Saturday, March 12, 2016

Weekly Commentary: Thesis Update

With global risk markets staging a significant rally, it’s an appropriate time to update my bursting global Bubble thesis. Three weeks ago I titled a CBB “Crisis Management.” My view was that mounting global market instability had reached the point where concerted policy measures would be employed in an effort to bolster faltering global Bubbles. I do not expect such stimulus to succeed in resuscitating the global Bubble that inflated out of the 2009 crisis response. At the same time, policymakers obviously still retain some power to incite rallies in a grossly speculative marketplace.

Let’s try to put things into context: We’ve witnessed history’s greatest financial Bubble. The Bubble has been fueled by a confluence of extraordinary financial innovation (i.e. securitized finance, leveraged speculation, derivatives, state-directed finance, etc.), unmatched debt growth, unprecedented central bank Credit expansion and market manipulation - and the global adoption of all of the above. Especially since 2009, global central bankers have embraced extreme monetization and rate measures specifically to target rapid Credit expansion and securities market inflation.

The upshot has been the greatest expansion of speculative finance ever – finance operating as one massive “risk on” global speculative dynamic. When market participants were embracing risk-taking, this massive pool of global finance easily inflated securities and market prices virtually across the board. Over time, the divergence between inflating securities market Bubbles and deflating global economic prospects widened to precarious extremes.

Simplistically, the prospect of faltering Chinese and EM Bubbles proved a catalyst for a problematic collapse in energy and commodities prices. Rather quickly, the global Bubble began to deflate as the promise of literally Trillions of rotten Credit began to unfold – commodities-related, China, EM and risky corporate debt more generally. Confidence that policy measures could hold things together began to wane, and market vulnerabilities rather quickly reemerged.

I believe that confidence in global finance and faith in government policy measures have been irreparably damaged. This is central to my thesis that the global Bubble has burst. At the same time, now catastrophic risks ensure that policymakers employ all means to bolster the markets (sustain Bubbles). The outcome, as we’ve witnessed over recent months, is acute global market instability and volatility. When the massive pool of global finance turns risk averse, selling and hedging quickly overwhelm the markets into illiquidity and “flash crash” susceptibility. Then, when policy measures are employed to buttress frail markets, the subsequent unwind of substantial short positions and hedges spurs abrupt “rip your face off” market rallies. In short, epic market speculation is one massive Crowded Trade built on a flimsy foundation of faith in experimental policymaking, prone to the type of volatility and uncertainties that create a "money" management and performance nightmare.

Reuters ran an article Monday: “The European Central Bank is checking liquidity levels at a number of Italian banks, including Banca Carige and Monte dei Paschi di Siena , on a daily basis…”

It was a crucial week from my “Crisis Management” perspective. I have referred to Mario Draghi as the world's most influential central banker. Recall how Draghi’s failure to deliver additional QE back in early December proved a catalyst for a bout of global “risk off.” Over recent months, Europe once again demonstrated its still festering financial and economic fragilities. And with global markets having recently rallied in anticipation of concerted stimulus measures, there was a lot riding on the outcome of this past Thursday’s ECB meeting.

“Whatever it takes” Draghi was clearly determined to wrest back his reputation for “beating market expectations.” He lowered rates further into negative territory. More importantly, the ECB significantly boosted the size of monthly QE purchases by a third to euro 80 billion ($90bn). Moreover, the ECB will commence corporate debt purchases (details to come). Some analysts now expect the ECB to purchase up to $15 billion of corporate debt on a monthly basis. The ECB – and central banks more generally – are desperate to convey that they’ve not run short of ammunition.

It’s difficult to believe what has transpired at the ECB under Mario Draghi. Negative interest rates. Trillion annual QE as far as the eye can see – massive monetization of extremely overvalued sovereign bonds (including Greek, Italian and Portuguese) and now overpriced corporate debt. Expectations are that equities could be next. I always expected the Germans to eventually draw the line. Instead, we find overwhelming support for the tenet that once monetary inflation is commenced it becomes virtually impossible to rein it in.

I have argued for some time now that China has completely lost control of its Credit Bubble. This week provided important additional confirmation.

March 6 – Wall Street Journal (Mark Magnier and Lingling Wei): “China’s leaders made clear they are emphasizing growth over restructuring this year, but suggested they are trying to avoid inflating debt or asset bubbles as they send massive amounts of money coursing through the economy… And for the first time, the Chinese government specified total social financing—a broad measure of credit that includes both bank loans and nonbank lending—as a metric for helping determine monetary policy… Both measures have increased sharply in recent months… This year, the two targets are paired, with both set to rise 13%.”

It’s surprising that China’s move to target 13% broad Credit growth (“total social financing”) didn’t garner more attention. Not only would this see Credit expansion likely more than double the rate of GDP growth, it would could amount to upwards of an astounding $3 Trillion of new system Credit.

Using the U.S. Bubble as an example, total (non-financial and financial) Credit growth averaged about $700bn during the nineties. Credit Bubble dynamics had seen debt growth surge to $1.651 TN by 2003, and then inflate to $2.131 TN in 2004, $2.235 TN in 2005, $2.378 TN in 2006 and then the (still) all-time record $2.470 TN in 2007. China’s Credit target is akin to U.S. officials having in 2007 moved aggressively to boost the rate of debt growth. The problem is that 2007 debt was already of extraordinarily poor quality – enormous amounts of weak mortgage Credit financing over-priced real estate, along with unprecedented amounts of non-productive corporate and household debt (financing a highly imbalanced “Bubble Economy”). Tremendous system impairment (real economy and financial) is wrought during “Terminal Phase” Bubble excess.

Chinese officials claimed to have studied and learned from the wretched Japanese Bubble experience. And for several years China made varied and repeated efforts to rein in excess. I argued repeatedly that their Bubble would be impervious to timid measures. And as the Bubble attained only more powerful momentum, officials were unwilling to take the significant risks associated with orchestrating a bursting. China has completely capitulated. It’s now growth at any cost. Let there be no doubt, the costs are potentially catastrophic.

I have referred to a multi-decade experiment with unfettered global “money” and Credit. The U.S. experiment in economic structure, securitized finance and monetary inflation/manipulation went global. And there is the ongoing experiment in European monetary integration. There is as well the EM experiment in market-based finance and international financial flows. And now China is trapped in its own runaway experiment in central management of massive Credit expansion, economic development and currency control.

The Goldman Sachs Commodities Index rallied 10% in two-weeks. Crude (WTI) surged 17%. The Brazilian real gained about 10% over two weeks, with the Australian dollar rising 6%. There’s clearly been a major short squeeze unfold throughout commodities and EM. But on a fundamental basis, if Chinese officials ensure upwards of $3 TN 2016 system Credit growth this should at least somewhat help underpin demand for commodities (got gold?).

The Chinese are playing a very dangerous game. Peg (highly suspect) Credit growth at about $3 TN, peg (highly imbalanced) economic expansion at about 6.5% and peg their (now highly suspect) currency versus the dollar. This amounts to truly epic financial and economic impairment. And, importantly, this predicament has become rather conspicuous. Waning confidence in policymaking is fundamental to my bursting global Bubble thesis.

Markets can pretend for a time that Chinese officials have taken measures that have stabilized their finance, economy and currency – and in the process stabilized global markets. Yet the Chinese and global backdrops are anything but stable. There are already indications that acute monetary disorder is stoking a speculative melee in Chinese debt and some real estate markets.

It’s been my view that Chinese risks have been the major factor weighing on commodities and EM. And while Chinese policies have supported markets in the near-term, risks of a global crisis of confidence now rise (exponentially?) right along with prolonged historic Chinese “Terminal Phase” excess.

It’s worth noting that the euro surged abruptly on the ECB announcement, confounding central banker and market participant alike. Similar to the yen’s recent market-surprising response to additional BOJ stimulus measures, central bankers appear to have lost their capacity to manipulate currency markets. This implies major market uncertainty and volatility. Another crucial aspect of my bursting global Bubble thesis is that uncertainties now stipulate significantly less leverage throughout various currency “carry trades.” Especially since the summer of 2012, I believe currency speculation-related leverage came to play a prominent role in securities market liquidity around the globe. While the consequences of the recent momentous market shift are masked during squeezes and rallies, I expect the issue of waning liquidity to resurface whenever the next “risk off” unfolds.

It’s worth noting that Italian bank stocks rallied 8% Friday, with European bank stocks up almost 5%. Italian stocks rallied 3.9% this week, with Spanish equities up 3.2%. Italian 10-year spreads to German bunds narrowed 17 bps this week. Portuguese spreads narrowed 19 bps. Greek yields sank 79 bps. Clearly, some large bets had been waged over recent weeks on the return of systemic crisis in Europe. And perhaps Draghi and the Chinese can hold crisis at bay. But the bottom line is that central bankers have had to resort to only more obvious desperate measures, while the Chinese have succumbed to lunacy. It’s all anything but confidence inspiring.

For the week:

The S&P500 gained 1.1% (down 1.1% y-t-d), and the Dow rose 1.2% (down %1.2). The Utilities jumped 2.4% (up 11.3%). The Banks slipped 0.2% (down 10.5%), while the Broker/Dealers rose 1.7% (down 9.3%). The Transports increased 0.5% (up 2.5%). The S&P 400 Midcaps gained 0.6% (up 0.6%), and the small cap Russell 2000 increased 0.5% (down 4.3%). The Nasdaq100 rose 0.8% (down 5.0%), and the Morgan Stanley High Tech index jumped 1.4% (down 5.5%). The Semiconductors rose 1.3% (down 0.7%). The Biotechs dropped 2.2% (down 23.4%). Though bullion fell $10, the HUI gold index gained 2.0% (up 57.7%).

Three-month Treasury bill rates ended the week at 32 bps. Two-year government yields jumped nine bps to 0.96% (down 9bps y-t-d). Five-year T-note yields rose 12 bps to 1.49% (down 26bps). Ten-year Treasury yields gained 11 bps to 1.98% (down 27bps). Long bond yields increased 5 bps to 2.75% (down 27bps).

Greek 10-year yields sank 79 bps to a two-month low 8.57% (up 125bps y-t-d). Ten-year Portuguese yields fell 16 bps to 2.89% (up 37bps). Italian 10-year yields dropped 14 bps to 1.32% (down 27bps). Spain's 10-year yields declined seven bps to 1.48% (down 29bps). German bund yields gained three bps to 0.27% (down 35bps). French yields rose four bps to 0.62% (down 37bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields rose nine bps to 1.57% (down 39bps).

Japan's Nikkei equities index slipped 0.4% (down 11.0% y-t-d). Japanese 10-year "JGB" yields increased three bps to negative 0.02% (down 28bps y-t-d). The German DAX equities index was little changed (down 8.5%). Spain's IBEX 35 equities index rallied 3.2% (down 4.8%). Italy's FTSE MIB index surged 3.9% (down 11.3%). EM equities were mixed. Brazil's Bovespa index gained 1.1% (up 14.5%). Mexico's Bolsa slipped 0.3% (up 4.1%). South Korea's Kospi index increased 0.8% (up 0.5%). India’s Sensex equities index rose 0.3% (down 5.4%). China’s Shanghai Exchange dropped 2.2% (down 20.6%). Turkey's Borsa Istanbul National 100 index jumped 2.8% (up 10.7%). Russia's MICEX equities was little changed (up 6.5%).

Junk funds saw inflows $1.8 billion (from Lipper), the second straight week of big positive flows.

Freddie Mac 30-year fixed mortgage rates rose four bps to 3.68% (down 18bps y-o-y). Fifteen-year rates increased two bps to 2.96% (down 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates four bps higher to 3.78% (down 44bps).

Federal Reserve Credit last week expanded $2.2bn to $4.441 TN. Over the past year, Fed Credit declined $9.0bn, or 0.2%. Fed Credit inflated $1.630 TN, or 58%, over the past 174 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $3.4bn to $3.254 TN. "Custody holdings" were up $6.5bn y-o-y, or 0.2%.

M2 (narrow) "money" supply last week gained $14.0bn to $12.512 TN. "Narrow money" expanded $660bn, or 5.6%, over the past year. For the week, Currency increased $3.1bn. Total Checkable Deposits surged $45.5bn, while Savings Deposits dropped $33.3bn. Small Time Deposits were little changed. Retail Money Funds slipped $1.3bn.

Total money market fund assets declined $1.2bn to $2.803 TN. Money Funds rose $112bn y-o-y (4.1%).

Total Commercial Paper added $1.6bn to $1.084 TN. CP expanded $61 billion y-o-y, or 6.0%.

Currency Watch:

The U.S. dollar index declined 1.0% this week to 96.20 (down 2.5% y-t-d). For the week on the upside, the Brazilian real increased 4.5%, the Australian dollar 1.7%, the Swedish krona 1.6%, the euro 1.1%, the Swiss franc 1.1%, the Canadian dollar 0.8%, the Norwegian krone 0.8%, the South African rand 0.8% and the Mexican peso 0.4%. For the week on the downside, the New Zealand dollar declined 1.0% and the Japanese yen slipped 0.1%. The Chinese yuan increased 0.2% versus the dollar.

Commodities Watch:

March 8 – Bloomberg (Eddie Van Der Walt): “For an asset touted as a hedge against inflation, gold’s doing pretty well right now. The metal is off to its best start to the year since 1974 even as expectations for gains in consumer prices are near their weakest since the global financial crisis seven years ago.”

The Goldman Sachs Commodities Index surged 5.3% (up 6.3% y-t-d). Spot Gold slipped 0.8% to $1,249 (up 17.8%). March Silver fell 1.1% to $15.51 (up 12.4%). April WTI Crude jumped $2.54 to $38.46 (up 4%). March Gasoline surged 8.4% (up 14%), and March Natural Gas rose 7.8% (down 23%). March Copper declined 1.2% (up 5%). May Wheat jumped 3.3% (up 1%). May Corn gained 1.9% (up 2%).

Fixed-Income Bubble Watch:

March 9 – Bloomberg (Cordell Eddings): “Moody’s… raised its forecast for global junk-bond defaults this year to 4.7%, from an estimate of 4.2% just a month ago, as a prolonged downturn in commodity prices continues to ravage corporate balance sheets. ‘The corporate default cycle has turned and default rates are very likely to pick up and surpass the long-term averages,’ Moody’s credit analyst Sharon Ou wrote… ‘This forecast is the outcome of shifting economic conditions as indicated by rising high-yield spreads, and deteriorating credit quality in sectors such as oil & gas and metals & mining due to stagnating commodity prices.’ The ratings company forecasts the speculative-grade default rate to rise to the highest level since August 2010, when it reached 5.06%. The current figure is 3.7%.”

March 11 – Bloomberg (Asjylyn Loder, Steven Church and Jodi Xu Klein): “Investors are facing $19 billion in energy defaults as the worst oil crash in a generation leaves drillers struggling to stay afloat. The wave could begin within days if Energy XXI Ltd., SandRidge Energy Inc. and Goodrich Petroleum Corp. fail to reach agreements with creditors and shareholders. Those are three of at least eight oil and gas producers that have announced missed debt payments, triggering a countdown to default. ‘Shale was a hot growth area and companies made the mistake of borrowing too much,’ said George Schultze, founder and chief investment officer of Schultze Asset Management… ‘It’s amazing that so many people were willing to lend them money. Many are going to file for bankruptcy, and bondholders and equity are going to get wiped out en masse.’”

March 10 – Wall Street Journal (Timothy W. Martin): “The three big ratings firms that played a central role in the last financial crisis never got a downgrade of their own. Investors still overwhelmingly rely on Standard & Poor’s…, Moody’s… and Fitch… when deciding whether to buy bonds. The three issue more than 95% of global bond ratings, a total virtually unchanged from the pre-2008 period. Profits also are nearing all-time highs as they ride a recent wave of debt sales and push into new lines of business.”

March 8 – Bloomberg (Cordell Eddings): “The good news is that investors will find slightly better protection on leveraged loans this year. The bad news, according to Moody’s…, is that loan covenants will remain categorically weak for a fourth straight year. ‘Investors in today’s volatile market are being exposed to rising risk as they forfeit key levers traditionally available to them when a borrower is in financial distress,’ Moody’s analysts lead by Enam Hoque wrote... Data ‘indicate that covenant protections remain stubbornly weak.’ Moody’s loan covenant quality score, judged according to seven factors including asset sales without lender approval and the use of net debt in calculating leverage ratios, has remained "weak" since 2013.”

Global Bubble Watch:

March 11 – Financial Times (Dan McCrum): “The European Central Bank is not yet employing helicopters to scatter banknotes over cities. But, so far as companies are concerned, pallets of cash will soon be placed on loading bays ready for their trucks to collect. The money won’t quite be free, as that inducement was extended only to Europe’s banks in the package of measures announced Thursday. Still, plans for the central bank to start buying corporate bonds later this year prompted an immediate response in credit markets, pushing borrowing costs lower for both risky and reliable debtors.”

March 11 – Reuters (Frank Siebelt, Balazs Koranyi and Gederts Gelzis): “The European Central Bank embarked on a rearguard action to win over skeptical investors on Friday, a day after chief Mario Draghi unveiled a new stimulus package but blunted its impact by suggesting the ECB would not cut interest rates again. A number of top ECB officials, both publicly and behind the scenes, spoke out in support of the measures Draghi announced on Thursday… Shortly after announcing the package, which included cuts to all three of the ECB's key rates and even a scheme through which it could pay banks to lend, Draghi stunned investors by appearing to rule out further rate reductions. His remarks pushed up bond yields and sent the euro rising against the dollar, as investors took it to mean that the man they dubbed ‘Super Mario’ after his 2012 pledge to do ‘whatever it takes to save the euro’ was losing his touch.”

March 6 – Reuters (Marc Jones): “Financial markets' shaky start to the year shows they are losing faith in the ‘healing powers’ of central banks, the Bank for International Settlements (BIS) said… while voicing concerns over sub-zero interest rates and emerging economies. The Swiss-based organization, which fosters cooperation between central banks in the pursuit of monetary and financial stability, said that recent worries over China's economy, oil and commodity prices and some European banks had come as fundamental shifts take place in the global economy. International bank-to-bank lending is contracting for the first time in two years, the use of dollar-denominated debt to drive growth in emerging markets has ground to a halt on a strengthening of the currency that has also served to send U.S. companies rushing to borrow in euros. ‘The latest turbulence has hammered home the message that central banks have been overburdened for far too long post-crisis,’ the head of the BIS monetary and economics department, Claudio Borio, said… ‘Market participants have taken notice. And their confidence in central banks’ healing powers has -- probably for the first time -- been faltering. Policymakers, too, would do well to take notice.’”

March 10 – New York Times (James B. Stewart): “Last year, a Manhattan penthouse sold for $100 million and another went into contract for $200 million. Christie’s auctioned Picasso’s ‘Women of Algiers’ for $179 million, and Sotheby’s sold the 12-carat Blue Moon of Josephine diamond for $48.4 million. A vintage Jaguar sold for $13.2 million. For the ultrawealthy, 2015 was an embarrassment of riches. But after years of dizzying appreciation, the values of luxury assets are plateauing and in some cases plunging. Volumes have shrunk, prices are being cut and some auction lots are going unsold. ‘We’ve just come through a boom unlike anything I’ve experienced in 30 years in the business,’ Jonathan J. Miller, chief executive of Miller Samuel, a real estate appraisal and consulting firm, said of the market for high-end sales. ‘The hard asset buyers have all cooled at the same time.’”

U.S. Bubble Watch:

March 4 – Wall Street Journal (Kevin Kingsbury): “Wall Street’s earnings estimates for S&P 500 companies are falling at the fastest pace since the height of the financial crisis. Since the start of 2016, Wall Street has gone from anticipating 0.3% growth in first-quarter earnings for S&P 500 companies to an 8% decline, according to FactSet. It’s the biggest shift since the first two months of 2009… The reduction in first-quarter earnings forecasts comes as last year’s pressure points — namely oil’s price slump and a stronger dollar — persist.”

March 9 – Bloomberg (Janet Lorin): “It’s shaping up to be a difficult time for U.S. college endowments. A dozen funds that responded to requests from Bloomberg for their returns for the first six months of fiscal 2016 showed an average loss of 3.8%. Indiana University’s $2.3 billion endowment had the biggest loss at 6.1% through Dec. 31. Pennsylvania State University’s $3.7 billion fund had the smallest decline at 1.8%. The Standard & Poor’s 500 Index lost 1.6% in that time. The interim results… provide a snapshot of performance at endowments, which are typically heavily invested in equities, hedge funds and private equity.”

March 7 – CNBC (Robert Frank): “Despite volatile financial markets and slow economic growth, the U.S. added 300,000 new millionaires in 2015, bringing the total to a record 10.4 million… The number of American households with assets of $1 million or more, not including their primary residence, increased 3% last year, from 10.1 million, according to Spectrem Group…”

China Bubble Watch:

March 6 – Wall Street Journal (Mark Magnier and Lingling Wei): “China’s leaders made clear they are emphasizing growth over restructuring this year, but suggested they are trying to avoid inflating debt or asset bubbles as they send massive amounts of money coursing through the economy. The government’s announcement of a 6.5% to 7% growth target for 2016 at the start of the National People’s Congress over the weekend came with subtle acknowledgment that some of its efforts to jump-start a persistently decelerating economy have misfired, failing to steer stimulus to the most productive sectors… And for the first time, the Chinese government specified total social financing—a broad measure of credit that includes both bank loans and nonbank lending—as a metric for helping determine monetary policy… Both measures have increased sharply in recent months. But the money-supply measure fails to capture how banks and financial institutions use the funds. For instance, M2 jumped 13.3% last year while total social financing grew 12.4%... This year, the two targets are paired, with both set to rise 13%. ‘The government seeks to more accurately show where the money is going, and whether credit is being used to support the real economy,’ said Sheng Songcheng, head of the central bank’s survey and statistics department…”

March 5 – Wall Street Journal (Chuin-Wei Yap): “A credit boom is creating anxiety among executives and economists over heightened risks in China’s financial system and a wave of soured loans. China’s slowing economy—whose growth Beijing said Saturday would be maintained at an average of 6.5% over the next five years—is compounding a policy conundrum: how to generate lending without fueling what analysts have already flagged as the return of a residential property bubble. The sharp rise in money supply in recent months ‘enlivens’ capital markets but bears careful monitoring, said Fu Yuning, chairman of China Resources Holdings… ‘We are closely watching the financial risks that come from the increase in monetary supply,’ Mr. Fu told reporters… China lent $524 billion in January—an amount exceeding Norway’s annual gross domestic product—including a record $386 billion in new loans extended by Chinese banks and a surge of new issuance of corporate bonds… Central bank lending into the financial system pushed up M2… by 14% last month from a year earlier.”

March 8 – Wall Street Journal (Wei Gu and Chuin-Wei Yap): “Chinese officials are trying anew to slow an unprecedented money exodus from the country, clamping down on individuals seeking to flee the yuan and making life tougher for companies that need to trade the currency for dollars to do business. China’s foreign-exchange regulator in recent months has deployed a new system to monitor individual purchases of foreign funds and has asked banks to reduce foreign-currency transactions. It has summoned bankers to its offices to give guidance and has grilled them when foreign-exchange activity spikes… ‘There appears to be a real crackdown on money flowing out of China,’ said Jean Francois Harvey, global managing partner at Hong Kong law firm Harvey Law Corp., whose clients have had difficulty recently transferring money out of China for equipment purchases and investment. ‘Even normal business transactions which are ongoing are getting delayed.’”

March 7 – Bloomberg: “China’s foreign-exchange reserves fell at a slower pace last month as the nation’s financial markets stabilized and policy makers took more steps toward shoring up growth. The world’s largest currency hoard dropped by $28.6 billion to $3.2 trillion in February… That was the smallest decline since June and less than the $40.9 billion decrease expected by economists…”

March 9 – Bloomberg (Saijel Kishan and Enda Curran): “China’s central bank is probably using stealth measures to intervene in the foreign-exchange market and shore up its currency reserves, according to Daiwa Capital Markets. The People’s Bank of China may have bought foreign currency from local banks, used the forwards market to prop up the yuan and asked the nation’s sovereign wealth fund to liquidate overseas assets, Daiwa analysts Kevin Lai and Junjie Tang wrote… ‘As everyone is watching the foreign-exchange reserves number so carefully, it is important for the government to show a nice number,’ said Hong Kong-based Lai. ‘Otherwise there will be market panic.’”

March 11 – Bloomberg: “China’s broadest measure of new credit dropped sharply after a record surge a month earlier. Aggregate financing was at 780.2 billion yuan ($120bn) in February…, compared with the median forecast of 1.84 trillion yuan… New yuan loans were 726.6 billion yuan, compared to the estimate of 1.2 trillion yuan. China’s money supply increased 13.3% from a year earlier, the PBOC said, less than the 14% gain in the prior month and below the 13.7% economists projected. The numbers may reflect some distortions arising from the week-long lunar new year holiday in early February.”

March 7 – CNBC: “China's exports fell 25.4% on-year in February, while imports declined 13.8%, clocking far bigger slides than expected by analysts. Analysts polled by Reuters had expected a 12.5% drop in February exports, and a 10.0% drop in imports, after China's exports fell 11.2% in January from a year earlier and imports slid 18.8%. According to Reuters, the on-year decline in exports in February was the steepest since May 2009. China's trade surplus came in at $32.59 billion in February, against analysts' expectations of a $50.15 billion surplus.”

March 10 – Wall Street Journal (Rose Yu and Lilian Lin): “Growth cooled in the world’s largest light-vehicle market in early 2016, raising a caution flag for dealers becoming reluctant to put too much inventory on car lots amid concerns about the broader economy and stock market. New car sales fell modestly in February, capping off a two-month sales period that is traditionally affected by the Lunar New Year. China sold about 1.38 million cars—sedans, sport-utility vehicles and minivans—last month, down 1.5% from a year earlier.”

March 9 – Bloomberg: “China’s consumer price rose the most since mid-2014 in February as food costs jumped amid the week-long Lunar New Year holidays, where millions binge on roast pork, duck, seafood and vegetables. The consumer-price index rose 2.3% in February from a year earlier, up from 1.8% in January, as food prices surged 7.3%”

March 9 – Bloomberg: “Shanghai authorities held a meeting on Tuesday to discuss measures to cool a surge in property prices after recent frenzied residential homebuying, according to people familiar with the matter. The municipal government’s National Development and Reform Commission held discussions with regional authorities from the People’s Bank of China and the China Banking Regulatory Commission… Residential home prices in first-tier cities including Beijing, Shanghai, and Shenzhen have surged amid central bank monetary stimulus and a relaxation of housing curbs intended to boost real estate investment.”

March 7 – Washington Post (Anna Fifield): “Just as Moody’s… warns of the strain on China’s finances of debt among state-owned enterprises, the companies are loading up on record overseas loans to buy assets around the world. China National Chemical Corp., or ChemChina, got $50 billion in such financing for its $43 billion purchase of Swiss pesticides producer Syngenta AG, including $35 billion that’s being or will be syndicated offshore… That brings loans syndicated offshore for Chinese firms undertaking acquisitions, including those in the pipeline, to at least $36.3 billion this year, compared with the record $23.3 billion completed in 2015.”

March 8 – Bloomberg (David Yong): “Investors betting on troubled Chinese companies could be waiting some time for their salvation, according to U.S. law firm Jones Day. Debts tied to battered commodities and a lack of legal protections for offshore creditors will pose significant challenges for recovery of monies owed, said Jayant W. Tambe, a… partner who is representing Lehman Brothers… in derivatives lawsuits… ‘We don’t see a fundamental change in the risk factors, in that there’s still a high level of debt load and there’s still a fair amount of exposure to the commodity cycle,’ Tambe said… ‘We see an increase in defaults through the rest of 2016 in emerging markets.’”

Japan Bubble Watch:

March 9 – Reuters (Leika Kihara): “The Bank of Japan is set to hold off cutting interest rates at next week's rate review, sources say, as it scrambles to soothe market jitters caused by January's surprise decision to adopt negative interest rates. Markets are rife with speculation the BOJ will expand monetary stimulus in coming months… But many central bank policymakers are reluctant to ease again soon unless external shocks jolt global financial markets enough to derail Japan's fragile economic recovery.”

March 7 – Bloomberg (Kevin Buckland, Masaki Kondo and Shigeki Nozawa): “The amount of Japanese government bonds in the market offering negative yields has doubled this year to more than 600 trillion yen ($5.3 trillion) and that’s a major headache for the finance industry. After the Bank of Japan’s surprise decision on Jan. 29 to implement negative interest rates on some deposits, almost three-quarters of total JGBs would offer no returns or even burn a hole in balance sheets if bought now.”

Europe Watch:

March 7 – Reuters: “The European Central Bank is checking liquidity levels at a number of Italian banks, including Banca Carige and Monte dei Paschi di Siena , on a daily basis, two sources close to the matter said on Monday. Italian banking shares have fallen sharply since the start of the year amid market concerns about some 360 billion euros of bad loans on their books and weak capital levels. The ECB has been putting pressure on several Italian banks to improve their capital position.”

March 7 – Reuters (Francesco Guarascio): “Italy's 2016 budget is at risk of breaking European Union fiscal rules even if Rome is granted all possible fiscal leeway by the European Commission, euro zone finance ministers said in a joint statement… Italy has the second largest debt in the European Union after Greece and is running an expansionary budget in 2016 in a bid to revive sluggish growth. This puts Rome at odds with EU fiscal rules which require significant cuts in public debt for countries with excessive indebtedness and corrections to reduce the structural deficit. Stretching the rules, Rome asked for nearly 10 billion euros of further deficit spending in 2016…”

March 6 – Financial Times (Tony Barber): “I found myself mesmerised on Monday looking at the Italy page of a website called National Debt A 13-digit figure, representing Italy’s outstanding national debt, goes up by a couple of thousand euros every second. Now the debt is just under €2.2tn, or about 133% of Italy’s annual economic output. Despite its astronomical debt burden, the Italian government succeeded last October in selling two-year bonds at a negative yield. In other words, investors paid Italy, one of the planet’s most indebted nations for the past quarter of a century, for the honour of buying its debt. This is a topsy-turvy world that inspires me with something less than full confidence in financial markets… Italian banks held €410bn in domestic government securities in January, according to the European Central Bank. These securities account for 10.4% of the banks’ assets.”

Central Bank Watch:

March 10 – Bloomberg (Lananh Nguyen and Rachel Evans): “It took less than 90 minutes for the euro to reverse all of the decline sparked by the European Central Bank’s package of monetary stimulus. The shared currency rallied as much as 2% after ECB President Mario Draghi said he didn’t see any need to cut interest rates further. That erased an initial loss, which was driven by the central bank lowering interest rates and expanding its quantitative-easing plan, exceeding economists’ expectations for stimulus measures. The euro has risen almost 3% against the dollar this year, bucking predictions for it to weaken.”

March 10 – Bloomberg (Jana Randow and Alessandro Speciale): “European Central Bank policy makers differed the most over plans to expand bond purchases, and dissent on lowering the deposit rate centered mainly on the size of the cut, according to officials familiar with the deliberations. A handful of the 25 Governing Council members were skeptical that bolstering quantitative easing and starting to purchase corporate bonds would help boost euro-area inflation, the officials said…”

EM Bubble Watch:

March 11 – Reuters (Sujata Rao): “Recent signs of stabilisation in emerging markets may merely be the calm before the storm - a $1.6 trillion (£1.1 trillion) debt mountain is due for repayment in the next five years, a steep rise in maturities that could stir fresh trouble. The debt-servicing hump - with annual repayments jumping by more than $100 billion by 2020 compared with 2015 - is a result of a borrowing spree after the 2008 financial crisis. From African governments to Turkish banks, developing world borrowers flogged their debt on hard-currency bond markets in post-crisis years, encouraged by near-zero U.S. interest rates that sent investors hunting for higher yields. But it's payback time. Almost $1.6 trillion is due for repayment from 2016 to 2020 with corporate debt accounting for more than three-quarters of the total, according to… ICBC Standard Bank.”

Leveraged Speculation Watch:

March 11 – New York Times (Matthew Goldstein and Alexandra Stevenson): “The hedge fund titan Larry Robbins did something out of character last year. He apologized to investors for losing their money and pledged to ‘right the ship as quickly as possible’ Then he solicited more money from them, raising $1 billion for a new fund… But he keeps on losing money. Over the first two months of this year, his $9.2 billion Glenview Capital Management’s flagship portfolio lost 15%... If last year was a tough one for the swing-for-the-fences hedge fund managers who became synonymous with moneymaking in years past, the first few months of 2016 are looking just as bad. These losses have become harder for impatient investors to stomach following big losses last year.”

Brazil Watch:

March 11 – Bloomberg (Raymond Colitt, Arnaldo Galvao and Anna Edgerton): “Once again, Brazil’s embattled President Dilma Rousseff finds herself scrambling to stay in power. In just the past seven days, the long-running saga over Rousseff’s political future has deteriorated markedly, culminating on Thursday in a request by prosecutors to place her predecessor and mentor, Luiz Inacio Lula da Silva, under preventative arrest… ‘Day after day her chances of survival are plummeting,’ said Andre Cesar, a political analyst and founder of consulting company Hold Assessoria Legislativa. ‘The barrage of accusations, allies turning their back, the prospect of popular protest -- it may all become too much for her.’”

Geopolitical Watch:

March 7 – Washington Post (Anna Fifield): “The United States and South Korea kicked off major military exercises on Monday, including rehearsals of surgical strikes on North Korea’s main nuclear and missile facilities and ‘decapitation raids’ by special forces targeting the North’s leadership. The drills always elicit an angry response from Pyongyang, but Monday’s statement was particularly ferocious, accusing the United States and South Korea of planning a ‘beheading operation’ aimed at removing Kim Jong Un’s regime. The North Korean army and people ‘will take military counteraction for preemptive attack so that they may deal merciless deadly blows at the enemies,’ the North’s powerful National Defense Commission said…”

March 7 – Associated Press: “China’s foreign minister took a hard line Tuesday on the country's claims to virtually all the South China Sea, saying Beijing won't permit other nations to infringe on what it considers its sovereign rights in the strategically vital area. Wang Yi… said that another nation's claim to freedom of navigation in the region doesn't give it the right to do whatever it wants… Wang sought to deflect allegations China is militarizing the region by building military facilities on the artificial islands. He said China's development there was defensive and that other nations were being militaristic — not China. ‘China cannot be labeled as the most militaristic. This label is more suited to other countries,’ Wang said.”

March 8 – Reuters (Ben Blanchard and Kiyoshi Takenaka): “China sees little reason for optimism that relations with Japan will improve, China's Foreign Minister said…, accusing ‘two-faced’ Tokyo of constantly seeking to make trouble. China… and Japan… have a difficult political history, with relations strained by the legacy of Japan's World War Two aggression and conflicting claims over a group of uninhabited East China Sea islets. While ties have been thawing, with meetings between Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping, Beijing remains deeply suspicious of Japan, especially of Abe's moves to allow the military to fight overseas for the first time since the war.”

March 8 – Bloomberg (Anthony Capaccio): “The U.S. Army plans to bolster its presence in Europe next year with the long-term deployment of its best armor, tank-killing helicopters and infantry vehicles capable of destroying Russian armored personnel carriers. The service will increase the prepositioning of combat equipment that soldiers surging from the U.S. could use in a crisis, as the U.S. and NATO work to deter an assertive Russia… The service also has been retooling its training forces to role-play as Russian troops employing tactics they might use in assaults against Ukraine’s military, including cyberwarfare.”