Saturday, January 9, 2016

Weekly Commentary: Issues 2016

January 8 – CNBC (Ritika Shah): “Billionaire investor Mark Cuban is ‘doing nothing’ about the market sell-off. In his latest note to his ‘dusters’—a term for users of the Cyber Dust app that he advises and funds—Cuban revealed his investment strategy. ‘While all the selling seems to be based on China and the price of oil, I really don’t know what the long term implications for our stock market is,’ he wrote… ‘So I follow the number one rule of investing. When you don’t know what to do. Do nothing.’”

It’s being called the worst start for global securities markets ever. The Shanghai Composite was down a quick 10% this week. Japan’s Nikkei sank 7.0%. Hong Kong’s financial index dropped 8.7%. Germany’s (investor “darling”) DAX equities index was slammed for 8.3%. Here at home, the S&P fell a relatively moderate 6.0%. Biotechs sank 10%. Gloomily, the financials (banks and broker/dealers) were down almost double-digits. The small caps were hit for 8%. The Nasdaq100 fell 7%. “FANG” was defanged.

Credit spreads widened across the board. With “money” flowing out of bond funds, even top-tier bonds are now feeling the effects. Investment-grade spreads widened this week to a three-year high. It was another tough week for high-risk corporate debt.

Currency markets commenced the year in disarray. The yen jumped 2.7% against the dollar, surpassing August tumult-period highs. Borrowing in cheap yen to finance leveraged holdings in higher-yielding currencies was a fiasco. The Australian and New Zealand dollars were down almost 5%. Some key EM currencies were under intense pressure. The Mexican peso fell 3.9%, the South African rand 4.8%, the Russian ruble 3.1%, the Turkish lira 3.6%, the Chilean peso 2.9%, the Colombian peso 2.9%, the Singapore dollar 2.4% and the Malaysian ringgit 2.3%. China’s yuan declined 1.6% against the dollar.

WTI crude was down 10.5% to a new 12-year low. After sinking 26% in 2015, the Goldman Sachs Commodities Index fell 5.2% to begin 2016. Ten-year Treasury yields declined a modest 13 bps, with fixed-income this week offering little protection against major losses throughout global risk markets. Benefiting from safe haven status, bullion surged 4.1%. Conversely, copper sank 5.3% to an almost seven-year low.

It was an ominous beginning to what is poised to be a most tumultuous year. Market participants are quickly coming to appreciate that China does in fact matter. Few understand why. Most – from billionaires to fund managers to retail investors – will “Do Nothing.” This has worked just fine in the past – repeatedly. Not understanding and not doing anything will be detriments going forward.

Analysts will point to Friday’s surge in non-farm payrolls as evidence of the underlying health of the U.S. economy. There’s a strong consensus that U.S. markets have been greatly overreacting to risks posed by China and the global slowdown. Popular sentiment was captured well in a Friday headline: “Market meltdown can be read as giant ‘buy’ signal”

Back in 2000, I titled a presentation (and CBB) “How Could Irving Fisher Have Been So Wrong?” From Wikipedia: “The stock market crash of 1929 and the subsequent Great Depression cost Fisher much of his personal wealth and academic reputation. He famously predicted, three days before the crash, ‘Stock prices have reached what looks like a permanently high plateau.’ Irving Fisher stated on October 21 that the market was ‘only shaking out of the lunatic fringe’ and went on to explain why he felt the prices still had not caught up with their real value and should go much higher.”

Fisher, one of America’s most accomplished economists, was in 1929 operating with a deeply flawed analytical framework. And for years leading up to the crash the optimists had been repeatedly emboldened, as a booming stock market confirmed their view of the world. Fisher and the world were then completely blindsided. Their views of how the economy, the securities markets, policymaking and Credit interacted were completely erroneous. I expect some resolution to competing analytical frameworks will be a key Issue 2016.

Today’s conventional view holds that the underlying fundamentals supporting the U.S. economy are healthy. In general, fundamentals drive the markets. Finance is sound. China, commodities and a downshift in global growth are temporary setbacks that ensure ongoing ultra-loose monetary policies. U.S. markets will soon look beyond negatives, as focus returns to long-term favorable prospects for growth, corporate profits and inflation.

An opposing analytical framework, one to which I subscribe, is focused foremost on finance – in particular the system of securities-based Credit and securities markets that over the past thirty years rose to world dominance. Regrettably, this “system” is deeply flawed and today acutely unstable. In short, global “money” and Credit are structurally unsound. In general, and especially late in this era, market-based finance drives economies. Unprecedented central bank monetization and market manipulation have inflated securities markets along with underlying fundamentals (corporate cash flows/profits, incomes, household perceived wealth and GDP).

Why is China today so critical to global markets – including those in the U.S.? The bulls argue that a Chinese slowdown will have minimal impact on U.S. corporate profits. The harsh reality is that Chinese financial and economic crisis has the potential to push an already fragile global financial “system” over the edge. From the perspective of my analytical framework, the historic “global government finance Bubble” is faltering and will not survive a China bust.

As they say, “bull markets create genius” (unless you’re an analyst of Credit and Bubbles). And there’s also a reason they’re called “virtuous cycles” – though there’s nothing virtuous about Bubbles. But they sure look good and feel good – and inspire over-confidence (along with dreams and inflated ambitions). Things just seem to go right during booms. And it wasn’t long ago that the conventional view held that Brazil, after all these years, finally got it right. Brazilian politicians, central bankers, businessmen – and the nation’s economy – were held in high regard. Talk today is of corruption, inflation, depression, impeachment and mayhem. The Bubble burst and genius was in short order transformed to gross Incompetence.

For years (decades), China was perceived to be doing all the right things. Their system of disciplined meritocracy ensured the best and brightest were in command of one of the greatest economic miracles (and enterprising and hard-working populations) the world has ever known. Today, history’s most spectacular Bubble is bursting. Genius has so rapidly morphed into Incompetence. When Bubbles burst – and confidence turns to angst – it’s as if suddenly nothing can go right. Dwarfing even the Japanese experience, it’s astounding how decades of accomplishment have been sabotaged by seven years of runaway Bubble excess.

This is not Mexico 1995, Thailand 1997, Russia 1998, nor even Europe 2012. Approaching $35 TN (from ~$8TN in 2008), the Chinese banking system over recent years has ballooned to almost double the size of that of the U.S. In terms of economic output, China rivals the U.S. As a global hub for manufacturing, they have few rivals. And if global financial and economic ramifications were not troubling enough, there is an alarming geopolitical component to the unfolding China bust. The Chinese boom has tremendously inflated perceived wealth right along with expectations. The Chinese people do not have a ballot box. Beijing will blame foreigners, especially the U.S. and Japan. China is a most critical Issue 2016 – and fight off the calls to downplay its maladies and significance.

A Friday headline from the Financial Times: “China steps up capital controls to stem outflows - Queues form outside Shenzhen banks as regulator orders them to limit clients’ dollar buying”

China policymakers today face a dire circumstance. Chinese international reserves dropped a record $108 billion in December to $3.33 Trillion (down almost $700bn in 12 months). The year ago $4.0 TN (and growing) reserve war chest was viewed as sufficient to placate growing international concerns for the soundness of China’s economy and the finance underpinning the boom. Massive reserve holdings surely bolstered Beijing’s own confidence that ample resources were available to ensure system stability, as they moved forward with economic reform and structural adjustment.

Now, as the bursting Bubble phase gathers momentum, China’s reserves provide a crumbling foundation for confidence – internationally as well as domestically. Chinese officials might now seek to orchestrate a major currency devaluation and system reflation (comparable to past moves by the U.S., Japan and Europe). But they will face the traditional EM problem of flagging confidence – in their currency, in their banking and financial systems, in their economic structure and in policymaking. They risk further inciting destabilizing outflows – and the more aggressive Chinese fiscal and monetary stimulus the more precarious the “capital” flight issue will become.

It was always my view that there was an unappreciated downside to the inflating Chinese reserve position. There was evidence and anecdotes of enormous “capital” flight out of China (corrupt “money” as well as the affluent seeking safety). Yet these outflows were overwhelmed by massive “investment” inflows. I long suspected that huge – potentially unprecedented - “hot money” flows were being attracted by China’s high yields (i.e. corporate bonds and “shadow banking” instruments).

I believe we’re now seeing a highly destabilizing scenario unfold, where faltering financial and economic Bubbles spur de-leveraging and flight out of Chinese financial assets. At the same time, Chinese companies that issued huge amount of dollar-denominated debt are these days scurrying to accumulate dollars. Moreover, Chinese households – having accumulated Trillions of deposits and other financial claims – would today prefer to diversify some of their newfound wealth out of the depreciating yuan.

Do Chinese officials continue to expend national wealth (international reserves) to accommodate flight out of China (at top dollar)? Not many months ago Putin decided it was not in Russia’s interest to rapidly burn through the nation’s international reserve holdings.

January 7 – Under the Reuters’ headline, “Sources: China wants quick, sharp currency decline.” “China’s central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15%, as its recent gradual softening is thought to be doing more harm than good. The People's Bank of China (PBOC) has spent billions of dollars buying yuan over recent months to defend the exchange rate, but has failed to stabilize market sentiment... That gradual, managed depreciation makes the yuan a one-way bet for investors who see the currency weaken even as the central bank intervenes to prop it up. Policy insiders are now calling for a quick and sharp yuan depreciation, backed by tighter capital controls to curb speculation and the flight of money out of the country.”

Especially late in 2015, unusual anomalies throughout the interest-rate swaps derivative marketplace attracted some attention. Strange pricing relationships were generally dismissed as a consequence of extraordinary corporate debt issuance and related hedging coupled with atypically large EM central bank Treasury liquidations.

I’ll throw out some thoughts: In general, I expect so-called “price anomalies” and dislocation to be an Issue 2016 for derivatives and securities markets generally. The course of China’s currency regime shift could easily turn disorderly, spurring dislocation and illiquidity in various markets. At the same time, markets could dislocate as various leveraged currency “carry trades” unravel – certainly including what I suspect is massive embedded leverage in the yen “carry trade.” The probabilities are also substantial that EM markets could dislocate on the fear of unmanageable dollar-denominated debt. A system-wide de-leveraging episode is possible. I would argue that there has never been such a risky global backdrop with a confluence of major market fault lines.

My analysis has focused on the proliferation of leveraged strategies, speculative excess and the Crowded Trade phenomenon. For seven years now, the Fed and global central banks have inflated global securities markets with Trillions of new “money.” This “money” - along with central bank manipulation and liquidity backstops – over time effectively destroyed the normal functioning of the marketplace. Excesses were allowed to grow and become deeply embedded. And, importantly, the aberrant market backdrop worked to the disadvantage of active management relative to the indexes. Last year saw further exodus from active (to passive) management work generally to exacerbate the travails of active fund management, especially for more sophisticated “long/short,” “quant” and “risk parity” strategies.

The upshot has been, in the face of a faltering global Bubble, “money” continuing to rush into the “market” through index ETFs and similar products. According to Blackrock, $347 billion flowed into ETFs globally in 2015 to surpass $3.0 TN. Almost matching 2014’s $246 billion, another $228 billion made its way to U.S. ETFs last year. This is “money” speculating on the market, in contrast to investing in a savvy manager, a sound investment strategy or in company/industry fundamentals. Chiefly, it’s one historic bet on the conventional bullish view and faith in the ongoing genius of central bankers. This “hot money” is now at high-risk for a destabilizing rush to the exits.

I have serious issues with the underlying structure of U.S. and global financial markets that I expect to emerge in 2016. The biggest losses since the financial crisis come with bullishness and complacency deeply entrenched. It is not easy at this point to envisage the buyers who will let the ETF crowd unwind their bullish positions. It’s not obvious how markets remain liquid in the event that the leveraged speculative community is hit with large redemptions. And I have no idea how confidence in the multi-hundreds of Trillions derivatives marketplace holds when the markets begin to seize up.

And it again comes back to competing analytical frameworks. China doesn’t look all too problematic from the perspective that views the U.S. economy as healthy; U.S. finance as sound; that corporate profits and GDP will continue their long-term upward trends; and that the astute Federal Reserve has things well under control. But from the perspective of seven years of the most egregious monetary inflation in history – the “Terminal Phase” of an unprecedented multi-decade global Credit Bubble - fueling the biggest global securities Bubble in history, with history’s greatest worldwide speculative excess and most precarious economic maladjustment and imbalances ever – well, China provides a dangerous Bubble-piercing catalyst.

I expect 2016 to see some resolution to the unprecedented divergence between inflated global securities markets and deflating fundamental prospects. Portending acute economic vulnerability, faltering markets will see a tightening of financial conditions and vanishing perceived wealth. Confidence will wane – confidence in the markets, in the economy and in policymaking. It will surely make for a wild election cycle. It will also ensure a high-risk geopolitical backdrop. I expect less rate “normalization” and more QE.

Drawing from my “Core vs. Periphery” analytical framework: De-risking/de-leveraging at the “Periphery” is problematic with the potential for expanding risk aversion to exert contagion effects toward the “Core.” I’ll posit that de-risking/de-leveraging at the “Core” pushes a fragile system right back to financial crisis. As such, the first week of 2016 supports the view of a vulnerable “Core.” U.S. stocks have succumbed to “risk off.” Attention now turns to a critical Issue 2016: The soundness of U.S. and global corporate Credit.

Over recent Bubble years, incredible quantities of “money” have flowed freely into U.S. Credit. Central bank policies have ensured epic mispricing throughout U.S. and global fixed income and derivatives markets. Buyers of U.S. securities and derivatives have been willing to tolerate skinny little returns on the view that the Fed ensured minimal risk. The Fed and global central bankers readily nurtured the perception of low risk throughout global securities and derivative markets – the “Moneyness of Risk Assets.”

There’s always a vulnerability associated with money – and “Moneyness”: crises of confidence are inherently highly destabilizing. There’s a shock when holders of perceived risk-free “money”/securities/derivatives come to realize their previous misperception. As confidence in both economic fundamentals and central banking wanes, I expect already problematic fund outflows to accelerate. A tightening of financial conditions portends Credit problems way beyond energy and mining. I hope I am much too dire. Acute systemic risk on a global basis is The Big Issue 2016.

For the Week:

The S&P500 fell 6.0%, and the Dow dropped 6.2%. The Utilities were unchanged. The Banks were hammered 9.1%, and the Broker/Dealers were hit 9.5%. The Transports sank 7.5%. The S&P 400 Midcaps lost 6.4%, and the small cap Russell 2000 fell 7.9%. The Nasdaq100 dropped 7.0%, and the Morgan Stanley High Tech index fell 7.5%. The Semiconductors sank 9.5%. The Biotechs were drilled 9.9%. With bullion rallying $43, the HUI gold index surged 6.6%.

Three-month Treasury bill rates ended the week at 19 bps. Two-year government yields dropped 12 bps to 0.93% (up 37bps y-o-y). Five-year T-note yields sank 19 bps to 1.56% (up 14bps). Ten-year Treasury yields fell 13 bps to 2.12% (up17bps). Long bond yields declined nine bps to 2.93% (up 40bps).

Greek 10-year yields surged 111 bps to 8.43% (down 171bps y-o-y). Ten-year Portuguese yields rose seven bps to 2.59% (down 5bps). Italian 10-year yields fell six bps to 1.53% (down 35bps). Spain's 10-year yields dropped seven bps to 1.70% (down 2bps). German bund yields fell 11 bps to 0.51% (up 2bps). French yields sank 11 bps at 0.88% (up 10bps). The French to German 10-year bond spread was unchanged at 37 bps. U.K. 10-year gilt yields sank 19 bps to 1.77% (up 17bps).

Japan's Nikkei equities index sank 7.0%. Japanese 10-year "JGB" yields dropped five bps to a record low 0.21% (down 6bps y-o-y). The German DAX equities index sank 8.3%. Spain's IBEX 35 equities index fell 6.7%. Italy's FTSE MIB index lost 7.2%. EM equities opened 2016 on the downside. Brazil's Bovespa index fell 6.3%. Mexico's Bolsa dropped 6.3%. South Korea's Kospi index declined 2.2%. India’s Sensex equities index dropped 4.5%. China’s Shanghai Exchange sank 10.0%. Turkey's Borsa Istanbul National 100 index declined 1.6%. Russia's MICEX equities index slipped 0.7%.

Junk funds saw outflows jump to $809 million (from Lipper). Notably, investment-grade bond funds saw their seventh consecutive week of outflows ($1.1bn).

Freddie Mac 30-year fixed mortgage rates declined four bps to 3.97% (up 24bps y-o-y). Fifteen-year rates added two bps to 3.26% (up 21bps). One-year ARM rates were unchanged at 2.68% (up 29bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.08% (down 14bps).

Federal Reserve Credit last week declined $7.5bn to $4.447 TN. Over the past year, Fed Credit declined $11.9bn, or 0.3%. Fed Credit inflated $1.636 TN, or 58%, over the past 165 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.1bn to $3.311 TN. "Custody holdings" were up $11bn y-o-y, or 0.3%.

M2 (narrow) "money" supply fell $10.8bn to $12.348 TN. "Narrow money" expanded $697bn, or 6.0%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits declined $10.7bn, and Savings Deposits dipped $6.3bn. Small Time Deposits were little changed. Retail Money Funds gained $3.4bn.

Total money market fund assets shrank $24.4bn to $2.735 TN. Money Funds rose $20.3bn y-o-y (0.7%).

Total Commercial Paper jumped $25.5bn to $1.081 TN. CP declined $5bn y-o-y, or 0.4%.

Currency Watch:

January 8 – Financial Times (Gabriel Wildau): “China is ratcheting up ad hoc capital controls to stem accelerating capital outflows, with banks restricting dollar purchases amid fierce demand from households and companies. The foreign exchange regulator has provided verbal guidance to banks in Shenzhen instructing them to limit dollar buying by individual and corporate clients, according to a person with knowledge of the situation. The official Shanghai Securities News cited client managers at banks in Shenzhen including Industrial and Commercial Bank of China and Bank of China as saying that demand for US and Hong Kong dollars had increased sharply since the start of the year. Chinese residents are permitted to buy up to $50,000 annually, with the quota resetting at the beginning of the calendar year. ‘They’re focused on Shenzhen and Shanghai because that’s where demand has really spiked,’ said the person.”

January 7 – Financial Times (Jennifer Hughes, Patrick McGee and Roger Blitz): “The gap between China’s two renminbi rates widened to a new record on Thursday after authorities set the official rate sharply weaker, sending the offshore rate tumbling to fresh lows. The sharp decline in the renminbi has put investors on notice that the Chinese economy, an engine of global growth, may be slowing at a faster pace than previously forecast. Investors around the world are worried that an unexpectedly fast depreciation will further destabilise China’s economy. Some also fear it could trigger a wave of competitive devaluations across the region… Several of the biggest foreign banks in the renminbi market had been suspended, two people familiar with the situation said. They said this appeared to be an attempt by Beijing authorities to close the gap that has widened in recent weeks between the price of the onshore and offshore rates to a record level. China wanted to stop banks from arbitraging the spread between the two markets for its currency, one of the people said. ‘This is not the way we do things in the UK, but it is understandable when you think about how China is trying to bring its currency under control,’ said one of the people.”

January 7 – Bloomberg (Eric Martin): “The decline in China’s yuan is generating turbulence in financial markets across the world, including Mexico, and threatens to spark a cycle of competitive devaluations of currencies, Finance Minister Luis Videgaray said. Videgaray said that while the decline in China’s currency has been relatively small so far, it’s been enough to concern global investors and affect Mexico’s stock market and currency. Mexico’s peso touched a record low Thursday… China’s tolerance for a weaker currency is viewed as evidence policy makers are struggling to revive the economy of the world’s largest developing nation. The yuan’s decline ‘implies a risk of starting a cycle of competitive devaluations,’ Videgaray said… ‘It’s frankly a perverse process, because at the end of the day if all countries engage in a competitive devaluation, no one becomes more competitive, and you generate financial dislocations.’”

January 5 – Bloomberg (Oshrat Carmiel): “Saudi Arabia’s currency peg is no longer sustainable amid a slump in oil prices that threatens to further crimp government financing, according to Commerzbank AG. The cost of buying 12-month dollar-riyal forwards has risen almost 1% since early December to about 3.83 per dollar, Commerzbank said… Upward pressure on the forwards will probably increase over the ‘coming weeks and months,’ it said. Saudi Arabia has pegged its currency to the dollar at 3.75 since 1986. ‘Markets clearly no longer believe that the USD-SAR peg is durable,’ said Peter Kinsella, an analyst at Commerzbank… ‘If they did, then forwards would not diverge from spot prices to any large extent.”

The U.S. dollar index slipped 0.3% this week to 98.38 (up 7.0% y-o-y). For the week on the upside, the yen increased 2.7%, the Swiss franc 0.7% and the euro 0.6%. For the week on the downside, the New Zealand dollar declined 4.9%, the Australian dollar 4.8%, the South African rand 4.8%, the Mexican peso 3.9%, the Canadian dollar 2.3%, the British pound 1.6%, the Brazilian real 1.6%, the Swedish krona 0.5% and the Norwegian krone 0.2%. The Chinese yuan declined 1.6% versus the dollar.

Commodities Watch:

January 5 – Bloomberg (Megan Durisin and Jeff Wilson): “A measure of wheat, corn and soybean prices fell to a nine-year low as beneficial weather in Latin America boosted concerns that global supply gluts will expand, while a slump in equities dragged commodities lower.”

The Goldman Sachs Commodities Index sank 5.3% (down 25.2% y-o-y). Spot Gold rallied 4.1% to $1,104 (down 9.7%). March Silver increased 0.9% to $13.92 (down 15%). February WTI Crude sank $3.88 to $33.16 (down 31%). February Gasoline dropped 11.7% (down 15%), while February Natural Gas jumped 6.0% (down 16%). March Copper fell 5.3% (down 27%). March Wheat gained 1.8% (down 15%). March Corn slipped 0.5% (down 11%).

Global Bubble Watch:

January 7 – Bloomberg (Anusha Ondaatjie and Adam Haigh): “Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka… China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo. A return to positive interest rates is a challenge for the developing world, he said, adding that the current environment has similarities to 2008…. ‘China has a major adjustment problem,’ Soros said. ‘I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.’”

January 3 – Reuters (Trevor Hunnicutt): “Investors poured $347 billion into exchange-traded funds globally during 2015, fund-manager BlackRock Inc said…, setting a new record for the industry. BlackRock said its own haul of $130 billion in new money also set a record in global flows for its iShares ETF business, surpassing the previous annual record set in 2014, when investors added $103 billion… ETFs, generally a basket of stocks, bonds or other assets, grew at a record rate despite markets struggling in 2015 to deliver the broad gains they have posted since rebounding from the financial crisis in 2009. Global ETF assets now total about $3 trillion. In the United States, inflows of $228 billion last year were not enough to top the record $246 billion brought in during 2014…”

January 6 – Bloomberg (Lyubov Pronina): “Sovereign downgrades are likely to accelerate this year after negative rating outlooks were more than triple the level of positive outlooks in 2015, according to Standard & Poor’s. The balance between positive and negative outlooks… worsened in all regions except the Asia Pacific, with the most pronounced deterioration in the Middle East, the Commonwealth of Independent States and Africa, S&P said… Europe, Latin America and the Caribbean had a more moderate deterioration in outlook in 2015, it said.”

January 3 – Bloomberg (Anchalee Worrachate): “The amount of debt that the governments of the world’s leading economies will need to refinance in 2016 will be little changed from last year as nations make strides in cutting budget deficits to a third of the highs seen during the financial crisis. The value of bills, notes and bonds coming due for the Group-of-Seven nations plus Brazil, China, India and Russia will total $7.1 trillion, compared with $7 trillion in 2015…”

U.S. Bubble Watch:

January 4 – Reuters (Lucia Mutikani): “U.S. manufacturing contracted further in December as lower oil prices undercut spending in the energy sector while construction spending fell in November for the first time in nearly 1-1/2 years, suggesting the economy ended 2015 with less momentum. The downbeat reports on Monday cast a dark cloud over the near-term growth outlook and prompted economists to sharply lower their growth estimates for the fourth quarter.”

January 5 – Bloomberg (Oshrat Carmiel): “Manhattan home prices surged to a record in the fourth quarter, propelled by closings of luxury deals in new developments that were agreed to years ago… The median price of all completed co-op and condominium purchases in the borough jumped 17% from a year earlier to $1.15 million, the highest in 27 years of record-keeping, according to… appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. That tops the previous peak of $1.03 million, set in the second quarter of 2008, before the collapse of Lehman Brothers Holdings Inc. triggered a plunge in property prices and a near standstill in sales.”

January 8 – Financial Times (Robert Wright): “Boeing on Thursday provided the latest evidence of the sharp slowdown in commercial aircraft deals when it said that net orders for 2015 had nearly halved compared with 2014. News of the slowdown from the record 1,432 orders that the manufacturer captured the previous year helped to send Boeing’s shares down 4.2% to $132.98 by the close of trading.”

China Bubble Watch:

January 7 – Financial Times (Gabriel Wildau): “China’s foreign exchange reserves fell by the most on record in December, a sign of accelerating capital outflows and spending by the central bank to boost the renminbi. Reserves fell $108bn in past month to $3.33tn…, bigger than the $87bn slide in November. Reserves peaked at $3.99tn in June 2014, but have fallen for 13 of the past 15 months. The latest decline raises fresh doubts about the People’s Bank of China's ability to continue supporting the renminbi exchange rate by selling dollars from its reserves.”

January 8 – Reuters: “China's foreign exchange regulator has ordered banks in some of the country's major import and export centers to limit purchases of U.S. dollars this month, three people with direct knowledge said on Friday, in the latest attempt to stem capital outflows. The move comes as China reported its biggest annual drop in foreign exchange reserves on record in 2015, while the central bank has allowed a sharp slide in the yuan currency to multi-year lows, raising fears of more capital flight and panicking global markets. The price spread between the onshore and offshore markets for the yuan, or renminbi, has been growing since China's surprise devaluation last August, spurring Beijing to adopt a range of measures to curb outflows of capital. All banks in certain trading hubs, including Shenzhen, received the regulator's order recently, the people added... ‘It will have some impact, because it is a form of control, but at the moment the limit doesn't seem very restrictive so unless they extend the period of the limit, it's unlikely to change volumes over the whole year,’ said a senior banker in the foreign exchange department of a foreign bank. ‘It's just to stop panic buying this month,’ the banker added.”

January 7 – Bloomberg: “Even by the rough-and-tumble standards of China’s stock market, it was a chaotic 29 minutes. With share prices going into free fall almost as soon as local exchanges opened, market gurus at Huaxi Securities Co. were at a loss to explain why. One manager of $46 million in Shanghai liquidated all his holdings. Other investors, including a top-performing hedge fund, tried in vain to cash out as circuit breakers brought trading to an abrupt halt. By 9:59 a.m. local time it was all over -- except that it wasn’t. Next came a torrent of calls from angry clients upset by the carnage in a week that’s seen two abbreviated trading sessions and a 12% tumble in the benchmark CSI 300 Index. And it’s only January 7th. ‘We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit breaker,’ said Wei Wei, an analyst at Huaxi Securities… ‘We are also feeling at a loss and confused today as we didn’t quite figure out what was going on in the market.’”

January 7 – Bloomberg: “China’s foreign reserves shrank last year for the first time since 1992, ending a 22-year ascent that began under former top leader Deng Xiaoping and accelerated with presidents Jiang Zemin and Hu Jintao. The currency hoard plunged by $513 billion in 2015 to $3.33 trillion as of Dec. 31… It was dragged down down by factors including central bank intervention to prop up the yuan after an August devaluation roiled global markets and capital flight from the world’s second-largest economy, analysts said. Reserves were swelled for more than two decades by foreign capital pouring in to an economy expanding at an average 10% clip a year and a trade surplus fueled by exporters seizing market share overseas. Now policy makers are fighting to hold up the currency amid slower growth and plunging stocks, burning through assets to reduce yuan volatility. ‘The switch from reserve accumulation to decline is a major turning point in the history of Chinese development,’ said Freya Beamish, a London-based economist at Lombard Street Research Ltd. ‘It signifies a reversal of China’s role in the U.S. Treasuries market from buyer to seller.”

January 3 – Reuters (James Pomfret and Teenie Ho): “Hong Kong leader Leung Chun-ying said on Monday there was no indication so far outside agents were involved in the disappearance of five booksellers specializing in publications critical of China, but that it would be ‘unacceptable’ if any were. The disappearances have stoked fears of mainland Chinese authorities using shadowy tactics that erode the ‘one country, two systems’ formula under which the former British colony has been governed since its return to Chinese rule in 1997.”

Brazil Watch:

January 4 – Bloomberg (David Biller): “Brazil’s economy will contract more than previously forecast and is heading for the deepest recession since at least 1901 as economic activity and confidence sink amid a political crisis, a survey of analysts showed. Latin America’s largest economy will shrink 2.95% this year, according to the weekly central bank poll… Analysts lowered their 2016 growth forecast for 13 straight weeks and estimate the economy contracted 3.71% last year. Brazil’s policy makers are struggling to control the fastest inflation in 12 years without further hamstringing a weak economy.”

January 8 – Dow Jones (Rogerio Jelmayer): “Consumer price inflation in Brazil increased last year to the highest rate in 13 years, despite the country's economic contraction, underscoring one of the main challenges facing Latin America's largest economy. Brazil's consumer-price index, known as the IPCA, rose 10.67% last year, compared with an increase of 6.41% in 2014…”

January 7 – Bloomberg (David Biller): “Brazil’s industrial production fell more than all analyst forecasts in November, underscoring the challenge that policy makers face in pulling Latin America’s largest economy out of its worst slump in decades. Output in November decreased 2.4% from the previous month… From a year earlier, industrial production fell 12.4%.”

EM Bubble Watch:

January 7 – Financial Times (Elaine Moore and Jonathan Wheatley): “More than $800bn of emerging market sovereign debt is being camouflaged by the growing use of bonds that offer implicit state backing without always appearing on government balance sheets, according to new research. The stock of so-called quasi-sovereign bonds issued in dollars and other hard currencies by emerging markets has risen sharply in the past 12 months to overtake that of all external emerging market sovereign debt by the end of 2015. The growing use of such bonds suggests that developing countries are increasingly transferring debt obligations to third parties that have taken advantage of historically low interest rates to load up with cheap debt… Although official debt-to-GDP levels of countries such as India, Russia and China remain low by global standards, the growth of less visible debt which they might still have to guarantee in a crisis underlines the potential scale of their liabilities. ‘This has been a source of worry for some time, in part because it does not always appear on government balance sheets.” said Lee Buchheit, a partner at Cleary Gottlieb… ‘Emerging markets have benefited from interest rates at historic low levels and commodity prices at historic highs,” he said: “In the last year both of these have begun to unwind. If the resulting strains on a country compel a sovereign debt rearrangement of some kind, these contingent liabilities of the sovereign will need to be addressed.’”

Fixed Income Bubble Watch:

January 7 – Bloomberg (Sridhar Natarajan and Michelle Davis): “Junk-bond investors coming off their first losing year since 2008 are in the crosshairs again, as a stock-market meltdown in China and a plunge in oil prices cloud the outlook for debt sold by the least credit-worthy companies. The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, surged as much as 21 bps to 516 bps, rising toward the highest mark in three years. The average borrowing costs for the riskiest portion of the high-yield market surged to 18.5%, Bank of America Merrill Lynch index data show, a level not seen since 2009. ‘The whole world’s interrelated and you can’t get around that,’ said Andrew Brenner, head of international fixed income for National Alliance Capital Markets… ‘High-yield’s going to be under pressure just because oil’s under pressure. And you’re having this whole risk-off situation.’”

January 8 – Reuters (Michelle Kaske): “Insurance companies that guarantee Puerto Rico municipal debt filed a lawsuit challenging the constitutionality of the commonwealth’s decision to divert revenue designated for some bonds to pay other creditors. Ambac Financial Group Inc. and Assured Guaranty Ltd. said the claw back of revenue pledged to bond issues violates the U.S. Constitution by interfering with debt-holders’ contractual rights. The suit filed in U.S. District Court in Puerto Rico seeks to have the clawback declared unlawful and asks the court to issue an injunction against implementation…”

January 7 – Reuters (Davide Scigliuzzo): “The embattled US high-yield market has struggled to get back on track in the first week of 2016, after three issuers bypassed public bond sales in a sign of more trouble for the asset class. The junk-bond sector, which delivered a net loss in 2015, now faces renewed questions about the extent of demand for what is believed to be a US$90bn pipeline of bond and loan deals. Faced with a wary buyside, the private equity firms behind the buyouts of Petco and 1-800-Contacts opted to sell the riskiest portions of their financings privately… ‘It has been a tough start,’ one senior leveraged finance banker told IFR. ‘We had negative flows in December, and there is a full calendar of deals that need to come to market in the next month or so.’”

Europe Watch:

January 3 – Bloomberg (Luke Kawa): “Divergence between the U.S. and Europe goes far deeper than currency values or interest rates, according to Eurasia Group. ‘We've never seen the relationship between the United States and Europe—the most important and foundational alliance for the world's economic system—so weak since the end of World War II,’ said President Ian Bremmer… ‘This is not a relationship that we’ve seen, and it’s so critical to maintain stability not only for global markets but also for the hot spots that we're looking at.’ As tensions and turmoil in the Middle East mount, the influence of the trans-Atlantic alliance—the driving force behind major international institutions and agreements such as the North Atlantic Treaty Organization, the Bretton Woods accord, the United Nations, the World Trade Organization, the International Monetary Fund, and the World Bank—continues to wane.”

January 2 – Financial Times (Martin Arnold and Thomas Hale): “Europe’s new regime for winding up failing banks has made an inauspicious start, as investors lashed out at the European Central Bank for allowing Portugal to impose losses on almost €2bn of senior bondholders in Novo Banco. The central bank of Portugal last week moved five of 52 senior Novo Banco bond issues to the ‘bad bank’ it set up to hold the lender’s toxic assets after a bailout of Banco Espírito Santo in mid-2014. Investors have cried foul, threatening legal action and claiming Portugal is discriminating between holders of the same class of bonds and thus breaching the pari passu principle of equal treatment to protect domestic bondholders.”

January 7 – Reuters: “British Chancellor George Osborne warned… that the economy faced a ‘dangerous cocktail’ of threats from abroad and he urged against complacency after two years of solid growth. Osborne, whom Prime Minister David Cameron has named as a possible successor, said in a new year's message that Britain faced headwinds from slower growth in China, Brazil and Russia, tension in the Middle East and stock market falls… ‘This year opens with a dangerous cocktail of new threats,’ Osborne said. ‘We are only seven days into the New Year, and already we've had worrying news about stock market falls around the world, the slowdown in China (and) deep problems in Brazil and in Russia.’ Osborne made no mention of the referendum on European Union membership that Cameron has promised to hold before the end of 2017 but which many analysts expect to take place as early as June.”

Geopolitical Watch:

January 2 – Reuters (Vladimir Soldatkin): “A new appraisal names the United States as one of the threats to Russia's national security for the first time, a sign of how relations with the west have deteriorated in recent years. The document, ‘About the Strategy of National Security of Russian Federation’, was signed by President Vladimir Putin on New Year's Eve. It replaces a 2009 version… which mentioned neither the United States not NATO. It says Russia has managed to heighten its role in solving global problems and international conflicts. That heightened role has caused a reaction by the West, it says. ‘The strengthening of Russia happens against the background of new threats to the national security, which has complex and interrelated nature,’ the document says. Conducting an independent policy, ‘both international and domestic’ has caused ‘counteraction from the USA and its allies, which are striving to retain their dominance in global affairs.’ That in turn is likely to lead to ‘political, economical, military and informational pressure’ on Russia, the document says.’”

January 5 – Reuters (Tony Munroe): “North Korea said it had successfully conducted a test of a miniaturized hydrogen nuclear device on Wednesday morning. The announcement on North Korean state TV followed detection of a 5.1 magnitude earthquake near its known nuclear test site… The nuclear test is the fourth by the isolated country, which is under U.S. and UN sanctions for its nuclear and missile programs.”

January 5 – Reuters (Mohammed Mukhashaf): “Air strikes led by Saudi Arabia targeting Iran-allied Houthi forces intensified in Yemen on Tuesday, residents said, ending weeks of a relative lull in the war after a major diplomatic row erupted between the kingdom and arch foe Tehran. Large air strikes targeted military positions linked to Yemen's ascendant Houthis in the capital Sanaa, the port city of Hodaida and the disputed southwestern city of Taiz.”

January 5 – Bloomberg (Donna Abu-Nasr and Nafeesa Syeed): “The relationship between Saudi Arabia and Iran has certainly had more downs than ups, yet seldom have they come at a worse time for the region’s prospects. The latest standoff, triggered by the execution of prominent Shiite cleric Nimr al-Nimr by Saudi authorities over the weekend, risks erasing the scant progress that has been made to resolve the crises in Syria and Yemen, where the majority Sunni kingdom and mainly Shiite Iran support rival players… ‘We and the Iranians are like fire and dynamite in one room,’ Jamal Khashoggi, a former media adviser to Saudi Prince Turki al-Faisal, said… ‘It doesn’t matter who’s the dynamite and who’s the fire.’”

January 5 – Reuters (Angus McDowall): “Saudi Arabia widened its rift with Iran on Monday, saying it would end air traffic and trade links with the Islamic republic and demanding that Tehran must ‘act like a normal country’ before it would restore severed diplomatic relations. Foreign Minister Adel al-Jubeir told Reuters… that Tehran was responsible for rising tensions after the kingdom executed Shi'ite Muslim cleric Nimr al-Nimr on Saturday, describing him as a terrorist. Insisting Riyadh would react to ‘Iranian aggression’, he accused Tehran of dispatching fighters to Arab countries and plotting attacks inside the kingdom and its Gulf neighbours. ‘There is no escalation on the part of Saudi Arabia. Our moves are all reactive. It is the Iranians who went into Lebanon. It is the Iranians who sent their Qods Force and their Revolutionary Guards into Syria,’ Jubeir said.”

January 3 – Bloomberg (Donna Abu-Nasr): “Saudi Arabia’s move to isolate Iran raises the specter of deepening conflicts in the volatile Middle East after the biggest meltdown in relations between the two regional powers in almost three decades. The Saudi government and staunch ally Bahrain severed diplomatic ties, giving Iranian ambassadors 48 hours to leave after protesters set the Saudi embassy in Tehran on fire… following the execution of Saudi cleric Nimr al-Nimr, a critic of the kingdom’s treatment of its Shiite minority. The United Arab Emirates reduced its representation to the level of charge d’affaires. The clash exposes again the fault lines in the world’s tinderbox and risks worsening conflicts in Yemen and Syria, where Sunni-dominated Saudi Arabia and Shiite Iran are fighting proxy wars. The widening rift follows Saudi criticism of the U.S.-led deal last year over Iran’s nuclear program. It also comes as the collapse in the oil price strains domestic finances in a region that accounts for more than half of global reserves.”

January 2 – Bloomberg: “China’s flight to a newly built airfield on Yongshu reef in the Nansha islands is a matter ‘completely within China’s sovereignty,’ the country’s Ministry of Foreign Affairs said… in response to an official protest from Vietnam, which said the flight ‘undermines peace and stability.’ China won’t accept Vietnam’s ‘unfounded accusations’ and hopes Vietnam can work toward achieving ‘sustainable, healthy and stable’ development of bilateral ties, Hua Chunying , China’s foreign ministry spokeswoman, said…”

January 5 – Financial Times (Hannah Kuchler): “Hackers brought down the power supply to hundreds of homes in Ukraine last week, in a cyber attack believed to be the first ever to result in a power outage. The Ukrainian energy ministry said it was probing a ‘suspected’ cyber attack on the power grid, targeting several regional power companies, which the country’s intelligence service blamed on ‘Russian special services’.”