Tuesday, June 27, 2017

Tuesday Afternoon Links

[Bloomberg] U.S. Stocks, Bonds Decline as Trump Agenda Stalls: Markets Wrap

[Bloomberg] Yellen Keeps Fed on Track for Rate Hikes

[Bloomberg] Trio of Fed Speakers Warn on Valuations With Eyes on Tightening

[Bloomberg] Fed's Fischer Warns Against Complacency Over Stability Risks

[Reuters] Not another financial crisis in 'our lifetimes': Fed's Yellen

[Bloomberg] GOP Leaders Delay Health Bill Vote Until After July 4 Recess

[Bloomberg] 'Untested' ETF Market Worries Top Speed Trader in U.S. Equities

[Bloomberg] 50 Cent Isn't the Only One Seeking Big Protection in VIX Options

[Reuters] Ransomware virus hits computer servers across the globe

[Reuters] Italy's Berlusconi dusts himself down in final bid for power

[NYT] Global Cyberattack: What We Know and Don’t Know

[WSJ] How Bad Is the Crisis in Illinois? It Has $14.6 Billion in Unpaid Bills

[WSJ] ECB’s Draghi Hints at Possible Winding Down of Eurozone Stimulus

[FT] Michel Temer faces fight for survival after corruption charge

[FT] Smooth talking Draghi drops the R word

Tuesday's News Links

[Bloomberg] U.S. Stocks, Dollar Fall as Treasuries Strengthen: Markets Wrap

[Reuters] Stocks, dollar ease as central bank officials take center stage

[Reuters] Euro surges nearly one percent after Draghi comments, dollar slips

[Bloomberg] Draghi Sees Room for Paring Stimulus Without Tightening Policy

[Bloomberg] IMF Cuts U.S. Outlook, Calls Trump's Growth Target Unrealistic

[Reuters] U.S. home prices for April rise slower than expected

[Bloomberg] Senators Considering Breaking Fannie-Freddie Into Pieces, Sources Say

[Reuters] EU fines Google record $2.7 billion in first antitrust case

[Bloomberg] Markets Have Nothing Left to Fear But Fearlessness Itself

[Bloomberg] China Debt Squeeze Has Moody's Awaiting First Local Default

[Bloomberg] Rising Inequality May Be the Real Risk of Automation

[WSJ] Anxious Investors Try to Hedge Against a Big Selloff, Even as Good Times Roll

[WSJ] Hostage to China’s Insecurity—Its Markets

[WSJ] Trump Administration Struggles to Find Community Banker for Fed Board

[WSJ] A Turning Point for Commercial Property

Sunday, June 25, 2017

Monday's News Links

[Bloomberg] Treasuries Erase Loss, Dollar Slips on Orders Data: Markets Wrap

[Bloomberg] Gold Plunges as 1.8 Million Ounces Traded in a New York Minute

[Reuters] UK PM May strikes $1.3 billion deal to get Northern Irish DUP support for her government

[Reuters] Fed's Williams sees gradual rate hikes as key to further U.S. growth

[CNBC] Bond investors are setting themselves up for ‘real painful trade,’ this strategist warns

[Bloomberg] Why China's Secretive Regulators Are An Issue for Asian Dollar Debt

[Bloomberg] Only the World Can Stop Germany as Business Climate Hits Record

[Bloomberg] Berlusconi Stages Comeback in Italy's Mayoral Elections

[NYT] After Puerto Rico’s Debt Crisis, Worries Shift to Virgin Islands

[WSJ] Italy Is Prepared to Spend Billions in Shutdown of Two Banks

[WSJ] Deal on Italian Banks Raises Questions About Eurozone Rules

[WSJ] Ties Between Chinese Banks and Deal Makers Run Deep

[FT] Xi Jinping’s war on the ‘financial crocodiles’ gathers pace

Sunday Evening Links

[Bloomberg] Asia Stocks Advance as Crude Gains for Third Day: Markets Wrap

[Reuters] Oil climbs on weaker dollar, but rise in U.S. drilling drags

[Reuters] Takata decides to file for bankruptcy: source

Sunday's News Links

[Bloomberg] Italy Commits Up to $19 Billion to Keep Veneto Banks Afloat

[Bloomberg] Italy Rushes to Approve Decree Law to Keep Two Veneto Banks Open

[Reuters] Time may be nearing for ECB stimulus exit: Weidmann

[Reuters] Push on with the 'great unwinding', BIS tells central banks

[CNBC] BIS warns of geopolitical events and four other risks that could undermine global upswing

[Bloomberg] U.K. Credit Binge May Spur BOE's Carney to Rein in Exuberance

[NYT, Morgenson] Lessons From the Collapse of Banco Popular

[FT] Anbang’s predicament amid bank-risk probe

Saturday, June 24, 2017

Saturday's News Links

[CNBC] It’s going to end ‘extremely badly,’ with stocks set to plummet 40% or more, warns Marc Faber

[AP] Italian PM 'guarantees' savers' accounts in 2 troubled banks

[Bloomberg] Italy to Shield Senior Creditors in Liquidating Veneto Banks

[CNBC] Qatar says demands made by four Arab states not 'realistic'

[WSJ] Fed Officials Split on Inflation’s Path

[FT] Contenders vie to be China’s next central bank governor

[WSJ] Why the Fed Should Surprise Us More

[FT] Time to brace for ‘market turmoil’, warns JPMorgan

[FT] Hedge funds turn from Opec friend to adversary in oil market

Weekly Commentary: Washington Finance and Bubble Illusion

June 18 – Financial Times (Mohamed El-Erian): “In hiking rates and, more notably, reaffirming its forward policy guidance and setting out plans for the phased contraction of its balance sheet, the Federal Reserve signalled last week that it has become less data dependent and more emboldened to normalise monetary policy. Yet, judging from asset prices, markets are failing to internalise sufficiently the shift in the policy regime. Should this discrepancy prevail in the months to come, the Fed could well be forced into the type of policy tightening process that could prove quite unpleasant for markets."

I’m not yet ready to move beyond the recent focus on global monetary policy. Belatedly, the Fed has become “more emboldened to normalise monetary policy.” Global policymakers may finally be turning more emboldened, though taking their precious time has nurtured alarming market complacency.

Over a period of years, securities markets became progressively more emboldened to the view that higher asset prices were the top priority of global central banks. For years I’ve argued that this is one policy slippery slope. For good reason, markets do not these days take seriously the threat of a tightening of financial conditions. The Fed and fellow central banks will surely seek to avoid what at this point would be a painful development for the global securities markets. When faced with a well-established Bubble, the notion of a painless tightening of financial conditions is a myth.

The current debate, focusing simplistically on interest rates and the level consumer price inflation, misses the overarching issue. U.S. and global central banking shifted to an untested and radical regime of directly inflating securities prices. No longer do central banks attempt to loosen or tighten bank lending through subtle changes in reserve holdings and interbank lending rates. Why not just purchase securities, supporting prices while injecting liquidity directly into the marketplace?

This momentous transformation of monetary management unfolded over a couple of decades – somehow seemingly unnoticed. Financial innovation played a key role. As more debt was securitized, the impact of marketplace liquidity upon system Credit dynamics became increasingly important. Much to its delight, the Fed recognized that small policy adjustments could exert big effects on risk-taking and leveraging – hence marketplace liquidity, pricing and overall system stimulus.

It was a case of booming Wall Street finance affording the Greenspan Fed the most powerfully alluring monetary policy transmission in history. At the same time, it was power our central bank was ill-equipped to administer. The Fed became increasingly supportive of the debt and equities markets – of Wall Street more generally - nurturing speculation, securities leveraging, derivatives and myriad deleterious financial and economic effects.

In terms of overall system stimulus, securities markets eventually came to dominate traditional bank lending. After disregarding repeated market warnings, the fragility of such a financial regime became obvious in 2008. Rather than using the crisis and its lessons to reposition to a more well-grounded monetary regime, the Fed and other central banks doubled down. Reflating securities markets became priority one, and central banks went so far as to be willing to inject newly created “money” directly into the markets to achieve their objective.

Central banks should not be in the business of favoring individual asset classes, sectors or groups in society. Never should a small group of unelected officials have such discretion to create Trillions of “money” and allocate wealth. After all, if “printing” Trillions to buy marketable debt was such a fine idea, why did central bankers wait until deep crisis to implement such a doctrine?

The new regime that developed specifically favored securities markets, Wall Street and the wealthy. It has fancied the financial speculator at the expense of the saver. The new regime favored financial engineering to productive investment – the white collar to the blue collar. There was no problem seen with deindustrialization and persistent huge Current Account Deficits. No issue whatsoever exchanging new financial claims for Chinese imports.

The new regime has spurred wealth redistribution that is at the root of a divided country, political dysfunction and escalating geopolitical risk. And there is little mystery surrounding weak economic underpinnings, dismal productivity trends and stagnant wages and living standards. Contemporary finance has proven itself especially deficient in allocating resources throughout the economy. Markets have been over-liquefied, too distorted, grossly speculative and too monstrous to be an effective mechanism for resource allocation.

All these consequences of precarious financial and policy regimes - and resulting Credit and assets Bubbles – apparently ensure that the Fed and global central bankers are trapped in policy doctrine beholden to the securities and derivatives markets.

This week I found myself again contemplating contemporary “money” and monetary theory. I pondered the attributes of “insatiable demand” and “preciousness” - and how governments throughout history abused the insatiable demand for money, eventually destroying its preciousness with dire consequences for financial systems, economies and societies.

Contemporary central bankers have become way too comfortable creating new “money” and using it to drive the markets. Over-liquefied markets, then, turned too comfortable financing (and leveraging) endless government borrowings. It has amounted to a historic inflation of “money” at the heart of the financial system. Especially since the crisis and Bernanke Reflation aftermath, Washington Finance has come to completely dominate the foundation of contemporary global finance.

Looking back to 1990, there were about $2.5 TN of Treasury Securities, $1.5 TN of Agency Securities and $340bn of Federal Reserve Credit. The three main sources of Washington Finance combined to $4.25 TN, or 71% of GDP. The explosive growth of the GSEs helped push Washington Finance to $8.34 TN (Treasury $3.36 TN, Agency $4.35 TN, and Fed $635bn) by the end of 2000, or 81% of GDP. Nearing the end of the mortgage finance Bubble in 2007, Washington Finance had inflated to $14.4 TN (Treasury $6.05 TN, Agency $7.40 TN, and Fed $950bn), or 99% of GDP.

In terms of Washington Finance, it is simply astonishing to contemplate what has unfolded since the crisis. Outstanding Treasury securities have reached $16.0 TN, with the Fed’s balance sheet ending 2016 at $4.43 TN. After all the fraud, insolvency and receivership, one might have assumed a downsized Agency sector. Not to be. Once Washington Finance takes hold, there’s apparently no letting loose. After a notably strong year of GSE growth, outstanding Agency Securities ended 2016 at a record $8.52 TN. Total Washington Finance ended the year at an incredible $28.93 TN, or 156% of GDP.

This almost $29.0 TN of “money-like” Credit provides a deceptively (Bubble Illusion) solid foundation to U.S. and global finance. Here at home, this unprecedented inflation of Washington “money” has significantly bolstered asset prices, spending, corporate profits and government revenues. Globally, the flow of Washington “money” abroad (Current Account Deficits and financial flows) inflated international reserve holdings, integral to what became booming post-crisis EM financial systems. I would furthermore argue that the unprecedented inflation of Washington “money” was instrumental in bolstering Chinese Bubble inflation to epic proportions. Chinese financial and economic Bubbles then became elemental to powering Bubbles around the globe. And particularly over the past two years, unprecedented U.S.-inspired inflation of government “money” in Europe and Japan (and elsewhere) provided the liquidity to propel a financial Bubble in the face of an increasingly troubling fundamental backdrop.

This has now been going on so long that is seems business as usual. Central banking and contemporary monetary doctrine are held in high esteem. Yet the history of great monetary inflations shows that, once going, they’re virtually impossible to control. And that’s where we are today. Understandably, after accommodating Bubbles to this point, markets assume that policymakers (i.e. Washington, Beijing, Frankfurt, Tokyo, etc.) will not dare risk popping them. At the same time, central bankers must by now appreciate that ultra-loose policies are a clear and present danger to financial stability. Beijing at least recognizes the risk of letting their (out of control) Bubble run.

Surely officials in Washington, Beijing, Europe, Tokyo and elsewhere would prefer to begin normalizing policy at this point. But this now goes so far beyond interest rates. We’re talking tens of Trillions of specious “money” and money-like securities and even much larger quantities of equities and corporate Credit whose values have been inflated by the massive expansion of government finance. To be sure, the current backdrop so dwarfs market misperceptions, distortions and mispricing from the mortgage finance Bubble period.

Policymakers everywhere prefer a go slow approach to “tightening,” determined not to upset the securities markets. Beijing this week provided aggressive liquidity injections, taking some pressure off Chinese bond yields, interbank lending rates and stock prices. Market wishful thinking has it that both Chinese officials and the Federal Reserve have largely completed “tightening” measures. Both systems, however, have powerful Bubble Dynamics feeding off the perception of safe government “money” and ongoing government support for securities and asset prices. Policy “normalization” would require that governments retreat from backstopping the markets and dictating system finance more generally.

At this late-stage of the Bubble, markets have no fear that policymakers are willing to risk bursting Bubbles. A cautious go slow approach to tightening and normalization may seem perfectly logical to central bankers, but it’s tantamount to not going at all. Inflation psychology has become deeply engrained throughout global financial markets – and it will be broken only through significant disappointment and anguish.


For the Week:

The S&P500 added 0.2% (up 8.9% y-t-d), while the Dow was unchanged (up 8.3%). The Utilities dropped 1.8% (up 9.0%). The Banks fell 2.3% (down 0.3%), and the Broker/Dealers lost 1.6% (up 7.1%). The Transports slipped 0.3% (up 3.8%). The S&P 400 Midcaps declined 0.5% (up 5.0%), while the small cap Russell 2000 gained 0.6% (up 4.2%). The Nasdaq100 rallied 2.1% (up 19.3%), and the Morgan Stanley High Tech index jumped 3.0% (up 24%). The Semiconductors rose 2.0% (up 20.1%). The Biotechs surged 8.8% (up 30.6%). With bullion gaining $3, the HUI gold index recovered 4.4% (up 6.6%).

Three-month Treasury bill rates ended the week at 94 bps. Two-year government yields rose 3 bps to 1.34% (up 15bps y-t-d). Five-year T-note yields increased a basis point to 1.76% (down 17bps). Ten-year Treasury yields slipped a basis point to 2.14% (down 30bps). Long bond yields fell six bps to 2.72% (down 35bps).

Greek 10-year yields dropped 24 bps to 5.37% (down 165bps y-t-d). Ten-year Portuguese yields were unchanged at 2.92% (down 82bps). Italian 10-year yields dropped seven bps to 1.92% (up 10bps). Spain's 10-year yields fell eight bps to 1.38% (unchanged). German bund yields slipped two bps to 0.26% (up 5bps). French yields declined three bps to 0.61% (down 7bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields added a basis point to 1.03% (down 20bps). U.K.'s FTSE equities index slipped 0.5% (up 3.9%).

Japan's Nikkei 225 equities index gained 0.9% (up 5.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.06% (up 2bps). France's CAC40 was about unchanged (up 8.3%). The German DAX equities index slipped 0.2% (up 10.9%). Spain's IBEX 35 equities index fell 1.2% (up 13.7%). Italy's FTSE MIB index dipped 0.5% (up 8.3%). EM equities were mixed. Brazil's Bovespa index lost 0.9% (up 1.4%), and Mexico's Bolsa declined 0.5% (up 7.3%). South Korea's Kospi increased 0.7% (up 17.4%). India’s Sensex equities index added 0.3% (up 16.9%). China’s Shanghai Exchange rallied 1.1% (up 1.7%). Turkey's Borsa Istanbul National 100 index jumped 1.5% (up 27.5%). Russia's MICEX equities index recovered 2.4% (down 16.4%).

Junk bond mutual funds saw outflows of $198 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.90% (up 34bps y-o-y). Fifteen-year rates declined one basis point to 3.17% (up 34bps). The five-year hybrid ARM rate fell a basis point to 3.14% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.0% (up 29bps).

Federal Reserve Credit last week expanded $2.4bn to $4.430 TN. Over the past year, Fed Credit declined $8.0bn. Fed Credit inflated $1.619 TN, or 58%, over the past 241 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $19.7bn last week to $3.290 TN. "Custody holdings" were up $51.5bn y-o-y, 1.6%.

M2 (narrow) "money" supply last week added $8.4bn to $13.516 TN. "Narrow money" expanded $708bn, or 5.5%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits fell $10.7bn, while Savings Deposits gained $12.1bn. Small Time Deposits rose $1.5bn. Retail Money Funds increased $1.6bn.

Total money market fund assets declined $16.2bn to $2.618 TN. Money Funds fell $85bn y-o-y (3.2%).

Total Commercial Paper jumped $10.3bn to $799bn. CP declined $60bn y-o-y, or 5.8%.

Currency Watch:

The U.S. dollar index was little changed at 97.26 (down 5.0% y-t-d). For the week on the upside, the New Zealand dollar increased 0.4%, the Swiss franc 0.4% and the Norwegian krone 0.1%. For the week on the downside, the Brazilian real declined 1.5%, the South African rand 0.9%, the Australian dollar 0.7%, the Mexican peso 0.5%, the British pound 0.5%, the South Korean won 0.4%, the Canadian dollar 0.4%, the Japanese yen 0.4%, the Singapore dollar 0.3%, and the Swedish krone 0.1%. The Chinese renminbi fell 0.38% versus the dollar this week (up 1.59% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.8% (down 11.2% y-t-d). Spot Gold increased 0.2% to $1,257 (up 9.1%). Silver added 0.3% to $16.707 (up 4.5%). Crude sank another $1.73 to $43.01 (down 20%). Gasoline declined 1.4% (down 14%), and Natural Gas sank 3.2% (down 22%). Copper rallied 2.3% (up 5%). Wheat fell 1.7% (up 16%). Corn sank 6.8% (up 4%).

Trump Administration Watch:

June 23 – New York Times (Jonathan Martin and Alexander Burns): “Senator Dean Heller of Nevada, perhaps the most vulnerable Republican facing re-election in 2018, said Friday that he would not support the Senate health care overhaul as written, dealing a serious blow to his party’s attempt to repeal the Affordable Care Act just days before a showdown vote. Using remarkably harsh language, Mr. Heller, who is seen as a pivotal swing vote, denounced the Senate-drafted bill in terms that Democrats swiftly seized on. He said the measure would deprive millions of health care and do nothing to lower insurance premiums. ‘I cannot support a piece of legislation that takes insurance away from tens of millions of Americans,’ he said at a news conference…”

China Bubble Watch:

June 20 – Reuters (Andrew Galbraith and Samuel Shen): “Generous money injections by China's central bank are helping to maintain some calm in the country's financial markets, but market rates are persistently high, reflecting worries that liquidity conditions remain unusually tight. Rates on 14-day repos climbed to 5.3% on Monday, their highest late April… Liquidity conditions are typically tight in China in June due to tax payments and as companies look to make their balance books look healthier at the end of the month and quarter… This year, a regulatory clampdown on riskier forms of financing, particularly between banks and non-financial institutions, has created additional strains on the system.”

June 20 – Reuters (Sue-Lin Wong and Shu Zhang): “The number of high net worth individuals (HNWIs) in China has risen nearly 9 times since a decade ago, a private survey released on Tuesday showed… Chinese with at least 10 million yuan ($1.47 million) of investable assets hit 1.6 million in 2016, up from 180,000 in 2006, according to the 2017 China Private Wealth Report by Bain Consulting and China Merchants Bank. The overall value of the private wealth market increased to 165 trillion yuan in 2016, growing at 21% annually in 2014-2016.”

June 19 – Bloomberg: “China’s home prices increased in fewer cities last month in the wake of cooling measures imposed by local authorities. New-home prices, excluding government-subsidized housing, gained from the previous month in 56 of 70 cities tracked by the government, compared with 58 in April… Prices fell in nine cities and were unchanged in five. In Beijing, the scene of the nation’s tightest property restrictions, prices of new homes were unchanged from the previous month, and prices of existing homes fell by 0.9%, the first decline since February 2015.”

June 19 – Bloomberg: “China’s workers may be starting to feel like they’re getting a raw deal. Amid soaring industrial profits, employees in the world’s second-largest economy saw slower wage growth last year -- and many are seeing the smallest raises since 1997. That’s another sign that the years of pay gains above ten percent and burgeoning spending power are coming to a close, as China confronts industrial overcapacity, mounting debt and waning competitiveness.”

June 21 – Bloomberg (Sam Mamudi and Ben Bartenstein): “Chinese stocks were little moved by their addition to MSCI Inc.’s benchmark indexes… While MSCI’s announcement was a landmark step in China’s integration with the global financial system, it will initially have a small effect on the amount of foreign money entering the nation’s $6.9 trillion stock market. Domestic shares will comprise just 0.7% of MSCI’s global emerging-markets gauge as inclusion begins in two steps: the first in May 2018 and the second in August of next year.”

June 19 – Bloomberg (Fion Li): “Hong Kong’s pegged exchange rate should stay as it has served the city well through financial crises for more than 30 years, the chief of its de facto central bank said. ‘Hong Kong is a small and open economy,’ Hong Kong Monetary Authority Chief Executive Norman Chan said… as the city approaches the 20th anniversary of Chinese rule. ‘Keeping a stable exchange rate between the Hong Kong dollar and the U.S. dollar is the most suitable arrangement. We have no need and no intention to change such an effective system.’”

Europe Watch:

June 19 – Bloomberg (Kevin Costelloe and Sonia Sirletti): “Italian finance officials and the European Commission are racing to find a solution for two troubled banks in the northern Veneto region that have weighed on the nation’s financial system. Finance Minister Pier Carlo Padoan said… the matter of Veneto Banca SpA and Banca Popolare di Vicenza SpA is being worked on ‘actively,’ without offering details. The European Commission is working ‘hand in hand’ with Italian authorities and Europe’s Single Supervisory Mechanism, and is making ‘good progress’ on reaching a solution within the bloc’s rules…”

Central Bank Watch:

June 20 – Bloomberg (Lucy Meakin and Fergal O'Brien): “Mark Carney ended more than a month of silence with a major speech that pushed back against rate hawks in the Bank of England and re-emphasized his concerns about the impact of Brexit on the economy. The U.K.’s exit from the European Union was a central theme of his address…, with the BOE governor highlighting the risks to consumer spending, business investment, the current-account deficit and financial services. He indicated he’s in no rush to raise interest rates, saying he wants to see how the economy responds to the ‘reality of Brexit negotiations.’”

June 21 – Bloomberg (Jill Ward): “Bank of England chief economist Andy Haldane is leaning toward joining the hawks on the Monetary Policy Committee, saying that the risks of leaving policy tightening too late are rising and that he considered a vote for a rate increase as early as June. ‘The risks of tightening ‘too early’ have shrunk as growth and, to lesser extent, inflation have shown greater resilience than expected,’ Haldane said in a speech… ‘Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.’ The comments from Haldane, usually on the more dovish end of the panel, add to signs that policy makers are becoming increasingly restless as inflation breaches their 2% target.”

June 21 – Bloomberg (Paul Gordon): “The European Central Bank cited the government of U.S. President Donald Trump as a key reason why the risks to the global economy remain tilted to the downside. The… ECB said in an article from its Economic Bulletin… that while some concerns over the prospects for world growth have diminished, such as China’s short-term outlook and the resilience of emerging-market economies, others have appeared. ‘Since the U.S. election, pressures for more inward-looking policies have risen… In particular, there is significant policy uncertainty surrounding the intentions of the new U.S. administration regarding fiscal and, especially, trade policies, the latter entailing potentially significant negative effects on the global economy.’”

Brexit Watch:

June 23 – UK Guardian (Dan Roberts): “One year on from Britain’s vote to leave the EU, the anniversary of the referendum was overshadowed by fresh outbreaks of doubt. In Brussels, Theresa May’s farewell offer on EU citizenship was met with a shrug from commission president Jean-Claude Juncker and a chorus of voices urging Britain to stay. In Westminster, her own chancellor, Philip Hammond, is one of many dusting down alternative models of Brexit to soften its impact on a faltering economy. British officials in Whitehall have meanwhile had to temper their negotiating strategy after May’s mandate to walk away with no deal was undermined by a humiliating general election result. But what are the chances of Brexit 2.0 emerging from a second year of Britain’s post-referendum soul-searching? Has an election in which both main parties still supported departure simply flushed out the last few remoaners in denial? Or was this the week the wheels started to fall off May’s all-or-nothing exit vehicle?”

Global Bubble Watch:

June 19 – Wall Street Journal (Steven Russolillo): “The calm that has descended on U.S. financial markets is stretching around the world. Based on one commonly used measure, Asian equities are near their least volatile this century... In the U.S., Wall Street’s ‘fear gauge’ is near all-time lows, and in Europe, volatility has also largely subsided. ‘This is a global dynamic,’ said Michael Parker, head of strategy, Asia-Pacific at Bernstein Research in Hong Kong. ‘You see low volatility everywhere.’”

June 16 – CNBC (Jeff Cox): “The staggering level of government debt carrying negative yields, after falling from its peak a year ago, is back on the rise. A slew of factors converged in May to send the global total to $9.5 trillion of sovereign debt — a situation where governments effectively are getting paid to borrow money, according to Fitch Ratings. The total represented a 10.5 percent increase from April. Prominent investors have warned of the dangers of so much negative-yielding debt. Janus Henderson's Bill Gross has called it a ‘supernova’ that will ‘explode,’ while Deutsche Bank CEO John Cryan has cautioned about "fatal consequences" of central banks being enticed by slashing rates to that extent.”

June 19 – Bloomberg (Emily Cadman): “Moody’s… cut the long-term credit rating of Australia’s four biggest banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders. Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. were all downgraded to Aa3 from Aa2, Moody’s said… The ratings outlook for all four lenders is stable, Moody’s said. ‘Risks associated with the housing market have risen sharply in recent years… While a sharp housing downturn isn’t its core scenario, ‘the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks…’”

June 17 – CNBC (Robert Frank): “The world's millionaires, who represent the top 1% of the population, now own a record 45% of the global wealth and their share is growing… There are now 17.9 million households in the world, up 8% from 16.6 million last year, according to… The Boston Consulting Group. The U.S. has the most millionaires, with over 7 million millionaire households, with China ranking second with 2.1 million.”

June 20 – Financial Times (Vanessa Houlder): “Offshore companies in the British Virgin Islands have assets of more than $1.5tn, more than twice the sum estimated in 2010. Two-thirds of the offshore companies registered in the BVI are used for ‘corporate structuring’, and more than 140 listed businesses in London, New York and Hong Kong have a unit in the BVI… These units can be used for tax planning, but can also be useful as a tax-neutral hub for investors from different locations. Companies are also attracted by the BVI’s legal system, which mirrors British law.”

Fixed Income Bubble Watch:

June 19 – Wall Street Journal (Julie Wernau and Taos Turner): “Argentina sold a 100-year bond on Monday, the latest sign of investor hunger for yield as the country joined a small group to sell so-called century bonds. The Argentine government raised $2.75 billion through the debt issue with a yield of 7.9%... Proceeds from the private-placement offering will go toward financing its budget and refinancing existing debt. The yield was lower than the initial price talk of 8.25%, an indication that many investors around the world jumped at the chance to own debt with yields exceeding those of even many emerging-market issuers.”

Federal Reserve Watch:

June 20 – Reuters (Ann Saphir and Lindsay Dunsmuir): “The outlook for inflation and the future of financial stability are emerging as dueling concerns at the heart of a debate at the U.S. central bank over how fast to proceed on future interest-rate hikes. That is a change from years past, where high unemployment was at the top of the Federal Reserve's worry list for the U.S. economy. But with the U.S. unemployment rate now at 4.3%, most Fed officials are now convinced that nearly all Americans who want jobs can and do get them. That is a main reason the Fed last week raised its target range for short-term interest rates for the second time this year… Fed Chair Janet Yellen expressed confidence inflation would eventually perk up, but some policymakers cast doubt.”

June 19 – Reuters (Jonathan Spicer): “U.S. inflation is a bit low but should rebound alongside wages as the labor market continues to improve, an influential Federal Reserve official said…, reinforcing the message that a recent patch of weak data is unlikely to derail plans to keep raising interest rates. The comments by New York Fed President William Dudley… were among the first after the U.S. central bank hiked rates last week in the face of a series of soft inflation readings… ‘We are pretty close to full employment… Inflation is a little lower than what we would like, but we think that if the labor market continues to tighten, wages will gradually pick up and with that, inflation will gradually get back to 2%.’”

June 20 – Reuters (Lindsay Dunsmuir): “Boston Fed President Eric Rosengren said… that the era of low interest rates in the United States and elsewhere poses financial stability risks and that central bankers must factor such concerns into their decision-making. ‘Monetary policy is less capable of offsetting negative shocks when rates are already low,’ Rosengren said in a speech at a conference on macroprudential policy in Amsterdam jointly organized by the Dutch and Swedish central banks. In particular, he said… ‘Reach-for-yield behavior can make financial intermediaries and the economy more risky,’ Rosengren said.”

U.S. Bubble Watch:

June 20 – Reuters: “The U.S. current account deficit widened slightly in the first quarter, as the country imported more crude oil, car parts and supplies for its factories. …The current account deficit, which measures the flow of goods, services and investments into and out of the country, expanded by 2.4% to $116.8 billion… The first-quarter current account deficit represented 2.5% of gross domestic product…”

June 17 – Associated Press (Sara Burnett): “The Illinois official responsible for paying the state's bills is warning that new court orders mean her office must pay out more each month than Illinois receives in revenue. Comptroller Susana Mendoza must prioritize what gets paid as Illinois nears its third year without a state budget. A mix of state law, court orders and pressure from credit rating agencies requires some items be paid first. Those include debt and pension payments, state worker paychecks and some school funding. Mendoza says a recent court order regarding money owed for Medicaid bills means mandated payments will eat up 100% of Illinois' monthly revenue.”

June 20 – Bloomberg (Kristy Westgard): “Even a stock market soaring to record highs won’t rescue America’s struggling state and local pension plans. A ‘best case’ scenario of a cumulative 25% investment return during the 2017-2019 period will not offer a respite for chronically underfunded U.S. public pension plans, according to a Moody’s... The growing gap between how much state and local governments are projected to pay employees and how much funds they actually have set aside has risen to over $4 trillion nationwide. New Jersey sports the widest funding gap, followed closely by Kentucky and Illinois. The optimistic ‘best case’ of cumulative 25% investment return would reduce net pension liabilities by just 1% through 2019 year-end because of past bad investment returns and weak contributions. Meanwhile, the ‘base case’ scenario of 19% returns would see net pension liabilities rise by 15%.”

June 21 – CNBC (Diana Olick): “After surging to the highest level since the presidential election, demand for home loans remained steadily elevated last week… Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, fell 1% for the week, seasonally adjusted, but are 9% higher than the same week one year ago.”

June 19 – New York Times (David Streitfeld): “Joke all you want about drone-delivered kale and arugula. Amazon's $13.4 billion bet to take on the $800 billion grocery business in the United States by acquiring Whole Foods fits perfectly into the retailer's business model. Unlike almost any other chief executive, Amazon's founder, Jeff Bezos, has built his company by embracing risk, ignoring obvious moves and imagining what customers want next… Key to that strategy is his approach to failure. While other companies dread making colossal mistakes, Mr. Bezos seems just not to care. Losing millions of dollars for some reason doesn't sting. Only success counts. That breeds a fiercely experimental culture that is disrupting entertainment, technology and, especially, retail.”

June 16 – New York Times (Rachel Abrams and Julie Creswell): “Shares of Walmart, Target, Kroger and Costco, the largest grocery retailers, all tumbled on Friday. And no wonder. Grocery stores have spent the last several years fighting against online and overseas entrants. But now, with its $13.4 billion purchase of Whole Foods, Amazon has effectively started a supermarket war. Armed with giant warehouses, shopper data, the latest technology and nearly endless funds — and now with Whole Foods’ hundreds of physical stores — Amazon is poised to reshape an $800 billion grocery market that is already undergoing many changes.”

Japan Watch:

June 19 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Shinzo Abe struck an apologetic tone at a news conference Monday as he expressed his regret that a cronyism scandal had eaten into parliamentary debate on policy and triggered public mistrust in his government. Abe said that the opposition’s focus on the question of his possible intervention in the government’s approval of a school run by one of his close associates took up too much time in the current parliament session. The premier said he would fulfill his responsibility to explain the issue.”

June 19 – Reuters (Tetsushi Kajimoto and Izumi Nakagawa): “Confidence among Japanese manufacturers bounced in June to match a decade-high level recorded in April and is expected to rise for several months, a Reuters survey found, providing more evidence of economic recovery. Service-sector mood rose to a two-year high…”

EM Watch:

June 17 – Reuters (Bruno Federowski): “Brazilian President Michel Temer led a corruption scheme in which lawmakers squeezed high-profile executives for bribes, billionaire Joesley Batista told magazine Época… In his first interview since striking a leniency agreement with Brazilian prosecutors, Batista told Época that Temer asked for money several times since 2010. Batista told the magazine that Temer led a group of senior politicians regularly demanding kickbacks in exchange for political favors.”

June 21 – Reuters (Lisandra Paraguassu and Brad Brooks): “Brazil's federal police… delivered to a top court justice the bulk of their investigation into allegations that President Michel Temer took bribes in exchange for political favors doled out to the world's largest meatpacker, JBS SA. The document, made public by the top court, is a significant step in the investigation, which is widely expected to lead to Brazil's top federal prosecutor lodging corruption charges against Temer by the end of next week… It also adds to doubts that Temer will be able to push through badly needed economic reforms through congress, needed to spark Brazil's economy just as it emerges from its worst recession on record.”

Leveraged Speculator Watch:

June 20 – Bloomberg (Dani Burger): “Believe the hype. Quants have never been more popular. After doubling over the past decade, assets run by so-called systematic funds have hit a record $500 billion this year, according to… Barclays Plc. In some ways, their meteoric rise is due to the same technological advances that are disrupting most industries. Faster computers and better data has enabled asset managers to automate skills that once were limited to market legends… The most popular type of quant hedge fund strategy, managed futures funds, aim to capture broad market trends across asset classes and trade futures to do so. They oversee nearly $200 billion…”

Geopolitical Watch:

June 18 – Financial Times (Wolfgang Münchau): “Matteo Renzi, David Cameron, Theresa May — all were fooled by the polls. The problem was not that the polls were wrong. Some were quite good, and most were right at the time when the leaders took the politically fateful decisions. The former Italian and UK prime ministers clearly had the support of a majority of their electorates when they called referendums and were sure they could win. The Conservative party was indeed well ahead of Labour in April this year when the prime minister called her snap election. The speed with which the electorate changed its mind was more fateful than the polls themselves. The French electorate has been more extreme than any other. It managed to eradicate virtually the entire political establishment in a short sequence of elections… The French are in a process of exhausting all their alternatives. It is painful to think what they might do if they ever become disillusioned with Emmanuel Macron.”

June 19 – Wall Street Journal (Dion Nissenbaum and Thomas Grove): “Tensions between Washington and Moscow escalated… when Russia threatened to track American warplanes in Syria after a U.S. pilot shot down a Syrian jet for the first time in the country’s six-year war. The U.S. military responded to Moscow’s warnings by shifting the flight routes of some pilots carrying out missions in Syria, U.S. officials said, an effort to minimize risks to American pilots as the White House and the Pentagon both appealed for calm. Sunday’s U.S. downing of the Syrian regime warplane came as American forces are increasingly at risk of direct confrontation with Syrian President Bashar al-Assad and his allies from Russia and Iran.”

June 16 – Wall Street Journal (Nathan Hodge and Julian E. Barnes): “A quarter-century after the Cold War ended, U.S. and Russian tank formations are once again squaring off. This spring, the North Atlantic Treaty Organization moved armored forces to the Russian border, where they are conducting daily drills from Poland to Estonia. Less than 100 miles away, Moscow’s forces are preparing for large-scale maneuvers in the autumn, a demonstration of the country’s revitalized might... Facing off behind these front lines and shaping each side’s grand strategy are two of this generation’s most influential officers in Washington and Moscow: U.S. Army Lt. Gen. H.R. McMaster and Russian Gen. Valery Gerasimov.”

June 19 – Reuters (Stephen Kalin and William Maclean): “Two years after launching headfirst into a conflict in Yemen that has no end in sight, Saudi Arabia and the United Arab Emirates have astonished the world again, this time with a severe boycott of neighboring Qatar. Like the Yemen war, which has killed more than 10,000 people, the rift with Qatar is most closely associated with a new generation of leaders in the energy-rich Gulf who are more hawkish than conservative predecessors… While the dispute could end up costing Qatar dearly, it also has implications for the Saudis and Emiratis whose activism, critics say, is fuelling uncertainty in an already unstable neighborhood and could even push the region towards all-out conflict with arch-enemy Iran.”

June 19 – Bloomberg (Golnar Motevalli and Ladane Nasseri): “Iran said it fired missiles at Islamic State targets in Syria in retaliation for the jihadists’ deadly attacks in Tehran last week, a rare strike signaling Iran’s willingness to escalate its use of military power in the region’s conflicts. Six surface-to-surface missiles were launched on Sunday from western bases in Iran at command centers, logistic sites and suicide car bomb factories in Syria’s eastern Deir Ezzor area... The missile operation ‘is just a very small part of the capability of Iran’s punitive force against the terrorists and its enemies,’ the Islamic Students’ News Agency quoted Guards spokesman Brigadier General Ramezan Sharif…”

June 20 – Financial Times (Rebecca Collard, Erika Solomon, Najmeh Bozorgmehr and Katrina Manson): “The military activity last month around al-Tanf, a Syrian town on the Iraqi border, was an early sign that as rival forces scrambled to capture Isis territory in eastern Syria, the region risked becoming the flashpoint for international confrontation. As Syrian regime forces advanced towards a base used by US soldiers to train rebels to fight Isis, US-led coalition jets dropped leaflets carrying a stark warning. ‘Any movements toward al-Tanf will be considered an aggression that our forces [will] defend against . . . you have entered a safe zone, leave the area now.’ The fears of a confrontation materialised on Sunday when the US shot down a Syrian warplane that the Pentagon said was bombing areas near a Syrian Kurdish militia it backs in Raqqa province. The same day, Iran fired ballistic missiles into Syria for the first time to target Isis but also to put on a show of force intended to send a message to the US and Saudi Arabia, its regional rival.”

June 21 – Bloomberg (Zaid Sabah, Alaa Shahine, Vivian Nereim, and Tarek El-Tablawy): “The abrupt shake-up that made Saudi Prince Mohammed bin Salman heir to his father’s throne gives the 31-year-old extraordinary powers to push through his vision to wean the economy off oil and exert his influence in regional conflicts. Prince Mohammed replaced his elder cousin as crown prince, removing any doubt of how succession plans will unfold following the reign of King Salman, now 81. Even before the promotion, the new crown prince was dictating defense and oil policy, including overseeing plans to privatize state oil giant Aramco. The move suggests a harder foreign policy line for the key U.S. ally in a region fraught with instability.”

Friday, June 23, 2017

Friday Evening Links

[Bloomberg] U.S. Stocks Gain as Oil Stabilizes, Dollar Falls: Markets Wrap

[Reuters] Policy ponder: central banks head for the Portuguese hills

[Reuters] Fed's Mester unmoved by weak U.S. inflation

[Bloomberg] Fed's Mester Argues for Rate Hikes as Bullard Counsels Patience

[Bloomberg] A Second, Even Bigger Foreclosure Reaches NYC Billionaires' Row

[Reuters] Trump, Putin and Erdogan behave like autocratic rulers: Germany's Schulz

Friday's News Links

[Bloomberg] U.S. Stocks Gain as Oil Stabilizes, Dollar Falls: Markets Wrap

[Bloomberg] Surging Prices for New U.S. Homes Suggest Tight Low-End Supply

[CNBC] GOP leaders have a tough task ahead to win enough support for Obamacare replacement

[Bloomberg] Senate Holdouts Seek Upper Hand in Perilous Health Bill Talks

[CNBC/SCMP] China’s banking regulator orders loan checks on Wanda, Fosun, HNA, others

[Bloomberg] As China Targets Serial Acquirers, These Are The Deals Still Pending

[Reuters] German bond scarcity a key factor in ECB QE extension debate: sources

[Bloomberg] How Australia's Banks Have Been Beaten Down This Week

[Bloomberg] Asia Junk Bond Buyers Accept Weaker Protection as Sales Surge

[CNBC] Singapore wealth fund Temasek: How a financial crisis in China might play out

[WSJ] China’s Debt Crackdown Could Get Out of Hand

[WSJ] Goodbye for Now to China’s Biggest Deal Makers

[WSJ] Wild Week for Chinese Stocks Reminds Investors of Beijing’s Heavy Hand

[FT] China probe shines light on top dealmakers

[FT] Big China companies targeted over ‘systemic risk’

[Reuters] North Korea tests rocket engine, possibly for ICBM: U.S. officials

[Reuters] Japanese warship takes Asian guests on cruise in defiance of China

Wednesday, June 21, 2017

Wednesday Evening Links

[Reuters] Oil drops to 10-month low; biggest first-half slide in 20 years

[Reuters] Nasdaq boosted by biotechs; energy, banks weigh on Dow, S&P

[Bloomberg] U.S. Enjoying Easiest Financial Conditions in Three Years: Chart

[Reuters] U.S. existing home sales unexpectedly rise in May

[CNBC] Divide widens between housing haves and have-nots

[Bloomberg] High-Yield Carnage Stays Contained for Now

[Bloomberg] Toronto Home Sales Cool Amid Signs Prices May Be Next to Fall

Wednesday's News Links

[Bloomberg] Stocks Decline as Crude Struggles; Pound Advances: Markets Wrap

[Bloomberg] Oil Extends Drop Into Bear Market as Supply Remains Plentiful

[Bloomberg] BOE’s Haldane Sees Case for Raising Interest Rates This Year

[Reuters] After weeks of secrecy, U.S. Senate to unveil healthcare bill

[CNBC] Mortgage applications hold steady as rates remain low

[Bloomberg] ECB Sees Trump Administration as Key Risk to Global Economy

[Bloomberg] Saudi King Removes Crown Prince, Appoints Mohammed Bin Salman as Replacement

[Reuters] Brazilian police deliver graft investigation against Temer

[Bloomberg] Balance of Power: How to Read the Saudi Shakeup

[Bloomberg] Take a Look at the States Sending the Most Carbon Into the Air

[WSJ] U.S. Oil Falls Into Bear Market Amid Worries Over Supply Glut

[WSJ] Forget Trump-Generated Volatility. The World Is Awash in Calm

[FT] Assets of $1.5tn wash up in British Virgin Islands

[FT] Battle for eastern Syria risks US, Russia and Iran confrontation

Tuesday, June 20, 2017

Tuesday Evening Links

[Bloomberg] U.S. Stocks Drop Most in Month on Oil Bear Market: Markets Wrap

[Reuters] U.S. crude ends at nine-month lows on global oversupply

[Reuters] Fed policymakers in tug-of-war on inflation, instability

[ABC] Brazil federal police accuse president of getting bribes

[Bloomberg] China Stocks Enter MSCI as $6.9 Trillion Market Goes Global

[Bloomberg] Remember the Stunning Dollar Rally in 2014? Now It's Euro's Turn

[Bloomberg] Pension Crisis Won't Be Reversed by High Returns, Moody's Says

[CNBC] Trump: Working with China on North Korea 'has not worked out'

Tuesday's News Links

[Bloomberg] U.S. Stocks Slip With Oil Below $43; Pound Slumps: Markets Wrap

[Bloomberg] Oil Drops to Seven-Month Low as Libya Adds to Persistent Surplus

[Reuters] U.S. current account deficit widens to 2.5 percent of GDP

[Reuters] Fed's Rosengren: Low interest rates pose financial stability risks

[Bloomberg] Ryan Says Tax Overhaul Must Happen in 2017 to Rebuild Economy

[Bloomberg] Carney Ends Silence With Brexit Warning to Rebuff Rate-Hike Call

[Reuters] Funding scramble squeezes China's borrowers despite PBOC injections

[Bloomberg] China Deploys Bond-Buying Tool First Time to Boost Liquidity

[Reuters] Wealthy Chinese rise to 1.6 million in past decade, up nearly 9 times - survey

[Bloomberg] Rise of Robots: Inside the World's Fastest Growing Hedge Funds

[WSJ] Argentina Sells $2.75 Billion of 100-Year Bonds

Monday, June 19, 2017

Monday Evening Links

[Bloomberg] U.S. Tech Stocks Rally; Dollar Gains, Bonds Slide: Markets Wrap

[Reuters] Japan business mood up, points to better BOJ tankan - Reuters Tankan

[Bloomberg] Shale's Record Fracklog Could Force Crude Prices Even Lower

[Bloomberg] China's Workers are Saying Goodbye to Double-Digit Pay Raises

[Reuters] White House says it retains right to self-defense in Syria; Moscow warns Washington

[WSJ] Russia Warns U.S. as Risks Rise in Syria

Monday's News Links

[Bloomberg] U.S. Tech Stocks Jump; Dollar Gains, Bonds Decline: Markets Wrap

[Reuters] Tight U.S. labor market should push inflation higher: Fed's Dudley

[CNBC/NYT] Whole Foods Deal Shows Amazon’s Prodigious Tolerance for Risk

[Bloomberg] Brexit Talks Kick Off in Brussels as May Urged to Soften Stance

[Bloomberg] Hong Kong Will Continue With Currency Peg, HKMA's Chan Says

[Bloomberg] China's Home Prices Increase in Fewer Cities as Curbs Bite

[Bloomberg] Moody’s Cuts Ratings on Australia’s Banks on Housing Concern

[NYT] Some Global Investors See Fresh Worries in an Old Problem: China

[Bloomberg] Abe's Popularity Slides as Mounting Japan Scandals Take Toll

[WSJ] Market Volatility Has Vanished Around the World

[FT, El-Erian] Markets must grasp that the Fed is no longer their best friend

[FT] Brexit talks: what to expect on day one

[BBC] Syria conflict: Russia issues warning after US coalition downs jet

[Reuters] New assertive generation of Gulf leaders at heart of Qatar rift

Saturday, June 17, 2017

Saturday's News Links

[Bloomberg] May Is Living Brexit Nightmare She Warned Of

[Spiegel] Brexit Talks Set to Begin amid Chaos in London

[Reuters] Brazil's Temer led graft scheme, billionaire tells Época magazine

[AP] Official Warns Illinois Finances in 'Massive Crisis Mode'

[CNBC] Negative-yielding government debt 'supernova' jumps to $9.5 trillion

[CNBC] Millionaires own a record 45% of the world's wealth — and their share is growing

[NYT] Amazon Deal for Whole Foods Starts a Supermarket War

[FT] A deal too far for China’s Anbang

Weekly Commentary: Peak Stimulus Has Passed

Bloomberg Radio/Television’s Tom Keene, Wednesday June 14, 2017: “Professor, what is the question you want to ask chair Yellen at the press conference here in six minutes?”

Narayana Kocherlakota, former president of the Minneapolis Fed: “I think the question to ask is ‘Why are you continuing to hike rates in such a low inflation environment?’. There doesn’t seem to be any risk to keeping rates low and lots of benefits to it.”

Torsten Slok, chief international economist at Deutsche Bank: “What are their arguments why this move down in inflation is only temporary?”

Bloomberg’s Keene: “Krishna, what do you want to know? Please keep the stock markets up?”

Krishna Memani, chief investment officer of Oppenheimer Funds: “I want to know what would it take for you to get off the path of tightening? What would the data have to show you to get off the path you have set the Fed on?”

Bloomberg’s Keene: “Do you agree with vice chairman Fischer that we are still ultra-accommodative even with the low inflation…?”

Memani: “Yes we are, and there’s no downside because despite ultra-accommodative policies there’s no uptick in inflation. So we can press on the pedal as much as we want without it effecting the economy negatively.”

Bloomberg’s Keene: “Professor, do we have a good understanding of where we are in our technological economy – do you have a belief in the data that the good PhDs at the Fed are coming up with on productivity, on the measurement of price change, on GDP? Do you have faith in the numbers?”

Kocherlakota: “I have faith. It’s definitely a difficult job to be doing – to be measuring productivity in the kind of changing economy that we’re in. But I have faith in that. I look at the data, I try to keep track of not just what’s going on at the aggregate level but individual price changes and I think we’re living in a low inflation world and that gives the Fed a lot more room to stay accommodative.”

Bloomberg’s Scarlet Fu: “Is there any central bank that's doing it right, Torsten? You’re an international economist. Is the ECB doing it better? Is the BOE doing better? Is the Bank of Canada doing it better?”

Slok: “There are important nuances, but I actually think that central banks have done extremely well. They have supported the economy as good as they can; they have invented new tools and instruments. We can debate if they were the right tools at the right time - the right dose. But I still will argue, at the end of the day, that what else should they have done, if we had been sitting in their chairs? I think we would have done the same thing. You can’t invent new tools and [do] Monday morning quarterbacking again without having another framework that's better. This has proven again and again that this was the right way to look at. And you need to come up with some other reason or some other model, and there really is no convincing model other than what the Fed is saying.”


It’s not as if we don’t learn from history. It’s just that more recent history has such a predominant effect on our thinking and perspectives. Nowhere is this truer than in the financial markets.

It’s been going on nine years since the “worst financial crisis since the Great Depression.” We’re now only two months from the 10-year anniversary of the Fed’s August 17, 2007 extraordinary measures: “To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 bps reduction in the primary credit rate to 5-3/4%.”

This extraordinary inter-meeting response to a faltering market Bubble marked the beginning of unprecedented global central bank stimulus that continues to this day. It’s worth noting that the Fed’s August 2007 efforts did somewhat prolong the Bubble. The S&P500 traded to a then record 1,562 on October 12, 2007 (Nasdaq peaked in November). Extending “Terminal Phase” mortgage finance Bubble excess, 30-year mortgage rates dropped below 5.7% by early-2008, down about 100 bps from early-August 2007. And trading at about $72 a barrel in August, crude oil then went on a moonshot to surpass $140 by June 2008.

Memories of the devastating effects of Credit and asset Bubbles have faded from memory. The disastrous aftermath of the Fed aggressively stimulating mortgage Credit - as the centerpiece of its post-“tech” Bubble reflation strategy - has been wiped away by the cagey hand of historical revisionism. The consequences of loose financial conditions – i.e. speculation, malinvestment, maladjustment, deep structural economic impairment, financial system fragility, wealth redistribution – no longer even merit consideration. Instead, it’s accepted as fact that central bank stimulus has been a huge and undeniable success. With inflation so low, central banks “can press on the pedal as much as we want without it effecting the economy negatively.” “There doesn’t seem to be any risk to keeping rates low and lots of benefits to it.” This never has to end.

These folks are “charlatans” and “monetary quacks”, terminology pulled from analysis of the long and sordid history of monetary booms and busts. Today's central bankers are destroying the sanctity of money with no meaningful pushback. And while they risk calamity, pundits claim there’s little risk in zero rates and creating Trillions of new “money.” So long as securities prices are high, all must be well in the markets and with policy.

I am reminded of a parable coming out of the late-eighties commercial real estate boom and bust. A developer walks into a bank hoping for a loan to finance a wonderful new development idea. The loan officer thinks to herself, “This guy is a visionary and surely must know what he’s doing or he wouldn’t be here.” Sitting across the table from the loan officer, the developer is thinking “she’s a whiz with the numbers and wouldn’t think of lending me a dime if this plan doesn’t make financial sense.” So the relationship is cemented, the loan is made and everyone is happy – for a while.

These days, securities markets have raged on the notion of “enlightened” central bank monetary management. Meanwhile, central bankers have viewed robust markets as validation of the ingenuity of both their measures and overall policy frameworks. Everyone is happy - for now.

The crisis put the fear of God into Central bankers back in 2008/09 – and there have been a few unnerving reminders since. It’s difficult to believe most buy into the notion that low inflation ensures there’s little risk associated with sticking with extreme accommodation. Surely they’re familiar with the history of the late-twenties. And I believe there is a consensus view taking shape within the global central banker community that monetary policy should be moving in the direction of normalization. The Fed raised rates Wednesday, and the week was notable as well for less than dovish comments out of the Bank of England and Bank of Canada. And while the Bank of Japan left monetary policy unchanged, there has been a recent notable reduction in the quantity of bonds purchased. This week also saw Finance Minister Schaeuble (among other German officials) urging the ECB to prepare to reverse course.

I do think central bankers would prefer to remove some accommodation – and they won’t this time around be as disposed to flinch at the first sign of a market hissy fit. The Fed has now raised the fed funds rate four times, and financial conditions are as loose as ever. Securities markets have grown convinced that central bankers will not tighten policy to the point of meddling with the great bull market. Such market assurance then works to sustain loose financial conditions, a backdrop that will prod central bankers to move forward with accommodation removal.

I believe passionately in the moral and ethical grounds for sound money. It is a policy obligation at least commensurate with national defense. From my perspective, one can trace today’s disturbing social, political and geopolitical circumstance right back to the consequences of decades of unsound “money” and Credit. At this point, downplaying the risks of ultra-loose central bank policy measures is farcical.

Beyond morality and ethics, there are a more concrete practical issues that seems to escape conventional analysts. Desperate central bankers resorted to a massive “money printing” (central bank Credit) operation at the very heart of contemporary finance. Not surprisingly, years later they remain trapped in this inflationary gambit. They have manipulated interest rates, imposed zero rates on savings and forced savers into the risk markets. After nurturing a $3.0 TN hedge fund industry, monetary policymaking then promoted at $4.0 TN ETF complex. Near zero rates have accommodated an unprecedented expansion of global government and government-related debt. In China, ultra-loose global finance helped push a historic Bubble to unbelievable extremes.

History will look back at these measures as a most regrettable end game to a runaway multi-decade Credit and financial Bubble. When confidence wanes – in the moneyness of electronic central bank “money”; in the ability of central banks to manipulate market yields and returns; in the perception of money-like liquid and low-risk equities and corporate debt; in China – global policymakers will have lost the capacity to control financial and economic developments. It was a epic mistake to embark on almost a decade of central bank liquidity injections to reflate and then backstop global securities markets. To believe that structurally low consumer price inflation justifies ongoing aggressive monetary stimulus is foolhardy.

We’ve entered a dangerous period for the securities markets. Highly speculative markets have diverged greatly from underlying economic prospects. Unstable markets have been fueled by central bank liquidity and the belief that central bankers will not risk removing aggressive stimulus. At the minimum, there is now considerable uncertainty regarding the remaining two main sources of global QE (ECB and BOJ) out past a few months. Meanwhile, the Fed continues on a path of rate normalization, a course other central banks expect to follow. The monetary policy backdrop is in the process of changing. Peak Stimulus Has Passed.

Bull markets create their own liquidity. Especially late in the cycle, speculative leveraging spawns self-reinforcing liquidity abundance. Even with a diluted punch bowl, the party can still rave for a spell. Yet these days the changing backdrop significantly boosts the odds that the next risk-off episode sparks a problematic liquidity issue. It’s been awhile since the markets experienced de-risking/de-leveraging without the succor of a powerful QE liquidity backdrop.

According to JPMorgan’s Marko Kolanovic (via zerohedge), an incredible $1.3 TN of S&P500 options expired during Friday’s quarterly “quad witch” expiration. I have always been of the view that derivative trading strategies played a prevailing role in the final speculative blow-off in the big Nasdaq stocks back in Q1 2000. Coincidence that the Nasdaq 100 (NDX) peaked around March 2000 “triple witch” option expiration? After trading at a record high 4,816 on March 24, 2000, the NDX sank below 1,100 in August 2001 before hitting a cycle low 795 on October 8, 2002. Let this be a reminder of how quickly euphoria can vanish; how abruptly greed is transformed into fear; and how rapidly company, industry and economic fundamentals deteriorate when Bubbles burst.

The S&P500 traded to new all-time highs Wednesday, before a resumption of the technology selloff pressured major indices lower. After trading above 12 on Monday and Wednesday, the VIX retreated into Friday’s close (10.38). Such a low VIX reading doesn’t do justice to the volatility that is coming to life below the market’s veneer. The bank stocks (BKX) traded as high as 94.85 at Monday’s open and then retreated to a low of 93.24 before lunch, then traded to 94.93 Tuesday morning and then to 92.59 mid-session Wednesday - before rallying back to 94.78 Thursday and concluding the week at 93.94. The NDX traded as low as 5,633 Monday, then rallied to 5,774 Wednesday’s then as low as 5,635 early-Thursday - before closing the week down 1.1% at 5,681.

Thursday trading was the most interesting of the week. At one point, the S&P500 was approaching a 1% decline, with larger losses for the broader indices. The NDX was down as much as 1.6%. Yet despite weak equities, Treasury yields were grinding higher (up 4bps for the session). Both investment-grade and high-yield bonds were under modest selling pressure. Meanwhile, the currencies were trading wildly. The yen reversed abruptly lower, trading in an almost 2% range during the session. It was a market day that seemed to provide an inkling of what a more generally problematic de-risking episode might look like. But it was not to be this time, not with “quad witch” approaching. A significant amount of market “insurance” (put options) purchased over the past month (Trump/Comey/investigation uncertainties) expired worthless.

Returning to earlier, “There doesn’t seem to be any risk to keeping rates low…”, I would point directly to the incredible explosion in options trading (thought it was enormous before!). The VIX is indicative of one of the more conspicuous market distortions nurtured by low rates and central bank liquidity backstops. Anyone not seeing derivatives markets - the epicenter of central bank-induced risk misperceptions and price deviance - as one gigantic accident in the making hasn’t been paying attention.

Clearly, the (distorted) low cost of “market insurance” promotes destabilizing risk-taking and speculative leveraging. Moreover, derivative-related market leverage – in sovereign debt, corporate Credit, equities and commodities – is surely instrumental in what has evolved into a self-reinforcing global liquidity and price Bubble. Furthermore, these dynamics are integral to what has evolved into a major divergence between ultra-loose financial conditions in the markets and a central bank preference for marginally less accommodation.

I have little confidence that central bankers are on top of market developments. I do, however, suspect that they have become increasingly concerned by the markets’ general disregard for economic fundamentals and policy normalization measures. Central bankers over recent years have grown increasingly confident in their extraordinary control over securities markets. At least from the Fed’s vantage point, there must be some reflecting that perhaps markets have left them behind. Fed officials still talk the inflation and employment mandate along with “data dependent.” But they’ve now got at least one eye fixed on the markets.

In contrast to Dr. Kocherlakota, I doubt central bankers have a “good understanding of where we are in our technological economy.” There must be some nagging feelings creeping in – “Are we even measuring GDP correctly? Ditto productivity? Inflation dynamics have changed profoundly – so what effect do our policies really exert these days on consumer prices? Are our economic models even valid? It’s increasingly difficult to maintain faith in what we’ve been doing – this monetary experiment...”

In a period of such profound uncertainties, there’s one thing that is certain by now: central bank accommodation exerts powerful inflationary effects upon securities and asset prices. And for the first time in a while, unstable asset market Bubbles pressure central bankers to remove accommodation. Sure, they don’t want to be in the Bubble popping business, though when it comes to market Bubbles the sooner they pop the better. Surreptitiously, tremendous amounts of structural damage occur during late-cycle excess. Markets are indicating an initial recognition of structural issues.


For the Week:

The S&P500 was little changed (up 8.7% y-t-d), while the Dow increased 0.5% (up 8.2%). The Utilities jumped 1.6% (up 10.9%). The Banks were about unchanged (up 2.1%), while the Broker/Dealers added 0.7% (up 8.9%). The Transports gained 0.9% (up 4.1%). The S&P 400 Midcaps slipped 0.2% (up 5.6%), and the small cap Russell 2000 declined 1.1% (up 3.7%). The Nasdaq100 fell 1.1% (up 16.8%), and the Morgan Stanley High Tech index lost 0.8% (up 20.4%). The Semiconductors dropped 2.1% (up 17.7%). The Biotechs gained 0.9% (up 20.1%). With bullion down $13, the HUI gold index dropped 5.2% (up 2.1%).

Three-month Treasury bill rates ended the week at 99 bps. Two-year government yields slipped two bps to 1.32% (up 13bps y-t-d). Five-year T-note yields dipped two bps to 1.74% (down 18bps). Ten-year Treasury yields fell five bps to 2.15% (down 29bps). Long bond yields dropped eight bps to 2.78% (down 29bps).

Greek 10-year yields sank 32 bps to 5.63% (down 141bps y-t-d). Ten-year Portuguese yields dropped 10 bps to 2.92% (down 83bps). Italian 10-year yields fell 10 bps to 1.99% (up 17bps). Spain's 10-year yields added a basis point to 1.46% (up 8bps). German bund yields increased one basis point to 0.28% (up 7bps). French yields declined two bps to 0.63% (down 5bps). The French to German 10-year bond spread narrowed three to 35 bps. U.K. 10-year gilt yields added a basis point to 1.02% (down 22bps). U.K.'s FTSE equities index declined 0.8% (up 4.5%).

Japan's Nikkei 225 equities index slipped 0.3% (up 4.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.056% (up 2bps). France's CAC40 dipped 0.7% (up 8.2%). The German DAX equities index declined 0.5% (up 11.1%). Spain's IBEX 35 equities index dropped 2.0% (up 15%). Italy's FTSE MIB index declined 0.9% (up 8.9%). EM equities traded lower. Brazil's Bovespa index fell 0.9% (up 2.3%), while Mexico's Bolsa added 0.3% (up 7.8%). South Korea's Kospi lost 0.8% (up 16.5%). India’s Sensex equities index declined 0.7% (up 16.6%). China’s Shanghai Exchange fell 1.1% (up 0.6%). Turkey's Borsa Istanbul National 100 index declined 0.8% (up 25.7%). Russia's MICEX equities index sank 3.2% (down 18.4%).

Junk bond mutual funds saw inflows of $198 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased two bps to 3.91% (up 37bps y-o-y). Fifteen-year rates gained two bps to 3.18% (up 37bps). The five-year hybrid ARM rate rose four bps to 3.15% (up 41bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.00% (up 33bps).

Federal Reserve Credit last week declined $5.5bn to $4.428 TN. Over the past year, Fed Credit slipped $3.9bn. Fed Credit inflated $1.617 TN, or 58%, over the past 240 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $11.8bn last week to $3.270 TN. "Custody holdings" were up $32bn y-o-y, 1.0%.

M2 (narrow) "money" supply last week declined $11.7bn to $13.508 TN. "Narrow money" expanded $747bn, or 5.5%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits fell $36.7bn, while Savings Deposits rose $23.4bn. Small Time Deposits added $1.7bn. Retail Money Funds slipped $2.3bn.

Total money market fund assets fell $25bn to $2.634 TN. Money Funds fell $72.9bn y-o-y (2.7%).

Total Commercial Paper dropped $28.2bn to $969bn. CP declined $75bn y-o-y, or 7.2%.

Currency Watch:

The U.S. dollar index slipped 0.1% to 97.164 (down 5.1% y-t-d). For the week on the upside, the Canadian dollar increased 2.0%, the Mexican peso 1.5%, the Australian dollar 1.3%, the South African rand 1.0%, the New Zealand dollar 0.6%, the Norwegian krone 0.5%, the British pound 0.3%, the Singapore dollar 0.1% and the Brazilian real 0.1%. For the week on the downside, the South Korean won declined 1.0%, the Japanese yen 0.5% and the Swiss franc 0.4%. The Chinese renminbi declined 0.18% versus the dollar this week (up 1.97% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.5% (down 8.6% y-t-d). Spot Gold lost 1.0% to $1,254 (up 8.8%). Silver sank 3.3% to $16.66 (up 4.3%). Crude dropped $1.09 to $44.74 (down 17%). Gasoline fell 3.1% (down 13%), while Natural Gas was little changed (down 19%). Copper dropped 2.7% (up 3%). Wheat surged 4.7% (up 18%). Corn gained 1.1% (up 11%).

Trump Administration Watch:

June 14 – Politico (Rachel Bade and Sarah Ferris): “House GOP efforts to write a fiscal 2018 budget are deadlocked amid Republican infighting, a divide that threatens to undermine President Donald Trump’s agenda by stalling tax reform and delaying progress on appropriations. The House Budget Committee is months behind its usual timeline in releasing and marking up its annual fiscal blueprint. While the panel said it hoped to release the budget by early June, conference-wide bickering over priorities and spending levels have all but ground the process to a halt.”

June 13 – Reuters (Pete Schroeder and Lisa Lambert): “The U.S. Treasury Department unveiled a sweeping plan… to upend the country's financial regulatory framework, which, if successful, would grant many items on Wall Street's wishlist. The nearly 150-page report suggested more than 100 changes, most of which would be made through regulators rather than Congress, Treasury Secretary Steven Mnuchin said… ‘We were very focused on, what we can do by executive order and through regulators,’ he said. ‘We think about 80% of the substance in the report can be accomplished by regulatory changes, and about 20% by legislation.’ Republican President Donald Trump has gradually been nominating heads of financial agencies to carry out his agenda…”

China Bubble Watch:

June 14 – Bloomberg: “China’s broadest measure of new credit slowed in May as policy makers moved to contain excessive borrowing, while M2 money supply increased at the slowest pace on record. Aggregate financing stood at 1.06 trillion yuan ($156bn)…, versus a median estimate of 1.19 trillion yuan… and 1.39 trillion yuan in April. New yuan loans rose to 1.11 trillion yuan, compared to the estimated 1 trillion yuan. The broad M2 money supply increased 9.6%, versus the 10.4% forecast…”

June 14 – Wall Street Journal (Anjani Trivedi): “China’s banking regulator should know better by now: loosen the reins and debt soon piles up. While Beijing is carrying out a high-profile campaign to reduce leverage in its financial markets with one hand, with the other it is encouraging more potentially reckless borrowing. This week, the regulator put pressure on the country’s big banks to lend more to small companies and farmers, while the government announced tax breaks for financial institutions that lend to rural households… If the goal of lending to poorer customers sounds noble, the concern is that the execution will only worsen Chinese banks’ existing problems, namely high levels of bad loans and swaths of mispriced credit. Bank lending to small companies is already growing pretty fast, with non-trivial sums involved: It jumped 17% in the year through March to 27.8 trillion yuan ($4.084 trillion). That compares favorably with the 7% rise in loans to large- and medium-size companies over the same period.”

June 14 – Bloomberg: “Only a year ago he was hailed as one of the boldest dealmakers in China. But on Wednesday, with scant explanation, Wu Xiaohui was said to be unable to perform his duties as chairman of Anbang Insurance Group Co… The development added another layer of intrigue to the story of Anbang, whose overseas acquisition spree has slowed in recent months amid increased scrutiny at home and abroad. China’s central bank was said to look into suspected breaches of anti-money laundering rules at the insurer late last year, while authorities temporarily banned Anbang’s life insurance unit from selling new products in May. High-profile bids for American hotels, insurance assets and a Manhattan office tower owned by the family of U.S. presidential adviser Jared Kushner have all fallen through over the past 18 months.”

June 14 – Bloomberg (Keith Zhai and Ting Shi): “China’s billionaires are learning yet again that wealth and power are no longer enough to keep them out of trouble. Anbang Insurance Group Co. said… that Wu Xiaohui -- its chairman, and one of China’s most aggressive overseas dealmakers -- was unable to perform his duties for personal reasons. Caijing Magazine, a reputable finance and business publication, said he was taken away for questioning. Wu is the latest example of the new reality in Xi Jinping’s China: Almost anyone could be hauled away at any time, regardless of cash or connections. Since Xi became party chief in 2012, billionaires and senior Communist Party members alike have been among those rounded up for questioning over corruption, financial crimes or other misdeeds.”

June 12 – Reuters (Stella Qiu and Jake Spring): “Chinese auto sales slipped in May from a year ago, registering two straight months of declines for the first time since 2015, with the automakers' association saying the weakness may drag on as the rollback of a tax incentive continues to hurt. The world's biggest auto market got a shot in the arm in 2016, growing at its fastest pace in three years, after Beijing halved the purchase tax on smaller-engined vehicles. But buyers have shied away since taxes climbed to 7.5%, from 5%, at the start of this year. Auto sales in China fell 0.1% in May from a year ago to 2.1 million vehicles…”

June 13 – Bloomberg (Kana Nishizawa): “The Hong Kong dollar may be sliding into the weak end of its trading band, yet money managers see no reason for stock investors to turn bearish just yet. Unlike previous bouts of weakness in the pegged currency… this time around there’s plenty of liquidity in the system, and no shortage of buyers. Foreign and mainland Chinese investors alike have been piling into Hong Kong-listed shares, lifting the benchmark index to a two-year high last week, even as the local currency retreated to a 17-month low.”

Europe Watch:

June 13 – Bloomberg (Rainer Buergin, Birgit Jennen, and Patrick Donahue): “German Finance Minister Wolfgang Schaeuble called for central banks to end ‘ultra loose’ monetary policy to avoid stoking global imbalances, saying that while they were beginning to take steps in that direction it was harder for the European Central bank to do so. ‘The Federal Reserve has already begun this process and even the ECB has made some communications that you could feel that, in a medium-term time, they will continue to think about -- in this direction,’ Schaeuble said… at the Bloomberg Germany G-20 Day conference in Berlin. ‘It’s not easy for the ECB, with all due respect.’”

June 14 – Reuters (Balazs Koranyi and Toby Sterling): “Top critics of the European Central Bank's asset purchase scheme expressed fresh doubts about the effectiveness of the program…, laying down their arguments just as the bank prepares for a debate on extending the measures. With its unprecedented 2.3 trillion euro ($2.6 trillion) bond buying scheme set to run until year's end, the ECB will have to decide this autumn whether to keep on buying to prop up a still weak inflation rate or start winding down the program. Conservative countries led by Germany, the bloc's biggest economy, have long opposed the scheme arguing that its effect is questionable while risks are underestimated… Jens Weidmann, president of the powerful Bundesbank, argued that the ECB, now a top creditor to euro zone governments, is at risk of coming under political pressure because any hint of policy tightening poses the risk of pushing yields higher and blowing a hole in national budgets. ‘At the end of the day, this can lead to political pressure being exerted on the Eurosystem to maintain the very accommodative monetary policy for longer than appropriate from a price stability standpoint,’ Weidmann told a conference…”

Central Bank Watch:

June 11 – Bloomberg: “Investors who fret about when and how global central banks will run down their crisis-era balance sheets can be relaxed about the biggest of them all -- China’s. Whereas the Federal Reserve’s $4.5 trillion asset pile is set to be shrunk and the European Central Bank’s should stop growing by the end of this year as the outlook brightens, China’s $5 trillion hoard is here to stay for the time being -- and could even still expand, according to the majority of respondents in a Bloomberg survey of People’s Bank of China watchers. The PBOC balance sheet is a fundamentally different beast from its global peers -- run up through years of capital inflows and trade surpluses rather than hoovering up government bonds -- but it still matters for the global economy. Changes in the amount of base money in the world’s largest trading nation are having a bigger impact than ever, making the variable key for stability in a year when political transition in Beijing is in the cards.”

June 15 – Reuters (Michael Nienaber): “Germany continued its push against European Central Bank policy…, when a senior member of Chancellor Angela Merkel's conservatives asserted the ECB has damaged the European project with its bond buying programme and could only regain trust by scaling back its ultra-loose monetary policy. The comments by Werner Bahlsen, head of the economic council of Merkel's CDU conservatives, came after Finance Minister Wolfgang Schaeuble… urged the ECB to change its policy ‘in a timely manner’, warning that very low interest rates had caused problems in some parts of the world. Germany is heading towards a federal election in September.”

June 14 – Reuters (Toby Sterling): “The impact of the European Central Bank's 2.3 trillion asset purchase program on inflation has been disappointing, Dutch central bank chief Klaas Knot, a long-time critic of the bond buying scheme, said… The purchases… have taken longer to work than the bank has anticipated. But other ECB officials argue that the benefits are now clear. ‘I think the effect (of asset buys) has been there in keeping the economic recovery going,’ Knot told Dutch lawmakers. ‘But the effect on inflation has just been what you'd call disappointing, full stop…If you look at core inflation... then actually inflation has been flat for four years, flat as a pancake, and so you can barely observe any effect,’ Knot said.”

June 15 – Bloomberg (Fergal O'Brien): “A split among Bank of England policy makers widened this month as two officials joined Kristin Forbes in her call for a rate increase, warning that inflation could rise more than previously thought. In the biggest division on interest rates in six years, the Monetary Policy Committee voted by five members to three to maintain the key interest rate at a record-low 0.25%. Michael Saunders and Ian McCafferty broke ranks to demand an immediate hike to 0.5%.”

June 12 – Bloomberg (Greg Quinn and Maciej Onoszko): “The Bank of Canada offered its strongest signal yet that it’s ready to raise interest rates as the economy gathers steam, in surprise comments that sent the Canadian dollar and bond yields soaring. In a speech Monday, Senior Deputy Governor Carolyn Wilkins highlighted how the nation’s recovery is broadening across regions and sectors, giving policy makers ‘reason to be encouraged.’ She downplayed worries about Toronto’s housing market and said policy makers need to keep their eye on the future evolution of growth, not only current economic conditions.”

Brexit Watch:

June 15 - CNN (Charles Riley): “Britain has three days to figure out its Brexit plan. The U.K. confirmed Thursday that official divorce talks with the European Union will start on June 19. But it's far from clear what its negotiating position will be when they get underway. Last week's general election wiped out Prime Minister Theresa May's parliamentary majority and raised big doubts about her hardline EU exit strategy. May is still trying to secure the support of a fringe party whose votes she needs to form a government, and it won't be clear until next Wednesday whether she commands a majority in parliament. Meanwhile, there is open debate about how Britain should approach talks with the EU, despite a year having passed since voters chose to pull the U.K. out of its most important export market.”

Global Bubble Watch:

June 11 – Bloomberg (Jonas Cho Walsgard): “The best returns are not in the riskiest stocks but in the least risky bonds. But you can’t get them without leverage. That philosophy helped Asgard Fixed Income Fund deliver a 19% return in the past year. ‘That’s the core of our strategy,’ Morten Mathiesen, 45, chief investment adviser at Copenhagen-based Moma Advisors A/S, said… ‘The best risk-adjusted returns are actually the low vol trades.’ …Mathiesen uses a proprietary model to forecast and pick the best risk premiums in short-term, high-quality bond markets. Most of the fund’s bonds are AAA rated, such as Danish mortgage bonds… To offset the interest rate risk the fund hedges the bonds with derivatives and is only exposed to the spread. The spread is usually small so the fund must borrow money to boost the return. Current leverage is about 11 times and has been as high as 25 times, according to Mathiesen. The volatility target is about 6%.”

June 14 – Wall Street Journal (Asjylyn Loder and Gunjan Banerji): “Wall Street’s ‘fear gauge’ has neared all-time lows this year. That hasn’t stopped retail investor Jason Miller from making a nice chunk of change betting it will go even lower. The Boca Raton, Fla., day trader says he has made $53,000 since the start of the year by effectively shorting the CBOE Volatility Index, nicknamed the VIX. That includes a white-knuckle day on May 17, when the VIX spiked 46% following reports that President Donald Trump had pressured former FBI Director James Comey to drop an investigation into former National Security Advisor Michael Flynn. As the 40-year-old Mr. Miller recalls, he rode out the storm, confident the market would revert to its torpid ways—which it did. ‘One person’s fear is another person’s opportunity,’ says Mr. Miller.”

June 11 – CNBC (Stephanie Landsman): “If David Stockman is right, Wall Street should hunker down. ‘This is one of the most dangerous market environments we’ve ever been in. It’s the calm before a gigantic, horrendous storm that I don't think is too far down the road,’ he recently said on ‘Futures Now.’ Stockman, who was director of the Office of Management and Budget under President Ronald Reagan, made his latest prediction after lawmakers grilled former FBI Director James Comey…”

June 14 – Bloomberg (Michael Heath): “Australian employment surged in May, led by a rebound in full-time positions, sending the jobless rate to the lowest level in more than four years. The currency surged. Employment jumped 42,000 from April, when it climbed an upwardly revised 46,100… Jobless rate fell to 5.5%, the lowest since Feb. 2013…”

Fixed Income Bubble Watch:

June 14 – Bloomberg (Luke Kawa and Robert Elson): “Combine the enduring search for yield with a renewed bull market in Treasuries and what do you get? Record high U.S. corporate debt holdings. Stone & McCarthy Research Associates’ weekly survey of fixed-income portfolio managers showed corporate debt allocations at an all-time high of 37%, matching levels last seen in August 2016. Money managers’ holdings of corporate bonds as a share of assets has oscillated between 32% and 37% over the past five years. Survey participants also reported reducing their allocation to Treasuries ahead of this week’s Federal Reserve meeting to 24.2%...”

June 11 – Bloomberg (Michelle Kaske and Steven Church): “Puerto Rico will likely need to fund government operations using sales-tax revenue claimed by warring factions of bondholders unless a legal dispute at the heart of the island’s bankruptcy is resolved by November. The federal oversight board charged with restructuring Puerto Rico’s $74 billion debt asked a judge to let the board appoint two independent agents to help litigate a dispute over who owns cash collected by the government’s sales tax agency…”

June 14 – Wall Street Journal (Ben Eisen): “Move over Benjamin Franklin. It’s all about the euros. American companies sold $107.3 billion of bonds in other currencies in 2017, the most for any comparable period in a decade, according to… Dealogic. U.S. companies have done hefty issuance of euro-denominated debt but have also sold bonds in Canadian dollars and British pounds this year, Bank of America Merrill Lynch data show.”

June 14 – Bloomberg (Carrie Hong and Narae Kim): “Dollar bond deals in Asia are coming so fast and furious that buyers sometimes aren’t getting the chance for a thorough look under the hood. Yet with yields higher than available elsewhere, the pressure is on to buy nevertheless -- a situation that could see problems down the road… That’s the picture emerging from an analysis of the record $137 billion of bonds sold in the U.S. currency in Asia excluding Japan so far this year -- nearly double of what was priced in the same period last year.”

Federal Reserve Watch:

June 14 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve officials forged ahead with an interest-rate increase and additional plans to tighten monetary policy despite growing concerns over weak inflation. Policy makers agreed to raise their benchmark lending rate for the third time in six months, maintained their outlook for one more hike in 2017 and set out some details for how they intend to shrink their $4.5 trillion balance sheet this year. In a press conference…, Fed Chair Janet Yellen said the unwinding plan could be put into effect ‘relatively soon’ if the economy evolves as the central bank expects. ‘Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely,’ the Federal Open Market Committee said… ‘The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.’”

June 11 – Wall Street Journal (David Harrison): “The Federal Reserve’s interest-rate increases aren’t having the desired effect of cooling off Wall Street’s hot streak. While Fed officials meeting this week will likely decide to raise short-term interest rates for a fourth time since December 2015, much of that tightening effort has yet to be felt in financial markets, where stocks have rallied to records this year and bond yields have fallen, developments that tend to prompt more borrowing, faster economic growth and more market speculation. The tech-heavy Nasdaq Composite stock index, despite a drop Friday afternoon, is still up 15% as it nears the midyear mark and the S&P 500 index a robust 9% so far in 2017. Yields on 10-year Treasury notes have dropped to their lowest levels since November, meaning borrowing costs are falling for many households and businesses even as the Fed tries to raise them. Broad financial conditions are as accommodative now as they were in early 2015, the point of maximum Fed stimulus, according to a closely watched Goldman Sachs index…”

June 14 – Bloomberg (Cameron Crise): “The Federal Reserve’s focus on consumer-price inflation, over which it exerts relatively little influence, means it’s ignoring asset prices that are veering dangerously close to bubble territory. The surge in prices this year for virtual currencies such as bitcoin is reminiscent of the technology-stock excess of the late 1990s, and even after a recent selloff, the biggest U.S. tech shares are still up more than 20%. Policy makers could rein in the speculation by speeding up the pace of interest-rate increases…”

June 14 – Bloomberg (Nick Timiraos and Kate Davidson): “The White House is set to launch its search for the next Federal Reserve chief, according to a senior official, and it will be managed by Gary Cohn, the former Wall Street executive who some market strategists believe could be a candidate for the post himself. Officials won’t publicly outline any timetable for their decision or shortlist of candidates. Fed Chairwoman Janet Yellen’s term runs through January… Ms. Yellen’s reappointment isn’t an outcome many observers expect because of Mr. Trump’s fierce criticism of her during the final weeks of last year’s presidential campaign. But his willingness to consider her speaks to the amicable relationship they have forged since Mr. Trump took office, observers say.”

U.S. Bubble Watch:

June 14 – Bloomberg (Sho Chandra): “U.S. retail sales fell in May by the most since the start of 2016, reflecting broad declines in categories including motor vehicles and electronics… Retail sales dropped 0.3% (est. unchanged) after a 0.4% increase in prior month. Sales excluding autos and gasoline were unchanged after a revised 0.5% advance…”

June 14 – Wall Street Journal (Jon Sindreu): “Desperate to increase returns, some of the world’s most conservative investors are taking bigger risks by aping banks and lending directly to companies. In recent years, there has been a surge in investments from pension funds and life insurers into specialist asset managers that lend to midsize firms who can’t get financing from banks… But now the flood of cash is pushing down returns, leading these funds to design riskier and more complex products, while increasing their leverage. Because ultralow interest rates and other monetary stimulus have pushed down yields across markets, pension funds and life insurers have struggled to match their long-dated liabilities. That has encouraged them to chase riskier assets, such as real estate, private equity and now direct lending to companies.”

June 13 – Bloomberg (Julie Verhage): “U.S. stocks are the most overvalued investment in the world. At least that’s what institutional investors say. A record 44% of fund managers polled in a monthly survey from Bank of America Merrill Lynch see equities as overvalued, up from 37% last month. The technology-heavy Nasdaq Composite Index was named the most crowded trade, with 57% of investors saying Internet stocks are expensive and 18% calling them ‘bubble-like.’ Still, analysts caution that these results don’t spell the end of the bull market.”

June 12 – Bloomberg (Luke Kawa): “The severity of the retreat from tech shares Friday can be seen in the amount of cash that fled the group. The Technology Select Sector SPDR Fund, ticker XLK, suffered its worst week of outflows in 18 months, shedding more than $737 million. Friday’s withdrawals of $560.5 million were the most among U.S.-listed equity products, and the third-highest for the ETF since the start of 2015.”

June 14 – Bloomberg (Matt Scully): “Two of the biggest online consumer lenders don’t always check whether borrowers are lying to them, and if they find errors in an application, they may still approve the loan. Prosper Marketplace Inc. doesn’t verify key information like income and employment for around a quarter of the loans it makes, according to documents... LendingClub Corp. said it only verified income about a third of the time for one of the most popular loans it made in 2016… If either lender finds mistakes in a borrower’s application, such as overstated income, they may still go ahead with the loan, according to disclosures…”

June 12 – Wall Street Journal (Kristen Grind): “Brokers willing to learn the lost art of making risky mortgages are in demand again. Brandon Boyd was a high school junior during the financial crisis. Now, the former Calvin Klein salesman is teaching mortgage brokers how to make subprime loans. Mr. Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.”

June 12 – Bloomberg (Matt Scully): “Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitizations, according to Fitch Ratings. This group of securities is experiencing cumulative net losses at a rate projected to reach 15%, which is higher even than for bonds in the 2007, Fitch analysts Hylton Heard and John Bella Jr. wrote… ‘The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending, a trend which was not as apparent in the recessionary vintages,’ said the analysts, referring to lenders’ stretching out repayment terms on subprime loans, sometimes to over six years, to lower borrowers’ monthly payment.”

Japan Watch:

June 14 – Wall Street Journal (Saumya Vaishampayan and Megumi Fujikawa): “Don’t look now, but Japan’s central bank is slowing its vast bond-buying exercise. The Bank of Japan bought just ¥7.89 trillion ($71.6bn) worth of Japanese government debt last month, according to J.P. Morgan. While that sounds like a lot, it is the least outright buying… since October 2014, when the central bank surprised markets by saying it would increase its asset purchases. The latest figure raises a question: Is the BOJ trying to rein in its ultraloose policies by stealth?”

EM Watch:

June 13 – Bloomberg (Archana Narayanan, Alaa Shahine, and Fiona Macdonald): “Some Qatari banks are boosting interest rates on dollar deposits to shore up liquidity as a Saudi-led campaign to isolate the gas-rich Arab state intensifies, people familiar with the matter said. The lenders are offering a premium of as much as 100 bps over the London interbank offered rate to attract dollars from regional banks… That compares with rates of 20 basis bps over Libor before the feud started on June 5.”

Leveraged Speculator Watch:

June 14 – Bloomberg (Evelyn Cheng): “Short-term investors should sell stocks and get ready for a drop in the market this summer, Jeffrey Gundlach, CEO and CIO of DoubleLine, said… ‘If you’re a trader or a speculator I think you should be raising cash today, literally today. If you're an investor you can easily sit through a seasonally weak period,’ Gundlach said… Gundlach reiterated his expectation for a summer correction in the U.S. stock market, while Treasury yields rise.”

June 13 – Bloomberg (John Gittelsohn): “Investors should be wary as low interest rates, aging populations and global warming inhibit real economic growth and intensify headwinds facing financial markets, according to Bill Gross. ‘Don’t be mesmerized by the blue skies,’ Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, wrote... ‘All markets are increasingly at risk.’”

Geopolitical Watch:

June 13 – Reuters (Idrees Ali and Mike Stone): “U.S. Defense Secretary Jim Mattis said… that North Korea's advancing missile and nuclear programs were the ‘most urgent’ threat to national security and that its means to deliver them had increased in speed and scope. ‘The regime’s nuclear weapons program is a clear and present danger to all, and the regime’s provocative actions, manifestly illegal under international law, have not abated despite United Nations’ censure and sanctions,’ Mattis said… ‘The most urgent and dangerous threat to peace and security is North Korea… North Korea's continued pursuit of nuclear weapons and the means to deliver them has increased in pace and scope.’”

June 10 – Reuters (Maria Kiselyova): “Russia said… it had told the United States it was unacceptable for Washington to strike pro-government forces in Syria after the U.S. military carried out an air strike on pro-Assad militia last month. Russian Foreign Minister Sergei Lavrov relayed the message to U.S. Secretary of State Rex Tillerson… on Saturday initiated by the U.S. side, the Russian Foreign Ministry said…”

June 13 – Reuters (Jim Finkle): “Two cyber security firms have uncovered malicious software that they believe caused a December 2016 Ukraine power outage, they said…, warning the malware could be easily modified to harm critical infrastructure operations around the globe. ESET, a Slovakian anti-virus software maker, and Dragos Inc, a U.S. critical-infrastructure security firm, released detailed analyses of the malware, known as Industroyer or Crash Override, and issued private alerts to governments and infrastructure operators to help them defend against the threat.”