Strong Data and Conspicuous Bubble Excess

By: Doug Noland | Sat, Sep 2, 2017
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Analysis surrounding economic data is especially interesting these days. As always, there's ample opportunity to pick and choose data points to support a particular perspective. I hold the view that economic activity is generally more robust than given credit for (especially in bond markets). The analytical community for the most part downplays economic strength. No reason to stir the Fed or the fixed-income markets. Besides, these days most economic data have minimal market impact. Beyond reports on consumer inflation and wage growth, little seems to garner much interest from Federal Reserve officials.

U.S. Manufacturing payrolls increased 36,000 (estimate 8k) in August, the strongest monthly gain since March 2012. Moreover, July growth was revised up 10,000 to 26,000. One must look all the way back to the 2010 recovery for a stronger two-month period of manufacturing job gains. And while overall August payroll gains (156k) lagged expectations (180k), it's worth mentioning the much stronger number out of ADP. At 236,600 jobs added, August ADP was the strongest since March (255k). One must go back many years to find a stronger August report from ADP.

The US ISM Manufacturing index was reported Friday at a stronger-than-expected 58.8, the highest reading since April 2011. Prices Paid remained unchanged at an elevated 62, with Production up slightly to 61. New Orders were little changed at 60.3. Notably, Employment jumped 4.7 points to 59.9, the strongest reading since June 2011. Manufacturing strength was broad-based, with 14 of 18 industries reporting growth for the month. A Bloomberg article quoted Timothy Fiore, chairman of ISM's factory survey committee: "Really, really strong month for manufacturing... We're seeing a significant expansion." And with an estimated 500,000 vehicles to be scrapped after hurricane Harvey, the auto manufactures no longer face much of an inventory issue. Ford and GM gained about 5% in three sessions.

A headline from a couple weeks back: "Japan Is Now the Fastest-Growing Economy in the G7." With 4% annualized growth, and the "longest expansion in more than a decade," the Japanese economy unexpectedly moved to the top of the growth leaderboard. It was short-lived. Canada's GDP was reported Thursday at a stronger-than-expected 4.5% annualized (y-o-y up 5.3%), the strongest growth since Q3 2011. The expansion was broad-based, with Household Consumption up 4.6% and Exports surging 9.6%.

September 1 - Bloomberg (Carolynn Look): "In a month traditionally reserved for time at the beach, euro-area factories increased output at one of the fastest rates since 2011. A Purchasing Managers' Index for manufacturing climbed to 57.4 in August from 56.6 in July, IHS Markit said... A surge in export orders, paired with robust domestic demand, put pressure on capacity and forced companies to take on more workers."

The JPMorgan Markit Economics global manufacturing index rose 0.4 to 53.1, the highest reading since may 2011. Germany's PMI jumped to 59.3, just below multi-year highs. UK's manufacturing PMI rose to 56.9 vs. a 55.0 estimate.

Data out of China continues to confirm (Credit-induced) expansion. The Caixin China Manufacturing PMI increased 0.5 to 51.6 in August, the strongest reading since February. Export Orders rose to the highest level since 2010. It's worth noting that India (51.2), Mexico (52.2) and Brazil (50.9) all posted stronger manufacturing PMIs.

"Soft" data remain robust. "U.S. Consumer Confidence at Second-Highest Level Since 2000." Conference Board August consumer confidence increased to a stronger-than-expected 122.9. Present Conditions rose to 151.2, the strongest reading since July 2001. European economic confidence jumped to the highest level since the summer of 2007. Meanwhile, German CPI rose to a stronger-than-expected 1.8% in August.

Ten-year Treasury yields rose five bps Friday to 2.17%. For the most part, however, global bond yields have reacted little to stronger-than-expected data. Treasury yields traded as low as 2.10% Friday morning on weaker nonfarm payrolls along with reports out of Frankfurt that the ECB may not have its final plan for winding down QE together until December.

To be sure, global central bankers have brought new meaning to the phrase "behind the curve." Expectations have the ECB taking a gradualist approach to winding down bond purchases. Who knows if rates will ever be returned to a semblance of a reasonable level. Here at home, despite a 3.0% GDP print and a 4.4% unemployment rate, the market sees the Fed likely done raising rates for 2017 (36% odds of rate hike before year-end). And there's still no end in sight for the Bank of Japan's incredible securities purchase program.

The stronger the global economy the more fixated central banks are on CPI. They define "price stability" as a steady 2% rise in an aggregate of consumer prices - even though it's obvious that relatively stable CPI is not reflective of financial stability or overall pricing dynamics throughout the financial markets and economy. Somehow it's gotten to the point where central bankers are determined to prolong a radical experiment in monetary inflation, with slightly below target CPI as justification.

The focus should instead be on the stability of prices more generally, certainly including securities and asset prices. It seems rather inarguable. Central bankers should incorporate a broad mosaic of indicators of financial conditions. These would include money and Credit growth, securities market risk premiums, debt issuance and asset market trends, along with indications of speculative leveraging, destabilizing flows, risk embracement, aggressive risk intermediation and other excesses.

Alan Greenspan fashioned an asymmetrical approach to rate adjustment: slash them aggressively in the event of de-risking/de-leveraging in the markets, while raising them cautiously to ensure that markets are not at risk from tightening financial conditions. This was a Godsend to financial speculation. The Bernanke Fed took things a giant leap deeper. The Fed was prepared to push back against any tightening of financial conditions. "Asymmetrical" doesn't do justice. In the event of ongoing ultra-loose financial conditions and resulting asset price instability, the Fed (and their central bank compatriots) can sit back and completely disregard escalating monetary disorder (while clasping hands and repeating "CPI below target").

Things turn crazy late in Bubble episodes - especially, as we're witnessing, in the "Granddaddy of All Bubbles."

August 23 - Financial Times (Joe Rennison): "Hedge funds are embracing an esoteric credit product widely blamed for exacerbating the financial crisis a decade ago, as low volatility and near record prices for corporate debt tempt them into riskier areas to seek higher returns... The surge in activity reflects the effort by investors to generate a higher rate of return during a period of historically low volatility in credit markets, compounded by low fixed rate yields... Tranches with less exposure to defaults might only offer a 0.3 to 0.5% annual return but investors 'lever' the position by paying only a proportion of the deal value as collateral. While that increases the risk of safer tranches, investors are using less leverage than was case before the financial crisis, traders say. Leverage up to 20 times is now typical, pushing returns above 5%."

August 28 - Wall Street Journal (Christopher Whittall and Mike Bird): "The synthetic CDO, a villain of the global financial crisis, is back. A decade ago, investors' bad bets on collateralized debt obligations helped fuel the crisis. Billed as safe, they turned out to be anything but. Now, more investors are returning to CDOs—and so are concerns that excess is seeping into the aging bull market... Desperate for something that pays better than basic government bonds, insurance companies, asset managers and affluent investors are scooping up investments like synthetic CDOs, bankers say, which had largely become the preserve of hedge funds after 2008... The fastest growth this year has come in credit—the epicenter of the 2007-08 crisis. The top 12 global investment banks had around $1.5 billion in revenue in structured credit in the first quarter, according to Coalition, more than doubling since the first quarter of 2016. Structured equities are largest overall, a business dominated by sales of derivatives linked to moves in stock prices, with revenue of $5 billion in the first quarter."

According to Dealogic, U.S. corporate debt sales have surpassed $1.2 TN y-t-d and remain on record pace. How much is demand for these debt securities driven by the popularity of various structured finance vehicles, including a rejuvenated CDO marketplace? How much leverage is accumulating when "up to 20 times is now typical" for "safe" tranches? How have years of ultra-loose monetary policy, along with Fed's assurances to "push back" against any tightening of financial conditions, distorted the entire structure of the corporate debt marketplace?

Friday from the Financial Times (Kadhim Shubber), under the headline "This is What Watching a Bubble Feels Like... Behold the Madness:"

"'The OMG token sale, which raised $25 million, took place in July and initially one OMG token was worth around $0.27. Today, the value is at more than $11, giving a return of more than 40X to anyone who bought in at the ICO stage. Qtum raised $15.6 million worth of crypto in March. Its QTUM token was worth $0.30 initially, but today that price is above $17.' That's via TechCrunch, which says OMG and Qtum are the first initial coin offerings to breach a $1bn market cap. It dubs them 'ICO unicorns'. Apparently the price rises are a 'massive respectable return for those who speculated'. Never mind that 'neither company has an actual product in the market right now'."

August 29 - Bloomberg (Sho Chandra): "Unless you've been living under a rock, you're probably aware that bitcoin and a number of other digital currencies have seen some pretty crazy runs this year. Bitcoin, the best-known digital currency, has surged 358%. While staggering, lesser-known competitors have seen even bigger gains, such as the more than 4,000% increase for ethereum. Bespoke Investment Group contrasted the rise in bitcoin with infamous bubbles such as the tech market in the late nineties. There's almost no comparison. Tech stocks rose just over 1,000% over the entire course of their bubble, and bitcoin is already up more than twice that."

August 30 - Bloomberg: "The rise of initial coin offerings in China has disrupted the social economic order and poses a financial risk, a domestic trade group said. Institutions have misled investors to raise funds through ICOs, the National Internet Finance Association of China, an organization endorsed by the State Council and top finance and banking watchdog, said... Unauthorized by regulators, some of the ICOs are suspected of fraud, illegal equity offerings and fundraising, the group said... 'ICO projects have unclear assets, no investor suitability standards and gravely lack information disclosure and therefore have relatively high risks,' the association said. 'Investors should keep a clear mind, stay on high alert for frauds and report any wrongdoings to the police department.'"

The unfolding cryptocurrency Bubble has been feeding off ultra-loose financial conditions and a mindset of speculation that has become deeply entrenched (from years of free "money"). It's become a full-fledged mania, although its significance will be downplayed by those pointing to the relatively small scope of the market. While not quite as outrageous, there are myriad indicators pointing to precariously loose monetary conditions and late-stage Bubble Excess (where market cap is quite meaningful).

Biotech stocks (BTK) surged 9.0% this week, pushing y-t-d gains to 37.7%. The Nasdaq Biotech index (PE 107) this week saw 10 stocks (out of 160) gain better than 20% and 43 rise double-digits. About any company in the process of developing a new cancer treatment saw its stock soar.

Biotech is not alone in indicating Bubble danger. The Morgan Stanley High Tech Index surged 2.6% this week to new all-time highs, boosting y-t-d gains to 28.7%. The Semiconductor index jumped 3.6%, increasing 2017 gains to 23.5%. The Nasdaq Composite rose 2.7% (up 19.6% y-t-d) and the Nasdaq100 advanced 2.8% (up 23.1%).

August 29 - CNBC (Andrea Riquier): "U.S. home price growth picked up steam in June as strong demand continued to buoy the market. The S&P/Case-Shiller 20-city index rose a seasonally adjusted 5.7% in the three-month period ending in June, compared with a year ago, the same rate of change as in May. The national index rose 5.8%, compared with a year ago, up from a 5.7% annual increase in May. Nine cities had stronger annual price growth in June than in May, and western metros remained on top, with annual price gains ranging from 13.4% in Seattle to 7.7% in Dallas. Seattle prices are rising so rapidly that they have left No. 2 Portland in the dust."

I may be biased by what I see locally - and by generally overheated housing markets along the entire West Coast - but I believe a powerful inflationary bias and Bubble Dynamics have taken hold in many markets around the country. This is an important consequence of timid central bankers and low bond yields. Recent housing sales have somewhat disappointed, but this has likely been impacted by the lack of inventory in strong markets. It's taking time for builders to catch up with robust demand (homebuilder index up 13.8% y-t-d).

There is ample support for the global Bubble thesis. Emerging market equities (EEM) rose this week to three-year highs. Brazil's 1.2% rise increased y-t-d gains to 19.4%. India's almost 1% gain took y-t-d returns to 19.8%. So far this year, stocks in Turkey have gained 41%, Poland 26%, Hungary 17.9%, Romania 14.6%, Hong Kong 27.1%, South Korea 16.4%, Taiwan 14.5%, Indonesia 10.7%, Philippines 16.3%, Vietnam 18.6%, Mexico 11.9%, Argentina 40%, Chile 24.6% and South Africa 13.9%.

In any other environment, surging securities and asset prices coupled with synchronized global economic momentum would see bond prices under pressure. But with global central bankers fixated on consumer price indices and the bond market confident in inflation dynamics, fixed income has been about as comfortable as one could imagine.

Perhaps central bankers have just decided to sit back and let these Bubbles run. I hold out some hope that they will recognize their predicament and begin to signal a desire to get back to the process of "normalization." We're at the late phase of the Bubble - where bond markets are sniffing out trouble (bursting Bubbles and mounting geopolitical risks). But it's the bond market's keen sense of smell that keeps yields artificially low, ensuring exactly the loose financial conditions necessary to sustain perilous late-stage Bubble excess.

A Thursday Bloomberg headline: "The Bond Market's Biggest Rally of 2017 Amazes Traders." By Friday afternoon fixed income did seem to be awakening somewhat to reality. Also from Bloomberg: "Junk Bonds Face Wave of Supply Just as Investors Turn Sour." It's interesting to ponder how the world might change when investors turn sour on corporate Credit and fixed-income more generally. It may not these days be the most conspicuous of Bubbles - but it's surely among the biggest and with the most far-reaching consequences.

 


For the Week:

The S&P500 gained 1.4% (up 10.6% y-t-d), and the Dow increased 0.8% (up 11.3%). The Utilities declined 0.7% (up 11.3%). The Banks slipped 0.6% (up 2.1%), while the Broker/Dealers added 0.7% (up 11.2%). The Transports jumped 2.4% (up 3.5%). The S&P 400 Midcaps rallied 1.7% (up 4.6%), and the small cap Russell 2000 recovered 2.6% (up 4.2%). The Nasdaq100 jumped 2.8% (up 23.1%), and the Morgan Stanley High Tech index advanced 2.7% (up 28.7%). The Semiconductors rose 3.6% (up 23.5%). The Biotechs surged 9.0% (up 37.7%). With bullion up $34, the HUI gold index jumped 5.9% (up 16.9%).

Three-month Treasury bill rates ended the week at 98 bps. Two-year government yields added a basis point to 1.34% (up 15bps y-t-d). Five-year T-note yields slipped two bps to 1.74% (down 19bps). Ten-year Treasury yields were little changed at 2.17% (down 28bps). Long bond yields rose three bps to 2.78% (down 29bps).

Greek 10-year yields were little changed at 5.48% (down 154bps y-t-d). Ten-year Portuguese yields declined three bps to 2.84% (down 91bps). Italian 10-year yields slipped two bps to 2.08% (up 27bps). Spain's 10-year yields dipped a basis point to 1.60% (up 22bps). German bund yields were unchanged at 0.38% (up 18bps). French yields declined one basis point to 0.69% (up 1bp). The French to German 10-year bond spread narrowed one to 31 bps. U.K. 10-year gilt yields were little changed at 1.06% (down 18bps). U.K.'s FTSE equities index added 0.5% (up 4.1%).

Japan's Nikkei 225 equities index gained 1.2% (up 3.0% y-t-d). Japanese 10-year "JGB" yields declined two bps 0.00% (down 4bps). France's CAC40 increased 0.4% (up 5.4%). The German DAX equities index slipped 0.2% (up 5.8%). Spain's IBEX 35 equities index dipped 0.2% (up 10.4%). Italy's FTSE MIB index gained 0.5% (up 13.6%). EM equities were mixed. Brazil's Bovespa index rose 1.2% (up 19.4%), while Mexico's Bolsa declined 0.6% (up 11.9%). South Korea's Kospi fell 0.9% (up 16.3%). India's Sensex equities index added 0.9% (up 19.8%). China's Shanghai Exchange rose 1.1% (up 8.5%). Turkey's Borsa Istanbul National 100 index increased 0.2% (up 40.8%). Russia's MICEX equities index jumped 1.6% (down 9.9%).

Junk bond mutual funds saw outflows of $277 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined four bps to a 2017 low 3.82% (up 36bps y-o-y). Fifteen-year rates were down four bps to 3.12% (up 35bps). The five-year hybrid ARM rate slipped three bps to 3.14% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 3.99% (up 42bps).

Federal Reserve Credit last week dropped $11.1bn to $4.414 TN. Over the past year, Fed Credit declined $4.6bn. Fed Credit inflated $1.603 TN, or 57%, over the past 251 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $3.3bn last week to an almost two-year high $3.345 TN. "Custody holdings" were up $157bn y-o-y, or 4.9%.

M2 (narrow) "money" supply last week surged $39.6bn to a record $13.668 TN. "Narrow money" expanded $695bn, or 5.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits jumped $57.4bn, while Savings Deposits fell $34.4bn. Small Time Deposits added $2.3bn. Retail Money Funds gained $12.8bn.

Total money market fund assets dropped $19.7bn to $2.716 TN. Money Funds declined $8.1bn y-o-y.

Total Commercial Paper surged $27bn to a one-year high $1.023 TN. CP gained $42bn y-o-y, or 4.3%.

Currency Watch:

August 27 - Bloomberg (Justina Lee): "With the dollar languid in the absence of supportive rate-hike rhetoric from Jackson Hole, the People's Bank of China set the strongest yuan fixing in a year on Monday, exceeding the average forecast of 18 traders and analysts... The signal that Chinese policy makers are comfortable with yuan strength saw the currency trade below 6.65 per dollar onshore, a level the yuan seemed to have stalled at following a hefty advance. The currency is the best performer in Asia this month, and shows no signs of slowing down."

The U.S. dollar index was little changed at 92.814 (down 9.4% y-t-d). For the week on the upside, the Canadian dollar increased 0.7%, the South African rand 0.6%, the Brazilian real 0.6%, the Australian dollar 0.5%, the British pound 0.5%, and the South Korean won 0.5%. On the downside, the New Zealand dollar declined 1.2%, the Mexican peso 1.1%, the Swiss franc 0.8%, the Japanese yen 0.8%, the Norwegian krone 0.6%, the euro 0.5%, the Swedish krona 0.4% and the Singapore dollar 0.1%. The Chinese renminbi jumped 1.34% versus the dollar this week (up 5.89% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.9% (down 3.0% y-t-d). Spot Gold jumped 2.6% to $1,325 (up 15%). Silver surged 4.0% to $17.816 (up 11.5%). Crude fell 58 cents to $47.29 (down 12%). Gasoline surged 4.9% (up 5%), and Natural Gas jumped 6.2% (down 18%). Copper rose 2.0% (up 24%). Wheat added 0.8% (up 8%). Corn increased 0.5% (up 1%).

Trump Administration Watch:

August 28 - Bloomberg (Sahil Kapur): "President Donald Trump is planning to kick off one of the most important sales pitches of his presidency this week -- getting Americans fired up about rewriting the U.S. tax code. But there's no plan to sell. Basic questions remain unanswered. Will the changes be permanent or temporary? How will individual tax brackets be set? What rate will corporations and small businesses pay? Instead of providing details that could help build support for a bill, the president will largely rely on the same talking points he and his advisers have highlighted since January: The middle class deserves a tax cut and businesses need changes to help them compete with global rivals. Treasury Secretary Steven Mnuchin -- who earlier predicted having a tax bill done by August -- revealed the enormity of the task ahead on Friday: He didn't commit to completing it by year's end. 'They're nowhere. They're just nowhere,' said Henrietta Treyz, a tax analyst with Veda Partners and former Senate tax staffer. 'I see them putting these ideas out as though they're making progress, but they are the same regurgitated ideas we've been talking about for 20 years that have never gotten past the white-paper stage.'"

August 30 - Reuters (James Oliphant): "U.S. President Donald Trump made his first major tax reform speech on Wednesday, but in a long list of thank yous he did not mention Gary Cohn, the White House point man on taxes who traveled with Trump to the event. At a manufacturing company in Springfield, Missouri, Trump reiterated his longstanding call for slashing the U.S. corporate tax rate to 15% from 35% at a time when lawmakers believe they could be lucky to bring it down to 25%."

August 29 - CNBC (Ylan Mui): "Conservatives are beginning to draw battle lines in next month's fight over raising the nation's borrowing limit, setting the stage for a showdown that could rattle the markets. North Carolina Rep. Mark Walker, head of the influential Republican Study Committee, said this week that any increase in the federal debt ceiling should be paired with more stringent eligibility requirements for Medicaid. The committee is still considering whether to seek other spending reforms as well and will discuss their priorities with GOP leadership next week. But the committee represents more than half of the Republican lawmakers in the House — endangering any bill that does not have its full support. 'We're very aware and understand the ramifications, and we want to make sure that we don't default,' Walker told CNBC. 'But at some point ... we have to look at specific reforms to make sure that we're being fiscally responsible.'"

August 30 - Wall Street Journal (Vipal Monga): "Republican plans to scale back tax deductions on companies' interest payments risk pushing more borrowing overseas, say analysts and market participants, eroding the competitive advantage of the $6.053 trillion U.S. corporate-bond market. Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, said this month that he wanted to curtail companies' capacity to deduct net interest payments from taxable income to pay for tax cuts. The comments virtually ensure the topic will feature prominently in the coming tax debate, which is expected to begin in earnest after Labor Day. White House officials and top House Republicans say they are optimistic about finishing a major tax bill this year, but they have a long way to go."

August 28 - Financial Times (Demetri Sevastopulo and Shawn Donnan): "Donald Trump last month rejected a Chinese proposal to cut steel overcapacity despite it being endorsed by some of his top advisers, as he urged them instead to find ways to impose tariffs on imports from China. One week after the July G20 summit in Hamburg, at which Mr Trump criticised China for flooding the world market with cheap steel, Beijing proposed cutting steel overcapacity by 150m tonnes by 2022. But Mr Trump twice rejected the deal, according to several people familiar with the internal debate. The offer came the week before US and Chinese officials held a high-level economic dialogue that had been set up by Mr Trump and Chinese president Xi Jinping in April. Wilbur Ross, US commerce secretary, endorsed the deal and brought it to Mr Trump, but the president rejected the proposal."

China Bubble Watch:

August 31 - Bloomberg: "For most of the year, there's been an oft-repeated refrain among China-watchers. Whispered in private meetings with clients or loudly spoken by confident brokers, it goes something like this: 'Don't worry about the economy or markets in 2017 -- Beijing won't let anything bad happen ahead of the Communist Party Congress.' Much less clear is what happens after the gathering, a once-in-five years conclave now scheduled to convene on Oct. 18 in Beijing. Now that the dates -- a secret until late Thursday -- are known, the narrative will need to evolve, with what takes place at the meeting of some 2,300 delegates key to determining China's course over the next five years."

August 29 - Bloomberg: "Regional banks in China's rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS... Smaller rust-belt banks... have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said. Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default..."

August 30 - Bloomberg (Prudence Ho): "HNA Group Co.'s financing costs more than doubled during the first half of the year, signaling the conglomerate's $45-billion-plus acquisition spree since 2015 is catching up with the company. The diversified group, which in recent years bought large stakes in companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG, saw such expenses surge to 14.2 billion yuan ($2.1bn) from 6.47 billion yuan a year earlier... Based on Bloomberg calculations, earnings before interest and taxes were insufficient to cover those costs, a rarity for a company of HNA's size -- even in China."

Brexit Watch:

August 29 - Bloomberg (Ian Wishart and Nikos Chrysoloras): "European Commission President Jean-Claude Juncker joined the bloc's chief negotiator in lashing out at the U.K. for failing to prepare for Brexit talks, as the third round of negotiations looked set to produce little progress. 'I've read all the position papers produced by Her Majesty's government and none of them is satisfactory,' Juncker said... as talks between the U.K. and the EU resumed. 'There is still an enormous amount of issues that remain to be settled.' The stage had already been set for an intense round of negotiations after chief negotiator Michel Barnier and Brexit Secretary David Davis met on Monday for the first time since July and candidly aired their frustration at each other's approaches."

Central Bank Watch:

August 30 - Bloomberg (Piotr Skolimowski): "German inflation accelerated more than economists predicted as European Central Bank officials prepare to discuss paring back stimulus. The rate rose to 1.8% in August from 1.5% in July... In Spain, energy prices propelled consumer inflation to 2% in August..."

August 27 - Bloomberg (Brett Miller and Kathleen Hays): "Bank of Japan Governor Haruhiko Kuroda said that despite some signs of reduced liquidity, the market for Japanese government bonds is 'functioning quite well' and actually makes it easier for the BOJ to manage yields with fewer purchases. 'Since JGBs remaining in the market is going to decline, that means that with one unit of JGB purchase, the impact on the interest rate could be bigger,' Kuroda said... 'So that in coming months there will be less and less need to purchase JGBs in order to maintain the yield curve.'"

Global Bubble Watch:

August 27 - Bloomberg (Ben Bartenstein): "More investors are joining the cast of Wall Street veterans from Jeff Gundlach to Ray Dalio in warning that risky assets are overvalued. They point to rising global turmoil underscored by the recent terrorist attacks in Barcelona and the racially charged violence in Charlottesville, Virginia, as well as valuations that no longer compensate for potential flareups in North Korea and Venezuela. That's not to mention the unpredictability in the U.S., where President Donald Trump is feuding with members of Congress before a critical vote to increase the country's debt ceiling. Among the assets under scrutiny are emerging-market bonds, which for only the third time in history are yielding less than U.S. junk debt."

August 31 - Bloomberg (Theophilos Argitis): "Canada's economy unexpectedly accelerated at a 4.5% pace in the second quarter -- tops among Group of Seven countries -- led by the biggest binge in household spending since before the 2008-2009 global recession. Annualized growth was the fastest in six years and topped the 3.7% average forecast from economists. The expansion surpassed the 3.7% first quarter growth rate..."

Fixed Income Bubble Watch:

August 29 - CNBC (Jeff Cox): "Unless something dramatic happens, the Federal Reserve won't be hiking interest rates again until well into 2018, according to current market predictions. Fed funds futures — contracts that indicate where the market thinks the central bank's benchmark rate will be — point to no further moves until at least next June, and possibly a good deal later. Futures indicate that the Fed will approve just one increase between now and the end of next year."

Federal Reserve Watch:

August 29 - Bloomberg (Sho Chandra): "John Williams, president of the San Francisco Fed, was the latest US policymaker to reiterate that the Federal Reserve is intent on making the unwinding of its $4.5tn balance sheet as boring as possible. The European Central Bank has been making similar noises ahead of an expected tapering of its bond-buying plan. Thus far, markets have agreed. Rather than a re-run of the 2013 'taper tantrum' that hammered markets when the central bank first talked about stopping its purchases, bond yields have sagged lower this year, while the stock market has hit fresh records... Yet murmurs are rising that investors are underestimating the potential impact of the combination of both the Fed and the ECB simultaneously scaling back their monetary stimulus programmes. Indeed, some now reckon this is the single-biggest danger confronting markets this autumn and into next year."

August 27 - Bloomberg (Christopher Condon): "Federal Reserve Bank of Cleveland President Loretta Mester urged her colleagues to look past recent weak inflation data and to stick to their gradual pace of lifting interest rates, with one more increase projected before the end of this year. 'There's some risk that if we wait too long we can find ourselves in a bad spot,' Mester said... on the sidelines of the Fed's annual retreat in Jackson Hole, Wyoming. 'We have to move policy a little bit before we get to the goals or else we're going to get behind.'"

U.S. Bubble Watch:

August 30 - Bloomberg (Sho Chandra): "U.S. second-quarter growth was revised upward to the fastest pace in two years on stronger household spending and a bigger gain in business investment, putting the economy on a stronger track... Gross domestic product rose at a 3% annualized rate from prior quarter (est. 2.7%); revised from initial estimate of 2.6%. Consumer spending, biggest part of the economy, grew 3.3% (est. 3%), most since second quarter of 2016 and revised from 2.8%. Nonresidential fixed investment rose 6.9%, revised from initial increase of 5.2%."

August 29 - CNBC (Diana Olick): "Not only are home prices continuing to rise, but the gains are accelerating. Couple that with record-low supply of homes for sale, and you would think demand would fall off. So far, it has not. Bidding wars are to be expected with most offers, especially in larger metropolitan areas and their suburbs. 'It's a new normal in the housing market,' wrote Cheryl Young, senior economist at Trulia... 'Ever rising prices being met by insatiable demand.' The supply of homes for sale at the end of July was 9% lower compared with July of 2016... Homes are selling faster and faster each month... Builders are shifting somewhat to lower-priced products but really continue to concentrate on move-up homes, which is not helping the shortage."

August 29 - Bloomberg (Sho Chandra): "A pickup in consumer confidence to the second-highest level since late 2000 provide a basis for steady gains in spending, according to... the... Conference Board. Confidence index rose to 122.9 (est. 120.7) from downwardly revised 120 in July. Present conditions measure increased to 151.2, highest since July 2001, from 145.4."

August 30 - Bloomberg (Katherine Chiglinsky): "Hurricane Harvey could cause $70 billion to $90 billion in economic losses from wind, storm surge and flood damage, most of it in the Houston metropolitan area, according to risk-modeling company RMS. The majority of those losses will be uninsured... The final tally of damages could rise as the flooding continues, the company said."

August 29 - CNBC (Phil LeBeau): "They seem to be in almost every picture or video of flooded neighborhoods in and around Houston. There are scores of cars and trucks with water up to their windows and in some cases over the hood and roof. In fact, the flooding is so extensive, Cox Automotive estimates a half-million vehicles may wind up in the scrap yard. 'This is worse than Hurricane Sandy,' said Jonathan Smoke, chief economist for Cox Automotive. 'Sandy was bad, but the flooding with Hurricane Harvey could impact far more vehicles.'"

August 27 - Financial Times (Ben McLannahan): "Wall Street analysts have been urging investors all year to buy stocks in the big US banks. But Wall Street itself is not listening. Executives and board members at the top six US banks have been consistent sellers of their own banks' shares this year... Insiders at the big six banks by assets — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley — have in total sold a net 9.32m shares on the open market since the turn of the year. Even excluding Warren Buffett's big dumping of shares in Wells in April... sales by insiders outnumber purchases by about 14 to one."

August 29 - Bloomberg: "Insurers got burned badly in the 2008 financial crisis. So almost a decade later, BlackRock Inc scoured the industry's $5 trillion in US investments to figure out how they would fare if markets crash so hard again. The answer: Worse. The world's largest money manager mined regulatory filings of more than 500 insurance companies and modeled their portfolios in a similar downturn. Their stockpiles... would drop by 11% on average... That's significantly steeper, BlackRock estimates, than the group's 'mark-to-market' losses during the depths of the crisis. The reason is pretty simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets..."

Europe Watch:

August 31 - Bloomberg (Catherine Bosley): "Inflation in the euro area picked up more than economists predicted though underlying cost pressures failed to accelerate, underscoring the European Central Bank's struggle for price stability just days before officials debate the future of their stimulus program. Consumer prices rose 1.5% in August after 1.3% in July... That's the highest reading in four months..."

August 26 - Reuters (Sudip Kar-Gupta): "Most French voters are now dissatisfied with Emmanuel Macron's performance, a poll showed on Sunday, a dramatic decline for a president who basked in a landslide election victory less than four months ago. The poll, conducted by Ifop for newspaper Le Journal du Dimanche (JDD), showed Macron's 'dissatisfaction rating' rising to 57%, from 43% in July."

Geopolitical Watch:

August 30 - BBC: "North Korea says its firing of a missile over Japan was 'the first step' of military operations in the Pacific, signalling plans for more launches. State media also repeated threats to the US Pacific island of Guam, which it called 'an advanced base of invasion'. The missile launched on Tuesday crossed Japan's northern Hokkaido island, triggering public alerts to take cover, before landing in the sea. The UN Security Council has unanimously condemned North Korea for its actions. Meeting late on Tuesday..., the council called the launch 'outrageous', demanding North Korea cease all missile testing."

August 28 - CNBC (Justina Crabtree): "North Korea's provocative launch of a missile through Japanese airspace came quickly following strong warnings from South Korea that its military was gearing up to hit North Korea back hard if necessary. South Korea and Japan condemned the latest Tuesday's launch in strong terms. While Japanese Prime Minister Shinzo Abe said the missile was an unprecedented, serious and grave threat to his country, South Korean President Moon Jae-in ordered a show of 'overwhelming' force against Pyongyang."

August 29 - Reuters (Jack Kim and Kaori Kaneko): "South Korean and Japanese jets joined exercises with two supersonic U.S. B-1B bombers above and near the Korean peninsula on Thursday, two days after North Korea fired a missile over Japan, sharply raising tension. The drills, involving four U.S. stealth F-35B jets as well as South Korean and Japanese fighter jets, came at the end of annual joint U.S.-South Korea military exercises focused mainly on computer simulations."

August 29 - Reuters (Parisa Hafezi): "Iran has dismissed a U.S. demand for United Nations nuclear inspectors to visit its military bases as 'merely a dream'. It also said the International Atomic Energy Agency (IAEA) was unlikely to agree anyway. The U.S. ambassador to the United Nations, Nikki Haley, last week pressed the IAEA to seek access to Iranian military bases to ensure that they were not concealing activities banned by the 2015 nuclear deal reached between Iran and six major powers. U.S. President Donald Trump has called the nuclear pact... 'the worst deal ever'. In April, he ordered a review of whether a suspension of nuclear sanctions on Iran was in the U.S. interest."

 


 

Doug Noland

Author: Doug Noland

Doug Noland
Credit Bubble Bulletin

Doug Noland

I just wrapped up 25 years (persevering) as a "professional bear." My lucky break came in late-1989, when I was hired by Gordon Ringoen to be the trader for his short-biased hedge fund in San Francisco. Working as a short-side trader, analyst and portfolio manager during the great nineties bull market - for one of the most brilliant individuals I've met - was an exciting, demanding and, in the end, a grueling and absolutely invaluable learning experience. Later in the nineties, I had stints at Fleckenstein Capital and East Shore Partners. In January 1999, I began my 16 year run with PrudentBear, working as strategist and portfolio manager with David Tice in Dallas until the bear funds were sold in December 2008.

In the early-nineties, I became an impassioned reader of The Richebacher Letter. The great Dr. Richebacher opened my eyes to Austrian economics and solidified my lifetime passion for economics and macro analysis. I had the good fortune to assist Dr. Richebacher with his publication from 1996 through 2001.

Prior to my work in investments, I worked as a treasury analyst at Toyota's U.S. headquarters. It was working at Toyota during the Japanese Bubble period and the 1987 stock market crash where I first recognized my love for macro analysis. Fresh out of college I worked as a Price Waterhouse CPA. I graduated summa cum laude from the University of Oregon (Accounting and Finance majors, 1984) and later received an MBA from Indiana University (1989).

By late in the nineties, I was convinced that momentous developments were unfolding in finance, the markets and policymaking that were going unrecognized by conventional analysis and the media. I was inspired to start my blog, which became the Credit Bubble Bulletin, by the desire to shed light on these developments. I believe there is great value in contemporaneous analysis, and I'll point to Benjamin Anderson's brilliant writings in the "Chase Economic Bulletin" during the Roaring Twenties and Great Depression era. Ben Bernanke has referred to understanding the forces leading up to the Great Depression as the "Holy Grail of Economics." I believe "The Grail" will instead be discovered through knowledge and understanding of the current extraordinary global Bubble period.

Disclaimer: Doug Noland is not a financial advisor nor is he providing investment services. This blog does not provide investment advice and Doug Noland's comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. The Credit Bubble Bulletins are copyrighted. Doug's writings can be reproduced and retransmitted so long as a link to his blog is provided.

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