Market Commentary: Faux Statesmanship

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April 5 – New York Times (Dealbook): “’It doesn’t take a genius’ to know capitalism needs fixing. Capitalism helped Ray Dalio build his investment empire. But in a lengthy LinkedIn post, the Bridgewater Associates founder says that it isn’t working anymore. Mr. Dalio writes that he has seen capitalism ‘evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.’ ‘Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another.’ ‘The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.’ ‘We are now seeing conflicts between populists of the left and populists of the right increasing around the world in much the same way as they did in the 1930s when the income and wealth gaps were comparably large.’ ‘It doesn’t take a genius to know that when a system is producing outcomes that are so inconsistent with its goals, it needs to be reformed.’ Stay tuned: Mr. Dalio says that he’ll offer his solutions in another essay.”

I’m reminded of back in 2007 when Pimco’s Paul McCulley coined the term “shadow banking” – and the world finally began taking notice of the dangerous new financial structure that had over years come to dominate system Credit. Okay, but by then the damage was done. As someone that began posting the “Credit Bubble Bulletin” in 1999 and had chronicled the prevailing role of non-bank Credit in fueling the “mortgage finance Bubble” fiasco (on a weekly basis), it was all frustrating.

Why wasn’t the discussion started in 2001/02 when mortgage Credit began expanding at double-digit rates, and there were clear signs of Bubble formation? Oh yea, that’s right. There was desperation to reflate the system and fight the “scourge of deflation” after the bursting of the “tech” Bubble. Excess was welcomed early on – and later, when things got really heated up, nobody dared risk bursting the Bubble.

Reading Mr. Dalio’s latest, I have to ask, “What ever happened to ‘beautiful deleveraging’?” And I’m not on the edge of my seat waiting for his “solutions.”

There was a window of opportunity early in the mortgage financial Bubble period for “statesmen” to rise up and call out the recklessness of the Fed spurring mortgage Credit excess and house price inflation in the name of system reflation. Statesmen and women should have excoriated governor Bernanke for suggesting the “government printing press” and “helicopter money” - the type of crazy talk that should disqualify one for a position of responsibility at the Federal Reserve. Fed chairman? You’ve got to be kidding.

There was a window of opportunity to rein the Fed in after QE1. The Federal Reserve should have been held to their 2011 monetary stimulus “exit strategy.” Instead they doubled down – literally – as the Fed’s balance sheet doubled in about three years to $4.5 TN. Mr. Dalio - along with virtually everyone – didn’t seem to have any issues. Indeed, an unprecedented expansion of non-productive debt (certainly including central bank Credit and Treasury borrowings) somehow equated with “beautiful deleveraging.” It was ridiculous analysis in the face of the greatest global Bubble in human history.

Central banks aren’t fully to blame, but it's an awfully good place to start. Three decades of “activist” monetary management has left a horrible legacy. The Institute for International Finance reported this week that global debt ended 2018 at a record $243 TN. This debt mountain simply would not have been possible without “activist” central banking. Despite a lengthening list of risks, global stocks have powered higher in 2019 to near all-time highs. A relentless speculative Bubble has only been possible because of central bank policies.

I’m not all that interested in Dalio’s “solutions.” In my mind, he missed what was an exceptional opportunity for statesmanship. Bridgewater’s investors were the priority and have been rewarded handsomely. Pro-central bank “activism” has been the right call for compounding wealth for the past decade (or three). But no amount of ingenuity will resolve the historic predicament the world finds itself in today. Markets are broken, global imbalances the most extreme ever, and structural impairment unprecedented – and worsening, all of them.

Most regrettably, the type of structural reform required will only arise from a severe crisis. The Fed and global central bankers have been reflating Bubbles for more than three decades. Highly speculative global markets at this point completely disregard risk. And with borrowing costs incredibly low, what government (ok, Germany) is going to impose some spending discipline and operate on a fiscally responsible trajectory? At this point, finance is hopelessly unsound – and, importantly, hopelessly destructive on an unprecedented global scale.

I had the great pleasure of spending part of my Friday with the University of Oregon Investment Group. I gave a talk, “Money, Credit, Inflation and the Markets.” Being with bright, intellectually curious and enthusiastic university students gives me hope – and a smile.

From my presentation: “It just breaks my heart to see young people turn away from Capitalism. I anticipate spending the rest of my life trying to explain that the culprit is unsound finance and deeply flawed monetary management – and not the system of free-market Capitalism. History teaches us that credit is inherently unstable. I would argue that the experiment in New Age unfettered credit – with its serial booms and busts – evolved into a failed experiment in “activist” monetary management – another debacle in “inflationism.”

“The result has been a period of historic bubbles – in the markets and in economies – on a global scale. And protracted Bubbles become powerful mechanisms of wealth redistribution and destruction. Central banks readily creating new “money” and favoring the securities markets are fundamental to the problem. Such policies benefit the wealthy and worsen inequality. We’re witnessing the resulting rise of populism and a mounting crisis of confidence in our institutions. Even with 3.8% unemployment, near-record stock prices and one of the longest economic expansion on record, our country is deeply divided and resentful. I fear for the next downturn.”

A Friday Business Insider headline: “Hedge-fund billionaire Ray Dalio says the current state of capitalism poses 'an existential threat for the US'”; Barron’s: “Hedge Fund Billionaire Ray Dalio Says Capitalism ‘Must Evolve or Die’”; and Vanity Fair: “Billionaire Hedge-Fund Manager Warns a ‘Revolution’ is Coming.” Observer: “Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences.” And CBS: “Billionaire Investor Ray Dalio: Capitalism Run Amok is ‘Economically Stupid’”

I’m reminded of an analogy I’ve used in the past. One could make a reasonable argument that our eyeballs are flawed. How could something of such importance be so soft, delicate and vulnerable? Yet this vital organ is not flawed – imperfection is not a legitimate issue. It is the nature of its function that dictates its characteristics and vulnerabilities. Our eyes cannot sit within a protective ribcage like the heart, or within the hardened skull as the brain does.

To be able to see the world – looking at distant mountain ranges and then immediately shifting focus to the pages of a wonderful book – requires an exquisitely complex organ functioning exposed to the elements and largely unprotected. Importantly, we recognize and accept our eyes’ sensitivities and vulnerabilities. We would not wander into a metal shop without wearing protective eye coverings. We don sunglasses on bright days – darkened snow goggles for spring skiing. We learn at a very young age not to stare into the sun.

I disagree with the increasingly popular view that Capitalism as flawed. At the same time, I have been long frustrated by those dogmatically preaching the virtues of Capitalism without accepting the reality of inherent delicacy, vulnerabilities and weaknesses. As we are with our eyes, we have to be on guard, take precautions, and definitely avoid doing anything stupid. Who is reckless with their eyes? There’s too much to lose. No one wants to contemplate being blind for the rest of their life.

How could we ever have allowed Capitalism to be so irreparably damaged? There are innate instabilities in Credit and finance that have been disregarded for way too long. Unsound “money” is a primary (and insidious) risk to capitalistic systems. I would further argue that persistent asset inflation and recurring speculative Bubbles pose a major risk to sound finance and, as such, to Capitalism more generally. Moreover, inflationism – “activist” central banking – with its asset market focus, manipulation and nurturing of speculative excess and inequality, is anathema to free-market Capitalism.

When the Fed slid down the slippery slope and implemented QE, the economics profession and investment community failed society. The case against QE shouldn’t have been primarily focused on inflation risk. The overarching danger was a corrosive impairment of markets and finance, with resulting dysfunction for Capitalism more generally. The risk was destabilizing inequality, insecurity and resulting societal stress. There was the peril of a fragmented society, divided nation, political dysfunction and waning trust in our institutions. Somehow, everyone was content to ignore the reality that unsound “money” reverberates throughout the markets, the economy, society, politics and geopolitics.

Over the years, I’ve referred to the “first law of holes.” If you find yourself in a hole, the first requirement is to stop digging. Similarly, I’ve repeatedly noted the long-ago recognized issue with discretionary monetary management: One mistake invariably leads to only bigger mistakes. And I’m fond of reminding readers that “things turn crazy at the end of cycles.” Historic cycle, historic “crazy.” And I’ll repeat what I’ve written many times before: From my analytical perspective, things continue to follow the worst-case scenario.

It was yet another mistake for the Fed to go full U-Turn dovish. It was another blunder for the global central bank community to signal they were willing to move quickly and aggressively to bolster international markets. The 2019 speculative run in the markets only exacerbates underlying fragilities – worsens inequality – and sets the stage for an only deeper crisis.

I’ll be curious to see if Ray Dalio’s “solutions” include having the Fed disavow aggressive monetary stimulus, while letting markets begin functioning on their own. The biggest problem with Capitalism these days is that the system is not self-adjusting and correcting. Structurally distorted markets and deeply maladjusted economies are incapable of correction. Global imbalances only worsen every year. Speculative Bubbles inflate further.

Global central banks are understandably distressed about the potential for market dislocation and crisis. Yet recurring efforts to forestall upheaval increasingly risk financial collapse. There is no real solution until deeply flawed monetary management is recognized and changed. The current course will only exacerbate inequality and foment Dalio’s “revolution.” Any soul-searching and scrutinizing of Capitalism must begin with central banking and monetary mismanagement. Where were the likes of Dalio, Dimon and Buffett when it could have made a difference? Faux Statesmanship.


For the Week:

The S&P500 rose 2.1% (up 15.4% y-t-d), and the Dow gained 1.9% (up 13.3%). The Utilities slipped 0.2% (up 10.3%). The Banks jumped 4.3% (up 13.8%), and the Broker/Dealers surged 5.4% (up 12.3%). The Transports rose 3.1% (up 17.1%). The S&P 400 Midcaps (up 17.2%), and the small cap Russell 2000 (up 17.4%) both gained 2.8%. The Nasdaq100 rose 2.7% (up 19.7%). The Semiconductors surged 5.9% (up 27.9%). The Biotechs gained 2.6% (up 24.7%). With bullion little changed, the HUI gold index increased 0.7% (up 6.6%).

Three-month Treasury bill rates ended the week at 2.38%. Two-year government yields jumped eight bps to 2.34% (down 15bps y-t-d). Five-year T-note yields rose seven bps to 2.31% (down 21bps). Ten-year Treasury yields jumped nine bps to 2.50% (down 19bps). Long bond yields rose nine bps to 2.90% (down 11bps). Benchmark Fannie Mae MBS yields gained six bps to 3.17% (down 33bps).

Greek 10-year yields sank 21 bps to 3.52% (down 88bps y-t-d). Ten-year Portuguese yields added a basis point to 1.26% (down 47bps). Italian 10-year yields slipped one basis point to 2.48% (down 26bps). Spain's 10-year yields increased a basis point to 1.11% (down 31bps). German bund yields jumped eight bps to 0.01% (down 24bps). French yields rose four bps to 0.36% (down 35bps). The French to German 10-year bond spread narrowed four bps to 35 bps. U.K. 10-year gilt yields jumped 12 bps to 1.12% (down 16bps). U.K.'s FTSE equities index gained 2.3% (up 10.7% y-t-d).

Japan's Nikkei 225 equities index jumped 2.8% (up 9.0% y-t-d). Japanese 10-year "JGB" yields rose five bps to negative 0.03% (down 3bps y-t-d). France's CAC40 gained 2.3% (up 15.8%). The German DAX equities index surged 4.2% (up 13.7%). Spain's IBEX 35 equities index jumped 2.9% (up 11.4%). Italy's FTSE MIB index gained 2.2% (up 18.7%). EM equities were mostly higher. Brazil's Bovespa index gained 1.8% (up 6.7%), and Mexico's Bolsa surged 3.9% (up 8.0%). South Korea's Kospi index rose 3.2% (up 8.3%). India's Sensex equities index increased 0.5% (up 7.7%). China's Shanghai Exchange surged 5.0% (up 30.2%). Turkey's Borsa Istanbul National 100 index jumped 5.3% (up 8.2%). Russia's MICEX equities index gained 1.8% (up 7.2%).

Investment-grade bond funds saw inflows of $2.901 billion, and junk bond funds posted inflows of $2.0 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased two bps to 4.08% (down 32bps y-o-y). Fifteen-year rates slipped one basis point to 3.56% (down 31bps). Five-year hybrid ARM rates dropped nine bps to 3.66% (up 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 14 bps to 4.30% (down 22bps).

Federal Reserve Credit last week declined $12.4bn to $3.909 TN. Over the past year, Fed Credit contracted $443bn, or 10.2%. Fed Credit inflated $1.098 TN, or 39%, over the past 335 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.3bn last week to $3.460 TN. "Custody holdings" gained $21.9bn y-o-y, or 0.6%.

M2 (narrow) "money" supply gained $32.3bn last week to a record $14.521 TN. "Narrow money" rose $569bn, or 4.1%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits rose $18.3bn, and Savings Deposits gained $5.1bn. Small Time Deposits increased $3.7bn. Retail Money Funds added $2.9bn.

Total money market fund assets rose $5.8bn to $3.107 TN. Money Funds gained $287bn y-o-y, or 10.2%.

Total Commercial Paper gained $6.3bn to $1.085 TN. CP expanded $37.4bn y-o-y, or 3.6%.

Currency Watch:

The U.S. dollar index was little changed at 97.395 (up 1.3% y-t-d). For the week on the upside, the South African rand increased 2.9%, the Mexican peso 1.9%, the Brazilian real 1.2%, the Norwegian krone 0.2%, the Australian dollar 0.1% and the Singapore dollar 0.1% . For the week on the downside, the New Zealand dollar declined 1.1%, the Japanese yen 0.8%, the Swiss franc 0.5%, the Canadian dollar 0.3%, the Swedish krona 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.07% versus the dollar this week (up 2.40% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 1.6% this week (up 7.0% y-t-d). Spot Gold was about unchanged at $1,292 (up 0.7%). Silver slipped 0.2% to $15.086 (down 2.9%). Crude surged another $2.94 to $63.08 (up 39%). Gasoline jumped 4.6% (up 49%), while Natural Gas was little changed (down 9%). Copper declined 1.4% (up 10%). Wheat rallied 2.2% (down 7%). Corn recovered 1.7% (down 3%).

Market Instability Watch:

April 4 – Bloomberg (Michelle Davis): “Jamie Dimon warned investors to get ready for more wild rides like the one that upended markets at the end of last year. ‘The fourth quarter of 2018 might be a harbinger of things to come,’ the chief executive officer of JPMorgan… said… in his 51-page annual letter to shareholders. Dimon cited a raft of issues driving the more pessimistic outlook, including uncertainty about the Federal Reserve’s interest-rate shifts, Germany’s economic slowdown, Brexit and the U.S.-China trade spat. Investors face a ‘new normal’ of liquidity constraints because of tighter regulations on banks and other market makers, Dimon said, adding that ‘there are growing geopolitical tensions -- with less certainty around American global leadership.’”

April 2 – Bloomberg (Cecile Gutscher and Tasos Vossos): “For investors trying to make sense of recent extreme moves in the global credit market, bad news: The roller coaster may go on. The long-feared liquidity menace is well and truly here, and it’s overshadowing more prosaic factors like low default rates and corporate earnings when turbulence in the $13 trillion market erupts, according to… UBS Group AG. ‘Dizzying’ moves of late have been driven by rapidly rising and falling liquidity, strategists at the bank argued… These are symptoms of a herd mentality that’s exacerbating every selloff and rally, and the problem is particularly acute for junk-rated debt, they said.”

April 1 – Bloomberg (Lila Lee): “The $5.1-trillion-a-day foreign exchange market is suffering more than most from central bank decisions to move in tandem and keep interest rates low for longer. Policymakers moving to press pause on policy tightening in 2019, as well as broadly mixed messages from the biggest economies, have combined to suppress already-low volatility to levels not seen in five years… Volatility fell to its lowest levels since late 2014 in March, according to the Deutsche Bank Currency Volatility Index.”

April 1 – CNBC (Diana Olick): “A sharp drop in interest rates last week suddenly made millions more borrowers eligible to refinance their mortgages. With the average rate on the 30-year fixed now close to 4%, 4.9 million borrowers could likely qualify for a refinance that could reduce their interest rates by at least three-quarters of a percentage point, according to Black Knight, a mortgage data and analytics company. That’s a nearly 50% increase in the size of that population in a single week.”

April 3 – Bloomberg (Sarah Ponczek): “For active managers who spent the year’s first two months rediscovering their super powers, March was kryptonite. Stock-picking mutual funds have watched it all turn tragic over the last four weeks, with two-thirds trailing benchmarks, upending the strongest start to a year since the bull market began. Blame it on a loss of nerve. In a market that kept trudging upward, they bailed on the winners. Now, only 36% of large-cap portfolios are ahead of indexes like the Russell 1000…”

April 3 – Bloomberg (Rachel Evans): “A rough start to the year for more than $850 billion exchange-traded funds with quantitative strategies is fueling a product rethink. Smart-beta stock ETFs -- which use characteristics such as a company’s value, size or momentum to direct investments -- lured the least money in 12 months in the U.S., dragging asset growth below the five-year average for a second quarter… Instead of quitting, ETF providers are doubling down and trying to woo investors with all-in-one funds that pull together several factors.”

Trump Administration Watch:

April 2 – CNBC (Patti Domm): “When the U.S. escalated the trade war by slapping tariffs on $200 billion in Chinese goods last September, China’s economy was struggling and its stock market was in a deep slide, giving the U.S. a seeming advantage in a trans-Pacific trade rift. But months later, the U.S. has lost some of that edge. China’s Shanghai stock market has surged more than 27% in 2019 and is the best performer of major markets globally, while China’s economy is finally showing early signs of stabilizing. When the September tariffs were announced, President Donald Trump was seen as emboldened by the best two quarters of more than 3% U.S. growth in years and a stock market that was hitting all-time highs. While the U.S. is still seen as having an advantage, economic growth has faltered, to a below trend 1.5% pace in the first quarter.”

April 3 – Financial Times (James Politi and Lucy Hornby): “Top US and Chinese officials have resolved most of the issues standing in the way of a deal to end their long-running trade dispute but are still haggling over how to implement and enforce the agreement, people briefed on the talks have said. Liu He, China’s vice-premier, on Wednesday began meeting with Robert Lighthizer, the US trade representative, and Steven Mnuchin, the US Treasury secretary, for a potentially climactic negotiation session that was expected to last for three days. News that the two sides are closing in on a deal after four months of negotiations energised stock markets as the new round of talks began. Mr Lighthizer greeted Mr Liu with a handshake on the steps leading into the US trade representative’s headquarters…”

April 3 – Wall Street Journal (Nick Timiraos and Alex Leary): “President Trump is blaming the Federal Reserve for holding back the economy and stock market despite the central bank’s recent decision to do two things he wanted—halt rate increases and stop shrinking its asset portfolio. The president blasted the Fed and Chairman Jerome Powell at three meetings in the past week alone, telling Republican senators, supporters and staffers that if it wasn’t for the central bank’s past rate increases, economic output and stocks would be higher and the U.S. budget deficit would be rising less. ‘He was pretty rough,’ said one person… Mr. Trump also blamed Treasury Secretary Steven Mnuchin for recommending Mr. Powell for the top Fed job. ‘Mnuchin gave me this guy,’ Mr. Trump said. Mr. Trump recalled a recent phone conversation he had with Mr. Powell, this person said. ‘I guess I’m stuck with you,’ the president recalled telling Mr. Powell.”

March 31 – Reuters (Trevor Hunnicutt and Ann Saphir): “Barely a week after the U.S. Federal Reserve called a halt to interest rate hikes, policymakers are now battling a view growing in financial markets, and embraced by the Trump administration, that the Fed will need to cut rates before long. Larry Kudlow, President Donald Trump’s top economic advisor, said Friday on CBNC that while there is ‘no emergency,’ the Fed should cut rates to protect the U.S. economy from slowing down. But no fewer than five Fed officials in the past 24 hours have touted the underlying strength of the American economy and argued the recent spate of weak data on business activity is more likely to prove fleeting than lasting. Even the Fed’s two most dovish policymakers - the presidents of the St. Louis and Minneapolis regional banks - say they are not ready to agitate for the central bank to start reversing three years of rate increases.”

April 2 – Reuters (David Lawder): “The Trump administration is maintaining support for prospective Federal Reserve nominee Stephen Moore following reports the conservative commentator has had legal problems, a White House adviser said… ‘We stand behind him a hundred percent,’ National Economic Council Director Larry Kudlow told reporters…”

April 1 – Politico (Sarah Ferris): “A looming battle between President Donald Trump and Democrats over government spending and the debt limit could make the 35-day government shutdown look like a blip. A series of budget deadlines converge in the coming months that could leave Washington on the precipice of another shutdown, $100 billion in automatic spending cuts and a full-scale credit crisis. And lawmakers are openly worried about stumbling over the edge. Some top Democrats have begun quietly pushing for a grand bargain to simultaneously raise the debt ceiling and Congress’ stiff budget caps — avoiding market turmoil and staving off harsh cuts to domestic and defense programs… But the White House, focused on Trump’s reelection bid, is resisting talk of another massive deal that could cost as much as $350 billion over two years.”

March 30 – Reuters (Julia Harte and Tim Reid): “The U.S. government cut aid to El Salvador, Guatemala and Honduras on Saturday after President Donald Trump blasted the Central American countries for sending migrants to the United States and threatened to shutter the U.S.-Mexico border... On Friday, Trump accused the nations of having ‘set up’ migrant caravans and sent them north. Trump said there was a ‘very good likelihood’ he would close the border this week if Mexico did not stop immigrants from reaching the United States.”

Federal Reserve Watch:

April 3 – Bloomberg (Jennifer Jacobs): “President Donald Trump intends to nominate Herman Cain, the former pizza company executive who ran for the 2012 Republican presidential nomination, for a seat on the Federal Reserve Board, according to people familiar with the matter. Trump plans to announce his selection very soon, said three people, who asked not be identified discussing the nomination because it hasn’t been announced. Cain would fill one of two open seats on the board; the president plans to name Stephen Moore, a visiting fellow at the Heritage Foundation and a long-time Trump supporter, for the other. In Cain and Moore, Trump would place two political loyalists on the board of a central bank that has frequently crossed him.”

April 3 – Bloomberg (Rich Miller): “The Federal Reserve risks stoking the same sort of asset bubbles that Chairman Jerome Powell has linked to the last two recessions with its new-found eagerness to fan inflation. The Fed’s surprise pivot away from any interest rate increases this year has boosted prices of stocks, high yield bonds and other risky assets in spite of nagging investor concerns about slowing global economic growth. Financial conditions, at least as measured by the Chicago Fed, are at their easiest since 1994. And they could well get looser.”

U.S. Bubble Watch:

April 1 – Associated Press (Josh Boak): “U.S. manufacturers grew at a faster pace in March, as the pace of employment jumped and new orders and production improved. The Institute for Supply Management… said… that its manufacturing index rose to 55.3 last month, up from 54.2 in February… The sector has been reporting growth for 31 months.”

April 4 – CNBC (Diana Olick): “If you’re shopping for a cheap home this spring, good luck. The median value of homes listed for sale in March hit a record $300,000, according to realtor.com. Home values overheated from 2016 to mid-2018, as demand outstripped supply, especially at the lower end of the market. Those gains began to shrink last summer, as mortgage rates rose. The difference this spring is that there continues to be a shortage of entry-level homes for sale, but the supply of higher-end homes is rising. ‘Despite a slowing growth rate, home prices will likely continue to set new records later this year,” said Danielle Hale, realtor.com’s chief economist. ‘Heading into spring, U.S. prices are expected to continue to rise and inventory is expected to continue to increase, but at a slower pace than we’ve seen the last few months…’”

March 31 – Wall Street Journal (Laura Kusisto): “The spring home-buying season is shaping up as the best in years, offering new opportunities after last year’s tough housing market drove away many would-be buyers. A number of economic factors that slowed sales in 2018 have eased or even reversed in recent weeks. Mortgage rates have been falling, home inventory is rising in many once-tight markets and the pace of home-price growth is slowing. These more favorable conditions are already bringing price cuts and fewer of the bidding wars that left many buyers empty-handed, recent data show. The housing market had become so skewed toward sellers that many buyers were giving up, causing sales to drop.”

March 30 – Wall Street Journal (Dana Cimilluca): “Remember the last time investors went nuts for an IPO boom? In 1999, hundreds of companies made a madcap dash to the public markets, capturing the imaginations of everyday Americans who thought they could day-trade their way to fortunes. Startups like Webvan and eToys were suddenly household names. The Pets.com sock puppet was a guest on ‘Live With Regis and Kathie Lee.’ All told, 547 companies had initial public offerings in the U.S. that year, taking in a record haul of $107.9 billion, according to Dealogic. This year could be even bigger.”

March 29 – Reuters (P.J. Huffstutter and Humeyra Pamuk): “At least 1 million acres of U.S. farmland were flooded after the ‘bomb cyclone’ storm left wide swaths of nine major grain producing states under water this month, satellite data analyzed by Gro Intelligence for Reuters showed.”

April 1 – CNBC (Tom Polansek): “The Black Hawk military helicopter flew over Iowa, giving a senior U.S. agriculture official and U.S. senator an eyeful of the flood damage below, where yellow corn from ruptured metal silos spilled out into the muddy water. And there’s nothing the U.S. government can do about the millions of bushels of damaged crops here under current laws or disaster-aid programs, U.S. Agriculture Under Secretary Bill Northey told a Reuters reporter… The USDA has no mechanism to compensate farmers for damaged crops in storage, Northey said, a problem never before seen on this scale. That’s in part because U.S. farmers have never stored so much of their harvests, after years of oversupplied markets, low prices and the latest blow of lost sales from the U.S. trade war with China…”

April 1 – Wall Street Journal (Dan Molinski): “Gasoline prices typically move higher this time of year. But the seasonal rise is even more pronounced thanks to flooding in the Midwest and dwindling oil production out of Venezuela. U.S. drivers now pay $2.71 for a gallon on average, up 28 cents from a month ago and nearly 50 cents higher since early January… Prices are closing in on the $2.98-a-gallon level reached in May, which was the priciest level since October 2014.”

April 2 – CNBC (Robert Frank): “Manhattan real estate had its worst first quarter since the financial crisis, capping the longest losing streak for sales in over 30 years… Total sales fell 3% in the first quarter, according to… Douglas Elliman and Miller Samuel. That marked the sixth straight quarter of declines, which is the longest downturn in the three decades that the appraisal and research firm has been keeping data… Prices in Manhattan continue to remain soft. While the average sale price got a big boost from hedge fun billionaire Ken Griffin’s $238 million condo purchase, hitting $2.1 million, the median sales price in Manhattan declined slightly, to just over $1 million.”

China Watch:

March 30 – Reuters (Yawen Chen and Ryan Woo): “Factory activity in China unexpectedly grew for the first time in four months in March, an official survey showed…, suggesting government stimulus measures may be starting to take hold in the world’s second largest economy… Factory output grew at its fastest pace in six months in March, reversing a brief contraction in the previous month. It rose to 52.7 from February’s 49.5, the highest level seen since September 2018. Total new orders also grew at a quicker pace, driving up factory-gate prices to a five-month high of 51.4, ending four months of contraction.”

April 2 – Reuters (Yawen Chen and Ryan Woo): “Activity in China’s services sector picked up to a 14-month high in March as demand improved at home and abroad…, adding to signs that government stimulus policies are gradually kicking in… The Caixin/Markit services purchasing managers’ index (PMI) rose to 54.4, the highest since January 2018 and up from February’s 51.1, a fourth-month low… Survey respondents said activity was being buoyed by stronger demand, new state policies and improved access to financing.”

April 3 – Bloomberg: “China offered new measures to reduce taxes and raise its citizens’ wages, ramping up an already ambitious plan to boost domestic demand. Policy makers are drafting policies to help farmers, small-business owners and scientific researchers boost their incomes, the Economic Information Daily reported, citing unnamed sources. The measures will probably include ‘bigger breakthroughs’ in land reform to enhance farmers’ property gains, the newspaper said.”

April 1 – Bloomberg: “Chinese companies have missed payments on 26.2 billion yuan ($3.9bn) of local bonds in the first quarter, almost quadruple the same period in 2018. It was also the third highest quarter for bond delinquencies in China’s history…”

April 3 – Bloomberg: “A series of bankruptcy filings by major private-sector bond issuers in China’s third-wealthiest province is shining a spotlight on aggressive efforts by local governments to manage unsustainable debt loads. Four debtors have entered bankruptcy procedures since the start of November in Dongying, a city of 2 million in the eastern province of Shandong that once thrived with a booming tire-making industry. While China sees thousands of bankruptcies each year, instances of court-led restructuring of publicly issued bonds have been rare.”

Central Bank Watch:

April 1 – Bloomberg (Viktoria Dendrinou and Piotr Skolimowski): “European Central Bank officials pressed the case for continued monetary-policy support as they signaled the euro-area economic slowdown is weighing on inflation. In a foreword to the ECB’s annual report, President Mario Draghi warned of a ‘persistence of uncertainties’ and said there’s a continued need for stimulus to boost inflation. His vice president, Luis de Guindos echoed that, saying ‘weaker growth momentum will leave its mark on domestic price pressures, slowing the adjustment of inflation toward our aim.’”

April 3 – Financial Times (Claire Jones): “Five years after the European Central Bank broke ground by cutting interest rates below zero, its officials are considering a redesign of the contentious policy as they face up to an economy and banking system that could remain fragile for a lot longer. ECB president Mario Draghi pushed the world’s leading central banks into uncharted territory in 2014 when the eurozone deposit rate — what commercial banks pay to hold money at the ECB — went negative. Further cuts have pushed the rate to minus 0.4% since 2016, part of a policy to spur banks to lend money rather than sit on it. Banks were dismayed at what has been in effect a tax on their activities, which ECB insiders say amounts to €7.5bn a year.”

Brexit Watch:

March 30 – Reuters (William Schomberg and David Milliken): “British Prime Minister Theresa May risks the ‘total collapse’ of her government if she fails to get her battered Brexit deal through parliament, the Sunday Times newspaper said, amid growing speculation that she might call an early election. Underscoring the tough choices facing May to break the Brexit impasse, the newspaper said at least six pro-European Union senior ministers will resign if she opts for a potentially damaging no-deal departure from the EU.”

April 3 – Financial Times (Lucy Meakin): “The risk of a no-deal Brexit is now ‘alarmingly high,’ according to Bank of England Governor Mark Carney, who described some claims about how the U.K. could manage such a situation as ‘absolute nonsense.’ Leaving the European Union without an agreement has become the ‘default’ outcome despite being opposed by Parliament, and could happen by accident, he said…”

Europe Watch:

April 4 – Associated Press (David Rising): “A group of leading German economic research institutes slashed their growth forecast for the country…, warning that if Britain leaves the European Union without a deal, it could get even worse. In a joint statement, the five institutes said they were reducing their autumn forecast of 1.9% growth for Europe’s largest economy downward to 0.8% after concluding ‘political risks have further clouded the global economic environment.’”

April 1 – Reuters (Gavin Jones): “Italy’s finances will deteriorate this year and next, with debt and the budget deficit both rising because of recession and higher public spending, the Organisation for Economic Cooperation and Development said… In a special report on Italy, the… OECD said the deficit would rise to 2.5% of gross domestic product this year, above the 2% target Rome agreed in December… The economy will shrink by 0.2% this year, the OECD said, confirming a forecast last month, before expanding 0.5% in 2020.”

EM Watch:

April 3 – Reuters (Ece Toksabay and Tuvan Gumrukcu): “Turkey’s main opposition candidate in Istanbul urged the High Election Board (YSK)… to confirm him as the elected mayor after it ruled in favour of a partial recount of votes in 18 of the city’s 39 districts. Initial results from Sunday’s mayoral elections showed the opposition Republican People’s Party (CHP) had narrowly won control of Turkey’s two biggest cities, Istanbul and Ankara, in a shock upset for President Tayyip Erdogan’s ruling AK Party.”

April 2 – Financial Times (Editorial Board): “It is hard to overstate the blow to Turkey’s president Recep Tayyip Erdogan represented by losing political control not just of Ankara but — most likely — Istanbul too. It was victories in Turkey’s two biggest cities 25 years ago that gave him his real political start; as he told party activists in 2017: ‘If we stumble in Istanbul, we lose our footing in Turkey.’ Sunday’s shock regional election setbacks bring Mr Erdogan to a fork in the road — where he must choose between the pragmatism he is capable of, and his instinct to double down against opposition.”

April 3 – Financial Times (Adam Samson): “Turkey’s inflation rate remained a whisker below 20% last month… Consumer prices rose 19.71% in March from the same month in 2018…, from 19.67% in February… The collapse last year in the value of the lira against other world currencies ignited a boom in price growth that has had wide-ranging implications across the economy.”

Global Bubble Watch:

April 2 – Bloomberg (John Authers and Lauren Leatherby): “This was the decade of de-leveraging that wasn’t. A decade ago, as the world began to piece the financial system back together after an epic credit crisis, there was agreement on one thing: Too much debt had caused the crisis, and so there must be a huge de-leveraging. It has not worked out like that. Everyone knew that leverage was too high. In 2007, as subprime lenders went bankrupt and the crisis took hold, sinister charts circulated around Wall Street. Shooting upwards, on one side, was U.S. household debt as a proportion of total GDP. Shooting downwards, on the other side, was the U.S. savings rate, plunging near zero… Behold the result of their labors: Leverage has increased. U.S. consumers and the Western banking system have cut back somewhat, but leverage has just moved elsewhere. Their retrenchment was far outstripped by a rise in borrowing by companies and particularly by governments.”

April 3 – Wall Street Journal (Laura Kusisto and Peter Grant): “Cities around the world, from New York to London to Stockholm to Sydney, are struggling to solve growing affordable housing crises. Acute shortages are persisting despite millions of dollars invested and hundreds of thousands of units built. Some countries have focused on solutions promoting unshackled free markets while others have turned more to rent control and subsidies. But no approach has solved the crises and most have other negative ripple effects. Across 32 major cities around the world, real home prices on average grew 24% over the last five years, while average real income grew by only 8%..., according to Knight Frank, a… real-estate consulting firm. Economists say it is striking that affordability has worsened even during a period of global prosperity over the last six years.”

March 30 – Wall Street Journal (Cara Lombardo and Ben Dummett): “Global political tension and slowing economies abroad are taking a bite out of mergers-and-acquisitions activity. So far this year, companies world-wide have struck $913 billion of merger deals, down 17% from the same period in 2018, according to Dealogic.”

March 31 – Financial Times (Don Weinland): “A global real estate boom fueled by China’s ambitious Belt and Road Initiative has slowed to a crawl, as Beijing seeks to rein in rogue building projects across the developing world. So far this year, less than $1bn has been invested into overseas commercial property projects by Chinese developers in designated BRI countries. That puts this year’s total on track to be far below last year’s figure of about $14bn, and marks another sharp drop from the peak of $23.6bn in 2016… When China announced its $1tn plan to build bridges, roads and ports in emerging markets starting in 2013, it also unleashed a wave of investments into hotels, office buildings and casinos from Mongolia to Montenegro — an unintended consequence of the plan.”

April 4 – Financial Times (Don Weinland): “Chinese state banks have been forced to recalibrate their appetite for risk on overseas infrastructure financing this year as developing countries struggle to repay debts. Over the past decade, government-controlled lenders such as China Development Bank, ICBC and Bank of China have risen up the ranks to become Asia’s largest players in infrastructure finance. China’s Belt and Road Initiative, a $1tn plan to build ports, roads and bridges across Eurasia and into Africa, has delivered a boost to the banks’ overseas activity.”

April 3 – Bloomberg (Wendy Tan): “Asian junk bonds suffered the worst downgrade-upgrade ratio from Fitch Ratings in seven years last quarter, led by Chinese issuers. That makes it vital to understand an issuer’s position in a business group. Distressed-debt cases including China’s HNA Group Co. have highlighted the risk of owning debt issued by a holding entity rather than its operating arms.”

March 31 – Bloomberg (Peter Vercoe): “Australian property prices continued their slide last month, as prospective buyers delay purchases until after national elections, and tougher lending standards make it harder to obtain financing. Housing values in the combined state and territory capitals fell 0.7% in March, to be down 8.2% from a year earlier, according to CoreLogic… The nation’s two biggest cities remained at the forefront of the slump. Sydney prices fell 0.9% last month, and are now down 13.9% from their mid-2017 peak, while Melbourne values dropped 0.8% to be 10.3% below their peak.”

Japan Watch:

March 31 – Financial Times (Andrew Whiffin): “The Bank of Japan is now in its tenth year of domestic stock buying through exchange traded funds and is showing little sign of winding the programme down. With the stated inflation target of 2% still elusive, Bank governor Haruhiko Kuroda rejected criticisms of the programme in an address to Japan’s parliament in December and dismissed the notion that an exit should be considered anytime soon. Last year the Bank bought just over Y6tn ($55bn) of ETFs in line with its target for 2018 and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the country’s total market capitalisation. The Bank also owns close to half of all outstanding Japanese government bonds.”

March 31 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s business mood slumped to a two-year low in the March quarter, a central bank survey showed, underscoring concerns that Sino-U.S. trade tensions and softening global demand were taking a toll on the export-reliant economy. The gloom was most pronounced among big manufacturers, where sentiment soured at the fastest pace in more than six years… Separately…, a private business survey showed manufacturing activity in Japan contracted for a second straight month in March, with output down at the sharpest rate in nearly three years.”

Fixed-Income Bubble Watch:

April 2 – CNBC (Jeff Cox): “Debt market activity slowed to a comparative crawl to start out 2019… Issuance plummeted across the board, from syndicated loans to mergers and acquisitions to institutional lending. Securitized products such as collateralized loan obligations also saw a huge drop in activity as did leveraged buyouts, according to… Refinitiv. First-quarter syndicated lending overall declined 36% to about $400 billion. Leveraged loans… fell 56% to $152 billion. Institutional loans dropped to a three-year low of $58.8 billion, and investment grade and leveraged buyout funding slid 11% apiece… Bond issuance across the board fell 14.5% through February, with declines particularly sharp in mortgage-related bonds (off 32.5%) and asset-backed securities (down 55.6%), according to Securities Industry and Financial Markets Association data. Total bond market debt outstanding closed 2018 just shy of $43 trillion, up 4.7% from the year before.”

April 2 – Financial Times (Editorial Board): “Finance is more vulnerable to short-memory syndrome than other industries. An occasional reminder of the grim lessons of history is therefore useful, and no more so than in private equity. The industry still works on the basis that as long as the orchestra is playing a medley of cheap debt, deep pools of capital, and ever larger deals, it should leverage up and keep dancing. A warning from one of private equity’s own that this tune could come to an abrupt end is timely, important and welcome. This week, Jonathan Lavine, co-managing partner of Bain Capital, signalled his concern about private equity groups’ appetite for debt. This time is — slightly — different from the prelude to the financial crisis of 2008… In any case, the worrying similarities with 2007-08 outweigh the differences. Debt levels are high. Loan quality is low. Leveraged buyout loans rate predominantly at B2 or below — the most speculative end of speculative-grade debt — Moody’s says. In a repeat of the breakneck yield-chase before the crisis, investors are eager to grab the higher returns available on such loans. More than 80% of loans are also ‘covenant-lite’, according to LCD… Cov-lite loans may allow ailing companies to survive for longer, but traditional loan conditions are also an effective signal of trouble ahead.”

April 1 – Bloomberg (Tommy Wilkes and Ritvik Carvalho): “U.S. leveraged loans just had their best quarter since 2010, despite lackluster performance in March. The floating-rate asset class has returned about 4% year-to-date, trailing both investment grade and high-yield bonds. The S&P/Leveraged Loan Total Return Index fell 0.17% last month, while the Bloomberg Barclays U.S. investment grade bond index gained 2.5% and U.S. high-yield rose 0.9%. Junk is having the best start to a year since 2003 while BBB rated bonds are doing the best since 1995.”

Leveraged Speculator Watch:

April 2 – Bloomberg (Justina Lee and Ksenia Galouchko): “Quants surfing the momentum of assets around the world have caught the bullish wave powering government bonds in a tentative reprieve for the besieged $355 billion industry. Trend followers, or commodity trading advisers, have posted their best quarter since late 2017 after recession panic juiced long wagers tracking interest-rate markets, according to a Societe Generale SA index… The bad news: They’re only up 1.9%, even as stocks and crude post their best first-quarter performance in over a decade. Automated traders have largely missed out on the biggest gains on offer as their trading signals flash caution after last year’s market meltdown. All told, whipsawing trends continue to dog the industry after the worst outflows in over 10 years in 2018.”

Geopolitical Watch:

April 2 – Reuters (Angus Berwick and Vivian Sequera): “Venezuela’s Constituent Assembly, an all-powerful legislature controlled by the ruling Socialist Party, …approved a measure allowing for a trial of opposition leader Juan Guaido, in what appeared to be a step toward having him arrested. Guaido, leader of the opposition-controlled National Assembly, in January invoked the country’s constitution to assume the interim presidency after declaring President Nicolas Maduro’s 2018 re-election a fraud. He has been recognized by the United States and most other Western nations as Venezuela’s legitimate leader, and has said he does not recognize decisions emanating from the Maduro government.”

April 4 – Reuters (Maxim Rodionov): “Venezuela’s deputy foreign minister Ivan Gil said… he does not rule out that more Russian military personnel may arrive in Venezuela under agreements already concluded with Russia… The deputy minister also said Russian forces will stay in Venezuela as long as needed…”

March 31 – Reuters (Yimou Lee and Ben Blanchard): “Taiwan on Sunday condemned what it called a ‘provocative’ move by China after two Chinese fighter jets crossed a maritime border separating the two sides amid growing friction between Taipei and Beijing. Earlier on Sunday Taiwan scrambled aircraft to drive away the two Chinese planes, the self-ruled island’s defence ministry said.”

Friday Afternoon Links

[Reuters] U.S. payrolls report, trade optimism lift stocks

[Reuters] Trump urges Fed to lower U.S. interest rates

[Reuters] May's Brexit talks with Labour stall, delay request fails to convince EU

[WSJ] Trump Calls on Fed to Cut Interest Rates, Resume Bond-Buying to Stimulate Growth

[FT] Editorial Board: Donald Trump must be stopped from packing the US Federal Reserve