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Revisiting the Global Savings Glut Thesis

"Why is the United States, with the world's largest economy, borrowing heavily on international capital markets--rather than lending, as would seem more natural? What implications do the U.S. current account deficit and our consequent reliance on foreign credit have for economic performance in the United States and in our trading partners? What policies, if any, should be used to address this situation? In my remarks today I will offer some tentative answers to these questions. My answers will be somewhat unconventional in that I will take issue with the common view that the recent deterioration in the U.S. current account primarily reflects economic policies and other economic developments within the United States itself. Although domestic developments have certainly played a role, I will argue that a satisfying explanation of the recent upward climb of the U.S. current account deficit requires a global perspective that more fully takes into account events outside the United States. To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. ...As I will discuss, an important source of the global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders. To be clear, in locating the principal causes of the U.S. current account deficit outside the country's borders, I am not making a value judgment about the behavior of either U.S. or foreign residents or their governments." ~ Federal Reserve governor Ben Bernanke, "The Global Saving Glut and the U.S. Current Account Deficit," April 14, 2005

I was flabbergasted back in 2005 with Dr. Bernanke's "global savings glut" thesis. At that time mortgage Credit was in the process of expanding a still all-time annual record $1.436 TN. National home prices (Case-Shiller) were up better than 14% year-over-year. The California housing Bubble was coming completely unhinged. Nationally, household mortgage Credit was expanding at double-digit rates for the fifth straight year, as a powerful inflationary psychology took hold in U.S. housing markets and throughout mortgage finance. Moreover, overall system Credit continued to expand rapidly following 2004's 9.2% growth (strongest since 1988). At 2.75%, the Fed funds rate was ridiculously low in comparison to rapidly inflating home prices and generally rising securities and asset prices.

I had a difficult time accepting that Bernanke actually believed that emerging markets were playing such a primary financing role in the U.S. markets and economy. The Fed was in the midst of experimental reflationary policies, and I just assumed the "global savings glut" thesis was sophisticated rationalization and justification (reminiscent of Greenspan's new paradigm productivity and rising speed limit rationale). Clearly, the Fed was headstrong to avoid tightening Credit even in the face of conspicuous mortgage excess, fearing that it might pull the rug out from under system reflation.

For a long time now, I've viewed the unique backdrop in the context of a historic multifaceted Experiment in: 1) Unconstrained global "money" and (market-based) Credit; 2) Unconventional economic structure; and 3) Activist/inflationist monetary management on a coordinated global basis.

There was no doubt in my mind that unfettered finance would foment market and economic instability. Indeed, evidence of global financial dysfunction has been on full display now for well over two decades. As custodian of the world's reserve currency and champion of financial innovation, the U.S. has all along been the global leader with respect to Credit excess, speculation and monetary management. The financialization of the global economy has been integral to the U.S.'s unique capacity to run persistently large trade and Current Account Deficits.

Why not de-industrialize and instead use new financial claims in exchange for imported manufactured goods? The experiment in a services and consumption economic structure then took on a life of its own, fueled first by Wall Street finance and then by government debt and central bank Credit.

Unfettered global "money" and Credit coupled with a world flooded with U.S. financial claims (largely IOUs) was a recipe for extreme financial instability. Never did I imagine such an experiment could be sustained for so long. I simply did not contemplate the extent to which central bankers would be willing to underpin unsound global finance.

It's not as if this great Experiment hasn't been at the brink a few times: 1997, 1998, 2002, 2008, 2012 and early-2016. At this point, markets are understandably convinced that central bankers have no alternative than to always come immediately to the rescue.

Granted, QE retains the capacity to incite speculation and levitate markets. Yet monetary inflation's myriad effects on societies and democracies are at this point progressively - and openly - corrosive. Rising anti-establishment sentiment and anti-globalization movements reflect mounting frustration with the existing world order. I believe the Brexit and Trump movements are indicative of the unfolding failure of this Global Experiment. I had assumed that the Experiment's downfall would be marked by a crisis of unstable markets. At this time, the world is at monumental crossroads in terms of social, political, market and economic instability.

November 21 - Wall Street Journal (William Mauldin and David Luhnow): "Rather than kill Nafta, Donald Trump and his advisers appear set to push for substantial changes to the treaty governing U.S. trade with Mexico and Canada, an effort that could prove difficult to negotiate and perilous to the regional economy. The president-elect vilified the North American Free Trade Agreement during the campaign and threatened to pull the U.S. out of the trade deal—but only if Mexico doesn't agree to substantial modifications. The U.S. trade deficit with Mexico rose 9.5% in 2015 to $60.7 billion, while the deficit with Canada fell 57% to $15.5 billion. Mr. Trump hasn't released a blueprint for his new vision of Nafta, but his comments and those of his advisers suggest they want big changes. Among the likeliest would be special tariffs or other barriers to reduce the U.S. trade deficit with Mexico and new taxes that would hit U.S. firms that moved production there, according to Trump advisers."

The Trump campaign was built upon a platform of economic nationalism and the imperative of major change. Trade deals must be canceled or significantly revamped. Jobs and manufacturing must be brought back to the U.S. America must come first to be great again. In the view of Trump and his advisors, The Experiment has clearly failed. Donald Trump often referred to the "Bubble." He lashed out at Federal Reserve policymaking and the massive U.S. debt. With indices sprinting to record highs, it's the nature of markets to forget why the Trump campaign received scant support from the business community and was viewed with contempt by Wall Street (and global markets).

James Carville famously quipped back in 1993: "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."

In his acceptance speech, President-elect Trump avoided slamming Yellen, the Federal Reserve or deficit spending. Bypassing confrontation, he chose instead to trumpet a revitalizing $1.0 TN infrastructure spending program. Such a priority undertaking would require close cooperation, both from the Federal Reserve and the financial markets. Détente. Wasting no time, markets immediately relegated Trump's focus on trade and the American displaced worker to the realm of campaign bluster. No need for antipathy or fear - not with markets retaining firm control. Better yet, if the Trump administration seeks a successful Presidency, all roads must pass through all-powerful Wall Street. Incredibly, surging U.S. markets stirred the imagery of Ronald Reagan.

The general election presented an epic battle between deeply conflicting perceptions of reality. One sect held a more constructive view of a generally sound economic backdrop. With Washington's assistance and commanding oversight, things were under control and on a definite uptrend. The opposing view held that it was all largely a mirage: the economy and markets were a Bubble illusion. Underpinnings (financial, economic, social and geopolitical) were disturbingly unsound, a product of years of gross Washington mismanagement. Only radical change would reverse our nation's accelerating downfall.

U.S. markets have thus far been content to focus on prospects for financial deregulation, lower corporate taxes and infrastructure spending. Comforting and not so radical, no doubt. Yet the bedrock of the Trump movement is about putting American jobs and manufacturing first. And only radical change in trade relationships (and global finance?) will reverse the (experimental) course that is placing our economy, finances and society in peril. Begin immediately with TPP and NAFTA - then move on to China and Asia.

There's a huge issue: The world - economy as well as financial "system" - is addicted to enormous U.S. Current Account Deficits. America has for two decades simultaneously flooded the global economy with purchasing power and international markets with cheap liquidity. Over years the upshot has been massive overinvestment in manufacturing capacity and incessant global financial instability. Central banks then moved to mitigate this troubling backdrop with a now protracted period of unprecedented reflationary measures. This only accommodated greater economic maladjustment and financial excess - while deepening global addictions.

From my analytical framework, it was never "the chicken or the egg" issue. It was loose monetary policies, financial excesses and associated U.S. Current Account Deficits that were the core of the so-called "global savings glut." U.S. trade deficits ensured massive financial flows abroad, especially to rapidly growing China, Asia and EM. These dollar balances were then recycled right back to U.S. securities markets, in large part through EM central bank purchases of Treasuries and agency securities.

Moreover, EM, flush with dollar reserves and booming economies, enjoyed a self-reinforcing and destabilizing boom in "hot money" inflows (which could also be recycled into U.S. securities). This dynamic went into overdrive after the 2008 crisis and the introduction of QE. Virtually unlimited cheap liquidity on a global basis incentivized "carry trades" and all varieties of leveraged speculation. So long as yields continued their historic decline, central banker, the leveraged hedge fund operator, sovereign wealth fund manager, derivative player and Joe Public could all just keep buying and relishing the spectacular windfall.

A rapidly changing trade backdrop now risks significantly altering the global financial landscape. A focus on making America great again will ensure a radically different view of trade and "globalization." I've always believed in the important distinction of trading goods for goods- as opposed to creating endless quantities of new financial claims to pay for boundless cheap imports. Fiat for goods may have appeared miraculous - with central bankers happy to Credit themselves for whipping inflation. But at the end of the day the world is left with destabilizing economic imbalances and unstable finance. Too much finance, overcapacity and inequality. And, as we've witnessed of late, there's an alarming amount of angst and social divisions, along with a democratic majority demanding an end to the status quo.

Understandably, global bond markets are on edge. Already beginning to percolate, the combination of trade frictions and fiscal stimulus potentially creates the most nurturing inflationary backdrop in years. EM is under pressure, with fears of shrinking trade surpluses, weaker currencies, shrinking reserves and the specter of self-reinforcing "hot money" outflows. Instead of reliable buyers of U.S. Treasuries and other securities, EM appears more likely persistent sellers. And a faltering EM only fuels a powerful self-reinforcing king dollar dynamic. Besides, if EM central bankers are no longer backstopping Treasuries and bonds more generally, these instruments are now a lot less attractive instruments for leveraged speculation. And will central bankers - and others - keep buying even as previous windfalls morphs into mounting losses.

The S&P500 gained 1.4% this week to join the small caps, midcaps and DJIA at all-time highs. How is it possible that U.S. equities surge to record highs in the face of such a troubling unfolding backdrop? Right now, the U.S. "Core" is winning big at the expense of the faltering "periphery." And with global QE continuing at an astounding $2.0 TN annualized pace, today's prevailing market worry is missing out on "Risk On" flows rather than fretting some nebulous brewing "Risk Off." Moreover, markets by now have become well-conditioned to see heightened risk as ensuring central banks keep liquidity spigots wide open.

The "fiat for goods", services/consumption economic structure, activist central banking, accommodate financial innovation/leveraged speculation experimental regime created the illusion of a golden era of low inflation, booming securities markets and unending economic growth. Central bankers enjoyed the luxury of easy decisions. Inflation was trending down, while bond prices trended up - seemingly forever. Central banks saw no pressing reason to tighten policies, irrespective of booming securities markets and/or Bubbles.

Going forward, the world could experience a new paradigm of inflation trending higher and bond prices lower. This would entail great uncertainty, including who will step up and fund rising deficits in a new era of declining bond prices. There is today as well great uncertainty as to how U.S. economic nationalism will play out globally. Trade and currency wars are a very real possibility.

In the near-term, central banking is about to turn a lot more difficult. All this QE in the face of rising bond yields and general uncertainty will stoke inflation fears. Already, the surge of liquidity into equities is drawing funds from fixed income, while exacerbating general flow instability. Liquidity flooding into king dollar exacerbates EM fragilities. Increasingly apparent EM trouble then spurs more flows into hot "Core" securities. "Melt-up" stuff. Do central banks come to view QE as destabilizing to inflation expectations and overall market speculation and flows? Or do they view the backdrop as too risky to begin reining in global monetary stimulus, again turning their backs on increasingly dangerous speculative excess? Might views begin to diverge, a likely scenario that would usher in a less straightforward - and less market-comforting - policymaking paradigm.

A few weeks back I argued the case for Peak Monetary Stimulus. This week it's Past Peak "Global Savings Glut." I suspect liquidity conditions worldwide will react poorly to any retreat from global QE.


For the Week:

The S&P500 gained 1.4% (up 8.3% y-t-d), and the Dow rose 1.5% (up 9.9%). The Utilities rallied 2.0% (up 9.0%). The Banks increased 1.4% (up 18.9%), and the Broker/Dealers added 1.1% (up 14.4%). The Transports advanced 2.1% (up 20.4%). The broader market outperformed again. The S&P 400 Midcaps jumped 2.2% (up 17.3%), and the small cap Russell 2000 rose 2.4% (up 18.6%). The Nasdaq100 gained 1.3% (up 6.0%), and the Morgan Stanley High Tech index increased 1.0% (up 13.1%). The Semiconductors rose 2.1% (up 34.3%). The Biotechs were little changed (down 11.7%). With bullion down $24, the HUI gold index dropped 3.5% (up 58.1%).

Three-month Treasury bill rates ended the week at 49 bps. Two-year government yields rose five bps to 1.12% (up 7bps y-t-d). Five-year T-note yields gained four bps to 1.84% (up 9bps). Ten-year Treasury yields added a basis point to 2.36% (up 11bps). Long bond yields declined three bps to 3.00% (down 2bps).

Greek 10-year yields fell 12 bps to 6.81% (down 51bps y-t-d). Ten-year Portuguese yields dropped 25 bps to 3.57% (up 105bps). Italian 10-year yields declined a basis point to 2.08% (up 49bps). Spain's 10-year yields slipped two bps to 1.57% (down 20bps). German bund yields declined three bps to 0.24% (down 38bps). French yields added two bps to 0.77% (down 22bps). The French to German 10-year bond spread widened five to 53 bps. U.K. 10-year gilt yields fell four bps to 1.41% (down 55bps). U.K.'s FTSE equities index added 1.0% (up 9.6%).

Japan's Nikkei 225 equities index jumped 2.2% (down 3.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.03% (down 23bps y-t-d). The German DAX equities index increased 0.3% (down 0.4%). Spain's IBEX 35 equities index increased 0.6% (down 9.1%). Italy's FTSE MIB index rallied 1.5% (down 22.9%). EM equities were mixed. Brazil's Bovespa index rallied 2.7% (up 42%). Mexico's Bolsa recovered 2.2% (up 5.5%). South Korea's Kospi was unchanged (up 0.7%). India's Sensex equities index increased 0.6% (up 0.8%). China's Shanghai Exchange advanced 2.2% (down 7.8%). Turkey's Borsa Istanbul National 100 index fell 1.7% (up 3.7%). Russia's MICEX equities index surged 2.9% (up 19.1%).

Junk bond mutual funds saw inflows of $598 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped nine bps to a 16-month high 4.03% (up 8bps y-o-y). Fifteen-year rates rose 11 bps to 3.25% (up 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.08% (up 14bps).

Federal Reserve Credit last week expanded $2.4bn to $4.422 TN. Over the past year, Fed Credit contracted $29.4bn (down 0.7%). Fed Credit inflated $1.611 TN, or 57%, over the past 211 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.0bn last week to near a six-year low $3.120 TN. "Custody holdings" were down $199bn y-o-y, or 6.0%.

M2 (narrow) "money" supply last week surged $51.1bn to a record $13.214 TN. "Narrow money" expanded $955bn, or 7.8%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits surged $93.5bn, while Savings Deposits fell $53.2bn. Small Time Deposits declined $1.2bn. Retail Money Funds jumped $10.4bn.

Total money market fund assets rose $18.8bn to a 12-week high $2.705 TN. Money Funds declined $18.3bn y-o-y (0.7%).

Total Commercial Paper jumped $9.6bn to $922bn. CP declined $135bn y-o-y, or 12.8%.

Currency Watch:

November 24 - Financial Times: "The relentless rise of the dollar scorched emerging market currencies on Thursday, sending China's renminbi to its weakest level in eight years, while India's rupee plumbed a record low. Broad currency weakness against the dollar came as the bond market fully expects policy tightening by the Federal Reserve at its December meeting."

November 24 - Financial Times (Peter Wells): "The Philippine peso has hit 50 per dollar for the first time since the financial crisis... It was the first time the currency traded through the 50 level since November 24, 2008, precisely eight years ago."

November 24 - Financial Times (Peter Wells): "Malaysia's ringgit has hit its weakest point since the Asian financial crisis, as the US dollar continues to strengthen and push down on currencies the world over... Yesterday, Malaysia's central bank kept benchmark lending rates unchanged. Many analysts expected the decision, reasoning the weakening currency would prompt Bank Negara Malaysia to stand pat."

The U.S. dollar index added 0.3% to 101.21 (up 2.6% y-t-d). For the week on the upside, the South African rand increased 2.2%, the Australian dollar 1.4%, the British pound 1.1%, the Swedish krona 0.5%, the South Korean won 0.5%, the New Zealand dollar 0.5%, the Taiwanese dollar 0.2%, and the Norwegian krone 0.2%. For the week on the downside, the Japanese yen declined 2.0%, the Brazilian real 0.9%, the Swiss franc 0.4%, and the Singapore dollar 0.1%. The Chinese yuan declined 0.5% versus the dollar (down 6.15%).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.5% (up 17.2% y-t-d). Spot Gold fell 2.0% to $1,184 (up 11.5%). Silver slipped 0.6% to $1 (up 20%). Crude added 37 cents to $46.06 (up 24%). Gasoline rose 2.5% (up 8%), and Natural Gas jumped 7.8% (up 31%). Copper surged 8.2% (up 26%). Wheat declined 1.4% (down 11%). Corn gained 1.3% (unchanged).

China Bubble Watch:

November 25 - Wall Street Journal (Lingling Wei): "China plans to clamp tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook. The State Council, China's cabinet, will soon announce new measures that subject many overseas deals to reviews of "strict control," according to people with direct knowledge... Targeted for particular scrutiny by the pending measure are 'extra-large' foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor's core business."

November 21 - Bloomberg: "Dollar strength and rising U.S. interest rates under President-elect Donald Trump would intensify pressure on capital outflows from China, forcing its policy makers to choose between tightening capital controls or a drastic floating of the currency in coming months. That's according to Victor Shih, a University of California at San Diego professor who studies China's government and finance and specializes in tracking politics at the most elite level. 'Given the Chinese government's consistent preference for control, we may see much more Draconian capital controls before a decision to float the currency can be made,' Shih said... 'The main objective is to avoid a panicky float.'"

November 21 - Bloomberg (Pooja Thakur Mahrotri and En Han Choong): "The landscaped lawns and flowering shrubs of Country Garden Holdings Co.'s huge property showroom in southern Malaysia end abruptly at a small wire fence. Beyond, a desert of dirt stretches into the distance, filled with cranes and piling towers that the Chinese developer is using to build a $100 billion city in the sea. While Chinese home buyers have sent prices soaring from Vancouver to Sydney, in this corner of Southeast Asia it's China's developers that are swamping the market, pushing prices lower with a glut of hundreds of thousands of new homes. They're betting that the city of Johor Bahru, bordering Singapore, will eventually become the next Shenzhen. 'These Chinese players build by the thousands at one go, and they scare the hell out of everybody,' said Siva Shanker, head of investments at Axis-REIT Managers Bhd... 'God only knows who is going to buy all these units, and when it's completed, the bigger question is, who is going to stay in them?'"

Europe Watch:

November 21 - Reuters (Andreas Rinke and Madeline Chambers): "Angela Merkel announced... she wants to run for a fourth term as German chancellor in next year's election... The 62-year old conservative, facing a voter backlash over her open-door migrant policy, said she had thought long and hard before eventually deciding to stand again in the September election, ending months of speculation over her decision."

November 24 - Reuters (Michael Nienaber): "Growth in leading euro zone economies slowed over the summer months and an expected German-led rebound at the end of the year may prove too short-lived for the European Central Bank to unwind its monetary stimulus. Germany's quarterly growth rate halved to 0.2% in the three months to September even though private consumption and state spending rose, as weak foreign trade slowed overall activity in Europe's biggest economy."

November 24 - Financial Times (Claire Jones, Dan McCrum, Thomas Hale and Elaine Moore): "Hopes of a fix to the collateral squeeze facing the eurozone's €5tn short-term funding markets were boosted this week after reports emerged the European Central Bank will consider ways to ease rules on how it lends its stockpile of sovereign debt. A lack of good quality collateral, which market participants use to secure loans, has crippled the single currency area's short-term funding ('repo') markets. One big reason for the shortage is that the eurozone's central bankers have spent the past year-and-a-half buying €1.1tn in government bonds... as part of their quantitative easing programme to boost growth."

ECB Watch:

November 21 - Reuters (Gernot Heller and Joseph Nasr): "German Finance Minister Wolfgang Schaeuble called on the European Central Bank... to start unwinding it expansive monetary policy, adding that such a reversal should be done cautiously. 'I will not get tired of saying that I would prefer it if we started as soon as possible,' Schaeuble said. 'Exiting this unusual monetary policy should be done with immense caution,' he added, warning of possible shock reactions to such steps."

November 24 - Bloomberg (Alessandro Speciale, Piotr Skolimowski and Catherine Bosley): "The European Central Bank is confident it will be able to continue shielding the euro area from the risk of a sudden correction in asset prices, after political events such as the election of Donald Trump threaten to increase volatility in coming months. 'We are certainly seeing a correction coming from the U.S.,' ECB Vice President Vitor Constancio said... 'The ECB will continue to exert its stabilizing role, so I don't think there will be significant contagion to Europe.'"

November 24 - CNBC (Silvia Amaro): "The increasing political uncertainty across advanced economies is risking the stability of the euro zone, the region's central bank warned in a new biannual report... The uncertainty surrounding upcoming key referendums and elections across the 19-member euro zone bloc, along with expected policy changes in the U.S. raise inflation and growth challenges for euro area countries, the European Central Bank (ECB) said. Such uncertainty could lead to a global asset market corrections, it stated. 'The financial stability implications for the euro area stemming from changes in U.S. economic policies are highly uncertain at this point in time,' the bank said."

November 22 - Wall Street Journal (Christopher Whittall and Mike Bird): "The European Central Bank began buying billions of euros worth of corporate bonds earlier this year in a high-profile experiment aimed at spurring private investment. So far, the spending hasn't materialized. Since June, the ECB has bought €44.3 billion (around $46.9bn) in corporate debt... The ECB buys bonds to stimulate tame growth with corporate spending. However, companies aren't spending, executives say and data suggest, because they see few opportunities amid feeble growth and because credit was already cheap."

Fixed-Income Bubble Watch:

November 23 - Financial Times (Thomas Hale): "Eurozone corporate bond risk premiums have jumped to their highest level since July, as Donald Trump's victory in the US election effectively erases gains generated by the European Central Bank's policy of buying companies' debt. A sharp rise in global bond yields since Mr Trump's triumph has also spurred an underperformance of European credit relative to the US corporate debt market. Higher corporate credit spreads in euros, which measure the risk of company debt compared to a benchmark rate, come despite ongoing purchases by the ECB... The ECB has purchased €44bn of corporate bonds so far."

Global Bubble Watch:

November 21 - Reuters (Jamie McGeever): "Next year will be the first since 2006 that there will be no big monetary policy easing across the world's leading industrialized nations, signifying the end of the 35-year bull market in bonds, Bank of America Merrill Lynch said... Having driven interest rates to their lowest ever levels and lifted purchases of financial assets to over $25 trillion this year, central banks are finally maxed out, BAML said in its 2017 outlook. Any stimulus to the world economy will now come from governments, who will use fiscal policy to wage a 'war on inequality', according to BAML. 'The era of excess central bank liquidity is ending. In 2017 markets likely will not benefit from a big monetary easing for the first time since 2006,' BAML's investment strategy team led by Michael Hartnett... said..."

November 22 - Bloomberg (David Finnerty and Yumi Teso): "Global funds sold about $11 billion of equities and bonds in Asia's emerging markets after Donald Trump's victory in the U.S. presidential election as expectations for his economic policies sent Treasury yields higher and sparked the dollar's strongest rally in eight years. India suffered the biggest outflows between Nov. 9 and Nov. 18, followed by Thailand... The capital flight trims the year-to-date inflow into India, Indonesia, the Philippines, South Korea, Taiwan and Thailand to around $55 billion."

November 21 - Wall Street Journal (Rachel Rosenthal and Carol Chan): "Asian companies are starting to feel the 'Trump effect,' as a rise in global borrowing costs forces them to reconsider their debt-raising plans. Corporate-bond issuance in Asia has already slowed since the U.S. election, with companies from China to India pulling or postponing planned deals. The sudden stalling in debt markets could threaten a model of growth that has taken root in Asia in recent years. Firms across the region have taken advantage of low global interest rates to pile up trillions of dollars worth of debt, often denominated in greenbacks... Asian companies have already raised $1.1 trillion in bonds so far this year, compared with $260.8 billion for all of 2008, according to Dealogic."

November 21 - Reuters (Abhinav Ramnarayan and Helen Reid): "Euro zone governments are increasingly relying on hedge funds to help them meet their borrowing needs, which risks leaving them vulnerable to a debt market sell-off driven by a class of investors dubbed 'fast money' for their speculative approach. With banks playing a less active part in the sovereign debt market because of pressures on their balance sheets, several countries have turned to hedge funds to sell their targeted amount of bonds... Hedge funds tend to look for quick returns on investments, which could increase the volatility of government bond markets as they face several tests of sentiment in coming months. A populist revolt that propelled Donald Trump and the Brexit vote is sweeping the developed world and threatens to unseat established leaders in an Italian referendum next month, and Dutch, French and German elections in 2017."

November 19 - New York Times (Peter S. Goodman): "Among policy makers alert for signs of the next financial disaster, Italy's mountain of uncollectable bank debt is a subject discussed in tones ordinarily reserved for piles of plutonium. Its banks seem at once too big to fail and eminently capable of doing so... For years, Italian lenders have muddled through, hoping time would cure their afflictions. But Italy's economy has been terminally weak, not growing at all over a recent 13-year stretch... Nearly one-fifth of all loans in the Italian banking system are classified as troubled, a toll worth 360 billion euros, or nearly $400 billion, at the end of last represents roughly 40% of all the bad loans within the countries sharing the euro. In recent weeks, the world's focus has shifted to Germany's largest lender, Deutsche Bank... But if Deutsche has become the crisis of the moment, Italy is the perpetual threat that could, at any moment, present the world with an unpleasant surprise..."

November 21 - Financial Times (Alex Barker, Jim Brunsden and Martin Arnold): "Brussels is proposing to tighten its grip over overseas banks operating in the EU in a tit-for-tat step against the US that will raise costs for big foreign lenders and potentially hurt the City of London after Brexit. The European Commission will unveil provisions on Wednesday that mirror controversial US 'intermediate holding company' rules that ringfence foreign bank capital."

November 21 - Reuters (Huw Jones): "Citi has joined JPMorgan at the top of global regulators' list of systemically important banks, replacing HSBC and meaning the U.S. bank will have to hold extra capital from 2019 to help preserve financial stability. The group of 20 economies (G20) agreed after the 2007-09 financial crisis that top banks, whose size and complexity mean a collapse could wreak havoc in markets, should hold extra capital, according to the level of risk they present."

U.S. Bubble Watch:

November 23 - Wall Street Journal (Gunjan Banerji): "Sectors and styles in the S&P 500 index have started to move independently after seven years of depressed volatility and tighter correlations. The catalyst is the U.S. presidential election... Among the sharpest collapses is the link between financial stocks in the S&P 500 and the broader gauge. The correlation between the two over the last month has fallen to 0.59, compared with 0.89, where it was on Nov.7... Shares of banks, asset managers and insurance companies as a group have jumped 11% since election day as investors bet on lighter regulation for the sector under the Trump administration. The financial sector's performance trounced other groups, such as utilities and consumer staples, each of which are down more than 3%."

November 23 - Wall Street Journal (Chris Dieterich): "Money is pouring out of municipal bond funds at the fastest pace since the 2013 'taper tantrum' as investors slash bond holdings and wonder about potential changes to the tax code. Investors pulled $3 billion from muni bond mutual and exchange-traded funds the week after the presidential election, the largest such withdrawal since June 2013... The $7.3 billion iShares National AMT-Free Muni Bond ETF, ticker MUB, has fallen 3.4% this month and is on pace for its sharpest monthly drop since Sept. 2008."

November 20 - New York Times (Mary Williams Walsh): "Picture the next major American city to go bankrupt. What springs to mind? Probably not the swagger and sprawl of Dallas. But there was Dallas's mayor, Michael S. Rawlings, testifying this month to a state oversight board that his city appeared to be 'walking into the fan blades' of municipal bankruptcy... But under its glittering surface, Dallas has a problem that could bring it to its knees, and that could be an early test of America's postelection commitment to safe streets and tax relief: The city's pension fund for its police officers and firefighters is near collapse and seeking an immense bailout."

November 23 - New York Times (Patricia Cohen and Conor Dougherty): "When Jared Rutledge called his mortgage broker one morning last week after putting in an offer on a home in Glendale, Ariz..., he discovered that the 3.8% rate he had been quoted a couple of months ago had already gone up to 4.125%. That afternoon, it had inched up to 4.25, and by evening, when he finally called back to finalize the deal, it was 4.375%. 'I was kind of frustrated,' Mr. Rutledge said. But with a third child on the way, and a buyer for their current home, he and his wife felt they had little choice. 'Instead of holding out and waiting, we locked it in,' he said. Since the election, mortgage rates have climbed roughly half a percentage point to a 16-month high...

November 24 - Bloomberg (Joe Light and Prashant Gopal): "The definition of a jumbo mortgage is changing for the first time in more than a decade. Fannie Mae and Freddie Mac in 2017 will back mortgages of up to $424,100 in most of the U.S., an increase from $417,000... The change, which will increase the limit for areas with the most expensive homes to $636,150 from $625,500, comes after home prices in the third quarter pushed past their level of a decade ago."

November 22 - Bloomberg (Sho Chandra): "Sales of previously owned U.S. homes unexpectedly climbed in October to the highest level since February 2007, a sign of momentum in the housing market a month before a jump in borrowing costs... Contract closings rose 2% to a 5.60 million annual rate (forecast was 5.44 million)... Median sales price rose 6% from October 2015 to $232,200. Inventory of available properties fell 4.3% from October 2015 to 2.02 million, marking the 17th straight year-over-year decline..."

Federal Reserve Watch:

November 23 - New York Times (Binyamin Appelbaum): "When Federal Reserve officials convened just before the presidential election, they talked like people who were ready to raise interest rates, although they decided to wait a little longer. They fretted about the growing risks of keeping borrowing costs at a historically low level... They also expressed confidence, albeit with some reservations, that the economy was ready for higher rates. The exuberant reaction of financial markets to Donald J. Trump's victory has strengthened the case for higher rates, and solidified expectations that the Fed will act at its next meeting in December."

November 22 - Bloomberg (Kevin Cirilli): "Donald Trump is looking to reshape the Federal Reserve -- very quickly. Two transition team sources said that the president-elect will move within his first three months in office to fill two vacant seats on the Fed's Board of Governors in Washington, which have been vacant recently. Earlier Tuesday, Trump announced that Ralph Ferrara would lead the so-called 'landing team' designed at looking at the central bank to see ways it could be improved to Trump's liking."

Japan Watch:

November 21 - Bloomberg (Connor Cislo): "Japan posted a trade surplus for a second straight month in October... Exports fell 10.3% in October from a year earlier... Shipments have also dropped in every month for more than a year. Imports decreased 16.5% during the same period..."

EM Watch:

November 24 - Bloomberg (Yumi Teso and Lilian Karunungan): "Asian currencies' drop to the weakest this decade will probably deter regional central banks from easing monetary policies as the prospects of higher U.S. rates spurred capital outflows. Indeed, they are more likely to be stepping in to smooth declines in their currencies -- the rupee's drop on Thursday reportedly prompted intervention from the Reserve Bank of India. The Bloomberg-JPMorgan Asia Dollar Index has tumbled to the weakest since 2009, the Philippine peso cracked 50 per dollar for the first time since the global financial crisis and forwards traders are expecting Malaysia's ringgit will drop within a week to levels last seen in 1998."

November 24 - Bloomberg (Selcan Hacaoglu and Onur Ant): "Turkey's central bank unexpectedly raised its one-week repurchase and overnight lending rates for the first time in almost three years, after the lira's plunge to a record low and its impact on inflation trumped political demands for lower borrowing costs. The bank raised the one-week repo and overnight lending rates by 50 and 25 basis points to 8% and 8.5%..."

November 21 - Reuters (Anthony Boadle): "Brazilian President Michel Temer warned... that the national debt could swell to the size of the country's gross domestic product within eight years should public spending not be brought under control and fiscal reforms not enacted... The nature of Brazil's crisis is fiscal. For too long, governments have spent more than they earned,' said Temer..."

November 23 - Bloomberg (Jiyeun Lee): "South Korea's household debt swelled to a record in the third quarter, prompting the government to release another set of measures to slow its rise. Household debt including credit purchases rose to 1,295.8 trillion won ($1.1 trillion) as of end-September, an 11% jump from the previous year... The financial regulator said Thursday that it will seek stricter loan screening by banks on some type of mortgages and lending from so-called mutual finance institutions that had been loosely scrutinized, adding to measures announced in August."

Leveraged Speculator Watch:

November 21 - Opalesque: "The breadth of hedge fund asset outflows in October was the industries' largest in 2016, with 61% of reporting funds seeing net outflows for the month, according to... eVestment... October's -$14.2 billion outflow marked the fourth month of redemptions in the last five, with year to date (YTD) hedge fund assets down -$77 billion. Overall industry AUM is getting dangerously close to dropping below $3 trillion. Industry assets now stand at $3.03 trillion now following this string of disappointing months for hedge funds."

November 22 - Bloomberg (Julie Verhage): "Those looking to explain what's set to be another bad year for hedge funds could do worse than blame their passion for tech stocks. The funds have averaged a 4% gain year-to-date, but that pales next to a 9% rally in the S&P 500. Barring a sharp turnaround before December 31, this will be the eighth year since 2008 that hedge funds have underperformed, according to Goldman Sachs Group... 'Most hedge funds have improved performance following first quarter struggles but continue to lag the broad S&P 500 index as well as the average mutual fund,' the analysts wrote..."

Geopolitical Watch:

November 24 - Bloomberg: "American military vessels and aircraft carried out more than 700 patrols in the South China Sea region during 2015, making China the U.S.'s No. 1 surveillance target, according to a report by China's only state-backed institution dedicated to research of the waters. The patrols pose a threat to China's sovereignty and security interests, said the report by the National Institute for South China Sea Studies, which is headquartered in Hainan island. The document, the first of its kind released by China, warned that continued targeted operations by U.S. patrols would lead to militarization of the waters."

November 20 - Reuters (Daren Butler and Nick Tattersall): "President Tayyip Erdogan was quoted on Sunday as saying that Turkey did not need to join the European Union 'at all costs' and could instead become part of a security bloc dominated by China, Russia and Central Asian nations. NATO member Turkey's prospects of joining the EU look more remote than ever after 11 years of negotiations."

November 25 - Reuters (Tulay Karadeniz and Nick Tattersall): "Turkish President Tayyip Erdogan threatened on Friday to unleash a new wave of migrants on Europe after lawmakers there voted for a temporary halt to Turkey's EU membership negotiations, but behind the fighting talk, neither side wants a collapse in ties. Europe's deteriorating relations with Turkey, a buffer against the conflicts in Syria and Iraq, are endangering a deal which has helped to significantly reduce a migrant influx which saw more than 1.3 million people arrive in Europe last year."


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