Sunday, October 23, 2016

Monday's News Links

[Bloomberg] Stocks Rise With Bonds as Europe Lifts Market With Triple Boost

[Bloomberg] Offshore Yuan Nears Record Low as PBOC Seen Tolerating Declines

[Bloomberg] Most Asian Emerging Currencies Decline as China's Yuan Weakens

[Reuters] Fed's Bullard says one rate increase is all that's needed for now

[Bloomberg] Most Crowded Trade in Bonds Is a Powder Keg Ready to Blow

[Bloomberg] China Rate Swaps Rise to Six-Month High as PBOC Curbs Leverage

[Bloomberg] China Tackles Bad Debt by Allowing More Asset Firms, News Says

[Bloomberg] Japan’s Exports Drop for 12th Month in Dismal Year for Trade

[Reuters] Euro zone October business growth buoyant, prices rise: PMIs

[Bloomberg] Brazil Economists Trim Economic Growth Outlook for 2016 and 2017

[CNBC] Santoli: Overcrowded ETF market headed for a shakeout

[WSJ] Subprime Credit Card Surge Pushing Up Missed Payments

[WSJ] Sputtering Startups Weigh on U.S. Economic Growth

[Reuters] As China plenum opens, party paper says 'core' leadership needed

[WSJ] Investors’ New Message to Global Governments: Spend More

[WSJ] Russians Conduct Nuclear-Bomb Survival Drills as Cold War Heats Up

Sunday Evening Links

[Bloomberg] Asia Stocks Signal Mixed Open Ahead of Earnings; Euro Holds Lows

[Dow Jones] Bankruptcy Bust: How Zombie Companies Are Killing the Oil Rally

[Bloomberg] Fake Divorce Is Path to Riches in China’s Hot Real Estate Market

[Bloomberg] German Momentum Grows for Curbs on Chinese Overseas Investment

[Bloomberg] How China's Dealmakers Pulled off a $207 Billion Global Spree

[CNBC] Ultra-wealthy still interested in buying real estate despite slowdown, uncertainty

Sunday's News Links

[Reuters] Banks preparing to leave UK over Brexit, says banking body chief executive

[Reuters] Italy's front line in fight to save banks: a storage room

[WSJ] China’s Xi Jinping Seeks Safety in Numbers—Or Else

[WSJ] China Banking Regulator Seeks Fresh Limits on Property Lending

Saturday, October 22, 2016

Saturday's News Links

[Verge]  How an army of vulnerable gadgets took down the web today

[NYT] Hackers Used New Weapons to Disrupt Major Websites Across U.S.

[Spiegel] A Precarious Alliance Takes on Islamic State

Weekly Commentary: The Latest on China's Mortgage Finance Bubble

It’s been a full seven days since a CBB focused on China… Important – confirmation of the thesis - data again this week.

October 21 – Reuters (Yawen Chen and Nicholas Heath): “China's new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October. The boom in sales and prices was evident in mortgage lending, with new housing loans to individuals totaling 475.9 billion yuan in September alone, some 76% higher than the same month last year… Prices in China's 70 major cities rose 11.2% in September from a year earlier, accelerating from a 9.2% increase in August, as 64 of them saw year-on-year price gains…”

Year-on-year prices were up 34.1% in Shenzhen, 32.7% in Shanghai, and 27.8% in Beijing.

Also from Reuters: “The house-prices-to-household-disposable-income ratio in first-tier cities has risen to be around 18 to 20 times in this year's housing fever, putting housing affordability close to Hong Kong's and making it less affordable than London, UBS wrote…”

October 19 – Wall Street Journal (Lingling Wei): “Xiong Meifang was about $30,000 short two months ago for a 30% down payment on an $895,000 apartment in the southern part of China’s capital. To make up the difference, the 31-year-old graphic designer took out a line of credit from a national bank. She said the bank told her she could use the loan however she wanted. China bans borrowing for down payments. A surge in such financing offered by nonbank lenders earlier this year led to a regulatory clampdown. But as banks increasingly turn to mortgage lending, there are new signs of risky practices. In some instances, banks offer credit lines to borrowers buying apartments with few questions asked. In others, banks work with independent loan brokers or property agents to funnel money into down-payment financing… Data released Tuesday showed medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”

The above noted WSJ article, "China’s Property Frenzy Spurs Risky Business" (Lingling Wei), included some insightful data and a particularly interesting chart. While briefly dipping below 10% in 2012, new mortgage loans as a share of the value of total new loans averaged around 20% for much of the period 2010 through 2015 – before spiking over recent quarters. “…medium- and long-term household loans, almost all of which are mortgages, made up 60% of all new loans created in the third quarter, up from 47% in the second quarter and 23% in the first.”

The article also included a graphic, “Number of years of median household income needed to buy a property of median value.” Here, Chinese cities are compared to some of the more notoriously expensive markets in the world: London 29 years, Tokyo 23, New York 15 and Sydney 12. With China’s Credit Bubble now spurring rampant housing inflation, Shenzhen has shot to the top of the list at 41 years, followed by Beijing (34) and Shanghai (32). Guangzhou made the list at 25 years, followed by Nanjing (22) and Hangzhou (17).

Not a big surprise, China’s September loan growth was reported at a level double forecasts.

October 18 – AFP: “New loans by Chinese banks in September surged nearly 30% from the previous month…, deepening concern about risky credit expansion in the world’s second largest economy. New loans extended by banks jumped to 1.22 trillion yuan ($181.3bn) last month from 948.7 billion yuan in August… Beijing has relied on stimulus measures such as loose credit to boost the economy, which faces a tough structural transition and sluggish global demand. But the rapid rise in borrowing has sparked alarm.”

Fueled by a surge in housing-related finance, September Total Social Finance (total Credit excluding govt bonds) surged to almost $250 billion, about a third larger than forecast. This was the strongest Credit expansion since (“off the charts”) March ($360bn).

October 18 – Bloomberg: “The value of China’s new home sales rose 61% in September from a year earlier, defying policymakers’ moves earlier this year to cool the property market. The value of homes sold rose to 1.2 trillion yuan ($178bn) last month from a year earlier… The increase compares with a 33% gain the previous month.”

“CTV.” During the U.S. mortgage finance Bubble heyday period, I regularly highlighted a “Calculated Transaction Value” that I pulled from my spreadsheet of National Association of Realtors data (sales volumes by average prices). A Bubble’s manic phase sees a powerful surge in the number of transactions - at rapidly inflating prices. This explains how the value of China’s September home sales inflated 61% from September 2015, with “new housing loans to individuals” up 76% y-o-y.

I viewed CTV as the leading indicator of systemic risk associated with mortgage Bubble excess. For one, it provided a timely barometer of the general tenor of Credit growth. It was clearly the best gauge of the “inflationary bias” at work throughout housing. Parabolic growth in CTV also accurately reflected the commencement of “Terminal Phase” excess.  Moreover, the historic surge of (borrowed) “money” into housing was indicative of destabilizing speculative excess, loose Credit conditions and, more generally, the degree to which financial stimulus was fueling economic imbalances.

It’s my view that the world is at the critical late-stage of a historic multi-decade Credit Bubble. China has become integral to the global Bubble – the marginal source of Credit and global finance. And in the face of a faltering Bubble Economy and increasingly vulnerable Chinese financial system, China’s mortgage finance Bubble has evolved into the predominant source of stimulus. Record Chinese Credit growth is the biggest global financial and economic story of 2016.

There’s a fundamental problem with speculative melt-ups and Credit Bubble “Terminal Phases:” They are invariably unsustainable. A torrent of Credit-driven liquidity inflates prices to unsustainable levels. Mortgage finance Bubbles are especially dangerous. They tend to be powerfully self-reinforcing, with Credit expanding exponentially during the precarious “Terminal Phase.” Fear and panic, as we’ve witnessed, can rather quickly see massive Credit expansion transformed into collapse.

It’s now been years of Chinese officials tinkering with an increasingly impervious Credit Bubble. They remain too timid, and I’d be surprised if current measures to slow housing markets have a dramatic impact. More likely, Chinese Credit continues to grow rapidly over the coming months. The much higher interest rates needed to slow rampant mortgage Credit excess are viewed as completely incompatible with a struggling general economy. Instead, it appears China will tolerate booming mortgage Credit as it systematically devalues its currency.

According to Zerohedge, a Goldman analyst (MK Tang) estimated that flows out of China surged to $78 billion during September, up from August’s estimated $32 billion. This would be the highest outflows since January. The Chinese currency weakened another 60 bps versus the dollar this week, putting the year-to-date devaluation to a not insignificant 4.2%.

Perhaps booming Chinese Credit and strong financial outflows are behind a growing inflationary bias taking hold in global markets. Crude traded near 15-month highs this week. This week in the currencies, the South African rand jumped 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6% and the Russian ruble 0.9%. Brazilian stocks surged 3.8%, and Mexican stocks jumped 1.5%.

Along with EM, markets are looking at bank stocks through more rose-colored glasses. European banks jumped 5.1% this week, with Italian bank surging 7.3%. U.S. bank stocks rose 3.5%. The European periphery also rallied strongly this week, with Spanish and Italian stocks up 3.8% and 3.5%.

And while global yields have risen over the past month, bonds don’t seem all that fearful of an inflation resurgence. Recall 2007, and how the bond market had smelled out the loaming mortgage bust. Yields dropped, basically ignoring stocks (and crude) as equities went to all-time highs. What I remember most from that period was how monetary disorder created heightened instability across the markets right up until the crisis.

For the Week:

The S&P500 added 0.4% (up 4.8% y-t-d), while the Dow was about unchanged (up 4.1%). The Utilities gained 0.5% (up 11.7%). The Banks surged 3.5% (up 0.8%), and the Broker/Dealers increased 0.2% (down 2.4%). The Transports slipped 0.2% (up 6.9%). The S&P 400 Midcaps gained 0.5% (up 9.2%), and the small cap Russell 2000 rose 0.5% (up 7.2%). The Nasdaq100 gained 0.9% (up 5.6%), and the Morgan Stanley High Tech index advanced 1.1% (up 10%). The Semiconductors recovered 0.6% (up 22.8%). The Biotechs rallied 0.8% (down 19.8%). With bullion up $15, the HUI gold index surged 8.2% (up 94%).

Three-month Treasury bill rates ended the week at 32 bps. Two-year government yields slipped a basis point to 0.82% (down 23bps y-t-d). Five-year T-note yields fell five bps to 1.24% (down 51bps). Ten-year Treasury yields dropped seven bps to 1.73% (down 52bps). Long bond yields fell eight bps to 2.48% (down 54bps).

Greek 10-year yields rose six bps to 8.28% (up 96bps y-t-d). Ten-year Portuguese yields dropped 11 bps to 3.16% (up 64bps). Italian 10-year yields slipped a basis point to 1.37% (down 22bps). Spain's 10-year yields declined one basis point to 1.11% (down 66bps). German bund yields dropped five bps to 0.00% (down 62bps). French yields fell five bps to 0.28% (down 71bps). The French to German 10-year bond spread was unchanged at 28 bps. U.K. 10-year gilt yields were unchanged at 1.09% (down 87bps). U.K.'s FTSE equities index was little changed (up 12.5%).

Japan's Nikkei 225 equities index rallied 1.9% (down 9.7% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to negative 0.07% (down 33bps y-t-d). The German DAX equities index rose 1.2% (down 0.3%). Spain's IBEX 35 equities index surged 3.8% (down 4.6%). Italy's FTSE MIB index jumped 3.5% (down 19.9%). EM equities were mostly higher. Brazil's Bovespa index surged 3.8% (up 48%). Mexico's Bolsa gained 1.5% (up 12.7%). South Korea's Kospi increased 0.5% (up 3.7%). India’s Sensex equities jumped 1.5% (up 7.5%). China’s Shanghai Exchange rose 0.9% (down 12.7%). Turkey's Borsa Istanbul National 100 index jumped 1.7% (up 9.9%). Russia's MICEX equities index slipped 0.4% (up 11.1%).

Junk bond mutual funds saw outflows of $160 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps last week to a four-month high 3.52% (down 27bps y-o-y). Fifteen-year rates added three bps to 2.79% (down 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 3.63% (down 24bps).

Federal Reserve Credit last week jumped $17.3bn to $4.435 TN. Over the past year, Fed Credit contracted $22.7bn (0.5%). Fed Credit inflated $1.624 TN, or 58%, over the past 206 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $23.7bn last week to a new six-year low $3.122 TN. "Custody holdings" were down $179bn y-o-y, or 5.4%.

M2 (narrow) "money" supply last week surged $43.4bn to a record $13.123 TN. "Narrow money" expanded $955bn, or 7.9%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $5.5bn, while Savings Deposits surged $37.5bn. Small Time Deposits slipped $0.8bn. Retail Money Funds gained $11.6bn.

Total money market fund assets dropped $14.1bn to a 16-month low $2.635 TN. Money Funds declined $64bn y-o-y (2.4%).

Total Commercial Paper increased $2.4bn to $905bn. CP declined $158bn y-o-y, or 14.8%.

Currency Watch:

The U.S. dollar index added 0.6% to 98.63 (down 0.1% y-t-d). For the week on the upside, the South African rand increased 2.3%, the Mexican peso 2.2%, the Brazilian real 1.6%, the New Zealand dollar 1.0%, the British pound 0.4% and the Japanese yen 0.4%. For the week on the downside, the Canadian dollar declined 1.5%, the euro 0.8%, the Swedish krona 0.8%, the Swiss franc 0.3%, the Norwegian krone 0.3%, and the Australian dollar 0.1%. The Chinese yuan fell another 0.6% versus the dollar (down 4.2% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was unchanged (up 20.6% y-t-d). Spot Gold rallied 1.2% to $1,266 (up 19.4%). Silver increased 0.5% to $17.53 (up 27%). Crude gained 50 cents to $50.85 (up 37.3%). Gasoline rose 2.6% (up 21%), while Natural Gas sank 9.1% (up 28%). Copper fell 1.0% (down 2%). Wheat dropped 1.5% (down 12%). Corn declined 0.5% (down 2%).

China Bubble Watch:

October 18 – Bloomberg: “China’s economic growth remained stable in the third quarter, all but ensuring the government’s full-year growth target is met and opening a window for policy makers to deliver on vows to rein in excessive credit and surging property prices. Gross domestic product rose 6.7% in the third quarter from a year earlier, matching the median projection by economists…”

October 16 – Bloomberg (Narae Kim): “China has been issued another yellow card. In a report released last week, S&P Global Ratings warned that China is at risk of losing its AA-status if it doesn't rein in its debt-fueled economic growth. ‘Credit growth in China continues to outpace income growth, and much new lending appears to be financing public investment,’ S&P analysts Kim Eng Tan and Xin Liu wrote. ‘Consequently, we see support for the Chinese sovereign ratings gradually diminishing.’ A downgrade would be the latest blow to the world's second-largest economy, whose outlook was slashed to negative from stable by the ratings agency in March.”

October 20 – Reuters (Samuel Shen and Adam Jourdan): “China has uncovered over 1 trillion yuan (120.35 billion pounds) worth of illegal transactions by underground banks this year, the official Financial News reported… The State Administration of Foreign Exchange (SAFE) will step up investigations into capital outflows and intensify a crackdown on underground banks to foster healthy development of the country's foreign exchange market, Zhang Shenghui, a senior director at SAFE told the newspaper.”

October 18 – Bloomberg: “China’s financial hub Shanghai is stepping up a crackdown on property developers and the flow of funds into land transactions, part of broader government efforts to prevent a housing bubble. Shanghai’s commission of housing and urban-rural development said… it was investigating whether eight developers raised selling prices for residential projects without permission. The agency has already suspended transaction licenses for some properties…”

Europe Watch:

October 20 – Bloomberg (Jeff Black and Jana Randow): “In Germany, fretting about inflation is a political currency that never seems to lose its value. In the past week, for example, at least three national newspapers have run prominent articles telling the populace that their savings -- denied the magic of compound interest by the European Central Bank’s low-rate policies -- are in for a renewed onslaught from accelerating consumer prices. The Bundesbank forecasts average inflation of 1.5% next year, whereas rates will likely be around zero.”

October 16 – Bloomberg (Mark Whitehouse): “Will Italy follow the U.K.'s example and leave the European Union? Far-fetched as it may seem, capital flows suggest that some people aren’t waiting to find out. To keep the euro area's accounts in balance, Europe's central banks track flows of money among the members of the currency union. If, for example, a depositor moves 100 euros from Italy to Germany, the Bank of Italy records a liability to the Eurosystem and the Bundesbank records a credit. If a central bank starts building up liabilities rapidly, that tends to be a sign of capital flight. Lately, Italy's central bank has been building up a lot of liabilities to the Eurosystem. As of the end of September, they stood at about 354 billion euros, up 118 billion from a year earlier -- and up 78 billion since the end of May… The outflow isn't quite as large as during the sovereign-debt crisis of 2012, but it's still significant. The main beneficiary seems to be Germany, which has seen its credits to the Eurosystem increase by 160 billion over the past year.”

October 20 – Bloomberg (Carolynn Look): “Portugal’s debt would no longer be eligible for purchase under the European Central Bank’s quantitative-easing program if the country’s credit rating is downgraded on Friday, President Mario Draghi said. A decision by Canadian rating company DBRS Ltd. to take away the country’s only investment-grade rating would disqualify Portuguese sovereign bonds from asset purchases and use as collateral in refinancing operations, Draghi said…”

Brexit Watch:

October 21 – Bloomberg (Lukanyo Mnyanda and Stephen Spratt): “Money markets are zeroing in on Article 50 as the catalyst for increased risk in banks’ pound borrowing. A gauge of where bank borrowing costs will be in coming months, known as the FRA/OIS spread, shows a marked increase in traders’ perception of risk beyond March 2017. That’s the point by which U.K. Prime Minister Theresa May has pledged to formally invoke the article of the Lisbon Treaty that will formally put the nation on a path out of the European Union.”

Fixed-Income Bubble Watch:

October 18 – Bloomberg (Scott Lanman): “China’s holdings of U.S. Treasuries fell to the lowest level since November 2012, as the world’s second-largest economy draws down its foreign reserves to prop up the yuan. The biggest foreign holder of U.S. government debt had $1.19 trillion in bonds, notes and bills in August, down $33.7 billion from the prior month, the biggest drop since 2013… The portfolio of Japan, the largest holder after China, fell for the first time in three months, down $10.6 billion to $1.14 trillion. Saudi Arabia’s holdings of Treasuries declined for a seventh straight month, to $93 billion.”

October 20 – Reuters (Herbert Lash and Joy Wiltermuth): “The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit. Weak September core retail sales… provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales. Some $128 billion of commercial real estate loans - more than one-quarter of which went to finance malls a decade ago - are due to refinance between now and the end of 2017…”

Global Bubble Watch:

October 16 – Bloomberg (Phil Kuntz): “The world’s biggest central banks are bulking up their balance sheets this year at the fastest pace since 2011’s European debt crisis… The 10 largest lenders now own assets totaling $21.4 trillion, a 10% increase from the end of last year… Their combined holdings grew by 3% or less in both 2015 and 2014. The accelerating expansion of central banks’ balance sheets comes as debate rages over whether their asset purchases and continued low interest rates are creating bubbles, especially in the bond market… Almost 75% of the world’s central-bank assets are controlled by policy makers in four places: China, the U.S., Japan and the euro zone. The next six -- …Brazil, Switzerland, Saudi Arabia, the U.K., India and Russia -- each account for an average of 2.5%.”

October 19: “ETFGI… today reported assets invested in ETFs/ETPs listed globally reached a new record high US$3.408 trillion at the end of Q3 2016. Net flows gathered by ETFs/ETPs in September were strong with US$25.19 bn… marking the 32nd consecutive month of net inflows… Record levels of assets were also reached at the end of Q3 for ETFs/ETPs listed in the United States at US$2.415 trillion, in Europe at US$566.74 bn, and in Asia Pacific ex-Japan at US$131.88 bn. At the end of Q3 2016, the Global ETF/ETP industry had 6,526 ETFs/ETPs, with 12,386 listings, assets of US$3.408 trillion, from 284 providers listed on 65 exchanges in 53 countries.”

October 17 – Financial Times (Elaine Moore and Thomas Hale): “The European Central Bank’s mass bond-buying programme is escalating stress in a crucial short-term funding market that underpins the eurozone financial system, raising the risk of shocks in wider markets. Large-scale purchases of government bonds by the ECB has resulted in a squeeze on the availability of assets favoured for trillions of euros of repurchase agreements, or ‘repos’ — effectively short-term loans between institutions. Bankers and asset managers say the market’s dysfunction should be high on the list of topics discussed by the ECB’s governing council when it meets in Frankfurt this week to decide on the future of its €80bn a month quantitative easing programme.”

October 18 – Bloomberg (Luke Kawa and Andrea Wong): “It’s not hard to see the potential flash points on the horizon -- the U.S. presidential election; Deutsche Bank AG’s mounting legal charges; the day central banks stop buying bonds. Yet when it comes to gauging risks in the world’s financial markets, these days investors are flying more or less blind. That’s because the once-dependable indicators traders relied on for decades to send out warnings are no longer up to the task. The so-called yield curve isn’t the recession predictor it once was. Swap spreads are so distorted they can’t be trusted. Even the vaunted VIX -- sometimes referred to as the ‘fear gauge,’ is leading its followers astray, strategists say.”

October 18 – Bloomberg (Sid Verma and Luke Kawa): “Fears of a bond-market crash, a breakdown in globalization, a new crisis in the euro area? There were a bevy of reasons for fund managers to push their cash balances to 5.8% of their portfolios in October, up from 5.5% last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn't been higher than that since November 2001, shortly after the terrorist attacks in the U.S…”

U.S. Bubble Watch:

October 21 – Bloomberg (Oliver Renick and Rebecca Spalding): “U.S. companies are on pace to spend a record $1 trillion on buybacks and dividends in 2016. It’ll be a tough record to top. A total $600 billion in share repurchases and $400 billion in dividends will be doled out by S&P 500 Index members by the end of the year, the biggest combined payout in history, according to… Barclays Plc. Gravy like that is getting tougher to sustain as corporate profits suffer a six-quarter slump and cash levels begin to dwindle. As a result, fewer companies in the third quarter upped their dividend -- and more are tapping the debt market to sustain their buyback programs, data from S&P Global Inc. and JPMorgan… show. For U.S. stock investors, it means a key pillar of the 7 1/2-year-old bull market may be tipping over.”

October 20 – Bloomberg (Michelle Jamrisko): “Sales of previously owned U.S. homes increased more than projected in September, showing residential real estate continues to contribute modestly to growth… Contract closings rose 3.2% to a 5.47 million annual rate… Sales climbed 2.8% from September 2015… Median sales price increased 5.6% from September 2015 to $234,200. Inventory of available properties dropped 6.8% from a year earlier to 2.04 million…”

October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Investors are giving up on stock picking. Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins. Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.”

October 20 – Financial Times (Robin Wigglesworth, Nicole Bullock and Joe Rennison): “The US Securities and Exchange Commission is gearing up for a root-and-branch review of the rapidly growing exchange traded fund industry amid concerns massive flows into ETFs may be exacerbating volatility in financial markets. In the US alone, ETF assets stand at $2.4tn, and globally they hold $3.3tn, according to ETFGI… They account for about 30% of the value of all US shares traded… ETFs were at the centre of wild equity trading in August 2015. In one session, more than 1,000 securities were suspended from trading for sharp moves and some ETFs veered sharply from their net asset values. The chaotic trading highlighted how interconnected ETFs are with the underlying stocks as well as the futures market.”

October 17 – Wall Street Journal (Dennis K. Berman and Jamie Heller): “Picking stocks is at heart an arrogant act. It requires in the stock picker a confidence that most others are dunces, and that riches await those with better information and sharper instincts. Entire cities—notably New York and London—have been erected in service of this belief. And the image of the clever, dauntless stock maestro is embedded in the American ideal. Yet there is a simple, destructive idea taking over Wall Street: that stock pickers can’t pick stocks well—or at least well enough for the fees they charge. And even those who do can’t sustain it year after year. In short, the idea of the ‘active manager’ is rapidly losing its intellectual legitimacy to the primacy of the ‘passive investor’ who merely buys an index of shares.”

October 18 – Bloomberg (Michelle Jamrisko): “The cost of living in the U.S. rose at the fastest pace in five months on energy and shelter prices, a sign inflation is getting closer to the Federal Reserve’s goal. The consumer-price index increased 0.3% in September from the previous month… The year-on-year rise was 1.5%, the most since October 2014.”

October 16 – Wall Street Journal (Julie Jargon and Lillian Rizzo): “The U.S. is having one of its biggest restaurant shakeouts in years, as an oversupply of eateries and new rivals offering prepared meals to go claim what is expected to be a growing number of casualties. In one recent week alone, three restaurant companies filed for chapter 11 bankruptcy protection, including Così Inc.; Rita Restaurant Corp., parent of the Don Pablo chain, and Garden Fresh Corp... At least five other restaurant operators have filed for court protection this year, with restructuring plans that call for restaurant closures.”

Federal Reserve Watch:

October 20 – Bloomberg (Jeanna Smialek): “The U.S. economy maintained a steady growth pace between late August and early October, as a tight labor market with nascent wage pressures contributed to a ‘mostly positive’ outlook, a report from the 12 Federal Reserve districts showed. ‘Most districts indicated a modest or moderate pace of expansion,’ according to the Fed’s latest Beige Book, an economic survey by reserve banks. ‘Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several districts.’”

October 18 – Bloomberg (Jeanna Smialek): “The boards of directors at nine of the 12 regional Federal Reserve banks last month sought an increase in the rate on direct loans from the Fed to 1.25% from 1%… The Atlanta Fed joined the calls for an increase in the discount rate, pushing the number of regional banks asking for a hike to its highest since December 2015.”

Japan Watch:

October 18 – Reuters (Malcolm Foster and Tetsushi Kajimoto): “Japan Inc has little faith in the central bank's latest shift in monetary policy, with companies saying it won't generate long-desired inflation, spur further business investment or have an impact on the economy. The findings of the Reuters Corporate Survey… suggest a long road ahead for Prime Minister Shinzo Abe… More than 80% of firms said last month's overhaul in policy - one that targets the bond market's yield curve instead of the amount of money pumped into the financial system - will not have an impact on prices or change their capital spending plans.”

Leveraged Speculator Watch:

October 20 – Bloomberg (Saijel Kishan): “Howard Fischer, wearing a white shirt and khakis, leans back into a window seat at a juice bar in Greenwich, Connecticut, sips a cold-brewed Mexican mocha and shares his angst. ‘It’s miserable, miserable,’ the 57-year-old manager of $1.1 billion Basso Capital Management says of hedge fund returns over the past few years. ‘If that’s the normal expectation, I don’t have a business.’ Fischer’s lament and ones like it are echoing through the industry. It’s an existential crisis for former masters of the universe who once prided themselves on their trading prowess. Now they’re questioning their wisdom and their ability to generate profits that made them among the richest in finance. The $2.9 trillion industry has posted average annual returns of 2% over the past three years, well below those of most index funds…”

October 20 – Bloomberg (Saijel Kishan and Simone Foxman): “Hedge fund investors pulled $28.2 billion from the industry in the third quarter, the most since the aftermath of the global financial crisis, according to Hedge Fund Research Inc. The net outflows, which amount to 0.9% of the industry, are the largest since the second quarter of 2009… Investors redeemed $51.5 billion in the first nine months of the year, even as industry assets rose to a record $2.97 trillion… The third quarter was the fourth consecutive quarter of redemptions for the industry, the longest since 2008 and 2009, HFR said. Redemptions were concentrated in the biggest funds…”

October 20 – Bloomberg (Sonali Basak): “Portfolio managers at hedge funds, facing an exodus of investors frustrated with high fees, are about to feel the pain from an estimated 34% reduction in their compensation. While fund managers may take the biggest pay cut in the industry, professionals with seven or more years of experience see their total compensation declining by 14% on average for 2016, recruiter Odyssey Search Partners said in a report…”

October 19 – Wall Street Journal (Justin Baer): “One junk-bond trader at Goldman Sachs Group Inc. earned more than $100 million in trading profits for the firm earlier this year, an unusual gain at a time when new regulations have pushed Wall Street to take fewer risks.”

October 18 – Bloomberg (Suzy Waite): “Asia hedge funds are opening at the slowest pace since the turn of the century. Just 27 new funds started trading in Asia in the first nine months of this year, the fewest since 2000 when 56 funds opened, according to Eurekahedge. It’s the third straight year of declines, and down from 83 new funds last year.”

Geopolitical Watch:

October 19 – Reuters (David Brunnstrom and Arshad Mohammed): “The United States and South Korea agreed… to step up military and diplomatic efforts to counter North Korea's nuclear and missile programs, saying they posed a ‘grave’ security threat following repeated tests this year. After talks in Washington between their foreign and defense ministers, the countries said they had agreed to set up a high-level Extended Deterrence Strategy and Consultation Group to leverage ‘the full breadth of national power – including diplomacy, information, military coordination, and economic elements’ in the face of the North Korean threat.”

October 20 – Bloomberg (Ian Wishart, John Follain and Patrick Donahue): “The European Union said it was too soon to consider imposing sanctions on Russia for the bombing of rebel-held areas of Syria, while maintaining the threat of action if Vladimir Putin doesn’t back down… While the U.K., France and Germany wanted to take a harsher tone with Russia, Italy’s Matteo Renzi led those countries who opposed the move.”

October 20 – Bloomberg (Andreo Calonzo and Cecilia Yap): “Philippine President Rodrigo Duterte will bring home $24 billion worth of funding and investment pledges from his four-day visit to China as both nations agreed to resume talks and explore areas of cooperation in the South China Sea. China will provide $9 billion in soft loans, including a $3 billion credit line with the Bank of China, while economic deals including investments would yield $15 billion… Preliminary agreements in railways, ports, energy and mining worth $11.2 billion were signed… ‘China is not only a friend. China is only a relative, but China is a big brother,’ Communications Secretary Martin Andanar said in Beijing…”

October 20 – Reuters (Ben Blanchard): “Philippine President Rodrigo Duterte announced his ‘separation’ from the United States on Thursday, declaring he had realigned with China as the two agreed to resolve their South China Sea dispute through talks. Duterte made his comments in Beijing, where he is visiting with at least 200 business people to pave the way for what he calls a new commercial alliance as relations with longtime ally Washington deteriorate. ‘In this venue, your honors, in this venue, I announce my separation from the United States,’ Duterte told Chinese and Philippine business people, to applause, at a forum in the Great Hall of the People attended by Chinese Vice Premier Zhang Gaoli.”

October 19 – Reuters (Orhan Coskun and Nick Tattersall): “Smarting over exclusion from an Iraqi-led offensive against Islamic State in Mosul and Kurdish militia gains in Syria, President Tayyip Erdogan warned… Turkey ‘will not wait until the blade is against our bone’ but could act alone in rooting out enemies. In a speech at his palace, Erdogan conjured up an image of Turkey constrained by foreign powers who ‘aim to make us forget our Ottoman and Selcuk history’, when Turkey's forefathers held territory stretching across central Asia and the Middle East. ‘From now on we will not wait for problems to come knocking on our door, we will not wait until the blade is against our bone and skin, we will not wait for terrorist organizations to come and attack us…’”

Friday, October 21, 2016

Friday Afternoon Links

[Bloomberg] U.S. Stocks Almost Erase Losses on Deals, Earnings; Dollar Gains

[CNBC] Janet Yellen could be on the verge of starting a 'civil war' at the Fed

[Bloomberg] Why Corporate America’s Debt Is a ‘Major Risk’

[Bloomberg] Sliding Corporate Profits Are a Darkening Cloud for U.S. Workers

[Reuters] China's urbanites embrace sacrifice to ride property frenzy

[Bloomberg] Portugal Keeps Credit Rating That Ensures Eligibility for QE

[Reuters] U.S. warship challenges China's claims in South China Sea

[Reuters] China protests 'illegal,' 'provocative' U.S. South China Sea patrol

Friday's News Links

[Bloomberg] Stocks Fall as GE Gloom Outweighs Microsoft Rally; Dollar Climbs

[Bloomberg] Euro Falls to Lowest Since March as Draghi Eases Nerves on QE

[Bloomberg] Asian Stock Rally Fizzles Amid Earnings as Euro Drops With Oil

[Bloomberg] Yuan Weakens Beyond Year-End Estimates as PBOC Lowers Fixing

[Bloomberg] Sterling Money Markets Signal Trouble for Banks Closer to Brexit

[Reuters] China September home prices rise at record rate, stretching affordability further

[Bloomberg] China Home Prices Rise in Fewer Cities Amid Tougher Curbs

[Bloomberg] Trillion-Dollar Payout May Mean Peak Largesse for U.S. Investors

[Bloomberg] Draghi Says Portuguese Bonds Ineligible for QE If Downgraded

[Bloomberg] Germany’s Long-Suffering Savers Have Real Cause to Complain

[Bloomberg] Hedge Fund Managers Struggle to Master Their Miserable New World

[Reuters] U.S. mall investors set to lose billions as retail gloom deepens

[BusinessWeek] Global Markets Stumble Into a High-Debt, Low-Investment 2017

[WSJ] Bellwether Bonds Part Ways With Stocks

[Bloomberg] China Visit Helps Duterte Reap Funding Deals Worth $24 Billion

[FT] Portugal awaits crucial credit rating decision

[Bloomberg] EU Leaders Spar Over Russia Sanctions as Renzi Pushes Back

[BBC] Russian warships pass through English Channel

Wednesday, October 19, 2016

Wednesday Evening Links

[Bloomberg] Fed Beige Book Shows ‘Mostly Positive’ Outlook for U.S. Economy

[Bloomberg] Gold Hits Two-Week High as Dollar Weakens on Rate Speculation

[Bloomberg] A Crisis in Asian Waters Could Explode Into Armed Conflict

[Reuters] U.S. vows all-out defense against 'grave' North Korean threat

Wednesday News Links

[Bloomberg] Stocks Rise Amid Earnings as OPEC Deal Optimism Spurs Oil Rally

[Bloomberg] Asian Stocks Rise on China GDP, U.S. Rate-Increase Outlook

[Bloomberg] China Home Sales Value Rose 61% in September From Year Earlier

[Bloomberg] China Growth Holds at 6.7%, Backed by Government and Consumers

[Bloomberg] U.S. Housing Starts Unexpectedly Drop on Multifamily-Unit Slide

[Bloomberg] Broken Indicators Mean It's Growing Harder to Spot Troubles in the Market

[Reuters] Inflation is next nerve-jangler for investors

[Bloomberg] Renzi Might Hang On for Months Even If He Loses Italy Referendum

[Bloomberg] Hedge Fund Startups Plummet in Asia Amid Low Returns, High Fees

[] Assets Invested In ETFs/ETPs Globally Reach Record $3.408 Trillion By Q3 2016

[Bloomberg] Adrenaline Shot From China Housing Boom May Spur 2017 Hangover

[WSJ] China’s Property Frenzy Spurs Risky Business

[WSJ] Economists Question China’s Consistent Growth Numbers

[WSJ] ‘Passive’ Investing Can Be a Lot More Active Than You Think

[WSJ] How One Goldman Sachs Trader Made More Than $100 Million

[Reuters] Evoking Ottoman past, Erdogan vows to tackle Turkey's enemies abroad

Sunday, October 16, 2016

Monday's News Links

[Bloomberg] Treasuries Rise as Dollar Falls Amid Economic Data; Oil Slumps

[Reuters] Gilts sell off accelerates, putting pressure on sterling

[Reuters] Bond yields grind to highest since June, stocks wince

[Bloomberg] Asian Stocks, Bonds Decline as Dollar Extends Post-Yellen Gains

[Bloomberg] Hong Kong Stocks Slump as Casinos Plunge After Crown Detentions

[Reuters] Deutsche Bank's options to solve capital dilemma seen to be limited

[Bloomberg] S&P: China's Credit Growth Weighs Down Its Sovereign Rating

[Bloomberg] Will Italy Leave the EU? Follow the Money

[Bloomberg] The U.S. Dollar Is ‘Back in Play,’ So Carry Trades May Suffer

[NYT] China Property Boom Spurs Fear of Bubble’s Burst

[WSJ] Rosengren Signals Willingness to Keep Rates Steady in November

[WSJ] Restaurant Chains Get Burned by Overexpansion, New Rivals

[FT] ECB ‘tapering’ back in the market’s spotlight

[FT] ECB’s QE programme strains eurozone repo market

[BBC] Russia and the West: Where did it all go wrong?

Sunday Evening Links

[Bloomberg] Asian Stocks Fall as Casino Shares Tumble With Crown Resorts

[Bloomberg] Big Central Bank Assets Jump Fastest in 5 Years to $21 Trillion

[Bloomberg] U.S. and Britain Weighing New Sanctions Over Aleppo Attacks

[WSJ] Stocks Face Threat as Globalization Loses Steam

[FT] China’s service sector frailties may thwart key reforms

Sunday's News Links

[Bloomberg] Saudi Bank Stress Builds as Kingdom’s Cash Injection Falls Short

[Bloomberg] May Urged to Reveal Brexit Strategy as Lawmakers Push for Vote

[Bloomberg] Greece's lenders to launch new review as Athens digs in on debt relief

Saturday, October 15, 2016

Saturday's News Links

[Bloomberg] Merkel Calls Brexit ‘Deep Cut,’ Says EU Must Work Together

[Reuters] Deutsche Bank considering changes to U.S. strategy: sources

[AFP] Russia slams ‘unprecedented’ US threats over cyber-attacks

[UK Independent] Russia accused of 'posturing' as its warships head for English Channel

Weekly Commentary: The Perils of a Resurgent China Credit Boom

There’s this uneasiness – an eeriness – in the markets; in the world (I’m not touching politics). Seemingly out of nowhere, the U.S. dollar index surged 1.7% this week. Notably, the Chinese currency fell 0.8% versus the dollar, the biggest weekly decline since January. Copper dropped 2.4%. Most EM currencies were under pressure. I suspect fears of heightened Chinese vulnerability have again become a major force behind unstable global markets.

We’re all numb to the big numbers. China’s debt has rapidly inflated to over 250% of GDP (Bloomberg at 247% to end ’15 from ‘07’s 150%), in what has evolved into history’s greatest Credit Bubble. Total Social Financing, China’s aggregate of total Credit (excluding government bonds) is on pace to expand almost $3.0 TN this year. A headline from Bloomberg TV: “China’s Total Debt Grew 465% Over Past Decade”

Global markets were troubled earlier in the year by fears of a faltering China Bubble – a stock market collapse, destabilizing outflows and a fledgling crisis of confidence. Market recovery owed much to the visibly heavy hand of Beijing frantically plugging holes and spurring a Credit resurgence. Those efforts ensured ongoing China economic expansion that, when coupled with $2.0 TN of QE, supported a short squeeze turned major rally throughout EM and commodities markets. Surging commodities and EM took pressure off troubled sectors, bolstering U.S. and developed market rallies generally. Highly leveraged speculators, commodity producers, companies, countries and continents were granted new leases on life.

The downside of ongoing massive QE and negative rates has of late become a market concern, and with concern comes heightened vulnerability. This ensures keen focus on the other major source of 2016 market support: The Resurgent China Boom. Here as well, the downside of egregious inflationism has become increasingly conspicuous. China’s Credit Bubble is completely out of control – and it’s become deeply systemic. We’re numb to how dangerous circumstances have become.

The banking system continues to balloon uncontrollably, as does so-called “shadow banking.” Reported bank assets have reached $30 TN, having more than tripled since 2008. According to Moody’s, shadow banking has expanded from from 40% to 78% of GDP - in just the past two years. Contemporary Chinese finance is nothing if not incredibly convoluted.

October 12 – Financial Times (Gabriel Wildau): “What is the true size of China’s debt load, and how fast is it growing? The answer has significant implications for the global economy. Global watchdogs including the International Monetary Fund and the Bank for International Settlements… have become increasingly shrill in their warnings that China’s rising debt load poses global risks. Estimates of Chinese debt based on official figures are frightening enough — an FT analysis put the figure at 237% of GDP at the end of March — but an increasing number of analysts now believe that the true figure may be higher. The reason is not… that China’s government statisticians are intentionally cooking the books. Instead, financial engineering and rising complexity in the shadow banking system are outstripping the ability of traditional indicators to track debt flows from all sources. In focus is a once-obscure data series that tracks bank lending to non-bank financial institutions (NBFIs)… Bank claims on NBFIs… have increased massively, from to Rmb11.2tn at the end of 2014 to Rmb25.2tn at the end of August.”

As the banking system self-destructs, the problematic local government debt situation only worsens. What's more, Corporate Credit continues to expand rapidly, in the face of an increasingly hostile pricing and earnings backdrop. Corporate debt has ballooned to $18 TN, or to almost 170% of GDP (from Reuters).

Meanwhile, real estate finance is today a full-fledged “Terminal Phase” disaster in the making. Various government efforts over recent years to rein in an aged Credit cycle have failed, repeatedly shoved to the back burner by fear of an unacceptable bust. Last month from the WSJ (Anjani Trivedi): “More than 70% of new loans in August were to households, much of that in the form of mortgages… a remarkable shifting of the fire hose of credit… China’s stock of mortgages stood at 16.9 trillion yuan ($2.5 trillion) as of June 30. Almost a quarter of that was built up in just the past year…”

A Thursday headline from Bloomberg: “Global Stocks Slide, Treasuries Gain as China Concern Resurfaces.” Various articles pointed to the worse-than-expected 10% y-o-y drop in September Chinese exports, the largest decline since February (imports down 1.9%). More important, the People’s Bank of China weakened the yuan seven straight days to a new six-year low. Most importantly, Beijing is – once again - intensifying its push to rein in debt growth. There is an acute need to act, as well as lurking fragility that ensures acting is a high-risk proposition.

When markets are in a bullish mood, faith comes easy that enlightened central bankers have mastered QE infinity. Similarly, astute Chinese authorities have become exceptionally proficient at financial and economic tinkering. Reality is a different story. Whether it is global central bankers or Chinese communist leadership, once monetary inflation really gets heated up there will be no cataclysm-free resolution. There remains a complacent view that patient central bankers will successfully wean the world off this torrent of cheap liquidity. Beijing will cautiously take its time in resolving structural Credit and economic issues. The harsh reality is that all these central planners badly missed their timing. At this point, the consequence of patience and caution is deeper maladjustment.

Mortgage Credit booms are dangerously prone to the type of prolonged excess that ensures deep structural (financial, economic and social) impairment. Systemic risk rises exponentially late in the Credit cycle. Rapid Credit growth, much of it from weak borrowers, inflates home prices to precariously unsustainable levels. To be sure, China’s mortgage finance Bubble is putting U.S. subprime to shame. China essentially has unlimited numbers of borrowers. Inflating apartment prices continue to provide owners unprecedented increases in (perceived) wealth, providing the resources for larger down-payments for more expensive units (and/or more units). And keep in mind that this is more of an apartment rather than a “real estate” Bubble – and, for the most part, shoddily constructed apartments. There is also basically endless supply.

Chinese authorities have initiated attempts to tighten mortgage Credit going back in 2010. Beijing and local governments have to this point not been willing to inflict the type of pain necessary to break entrenched inflationary psychology. Ill-conceived efforts to tighten mortgage Credit in 2014, while permitting loose finance to fuel an ongoing Credit Bubble, ensured a spectacular stock market boom and bust. And last year’s equities bust – and resulting stimulus-induced Credit/liquidity surge - incited speculative “blow-off” dynamics into “safe haven” real estate. Mania.

Markets have good reason to fear the consequences from the latest round of tightening. System Credit has exploded since 2010. Financial and economic fragilities are much more acute. From Thursday’s WSJ: “China Sees ‘New Challenges’ in Mortgage Surge;” followed with Friday’s: “China’s Ballooning Mortgage Debt Built on Shaky Foundation.”

In the unfolding worst-case scenario, the rapid buildup of household sector debt has compounded systemic vulnerability from already heavily leveraged corporate and local government sectors.

October 12 – CNBC (Huileng Tan): “China's economic transition has caused a problem for the government—how to avert a sharp slowdown while keeping a lid on ballooning debt. In a report Thursday, rating agency Standard and Poor's highlighted the ‘tough choice between supporting growth and controlling debt sustainability’ as China tries to find new ways to fund public investments. ‘Although aggregate and provincial GDP growth stabilized in the first two quarters of 2016, we believe the fiscal conditions of Chinese local governments are under more pressure given the weakened economy,’ S&P wrote… The rising debt pile of local government financing vehicles (LGFV) raised questions on credit risks, said S&P.”

October 12 – Bloomberg: “Finance firms that help keep cash flowing to China’s towns, cities and provinces face rising risks of landmark bond defaults just as they turn to global markets for funds. China’s economic slowdown is weighing on revenue at regional governments, hampering their ability to support the 5.3 trillion yuan ($789bn) of outstanding onshore notes from local-government financing vehicles, which have yet to suffer nonpayments. Such issuance fell 18% last quarter as regulators curbed sales, forcing some to seek funds overseas. Financing units in provinces including Hunan, Jiangsu, Hubei and Sichuan are considering or planning U.S. currency notes, people familiar with the matters have said.”

Corporate debt is arguably China’s most precarious sector Bubble. In conjunction with the release of a new report on Chinese corporate Credit, Terry Chan – head of Asia-Pacific Analytics and Research - S&P Global Ratings – appeared Monday evening on Bloomberg TV:

Chan: “We estimate at the end of 2015 [there was] 5.6% problem credit. We use credit rather than loans because it’s a broader definition. If it slows down, as we expect, by 2020 it will be about 10%. It’s manageable given the returns they have. But if the rate doesn’t stop – if credit still grows around 15-16% - we think problem credit could reach 17% by 2020. And that’s basically ‘the straw that breaks the camels back.’ So what the banks would have to do is actually raise fresh capital – we estimate about $1.7 TN, or about 16% of China GDP. So those are big numbers… Obviously the state-owned enterprises are a massive part of the economy. In our sample of the 200 top corporates, for example, 70% are state-owned and they have 90% of the debt. So it’s a really big problem… At least for the next two years it is going to get worse. We see the momentum already in our study of the top 200 corporates. 2016 is as bad as 2015 was. It’s going to take a while. They are pressing the brakes slowly. They’re not going to slam on it. If credit doesn’t really slow down by the end of next year, we could be in a bit of strife.”

I would argue that a tremendous amount of global strife unfolds when the Chinese Credit boom succumbs. Chinese banks now lead the list of the world’s largest financial institutions. The performance of China’s economy now has major global ramifications. Reporters were quick to point to China to explain Friday’s global market rally. “Economic Data Signals Turnaround, Stability in China;” “China’s Days of Exporting Deflation May Be Drawing to a Close.”

There is great instability in China, masked by historic Credit expansion. It’s important to appreciate that China is new to this Capitalism thing. They’re completely inexperienced when it comes to mortgage finance Bubbles – and that goes for apartment owners, bankers and regulators. They are novices with massive corporate debt booms. They are newcomers in the face of a $30 TN banking system. They have outdone even the U.S. in mismanaging “shadow banking.” The Chinese have followed the “developed world” lead in repo, derivatives and “sophisticated” structured finance.

Years of exceptionally loose finance have surely nurtured unprecedented amounts of fraud and malfeasance – not the recipe for a sound financial system. Worse yet, they grabbed the Credit Bubble baton at the worst possible time – the conclusion of a historic global Credit Bubble, with all the associated economic, financial, social and geopolitical risks. Chinese rulers saw their juggernaut economy as ensuring global power and prestige. Things – at home and abroad – are developing much differently than they had anticipated.

New realities were discussed in a Friday FT article, “China Rethinks Developing World Largesse as Deals Sour.” With clients such Venezuela, Zimbabwe and Sudan, China developed into the world’s subprime lender. Form the FT: “Six of the top 10 recipients of Chinese development finance commitments between 2013 and 2015 were classified alongside Venezuela in the highest category of default risk ranked by the… OECD.”

October 13 – Financial Times: “When China signed up to build Venezuela’s Tinaco-Anaco Railway in 2009, the scheme was hailed as proof of the effectiveness of socialist brotherhood. Gleaming new Chinese trains were envisaged, whisking passengers and cargo along at 137mph on about 300 miles of track. Hugo Chávez, the late Venezuelan president, called the $800m project ‘socialism on rails’ and said the air-conditioned carriages would be available to everyone, rich or poor. But the endeavour has become what locals call a ‘red elephant’, the vandalised and abandoned symbol of Venezuela’s deepening economic crisis… For China, the project represents more than just an isolated example of a dream turned to dust. Over the past decade, the country has transformed itself from a marginal presence to the dominant player in international development finance with a loan portfolio larger than all six western-backed multilateral organisations put together. Outstanding loans from the two big Chinese ‘policy’ banks and 13 regional funds are well in excess of the $700bn owed to the western-backed institutions…”

As we closely monitor the Chinese Credit Bubble over the coming weeks and months, let’s be mindful of the central role China has come to play in the greatest global Bubble the world has ever experienced. There is tremendous uncertainty as to how this will play out.

As I’ve argued in the past, China is one enormous EM Credit system and economy. EM Credit Bubbles notoriously end with a destabilizing “hot money” exodus. A crashing currency then limits the central banks ability to reflate, and the whole thing turns sour.

In contrast, Beijing has orchestrated this strange dynamic of aggressive “money” and Credit inflation, while significantly restricting the capacity for this liquidity to exit the Bubble. Might this have only created a wall of “hot money” to be let loose once the dam breaks? How much leverage has accumulated with funds borrowed cheap overseas to speculate in higher yielding Chinese securities and financial instruments? Lots of questions and few answers. I’m not so sure Chinese policymakers have the answers either. They just recognize they have a major problem. We all share the problem.

For the Week:

The S&P500 declined 1.0% (up 4.4% y-t-d), and the Dow dipped 0.6% (up 4.1%). The Utilities gained 1.3% (up 11.1%). The Banks dropped 2.2% (down 2.5%), and the Broker/Dealers fell 1.8% (down 2.7%). The Transports slipped 0.2% (up 7.1%). The S&P 400 Midcaps declined 0.9% (up 8.7%), and the small cap Russell 2000 dropped 2.0% (up 8.8%). The Nasdaq100 fell 1.2% (up 4.7%), and the Morgan Stanley High Tech index lost 2.0% (up 8.8%). The Semiconductors dropped 3.3% (up 22%). The Biotechs sank 7.4% (down 20.5%). While bullion declined $6, the HUI gold index was little changed (up 79%).

Three-month Treasury bill rates ended the week at 29 bps. Two-year government yields were unchanged at 0.83% (down 22bps y-t-d). Five-year T-note yields gained three bps to 1.29% (down 46bps). Ten-year Treasury yields jumped eight bps to an almost five-month high 1.80% (down 45bps). Long bond yields surged 11 bps to 2.56% (down 46bps).

Greek 10-year yields rose seven bps to 8.22% (up 90bps y-t-d). Ten-year Portuguese yields dropped 28 bps to 3.27% (up 75bps). Italian 10-year yields were unchanged at 1.38% (down 21bps). Spain's 10-year yields gained 11 bps to 1.12% (down 65bps). German bund yields rose three bps to 0.05% (down 57bps). French yields increased two bps to 0.33% (down 66bps). The French to German 10-year bond spread narrowed one to 28 bps. U.K. 10-year gilt yields jumped another 12 bps to a three-month high 1.09% (down 87bps). U.K.'s FTSE equities index slipped 0.4% (up 12.4%).

Japan's Nikkei 225 equities index was about unchanged (down 11.4% y-t-d). Japanese 10-year "JGB" yields increased a basis point to negative 0.06% (down 32bps y-t-d). The German DAX equities index gained 0.9% (down 1.5%). Spain's IBEX 35 equities index jumped 1.7% (down 8.1%). Italy's FTSE MIB index rose 1.1% (down 22.5%). EM equities were mixed. Brazil's Bovespa index advanced 1.1% (up 42.5%). Mexico's Bolsa added 0.2% (up 11%). South Korea's Kospi fell 1.5% (up 3.1%). India’s Sensex equities declined 1.4% (up 6.0%). China’s Shanghai Exchange rallied 2.0% (down 13.4%). Turkey's Borsa Istanbul National 100 index slipped 0.5% (up 8.1%). Russia's MICEX equities index declined 0.7% (up 11.6%).

Junk bond mutual funds saw outflows of $72 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps last week at 3.47% (down 35bps y-o-y). Fifteen-year rates gained four bps to 2.76% (down 27bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to an almost three-month high 3.64% (down 24bps).

Federal Reserve Credit last week dipped $0.9bn to $4.417 TN. Over the past year, Fed Credit contracted $34bn (0.8%). Fed Credit inflated $1.607 TN, or 57%, over the past 205 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.3bn last week to $3.146 TN. "Custody holdings" were down $168bn y-o-y, or 5.1%.

M2 (narrow) "money" supply last week declined $8.0bn to $13.094 TN. "Narrow money" expanded $915bn, or 7.5%, over the past year. For the week, Currency increased $1.1bn. Total Checkable Deposits jumped $68.3bn, while Savings Deposits sank $73.2bn. Small Time Deposits were little changed. Retail Money Funds fell $4.4bn.

Total money market fund assets declined $6.2bn to a one-year low $2.649 TN. Money Funds fell $49bn y-o-y (1.8%).

Total Commercial Paper dropped another $13.4bn to a multi-year low $903bn. CP declined $146bn y-o-y, or 13.9%.

Currency Watch:

October 10 – Bloomberg (Lananh Nguyen and Andrea Wong): “The inexplicable volatility that roiled the British pound last week came as no surprise to Bank of America Corp., which just days earlier warned that liquidity in the $5.1 trillion-per-day global currency market was far worse than anyone imagined. Sterling sank 6.1% in a span of minutes in early Asian trading Oct. 7, following at least three other bouts of puzzling foreign-exchange turbulence in the past two years. The latest episode involved the fourth-most-traded currency, serving up a stark reminder of the pitfalls that investors face in the world’s biggest financial market as banks -- the traditional middlemen -- step back amid post-crisis regulations. The currency market is growing more fragile because ‘phantom liquidity’ is undermining investors’ ability to buy and sell when they need to, Bank of America analysts wrote…”

The U.S. dollar index surged 1.7% to 98.09 (down 0.6% y-t-d). For the week on the upside, the Mexican peso increased 1.5% and the Brazilian real added 0.5%. For the week on the downside, the South African rand declined 3.2%, the Swedish krona 2.5%, the Norwegian krone 2.2%, the British pound 2.0%, the euro 2.0%, the Swiss franc 1.3%, the Japanese yen 1.2% and the Australian dollar 0.5%. The Chinese yuan fell 0.8% versus the dollar (down 3.6% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.0% (up 20.5% y-t-d). Spot Gold slipped 0.5% to $1,251 (up 18%). Silver fell 0.8% to $17.44 (up 26%). Crude added 54 cents to $50.35 (up 36%). Gasoline gained 1.1% (up 18%), and Natural Gas jumped 3.1% (up 41%). Copper sank 2.4% (down 1%). Wheat jumped 6.6% (down 10%). Corn rose 4.3% (down 1%).

China Bubble Watch:

October 13 – Reuters (Yawen Chen and Kevin Yao): “China's September exports fell 10% from a year earlier, far worse than expected, while imports unexpectedly shrank after picking up in August, suggesting signs of steadying in the world's second-largest economy may be short-lived. The disappointing trade figures pointed to weaker demand both at home and aboard, and deepened concerns over the latest depreciation in China's yuan currency… ‘This comes on the heels of weak South Korean trade data, and it definitely make us worry about to what extent global demand is improving,’ said Luis Kujis, head of Asia economics at Oxford Economics…”

October 11 – Bloomberg (Paul Panckhurst): “S&P Global Ratings said China’s banks may need to raise as much 11.3 trillion yuan ($1.7 trillion) of fresh capital from 2020 because of troubled credit, should a corporate debt binge fail to slow. The potential cost… equals 16% of last year’s nominal gross domestic product, S&P said. The warning adds to a drumbeat of concern over a surge in Chinese corporate credit since the global financial crisis and dwindling economic returns as the nation gets less bang for its buck and companies spend more on servicing debt… The rate of growth in China’s debt is ‘not sustainable for long,’ the ratings company said. The $1.7 trillion scenario is based on problem credit rising to 17% of outstanding credit by 2020, S&P said. The firm’s base case is for an increase to 10% from an estimated 5.6% in 2015.”

October 12 – Bloomberg (Jonathan Browning): “The Chinese account statement had all the trappings of the real thing: a red oval seal bearing Bank of Jiangsu Co.’s name, a balance printed to the last decimal (852,468,304.56 yuan) and a time stamp of 4:14 p.m. on April 25. Provided by a little-known Chinese investor group during early-stage acquisition talks with AC Milan, the document was among paperwork purporting to show the consortium’s ability to buy Silvio Berlusconi’s storied Italian soccer club… The only problem? The statement wasn’t true, according to Bank of Jiangsu. The lender told Bloomberg News last month that it hadn’t issued any such record… False bank records may be an extreme example of the risks from this year’s record wave of overseas Chinese acquisitions, but the episode highlights the challenge for Western firms who increasingly find themselves across the table from buyers with little to no international track record.”

October 13 – Bloomberg: “Actions by China’s policy makers to rein in property prices in the bubble-prone nation may prove so effective that the economy’s growth rate could be affected next year. At least 21 cities have introduced purchase restrictions and toughened mortgage lending since late September, reversing two years of easing to support home buyers. Goldman Sachs… says more tightening is likely to follow if prices keep soaring… ‘This is a round of substantial and high-profile property tightening, whose national impacts should not be underestimated,’ Harrison Hu, chief greater China economist at Royal Bank of Scotland Group…, wrote… ‘A full-fledged property downturn will bring significant downward pressures on the real economy’ and increase the potential for a hard-landing, he said.”

October 12 – Bloomberg (Narae Kim): “For Beijing's policy makers, taming the country's ever-growing property sector presents a challenge. While problems with China's overheating housing sector are nothing new, the fact that real-estate prices are climbing so fast when wider economic growth is slowing raises a big red flag. In a country where stock markets are underdeveloped and capital is tightly controlled, abundant liquidity injected by previous monetary stimulus has flowed into alternative assets including bonds, commodities, and the housing market. Weak investment appetite due to a slowdown in the real economy has accelerated cash flows into the real-estate market… This poses a serious policy conundrum for Beijing. Considering that the real-estate sector makes up about a quarter of the country's GDP, a property meltdown could be disastrous for the world's second-largest economy.”

October 11 – Bloomberg: “China’s currency outflows may be bigger than they look, with Goldman Sachs… warning that a rising amount of capital is exiting the country in yuan rather than in dollars. While the nation’s foreign-exchange reserves have stabilized and lenders’ net foreign-exchange purchases for clients have fallen close to a one-year low, official data show that $27.7 billion in yuan payments left China in August. That’s compared with a monthly average of $4.4 billion in the five years through 2014. Such large cross-border moves can’t be explained by market-driven factors and need to be taken into account when measuring currency outflows, according to MK Tang, …senior China economist at Goldman… Any sign of increased capital outflows could disturb a recent calm in China’s foreign-exchange market… The yuan fell to a six-year low on Monday, adding to outflow pressures.”

October 10 – Bloomberg: “China’s financial regulators plan to further tighten control on funds flowing into the property market in violation of current rules, according to people familiar with the matter. Authorities including the central bank, the China Banking Regulatory Commission and the China Securities Regulatory Commission aim to tighten control on speculative real-estate investments and money involved in land transactions, said the people, who asked not to be identified…”

October 13 – Wall Street Journal (Lingling Wei): “Recent rapid increases in property loans in China pose ‘new challenges’ for the government as it seeks to ensure the nation’s financial stability at a time of rising bad debt, a senior banking regulator said. …Wang Shengbang, a deputy director at the China Banking Regulatory Commission, said the surge in real-estate loans, which was triggered by a homebuying frenzy in many Chinese cities in recent months, has both ‘positive and negative sides.’ While the increased leverage has helped reduce housing inventory in some cities, it represents ‘new challenges’ to the regulator in its efforts to safeguard the financial system, Mr. Wang said.”

October 10 – Bloomberg: “China released guidelines for reducing corporate debt while also saying that the government won’t bear the final responsibility for borrowing by companies, the latest sign that policy makers are stepping up their fight against excessive leverage. The State Council, China’s cabinet, issued guidelines for reducing corporate debt and for how banks may swap bad debt to equity. At the same time, officials from the central bank and other government regulators held a briefing at which they described corporate leverage as high among major global economies.”

October 11 – Wall Street Journal (Loingling Wei): “China unveiled a controversial loan-relief plan that could help companies reduce their mounting debt loads but leave banks more strapped for capital. The continued economic slowdown has made it harder for businesses to repay debts that have been piling up at an alarming rate in recent years as leaders have encouraged lending to revive growth. Analysts estimate that corporate debt now accounts for 160% of China’s gross domestic product, up from less than 100% in 2008. The plan announced Monday by the State Council, China’s cabinet, lets companies give their lenders equity stakes in return for debt forgiveness.”

October 11 – Bloomberg: “Passenger-vehicle sales surged 29% in China last month… as consumers seeking to beat an expiring tax cut helped clear inventory on dealer lots. Deliveries of sedans, minivans, sport utility and multipurpose vehicles to dealerships rose to 2.27 million units in September…”

October 12 – Financial Times (Tom Mitchell): “The secretive billionaire who launched a hostile takeover bid for China’s largest property developer has emerged as one of the country’s richest people, illustrating how leveraged financial investments are propelling huge increases in private wealth. According to the Hurun Report’s annual China Rich List, Yao Zhenhua’s net worth surged more than nine times to $17.2bn last year, making him the country’s fourth richest person. Last year he was ranked 204th. Wang Jianlin, the entertainment mogul behind a series of high-profile acquisitions in Hollywood, and internet tycoon Jack Ma retained their spots at the top of the list, with fortunes of $32.1bn and $30.6bn respectively.”

Europe Watch:

October 10 – Financial Times (Laura Noonan, Caroline Binham and James Shotter): “Deutsche Bank was given special treatment in the summer EU stress tests that promised to restore faith in Europe’s banks by assessing all of their finances in the same way. Germany’s biggest lender… has been using the results of the July stress tests as evidence of its healthy finances. But the Financial Times has learnt that Deutsche’s result was boosted by a special concession agreed by its supervisor, the European Central Bank.”

October 10 – CNBC (Spriha Srivastava): “The problems surrounding Deutsche Bank are front and center in investors' minds… But while it is still unclear if the ailing German lender will need state aid to sail through this crisis, there is a regulation that could stop the German government from ending the misery by injecting equity into the bank. The Banking Recovery and Resolution Directive (BRRD), that came into force earlier this year - requires an 8% bail-in of a bank's creditors, including very large foreign banks and hedge funds — be applied before taxpayers get put on the hook. The directive has a well-laid out structure for resolving a troubled or failing European bank, irrespective of whether it is a small lender in Italy or a national champion in Germany.

October 9 – Wall Street Journal (Giovanni Legorano and Andrea Thomas): “When shares in Deutsche Bank AG, Germany’s largest lender, tanked last month, sparking rumors of a state-funded bailout, Italian politicians couldn’t help indulging in a bit of schadenfreude. Scolded by Berlin for years for his apparent failure to sort out Italy’s endemic bank problems, Premier Matteo Renzi showed evident pleasure in wagging the finger back at Germany. ‘I am sure German authorities will do everything needed to prevent Deutsche Bank’s crisis from worsening,’ he told Italian state television… ‘We have always said that as far as the issue of credit is concerned, Europe has to do everything needed to fix the situation of banks and that the main concern comes from German banks.’”

October 14 – Bloomberg (Giovanni Salzano and Lorenzo Totaro): “Italy’s public debt would exceed 150% of the value of all goods and services produced in the country without the contribution of the illegal and underground economy to national wealth. The ratio of debt-to-gross domestic product this year would amount to 152.6%, according to Bloomberg News calculations based on new data…”

Brexit Watch:

October 12 – Bloomberg (Robert Hutton): “Prime Minister Theresa May accepted that Parliament should be allowed to vote on her strategy for taking Britain out of the European Union as lawmakers who want to keep closer ties to the bloc began to assert themselves. The pound climbed against all of its 31 major peers as May’s move was seen as a conciliatory gesture, calming investor concern that she was taking a gung-ho approach to negotiations with the EU. Sterling had tumbled, losing more than 6% this month through Tuesday, after May signaled her intention to put immigration curbs before free trade and the City of London’s interests in pulling Britain out of the bloc.”

Fixed-Income Bubble Watch:

October 10 – Bloomberg (Tracy Alloway): “There are no bargains left in U.S. corporate credit, according to Deutsche Bank AG. Ultra-low interest rates in Europe, Japan and the U.K. have spurred investors to seek returns by buying the debt sold by U.S. companies with investment-grade ratings, leading some analysts to label the market as ‘the only game in town.’ But the rush into the asset class and the rising cost of protecting against currency-risk on dollar-denominated securities means foreign investors are facing an increasingly unpalatable menu of options when it comes to generating higher returns by buying U.S. corporate debt. ‘The U.S. investment-grade market has earned a reputation as the source of global yield for overseas portfolio managers,’ wrote Deutsche Bank credit strategists Oleg Melentyev and Daniel Sorid… ‘But a combination of rising FX hedging costs, low U.S. yields and tight credit spreads is challenging that reputation.’ The toxic mix means that ‘the best days of the global reallocation to U.S. credit may be behind us,’ they added.”

October 9 – Financial Times (Thomas Hale): “Investors have piled more than $100bn into bond exchange traded funds so far this year, taking the global total to its highest ever level as fixed income investors adapt to a changing financial ecosystem… The total amount invested in ETFs, which allow investors to buy shares backed by underlying assets such as equities, bonds or commodities, rose to $3.4tn at the end of September, up from $3tn at the end of 2015. Of that $612bn — or just under a fifth of total ETF assets — is now backed by fixed income products, according to… BlackRock. That represents a rise of 24% on the end of last year, when $495bn was invested.”

October 14 – Financial Times (Eric Platt and Joe Rennison): “European bond funds suffered their largest withdrawals in more than a year and the redemptions from the continent’s equity funds inched closer to the $100bn mark as a turbulent pound highlighted the risks of the looming UK exit from the EU.”

October 11 – Financial Times (Joe Rennison): “And then there was one. A crucial US funding market will soon be dominated by just one bank, sparking concern over the integrity of the vast plumbing system that keeps fixed income trading flowing. The importance of the $1.6tn tri-party repurchase (repo) market was vividly illustrated during the financial crisis, and by next year BNY Mellon alone will settle transactions across both US government bonds and this short-term lending market, where banks borrow cash from investors in exchange for assets such as Treasuries. The tri-party repo market greases the wheels that keep financial markets rolling. It is fundamental to the sale of new Treasuries, as banks buy securities at auction using the credit of a settlement bank, before exchanging them for cash with investors in the repo market to pay back the credit line, usually with the same settlement bank standing in the middle. Now, JPMorgan is planning to stop settling Treasury transactions inside the next 18 months, which is expected to also drastically reduce their tri-party repo operations in the US due to how closely linked the businesses are.”

Global Bubble Watch:

October 10 – CNBC (Matt Clinch): “Axel Weber, UBS chairman and a former policymaker at the European Central Bank (ECB), has warned today's incumbents that monetary intervention is causing international spillovers and major disturbances in global markets. ‘They (central banks) have taken on massive interventions in the market, you could almost say that central banks are now the central counterparties in many markets. They are the ultimate buyer,’ Weber told CNBC… Weber, who was president of the German Bundesbank between 2004 and 2011…, referenced the housing bubble leading up to the 2008 financial crash and said central banks had strayed from their core mandate. ‘Investors have been driven into investments where they have very little capability for dealing with what is on their plate and I think that is a sure reminder of where we were in a different asset class in 2007… So I think the central bankers need to be very careful that they do not continue to produce disturbances in the markets, which they acknowledge - it's a known side effect - but the perception that the underlying impact of monetary policy outweighs the potential side effect in my view is starting to be wrong,’ he added.”

October 11 – Reuters: “Deutsche Bank pays more to borrow from other banks than its peers including stragglers in Greece and Italy, Euribor data showed on Tuesday, a trend that underscores the gravity of the problems facing Germany's flagship lender. Deutsche is the only bank to pay to borrow over a 9 or 12-month period of a group of 21 lenders, which are polled to determine the price of interbank borrowing for the wider sector. The reading puts Deutsche in a worse position even than Italy's embattled Monte dei Paschi or the National Bank of Greece, due to concerns over a likely multi-billion-euro legal penalty for misselling toxic mortgage securities.”

October 9 – Reuters (Carmel Crimmins and Olivia Oran): “It wasn't just Deutsche Bank that was grappling with big questions about the future at the International Monetary Fund meetings in Washington last week. The German bank is scrambling to overhaul its operations as it faces a multi-billion dollar fine for selling toxic mortgage-backed securities in the United States. But many others in the banking industry are also still figuring out what they should be doing, nearly a decade after the financial crisis, as they grapple with anemic economic growth, wafer-thin returns on lending and the possibility that regulators will further hike their cost of doing business. ‘This new world of low interest rates and even negative interest rates is something that is very difficult,’ said Frederic Oudea, the chief executive of French bank Societe Generale. ‘It is a game changer, not just for banks but for the whole financial industry,’ he told an audience from the Institute of International Finance (IIF)…”

October 13 – Wall Street Journal (Judy Shelton): “The International Monetary Fund last week sharply lowered its growth forecasts for the United States and other advanced economies. Only three months ago, in July, the IMF was predicting U.S. growth of 2.2% this year. But in the October edition of its World Economic Outlook report, that figure has been cut to 1.6%. The report’s authors blame ‘political discontent’ and policy uncertainty for the deteriorating prognosis… Meanwhile, the IMF is forecasting dismal 1.1% growth for the United Kingdom in 2017, which is half the 2.2% it predicted in April… The downgrade reflects the fund’s opinion that uncertainty over Brexit will depress consumer spending as well as business investment and hiring.”

October 13 – Reuters (Michael Shields): “Billionaires on average became poorer last year as their collective fortunes shrank, even as Asia continued to crank out a new billionaire nearly every three days, a study… found. Transfers of assets within families, falling commodity prices and a stronger dollar helped reduce total billionaire wealth by $300 billion in 2015 to $5.1 trillion. That meant the average billionaire -- there were 1,397 of them, a net gain of 50 over 2014 -- was worth only $3.7 billion, the survey of 14 big markets by Swiss wealth manager UBS and advisory group PwC discovered. ‘After more than 20 years of unprecedented wealth creation, the Second Gilded Age has stalled,’ the report found. The United States added only a net five billionaires as 41 joined and 36 dropped out of the ranks of the ultra-rich. China alone, buoyed by its tech sector, minted 80 new billionaires.”

U.S. Bubble Watch:

October 14 – Reuters (Lindsay Dunsmuir): “The U.S. budget deficit widened to $587 billion for the fiscal year 2016 on slower-than-expected revenues and higher spending for programs including Social Security and Medicare… The 2016 deficit increased to 3.2% of gross domestic product. It was the first time the deficit increased in relation to economic output since 2009… That year, the deficit peaked at $1.4 trillion amid the financial crisis.”

October 12 – Bloomberg (Matt Scully): “Subprime borrowers are falling behind on their car loan payments at the highest rate in more than six years, and some bonds backed by these loans are vulnerable to getting downgraded, according to S&P Global Ratings. Competition has spurred lenders to loosen standards and resulted in more delinquencies and default by people with weak credit… Subprime borrowers were behind by more than 60 days on about 4.85% of auto loans in August, the highest level since January 2010. The rate was 4.14% in August of last year…”

Federal Reserve Watch:

October 14 – Reuters (Howard Schneider and Svea Herbst-Bayliss): “The Federal Reserve may need to run a ‘high-pressure economy’ to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short. Though not addressing interest rates or immediate policy concerns directly, Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping and aggressive steps may be needed to rebuild it.”

October 13 – Bloomberg (Craig Torres and Christopher Condon): “U.S. central bankers debating the merits of raising interest rates last month described the decision as a close call, with several saying a rate hike was needed ‘relatively soon,’ minutes of the September meeting showed. ‘Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the committee expected,’ the minutes from the Sept. 20-21 gathering… showed. ‘It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation.’”

October 13 – Bloomberg (Sid Verma): “Citigroup… posed an unspeakable question: will a political storm sweep Federal Reserve Chair Janet Yellen after the election that will force her to quit before her term ends in February 2018? Amid one of the most polarized U.S. elections in living memory, monetary policy has been thrust firmly into the campaign limelight. Republican nominee Donald Trump has attacked Yellen in highly personal terms, questioned the independence of the Fed, and suggested the Chair could be replaced with a partisan choice under a Trump administration. That the Citi analysts indulge such an extreme scenario is a testament to the unprecedented nature of the current U.S. electoral cycle…‘Calls to limit the power and monetary policy independence of the Fed are not new,’ the analysts, led by Dana Peterson, wrote… ‘However, recently intensified scrutiny of Fed activities and policy decisions, especially amid the 2016 election season, has prompted speculation that Fed Chair Yellen may exit her position and the board itself, sooner rather than later.’”

Central Bank Watch:

October 12 – Reuters (Michael Shields): “The European Central Bank may discuss technical changes to its asset-buying scheme next week but a decision could be deferred until December when the bank will also decide whether to extend the scheme beyond March, sources… said. Compromise proposals could include relaxing, on a temporary and partial basis, a rule forcing the ECB to buy debt in proportion to the size of each euro zone economy, the sources familiar with the discussion added. That could potentially reduce the ECB's purchase of German debt, risking renewed conflict with Berlin, which has already argued that the ECB is subsidizing indebted countries. Other proposals may include buying a limited amount of bonds yielding less than the deposit rate, which the ECB currently rules out, and buying a bigger share of any individual bond issue, the sources added.”

Japan Watch:

October 12 – Reuters (Leika Kihara and Stanley White): “Bank of Japan policymakers signaled… they had raised the threshold for further easing after last month's policy revamp - keeping their pledge to expand stimulus if needed, but only to protect the economy from external shocks. Yutaka Harada, who has been among the most vocal advocates of aggressive money printing on the BOJ's nine-member board, said he saw no need to ease policy at the central bank's next rate review. ‘Job markets continue to improve as a trend so for now, additional easing may not be necessary,’ even though inflation was undershooting prior forecasts, Harada told… In an earlier speech… Harada said it would take a ‘sudden change in the global economy’ that threatened the achievement of the BOJ's price target for the central bank to consider easing.”

EM Watch:

October 11 – Bloomberg (Zainab Fattah and Matthew Martin): “Saudi Arabia’s austerity measures will slash capital spending this year by 71%, as the world’s biggest exporter of crude seeks to repair public finances damaged by low oil prices. Capital expenditure is projected to fall to 75.8 billion riyals ($20.6bn) this year compared with 263.7 billion in 2015… In 2014, capital spending amounted to 370 billion riyals.”

Leveraged Speculator Watch:

October 13 – Bloomberg (Matt Robinson): “Wall Street’s top cop demanded that a resolution of its insider-trading case against Leon Cooperman include the billionaire investor accepting a temporary suspension from the hedge fund industry, according to people familiar with the matter. Before suing Cooperman last month, the U.S. Securities and Exchange Commission pushed the outspoken trader to agree to a settlement that would have required him to pay about $8 million in penalties and prevented him for some period of time from managing money for clients…”

October 11 – Bloomberg (Simone Foxman and Erik Schatzker): “Leon Cooperman, the hedge-fund manager accused of insider trading, said Tuesday that his Omega Advisors Inc. will continue investing money for clients even as its assets have dropped to $4 billion. ‘I have to make adjustments in the team but I’m prepared to run the business at a loss,’ Cooperman said… ‘We’re not retiring, we’re not sending back the money.’”

Geopolitical Watch:

October 14 – Bloomberg (Ting Shi and Ilya Arkhipov): “Chinese President Xi Jinping and his Russian counterpart, Vladimir Putin, will have more than vodka shots and gifts of ice cream to show for their warming relationship when they meet this weekend on the sidelines of a developing nations’ summit in India. Recent months have seen greater security cooperation between Russia and China as they find common ground against the U.S. The neighboring giants last month held their first joint naval drill in the South China Sea and both have condemned U.S. plans to deploy a U.S. missile shield in South Korea… ‘The fact that both countries started to talk about joint actions on the military level is a very serious development,’ said Vasily Kashin, a senior fellow of Russian Academy of Science’s Far Eastern Studies Institute. ‘The threat from U.S. missile defense pushes both China and Russia closer to each other. For Russia and China, the policy of containment is the containment of the U.S. first of all.’”

October 9 – Reuters (Maria Kiselyova): “Russian Foreign Minister Sergei Lavrov said… he had detected increasing U.S. hostility towards Moscow and complained about what he said was a series of aggressive U.S. steps that threatened Russia's national security. In an interview with Russian state TV likely to worsen already poor relations with Washington, Lavrov made it clear he blamed the Obama administration for what he described as a sharp deterioration in U.S.-Russia ties. ‘We have witnessed a fundamental change of circumstances when it comes to the aggressive Russophobia that now lies at the heart of U.S. policy towards Russia… It's not just a rhetorical Russophobia, but aggressive steps that really hurt our national interests and pose a threat to our security.’”

October 10 – AFP (Henry Meyer): “Former Soviet leader Mikhail Gorbachev warned… that the world has reached a ‘dangerous point’ as tensions between Russia and the United States spike over the Syria conflict. Relations between Moscow and Washington -- already at their lowest since the Cold War over the Ukraine conflict -- have soured further in recent days as the United States pulled the plug on Syria talks and accused Russia of hacking attacks. The Kremlin has suspended a series of nuclear pacts, including a symbolic cooperation deal to cut stocks of weapons-grade plutonium.”

October 10 – Bloomberg (Henry Meyer): “Russian state television is back on a war footing. This time, the ramped-up rhetoric follows the collapse of cease-fire efforts in Syria. As the U.S. and Russia accused each other of sinking diplomacy, Moscow increased its military presence in the Mediterranean and Baltic regions, and suspended a nuclear non-proliferation treaty. A prime-time news program warned that the U.S. wants to provoke a conflict… ‘Offensive behavior toward Russia has a nuclear dimension,’ Russian state TV presenter Dmitry Kiselyov said in his ‘Vesti Nedelyi’ program… ‘Moscow would react with nerves of iron to a Plan B,’ he said, referring to any possible U.S. military strike in Syria.”

October 11 – Bloomberg (Ilya Arkhipov): “Russia said it’s working with China to counter U.S. plans to expand its missile-defense network, which the two nations see as targeting their military assets. The upgrades aim to give Washington the ability to launch a nuclear strike ‘with impunity,’ Lieutenant General Viktor Poznikhir of the Russian Armed Forces General Staff said… at a security forum in Xiangshan, China… The Asian neighbors this year conducted a joint missile-defense exercise of their computer command staff, he said. ‘We are working together on ways to minimize possible damage to the security of our countries,’ Poznikhir said. ‘The illusion of invulnerability and impunity under the guise of missile defense will encourage Washington to make unilateral steps in dealing with global and regional issues. This could lead to a decrease in the threshold for using nuclear weapons to preempt enemy actions.’”

October 12 – Financial Times (Charles Clover): “Beijing could employ controversial measures to control the disputed airspace over the South China Sea, according to a leading expert with close ties to the Chinese government, as it seeks new ways to assert its authority in the contested region. Wu Shicun, head of the National Institute for South China Sea Studies, said Beijing ‘reserves the right’ to impose a so-called air defence identification zone (ADIZ) once it has finished building its second aircraft carrier.”

October 11 – Reuters (Michel Rose): “Europe should challenge the United States over its increasingly aggressive use of extraterritorial laws that have cost European companies - especially banks - billions in fines and other settlements, a French parliamentary report said. Still reeling from the $9 billion fine its biggest bank, BNP Paribas, had to pay U.S. authorities over violations of American sanctions against other countries, the French government has criticized in recent years what it considers the over-reach of the U.S. legal system. Paris's main objections center on the U.S. Department of Justice's broad interpretation of what it considers its jurisdiction. This sphere of influence can include transactions between non-Americans outside the U.S. where the U.S. dollar currency is involved. It can also cover deals and other actions taking place via the Internet using U.S. computer servers.”