Saturday, April 20, 2019

Weekly Commentary: Full Capitulation

April 16 – Bloomberg (Rich Miller and Craig Torres): “Federal Reserve Chairman Jerome Powell and his colleagues have made an important shift in their strategy for dealing with inflation in a prelude to what could be a more radical change next year. The central bank has backed off the interest-rate hikes it had been delivering to avoid a potentially dangerous rise in inflation that economic theory says could result from the hot jobs market. Instead, Powell & Co. have put policy on hold until sub-par inflation rises convincingly.”

April 15 – CNBC (Thomas Franck): “Chicago Federal Reserve President Charles Evans said on Monday that he’d be comfortable leaving interest rates alone until autumn 2020 to help ensure sustained inflation in the U.S. ‘I can see the funds rate being flat and unchanged into the fall of 2020. For me, that’s to help support the inflation outlook and make sure it’s sustainable,’ Evans told CNBC’s Steve Liesman.”

April 15 – Reuters (Trevor Hunnicutt): “The U.S. Federal Reserve should embrace inflation above its target half the time and consider cutting rates if prices do not rise as fast as expected, a top policymaker at the central bank said… ‘While policy has been successful in achieving our maximum employment mandate, it has been less successful with regard to our inflation objective,’ Federal Reserve Bank of Chicago President Charles Evans said… ‘To fix this problem, I think the Fed must be willing to embrace inflation modestly above 2% 50% of the time. Indeed, I would communicate comfort with core inflation rates of 2-1/2%, as long as there is no obvious upward momentum and the path back toward 2% can be well managed.”

It's stunning how dramatically the Fed’s perspective has shifted since the fourth quarter. There’s now a chorus of Fed governors and Federal Reserve Bank Presidents calling for the central bank to accommodate higher inflation. Watching the inflation data (March CPI up 1.9% y-o-y), it’s not readily apparent what has them in such a tizzy. And with crude prices surging 40% to start 2019, it takes some imagining to see deflationary pressures in the pipeline.

The Fed’s (and global central banks’) dovish U-turn was clearly in response to December’s global market instability. Quickly, the global system was lurching toward the precipice. Acute fragility revealed – with central bankers left shaken. And witnessing the speculative fervor that has accompanied central bankers' change of heart, the backdrop is increasingly reminiscent of Bubble Dynamics following the 1998 LTCM bailout. A Bloomberg headline from earlier in the week caught my attention: “Evans Sees Lessons From 1998 Rate Cuts for Fed Policy This Year.” It said, “For the Chicago Fed president Charles Evans the situation recalls the Asian financial crisis of 1998. According to Evans, ‘The risk-management approach taken by the Fed is not unusual. It served us well in similar situations in the past.’”

Historical revisionism. For starters, the Asian crisis was in 1997. The Fed aggressively reduced rates from 5.50% to 4.75% in the Autumn of 1998 in response to the simultaneous Russia and Long-Term Capital Management (LTCM) collapses.

From Evans’ April 15, 2019 speech, “Risk Management and the Credibility of Monetary Policy:”
Later, in the autumn of 1998, the fallout on domestic financial conditions from the Russian default led to a downgrading of the economic outlook and an aggressive 75 basis point easing in the funds rate over a two-month period. When making the first of those cuts, the FOMC noted that easing would ‘provide added insurance against the risk of a further worsening in financial conditions and a related curtailment in the availability of credit to many borrowers.’”

Clearly many borrowers – and the system more generally - should have faced much tighter Credit Availability by late-1998.  This certainly included those aggressively partaking in leveraged speculation (equities, fixed-income and derivatives) and debt gluttons in the real economy - including the highly levered telecom companies (i.e. WorldCom, Global Crossing, XO Communications and a long list) and others (i.e. Enron, Conseco, PG&E, etc.).

Evans, not surprisingly, skips over LTCM. That the Fed orchestrated a bailout of this renowned hedge fund sent a very clear message that the Federal Reserve and global central banks were there to backstop the new financial infrastructure that was taking control of global finance (Wall Street firms, derivatives, the leveraged speculating community, Wall Street structured finance and securitizations). Had the Fed allowed the system to take the harsh medicine in 1998, the world would be a much safer place today.

Evans: “How did this risk-management strategy turn out? In the end, the economy weathered the situation well. Productivity accelerated sharply, and by early 1999 growth was on a firm footing. Subsequently, the FOMC raised rates by a cumulative 175 basis points by May of 2000.

Evans leaves out the near doubling of Nasdaq in 1999, along with what I refer to as “terminal phase” Bubble excess. The bottom line is the Fed aggressively loosened policy while the system was in the late-stage of a significant Bubble, and then failed to remove this accommodation until mid-November 1999.

And let’s not forget that the subsequent bursting of the so-called “tech bubble” led to what was, at the time, unprecedented monetary stimulus – including Dr. Bernanke’s speeches extolling the virtues of the “government printing press” and “helicopter money.” These measures were instrumental in fueling the mortgage finance bubble that burst in 2008. That collapse then led to a decade-long – and ongoing - global experiment in zero rates, open-ended money-printing and yield curve manipulation.

This whole fixation on deflation risk and CPI running (slightly) below target gets tiring - after a few decades. Clearly, the evolution to globalized market-based finance has profoundly altered the nature of inflation. CPI is no longer a paramount issue – especially with the proliferation of new technologies, the digitization of so much “output,” the move to services-based economies and, of course, globalization. There is today a virtual endless supply of goods and services – certainly including digital downloads, electronic devices and pharmaceuticals – that exert downward pressure on aggregate consumer prices. Importantly, consumer price indices are no longer a reliable indicator of price stability, general monetary stability or the appropriateness of central bank policies.

Central bank officials today lack credibility when they direct so much attention to consumer price inflation while disregarding the overarching risks associated with unrelenting global debt growth, highly speculative and leveraged global financial markets, and deep global economic structural maladjustment. In the grand scheme of things, consumer prices running just below target seems rather trivial. What’s not trivial is a central bank community that now appears to have accepted that they will accommodate financial excess and worsening structural impairment. At this point, it appears Full Capitulation.

In the same vein (and same day) as Evans’ speech, former President of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, posted a Bloomberg editorial: “The Fed Needs to Fight the Next Recession Now. Its Tools are Limited, so the Central Bank Must Compensate by being Aggressive.”

Almost 10 years after the Great Recession ended, the growing threat of a new economic slowdown raises a troubling question: When the next recession strikes, what can the world’s central banks do? With interest rates low and their balance sheets still loaded with assets bought to fight the 2008 crisis, do they have the tools to respond? ‘What, then, can the Fed do?’ In my view, it needs to be much more aggressive in using the limited tools that it has. For one, if your medicine chest is nearly empty, you want to keep your patient as healthy as possible. That means cutting interest rates now to lower the unemployment rate even further. Doing so could also boost demand during any recession: If people come to expect stronger recoveries, they will be more likely to keep spending even in downturns. A pre-commitment to strong growth could also help. In the last recession and ensuing slow recovery, the Fed treated its low-interest-rate policy largely as an emergency step that would be removed within the next year or two. Instead, the Fed should publicly commit now to maintain maximum stimulus after a recession until the unemployment rate falls below 3%, as long as the year-over-year core inflation rate remains below 2.5%. Such a promise, much stronger than any used or even suggested during the last recovery, would help minimize the damage and speed up the rebound.”

It’s simply difficult to believe such analysis resonates – yet it sure does. These are strange and dangerous times. Kocherlakota: “If your medicine chest is nearly empty, you want to keep your patient as healthy as possible.” Noland: If you’re running short of medicine, you better not encourage your patient to live a reckless lifestyle. You certainly don’t want to convince the foolhardy that you possess an elixir that will cure whatever ails them. These central bankers have really lost their minds: What they administer is anything but medicine.

Such central bank crazy talk should have longer-term bonds beginning to sweat. But, then again, bond markets are confident that central bankers from across the globe will be buying plenty of bonds over the coming months and years. When central bankers talk about accommodating higher inflation, bonds hear “more QE”. And while safe haven bonds may not be overjoyed at the thought of CPI creeping higher, they remain more than fine with bubbling risk markets – prospective bursting Bubbles that ensure only more expansive QE programs. The so-called U-turn marked an inflection point from a meek attempt to return central banking to sounder principles - to a decisive breakdown in any semblance of responsible monetary management.

I was convinced in ‘98 the Fed was committing a major policy error. Like today, the Fed and global central bankers were afraid of global fragilities. Yet markets and economies do turn progressively fragile after years of excess. These days, I worry about what central bankers have unleashed with their ultra-dovishness in the face of historic late-stage global Bubble “terminal excess.”


For the Week:

In the holiday-shortened week, the S&P500 was little changed (up 15.9% y-t-d), while the Dow added 0.6% (up 13.9%). The Utilities fell 1.4% (up 9.0%). The Banks added 0.1% (up 16.1%), and the Broker/Dealers gained 1.1% (up 15.1%). The Transports increased 0.7% (up 19.8%). The S&P 400 Midcaps declined 0.6% (up 17.5%), and the small cap Russell 2000 fell 1.2% (up 16.1%). The Nasdaq100 gained 0.8% (up 21.5%). The Semiconductors surged 4.1% (up 34.9%). The Biotechs sank 7.7% (up 10.1%). With bullion down $15, the HUI gold index dropped 4.7% (down 0.1%).

Three-month Treasury bill rates ended the week at 2.36%. Two-year government yields slipped a basis point to 2.38% (down 11bps y-t-d). Five-year T-note yields declined one basis point to 2.37% (down 14bps). Ten-year Treasury yields dipped a basis point to 2.56% (down 13bps). Long bond yields declined two bps to 2.96% (down 5bps). Benchmark Fannie Mae MBS yields increased three bps to 3.31% (down 19bps).

Greek 10-year yields increased two bps to 3.30% (down 110bps y-t-d). Ten-year Portuguese yields were unchanged at 1.17% (down 55bps). Italian 10-year yields rose six bps to 2.60% (down 14bps). Spain's 10-year yields added two bps to 1.07% (down 35bps). German bund yields declined three bps to 0.03% (down 22bps). French yields fell three bps to 0.37% (down 34bps). The French to German 10-year bond spread was little changed at 34 bps. U.K. 10-year gilt yields declined one basis point to 1.20% (down 8bps). U.K.'s FTSE equities index added 0.3% (up 10.9% y-t-d).

Japan's Nikkei 225 equities index gained 1.5% (up 10.9% y-t-d). Japanese 10-year "JGB" yields rose three bps to negative 0.03% (down 3bps y-t-d). France's CAC40 rose 1.4% (up 18.0%). The German DAX equities index jumped 1.9% (up 15.8%). Spain's IBEX 35 equities index rose 1.2% (up 12.2%). Italy's FTSE MIB index added 0.4% (up 19.8%). EM equities were mostly higher. Brazil's Bovespa index rallied 1.8% (up 3.9%), and Mexico's Bolsa jumped 1.9% (up 9.3%). South Korea's Kospi index declined 0.8% (up 8.6%). India's Sensex equities index increased 1.0% (up 8.5%). China's Shanghai Exchange rallied 2.6% (up 31.2%). Turkey's Borsa Istanbul National 100 index increased 0.9% (up 6.1%). Russia's MICEX equities index was little changed (up 3.9%).

Investment-grade bond funds saw inflows of $2.308 billion, and junk bond funds posted inflows of $1.101 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps to 4.17% (down 38bps y-o-y). Fifteen-year rates added two bps to 3.62% (down 39bps). Five-year hybrid ARM rates slipped two bps to 3.78% (up 22bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.30% (down 12bps).

Federal Reserve Credit last week declined $0.6bn to $3.893 TN. Over the past year, Fed Credit contracted $452bn, or 10.4%. Fed Credit inflated $1.086 TN, or 39%, over the past 337 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $3.7bn last week to $3.467 TN. "Custody holdings" gained $30.5bn y-o-y, or 0.9%.

M2 (narrow) "money" supply fell $24.3bn last week to $14.489 TN. "Narrow money" rose $543bn, or 3.9%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits jumped $15.2bn, while Savings Deposits sank $48.9bn. Small Time Deposits were little changed. Retail Money Funds gained $8.4bn.

Total money market fund assets sank $55.3bn to $3.043 TN. Money Funds gained $214bn y-o-y, or 7.6%.

Total Commercial Paper rose $9.9bn to $1.081 TN. CP gained $16.6bn y-o-y, or 1.6%.

Currency Watch:

The U.S. dollar index increased 0.5% to 97.378 (up 1.2% y-t-d). For the week on the upside, the South Korean won increased 0.2% and the Japanese yen added 0.1%. For the week on the downside, the Swiss franc declined 1.2%, the New Zealand dollar 1.2%, the Brazilian real 1.2%, the South African rand 0.7%, the British pound 0.6%, the Canadian dollar 0.5%, the euro 0.5%, the Swedish krona 0.3%, the Norwegian krone 0.3%, the Australian dollar 0.3%, the Mexican peso 0.2% and the Singapore dollar 0.2%. The Chinese renminbi was about unchanged versus the dollar this week (up 2.60% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.2% this week (up 6.1% y-t-d). Spot Gold fell 1.2% to $1,275 (down 0.5%). Silver increased 0.5% to $15.038 (down 3.2%). Crude added 11 cents to $64.00 (up 41%). Gasoline rose 1.7% (up 57%), while Natural Gas sank 6.4% (down 15%). Copper declined 0.7% (up 11%). Wheat dropped 4.3% (down 11%). Corn dipped 0.6% (down 2%).

Market Instability Watch:

April 15 – Bloomberg (Sarah Ponczek and Vildana Hajric): “The S&P 500 has grown by $4 trillion since its December meltdown, and exchange-traded fund investors are betting there may be more room to run. Investors poured more than $5.6 billion into the SPDR S&P 500 ETF Trust, known as SPY, last week… The last time the world’s largest ETF saw inflows of this magnitude, U.S. stocks were on the cusp of a bear market in late 2018. But this time around, the cash infusion comes as the benchmark nears new highs.”

April 18 – Reuters (Jennifer Ablan): “Investors’ appetite for risk was on display yet again this week with huge cash inflows into U.S.-based stock exchange-traded funds, corporate bond funds and high-yield ‘junk’ bond portfolios, according to Refinitiv’s Lipper research service… U.S.-based investment-grade corporate bond funds attracted more than $2.3 billion in the week ended Wednesday, extending their weekly inflow streak since late January… U.S.-based high-yield junk bond funds attracted more than $1.1 billion in the week…, their sixth consecutive week of inflows, Lipper said. Stock exchange-traded funds (ETFs) attracted about $7.35 billion of inflows…”

April 17 – Financial Times (Colby Smith and Robin Wigglesworth): “The soaring cost of buying protection against dollar gyrations is spurring more foreign investors to buy US bonds ‘unhedged’, raising the risk of painful losses and wider market ructions if the US currency weakens. With the trade-weighted dollar near its most expensive levels in 20 years and US interest rates high compared to Europe and Japan — despite the Federal Reserve’s dovish turn this year — the cost for foreign investors to insure, or hedge, against fluctuations is near an all-time high. The effect is to turn US Treasuries, a risk-free staple of investment portfolios the world over, into a negative-yielding investment for many foreign buyers.”

April 14 – Bloomberg (Joanna Ossinger): “A combination of low liquidity and high complacency mean cross-asset volatility won’t stay at historic lows for much longer, according to Morgan Stanley. ‘There are still two things that argue against the current levels of volatility being correct or sustainable,’ cross-asset strategist Andrew Sheets said… ‘The first is that market liquidity is still not great. The second: I’m not sure that the market in its newfound optimism has taken the story to the logical conclusion’ about where asset prices are headed, he said.”

April 15 – Bloomberg (Liz McCormick): “There is a complacency haunting foreign-exchange markets. Measures of how much traders expect currencies to gyrate over the coming months have plunged amid apparent assurances from central banks that they aren’t going to create major waves with further policy normalization anytime soon. But some observers, including strategists at Canadian Imperial Bank of Commerce, Morgan Stanley and Scotiabank are raising warning flags about the lack of volatility.”

Trump Administration Watch:

April 15 – Reuters (Steve Holland): “President Donald Trump said… he believed the United States would emerge from its trade dispute with China as a winner, no matter what happened. ‘We’re going to win either way. We either win by getting a deal or we win by not getting a deal,’ Trump said during a visit to a business roundtable in Burnsville, Minnesota.”

April 17 – Wall Street Journal (William Mauldin and Josh Zumbrun): “The U.S. and China are planning two rounds of face-to-face meetings as they seek to wrap up a trade deal, with negotiators aiming for a signing ceremony in late May or early June, according to people familiar with the situation. Under the tentative schedule, U.S. trade representative Robert Lighthizer is set to travel to Beijing the week of April 29, the people said, with Chinese envoy Liu He coming to Washington the week of May 6. Treasury Secretary Steven Mnuchin also will be a part of the delegation to China, a senior administration official said. President Trump said… negotiations were ‘moving along quite well.’”

April 15 – Reuters (Philip Blenkinsop): “The European Union is ready to start talks on a trade agreement with the United States and aims to conclude a deal before year-end, European Trade Commissioner Cecilia Malmstrom said…"

April 14 – The Hill (Sylvan Lane): “President Trump is struggling to win his fight to reshape the Federal Reserve with Republicans rebelling over a potential nominee and the bank's chairman resisting calls to cut interest rates. The independent central bank has long been a popular target for the president who has hammered it over its policies. But despite Trump's persistent criticism, his efforts to shake up the bank and influence its decisions have fallen short. Four Republican senators this week announced they would reject Herman Cain if Trump appointed him to the Federal Reserve's Board of Governors… It's only the latest blow to Trump, marking the third time his own party has derailed one of his picks for the central bank.”

April 14 – Financial Times (Sam Fleming and Chris Giles): “Donald Trump’s attempts to influence the US Federal Reserve have triggered anxiety among policymakers gathered for meetings in Washington, as economists fret that the apparent absence of an inflationary threat is making it easier for politicians to push for looser monetary policy. Officials at the spring meetings of the International Monetary Fund and World Bank defended the Fed following Mr Trump’s attempts to appoint two political allies to its board, and demands that it lower rates and restart quantitative easing. The Fed is not alone in facing a threat to its independence: the Turkish and Indian central banks have also been pressured to loosen policy in recent months.”

April 15 – Wall Street Journal (Nick Timiraos): “Former Federal Reserve officials and foreign central bankers said President Trump’s combative stance toward the U.S. central bank could over time weaken the institution and its role in the global economy. A string of central bankers, including several gathered in Washington for International Monetary Fund meetings over the weekend, expressed concern about the Fed’s political independence as Mr. Trump again criticized the central bank and as he seeks to nominate two stalwart political supporters to the organization who also disapprove of its actions. Though the Fed signaled in recent weeks that it was done for now with interest-rate increases, Mr. Trump wrote… on Twitter that the economy and stock market would be growing faster ‘if the Fed had done its job properly, which it has not.’”

Federal Reserve Watch:

April 15 – Reuters (Trevor Hunnicutt): “The U.S. Federal Reserve should shore up its ability to fight economic downturns by committing to let inflation run above 2% ‘in good times,’ a top policymaker said… The comments by Eric Rosengren, president of the Boston Fed, echoed remarks made earlier in the day by another Fed policymaker who cited the U.S. economy’s falling a bit short on the central bank’s inflation target as a problem. The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, is currently at 1.8%. Rosengren said he supports an approach that would see the Fed, which is ‘forced to accept’ inflation below its 2% target during recessions, commit to achieve above-2% inflation ‘in good times.’”

April 13 – New York Times (Jim Tankersley and Neil Irwin): “As soon as the Federal Reserve chairman, Jerome H. Powell, finished speaking at his December news conference, it was clear, even to him, that he had blown it. Stocks were tumbling. Analysts worried that the Fed was steering the economy into recession. And President Trump was furious. Four months later, Mr. Powell and the Fed have mostly repaired the damage, ending a steady march of interest rate increases and signaling that their next policy move may well be a rate cut if the economy continues to soften. Markets have rallied and recession fears have cooled. But one challenge has only worsened for Mr. Powell: Mr. Trump and his escalating anger at the Fed. The president’s relentless attacks on the central bank, which he blames for slowing United States economic growth, are putting Mr. Powell in a bind as he tries to bolster the economy without feeding fears that he is buckling under political pressure and damaging the integrity of an independent Fed.”

U.S. Bubble Watch:

April 17 – Reuters (Richard Leong): “Applications to U.S. lenders seeking loans to buy a home climbed to their highest level in almost nine years last week even as mortgage rates increased for a second week, the Mortgage Bankers Association said… ‘The spring buying season continues to be robust, with activity more than 7% higher than a year ago and up year-over-year for the ninth straight week,’ Joel Kan, MBA’s associate vice president of economic and industry forecasting, said…”

April 17 – Reuters (Pete Schroeder): “Labor markets remained tight across the United States as businesses struggled to find skilled workers and wages grew modestly, the Federal Reserve said… in its latest report on the economy. Prices have risen modestly since the last Beige Book, with tariffs, freight costs and rising wages often cited as key factors, the Fed said… Wages grew moderately in most districts for both skilled and unskilled workers, with only three reporting slight growth in workers’ pay… Businesses in most districts reported shortages of skilled workers, mainly in manufacturing and construction, but also in technical and professional roles. Companies have responded to the tight labor market by boosting bonuses and benefits packages, along with raising wages moderately…”

April 18 – Reuters (Lucia Mutikani): “U.S. retail sales increased by the most in 1-1/2 years in March as households boosted purchases of motor vehicles and a range of other goods, the latest indication that economic growth picked up in the first quarter after a false start. …Retail sales surged 1.6% last month. That was the biggest increase since September 2017 and followed an unrevised 0.2% drop in February… In March, sales at auto dealerships jumped 3.1%, the most since September 2017.”

April 15 – New York Times (Erin Griffith and Michael J. de la Merced): “When Jennifer Tejada, chief executive of PagerDuty, decided to take the software company public, she wanted to avoid this week. The stock market closes on Good Friday, and many people are on spring break. She had also feared being drowned out by a horde of other tech initial public offerings. ‘I remember saying, ‘I hope we don’t get run over by the ‘unicorn’ stampede,’ she said, using the term for private companies valued at more than $1 billion.”

April 12 – New York Times (Sapna Maheshwari): “As an executive vice president at Great American Group, a firm that helps liquidate the merchandise, clothing racks and mannequins at stores that are closing, Ryan Mulcunry has been watching booms and busts in the retail industry for almost two decades. Companies like his have been busy in recent years, but lately one thing has been missing. ‘In all the other cycles, including 2008, a lot of people would come in and buy racking, circular racks and so on,” Mr. Mulcunry said. ‘They’d buy it all and warehouse it and wait until somebody wanted to reopen a store and sell it back to them. Those people have gone away.’ …As the internet continues to change shopping habits, stores across the United States continue to close. Less than halfway through April, American retailers have announced plans this year to shut 5,994 stores, exceeding the 5,854 announced in all of 2018…”

April 14 – Reuters (Anna Irrera): “U.S. online lenders such as LendingClub Corp, Kabbage Inc and Avant LLC are scrutinizing loan quality, securing long-term financing and cutting costs, as executives prepare for what they fear could be the sector’s first economic downturn. A recession could bring escalating credit losses, liquidity crunch and higher funding costs, testing business models in a relatively nascent industry. Peer-to-peer and other digital lenders sprouted up largely after the Great Recession of 2008. Unlike banks, which tend to have lower-cost and more stable deposits, online lenders rely on market funding that can be harder to come by in times of stress.”

April 16 – Financial Times (Robert Smith): “Private equity firms have become notorious for juicing the numbers. It is rather less common for their senior partners to be bracingly honest about it. This year marks the 30th anniversary of Barbarians at the Gate — the seminal account of the 1980s leveraged buyout boom — and the private equity playbook remains essentially unchanged: pile debt on a company to fund its acquisition, strip out as many costs as possible, then flip the ‘improved company to another buyer for a higher price.’ Today’s masters of the universe have taken this template one stage further, giving themselves credit for the cost-cutting before they even get their hands on the company. Heavily adjusted earnings have become an inescapable fact of life in the modern buyout boom. Private equity firms now use eyebrow-raising ‘pro forma’ earnings numbers, a useful bit of Latin allowing them to factor in cost savings before they are even made.”

April 15 – Wall Street Journal (Christopher M. Matthews): “Two years ago, investors handed veteran oilman Jim Hackett a $1 billion check and sent him to seek riches in shale drilling. Today, the company he founded with their money, Alta Mesa Resources Inc., has a market value of about $43 million and is teetering on financial ruin—one of the more spectacular failures met chasing the next big thing in the American shale boom. Mr. Hackett bet big on an up-and-coming Oklahoma oil field after early wells there rivaled those of the best fields in Texas, but subsequent output has been disappointing.”

April 16 – Wall Street Journal (Patrick Thomas): “The best place to make money in the world of finance and investment may not be at a bank but in real estate. Real-estate investment trusts had some of the highest median worker pay among financial, real-estate and insurance companies in 2018… Property companies such as Host Hotels & Resorts Inc. and HCP Inc. paid their median employees more than some of the largest banks did. Host Hotels & Resorts, the lodging REIT formed through deals including a spinoff over 20 years ago from what was Marriott Corp., had median worker pay of $183,956…”

April 17 – Reuters (Lucia Mutikani): “The U.S. trade deficit fell to an eight-month low in February as imports from China plunged, temporarily providing a boost to President Donald Trump’s ‘America First’ agenda and economic growth in the first quarter… The trade deficit tumbled 3.4% to $49.4 billion in February, the lowest level since June 2018.”

China Watch:

April 16 – Bloomberg (Yinan Zhao and Enda Curran): “China’s economy rebounded through the first quarter, a welcome sign of stabilization for the world and handing the government room for maneuver as trade negotiations with the U.S. enter a crucial stage. Gross domestic product rose 6.4% in the first three months from a year earlier -- matching last quarter’s pace and beating economists’ estimates. Factory output in March jumped 8.5% from a year earlier, much higher than forecast. Retail sales expanded 8.7% while investment was up 6.3% in the year to date… ‘President Trump and other U.S. officials spent much of the last year saying that China’s slowdown was making Beijing desperate for a deal,’ said Michael Hirson, Practice Head, China and Northeast Asia at Eurasia Group… ‘Now that China’s growth is recovering, Trump and team will be getting more questions from pundits and the media about whether his leverage is slipping away.’”

April 16 – Reuters: “China’s industrial output grew 8.5% in March from a year earlier, the fastest pace since July 2014…, as factories ramped up output in anticipation of more businesses amid government support measures. Analysts polled by Reuters had expected industrial output would grow 5.9%, accelerating from 5.3% in the combined January-February period. The fixed-asset investment grew 6.3% in the first three months of 2019 from the same period a year earlier, the strongest pace since January-April last year…”

April 15 – Bloomberg (Robert Burgess): “An economic slowdown in China is the biggest risk facing markets, according to Bank of America’s monthly investor survey. So it should be good news that the most recent data indicate the Asian nation’s economy is perking up. The problem, as seen in the performance of global stocks Monday, is that the economy may be rebounding a bit too strongly, leading the People’s Bank of China to pull back on its latest stimulus measures. The PBOC admitted as much…, saying it will keep good control of the money supply ‘floodgate’ and not ‘flood’ the economy with excessive liquidity as the economy improves.”

April 16 – Reuters (Kevin Yao): “China’s stimulus measures will shore up economic growth this year and next but may undermine the country’s drive to control debt and worsen structural distortions over the medium term, the OECD said… Local governments will be allowed to issue 2.15 trillion yuan ($320.60bn) worth of special purpose bonds in 2019 to fund infrastructure projects, a jump of 59% from last year. But S&P Global Ratings estimated last year that local governments were already sitting on hidden debt that could be as high as 40 trillion yuan. ‘Infrastructure stimulus could lift growth over the projection horizon, but it could lead to a further build-up of imbalances and capital misallocation, and thereby weaker growth in the medium term,’ the OECD said… ‘The stimulus risks increasing once again corporate sector indebtedness and, more generally, reversing progress in deleveraging,’ it said.”

April 17 – Bloomberg: “China may be poised to take more stimulus steps to drive an expansion showing renewed signs of health. Officials are drafting measures to bolster sales of cars and electronics, according to people familiar…That news coincided with data showing a 6.4% year-on-year expansion in the first quarter -- beating economists’ estimates. Speculation over the stimulus swirled in the markets Wednesday, pushing up shares of domestic carmakers…”

April 17 – Bloomberg (Livia Yap): “The overnight borrowing cost in China’s money market rose to a four-year high as cash supply tightened just as tax payments increased demand for liquidity. The overnight repurchase rate rose as much as 11 basis points to 3.0006%, the first time it’s reached that level since April 2015… It has jumped 35 bps in three sessions, and is higher than the seven-day rate, which fell to 2.7905%.”

April 16 – Reuters (Winni Zhou and Andrew Galbraith): “China’s bond market sold off sharply this week as a slew of unexpectedly strong economic indicators prompted investors to ask if the country’s latest round of monetary easing may be drawing to a close. The first sign of trouble came when Chinese 10-year Treasury futures for June delivery… fell as much as 0.7% in initial deals on Monday… At 3.40%, the 10-year yield has now retraced to levels last seen in December.”

April 16 – Bloomberg (Livia Yap): “A sell-off in Chinese corporate bonds is accelerating as signs of a stabilizing economy bears down on the debt market. In the first two weeks of April, the average yield for three-year AAA rated corporate notes surged 23 bps in the steepest bi-weekly gain since November 2017… The yield for similar five-year debentures jumped the most since last August in comparison. Meanwhile, the five-year government yield surged to a five-month high of 3.24%.”

April 16 – Reuters (Lusha Zhang and Ryan Woo): “New home prices in China grew slightly faster in March after growth slowed the previous month, putting a floor under the cooling market, as Beijing rolled out stimulus to boost the economy. The sector’s solid growth could cushion the impact of a vigorous multi-year government crackdown on debt and escalating trade tensions with the United States, although some analysts say bubble risks are rising as prices continue to climb. Average new home prices in China’s 70 major cities rose 0.6% in March, quickening from a 0.5% gain in February… On the whole, it logged the 47th straight month of price increases. Most of the 70 cities surveyed by the NBS reported monthly price increases for new homes, and the number climbed sharply to 65 from 57 in February. On an annual basis, home prices rose 10.6% in March, the highest since April 2017, and also accelerating from a 10.4% gain in February.”

April 17 – Bloomberg: “Property developers that focus on smaller cities in China are set to be the beneficiaries of a reform last week that could encourage 100 million rural citizens to move to urban areas. Policy makers said cities with an urban population of 1 million to 3 million should scrap the residency registration system this year, a move that is seen boosting housing demand in lower-tier cities. Developers with higher land reserves or housing inventories in those cities, especially growing areas such as the Yangtze River Delta and Greater Bay Area are among the winners from the policy, analysts say.”

April 14 – Bloomberg: “Alarm bells are ringing as Chinese citizens keep pouring their savings into wealth-management products, a market that has tripled to more than $4 trillion in a little over three years. Like mortgage-backed securities were in the U.S., these products are building blocks of a shadow-banking system that exists largely off banks’ balance sheets. In China, a history of bailouts has persuaded many investors that WMPs are implicitly guaranteed by the issuing bank or the state. The People’s Bank of China has taken note, as have other regulators. Issued by banks, WMPs have emerged as a key tool for lenders to attract funds. Investors are lured by yields of 3% to 5%, compared with 1.5% for one-year bank deposits. The WMPs invest in everything from bonds to property and can be exposed to struggling industries like mining. The banks can keep the WMPs off their balance sheets provided the products are not principal-guaranteed, which most are not. They can also hand over the products to non-banks to manage in return for a predetermined interest rate.”

April 14 – Bloomberg (Livia Yap): “China’s savers are turning a deaf ear to government warnings about one of their favorite investments. Individuals hold nearly 90% of instruments known as wealth management products, a record share, because many believe they’re shielded from losses -- a view officials have tried hard to discourage. The assumption of safety has been buttressed by the fact that the large banks that issue WMPs have at times dipped into their own balance sheets to protect investors from losses or even outright defaults. That retail buyers have kept piling into WMPs even as corporate investors and financial institutions pared their exposure presents a quandary for Chinese policy makers preoccupied with controlling risks. While they want to stress that WMPs aren’t immune from losses to curb moral hazard, they must also avoid sparking a stampede for the exit among China’s millions of yield-hungry savers. ‘Regulators face the tough task of having to educate investors about the risks without actually having these risks play out,’ said Dexter Hsu, a Taipei-based analyst at Macquarie Research.”

April 15 – Wall Street Journal (Mike Bird): “China’s banks are lending again. The more they extend in credit, the more they’ll feel the pressure to boost their capital buffers. One method banks are already using is convertible bond issuance. The good news for the issuers is that this market is currently booming. The amount of convertible bonds listed on the Shanghai Stock Exchange has more than doubled in the past year… But investors should keep an eye on the market, which is still nascent: the evolution of the assets and their accounting is still uncertain.”

April 17 – Bloomberg: “Donald Trump once called himself the ‘king of debt.’ Hui Ka Yan, China’s richest property mogul, has a much stronger claim to the throne. No one has gotten wealthier on the back of a corporate borrowing binge than Hui. His junk-rated China Evergrande Group is not only the nation’s most indebted developer, it also has the highest leverage among companies underlying the world’s largest fortunes. Hui, who has a net worth of $35 billion, is the 26th richest person in the Bloomberg Billionaires Index. Everyone above him for whom data is publicly available… has grown their fortune via companies with far more conservative balance sheets. In many ways, Hui is more emblematic of recent trends in global business than his richer peers. Worldwide corporate debt has swelled by 26% over the past decade to $132 trillion as companies have taken advantage of historically low interest rates to fund their growth. Like Evergrande, many have also used borrowed cash to repurchase shares and boost dividends.”

April 14 – Bloomberg: “An iPhone assembler, e-commerce emporium and real-estate developer typically don’t compete in the same business -- except when it comes to electric vehicles in China. That’s because of a seismic shift toward EVs, which has spurred billions of dollars in investments by traditional carmakers, startups and titans of the internet, electronics and real-estate industries. The rush is on even as the government pulls back on the subsidies that juiced the industry to begin with. There are now 486 EV manufacturers registered in China, more than triple the number from two years ago. While sales of passenger EVs are projected to reach a record 1.6 million units this year, that’s likely not enough to keep all those assembly lines humming, prompting warnings that the ballooning EV market could burst and leave behind only a few survivors.”

Central Bank Watch:

April 14 – Reuters (Howard Schneider): “As a financial crisis spread across the globe in September of 2008, the U.S. Federal Reserve gathered in an emergency atmosphere as requests flooded in from other central banks for access to dollars. The ‘swap lines’ that the Fed quickly approved helped ease intense financial stress in foreign markets, but also showed the U.S. central bank was prepared to stand behind the global system. Would an ‘America First’ Fed do the same? The question is suddenly relevant for global economic officials and central bankers after moves by President Donald Trump to put two strong partisans on the Federal Reserve board.”

April 16 – Wall Street Journal (Jon Sindreu): “Fears of a global economic slowdown have led the European Central Bank to once again ponder the idea of taking interest rates into deeply negative territory and then come up with ways so to cushion any ill effects. That last bit in itself should be a red flag. Only a few months ago, investors expected central banks to keep tightening financial conditions after a decade of unprecedented stimulus. Now they think more easing is at hand. In the U.S., futures markets price in almost a 50% probability that the Federal Reserve will lower interest rates by January. But the real problem is in the eurozone, where the ECB never lifted rates from their record-low minus-0.4%, and officials need to do something to signal that their arsenal isn’t spent. At their latest policy meeting…, they suggested rates could go further below zero, accompanied by a tiered deposit mechanism designed to shield banks from the damage.”

April 14 – Financial Times (Claire Jones): “A technical measure of the inflation expectations of eurozone investors has fallen to its lowest level for three years, putting pressure on the European Central Bank to convince doubters that it is willing to use fresh stimulus to boost the region’s economy. In August 2014 ECB president Mario Draghi highlighted the so-called ‘five-year, five-year inflation swap rate’ at the US Federal Reserve’s annual retreat in Jackson Hole… Six months later, after the rate had fallen further, the bank launched an economic stimulus programme, buying €2.6tn of government and corporate bonds.”

Brexit Watch:

April 14 – Financial Times (Wolfgang Münchau): “Last week’s European Council was dominated by Brexit. But it may be remembered for the visible cracks in the Franco-German relationship. Emmanuel Macron’s refusal to accept the German-led majority view to agree to a long Brexit extension is perhaps the most clear sign of an end to the love-in between the two countries. The French president’s uncompromising stance caught most German political observers off-guard. Some members of Angela Merkel’s entourage in Brussels expressed unbridled fury at Mr Macron’s insurrection. How dare he? What the debate in Germany misses is that Mr Macron owes little to the German chancellor. She managed to fend off most of his eurozone reforms.”

Europe Watch:

April 17 – Associated Press (Geir Moulson): “The German government… slashed its 2019 economic growth forecast for the country for the second time this year, halving its outlook to a meager 0.5%. The update came less than three months after the government cut its forecast to 1% from 1.8% in late January. Weaker growth elsewhere as a result of global trade tensions and uncertainty over Britain’s exit from the European Union has weighed on Germany’s prospects — along with the after-effects of its own weak performance at the end of last year, when output was dragged down largely by one-time factors related to new car emissions standards.”

April 17 – Bloomberg (Arne Delfs): “The German economy is turning into Europe’s underperformer, with the government now predicting 2019 will see the weakest expansion in six years. Amid slowing global momentum and concerns over Brexit and trade disputes, the economy ministry… cut its estimate to 0.5%, half the pace previously forecast. It’s the latest in a series of downward revisions from a 2.1% projection a year ago. Growth for next year is seen at 1.5%.”

April 15 – Financial Times (Ian Mount): “At a Vox rally at a former bullring in the working-class Madrid suburb of Leganés, Sandra Gutiérrez says she is drawn to the far-right party for a simple reason. ‘I’m here because of the disaster that is Spain,’ said Ms Gutiérrez, a public relations consultant from Madrid. ‘You have to put your foot down and say, ‘Enough. It’s over.’ The same that happened in Italy, Austria, Hungary, Poland. The people explode because of the oligarchies, the bureaucracy. The money is for them, not for the citizens.’ At the rally, Ms Gutiérrez had listened alongside almost 9,000 others as Vox’s leader, Santiago Abascal, thundered about protecting rural traditions such as bullfighting and hunting and the need for immigrants to ‘accept our culture’.”

EM Watch:

April 17 – Financial Times (Laura Pitel and Adam Samson): “Turkey’s central bank has bolstered its foreign currency reserves with billions of dollars of short-term borrowed money, raising fears among analysts and investors that the country is overstating its ability to defend itself in a fresh lira crisis. Reported net foreign reserves held by the central bank stood at $28.1bn in early April — a sum that investors already believed was inadequate because of Turkey’s heavy need for dollars to cover debt and foreign trade. But calculations by the Financial Times suggest that this total has been enhanced by an unusual surge in the use of short-term borrowing, or swaps, since March 25. Stripping those swaps out, the total is less than $16bn. Analysts and investors, already skittish about putting money to work in Turkey given the direction of economic policy under President Recep Tayyip Erdogan, are concerned that the state of the financial defences leaves the country ill-equipped to deal with any potential market crisis.”

April 17 – Bloomberg (Michelle Jamrisko and Catarina Saraiva): “Inflation that’s projected to reach an eyeball-popping 8 million percent this year has left Venezuela saddled with the title of the world’s most miserable economy. The embattled South American nation topped the rankings of Bloomberg’s Misery Index, which sums inflation and unemployment outlooks for 62 economies, for the fifth straight year.”

Global Bubble Watch:

April 16 – Financial Times (Chelsea Bruce-Lockhart and Joe Rennison): “Bond sales are booming in 2019, running at a record pace globally for the year so far, as a pivot in monetary policy among the world’s central banks prompts a fresh binge in corporate borrowing. Global corporate bond issuance has reached almost $747bn for the year…, according to… Dealogic, edging ahead of the previous record of $734bn issued over the same time period in 2017, which ended up being the biggest year on record for new debt sales. A sharp U-turn in global monetary policy, with the Federal Reserve pausing further interest rate increases in the US and the European Central Bank committing to reviving growth, has breathed life into corporate debt markets.”

April 15 – Financial Times (Philip Stafford): “Global regulators reminded the world last week that they would like to see the Libor lending benchmark all but gone by 2022, and they will be watching banks’ progress carefully. Figuring out how to replace the London interbank offered rate, however, is fast becoming one of the prickliest issues in global markets. The benchmark, embedded in everything from the most sophisticated derivatives to the average mortgage, is based only partly on real transactions — a clear anomaly that left it subject to abuse. Banks are backing away from supporting the rate, which is now, in effect, on life support… But the estimated $350tn of contracts tied to it represent a huge challenge that market participants, primarily banks, are expected to fix by themselves.”

April 15 – Financial Times (Sarah Provan and Adam Samson): “Greek bond yields hit the lowest level in nearly 14 years, highlighting a comeback for the country that was the focal point of a debt crisis that crippled the eurozone a decade ago. The benchmark 10-year yield fell 3 bps to 3.274%, its lowest since September 2005… The fall… marks a stark contrast from eight years ago, when yields climbed above 40%. Athens was then at the epicentre of the eurozone debt crisis that began in 2009. The country went through a deep recession and a trio of IMF bailouts, the last of which it emerged from in the summer.”

Japan Watch:

April 15 – Reuters (Tetsushi Kajimoto): “Bank of Japan Governor Haruhiko Kuroda… vowed to ‘patiently continue’ the central bank’s ‘powerful’ monetary easing as it was taking longer than previously thought to accelerate inflation to its 2% target. Prices remain weak despite a tight labor market, but the momentum toward 2% inflation is intact, Kuroda told lawmakers… While continuing its massive monetary stimulus, the BOJ will examine whether the decline in profits at regional banks may undermine financial intermediation, Kuroda added…”

April 12 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… the central bank was ready to expand monetary stimulus if needed, brushing aside the view the BOJ had little ammunition left to fight the next economic downturn. Kuroda said it was true major central banks may have less room to cut interest rates because they are already very low after years of aggressive monetary easing. ‘But that doesn’t mean central banks have no ammunition left to ease further in response to financial developments,’ Kuroda told a news conference…’The BOJ also has room to ease monetary policy further if doing so becomes necessary,’ he said.”

Fixed-Income Bubble Watch:

April 15 – Reuters (Richard Leong): “Foreigners purchased U.S. Treasury securities in February after selling them for three consecutive months, suggesting some overseas appetite for low-risk government debt due to worries about the global economy… They bought $19.91 billion in Treasuries in February, compared with $11.99 billion in sales the month before…”

April 17 – Financial Times (Joe Rennison): “While most areas of the debt markets have rebounded sharply from a slump in prices at the end of 2018, one corner remains under pressure: collateralised loan obligations. CLOs bundle up loans that then back a series of bonds and equity, with varying degrees of risk and return for investors. Pristine, triple-A slices of new debt have languished behind the recovery seen in other markets such as investment grade debt, junk bonds and risky leveraged loans, with yields rising to an average of 1.44 percentage points above the interest rate benchmark Libor. That is the highest it has been in more than two years. The drab performance in this $600bn market reflects a stark change in appetite among the fund managers, insurance companies and international banks that had piled into one of the hottest corners of debt markets in recent years.”

Geopolitical Watch:

April 18 – Reuters (Yimou Lee): “China was stepping up a campaign to exert influence over Taiwan, including its upcoming presidential election, a senior U.S. official said…, at a time of heightened tension between the self-ruled island and Beijing. China has increased military and diplomatic pressure on Taiwan, whose president, Tsai Ing-wen, Beijing suspects of pushing for the island’s formal independence, a red line for China which has never renounced the use of force to bring Taiwan under its control. The island is gearing up for a presidential election in January that could shake up the political landscape, with contenders including Terry Gou, chairman of Apple supplier Foxconn. ‘They’ve obviously stepped up campaigns of disinformation and direct influence against Taiwan,’ James Moriarty, chairman of the American Institute in Taiwan, told Reuters.”

April 14 – Reuters (Yimou Lee): “Chinese bombers and warships conducted drills around Taiwan on Monday, the latest military maneuvers near the self-ruled island that a senior U.S. official denounced as ‘coercion’ and a threat to stability in the region. The United States has no formal ties with Taiwan but is bound by law to help provide the island with the means to defend itself and is its main source of arms.”

April 15 – Reuters (Yimou Lee): “Taiwan has not been intimidated by China’s military drills this week, President Tsai Ing-wen said…, after the latest Chinese maneuvers were denounced by a senior U.S. official as ‘coercion’ and a threat to regional stability. China’s People’s Liberation Army said its warships, bombers and reconnaissance aircraft had conducted ‘necessary drills’ around Taiwan on Monday… ‘China’s armed forces yesterday sent a large number of military aircraft and naval vessels into our vicinity. Their actions threaten Taiwan and other-like minded countries in the region,’ Tsai said.”

April 16 – Reuters (Ulf Laessing and Ahmed Elumami): “At least four people were killed in heavy shelling in the Libyan capital Tripoli, an official said on Wednesday as Europe and the Gulf were divided over a push by eastern forces commander Khalifa Haftar to seize the city. Nearly two weeks into its assault, the veteran general’s eastern-based Libyan National Army (LNA) is stuck in the city’s southern outskirts battling armed groups loyal to the internationally recognized Tripoli government.”

April 16 – Reuters (David Brunnstrom): “Satellite images from last week show movement at North Korea’s main nuclear site that could be associated with the reprocessing of radioactive material into bomb fuel, a U.S. think tank said… Any new reprocessing activity would underscore the failure of a second summit between U.S. President Donald Trump and North Korean leader Kim Jong Un in Hanoi in late February to make progress toward North Korea’s denuclearization.”

April 14 – Reuters (Julia Symmes Cobb and Matt Spetalnick): “The United States will use all economic and political tools at its disposal to hold Venezuelan President Nicolas Maduro accountable for his country’s crisis and will make clear to Cuba and Russia they will pay a price for supporting him, U.S. Secretary of State Mike Pompeo said...”

April 12 – Reuters (Natalia A. Ramos Miranda): “U.S. Secretary of State Mike Pompeo… defended sanctions on Venezuela and said the United States would not ‘quit the fight’ in the socialist-run Latin American nation which is spiraling into deepening economic and political crisis. Pompeo is on a three-day trip to Chile, Paraguay and Peru, a clutch of fast-growing countries in a region where Washington’s concerns are focused on China’s growing presence as well as the Venezuelan crisis.”