Saturday, June 24, 2017
Weekly Commentary:
Washington Finance and Bubble Illusion
by Doug Noland
full column here:
My edited version is below:
Treasury Securities, Agency Securities and Federal Reserve Credit
are the three main sources of "Washington Finance":
In 1990, the three combined were $4.3 Trillion (71% of GDP)
In 2007, they were $14.4 Trillion (99% of GDP)
In 2016, they were $28.9 Trillion (156% of GDP)
This unprecedented inflation of Washington “money” has significantly bolstered asset prices, spending, corporate profits and government revenues.
The history of great monetary inflations shows that, once going, they’re virtually impossible to control.
And that’s where we are today.
For the week ending June 23, 2017:
S&P500 up 0.2% (up 8.9% year-to-date),
Dow Industrials unchanged (up 8.3%).
Dow Utilities down 1.8% (up 9.0%).
Dow Transports down 0.3% (up 3.8%)
S&P 400 Midcaps down 0.5% (up 5.0%)
Small cap Russell 2000 up 0.6% (up 4.2%)
Nasdaq100 up 2.1% (up 19.3%)
Biotechs up 8.8% (up 30.6%).
With GOLD bullion gaining $3,
the HUI gold stock index was up 4.4%
(up 6.6%).
U.K.'s FTSE down 0.5% (up 3.9%).
Japan's Nikkei 225 up 0.9% (up 5.3% y-t-d).
France's CAC40 unchanged (up 8.3%).
German DAX down 0.2% (up 10.9%).
Spain's IBEX 35 down 1.2% (up 13.7%).
Italy's FTSE MIB down 0.5% (up 8.3%).
Brazil's Bovespa down 0.9% (up 1.4%)
Mexico's Bolsa down 0.5% (up 7.3%).
South Korea's Kospi up 0.7% (up 17.4%).
India’s Sensex up 0.3% (up 16.9%).
China’s Shanghai up 1.1% (up 1.7%).
Turkey's Istanbul National 100 up 1.5% (up 27.5%)
Russia's MICEX up 2.4% (down 16.4%)
US Ten-year Treasury bond yields
slipped a basis point to 2.14%
(down 30bps)
US Thirty-year Treasury bonds yields
fell six bps to 2.72%
(down 35bps).
US Freddie Mac 30-year fixed mortgage rates
slipped a basis point to 3.90%
(up 34bps y-o-y).
Fifteen-year rates
declined one basis point to 3.17%
(up 34bps).
The five-year hybrid ARM rate
fell a basis point to 3.14%
(up 40bps).
Jumbo mortgage 30-yr fixed rates
were unchanged at 4.0%
(up 29bps).
Over the past year Fed Credit declined $8.0bn.
M2 money supply expanded 5.5% over the past year.
Currency Watch:
The U.S. dollar index was little changed at 97.26
(down 5.0% y-t-d)
Commodities Watch:
Goldman Sachs Commodities Index
down 2.8% (down 11.2% y-t-d)
Spot Gold up 0.2% to $1,257 (up 9.1%)
Silver added 0.3% to $16.707 (up 4.5%)
Crude oil down $1.73 to $43.01 (down 20%)
Gasoline down 1.4% (down 14%)
Natural Gas down 3.2% (down 22%)
Copper up 2.3% (up 5%)
Wheat down 1.7% (up 16%)
Corn down 6.8% (up 4%)
Trump Administration Watch:
June 23 – New York Times (Jonathan Martin and Alexander Burns):
“Senator Dean Heller of Nevada, perhaps the most vulnerable Republican facing re-election in 2018, said Friday that he would not support the Senate health care overhaul as written, dealing a serious blow to his party’s attempt to repeal the Affordable Care Act just days before a showdown vote.
Using remarkably harsh language, Mr. Heller, who is seen as a pivotal swing vote, denounced the Senate-drafted bill in terms that Democrats swiftly seized on. He said the measure would deprive millions of health care and do nothing to lower insurance premiums. ‘I cannot support a piece of legislation that takes insurance away from tens of millions of Americans,’ he said at a news conference…”
China Bubble Watch:
June 20 – Reuters (Sue-Lin Wong and Shu Zhang):
“The number of high net worth individuals (HNWIs) in China has risen nearly 9 times since a decade ago, a private survey released on Tuesday showed…
Chinese with at least 10 million yuan ($1.47 million) of investable assets hit 1.6 million in 2016, up from 180,000 in 2006, according to the 2017 China Private Wealth Report by Bain Consulting and China Merchants Bank.
The overall value of the private wealth market increased to 165 trillion yuan in 2016, growing 21% annually in 2014-2016.”
June 19 – Bloomberg:
“China’s workers may be starting to feel like they’re getting a raw deal. Amid soaring industrial profits, employees in the world’s second-largest economy saw slower wage growth last year -- and many are seeing the smallest raises since 1997.
That’s another sign that the years of pay gains above ten percent and burgeoning spending power are coming to a close, as China confronts industrial overcapacity, mounting debt and waning competitiveness.”
Europe Watch:
June 19 – Bloomberg (Kevin Costelloe and Sonia Sirletti):
“Italian finance officials and the European Commission are racing to find a solution for two troubled banks in the northern Veneto region that have weighed on the nation’s financial system.
Finance Minister Pier Carlo Padoan said… the matter of Veneto Banca SpA and Banca Popolare di Vicenza SpA is being worked on ‘actively,’ without offering details.
The European Commission is working ‘hand in hand’ with Italian authorities and Europe’s Single Supervisory Mechanism, and is making ‘good progress’ on reaching a solution within the bloc’s rules…”
Central Bank Watch:
June 21 – Bloomberg (Paul Gordon):
“The European Central Bank cited the government of U.S. President Donald Trump as a key reason why the risks to the global economy remain tilted to the downside.
The… ECB said in an article from its Economic Bulletin… that while some concerns over the prospects for world growth have diminished, such as China’s short-term outlook and the resilience of emerging-market economies, others have appeared.
‘Since the U.S. election, pressures for more inward-looking policies have risen…
In particular, there is significant policy uncertainty surrounding the intentions of the new U.S. administration regarding fiscal and, especially, trade policies, the latter entailing potentially significant negative effects on the global economy.’”
Global Bubble Watch:
June 19 – Wall Street Journal (Steven Russolillo):
“The calm that has descended on U.S. financial markets is stretching around the world.
Based on one commonly used measure, Asian equities are near their least volatile this century...
In the U.S., Wall Street’s ‘fear gauge’ is near all-time lows, and in Europe, volatility has also largely subsided.
‘This is a global dynamic,’ said Michael Parker, head of strategy, Asia-Pacific at Bernstein Research in Hong Kong.
‘You see low volatility everywhere.’”
June 16 – CNBC (Jeff Cox):
“The staggering level of government debt carrying negative yields, ... is ... $9.5 trillion of sovereign debt — a situation where governments effectively are getting paid to borrow money, according to Fitch Ratings.
... Prominent investors have warned of the dangers of so much negative-yielding debt.
Janus Henderson's Bill Gross has called it a ‘supernova’ that will ‘explode,’ while Deutsche Bank CEO John Cryan has cautioned about "fatal consequences" of central banks being enticed by slashing rates to that extent.”
June 19 – Bloomberg (Emily Cadman):
“Moody’s… cut the long-term credit rating of Australia’s four biggest banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders.
Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. were all downgraded to Aa3 from Aa2, Moody’s said…
The ratings outlook for all four lenders is stable, Moody’s said.
‘Risks associated with the housing market have risen sharply in recent years…
While a sharp housing downturn isn’t its core scenario, ‘the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks…’”
June 17 – CNBC (Robert Frank):
“The world's millionaires, who represent the top 1% of the population, now own a record 45% of the global wealth and their share is growing…
There are now 17.9 million millionaire households in the world, up 8% from 16.6 million last year, according to… The Boston Consulting Group.
The U.S. has the most millionaires, with over 7 million millionaire households, with China ranking second with 2.1 million.”
June 20 – Financial Times (Vanessa Houlder):
“Offshore companies in the British Virgin Islands have assets of more than $1.5tn, more than twice the sum estimated in 2010.
Two-thirds of the offshore companies registered in the BVI are used for ‘corporate structuring’, and more than 140 listed businesses in London, New York and Hong Kong have a unit in the BVI…
These units can be used for tax planning, but can also be useful as a tax-neutral hub for investors from different locations.
Companies are also attracted by the BVI’s legal system, which mirrors British law.”
Federal Reserve Watch:
June 20 – Reuters (Ann Saphir and Lindsay Dunsmuir):
“ ... with the U.S. unemployment rate now at 4.3%, most Fed officials are now convinced that nearly all Americans who want jobs can and do get them.
That is a main reason the Fed last week raised its target range for short-term interest rates for the second time this year…
Fed Chair Janet Yellen expressed confidence inflation would eventually perk up, but some policymakers cast doubt.”
U.S. Bubble Watch:
June 20 – Reuters:
“The U.S. current account deficit widened slightly in the first quarter, as the country imported more crude oil, car parts and supplies for its factories. …
The current account deficit, which measures the flow of goods, services and investments into and out of the country, expanded by 2.4% to $116.8 billion…
The first-quarter current account deficit represented 2.5% of gross domestic product…”
June 17 – Associated Press (Sara Burnett):
“The Illinois official responsible for paying the state's bills is warning that new court orders mean her office must pay out more each month than Illinois receives in revenue.
Comptroller Susana Mendoza must prioritize what gets paid as Illinois nears its third year without a state budget.
A mix of state law, court orders and pressure from credit rating agencies requires some items be paid first.
Those include debt and pension payments, state worker paychecks and some school funding.
Mendoza says a recent court order regarding money owed for Medicaid bills means mandated payments will eat up 100% of Illinois' monthly revenue.”
June 20 – Bloomberg (Kristy Westgard):
“Moody's says the growing gap between how much state and local governments are projected to pay employees and how much funds they actually have set aside has risen to over $4 trillion nationwide.
New Jersey sports the widest funding gap, followed closely by Kentucky and Illinois.
The optimistic ‘best case’ of cumulative 25% investment return would reduce net pension liabilities by just 1% through 2019 year-end because of past bad investment returns and weak contributions.
Meanwhile, the ‘base case’ scenario of 19% returns (from 2017 to 2019) would see net pension liabilities rise by 15%.”
June 21 – CNBC (Diana Olick):
“After surging to the highest level since the presidential election, demand for home loans remained steadily elevated last week…
Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, fell 1% for the week, seasonally adjusted, but are 9% higher than the same week one year ago.”
June 16 – New York Times (Rachel Abrams and Julie Creswell):
“Shares of Walmart, Target, Kroger and Costco, the largest grocery retailers, all tumbled on Friday.
Grocery stores have spent the last several years fighting against online and overseas entrants.
But now, with its $13.4 billion purchase of Whole Foods, Amazon has effectively started a supermarket war.
Armed with giant warehouses, shopper data, the latest technology and nearly endless funds — and now with Whole Foods’ hundreds of physical stores — Amazon is poised to reshape an $800 billion grocery market that is already undergoing many changes.”
Japan Watch:
June 19 – Bloomberg (Isabel Reynolds):
“Japanese Prime Minister Shinzo Abe struck an apologetic tone at a news conference Monday as he expressed his regret that a cronyism scandal had eaten into parliamentary debate on policy and triggered public mistrust in his government.
Abe said that the opposition’s focus on the question of his possible intervention in the government’s approval of a school run by one of his close associates took up too much time in the current parliament session.
The premier said he would fulfill his responsibility to explain the issue.”
June 19 – Reuters (Tetsushi Kajimoto and Izumi Nakagawa):
“Confidence among Japanese manufacturers bounced in June to match a decade-high level recorded in April and is expected to rise for several months, a Reuters survey found, providing more evidence of economic recovery.
Service-sector mood rose to a two-year high…”
Emerging Markets Watch:
June 21 – Reuters (Lisandra Paraguassu and Brad Brooks):
“Brazil's federal police… delivered to a top court justice the bulk of their investigation into allegations that President Michel Temer took bribes in exchange for political favors doled out to the world's largest meatpacker, JBS SA.
The document, made public by the top court, is a significant step in the investigation, which is widely expected to lead to Brazil's top federal prosecutor lodging corruption charges against Temer by the end of next week…
It also adds to doubts that Temer will be able to push through badly needed economic reforms through congress, needed to spark Brazil's economy just as it emerges from its worst recession on record.”
Geopolitical Watch:
June 19 – Wall Street Journal (Dion Nissenbaum and Thomas Grove):
“Tensions between Washington and Moscow escalated… when Russia threatened to track American warplanes in Syria after a U.S. pilot shot down a Syrian jet for the first time in the country’s six-year war.
The U.S. military responded to Moscow’s warnings by shifting the flight routes of some pilots carrying out missions in Syria, U.S. officials said, an effort to minimize risks to American pilots as the White House and the Pentagon both appealed for calm.
Sunday’s U.S. downing of the Syrian regime warplane came as American forces are increasingly at risk of direct confrontation with Syrian President Bashar al-Assad and his allies from Russia and Iran.”
June 19 – Reuters (Stephen Kalin and William Maclean):
“Two years after launching headfirst into a conflict in Yemen that has no end in sight, Saudi Arabia and the United Arab Emirates have astonished the world again, this time with a severe boycott of neighboring Qatar.
Like the Yemen war, which has killed more than 10,000 people, the rift with Qatar is most closely associated with a new generation of leaders in the energy-rich Gulf who are more hawkish than conservative predecessors…
While the dispute could end up costing Qatar dearly, it also has implications for the Saudis and Emiratis whose activism, critics say, is fuelling uncertainty in an already unstable neighborhood and could even push the region towards all-out conflict with arch-enemy Iran.”
June 20 – Financial Times (Rebecca Collard, Erika Solomon, Najmeh Bozorgmehr and Katrina Manson):
“The military activity last month around al-Tanf, a Syrian town on the Iraqi border, was an early sign that as rival forces scrambled to capture Isis territory in eastern Syria, the region risked becoming the flashpoint for international confrontation.
As Syrian regime forces advanced towards a base used by US soldiers to train rebels to fight Isis, US-led coalition jets dropped leaflets carrying a stark warning.
‘Any movements toward al-Tanf will be considered an aggression that our forces [will] defend against . . . you have entered a safe zone, leave the area now.’
The fears of a confrontation materialised on Sunday when the US shot down a Syrian warplane that the Pentagon said was bombing areas near a Syrian Kurdish militia it backs in Raqqa province.
The same day, Iran fired ballistic missiles into Syria for the first time to target Isis but also to put on a show of force intended to send a message to the US and Saudi Arabia, its regional rival.”
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