Credit Bubble Bulletin : March 2015

March 27 – Bloomberg (by Christopher CondonIan Katz): “Federal Reserve officials, fresh from the latest round of tests designed to ensure the safety of the biggest banks, are now peering into the darker corners of the financial system as they assess the risks of another crisis. One source of concern: tighter regulation of banks is prompting more borrowers to seek funding through the $25 trillion shadow banking system -- money-market mutual funds, hedge funds, brokerages and other entities that face fewer restrictions. ‘These institutions are a significant and growing source of credit in the economy,’ Dennis Lockhart, president of the Atlanta Fed, said… ‘They are part of an interconnected financial system that, in extreme circumstances, is prone to contagion.’ …Worldwide, shadow banking assets have grown, while banking assets stagnated, according to a report by the Financial Stability Board, a global group of regulators. Non-bank financial intermediation grew almost 7% to $75 trillion in 2013, the latest year for which figures are available, while banking assets declined less than 1% to $139 trillion. In the U.S., shadow banking -- also known as market finance -- grew almost 9% to $25.2 trillion in 2013, while banking assets increased almost 5% to $20.2 trillion. ‘One of the oft-cited examples regarding the prowess of the U.S. financial system is our reliance on market finance,’ said Lawrence Goodman, president of the… Center for Financial Stability… ‘It helps grease the wheels of the financial system.’ The grease can also magnify risks.”

So-called “shadow banking” will undoubtedly play a paramount role in the next global financial crisis. It was at the heart of the 2008 fiasco. Yet somehow “shadow banking” has been allowed to inflate unchecked over recent years – at home and abroad (especially in China). How could this be?

There was no credible effort to analyze and grasp the root causes of the 2008 financial and economic crisis. The Bernanke Fed and the Treasury moved immediately to flood the system with liquidity, backstop troubled borrowers and reflate system Credit. It’s been rationalization and justification – not to mention monetization - ever since. Inflating risk asset prices was the cornerstone of Bernanke’s reflationary strategy. Rates were collapsed to zero, providing a competitive advantage to marketable securities (at the expense of savings). The Fed quickly purchased $1.0 TN of Treasury and MBS securities. The Fed and Treasury backstopped and bailed out key players in the “shadows.” Too Big To Fail.

The Federal Reserve has been determined to paint the 2008 crisis as a consequence of poor lending standards. Excessively loose monetary policy has been absolved of responsibility. And distorted financial market incentives apparently were not culprits either.

The Fed has expounded the view of a somewhat exceptional yet classic consequence of lax supervision and egregious mortgage lending. This was most convenient analysis – a framework that allowed the Fed to toughen oversight of the banks. Market-based finance, on the other hand, was given a pass. Central to Fed strategy, after all, was the aggressive reflation of market-based Credit and the securities markets more generally. It was the Fed’s flawed doctrine and policy course that had me first warning back in April 2009 of the likely emergence of the “global government finance Bubble.”

It’s a fascinating dynamic. Importantly, “market-based” finance has evolved to be quite a misnomer. In one of history’s great ironies, securities market prices – and resulting flows of finance – have come under the direction of central government control. The capacity to intervene, manipulate and dictate securities market prices has provided governments historic sway over market forces. And, of course, few participants have qualms with governments inflating securities markets higher. In an update of Minsky’s stages of capitalistic development, I’ve referred to the post-crisis reflationary period as “Government Finance Quasi-Capitalism.”

Traditionally, central banks would adjust bank reserve requirements and short-term funding costs in an effort to regulate bank lending and inflation. Government deficit spending would seek to boost economic activity, incomes and corporate profits. The resulting mix of real growth and inflation would bring about significant effects on securities prices. Moderate annual inflation in the general price level was viewed as greasing the wheels of commerce, bolstering debtors and holders of risk assets alike. Moreover, accelerating consumer price inflation could be countered with measures to tighten banking lending/Credit.

These days, a momentous change in economic doctrine has policymakers openly targeting rising securities prices. It is believed that central bank Credit-induced wealth effects will stimulate spending, system-wide Credit expansion and, eventually, a steady 2% increase in the general price level. What began with the free-market advocate Alan Greenspan in the nineties (stealthily) nurturing U.S. non-bank Credit expansion, has regressed to open global government manipulation of sovereign bond, corporate debt, equities and currency markets.

There are serious flaws in today’s New Age doctrine that ensure spectacular failure. Generally speaking, global policy is pro-Bubble – pro-Credit Bubble, pro-securities market Bubbles, pro-wealth redistribution and pro-global Bubble-induced financial and economic maladjustment. It is pro unsustainable divergence between inflating securities prices and deflating economic prospects.

Fundamentally, market-based Credit is unstable, with this era’s great experiment requiring progressive government intervention and manipulation. Providing robust incentives for leveraged speculation ensures mispriced Credit, loose Credit Availability and boom and bust dynamics. It also ensures an inflating pool of trend-following and performance-chasing finance. Incentivizing flows to the risk markets as opposed to savings only exacerbates the proclivity of markets toward destabilizing speculative excess. As we’ve witnessed over the years, mounting market distortions and associated fragilities have been met with only more aggressive policy measures. A breakdown in market pricing mechanisms is celebrated as a historic “bull market.”

Importantly, it has reached the point where the risks associated with a bursting global Bubble overshadow policy discussions and objectives. Policymakers now endeavor to completely repress market self-adjusting and correcting mechanisms (i.e. “quasi-Capitalism”). Bear markets and recessions have become completely unacceptable, as this historic Bubble’s “Terminal Phase” runs its regrettable course.

There’s another profound flaw in today’s monetary experiment: The historic inflation in market-based finance and securities markets has not – will not - translate into a stable rise in the general price level. Indeed, there are sound arguments as to why policies that target inflating risk markets ensure a problematic divergence between securities prices and a general price level. Generally speaking, the global nature of Bubble distortions ensures spending and investment patterns inconsistent with some general increase in consumer prices. Wealth redistribution distorts spending patterns, with much of the U.S. and global population not enjoying spending-inducing increases in incomes and wealth. In short, I contend that targeting and manipulating “financial sphere” prices ensures inevitable “economic sphere” instability and dislocation.

A myth has prevailed that under the current policy regime central bankers control a general price level. Market prices have inflated tremendously, outstanding debt has inflated tremendously, market faith in central bankers has inflated incredibly – and all have converged to foster a historic divergence between inflated market-based finance and general consumer prices that rebuff financial sphere inflation.

Truth be told, global central bankers have lost control of pricing mechanisms – both in the risk markets and with general consumer price levels. But instead of accepting the realities of a failing policy experiment, central bankers have succumbed to only more extreme monetary inflation. Global securities market Bubbles have inflated to historic extremes, while the policy course has shifted to countries manipulating currencies in hope of countering stagnation and deflationary forces (“currency wars”). At this point, a runaway “Financial Sphere” inflation comes at the expense of A Progressively Maladjusted “Economic Sphere.”

The combination of a faltering global Bubble, increasingly powerful deflationary forces and aggressive currency market manipulation has spurred a powerful king dollar dynamic. Last week I argued that an increasingly destabilizing king dollar provoked a pronouncement of True Ultra-Dovishness from the Yellen Fed. The focal point of my market analysis will center on the currency markets, EM and the ongoing impact of Fed dovishness. The market week was inconclusive.

The Yemen meltdown and an abrupt double-digit percentage jump in crude add complexity to the analysis. King dollar enjoyed an extra boost from some safe haven buying. I would add, however, that the now prolonged global Bubble – rife with wealth redistribution and inequities – ensures an increasingly unstable and problematic geopolitical backdrop. Geopolitical risk bolstering the dollar’s safe haven appeal these days becomes fundamental to the self-reinforcing and destabilizing king dollar dynamic. This dynamic cut short the Fed-induced EM currency and market rally attempt. As the rally faded, EM weak-links this week again displayed vulnerability.

After gaining 3.1% Monday, losses in Tuesday’s and Friday’s sessions saw the Brazilian real end the week down 0.6%. The Turkish lira also had early-week gains evaporate. Rallies abruptly gave way to notable late-week selling in Latin American and Eastern European currencies.

Thursday and Friday losses pushed Brazilian equities to a 3.6% loss for the week. The heavily indebted Brazilian corporate and banking sectors came under pronounced selling pressure again this week. It’s worth noting that BNDES (Brazil’s development bank) CDS jumped 30 bps on Friday to 350 bps, rather quickly giving back much of the Fed-Dove rally. Vale CDS blew right through last week’s (pre-Fed) highs to end Friday at a multi-year high 370 bps. Petrobras CDS increased 5 bps this week to an elevated 625 bps, though prices remain below last week’s high of almost 700 bps.

After an unimpressive Fed-Dove rally, Brazilian 10-year (real) bond yields were up 14 bps this week to 13.21%. Ominously, Brazil sovereign CDS remain at elevated levels, ending the week only 18 bps below recent (pre-Fed) 11-year highs. Mexican peso yields jumped 17 bps this week to 5.86% and Colombia yields jumped 20 bps to 6.96%. After rallying on Fed-Dove, Venezuela CDS surged 530 bps this week to 4,697. Ukraine CDS jumped 325 bps to 2,674. Fleeting stabilization at the troubled Periphery…

Turkey’s 10-year (lira) yields jumped 45 bps to 8.34%, surging past last week’s pre-Fed highs. Turkey CDS increased seven to 217 bps. India’s equity Bubble showed vulnerability, with the Sensex index dropping 2.8% this week. Stocks were hit 5% in Egypt, 3% in Saudi Arabia and Kuwait, and 2% in Oman and United Arab Emirates.

Markets were unsettled here at home as well. Some of the more conspicuous Bubbles demonstrated vulnerability. The biotechs (BTK) were hammered for 4.9%, reducing Q1 gains to 17.3%. The semiconductors (SOX) were hit for 5.0%, pushing year-to-date returns down to only 1.1%. The Morgan Stanley High Tech index dropped 3.4%, as the Nasdaq Composite fell 2.7%. The Transports were clobbered for 4.9% and the REITS (BBG) fell 3.2%.

And let us not forget Greece. After trading above 18% last Thursday, Greek five-year bond yields dropped to almost 15% Thursday before ending the week at 15.6%. Greek CDS surged 300 bps Friday to 1,900. Greek uncertainty remains a major market risk.

March 27 – Financial Times (Jan Strupczewski): “Greece is unlikely to exit the euro, either intentionally or accidentally. But it might be forced to introduce an alternative means of payment, in parallel to the euro, to pay some domestic bills if a reform-for-cash deal with its creditors is not secured soon, several euro zone officials said. Athens has lost access to bond markets and international creditors are not willing to lend it more money until it starts implementing reforms. An official familiar with the matter told Reuters this week that without fresh funds, the government will run out of money by April 20. ‘At some point, when the government has no more euros to pay salaries or bills, it might start issuing IOUs -- a paper saying that its holder would receive an x number of euros at a point in time in the future," one senior euro zone official said. ‘Such IOUs would then quickly start trading in secondary circulation at a deep discount to the real euros and they would become a 'currency', whatever its name would be, that would exist in parallel to the euro,’ the official said.”

All in all, it was another unsettled week for commodities, currencies, equities and fixed-income. Ten-year Treasury yields traded at the week’s low yield of 1.85% Wednesday and a high of 2.01% Thursday. Thursday trading saw the yen trade at a one-month high versus the dollar. The two-year German bund traded at a record low negative 0.256% in early-Friday trading. After trading below $45.50 Monday morning, crude (WTI) surged 7% to traded near $52.50 on Thursday. Late-Friday selling saw crude sink 5.6% to end the week up $2.30 to $48.87.

March 27 – Financial Times (Peter Salisbury): “Shia Houthi rebels clashed with Saudi military units on Yemen’s northern border on Friday. The rebels vowed to intensify their campaign for control of the country after a second night of air strikes by a coalition of regional Sunni states led by Saudi Arabia. Houthi fighters also clashed with rival militias in the south of the country. As the fighting intensified, president Abd-Rabbu Hadi, who this week fled the southern port city of Aden in the face of the Houthi advance, travelled to Egypt to attend a summit of Arab leaders in Sharm el-Sheikh. The president vowed to call for an Arab ‘Marshall Plan’ to rebuild his country once the Houthis have been ousted. Tensions grew on Friday as Saudi and Egyptian warships deployed to the strategic Bab al-Mandab strait in an effort to stop Houthis taking control of the waterway. Large volumes of Gulf oil and trade flow through the strait, bound for the Suez Canal.”

For some time now, markets have been content to gaze at a Middle East drifting into the abyss. Now, with Saudi Arabia involved in military operations in Yemen the stakes have changed – perhaps significantly. The risk of major regional conflict escalation has risen. And with the Iran nuclear talks coming down to the wire, the Yemen crisis comes at a critical time. This surely raises the level of general uncertainty, a backdrop supportive of king dollar and ongoing EM instability.

For the Week:

The S&P500 declined 2.2% (up 0.1% y-t-d), and the Dow fell 2.3% (down 0.6%). The Utilities dropped 2.5% (down 7.7%). The Banks sank 3.4% (down 3.9%), and the Broker/Dealers lost 2.6% (up 1.3%). The Transports were clobbered for 4.9% (down 4.8%). The S&P 400 Midcaps declined 2.0% (up 3.9%), and the small cap Russell 2000 fell 2.1% (up 3.0%). The Nasdaq100 dropped 2.8% (up 2.3%), and the Morgan Stanley High Tech index was hit for 3.4% (down 1.2%). The Semiconductors sank 5.0% (up 1.1%). The Biotechs were hammered for 4.9% (up 17.3%). With bullion gaining $16, the HUI gold index declined 2.1% (up 1.3%).

One-month Treasury bill rates ended the week at one basis point and three-month rates closed at three bps. Two-year government yields added a basis point to 0.60% (down 7bps y-t-d). Five-year T-note yields gained two bps to 1.44% (down 22bps). Ten-year Treasury yields rose three bps to 1.96% (down 21bps). Long bond yields increased four bps to 2.54% (down 21bps). Benchmark Fannie MBS yields added two bps to 2.71% (down 12bps). The spread between benchmark MBS and 10-year Treasury yields widened one to 75 bps. The implied yield on December 2015 eurodollar futures dropped 5.5 bps to 0.67%. Corporate bond spreads widened. An index of investment grade bond risk increased two bps to 65 bps. An index of junk bond risk surged 39 bps to a one-month high 350 bps. An index of EM debt risk fell nine bps to 369 bps.

Greek 10-year yields dropped 34 bps to 10.84% (up 109bps y-t-d). Ten-year Portuguese yields rose 13 bps to 1.75% (down 87bps). Italian 10-yr yields gained 15 bps to 1.35% (down 54bps). Spain's 10-year yields jumped 14 bps to 1.32% (down 29bps). German bund yields increased two bps to 0.21% (down 34bps). French yields rose six bps to 0.50% (down 33bps). The French to German 10-year bond spread widened four to 29 bps. U.K. 10-year gilt yields gained three bps to 1.54% (down 21bps).

Japan's Nikkei equities index lost 1.4% (up 10.5% y-t-d). Japanese 10-year "JGB" yields rose five bps to 0.37% (up 5bps y-t-d). The German DAX equities index traded down 1.4% (up 21.0%). Spain's IBEX 35 equities index was little changed (up 11.2%). Italy's FTSE MIB index declined 0.8% (up 20.9%). Emerging equities were mostly under pressure. Brazil's Bovespa index sank 3.6% (up 0.2%). Mexico's Bolsa declined 0.8% (up 1.1%). South Korea's Kospi index slipped 0.9% (up 5.4%). India’s Sensex equities index dropped a notable 2.8% (down 0.2%). China’s Shanghai Exchange jumped another 2.0% to a new six-year high (up 14.1%). Turkey's Borsa Istanbul National 100 index fell 2.0% (down 5.6%). Russia's MICEX equities index was hit for 3.5% (up 12.5%).

Debt issuance picked up. Investment-grade issuers included Goldman Sachs $4.2bn, Bank of America $2.3bn, Ford Motor Credit $1.75bn, Potash $500 million, Franklin Resources $400 million, Southwestern Electric Power $400 million and Kimco Realty $350 million.

Convertible debt issuers this week included inContact $100 million.

Junk funds saw inflows of $856 million (from Lipper). A notable list of junk issuers included Whiting Petroleum $1.75bn, Ally Financial $1.25bn, Sunoco LP $800 million, Cliffs Natural Resources $540 million, Consol Energy $500 million, Verisign $500 million, Navient $500 million, GCI $450 million, Rice Energy $400 million, Calumet Specialty Product Partners LP $325 million, Townsquare Media $300 million, Credit Acceptance $250 million and Outdoor Americas Capital $100 million.

International debt issuers included KFW $5.0bn, UBS $4.85bn, Credit Suisse $4.0bn, Colombia $2.5bn, HSBC $2.25bn, Standard Chartered Bank $2.0bn, Toronto-Dominion Bank $1.75bn, Deutsche Bank $1.5bn, XLIT $1.0bn, ANZ New Zealand $750 million, BOC Aviation $750 million, Schaeffler Finance $600 million, Colombia Telecommunicaciones $500 million, Hyundai Capital Services $400 million and Queen Street RE $100 million.

Freddie Mac 30-year fixed mortgage rates fell nine bps to a seven-week low 3.69% (down 18bps y-t-d). Fifteen-year rates dropped nine bps to 2.97% (down 18bps). One-year ARM rates were again unchanged at 2.46% (up 6bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.12% (down 16bps).

Federal Reserve Credit last week declined $7.9bn to $4.453 TN. During the past year, Fed Credit inflated $266bn, or 6.4%. Fed Credit inflated $1.642 TN, or 58%, over the past 124 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week jumped $10.4bn to $3.234 TN. "Custody holdings" were down $59.3bn y-t-d.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were down $74bn y-o-y, or 0.6%, to $11.638 TN. Reserve Assets are now down $395bn from the August 2014 peak. Over two years, reserves were $685bn higher, for 6% growth.

M2 (narrow) "money" supply rose $9.9bn to $11.834 TN. "Narrow money" expanded $668bn, or 6.0%, over the past year. For the week, Currency increased $2.0bn. Total Checkable Deposits declined $7.7bn, while Savings Deposits jumped $20.4bn. Small Time Deposits fell $4.2bn. Retail Money Funds declined $1.1bn.

Money market fund assets jumped $16.8bn to $2.689 TN. Money Funds were down $44.1bn year-to-date.

Total Commercial Paper increased $6.7bn to an 11-week high $1.032 TN. CP increased $7bn over the past year, or 0.7%.

Currency Watch:

The U.S. dollar index slipped 0.6% to 97.29 (up 7.8% y-t-d). For the week on the upside, the South Korean won increased 1.8%, the Swiss franc 1.4%, the Japanese yen 0.8%, the Taiwanese dollar 0.7%, the Singapore dollar 0.7%, the euro 0.6%, the Norwegian krone 0.6%, the Danish krone 0.4%, and the Swedish krona 0.4%. For the week on the downside, the Mexican peso declined 1.2%, the Brazilian real 0.6%, the British pound 0.5%, the Canadian dollar 0.5%, the Australian dollar 0.3% and the South African rand 0.2%.

Commodities Watch:

March 24 – Reuters (Chen Aizhu): “China's commercial and strategic oil storage is almost full, a Sinopec trading executive said…, leaving little room for the world's No.2 oil consumer to increase its crude imports this year. China's purchases to fill its strategic petroleum reserves (SPR) was one of the main drivers of Asian demand since August of last year, with the nation's importers buying cheap crude to fill oil tanks despite slowing economic growth. But with storage capacities approaching their limits, China's oil imports will likely stay flat or rise only slightly this year, said the executive… China's crude oil imports grew 4.5% in the first two months of the year compared to the same period a year ago…”

March 27 – Financial Times (Lucy Hornby and Neil Hume): “Concerns about a supply glut have pushed the price of iron ore, a key ingredient in steelmaking, to levels last seen during the financial crisis. Benchmark Australian ore for immediate delivery into China was assessed on Friday at $54.10 a tonne, down 70 cents, by the Steel Index. That is the lowest price since TSI began compiling records in 2008. The drop caps a fifth consecutive week of losses for the commodity, which has slumped 60% in the past year.”

The Goldman Sachs Commodities Index increased 0.5% (down 3.7% y-t-d). Spot Gold gained 1.4% to $1,199 (up 1.2%). May Silver added 1.1% to $17.07 (up 9%). May Crude jumped $2.30 to $48.87 (down 8%). April Gasoline was unchanged (up 22%), while May Natural Gas sank 5.9% (down 9%). May Copper increased 0.2% (down 2%). May Wheat dropped 4.2% (down 14%). May Corn gained 1.6% (down 2%).

Fixed Income Bubble Watch:

March 27 – Wall Street Journal (Matt Jarzemsky): “The ranks of financially stressed companies have swelled to a 4½-year high as the sharp drop in oil prices batters energy companies. The number of companies with the worst below-investment-grade debt ratings rose to 184 in February, the highest count since November 2010, and remained at that level in March, according to Moody’s… That is a 16% increase over March 2014. The 25 oil-and-gas and oil-services companies listed accounted for 13.6% of the total this month, their highest share ever… ‘If this trend increases, we might see more defaults in the energy sector,” said Julia Chursin… at Moody’s.”

U.S. Bubble Watch:

March 25 – Bloomberg (Callie Boist): “The new haven trade is equities. So suggests the Chicago Board Options Exchange Volatility Index, the gauge of stock market anxiety that has plunged 39% since January even as turbulence engulfed currencies, commodities and bonds. Compared with foreign exchange, U.S. shares are the calmest since 2006… Peace persists in a market where six years of gains taught investors to treat dips as buying opportunities. At the same time, central bank actions and speculation about when the U.S. Federal Reserve will raise interest rates are exerting pressure on currencies and commodities that has yet to filter into stocks, said Max Breier at BMO Capital Markets Corp. ‘Volatility sensitivity is ranked upward from U.S. dollar sensitivity, with equities being the least sensitive,’ Breier… said… ‘Most of the non-equity asset classes are reacting to U.S. dollar sensitivity.’”

March 25 – Reuters (Tim McLaughlin and Ross Kerber): “CEOs at large U.S. companies collectively realized at least $6 billion more in compensation than initially estimated in annual disclosures in the five years after the financial crisis first hit, according to a Reuters analysis. The reason for the windfall: the soaring value of their stock awards. About 300 CEOs who served throughout the 2009-2013 period at S&P 500 companies together realized about $22 billion in compensation in the form of pay, bonuses and share and option grants, or an average of $73 million each…That compares to about $16 billion initially reported in annual company summary compensation tables… The comparison does not include pensions and perks such as country club memberships and use of corporate jets for private use. The study also excludes rewards reaped by other top executives, such as chief financial officers and chief operating officers, and compensation for CEOs who did not serve the full five years. Further gains in share prices in 2014 and so far this year will only have increased the gap between the annual disclosures and the amount actually derived from the awards, with the full picture for last year only becoming clear over the next couple of months.”

March 26 – Bloomberg (Michael J Moore and Brian Womack): “Google Inc. agreed to pay new Chief Financial Officer Ruth Porat more than $70 million after she takes the post in May, putting her among the highest-paid CFOs in the industry. Porat, who held the same role at Morgan Stanley, will get a $5 million one-time signing bonus and a $25 million stock grant this year that will vest through 2017…She will also receive a $40 million biennial stock grant in 2016 that will vest by 2019 and a base salary of $650,000 annually.”

March 27 – Bloomberg (Victoria Stilwell): “For most people, buying a home is no cheap venture. That's especially the case when the growth in U.S. home prices is beating wage increases 13 to 1. Wages climbed by 1.3% from the second quarter of 2012 to the second quarter of 2014, compared to a 17% increase in home prices around that time, according to… RealtyTrac.”

March 22 – Reuters (Sinead Carew): “The surging value of the U.S. dollar may be posing the biggest threat to U.S. corporate earnings since the 2008 financial crisis, hurting results at most U.S.-based multinationals. Some on Wall Street are even talking about an earnings recession. The dollar’s gain of 22% in the past 12 months against a basket of major currencies has landed a double whammy on U.S. companies with big sales abroad. Revenue and earnings from foreign markets are worth less when translated into greenbacks and their costs become relatively less competitive against rivals producing in countries with declining currencies. Dollar moves of this magnitude in the past have resulted in what Bank of America/Merrill Lynch strategists term an ‘earnings recession,’ which is generally defined as at least two successive quarters of declining earnings from the year-earlier quarters.”

March 22 – Bloomberg (David Carey and Serena Saitto): “A flood of money from unconventional sources has sent valuations of late-stage technology startups, including Uber Technologies Inc. and Snapchat Inc., to levels that haven’t been seen since before the dot-com crash. Hedge funds and mutual funds that once shunned venture-style deals are flocking to the market’s hottest corner, paying 15 to 18 times projected sales for the year ahead in recent private-funding rounds…That compares with 10 to 12 times five years ago for the priciest companies, one said. While some of the startups may become profitable, others are consuming cash and could fail. The torrid action is spurring talk that 15 years after the collapse of the Internet bubble, the market may be setting itself up for another bruising fall. ‘Some of the valuations are mind-boggling,’ said Sven Weber, investment manager… as SharesPost 100 Fund, which backs late-stage tech startups.”

March 24 – Wall Street Journal (Gregory Zuckerman): “Nasdaq bubble fears are back. But this time around, the biggest dangers may not involve technology stocks. Instead, some investors are looking askance at biotechnology stocks, a sector that wasn’t nearly as developed when the Nasdaq Composite Index set its record close in 2000 of 5048.62. The Nasdaq Biotech Index is up about 240% since the beginning of 2012. That dwarfs the 82% gain logged by the Nasdaq-100 tech index of the largest technology companies listed on the exchange operated by Nasdaq OMX Group Inc. Giant biotech firms have surged in value: Both Gilead Sciences Inc., valued at $152 billion, and Amgen Inc., at $127 billion, have risen 40% over the past year. Biogen, valued at $108 billion, has climbed 47%. Celgene Corp., valued at $99 billion, is up 75%.”

March 24 – New York Times (Nathaniel Popper and Conor Dougherty): “One of the country’s largest banks, Morgan Stanley, is losing its chief financial officer to Google in the most visible example yet of the flow of talent from Wall Street to Silicon Valley. Ruth Porat, Morgan Stanley’s chief financial officer since 2010, has been one of the most powerful women in a financial industry… Ms. Porat is following in the steps of other big names from the bastions of East Coast power who have recently decamped to the ascendant technology industry on the West Coast…”

March 22 – Wall Street Journal (Nick Timiraos): “Prospects for an uptick in business investment this year are facing a major drag: The collapse in oil prices is spurring significant cutbacks by the energy-production industry, which had been a standout in an otherwise lackluster U.S. economic expansion. Business capital spending rose 6% last year due to gains from a broad base of U.S. industries. The drag from energy this year could cut that growth rate in half in 2015, according to economists at Goldman Sachs. Moreover, equity analysts at the bank estimate capital spending globally by energy companies in the S&P 500 will fall 25%, leading to the first annual decline in overall capital investment by big businesses in many sectors since 2009. Already, energy companies in the S&P 500 have announced about $8.3 billion in spending cuts. The energy cutbacks come when exporters and manufacturers more broadly face headwinds from a strengthening dollar, which makes U.S. goods more costly abroad.”

Federal Reserve Watch:

March 23 – Financial Times (Chris Giles and Ferdinando Giugliano): “The US risks inflating asset price bubbles with ‘devastating consequences’ if it leaves interest rates at zero, according to a senior Federal Reserve official. James Bullard, head of the Reserve Bank of St Louis, told the Financial Times… the Fed ‘should get on with normalisation’ as soon as possible so that it does not have to raise rates more aggressively later causing significant market volatility. The policy maker’s concerns underscore the nervousness among many central bankers about interest rates remaining at rock bottom rates even as unemployment in the US and UK returns to normal levels. Mr Bullard… said the die was already cast and the US would have ‘super easy’ monetary policy even as unemployment dropped further… Recalling the tech bubble in the 1990s and the housing bubble of the 2000s, he said: ‘Zero [interest rates] is too low in that kind of environment. I wouldn’t be comfortable with that. A zero rate would feed into an asset price bubble’. ‘When asset bubbles start, they keep going until they blow up out of control with devastating consequences.’”

March 25 – Reuters (Francesco Canepa and Ahmed Aboulenein): “Chicago Federal Reserve President Charles Evans said… the dollar's recent appreciation would weigh on inflation by lowering import prices but that this would be short-lived. ‘To the extent that whatever movements in the dollar take place and then there’s some level of stability, that change in import prices unwind,’ Evans, an advocate for restraint in raising U.S. interest rates, said. ‘It is transitory and our normal U.S. monetary influences on inflation ought to become more important at that point.’”

Global Bubble Watch:

March 26 – Reuters (Huw Jones): “Authorities are nowhere near to fully understanding ‘shadow banking’ as the $75 trillion sector morphs and grows under the influence of new technology and regulation, a top markets supervisor said…Shadow banking refers to the supply of credit outside traditional banks, such as from private equity investors, money market funds, insurers, repurchase agreements and securities lending. The Group of 20 economies (G20) agreed during the 2007-09 financial crisis that the opaque sector should be better supervised, fearing that as traditional banks become more regulated, risky lending activities would migrate there. But progress has been slow. ‘After 10 years of being a hot topic there isn't a consensus yet,’ Ashley Alder, chief executive of Hong Kong's Securities and Futures Commission, told a CityWeek conference… ‘Is it banking or is it part of market-based finance? What are we going to do about it? We are nowhere near the finishing line,’ he said. So far, regulators have limited themselves to tighter supervision of the sector and rules which make it more expensive for hedge funds and insurance companies to raise funds from loaning shares from the end of 2017.”

March 24 – Bloomberg: “A record high yield premium for offshore yuan debt and Asia’s strongest currency rally are attracting investors back to Dim Sum bonds traded in Hong Kong. The yield on three-year sovereign notes in the city was 45 bps higher than that in mainland China at 3.69% on March 23, compared with an average discount of 118 bps last year. The average overall offshore yield surged 85 bps this year to an unprecedented 5.5%, a Deutsche Bank AG index shows… Premier Li Keqiang has said he will take policy action if needed to shore up the economy, as a preliminary gauge of manufacturing slumped to the weakest in 11 months. He has also committed to obtain reserve status for the yuan from the International Monetary Fund.”

March 24 – Bloomberg (Seleha Mohsin): “The central bank governor of western Europe’s biggest crude producer is becoming less concerned over the plunge in oil prices. Threats from Norway’s hot housing market have trumped anxiety that forced Governor Oeystein Olsen, 63, to deliver a surprise rate cut in December… That rate reduction has helped mitigate risks of an oil-induced crisis, as evidence in the real economy shows, he said. ‘We could now be characterized as leaning slightly against the wind,’ he said… ‘The former risk hasn’t disappeared, but a few months have passed and we have not seen a more severe downturn.’”

ECB Watch:

March 27 – Reuters (John O’Donnell): “Debt in the euro zone has entered the ‘danger zone’, the head of Germany's Bundesbank said…, calling for banks' exposure to the debt of individual countries to be capped. ‘In the euro area we are already in the danger zone - at least with regard to public debt standing at 91% and corporate debt at 105%,’ Jens Weidmann said… ‘Sovereign debt needs to be backed by capital, and exposure to a single sovereign must be capped, just as is the case for any private debtor,’ said Weidmann…”

Europe Watch:

March 27 – Financial Times (Peter Spiegel): “Greek companies and households pulled €7.6bn out of their bank accounts during the government’s standoff with its international bailout creditors in February, driving deposits down to €140.5bn — the lowest level in 10 years. Although the withdrawals were lower than in January, the €20.4bn pulled out over the two months shows how close Greece came to a full-scale bank run before Athens reached agreement with eurozone authorities to extend its €172bn bailout into June. The two-month total… is even larger than the €15.9bn withdrawn by companies and households in May and June 2012, when back-to-back Greek elections led eurozone officials to prepare actively for a Greek exit from the single currency… If withdrawals become so large that Greek banks are deemed insolvent, the European Central Bank would have to end its practice of allowing emergency loans to lenders to fund day-to-day operations. The only way to restart the banking system would be for Greece to print its own currency.”

March 24 – Reuters (George Georgiopoulos and Thorsten Severin): “Greece risks running out of cash by April 20 unless it secures fresh aid, a source familiar with the matter told Reuters… After talks with EU leaders including German Chancellor Angela Merkel in the past week, Athens said it will present a package of reforms to its euro zone partners by Monday in the hope of unlocking aid and avoiding a messy default. ‘It will be done at the latest by Monday,’ government spokesman Gabriel Sakellaridis told Mega TV. Merkel did not reveal details from her meetings with Greek Prime Minister Alexis Tsipras, but she did tell members of her conservative party at a closed-door meeting in parliament on Tuesday that Greece needs to work with the European Central Bank, the International Monetary Fund and the European Commission to unlock the cash injection it needs. ‘Time is short,’ she said…”

March 24 – Bloomberg (Tom Beardsworth and Francine Lacqua): “The chances of Greece leaving the euro area are now 50-50 and the country could go ‘down the drain,’ billionaire investor George Soros said. ‘It’s now a lose-lose game and the best that can happen is actually muddling through,” Soros, 84, said in a Bloomberg Television interview… ‘Greece is a long-festering problem that was mishandled from the beginning by all parties.’”

March 25 – Reuters (Inmaculada Sanz): “Leftist newcomer Podemos made spectacular inroads in elections in the Spanish region of Andalusia on Sunday, with the vote splitting over the political spectrum in a foretaste of the upheaval likely in national elections before the year-end. The vote showed the anti-austerity sentiment that brought Syriza to power in Greece has now taken root in Spain, where one in four workers is unemployed… While Spain is emerging from the euro-zone debt crisis as one of Europe's fastest growing economies, a campaign by the ruling People's Party (PP), and to a lesser extent the Socialists, to show that newly minted political alternatives are dangerous for the recovery did little to limit their magnetism. ‘We are the protagonists of the change, of the creation of new alternatives. ... The political map in Andalusia and Spain has changed,’ said Teresa Rodriguez, who led the Podemos campaign in Andalusia.”

China Bubble Watch:

March 27 –Bloomberg: “China’s biggest banks are accelerating cuts to their dividend payouts as bad debts pile up from struggling exporters in the Pearl River Delta, coal companies in the nation’s west and manufacturers in the Bohai Rim near Beijing. Three of the nation’s four largest banks… this week cut their payment ratios for 2014 by the most in three years. ICBC’s fell to 33% from 35% a year earlier… Rising charges for bad debts -- ICBC more than doubled provisions in the fourth quarter -- are cutting profits just as regulators require banks to hold extra capital. The average gain in net income for four of the five biggest banks -- ICBC, Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. -- was 6.7%, the weakest in more than a decade… ‘The new normal for the Chinese economy and banking sector includes sluggish growth and persistent credit deterioration,’ Jim Antos… analyst at Mizuho Securities Asia Ltd., said…”

March 27 –Bloomberg: “China’s second-largest loan-guarantee company has halted operations and replaced its chairman as managers probe past deals for evidence that it took on too much financial risk, said people familiar with the matter. Hebei Financing Investment Holding Group, itself wholly owned by the Hebei provincial government, was put under the control of another state-owned company, Hebei Construction Group… The trouble at Hebei Financing highlights strains on a model championed by Premier Li Keqiang to help small businesses and farmers obtain loans. Loan guarantee companies were created to provide backing for loans and reassure lenders in the absence of sufficient credit history or collateral. Several have come under financial pressure in recent months as China’s economic growth has slowed.”

March 21 – Reuters (Kevin Yao): “China will take steps to rein in possible risks from short-term local government bonds, including converting such bonds into long-term debt, the country's vice finance minister, Zhu Guangyao, said… On March 8, the ministry announced local governments would be permitted to swap 1 trillion yuan ($161.2bn) of maturing, high-interest local debt for new official municipal or provincial bonds, to help cut interest costs. Zhu said local governments were burdened by piles of short-term debt, including that raised through trust products. ‘In accordance with the State Council's plans, we will turn such short-term financing into long-term financing, and the size for 2015 is 1 trillion yuan,’ Zhu told an international conference…”

March 24 – Bloomberg: “Bonds of 11 Chinese companies now yield more than 15% as investors brace for the nation’s second onshore default amid record maturities in the coming quarter. Companies in Asia’s largest economy need to repay 1.5 trillion yuan ($242bn) of local-currency notes in the period to June 30, the most for a quarter in Bloomberg data going back to 1998… Political, economic and regulatory factors are converging to make defaults more likely. Premier Li Keqiang told parliament this month he is prepared to tolerate individual cases of ‘financial risk,’ growth is the slowest in more than two decades, an anti-graft campaign is halting projects and authorities are limiting investors’ scope to buy riskier bonds.”

Geopolitical Watch:

March 27 – Financial Times (Simeon Kerr): “Saudi Arabia’s military intervention in Yemen’s civil conflict has turned up the heat on the simmering cold war that has pitted Sunni Arab states against their Shia rival, Iran. The air strikes by Saudi jets in the early hours of Thursday targeted Yemeni air defences, the political offices of the Shia Houthi rebels who have taken control of swaths of the country, and a special forces base loyal to the Houthis’ ally, Ali Abdullah Saleh, the former president… Houthi militia forces said they responded with rocket fire into Saudi Arabia from their power base in the northern Yemeni highlands. As the conflict swells, there are fears that the Saudi intervention, which is backed by a 10-nation Sunni Muslim coalition, could risk igniting a wider regional conflagration.”

March 23 – Financial Times (Simeon Kerr): “Saudi Arabia pledged on Monday that ‘necessary measures’ could be taken to end the conflict in Yemen after the country’s foreign minister called on neighbouring Gulf Arab states to intervene and halt the progress of Shia Houthi rebels. ‘They’re expanding in territory, occupying airports and cities, attacking Aden with planes . . . gathering their forces,’ Riyadh Yassen said… Saud al-Faisal, Saudi foreign minister, later said Gulf countries would react to “aggression” by the Iran-allied Houthis if attempts to find a diplomatic solution to the country’s unfurling crisis failed.”

March 24 – Bloomberg: “Seven decades after the end of World War II, the international economic architecture crafted by the U.S. faces its biggest shakeup yet, with China establishing new channels for influence to match its ambitions. Three lending institutions with starting funds of at least $190 billion are taking shape under China’s leadership… Also this year, China’s yuan may win the IMF’s blessing as an official reserve currency, a recognition of its rising use in trade and finance. China’s clout has been expanding for decades, as its rapid growth allowed it to snap up a rising share of the world’s resources, its exports penetrated global markets, and its bulging financial assets gave it power to make big individual loans and purchases. Now, the creation of international lending institutions is leveraging that economic influence closer to the political and diplomatic arenas, as U.S. allies defy America to back China’s initiative.”

March 27 – Reuters (John O’Donnell): “China's Foreign Ministry expressed serious concern on Friday after the Philippines said it would resume repair and reconstruction works on disputed islands in the South China Sea, saying Manila was infringing on Chinese sovereignty… China itself is undertaking massive reclamation works in the area, while Taiwan, Malaysia and Vietnam have also been improving their facilities. Chinese Foreign Ministry spokeswoman Hua Chunying said it was ‘seriously concerned’ by the remarks by Philippine Foreign Minister Albert del Rosario. ‘On the one hand the Philippines makes unreasonable criticism about China's normal building activities on its own isles, and on the other announces it will resume repairs on an airport, runway and other illegal constructions on China's Spratly Islands, which it illegally occupies,’ Hua said. ‘This is not only a series infringement of China's sovereignty, but it also exposes the Philippines' hypocrisy,’ she told a daily news briefing…”

Brazil Watch:

March 24 – Bloomberg (David Biller and Paula Sambo): “Brazil’s central bank scaled back its support for the real, ending sales of new foreign-exchange swaps that had swelled the government’s liabilities. Officials will stop the auctions at the end of this month… The monetary authority will continue rolling over old contracts, which are equivalent to selling dollars in the futures market, depending on demand and may still hold auctions for dollar loans. The program, which began in 2013 as part of an effort to limit volatility, wasn’t enough to keep the Brazilian real from plunging 26% over the past year to the weakest level since 2003 this month. The swaps became a fiscal liability after growing to about $113 billion, according to Alberto Ramos, the chief Latin America economist for Goldman Sachs…”

March 26 – Bloomberg (Raymond Colitt): “Brazil’s central bank says it will miss its inflation target for the first time since 2003 as rising government-controlled prices and a weaker real offset higher interest rates. Consumer prices will rise 7.9% in 2015… Policy makers predict inflation will slow to within its 2.5% to 6.5% target range next year. The government faces a combination of above-target inflation, stagnant growth and the worst-performing major currency this year.”

March 26 – Reuters (Anthony Boadle): “Brazilian authorities… said they uncovered a tax fraud scheme at the Finance Ministry's tax appeals board that may have cost taxpayers up to 19 billion reais ($5.96bn). The news came in the midst of a multibillion-dollar corruption scandal at state oil company Petroleo Brasileiro SA , known as Petrobras, that has rattled Brazil's political establishment and weighed on the fragile economy. In the latest case, federal police inspector Marlon Cajado said companies bribed members of the CARF, a body within the Finance Ministry that hears appeals on tax disputes, to get favorable rulings that reduced or waived the amounts owed.”

EM Bubble Watch:

March 26 – Reuters (Humeyra Pamuk): “Turkish President Tayyip Erdogan accused Iran on Thursday of trying to dominate the Middle East and said its efforts have begun annoying Ankara, as well as Saudi Arabia and Gulf Arab countries. Turkey earlier said it supports the Saudi-led military operation against Houthi rebels in Yemen and called on the militia group and its ‘foreign supporters’ to abandon acts which threaten peace and security in the region. ‘Iran is trying to dominate the region,’ said Erdogan… ‘Could this be allowed? This has begun annoying us, Saudi Arabia and the Gulf countries. This is really not tolerable and Iran has to see this,’ he added…”

March 26 – Reuters (Abhishek Vishnoi): “The BSE Sensex and Nifty fell more than 2% on Thursday to a more than 10-week low on worries foreign investors, whose ownership of domestic shares have hit a record, may trim positions on risk aversion after Saudi Arabia launched air strikes in Yemen. Foreign flows have been the back bone of a record-setting rally in Indian shares since last year on Modi government's promise of reform led economic revival, pumping in $16.1 billion in 2014 and $5.8 billion so far this year. That has brought foreign ownership of Indian shares to the highest ever… As a result, any fears of exits can have a big impact on shares, especially as an expected pick up in earnings growth is taking more time, although there has not yet been any big foreign selling so far.”

March 27 – Reuters (Fahad Shadeed): “Saudi Arabia has begun drawing down its foreign currency reserves for the first time since 2009 to cover a record state budget deficit caused by the plunge in oil prices, data from the Saudi central bank indicated on Thursday. The central bank's net foreign assets fell 1.4% from a year earlier to 2.650 trillion riyals ($707bn) in February…”

Russia and Ukraine Watch:

March 27 – Financial Times (Kathrin Hille): “Vladimir Putin on Thursday described Russia as a country besieged by hostile forces and vowed to hit back hard both against attempts at military containment and of destabilisation of his regime from within. Taking a sharp tone both on domestic and foreign policy, the Russian president appeared to reassert his authority in his first major speech since the murder of opposition politician Boris Nemtsov on February 27 and Mr Putin’s subsequent disappearance from public view for 11 days this month… The situation around Russia ‘will not change for the better if we succumb and yield at every step. It will only change for the better if we become stronger,’ the Russian president told leaders of the Federal Security Bureau… Mr Putin accused the west of trying to undermine his regime. ‘Attempts by western special services at using social, non-governmental organisations and politicised associations for their goals are continuing without pause, especially to discredit the government and destabilise the internal situation in Russia,’ he said.”

March 22 – Financial Times (Richard Milne): “Russia has threatened Denmark with a nuclear strike if it takes part in Nato’s missile shield, in some of the most incendiary comments yet directed at a member of the military alliance. Russia’s ambassador to Denmark wrote in a newspaper opinion piece that the Nordic country had not fully understood the consequences of signing up to the Nato missile defence programme. ‘If it happens, then Danish warships will be targets for Russia’s nuclear weapons. Denmark will be part of the threat to Russia,’ Mikhail Vanin wrote… The dramatic threat cranks up further Russian pressure on countries in the Baltic region. Russian aircraft have violated the airspace of Estonia, Finland and Sweden… Russia is also reportedly moving Iskander missiles to Kaliningrad, its enclave that is bordered by Lithuania and Poland and which has seen a number of large military exercises in recent years.”

March 22 – Bloomberg (Ian Wishart): “The U.S. should consider sending defensive weapons to Ukraine amid signs that last month’s cease-fire is crumbling, Air Force General Philip Breedlove said… ‘I do not think that any tool of the U.S. or any other nation’s power should necessarily be off the table,’ said Breedlove, the North Atlantic Treaty Organization’s top military commander. ‘Could it be destabilizing? The answer is yes. Inaction could also be destabilizing.’”

March 23 – Financial Times (Roman Olearchyk): “Ukraine’s President Petro Poroshenko warned on Monday that no regional governor would be allowed a ‘pocket army’, after armed men took up positions around an oil company in which Igor Kolomoisky, the billionaire oligarch and governor, is battling to retain control. The stand-off threatened to escalate into a full-blown clash between the country’s wealthy president and a rival oligarch who has long been one of Ukraine’s richest men but since last year’s Ukrainian revolution has also developed a political power base. Mr Kolomoisky accepted the role of governor of the central Dnipropetrovsk region last year as Ukraine’s new government tried to stabilise the country after the president at the time, Viktor Yanukovich, was toppled by anti-government protests. He has also funded volunteer militias fighting Russian-backed separatists in Ukraine’s east.”

Japan Watch:

March 22 – Reuters (Leika Kihara and Tetsushi Kajimoto): “A rift is emerging between Prime Minister Shinzo Abe and his hand-picked central bank boss on how to fix Japan's tattered finances, which could blunt the impact of the ‘Abenomics’ stimulus policies they have worked together to prosecute. Two years into Bank of Japan Governor Haruhiko Kuroda's tenure, the cracks are becoming hard to conceal and could affect the timing of any further monetary easing and an eventual end to the massive money-printing program he set in train. Their differences over fiscal policy needed to cut Japan's staggering public debt, which at 230% of GDP is twice the U.S. figure and about 50 points higher than perilous Greece, have so far been masked by their shared determination to end deflation.”

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