Saturday, December 12, 2015

Weekly Commentary: The Precipice

Global markets have found themselves again at the precipice. My sense is that everyone’s numb – literally dazed and confused from prolonged Monetary Disorder and the resulting perverted market backdrop. Repeatedly, “The Precipice” has signaled easy-money buying and trading opportunities. Again and again, selling, shorting and hedging at “The Precipice” guaranteed you were to soon look (and feel) like an absolute moron – for some, progressively poorer dunces the Bubble was pushing yet another step closer to serious dilemmas (financial, professional, personal and otherwise). A focus on risk became irrational. Fixation on seeking potential market rewards turned all-encompassing.

All of this will prove a challenge to explain to future generations. Keynes: “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” And paraphrasing the great Charles Kindleberger: Nothing causes as much angst as to see your neighbor (associate or competitor) get rich. In short, Bubbles are all powerful.

Going back to those darks days in late-2008, global policymakers have been determined to not let the markets down. Along the way they made things too easy. “Do whatever it takes!” “Shock and Awe!” “Ready to push back against a market tightening of financial conditions.” “Do what we must to raise inflation as quickly as possible.” Historic market excess and distortions were incentivized and, predictably, things ran amuck. “QE infinity.” Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to “perpetual money machine” quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened.

It was a week of ominous developments among multiple key flashpoints. Let’s start with commodities and EM, where the accelerating downward spiral is now rapidly reaching the status of “unmitigated disaster.” In a destabilizing crisis of confidence, panic outflows saw the South African rand sink 10% to an all-time low. Local South African bond Yields jumped 140 bps in two sessions to about 9% (from WSJ). The Turkish lira dropped another 3%, as Turkey’s equities were slammed for 5%. The Russian ruble dropped 3.4%. The Brazilian real declined 3.2%. Despite repeated central bank interventions, the Mexican peso sank 4.4% this week to a record low. Also hurt by collapsing crude, the Colombian peso dropped 4% to a new low.

Crude (WTI) sank 12% this week to the lowest level since the 2008 crisis. The Bloomberg Commodities Index sank to fresh 16-year lows. Natural gas dropped 9%, to lows since 2012. Iron ore was down 4% this week to a record low (going back to 2009). Iron ore prices have collapsed almost 50% this year. Crude prices are down about 35%. For highly leveraged operators throughout the commodities arena, the situation has quickly turned desperate. In the financial realm, the yen jumped 1.7% and the euro gained another 1% against the dollar this week, pressuring the leveraged “carry trade” crowd.

It has rather quickly become equally desperate for financial operators holding risky corporate debt in a marketplace that has turned illiquid and increasingly dislocated. For the first time since the 2008 crisis, a public mutual fund (Third Avenue) this week halted redemptions. A Credit hedge fund (Stone Lion Capital) also halted redemptions. The concept of “Moneyness of Risk Assets” has been integral to my “global government finance Bubble” thesis. Monetary policy coupled with aggressive risk intermediation (certainly including fund structures and derivatives) created the market perception that high-yield corporate debt could be held with minimal risk (price and liquidity). With the Credit cycle turning, this misperception is being exposed. Junk bond fund redemptions jumped to $3.5 billion this week. The halcyon notion of turning illiquid securities into perceived liquid instruments is coming home to roost. Credit spreads widened significantly this week. Ominous as well, bank stocks sank 6.2%, and the Broker/Dealers were slammed 7.5%.

A Friday Bloomberg article (Sridhar Natarajan, Miles Weiss and Charles Stein) included a pertinent quote: “‘A lot of this looks like late 2007 or early 2008,’ when the credit crunch began to take root, said [Berwyn Income Fund’s George] Cipolloni… ‘But instead of housing and mortgages, it’s energy and materials leading the decline.’”

Cipolloni is on the right track, though this week looked more like later in 2008. And it’s important to contrast the current backdrop to that of the mortgage finance Bubble. I would argue that Credit issues in “energy and materials” are akin to subprime at the “periphery”– as opposed to mortgage Credit generally. Few in 2008 appreciated the degree of mispricing that pervaded mortgage Credit and derivatives, and the near-catastrophic consequences (to market liquidity and the flow of finance throughout the asset markets and real economy) that would materialize with the bursting of the Bubble. Today, market mispricing is systemic and global – virtually all securities classes at home and abroad.

And whether it is commodities, EM or U.S. corporate debt, this was the type of week that spurs contagion. Especially with panicked fund redemptions, problems at the “periphery” can quickly move toward the “core” as risk aversion takes hold and financial conditions tighten more generally. And when players (especially those leveraged) can’t sell what they want, they begin selling what they can. There was also a rush to hedge, a backdrop conducive to market weakness begetting selling, more hedging and more “delta hedging” (selling to offset risk from derivative protection sold).

My plan for the week was to focus on the new Z.1 “flow of funds” report released Thursday. It is important data that confirm the bursting Bubble thesis. Credit growth slowed markedly, confirming that financial conditions tightened meaningfully during the third quarter.

Total Non-Financial Debt expanded at a 2.0% rate during Q3, the slowest debt expansion since Q2 2011. Q3 debt growth slowed sharply from Q2’s 4.6% and compares to Q3 2014’s 4.5%. Importantly, the Credit slowdown was broad-based. Household debt growth slowed to 1.5% from Q2’s 4.2%, to the weakest expansion since Q4 2013. Home Mortgage growth slowed from Q3’s 2.4% to 1.6%, while Consumer Credit slowed from 8.5% to 7.2%. Federal government debt growth slowed from 2.4% to Q3’s 0.2%.

Yet the most remarkable Credit slowdown unfolded during Q3 in Corporate borrowings. Corporate debt growth slowed to a 4.3% pace, about half Q2’s 8.8% (strongest since Q3 2013’s 10.1%). In dollar terms, Total Business Borrowings slowed to a seasonally-adjusted and annualized rate (SAAR) of $586bn, down from Q2’s $1.025 TN.

Total Non-Financial Debt growth slowed markedly to SAAR $871bn, the weakest Credit expansion since Q4 2009 (SAAR $686bn) and down from Q2’s SAAR $1.989 TN and Q3 2014’s $1.907 TN. It’s worth noting that the rate of Credit expansion during the quarter was less than half the $2.0 TN bogey that I have posited is required to sustain the Bubble and unsound economic expansion.

Importantly, the Credit slowdown exacerbates already acute system vulnerability to a securities market downturn. With debt market tumult and dislocation building, there will surely be further slowing in Corporate Credit. After the late-nineties boom, Corporate Credit slowed sharply in 2001 and 2002 - and was barely positive in 2003. After peaking at more than $1.1 TN in 2007, Corporate Credit growth was cut in half in 2008, before contracting $455 billion in 2009. Corporate Credit has a strong proclivity for boom and bust dynamics.

The downturn now enveloping Corporate Credit portends a contraction in corporate profits and an abrupt slowdown of income growth. A significant tightening in corporate Credit also has negative ramifications for stock buybacks, M&A and financial engineering more generally. Such a backdrop is negative for stock prices, and Q3 provided a glimpse of the feedback loop of tightened Corporate finance, weaker stock prices, declining household perceived wealth and economic vulnerability.

During Q3, Household (and Non-Profits) Assets declined $1.153 TN, or 1.1%, to $99.55 TN. With Household Liabilities expanding slightly, Household Net Worth declined $1.232 TN during the quarter. For perspective, Household Net Worth increased on average $1.838 TN over the previous 15 quarters. As a percentage of GDP, Household Net Worth declined from Q2’s 482% to 472%. After ending 2007 at 461%, Household Net Worth fell below 350% in early 2009. Household Net Worth closed out Q1 2015 at a record 486% of GDP. It’s worth noting that Households ended Q3 with Financial Assets at $68.925 TN, or 382% of GDP. This compares to 272% to end the eighties, 361% to end Bubble year 1999 and 366% to end 2007.

Rest of World (ROW) holdings of U.S. financial assets declined a notable SAAR $299bn, led by a SAAR $492bn drop in Treasury holdings. This was an abrupt reversal from strong (Trillion plus) annual growth in ROW holdings of U.S. assets over recent years. After expanding SAAR $705 billion in Q2, ROW holding of U.S. Bond’s increased only SAAR $21 billion during Q3. ROW holdings of U.S. equities contracted SAAR $100 billion. Q3 data may suggest waning demand for U.S. securities, or perhaps it reflects more globalized de-risking and de-leveraging pressures.

Q3 had its share of market tumult. There was the August Chinese devaluation and U.S. market “flash crash.” Currency markets were highly unstable, not unlike market conditions of late. The faltering Chinese Bubble has been integral to my bursting Bubble thesis. I have posited that a disorderly Chinese devaluation poses a major potential flashpoint for global finance and economies. The yuan devalued 0.8% this week, the largest decline since August. And Friday the Bank of China indicated a new trade-weighted basket of currencies may provide a better gauge of measuring the Chinese currency than a direct peg to the U.S. dollar.

Analysts generally responded positively to China’s apparent move to a more “flexible” currency regime. It appears more of a clever devaluation ploy. Apparently now moving away from a clearly defined currency peg to the dollar, the Bank of China can more easily obfuscate its intentions and keep currency speculators in check. But this new “regime” is problematic for Chinese issuers of dollar-denominated debt, as well as “carry trade” leverage that has flooded into Chinese high-yielding securities and instruments. Previous Chinese attempts to commence devaluation proved problematic. The current backdrop is fraught with much greater risks.

And I will be part of the crowd trying to anticipate the policymaker response to unstable global markets. Draghi has already disappointed the markets. The Fed does not want to follow the ECB’s lead. The markets expect the Fed to bump up rates 25 bps. I anticipate they will follow through this time around, but it would not be surprising if they don’t. But I’ve contended for some time now that global market instability is much more about the bursting Bubble than Fed tightening – more about China and EM than U.S. monetary policy. I’ll assume a dovish Fed might spur some fleeting bullishness, but it would also further destabilize currency trading. 

At this point, I don’t expect (de-risking and de-leveraging) markets to respond much to rates. They will be increasingly desperate for more QE. I fully expect the Fed to eventually reinstate QE in response to financial crisis.  In the meantime, I suspect central bankers won't have answers for what ails global markets.

For the Week:

The S&P500 dropped 3.8% (down 2.3% y-t-d), and the Dow fell 3.3% (down 3.1%). The Utilities declined 1.8% (down 13.9%). The Banks sank 6.2% (down 3.0%), and the Broker/Dealers tanked 7.5% (down 5.3%). The Transports were hit 5.4% (down 17.7%). The S&P 400 Midcaps lost 4.1% (down 4.3%), and the small cap Russell 2000 fell 5.1% (down 6.7%). The Nasdaq100 declined 3.8% (up 7.1%), and the Morgan Stanley High Tech index lost 4.1% (up 6.0%). The Semiconductors dropped 4.4% (down 3.8%). The Biotechs sank 5.1% (up 3.8%). With bullion down $12, the HUI gold index fell 4.1% (down 29.0%).

Three-month Treasury bill rates ended the week at 22 bps. Two-year government yields declined seven bps to 0.87% (up 20bps y-t-d). Five-year T-note yields dropped 16 bps to 1.55% (down 10bps). Ten-year Treasury yields fell 14 bps to 2.13% (down 4bps). Long bond yields sank 14 bps to 2.87% (up 12bps).

Greek 10-year yields jumped 46 bps to 8.40% (down 135bps y-t-d). Ten-year Portuguese yields slipped three bps to 2.43% (down 19bps). Italian 10-year yields fell 12 bps to 1.53% (down 36bps). Spain's 10-year yields dropped 11 bps to 1.62% (up 1bp). German bund yields fell 14 bps to 0.54% (unchanged). French yields dropped 14 bps to 0.86% (up 3bp). The French to German 10-year bond spread was unchanged at 32 bps. U.K. 10-year gilt yields dropped 11 bps to 1.81% (up 6bps).

Japan's Nikkei equities index declined 1.4% (up 10.2% y-t-d). Japanese 10-year "JGB" yields slipped two bps to 0.31% (down 1bp y-t-d). The German DAX equities index was hit 3.8% (up 5.5%). Spain's IBEX 35 equities index sank 4.4% (down 6.3%). Italy's FTSE MIB index lost 4.6% (up 10.5%). EM equities were under pressure. Brazil's Bovespa index was little changed (down 9.5%). Mexico's Bolsa fell 2.3% (down 2.7%). South Korea's Kospi index declined 1.3% (up 1.7%). India’s Sensex equities index fell 2.3% (down 8.9%). China’s Shanghai Exchange dropped 2.6% (up 6.2%). Turkey's Borsa Istanbul National 100 index was slammed 5.4% (down 18%). Russia's MICEX equities index lost 2.0% (up 23%).

Junk fund saw outflows surge to an alarming $3.5bn (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased two bps to 3.95% (up 8bps y-t-d). Fifteen-year rates gained three bps to 3.19% (up 4bp). One-year ARM rates rose three bps to 2.64% (up 24bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 12 bps to 4.01% (down 27bps).

Federal Reserve Credit last week declined $11.4bn to $4.442 TN. Over the past year, Fed Credit dipped $6.1bn. Fed Credit inflated $1.631 TN, or 58%, over the past 161 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $5.6bn to $3.318 TN. "Custody holdings" were down $6.3bn y-o-y.

M2 (narrow) "money" supply dropped $38.8bn to $12.271 TN. "Narrow money" expanded $676bn, or 5.8%, over the past year. For the week, Currency increased $0.8bn. Total Checkable Deposits fell $14bn, and Savings Deposits dropped $25.4bn. Both small Time Deposits and Retail Money Funds were little changed.

Total money market fund assets rose $12.8bn to $2.754 TN. Money Funds increased $21.2bn year-to-date, and gained $47.8bn y-o-y (1.8%).

Total Commercial Paper fell $14.6bn to $1.036 TN. CP increased $35bn year-to-date.

Currency Watch:

The U.S. dollar index declined 0.6% this week to 97.63 (up 8.2% y-t-d). For the week on the upside, the Japanese yen increased 1.7%, the Swiss franc 1.4%, the euro 1.0% and the British pound 0.7%. For the week on the downside, the South African rand declined 10.6%, the Mexican peso 4.4%, the Brazilian real 3.2%, the Canadian dollar 2.9%, the Norwegian krone 2.1%, the Australian dollar 2.0% and the New Zealand dollar 0.4%.

Commodities Watch:

The Goldman Sachs Commodities Index sank 5.3% to a new multi-year low (down 24.9% y-t-d). Spot Gold slipped 1.1% to $1,075 (down 9.3%). March Silver fell 4.5% to $13.89 (down 11%). January WTI Crude sank $4.78 to $35.36 (down 34%). January Gasoline declined 1.0% (down 14%), and January Natural Gas sank 9.2% (down 32%). March Copper rallied 1.8% (down 25%). March Wheat gained 1.2% (down 17%). March Corn fell 1.6% (down 6%).

Global Bubble Watch:

December 5 – Reuters (Balazs Koranyi and John O’Connell): “Hints by Mario Draghi ahead of last Thursday's ECB rate meeting that the euro zone may need another big injection of money backfired, stiffening the resolve of more conservative central bankers who criticized him for raising expectations too high, sources familiar with the discussions said. The European Central Bank President and his chief economist Peter Praet stoked expectations with dovish speeches in the weeks before the meeting but the ECB’s Governing Council concluded that markets needed to be disappointed this time… A pending U.S. Federal Reserve rate hike also factored into the decision, though to a lesser extent… The ECB cut its deposit rate on Thursday and extended its monthly asset buys by six months to boost stubbornly low inflation and lift growth. But the moves were considered by markets to be the bare minimum in the light of the bank’s previous signals. One source with direct knowledge of the situation interpreted Draghi’s public stance ahead of the meeting as trying to pressure the Governing Council to take bigger action. ‘Draghi raised expectations too high, on purpose, and attempted to paint the Governing Council into a corner,’ the source said. ‘This was problematic and he was criticized for this by several governors in private.’ Unlike last year, when opponents of quantitative easing made their stance public before the decision, the hawks mostly worked behind the scenes.”

December 6 – Financial Times (Attracta Mooney): “Sovereign wealth funds in the Gulf have been pulling money out of asset managers at the fastest rate on record as they rush to boost their economies following the collapse in the oil price. At least $19bn was withdrawn by state institutions during the third quarter, according to… eVestment, denting investment managers’ profits and raising concerns about the prospect of further outflows. However, the true level of this year’s withdrawals is likely to be much greater as some asset managers, including BlackRock, the world’s biggest fund house, do not disclose their dealings with sovereign funds. Morgan Stanley estimates BlackRock suffered redemptions of $31bn from government institutions during the second and third quarters… Governments in oil-rich countries have been forced to raid their wealth funds in response to the slump in the oil price…”

December 6 – Bloomberg (Narayanan Somasundaram): “Chinese demand, which helped propel a surge in Sydney homes, has dropped as much as 15% from a year earlier as China’s stocks tumbled and the economy slowed, according to real estate agent McGrath Ltd. Buyers from mainland China are turning away from Sydney and Melbourne and looking at southeast Queensland where dwelling values are ‘compelling,’ John McGrath, chief executive officer of McGrath, said… Sydney and Melbourne prices are at the end of the ‘growth cycle,’ McGrath said. After running up 47% in the three years to October, sending the value of an average Sydney house to about A$1 million, home prices in the city dropped 1.4% in November…”

December 7 – Bloomberg (Grant Smith): “OPEC’s new free-for-all production stance could lift the lid on millions of barrels of additional crude supply next year. ‘Everyone does whatever they want’ now that the Organization of Petroleum Exporting Countries has effectively abandoned its formal production target, Iranian Oil Minister Bijan Namdar Zanganeh said… What Iran wants is to revive exports by about 1 million barrels a day when sanctions are removed next year. It’s not the only member with potential to swell the global oil surplus, with millions of barrels of capacity lying unused under the sands of Saudi Arabia and Libya. ‘It means more OPEC oil next year,’ Jamie Webster… analyst for IHS Inc., said… ‘OPEC is not cutting. With Iran looming, as well as largely only upside risk for Libya, the smart money is on more, and not less, production.’”

U.S. Bubble Watch:

December 10 – Reuters (Balazs Koranyi and John O’Connell): “Middle class Americans are now outnumbered by those above and below them and are ‘falling behind financially’, according to new analysis of government data by the Pew Research Center. The beginning of 2015 saw 120.8 million adults living in middle-income homes, compared with 121.3 million Americans living in lower and upper income households, a significant shift that ‘could signal a tipping point.’ According to Pew's report, the 21st century has seen ‘middle-income Americans’ fall behind financially. The median income of middle income households fell by 4% between the year 2000 and 2014, while median wealth – assets minus debts – fell by 28% between 2001 and 2013.”

December 9 – Wall Street Journal (Mike Cherney): “Losses in the energy sector’s junk-bond market are spreading beyond oil-and-gas producers amid a prolonged slump in commodity prices, further rattling investors who are now preparing for a wave of defaults next year. Bonds from electric utilities including Dynegy Inc., AES Corp. and NRG Energy Inc. have declined in recent days, reflecting concerns that falling natural-gas prices will drag down electricity prices as well… ‘Sentiment is awful,’ said Henry Peabody, who helps oversee the $1 billion Eaton Vance Bond Fund. ‘We’re flirting with credit-crisis energy prices, and we’re probably flirting with credit-crisis bond prices to some degree in these sectors.’”

December 8 – Bloomberg (Joe Carroll): “Kinder Morgan Inc. slashed its full-year dividend by 74% to preserve cash it needs to keep growing while it repays $41 billion of debt, stemming a six-day stock slide that erased one-third of its value… As recently as Nov. 18, the company was promising investors a 6% to 10% increase next year, but the freefall in oil prices cut cash flow and raised questions about Kinder’s ability to repay its debt.”

December 10 – Bloomberg (Gerrit De Vynck): “The chief executive officer of one of Canada’s largest software companies is calling the second tech bubble. The valuations of many software startups have gotten so high the market looks similar to the way it did 15 years ago before the technology bubble collapsed, Mark Barrenechea, CEO of Open Text Corp. and a former Oracle Corp. executive, said… ‘I remember back in my days at Oracle, it used to take me about 40 minutes to get to work and then the Internet boom came along,’ and traffic surged, he said. ‘It took me an hour and a half and then all of the receptionists were day trading. It feels the same way today.’ The number of private tech companies with valuations of more than $1 billion has increased as easier access to venture capital has allowed firms to stay private longer and avoid the scrutiny of public markets. There are now 144 private companies with valuations over $1 billion, 70 of which joined the list in 2015, according to… CB Insights.”

China Bubble Watch:

December 7 – CNBC (Neelabh Chaturvedi): “The constant stream of capital outflows from China that have bedeviled global financial markets likely reached a record in November, according to estimates from Capital Economics. Julian Evans-Pritchard, China economist at the Singapore office of Capital Economics, has estimated that net capital outflows totaled $113 billion last month, accelerating from $37 billion in October. But getting an accurate picture of how much money is actually fleeing China is somewhat tricky. Data released Monday showed China's foreign exchange reserves fell by $87.2 billion in November to $3.44 trillion. Evans-Pritchard's calculations suggest that fluctuations in exchange rates accounted for $30 billion of that reduction, leaving $57 billion in foreign exchange sales by the central bank. Combining the foreign exchange sales with Capital Economics' trade surplus estimate of around $55 billion for November leaves net capital outflows at $113 billion.”

December 9 – Bloomberg (Richard Miller and Enda Curran): “The biggest loser from a stronger dollar may be China, not the U.S. And that’s why some economists predict the Asian nation will loosen its currency’s link to the greenback and allow the yuan to depreciate. The People’s Bank of China took what may be a small step in that direction on Wednesday when it cut the currency’s reference rate to 6.4140 per dollar, its weakest level since 2011. The Asian nation has tethered the yuan, for the most part, to the dollar in order to enhance financial stability. That means as the dollar advances against most currencies across the world on expectations of rising U.S. interest rates, the yuan does, too. China suffers more, though, because its slowing economy is almost twice as dependent on trade. ‘It’s a problem,’ said Yukon Huang, a senior associate at the Carnegie Endowment for International Peace in Washington and a former World Bank country director for China. ‘Excessive appreciation at a time when the economy is sinking is a bad thing.’”

December 8 – Financial Times: “If the prospect of the Chinese renminbi’s entry into the basket of currencies composing the special drawing right was supposed to insulate it from the whims of speculation, no one appears to have told the foreign exchange traders. On Tuesday, after data showed Chinese exports in November sharply lower over the year on the back of weak external demand, the renminbi dropped to its lowest level in four years. Earlier this week, it emerged that Chinese official foreign exchange reserves registered their third-largest monthly decline on record in November. Beijing is discovering that symbolic achievements such as admission to the SDR basket are less important than having a sustainable growth model. China is trying to effect a hugely difficult balancing act between short-term growth and long-term stability. In the face of capital outflows and downward pressure on the currency, it must steer an uneasy course between the two… A slowdown in global export demand, and a general sell-off of emerging market currencies, have assisted the first goal, on a cyclical rather than a structural basis. But they have done little to help the second leg of growth in consumer demand and domestic services.”

December 8 – Bloomberg (Heesu Lee): “There’s no let-up in the onslaught of commodities from China. While the country’s total exports are slowing in dollar terms, shipments of steel, oil products and aluminum are reaching for new highs, according to trade data… That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas. The flood is compounding a worldwide surplus of commodities that’s driven returns from raw materials to the lowest since 1999, threatening producers from India to Pennsylvania and aggravating trade disputes. While companies such as India’s JSW Steel Ltd. decry cheap exports as unfair, China says the overcapacity is a global problem. ‘It puts global commodities producers in a bad situation as China struggles with excess supplies of base metals, steel and oil products,’ Kang Yoo Jin, a commodities analyst at NH Investment & Securities Co., said… ‘The surplus of commodities is becoming a real pain for China and to ease the glut, it’s increasing its shipments overseas.’”

December 10 – Reuters (Sue-Lin Wong): “New loans and money supply grew faster than expected in China in November as interest rate cuts and higher government spending spurred more demand for credit, a welcome bright spot after a raft of disappointing economic data. Chinese banks extended 708.9 billion yuan ($109.81bn) of new loans last month, more than the 700 billion yuan economists had expected and up 38% from October. Total social financing, a broader measure of net new credit, more than doubled to 1.02 trillion yuan from the previous month, while broad money supply (M2) rose 13.7% year-on-year, its strongest pace since June 2014 and up from 13.5% in October.”

December 6 – Bloomberg: “Citic Securities Co. said it has been unable to contact two executives, adding to deepening turmoil at a brokerage that is being investigated amid a government probe into China’s stock-market rout. Chen Jun and Yan Jianlin, both members of the company’s eight-person executive committee, its highest decision-making body, can’t be reached… Chen is head of Citic Securities’ investment-banking business, while Yan leads investment banking at its international unit… Should their involvement with the market probes be confirmed, it would bring to at least 10 the number of Citic Securities executives including President Cheng Boming caught up in investigations to determine the causes of the stock plunge that wiped out $5 trillion of market value.”

Brazil Watch:

December 9 – Bloomberg (David Biller): “Brazil’s consumer prices in November rose more than economists forecast, as President Dilma Rousseff faces impeachment proceedings that hamper attempts to fix the economy. Consumer prices rose 1.01% in November, up from 0.82% in October…That was above the median 0.95% estimate from 40 economists surveyed by Bloomberg, and the fastest pace in eight months. Annual inflation accelerated to 10.48%, the fastest pace in 12 years. Inflation running in the double digits has shattered consumer and business confidence and is helping push Brazil into its deepest recession in 25 years. The central bank has signaled it’s ready to resume interest rate increases should policy makers fail to pass fiscal austerity measures, which the government says would tame inflation and boost economic growth. With Congress focused on impeachment proceedings, the debate around economic policies has come to a stop.”

EM Bubble Watch:

December 10 – Bloomberg (Michael Cohen Xola Potelwa): “Investors are giving up on South African President Jacob Zuma and his ruling African National Congress. Less than 24 hours after Zuma sent markets into chaos by abruptly firing his finance minister and replacing him with an untested unknown on Wednesday, fund managers and analysts warned that the ANC’s reputation for prudent financial management was practically in tatters. ‘This is a self-induced crisis,’ Malcolm Charles, an Investec Asset Management fund manager… said by phone from Cape Town. ‘Investors are absolutely distraught and they’re voting with their feet. All these guys are selling at a loss and they continue to sell. They’d rather take money to a place where they know what the macroeconomic policies are going to be.’”

December 6 – Bloomberg (Srinivasan Sivabalan): “The commodity-price slump and the slowdown in China’s economy are crippling developing nations’ ability to borrow abroad, even as international debt sales from advanced nations remain at a five-year high. Issuance by emerging-market borrowers slumped to a net $1.5 billion in the third quarter, a drop of 98% from the second quarter, according to the Bank for International Settlements. That was the biggest downtrend since the 2008 financial crisis and reduced global sales of securities by almost 80%... Emerging-market assets tumbled in the third quarter, led by the biggest plunge in commodity prices since 2008 and China’s surprise devaluation of the yuan. The average yield on developing-nation corporate bonds posted the biggest increase in four years, stocks lost a combined $4.2 trillion and a gauge of currencies slid 8.3% against the dollar.”

December 7 – Bloomberg (Tugce Ozsoy): “Foreign investors look set to keep pulling their money out of Turkey after dumping a record amount of stocks and bonds this year. Investors from abroad withdrew $7.6 billion from assets in 2015, including $1.4 billion in outflows last month as the party that President Recep Tayyip Erdogan helped found swept back into power… Declines resumed as the war in neighboring Syria and Russian sanctions threatened the country’s $720 billion economy. More selling will probably follow and a rout in the lira, on course for the biggest annual drop since 2008, is set to deepen…”

Fixed Income Bubble Watch:

December 11 – Reuters (Tim McLaughlin): “New York-based Third Avenue Management is blocking investors from withdrawing their money from a near $1 billion junk bond fund as it tries to liquidate the fund in the biggest failure in the U.S. mutual fund industry since the Primary Reserve Fund ‘broke the buck’ during the 2008 financial crisis. The demise of the fund is sure to renew fears that less liquidity in the corporate bond market will cause more volatility, especially as the Federal Reserve leans toward raising interest rates next week for the first time in a decade.”

December 10 – Wall Street Journal (Karen Damato): “Amid a severe downturn in high-yield and distressed debt, a mutual fund in this sector has barred investors from redeeming shares to facilitate an orderly liquidation. The unusual move by Third Avenue Focused Credit Fund, which had more than $2.4 billion in assets earlier this year, comes amid redemption requests at the fund and reduced liquidity in some parts of the bond market. Those two factors made it ‘impractical’ for the fund to pay off departing investors without selling holdings at fire-sale prices ‘that would unfairly disadvantage the remaining shareholders,’ David Barse, chief executive of Third Avenue Management LLC, wrote… The move at the Third Avenue mutual fund comes at a time of widespread uneasiness about holdings of hard-to-sell securities in funds that trade daily or intraday.”

Leveraged Speculation Watch:

December 7 – Financial Times (Miles Johnson): “What was meant to be the big comeback year for the beleaguered hedge fund industry has instead been one of its toughest since the financial crisis. Wrongfooted by central banks and sudden bouts of market volatility, some of the world’s best known hedge fund managers such as Bill Ackman and David Einhorn have suffered stinging losses, while other large funds, like Mike Novogratz’s Fortress Macro Fund, have closed down altogether. ‘People have been burnt in so many places,’ says one manager of a multibillion dollar hedge fund. ‘We are living in a new sort of world, where large moves in markets are happening, but they happen very quickly and more abruptly, being condensed into a few days rather than a few months. These moves are very, very difficult to trade.’ Hedge funds are under pressure over fees and lacklustre performance from an increasingly conservative investor base — now more likely to be pension funds rather than yacht-hopping private millionaires. The travails of 2015 have further dented the industry’s reputation. In January many hedge fund managers that specialise in making big bets on the direction of interest rates and currencies believed that finally, after several years of directionless markets, their time had come.”

Central Bank Watch:

December 10 – Reuters (Jonathan Gould): “A great majority of European Central Bank governors do not want to boost quantitative easing further, Yves Mersch said, adding that its move to buy new bonds as old ones mature would inject hundreds of billions of euros. ‘The very large majority of the Governing Council is of the view that the measures are appropriate and that more is not needed to reach our goal,’ Mersch told a journalists' club dinner on Wednesday, referring to the group that sets policy to keep inflation ticking upwards.”

December 9 – Bloomberg (Boris Groendahl): “European Central Bank policy maker Ewald Nowotny said the financial community misjudged the state of the euro-area economy and thus had unrealistic expectations for more stimulus last week. ‘It was absurd what expectations were expressed,’ Governing Council member Nowotny told reporters… ‘I believe it was really a massive failing of market analysts. I don’t believe the ECB’s communications policy gave a false signal.’ … ‘It’s our job to call the ECB, so he’s right to say it’s our fault,’ said Richard Barwell, senior economist at BNP Paribas Investment Partners…‘However, if I was a member of the Governing Council, I’m not sure I would describe expectations that the ECB would increase the pace of bond purchases to drive inflation back to 2% as quickly as possible as absurd.’”

Japan Watch:

December 9 – Reuters (Takashi Umekawa and Junko Fujita): “Japan’s trillion-dollar public pension fund is ready to hedge against the risk of fluctuations in the dollar and euro to minimise possible losses in its investments, President Takahiro Mitani said… The Government Pension Investment Fund (GPIF) suffered a record 7.9 trillion yen ($64.34bn) loss in the third quarter as financial market turmoil triggered by China's economic slowdown battered global equities. The loss was reported after GPIF last year made a historical shift by abandoning its stance to let domestic government bonds comprise the bulk of its portfolio in the wake of Prime Minister Shinzo Abe's push to promote risk-taking and foster confidence in financial markets.”

Geopolitical Watch:

December 8 – Reuters (Ben Blanchard): “Turkey's prime minister accused Russia on Wednesday of attempted ‘ethnic cleansing’ in northern Syria, saying Moscow was trying to drive out the local Turkmen and Sunni Muslim populations to protect its military interests in the region. Ahmet Davutoglu's comments could further harm strained relations between Moscow and Ankara, already at their worst in recent memory… ‘Russia is trying to make ethnic cleansing in northern Latakia to force (out) all Turkmen and Sunni population who do not have good relations with the regime,’ Davutoglu told foreign reporters… ‘They want to expel them, they want to ethnically cleanse this area so that the regime (of Syrian President Bashar al-Assad) and Russian bases in Latakia and Tartus are protected,’ he said… The Turkmens are ethnic kin of the Turks and Ankara has been particularly angered by what it says is Russian targeting of them in Syria.”

December 7 – Reuters (Daren Butler and Isabel Coles): “Turkey said on Monday it would not withdraw hundreds of soldiers who arrived last week at a base in northern Iraq, despite being ordered by Baghdad to pull them out within 48 hours. The sudden arrival of such a large and heavily armed Turkish contingent in a camp near the frontline in northern Iraq has added yet another controversial deployment to a war against Islamic State fighters that has drawn in most of the world's major powers. Ankara says the troops are there as part of an international mission to train and equip Iraqi forces to fight against Islamic State. The Iraqi government says it never invited such a force, and will take its case to the United Nations if they are not pulled out.”

December 7 – UK Guardian (Kim Willsher): “France’s traditional political parties have held a series of emergency meetings to thrash out tactics to defeat the Front National after the far right scored a historic victory in the first round of local elections. The governing Socialist party (PS) has urged its supporters and the country’s centre-right opposition to form a ‘republican bloc’ against the FN. The official opposition, Les Républicains (LR), led by former president Nicolas Sarkozy, has refused any deals. The country awoke on Monday to confirmation that the far-right FN, led by Marine Le Pen, polled a record score of almost 30% of the national vote on Sunday. Le Pen’s party is ahead in six of metropolitan France’s 13 departments after the first round vote…”

December 7 – Bloomberg (Patrick Donahue): “The number of asylum seekers making their way to Germany this year approached one million as Chancellor Angela Merkel’s government struggles to shelter and register the influx of migrants fleeing war and poverty. The number of registered asylum seekers rose to about 965,000 by the end of November, exceeding the government’s full-year forecast from August of 800,000…”

December 9 – Bloomberg (Olga Tanas and Natasha Doff): “Russian Prime Minister Dmitry Medvedev accused Ukrainian leaders of being ready to cheat his country over a $3 billion bond that comes due this month as he stepped up threats of retribution if the amount isn’t paid. ‘As they say, hope dies last,’ Medvedev said… ‘But I have a feeling that they won’t return it, because they’re swindlers. They refuse to return our money, and our Western partners not only aren’t helping us, they’re a hindrance.’ The International Monetary Fund revised its policy Tuesday, allowing it to continue lending to countries that fail to pay debts held by other nations. That means financial aid to Ukraine may continue after non-payment of the $3 billion Eurobond Russia bought in December 2013 from the government of Ukraine’s then president, Viktor Yanukovych. Ukraine is barred from redeeming the note, due Dec. 20, in full under a $15 billion restructuring accord reached with commercial lenders. ‘We won’t put up with this,’ Medvedev said. ‘We’ll got to court. We’ll seek default on the debt and will seek default on all of Ukraine’s obligations.’”

December 8 – Reuters (Ben Blanchard): “China's military is paying ‘close attention’ to an agreement between the United States and Singapore to deploy the U.S. P8 Poseidon spy plane to the city state and hopes the move does not harm regional stability, the defense ministry said. ‘We are paying close attention to how the relevant situation develops, and hope bilateral defense cooperation between the relevant countries is beneficial to regional peace and stability and not the opposite,’ the ministry said… The foreign ministry of China, which is at odds with Washington over the South China Sea, said on Tuesday the move was aimed at militarizing the region.”