Saturday, May 14, 2016

Commentary: Ominous Portents

Friday headlines from Bloomberg: “Retail Sales Rise Most in a Year, Marking U.S. Consumer Comeback” and “Consumers Turn Out to Be U.S. Growth Lifeline After All.” Ironically, U.S. retail stocks (SPDR S&P Retail ETF) were slammed 4.3% this week, trading back to almost three-month lows. Poor earnings were the culprit. Macy’s sank 15% on Wednesday’s earnings disappointment. Kohl’s missed, along with Nordstrom and JC Penney.

It may be subtle, yet it’s turning pervasive. Support for the burst global Bubble thesis mounts by the week. With stated U.S. unemployment at 5.0% and consumer confidence at this point still in decent shape, spending has enjoyed somewhat of a tailwind. Yet the overall U.S. economy has begun to succumb to a general Credit slowdown. Despite the bounce in crude, the energy sector bust continues to gather momentum. The tech and biotech Bubbles have peaked. Cracks have quickly surfaced in fintech. There are as well indications that some overheated real estate markets across the country have cooled. Whether it is from China or Latin America or Europe, the rush of “hot money” into U.S. real estate and securities markets has slowed meaningfully.

The downshift of Credit and “hot money” flows helps explain the weakness in both corporate profits and the overall stock market. And with stock prices down year-on-year, Household Net Worth has essentially stagnated. Keep in mind that Net Worth inflated from $56.5 TN at year-end 2008 to a record $86.8 TN to close 2015. Over the past six years, Net Worth increased on average $4.76 TN annually. Such extraordinary inflation in household perceived wealth supported spending – which bolstered profits and underpinned asset price inflation and more spending.

Let’s return to the irony of positive retail sales data and negative earnings. It’s easy to forget that retail had been significantly overbuilt during the mortgage finance Bubble period. The worst of the shakeout was avoided as Household Net Worth inflated from 384% (2008) to a record 484% (2015) of GDP. And while inflating perceived wealth boosted spending, zero rates and manic financing markets ensured another period of booming retail investment (bricks and mortar and Internet). There has, as well, been extraordinary growth in various services, certainly including telecommunications.

In contemporaneous analysis during the Great Depression, there was insightful debate questioning whether over-investment or malinvestment was primarily to blame. Well, there was ample blame to go around. And this gets back to the fundamental thesis: It was not insufficient “money” after the 1929 Crash that was the root cause of economic depression, but instead gross excess of “money,” Credit and speculation throughout the Roaring Twenties.

A few weeks back I noted analysis that placed excess global energy sector investment at several Trillion. And this week from Bloomberg (Agnieszka De Sousa), “Glencore CEO Lists Mining's Mistakes After $1 Trillion Spree.” And how many Trillions of over/malinvestment were spent in recent years throughout “tech,” biotech, pharmaceuticals and retail? Tens of Trillions throughout China and Asia more generally? Downward price pressures globally on so many things should be no mystery. And by now it should be indisputable that so-called “deflationary pressures” are not the consequence of insufficient “money.”

In the name of “shortfalls in aggregate demand,” central bankers have flooded the world with “money” and Credit. Predictably, this unprecedented global monetary inflation has wreaked havoc on financial market behavior and investment patterns, while spurring self-reinforcing asset inflation and Bubbles. And aggregate demand? It is not - will never be - "sufficient". As we’ve witnessed, Credit Bubbles redistribute and destroy wealth. Bubbles distort investment and spending patterns, which in the end ensures too much of a lot of stuff that the general population either cannot afford or does not desire.

Newfound retail industry worries are intriguing. Energy – and even tech and biotech – sector excess was somewhat conspicuous, but relatively narrow in focus. Retail malinvestment is much more systemic – it’s virtually everywhere. Zero rates, the yield chase and QE flooded all facets of the sector with cheap finance. “Money” flowed freely into retail-related real estate investment trusts (REITs). Retail property prices inflated as “cap rates” collapsed. The upshot was additional construction and more retail. Meanwhile, booming property values and easy finance ensured that a lot of retail that should have gone bust didn’t.

While on the subject of busts, Lending Club dropped 50% this week. Count me skeptical of the incredible virtues of “marketplace lending,” “peer to peer” and “fintech” more generally. How much valuable innovation is available after decades of radical experimentation – not to mention thousands of years of lending? Yet every boom cycle greets financial innovation with boundless enthusiasm.

I do appreciate that few businesses enjoy the capacity to grow accounting profits as rapidly as lending to those with difficulty borrowing from traditional sources/channels. Lenders can charge high rates, ensuring a profits bonanza so long as rapid loan book growth is maintained. Minimal provisions for future loan losses can be justified, with the percentage of seasoned loans turning sour remaining small in comparison to (rapidly expanding) total loans. But ballooning growth in loan books requires that lenders retain ready access to funding markets. Telecom debt in the nineties and subprime in the 2000s come to mind. It’s amazing how long ridiculous lending crazes can endure – and it’s equally amazing how abruptly the “money” spigot can be shut off.

After last week’s drubbing, global financial stocks saw little relief this week. U.S. bank stocks were down 1.6% Friday, more than erasing the modest gain from earlier in the week. Bank stocks are now down 9.7% year-to-date, with the broker/dealers losing 12.7%.

Globally, Italian banks sank another 2.9% this week, increasing 2016 losses to 36.9%. European bank stocks were volatile but ended the week little changed (down 22.1% y-t-d). The Hang Seng Financials sank 2.5% this week, increasing 2016 losses to 17.8%. It’s worth noting that the Shanghai Composite dropped 3.0% this week, increasing its y-t-d decline to 20%. China’s ChiNext (“innovative and fast-growing enterprises”) Index was clobbered 4.9%.

May 9 – Reuters (Samuel Shen, Pete Sweeney and Kevin Yao): “China may suffer from a financial crisis and economic recession if the government relies too much on debt-fueled stimulus, the official People's Daily quoted an ‘authoritative person’ on Monday as saying. The People's Daily, official paper of the ruling Communist party, in a question and answer interview quoted the person as saying excessive credit growth could heighten risks and trigger a financial crisis if not controlled properly. ‘Trees cannot grow to the sky. High leverage will inevitably bring about high risks, which could lead to a systemic financial crisis, negative economic growth and even wipe out ordinary people's savings,’ the person… said in response to a question on whether stimulus should be used in future economic policy. ‘We should completely abandon the illusion of reducing leverage by loosing monetary conditions to help accelerate economic growth.’”

China’s “authoritative person” sounds like he really knows what he’s talking about. Chinese officials face a quite serious dilemma. They’ve inflated history’s greatest Bubble and they apparently have come to appreciate that the current policy course is unsustainable. Housing Bubble to stock market Bubble to commodities Bubble to runaway Credit Bubble. At this point, it seems completely reasonable to me that Chinese officials recognize that there really is no alternative than to rein in destabilizing Credit excess. I doubt they appreciate the complexities, myriad challenges and extraordinary risks that await.

May 13 – Bloomberg: “China’s broadest measure of new credit rose less than expected last month, suggesting that the central bank is starting to temper a flood of borrowing amid warnings from officials about potential side effects of the debt binge. Aggregate financing was 751 billion yuan ($115bn) in April…, below all 26 analyst forecasts… New yuan loans were 555.6 billion yuan, compared with the median estimate for 800 billion yuan… ‘Policy makers have started to think again and are holding back after injecting too much liquidity in the first quarter,’ said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd… ‘I expected a switch in policy, but didn’t expect it to come so soon.’”

After a spectacular – and historic - $1.0 TN of Q1 Credit growth - total “social financing” fell to $115 billion in April. Was this abrupt slow-down policy-induced? What can be expected from Credit growth going forward? These are incredibly important issues with global ramifications. Confusion abounds. Do policymakers have a cohesive plan – or are we witness to epic floundering? Is Beijing unified or is dissension building? The week saw more air released from China’s commodities Bubble.

May 13 – Wall Street Journal (Biman Mukherji): “China’s steel and iron-ore futures prices tumbled again as renewed worries about excess supplies sent traders rushing for the exits. Iron ore ended Friday down 5.2% at 363 yuan ($55.68) a metric ton, steel rebar down 4.6% at 2,030 yuan a metric ton and hot-rolled coil down 4% at 2,195 yuan a metric ton. For the week, iron-ore futures and steel-rebar futures… both dropped 13% and hot-rolled coil fell 12%, bringing the losses since the April 21 peak to the neighborhood of 25%.”

The week saw little respite for faltering EM. South Africa’s rand sank 3.5% to a six-week low. The Mexican peso dropped another 1.7%, the Chilean peso sank 3.9% and the Colombian peso declined 1.2%. Rising instability had the Turkish lira falling another 1.5%, with Turkey’s stocks down 0.7%, “longest rout since December…” With Brazilian President Dilma Rousseff suspended while awaiting impeachment proceedings, Brazil’s currency declined 0.9%.

Returning to the U.S. and the burst Bubble thesis, it’s worth nothing that the Transports sank 3.0% this week to two-month lows, having now given back all 2016 gains. Copper prices dropped 3.5%, trading to two-month lows. Ten-year Treasury yields sank eight bps to 1.70%, the low yield since January’s market tumult period. The bond market is just not buying into Fed talk of multiple rate rises this year. Instead, bond yields lend strong support to the view of latent U.S. and global fragilities. For me, the backdrop is reminiscent of previous early-stage deflating Bubbles. A Friday Reuters article certainly brought back memories – Ominous Portents.

May 13 – Reuters (Sharon Bernstein): “California Governor Jerry Brown… is expected to amend his proposed $170.7 billion spending plan for the next fiscal year in the wake of unexpectedly low tax revenues. In January, Brown proposed a new state budget that increased public spending on education, healthcare and infrastructure in an indication of the state's continued rebound from years of economic doldrums. But earlier this week, state officials said that tax revenues for the first four months of the year were $869 million below projections, due in large part to unexpectedly low income tax revenues in April, which were more than $1 billion below expectations.”

For the week:

The S&P500 declined 0.5% (up 0.1% y-t-d), and the Dow fell 1.2% (up 0.6%). The Utilities gained 0.9% (up 13.5%). The Banks dropped 1.4% (down 9.7%), and the Broker/Dealers declined 0.6% (down 12.7%). The Transports were slammed 3.0% (unchanged). The S&P 400 Midcaps fell 0.8% (up 3.0%), and the small cap Russell 2000 declined 1.1% (down 2.9%). The Nasdaq100 was little changed (down 5.8%), while the Morgan Stanley High Tech index increased 0.4% (down 5.5%). The Semiconductors slipped 0.7% (down 4.6%). The Biotechs declined 0.3% (down 23.5%). With bullion down $16, the HUI gold index fell 2.1% (up 99.2%).

Three-month Treasury bill rates ended the week at 26 bps. Two-year government yields added two bps to 0.75% (down 30bps y-t-d). Five-year T-note yields slipped two bps to 1.21% (down 54bps). Ten-year Treasury yields fell eight bps to 1.70% (down 4bps). Long bond yields declined seven bps to 2.55% (down 47bps).

Greek 10-year yields dropped 91 bps to 7.25% (down 7bps y-t-d). Ten-year Portuguese yields fell 16 bps to 3.13% (up 61bps). Italian 10-year yields declined two bps to 1.47% (down 12bps). Spain's 10-year yields were unchanged at 1.59% (down 18bps). German bund yields declined two bps to 0.12% (down 50bps). French yields fell five bps to 0.47% (down 52bps). The French to German 10-year bond spread narrowed three to 35 bps. U.K. 10-year gilt yields declined five bps to 1.37% (down 59bps).

Japan's Nikkei equities index recovered 1.9% (down 13.8% y-t-d). Japanese 10-year "JGB" yields increased a basis point to negative 0.12% (down 38bps y-t-d). The German DAX equities index rallied 0.8% (down 7.4%). Spain's IBEX 35 equities index increased 0.2% (down 8.6%). Italy's FTSE MIB index slipped 0.6% (down 17.2%). EM equities were mixed to lower. Brazil's Bovespa index was little changed (up 19.4%). Mexico's Bolsa recovered 0.4% (up 5.6%). South Korea's Kospi index dipped 0.5% (up 0.3%). India’s Sensex equities index gained 1.0% (down 2.4%). China’s Shanghai Exchange sank another 3.0% (down 20.1%). Turkey's Borsa Istanbul National 100 index declined 0.7% (up 8.5%). Russia's MICEX equities index gained 0.3% (up 8.3%).

Junk funds saw outflows of $1.9 billion (from Lipper), the largest negative flows since January.

Freddie Mac 30-year fixed mortgage rates declined four bps to a three-year low 3.57% (down 28bps y-o-y). Fifteen-year rates fell five bps to 2.78% (down 26bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 3.77% (down 24bps).

Federal Reserve Credit last week added $1.1bn to $4.438 TN. Over the past year, Fed Credit slipped $1.1bn. Fed Credit inflated $1.627 TN, or 58%, over the past 183 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $8.8bn to a one-year low $3.220 TN. "Custody holdings" were down $97bn y-o-y, or 2.9%.

M2 (narrow) "money" supply last week jumped $28.5bn to a record $12.717 TN. "Narrow money" expanded $826bn, or 6.9%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits rose $35.6bn, while Savings Deposits fell $14.2bn. Small Time Deposits were little changed. Retail Money Funds gained $4.7bn.

Total money market fund assets increased $4.3bn to $2.715 TN. Money Funds rose $126bn y-o-y (4.9%).

Total Commercial Paper declined $4.6bn to $1.116 TN. CP expanded $123bn y-o-y, or 12.4%.

Currency Watch:

May 11 – Bloomberg (Anchalee Worrachate and Chikako Mogi): “The yen advanced after the currency’s biggest two-day slide in three months attracted buyers even as wariness remains that the Japanese government may intervene to weaken it. Japan’s currency climbed against most of its 16 major peers Wednesday, resuming gains that pushed it to an 18-month high against the dollar last week. Finance Minister Taro Aso reiterated Tuesday that the government can intervene to stabilize foreign-exchange markets if necessary. Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe, said rapid gains in the yen to 100 per dollar could trigger intervention.”

The U.S. dollar index gained 0.8% this week to 94.58 (down 4.2% y-t-d). For the week on the downside, the South African rand declined 3.5%, the Mexican peso 1.7%, the Japanese yen 1.4%, the Australian dollar 1.3%, the Swedish krona 1.3%, the Brazilian real 0.9%, the euro 0.8%, the New Zealand dollar 0.8%, the British pound 0.4%, the Swiss Franc 0.3% and the Canadian dollar 0.2%. The Chinese yuan declined 0.6% versus the dollar.

Commodities Watch:

May 10 – Bloomberg (Katia Porzecanski and Simone Foxman): “Billionaire hedge fund manager Paul Singer said that gold’s best quarter in 30 years is probably just the beginning of a rebound as global investors -- including Stan Druckenmiller -- weigh the ramifications of unprecedented monetary easing on inflation. ‘It makes a great deal of sense to own gold. Other investors may be finally starting to agree,’ Singer wrote… ‘Investors have increasingly started processing the fact that the world’s central bankers are completely focused on debasing their currencies.”

The Goldman Sachs Commodities Index jumped 3.2% (up 16.1% y-t-d). Spot Gold declined 1.2% to $1,273 (up 20%). Silver slipped 0.4% to $17.13 (up 24%). WTI Crude rose another $1.73 to $46.37 (up 25%). Gasoline surged 6.0% (up 25%), while Natural Gas slipped 0.5% (down 11%). Copper sank 3.5% (down 3%). Wheat jumped 2.4% (up 1%). Corn surged 3.5% (up 9%).

Fixed-Income Bubble Watch:

May 8 – Bloomberg (Eric Balchunas): “The guest list of visitors to the world’s largest junk bond exchange-traded fund (ETF) is pretty impressive. When the iShares iBoxx $ High Yield Corporate Bond ETF–better known as HYG–began trading more than a decade ago, it was mostly thought of as a buy-and-hold product used by financial advisers and retail investors. Yet more and more big institutional investors are using it like a hotel—checking in and out in increasingly large sizes with an average stay of less than a month. These ‘guests’ form a veritable Who’s Who of institutional investing… This ‘high roller’ clientele was on full display last week when HYG saw an incredible $2.8 billion in outflows—the most ever by any bond ETF, two times over.”

May 13 – Bloomberg (Claire Boston): “Investors who gobbled up $74 billion of corporate bonds sold by blue-chip companies in the U.S and Europe in the busiest week since January, should get ready for another deluge of debt sales. Next week Dell Inc. may sell more than $16 billion of notes in the investment-grade bond market to fund its buyout of EMC Corp. That would make it the second-largest corporate bond sale this year after Anheuser-Busch InBev NV’s $46 billion deal in January that backed its purchase of SABMiller Plc.”

Global Bubble Watch:

May 8 – Wall Street Journal (Tom Fairless): “The financial crisis has been a cash cow for central banks. They are turning record profits, bolstered by income from their bulging asset and loan portfolios and, more recently, from charging banks for making deposits. The windfall has been a boon for cash-strapped governments. But as their balance sheets grow, political pressures on central banks are intensifying… The U.S. Treasury collected almost $100 billion from the Federal Reserve in each of the past two years, more than three times its average annual haul in the three years before the 2008 financial crisis.”

May 11 – Wall Street Journal (Liz Hoffman): “In the world of mergers and acquisitions, 2015 was a year of record-breaking deals. This year is one of broken-deal records. More than $395.4 billion in U.S. mergers… have fallen apart in 2016, according to… Dealogic, felled by exacting regulators, rocky markets or reluctant targets. That will be a record even if no other deals stumble for the rest of the year. That is bad news for the banks that stood to make billions of dollars in fees on the M&A feast of 2015, a record-setting year of more than $4.6 trillion in announced deals. Financial advisers pocket most of their money only when deals close, which means that when deals go bust, the work they have already done goes largely unpaid.”

May 12 – Financial Times (Eric Platt): “Outflows from equities have hit nearly $90bn this year, after investors pulled $7.4bn from global funds in the fifth consecutive week of redemptions… The withdrawals have put equities ‘firmly’ on track for their biggest year of redemptions since 2011, according to… EPFR.”

May 11 – Financial Times (Elaine Moore and Simeon Kerr): “Middle Eastern governments have already set a record for debt sales, as the sustained fall in oil prices weakens public finances across the world’s largest crude-exporting region… HSBC’s chief economist for the Middle East, Simon Williams, calculates that sovereign, financial and corporate borrowers in the six-nation Gulf Cooperation Council must repay or refinance $94bn in bonds in 2016 and 2017. This, he said, would be increasingly difficult amid slowing growth and rating downgrades. So far this year, S&P and Fitch have both cut ratings on Saudi Arabia while Moody’s has cut Oman’s credit rating and lowered Bahrain’s rating to junk… Bankers are awaiting later this month Moody’s ratings decision after placing Saudi Arabia on a review for possible downgrade.”

May 11 – Bloomberg (Saijel Kishan and Katia Porzecanski): “Kyle Bass, the hedge fund manager who’s wagering on a slowdown in China’s economy, said Hong Kong’s property market is in ‘free fall’ and the credit expansion in Southeast Asian emerging markets will unravel. ‘Hong Kong is in a worse position than it was in prior to the ’97 crisis today,’ Bass said... He said credit in Asian emerging markets has grown ‘recklessly,’ citing Malaysia and Thailand. Bass… is predicting losses for China’s banks and raising money to start a dedicated fund for bets in the nation. He said last week at a conference that investors putting money in Asia should ask themselves if they can handle 30% to 40% writedowns in Chinese investments. ‘China may be able to not tell the truth about specific output levels, or GDP figures -- they might be able to fudge those numbers for a while… But their trading partners kind of tell the truth, and you’re already seeing what’s happening in their primary trading partners.’ The Chinese credit system, according to Bass, is ‘one of the biggest macro imbalances the world has ever seen.’”

May 12 – New York Times (Leslie Picker): “While last year set a record for the amount of money spent on corporate mergers — $4.7 trillion — this year is so far setting a very different record: the dollar amount of deals that have come undone. Since the beginning of January, $400 billion worth of corporate mergers have been withdrawn in the United States, almost three times the previous record for the same period, set in 2007, according to Dealogic… On Tuesday, the retailers Staples and Office Depot called off their $6.3 billion deal. The collapse came about a week after the dismantling of the proposed $35 billion merger of the oil services companies Halliburton and Baker Hughes, and one month after the death of the drug giant Pfizer’s proposed $152 billion merger with Allergan…”

May 11 – Bloomberg (Agnieszka De Sousa): “Glencore Plc’s billionaire Chief Executive Officer Ivan Glasenberg wants the mining industry to learn from past mistakes after a $1 trillion spending spree left the world awash with metals. Growth for the metals industry should mean cash flows and earnings, not digging up as many tons as possible, Glasenberg said… Profit can be improved by accepting lessons from the 12 years when mining companies poured cash into boosting production of everything from copper to iron ore.”

May 12 – Bloomberg (Prashant Gopal): “The world’s wealthiest homebuyers are pulling back from the traditional magnets of New York, Hong Kong and London, making way for cities such as Auckland, New Zealand, and Jackson Hole, Wyoming, to rank among the fastest-growing luxury real estate markets. Sales of luxury homes -- those of at least $1 million -- rose 8% worldwide last year, slowing after a 16% jump in 2014, according to a Christie’s International… Purchases declined in Manhattan, Hong Kong and central London, while jumping 63% in Auckland, 48% in the Toronto metropolitan area, 21% in Paris and 45% in the resort market of Jackson Hole. Buyers’ appetite for homes in gateway cities globally has been damaged by economic unrest, soaring prices and exchange-rate shifts.”

U.S. Bubble Watch:

May 11 – Washington Post (Emily Badger and Christopher Ingraham): “The great shrinking of the middle class that has captured the attention of the nation is not only playing out in troubled regions like the Rust Belt, Appalachia and the Deep South, but in just about every metropolitan area in America, according to a major new analysis by the Pew Research Center. Pew reported in December that a clear majority of American adults no longer live in the middle class, a demographic reality shaped by decades of widening inequality, declining industry and the erosion of financial stability and family-wage jobs. But while much of the attention has focused on communities hardest hit by economic declines, the new Pew data… show that middle-class stagnation is a far broader phenomenon. The share of adults living in middle-income households has also dwindled in Washington, New York, San Francisco, Atlanta and Denver. It's fallen in smaller Midwestern metros where the middle class has long made up an overwhelming majority of the population. It's withering in coastal tech hubs, in military towns, in college communities, in Sun Belt cities. The decline of the American middle class is ‘a pervasive local phenomenon,’ according to Pew…”

May 11 – New York Times (Mary Williams Walsh): “To tourists, Puerto Rico means piña coladas and sunbathing. To Puerto Ricans, it looks very different: The unemployment rate is over 12%, schools and hospitals are closing, and the government debt is so huge it makes Detroit’s look modest. Puerto Rico is now supposed to pay an unfathomable $2 billion to bondholders on July 1 — which it cannot do — even as it accrues pension obligations to its workers and lets public works lapse… But mainland residents should not look smugly at Puerto Rico. Across America, dozens of cities, counties and states may be heading down the same financial rabbit hole. Illinois, New Jersey, Philadelphia, St. Louis and Jacksonville, Fla., to name just a few, are all facing their own slowly unspooling financial disasters.”

May 8 – Wall Street Journal (Stephen Grocer): “For deal makers, 2016 is set to be another record year, just not the type of record anyone wants. Last week Halliburton Co. and Baker Hughes Inc. called off their nearly $35 billion deal after facing resistance from regulators. The transaction’s failure brought the value of withdrawn U.S. deals to $378 billion. That is not only the highest level year to date for U.S. withdrawn deals, it is the highest total for a full year… World-wide buyers have canceled $489 billion of deals so far this year, according to Dealogic, the second highest year-to-date level since the $505 billion in 2007.”

May 13 – Bloomberg (Suzanne Woolley): “Student loans are gobbling up a growing share of household debt. Borrowing for education accounted for 10.2% of that debt at the end of 2015, about three times as much as in 2005. That makes student loans second only to mortgage debt on family balance sheets... It adds up to a massive $1.3 trillion in student loans outstanding, 11.5% of which is overdue by 90 days or more.”

May 10 – Dow Jones (Michael Corkery): “Renaud Laplanche and his crew steered a 105-foot racing boat through New York Harbor one day last spring, its towering sails ripping across the water at 30 knots. An accomplished sailor and founder of Lending Club, Mr. Laplanche was hosting executives from hedge funds, Goldman Sachs and other banks — part of his effort to win over Wall Street on his plans to upend traditional banking with a faster, more democratic form of lending. He already had endorsements from Lawrence H. Summers… and John Mack, the former chief of Morgan Stanley, who joined his board. At Lending Club’s initial public offering in December 2014, the company was valued at over $8 billion. But on Monday, Lending Club announced that Mr. Laplanche had resigned after an internal investigation found improprieties in its lending process, including the altering of millions of dollars’ worth of loans. The company’s stock price… fell 34%. The company’s woes are part of a broader reckoning in the online money-lending industry.”

May 11 – Bloomberg (Noah Buhayar and Matt Scully): “Questions swirling around LendingClub Corp.’s leadership shakeup this week are threatening to compound a concern already weighing on its stock: Will investors keep snapping up its loans? In interviews, people in the business of buying debts from its platform said Tuesday the company hasn’t adequately explained what prompted the management shuffle, causing some to consider scaling back or delaying purchases… The stock has plunged 44% since then, trading Wednesday at less than a third the price of its initial public offering in 2014.”

May 10 – New York Times (Eliot Brown and Josh Barbanel): “The 1,004-foot Manhattan condominium tower known as One57 was the envy of the real-estate market as it was being constructed in recent years, garnering interest from so many wealthy buyers that it sparked a boom by developers betting demand for luxury apartments would keep climbing to the skies. It didn’t. Instead, sales at One57 have slowed to a trickle, with about 20 of the original 94 condos still unsold… Demand in Manhattan’s super-high-end condo market has dried up amid global economic jitters, just as the market has been flooded with unprecedented supply. It is a potent recipe for a bear market in a sector that has reshaped the peaks of the Manhattan skyline in recent years.”

May 9 – Bloomberg (Hui-Yong Yu): “Hotels in sun-drenched Miami are getting burned by a pullback in Brazilian travel and a building boom that has added thousands of rooms to the market. Nightly room costs are dropping. Greater Miami’s revenue per available room.. has fallen each month this year, and in April was the worst of the top 25 U.S. markets, according to STR… Marriott International Inc., set to become the world’s largest hotel operator, said on its first-quarter earnings call that Miami is among its weakest U.S. areas. The city, known for its Latin American influences and trendy South Beach party scene, is being hit by too much hotel supply and not enough demand.”

May 12 – Bloomberg (Heather Perlberg): “Seven months after Blackstone Group LP said it planned to expand into online consumer lending, the firm is pulling back. Several executives at Blackstone’s B2R Finance… have left as the company reorganized to focus more on its original mission, real estate financing, according to people familiar… The moves were in the works before shares of online lender LendingClub Corp. fell more than 40% this week. Blackstone is aborting its foray into an industry that was going to rewrite the rules of banking, yet is now facing scrutiny after a scandal at LendingClub.”

Federal Reserve Watch:

May 11 – CNBC (Tom DiChristopher): “Persistently low interest rates are doing ‘a lot of damage,’ particularly to the financial industries that underpin the U.S. economy, former Dallas Federal Reserve President Richard Fisher said… The companies Fisher said he's most worried about are insurers. ‘Insurance companies, particularly life companies, are like noble oxen. They pull the cart forward steadily forever and ever and ever. They're living in a 1% world in this country, but they're pulling a 3-to-6% liability cart. It doesn't square,’ he told CNBC's ‘Squawk Box.’ Low interest rates are a major risk for insurers because the income they derive from investments — mostly in safe assets like Treasurys — may be insufficient to fund payouts to customers in low-rate environments.”

China Bubble Watch:

May 11 – Financial Times (Tom Mitchell): “So maybe George Soros was on to something after all. On Monday the People’s Daily, the Chinese Communist party’s flagship newspaper, published a front-page interview with an ‘authoritative figure’ who warned that the country’s soaring debt levels could lead to ‘systemic financial risks’. The last time the People’s Daily made such a splash was in January, when its overseas edition took Mr Soros to task for allegedly shorting the renminbi… More recently, the ‘man who broke the Bank of England’ said China was at the top of a debt precipice comparable to the one the US tumbled off a decade ago. The ‘authoritative figure’ … was even more quotable than Mr Soros on China’s dangerous debt level, currently at 237% of gross domestic product and climbing. ‘A tree cannot reach the sky… Any mishandling [of the situation] will lead to systemic financial risks, negative economic growth and evaporate people’s savings. That’s deadly.’”

May 9 – Bloomberg: “To get a read on U.S. economic policy, investors may parse minutes from Federal Reserve meetings. In Europe, they scrutinize Mario Draghi’s public remarks. When it comes to China, they’re increasingly studying an ‘authoritative person’s’ anonymous prognostications in the Communist Party’s most important newspaper. For the third time in less than a year on Monday, the People’s Daily published an extended interview with an unnamed official expounding the policies needed to address challenges facing the world’s second-largest economy. As in similar pieces in January and last May… the speaker sought to clear up what were presented as misunderstandings about China’s policy plans. Monday’s page-one takeaway: Excessive debt was China’s ‘original sin’ and the country can’t borrow its way to long-term economic health.”

May 13 – Reuters (Shu Zhang and Matthew Miller): “Troubled lending at China's commercial banks reached 4.6 trillion yuan ($706bn) at end-March, a jump of 428 billion yuan from December…, as the pace at which loans are souring has risen amid the country's slowdown. Chinese commercial bank non-performing loans (NPLs) rose to an 11-year-high of 1.4 trillion yuan, or 1.75% of total bank lending… At the end of 2015, NPLs accounted for 1.67% of all loans. Separate from NPLs, ‘special mention’ loans, or lending potentially at risk of becoming non-performing, rose to 3.2 trillion yuan…, the CBRC said, surpassing 4% of total loan volume for commercial banks.”

May 9 – Bloomberg: “From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors. But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of $183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame. What started as a logical bet -- that China’s economic stimulus and industrial reforms would lead to shortages of construction materials -- quickly morphed into a full-blown commodities frenzy with little bearing on reality… ‘You have far too much credit, money sloshing about, money looking for higher returns,” said Fraser Howie, the co-author of ‘Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.’ ‘Even in commodities where you could have argued there is some reason for prices to rise, that gets quickly swamped by a nascent bull market and becomes an uncontrollable bubble.’”

May 9 – Reuters (Ruby Lian and Gavin Maguire): “Chinese commodities dived on Monday, led by 6% falls in steel and iron ore futures, as deepening worries about China’s demand extended a fortnight of sharp drops and false rebounds in the country's market for industrial metals. Speculative funds rushed into China's commodities futures last month, betting the country's economy was bottoming. The buying frenzy alarmed domestic exchanges and regulators fearing a bubble could be forming as volumes and prices soared.”

May 11 – Reuters (Patturaja Murugaboopathy): “Local governments across China are binging on debt again to pump-prime their slack economies. But this time round, they are not wasting money propping up zombie factories or loss-making steel plants. Investment in industries hit by chronic overcapacity is drying up quickly. Investment in mining tumbled 18% in the first quarter from a year earlier, the most since at least the second quarter of 2004, while investment in manufacturing grew just 6%... In recent years, miners and manufacturers had tapped easy-to-access bank credit and government subsidies to fire up production even as demand began to wilt. In a landmark move, Beijing has ordered the closure of debt-ridden zombie firms as its policy priority for 2016.”

May 11 – Financial Times (Hudson Lockett and Lucy Hornby): “The Chinese government is to pump almost Rmb5tn into transport infrastructure over the next three years, in a sign of its determination to use state investment to keep the economy humming. However, analysts said the announcement by the Ministry of Transport added to a sense of confusion about the direction of Chinese economic policy. Infrastructure spending served China well when it was growing rapidly and seeking to build a modern economy but in recent years has resulted in white elephants, industrial overcapacity, economic distortions and debt. The announcement on Wednesday of the spending — Rmb5tn is equivalent to 6.9% of China’s 2015 gross domestic product — comes despite other influential voices in China warning this week of the alarming degree of leverage in the Chinese economy.”

May 11 – Financial Times (Gabriel Wildau): “China’s securities regulator is barring companies from selling new shares to fund investments in non-core businesses such as internet finance, online gaming and virtual reality, in a bid to head off a speculative bubble, according to local media. As China's economic slowdown has slammed traditional industries such as manufacturing and construction, investors have piled into sunrise industries including technology, finance and media. In a bid to renew their fortunes and boost stock prices, listed companies in declining sectors have made abrupt shifts into new business lines, often signalling them with eye-catching name changes designed to capture investor interest.”

May 7 – MarketWatch (Sue Change): “China’s bad loans are many times worse than what the official data are claiming, and the Chinese authorities do not have a strategy to tackle the problem, according to… CLSA. ‘Nonperforming loans will worsen with the slowing economy, but the government does not have a comprehensive plan,’ Francis Cheung, head of CLSA’s China and Hong Kong strategy, said… Cheung estimated that the country’s bad loans are actually around 15% to 19%, significantly more than the 1.6% announced by the government recently. At that rate, it will require at least $1 trillion, equivalent to 10% of the economy, to clean up the banking sector, he said. That is in line with a study from the International Monetary Fund last month that indicated that loans at risk account for about 15.5% of total bank loans, or $1.3 trillion. ‘The share of commercial banks’ loans to corporates that could potentially be at risk has been rising fast and, although currently at a manageable level, needs to be addressed with urgency in order to avoid serious problems down the road,’ the IMF said…”

May 9 – Wall Street Journal (Brian Spegele and John W. Miller): “China is doubling down on efforts to keep unprofitable factories afloat despite for years pledging to curb excess capacity, adding to a glut of basic materials flooding the global economy. The country’s overproduction of steel, aluminum, diesel and other industrial goods has driven down prices and crippled competitors, leading to thousands of lost jobs in the U.S. and elsewhere. China’s continuing aid for unneeded factories is triggering a sharp rise in trade disputes and protectionist sentiment, especially in the U.S., where trade has emerged as one of the pivotal issues in the U.S. presidential election.”

May 8 – Bloomberg: “China’s problem with fake trade invoices appears to be getting worse. Imports from Hong Kong surged a record 204% last month…, intensifying the spotlight on a channel used to get capital out of the country. While the value at $2.1 billion is relatively small, the suspected use of phantom goods to secure hard currency shows concern persisting among Chinese savers and companies that the yuan will weaken. ‘As long as there is an expectation of yuan depreciation against the dollar, there will be a massive outflow of funds,’ said Iris Pang… senior economist for greater China at Natixis Asia Ltd. ‘As long as channels under the capital account are still semi-closed, trade will remain a shadow channel for fund outflows.”

May 13 – Bloomberg: “Hong Kong’s economy unexpectedly contracted in the first quarter as falling retail sales and a weakening property market weigh on the city. Gross domestic product fell 0.4% in the three months through March from the previous quarter… Hong Kong’s retail sales fell for a thirteenth straight month in March, the longest stretch since 1999…”

Central Bank Watch:

May 10 – Bloomberg (Jeff Black): “The world’s dollar-dominated monetary order has serious instabilities that can best be fixed by central banks explicitly coordinating policy, Claudio Borio, the chief economist of the Bank for International Settlements, argued in a new paper. ‘The Achilles heel of the international monetary and financial system is that it amplifies the key weakness of domestic monetary and financial regimes, i.e. their inability to prevent the build-up and unwinding of hugely damaging financial imbalances,’ Borio wrote. The ‘most ambitious possibility would be to develop and implement new global rules of the game that would help instill greater discipline in national policies.’ …’How far away is the international community from finding adequate solutions? The answer is a long way,’ Borio said. ‘There is no doubt that the dominance of one currency creates challenges’ for the global system, he said.”

May 10 – Dow Jones (Paul Hannon): “The head of India's central bank questioned… the ability of his counterparts in developed economies to boost demand, and said that their continued efforts to do so risked doing more harm than good to the global economy. With economic growth remaining weak and inflation rates very low, central banks in developed economies have ventured into new territories in recent years… Mr. Rajan said that by reducing the income people expect to earn from their savings, very low or negative interest rates actually spur them to put more money aside for their retirement, or other future purpose. And while quantitative easing raises asset prices, people may expect future declines when that policy is withdrawn, again giving them an incentive to save more, he said. ‘We're reaching the limits of what monetary policy can do,’ Mr. Rajan said.”

May 10 – Wall Street Journal (Paul Hannon): “The head of India’s central bank questioned… the ability of his counterparts in developed economies to boost demand, and said that their continued efforts to do so risked doing more harm than good to the global economy. With economic growth remaining weak and inflation rates very low, central banks in developed economies have ventured into new territories in recent years, adopting a range of novel measures… But in a speech…, Reserve Bank of India Governor Raghuram Rajan said that those policies appear to be having little impact on domestic demand.”

May 10 – Reuters (Gernot Heller): “German Finance Minister Wolfgang Schaeuble said… central banks should start finding ways to gradually raise their record-low interest rates, though he refrained from naming the European Central Bank whose monetary policy he has often criticized. ‘I have repeatedly said that the zero rates and negative rates, which we have, carry an enormous political risk,’ Schaeuble told an event… ‘Therefore I would much prefer that the central banks gradually try to find a way out of the unusual monetary policy, gently and cautiously.’”

Japan Watch:

May 13 – Wall Street Journal (Atsuko Fukase): “Top executives at two Japanese megabanks said they were doubtful about the effectiveness of the Bank of Japan’s negative-interest-rate policy because uncertainty over the global economy was making corporate executives cautious about new borrowing. Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. reported earnings Friday that highlighted their challenges after the central bank’s easing cut into their profit margins… ‘We’re not at all in a positive business environment, with the Chinese economy continuing to slow down and Japan facing a strong-yen trend,’ Yasuhiro Sato, the president of Mizuho, said… He said he hasn’t seen any pickup in appetite for loans from companies and individuals despite the Bank of Japan’s decision earlier this year to introduce negative interest rates…”

Europe Watch:

May 11 – Bloomberg (Lorenzo Totaro and Chiara Albanese): “Try as he might, Matteo Renzi just can’t push Italy’s economy into the euro area’s premier league. Progress in the currency bloc’s third-largest economy has been hobbled by dizzyingly high levels of debt for the government and mountains of bad loans that burden the country’s largest banks and weigh on their stocks’ performance… While the economy probably grew for a fifth quarter at the start of the year, gross domestic product remains 8% below its pre-crisis peak reached in 2007. Within the euro area, that leaves Italy’s gap second only to Greece in terms of ground to be made up… Worries about banks centered on their 360 billion euros ($410bn) gross amount of non-performing loans, a debt burden that’s hindering lending and stifling profitability.”

May 12 – Reuters (Francesco Canepa): “Two banks borrowed $1 billion at the European Central Bank's weekly dollar auction on Wednesday, a rare use of a source of emergency cash created to help troubled lenders during the financial crisis. The banks were not identified and their reason for tapping relatively expensive ECB funding is not known. But dealers contacted by Reuters said they might have not have been able to source dollars more cheaply on the market because they lacked good collateral.”

May 10 – Financial Times (Alex Barker and Jim Brunsden): “Long-promised debt relief talks for Greece have started: Greek markets are giddy, politicians in Athens are hailing a breakthrough, and eurozone officials are aiming for bailout loans to be unblocked within weeks. That is if all goes to plan. While a meeting of eurozone finance ministers on Monday made headway in breaking a stalemate between creditors on Greece’s €86bn bailout, officials are still at the start of a difficult political journey. ‘Finally we have the will to get this done, but are we ready for a full debt relief deal by May 24? I have serious doubts,’ said a senior eurozone official involved in the talks. To continue its participation in the programme, the International Monetary Fund is pressing for the eurozone to grant deep, far-reaching and near-automatic debt relief when Greece’s programme ends in 2018. Yet it is unclear whether Germany and other more hardline creditor countries are willing to take the political hit now of making bankable debt relief commitments…”

Leveraged Speculation Watch:

May 12 – Wall Street Journal (Rob Copeland and Timothy W. Martin): “Some of the most famous minds in investing convened here this week for an annual celebration of the hedge-fund industry. But, feeling the weight of years of underperformance and an uptick in client defections, the mood was anything but festive. Longtime hedge-fund manager Leon Cooperman openly questioned whether it made sense to continue on after redemptions from his firm, Omega Advisors… The 73-year-old Mr. Cooperman summed up the industry’s mood… ‘The hedge-fund model is under challenge. It’s under assault’…”

May 10 – New York Times (Alexandra Stevenson): “JPMorgan Chase paid its chief executive, Jamie Dimon, $27 million in 2015. In another Wall Street universe, the hedge fund manager Kenneth C. Griffin made $1.7 billion over the same year. Even as regulators push to rein in compensation at Wall Street banks, top hedge fund managers earn more than 50 times what the top executives at banks are paid. The 25 best-paid hedge fund managers took home a collective $12.94 billion in income last year, according to… Institutional Investor’s Alpha magazine. Those riches came during a year of tremendous market volatility that was so bad for some Wall Street investors that the billionaire manager Daniel S. Loeb called it a ‘hedge fund killing field.’ A few hedge funds flamed out; others simply closed down. Some of the biggest names in the industry lost their investors billions of dollars.”

May 12 – Wall Street Journal (Rob Copeland): “One of the biggest backers of hedge funds is having second thoughts. ‘I have to say, the past few years I’m sort of disappointed with the performance, to say the least, of the industry,’ Roslyn Zhang, managing director overseeing hedge funds for China Investment Corp., said at the hedge-fund industry’s annual SALT conference. CIC is the sovereign wealth fund for the world’s most populous nation. The CIC official later told The Wall Street Journal in an interview that she was booting managers from her approved list and beginning the process of evaluating whether to slash the fund’s investment in hedge funds overall.”

Brazil Watch:

May 12 – Bloomberg (Arnaldo Galvao, Mario Sergio Lima and Randy Woods): “Brazil’s Senate voted to suspend President Dilma Rousseff from office, ushering in a new government after months of political turmoil in the recession-wracked country. Legislators agreed on Thursday after a marathon session that lasted 21 hours to try the president on allegations she illegally doctored fiscal accounts to mask the size of the budget deficit… Rousseff, a one-time guerrilla fighter, now must step down and stand trial in the Senate, a process that could wrap up by September…”

Geopolitical Watch:

May 12 – New York Times (Andrew E. Kramer): “As American and allied officials celebrated the opening of a long-awaited missile defense system in Europe with a ribbon cutting and a band, the reaction in Moscow on Thursday was darker: a public discussion of how nuclear war might play out in Europe and the prospect that Romania, the host nation for the United States-built system, might be reduced to ‘smoking ruins.’ ‘We have been saying right from when this story started that our experts are convinced that the deployment of the ABM system poses a certain threat to the Russian Federation,’ the Kremlin spokesman, Dmitri S. Peskov, told reporters… ‘Measures are being taken to ensure the necessary level of security for Russia,’ he said. ‘The president himself, let me remind you, has repeatedly asked who the system will work against.’”

May 10 – Bloomberg (Adela Lin and Debra Mao): “China and Taiwan are facing a confrontation not seen in years as the island’s incoming president refuses to accept Beijing’s bottom line for maintaining stable ties between the one-time civil war foes. With little more than a week before her inauguration, Taiwanese President-elect Tsai Ing-wen has shown no sign she’ll bow to Communist Party pressure and use the May 20 event to proclaim that both sides are part of ‘one China.’ That understanding -- known as the 1992 consensus -- underpinned eight years of improving ties across the Taiwan Strait. That is, until Tsai’s pro-independence Democratic Progressive Party swept the more-Beijing-friendly Kuomintang from power in a landslide election in January.”

May 11 – Reuters (Ben Blanchard): “Taiwan's new government will be to blame for any crisis with China that erupts once it assumes office, Beijing said…, heaping on the pressure ahead of the inauguration of a new president from a pro-independence party… Tsai and the DPP won presidential and parliamentary elections by a landslide in January, in part on rising anti-China sentiment. Beijing has never renounced the use of force to take the island which it considers a breakaway province…”

May 11 – Reuters (Michael Martina, Greg Torode and Ben Blanchard): “China scrambled fighter jets on Tuesday as a U.S. navy ship sailed close to a disputed reef in the South China Sea, a patrol China denounced as an illegal threat to peace which only went to show its defense installations in the area were necessary. Guided missile destroyer the USS William P. Lawrence traveled within 12 nautical miles of Chinese-occupied Fiery Cross Reef…”

May 13 – Reuters (Seyhmus Cakan and Seda Sezer): “Eight Turkish soldiers and 22 Kurdish militants have been killed in clashes over the last two days…, as violence widened in the largely Kurdish southeast following two bombings. After the collapse of a ceasefire between the Kurdistan Workers Party (PKK) and the government last July, Turkey's southeast has seen some of its worst fighting since the height of the Kurdish insurgency in the 1990s.”