Weekly Commentary: Q2 2018 Z.1 Flow Of Funds

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by: Doug Noland

Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $2.283 TN during the second quarter. While this was down from Q1's booming SAAR $3.681 TN, it nonetheless puts first-half Credit growth at an almost $3.0 TN pace. Annual NFD growth has exceeded $2.0 TN only one year in the past decade (2016's $2.739 TN). NFD expanded $2.509 TN in 2007, second lonely to 2004's record $2.910 TN.

NFD ended Q2 at a record $50.710 TN, up $2.674 TN over the past four quarters and $4.868 TN over two years. NFD has increased $15.65 TN, or 45%, since the end of 2008. NFD ended the quarter at 248% of GDP. This compares to 231% at the end of 2007 and 189% to end 1999. It's worth noting that Q2 y-o-y GDP growth of 5.4% was the strongest since Q2 2006.

The historic federal government borrowing binge runs unabated. Federal debt rose SAAR $1.186 TN during Q2, huge borrowings yet down from Q1's blistering SAAR $2.828 TN. For the quarter, Federal Expenditures were up 6.0% y-o-y, while Federal Receipts were down 2.0%. Over the past year, outstanding Treasury Securities increased $1.292 TN to a record $17.091 TN. Since the end of 2007, Treasuries have ballooned $11.040 TN, or 182%.

But let's not forget the government-sponsored enterprises (GSEs). Agency Securities expanded SAAR $236bn during Q2 to a record $8.962 TN. Over the past year, Agency Securities jumped $295 billion, with a two-year jump of $638 billion. This has been the strongest GSE growth in more than a decade. Combined Treasury and GSE Securities expanded to 128% of GDP (vs. 92% at the end of '07 and 80% in 2000).

Total Debt Securities expanded SAAR $1.579 TN during the quarter. Washington continues to completely dominate securities issuance. Federal government accounted for SAAR $1.186 TN, the GSEs SAAR $80 billion, and Agency/GSE-MBS SAAR $161 billion. With net corporate debt issuance grinding to a halt during the quarter, little wonder corporate Credit spreads remain compressed.

And while overall Bank Assets posted a marginal decline during the quarter, this was fully explained by the contraction of "Reserves at the Federal Reserve." Bank "Loans" expanded SAAR $504 billion, the strongest growth in a year. Security Broker/Dealer Assets expanded SAAR $199 billion, also the biggest gain since Q2 '17. The largest Broker/Dealer asset gains were in "Security Repurchase Agreements" (SAAR $88bn) and Treasury Securities (SAAR $133bn).

Total (home, commercial and farm) Mortgages expanded SAAR $557 billion during the quarter. First-half growth in Total Mortgages is running just below 2017's $576 billion pace, the strongest expansion since 2007. Commercial Mortgages expanded SAAR $201 billion, one of the strongest quarters since the crisis. The Fed's Z.1 report recently created a category "Loans," which combines mortgages, other bank loans and consumer credit. "Loans" expanded SAAR $1.028 TN during Q2. This was just below 2017's $1.041 billion increase, the strongest annual gain since 2007.

And while lending has recovered strongly since the crisis, the greatest inflation has been in the securities markets. Total Debt Securities (TDS) were up $2.111 TN over the past year to a record $43.982 TN. TDS ended the quarter at 215% of GDP, after beginning the nineties near 130%, ending 1999 at 157%, and closing out 2007 at 200%. Total Equities jumped $5.141 TN over the past four quarters to a record $48.414 TN. Total Equities ended the period at 237% of GDP, after ending the eighties at about 70%, the nineties at 193% and 2007 at 172%. Total (Debt and Equities) Securities jumped $7.251 TN over the past four quarters to a record $92.396 TN, or 453% of GDP. This compares to about 200% to begin the '90s, 350% to end 1999 and 373% to conclude 2007.

The rapidly inflating Household Balance Sheet remains fundamental to Bubble Analysis. Household Assets jumped another $2.323 TN during the quarter to a record $122.657 TN. Household Assets jumped $8.628 TN over the past four quarters (7.6%) and $17.076 TN over two years (16.2%). The one-year gain in Assets lags only 2013's $10.669 TN, while the two-year gain is unmatched. By asset category, Financial Assets jumped $1.697 TN during Q2, and Real Estate assets rose $559 billion. Financial Assets were up $6.468 TN over four quarters and $12.978 TN over two years. For comparison, Household Financial Assets rose $3.923 TN in Bubble year 1999. The pre-crisis record annual gain was 2004's $5.000 TN.

With Household Liabilities increasing $132 billion, Household Net Worth (assets less liabilities) surged another $2.191 TN during Q2 to a record $106.929 TN. Household Net Worth inflated $8.106 TN over the past four quarters and $16.035 TN in two years. It's extraordinary to see $2.0 TN quarterly growth in Net Worth over eight quarters. Comparing previous peak two-year periods, the 1998-99 period saw Net Worth jump $8.208 TN and the 2004-05 period $13.232 TN. "Uncharted waters," as they say.

Household Assets ended Q2 at a record 601% of GDP. Household Net Worth ended the quarter at a record 522% of GDP. For comparison, Net Worth-to-GDP ended the seventies at 342%, the ("decade of greed") eighties at 378%, Bubble Year 1999 at 447%, and Bubble Year 2007 at 473%. The ratio of Household Financial Assets-to-GDP ended Q2 at a record 430%. This compares to 363% in 1999 and 379% in 2007. It's worth adding that total Household Equities holdings (Equities and Mutual Funds) ended the quarter at 132% of GDP, up from cyclical peaks 117% during Q1 2000 and 103% in Q3 2007. Total Equities-to-GDP was at 33% to end 1985 and 47% to end the eighties. Equities-to-GDP dropped to a cyclical low 59% in 2002 and 53% in 2009. Equities to GDP averaged about 77% over the past 44 years.

International flows to U.S. asset markets continue to play an integral role in fueling the U.S. Bubble. Rest of World (ROW) holdings of U.S. Financial Assets rose SAAR $467 billion during Q2 to a record $27.480 TN. ROW holdings have surged $13.325 TN since the crisis, almost doubling the 2008 level. ROW holdings jumped $3.214 TN in just the past six quarters, extraordinary growth with parallels to the surge in ROW holdings in the manic 2006/07 period. ROW holdings began the 2000s at $5.640 TN, or 57% of GDP. ROW holdings ended Q2 2018 at 135% of GDP.

ROW holdings expanded $2.782 TN in 2017. Holdings increased only (nominal) $433 billion during 2018's first half. ROW U.S. Corporate Bond holdings declined during Q2, while Treasuries were little changed. I don't believe it is mere coincidence that ROW flows to U.S. securities markets ebbed as global financial conditions tightened. Recall that U.S. 10-year yields jumped to 3.13% mid-quarter, before reversing sharply on EM market tumult.

Ten-year Treasury yields closed Friday trading at 3.06%, the high since May 17th. Safe-haven bids for Treasuries and the dollar have waned of late. For the most part, EM has somewhat stabilized. But the Fed will likely raise rates again next Wednesday, returning the markets' focus to U.S. rate prospects.

It's still early innings for EM travails. Liquidity tends to ebb and flow with greed and fear, as crisis conditions unfold over time. It's been quite a short squeeze backdrop in U.S. equities the past several months. This week saw some decent squeezes in global markets. The Argentine peso jumped almost 7% this week, with the South African rand up 4.3% and the Brazilian real gaining 3.1%. Brazil's Bovespa equities index surged 5.3% and Turkish stocks rallied 3.4%. The Shanghai Composite jumped 4.3%. Hong Kong's Hang Seng Financial index recovered 5.6%. Japan's TOPIX Bank Index surged 6.6%. European bank stocks rallied 4.1%. Italian stocks were up 3.1%, while Italian 10-year yields dropped 15 bps. Copper jumped 8.0%, and crude surged 2.6%.

Booming U.S. securities markets bolster the case for the Fed sticking with "normalization." This week's squeeze notwithstanding, higher U.S. rates boost the odds of another round of EM de-risking/de-leveraging - and a further tightening of global financial conditions. Such a backdrop would be conducive to tighter conditions at the "periphery" coming closer to penetrating the "core." The Q2 Z.1 report indicated waning international liquidity flows into U.S. securities markets.

For the Week:

The S&P500 gained 0.8% (up 9.6% y-t-d), and the Dow jumped 2.3% (up 8.2%). The Utilities fell 1.5% (up 0.4%). The Banks rose 2.3% (up 3.1%), and the Broker/Dealers added 0.7% (up 3.4%). The Transports slipped 0.3% (up 8.7%). The S&P 400 Midcaps dipped 0.3% (up 7.4%), and the small cap Russell 2000 declined 0.5% (up 11.5%). The Nasdaq100 declined 0.2% (up 17.7%). The Semiconductors added 0.4% (up 10.4%). The Biotechs gained 1.3% (up 23.3%). With bullion up $6, the HUI gold index rallied 3.9% (down 25.7%).

Three-month Treasury bill rates ended the week at 2.12%. Two-year government yields increased two bps to 2.80% (up 92bps y-t-d). Five-year T-note yields rose four bps to 2.95% (up 74bps). Ten-year Treasury yields jumped seven bps to 3.06% (up 66bps). Long bond yields rose seven bps to 3.20% (up 46bps). Benchmark Fannie Mae MBS yields gained five bps to 3.82% (up 82bps).

Greek 10-year yields slipped two bps to 4.05% (down 3bps y-t-d). Ten-year Portuguese yields added a basis point to 1.87% (down 7bps). Italian 10-year yields dropped 15 bps to 2.83% (up 81bps). Spain's 10-year yields increased one basis point to 1.50% (down 7bps). German bund yields added a basis point to 0.46% (up 4bps). French yields increased one basis point to 0.78% (down 1bp). The French to German 10-year bond spread was unchanged at 32 bps. U.K. 10-year gilt yields rose two bps to 1.55% (up 36bps). U.K.'s FTSE equities index surged 2.5% (down 2.6%).

Japan's Nikkei 225 equities index jumped 3.4% (up 4.9% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.13% (up 9bps). France's CAC40 rose 2.6% (up 3.4%). The German DAX equities index jumped 2.5% (down 3.8%). Spain's IBEX 35 equities index gained 2.4% (down 4.5%). Italy's FTSE MIB index rallied 3.1% (down 1.4%). EM equities were mostly higher. Brazil's Bovespa index surged 5.3% (up 4.0%), while Mexico's Bolsa slipped 0.5% (unchanged). South Korea's Kospi index increased 0.9% (down 5.2%). India's Sensex equities index fell 3.3% (up 8.2%). China's Shanghai Exchange recovered 4.3% (down 15.4%). Turkey's Borsa Istanbul National 100 index jumped 3.4% (down 15%). Russia's MICEX equities index rose 2.8% (up 15%).

Investment-grade bond funds saw inflows of $1.017 billion, and junk bond funds had inflows of $967 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained five bps to 4.65% (up 66bps y-o-y). Fifteen-year rates rose five bps to 4.11% (up 67bps). Five-year hybrid ARM rates slipped a basis point to 3.92% (up 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rate up 17 bps to 4.83% (up 68bps).

Federal Reserve Credit last week increased $2.7bn to $4.173 TN. Over the past year, Fed Credit contracted $252bn, or 5.7%. Fed Credit inflated $1.362 TN, or 48%, over the past 307 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $4.3bn last week to $3.426 TN. "Custody holdings" were up $50bn y-o-y, or 1.5%.

M2 (narrow) "money" supply declined $15.7bn last week to $14.230 TN. "Narrow money" gained $523bn, or 3.8%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits sank $93bn, while Savings Deposits jumped $71.3bn. Small Time Deposits increased $3.1bn. Retail Money Funds were little changed.

Total money market fund assets declined $15.8bn to $2.866 TN. Money Funds gained $141bn y-o-y, or 5.2%.

Total Commercial Paper gained $7.3bn to $1.074 TN. CP gained $31bn y-o-y, or 2.9%.

Currency Watch:

September 18 - Reuters (Kevin Yao): "China will not stoop to competitive devaluation of its currency, Premier Li Keqiang stressed, hours after China hit back, with a softer punch than the one landed by the United States, in an escalating tariff war between the world's largest economies. Addressing a World Economic Forum event in the port city of Tianjin…, Li did not directly mention the trade conflict but said talk of Beijing deliberately weakening its currency was 'groundless.' 'One-way depreciation of the yuan brings more harm than benefits for China,' he said. 'China will never go down the road of relying on yuan depreciation to stimulate exports.' China will not do that to chase 'thin profits' and 'a few small bucks'."

The U.S. dollar index declined 0.7% to 94.22 (up 2.3% y-t-d). For the week on the upside, the South African rand increased 4.3%, the Brazilian real 3.1%, the Swedish krona 2.6%, the New Zealand dollar 2.1%, the Australian dollar 1.9%, the Norwegian krone 1.3%, the euro 1.1%, the Swiss franc 1.0%, the Canadian dollar 0.9%, the Singapore dollar 0.8%, the Mexican peso 0.3%, and the South Korean won 0.1%. For the week on the downside, the Japanese yen declined 0.5%. The Chinese renminbi increased 0.15% versus the dollar this week (down 5.11% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 2.0% (up 7.1% y-t-d). Spot Gold recovered 0.5% to $1,199 (down 8.0%). Silver rallied 1.5% to $14.359 (down 16.2%). Crude jumped $1.79 to $70.78 (up 17%). Gasoline rose 2.4% (up 12%), and Natural Gas surged 7.6% (up 1%). Copper surged 8.0% (down 13%). Wheat gained 1.6% (up 22%). Corn rose 1.6% (2%).

Trump Administration Watch:

September 21 - Bloomberg (Mike Dorning, Jenny Leonard and Mark Niquette): "U.S. President Donald Trump continued to hit out at China days after announcing another round of tariffs, signaling the trade war won't end any time soon. 'It's time to take a stand on China,' Trump said in an interview… 'We have no choice. It's been a long time. They're hurting us.'"

September 18 - Financial Times (James Politi and Demetri Sevastopulo): "President Donald Trump's preference for aggressively confronting China on trade had been apparent ever since the collapse of high-level talks between Washington and Beijing in May. But Monday's decision to impose tariffs on $200bn of Chinese imports brought the hostilities with China to an entirely new level, leaving little room for any settlement. 'It is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country… My administration will not remain idle when those interests are under attack.'"

September 17 - Bloomberg (Christopher Balding): "As the trade war between the U.S. and China drags on with new tariffs and no end in sight, we need to ask ourselves: What do they want? A fundamental objective for both is to become less reliant on the other. The trade war should thus be reframed as a conscious uncoupling. Behind the rhetoric from both sides lies a profound distrust. U.S. suspicion stems from two specific issues. China is increasingly seen as a national security threat that fails to play by the rules. The Trump administration's stance has spurred debate over whether it was a mistake to allow admittance of a highly protectionist Communist country to the World Trade Organization… For its part, the government of Xi Jinping is concerned about China's dependence on U.S. technology and finished manufactured products. The focus of its Made In China 2025 plan is to shift Chinese consumption of high-tech products away from foreign, specifically American, manufacturers and toward domestic companies."

September 18 - Financial Times (Gideon Rachman): "They don't call them trade wars for nothing. The latest round of tit-for-tat trade sanctions between the US and China is driven by the same emotions of fear and pride that lead real wars to break out. One country makes an aggressive move, so the other feels obliged to respond in kind. Both sides fear that if they back down, they will lose face in the eyes of the world and of their own people. The Trump administration's view is that China has been 'cheating' on trade for decades. But instead of responding to the first round of US tariffs, imposed in July, with concessions, the Chinese reacted with tariffs of their own. So now President Donald Trump is imposing further tariffs of 10% on an extra $200bn-worth of Chinese exports. Predictably, rather than backing down, the Chinese have promised to respond to this latest round of measures with more tariffs on American goods. Following the logic of escalation, Mr. Trump has pledged that will trigger yet more US tariffs - possibly at a higher rate of 25% - covering essentially all Chinese exports to America. Both sides are willing to risk a trade war because they think they have a good chance of winning."

September 18 - New York Times (Jim Tankersley and Alan Rappeport): "The Trump administration seems confident that consumers will not feel pain from its escalating trade war with China. 'Because it's spread over thousands and thousands of products, nobody's going to actually notice it at the end of the day,' Commerce Secretary Wilbur Ross told CNBC… But a pain-free trade war with China is nearly impossible. For American consumers, prices have already risen on some products that the administration targeted for tariffs this year - most notably, washing machines, which were subjected to steep tariffs in January."

September 18 - CNBC (Matthew J. Belvedere): "Commerce Secretary Wilbur Ross said… that new U.S. tariffs on China are aimed at modifying Beijing's behavior and leveling the playing field for American companies competing there. Ross appeared on CNBC the morning after the administration announced that President Donald Trump will impose 10% tariffs on $200 billion worth of Chinese imports, with those duties rising to 25% at the end of the year… Ross said… regarding the expected move, that China is 'out of bullets' to retaliate because its imports to the U.S. are nearly four times larger than the U.S. exports to China."

September 17 - CNBC (Kate Rooney): "Top White House Economic Advisor Larry Kudlow said while the administration needs to be tougher on spending, growth from recent tax cuts should fix the issue. 'If you grow rapidly you're going to have lesser deficits. Growth solves a lot of problems,' Kudlow said at the Economic Club of New York… 'The gap is principally spending too much.' Thanks to an uptick in gross domestic product, or GDP, after tax cuts, Kudlow said the U.S. has 'just about paid for two thirds of the total tax cuts.'"

September 17 - Reuters (Chris Prentice and David Lawder): "A top economic adviser to President Donald Trump said… he expects U.S. budget deficits of about 4% to 5% of the country's economic output for the next one to two years, adding that there would likely be an effort in 2019 to cut spending on entitlement programs. 'We have to be tougher on spending,' White House economic adviser Larry Kudlow said…, adding that government spending was the reason for the wider budget deficits, not the Republican-led tax cuts activated this year."

September 16 - New York Times (Alexandra Stevenson, Kate Kelly and Keith Bradsher): "When President Bill Clinton deliberated whether he should loosen trade barriers against China, Wall Street helped plead Beijing's case. When Presidents George W. Bush and Barack Obama talked tough about labeling China as a currency manipulator, Wall Street urged restraint - and both presidents backed down. Today, China is hoping that Wall Street will once again use its political heft to soothe tempers in Washington. But as President Trump ratchets up the trade war with Beijing, Wall Street's words are falling on deaf ears. Senior Wall Street executives met in Beijing on Sunday with current and former Chinese officials and bankers at a hastily organized session to find ways to strengthen financial ties between the United States and China."

September 19 - The Hill (Niv Elis): "Weeks before the midterm elections, conservatives in the House are gaining little traction on fiscal issues as Congress passed one spending bill after another in bipartisan votes. It's a significant shift from the last few years, when the House Freedom Caucus often threw a wrench into appropriations plans with demands to cut mandatory spending and advance other conservative priorities. 'It's a little bit frustrating right now,' said Rep. Mark Walker, the chairman of the Republican Study Committee (RSC), the largest GOP caucus in the House."

Federal Reserve Watch:

September 21 - Reuters (Howard Schneider): "Unemployment near a 20-year low screams at the U.S. Federal Reserve to raise interest rates or risk a too-hot economy. The bond market, not far from a state that typically precedes a recession, says not so fast. The decision of which to heed looms large when the Fed's interest-rate setters meet next week. Which path they follow will begin to define whether Chairman Jerome Powell engineers a sustained, recession-free era of full employment, or spoils the party with interest rate increases that prove too much for the economy to swallow. New Fed staff research and Powell's own remarks seem to put more weight on the risks of super-tight labor markets, which could mean a shift up in the Fed's rate outlook and a tougher tone in its rhetoric."

September 19 - CNBC (Jeff Cox): "When the Federal Reserve gathers next week, markets likely will be looking past a widely expected rate hike and toward the direction the central bank will chart ahead. A quarter-point increase in the Fed's benchmark funds rate is already baked in the cake. That will take the funds target to 2% to 2.25%, where it last was more than 10 years ago. The mystery for investors will be how officials view the future, particularly at a time when they've been making public statements that seem to indicate a difference of opinion over how aggressive policy needs to be as the economy ignites."

September 19 - Reuters (Steve Holland and Howard Schneider): "U.S. President Donald Trump intends to nominate former Federal Reserve economist Nellie Liang to the U.S. central bank's board of governors, the White House said… Earlier, two White House officials speaking on condition of anonymity told Reuters that Liang has a strong background on financial and monetary stability, including crisis response, and is considered a good fit for the Fed board."

U.S. Bubble Watch:

September 18 - Nextgov (Frank Konkel): "The federal government is primed to spend as much as $300 billion in the final quarter of fiscal 2018 as agencies rush to obligate money appropriated by Congress before Sept. 30 or return it to the Treasury Department. The spending spree is the product of the omnibus budget agreement signed six months late in March coupled with funding increases of $80 billion for defense and $63 billion for civilian agencies. The shortened time frame left procurement officials scrambling to find ways to spend the money. Through August, defense and civilian agencies obligated some $300 billion in contracts. But to spend all the money appropriated to them by Congress, they may have to obligate well over $200 billion more in the final quarter of fiscal 2018… 'It is not impossible for this to happen, but it is unprecedented for that high of a percentage to be obligated to contracts for a fiscal quarter,' David Berteau, president of the Professional Services Council, told Nextgov. 'You'd have to spend almost 50% of the yearly total in three months.'"

September 18 - Bloomberg (Shobhana Chandra): "President Donald Trump's decision to impose tariffs on an additional $200 billion of imports from China drags the biggest part of the U.S. economy into the thick of the trade war, threatening to deliver a more direct hit to growth. The 10% tariffs… affect everyday items including food, furniture, and clothing, making grocery shopping and holiday gifts potentially pricier. That broadens the trade fallout more directly into the realm of household spending, which accounts for about 70% of the U.S. economy."

September 20 - Reuters (Rishika Chatterjee and Nivedita Balu): "Walmart Inc said that it may hike prices of products if the Trump administration imposes a tariff on Chinese imports, according to a letter the company wrote to U.S. Trade Representative Robert Lighthizer… Walmart, the world's largest retailer, in its letter said the tariff would impact prices of everything from food products to beverages and personal care items."

September 18 - Wall Street Journal (Te-Ping Chen and Eric Morath): "U.S. employers are boosting benefits-including bonuses and vacation time-at a faster pace than salaries, a move that gives them more flexibility to dial back that compensation if the economy turns sour. The cost of benefits for private-sector employers rose 3% in June from a year earlier, while the cost of wages and salaries advanced 2.7%... The benefit gain was driven by a nearly 12% increase in bonuses and other forms of supplemental pay. Paid leave, including vacation time, rose 4% in June from a year earlier… 'Bonuses and supplemental pay speak to labor market conditions, and workers are in a good spot to get a little more,' said Ryan Sutton, a district president for staffing agency Robert Half. 'Companies are still reluctant to move base wages up too much. It's a lot harder to take that away than bonuses.'"

September 18 - CNBC (Thomas Franck): "Former White House economic advisor Gary Cohn said President Donald Trump will work with Congress to pass a massive debt-fueled infrastructure bill if Democrats take control of the House of Representatives in November. 'If the Democrats win the House I will be shocked if the first thing they don't do is infrastructure,' Cohn said… 'I think they'll do a trillion dollars, trillion and a half dollars of infrastructure, and the president will sign it.' 'Another trillion dollars of debt, here we come,' he added. A perennial issue for Washington lawmakers, the national debt is expected to rise to $28.7 trillion from $15.7 trillion over the next decade, according to the Congressional Budget Office."

September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution."

September 19 - CNBC (Jeff Cox): "The 'Great Bull' market that came after the financial crisis is dead due to slowing economic growth, rising interest rates and too much debt, according to a Bank of America Merrill Lynch analysis. In its place will be one that features lower returns, the bulk of which will be concentrated in assets that suffered during the recovery, Michael Hartnett, BofAML's chief investment strategist, said: 'The Great Bull Dead: end of excess liquidity = end of excess returns,' Hartnett said. The liquidity reference is to central banks that have pumped in $12 trillion worth in various easing programs that have seen 713 interest rate cuts around the world…"

September 17 - Reuters (Anna Irrera and Svea Herbst-Bayliss): "Gary Cohn, the former economic adviser to U.S. President Donald Trump, gave a ringing endorsement of Wall Street bankers on Monday, arguing that borrowers were just as responsible for the 2007-2009 financial crisis as lenders and ridiculing rules intended to make the system stronger in its aftermath. In a wide-ranging conversation at an event hosted by Reuters Breakingviews…, Cohn's comments mostly tracked the sentiment of Wall Street bankers and other wealthy Americans who have felt unfairly maligned for the mortgage market's collapse and the economic downturn that ensued… Defending his fellow bankers, who are often blamed for causing and worsening the crisis, Cohn said borrowers played a hand in their financial disasters as well. 'Who broke the law? I just want to know who you think broke the law,' said Cohn. 'Was the waitress in Las Vegas who had six houses leveraged at 100% with no income, was she reckless and stupid? Or was the banker reckless and stupid?'"

September 19 - Bloomberg (Riley Griffin): "As U.S. household debt rises and wages stagnate, millions of Americans are thinking about tapping into home equity to keep up with day-to-day expenses. Twenty-four million homeowners believe borrowing against home equity is an acceptable way to cover regular bills, according to a Bankrate.com report… Cash-strapped millennials, low earners and the less educated were most likely to think home equity offered an appropriate solution to ordinary bills. 'Regular household bills should be funded by a regular household income, not home equity,' said Greg McBride, chief financial analyst at Bankrate.com. 'Wage growth has been elusive, but rising household expenses have not. And now home equity is being seen as a lifeline for those who are strapped for money with little wiggle room.'"

September 17 - Reuters (Laila Kearney): "While U.S. states' financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report… Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said. 'In their fight against recessions, budget reserves are what states send to the frontline,' the report said. 'They are an internal source of immediate liquidity and can provide transitional funding to agencies before budget cuts take effect.' States face worse revenue shortfalls in the next recession compared with the Great Recession, S&P said. That is because states rely more heavily on personal income taxes as a percentage of general fund revenues now than a decade ago, with the taxes currently contributing a combined 55% to the funds compared with 49% in 2008, S&P said."

September 20 - Financial Times (Diana Olick): "After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest. In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1% and less than 50%."

September 17 - Wall Street Journal (Paul J. Davies): "People in the Carolinas are about to rediscover the difference between the damage a storm causes and what is covered by insurance. Hurricane Florence weakened considerably as it moved over the U.S. coast over the weekend, lessening its speed and causing much less wind damage than had been feared earlier last week. However, heavy rain and severe flooding have arrived, bringing tragedy in their wake. The problem is that while wind damage is well covered by insurers and reinsurers, flood damage is absent from most homeowner policies and is typically an optional cover in commercial policies."

September 20 - Wall Street Journal (Katherine Clarke): "Entertainers Beyoncé and Jay-Z and billionaire hedge-fund executive Ken Griffin have something in common: They are among a small but growing number of ultraluxury home buyers who are borrowing tens of millions of dollars for home purchases. The trend bucks the tradition of the ultrawealthy paying cash for their super-pricey homes. Mortgage experts attribute the shift toward so-called 'superjumbo loans' over the past couple of years to rising real-estate prices across the country and the historically low interest rate environment, which encourages wealthy buyers to borrow against their real estate to free up cash to invest elsewhere."

China Watch:

September 18 - Reuters (Kevin Yao): "Maintaining China's steady growth is increasingly difficult amid significant changes in the external environment, but China will not resort to massive stimulus, Premier Li Keqiang said… China has ample policy tools to cope with difficulties and challenges, and it will keep macro-economic policies steady, Li said in a speech at the World Economic Forum in Tianjin."

September 18 - CNBC (Tae Kim): "China said it will institute new tariffs on U.S. goods worth $60 billion on Sept. 24, according to a Reuters report. The media outlet said the Asian country's tariff rate on a list of 5,207 U.S. products will range between 5% and 10%."

September 18 - Financial Times (Tom Mitchell and Gabriel Wildau): "When Donald Trump declared on Monday that he would impose punitive tariffs on about half of all Chinese exports to the US, it was a moment that President Xi Jinping had long believed would never come. For two years after Mr. Trump emerged as a force to be reckoned in the 2016 US presidential campaign, Mr. Xi and his lieutenants clung to precedent for comfort. While American presidential candidates routinely bashed China on the campaign trail, once in the White House they played down differences with their geopolitical rival. As Mr. Xi said at his first meeting with Mr. Trump in the spring of 2017: 'We have a thousand reasons to get US-China relations right, and not one reason to spoil them.' Mr. Xi's administration began to appreciate this year that Mr. Trump intended to practise as president what he had preached as a candidate."

September 16 - Reuters (Michael Martina, Ryan Woo, Christian Shepherd and Susan Heavey): "China will not be content to only play defense in an escalating trade war with the United States, a widely read Chinese tabloid warned… The Global Times, which is published by the ruling Communist Party's People's Daily, wrote in an editorial: 'It is nothing new for the U.S. to try to escalate tensions so as to exploit more gains at the negotiating table.' 'We are looking forward to a more beautiful counter-attack and will keep increasing the pain felt by the U.S.,' the… column said. Besides retaliating with tariffs, China could also restrict export of goods, raw materials and components core to U.S. manufacturing supply chains, former finance minister Lou Jiwei told a Beijing forum…"

September 18 - CNBC (Patti Domm): "China's holdings of U.S. Treasury bills, notes and bonds dropped to a six month low of $1.171 trillion in July, from $1.178 trillion in June. The data is closely watched, since dumping Treasury securities is viewed as one way China could retaliate against the U.S. in an ongoing trade dispute… China is the biggest holder of U.S. Treasurys, followed by Japan. Japan's holdings rose to $1.04 trillion from $1.03 trillion in June… Strategists say China is much more likely to retaliate against U.S. tariffs by slapping its own tariffs on American goods… Some market pros believe China would use its currency as a weapon before it would dump Treasurys."

September 18 - Reuters (Jamie McGeever): "One of the foundations upon which the economic and financial relationship between the United States and China over the past 15 years has been built is the assumption that Beijing won't sell its vast holdings of U.S. Treasuries. The financial damage to both countries, and the potential fallout beyond the monetary effect, would be so profound that it simply wouldn't happen, so the theory goes. Disregarding this would be the economic superpower equivalent of the Cold War's 'mutually assured destruction' doctrine. But with trade tensions between the two countries escalating dramatically, it may no longer be a total long shot. It's a scenario being contemplated now more than at any point in recent years…"

September 19 - Financial Times (Jamie Powell): "Name the following Chinese company: It boasts an enterprise value of $145bn. In the first half of the year it generated $44bn of revenues and $4.5bn of profits, paying out half in dividends. It has $98bn of debt, $44bn of it due within the next twelve months. The answer is China Evergrande, a real estate kraken with tentacles stretching across China. It does all things property including development, investment, management and construction, along with a host of smaller ventures in technology, finance and healthcare. That reach makes some of the numbers mind boggling, particularly when it comes to the company's debt. For instance, it paid $4.2bn of interest over the first six months of 2018... In part that's because Evergrande pays a lot to borrow: its average financing cost of 8.3% is the highest of peers, which pay an average 5.9% interest rate…"

September 20 - Bloomberg: "China's government plans to outlaw foreign TV shows in prime time and to limit imported content in fast-growing streaming platforms. The rules released Sept. 20 extend restrictions that have for years narrowed access to non-Chinese programming to curb what officials have characterized as negative influences on viewers. The National Radio and Television Administration proposal will also limit air time for foreign content and cap the participation of talent from outside the country."

EM Watch:

September 19 - Reuters (Walter Bianchi and Scott Squires): "Argentina's gross domestic product contracted 4.2% in the second quarter of 2018 from the same period last year and 3.9% from the prior quarter… Sky-high interest rates have shut off growth in the recession-hit country while failing to bolster its beleaguered peso currency, which has slumped more than 52% against the dollar so far this year."

September 20 - Financial Times (Laura Pitel and Jonathan Wheatley): "Turkey's finance minister has slashed the country's economic growth targets and promised to cut public spending by nearly $10bn as the country tries to rebuild shattered market confidence and find a way out of a currency crisis. Investors welcomed the decision by Berat Albayrak, who was put in charge of the economy two months ago by his father-in-law, President Recep Tayyip Erdogan, to reduce growth projections to 3.8% in 2018 and 2.3% in 2019. The previous target was 5.5% for both years. But some were sceptical about the credibility of a proposal to reduce the budget deficit to 1.9% of gross domestic product this year and 1.8%in 2019. They voiced disappointment, too, over the absence of a strategy to support Turkish banks, which face mounting bad loans."

September 17 - Bloomberg (Asli Kandemir, Taylan Bilgic, Ercan Ersoy and Kerim Karakaya): "The Turkish government will unveil measures to help banks tackle the expected pile-up of bad loans resulting from the lira's plunge and soaring interest rates, according to people with knowledge of the matter. The plan will seek to mitigate the need for capital injections and propose transferring non-performing loans to a state-designated entity… Lenders have been struggling to deal with a rising number of restructurings after the lira dropped 40% against the dollar this year…"

September 19 - Financial Times (Laura Pitel and Funja Guler): "Little more than a year ago, the head of the Turkish construction company Sur Yapi was opening a glitzy new shopping centre in the western city of Bursa, thanking a crowd of local dignitaries assembled on its immaculate plaza. But Turkey's economic turmoil has turned that celebratory mood into a memory as shopping malls, once a symbol of the country's economic boom, find themselves at the sharp end of a currency crisis. Sur Yapi recently faced a tenants' revolt in the Bursa mall as a group of shops pulled down their shutters in protest at the growing burden of rents that were indexed to the euro… Thousands of companies, including Sur Yapi, took advantage of foreign currency loans to fund their investments, but are now grappling with the fallout from a slide in the Turkish lira."

September 20 - Bloomberg (Aashika Suresh): "It's little wonder that debt defaults by key Indian shadow bank Infrastructure Leasing & Financial Services Ltd. have shocked credit traders: not only are nonpayments rare in the country, but the conglomerate is a major player in the market.IL&FS's outstanding debentures and commercial paper accounted for 1% and 2%, respectively, of India's domestic corporate debt market as of March 31, according to Moody's… The liquidity problems at IL&FS are raising concern about broader fallout among Indian lenders, already struggling to clean up more than $210 billion of stressed debt on their balance sheets. And the group's complex corporate structure makes problems worse -- it has 169 subsidiaries, associates and joint ventures."

September 21 - Financial Times (Chloe Cornish): "The cost of insurance on Lebanese sovereign bonds has soared in recent weeks, reflecting concerns about the sustainability of the country's debt burden as its economy slows and faces a potential cash crunch. Like many emerging markets, rising global interest rates are swelling Lebanon's external financing costs as the economy's growth rate slows to 1.3% this year. The country has the world's third highest debt-to-GDP ratio at 150%, a legacy of borrowing from public markets to rebuild after its devastating civil war."

Central Bank Watch:

September 18 - Wall Street Journal (Tom Fairless): "The race to succeed Mario Draghi as European Central Bank president presents Germany with a stark choice: Back the country's own candidate, a foe of Mr. Draghi's 2.5-trillion-euro bond-buying program, or concede that once-unorthodox monetary tools are here to stay. Germany's central bank, long a powerful voice in the global fight against inflation, has grown out of sync in the postfinancial crisis era of stagnant prices and wages, with its greatly expanded role for central banks and outside-the-box policies. 'Perhaps the sands have shifted,' said Stefan Gerlach, former deputy governor of Ireland's central bank. 'Having been on the wrong side of history, at least as it appears now, has not helped the Germans.' Now, with the jockeying among European capitals already underway, Berlin must decide in the coming months whether to endorse Jens Weidmann, president of Germany's central bank, who has likened printing money to the devil and testified against Mr. Draghi's crisis-era bond program in a German court."

September 17 - CNBC (Eustance Huang): "Borrowing costs remain too low today and it's 'hurting our savers,' said Allianz CEO Oliver Bäte. 'European money is too cheap and that leads to misallocation of assets,' Bäte told CNBC's Nancy Hungerford… 'We still have a lot of mismanagement in the central bank side.' Bäte said schemes such as the European Central Bank's 'ultra-loose' monetary policy - which has been in place since the global financial crisis of 2008 - will 'just make money cheaper for over-indebted governments.' He said it was not helping the economy, and just makes it easier for people to borrow money."

Europe Watch:

September 21 - Financial Times (Laura Hughes and George Parker): "A defiant Theresa May on Friday accused EU leaders of failing to show "respect" to Britain and threw down the gauntlet to Brussels to shift its position or risk a breakdown in Brexit negotiations and a no deal exit. In a statement delivered in Downing Street in front of two union flags, Mrs. May said Britain stood ready to leave the EU without a deal and admitted Brexit negotiations had run into the sand. 'We are at an impasse… It is not acceptable to simply reject the other side's proposals without a detailed explanation and counter-proposals. I will not overturn the result of the referendum nor will I break up my country.'"

Global Bubble Watch:

September 16 - Reuters (Andrea Shalal): "Governments cannot completely prevent a repeat of events like the 2008 global financial crisis even though regulations have been tightened since the collapse of Lehman Brothers a decade ago, Germany's top central banker told Bild newspaper. Bundesbank President Jen Weidmann said German banks were not only victims of the 2008 financial crisis, but many institutions had also taken on more risk than they could ultimately carry. Regulations had been tightened since then, but it would be 'an illusion' to think that governments could completely avert such crises, he said."

September 20 - Bloomberg (William Horobin): "The global economy is shrouded in 'high uncertainty' as the outlook for emerging markets deteriorates sharply and trade tensions intensify, the Organization for Economic Cooperation and Development said. The gloomy analysis has pushed the Paris-based institution to cut its global growth forecasts for this year and next with particularly sharp revisions for Turkey, Argentina, South Africa and Brazil. Since its last economic forecasts in May, the OECD said differences between economies have widened, confidence has fallen, and business surveys across the world point to a slowdown. 'Global growth is hitting a plateau,' its chief economist, Laurence Boone, said…"

September 18 - Reuters (Gayatri Suroyo): "Confidence among Asian companies slumped to the weakest in almost three years in the third quarter as businesses feared blowback from a worsening global trade war, a Thomson Reuters/INSEAD survey showed. Representing the six-month outlook of 104 firms, the… Asian Business Sentiment Index fell to 58 for the July-September quarter, its lowest since the fourth quarter of 2015, from 74 three months before."

September 18 - Reuters (Jacob Gronholt-Pedersen and Teis Jensen): "Danske Bank's chief executive Thomas Borgen resigned on Wednesday after an investigation revealed payments totaling 200 billion euros ($234bn) through its small Estonian branch, many of which the bank said were suspicious. The Danish bank detailed compliance and control failings amid growing calls for a European Union crackdown on financial crime after a series of money laundering scandals which have attracted the attention of U.S. authorities."

September 18 - Bloomberg (Satyajit Das): "Markets have served a timely reminder of the latent risk from derivatives - the wild beasts of finance. Ten years after the collapse of Lehman Brothers… a private trader and one of Norway's richest men suffered 114 million euros ($132.6 million) of losses on energy-futures positions traded on Nasdaq. The default ate through around two-thirds of Nasdaq's mutual default fund, using up several layers of protection. Members of the clearinghouse must now make substantial cash contributions to rebuild that cushion. Given derivative-market and counterparty credit risk of $13 trillion, the losses were relatively small and the risk was contained. Yet the event nonetheless raises concerns about the system's ability to withstand defaults by one or more major market participants, for which losses could potentially be much greater."

September 17 - Bloomberg (Jeanna Smialek, Shobhana Chandra and Enda Curran): "Workers in the world's richest countries are getting their biggest pay bump in a decade, a step toward solving a labor market puzzle that's unnerving central bankers. As shrinking unemployment in the U.S., Japan and euro zone finally forces companies to lift wages to retain and attract staff, JPMorgan... reckons pay growth in advanced economies hit 2.5% in the second quarter, the most since the eve of 2009's worldwide recession. The bank predicts wages will accelerate to near 3% next year."

September 20 - Bloomberg (Shawna Kwan): "There's expensive, and then there's Hong Kong property expensive. A four-bedroom house in the exclusive Peak neighborhood has hit the market for an eye-watering HK$3.5 billion ($446 million), which would make it the most expensive home sold in the city, if not the world. Villa Les Cedres, a 188-year-old, 14-bedroom mansion in the south of France, was last year listed for 350 million euros ($409 million). Don't expect a palatial estate though. The modestly-sized house at 24 Middle Gap Road sits on 16,330 square-feet of land, or just over a third of an acre, and comes with a swimming pool, parking for two cars and some dated 1990s decor."

Fixed Income Bubble Watch:

September 21 - Bloomberg (Brian Chappatta): "Bond investors often say that 'No one wants to be a forced seller.' And that makes perfect sense: If you need to sell during a rout, no matter the price, you're going to take a big hit. But it should be equally as scary to be a forced buyer. Increasingly, that's what's happening in the U.S. high-yield corporate bond market. With ample cash and little new supply to purchase, investors have pushed the average spread on junk debt down to just 3.15 percentage points, close to the narrowest since 2007... As recently as 2016, that gap was more than twice as wide."

September 21 - Bloomberg (Misyrlena Egkolfopoulou and Sally Bakewell): "Money managers, eager for assets whose yields rise as the Federal Reserve hikes rates, snatched up some of the year's biggest leveraged loan offerings this week. Some caution that investors may be buying at the wrong time… Retail investors have poured cash into funds that buy loans, with $282 million of inflows into mutual funds and exchange traded funds in the week ended Sept. 12, the 10th straight week of money coming in, according to Lipper data. Pension funds have also been big buyers of credit products Broadly…"

September 18 - Wall Street Journal (Sam Goldfarb and Soma Biswas): "One of the largest-ever sales of speculative-grade debt was completed with ease on Tuesday, a sign of the favorable environment for U.S. borrowers at a time of robust economic growth and strong demand from investors. The $13.5 billion sale-which a Blackstone Group LP-led investor group is using to acquire a 55% stake in a Thomson Reuters Corp. data business called Refinitiv-comprised $9.25 billion of loans and $4.25 billion of secured and unsecured bonds, with different pieces denominated in U.S. dollars and euros."