End of an Era

By: Doug Noland | Sat, Nov 4, 2017
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Of the diverse strains of inflation, asset inflation is by far the most dangerous. A bout of consumer price inflation would be generally recognized as problematic and rectified through a tightening of monetary conditions. On the other hand, asset price inflation is both celebrated and venerated. There is simply no constituency calling for a tightening of conditions to ward off the deleterious effects of rising asset prices, Bubbles and attendant economic maladjustment. And as we've witnessed, the bigger the Bubble the more powerful the constituencies that rationalize, justify and promote Bubble excess.

About one year ago, I was expecting a securities markets sell-off in the event of an unexpected Donald Trump win. A Trump presidency would create disruption, upheaval and major uncertainties - political, geopolitical, economic and social. Instead of a fall, the markets experienced a short squeeze and unwind of hedges. Over-liquefied markets and a powerful inflationary bias throughout global securities markets won the day - and the winning runs unabated.

We've come a long way since 1992 and James Carville's "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." New age central banking has pacified bond markets and eradicated the vigilantes. These days it's the great equities bull market as all-powerful intimidator.

The President admitted his surprise in winning the election. I suspect he and his team were astounded by the post-election market rally. I've always held the view that prolonged bull markets foster a portentous concentration of power - not only in the financial markets but within the financial system more generally.

That was certainly the case during the "Roaring Twenties," just as it was in the late-nineties and throughout the mortgage finance Bubble period. A big market decline would have provided the new President the opportunity to blame the Bubble while moving forward aggressively with his reform agenda. Instead, a rally ensured that Team Trump would be held captive to the financial markets. As his administration struggled, President Trump could at least point to record stock prices.

I was hoping for reform-minded Kevin Warsh or John Taylor at the helm of the Federal Reserve. But I've somewhat warmed up to establishment-favored Jerome Powell, not so much because he will pursue needed changes in monetary management - but because Mr. Powell is likely about the best we could have hoped for in the current market environment. Apparently, the President was close to reappointing market darling chair Yellen. And if Yellen wasn't dovish enough for the markets, Bill Gross stated his preference for either Paul McCulley or Neel Kashkari. I have McCulley and Kashkari far down the list - just above Ben Bernanke but below Charles Evans and Mark Zuckerberg.

Powell is viewed as the logical choice for continuity and stability at the Fed. He has a diverse background in law, government, the markets (with Carlyle Group), regulation and monetary policy. Powell will be the first Fed chairman without an economics Ph.D. since Paul Volcker. In many ways, it is a much welcomed End of an Era.

Janet Yellen is a widely respected economist - and by all accounts has been an able administrator of the Federal Reserve system. It has been noted that she will be the first Fed chair whose term ended without the experience of a recession. More importantly, she is surely the first leader of our central bank to have enjoyed a full term of uninterrupted extremely loose policy and financial conditions.

I'll rain on the parade of accolades: The Yellen Fed failed to tighten policy in the face of increasingly conspicuous Bubble excess. Worse even than unforgivable past episodes, the Fed badly missed its timing. Today's backdrop ensures an easy start to what will be an extremely challenging job for chairman Powell.

I've read numerous articles and listened to various commentaries. Leave it to esteemed former Minneapolis Fed President Gary Stern to offer the keenest insight:

Bloomberg's Tom Keene: "Ellen Zentner at Morgan Stanley writes a detailed note about what we would expect from chairman Powell. She mentions that there's a mystery here over chairman Powell and core economics, including NAIRU [non-accelerating inflation rate of unemployment]... Does it matter that chairman Powell maybe has a little fuzzy knowledge of NAIRU like mere mortals like me?"

Former Minneapolis Fed President Gary Stern: "No. And, in fact, I might view that as an advantage. Because that framework is frayed at best, it seems to me given our economic performance over the past "X" years - and "X" is not a small number. So, I think some open-mindedness on that framework is a distinct positive. And I think it would be worthwhile for a fair amount of resources to be devoted to a pretty thorough review of some of the critical macroeconomic issues and frameworks of the day, because they have not all served policymakers well; they have not all served commentators well; they have not all served the Street well. And I think it would be a good idea to open some of that up."

Bloomberg's Mike McKee: "Do you think we've come to the end, maybe, of the Bernanke era of making policy in terms of setting an inflation target at 2% and aiming for that as sort of the reason - the way you conduct policy. Could we see some sort of change?"

Stern: "I think you certainly could. But I can't read the new chair's mind - so I don't know where he stands on that 2% number. To me, that number's always been sort of an arbitrary number. My nickel on it is that if you're running a little below your inflation target that's hardly a big problem. I would once again urge review and maybe modification of that particular target because it's not clear to me that there's great virtue in it. There may be a better way to formulate the inflation objective."

And from the Wall Street Journal: "'He is remarkably undogmatic,' says Jeremy Stein, a Harvard University economics professor, Democrat and former Fed governor whose office was adjacent to Mr. Powell's. 'He listens more than he talks.'"

With the suggestion of an End of an Era, I'm thinking of 30 years of ideologies dominating the Federal Reserve system. Alan Greenspan was the free-market ideologue that championed market-based finance, only to morph into "The Maestro" cunningly intervening in and manipulating increasingly unstable financial markets. Dr. Bernanke was summoned to the Federal Reserve in 2002 on the back of his radical theories of post-Bubble reflation. The powers that be later embraced Bernanke as Greenspan's successor. By 2006, it was clear that reflationary measures had created an only more formidable Bubble for "helicopter Ben" to pilot. Janet Yellen, the pleasantly dovish intellectual of all things employment economics, was to ensure continuity in the implementation of the Bernanke Doctrine of radical monetary inflationism.

As Mr. Stern suggested above, it's now time for a "pretty thorough review of some of the critical macroeconomic issues and frameworks of the day." Long Overdue. I don't envy Mr. Powell. His predecessors have left him, in the words of candidate Trump, "one big, fat, ugly Bubble." Markets are comfortable that Powell will stick with the program of occasional little, harmless baby-step rate increases. Policies that actually tighten financial conditions remain unacceptable indefinitely. And it goes without saying that markets will be ready to throw a tizzy fit if the new chairman dares to even hint of a departure from market-friendly policymaking.

Powell has been referred to as a "loyal ally" of Janet Yellen, which endears him to the markets. He is by all accounts deferential and hard-working. Yet Powell is not an ideologue. He does not champion a doctrine that would have him wedded to specific econometric models or theoretical constructs.

It's hard for me to believe he has the mindset to fixate on CPI measures slightly below target, while disregarding the markets. The Fed's slim notion of "price stability" needs broadened and modernized. And I'm hopeful a Powell Fed's "risk management approach" will focus more on the risks of promoting excess rather than measures to dampen market volatility and incentivize risk-taking. In such a complex world of extraordinary financial and economic developments, it's hard to believe Powell will get bogged down in a debate on mythical "neutral" and "natural" interest rates. Ditto NAIRU.

So, trying to be constructive here, it's a start. He may not be the bold reformer so needed at the Federal Reserve, but I'm hoping he'll capably begin pulling the Fed away from radical inflationism. If he has been a keen observer and good listener, it would be rational to begin the process of extricating the Fed from such a dominant position in the markets. It's not as if the Bubble is inconspicuous.

Perhaps Jerome Powell is even the type of individual driven to cultivate a sound analytical framework and philosophy - determined to learn, understand and adapt. That would be such a refreshing change from the Era of ideologues.

As someone with significant market experience, he surely recognizes the risks associated with financial excess. He must appreciate the dangers associated with Bubbles and pandering to speculative markets.

A lot will remain unknown until Powell is tested. How quickly does he come to the markets' defense? Does he quietly abandon Bernanke's - "the Fed will push back against a tightening of financial conditions" - over-the-top market inducement?

While he has not dissented on an FOMC vote, from his diverse real world experience, does he believe the Fed has been too reluctant in returning to traditional monetary management? Will he be a proponent of QE or instead view it with a healthier skepticism than the ideologues? I have no illusions that the Fed is about to eliminate QE from its toolkit. My view holds that, come the next serious de-risking/de-leveraging episode, central bankers will see few alternatives than creating more "money."

Yet the key issue is how quickly in a crisis does the Powell Fed come to the markets' rescue. As a pragmatic non-ideologue, he may appreciate the risks of coming too soon. And I have a crazy thought: maybe Powell even believes in the value of market discipline. By design or, more likely, by default - it's the right time to move away from academic economists.

Depending on the President's other Fed nominations, it could be quite a diverse group at the FOMC. Markets are today worry-free, but could chairman Powell be relegated to herding cats? It's already a divided group - with divisions going much beyond traditional "hawk" and "dove." Indeed, there are starkly divergent views as to how the world works. For starters, do economies drive the markets - or is it the securities markets these days that govern economic development? To what extent should central banks be dictating financial market behavior? Under what circumstances should central banks employ aggressive monetary stimulus? To what extent has Fed stimulus fueled deficit spending and big government? Should central bankers have complete discretion to rapidly expand central bank Credit?

Lots of momentous questions that somehow seems to matter so little at this juncture. The focus on interest rate policy and deregulation misses the larger issue: The Federal Reserve is soon under the command of a conventional and non-ideological individual with a distinguished career in the public and private sectors. I so hope Mr. Powell proves to be the distinguished statesman this country desperately needs running our central bank.

 


For the Week:

The S&P500 added 0.3% (up 15.6% y-t-d), and the Dow increased 0.4% (up 19.1%). The Utilities gained 0.2% (up 13.4%). The Banks were little changed (up 11.3%), while the Broker/Dealers declined 1.3% (up 18.9%). The Transports fell 1.8% (up 7.9%). The S&P 400 Midcaps slipped 0.2% (up 10.6%), and the small cap Russell 2000 declined 0.9% (up 10.2%). The Nasdaq100 jumped another 1.3% (up 29.4%).The Semiconductors surged 2.9% (up 43.4%). The Biotechs rose 2.2% (up 26.8%). With bullion down $4, the HUI gold index slipped 0.5% (up 2.0%).

Three-month Treasury bill rates ended the week at 115 bps. Two-year government yields increased three bps to 1.62% (up 43bps y-t-d). Five-year T-note yields fell four bps to 1.99% (up 6bps). Ten-year Treasury yields dropped seven bps to 2.33% (down 11bps). Long bond yields sank 10 bps to 2.81% (down 25bps).

Greek 10-year yields sank 40 bps to 5.09% (down 93bps y-t-d). Ten-year Portuguese yields dropped 13 bps to 2.07% (down 168bps). Italian 10-year yields fell 16 bps to 1.79% (down 2bps). Spain's 10-year yields declined 11 bps to 1.47% (up 9bps). German bund yields dipped two bps to 0.36% (up 16bps). French yields declined four bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed three to 39 bps. U.K. 10-year gilt yields fell nine bps to 1.26% (up 3bps). U.K.'s FTSE equities gained 0.7% (up 5.8%).

Japan's Nikkei 225 equities index jumped 2.4% to a new 20-year high (up 17.9% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.05% (up 2bps). France's CAC40 added 0.4% (up 13.5%). The German DAX equities index jumped 2.0% (up 17.4%). Spain's IBEX 35 equities index gained 1.6% (up 10.8%). Italy's FTSE MIB index rose 1.5% (up 19.6%). For the most part, EM equities underperformed. Brazil's Bovespa index dropped 2.7% (up 22.7%), and Mexico's Bolsa fell 1.4% (up 6.3%). India's Sensex equities index gained 1.6% (up 26.5%). China's Shanghai Exchange fell 1.3% (up 8.6%). Turkey's Borsa Istanbul National 100 index surged 3.2% (up 42.4%). Russia's MICEX equities index increased 0.6% (down 6.8%).

Junk bond mutual funds saw inflows of $1.196 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at a 3.94% (up 40bps y-o-y). Fifteen-year rates added two bps to 3.27% (up 43bps). Five-year hybrid ARM rates gained two bps to 3.23% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.18% (up 44bps).

Federal Reserve Credit last week declined $6.8bn to $4.421 TN. Over the past year, Fed Credit increased $8.1bn. Fed Credit inflated $1.601 TN, or 57%, over the past 260 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $1.0bn last week to $3.366 TN. "Custody holdings" were up $245bn y-o-y, or 7.9%.

M2 (narrow) "money" supply last week gained $5.9bn to $13.746 TN. "Narrow money" expanded $672bn, or 5.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits jumped $28.8bn, while Savings Deposits fell $26.9bn. Small Time Deposits and Retail Money Funds were both little changed.

Total money market fund assets dropped $17.9bn to $2.730 TN. Money Funds rose $52bn y-o-y, or 2.0%.

Total Commercial Paper dropped $19.8bn to $1.048 TN. CP gained $140bn y-o-y, or 15.4%.

Currency Watch:

The U.S. dollar index was little changed at 94.94 (down 7.3% y-t-d). For the week on the upside, the South Korean won increased 1.5%, the New Zealand dollar 0.4% and the Canadian dollar 0.3%. For the week on the downside, the Brazilian real declined 2.4%, the South African rand 0.9%, the Swedish krona 0.7%, the British pound 0.4%, the Mexican peso 0.4%, the Australian dollar 0.4%, the Japanese yen 0.4%, the Norwegian krone 0.4%, and the Swiss franc 0.3%. The Chinese renminbi added 0.17% versus the dollar this week (up 4.61% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.1% (up 5.6% y-t-d). Spot Gold slipped 0.3% to $1,270 (up 10.2%). Silver rallied 0.5% to $16.834 (up 5.3%). Crude jumped $1.74 to $55.64 (up 3%). Gasoline gained 1.4% (up 7%), while Natural Gas was about unchanged (down 20%). Copper added 0.5% (up 24%). Wheat slipped 0.4% (up 4%). Corn was little changed (down 1%).

Trump Administration Watch:

October 31 - Politico (Danny Vinik): "No president has ever had a chance to rewrite the course of the Federal Reserve as completely, and as quickly, as President Donald Trump. When Trump picks a new head of the Federal Reserve—a move expected to happen on Thursday—it will be just the midpoint of his reshaping of the nation's most important financial body. He's likely to fill three more critical positions at the Fed: the vice chair, and two spots on the Fed Board of Governors. Combined with Governor Randy Quarles, who was confirmed by the Senate in October, Trump has a chance to nominate five of seven Fed governors by early next year. But just what Trump will do with that power remains unclear."

Federal Reserve Watch:

November 1 - Bloomberg (Christopher Condon): "Federal Reserve officials reinforced expectations for a December interest-rate increase by subtly upgrading their assessment of the U.S. economy... 'Economic activity has been rising at a solid rate despite hurricane-related disruptions,' the Federal Open Market Committee said... following a two-day meeting... at which they left rates unchanged as expected. After its meeting in September the FOMC said the economy was expanding 'moderately.' Wednesday's statement marked the first time since January 2015 that the committee used the word 'solid' to describe growth. The Fed repeated its assessment that while inflation may remain 'somewhat below 2% in the near term,' it's expected to stabilize around the central bank's 2% objective 'over the medium term.'"

U.S. Bubble Watch:

November 2 - Bloomberg (Charles Stein): "Vanguard Group collected as much from U.S. investors in the first 10 months of 2017 as it did in all of 2016. The firm attracted $303 billion into its U.S. mutual funds and exchange-traded funds through October, matching last year's record total... Vanguard collected almost $30 billion in October. The company, the biggest provider of mutual funds, is benefiting from a flood of money pouring into low-cost products that track indexes. In the 12 months ended Sept. 30, passive mutual funds and ETFs in the U.S. attracted a net $714 billion..., while active funds suffered outflows of $187 billion."

October 30 - Reuters (Lucia Mutikani): "U.S. consumer spending recorded its biggest increase in more than eight years in September, likely as households in Texas and Florida replaced flood-damaged motor vehicles, but underlying inflation remained muted. Households, however, dipped into their savings to fund purchases last month, pushing savings to their lowest level since 2008. Against the backdrop of lackluster wage growth, the drop in savings suggests that September's robust pace of consumer spending is probably unsustainable."

October 30 - CNBC (Jeff Cox): "Americans are saving at the lowest pace in nearly 10 years, a sign of growing confidence as money pours into risk. The savings rate in September fell to 3.1%... That's the weakest level since December 2007... The August savings rate was 3.6%. As the downturn's effects back then ate into economic activity, consumers pushed their money into mattresses and reduced debt, which hit a historic peak of 13.2% of disposable income in the fourth quarter of 2007... Over the years, savings hit its peak of 11% in December 2012 and has been tailing lower since."

October 31 - Bloomberg (Vince Golle): "America's factories cranked it up in October, according to the latest regional manufacturing indexes. From Milwaukee to Dallas to New York state, measures improved to multi-year highs, reflecting robust orders growth as the global economy shows some promise. The MNI Chicago Business Barometer unexpectedly advanced to 66.2, exceeding all forecasts in a Bloomberg survey and marking the strongest reading since March 2011... Down south in the Lone Star State, manufacturing business activity was the firmest in more than 11 years... The Kansas City Fed's measure advanced to the strongest reading since March 2011, while the New York Fed's Empire State factory index climbed to the highest since September 2014."

October 31 - Bloomberg (Agnel Philip): "Home-price gains in 20 U.S. cities accelerated in August amid tight inventories and steady economic growth, figures from S&P CoreLogic Case-Shiller showed... 20-city property values index rose 5.9% y/y (matching est.) after 5.8%. National price gauge increased 6.1% y/y, most since June 2014."

October 31 - Bloomberg (Frederik Balfour): "U.S. consumer confidence rose more than expected in October to the highest in almost 17 years as Americans grew more confident about the economy and job market, according to... the ...Conference Board. Confidence index rose to 125.9 (est. 121.5), highest since Dec. 2000, from 120.6 in Sept. Present conditions measure increased to 151.1, highest since 2001, from 146.9."

October 30 - Bloomberg (Patrick Clark): "Here's more evidence that the defining characteristic of the U.S. housing market is a shortage of inventory for sale: Homes are sitting on the market for the shortest time in 30 years, according to... the National Association of Realtors. The typical home spent just three weeks on the market... That was down from four weeks in the year ending June 2016 and 11 weeks in 2012... It was the shortest time since the NAR report began including data on how long homes spend on the market, in 1987... Forty-two percent of buyers paid at least the listing price, the highest share since the NAR survey started keeping track in 2007."

October 29 - Wall Street Journal (Laura Kusisto and Christina Rexrode): "Despite rising home prices and a growing economy, U.S. homeowners' mobility rate is stuck at a 30-year low... The median duration of owners in their homes in 2017 was 10 years... That matched last year's duration, which, along with 2014, was the highest level since the NAR started tracking the data in 1985. Americans aren't moving in part because inventory levels have fallen near multidecade lows and home prices have risen to records. Many homeowners are choosing to stay and renovate... The lack of inventory 'is like not having enough oil in your car and your gears slowly come to a grind,' said Sam Khater, deputy chief economist at data company CoreLogic."

China Bubble Watch:

October 30 - Bloomberg (Justina Lee): "After a four-day bond selloff in China that shocked at least one market player, the government took action and stepped in. Chinese sovereign notes rose on Tuesday after the central bank boosted cash injections in the financial system and China Development Bank, a key so-called policy lender, downsized its debt issuance. A manufacturing gauge that signaled slower expansion also gave the bonds some much-needed support."

October 29 - Bloomberg (Enda Curran and Chris Anstey): "It used to be that when America sneezed, the world caught a cold. This time around, it's the risk of a sickly China that poses a bigger threat. The world's second-largest economy is now trying to ward off the sniffles. While output is still growing at a pace that sees gross domestic product double every decade, the problem remains that much of that has been fueled by a massive buildup of credit. Total borrowing climbed to about 260% of the economy's size by the end of 2016, up from 162% in 2008, and will hit close to 320% by 2021 according to Bloomberg Intelligence estimates. Economy-wide debt levels are on track to rank among 'the highest in the world,' according to Tom Orlik, BI's Chief Asia Economist."

October 29 - Bloomberg: "Investors in Chinese company bonds have so far avoided the brunt of a debt selloff that's driven 10-year sovereign yields to the highest in three years. Their luck may be about to run out. Now that the Communist Party Congress is over, China's bond holders may be about to get hit by 'daggers falling from the sky,' said Huachuang Securities Co., referring to aggressive deleveraging policies. Plus, accelerating inflation and the risk that China's central bank may follow the Federal Reserve in raising borrowing costs are casting a shadow over the entire bond market. That all means that the situation that's existed for most of 2017 -- sovereign yields rising, and corporate debt remaining relatively resilient -- is at risk of cracking. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire."

November 2 - Bloomberg (Eric Lam): "China's deleveraging campaign has foreign investors flocking to the nation's short-term bank debt. A sell-off in the country's onshore bonds last month -- triggered by signs that policy makers are determined to rein in speculative borrowing -- encouraged offshore investors to home in on a particular slice of the market that might insulate them from turmoil. They're called negotiable certificates of deposit, securities based on a deposit by one bank into another. Mainly issued by small and medium-sized lenders, they're short-dated, so bear less credit risk. Overseas holdings of NCDs jumped nearly six-fold in the two months through September, vastly outpacing the 18% gain for the overall onshore bond market... And the debt may only get more appealing through year-end, with rates likely to rise thanks to seasonal dynamics."

October 27 - Reuters (Jemima Kelly): "China is stepping up its oversight of cash loans offered through the internet amid growing concerns over rapid growth in the lightly regulated industry... Caixin... quoted Ji Zhihong of the central bank's financial markets department as saying it has developed with other authorities a special regulation for controlling online financial risk. ...Ji told a seminar the regulation has already achieved some success. Caixin also quoted Ji as saying China will improve regulations for all online financing businesses, and all financing activity should be subject to a basic level of oversight."

October 31 - Wall Street Journal (Chao Deng and James T. Areddy): "A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing's campaign to weed out risks in the financial system. Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday. A company statement cited 'heavy interest-bearing debt burdens and high short-term payment pressure' and said it is working with underwriters to repay the investors. The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years..."

October 31 - Bloomberg (Frederik Balfour): "A luxury home in Hong Kong's exclusive Peak neighborhood sold for HK$1.16 billion ($149 million), Wheelock Properties Ltd. said. The four-bedroom, 9,178 square foot (853 square meter) house boasts a swimming pool, elevator, garden and unobstructed views of Hong Kong and Victoria Harbour. The price per square foot was HK$126,813, the most paid for a unit in the development, Wheelock said."

Central Banker Watch:

November 2 - Bloomberg (Lucy Meakin): "Bank of England policy makers raised interest rates for the first time in a decade, yet expressed concern for Britain's Brexit-dented economy by indicating that another increase isn't imminent. Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5% from 0.25%. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears."

October 29 - Financial Times (Merryn Somerset Webb): "It has been a good week for billionaires. The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world's 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK's gross domestic product. It has not been a particularly good week for governments. They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty. This kind of report does not do much for central bankers, either: the rise of the billionaires is as much about financial globalisation as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years. The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects, and this observation is hardly controversial. The rich have become much richer; corporate wealth has become more concentrated; soaring house prices have created intergenerational strife; low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures."

October 29 - Wall Street Journal (Lev Borodovsky): "Central bankers are slowly unwinding the stimulus that has helped support the epic postcrisis rally in financial markets. Inflation has been quiet throughout, but there are signs it may soon be heard from. Inflation has tiptoed higher in major economies, and there are signs in smaller nations that prices are beginning to get traction as well. Some analysts see the development as the natural next step following a global reflation that began in earnest in mid-2016... Time will tell. Wholesale inflation is percolating globally with parallel trends in Europe and Asia, a reflection of integrated supply chains."

Global Bubble Watch:

October 30 - Financial Times (Miles Johnson): "The International Monetary Fund has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets. ...Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF, said an increasing appetite for yield was driving investors to look for ways to boost income through complex instruments. 'The combination of low yields and low volatility facilitates the use of leverage by investors to increase returns, and we have seen rapid growth in some types of products that do this,' he said... The IMF estimates that assets invested in volatility targeting strategies have risen to about $500bn, with this amount increasing by more than half over the past three years."

October 29 - Wall Street Journal (Chris Dieterich, Ben Eisen and Akane Otani): "Markets around the globe are surging to records, reflecting growing optimism about the world economy and fueling an increasing eagerness by investors to step in and buy assets whenever prices dip. In the U.S. stock market, declines have grown shallower over the past two years and are snapping back sooner. The S&P 500 has gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index... The index hasn't had a decline of 10% or more from a recent peak since February 2016. The steady buying in the U.S. has lately spread to Europe, Japan and even developing markets... On Friday, the Dow Jones Industrial Average rose 0.1% to 23434.19, near its record from Tuesday, its 54th of the year. Japan's Nikkei gained 2.6% this past week to its highest level since 1996, and share indexes in the U.K. and Germany have hit records this month."

November 1 - Bloomberg (Cecile Gutscher and Paul Cohen): "Ultra-low interest rates and an expansionary European Central Bank have stoked a borrowing spree that's already eclipsed all of 2016, two months before the end of the year. Syndicated bond sales in Europe are set to reach 1.13 trillion euros ($1.3 trillion) Wednesday... Treasurers from across the globe have flocked to the region's markets, where the ECB has suppressed yields with an asset purchase program that's even swept up debt issued by companies beyond its own borders."

November 2 - Bloomberg (Eric Lam): "Bitcoin surged past $7,000 for the first time, breaching another milestone less than one month after it tore through the $5,000 mark. The digital currency got new impetus this week after CME Group Inc., the world's largest exchange owner, said it plans to introduce bitcoin futures by the end of the year, citing pent-up demand from clients. Skeptics including Themis Trading say the rally is evidence that the software-created asset is a bubble that should not be given regulatory cover."

October 31 - Bloomberg (Nick Baker and Matthew Leising): "The allure of bitcoin was too much for CME Group Inc. The world's largest exchange owner reversed course today and said it plans to introduce bitcoin futures by the end of the year, only a month after dismissing such a plan. The largest cryptocurrency, which has surged more than sixfold this year, climbed to a record high after the announcement."

October 31 - Wall Street Journal (Dominique Fong and Esther Fung): "China's controls on capital outflow are putting a chill on some global commercial real-estate markets. Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country's most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens. In August, China's powerful State Council announced that property investments abroad were 'restricted,' along with deals in hotels, movie studios and sports teams.... At the recent Communist Party congress, where President Xi Jinping solidified his control, officials reiterated concerns about systemic risks stemming from ill-considered purchases abroad."

November 1 - Bloomberg (Peter Vercoe and Matthew Burgess): "The housing boom that has seen Australian home prices more than double since the turn of the century is 'officially over,' after data showed prices now flatlining, UBS Group AG said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July... 'There is now a persistent and sharp slowdown unfolding,' UBS economists led by George Tharenou said... 'This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.'"

Fixed Income Bubble Watch:

October 29 - Financial Times (Joe Rennison and Eric Platt): "Wall Street banks are having a strong year underwriting and selling riskier loans, with the volume so far this year already surpassing the whole of 2016. The increase in issuance of leveraged loans, lent to borrowers with sub-investment grade ratings, has been driven by companies renegotiating debt at lower interest rates. Those rates are more attractive partly because of the burgeoning demand for the asset class, as well as the low level of market rates more generally. Nine of the 10 largest lenders in the business — including Bank of America Merrill Lynch, JPMorgan Chase, Goldman Sachs and Barclays — have already surpassed 2016 activity..."

Europe Watch:

October 27 - Wall Street Journal (Tom Fairless): "The European Central Bank's reluctance to quickly phase out its bond-buying program has reopened a rift at the top of the world's second-most powerful central bank, pitting ECB President Mario Draghi against German Bundesbank head Jens Weidmann —just as discussions begin about whether the German will succeed the Italian... Mr. Weidmann, widely seen as a leading contender for the ECB's top job, has publicly opposed many of the bank's stimulus policies in recent years, notably its large-scale purchases of government bonds, known as quantitative easing or QE. Although he toned down his criticism in recent months, Mr. Weidmann changed tack this week, publicly opposing a decision to extend QE through September 2018."

October 29 - Wall Street Journal (Giovanni Legorano): "When European Central Bank President Mario Draghi embarked on a policy of buying government bonds, it was an especially welcome lifeline for Italy, then reeling from soaring interest rates and trapped in the country's worst economic crisis since the war. Now, as the central bank unwinds the stimulus program known as quantitative easing 2½ years later, Italy is an important test case for the long-term success of Mr. Draghi's policy. Years of cheap money and a robust recovery elsewhere in Europe is nudging Italy to its fastest economic growth in seven years. But while thriving on stimulus, Italy has failed to take big steps on changes such as cutting red tape and reducing the cost of labor."

Japan Watch:

November 1 - Bloomberg (Isabel Reynolds and Emi Nobuhiro): "Prime Minister Shinzo Abe praised the Bank of Japan's efforts to reach its inflation target, but stopped short of saying whether he'd reappoint Governor Haruhiko Kuroda to lead the central bank when his term expires next year. ...Abe said 'the slate is completely blank' on his choice for governor. 'We haven't yet reached the 2% price stability target, but we expect the Bank of Japan to continue to make efforts to achieve it,' he said... Kuroda is the top contender by a wide margin to lead the Bank of Japan again when his five-year term comes to an end in April..."

Emerging Market Watch:

November 1 - Wall Street Journal (Julie Wernau and Ana Rivas): "Venezuela has sunk into a deep recession as it grapples with the collapse of oil prices and the effects of years of economic mismanagement. Many analysts expect the country to default on its debt... Here's a look at the state of Venezuela's economy and finances. Venezuela has the world's highest inflation, estimated by the International Monetary Fund to reach 653% this year. The country has been ravaged by shortages of food and medicine, and months of protests that cost more than 120 lives. As Mr. Maduro has consolidated power, the opposition has been weakened and divided."

Leveraged Speculation Watch:

November 2 - Bloomberg (Dani Burger): "By some measures, equity quantitative funds should be thriving. But they're not. Their fundamental counterparts are having a banner year. Stock correlations are at all time lows and clearer market trends are breathing life back into the momentum trade, a strategy among equity quants that bets the winners will keep winning. As those shares chart increasingly independent paths from the losers, equity fund managers are recording their strongest performance in five years... Yet for market-neutral quants who take advantage of patterns and dislocations, this year has been anything but a standout. Only 30% of those managers are beating their benchmark..."

Geopolitical Watch:

October 30 - Reuters (David Brunnstrom and Matt Spetalnick): "China's ambassador to Washington said... U.S. President Donald Trump's state visit to Beijing next week was a historic opportunity to boost cooperation between the world's two largest economies, but warned against attempts to 'contain' Beijing. Cui Tiankai also stressed the urgency of efforts to find a negotiated solution to the crisis over North Korea's nuclear and missile programs and warned of a 'more dangerous' situation if tensions between the United States and Pyongyang continued."

October 31 - Reuters (Greg Torode and Ben Blanchard): "China has quietly undertaken more construction and reclamation in the South China Sea, recent satellite images show, and is likely to more powerfully reassert its claims over the waterway soon, regional diplomats and military officers say. With global attention focused on North Korea and Beijing engrossed in its Party Congress, tensions in the South China Sea have slipped from the headlines in recent months. But with none of the underlying disputes resolved and new images reviewed by Reuters showing China continuing to develop facilities on North and Tree islands in the contested Paracel islands, experts say the vital trade route remains a global flashpoint."

October 30 - CNBC (Anmar Frangoul): "The amount of carbon dioxide in the atmosphere reached its highest level in 800,000 years in 2016, the World Meteorological Organization (WMO) said... Carbon dioxide levels 'surged' at record breaking speeds last year, with globally averaged concentrations of CO2 hitting 403.3 parts per million in 2016 compared to 400 parts per million in 2015..."

 


 

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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