Sunday, December 14, 2014

09/05/2014 Do Whatever it Takes to Shock and Awe *

I’m not really that old. And I don’t have to think back all that many years to recall when “Fed watchers” would monitor every move of our central bank’s “open-market operations” in hope of discerning subtle changes in monetary policy. Things changed profoundly during the nineties, as a long tradition of conservative central banking principles gave way to “activist” monetary management.

Thursday provided yet another chapter in the fateful evolution of contemporary central banking. In what I’ll call “Do Whatever it Takes to Shock and Awe,” Mario Draghi straggled deeper into the uncharted territory of negative rates, while also announcing a plan to aggressively expand the European Central Bank’s (ECB) balance sheet (create “money”) through the purchase of asset-backed securities (ABS) and covered loans. European stocks and bonds surged on the surprise announcement, as the euro currency was taken out to the woodshed.

Central banks now freely peg short-term interest rates (near zero!), manipulate market yields, monetize debt, target/spur higher stock and risk asset prices and essentially promise continuous and liquid securities markets. Importantly, central bankers have been conditioned to absolutely avoid disappointing the markets. Indeed, heads of central banks have one-upped corporate America in striving to “beat expectations.” There is no longer anything cautious or subtle with respect to monetary management. The goal is precisely the opposite. One might these days contemplate why it took central banking a few hundred years to figure this all out – to appreciate the myriad benefits of zero rates, debt monetization and perpetual bull markets.

It seems completely lost on both today’s policymakers and pundits that throughout history global finance was for the most part a self-correcting system of interconnected domestic monetary systems. The inflation of money and Credit was constrained by the likes of gold/precious metals standards, global currency regimes (i.e. Bretton Woods), bank reserve and capital requirements and, fundamentally, by disciplined behavior from bankers, government officials and market participants more generally. The gold standard, in particular, was successful in large part because of the strong commitment nations (policymakers and economic agents) had in preserving the system. Importantly, such a system was self-adjusting and self-correcting. Participants understood that there would be predictable policy countermeasures in the event the system began to move in the direction of excess, with their actions working to counter fledgling excesses and imbalances in finance as well as the real economy.

Things changed profoundly throughout the nineties with the explosion of market-based “money” and Credit. It amounted to nothing less than the final breakdown of any semblance of restrained global finance. With the proliferation of GSE and “Wall Street” finance, there were no longer constraints on the quantity or quality of U.S. “money” and Credit, constituents of the world’s “reserve currency.” America’s feeble savings didn’t matter. Troubling “twin deficits” (fiscal and trade) no longer mattered. With the U.S. able to run perpetual trade deficits, the economic structure could shift to consumption and services and away from industry and production.

Unfettered finance became the U.S.’s leading export to the world – year in and year out. Whether in the real economy, throughout Credit systems or for the financial markets, unconstrained global finance profoundly altered system dynamics: the forces of self-adjustment and correction were relegated to financial and economic history.

Heightened monetary instability and resulting serial Bubbles were readily on display all throughout the nineties. Fatefully, central bankers turned only more “activist.” Instead of recognizing and countering the newfound propensity for system Credit and speculative excess, the Greenspan Fed adopted progressively more interventionist policies (market interventions, manipulations and liquidity backstops).

I began warning/chronicling the mortgage finance Bubble in 2002. It was clear to me at that point that the Fed had learned nothing from its failed policies (including the 1998 LTCM bailout) that had been instrumental in fueling the “tech” Bubble. Worse yet, Fed officials, Wall Street pundits and many economists were calling for only more aggressive market interventions and manipulations. Fed governor Bernanke was espousing absolutely radical measures – while the inflationist caucus had their sights on mortgage Credit as the monetary expedient capable of resuscitating financial and economic booms. There was absolutely no doubt they were setting a disastrous course. It took six years.

In April 2009, I began warning/chronicling the “global government finance Bubble” – the “Granddaddy of all Bubbles.” It was (again) clear to me at that point that the Fed (and global central banks) had learned nothing from its failed policies that had been instrumental in fueling a much more systemic mortgage finance Bubble. Worse yet, Fed officials, Wall Street pundits and the economic community were calling for the most extreme monetary inflation, market interventions and manipulations imaginable. Having moved beyond mortgage Credit, the inflationists were determined to use government Credit to resuscitate general asset inflation (stocks, Treasuries, MBS, real estate, corporate Credit, etc.)

I didn’t anticipate an ECB determined to balloon its balance sheet with all kinds of securities. I didn’t anticipate that Fed holdings would inflate to $4.5 Trillion, nor did I imagine the BOJ willing to do open-ended QE to the tune of $700bn annually. I could not have predicted that post-crisis growth in the Chinese banks would exceed the total size of the U.S. banking system. I didn’t see the creation of Trillions of Chinese “shadow banking” assets. I would not have guessed that central bank international reserve holdings would surpass $12 Trillion by 2014 (almost doubling in six years).

I was, however, able to anticipate a very critical reality that remains fundamental to the ongoing global government finance Bubble: once the world’s central banks adopted unprecedented monetary inflation there would be no turning back. Target higher securities prices and then try to control runaway Bubble excess – in the face of ever-increasing global financial and economic fragility. Indeed, policymakers with their unlimited quantities of central bank Credit and government debt were playing with a much more combustible fire than what had previously culminated in “the worst financial crisis since the Great Depression.”

Traditional conservative central bank principles were fixated on price and financial stability. Foster a stable monetary (money and Credit) backdrop and leave the markets to market participants. Things have regressed to the point where unprecedented market intervention and monetary inflation are required to sustain runaway securities market speculative Bubbles around the globe. Conservatism in (rules-based) central banking was fundamental to avoiding big policy mistakes – as opposed to “activist” discretionary policymaking where policy errors inherently lead to only more catastrophic blunders.

There was never a chance inflationist policy doctrine would succeed. Policymaking today only exacerbates acute financial and economic instability. Central banks are stoking market excess with no hope for extricating themselves from unprecedented intervention and monetary inflation.

There are just so many flaws in conventional thinking. There is the myth that central bankers control some “price level” that they can dictate through policy measures. Yes, they do have the capacity for unfettered “money” creation, but this liquidity has disparate impacts on a multitude of prices. Today, the powerful inflationary bias in securities and asset prices ensures that central bank liquidity exacerbates speculative Bubbles while largely avoiding the real economy. In the face of historic financial excess and Bubbles, it has become impossible for economies to grow out of debt problems.

Draghi devised a clever scheme for buying asset-backed securities (No Germany, we’re not adopting QE financing of government deficits!) from the Eurozone banking system. But why would the banks then use this liquidity for risky lending in the stagnant European economy, when the ECB has made buying government bonds such an electrifying risk-free proposition? Securities markets are betting liquidity will continue to (over)flow into the markets. In Europe and around the world, central bank liquidity and market intervention policies have bolstered the case for financial speculation at the expense of real economy investment.

Unable to inflate a general price level and incapable of determining the effects of their liquidity-creating operations, central bank “money” at this point chiefly chases security market returns while stoking Bubbles. Whether it is the ECB, Fed or BOJ, throw liquidity into the system and it will avoid the disinflationary forces prevalent in real economies in favor of the highly inflationary impulses commanding incredibly speculative global securities markets.

Moreover, in today’s highly connected and unbalanced global system, “money” gravitating toward real business investment works to exacerbate overinvestment and overcapacity, especially in China and Asia. The upshot is only greater instability associated with extreme liquidity overabundance in a global system steeped in deteriorating economic profits and inflating financial and speculative returns. Meanwhile, monetary disorder continues a highly uneven distribution of wealth, within individual countries as well as globally. Remarkably, the policy response is only more vociferous “Do Whatever it Takes to Shock and Awe.”

“When and how does it all end,” is an obvious question. It’s impossible to know, although there is a list of potential catalysts: Crisis in China, geopolitical and a market accident seem to remain at the top of my list. Yet thus far heightened risk – certainly on economic and geopolitical fronts – have ensured “Whatever to Shock and Awe” – more QE from Kuroda, QE from Draghi and, apparently, zero for longer from Yellen.

September 5 – Wall Street Journal (Steven Russolillo): “Professional stock pickers have had a terrible 2014. With Labor Day in the rear view mirror and less than four months remaining in 2014, Goldman Sachs Group Inc. takes a moment to examine how fund managers have fared so far and evaluate the circumstances they face for the rest of the year. It isn’t a pretty picture, but Goldman says that may actually bode well for the market through the rest of the year. Only 23% of large-cap mutual fund managers have outperformed the S&P 500 this year, rivaling the worst performance in the past decade, according to David Kostin, chief U.S. equity strategist at Goldman… Other stock pickers are also struggling in the current environment. Fewer than 20% of large-cap growth and value managers have outperformed their respective Russell 1000 benchmarks, according to Goldman. Hedge funds have also woefully underperformed. The average hedge fund is up just 2% this year, according to industry tracker HFR, compared to about a 10% return, including dividends, for the S&P 500. ‘Choice of shorts and market timing are the clear sources of blame,’ Mr. Kostin said.”

How about the notion that today’s capricious global “activist” policymaking is a market accident in the making? It’s compelling. After all, below the surface of this irrepressible bull market are myriad unhealthy underpinnings. Why are stock pickers having such a miserable time of it? What’s behind the ongoing struggles in the hedge fund community? How can “money” flowing blindly into equity index ETFs just trounce most active managers – mutual funds and hedge funds alike? Because the markets are broken.

Central bank policies ensure that too much (and inflating quantities of) “money” chases too few securities. Zero rates and central bank liquidity backstops have ensured that way too much “money” is chasing too few risk (higher-yielding/returning) assets. Global financial speculation has become one colossal “crowded trade” of epic proportions. Never in history has so much “money” been dedicated to trend-following and performance-chasing speculation. Never in history have central bank measures had such a profound impact on market perceptions, trading dynamics and speculative flows. Arguably, securities prices have never been so detached from fundamental prospects. Never has policy created such uncertainty with respect to what the future holds for finance, the markets, real economies and “geopolitics” around the world. Such a backdrop foments extremely difficult market underpinnings, masked by market indexes rising effortlessly into record territory.

Markets so far this year have punished the Treasury bears. Those betting against what seemed at the beginning of the year to be ridiculously mispriced European periphery debt markets have been killed. The dollar bears have been hammered. The bludgeoned equities bears have been further bludgeoned. The last couple months have seen the emerging market bears taken out to the woodshed (Shanghai Composite up 13% since July 21st). In the face of fragile underpinnings, EM stocks, bonds and currencies have performed exceptionally well.

Throughout global markets, securities prices have tended to defy fundamental analysis. There has certainly been a proclivity for short covering/squeezes – and resulting market outperformance that has enticed flows from the vast global pool of trend-following/performance-chasing speculative finance. Securities prices have been overshooting globally, especially where managers were either short or underweight. This has led to poor performance for all varieties of long/short strategies and resulting outflows - which feeds a self-reinforcing dynamic of short covering (buying) of fundamentally suspect securities/markets along with the liquidation of positions in securities/markets generally viewed as relatively attractive.

This dynamic then intensifies the difficulty for the active-management “stock picker” community, much to the benefit of the burgeoning ETF complex and the bevy of “closet indexers.” It’s no coincidence that this “active manager trounced by index” dynamic occurs simultaneous with historic extremes in “market” bullishness. Indeed, “money” flowing freely into “the market” powers the indexes higher, as aggravated active managers are forced to throw in the towel (including covering shorts and unwinding hedges) and jump aboard the inflating indexes. Below the surface, the “crap” significantly outperforms, much to the benefit of the momentum speculator crowd - but at the expense of the lowly investor (and market stability). It’s all a recipe for quite a market speculative blow-off – similarities to 1999 but across virtually all asset classes all over the world (as opposed to chiefly the U.S. technology sector).

Hundreds of billions flowing into stock and corporate debt indexes is definitely a recipe for a market accident, especially when these flows are largely premised on the notion that stock prices (at least eventually) always go up and that central banks will continue to guarantee buoyant and liquid markets. Throw in a global speculator community that has surely been forced into aggressively long positioning, yet with one eye on hedging instruments and the other on the exits.

And I’d be remiss if I didn’t mention the risk in Draghi’s “Do Whatever it Takes to Shock and Awe.” When he uttered “Do Whatever it Takes, and believe me it will be enough…” back in 2012, this was a direct threat to the speculators that they had better cover their euro-related shorts and go long. This week’s ECB measures came with Spanish yields below 2.25% and Italian yields below 2.5%. They came in the midst of more than ample market liquidity, with European stock prices not far from record highs. For good reason, the markets took Draghi’s Shock and Awe as a direct attack on the euro currency. And in this age of leveraged “carry trades,” trend-following/performance chasing speculation and booming derivative trading, those seeking a weaker euro (European policymakers) should be careful what they wish for. Beggar thy neighbor took a giant leap this week – in the convenient guise of fighting “deflation.”

For the Week:

The S&P500 added 0.2% (up 8.6% y-t-d), and the Dow gained 0.2% (up 3.4%). The Utilities gained 0.8% (up 13.1%). The Banks added 0.4% (up 3.7%), while the Broker/Dealers slipped 0.1% (up 3.9%). Transports jumped 2.3% (up 16.2%). The S&P 400 Midcaps added 0.1% (up 7.3%), while the small cap Russell 2000 declined 0.4% (up 0.6%). The Nasdaq100 added 0.2% (up 13.9%), while the Morgan Stanley High Tech index dipped 0.1% (up 10.1%). The Semiconductors gained 0.9% (up 21.7%). The Biotechs gave back 1.4% (up 32.5%). With bullion falling $19, the HUI gold index was clobbered for 7.1% (up 15.4%).

One-month Treasury bill rates closed the week at two bps and three-month bills ended at three bps. Two-year government yields were up two bps to 0.51% (up 13bps y-t-d). Five-year T-note yields were seven bps higher to 1.69% (down 5bps). Ten-year Treasury yields jumped 12 bps to 2.46% (down 57bps). Long bond yields jumped 15 bps to 3.23% (down 74bps). Benchmark Fannie MBS yields gained eight bps to 3.16% (down 45bps). The spread between benchmark MBS and 10-year Treasury yields narrowed four to 70 bps. The implied yield on December 2015 eurodollar futures was unchanged at 0.995%. The two-year dollar swap spread declined one to 21 bps, and the 10-year swap spread was down three to 12 bps. Corporate bond spreads were mixed. An index of investment grade bond risk declined less than one to 56 bps. An index of junk bond risk rose three to 315 bps. An index of emerging market (EM) debt risk sank 10 to 271 bps.

Ten-year Portuguese yields sank 17 bps to 3.05% (down 307bps y-t-d). Italian 10-yr yields dropped 18 bps to a record low 2.25% (down 187bps). Spain's 10-year yields fell 19 bps to a record low 2.04% (down 211bps). German bund yields increased four bps to 0.93% (down 100bps). French yields were unchanged at a record low 1.26% (down 130bps). The French to German 10-year bond spread narrowed four to 33 bps. Greek 10-year yields sank 25 bps to 5.57% (down 285bps). U.K. 10-year gilt yields jumped 10 bps to 2.46% (down 56bps).

Japan's Nikkei equities index jumped 1.6% (down 3.8% y-t-d). Japanese 10-year "JGB" yields rose five bps to 0.54% (down 20bps). The German DAX equities index jumped 2.9% (up 2.0%). Spain's IBEX 35 equities index surged 3.9% (up 12.4%). Italy's FTSE MIB index advanced 4.6% (up 12.8%). Emerging equities were mostly higher. Brazil's Bovespa index fell 1.9% (up 17.8%). Mexico's Bolsa gained 1.3% (up 8.2%). South Korea's Kospi index fell 0.9% (up 1.9%). India’s bubbly Sensex equities index rose 1.5% to another all-time high (up 27.7%). China’s Shanghai Exchange surged 4.9% to a 15-month high (up 10.0%). Turkey's Borsa Istanbul National 100 index rose 2.3% (up 21.2%). Russia's MICEX equities index surged 5.9% (down 2.0%).

Debt issuance surged to the highest weekly total of 2014 ($62bn from Bloomberg). Investment-grade issuers included Wells Fargo $4.35bn, JPMorgan $3.0bn, Credit Suisse New York $3.0bn, Ford Motor Credit $2.4bn, Morgan Stanley $2.25bn, Bank of New York Mellon $2.0bn, Bank of America $2.0bn, Marathon Petroleum $1.95bn, American Honda Finance $1.5bn, Capital One $1.75bn, Simon Properties Group LP $1.3bn, Lowe's $1.25bn, Fifth Third Bank $850 million, Marsh & McLennan $800 million, Plains All American Pipeline $750 million, Florida Power & Light $500 million, Packaging Corp of America $400 million, Alleghany Corp $300 million, Camden Property Trust $250 million, American Airlines $215 million and Principal Life $250 million.

Junk funds saw outflows of $198 million (from Lipper). Junk issuers included T-Mobile USA $3.0bn, Frontier Communications $1.55bn, Linn Energy $1.85bn, Steel Dynamics $1.2bn, Clear Channel $950 million, Group 1 Auto $550 million, WPX Energy $500 million, HealthSouth $450 million, Cequel Communications $500 million, Gannett $325 million, Consolidated Communications $200 million and Summit Materials $115 million.

Convertible debt issuers included Electronics For Imaging $300 million, DepoMed $300 million, Clovis Oncology $250 million and Huron Consulting Group $225 million.

The long list of international dollar debt issuers included Bank of Tokyo-Mitsubishi $3.25bn, Ontario $2.0bn, Standard Charter $2.0bn, Indonesia $1.5bn, Bank of Nova Scotia $1.5bn, Asian Development Bank $1.35bn, National Bank Australia $1.25bn, Barclays $1.25bn, BNZ International Funding $1.25bn, Cemex $1.1bn, Lloyds Bank $1.0bn, Abbey National $1.0bn, Ultra Petroleum $850 million, Commonwealth Bank Australia $750 million, Korea Development Bank $750 million, Bank Nederlandse Gemeenten $500 million, Kommunivest $500 million, Inter-American Development Bank $500 million, Canada $250 million and National Savings Bank $250 million.

Freddie Mac 30-year fixed mortgage rates were unchanged at 4.10% (down 47bps y-o-y). Fifteen-year rates slipped a basis point to 3.24% (down 31bps). One-year ARM rates added one basis point to 2.40% (down 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.55% (down 31bps).

Federal Reserve Credit last week slipped $2.5bn to $4.374 TN. During the past year, Fed Credit inflated $766bn, or 21.2%. Fed Credit inflated $1.563 TN, or 56%, over the past 95 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.4bn last week to $3.339 TN. "Custody holdings" were down $15bn year-to-date, while posting a one-year increase of $59bn.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $830bn y-o-y, or 7.4%, to $12.007 TN. Over two years, reserves were $1.406 TN higher for 13% growth.

M2 (narrow) "money" supply rose $14.5bn to a record $11.472 TN. "Narrow money" expanded $697bn, or 6.5%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits gained $5.3bn, and Savings Deposits rose $10.5bn. Small Time Deposits were little changed. Retail Money Funds dipped $3.2bn.

Money market fund assets declined $8.7bn to $2.586 TN. Money Fund assets were down $132bn y-t-d and dropped $53bn from a year ago, or 2.0%.

Total Commercial Paper gained $7.8bn to a two-month high $1.048 TN. CP was up $1.9bn year-to-date, with a one-year gain of $33bn.

Currency Watch:

The U.S. dollar index jumped 1.2% to 83.74 (up 4.6% y-t-d). For the week on the upside, the Australian dollar increased 0.4% and the Mexican peso 0.4%. For the week on the downside, the British pound declined 1.6%, the Swedish krona 1.5%, the Swiss franc 1.4%, the euro 1.4%, the Norwegian krone 1.3%, the Danish krone 1.3%, the South Korean won 1.0%, the Japanese yen 1.0%, the Singapore dollar 0.4%, the New Zealand dollar 0.4%, the Brazilian real 0.3%, the South African rand 0.3% and the Taiwanese dollar 0.1%. The Canadian dollar was unchanged.

Commodities Watch:

The CRB index dropped 1.6% this week (up 2.8% y-t-d). The Goldman Sachs Commodities Index sank 1.7% (down 5.1%). Spot Gold fell 1.5% to $1,269 (up 5.2%). September Silver declined 1.7% to $19.156 (down 1%). October Crude sank $2.67 to $93.29 (down 5%). October Gasoline dropped 1.5% (down 7%), and October Natural Gas sank 6.7% (down 10%). September Copper increased 0.3% (down 7%). September Wheat fell 3.4% (down 12%). September Corn was down 3.5% (down 18%).

U.S. Fixed Income Bubble Watch:

September 4 – Bloomberg (Lisa Abramowicz): “Remember last year’s taper tantrum, when investors fled bonds in the face of less Federal Reserve stimulus? That now seems like a quaint exercise unlikely to be repeated anytime soon. Even though the U.S. central bank is winding down its debt buying, there’s a new gorilla in the room: the European Central Bank. President Mario Draghi is pumping more and more cash into the global bond market, taking the lead in a race to lower borrowing costs. The ECB said today it plans to buy securitized debt and covered bonds, and it surprised analysts by dropping all three of its main interest rates by 10 bps. ‘In the last several months, the European bond market has been a very dominant force on U.S. yields,’ said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott… As for which type of bond has benefited the most, he said, ‘the longer the better.’ Treasuries maturing in more than 15 years have returned 16.7% so far this year, the most for the period since 2011. That’s equal to about $166 billion worth of gains…”

September 5 – Bloomberg (Sridhar Natarajan): “Companies in the U.S. tapped the bond market by the most in at least six months with sales this week exceeding debt sold in all of August. Ford Motor… and… Frontier Communications… were among about 50 borrowers raising $62 billion this week… That’s the most since the week ending March 7 and exceeds the $51.9 billion sold last month… Bond sales are soaring borrowers as rush to lock in yields that have climbed from all-time lows reached last year… Primary markets started September off with a bang,’ Barclays Plc strategists led by Jeffrey Meli and Bradley Rogoff wrote… Issuance ‘surpassed even the lofty expectations built over the last few weeks.’”

September 4 – Bloomberg (Luca Casiraghi): “The leveraged loan market is becoming riskier in Europe as private-equity firms shun banks in favor of hedge funds and other institutional investors to finance buyouts. Of the seven junk loan deals totaling 2.6 billion euros ($3.5bn) issued last month, none featured portions where principal has to be paid down in installments, the type of senior debt usually sold to banks… Borrowers are also seeking to loosen investor protection, with so-called covenant-lite transactions surging to 6.4 billion euros this year from 3.75 billion euros in 2013… ‘Funds are asking for more paper and private-equity owners are taking the chance to structure riskier and more aggressive deals,’ said Paolo Malaguti, founder of Aston-Corp Analytics… ‘They are pushing for loans with fewer covenants and with higher leverage which often banks are reluctant to take on.’ The move toward riskier structures is bringing Europe closer to the U.S. market, where bank participation in leveraged lending is typically limited to revolving credit facilities and small portions of loans.”

September 3 – Bloomberg (Jesse Hamilton): “U.S. regulators adopted requirements for the level of high-quality, liquid assets banks must stockpile to survive a 30-day liquidity drought, a major step in efforts to prevent a repeat of the 2008 credit crisis. Big banks are said by the Federal Reserve to be about $100 billion short of $2.5 trillion in easy-to-sell assets they need to meet the standards approved today by the Fed and Office of the Comptroller of the Currency, and set for a Federal Deposit Insurance Corp. vote. Municipal bonds are excluded from the category of assets banks can use to reach the target. The agencies also will propose a rule on collateral for swaps traded outside of clearinghouses and wrap up rules on how much loss-absorbing capital must be held against total assets.”

September 3 – Bloomberg (Steven Church): “Detroit’s proposal to exit its record municipal bankruptcy by cutting more than $7 billion in debt will cause ‘serious mayhem’ to the law, an attorney for plan opponents told a judge. Marc Kieselstein, an attorney for bond insurer Syncora Guarantee Inc., outlined his client’s case against the city’s proposal on the second day of a trial in Detroit federal court. The bond insurer argues that the plan illegally proposes paying retired city workers much more on their claims than investors who hold more than $1.4 billion in pension-related debt.”

Federal Reserve Watch:

September 5 – Bloomberg (Steve Matthews and Jason Philyaw): “Federal Reserve Bank of Dallas President Richard Fisher said a decline in interest rates on riskier credit suggests U.S. markets have become overheated. ‘The dashboard shows that we have overshot the mark,’ Fisher said… ‘I have been involved with the credit markets since 1975. I have never seen such ebullient credit markets… Interest rates on the lowest-quality credits -- on junk -- are historically low, as are the spreads they are priced at above the current historically low nominal rates for investment- grade credits,’ Fisher said… ‘Cheap and abundant monetary fuel’ has allowed companies to improve their finances and become ‘rich and muscular,’ Fisher said.”

U.S. Bubble Watch:

September 4 – Bloomberg (Victoria Stilwell and Craig Torres): “Only the richest Americans saw their incomes benefit from the economic recovery during 2010-2013, as earnings stagnated or fell for all others, a report from the Federal Reserve showed… Median income adjusted for inflation rose 2% to $223,200 for the wealthiest 10% of households from 2010 to 2013… The bottom 60% saw the biggest declines.”

September 3 – CNBC (Jeff Cox): “Professional investors haven't had this little fear about stocks since Ronald Reagan was president. It was the same year Michael Jackson told us in a song he was "Bad." The New York Giants won the Super Bowl. And oh yeah ... by the way ... the stock market crashed. As gauged by the weekly Investors Intelligence report, bearishness among market newsletter writers has fallen to 13.3 percent, a level it has not seen since 1987 as the market continues to set new highs despite a seemingly endless call for a long-overdue correction. Billionaire and real estate magnate Sam Zell was the latest high-profile voice to warn about valuation, telling CNBC… that ‘it's very likely something has to give’ at a time when many companies are suffering from lack of demand even as the market surges to record levels.”

September 5 – Bloomberg (Leslie Picker): “Alibaba Group Holding Ltd., the e-commerce company whose fortunes surged along with China’s economy, is seeking a valuation of as much as $162.7 billion, larger than 95% of the Standard & Poor’s 500 Index, as it enters the final stages of an initial public offering. The company may raise as much as $21.1 billion…, the biggest U.S. IPO ever. At the high end of the proposed price range, Alibaba would be the third most valuable Internet company traded in the U.S. after Google Inc. and Facebook Inc.”

September 2 – Bloomberg (Christopher Palmeri): “The Revel Casino Hotel was envisioned as a playground for Wall Streeters who hated flying to Las Vegas. Instead, it’s become a money pit for the banks and money managers who spearheaded the New Jersey project, and the losses will keep coming even after closing today. The Atlantic City resort, built at a cost of $2.4 billion, ceased operations after two bankruptcies and a 10-month search for a buyer. Barring a sale, the new owners may be Wells Fargo & Co. and JPMorgan Chase & Co., which provided $125 million in court-approved funding… The resort fell prey to poor timing, bad design and a misreading of the local market. The Revel saga shows what can go wrong when bankers stray from what they know, according to Charles Geisst, a professor of finance at Manhattan College… and author of the book ‘Wall Street: A History.’”

Central Bank Watch:

September 5 – Financial Times (Claire Jones and Christopher Thompson): “It has been more than a year in the making. But Mario Draghi on Thursday finally unveiled the European Central Bank’s plan to revive the eurozone’s dormant securitisation market, which the central bank hopes can help to turn around the region’s economic fortunes. The ECB will start to buy packages of sliced and diced loans, known as asset-backed securities (ABS), in big quantities from next month. The move caps a remarkable comeback for the practice of reprocessing bundles of loans, the fruits of which were once labelled ‘toxic sludge’ for their role in spreading problems in one corner of the US mortgage market throughout the financial system.”

September 4 – Bloomberg (Simon Kennedy): “Mario Draghi signaled at least 700 billion euros ($906bn) of fresh aid for his moribund economy and left a fight with Germany over sovereign-bond purchases for another day. Pledging to ‘significantly steer’ the European Central Bank’s balance sheet back toward the 2.7 trillion euros of early 2012 from 2 trillion euros now, the ECB president today announced a final round of interest-rate cuts and a plan to buy privately owned securities. His mission: to revive inflation in the 18-nation euro area. Fully-fledged quantitative easing as deployed in the U.S. and Japan wasn’t enacted amid a split on the 24-member Governing Council, with Bundesbank President Jens Weidmann opposing the new stimulus and others seeking more. The latest round of measures pushed the euro below $1.30 for the first time since July 2013 and sent European bond yields negative.”

September 4 – Bloomberg (Jeff Black and Catherine Bosley): “The European Central Bank cut interest rates and will start buying assets, boosting the flow of funding for the euro-area economy while stopping short of broad-based quantitative easing. ECB President Mario Draghi’s plan to buy asset-backed securities and covered bonds pushed the euro below $1.30 for the first time since July 2013 as he said the inflation outlook had worsened. Germany’s Jens Weidmann opposed the rate cut and ABS plan… The ECB ‘will purchase a broad portfolio of simple and transparent securities,’ Draghi said… ‘Some of our council were in favor of doing more than presented.’”

September 4 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan maintained record stimulus to keep stoking inflation and boost economic momentum that’s been sapped by a higher sales tax. The central bank kept its pledge to increase the monetary base at an annual pace of 60 trillion yen to 70 trillion yen ($667bn)… Governor Haruhiko Kuroda said a moderate recovery would continue and indicated a weaker yen would support an economy that faces headwinds after the levy hike triggered the steepest contraction since the 2011 earthquake… ‘Kuroda indicated he wants the yen to weaken further as that will help the economy and the BOJ’s inflation goal,’ said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA in Tokyo. ‘He really wants the government to go ahead with the planned sales-tax hike.’”

Europe Watch:

September 5 – Bloomberg (Catherine Bosley): “The euro-area’s economic recovery ground to a halt in the second quarter as investment slid for the first time since the start of 2013. Gross domestic product in the three months through June was unchanged from the first quarter, when it increased 0.2%...”

September 1 – Bloomberg (Stefan Riecher and Scott Hamilton): “U.K. factory growth slowed more than forecast last month and Italian manufacturing shrank as Europe suffered the fallout from weakening demand and mounting geopolitical risks. Markit Economics said its euro-area gauge fell more than initially estimated last month, with the index for Italy unexpectedly dropping below 50, indicating the first contraction in 14 months… There was also a slowdown in China’s factories last month, a separate report showed. Sentiment across Europe has been hit by the conflict between Ukraine and Russia, undermining spending and company investment and keeping central banks on alert about risks to their economies.”

Germany Watch:

August 31 – Reuters (Stephen Brown): “A German news magazine reported on Sunday that Chancellor Angela Merkel is unhappy with European Central Bank chief Mario Draghi for apparently proposing a greater emphasis on fiscal stimulus over austerity in order to boost growth in Europe. Der Spiegel reported, without citing any sources, that she and Finance Minister Wolfgang Schaeuble had both called the ECB president last week to take him to task about comments he made in a speech at Jackson Hole… Schaeuble said last week that he believed Draghi's comments had been ‘over-interpreted’. ‘The ECB has a clear mandate to ensure currency stability. It doesn't have a mandate to finance states… All those who can’t manage within their budget want to cross that boundary. They would like to get (financing) from the ECB.’”

September 4 – Bloomberg (Stefan Riecher and Jana Randow): “Bundesbank President Jens Weidmann opposed the European Central Bank’s policy measures today, according to two euro-region central bank officials. Weidmann dissented both on the ECB’s interest-rate cuts and its purchase program for asset-backed securities, according to the two officials, who asked not to be identified because the discussions are private… ECB President Mario Draghi said that he secured a ‘comfortable majority’ in favor of action…”

September 4 – Bloomberg (Rainer Buergin): “German lawmaker Ralph Brinkhaus, finance spokesman in parliament of Chancellor Angela Merkel’s Christian Democratic Union, says he takes a ‘critical view’ of today’s rate cut decision by the European Central Bank. ‘The ECB must watch out that its decisions aren’t increasingly seen as action for action’s sake,” Brinkhaus says… ‘Monetary policy is no substitute for structural reforms… It’s mainly the job of governments, not the ECB, to restore confidence as a basis for lending to medium-sized companies…”

September 3 – Bloomberg (Arne Delfs): “German position on joint bond sales by euro-region governments hasn’t changed, Chancellor Angela Merkel’s spokesman Steffen Seibert says… Seibert also says: ‘The key to overcoming the challenges the euro region faces in a lasting way is a mix of sustainable public finances, strengthened competitiveness, growth and employment, and you achieve that with structural reforms.’”

September 5 – Financial Times (Stefan Wagstyl): “German banks dismissed the European Central Bank’s surprise interest rate cut and asset-purchase programme on Thursday as largely useless for achieving its stated aim of reviving stagnant economic growth. German savers were also left fuming at the likely reduction in the returns on their deposits as well as the collateral damage their accounts suffered from the euro’s sharp fall after the ECB decision. Liane Buchholz, managing director of the German Association of Public Banks…, said the rate cut was akin to offering the euro ‘in a late summer sale’. She added: ‘Even this rate cut to 0.05% will not lead to the expected boost to lending to small and medium-sized companies. Even the lowest interest rate would not increase the risk appetite of banks in the eurozone. Here, the ECB has clearly reached the limit with stimulatory effects of economic policy.’”

Global Bubble Watch:

September 4 – MarketNews International: “International Monetary Fund Managing Director Christine Lagarde voiced support Thursday for the recent rate moves and asset purchase plans of the European Central Bank. ‘We strongly welcome the measures taken by the ECB, which will help to counteract the dangers posed by an extended period of low inflation,’ Lagarde said…”

September 5 – Financial Times (Josh Noble): “Global investors are lending money to Chinese property developers in record amounts this year, in spite of a deteriorating housing market and warnings from rating agencies over the state of the sector. Offshore bond issuance from mainland property companies is on track for a record year, with $18bn of debt sold year to date, according to Dealogic – fast approaching the $19.5bn total for all of 2013… The rise in offshore borrowing has coincided with tighter credit conditions within China that have forced developers to look overseas for funding… In spite of worsening market conditions, global investors seeking yield in an era of record low interest rates have shown willingness to step into the breach. Developers have borrowed a total of $27.6bn via offshore bonds and syndicated loans so far this year, according to Dealogic, up from $26.9bn over the same period last year.”

September 5 – Bloomberg (Lucy Meakin and Eshe Nelson): “Four years ago, Ireland had to be bailed out by its European Union partners. Today investors are paying to lend it money. Ireland joined nations from Germany and Austria to Finland as its two-year note rate dropped below zero for the first time. Irish 10-year bond yields also declined to a record along with Italy’s… A report today confirmed the region’s recovery ground to a halt in the second quarter. Negative yields reflect ‘ECB policy but also reflect a mounting belief in the lack of positive prospect for the European economy,’ said Luca Jellinek, head of European rates strategy at Credit Agricole… ‘This is good news for the periphery.’”

September 3 – Bloomberg (John Glover): “The market for the riskiest bank debt will probably swell by more than 50% to $80 billion in Europe by year-end as lenders bolster capital ratios. Faced with stress tests and an asset quality review in coming weeks, European banks will issue about 20 billion euros ($26bn) more additional Tier 1 notes this year, according to Barry Donlon, head of capital solutions for Europe, the Middle East and Africa at UBS AG in London. There are about $52 billion of the securities currently outstanding.”

September 3 – Bloomberg (Hui-yong Yu): “Investors are putting money into real estate companies outside the U.S. at a record pace as interest rates recede, economies expand and opportunities remain to buy assets at discounts amid lingering distress from the global financial crisis… Real estate has emerged as the asset of choice following the global financial meltdown because of its relatively high yields. While the U.S. has claimed a large share of interest for its perceived stability and enduring appeal of gateway markets such as New York and Los Angeles, investors also have increased purchases in Europe, Asia-Pacific and Latin America. ‘Many investors that have moved to have real estate allocations in the U.S. are now looking to do so internationally,’ said David Mazza, head of ETF investment strategy at State Street Global Advisors. ‘Investors are looking ahead to greater cyclical recovery and taking advantage of some pockets of distress’ outside the U.S.”

Geopolitical Watch:

September 4 – Washington Post (Michael Birnbaum;Annie Gowen;Daniela Deane): “The Kremlin on Thursday underscored Russia's opposition to NATO membership for Ukraine, warning that such a move could derail efforts to end the conflict in eastern Ukraine, as leaders of the alliance gathered for a key summit in Wales. Russian Foreign Minister Sergei Lavrov also told the United States not to try to impose its own will on Kiev. Lavrov's comments came one day after Russian President Vladimir Putin announced a plan to end the fighting that would entrench gains by pro-Russian rebels and hand a significant defeat to Ukrainian leaders who have sought to regain full control of their nation. Putin and Ukrainian President Petro Poroshenko said they hoped that peace talks could start Friday in Minsk, the capital of Belarus.”

September 3 – Bloomberg (Peter Laca and Radoslav Tomek): “Vladimir Putin once said ‘one could simply die’ listening to the fractious debates of the European Union. He’ll like the current sound of discord, as three ex- Soviet satellites try to temper the push for tougher sanctions. As the European Commission prepares another round of economic penalties this week to punish Russia for aiding the insurrection in eastern Ukraine, the showdown is testing the allegiances of Hungary, Slovakia and the Czech Republic. Bound by the rule of unanimity, the 28-member bloc will probably face diplomatic efforts by the three central European nations to snarl the process and soften any restrictions, said Tsveta Petrova, an analyst at Eurasia Group… ‘For the Baltics and Poland, security trumps the economy,’ Petrova said. ‘The rest of central and eastern European countries put their business interests above political goals. They’re trying to change the definition of what the sanctions might look like to avoid their economies being hurt.’”

September 3 – Washington Post (Rick Noack): “As Ukraine looks like a country teetering on the edge of war, there's an important factor to keep an eye on: The country's 15 nuclear reactors. ‘There haven't been many conflicts in states with nuclear power facilities in the past, so we're really entering unknown territory here,’ said Jeffrey Mankoff, Deputy Director of the Center for Strategic and International Studies' Russia and Eurasia Program. NATO has already shown its concern, sending a small team of civilian experts to Ukraine in April to advise the government on the safety of its infrastructure.”

China Bubble Watch:

September 1 – Bloomberg (Christopher Langner): “Cash-strapped Chinese developers are borrowing a record amount in the offshore loan market this year, adding to the highest debt loads since 2005. Homebuilders in the world’s second-largest economy got $5.9 billion from foreign banks, up 39% from the same period last year… Builder debt has soared to 128% of equity, the highest since 2005, according to a Bloomberg Intelligence gauge of 84 companies. New home prices fell in July in almost all cities the government tracks and developers are missing sales targets. ‘Higher leverage on the balance sheet will give developers a higher financial burden,’ said Agnes Wong, credit strategist at Nomura Holdings Inc. in Hong Kong. ‘That means that if presales are not going as quick as they expect it can translate into trouble more easily than before.’ …China’s home sales fell 10.5% in the first seven months of the year compared to the same period in 2013 to 3 trillion yuan ($488bn), Moody’s… said in an Aug. 29 report. New construction declined 20% across the country, according to… Fitch Ratings.”

September 1 – Bloomberg: “China laid the legal framework to let more local governments sell bonds directly to raise funds for projects of public interest after top lawmakers passed an amendment to the country’s Budget Law. Under quotas approved by the State Council, local authorities can sell debt to invest in such projects. Bond sales to finance day-to-day expenditures remain prohibited, along with all forms of credit guarantees to individuals or entities… President Xi Jinping vowed to make policy changes to the nation’s tax and budget systems at a Communist Party meeting in November last year as local borrowings jumped 67% from the end of 2010 to 17.9 trillion yuan ($2.9 trillion) in June 2013. Almost 40% of this came from off-budget funding through financing vehicles. The revision has ‘solved the problem of borrowing money’ for local governments, Finance Minister Lou Jiwei said…”

September 4 – Bloomberg: “China may allow listed developers to sell bonds on its interbank market for the building of homes, providing a possible new source of financing to a sector facing cooling prices and surging debt levels. The National Association of Financial Market Institutional Investors held a meeting on Aug. 29 with some underwriters and told them the plan, people familiar with the matter said… The people asked not to be identified citing company policy. ‘Allowing listed developers to issue notes is equivalent to credit easing, suggesting Beijing is pushing a fresh round of stimulus to reach its 7.5 percent growth target after a batch of poor economic data in July and August,’ Ting Lu, Bank of America Merrill Lynch’s China economist, wrote…”

September 1 – Bloomberg: “China’s manufacturing slowed more than estimated last month, joining weaker-than-anticipated credit, production and investment data in suggesting the economy is losing momentum. The government’s Purchasing Managers’ Index was at 51.1 for August…"

Japan Watch:

September 2 – Reuters (Linda Sieg and Tetsushi Kajimoto): “Prime Minister Shinzo Abe's plan for Japan's economy to generate self-sustained growth on the back of his three policy ‘arrows’ of massive monetary easing, spending and reform appears to be faltering - but no magic solution is in sight. Abe's aides and advisers are promising to forge ahead with painful structural reforms, while spreading the benefits of ‘Abenomics’ to regional areas and drafting a long-term vision for addressing Japan's shrinking population. But gloomy economic data suggests the plan is not succeeding as hoped and the only short-term contingency plans appear to be further central bank stimulus or delaying a second rise in the sales tax set for October 2015. ‘Abenomics is in trouble - because it's not happening fast enough,’ said Robert Feldman, head of research at Morgan Stanley MUFG in Tokyo…”

September 5 – Bloomberg (Finbarr Flynn and Tesun Oh): “Japanese companies from NTT Docomo Inc. to Honda Motor Co. are putting the brakes on spending as they pile up cash, showing the challenge Prime Minister Shinzo Abe’s new cabinet faces in reviving the economy. Capital expenditure growth by non-financial companies will slow on aggregate to 1.3% next fiscal year from an estimate of 7.9% this year, according to a Moody’s… study of rated companies. Firms on the Topix share index boosted cash by 10% to 68.5 trillion yen ($653bn) in the past year… ‘Companies are piling up cash because they remain cautious,’ Peggy Furusaka, a Tokyo-based credit analyst at Moody’s, said… ‘The biggest spenders, the automakers and telecommunications companies, had already started spending from three years ago and they are leveling off as they move through their investment cycle.’”