Doug Noland

Weekly Commentary: Disequilibrium

Much to the consternation of our allies, President Trump withdraws from the Iran nuclear deal. WTI crude adds another 1.5% (up 17% y-t-d) this week to the high since November 2014. Iran and Israel moved closer to direct military confrontation. With …

Doug Noland’s Credit Bubble Bulletin: Old Roach Motel

Today is reminiscent of 1999, but on such a grander scale that the two periods are hardly comparable. The late-twenties is more pertinent: the proliferation of exciting technologies and innovation; lavishly over-liquefied securities markets; faith in policymakers and a general disregard for risk. In 1929, there was essentially no recognition of downside risk. Sound familiar?

Conventional Wisdom

Conventional wisdom is so often proved wrong. Thinking back over my career, it’s amazing how many times what is believed true without a doubt in the markets turns out completely erroneous. There’s no mystery behind this phenomenon. Responsibility li…

Doug Noland: Recalling 1994

Equities rallied to begin the week. With Syrian missile strikes more limited than feared and no military response from Russia, there was immediate impetus to unwind hedges. That it was option expiration week ensured plenty of firepower. The S&P5…

Doug Noland: Bizarre and Ominous

Things have gone from surreal to the bizarre. The President points blame directly at Putin for a chemical attack in Syria. Russia threatens to shoot down any missiles fired into Syria. President Trump tweets “Get ready Russia, because [missiles] wil…

Weekly Commentary: Q4 2017 Z.1 Flow of Funds

So much uncertainty in the world these days. Some things, however, we know with certitude: U.S. Debt, the value of the securities markets and Household Net Worth do grow to the sky. The Fed’s latest Z.1 report documents another quarter of inflating Credit, markets and perceived wealth – three additional months of history’s greatest Bubble.

Total (non-financial and financial) U.S. System borrowings jumped a nominal $495 billion during the quarter and $2.630 TN in 2017 to a record $68.591 TN. Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $1.407 TN during 2017’s fourth quarter to a record $49.050 TN (’17 growth of $1.793 TN). Credit growth slowed from Q3’s SAAR $3.007 TN and Q2’s SAAR $1.921 TN, while it was closely in line with Q4 2016’s SAAR $1.435 TN. NFD as a percentage of GDP ended 2017 at 249%. This compares to 230% to end 2007 and 179% in 1999.

By major category for the quarter, Household Debt expanded SAAR $790 billion, a notable acceleration from Q3’s $516 billion and Q2’s $573 billion. For perspective, one must go back to 2007’s $946 billion to see annual growth exceeding Q4’s pace of Household borrowings. For 2017, total Household Borrowings expanded $604 billion, up from 2016’s $510 billion, ‘15’s $403 billion, ‘14’s $402 billion, ‘13’s $241 billion, and ‘12’s $266 billion. Household Borrowings contracted $51 billion in ’11 and $61 billion in ’10.

And while Household Mortgage borrowings increased to SAAR $302 billion (from Q3’s $282bn), the surge in Household Borrowings was led by a record SAAR $292 billion jump in (non-mortgage) Consumer Credit. Consumer Credit rose SAAR $134 billion in Q3 and SAAR $229 billion in Q4 2016. It’s worth noting that Consumer Credit growth posted its previous cycle peak at $181 billion in Q3 2007.

Total Corporate Credit growth slowed markedly during Q4 to SAAR $520 billion, down from Q3’s SAAR $840 billion, Q2’s $808 billion and Q1’s $815 billion – but was ahead of Q4 ‘16’s $314 billion. Total Corporate Borrowings expanded $746 billion in 2017, up from ‘16’s $710 billion but below ‘15’s $819 billion.

Federal government borrowings slowed sharply during the fourth quarter, with massive debt issuance pushed into Q1 ’18. For calendar year 2017, federal borrowings dropped to $447 billion from ‘16’s $843 billion. 2018 federal borrowings will be enormous.

On a percentage basis, Non-Financial Debt growth slowed to 3.8% in 2017, down from ‘16’s 4.6%. But this slowdown was chiefly related to a halving of the growth in federal borrowings to 2.8% from 5.6%. Household Debt expanded at a 4.1% pace, up from ‘16’s 3.6% to the strongest growth since 2007’s 7.1%.

The Domestic Financial Sector expanded nominal $1.832 TN during the quarter to a record $97.041 TN. During the quarter, Agency/GSE securities gained SAAR $302 billion, Corporate & Foreign Bonds SAAR $517 billion, Fed Funds & Repo SAAR $486 billion and Loans SAAR $898 billion.

Bank (Private Depository Institutions) Assets increased nominal $204 billion, or 4.4% annualized, during Q4 to a record $18.925 TN. Bank Loans jumped nominal $167 billion, or 6.3% annualized, to $10.776 TN. Bank Assets were up $852 billion in 2017 (4.5%), an increase from 2016’s $712 billion (3.9%).

From a more conventional perspective, growth in U.S. “money” and Credit doesn’t appear all that remarkable. Yet asset-based lending has quietly gained significant momentum. Total Mortgage Credit jumped $573 billion in 2017 (Q4 SAAR $625bn), the strongest expansion since 2007. Q4 multifamily mortgage growth was the strongest in years. Agency Securities gained nominal $337 billion (3.9%) in 2017 to a record $8.857 TN, with a two-year gain of $688 billion. It’s anything but clear why the GSEs should be growing rapidly at this point. Broker/Dealer Assets jumped nominal $116 billion during Q4 (15% annualized) to $2.229 TN, an almost three-year high. Broker/Dealer assets expanded $206 billion in 2017, the largest expansion since 2010’s $235 billion. Exchange-traded Funds (ETF) expanded $263 billion during Q4 to $3.400 TN. ETFs expanded $876 billion, or 34.7% in 2017, with a two-year gain of $1.300 TN, or 62%.

After beginning 2008 at $6.051 Trillion (42% of GDP), Treasury Securities ended 2017 at $16.431 TN (83% of GDP). Treasury and Agency Securities combined for $25.288 TN, or 128% of GDP. It’s a staggering amount of so-called “risk free” securities underpinning the entire financial system. Also “staggering” and “underpinning,” global finance pouring into U.S. securities markets is unrelenting. It’s become a primary source of fuel sustaining the Bubble.

Rest of World (ROW) increased holdings of U.S. financial assets by a nominal $646 billion during Q4. For perspective, this is more than triple the Q4 expansion of bank loans. This put 2017 ROW growth at a record $2.817 TN, up from ‘16’s $1.182 TN and surpassing ‘13’s $2.174 TN and ‘06’s $2.125 TN. ROW now holds a record $11.456 TN of U.S. debt securities, $7.888 TN of equites and mutual funds, $737 billion of Repos and $4.699 TN of Foreign Direct Investment. Since the end of 2008, ROW holdings have increased $13.342 TN, or 97%, to end 2017 at a record $27.042 TN. ROW holdings began the nineties at $1.738 TN and ended that decade at $5.621 TN.

Total outstanding Debt Securities (TDS) expanded nominal $441 billion during Q4 to a record $42.826 TN. TDS gained $1.537 TN in 2017, after increasing $1.543 TN in ’16. TDS has increased $11.88 TN, or 38%, since the end of 2008. TDS as a percent of GDP remained constant during Q4 at 217%, after ending 2007 at 200%.

Total Equities Securities (TES) jumped $2.285 TN during Q4 to a record $45.825 TN. TES rose $7.403 TN during 2017, or 19.3%. Since the end of ’08, TES has surged $30.587 TN, or 201%. As a percentage of GDP, TES ended 2017 at a record 232%. This compares to cycle peaks 181% to end Q3 ’07 and 202% during Q1 2000. It’s worth mentioning as well that TES as a percentage of GDP didn’t recover to 100% until Q3 ’95 (106% in 1968). TES as a percentage of GDP ended 1970 at 77%, 1975 at 50%, 1980 at 52%, 1985 at 52%, and 1990 at 59%.

Total (Debt and Equities) Securities ended 2017 at a record $88.651 TN. Total Securities surged to a record 449% of GDP, up from 429% to conclude 2016. For perspective, Total Securities to GDP peaked at 379% ($55.3TN) during Q3 2007 and 359% ($36.0TN) at cycle highs in Q1 2000. Total Securities as a percent of GDP ended 1970 at 148%, 1975 at 122%, 1980 at 128%, 1985 at 155%, 1990 at 189%, and 1995 at 262%.

Massive inflows of international finance have been integral to the U.S. securities market Bubble. Inflating securities and asset prices have inflated perceived household wealth, a dynamic fundamental to the U.S. Bubble Economy.

Household Assets jumped nominal $2.284 TN during Q4 to a record $114.395 TN, with a one-year gain of $7.760 TN and two-year rise of $13.514 TN. For the quarter, Real Estate increased $511 billion to a record $27.848 TN. Financial Assets jumped $1.699 TN in Q4 to a record $80.395 TN, with total equities up $972 billion to $26.562 TN.

With Household Liabilities up $209 billion to $15.650 TN, Household Net Worth jumped $2.076 TN during the quarter to a record $98.746 TN. Household Net Worth inflated $7.162 TN during 2017 to a record 500% of GDP. For comparison, Net Worth to GDP ended 2007 at 459% and 1999 at 445%. Net Worth to GDP ended 1970 at 357%, 1975 at 342%, 1980 at 359%, 1985 at 350%, 1990 at 367% and 1995 at 381%.

I define a Bubble as a self-reinforcing but inevitably unsustainable inflation. Household Net Worth at 500% of GDP is not sustainable. I believe it is unsustainable because I don’t believe Total Securities at 449% of GDP is sustainable. And current securities values are unsustainable because the current financial structure is not sustainable.

Too large a percentage of new Credit creation is financing overvalued assets (securities and real estate, in particular), leaving this key source of liquidity vulnerable to asset price reversals. Too much of the new Credit is Treasury and government-related securities that are grossly mispriced in the marketplace. Moreover, enormous foreign-sourced inflows are having a major (if unappreciated) impact on marketplace liquidity. I suspect that a significant portion of these inflows are related to global QE and, somewhat less directly, to speculative leveraging (“carry trades,” etc.). These sources of liquidity are increasingly vulnerable to central bank “normalization,” higher funding costs and rising global yields.

For the Week:

The S&P500 rallied 3.5% (up 4.2% y-t-d), and the Dow recovered 3.3% (up 2.5%). The Utilities increased 0.7% (down 7.2%). The Banks jumped 3.8% (up 8.8%), and the Broker/Dealers surged 6.8% (up 13.7%). The Transports rose 3.9% (up 1.2%). The S&P 400 Midcaps rallied 3.8% (up 2.6%), and the small cap Russell 2000 surged 4.2% (up 4.0%). The Nasdaq100 jumped 4.2% (up 11.0%). The Semiconductors surged 4.9% (up 14.2%). The Biotechs rose 4.7% (up 15.4%). With bullion about unchanged, the HUI gold index was little changed (down 10.1%).

Three-month Treasury bill rates ended the week to 1.63%. Two-year government yields added two bps to 2.26% (up 38bps y-t-d). Five-year T-note yields rose three bps to 2.65% (up 44bps). Ten-year Treasury yields were up three bps to 2.89% (up 49bps). Long bond yields added two bps to 3.16% (up 42bps).

Greek 10-year yields fell 17 bps to 4.16% (up 9bps y-t-d). Ten-year Portuguese yields dropped 12 bps to 1.86% (down 8bps). Italian 10-year yields gained four bps to 2.01% (unchanged). Spain’s 10-year yields fell 11 bps to 1.44% (down 13bps). German bund yields were little changed at 0.65% (up 22bps). French yields declined three bps to 0.89% (up 11bps). The French to German 10-year bond spread narrowed three to 24 bps. U.K. 10-year gilt yields added two bps to 1.49% (up 30bps). U.K.’s FTSE equities index rallied 2.2% (down 6%).

Japan’s Nikkei 225 equities index gained 1.4% (down 5.7% y-t-d). Japanese 10-year “JGB” yields declined two bps to 0.05% (up 1bp). France’s CAC40 rallied 2.7% (down 0.7%). The German DAX equities index recovered 3.6% (down 4.4%). Spain’s IBEX 35 equities index rose 1.6% (down 3.6%). Italy’s FTSE MIB index surged 3.8% (up 4.1%). EM markets were mostly higher. Brazil’s Bovespa index increased 0.7% (up 13.0%), and Mexico’s Bolsa gained 2.1% (down 1.6%). South Korea’s Kospi index rose 2.4% (down 0.3%). India’s Sensex equities index fell 2.2% (down 2.2%). China’s Shanghai Exchange gained 1.6% (unchanged). Turkey’s Borsa Istanbul National 100 index was unchanged (up 1.4%). Russia’s MICEX equities index rose 1.0% (up 9.6%).

Investment-grade funds saw outflows of $740 million, and junk bond funds had outflows of $525 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained three bps to 4.46%, the high since January 2014 (up 25bps y-o-y). Fifteen-year rates rose four bps to 3.94% (up 52bps). Five-year hybrid ARM rates added a basis point to 3.63% (up 40bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.59% (up 23bps).

Federal Reserve Credit last week declined $11.8bn to $4.354 TN. Over the past year, Fed Credit contracted $63.3bn, or 1.5%. Fed Credit inflated $1.544 TN, or 55%, over the past 279 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $22.0bn last week to $3.440 TN. “Custody holdings” were up $258bn y-o-y, or 8.1%.

M2 (narrow) “money” supply jumped $32.1bn last week to a record $13.875 TN. “Narrow money” expanded $535bn, or 4.0%, over the past year. For the week, Currency increased $4.2bn. Total Checkable Deposits rose $11.5bn, and savings Deposits gained $15.9bn. Small Time Deposits and Retail Money Funds were little changed.

Total money market fund assets rose $14.3bn to $2.857 TN. Money Funds gained $168bn y-o-y, or 6.3%.

Total Commercial Paper added $1.7bn to $1.094 TN. CP gained $130bn y-o-y, or 13.4%.

Currency Watch:

March 6 – South China Morning Post (Alun John): “A senior Hong Kong Monetary Authority official said… that while the Hong Kong dollar had reached its weakest level in more than 30 years, this valuation was ‘well within the design of the system’… The Hong Kong dollar touched new lows against the US dollar, …one US dollar was worth 7.8337 Hong Kong dollars, its lowest level in 33 years…The Hong Kong dollar is pegged to the US dollar, and its value is permitted to fluctuate between 7.75 to 7.85 Hong Kong dollars to one US dollar.”

March 6 – Bloomberg (Katherine Greifeld and Liz McCormick): “In foreign-exchange markets, investors aren’t waiting to find out if all the tariff threats being thrown around lead to a full-blown trade war. Some money managers have begun piling into traditional havens like the yen; others are trimming currency exposure altogether; and even those who’re betting not much will come from the row are hedging just in case. The concern is that President Donald Trump’s plan to impose steel and aluminum tariffs will trigger a wave of retaliatory levies that derail the worldwide economic expansion… ‘Currencies can be very small but sharp objects, where a little exposure can have a large impact,’ said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle Investments. ‘So you could see more and more managers just not really stick their neck out as it relates to FX exposure.’”

The U.S. dollar index added 0.2% to 90.093 (down 2.2% y-o-y). For the week on the upside, the Mexican peso increased 1.1%, the Australian dollar 1.1%, the South Korean won 1.0%, the South African rand 0.9%, the New Zealand dollar 0.6%, the Canadian dollar 0.6%, the British pound 0.4%, the Singapore dollar 0.3%, and the Norwegian krone 0.2%. For the week on the downside, the Swiss franc declined 1.5%, the Japanese yen 1.0%, the Brazilian real 0.1% and the euro 0.1%. The Chinese renminbi increased 0.17% versus the dollar this week (up 2.72% y-t-d).

Commodities Watch:

March 6 – Bloomberg (Jessica Summers): “U.S. crude production is poised to accelerate this year, reaching the highest annual average on record. The Energy Information Administration boosted its output forecasts for 2018 and 2019, and said that production would top 11 million barrels a day in October… The forecast comes as U.S. shale producers met with OPEC officials for a dinner on the sidelines of the CERAWeek by IHS Markit conference in Houston… OPEC Secretary General Mohammad Barkindo told Bloomberg after the dinner that he wasn’t worried about U.S. production growth because ‘demand is very robust, very strong.’”

The Goldman Sachs Commodities Index increased 0.6% (up 0.4% y-t-d). Spot Gold was little changed at $1,323 (up 1.6%). Silver gained 0.9% to $16.608 (down 3.1%). Crude recovered 79 cents to $62.04 (up 2.7%). Gasoline added 0.2% (up 6%), and Natural Gas gained 1.4% (down 8%). Copper increased 0.4% (down 5%). Wheat dropped 2.2% (up 15%). Corn rose 1.4% (up 11%).

Market Dislocation Watch:

March 6 – CNBC (Jeff Cox): “February’s brutally volatile market saw investors flee U.S. stocks in near-record numbers, and they’re only slowly coming back. Funds that focus on domestic equities saw investors withdraw $41.1 billion during the month, according to… TrimTabs, which said it was the third most in the market data firm’s records. Global funds went in the other direction, attracting $17.9 billion even though stock markets abroad fared even worse than in the U.S. Outflows were evenly distributed between exchange-traded funds (-$19.6bn) and mutual funds (-$21.5bn)…”

March 6 – Bloomberg (Sid Verma): “Investors appear to be paring exposure to U.S. bonds as selloff pressure endures in the world’s largest debt market. The biggest fixed-income exchange-traded fund — the iShares Core U.S. Aggregate Bond ETF, ticker AGG — was hit by a record $798 million outflow Monday, the largest one-day withdrawal since its September 2003 inception. Expectations that President Donald Trump’s tough talk on tariffs would fail to spur strongly protectionist outcomes fed risk appetite during Monday’s trading, sending 10-year Treasury yields toward 2.90%.”

March 5 – Bloomberg (Dani Burger): “Finding shelter from stormy markets is getting harder than ever. Major asset classes have been trending together to levels rarely seen over the past decade and, more often than not, that trend has been down. Investors who enjoyed easy gains as markets rose in sync in the past six months are struggling to find securities that move in opposition, leaving them exposed to losses even if they’re diversified. Once immune to geopolitics, proposed U.S. tariffs have sent global stock markets lower. But bonds aren’t offering much of a fallback option, as reflationary threats and hawkish central banks hobble returns. Hoping commodities will provide a haven? Too bad. Crude and copper futures are extending losses after a hefty February decline…”

Trump Administration Watch:

March 6 – Bloomberg (Andrew Mayeda and Jennifer Jacobs): “The Trump administration is considering clamping down on Chinese investments in the U.S. and imposing tariffs on a broad range of its imports to punish Beijing for its alleged theft of intellectual property, according to people familiar with the matter. An announcement following an investigation by the U.S. Trade Representative’s office into China’s IP practices is expected in the coming weeks, potentially handing President Donald Trump further cause to impose trade restrictions… ‘The U.S. is acting swiftly on intellectual property theft. We cannot allow this to happen as it has for many years!’ Trump said in a Twitter post… In an earlier tweet, he said China has been asked to develop a plan to reduce their ‘massive trade deficit with the United States.’”

March 6 – Bloomberg (Toluse Olorunnipa): “President Donald Trump reiterated his commitment to levying tariffs on steel and aluminum, saying that the U.S. has poor trading conditions with other nations, including those in the European Union. ‘When we’re behind every single country, trade wars aren’t so bad,’ Trump said… ‘The trade war hurts them, not us.’ Trump said that the E.U. has been ‘particularly tough’ on U.S. products, yet is able to sell its own goods such as cars to Americans. Trump warned that he would impose a 25% penalty on European car imports if the bloc carried out a threat to retaliate against the metals tariffs… ‘We have to straighten this out. We really have no choice,’ Trump said.”

March 7 – Bloomberg (Jonathan Stearns): “The European Union mounted a last-ditch push to stop U.S. President Donald Trump from triggering tariffs on foreign steel and aluminum, vowing a ‘firm’ response and warning of widespread damage from a trans-Atlantic trade war. ‘I truly hope that this will not happen,’ EU Trade Commissioner Cecilia Malmstrom told reporters… ‘A trade war has no winners.’ The EU intends to hit a range of U.S. goods with punitive tariffs in retaliation for Trump’s pledges to impose a 25% duty on foreign steel and a 10% levy on imported aluminum. His plan is based on a national-security argument that Malmstrom called ‘alarming’ and ‘deeply unjust.’”

March 5 – Wall Street Journal (Siobhan Hughes and William Mauldin): “House Speaker Paul Ryan warned… that President Donald Trump’s plan to impose tariffs on steel and aluminum imports could trigger a trade war, as the president sought to wrest economic concessions from Canada and Mexico by turning up pressure on the proposal. Mr. Trump’s evolving trade policy drew harsh criticism from congressional Republicans, who said they are concerned the president’s new threats will provoke retaliation rather than draw concessions. ‘We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,’ said a spokeswoman for Mr. Ryan…”

March 4 – Reuters (Lesley Wroughton and Sharay Angulo): “Mexican and U.S. officials pushed… to speed up NAFTA negotiations, with the United States floating the idea of reaching an agreement ‘in principle’ in coming weeks to avoid political headwinds later this year. U.S. Trade Representative Robert Lighthizer, showing impatience at the slow pace of the talks, said Mexico’s presidential election and the looming expiry of a congressional negotiating authorization in July put the onus on the United States, Mexico and Canada to come up with a plan soon. ‘We probably have a month, or a month and a half, or something to get an agreement in principle,’ Lighthizer told reporters…”

March 5 – Reuters (Jeff Mason and Christine Kim): “Feeling the pressure of sanctions, North Korea seems ‘sincere’ in its apparent willingness to halt nuclear tests if it held denuclearization talks with the United States, President Donald Trump said… as U.S., South Korean and Japanese officials voiced skepticism about any discussions.”

March 6 – Reuters (Susan Cornwell and Jeff Mason): “Economic nationalists appeared to gain the upper hand in a White House battle over trade with the resignation of Donald Trump’s top economic adviser, Gary Cohn, on Tuesday in a move that could ramp up protectionist measures that risk igniting a global trade war… He had told Trump that markets would slump on a tariffs threat and was regarded as a bulwark of economic orthodoxy in an administration whose protectionist policies have sparked alarm among U.S. legislators and in governments around the world. Cohn’s resignation came after Trump said he was sticking with plans to impose hefty tariffs on steel and aluminum imports. While the measures on their own are relatively small, the risk is that an emboldened Trump administration will push ahead with a full-scale economic confrontation with China.”

March 8 – Reuters (David Chance and Roberta Rampton): “An economist who believes that Chinese goods are literally poisoning Americans, advocates ending Washington’s ‘One China’ policy and says trade deals have weakened the United States economically with the connivance of U.S. business has emerged as the big winner from renewed turmoil in the White House. While Peter Navarro says he is not in the running to replace Trump’s top economic adviser Gary Cohn…, he will be a big winner from the departure of a person seen as a bulwark against economic protectionism… He has publicly backed Trump’s proposed steel and aluminum tariffs in a series of media appearances after being out of the public eye for months. Navarro has endorsed withdrawal from the North American Free Trade Agreement as well as from a trade deal with South Korea. He believes the World Trade Organization allows unfair tax practices like value added tax that penalize American business.”

March 6 – New York Times (Cecilia Kang and Alan Rappeport): “As the United States and China look to protect their national security needs and economic interests, the fight between the two financial superpowers is increasingly focused on a single area: technology. The clash erupted in public on Tuesday after the United States government, citing national security concerns, called for a full investigation into a hostile bid to buy the American chip stalwart Qualcomm… The proposed acquisition by the Singapore-based Broadcom would have been the largest deal in technology history, creating a major force in the development of the computer chips that power smartphones and many internet-connected devices. But a government panel said the takeover could weaken Qualcomm and give its Chinese rivals an advantage. ‘China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover,’ a United States Treasury official wrote in a letter calling for a review of the deal. The fight over technology is redefining the rules of engagement in an era when national security and economic power are closely intertwined.”

U.S. Bubble Watch:

March 7 – Reuters (Lucia Mutikani): “The U.S. trade deficit increased to a more than nine-year high in January, with the shortfall with China widening sharply, suggesting that President Donald Trump’s ‘America First’ trade policies aimed at eradicating the deficit will likely fail. The trade gap continues to widen a year into the Trump presidency. Trump, who claims that the United States is being taken advantage of by its trading partners, has imposed tariffs on imports of some goods and threatened punitive measures on others to shield domestic industries from competition. The protectionist measures have sparked fears of a trade war… The Commerce Department said… the trade deficit jumped 5.0% to $56.6 billion. That was the highest level since October 2008 and exceeded… expectations… Part of the rise in the trade gap in January reflected higher commodity prices. The politically sensitive goods trade deficit with China surged 16.7% to $36.0 billion, the highest since September 2015.”

March 5 – Wall Street Journal (Spencer Jakab): “…The U.S. trade balance may be much worse than it looks. The reason is the boom in U.S. energy production has dramatically reduced the need for oil imports. The U.S. trade deficit in goods and services was $566 billion last year, and in December widened to its highest since 2008. The annual deficit with China alone climbed to $375.2 billion. It would have been much worse without energy. Since 2007 net trade in three major categories of petroleum and related products plus natural gas has improved by $233 billion.”

March 7 – CNBC (Jeff Cox): “Job creation saw another powerful month in February, with companies adding 235,000 positions, ADP and Moody’s Analytics reported… Growth actually decelerated slightly, as January posted an upwardly revised 244,000 from the initially reported 234,000. February marked the fourth month in a row that private payrolls hit 200,000 or better. ‘The job market is red hot and threatens to overheat,’ Mark Zandi, chief economist at Moody’s, said… ‘With government spending increases and tax cuts, growth is set to accelerate.’”

March 4 – Wall Street Journal (AnnaMaria Andriotis): “Small banks have been fighting for a bigger piece of the credit-card market in search of higher returns. Now, they’re contending with rising losses. Missed payments on credit cards at small banks have risen sharply over the past year, a sign that their cardholders are taking on more debt than they can handle. Their charge-off rate, or the share of outstanding card balances written off as a loss after consumers failed to pay, hit 7.2% in the fourth quarter, up from 4.5% a year ago…”

March 7 – Reuters (Lucia Mutikani): “U.S. unit labor costs increased faster than initially thought in the fourth quarter amid weak worker productivity, but the trend pointed to a gradual increase in inflation. The Labor Department said… that unit labor costs, the price of labor per single unit of output, rose at a 2.5% annualized rate in the last quarter instead of increasing at a 2.0% pace as reported last month.”

March 7 – Wall Street Journal (Laura Kusisto): “The economy is booming, take-home pay is rising and millennials are getting married and having children. Despite all those homebuying catalysts, this could be one of the weakest spring selling seasons in recent years. The culprits: rising mortgage rates, a tax bill that reduces the incentives for homeownership and a growing weariness among first-buyers being priced out of the market—all of which are expected to damp demand for homes this year. The next few months are a critical test of the housing market, as buyers look to get into contract on a home before summer vacations and the new school year. About 40% of the year’s sales take place from March through June…”

March 5 – New York Times (Nellie Bowles): “In search of reasonable rent, the middle-class backbone of San Francisco — maitre d’s, teachers, bookstore managers, lounge musicians, copywriters and merchandise planners — are engaging in an unusual experiment in communal living: They are moving into dorms. Shared bathrooms at the end of the hall and having no individual kitchen or living room is becoming less weird for some of the city’s workers thanks to Starcity, a new development company that is expressly creating dorms for many of the non-tech population. Starcity has already opened three properties with 36 units. It has nine more in development and a wait list of 8,000 people.”

Federal Reserve Watch:

March 6 – CNBC (Jeff Cox): “Raising interest rates now gives the U.S. the best chance to keep pushing the economy forward, Dallas Fed President Robert Kaplan said… In that light, Kaplan said he favors three rate hikes this year, a sentiment reflected in markets that nevertheless have been wary that the central bank may get more aggressive should the improving economy start generating more noticeable inflation. ‘It’s three for this year. I think we should get started sooner rather than later, though,’ he said…”

March 5 – Reuters (Pete Schroeder): “The chief regulator for the U.S. Federal Reserve said Monday the nation’s regulators are actively considering a significant rewrite of the ‘Volcker Rule.’ Fed Vice Chair for Supervision Randal Quarles told bankers gathered in Washington that regulators want to make ‘material changes’ to streamline and simplify several aspects of the ban on certain bank trading, put in place after the 2007-2009 financial crisis. His comments are the most explicit endorsement yet of regulators rewriting one of the central post-crisis rules, which bans banks from making profit-seeking trades on their own account.”

March 6 – Bloomberg (Jeanna Smialek and Christopher Condon): “Federal Reserve Governor Lael Brainard, one of the central bank’s most ardent doves, sounded optimistic about the U.S. economy’s outlook and suggested the pace of monetary policy tightening may need to accelerate. ‘The macro environment today is the mirror image of the environment we confronted a couple of years ago,’ Brainard told the Money Marketeers of New York University… ‘In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true.’”

China Watch:

March 6 – Financial Times (Matthew C Klein): “The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s — are not encouraging. Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding… Chinese households, however, are quickly catching up. This is bad news… As of mid-2017, Chinese households had debts worth about 106% of their disposable incomes. For perspective, Americans currently have debts worth about 105% of their disposable incomes… The difference is that American indebtedness has been basically flat the past few years after steady declines since 2007. Chinese households have been experiencing rapid income growth by rich-country standards for a long time, but their debts have grown far faster… Since the start of 2007, Chinese disposable household income has grown about 12% each year on average, while Chinese household debt has grown about 23% each year on average. The cumulative effect is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. The mismatch has been getting worse recently…”

March 8 – Reuters (Elias Glenn): “China’s exports unexpectedly surged at the fastest pace in three years in February, suggesting both its economy and global growth remain resilient even as trade relations with the United States rapidly deteriorate. China’s February exports rose 44.5% from a year earlier, far more than analysts’ median forecast for a 13.6% increase and January’s 11.1% gain…”

March 4 – Bloomberg: “China stepped up its push to curb financial risk, cutting its budget deficit target for the first time since 2012 and setting a growth goal of around 6.5% that omitted last year’s aim for a faster pace if possible. The deficit target… was lowered to 2.6% of gross domestic product from 3% in the past two years. The 6.5% goal is consistent with President Xi Jinping’s promise to deliver a ‘moderately prosperous’ society by 2020. Policy makers dropped a target for M2 money supply growth, saying it’s expected to expand at similar pace to last year. Authorities reiterated prior language saying prudent monetary policy will remain neutral this year and that they’ll ensure liquidity at a reasonable and stable level.”

March 6 – Bloomberg: “China is attempting to pull off an unusual fiscal feat: Cut taxes, boost spending and shrink the deficit, all with a slowing economy. Premier Li Keqiang… announced the first budget deficit goal reduction since 2012, to 2.6% of gross domestic product from 3%. He also pledged tax cuts of 800 billion yuan ($126bn) for companies and individuals and set a 6.5% annual economic growth target… In the context of China’s multi-year effort to slow debt growth, a tighter fiscal budget sends a powerful signal — even the state is tightening its belt.”

March 6 – Reuters (Philip Wen): “China must strengthen regulatory oversight and control the overall amount of money supply to guard against mounting financial risks in the economy, a top economic official said… Yang Weimin, the deputy director of the Office of the Central Leading Group on Financial and Economic Affairs, said the ‘extremely arduous’ task was necessary to head off the financial risks in the Chinese economy that were becoming ‘progressively visible’, according to the Securities Times business newspaper.”

March 6 – Bloomberg (Keith Zhai): “Chinese President Xi Jinping is preparing to extend a sweeping government overhaul that would give the Communist Party greater control over everything from financial services to manufacturing to entertainment in the world’s second-largest economy, two people familiar with the matter said. The changes are part of a proposed ‘CPC leadership system’ approved by the party on Feb. 28… Details of that document, which called for merging more than a dozen state agencies, are due to be revealed by March 17 when the National People’s Congress — China’s rubber-stamp legislature — votes on the plan.”

March 4 – Bloomberg: “China said that it would increase coordination of monetary policy, macroprudential monitoring and financial supervision, the strongest signal yet that top leaders gathering in Beijing this week plan to unveil an overhaul of economic authorities. The financial supervision system will be improved to ensure financial stability and prevent systemic risk, the official Xinhua News Agency reported…, citing a decision by a Communist Party committee on deepening government reform.”

March 6 – Bloomberg (Alfred Cang): “Just six months ago, CEFC called itself China’s largest private oil and gas company, with 50,000 employees and revenue of more than $40 billion. That’s when it agreed to buy a $9 billion stake in Russian state energy giant Rosneft PJSC following a series of deals elsewhere — a spree that spawned speculation over how the previously obscure firm managed to make its mark on the international stage so quickly. Now, it’s being hit by a slew of bad news. Chairman Ye Jianming is said to have been investigated by authorities, it’s reported to have been taken over by an arm of the Shanghai government and the company’s bonds have posted record declines. All that’s raised questions about the status of the Rosneft deal, which is yet to close. CEFC is also said to have missed paying $63 million for an oil-trading joint venture.”

Central Bank Watch:

March 8 – Financial Times (Claire Jones and Michael Hunter): “The European Central Bank has taken a significant step towards ending its crisis-era economic stimulus measures, dropping an explicit commitment to expand its bond-buying programme if the current eurozone expansion sputters. As often with the ECB, the important policy shift was couched in a minor change in wording in its post-governing council meeting statement…, where it took out language vowing to intervene more aggressively in bond markets should growth disappoint. But the change in its ‘easing bias’ marked one of the final steps Mario Draghi… must go through before winding up a programme launched three years ago… It also comes amid a global effort by central banks to return to pre-crisis policymaking, a shift that has unnerved financial markets accustomed to cheap money pumped into the system by years of massive emergency stimulus from the ECB, US Federal Reserve and Bank of Japan.”

March 4 – Bloomberg (Enda Curran and Toru Fujioka): “The end of the easy money era which spanned the global economy for the last decade came into even sharper focus as the Bank of Japan gave fresh insight into when it might slow its stimulus program. Governor Haruhiko Kuroda’s remarks… that the central bank will start thinking about how to complete its unprecedented easing around the fiscal year starting April 2019 was the clearest signal yet that a conclusion might be in sight to emergency support for the Japanese economy. While Kuroda’s statement in response to questions from lawmakers was in some ways stating the obvious… the significance is that he’s put down a marker in public that he can be held to.”

March 8 – Financial Times (Claire Jones and Guy Chazan): “On the face of it, it looks an easy choice for Germany. More than at any other point in the history of monetary union Berlin has the clout — and a willing candidate in Bundesbank chief Jens Weidmann — to secure the presidency of the European Central Bank. But officials in the eurozone’s largest and most powerful economy are still hesitating whether to risk political capital on a campaign to anoint one of their own as Mario Draghi’s successor. The fear is that they will have to bend too much to Paris and Rome’s vision of European monetary union in return. ‘The price can’t be too high,’ said one German official. ‘The question is what political and economic benefit it brings to Germany.’”

Global Bubble Watch:

March 4 – Financial Times (Caroline Binham): “‘Shadow banking’ grew by nearly 8% globally to more than $45tn on a conservative measure after international rulemakers were able to include detailed data from China and Luxembourg for the first time. Shadow banking — the parts of the financial system that perform banklike functions such as lending but do not have the same safeguards — accounted for 13% of total global financial assets, according to the Financial Stability Board, the international group of policymakers and regulators that makes recommendations to the G20.”

March 6 – Wall Street Journal (Paul J. Davies): “Tax cuts and economic growth are spurring a spending spree by U.S. companies on deal making as well as share buybacks. But with some deals being done at big earnings multiples, companies and their investors may find they haven’t spent wisely when the dust eventually settles… Mergers and acquisitions announced by U.S. acquirers so far in 2018 are running at the highest dollar volume since the first two months of 2000, according to Dealogic… More than $325 billion worth of bids have been launched so far in 2018…, with all-cash offers outstripping all-share offers by three-to-one in dollar terms, highlighting the continued availability of cheap debt as well as the income boost to come from tax cuts.”

Europe Watch:

March 5 – Financial Times (James Politi): “Italian voters put their country on a potential collision course with the EU after delivering sweeping gains for populist and Eurosceptic parties in a general election that marked the biggest political upheaval in Europe since the Brexit vote in 2016. With Italy on course for a hung parliament, the populist Five Star Movement and anti-immigration Northern League party are likely to take a leading role in complex talks to form the next government. The outcome of protracted negotiations is likely to see Italy clash with Brussels on everything from budget rules to immigration. The governing centre-left Democratic party suffered a crushing defeat, forcing Matteo Renzi, leader and former prime minister, to resign while Silvio Berlusconi’s Forza Italia lost its leadership of the centre-right coalition.”

March 5 – Wall Street Journal (Eric Sylvers and Marcus Walker): “Italy entered a period of political instability… after national elections boosted populists but failed to produce a winner with enough support to patch together a parliamentary majority. Sunday’s two big winners—the 5 Star Movement and a center-right coalition including former Premier Silvio Berlusconi and the anti-immigrant League—each claimed Monday to have won enough support to earn the right to try to form a government. But with neither group having won an outright majority, Italy is likely to face weeks or months of consultations among the parties.”

March 6 – Reuters (Thomas Escritt and Michelle Martin): “Germany’s Social Democrats (SPD) decisively backed another coalition with Chancellor Angela Merkel’s conservatives on Sunday, clearing the way for a new government in Europe’s largest economy after months of political uncertainty. Two thirds of the membership voted ‘yes’ to the deal in a ballot — a wider margin than many had expected. That means Merkel could be sworn in for a fourth term as early as the middle of the month, in a repeat of the grand coalition that has governed since 2013.”

Japan Watch:

March 6 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s central bank chief said… a future exit from ultra-easy monetary policy would need to be ‘very gradual’, in comments analysts described as a bid to temper expectations about a near-term end to crisis-mode stimulus. Bank of Japan Governor Haruhiko Kuroda startled markets last week when he told lawmakers that the central bank could consider exiting easy policy if his inflation target was met in fiscal 2019 as projected… ‘When the BOJ exits, it will be a very gradual process … so as not to trigger a spike in long-term interest rates or a disruption in financial markets,’ Kuroda said…”

EM Bubble Watch:

March 5 – Financial Times (Jonathan Wheatley): “…Across the emerging world, businesses, households and governments loaded up on an estimated $40tn of cheap debt during the decade of loose monetary policy in the developed world that followed the global financial crisis. Now that period is nearing its end, and as the US continues its ‘normalisation’ of monetary policy… several analysts have questioned whether the emerging world’s debt pile is sustainable. ‘The premise on which lenders keep lending to borrowers as they become more indebted is that the backdrop will stay benign,’ says Sonja Gibbs, senior director for global capital markets at the… Institute of International Finance… With political uncertainty on the rise around the world, she says, ‘it feels more like there is the potential for events to trigger volatility in emerging markets than it has done for some time’.”

March 8 – Bloomberg (Justin Villamil and Taylan Bilgic): “Turkey’s credit rating was cut further into junk by Moody’s… on an erosion of institutional strength as well as more risk of external shocks and geopolitical risks. The lira weakened. Moody’s lowered the rating one notch to Ba2, two levels below investment grade… Moody’s analyst Kristin Lindow said… That leaves the nation on par with Brazil, Croatia and Costa Rica. The government of President Recep Tayyip Erdogan appears focused on short-term measures, undermining effective monetary policy and economic reform, Lindow wrote.”

Leveraged Speculator Watch:

March 6 – Bloomberg (Dani Burger): “A decades-old $350 billion pocket of quantitative money management may have met its match in February’s choppy markets — and it could get worse from here. Some quant investors are concerned that the most popular trend-following commodity trading advisers, more widely known as CTAs, are ill-equipped to handle a new era of steeper declines and sudden volatility spikes. The strategy, which rides price trends across asset classes, fell 6.4% in February, the worst month since 2001, according to a Societe General basket of the 20 largest managers…. Many programs that were built on data from nine years of relative market calm are breaking down, according to Quest Partners’s Nigol Koulajian.”

March 4 – Bloomberg (Klaus Wille): “The PruLev Global Macro Fund gave up almost one-third of last year’s 52% gain in February, after being caught out by the return of volatility. The fund, the world’s best performer last year among macro funds with assets of more than $100 million, lost 16%, mainly from stock bets…”

Geopolitical Watch:

March 6 – Bloomberg (David Tweed and Adrian Leung): “As lawmakers meet this week to cement Xi Jinping’s power at home, China’s president is also looking to boost his country’s military might abroad. He’s overhauled China’s military to challenge U.S. supremacy in the Indo-Pacific, most visibly with a plan to put half-a-dozen aircraft carriers in the world’s oceans. Still, Xi has a problem: He needs bases around the world to refuel and repair his global fleet. So far, China only has one overseas military base, compared with dozens for the U.S., which also has hundreds of smaller installations. In recent years China has stepped up efforts to challenge the U.S.’s military presence in the South China Sea, developing missiles to deter American warships and reclaiming land to build bases on the disputed Spratly Islands. It also started sending submarines and frigates into the Indian Ocean, opened its first overseas base in Djibouti and invested in ports around the region that could one day be used for military purposes.”

March 4 – Reuters (Pete Schroeder): “China said… that it would never tolerate any separatist schemes for self-ruled Taiwan and would safeguard China’s territorial integrity with the aim of ‘reunification’ with an island it considers its sacred territory. Premier Li Keqiang issued the warning in a speech at the opening of the annual session of China’s parliament, his stern words coming amid mounting Chinese anger over a U.S. bill that seeks to raise official contacts between Washington and Taipei.”

Weekly Commentary: Cracks

After posting an intra-week high of 25,800 on Tuesday, the DJIA then dropped 1,583 points (6.1%) at the week’s Friday morning low (24,217) – before closing the session at 24,538 (down 3.0% for the week). The VIX traded as low as 15.29 Tuesday. It then closed Wednesday at 19.85, jumped as high as 25.30 on Thursday and then rose to 26.22 in wild Friday trading, before reversing sharply to close the week out at 19.59.

Friday’s session was another wild one. The Nasdaq Composite rallied 2.6% off early-session lows to finish the day up 1.1%. The small caps were as volatile, with an almost 1% decline turning into a 1.7% gain. The Banks had a 2.8% intraday swing and the Broker/Dealers 2.4%. The Biotechs had a 3.7% swing, ending the session up 3.2%. The Semiconductors swung 3.3%, gaining 1.8% on the day.

Friday morning trading was of the ominous ilk. Stocks, Treasuries, commodities and dollar/yen were all sinking in tandem. The VIX was surging. Japan’s Nikkei dropped 2.5% in Friday trading, with Germany’s DAX down 2.3% and France’s CAC losing 2.4%. The emerging markets (EEM) were down as much as 1.7%. For the week, the DAX sank 4.6% and the Nikkei fell 3.2%. Curiously, bank stocks outside of the U.S. came under notable pressure. European banks (STOXX) dropped 3.5%, Hong Kong’s Hang Seng Financial Index 4.5% and Japan’s TOPIX Bank index 3.4%.

There are cracks – cracks in the U.S. and cracks spread globally. This week’s market gyrations suggest these interconnected fissures will not prove transitory. VIX traders on edge. Risk parity and the CTA community on edge. ETF complex? Everything’s turned correlated. Hedges have become expensive, and the Treasury hedge isn’t working. The yen has taken on a life of its own. Central bankers playing coy. How long can all of this hold together?

This was never going to end well. It’s just that raging bull markets are willing to disregard so much. Fully inebriated by the bottomless libation of easy money, markets in speculative blow-off mode gleefully ignore about everything. President Trump had stated he wanted tariffs. Fed Chairman Powell was clearly no clone of Drs. Yellen and Bernanke. The Bank of Japan couldn’t stick with experimental monetary inflation forever. U.S. tax cuts won’t transform either a flawed financial structure or maladjusted economy.

Speculative blow-offs and “Terminal Phase Excess” are fundamental to Bubble analysis. It’s important to appreciate these culminations of excess are manifestations of Monetary Disorder. Invariably, prolonged bouts of asset inflation and Bubble Dynamics were fueled by some underlying monetary disturbance. Monetary policies remained excessively loose, with rates held too low for too long, often out of fear of lurking fragilities. Over time, markets will disregard underlying vulnerabilities – or even be willing to conceive of them bullishly. After all, structural deficiencies ensure uninterrupted easy “money” and ever higher asset prices. Speculative leverage accumulates at compounding rates.

As the cycle extends and timid central banks dilly-dally, the gap widens dramatically between bullish perceptions and mounting systemic deficiencies – between inflating expectations and deteriorating fundamental prospects. This chasm, however, is well-masked by the remarkable inflation of perceived financial wealth, along with, let us not forget, the associated boosts in “money,” Credit and market liquidity.

What’s more, loose financial conditions and rapidly inflating asset markets stimulate economic activity, reinforcing misperceptions as to the underlying soundness of the boom. This Wealth Illusion becomes powerfully self-reinforcing throughout both the Financial and Real Economy Spheres. It is one of the great wonders of economic history – how everyone turns so blindly optimistic right before the bottom falls out.

Tremendous structural damage can be wrought during the “Terminal Phase.” Financial flows go haywire, the reign of speculation dominates, markets turn whimsical, resources are terribly misallocated and systemic risk expands exponentially. Meanwhile, over-liquefied markets see sentiment turn wildly bullish. Misperceptions are rife, as rapidly mounting risks go completely unrecognized. When the spell is inevitably broken and markets reverse sharply lower, suddenly comes the recognition that things are not as previously perceived. So much changes so abruptly, as greed swings to fear.

Over the years, CBB analysis has focused on three epic and interrelated experiments: 1) Unfettered market-based finance. 2) A de-industrialized financial/services/consumption-based U.S. economic structure. 3) Activist central bank monetary inflation and market manipulation.

These runaway experiments have combined to inundate the world with “money” (dollar balances), inflating historic asset Bubbles at home and abroad. Unhinged U.S. finance cultivated unhinged finance globally. A Friday headline from ZeroHedge: “Pat Buchanan Blasts ‘The Fatal Delusions of Western Man – We fed the Tiger, and Created a Monster…’” China is unequalled in terms of feeding off unfettered dollar-based finance while championing economic power, national wealth, military might and global ambitions. And not until Bubbles burst will we have a clearer understanding as to how much wealth has been redistributed and how much has been pilfered and destroyed – and to what regrettably great consequence.

Myriad global Bubbles have been fundamental to unprecedented wealth redistribution, inequalities and economic stagnation – potent fuel for populism and anti-globalization movements (Italian election Sunday). The backdrop has nurtured the rise of the strongman politician, dictator and despot. In a deeply divided world, seemingly the only common understanding is that central bankers and policymakers won’t tolerate market dislocation, recession or crisis.

March 2 – Bloomberg (Joe Deaux, Andrew Mayeda, Toluse Olorunnipa, and Jeff Black): “President Donald Trump pushed back against a wave of criticism against steel tariffs, telling the world that not only are trade wars good, they are easy to win. Trump is facing anger from manufacturers and trade partners in China and Europe after announcing tariffs of 25% on imported steel and 10% on aluminum for ‘a long period of time.’ The formal order is expected to be signed next week. ‘When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,’ Trump said in an early morning tweet on Friday.”

March 2 – Axios (Mike Allen and Jonathan Swan): “President Trump has long mused about doing what he wants, when he wants, how he wants. He wanted tariffs on steel and aluminum — big ones — now. He wanted to negotiate with Congress — in public, on his court, surprise and shock, all for the cameras. He wanted to ditch any P.C. pretenses and consider Singapore-style death for all drug dealers. He wanted to play by his rules alone. Why it matters: His staff at times managed to talk him off the ledge. No more. Tired of the restraints, tired of his staff, Trump is reveling in ticking off just about every person who serves him.”

Trump’s Tariffs should come as little surprise. Perhaps markets are finally beginning to come to terms with the disequilibrium and turmoil of the Trump presidency. Rumors have it that Wall Street darling Gary Cohen, having lost on tariffs, could be on his way out. It’s alarming to see the spectacle of the President referring to the Attorney General as “DISGRACEFUL,” and Mr. Sessions pushing back with “I will continue to discharge my duties with integrity and honor…”

Top aid and close confidante Hope Hicks abruptly resigned this week, with National Security advisor H.R. McMaster’s job said to be in jeopardy. Trump family members are under intense scrutiny, while chief of staff John Kelly has been under attack. After assailing the NRA and contemplating gun control, what might our President do next? Turn on the stock market? But hasn’t he used surging equities to define the incredible merits of his leadership? Commentators Friday on Bloomberg TV used “unleashed” and “rogue.” Not so easy to disregard the Washington spectacle when the markets are unsettled.

Fed Chairman Powell’s testimony should have provided little surprise. He impressed as a traditional central banker. It’s been awhile, and it sure was refreshing. Powell highlighted recent economic momentum and, as a disciplined central banker should at this point, demonstrated a resolve to move toward normalizing monetary policy. Our top central banker wasn’t going to belabor the nuances of academic discussions on employment demographics or r-star. No talk of the economy’s higher “speed limit” or of a “global savings glut.”

The new Chairman is not in awe and, at least to commence his term, seems disinclined to pander to the markets. With greed waning, the change in tone was difficult for an uncomfortable Wall Street to ignore. Markets have grown too accustomed to central bank chiefs with an academic view of “efficient” markets – scholars wedded to doctrine that it’s the role of central banks to bolster and backstop securities markets. Powell knows better. As the old saying goes, “he knows where the bodies are buried.” Wall Street fancies the naïve. FT: “‘Powell Put’ Assumption Challenged as Fed Chief Shows Hand.”

I believe Powell recognizes the perils associated with backstopping a speculative marketplace. That doesn’t mean he won’t be compelled to do it. At some point, he’ll have little choice. But it likely means he will not act in haste. The Powell Fed will be much more cautious in delivering market assurances. He was skeptical of QE in the past, and I’ll assume he knows he was right. He will resort to additional QE slowly and cautiously. Importantly, I believe the new Chairman will want to pull the Fed back to traditional central banking. His preference would be to conclude the monetary experiment – end the follies of “whatever it takes.”

February 27 – Bloomberg (Jeanna Smialek): “Call them the star wars. Debate is heating up over whether the Federal Reserve’s neutral interest rate — commonly called r-star — is about to head higher, and America’s monetary policy outlook hinges on who has it right. In one corner, San Francisco Fed President John Williams and his co-authors think long-term factors are holding down the interest rate that neither stokes nor slows growth, so the Fed will have to stop lifting rates this cycle at a historically low endpoint. In the other, Goldman Sachs chief economist Jan Hatzius thinks the recent decline owes to cyclical factors and could reverse meaningfully, allowing the Fed to lift rates higher next year. The intellectual showdown is relevant as Jerome Powell heads to Capitol Hill Tuesday for his first testimony as Fed Chair, and as central bank-watchers look eagerly for hints about how the new chief expects r-star to evolve.”

An incredible amount of intellectual effort is expended on “r-star,” the Philipps Curve, NAIRU (non-accelerating inflation rate of unemployment), and the like. “R-star” – the neutral rate – is a myth. There is no single aggregate price level – there is no equilibrium interest rate. Importantly, the three epic experiments completely altered price dynamics throughout finance and real economies. Inflation is no longer too much money chasing too few goods. Too much “money” – in this age of momentous technological advancement, globalization and changes in the nature of economic output – no longer manifests primarily in problematic consumer price inflation.

There are instead powerful inflationary biases in securities and asset markets. Too much “money” – and activist central bank support – chasing limited quantities of securities (and upscale homes, commercial real estate, art, collectibles, etc.) The academics need to discard “r-star.” Determining monetary policy based on some convoluted notion of aggregate consumer price indices (or economic equilibrium) in the current backdrop will ensure destabilizing loose finance for securities and asset markets.

In Powell’s testimony, there was mention of the long-accepted view that central banks should not be in the business of Credit allocation. Yet contemporary central bankers have gone so far as to conspicuously favor the securities markets. This is fundamental as to why financial stability risks now reign supreme. Central bankers should take a broad view of monetary stability and begin extricating themselves from the business of incentivizing financial flows and speculation into the markets. I know others disagree, but I believe the majority of central bankers would prefer to return back to traditional monetary management. After almost a decade, they’ve grown weary – of the experiment; rationalizing the experiment; justifying the experiment.

March 2 – Bloomberg (Toru Fujioka): “The Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, Governor Haruhiko Kuroda said Friday, marking the first time he’s provided any clear guidance on timing for normalizing policy. The yen surged, gaining as much as 0.5% to 105.71 per dollar, while yields on Japanese sovereign debt climbed across the curve. The Nikkei 225 Index closed 2.5% lower and the Topix Index fell 1.8%.”

For the Week:

The S&P500 fell 2.0% (up 0.7% y-t-d), and the Dow dropped 3.0% (down 0.7%). The Utilities sank 2.9% (down 7.8%). The Banks declined 2.0% (up 4.9%), while the Broker/Dealers were little changed (up 6.5%). The Transports fell 2.3% (down 2.6%). The S&P 400 Midcaps declined 1.3% (down 1.3%), and the small cap Russell 2000 dipped 1.0% (down 0.2%). The Nasdaq100 fell 1.2% (up 6.5%). The Semiconductors added 0.9% (up 8.8%). The Biotechs slipped 0.8% (up 10.3%). With bullion down $6, the HUI gold index declined 2.1% (down 10.0%).

Three-month Treasury bill rates ended the week at 1.61%. Two-year government yields were unchanged at 2.24% (up 36bps y-t-d). Five-year T-note yields added a basis point to 2.63% (up 42bps). Ten-year Treasury yields were little changed at 2.87% (up 46bps). Long bond yields declined two bps to 3.14% (up 40bps).

Greek 10-year yields declined three bps to 4.33% (up 25bps y-t-d). Ten-year Portuguese yields fell five bps to 1.99% (up 4bps). Italian 10-year yields sank 10 bps to 1.97% (down 5bps). Spain’s 10-year yields fell five bps to 1.55% (down 2bps). German bund yields were unchanged at 0.65% (up 22bps). French yields dipped a basis point to 0.92% (up 14bps). The French to German 10-year bond spread narrowed one to 27 bps. U.K. 10-year gilt yields dropped five bps to 1.47% (up 28bps). U.K.’s FTSE equities index dropped 2.4% (down 8.0%).

Japan’s Nikkei 225 equities index sank 3.2% (down 7.0% y-t-d). Japanese 10-year “JGB” yields gained two bps to 0.07% (up 2bps). France’s CAC40 dropped 3.4% (down 3.3%). The German DAX equities index sank 4.6% (down 7.8%). Spain’s IBEX 35 equities index lost 3.0% (down 5.1%). Italy’s FTSE MIB index dropped 3.4% (up 0.3%). EM markets were lower. Brazil’s Bovespa index declined 1.8% (up 12.3%), and Mexico’s Bolsa dropped 2.3% (down 3.7%). South Korea’s Kospi index fell 2.0% (down 2.6%). India’s Sensex equities index slipped 0.3% (unchanged). China’s Shanghai Exchange declined 1.0% (down 1.6%). Turkey’s Borsa Istanbul National 100 index dipped 0.6% (up 1.3%). Russia’s MICEX equities index fell 2.1% (up 8.5%).

Junk bond mutual funds saw outflows of $703 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained three bps to 4.43%, the high since January 2014 (up 33bps y-o-y). Fifteen-year rates jumped five bps to 3.90% (up 58bps). Five-year hybrid ARM rates declined three bps to 3.62% (up 48bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.61% (up 31bps).

Federal Reserve Credit last week declined $3.1bn to $4.366 TN. Over the past year, Fed Credit contracted $60.6bn, or 1.4%. Fed Credit inflated $1.555 TN, or 55%, over the past 278 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.9bn last week to $3.418 TN. “Custody holdings” were up $243bn y-o-y, or 7.6%.

M2 (narrow) “money” supply declined $5.1bn last week to $13.843 TN. “Narrow money” expanded $553bn, or 4.2%, over the past year. For the week, Currency dipped $1.2bn. Total Checkable Deposits fell $9.3bn, while savings Deposits were little changed. Small Time Deposits added $1.5bn. Retail Money Funds gained $3.2bn.

Total money market fund assets declined $2.0bn to $2.842 TN. Money Funds gained $164bn y-o-y, or 6.1%.

Total Commercial Paper slipped $2.7bn to $1.092 TN. CP gained $121bn y-o-y, or 12.4%.

Currency Watch:

The U.S. dollar index added 0.1% to 89.935 (down 2.4% y-o-y). For the week on the upside, the Japanese yen increased 1.1%, the Norwegian krone 0.8%, and the euro 0.2%. For the week on the downside, the South African rand declined 3.1%, the Canadian dollar 1.9%, the Mexican peso 1.4%, the British pound 1.2%, the Australian dollar 1.1%, the New Zealand dollar 0.9%, the Swedish krona 0.9%, the Brazilian real 0.5%, the Swiss franc 0.1%, the South Korean won 0.1% and the Singapore dollar 0.1%. The Chinese renminbi declined 0.13% versus the dollar this week (up 2.54% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.2% (down 0.2% y-t-d). Spot Gold slipped 0.5% to $1,323 (up 1.5%). Silver declined 0.5% to $16.466 (down 4.0%). Crude sank $2.30 to $61.25 (up 1%). Gasoline jumped 5.0% (up 6%), and Natural Gas gained 2.7% (down 9%). Copper sank 3.4% (down 5%). Wheat surged 7.7% (up 17%). Corn jumped 2.9% (up 9.8%).

Market Dislocation Watch:

February 27 – Financial Times (Yian Mui): “Federal Reserve Chairman Jerome Powell played down concerns about recent market volatility, arguing Tuesday that the dramatic swings do not weigh heavily on his outlook for the economy and maintaining his expectation for further gradual increases in interest rates. In Capitol Hill testimony, Powell emphasized that the job market remains robust, consumer spending is solid and wage growth is accelerating. He also highlighted gains in U.S. exports and stimulative fiscal policy as new ‘tailwinds’ for the economy. ‘After easing substantially during 2017, financial conditions in the United States have reversed some of that easing,’ he said… ‘At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation. Indeed, the economic outlook remains strong.’”

February 27 – CNBC (Jeff Cox): “February’s stock market correction probably would have been worse if companies had not stepped in to the fray. With both traders and retail investors selling at a frenzied level earlier this month, corporations swept in looking for bargains… As the month nears a close, companies have bought back $113.4 billion of their own shares, good for the highest total since April 2015, according to… TrimTabs. That’s part of an overall strong trend for buybacks, which stand at $5.8 billion a day during the current earnings season, a record.”

February 26 – Financial Times (Robin Wigglesworth and Lindsay Fortado): “Computer-driven, trend-following hedge funds are heading for their worst month in nearly 17 years after getting whipsawed when the stock market’s steady soar abruptly reversed into one of the quickest corrections in history earlier in February. Hedge funds known as ‘commodity trading advisers’ or managed futures funds — which surf the momentum of markets — got sucked into big bets on stocks from last year’s rally, which culminated in the strongest monthly equity fund inflows since 1987 in January. But the rally unravelled in dramatic fashion in early February, slamming trend-followers. Société Générale’s CTA index is down 5.55% this month…, making it the worst period for these systematic hedge funds since November 2001.”

February 27 – Bloomberg (Sid Verma): “Risk appetite is back with a vengeance. As U.S. stocks rose to a nearly four-week high on Monday, inflows into the benchmark exchange-traded fund for technology shares jumped to the second-most on record… Money managers sank at least $2.7 billion into the PowerShares QQQ Trust Series 1 ETF, which follows the Nasdaq 100 Index, bringing assets under management to an all-time high of $65.7 billion.”

February 27 – Bloomberg (Luke Kawa): “Options tied to exchange-traded products that allow investors to place bets on U.S. equity volatility are getting crushed in early trading on Tuesday. Late on Monday evening, ProShares announced that it would be dialing down the leverage on the Short VIX Short-Term Futures exchange-traded fund (ticker SVXY) — a product that offers exposure to market tranquility — and the Ultra VIX Short-Term Futures ETF (ticker UVXY), whose owners were making a levered wager that equity volatility would increase. Reducing the leverage on these funds will dampen their price swings going forward. The shifts also make it much less likely that any out-of-the-money options tied to these products would ultimately pay off.”

Trump Administration Watch:

February 25 – Axios (Jonathan Swan): “Bloomberg scooped on Friday that Trump wants the Commerce Department to seek the harshest maximum tariffs on global steel imports: 24%. I’m told that’s accurate, but with one small tweak: Sources tell me the president has told confidants he actually wants a 25% global tariff on steel because it’s a round number and sounds better. The big picture: Also, an official with knowledge of the trade discussions told me the White House is preparing to impose tariffs on a ‘shit ton’ — meaning, potentially hundreds — of Chinese products. They’ll avoid going through the World Trade Organization — which Trump doesn’t trust — and instead use Section 301 of the Trade Act of 1974 to unilaterally retaliate against China for stealing Americans’ intellectual property.”

March 1 – Bloomberg (Andrew Mayeda): “President Donald Trump is warning the U.S. will use ‘all available tools’ to prevent China’s state-driven economic model from undermining global competition, the latest warning to Beijing as America readies a host of trade actions. China hasn’t lived up to the promises of economic reforms it made when it joined the World Trade Organization in 2001, and actually appears to be moving further away from ‘market principles’ in recent years, according to the president’s annual report to Congress… China’s ‘statist’ policies are causing a ‘dramatic misallocation’ of global resources that is leaving all countries poorer than they should be, said the report.”

U.S. Bubble Watch:

February 27 – CNBC (Diana Olick): “Sky-high demand and record-low supply continued to push home prices higher in December, far faster than income growth. U.S. home prices increased 6.3% compared with December 2016, according to the… S&P CoreLogic Case-Shiller national home prices index. That is an increase from 6.1% annual growth in the previous month. The index measuring the nation’s 20 largest metropolitan markets rose 6.3% year over year… ‘The rise in home prices should be causing the same nervous wonder aimed at the stock market after its recent bout of volatility,’ David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, said… ‘Across the 20 cities covered by S&P Corelogic Case Shiller Home Price Indices, the average increase from the financial crisis low is 62%; over the same period, inflation was 12.4%. Even considering the recovery from the financial crisis, we are experiencing a boom in home prices.’ The boom is strongest in Seattle, Las Vegas and San Francisco…”

March 1 – Bloomberg (Sho Chandra): “Americans’ wallets fattened in January on recent tax cuts, indicating increased spending power may boost the economy this quarter. Real disposable income, or earnings adjusted for taxes and inflation, advanced 0.6% from the prior month, the biggest gain since April 2015… Nominal consumer spending grew 0.2%, matching the median forecast… and following a 0.4% gain. The Federal Reserve’s preferred price gauge, excluding food and energy, had the biggest monthly increase in a year.”

February 28 – Bloomberg (Sarah McGregor): “Foreign holdings of U.S. securities rose to a record $18.4 trillion as of the end of June… An annual survey of foreign portfolio investments — including U.S. stocks along with short-and long-term debt — showed holdings rose by 8%, up from $17.1 trillion a year earlier… Japan was largest investing country with $2 trillion, followed by the Cayman Islands at $1.7 trillion and the U.K. and China at about $1.5 trillion each. Luxembourg rounded out the top five at $1.4 trillion. Foreign holdings of U.S. equities climbed to $7.2 trillion as of June 30, from $6.2 trillion a year earlier. Short-term debt holdings increased to $954 billion from $909 billion, while long-term debt holdings rose to $10.3 trillion from $10 trillion…”

March 1 – Wall Street Journal (Akane Otani, Richard Rubin and Theo Francis): “U.S. companies are buying back their shares at an aggressive pace, stirring debates in Washington and on Wall Street about how savings from corporate tax cuts are being used and who benefits most. Share buybacks announced by large U.S. companies have exceeded $200 billion in the past three months, more than double the prior year, according to a Wall Street Journal analysis of data for S&P 500 companies. Among the biggest: Cisco Systems Inc. at $25 billion, Wells Fargo & Co. at about $21 billion, PepsiCo Inc. at $15 billion, AbbVie Inc. and Amgen Inc. at $10 billion apiece, and Alphabet Inc. at $8.6 billion.”

February 25 – Reuters (Eric M. Johnson and Chris Prentice): “The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills Inc and Hormel Foods Corp to spend more on deliveries and consider raising their own prices as a way to pass along the costs. Interviews with executives at 10 companies across the food, consumer goods and commodities sectors reveal that many are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate.”

February 26 – Bloomberg (Sho Chandra): “U.S. sales of new homes unexpectedly fell in January to the lowest level since August as borrowing costs rose and winter weather depressed demand… Single-family home sales dropped 7.8% m/m to 593k annualized pace (est. 647k) after 643k rate (revised from 625k)… The results, which are volatile on a month-to-month basis, showed a 14.2% slump in the South, the largest decrease since March 2015 and a sharp decline in the Northeast. The two areas experienced inclement weather.”

February 27 – Bloomberg (Shelly Hagan and Sho Chandra): “U.S. consumer confidence jumped to a 17-year high as optimism about employment prospects grew and Americans began seeing additional money in their paychecks from recently enacted tax cuts, data from the… Conference Board showed… Confidence index rose to 130.8 (est. 126.5), highest since Nov. 2000, from downwardly revised 124.3 in January. Present conditions measure climbed to 162.4, highest since 2001, from 154.7.”

February 28 – Bloomberg (Luke Kawa): “The high-flying technology sector hit a potentially ominous milestone on Tuesday: It now amounts to more than 25% of the S&P 500 Index. ‘It’s the first time the sector has made up at least a quarter of the S&P since a one-year period that ran from Thanksgiving 1999 through Thanksgiving 2000,’ according… Bespoke Investment Group. ‘Notably, the weighting only got above 25% for the final four months of the dot-com bubble when share prices were going insane.’”

February 25 – Wall Street Journal (Michael Wursthorn and Chelsey Dulaney): “Investors borrowing record sums to bet on stocks exacerbated this month’s selloff, after they were hit with calls to reduce those obligations and forced to sell shares to raise cash. If that debt, known as margin loans, continues to rise at the current pace, analysts warn that big selloffs and sudden bouts of volatility in the stock market could become more commonplace. Retail and institutional investors have borrowed a record $642.8 billion against their portfolios…, as they try to pocket bigger gains by ramping up their exposure to stocks.”

Federal Reserve Watch:

March 1 – Financial Times (Joe Rennison and Nicole Bullock): “The Powell Put has a nice ring to it. After years of being able to count on having the Federal Reserve in their corner, investors had assumed it would be more of the same from the new Fed chair. Yet as Jay Powell, who has been a Fed governor since 2012 and spent almost 20 years as a partner at private equity firm Carlyle, publicly outlined his views on policy for the first time since succeeding Janet Yellen that assumption was under threat. In a marked departure from the more academic tone of his immediate predecessors in the Fed chair, the 65-year old signalled to Congress a willingness to look beyond bursts of volatility in financial markets and would tighten policy against a backdrop of a strengthening economy that may in due course reveal signs of overheating.”

February 27 – Bloomberg (Craig Torres and Christopher Condon): “Jerome Powell opened the door to the Federal Reserve raising U.S. interest rates four times this year as he acknowledged stronger economic growth may prompt policy makers to rethink their plan for three hikes. ‘My personal outlook for the economy has strengthened since December,’ the Fed chairman said Tuesday in response to a question about what would cause the central bank to step up the pace of policy tightening. He then listed four events that are causing him to revise up his outlook.”

February 25 – Bloomberg (Rich Miller and Shelly Hagan): “Federal Reserve Chairman Jerome Powell and his colleagues may be willing to accept inflation rising as high as 2.5% as they seek to extend the almost nine-year economic expansion. So say a number of veteran Fed watchers who argue that the central bank’s Federal Open Market Committee would tolerate a moderate rise in inflation above its 2% goal after years of falling below that objective… ‘I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot’ as long as it’s below 2.5%, former Fed governor Laurence Meyer said…”

February 26 – Financial Times (Sam Fleming): “The US may be on the cusp of a shift to higher sustained growth, pointing to a possible rise in the interest rate needed to maintain stable prices and full employment, a senior Federal Reserve policymaker said… Randal Quarles, the vice-chairman for financial supervision at the Fed’s board of governors, told a conference that growth may outpace central bankers’ forecasts as post-crisis drags abate… A jump in the growth rate to a durably faster pace could lead to a rise in the so-called natural rate of interest — the rate that keeps the economy on an even keel…. ‘There is a real possibility that some of the factors that have been holding back growth in recent years could shift, moving the economy on to a higher growth trajectory,’ Mr Quarles told the National Association for Business Economists…”

China Watch:

February 25 – Financial Times (Jamil Anderlini): “In the aftermath of Chairman Mao Zedong’s disastrous personality cult, Chinese paramount leader Deng Xiaoping recognised the dangers of totalitarian dictatorship. In the early 1980s Deng set about establishing a system that relied on competent governance, co-opting the elite and consensus rule at the top. China was still an autocracy but it incorporated and empowered enough interest groups to provide basic political stability and stellar economic growth, with just one big exception in 1989. That system, which has served China so well for decades, has now been swept away. On Sunday, the Communist party announced it would remove term limits on the presidency, allowing Xi Jinping to rule for life if he wants.”

February 26 – Financial Times (Lucy Hornby): “China’s Communist party has cleared the way for President Xi Jinping to rule for life, and in the process strengthened the state’s ‘command and control’ power over the world’s second-largest economy. Mr Xi’s unparalleled power theoretically allows him to push through painful reforms in the face of recalcitrant vested interests, particularly in state-dominated sectors… When Mr Xi took over the Communist party in 2012, bureaucrats hastened to reassure foreign businesses and diplomats that the president was merely consolidating power to enact economic reforms. So far economic liberalisation has been slow to materialise. ‘Xi believes that he is ideally suited to keep China politically and economically strong in coming decades and he is trying to make sure his power is equal to the task,’ says Andrew Collier, managing director at Orient Capital Research. Mr Xi’s advisers are aware the country faces the end of its demographic boom and a growing debt problem, he adds.”

February 28 – Financial Times (Hudson Lockett): “China’s official gauge of manufacturing activity suffered its largest fall since 2011 in February, an unexpectedly sharp slowdown that left it near the zero-growth level. The manufacturing purchasing managers’ index… dropped to 50.3, down a point from January and the largest fall in more than six years. The fall marked the gauge’s nearest brush with the 50-point mark that separates growth from contraction since August 2016.”

February 28 – Bloomberg: “China plans to expand its unprecedented crackdown on financial risk to money-market funds by capping how much investors can redeem in a day, people familiar with the matter said. The limit for same-day redemption will be set at 10,000 yuan ($1,580)… The same restriction will apply when investors use their assets in money-market funds directly for payment and consumption… Such a move would be the latest tightening by China’s policy makers, who are making stability job No. 1 as they work to balance continued expansion with defusing the country’s debt bomb.”

February 23 – Reuters (Josephine Mason and Pei Li): “China’s new home prices grew in January although major cities saw early signs of softening, as the government continued its efforts to rein in speculative demand to fend off bubble risk. The acceleration in prices across the nation suggests moves by provincial governments to support first-time buyers and upgraders by relaxing some purchase restrictions may be further fanning price gains in a market where fear of missing out is strong and mortgage fraud is rampant. Average new home prices in China’s 70 major cities rose 5% in January from a year earlier and 0.3% month on month…”

February 28 – Reuters (Michael Martina and Patricia Zengerle): “China expressed anger on Thursday after the U.S. Senate passed a bill promoting closer U.S. ties with Taiwan, but the step drew praise from the self-ruled island which pledged to deepen cooperation. The move adds to tensions between China and the United States, already at loggerheads over trade, with President Xi Jinping’s close economic advisor Liu He in Washington this week to try and avert a trade war.”

February 23 – Wall Street Journal (Nathaniel Taplin): “China’s Anbang Insurance went from zero to too-big-to-fail in the blink of an eye. It is a lesson in how quickly China’s financial problems grow—and how much is left to clean up. Beijing said Friday that the state is taking direct control of Anbang Insurance Group, the acquisitive purveyor of unusual investment products whose high-flying chairman Wu Xiaohui was detained last summer amid a broader crackdown on debt… The total cost of cleaning up the mess, including whatever losses sit on Anbang’s gargantuan balance sheet—put at close to 2 trillion yuan ($300bn) in April by financial magazine Caixin—is an unknown.”

March 1 – Bloomberg (Keith Zhai and Alfred Cang): “President Xi Jinping’s government has fired another warning shot at global dealmakers doing business with Chinese billionaires: Not even the most well-connected tycoons are safe. Ye Jianming, a globe-trotting Chinese tycoon who runs the conglomerate CEFC China Energy Co., has been investigated by authorities, according to people with knowledge… The news, first reported by local media outlet Caixin, comes shortly after Xi’s government seized Anbang Insurance Group Co., a global empire whose once-influential founder, Wu Xiaohui, is detained while facing fraud charges.”

Central Bank Watch:

March 2 – Bloomberg (Lucy Meakin and Edward Robinson): “Mark Carney is calling for greater regulation to bring the era of cryptocurrency “anarchy” to an end. ‘The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system,’ the Bank of England governor said… Carney, who is also head of the Financial Stability Board, joins a growing chorus calling for greater oversight of the technology after the explosion of new cryptocurrencies created more than $438 billion in paper wealth since March 2, 2017…”

Global Bubble Watch:

February 28 – Financial Times (Eric Platt and Joe Rennison): “Some of the biggest international buyers of US corporate debt are showing signs of stepping back from this $8.8tn market, reflecting expectations of a bigger shift under way: the retreat of central banks from the era of easy money. In contrast to Europe and Japan, the fixed yields paid to holders of US corporate debt has long been much higher, an attractive proposition to global investors until late last year. International investors were net sellers of US corporate paper in December, only the second time this has occurred in the past three years as the rising cost of insulating their portfolios against swings in the dollar erodes the attraction of high US bond yields. ‘[Foreign] investors are seeing their net returns post-hedge eroded,’ says Steven Oh, global head of credit and fixed income at PineBridge Investments. ‘And because they are losing that yield differential, they are going to rethink not only their allocation to US credit but going forward [if] they actually withdraw.’”

February 28 – Wall Street Journal (Jon Sindreu): “The rise in Treasury yields should make U.S. debt more attractive to international investors still struggling with low returns at home—yet few are buying. The rising costs of currency hedges means it often isn’t worth it… Last year, buying Treasurys and swapping the proceeds back into euros provided European investors with a higher return than buying German sovereign bonds. Now, hedging costs have increased so much that this trade is no longer profitable. That could sap an important source of demand for U.S. Treasurys. It’s also making it more expensive for foreign investors to buy U.S. corporate debt.”

February 25 – Financial Times (Javier Espinoza): “Private equity groups are buying public companies at the fastest rate since before the financial crisis, with deals totalling $180bn last year, nearly twice the level of 2016, according to Bain & Co. The jump in dealmaking is the largest increase since 2007 and comes as the sector is under pressure to deploy record sums of cash… Bain… said in its global report that the number of ‘public-to-private’ deals, where a private equity group buys a listed company, hit 152 last year, up from 94 in 2016. The all-time high of 196 transactions was hit in 2007, while the record value for such deals was $423bn in 2006.”

March 1 – Bloomberg (Emily Cadman): “Australian home prices fell for a fifth consecutive month in February, in a further sign the property boom is over. Housing prices fell 0.1% nationally, led by a 0.6% decline in Sydney, according to CoreLogic… Prices in Sydney, the epicenter of the boom, are down 0.5% from a year earlier — the first annual decline since 2012.”

February 28 – Wall Street Journal (Jean Eaglesham and Paul Vigna): “The Securities and Exchange Commission has issued dozens of subpoenas and information requests to technology companies and advisers involved in the red-hot market for cryptocurrencies, according to people familiar with the matter. The sweeping probe significantly ratchets up the regulatory pressure on the multibillion-dollar U.S. market for raising funds in cryptocurrencies. It follows a series of warning shots from the top U.S. securities regulator suggesting that many token sales, or initial coin offerings, may be violating securities laws.”

Fixed-Income Bubble Watch:’

February 27 – Wall Street Journal (Kosaku Narioka and Saumya Vaishampayan): “Japanese investors may be America’s bond bears. They are shifting toward selling U.S. Treasury bonds and other dollar-based debt after fears have picked up in recent weeks that the Trump administration’s budget and other policies add up to a weak dollar… Any questioning in Tokyo of the dollar or of the U.S. Treasury is significant because Japanese holders including the government own nearly $1.1 trillion in Treasury bonds, a close second to China. For years, the U.S. economy has relied on Japan and China to recycle their trade surpluses back into the U.S. by buying American debt. Japan’s suspicions were fanned by Treasury Secretary Steven Mnuchin’s remark in January that ‘a weaker dollar is good for trade.’”

February 27 – Bloomberg (Sid Verma and Luke Kawa): “Investors reaching for yield are now finding it’s less of a stretch. Global credit markets are on the cusp of a post-crisis regime shift as higher rates on short-dated U.S. Treasuries challenge the investment case for high-grade corporate bonds — on both sides of the Atlantic. Consider this: The Vanguard short-term corporate bond exchange-traded fund, which holds U.S. investment grade debt with a maturity of less than five years, now has an indicated dividend yield only 0.54 percentage point above that of the three-month Treasury bill. That represents a tiny pickup compared with a whopping 2 percentage points in early 2017.”

February 28 – Financial Times (Eric Platt and Joe Rennison): “US short-dated bank bonds have been in the line of fire in recent weeks and this selling pressure reflects tax reform, analysts say, rather than a change in traders’ beliefs about the creditworthiness of financials. Companies with large amounts of offshore cash from their global operations placed the money in US government and corporate bonds. Now as the cash appears set to come home thanks to changes in US tax law, the first signs of liquidation are being seen. Many big multinationals invested primarily in corporate bonds and the likes of Apple, for example, were large buyers of short-term bank bonds… Highlighting a sell-off, risk premiums rose for senior unsecured bonds issued by Bank of America, Citigroup and JPMorgan…”

Europe Watch:

March 1 – Reuters (Markus Wacket): “Germany’s Social Democrat (SPD) environment minister said on Thursday she expects party members to support a new coalition government with Chancellor Angela Merkel’s conservatives by a margin of 60%. The SPD’s 464,000 members are voting in a postal ballot on whether to endorse their party leadership’s decision to renew for another four years the ‘grand coalition’ that took office in 2013. The result of the postal ballot is due on Sunday.”

March 1 – Financial Times: “It is a mark of the impatience of Italian voters that Silvio Berlusconi is poised to stage a political resurrection in Italy’s March 4 elections. The disgraced tycoon and former prime minister is barred from holding office as a result of a conviction for tax fraud, at least until 2019. Whatever the fate of the alliance between his Forza Italia party, the resurgent populist nationalist Northern League, and smaller far-right Brothers of Italy in a centre right coalition, he remains the potential kingmaker. Strikingly, given the extreme views of his fellow travellers, Mr Berlusconi’s own past outbursts and indiscretions seem relatively moderate. Sunday’s polls are the most significant in this year’s European calendar, testing the resilience of the populist nationalist vote, and long-term future of the centre-left. They have a bearing on the future of the eurozone, on the precarious fortunes of its third-largest economy and on Europe’s response to migration.”

February 28 – BBC: “An EU proposal for the Northern Ireland border threatens the ‘constitutional integrity’ of the United Kingdom, Theresa May has said. The EU’s draft legal agreement proposes a ‘common regulatory area’ after Brexit on the island of Ireland – in effect keeping Northern Ireland in a customs union – if no other solution is found. Mrs May said ‘no UK prime minister could ever agree’ to this. The EU says the ‘backstop’ option is not intended to “provoke” the UK.”

Japan Watch:

February 28 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… that once the central bank starts to normalize monetary policy the process would be ‘very gradual,’ and that the BOJ would pay attention to any risks to the economy. Speaking in the lower house of parliament, Kuroda said the BOJ would not continue with its aggressive monetary easing when inflation reached its price target and the economy was growing stably.”

EM Bubble Watch:

February 27 – Bloomberg (Selcuk Gokoluk): “Developing-nation borrowers are raising more money in local markets than ever before… Local-currency bond sales in emerging markets this year exceeded $1 trillion, almost triple the amount raised in the same period last year and dwarfing the $160 billion in hard-currency issues… Domestic sales have increased almost five-fold in the past five years.”

Leveraged Speculator Watch:

March 1 – Bloomberg (John Ainger): “Hedge-fund veteran Paul Tudor Jones has joined the growing chorus of big hitters in the fixed-income world warning that bonds are well and truly in a bear market. He sees 10-year U.S. Treasury yields rising to 3.75% by year-end as a ‘conservative’ target given that supply outweighs demand, economic momentum is outpacing the monetary policy response, and that bond valuations are ‘glaring.’ That puts him in the company of Bill Gross and Ray Dalio who say the days of a bond bull market are over.”

February 28 – Bloomberg (Scott Deveau): “One of the longest and most colorful battles in Wall Street history is over, and Bill Ackman lost. Ackman has almost entirely exited his position in Herbalife Ltd., ending a short-selling campaign that lasted more than five years… The move follows a steady rise in the shares of a company that he repeatedly called an illegal pyramid scheme and vowed to destroy.”

Geopolitical Watch:

February 28 – Wall Street Journal (Sune Engel Rasmussen): “The demise of Islamic State is intensifying a scramble among foreign powers in Syria, raising the risk that diverging strategic and commercial interests could lead to a wider regional war. In the past month, a U.S. airstrike in the eastern part of the country killed an unknown number of Russian military contractors; Israel hit Iranian military installations deep inside Syria; while Turkey waged a campaign against Kurdish militias in the north. The volatile situation is a result of how the fight against Islamic State was conducted, with players seizing territory, arming proxies and aggravating long-existing ethnic and political divisions. The result: a series of flashpoints where clashes could erupt among major powers and spill over Syria’s borders. ‘No one wants that war, but everyone is ready for it and expects it,’ said Emile Hokayem, a Syria expert at the International Institute for Strategic Studies in London.”

February 27 – Financial Times (Ben Bland): “While Beijing was outlining the path for Xi Jinping to rule as China’s president for life, Tsai Ing-wen, his democratically elected counterpart in Taiwan, was speaking about the importance of universal human rights at a Holocaust memorial ceremony in Taipei. But Mr Xi’s concentration of power — unparalleled since the era of Mao Zedong — represents a growing threat to Taiwan’s efforts to maintain de facto independence, in the face of Beijing’s insistence that the island is part of its territory, and to the embattled democracy movement in neighbouring, semi-autonomous Hong Kong. ‘Xi Jinping has largely been the author of fairly hard-line policies toward [Hong Kong and Taiwan],’ said William Stanton, a former US diplomat… ‘The problem with all dictators is that no one can put a brake on anything they want to do.’”

March 1 – Bloomberg (Ben Blanchard and Yimou Lee): “China warned Taiwan on Friday it would only get burnt if it sought to rely on foreigners, adding to warnings from state media the country could go to war over Taiwan if the United States passes into law a bill promoting closer U.S. ties.”