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Issue 2018: Market Structure

By: Doug Noland | Saturday, January 6, 2018

Financial conditions are much too loose. They remain too loose at home; they remain too loose abroad.

January 3 - ETF.com (Heather Bell): "...ETF flows really blew away previous records. Flows into exchange-traded funds were going full blast throughout the year and finished on a particularly strong note. A whopping $51 billion in new money came into U.S.-listed ETFs during December, pushing inflows for the year to $476.1 billion. Total assets now top $3.4 trillion. The data, which comes from FactSet, includes flows for every trading day of 2017. The $476.1 billion figure was far and away a record for annual inflows, blowing past the previous all-time high from last year of $287.5 billion."

Think of this: 2017 ETF flows surpassed the previous year's record flows by 66%. And while U.S. equities attracted the strongest flows at $180 billion, international equities were not far behind at $162 billion. There's never been anything comparable to this Market Structure.

The Nasdaq100 jumped 4.0% in 2018's initial four sessions. The Nasdaq Computer Index surged 4.2%. The Semiconductors jumped 5.8%. The Nasdaq Industrials gained 3.1%, the NYSE Healthcare Index 3.2%, the Philadelphia Stock Exchange Oil Services Sector Index 5.1% and the S&P500 Index 2.6%. The mania is global. Germany's DAX jumped 3.1% in four sessions, France's CAC 40 3.0%, Spain's IBEX 3.7%, and Italy's MIB 4.2%. Japan's Nikkei jumped 4.2%, Hong Kong's Hang Seng 3.0%, and the Shanghai Composite 2.6%. Notable EM gainers included Brazil (3.5%), Russia (4.6%), Argentina (7.1%), Poland (2.5%), Czech Republic (2.5%), Romania (3.0%), Philippines (2.5%) and Pakistan (5.1%). Portending a wild year in the currencies, a number of EM currencies went nuts this week.

Bubbles are self-reinforcing but inevitably unsustainable inflations. Asset Bubbles are fueled by some underlying source of unsound monetary inflation. Major speculative Bubbles and manias are always propelled by key misperceptions and resulting monetary disorder. Bubble flows intensified in 2017, as misperceptions became only more deeply embedded in the Structure of Securities Market Pricing. Loose finance is ensured indefinitely.

The U.S. (Bubble) economy is energized. Strong earnings will be further inflated by lower corporate tax rates. Meanwhile, there's a stimulus-fueled synchronized global economic boom. European growth is the strongest in years. China has set another 6.5% GDP growth target. Throughout Asia and with scores of other EM economies, things are booming. Whether on a U.S. or global basis, there is a broad consensus view that "fundamentals" are exceptionally constructive. Lost in all the euphoria is the critical issue of finance: global finance is alarmingly unsound.

The 10-year anniversary of the 2008 crisis arrives this year. Amazingly, a decade has passed yet global central banks continue with quantitative easing and ultra-low rates. At the onset, central bankers believed they could employ QE to goose inflation and risk-taking. Then, with inflation dynamics having regained normal traction, central banks would simply wind down "money printing" operations. Everything would settle nicely back to normal.

But it was all flawed. Inflationist doctrine failed. And as archaic as it sounds, the world is today trapped in the Scourge of Unsound "Money." Central banks inflated a global securities market Bubble and have been incapable of extricating themselves from market domination. Each year sees the Bubble inflate to only more precarious extremes.

2018 will likely see (in the neighborhood of) an additional $1.0 Trillion of QE. This amount, however, will be down significantly from 2017. The ECB slashes its monthly purchases in half starting this month (to about $36bn). The Fed has plans to reduce balance sheet holdings, while the BOJ has of late scaled back purchases. Markets have been conditioned to believe QE reduction doesn't matter. This complacency will be tested in 2018. Last year's concern for waning central bank liquidity operations has been supplanted by this year's heady confidence that it's not an issue.

From my analytical perspective, the global market boom has been financed by two extraordinary (interrelated) sources. First, Trillions of QE have directly financed inflated and over-liquefied global markets. Second, I believe leveraged speculation has played a major role in exacerbating liquidity excess. Importantly, QE-related liquidity coupled with the perception that open-ended QE is available to backstop markets has fostered an environment conducive to speculative leveraging. In short, the leveraging of central bank balance sheets has incentivized the aggressive expansion of speculative securities and derivatives leverage globally. And the bigger the Bubble inflates the less willing central banks will be to tighten financial conditions. This only further incentivizes risk-taking and leveraging throughout global markets that have over years become progressively too comfortable pushing the risk envelope.

Central bankers confront a historic dilemma. They perpetuated a prolonged major Bubble inflation. Despite a strengthening global economy and conspicuously speculative markets, central banks in 2017 failed to move forward with "normalization." Financial conditions further loosened when they needed to have tightened. At this point, when it comes to monetary tightening central bankers lack credibility. The view that central bankers will avoid any actual tightening of financial conditions has become deeply embedded in a extremely distorted marketplace.

At this phase in the cycle, markets would typically fret central banks "falling behind the curve." These days, however, markets see zero possibility that the Fed (or any central bank) would resort to "slamming on the brakes." At this point, it would appear only a significant change in the inflation backdrop would have the markets fretting the prospect of a true tightening cycle.

The general backdrop is increasingly supportive of U.S. headline CPI moving above the 2% threshold in 2018. Labor markets are tight, and the growth in manufacturing employment has attained decent momentum. With an increasing number of sectors overheated, companies will be forced to pay up for talent. And with sales strong and inventories slim, expect further acceleration in housing prices and construction. Crude prices have surpassed $61, with the weaker dollar stoking commodities prices generally.

It's no coincidence that securities markets have succumbed to speculative Bubble Dynamics in the face of economic, financial, social, political and geopolitical unrest. For several decades now, unstable finance has fostered serial boom and bust dynamics. Central bank intervention has only increased the scope of Bubbles, their duration and the severity of consequences. Wealth inequality, disillusionment and anxiety reached a crisis stage. In the face of upheaval, decisions have been made to let the "money" flow.

Speculative markets welcome fragile underpinnings, confident that central banks will continue to goose the markets. Markets relished the Trump administration's chaotic first year. The more unnerving the Washington backdrop the more likely it became that the President and the Republicans would throw all their energy into must-have tax legislation. One and done?

With all the tax reform hype and market euphoria, it's easy to disregard longer-term ramifications for about the most partisan tax legislation imaginable. The powerless big "blue" states have taken one on the chin. And when all is said and done, I doubt Republicans will win the PR battle on this one. Taxes will be going up for many; an election promise broken to many. This will be seen as yet another gift to the wealthy and corporate America. Come November, the Republicans hope to receive credit for a booming economy. Expect Democrats to be the more energized party.

Exuberant markets are numb to political dysfunction. And with stock prices setting daily records, there's no difficulty dismissing the Washington Spectacle. Tax legislation was likely an aberration. Republicans were desperate for a win, so they came together and passed legislation. The pendulum will now swing back. The dismal fiscal backdrop will have the so-called "deficit hawks" spooked. Attention will turn to reelection. Fixated on Tuesday, November 6th, Democrats have no incentive to play ball. Trump's 2018 agenda could be DOA.

Pundits will trumpet earnings, earnings and more earnings. After receiving the gift of big corporate tax cuts to end 2017, talk will shift to "politics don't matter." Politics could matter greatly in 2018. There's the ongoing Mueller investigation. An investigative shift to past financial issues (and potential money laundering) could spark to a constitutional crisis. Many are raising questions as to the President's mental fitness for the highest office. Some Democrats will look for an opportunity to move on impeachment proceedings. In summary, this is one big, ugly unfolding mess that doesn't matter - until it does.

There are extraordinary political uncertainties, including the mid-terms. The Republicans could very well lose the power to push through legislation. And while bullish equities strategists extrapolate lower taxes and higher earnings years into the future, there's a scenario where the repeal of Republican tax (among other) legislation commences in about three years.

Geopolitical risks are even more unnerving. Perhaps North Korea backs down. Trump and the U.S. military may not, arguing this problem has been left to fester to the point that action must be taken. On multiple fronts, relations with China have been cooling. The President has said, "I want tariffs. Bring me some tariffs!" It's worth noting the U.S. November trade deficit surpassed $50 billion for the first time since March 2012. Especially if other agenda items face resistance, the President may lean more aggressively on administration trade policy. A tougher stance toward China will see little pushback - except from Beijing.

The prevailing view has inflation dead and buried. The backdrop is ripe for an upside surprise. If focus turns to boom-time labor tightness, a manufacturing renaissance, and a fledgling housing construction boom and attendant bottlenecks - prospects for rising import costs could be enough to arouse a secular shift in inflation psychology.

2018 is set up for a Historic Year. Global Bubble markets are dominated by the dangerous misperception that central bankers have it all under control. I believe the extraordinary liquidity backdrop is acutely vulnerable to an unanticipated bout of de-risking/de-leveraging dynamics. The expectation is that 2018 will be a stable continuation of 2017: financial conditions will remain loose - or, why not, even looser. But unless global central bankers are completely reckless, there will be heightened pressure in 2018 to commence "normalization." The Powell Fed will have its hands full.

Why do Bubbles burst? At some point, Bubble Finance turns unmanageable. On the upside, Bubbles create their own self-reinforcing liquidity and momentum. Things turn crazy near the end. It's just so easy to make money. Everyone should be wealthy, and nothing causes as much angst as to watch your neighbor get rich (thank you C.P. Kindleberger).

It's the parabolic speculative blow-off that seals a Bubble's fate. A "melt-up" in prices is sustained by only progressively larger speculative flows. The higher prices inflate the greater the amount of finance required sustain the Bubble. In the heart of the mania, these flows are sustained by extreme speculative leveraging. Finance becomes deranged. Such a Market Structure creates latent fragilities - manic speculative leveraging and the rapidly elevating risk of a bout of destabilizing "Risk Off."

I see overwhelming support for my view that we are witnessing history's greatest financial Bubble. Things turned crazy in 2017 and, if the first four sessions of 2018 are any indication, markets are taking "crazy" up a notch.

Can bond markets avoid trouble for yet another year - without facing the comeuppance one would expect after years of loose finance? With fiscal deficits and inflation likely on the rise, when will bond holders finally demand a semblance of reasonable risk premiums? When will bond holders focus on long-term risk-adjusted real returns rather than short-term funding costs and rate differentials? Global bond markets are in the greatest Bubble in history, yet worry of Market Structure is nonexistent.

The ETF industry recently surpassed $3.4 Trillion. Do 2018 flows again surpass the previous year's? Here again, Market Structure is a serious issue. "Money" has flooded into "the market" through perceived safe and liquid ETF instruments. A surprising bout of "Risk Off" would test market liquidity and perceptions.

Central bank liquidity; faith in central banker monetary management; seemingly unshakable global bond markets; and the bubbling ETF complex have been integral to the global collapse in market volatility/risk perceptions (i.e. VIX). Shorting "volatility" has for years now been a huge money-maker. Amazingly, selling market risk "insurance" during a central-banker ensured drought has become one massive Crowded Trade on a global scale. This is a huge accident in the making, and this Epic Structural Market Flaw could easily become a major Issue in 2018.

Forecasting a catalyst for a bursting Bubble is risky business. There are any number of potential accidents in this now tightly integrated global economy and financial Bubble. China's Bubble is a historic accident in the making. Like global central bankers, Beijing appears for now to have everything under control. They also have no experience with the downside of an unparalleled Credit Cycle.

Massive 2017 financial flows gave EM Bubbles a further lease on life. The weak dollar in 2017 helped devalue their still mounting dollar-denominated debt problem. A global "Risk Off" would see an abrupt reversal in their liquidity position. One of these days - perhaps even in 2018 - there might be some worry about Chinese and EM financial institutions. It's been such a long cycle. How much bigger did the fraud issue inflate during 2017's Credit bonanza?

I expect the cryptocurrency Bubble to burst in 2018. Seems like we're set up for major cyber security issues. Will there be even more damaging weather disasters?

There will be numerous surprises and unexpected developments. I just wish I could share in all the optimism. But Bubbles are just so destructive. Markets continue to grossly misprice risk. Resources - real and financial - are being poorly allocated. Too many uneconomic enterprises are lavishing in boom-time finance. Real economic wealth is being redistributed and destroyed, while asset price Bubbles ensure wealth illusion and a perilous lack of discipline. Speculation doesn't matter; deficits don't matter; excess doesn't matter; and debt doesn't matter. Market Structure doesn't matter.

Because of the unprecedented globalization of Bubble Dynamics during this protracted cycle, I have special concern for geopolitical risks. Pondering what might unfold this year leaves me uncomfortable.

 


For the Week:

The S&P500 jumped 2.6% (up 20.5% y-o-y), and the Dow gained 2.3% (up 26.7%). The Utilities dropped 2.9% (up 5.4%). The Banks rose 2.1% (up 17.4%), and the Broker/Dealers jumped 2.5% (up 27%). The Transports gained 2.8% (up 19.9%). The S&P 400 Midcaps rose 1.9% (up 15.1%), and the small cap Russell 2000 gained 1.6% (up 14.1%). The Nasdaq100 surged 4.0% (up 32.9%). The Semiconductors jumped 5.8% (up 45.9%). The Biotechs advanced 2.6% (up 31.9%). With bullion up $16, the HUI gold index increased 3.0% (up 0.8%).

Three-month Treasury bill rates ended the week at 137 bps. Two-year government yields jumped eight bps to 1.96% (up 75bps y-o-y). Five-year T-note yields gained eight bps to 2.29% (up 37bps). Ten-year Treasury yields rose seven bps to 2.48% (up 6bps). Long bond yields gained seven bps to 2.81% (down 20bps).

Greek 10-year yields fell 34 bps 3.73% (down 305bps y-o-y). Ten-year Portuguese yields were unchanged at 1.94% (down 211bps). Italian 10-year yields slipped a basis point to 2.01% (up 4bps). Spain's 10-year yields fell four bps to 1.52% (down 2bps). German bund yields added a basis point to 0.44% (up 14bps). French yields added one basis point to 0.80% (down 3bps). The French to German 10-year bond spread was about unchanged at 36 bps. U.K. 10-year gilt yields rose five bps to 1.24% (down 14bps). U.K.'s FTSE equities index increased 0.5% (up 7.1%).

Japan's Nikkei 225 equities index surged 4.2% (up 21.9% y-o-y). Japanese 10-year "JGB" yields increased two bps 0.063% (unchanged). France's CAC40 jumped 3.0% (up 11.4%). The German DAX equities index rose 3.1% (up 14.8%). Spain's IBEX 35 equities index jumped 3.7% (up 9.4%). Italy's FTSE MIB index advanced 4.2% (up 15.6%). EM markets were mostly higher. Brazil's Bovespa index rose 3.5% (up 28.2%), and Mexico's Bolsa gained 1.1% (up 8.3%). South Korea's Kospi index increased 1.2% (up 21.9%). India's Sensex equities index added 0.3% (up 27.6%). China's Shanghai Exchange jumped 2.6% (up 7.5%). Turkey's Borsa Istanbul National 100 index gained 1.1% (up 51.3%). Russia's MICEX equities index surged 4.6% (down 0.3%).

Junk bond mutual funds saw inflows of $186 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell four bps to 3.95% (down 25bps y-o-y). Fifteen-year rates declined six bps to 3.28% (down 6bps). Five-year hybrid ARM rates slipped two bps to 3.45% (up 12bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.13% (down 15bps).

Federal Reserve Credit last week declined $10.1bn to $4.408 TN. Over the past year, Fed Credit slipped $6.8bn. Fed Credit inflated $1.597 TN, or 57%, over the past 270 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $6.2bn last week to $3.356 TN. "Custody holdings" were up $174bn y-o-y, or 5.5%.

M2 (narrow) "money" supply fell $19.5bn last week to $13.844 TN. "Narrow money" expanded $657bn, or 5.0%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits dipped $4.0bn, and Savings Deposits declined $15.2bn. Small Time Deposits were little changed. Retail Money Funds fell $2.6bn.

Total money market fund assets declined $7.6bn to $2.838 TN. Money Funds gained $125bn y-o-y, or 4.6%.

Total Commercial Paper expanded $6.5bn to a 19-month high $1.086 TN. CP gained $136bn y-o-y, or 14.3%.

Currency Watch:

The U.S. dollar index slipped 0.2% to 91.949 (down 10.2% y-o-y). For the week on the upside, the Mexican peso increased 2.5%, the Brazilian real 2.5%, the Norwegian krone 1.9%, the New Zealand dollar 1.1%, the South Korean won 0.7%, the Singapore dollar 0.7%, the Australian dollar 0.7%, the South African rand 0.6%, the British pound 0.4%, the Swedish krona 0.3%, and the euro 0.2%. For the week on the downside, the Japanese yen declined 0.3%. The Chinese renminbi increased 0.28% versus the dollar this week (up 5.98% y-o-y).

Commodities Watch:

The Goldman Sachs Commodities Index increased 0.3% (up 11.4% y-o-y). Spot Gold rose another 1.3% to $1,319 (up 14.5%). Silver gained 0.8% to $17.285 (up 8.2%). Crude jumped $1.02 to $61.44 (up 14%). Gasoline slipped 0.6% (up 7%), while Natural Gas dropped 5.4% (down 25%). Copper fell 2.2% (up 29%). Wheat gained 0.9% (up 6%). Corn was little changed (unchanged).

Trump Administration Watch:

January 2 - CNBC (Tom DiChristopher): "The world is moving toward crisis and a state of 'geopolitical depression' as the presidency of Donald Trump accelerates divisions among citizens and the unraveling of the global order, risk consultancy Eurasia Group warns. Liberal democracies are suffering from a deficit of legitimacy not seen since World War II, and today's leaders have largely abandoned civil society and common values, Eurasia Group says... The breakdown in norms opens the door to a major event that could rock the global economy and markets. 'In the 20 years since we started Eurasia Group, the global environment has had its ups and downs. But if we had to pick one year for a big unexpected crisis -- the geopolitical equivalent of the 2008 financial meltdown -- it feels like 2018,' said Eurasia Group President Ian Bremmer and Chairman Cliff Kupchan."

December 31 - Associated Press: "North Korean leader Kim Jong Un says the United States should be aware that his country's nuclear forces are now a reality, not a threat. Kim was speaking in his annual New Year's Day address. He said the country had achieved the historic feat of 'completing' its nuclear forces and added that the has a 'nuclear button' on his desk."

January 1 - CNBC (Yen Nee Lee): "North Korea called itself a nuclear power on Monday, but the question now is whether U.S. President Donald Trump recognizes the rogue regime as one, a strategist told CNBC... That's an important development to watch as actions taken by Trump against North Korea will likely result in a cold war between the U.S. and China, said David Roche, president and global strategist at Independent Strategy. Such a turn of events between the two major powers would have global implications, he added, pointing to how it would affect worldwide trade and investment. Outlining the two likely scenarios that could play out, Roche said the U.S. may try to contain North Korea by having 'rings of missiles throughout the Asia Pacific region pointing at Pyongyang' or it could try to remove the hermit nation's leader Kim Jong Un through an attack. Both those scenarios undermine China's influence... and would lead to an 'almost inevitable cold war' between China and the U.S., he said."

January 1 - Reuters (Rodrigo Campos and Christine Kim): "The U.S. ambassador to the United Nations, Nikki Haley, warned North Korea... against staging another missile test and said Washington would not take any talks between North and South Korea seriously if they did not do something to get Pyongyang to give up its nuclear weapons."

January 2 - Reuters (Francesco Canepa): "Ant Financial's plan to acquire U.S. money transfer company MoneyGram International Inc collapsed... after a U.S. government panel rejected it over national security concerns, the most high-profile Chinese deal to be torpedoed under the administration of U.S. President Donald Trump."

January 3 - CNBC (Huileng Tan): "China warned of a 'bumpy journey' in trade with the U.S. and 'retaliatory measures' a day after Washington blocked MoneyGram's proposed sale to a financial services firm affiliated with Chinese tech giant Alibaba. 'It is not surprising that a number of Chinese companies have hit the buffers in Washington as trade tensions between the two countries are flaring,' state news agency Xinhua said in a commentary... On Tuesday, the U.S. government torpedoed MoneyGram's multi-million-dollar merger with Ant Financial, which is controlled by Alibaba founder Jack Ma."

December 29 - Wall Street Journal (Josh Zumbrun): "One of the lingering questions about the overhaul of the U.S. tax code is what will happen to the U.S. national debt, already one of the world's largest debt burdens. As of 2017, the general government gross debt of the U.S. stood at 108.1% of gross domestic product... Only four large countries have more debt for the size of their economies... Japan's government carries debts at 240.3% of gross domestic product, far and away the world's largest burden... Greece's debt-to-GDP stands at 180.2% of GDP, Italy's at 133% and Portugal's at 125.7%."

December 29 - Reuters (Kevin Drawbaugh and Roberta Rampton): "The head of a conservative Republican faction in the U.S. Congress, who voted this month for a huge expansion of the national debt to pay for tax cuts, called himself a 'fiscal conservative' on Sunday and urged budget restraint in 2018. In keeping with a sharp pivot under way among Republicans, U.S. Representative Mark Meadows... drew a hard line on federal spending, which lawmakers are bracing to do battle over in January. When they return from the holidays on Wednesday, lawmakers will begin trying to pass a federal budget in a fight likely to be linked to other issues..."

China Watch:

January 1 - Bloomberg: "China's economy begins 2018 facing what its own leaders call three years of 'critical battles.' Those fights to tackle domestic debt, poverty and pollution pose a hat-trick of risks to the world's No. 2 economy even before higher interest rates and trade war threats from the U.S. are taken into account. While the nation is starting from a position of strength, with full-year growth in 2017 poised for its first acceleration since 2010... As a result, the government of Xi Jinping is signaling that it's sanguine about more modest economic performance, if progress on the top risk -- financial fragility -- can be made... 'Significant economic imbalances continue to create downside risk to the outlook for 2018,' said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit... 'Risks to the Chinese economy will remain among the key risks to the global growth outlook in 2018, with the Asia Pacific region particularly vulnerable to the shock waves from a slowdown.'"

December 31 - Bloomberg (Sungwoo Park): "China, the world's biggest oil buyer, is on the verge of opening a domestic market to trade futures contracts. It's been planning one for years, only to encounter delays. The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest -- a first for China's commodities markets -- because the exchange is registered in Shanghai's free trade zone. There are implications for the U.S. dollar's well-established role as the global currency of the oil market."

December 30 - Bloomberg: "China's official factory gauge maintained momentum, signaling campaigns to reduce both pollution and debt risk haven't curbed output. The manufacturing purchasing managers index edged down to 51.6 in December, in line with the forecast... The non-manufacturing PMI stood at 55, compared with a projected 54.7 reading and 54.8 in November..."

January 2 - Bloomberg: "China's money market rates are set to grind higher and a bear market in bonds will worsen before it gets better, according to a survey of strategists and traders. The seven-day repurchase rate will average 2.99% in 2018, up from 2.88% in the fourth quarter, according to the median estimate in a Bloomberg survey. The yield on 10-year government debt is projected to rise as high as 4.20% before ending the year at 3.75%. The yield was little changed at 3.93% on Wednesday. China's sovereign bonds have fallen for five quarters, the longest losing streak since Bloomberg started to compile the data in 2005, as the government stepped up a campaign to cut leverage in the financial sector and inflation picked up. The 10-year yield rose last year by the most since 2013."

Federal Reserve Watch:

January 4 - Bloomberg (Craig Torres): "The Federal Reserve is getting ready to welcome a new chairman amid doubts and divisions among policy makers about how many times to raise interest rates this year. Jerome Powell will take over from Janet Yellen in early February... He will lead a policy-making committee that, judging by a record of its last meeting released on Wednesday, still thinks the gradual pace of tightening it followed last year is correct. But the debate also highlighted a split between officials concerned about low inflation and others pointing to robust growth about to get a further boost from tax cuts."

U.S. Bubble Watch:

January 2 - CNBC (Diana Olick): "The temperature may be frigid across much of the nation, yet home prices are sizzling and sellers are in the hot seat. Sales prices jumped 7% annually in November, according to... CoreLogic. That is the third straight month at that pace, far higher than the price gains in the first half of 2017. Low supply and high demand are fueling the spurt and neither of those is expected to ease up anytime soon. Supply is actually falling even more now, and a strengthening economy is pushing demand. This will have potential buyers out early this year, trying to get a jump on the spring market. 'Rising home prices are good news for home sellers, but add to the challenges that home buyers face,' said Frank Nothaft, chief economist at CoreLogic... Nothaft said the limited supply is the worst at the lower end, and will hit the growing number of first-time buyers hardest."

January 3 - Reuters (Lucia Mutikani): "In November, spending on private residential projects soared 1.0% to the highest level since February 2007 after rising 0.3% in October. The increase was in line with a recent jump in homebuilding and supported expectations that housing would boost economic growth in the fourth quarter after being a drag on GDP since the April-June period."

January 3 - Bloomberg (Katia Dmitrieva): "U.S. manufacturing expanded in December at the fastest pace in three months, as gains in orders and production capped the strongest year for factories since 2004, the Institute for Supply Management said... Factory index climbed to 59.7 (est. 58.2) from 58.2 a month earlier... Gauge of new orders advanced to 69.4, the highest in nearly 14 years, from 64. Measure of production increased to 65.8, the strongest since May 2010, from 63.9."

January 4 - Bloomberg (Jordan Yadoo): "American consumers last year were more upbeat on average than at any time since 2001, reflecting more favorable views of the economy, personal finances and the buying climate, according to the Bloomberg Consumer Comfort Index... Comfort measure averaged 50.0 in 2017, up from 43.6 a year earlier and the best reading since 51.8 in 2001..."

December 30 - Bloomberg (Katia Dmitrieva): "Payrolls at U.S. companies increased in December by the most in nine months, consistent with further progress in the labor market, according to... ADP... Private payrolls rose by 250k (190k est.), exceeding all estimates..."

January 4 - CNBC (Chloe Aiello): "U.S. employers announced plans to cut 32,423 jobs in December, bringing the year's total to a low not seen since 1990, global outplacement consultancy Challenger, Gray & Christmas reported... 'The tight labor market, coupled with uncertainty surrounding health care and tax legislation, possibly kept employers from making any long-term staffing decisions this year,' CEO John Challenger said..."

January 2 - Bloomberg (Mary Schlangenstein): "Two U.S. airlines -- American and Southwest -- joined the tide of companies offering employees $1,000 bonuses to mark the tax overhaul Congress put in place for 2018... AAON, U.S. Bancorp, Commerce Bancshares Inc. and Zions Bancorporation were among the companies touting similar moves.vBanks, insurers and airlines have led the way on the handouts -- all industries that have important regulatory issues pending with the Trump administration. The moves appear to be an effort to sway public opinion in favor of the unpopular tax bill. Republican legislators pushed to pass the overhaul in December as President Donald Trump's crowning achievement of 2017."

January 1 - Wall Street Journal (Shayndi Raice and Eric Morath): "In U.S. cities with the tightest labor markets, workers are finding something that's long been missing from the broader economic expansion: faster-growing paychecks. Workers in metro areas with the lowest unemployment are experiencing among the strongest wage growth in the country. The labor market in places like Minneapolis, Denver and Fort Myers, Fla., where unemployment rates stand near or even below 3%, has now tightened to a point where businesses are raising pay to attract employees, often from competitors. It's an outcome entirely expected in economic theory, but one that's been largely absent until now in the upturn that began more than eight years ago."

January 2 - CNBC (Lauren Thomas): "Land fit for future fulfillment centers for the likes of Amazon and Walmart saw huge spikes in prices last year, according to... CBRE. In a trend largely stemming from the growth of e-commerce players across the U.S., some plots of land now cost twice the amount they did a year ago, the group found. This is especially true in major markets, including Atlanta and Houston. In surveying 10 U.S. markets, CBRE found the average price for 'large industrial parcels' (50 to 100 acres) now sits at more than $100,000 per acre, up from about $50,000 a year ago. Industrial land plots of five to 10 acres, which typically house infill distribution centers for completing 'last-mile' deliveries, watched their prices soar to more than $250,000 per acre by the end of 2017, up from roughly $200,000 a year ago..."

January 2 - Wall Street Journal (Laura Kusisto): "The multifamily housing market turned in a lackluster performance in 2017 as demand failed to keep pace with a deluge of new apartment supply, according to a new report... U.S. apartment rents climbed 2.5% in 2017, according to RealPage Inc., RP -0.11% a real estate technology and data firm. That was in line with historical averages but down significantly from the 5.2% posted in 2015, the most recent peak."

January 2 - Reuters (Ankit Ajmera): "U.S. office vacancy rate rose to 16.3% in the fourth quarter of 2017, from 16.1% a year earlier, rising for the first time in at least five years, according to... Reis Inc. Asking and effective rents increased 0.6% in the quarter, compared with the third quarter, registering the highest quarterly growth rate in six quarters. Rent growth was 1.8% for 2017. 'The year-end numbers showed a consistent deceleration in occupancy but somewhat higher rent and employment growth than in previous quarters. We expect this trend to continue at the start of 2018 as more office construction is expected to come on line,' Barbara Denham, senior economist at Reis, said..."

December 30 - Bloomberg (Joanna Ossinger): "Financial imbalances including those in credit markets and cryptocurrencies will shadow an otherwise robust 2018 U.S. economy, said Goldman Sachs... economist Jan Hatzius. Hatzius has already made some predictions for the new year: four Federal Reserve rate hikes, real U.S. gross-domestic product growth quickening to an average of 2.6%, the jobless rate dropping to about 3.5%, and the yield curve not inverting. In a new report, Hatzius reiterated his expectation for overall economic strength, while flagging some concerns. 'Asset valuations in some areas -- especially credit -- have risen to high levels by historical standards,' Hatzius said in the '10 Questions for 2018' report... 'While we have not seen the type of large credit expansions that would be most worrisome for Fed officials concerned about financial imbalances, there are now some signs of speculative behavior in financial markets, e.g. the cryptocurrency boom.'"

Central Bank Watch:

January 2 - Reuters (Francesco Canepa): "The European Central Bank may end its stimulus program this year if the euro zone economy continues to grow strongly, ECB rate-setter Ewald Nowotny told a German newspaper. The ECB has said it will buy bonds at least until September and it is widely expected to wind down the 2.55 trillion-euro scheme, the centerpiece of its efforts to revive inflation in the euro zone, after that. Nowotny's comments, echoing those of board member Benoit Coeure at the weekend, are likely to help cement those expectations. 'If the economy continues to do so well, we could let the program run out in 2018,' Nowotny told Sueddeutsche Zeitung..."

January 3 - Reuters (Yoshifumi Takemoto): "Bank of Japan Governor Haruhiko Kuroda said... the central bank would 'patiently' maintain its ultra-easy monetary policy to beat deflation. 'Unlike snow, Japan's deflationary mindset won't melt easily,' Kuroda said in a speech at a gathering of bank executives."

January 2 - Bloomberg (Katia Dmitrieva): "The European Central Bank is heading for a two-year leadership overhaul that peaks with the selection of a successor to President Mario Draghi, and it will be politics as much as ability that determines who get the jobs. Five of the ECB's seven top posts will be vacated by the end of 2019, starting with Vice President Vitor Constancio this June. Among the criteria candidates should bear in mind: being a woman is a plus, and appointing a government minister would break with tradition... 'A big game of musical chairs is going to play out over the next two years as a lot of high-profile positions come up for grabs in the European Union," said Carsten Brzeski, chief economist at ING-Diba AG... What will emerge at the end of this process will have profound consequences for how the ECB goes about tightening its policy.'"

Global Bubble Watch:

January 2 - Financial Times (Robin Wigglesworth): "Global monetary policy has been a multi-trillion dollar relay race over the past decade. But in 2018, there will be no one to pick up the baton, setting up a potentially anxious year for the world's bond markets. That is a sharp contrast to recent years. When the Federal Reserve began to unwind its bond-buying programme, the Bank of Japan cranked up its even grander quantitative easing scheme. By the time the Fed started raising interest rates, the European Central Bank had unveiled its own monetary bazooka, quelling the ructions that many feared were inevitable. The coming year promises to be an inflection point for central banks. The Fed has started reducing the pile of the bonds it acquired after the financial crisis -- a process that will accelerate. The ECB started to trim its QE programme in 2017 and is expected to end it altogether in 2018. Even the BoJ is expected to raise its bond yield target slightly this year."

January 2 - Bloomberg (Fergal O'Brien): "Factories across the globe warned they are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices as the world economy looks set to enjoy its strongest year since 2011. A slew of Purchasing Managers Indexes... from countries including China, Germany, France, Canada and the U.K. all pointed to deeper supply constraints. The U.S. reading from IHS Markit rose for the third month in the past four, reaching the highest since March 2015 amid 'increased capacity pressures.' Such strains on potential output may mean companies have to hire or invest more to avoid overheating, yet it could also force them to push up prices, propelling inflation enough to squeeze the expansion. JPMorgan... is among the banks predicting global growth will be around 4% this year..."

January 4 - Bloomberg (Charles Stein): "Vanguard Group, the world's largest mutual fund company, attracted an estimated $368 billion in deposits from customers last year, topping the previous record of $323 billion in 2016. The company's mutual funds gathered 61% of the haul, while its exchange-traded funds collected 39%... About 52% of the total went to stocks and 41% to bonds. More than half of the money sent to Vanguard came from financial advisers and other intermediaries... BlackRock reported almost $6 trillion in assets under management as of Sept. 30. At Vanguard, the total is approaching $5 trillion..."

January 3 - Reuters (Douglas Busvine and Stephen Nellis): "Security researchers... disclosed a set of security flaws that they said could let hackers steal sensitive information from nearly every modern computing device containing chips from Intel Corp, Advanced Micro Devices Inc and ARM Holdings. One of the bugs is specific to Intel but another affects laptops, desktop computers, smartphones, tablets and internet servers alike. Intel and ARM insisted that the issue was not a design flaw, but it will require users to download a patch and update their operating system to fix."

January 2 - Bloomberg (Kanika Sood): "Australian home prices fell in the final three months of 2017, the first such decline in almost two years, as the nation's biggest market Sydney continued to cool. Values nationally declined 0.3%... Prices in Sydney dropped 2.1% in the quarter, dragging the city's annual growth rate to 3.1% from 17.1% just seven months ago. 'Sydney's housing market has become the most significant drag on the headline growth figures,' said Tim Lawless, CoreLogic's head of research."

January 4 - Bloomberg (Natalie Wong and Erik Hertzberg): "Toronto's housing market continues to cool as prices fell last month and the supply of homes for sale spiked ahead of new stress-test rules that went into effect this week. The benchmark home price index fell in December for the seventh consecutive month, down 0.2% from November... The index has fallen 8.9% since May..."

Fixed Income Watch:

January 4 - Bloomberg (Liz McCormick and Sid Verma): "Investors devoted to the idea that inflation will stay subdued should be worried. Worldwide data have recently made clear that producer-price increases have picked up steam. That's led bond buyers to begin wagering that consumer inflation could be soon to follow, with U.S. breakeven rates above 2% in many tenors for the first time since March. The shift represents a sea change for investors who have grown complacent about the threat of rising prices over the past few years, when inflation was subdued by modest economic growth rates, suppressed wages and shifts in technology and demographics."

Europe Watch:

January 2 - Financial Times (Nicholas Megaw): "European factories have reported their strongest month since before the creation of the euro, capping off a much better than expected year for businesses in the single currency area. The eurozone manufacturing purchasing managers' index in December hit 60.6, its highest level since surveys began in mid-1997... Any figure above 50 indicates expansion over the month. The figures... suggested the sector had recorded its best annual performance on record, while new national-level data pointed to broad-based growth across the continent."

Geopolitical Watch:

January 2 - Reuters (Ankit Ajmera): "Iran's elite Revolutionary Guards have deployed forces to three provinces to put down anti-government unrest after six days of protests that have rattled the clerical leadership and left 21 people dead. The protests, which began last week over economic hardships suffered by the young and working class, have evolved into a rising against the powers and privileges of a remote elite, especially supreme leader Ayatollah Ali Khamenei. The unrest continued to draw sharply varied responses internationally, with Europeans expressing unease at the delighted reaction by U.S. and Israeli leaders to the display of opposition to Iran's clerical establishment."

January 3 - CNBC (Nyshka Chandran): "Just 24 hours after President Donald Trump took aim at Pakistan on Twitter, the South Asian nation already appears to be cozying up to the world's second-largest economy. A day after the U.S. leader slammed Islamabad for harboring terrorists in a New Year's Day tweet, Pakistan's central bank announced that it will be replacing the dollar with the yuan for bilateral trade and investment with Beijing. The same day, Chinese Foreign Ministry spokesman Geng Shuang defended Islamabad's counter-terrorism track record, saying the country 'made great efforts and sacrifices for combating terrorism' and urged the international community to 'fully recognize this.'"

 

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.

Copyright © 2015-2017 Doug Noland