Saturday, September 24, 2016

Saturday's News Links

[Bloomberg] Merkel Rules out Assistance for Deutsche Bank, Focus Reports

[Bloomberg] Schaeuble Urges Lawmakers to Go Tough on Draghi, Bild Reports

[Reuters] U.S. presidential contest takes center stage for investors

[NYT] In Australia, China’s Appetite Shifts From Rocks to Real Estate

[Yahoo] Tom Ridge: Cyber attacks are now worse than physical attacks

Weekly Commentary: Like Old Times: Q2 2016 Flow of Funds

The beginning of the year seems ages ago.  Recall how securities markets fell under significant stress. Global central bankers responded (Pavlovian) with more QE and lower rates. Here at home, the Fed suspended its rate “normalization” plan after one single little baby-step. As for the Fed’s Q2 2016 “flow of funds” report, it was almost Like Old Times. Rapid GSE growth helped to liquefy U.S. securities markets, spurring speculative leveraging and Wall Street finance more generally, including securities firms balance sheets, “repos”, funding corps and, even, mortgage lending. Credit inflated, securities markets inflated, Household Net Worth inflated and the mirage of great wealth endured.

For the second quarter, Total Non-Financial Debt (NFD) expanded at a 4.4% rate, down from Q1’s 5.4% (while matching Q2 2015). Household debt growth jumped to a 4.4% pace (from Q1’s 2.7%), the strongest expansion in two years. Total Business (including financial) debt growth dropped to 4.1% from Q1’s 9.4% pace (and vs. Q2 2015’s 7.9%), the slowest expansion in 10 quarters (Q4 2013). State & Local borrowings expanded at a 2.2% rate, up from Q1’s 0.8% to the strongest rate since Q4 2010. Federal government borrowings slowed slightly from 5.6% to 5.0%, which was about double the growth from Q2 2015 (2.7%).

In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $1.999 TN, right at my theoretical bogey for Credit growth sufficient to sustain the U.S. Bubble. During Q2, Household debt expanded SAAR $622bn, surpassing Total Business ($540bn) for the first time since Q1 2011. State & Local borrowings expanded SAAR $66bn.

Leading the Credit charge – once again - was the federal government. Federal borrowing jumped SAAR $751bn, down from Q1’s $852 but still the strongest Q2 borrowings since 2012. Federal expenditures rose to a record SAAR $4.137 TN, up 41% compared to pre-crisis Q2 2007. At SAAR $3.470 TN, Q2 federal receipts were up 30% compared to Q2 2007. Deficits have this year been running at the fastest pace since 2012.

Also keeping quite occupied in Washington, GSE holdings jumped SAAR $348bn. This was up sharply from Q1’s $9.9bn growth and Q2 2015’s $70.9bn. GSE holdings enjoyed their strongest quarterly expansion since Q2 2008. The second quarter saw FHLB (Federal Home Loan Banks) Loans increase SAAR $168bn (up from Q1’s $51bn), the biggest quarterly growth since Q3 2008. (Worth noting from FHLB financial statements, Advances to Member Banks expanded almost 9% in the year’s first half to $690bn). Again, Like Old Times.

Total Agency- and GSE-backed Securities expanded SAAR $581bn (GSE debt $422bn and MBS $159bn) during Q2, up from Q1’s $60.4bn and Q2 2015’s $216bn. Here as well, Q2 saw the strongest expansion in GSE Securities since Q3 2008. For perspective, GSE Securities increased $293bn in (bond crisis) 1994, $474bn in (Russia/LTCM) 1998, $593bn in (Y2K) 1999, $642bn in (tech crash) 2001 and $547bn in (corporate Credit crisis) 2002. The big buyers of Agency securities during Q2? Money Market Mutual Funds increased GSE holdings by SAAR $403bn during the quarter. ROW snapped up SAAR $104bn.

Security Brokers/Dealer holdings expanded SAAR $301bn (strongest quarter since Q1 2012), up from Q1’s SAAR $195bn and Q2 2015’s SAAR $135bn contraction. Debt Security holdings rose SAAR $174bn and Repos surged SAAR $328bn. Miscellaneous Assets declined SAAR $250bn. On the Liability side, Repos rose SAAR $228bn and Misc. - Other increased SAAR $92bn.

Riding a nice GSE tailwind, securities finance enjoyed a banner quarter. Federal Funds and Security Repurchase Agreements increased SAAR $627bn, the biggest quarterly increase since Q1 2008. This reversed two quarters of Repo contraction, in what has been extraordinary quarter-to-quarter volatility. Funding Corps expanded SAAR $27bn during Q2, increasing one-year growth to $233bn, or 16.8%.

Corporate (and Foreign) Bond issuance slowed to $90.5bn during the quarter, down from Q1’s booming $494bn and Q2 2015’s $591bn. And while there may have been some temporary tightening of corporate Credit, the opposite was true elsewhere. Consumer Credit expanded SAAR $230bn, up from Q1’s SAAR $199bn and compared to Q2 2015’s SAAR $267bn. Trade Credit surged SAAR $250bn, up from Q1’s $53.1bn and Q2 2015’s SAAR $170bn.

Private Depository Institutions (banks) increased Debt Securities holdings SAAR $316bn, up from Q1’s $148bn and Q2 2015’s $142bn. Loans expanded SAAR $679bn, down from Q1’s $783bn and compared to Q2 2015’s $639bn. For comparison, Loans increased $261bn in 2013, $579bn in 2014 and $676bn in 2015. Notably, mortgage loans, held as bank assets, jumped SAAR $390bn during Q2, the strongest mortgage lending since Q3 2007 ($433bn).

Total Mortgage Debt expanded SAAR $521bn, the biggest mortgage debt increase since before the crisis (Q1 2008). Total Home Mortgage Debt increased SAAR $259bn (up from Q1’s $205bn and Q2 2015’s $215bn), matched by an almost equal amount of Multifamily and Commercial mortgage debt growth.

Rest of World (ROW) increased holdings of U.S. Financial Assets by a notable SAAR $1.193 TN during Q2, up from Q1’s $444bn to the highest level since Q1 2015. ROW Debt Securities holdings increased SAAR $417bn, led by a SAAR $324bn increase in U.S. Corporate Bonds. Foreign Direct Investment (FDI) jumped SAAR $606bn. Also noteworthy, ROW U.S. Liabilities jumped SAAR $1.061 TN, led by a SAAR $383bn increase in Repos. Like Old - 2006 and 2007 - Times.

Total Debt Securities (Fed’s compilation) ended Q2 at a record $40.581 TN, up a nominal $252bn for the quarter and $1.618 TN (4.2%) over four quarters. Total Debt Securities expanded $9.635 TN, or 31%, since the end of 2007. Over this period, Treasury Securities increased to $15.385 TN from $6.051 TN, for growth of 154%. The increase in Treasuries accounted for 84% of the growth of Total Debt Securities. Outstanding GSE Securities increased $926bn (13%) over this period to $8.324 TN. As such, the combined growth of “Washington finance” (Treasury & GSE) amounted to 92% of the Total Debt Securities expansion since the beginning of 2008.

Total Debt Securities ended Q2 at 220% of GDP. This compares to 200% to end 2007. Equities ended Q2 at $36.112 TN (down $1.415 TN y-o-y), or 196% of GDP. Equities peaked at $26.433 TN, or 181% of GDP, during Q3 2007.

Total (Debt and Equities) Securities ended Q2 at $76.693 TN, or 416% of GDP. Total Securities to GDP began the eighties at 117% ($3.086 TN) and the nineties at 193% ($10.937 TN). This ratio ended Bubble year 1999 at 360% ($34.753 TN) and Bubble year 2007 at 378% ($54.768 TN) - (peaked Q3 2007 at 379%).

The Household balance sheet remains fundamental to Bubble Analysis. Household Assets inflated $1.238 TN during Q2 to a record $103.750 TN, with both Real Estate ($25.6 TN) and Financial Assets ($72.3 TN) at record highs. Household Assets increased $3.053 TN (3.0%) y-o-y and were up $8.023 TN (8.4%) in two years. With Household Liabilities increasing $163bn during Q2, Household Net Worth jumped $1.075 TN during the period to a record $89.063 TN. Since the end of 2008, Household Net Worth has inflated $33.30 TN, or 60%. Household Net Worth had peaked previously at $67.744 TN during Q2 2007.

The ratio of Household Net Worth to GDP increased two percentage points to 483%. Net Worth to GDP peaked at 379% (1989) during the eighties Bubble; 435% (Q4 1999) during the “Tech” Bubble; and 473% (Q1 2007) during the mortgage finance Bubble period.

September 21 - Reuters (Leika Kihara and Stanley White): “The Bank of Japan made an abrupt shift on Wednesday to targeting interest rates on government bonds to achieve its elusive inflation target, after years of massive money printing failed to jolt the economy out of decades-long stagnation. While the BOJ reassured markets it would continue to buy large amounts of bonds and riskier assets, the policy reboot appeared to open the door for an eventual winding down of its huge asset purchases, and tried to repair some of the damage caused by its shock move to negative rates early this year. ‘The impression is that the BOJ is starting to pull back some of its troops from the battlefront,’ said Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. The BOJ's increasingly radical stimulus efforts are being closely watched by other global central banks which are also struggling to revive growth…"

It was another interesting week. No meaningful surprises from the Fed or the Bank of Japan (BOJ). A Bloomberg headline capture market sentiment: “Kuroda’s Journey From Shock-And-Awe to Bond Market Fine-Tuning.” The Fed again refrained from a second baby step, while forewarning the markets of a likely hike in December. Market participants chuckled as they bought stocks, risk assets and precious metals.

And it’s all been fun and games. Except for the harsh reality that QE hasn’t been working, and the markets know that policymakers know. Policymakers will never admit as much, but they’ve run short of options. Japan is an absolute policy debacle in the making. European bank problems continue to fester – in Italy, Germany and elsewhere. Here in the U.S., a potentially destabilizing election is now just about six weeks away. And let’s not forget the historic Chinese Credit Bubble that gets scarier by the week.

September 23 - CNBC (Katy Barnato): “Toxic loans in the Chinese financial system could be 10 times as high as official estimates suggest, Fitch Ratings has warned. The international ratings agency said in a report on Thursday that, as a proportion of China's total loan pool, non-performing loans (NPLs) could be as high as 15-21 percent. By comparison, official data put the NPL ratio for commercial banks at 1.8%... ‘There seems a high likelihood that banks' NPL ratios will continue rising over the medium term, in light of this discrepancy. There are already signs of stress, most obviously in the increased frequency with which banks are writing off or offloading loans, such as those to asset-management companies’… Solving China's bad loan problem would result in a capital shortfall of 7.4 trillion-13.6 trillion yuan ($1.1-2.1 trillion), equivalent to around 11-20% of China's economy, Fitch said.”


For the Week:

The S&P500 rallied 1.2% (up 5.9% y-t-d), and the Dow increased 0.8% (up 4.8%). The Utilities surged 3.4% (up 18.3%). The Banks gained 1.3% (down 2.5%), and the Broker/Dealers jumped 1.8% (down 2.4%). The Transports rose 2.1% (up 5.7%). The broader market was strong. The S&P 400 Midcaps rallied 2.0% (up 10.9%), and the small cap Russell 2000 surged 2.4% (up 10.5%). The Nasdaq100 increased 0.8% (up 5.8%), and the Morgan Stanley High Tech index added 0.7% (up 9.9%). The Semiconductors increased 0.4% (up 21.3%). The Biotechs jumped 2.6% (down 9.7%). With bullion jumping $31, the HUI gold index rallied 4.2% (up 1%).

Three-month Treasury bill rates ended the week at 17 bps. Two-year government yields declined a basis point to 0.75% (down 30bps y-t-d). Five-year T-note yields fell four bps to 1.16% (down 59bps). Ten-year Treasury yields declined seven bps to 1.62% (down 63bps). Long bond yields dropped 10 bps to 2.35% (down 67bps).

Greek 10-year yields dropped 22 bps to 8.23% (up 91bps y-t-d). Ten-year Portuguese yields declined four bps to 3.35% (up 83bps). Italian 10-year yields fell 13 bps to 1.21% (down 38bps). Spain's 10-year yields dropped 11 bps to 0.96% (down 81bps). German bund yields declined eight bps to negative 0.08% (down 70bps). French yields fell nine bps to 0.21% (down 78bps). The French to German 10-year bond spread narrowed one to 29 bps. U.K. 10-year gilt yields dropped 14 bps to 0.73% (down 123bps). U.K.'s FTSE equities index jumped 3.0% (up 10.7%).

Japan's Nikkei 225 equities index increased 1.4% (down 12% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.05% (down 31bps y-t-d). The German DAX equities index surged 3.4% (down 1.1%). Spain's IBEX 35 equities index rose 2.2% (down 7.6%). Italy's FTSE MIB index recovered 1.6% (down 23.2%). EM equities were higher. Brazil's Bovespa index jumped 2.9% (up 35.4%). Mexico's Bolsa surged 4.0% (up 11.2%). South Korea's Kospi rallied 2.7% (up 4.7%). India’s Sensex equities added 0.2% (up 9.8%). China’s Shanghai Exchange gained 1.0% (down 14.3%). Turkey's Borsa Istanbul National 100 index surged 4.9% (up 11.2%). Russia's MICEX equities index gained 1.5% (up 14.2%).

Junk bond mutual funds saw outflows of $274 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped two bps to 3.48% (down 38bps y-o-y). Fifteen-year rates slipped a basis point to 2.76% (down 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 3.63% (down 26bps).

Federal Reserve Credit last week expanded $2.9bn to $4.426 TN. Over the past year, Fed Credit declined $30.4bn. Fed Credit inflated $1.615 TN, or 57%, over the past 202 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $14.3bn last week to a new two-year low $3.150 TN. "Custody holdings" were down $201bn y-o-y, or 6.0%.

M2 (narrow) "money" supply last week surged another $37.4bn to a record $13.077 TN. "Narrow money" expanded $885bn, or 7.3%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits jumped $39bn, while Savings Deposits declined $4.5bn. Small Time Deposits added $0.9bn. Retail Money Funds were little changed.

Total money market fund assets rose $10.7bn to $2.670 TN. Money Funds increased $10bn y-o-y (0.4%).

Total Commercial Paper dropped another $21.1bn to a multi-year low $942.6bn. CP declined $88bn y-o-y, or 8.5%.

Currency Watch:

September 19 - Bloomberg: “China’s desire to stabilize the yuan risks undermining its future as a global reserve currency. For the second time this year, the overnight cost to borrow the offshore currency in Hong Kong surged above 20% amid speculation the People’s Bank of China is mopping up liquidity to boost the exchange rate. The volatility comes less than two weeks before the yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights -- an event seen as a validation of President Xi Jinping’s efforts to promote its standing on the world stage.”

The U.S. dollar index declined 0.6% to 95.51 (down 3.2% y-t-d). For the week on the upside, the South African rand increased 3.3%, the Norwegian krone 2.4%, the Australian dollar 1.8%, the Japanese yen 1.2%, the Swiss franc 1.0%, the euro 0.6%, the Brazilian real 0.6%, the Swedish krona 0.3%, Canadian dollar 0.3% and the New Zealand dollar 0.3%. For the week on the downside, the Mexican peso declined 0.9% and the British pound slipped another 0.3%. The Chinese yuan was little changed versus the dollar (down 2.7% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.0% (up 12.8% y-t-d). Spot Gold jumped 2.4% to $1,342 (up 26%). Silver surged 5.0% to $19.78 (up 43%). Volatile Crude recovered $1.45 to $44.48 (up 20%). Gasoline gave back 5.8% (up 8%), while Natural Gas added 0.3% (up 27%). Copper jumped 1.9% (up 3%). Wheat increased 0.4% (down 14%). Corn was little changed (down 6%).

China Bubble Watch:

September 22 - Bloomberg (Kyoungwha Kim): “A spike in yuan borrowing costs offshore is spreading to mainland China, with rates in Shanghai climbing to seven-month highs amid speculation policy makers are looking to reduce leverage and keep the currency steady. The one-day Shanghai Interbank Offered Rate rose to 2.17% on Thursday, the highest since Feb. 6… The comparable cost in Hong Kong surged to 23.7% on Monday, the highest since suspected central bank meddling roiled global markets in January.”

September 22 - Bloomberg (Yashaswini Swamynathan): “The lines between China's financial sector and property market are getting blurrier still. While the degree to which China's banking system is exposed to its red-hot real estate sector has long concerned analysts, a new report from CreditSights Inc. suggests a fresh link is growing. Chinese property developers such as Greenland Hong Kong Holdings Ltd., Country Garden Holdings Co., and China Evergrande Group have been bulking up their online finance businesses, offering loans and other financial products to retail investors as a way to drive revenue, diversify their business, or repay debt. ‘Internet finance has become a new growth area for Chinese developers, to our surprise and concern,’ the analysts wrote… ‘The deviation from the core real estate business and the opaque nature of internet finance worry us.’”

September 19 - Wall Street Journal (Jacky Wong): “China’s attempts to contain property prices have been halfhearted. If anything, they may have made the bubble grow even bigger. Average new-home prices in August were up 1.3% from July, …the 17th straight increase and the biggest since at least January 2011…. The latest leg of China’s property boom, which began last year in the biggest cities—such as Shenzhen and Shanghai—has recently spread to smaller cities, driving local governments to roll out tightening measures.”

September 18 - Bloomberg: “Chinese home prices rose the most in more than six years last month, suggesting local government efforts to avert a housing bubble are having only a limited effect. New-home prices… in August gained in 64 of the 70 cities the government tracks, compared with 51 in July… Average new-home prices in the 70 cities rose 1.2% in August from July, the biggest increase since January 2010… The value of home sales jumped 33% last month from a year earlier, the fastest pace in four months.”

September 21 - Reuters (Yawen Chen and Nathaniel Taplin): “China's listed property developers issued 960 billion yuan (110.8bn pounds) in bonds as of Sept. 19, more than three times the amount in the same period last year, financial magazine Caixin reported… At this pace, there is no suspense that bond sales by property developers would reach over 1 trillion yuan ($149.91bn) this year,’ the report said… Average new home prices in China climbed 9.2% in August from a year earlier, up from 7.9% in July as buyers piled into the market…”

September 19 - Bloomberg: “China’s shadow banking could lead to losses of $375 billion, according to CLSA Ltd. Estimates… The brokerage estimated the potential bad debt ratio for ‘bank-related shadow financing’ at 16.4%, or 4.2 trillion yuan, in a report… Assuming a 40% recovery rate left a potential loss of 2.5 trillion yuan. ‘Shadow financing is banking reform gone wrong given that the key driver of growth has been the banks circumventing regulations to protect their margins,’ analyst Francis Cheung wrote… ‘Shadow financing has grown rapidly, benefiting from implicit government guarantees despite being a channel for credit to higher-risk industries.’”

September 23 - Bloomberg: “China’s approval of credit-default swap trading for the first time is fueling speculation authorities will allow more bond delinquencies as the economy slows. The People’s Bank of China has approved rules governing CDS trading in the nation’s interbank market, according to a statement from the National Association of Financial Market Institutional Investors, a unit under the central bank. The purpose is to help diversify credit risks and facilitate healthy development of the market, the statement said.”

Europe Watch:

September 23 - Bloomberg (Tom Beardsworth): “Junior bonds of Banca Monte dei Paschi di Siena SpA fell to an eight-month low after a media report said the troubled Italian bank may require state support. Monte Paschi’s 379 million euros ($424 million) of 5.6% notes due in September 2020 fell 1.6 cents on the euro to 62.6 cents, the lowest since Jan. 21…The worst-performing lender in euro-area stress tests this year may have to turn to the government as it struggles to raise 5 billion euros in capital…”

September 22 - Reuters (John O'Donnell): “European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses. Less than two months after the Tuscan lender announced an emergency plan to raise 5 billion euros of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short.”

September 22 - Bloomberg (Birgit Jennen): “Deutsche Bank AG’s finances, weakened by low profitability and mounting legal costs, are raising concern among German politicians after the U.S. sought $14 billion to settle claims related to the sale of mortgage-backed securities. At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Participants discussed the U.S. fine and the financial reserves at Deutsche Bank’s disposal if it had to cover the full amount…”

September 22 - Bloomberg (Boris Groendahl): “The euro area’s biggest banks will be asked to earmark funds equivalent to more than twice their minimum capital requirements to make sure a possible emergency doesn’t cost taxpayers, according to Elke Koenig, head of the Single Resolution Board. The Brussels-based SRB, the resolution authority for 142 banks including Deutsche Bank AG and BNP Paribas SA, will use the minimum capital requirement set by the European Central Bank as a proxy for funds that would be needed to absorb losses and allow recapitalization in a crisis… The European Banking Authority said in July that the region’s banks may need as much as 470 billion euros ($524bn) in additional MREL-eligible funding under conditions similar to those cited by Koenig.”

September 23 - Bloomberg (Matt Clinch): “There was more bad news for euro zone on Friday with the latest flash purchasing manager's index (PMI) falling to a near two-year low, indicating that the economic upturn in the region is fragile and failing to achieve any real traction. The preliminary PMI from Markit showed that business activity in the 19-country region fell to 52.6 in September versus 52.9 in August and below market expectations.”

September 18 - Reuters (Gavin Jones): “Italian Prime Minister Matteo Renzi stepped up his attacks against other European Union leaders on Sunday after an EU summit in Bratislava which he said amounted to no more than ‘a nice cruise on the Danube.’ In a fiery interview… Renzi - who has staked his career on a referendum this year on his plan for constitutional reform - intensified his criticisms… ‘If we want to pass the afternoon writing documents without any soul or any horizon they can do it on their own,’ Renzi said… ‘I don't know what Merkel is referring to when she talks about the 'spirit of Bratislava'… If things go on like this, instead of the spirit of Bratislava we'll be talking about the ghost of Europe.’”

Brexit Watch:

September 22 - Bloomberg (Gavin Finch and John Detrixhe): “Executives at global investment banks in London expect France and Germany will prevail in a tussle over the clearing of $570 billion of euro derivatives and are making plans to deal with the fallout, according to people at four of the biggest firms. They assume the City of London will eventually be stripped of the ability to clear euro denominated swaps after Britain formally exits the European Union… While that might take years to happen, employees and operations central to the clearing function will be among the first moved to the continent once Brexit is triggered…”

Fixed-Income Bubble Watch:

September 18 – Financial Times (Eric Platt): “Global bond issuance is running at its fastest pace in nearly a decade as companies, countries and US agencies such as Fannie Mae and Freddie Mac binge on debt in an era of historically low interest rates. A total of $4.88tn of debt has been sold since the year began… according to… Dealogic. The figure is a hair below that of 2007, when $4.91tn of bonds were issued during the same period… Debt sales this year are running 9% ahead of the pace in 2006, when banks underwrote a record $6.6tn of debt. The figures do not include sovereign bonds sold at auction… ‘The leverage increase is significant,’ said Rick Rieder, BlackRock’s fixed income chief investment officer. ‘There is a long discussion about if this is a shift in the credit cycle. It’s something we’ve never seen before.’”

September 20 - Bloomberg (Claire Boston and Harvard Zhang): “Investors are cooling on one of the hottest U.S. corporate bond trades this year. Corporate bonds maturing in 10 years or more have fallen 2.9% in September…, a drop that is nearly five times as large as the broader bond market’s decline and that erases some of the double-digit gains of the previous eight months… Even with recent declines, long-dated bonds are still up more than 14% for 2016 through Monday’s close, including price gains and interest payments.”

September 20 - Bloomberg (Tracy Alloway): “Would you like to supersize that corporate bond sale? Companies selling their debt to eager investors have replied with a collective 'yes.' They've opted to increase their issuance of mega-sized bonds of $5 billion or more to a record $330 billion in 2015, according to data from HSBC Holdings Plc.”

Global Bubble Watch:

September 22 - Reuters (Yashaswini Swamynathan): “U.S. stocks marched higher on Thursday, with the Nasdaq hitting a record intraday high, as investors cheered the Federal Reserve's decision to not raise interest rates. While the Fed said the risks to economic outlook were roughly ‘balanced’, it left rates unchanged for want of ‘further evidence of continued progress’. Inflation remains below the central bank's target of 2% and members saw room for improvement in the labor market. The Fed also slowed the pace of future hikes and cut its longer run interest rate forecast, but sent a strong signal for a rate hike by the end of this year.”

September 20 - Bloomberg (Tom Beardsworth): “Deutsche Bank AG’s riskiest bonds dropped to the lowest since a marketwide rout in February as a potential $14 billion bill to settle a U.S. probe into mortgage-backed securities reignited capital concerns. The lender’s 1.75 billion euros ($2bn) of 6% additional Tier 1 bonds, the first notes to take losses in a crisis, fell four cents on the euro to 72 cents… That extended the decline since the U.S. Department of Justice’s initial settlement figure was announced last week to 11 cents.”

September 19 – Financial Times (Henny Sender): “Mid-Autumn Festival, which honours the full moon and is supposed to bring peace and prosperity in China, is a time for reflection. It is also a time for normally non-reflective types such as hedge fund managers to tally up their gains and losses as the final quarter of the year approaches. ‘The biggest mistake many made,’ says one Singapore-based investor, ‘was to believe the Fed would raise rates four times and all go long the dollar. That was the pain trade of this year.’ In fact, contrary to those who naively took the Fed at its word, liquidity continued to drive financial markets, saving those that seemed near death not long ago. Thus Glencore, the object of many short bets on the belief that it would prove insolvent less than a year ago, was able to borrow for virtually nothing, despite its less than stellar rating. Similarly, faith that Vedanta, an Indian commodities and energy group, would not go bust helped the bottom line of many distressed players.”

September 22 - Bloomberg: “The explosive growth of spending overseas by Chinese tourists dwarfs the increase in the number of Chinese traveling abroad. The most likely reason? Disguised capital outflows. So says former U.S. Treasury official Brad Setser, who drilled into the spending data provided by some of the most popular destinations for Chinese travelers. The nation’s tourism deficit -- a measure of foreign visitor expenditure in China minus what its citizens spend overseas -- soared to $206 billion in the 12 months through June 30, up from $77 billion in 2013…”

September 20 - Wall Street Journal (Jon Sindreu): “In their efforts to stimulate economies, central banks have been swelling government coffers. Last year, the central banks of eight large developed economies remitted about $149 billion to their respective governments, more than triple the $40 billion they sent along in 2005…”

September 19 - Bloomberg (Katya Kazakina): “Art dealer and collector Niels Kantor paid $100,000 two years ago for an abstract canvas by Hugh Scott-Douglas with the idea of quickly reselling it for a tidy profit. Instead, he is returning the 28-year-old artist’s work to the market this week at an 80% discount. Such is the new art season. At auction houses in London and New York, sellers are preparing to bail on their investments after the emerging-art bubble burst and the resale market for once sought-after artists dried up. ‘I’d rather take a loss,’ said Kantor… ‘I feel like it can go to zero. It’s like a stock that crashed.’”

September 19 - Wall Street Journal (Bob Tita): “Used machinery is flooding the secondhand market, piling more pain on equipment makers battling slack demand from any customer that mines, moves or refines commodities amid a global slump in the value of everything from coal to corn. Instead of buying a new $500,000 bulldozer or $300,000 excavator, many construction firms and other equipment users are renting or entering longer-term leases for machines to expand their fleets or replace worn out equipment, dealers and analysts say. Dealers, in turn, are keeping smaller inventories of new wheel loaders, backhoes and other machinery.”

U.S. Bubble Watch:

September 22 - Bloomberg (Yashaswini Swamynathan): “Sales of previously owned U.S. homes unexpectedly declined to a six-month low in August, signaling buyers are getting discouraged by a limited selection of properties that’s kept prices high… Sales rose 7.3% from August 2015… Median price of an existing home increased 5.1% from August 2015 to $240,200. Inventory of available properties fell 10.1% from a year earlier to 2.04 million.”

September 20 - Bloomberg (Sho Chandra): “New U.S. home construction fell more than projected in August as a plunge in the South, the biggest region for building, more than offset gains in the rest of the country. Residential starts declined 5.8% to a 1.14 million annualized rate, from the prior month’s revised 1.21 million pace…”

September 22 - Wall Street Journal (Maureen Farrell): “The battered IPO market and a flood of cheap funding for companies have cut so deeply into the business of selling stocks that some on Wall Street worry the pillar of investment banking may never fully recover. U.S. equity-capital-markets revenue for banks is lower than it has been in more than 20 years, according to Dealogic. So far this year, banks have taken in just $3.7 billion in fees from U.S.-listed equity deals…”

Federal Reserve Watch:

September 22 - Wall Street Journal (Jon Hilsenrath and David Harrison): “The Federal Reserve left short-term interest rates unchanged Wednesday but signaled it still expected to raise them before year-end, reaching a temporary truce among officials divided over when to withdraw financial stimulus from the economy. Fed Chairwoman Janet Yellen offered an upbeat assessment of the economic outlook, noting that growth has picked up after a dismal first half, with household incomes growing solidly and workers rejoining the labor force in search of jobs after years of not looking.”

September 22 - Financial Times (Robin Wigglesworth and Joe Rennison): “Washington’s ‘Mighty Doves’ once again vanquished the ‘Regional Hawks’ at this week’s monetary policy fixture, with the Federal Reserve electing to keep interest rates on hold spurring a rally across equities, bonds and emerging market assets. Three regional Fed heads voted to raise rates while the central bank’s customarily more dovish board members voted to stay on hold. This is only the fifth case of a three-vote dissent in 30 years but fund managers say ‘lower for longer’ remains the leitmotif for financial markets.”

September 21 - Bloomberg (Anchalee Worrachate and Chikako Mogi): “The dollar fell against most of its major peers, extending a slide toward its biggest annual decline in seven years, after the Federal Reserve delayed raising interest rates.”

Central Bank Watch:

September 23 - Reuters (Balazs Koranyi): “European Central Bank interest rates are probably close to the bottom, even though the bank had hoped the euro zone economy would respond better to its stimulus measures, two top policymakers said on Friday. With ECB rates now well into negative territory, the potential for detrimental side effects are increasing as they cut into banking profitability and raise the risk of asset bubbles and market distortions, the policymakers said.”

September 21 - Financial Times (Claire Jones): “Officials at the European Central Bank fear they could be hemmed in by legal action as they look for ways to extend their quantitative easing programme to help fuel the eurozone’s fragile recovery. The €80bn-a-month bond buying plan is already the subject of a legal challenge and officials fear that its problems in court will increase if the ECB relaxes the conditions of the scheme — a move staff are considering. Peter Gauweiler, a conservative German politician who has sued the ECB in the past, told the Financial Times that changes to QE would ‘increase the chances of success’ of a case he and others are trying to bring against the asset purchase programme… Mr Gauweiler believes that QE ‘already violates rules on the prohibition of monetary financing [of eurozone governments] by the ECB’ — even before any alteration of its conditions. He said that softening the rules could redistribute the risk of a member state default, ‘which is clearly incompatible with European law’.”

September 18 - Reuters (Paul Carrel): “The European Central Bank suffers from a conflict of interests due to its dual responsibilities for setting monetary policy in the euro zone and for supervising banks, ECB policymaker Jens Weidmann said. ‘As a banking supervisor, it could find it difficult to be tough with a bank or even wind it down if it knows that, because of its monetary policy measures, it is its biggest creditor,’ Weidmann told Germany's Sueddeutsche Zeitung…”

Japan Watch:

September 21 - Bloomberg (Toru Fujioka): “The Bank of Japan shifted the focus of its monetary stimulus Wednesday from expanding the money supply to controlling interest rates, which some economists deemed as further evidence that BOJ policy had reached the limits of its effectiveness. The central bank said it would adjust the volume of its asset purchases, the core of its framework until now, as necessary in the short term to control bond yields, while keeping it at about 80 trillion yen ($780bn) annually over the long term. The BOJ also scrapped a target for the average maturity of its holdings of government bonds.”

September 21 - Bloomberg (Enda Curran and Toru Fujioka): “Bank of Japan Governor Haruhiko Kuroda stormed onto the global stage back in 2013 with the subtlety of a Metallica concert, electrifying markets with a shock-and-awe monetary expansion powered by increased purchases of Japanese government bonds. On Wednesday, Kuroda seemed a little bit more like a jazz musician, riffing variations on established themes. It’s not the sort of stuff that quickens the hearts of investors. The BOJ refrained from another interest rate cut and instead pledged to bolster the long-end of the bond market’s yield curve. It’s a move that will help Japanese banks, pension funds and insurers cope in a less-than-zero rate environment, but disappointing to economists who had hoped for more dramatic action.”

September 20 - Bloomberg (Connor Cislo): “Japan’s poor exports performance continued in August, with shipments falling for an 11th straight month as a strong yen and tepid global economy undercut demand. Exports dropped 9.6% in August from a year earlier…”

EM Watch:

September 18 - Bloomberg (Lyubov Pronina): “Emerging-market issuers are exposing themselves to greater currency volatility by letting dollar borrowings outstrip their buffer of reserves, according to the Bank for International Settlements. Developing-nation companies including state-owned enterprises have accumulated $3.2 trillion of dollar debt… ‘In many cases, rising foreign currency debt has not been matched with FX assets and revenues,’ according to the report by the BIS, which acts as a global forum for as many as 60 central banks. ‘There is a great risk that booms and busts in capital flows will cause large shifts in exchange rates.’”

September 23 - CNBC (Isobel Finkel and Benjamin Harvey): “Turkey’s sovereign credit rating was cut to junk by Moody’s…, which concluded a review initiated after an unsuccessful coup attempt on July 15. Moody’s cited rising risks related to Turkey’s external financing needs and a weakening in credit fundamentals as economic growth slows… ‘The risk of a sudden, disruptive reversal in foreign capital flows, a more rapid fall in reserves and, in a worst-case scenario, a balance of payments crisis has increased,’ Moody’s said…”

September 22 - Bloomberg (John Micklethwait and Sangwon Yoon): “Turkey’s President Recep Tayyip Erdogan said he is not worried if his country is rated below investment grade as credit rating firms are making wrong decisions because of their political bias. ‘I don’t care at all, they’re making mistakes and they’re doing it intentionally,’ Erdogan said in an interview in New York… ‘Whether you’re honest or not, Turkey’s economy is strong.’”

Brazil Watch:

September 22 - Bloomberg (Sabrina Valle and Mario Sergio Lima): “Brazil’s former Finance Minister Guido Mantega was released a few hours after being arrested on Thursday in connection to the so-called Carwash corruption probe that has shaken the nation’s business and political elite… Mantega, Brazil’s longest-serving finance minister, was arrested based on testimony and banking documents from Brazilian former billionaire Eike Batista… Mantega had requested a payment of 5 million reais, worth $2.35 million at the time, to a political marketing company linked to the ruling Workers’ Party…”

Leveraged Speculator Watch:

September 21 - CNBC (Joe Marino): “Billionaire Leon Cooperman and his Omega Advisors hedge fund were charged Wednesday with insider trading, the Securities and Exchange Commission announced. The SEC accused Cooperman of buying into Atlas Pipeline Partners ahead of a deal, using his status as one of its largest shareholders to acquire nonpublic information about an upcoming transaction. ‘We allege that hedge fund manager Cooperman, who as a large APL shareholder obtained access to confidential corporate information, abused that access by trading on this information,’ said Andrew J. Ceresney, director of the SEC's Division of Enforcement. ‘By doing so, he allegedly undermined the public confidence in the securities markets and took advantage of other investors who did not have this information.’”

September 22 - Bloomberg (Dani Burger): “For once, the trend was nobody’s friend. Commodity trading advisers, the catch-all phrase for a breed of quantitative investors who use trends in asset prices and volatility as trading signals, posted some of the hedge fund industry’s worst losses in August -- and it isn’t getting better. The group is down between 1% to 1.5% this month, according to Credit Suisse… Wrong-way bets on everything from Treasury rates to commodities have cost trend followers as market correlation whipped up before this week’s meeting of the Federal Reserve. In particular, CTAs paid a price for betting interest rates would fall in the second half of the year, Credit Suisse said. ‘The trend-following CTAs have given back the vast majority of a profitable first half of 2016 as their long equities, long rates and short crude gambit results in losses,’ wrote Mark Connors, Credit Suisse’s global head of risk advisory in New York…”

Geopolitical Watch:

September 18 - Reuters (Paul Carrel and Michael Nienaber): “Chancellor Angela Merkel's conservatives suffered their second electoral blow in two weeks on Sunday, with support for her Christian Democrats (CDU) plunging to a post-reunification low in a Berlin state vote due to unease with her migrant policy. The anti-immigrant Alternative for Germany (AfD) polled 11.5%, gaining from a popular backlash… The result means the AfD will enter a 10th state assembly, out of 16 in total. Merkel's CDU polled 18%, down from 23.3% at the last election in 2011…”

September 23 - Bloomberg (Andre Tartar): “Syria’s civil war. North Korean nuclear tests. Brexit. Turkey’s failed coup. A volatile U.S. election. This jarring backdrop was hard to miss as world leaders stepped up to the familiar green marble dais during this week's United Nations General Assembly. Heads of state and government representing the world’s largest economies used words like ‘fear,’ ‘uncertainty,’ ‘risk,’ and ‘terror’ 87 percent more often on average than during last year's gathering, according to an analysis by Adam Tiouririne, a leadership communication adviser at Logos Consulting Group.”

Friday, September 23, 2016

Friday Afternoon Links

[Bloomberg] Stock Rally Fizzles as Traders Waver After Euphoria; Oil Tumbles

[Bloomberg] Oil Tumbles as Saudis Said to See Algiers Talks as Consultation

[CNBC] China’s toxic debt pile may be 10 times official estimates: Fitch

[UK Telegraph] Fitch reveals the $2trillion black hole in China's economy that heralds a lost decade

[Bloomberg] Turkey Cut to Junk as Moody’s Concludes Its Post-Coup Review

Friday's News Links

[Bloomberg] Stocks, Bonds Fall as Fed-Driven Rally Fizzles; Dollar Rebounds

[Bloomberg] Asian Stocks Pare Weekly Gain Amid Dollar Rebound; Bonds Advance

[Bloomberg] China’s Shibor at Seven-Month High as Cost Spike Spreads Onshore

[Bloomberg] Monte Paschi Bonds Fall to Eight-Month Low on State Aid Report

[Reuters] Investors pull $7.4 billion from stocks funds, largest outflow in 12 weeks: BAML

[Bloomberg] Gold Sparkles as Central Bank Largesse Burnishes Investor Demand

[CNBC] Euro zone business growth hits 20-month low, Germany loses momentum

[Reuters] ECB policymakers say rates near bottom even if recovery is disappointing

[Bloomberg] Kuroda’s Quest to Control Yields Undermined as Long Bonds Jump

[Bloomberg] Bond Bulls Curb Their Enthusiasm in China’s Leverage Crackdown

[AP] A look at the EU-US trade talks and why they're faltering

[Bloomberg] China Starts Default-Swap Trading as Buffer Against Failures

[CNBC] Russia’s central bank criticizes the easy money policies of its peers

[WSJ] How Bond Yields Got This Low

[Bloomberg] Anxiety Spikes Among G-20, An Analysis of UN Speeches Shows

Thursday, September 22, 2016

Thursday Evening Links

[Reuters] Exclusive: Regulators Expect Monte Dei Paschi to Ask Italy for Help-Sources

[Reuters] Cash is king as correlations cloud asset allocation

[Bloomberg] Deutsche Bank Woes Sparks Concern Among German Lawmakers

[CNET] Yahoo hit in worst hack ever, 500 million accounts swiped

[FT] US stock funds suffer biggest redemptions since Brexit vote

[FT] China’s economic fate rests on its housing market

[FT] SEC’s pursuit of Leon Cooperman rattles hedge fund industry

Thursday's News Links

[Bloomberg] Stocks Climb With Bonds in Fed-Inspired Rally; Crude Tops $46

[Reuters] Nasdaq hits record high after Fed leaves rates unchanged

[Bloomberg] Emerging Assets Advance for Fourth Day as Fed Spurs Yield Demand

[Bloomberg] Gold Holds Biggest Gain in Two Weeks as Fed Damps Rate Outlook

[Bloomberg] Sales of Existing U.S. Homes Unexpectedly Declined in August

[Bloomberg] Beware the Chinese Property Companies That Look Like Shadow Banks

[Bloomberg] Suitcases of Cash: China Travel Data Hint at Capital Outflow

[Bloomberg] EU Banks May Need Rescue Funds Equaling Twice ECB Capital

[Bloomberg] Banks Said to Plan for Loss of Euro Clearing After Brexit

[Bloomberg] Brazil Ex-Finance Minister Mantega Arrested in Graft Probe

[Bloomberg] Leon Cooperman’s Way: From the Bronx to Goldman to SEC Target

[Bloomberg] Popular Quant Hedge Fund Strategy Is Suddenly Doing Terribly

[WSJ] Japan’s New Special Relationship With the Federal Reserve

[FT] ECB fears legal action will rein in scope for QE

[FT] Mighty Doves see off the Regional Hawks over rates

[WSJ] Wall Street’s Stock-Selling Business: The Worst in 20 Years

[Reuters] Warplanes hit Aleppo in heaviest attack in months, defy U.S.

Tuesday, September 20, 2016

Wednesday's News Links

[Bloomberg] Stocks Rally With Banks on BOJ Amid Fed Countdown; Oil Climbs

[Bloomberg] BOJ Shifts Policy Framework to Targeting Japan’s Yield Curve

[Reuters] BOJ overhauls policy focus, sets target for government bond yields

[Reuters] Yen strengthens on scepticism about BOJ's new framework

[CNBC] SEC charges hedge fund manager Leon Cooperman, Omega Advisers with insider trading

[Bloomberg] U.S., Japanese Bonds Trim Loss as BOJ Seen ‘Not Hawkish at All’

[Reuters] Over to the Fed after world stocks get a lift from BOJ

[Bloomberg] Fed Focus Turns to Dots as Hike Odds Fade: Decision-Day Guide

[Bloomberg] Kuroda’s Journey From Shock-And-Awe to Bond Market Fine-Tuning

[Bloomberg] The Bank of Japan's Moment of Truth: Decision Day Guide

[Bloomberg] Helicopters Circle Over Bank of Japan With Kuroda Running Out of Options

[MarketWatch] 4 things to know about the Bank of Japan’s policy meeting

[Reuters] China property developers may issue $150 billion in bonds in 2016

[Bloomberg] Japanese Exports Decline for 11th Straight Month in August

[WSJ] Central-Bank Rescues Prove Profitable

[FT] BoJ experiment risks the worst of all worlds

Tuesday Evening Links

[Bloomberg] Mexico’s Central Bank Tested by Traders as Peso Falls to Record

[Bloomberg] Long Trade in Corporates Brings Pain as Central Banks Deliberate

[Bloomberg] Gold Seen Entering Long-Term Bull Market as Asset Bubbles Burst

[FT] Calm descends before central bank storm

[FT] Debt buybacks boom as companies cut borrowing costs

[Bloomberg] Why China's Experiment in Direct Democracy Was Doomed to Fail

Tuesday's News Links

[Bloomberg] Bonds Rise With Stocks as Clock Ticks Toward Fed, BOJ; Oil Falls

[Bloomberg] Deutsche Bank’s Riskiest Bonds Fall to Lowest Since February

[Bloomberg] Asian Stocks Hold Gains as Bonds Decline Amid BOJ, Fed Countdown

[Bloomberg] Signs Are Building That the BOJ Is Reaching Its 'Endgame'

[Bloomberg] Supersized Corporate Bond Sales Are Taking a Bigger Bite Out of an $8 Trillion Market

[Bloomberg] Yuan Funding Crunch Shows Risks in Reserve Currency Ranking

[Bloomberg] China Risks $375 Billion of Shadow Banking Losses, CLSA Says

[CNBC] Why the Bank of Japan may overshadow the Federal Reserve on Super Wednesday

[Bloomberg] Housing Starts in U.S. Declined in August on Plunge in South

[Bloomberg] China’s Biggest Banks Quicken Pace of Bad-Loan Security Sales

[MarketWatch] Meet the affable bear who expects the S&P to tumble to 20-year lows

[Reuters] Weakness at home hobbles once-powerful Merkel in Europe

[FT] Five key questions ahead of Bank of Japan’s policy meeting

[FT] Cheap money points to more taper tantrums

[FT] Fed plays poker with tempestuous markets

Saturday, September 17, 2016

Saturday's News Links

[CNBC] Top investors have one theme on their minds: Danger

[Reuters] Fed meeting grabs spotlight amid volatility comeback

[Bloomberg] German Protesters Gather to Oppose Transatlantic Trade Deals

Weekly Commentary: Risk Off, the BOJ and China

Is a meaningful de-risking/de-leveraging episode possible with global central banks injecting liquidity at the current almost $2.0 TN annualized pace?

Thus far, central bankers have successfully quashed every incipient Risk Off. Market tumult has repeatedly been reversed by central bank assurances of even more aggressive monetary stimulus. The flood gates were opened with 2012’s global concerted “whatever it takes.” Massive QE did not, however, prevent 2013’s “taper tantrum.” Previously unimaginable ECB and BOJ QE coupled with ultra-loose monetary policy from the Fed were barely enough to keep global markets from seizing up earlier in the year.

It’s my long-held view that market interventions and liquidity backstops work primarily to promote speculative excess and resulting Bubbles. While celebrated as "enlightened" policymaking throughout the markets, an “activist” governmental role (fiscal, central bank, GSE, etc.) is inevitably destabilizing. The upshot of now two decades of activism is a global marketplace dominated by speculation and leveraging.

I’ll posit that a given size of “liquidity backstop” fosters a commensurate speculative response in the marketplace, ensuring that a larger future backstop/intervention will be required come the next serious de-risking/de-leveraging episode. The essence of the current (global government finance) Bubble is that central banks have committed to doing “whatever it takes” – and this moving target “whatever it will take” has kept inflating right along with speculative market and asset Bubbles across the globe. This scheme has gone on for years. A Day of Reckoning cannot be postponed indefinitely.

This is clearly a more pressing issue for me than for other analysts. Speculative Bubbles tend to climax with a terminal flurry of exuberance, excess and dislocation. A final destabilizing tsunami of financial flows and attendant price spikes ensure that grossly inflated market confidence and price levels turn untenable. Then comes the painful Reversal.

Global sovereign debt and bond markets this year were overwhelmed by “blow-off” excess. The biggest cash markets in the world along with the biggest derivative markets in the world dislocated in historic “melt-up.” Effects became systemic. Price impacts were extreme – historic. Virtually all asset classes were significantly disrupted by Bubble Dynamics. To be sure, there was newfound exuberance in the power and sustainability of “whatever it takes.”

From my analytical perspective, it appears we’re again nearing another “critical juncture,” yet another potential major inflection point. And the probability that such prognostication ends up looking foolhardy is not small. After all, central bankers have repeatedly had their way – imposed their will upon the markets. On the other hand, if we have indeed reached a critical point for acutely vulnerable markets, few are prepared. Of course, almost everyone is convinced they have the answer to the opening question: “No, and this was proved earlier in the year.”

Let’s take a different tack. Would $167bn ($2TN/12), a month of global QE, be sufficient to hold Risk Off at bay? How about $38 billion during a week of intense market tumult? The proverbial drop in the bucket. I actually believe that the global Bubble has inflated to such precarious extremes that even $2.0 TN of central bank purchases would in rather short order be overwhelmed in the event of a major bout of speculative de-leveraging. Let me suggest that the almighty central bank liquidity backstop arsenal would wither in the face of a synchronized global liquidation across various asset classes. What’s more, the possibility of just such an outcome has greatly increased after the recent global bout of synchronized central bank-induced speculative excess.

By the look of markets over the past week or two, the six-month central bank-induced respite appears to be winding down. The ghosts of January and February have reawakened: Europe, global banks, energy, EM and China (to name a few). Some Friday headlines: “Oil Falls to 1-Month Low…” “Mexican Peso Slides to Record Low…”; ‘Cost of Insuring Deutsche Bank’s debt Rises 8 percent…”; “U.S. Stock Funds Post Largest Weekly Outflows in a Year…” “Monte Paschi Bonds Slide to Two-Month Low…” “China H Shares Go From Best to Worst…”; “Low-Volatility Funds Face Rougher Ride”. “Volatility Puts Some Funds at Risk.”

Europe suffered a rough week, especially at The Fragile Periphery. In general, unimpressive rallies gave way to serious selling. Greek 10-year yields surged 33 bps to 8.45%, the high going back to April. Portugal’s 10-year spread (to bunds) widened 26 bps this week to 339 bps, the widest level since February. Italian spreads widened 10 bps to a four-month wide 134 bps. Major equities indices dropped 2.8% in Germany and 3.5% in France. Stocks were slammed 4.3% in Spain and 5.6% in Italy.

September 16 – Wall Street Journal (Jenny Strasburg): “A legal settlement half the size of the U.S. Justice Department’s $14 billion opening bid in a mortgage-securities case would exceed Deutsche Bank AG’s litigation provisions and strain its already thin capital cushion. Even a $4 billion settlement ‘would put questions around capital position,’ J.P. Morgan… analyst Kian Abouhossein said in a research note this week.”

Ominously, European banks were back in the markets’ crosshairs. Deutsche Bank was hammered 12.3% this week, boosting y-t-d losses to 45%. Europe’s STOXX 600 Bank Index sank 5.6% (down 24% y-t-d). Italian banks were slammed 9.4% (down 50% y-t-d). Italy’s Monte dei Paschi was clobbered 9% Friday, while UniCredit sank 5.8%. It was not only European banks under pressure. Japan’s Topix Bank index dropped 4.3% this week (down 29% y-t-d), while Hong Kong’s Hang Seng Financials fell 4.2% (down 1.7% y-t-d). U.S. Banks dropped 1.6% (down 3.7% y-t-d).

Also reminiscent of January/February, EM selling pressure intensified. The Mexican peso sank 3.8% this week to a record low. It’s easy to blame Trump, but clearly the markets are increasingly concerned with Mexico’s large current account deficit (3% of GDP), economic vulnerability and susceptibility to “hot money” outflows. Mexico – along with indebted energy companies and countries around the world - were not helped by crude’s $2.85 drop to $43.03, a one-month low. Russian stocks dropped 2.3%, with the ruble down 0.7%. No help from geopolitical either. The South Korean won dropped 2.1%, with Korean stocks down 1.9%. Mexico’s stocks lost 1.2%, and Brazil’s Bovespa fell 1.7%.

September 11 – Reuters (Silvio Cascione): “Brazilian prosecutors launched a preliminary investigation into an alleged corruption scheme at the national development bank BNDES, weekly magazine Veja reported… The prosecutors have been gathering documents for at least two months and are in talks with a former BNDES executive about a potential collaboration… BNDES is the largest source of long-term corporate credit in Brazil and is one of the world's largest development banks. The bank ramped up lending under the administrations of the Workers' Party between 2003 and 2015 as part of government efforts to boost economic growth, offering subsidized credit to several of Brazil's largest firms across sectors.”

It was another interesting week in the currencies. The dollar caught a bid, especially versus EM and Europe. And as the marketplace turns its focus back to risk and liquidity, it’s notable that the British pound was hit 2.0% against the dollar this week. The Japanese yen gained 0.4% versus the dollar.

The much anticipated Fed and BOJ meetings are now just days away (Sept. 20/21). Market odds for the FOMC raising rates next week have dropped down to about 10%. Significantly more uncertainty surrounds the Bank of Japan meeting.

September 15 – Wall Street Journal (Takashi Nakamichi): “The world’s leading experiment in monetary easing is floundering, and its engineers are divided over how to get it on track. The Bank of Japan has tried radical measures for 3½ years to reflate the country’s sagging economy, resorting this year to negative interest rates. Growth and inflation remain elusive. Now the bank’s board, while still in favor of easing, has some members wanting to revise the methods for doing so—likely sparking uncertainty for economy-watchers and worries for investors. Japan’s financial regulator, big banks, insurers and advisers to Prime Minister Shinzo Abe have all piled into the fray with policy prescriptions, in a ferment that comes less than a week before the BOJ meets to decide its next move. ‘The BOJ’s policy has become a ‘cloudy cocktail’—nontransparent and difficult to understand,’ said Nobuyuki Nakahara, a former BOJ board member who advises Mr. Abe… The suspicion that central-bank firepower is reaching its limits finds support in Japan, where the BOJ has yet to generate steady inflation despite buying nearly $800 billion of bonds annually since late 2014, plus billions of dollars worth of exchange-traded funds.”

One could surmise that there’s been sufficient pre-meetings market volatility to hold hesitant central bankers at bay – in Washington and Tokyo. The now typical modus operandi finds central bankers attempting to muster some courage (“trial balloons” floated along the way) ensuring market conniption fits leading up to policy decision time. Unsettled markets needle dovish central bankers to “beat expectations” – and markets rally. Clockwork.

The problem is that it’s no longer easy for central bankers to placate an increasingly disordered market backdrop. BOJ stimulus was already unprecedented, even before QE was again supersized earlier in the year. Interest rates are already negative. There are heightened fears that negative rates are harming the banks, insurance companies and pension funds, and that the BOJ risks running short of bonds to purchase. As for the FOMC, the markets are already confident the diffident Fed will again stand pat.

All eyes will be fixated on the Bank of Japan. Indication of a loss of nerve would have an immediate impact on global yields and currencies. More likely, policy measures will be convoluted. At this point, efforts to manipulate a steeper yield curve could prove too cute by half. Markets are somewhat indifferent to negative rates, but would look quite unkindly to any uncertainty with respect to future “whatever it will take” QE.

The markets have grown so accustomed to Kuroda’s game of dovish surprises. These days there’s recognition that going on four years of BOJ stimulus have failed to bear fruit – while risk proliferates like weeds (tall with nettles). One more round of mindlessly “beating expectations” could very well propel a reflex rally. It also risks an alarming – policy at the “end of the rope”! - market seizure.

A few months back I wrote that the latest round of central bank reflationary measures would prove unsuccessful. I’m sticking with this view, notwithstanding the strong rallies experienced almost across the board. A policy-induced short squeeze took on a life of its own. Sovereign bonds dislocated spectacularly, unleashing a liquidity outburst. “Money” flooded into EM and anything with a yield. “Melt-up.” “Money” flooded into perceived low-risk equity products. “Money” flooded into the indexes – equities and corporate debt. Within the hedge fund community, “money” flooded into the hot strategies – risk-parity and “managed futures”/CTA. “Money” flooded into instruments profiting from a collapse in market volatility.

Central banks ensured that enormous amounts of “money” simultaneously flowed across various – now highly correlated - asset classes. “Funny” how things work. Just when it was becoming apparent that monetary stimulus was losing its punch, desperate policy measures spurred one final destabilizing “whatever it will take” speculative whirlwind. This has created an extraordinary backdrop of markets set up for disappointment and dislocation.

My view holds that Global Risk Off has likely commenced. It’s reemerging in Europe, in EM, in energy and in global financials. China remains a major unknown. Their economy stumbles along on record Credit expansion, Credit that turns more problematic by the month. A mortgage lending Bubble is increasingly dominating Credit growth, creating serious issues for regulators, the financial sector and the overall maladjusted Chinese economy. And Global Risk Off risks triggering another bout of destabilizing outflows and China currency angst, which would be an even bigger problem for the world today than it was at the beginning of the year.


For the Week:

The S&P500 recovered 0.5% (up 4.7% y-t-d), and the Dow increased 0.2% (up 4.0%). The Utilities rallied 2.2% (up 14.4%). The Banks were hit 1.6% (down 3.7%), while the Broker/Dealers were little changed (down 4.0%). The Transports declined 0.7% (up 3.5%). The S&P 400 Midcaps fell 0.5% (up 8.8%), while the small cap Russell 2000 gained 0.5% (up 7.8%). The Nasdaq100 jumped 2.9% (up 4.9%), and the Morgan Stanley High Tech index rose 1.7% (up 9.1%). The Semiconductors surged 4.3% (up 20.8%). The Biotechs rose 1.3% (down 12%). With bullion down $17, the HUI gold index dropped 1.9% (up 103%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields declined two bps to 0.76% (down 29bps y-t-d). Five-year T-note yields slipped two bps to 1.20% (down 55bps). Ten-year Treasury yields rose two bps to 1.69% (down 56bps). Long bond yields gained six bps to 2.45% (down 57bps).

Greek 10-year yields surged 33 bps to 8.45% (up 113bps y-t-d). Ten-year Portuguese yields jumped 25 bps to 3.39% (up 87bps). Italian 10-year yields rose 10 bps to 1.34% (down 25bps). Spain's 10-year yields were unchanged at 1.07% (down 70bps). German bund yields declined a basis point to 0.00% (down 62bps). French yields were unchanged at 0.30% (down 69bps). The French to German 10-year bond spread widened one to 30 bps. U.K. 10-year gilt yields increased a basis point to 0.87% (down 109bps). U.K.'s FTSE equities index declined 1.0% (up 7.5%).

Japan's Nikkei 225 equities index sank 2.6% (down 13.2% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.05% (down 31bps y-t-d). The German DAX equities index fell 2.8% (down 4.3%). Spain's IBEX 35 equities index slid 4.3% (down 9.5%). Italy's FTSE MIB index sank 5.6% (down 24.4%). EM equities were under pressure. Brazil's Bovespa index dropped 1.7% (up 31.6%). Mexico's Bolsa was down 1.2% (up 6.9%). South Korea's Kospi declined 1.9% (up 1.9%). India’s Sensex equities slipped 0.7% (up 9.5%). China’s Shanghai Exchange fell 2.5% (down 15.2%). Turkey's Borsa Istanbul National 100 index declined 1.3% (up 6.0%). Russia's MICEX equities index fell 2.3% (up 12.5%).

Junk bond mutual funds saw outflows surge to $2.5 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped six bps to 3.50% (down 41bps y-o-y). Fifteen-year rates added a basis point to 2.77% (down 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates jumping eight bps to 3.62% (down 35bps).

Federal Reserve Credit last week declined $4.7bn to $4.423 TN. Over the past year, Fed Credit declined $22.4bn. Fed Credit inflated $1.612 TN, or 57%, over the past 201 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $19.5bn last week to a two-year low $3.165 TN. "Custody holdings" were down $173bn y-o-y, or 5.2%.

M2 (narrow) "money" supply last week declined $7.5bn to $13.040 TN. "Narrow money" expanded $873bn, or 7.2%, over the past year. For the week, Currency dipped $0.8bn. Total Checkable Deposits dropped $38.1bn, while Savings Deposits jumped $31.2bn. Small Time Deposits added $1.2bn. Retail Money Funds slipped $1.0bn.

Total money market fund assets sank $38.5bn to an almost one-year low $2.659 TN. Money Funds increased $13bn y-o-y (0.5%).

Total Commercial Paper dropped $19bn to $964bn. CP declined $75bn y-o-y, or 7.2%.

Currency Watch:

September 15 – Bloomberg (Kevin Buckland and Netty Idayu Ismai): “Volatility has reawakened in the $5.1 trillion foreign-exchange market, as traders start to imagine life without ultra-easy monetary policy. The impact is greatest in the currencies with most at stake from an end to years where stimulus only got more generous -- the so-called high yielders. A gauge of expected swings in emerging-market currencies has surged above an equivalent measure for developed markets by the most since May.”

September 14 – Wall Street Journal (Anjani Trivedi): “A yuan credit crunch isn’t what Beijing had in mind when it promoted trading of its currency offshore. But that’s what it has achieved in Hong Kong of late. For the second time this year, short-term borrowing costs in the yuan have skyrocketed. In recent days, the rate on one-week interbank yuan loans in Hong Kong surged over 8 percentage points to 10.15%. That again makes betting against the yuan an expensive proposition. It’s also a reminder that just because the yuan’s recent behavior has been seemingly anodyne, markets shouldn’t get too complacent.”

September 14 – Bloomberg: “The Chinese central bank’s yuan positions -- which reflect the amount of foreign currency held on its balance sheet -- fell to the lowest since 2011 in August, a sign that it sold dollars to support the yuan. The People’s Bank of China has been seen intervening in the market to stem the currency’s slide…”

The U.S. dollar index rallied 0.7% to 96.04 (down 2.7% y-t-d). For the week on the upside, the South African rand increased 1.6%, the Japanese yen 0.4% and the Brazilian real 0.3%. For the week on the downside, the Mexican peso declined 3.8%, the British pound 2.0%, the Canadian dollar 1.2%, the Swedish krona 0.9%, the New Zealand dollar 0.8%, the Norwegian krone 0.7%, the euro 0.7%, the Australian dollar 0.7% and the Swiss franc 0.5%. The Chinese yuan increased 0.2% versus the dollar (down 2.8% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 1.9% (up 11.7% y-t-d). Spot Gold declined 1.3% to $1,310 (up 24%). Silver dropped 2.7% to $18.84 (up 37%). Volatile Crude sank $2.85 to $43.03 (up 16%). Gasoline surged 7.4% (up 15%), and Natural Gas rose 5.4% (up 26%). Copper jumped 3.2% (up 1%). Wheat was little changed (down 14%). Corn declined 1.2% (down 6%).

China Bubble Watch:

September 14 – Bloomberg: “China’s broadest measure of new credit exceeded estimates in August as a property boom in the nation’s biggest cities fuels near-term growth and adds to longer-term worries about the expansion’s sustainability. Aggregate financing was 1.47 trillion yuan ($220bn) in August compared with a median estimate of 900 billion yuan in a Bloomberg survey… New yuan loans stood at 948.7 billion yuan, versus a projected 750 billion yuan. M2 rose 11.4% from a year earlier versus 10.5% seen by economists.”

September 15 – Wall Street Journal (Anjani Trivedi): “China’s credit engines were at it again last month and, worryingly, instead of sprinkling debt evenly across the financial system, mortgages took an outsize share. More than 70% of new loans in August were to households, much of that in the form of mortgages, going by historical averages, a remarkable shifting of the fire hose of credit. It also helps explain why China’s property market has raced higher despite broader economic worries. China’s stock of mortgages stood at 16.9 trillion yuan ($2.5 trillion) as of June 30. Almost a quarter of that was built up in just the past year…”

September 13 – Bloomberg: “China’s economy strengthened after July’s hiccup as factory output, investment and retail sales all exceeded economist estimates, amid a boost from property that’s added to concern that price gains may prove unsustainable. Industrial production rose 6.3% from a year earlier in August… Retail sales climbed 10.6% last month, from 10.2% on July. Fixed-asset investment increased 8.1% in first eight months of the year.”

September 12 – Reuters (Kevin Yao): “China should take steps to curb the flow of capital into the property market and state-owned companies to help slow the rise of debt levels in the economy, Ma Jun, the central bank's chief economist, told the China Business News… China's total debt load rose to 250% of gross domestic product (GDP) last year, and the IMF has warned that the high corporate debt ratio of 145% of GDP could lead to slower economic growth if not addressed… Ma identified the property sector and state-owned enterprises as key drivers of high debt levels in the economy over recent years. ‘We should take a lot of measures to curb excessive bubbles in the real estate sector, curb the flow of excessive financial resources into the real estate sector," Ma said.”

September 11 – Bloomberg: “China has proposed measures to tighten leverage rules in the onshore bond market, highlighting concern that investors’ borrowings are overextended after a series of defaults. The China Securities Depository and Clearing Corp. said… investor’s outstanding repurchase contracts shouldn’t exceed 70% of debt holdings in the person’s account…If an investor uses a security rated AA or AA+ as collateral, the amount shouldn’t be more than 10% of the bond’s total issuance… The CSDC is seeking public opinions on the proposed regulations… Chinese regulators have sought to cut leverage in the bond market after at least 18 notes defaulted so far this year, already exceeding the tally for 2015. The outstanding amount of repurchase agreements in China’s interbank market, used by debt traders to amplify their buying power, declined 1.8% in August to 8.5 trillion yuan ($1.3 trillion) from July. Still, that’s 37% higher than the level a year earlier.”

September 11 – Bloomberg: “China should take steps to restrain bubble-like expansion in housing markets and tame excessive financial inflows into property, according to a central bank economist. ‘Measures should be taken to put a brake on the excessive bubble expansion in the property sector, and we should curb excessive financing into the real estate sector,’ Ma Jun, chief economist of the People’s Bank of China’s research bureau, said… A third of the financial-system leverage added over the past decade has come from the surge of housing prices, Ma said.”

Europe Watch:

September 11 – Wall Street Journal (Giovanni Legorano): “For UniCredit SpA, the summer of discontent for Italy’s banks looks likely to stretch well into the fall—and possibly beyond. UniCredit, Italy’s largest lender by assets, emerged as one of the weakest big banks in Europe in July’s stress tests, showcasing the failure of its attempts to respond to rock-bottom interest rates and a huge pile of bad loans. Now, as Jean-Pierre Mustier, the bank’s new chief executive, readies a big-bang plan to revive UniCredit’s fortunes, he faces a series of unpalatable choices: Aggressive action to cut the bank’s €80 billion ($89.9bn) in bad loans…, while an asset sale could help bolster its capital position but would hurt already thin profit.”

September 11 – Bloomberg (Nikos Chrysoloras): “Prime Minister Alexis Tsipras said Greece will only be able to lure investors once a quarrel between creditors over how to lower the country’s debt burden is resolved, which he said should lead the European Central Bank to include Greek government bonds in its asset purchase program. ‘What is currently causing a delay in regaining the trust of markets and investors isn’t debt decisions in themselves, as what the Eurogroup decided was in the right direction, but the constant quarrel and clash between the International Monetary Fund and European institutions,’ Tsipras said… “

Fixed-Income Bubble Watch:

September 13 – Bloomberg (Beth Jinks): “Elliott Management Corp.’s Paul Singer said investors should sell out of longer-term bonds, warning that even debt securities of G7 nations aren’t a safe haven. Speaking at the CNBC Institutional Investor Delivering Alpha Conference…, the hedge fund billionaire said he sees a risk that inflation may ‘surprise everyone’’ and ‘blow through targets’’ even during poor economic conditions. Singer, 72, said the world is experiencing a ‘very dangerous’ time in global economies and financial markets.”

September 12 – Wall Street Journal (Richard Barley): “The bond market has been turned on its head by central banks—and the market’s tantrum shows it. Last week brought a string of events that could be read as clear signals of overheating in credit markets. There was the bizarre sight of French drugmaker Sanofi and German consumer-goods company Henkel issuing debt at negative yields. And in the European high-yield market, bearings maker Schaeffler and packaging group Ardagh sold large payment-in-kind notes where interest can be paid in additional debt under certain circumstances, traditionally a sign of a frothy market. Yields on ‘junk’-rated euro-denominated debt hit a record low of 3.35% last week.”

September 14 – Bloomberg (Eliza Ronalds-Hannon): “The $13.6 trillion Treasury market is sending a signal it hasn’t flashed in more than four years. The message: Shorter-dated debt is the place to be as traders gain confidence the Federal Reserve will keep interest rates on hold, at least through next week’s policy meeting. The extra yield investors demand to own 30-year rather than five-year securities, a measure of the yield curve, increased for a ninth straight day Wednesday. That’s the longest streak since 2012,”

September 16 – Bloomberg (Scott Lanman): “China’s holdings of U.S. Treasuries fell in July to the lowest level in more than three years, as the world’s second-largest economy pares its foreign-exchange reserves to support the yuan. The biggest foreign holder of U.S. government debt had $1.22 trillion in bonds, notes and bills in July, down $22 billion from the prior month, in the biggest drop since 2013… The portfolio of Japan, the largest holder after China, rose $6.9 billion to $1.15 trillion. Saudi Arabia’s holdings of Treasuries declined for a sixth straight month, to $96.5 billion.”

September 12 – Bloomberg (Luca Casiraghi): “Bonds that allow issuers to defer interest payments are nosediving less than a week after they were sold amid a sell-off of fixed-income assets. Ardagh Group SA’s 845 million euros ($948 million) payment-in-kind toggle notes due September 2023 are indicated at 95.5 cents on the euro, down 4.5 cents from when the… packaging company sold them on Wednesday… German auto components maker Schaeffler AG’s 750 million euros of notes due September 2026 are quoted 97.2 cents down from a sale price of 100 cents on Thursday… Both companies increased the size of their payment-in-kind note sales last week amid surging demand for higher-yielding assets, which pushed borrowing costs for junk-rated companies to a record low.”

September 14 – Bloomberg (Liz McCormick): “With a seismic overhaul of the $2.6 trillion money-market industry weeks away from kicking in, money managers are bracing for a last-minute exodus of as much as $300 billion from funds in regulators’ cross hairs. Prime funds, which seek higher yields by buying securities like commercial paper, are at the center of the upheaval. Their assets have already plunged by almost $700 billion since the start of 2015, to $789 billion… The outflow has rippled across financial markets, shattering demand for banks’ and other companies’ short-term debt and raising their funding costs… The key date is Oct. 14, when rules take effect mandating that institutional prime and tax-exempt funds end an over-30-year tradition of fixing shares at $1. Funds that hold only government debt will be able to maintain that level.”

September 15 – Wall Street Journal (Ben Eisen and Min Zeng): “Yield tourism is getting expensive. For much of the year, strong demand from Japanese and European investors seeking better returns for their money than they could get at home pushed up prices of U.S. Treasurys. Now, the rising cost of borrowing dollars overseas and investing them in the U.S. is amplifying the selloff. The culprit is the cost of hedging against foreign-exchange swings in markets for cross-currency basis swaps and foreign-exchange forwards. The additional cost has all but erased the extra income Japanese investors could gain from buying Treasurys instead of lower-yielding assets at home.”

Global Bubble Watch:

September 15 – Bloomberg (Wes Goodman and Eliza Ronalds-Hannon): “Speculation that the Japanese central bank is about to undertake a shift in monetary policy is changing the shape of bond markets around the globe. The difference between short- and long-term yields is widening globally on bets the Bank of Japan’s next monetary twist at its Sept. 20-21 policy meeting will steepen the yield curve. Japan would achieve that by cutting its negative interest rate further, while simultaneously reducing purchases of long-term bonds, according to Morgan Stanley MUFG Securities… Such moves have the potential to ripple across the globe by reversing this year’s collapse in Japan’s longest-dated yields, and the attendant flows of money from the world’s second-biggest bond market to the U.S. and its juicier yields.”

September 12 – Financial Times (Robin Wigglesworth): “The summer tranquility is ending with a bang, as markets convulse with the most severe bout of turmoil since the UK’s Brexit vote. Some analysts say an old bogeyman might have exacerbated the turmoil. The primary trigger for the sell-off over the last two days was disappointment with the European Central Bank not extending its bond-buying programme… Yet some analysts say the severe reaction might have been worsened by forced selling by vehicles such as commodity trading advisers (CTAs), risk parity funds and other computer-driven strategies that respond automatically and dynamically to market turbulence. ‘If you think of an impartial, impassionate machine just grinding away, hitting bids trying to identify weakness and stops, then I think you have the CTA situation about right for now,’ Peter Tchir of Brean Capital wrote… ‘Then there are the risk parity funds who I think are hitting a trifecta of problems, rising volatility, correlations becoming more positive and a couple of days of everything going down.’ CTAs are trend-following, algorithmic hedge funds that tend to buy securities that have already gone up in price, and sell falling ones.”

September 13 – Wall Street Journal (Corrie Driebusch and Aaron Kuriloff): “Broad selling rattled stock and bond markets again Tuesday, intensifying concerns that the surge in volatility could force sales by a breed of hedge funds that use borrowed money to boost returns. So-called risk-parity funds seek to produce above-market gains with lower risk by using futures or other derivatives to increase their returns on safer assets such as bonds. This leverage has at times resulted in strong performance by the funds… But it also leaves them vulnerable when stock and bond prices fall suddenly, as happened both on Friday and Tuesday.”

September 16 – Bloomberg (Dakin Campbell, Tom Schoenberg and Jan-Henrik Foerster): “Deutsche Bank AG’s shares and its riskiest bonds dropped the most since the Brexit vote after the lender said the U.S. Justice Department is seeking $14 billion to settle a probe tied to mortgage-backed securities, more money than the bank is willing to pay. ‘Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited… The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.’”

September 11 – Bloomberg (Sid Verma and Luke Kawa): “Global current-account imbalances are back, bringing with them deflationary forces and slamming the brakes on global growth. That's the sobering conclusion of an HSBC… report…, which laments that an effective, international policy response to the problem is likely to be a long way off. Last year represented an inflection point for the global economy according to Janet Henry, the bank's global chief economist. After moderating slightly after the financial crisis, current-account imbalances have started to widen once more, with the surpluses of Germany, China, and Japan – the world’s three largest surplus nations — increasing both in dollar and GDP-share terms. By the former metric, HSBC calculates that this year global imbalances will be close to 2007's record highs.”

September 14 – Wall Street Journal (Greg Ip): “For years, the world has looked to central banks to deploy whatever tools they had to prop up economic growth. Now, just as those tools reach their limits, governments are quietly stepping up. Fiscal policy across the developed world is collectively turning more stimulative for the first time since the end of the recession… While the scale of the stimulus is modest in dollar terms, it signals a more profound shift in the political winds. Globally, the rise of political populism has pushed deficits down the list of priorities while elevating tax cuts and benefits for the working class.”

September 15 – Bloomberg (Greg Quinn): “Canadian household debt exceeded the country’s gross domestic product for the first time as liabilities climbed to a fresh record relative to disposable income. Household debt rose to 100.5% of gross domestic product in the second quarter from 98.7% previously... Credit-market debt such as mortgages increased to 167.6% of after-tax income…”

September 13 – Bloomberg (Katia Dmitrieva): “A tax on foreign homebuyers in Vancouver cut luxury purchases in Canada’s priciest housing market by more than half last month… Meanwhile, high-end sales in Toronto surged. Transactions in Vancouver of at least C$1 million ($759,000) slid 65% from a year earlier to 95 units in August, the month that a 15% transfer tax on deals by non-Canadian homebuyers took effect, according to Sotheby’s International Realty Canada. At the same time, luxury-home sales in Toronto and its suburbs doubled to 1,459 units…”

U.S. Bubble Watch:

September 13 – Reuters (Lindsay Dunsmuir): “The U.S. government posted a $107 billion budget deficit in August, a 66% increase from the same month last year… This compared to a deficit of $64 billion in August 2015… The fiscal year-to-date deficit was $621 billion through August, up 17% from a $530 billion deficit at the same time last year.”

September 14 – CNBC (John W. Schoen): “Years of underfunding and lackluster investment returns have left state pubic pensions even deeper in the hole — a shortfall taxpayers will eventually have to make up. Some states are in much better shape than others, according to the latest data from S&P Global Ratings. In New Jersey, for example, the state has set aside just 38% of what it needs to make good on promises to current and future retirees, which leaves a shortfall that works out to $10,648 per person… After years of not setting aside enough money, state pension funds are looking at a $1 trillion shortfall in what they owe workers in benefits…”

September 15 – Financial Times (Nicole Bullock and Robin Wigglesworth): “Low volatility investment funds have been one of the year’s hottest trends. But the recent stock market ructions have underscored that they may not be the ‘killer app’ that some investment experts think. Low or minimum volatility exchange traded funds seek stock investments with less volatility than overall equities…Their genesis came after academics showed how these more boring stocks actually tend to sharply outperform the stock market over time. ‘Low-vol’ ETFs naturally had a receptive audience when they were first introduced in 2011. And lately they have been on a red hot streak, against a backdrop of nervousness about global growth and burgeoning interest in so-called ‘smart beta’, the next generation of passive investment, with ETFs focusing on one or several so-called factors, such as low-vol, cheap valuations or momentum, in an effort to outperform the wider market.”

September 14 – Bloomberg (Lu Wang and Oliver Renick): “Two investor obsessions, volatility and exchange-traded notes, are being taken to increasingly extreme lengths in the U.S. stock market. For the first time on record, the iPath S&P 500 VIX Short-Term Futures ETN recorded more volume on Tuesday than any company in the S&P 500 Index, with a record 110 million shares changing hands. The closest was Bank of America Corp., with 89.3 million shares trading. The note fell 0.5% Wednesday, trimming a rout that topped 5% as the S&P 500 Index erased gains… Among ETPs, VXX ranked the third-most active yesterday after SPDR S&P 500 ETF Trust and iShares MSCI Emerging Markets ETF.”

September 16 – Wall Street Journal (Riva Gold and Art Patnaude): “Real-estate funds just posted their biggest-ever weekly inflows, a sign of investors’ continued appetite for income-providing holdings in an era of ultra-low interest rates. Despite a rough week in terms of performance, mutual fund investors poured the most money on record into real estate in the second week of September… The net $2.9 billion committed trounced the previous record of $1.68 billion set earlier this year.”

September 13 – Wall Street Journal (Josh Mitchell): “The industry warnings are urgent and often dire: The housing market could stall. Marriages are being postponed. Workers won’t have the savings to retire. The nation’s food supply will be disrupted. They point to one threat: soaring student debt. A tripling of student debt over the past decade to more than $1.3 trillion has unleashed a torrent of Washington lobbying from outside the education sector, with various industries describing a ‘crisis’ requiring federal intervention. Real-estate agents, farmers, architects, startup lenders, lawyers, tech companies, benefits administrators—even podiatrists—have sent lobbyists to Capitol Hill over the past two years to push for legislation to forgive or at least reduce what workers and consumers owe…”

September 14 – CNBC (Jon Marino): “Wall Street is hitting the brakes on car loans. The CEO of JPMorgan Chase's consumer and community banking segment, Gordon Smith, said this week at an industry conference… that his company is backing away from the longest types of auto loans... ‘We decided to do a lot less lending’ in the 84-month term loan category, he said… at the Barclays 2016 Global Financial Services Conference. ‘Should we see a downturn in the economy ... that will be an area that is more stressed,’ he added. At Wells Fargo, which also appeared at the event, the bank added $150 million to reserves in the second quarter, ‘primarily driven by loan growth in the commercial, auto and credit card portfolios.’”

September 14 – Wall Street Journal (Anna Wilde Mathews): “The average cost of health coverage offered by employers pushed above $18,000 for a family plan this year, though the growth was slowed by the accelerating shift into high-deductible plans… Annual premium cost rose 3% to $18,142 for an employer family plan in 2016, from $17,545 last year, according to the annual poll… by the nonprofit Kaiser Family Foundation along with the Health Research & Educational Trust…”

September 16 – Bloomberg (Dawn McCarty and Shahien Nasiripour): “ITT Educational Services Inc. began liquidation proceedings in an Indianapolis bankruptcy court Friday after closing 136 technical schools, leaving over 35,000 students stranded in one of the largest college shutdowns in U.S. history. The 50-year-old for-profit college operator, which had campuses in 38 states, said it was forced to close its doors after the U.S. Education Department demanded a steep increase in the security the company would have to post to guarantee federal student aid. More than 8,000 employees were affected…”

September 13 – Reuters (Olivia Oran): “As Goldman Sachs… has built its U.S. consumer bank, it has established a team to put its deposits to work on Wall Street, a telling development about Goldman's ambitions for the retail bank. Led by 40-year-old Goldman partner and credit trading veteran Gerald Ouderkirk, the team's job is to use consumer deposits and other types of funding for trades, investments and big loans to earn profits, people familiar with the matter told Reuters. The existence of the team, which has not been previously reported, was set up in mid-2015 and is formally known as the institutional lending group. Lately, it has ramped up activities as Goldman Sachs looks to do more lending broadly.”

September 13 – Bloomberg (Jeff Wilson): “Short-seller Jim Chanos said an announced $2.6 billion merger with SolarCity Corp. will make Tesla Motors Inc. a ‘walking insolvency.’ ‘The synergies are questionable at best,’ Chanos… said at the CNBC Institutional Investor Delivering Alpha Conference… He estimated that the combined company, which will depend on access to the capital market, could have a cash burn of roughly $1 billion per quarter.”

Federal Reserve Watch:

September 13 – Wall Street Journal (Jon Hilsenrath): “Federal Reserve officials, lacking a strong consensus for action a week before their next policy meeting, are leaning toward waiting until late in the year before raising short-term interest rates. It is a close call. But with inflation holding below the Fed’s 2% target and the unemployment rate little changed in recent months, senior officials feel little sense of urgency about moving and an inclination toward delay... Interest rates can affect stock valuations, the cost of financing a home and whether companies will take on big new projects, making the central bank the perpetual center of market attention. Wall Street is especially attuned to when the Fed will move after it has decided to hold rates steady so far this year.”

September 12 – Wall Street Journal (Harriet Torry): “Three Federal Reserve officials indicated Monday they’re in no hurry to raise short-term interest rates at their policy meeting next week. Fed governor Lael Brainard said in a speech the central bank’s recent caution on rates—leaving them unchanged since December—‘has served us well in recent months, helping to support continued gains in employment and progress on inflation.’”

September 12 – Bloomberg (Jeanna Smialek and Rich Miller): “Federal Reserve Governor Lael Brainard counseled continued prudence in tightening monetary policy, even as she said the economy is making gradual progress toward achieving the central bank’s goals. ‘The case to tighten policy preemptively is less compelling’ in an environment where declining unemployment has been slow to spur faster inflation, Brainard said…”

September 14 – CNBC (Jeff Cox): “Former Fed Chairman Ben Bernanke thinks policymakers should give serious thought to implementing negative rates. The man who led the U.S. central bank immediately before Janet Yellen doesn't believe his former colleagues should rush to that kind of ultra-aggressive policy stance. But of all the options the Fed has for stimulus, going to negative rates may not be as drastic as it seems, Bernanke said in a blog post this week.”

September 12 – Bloomberg (Hugh Son): “JPMorgan… Chief Executive Officer Jamie Dimon said the Federal Reserve should increase interest rates -- sooner, rather than later. ‘Let’s just raise rates,’ Dimon said Monday during a wide-ranging discussion at the Economic Club of Washington. ‘The Fed has to maintain credibility. I think it’s time to raise rates. Normality is a good thing, not a bad thing. The return to normal is a good thing.’”

Japan Watch:

September 14 – Reuters (Leika Kihara): “The Bank of Japan will consider making negative interest rates the centerpiece of future monetary easing by shifting its prime policy target to interest rates from base money at its review next week, sources familiar with its thinking say. The change would underscore growing concerns in the central bank and financial markets over the limits to the BOJ's economic stimulus efforts, as more than three years of aggressive bond buying is draining market liquidity. It would also be a shift away from the BOJ's unique monetary experiment that attempted to crush yields across the curve and try to convince the public that its massive money printing will boost economic activity and prices. ‘Among the BOJ's policy tools, the priority will likely shift more towards interest rates and away from huge bond purchases,’ said one of the sources…”

EM Watch:

September 13 – Bloomberg (Tracy Alloway): “How quickly things change in emerging markets. In early 2016, EM asset prices tanked as investors fretted about developing countries' and corporations' ability to service their debts, especially those denominated in U.S. dollars… Fast forward nine months, and EM investors seem to have given birth to a fresh bout of optimism thanks in part to a stable greenback and ultra-low interest rates in developed markets… Emerging market companies have been taking advantage of the sharp turnaround in sentiment to sell more dollar-denominated debt with year-to-date issuance totaling $153 billion... Meanwhile, risk premiums in emerging market bonds have also compressed…”

Brazil Watch:

September 14 – Reuters (Sergio Spagnuolo): “Brazilian prosecutors charged ex-President Luiz Inacio Lula da Silva… with being the ‘boss’ of a vast corruption scheme at state oil company Petrobras, in a major blow to the leftist hero's hopes of a political comeback. It was the first time that Lula, still Brazil's most popular politician despite corruption accusations against him and his Workers Party, was charged by federal prosecutors for involvement in the political kickbacks scheme at Petroleo Brasileiro…”

September 13 – Bloomberg (David Biller): “Brazil’s retail sales fell more than expected by analysts in July, marking the worst performance for that month in 15 years, as rising unemployment takes its toll on Latin America’s largest economy. Sales fell 0.3% after a revised 0.3% increase in June… Sales fell 5.3% versus the same month in 2015, the worst July since the series began in 2001.”

Leveraged Speculator Watch:

September 14 – Bloomberg (Saijel Kishan): “Andrew Law said the hedge fund business is too big -- and failing. Law, who runs Caxton Associates, said the growth in industry assets since the global financial crisis has been ‘both an exceptional and unwelcome development.’ Managers now need to generate gains of $350 billion a year to satisfy investor expectations, he said. That’s an annual return of about 12% from the $2.9 trillion industry, which has returned an average of 2.2% in the past five years. ‘Against a backdrop of comparatively sclerotic growth, S&P 500 valuations stretched on numerous metrics, and alongside approximately $10 trillion of negative-yielding debt, it is reasonable to conclude that the alternatives industry is inappropriately sized to deliver on clients’ return expectations,’ Law, 50, said…”

September 13 – Bloomberg (Saijel Kishan, Hema Parmar and Katherine Burton): “Some of the biggest and best-known hedge funds can’t hang on to client capital. Richard Perry, who started his hedge fund 28 years ago, has seen assets in his Perry Capital shrink to $4 billion, from $10 billion last September. That 60% drop comes as the firm’s main fund fell 18% from the end of 2013 through July. Perry isn’t the only manager struggling. John Paulson’s assets, on the decline since 2011, are down an additional 15% this year. And Dan Och… is now managing $39.2 billion at his Och-Ziff Capital Management Group, compared with $44.6 billion at the start of the 2016. Hedge funds have suffered their biggest withdrawals since the financial crisis, with investors pulling $23.3 billion in the first half of the 2016, according to… Hedge Fund Research…”

September 13 – CNBC (Jeff Cox): “The debt market is in a ‘dangerous situation’ as central banks around the world lose their ability to stimulate growth, hedge fund giant Ray Dalio said… As the world faces more than $11 trillion in negative-yielding debt, Dalio said central banks like the Fed, the European Central Bank and the Bank of Japan are facing a dilemma. ‘There's only so much you can squeeze out of the debt cycle, and we're there globally,’ the head of Bridgewater Associates said at the Delivering Alpha conference… ‘You can't lower interest rates more.’”

September 11 – Bloomberg (Katia Porzecanski and Neil Weinberg): “Bridgewater Associates LP, the world’s largest hedge fund manager, has attracted $22.5 billion in client money since it started a new strategy early last year… About three-quarters of the money went to the new fund… The remainder went into the firm’s main macro hedge fund, Pure Alpha, after Bridgewater opened that fund to select investors this year.”

Geopolitical Watch:

September 12 – Bloomberg: “China deflected criticism that it could do more to stifle North Korea’s nuclear ambitions, questioning the effectiveness of sanctions and saying the U.S. has a responsibility to fix a problem it created. ‘The crux of the Korean nuclear issue lies not in China but in the U.S. as this issue is nothing but conflict between the DPRK and the U.S.,’ China Foreign Ministry spokeswoman Hua Chunying said… She was responding to calls by President Barack Obama for China to tighten up sanctions against Kim Jong Un’s regime prior to its fifth -- and biggest -- nuclear test last week.”

September 12 – CNN (Brad Lendon and Katie Hunt): “Chinese and Russian naval forces began joint exercises in the South China Sea on Monday, adding a new twist to ongoing tensions over Chinese island-building in the region. The eight-day exercises will highlight marine corps units in ‘live-fire drills, sea crossing and island landing operations, and island defense and offense exercises,’ Chinese navy spokesperson Liang Yang said… Aside from the marines, Chinese and Russian surface ships, submarines, planes, helicopters and amphibious armored equipment would be used, Liang said.”

September 16 – Reuters (David Brunnstrom and Idrees Ali): “Japan will step up its activity in the contested South China Sea through joint training patrols with the United States and bilateral and multilateral exercises with regional navies, Japanese Defense Minister Tomomi Inada said… Japan also has its own dispute with China over territory in the East China Sea. Inada said that if the world condoned attempts to change the rule of law and allowed ‘rule bending’ to succeed, the ‘consequences could become global.’”

September 13 – Bloomberg (Jeff Wilson): “The U.S. brought a trade complaint to the World Trade Organization alleging China is offering excessive support for the production of corn, rice and wheat, in the process denying American farmers the ability to compete fairly for exports. The value of China’s price support for the commodities last year was an estimated $100 billion more than what it had committed to when the nation joined the WTO, the U.S. Trade Representative… said…”