Friday, March 25, 2016

Weekly Commentary: All is Not Well

The 1987 stock market crash raised concerns for the dangers associated with mounting U.S. “twin deficits.” Fiscal and trade deficits were reflective of poor economic management. Credit excesses – certainly including excessive government borrowings – were stimulating demand that was reflected in expanding U.S. trade and Current Account Deficits. Concerns dissipated with the revival of the bull market. These days we’re confronting the consequences of 30-plus years of mismanagement.

Japan was the early major recipient of U.S. Bubble excess (throughout the eighties). The world today would be a much different place if the policy onus had fallen upon the Fed and congress to rein in U.S. borrowing excesses. Instead, enormous pressure was placed on Japan (and, later, others) to ameliorate trade surpluses with the U.S. by stimulating domestic demand. Such stimulus measures were instrumental in (repeatedly) stoking already powerful Bubbles to precarious extremes.

Fiscal and Current Account Deficits exploded in the early-nineties post-Bubble period. And as the nineties reflation gathered momentum, the boom in Wall Street and GSE finance pushed the Current Account to previously unimaginable extremes. Then, as the decade progressed, the associated global boom in dollar-based finance proved ever more destabilizing. Always ignoring root causes, each new crisis provided an excuse to further stimulate/inflate.

The fundamentally unsound dollar proved pivotal for European monetary integration, as the strong euro currency coupled with global liquidity abundance ensured runaway Bubble excesses throughout Europe’s periphery. If the U.S. could run perpetual Current Account Deficits, why not Greece, Italy, Spain and Portugal? Having ignored problematic financial and economic imbalances for years, when European troubles erupted everyone turned immediately to pressure the big surplus economy (Germany) to further stimulate their Bubble economy.

Economists traditionally viewed persistent Current Account Deficits as problematic. But as New Paradigm and New Era thinking took hold throughout the nineties, all types of justification and rationalization turned conventional analysis on its head. The U.S. was the world’s lone superpower, leading the world into a golden age of new technologies and free-market Capitalism. The Greenspan Fed believed a paradigm shift of enhanced productivity boosted the economy’s “speed limit”. Financial conditions turned perpetually loose. And if the Bubble burst, just call upon some fanatical academic willing to evoke “helicopter money”.

With U.S. officials turning their backs on financial excesses, Bubble Dynamics and unrelenting Current Account Deficits, I expected the world to lose its appetite for U.S. financial claims. After all, how long should the world be expected to trade real goods and services for endless U.S. IOUs?

As it turned out, rather than acting to discipline the profligate U.S. Credit system, the world acquiesced to Bubble Dynamics. No one was willing to be left behind. Along the way it was learned that large reserves of U.S. financial assets were integral to booming financial inflows and attendant domestic investment and growth. The U.S. has now run persistently large Current Account Deficits for going on 25 years.

Seemingly the entire globe is now trapped in a regime of unprecedented monetary and fiscal stimulus required to levitate a world with unmatched debt and economic imbalances. History has seen nothing comparable. And I would strongly argue that the consequences of Bubbles become much more problematic over time. The longer excesses persist the deeper the structural impairment.

Not many months ago bullish Wall Street strategists and pundits were celebrating the backdrop. It appeared to many that global central bankers had mastered the perpetual “money” machine. Markets could only go higher. Yet one would have to be delusional not to recognize the darkening clouds overtaking the world and U.S. Look no further than global terrorist attacks, geopolitical tension and the sour U.S. political discourse as confirmation that All is Not Well.

Over the years, I’ve been accused of being a left-wing liberal as well as a right-wing conservative. I’m pretty determined to keep politics out of the CBB. Yet it’s fundamental to my analysis that years of monetary and fiscal mismanagement are elemental to today’s darkening social mood. The “establishment” is despised. Washington policymakers and Wall Street are held in complete contempt. And, importantly, Capitalism is under attack. Globalization is now viewed with deep suspicion. The establishment is shocked that trade deals are these days seen as disadvantageous to U.S. workers. Integration and cooperation has become a game for suckers.

Instead of the world turning against the ever inflating quantities of U.S. financial claims circulating around the globe, it’s the American working class that has become increasingly fed up with the structure of the economic system. Trading new financial claims for inexpensive imports worked almost miraculously. For longer than I ever imagined, unfettered global finance spurred a historic capital investment boom - in China, Asia and EM. But this Bubble has burst globally, while the U.S. economy is left with much of its industrial base gutted and workers suffering stagnant wages. Most now refuse to view the future through rose-colored glasses.

Many have just had enough of the BS – from politicians, from Wall Street, from “Big Business,” the media and the inflationist Federal Reserve. We now face the downside of years of monetary inflation, including the consequences of repeatedly inflating expectations. Folks are understandably disillusioned. The political season has cracked things wide open.

Gross global economic imbalances and maladjustment are being exposed. The rank inequities of the existing structure are feeding social, political and geopolitical instability. Wall Street can continue to pretend that all is well – while the backdrop clearly turns more disconcerting by the week.

My thesis remains that the global Bubble has burst. Current risks are extraordinary, and global officials are at this point wedded to desperate measures. The ECB increased QE to over $1.0 TN annually, while adding corporate debt to its shopping list. Chinese officials have stated their intention to stabilize their currency, while spurring 13% system Credit expansion (to ensure 6.5% GDP growth). Market perceptions hold that the Bank of Japan is willing to boast QE, while the Fed would clearly not hesitate to again call upon QE as necessary.

Global markets have rallied strongly over the past month. Bear market rally or a springboard to another bull run? Or has it all regressed to a sullied game where only the timing of unfolding fiasco is unknown. Fundamental to the Bursting Bubble Thesis is that a most protracted global Credit Cycle has finally succumbed. “Terminal Phase” excess has left conspicuous wreckage throughout the Chinese economy and financial system – with momentous global ramifications. China – along with the global Bubble - now faces the dreaded day of reckoning. Confidence in Chinese policymaking has waned – just as faith is fading in the capacity of QE to rectify the world’s ills.

I have viewed 2016’s pronounced weakness in global financial stocks as important validation of the Burst Bubble Thesis. After rallying with the market, financial underperformance has reemerged.

Here at home, the Securities Broker/Dealers (XBD) sank 3.1% this week, increasing y-t-d losses to 10.8%. The Banks (BKX) dropped 1.6%, with a 2016 decline of 11.3%. And while Chinese stocks mustered a small advance for the week, the Hang Sang Financial Index declined 1.1% (down 11.7% y-t-d). I have posited that a vulnerable Europe resides “at the margin” of the faltering global Bubble. With this in mind, European financial stocks deserve close attention. This week saw the STOXX Europe 600 Banks Index slammed 4.9%, increasing y-t-d losses to 19.8%. Italian banks were hit 3.8% (down 29% y-t-d).

While on the subject of vulnerable rallies and Europe, it’s worth noting that French and Spanish stocks dropped about 3% this week, while Italian equities fell 2.4%. German bund yields declined another three bps (to 18 bps), while periphery spreads widened (Greece +17, Spain +12, Portugal +6 and Italy +6).

March 25 – Bloomberg (Rich Miller and Alexandre Tanzi): “On the face of it, the latest government update on how the U.S. economy performed in the fourth quarter looked a bit more encouraging. Growth was revised to a 1.4% annualized pace from a previously estimated 1%... consumer spending rose more than previously thought. Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5% in the fourth quarter from the year-ago period, the biggest drop since a 31% collapse at the end of 2008 during the height of the financial crisis. For 2015 as a whole, pretax earnings fell 3.1%, the most in seven years…”

I view unfolding profit deterioration as a consequence of the secular downturn in U.S. and global Credit. The real earnings pain will unfold as securities markets succumb to the deteriorating domestic and global backdrop – the self-reinforcing downside of so-called “wealth effects” and financial engineering.

Acutely unstable currencies markets are also central to the Burst Global Bubble Thesis. This week saw the dollar lurch higher and recently strong currencies hit with losses, the type of unpredictability and volatility that are anything but conducive to leverage. And while on the subject of leverage:

March 23 – Financial Times (Izabella Kaminska): “The spike in US Treasury bond fails to deliver, which started earlier this year, is something we’ve been watching closely. It’s fair to say we’re now at a significant milestone and the story is beginning to go mainstream. From the WSJ on Tuesday: ‘Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repos through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised…’ Over at ADMISI Paul Mylchreest has dubbed it a $450bn plumbing problem…”

All is not well in leveraged speculation…

For the week:

The S&P500 slipped 0.7% (down 0.4% y-t-d), and the Dow declined 0.5% (up 0.5%). The Utilities added 0.4% (up 13.8%). The Banks fell 1.6% (down 11.3%), and the Broker/Dealers were hit 3.1% (down 10.8%). The Transports lost 1.8% (up 5.6%). The S&P 400 Midcaps dropped 1.1% (up 1.1%), and the small cap Russell 2000 sank 2.0% (down 5.0%). The Nasdaq100 slipped 0.1% (down 4.1%), and the Morgan Stanley High Tech index declined 0.1% (down 4.2%). The Semiconductors declined 1.3% (up 0.4%). The Biotechs gained 1.3% (down 24.6%). With bullion down $38, the HUI gold index sank 5.5% (up 54.2%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields gained three bps to 0.87% (down 18bps y-t-d). Five-year T-note yields rose five bps to 1.38% (down 37bps). Ten-year Treasury yields increased three bps to 1.90% (down 35bps). Long bond yields slipped a basis point to 2.67% (down 35bps).

Greek 10-year yields rose 14 bps to 8.50% (up 118bps y-t-d). Ten-year Portuguese yields increased three bps to 2.94% (up 42bps). Italian 10-year yields gained three bps to 1.30% (down 29bps). Spain's 10-year yields jumped nine bps to 1.52% (down 25bps). German bund yields declined three bps to 0.18% (down 44bps). French yields fell three bps to 0.53% (down 46bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields were unchanged at 1.45% (down 51bps).

Japan's Nikkei equities index rallied 1.7% (down 10.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.10% (down 36bps y-t-d). The German DAX equities index declined 1.0% (down 8.3%). Spain's IBEX 35 equities index sank 2.9% (down 7.9%). Italy's FTSE MIB index was hit 2.4% (down 15.2%). EM equities equities were mixed. Brazil's Bovespa index dropped 2.3% (up 14.6%). Mexico's Bolsa added 0.4% (up 6.2%). South Korea's Kospi index slipped 0.4% (up 1.1%). India’s Sensex equities index gained 1.5% (down 3.0%). China’s Shanghai Exchange added 0.8% (down 15.8%). Turkey's Borsa Istanbul National 100 index fell 1.9% (up 13.5%). Russia's MICEX equities index declined 2.4% (up 6.0%).

Junk funds saw inflows $2.156 billion (from Lipper), the fourth straight week of big positive flows.

Freddie Mac 30-year fixed mortgage rates declined two bps to 3.71% (up 2bps y-o-y). Fifteen-year rates fell three bps to 2.96% (down 30bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 3.81% (down 31bps).

Federal Reserve Credit last week expanded $4.5bn to $4.451 TN. Over the past year, Fed Credit declined $2.5bn, or 0.1%. Fed Credit inflated $1.640 TN, or 58%, over the past 176 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $4.4bn to $3.256 TN. "Custody holdings" were up $22.4bn y-o-y, or 0.7%.

M2 (narrow) "money" supply last week jumped $22.8bn to $12.534 TN. "Narrow money" expanded $693bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $46.9bn, while Savings Deposits fell $23.7bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.8bn.

Total money market fund assets fell $14.8bn to $2.752 TN. Money Funds rose $71bn y-o-y (2.6%).

Total Commercial Paper declined $7.7bn to $1.090 TN. CP expanded $58 billion y-o-y, or 5.6%.

Currency Watch:

The U.S. dollar index rallied 1.1% this week to 96.13 (down 2.6% y-t-d). For the week on the downside, the British pound declined 2.4%, the Canadian dollar 2.0%, the New Zealand dollar 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Australian dollar 1.3%, the South African rand 1.2%, the Norwegian krone 1.3%, the euro 0.9%, the Swedish krona 0.9%, the Swiss franc 0.8% and the Mexican peso 0.8%. The Chinese yuan declined 0.7% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index fell 2.2% (up 5.2% y-t-d). Spot Gold dropped 3.1% to $1,217 (up 14.7%). March Silver sank 3.9% to $15.20 (up 10%). April WTI Crude was little changed at $39.46 (up 7%). March Gasoline rose 2.7% (up 15%), while March Natural Gas fell 5.2% (down 23%). March Copper declined 2.3% (up 4%). May Wheat was unchanged (down 2%). May Corn increased 0.8% (up 3%).

Fixed-Income Bubble Watch:

March 21 – Wall Street Journal (Katy Burne): “Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repo through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised.”

March 20 – Bloomberg (Alexandra Scaggs and Liz McCormick): “The world’s biggest bond dealers are getting saddled with Treasuries they can’t seem to easily get rid of, adding to evidence of cracks in the $13.3 trillion market for U.S. government debt. The 22 primary dealers held more Treasuries last month than any time in the last two years… While at first glance that may suggest a bullish stance, the surge in holdings is more likely the result of investors including central banks dumping the debt on the firms, said JPMorgan… strategist Jay Barry. Foreign official accounts sold a net $105 billion of the securities in December and January, an unprecedented liquidation…”

March 23 – Bloomberg (Finbarr Flynn, Katie Linsell and Cordell Eddings): “Mario Draghi and Haruhiko Kuroda have handed a big gift to U.S. companies like Coca-Cola Co. and General Electric Co.: piles of money from European and Japanese investors. Nearly $8 trillion of bonds globally have negative yields now, which has spurred fund managers from around the world to buy corporate debt in the U.S… ‘Draghi has forced me as a European investor to look at overseas holdings that aren’t euro-denominated,’ said James Tomlins, a… high-yield money manager at M&G Investments… ‘The potential for returns is much better in the U.S.’…Demand from Asian and European investors has already helped cut risk premiums on U.S. investment-grade corporate bonds by about half a percentage point since mid-February, according to Bank of America Merrill Lynch…”

March 21 – Financial Times (Joe Rennison): “Investors in bonds backed by risky loans remain broadly positive on deals that include the debt of pharmaceutical company Valeant, despite this week’s warning from Moody’s. The… rating agency cautioned that roughly a third of the group’s loans had been packaged into collateralised loan obligations, securities in which loans are pooled together into bonds and sold to investors. Moody’s estimated $3.4bn worth of loans had been purchased by CLOs…”

Global Bubble Watch:

March 22 – Bloomberg (Simon Kennedy): “After more than 600 interest-rate cuts and $12 trillion of asset purchases failed to move the inflation needle enough, central banks may need to head even deeper into uncharted territory. The way to get the world out of its disinflationary rut could lie in them directly financing government stimulus -- a strategy known as deploying ‘helicopter money’ after a 1969 proposal from Nobel laureate Milton Friedman. Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks, while hedge fund titan Ray Dalio sees potential in the idea. European Central Bank officials are already squabbling about what President Mario Draghi calls a ‘very interesting concept.’ ‘We don’t know for certain that ‘helicopter money’ will be the next attempted silver bullet, however the topic is receiving considerably more attention,” said Gabriel Stein, an economist at Oxford Economics... ‘The likelihood is reasonably high of some form being implemented somewhere.’”

March 20 – Bloomberg (Katia Dmitrieva): “Buyers from China comprised about one-third of purchases of Vancouver’s hot housing market in 2015, according to ‘back of the envelope calculations’ by National Bank of Canada. Chinese investors spent about C$12.7 billion ($9.6bn) on real estate in the western Canadian city in 2015, or 33% of its C$38.5 billion in total sales, according to… analyst Peter Routledge… In Toronto, they made up 14% of purchases, or about C$9 billion of the C$63 billion in deals.”

March 23 – Bloomberg (Donal Griffin and Richard Partington): “Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said the firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business. ‘This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank’ when the firm laid out a strategy in October, Thiam, 53, said… ‘There needs to be a cultural change because it’s completely unacceptable,’ adding that there had been ‘consequences’ for some employees.”

Federal Reserve Watch:

March 23 – CNBC (Steve Liesman): “Fed Chair Janet Yellen has something of a mini revolt on her hands. Four of the 17 members of the Federal Open Market Committee have now publicly indicated their disagreement with the dovish guidance in last week's policy statement and in comments from Fed Chair Janet Yellen at her press conference. The latest dissenter is Patrick Harker, the new president of the Philadelphia Fed, who said… that the Fed should ‘get on with’ rate hikes and consider another move in April. He joins centrists John Williams of San Francisco and Dennis Lockhart of Atlanta who… said the Fed should consider an April hike. Esther George, the Kansas City Fed president… dissented at the meeting last week and called for a 25 bps hike.”

March 23 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets. ‘You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,’ Bullard, who votes on policy this year, said… ‘I think we are going to end up overshooting on inflation’ and the natural rate of unemployment, he said.”

U.S. Bubble Watch:

March 21 – CNBC (Jeff Cox): “If the stock market rally is going to continue the next couple of months, it will have to do so against an aggressively worsening profit backdrop. The corporate earnings picture is ugly and getting uglier in a hurry, with S&P 500 companies expected to post an 8.3% decline in first-quarter profits from the same period a year ago. While history suggests that earnings season always ends up looking better at the end than it did at the beginning, if the current trend holds up it will be the worst period since the third quarter of 2009, according to FactSet.

March 21 – Reuters (Caroline Valetkevitch): “U.S. companies are once again relying on a lot of financial engineering to boost earnings, suggesting that last year's weak profit picture may have been even worse than it seemed… S&P 500 companies reported adjusted earnings - which often exclude one-time charges and taxes - for the last 12 months that were 30% higher than income they reported based on generally accepted accounting principles, or GAAP, analysts at Evercore ISI… said. That is the biggest difference for a 12-month period since 2008, the year of the U.S. financial crisis, and the third highest since 1994… Fourth-quarter S&P 500 earnings declined 2.9% from a year ago, while revenue fell 3.6%, Thomson Reuters data showed.”

March 24 – Bloomberg (Selina Wang): “In recent months, venture capital firms and mutual funds have become choosier about which technology startups they’re prepared to back. Now hedge funds, after helping push valuations to dot-com-era heights, are getting more picky, too. Last month, hedge funds participated in the fewest number of venture capital rounds in U.S. tech companies since 2013, inking just two deals, according to… PitchBook Data… Like VCs, hedge funds are more circumspect because some startups have failed to live up to their billing. Plus, in the wake of several disappointing tech IPOs, many of the most promising firms are choosing to stay private longer, meaning it takes longer to cash out. Investors’ stinginess is forcing startups to cut costs, fire workers and accept more stringent terms when raising money. ‘We’ve completely stopped investing in private tech,’ said Jeremy Abelson, a portfolio manager at Irving Investors... ‘I’m done with intangible valuations, unknown exits, unknown liquidity, and I want something that if I put my money into it now, I’m not going to hit a grand slam, but I’m going to get something that’s immediately yielding.’”

March 24 – Bloomberg (Janet Lorin): “The managers of U.S. college endowments try hard to earn more for their schools than a plain-vanilla portfolio of stocks would. That’s never easy, and lately it’s been especially tough. Fifteen endowments that provided Bloomberg with total returns for the second half of 2015 lost 3.6% on average. In the same period, the Standard & Poor’s 500-stock index earned a slight gain with dividends.”

March 23 – Bloomberg (Romy Varghese): “New Jersey’s credit-rating outlook was revised to negative from stable by Standard & Poor’s, which cited the ‘significant long-term pressures’ the state is under from employee benefit liabilities and the risk the situation will worsen.”

China Bubble Watch:

March 23 – Nikkei Asian Review (Iori Kawate): “Excessive debt held by Chinese companies and households is highlighting a grave reality behind the country's economy. In a sign that this debt is being regarded as a risk to the global economy, it became a topic of discussion at a meeting of G-20 finance ministers and central bank governors held in February. China even appears to be taking steps similar to Japan's moves in its own post-bubble era. Total credit to the Chinese private non-financial sector stood at $21.5 trillion at the end of September 2015, accounting for 205% of the country's gross domestic product… In Japan, the figure accounted for more than 200% of the nation's GDP at the end of September 1989, when the country was in the late stage of its economic bubble. After that bubble burst, the number shot up to 221% by the end of December 1995… And now in China, the outstanding amount of total credit to the private sector has surged 300% from the end of December 2008.”

March 20 – Bloomberg (Ye Xie and Fox Hu): “Not since 1999 have China’s companies had so much trouble getting customers to actually pay for what they’ve bought. It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers. As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation’s public firms have swelled by 23% over the past two years to about $590 billion… The raft of unpaid bills -- bigger than at any time since former Premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century -- shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China’s vast web of interconnected supply chains.”

March 22 – Reuters (David Stanway): “China's campaign to slim down its bloated industries could be derailed by more than $1.5 trillion of debt in its steel, coal, cement and non-ferrous metal sectors, which threatens to overwhelm local banks. Tackling industrial overcapacity has become a priority for Beijing to make its slowing economy more efficient and address a supply glut that has hammered coal and steel prices. China is providing more than 100 billion yuan ($15bn) in the next two years to handle layoffs from coal and steel, but that will only be made available once debts have been settled. Critics say there is no clear mechanism for tackling the debt burden, which will put huge strain on the weakest sections of the banking sector.”

March 20 – Financial Times (Patti Waldmeir): “China’s central bank governor has warned that the country’s corporate debt levels are too high and are stoking risks for the economy, just as highly-leveraged Chinese companies have gone on an overseas takeover binge. Adding his voice to a recent chorus of concern by senior Chinese officials, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), told global business leaders meeting in Beijing that the ratio of lending to gross domestic product was becoming excessive. ‘Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side,’ he said… Corporate debt in China has risen to about 160% of GDP, while total debt is about 230%, according to Financial Times estimates.”

March 20 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan sounded a warning over rising debt levels, saying corporate lending as a ratio to gross domestic product had become too high and the country must develop more robust capital markets. China still has a problem with illegal fundraising and financial services are insufficient, Zhou said… He said the country still needs regulation to guard against excessive leverage in foreign currencies. ‘Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,’ Zhou said. He said a high leverage ratio is more prone to macroeconomic risk.”

March 25 – Bloomberg: “Shanghai officials announced stricter real-estate regulations Friday to help cool a market where new-home prices soared 21% in February from a year earlier. Buyers will need to show they’ve been in the city for five years, and some second homes will require down payments of at least 70%.”

ECB Watch:

March 23 – Reuters (Dhara Ranasinghe): “Expanding QE could see the European Central Bank owning up to 25% of the 7 trillion euro government bond market, analysts estimate, exacerbating worries about bond scarcity and thin market conditions. It could also hold as much as 10% of top-rated corporate debt in the euro area after announcing this month it will include bonds of investment-grade non-financial firms in its asset purchase scheme from the second quarter. The ECB has said it will increase its bond-buying by 20 billion euros (£16bn) to 80 billion euros per month from April.”

March 19 – Reuters (Michelle Martin): “‘Helicopter money’, or free cash dished out to citizens in a bid to stimulate spending and inflation, would end up costing euro zone states and therefore taxpayers, the head of Germany's central bank said in an interview with German newspapers. After years of increasingly desperate attempts to kick-start growth, some bankers and finance officials fear policymakers are running out of effective ammunition and future stimulus efforts could even be harmful. Economists say ‘helicopter money’ would be a last resort. ‘Helicopter money is not manna that falls from heaven - it would actually rip huge holes in central bank balance sheets… Ultimately euro zone states and therefore taxpayers would end up having to bear the costs because there wouldn't be central bank profits for a long time,’ said Weidmann…”

March 23 – Reuters (Jochen Elegeert and Toby Sterling): “Dutch Central Bank President Klaas Knot, who has voted against recent monetary easing by the European Central Bank, said… that the measure had reached the limit of its effectiveness. Knot said further bond purchases by the ECB would encroach on a ban on financing government spending that is enshrined in its charter. …Hhe said that, while further easing was technically possible, ‘the question is whether the added value of doing more is worth the side effects’. ‘I have my doubts,’ he added. He cited a list of problems caused by quantitative easing including financial bubbles, ‘an unhealthy hunt for yield, rolling of problem loans, increasing wealth inequality, and an addiction to low interest rates’.”

Europe Watch:

March 23 – Bloomberg (Tom Beardsworth): “Credit Suisse Group AG’s forecast for a second straight quarterly loss, mainly because of trading operations, has stoked perceived credit risk at European banks. Costs for insuring European lenders’ subordinated and senior bonds climbed to two-week highs on Thursday, based on Markit iTraxx indexes of credit-default swaps. Contracts tied to Deutsche Bank AG and UniCredit SpA have led increases in the past week.”

Japan Watch:

March 22 – Reuters (Stanley White): “Japan's manufacturing activity contracted in March for the first time in almost a year as new export orders shrank sharply, a preliminary business survey showed…, in a worrying sign that the global economy is weakening. The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 49.1 in March on a seasonally adjusted basis from a final 50.1 in February… The sub-index for new export orders fell to a preliminary 45.9 from 49.0 in February…”

Central Bank Watch:

March 21 – Bloomberg (Jill Ward): “The European Central Bank and the Bank of Japan are essentially trying to push down the values of their respective currencies with the use of negative interest rates, former Bank of England Governor Mervyn King said. ‘There are clearly limits’ to the effectiveness of negative rates, King said… ‘I think you can see with Japan and the euro area, that in essence, the central banks are trying to push down the exchange rate. Most countries in the world could say now, ‘If only the rest of the world was growing normally, we’d be fine. But since it isn’t, we aren’t. What’s left? Push down the exchange rate.’”

EM Bubble Watch:

March 23 – Bloomberg (Amogelang Mbatha): “South African inflation accelerated to 7% in February, the fastest pace since June 2009, adding to the central bank’s policy dilemma of rising consumer prices and slowing economic growth. The inflation rate jumped from 6.2% a month earlier…”

Leveraged Speculation Watch:

March 24 – Bloomberg (Nishant Kumar): “Investors allocated a net $4.4 billion to hedge funds in February, 80% less than the average pledged during the month since 2010, according to… eVestment. February typically sees increased inflows as investors rebalance their portfolios and the drop reflects investor dissatisfaction with returns last year… In the six years to 2015, investors added an average $22.6 billion in net new capital to hedge funds every February.”

March 24 – Bloomberg (Sabrina Willmer): “A Blackstone Group LP mutual fund that allocates money to hedge funds lost almost half of its assets this month as the fund’s biggest backer, Fidelity Investments, slashed its stake. Clients withdrew $585.5 million from the Blackstone Alternative Multi-Manager Fund in the first three weeks of this month, leaving it with $631.2 million in assets…”

Brazil Watch:

March 21 – Bloomberg (Simon Kennedy): “Petroleo Brasileiro SA, the oil producer at the center of Brazil’s largest corruption scandal, reported a record loss that surprised analysts and sent shares lower. The fourth quarter net loss of 36.9 billion reais ($10.2bn), caused by unprecedented asset writedowns linked to falling oil prices… At 46.4 billion reais, the impairments equated to more than a third of Petrobras’s market capitalization and exceeded the equity value of 97% of publicly-traded firms in Brazil.