Philip Hammond hands his fiscal gift right back

This Budget is the largest discretionary fiscal loosening since the OBR’s creation in 2010

Martin Wolf

Philip Hammond: near-term giveaways followed by longer-term takeaways © Tolga Akmen/FT

In normal circumstances, Philip Hammond, chancellor of the exchequer, would have been in a far more comfortable position in delivering his Budget on Monday than he or his predecessors since the financial crisis 10 years ago. As he repeatedly reminded his listeners, the fiscal squeeze was coming to an end. Above all, he had more money to play with than he expected.

Alas, these are not normal circumstances. The uncertainty of Brexit hangs over prospects. Mr Hammond is a sensible man who hopes for a sensible deal. Unfortunately, he is surrounded by people who think crashing out of the EU without one would be just fine. Brexit is bad enough. But this notion is lunacy. He (and we) must hope it does not happen. The UK needs to agree a reasonable exit with its EU partners, a sufficiently long standstill and a mutually beneficial final relationship. If this does not occur, the Office for Budget Responsibility might have a very different view next time it considers prospects for the UK.

Before considering what Mr Hammond made of the position he is now in, we need to recognise that the economy is in far from excellent condition. As the OBR notes in its Economic and Fiscal Outlook, economic growth is “near the bottom” of the league, among the Group of Seven leading high-income economies. While employment performance is very good, as the chancellor stressed on several occasions, productivity performance remains miserable. Output per hour actually fell between the last quarter of 2017 and the second quarter of 2018. The only good news is that it shrank less than forecast last March. Truth be told, the OBR’s medium-term forecast is also miserable: 1.3 per cent growth this year, followed by 1.6 per cent in 2019, 1.4 per cent in 2020 and 2021, 1.5 per cent in 2022 and 1.6 per cent in 2022. By pre-crisis standards, this is simply awful. (See charts.)

So how, given this far from cheerful economic picture, does the chancellor find himself with a great deal of money to spray around? The main answer, as the OBR, admits, is that: “The public finances have performed better so far this year than we and outside forecasters expected back in March, even though the economy has grown less quickly.” As a result, the starting point is £11.9bn lower borrowing this fiscal year than expected last March. The OBR also now forecasts a modest improvement in prospective economic growth due to “a downward revision to our estimate of the sustainable rate of unemployment and an upward revision to potential labour market participation”. Taking all this together, concludes the OBR, the underlying improvement in the budget deficit rises to £18.1bn by 2022-23. At 0.6 per cent of gross domestic product, on average, this would have been sufficient to balance the budget by 2025.

The government has decided to give the “fiscal windfall” back to the public. Far and away the biggest amount, as the chancellor noted, is due to the commitment to extra spending on the National Health Service, already announced by the prime minister. The cost of this extra spending on health rises from £7.4bn in 2019-20 to £27.6bn in 2023-24. The rest of his package has what the OBR calls “the familiar Augustinian pattern”: give us frugality, but not yet. Thus there are near-term giveaways followed by longer-term takeaways. Maybe the chancellor is insuring against the possibility of a general election in the relatively near future.

Giveaways include raising the personal tax allowance to £12,500, oiling the introduction of the controversial universal credit and freezing fuel duties — just what a government supposedly committed to tackling climate change ought not to do. The main takeaways are a new (and itself welcome) tax on digital businesses, a further tightening up on people who work through a company they own, and changes to national insurance contributions. It also appears that departmental capital spending has been cut from 2019-20 onwards.

In all, this is the largest discretionary loosening at any fiscal event since the OBR was created in 2010. It has disposed fully of the windfall, leaving the finances almost where they were expected to be back in March.

Does this make sense? This has an economic and a political answer.

The broad answer to the economic question is that the forecasts show a steady decline in public sector net debt from 85 per cent of GDP in 2017-18 to 74.1 by 2023-24. They show a cyclically adjusted surplus on the current Budget throughout the forecast period, rising to 1.3 per cent of GDP by 2023-24. They also show public sector net borrowing falling to 0.8 per cent of GDP by the latter year. Ordinarily, this should be enough to sustain confidence in the UK. But Brexit is one huge uncertainty. The possible election of a Jeremy Corbyn-led Labour party is another. Mr Hammond does not control either possibility. He can, however, seek to influence them.

This is where the politics come in. Mr Hammond is indicating to his colleagues that, provided they are reasonable and give prime minister Theresa May the latitude she needs to reach a Brexit deal, sunlit uplands of growth and fiscal largesse lie ahead. In any case, the need for brutal cuts in unprotected spending should be at an end. But, if Brexit turns into a disaster, that may well not remain true.

He is also indicating to the public that due to “their hard work” — a debatable description of the decisions taken over the past eight years — good (or at least better) times now lie ahead. This, it is surely clear, is the only platform the Conservatives can credibly use as a basis for appealing to the country for support. They cannot argue the economic recovery has been satisfactory, because it has been very far from that. They cannot deny they have imposed a fiscal tightening that a large proportion of the people believe was painful and, in important respects, unfair. But they can at least seek to argue that it was necessary, that it is over and, above all, that Labour would throw everything that has by now been achieved into jeopardy. In truth, this is the only basis on which the Tories can campaign. Will it work? In time, we will find out.

America’s Midterm Elections Turn Menacing

With the approach of crucial congressional and state elections, no one should be surprised that domestic terrorism has emerged from the ranks of President Donald Trump's hyper-partisan supporters. In fact, given Trump’s pattern of incitement, many have warned that some of his followers would resort to violence.

Elizabeth Drew  

trump supporter

WASHINGTON, DC – With the approach of this year’s midterm elections in the United States, domestic terrorism is starting to dominate the political landscape. First, barely two weeks before Election Day, an angry supporter of US President Donald Trump began sending 14 bombs to prominent Democrats and others whom Trump has frequently attacked. (None of the bombs exploded.) Then things became much worse, with the murder, on a Saturday, of 11 Jews in a Pittsburgh synagogue. Today, a polarized and anxious American public finds itself with a president totally unsuited to, and not very interested in, comforting the nation, much less trying to lead it away from the hate and deadly partisanship that he has stoked.

Had the 14 crude bombs, which the FBI called “potentially destructive devices,” worked as intended, the bombmaker could have killed or gravely injured a who’s who of Trump adversaries. The list included two former presidents (Bill Clinton and Barack Obama), Hillary Clinton, former Attorney General Eric Holder; a former CIA director; a former director of National Intelligence; two likely Democratic presidential candidates in 2020; a black congresswoman whom Trump frequently describes as “low IQ” (a common racist charge); two prominent Jewish billionaire philanthropists, one of whom, George Soros, is a frequent target of Trump and the subject of various right-wing conspiracy fantasies; and the actor Robert De Niro (who began his speech at this year’s Tony Awards ceremony by declaring, “Fuck Trump”).

Though Trump had frequently singled out many of the bomber’s targets at his rallies – still attacking Hillary Clinton, his election opponent in 2016, for example, and then smiling as his audience chanted “Lock her up” – Trump’s defenders tried to throw the spotlight elsewhere. The mail bombs, they claimed, were a “false flag” operation by the left, with some of the Democrats even sending the bombs to themselves in order to blame Trump.

So it was highly inconvenient for true believers when the would-be bomber turned out to be a fanatical Trump supporter who lives in Florida and drives a white van covered in hate-filled depictions of his targets. US law enforcement agencies – another frequent target of Trump – are extremely good at tracking down miscreants: the suspect was arrested four days after the first bomb was discovered in Soros’s mailbox.

The most disheartening aspect of the entire episode was Trump’s utter incapacity as a national leader. But that should surprise no one. How could a president who has thrived politically on dividing the American people, who has been spewing hate, sowing resentment, and at times even encouraging violence at his rallies, suddenly be – or even pretend to be – a healer? In fact, Trump’s pattern of incitement and routine denunciations of the media as “the enemy of the people” had convinced many that some of his followers might resort to violence against members of the press.

The day after the discovery of the bombs sent to the Clintons and the Obamas, among others, a subdued Trump read a prepared statement at a prescheduled White House ceremony, condemning “acts or threats of political violence” and saying that the nation must unify.
It didn’t last. By that evening, at a rally in Wisconsin, he was making fun of his “trying to be nice” act and blamed the media for the violence. And soon he was back to whipping up fear of a caravan of refugees from Honduras. Though still roughly 1,000 miles from the US border, Trump portrayed the refugees as an imminent national security threat, warning, without evidence, that “Middle Easterners” were among them.

Trump’s rallies are now almost a daily event, and his lies are even more frequent than before. With the entire House of Representatives and one-third of the Senate to be chosen on November 6, the upcoming midterm election is widely regarded as the most consequential in memory, perhaps ever. The Republicans’ two-year lock on the entire US government – the House, the Senate, the presidency, and, with the recent addition of Justice Brett Kavanaugh, the Supreme Court – could be broken.

The midterm election following the election of a new president is often considered a verdict on the incumbent, and his party usually loses strength, particularly in the House. But Trump has made the midterms about himself to an unprecedented degree. He tells audiences that though he’s not on the ballot, they should vote as if he were (though his approval ratings are in the low forties).

It has long been believed that the Democrats are more likely to win the House than the Senate, because several of the Senate seats in play are held by Democrats in traditionally conservative states. Trump’s determination, or anxiety, that Republicans maintain control of both chambers is understandable. Should the Democrats take over the House, newly empowered committee chairmen, armed with subpoenas, will launch investigations of a broad range of administration actions and agencies, where extensive corruption is suspected.

But the real, almost palpable, fear on Trump’s part is that a Democratic-controlled House will focus all manner of investigations on him personally: his acceptance of Constitutionally forbidden “emoluments” from foreign countries; his failure to separate himself sufficiently from the family business; his tax returns; his unauthorized foreign wars in Yemen and Syria; and of course his official and private dealings with Russia. At least the House is likely to have the conclusions of Special Counsel Robert Mueller to consider. In other words, no more lapdog Congress.

But if the Republicans maintain control of the Senate, there will be limits on what the Democrats can achieve. Even if the House were to impeach Trump – no sure thing – convicting him in the Senate would be extremely difficult. Whether a Democratic House would even proceed in that direction has been the subject of intra-party debate.

The nightmare election possibility for the Democrats is continued Republican control of both chambers. In that case, Trump will feel vindicated and more liberated than ever. He might then fire a raft of officials, treat immigrants still more harshly, and try to shut down Mueller’s investigation of his campaign’s possible collusion with the Kremlin and Trump’s probable obstruction of justice.

The conventional wisdom may prevail, with the Democrats winning the House but not the Senate. But the polls have been fluctuating. And since Trump’s stunning election victory in 2016, most observers have become more cautious about predicting outcomes.  

Elizabeth Drew is a contributing editor at The New Republic and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon's Downfall.

The Surprising Losers if U.S. Leveraged Loan Boom Fizzles

U.S. regulators and others are casting a closer eye over aggressive loans for private-equity deals

By Paul J. Davies

The $1.3 trillion market for risky loans used in private-equity deals has regulators worried.

Activity in the U.S. market has boomed and it is U.S. officials leading the warning calls. But, while U.S. investment banks lead many businesses, it is the big Europeans that punch above their weight in U.S. loans and that face the bigger risks. For Credit Suisse , Barclaysand Deutsche Bank ,leveraged loans bring in a bigger share of investment bank revenue than they do for JP Morgan ,Bank of America Merrill Lynch and Goldman Sachs .

Standards in the leveraged loan market have been slipping as more aggressive private-equity deals have pushed debt multiples higher and eviscerated the traditional protections, known as covenants, that allow lenders to intervene if borrowers start to struggle.

The latest warning on leveraged loans came from Federal Reserve banking regulator Todd Vermilyea last Wednesday. He highlighted many of the aggressive practices that have been regularly covered in this column and told an industry conference that the Fed was taking a closer look at banks’ risk management. Janet Yellen, former Fed chair, also raised concerns about the market last week in a newspaper interview, while Fed officials at their latest monetary policy meeting discussed the growth of loans, loosening of standards and role of non-banks in the market, according to minutes released this month.

Federal Reserve banking regulator Todd Vermilyea said the Fed was taking a closer look at banks’ risk management. Photo: chris wattie/Reuters 

Meanwhile, the Bank of England’s financial stability committee said it would assess the risks posed to banks by this market in this year’s stress test after it noted that global leveraged loans were larger than U.S. subprime mortgages in 2006 and growing as quickly.

European banks and some U.S. brokers like Jefferies Financial Grouphave been competing harder in leveraged loans in part because they don’t do so well against top U.S. banks in winning mandates to advise on mergers and acquisitions, according to an industry report from Morgan Stanleyand Oliver Wyman earlier this year.

Last week, Deutsche Bank was quizzed on its third-quarter results call by analysts about whether it was the right time to be increasing its market share in leveraged loans. Christian Sewing, the chief executive, said he was absolutely confident Deutsche wasn’t taking undue risks.

JP Morgan has the most revenue from U.S. leveraged loan deals this year so far—a spot occupied by Credit Suisse for each of the past five years, according to Dealogic—although this revenue is still less important to JPMorgan than it is to Credit Suisse.

Banks tend not to hold these loans. Instead, they sell them to other investors, especially mutual funds and collateralized loan obligations. However, if the market freezes, banks can get stuck with this debt, as many discovered to their dismay in 2007.

Any effort by regulators to cool the market, or any market problem that stops banks from selling the loans, would have a cost for all those involved: For the Europeans, though, the proportion of revenue and capital affected would be greater. Leveraged finance revenue is worth about 12% of advisory and capital raising revenue on average for the three Europeans, according to UBS ,while it is worth just 7% for the five largest U.S. banks.

These banks might ultimately thank the Fed, or another regulator, that acted to cool the market. Foregone revenue notwithstanding, it could save them from a bigger accident to come.


What if We’re All Coming Back?

The prospect of being reborn as a poor person in a world ravaged by climate change could lead us to very different political decisions.

By Michelle Alexander
Opinion Columnist

CreditCreditJosh Haner/The New York Times

I can’t say that I believe in reincarnation, but I understand why some people do. In fact, I had a bizarre experience as a teenager that made me wonder if I had known someone in a past life.

I was walking to school one day, lost in thought. I turned the corner onto a wide, tree-lined street and noticed a man on the other side heading my direction. For an instant, we held each other’s gaze and a startling wave of excitement and recognition washed over me. We spontaneously ran toward each other, as if to embrace a long-lost friend, relative or lover. But just as we were close enough to see the other’s face, we were both jolted by the awareness that we didn’t actually know each other.

We stood in the middle of the street, bewildered. I mumbled, “I’m so sorry — I thought I knew you.” Equally embarrassed, he replied: “Oh, my God, this is so strange. What’s happening right now?” We backed away awkwardly — me, a teenage black girl; he, a middle-aged white man. I never saw him again.

The incident shook me deeply. This was not a case of mistaken identity. Something profound and mysterious happened and we both knew it. Still, I’m not among the 33 percent of Americans (including 29 percent of Christians) who believe in reincarnation. Lately, though, I’ve been thinking that if more of us did believe we were coming back, it could change everything.
At first, I thought about reincarnation in the narrowest possible terms, wondering what future life I’d earn if karma proved real. It’s a worrisome thing to contemplate. It’s easier to speculate about what kind of future lives other people deserve. Maybe Bull Connor — that white supremacist Alabama politician who ordered that black schoolchildren protesting segregation be attacked with police dogs and fire hoses — has already been born again as a black child in a neighborhood lacking jobs and decent schools but filled with police officers who shoot first and ask questions later. Maybe he’s now subjected to the very forms of bigotry, terror and structural racism that he once gleefully inflicted on others.

This kind of thought experiment is obviously dangerous, since it can tempt us to imagine that people have somehow earned miserable fates and deserve to suffer. But considering future lives can also be productive, challenging us to imagine that what we do or say in this life matters and might eventually catch up with us. Would we fail to respond with care and compassion to the immigrant at the border today if we thought we might find ourselves homeless, fleeing war and poverty, in the next life? Imagining ourselves in those shoes makes it harder to say: “Well, they’re not here legally. Let’s build a wall to keep those people out.” After all, one day “those people” might be you.

Once I entered college, I found myself less interested in karma and more interested in politics. It occurred to me that if we’re born again at random, we can’t soothe ourselves with fantasies that we’ll come back as one of the precious few on the planet who live comfortably. We must face the fact that our destiny is inextricably linked to the fate of others. What kind of political, social and economic system would I want — and what would I fight for — if I knew I was coming back somewhere in the world but didn’t know where and didn’t know who I’d be?

In law school, I discovered that I wasn’t the first to ponder this type of question. In his landmark 1971 book, “A Theory of Justice,” the political philosopher John Rawls urged his audience to imagine a wild scene: A group of people gathered to design their own future society behind “a veil of ignorance.” No one knows his or her place in society, class position or social status, “nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength and the like.” As Rawls put it, “If a man knew that he was wealthy, he might find it rational to advance the principle that various taxes for welfare measures be counted unjust; if he knew he was poor, he would most likely propose the contrary principle.” If denied basic information about one’s circumstances, Rawls predicted that important social goods, such as rights and liberties, power and opportunities, income and wealth, and conditions for self-respect would be “distributed equally unless an unequal distribution of any or all of these values is to everyone’s advantage.”

Back then, I was struck by how closely Rawls’s views mirrored my own. I now believe, however, that the veil of ignorance is quite distorted in an important respect. Rawls’s veil encourages us to imagine a scenario in which we’re equally likely to be rich or poor or born with natural talents or limitations. But the truth is, if we’re reborn in 50 years, there’s only a small chance that any of us would be rich or benefit from white privilege.
Almost half the world — more than three billion people — live on less than $2.50 per day. At least 80 percent of humanity lives on less than $10 per day. Less than 7 percent of the world’s population has a college degree. The vast majority of the earth’s population is nonwhite, and roughly half are women. Unless radical change sweeps the globe, the chances are high that any of us would come back as a nonwhite woman living on less than $2.50 per day. And given what we now know about climate change, the chances are very good that we would find ourselves suffering as a result of natural disasters — hurricanes, tsunamis, droughts and floods — and enduring water and food shortages and refugee crises.

This month, the world’s leading climate scientists released a report warning of catastrophic consequences as soon as 2040 if global warming increases at its current rate. Democratic politicians expressed alarm, yet many continue to accept campaign contributions from the fossil fuel industry that is responsible for such a large percentage of the world’s greenhouse gas emissions.

It’s nearly impossible to imagine that our elected officials would be so indifferent if they knew climate scientists were foretelling a future that they would have to live without any of the privileges they now enjoy.

Rawls was right: True morality becomes possible only when we step outside the box of our perceived self-interest and care for others as much as we care for ourselves. But rather than imagining a scenario in which we’re entirely ignorant of what the future holds, perhaps we ought to imagine that we, personally, will be born again into the world that we are creating today through our collective and individual choices.

Who among us would fail to question capitalism or to demand a political system free from corporate cash if we knew that we’d likely live our next life as a person of color, earning less than $2.50 a day, in some part of the world ravaged by climate change while private corporations earn billions building prisons, detention centers and border walls for profit?

Not I. And I’m willing to bet, neither would you. We don’t have to believe in reincarnation to fight for a world that we’d actually want to be born into.

Michelle Alexander became a New York Times columnist in 2018. She is a civil rights lawyer and advocate, legal scholar and author of “The New Jim Crow: Mass Incarceration in the Age of Colorblindness.”

Back to Fundamentals

Doug Nolan

The Dow (DJIA) jumped 545 points (2.1%) in Wednesday's post-midterms trading. The S&P500's 2.1% rise was overshadowed by The Nasdaq Comp's 2.6% and the Nasdaq100's 3.1% advances. Healthcare stocks surged, with the S&P500 Healthcare Index up 2.9% (Healthcare Supplies index jumping 4.5%). Led by Amazon's 6.9% (113 points!) surge, the S&P Internet Retail Index gained 6.1%. From October 29th trading lows to Thursday's highs, the S&P500 rallied 8.1% and the Nasdaq100 jumped 9.6%.

The post-election bullish battle cry was a resolute "back to fundamentals!" With the market surging, analysts were proclaiming "reduced uncertainty" and "the best possible outcome for the markets." The President and Nancy Pelosi both adopted restrained tones and spoke of efforts to cooperate on important bipartisan legislation. Prospects for a market-pleasing infrastructure spending bill have improved. What's more, a positive spin was put on the return of Washington gridlock. Less Treasury issuance would support lower market yields generally, ensuring the U.S. economic expansion maintains ample of room to run. The weaker post-election dollar was said to be constructive for global liquidity.

The EEM emerging market ETF rose 1.9% Wednesday, pushing the rally from October 29th lows to 11.0%. The South African rand and Indonesian rupiah gained 1.5%, as most EM currencies temporarily benefited from the weaker dollar.

Wednesday provided a good example of news and analysis following market direction. Stocks were up, so election results must have been positive. I would tend to see Wednesday's trading as heavily impacted by the unwind of hedges - and yet another short squeeze. After trading as high as 20.6 in Tuesday trading, the VIX (equities volatility) index ended Wednesday's session at 16.36, an almost one-month low.

Market weakness in the weeks leading up to the midterms created an unusual backdrop. A pivotal election combined with a vulnerable market backdrop ensured a double-dose of hedging activity heading into Tuesday. And with the election having avoided "tail risk" outcomes (blue wave and Democratic control of both houses, or Republicans maintaining full control), post-election trading saw a significant reversal of risk hedges and bearish speculations.

It didn't, however, take long for the joyful "gridlock is good" rally to face a reality check. The President's tweet: "If the Democrats think they are going to waste Taxpayer Money investigating us at the House level, then we will likewise be forced to consider investigating them for all of the leaks of Classified Information, and much else, at the Senate level. Two can play that game!" NYT: "Jeff Sessions is Forced Out as Attorney General as Trump Installs Loyalist." And then came Friday's (post-election) barbs from the director of the White House's National Trade Council:

November 9 - Bloomberg (Andrew Mayeda and Shawn Donnan): "White House trade adviser Peter Navarro warned Wall Street bankers and hedge-fund managers to back down from their push for President Donald Trump to strike a quick trade deal with China's Xi Jinping. 'As part of a Chinese government influence operation, these globalist billionaires are putting a full-court press on the White House in advance of the G-20 in Argentina,' Navarro said… Their mission is to 'pressure this President into some kind of deal' but instead they're weakening his negotiating position and 'no good can come of this.' Navarro said investors should be re-directing their 'billions' of dollars into helping rebuild areas hit by manufacturing job losses. 'Wall Street, get out of those negotiations. Bring your Goldman Sachs money to Dayton, Ohio, and invest in America.'"

As another extraordinary market week came to its conclusion, the bulls "Back to Fundamentals" mantra from Wednesday was being hijacked by the bear camp. From my analytical perspective, the outcome of the midterms wasn't going to materially alter the Bursting Global Bubble Thesis. Global financial conditions continue to tighten. Very serious issues related to China's faltering Bubble remain unresolved. Italy's political, financial and economic problems won't be disentangled anytime soon. And the midterms weren't going to solve the more pressing issues in the U.S., certainly including inflated asset and speculative Bubbles and a Federal Reserve determined to stay on the policy normalization course.

November 8 - Wall Street Journal (Justin Lahart): "Anybody who thought the Federal Reserve might scale back its plans for future rate increases after all the recent turmoil in the stock market has to be disappointed. The Fed on Thursday left interest rates unchanged, and it didn't change much else. The statement it put out following its two-day meeting contained only minor tweaks from its September statement. It noted that the unemployment rate had declined since its September meeting (as opposed to 'stayed low'), and that business investment has "moderated from its rapid pace earlier in the year" (rather than 'grown strongly'). The two things roughly offset each other and both have been clear from the data."

WSJ: "Treasury Bond Auction Draws Weakest Demand in Nearly a Decade." Thursday's 30-year auction incited spiteful name calling: "weak," "sloppy," and "nasty." It's worth noting that 10-year Treasury yields traded to 3.25% election night, the high going back to April 2011. Benchmark MBS yields ended Thursday at 4.10%, also the high since 2011. Ten-year Treasuries enjoyed a little relief late in the week as equities reversed lower, ending Friday at 3.18%, down three bps for the week.

Dollar post-election weakness reversed sharply into week's end. After trading down to 95.678 Wednesday, the U.S. dollar index surpassed 97 on Friday before closing the week up 0.4% to 96.901. After closing at 41.63 on Wednesday, emerging market equities (EEM) sank almost 5% to close the week at 39.80.  
Perhaps more noteworthy from a global liquidity and "risk off" perspective, EM bonds came under renewed pressure this week. Brazilian 10-year (local currency) bond yields jumped 27 bps (to 10.41%). Russian yields surged 31 bps (8.91%) and Mexican yields 23 bps to a multiyear high (8.85%). Ominously, Mexico's 10-year (peso) yields are up almost 100 bps in six weeks. Brazil, Russia and Mexico dollar-denominated bond yields also turned higher, seemingly ending eight weeks of relative bond market calm.

After a recent modest pullback in yields, Italian 10-year yields jumped eight bps this week to 3.40% (Italian CDS up 11 to 270 bps). With German bund yields declining two bps (0.41%), the Italian to German 10-year sovereign spread widened 10 bps to 299 bps. European periphery bonds notably underperformed, with spreads to bunds widening 11 bps in Greece, eight bps in Portugal and five bps in Spain.

For me, Back to Fundamentals means a return of "Periphery to Core Crisis Dynamics" - rising yields, widening Credit spreads, de-risking/deleveraging, faltering global liquidity and, to be sure, China.

November 9 - Bloomberg: "China aims to boost large banks' loans to private companies to at least one-third of new corporate lending, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission. Shares of lenders retreat on the mainland and in Hong Kong. Guo's comments are the latest attempt by authorities to try to improve funding access for China's non-state companies… It's the first time financial regulators have given targets on private lending, a reflection that earlier efforts haven't triggered the necessary credit activity… The target for small and medium-sized banks is higher, at two-thirds of new corporate loans, Guo said…"

November 9 - Bloomberg (Tian Chen): "Chief economists at Chinese brokerage firms should make efforts to guide market expectations and also effectively promote and analyze government policies, says the head of the nation's top securities regulator. Economists should properly understand, interpret and promote President Xi Jinping's remarks on supporting private companies, Liu Shiyu, chairman of the China Securities Regulatory Commission, said at a meeting with economists this month. The analysts should cherish the reputation of the industry, improve their ability to conduct research and properly use their influence on the public, Liu said…"

Beijing faces the critical issue of a deeply maladjusted economic structure that, at this point, requires in the neighborhood of $3.5 TN of annual (and sustained) system Credit growth to keep the Bubble from deflating. Moreover, the last thing China's incredibly inflated banking system needs is rapid growth in risky late-cycle lending. Determined to rein in non-bank "shadow" lending, Beijing faces no good alternatives. Granted, Chinese officials have the capacity to recapitalize their banking system down the road. And markets to this point have been comfortable with the implied Beijing guarantee of banking system liquidity and solvency.

There is, however, a very serious problem brewing: Systemic risk expands exponentially during the "Terminal Phase" of excess, as rising quantities of increasingly risky loans imperil the entire financial system. The past two years have seen extremely rapid (speculative "blow-off") Credit growth in two particularly problematic sectors: lending against equities and apartments - both at inflated prices. There will come a point when the market begins to question the validity of Beijing's banking system fortification. This type of waning confidence could initially manifest in the currency market.

November 7 - Reuters (Kevin Yao and Fang Cheng): "China's foreign exchange reserves fell more than expected to an 18-month low in October amid rising U.S. trade frictions, suggesting authorities may be slowly stepping up interventions to keep the yuan from breaking through a key support level. Reserves fell by $33.93 billion in October to $3.053 trillion… The drop was the biggest monthly decline since December 2016, and compared with a fall of $22.69 billion in September."

November 9 - Bloomberg: "Chinese President Xi Jinping's mantra that homes should be for living in is falling on deaf ears, with tens of millions of apartments and houses standing empty across the country. Soon-to-be-published research will show roughly 22% of China's urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes, he said. The nightmare scenario for policy makers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral."

Contemplating an economy with 50 million empty apartments entangles the mind. Granted, this is not a new issue. For years, a steady flow of workers vacating the countryside for booming urban centers has provided seemingly endless housing demand. But after a decade (or two) of cheap Credit and booming mortgage lending growth, China now confronts an inescapable comeuppance: a historic speculative Bubble with the prospect of declining prices, a speculative bust, massive oversupply and an acutely vulnerable financial sector.

The Shanghai Composited dropped 2.9% this week (down 21.4% y-t-d). China's CSI Financials index sank 4.3%, and Hong Kong's Hang Seng Financials fell 2.9%. China's renminbi dropped 0.95% this week vs. the dollar, increasing y-t-d losses to 6.47%. Copper sank 4.7%, increasing y-t-d losses to 19%. It's stunning how quickly crude and commodities indices erased what were until recently decent 2018 gains. Everywhere, it seems, Perceived Wealth is Vanishing into Thin Air. What is it that Warren Buffett says about when the tide goes out?

November 9 - Bloomberg (Saijel Kishan): "After beleaguered hedge fund managers had their worst month in seven years, many are bracing for an industry D-Day: Nov. 15. That's the deadline for investors to put managers on notice to get some -- or all -- of their money at year end. If history is any guide, the rush for the exits will be swift and accelerate. Clients have already pulled $11.1 billion even before funds fell into the red for the year. The last time the industry careened toward annual losses was in 2015…The fallout: clients withdrew $77.2 billion between the fourth quarter of that year and the first quarter of 2017 -- the biggest withdrawals since the global financial crisis. Investors can cash out of most hedge funds quarterly after giving 45 days notice."

"Hedge Funds Face Reckoning After Worse Month Since 2011," was the headline to the above Bloomberg article. Other notable headlines this week included: MarketWatch: "Hedge Funds Are on Pace for the Worst Annual Year Since Lehman Brothers." WSJ: "Quants are Facing a Crisis of Confidence;" "Quant King D.E. Shaw Finds Stock-Picking Can Be Difficult;" and "Tech Swoon Stings Hedge Funds." Also from Bloomberg: "Hedge Fund 'Hotels' Burned Managers Who Sought Refuge in October." And from the FT: "Hedge Funds Overly Optimistic on Risk, SocGen Finds."

The odds of de-risking/deleveraging dynamics attaining destabilizing momentum are mounting. Many hedge funds now have losses for the year, which forces managers to take down both risk and leverage in anticipation of year-end outflows. I believe deleveraging is now having a growing impact on marketplace liquidity around the world - and across asset classes. Yields are rising and spreads are widening throughout global fixed-income. Unstable equities markets around the globe are indicating a fragile liquidity backdrop. And this week's $2.68 (4.3%) drop in WTI has all the appearances of a major leveraged speculating community panic liquidation (portending challenges for the - to this point - resilient junk bond market).

Bloomberg this week posed a most-pertinent question: "When will funding squeezes impact the Fed?" The market continues to focus on building rate pressures throughout the money markets, with added concern now that year-end funding issues are coming to the fore. The system is, after all, in its first experimental unwind (QT or "quantitative tightening") of some of the Fed's QE holdings. Market analysis is only further challenged by the enormous issuance of T-bills necessary to fund ballooning fiscal deficits. Three-month LIBOR added another two basis points this week to a decade high 2.61%. The effective Fed Funds rate (2.20%) remains stubbornly near the top of the Fed's target range (2-2.25%). There are also hints of waning liquidity in the mortgage marketplace. Furthermore, ebbing foreign demand at Treasury auctions is a rising concern.

At this point, conventional analysis has yet to factor in the liquidity impact from speculative deleveraging - in terms of money market rates, fixed-income yields and the risk markets more generally. The degree to which speculative leverage has accumulated over this long cycle is The Momentous Unknowable. Indeed, there's a portentous lack of transparency for something of such vital importance. For the most part, the contemporary realm of speculative leveraging operates outside of traditional banking. As such, it was just too convenient for the Bernanke Fed and global central bankers to ignore this issue as they collapsed borrowing costs, flooded the world with liquidity and committed to market liquidity backstops.

At this point, I seriously doubt the Fed has a solid grasp of the (direct and indirect) sources of the Trillions of global liquidity that have flooded into U.S. securities and asset markets over the past decade. I take them at their word that they don't see the degree of leverage that would typically indicate a Bubble. Yet this has been the most atypical of global Bubbles. I am not convinced the Fed knows where to look for the leverage most germane to today's global Bubble. And, I'm compelled to add, the whole world seems oblivious. Speculative deleveraging is not on the Fed's radar, and this is a problem for the markets.