Friday, February 20, 2015

My Weekly Commentary: The Curse of Moneyness

“In all speculative episodes there is always an element of pride in discovering what is seemingly new and greatly rewarding in the way of financial instrument or investment opportunity. The individual or institution that does so is thought to be wonderfully ahead of the mob. This insight is then confirmed as others rush to exploit their own, only slightly later vision. This perception of something new and exceptional rewards the ego of the participant, as it is expected also to reward his or her pocketbook. And for a while it does. As to new financial instruments, however, experience establishes a firm rule, and on few economic matters is understanding more important and frequently, indeed, more slight. The rule is that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets. This was true in one of the earliest seeming marvels: when banks discovered that they could print bank notes and issue them to borrowers in a volume in excess of the hard-money deposits in the banks’ strong rooms. The depositors could be counted upon, it was believed or hoped, not to come all at once for their money. There was no seeming limit to the debt that could thus be leveraged on a given volume of hard cash. A wonderful thing. The limit became apparent, however, when some alarming news, perhaps of the extent of the leverage itself, caused too many of the original depositors to want their money at the same time. All subsequent financial innovation has involved similar debt creation leverage against more limited assets with only modifications in the earlier design. All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.” John Kenneth Galbraith, "A Short History of Financial Euphoria"

As further proof that I don’t pander to readers, I’m back this week with additional monetary theory. “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.” I doubt Dr. Galbraith ever contemplated global central banks injecting Trillions of new liquidity directly into securities markets. Clearly, this cycle has seen absolutely momentous policy innovation – some subtly and much spurred obtrusively with post-Bubble policy convulsions. Understanding the nuances of the latest and greatest “reinvention of the wheel” offers a constant analytical challenge.

Financial innovation occurs more subtly and incrementally. Pay really close attention or you’re bound to miss it all. There are variations of financial instruments, institutions, market norms and government involvement. Success, real or perceived, ensures the envelope is pushed – in the markets and with policy. As we’ve witnessed, cumulative incremental policy experimentation over time can result in fundamentally revamped doctrine. In the markets and in real economies, incremental (“frog in the pot”) changes over the life of protracted booms can amount to profound transformations. And that is exactly what’s been experienced with “money” and monetary management.

The nineties saw the age-old issue of fractional reserve banking completely turned on its head. The “evolution” to market-based Credit fashioned what I refer to as the “infinite multiplier effect” – “money” and Credit created, miraculously, out of thin air like never before. With their implicit government backing, the GSEs enjoyed unlimited capacity to issue new debt liabilities – fed by insatiable demand from both home and abroad. During the mortgage finance Bubble, Wall Street relished in the capacity for seemingly limitless issuance of “money”-like mortgage- and asset-backed securities, most guaranteed by the GSEs that were backed by the federal government.

The phenomenal policy response to the bursting of the mortgage finance Bubble unleashed the “global government finance Bubble”. The world has now seen the evolution of unfettered electronic “money” advance to its final act, with profound yet unappreciated ramifications. For the past twenty-five years, each new Bubble has seen the scope of “money” widen to the point of ensuring Credit expansion sufficient to reflate increasingly impaired financial and economic systems. Yet each reflationary episode only compounded global financial imbalances and economic maladjustment (in the process increasing the amount of new Credit necessary to keep the game going).  These days, concerted desperate reflationary measures see perilous expansion at the heart of “money” and at the very foundation of global Credit.

When, in the early-nineties, the U.S. banking system (impaired from “decade of greed” excess) had lost the capacity to create sufficient “money” (largely deposits), an extraordinarily accommodative Greenspan Federal Reserve ensured that non-bank “money” (largely “repo” and short-term GSE liabilities) creation took up the slack.

In the post-tech Bubble landscape, the notion that policymakers would be willing to condone “helicopter money” and the “government printing press” ensured “money” creation broadened to the realm of the securitization marketplace. Since the bursting of that historic Bubble, it has been left to unprecedented expansion of central bank Credit to provide the necessary “money” to keep the ever-rising mountain of global debt from imploding. For something so important, it’s stunning how little attention is paid to the saga of contemporary “money.”

Over the years, I’ve argued that booms fueled by high-risk “junk” bonds don’t warrant undue concern. Invariably, the marketplace’s response to over-issuance includes a waning appetite for risk. Demand for new junk debt begins to dissipate, ushering in a period of Credit tightening and risk aversion. Importantly, attention to risk and attendant finite demand for increasingly risky debt instruments work to limit the duration of the boom cycle. This ensures that excesses and resource misallocation have insufficient time to impart deep structural maladjustment. The market pricing mechanism promotes self-regulation and adjustment.

Importantly, it goes unappreciated that “money” is incredibly dangerous when compared to even high-risk Credit. Money is special. Enjoying insatiable demand, “money” is prone to gross over-issuance. It is for the most part detached from market regulation and self-correction. Moreover, when this “money” gravitates to asset and securities markets, resulting pernicious inflationary effects are either ignored or misunderstood in policy circles (in contrast to traditional consumer price inflation). Credit is inherently unstable. The perceived stability of money masks a dangerously capricious nature.

Governments widen the domain of perceived money-like instruments at the system’s peril. There are heavy costs that come with printing Trillions, guaranteeing market liquidity, monkeying with risk perceptions and directly inflating securities markets. Once commenced, a self-reinforcing cycle of monetary over-issuance (“inflation”) will be sustained so long as confidence holds. Indeed, global “do whatever it takes” monetary management has had momentous effect on market faith in “money” and the perceived safety (“moneyness”) of risk assets worldwide.

In desperation, the world’s major central banks have resorted to the “nuclear option” of issuing Trillions of new “money” backed by nothing more than their willingness to create endless additional quantities. Also unique from a historical perspective, central banks inject this new “money” directly into securities markets. Distortions to global markets and economies have been unparalleled. Having evolved incrementally over decades, the previously unimaginable is today accepted as reasonable and rational. Central bank “money” – along with pledges to print as much as necessary - dictates market behavior like never before.

As a long-time market analyst, I can attest to profound changes in the way markets operate. Traditionally, a boom experiences progressively riskier behavior. The quality of Credit issued over the course of the boom deteriorates - as the scope of speculation and leveraging elevates. Risk grows exponentially in the boom’s final phase. As such, it is the riskiest segments of the marketplace that are to be monitored closely for indications of a cycle’s turning point. Risk aversion at the “periphery” traditionally marks an infection point. Simplistically, the expanding quantity of Credit required to sustain the boom inevitably confronts the harsh reality of waning demand for increasingly suspect Credit instruments.

Traditional analysis, however, has been usurped by the phenomenon of concerted unfettered central bank “money” printing. These days, stress at the periphery ensures ever more aggressive monetary inflation. And with today’s specter of incessant global financial and economic fragilities, market operators appreciate that policymakers are trapped in a policy of round-the-clock liquidity injections and market interventions. Persistent trouble at the “periphery” and latent fragility at the “core” cultivate history’s most prolonged global Credit and speculative cycles.

Growth in the global leveraged speculating community took off in the early-nineties. The Greenspan Fed had slashed rates and aggressively intervened in the government debt market. As Greenspan willingly manipulated rates, the yield curve and marketplace liquidity, longer-dated government and mortgage bonds began to reap the benefits of “moneyness” like never before. After more than twenty years of incremental policy activism, market intervention across all classes of assets has become commonplace for central bankers around the world. I have referred to this anomaly as “The Moneyness of Risk Assets.”

There’s another very important aspect of Monetary Analysis that also evolved from the nineties. As market-based “money” and Credit took shape in the U.S., the unfolding Credit boom had a profound impact on the world’s monetary anchor. Globally, persistently huge U.S. Current Account Deficits unleashed a dollar liquidity onslaught. This profoundly altered the incentives and general backdrop for financial speculation. On the one hand, easy “hot money” returns began spurring spectacular booms and busts (i.e. Mexico, the Asian “Tigers,” Argentina, Iceland, etc.). On the other, an unstable late-nineties global securities market backdrop propelled “king dollar” and increasingly precarious U.S. securities Bubbles.

The U.S. “tech” (and king dollar) Bubble burst in 2000, provoking previously unthinkable monetary stimulus. I would strongly contend that without the unsound dollar (and flawed Fed policy), the world would have adopted a more skeptical view of the euro monetary experiment. And without such a strong euro (relative to the dollar), Greek and the European periphery debt would have never enjoyed The Curse of Moneyness. It would be a different world today.

The latest and (to that point) greatest U.S. Credit boom burst in late-2008/2009, unleashing only more egregious monetary inflation. By this point, monetary mismanagement and ongoing massive Current Account deficits ensured a deeply flawed global “reserve currency”. This extraordinary backdrop was fundamental to the perception of “Moneyness” for China’s currency and Chinese Credit more generally. Only in a highly abnormal global monetary backdrop would the marketplace afford a strong Chinese currency in the face of a four-fold surge in Chinese bank Credit (not to mention “shadow” liabilities) to $28 Trillion. Only a dysfunctional global financial system would ascribe “Moneyness” upon Credit instruments fueling the greatest economic maladjustment, asset inflation and systematic corruption of all-time. The ongoing historic Chinese Credit boom has forever changed the world.

Last weekend’s Financial Times (Tom Burgis) included a thought-provoking article, “Nigeria Unravelled - Oil should have made the country rich. Instead, it has distorted its economy, corrupted its political class, paved the way for Boko Haram — and killed off a thriving textile industry.”

The piece was actually less about oil and more about how cheap Chinese textiles smuggled into the country destroyed Nigeria’s domestic textile industry – and the communities it supported. I couldn’t help but to ponder how global monetary mismanagement, oil and commodities price booms, and massive Chinese overinvestment have conspired to wreak bloody havoc around the world.

While the weekly expansion of radicalism garners headlines, Greece remained the markets’ focus again this week. Basically, there remains some concern for “Grexit,” although market participants have been trained to heavily downplay such risks. And, sure enough, it appears a compromise has been reached that will at least kick the Greek can down the road for a few months.

And, interestingly, the analysis does come back to money. Fundamental to sound money is that debts do settle. One cannot just accumulate debt and expect confidence in the underlying obligations to hold forever. Yet in today’s world debts don’t settle – they just keeps expanding and expanding – Greece, the U.S., China, Japan, Brazil, EM and “developed.” Greece does not have the economic wherewithal to service its huge debt load. The inflationists call for the Germans and the eurozone, more generally, to use the “Moneyness” of their obligations to provide additional assistance to Greece. The Germans and others understand that additional wealth transfers risk impairing EU Credit more generally – the old “throwing good money after bad.” The problem these days is that it’s quite difficult to identify good money to throw – or, better yet, to save for a rainy day.

For the Week:

The S&P500 increased 0.6% (up 2.5% y-t-d), and the Dow gained 0.7% (up 1.8%). The Utilities recovered 1.0% (down 4.1 %). The Banks slipped 0.2% (down 2.5%), while the Broker/Dealers gained 0.5% (down 1.2%). The Transports rose 1.1% (down 0.1%). The S&P 400 Midcaps increased 0.9% (up 4.4%), and the small cap Russell 2000 gained 0.7% (up 2.3%). The Nasdaq100 rose 1.3% (up 4.9%), and the Morgan Stanley High Tech index jumped 1.5% (up 4.2%). The Semiconductors gained 0.9% (up 3.6%). The Biotechs surged 3.8% (up 12.1%). With bullion declining $27, the HUI gold index sank 3.5% (up 12.4%).

One- and three-month Treasury bills rates ended the week at about a basis point. Two-year government yields slipped a basis point to 0.63% (down 3bps y-t-d). Five-year T-note yields rose five bps to 1.59% (down 7bps). Ten-year Treasury yields gained six bps to 2.11% (down 6bps). Long bond yields jumped seven bps to 2.72% (down 4bps). Benchmark Fannie MBS yields rose seven bps to 2.84% (up one basis point). The spread between benchmark MBS and 10-year Treasury yields widened one to 73 bps. The implied yield on December 2015 eurodollar futures slipped a basis point to 0.83%. Corporate bond spreads narrowed. An index of investment grade bond risk declined one to 63 bps. An index of junk bond risk sank 16 bps to an almost three-month low 328 bps. An index of EM debt risk fell four bps to 359 bps.

Greek 10-year yields jumped 61 bps to 9.73% (down one basis point y-t-d). Ten-year Portuguese yields fell 16 bps to 2.21% (down 41bps). Italian 10-yr yields declined three bps to 1.57% (down 32bps). Spain's 10-year yields fell five bps to 1.50% (down 11bps). German bund yields increased two bps to 0.37% (down 18bps). French yields gained four bps to 0.68% (down 14bps). The French to German 10-year bond spread widened two to 31 bps. U.K. 10-year gilt yields jumped nine bps to 1.76% (up one basis point).

Japan's Nikkei equities index jumped 2.3% (up 5.1% y-t-d). Japanese 10-year "JGB" yields slipped four bps to 0.38% (up 6bps y-o-y). The German DAX equities index added 0.8% (up 12.7%). Spain's IBEX 35 equities index gained 1.3% (up 5.8%). Italy's FTSE MIB index surged 3.0% (up 14.9%). Emerging equities were mixed. Brazil's Bovespa index jumped 3.4% (up 2.5%). Mexico's Bolsa gained 1.1% (up 0.9%). South Korea's Kospi index added 0.2% (up 2.4%). India’s Sensex equities index increased 0.5% (up 6.3%). China’s Shanghai Exchange gained 1.3% in a holiday-shortened week (up 0.4%). Turkey's Borsa Istanbul National 100 index slipped 0.4% (down 0.3%). Russia's MICEX equities index was hit for 2.5% (up 28.4%).

Debt issuance slowed for the holiday-shortened week. Investment-grade issuers included Bank of New York Mellon $2.0bn, Waste Management $1.8bn, PNC Bank $1.75bn, Phillips 66 Partners LP $1.1bn, Huntington National $1.0bn, AmerisourceBergen $1.0bn, Boeing $750 million, Ryder $400 million, Kemper $250 million and Toyota Motor Credit $100 million.

Convertible debt issuers included Microchip Technology $1.73bn.

Junk funds saw a fourth week of strong inflows, at $1.64bn according to Lipper. Junk issuers included Nielsen Finance $2.3bn, PetSmart $1.9bn, Sprint $1.5bn, iHeartCommunications $950 million, American Tire Distributors $855 million, Dean Foods $700 million, USG $350 million and Oshkosh $250 million.

International debt issuers included Sumitomo Mitsui Banking $2.75bn, Inter-American Development Bank $650 million, BNZ International Funding $600 million and Macquarie Bank $228 million.

Freddie Mac 30-year fixed mortgage rates rose seven bps to 3.76% (down 57bps y-o-y). Fifteen-year rates gained six bps to 3.05% (down 30bps). One-year ARM rates increased three bps to 2.45% (down 12bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.33% (down 2bps).

Federal Reserve Credit last week jumped $11.5bn to a record $4.475 TN. During the past year, Fed Credit inflated $365bn, or 8.9%. Fed Credit inflated $1.663 TN, or 59%, over the past 119 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.5bn to $3.263 TN. "Custody holdings" were down $50.1bn over the past year, or 1.5%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were down $67bn y-o-y, or 0.6%, to $11.638 TN. Reserve Assets are now down $404bn from the August 2014 peak. Over two years, reserves were $685bn higher, for 6% growth.

M2 (narrow) "money" supply declined $9.8bn to $11.776 TN. "Narrow money" expanded $663bn, or 6.0%, over the past year. For the week, Currency declined $0.4bn. Total Checkable Deposits fell $11.1bn, while Savings Deposits gained $7.9bn. Small Time Deposits slipped $1.4bn. Retail Money Funds declined $4.6bn.

Money market fund assets fell $9.0bn to a three-month low $2.681 TN. Money Funds were down $52.2bn year-to-date.

Total Commercial Paper slipped $2.9bn to $992bn. CP declined $36.1bn over the past year, or 3.5%.

Currency Watch:

The U.S. dollar index was little changed at 94.25 (up 4.4% y-t-d). For the week on the upside, the Australian dollar increased 1.0%, the New Zealand dollar 0.9%, the Norwegian krone 0.8%, the Swedish krona 0.5% and the South African rand 0.2%. For the week on the downside, the South Korean won declined 1.4%, the Brazilian real 1.2%, the Mexican peso 1.0%, the Taiwanese dollar 0.9%, the Canadian dollar 0.7%, the Swiss franc 0.6%, the Singapore dollar 0.4%, the Danish krone 0.4%, the Japanese yen 0.2% and the euro 0.1%.

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.3% (down 0.5% y-t-d). Spot Gold fell 2.2% to $1,202 (up 1.4%). May Silver sank 5.9% to $16.32 (up 5%). April Crude was slammed $2.86 to $50.81 (down 5%). March Gasoline increased 0.9% (up 12%), and March Natural Gas jumped 5.2% (up 2%). May Copper slipped 0.6% (down 8%). March Wheat dropped 4.3% (down 14%). March Corn declined 0.5% (down 3%).

U.S. Fixed Income Bubble Watch:

February 18 – Bloomberg (Andrew Mayeda): “China’s holdings of U.S. government debt declined for a fourth straight month in December and ended the year lower as the world’s second-largest economy slows the growth of its foreign-exchange reserves. China, the largest foreign holder of Treasuries, had $1.24 trillion as of December, $6.1 billion less than a month earlier… Japan, the second biggest holder abroad, decreased its ownership by $10.6 billion to $1.23 trillion. The two countries account for about two-fifths of all foreign ownership of Treasuries, which gained $41.3 billion in December to $6.15 trillion… Data from China last month showed that the nation’s foreign-exchange reserves, the world’s largest stockpile, fell about $4 billion to $3.84 trillion in December… Signs of capital outflows are mounting in China as economic growth slows, which reduces the need for authorities to buy dollar assets to keep the currency from strengthening too much.”

February 17 – Bloomberg (Jody Shenn and Matthew Robinson): “After stunning mortgage-bond traders by seeking to put one in jail, U.S. investigators see more inappropriate behavior that needs to be addressed in the market for such complicated debt. Investigators are finding signs that dealers are still lying to clients and striking improper deals such as parking debt, according to Michael Osnato, head of the complex financial instruments group in the Securities and Exchange Commission’s enforcement division. Traders or investors park bonds by selling them to accomplices with an understanding that they’ll repurchase the securities at a later date, in an attempt to skirt capital or internal rules. The opacity of the market ‘just creates an atmosphere where people feel they can get away with things -- and they largely have for a long time,’ Osnato said… ‘It’s more pervasive than we would like,’ he said.”

February 17 – Financial Times (Vivianne Rodrigues): “Fresh doubts over Puerto Rico’s ability to meet its debt payments are worrying the $4tn market where US states and municipalities raise capital, casting a shadow on the outlook for muni bonds… Standard & Poor’s last week downgraded the rating on Puerto Rico’s general obligation debt by three notches, citing the island’s declining revenue and a recent district court ruling. A federal judge this month overturned a plan by the island… that would have allowed Puerto Rico to put some government agencies into debt restructuring… The judge’s decision and the rating downgrade has hit demand for Puerto Rico’s debt, which hovers around $70bn, and added to pressures on the broader muni market. Yields on Puerto Rico’s 30-year GO debt have risen 36 bps since the start of the month, to stand at 8.06% on Friday…”

February 18 – Bloomberg (Michelle Kaske): “There’s a high probability that Puerto Rico will default on its general-obligation, sales-tax or Government Development Bank debt during the next two years, Moody’s… said. Revenue shortfalls because of the island’s ‘sluggish’ economic growth and the political risk of potential changes to Puerto Rico’s tax system may cause outcomes unfavorable to bondholders, Ted Hampton, a Moody’s analyst…said… Those are among pressures that have increased default risk to ‘a high level during the next two years,’ Hampton said.”

February 18 – Bloomberg (Jody Shenn): “Bond buyers are flocking back to the market for securities used by mortgage giants Fannie Mae and Freddie Mac to share their risks with investors. Fannie Mae sold $1.5 billion of the debt Thursday, through which it can potentially transfer some of its losses from guaranteeing $50.2 billion of loans…”

U.S. Bubble Watch:

February 20 – New York Times (Michael J. de la Merced and Mike Isaac): “What a difference a year makes. Less than 12 months after investors valued Snapchat, the red-hot messaging app, at about $10 billion, the start-up is again in the market for money — and poised to nearly double that valuation. A range of other popular start-ups are also poised to propel their net worths to similar multibillion-dollar heights, including the virtual scrapbooking service Pinterest and the ride-hailing app Lyft. Uber, Lyft’s top competitor, has raised more than $3 billion in the last year and now has an eye-popping valuation of $40 billion. Giant sums of money and sky-high valuations are nothing new in the technology industry. But the latest burst of activity has put on clear display the frenzied pace of investors, who are eager to catch the next blockbuster company… The action is also again spurring talk that overeager investors are poised to relive the dot-com boom and bust at the turn of the century, when overinflated start-ups led to a quick and painful downturn. For investors, the hunt is for the next proverbial so-called unicorn, a nascent business worth $1 billion or more — on paper, at least. Just last year, 38 privately held companies backed by venture capital joined the billion-dollar club, putting the membership of that group at 54, according to the data firm CB Insights.”

February 20 – Financial Times (Peter Spiegel): “Athens and its eurozone bailout lenders agreed an 11th-hour deal to extend the country’s €172bn rescue programme for four months, ending weeks of uncertainty that threatened to spark a Greek bank run and bankrupt the country. The deal, reached at a make-or-break meeting of eurozone finance ministers on Friday night, leaves several important issues undecided — particularly what reform measures Athens must adopt in order to get €7.2bn in aid that comes with completing the current programme. The new Greek government is to submit those measures for review to the International Monetary Fund and EU institutions on Monday, and officials said if they were not adequate another eurogroup meeting could be called on Tuesday. Critically, Friday’s agreement commits Athens to the ‘successful completion’ of the current bailout review, something the new Greek government has long vowed to avoid. ‘As long as the programme isn’t successfully completed, there will be no payout,’ said Wolfgang Schäuble, the powerful German finance minister. Still, the agreement avoids what eurozone officials feared would be market turmoil if the bailout had expired at the end of next week and should stem the mounting deposit withdrawals from Greece’s banking sector, which officials said were reaching close to €800m per day, creating a situation at risk of becoming a full-scale bank run.”

February 19 – WSJ (Alan Zibel and Annamaria Andriotis): “Loans to consumers with low credit scores have reached the highest level since the start of the financial crisis, driven by a boom in car lending and a new crop of companies extending credit. Almost four of every 10 loans for autos, credit cards and personal borrowing in the U.S. went to subprime customers during the first 11 months of 2014… That amounted to more than 50 million consumer loans and cards totaling more than $189 billion, the highest levels since 2007, when subprime loans represented 41% of consumer lending outside of home mortgages.”

February 18 – Bloomberg (Oshrat Carmiel): “Manhattan’s ultra-luxury condo market has a new high-water mark: $150 million. That’s the price set by developer Chetrit Group for a 21,500-square-foot (2,000-square-meter) triplex at the former Sony Building in Midtown… It would be a record for a residential listing, topping a $130 million offering planned at Zeckendorf Development Co.’s 520 Park Ave. As luxury apartments proliferate in Manhattan, builders are offering their premier units at ever-higher prices as a way of standing out from the crowd, said Jonathan Miller, president of New York appraiser Miller Samuel Inc. So far, the highest price ever paid for a condominium in the city is $100.5 million, a deal completed in December for a duplex penthouse at the One57 tower.”

Federal Reserve Watch:

February 18 – Bloomberg (Rachel Evans): “The minutes from the Federal Reserve’s meeting last month have foreign-exchange traders wondering whether Janet Yellen has joined the currency wars. Policy makers pointed to the dollar’s rising value as ‘a persistent source of restraint’ on exports in a surprisingly dovish set of minutes… The greenback fell against a broad group of its peers. Central bankers from Europe to Australia have engaged this year in bouts of rate-cutting oneupmanship, leaving the U.S., and possibly Britain, as the only developed nations seen as likely to raise borrowing costs in 2015… ‘The Fed is finding a very subtle way to temper the enthusiasm around the risks of a sustained dollar bull market that gets out of control,’ said Alessio de Longis, a macro strategist in New York at OppenheimerFunds… ‘What the Fed is trying to decelerate a bit is this dollar appreciation in order to make sure that the transition to a Fed hiking policy is more gradual.’”

February 18 – New York Times (Binyamin Appelbaum): “The Federal Reserve is not sounding like an institution that is ready to raise its benchmark interest rate in June. Fed officials at their most recent policy-making meeting in January worried that economic growth remained fragile, and that raising rates prematurely could undermine recent gains… The account also described greater concerns than the Fed had disclosed previously about the sluggish pace of inflation and the decline of inflation expectations among investors. ‘You can almost hear a little hesitation in the committee,’ said Zach Pandl, senior interest rate strategist at the investment firm Columbia Management. ‘They sound confident on the economy but nervous on pulling the trigger on rate hikes.’”

Global Bubble Watch:

February 20 – Bloomberg (Cordell Eddings): “Major central banks are buying up so much government debt that investors have little choice other than to funnel ever more of their money into riskier corporate debt. Led by the European Central Bank and the Bank of Japan, policy makers will swallow up all of the net $1.2 trillion in government securities expected to be issued this year, according to JPMorgan… ‘Companies are in a prime position to finance their business over a long period of time,’ said Edward Marrinan, a macro credit strategist at RBS Securities… ‘With yields so low, investors are willing to trust the Microsofts and Cokes of the world for the extra basis points.’ Companies from top-rated Microsoft Corp. to speculative-grade PetSmart Inc. are benefiting from unprecedented monetary stimulus that’s cut average yields by more than half since 2008 to a near record low of 2.54%. Borrowing costs have dwindled so much that investors are willing to accept next to nothing to own some bonds, like those of Nestle’s SA, which look attractive compared with the more than $1.75 trillion of the developed world’s sovereign debt that has negative yields… Sales of corporate bonds rose to an unprecedented $4.14 trillion in 2014…”

February 18 – Bloomberg (Adam Ewing): “The biggest buyout fund in the Nordic region says an unprecedented era of monetary stimulus is inflating asset prices across markets to extreme levels, with history offering little help in predicting how it will all end. ‘There are financial bubbles being built up and how they’ll be solved, I don’t know,’ Thomas von Koch, managing partner at EQT Partners in Stockholm, said… ‘The problem is global, not just for Europe. It’s the asset bubbles in general that concern me. It’s wherever we look.” Charting a path through markets today poses challenges most portfolio managers haven’t faced before. Economic theory taught us to expect hyper-inflation when money costs nothing; instead we now face the threat of deflation. ‘I can virtually toss those textbooks in the fire,’ said von Koch… Debt levels are approaching those recorded in 2006 and 2007, just before the global economy lurched into its worst crisis since the Great Depression, according to von Koch. ‘You also have a private market chasing yield with a bond spread between those and debt provided by the banks that has never been as narrow as it is today,’ von Koch said. ‘And the underlying economies for the companies, you don’t have much growth. From that perspective, we’re more leveraged today than in 2006-2007.’”

Europe Watch:

February 20 – Financial Times (Peter Spiegel): “Athens and its eurozone bailout lenders agreed an 11th-hour deal to extend the country’s €172bn rescue programme for four months, ending weeks of uncertainty that threatened to spark a Greek bank run and bankrupt the country. The deal, reached at a make-or-break meeting of eurozone finance ministers on Friday night, leaves several important issues undecided — particularly what reform measures Athens must adopt in order to get €7.2bn in aid that comes with completing the current programme. The new Greek government is to submit those measures for review to the International Monetary Fund and EU institutions on Monday, and officials said if they were not adequate another eurogroup meeting could be called on Tuesday. Critically, Friday’s agreement commits Athens to the ‘successful completion’ of the current bailout review, something the new Greek government has long vowed to avoid. ‘As long as the programme isn’t successfully completed, there will be no payout,’ said Wolfgang Schäuble, the powerful German finance minister. Still, the agreement avoids what eurozone officials feared would be market turmoil if the bailout had expired at the end of next week and should stem the mounting deposit withdrawals from Greece’s banking sector, which officials said were reaching close to €800m per day, creating a situation at risk of becoming a full-scale bank run.”

February 20 – Bloomberg (Frances Schwartzkopff): “Here’s an example of some of the twists and turns that economies with negative rates might need to gird for. Seven years after Denmark’s property bubble burst, house prices in the country’s biggest cities are already higher than at any point in recorded history. Meanwhile, banks are trying to figure out how to navigate their way through the first auctions that will probably result in investors paying homeowners to borrow. These are the clearest signs that efforts to defend Denmark’s euro peg with an unprecedented injection of cheap money may be distorting some corners of the economy. The central bank’s benchmark deposit rate is minus 0.75% after four cuts this year. Yields on government bonds are negative for maturities as long as five years. Mortgage-bond yields trade below zero for maturities up to three years… In the leafy Copenhagen district of Frederiksberg, an average 140 square-meter (1,500 square-foot) house costs 1.8 million kroner ($275,000) more today than it did in 2009, according to Nybolig, a unit of Nykredit. That’s about 676,000 kroner more than at the height of Denmark’s real estate boom, which topped in 2007 and burst a year later.”

China Bubble Watch:

February 18 – WSJ (Anjani Trivedi): “Investors see more pain ahead for the Chinese yuan, as pressure mounts for Beijing to address slowing growth by devaluing its tightly controlled currency… The yuan’s losses reflect growing unease among investors about the economic prospects of the world’s second-biggest economy. China guided the yuan higher for years, helping draw in cash and supercharge growth. The fear today is that that same money is leaking out of the country now that the economy is expanding at a more moderate pace. A falling yuan would hasten that move by reducing the value of Chinese assets.”

February 18 – Bloomberg: “Global investors are wary of Chinese local government debt just as the nation’s provinces start going overseas for fundraising amid state scrutiny. Qingdao City Construction Investment Group Co., a local government financing vehicle on the country’s east coast, sold a debut issue of U.S. dollar-denominated bonds on Feb. 5, raising $800 million in a two-tranche sale. Some 20% of the $500 million portion was bought by money managers, compared with an average 54% take-up for a $1 billion offshore deal by Beijing Infrastructure Investment Co. in November… China has mobilized about 50,000 auditors to probe local government debt, according to Mizuho Securities Asia Ltd., after borrowings swelled to 17.9 trillion yuan ($2.9 trillion) as of June 2013, from 10.7 trillion yuan at the end of 2010. Funding arms for the nation’s bridges, sewage systems and roads sold the least onshore yuan notes in 17 months in January… ‘We’re seeing funding vehicles from China that actually aren’t able to borrow onshore any longer and are now coming to the offshore market,’ Endre Pedersen, who helps manage $45 billion …at Manulife Asset Management… said…”

February 17 – Bloomberg: “The recovery in China’s property market remains fragile, with new-home prices rising in only one of 70 cities tracked by the government last month and recording their biggest year-on-year decline ever. Prices fell in 64 cities from the previous month, compared with 65 in December… Average prices fell 5.1% from a year earlier, the biggest drop on record, according to Tom Orlik, chief Asia economist at Bloomberg Intelligence… New-home sales by area slumped 31% in January from December in 40 cities tracked by Centaline Group, as developers slowed project offers in a traditionally weak season for the property market.”

February 17 – Bloomberg: “China’s world-best stock market rally made January the busiest month for IPOs in a year. It also created a bundle of new billionaires. In the first six weeks of 2015, the world’s second-biggest economy hatched about two dozen billionaires, many of whom are riding initial public offerings that investors are driving to their daily price-trading limits -- a frenzy that harkens back to the IPO market of the late 1990s. Among the high-fliers are an airline, a video-game developer and a drug-store chain. ‘IPOs have become very hot investment products in China,’ said Ronald Wan, chief China adviser at Hong Kong-based Asian Capital Holdings… ‘So all the controlling IPO shareholders become very rich afterwards -- they become billionaires.’”

February 17 – Bloomberg (Lianting Tu): “An unexplained doubling of debt at Kaisa Group Holdings Ltd. is fueling speculation that home buyers may have unwittingly turned into lenders to the troubled Chinese developer. Kaisa said in an exchange filing yesterday that its interest-bearing debts jumped to 65 billion yuan ($10.4bn) as of Dec. 31, more than double total borrowings of 29.8 billion yuan at the end of June… While a buyout offer from Sunac China Holdings Ltd. earlier this month staved off a bond default, Sunac can walk away from the deal if the debt isn’t successfully restructured. ‘Advance proceeds and deposits, which totaled 31 billion yuan as at 30 June, 2014, may have somehow evolved into interest-bearing debts,’ said Charles Macgregor, head of high-yield research at Lucror Analytics.”

Russia/Ukraine Watch:

February 20 – Bloomberg (Mark Raczkiewycz and Patrick Donahue): “Germany, France, Russia and Ukraine said a truce signed last week must still be enforced after a rebel offensive pushed government troops out of the strategic town Debaltseve and the leadership in Kiev called for peacekeepers. Chancellor Angela Merkel and presidents Vladimir Putin, Francois Hollande and Petro Poroshenko agreed to stand by the deal signed in Minsk, Belarus, ‘despite the grave breach of the cease-fire in Debaltseve,’ Germany’s government said… Fighting continued after the cease-fire agreement was meant to come into force on Feb. 15, underscoring the tenuous nature of the deal brokered by European leaders last week in Belarus. It also raises the prospect of the conflict hardening into a long-term standoff.”

February 20 – Bloomberg (Boris Korby): “Russia’s credit rating was cut to junk by Moody’s… as the conflict in Ukraine and plunging oil prices curb growth and erode financial stability. The rating company downgraded Russia one level to Ba1, the highest junk grade and in line with countries including Hungary and Portugal. Moody’s has a negative rating outlook on the country…”

February 20 – Bloomberg (Krystof Chamonikolas): “Ukraine’s bonds extended a record weekly drop as an offensive by pro-Russian rebels threatened to deepen the nation’s financial distress before debt-restructuring talks. The sovereign notes fell to an all-time low on Friday as the 10-month insurgency continued in the Donetsk region five days after a cease-fire was meant to come into force.”

Brazil Watch:

February 20 – Bloomberg (Sabrina Valle): “Some of Brazil’s biggest building companies were targeted for the first time in an investigation into alleged kickbacks at Petroleo Brasileiro SA, with prosecutors seeking 4.47 billion reais ($1.6 billion) in compensation. Federal prosecutors in Parana state accused Camargo Correa, Mendes Junior, OAS, Galvao Engenharia, Grupo Engevix and Sanko of diverting public funds and called for them to be banned from new state contracts… ‘Some people think Carwash is in the middle or close to an end -- no, it’s just beginning,’ prosecutor Deltan Dallagnol said…”

EM Bubble Watch:

February 17 – Bloomberg (Onur Ant and Selcan Hacaoglu): “Turkish companies’ record exposure to foreign-currency debt is a growing risk to the central bank as policy makers weigh deeper interest-rate cuts to spur growth. Corporate short-term foreign-exchange debt rose 2.5% to $115 billion last year, the highest year-end figure since the central bank began reporting the statistics in 2002… The threat to the lira is also building as the U.S. moves closer to its first rate increase since 2006, Fitch Ratings said. With Turkey reliant on foreign cash, including to help finance the nation’s current-account gap, ‘any ill-thought rate cut’ could deter inflows of short-term funds, according to Okan Akin, a fixed-income analyst at AllianceBernstein… Ten-year government yields have jumped the second most among 22 emerging markets monitored by Bloomberg since central bank Governor Erdem Basci cut the benchmark to 7.75% on Jan. 20 amid political pressure to lower borrowing costs.”

February 18 – Bloomberg (Selcan Hacaoglu and Benjamin Harvey): “Lawmakers in Turkey’s parliament beat each other until several required medical treatment early Wednesday, as tensions boiled over in a debate over a new package of laws seeking to grant police greater powers… The fight broke out when two female Kurdish politicians, Sebahat Tuncel and Pervin Buldan, tried to prevent ruling party deputies from approaching the speaking podium and were attacked, according to Ertugrul Kurkcu, a pro-Kurdish lawmaker… Both sides accused the other of throwing iron chairs and glasses…”

Japan Watch:

February 19 – Bloomberg (Kevin Buckland and Hiroko Komiya): “Bank of Japan Governor Haruhiko Kuroda has helped calm expectations for price swings in government debt by leaving open the possibility of more monetary stimulus. A gauge of expected volatility in Japanese bond futures fell to the lowest in two weeks on Wednesday, retreating from a 17-month high set earlier this month, after Kuroda told a news conference that he remains ready to adjust monetary policy, though no change is needed now.”