Saturday, February 13, 2016

Weekly Commentary: The Global Bubble

Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder - can prove particularly hazardous (to finance and the real economy).

Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).

A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.

The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.

The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance. Declining bond yields by 1987 had helped spur rapid expansion in corporate bonds, GSE securitizations, commercial paper, securities financing (i.e. “repos,” Fed funds, funding corps) and derivative trading (i.e. “portfolio insurance”). Post-crash accommodation ensured that the Federal Reserve looked the other way as Bubbles proliferated in junk bonds, leveraged buyouts and commercial and residential real estate on both coasts.

It’s instructive to note that period’s momentous financial innovation/expansion.  In the 10-year period 1986 to 1995, total Debt Securities (from Fed Z.1 report) surged $7.097 TN, or 159%, to $11.574 TN. For comparison, bank Loans increased 73% ($3.309 TN) to $7.839 TN. Leading the charge in marketable debt issuance, GSE Securities (with their implied government backing) surged 283% ($1.777 TN) to $2.406 TN. Corporate Bonds jumped 254% ($2.213 TN) to $3.085 TN. Outstanding Asset-Backed Securities inflated an incredible 1,692% ($626bn) to $663 billion.

The other side of issuance boom was a revolution in the structure of financial asset management. Mutual Fund assets inflated 653% ($1.607 TN) during the ‘86-‘95 period to $1.853 TN. Money Market Fund assets surged 206% ($499bn) to $741 billion. Security Broker/Dealer assets jumped 288% ($860bn) to $1.159 TN. Wall Street Funding Corps rose 195% ($242bn) to $366 billion, and Fed Funds and Security Repurchase Agreements increased 171% ($802bn) to $1.271 TN. Certainly also worth noting, over this period the global derivatives market expanded from almost nonexistence to about $64 TN.

Market-based Credit is highly unstable. Predictably, the evolution to market finance created persistent instability and, over time, acute fragilities. The early-nineties saw the bursting of Bubbles in junk bonds, M&A and commercial real estate. The neglected S&L crisis festered from a few billion-dollar problem to a $300 billion debacle. By 1991, the U.S. banking system was significantly impaired.

There was a school of thought that S&L losses were akin to money flushed down the toilet. It had been destroyed and should simply be replaced with new money. “Helicopter money” was not yet reputable – much less fancied. So the Greenspan Fed instead slashed rates, manipulated the yield curve and accommodated the rapid expansion of market-based finance. If not for the ’87 bailout, the early-nineties stealth bailout and cultivation of non-bank Credit would not have been necessary.

Spurring market-based Credit - and the financial markets more generally - proved the most powerful monetary policy mechanism ever. The collapse in the Soviet Union couple with the proliferation of new technologies provided powerful impetus to New Paradigm and New Era thinking.

The unfolding historic inflation of “money” and Credit by the world’s reserve currency did not come without profound consequences. Massive U.S. Current Account Deficits flooded the world with dollar balances. Meanwhile, the flourishing leveraged speculating community broadened their targets from U.S. debt markets to higher yielding securities around the world.

By 1993, market-based finance and leveraged speculation was gaining momentum globally. Apparently there was no turning back. So it’s been serial booms, busts and progressively more audacious policy accommodation ever since. The GSEs bailed out the bond, MBS and derivative markets in 1994, ensuring much more spectacular Bubbles to come. The 1995 Mexican bailout created a backdrop ensuring that fledgling “Asian Tiger” Bubbles inflated precariously. When those Bubbles chaotically imploded in 1997, the perception took hold that the West would never allow Russia to collapse. Such thinking spurred speculative excess in Russian debt and currency derivatives that imploded in September, 1998.

Global Bubble Dynamics had certainly taken deep root by 1998. U.S.-style financial innovation was taking hold throughout Asia and Europe. Financial flows were booming across the markets, and the world’s big financial conglomerates were aggressively adopting securitization, speculation and globalization. Moreover, a booming leveraged speculating community, with trades propagating across the globe, ensured increasingly tight linkages between international markets. When Long-Term Capital Management (LTCM) – with egregious leverage along with $2.0 TN of notional derivative exposures around the globe – failed in the fall of 1998, it was a case of top U.S. officials acting as the “committee to save the world.”

The Bubble saved back in 1998/99 has inflated uncontrollably and today has the world at the precipice. Historic debt expansion unfolded virtually everywhere, much of it tradable in the marketplace. The global leveraged speculating community has inflated from about $400 billion to $3.0 TN. Global derivatives have exploded to $700 TN. An ETF complex has risen from nothing to more than $3.0 TN.

The LTCM bailout ensured an almost doubling of Nasdaq in 1999, with that Bubble imploding in 2000. I’m not so sure the euro currency would exist in its current form if not for the efforts of “the committee…”. Leveraged speculation played an instrumental role in the collapse in Italian and Greek bond yields, a miraculous development that proved pivotal for highly indebted Greece and Italy’s inclusion in the euro monetary regime. I also believe that the U.S. Credit Bubble, fueled largely by the GSEs and non-bank Credit creation, played prominently in the huge flows boosting the euro currency. Global demand for euro-based securities created fatefully loose Credit conditions for the likes of Greece, Portugal, Ireland, Italy and Spain.

If not for the “committee to save the world” and the 1998 bailouts, I doubt we would have witnessed the rise of “Helicopter Ben.” The ’87 stock market crash drove fears of another depression. Depression worries returned with the early-nineties banking crisis, and then again in 1998. When U.S. stock and corporate bond Bubbles burst in 2000-2002, Dr. Bernanke, the foremost expert on the Great Depression, was summoned to the Federal Reserve to provide the theoretical framework for a major reflationary effort.

With Wall Street cheering all the way, the Greenspan/Bernanke Fed collapsed rates and targeted (the fledgling Bubble in) mortgage Credit as the primary mechanism for system reflation. Mortgage Credit doubled in almost six years, in the process inflating home prices, corporate profits, securities prices and incomes. Much more so than the “tech” Bubble, the mortgage finance Bubble became deeply systemic. Unprecedented Current Account Deficits, the weak dollar and enormous speculative flows further inundated the world with finance. As the U.S. Credit Bubble became increasingly global, policymakers around the world remained too (pro-global Bubble) accommodative.

The bursting of the mortgage finance Bubble almost incited global financial collapse. It took concerted central bank intervention, $1.0 TN of Bernanke QE, unprecedented bailouts, zero rates and massive fiscal stimulus to hold catastrophe at bay. Massive monetary stimulus pushed fledgling EM and China Bubbles to historic ("blow-off") extremes. The Chinese instituted a $600 billion stimulus package then proceeded to completely lose control of their financial and economic Bubbles. QE, zero rates and dollar devaluation incited a spectacular Global Reflation Trade that has collapsed spectacularly. Ultra-loose finance on a global basis ensured epic over- and malinvestment throughout the energy and commodity sectors. Virtually free-“money” incited massive over-investment in manufacturing capacity, especially throughout China and Asia. In the U.S. and globally, zero rates and liquidity excess fueled crazy tech and biotech Bubbles 2.0.

Along the way the global government finance Bubble became deeply systemic. Zero rates and QE inflated securities markets and asset prices on an unprecedented scale. Leveraged securities speculation engulfed the entire globe. Derivatives trading became globalized like never before. And each instance of market vulnerability was met with an aggressive concerted central bank response. As the global Bubble succumbed to “blow off” excess, central bankers completely lost control of inflationary processes.

The European Bubble was at the precipice in 2012. If not for Bernanke’s QE gambit, I seriously doubt Draghi and Kuroda would have ever succeeded in pushing their massive “money” printing operations through the ECB and BOJ. With the Fed, ECB, BOJ and others moving forward with “whatever it takes” concerted QE, global securities Bubbles morphed into one big play on the global monetary experiment.

It’s now been more than three years of absolute monetary disorder. The commodities Bubble went bust, which, in the age of over-liquefied and speculative global markets, worked to spur only greater “blow off” excess throughout global securities markets. The EM Bubble burst, which provoked only greater stimulus measures in China. Chinese reflationary policies incited precarious “blow off” stock and bond market excesses. The timid Fed’s failure to begin rate normalization spurred speculative Bubble excess throughout equities, fixed-income and derivative markets.

On an unprecedented global scope, extreme monetary measures fueled financial excess at the expense of real economies. Monetary disorder and Bubble Dynamics ensured highly destabilizing wealth redistribution – within and between nations. Extreme central bank policies spurred leveraged speculation around the globe. Extraordinary devaluation measures from the ECB and BOJ ensured the euro and yen were used aggressively for leveraged “carry trade” speculations. “Carry trade” and currency derivative-related leverage became powerful sources of liquidity driving securities market “blow off” excess – again on a globalized basis. With the global Bubble faltering, risk is now too high to maintain highly leveraged bets.

In the face of faltering energy and commodities, weakening CPI trends, a highly vulnerable global economic backdrop and mounting social and geopolitical tension, highly unstable global securities markets lurched higher. It all became one gargantuan bet on the global central bank experiment with boundless monetary stimulus. Global securities markets diverged from fundamental economic prospects like never before.

In the end, the runaway global Bubble was built chiefly upon confidence in central banking and policymaking more generally. Markets then rather abruptly lost confidence in the ability of Chinese officials to manage their faltering Bubbles. With the historic Chinese Credit and economic Bubbles at risk of imploding – and energy and commodities collapsing - faith in the capacity of global central bankers to keep the game going began to wane. The sophisticated leveraged players commenced risk reduction - and suddenly there were few buyers. Instead of more QE, central bankers have responded to “risk off” with negative interest rates. Negative rates don’t alleviate market illiquidity and they won’t bolster faltering global Bubbles. They do intensify the unfolding crisis of confidence.

Between the faltering Chinese Bubble and the unwind of securities market speculative leverage globally, global Credit and economic backdrops have turned ominous. The downside of a historic global Credit cycle has commenced. De-risking/de-leveraging ensure a process of much tighter Credit conditions. This is problematic for leveraged speculators, companies, countries and regions – certainly including banks and securities firms around the world.

Negative rates, collapsing energy companies and weak global prospects hurt bank sentiment. Yet bank stocks are collapsing globally because of the faltering global Credit Bubble. Between waning confidence in central banking and the global banking system, one is left to question the functioning of global derivatives markets. And if counter-party risk becomes an issue in the global risk “insurance” marketplace, global securities markets quickly face a potentially catastrophic backdrop.

A tremendous number of bets were placed based on a world of ongoing liquidity abundance, risk embracement and growth. In a “risk on” world of cheap finance, the latest Greek bailout strategy appeared manageable. In today’s “risk off” faltering global Bubble reality, Greece is a disaster. Greek sovereign yields were up 370 bps in six weeks. A bursting global Bubble will shake confidence in the European periphery – and likely European integration more generally. Periphery spreads widened meaningfully again this week.

Here at home, contagion effects have made it to the investment-grade corporate debt market. In “risk on,” loose “money” as far as the eye can see, writing insurance on corporate Credit (CDS) became a quite popular endeavor. But with the market now questioning the global economy, central bank efficacy, and the soundness of the banking system and Wall Street firms, it makes more sense to unwind previous speculations and buy insurance. This equates to a major unwind of leverage throughout the corporate debt marketplace, in addition to huge amounts of additional selling to hedge new CDS trades. Suddenly, liquidity abundance is transformed into problematic marketplace illiquidity. Again, a major tightening in Credit conditions bodes ill for leveraged entities. It also bodes ill for the general economy - the Credit Cycle's self-reinforcing downside.

Booming international corporate debt markets have been instrumental in fueling the global securities market boom – and the Global Credit Bubble more generally. And I would add that perceived low-risk corporate Credit has been at the (Crowded) epicenter of the central bank-induced “Moneyness of Risk Assets” phenomenon. If I’m right on the unfolding global backdrop, prospects for corporate Credit as a liquid store of value are dismal. A Crisis of Confidence in Corporate Credit would severely impact an already fragile global financial and economic backdrop.

For the Week:

The S&P500 slipped 0.8% (down 8.8% y-t-d), and the Dow declined 1.4% (down 8.3%). The Utilities dropped 2.8% (up 5.0%). The Banks fell another 3.0% (down 18.5%), and the Broker/Dealers sank 4.1% (down 22.0%). The Transports rallied 1.5% (down 6.1%). The S&P 400 Midcaps lost 1.4% (down 9.8%), and the small cap Russell 2000 dropped 1.4% (down 14.4%). The Nasdaq100 was little changed (down 12.5%), while the Morgan Stanley High Tech index was hit 1.7% (down 17.1%). The Semiconductors dropped 2.4% (down 13.8%). The Biotechs recovered 0.3% (down 27.9%). With bullion up $65, the HUI gold index surged 10.6% (up 47.1%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields slipped a basis point to 0.71% (down 34bps y-t-d). Five-year T-note yields declined four bps to 1.20% (down 55bps). Ten-year Treasury yields fell 10 bps to 1.74% (down 51bps). Long bond yields declined seven bps to 2.60% (down 42bps).

Greek 10-year yields surged 170 bps to a seven-month high 11.03% (up 371bps y-t-d). Ten-year Portuguese yields jumped 58 bps to 3.69% (up 117bps). Italian 10-year yields rose nine bps to 1.64% (up 5bps). Spain's 10-year yields gained nine bps to 1.73% (down 4bps). German bund yields slipped three bps to a nine-month low 0.26% (down 36bps). French yields increased two bps to 0.65% (down 34bps). The French to German 10-year bond spread widened five to 39 bps. U.K. 10-year gilt yields dropped 15 bps to 1.41% (down 55bps).

Japan's Nikkei equities index sank 11.1% (down 21.4% y-t-d). Japanese 10-year "JGB" yields rose five bps to 0.07% (down 19bps y-t-d). The German DAX equities index declined 3.4% (down 16.5%). Spain's IBEX 35 equities index sank 6.8% (down 17%). Italy's FTSE MIB index dropped 4.3% (down 22.9%). EM equities were under pressure. Brazil's Bovespa index declined 1.9% (down 8.2%). Mexico's Bolsa fell 1.9% (down 1.3%). South Korea's Kospi index sank 4.3% (down 6.4%). India’s Sensex equities index was hit 6.6% (down 12%). China’s Shanghai Exchange was closed for holiday (down 21.9%). Turkey's Borsa Istanbul National 100 index sank 4.4% (down 1.1%). Russia's MICEX equities index dropped 3.1% (down 2.0%).

Junk funds saw outflows of $108 million (from Lipper). Investment-grade bond funds ended their streak of outflows at 11 weeks.

Freddie Mac 30-year fixed mortgage rates fell seven bps to an eight-month low 3.65% (down 4bps y-o-y). Fifteen-year rates dropped six bps to 2.95% (down 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 3.68% (down 68bps).

Federal Reserve Credit last week expanded $1.6bn to $4.446 TN. Over the past year, Fed Credit fell $15.9bn, or 0.4%. Fed Credit inflated $1.635 TN, or 58%, over the past 170 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $6.3bn to $3.267 TN. "Custody holdings" were up $6.9bn y-o-y, or 0.2%.

M2 (narrow) "money" supply was little changed last week at $12.467 TN. "Narrow money" expanded $675bn, or 5.7%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits fell $53.6bn, while Savings Deposits jumped $46bn. Small Time Deposits were little changed. Retail Money Funds rose $7.1bn.

Total money market fund assets increased $3.2bn to $2.755 TN. Money Funds rose $66bn y-o-y (2.4%).

Total Commercial Paper expanded $12.2bn to $1.077 TN. CP expanded $82bn y-o-y, or 8.3%.

Currency Watch:

February 12 – Reuters (Anirban Nag): “The yen was on track on Friday for its biggest weekly gain against the dollar since late 2008 as worries about global growth supported inflows to safe-haven assets, although the currency's recent surge stalled in London trade. Japanese officials stepped up their attempts to talk the yen down, with Finance Minister Taro Aso hoping that the G20 finance leaders gathering in Shanghai this month will consider a global policy response to the recent market turmoil. Major central banks including the European Central Bank, the Bank of Japan and the Swiss National Bank have all adopted negative rates to boost inflation. But these are weighing on banks' earnings and dragging down stocks globally, threatening business confidence and growth prospects.”

February 10 – Bloomberg (Lananh Nguyen and Rachel Evans): “Foreign-exchange volatility climbed to the highest level since 2012 as Federal Reserve Chair Janet Yellen signaled continuing market turmoil may hurt the prospect of multiple interest-rate increases this year. The yen rallied to the strongest level against the dollar since October 2014 while a gauge of the U.S. currency reached a three-month low. Implied one-month volatility for the euro versus the dollar rose to a two-month high on Wednesday while a similar measure of swings for the yen against the greenback remained near the highest since July 2013.”

February 11 – Financial Times (Roger Blitz): “Market turmoil often radiates from currencies and showdowns between central banks and aggressive investors. A burning question early in 2016 is how long countries such as China, Saudi Arabia and others can continue to rely on currency reserves to spare their currencies from a pronounced drop in value. As the global economy shows further signs of weakening and the collapse in commodity prices has punctured the budgets of many countries, investors are betting on much weaker currencies and the end of the Saudi peg to the dollar. Analysts are divided on whether traders or central banks will eventually triumph, but countries are burning through their reserves to hold the FX status quo…”

The U.S. dollar index declined 1.0% this week to 95.97 (down 2.8% y-t-d). For the week on the upside, the yen increased 3.1%, the Swiss franc 1.4%, the euro 0.9%, the South African rand 0.9%, the Australian dollar 0.6%, the Swedish krona 0.6% and the Canadian dollar 0.5%. For the week on the downside, the Brazilian real declined 2.5%, the Mexican peso 2.5% and Norwegian krone 0.5%. The British pound, New Zealand dollar and Chinese yuan were unchanged versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index rallied 1.1% (down 5.3% y-t-d). Spot Gold surged 5.5% to a one-year high $1,238 (up 10.6%). March Silver jumped 6.0% to $15.76 (up 14.2%). March WTI Crude declined $1.86 to $29.14 (down 21%). March Gasoline rallied 4.7% (down 18%), while March Natural Gas sank 4.4% (down 16%). March Copper fell 2.9% (down 5.0%). March Wheat declined 2.0% (down 3%). March Corn fell 1.9% (unchanged).

Fixed-Income Bubble Watch:

February 9 – Bloomberg (Liz McCormick): “Worldwide gains in sovereign bonds sent Japan’s benchmark 10-year yield below zero for the first time and have guided U.S. Treasuries to the best start to a year since 1988 as investors seeking the safest assets gorge on government debt. Yields on Treasury 10-year notes touched the lowest in a year while those on short-dated German securities slid to a record, as U.S. stocks followed shares in Europe and Asia lower. Volatility in Treasuries reached the highest since September as the U.S. sold $24 billion in three-year debt at the lowest yield in almost two years. There’s now $7 trillion of government debt with yields below zero globally…”

February 7 – Wall Street Journal (Matt Wirz): “Hedge funds are betting the next bond sector to crack will be the $4.5 trillion market for the safest U.S. corporate debt. New York’s Perry Capital has placed a $1 billion wager against investment-grade bonds issued by 10 companies it thinks are especially susceptible… The bet and others like it reflect a belief that this year’s economic uncertainty and market turbulence are evidence of deeper problems that won’t be confined to vulnerable areas such as energy and junk bonds. Investment-grade debt held up during the pummeling of the junk-bond market last fall, but pressure started to show in recent months.”

Global Bubble Watch:

February 12 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japanese policymakers on Friday said they would seek a global policy response from G20 nations to world market turbulence, as the country's central bank governor dismissed suggestions the rout was caused by the bank's new negative interest rate policy. Underscoring Tokyo's alarm over the relentless drop in stock prices, Prime Minister Shinzo Abe held talks with Kuroda for the first time in nearly five months to discuss global economic and market developments. ‘I explained the BOJ's thinking on quantitative and qualitative easing with negative interest rates and its effects,’ Kuroda told reporters after the meeting, adding that Abe made no particular remarks on monetary policy.”

February 11 – Reuters (Claire Milhench and Sujata Rao): “The cost of insuring exposure to Deutsche Bank subordinated debt via CDS rose on Thursday to a record high as mounting fears about European banks' profitability led to a heavy selloff in their shares. Data from Markit showed that five-year subordinated credit default swaps (CDS) for Deutsche Bank rose 85 bps from Wednesday's close to a record high of 540 basis points, whilst one-year subordinated CDS blew out 114 bps to 552 bps. The five-year senior CDS rose 43 bps from Wednesday's close to 275 bps, the highest level since 2011… European bank shares have hit multi-year lows this week on fears about their ability to cope with a low-growth, low interest rate environment. The STOXX Europe 600 Banks index fell 6% on Thursday to its lowest level since August 2012. Shares in Deutsche Bank have hit their lowest since 2009, having lost 40% so far this year…”

February 9 – Financial Times (Joe Rennison): “Investors have rushed to buy protection against banks’ declining bond prices, amplifying concerns over the health of financial companies. A popular credit derivatives index that tracks the likelihood of default of investment-grade debt of European companies and banks was trading at 118 bps on Tuesday, near its highest level since June 2013. The value of the contract should increase as the value of the debt it references falls, protecting investors from losses. The surge in the cost of credit default swaps reflects growing investor anxiety about the health of Europe’s banks and highly indebted companies…”

February 11 – Financial Times (Thomas Hale): “Last year, investors who braved the riskiest class of bank debt were rewarded. So-called coco bonds, which convert to equity or are written down when banks run into trouble, returned almost 7% over 2015. Already this year, the music has stopped. A Bank of America index for the asset class is down 8% so far. More startling moves have occurred for specific European banks. A €1.75bn Deutsche coco fell below 71 cents…, while securities sold by UniCredit and Banco Popular are trading below 75 cents. The coco market, which was crafted by regulators to transfer banking risk to investors and away from taxpayers, is still new and relatively untested. No bank has defaulted or missed a payment on the bonds, which are mostly referred to as additional tier one capital (AT1) and are intended to boost financial stability. Instead, doubts over cocos has intensified turmoil in bank stocks, fanning a fresh wave of risk aversion across financial markets.”

February 10 – Bloomberg (Simon Ballard): “The volatility and credit spread gyrations seen in the financial space over the past 24 hours may be the consequence of more than just investor unease over Deutsche Bank AG’s ability or otherwise to meet obligations on its riskiest bonds and other debt service costs… Rather it probably highlights the extent to which investors have chased yield down the capital structure over the past couple of years and are now left exposed to possible re-pricing risk. From a regulatory perspective, Contingent Convertible Bonds, known as CoCos or additional Tier 1 securities, were developed to be a strategic funding tool -- a regulatory capital buffer to prevent systemic collapse of important financial institutions. Effectively, CoCos are designed to fail, without bringing down the bank itself in the process. The key problem in understanding the true risk embedded in this asset class, though, might be that it has never been tested.”

February 11 – Bloomberg (Jeffrey Voegeli): “Credit Suisse Group AG plunged to a 27-year low as a selloff across the industry compounded doubts about Chief Executive Officer Tidjane Thiam’s restructuring plans. A rout in bank stocks deepened on Thursday after France’s Societe Generale SA missed fourth-quarter profit estimates, with earnings declining 35% at the investment bank. Credit Suisse shares dropped as much as 9%...”

February 8 – Bloomberg (Sofia Horta E Costa and Lukanyo Mnyanda): “As the global market rout deepens, Greek assets are again the ones that are suffering the most. The nation’s stocks are back to being the biggest decliners of the year as they fell to their lowest prices since 1990. Its bonds, which have already lost more than three times as much as the second-worst performer in the euro area in 2016, saw yields on securities maturing in a decade rising to more than 10%. With growing concern over global market turmoil and yet another stalled bailout review in Greece, investors are abandoning assets deemed riskier. Greek banks, which have already lost almost all of their market value, plunged a further 24% on Monday, the most since August.”

U.S. Bubble Watch:

February 10 – Bloomberg (Oliver Renick): “Amid the worst start for stocks ever, one long-time buyer is standing firm: U.S. companies. Whether that’s reason for optimism is debatable. American corporations repurchased more of their own shares in the first four weeks of the year than they did in the same period of 2015… Goldman Sachs… told clients this week that buybacks are accounting for nearly 20% of trading volume… Corporations have been one of the biggest sources of fresh cash for equities, churning out more than $2 trillion through repurchases, data from S&P Dow Jones Indices show. Through Dec. 21, 2015, last year was on pace for the biggest year of buybacks since 2007, according to S&P.”

February 9 – New York Times (Clifford Krauss and Michael Corkery): “On the 15th floor of an office tower in Midland looms a five-foot-long trophy black bear, shot by the son of an executive at Caza Oil & Gas. But it is Caza that has recently fallen prey to a different kind of predator stalking the Texas oil patch: too much debt. While crude prices have dropped more than 70% over the last 20 months, a reckoning in the nation’s vast oil industry has only just begun. Until recently, companies were able to ride out the slump using hedges to sell their oil for higher than the low market prices. In recent months, however, most of those hedges expired, leaving a number of oil companies low on cash and unable to pay their debt. More broadly, energy executives and their lenders are realizing that a recovery in oil prices is at least a year away, too long for many companies to hold out.”

February 10 – Bloomberg (Aleksandra Gjorgievska and Cordell Eddings): “The cost for U.S. junk-rated energy companies to borrow in the bond market exceeded 20% for the first time ever after Goldman Sachs… said oil may drop below $20 a barrel. The difference between the price of holding high-yield debt sold by energy companies and ultra-safe Treasuries widened to record levels, according to Bank of America Merrill Lynch indexes. The move was part of a global rout that has seen stocks tumble toward a bear market and volatility rise amid fears of a worldwide economic slowdown. Crude could drop ‘into the teens,’ from about $30 on Tuesday, before supply and demand are brought back into balance, according to Goldman Sachs.”

Federal Reserve Watch:

February 10 – Bloomberg (Christopher Condon, Jana Randow and Craig Torres): “Chair Janet Yellen said the Federal Reserve still expects to raise interest rates gradually while making it clear that continued market turmoil could throw the central bank off course from the multiple increases that policy makers have forecast for 2016. ‘Financial conditions in the United States have recently become less supportive of growth,’ Yellen said in testimony… before the House Financial Services Committee… ‘These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market.’”

China Bubble Watch:

February 7 – Dow Jones (Lingling Wei): “China's foreign-exchange reserves fell to the lowest level in more than three years in January… The People's Bank of China said Sunday that the world's largest stockpile of foreign currency plunged by $99.5 billion last month, to $3.23 trillion. The drop follows a record $107.9 billion drop in December and continues a decline that has accelerated since last fall, triggered by a deepening economic slowdown, a weakening yuan and concerns among businesses and people that those trends will worsen. The steep decline raises questions about how long Beijing can keep the fight going without triggering a loss of public confidence in the yuan and a massive capital flight.”

February 5 – New York Times (Neil Gough): “At every turn in his improbably rapid rise, Ding Ning, 34, went to great efforts to convey the image of strong government backing for his Internet financing business. There was his company’s lavish annual meeting and banquet last year in Beijing’s Great Hall of the People, where China’s legislature meets and where top government leaders host official functions. Adding a splash of celebrity to the event were Zhou Tao, a nationally famous actress and host on the government’s main television broadcaster, and several mid-ranking officials, bureaucrats and lawmakers. There were the positive profiles in state-controlled media, as well as the company’s advertising on official TV. There was the section of his company’s website devoted to building Communist Party spirit. But it all came crashing down in dramatic fashion for Mr. Ding this week, when the police alleged that his financing business, Ezubao, was a $7.6 billion Ponzi scheme…”

February 10 – Bloomberg (Katia Porzecanski): “Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis. Should the Chinese banking system lose 10% of its assets because of nonperforming loans, the nation’s banks will see about $3.5 trillion in equity vanish, Bass… wrote in a letter to investors… The world’s second-biggest economy may end up having to print more than $10 trillion of yuan to recapitalize banks, pressuring the currency to devalue in excess of 30% against the dollar, according to Bass.”

Central Bank Watch:

February 9 – Bloomberg (Maria Tadeo): “Central banks’ ultra-loose monetary policy is putting the world economy at risk, said William White, a senior adviser to the Organization for Economic Cooperation and Development. Negative interest rates and quantitative-easing programs from the U.S. to Japan may have unintended side effects such as higher debt levels for both sovereigns and consumers, said White, who leads the OECD’s Economic and Development Review Committee. Central bankers have been dragged away from their focus on inflation as governments struggle to generate sustainable growth, he added. ‘The objective of that policy has changed totally -- it’s trying to stimulate aggregate demand and the honest truth is that it’s not capable of doing that in a sustainable way,’ White said… ‘If people thought we were in a period of deleveraging that would set the scene for a period of robust growth. We haven’t even started yet.’”

February 11 – New York Times (Landon Thomas Jr.): “What if the bazooka is shooting blanks? Since the financial crisis, it has been gospel for many investors that some combination of actions by central banks — bond buying, bold promises or flirtations with negative interest rates — would be enough to keep the global economy out of recession. But investors’ distress over the latest volley by a major central bank, the surprise decision on Thursday by the Swedish central bank to lower its short-term rate to minus 0.50% from minus 0.35%, has heightened fears that brazen actions by central bankers are now making things worse, not better. Global stock markets sank, the price of oil plunged to a 13-year low and investors fled to safe haven instruments like gold and United States Treasury bills.”

February 12 – Reuters (John O'Donnell): “The European Central Bank is in talks with the Italian government about buying bundles of bad loans as part of its asset-purchase programme and accepting them as collateral from banks in return for cash, the Italian Treasury said. The move could give a big boost to a recently approved Italian scheme aimed at helping banks offload some of their 200 billion euros (200 billion pounds) of soured credit and free up resources for new loans. Nonetheless, it would likely fuel a debate in other countries about whether the ECB is taking on too much risk by buying asset-backed securities (ABS) based on loans that have not been repaid for roughly three months.”

EM Bubble Watch:

February 7 – Wall Street Journal (Anjani Trivedi): “Central banks in some emerging markets are stepping up efforts to flood their financial systems with cash, highlighting the pressure that they face from rapid capital flight. The moves amount to a collective turnabout from months of interest-rate cuts in 2015 that helped send emerging-market currencies down by as much as 20% to 30% over the past year… The shift in approach was on display last week when India’s central bank left its key policy rate unchanged at 6.75%, after slashing rates by 1.25 percentage points last year. But now, the central bank is pumping more money into its financial system than at any point in the past year by snapping up government bonds and giving banks cash via short-term loans known as repurchase agreements… Between 2010 and 2014, an average of $1.2 trillion worth of foreign private capital flowed into emerging markets each year, according to the IIF. Last year, these countries collectively saw their first net cash outflows since 1988.”

February 12 – Reuters (Rajesh Kumar Singh): “India's retail inflation unexpectedly edged up to a 17-month high in January, while industrial production contracted at a faster-than-expected pace in December, underscoring imbalances lurking in Asia's third-largest economy. Retail prices rose 5.69% on year in January, their fastest pace since August 2014, government data showed on Friday. The rise compared with a 5.4% increase predicted by analysts in a Reuters poll and a 5.61% annual gain in December. Output at factories, utilities and mines shrank an annual 1.3% in December…”

Leveraged Speculation Watch:

February 9 – Bloomberg (Robin Wigglesworth): “Last year was a terrible one for ‘risk parity’, once one of the hottest strategies in the investment world, as losses mounted and some analysts blamed it for exacerbating market turbulence. So far 2016 has offered little respite. At its core, the risk parity strategy is about balance. Rather than spread investments according to old-fashioned rules of thumb — such as 60% in equities and 40% in bonds — risk parity funds invest equally in asset classes according to their mathematical volatility, so each contributes equally.”

February 10 – CNBC (Nasos Koukakis): “Renowned fund managers who invested hundreds of millions of dollars in the troubled Greek banks are trapped in uncertainty caused by the political developments in Greece and global financial turmoil. John Paulson, Prem Watsa, Wilbur L. Ross and other funds, such as Brookfield Capital Partners, Capital Research & Management, Mackenzie Cundill, Schroder Investment Management and Wellington Management are among those who invested more than 10 billion euros ($11.3bn) of capital in the Greek banking system over the past couple of years. Many of them saw the $6.7 billion worth of investments in Greek banks that they made in February 2014 evaporate just a year later… Although they lost their initial bet on Greek banks, last November they dared to put an additional 4 billion euros ($4.45bn) worth of funds into the Greek banking system. Greek bank shares have plunged as uncertainty over yet another stalled bailout review weighs on the country's economic recovery prospects.”

February 11 – Bloomberg (Sonali Basak): “Paul Taubman, whose PJT Partners Inc.’s advisory business has helped hedge funds raise $25 billion over the past decade, said market turbulence may spur investors to flee such bets. ‘In the hedge fund world there’s no doubt that with all this volatility, you’re seeing either a slowing of net inflows or outright outflows,’ Taubman said… ‘What that does, it creates more of a flight to quality.’ Hedge funds recorded net investor capital outflows for the first time since 2011 in the fourth quarter amid market volatility even though industry assets rose during 2015 to $2.9 trillion, according to… Hedge Fund Research Inc. Those outflows may represent only a fraction of investor activity since some redemption requests submitted in the fourth quarter haven’t yet shown up in the data.”

Europe Watch:

February 11 – Bloomberg (Andrew Mayeda): “Greece will face renewed fears that it will exit the euro area unless the nation’s government and European creditors come up with a credible plan to make the country’s debt sustainable, a top IMF official said. ‘We have yet to see a credible plan for how Greece will reach the very ambitious medium-term surplus target that is key to the government’s plans for restoring debt sustainability,’ Poul Thomsen, head of the International Monetary Fund’s European Department, wrote… ‘A plan built on over-optimistic assumptions will soon cause Grexit fears to resurface once again and stifle the investment climate.’ Greece will need both reforms to its pension system and debt relief from its European creditors to bring its debt levels under control, said Thomsen, who oversees the IMF’s Greek bailout program. Without pension reforms, the country won’t be able to reach its goal of a primary surplus of 3.5 percent of gross domestic product, he said.”

February 9 – Reuters (Michael Nienaber): “German industrial output plunged in December at the steepest rate in 16 months and exports unexpectedly dropped, in a sign that Europe's largest economy ended 2015 on a weak footing. The unexpectedly weak data raised questions about the future growth prospects of Germany's traditionally export-oriented economy…”

February 10 – Reuters: “Europe’s top four economies suffered steeper drops in industrial output during December than any analyst had forecast, a grim sign for the global economy as it struggles to sustain momentum. Wednesday’s industrial output data for Britain, France and Italy followed news a day earlier of a shock plunge in Germany, setting back expectations that economic growth across the continent might be picking up in 2016.”

Japan Watch:

February 11 – Wall Street Journal (Takashi Nakamichi): “A close adviser to Prime Minister Shinzo Abe said Friday that the Bank of Japan may call an emergency meeting to undertake additional monetary easing if financial markets remain turbulent. Etsuro Honda, a former finance ministry bureaucrat, said the government needs to delay a sales-tax increase scheduled for next year and should consider an additional fiscal stimulus package. Mr. Honda’s remarks, made during an interview with The Wall Street Journal, underline a heightened sense of urgency among Japanese policy makers as the yen’s resurgence and plummeting stocks threaten to further undermine an already fragile economy. The central bank has no policy meeting scheduled until mid-March, but Mr. Honda predicted that the BOJ wouldn’t wait until then…”

Geopolitical Watch:

February 10 – Reuters (Daren Butler): “Turkish President Tayyip Erdogan upbraided the United States for its support of Syrian Kurdish rebels on Wednesday, saying Washington's inability to grasp their true nature had turned the region into a ‘sea of blood’. Turkey should respond by implementing its own solution, he said, alluding to the creation of a safe zone in northern Syria - something Ankara has long wanted but a proposal that has failed to resonate with the United States and other NATO allies. His comments, a day after Turkey summoned the U.S. ambassador over its support for Syrian Kurds, displayed Ankara's growing frustration with Washington, which backs Syrian Kurdish rebels against Islamic State militants in Syria's civil war.”

February 9 – Reuters (Steve Scherer and Gavin Jones): “The European Union faces ‘critical times’ and all its members should set aside selfish interests to tackle problems such as immigration and terrorism, the bloc's six founding nations said… A week after the EU accepted that some members may never go further in sharing sovereignty, as part of the price for keeping Britain in the club, Germany, France, Italy, Belgium, the Netherlands and Luxembourg pledged to pursue ‘ever closer union’ at a meeting in Rome, where they founded the bloc in 1957. ‘We are concerned about the state of the European project,’ the foreign ministers of the Six said… ‘Indeed, it appears to be facing very challenging times. It is in these critical times that we, as founding members, feel particularly called upon.’”

February 12 – Reuters (Pavel Polityuk): “Hackers used a Russian-based internet provider and made phone calls from inside Russia as part of a coordinated cyber attack on Ukraine's power grid in December, Ukraine's energy ministry said on Friday. The incident was widely seen as the first known power outage caused by a cyber attack, and has prompted fears both within Ukraine and outside that other critical infrastructure could be vulnerable.”