The threat of nuclear crisis with North Korea. Two destructive hurricanes. Puerto Rico devastated and about out of money. The start of a major comprehensive tax reform effort, along with general political mayhem in Washington. The worst mass shooting in U.S. In the midst of it all, the President is apparently about to make a potentially momentous decision: A Fed chair will be appointed with a new four-year term.

As has become the norm, markets are happy-go-lucky (at almost daily record highs). How could anything possibly rock the boat? Outside of the financial media, a change of the guard at the Fed is hardly newsworthy. It’s an interesting narrative leading up to the President’s decision. Of course, there’s the typical “hawk” vs.

“dove” framework. The Wall Street Journal had an insightful op-ed: “Donald Trump’s Fed Choice: Continuity or Disruption.” And there was Friday’s Krugman piece in the New York Times: “Will Trump Trumpify the Fed?” – that I will return to.

I am working to prepare myself for the President’s decision. When it comes to the Fed, I have been consistently disappointed over the years. At every turn. Trumpeting the risk of deflation, the Greenspan Fed in the early-nineties took to interest-rate and yield curve manipulation as primary reflationary policy measures. Greenspan recognized how the clever exploitation of contemporary market-based finance yielded the Federal Reserve history’s most potent monetary policy transfer mechanism. Monkeying with the markets is always a slippery slope.

And generations ago it was appreciated that the greatest risk associated with discretionary policymaking was that one mistake invariably leads to another (and another and). What began in 1987 with post-crash assurances of ample liquidity for the stock market – and then a few years later a surreptitious bank bailout (after late-eighties “decade of greed” excess) – evolved into a cycle of historic booms and busts. Ever more experimental reflationary measures were the inevitable responses. Commodities Watch: The Goldman Sachs Commodities Index declined 1.9% (down 1.7% y-t-d). Spot Gold slipped 0.3% to $1,277 (up 10.8%).

Silver gained 0.7% to $16.79 (up 5.1%). Crude dropped $2.38 to $49.29 (down 8%).

Gasoline fell 2.0% (down 7%), and Natural Gas sank 4.8% (down 23%). Copper jumped 2.5% (up 21%). Wheat fell 1.1% (up 9%). Corn dropped 1.5% (down 1%). Trump Administration Watch: October 1 – Wall Street Journal (Felicia Schwartz): “President Donald Trump said he didn’t think it was worth pursuing negotiations with North Korean leader Kim Jong Un, a day after his secretary of state revealed the U.S. Was in direct contact with Pyongyang.

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‘I told Rex Tillerson, our wonderful Secretary of State, that he is wasting his time trying to negotiate with Little Rocket Man,’ Mr. Trump said on Twitter ‘Save your energy Rex, we’ll do what has to be done!’” October 5 – Bloomberg (Erik Wasson): “House and Senate Republicans took their first concrete steps toward enacting a major U.S. Tax cut by advancing budget resolutions for fiscal 2018 — and it only gets harder from here. ‘It’s uphill, there’s no doubt about that,’ Senator Orrin Hatch of Utah, chairman of the tax-writing Finance Committee, told reporters Republicans are arguing over the size of proposed tax cuts, whether those cuts should add to the federal deficit, and which tax breaks to eliminate — in particular the deduction for state and local taxes. Lawmakers say there will be more fights ahead on other tax breaks for individuals and businesses as the GOP tries to reach its longtime tax-cut goals.

‘I think every one of these is going to be hard,’ said Senator John Thune of South Dakota, a member of Republican leadership and the Finance Committee.” October 4 – Reuters (David Morgan and Susan Cornwell): “The U.S. Budget deficit is proving to be a major obstacle to the tax reform plan being offered by President Donald Trump and top congressional Republicans, with one leading Senate hawk saying a week after the plan was introduced that any enlarging of the fiscal gap could kill his support. From proposed infrastructure enhancements to a military build-up, the deficit long ago put the brakes on major new federal spending programs; now Trump’s tax-cut proposal is threatened.

‘It looks to me like the administration’s already running for the hills. It looks to me like some of the tax-writing chairmen are already running for the hills I’m disheartened by the lack of intestinal fortitude I’m seeing,’ Sen. Bob Corker said.

The main problem is that the federal government is swimming in red ink with an annual deficit of $550 billion and a national debt — the accumulation of past deficits and interest due to lenders to the U.S. Treasury — exceeding $20 trillion.” October 4 – The Hill (Scott Wong and Naomi Jagoda): “Republicans are feeling antsy over a key provision in their tax plan that could put some of the party’s most vulnerable members in the House in deeper jeopardy. The GOP tax plan would raise $1.3 trillion over the next decade by eliminating a deduction for state and local taxes. The provision would help Republicans pay for lower rates, but could hit people hard in high-tax states such as New York, New Jersey and California.

In the House, Republicans in swing districts disproportionately represent constituencies where the tax deduction is important, creating an immediate campaign ad for Democrats. A few Republicans are already warning that they’ll oppose their party’s tax overhaul if the deduction is a part of the plan.” October 3 – CNBC (Ben White): “Tax reform, we have a problem. President Donald Trump and the Republican Congress are betting their 2018 electoral fortunes on getting a big tax bill signed into law by the end of the year.

Without it, the GOP will be zero-for-two on big-ticket items following the Obamacare repeal failure. But significant problems are already emerging that could turn their hopes into disaster — or at least into a much less ambitious, temporary tax cut bill. The problems begin with Senate Republicans, who also torched Obamacare repeal. Last week, Sen. Bob Corker, the Tennessee Republican now unchained from political considerations after announcing he won’t run again, said he would not vote for a bill that significantly adds to the deficit. ‘With realistic growth projections, it cannot produce a deficit’ Corker said. ‘There is no way in hell I’m voting for it.’ That ‘realistic growth projections’ line is key.” October 2 – CNBC (Jeff Cox): “Profits that companies are holding overseas would be brought back home at a tax rate that looks to be around 10%, according to current White House estimates.

Gary Cohn said the tax reform plan the administration supports seeks to bring back what could be $3 trillion in offshore wealth, but at a reasonable rate. ‘We are not giving companies the choice. They are going to pay the rate if they have the money overseas,’ Cohn said ‘That’s how we catch up from the worldwide system to the territorial system.’” China Bubble Watch: October 3 – Financial Times (Lucy Hornby): “China’s Communist party is making clear that it expects to dictate business decisions — not only at state-owned enterprises, but also at private companies and joint ventures with foreign partners. Under President Xi Jinping, the party has become more assertive, reclaiming functions that the civil government and industrial groups carved out during decades of liberalisation. Beijing has largely abandoned a list of promised economic liberalisation issued four years ago, opting instead for greater control by the party and state over the economy and civil society.

For businesses, that control takes the form of party cells, long a feature of SOEs but increasingly a part of corporate life at private companies and foreign joint ventures. In the past week, the party has moved to define its role in business. A government statement laid out Beijing’s definition of ‘entrepreneurship’, saying it involves patriotism and professionalism, followed by observing discipline, obeying laws, innovation and serving society.” October 1 – Bloomberg: “China’s official factory gauge rose to a five-year high, signaling that efforts to clean up the financial sector and the environment aren’t damping economic growth yet. The manufacturing purchasing managers index rose to 52.4 in September, compared with a projected 51.6 and 51.7 in August. The non-manufacturing PMI stood at 55.4 compared with 53.4 a month earlier.” October 1 – Financial Times (Xinning Liu and Gabriel Wildau): “Chinese banking regulators have told lenders to crack down on the use of consumer loans to finance home purchases, the latest effort to cool down the overheated property market and rein in financial risk.

In principle, Chinese banks enforce a stringent minimum downpayment of 20% on first mortgages. For second homes, the requirement is about 60% in big cities.

But this can, in effect, drop to zero if homebuyers use other sources of credit to finance the downpayment. Chinese lenders issued a net Rmb1.28tn ($192bn) in short-term household loans — the category targeted by the latest crackdown — in the first eight months of this year, up from Rmb651bn for all of 2016” October 2 – Wall Street Journal (Nathaniel Taplin): “It’s not easy being an entrepreneur in China. A high-level document published last week by China’s cabinet emphasized that entrepreneurs are important contributors to growth—but also that they need to be more patriotic and approach their role with the mind-set of serving society. Little wonder private investment has been weak for years. This weekend’s move by China’s central bank is unlikely to do much to lift the dark mood of China’s private sector. That’s especially given the clear tilt of China’s ‘reform’ agenda back toward the state under President Xi Jinping.” October 1 – Bloomberg: “China’s central bank said it will reduce the amount of cash lenders must hold as reserves from next year, with the size of the cut linked to the flow of funding to parts of the economy where credit is scarce.

The targeted measures apply to all major banks, 90% of city commercial banks, and 95% of rural commercial lenders, the People’s Bank of China said Cuts will range from 0.5 percentage point to 1.5 percentage point depending on how much business banks do with small enterprises, agricultural borrowers and startups. Foreign banks will also be eligible for the cut should they meet the requirements.” Central Banker Watch: October 4 – Financial Times (Claire Jones): “The European Central Bank’s policymakers are keen to press ahead with plans to end their bond-buying spree next year — despite some reservations on wage inflation and the strength of the euro.

Accounts of the bank’s September vote suggest members of its governing council were increasingly confident that the region’s economic recovery would last. Market developments were favourable, while there were ‘nascent’ signs of reflationary forces.

‘A view was put forward that conditions were increasingly falling into place that would allow the intensity of monetary policy accommodation to be adapted and would provide an opportunity to scale back the Eurosystem’s net asset purchases,’ the accounts read. The ECB is widely expected to announce that it will wind down QE from January 2018 at its October 26 vote.” October 3 – Financial Times (Adam Samson): “As central banks begin shrinking their balance sheets, they risk triggering another financial crisis, something that may be sharpened by the shift away from active investing, JPMorgan’s top quant strategist has warned. October 2 – Reuters (Lucia Mutikani): “A measure of U.S. Manufacturing activity surged to a near 13-1/2-year high in September as disruptions to the supply chains caused by Hurricanes Harvey and Irma resulted in factories taking longer to deliver goods and boosted raw material prices.

Still, details of the Institute for Supply Management’s (ISM) survey underscored the economy’s underlying momentum, with factories reporting stronger order growth last month. A measure of factory employment hit its highest level since 2011.” October 2 – Reuters (Richard Leong): “The U.S. Economy is on track to grow at a 2.7% annualized pace in the third quarter, based on the stronger-than-forecast rise on construction spending in August and a surprise acceleration in factory activity in September, the Atlanta Federal Reserve’s GDP Now forecast model showed” October 3 – Reuters (Nick Carey): “Major automakers posted higher U.S. New vehicle sales in September as consumers in hurricane-hit parts of the country replaced flood-damaged cars, extending a rally in their shares that began when Hurricane Harvey hit southeast Texas in late August.

Analysts and industry consultants had predicted hurricanes Harvey and Irma would provide automakers with their first monthly gains in 2017. Sales had been weak after a strong run since 2010 that culminated in record sales of 17.55 million units in 2016 The seasonally adjusted annualized rate of U.S.

Car and light truck sales in September rose to 18.57 million units from 17.72 million units a year earlier” October 3 – Wall Street Journal (Laura Kusisto): “A chill that started in the New York and San Francisco rental-apartment markets last year is spreading to less expensive cities. Several metros that enjoyed strong rent growth last year dropped off sharply in the third quarter of 2017. Dallas posted annual rent growth of 2.8% in the third quarter, down from 5% in the same quarter a year earlier In the urban core rent growth was essentially flat. Likewise, rents in Charlotte, N.C., grew just 2.5% year-over-year in the third quarter, down from 4.2% in the same quarter a year earlier. Higher-flying markets slowed as well.” October 2 – CNBC (Oshrat Carmiel): “Manhattan condo buyers who rent out their apartments are getting little more yield than they would with government debt. Newly purchased condos that were listed for lease in the second quarter brought their owners a median return of 2.5%, according to StreetEasy. It’s been stuck at that level since the end of last year, the lowest in data going back to 2010.

The median yield on relatively risk-free 10-year Treasury notes was 2.25% in the second quarter. ‘This is the lowest point we’ve seen in history,’ Grant Long, a senior economist at StreetEasy, said ‘It’s a steady downward trend.’” Europe Watch: October 4 – Bloomberg (Angus Berwick and Sonya Dowsett): “Catalonia will move on Monday to declare independence from Spain after holding a banned referendum, pushing the European Union nation toward a rupture that threatens the foundations of its young democracy. Catalan President Carles Puigdemont said he favored mediation to find a way out of the crisis but that Spain’s central government had rejected this. Prime Minister Mariano Rajoy’s government responded by calling on Catalonia to “return to the path of law” first before any negotiations.” October 1 – Financial Times (Tony Barber): “After Catalonia’s chaotic, disputed referendum on independence, Mariano Rajoy, Spain’s prime minister, will have to display political skills of the highest order. Sunday’s illegal vote has drastically polarised Catalonian society.

It has fuelled tensions between the region’s government and the authorities in Madrid to an intensity unseen since Spain’s return to democracy in the late 1970s. Mr Rajoy faces an extraordinarily difficult task. He is adamant that it is his government’s fundamental duty to uphold the law and preserve the integrity of the Spanish state.” Brexit Watch: October 5 – Bloomberg (Tim Ross and Kitty Donaldson): “U.K. Prime Minister Theresa May is losing the confidence of her colleagues and should consider stepping down, a former minister suggested, after a key speech aimed at revitalizing her leadership descended into chaos.

Conservative lawmaker Ed Vaizey is the first member of Parliament since the speech to publicly air concerns about May continuing as leader, adding that he believed many of his colleagues feel the same. Vaizey was a culture minister under May’s predecessor and left when David Cameron resigned. If more Tories join him on the record in asking her to go, May’s position could become untenable.” Japan Watch: October 1 – Bloomberg (Isabel Reynolds and Maiko Takahashi): “Support for Japanese Prime Minister Shinzo Abe fell in two polls, three weeks before a general election where Tokyo Governor Yuriko Koike’s new Party of Hope threatens to eat into his majority. The premier’s approval rate dropped below his disapproval rate in polls Almost 46% of respondents to the Kyodo survey said they saw Abe as an appropriate person to be prime minister, compared with 33% who chose Koike” October 1 – Bloomberg (Toru Fujioka): “Confidence among Japan’s big manufacturers has improved to the highest level in a decade Sentiment among large manufacturers rose to 22 from 17 three months ago, the highest level since September 2007, (estimate 18), according to the quarterly Tankan survey” Emerging Market Watch. October 3 – Wall Street Journal (Georgi Kantchev): “The amount of money flowing into emerging markets is set to top $1 trillion in 2017, the biggest flow of funds in three years Nonresident capital flows to emerging markets are likely to rise to $1.1 trillion in 2017 and edge up to $1.2 trillion in 2018, according to the Institute of International Finance Geopolitical tensions could escalate, while central banks in the developed world might move faster than expected when tightening the monetary policies that have damped returns in home markets.

Investors could also be put off emerging markets if the dollar continues its recent upswing or if President Donald Trump follows through on plans to implement protectionist policies. For now, though, money is continuing to move into emerging markets.” October 3 – Wall Street Journal (Peter Grant): “Investors are showing more interest in commercial real estate in Asia, South America and other emerging markets, where growth trends and the lure of outsize returns overshadow the additional political and financial risks these regions can pose. From 2012 to 2016, investors mostly were fleeing markets like Brazil, Russia and India as those countries were hit by political turmoil, weak growth and shaky values. But in the last 18 months, some of the biggest names in real-estate investing have become more bullish on emerging markets as growth has picked up and some governments implement reforms.” Leveraged Speculator Watch: October 3 – Financial Times (Lindsay Fortado): “Private equity and hedge fund firms are lending to companies at the highest rate ever, driving up competition in the sector and forcing funds to look outside the US for more opportunities. Private credit, which has sprouted while post-crisis regulation curtailed the amount that banks were willing to lend, is growing at a rate not seen since the hedge fund industry boom in the 1990s. Private credit funds managed about $600bn at the end of last year, according to Preqin. That figure could grow to $1tn by 2020, according to two industry lobby groups” Geopolitical Watch: September 30 – Reuters (Dirimcan Barut): “Turkey’s President Tayyip Erdogan said Iraqi Kurdish authorities would pay the price for an independence referendum which was widely opposed by foreign powers.

Iraq’s Kurds overwhelmingly backed independence in Monday’s referendum, defying neighboring countries which fear the vote could fuel Kurdish separatism within their own borders and lead to fresh conflict. ‘They are not forming an independent state, they are opening a wound in the region to twist the knife in’ Erdogan told members of his ruling AK Party” 2018-09-18T15:07:34+00:00.