Friday, April 17, 2015

My Weekly Commentary: Horrible Risk Versus Reward

I found myself this week reflecting back to this past May, shortly after Ben Bernanke began his (reportedly) $250,000 dinner meetings.

May 6 - Bloomberg: “David Einhorn, manager of the $10 billion Greenlight Capital Inc., said he found a recent dinner conversation with former Federal Reserve Chairman Ben S. Bernanke scary. ‘I got to ask him all these questions that had been on my mind for a long time,’ Einhorn said in an interview today with Erik Schatzker and Stephanie Ruhle on Bloomberg Television…‘It was sort of frightening because the answers were not better than I thought they would be.’”

Bernanke’s new blog attempts to answer some of his critics. So far the “answers” have not been “better than I thought they’d be.” Not to be hypercritical, but even after all these years and dramatic experiences, Dr. Bernanke demonstrates an unsophisticated understanding of markets. And as international markets have assumed an ever more powerful command over global economies – and policymakers over the financial markets - is it coincidence that monetary policy has become largely dictated by academics? I find it somewhat ironic that Bernanke signed up this week as senior advisor to one of the world’s most successful hedge fund groups.

April 16 – New York Times (Andrew Ross Sorkin and Alexandra Stevenson): “For eight years, Ben S. Bernanke, the former Federal Reserve chairman, was steward of the world’s largest economy. Now he has signed on to advise one of Wall Street’s biggest hedge funds. Mr. Bernanke will become a senior adviser to Citadel, the $25 billion hedge fund… He will offer his analysis of global economic and financial issues to Citadel’s investment committees. He will also meet with Citadel’s investors around the globe. It is the latest and most prominent move by a Washington insider through the revolving door into the financial industry… Mr. Bernanke joins a long parade of colleagues and peers to Wall Street and investment firms… In an interview, Mr. Bernanke said he was sensitive to the public’s anxieties about the ‘revolving door’ between Wall Street and Washington and chose to go to Citadel, in part, because it ‘is not regulated by the Federal Reserve and I won’t be doing lobbying of any sort.’ He added that he had been recruited by banks but declined their offers. ‘I wanted to avoid the appearance of a conflict of interest,’ he said. ‘I ruled out any firm that was regulated by the Federal Reserve.’”

I’m reminded of Willie Sutton’s response to why he robbed banks: “Because that’s where the money is.” I could only chuckle at the New York Magazine headline: “Helicopter Ben Makes it Rain – for Himself.” It’s absolutely laughable that the former Fed chair suggests part of his decision for hooking up with a hedge fund was his sensitivity to public anxieties about the “revolving door” between Wall Street and Washington.

I, at least, would rather see Bernanke working with a traditional regulated financial firm, although his compensation would surely be much less. Especially in this Bubble backdrop with the global leveraged speculating community playing such an integral role, it just doesn’t look good. In an era where public confidence in the Federal Reserve is so thin and vulnerable, why couldn’t Bernanke have just stuck with his post-Fed career of writing, teaching and a few lucrative dinner engagements? After all these years, I still miss Chairman Volcker.

In his April 7th post, “Should Monetary Policy Take Into Account Risks to Financial Stability?”, Bernanke further builds his case as to why the Fed should not rely on monetary policy to counter asset inflation and Bubbles. He leaves slightly ajar the possibility of at some point resorting to monetary tightening, although that requires the “weighing of benefits and costs.” Bernanke references recent studies where – no surprise here – the associated costs of tightening monetary policy greatly outweigh the benefits.

“Although, in principle, the authors' framework could justify giving a substantial role to monetary policy in fostering financial stability, they generally find that, when costs and benefits are fully taken into account, there is little case for doing so. In their baseline analysis, they find that incorporating financial stability concerns might justify the Fed holding the short-term interest rate 3 basis points higher than it otherwise would be, a tiny amount…”

A few basis points? Surely every sophisticated hedge fund manager in the world would scoff at such research. Directly from Bernanke: “Again, the bottom line is that large increases in the short-term rate based on financial stability considerations alone would involve costs that well exceed the benefits.”

Legendary hedge fund manager Stan Druckenmiller was out this week sharing some of his wisdom (including an insightful WSJ op-ed). He argued (on Bloomberg Television) that current ultra-loose monetary policy provides a “Horrible Risk Versus Reward.” Obviously he’s spot on. Two major U.S. bursting episodes in the past 15 years provide overwhelming proof of the profound financial, economic, social and geopolitical costs associated with Bubbles. If that’s not sufficient, the last two decades witnessed scores of devastating Boom and Bust Cycles around the globe.

While the “blunt tool” of global monetary policy has by now bludgeoned everyone senseless, the world’s numbness to risk did begin tingling a bit late in the week. As the current poster child for the devastating costs associated with major Bubbles, Greece is back in the forefront.

In reality, the “Greek” disaster has been absolutely great for markets. The summer of 2012 crisis of confidence in Greece, European periphery bonds, the region’s banks and the euro unleashed open-ended QE at the Fed, BOJ, SNB and elsewhere. More recently, ongoing Greek and European fragility made certain that the ECB joined the global QE soiree. And the more Greece has appeared to be sliding closer to the brink, the deeper European bond yields have sunk into the great unknown (pulling down Treasury and global bond yields in the process). Here at home, global fragilities empowered the dovish Fed to do nothing (not even a little 25bps baby-step) that might risk rocking the apple cart. This ensured Treasury yields completely defied U.S. fundamentals, especially with king dollar enticing enormous Bubble flows into American stocks, corporate debt and the real economy.

Bernanke concluded his most recent post (“Why Are Interest Rates So Low, Part 4: Term Premiums,” April 13, 2015) with the sentence, “Thus, the recent decline in longer-term yields and term premiums in the US remains something of a puzzle.” Bernanke again invokes the “global savings glut” thesis as the likely explanation for Alan Greenspan’s 2006 “conundrum” (long-term yields remaining low in the face of Fed “tightening”). I argued in 2006 that low bond and MBS yields indicated dangerously distorted Bubble markets. The bond market appreciated escalating Bubble risk – and correctly discerned forthcoming extraordinary policy measures. In the process, tremendous systemic damage was wrought in that 2006-2008 period of (“Terminal Phase” Bubble) market dysfunction.

Some nine years later, there should be little confusion surrounding low (“Conundrum 2.0”) bond yields. Global central banks have demonstrated there is no limit to either the amount of “money” they are willing to create or quantities of securities they will buy. They have essentially guaranteed uninterrupted abundant and cheap market liquidity. Policymakers have assured market participants that financial crisis (or even a recession!) will not be tolerated. Worse yet, central bankers have repeatedly demonstrated no appetite for even a small ration of global de-risking/de-leveraging. In total, myriad interventions have had momentous impact on global market risk and “term premiums.”

Nowadays, the larger global Bubbles inflate the higher the probability of additional QE. This market perception pushes yields lower and stocks higher – in the process fueling a precarious self-reinforcing Bubble Dynamic. Central bankers should never so vigorously manipulate market risk perceptions – especially in an extraordinarily speculative marketplace. The end result has been the most highly distorted Bubble markets in financial history. At this point, everyone has been forced on board (some kicking and screaming).

Greek five-year bond yields surged 325 bps this week to 18.31%, the high since those dark days of 2012. Increasingly pricing in default, Greek CDS surged 770 bps this week to 2,775 bps. Notably, especially late in the week, thus far dormant contagion effects began to awaken. Portuguese bond yield spreads to German bunds surged 48 bps. Italian spreads widened 19 bps and Spain spreads widened 30 bps. Portuguese CDS jumped 21 bps, Italy 22 bps and Spain 19 bps. An index of European (subordinated) bank debt jumped 27 bps to a 2014 high. And after having rallied significantly on the back of Draghi’s QE, European corporate junk bonds this week suffered a sharp reversal of fortunes. Meanwhile, Thursday and Friday trading saw Germany’s DAX equities index suffer a two-day decline of 4.4%.

Blackrock’s Larry Fink has been out front warning of latent market illiquidity risks. Discussing liquidity Friday with UBS’s Axel Weber (on Fox Business), Fink admonished global regulators for failing to address this issue. Yet with the world awash in central bank liquidity and market participants having grown convinced of its endless supply, why on earth would anyone fret illiquidity? The chief worry has instead been the risk of being underinvested and not fully capturing rallies.

April 16 – Financial Times (Ralph Atkins): “‘I was flabbergasted, I could not believe it.’ The veteran portfolio manager at a top US fund was this week recalling the US Treasury ‘flash crash’ exactly six months ago, when yields in the world’s largest government debt market swung wildly in a matter of minutes. Statistically, such events happened only once every 3bn years, Jamie Dimon, chief executive of JPMorgan Chase, noted recently… But maybe it would help if such events were frequent? As Mr Dimon observed in a letter to shareholders this month, ‘almost no one was significantly hurt’ by what happened on October 15. Instead the ‘flash crash’ triggered a welcome debate about the underlying fragility of the post-2007 crisis global financial system. As Mr Dimon pointed out, it served as a ‘warning shot across the bow’ of investors and market participants.”

The S&P500 rallied 16% off of October 15th “flash crash” lows. The Semiconductors rose as much as 34% and the Biotechs 50%. In reality, so-called “flash crash” “warning shots” have fallen on deaf ears, working instead to embolden what is now a powerful late-cycle buy the dip mentality. Indeed, the too hasty policymaker responses to previous bursts of risk aversion (2010, 2011, summer 2012, spring 2013, October 2014 and early-2015) solidified the market view that officials have adopted the role of eager promoter and defender of global risk markets.

Bubbles burst. Yet Bubbles can thrive on loose monetary conditions for so long that seemingly nothing can get in their way. And the bigger the Bubble the greater the risk of a destabilizing shift in market perceptions. The longer “risk on” gains momentum and becomes more deeply entrenched, the higher the probability of a “black swan.”

From my vantage point, excesses have reached the point where a bout of “Risk Off” de-risking/de-leveraging risks another “flash crash” and liquidity panic. As I’ve argued in the past, so-called “black swans” are actually not the as-advertised “low-probability events”. Indeed, the deepening perception of low probability bad market outcomes over time creates a high probability for market dislocation catching The Crowd unprepared. The next “flash crash” is as close as the trend-following, performance-chasing and “high-frequency” trading Crowds moving concurrently to take some risk off the table. The proliferation of derivative strategies and trading provides enormous additional market leverage to the upside as well as the downside.

Greek default and possible “Grexit” create potential major “Risk Off” catalysts. That monetary policy has so numbed global market risk senses significantly raises the stakes. Policy-induced runaway global equities Bubbles have unfolded in the face of diminishing economic prospects. This elevates the risk of “Risk Off” escalating into something quite problematic. And that Chinese officials moved Friday evening to tighten the finance fueling their runaway stock market Bubble adds another important source of global uncertainty.

It’s worth noting that the crowded dollar bull trade was under pressure this week. The dollar index fell 1.8%. The crowded euro short was pressured by a 1.9% rally in the euro currency. The “yen carry trade” was pressured by a better than 1% yen rally versus the dollar. The crowded commodities short was also under pressure. Crude surged 7.9%, with natural gas up 4.9%. As Treasuries rallied, corporate Credit and MBS spreads widened.  Risk Off has an opening.

April 17 – Reuters (Marc Jones and John O’Donnell: “The European Central Bank has analyzed a scenario in which Greece runs out of money and starts paying civil servants with IOUs, creating a virtual second currency within the euro bloc, people with knowledge of the exercise told Reuters. Greece is close to having to repay the International Monetary Fund about 1 billion euros in May and officials at the ECB are growing concerned. Although the Greek government has repeatedly said that it wants to honor its debts, officials at the ECB are considering the possibility that it may not, in work undertaken by the so-called adverse scenarios group. Any default by Greece would force the ECB to act and possibly restrict Greek banks' crucial access to emergency liquidity funding. Officials fear however that such action could push cash-strapped Athens into paying civil servants in IOUs in order to avoid using up scarce euros. ‘The fact is we are not seeing any progress... So we have to look at these scenarios,’ said one person with knowledge of the matter.”

For the Week:

The S&P500 declined 1.0% (up 1.1% y-t-d), and the Dow fell 1.3% (unchanged). The Utilities lost 1.2% (down 7.0%). The Banks (down 2.1%) and Broker/Dealers (up 2.6%) were little changed. The Transports fell 1.4% (down 5.4%). The S&P 400 Midcaps lost 1.3% (up 4.4%), and the small cap Russell 2000 declined 1.0% (up 3.9%). The Nasdaq100 fell 1.6% (up 2.7%), and the Morgan Stanley High Tech index slipped 0.5% (up 0.5%). The Semiconductors dropped 1.8% (up 1.3%). The Biotechs dipped 0.6% (up 17.9%). With bullion little changed, the HUI gold index rallied 3.2% (up 7.7%).

One-and three-month Treasury bill rates ended the week at two bps. Two-year government yields fell five bps to 0.51% (down 15bps y-t-d). Five-year T-note yields dropped nine bps to 1.31% (down 35bps). Ten-year Treasury yields declined eight bps to 1.87% (down 31bps). Long bond yields fell six bps to 2.52% (down 23bps). Benchmark Fannie MBS yields slipped four bps to 2.59% (down 24bps). The spread between benchmark MBS and 10-year Treasury yields widened four to 72 bps. The implied yield on December 2015 eurodollar futures declined 4.5 bps to 0.595%. Corporate bond spreads widened. An index of investment grade bond risk increased two bps to 63 bps. An index of junk bond risk jumped 11 bps to 341 bps. An index of EM debt risk rose 13 bps to 358 bps.

Greek 10-year yields surged 164 bps to 12.71% (up 296bps y-t-d). Ten-year Portuguese yields jumped 40 bps 2.00% (down 62bps). Italian 10-yr yields rose 21 bps to 1.47% (down 42bps). Spain's 10-year yields jumped 22 bps to 1.45% (down 16bps). German bund yields declined another eight bps to a remarkable record low 0.08% (down 46bps). French yields declined six bps to a record low 0.37% (down 46bps). The French to German 10-year bond spread widened two to 29 bps. U.K. 10-year gilt yields were unchanged at 1.58% (down 17bps).

Japan's Nikkei equities index declined 1.3% (up 12.6% y-t-d). Japanese 10-year "JGB" yields fell four bps to 0.30% (down 2bps y-t-d). The German DAX equities index was slammed for 5.5% (up 19.2%). Spain's IBEX 35 equities index fell 3.3% (up 10.5%). Italy's FTSE MIB index was hit for 3.5% (up 21.2%). Emerging equities were mixed. Brazil's Bovespa index slipped 0.5% (up 7.9%). Mexico's Bolsa added 0.3% (up 4.3%). South Korea's Kospi index jumped 2.7% (up 11.9%). India’s Sensex equities index fell 1.5% (up 3.4%). China’s bubbling Shanghai Exchange surged 6.3% to a new six-year high (up 32.5%). Turkey's Borsa Istanbul National 100 index slipped 0.3% (down 3.9%). Russia's MICEX equities index was unchanged (up 18.6%).

Debt issuance was steady. Investment-grade issuers included Bank of America $5.0bn, JPMorgan $2.0bn, Goldman Sachs $2.0bn, CSX $600 million, Baylor Scott & White $495 million, Gulfport Energy $350 million, Neuberger Berman $300 million and Healthcare Realty Trust $250 million.

Convertible debt issuers this week included Pernix Therapeutics $130 million.

Junk funds saw inflows of $791 million (from Lipper). Junk issuers included Davita HealthCare Partners $1.5bn, Univision Communications $1.56bn, Level 3 $1.5bn, Communications Sales $1.1bn, Charter Communications $800 million, Carrizo Oil & Gas $650 million, BBVA Colombia $400 million, Wavedivision $400 million, Newstar Financial $300 million and Corrals Restaurant Group $200 million.

International debt issuers included European Investment Bank $5.0bn, Japan Finance Organization for Municipalities $2.0bn, China Cinda Finance $1.7bn, Malaysia Sovereign Sukuk $1.5bn, Groupe Office Cherifien des Phosphates $1.0bn, Santander $1.0bn, Kommunalbanken $1.0bn, Global Bank Corp $550 million, Kommunivest Sverige $550 million and Beijing Capital Hong Kong $100 million.

Freddie Mac 30-year fixed mortgage rates increased a basis point to 3.67% (down 20bps y-t-d). Fifteen-year rates added one basis point to 2.94% (down 21bps). 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 up 21 bps to 4.16% (down 12bps).

Federal Reserve Credit last week expanded $4.4bn to $4.449 TN. Over the past year, Fed Credit inflated $211bn, or 5.0%. Fed Credit inflated $1.638 TN, or 58%, over the past 127 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $1.0bn to $3.289 TN. "Custody holdings" were down $4.4bn y-t-d.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were down $314bn y-o-y, or 2.6%, to a 15-month low $11.553 TN. Reserve Assets are now down $480bn from the August 2014 peak. Over two years, reserves were $459bn higher, for 4% growth.

M2 (narrow) "money" supply rose $78.9bn to a record $11.933 TN. "Narrow money" expanded $741bn, or 6.6%, over the past year. For the week, Currency slipped $0.9bn. Total Checkable Deposits surged $57.5bn, and Savings Deposits jumped $23.1bn. Small Time Deposits declined $1.5bn. Retail Money Funds increased $0.7bn.

Money market fund assets were down $39.3bn to a six-month low $2.594 TN. Money Funds were down $139bn year-to-date.

Total Commercial Paper rose $13.3bn to $1.032 TN. CP declined $12bn over the past year, or 1.2%.

Currency Watch:

The U.S. dollar index fell 1.8% to 97.52 (up 8.0% y-t-d). For the week on the upside, the Norwegian krone increased 3.4%, the Swiss franc 2.8%, the Canadian dollar 2.6%, the British pound 2.3%, the Swedish krona 2.2%, the Danish krone 2.1%, the euro 1.9%, the New Zealand dollar 1.9%, the Singapore dollar 1.7%, the Australian dollar 1.3%, the Brazilian real 1.1%, the Japanese yen 1.1%, the South Korean won 0.8% and the Taiwanese dollar 0.6%. For the week on the downside, the Mexican peso declined 0.7% and the South African rand 0.6%.

Commodities Watch:

The Goldman Sachs Commodities Index surged 4.7% (up 3.2% y-t-d). Spot Gold slipped 0.3% to $1,204 (up 1.6%). May Silver declined 0.9% to $16.23 (up 4%). May Crude surged $4.10 to $55.74 (up 5%). May Gasoline was up 6.8% (up 31%), and May Natural Gas recovered 4.9% (down 9%). July Copper gained 1.2% (down 2%). May Wheat sank 6.1% (down 16%). May Corn increased 0.7% (down 4%).

Fixed Income Bubble Watch:

April 16 – Bloomberg (Matt Scully): “Some of the biggest buyers of bonds financing U.S. commercial properties are asking regulators to help stop a Wall Street practice of shopping for the highest credit ratings that they say has gotten excessive. MetLife Inc., Genworth Financial Inc. and Deutsche Bank AG’s investment arm are among at least nine firms that have discussed their concerns with regulators… Their main gripe is that underwriters are increasingly dropping credit raters such as Moody’s… and Fitch Ratings that demand the securities be structured to offer more protection from defaults.”

April 14 – Bloomberg (Lisa Abramowicz): “The Federal Reserve may be putting off raising interest rates from near zero, but the days of cheap money for everyone in credit markets have already come and gone. The amount of outstanding distressed bonds -- those that investors consider most likely to default -- has more than doubled in the past year to $121 billion, according to Bank of America Merrill Lynch index data. Prices on the debt have tumbled 2.6% in 2015, the biggest decline for the period since the 2008 credit crisis. Much of this has to do with oil prices that have fallen by half from last year’s peak, devastating junk-rated energy companies that had been piling on record amounts of debt.”

April 15 – Bloomberg (William Wade): “Yieldcos, a clean-energy financing model that didn’t exist three years ago, are on track to become a $100 billion market. That’s almost quadruple the $27 billion in market value now, according to Jeff McDermott, a managing partner at Greentech Capital Advisors LLC, a… investment bank that invests in yieldcos. Wind and solar developers continue to form the publicly traded ventures to reduce funding costs as investors snap up the shares, which provide one of the few opportunities to buy into the steady revenue delivered by renewable power plants, he said. ‘It really does lower the costs of renewables,’ McDermott said during a panel discussion… at Bloomberg New Energy Finance’s annual conference… “It’s got a lot of room to run.’ There are at least a dozen yieldcos now and more are in the works. First Solar Inc. and SunPower Corp., the biggest U.S. solar manufacturers, said in February they plan to jointly form one.”

Federal Reserve Watch:

April 16 – Reuters (Jonathan Spicer): “The Federal Reserve should begin a gradual series of interest rate hikes ‘relatively soon’ as long as the economy rebounds from a soft first quarter, since the benefits of delaying are running thin, a top Fed official said… Cleveland Fed President Loretta Mester, a newer but influential policymaker at the central bank, painted an optimistic picture of the U.S. economy and delivered a three-pronged thesis for starting to tighten policy sooner rather than later. …Mester said lifting rates from near zero relatively soon would allow the Fed to follow a gradual path of subsequent hikes that would not derail the economic expansion driven by a stronger job market and more resilient households. Waiting too long to tighten, she added, could destabilise financial markets.”

U.S. Bubble Watch:

April 14 – Bloomberg (Lynn Doan and Dan Murtaugh): “The shale oil boom that pushed U.S. crude production to the highest level in four decades is grinding to a halt. Output from the prolific tight-rock formations such as North Dakota’s Bakken shale will decline 57,000 barrels a day in May, the Energy Information Administration said… It’s the first time the agency has forecast a drop in output since it began issuing a monthly drilling productivity report in 2013… The retreat in America’s oil boom is necessary to correct a supply glut and rebalance global oil markets, according to Goldman. ‘We’re going off an inevitable cliff’ because of the shrinking rig counts, Carl Larry, head of oil and gas for Frost & Sullivan LP, said… ‘The question is how fast is the decline going to go. If it’s fast, if it’s steep, there could be a big jump in the market.’”

April 14 – Reuters (Tom Hals): “The number of bankruptcies among publicly traded U.S. companies has climbed to the highest first-quarter level for five years, according to a Reuters analysis… Plunging prices of crude oil and other commodities is one of the major reasons for the increased filings, and bankruptcy experts said a more aggressive stance by lenders may also be hurting some companies. While U.S. stocks have climbed to near record levels and the jobless rate has fallen to a six-year low, 26 publicly traded U.S. corporations filed for bankruptcy in the first three months of 2015. The number doubled from 11 in the first quarter of last year and was the highest since 27 in the first quarter of 2010… In addition, many of the bankruptcies were large. Six companies had reported at least a billion dollars in assets when they filed in the first quarter of this year, the most in the first quarter of any year since 2009. The $34 billion in assets held by the 26 companies is the second highest for a first quarter in the past decade.”

April 15 – Bloomberg (Shobhana Chandra): “The big hit from the strong dollar is going to fall on small U.S. exporters. While large U.S. multinational corporations have kicked up a storm of complaints about the currency’s advance, their broader customer and production bases make them more nimble and able to cope. For the smaller counterparts with fewer products to offer and most factories in the U.S., it’s becoming more difficult to remain competitive. The swift and sizeable appreciation of the dollar ‘is a hard knock for any company, and it’s harder for small exporters,’ many of which sell specialty products often less than $1,000 a shipment, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics… ‘The short-term outlook is painful.’ Companies employing fewer than 500 workers accounted for about a third of the $1.6 trillion in goods sold overseas… The dollar’s surge of about 25% since mid-2014 is making American-made goods more expensive to foreign buyers and imports cheaper, stoking competition. For small firms the squeeze is inescapable, and it’s only just beginning.”

April 16 –CNBC (Giovanny Moreano): “More than $100 billion in buyback authorizations were approved last month, according to Birinyi Associates, as corporate America continues to purchase its own shares at a record clip. Based on that data, the total amount of buyback authorizations will reach $1 trillion, far surpassing the previous record set in 2007. In fact, March was the third-strongest month ever for buyback plans, pushing the year-to-date figure to $257 billion or the highest dollar amount to a start of a year on record…”

April 15 – CNBC (Jeff Cox): “The largest five banks in the U.S. now control nearly 45% of the industry's total assets, according to an analysis from SNL Financial that comes amid an earnings season that has been generally positive for the largest institutions. In total, the five institutions—JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and U.S. Bancorp—had just under $7 trillion in total assets as of the end of 2014. That's good for 44.61% of the industry total. It also leaves the other 55.4% of the assets to be divided up among 6,504 other institutions.”

April 15 – Reuters (Sophia Yan): “The United States has depleted its annual supply of EB-5 immigrant investor visas for the second year in a row after a huge wave of applications from rich Chinese. The State Department has announced that starting in May, no more spots will be available to Chinese for the rest of the U.S. government's fiscal year, which ends Sept. 30. Known as EB-5, the immigration program hands out green cards to foreigners who invest at least $500,000 and create 10 jobs in the U.S. The program, which caps the number of visas issued annually at 10,000, hit its annual limit for the first time last August. This year, the program has reached the quota even earlier, reflecting the massive jump in demand among wealthy Chinese to move to the U.S., especially after Canada ended a similar program in 2014.”

April 14 – Bloomberg (Danielle Burger): “U.S. spending on prescription drugs saw the largest increase since 2001, with the nation’s pharmacy bill rising to $373.9 billion last year as new treatments came to market and manufacturers increased prices on old ones. ‘Last year’s $43 billion growth in spending on medicines was the highest ever,’ said Murray Aitken, executive director the IMS Institute for Healthcare Informatics, which issued the report… In total, spending on prescription drugs rose 13.1% in 2014, according to the report.”

Global Bubble Watch:

April 16 – Reuters: “German Finance Minister Wolfgang Schaeuble said… that high debt levels remain a source of concern for the global economy, noting that growth in China appeared to be ‘built on debt’. In a speech at the Brookings Institution in Washington, Schaeuble said expansionary monetary policy and debt-financed fiscal policy had spawned the financial crises of the past decades and continued to weigh on global growth. ‘Debt levels in the global economy continue to give cause for concern,’ Schaeuble said, citing data showing global debt has risen by $57 trillion since 2007, with government debt making up nearly half of that amount. ‘In China, debt has nearly quadrupled since 2007… China's growth appears to be built on debt, driven by a real estate boom and shadow banks.’ He added that an ‘alarming’ amount of corporate debt was being issued by companies with poor credit ratings.”

April 17 – Bloomberg (Belinda Cao): “The largest U.S. exchange-traded funds tracking Chinese stocks sank on concern the nation’s equity markets will retreat after posting world-beating rallies as policy makers take measures to slow gains. The iShares China Large-Cap ETF, tracking Chinese companies trading in Hong Kong, dropped 4.4%... for the steepest decline since January. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF tumbled 5.3%, the most in four months.”

April 15 – Financial Times (Kate Allen): “Fears of a renewed global property bubble are rising as prices and yields hit records last seen before the financial crisis… The pricing of real estate around the world had become ‘increasingly aggressive’, research company MSCI said. This is particularly the case in the US, where investors’ returns from rental income are now lower than before 2008, when a crash in massively overleveraged property triggered an international banking slump. Globally, property generated total average returns of 9.9% in 2014 thanks to rapid capital value appreciation, MSCI found — the best performance since 2007 and the fifth consecutive year of increasing returns. The spiralling price of property assets in the world’s biggest investment markets was raising ‘increasing concerns over its sustainability’, said Peter Hobbs, research managing director at MSCI.”

April 15 – Bloomberg (Alastair Marsh): “The unprecedented demand for bond exchange-traded funds in the U.S. is spreading across the pond as European investors seek an easy way to buy into one of the longest bull runs in credit-market history. The ETFs, which trade like stocks and can be purchased online, have attracted $35.7 billion this year worldwide, on track to exceed the record $84.9 billion placed last year, according to… BlackRock Inc. About $14 billion of that was in Europe, the data show. Thirteen years after being created in the U.S., the funds are gaining traction globally as a salve for traders’ complaint that new regulations are making it harder to buy and sell bonds. While it’s simple to purchase an ETF, concern is growing that investors are underestimating how difficult it may be to get out when sentiment sours. The International Monetary Fund said in a report last week that the dynamic may pose a risk to financial stability.”

ECB Watch:

April 17 – Bloomberg (John Glover): “Investors are distinguishing less and less between weaker and stronger companies as unprecedented stimulus warps Europe’s credit markets. The difference in yield premiums for borrowers rated AA and those rated six levels lower at BBB fell by about a third this year to 61 bps… That’s within two basis points of the smallest gap since January 2008, which was reached last week. Prices are being distorted as central bank measures to spur the economy suppress yields, encouraging investors to buy the bonds of riskier issuers and allowing companies to take on more debt…. ‘People are shutting their eyes and buying the asset class,’ said Luke Hickmore… senior investment manager at Aberdeen Asset Management Plc, which oversees about $504 billion. ‘The risk is that when rates turn and strategies change with them, they won’t be able to get out of positions they don’t like any more.’”

Europe Watch:

April 15 – Bloomberg (Brendan Greeley, Rainer Buergin and Birgit Jennen): “German Finance Minister Wolfgang Schaeuble ruled out further concessions to Greece, saying it’s up to the Greek government to commit to the reforms needed to release aid rather than give false hopes to its people. Schaeuble… said that another debt restructuring wasn’t up for discussion now, and that Greek demands for war reparations from Germany were ‘completely unrealistic.’ ‘It’s entirely down to Greece,’ said Schaeuble… While some kind of restructuring might be on the agenda in 10 years, ‘today the issue for Greece is reforming its economy in such a way that it becomes competitive at some point.’”

China Bubble Watch:

April 13 – Bloomberg: “Even the world-beating rally in Hong Kong’s stock market can’t compete with Chinese investors’ favorite way to make a quick profit: initial public offerings. While mainland traders purchased the maximum amount of Hong Kong shares allowed through the city’s exchange link with Shanghai on Wednesday and Thursday last week, inflows have since slowed and were 57% below the five-day average on Tuesday. A key reason for the drop-off is that investors are turning their attention to the 30 Chinese IPOs taking orders this week, according to Hengsheng Asset Management Co. The offerings may attract 2.73 trillion yuan ($439bn) of bids, almost the equivalent of Malaysia’s entire stock-market capitalization, based on the median estimate of six brokerages. While a projected oversubscription rate of about 150 times means the odds of getting into an IPO are slim, the reward is too big for investors to ignore: every one of the 147 mainland IPOs that began trading over the past year jumped the maximum 44% allowed on their first day.”

April 13 – Bloomberg: “Confident that China’s stock market rally still has legs, Jiang Lin recently began borrowing money from her brokerage to buy more shares. Her newly-opened margin finance account with state-owned China Investment Securities Co. has allowed Jiang, a 29-year-old marketing executive in Beijing, to double up her bets on the vertigo-inducing rally in Chinese share prices. ‘It’s worth the risk,’ said Jiang, while admitting she doesn’t fully understand how margin finance works because she hasn’t had her broker explain it to her. Investors such as Jiang are part of a $264 billion dilemma facing the country’s securities regulator, the China Securities Regulatory Commission... China’s margin finance now stands at about double the amount outstanding on the New York Stock Exchange, after adjusting for the relative size of the two markets. ‘Regulators are aware of the risk of rising margin debt but they can’t afford to puncture the equities bubble with very draconian measures,’ said Lu Wenjie, a Shanghai-based analyst at UBS… ‘They want to pelt the mice without smashing the china.’”

April 15 – Reuters (Clare Jim): “Growth in China's real estate investment in the first quarter slowed to the lowest rate since 2009 as developers prioritized clearing inventory amid a housing glut, while the rate of fall in property sales narrowed. Property investment growth eased to 8.5% in January to March from a year earlier, …dropping from 10.4% in the first two months of 2015. The 2009 low was 8.3%.”

April 13 – Bloomberg: “Investors in Chinese junk bonds are taking the biggest gamble in at least a decade. Leverage for speculative-grade Chinese companies is at its highest since at least 2004, whether measured by earnings relative to interest expense or total debt to a measure of cash-flow, according to data compiled by Bloomberg… Borrowers have also piled on the most debt relative to their assets since 2007. The deterioration in credit quality coincides with the slowest annual growth since 1990 for Asia’s biggest economy… That’s bad timing for bond investors who swallowed a record $209.2 billion of Chinese-company notes denominated in either dollars, euros or yen last year…‘The credit cycle in China has peaked,’ said… Arthur Lau, the head of fixed income for Asia ex-Japan at PineBridge Investments Asia… ‘Corporate earnings are negative in general and investors are bracing for a deterioration in metrics.’”

April 16 – Bloomberg (David Yong): “Kaisa Group Holdings Ltd. has until Monday to find $52 million for missed payments on two of its dollar bonds as it seeks to avoid default. The troubled developer must pay the interest on its 2017 and 2018 notes that was due on March 18 and March 19 respectively after the expiry of a 30-day grace period… Standard & Poor’s doesn’t expect Kaisa to pay and downgraded it to default last month.”

April 15 – Bloomberg: “A Chinese power-transformer maker said it’s uncertain it can pay bond interest due next week after China’s onshore debt market this month had its second default ever. Baoding Tianwei Group Co. is unsure if it can make the 85.5 million yuan ($13.8 million) payment on April 21 because of ‘huge losses’ last year in its alternative energy business, listed affiliate Baoding Tianwei Baobian Electric Co. said… Cloud Live Technology Group Co. missed a bond payment on April 7 after Premier Li Keqiang told parliament last month he is prepared to tolerate individual cases of ‘financial risk.’ China’s corporate debt is the biggest in the world, a former central bank adviser wrote in the official China Daily…”

April 15 – Bloomberg: “The vast majority of China’s more than 1,500 peer-to-peer lenders are going to fail, with as few as one in 20 surviving, according to Gregory Gibb, who runs the biggest. ‘Their business models are turning into pyramid schemes,’ Gibb, chairman of the lending platform Lufax, said… Some promise unrealistic returns to investors and lend without enough data to determine borrowers’ creditworthiness, he said. Gibb said there were just a handful of people considering peer-to-peer lending in China when he was setting up Lufax four years ago. Now, newcomers to banking… are jumping in, chasing quick returns in a largely unregulated industry. Peer-to-peer lending surged almost 13-fold since 2012 to $41 billion last year as the number of platforms multiplied, according to… Yingcan Group…”

Geopolitical Watch:

April 17 – New York Times (Jonathan Weisman): “As world leaders converge here for their semiannual trek to the capital of what is still the world’s most powerful economy, concern is rising in many quarters that the United States is retreating from global economic leadership just when it is needed most. The spring meetings of the International Monetary Fund and World Bank have filled Washington with motorcades and traffic jams and loaded the schedules of President Obama and Treasury Secretary Jacob J. Lew. But they have also highlighted what some see as a United States government so bitterly divided that it is on the verge of ceding the global economic stage it built at the end of World War II and has largely directed ever since. ‘It’s almost handing over legitimacy to the rising powers,’ Arvind Subramanian, the chief economic adviser to the government of India, said of the United States… ‘People can’t be too public about these things, but I would argue this is the single most important issue of these spring meetings.”

April 17 – Reuters (David Brunnstrom): “Recent satellite images published on Thursday show China has made rapid progress in building an airstrip suitable for military use in contested territory in the South China Sea's Spratly Islands and may be planning another, moves that have been greeted with concern in the United States and Asia.”

April 16 –New York Times (Saeed Al-Batati and Kareem Fahim): “Al Qaeda’s branch in Yemen took control of a major airport and an oil export terminal in the southern part of the country on Thursday, expanding the resurgent militant group’s reach just two weeks after it seized the nearby city of Al Mukalla and emptied its bank and prison… Al Qaeda is capitalizing on the expanding multisided war in Yemen and the collapse of its government to carve out territory for itself.”

Brazil Watch:

April 15 – Bloomberg (Filipe Pacheco): “Brazil’s seemingly boundless corruption scandal centered around Petroleo Brasileiro SA has dominated headlines and investor attention. And yet the country faces perhaps a bigger and potentially harder-to-solve problem: how to wean the nation’s companies off state-development bank BNDES. Its 651.2 billion reais ($212.5bn) of outstanding loans are swelling the government’s debt and putting the country at risk of a downgrade to junk. Finance Minister Joaquim Levy, who’s been leading the push to preserve Brazil’s investment grade since taking office in January, is now seeking to curb the bank’s largess… ‘We have seen a big expansion of public banks including BNDES in the past few years, but that cannot last forever,’ said Cristiano Oliveira, the chief economist at Banco Fibra SA. While a stalling economy and the widening graft probe may limit the investor appetite that Levy needs to reduce BNDES’s lending, Brazil may have few other choices after years of state support for its ‘national champions.’ The surge in total lending at the… bank -- whose loans carry a subsidized interest rate that’s about half the nation’s benchmark -- has been staggering. It’s almost quintupled over the past decade, eclipsing lending by the World Bank…With Latin America’s biggest economy set for its worst contraction in a quarter-century and benchmark borrowing costs at a six-year high of 12.75%, local bond sales plunged 60% in the first quarter from the same period last year.”

April 16 – Reuters (Rodrigo Viga Gaier): “Brazil's state-run oil company, Petrobras, plans to slash projected investment over five years by 20% compared with its previous five-year plan, a person with direct knowledge of the discussions told Reuters… A 20% cut would reduce planned spending under the company's 2015-2019 business plan by about $44 billion, to nearly $177 billion… After a decade of missed production targets and rising spending Petrobras has struggled to generate enough cash to pay for one of the world's largest and most ambitious output-expansion efforts.’”

EM Bubble Watch:

April 15 – Bloomberg (Zahra Hankir and Constantine Courcoulas): “For a view of how unnerving Turkey’s elections are becoming for investors, consider the currency market. The lira has just surpassed Brazil’s real for this year’s biggest nosedive. While Brazilian President Dilma Rousseff is embroiled in a scandal over kickbacks for government contracts, investors in Turkey are concerned victory for the ruling AK Party in June will usher in a team close to President Recep Tayyip Erdogan that disputes traditional monetary theory and accuses foreigners of undermining the economy. The lira weakened beyond 2.7 against the dollar for the first time on Wednesday, extending this year’s decline to 13%... Government borrowing costs have jumped as Turkish two-year yields increased the most among major emerging markets.”

April 15 – Financial Times (Daniel Dombey): “These are unsettling times for Turkey, as the nation steels itself for elections in June that could determine its course for years to come. President Recep Tayyip Erdoğan, the country’s president and dominant figure, has struck an increasingly confrontational tone on relations with the west. ‘They want us dead, they want to see our children dead,’ he told an Islamic meeting last year, and claimed last month that outside forces wanted to turn Turkey into a second Andalucía — the Spanish region reconquered by Christians from Muslims in 1492. Scores of people have been prosecuted for insulting Mr Erdoğan since he moved from the prime minister’s to the president’s office last August — including cartoonists, journalists, students and Mehmet Altunses, a 16-year old boy who was marched to the police station from the classroom… A tidal wave of legislation has centralised power.”

April 15 – Bloomberg (Natasha Doff, Marton Eder and Lyubov Pronina): “The relief rally in Ukrainian bonds may be premature if stalled talks between investors and the nation’s state-owned trade bank are anything to go by. The State Export-Import Bank of Ukraine is in deadlock over its request for a three-month breather on repaying $750 million of bonds due this month after failing to get support from creditors. The decision has been delayed until April 27… Ukraine needs to restructure at least $23 billion of debt by the end of May to meet conditions for the next slice of International Monetary Fund aid after its yearlong conflict with pro-Russian insurgents drained reserves… ‘These kinds of issues that we’re seeing right now with Ukreximbank are just a harbinger for what’s going to come,’ Ivan Tchakarov, a Moscow-based economist at Citigroup Inc., said… ‘If they can’t agree on this one small bond, how are they going to agree on the rest of the debt? The negotiations are going to be quite fraught.’”

Russia and Ukraine Watch:

April 14 – Bloomberg (Henry Meyer and Stephen Bierman): “As Russian President Vladimir Putin has shown in Crimea and eastern Ukraine, he’s willing to take an economic hit to expand his political influence. He’s taking the same approach with Iran. Lifting sanctions and allowing Iranian oil onto global markets would threaten to deepen the plunge in crude prices, curbing revenue from Russia’s biggest export. The cost: about $27 billion, based on estimates from the central bank in Moscow. ‘The strategic benefits are much more important for Russia,’ said Nikolay Kozhanov, an expert at the Royal Institute of International Affairs in London and a nonresident fellow at the Carnegie Moscow Center. “Incorporating Iran into pro-Moscow organizations, Russia is hoping to secure its share in this market or divide zones of influence.’”Putin will get an opportunity to bolster an ally, stymie regional adversaries and open business opportunities. The approach was underscored by his decision this week to lift a ban on shipping S-300 air-defense missile systems to Tehran under an $800 million contract.”

Japan Watch:

April 17 – Bloomberg (Andrew Mayeda): “U.S. Treasury Secretary Jacob J. Lew urges Japan to use all policy tools to support durable economic recovery and end deflation.”