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Not Clear What That Means

November 15 - Bloomberg (Nishant Kumar and Suzy Waite): "Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven't been resolved. 'Have we learned our lesson? It depends what the lesson was...' Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market 'could have been dealt with differently.' And in the 'so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.' 'If you took all of the obvious problems from the financial crisis, we kind of solved none of them,' Einhorn said... Instead, the world 'went the bailout route.' 'We sweep as much under the rug as we can and move on as quickly as we can,' he said."

October 12 - ANSA: "European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying 'It's not clear what that means'."

Once you provide a benefit it's just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.

When I read David Einhorn's above analysis, my thoughts returned to Ben Bernanke's comment last month regarding distorted markets: "It's Not Clear What That Means." Einhorn attended one of those paid dinners with Bernanke back in 2014, and then shared thoughts on Bloomberg television: "I got to ask him all these questions that had been on my mind for a very long period of time. And then on the other side, it was, like, sort of frightening, because the answers weren't any better than I thought that they might be." A successful hedge fund manager such a Mr. Einhorn is keen to decipher market distortions. Dr. Bernanke was keen to benefit markets - to inflate them.

During the mortgage finance Bubble period, I often referred to "The Moneyness of Credit" and "Wall Street Alchemy." Various risk intermediation processes were basically transforming endless (increasingly) risky loans into perceived safe and liquid money-like instruments. Throughout history, insatiable demand for money creates great power and peril. I can't conceptualize a more far-reaching market distortion than conferring money attributes to risky financial instruments. Pandora's Box. For a while now, I've been astounded that the Federal Reserve has no issue with epic market distortions.

Fannie and Freddie were on the hook for insuring Trillions of mortgage securities. These GSEs essentially had no reserves or equity in the event of a significant downturn, a fact that had no bearing whatsoever on the safe haven pricing of their perceived money-like securities. Insurers of Credit were on the hook for Trillions, with minimal reserves. So, investors held (and leveraged) Trillions of "AAA" with little concern for losses or illiquid trading. Meanwhile, there was the gargantuan derivatives marketplace thriving on the assumption of liquid and continuous markets, despite hundreds of years of market history replete with recurring bouts of illiquidity and dislocation.

There were as well myriad variations of cheap market "insurance" readily available, bolstering risk-taking with the misperception that risks (equities, Credit, interest-rates, etc.) could always be easily hedged. And so long as Credit expanded (risky loans into "money"), the economy boomed and markets inflated, the pricing for market insurance remained low (or went lower).

As Einhorn stated, "risk was transferred, but not really being transferred, and not properly valued." It amounted to a historic market Bubble distortion. Underlying risks were being grossly distorted and mispriced in the marketplace. Distortions fostered a massive expansion of risky Credit and untenable financial intermediation - a powerful boom and bust dynamic that culminated in a crash. Amazingly, catastrophic market distortions evolved gradually enough over years so to barely garnered attention. Can't worry about risk when there's easy "money" to amass.

Central bankers learned the wrong lessons from that modern-day market crisis. The post-crisis focus was on traditional lending and bank capital. As the thinking goes, so long as banks avoid reckless lending and remain well-capitalized, the risk of a repeat crisis is negligible. They did come to appreciate the risk of institutional Too Big to Fail, but again the solution was additional bank capital. Market distortions behind the Bubble and crash didn't even enter into the discussion. Indeed, the Fed moved aggressively to reflate market prices, employing various measures that specifically manipulated market perceptions, prices and dynamics. There was no recognition that this course would elevate the entire structure of global market Bubbles to Too Big to Fail.

The "Moneyness of Credit" evolved into the "Moneyness of Risk Assets." It moved so far beyond Fannie, Freddie, and Wall Street structured finance distorting perceptions of risk in mortgage securities. The Federal Reserve and global central bankers turned to brazenly distorting risk perceptions throughout equities, corporate Credit, sovereign debt, EM and the rest. Slash rates and force savers into the risk asset marketplace. Inject new "money" into the securities markets and guarantee liquid, continuous and levitated markets. Who wouldn't write flood insurance during a predetermined drought? And then, why not reach for risk, speculate and leverage with prices rising and market insurance remaining so cheap? History's Greatest Market Distortions.

The VIX ended Friday's session at 11.43, only somewhat above recent historic lows. The Fed is only a few weeks from what will likely be its fifth "tightening" move of this cycle. And with rather conspicuous market excesses facing a tightening cycle, why does market insurance remain so cheap? For one, markets assume that central bankers will not actually impose a tightening of market or financial conditions. Second, the greater risk asset Bubbles inflate the more confident the markets become that central bankers have no alternative than to backstop market liquidity and prices.

"The West will never allow a Russian collapse." Then, after the LTCM bailout and the "committee to save the world," the powers that be would surely not allow a crisis in 1999. Then it was "Washington will never allow a housing bust." Later it was 2008 as the "100-year flood." Global central bankers will simply not tolerate another crisis. And it is always these types of pervasive market misperceptions that ensure far-reaching distortions - risk-taking, lending, speculating, leveraging, investing, etc. - that inevitably ensure problematic market "adjustments."

One of the Capitalism's great virtues is the capacity for a well-functioning pricing mechanism to promote self-adjustment and self-correction. And I would argue that the pricing of finance is absolutely critical to system adjustment and sustainability. Increasing demands for finance should induce higher borrowing costs that work to temper demand. But the proliferation of non-traditional non-bank and market-based finance essentially generated unlimited supply. It may have been subtle, though consequences were earth-shattering.

With Wall Street intermediation leading the charge, the mortgage finance Bubble period experienced a huge surge in demand for Credit accommodated at declining borrowing costs. This was transformative particularly for home and securities price inflation dynamics, where rising asset prices generally tend to incite heightened speculative demand. The critical pricing mechanisms that promote self-adjustment and correction became inoperable.

There is a special place in market hell for long-term price distortions. Given sufficient time, an enterprising Wall Street will ensure a proliferation of new products and strategies meant to profit from upward price trends and ingrained market perceptions. As central banks punished savers and "helped" the markets with low rates, QE and liquidity assurances, The Street ensured an onslaught of enticing new investment vehicles and approaches. Why not just buy a corporate Credit ETF instead of holding zero-rate deposits or T-bills? Of course it's perfectly rational to own equities index ETFs, especially with central bankers ensuring underperformance by active managers conscious of risk. And after a number of years, with markets booming and economies humming along, don't fundamentals beckon for participating in the junk bond ETF bonanza?

From my perspective, there are two key areas where central banker-induced market distortions have been precariously exacerbated by (fed and fed by) structural developments. First, the perception of "moneyness" has spurred Trillions of flows into the ETF complex. Indeed, the perception of safety and liquidity has created a structural vulnerability to a destabilizing reversal of flows. Everyone perceives they can easily - and almost instantaneously - get out of the market with a couple mouse clicks. And in a rehash of Wall Street Alchemy, hundreds of billions (Trillions?) of illiquid securities have been intermediated through the ETF complex - transformed into perceived liquid ETF shares. This has been a particularly momentous development for corporate Credit and critical as well for mid- and small cap equities.

A second perilous structural development has been within the Wild West of Derivatives. The perception that there are no limits to what central bankers will do to bolster the markets has fostered an explosion of derivative strategies - variations of writing market protection or "selling flood insurance during a drought". The availability of cheap risk protection became fundamental to financial excess on a systemic basis.

I would add, as well, that over the years a powerful interplay has evolved between the ETF complex and derivatives markets. The perception of highly liquid ETF shares - especially in corporate Credit and liquidity-challenged equities - has been integral to "dynamic" derivative hedging strategies. Why not leverage in corporate Credit and outperforming small cap stocks when cheap derivative protection is so readily available? Better yet, why not leverage a "diversified" portfolio of multiple asset classes (i.e. "risk parity")? And, likewise, why not garner easy returns from selling such insurance on the low-probability of a market decline? After all, liquid markets in ETF shares are available for shorting in the unlikely event the seller of market protection decides to hedge risk.

November 17 - CNBC (Jeff Cox): "Though stock market prices have held up in November, investors generally are running from risk at a near-record pace. Judging from the flow of money out of high-yield bonds, investors are getting increasingly leery of a market that continues to hover around record levels, despite a handful of rough trading sessions in November and a rocky start Friday. Funds that track junk bonds saw $6.8 billion of outflows over the past week through Wednesday, according to Bank of America Merrill Lynch. That's the third-highest on record."

Just a very interesting week in the markets. There was a Risk Off feel to junk bond flows. Risk aversion also appeared to be gaining some momentum early in the week. The S&P500 traded to a two-week low in early-Wednesday trading, confirmed by a safe haven bid to Treasuries. Equities then rallied sharply Thursday, in what appeared a habitual final jam prior to option expiration (conveniently crushing the value of puts). For the week, the safe haven yen gained 1.1%, while the euro increased 1.1% and the Swiss franc rose 0.7%. Gold gained 1.5%. The Treasury yield curve flattened notably, with two-year yields up seven bps and ten-year yields down five bps (62 bps spread a 10-year low).

There were other dynamics not necessarily inconsistent with incipient Risk Off. The small caps rallied 1.2% this week. There also appeared a squeeze in some of the popularly shorted stocks and sectors. The Retail Sector ETF (XRT) surged 3.9%. Footlocker jumped 34.5% and Abercrombie & Fitch rose 23.8%. And speaking of popular shorts, Mattel jumped 27.8% and Buffalo Wild Wings gained 16.3%.

It would not be extraordinary for a market to succumb to Risk Off at the conclusion of a short squeeze. In the initial phase of Risk Off, the leveraged speculating community pares back both longs and shorts. The upward bias on popular short positions fuels disappointing performance generally on the short side, spurring short covering, frustration and position adjustments. The market had that kind of feel this week. Definitely some instability beneath the markets' surface, while complacency generally held sway.


For the Week:

The S&P500 slipped 0.1% (up 15.2% y-t-d), and the Dow declined 0.3% (up 18.2%). The Utilities added 0.3% (up 14.2%). The Banks rallied 1.6% (up 8.1%), and the Broker/Dealers added 0.1% (up 19.4%). The Transports dipped 0.2% (up 4.9%). The S&P 400 Midcaps gained 0.8% (up 10.8%), and the small cap Russell 2000 jumped 1.2% (up 10.0%). The Nasdaq100 added 0.1% (up 29.8%).The Semiconductors increased 0.3% (up 44.2%). The Biotechs recovered 1.5% (up 35.0%). With bullion up $19, the HUI gold index added 0.5% (up 3.1%).

Three-month Treasury bill rates ended the week at 124 bps. Two-year government yields jumped seven bps to 1.72% (up 53bps y-t-d). Five-year T-note yields added a basis point to 2.06% (up 13bps). Ten-year Treasury yields fell five bps to 2.34% (down 10bps). Long bond yields dropped ten bps to 2.78% (down 29bps).

Greek 10-year yields rose five bps to 5.18% (down 184bps y-t-d). Ten-year Portuguese yields fell another eight bps to 1.98% (down 176bps). Italian 10-year yields slipped a basis point to 1.84% (up 2bps). Spain's 10-year yields dipped two bps to 1.56% (up 18bps). German bund yields fell five bps to 0.36% (up 16bps). French yields dropped seven bps to 0.71% (up 3bps). The French to German 10-year bond spread narrowed two to 35 bps. U.K. 10-year gilt yields declined five bps to 1.29% (up 6bps). U.K.'s FTSE equities declined 0.7% (up 3.3%).

Japan's Nikkei 225 equities index fell 1.3% (up 17.2% y-t-d). Japanese 10-year "JGB" yields declined less than a basis point to 0.036% (unchanged). France's CAC40 fell 1.1% (up 9.4%). The German DAX equities index lost 1.0% (up 13.2%). Spain's IBEX 35 equities index declined 0.8% (up 7.0%). Italy's FTSE MIB index dropped 2.1% (up 14.9%). EM markets were mostly. Brazil's Bovespa index rallied 1.8% (up 21.9%), while Mexico's Bolsa slipped 0.4% (up 4.9%). India's Sensex equities index was little changed (up 25.2%). China's Shanghai Exchange dropped 1.4% (up 9.0%). Turkey's Borsa Istanbul National 100 index sank 2.5% (up 36%). Russia's MICEX equities index lost 1.7% (down 4.5%).

Junk bond mutual funds saw outflows surged to $4.442 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps to 3.95% (up 1bp y-o-y). Fifteen-year rates jumped seven bps to 3.31% (up 17bps). Five-year hybrid ARM rates slipped a basis point to 3.21% (up 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 12 bps to 4.13% (up 12bps).

Federal Reserve Credit last week gained $4.5bn to $4.423 TN. Over the past year, Fed Credit increased $2.9bn. Fed Credit inflated $1.603 TN, or 57%, over the past 262 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.2bn last week to $3.369 TN. "Custody holdings" were up $250bn y-o-y, or 8.0%.

M2 (narrow) "money" supply increased $8.2bn last week to $13.758 TN. "Narrow money" expanded $667bn, or 5.1%, over the past year. For the week, Currency slippped $0.5bn. Total Checkable Deposits fell $15.0bn, while Savings Deposits jumped $23.1bn. Small Time Deposits were little changed. Retail Money Funds gained $3.7bn.

Total money market fund assets slipped $1.4bn to $2.739 TN. Money Funds rose $52.4bn y-o-y, or 2.0%.

Total Commercial Paper dropped $18.8bn to $1.033 TN. CP gained $120bn y-o-y, or 13.2%.

Currency Watch:

The U.S. dollar index declined 0.8% to 93.662 (down 8.5% y-t-d). For the week on the upside, the South African rand increased 2.7%, the South Korean won 1.8%, the Japanese yen 1.1%, the euro 1.1%, the Mexican peso 0.8%, the Brazilian real 0.8%, the Swiss franc 0.7%, the Singapore dollar 0.3%, and the British pound 0.1%. For the week on the downside, the New Zealand dollar declined 1.9%, the Norwegian krone 1.3%, the Australian dollar 1.3%, the Swedish krona 0.9% and the Canadian dollar 0.6%. The Chinese renminbi increased 0.22% versus the dollar this week (up 4.81% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 0.8% (up 6.7% y-t-d). Spot Gold gained 1.5% to $1,294 (up 12.3%). Silver jumped 3.0% to $17.373 (up 8.7%). Crude slipped 19 cents to $56.55 (up 5%). Gasoline dropped 3.7% (up 4%), and Natural Gas declined 0.8% (down 17%). Copper added 0.5% (up 23%). Wheat jumped 2.8% (up 9%). Corn surged 3.3% (up 1%).

Trump Administration Watch:

November 13 - Bloomberg (Ben Brody and Mark Niquette): "The House of Representatives wouldn't accept a tax bill that, like the Senate's, eliminates deductions for all state and local taxes, the chairman of the House's tax-writing committee said. The comments from House Ways and Means Chairman Kevin Brady show that although both the House and Senate are moving forward with plans to overhaul the U.S. tax code under tight, self-imposed deadlines, the path forward remains difficult because of differences in their legislation."

November 15 - Bloomberg (Jacob Pramuk): "The Republican tax plan appears to have a public opinion problem. Most American voters — 52% — disapprove of the GOP proposals to overhaul the tax system, according to a Quinnipiac University poll... Only 25% of respondents approve of the Republican effort. The GOP says its push to chop taxes on businesses and individuals by year-end is designed to trim the burden on middle-class taxpayers while boosting job creation and wage growth. Voters largely have not bought into the message, the Quinnipiac poll found."

China Watch:

November 16 - Financial Times (Don Weinland and Yuan Yang): "China's central bank injected the largest amount of reserves since January into the financial system on Thursday, a move that stemmed recent weakness in government bond prices that has driven the 10-year benchmark yield to its highest level since late 2014. Bond market concerns have intensified this past week as China's policymakers reiterated their determination to reduce the economy's reliance on debt-fuelled growth. Jitters have been accompanied by global investors cutting their exposure across emerging markets, with notable swings seen in prices for commodities such as metals and oil. China's benchmark 10-year yield has steadily climbed from 3.60% since late September to above 4% this week..."

November 13 - Bloomberg: "China's new home sales fell by the most in almost three years last month, adding to signs of cooling as local governments keep rolling out curbs to limit price increases. Sales by value dropped 3.4% from a year earlier to 909 billion yuan ($137bn)... That was the biggest year-on-year decline since November 2014."

November 14 - Bloomberg: "China's economic expansion dialed back a notch in October, as a campaign to manage credit risks took hold and the Communist Party signaled a less stringent approach to hitting growth targets. Industrial output rose 6.2% from a year earlier in October, versus a median projection of 6.3% and September's 6.6%. Retail sales expanded 10% from a year earlier, versus an estimated 10.5 percent and 10.3 percent the prior month. That's the slowest pace in a year."

November 13 - Financial Times (Eric Platt): "Asset-backed securities still suffer an image hangover in the west from the days of the 2008 financial crisis. But China's issuance of the financial products is soaring this year as Beijing places a big bet on securitisation as a salve for its huge credit risks. Though only a few years old, the Chinese debt securitisation market — in which pools of debt like mortgages, auto loans and credit-card loans are repackaged and sold to investors — is growing like topsy. Issuance of securitised assets rose 61% in the first half of this year and could climb to $170bn for the full year, according to... Bank of America Merrill Lynch. But are foreign investors ready to dive in? The answer appears to be a qualified yes. Given memories of how the US collateralised debt obligation (CDOs) market imploded 10 years ago, it is not surprising that foreign investors are cautious and generally avoid local issuers."

Federal Reserve Watch:

November 15 - Bloomberg (Jeanna Smialek and Matthew Boesler): "Federal Reserve officials are pushing for a potentially radical revamp of the playbook for guiding U.S. monetary policy, hoping to seize a moment of economic calm and leadership change to prepare for the next storm. While the country is enjoying its third-longest expansion on record, inflation and interest rates are still low, meaning the central bank has little room to ease policy in a downturn before hitting zero again. With Jerome Powell nominated to take over as Fed chairman in February, influential officials including San Francisco Fed chief John Williams and the Chicago Fed's Charles Evans have taken the lead in calling for reconsidering policy maker's 2% inflation target."

November 14 - Reuters (Ann Saphir): "Chicago Federal Reserve Bank President Charles Evans... became the second Fed policymaker in recent days to call for a new approach to rate-setting that would allow the central bank to respond to shocks when interest-rate cuts alone are not enough. One option is so-called price-level targeting, Evans said in remarks prepared for a European Central Bank conference... Under such a strategy, a central bank combats bouts of too-low inflation by allowing inflation to run too high for a time. Evans championed this policy in 2010 to deal with sagging inflation, but ultimately the Fed rejected such an 'extreme' idea as too difficult to undertake during an economic crisis, Evans said..."

U.S. Bubble Watch:

November 14 - Bloomberg (Sho Chandra): "U.S. wholesale prices advanced more than forecast in October, boosted by higher margins at fuel retailers... Compared with a year earlier, producer prices rose the most in more than five years. Producer-price index rose 0.4% (est. 0.1% gain) for a second month. PPI climbed 2.8% from a year earlier, the most since February 2012, after 2.6% gain in prior 12-month period. Excluding food and energy, core gauge rose 0.4% from prior month and was up 2.4% from October 2016."

November 12 - Financial Times (John Authers and Joanna S Kao): "The year after Donald Trump's surprise victory in the US presidential election have been the quietest months for the US stock market in more than half a century. Since election day, the daily change in the S&P 500, the most widely followed index of US stocks, has been only 0.31% as the blue-chip index has set new record highs. This is the lowest daily change in more than 50 years... A Financial Times analysis of historic returns for the S&P 500, dating back to its inception in 1927, shows only one previous period with lower average volatility. The quietest 12 months on record also followed a political shock, starting a week after the assassination of John F. Kennedy in 1963. The period saw an average daily movement of only 0.25%... Over the last half century, the index has moved by an average of 0.72% each day, more than double the volatility seen this year."

November 15 - Wall Street Journal (Sarah Krouse): "Vanguard Group quadrupled in size over the last eight years. It is about to get even bigger. The money management giant is on pace to collect a record one-year total of about $350 billion in investor cash by the end of 2017... The expected haul, which would exceed Vanguard's prior record by $27 billion, reinforces an industrywide shift away from money managers who specialize in handpicking winners."

November 13 - Bloomberg (Rebecca Spalding): "Puerto Rico is seeking $94 billion in federal aid to help it recovery from the hurricane that devastated the territory in September, leaving much of the island still without power and worsening a financial crisis that had already pushed the government into bankruptcy. The biggest share of the funds, $31 billion, would be used to rebuild homes, with another $18 billion requested for the electric utility, Governor Ricardo Rossello said... 'The scale and scope of the catastrophe in Puerto Rico in the aftermath of Hurricane Maria knows no historic precedent,' Rossello wrote.' We are calling upon your administration to request an emergency supplemental appropriation bill that addresses our unique unmet needs with strength and expediency.'"

November 13 - CNBC (John Melloy): "General Electric said... it is cutting its dividend in half, a move that could cause many long-time shareholders in the 125-year-old conglomerate to flee but also free up much-needed capital to fund a turnaround for the one-time American bellwether. GE said the quarterly payout is being cut to 12 cents a share from 24 cents... Shares, which are down more than 35% for the year, rose 0.3% in premarket trading."

November 13 - Bloomberg: "China's efforts to curb credit growth are increasingly showing signs of working. Aggregate financing stood at 1.04 trillion yuan ($156.6 bn) in October, the People's Bank of China said..., versus an estimated 1.1 trillion yuan... New yuan loans stood at 663.2 billion yuan, versus a projected 783 billion yuan. The broad M2 money supply rose 8.8%, compared with a projected 9.2%. Broad money supply growth was the slowest since at least January 1996."

Central Banker Watch:

November 14 - Reuters (Balazs Koranyi and Francesco Canepa): "Four of the world's top central bankers promised... to keep openly guiding investors about future policy moves as they slowly withdraw the huge monetary stimulus rolled out during the financial crisis. After pumping some $10 trillion into financial markets since the 2008 crisis... the Federal Reserve, European Central Bank, Bank of England and Bank of Japan are now trying to wean investors off easy money without causing an upset. To do this, words will be key, the heads of the four central banks told an ECB conference on communication. It is called forward guidance in banker-speak, essentially warning gently of what is coming. 'Forward guidance has become a full-fledged monetary policy instrument,' ECB President Mario Draghi said. 'Why discard a monetary policy instrument that has proved to be effective?'"

November 13 - Financial Times (Eric Platt): "As investors fret over the recent sell-off in US Treasuries, a reminder that the world is still awash in low yields. Nearly $11tn of sovereign and corporate bonds trade with a yield below zero... The $10.9tn figure includes notes and bonds in the benchmark global aggregate index as well as Bloomberg Barclays' US, Euro, UK and Japanese short-Treasury indices at the end of October. Central bank stimulus upended the normal rules of fixed income markets after the financial crisis, when policymakers in Europe, the US, Japan and UK launched large-scale bond buying programmes and the European Central Bank and Bank of Japan cut interest rates below zero."

November 16 - Reuters (Balazs Koranyi and Marja Novak): "Investors should not expect the European Central Bank to increase its bond purchases, ECB director Yves Mersch said on Thursday, adding such unconventional stimulus tools will be gradually phased out with the rise of inflation."

Global Bubble Watch:

November 15 - Bloomberg (Steven Church and Michelle Kaske): "The conundrum faced by Alan Greenspan is back -- and possibly worse. This time, the Federal Reserve is confronting a 'far more dangerous' backdrop in the bond market as it gears up to further raise interest rates. The prevailing dynamics in the Treasury market -- an ever-narrowing gap between short and longer-term U.S. Treasury yields, and record lows in forward rates for this point in the monetary cycle -- could derail the Fed's tightening path, according to Bank of America Merrill Lynch. Though a flattening yield curve is seemingly a replay of previous rate-hike regimes -- including the one overseen by Greenspan and Ben Bernanke, which culminated in the financial crisis -- Bank of America sees extra cause for concern. A Fed that's intent on raising rates four to five more times by the end of 2018 would risk 'consciously putting short-term rates above five-year term rates," strategists led by Shyam Rajan wrote... That's something the central bank has never allowed to happen aside from a brief period in the last month of its 2004-2006 tightening cycle."

November 13 - Wall Street Journal (Steven Russolillo and Corrie Driebusch): "A flood of Chinese companies is driving the biggest world-wide surge of initial public offerings in a decade. More than 1,450 companies globally have gone public so far in 2017, putting this year on track to become the busiest for new listings since 2007, according to Dealogic... Roughly two-thirds of the IPOs were in the Asia-Pacific region... Overall, the deals raised more than $170 billion globally, compared with the roughly 950 deals in the same period last year that raised around $120 billion... Nearly 170 private companies globally are valued at $1 billion or more, according to Dow Jones VentureSource. That is up from about 75 in November 2014."

November 13 - Financial Times (Thomas Hale and Robert Smith): "Sales of corporate bonds is on course for a record year, as stimulus from the European Central Bank and extremely cheap borrowing costs propel companies into the capital markets. There have been €339bn of non-financial corporate bonds sold in euros so far in 2017, according to Dealogic..., putting issuance on course to surpass last year's record of €345bn. A decade of monetary stimulus from major central banks, including the ECB, has swelled borrowing to levels few would have imagined before the global financial crisis. In 2007, corporate issuance in euros was less than half its current level."

November 13 - Financial Times (Kate Allen): "The world's riskiest countries are issuing debt at a record rate, buoyed by the global economic upturn and investors' search for yield in a world of historically low returns. Junk-rated emerging market sovereigns have raised $75bn in syndicated bonds so far this year, up 50% year on year to the highest total on record, according to... Dealogic... The increase has buoyed the total volume of debt-raising by developing economies; non-investment grade issuance has made up 40% of the new debt syndicated in EM so far in 2017. These rare and new issuers have been lured into the market by attractive pricing..., making it one of the best-performing assets globally in 2017."

November 14 - CNBC (Liz Moyer): "Sign of the times: It is shaping up to be the hottest year in a decade to raise investor money for companies in the development stage with no specific business plan or purpose. This week, a former hedge fund manager and a former real estate executive are raising $500 million to hunt for buyouts in the 'blank check company' in the hospitality and real estate sectors... It comes the same week as former Procter & Gamble executives prepare for their $345 million Legacy Acquisition to begin trading in the U.S., focused on snapping up companies in consumer packaged goods, food, retail and restaurant sectors. Blank check companies... raise money from investors first and use it to buy companies later... So far this year, 27 of them have begun trading in the U.S., raising $7.7 billion, the most active year since 2007, according to Renaissance Capital."

November 15 - Bloomberg: "China's non-financial outbound investment slumped to $86.3 billion in January to October, plunging 41% from a year earlier, as projects in some industries dried up. There were no new real estate, sports or entertainment deals for the period... Most outbound investment was in leasing and business services, manufacturing, wholesale and retail sales and information technology services."

November 15 - CNBC (Everett Rosenfeld): "A Leonardo da Vinci painting sold for more than $450 million on Wednesday, according to auction house Christie's, which said that it topped a world record for any work of art sold at an auction. The painting, called 'Salvator Mundi,' Italian for 'Savior of the World,' is one of fewer than 20 paintings by Leonardo known to exist and the only one in private hands."

Fixed Income Bubble Watch:

November 13 - Bloomberg (Dani Burger): "Trading in exchange-traded funds got a little crazy last week when it became clear that junk bonds were in for more pain. But the market was fortunate the consequences weren't more severe, strategists warn. Though spared the worst, investors came close to creating a scenario where ETF activity drove prices. Calling it the 'ETF spiral,' Peter Tchir of Academy Securities Inc. describes a snowball effect where a dislocation develops between the fund price and the value of its underlying assets. The issue's endemic to liquid ETFs that trade without dipping into the underlying market. In that case, the selling doesn't affect the actual securities it holds right away, so for a time the fund is priced differently than the cumulative value of its assets, known as its NAV."

November 12 - Bloomberg (Steven Church and Michelle Kaske): "Puerto Rico is considering suspending debt-service payments for five years, a lead lawyer for the territory's federal oversight board said, in the first indication of how the devastation caused by Hurricane Maria will affect the restructuring of the island's debt. A moratorium may be included as part of Puerto Rico's plan to reduce what it owes through bankruptcy, Martin Bienenstock, a partner at Proskauer Rose LLP who represents the panel, said at a court hearing Wednesday in Manhattan. It wasn't immediately clear whether such a step would apply to all of government's $74 billion of debt."

November 16 - Wall Street Journal (Nick Timiraos): "The Treasury Department has unveiled a new strategy for managing federal debt that could ease pressures set to push up long-term interest rates and reduce a potential drag on the economy. Under the plan unveiled earlier this month by Treasury, the department would increase the share of shorter-term debt issuance and reduce the share of longer debt issuance, ending a yearslong trend that favored long-term debt issuance. Total issuance of government debt will still rise in coming years with growing federal budget deficits."

November 13 - Bloomberg (Srinivasan Sivabalan): "Slowly but steadily, a selloff is taking hold in developing-nation bonds. A Bloomberg Barclays Index of hard-currency emerging-market bonds has fallen for six straight days, capping the biggest weekly yield jump since last year when Donald Trump's victory spurred a selloff in risk assets. The gauge shows average borrowing costs for governments and companies in developing nations have risen to a four-month high of 4.68%."

Europe Watch:

November 13 - Bloomberg (Piotr Skolimowski): "German growth steamed ahead in the third quarter, keeping Europe's largest economy on track for its best year since 2011. The 0.8% jump in gross domestic product was an acceleration from the previous three months and topped the 0.6% median forecast..."

November 11 - Reuters (Valentina Za): "The outcome of local elections in Sicily has further weakened the ruling party of former Prime Minister Matteo Renzi and strengthened the populist 5-Star Movement's lead... Based on the IPSOS poll published in Saturday's Corriere della Sera, a center-right coalition would win next year's general election with 253 seats while the 5-Star would have 173 and Renzi's Democratic Party 164 together with a smaller ally, leading to a hung parliament."

Brexit Watch:

November 12 - Bloomberg (Lucy Meakin): "Embattled U.K. Prime Minister Theresa May faced a fresh challenge as the Sunday Times said 40 Conservative members of Parliament, nearly enough to trigger action, have agreed to sign a letter of no confidence in her. May's opponents are now eight lawmakers short of what's needed for a leadership challenge... May is struggling to maintain her grip on power after the resignation of two cabinet ministers, mounting calls to sack Foreign Minister Boris Johnson and as the European Union raises the prospect of Brexit talks failing to reach a breakthrough by year-end."

Emerging Market Watch:

November 13 - Bloomberg (Ben Bartenstein, Katia Porzecanski, and Patricia Laya): "Venezuela's grand gathering with creditors Monday lasted all of 30 minutes and didn't produce anything of substance. To make matters worse, S&P Global Ratings declared the country in default while Fitch... cited missed payments by the state oil company prompting a fresh selloff in the nation's bonds. The actions from the ratings companies came after an odd spectacle in Caracas, where bond investors who made the trek found a red-carpet welcome, an honor guard salute and gift bags stuffed with state-produced chocolate and coffee."

November 12 - Financial Times (Ahmed Al Omran and Simeon Kerr): "When Saudi Crown Prince Mohammed bin Salman spoke to his nation six months ago, he pledged to crack down on corruption. 'I assure you that nobody who is involved in corruption will escape, regardless if he was minister or a prince or anyone,' he said. But few people could have expected the sudden storm this month when a new anti-graft committee ordered the arrest of more than 200 suspects, including princes, prominent businessmen and former senior officials, on allegations related to at least $100bn in corruption... But others have raised questions about the motivations behind a probe that also targeted a member of the royal family once seen as a contender for the throne. Critics of Saudi Arabia's King Salman warn of the danger of ignoring the actions of the monarch's own children, including the crown prince, who in 2015 reportedly bought a yacht for €420m. The Salman clan has extensive business interests, including media and financial services."

Geopolitical Watch:

November 12 - Reuters (Mostafa Hashem): "Saudi Arabia has called for an urgent meeting of Arab League foreign ministers in Cairo next week to discuss Iran's intervention in the region, an official league source told Egypt's MENA state news agency... The call came after the resignation of Lebanon's prime minister pushed Beirut back into the center of a rivalry between Sunni kingdom Saudi Arabia and Shi'ite Iran and heightened regional tensions."


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