Saturday, April 9, 2016

Weekly Commentary: Bubble Economy or Not?

"The US economy has made tremendous progress in recovering from the damage from the financial crisis. Slowly but surely the labor market is healing. For well over a year, we have averaged about 225,000 jobs (gains) a month. The unemployment rate now stands at 5%. So, we’re coming close to our assigned congressional goal of maximum employment. Inflation which my colleagues here, Paul (Volcker) and Alan (Greenspan), spent much of their time as chairmen bringing inflation down from unacceptably high levels. For a number of years now, inflation has been running under our 2% goal, and we are focused on moving it up to 2%. But we think that it’s partly transitory influences, namely declining oil prices and the strong dollar that are responsible for pulling inflation below the 2% level we think is most desirable. So, I think we’re making progress there as well. This is an economy on a solid course - not a bubble economy. We tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that - clearly overvalued asset prices, high leverage, rising leverage, and rapid credit growth. We certainly don’t see those imbalances. And so although interest rates are low, and that is something that can encourage reach for yield behavior, I certainly wouldn’t describe this as a bubble economy.” Janet Yellen, April 7, 2016, International House: “A Conversation with Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker”

From my analytical perspective, unsustainability is a fundamental feature of “Bubble Economies.” They are sustained only so long as sufficient monetary fuel is forthcoming. Over time, such economies are characterized by deep structural maladjustment, the consequence of years of underlying monetary inflation. Excessive issuance of money and Credit are always at the root of distortions in investment and spending patterns. Asset inflation and price Bubbles invariably play central roles in latent fragility. Risk intermediation is instrumental, especially late in the cycle as the quantity of Credit expands and quality deteriorates. Prolonged Credit booms – the type associated with Bubble Economies – invariably have a major government component.

Japanese officials in the late-eighties recognized the risks associated with their Bubble economy and moved courageously to pierce the Bubble. Outside of that, few policymakers have been even willing to admit that Bubble Dynamics have taken hold in their systems. Apparently, only in hindsight did U.S. monetary authorities recognize the Bubble component that came to exert pernicious effects on the U.S. economy in the late-eighties, later in the nineties and again in the 2002-2007 mortgage finance Bubble period. I would strongly argue that the U.S. has been in a “Bubble Economy” progression for the better part of thirty years, interrupted by financial crises relatively quickly resolved by aggressive governmental reflationary measures. And each reflation has been more egregious than the previous, with resulting booms exacerbating underlying financial and economic maladjustment.

Chair Yellen stated that the U.S. “is an economy on a solid course - not a bubble economy” – “we tried carefully to look at evidence of potential financial instability that might be brewing.” That the Fed has for seven post-crisis years clung to near zero rates and a $4.5 TN balance sheet (with reassurances that it can grow larger) argues against such claims. That the Fed rather abruptly backed away from its 2011 “exit strategy” and repeatedly postponed “lift off” due to market instability rather clearly demonstrates the Fed’s underlying lack of confidence in the soundness of the markets and real economy.

I have argued that the more systemic a Bubble the less obvious it becomes to casual observers. By the late-nineties, the “tech” Bubble had turned rather conspicuous (although the Fed and the bulls still rationalized with claims of New Eras and New Paradigms). While having quite an impact on the technology, telecom and media sectors, these relatively narrow Bubble distortions had yet to cultivate more general structural impairment throughout the economy.

The mortgage finance Bubble was a much more powerful Bubble Dynamic, clearly in terms of Credit expansion, economic imbalances and systemic impairment. Alan Greenspan nonetheless argued that since real estate was driven by local factors, a national housing Bubble was implausible. Only in hindsight was the degree of systemic “Bubble Economy” maladjustment recognized.

It’s now been seven years since my initial warning of an inflating “global government finance Bubble” – the “Granddaddy of All of Bubbles.” This Bubble did become systemic on a globalized basis, ensuring the strange dynamic of a somewhat less than conspicuous global Bubble of historic proportions. Over the past eight years, global Credit growth has been unprecedented – driven by an extraordinary expansion of government borrowings. The inflation of central bank Credit has been simply unimaginable. Global asset inflation has been extraordinary – especially in securities markets and real estate.

The expansion of Chinese Credit has been greater than I previously imagined possible. Hundreds of billions – perhaps Trillions - have flowed out of China, with untold amounts flowing into the U.S. (real estate, securities and M&A). For that matter, I believe huge inbound flows have been inflating U.S. securities and some real estate markets, especially “money” fleeing bursting EM Bubbles.

Indeed, extraordinary international financial flows are fundamental to the global government finance Bubble thesis, flows that I believe are increasingly at risk. Along with Bubble flows from China and out of faltering EM, I believe speculative flows grew to immense proportions. And, importantly, the massive global pool of destabilizing speculative finance has been inflated by the proliferation of leveraged strategies. Chair Yellen may not see “high leverage,” yet on a globalized basis I strongly believe speculative leverage reached new heights over recent years. “Carry trade” speculation – borrowing in low-yielding currencies (yen, swissy, euro, etc.) - has proliferated over recent years, especially after the 2012 “whatever it takes” devaluations orchestrated by the European Central Bank and Bank of Japan.

How much of the resulting speculation-related liquidity ended up flowing into U.S. markets and the American economy? What are the consequences – to the markets and overall economy – if these flows stop - or even reverse? Moreover, I suspect unprecedented amounts of leverage have accumulated throughout the U.S. Credit market – Treasuries, corporates and munis. And Wall Street has definitely been hard at work in recent years creating all varieties of instruments, products and strategies that benefit from the combination of ultra-low rates and leverage (certainly including higher-yielding equities).

Over time, Bubble Economies become increasingly vulnerable to economic stagnation, Credit degradation and asset price busts. Bubbles are fueled by Credit excesses that distort risk perceptions and resource allocation. Credit and asset price inflation will incentivize speculation, another key dynamic ensuring misallocation and malinvestment. In the end, Bubbles redistribute and destroy wealth. Major Bubbles will tear at the threads of society.

It remains my view that the global Bubble has burst. The recent rally in global risk markets restored hope that things remain central bank-induced business as usual. This week provided support for the view that the respite from heightened volatility and vulnerability has likely run its course.

Global equities were under pressure this week, while safe haven bonds and gold rallied. Japan’s Nikkei dropped 2.1%, increasing 2016 losses to 16.9%. The German DAX fell 1.8%, boosting y-t-d declines to 10.4%. Spanish stocks were down 2.0% (down 11.7%), and Italian shares fell 1.5% (down 18.3%). Ten-year German bund yields dropped to nine basis points

Ominously, global financial stocks continue to trade poorly. After the recent notably unimpressive rally, selling of global bank and financial shares has resumed. The STOXX Europe 600 Bank index sank 3.5% this week, pushing 2016 losses to 24.7%. This week’s 3.1% decline boosted Italian bank stock y-t-d losses to 35.4%. Deutsche Bank has returned to February lows (down 34%). European bank stocks generally are quickly approaching February lows. Italian bank stocks traded this week slightly below lows from the February tumult period. Hong Kong’s Hang Seng Financial index was down 2.0% this week (down 12.6%). Here at home, U.S. bank stocks (BKX) dropped 3.6%, increasing y-t-d declines to 14.7%. The security broker/dealers (XBD) sank 6.2%, increasing 2016 losses to 13.7%. Goldman Sachs closed Friday at about $150, after trading as high as $200 this past November.

I would argue that currency market instability has negative portents as well. The Japanese yen surged 3.2% this week to a 17-month high. The yen gained about 5% versus the Australian dollar, New Zealand dollar and Mexican peso. It's worth noting that the Chilean peso, Colombian peso, Turkish lira and Brazilian real were all under pressure, as the recent EM rally appears increasingly vulnerable.

A few headlines were telling: “Japanese Yen Trade Mystifies and Could Penalize” (CNBC); “Stunning Rally in Japanese Yen Risks Too Little Faith in BoJ Policy Genius” (Australian Financial Review); and “Japan Faces Trouble Controlling Yen Rise” (Reuters).

It is no coincidence that the yen is rising as global financial stocks are sinking. Both are indicative of market fears that global policymakers are losing control. The yen has rallied significantly in the face of the BOJ imposing punitive negative interest rates. The euro has also risen to a six-month high in spite of the ECB’s surprise one-third increase in its QE program.

Keep in mind that both the BOJ and ECB boosted stimulus, as the Fed assumed a more dovish posture, in a concerted response to heightened global market instability. These measure did incite a robust short squeeze, an unwind of bearish hedges and a general rally in global risk markets. Yet markets are already again indicating waning confidence that policymakers actually have things under control.

The Japanese have lost control of the yen, which has hurt prospects for Japan’s equities and overall economy. It has also turned various leveraged strategies on their heads, portending pressure on the global leveraged speculating community more generally. Meanwhile, the half life of Draghi’s latest “shock and awe” has proved alarmingly short. Boosting the ECB’s QE program reversed what had been a significant widening of Credit spreads throughout Europe. It’s worth noting that European periphery spreads (to German bunds) widened meaningfully this week. Portuguese spreads surged 48 bps and Greek spreads widened 41 bps. Italian spreads widened 13 bps and Spanish spreads increased 12 bps.

I’ve excerpted below from my recent analysis of the Fed’s Q4 2015 Z.1 “flow of funds” report:

Treasury Securities ended 2007 at $6.051 TN. By 2015’s conclusion, Treasuries had inflated to $15.141 TN, an increase of $9.090 TN, or 150%, in eight years. It’s worth noting that Agency Securities ended 2015 at $8.153 TN, having now almost recovered back to 2008’s record high.

Total Debt Securities (Treasuries, Agencies, Corporates & muni’s) ended 2015 at a record $38.741 TN. Total Debt Securities have increased $11.3 TN, or 41%, from what had been 2007’s record level. Total Debt Securities as a percent of GDP ended 2015 at a near record 217% of GDP. For perspective, this ratio began the eighties at 66%, the nineties at 110%, and the 2000’s at 140%.

Equities ended 2015 at $35.687 TN, or 199% of GDP. This compares to Equities/GDP of 44% to begin the eighties, 67% to start the nineties and 200% to end Bubble Year 1999. Combining Debt and Equity Securities, Total Securities ended 2015 at a record $74.428 TN. This was up 40% from 2007 (a then record 366% of GDP) to 415% of GDP. This compares to 109% to begin the eighties, 178% to start the nineties and 341% to end the nineties.

Household… Assets ended 2015 at a record $101.306 TN, up $2.953 TN during the year. Household Assets have increased almost 50% since the end of 2008. …Household Net Worth jumped another $2.607 TN last year. For the year, Household holdings of Real Estate increased $1.562 TN (to a record $25.267 TN), with Financial Assets up $1.171 TN (to a near-record $70.327 TN). Household Net Worth as a percentage of GDP ended 2015 at 484%. For comparison, Household Net Worth to GDP began the nineties at 379%, ended 1999 at 446% and closed Bubble Year 2007 at 461% of GDP.

Total Non-Financial Debt increased $1.912 TN in 2015 to a record $45.149 TN. NFD has increased $10.218 TN, or 29%, over the past seven years. NFD to GDP ended 2015 at a record 252%. For perspective, this ratio began the eighties at 138%, the nineties at 179% and the 2000’s at 179%.

The U.S. economy has all the characteristics of a Bubble economy – one increasingly vulnerable on myriad fronts.

For the week:

The S&P500 declined 1.2% (up 0.2% y-t-d), and the Dow fell 1.2% (up 0.9%). The Utilities were hit 2.2% (up 13.2%). The Banks sank 3.6% (down 14.7%), and the Broker/Dealers were clobbered 6.2% (down 13.7%). The Transports lost 1.7% (up 3.0%). The S&P 400 Midcaps fell 1.7% (up 2.0%), and the small cap Russell 2000 dropped 1.8% (down 3.4%). The Nasdaq100 declined 1.3% (down 2.6%), and the Morgan Stanley High Tech index fell 1.7% (down 3.4%). The Semiconductors dropped 1.5% (up 1.2%). The Biotechs surged 3.9% (down 17.3%). With bullion gaining $18, the HUI gold index surged 7.9% (up 74.6%).

Three-month Treasury bill rates ended the week at 22 bps. Two-year government yields declined four bps to 0.69% (down 36bps y-t-d). Five-year T-note yields fell seven bps to 1.15% (down 60bps). Ten-year Treasury yields dropped six bps to 1.71% (down 54bps). Long bond yields declined five bps to 2.55% (down 47bps).

Greek 10-year yields jumped 37 bps to 8.71% (up 139bps y-t-d). Ten-year Portuguese yields surged 44 bps to 3.33% (up 81bps). Italian 10-year yields rose nine bps to 1.31% (down 28bps). Spain's 10-year yields gained eight bps to 1.51% (down 26bps). German bund yields declined four bps to 0.09% (down 53bps). French yields slipped three bps to 0.43% (down 56bps). The French to German 10-year bond spread widened one to 34 bps. U.K. 10-year gilt yields fell five bps to 1.36% (down 60bps).

Japan's Nikkei equities index dropped 2.1% (down 16.9% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.10% (down 36bps y-t-d). The German DAX equities index lost 1.8% (down 10.4%). Spain's IBEX 35 equities index sank 2.0% (down 11.7%). Italy's FTSE MIB index fell 1.5% (down 18.3%). EM equities equities were mixed. Brazil's Bovespa index slipped 0.5% (up 16%). Mexico's Bolsa dropped 2.6% (up 4.4%). South Korea's Kospi index was little changed (up 0.5%). India’s Sensex equities index dropped 2.4% (down 5.5%). China’s Shanghai Exchange slipped 0.8% (down 15.7%). Turkey's Borsa Istanbul National 100 index added 0.2% (up 15%). Russia's MICEX equities index gained 1.1% (up 6.6%).

Junk funds saw inflows of $1.12bn (from Lipper), the sixth straight week of positive flows.

Freddie Mac 30-year fixed mortgage rates sank 12 bps to 3.59% (down 7bps y-o-y). Fifteen-year rates fell 10 bps to 2.88% (down 5bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 3.68% (down 27bps).

Federal Reserve Credit last week declined $1.0bn to $4.444 TN. Over the past year, Fed Credit was little changed. Fed Credit inflated $1.633 TN, or 58%, over the past 178 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $2.9bn to $3.258 TN. "Custody holdings" were down $32bn y-o-y, or 1.0%.

M2 (narrow) "money" supply last week surged $69bn to a record $12.641 TN. "Narrow money" expanded $787bn, or 6.6%, over the past year. For the week, Currency increased $1.3bn. Total Checkable Deposits fell $7.2bn, and Savings Deposits jumped $83.4bn. Small Time Deposits were down $6.4bn. Retail Money Funds were little changed.

Total money market fund assets dropped $26.7bn to $2.739 TN. Money Funds rose $105bn y-o-y (4.0%).

Total Commercial Paper added $1.1bn to $1.102 TN. CP expanded $83 billion y-o-y, or 8.1%.

Currency Watch:

April 5 – Bloomberg (Candice Zachariahs and Netty Idayu Ismail): “Foreign-exchange traders are challenging Japanese policy makers’ tolerance for a stronger yen as the currency climbed to a level unseen for 17 months. The yen briefly pushed through 110 per dollar on Tuesday to the highest since Bank of Japan Governor Haruhiko Kuroda boosted monetary easing in October 2014, and a level that some strategists see as heightening the risk of intervention. Kuroda has said he’ll keep monitoring the currency and reiterated the potential for cutting interest rates further below zero. The next scheduled policy meeting is April 27-28.”

The U.S. dollar index declined 0.4% this week to 94.19 (down 4.6% y-t-d). For the week on the upside, the Japanese yen increased 3.2%, the Norwegian krone 1.0%, the Swiss franc 0.5%, the Canadian dollar 0.2% and the euro 0.1%. The For the week on the downside, the Mexican peso declined 2.5%, the South African rand 1.9%, the Australian dollar 1.6%, the New Zealand dollar 1.4%, the Brazilian real 1.0% and the Swedish krona 0.2%. The Chinese yuan increased 0.3% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index jumped 4.0% (up 5.6% y-t-d). Spot Gold gained 1.4% to $1,240 (up 17%). March Silver jumped 2.0% to $15.36 (up 11%). April WTI Crude surged $2.97 to $39.66 (up 7%). March Gasoline rose 3.8% (up 15%), and March Natural Gas gained 2.1% (down 15%). March Copper sank 3.7% (down 2%). May Wheat fell 3.3% (down 2%). May Corn was up 2.3% (up 1%).

Fixed-Income Bubble Watch:

April 8 – Reuters: “The global bond default rate by companies is running at its highest since 2009 with the US accounting for the vast majority, according to… Standard & Poor’s. A further four defaults this week, with three coming from the troubled oil and gas sector, pushed the overall tally to 40 with a little over a quarter of 2016 done. The total so far is just over a third higher than the same period in 2015…”

April 5 – Bloomberg (Wes Goodman and Anooja Debnath): “Global bond yields fell to a record, a warning sign for the worldwide economy. The yield on the Bank of America Corp. Global Broad Market Index plunged to 1.3%... A third of the world’s developed-market sovereign debt now has negative yields, based on Bloomberg bond indexes, after Europe and Japan cut interest rates below zero to counter deflation. Investors rushed to higher-yielding debt, fueling the global rally.”

Global Bubble Watch:

April 5 – Wall Street Journal (Margot Patrick, Laurence Fletcher and Rachel Louise Ensign): “Offshore companies created in Panama, the British Virgin Islands and elsewhere can be impenetrable to authorities—and anyone else poking around. That has made them legitimate vehicles for wealth protection and tax planning, but also hideaways for tax dodgers, frauds and worse. Some of the world’s biggest banks, whose clients seek discretion, operate next to the offshore specialists that create and register companies, find ‘nominee’ directors and shareholders to take the true owners’ place on forms, and assemble complex, bespoke structures. According to the International Consortium of Investigative Journalists, HSBC Holdings PLC, UBS Group AG and Credit Suisse AG were some of the heaviest users of company-incorporation services provided by Mossack Fonseca…”

April 6 – Bloomberg (Omar Valdimarsson): “The Panama secrecy leak claimed its first casualty after Iceland’s Prime Minister Sigmundur David Gunnlaugsson stepped down following allegations he had sought to hide his wealth and dodge taxes. The decision was announced in parliament after the legislature became the focus of street protests that attracted thousands of Icelanders angered by the alleged tax evasion efforts of their leader.”

April 6 – New York Times (Michael Forsythe): “At least three of the seven people on the Chinese Communist Party’s most powerful committee, including President Xi Jinping, have relatives who have controlled secretive offshore companies, the organization that has publicized a trove of leaked documents about hidden wealth reported… The disclosures by the organization, the International Consortium of Investigative Journalists, risked new embarrassment for the Chinese authorities, already unnerved and infuriated by the organization’s leaks of the documents… Chinese government censors have moved aggressively since the first release of leaked documents on Sunday to purge any media’s mention of them in China, going so far as to block Internet searches and online discussions that involve the words ‘Panama Papers.’”

April 5 – Associated Press (Frank Jordans and Raf Casert): “The European Union has threatened to sanction countries like Panama if they continue to refuse to cooperate fully to fight money laundering and tax evasion, after a leak of data showed the tiny country remains a key destination for people who want to hide money. A leak of 11.5 million documents from Panama-based law firm Mossack Fonseca showed it had helped thousands of individuals and companies from around the world to set up shell companies and offshore accounts in low-tax havens. Because such accounts often hide the ultimate owner of the money, they are a favored tool to launder money, pay bribes or evade taxes.”

April 5 – Bloomberg (Rich Miller): “The profits recession is global -- and that's bad news for the world economy and for equity markets. So say researchers at the Institute of International Finance… that represents close to 500 financial institutions from 70 countries. In their April ‘Capital Markets Monitor,’ IIF executive managing director Hung Tran and his team blamed the global decline in earnings on poor productivity growth, weak demand and a general lack of pricing power. U.S. companies also are being squeezed by rising labor costs as they add people to their payrolls.”

U.S. Bubble Watch:

April 6 – Bloomberg (Kristen Hallam, Cynthia Koons and Zachary Tracer): “The biggest deal in drug industry history is dead. Pfizer Inc. and Allergan Plc terminated their $160 billion merger on Wednesday after the U.S. government proposed regulations to crack down on corporate tax inversions, stymieing New York-based Pfizer’s long effort to get out from under the highest corporate tax rate in the developed world.”

April 6 – New York Times (Michael J. de la Merced and Leslie Picker): “The drug giant Pfizer wanted to cut its taxes through a $152 billion takeover of the Dublin-based maker of Botox. And Halliburton sought to buy a major rival in the business of selling equipment to oil drillers for nearly $35 billion. But this week, the Obama administration took on both deals — and it has claimed at least one trophy so far… In both cases, the administration showed how it has been increasingly willing to challenge giant takeovers, reflecting a belief that the corporate world goes too far in its pursuit of megamergers.”

April 3 – Financial Times (Attracta Mooney): “Unicorns, as billion-dollar start-ups have been dubbed, were one of the hottest topics of 2015. Asset managers, including Fidelity Management and Research, BlackRock and T Rowe Price, piled into private start-ups last year to take advantage of the boom in technology companies. But one year on, most fund houses appear to have taken a vow of silence when it comes to their investments in the billion-dollar fledglings. Few of the 25 or more asset managers and venture capitalists contacted would talk on the record about unicorns… During the final quarter of 2015, so-called crossover investors from public markets, the likes of mutual funds and hedge funds, were involved in 168 deals worth $8.1 billion, compared with 223 deals worth $13.5 billion during the third quarter, according to CB Insights… Overall, however, crossover investments in private technology companies rose 51% last year, to more than $40.9 billion across 800 deals…”

April 5 – Bloomberg (Michelle Jamrisko): “America’s trade deficit widened in February to a six-month high as an increase in imports exceeded a more modest pickup in shipments overseas. The gap increased 2.6% to $47.1 billion from a revised $45.9 billion in January…”

China Bubble Watch:

April 3 – Financial Times (Lucy Hornby): “China is rolling out a nationwide system of social control known as ‘grid management’ in a revival of state presence in residential life that had receded as society liberalised during recent decades. From smog-blanketed towns on the North China Plain to the politically sensitive Tibetan capital of Lhasa, small police booths and networks of citizens have been set up block by block to reduce neighbourhood disputes, enforce sanitation, reduce crime — and keep an eye on anyone deemed a troublemaker. The rollout coincides with a broader tightening of state control over civil society and crackdown on dissent under President Xi Jinping. ‘The grid management system is an attempt by the authorities to re-establish its control over individuals,’ said Li Dun, an expert in public management at Tsinghua University in Beijing. ‘The aim is to reinstate the idea of upholding the party’s leadership.’”

April 4 – Wall Street Journal (Esther Fung and Lingling Wei): “Government efforts to tackle a glut of vacant housing in China by spurring home lending have triggered a bigger problem: a surge in risky subprime-style loans that is generating alarm. Home buyers in China normally put down a third of the cost of a new property upfront. But a rapid rise in buyers borrowing for their down payments—an echo of the easy credit that cratered the U.S. housing market and sparked the financial crisis—has led authorities to clamp down… A senior banking executive at one of China’s top four state-owned banks said down-payment loans directly contributed to a recent run-up in housing prices in big cities. ‘It’s a risky practice that should be contained,’ he said.”

April 4 – Bloomberg: “Chinese companies canceled more than double the amount of bond offerings in March compared with a year earlier, as mounting defaults increased financing costs. At least 62 Chinese firms postponed or scrapped 44.8 billion yuan ($7bn) of planned note sales last month, compared with 23 companies with 15.7 billion yuan a year ago… China Eastern Airlines Corp. canceled issuance of 3 billion yuan of short-term bills on April 1 because of market volatility… The surge in scrapped offerings reflects investors’ growing concern about default risks amid the worst slowdown in a quarter century.”

April 6 – Bloomberg: “Chinese solar-panel maker Yingli Green Energy Holding Co. said it will be ‘very difficult’ for it to repay 1.4 billion yuan ($220 million) of notes due on May 12 and that talks so far with its creditors failed to reach a deal to extend the debt. The company also will make its ‘best efforts’ to repay the remaining portion of 1 billion yuan of notes…”

April 6 – Bloomberg: “A Chinese coal miner failed to make a bond payment…, highlighting rising credit risks in the nation as economic growth slows. The Shanghai Clearing House hadn’t received funds from Chinacoal Group Shanxi Huayu Energy Co. to pay holders of its 600 million yuan ($92.5 million) 6.3% notes… Chinese firms are struggling with surging debt burdens amid the country’s worst economic slowdown in a quarter-century. At least 13 companies have defaulted on bonds in the past two years even as the central bank loosened monetary policy.”

April 7 – Bloomberg: “China’s foreign-exchange reserves unexpectedly increased in March after capital outflow pressure eased as the nation’s currency steadied. The world’s largest currency hoard rose by $10.3 billion to $3.21 trillion last month… Authorities have stemmed a record tide of departing money with stricter currency rules and repeated statements they don’t want a big devaluation in the yuan.”

April 8 – Reuters (Clare Jim): “Home sales in the red-hot property markets of Shanghai and Shenzhen tumbled sharply in the week after authorities made it tougher to buy homes in the cities to prevent a property bubble… After Shenzhen and Shanghai property prices had jumped 57% and 20.6% in February from a year earlier, local governments tightened downpayment requirements for second homes and raised the eligibility bar for non-residents to buy in the cities. In the week beginning March 28, the first after the new rules took effect, the total floor area sold in Shanghai fell 60% from the previous week… Shenzhen sales fell 28.2%...”

April 7 – Bloomberg (Enda Curran): “Hong Kong, which for years rode a wave of cheap capital and China’s economic boom, is as vulnerable now as it was before the 1990’s Asian financial crisis as those drivers reverse, according to analysis by Daiwa Capital Markets. In a bearish take on the financial hub, Daiwa forecasts ‘enormous stress’ ahead as money heads out amid a global U.S. dollar debt deleveraging, China’s economy slows and currency weakens, U.S. interest rates increase, and domestic property prices slump. ‘If the Asian financial crisis was preceded by a classic credit and housing bubble, we see another one now of a bigger scale,’ the Daiwa analysts led by Kevin Lai, chief economist for Asia excluding Japan, wrote… ‘Money inflows have been unprecedented; we expect this money to leave eventually on the back of global dollar debt deleveraging.’”

ECB Watch:

April 7 – Reuters (Francesco Canepa and John O’Donnell): “Top European Central Bank officials drew the boundaries of future action on Thursday, saying the bank had no plan to transfer ‘helicopter’ money directly to Europeans but remained willing to take smaller steps to counter global slowdown. ‘We are not considering anything of that sort. So it's not on the table in any shape or form,’ ECB Vice President Vitor Constancio told lawmakers in the European Parliament, commenting on the concept of making direct payments to citizens, cited by some as a last resort.”

Central Bank Watch:

April 7 – Reuters (Robin Harding in Tokyo and Claire Jones): “Japanese officials stepped up their hints of possible intervention to weaken the yen as the currency soared to its highest levels since the Bank of Japan fired its second stimulus bazooka in October 2014. But despite government warnings of ‘one-sided’ moves, a signal that would usually put traders on high alert, the Japanese currency forged higher to trade at Y107.99 against the dollar. The yen’s momentum is the latest sign that the Herculean efforts undertaken by central banks to spur growth in Asia and Europe are still struggling. Like the BoJ, the European Central Bank has intervened in the capital markets at unprecedented levels to little effect.”

April 4 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda stressed on Tuesday his readiness to expand monetary policy still further, saying that market moves would be key factors the central bank would examine in deciding when and how it might next expand stimulus.”

April 4 – Bloomberg (Sandrine Rastello): “India’s central bank lowered its key interest rate for the first time in six months and said it would look for more room to ease as it watches monsoon rains. Governor Raghuram Rajan cut the benchmark repurchase rate to 6.5% from 6.75%… That’s the lowest since March 2011.”

Europe Watch:

April 3 – Bloomberg (Rebecca Christie): “Greece could again face the threat of being pushed into default and out of the euro if its current bailout review drags on into June and July, according to European officials monitoring the slow progress of Prime Minister Alexis Tsipras’s negotiations with creditors. Greece still hasn’t cut a deal on pensions, tax administration or its fiscal gap, and other issues like non-performing loans and a proposed privatization fund continue to slow the talks… The International Monetary Fund presents another obstacle, they said.”

April 5 – New York Times (Jack Ewing): “China is cutting back on mining machinery as its economy slips. The United Arab Emirates and other Middle Eastern countries are no longer awash in oil money, putting luxury car brands at risk. Russia, still facing Western sanctions, cannot buy as much high-tech energy equipment. The downshift in the emerging markets is leaving Germany vulnerable… As many businesses in the region struggled just to tread water in recent years, German companies prospered by selling the goods and technology that emerging countries needed to become more modern economies. As they did, Germany’s strength served as a counterweight to the economic malaise, financial turmoil and Greek debt drama that dragged down many European countries. Now, Germany, which accounts for the largest share of the European economy, is looking like the laggard.”

April 8 – Bloomberg (Lorenzo Totaro and John Follain): “Italy will fail to reduce its debt load this year as much as previously targeted due to lower than expected economic growth. The debt ratio, the euro region’s second-highest, will slip to 132.4% of gross domestic product this year from 132.7% in 2015…”

Japan Watch:

April 6 – Bloomberg (Luke Kawa): “The Bank of Japan is running out of government bonds to buy. The central bank's would-be counterparties have become increasingly unwilling to sell the debt that monetary policymakers have pledged to buy, and the most recently issued 30-year Japanese bond didn't record a single trade during a session last week as existing owners opted to hoard their holdings. The central bank in the land of the rising prices sun has set a target of $80 trillion (yen) in government bond purchases per year…, an amount that's three times the rate of issuance and totals about 1% of gross domestic product, according to Jefferies Group LLC Chief Global Equity Strategist Sean Darby.”

April 6 – Reuters: “Japan's index of coincident economic indicators in February fell at its fastest pace since the March 2011 earthquake, in a further sign of slowdown in the world's third-largest economy… ‘Consumer spending, exports and capital spending are sluggish and the economy lacks driving forces to propel economic growth,’ said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.”

EM Bubble Watch:

April 6 – Wall Street Journal (William Mauldin): “An exodus of cash from emerging markets in recent years is closely tied to developing economies’ slower growth rates and could end with financial crises in the countries involved, the International Monetary Fund… The IMF highlighted weak growth as the leading culprit in the outflows, as well as investors’ risk appetite and the comparative interest rates in developed and developing economies… Investors flocked to emerging markets for years to take advantage of higher growth rates.”

April 7 – Financial Times (Hudson Lockett): “A gauge of liquidity stress in Asia produced by Moody’s… rose to its highest level since March 2009 last month as corporate liquidity deteriorated in China. The ratings agency’s Asian Liquidity Stress Index, which measures the proportion of companies with weak speculative-grade liquidity among the high yield entities it rates, rose to 32.2% in March, up 1.3 percentage points from February… The ratings agency said the headline index had weakened significantly over the past 12 months…”

April 4 – CNBC (Saheli Roy Choudhury): “India has a big debt problem. A third of the country's 500 largest listed non-financial companies failed to earn enough to make interest payments in the financial year that ended March 2015, according to… India Ratings and Research. The report… said in fiscal 2015, 178 out of the largest listed 500 corporate borrowers had an interest coverage ratio below 1.”

Leveraged Speculation Watch:

April 8 – Bloomberg (Nishant Kumar and Will Wainewright): “After the worst start to a year since 2008, hedge funds repaired some of the damage in March as investments in equities, fixed income and commodities fueled the best monthly gains in two years. Almost 70% of hedge funds globally advanced last month, with average returns of 2.3%, according to eVestment… Hedge funds globally lost 1.7% in January, according to Hedge Fund Research Inc., who described it as the worst start for eight years.”

Brazil Watch:
April 8 – Bloomberg (Raymond Colitt, Anna Edgerton and Arnaldo Galvao): “Brazil’s drawn-out political crisis is moving into a decisive phase next week with two key votes in Congress that could seal the fate of President Dilma Rousseff’s political future. A special committee in the lower house began a marathon session on Friday in order to decide by Monday whether to move forward with an impeachment request… The full Chamber of Deputies could vote as early as April 17, either killing impeachment or setting the stage for Rousseff’s ouster in the Senate. An economic crisis that cost Brazil its coveted investment-grade rating and a corruption scandal that locked up leading executives and politicians have left Latin America’s largest nation deeply divided.”

Geopolitical Watch:

April 3 – Financial Times (Andrea Shalal): “The U.S. Navy plans to conduct another passage near disputed islands in the South China Sea in early April, a source familiar with the plan said…, the third in a series of challenges that have drawn sharps rebukes from China… The United States has conducted what it calls ‘freedom of navigation’ exercises in recent months, sailing near disputed islands to underscore its right to navigate the seas.”