Friday, April 10, 2015

My Weekly Commentary: A Tale of Two Entangled Super Bubbles

“This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the United States before and multiple times when U.S. behavior was hardly multilateralist, such as the 1971 Nixon shock ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out. This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the U.S. approach to global economics. With China’s economic size rivaling that of the United States and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the United States have rendered the architecture increasingly dysfunctional.” Lawrence Summers, April 5, 2015, Washington Post

While on the subject of Larry Summers, it’s worth noting that the International Monetary Fund this week seemed to throw its weight behind Summers’ “secular stagnation” thesis (“new reality of lower speed limits”). And while the prognosis resonates, I have serious issues with the root cause diagnosis. After all, prolonged Credit Bubbles and attendant resource misallocation, mal-investment, maladjustment and wealth redistribution ensure fragility and debilitated economic systems. Bubbles as well strike a heavy toll on social and political stability. The upshot is mounting stress and divisiveness between social classes, political parties, nations and global economic and security blocks. Accordingly, it is absolutely essential to ward off Bubbles prior to them becoming powerfully ingrained. This is the great lesson global policymakers doggedly refuse to learn.

From an analytical perspective, it’s crucial to appreciate that today’s “global government finance Bubble” - the “Granddaddy of all Bubbles” - arose from a backdrop of fragility and maladjustment. Literally decades of financial mismanagement and resulting serial Boom and Bust Cycles set the stage for what would have previously been viewed as unimaginable policy measures. Nowadays, stagnation in real economies ensures that central banking printing inflates financial market Bubbles.

There are pertinent Credit Bubble Tenets at play: “The more systemic a Bubble becomes the less conspicuous its inflationary effects.” “Bubbles inflate perceived wealth while destroying real economic wealth.” “Credit Bubbles redistribute wealth within economies, with the middle class the inevitable biggest loser.” “Global Credit Bubbles redistribute wealth between nations, with geopolitical instability inescapable.” “Timid policymaking hamstrung by progressive financial fragility and economic vulnerability is fundamental to ‘Terminal Phase’ Credit Bubble excess.”

Observing the financial world these days, it is difficult not to invoke Mises’ “crackup boom.” Europe’s Euro Stoxx index jumped 3.1% this week to a new record high, increasing y-t-d gains to 21.3%. The German DAX jumped another 3.6% this week (up 26.2%). Ten-year German bund yields closed at a record low 15 bps. France’s CAC 40 Index gained 3.3% (up 22.7%), as French 10-year yields ended the week at a miserly – and new low - 43 bps. The UK’s FTSE 250 index surged 3.8% (8.0%). This week also saw equities surge 3.7% in Switzerland, 5.8% in Norway, 3.6% in Denmark, 3.4% in Finland, 3.5% in Belgium, 3.0% in Netherlands, 5.2% in Portugal, 3.4% in Ireland, 2.9% in Austria and 2.4% in Italy.

The Bubble in Asian securities, especially China-related, is almost on par with Europe. Chinese stocks surged 5.5% this week, increasing 2015 gains to 24.7%. Incredibly, the Hang Seng equities index surged 9.5% over the past five sessions, as the mainland’s equities speculative Bubble now engulfs Hong Kong. Hong Kong’s Hang Seng has gained 14% the past month to the highest level since 2007. The Shanghai Composite has inflated an incredible 90% since this past July.

Chinese officials devoted significant resources to the study of the Japanese Bubble experience. They seemed to comprehend key dynamics, having stated in the past their determination not to repeat similar mistakes. I believe China’s policymakers had finally decided to bite the bullet and pierce their Bubble. The decision was made to significantly rein in Credit and speculative excess. It’s also my view that the Chinese in 2014 embarked on what they hoped would be an orderly (competitive) devaluation against the U.S. dollar.

This policy course, however, was thwarted by the emergence of acute financial and economic fragilities - at home and abroad. The degree of structural impairment had been unappreciated. Risks associated with popping the Bubble had grown too high. Moreover, policy priorities were reworked in response to a shifting geopolitical landscape.

The greater EM Bubble has played prominently – and Europe (i.e. ECB) and Japan (i.e. BOJ, savers and financial institutions) have assumed increasingly powerful roles. Yet for some time I’ve viewed the “global government finance Bubble” primarily in terms of “A Tale of Two Entangled Super Bubbles.” Without the U.S. so mismanaging the world’s reserve currency and flooding the globe with dollar balances, the Chinese Credit system would have never enjoyed such free rein. The Chinese manufacturing base – not to mention apartment developers and buyers – would not have lavished in unlimited cheap finance. And after the collapse of the mortgage finance Bubble, U.S. reflationary measures would not have gained traction without the corresponding historic expansion of Chinese “money” and Credit.

Major Credit Bubbles make for strange bedfellows. The U.S. and China are intense global rivals, increasingly competing for global financial, economic and military power and influence. Yet over the protracted Bubble period these two adversarial powers have grown increasingly dependent upon the other’s inflating Bubble – respective Bubbles whose excesses mirror those of their rival. Economies have become deeply integrated, financial systems extremely intertwined and their currencies tightly bound together. The façade of stability holds only so long as these increasingly antagonistic adversaries see it in their individual self-interests to feed the runaway global Credit Bubble.

In the simplest terms: The U.S. is a descending global power with a major Credit Bubble problem; China is an ascending global power with a major Credit Bubble problem. More complexly, precarious Bubble codependency masks latent geopolitical explosiveness.

The U.S. has run more than two decades of unending Current Account Deficits, offsetting the gutting of its manufacturing base with finance, services and Trillions of IOUs. The U.S. resorted to a historic inflation of mortgage Credit to reflate after the bursting of the nineties Bubble. The post-mortgage finance Bubble backdrop has witnessed offensive use of the government’s electronic printing press. This increasingly reckless use of finance has led to a highly dysfunctional global Bubble backdrop, destructive wealth redistribution, heightened fragilities and deep acrimony and antagonism.

The Chinese succumbed to a foolhardy expansion of manufacturing capacity, housing and system Credit. China’s Bubble completely got away from authorities after the extraordinary 2009 fiscal and monetary stimulus measures. Plans to rein in excess were then relegated to the backseat. The global backdrop had turned increasingly complex. The “global reflation trade” was collapsing. Commodities and EM – both complexes on the receiving end of enormous Chinese lending and investment – were in serious trouble. This was unfolding just as the Chinese apartment Bubble was finally succumbing. Time for another CBB Tenet: “There’s never a convenient time to rein in major Bubbles.”

Importantly, the bursting EM/China apartment/commodities Bubbles coupled with Federal Reserve policymaking incited a destabilizing king dollar dynamic. This dynamic only exacerbated fragility throughout EM, commodities and energy complexes. Meanwhile, China found its currency tied to a rapidly appreciating dollar, much to the detriment of its manufacturers already burdened by massive overcapacity and its financial institutions challenged by a rapidly deteriorating Credit backdrop domestically and internationally.

Chinese policymakers confronted an extraordinarily complex backdrop – and very difficult decisions. I imagine they looked at king dollar, surging securities markets and a recovering U.S. economy in somewhat disbelief. And they surely viewed U.S. reflation in terms of America as a re-energized geopolitical rival. The increasingly hard-line and nationalistic Chinese leadership determined it was no time to rein in its Bubble and risk deflating its global power play.

The Chinese (and Russians) were working surreptitiously yet methodically toward developing a counter to (perceived waning) U.S. global dominance. I believe the Ukrainian revolution and Crimea takeover provided a game-changer. Suddenly, the U.S. was spearheading an effort to take a hard-line with Putin and Russia. In response, Putin adopted a belligerent approach, determined not to allow U.S.-dictated sanctions and financial power to alter Russia’s policy course. Russia saw the collapse of crude and the ruble as part and parcel to a U.S. plot to undermine Putin and Russia more generally. It was not long before Putin was off to Beijing to consult with President Xi Jinping.

Surreptitious campaigns for global power and influence were suddenly in the wide open. Putin had to be thwarted – but there was certainly no appetite for military confrontation. The U.S. would impose its financial muscle – power in no small part dependent upon the Fed’s Bubble-induced securities market juggernaut.  Putin could not be allowed to mess with the U.S. bull market and economic recovery.  As such, it became an inopportune time to contemplate a move to normalize U.S. monetary policy. Not unlike the Chinese dilemma, an increasingly complex global financial, economic and geopolitical backdrop had the Yellen Federal Reserve content to downplay Bubble risks.

April 9 – RT: “The creation of the BRICS reserve currencies pool worth $100 billion will allow member states to depend less on negative processes in the world economy and bypass market volatility, said Russian Prime Minister Dmitry Medvedev. ‘Along with the launch of the New Development Bank, it is one of the most important initiatives for countries entering into this association. The agreement establishing a pool of reserve currencies was signed last summer,’ said Medvedev… ‘Russia is providing $18 billion. Each of the BRICS members may apply to any party to the treaty for loan,” Medvedev said, adding that key decisions will be taken by the Governing Council, which consists of either finance ministers or central bank governors. Russia will be represented by the head of the Central Bank of Russia Elvira Nabiullina. ‘I hope it [the agreement on establishing the pool – Ed.] will not only strengthen our economic cooperation, but also provide the participants of the ‘five’ more independence from the current international financial situation and the problems existing in the international financial institutions,’ he said…”

April 6 – Bloomberg (Sabrina Valle): “A group of Petroleo Brasileiro SA suppliers is negotiating about $3.5 billion in loans from Chinese institutions as China expands support for Brazil’s oil industry, the Brazil-China Chamber of Commerce & Industry said. About half of the more than 20 suppliers banned from participating in new tenders with Petrobras amid a graft probe are in talks with lenders including China Development Bank Corp., Export-Import Bank of China and China Export & Credit Insurance Corp., Charles Tang, who heads the chamber, said… The talks follow China Development Bank’s loan to Petrobras for the same amount announced April 1. The state-run producer’s shares jumped 4.9% that day as the deal eased concern of a looming cash crunch as delays in reporting financial results keep the company out of bond markets.”

Major Bubbles coalesce around adaption, evolution, accommodation and, in the end, the embracement of instruments, strategies and policies that would have earlier seemed objectionable. Who would have thought the Chinese would be willing to accumulate $4.0 TN of international reserves (electronic IOU’s from a bunch of over-indebted borrowers)? Well, the Chinese and EM more generally learned from previous crisis experience that large reserve holdings would ward off currency runs and bolster systemic stability.

So International Reserves inflated from $6.6 TN in early-2009 to last year’s high of $12.0 TN. This dynamic was fundamental to the “global government finance Bubble” thesis. China and EM central banks (chiefly) accumulated U.S. IOUs, accommodating egregious U.S. reflationary measures. In the process, this accumulation of Reserves required the expansion of domestic “money” and Credit (throughout China and EM economies). Moreover, the growing trove of reserves emboldened the perception that EM economies and Credit systems were now immune to “hot money” exodus, currency runs and burst Bubbles. I have argued that these massive Reserves were instead indicative of unprecedented “hot money” flows, leverage, currency mismatches and inherent fragilities.

Importantly, the accumulation of International Reserves has reversed. From an August 2014 high of $12.033 TN, reserves have dropped $400 to $11.632 TN. As the poster child for how quickly Reserves can go from seemingly abundant to alarmingly depleted, Russia has seen Reserves drop from a 2014-high of $475bn to $309bn.

If Russia had the financial resources, surely Putin would love to play spoiler and tempt Greece’s Tsipras into his (anti-US, anti-Europe) sphere of influence. China these days has the financial wherewithal. Chinese investment (see above) in Petrobras and its suppliers played a major role in reversing Petrobras’ bonds and CDS, Brazilian bank bonds/CDS, Brazilian sovereign yields, the Brazilian real and EM markets more generally.

From a March high of 487 bps, Banco do Brasil CDS closed this week at 374 bps. Brazil sovereign CDS fell from 312 to Friday’s 249 bps. Brazil 10-year real yields have declined from 13.5% to 12.58%. Brazilian equities have rallied 13% off of March 13th trading lows.

April 9 – Bloomberg: “Bull markets are always tough on short sellers. This one in China right now, though, is proving downright brutal. Bearish wagers on the Shanghai Stock Exchange have climbed more than threefold in the past nine months and reached a record 7.46 billion yuan ($1.2bn) on Thursday, a period in which the benchmark equity index jumped 94%. Across the border in Hong Kong, where the Hang Seng Composite Index has surged 7.6% in just the past two days, the gauge’s 20 most-shorted stocks surged 18% on average.”

Late-stage speculative runs are often fueled by short squeezes. As deteriorating fundamentals and underlying vulnerability begin to manifest, short positions and bearish derivative bets are initiated as both directional speculations and market hedges. At the same time, prolonged bullish cycles ensure upside momentum and general “bullish” inertia. Blow-off tops can be the result of a confluence of policy measures to ward off collapse and an expansive pool of speculative finance that has profited greatly from gaming policy.

There’s understandable skepticism that Chinese authorities can hold their increasingly unwieldy Bubble together. Add now a stock market Bubble to their already lengthy list of problems. Still, reserves of $3.8 TN are a lot of “money.” But how much is needed to sustain the aged Chinese Bubble, it’s U.S. counterpart and, perhaps more pertinent at the moment, faltering global EM and commodities Bubbles. In the midst of all the bullish hoopla, it’s worth noting king dollar caught a strong bid this week. One of these days, the Super Currency Peg binding the two Super adversaries and their Super Bubbles will need to be disentangled.

For the Week:

The S&P500 gained 1.7% (up 2.1% y-t-d), and the Dow rose 1.7% (up 1.3%). The Utilities added 0.3% (down 5.8%). The Banks increased 0.4% (down 2.0%), while the Broker/Dealers slipped 0.4% (up 2.7%). The Transports jumped 1.9% (down 4.1%). The S&P 400 Midcaps added 0.7% (up 5.7%), and the small cap Russell 2000 rose 0.7% (up 5.0%). The Nasdaq100 surged 2.5% (up 4.4%), and the Morgan Stanley High Tech index advanced 2.4% (up 0.9%). The Semiconductors rallied 2.9% (up 3.2%). The Biotechs surged 3.8% (up 18.6%). With bullion up $5, the HUI gold index jumped 2.5% (up 4.4%).

One-month Treasury bill rates ended the week at a basis point and three-month rates closed at two bps. Two-year government yields increased eight bps to 0.56% (down 11bps y-t-d). Five-year T-note yields jumped 14 bps to 1.40% (down 26bps). Ten-year Treasury yields rose 11 bps to 1.95% (down 22bps). Long bond yields gained nine bps to 2.58% (down 17bps). Benchmark Fannie MBS yields gained four bps to 2.63% (down 20bps). The spread between benchmark MBS and 10-year Treasury yields narrowed seven to 68 bps. The implied yield on December 2015 eurodollar futures increased 4.5 bps to 0.64%. Corporate bond spreads narrowed. An index of investment grade bond risk declined two bps to 61 bps. An index of junk bond risk dropped 11 bps to 330 bps. An index of EM debt risk fell 11 bps to 345 bps.

Greek 10-year yields sank 81 bps to 11.07% (up 132bps y-t-d). Ten-year Portuguese yields dropped nine bps to a record low 1.60% (down 102bps). Italian 10-yr yields declined three bps to 1.26% (down 63bps). Spain's 10-year yields increased one basis point to 1.23% (down 39bps). German bund yields fell four bps to a record low 0.15% (down 39bps). French yields declined five bps to a record low 0.43% (down 39bps). The French to German 10-year bond spread narrowed one to 28 bps. U.K. 10-year gilt yields slipped a basis point to 1.58% (down 17bps).

Japan's Nikkei equities index surged 2.4% (up 14.1% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.34% (up 2bps y-t-d). The German DAX equities index jumped 3.6% (up 26.2%). Spain's IBEX 35 equities index gained 1.0% (up 14.3%). Italy's FTSE MIB index rose 2.4% (up 25.6%). Emerging equities were mostly higher. Brazil's Bovespa index gained 1.5% (up 8.4%). Mexico's Bolsa rose 1.5% (up 4.0%). South Korea's Kospi index gained 2.1% (up 9.0%). India’s Sensex equities index rose 2.2% (up 5.0%). China’s Shanghai Exchange surged 4.4% to a new six-year high (up 24.7%). Turkey's Borsa Istanbul National 100 index slipped 0.4% (down 3.6%). Russia's MICEX equities index declined 1.5% (up 18.7%).

Debt issuance was steady. Investment-grade issuers included General Motors $2.5bn, Glencore $2.25bn, Alabama Power $975 million, Monsanto $800 million, Compass Bank $700 million, Mass Mutual Life $500 million, Teco Finance $250 million, New York University $180 million and Hilltop Holdings $150 million.

Convertible debt issuers this week included Trinity Biotech $115 million.

Junk funds saw inflows of $1.345bn (from Lipper). Junk issuers included Infor $1.63bn, Murray Energy $1.3bn, ExamWorks Group $500 million, Matador Resources $400 million, RHP Hotel Properties LP $400 million, Endeavor Energy Resources LP $300 million, EnerSys $300 million, Isle of Capri Casinos $150 million and HRG Group $100 million.

International debt issuers included Inter-American Development Bank $3.0bn, Fiat Chrysler Automobile $3.0bn, Turkey $1.5bn, Mallinckrodt $1.4bn, Bank of Montreal $1.25bn, ING Groep $2.25bn, Nederlandse Waterschapsbank $1.25bn, Bank of Nova Scotia $1.1bn, Shinhan Bank $600 million, Cosmos Energy $225 million and AltaGas $125 million.

Freddie Mac 30-year fixed mortgage rates declined four bps to a nine-week low 3.66% (down 21bps y-t-d). Fifteen-year rates fell five bps to 2.93% (down 22bps). One-year ARM rates were again unchanged at 2.46% (up 6bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 3.95% (down 33bps).

Federal Reserve Credit last week increased $0.6bn to $4.444 TN. During the past year, Fed Credit inflated $246bn, or 5.9%. Fed Credit inflated $1.634 TN, or 58%, over the past 126 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week surged $30.3bn to a three-month high $3.290 TN. "Custody holdings" were down $3.4bn y-t-d.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were down $106bn y-o-y, or 0.9%, to a 15-month low $11.632 TN. Reserve Assets are now down $400bn from the August 2014 peak. Over two years, reserves were $556bn higher, for 5% growth.

M2 (narrow) "money" supply rose $10.5bn to $11.854 TN. "Narrow money" expanded $703bn, or 6.3%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits were little changed, while Savings Deposits rose $8.1bn. Small Time Deposits slipped $1.2bn. Retail Money Funds increased $1.7bn.

Money market fund assets were little changed at $2.633 TN. Money Funds were down $100bn year-to-date.

Total Commercial Paper gained $8.2bn to $1.019 TN. CP declined $19.3bn over the past year, or 1.9%.

Currency Watch:

The U.S. dollar index rallied 2.9% to 99.34 (up 10% y-t-d). For the week on the upside, the Brazilian real increased 1.5% and the Australian dollar gained 0.6%. For the week on the downside, the euro declined 3.3%, the Danish krone 3.3%, the Swedish krona 3.1%, the Swiss franc 2.8%, the Mexican peso 2.6%, the British pound 1.9%, the Norwegian krone 1.9%, the South African rand 1.6%, the Singapore dollar 1.3%, the Japanese yen 1.0%, the New Zealand dollar 1.0%, the Taiwanese dollar 0.8% and the Canadian dollar 0.6%.

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.8% (down 1.4% y-t-d). Spot Gold increased 0.4% to $1,208 (up 1.9%). May Silver fell 1.9% to $16.38 (up 5.0%). May Crude jumped $2.50 to $51.64 (down 3%). May Gasoline was up 3.6% (up 23%), while May Natural Gas sank 7.4% (down 13%) to an almost three-year low. May Copper was unchanged (down 3%). May Wheat fell 1.8% (down 11%). May Corn dropped 2.5% (down 5%).

Fixed Income Bubble Watch:

April 8 – Bloomberg (Sonali Basak and Doni Bloomfield): “JPMorgan… head Jamie Dimon said last year’s volatility in U.S. Treasuries is a ‘warning shot’ to investors and that the next financial crisis could be exacerbated by a shortage of the securities. The Oct. 15 gyration, when Treasury yields fluctuated by almost 0.4 percentage point, was an ‘unprecedented move’ that would have serious consequences in a stressed environment, Dimon… said… Treasuries are supposed to be among the most stable securities… It’s just a matter of time until some political, economic or market event triggers another financial crisis, he said, without predicting one is imminent. The Treasuries move was ‘an event that is supposed to happen only once in every 3 billion years or so,’ Dimon wrote. A future crisis could be worsened because there ‘is a greatly reduced supply of Treasuries to go around.’”

April 2 – Wall Street Journal (Katy Burne): “A shortage of high-quality bonds is disrupting the $2.6 trillion U.S. market for short-term loans known as repurchase agreements, or ‘repos,’ creating bottlenecks for a key source of liquidity in the financial system and sending ripples through short-term debt markets. Stresses in the repo market are amplifying price swings in government bonds and related debt markets at a time when many investors are reshuffling their portfolios around new interest-rate expectations, following a period of low volatility, traders and analysts said. Although traders said the impact so far has been manageable, the broad concern is that scarcity in repos will pressure rates and could complicate efforts by the Federal Reserve to lift interest rates when the time comes.”

April 6 – Bloomberg (Christine Idzelis): “The market for loans to below-investment grade companies is off to its slowest start in five years as regulators step up efforts to curb risky underwriting and investors put their money elsewhere. About $63 billion of leveraged loans have been sold to money managers this year, down 69% from 2014 and the least since $53 billion was issued during the same period in 2010… Investors have pulled a net $5.5 billion this year from funds that buy the debt, adding to last year’s record $23.9 billion in withdrawals… The loan market is mired in a slump that started a year ago as regulators led by the Federal Reserve increased scrutiny on what they deemed excessive risk-taking by Wall Street’s biggest lenders.”

April 8 – Bloomberg (Asjylyn Loder and Dakin Campbell): “For U.S. shale drillers, the crash in oil prices came with a $26 billion safety net. That’s how much they stand to get paid on insurance they bought to protect themselves against a bear market… The flipside is that those who sold the price hedges now have to make good. At the top of the list are the same Wall Street banks that financed the biggest energy boom in U.S. history, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. While it’s standard practice for them to sell some of that risk to third parties, it’s nearly impossible to identify who exactly is on the hook because there are no rules requiring disclosure of all transactions. The buyers come from groups like hedge funds, airlines, refiners and utilities. ‘The folks who were willing to sell it were left holding the bag when prices moved,’ said John Kilduff, partner at Again Capital…”

Federal Reserve Watch:

April 10 – Bloomberg (Simone Foxman): “Stan Druckenmiller has spent the past two years taking to public stages and television to criticize the Federal Reserve for taking unnecessary risks. He’s also done so in more intimate settings. The billionaire investor, who has one of the best long term track records in money management, told an audience at the Lost Tree Club in North Palm Beach, Florida, on Jan. 18 that trouble is looming. ‘I just have the same horrific sense I had back in ’04,’ Druckenmiller said… ‘Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there.”

U.S. Bubble Watch:

April 8 – Reuters (Caroline Valetkevitch): “Wall Street is greeting what is expected to be the worst earnings season since 2009 with a gigantic shrug… The earnings season unofficially kicks off Wednesday with results from aluminum company Alcoa… First-quarter S&P 500 earnings are projected to have declined by 2.8% from a year ago, which would make the quarter the worst for results since the third quarter of 2009… But investor sentiment has been boosted by optimism that the Federal Reserve will continue to delay its first interest rate hike in nearly a decade.”

April 6 – Bloomberg (Richard Clough and Joe Carroll): “Tumbling oil prices and a stronger dollar are pushing down U.S. corporate profits for the first time in more than five years… First-quarter earnings per share for companies in the Standard & Poor’s 500 Index may have fallen about 5.8%, according to estimates compiled by Bloomberg, in the first year-over-year decline since 2009’s third quarter. As earnings season gets its unofficial start this week with Alcoa Inc., the biggest drag will come from a 63% profit decline at energy companies… ‘There are all these cross currents going on right now heading into earnings season,’ said Todd Lowenstein… at HighMark Capital Management Inc. ‘You’re going to have at least on paper a technical earnings recession, meaning two consecutive quarters of negative growth, in the first and second quarters.’”

April 8 – New York Times (Gretchen Morgenson): “For almost two years, shareholders of Fannie Mae and Freddie Mac have been asking the United States government about its 2012 decision to divert all of the mortgage finance giants’ earnings to the Treasury rather than let them repay taxpayers under the original bailout agreement. But the government has declined to disclose documents relating to that decision, contending that some may be subject to presidential privilege. Now, this cloak of secrecy has drawn the scrutiny of Charles E. Grassley, the Iowa Republican who is chairman of the Senate Judiciary Committee. On Tuesday, Mr. Grassley sent letters to the Justice Department and the Treasury asking for details about the decision and why the government has kept such a tight lid on documents relating to it.”

April 7 – Bloomberg (Jody Shenn): “Auto-finance companies are issuing record amounts of bonds backed by leases as used cars retain their value like never before. With the supply of second-hand vehicles now poised to rise, it’s raising concern that risks are building. Sales of securities backed by car leases have already surpassed $6 billion this year after a record $16.4 billion were issued in 2014… As everyone from automakers to mutual funds wagers on how much cars will be worth when the leases expire, the size of the market has more than tripled since 2008. The concern is that the expansion is underpinned by a shortage of used cars that a widely followed forecaster says will begin to reverse this year. That would threaten to depress car values and increase the risk of losses for lessors including Ford Motor Co., General Motors Co. and Ally Financial Inc. should they fall more than estimated.”

April 9 – Bloomberg (Oshrat Carmiel): “Home prices in Brooklyn jumped to a record in the first quarter as buyers clamoring to own real estate in New York’s most populous borough competed for the limited supply of listings on the market. Condominiums, co-ops and one- to three-family homes sold for a median of $610,894 in the period, up 18% from a year earlier and the highest in 12 years of data-keeping, according to… Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. The median price has reached a record six times in the past eight quarters.”

April 8 – Bloomberg (Oshrat Carmiel): “Tom Vitale bought a small Manhattan condo in August 2012, planning to keep the investment for about four years, or long enough to make at least a 15% return. When he listed the apartment ahead of schedule, the gain was more than double his target. ‘I didn’t expect that,’ said Vitale, who sold the 536-square-foot studio in January for $859,000, 34% more than his purchase price. ‘It boils down to lack of inventory. There’s not a lot that the entry-level buyer can afford.’ Owners of Manhattan apartments are reaping fast returns when they sell in short time frames… Buyers of condos in 2012 who resold their units in the second half of last year saw a 37% gain on average, according to… Those who purchased condos in 2013 and sold within the same six-month period had an average return of 22%.”

April 10 – Bloomberg (David M Levitt and Oshrat Carmiel): “A group including billionaire investor Bill Ackman paid $91.5 million for a duplex penthouse at Extell Development Co.’s One57 condominium tower, one of New York City’s most expensive home purchases ever.”

Global Bubble Watch:

April 8 – Wall Street Journal (Emese Bartha and Chiara Albanese): “Europe’s plunging borrowing costs marked two new milestones on Wednesday, with Switzerland becoming the first country ever to issue 10-year debt that gives investors a yield under 0%, and Mexico lining up a rare deal to borrow euros that it will repay a century from now. Bond prices across Europe have rocketed this year in response to the European Central Bank’s massive stimulus package, crushing yields for investors and borrowing costs for issuers. Several European countries inside and outside the eurozone have sold government debt with up to five years of maturity at negative yields… The Alpine country sold a total of 377.9 million Swiss francs (about $391 million) of bonds maturing in 2025 and 2049. On the 10-year slice, the yield was -0.055%...”

April 8 – Bloomberg (Kasia Klimasinska): “Bond funds may be exposing customers and the financial system to more risk than some investors realize as money managers seek higher returns in less liquid assets, the International Monetary Fund said… ‘The role of fixed-income funds, which entail larger contagion risks than traditional equity investment, has expanded considerably,’ the IMF said… in its latest Global Financial Stability Report… Globally, asset managers oversee $76 trillion -- the equivalent of world gross domestic product, the IMF said. The report brings the institution into a debate in the U.S. and elsewhere about whether the asset-management industry -- from common mutual funds to ETFs -- needs closer scrutiny. ‘We know relatively little about leverage -- even for plain vanilla mutual funds we don’t have much information,’ Gelos said… ‘In particular, we don’t have much information about the derivatives, so that’s one area where more disclosure would be helpful.’”

ECB Watch:

April 7 – Bloomberg (Lisa Abramowicz): “Just when debt-addicted American companies were starting to worry that Federal Reserve Chair Janet Yellen was going to take their proverbial punch bowl away, along came Mario Draghi. The European Central Bank president has made borrowing so cheap in the region that foreign corporations are selling record amounts of debt. Forget the deeper, bigger U.S. corporate-bond market. Borrowing in euros is all the rage these days because it’s about 2 percentage points less expensive to do so. About 65% of the record 60 billion euros of investment-grade bonds sold in March came from overseas companies, according to a March 27 Bank of America report. And a lot of those sellers are based in the U.S.”

Europe Watch:

April 9 – Reuters: “Greece made a crucial payment to the International Monetary Fund and won extra emergency lending for its banks on Thursday but it remained unclear whether Athens can satisfy skeptical creditors on economic reforms before it runs out of money. Euro zone partners gave Greece six working days to improve a package of proposed reforms in time for finance ministers of the currency bloc to consider whether to release more funds to keep the country afloat when they meet on April 24. After weeks of contradictory statements, Finance Minister Yanis Varoufakis announced that Athens was resuming the sale of state assets halted when a leftist-led government was elected in January, but would do so on different terms.”

China Bubble Watch:

April 7 – Bloomberg: “The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison. The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits… When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156. Like the rise of the Internet two decades ago, China’s technology shares are being fueled by a compelling story: the ruling Communist Party is promoting the industry to wean Asia’s biggest economy from its reliance on heavy manufacturing and property development. In an echo of the late 1990s, Chinese stocks are also gaining support from lower interest rates, a boom in initial public offerings and an influx of money from novice investors.”

April 8 – Bloomberg (Jonathan Burgos,Adam Haigh and Kyoungwha Kim): “The frenzy that made Chinese stocks the world’s best performers is spilling over the border into Hong Kong. After propelling the Shanghai Composite Index to a 90% rally in the past 12 months, mainland investors are buying as many Hong Kong equities through the exchange link as regulators will allow. Turnover in the former British colony jumped to an all-time high on Wednesday, volatility jumped and the city’s benchmark stock gauge surged the most since 2011. Gains accelerated in early Thursday trading, with the Hang Seng Index soaring as much as 6.4% before paring its advance to 2.9%. Hong Kong’s $4.7 trillion stock market is catching up with its Chinese counterpart…”

April 9 – Bloomberg (Alfred Liu): “Hong Kong’s stock market rally is drawing individual investors from all walks of life as the Hang Seng Index soars to a seven-year high. With money from the mainland exchange link contributing to record turnover in the city’s $4.9 trillion stock market, a crowd of part-time traders hunched over computer screens at Bright Smart Securities & Commodities Group in Hong Kong’s central business district to take advantage of the surge in Chinese demand. ‘Things are getting quite exciting,’ said Chow Man, a 68-year-old housewife who favors Chinese banks and infrastructure stocks…’It’s becoming like a hobby for a lot of mainland investors to trade stocks now. That’s why more of them are taking opportunities in Hong Kong.’”

April 7 – Bloomberg: “Chinese junk bonds fell after Cloud Live Technology Group Co. said it will miss payments due today as the nation braces for its second onshore corporate default. The yield on solar-cell maker Baoding Tianwei Baobian Electric Co.’s notes due 2018 climbed seven bps to 7.49% after Cloud Live’s statement late Monday… Fertilizer company Inner Mongolia Nailun Group Inc.’s 2018 bonds surged 50 bps to 21.06%. Higher-graded securities showed little reaction… President Xi Jinping’s anti-graft probe and the slowest economic growth since 1990 are stoking default concerns a year after Shanghai Chaori Solar Energy Science & Technology Co. became the first company to default on onshore bonds. Companies in Asia’s largest economy need to repay 1.5 trillion yuan ($242bn) of local-currency notes in the period to June 30, the most for a quarter in Bloomberg data going back to 1998.”

April 8 – Bloomberg: “Chinese developers target lower growth for new-home sales this year, as prospects for the real estate market remain in doubt even after the government eased monetary policy and lifted curbs on housing purchases. Property companies are targeting median growth of 12.6% for contract sales this year, less than 2014's 16% annual gain, a Bloomberg survey of 28 listed developers showed. The median of sales were 42.2 billion yuan ($6.8bn) last year, short of the median target of 44 billion yuan.”

Geopolitical Watch:

April 8 – Bloomberg (Nicole Gaouette and Andrew Mayeda): “The Obama administration’s vain attempt to prevent allies from joining China’s Asian Infrastructure Investment Bank is feeding a growing perception that U.S. influence in Asia is declining and America is losing its 70-year grip on global economic institutions. ‘This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system,’ former Treasury Secretary Larry Summers wrote in an April 5 column in which he also blamed Congress for domestic politicking that has rendered the U.S. ‘increasingly dysfunctional.’ The administration’s campaign against China’s new investment bank stands in contrast to its push for greater regional leadership to battle Islamic extremists, remedy climate change and address other global issues. And while administration officials argue that domestic economic realities limit America’s ability to police the world, they’re trying to resist the reality of China’s growing economic clout, said a U.S. official… The U.S. ‘knows only too well that China is rising and that it wants to reshape the global order, and it is trying to prevent this from happening.’ said Tom Miller, senior Asia analyst at Gavekal Dragonomics… That’s leaving the U.S. increasingly isolated.”

April 7 – Wall Street Journal (Felicia Schwartz): “The U.S. is deeply concerned about China’s behavior in the South China Sea and its cyber activities, Defense Secretary Ash Carter said… In his first major remarks on China as defense secretary, Mr. Carter struck a tough pose. He said the U.S. would invest in weapons including a new long-range stealth bomber as well as other assets to secure the Asia-Pacific region. The U.S. also will deploy advanced aircraft and ships to the region, part of a gradual increase in attention to Asia during President Barack Obama’s last two years in office. ‘We and many other countries are deeply concerned about some of the activities China is undertaking,’ Mr. Carter said… ‘Its opaque defense budget, its actions in cyberspace and its behavior in places like the South China Sea raise a number of serious questions.’”

EM Bubble Watch:

April 8 – Financial Times (Elaine Moore and Robin Wigglesworth): “Mexico has sold its first euro-denominated ‘century’ bond, affirming its status as one of the developing world’s most favoured sovereign borrowers and swelling the issuance of world debt that will not be paid back for generations. The €1.5bn deal was priced at a yield of just 4.2%, down from initial pricing talks of around 4.5% — but still an attractive proposition at a time when large swaths of the global government bond market offer sub-zero yields. Mexico has sold euro debt before but this is the first ever 100-year emerging markets bond sale in the common currency…”

April 9 – New York Times (Simon Romero): “Scandals are shaking one government after another this year in Latin America: the mysterious death of a prosecutor in Argentina; the ouster of Peru’s prime minister over a domestic spying operation; the revelations of a vast bribery scheme at Brazil’s national oil company. Chile was long thought to be above such agitations, given its reputation as one of the region’s least corrupt nations. But a series of stunning scandals is placing the political establishment here in turmoil, suddenly raising doubts about a country that has been a darling of international finance institutions and exposing figures across the ideological spectrum to scorn.”

April 6 – Bloomberg (Isobel Finkel and Constantine Courcoulas): “The lira’s worst slump since 2008 is driving up the debt-servicing costs of Turkish companies, complicating government efforts to spur the economy before general elections. The currency’s 9.9% retreat against the dollar since Jan. 1 was bigger than any analyst surveyed by Bloomberg was projecting at the start of the year. Non-financial companies with $89 billion of debt coming due within the next 12 months have little choice than to curtail investments to service the liabilities, according to Renaissance Capital and GlobalSource Partners Inc. ‘No one can convince me that several corporates are not hurting badly as they service this debt,’ Murat Ucer, an economist covering Turkey at GlobalSource in Istanbul, said… ‘While a few firms have foreign-exchange revenues that help mitigate the effects of this deterioration, some firms must be experiencing serious pain.’ The spending drop is already rippling through Turkish manufacturing, which is in the midst of its biggest contraction in six years, while consumer confidence takes a hit as the falling lira cuts into household spending power.”

Russia and Ukraine Watch:

April 6 – Bloomberg (Olga Tanas): “Russian inflation accelerated in March to the fastest on an annual basis since 2002 even as slowing weekly readings may allow the central bank to cut borrowing costs further. Consumer prices rose 16.9% from a year earlier, compared with 16.7% in February… Prices gained 1.2% in the month.”

Japan Watch:

April 9 – Bloomberg: “Japanese banks have been more aggressive than their Chinese peers in expanding abroad since the global financial crisis, the International Monetary Fund said… Banks in both countries have used their strong balance sheets to seize growth opportunities overseas as European and U.S. lenders retrench from Asia, the IMF said in its Global Financial Stability Report. Yet Japanese banks expanded on a larger scale and diversified their businesses, making them less vulnerable to funding issues… Driven by limited growth prospects at home, Japan’s three biggest banks increased overseas loans to more than 31% of their total advances in 2013 from 18% in 2009, the IMF said. Chinese lenders expanded loans abroad to 9.2% from 6.1% in the period, it said.”

April 8 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan kept policy unchanged on Wednesday, with Governor Haruhiko Kuroda saying the economy faces less risk now than it did last year when the central bank boosted monetary stimulus to an unprecedented level. The BOJ vowed to continue expanding the monetary base at an annual pace of 80 trillion yen ($666bn)… The board voted 8 to 1 against a proposal by Takahide Kiuchi, a consistent opponent of Kuroda’s easing, to reduce the target by almost half. The governor’s bid to spur 2% inflation is facing a test, with the BOJ’s main gauge of price gains sinking to zero because of cheaper oil and weakness in Japan’s recovery from recession.”

April 10 – Reuters (Leika Kihara and Sumio Ito): “Bank of Japan Deputy Governor Hiroshi Nakaso has tempered market expectations that the bank will expand its stimulus program later this month, saying a cut in its inflation forecast would not be enough to justify more monetary easing… ‘What's important is the underlying trend of inflation dynamics, which are steadily improving,’ Nakaso told Reuters in an interview on Thursday, his first with non-Japanese media in nearly a year. ‘As long as there's no change to the underlying trend of inflation, additional monetary easing is unnecessary.’”