Saturday, November 14, 2015

Weekly Commentary: Risk Off?

The “Granddaddy of All Bubbles” thesis rests upon the view that the world is in the midst of the precarious grand finale of a multi-decade global Credit and financial Bubble. When a Bubble bursts, system reflation requires an even larger fresh new Bubble. This has repeatedly been the case going back at least to the “decade of greed” late-eighties Bubble in the U.S. These days the world confronts the terminal Bubble phase partially because of the unprecedented scope of the China and EM Bubbles. It’s simply difficult to imagine another more far-reaching Bubble.

Also critical to the finale Bubble thesis is that the “global government finance Bubble” - encompassing unprecedented excesses in sovereign debt, central bank Credit and government market manipulation - has engulfed the very foundation of contemporary “money” and Credit. It’s again quite a challenge to envisage a new financial Bubble inflation cycle following a crisis of confidence at the heart of global finance.

As I’ve posited repeatedly, the global Bubble has been pierced. There's more confirmation again this week.  The collapse in commodities and EM currencies along with the faltering Chinese financial Bubble mark an historic inflection point. Global policymakers have gone to incredible measures to stabilize market, financial and economic backdrops. Yet reflationary measures will continue to only further destabilize.

When policy-induced “risk on” is overpowering global securities markets, fragilities remain well concealed (and my prognosis appears ridiculous). Fragilities, however, swiftly manifest with the reappearance of “risk off.”  Rather quickly securities markets demonstrate their proclivity for illiquidity and so-called “flash crashes.” So after an unsettled week in global markets, the critical issue is whether “risk on” is giving way to “risk off” dynamics.

There is no doubt that a powerful “risk off” has again gripped commodities markets. Crude (WTI) sank 8.5% this week to $40.71, the low since the tumultuous August period. The “GSCI” Commodities Index dropped 4.0% this week, increasing 2015 losses to almost 19% while trading down to near August lows. The Bloomberg Commodities Index sank to an almost 16-year low. Copper prices this week sank 3.6%, trading to a new six-year low. Zinc also traded to a six-year low, with nickel at a five-year low. Unleaded gasoline dropped almost 10%. Wheat fell 5.3% and Corn dropped 4.0%.

With commodities succumbing to another leg in an increasingly brutal bear market, worries quickly returned to EM. The Brazilian real declined 2.1% this week and the Colombian peso sank 6.4%. The Russian ruble fell 3.5% and the South African rand declined 1.6%. Mexican stocks were hit 3.6%.

November 9 – Bloomberg (Taylor Hall): “Debt in developing markets is estimated to have reached $58.6 trillion at the start of 2015, with credit in China, Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea and Thailand exceeding that of Latin America, emerging Europe and the Middle East, according to the Institute of International Finance. Emerging-market debt has grown $28 trillion since 2009, according to the IIF… Global debt has soared $50 trillion during the period to surpass a total of $240 trillion, or 320% of gross domestic product, in early 2015. While credit has increased for almost all countries included in the new monitor over the past decade, debt-to-GDP ratios in developing Asia for non-financial corporate, household and financial corporate sectors have risen the most… Non-financial corporate sector debt in emerging markets has risen $13 trillion since 2009, increasing more than five-fold over the past decade to surpass $23.7 trillion in the first quarter of 2015. The advance has been most concentrated in emerging Asia, where it rose to 125% of GDP.”

And with market attention seemingly returning to the world’s precarious debt overhang, “developing” Asian equities were hit hard this week. Stocks were down 4.2% in Taiwan (TAIEX), 2.8% in Singapore (STI), 2.8% in Thailand (SET), 3.1% in the Philippines (SE IDX), 2.1% in Indonesia (Jakarta Comp) and 1.6% in Malaysia (KLCI). Australian stocks (ASX 200) were hit 3.1% and New Zealand stocks (NZX 20) fell 1.7%. Hong Kong’s Hang Seng Financial index dropped 2.6%, increasing its 2015 decline to 30.4%.

Disappointing Chinese economic data (imports, exports, producer inflation, etc.) already had investors on edge. A (rapidly?) deteriorating corporate Credit backdrop was beginning to cause angst. And then Thursday’s Chinese Credit data was stunningly disappointing. October saw total Credit growth (“Total Social Financing”) cut by more than half. After September’s jump to $204bn, Credit growth slowed sharply to $75bn, the weakest month of Credit expansion since July 2014. New bank loans, at $81bn, were less than half of September’s $165bn. This is insufficient Credit to hold bust at bay.

In short order, confidence that Chinese policymakers have everything under control has begun to wane. The view that Beijing can simply dictate Credit growth through mandates to the big state-directed lenders is being shaken by anecdotes of increasingly nervous bankers and cautious borrowers. Suddenly there’s talk of the Chinese “pushing on a string.”

When global markets are in a bullish mood, commodities and EM currencies appear to have bottomed. Yields on energy, commodities and deep cyclical company debt around the globe seem enticing. “Developing” country debt is attractively priced. Chinese officials seem capable of ensuring 6.5% growth as far as the eye can see. China enjoys the capacity to stabilize its currency, inflation level and debt load. And stable Chinese growth will backstop commodities markets, EM markets and economies and the global economy (and markets!) more generally.

But this optimistic view of things turns flimsy in a hurry. When crude and commodities begin to tank, large quantities of debt (company, country and financial) look increasingly suspect. King dollar takes off, putting added pressure on faltering commodities and EM (currencies, debt and stocks) Bubbles. And with the Chinese currency pegged to king dollar, the markets’ view of the China Credit situation can abruptly shift from “manageable” to “potentially very troubling.”

And returning to the “Granddaddy Bubble Finale” thesis, the Chinese and EM Bubbles fundamentally changed the “producer” and “consumer” inflationary backdrops. Ultra-loose global finance has ensured massive overcapacity in too many things. It has created an unprecedented divergence between bubbling financial markets and weakening fundamental prospects. There’s way too much debt almost everywhere, a debt burden that central bankers would like to inflate away to more manageable levels. The Chinese are desperate for inflation to grow out of historic amounts of debt. They’ve been able to inflate out of debt troubles previously, and they’ve watched U.S. reflationary measures work their magic repeatedly.

The bursting global Bubble is especially problematic for China. EM currencies have been devalued, while the U.S. and Chinese currencies have skyrocketed. The old reflationary measures no longer work. Loose “money” only exacerbates overcapacity, inequalities and financial Bubbles. The strong dollar further pressures global pricing, while adding to heightened Credit stress globally (certainly including EM dollar-denominated debt). Meanwhile, China’s currency peg to the dollar ensures the already vulnerable Chinese manufacturing complex becomes further uncompetitive. It ensures major problems related to the country’s enormous lending and investing boom in global resources. The resulting Credit stress only exacerbates disinflationary pricing pressures.

In 2014 and again in August, it appeared China was to commence meaningful currency devaluation. In both instances acute financial stress forced Chinese officials to immediately backtrack. Trying to recover from the August fiasco, the Chinese have focused on currency stability. And when markets are in that optimistic state of mind, Chinese policy appears sensible and sustainable. But when “risk off” begins to take hold, China’s mountains of overcapacity and debt appear completely at odds with a strong currency – with a peg to king dollar – in a disinflationary global environment.

It wasn’t only commodities and EM that succumbed to “risk off” this week. European stocks were down about 3%. U.S. stocks had a really rough week. The S&P500 declined 3.6%, with the broader market down even more. Selling was broad-based. Credit spreads also widened, most notably in high-yield. Junk bond funds saw flows reverse to sizable outflows. There were anecdotes of waning demand for leveraged loans, high-yield municipal debt and risky Credits more generally. Puerto Rico… Hedge fund performance… This is all consistent with heightened risk aversion and self-reinforcing pressure to de-leverage.

Confidence was so high that the bulls had essentially already taken a big year-end rally to the bank. “Risk off” into December would catch the bullish consensus completely flatfooted. “Risk off” would also catch most market operators un-hedged and over-exposed on the long side. “Risk off” would also complicate life for the Fed. Just when they had finally gathered the nerve to move, global markets turn sour. And perhaps the Fed has been whipsawed by the markets one too many times. But I still think global markets are being dictated much more by China than the Fed. And at this point, Chinese officials have the much more difficult decisions. Do they bite the bullet and start devaluing? Or do they stick with the peg and hope?

My Friday writing has been interrupted by the news of terrible terrorist attacks in Paris. It’s a reminder of the increasingly hostile world in which we live. And it’s consistent with a darkening of the social mood in Europe, as well as here in the U.S. and around the world more generally. It’s also part of the troubling backdrop conducive to a problematic “risk off” when faith in global central bankers and Chinese officials wanes. 

November 13 – Bloomberg (Candice Zachariahs, Anchalee Worrachate and Lananh Nguyen): “...While dislocations may provide opportunities for investors, they also bring challenges, according to... Luke Bartholomew, an investment manager at Aberdeen Asset Management... 'The real worry about liquidity is that it behaves like a bad friend -- it is there when you don’t especially need it, but as soon as you do need it, it disappears.'"


For the Week:

The S&P500 dropped 3.6% (down 1.7% y-t-d), and the Dow fell 3.7% (down 3.2%). The Utilities recovered 0.7% (down 7.6%). The Banks fell 3.7% (down 0.7%), and the Broker/Dealers were hit 4.2% (down 2.8%). The Transports declined 2.8% (down 12.4%). The S&P 400 Midcaps lost 3.9% (down 3.2%), and the small cap Russell 2000 fell 4.4% (down 4.8%). The Nasdaq100 sank 4.4% (up 6.3%), and the Morgan Stanley High Tech index fell 4.5% (up 5.5%). The Semiconductors lost 4.8% (down 6.3%). The Biotechs declined 1.3% (up 5.4%). With bullion down $5, the HUI gold index slipped 0.2% (down 33.4%).

Three-month Treasury bill rates ended the week at 11 bps. Two-year government yields declined four bps to 0.85% (up 18bps y-t-d). Five-year T-note yields fell seven bps to 1.66% (up one bp). Ten-year Treasury yields declined six bps to 2.27% (up 10bps). Long bond yields slipped three bps to 3.06% (up 31bps).

Greek 10-year yields fell 53 bps to 6.97% (down 278bps y-t-d). Ten-year Portuguese yields rose eight bps to a four-month high 2.74% (up 12bps). Italian 10-year yields fell 23 bps to 1.56% (down 33bps). Spain's 10-year yields declined 12 bps to 1.79% (up 18bps). German bund yields dropped 13 bps to 0.56% (up 2bps). French yields fell 15 bps to 0.87% (up 4bps). The French to German 10-year bond spread narrowed two to 31 bps. U.K. 10-year gilt yields declined six bps to 1.98% (up 23bps).

Japan's Nikkei equities index gained 1.7% (up 12.3% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.30% (down 2bps y-t-d). The German DAX equities fell 2.5% (up 9.2%). Spain's IBEX 35 equities index sank 3.3% (down 1.6%). Italy's FTSE MIB index dropped 3.1% (up 14.9%). EM equities were mostly under pressure. Brazil's Bovespa index declined 0.9% (down 7.0%). Mexico's Bolsa was hit 3.6% (up 1.1%). South Korea's Kospi index sank 3.3% (up 3.0%). India’s Sensex equities index lost 2.5% (down 6.9%). China’s Shanghai Exchange was volatile but ended the week down only 0.3% (up 10.7%). Turkey's Borsa Istanbul National 100 index was little changed (down 4.5%). Russia's MICEX equities index fell 1.5% (up 23.7%).

Junk fund flows abruptly reversed this week, with outflows of $1.8bn (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to a four-month high 3.98% (up 11bps y-t-d). Fifteen-year rates rose 11 bps to 3.20% (up 5bps). One-year ARM rates increased three bps to 2.65% (up 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 12 bps to 3.99% (down 29bps).

Federal Reserve Credit last week added $1.5bn to $4.453 TN. Over the past year, Fed Credit increased $5.7bn, or 0.1%. Fed Credit inflated $1.642 TN, or 58%, over the past 157 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week recovered $19.6bn to $3.303 TN. "Custody holdings" increased $10.2bn y-t-d.

M2 (narrow) "money" supply surged another $55.1bn to a record $12.293 TN. "Narrow money" expanded $642bn, or 6.7%, over the past year. For the week, Currency increased $3.4bn. Total Checkable Deposits jumped $24.5bn, and Savings Deposits gained $26.1bn. Small Time Deposits were little changed. Retail Money Funds added $1.7bn.

Total money market fund assets gained $12.1bn to $2.714 TN. Money Funds were down $19bn year-to-date, while gaining $70bn y-o-y (2.7%).

Total Commercial Paper declined $8.8bn to $1.049 TN. CP increased $41bn year-to-date.

Currency Watch:

The U.S. dollar index slipped 0.4% this week to 98.8 (up 9.5% y-t-d). For the week on the upside, the British pound increased 1.2%, the Australian dollar 1.2%, the Mexican peso 0.7%, the Swedish Krona 0.6%, the Japanese yen 0.4%, the euro 0.3% and the New Zealand dollar 0.2%. For the week on the downside, the Brazilian real declined 2.1% and the South African rand fell 1.6%. The Canadian dollar and Swiss franc were little changed.

Commodities Watch:

The Goldman Sachs Commodities Index sank 4.0% (down 18.8% y-t-d). Spot Gold slipped 0.5% to $1,084 (down 8.5%). December Silver fell 3.5% to $14.23 (down 8.8%). December WTI Crude was hammered $3.79 to $40.73 (down 24%). December Gasoline fell 9.5% (down 16%), while December Natural Gas increased 0.8% (down 18%). December Copper dropped 3.6% (down 24%). December Wheat sank 5.3% (down 16%). December Corn fell 4.0% (down 10%).

Global Bubble Watch:

November 11 – Bloomberg (Deborah Hyde, Lucy Meakin and Liz McCormick): “A crunch is developing in international funding markets. The cost to convert local currency payments in the euro area, U.K. and Japan into dollars has jumped amid speculation the Federal Reserve will raise interest rates in December. With other major central banks set to hold, or even loosen, monetary policy, the projected policy divergence is supercharging the usual year-end uptick in demand for dollar funding… The one-year cross-currency basis swap rate between euros and dollars reached negative 39 bps Wednesday, the largest effective premium for dollar borrowing since September 2012… The rate was at negative 37 bps as of 11:31 a.m…. The measure, which was closely watched by investors during the financial crisis as an indicator of stresses in the banking system, reached negative 138 bps in 2008 following the collapse of Lehman Brothers… While the increase this month is driven more by monetary-policy divergence it still has implications for global banks. It also means U.S. companies, which have been borrowing in euros to take advantage of historically low interest rates, must pay more to swap those proceeds back into dollars.”

November 7 – Bloomberg (Christian Wienberg): “The world’s economy is growing at a slower pace than the International Monetary Fund and other large forecasters are predicting. That’s according to Nils Smedegaard Andersen, chief executive officer at A.P. Moeller-Maersk. His company, owner of the world’s biggest shipping line, is a bellwether for global trade, handling about 15% of all consumer goods transported by sea. ‘We believe that global growth is slowing down,’ he said… ‘Trade is currently significantly weaker than it normally would be under the growth forecasts we see.’”

November 10 – Bloomberg (Ari Altstedter): “The words ‘bold’ and ‘pension fund’ don’t always go together easily. Then again, neither do bold and Canada. But Canadian public pension funds are once again employing bold strategies in a world where interest rates have remained persistently low at the very moment that aging baby boomers are increasingly drawing down their retirement funds. With traditionally safe pension investments such as bonds no longer yielding enough to cover obligations, a number of Canadian plans are ramping up leverage strategies -- approaches intended to squeeze more profit from their investments by doubling down with debt. They are mortgaging some of their swankiest skyscrapers and forming in-house hedge funds that invest in complex derivatives like forwards, swaps and options, accepting more risk in an effort to keep their promises to retirees. ‘We have to earn that return somehow,’ said Jim Keohane, chief executive of the Healthcare of Ontario Pension Plan… ‘If I don’t do this, what am I going to do instead?’”

November 9 – Bloomberg (Katya Kazakina): “Chinese billionaire Liu Yiqian bought Amedeo Modigliani’s painting of a reclining nude woman for $170.4 million, the second-highest price for an artwork at auction, in a volatile sale at Christie’s… Modigliani’s 1917 ‘Nu Couche (Reclining Nude)’ anchored Christie’s special, mixed-category sale titled ‘The Artist’s Muse,’ which included 34 paintings and sculptures created from the 1860s through the 2000s. The evening tallied $491.4 million, setting five auction records for artists including Gustave Courbet and Roy Lichtenstein, whose painting of a nurse sold for $95.4 million… ‘Prices have reached the Promised Land,’ billionaire collector Eli Broad said after the sale. ‘I can’t imagine it going much higher though. Can you?’”

November 12 – Bloomberg (Neil Callanan): “London’s most expensive homes and apartments have slumped in value as the government’s stamp duty sales tax damps demand. Prices of homes valued at 5 million pounds ($7.6 million) or more fell 11.5% on a per square foot basis from the third quarter of 2014, according to Richard Barber, a director at broker W.A. Ellis… Sales volumes across all homes in the best parts of central London dropped 14% in the period, the realtor said… ‘The bubble may already have burst’ for the most expensive homes, Barber said. Now, ‘36% of all properties currently on the market across prime central London are being marketed at a lower price than they were originally listed at, with the average reduction in price being 8.5%.’”

China Bubble Watch:

November 12 – Bloomberg: “China’s government spending surged four times the pace of revenue growth in October, highlighting policy makers’ determination to meet this years’ growth target as a manufacturing and property investment slowdown weigh on the economy. Fiscal spending jumped 36.1% from a year earlier to 1.35 trillion yuan ($210bn), while fiscal revenue rose 8.7% to 1.44 trillion yuan… In the first ten months of the year, spending advanced 18.1% and revenue increased 7.7%. China is turning to increased fiscal outlays as monetary easing, a relaxation on local government financing, and an expansion of policy banks’ capacity to lend, struggle to stabilize growth in the nation’s waning economic engines… ‘With downward economic pressure and structural tax and fee cuts, fiscal revenue will face considerable difficulties in the next two months,’ the Ministry of Finance said… ‘As revenue growth slows, fiscal expenditure has clearly been expedited to ensure that all key spending is completed.’”

November 7 – Wall Street Journal (Lingling Wei): “The closed-door meeting of some of China’s most powerful economic mandarins this fall was getting tense. Their boss, President Xi Jinping, was already unhappy he was taking the blame for the economic gloom that had settled over China this summer, and it was their job to come up with ways to fix it. Officials from the state planning commission at the Sept. 22 meeting in a conference room at the agency’s headquarters called for the kind of big spending on airports, roads and other government projects that Beijing had relied on to rev up the economy in recent years… Finance-ministry officials disagreed, favoring a plan to encourage Chinese consumers to buy more electronics, cars, clothes and other goods China churns out. But most in the room agreed on one thing: It would be hard to proceed with plans to liberalize the tightly controlled economy and still hope to meet Mr. Xi’s 7% GDP-growth target for 2015. Such plans, laid out in better times, weren’t likely to deliver the shot of growth China’s economy needed. ‘Reform itself faces huge problems,’ said an attendee at the Sept. 22 meeting… ‘It’s doubtful that any reform dividends can be translated into economic growth in the foreseeable future.’”

November 12 – Bloomberg: “Chinese banks’ troubled loans swelled to almost 4 trillion yuan ($628bn) by the end of September, more than the gross domestic product of Sweden, according to figures released by the industry regulator. Banks’ profit growth slumped to 2% in the first nine months from 13% a year earlier… The numbers come as a debt crisis at China Shanshui Cement Group Ltd. prompts lenders including China Construction Bank Corp. and China Merchants Bank Co. to demand immediate repayments and as weakness in October credit growth shows the risk of a deeper economic slowdown. While the official data shows non-performing loans at 1.59% of outstanding credit, or 1.2 trillion yuan, that rises to 5.4%, or 3.99 trillion yuan, if ‘special mention’ loans, where repayment is at risk, are also included.”

November 10 – Bloomberg (Lianting Tu): “The buzzing mobile phone foretold trouble. During an interview last month at the posh Shangri-La Hotel in Hong Kong, Henry Li stepped aside four times in an hour to take calls. Creditors were frantically trying to connect with the chief financial officer of China Shanshui Cement Group Ltd., and they wanted to know one thing: Was his company about to default? ‘Honestly speaking, banks are very worried about us, as you can tell from the fact that I’ve received many calls,’ said Li… On Wednesday, the creditors got their answer. Shanshui, reeling from China’s economic slowdown and a shareholder campaign to oust Zhang, said it will fail to pay 2 billion yuan ($314 million) of bonds due on Nov. 12, making it at least the sixth Chinese company to default in the local note market this year… Shanshui’s troubles -- it will also default on dollar bonds and file for liquidation -- reflect the fallout from years of debt-fueled investment in China that authorities are now trying to curtail as they shift the economy toward consumption and services.”

November 8 – Reuters: “China's trade figures disappointed analyst expectations by a wide margin in October… While Beijing has repeatedly cut interest rates, the latest data showing an eighth monthly drop in net trade indicates persistent weakness in demand at home and abroad. October exports fell 6.9% from a year ago, down for a fourth month, while imports slipped 18.8%, leaving the country with a record high trade surplus of $61.64 billion… Economists polled by Reuters had expected dollar-denominated exports to fall 3.0% and imports to decline 16.0%, an improvement over September's drop of 3.7% and 20.4%...”

November 9 – Reuters: “China's October inflation data showed persisting if not intensifying deflationary pressure, spurring analysts to expect more moves to stimulate the slowing economy by year-end. The October consumer price index (CPI) cooled more than expected, rising 1.3% from a year earlier. compared with 1.6% in September… The producer price index (PPI) fell 5.9% in October from a year earlier, equal to the September decline and slightly worse than economists' forecasts of a 5.8% drop. On a monthly basis, consumer prices fell 0.3%, compared with a 0.1% increase in September.”

November 12 – Bloomberg (Frederik Balfour): “Chinese developer Evergrande Real Estate Group Ltd. has agreed to buy the Mass Mutual Tower in Hong Kong for HK$12.5 billion ($1.6bn) from Chinese Estates Holdings Limited, the most ever paid for a commercial building in the city… The 26-story building is fully occupied… The building in the bustling Wan Chai district changed hands for more than 20 times the sum Chinese Estates paid for it over a decade ago.”

Fixed Income Bubble Watch:

November 11 – Bloomberg (Laura J Keller and Jodi Xu Klein): “Eleven months of depressed oil prices are threatening to topple more companies in the energy industry. Four firms owing a combined $4.8 billion warned this week that they may be at the brink, with Penn Virginia Corp., Paragon Offshore Plc, Magnum Hunter Resources Corp. and Emerald Oil Inc. saying their auditors have expressed doubts that they can continue as going concerns… The industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. Barclays Plc analysts say that will cause the default rate among speculative-grade companies to double in the next year. Marathon Asset Management is predicting default rates among high-yield energy companies will balloon to as high as 25% cumulatively in the next two to three years if oil remains below $60 a barrel.”

November 8 – Wall Street Journal (Matt Wirz and Liz Hoffman): “Wall Street banks are struggling to sell billions of dollars of loans they made to finance the corporate buyout boom, a sign that investor appetite for riskier debt remains muted despite a robust autumn rally in other financial markets. The slowdown threatens to cool the surge in mergers-and-acquisitions that has sent takeover volume in 2015 to record levels, thanks in part to easy credit. Bank of America Corp., Credit Suisse Group AG and Morgan Stanley are among the banks wrestling to sell loans they made to back purchases… ‘This is the longest sustained downturn we’ve seen in the markets in a while,’ said Michael Kaplan, a deal-financing partner at law firm Davis Polk & Wardwell LLP. For now, loan investors have lost their appetite only for the riskiest deals while relatively high junk credit ratings still attract buyers. Investment banks are growing reluctant to back new deals with heavier debt loads or in troubled industries like energy and pharmaceuticals. That in turn makes it harder for potential acquirers to capture takeover targets. The stresses contrast to a boom in sales of debt considered less risky, or investment grade.”

November 12 – Bloomberg (Brian Chappatta): “The municipal-bond market is forcing high-yield borrowers to scrap their junk. The Florida Development Finance Corp. this week postponed a $1.75 billion unrated bond sale for All Aboard Florida, a passenger railroad backed by Fortress Investment Group LLC, that underwriters have been marketing since August. A Texas agency has delayed pricing $1.4 billion of speculative debt for a methanol plant… And the Puerto Rico Aqueduct & Sewer Authority, struggling to access capital as the island staggers toward default, couldn’t lure buyers even with yields of 10%. The struggle to sell the munis mirrors the slowdown in the corporate-debt market for much of the year… With speculation growing that the Federal Reserve will raise interest rates for the first time in nearly a decade and Puerto Rico’s fiscal crisis escalating, the flow of money into funds that invest in the riskiest munis has slowed to $1.2 billion this year, compared with $8.8 billion in 2014…”

November 12 – Bloomberg (Katherine Burton and Ye Xie): “The explosion of issuance in the corporate-bond market is hiding evidence that it may be getting tougher to trade, according to Barclays… It’s a decrease in large transactions that analysts led by Shobhit Gupta point to as a worrying sign… The average size of ‘block’ trades -- defined by Barclays as transactions over $5 million -- declined by more than 6% over the past year, to $11.1 million from $11.9 million. And ‘large block’ trades, deals of more than $25 million, have fallen to 16% of all block trades from more than 20% last year… Total turnover in corporate bonds has declined to 72% of the market this year from as high as 90% in 2011. ‘Liquidity in credit markets remains challenging,’ the Barclays analysts wrote. ‘This implies that if portfolio managers are out of the market for even a short period -– say, because of fund outflows -– the portfolio liquidity profile could worsen severely. To ensure that portfolios remain adequately liquid, managers have to keep switching into recently issued securities, potentially incurring additional transaction costs.’”

November 11 – Bloomberg (Michelle Kaske): “Puerto Rico is likely to default on at least a portion of Government Development Bank bond payments due Dec. 1 with the commonwealth’s cash crunch worsening, according to Moody’s… The GDB, which lends to the island and its localities, faces a $354 million principal and interest payment at the start of the month, just as the bank projects it may run out of available cash, according to Puerto Rico’s Nov. 6 financial report. The commonwealth expects to post a negative cash balance this month and next. A default ‘would be consistent with our expectation that the commonwealth will be forced to miss debt service payments in favor of providing essential government services because of its increasingly weak liquidity position,’ Genevieve Nolan, a Moody’s analyst, wrote…”

November 10 – Wall Street Journal (Michael Rapoport): “Some of America’s best-known companies—names such as AT&T Inc., CVS Health Corp. and Delta Air Lines Inc.—likely will soon have to effectively boost the debt they report on their balance sheets by tens of billions of dollars. The total possible impact for all companies: as much as $2 trillion. Within a few years, companies may have to add to their books the cost of many leases for real estate, aircraft and other items that aren’t already carried there. U.S. rule makers are set to vote Wednesday on whether to approve in principle long-awaited new rules requiring companies to make that addition, though the move wouldn’t take effect until at least 2018. If approved… that change could dramatically boost the reported leverage for retailers, restaurant chains, airlines, package-delivery companies and other companies that use leases heavily.”

Leveraged Speculation Watch:

November 12 – Bloomberg (Katherine Burton and Ye Xie): “Bridgewater Associates, once the biggest investor in the world’s two largest emerging-market exchange-traded funds, sold 41% of its holdings in the third quarter amid a rout in developing-nation assets. The firm… cut its investments in Vanguard Group Inc. and BlackRock Inc.’s ETFs to a combined 104 million shares, from 175 million in the previous three-month period… The value of the ETF holdings dropped more than 50% to $3.4 billion as a result of share price declines and the divestments. MSCI Inc.’s emerging-market index lost 19% in the three months through September, the biggest quarterly decline in four years…”

November 9 – Wall Street Journal (Rob Copeland): “She earned an M.B.A. from Wharton at age 21, won backing from hedge-fund industry heavyweight Julian Robertson before she turned 30 and earlier this year became one of the few women to manage more than $1 billion in an industry long dominated by men. Now Nehal Chopra has reached a less glorious milestone: more than $300 million in paper losses over the past three months, one of the swiftest and most severe money-losing streaks in a bruising year for hedge funds. Ms. Chopra’s Tiger Ratan Capital Fund LP fell about 33% over the past three months…”

Central Bank Watch:

November 8 – Bloomberg (Jeff Black, Piotr Skolimowski and Nicholas Rigillo): “You don’t have to use the euro for Mario Draghi to be the central banker setting your monetary policy. From Stockholm… to Prague, Copenhagen and Zurich, officials in countries circling the currency bloc are waiting for the European Central Bank president to say next month whether he’ll expand stimulus. Only then will it be clear whether they’ll need to retaliate with more asset purchases, rate cuts and currency interventions of their own to dig in against imported disinflation. Draghi’s bonanza of cheap cash is depressing financial returns in the euro area and driving investment flows into neighboring countries, pushing up their currencies and defeating their efforts to hit their own inflation targets. Looser monetary policy is in the cards even in countries where economic growth is strong and asset markets are overheating. ‘These countries don’t want to be the losers in the currency war they think the ECB is participating in,’ says Marchel Alexandrovich, senior European economist at Jefferies… ‘It’s a zero-sum game. If you’re trying to devalue, then there’s always someone on the other side of that trade.’”

U.S. Bubble Watch:

November 7 – Financial Times (Eric Platt and Joe Rennison): “A spate of jumbo corporate debt offerings has lifted US issuance to a record high… US multinationals have raised more than $132bn in so-called jumbo-deals — debt offerings above $10bn in size — in 2015, more than a fourfold increase from a year earlier…, according to… Dealogic. The offerings have buoyed overall corporate debt deal values in the US to a record of $815bn, with more than a month and a half to go before year end. The figure surpasses the previous high set in 2014 of $746bn… ‘It’s two years of incredible issuance flows,’ says Mitch Reznick, co-head of credit at Hermes Investment Management. ‘It’s driven by a desire to get financing done ahead of lift-off and a lot of this is going into M&A … The issuance just continues and continues.’”

November 12 – Financial Times (Eric Platt): “These are boom times for US debt capital markets and the bankers that are ushering in a wave of corporate debt ahead of an expected policy tightening by the Federal Reserve next month. A mammoth $75bn loan package announced by Anheuser-Busch InBev on Wednesday — a deal that will probably spawn a bond offering in the tens of billions of dollars next year — underlined appetite for what has been a record pace of investment grade debt and loan issuance this year. US offerings from both high yield and investment grade companies are on the point of crossing $1tn despite a decline in the overall number of issues, according to… Dealogic. The figures have been lifted by a 28% jump in high grade issuance… to $732bn from the same period a year earlier, more than offsetting weakness in the high yield market.”

November 10 – Bloomberg (Tracy Alloway): “You might choose to whisper it softly, but the balance sheets of U.S. companies are yelling it loudly, while wielding a baseball bat: Corporate leverage is now at its highest level in a decade, according to… Goldman Sachs. Years of low interest rates and eager investors have encouraged Corporate America to go on a shopping spree. On its list are share buybacks and dividend hikes to reward equity investors, as well as a series of merger and acquisition deals, all funded through a generous bond market. Since cash flow has not kept up with the boom in bond sales, the splurge has left Corporate America with its highest debt load in about 10 years, according to the bank. ‘Companies in the United States have taken advantage of low interest rates to issue record levels of debt over the past few years to fund buybacks and M&A,’ Goldman analysts led by Robert Boroujerdi wrote… ‘This has driven the total amount of debt on balance sheets to more than double pre-crisis levels.’”

November 12 – MarketWatch (Daniel Goldstein): “If a tiny shack in San Francisco with minimal land selling for more than $400,000 isn’t crazy enough, check out what’s happening a few miles south in Silicon Valley. One realtor there has listed a garage in the city of Palo Alto for $1.98 million… If a buyer plans to raze the shack and build a dream home on the lot, the city of Palo Alto will only allow a one-story 2,800 square foot house to be built on the site, or a 2,400 square foot two-story home… Still, that could be a bargain. A four-bedroom, four-bath home in the same neighborhood with nearly the same square footage (2,676 square feet) on nearby Chimalus Drive that was built in 1949 but remodeled dramatically is selling for $3.2 million. And the 1,940-square foot lot next door, with a four-bedroom, three-bathroom home on it, sold in September for $3.5 million.”

November 10 – New York Times (Michael J. de la Merced and Katie Benner): “The worth of hot technology start-ups seemed for years to go in only one direction: straight up. Now there are signs of growing unease over the dizzying valuations of some of the most richly priced private companies. The latest sign has emerged with one such favorite, Snapchat, being discounted 25% by one of its more recent investors, Fidelity, the mutual fund giant. Another start-up, Dropbox… was devalued by the giant asset manager BlackRock this year. The funds’ markdowns may tap the brakes on a fast-growing market. Investors, in the hopes of getting a piece of the next Facebook or Google, have been pouring billions of dollars into young private companies.”

EM Bubble Watch:

November 8 – Bloomberg (Ye Xie): “The BRIC era is coming to an end at Goldman Sachs… The bank’s asset-management unit folded its money-losing BRIC fund, which invests in Brazil, Russia, India and China, and merged it last month with a broader emerging-market fund. Goldman Sachs pulled the plug on the nine-year-old product because it doesn’t expect ‘significant asset growth in the foreseeable future,’ according to a filing… Fourteen years after former Goldman Sachs economist Jim O’Neill coined the acronym that ushered in an unprecedented investment boom, the biggest emerging markets are now sputtering. Russia and Brazil have fallen into recessions. China, long an engine of the world’s growth, is poised for its weakest expansion since 1990.”

Brazil Watch:

November 10 – Bloomberg (Andre Soliani Costa and Raymond Colitt): “In Brazil, the push to oust President Dilma Rousseff has shifted, as often happens in politics, away from the corruption scandal that first landed her government in trouble. Impeachment calls are now focused on her handling of fiscal accounts, and that is perhaps fitting since few problems in Brazil rank higher than its exploding budget deficit. At 536 billion reais ($141bn), the gap has swollen to the equivalent of more than 9% of gross domestic product. It’s not just that the figure is the biggest in at least two decades; it’s how quickly it has grown as the country sinks into a protracted recession. Eighteen months ago, the deficit was 3% of GDP. So while no one is talking about default as a near-term concern… many do say that it’s helping fuel an inflation surge and could eventually push the country toward a full-blown debt crisis unless spending is reined in after a decade of largesse.”

Europe Watch:

November 8 – Reuters (Caroline Copeley): “Germany needs to send a message to the world that it's reaching the limit of its capacity to help Europe's flood of migrants, German Finance Minister Wolfgang Schaeuble said…, as he advocated restricting family reunions for Syrian refugees. Germany has become a magnet for people fleeing war and violence in the Middle East. It expects 800,000 to a million refugees and migrants to arrive this year, twice as many as in any prior year. ‘We need to send a clear message to the world: we are very much prepared to help, we've shown that we are, but our possibilities are also limited,’ Schaeuble said…”

November 12 – Financial Times (Stefan Wagstyl): “Germany may be facing ‘an avalanche’ of refugees triggered by ‘careless’ actions, Wolfgang Schäuble, the country’s powerful finance minister, has warned in a thinly-veiled criticism of his boss, chancellor Angela Merkel. Mr Schäuble’s provocative remarks come as Ms Merkel faces mounting criticism from within her ruling CDU/CSU conservative bloc and growing public concern about her ‘refugees welcome’ approach. ‘You can trigger avalanches when a rather careless skier goes on to the slope ... and moves a bit of snow,’ said the… finance minister… ‘I don’t know whether we are already at the stage where the avalanche has reached the valley or whether we are [still] on first third of the slope [and there is more to come].’ He added: ‘If we are on the upper third of the slope, then the image of the avalanche is a real challenge. We Germans cannot cope with this alone.’ It was Mr Schäuble’s second attack on Ms Merkel’s refugee policy in a week.”

November 11 – Bloomberg (Lukanyo Mnyanda): “Portugal’s government bonds, the worst performers in the euro zone over the past month, face another hurdle with a potential credit-rating downgrade that may see them excluded from the European Central Bank’s asset-buying program. For Portugal’s bonds to be eligible for purchase, the nation must be rated investment grade by at least one major ratings company. It has already been junked by Moody’s…, Standard & Poor’s and Fitch Ratings. But the country still holds that crucial investment-grade status by DBRS Ltd. The Toronto-based company is scheduled to review its position on Friday…”

November 11 – Reuters (Andrés González and Elisabeth O'Leary): “Spain's Constitutional Court blocked Catalonia's attempted secession process… by agreeing to hear a Spanish government appeal against it, deepening a stand-off over the potential breakaway. Catalonia's regional parliament passed a resolution this week setting out a plan to establish a republic within 18 months in the highly industrialised and populous northeastern region which accounts for about a fifth of Spain's economic output. ‘This is a warning to (Catalan leaders) that if they fail to comply with the suspension, they may commit disobedience,’ read the ruling by the… high court.”

Geopolitical Watch:

November 8 – DefenseNews (Wendell Minnick): “China’s deployment of the more advanced J-11BH/BHS fighter aircraft to Woody Island, revealed in photographs released via online Chinese-language media websites in late October, underscores how seriously the People’s Liberation Army Navy (PLAN) is taking its claims to the South China Sea. The placement of advanced fighter aircraft on Woody Island, located in the Parcel archipelago, extends China’s fighter aircraft reach an additional 360 kilometers into the South China Sea… The new location could prove troublesome for US surveillance aircraft, such as the EP-3 Aries and the P-8 Poseidon, that fly through the area on a regular basis. In 2001, a collision between a Chinese fighter and EP-3 resulted in the death of a Chinese fighter pilot and the forced landing of the EP-3 on Hainan Island… Bonnie Glaser, director of the China Power Project, Center for Strategic and International Studies, said the Chinese are demonstrating to the US, other claimants to the South China Sea and their domestic audience that they intend to protect their sovereignty.”