Friday, March 6, 2015

My Weekly Commentary: King Dollar Tipping Point

The U.S. unemployment rate has dropped to 5.5%, cut almost in half from the 2009 high.  The rate is down 1.2 percentage points from a year ago, back to the June 2008 level.  Yet the Fed funds rate remains stuck at near zero.  The Fed’s balance sheet increased $325bn the past year, while having inflated about $3.6 TN from its pre-crisis level.  Securities prices have inflated to unprecedented levels.

The objective of the Fed’s extraordinary policy course over the last six years has been to spur risk-taking, asset market reflation, stimulative wealth effects and resulting economic recovery.  Superficially, Federal Reserve monetary inflation appears to have worked.  Yet beneath the facade exist extreme imbalances and maladjustment.  U.S. and global securities markets have been incredibly distorted.  The American and global Credit addiction has only worsened.  Such harsh realities cannot be disregarded forever.

Fed policymaking has provided a competitive advantage to financial assets over real economy investment.  Rate, monetization and liquidity policies have afforded competitive advantage to speculation at the expense of savings.  The overall outcome should be of little surprise:  speculative excess, asset Bubbles and financial engineering galore.  And as the Fed falls further behind the curve, Bubble excess turns conspicuous.  Mark Cuban blogged this week, “Why This Tech Bubble is Worse Than the Tech Bubble of 2000.”  CNBC had a Friday segment, “Bubble Trouble in Biotech?”  From Bloomberg, also on Friday: “Biotech Keeps Rising as Investors Worry ‘End Is Coming’”.  There is as well greater recognition of Bubble excess that has enveloped corporate debt and derivatives markets.  These days, confirmation of the multi-asset class “Granddaddy of All Bubbles” thesis is apparent about everywhere.

Meanwhile, the global situation – markets, economies and geopolitics - turns progressively unstable.  At this point, I am highly confident in my thesis that the global Bubble has been pierced (with profound ramifications!).  This view is supported by the self-reinforcing nature of the collapse in energy and commodities prices along with faltering EM currencies.  

At the same time, general risk aversion and destabilizing “hot money” exodus have been held at bay by the unprecedented central bank liquidity slushing around the global financial “system.”  Typical contagion effects have yet to attain momentum.  The bullish view holds that policymaking has lessened global systemic risk.  I instead believe unprecedented policy-induced distortions have created a bursting dam dilemma.  EM securities prices remain completely out-of-whack when compared to the unfolding reality.  Acute EM systemic fragility has been masked by central bank policies and historic speculative excess.

A Friday afternoon Bloomberg headline raised a pertinent issue:  “Why the Strong Jobs Report May Have Caused the Stock Market to Tumble.”  I’ll attempt an explanation.

First of all, the bond market was clobbered.  The June long-bond futures contract was slammed for over three points, with yields rising 16 bps to 2.46%.  Ten-year Treasury yields jumped 13 bps, with yields up a notable 25 bps for the week. Two-year government yields increased eight bps Friday to 0.725% (high since December), and December Eurodollars jumped nine bps to 0.865%.  

The conventional view holds that Friday’s strong non-farm payroll report increases the odds of a June rate increase.  Importantly, the markets must face the uncertainty of a now rapidly approaching reversal after six years of unprecedented easy “money.”  And while the markets remain confident the Yellen Fed will approach “normalization” with the most cautious little baby-steps imaginable, the key market issue at this point is the great uncertainty associated with years of policy-induced market excess and distortions.  It’s worth noting that EM bonds suffered much more dramatic Friday losses than Treasuries.  

Friday trading saw South African yields surged 25 bps, Colombia 20 bps, Turkey 18 bps, Brazil 15 bps, Mexico 16 bps, Hungary 25 bps and Poland 17 bps.  EM currencies also took one on the chin. Friday action saw the Mexican peso fall 2.0%, Brazilian real 2.0%, Czech Koruna 1.9%, Bulgarian lev 1.7%, Hungarian forint 1.7%, Romanian leu 1.7%, South African rand 1.7%, Colombian peso 1.5% and Polish zloty 1.4%.  

From my perspective, Friday may have provided The Tipping Point for King Dollar.  The Dollar Index jumped 1.3% during Friday’s session to the highest level since 2003.  The dollar is now in its most powerful advance since King Dollar’s heyday back in the late-nineties.  The King Dollar speculative dynamic is also turning highly destabilizing.  

Interestingly, at the top of the Periphery Fragility List, Brazil and Turkey saw their currencies this week hammered 7.3% and 4.4%, respectively.  Brazilian (real) 10-year bond yields surged 69 bps to 12.97%.  Brazilian stocks were hit for 3.1%, giving back all 2015 gains.  Turkish (dollar) yields jumped 37 bps this week to the highest level since December (4.68%).  Turkish stocks sank 4.6%, also to the low since December.  

Despite all the talk of global deflation risk, Brazil and Turkey (among others) have inflation problems.  Bloomberg:  “Brazil Posts Fastest Annual Inflation in Almost a Decade.”  Consumer price inflation has been running above 9% in Turkey for much of the past year.  Rapidly devaluing currencies now exacerbate inflationary pressures – the ugly old vicious cycle taking hold (that the printing press can’t rectify).

For the most part (excluding Ukraine, Venezuela and Russia), EM bond markets have held their own – even in the face of faltering EM Bubbles.  I’ll Credit this feat largely to the Fed’s intransigent zero-rate policy; BOJ and ECB liquidity injections; Chinese fiscal and monetary stimulus; and, in general, huge interest-rate differentials to “developed” bonds coupled with a massive (and expanding) pool of global speculative finance.  And as King Dollar pressured commodities and EM currencies, global deflationary fears were fanned.  This ensured that the dovish Fed stayed put at zero, which accommodated “Bubble On” and resulting runaway excess throughout U.S. securities markets.  Domestic and global fragilities ensured unrelenting “do whatever it takes” monetary stimulus from the ECB and BOJ that, when coupled with U.S. excess, provided ample fuel for a more globalized “Bubble On.”   

But the global pool of speculative finance became too massive and unwieldy, while yen and euro devaluation got out of hand.  Global securities markets became too leveraged.  The resulting King Dollar Dynamic ensured that global “hot money” flooded into U.S. asset markets (stocks, bonds, real estate, tech, biotech, energy, private businesses, etc.).  Reminiscent of the late-nineties, this dynamic became a self-reinforcing Bubble.  The stronger the dollar the more pressure on EM – inciting flows out of the faltering Periphery to the bubbling Core.     

Considering the U.S. financial and economic backdrops, rates – Fed funds to long-bond to corporates – are much too low.  Now, the prospect of the Fed commencing rate “normalization” only throws more gas on King Dollar.  This applies more pressure on EM currencies and commodities, which further stokes King Dollar.

The King Dollar Tipping Point comes when EM markets turn disorderly – currencies and bonds.  Disorderly is spurred by the prospect of companies, financial institutions and countries not having the wherewithal to service dollar-denominated obligations.  And be mindful of critical market psychology: King Dollar ensures that investors in dollar-denominated debt are for a while willing to overlook a lot of EM fundamental deterioration.  There comes, however, a Tipping Point where investors begin to fret the ability of the EM debtor to service debts and stabilize economies while avoiding the printing press.  There comes a time when nervous speculators move to hedge exposure.  There arrives a Tipping Point where market illiquidity becomes a serious concern.

I believe stocks were hit hard Friday because a surging dollar and U.S. bond yields now push EM bond markets a big step closer to a disorderly “Risk Off” dynamic.  A surprise jump in global yields would portend problematic de-leveraging.  I wrote last week that every fledgling Risk Off should now be monitored closely.  The global system is much more vulnerable to a liquidity event than is commonly perceived.  The global leveraged speculating community continues to struggle with performance – hence is susceptible to losses, de-leveraging, redemptions and more liquidity pressure on global markets.  There is also the important issue of de-risking/de-leveraging dynamics throughout the global commodities complex having already negatively impacted the liquidity backdrop.  Moreover, the Fed has ended QE and the pressure is now on the Fed to begin normalizing rates.  

It’s been an important part of my thesis for a while now that the next meaningful de-risking/de-leveraging episode would be poised for unexpected tumult.  Yet each fledgling “Risk Off” was met with comforting words and liquidity from the Fed and global central bankers more generally.  But I’ll presume (for now) that a 5.5% unemployment rate and elevated securities prices will dissuade the Fed from quickly restarting QE.  Meanwhile, ECB and BOJ QE feed an increasingly destabilizing King Dollar, much to the expense of the likes of Brazil, Turkey, Mexico, South Africa, Indonesia, Malaysia, etc.  

And there’s another King Dollar wildcard worth pondering: China’s renminbi.  As I touched on last week, King Dollar creates a serious dilemma for Chinese officials.  Chinese exporters became less competitive again this week.  And there is increasing focus on the possibility of destabilizing outflows from China.  Meanwhile, Chinese officials admitted to expanding difficulties, including rising inequality.  An ongoing parabolic dollar move might force their hand on de-pegging their currency from King Dollar.

While U.S. stock and bonds were under pressure this week, for the most part spreads were well-behaved.  The yen was also under pressure, weakness that supports the “yen carry trade” and global leverage more generally.  For Risk Off to attain momentum, I would expect to see spreads widen and the yen to catch a bid.  And with Brazil, Mexico, Turkey, South African and others under pressure late this week, markets are on the brink of a full-fledged EM problem - a King Dollar Tipping Point.  

For the Week:

The S&P500 dropped 1.6% (up 0.6% y-t-d), and the Dow fell 1.5% (up 0.2%). The Utilities were slammed for 4.3% (down 9.1%). The Banks gained 1.0% (down 1.6%), and the Broker/Dealers increased 0.8% (up 0.1%). The Transports declined 1.3% (down 2.5%). The S&P 400 Midcaps lost 1.3% (up 2.4%), and the small cap Russell 2000 fell 1.3% (up 1.1%). The Nasdaq100 declined 0.9% (up 3.9%), and the Morgan Stanley High Tech index dropped 1.7% (up 2.1%). The Semiconductors slipped 0.3% (up 3.7%). The bubbly Biotechs jumped another 3.0% (up 16.3%). With bullion down $46, the HUI gold index was hammered for 13.6% (up 1.6%).

One- and three-month Treasury bill rates ended the week at one basis point. Two-year government yields jumped 11 bps to 0.725% (up 6bps y-t-d). Five-year T-note yields rose 20 bps to 1.70% (up 4bps). Ten-year Treasury yields surged 25 bps to 2.24% (up 7bps). Long bond yields jumped 25 bps to 2.84% (up 9bps). Benchmark Fannie MBS yields rose 19 bps to 2.93% (up 11bps). The spread between benchmark MBS and 10-year Treasury yields narrowed six bps to 69 bps. The implied yield on December 2015 eurodollar futures jumped almost 10 bps to 0.865%. Corporate bond spreads were mixed. An index of investment grade bond risk increased one to 62 bps. An index of junk bond risk fell 10 bps to a six-month low 310 bps. An index of EM debt risk fell 11 bps to 346 bps.

Greek 10-year yields slipped four bps to 9.25% (down 50bps y-t-d). Ten-year Portuguese yields declined five bps to a record low 1.76% (down 86bps). Italian 10-yr yields dipped a basis point to a record low 1.31% (down 58bps). Spain's 10-year yields increased three bps to 1.29% (down 32bps). German bund yields jumped seven bps to 0.39% (down 15bps). French yields rose nine bps to 0.69% (down 14bps). The French to German 10-year bond spread widened two to 30 bps. U.K. 10-year gilt yields rose 15 bps to a two-month high 1.95% (up 19bps).

Japan's Nikkei equities index gained 0.9% to a new 15-year high (up 8.7% y-t-d). Japanese 10-year "JGB" yields jumped six bps to 0.39% (up 7bps y-t-d). The German DAX equities index gained another 1.3% to a new record high (up 17.8%). Spain's IBEX 35 equities index declined 0.8% (up 7.9%). Italy's FTSE MIB index added 0.4%. Emerging equities were mixed. Brazil's Bovespa index was hit for 3.1% (down 0.1%). Mexico's Bolsa dropped 2.1% (up 0.3%). South Korea's Kospi index gained 1.4% (up 5.1%). India’s Sensex equities index added 0.8% (up 7.1%). China’s Shanghai Exchange fell 2.1% (up 0.2%). Turkey's Borsa Istanbul National 100 index was slammed for 4.6% (down 6.3%). Russia's MICEX equities index was hit for 1.7% (up 23.8%).

It was the strongest week of debt issuance so far in 2015 ($60bn from Bloomberg): Investment-grade issuers included Exxon Mobil $8.0bn, Abbott Laboratories $2.5bn, Energy Transfer Partners LP $2.5bn, MetLife $1.5bn, Burlington Northern Santa Fe $1.5bn, Quest Diagnostics $1.2bn, Charles Schwabe $1.0bn, John Deere Capital $1.0bn, Marsh & McLennan $500 million, Lam Research $1.0bn, CME Group $750 million, TD Ameritrade $750 million, Newfield Exploration $700 million, Discover Financial Services $500 million, Alabama Power $550 million, Republic Services $500 million, PACCAR Financial $500 million, DTE Electric Company $500 million, Retail Properties of America $500 million, Solar Star Funding $350 million, Lincoln National $325 million and Idaho Power $250 million.

Convertible debt issuers included Cheniere Energy $625 million, Horizon Pharma $350 million, Gogo $300 million and InterDigital $275 million.

Junk funds saw a sixth week of positive flows, although inflows slowed to $309 million (from Lipper). Junk issuers included Zayo Group $1.43bn, Energy XXI Gulf Coast $1.45bn, Sirius XM Radio $1.0bn, Peabody Energy $1.0bn, Antero Resources $750 million, Comstock Resources $700 million, RSI Home Products $575 million, Pilgrim's Pride $500 million, Avis Budget Car Rental $375 million and Laredo Petroleum $350 million.

International debt issuers included Actavis $21bn, Caisse d'Amortissement de la Dette Sociale $5.0bn, European Investment Bank $4.0bn, ENSCO $1.7bn, KFW $1.0bn, Costa Rica $1.0bn, Council of Europe $1.0bn, Instituto de Credito Official $1.0bn, Commonwealth Bank Australia $4.25bn, AIA Group $750 million, Jaguar Land Rover Automotive $500 million and Kimberly-Clark de Mexico $250 million.

Freddie Mac 30-year fixed mortgage rates fell five bps to 3.75% (down 12bps y-t-d). Fifteen-year rates declined four bps to 3.03% (down 12bps). One-year ARM rates were unchanged at 2.44% (up 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up two bps to 4.31% (up 3bps).

Federal Reserve Credit last week declined $10.9bn to $4.449 TN. During the past year, Fed Credit inflated $325bn, or 7.9%. Fed Credit inflated $1.638 TN, or 58%, over the past 121 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $10.9bn to an almost one-year low $3.256 TN. "Custody holdings" were down $66bn over the past year, or 2.0%.

M2 (narrow) "money" supply surged $43.5bn to a record $11.853 TN. "Narrow money" expanded $710bn, or 6.4%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits added $1.8bn, and Savings Deposits jumped $40.5bn. Small Time Deposits slipped $1.8bn. Retail Money Funds increased $1.0bn.

Money market fund assets dropped $18.6bn to $2.672 TN. Money Funds were down $60.5bn year-to-date.

Total Commercial Paper dropped $28.2bn to $999 billion. CP fell $29.8bn over the past year, or 2.9%.

Currency Watch:

The U.S. dollar index surged 2.4% to 97.615 (up 8.1% y-t-d). For the week on the upside, the Taiwanese dollar increased 0.1%. For the week on the downside, the Brazilian real declined 7.3%, the Mexican peso 3.5%, the Swiss franc 3.2%, the South African rand 3.2%, the euro 3.1%, the Norwegian krone 3.1%, the Danish krone 3.0%, the New Zealand dollar 2.7%, the British pound 2.6%, the Swedish krona 1.5%, the Australian dollar 1.2%, the Singapore dollar 1.1%, the Japanese yen 1.0%, the Canadian dollar 0.9% and the South Korean won 0.1%.

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.2% (down 1.5% y-t-d). Spot Gold sank 3.8% to $1,167 (down 1.5%). May Silver fell 4.5% to $15.81 (up 1%). April Crude declined 15 cents to $49.61 (down 7%). April Gasoline sank 4.9% (up 28%), while March Natural Gas gained 3.8% (down 2%). May Copper fell 3.1% (down 8%). March Wheat was hammered 6.1% (down 18%). March Corn lost 1.4% (down 5%).

U.S. Fixed Income Bubble Watch:

March 4 – Bloomberg (Sarah Mulholland): “The oil glut is threatening to expose cracks in the commercial-mortgage bond market. Nomura Holdings Inc. estimates that $16 billion in property debt that has been sold to investors as securities is vulnerable to default after crude prices plunged, posing risks for the economies of U.S. cities and towns built around the boom. Wall Street analysts are poring over commercial-mortgage backed securities for signs of distress as the oil crash weighs on demand for real estate in energy hubs. Properties that house workers -- such as apartment complexes, mobile-home parks and hotels -- are likely to be the first to see vacancy rates rise as oil rigs idle and jobs vanish, according to Nomura debt analysts Lea Overby and Steven Romasko. ‘If this oil story persists, oil workers are going to go someplace else -- they’re transient,” Overby… analyst at the bank, said… ‘Demand is going to go from very high to zero overnight, and that’s a problem.’”

March 4 – Bloomberg (Jodi Xu KleinLaura J Keller): “A Colorado oil producer is giving debt investors a lesson in the risks of lending to companies that staked their future on the U.S. shale boom. Less than seven months after raising $175 million in a junk-bond offering, American Eagle Energy Corp. said Monday that it wouldn’t make its first interest payment on the debt. Instead, it hired two advisors… to negotiate with bondholders on a plan to restructure its debt… The holders of the notes are left to consider how to maximize recovery of their investment, either by giving the company more time to try to become profitable or by pushing the company into default. With the price of U.S. crude down 52% since July, American Eagle and other small energy production companies with significant debt loads are struggling to service obligations to creditors who were willing to lend them money just a few months ago.”

March 3 – Bloomberg (Lu Wang and Oliver Renick): “Corporate America’s love affair with itself grows more passionate by the month. Stock buybacks, which along with dividends eat up sums of money equal to almost all the Standard & Poor’s 500’s earnings, vaulted to a record in February, with chief executive officers announcing $104.3 billion in planned repurchases. That’s the most since TrimTabs Investment Research began tracking the data in 1995 and almost twice the $55 billion bought a year earlier… ‘Companies that are earning a lot of money and generating cash are borrowing money at basically zero rates and buying back,’ said Neil Grossman… chief investment officer at Tkng Capital Partners. “From an investor’s standpoint, you want the highest return on your dollar, period. If the highest return comes not from growing your business but buying your shares back, that’s fine.’”

March 4 – Bloomberg (Alastair Marsh): “There’s a little silver lining for banks in the lack of liquidity in credit markets: the opportunity to peddle derivatives that mimic debt securities as a fix. Trading in total-return swaps linked to bond indexes has surged to $4 billion a week, up from $2.4 billion a year ago, according to… BNP Paribas SA. JPMorgan… forecasts trading of the derivatives, which are meant to make it easier to place bullish and bearish bets in credit markets, will increase by as much as threefold this year. The swaps are gaining traction in part because investors are finding it harder to buy and sell the bonds themselves… ‘The number-one draw is that you can buy one swap and have access to about 1,000 bonds in an index, some of which have virtually no liquidity of their own,’ said Daniel Zraly, who trades total-return swaps and exchange-traded funds at BNP Paribas… ‘In buying the swap you gain exposure to the broad market and you may end up using less capital than if you bought a fully funded credit product like a bond.’ Total-return swaps amplify gains or losses because they allow investors to wager on a large pool of debt while setting aside a relatively smaller amount of collateral to back the trade. They also let buyers get returns tied to assets without having to own them. The derivatives appeal to investors because trading bonds or loans can be time consuming and expensive.”

U.S. Bubble Watch:

March 4 – Bloomberg (Richard Rubin): “Eight of the biggest U.S. technology companies added a combined $69 billion to their stockpiled offshore profits over the past year, even as some corporations in other industries felt pressure to bring cash back home. Microsoft Corp., Apple Inc., Google Inc. and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that U.S. companies are holding overseas…The total amount held outside the U.S. by the companies was up 8% from the previous year, though 58 companies reported smaller stockpiles. The money pileup, reflecting companies’ incentives to park profits in low-tax countries, has drawn the attention of President Barack Obama and U.S. lawmakers, who see a chance to tap the funds for spending programs and to revamp the tax code.”

March 4 – Bloomberg (Neil Callanan): “New York luxury-home prices rose 19% last year, beating cities around the world, as the U.S. economic recovery gathered pace and a growing number of upscale projects drew overseas buyers. U.S. cities made up four of the top 10 spots globally, with Aspen, Colorado ranked second, San Francisco in sixth and Los Angeles 10th, broker Knight Frank LLP said… The biggest drops were in Buenos Aires and the Swiss ski resort of Crans-Montana, where values fell 15%. Entrepreneurs are ‘very interested in the opportunity in New York because the economic context is so much more positive than the European context,’ said Liam Bailey, head of research at Knight Frank… ‘In the last 18 months you’ve seen quite a few new projects coming into the market in New York that’s helped pull in new buyers… This year, 2,386 newly built luxury condos will be listed for sale in Manhattan, the most on record, according to data compiled by Corcoran Sunshine Marketing Group.”

Federal Reserve Watch:

March 6 – Bloomberg (Steve Matthews): “As the U.S. jobless rate creeps ever closer to the Federal Reserve’s definition of full employment, some Fed officials are asking a question: How low can you go? Their answer: less than the 5.2 % to 5.5% the Fed currently defines as the lowest that can be achieved without heating up inflation. Some Chicago Fed economists say this sweet spot, often called full employment or the natural rate of unemployment, may be as low as 5%. Their boss, Chicago Fed President Charles Evans, is among policy makers who have lowered their estimates for the normal rate. ‘I now think that it might be something more like 5.0%,” Evans said… He’s not alone. ‘A few’ members of the policy-making Federal Open Market Committee lowered their estimates in light of ‘continued softness’ in inflation, according to minutes of the Jan. 27-28 meeting, which didn’t identify the officials.”

Central Bank Watch:

March 4 – Bloomberg (Mark Gilbert): “Denmark is unleashing huge amounts of ammunition in its battle to prevent the krone from appreciating. The cost of the campaign, though, suggests that any renewed assault by speculators could require an even more aggressive response -- capital controls. The nation revealed yesterday that its foreign currency reserves soared by 173 billion kroner ($26bn) in February -- the biggest increase ever. The central bank has been cranking up the printing presses, minting domestic currency for sale on the foreign exchange market to stop the krone from straying too far from its target rate of about 7.46 per euro. As it offloads kroner, the central bank buys foreign currencies, which go into a reserve account that held a record 737 billion kroner last week. Those sales, combined with four rate cuts this year -- driving the benchmark deposit rate to minus 0.75%...”

Global Bubble Watch:

March 3 – Bloomberg (Simon Kennedy): “Central bankers are fighting an uphill battle against the forces of deflation. Flatlining consumer prices and plunging commodity costs are sapping the potency of near-zero interest rates and driving up the so-called real rate -- or interest minus inflation. The higher that goes, the more attractive it is for companies and consumers to save rather than spend as policy makers want. The average real rate of developed economies has been negative since the 2009 recession, dropping below minus 2% in 2011, according to Pavilion Global Markets… It’s now about minus 0.28% and poised to move above zero, meaning monetary stimulus is becoming less powerful, according to Pavilion.”

March 2 – CNBC (Michelle Fox): “Despite producing an average return of 3.3% last year, the hedge fund industry is on track to surpass $3 trillion in assets this year, according to a new survey by Deutsche Bank. ‘We have seen a doubling in assets under management since 2008,’ said Barry Bausano, president of Deutsche Bank Securities and co-head of global prime finance for Deutsche Bank. ‘That's despite what's been pretty pedestrian performance.’”

March 3 – New York Times (William Alden): “In many ways, Lloyd C. Blankfein and Stephen A. Schwarzman are similar. Both are senior statesmen of Wall Street, both at the helms of powerful financial firms. But there is at least one big difference, as recent pay disclosures have made clear. Mr. Blankfein, the chief executive of Goldman Sachs, earned roughly $30 million in 2014, including his salary, bonus and dividends. Mr. Schwarzman, the chief executive and co-founder of the private equity giant Blackstone Group, received about $690 million. The gulf between the earnings of the two men illustrates the power of dividend income for private equity’s top brass. Mr. Schwarzman and his private equity rivals at Kohlberg Kravis Roberts, Apollo Global Management and the Carlyle Group retain large stakes in their firms after founding them.”

March 4 – Bloomberg: “More than 76,000 Chinese millionaires emigrated or acquired citizenship of another country in the decade through 2013 amid global expansion by the nation’s companies. Australia was among the most favored destinations, broker Knight Frank LLP said… citing data compiled by law firm Fragomen LLP. The Chinese accounted for more than 90% of applications for the country’s significant investor visa in the two years to the end of January, representing 1,384 people. They also make the most applications for high-net-worth visas in the U.K. and the U.S. ‘Ultimately, there is a desire from wealthy Chinese to relocate,’ said Liam Bailey, head of research at Knight Frank.”

ECB Watch:

March 6 – Bloomberg (David Goodman): “The European Central Bank’s flexible approach to buying 1.1 trillion euros ($1.2 trillion) of euro-area bonds risks making the process more opaque for investors. From Monday and for the next 19 months, both the ECB and the euro area’s 19 national central banks will seek to buy debt from counterparties in the secondary market. Within limits, their trading desks will have discretion over what they buy and when, in contrast to the Federal Reserve, which issued a calendar for the purchases it made in the U.S. ‘There is high potential for a lot of weird market effects,’ said Lyn Graham-Taylor, a fixed-income strategist at Rabobank… ‘Reverse auctions would arguably make the process cleaner.’ The… ECB will grant the national central banks, known as NCBs, wiggle room as they carry out purchases within their home markets, allowing them some choice between government and agency debt. It also avoided setting a target for the duration of the purchases, a measure of the sensitivity of bond prices to movements in yield.”

Europe Watch:

March 6 – Financial Times (Anne-Sylvaine Chassany and Roula Khalaf): “She calls for the collapse of the EU and talks about nationalising banks. She sees the US as a purveyor of dangerous policies and Russia as a more suitable friend. She wants to bring an end to immigration and believes the republic is under Islamist assault. Radical as Marine Le Pen’s vision for France may be, the prospect of her National Front (FN) policies becoming reality is no longer pure fantasy. ‘It’s the Front’s moment,’ Ms Le Pen declares in an interview with the Financial Times. Two months after the terrorist attacks on Charlie Hebdo, the French satirical magazine and a Jewish supermarket in Paris, the far-right party has cemented its standing as the most dynamic political force in a frightened and frustrated country; its 46-year-old leader now regarded as a possible winner of the presidency in 2017. Polls place the FN ahead of the centre-right UMP and ruling Socialist parties in the first round of this month’s local elections… The soaring popularity of a party that for decades seemed consigned to the fringes has raised alarm bells across the political spectrum.”

March 4 – Bloomberg (Nikolaos ChrysolorasRebecca ChristieVassilis Karamanis): “As talks over the disbursement of bailout funds for Greece drag on into their seventh consecutive month, the deadlock threatens to pull the country back into a recession this quarter, or even a possible default within weeks. Greece needs to refinance or repay about 6.5 billion euros ($7.2bn) in debt and interest in the next three weeks… To top that, its budget forecasts a 2.1 billion euros cash deficit in March. A tax-revenue shortfall opened a hole of 217 million euros in January, derailing budget targets. Having lost market access, Greece’s only lifeline is emergency loans extended by euro-area member states and the International Monetary Fund. Failure to secure an agreement with them on the disbursement of funds has triggered a liquidity squeeze, raising doubts about the country’s solvency, as well as the sustainability of its nascent economic recovery.”

China Bubble Watch:

March 6 – Financial Times (Jamil Anderlini and Tom Mitchell in Beijing and Gabriel Wildau): “China expects an even sharper economic slowdown following the lowest growth in a quarter of a century last year, as the country struggles with deflation and an increasingly obsolete economic model. In an unusually candid annual ‘state of the nation’ address to 3,000 members of China’s ersatz parliament on Thursday, Premier Li Keqiang laid out a litany of flaws in the model that has driven the world’s fastest-growing major economy for more than three decades. ‘Over the past year we have faced more difficulties and challenges than anticipated,” Mr Li told the National People’s Congress. But ‘with downward pressure on China’s economy building and deep-seated problems in development surfacing, the difficulties we will encounter in the year ahead may be even more formidable than those of last year’… Mr Li also said it was essential ‘to strengthen the bonds of attachment and affection of all Chinese, whether at home or overseas, to our fatherland.’ ‘Perhaps Premier Li is appealing to nationalistic feelings because of a general conception that it will be almost impossible for the economy to even grow as fast as 7% for much longer,’ said Willy Lam, of the Center for China Studies at the Chinese University of Hong Kong. ‘He is telling people that even if their standard of living is not improving as fast as the government promised they should still support the party and the government.’”

March 6 – Bloomberg: “More than three decades after China’s Communist Party allowed some people to get rich first, the country’s top leaders are still grappling with how to spread the benefits of the economic boom such freedoms triggered. ‘The only way to build a country is to enrich its people,’ said Premier Li Keqiang at the annual meeting of the legislature in Beijing Thursday, flagging income distribution as among primary concerns. He also vowed to extend a campaign against corrupt officials who enrich themselves, a clampdown that’s spread to the military and state-owned enterprises. A complementary step: cutting pay for public-company chiefs. A broadening in prosperity is central to prospects for consumption to take over as a growth driver as debt-fueled investment is reined in… ‘Inequality is a big concern for Chinese policy makers,’ said Liu Li-Gang, chief economist for greater China at Australia & New Zealand Banking Group… ‘China calls itself a socialist economy but its Gini ratio is now as high as the U.S.,’ he said, referring to a globally comparative measure of inequality.”

March 4 – Bloomberg: “China set the lowest economic growth target in more than 15 years and flagged increasing headwinds as leaders tackle the side effects of a generation-long expansion that spurred corruption, fueled debt and hurt the environment. The goal of about 7% -- down from last year’s aspiration of about 7.5% -- was given in Premier Li Keqiang’s work report at the annual meeting of the legislature in Beijing Thursday. Fiscal policy will remain proactive and monetary policy prudent, while the yuan exchange rate will be kept at a reasonable and balanced level, the government said. Headwinds that include a property slump, excess industrial capacity and disinflation prompted the second interest-rate cut in three months at the weekend. Policymakers flagged a wider budget deficit this year of about 2.3% of gross domestic product, adding fiscal firepower to the monetary stimulus.”

March 6 – Bloomberg (Fion Li): “January’s jump in foreign-currency deposits in China reflects mounting expectations that the yuan will weaken further, according to Barclays… The holdings climbed $45.2 billion in January to $655.7 billion, the U.K. lender said… That compared with a $108.4 billion gain for the whole of last year. The yuan has retreated 1% against the dollar since Dec. 31, after falling 2.4% in 2014… Depreciation risks spurring capital outflows that are complicating efforts to bring down borrowing costs amid a slowdown in the world’s second-largest economy. ‘The renewed rise in foreign-exchange deposits highlights the increasing currency pressures and the ongoing monetary dilemma that China is facing,’ Dennis Tan and Mitul Kotecha, Barclays strategists… wrote… ‘Even though the authorities have kept yuan fixings broadly stable and have attempted to tame market expectations of policy changes through public comments, these efforts have failed to calm market expectations of yuan depreciation.’”

March 4 – Bloomberg: “China plans a wider budget deficit this year as the government adds fiscal fuel to monetary stimulus to cushion the economy’s slowdown while risks such as a local-government debt binge are reined in. The government projects a budget shortfall of 1.62 trillion yuan ($258bn) in 2015… That amounts to about 2.3% of gross domestic product, it estimated. China’s central government is assuming some of the debt incurred by local-government financing vehicles as it reshapes its fiscal framework. Premier Li Keqiang last week called for more active fiscal policy, while the central bank on Saturday announced its second interest-rate cut in three months… Local authorities set up thousands of funding units to finance projects from sewage systems to subways after a 1994 budget law barred them from issuing notes directly. Their fundraising helped regional liabilities jump 67% from the end of 2010 to 17.9 trillion yuan as of June 2013. LGFVs’ bond sales almost doubled last year to 1.5 trillion yuan…”

March 3 – Bloomberg (Lianting Tu): “Banks are bundling loans into securities to make room on their balance sheets for more lending amid a fading property boom and stuttering economic growth. This isn’t the U.S. circa 2007, it’s China in 2015. Having banned asset-backed bonds in 2009 after they’d helped spark the global financial crisis, authorities in the world’s second-largest economy started allowing sales in 2012. Issuance has climbed since then to 282.3 billion yuan ($45bn) last year, almost 15 times the offerings in 2013… Sales are already up 147% this year versus the same period in 2014. The boom is alarming ratings companies as soured loans rise to the highest in four years and China’s public debt soars to more than 250% of its gross domestic product, more than double the ratio for the U.S. and Germany… ‘There’s been no real economic crisis in China in the past few decades, but if a severe one happens, the performance of the underlying assets backing these securities could deteriorate significantly,’ said Jerome Cheng, a structured finance analyst at Moody’s…”

March 3 – Bloomberg (Henrique Almeida): “Billboards in Chinese at Lisbon’s international airport peddling luxury properties leave little doubt about who is buying real estate in Portugal. While the ads offer a chance at securing a so-called golden visa to live in Portugal in exchange for property investments of at least 500,000 euros ($559,000), they leave out the golden rule of such purchases: never rush into a deal. The haste with which some Chinese buyers have acquired their piece of Portugal has left them feeling cheated once they realize they might have struck better deals. Some may even have been victims of middlemen who charge commissions of as much as a quarter of the value of the transaction. ‘Many Chinese land in Portugal for the first time, don’t speak the language and buy a home in a matter of days,’ said Y Ping Chow, head of the Chinese League in Portugal… ‘Some of these investors got burned.’”

March 4 – Bloomberg (Bhuma Shrivastava): “Sahara India Pariwar defaulted on loan agreements with Bank of China Ltd. that were secured against three luxury hotels in the U.S. and U.K., resulting in the recent appointment of an administrator to sell the Grosvenor House hotel in London. Sahara, which is controlled by financier Subrata Roy, said there had been ‘technical breaches’ of financial covenants on loans from Bank of China for the Plaza and Dream Downtown hotels in New York… As a result of cross-collateral, the loan on the Grosvenor hotel in London “also is being treated under default,” Sahara said… Deloitte LLP said… it was appointed as administrator for Sahara Grosvenor House Hospitality Ltd., which owns the leasehold title to the London hotel…”

Geopolitical Watch:

March 4 – Bloomberg (Evgenia PismennayaHenry Meyer): “Russia’s Security Council accused the U.S. of plotting to oust President Vladimir Putin by financing the opposition and encouraging mass demonstrations, less than a week after a protest leader was murdered near the Kremlin. The U.S. is funding Russian political groups under the guise of promoting civil society, just as in the ‘color revolutions’ in the former Soviet Union and the Arab world, council chief Nikolai Patrushev said… At the same time, the U.S. is using the sanctions imposed over the conflict in Ukraine as a ‘pretext’ to inflict economic pain and stoke discontent, he said. U.S. officials have dismissed the suggestion of a plot. White House spokesman Josh Earnest called the idea ‘outrageous and false.’ Secretary of State John Kerry said this week that Putin “misinterprets a great deal of what the United States has been doing and has tried to do.’”

Brazil Watch:

March 6 – Bloomberg (Steve Matthews): “For all practical purposes, Brazil’s overseas bond market is frozen. It’s been four months since a Brazilian company issued debt internationally. The last time borrowers were shut out for this long was in 2008, when the implosion of Lehman Brothers Holdings Inc. caused credit to seize up around the world. The drought is emblematic of how far Brazil has fallen in the eyes of investors as the economy founders and the fallout from Petroleo Brasileiro SA’s kickback scandal ensnares the nation’s companies. Since the bribery allegations at Petrobras surfaced in November, borrowing costs for Brazilian companies have soared six times more than the emerging-market average.”

March 6 – Bloomberg (Raymond ColittAnna Edgerton): “Brazil’s Supreme Court gave the green light to investigate the heads of both houses of Congress while ruling out a probe into President Dilma Rousseff in the country’s largest corruption scandal. Renan Calheiros and Eduardo Cunha, the chief of the Senate and lower house respectively, are among senior politicians to be investigated by the prosecutor general. The inquiry is related to an alleged kickback scheme dubbed Carwash that may have funneled hundreds of millions of dollars from state-controlled Petroleo Brasileiro SA to political parties.”

March 6 – Bloomberg (David Biller): “Brazil posted the fastest inflation in almost a decade as the currency tumbles amid forecasts for Latin America’s largest economy to contract this year. Consumer prices rose 7.70% in the 12 months through February… Monthly inflation as measured by the benchmark IPCA index was 1.22%... Brazil’s real is posting the biggest decline among major currencies this year, fueling increases in prices for imports as the government allows some regulated prices to rise after posting a record budget deficit last year.”

March 4 – BBC: “Brazil's chief prosecutor has asked the Supreme Court to investigate 54 people, including politicians, for alleged involvement in a huge kickback scheme at the state-run oil firm Petrobras. Investigators allege firms paid inflated prices for Petrobras contracts and money was funnelled to the ruling Workers Party (PT) and its allies. This has been denied by the party and President Dilma Rousseff. The politicians' names were not released by prosecutor Rodrigo Janot. The move takes Brazil's biggest corruption scandal, which has so far focussed on companies, into the political sphere. The scandal has led Petrobras' shares to drop and the company has lost about $100bn (£65bn) in value since September, with the crisis casting a long shadow in South America's biggest country… 'Operation Carwash' Mr Janot asked for 28 separate inquiries to be opened into the activities of politicians who allegedly benefitted from the alleged scheme.”

March 4 – Bloomberg (Mario Sergio LimaRaymond Colitt): “Brazil’s central bank raised borrowing costs to the highest level in almost six years on price pressure from a weakening currency and kept its options open on the size of the next increase. The board… voted unanimously Wednesday to maintain the pace of tightening with a half-point increase to 12.75%... Policy makers took into consideration ‘the macroeconomic scenario and the inflation outlook,’ according to their statement…”

EM Bubble Watch:

March 4 – Bloomberg (Alastair Marsh): “Turkey’s lira slid to a record for a third consecutive day after Economy Minister Nihat Zeybekci said the central bank didn’t go far enough with rate cuts, arguing there’s no need to worry about the currency. The foreign-exchange market ‘will find its own balance,’ Zeybekci said… helping spur a selloff that pushed the lira as low as 2.6006 per dollar on Thursday. Turkish bonds fell the most in emerging markets in the past month on concern Turkey will encroach on the central bank’s autonomy. President Recep Tayyip Erdogan said on Monday policy makers should take into account his warnings that interest rates are too high. ‘Expectations are for the central bank to continue cutting rates in the coming months on political pressure,’ Erkin Isik, a strategist at Turk Ekonomi Bankasi AS, said… ‘The bank is not taking any action against currency depreciation, which suggests that the lira has room to weaken further, in the absence of revival in global risk sentiment.’”

March 4 – Bloomberg (Onur Ant and Isobel Finkel): “As Turkey’s economy slows in an election year, President Recep Tayyip Erdogan is signaling to voters that it’s the central bank’s fault. Three months before the parliamentary ballot, Erdogan is blaming the bank for a drop in investments and rising unemployment, accusing it of keeping interest rates too high. The dispute has pushed the lira to a record low, yet for Erdogan and his allies there may be an offsetting political gain. ‘Politicians can get away with saying: You know what, the firms are complaining about interest rates being high. Well, we tell the central bank to bring down the interest rates and they won’t,’ Refet Gurkaynak, head of the economics department at Ankara’s Bilkent University, said… ‘That’s how you turn the central bank into a scapegoat.’”

Japan Watch:

March 3 – Bloomberg (Keiko Ujikane and Kyoko Shimodoi): “Speeding up the Bank of Japan’s purchases of Japanese government bonds would risk further distorting the world’s second-biggest sovereign debt market, said Yuri Okina, vice chairman at Japan Research Institute. ‘If additional easing is done using government bonds, it may have the considerable side-effect of impairing the functioning of the market,’ Okina, an economist and a former BOJ official, said… ‘It will probably be difficult for the BOJ to boost the pace that it buys government bonds.’ Gov. Haruhiko Kuroda told the Diet last month that JGB liquidity hadn’t fallen particularly as a result of the purchases. He has also said the BOJ has ‘many options’ and may need to get creative with any further monetary stimulus. Primary dealers responsible for distributing JGBs to investors told the government in November it was getting harder to determine prices because net supply was low. The BOJ accumulates government bonds at an annual pace of about ¥80 trillion ($667 billion) under an unprecedented ‘qualitative and quantitative’ easing program that Kuroda expanded in October. The policy gives the central bank room to soak up every new bond issued. The BOJ held ¥233 trillion of JGBs and treasury bills as of Sept. 30, or 23% of total issuance.”