Weekly Commentary: Another Coin in the Fuse Box

It’s not as if we’re lacking history as to how this works. Some two decades ago the Greenspan Fed’s “asymmetrical” (baby-step “tightening” measures versus aggressive rate slashing and market support) policy approach emboldened speculation and nurtured precarious Bubble Dynamics. “Asymmetrical” then took on a whole new meaning during the post “tech” Bubble backdrop, as the Greenspan/Bernanke Fed held rates at 1% in the face of double-digit mortgage Credit and house price inflation. Confidence that the Fed (and Washington) would never tolerate a housing bust proved fundamental to prolonged excesses that ensured a historic Bubble.

Credit is inherently unstable. Market-based Credit is potentially highly destabilizing. And I would strongly argue that the proliferation of market-based Credit within a global backdrop of unfettered “money” and Credit is a recipe for catastrophe. This is the heart of the problem that officials refuse to acknowledge.

The profound financial innovation that gathered momentum during the nineties beckoned for a major monetary policy rethink. Special precautions were needed to ensure that monetary management was not allowed to compromise market discipline. In short, increasingly speculative and leveraged markets required a shorter leash; the Federal Reserved needed to “lean against the wind.”

The Fed responded to market changes, although it took the opposite approach: Monetary policy shifted to providing an increasingly unstable marketplace more certainty, liquidity and market backstops. Moreover, the Fed looked the other way as the GSEs evolved into powerful liquidity backstops for the leveraged speculating community. The Fed repeatedly accommodated market speculation, as the game became rigged in favor of sophisticated market operators. Indeed, the activist Federal Reserve turned progressively assertive in using market manipulation as a stimulus mechanism.

Back in 2011, when the Fed was formalizing its “exit strategy,” I titled a CBB “No Exit.” At the time the Fed publically detailed its plans for normalizing interest rates and, importantly, its balance sheet that had inflated to $2.1 TN. I was confident that our central bank was much too optimistic in the markets’ capacity to absorb the selling associated with the Fed shrinking its securities holdings. I had no idea that rather than “normalizing” the Federal Reserve’s balance sheet, a few years later it would approach $4.5 TN.

I have in the past posited that the individual QEs exerted quite divergent effects. QE1 essentially accommodated marketplace deleveraging. If not for QE1, the hedge fund and derivative complexes would be a fraction of their current size. QE2 unleased massive liquidity that fueled “Terminal Phase” excess throughout EM and commodities Bubbles. Then, with EM Bubbles faltering and bond markets floundering, the QE3 liquidity onslaught set it sights on the asset class with the strongest upward momentum at the time: equities. Liquidity will seek out assets with the strongest inflationary biases.

Yet the Fed remained disinterested in the actual consequences of its “money”-printing operations. Theory claimed that injecting huge amounts of liquidity into the securities markets would raise the general price level and spur spending, investing and economic development more generally. If results demonstrated less than outright effectiveness, it was only because monetary stimulus had been employed in insufficient quantities.

When the Bernanke Fed scrapped its “exit strategy” it was imperative to avoid conveying an “asymmetrical” approach to its balance sheet – that it would be very hesitant to reduce holdings (extract liquidity from the marketplace) while quick to aggressively expand its securities portfolio (create liquidity). The Fed needed to state emphatically that the nuclear option was now off the table. Our central bank did the opposite and the predictable materialized: the Fed (and global central bankers) became hostage to runaway securities market Bubbles.

Bernanke committed yet another huge blunder back in 2013 – one that went largely unnoticed. When an intense “risk on” market backdrop began to waver, he commented that the Fed was ready to “push back against a tightening of financial conditions.” By this time, booming securities markets had become even more essential to the functioning of the broader economy – through both the financing channel (debt and equity) and wealth effects. That the Fed years after the crisis was so sensitive to any indication of fledgling market risk aversion, along with the Fed repeatedly delaying even a little 25 bps start to rate “normalization,” essentially signaled to the marketplace that the Fed had little tolerance for a bout of “risk off,” let alone a bursting Bubble or bear market.

The Fed should have from the get-go (2009) – back when the scheme was developed to induce “money” into the risk markets; back when the securities markets and associated wealth effects were the centerpiece of extraordinary post-Bubble reflationary measures – they should have formulated a strategy to ensure it did not become locked into sustaining market Bubbles of its own making. Somehow, the overarching central bank “financial stability” mandate has morphed into ensuring Bubbles don’t burst.

Back in the 1960s, Alan Greenspan was said to have explained to a group of ideological compatriots that the Great Depression was caused by the Fed repeatedly putting “coins in the fuse box” during the Roaring Twenties Bubble period. About that same time, Milton Friedman came with a revisionist view: the twenties were the “Golden Age of Capitalism,” while responsibility for the Great Depression rested primarily with the derelict Federal Reserve that failed to both administer aggressive monetary stimulus after the stock market crash and recapitalize the banking system.

(Friedmanite) Dr. Bernanke professes that a senseless shortage of money was the root cause of economic depression. If only helicopters had been available to drop money on families to buy shoes and automobiles; on corporations to invests and hire; on governments to spend; and on banks to recapitalize and lend – the despair and destruction of the Great Depression could have been avoided.

I side with the Roaring Twenties “coins in the fuse box.” Repeatedly, the inexperienced Fed backstopped the boom. The perception that the Fed could abrogate financial and economic crises became paramount. Confidence was certainly bolstered by momentous technological advancement coupled with unmatched gains in national wealth. And throughout the decade, securities speculation and leveraging proliferated. After awhile it seemed normal.

Securities leveraging had surreptitiously evolved into the prevailing source of system Credit and leveraging that was fueling a highly imbalanced “Bubble Economy.” By the late-twenties, “Wall Street” had essentially become a massive financial scheme, reliant on ever increasing amounts of securities Credit and speculative excess. Intense speculation, liquidity abundance and booming securities markets had financed scores of enterprises that were viable only so long as the Bubble continued to inflate. The financial scheme collapsed with the 1929 stock market crash, ushering in a period of acute instability for both the financial system and real economy. The Great Depression was fundamentally the system’s response to the deep systemic structural impairment that had compounded throughout the Bubble period.

Long ago it was well understood that central banks should not be in the Credit allocation business. There needed to be an intense debate when the Greenspan Fed bailed out the stock market in 1987, slashed rates and manipulated the yield curve in the early-nineties, and then became intensely involved in various bailouts throughout the nineties. There needed to be an intense debate about the role of the GSEs. There needed to be an intense debate about the radical notions of Dr. Bernanke. There needed to be an intense debate about the Fed’s ploy to use mortgage Credit to reflate. There needed to be an intense debate about the Fed targeting securities market inflation and all the QEs. Policies were accepted without serious discussion in 1987 because of the fear of another Great Depression; in the early-nineties because of fear of deflation, ditto the nineties as well as the new Millennium.

Chair Yellen’s Tuesday (The Economic Club of New York) speech is worthy of serious discussion. A Bloomberg headline: “Yellen Takes Control of Fed Message to Stress Gradual Approach.” It was already clear to everyone that the Fed would take an extremely gradual approach to “normalization.” The chair’s assertiveness gives the appearance of global monetary policy being dictated by team Draghi, Yellen, Carney, Kuroda and Zhou. It’s remarkable that Yellen deems it necessary to assure the markets that the Fed is prepared to employ additional “money” printing (QE):

Yellen: “Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis to put additional downward pressure on long-term interest rates and so support the economy--specifically, forward guidance about the future path of the federal funds rate and increases in the size or duration of our holdings of long-term securities. While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.”

Yellen: “In December, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate, the Federal Reserve's main policy rate, by 1/4 percentage point. This small step marked the end of an extraordinary seven-year period…”

Noland: Moving short-term rates slightly above zero surely does not mark the end of years of extraordinary policy accommodation.

Yellen: “As has been widely discussed, the level of inflation-adjusted or real interest rates needed to keep the economy near full employment appears to have fallen to a low level in recent years. Although estimates vary both quantitatively and conceptually, the evidence on balance indicates that the economy's ‘neutral’ real rate--that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential--is likely now close to zero.”

Noland: The concept of a so-called ‘neutral’ Fed funds rate is deeply flawed. The securities markets now dictate whether the backdrop is “expansionary” or “contractionary” – and powerful “risk on” or “risk off” dynamics can these days take hold at any level of short-term interest rates.

Yellen: “In my remarks today, I will explain why the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years…”

Noland: The acutely unstable Bubble backdrop will for the duration provide convenient justification for gradualism. More importantly, maintaining extraordinary accommodation and prolonging Bubble excess only exacerbates structural impairment and systemic risks more generally.

Yellen: “More generally, the economy will inevitably be buffeted by shocks that cannot be foreseen. What is certain, however, is that the Committee will respond to changes in the outlook as needed to achieve its dual mandate.”

Noland: With the fragile global (faltering Bubble) backdrop in mind, such comments signal to market participants that another round of QE is virtually inevitable.

Yellen: “Financial market participants appear to recognize the FOMC's data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important ‘automatic stabilizer’ for the economy… In addition, the public's expectation that the Fed will respond to economic disturbances in a predictable manner to reduce or offset their potential harmful effects means that the public is apt to react less adversely to such shocks--a response which serves to stabilize the expectations underpinning hiring and spending decisions.”

Noland: Market participants are all too confident that the Fed subscribes to the “whatever it takes” monetary management school of ensuring that Bubbles don’t burst. When de-risking/de-leveraging starts to gain momentum, bond yields collapse in anticipation of safe haven demand and crisis management policy measures. Chair Yellen may see this as an “automatic stabilizer,” while I view it as yet “Another Coin in the Fuse Box.” Bear markets and recessions are Capitalism’s indispensable circuit breakers.

Yellen: “Such a stabilizing effect is one consequence of effective communication by the FOMC about its outlook for the economy and how, based on that outlook, policy is expected to evolve to achieve our economic objectives. I continue to strongly believe that monetary policy is most effective when the FOMC is forthcoming in addressing economic and financial developments such as those I have discussed in these remarks, and when we speak clearly about how such developments may affect the outlook and the expected path of policy.”

Noland: The Fed has learned frustratingly little from previous fiascos. Extended periods of ultra-low interest rates in conjunction with public assurances of liquidity support and market backstops promote leveraged speculation along with associated financial and economic imbalances. Central bank “transparency” is pro-Bubble and thus counter-productive to financial stability.

Yellen: “The FOMC left the target range for the federal funds rate unchanged in January and March, in large part reflecting the changes in baseline conditions that I noted earlier. In particular, developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December. Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”

Noland: More importantly, global Bubble and policy backdrops ensure the FOMC's (and global central banks’) proclivity to use unconventional monetary policy (i.e. QE) in response to market disturbances. At this stage of heightened monetary disorder, prospects for more “whatever it takes” central bank stimulus is highly destabilizing for global markets.

It was another highly unsettled week in the currencies. The dollar index dropped 1.6%, with prevailing dollar weakness versus EM and developed currencies. The South African rand jumped 4.9% and the Brazilian real gained 3.4%. The commodity currencies – Australia, Canada and New Zealand – all gained at least 2%. The euro traded near a six-month high. The Malaysian ringgit gained 3.6% and the Turkish lira rose 2.0%.

With the Japanese yen trading near 17-month highs, Japan’s Nikkei equities index sank 4.9% (down 15.1% y-t-d). Global equities were erratic. Italian equities dropped 2.1%, as the Italian bank index sank 5.8% (down 33.4% y-t-d). European banks had another rough week, with the STOXX Europe 600 Bank Index down 2.7% (down 21.9% y-t-d). Spanish stocks declined 2.1%, and French stocks posted a small loss for the week. Germany’s DAX index declined 0.6%.

U.S. stocks responded strongly to Yellen, although there were notable divergences. The more speculative sectors enjoyed a big week. The biotechs surged 5.7%, the Nasdaq100 gained 2.9% and the small cap Russell 2000 surged 3.5%. At the same time, the banks (BKX) slipped 0.2% and the Transports declined 0.5%. It was as if the markets were admitting that the ultra-dovish policy stance would do little to boost real economy fundamentals - but perhaps a lot to spur speculation and market mayhem. Global bond markets love it.

March 21 – Financial Times (Ed Crooks): “About 600 people packed on to the Machinery Auctioneers lot on the outskirts of San Antonio, Texas, last week to pick up some of the pieces shaken loose by the oil crash. Trucks, trailers, earth movers and other machines used in the nearby Eagle Ford shale formation were sold at rock-bottom prices. One lucky bargain hunter was able to pick up a flatbed truck for moving drilling rigs — worth about $400,000 new — for just $65,000… The fire sale in Texas is just a small part of the worldwide value destruction caused by the oil decline. From Calgary to Queensland, oil and gas businesses are scrambling to sell assets, often at greatly reduced prices, to pay back the debts incurred to buy them… It is a reflection, some say, of worries about the destabilising effects of the industry’s mountain of debt. From 2006 to 2014, the global oil and gas industry’s debts almost tripled, from about $1.1tn to $3tn…"

The inflationists will surely continue to lament insufficient “aggregate demand,” while espousing the virtues of Trillions more of “money”. But let’s not lose sight of the fact that “From 2006 to 2014, the global oil and gas industry’s debts almost tripled, from about $1.1tn to $3tn.” The problem was clearly too much “money” and Credit stoking boom-time excess. Aggressive rate and QE policy measures played an integral roll in the funding free-for-all that has come home to roost for the global oil patch.

And, today, monetary accommodation will do little to ameliorate the energy bust, not with liquidity and speculation preferring ongoing Bubble Dynamics throughout “Silicon Valley”, commercial (and residential) real estate and anything providing a yield. Our central bankers, by fixating on fragility while ignoring segments of intense excess, are ensuring even more precarious Monetary Disorder.


For the week:

The S&P500 jumped 1.8% (up 1.4% y-t-d), and the Dow gained 1.6% (up 2.1%). The Utilities rose 1.6% (up 15.7%). The Banks slipped 0.2% (down 11.5%), while the Broker/Dealers gained 3.2% (down 8.0%). The Transports declined 0.5% (up 5.0%). The S&P 400 Midcaps jumped 2.7% (up 3.8%), and the small cap Russell 2000 surged 3.5% (down 1.6%). The Nasdaq100 advanced 2.9% (down 1.3%), and the Morgan Stanley High Tech index rose 2.6% (down 1.7%). The Semiconductors gained 2.3% (up 2.7%). The Biotechs surged 5.7% (down 20.4%). With bullion up $6, the HUI gold index gained 5.0% (up 61.8%).

Three-month Treasury bill rates ended the week at 22 bps. Two-year government yields dropped 14 bps to 0.73% (down 32bps y-t-d). Five-year T-note yields sank 16 bps to 1.22% (down 53bps). Ten-year Treasury yields fell 13 bps to 1.77% (down 48bps). Long bond yields declined seven bps to 2.60% (down 42bps).

Greek 10-year yields fell 16 bps to 8.34% (up 102bps y-t-d). Ten-year Portuguese yields declined five bps to 2.89% (up 37bps). Italian 10-year yields dropped eight bps to 1.22% (down 37bps). Spain's 10-year yields sank nine bps to 1.43% (down 34bps). German bund yields fell another five bps to 0.13% (down 49bps). French yields dropped seven bps to 0.46% (down 53bps). The French to German 10-year bond spread narrowed two to 33 bps. U.K. 10-year gilt yields declined four bps to 1.41% (down 55bps).

Japan's Nikkei equities index sank 4.9% (down 15.1% y-t-d). Japanese 10-year "JGB" yields increased three bps to negative 0.07% (down 33bps y-t-d). The German DAX equities index slipped 0.6% (down 8.8%). Spain's IBEX 35 equities index dropped 2.1% (down 9.9%). Italy's FTSE MIB index fell 2.1% (down 17%). EM equities equities were mixed. Brazil's Bovespa index added 0.9% (up 16.6%). Mexico's Bolsa gained 0.9% (up 7.2%). South Korea's Kospi index declined 0.5% (up 0.6%). India’s Sensex equities index slipped 0.3% (down 3.2%). China’s Shanghai Exchange gained 1.0% (down 15.0%). Turkey's Borsa Istanbul National 100 index gained 1.2% (up 14.8%). Russia's MICEX equities index declined 0.6% (up 5.4%).

Junk funds saw inflows of $550 million (from Lipper), the fifth straight week of positive flows.

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.71% (up one bp y-o-y). Fifteen-year rates added two bps to 2.98% (unchanged). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 3.76% (down 26bps).

Federal Reserve Credit last week declined $6.1bn to $4.445 TN. Over the past year, Fed Credit declined $0.7bn, or 0.1%. Fed Credit inflated $1.640 TN, or 58%, over the past 177 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $4.2bn to $3.260 TN. "Custody holdings" were about unchanged y-o-y.

M2 (narrow) "money" supply last week surged $37.5bn to a record $12.572 TN. "Narrow money" expanded $728bn, or 6.1%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits jumped $40.4bn, and Savings Deposits gained $5.3bn. Small Time Deposits were down $3.7bn. Retail Money Funds fell $7.4bn.

Total money market fund assets rose $13.9bn to $2.765 TN. Money Funds rose $132bn y-o-y (5.0%).

Total Commercial Paper gained $10.9bn to $1.101 TN. CP expanded $90 billion y-o-y, or 8.9%.

Currency Watch:

The U.S. dollar index dropped 1.6% this week to 94.61 (down 4.1% y-t-d). For the week on the upside, the South African rand increased 4.9%, the Brazilian real 3.4%, the New Zealand dollar 3.3%, the Australian dollar 2.3%, the Canadian dollar 2.0%, the Swiss franc 2.0%, the Swedish krona 2.0%, the euro 2.0%, the Norwegian krone 1.8%, the Japanese yen 1.2%, the Mexican peso 1.1% and the British pound 0.7%. The Chinese yuan gained 0.5% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index dropped 3.5% (up 1.5% y-t-d). Spot Gold added 0.5% to $1,223 (up 15%). March Silver slipped 0.9% to $15.06 (up 9%). April WTI Crude sank $2.77 to $36.69 (down 1.0%). March Gasoline fell 4.0% (up 11%), while March Natural Gas jumped 8.0% (down 17%). March Copper slid 2.8% (up 2%). May Wheat gained 2.8% (up 1%). May Corn was slammed 4.3% (down 1%).

Fixed-Income Bubble Watch:

March 28 – Bloomberg (Liz McCormick and Alexandra Scaggs): “Hedge funds are crowding into U.S. Treasuries, and that has bond traders bracing for more turbulence. While the Federal Reserve doesn’t break out hedge-fund ownership, a group seen as a proxy increased its holdings to a record $1.27 trillion in the past year… That came as foreign central banks and finance ministries, the biggest buy-and-hold owners in recent years, culled their investments for the first time on an annual basis since 2000… Hedge funds are also signaling their presence in the U.S. bond market in other ways. Since the end of 2013, investors domiciled in the Caribbean, a popular legal home for hundreds of hedge funds seeking lower taxes, have increased their holdings of Treasuries by 43% to $352 billion…”

March 31 – Bloomberg (Tracy Alloway): “Does the corporate bond market have an inequality problem? The bifurcation between bonds sold by investment-grade companies with stronger balance sheets and those sold by high-yield corporates with more fragile financials was on full display this week following a change in a proposed debt sale by Western Digital Corp. While the junk-rated maker of hard disks had originally planned to fund its acquisition of SanDisk Corp. through a $5.6 billion bond sale, lackluster demand from investors forced it to scale back the program to $5.23 billion… All U.S. bond markets have recovered, but some have recovered more than others. For instance, sales of investment-grade, also known as ‘high-grade,’ debt total a healthy $454 billion so far this year…, surpassing the $446 billion sold in the first quarter of 2015. Issuance of fresh high-yield debt has languished at $36 billion, compared with $86 billion a year ago.”

March 29 – Reuters (Amrutha Gayathri and Arathy S Nair): “U.S. solar energy company SunEdison Inc, whose aggressive acquisition strategy has saddled it with almost $12 billion of debt, is at ‘substantial risk’ of bankruptcy, one of its two publicly listed units warned… A bankruptcy would rank among the largest involving a non-financial company in the past 10 years… TerraForm Global Inc, one of two SunEdison ‘yieldcos’, said it would join its parent and fellow yieldco TerraForm Power Inc in delaying its annual report for the year ended Dec. 31.”

Global Bubble Watch:

March 29 – Bloomberg (Andrew Mayeda and Mark Deen): “Finance chiefs and central bankers from the Group of 20 will take a break this week from their efforts to rejuvenate the anemic global recovery, and instead contemplate another challenge: how to retool the world’s financial plumbing to prepare for the next crisis. People’s Bank of China Governor Zhou Xiaochuan, German Finance Minister Wolfgang Schaeuble and U.K. Chancellor of the Exchequer George Osborne will be among the policy makers meeting Thursday in Paris to discuss the world’s financial architecture. They will be joined by IMF Managing Director Christine Lagarde, OECD Secretary-General Angel Gurria, and economists including the London Business School’s Helene Rey. The event gives Zhou an opportunity to build on his argument that the global monetary system is too reliant on national reserve currencies such as the dollar, an idea he has been pushing since the 2008 global financial crisis.”

March 31 – Reuters: “Worldwide share issues slumped to a seven-year low in the first quarter of the year, as market volatility claimed the hopes of companies seeking to list their stock… The value of total share sales, including secondary issues as well as flotations, more than halved to $106.6 billion, the lowest since the immediate aftermath of the global financial crisis at the beginning of 2009…”

March 28 – Bloomberg (Jack Sidders): “Lenders are charging higher interest rates for development loans for London luxury homes as slumping commodity prices and increased taxes deter overseas buyers, fueling concern the market is oversupplied… ‘Everyone is freaking out,’ Sandhu, whose firm has loaned close to 1 billion pounds ($1.4 billion) to developers, said… ‘There has been nervousness for a while in the super prime market and there is also now nervousness in prime.’ Developers are constructing or plan to build about 54,000 homes in central London…”

U.S. Bubble Watch:

March 30 – CNBC (Kelley Holland): “If you think it's costing you more to run your household, you are onto something. Household spending has risen 25% or more in the past two decades, even adjusting for inflation, yet incomes have not followed suit. And that means more families are stretching to make ends meet, according to… the Pew Charitable Trusts. And the big spending culprits are not extras like a third laptop or a giant TV. It's core expenses like housing and transportation, Pew found… The Great Recession caused both household income and household spending to contract, the study found. But spending has picked up since then, increasing almost 14% from 2004 to 2014, while incomes contracted 13% over that decade… Embedded in the spending increase were several disturbing trends. Housing, food, health-care and transportation costs all consume a larger share of family budgets now than they did in 1996… But all families now have less leeway in their budgets, with expenditures equal to 75% of household income in 2014, up from 71% in 1996. ‘Families do not have a cushion,’ Currier said.”

March 28 – CNBC (Patti Domm): “First-quarter growth is now tracking at just 0.9%, after new data showed surprising weakness in consumer spending and a wider-than-expected trade gap. According to the CNBC/Moody's Analytics rapid update, economists now see the sluggish growth pace based on already reported data, down from 1.4% last week.”

March 28 – Bloomberg (Jack Sidders): “Home values in 20 U.S. cities kept climbing in January, a sign the limited supply of available properties may push prices out of reach for some buyers. The S&P/Case-Shiller index of property values increased 5.7% from January 2015, following a 5.6% gain in the year ended in December, the group said… Nationally, prices rose 5.4% year-over-year.”

April 1 – Bloomberg (Oshrat Carmiel): “The average price of a Manhattan apartment topped $2 million for the first time, reflecting the closing of deals from a high-end buying frenzy that’s now showing signs of a slowdown… The average price of all Manhattan home purchases completed in the three months through March was $2.05 million, up 18% from a year earlier and the highest in data going back to 1989, according to… Miller Samuel and brokerage Douglas Elliman Real Estate. The price per square foot of all co-ops and condos that changed hands in the period jumped 36% to $1,713 on average, also a record.”

March 30 – MarketWatch (Rolfe Winkler): “Venture-capital firms are raising money at the highest rate in more than 15 years, even as the values of some once-hot startups have begun to cool. With the quarter nearly over, U.S. venture funds have collected about $13 billion, which would be the largest total since the dot-com boom in 2000, according to… Dow Jones VentureSource… Investors have stayed excited about venture capital because it offers higher growth in a low-return environment.”

March 28 – Financial Times (Mamta Badkar): “With the end of the first quarter fast approaching, the drought in the US initial public offering market continues. IPO underwriting is headed for its first sub-billion dollar quarter since Q1 2009, when the US was in the depths of the financial crisis, according to S&P Global Market Intelligence. The 6 companies that priced this year have raised just $521m, compared with 32 companies that raised $4.8bn in the year ago quarter. That is also down sharply from the 31 companies that raised $7.1bn in the fourth quarter of last year…”

March 30 – CNBC (John W. Schoen): “OK, Illinois, it's your turn. Following this week's $30 billion budget deal in Pennsylvania, Illinois became the last state without a tax and spending plan for the fiscal year that began last July. The impasse has already forced cuts in education and social services and produced a steadily rising stack of nearly $6.5 billion in unpaid bills. The state's controller, Leslie Munger, has estimated the backlog could top $10 billion by the time the current fiscal year ends in July.”

March 28 – Bloomberg (Elizabeth Campbell): “Chicago had its credit rating cut to the lowest investment grade by Fitch Ratings after the Illinois Supreme Court tossed out Mayor Rahm Emanuel’s plan for dealing with the mounting debt to its workers’ pension plans. The two-step downgrade on Monday to BBB-, one rank above junk, affected $9.8 billion of general-obligation bonds and $486 million of debt backed by sales taxes. The company said the outlook is negative…”

China Bubble Watch:

March 29 – Reuters (Rachel Morarjee): “China is pouring money into the economy. But the gush of credit – banks doled out $540 billion of new loans in January and February – is not reaching nimbler private companies. That is worrying, since they generate 80% of the jobs in China’s cities and 60% of GDP. A Reuters analysis of Chinese listed companies that have reported 2015 earnings show their suppliers owe them – and they in turn owe customers – more money than at any time in the last decade. It takes listed firms almost 170 days to turn working capital into cash. It took just one month in 2006. Listed companies are larger and better connected than their unlisted peers, and often have access to state-bank funding, so the mounting backlog hits smaller outfits hardest.”

March 29 – Reuters (Shu Zhang and Matthew Miller): “China's Big Four state-run banks this week are set to report annual earnings growth that likely flat-lined after around a decade of terrific profitability, as a surge in soured loans continued unabated while economic expansion weakened. Profit growth has slowed in recent years while the sector tackles its greatest challenge since the global financial crisis, with bad loans at a 10 year high while funds set aside to cover the losses fall close to regulatory limits… Non-performing loans (NPLs) reached a 10 year high of 1.27 trillion yuan ($195bn) last year, or 1.67% of all loans outstanding as of December… However, analysts said some banks appear to be delaying recognising some loans as soured. The potential real bad loan ratio may be 8% to 9%, banking analyst Li Nan at Beijing Gao Hua Securities wrote…”

April 1 – Bloomberg (Xiaoyi Shao and Nicholas Heath): “China’s top corporate bond underwriter said defaults will increase this year, casting a cloud over the market after record offerings in the first quarter helped refinance debt. Six firms reneged on obligations in the first three months, up from zero in the year-earlier period, as Premier Li Keqiang sought to cut the number of ‘zombie companies’ in an economy transitioning to slower growth. While note sales surged 66% to 2.48 trillion yuan ($383.6bn) this year, China Securities Co. said non-payments will escalate further, causing disruptions in the months ahead.”

March 31 – Bloomberg: “China’s central bank revealed its short foreign-currency positions in forwards and futures for the first time… The People’s Bank of China held $28.9 billion of such positions with commercial lenders as of end-February… It added that it made short-foreign currency trades in derivatives with commercial lenders to meet demand from companies looking to hedge overseas liabilities. ‘It looks like this is the first time they are reporting their forwards book, and we finally get an idea of their forwards intervention,’ said Khoon Goh, a senior foreign-exchange strategist at ANZ. ‘It indicates that their intervention activity is a lot more than we had previously estimated in February.’”

March 28 – Reuters (Kevin Yao): “Capital expenditure by Chinese companies fell to the lowest in at least five years in the first quarter, a private survey showed, highlighting persistent weakness in the economy even as the government ratchets up policy support to head off a sharper slowdown. The quarterly survey of over 2,200 firms by China Beige Book International (CBB) also showed less hiring by companies… Only 33% of firms reported capital expenditure growth in the first quarter, the lowest in the survey's five-year history. The share of firms reporting capex growth has fallen by over 40% since the second quarter of 2014.”

April 1 – Financial Times (Yuan Yang and Ben Bland): “China has hit back at international rating agencies after recent downgrades to China’s government debt outlook. ‘Moody’s and Standard & Poor’s … have to some degree overestimated the problems facing our economy, and underestimated our country’s ability to implement reforms and address our risks,’ said Zhang Shiyao, vice-minister of finance… ‘Rating agencies need to deeply understand and holistically assess the fruits of our society’s development, and the progress we have made in structural reforms,’ Mr Zhang added.”

April 1 – Bloomberg (Xiaoyi Shao and Nicholas Heath): “Growth in China's new home prices quickened in March, two private surveys showed on Friday, evidence that housing prices are continuing to heat up even amid government cooling steps. Prices of new homes in 288 cities in March rose an average 5.6% from a year earlier, the eighth straight month of gains… The rise in March was faster than an increase of 4.3% in February.”

March 31 – Reuters (Xiaoyi Shao and Clare Jim): “While property prices in top-tier Chinese cities are booming, prices in smaller cities, where most of China's urban population lives, are still sinking, complicating government efforts to spread wealth more evenly and arrest slowing economic growth. Property has a special place in the psyche of Chinese investors, far outstripping stocks and bonds as a vehicle for their savings, so sliding property prices have a big impact on individual wealth and domestic consumption.”

March 31 – Bloomberg (Malcolm Scott): “Standard & Poor’s has cut the outlook for China’s credit rating to negative from stable, saying the nation’s economic rebalancing is likely to proceed more slowly than the ratings firm had expected. China’s AA- long-term credit rating now has a negative outlook, S&P said in a statement. Earlier in March, Moody’s… made a similar revision, highlighting surging debt and questioning the government’s ability to enact reforms.”

March 30 – Bloomberg: “The nation’s largest state-controlled lenders cut their dividend payouts for last year amid rising bad loans, underscoring what Bank of China Ltd.’s president described as a ‘new normal’ of low profit growth for the lenders… ICBC had 179.5 billion yuan of nonperforming loans as of December, an increase of 44% from a year earlier… Bank of China’s nonperforming loans rose 30%, while Construction Bank’s jumped 47%...”

March 31 – Bloomberg (Alfred Liu): “Shanghai-based Jinlu Financial Advisors is suspending payments on some wealth management products jointly created with partner Shanghai Kuailu Investment Group because of a 300 million yuan ($46 million) cash shortage… Jinlu didn’t explain the reason for the gap, saying only that investors gathered at its headquarters to ask about the payment on Thursday.”

March 28 – Bloomberg (Alfred Liu and Molly Wei): “More than 800. That’s how many times Hong Kong insurance agent Raymond Ng swiped the credit cards of a mainland Chinese client buying HK$28 million ($3.6 million) worth of insurance policies in the city earlier this month. Dozens, maybe more. That’s how many other agents are using similar tactics as a way around new restrictions on insurance policy purchases by mainlanders that are often used to evade capital controls and get their money out of China… ‘There are always ways around new restrictions,’ said Ng, 30, who started selling insurance and investment products to mainland Chinese four years ago, declining to allow his company’s name to be used. ‘Chinese customers are accelerating the pace of moving assets outside China, especially through insurance products."

March 28 – Bloomberg (Shai Oster and Lulu Yilun Chen): “China’s government is moving to tighten its grip over the Internet as it rolls out draft rules that will effectively ban Web domains not approved by local authorities… The Ministry of Industry and Information Technology is seeking feedback on regulations proposing that Internet domain names offering ‘domestic access’ should only be provided by services supervised by the government, according to a notice posted on the regulator’s website.”

March 27 – Dow Jones (Nobuhiro Kubo and Tim Kelly): “A Chinese news portal's publication of a mysterious letter calling for President Xi Jinping's resignation appears to have triggered a hunt for those responsible, in a sign of Beijing's anxiety over bubbling dissent within the Communist Party. The letter, whose authorship remains unclear, appeared on the eve of China's legislative session in early March… Since then, at least four managers and editors with Wujie Media—whose news website published the missive—and about 10 people from a related company providing technical support have gone missing…”

March 31 – Bloomberg (Stephanie Wong and Daniela Wei): “Hong Kong’s retail sales in February have plunged the most since 1999 as fewer Chinese tourists visited the city during the Lunar New Year holiday. Retail sales dropped 21% in February to HK$37 billion ($4.8bn) year on year… Combining January and February, sales fell 14%.”

ECB Watch:

March 29 – Reuters (Arno Schuetze and Jesús Aguado): “As the European Central Bank moves into an unfamiliar world of negative interest rates and incentives to encourage banks to make loans to businesses and consumers, a north-south divide is opening up between euro zone lenders. In the north, anemic demand for loans and a financial system already flush with cash mean banks see mostly costs. They must pay the ECB to deposit funds overnight and they have little need for the easy money on offer. In the south, lenders are keen to take advantage of the loans programme and many are set to get an instant boost to their profit margins when it takes effect in June. Under the ECB scheme, four-year loans will be offered at an interest rate of zero. Banks lending on more than a prescribed amount of that money to households and companies will get a reduction worth up to the deposit rate - in other words they will be paid to borrow.”

Europe Watch:

March 29 – Reuters (Francesco Canepa and Balazs Koranyi): “Lending to euro zone companies and households grew at its fastest pace since late 2011 in February, suggesting the bloc was continuing with modest recovery… Bank loans to non-financial corporations increased by 0.9% year on year, clocking up their best growth rate since December 2011… They had grown by 0.6% in January. Household lending growth picked up to 1.6%, the fastest since November 2011, from 1.4% in January, led by mortgages and consumer credit. The ECB bought hundreds of billions of euros worth of assets in the past year and had announced it will up the monthly pace of purchases by a third, hoping to kick-start lending to drive up growth and inflation.”

March 31 – Reuters (Carlos Ruano and Sarah White): “Spain missed its public deficit target for 2015 by far more than the European Commission and many analysts had expected, in spite an economic rebound and assurances from the acting government that the slippage would be smaller. The overall deficit stood at 56.6 billion euros (45bn pounds) last year, or at 5.24% of economic output…”

Japan Watch:

March 31 – Reuters (Stanley White): “Japan's manufacturing activity contracted in March at the fastest pace in more than three years as new export orders shrank sharply, a business survey showed on Friday, adding to fears the world's third-largest economy is sliding back into recession.”

March 29 – Bloomberg (Keiko Ujikane): “Japan’s industrial production dropped the most since the March 2011 earthquake as falling exports sapped demand and a steel-mill explosion halted domestic car production at Toyota Motor Corp. Output slumped 6.2% in February after rising in January…”

EM Bubble Watch:

March 31 – Bloomberg (Isabella Cota and Nacha Cattan): “Mexico is at risk of a credit-rating cut because of subdued economic growth and the possibility the government will need to give financial support to the state oil company, according to Moody’s… The ratings company reduced its outlook on Mexico’s grade to negative from stable… Moody’s said falling tax revenue and the growing likelihood that Petroleos Mexicanos will need an injection of liquidity could undermine the government’s efforts to shore up its balance sheet… Pemex has reported 13 straight quarterly losses dating back to 2012 and lost a total of about $32 billion in 2015. The oil company, which owed $8 billion to service providers at the end of last year, trimmed its 2016 budget by 100 billion pesos ($5.8bn) last month…”

March 28 – Bloomberg (Ahmed Feteha): “The Saudi economy is showing deepening signs of strain under the weight of cheap oil. Saudi consumers withdrew and spent less money in February… M3, one of the broadest measures of money supply, shrank for the first time since at least 2000, … While the kingdom still has one of the world’s largest foreign-currency reserves, cuts in government spending to shore up public finances are taking a toll on the economy. Growth may slow to 1.5% this year…, the slowest pace since at least 2009.”

Leveraged Speculation Watch:

March 31 – Wall Street Journal (Timothy W. Martin and Rob Copeland): “Marc Levine, chairman of the $16 billion Illinois State Board of Investment, had a provocative question this month during a board meeting about hedge funds. ‘Why do I need you?’ Mr. Levine asked. A lot of big investors are asking the same question. Pension funds, insurers and university endowments helped pump up hedge funds to a record $3 trillion in assets over the last decade. But with results falling behind a more traditional mix of stocks and bonds for six straight years and the high-fee structure now politically sensitive in some states due to uneven results, many of them are pulling back… Overall, big investors pulled an additional $19.75 billion out of hedge funds in January, according to eVestment. That was the largest outflow for the year’s first month since 2009.”

March 29 – Reuters (Svea Herbst-Bayliss): “Luxor Capital, a $3.8 billion hedge fund that has been losing money for months, said… it will not be returning exiting investors cash in full, keeping a portion locked up until some illiquid investments can be sold. Instead of returning all exiting clients' assets in cash, investors will receive 88% of their money back while 12% of the investments will be held in a so-called special purpose vehicle, Luxor's founder, Christian Leone, wrote…”

March 31 – Bloomberg (Dani Burger): “One of the most popular hedge fund trades just hit a wall. An investment approach that profits from the divergent paths of high- and low- momentum stocks over time, a strategy that had one of its biggest gains on record in 2015, seized up in the last three months, posting the worst quarter in six years. The plunge helped zap returns among a big category of quantitative hedge funds, the so-called market neutral group, whose year-to-date decline of 2.3% is the largest since 2012.”

March 28 – Bloomberg (Cindy Huang): “With energy stocks enjoying the biggest rebound since the beginning of the oil rout, short sellers have shifted their sights to regional banks that do business with the industry. Bearish bets have shot up 35% on average this year among the 10 most-shorted stocks in the KBW Regional Banking Index… Cullen/Frost Bankers Inc. and Prosperity Bancshares Inc. in Texas have seen short interest surge about 60%.”

Brazil Watch:

March 29 – Reuters (Anthony Boadle): “Brazil's largest party will decide on Tuesday to break away from President Dilma Rousseff's floundering coalition, party leaders said, sharply raising the odds that the country's first woman president will be impeached amid a corruption scandal. The fractious Brazilian Democratic Movement Party (PMDB) will decide at its national leadership meeting on the pace of disengagement from the Rousseff administration, in which it holds seven ministerial posts and the vice presidency. A formal rupture appears inevitable and will increase the isolation of the unpopular Rousseff, freeing PMDB members to vote for her impeachment. That makes it likely Rousseff will be temporarily suspended from office by Congress as early as May and replaced by Vice President Michel Temer, leader of the PMDB…”

March 29 – Reuters (Marcela Ayres and Guillermo Parra-Bernal): “Commercial banks in Brazil pared back lending in February for a second straight month…, as private-sector lenders kept slowing disbursements to mitigate the impact of a deepening recession on loan delinquencies. Outstanding loans in the country's banking system totaled 3.184 trillion reais (607.2bn pounds) at the end of February, down 0.5% from the prior month… Private-sector and foreign banks cut disbursements for a second month, while state-controlled banks slightly hiked them. Brazil's longest and most intense recession since at least the 1930s, coupled with rising credit costs, kept straining the capacity of consumer and corporate borrowers to stay current on their debts…”

April 1 – Bloomberg (Cristiane Lucchesi, Jonathan Levin and Francisco Marcelino): “Brazil’s biggest corporations, already reeling from a growing political crisis and the worst recession in a century, face a new threat: International banks have either stopped lending to them entirely or are demanding dollar-denominated collateral… Not a single syndicated loan has been made to a Brazilian company this year, compared with $12 billion in 2015, and none of the nation’s banks or corporations have sold bonds without dollar guarantees since July… While roughly 45 international banks provided dollar-denominated loans to Brazilian companies last year, only about 20 are left now, according to two of the people…”

Geopolitical Watch:

March 28 – Reuters (Nobuhiro Kubo and Tim Kelly): “Japan on Monday switched on a radar station in the East China Sea, giving it a permanent intelligence gathering post close to Taiwan and a group of islands disputed by Japan and China, drawing an angry response from Beijing. The new Self Defence Force base on the island of Yonaguni is at the western extreme of a string of Japanese islands in the East China Sea, 150 km (90 miles) south of the disputed islands known as the Senkaku islands in Japan and the Diaoyu in China.”

March 31 – Bloomberg (Chris Brummitt and Rieka Rahadiana): “Indonesia will deploy U.S.-made F-16 fighter jets to the Natuna islands to ward off ‘thieves’, the defense minister said less than two weeks after Chinese coast guard vessels clashed with an Indonesian boat in the area. The move is part of a military buildup on islands overlooking the South China Sea that will see a refurbished runway and a new port constructed, Ryamizard Ryacudu said… The military will, or has already, stationed marines, air force special force units, an army battalion, three frigates, a new radar system and drones, he said.”