Saturday's News Links

[Bloomberg] Brazil Government to Fight Judge's Decision on Lula With Appeal

[Reuters] 'Helicopter money' is not manna from heaven, Bundesbank chief says

[Bloomberg] `Helicopter Money' Hurts Banks, ECB's Weidmann Tells Newspaper

[Reuters] China Central bank vice governor: G20 policy coordination will help global growth, curb risks 

[Reuters] Struggling U.S. oil and gas companies eye rare financing deals

[CNBC/NYT] Carrier Workers See Costs, Not Benefits, of Global Trade

[Der Spiegel] A Painful Farewell: SPIEGEL Correspondent Forced to Leave Turkey

[Der Spiegel] The Next Disaster: Islamic State Expands as Libya Descends into Chaos

[Reuters] Risk of nuclear war in Europe growing, warns Russian ex-minister

Weekly Commentary: Q4 2015 Flow of Funds

I’d been waiting patiently for the Fed’s Q4 2015 Z.1 “flow of funds” report. The fourth quarter was a period of financial instability and tightened financial conditions. What tracks would be left in the data? Moreover, would the report confirm a continuation of the broadening Credit slowdown that had turned more pronounced during Q3, a slowing that would portend weak GDP and corporate earnings. Would the data support the thesis of mounting financial fragility? This Z.1 did not disappoint.

Importantly, Credit did slow almost across the board. For starters, weak Corporate borrowings were evidence of a meaningful tightening of Credit conditions. Q4’s growth rate of 2.7% was the weakest Corporate Credit growth since Q4 2010 and was down significantly from Q3’s 4.6%, Q2’s 8.6% and Q1’s 8.5%. Household Mortgage Debt slowed to 1.5%, verses Q3’s 1.7% and Q2’s 2.5%. The fourth quarter’s 5.9% pace of Consumer (non-mortgage) Credit expansion compared to Q3’s 7.2%, Q2’s 8.5% and Q1’s 5.6%. There was even a marked stalling in State & Local borrowings, with Q4’s flat growth down from Q3’s 1.7%, Q2’s 1.0% and Q1’s 4.3%.

Federal debt was the big outlier in the “almost across the board” Credit slowdown. Federal borrowings expanded at an 18.5% rate, the strongest Washington Credit boom since Q2 2010. This more than offset the private-sector slowdown, ensuring that overall Non-Financial Debt (NFD) growth accelerated to an 8.6% pace in Q4. This reversed the trend that had seen Q3’s 2.1% at less than half of Q2’s 4.6% pace (Q1 2.6%).

Q4’s surge in Federal borrowing pushed 2015 Total Non-Financial Debt growth to 4.5%, matching 2014. NFD expanded 4.0% in 2013, 5.0% in 2012, 3.5% in 2011 and 4.4% in 2010. Total Business (corporate plus business financial) borrowings expanded a robust 6.6% (up from 2014’s 6.3%). Annual Federal borrowings slowed somewhat to 5.0% (from 2014’s 5.4%). State & Local borrowings expanded 1.8% after contracting 0.5% in 2014. Consumer Credit expanded 7.0%, the same rate as 2014 (strongest since 2001). Home Mortgage debt expanded 1.5% (strongest since 2007), up from 2014’ 0.5%.

In nominal dollars, NFD expanded $1.961 TN in 2015, up from 2014’s $1.848 TN to the strongest expansion since 2007 ($2.480 TN). Last year’s debt growth was led by $794 billion of total business borrowings, the strongest expansion since 2007. Federal borrowings increased $725 billion, down only slightly from 2014’s $736 billion. Household Mortgage borrowings expanded $137 billion last year, the strongest growth since 2007’s $734 billion. Consumer Credit grew a record $231 billion (up from 2014’s $218bn).

The Domestic Financial Sector saw borrowings slow to a 1.3% pace, down from Q3’s 1.9% and Q2’s 2.4%. Bank (“Private Depository Institutions”) lending ended 2015 on a strong note, expanding SAAR (seasonally-adjusted and annualized rate) $722 billion during Q4. This put 2015 annual loan growth at $674 billion, up from 2014’s $579 billion and the strongest expansion since 2007.

Certainly related the quarter’s financial market instability, there was a significant contraction in Foreign Banking Offices in U.S.  Here, Assets contracted SAAR $562 billion (after Q3’s SAAR $59bn contraction). On the Foreign Bank asset side, Reserves at Federal Reserve dropped SAAR $732 billion. Liabilities saw a SAAR $445 billion contraction in Net Interbank Liabilities to Foreign Banks. “Money” on the move…

Especially during Q4, strong domestic bank lending was more than offset by a notable decline in market-based Credit. Q4 market instability clearly had a major impact on Wall Street.  Securities Broker/Dealers saw assets contract SAAR $839 billion during the quarter, versus Q3’s $24 billion expansion, Q2’s $124 billion contraction and Q1’s $97 billion expansion. Broker/Dealer Debt Securities holdings contracted SAAR $168 billion, and Security Repurchase Agreement assets dropped SAAR $442 billion. Miscellaneous Assets contracted SAAR $266 billion. On the Liability side, Security Repurchase Agreements declined SAAR $502 billion and Other Miscellaneous Liabilities contracted SAAR $406 billion. Wild financial flows…

It’s been my view that policy and speculative market backdrops have unleashed intransigent Monetary Disorder.  Z.1 data offer support for this thesis. The category Federal Funds and Security Repurchase Agreements saw a Q4 contraction of SAAR $333 billion, which followed Q3’s SAAR $575 billion expansion, Q2’s SAAR $214 billion contraction and Q1’s SAAR $181 billion expansion.

Waning marketplace liquidity was apparent in a marked drop in corporate debt issuance. Corporate Bonds expanded only SAAR $53 billion during Q4, down from Q3’s SAAR $107 billion, Q2’s SAAR $654 billion and Q1’s SAAR $645 billion. It’s also worth noting that outstanding Asset-Backed Securities (ABS) contracted SAAR $96 billion during Q4, this following Q3’s SAAR $150 billion decline.

In the category “the more things change, the more they stay the same,” waning marketplace liquidity spurred a surge in GSE activity. The GSEs increased assets SAAR $224 billion during Q4, up from Q3’s SAAR $144 billion to the strongest expansion since Q4 2014 ($283bn). On an annualized basis, 2015’s $85 billion GSE expansion was the strongest since 2008 ($234bn).

Agency- and GSE-Backed Mortgage Pools expanded SAAR $196 billion during the period, versus Q3’s SAAR $185 billion, Q2’s SAAR $122 billion and Q1’s SAAR $5.1 billion. For 2015, GSE MBS expanded $127 billion, up from 2014’s $75 billion.

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 (down from 2014’s $37.612 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 (& non-profits) Assets ended 2015 at a record $101.306 TN, up $2.953 TN (3.0%) during the year. Household Assets have increased almost 50% since the end of 2008. And with Household Liabilities rising $345 billion, 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% (little changed from 2014’s record). 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%.

March 18 – Bloomberg (Rich Miller): “Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.”

March 18 – Bloomberg (Luke Kawa): “According to economists at Goldman Sachs…, the Federal Reserve just delivered one of its most dovish decisions of the new millennium. The surprise, per Economists Zach Pandl and Daan Struyven, stemmed from the large reduction in where monetary policymakers expect interest rates to be at year-end if all things go according to plan. The median Federal Open Market Committee member thought that it would be appropriate for the midpoint of the federal funds rate range to be at 0.875% at the end of 2016, down from a median assessment of 1.375% back in December. Excluding two meetings during the depths of the financial crisis in late 2008 and early 2009, the shock of Wednesday's slash to the so-called ‘dot plot’ was only exceeded by introduction of calendar-based forward guidance in 2011, the decision to forego ‘Septaper’ in 2013, and last March's markdown…”

It’s unclear whether a “secret Shanghai Accord” emerged from last month’s G20 meeting. There’s no doubt, however, that leading global monetary officials have orchestrated concerted policy measures going back (at least) to the 2012 “European” crisis. It’s also clear that they became trapped in Bubble Dynamics of their own making. When de-risking/de-leveraging (“risk off”) dynamics materialize, market conditions now tend to turn sour rather abruptly. Yet when policy responses then incite short-squeezes and a reversal of market hedges, ensuing powerful rallies take on lives of their own. Under tremendous performance pressure, market participants have little alternative than to jump aboard. Rallies cannot be missed. The upshot is a backdrop of extreme market volatility and extraordinarily challenging market dynamics. To be sure, the fragile domestic and global Credit backdrops are not constructive for economic growth, corporate profits or equities prices.

For the week:

The S&P500 gained 1.4% (up 0.3% y-t-d), and the Dow jumped 2.3% (up 1.0%). The Utilities rose 1.9% (up 13.4%). The Banks increased 0.7% (down 9.9%), and the Broker/Dealers gained 1.4% (down 8.0%). The Transports surged 5.0% (up 7.5%). The S&P 400 Midcaps gained 1.6% (up 2.2%), and the small cap Russell 2000 rose rose 1.3% (down 3.0%). The Nasdaq100 advanced 1.1% (down 4.0%), and the Morgan Stanley High Tech index rose 1.5% (down 4.1%). The Semiconductors surged 2.4% (up 1.7%). The Biotechs lost 2.8% (down 25.6%). With bullion up $6, the HUI gold index added 3.4% (up 63.1%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields dropped 12 bps to 0.84% (down 21bps y-t-d). Five-year T-note yields sank 16 bps to 1.33% (down 42bps). Ten-year Treasury yields fell 11 bps to 1.87% (down 38bps). Long bond yields declined seven bps to 2.68% (down 34bps).

Greek 10-year yields fell 21 bps to 8.36% (up 104bps y-t-d). Ten-year Portuguese yields rose two bps to 2.91% (up 39bps). Italian 10-year yields declined five bps to 1.27% (down 32bps). Spain's 10-year yields fell five bps to 1.43% (down 34bps). German bund yields dropped six bps to 0.21% (down 41bps). French yields fell six bps to 0.56% (down 43bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields sank 12 bps to 1.45% (down 51bps).

Japan's Nikkei equities index fell 1.3% (down 12.1% y-t-d). Japanese 10-year "JGB" yields dropped eight bps to negative 0.10% (down 36bps y-t-d). The German DAX equities index gained 1.2% (down 7.4%). Spain's IBEX 35 equities index slipped 0.4% (down 5.2%). Italy's FTSE MIB index lost 2.0% (down 13.1%).  The EM equities rally continued. Brazil's Bovespa index jumped 2.4% (up 17%). Mexico's Bolsa rose 1.7% (up 5.8%). South Korea's Kospi index gained 1.1% (up 1.6%). India’s Sensex equities index increased 0.9% (down 4.5%). China’s Shanghai Exchange rallied 5.2% (down 16.5%). Turkey's Borsa Istanbul National 100 index jumped 4.5% (up 15.6%). Russia's MICEX equities rose 2.0% (up 8.7%).

Junk funds saw inflows $1.7 billion (from Lipper), the third straight week of big positive flows.

Freddie Mac 30-year fixed mortgage rates rose five bps to a seven-week high 3.73% (down 5bps y-o-y). Fifteen-year rates gained three bps to 2.99% (down 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 3.84% (down 33bps).

Federal Reserve Credit last week expanded $4.9bn to $4.446 TN. Over the past year, Fed Credit declined $14.9bn, or 0.3%. Fed Credit inflated $1.635 TN, or 58%, over the past 175 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $2.6bn to $3.252 TN. "Custody holdings" were up $28.4bn y-o-y, or 0.9%.

M2 (narrow) "money" supply last week was about unchanged at $12.512 TN. "Narrow money" expanded $680bn, or 5.7%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits sank $71.9bn, while Savings Deposits surged $74.5bn. Small Time Deposits declined $1.0bn. Retail Money Funds slipped $2.5bn.

Total money market fund assets sank $40bn to $2.763 TN. Money Funds rose $98bn y-o-y (3.7%).

Total Commercial Paper jumped $13.1bn to $1.098 TN. CP expanded $72 billion y-o-y, or 7.0%.

Currency Watch:

March 17 – Bloomberg (Filipe Pacheco, Arnaldo Galvao and Marisa Castellani): “Brazil’s central bank said it sees room to partially unwind a program aimed at boosting the real, prompting the currency to pare gains. Policy makers see the international economic environment creating an opportunity to unwind part of its foreign exchange swaps program by reducing its daily rollovers, the central bank press office told reporters…”

The U.S. dollar index dropped 1.2% this week to 95.06 (down 3.7% y-t-d). For the week on the upside, the Japanese yen increased 2.0%, the Mexican peso 1.7%, the Canadian dollar 1.6%, the Swiss franc 1.3%, the Swedish krona 1.3%, the euro 1.0%, the New Zealand dollar 0.8%, the British pound 0.7%, the Australian dollar 0.6% and the Norwegian krone 0.5%. For the week on the downside, the Brazilian real declined 1.1% and the South African rand slipped 0.3%. The Chinese yuan increased 0.4% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.2% (up 7.6% y-t-d). Spot Gold added 0.5% to $1,255 (up 18.3%). March Silver jumped 1.9% to $15.81 (up 14.6%). April WTI Crude rose another 98 cents to $39.44 (up 7%). March Gasoline slipped 1.2% (up 12%), while March Natural Gas jumped 6.1% (down 18%). March Copper rose 2.2% (up 7%). May Wheat dropped 2.7% (down 2%). May Corn increased 0.5% (up 2%).

Fixed-Income Bubble Watch:

March 17 – Bloomberg (Liz McCormick): “A shortage of benchmark 10-year notes in the market for borrowing and lending U.S. government debt caused uncompleted trades to surge last week to the highest since the financial crisis. Total settlement delivery failures for all Treasuries, excluding inflation-protected securities, were $456 billion for the week ended March 9, the most since 2008, when fails set a record $2.7 trillion, Federal Reserve Bank of New York data show.”

March 17 – Bloomberg (Dakin Campbell and Nabila Ahmed): “As Wall Street leaders warn publicly about this quarter’s plunging revenue from trading and deals, Goldman Sachs Group Inc., the bank most reliant on those operations, has provided no guidance. The mystery isn’t whether it is getting hit too -- it’s how hard. Goldman Sachs’s income from investment banking… is projected to tumble 32% this quarter from a year earlier, Credit Suisse Group AG analysts wrote... Internally, some senior executives are anticipating a drop of roughly 25% in that business… Firms including JPMorgan Chase & Co. and Citigroup Inc. have been warning that turbulent markets are battering their earnings, as stock swings, a slump in commodity prices and low interest rates prompt companies to delay share offerings and customers to pull back from trading.”

March 16 – Reuters (Jessica Dinapoli): “Peabody Energy Corp, the largest U.S. coal producer, may have to seek bankruptcy protection, the company said in a regulatory filing…, citing poor economies in countries that import coal and other factors battering the coal industry… Peabody, which flagged the possibility of bankruptcy under the ‘risk factors’ section of a filing with the U.S. Securities and Exchange Commission, said it had decided to skip $71.1 million in interest payments… The company, said there was ‘substantial doubt’ about its ability to continue as a going concern.”

March 17 – Reuters (Lynn Adler): “Troubled U.S. energy companies, maneuvering for stronger negotiating positions if filing for bankruptcy, are racing to tap cash still available under existing reserve-based loan commitments before banks cut their credit access next month. In April, lenders, in semi-annual valuations of oil and gas reserves backing these loans, are expected to cut available credit to many energy companies based on deeply depressed collateral prices. Earlier in March, Stone Energy joined a growing pack of companies… drawing down the full amount remaining under its credit facility… ‘Every company out there is nervous that if they don’t draw in the next couple of weeks, with determinations coming up, banks will finally start saying ‘no,’ an investor said.”

March 17 – Reuters (Kristen Haunss and Carl O’Donnell): “Creditors of Valeant Pharmaceuticals International, which has been in violation of lender agreements since Wednesday, are beginning to demand new terms that could further pressure the drugmaker's business model, according to three people familiar with the matter. Valeant said on Tuesday it would not meet a March 15 deadline for filing its annual financial statements with securities regulators, putting it in danger of defaulting on its $30 billion debt load… The shares have sunk to $33.54 from a high of $263.70 in August…”

March 16 – Bloomberg (Faris Khan): “Standard & Poor’s said it may lower its debt ratings for Valeant Pharmaceuticals International Inc. deeper into junk after the drugmaker slashed its earnings and revenue forecast for the year and warned that a delay in filing its annual report may breach debt agreements. Valeant’s B+ rating has been placed on negative credit watch reflecting ‘the preponderance of risks we see in the near term that could further weaken creditworthiness,’ S&P said…”

March 14 – Financial Times (Robin Wigglesworth): “Delinquencies on poor-quality US car loans have climbed to their highest level in almost two decades, according to Fitch…, reinforcing concerns over the rapidly growing market. The rate of ‘subprime’ auto loans overdue by more than 60 days rose to 5.16% in February. This surpassed the post-financial crisis peak and was the highest since the 5.96% reading in October 1996… Subprime auto loans have long been a concern for analysts, some of whom feared that rapid issuance since the crisis and weakening lending standards would cause problems in the market for securitised auto loans. There, banks repackage loans into asset-backed securities and sell them on to investors, much like they did with subprime mortgages in the 2000s… The overall US auto finance market passed $1tn in 2015, powered by strong car sales. Issuance of US auto loan-backed ABS climbed 17% to

March 17 – Bloomberg (Darrell Preston): “Houston’s $3 billion of general-obligation debt was cut one level by Moody’s…, which cited weakening economic performance due to lower oil prices, the city’s pensions obligations and restrictions on raising taxes. The fourth largest U.S. city was downgraded to Aa3, Moody’s fourth-highest level, and remains on watch for additional cuts, the rating company said… ‘The negative outlook reflects the recent weakness in economic and sales tax performance, fueled by energy companies’ reduced investments in personnel and capital, as oil prices have remained low,’ Moody’s said…”

Global Bubble Watch:

March 17 – Wall Street Journal (Timothy W. Martin): “Government debt in 20 industrialized countries stands at $44 trillion. But it’s actually a lot more than that, according to a new report. After factoring in public pension and other retirement liabilities, the debt levels nearly triple to a staggering $122 trillion. That’s the math according to a new report from Citigroup Inc report called, ‘The Coming Pensions Crisis,’ which analyzed government pension liabilities from 20 countries that are members of the Organisation for Economic Co-operation and Development . ‘It is really a ticking time bomb,’ said Charles Millard, Citi’s head of pension relations and former head of the Pension Benefit Guaranty Corporation…”

March 16 – Bloomberg (Nicholas Comfort): “Deutsche Bank AG shares dropped as much as 6.2% after co-Chief Executive Officer John Cryan said he doesn’t expect the German lender to report a profit this year. ‘We’ve said this year is not going to be a profitable year, we may make a small profit, we may make a small loss, we don’t know,’ Cryan said… ‘There’s a lot of stuff we have to get done this year, so this year we’re not going to be profitable.’ Cryan has already said the bank probably won’t pay a dividend for 2015 and 2016 as part of a plan to bolster finances…”

Federal Reserve Watch:

March 17 – Bloomberg (Craig Torres): “For the first time since the Asian and Russian crises rocked world financial markets in the late 1990s, U.S. monetary policy is as focused on the risks to global growth as it is on the domestic economy. Driving the resurgent internationalism inside the Federal Reserve is concern about how dollar strength -- reinforced by aggressive policy easing abroad -- could keep U.S. inflation too low when the Fed’s policy rate is close to zero. Another worry is a global economy that’s lumbering along without a prominent engine of growth, said Jon Faust, a former adviser to Fed Chair Janet Yellen.”

U.S. Bubble Watch:

March 17 – Financial Times (Attracta Mooney): “Analysis of 56 US public pension schemes has found that their funding deficits are set to grow by hundreds of billions of dollars this year, forcing some of America’s biggest states and cities to cut spending and raise taxes. Moody’s… said lacklustre returns in 2015 and 2016 will put severe pressure on the health of US public pension plans and force states and cities to act in order to plug their pension funding gaps. Tom Aaron, an analyst at Moody’s, said the funding deficit — the difference between the assets a pension fund has and what it has to pay out to current and future pensioners — will grow substantially this year.”

March 14 – Bloomberg (Lu Wang): “Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.”

March 14 – Bloomberg (Sarah Mulholland): “Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat. Banks are proceeding with caution as the specter of slowing economic growth rattles financial markets and shakes investor confidence in a six-year recovery that’s helped lift property values to records. Lenders are going to be more selective and discriminating as the year progresses, said Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., the largest U.S. commercial-property lender.”

March 14 – Bloomberg (Matt Scully): “Delinquencies on subprime auto debt packaged into securities reached a high not seen since October 1996, as late payments continued to worsen in February, according to Fitch Ratings. The number of car borrowers who were more than 60 days late on their bills in February rose 11.6% from the same period a year ago, bringing the delinquency rate to 5.16%... During the financial crisis delinquencies peaked at 5.04%, Fitch wrote.”

March 15 – Bloomberg (Asjylyn Loder): “The U.S. oil and gas industry, once a bright spot for the country’s economy, are employing the fewest workers since before the financial crisis. More than 100,000 jobs have disappeared in two years… Worldwide, there have been more than 265,000 layoffs since oil prices began tumbling in late 2014, according to Airswift…”

March 14 – Bloomberg (Tracy Alloway and Matt Scully): “In mid-December, shortly before Christmas, Moody's… gave a gift to investors in the fast-growing marketplace-lending space: the chance to buy a junior slice of a securitization of ‘peer-to-peer’ loans with a credit rating and a spread of 6% over benchmark swaps. Eight weeks later, investors found Moody's in a much less generous mood. The rating agency announced it was considering downgrading the riskiest portion of the deal, along with the junior tranches of two similar securitizations that had been previously sold to investors. The reviews for downgrade were ‘prompted by a faster buildup of delinquencies and charge-offs than expected,’ Moody's said… The move by Moody's and the deteriorating fortunes of some other marketplace-lending deals… have spurred fresh worries about the health of one of financial markets' newest asset classes.”

March 17 – Bloomberg (Caleb Melby): “Wall Street’s titans are still making enough to put food on the table. JPMorgan Chase & Co. gave Jamie Dimon a 35% pay raise to $27 million for 2015, eclipsing Goldman Sachs Group Inc.’s Lloyd Blankfein as the highest paid CEO at the six biggest U.S. banks. Wells Fargo & Co. gave John Stumpf $19.3 million for a fourth straight year. Bank of America Corp.’s Brian Moynihan was the lowest paid at $16 million.”

March 17 – Reuters (Herbert Lash): “The market for luxury homes in the Hamptons, the summer playground for Wall Street's wealthiest, is losing some of its luster as financial markets limp along for a second year. The average price of the 10 most expensive homes sold in this cluster of towns, villages and hamlets on Long Island's east end was $35.5 million in 2015, 20% lower than the $44.6 million recorded the year before, according to… Town & Country Real Estate in East Hampton.”

China Bubble Watch:

March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities… In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”

March 16 – Financial Times (Lucy Hornby): “Chinese Premier Li Keqiang… warned that a ‘dysfunctional’ real economy is the biggest threat to financial markets as he vowed to press on with industry restructuring while maintaining economic growth rates of 6.5-7%. Speaking at the end of China’s annual parliamentary meeting, Mr Li sought to reassure an anxious public that Beijing still has the firepower to meet its financial commitments despite economic ructions. ‘There may be small ups and downs but we can employ innovative means to deploy macroeconomic regulation to keep within our targets,’ Mr Li told reporters… ‘A dysfunctional real economy represents the biggest risk to financial markets.’”

March 14 – Bloomberg: “China’s annual legislative meetings, not known for vigorous public debate, have placed even more emphasis on conformity this year. Participants have been cautioned against impromptu discussions with foreign media in which they might stray from the script. ‘This year, we have stricter rules,’ Chen Jiping, party chief of the official China Law Society and a member of the country’s top political advisory body, told Bloomberg… ‘We’re advised not to take interviews during the meetings. You’d better apply online.’ The restrictions are a manifestation of a broad clampdown on dissent under President Xi Jinping that has gathered steam since the National People’s Congress last convened 12 months ago.”

March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities, before it wreaks damage to the wider economy. In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”

March 15 – Bloomberg: “China’s draft plan for a tax on currency trading is getting a cold reception in the foreign-exchange market. Mizuho Bank Ltd. says the so-called Tobin tax on yuan transactions would reduce liquidity in a currency with bid-ask spreads already five times wider than those of the yen. A levy would set back China’s push to make the yuan a reserve currency and could heighten investor anxiety over capital outflows, according to Commonwealth Bank of Australia. The proposal is ‘short sighted’ and would drive away foreign investors, Citi Private Bank said.”

March 17 – Reuters (Michelle Price and Engen Tham): “China's hedge fund industry has been thrown into disarray as managers rush to comply with stringent new rules, introduced overnight, that could see over half the industry shut down by August, fund managers and lawyers told Reuters. Domestic and foreign hedge fund managers are scrambling to secure legal advice, hire qualified staff and launch new products in a bid to save their licenses after the regulator threatened last month to close down around 17,000 ‘phantom’ fund managers as part of a broader government financial sector crackdown. The new hedge fund rules aim to shrink a vast industry insiders describe as a ‘Wild East’ rife with fraud… Private fund registrations more than doubled in 2015 to reach more than 25,000…”

Europe Watch:

March 17 – Bloomberg (Liz McCormick): “European Central Bank President Mario Draghi told European Union leaders that the central bank has ‘no alternative’ to its recent rate cuts and monetary policy actions, according to two officials familiar with deliberations. Draghi told EU heads of government gathered in Brussels that the most important thing they could do would be to provide clarity on the future of the euro area during a closed-door session. He also encouraged them to support the central bank by reassuring savers, insurers and bankers about potential market distortions or risks to financial stability from the latest stimulus efforts. The officials asked not to be identified discussing private talks.”

March 13 – Bloomberg (Patrick Donahue, Rainer Buergin and Arne Delfs): “Chancellor Angela Merkel faces an increasingly splintered political landscape after voters punished her party and lifted the anti-immigration Alternative for Germany to its best showing yet in three state elections dominated by the refugee crisis. Support for Merkel’s Christian Democratic Union tumbled across the board Sunday as her candidates failed to capture two western states including Baden-Wuerttemberg, home to carmaker Daimler AG. Her party hung on to win the most votes in Saxony-Anhalt in the formerly communist east, though Alternative for Germany, or AfD, upended the coalition math there by winning 24.2% support in its first attempt in the state.”

March 17 – Bloomberg (Esteban Duarte and Maria Tadeo): “Catalonia is deliberately flirting with default on its bank loans as the region’s separatist government tries to force the Spanish state to deliver aid payments, according to two people familiar with the situation. Officials in the regional capital Barcelona are counting on Spain to step in and supply the funds they need to meet loan repayments coming due this year, betting the central government will be forced to back down because the costs of a default would be greater for the Spanish sovereign, the people said, asking not to be identified discussing confidential matters.”

Central Bank Watch:

March 17 – Bloomberg (Xola Potelwa and Amogelang Mbatha): “South Africa’s central bank raised its benchmark interest rate for a second time this year in a decision that split the Monetary Policy Committee and as a political crisis engulfing the country hurts the currency. The repurchase rate was increased to 7% from 6.75%...”

EM Bubble Watch:

March 14 – Bloomberg (Anto Antony and George Smith Alexander): “The day of reckoning is coming: The Reserve Bank of India is due to complete its audit of all 50 of the country’s banks by the end of this month, forcing them to lay bare their hidden non-performing loans, stop making new loans to deadbeat borrowers just to pay the interest on their already-bad ones, and set aside more cash to cover their write-offs. That means India’s already-ugly bad loan situation is set to get even worse. The banks so far have been willing to disclose that $131 billion, or about 14% of their total lending… Another $36 billion may yet be added to that total, bringing total non-performing loans to 18%, when the audit finishes on March 31, according to Credit Suisse Group AG.”

Leveraged Speculation Watch:

March 13 – Bloomberg: “The battle over the fate of China’s currency is starting to get bloody for the bears. Seven months after a shock devaluation spurred hedge funds and other speculators to wager on further declines, the yuan’s unexpected resilience has turned many of those bets into losers. At least $562 million of options that pay out if the currency drops below 6.6 per dollar… have expired worthless since August. Another $807 million will lapse within three months. While those figures provide just a glimpse into the potential losses for pessimistic speculators, what’s clear is that the Chinese government has proven a stronger adversary than many traders anticipated.”

March 14 – Bloomberg (Oliver Renick): “It’s well known that stocks with the most hedge funds ownership have been doing badly in the U.S. How badly might surprise you. While volatility has seeped into every corner of the market over the last year, no group has had it worse than equities where professional speculators are most concentrated. Since July, Russell 3000 Index companies in which hedge funds have the highest ownership percentage have plunged 31%, compared with a 2.8% decline in the Standard & Poor’s 500 Index, according to… Bloomberg.”

March 16 – Bloomberg (Beth Jinks): “Pershing Square Holdings Ltd., the publicly traded security of Bill Ackman’s activist hedge fund, lost 26.4% this year through March 15, hammered by losses at Valeant Pharmaceuticals International Inc., the beleaguered drugmaker whose shares plunged by more than half this week… Ackman’s fund, Pershing Square Capital Management, has been caught up in the controversy surrounding Valeant, whose shares fell 51% Tuesday after the drugmaker cut its 2016 guidance and warned it may breach some of its debt agreements… Pershing Square lost about $764 million on the common shares it owns in the March 15 stock collapse… Pershing Square Capital Management posted its worst annual performance in 2015, with a net loss of 20.5% for the year.”

March 17 – Bloomberg (Will Wainewright): “Hedge-fund shutdowns outnumbered startups last year for the first time since 2009, according to… Hedge Fund Research… In the last quarter, 305 funds closed compared with 257 a year earlier, taking the total for the year to 979. Startups totaled 968…”

Brazil Watch:

March 17 – CNN (Tim Hume, Vasco Cotovio and Marilia Brocchetto): “A Brazilian federal judge moved Thursday to block the controversial swearing-in of former President Luiz Inacio Lula da Silva as chief of staff to President Dilma Rousseff -- the latest twist in the country's deepening political crisis. ‘Lula,’ as the two-time former president is known, was sworn into the Cabinet post earlier Thursday amid heated protests by opponents, who say the move is an attempt to shield him from a corruption investigation. Under Brazilian law, senior political figures can only be tried in the Supreme Federal Court, meaning any prosecution against Lula da Silva would effectively be delayed if he were chief of staff.”

March 13 – Bloomberg (Anna Edgerton and Raymond Colitt): “Dilma Rousseff’s future as president of Brazil was cast into further doubt as millions of protesters, wearied by scandal and recession, staged some of the largest rallies in the country’s modern history. Brazilians demonstrated peacefully for Rousseff’s ouster in cities throughout the country on Sunday, with some estimates counting more than 3 million people on the streets.”

Geopolitical Watch:

March 15 – Reuters (Seyhmus Cakan): “Fighting between Turkish security forces and Kurdish militants spread on Tuesday, with tanks, helicopters and armored cars deployed after a suicide bombing that killed 37 people in the capital Ankara. The deadliest violence took place in Diyarbakir, the largest city in mainly Kurdish southeastern Turkey, where Kurdistan Workers Party (PKK) fighters blocked roads and clashed with security forces overnight as a police helicopter flew overhead, witnesses said.”

Weekly Commentary: Q4 2015 Flow of Funds

I’d been waiting patiently for the Fed’s Q4 2015 Z.1 “flow of funds” report. The fourth quarter was a period of financial instability and tightened financial conditions. What tracks would be left in the data? Moreover, would the report confirm a continuation of the broadening Credit slowdown that had turned more pronounced during Q3, a slowing that would portend weak GDP and corporate earnings. Would the data support the thesis of mounting financial fragility? This Z.1 did not disappoint.

Importantly, Credit did slow almost across the board. For starters, weak Corporate borrowings were evidence of a meaningful tightening of Credit conditions. Q4’s growth rate of 2.7% was the weakest Corporate Credit growth since Q4 2010 and was down significantly from Q3’s 4.6%, Q2’s 8.6% and Q1’s 8.5%. Household Mortgage Debt slowed to 1.5%, verses Q3’s 1.7% and Q2’s 2.5%. The fourth quarter’s 5.9% pace of Consumer (non-mortgage) Credit expansion compared to Q3’s 7.2%, Q2’s 8.5% and Q1’s 5.6%. There was even a marked stalling in State & Local borrowings, with Q4’s flat growth down from Q3’s 1.7%, Q2’s 1.0% and Q1’s 4.3%.

Federal debt was the big outlier in the “almost across the board” Credit slowdown. Federal borrowings expanded at an 18.5% rate, the strongest Washington Credit boom since Q2 2010. This more than offset the private-sector slowdown, ensuring that overall Non-Financial Debt (NFD) growth accelerated to an 8.6% pace in Q4. This reversed the trend that had seen Q3’s 2.1% at less than half of Q2’s 4.6% pace (Q1 2.6%).

Q4’s surge in Federal borrowing pushed 2015 Total Non-Financial Debt growth to 4.5%, matching 2014. NFD expanded 4.0% in 2013, 5.0% in 2012, 3.5% in 2011 and 4.4% in 2010. Total Business (corporate plus business financial) borrowings expanded a robust 6.6% (up from 2014’s 6.3%). Annual Federal borrowings slowed somewhat to 5.0% (from 2014’s 5.4%). State & Local borrowings expanded 1.8% after contracting 0.5% in 2014. Consumer Credit expanded 7.0%, the same rate as 2014 (strongest since 2001). Home Mortgage debt expanded 1.5% (strongest since 2007), up from 2014’ 0.5%.

In nominal dollars, NFD expanded $1.961 TN in 2015, up from 2014’s $1.848 TN to the strongest expansion since 2007 ($2.480 TN). Last year’s debt growth was led by $794 billion of total business borrowings, the strongest expansion since 2007. Federal borrowings increased $725 billion, down only slightly from 2014’s $736 billion. Household Mortgage borrowings expanded $137 billion last year, the strongest growth since 2007’s $734 billion. Consumer Credit grew a record $231 billion (up from 2014’s $218bn).

The Domestic Financial Sector saw borrowings slow to a 1.3% pace, down from Q3’s 1.9% and Q2’s 2.4%. Bank (“Private Depository Institutions”) lending ended 2015 on a strong note, expanding SAAR (seasonally-adjusted and annualized rate) $722 billion during Q4. This put 2015 annual loan growth at $674 billion, up from 2014’s $579 billion and the strongest expansion since 2007.

Certainly related the quarter’s financial market instability, there was a significant contraction in Foreign Banking Offices in U.S.  Here, Assets contracted SAAR $562 billion (after Q3’s SAAR $59bn contraction). On the Foreign Bank asset side, Reserves at Federal Reserve dropped SAAR $732 billion. Liabilities saw a SAAR $445 billion contraction in Net Interbank Liabilities to Foreign Banks. “Money” on the move…

Especially during Q4, strong domestic bank lending was more than offset by a notable decline in market-based Credit. Q4 market instability clearly had a major impact on Wall Street.  Securities Broker/Dealers saw assets contract SAAR $839 billion during the quarter, versus Q3’s $24 billion expansion, Q2’s $124 billion contraction and Q1’s $97 billion expansion. Broker/Dealer Debt Securities holdings contracted SAAR $168 billion, and Security Repurchase Agreement assets dropped SAAR $442 billion. Miscellaneous Assets contracted SAAR $266 billion. On the Liability side, Security Repurchase Agreements declined SAAR $502 billion and Other Miscellaneous Liabilities contracted SAAR $406 billion. Wild financial flows…

It’s been my view that policy and speculative market backdrops have unleashed intransigent Monetary Disorder.  Z.1 data offer support for this thesis. The category Federal Funds and Security Repurchase Agreements saw a Q4 contraction of SAAR $333 billion, which followed Q3’s SAAR $575 billion expansion, Q2’s SAAR $214 billion contraction and Q1’s SAAR $181 billion expansion.

Waning marketplace liquidity was apparent in a marked drop in corporate debt issuance. Corporate Bonds expanded only SAAR $53 billion during Q4, down from Q3’s SAAR $107 billion, Q2’s SAAR $654 billion and Q1’s SAAR $645 billion. It’s also worth noting that outstanding Asset-Backed Securities (ABS) contracted SAAR $96 billion during Q4, this following Q3’s SAAR $150 billion decline.

In the category “the more things change, the more they stay the same,” waning marketplace liquidity spurred a surge in GSE activity. The GSEs increased assets SAAR $224 billion during Q4, up from Q3’s SAAR $144 billion to the strongest expansion since Q4 2014 ($283bn). On an annualized basis, 2015’s $85 billion GSE expansion was the strongest since 2008 ($234bn).

Agency- and GSE-Backed Mortgage Pools expanded SAAR $196 billion during the period, versus Q3’s SAAR $185 billion, Q2’s SAAR $122 billion and Q1’s SAAR $5.1 billion. For 2015, GSE MBS expanded $127 billion, up from 2014’s $75 billion.

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 (down from 2014’s $37.612 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 (& non-profits) Assets ended 2015 at a record $101.306 TN, up $2.953 TN (3.0%) during the year. Household Assets have increased almost 50% since the end of 2008. And with Household Liabilities rising $345 billion, 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% (little changed from 2014’s record). 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%.

March 18 – Bloomberg (Rich Miller): “Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.”

March 18 – Bloomberg (Luke Kawa): “According to economists at Goldman Sachs…, the Federal Reserve just delivered one of its most dovish decisions of the new millennium. The surprise, per Economists Zach Pandl and Daan Struyven, stemmed from the large reduction in where monetary policymakers expect interest rates to be at year-end if all things go according to plan. The median Federal Open Market Committee member thought that it would be appropriate for the midpoint of the federal funds rate range to be at 0.875% at the end of 2016, down from a median assessment of 1.375% back in December. Excluding two meetings during the depths of the financial crisis in late 2008 and early 2009, the shock of Wednesday's slash to the so-called ‘dot plot’ was only exceeded by introduction of calendar-based forward guidance in 2011, the decision to forego ‘Septaper’ in 2013, and last March's markdown…”

It’s unclear whether a “secret Shanghai Accord” emerged from last month’s G20 meeting. There’s no doubt, however, that leading global monetary officials have orchestrated concerted policy measures going back (at least) to the 2012 “European” crisis. It’s also clear that they became trapped in Bubble Dynamics of their own making. When de-risking/de-leveraging (“risk off”) dynamics materialize, market conditions now tend to turn sour rather abruptly. Yet when policy responses then incite short-squeezes and a reversal of market hedges, ensuing powerful rallies take on lives of their own. Under tremendous performance pressure, market participants have little alternative than to jump aboard. Rallies cannot be missed. The upshot is a backdrop of extreme market volatility and extraordinarily challenging market dynamics. To be sure, the fragile domestic and global Credit backdrops are not constructive for economic growth, corporate profits or equities prices.

For the week:

The S&P500 gained 1.4% (up 0.3% y-t-d), and the Dow jumped 2.3% (up 1.0%). The Utilities rose 1.9% (up 13.4%). The Banks increased 0.7% (down 9.9%), and the Broker/Dealers gained 1.4% (down 8.0%). The Transports surged 5.0% (up 7.5%). The S&P 400 Midcaps gained 1.6% (up 2.2%), and the small cap Russell 2000 rose rose 1.3% (down 3.0%). The Nasdaq100 advanced 1.1% (down 4.0%), and the Morgan Stanley High Tech index rose 1.5% (down 4.1%). The Semiconductors surged 2.4% (up 1.7%). The Biotechs lost 2.8% (down 25.6%). With bullion up $6, the HUI gold index added 3.4% (up 63.1%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields dropped 12 bps to 0.84% (down 21bps y-t-d). Five-year T-note yields sank 16 bps to 1.33% (down 42bps). Ten-year Treasury yields fell 11 bps to 1.87% (down 38bps). Long bond yields declined seven bps to 2.68% (down 34bps).

Greek 10-year yields fell 21 bps to 8.36% (up 104bps y-t-d). Ten-year Portuguese yields rose two bps to 2.91% (up 39bps). Italian 10-year yields declined five bps to 1.27% (down 32bps). Spain's 10-year yields fell five bps to 1.43% (down 34bps). German bund yields dropped six bps to 0.21% (down 41bps). French yields fell six bps to 0.56% (down 43bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields sank 12 bps to 1.45% (down 51bps).

Japan's Nikkei equities index fell 1.3% (down 12.1% y-t-d). Japanese 10-year "JGB" yields dropped eight bps to negative 0.10% (down 36bps y-t-d). The German DAX equities index gained 1.2% (down 7.4%). Spain's IBEX 35 equities index slipped 0.4% (down 5.2%). Italy's FTSE MIB index lost 2.0% (down 13.1%).  The EM equities rally continued. Brazil's Bovespa index jumped 2.4% (up 17%). Mexico's Bolsa rose 1.7% (up 5.8%). South Korea's Kospi index gained 1.1% (up 1.6%). India’s Sensex equities index increased 0.9% (down 4.5%). China’s Shanghai Exchange rallied 5.2% (down 16.5%). Turkey's Borsa Istanbul National 100 index jumped 4.5% (up 15.6%). Russia's MICEX equities rose 2.0% (up 8.7%).

Junk funds saw inflows $1.7 billion (from Lipper), the third straight week of big positive flows.

Freddie Mac 30-year fixed mortgage rates rose five bps to a seven-week high 3.73% (down 5bps y-o-y). Fifteen-year rates gained three bps to 2.99% (down 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 3.84% (down 33bps).

Federal Reserve Credit last week expanded $4.9bn to $4.446 TN. Over the past year, Fed Credit declined $14.9bn, or 0.3%. Fed Credit inflated $1.635 TN, or 58%, over the past 175 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $2.6bn to $3.252 TN. "Custody holdings" were up $28.4bn y-o-y, or 0.9%.

M2 (narrow) "money" supply last week was about unchanged at $12.512 TN. "Narrow money" expanded $680bn, or 5.7%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits sank $71.9bn, while Savings Deposits surged $74.5bn. Small Time Deposits declined $1.0bn. Retail Money Funds slipped $2.5bn.

Total money market fund assets sank $40bn to $2.763 TN. Money Funds rose $98bn y-o-y (3.7%).

Total Commercial Paper jumped $13.1bn to $1.098 TN. CP expanded $72 billion y-o-y, or 7.0%.

Currency Watch:

March 17 – Bloomberg (Filipe Pacheco, Arnaldo Galvao and Marisa Castellani): “Brazil’s central bank said it sees room to partially unwind a program aimed at boosting the real, prompting the currency to pare gains. Policy makers see the international economic environment creating an opportunity to unwind part of its foreign exchange swaps program by reducing its daily rollovers, the central bank press office told reporters…”

The U.S. dollar index dropped 1.2% this week to 95.06 (down 3.7% y-t-d). For the week on the upside, the Japanese yen increased 2.0%, the Mexican peso 1.7%, the Canadian dollar 1.6%, the Swiss franc 1.3%, the Swedish krona 1.3%, the euro 1.0%, the New Zealand dollar 0.8%, the British pound 0.7%, the Australian dollar 0.6% and the Norwegian krone 0.5%. For the week on the downside, the Brazilian real declined 1.1% and the South African rand slipped 0.3%. The Chinese yuan increased 0.4% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.2% (up 7.6% y-t-d). Spot Gold added 0.5% to $1,255 (up 18.3%). March Silver jumped 1.9% to $15.81 (up 14.6%). April WTI Crude rose another 98 cents to $39.44 (up 7%). March Gasoline slipped 1.2% (up 12%), while March Natural Gas jumped 6.1% (down 18%). March Copper rose 2.2% (up 7%). May Wheat dropped 2.7% (down 2%). May Corn increased 0.5% (up 2%).

Fixed-Income Bubble Watch:

March 17 – Bloomberg (Liz McCormick): “A shortage of benchmark 10-year notes in the market for borrowing and lending U.S. government debt caused uncompleted trades to surge last week to the highest since the financial crisis. Total settlement delivery failures for all Treasuries, excluding inflation-protected securities, were $456 billion for the week ended March 9, the most since 2008, when fails set a record $2.7 trillion, Federal Reserve Bank of New York data show.”

March 17 – Bloomberg (Dakin Campbell and Nabila Ahmed): “As Wall Street leaders warn publicly about this quarter’s plunging revenue from trading and deals, Goldman Sachs Group Inc., the bank most reliant on those operations, has provided no guidance. The mystery isn’t whether it is getting hit too -- it’s how hard. Goldman Sachs’s income from investment banking… is projected to tumble 32% this quarter from a year earlier, Credit Suisse Group AG analysts wrote... Internally, some senior executives are anticipating a drop of roughly 25% in that business… Firms including JPMorgan Chase & Co. and Citigroup Inc. have been warning that turbulent markets are battering their earnings, as stock swings, a slump in commodity prices and low interest rates prompt companies to delay share offerings and customers to pull back from trading.”

March 16 – Reuters (Jessica Dinapoli): “Peabody Energy Corp, the largest U.S. coal producer, may have to seek bankruptcy protection, the company said in a regulatory filing…, citing poor economies in countries that import coal and other factors battering the coal industry… Peabody, which flagged the possibility of bankruptcy under the ‘risk factors’ section of a filing with the U.S. Securities and Exchange Commission, said it had decided to skip $71.1 million in interest payments… The company, said there was ‘substantial doubt’ about its ability to continue as a going concern.”

March 17 – Reuters (Lynn Adler): “Troubled U.S. energy companies, maneuvering for stronger negotiating positions if filing for bankruptcy, are racing to tap cash still available under existing reserve-based loan commitments before banks cut their credit access next month. In April, lenders, in semi-annual valuations of oil and gas reserves backing these loans, are expected to cut available credit to many energy companies based on deeply depressed collateral prices. Earlier in March, Stone Energy joined a growing pack of companies… drawing down the full amount remaining under its credit facility… ‘Every company out there is nervous that if they don’t draw in the next couple of weeks, with determinations coming up, banks will finally start saying ‘no,’ an investor said.”

March 17 – Reuters (Kristen Haunss and Carl O’Donnell): “Creditors of Valeant Pharmaceuticals International, which has been in violation of lender agreements since Wednesday, are beginning to demand new terms that could further pressure the drugmaker's business model, according to three people familiar with the matter. Valeant said on Tuesday it would not meet a March 15 deadline for filing its annual financial statements with securities regulators, putting it in danger of defaulting on its $30 billion debt load… The shares have sunk to $33.54 from a high of $263.70 in August…”

March 16 – Bloomberg (Faris Khan): “Standard & Poor’s said it may lower its debt ratings for Valeant Pharmaceuticals International Inc. deeper into junk after the drugmaker slashed its earnings and revenue forecast for the year and warned that a delay in filing its annual report may breach debt agreements. Valeant’s B+ rating has been placed on negative credit watch reflecting ‘the preponderance of risks we see in the near term that could further weaken creditworthiness,’ S&P said…”

March 14 – Financial Times (Robin Wigglesworth): “Delinquencies on poor-quality US car loans have climbed to their highest level in almost two decades, according to Fitch…, reinforcing concerns over the rapidly growing market. The rate of ‘subprime’ auto loans overdue by more than 60 days rose to 5.16% in February. This surpassed the post-financial crisis peak and was the highest since the 5.96% reading in October 1996… Subprime auto loans have long been a concern for analysts, some of whom feared that rapid issuance since the crisis and weakening lending standards would cause problems in the market for securitised auto loans. There, banks repackage loans into asset-backed securities and sell them on to investors, much like they did with subprime mortgages in the 2000s… The overall US auto finance market passed $1tn in 2015, powered by strong car sales. Issuance of US auto loan-backed ABS climbed 17% to

March 17 – Bloomberg (Darrell Preston): “Houston’s $3 billion of general-obligation debt was cut one level by Moody’s…, which cited weakening economic performance due to lower oil prices, the city’s pensions obligations and restrictions on raising taxes. The fourth largest U.S. city was downgraded to Aa3, Moody’s fourth-highest level, and remains on watch for additional cuts, the rating company said… ‘The negative outlook reflects the recent weakness in economic and sales tax performance, fueled by energy companies’ reduced investments in personnel and capital, as oil prices have remained low,’ Moody’s said…”

Global Bubble Watch:

March 17 – Wall Street Journal (Timothy W. Martin): “Government debt in 20 industrialized countries stands at $44 trillion. But it’s actually a lot more than that, according to a new report. After factoring in public pension and other retirement liabilities, the debt levels nearly triple to a staggering $122 trillion. That’s the math according to a new report from Citigroup Inc report called, ‘The Coming Pensions Crisis,’ which analyzed government pension liabilities from 20 countries that are members of the Organisation for Economic Co-operation and Development . ‘It is really a ticking time bomb,’ said Charles Millard, Citi’s head of pension relations and former head of the Pension Benefit Guaranty Corporation…”

March 16 – Bloomberg (Nicholas Comfort): “Deutsche Bank AG shares dropped as much as 6.2% after co-Chief Executive Officer John Cryan said he doesn’t expect the German lender to report a profit this year. ‘We’ve said this year is not going to be a profitable year, we may make a small profit, we may make a small loss, we don’t know,’ Cryan said… ‘There’s a lot of stuff we have to get done this year, so this year we’re not going to be profitable.’ Cryan has already said the bank probably won’t pay a dividend for 2015 and 2016 as part of a plan to bolster finances…”

Federal Reserve Watch:

March 17 – Bloomberg (Craig Torres): “For the first time since the Asian and Russian crises rocked world financial markets in the late 1990s, U.S. monetary policy is as focused on the risks to global growth as it is on the domestic economy. Driving the resurgent internationalism inside the Federal Reserve is concern about how dollar strength -- reinforced by aggressive policy easing abroad -- could keep U.S. inflation too low when the Fed’s policy rate is close to zero. Another worry is a global economy that’s lumbering along without a prominent engine of growth, said Jon Faust, a former adviser to Fed Chair Janet Yellen.”

U.S. Bubble Watch:

March 17 – Financial Times (Attracta Mooney): “Analysis of 56 US public pension schemes has found that their funding deficits are set to grow by hundreds of billions of dollars this year, forcing some of America’s biggest states and cities to cut spending and raise taxes. Moody’s… said lacklustre returns in 2015 and 2016 will put severe pressure on the health of US public pension plans and force states and cities to act in order to plug their pension funding gaps. Tom Aaron, an analyst at Moody’s, said the funding deficit — the difference between the assets a pension fund has and what it has to pay out to current and future pensioners — will grow substantially this year.”

March 14 – Bloomberg (Lu Wang): “Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.”

March 14 – Bloomberg (Sarah Mulholland): “Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat. Banks are proceeding with caution as the specter of slowing economic growth rattles financial markets and shakes investor confidence in a six-year recovery that’s helped lift property values to records. Lenders are going to be more selective and discriminating as the year progresses, said Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., the largest U.S. commercial-property lender.”

March 14 – Bloomberg (Matt Scully): “Delinquencies on subprime auto debt packaged into securities reached a high not seen since October 1996, as late payments continued to worsen in February, according to Fitch Ratings. The number of car borrowers who were more than 60 days late on their bills in February rose 11.6% from the same period a year ago, bringing the delinquency rate to 5.16%... During the financial crisis delinquencies peaked at 5.04%, Fitch wrote.”

March 15 – Bloomberg (Asjylyn Loder): “The U.S. oil and gas industry, once a bright spot for the country’s economy, are employing the fewest workers since before the financial crisis. More than 100,000 jobs have disappeared in two years… Worldwide, there have been more than 265,000 layoffs since oil prices began tumbling in late 2014, according to Airswift…”

March 14 – Bloomberg (Tracy Alloway and Matt Scully): “In mid-December, shortly before Christmas, Moody's… gave a gift to investors in the fast-growing marketplace-lending space: the chance to buy a junior slice of a securitization of ‘peer-to-peer’ loans with a credit rating and a spread of 6% over benchmark swaps. Eight weeks later, investors found Moody's in a much less generous mood. The rating agency announced it was considering downgrading the riskiest portion of the deal, along with the junior tranches of two similar securitizations that had been previously sold to investors. The reviews for downgrade were ‘prompted by a faster buildup of delinquencies and charge-offs than expected,’ Moody's said… The move by Moody's and the deteriorating fortunes of some other marketplace-lending deals… have spurred fresh worries about the health of one of financial markets' newest asset classes.”

March 17 – Bloomberg (Caleb Melby): “Wall Street’s titans are still making enough to put food on the table. JPMorgan Chase & Co. gave Jamie Dimon a 35% pay raise to $27 million for 2015, eclipsing Goldman Sachs Group Inc.’s Lloyd Blankfein as the highest paid CEO at the six biggest U.S. banks. Wells Fargo & Co. gave John Stumpf $19.3 million for a fourth straight year. Bank of America Corp.’s Brian Moynihan was the lowest paid at $16 million.”

March 17 – Reuters (Herbert Lash): “The market for luxury homes in the Hamptons, the summer playground for Wall Street's wealthiest, is losing some of its luster as financial markets limp along for a second year. The average price of the 10 most expensive homes sold in this cluster of towns, villages and hamlets on Long Island's east end was $35.5 million in 2015, 20% lower than the $44.6 million recorded the year before, according to… Town & Country Real Estate in East Hampton.”

China Bubble Watch:

March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities… In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”

March 16 – Financial Times (Lucy Hornby): “Chinese Premier Li Keqiang… warned that a ‘dysfunctional’ real economy is the biggest threat to financial markets as he vowed to press on with industry restructuring while maintaining economic growth rates of 6.5-7%. Speaking at the end of China’s annual parliamentary meeting, Mr Li sought to reassure an anxious public that Beijing still has the firepower to meet its financial commitments despite economic ructions. ‘There may be small ups and downs but we can employ innovative means to deploy macroeconomic regulation to keep within our targets,’ Mr Li told reporters… ‘A dysfunctional real economy represents the biggest risk to financial markets.’”

March 14 – Bloomberg: “China’s annual legislative meetings, not known for vigorous public debate, have placed even more emphasis on conformity this year. Participants have been cautioned against impromptu discussions with foreign media in which they might stray from the script. ‘This year, we have stricter rules,’ Chen Jiping, party chief of the official China Law Society and a member of the country’s top political advisory body, told Bloomberg… ‘We’re advised not to take interviews during the meetings. You’d better apply online.’ The restrictions are a manifestation of a broad clampdown on dissent under President Xi Jinping that has gathered steam since the National People’s Congress last convened 12 months ago.”

March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities, before it wreaks damage to the wider economy. In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”

March 15 – Bloomberg: “China’s draft plan for a tax on currency trading is getting a cold reception in the foreign-exchange market. Mizuho Bank Ltd. says the so-called Tobin tax on yuan transactions would reduce liquidity in a currency with bid-ask spreads already five times wider than those of the yen. A levy would set back China’s push to make the yuan a reserve currency and could heighten investor anxiety over capital outflows, according to Commonwealth Bank of Australia. The proposal is ‘short sighted’ and would drive away foreign investors, Citi Private Bank said.”

March 17 – Reuters (Michelle Price and Engen Tham): “China's hedge fund industry has been thrown into disarray as managers rush to comply with stringent new rules, introduced overnight, that could see over half the industry shut down by August, fund managers and lawyers told Reuters. Domestic and foreign hedge fund managers are scrambling to secure legal advice, hire qualified staff and launch new products in a bid to save their licenses after the regulator threatened last month to close down around 17,000 ‘phantom’ fund managers as part of a broader government financial sector crackdown. The new hedge fund rules aim to shrink a vast industry insiders describe as a ‘Wild East’ rife with fraud… Private fund registrations more than doubled in 2015 to reach more than 25,000…”

Europe Watch:

March 17 – Bloomberg (Liz McCormick): “European Central Bank President Mario Draghi told European Union leaders that the central bank has ‘no alternative’ to its recent rate cuts and monetary policy actions, according to two officials familiar with deliberations. Draghi told EU heads of government gathered in Brussels that the most important thing they could do would be to provide clarity on the future of the euro area during a closed-door session. He also encouraged them to support the central bank by reassuring savers, insurers and bankers about potential market distortions or risks to financial stability from the latest stimulus efforts. The officials asked not to be identified discussing private talks.”

March 13 – Bloomberg (Patrick Donahue, Rainer Buergin and Arne Delfs): “Chancellor Angela Merkel faces an increasingly splintered political landscape after voters punished her party and lifted the anti-immigration Alternative for Germany to its best showing yet in three state elections dominated by the refugee crisis. Support for Merkel’s Christian Democratic Union tumbled across the board Sunday as her candidates failed to capture two western states including Baden-Wuerttemberg, home to carmaker Daimler AG. Her party hung on to win the most votes in Saxony-Anhalt in the formerly communist east, though Alternative for Germany, or AfD, upended the coalition math there by winning 24.2% support in its first attempt in the state.”

March 17 – Bloomberg (Esteban Duarte and Maria Tadeo): “Catalonia is deliberately flirting with default on its bank loans as the region’s separatist government tries to force the Spanish state to deliver aid payments, according to two people familiar with the situation. Officials in the regional capital Barcelona are counting on Spain to step in and supply the funds they need to meet loan repayments coming due this year, betting the central government will be forced to back down because the costs of a default would be greater for the Spanish sovereign, the people said, asking not to be identified discussing confidential matters.”

Central Bank Watch:

March 17 – Bloomberg (Xola Potelwa and Amogelang Mbatha): “South Africa’s central bank raised its benchmark interest rate for a second time this year in a decision that split the Monetary Policy Committee and as a political crisis engulfing the country hurts the currency. The repurchase rate was increased to 7% from 6.75%...”

EM Bubble Watch:

March 14 – Bloomberg (Anto Antony and George Smith Alexander): “The day of reckoning is coming: The Reserve Bank of India is due to complete its audit of all 50 of the country’s banks by the end of this month, forcing them to lay bare their hidden non-performing loans, stop making new loans to deadbeat borrowers just to pay the interest on their already-bad ones, and set aside more cash to cover their write-offs. That means India’s already-ugly bad loan situation is set to get even worse. The banks so far have been willing to disclose that $131 billion, or about 14% of their total lending… Another $36 billion may yet be added to that total, bringing total non-performing loans to 18%, when the audit finishes on March 31, according to Credit Suisse Group AG.”

Leveraged Speculation Watch:

March 13 – Bloomberg: “The battle over the fate of China’s currency is starting to get bloody for the bears. Seven months after a shock devaluation spurred hedge funds and other speculators to wager on further declines, the yuan’s unexpected resilience has turned many of those bets into losers. At least $562 million of options that pay out if the currency drops below 6.6 per dollar… have expired worthless since August. Another $807 million will lapse within three months. While those figures provide just a glimpse into the potential losses for pessimistic speculators, what’s clear is that the Chinese government has proven a stronger adversary than many traders anticipated.”

March 14 – Bloomberg (Oliver Renick): “It’s well known that stocks with the most hedge funds ownership have been doing badly in the U.S. How badly might surprise you. While volatility has seeped into every corner of the market over the last year, no group has had it worse than equities where professional speculators are most concentrated. Since July, Russell 3000 Index companies in which hedge funds have the highest ownership percentage have plunged 31%, compared with a 2.8% decline in the Standard & Poor’s 500 Index, according to… Bloomberg.”

March 16 – Bloomberg (Beth Jinks): “Pershing Square Holdings Ltd., the publicly traded security of Bill Ackman’s activist hedge fund, lost 26.4% this year through March 15, hammered by losses at Valeant Pharmaceuticals International Inc., the beleaguered drugmaker whose shares plunged by more than half this week… Ackman’s fund, Pershing Square Capital Management, has been caught up in the controversy surrounding Valeant, whose shares fell 51% Tuesday after the drugmaker cut its 2016 guidance and warned it may breach some of its debt agreements… Pershing Square lost about $764 million on the common shares it owns in the March 15 stock collapse… Pershing Square Capital Management posted its worst annual performance in 2015, with a net loss of 20.5% for the year.”

March 17 – Bloomberg (Will Wainewright): “Hedge-fund shutdowns outnumbered startups last year for the first time since 2009, according to… Hedge Fund Research… In the last quarter, 305 funds closed compared with 257 a year earlier, taking the total for the year to 979. Startups totaled 968…”

Brazil Watch:

March 17 – CNN (Tim Hume, Vasco Cotovio and Marilia Brocchetto): “A Brazilian federal judge moved Thursday to block the controversial swearing-in of former President Luiz Inacio Lula da Silva as chief of staff to President Dilma Rousseff -- the latest twist in the country's deepening political crisis. ‘Lula,’ as the two-time former president is known, was sworn into the Cabinet post earlier Thursday amid heated protests by opponents, who say the move is an attempt to shield him from a corruption investigation. Under Brazilian law, senior political figures can only be tried in the Supreme Federal Court, meaning any prosecution against Lula da Silva would effectively be delayed if he were chief of staff.”

March 13 – Bloomberg (Anna Edgerton and Raymond Colitt): “Dilma Rousseff’s future as president of Brazil was cast into further doubt as millions of protesters, wearied by scandal and recession, staged some of the largest rallies in the country’s modern history. Brazilians demonstrated peacefully for Rousseff’s ouster in cities throughout the country on Sunday, with some estimates counting more than 3 million people on the streets.”

Geopolitical Watch:

March 15 – Reuters (Seyhmus Cakan): “Fighting between Turkish security forces and Kurdish militants spread on Tuesday, with tanks, helicopters and armored cars deployed after a suicide bombing that killed 37 people in the capital Ankara. The deadliest violence took place in Diyarbakir, the largest city in mainly Kurdish southeastern Turkey, where Kurdistan Workers Party (PKK) fighters blocked roads and clashed with security forces overnight as a police helicopter flew overhead, witnesses said.”