Saturday, September 26, 2015

Weekly Commentary: New World Disorder

The Federal Reserve is flailing and global currency markets are in disarray. Notably, the Brazilian real dropped more than 10% in five sessions, before Thursday’s sharp recovery reversed much of the week’s loss. This week the Colombian peso dropped 3.0%, and the Chilean peso fell 3.1%. The Mexican peso dropped 1.9%. The Malaysian ringgit sank 4.5% for the week, with the South Korean won down 2.7% and the Indonesia rupiah losing 2.2%. The Singapore dollar fell 1.8%. The South African rand sank 4.4% and the Turkish lira fell 1.4%. Notably, market dislocation was not limited to EM. The Norwegian krone was hit for 4.4%, and the Swedish krona lost 2.0%. The British pound declined 2.3%. The Australian dollar also lost 2.3%.

Apparently alarmed by the market’s poor reaction to last week’s no hike decision, the Ultra-Dovish Fed this week attempted to slip on a little hawk attire. It’s looking really awkward. On Thursday evening, chair Yellen did her best to backtrack from last week’s FOMC statement with its focus on global issues. The markets are doing their best not to panic.

Securities markets have over the years grown too accustomed to knowing almost precisely what the Fed’s (and global central bankers) next move would be and what indicators were driving the decision-making (and timing) process. Transparency and clarity are hallmarks of New Age central banking. But chairman Bernanke back in 2013 significantly muddied the waters with his comments that the Fed was ready to push back against a “tightening of financial conditions.” Markets celebrated short-term ramifications: the Fed was overtly signaling it would react to “risk off” speculative dynamics.

And for more than two years, global market Bubble vulnerabilities ensured the Fed stayed firmly planted at zero. Meanwhile, the U.S. unemployment rate dropped to 5.1%. Stock prices shot to record highs, with conspicuous signs of speculative excess (biotech and tech!) The U.S. recovery soldiered on, Bubble excesses and imbalances on clear display.

At least to the adults on the FOMC, crisis-period zero rates some time ago became inappropriate. So it’s time to at least attempt a semblance of responsible central banking. There is, however, no thought of really tightening policy. Just a baby-step – or perhaps two – so history won’t look back and say the Fed sat back, watched the Bubble inflate and did absolutely nothing. The problem today is that even 25 bps will upset the fragile apple cart.

The global Bubble is bursting – hence financial conditions are tightening. Bubbles never provide a convenient time to tighten monetary policy. Best practices would require central bankers to tighten early before Bubble Dynamics take firm hold. Central bankers instead nurture and accommodate Bubble excess. It ensures a policy dead end.

As the unfolding EM crisis gathered further momentum this week, the transmission mechanism to the U.S. has begun to clearly show itself. While “full retreat” may be a little too strong at this point, the global leveraged speculating community is backpedaling. Biotech stocks suffered double-digit losses this week, as a significant Bubble deflates in earnest. It’s also worth noting that the broader market underperformed. The speculator Crowd hiding out in the small caps on the thesis that these companies were largely immune to global maladies must be feeling uncomfortable. The small cap universe is a dangerous place in the midst of de-leveraging/de-risking.

There was a new Z.1 “flow of funds” report released from the Fed last week. The “flow of funds” always turns fascinating at inflection points.

Total Non-Financial Debt (NFD) expanded at a 4.4% rate during Q2 2015, up from Q1’s 2.5%. Corporate debt growth accelerated to a notable 8.7% growth rate, up from Q1’s 8.4% to the fastest rate since Q3 2013. Household Debt expanded at a 3.9% pace, up from Q1’s 1.7% to the quickest pace since Q2 2014. Buoyed by strong boom-time receipts, Federal borrowings expanded at a modest 2.4% pace.

In seasonally-adjusted and annualized (SAAR) dollars, Non-Financial Debt expanded $1.936 TN during Q2, up from Q1’s SAAR $1.074 TN – and in the ballpark of the $2.0 Trillion bogey I’ve used as sufficient Credit growth to power Bubble reflation.

Credit and flow analysis always requires dissecting the data by key sectors, attempting to discern current excesses and vulnerabilities. This type of analysis becomes critical at key cycle inflection points.

During Q2, Total Business Borrowings (TBB) expanded at an extraordinary SAAR $1.009 TN, up from Q1’s already elevated $863bn. For perspective, Total Business borrowings expanded $707bn in 2014, $555 billion in 2013, $489 billion in 2012 and $298 billion in 2011. Importantly, Business borrowings are highly cyclical, and I would strongly argue especially vulnerable to an abrupt change in market sentiment. After expanding a record $1.115 TN in 2007, Business borrowings were almost cut in half ($587bn) in 2008, before contracting in 2009 ($455bn) and 2010 ($90bn).

Q2 saw Total Household borrowings expand SAAR $548 billion, up from Q1’s $241 billion to the strongest pace since Q2 2014 ($696bn). Household mortgage borrowings jumped to SAAR $206bn, the largest expansion since the mortgage finance Bubble period.

While much below the Trillion plus annual borrowings from 2008 through 2012, Federal Government borrowings rose to SAAR $350 billion during Q2. Of course, the government’s profound Credit system role is not limited to the issuance of Treasury debt and expanding Fed Credit. The Government-Sponsored Enterprises (GSE) expanded borrowings SAAR $106bn during Q2, a sharp reversal from Q1’s SAAR $135 billion contraction. Moreover, Agency- and GSE-Backed Mortgages Pools expanded SAAR $123 billion, up from Q1’s $5.3 billion. In the past, abrupt expansion in the GSE’s and Agency MBS sectors reflected an incipient tightening of market liquidity conditions (i.e. heightened demand for perceived safe and liquid securities).

Over recent years, “flow of funds” analysis has focused on the Bubble effects of inflating Household perceived wealth. During Q2, Household Assets rose another $828 billion (nominal/not annualized) to a record $99.990 TN.  Household sector Financial Assets increased $286 billion and Real Estate gained $499 billion. With Liabilities up $133 billion, Household Net Worth inflated $695 billion during the quarter to a record $85.712 TN. Household Net Worth increased $3.830 TN (4.7%) over the past year and $11.898 TN over two years (16.1%).

It’s worth recalling that Household Assets ended 2007 at $81.1 TN, with Net Worth at $66.7 TN. After declining to $56.5 TN to end 2008, Household Net worth has since then inflated $29.2 TN, or 52%. As a percentage of GDP, Household Net Worth slipped slightly to 390% from Q1’s 394%. For perspective, Household Net Worth ended the eighties at 267%, closed Bubble year 1999 at 361% and Bubble year 2007 at 366% of GDP.

Household sector holdings of Financial Assets ended 1985 at $10.9 TN, or 250% of GDP. These holdings had inflated to $22.8 TN by 1995, or 297% of GDP. By 2005 this number has surged to $45.5 TN, or 347% of GDP. Household holdings of Financial Assets ended Q2 2015 at a record $68.5 TN, a record 395% of GDP.

Inflating securities markets have been fundamental to my government finance Bubble thesis. As a proxy for Total Debt Securities (TDS), I combine Treasury Securities, Agency Securities, Corporate Bonds and Muni Debt. Total Equities is then added for a proxy of Total Securities. TDS ended Q2 at a record $39.31 TN. Total Equities, at $36.82 TN, was down slightly from Q1's record level.

Total Securities ended Q2 at a record $76.13 TN, or 425% of GDP. For perspective, Total Securities began the 1980s at 109% of GDP; the 1990s at 178% of GDP; and the 2000’s at 341% of GDP. Total Securities ended 2007 at 360% of GDP, before dropping to 297% to close out 2008. After ending 2008 at $43.72 TN, Fed-induced market inflation has seen Total Securities surge an astonishing 74%.

Ultra-loose financial conditions spurred resurgent system debt growth. Federal borrowings dominated Credit creation from 2008 through 2012, in the process bolstering household incomes, spending and corporate profits. Of late, corporate debt growth – notably to finance stock buybacks and M&A - has been instrumental in sustaining system reflation. It's central to my analysis that the corporate debt market is increasingly vulnerable to the faltering global Bubble.

“Flow of funds” analysis will now take special interest in the Rest of World (ROW) sector. ROW holdings of U.S. Financial Assets ended Q2 at a record $23.402 TN. For perspective, ROW holdings began the 1990s at $1.74 TN before ending the decade at $5.62 TN. ROW holdings surpassed $10.0 TN for the first time in 2005, before concluding 2007 at $14.56 TN. Since ending 2008 at $13.70 TN, massive post-Bubble U.S. fiscal and monetary inflation (inundating the world with dollar balances) has seen ROW U.S. Financial Asset holdings surge 71%.

Not surprisingly (from the perspective of a faltering global Bubble), Q2 ROW activity was notable. Rest of World holdings of U.S. Financial Assets increased SAAR $1.145 TN. Curiously, ROW Securities Repo holdings contracted SAAR $245 billion, Net Inter-Bank Assets contracted SAAR $115 billion, and Time & Checkable Deposits contracted SAAR $92 billion. Meanwhile, during the quarter holdings of Treasuries surged SAAR $565 billion, Agency Securities increased SAAR $128 billion and holdings of Corporate bonds jumped an eye-catching SAAR $705 billion. It's worth noting that ROW holdings of Corporate debt increased an unprecedented $266 billion over the past year. This data confirm highly unstable global financial flows.

Current dynamics in the corporate debt market recall the pivotal 2007 to 2008 inflection point period in the mortgage finance Bubble. Recall how the initial crack in subprime (spring 2007) actually spurred a loosening of conditions in prime (GSE) mortgage Credit and the corporate debt market. This worked to extend “Terminal Phase” excesses and vulnerabilities that would come home to roost later in 2008.

I do not know the sources of extraordinary Rest of World demand for U.S. corporate bonds and other securities. I suspect there is a speculative component – “carry trades,” and other “hot money” flows seeking refuge in the perceived safety of U.S. securities markets. I would also posit that, similar to late-2008 dynamics, there is now potential for an abrupt reversal of speculative flows as the faltering Bubble takes increasing aim at The Core.

Looking back to Q4 2007, even in the midst of a faltering Bubble, Non-Financial Debt (NFD) growth remained at an elevated SAAR $2.50 TN pace. Importantly, system Credit expansion (and fragilities) was being dominated by late-cycle excesses throughout mortgage and corporate finance. And by Q2 2008, NFD had sunk to SAAR $1.13 TN. Mortgage borrowings had collapsed and Corporate borrowings had fallen by more than half.

The U.S. corporate debt market is increasingly impinged by the forces of a faltering global Bubble and a resulting “risk off” speculative dynamic. Financial conditions have tightened meaningfully in the energy and commodities sectors. More generally, the market is now looking at leveraged balance sheets with rising trepidation. And as financial conditions tighten more generally and equities succumb to harsh new realities, I would expect corporate Treasurers to approach borrowing for stock buybacks with newfound caution. Heightened global economic and market risk should also prick the M&A Bubble. Heightened risk aversion, slowing stock buybacks and less M&A combine for a much less hospitable backdrop for equities. Faltering equities will further weigh on fragile sentiment in corporate debt markets. And faltering markets will hit Household wealth and spending.

Anticipating Fed policy moves has become tricky business. A faltering global Bubble will surely at some point pressure the Fed into additional QE. After all, who will be on the other side of a major cycle of speculative deleveraging? By default, it will be our and global central banks. Meanwhile, the Fed currently believes the market prefers a Fed rate increase. I suspect this preference will prove transitory.

Markets have been fearing a disorderly unwind of global leveraged “carry trades.” In particular, bouts of dollar weakness were pressuring short positions in the yen and euro (used to finance speculative bets in higher-yielding currencies). The Ultra-Dovish Fed statement pressured the dollar along with de-risking/deleveraging. And while Fed backtracking this past week did bolster the dollar, it came at the expense of increasingly disorderly EM and currency markets more generally.

I actually believe the faltering global Bubble has progressed beyond the point where Fed rate policy has much impact. Yet the Fed is determined to “push back against a tightening of financial conditions.” But are so-called “financial conditions” being tightened by happenings in China? Or is the culprit pressure on yen and euro short positions? Could it be because of a panicked “hot money” exit from EM – exposing Trillions of problematic dollar-denominated debt? How about an unwind of “risk parity” and other leveraged strategies that will not perform well in the New World Disorder of liquidity-challenged and unstable currency and financial markets? What about the possibility that the global leveraged speculating community is in increasing disarray? How about fears of potential counter-party issues in the convoluted world of derivatives trading?  Could it be because of mounting fears of a crisis of confidence in Chinese and EM banking systems? Analysts and the media always like to pick a culprit du jour.

Perhaps chair Yellen and the FOMC is beginning to appreciate that it is not in control of the markets – and is certainly not in control of the faltering global Bubble. And Chinese officials are not in control – nor the BOJ nor ECB. EM central bankers, facing a currency crisis, have certainly lost control. And with European and U.S. equities Bubbles succumbing, the unfolding global crisis has penetrated The Core. Things turn even more serious when contagion begins impinging liquidity in the U.S. corporate debt market. I fear I will be writing about this dynamic in relative short order.

For the Week:

The S&P500 declined 1.4% (down 6.2% y-t-d), and the Dow slipped 0.4% (down 8.5%). The Utilities sank 3.9% (down 10.5%). The Banks recovered 1.4% (down 5.1%), and the Broker/Dealers increased 0.7% (down 8.1%). The Transports dropped 2.3% (down 14.1%). The S&P 400 Midcaps fell 1.8% (down 4.4%), and the small cap Russell 2000 sank 3.5% (down 6.8%). The Nasdaq100 declined 2.3% (down 0.3%), and the Morgan Stanley High Tech index lost 1.4% (down 1.9%). The Semiconductors were hit for 2.7% (down 13.7%). The Biotechs were slammed 11.6% (up 2.7%). Although bullion gained $7, the HUI gold index sank 4.1% (down 32.1%).

Three-month Treasury bill rates ended the week at negative two bps. Two-year government yields added a basis point to 0.69% (up 2bps y-t-d). Five-year T-note yields gained three bps to 1.47% (down 18bps). Ten-year Treasury yields rose three bps to 2.16% (down one basis point). Long bond yields rose two bps to 2.96% (up 21bps).

Greek 10-year yields rose five bps to 7.97% (down 178bps y-t-d). Ten-year Portuguese yields increased four bps to 2.54% (down 8bps). Italian 10-yr yields rose three bps to 1.79% (down 10bps). Spain's 10-year yields jumped nine bps to 2.03% (up 42bps). German bund yields slipped a basis point to 0.65% (up 11bps). French yields added one basis point to 1.04% (up 21bps). The French to German 10-year bond spread widened two to 39 bps. U.K. 10-year gilt yields were up a basis point to 1.84% (up 9bps).

Japan's Nikkei equities index declined 1.0% (up 2.5% y-t-d). Japanese 10-year "JGB" yields slipped two bps to 0.32% (unchanged y-t-d). The German DAX equities index dropped 2.3% (down 1.2%). Spain's IBEX 35 equities index sank 3.3% (down 7.4%). Italy's FTSE MIB index lost 0.8% (up 12.2%). EM equities were under pressure. Brazil's Bovespa index sank 5.1% (down 10.4%). Mexico's Bolsa fell 2.6% (up 1.6%). South Korea's Kospi index dropped 2.7% (up 1.4%). India’s Sensex equities index fell 1.4% (down 5.9%). China’s Shanghai Exchange was little changed (down 4.4%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 13%). Russia's MICEX equities index sank 4.2% (up 17.4%).

Junk funds this week saw inflows of $236 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps to 3.86% (down one basis point y-t-d). Fifteen-year rates declined three bps to 3.08% (down 7bps). One-year ARM rates slipped three bps to 2.53% (up 13bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 3.89% (down 39bps).

Federal Reserve Credit last week expanded $10.9bn to $4.457 TN. Over the past year, Fed Credit inflated $39bn, or 0.9%. Fed Credit inflated $1.646 TN, or 59%, over the past 150 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $14.3bn last week to $3.352 TN. "Custody holdings" were up $58bn y-t-d.

M2 (narrow) "money" supply surged $36.7bn to a record $12.223 TN. "Narrow money" expanded $745bn, or 6.5%, over the past year. For the week, Currency increased $3.4bn. Total Checkable Deposits added $2.4bn, and Savings Deposits jumped $25.6bn. Small Time Deposits gained $5.9bn. Retail Money Funds were little changed.

Money market fund assets gained $14.0bn to $2.660 TN. Money Funds were down $73bn year-to-date, while gaining $69bn y-o-y (2.7%).

Total Commercial Paper fell $8.5bn to $1.031 TN. CP increased $23bn year-to-date.

Currency Watch:

September 23 – Bloomberg (Isabella Cota): “Mexico’s central bank held an extraordinary dollar auction for a third consecutive day to support the peso as the local currency tumbled to the lowest level in a month amid an emerging-market selloff. Policy makers sold an extra $200 million today, following similarly-sized auctions Monday and Tuesday. Still, the peso fell 1.3% to 17.1113 per dollar, reaching what would be the lowest closing level since Aug. 25.”

The U.S. dollar index gained 1.1% to 96.26 (up 6.6% y-t-d). For the week on the downside, the Norwegian krone declined 4.4%, the South African rand 4.4%, the British pound 2.3%, the Australian dollar 2.3%, the Swedish krona 2.0%, the Mexican peso 1.9%, the Swiss franc 1.1%, the euro 0.9%, the Brazilian real 0.8%, the Canadian dollar 0.8%, the Japanese yen 0.5% and the New Zealand dollar 0.2%.

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.2% (down 13.4% y-t-d). Spot Gold added 0.6% to $1,146 (down 3.3%). December Silver slipped 0.4% to $15.11 (down 3%). October Crude recovered 76 cents to $45.70 (down 14%). October Gasoline gained 2.3% (down 5%), while October Natural Gas slipped 1.5% (down 11%). September Copper sank 4.1% (down 19%). December Wheat rallied 4.3% (down 14%). December Corn jumped 3.1% (down 2.0%).

Federal Reserve Watch:

September 25 – Wall Street Journal (John Hilsenrath and Ben Leubsdorf): “Federal Reserve Chairwoman Janet Yellen argued the case for raising short-term interest rates later this year, effectively lobbing a warning to skittish financial markets that last week’s decision to keep rates near zero wasn’t a shift toward an interminable delay of liftoff. Ms. Yellen, setting out to build a case like a prosecutor giving a closing argument, presented a 40-page speech in a cavernous auditorium at the University of Massachusetts in Amherst. Thursday’s speech included 40 academic citations, 35 footnotes, an appendix and nine graphs projected to an audience of about 1,800 students and professors on a large screen.”

Global Bubble Watch:

September 21 – Wall Street Journal (Colin Barr): “The U.S. bond market is among the biggest financial markets in the world, with $39.5 trillion outstanding at mid-2015... That is equivalent to 1½ U.S. stock markets and nearly twice the aggregate size of the five largest foreign stock exchanges (in Japan, China and Europe)… The market is under scrutiny because the Federal Reserve is preparing to raise interest rates for the first time in nine years, at a time when the global economy is limping and debt ratios of countries around the world are higher than they were heading into the financial crisis. In the U.S., household, corporate and government debt amounted to 239% of gross domestic product in 2014, the Bank for International Settlements estimates, compared with 218% in 2007. The U.S. isn’t alone. Dollar credit to nonbank borrowers outside the U.S. hit $9.6 trillion this spring, the BIS said, up 50% from 2009. Repaying those loans and bonds will become costlier in local-currency terms should the dollar rise… Since 2007, $1.5 trillion has gone into U.S. bond mutual and exchange-traded funds holding assets from government bonds to corporates and municipal debt… That compares with $829 billion into comparable stock funds… Annual U.S. corporate high-yield bond issuance never exceeded $147 billion until 2010, according to Sifma data going back to 1996, but has more than doubled that figure in each of the past three years.”

September 24 – Financial Times (Elaine Moore): “Governments in some of the world’s poorest countries are revisiting plans to sell billions of dollars of debt as the US Federal Reserve’s decision to hold interest rates at a record low gives emerging market borrowers a temporary reprieve. Pakistan hopes to raise $1bn today in a sale of 10-year debt, the country’s first issuance of international debt this year. The yield on an existing 10-year bond maturing in 2024 is 7.3%... Albania, Iraq, Ghana and Ethiopia have all hired international banks to arrange meetings with prospective debt investors this month. So-called ‘frontier’ economies have been forced to check plans for market financing this year as falling commodity prices, China’s slowdown and the prospect of higher US interest rates sparked intense volatility in emerging markets… Last year, yield-hungry investors encouraged record issuance of government debt by frontier countries as central bank stimulus in developed markets encouraged investors including Norway’s sovereign wealth fund to add more frontier assets to their portfolios. Pakistan attracted bids of $7bn for a $2bn bond sold in 2014 while Ecuador saw investors bid more than $8bn for its $2bn sale of debt.”

September 23 – Bloomberg (Katya Kazakina): “Auction sales of Chinese art and antiques worldwide fell 7% to $7.9 billion in 2014, hampered by the country’s economic slowdown, government anti-corruption measures and fleeing speculators… Sales are down 31% from the Chinese art market peak in 2011, according to the third annual report published… by art researcher and database Artnet and the China Association of Auctioneers. Auctions in mainland China accounted for most of last year’s decline, falling 9.3% from 2013.”

China Bubble Watch:

September 25 – Bloomberg: “Money is leaving China faster than ever, according to a Bloomberg gauge tracking capital flows. An estimated $141.66 billion left China in August, exceeding the previous record of $124.62 billion in July, data compiled by Bloomberg show. The gauge of so-called ‘hot money’ is an estimate of the sum of foreign exchange purchases by banks and the change in foreign exchange deposits to measure flows into and out of the country. The monthly trade and direct investment balances are netted out for an estimate of portfolio flows.”

September 21 – Financial Times (Jamil Anderlini): “China’s crucial manufacturing sector is having its worst month since the depths of the global financial crisis in early 2009, according to a preliminary reading of a closely watched factory survey. The flash reading of the Caixin China general manufacturing purchasing managers’ index dropped to 47 points in September, down from 47.3 in August, marking the worst performance for the sector in 78 months.”

September 21 – Financial Times (Gabriel Wildau): “Chinese bondholders facing the prospect of a debt default by a state-owned enterprise will receive a bailout…, a sign that Beijing remains unwilling to impose market discipline on lossmaking state groups. China National Erzhong Group, a unit of one of the elite club of 112 big enterprises directly owned by the central government, employed a workforce of more than 13,000 in 2012, when it had assets of Rmb25bn ($3.9bn). But a slowing economy and rampant industrial overcapacity has hobbled the heavy industry group, leading to losses of Rmb8.4bn in 2014. Erzhong Group had warned of default just days after Beijing unveiled guidelines for an overhaul of SOEs aimed at improving their financial performance. SOEs control broad swaths of the economy but are heavily indebted and trail their privately owned counterparts in efficiency and profitability. But Erzhong’s bailout announcement signals that authorities remain nervous about the consequences for financial stability — and the ability of SOEs to raise capital — of permitting a large state firm to default.”

Fixed Income Bubble Watch:

September 21 – Bloomberg (Liz McCormick): “Hedge funds and other speculators were ready to profit last week if the Federal Reserve lifted interest rates. Their bets proved wrong-footed, leaving traders poised to reverse course, according to TD Securities. The net aggregate short position in all interest-rate contracts traded through CME Group Inc. was the largest since February… The wagers would’ve proven prescient if yields had spiked following the Fed’s Sept. 17 announcement. Yet the positions went awry when the bond market rallied after the Federal Open Market Committee decided to keep its benchmark rate near zero and released a statement that put an unexpected emphasis on low inflation and an uncertain outlook for global growth.”

Central Bank Watch:

September 24 – Bloomberg (Saleha Mohsin): “Norway’s central bank unexpectedly lowered interest rates to an all-time low and said it may ease policy further as it seeks to rescue an expansion in western Europe’s biggest petroleum producer from a plunge in oil prices. The overnight deposit rate was cut by 25 bps to 0.75%...”

September 24 – Bloomberg (Justina Lee Chinmei Sung): “Taiwan lowered its policy rate for the first time since the global financial crisis, sending forwards on the island’s currency to a six-year low. The central bank cut the benchmark discount rate by 12.5 bps to 1.75%... Taiwan’s economy is slowing as its technology exports are weighed by increased competition from China…”

September 23 – Bloomberg (Jonathan Ferro Jeff Black): “European Central Bank Governing Council member Ewald Nowotny said he’s wary of increasing central-bank stimulus any time soon even as policy makers struggle to boost euro-area inflation. The question of whether more quantitative easing is needed ‘deserves a much more thorough examination,’ he said… ‘Monetary policy should be a steady-hand policy. We shouldn’t act in a too-active way.’”

U.S. Bubble Watch:

September 24 – Wall Street Journal (Rachel Louise Ensign): “Banks are clashing with regulators over loan reviews that could crimp the flow of new credit to the oil patch. The dispute is focused on the relatively narrow issue of loans secured by oil and gas companies’ reserves, but it highlights the much broader point of how postcrisis regulation of the financial industry is affecting sectors far from Wall Street. On one side are the bankers who have been grappling with the plunge in oil prices and the need to shore up billions of dollars in credit extended to the energy industry. On the other are regulators eager to prevent another financial crisis while not knowing what it might be. Caught in the middle are the small- and medium-size exploration and production companies that rely on credit lines that use their energy reserves as collateral.”

September 21 – Bloomberg (Patrick Clark): “How bad can rental affordability in the U.S. get? Even worse. That's pretty bad. The number of U.S. households that spend at least half their income on rent—the ‘severely cost-burdened,’ in the lingo of housing experts—could increase 25% to 14.8 million over the next decade… Households shouldn't spend more than 30% of income on housing, by the general rule of thumb. The grim figures come from a report out today from Enterprise Community Partners, an affordable-housing nonprofit group, and Harvard’s Joint Center on Housing Studies.”

September 24 – Wall Street Journal (Annamaria Andriotis): “Federal programs designed to ease the burden of college loans are causing snarls in the bond market and raising concerns that banks may soon ratchet back lending. The programs, which let struggling borrowers scale back their repayments, have made student loans more affordable at a time when millions of Americans are falling behind on their student debts. But that slowing stream of money is having a knock-on effect in the market for bonds backed by that debt. Investors who own the bonds are beginning to worry that they may not get repaid on time, and they are balking at buying new bonds being offered by financial institutions. Without that revenue from selling off the student loans into bonds, banks have less capital to turn into new loans.”

EM Bubble Watch:

September 25 – Wall Street Journal (Anjani Trivedi): “Currencies in emerging markets have taken a turn for the worse, with no signs of reprieve. The Malaysian ringgit plumbed new lows Friday, on track for its largest weekly loss in nearly two decades, while Indonesia’s rupiah fell to a fresh 17-year low, following steep declines in other emerging market currencies earlier in the week. The MSCI Emerging Market Currency Index, a broad gauge of emerging-market currencies, has fallen to its lowest level in six years. Mexico’s peso and Brazil’s real fell to new lows Thursday as Turkey’s lira and South Africa’s rand continued to tread close to their weakest levels on record.”

Brazil Watch:

September 25 – Bloomberg (Paula Sambo): “Brazil’s real swung between gains and losses Friday, capping a tumultuous week of trading that sent volatility to the highest level in almost four years. The currency fell 0.5% to 3.9716 per dollar…, after earlier surging as much as 2.1% and plummeting as much as 2.4%. The real set record lows Wednesday and Thursday on speculation the government will struggle to pull Brazil out of its longest recession since the 1930s and shore up the budget deficit to avoid further cuts to its credit rating. One-month implied volatility rose to 26.96% and was the highest in emerging markets Friday after the central bank president and the finance minister said separately that policy makers could use international reserves to curtail instability.”

Europe Watch:

September 24 – Bloomberg (Christos Ziotis, Nikos Chrysoloras and Rebecca Christie): “Greek banks are being told by auditors some of their assets are overvalued, meaning they may have to raise close to the maximum 25 billion euros ($28bn) allocated for their recapitalization this fall, people familiar with the matter said. While a so-called Asset Quality Review on their books under the auspices of the European Central Bank is still in progress and no precise figures have been communicated yet, a drive by regulators to adopt more conservative assumptions about impairments and provisions for losses may lead to the capital holes… A significant shortfall could also force Greek banks to sell assets, or scale down non-core activities, in order to raise capital, before tapping taxpayers’ money, and thus revise the restructuring plans approved last year by the European Commission.”

September 21 – Financial Times (Tobias Buck): “Jordi S├ánchez remembers the last time Barcelona was filled with Spanish flags. It was the summer of 2010, and Spain´s football team had just won the World Cup…. ‘There were hundreds — no, thousands — of flags hanging from the houses,’ recalls the 50-year-old leader of the pro-independence Catalan National Assembly. Just two years later, however, many of the city’s same balconies and windows would fly an altogether different flag: the blue-red-and-yellow Estelada, the banner of Catalan independence. The flags still hang there today, some faded and others new, silent witnesses to the wrenching political change that has engulfed both the region and its capital city. If the independence movement has its way, the Catalan regional election on Sunday will bring that process to a dramatic climax. Should the pro-secession parties gain an absolute majority in parliament, they will press ahead with a plan to separate the prosperous region from the rest of Spain within 18 months.”

Geopolitical Watch:

September 25 – Reuters (Ingrid Melander): “Britain has said Russia's military build-up in Syria reinforces President Bashar al-Assad and increases Moscow's "moral responsibility in the crimes committed by the regime’. ‘Russia's military build-up complicates the situation," Foreign Secretary Philip Hammond told the French daily Le Monde in an interview after talks with his French and German counterparts in Paris on Thursday night. ‘Assad must go, he can't be part of Syria's future,’ Hammond added…”

Japan Watch:

September 24 – Bloomberg (Isabel Reynolds and Yoshiaki Nohara): “Prime Minister Shinzo Abe’s reboot of his economic agenda has left analysts scratching their heads, after Japan’s leader unveiled three new policy pillars without tying them to his previous plan. Speaking Thursday after his reappointment as leader of Japan’s ruling party, Abe unveiled three new ‘arrows’ of his so-called Abenomics plan -- a strong economy, child-care support and social security. When he took office in 2012, he had championed another trio -- monetary stimulus, flexible fiscal policy and structural reforms.”

September 25 – Financial Times (Robin Harding): “Japan has fallen back into deflation for the first time since April 2013 in a symbolic blow to prime minister Shinzo Abe’s economic stimulus. Headline prices, excluding fresh food, were down by 0.1% compared with a year ago in August, as slumping global energy prices outweighed stronger domestic inflation in Japan. The figures create a conundrum for the Bank of Japan: while it is encouraged by signs of inflation at home, the fall in headline prices risks creating the impression its policy has failed, especially given sluggish economic growth.”

September 25 – Bloomberg (Chikako Mogi, Yumi Ikeda and Kazumi Miura): “The global economic slowdown that prompted the Federal Reserve to delay an interest rate increase is also adding pressure on the Bank of Japan to boost stimulus, and it may need to consider new measures as sovereign note purchases near their limit, analysts say. The BOJ may start buying debt issued by local governments and notes to fund government projects, according to UBS Group AG and JPMorgan… Outstanding issuance of those bonds total 58 trillion yen ($482bn) and 69 trillion yen respectively… Financial firms including banks can only sell so many sovereign notes to the central bank because they need to keep some debt to meet collateral requirements, among other reasons. Even as the BOJ buys as much as 12 trillion yen of Japanese government bonds each month, or more than 90% of notes issued to markets, it’s nowhere near reaching its 2% inflation target, with consumer prices falling in August.”