% (up 21.6%). China’s Shanghai Exchange declined 0.4% (up 8.9%). Turkey's Borsa Istanbul National 100 index jumped 2.1% (up 38.8%). Russia's MICEX equities index dropped 1.3% (down 7.2%).

Junk bond mutual funds saw outflows of $450 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to 3.88% (up 36bps y-o-y). Fifteen-year rates dipped two bps to 3.19% (up 40bps). Five-year hybrid ARM rates added a basis point to 3.17% (up 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to a five-week low 4.11% (up 48bps).

Federal Reserve Credit last week jumped $13.6bn to $4.433 TN. Over the past year, Fed Credit slipped $2.1bn. Fed Credit inflated $1.622 TN, or 58%, over the past 258 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.6bn last week to $3.365 TN. "Custody holdings" were up $243bn y-o-y, or 7.8%.

M2 (narrow) "money" supply last week jumped $27.6bn to a record $13.748 TN. "Narrow money" expanded $677bn, or 5.2%, over the past year. For the week, Currency was little changed. Total Checkable Deposits jumped $49.3bn, while Savings Deposits declined $21.8bn. Small Time Deposits were about unchanged. Retail Money Funds were unchanged.

Total money market fund assets added $2.9bn to $2.744 TN. Money Funds rose $109bn y-o-y, or 4.1%.

Total Commercial Paper declined $2.0bn to $1.062 TN. CP gained $157bn y-o-y, or 17.3%.

Currency Watch:

The U.S. dollar index gained 0.7% to 93.701 (down 8.5% y-t-d). For the week on the downside, the New Zealand dollar declined 3.0%, the South African rand 2.8%, the Brazilian real 1.5%, the Japanese yen 1.5%, the Canadian dollar 1.3%, the Norwegian krone 1.2%, the Swiss franc 1.0%, the Singapore dollar 0.9%, the Australian dollar 0.9%, the British pound 0.7%, the Swedish krona 0.7%, the Mexican peso 0.5%, the euro 0.3% and the South Korean won 0.2%. The Chinese renminbi declined 0.62% versus the dollar this week (up 4.90% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was little changed (up 1.0% y-t-d). Spot Gold fell 1.8% to $1,281 (up 11.1%). Silver dropped 1.9% to $17.078 (up 6.9%). Crude added 39 cents to $51.84 (down 4%). Gasoline rose another 3.4% (unchanged), while Natural Gas fell 2.8% (down 22%). Copper gained 1.0% (up 26%). Wheat sank 3.1% (up 4%). Corn fell 2.0% (down 2%).

Trump Administration Watch:

October 20 – Bloomberg (Erik Wasson and Saleha Mohsin): “The U.S. posted its largest budget deficit since 2013 in the fiscal year that just ended, as a pickup in spending exceeded revenue gains. The federal government’s gap grew to $665.7 billion in the 12 months through Sept. 30, compared with a $585.6 billion shortfall in fiscal 2016… Treasury Secretary Steven Mnuchin and Budget Director Mick Mulvaney, in a statement accompanying the report, blamed weaker-than-expected tax receipts on historically ‘sub-par’ economic growth.”

October 19 – Wall Street Journal (Demetri Sevastopulo): “CIA director Mike Pompeo on Thursday warned that North Korea could be just ‘months away’ from developing the ability to strike America with a nuclear-armed ballistic missile. Speaking at the Foundation for Defense of Democracies, Mr Pompeo said the US had to deal with North Korea under the assumption that Kim Jong Un was ‘on the cusp’ of being able to hit the US after a spate of missile tests that have helped his scientists improve their expertise. ‘We ought to behave as if we are on the cusp of them achieving that objective,’ he said when asked if Pyongyang was “perilously close” to developing that capability.”

October 19 – Wall Street Journal (Michael C. Bender and Felicia Schwartz): “Secretary of State Rex Tillerson warned China on Thursday that the U.S. has an arsenal of economic weapons to force Beijing to address trade imbalances and a continuing territorial dispute in the South China Sea. ‘We can do this one of two ways,’ Mr. Tillerson said during a 35-minute interview in his State Department office, seeming at times to speak directly to his Chinese counterparts. ‘We can do it cooperatively and collaboratively, or we can do it by taking actions and letting you react to that.’”

October 19 – Politico (Ben White, Victoria Guida and Josh Dawsey): “Federal Reserve Governor Jerome Powell is the leading candidate to become the chair of the U.S. central bank after President Donald Trump concluded a series of meetings with five finalists Thursday, three administration officials said. The officials cautioned that Trump, who met with current Chair Janet Yellen for about half an hour on Thursday, has not made a final decision.”

October 16 – Bloomberg (Jennifer Jacobs, Saleha Mohsin, and Craig Torres): “Stanford University economist John Taylor, a candidate for Federal Reserve chairman, made a favorable impression on President Donald Trump after an hour-long interview at the White House last week, several people familiar with the matter said. Former Fed board governor Kevin Warsh has meanwhile seen his star fade within the White House, three of the people said. They would not say why but Warsh’s academic credentials are not as strong as other candidates, and his tenure on the Fed board has been criticized by a diverse group of economists ranging from Scott Sumner to Nobel laureate Paul Krugman. Trump gushed about Taylor after his interview, one of the people said.”

October 17 – Bloomberg (Garfield Clinton Reynolds): “Investors are still betting a Federal Reserve run by economist John Taylor would mean higher U.S. interest rates despite his signaling he would be more flexible in setting monetary policy than his academic work suggests. Reflecting such suspicion, the dollar rose and the 10-year U.S. Treasury note fell on Monday after Bloomberg News reported Taylor… impressed President Donald Trump in a recent White House interview. Driving those trades was speculation that the 70 year-old Taylor would push rates up to higher levels than a Fed helmed by its current chair, Janet Yellen. That’s because he is the architect of the Taylor Rule, a tool widely used among policy makers as a guide for setting rates since he developed it in the early 1990s.”

October 19 – Bloomberg (Laura Litvan and Erik Wasson): “The year’s most divisive fights in Congress are set to converge in a bitter partisan clash in December that could result in a U.S. government shutdown. The unresolved battles -- over a wall on the U.S.-Mexico border, immigration, health-care subsidies, Planned Parenthood and storm relief -- are hanging over talks on must-pass spending legislation to keep the government open after Dec. 8. The spending measure is at risk of becoming so weighted with controversial items that it collapses. ‘The laundry list of things they want to put on it grows every day,’ said Jim Dyer, a former House Appropriations Committee Republican staff director. Even without contentious issues, completing a trillion-dollar spending bill in time would be a tall order.”

October 15 – Politico (Rachael Bade and Burgess Everett): “Republicans’ unified control of Washington is triggering an identity crisis within the party over what it means to be a fiscal conservative in the age of Donald Trump: Do deficits even matter, or do tax cuts trump all? If the White House and GOP lawmakers can’t come to terms on the matter soon, it could very well doom Trump’s cherished tax reform initiative. Conservatives have long railed against the nation’s now-$20 trillion debt. But now that they’re desperate to pass a tax bill, many Republicans’ repulsion to red ink is fading fast. Yet some deficit hard-liners are holding the line, insisting that tax cuts be paid for, either by axing deductions or with stiff spending cuts. The debate is causing some hard feelings within the GOP.”

October 18 – Financial Times (Shawn Donnan): “Republicans in Congress are examining how to block a potential move by Donald Trump to pull the US out of the North American Free Trade Agreement as members of the president’s own party also warn him that any such move could put a joint push for tax cuts at risk. The preparations come amid rising concerns on Capitol Hill and among US businesses about changes to the 23-year-old trade pact with Canada and Mexico that the Trump administration is pursuing and what they fear are ‘poison pill’ proposals intended to force a collapse of increasingly bitter negotiations. They also illustrate how the Trump administration is becoming isolated in Washington on trade and other issues and how pro-trade Republicans are gearing up for another fight with the president to protect a Nafta they see as vital to the US economy.”

October 16 – Reuters (David Lawder and Dave Graham): “The top U.S. and Canadian and trade officials… accused each other of sabotaging efforts to renegotiate the North American Free Trade Agreement, even as they and Mexico agreed to extend talks into the first quarter of 2018. A seven-day round of talks… ended in acrimony over aggressive U.S. demands on autos, a five-year sunset clause on the pact itself and Canada’s dairy regulations, among other key issues. Canada’s foreign minister, Chrystia Freeland, accused Washington of pursuing a ‘winner take all’ approach.”

Federal Reserve Watch:

October 19 – Wall Street Journal (Kate Davidson): “After criticizing the Federal Reserve for the past eight years, Republicans have a chance to change the course of the central bank when President Donald Trump nominates someone to take the helm in early 2018. But they are divided over which direction monetary policy should take. GOP efforts to subject the Fed to more scrutiny and limit its discretion gained traction in the wake of the financial crisis, especially in the House, and Republicans hammered Fed officials over why they continued to keep interest rates so low, saying the policy hurt savers and distorted markets. Now, with the prospect of a Republican-led tax cut and faster economic growth on the horizon, some in the party are wary of a choice that could disrupt markets or cut off growth by lifting rates higher to keep inflation under control. ‘I’m not sure there’s a clear way that Republicans think about the Fed,’ said Tony Fratto, who worked on economic issues in the George W. Bush administration. ‘When you ask, ‘What would you want from a new Fed chair,’ I think it’s a little bit all over the place.’”

October 18 – Reuters (Lindsay Dunsmuir): “The U.S. economy expanded at a modest to moderate pace in September through early October despite the impact of hurricanes on some regions, the Federal Reserve said in its latest snapshot of the U.S. economy…, but there were still few signs of an acceleration in inflation. ‘Despite widespread labor tightness, the majority of districts reported only modest to moderate wage pressures,’ the U.S. central bank said in its Beige Book report of the economy, derived from talking to business contacts across the country.”

U.S. Bubble Watch:

October 16 – Financial Times (Nicole Bullock, Robin Wigglesworth, John Authers and Christian Pfrang): “Art Cashin recalls the heady atmosphere that dominated the New York Stock Exchange for much of 1987. After five or six straight days of the market rallying, senior partners at brokerage trading desks would instruct the junior partners [traders] to ‘lighten up a little bit’, Mr Cashin says. ‘When they did, the market just went higher.’ ‘The market in 1987 was relentless,’ says Mr Cashin, director of floor operations for UBS Financial Services at NYSE, who began working on ‘the floor’ as an assistant clerk in 1959… ‘Unfortunately there are some similarities [to today]. It reminds me a bit of what we have seen this year.’”

October 18 – CNBC (Michael Santoli): “The 30th anniversary of the 1987 crash is a perfect occasion to take in the vivid accounts of a headlong bull market skidding violently off course. ‘The bull is dead,’ a senior trader at the old Shearson Lehman told a reporter. ‘I've been in the business 33 years and it's one of the worst corrections I have ever seen.’ His counterpart at the former Donaldson Lufkin & Jenrette added, ‘We have young traders out here with their eyes popping out of their heads.’ An analyst at Josephthal & Co. reported, ‘My guts are numb. It's unreal; it's just unreal.’ But here's the thing: All of those accounts of market carnage were made the Friday before the crash on Monday, Oct. 19, 1987, when the Dow Jones industrial average plunged 22.6% in the worst single session in Wall Street history.”

October 16 – Bloomberg (Cecile Vannucci): “The number of speculators’ bets against CBOE Volatility Index futures just hit a fresh record, but so did the number of VIX contracts outstanding. Wagering on equity swings has become increasingly popular this year as the gauge of stock swings heads for its lowest ever annual average. While the VIX is up this month, history shows that it tends to fall in the fourth quarter.”

October 19 – Wall Street Journal (Riva Gold): “Stocks continue to hit record highs, yet those pushing them there are trading less and less. The number of stocks and exchange-traded products changing hands in the U.S. and Europe has fallen steadily in recent months as ultralow volatility, a lack of market-moving news and the rising popularity of passive investment funds have kept many investors on the sidelines. Some investors are mulling what the drop-off says about a global equity rally that has lifted many markets, including in the U.S., to new highs.”

October 18 – CNBC (John W. Schoen): “Voters worried that Congress and the White House can't tame federal borrowing may be overlooking another big debt bomb closer to home. States are falling further behind in the money they owe public employee pension funds, leaving taxpayers on the hook, according to… S&P Global Ratings… Despite recent stock market gains, state governments are not setting aside enough money to keep up with the rising liability of paying public worker pensions and other retirement benefits… In all but two states (Michigan and Alabama), the money set aside as a share of what's needed fell last year to an average ratio of 68%. That means states have funded just 68 cents for every dollar they owe in future payments.”

October 19 – Bloomberg (Yuji Nakamura and Lulu Yilun Chen): “Tezos, the startup which raised $232 million in a July initial coin offering, plunged on derivative exchanges after revealing a management spat and little progress in developing its product. Derivatives on Tezos tokens fell as much as 31%... On BitMEX, December futures on the tokens plunged 58% as traders unwound bets the project would be launched before the end of the year. The actual tokens have yet to be created. Founders Arthur and Kathleen Breitman said in a blog post… that recruitment had come to a standstill and little work has been done on their product: a better blockchain for digital currencies.”

China Bubble Watch:

October 18 – Wall Street Journal (Nathaniel Taplin): “Politicians are widely distrusted by citizens in most societies, but surprisingly often they say what they actually mean. On Wednesday, Chinese President Xi Jinping opened the nation’s twice-a-decade congress—where the leadership for the coming five years will be selected—with a robust and lengthy defense of the Communist Party’s role as captain of the economy, and a series of rote gestures toward further market-based economic reforms. Investors should take him at his word."

October 16 – Wall Street Journal (Lingling Wei): “As a new president, Xi Jinping promised to give markets more room in China’s economy. He even considered scrapping a hulking ministry supervising state-owned companies. Today, Mr. Xi has set aside such notions. In today’s China, state intervention attempts to engineer economic outcomes, ranging from raw-materials prices to the value of stocks and the currency. State-owned corporate giants are bulking up, with private capital funneled into them for support. The agency Mr. Xi toyed with dismantling is back in the driver’s seat. Going into his second term, Mr. Xi finds relying on markets too risky and state capitalism a better model. When the Chinese leadership talks of reform today it doesn’t mean economic liberalization as it did in, say, the era of Deng Xiaoping. It means fine-tuning a government-led model.”

October 17 – CNBC (Everett Rosenfeld): “Chinese President Xi Jinping… stressed the benefits of ‘socialism with Chinese characteristics’ at the beginning of the Communist Party's once-every-five-year Party Congress. The president told the assembled members of the party that his nation's prospects are bright, but it faces severe challenges. He proceeded to lay out his vision for a socialist future. ‘We will unite the Chinese people of all ethnic groups and lead them to a decisive victory in building a moderately prosperous society in all respects and in the drive to secure the success of socialism with Chinese characteristics for a new era,’ he said…”

October 15 – Reuters (Lusha Zhang and Kevin Yao): “Chinese banks extended more loans than expected in September, buoyed by demand from home buyers and companies, even as the government tightened the screws to wean the economy off its years-long addiction to cheap debt… Both bank lending and total social financing, a broad measure of credit and liquidity, look set to hit another record high this year… In September, banks extended 1.27 trillion yuan ($193.05bn) in net new yuan loans… Analysts polled by Reuters had predicted 1.1 trillion yuan, compared with August’s 1.09 trillion yuan… Total social financing (TSF), a broad measure of credit and liquidity in the economy, rose to 1.82 trillion yuan in September from 1.48 trillion yuan in August.”

October 18 – New York Times (Keith Bradsher): “China turned to a tried-and-true recipe to cook up another three months of respectable growth. Heavy lending by state-owned banks, brisk government spending and strong exports helped keep China’s economy growing briskly and steadily. China’s statistical agency said… that the economy had grown 6.8% in the July-to-September period, compared with the same quarter a year ago. President Xi Jinping had put heavy pressure on practically every government ministry to make sure that the economy put in a solid performance. The Chinese Communist Party’s twice-a-decade congress began this week, and it’s a time when the country’s leaders want predictability and an image of strength… Chinese officials say they are working hard to control China’s ballooning debt. The third quarter may not be a good example of that. Measures of credit and money supply grew faster than the economy itself in August and September…”

October 17 – Bloomberg (Nisha Gopalan and Andy Mukherjee): “So what if there's a lot of China debt out there, and the pile just keeps getting bigger? Investors, at least, appear not to care. As President Xi Jinping prepares for a second five-year term, he's already managed to convince markets that China's deleveraging train has left the station -- never mind that there's no evidence state-owned enterprises have even begun to shed assets or debt, more than a year after the government rolled out steps to rein in borrowing. At the end of 2012, just before Xi took office, as many as 986 nonfinancial state-owned and state-linked enterprises had a little more than $2 trillion in assets supported by around $775 billion in shareholders' funds, an analysis by Gadfly shows. Assets have since swelled to $3.6 trillion, while the equity cushion has grown to only $1.25 trillion. Financial leverage… has thus risen to 286%, from less than 274%, on the eve of this week's twice-a-decade Communist Party congress.”

October 16 – Bloomberg: “China’s factory prices jumped more than estimated, as domestic demand remained resilient and the government continued to reduce excess industrial capacity. Consumer price gains matched projections. The producer price index rose 6.9% in September from a year earlier, versus an estimated 6.4%.”

October 16 – Bloomberg: “They’ve made billions of dollars helping sell everything from iPhones to hairdryers on China’s burgeoning online shopping platforms. Now, tech giants led by Alibaba Group Holding Ltd.’s finance affiliate are making money off the loans consumers use to buy those products. Amid surging demand from cash-strapped Chinese millennials, companies such as Ant Financial -- controlled by Alibaba’s billionaire founder Jack Ma -- have been extending more consumer loans. The firms are then packaging the debt into complex financial products that they then sell on to investors, with Ant Financial selling at least 149 billion yuan ($23bn) of the so-called asset-backed securities this year… But the new practice is raising red flags for some analysts, who say there needs to be more transparency about how the securities, known as ABS, are created.”

October 18 – Financial Times (Tom Hancock and Gabriel Wildau): “Ocean Flower Island is a vision of luxury, Chinese-style. A man-made archipelago off the coast of the tropical island of Hainan in the South China Sea, it will boast thousands of apartments, 28 museums and 58 hotels including one which is ‘7-star level’ and another shaped like a European castle. Gold-painted Mercedes golf carts whisk potential customers to the sales centre for the project, where Chinese developer Evergrande Real Estate is leading construction. Inside the centre, Mr Yu, a 56-year-old owner of a building company who asked not to use his full name, wears a shirt emblazoned with the words ‘Beverly Hills Polo’ and sips green tea. He is keen to buy a 108 sq m apartment on one of the islands, adding to his eight properties elsewhere. ‘The house will definitely increase in value,’ he says.”

October 16 – Reuters: “China’s official Xinhua news agency attacked Western democracy as divisive and confrontational…, praising on the eve of a key Communist Party Congress the harmony and cooperative nature of the Chinese system. China’s constitution enshrines the Communist Party’s long-term ‘leading’ role in government, though it allows the existence of various other political parties under what is calls a ‘multi-party cooperation system’. But all are subservient to the Communist Party. Activists who call for pluralism are regularly jailed and criticism of China’s authoritarian system silenced.”

Central Banker Watch:

October 14 – Wall Street Journal (Tom Fairless): “The European Central Bank should be patient and persistent in the face of weak eurozone inflation, ECB President Mario Draghi argued…, as the bank prepares to decide on the future of its giant bond-buying program. Speaking on the sidelines of the meetings here of the International Monetary Fund and World Bank, Mr. Draghi gave an upbeat assessment of the economic outlook for the 19-nation eurozone. But he argued that underlying inflation remains too weak, perhaps due to weak wage growth. That means the ECB should be patient as it considers its future policies, he said. ‘It’s going to take time,’ he said. ‘We have got to be persistent with our monetary policy.’ The ECB’s €60 billion-a-month bond-buying program, known as quantitative easing or QE, is due to expire in December.”

October 17 – Financial Times (Claire Jones): “The European Central Bank looks set to remain active in the eurozone bond markets for most of 2018, confounding expectations that policymakers would end their landmark €60bn-a-month quantitative easing programme as early as June next year. ECB watchers now expect Mario Draghi… to say at the next governing council meeting on October 26 that the central bank will continue its asset purchases until next September — or possibly even December 2018. ‘It’s the first time since QE began that the communication from the eurozone’s monetary policymakers is clear: both the hawks and the doves seem in agreement that it will be a slow taper,’ said Frederik Ducrozet, economist at Pictet Wealth Management.”

October 17 – Bloomberg (Lucy Meakin): “Mark Carney reaffirmed that the Bank of England is close to its first interest-rate increase in over a decade, as inflation hit 3% and one of his colleagues said the economy is approaching a ‘tipping point.’ In a series of testimonies to lawmakers, the BOE governor and the two newest members of the rate-setting Monetary Policy Committee signaled that the erosion of economic slack is dominating their thinking as they prepare for a Nov. 2 decision. The appearances coincided with a report showing consumer prices rising at the fastest pace since April 2012.”

Global Bubble Watch:

October 18 – Reuters (Kevin Yao and Elias Glenn): “China’s central bank chief… issued a stark warning about asset bubbles in the world’s second-largest economy, which looks set to clock its first acceleration in annual growth since 2010, driven by public spending and record bank lending. Speaking on the sidelines of the closely-watched, twice-a-decade Communist Party Congress, People’s Bank of China Governor Zhou Xiaochuan spoke of the risks of a ‘Minsky moment’ in the economy, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.”

October 15 – Wall Street Journal (David Harrison and Harriet Torry): “Leaders of the world’s largest central banks indicated that weak inflation in advanced economies could prolong the postcrisis era of easy-money policies. Despite a broad-based improvement in the global economy, wages and consumer prices remain stubbornly low, making central bankers wary of removing their stimulus measures too quickly, they told a Group of 30 banking conference… Their concerns contrasted with the generally upbeat tone that prevailed during last week’s fall meetings of the International Monetary Fund and World Bank…”

October 15 – Reuters (Howard Schneider and Leika Kihara): “The leaders of the world’s top central banks who risked trillions of dollars and their reputations to rescue the global economy are now set to walk off stage at a time when the lingering effects of the crisis, evolving technology and a combustible political landscape will challenge their successors. The Federal Reserve, the Bank of Japan and the People’s Bank of China may all have new bosses in early 2018 and there will be a new head of the European Central Bank the following year… Some $10 trillion in assets bought by the Fed, the ECB and the BOJ to prop up their economies remains on the books and will have to be pared back. Stubbornly low global inflation and weak growth complicate the return to more conventional policies. There are unfinished reforms in China and Europe, while the rise of nationalism could erode central bank independence.”

October 17 – Bloomberg (Theophilos Argitis and Greg Quinn): “Canada’s banking regulator released final rules that will make it tougher for borrowers to take on uninsured mortgages, adding to a growing list of measures to rein in the nation’s housing markets. The Office of the Superintendent of Financial Institutions announced measures targeting borrowers in the uninsured segment of the mortgage market that has been responsible for the bulk of growth recently. A mortgage doesn’t need to be insured against default if the borrower makes a down payment of at least 20%.”

October 17 – Bloomberg (Ranjeetha Pakiam): “Gold wins out over cryptocurrencies when assessed on the majority of the key characteristics of money, according to Goldman Sachs…, which adds that fear and wealth are the core drivers of bullion. ‘Precious metals remain a relevant asset class in modern portfolios, despite their lack of yield,’ analysts including Jeffrey Currie and Michael Hinds wrote. ‘They are neither a historic accident or a relic.’ Looking at properties such as durability and intrinsic value, they are still relevant even with new materials discovered and new assets emerging, such as cryptocurrencies, they said.”

Fixed-Income Bubble Watch:

October 18 – CNBC (Patti Domm): “The bond market is warning that trouble could be on the horizon, either from an economic slowdown or an eventual recession. The yield curve, a set of interest rates watched closely by bond market pros, has gotten to its flattest level since before the financial crisis. The spread between 2-year note yields and 10-year yields this week reached near the lows, at about 0.75, it has been since before the financial crisis.”

Europe Watch:

October 19 – Bloomberg (Charles Penty, Todd White, and Esteban Duarte): “Prime Minister Mariano Rajoy will deploy the Spanish government’s most wide-ranging constitutional powers for the first time in the country’s history as he seeks to land a decisive blow on the Catalan separatist movement. Spanish stocks and bonds dropped as Rajoy’s government said it will move forward with the process of suspending the powers of the Catalan administration after regional President Carles Puigdemont refused to shelve his claim to independence. Spain’s government issued a statement on Thursday morning invoking Article 155 of the Constitution ‘to restore the legality’ of the semi-autonomous region.”

October 19 – Bloomberg (Esteban Duarte): “Separatist campaign group the Catalan National Assembly is calling on its supporters to pull cash from lenders including CaixaBank SA and Banco Sabadell SA between 8 a.m. and 9 a.m. Friday. In a video posted on twitter Thursday night, the Assembly asked Catalans to withdraw money from the top five banks, highlighting CaixaBank and Sabadell to protest at their decision to move their legal domiciles out of the region.”

October 14 – Reuters (Francois Murphy and Michael Shields): “Austria’s shift to the right in a parliamentary election has paved the way for young conservative star Sebastian Kurz to become the next leader and opened a path for the resurgent far right to return to power. The People’s Party, which named 31-year-old Foreign Minister Kurz its leader only in May, secured a clear victory on Sunday with a hard line on immigration that left little space between it and the anti-Islam Freedom Party (FPO).”

October 18 – Reuters (Mark Bendeich and Sara Rossi): “As nervous investors retreat from Catalonia, afraid the wealthy region may secede from Spain, another European region whose politicians once campaigned for independence is looking to attract some of them -- by talking of autonomy, not secession. The Italian region of Lombardy, the country’s industrial engine and home to its financial capital Milan, is holding a referendum on Sunday for more autonomy, an outcome its once-proudly secessionist leader hopes will lure more investment.”

Japan Watch:

October 17 – Bloomberg (Stephen Stapczynski, Ichiro Suzuki, and Masumi Suga): “Kobe Steel Ltd. said it will co-operate with the U.S. Department of Justice after the agency requested documents related to the fake data scandal that risks engulfing Japan’s third-biggest steelmaker. Kobe has said some 500 companies worldwide are in a supply chain tainted by admissions that it falsified certifications on the strength and durability of metals going back to 2007, including automotive giants Ford Motor Co. and General Motors Co. and the U.S.’s biggest plane maker, Boeing Co.”

Emerging Market Watch:

October 18 – CNBC (Gauri Bhatia): “If there's an idea, there will be funding. That's been the reality for India's start-up community for years — but it might be ending. India's start-up dudes — largely male, young engineering graduates or dropouts —are being jolted out of their fantasy world as investors tighten their purse strings and demand a greater bang for every buck they spend. India is the third-largest start-up hub in the world… It saw a peak in funding in 2015 when close to $6 billion was invested in new companies… Start-ups were originally seen as job creators and innovators who were solving India's problems. But that reputation has taken a hit and investor confidence in the sector is the lowest it has been in two years, industry insiders said.”

Geopolitical Watch:

October 16 – Associated Press: “North Korea's deputy U.N. ambassador warned… that the situation on the Korean Peninsula ‘has reached the touch-and-go point and a nuclear war may break out any moment.’ Kim In Ryong told the U.N. General Assembly's disarmament committee that North Korea is the only country in the world that has been subjected to ‘such an extreme and direct nuclear threat’ from the United States since the 1970s — and said the country has the right to possess nuclear weapons in self-defense. He pointed to large-scale military exercises every year using ‘nuclear assets’ and said what is more dangerous is what he called a U.S. plan to stage a ‘secret operation aimed at the removal of our supreme leadership.’”

October 18 – Reuters: “U.S. Secretary of State Rex Tillerson said before a visit to India next week that the Trump administration wanted to ‘dramatically deepen’ cooperation with New Delhi, seeing it as a key partner in the face of negative Chinese influence in Asia. Speaking… less than a month before President Donald Trump is due to make his first state visit to China, Tillerson said the United States had begun to discuss creating alternatives to Chinese infrastructure financing in Asia. In another comment likely to upset Beijing, he said Washington saw room to invite others, including Australia, to join U.S.-India-Japan security cooperation…”

October 16 – BBC: “State department spokeswoman Heather Nauert urged all parties to ‘avoid further clashes’. Iraqi soldiers moved into Kirkuk three weeks after the Kurdistan Region held a controversial independence referendum. They are aiming to retake areas under Kurdish control since Islamic State militants swept through the region. Residents of Kurdish-controlled areas, including Kirkuk, overwhelmingly backed secession from Iraq in a vote on 25 September.”

October 18 – Bloomberg (Javier Blas): “The crisis unfolding around the Iraqi city of Kirkuk has left some of the world’s largest commodity trading houses worried the country’s autonomous Kurdish region will struggle to repay billions of dollars in cash-for-oil loans. The approximately $3.5 billion in debts were going to be met with the roughly 500,000 to 600,000 barrels a day of crude that the northern region of Iraq was pumping… But output has now collapsed to about half that level after the federal government in Baghdad recaptured some oilfields that the Kurds seized in 2014.”

Thursday, October 19, 2017

Thursday Evening Links

[Bloomberg] U.S. Stocks Pare Drop, Treasuries Rise With Gold: Markets Wrap

[Politico] Trump leaning toward Powell for Fed chair, officials say

[Bloomberg] Catalan Separatists Ask Supporters to Pull Money From Banks

[Reuters] Chancellor: 1929 is more apt anniversary than 1987

[Bloomberg] Global Investors Brace for a Cruel New World of Feeble Returns

[WSJ] Tillerson Warns China on Trade, Territorial Claims

[WSJ] Former Fed Chair Paul Volcker Writing Memoir

[FT] North Korea ‘months’ away from strike range on US, says CIA head

Thursday's News Links

[Bloomberg] Stocks Slide From Records as Anxiety Bubbles Up: Markets Wrap

[Bloomberg] Hong Kong Stocks Tumble the Most This Year

[Bloomberg] Fewest Jobless Claims Since 1973 Show Firm U.S. Job Market

[Bloomberg] Spain Unleashes Historic Power to End Catalan Independence Push

[Bloomberg] Congress Heads Toward Shutdown Fight Over Immigration and Obamacare

[Reuters] China's central bank warns of 'Minsky moment' as economy powers ahead

[Reuters] China will crack down on irregularities in banking sector: regulator chief

[CNBC] State pension funds continue to fall behind. Here's how much you owe

[Bloomberg] China's Top Bank Regulator Endorses Reform of Finance Industry

[Bloomberg] One of the Biggest ICOs Yet Crashes Before It Even Launched

[Bloomberg] Iraq Turmoil Threatens Billions in Oil Trader Deals With Kurds

[CNBC] India's high-flying start-ups are getting a dose of harsh reality

[Reuters] Spain-Catalonia standoff set to intensify as leaders take hard lines

[Reuters] 'We're not Catalonia': Italy's separatists tread softly toward autonomy

[CNBC] Three decades later, watching for signs of another '87-style market cataclysm

[Reuters] US wants stronger India economic, defense ties given China's rise, Tillerson says

[NYT] A Stock Market Panic Like 1987 Could Happen Again

[NYT] China’s Economy Grew Steadily, Thanks to Loans and Homes

[NYT] Europe’s Fastest-Growing Economy Could Be Headed for Trouble

[WSJ] GOP Divided Over Monetary Policy As Fed Chief Pick Looms

[WSJ] Beneath the Market Rally: A Lot Less Trading

[FT] Republicans gear up to fight Trump over Nafta

[FT] Chinese property boom props up Xi’s hopes for the economy

Tuesday, October 17, 2017

Tuesday Evening Links

[Bloomberg] Caution Prevails as China Party Congress Begins: Markets Wrap

[Reuters] NAFTA negotiators trade barbs even as they agree to extend talks

[Bloomberg] Xi Jinping Poised to Put His Stamp on Chinese History

[Bloomberg] Xi's Deleveraging Dream Is a China Myth

[Bloomberg] As Nafta Tension Mounts, Retailers Warn of Economic Catastrophe

Tuesday's News Links

[Bloomberg] Dollar Gains on Fed Chair Talk; Euro Down on Spain: Markets Wrap

[Reuters] Petroleum, food boost U.S. import prices in September

[Bloomberg] Whatever the Rule, Investors See Taylor Turning Fed Hawkish

[CNBC] Horse race for Fed chair pits Warsh against mentor and brings Yellen back

[Bloomberg] Carney Confirms Rate Hike Is Near as BOE Heads for ‘Tipping Point’

[Bloomberg] Canada's Financial Regulator Toughens Mortgage Qualifying Rules

[Bloomberg] Initial Coin Offerings Rake in Another Billion in Under 2 Months

[Bloomberg] Goldman Sachs Says Gold Is Better Than Bitcoin

[Bloomberg] Japan’s Kobe Steel May Have Faked Data for Over a Decade

[Bloomberg] How China’s Economic Shock Therapy is Shaking Up Commodities

[Bloomberg] Millennials Are Helping Jack Ma's Financing Firm Become a Debt Giant

[AP] North Korea says 'a nuclear war may break out any moment'

[Reuters] Madrid, Catalonia clash over jailed pro-independence leaders as protests called

[BBC] US urges calm as Kirkuk crisis escalates

[Reuters] China state media attacks Western democracy ahead of Congress

[NYT] Fed’s Williams Says Economy Is Stronger Than It Looks

[FT] How big is the risk of another Black Monday equities crash?

Monday, October 16, 2017

Monday Evening Links

[Bloomberg] U.S. Stocks Climb to Record as Treasuries Decline: Markets Wrap

[Bloomberg] Taylor Impresses Trump for Fed Chairman, Warsh Slips

[Reuters] Trump to meet Yellen Thursday in search for new Fed chair: source

[CNBC] Trump says 'there is no such thing as Obamacare anymore' and 'short-term fix' in works

[CNBC] The real cause of the 1987 crash, as told by a trader who lived through it

[WSJ] China’s Xi Approaches a New Term With a Souring Taste for Markets

Monday's News Links

[Bloomberg] Commodities Surge Led by Copper, Oil; Euro Weakens: Markets Wrap

[Reuters] Oil rises as fighting escalates in Iraq's oil-rich Kirkuk

[Reuters] As the quartet breaks up, central banking leadership flux looms

[Bloomberg] Shorts of Volatility Futures Set a New Record

[Bloomberg] The Crash of ’87, From the Wall Street Players Who Lived It

[Bloomberg] Fed's Rosengren Sees Taylor as `Flexible' in Applying Rules

[Bloomberg] China's Factory Inflation Rebounds Amid Capacity Cuts

[Bloomberg] China's Central Bank Chief Warns Corporate Debt Is Too High

[CNBC] China's Communist Party is holding its most important meeting in years: Here's what you need to know

[Bloomberg] Catalans Defend Claim to Independence as Spain Prepares to Act

[Reuters] Madrid moves towards direct rule over Catalonia

[Bloomberg] Theresa May Heads to Brussels to Try to Break Brexit Deadlock

[Reuters] Iraq forces seize Kirkuk outskirts in advance on Kurdish-held territory

[Reuters] Iraq says vast areas taken from Kurds in Kirkuk, Kurds deny gains

[Politico] Deficit hawks trampled in GOP tax cut stampede

[WSJ] Central Bankers Cling to Stimulus Amid Weak Inflation

[WSJ] GOP Tax Plan Would Keep the Mortgage Break But Threaten Irrelevancy

[FT] China’s party congress will matter for investors this time

[WSJ] As Islamic State Recedes, Iraqi Forces and Kurds Turn on Each Other

Saturday, October 14, 2017

Saturday's News Links

[Bloomberg] China Credit Growth Exceeds Estimates Despite Debt Curb Vow

[Reuters] Spain to take control of Catalonia if gets ambiguous reply on independence

[Reuters] China confirms will amend party constitution, likely to include Xi's theories

[AP] Trump’s speech sparks a new war of words between US, Iran

Weekly Commentary: Arms Race

Bloomberg: “Treasuries Surge as December Hike Odds Drop After CPI Miss.” Year-over-year CPI was up 2.2% in September, with consumer inflation above 2% y-o-y for six of the past 10 months. The Producer Price Index gained 2.6% y-o-y in September. Yet, apparently, the focus will remain on core CPI (along with core personal consumption expenditure inflation) that, up 1.7% y-o-y, missed estimates by one tenth and remained below 2% for the sixth straight month. Notably – analytically if not in the markets – the preliminary October reading of University of Michigan Consumer Confidence jumped six points to the high since January 2004. Or taking a slightly different view, Consumer Confidence has been stronger for only one month in the past 17 years. Current Conditions rose to the highest level since November 2000.

Data notwithstanding, from Bloomberg: “Bond Shorts Experience the Agony of Defeat Yet Again.” Ten-year Treasury yields declined nine bps this week to 2.27%, though I’m not sure this qualifies as “defeat.” In stark contrast to the fanatical gathering on the opposing side of the field, not a single central banker was spotted on the bond bears’ sideline.

October 12 – Financial Times (Sam Fleming): “Worries about the risk of stubbornly low inflation hung over the Federal Reserve’s most recent policy meeting, even as the central bank held its course for a further rate rise as soon as the end of the year. Many of the US central bank’s policymakers declared at its latest rate-setting meeting that a further increase is likely to be needed ‘later this year’ as long as the economy stays on track. But minutes of the Fed’s gathering on September 19-20 revealed a body of policymakers who are troubled by this year’s doggedly weak inflation readings and divided over how best to respond. Many expressed worries that poor price growth could reflect entrenched factors following a half-decade of sub-target readings on the Fed’s favoured measure of core inflation. Several insisted they wanted to see economic data that ‘increased their confidence’ that inflation would move towards the Fed’s 2% objective before they acted again.”

October 13 – Reuters (Balazs Koranyi): “European Central Bank policymakers are homing in on extending their stimulus programme for nine months at their next meeting while scaling it back, five people with direct knowledge of discussions told Reuters. The ECB’s asset purchases are due to expire at the end of the year, and policymakers are set to decide on Oct. 26 whether to prolong them. They will have to reconcile the bloc’s best growth run in a decade with an inflation rate expected to undershoot the bank’s target of almost 2% for years. The next move is still up for discussion, but there is a consensus that it should signal both the need to cut support in light of strong economic growth, while also committing to an extended period of monetary accommodation…”

October 13 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda on Thursday stressed the central bank’s resolve to maintain its ultra-loose monetary policy, even as its U.S. and European counterparts begin to dial back their massive, crisis-mode monetary stimulus. Kuroda offered an upbeat view of Japan’s economy, saying it was expanding moderately with rising incomes leading to higher corporate and household spending. But he said inflation and wage growth were disappointingly low, despite such improvements in the economy.”

Goldman Sachs reduced its probability of a December Fed rate hike to 75%, as dovish comments from Fed officials and dovish minutes from the September FOMC meeting allay concerns that the Fed was leaning “normalization.” So global markets take comfort that the Fed is largely on hold with rate hikes; a rate increase may be at least a year away in the euro zone as the ECB sticks to its max leisurely path to winding down QE; and, best yet, the Bank of Japan is gratified to wait and see how the others get along without aggressive stimulus before contemplating its own course.

The S&P500 gained 0.2% this week to new record highs, increasing y-t-d gains to 14%. Indicative of the froth that has taken hold throughout EM, bastions of stability South Korea (up 22% y-t-d) and Turkey (up 36%) gained 3.3% and 2.0%, respectively. Meanwhile, Bitcoin (U.S. spot) surged $1,275 this week (29%!) to $5,615, with 2017 gains of a cool 480%. If central bankers have any concern with acute asset price inflation and speculation it was not apparent this week. And, sure enough, no sooner than Fed officials reiterate below-target inflation angst the commodities pop. The GSCI Commodities index jumped 2.8% this week to a six-month high. Copper rose 2.8% this week, increasing y-t-d gains to 25%. Crude jumped 4.4%, silver 3.7% and Gold 2.2%.

Markets these days have attained that late-nineties feel. Manic 1999 had those crazy Internet stocks. Manic 2017 has the even crazier cryptocurrencies – with biotech (up 39% y-t-d) and semiconductor (up 35%) stocks straining to keep up with the insanity. In the face of conspicuous speculative excess, the Fed in 1999 held firm with its baby-step “tightening” approach that worked only to promote a further loosening of financial conditions. The 1998 crisis was fresh in central bankers’ minds, while markets delighted in the fear central bankers harbored over Y2K. As for central banks here in 2017, apparently the 2008 crisis will remain forever top of mind. Markets have never been as reassured that central bankers are loving the party.

By 1999, a policy-induced prolonged technology boom had fostered a veritable Arms Race, especially in anything Internet and PC. Finance was flooding into the sector, ensuring massive mal- and over-investment. The upshot was the rapid propagation of negative cash-flow enterprises that would turn unviable the minute the Bubble burst. The New Age hype had one thing right: Exciting new technologies changed the world. This did not, however, prevent painful busts and a pair of powerful financial crises.

There’s complacency along with a lack of appreciation for the long-term structural impact associated with late-nineties excesses. I continue to read of the “mild recession” after the bursting of the “tech” Bubble. In reality, collapse ensured depression throughout a segment of the economy. And let’s not forget the 2002 corporate debt crisis.

The Fed held powerful reflationary tools at its discretion. Rates were slashed from 6.5% in December 2000 all the way to 1.00% by June 2003. There was also a strong inflationary bias throughout mortgage finance and housing. This provided the Federal Reserve a robust avenue in which to promote record Credit growth and an attendant Bubble of sufficient scope to more than emerge from the technology bust. No nineties boom and bust then no mortgage finance Bubble reflation and resulting 2008 collapse – and no ongoing global government finance Bubble. Open the central bank crisis-fighting tool kit today and there’s a single slot for QE. Markets are elated with the virtually barren apparatus.

The current “tech” Bubble absolutely dwarfs the late-nineties period. Arms Races now proliferate across various industries, technologies and products on a global basis. Recalling 1999, media these days are filled with ads from scores of upstarts promoting new products and services. How many will ever generate positive cash-flow and earnings? The big global tech firms – flush with extraordinary boom-time profits – spend lavishly in an Arms Race for primacy over the cloud, artificial intelligence and myriad new services. Alternative energies, another Arms Race. Media, telecom, entertainment and programming – more Arms Races. Pharmaceuticals, biotech and biopharma…

And then there’s the massive Arms Race gathering momentum in electric vehicles. “British Vacuum Maker Dyson Plans Electric Car Assault” – with, it’s worth noting, a $2.0 billion investment. From the Seattle Times, “In Race for an Electric-Car Future, China Seeks the Lead.” With a blank checkbook and the power to ban the combustion engine, China will invest hundreds of billions in electric car and battery development. Will anyone ever earn a profit?

One can do worse than ponder the work of the great economist Joseph Schumpeter. Known most for the concept “creative destruction,” Schumpeter was an eminent thinker on economic development and Credit. He believed innovation often evolves in “swarm like clusters,” where development in one sector spurs innovation and development in other areas. Entrepreneur success in one field motivates entrepreneurship more generally. Moreover, innovation fuels - and is fueled by - Credit. The interplay of the entrepreneur and finance plays a fundamental role in boom and bust cycles. Eventually over-production, waning profits and Credit issues lead to cyclical downturn.

Schumpeter’s analysis would occasionally enter the discussion back in the late-nineties. Some of us would compare the proliferation of new technologies to that of the “Roaring Twenties” period (automotive, production line, electricity, radio & entertainment, refrigeration, household appliances, science & medicine, etc.). There’s no doubt that innovation and speculation tend to become kindred spirits.

The Greenspan Fed, Wall Street strategists and most economists argued during the nineties that new technologies had raised the economy’s “speed limit.” This meant less impetus to tap on the monetary brakes to subdue the boom. I saw things differently: Periods of breakneck innovation, technological advancement and resulting economic transformation beckon for a commitment to sound “money.” Especially in our age of unbounded market-based finance, captivating innovation in the real economy over time spurs precarious self-reinforcing excess in “money,” Credit, the securities markets and derivatives.

It’s my view that prolonged cycles of economic and financial innovation turn progressively more perilous. The key analysis from the “Roaring Twenties” period was one of spectacular economic and financial innovation commencing even before the outbreak of the first World War. As the Twenties progressed, our fledgling central bank misread the downward pressure on consumer prices. Technological advances, new production methods, a proliferation of new products, and booming international trade – all empowered by loose finance - were generating downward pressure on prices.

The Fed accommodated escalating financial excess and was later unwilling to risk bursting the Bubble (in the face of mounting late-cycle fragilities). At the heart of financial and economic excess was the prevailing view that the Federal Reserve possessed the tools to underpin uninterrupted financial and economic prosperity. The perception of adept central banking had become integral to a transformative change in inflation dynamics – massive investment spurring disinflation in the real economy in the face of powerful inflation dynamics raging in asset markets. What was viewed as an extraordinarily favorable fundamental backdrop was in reality an unsustainable boom, with an acutely unsound financial Bubble at its core. The many parallels to today are too obvious to ignore.

October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It's not clear what that means’.”

October 11 – Financial Times (Chris Giles): “Central bankers usurped the titans of Wall Street as the masters of the universe almost a decade ago. They rescued the global economy from the financial crisis, flooding the world with cheap money. They used their powers effectively to get banks lending again. Their actions raised asset prices, keeping business and consumer confidence up. Financial markets and populations hang on their words. But never have they been so vulnerable. As they gather in Washington for the annual meetings of the International Monetary Fund, there is a crisis of confidence in central banking. Their economic models are failing and there are doubts whether they understand the effects of interest rates and other monetary policies on the economy. In short, the new masters of the universe might not understand what makes a modern economy tick and their well-intentioned actions could prove harmful. While there have long been critics of the power of central bankers on the left and the right, such profound doubts have never been so present within their narrow world.”

For those interested, McAlvany Wealth Management’s Tactical Short Q3 Update conference call will be next Wednesday, October 18th at 4:30 pm EST.   For more information please visit: https://mwealthm.com/register/


For the Week:

The S&P500 added 0.2% (up 14.0% y-t-d), and the Dow increased 0.4% (up 15.7%). The Utilities gained 1.2% (up 11.0%). The Banks dropped 1.9% (up 7.7%), and the Broker/Dealers slipped 0.6% (up 20.1%). The Transports added 0.5% (up 9.9%). The S&P 400 Midcaps were unchanged (up 9.5%), while the small cap Russell 2000 dipped 0.5% (up 10.7%). The Nasdaq100 increased 0.5% (up 25.3%). The Semiconductors jumped 2.3% (up 34.5%). The Biotechs declined 0.5% (up 38.6%). With bullion rallying $28, the HUI gold index increased only 0.3% (up 11.2%).

Three-month Treasury bill rates ended the week at 105 bps. Two-year government yields slipped a basis point to 1.50% (up 30bps y-t-d). Five-year T-note yields declined six bps to 1.90% (down 3bps). Ten-year Treasury yields fell nine bps to 2.27% (down 17bps). Long bond yields dropped nine bps to 2.81% (down 26bps).

Greek 10-year yields declined six bps to 5.49% (down 153bps y-t-d). Ten-year Portuguese yields fell eight bps to 2.33% (down 141bps). Italian 10-year yields declined six bps to 2.08% (up 27bps). Spain's 10-year yields dropped 10 bps to 1.61% (up 23bps). German bund yields fell six bps to 0.40% (up 20bps). French yields rose eight bps to 0.82% (up 14bps). The French to German 10-year bond spread widened 14 bps to 42 bps. U.K. 10-year gilt yields were little changed at 1.37% (up 13bps). U.K.'s FTSE equities added 0.2% (up 5.5%).

Japan's Nikkei 225 equities index jumped 2.2% (up 10.7% y-t-d). Japanese 10-year "JGB" yields added one basis point to 0.06% (up 2bps). France's CAC40 slipped 0.2% (up 10.1%). The German DAX equities index increased 0.3% (up 13.2%). Spain's IBEX 35 equities index rallied 0.7% (up 9.7%). Italy's FTSE MIB index was little changed (up 16.5%). EM equities were mostly higher. Brazil's Bovespa index gained 1.2% (up 27.8%), while Mexico's Bolsa declined 0.6% (up 9.5%). India’s Sensex equities index rose 1.9% (up 21.8%). China’s Shanghai Exchange gained 1.2% (up 9.2%). Turkey's Borsa Istanbul National 100 index rose 2.0% (up 35.9%). Russia's MICEX equities index increased 0.2% (down 6.0%).

Junk bond mutual funds saw inflows rise to $967 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose six bps to a 10-month high 3.91% (up 44bps y-o-y). Fifteen-year rates gained six bps to 3.21% (up 45bps).  Five-year hybrid ARM rates slipped two bps to 3.16% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.18% (up 54bps).

Federal Reserve Credit last week slipped $1.2bn to $4.419 TN. Over the past year, Fed Credit was little changed. Fed Credit inflated $1.608 TN, or 57%, over the past 257 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $5.7bn last week to $3.360 TN. "Custody holdings" were up $214bn y-o-y, or 6.8%.

M2 (narrow) "money" supply last week rose $12.2bn to a record $13.709 TN. "Narrow money" expanded $681bn, or 5.2%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits declined $1.0bn, while Savings Deposits added $7.7bn. Small Time Deposits gained $2.0bn. Retail Money Funds increased $2.3bn.

Total money market fund assets were little changed at $2.741 TN. Money Funds increased $93bn y-o-y, or 3.5%.

Total Commercial Paper declined $5.4bn to $1.064 TN. CP gained $161bn y-o-y, or 17.6%.

Currency Watch:

The U.S. dollar index declined 0.8% to 93.091 (down 9.1% y-t-d). For the week on the upside, the South African rand increased 3.6%, the British pound 1.7%, the Australian dollar 1.5%, the South Korean won 1.5%, the Norwegian krone 1.4%, the New Zealand dollar 1.2%, the Singapore dollar 1.2%, the euro 0.8%, the Japanese yen 0.7%, the Swiss franc 0.5%, the Canadian dollar 0.5%, the Brazilian real 0.3% and the Swedish krona 0.1%. For the week on the downside, the Mexican peso declined 2.0%. The Chinese renminbi gained 1.11% versus the dollar this week (up 5.55% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index surged 2.8% (up 1.1% y-t-d). Spot Gold rallied 2.2% to $1,305 (up 13.2%). Silver jumped 3.7% to $17.411 (up 9.0%). Crude surged $2.16 to $51.45 (down 4%). Gasoline jumped 4.1% (down 3%), and Natural Gas rose 4.8% (down 20%). Copper advanced 3.4% (up 25%). Wheat declined 0.9% (up 8%). Corn gained 0.8% (unchanged).

Trump Administration Watch:

October 13 – Bloomberg (Zachary Tracer): “President Donald Trump said he is moving “step by step” on his own to remake the U.S. health care system because Congress won’t act on his demand to repeal Obamacare. The Trump administration took its most drastic measure yet to roll back the Affordable Care Act Thursday evening, announcing it would cut off a subsidy to insurers hours after issuing an executive order designed to draw people away from the health law’s markets. The moves -- which critics call deliberate attempts to undermine the law -- come just weeks before Americans begin to sign up for coverage in 2018. ‘You saw what we did yesterday with respect to health care,’ Trump said at a Washington event… ‘It’s step by step by step. That was a big step yesterday.’”

October 13 – CNN (Stephen Collinson, Kevin Liptak and Dan Merica): “President Donald Trump on Friday threatened to pull out of a deal freezing and reversing Iran's nuclear program if Congress and US allies do not agree to strengthen it, as he unveiled a tough and comprehensive new policy toward the Islamic Republic. ‘As I have said many times, the Iran deal was one of the worst and most one-sided transactions the United States has ever entered into,’ Trump said in a major speech at the White House.”

October 11 – Politico (Burgess Everett): “Senate Republicans are imploring President Donald Trump and Sen. Bob Corker to end their increasingly ugly feud, fretting that it's threatening to further hobble the party's flagging agenda. But the public tit-for-tat has shown no sign of abating… On Tuesday, Trump took to Twitter to lambaste ‘Liddle Bob Corker,’ after the Tennessee Republican said he worried that Trump’s belligerent foreign policy rhetoric could ignite ‘World War III.’ Former Trump strategist Steve Bannon called on Corker to resign…”

October 11 – Wall Street Journal (Jacob M. Schlesinger): “The Trump administration has honed its strategy for remaking the North American Free Trade Agreement in recent weeks as it prepared for a critical round of talks that started Wednesday—by proposing a number of specific ways to water down the pact and reduce its influence on companies. U.S. trade officials have made that theme clear in recent days, prompting a backlash from Mexico and Canada and from business groups in all three countries, casting new uncertainty over the talks… One provision designed with that objective is a ‘sunset’ clause that would force Nafta’s expiration in five years unless all three countries act to renew it…”

October 8 – BBC: “‘Only one thing will work’ in dealing with North Korea after years of talks with Pyongyang brought no results, US President Donald Trump has warned. ‘Presidents and their administrations have been talking to North Korea for 25 years,’ he tweeted, adding that this ‘hasn't worked’. Mr Trump did not elaborate further.”

October 9 – Financial Times (Bryan Harris): “A trove of classified military documents, including the joint South Korea-US wartime operational plans for conflict with Pyongyang, was stolen by North Korean hackers, a lawmaker in Seoul said. Lee Cheol-hee… said hackers had broken into a defence data centre in September last year. He said stolen documents included Operational Plan 5015, the most recent blueprint for war with North Korea. The plans reportedly includes detailed procedures for a decapitation strike against the North Korean regime, a proposal that has infuriated Kim Jong Un… The development comes amid growing anxiety in South Korea that US President Donald Trump intends to use military action to curb North Korea’s rapidly developing nuclear and ballistic missiles programmes.”

October 11 – Reuters (Idrees Ali): “A U.S. Navy destroyer sailed near islands claimed by China in the South China Sea on Tuesday…, prompting anger in Beijing, even as President Donald Trump’s administration seeks Chinese cooperation in reining in North Korea’s missile and nuclear programs.”

October 8 – Reuters (Babak Dehghanpisheh and William Maclean): “Iran warned the United States against designating its Revolutionary Guards Corp as a terrorist group and said U.S. regional military bases would be at risk if further sanctions were passed. The warning came after the White House said… that President Donald Trump would announce new U.S. responses to Iran’s missile tests, support for ‘terrorism’ and cyber operations as part of his new Iran strategy. ‘As we’ve announced in the past, if America’s new law for sanctions is passed, this country will have to move their regional bases outside the 2,000 km range of Iran’s missiles’” Guards’ commander Mohammad Ali Jafari said…”

Federal Reserve Watch:

October 10 – CNBC (Jeff Cox): “The contest for who will become the next head of the Federal Reserve appears to be coming down to two pretty different choices. In recent days, market participants have become more focused on former Fed Governor Kevin Warsh and current Governor Jerome ‘Jay’ Powell. While Warsh has long been considered a front-runner to head the central bank, Powell has emerged only lately as a compromise candidate who may just get the nod. Fed watchers are keeping a close eye on PredictIt, a predictions market site… He has met with both Powell and Warsh, as well as Yellen and Gary Cohn, the president's chief economic advisor. As of Tuesday morning, PredictIt puts Powell in the lead, with a 40% chance, while Warsh had a 30% likelihood.”

October 10 – Reuters (Ann Saphir): “Dallas Federal Reserve Bank President Robert Kaplan said… he wants to see more signs of upward inflation before raising interest rates again, but that low long-term borrowing costs may limit how far and fast rates can be raised. The Fed has raised rates twice this year, and is widely expected to do so again in December. But even as the short-term interest rate targeted by the Fed has climbed, the yield on the benchmark 10-year Treasury has fallen, a reversal of what usually happens and a development that Kaplan said he sees as ‘a little ominous.’ ‘I view that as a comment on future economic growth,” Kaplan said... ‘And what I don’t want to see us do is raise rates so fast that we get an inverted yield curve because history has shown an inverted yield curve has tended to be a precursor to a recession.’”

U.S. Bubble Watch:

October 10 – Bloomberg (Jeanna Smialek): “A buoyant and complacent stock market is worrying Richard H. Thaler, the University of Chicago professor who this week won the Nobel Prize in economics. ‘We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,’ Thaler said…’I admit to not understanding it.’”

October 11 – CNBC (Fred Imbert): “BlackRock, the world's largest asset manager, reported better-than-expected third-quarter results… Total assets under management rose 17% to nearly $6 trillion as net inflows easily beat Wall Street expectations… Total assets under management: $5.977 trillion vs StreetAccount's projected $5.94 trillion. Net inflows: $96 billion vs $71.62 billion expected.”

October 11 – Wall Street Journal (Sarah Krouse): “Investors plowed nearly $300 billion into Vanguard Group funds in the first nine months of this year, nearly matching flows into the firm for all of 2016 in the latest affirmation of the primacy of low-cost ‘passive’ investing. The torrent of investor money extends a winning streak for the... firm, which has emerged as one of the chief beneficiaries of Americans’ unprecedented embrace of index funds during an eight-year-old U.S. stock bull market.”

October 8 – Financial Times (Joe Rennison and John Authers): “The head of the fourth-largest exchange traded fund provider has warned that investors are blindly pouring money into highly concentrated stock indices, putting them at risk of outsized losses if markets tumble. Martin Flanagan, president and chief executive of Invesco… said that relying on indices that weight stocks according to their market value could inflate losses if stock markets take a nosedive. So-called ‘cap-weighted’ indices direct money to the largest companies and to stocks with higher valuations. There has been an age-old debate within the passive asset management industry about the high concentrations these products can produce. The S&P 500, the index tracked by the most widely held ETF, is currently dominated by five large technology companies — Apple, Google’s holding company Alphabet, Microsoft, Amazon and Facebook — which make up 11.7% of the total index… ‘Too many people have created their total portfolios with cap-weighted indexes thinking they are safe and cheap,’ said Mr Flanagan. ‘The reality is they are turning more and more into momentum plays. You are ending up with a disproportionate amount of your portfolio in the biggest stocks.’”

October 8 – Financial Times (Eric Platt): “As President Donald Trump touched down at San Juan airport last week, 36-year-old Tanya Diaz was heading in the opposite direction. Although she has no job to go to Ms Diaz, her two sons and grandmother flew to California to escape the aftermath of Hurricane Maria… Some estimates suggest that more than 400,000 of the country’s 3.4m population will follow Ms Diaz in the coming years as the Caribbean island, which has already defaulted on its debt obligations, now confronts something that could be even more devastating to its economic recovery — losing thousands of its most talented people.”

October 10 – Bloomberg (Claire Boston): “Working-class Americans devoted a growing percentage of their income toward paying their debts last year, the first increase since 2010 and a shift that is likely contributing to rising default rates, Moody’s… said. The families’ debt burdens are still relatively low compared with earnings-- less than they’ve been for most of the last three decades… But the borrowers are accumulating more debt even as the economy continues its recovery, which could create problems for lenders if U.S. growth slows, said Jody Shenn, a senior analyst at the bond grader. ‘We are seeing signs of the credit cycle turning,’ Shenn said… It’s important to look out for signs of stress ‘and think about the implications when the economy does hit a rough patch.’”

China Bubble Watch:

October 9 – Financial Times (Tom Mitchell): “China’s outgoing central bank governor has called for an urgent return to his stalled capital account reforms, warning his country’s leaders that the opportunity to further open the economy ‘must be seized’. ‘No country can achieve an open economy with strict foreign exchange controls,’ Zhou Xiaochuan said… ‘Time windows are very important for reforms and must be seized. If missed, the cost of reform will be higher in future.’ Mr Zhou, who has run the People’s Bank of China since 2002, was speaking ahead of a Chinese Communist party congress next week that will mark the start of President Xi Jinping’s second five-year term.”

October 12 – Wall Street Journal (Aaron Back): “The Chinese government is pushing some of its biggest tech companies—including Tencent, Weibo and a unit of Alibaba—to offer the state a stake in them and a direct role in corporate decisions. Wary of the increasing power of private businesses, internet regulators have discussed taking 1% stakes with social-media powers Tencent Holdings Ltd. and Weibo Corp. and with Youku Tudou… While the authoritarian government already exerts heavy sway over businesses through regulation, a management role would give Beijing a direct hand in innovative companies that service hundreds of millions of Chinese.”

Central Banker Watch:

October 8 – Wall Street Journal (Josh Zumbrun): “A synchronized global economic expansion is leading to a big shift in monetary policy around the world—toward central banks shrinking rather than growing—with implications for markets, inflation and the outlook for growth. Following the financial crisis from 2007-2009, the world’s big central banks had been net buyers of financial assets in global markets, expanding their portfolios of government bonds, mortgage debt and corporate securities by 1% to 3% of global economic output per year for much of the past six years. Now that’s changing. The Bank of England announced in February it would mostly end its bond purchases, the Fed stopped buying bonds at the end of 2014 and announced in September it would move ahead with a plan to gradually shrink its holdings, and the European Central Bank is expected to announce at the end of October it will slow its pace of purchases.”

October 8 – Bloomberg (Adam Haigh): “Financial markets may be underpricing global risks, leaving them vulnerable to a major correction, …European Central Bank Governing Council member Klaas Knot warned. As global stocks surge, measures of volatility suggest unprecedented calm even as crises around the world -- including the Catalan separatists in Spain, Turkey’s diplomatic row with the U.S., North Korea’s missile tests and the danger of a hard Brexit -- make political headlines. ‘It increasingly feels uncomfortable to have low volatility in the markets on the one hand while on the other hand there are risks in the global economy,’ said Knot, who is also the president of the Dutch Central Bank.”

Global Bubble Watch:

October 11 – Wall Street Journal (Carolyn Cui and Manju Dalal): “Investors’ thirst for income is enabling governments and companies in some of the world’s poorest countries to sell debt at lower and lower interest rates. And the global bond boom has even reached Tajikistan. The central Asian country last month raised $500 million in its first-ever international bond sale, paying just 7.125% in annual interest… Greece, which was on the brink of default a few years ago, issued new bonds this past summer, and the National Bank of Greece launched a bond sale Tuesday, marking the first visit of a Greek bank to the credit markets since the country’s sovereign-debt crisis. And June saw the bond-market debut of the Maldives, a tiny nation in the Indian Ocean that raised $200 million in a sale of five-year bonds with a 7% coupon. Speculative-grade bond issuance in the developing world has hit a record $221 billion this year, according to data from J.P. Morgan… and Dealogic, up 60% from the full-year total in 2016.”

October 11 – Financial Times (Shawn Donnan): “The International Monetary Fund has warned that good times in the global economy mask longer-term risks, including a $135tn debt pile in G20 nations that companies and consumers are already finding difficult to service. A day after upgrading its global growth forecasts for this year and next the IMF warned… that benign economic conditions were fuelling an appetite for risk that, together with central banks’ response to the 2008 global crisis, appeared to be laying the ground for a new financial crunch. ‘While the waters seem calm, vulnerabilities are building under the surface [and] if left unattended, these could derail the global recovery,’ said Tobias Adrian, of the IMF’s financial stability watchdog… The US and China each accounted for about a third of the $80tn increase in debt since 2006, the IMF said.”

October 10 – CNBC (Evelyn Cheng): “The next global economic slowdown could come from rising risks outside the banking sector, according to the International Monetary Fund. Leverage in the nonfinancial sector for G-20 economies as a whole has surpassed its pre-crisis high, the IMF said… in its Global Financial Stability Report. Nonfinancial sector debt refers to borrowing by governments, nonfinancial companies and households. The total level of that debt for G-20 economies rose to $135 trillion, or about 235% of aggregate gross domestic product in 2016, surpassing the debt-to-GDP ratio of 210% in 2006, before the financial crisis…”

October 8 – Financial Times (Guy Chazan): “Wolfgang Schäuble has warned that spiralling levels of global debt and liquidity present a big risk to the world economy, in his parting shot as Germany’s finance minister. In an interview with the Financial Times, the Europhile who has steered one of the world’s largest economies for the past eight years, said there was a danger of ‘new bubbles’ forming due to the trillions of dollars that central banks have pumped into markets. Mr Schäuble also warned of risks to stability in the eurozone, particularly from bank balance sheets burdened by the post-crisis legacy of non-performing loans.”

October 11 – Bloomberg (Olga Kharif and Camila Russo): “Regulators worldwide are finding that it’s incredibly hard to control the explosive growth of money tied to no nation. Russian President Vladimir Putin is the latest to call for regulation of cryptocurrencies, saying there are ‘serious risks’ they can be used for money laundering or tax evasion. Finance Minister Anton Siluanov has called for regulating digital money as securities, while central bank officials vowed to work with prosecutors to block websites that allow retail investors access to bitcoin exchanges. ‘We think this is a pyramid scheme,’ said Sergey Shvetsov, first deputy governor of the central bank. Global efforts to regulate digital money have accelerated in the past month since China banned initial coin offerings and ordered all cryptocurrency exchanges to close, following inspections of more than 1,000 trading venues over a six-month period.”

October 12 – CNBC (Arjun Kharpal): “Bitcoin hit a new record high Thursday with rising investor interest causing a rally for the price of the cryptocurrency. Bitcoin climbed 11% to an all-time high of $5,364.10, according to… Coindesk. This surpassed the previous high of $5,013.91 hit on September 2. With Thursday's gains, bitcoin is now up around 454% year-to-date.”

October 12 – Wall Street Journal (Aaron Back): “China’s seemingly insatiable demand for foreign assets has driven up prices for everything from U.S. Treasury bonds to global companies to luxury real estate. Now, a combination of market forces and capital controls are choking off the flow of Chinese cash. Asset markets around the world will have to adjust.”

Fixed-Income Bubble Watch:


October 12 – Financial Times (Miles Johnson): “A boom in issuance of risky debt used to finance takeovers has resulted in a fee bonanza for investment bankers, with revenues generated this year from selling leveraged loans and high-yield bonds close to surpassing their post-crisis peak. Investment banks have made $10.5bn in revenues from selling leveraged finance deals so far this year, up from $6.9bn in 2016 and have hit the highest level since 2013… The surge in fees paid for arranging junk bond and leveraged loan deals reflects an explosion in demand for riskier debt from yield-starved institutional investors, such as pension funds, which have been among the largest buyers of $1.1tn of this debt so far this year. This appetite has helped private equity companies in Europe and the US finance an acquisition spree over the past 12 months larger than at any time since the financial crisis, with leveraged buyouts in Europe and the US this year surpassing $200bn.”

October 10 – Financial Times (Eric Platt): “With eight words last week, US president Donald Trump sent a tremor through Puerto Rico’s $74bn of debt and the broader municipal bond market, where states and local governments borrow to fund critical infrastructure projects and services. The president and former real estate mogul warned, in a heavily scrutinised interview, that ‘we’re going to have to wipe that out’ after Hurricane Maria devastated the island. That knocked the US’s $3.8tn municipal bond market. It suffered outflows in the seven days to October 4, the first redemptions since early July… Retail investors have pulled cash from muni bond funds every day since Mr Trump told investors to ‘say goodbye’ to the debt…”

Europe Watch:

October 11 – Bloomberg (Angeline Benoit, Todd White and Charles Penty): “Spanish Prime Minister Mariano Rajoy stepped up pressure on Catalonia to halt its drive for independence, taking the first step in a process that could strip the region’s separatist government of its limited autonomy and impose direct control from Madrid. Rajoy convened an emergency session of cabinet…, at which ministers agreed to issue a formal request to the Catalan government for confirmation of whether it had declared independence… Catalan President Carles Puigdemont’s response to the request will determine what happens next, Rajoy said… Rajoy’s request is a preamble to triggering Article 155 of the Spanish Constitution, a move that would enable him to suspend Catalonia’s devolved government and take over control of its affairs in what would represent an ultimate defeat of the Catalan leadership.”

October 11 – Bloomberg (Alessandro Speciale, Piotr Skolimowski and Carolynn Look): “European Central Bank policy makers are poised to preserve their commitment to ultra-low interest rates even as they wrangle over how long to keep their bond-buying program going. Members of President Mario Draghi’s Governing Council will meet this month amid discord over whether a strengthening economy means now is the time to plot an end to more than 2 1/2 years of quantitative easing or whether to keep it going until inflation accelerates. Where there is agreement is on keeping a pledge to not raise interest rates until ‘well past’ the end of bond buying, according to euro-area central bank officials… Maintaining that promise would remove one potential point of contention in the debate while offering reassurance to investors that higher borrowing costs won’t be imminent when purchases slow.”

Brexit Watch:

October 12 – Bloomberg (Ian Wishart and Tim Ross): “The European Union said talks hit an impasse over what the U.K. owes when it leaves, increasing the chances of a messy departure as time is running out to clinch a deal. The pound fell to the weakest in a month after chief EU negotiator Michel Barnier said there had been no discussions over the all-important bill that the U.K. has to agree it will pay before the EU will start trade talks. Barnier put the onus firmly on the U.K.’s squabbling government to find the political will to move the talks forward, while both sides raised the prospect of talks breaking down without an agreement -- throwing businesses into a chaotic legal limbo.”

Emerging Market Watch:

October 8 – Bloomberg (Adam Haigh): “Emerging-market investors were handed a timely reminder that political risk is never very far away. The lira briefly tumbled to a record low on Monday morning against a basket of currencies including the euro and the dollar as tensions between Turkey and the U.S. escalated. It’s the last thing the country needs -- with widening twin deficits in Turkey already dampening sentiment together with concern many emerging-market assets will be weakened in a climate of higher U.S. interest rates. Investors this year have already had to cope with President Recep Tayyip Erdogan’s state of emergency and the nation’s companies continue to grapple with vast financing needs… And the yield-hunting global wave of money means that appetite for lira-denominated assets has remained strong and may continue to be so if this latest political spat can be cooled quickly.”

Geopolitical Watch:

October 10 – Reuters (Christine Kim and Eric Beech): “The U.S. military flew two strategic bombers over the Korean peninsula in a show of force late on Tuesday, as President Donald Trump met top defense officials to discuss how to respond to any threat from North Korea. Tensions have soared between the United States and North Korea following a series of weapons tests by Pyongyang and a string of increasingly bellicose exchanges between Trump and North Korean leader Kim Jong Un.”

October 12 – Wall Street Journal (Yaroslav Trofimov): “Here’s one measure of where Turkey stands in today’s world. Russian and Iranian citizens are free to enter the country without a visa. Americans, following the recent spat over the detention of a U.S. consulate employee, are essentially barred from traveling to their fellow North Atlantic Treaty Organization ally. The unfolding breakup between Turkey and the U.S. goes far beyond that dispute. It is fueled by increasing frustration on both sides—and is encouraged by countries most interested in such a separation, especially Russia and Iran. Even in the Syrian war, Turkey now has found itself in a new convergence of aims with Moscow and Tehran—and opposing American goals.”

October 10 – NBC (Andrea Mitchell and Ken Dilanian): “The cybersecurity company FireEye says in a new report to private clients, obtained exclusively by NBC News, that hackers linked to North Korea recently targeted U.S. electric power companies with spearphishing emails.

The emails used fake invitations to a fundraiser to target victims, FireEye said. A victim who downloaded the invitation attached to the email would also be downloading malware into his or her computer network…”