Credit Bubble Bulletin : March 2020

Being an analyst of Credit and Bubbles over the past few decades has come with its share of challenges. Greater challenges await. I expect to dedicate the rest of my life to defending Capitalism. One of the great tragedies from the failure of this multi-decade monetary experiment will be the loss of faith in free market Capitalism – along with our institutions more generally.

Somehow, we must convince younger generations that the culprit was unsound finance. And it’s absolutely fixable. Deeply flawed, experimental central banking was fundamental to dysfunctional markets and resulting deep financial and economic structural impairment. The Scourge of Inflationism. If we just start learning from mistakes, we can get this ship headed in the right direction.

Over the years, I’ve argued for “rules-based” central banking that would sharply limit the Federal Reserve’s role both in the markets and real economy. The flaw in “discretionary” central banking was identified generations ago: One mistake leads invariably to only bigger blunders.

What commenced with Alan Greenspan’s market-supporting assurances of liquidity and asymmetric rate policy this week took a dreadful turn for the worse: Open-end QE, PMCCF, SMCCF, MMLF, CPFF, MSBLP, TALF… They’re going to run short of acronyms. Our central bank has taken the plunge into buying corporate bond ETFs, with equities ETFs surely not far behind. The Fed’s balance sheet expanded $586 billion – in a single week ($1.1 TN in four weeks!) – to a record $5.25 TN. Talk has the Fed’s new “Main Street Business Lending Program” leveraging $400 billion of (this week’s $2.2 TN) fiscal stimulus into a $4.0 TN lending operation. Having years back unwaveringly set forth, the ride down the slippery slope of inflationism has reached warp speed careening blindly toward a brick wall.

Ben Bernanke, appearing on CNBC, March 25, 2020: “Low interest rates are not - and I know some of you will be skeptical - but it’s just a fact that low interest rates around the world are not primarily a monetary policy phenomenon. Interest-rates around the world have been declining since the eighties. And if you look at the 10-year Treasury yield since 1980 from then till now – 40 years – it looks like a ski slope. The rate just keeps coming down and down and down. And as I’ve talked about before, I think what we have in the world now is a global savings glut. Longer life spans, rising incomes and for a variety of reasons there’s a lot of savings in the world. Any asset manager will tell you that – and it’s hard to find good uses for that money – hard to find good capital projects. Even when monetary policy is at a normal level - and we got pretty close to a normal level when the Fed was raising rates earlier - interest-rates are going to be much lower than in the past. So low interest rates are something we’re going to have to live with for a while very likely. And we have to be very alert about financial risk. The Fed is looking at that at much more detail than we used to. But, again, it’s not a monetary policy thing. It’s a long-term trend.”

The Fed “very alert about financial risk”? What exactly has the Fed been “looking at at much more detail”? Financial excess? Speculative leveraging? Mounting vulnerabilities in the derivatives complex, the ETF universe, corporate leverage? Global hedge fund leverage? Highly levered mortgage companies? We’ve now witnessed two historic bouts of market illiquidity and dislocation – exposing massive speculative leveraging – and Dr. Bernanke sticks resolutely with his “global savings glut” thesis. Central banks have during this cycle created more than $16 TN of new “money,” for heaven’s sake. Of course it’s been “a monetary policy thing.”

I’ve always viewed Bernanke as a decent man. But as a central banker – as the mastermind for the terminal phase of a runaway global monetary experiment – he’s been a disaster. His analytical framework is so flawed it’s difficult to comprehend the amount of power and discretion placed in his hands. It was Bernanke that invoked the government printing press to resolve whatever might ail the markets or economy. His crackpot theories that the Fed’s failure to print sufficient money supply after the ’29 stock market crash caused the Great Depression should have been sternly rebuked years ago. Worst of all, Dr. Bernanke specifically used the risk markets (stocks, corporate Credit, derivatives and such) as the primary mechanism for post-Bubble system reflation. The former Fed chief is the father of “QE,” “helicopter money,” and the ETF complex that took the world by storm.

Documenting for posterity the ever-lengthening list of lending facilities, this week from the Federal Reserve:

“The Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.”

“The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.”

“The Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.”

“Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities.”

“…A Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.”

“The TALF is a credit facility authorized under section 13(3) of the Federal Reserve Act intended to help meet the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities (“ABS”) and improving the market conditions for ABS more generally… The TALF SPV initially will make up to $100 billion of loans available.”

The Fed was to expand its assets by at least $625 billion this week. In concert with global central bankers, unprecedented liquidity operations coupled with a massive U.S. fiscal program was sufficient to reverse collapsing global markets. Once reversed, there was more than ample fodder from the reversal of short positions and market hedges to power a historic market spike (“biggest three-day surge since 1931”).

Chairman Jay Powell, appearing Thursday on the Today Show: “There’s nothing fundamentally wrong with our economy. Quite the contrary. The economy performed very well right through February. We’ve got a fifty-year low in unemployment for the last couple years. So, we start in a very strong position. This isn’t that something is wrong with the economy.”

Powell’s optimism was echoed by regional Fed presidents: Dallas’s Robert Kaplan: “We were strong before we went into this, and we believe that we’ve got a great chance to come out of this very strong.” Atlanta Fed President Raphael Bostic: “The economy started at a great place.”

The Fed believes it has “temporarily stepped in to provide loans” - for a system considered fundamentally sound and robust. I am an analyst and not a pessimist. But, most unfortunately, the opposite holds true. U.S. and global economies were unstable “Bubble Economies” fueled by Credit and financial excess, most notably by unprecedented asset market speculative leverage. Fed assets surpassed $5 TN this week, and I’ll be stunned if they ever again fall below this level. I am reminded of Fed officials having actually expected in 2011 that its “exit strategy” would return the Federal Reserve balance sheet to near pre-crisis levels – only to double assets again in about three years to $4.5 TN.

The Austrian “Bubble Economy” concept will be invaluable as we analyze dynamics going forward. From the economic perspective, a decade of ultra-loose financial conditions incentivized businesses to over-borrow – from multinational corporations, to mid- and small business to sole proprietorships. Tens of thousands of unprofitable (and negative cashflow generating) enterprises proliferated throughout the economy – from Silicon Valley “tech Bubble 2.0,” to shale, alternative energy, biotech, media, entertainment and leisure, and so on. Ultra-loose financial conditions stoked over- and malinvestment, while generally distorting business spending patterns. Confounding post-Bubble financial and economic landscapes will create investment decision mayhem.

U.S. and global economies are severely maladjusted – and ravenous Credit gluttons. Importantly, this ensures Trillions of monetary stimulus along with Trillions of fiscal spending will be absorbed as if dumping buckets of water onto the scorching desert sand.

Stimulus will for a time sustain scores of uneconomic enterprises, at the cost of prolonging the workout process. Nonetheless, with Bubbles popping in shale, technology, leisure and entertainment and elsewhere, millions of job losses will prove permanent.

Negative wealth effects will also wreak havoc on consumer spending patterns. From the Fed’s Z.1 report, Household Net Worth (Assets less Liabilities) ended 2019 at a record $118.4 TN, having ballooned $23 TN, or 21%, over the past three years. Household Net Worth ended 2019 at a record 545% of GDP, up from previous cycle peaks 492% (Q1 2007) and 446% (Q1 2000). Household holdings of Equities (Z1: Equities and Mutual Funds) ended Q4 at $30.8 TN, a record 142% of GDP (up from 2007’s 102% and 2000’s 117%).

Now comes the downside. Easy gains from asset inflation are spent more freely than incomes. Changing spending patterns will expose the fragile underbelly of the “services” and consumption-based U.S. economy. Meanwhile, some of the most expensive real estate markets in the country will suffer collapsing demand, with major effects on construction, spending and confidence (not to mention loan losses).

One of the many lasting pandemic consequences will be a reassessment of living in New York City, San Francisco, Los Angeles and other densely-populated urban centers. Beyond negative asset market wealth effects, I expect a prolonged impact on high-income earners (i.e. Wall Street compensation, executive pay, company stock rewards, Silicon Valley, entertainment and media, real estate-related, etc.). Expect some upper-end real estate Bubbles – having persevered even through the last crisis - to finally succumb. The bursting of an unprecedented nationwide commercial real estate Bubble will have major impacts on construction and the finances of owners of real estate, as well as on the underlying loans, securitizations and derivatives.

Every segment of the economy will be impacted – many deeply. Expectations for a quick recovery are wishful thinking. And I doubt it will be possible for the Fed and global central bankers to step back from market liquidity support operations. We should not be surprised by ongoing weekly Fed balance sheet growth of several hundred billion. Household, business and market confidence have been shaken – and will be slow to recover. Markets have been conditioned over recent decades to anticipate rapid recovery. Confidence was bolstered this week by incredible “whatever it takes” measures. I’m just not convinced the necessity for ongoing rapid central bank expansion will prove as confidence inspiring.

New York state reported its first coronavirus infection on March 1st. In less than four weeks, cases multiplied to 45,000. From the February 22nd CBB: “Cases tripled to nine Friday in Italy, with the first death reported.” Italy reported 919 deaths Friday, with total deaths of 9,134 and cases of 86,498.

Governments have made very unfortunate missteps managing this pandemic. Many now look to the trajectory of China’s outbreak for hope that cases elsewhere will begin declining soon - with economic normalization commencing in earnest. Yet Western democracies have a major disadvantage in managing a pandemic. Societies would not tolerate health authorities going door to door checking for symptoms and removing those with fevers (sometimes kicking and screaming) for immediate transport to isolation facilities.

One has only to view photos of a bustling Central Park or videos of crowded NYC subways to realize that “lock down” means something quite different in the U.S. than it does in Wuhan and Hubei Province. And only China has 170 million cameras and a sophisticated surveillance system – that in one case provided the ability to track an infected individual “down to the minute” as he traveled between provinces and along public transit in Nanjing.

Bill Gates’ comments (CNN Coronavirus Townhall, March 26th) resonated. Having warned of pandemic risk in a 2015 TED talk, and after years of being fully immersed with the Bill and Melinda Gates Foundation’s efforts in infectious disease control, vaccines and other global health initiatives, Gates possesses deep understanding of the subject matter. His view is that nationwide shutdowns and social distancing efforts must be strictly maintained until the number of active coronavirus cases declines to a low and manageable level. A cursory glance at one of the nationwide outbreak maps is sufficient to appreciate that the outbreak is currently out of control throughout the country.

We’ll learn more next week, but it appears the White House is moving forward with a plan to gauge the outbreak across the country in a county by county effort to get the economy moving back toward capacity as soon as possible. It’s difficult for me to see governors, mayors, local government officials and vulnerable healthcare systems around the country supporting any relaxation of pandemic management efforts.

Unfortunately, there will be no speedy economic recovery. Let’s hope the change of season offers some relief. But then there’s the loaming prospect for a second wave next fall and winter. Various experts, including Bill Gates, say a vaccine is a year to 18 months out. There’s going to be a hell of a battle in deciding how best to move the economy forward from here.

As for the markets: markets will do what markets do. And global market dynamics are incredibly unsound. Count me skeptical that the biggest three-day rally (in the DJIA) since 1931 is a sign of health. I fully appreciate that “buy the dip, don’t be one” has been richly rewarding for a long time now. “There couldn’t be a better time to start investing [than] right now… Fortunes are going to be made out of this time… I can guarantee you that if you stay in and you just stick with it, three years from now you will be very, very happy that you did.” I’d be especially cautious with guarantees. Suze Orman (and most) have little appreciation for what is now unfolding. The younger generation has yet to experience a grueling protracted bear market. “Buy the dip” and “buy and hold” are poised to dishearten.

Incredible central bank liquidity operations yanked global markets back from the precipice. In the three sessions, Tuesday to Thursday, the Dow surged 21.3% (ending the week up 12.8%). The week saw the S&P500 rally 10.3%, lagging the Japanese Nikkei’s 17.1% surge. Brazil’s Bovespa recovered 9.5%, as emerging equities bounced back. Mexico’s peso rallied 4.6%, leading an EM currency recovery. In “developed” currencies, the Norwegian krone rallied 11.6%, in another week of acute market instability.

After spiking 44 bps the previous week, investment-grade Credit default swaps (CDS) this week sank 40 to 112 bps. The iShares investment-grade corporate bond ETF (LQD) surged 14.7%, more than reversing the previous week’s extraordinary 13.3% decline.

The Fed’s move to open-ended QE coupled with corporate bond and bond ETF purchases was instrumental in arresting market collapse and sparking upside dislocation. This, along with expanded central bank swap arrangements, reversed global market illiquidity and panic.

If I believed global markets were chiefly facing liquidity issues, I would be more hopeful. Illiquidity was pressing, and global central bankers responded with “whatever it takes” (and it took a lot). Believing the global Bubble has burst, I see the overarching issue more in terms of a developing Solvency Problem. Burning the midnight oil in homes around the globe, rating agency employees enjoy enviable job security. And that would be Credit analysts for corporations, financial institutions, municipalities, investment-grade bonds, junk debt, structured products and nations. Credit and Solvency issues will turn systemic.

It’s a different world now. And while “whatever it takes” can accommodate speculative deleveraging and generally support market liquidity, The Solvency Problem will prove a historic challenge. The global economy has commenced a major downturn, hitting an already impaired global financial system. While markets enjoyed a recovery this week, EM debt is turning toxic. Energy-related debt is already toxic. Risk of general business and real estate debt turning toxic is growing rapidly.

As I posited last week, I see an environment hostile to speculative leverage. This ensures a fundamental tightening of financial conditions and attendant downward pressure on global asset markets – securities and real estate, in particular. And with Bernanke’s 40-year bond yield “ski slope” at the end of a historic run, central banks have today little capacity for using rate cuts to reflate asset prices.

The U.S. economy is in trouble. Europe is in greater trouble. EM economies face a disastrous combination of financial and economic hardship. And just as China moves to restart its economy, the massive Chinese export sector is confronting collapsing global demand. How long Beijing can hold things together is a critical issue. In the theme of bursting Bubble economies and unfolding Solvency Problems, no country faces greater challenges than China (with its deeply maladjusted economy and gargantuan financial sector).

March 26 – Bloomberg (Matthew Boesler): “The Federal Reserve’s balance sheet topped $5 trillion for the first time amid the U.S. central bank’s aggressive efforts to cushion debt markets against the coronavirus outbreak through large-scale bond-buying programs. Total assets held by the Fed rose by $586 billion to $5.25 trillion in the week through March 25… Borrowing by banks from the Fed’s discount window jumped to $50.8 billion. The central bank has rolled out several liquidity programs over the last few weeks to keep credit flowing… The scale of its current bond-buying efforts already dwarfs that of the purchase programs it undertook in the wake of the last financial crisis. The Fed is also expected to establish a Main Street Business Lending Program to provide help to smaller firms. Borrowing under its Primary Dealer Credit Facility was $27.7 billion as of Wednesday, with the Money Market Mutual Fund Liquidity Facility standing at $30.6 billion. Borrowing by foreign central banks soared to $206 billion -- the highest since 2009 -- following the Fed’s March 19 announcement that it would expand dollar swap lines to a larger group of nations.”

For the Week:

The S&P500 jumped 10.3% (down 21.3% y-t-d), and the Dow surged 12.8% (down 24.2%). The Utilities rose 17.1% (down 13.0%). The Banks gained 11.6% (down 40.4%), and the Broker/Dealers recovered 12.0% (down 26.1%). The Transports rallied 12.6% (down 29.4%). The S&P 400 Midcaps jumped 13.0% (down 31.0%), and the small cap Russell 2000 rallied 11.6% (down 32.2%). The Nasdaq100 increased 8.5% (down 13.1%). The Semiconductors recovered 14.6% (down 19.5%). The Biotechs gained 9.3% (down 14.4%). With bullion surging $130, the HUI gold index recovered 16.8% (down 19.7%).

Three-month Treasury bill rates ended the week at negative 0.0375%. Two-year government yields declined seven bps to 0.25% (down 132bps y-t-d). Five-year T-note yields fell seven bps to 0.40% (down 130bps). Ten-year Treasury yields dropped 17 bps to 0.68% (down 124bps). Long bond yields fell 15 bps to 1.27% (down 112bps). Benchmark Fannie Mae MBS yields sank 72 bps to 1.47% (down 124bps).

Greek 10-year yields sank 87 bps to 1.53% (up 10bps y-t-d). Ten-year Portuguese yields fell 28 bps to 0.67% (up 22bps). Italian 10-year yields dropped 30 bps to 1.33% (down 9bps). Spain's 10-year yields fell 19 bps to 0.54% (up 7bps). German bund yields declined 15 bps to negative 0.47% (down 29bps). French yields dropped 17 bps to negative 0.06% (down 17bps). The French to German 10-year bond spread narrowed two to 41 bps. U.K. 10-year gilt yields sank 20 bps to 0.37% (down 56bps). U.K.'s FTSE equities index recovered 6.2% (down 26.9%).

Japan's Nikkei Equities Index surged 17.1% (down 18.0% y-t-d). Japanese 10-year "JGB" yields declined seven bps to 0.02% (up 3bps y-t-d). France's CAC40 rallied 7.5% (down 27.2%). The German DAX equities index gained 7.9% (down 27.3%). Spain's IBEX 35 equities index increased 5.2% (down 29.0%). Italy's FTSE MIB index rallied 6.9% (down 28.4%). EM equities were mostly higher. Brazil's Bovespa index jumped 9.5% (down 36.5%), while Mexico's Bolsa declined 1.4% (down 22.4%). South Korea's Kospi index recovered 9.7% (down 21.8%). India's Sensex equities index slipped 0.3% (down 27.7%). China's Shanghai Exchange gained 1.0% (down 9.1%). Turkey's Borsa Istanbul National 100 index rose 2.7% (down 23.0%). Russia's MICEX equities index advanced 3.0% (down 21.2%).

Investment-grade bond funds saw outflows of $38.019 billion, and junk bond funds posted outflows of $2.028 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped 15 bps to 3.50% (down 56bps y-o-y). Fifteen-year rates fell 16 bps to 2.90% (down 67bps). Five-year hybrid ARM rates jumped 23 bps to 3.34% (down 41bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 24 bps to 3.84% (down 32bps).

Federal Reserve Credit last week surged $507.3bn to a record $4.970 TN, with a 29-week gain of $1.096 TN. Over the past year, Fed Credit expanded $1.049 TN, or 26.8%. Fed Credit inflated $2.160 Trillion, or 77%, over the past 385 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $55.4 billion last week to $3.355 TN. "Custody holdings" were down $115bn, or 3.3%, y-o-y.

M2 (narrow) "money" supply surged $170.1bn last week to a record $15.862 TN. "Narrow money" surged $1.388 TN, or 9.6%, over the past year. For the week, Currency increased $8.1bn. Total Checkable Deposits jumped $56.4bn, and Savings Deposits expanded $103.2bn. Small Time Deposits slipped $3.8bn. Retail Money Funds gained $6.2bn.

Total money market fund assets surged $285.7bn to a record $4.222 TN. Total money funds jumped $1.120 TN y-o-y, or 36.1%.

Total Commercial Paper sank $35.1bn to $1.112 TN. CP was up $31bn, or 2.8% year-over-year.

Currency Watch:

March 24 – Reuters (Tommy Reggiori Wilkes): “The meltdown in financial markets over the coronavirus has sparked a huge jump in foreign exchange trading volumes, with average daily turnover so far in March up 27% on February as volatility soared, CLS said… CLS.. said… high average daily volumes seen at the end of February had continued into March, with spot volumes rising by more than 50%. So far in March, average daily turnover has hit $2.3 trillion, CLS said. That compares with $1.8 trillion in February and $1.86 trillion in March 2019.”

For the week, the U.S. dollar index sank 4.3% to 98.365 (up 1.9% y-t-d). For the week on the upside, the Norwegian krone increased 11.6%, the British pound 7.2%, the Australian dollar 6.6%, the New Zealand dollar 5.9%, the Swedish krona 5.1%, the Mexican peso 4.6%, the euro 4.2%, the Swiss franc 3.7%, the South Korean won 3.1%, the Japanese yen 2.8%, the Canadian dollar 2.7%, and the Singapore dollar 1.7%. For the week on the downside, the Brazilian real declined 0.7% and the South African rand 0.1%. The Chinese renminbi was unchanged versus the dollar this week (down 1.87% y-t-d).

Commodities Watch:

March 24 – Financial Times (Neil Hume and Henry Sanderson): “Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the ‘currency of last resort’. Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12% from its early March peak… The yellow metal started to see a resurgence on Monday, rising by more than 4% after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell… ‘We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policymakers act to accommodate shocks such as the one being experienced now,’ said Jeffrey Currie, head of commodities at the Wall Street bank.”

March 24 – CNBC (Pippa Stevens): “Gold prices jumped more than 6% on Tuesday, putting the precious metal on track for its best day in 11 years, and Goldman Sachs believes the Federal Reserve’s latest stimulus package will prompt investors to seek out the safe-haven asset and drive prices even higher. ‘Time to buy the currency of last resort,’ Jeffrey Currie, Goldman Sachs’ global head of commodities research, succinctly summed up in a note to clients…”

March 25 – Bloomberg (Alex Longley and Javier Blas): “As oil crashes due to the impact of the coronavirus, it’s easy to overlook an even more dismal reality for producers: the real prices they’re getting for their barrels are worse still. Having collapsed by about 60% this year, Brent and West Texas Intermediate crude have stabilized at around $25 a barrel, but the price rout is far deeper for actual cargoes, which are changing hands at large and widening discounts… The discounts mean that in the physical market, some crude streams are trading at $15, $10 and even as little as $8 a barrel. ‘The physical market is in pain, and there is more pain to come,’ said Torbjorn Tornqvist, the co-founder of Gunvor Group Ltd., a large trading house. ‘We will see the full weight of the oversupply in a couple of weeks.’”

The Bloomberg Commodities Index rallied 2.6% (down 22.5% y-t-d). Spot Gold surged 8.6% to $1,628 (up 7.2%). Silver rallied 17.4% to $14.534 (down 19%). WTI crude fell another $1.12 to $21.51 (down 65%). Gasoline sank 5.2% (down 66%), and Natural Gas slipped 0.2% (down 24%). Copper was unchanged (down 22%). Wheat rallied 5.9% (up 2%). Corn increased 0.7% (down 11%).

Coronavirus Watch:

March 23 – New York Times (Keith Bradsher and Ana Swanson): “American front-line medical personnel are running desperately short of masks and protective equipment as they battle the coronavirus outbreak. China, already the world’s largest producer of such gear by far, has ramped up factory output and is now signaling that it wants to help. Reaching deals won’t be easy. Increasingly acrimonious relations between Washington and Beijing are complicating efforts to get Chinese-made masks to American clinics and hospitals. A breakdown over the last few days in the global business of moving goods by air around the world will make it costly and difficult as well.”

March 24 – Reuters (Crispian Balmer and Angelo Amante): “Fatalities in Italy from coronavirus have surged in the last 24 hours, the Civil Protection Agency said on Tuesday, dashing hopes the epidemic in the world’s worst hit country was easing after more encouraging numbers in the previous two days… The total number of confirmed cases hit 69,176 on Tuesday, but with Italy testing only people with severe symptoms, the head of the Civil Protection Agency said the true number of infected people was probably 10 times higher.”

March 23 – Axios (Zachary Basu): “In a national address on Monday, U.K. Prime Minister Boris Johnson became the latest world leader to order a nationwide lockdown in an effort to stop the spread of the coronavirus. Why it matters: Johnson warned on Sunday that a surge of coronavirus cases over the next two weeks could cripple the country's National Health Service, and that the U.K. is only ‘a matter of weeks’ behind Italy… ‘I urge you, at this moment of national emergency, to stay at home, protect our NHS, and save lives,’ Johnson said. The government will reassess the lockdown in three weeks.”

March 24 – Associated Press (Emily Schmall and Sheikh Saaliq): “India will begin the world’s largest lockdown, Prime Minister Narendra Modi announced…, warning that anyone going outside risked inviting the coronavirus inside their homes, and pledging $2 billion to bolster the country’s beleaguered health care system. ‘To save India and every Indian, there will be a total ban on venturing out of your homes,’ Modi said, adding that if the country failed to manage the next 21 days, it could be set back by 21 years. India’s stay-at-home order puts nearly one-fifth of the world’s population under lockdown.”

March 24 – CNBC (Clive Cookson): “White House officials… urged anyone leaving the New York City metropolitan area to self-isolate and monitor themselves carefully for 14 days as President Donald Trump called the region a ‘hot spot’ for coronavirus cases. ‘For anyone in the New York metropolitan area who has traveled, our task force is encouraging you to monitor your temperature, be sensitive to symptoms,’ Vice President Mike Pence… said… ‘And we are asking anyone who has traveled out of the New York City metropolitan area to anywhere else in the country to self isolate for 14 days.’”

March 26 – Reuters (Michael Berens): “Home healthcare providers, the lifelines to 12 million vulnerable Americans, are scrambling to decide how to serve patients who show symptoms of coronavirus — and how to ensure that the providers themselves neither catch nor spread it. A Texas-based company operating in 26 states instructed its caregivers to leave the homes of clients who recently traveled from states with ‘widespread community transmission’ or who had contact with anyone screened for coronavirus, regardless of whether that person tested positive…”

March 24 – Financial Times (Clive Cookson): “The end of winter is traditionally a time for celebration. Not so in 2020, as the arrival of spring in the northern hemisphere has been overshadowed by stringent lockdowns put in place to slow the spread of the coronavirus. Yet in the battle against the pandemic, some scientists see hope in the arrival of warmer and sunnier weather. If Covid-19 conforms to the seasonal pattern of other respiratory infections, the coming months will help the suppression of the virus — at least temporarily. Some studies have suggested that the new coronavirus will indeed follow the marked seasonality shown by its genetic cousins that have been circulating among humans for many years.”

March 23 – CNBC (William Feurer): “Coronavirus RNA survived for up to 17 days aboard the Diamond Princess cruise ship, lasting far longer on surfaces than previous research has shown, according to… the Centers for Disease Control and Prevention.”

Market Instability Watch:

March 23 – CNBC (Yun Li): “Twenty-two days. That’s all it took for the S&P 500 to fall 30% from its record high, the fastest drop of this magnitude in history. The second, third and fourth quickest 30% pullbacks all occurred during the Great Depression era in 1934, 1931 and 1929, respectively, according to data from Bank of America Securities. ‘This is not good company for 2020,’ Stephen Suttmeier, a technical research strategist at the bank, said... ‘The 2020 correction continues to make history, having already claimed the title as the third fastest end to a bull market going back to 1928.’”

March 23 – Financial Times (Henry Sanderson): “Traders have reported a growing global shortage of gold bars, as the coronavirus outbreak both disrupts supply and stokes demand, with one business comparing the frenzied buying of the yellow metal with the consumer rush for toilet roll. Retail investors in Europe and the US have bought up gold and silver bars and coins over the past two weeks in an effort to protect their money from the collapse in global stock prices and many currencies. But Europe’s largest gold refineries have struggled to keep up because of the region’s widening shutdown.”

March 26 – Bloomberg (Emily Barrett, Ruth Carson and Greg Ritchie): “In a matter of weeks, bond investors have seen some of their firmest market convictions swept away in a massive confluence of government stimulus and central bank intervention. Now, they’re being forced to rework their strategies for a new era. Core tenets such as what constitutes a safe asset, the value of bonds as a portfolio hedge, and expectations for returns over the next decade are all being reconsidered as governments and central banks strive to avert a global depression. Underlying much of the uncertainty is the risk that trillions of dollars in monetary and fiscal stimulus could create an eventual inflation shock that will trigger losses for bondholders. ‘I’ve never, ever, ever seen anything like this before,’ said Nader Naeimi, head of dynamic markets at AMP Capital Investors… ‘You have enormous buyers of debt meeting massive coordinated fiscal stimulus by governments across the globe. For bond investors, you’re caught between a rock and a hard place.’”

March 24 – Financial Times (Editorial Board): “Regulators scrambled to strengthen the banking system after the 2008 financial crisis. That made banks safer but their actions pushed the risk of rising defaults into the shadows. While the banks — designated as systemically important — repaired and tidied up their balance sheets, asset managers, hedge funds and others stepped into the gap, providing credit to the non-financial economy. Investor money flowed in, searching for yield. Now those shadow banks… are causing worries about systemic risk as the impact of coronavirus spreads. An index tracking US Business Development Companies, listed lenders to small businesses, has halved since February. Many Real Estate Investment Trusts, which have relied on the short-term money markets to boost dividend payouts, are also being pummeled. Money market mutual funds invested in corporate debt have been hit by disruptive mass redemptions. Junk bond exchange traded funds have traded at often large discounts to their underlying assets.”

March 25 – CNBC (Jeff Cox): “The coronavirus crisis has brought another first to U.S. financial markets — negative yields on government debt. Yields on both the 1-month and 3-month Treasury bills dipped below zero Wednesday, a week and a half after the Federal Reserve cuts its benchmark rate to near zero and as investors have flocked to the safety of fixed income amid general market turmoil.”

March 25 – Bloomberg (Bill Austin): “Investors withdrew from equity and fixed income mutual funds in the week ended March 18 for the third straight week of outflows, according to the Investment Company Institute. Outflows totaled $135 billion, compared with $27.9 billion the prior week. Investors withdrew $175.5 billion from mutual funds year-to-date.”

March 26 – Bloomberg (Andy Kostic and Olivia Raimonde): “U.S. corporate investment-grade funds reported a record $38 billion outflow, extending an unprecedented rout as investors flee for havens assets amid the global market meltdown. That exceeds the prior record of $35.6 billion set just last week as the selloff from the spreading coronavirus intensified.”

March 24 – Reuters (Hideyuki Sano): “Banks borrowed a total of $89.3 billion in the Bank of Japan’s two dollar funding operations on Tuesday, the central bank said after it offered three-month and one-week funds to market players who were seeking dollar funding. The takeup was well beyond its previous record of $50.2 billion, hit on October 21, 2008…”

March 26 – Bloomberg (Jacqueline Poh): “Companies globally have tapped $200 billion in revolving and new credit lines since March 9 to combat the coronavirus crisis impact. Borrowers in the Americas accounted for 80% of that. Borrowers from the Americas including General Motors and Whirlpool have either drawn down on revolving facilities or raised additional financing totaling $160b this month…”

March 23 – Wall Street Journal (Dawn Lim): “A broad set of bond exchange-traded funds are trading out of sync with their underlying assets, testing investors’ faith in a fast-growing part of the investment world. Bond ETFs of BlackRock Inc., Vanguard Group and others traded at historic discounts to the net asset value of their underlying bonds in recent days. BlackRock’s iShares iBoxx USD Investment Grade Corporate Bond ETF closed down at a discount of over 5% late last week, a record since 2008. The $28 billion bond fund, with the ticker LQD, typically trades within a fraction of a percent of the bonds it is designed to track. It closed at a discount of over 1.5% every day of the past week.”

March 23 – Bloomberg (Justina Lee): “The record volatility unleashed by the coronavirus outbreak has spurred quant traders to throw in the towel at an unprecedented pace. The silver lining: they now have much less to sell. Systematic clients on Credit Suisse Group AG’s prime-brokerage platform have slashed their equity positions by 45% this month compared with the end of last. After taking into account falling prices, the market-neutral funds, which take no directional bets on the benchmark, offloaded 15% of their bets in the five days through Thursday. That’s a record deleveraging spree in a decade of data.”

March 21 – Reuters (Tim McLaughlin): “Goldman Sachs… poured more than $1 billion into two of its prime money-market portfolios this week due to heavy investor withdrawals, according to a filing with the U.S. securities regulator… The bank repurchased securities from its two funds on Thursday after investors withdrew a net $8.1 billion from them during a four-day stretch…”

Global Bubble Watch:

March 22 – Bloomberg (Chris Anstey and Enda Curran): “The global rush for dollars that’s been roiling the $6.6 trillion a day foreign-exchange market has showcased a missing piece of financial-safety architecture that world policy makers never addressed in the aftermath of the 2008 crisis. The financial system’s reliance on one keystone currency proved to be an amplifier of shocks more than a decade ago. Yet since then, the greenback’s role has climbed even further as borrowers outside of America ramped up dollar-denominated debt. That’s again adding an enormous layer of stress on markets. ‘It’s precisely what the global economy does not need at this moment,’ Alexander Wolf, head of Asia investment strategy at JPMorgan Private Bank… said of a strong dollar. ‘It tightens financial conditions, make servicing dollar debt more expensive, and can cause pass-through inflation just when that is not needed.’”

March 23 – Financial Times (Joe Rennison, Philip Stafford, Colby Smith and Robin Wigglesworth): “Two weeks ago, traders at TwentyFour Asset Management came into the office after a weekend in which a global oil price war had erupted. The ensuing crash in crude made investors who were in the early stages of fretting about the coronavirus outbreak even more alarmed. The traders hoped to sell a ‘modest’ holding of 30-year US government bonds — one of the safest, most easily traded financial assets in the world — and asked three of the banks specially tasked with supporting US government debt auctions for prices. Two refused to bid at all. ‘This was extraordinary, and unprecedented in our experience,’ said Mark Holman, chief executive officer at the asset manager… The ease of buying and selling even the safest, most high-quality assets has deteriorated dramatically. JPMorgan has dubbed it the ‘Great Liquidity Crisis’, noting that it has piled extra volatility on to already fragile market conditions. ‘This is not a traditional liquidity situation,’ said Peter Tchir, head of global macro strategy at Academy Securities. ‘We are in unprecedented territory.’”

March 24 – Financial Times (David Sheppard): “It is no exaggeration to say the oil industry faces its gravest crisis of the past 100 years. As western economies go into hibernation, hoping to snuff out the first wave of coronavirus through lockdowns and isolation, the industry is facing up to the fact that fuel demand is going to fall faster than ever before. Already prices have roughly halved since the start of this month as airlines have been grounded and millions of commuters eschew the car… For an industry long aware that a 1-2% swing in the balance of supply and demand can be the difference between prices soaring or collapsing, the extent of the fall in consumption is hard to process. As Europe and North America hunker down, the latest estimates suggest 10 to 25% of global consumption could vanish in the coming few months… Such is the scale of the demand collapse that it risks overshadowing the price war between Saudi Arabia and Russia…”

March 23 – Reuters (David Milliken): “Britain faces a ‘much more serious’ economic challenge now than in 2008 when the country’s banking system almost collapsed, and must be prepared for far higher borrowing, former Bank of England Governor Mervyn King said… King said the policy challenge and potential economic damage from the coronavirus were even graver than in 2008-09, when Britain suffered its worst recession since the 1930s. ‘I think this is much more serious and much more difficult to cope with… In the financial crisis we were dealing with a relatively small number of financial institutions. We knew broadly what we had to do. In this case the situation is extremely uncertain’…”

March 24 – Reuters (Tim Hepher and Sarah Young): “Global airlines urged governments… to speed up bailouts to rescue the air transport industry as they doubled their estimate of 2020 revenue losses from the coronavirus crisis to more than $250 billion… IATA chief economist Brian Pearce said European airlines were most at risk, with airline capacity in the region forecast to be down 90% for the second quarter of 2020.”

March 22 – Wall Street Journal (Julia-Ambra Verlaine): “The global market rout has dealt a particular blow to a trade that intertwines Silicon Valley stock-market favorites with cautious Asian savers and European asset managers. Designed to boost returns during the 11-year bull market, Wall Street’s hunt for yield hatched a multibillion-dollar business betting on volatility itself. The idea functioned well, until the coronavirus pandemic blindsided investors and sent markets swinging at levels unseen since the financial crisis. The Cboe Volatility Index, or VIX—Wall Street’s fear gauge—surged above 80 from 13 over the past month, the S&P 500 and other major indexes plunged and even the Treasury market, usually a stalwart in market turmoil, faced disruptions so severe that the Federal Reserve intervened to prevent further chaos.”

Trump Administration Watch:

March 27 – CNBC (Jacob Pramuk): “President Donald Trump signed a $2 trillion coronavirus relief bill on Friday, as Washington tries to blunt economic destruction from the pandemic ripping through the United States. The House earlier passed the stimulus package, believed to be the largest in U.S. history, by voice vote, which simply measures if more lawmakers shout for ‘aye’ or ‘nay’ on whether to support it… The plan, which includes one-time payments to individuals, strengthened unemployment insurance, additional health-care funding and loans and grants to businesses to deter layoffs, got through the Senate unanimously on Wednesday night. House Speaker Nancy Pelosi had described the bill ‘as mitigation’ of the pandemic’s destruction, predicting Congress will draft more plans to aid in ‘recovery.’”

March 25 – New York Post (Ebony Bowden): “An emergency stimulus package to bail out the US economy amid the coronavirus pandemic will total $6 trillion — a quarter of the entire country’s GDP, the White House said Tuesday. Trump administration economist Larry Kudlow said the package would include $4 trillion in lending power for the Federal Reserve as well as a $2 trillion aid package currently being hammered out by Congress. ‘This package will be the single largest Main Street assistance program in the history of the United States,’ Kudlow said…”

March 26 – Reuters (Karen Freifeld, David Shepardson, Alexandra Alper): “Senior officials in the Trump administration agreed to new measures to restrict the global supply of chips to China’s Huawei Technologies, sources familiar with the matter said, as the White House ramps up criticism of China over coronavirus. The move comes as ties between Washington and Beijing grow more strained, with both sides trading barbs over who is to blame for the spread of the disease and an escalating tit-for-tat over the expulsion of journalists from both countries.”

Federal Reserve Watch:

March 23 – New York Times (Neil Irwin): “The extraordinary actions of the Federal Reserve on Monday morning can be boiled down to two sentences: There is a rapidly developing shortage of dollars across the economy. And the Fed will do anything it needs to, on any scale imaginable, to end this shortage. Its announcement was phrased in the dry bureaucratese typical of statements from a central bank. But it contains a powerful idea. The Fed, the one entity in the world with the power to create dollars out of thin air, has every intention of doing so at whatever magnitude is necessary to try to reduce the severity and limit the duration of the coronavirus economic crisis. ‘The Federal Reserve is committed to using its full range of tools to support households, businesses and the U.S. economy over all in this challenging time,’ the statement begins. Unlike some past grand statements from central bankers promising to do ‘whatever it takes’ to solve a crisis, this one was accompanied with actions matching the scale of the words.”

March 23 – Financial Times (Michael Mackenzie): “The vast and currently dysfunctional markets for US Treasuries, mortgages and corporate credit now have the ultimate buyer of last resort — the Federal Reserve. Ever since the big stock market crash of 1987, investors have grown to depend on the US central bank coming to the aid of financial markets when they hit the skids. Now the central bank is well and truly ‘all in’, announcing a slew of new initiatives on Monday… Until now, the Fed implied, the system has been in no shape to withstand an escalating pandemic that has the US economy facing the biggest hit to growth since the 1930s. Having failed to ease nerves over the past week with an expansion of its quantitative easing programme, the Fed has upped the ante to Buzz Lightyear territory. ‘QE infinity,’ in the form of unlimited buying of Treasury debt and mortgage-backed securities, is just one aspect of the new approach.”

March 23 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairman Jerome Powell’s whatever-it-takes moment arrived Monday. The central bank signaled it would do practically anything—extending loans to big and small businesses and purchasing unlimited amounts of government debt—to help an American economy in a race against time. After firing its arsenal at funding markets last week to prevent a public health crisis from morphing into a financial crisis, the Fed said it would throw another kitchen sink this week at credit markets that have broken down. The central bank unveiled a new generation of lending facilities to prevent a liquidity crunch from turning into a solvency crisis for American businesses. ‘This is the first time they’ve really basically turned into a commercial bank instead of a central bank,’ said Michael Feroli, chief U.S. economist at JPMorgan.”

March 26 – Bloomberg (Christopher Condon, Steve Matthews, Matthew Boesler, and Rich Miller): “Federal Reserve Chairman Jerome Powell said the central bank will maintain its muscular efforts to support the flow of credit in the U.S. economy as Americans hunker down from the coronavirus pandemic. ‘We will keep doing that aggressively and forthrightly, as we have been,’ Powell said… in a Fed chief’s first-ever interview on NBC’s ‘Today’ show. ‘When it comes to this lending we’re not going to run out of ammunition. That doesn’t happen.’”

March 25 – Bloomberg (Craig Torres): “The Federal Reserve could now have as much as $4.5 trillion to keep credit flowing and make direct loans to U.S. businesses through the massive coronavirus stimulus bill being considered by U.S. lawmakers. The bipartisan agreement… will include $454 billion in funds for the Treasury to backstop emergency actions by the Fed to support the U.S. economy, Senator Patrick Toomey said…”

U.S. Bubble Watch:

March 23 – Bloomberg (Cecile Daurat, Michael Sasso, Max Reyes, and Edward Ludlow): “First came the order to close up. Then the laying off of staff. Now small-business owners across the U.S. are bleeding cash and wading through paperwork to get financial assistance… Large swathes of the U.S. are under confinement orders that are becoming stricter by the day as authorities try to contain the coronavirus outbreak. Among the hardest hit are clothing shops and other mom-and-pop stores that are the engine of the economy. The impact is hard to overstate. The restaurant industry alone is set to lose 7.4 million jobs, consulting firm Challenger, Gray & Christmas Inc. estimates. The shutdowns across the country could send the jobless rate spiraling to 30% in the second quarter, Federal Reserve Bank of St. Louis President James Bullard told Bloomberg.”

March 23 – New York Times (Matt Phillips and Clifford Krauss): “Wall Street supercharged America’s energy boom of the past decade by making it easy for oil companies to finance growth with cheap, borrowed money. Now, that partnership is in tatters as the coronavirus pandemic has driven the fastest collapse of oil prices in more than a generation. The energy sector has buckled in recent weeks as the global demand for oil suddenly shriveled and oil prices plunged, setting off a price war between Saudi Arabia and Russia. Oil prices are now one-third their most recent high… The crisis has been a body blow to the American oil and gas industry. Already heavily indebted, many companies are now struggling to make interest payments on the debt they carry and are finding it challenging to raise new financing, which has gotten more expensive as traditional buyers of debt have vanished and risks to the oil industry have grown.”

March 25 – Financial Times (Derek Brower): “The shale revolution that made the US the world’s biggest oil and gas producer and offered the prospect of energy self-sufficiency has run out of steam, as drillers slash spending and production in response to the price war and coronavirus-led collapse of crude demand. US oil output, now a record high of 13m barrels a day, will begin falling steeply in the second half of this year and could drop 2.5m b/d by the end of 2021… Even a modest further oil price drop could cut US production back by almost 4m b/d, fully reversing three years of increases.”

March 23 – Financial Times (Andrew Edgecliffe-Johnson in New York and Daniel Thomas): “Companies around the world have begun cutting their dividends, choosing to halt payments long seen as sacrosanct amid rising pressure to conserve cash and fear of a backlash if they reward investors while seeking government help. The cuts announced by US companies have reduced the total dividends expected from members of the S&P 500 this year by almost $10bn, or 1.9%, said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. ‘It is a moving target, and it is going to get worse,’ he said. Members of the index had been on track for a near-10% increase in payouts this year before the crisis hit, but instead of achieving new records their dividends are now likely to fall for the first time since 2009, when they dropped 21%.”

March 22 – Bloomberg (Erik Schatzker): “Real estate investor Tom Barrack said the U.S. commercial-mortgage market is on the brink of collapse and predicted a ‘domino effect’ of catastrophic economic consequences if banks and government don’t take prompt action to keep borrowers from defaulting. Barrack… warned in a white paper and in a subsequent interview… of a chain reaction of margin calls, mass foreclosures, evictions and, potentially, bank failures due to the coronavirus pandemic and consequent shutdown of much of the U.S. economy. ‘To keep people employed, you have to support the employers,’ he said… ‘The biggest part of employer expense is rent. When commerce stops and they can’t pay rent and they can’t pay interest on the debt, and then the banks and the intermediaries can’t pay their investors, it all collapses.’”

March 24 – Wall Street Journal (Konrad Putzier and Esther Fung): “Shortly after James Wacht shut down his two gyms for children in Brooklyn last week, he sent letters to his landlords asking for rent relief. He has a successful business, he wrote to the building owners, but only limited cash reserves. To continue paying staff, he needed a break on his rent bill. As the spread of the coronavirus upends the economy, forcing restaurants, movie theaters, gyms and offices to close, many businesses across the country are likely to stop paying rent on April 1. Delaying or skipping rent payments offers a lifeline to struggling businesses and could ward off some bankruptcies and layoffs. Some, like Mr. Wacht, will try to renegotiate their leases. Many others won’t mail in their rent checks, daring landlords to evict them at a time when finding another tenant is almost impossible, and a number of U.S. cities have put a moratorium on evictions. Still others are simply liquidating.”

March 26 – New York Times (Jesse Drucker): “The federal government’s planned $2 trillion economic rescue package includes financial aid for individuals and industries that are struggling to survive the coronavirus pandemic. It also includes a potential bonanza for America’s richest real estate investors. Senate Republicans inserted an easy-to-overlook provision on page 203 of the 880-page bill that would permit wealthy investors to use losses generated by real estate to minimize their taxes on profits from things like investments in the stock market. The estimated cost of the change over 10 years is $170 billion.”

March 25 – Bloomberg (Davide Scigliuzzo): “Last month, on the Friday before the U.S. stock market recorded its worst weekly plunge since 2008, Texas billionaire Tilman Fertitta was beaming. As he prepared to host an annual Mardi Gras celebration at a beachfront resort outside Houston, business was booming, pushing his personal fortune to more than $5 billion. A few weeks later… his casinos and restaurants are shuttered and burning cash, 40,000 of his employees are temporarily out of a job, and a third of his net worth has evaporated. Few could have predicted the devastating impact that the coronavirus outbreak would have on the global economy. Yet for Fertitta, the use of financial leverage -- the tool that helped him build his riches -- has left the very future of his corporate empire at risk. ‘We are trying to survive,’ the 62 year-old said… ‘I have enough liquidity to ride this out. I can’t go forever but I can go for a few months.’”

March 25 – CNBC (Diana Olick): “An increase in interest rates, combined with a massive shutdown of the economy caused homeowners and potential homebuyers to back away from the mortgage market. Total mortgage application volume fell 29.4% last week from the previous week… Mortgage applications to purchase a home are usually less volatile… Those applications decreased an unusually wide 15% for the week to the lowest level since August and were 11% lower annually.”

March 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes fell in February after surging in the prior month, and could decline further… New home sales dropped 4.4% to a seasonally adjusted annual rate of 765,000 units last month. January’s sales pace was revised sharply higher to 800,000 units, which was the highest level since May 2007…”

Fixed-Income Bubble Watch:

March 25 – Bloomberg (Prashant Gopal): “As America heads into a deep recession, the $11 trillion residential-mortgage market is in crisis. Investors who buy home loans packaged into bonds are dumping even those with federal backing because of panic that millions might not make their payments. Yet one risky sector had started to show cracks long before the coronavirus pandemic sparked the worst financial meltdown in 12 years: the federal government’s largest affordable-housing program, whose lenient terms are geared toward marginal borrowers… As real estate prices soared in recent years, working-class adults everywhere have increasingly relied on mortgages backed by the Federal Housing Administration — and U.S. taxpayers. Since 2007, the FHA’s portfolio has tripled in value to more than $1.2 trillion, almost 11% of the market… Before Covid-19 started roiling China, a November FHA report found that 27% of borrowers last year spent more than half their incomes on debt, a level it describes as ‘unprecedented.’”

March 23 – Bloomberg (Shahien Nasiripour): “Mortgage industry trade groups proposed a plan for helping borrowers unable to make their payments because of the coronavirus pandemic that includes deferrals of as long as a year. The groups, which include the American Bankers Association, the Mortgage Bankers Association and the Housing Policy Council, sent federal agencies a list of proposals aimed at homeowners affected by illness or quarantine that results in a loss of income. Mortgage servicers would provide an initial 90-day forbearance that could be extended to 12 months…”

March 24 – Financial Times (Eric Platt, Robert Armstrong, Robert Smith and Joe Rennison): “Upheaval in the US mortgage market ricocheted through the investment world on Tuesday, with two more real estate investment trusts warning that they could not meet margin calls from their lenders. Shares of some of the largest funds invested in the residential mortgage-backed securities market tumbled after two companies — Invesco Mortgage Capital and MFA Financial — said that they had been unable to meet cash calls…”

March 23 – Wall Street Journal (Gregory Zuckerman and Ben Eisen): “Several investment funds focused on mortgage investments are examining assets sales, and at least one is struggling to meet margin calls from lenders, the latest signs of turmoil in crucial areas of the credit markets. In recent days, a cascade of selling has hit the market for mortgage bonds, helping spark unprecedented action by the Federal Reserve on Monday…”

March 25 – Bloomberg (Katherine Doherty): “The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion, reaching levels not seen since 2008 as the collapse of oil prices and fallout from the coronavirus shutters entire industries across the globe. In total, the tally has ballooned to $934 billion of U.S. corporate bonds that yield at least 10 percentage points above Treasuries and loans that trade for less than 80 cents on the dollar… That’s nearly double the amount from less than a week ago.”

March 25 – Financial Times (Claire Bushey, Joe Rennison and Peter Campbell): “Downgrades by Moody’s and S&P Global stripped Ford of its investment-grade credit rating…, a week after the carmaker shuttered most global plants, sending $36bn of its debt tumbling into the junk bond market. The move comes after regulators and investors warned about the risks of large amounts of debt falling down the ratings ladder, potentially causing turmoil as investors bound by strict requirements to only hold higher-rated debt are forced to sell.”

March 20 – Wall Street Journal (Cezary Podkul and Paul J. Davies): “Cirque du Soleil canceled its famed shows in Las Vegas and around the world last week, leaving fans disappointed. Over 100 investment funds suffered too, as the value of the circus’s loans tumbled. The company is among thousands of businesses whose loans have been packaged with similarly risky, junk-rated debts into funds, which were then sold to investors globally. The idea behind these funds, known as collateralized loan obligations, or CLOs, is that different businesses are extremely unlikely to all hit problems simultaneously. By pooling and diversifying their holdings, these funds could transform risky loans into highly rated, safe investments that pay better yields than Treasurys. CLOs boomed in recent years as investors hunted for income in a world of ultralow interest rates.”

March 26 – Bloomberg (Molly Smith and Hannah Benjamin): “The corporate bond market took another big step to thawing out Thursday with 34 issuers in the U.S. and Europe selling debt, making it the busiest day in months. Coming amid a stock market rally, the sudden loosening in the credit markets hinted at strengthening investor confidence even as surging unemployment claims suggested that the U.S. had already entered a recession.”

China Watch:

March 22 – Financial Times (Sun Yu): “Chinese banks have lowered rates and boosted the amounts they will lend to consumers, even though there has been a surge in defaults, as Beijing turns to credit to help boost domestic consumption hit by the coronavirus. More than a dozen state-owned lenders have started offering promotions… since the banking regulator relaxed credit controls last month. An official at the risk management department of a major bank said lenders were participating even if they knew that some loans were unlikely to be repaid. ‘We have to take part in the operation because the government wants to support the real economy with cheap credit… These loans may go under if the economy continues to weaken.’ Official data show that retail sale… fell a record 21% in the first two months of this year from a year earlier. Meanwhile, multiple local banks told the FT their overdue personal loan ratio had surged by as much as 60% from January…”

March 24 – Financial Times (Don Weinland and George Hammond): “China’s $43tn property sector, the backbone of the economy, is showing signs of deterioration even as Beijing attempts to kick-start growth after the coronavirus outbreak… Despite the efforts by Beijing, the property market, which some analysts estimate accounts for about 25% of the country’s gross domestic product, has not returned to normal in March — and may even be getting worse. China’s Beige Book property index showed a deepening in the contraction of sales volumes between February and March… ‘Real estate was devastated in Q1,’ the Beige Book report said. ‘Every core performance metric plunged deep into negative territory across both realty and construction.’”

March 22 – Bloomberg (Jack Sidders): “Home sales in China are starting to recover as the country lifts some restrictions imposed to battle the novel coronavirus outbreak… Residential transactions in China’s 30 major cities fell more than 99.7% from the day the first case was discovered to a low of just 22 deals on Feb. 8, according to… Capital Economics and Knight Frank. Still, in the first 17 days of March sales have partially rebounded and are up about 8.5 times on the same period a month earlier…”

March 25 – Bloomberg (Rebecca Choong Wilkins and April Ma): “The interest on bonds issued by China Evergrande Group, the country’s most indebted property developer, should be either 22% or 5%, depending on who you ask. Evergrande’s $200 million dollar bond due in June now yields more than four times as much as the company’s onshore note due the same month. Sunac China Holdings Ltd.’s offshore note due in July is yielding 15%, versus a 3% quote for a mainland-issued note with a similar maturity. They’re just two examples of the price dislocations now appearing in Chinese financial assets, where stocks and bonds trading on the mainland have shown relative resilience to the shockwaves upending global markets.”

March 24 – Bloomberg: “China’s government is facing the worst fiscal situation since the global financial crisis more than a decade ago, with revenue falling after the government shut down economic activity in February to curb the spread of the coronavirus. The income of central and local governments contracted 9.9% in the first two months of the year compared to a year ago. That was the deepest fall since February 2009. Tax revenue declined more than 11%, with drops in value-added taxes, corporate income taxes and car purchase taxes undercutting the government’s coffers just as it needs to find extra money to stimulate the economy.”

March 23 – Bloomberg (Ranjeetha Pakiam): “Chinese companies had their worst quarter on record, with every individual sector reporting worse results in the first three months of this year, according the China Beige Book… There was widespread decline in sales, especially in the retail sector, and a simultaneous collapse in revenue and profits…”

March 22 – Wall Street Journal (Zhou Wei and Chong Koh Ping): “Cracks are forming in China’s sprawling shadow-banking sector, as the coronavirus epidemic drains economic activity around the country and pressures lenders that many private firms have relied on for years. Since early February, several finance companies and online lending platforms have told investors they can’t produce the returns they previously promised, due to rising distress among businesses they funded. Some nonbank lenders have stopped selling new investment products to raise funds. One trust company asked its investors to give it more time to return their cash, while a U.S.-listed Chinese internet lender stopped paying interest on short-term loans it earlier took out and extended their duration… While China’s government has clamped down on peer-to-peer lending and other kinds of informal lending channels in the past few years, overall shadow banking had assets totaling 45 trillion yuan ($6.4 trillion) in 2019…”

March 23 – Bloomberg: “An unusual public spat between two top Chinese diplomats points to an internal split in Beijing over how to handle rising tensions with a combative U.S. president. The differences spilled into public view… after China’s ambassador to the U.S. reaffirmed his opposition to promoting theories that the virus that causes Covid-19 originated in an American military lab. Ambassador Cui Tiankai said… he stood by his Feb. 9 statement that it would be ‘crazy’ to spread such theories, even though a foreign ministry spokesman has repeatedly floated the idea on Twitter in recent weeks.”

Central Bank Watch:

March 23 – Bloomberg (John Ainger): “The European Central Bank ramped up its government bond buying program even before it boosted quantitative easing by an extra 750 billion euros ($805bn). Purchases of public-sector bonds in the week through March 20 added 13 billion euros to the ECB’s portfolio, the most since 2017. That doesn’t include any purchases made after the institution announced its Pandemic Emergency Purchase Programme last Thursday…”

March 22 – Financial Times (Shigeto Nagai): “Was that it? Markets’ reaction to the Bank of Japan’s unscheduled monetary policy moves last week in response to the coronavirus outbreak was a swift and highly negative dismissal of the actions taken as inadequate to the challenge posed. But while the BoJ’s actions were a modest surprise in their timing, the bank’s choice of measures — to increase asset purchases to try to calm markets, and to provide funding for banks to support struggling businesses — was all too predictable, given that already negative policy rates left it limited room for manoeuvre. Equally predictable was the adverse market reaction; the BoJ was not alone in seeing markets shrug off even the most massive interventions. Now, with the BoJ’s arsenal of monetary policy weapons much depleted, the big question is simple: what next?”

Europe Watch:

March 24 – Bloomberg (Paul Gordon): “The euro zone is sinking into the biggest economic crisis in its history as measures to contain the coronavirus pandemic bring much of the business world to a standstill. IHS Markit’s measure of private-sector activity plunged to the lowest since the index was started -- and the currency bloc was formed -- more than two decades ago.”

March 23 – Reuters (Michael Nienaber): “Germany… agreed a package worth up to 750 billion euros ($808bn) to mitigate the damage of the coronavirus outbreak on Europe’s largest economy, with Berlin aiming to take on new debt for the first time since 2013.”

March 24 – Reuters (Terje Solsvik): “Norway’s unemployment rate soared five-fold this month to above 10%, its highest level since the 1930s, as companies announced mass layoffs and shutdowns amid efforts to combat the coronavirus outbreak…”

EM Watch:

March 23 – Bloomberg (Kartik Goyal and Ishika Mookerjee): “Indian assets suffered a rough start to the week as stocks posted their worst-ever day on record as trading resumed after a system-wide halt, and the rupee hit a new low following a lockdown in much of Asia’s third-biggest economy. The S&P BSE Sensex and the NSE Nifty 50 indexes crashed 13% each at the close in Mumbai… The currency slid 1.4% to 76.2750 per dollar, all-time low.”

March 25 – Reuters (Eduardo Simoes and Stephen Eisenhammer): “President Jair Bolsonaro… blasted as criminals the governors and mayors of Brazil’s largest states and cities for imposing lockdowns to slow the coronavirus outbreak, as tensions with his health minister simmered… Bolsonaro has aligned himself with U.S. President Donald Trump in prioritizing the economy over the shutdowns favored by public health experts - including his own health minister… who have warned the outbreak in Brazil could trigger a collapse of the healthcare system next month. ‘Other viruses have killed many more than this one and there wasn’t all this commotion,’ Bolsonaro told journalists. ‘What a few mayors and governors are doing is a crime. They’re destroying Brazil.’”

Japan Watch:

March 25 – Bloomberg (Stephen Spratt and Chikako Mogi): “A shrinking supply of Japanese government bonds is causing havoc in money markets as the Bank of Japan seeks to buy an increasing amount of debt and dealers refuse to sell. Rates in Japan’s repurchase market -- where bond holders connect with investors looking to borrow them -- hit a record Tuesday… ‘Demand for JGBs as collateral and its importance now is heightening.’ Souichi Takeyama, a rates strategist at SMBC Nikko Securities…, said. ‘There is little incentive to sell to the BOJ because there are more effective ways to make use of JGBs.’ The repo rate dropped to minus 0.88% on Tuesday.”

March 24 – Reuters (Leika Kihara): “The coronavirus pandemic could plunge Japan into deep economic stagnation, the country’s central bankers warned at last week’s emergency monetary policy meeting with one seeing room for more stimulus… The Bank of Japan expanded monetary stimulus in an unscheduled policy meeting on March 16 to ease corporate funding strains and calm financial markets jolted by the health crisis… ‘Japan’s economy may continue to stagnate even after overseas economies recover, as the impact of the virus could be enormous,’ one board member was quoted as saying. ‘I’m doubtful of the view Japan’s economy will stage a strong rebound once the virus is contained,’ another opinion in the summary showed.”

Leveraged Speculation Watch:

March 23 – Reuters (Sumeet Chatterjee and Brenna Hughes Neghaiwi): “Global wealth managers are cutting some credit they extend to rich clients as a worldwide markets rout triggers margin calls, even as others see opportunities to help entrepreneurs plug liquidity gaps... Private banks including Credit Suisse Group AG, Julius Baer Gruppe AG, and UBS Group AG use lending as a key part of their business to grow their assets and lock in clients… ‘There is almost no new conversation happening with clients on loans and it’s unlikely to change any time soon. Clients are also very wary about leverage in this market,’ said a senior Greater China wealth manager at a leading Swiss private bank.”

March 22 – Bloomberg (Nishant Kumar and Hema Parmar): “First they lost money. Now hedge funds want clients to risk even more cash on the bets that caused the pain. LMR Partners, Citadel, Baupost Group and Capital Four Management are trying to persuade clients to inject money into their funds after taking a hit in the coronavirus-fueled market turmoil. Capula Investment Management has had talks with some investors as it considers raising fresh capital, according to people familiar with the matter. Hedge funds are marketing this month’s sell-off as a once-in-a lifetime opportunity to take advantage of unprecedented price dislocations across stocks, bonds and commodities.”

March 23 – Financial Times (Robin Wigglesworth): “DE Shaw’s priciest, most exclusive hedge fund has lost more than 9% this month, a rare stumble from the New York investment group as the market turmoil disturbed many of the signals the computer-powered vehicle depends on.” Valence, the $6bn-in-assets ‘statistical arbitrage’ hedge fund run by DE Shaw, was hit by last week’s violent stock market swings, in which normal market patterns were suddenly upended…”

March 23 – Financial Times (Henny Sender): “Last week markets were on edge, buffeted by rumours of hedge fund losses and job cuts… In the midst of the chaos, many hedge funds in Asia received calls from their prime brokers — the bankers who provide services ranging from loans and trading to research — demanding more collateral or announcing that the cost of funding was going up by more than 2 percentage points… That may not sound like much but when an equity fund is leveraged anywhere from six to 10 times, as many such as Millennium’s Asian outpost in Hong Kong were, that rise can be the difference between life and death. Prime brokers say their relations with their clients are highly collaborative. ‘We feast together and we die together,’ said a spokesman for one of the largest international investment banks. ‘We can’t prosper from [a hedge fund’s] misfortune.’”

Geopolitical Watch:

March 26 – Wall Street Journal (Bob Davis and Lingling Wei): “Chinese President Xi Jinping has been on a telephone spree this month, dialing the leaders of coronavirus-battered France, Italy, Spain and Germany with offers of support, including masks and other medical equipment. One phone number he hasn’t tried is Donald Trump’s. The last time the leaders of the world’s two largest economies talked was in early February when the virus was ravaging China but not the U.S. The two talked about whether China would still buy as many farm goods as it promised in a trade deal. Since then, both governments have traded barbs over the coronavirus, generating distrust that now stands in the way of rescuing the global economy. ‘How do you cooperate when you hear the president of the United States referring to the epidemic as the ‘Chinese virus’ all day long,’ said a Beijing government adviser. A senior U.S. administration official countered that China’s attempts to cast suspicion that the virus originated in the U.S. ‘are dangerous, counterproductive to relief efforts and something we’re watching closely.’”

March 23 – Financial Times (James Kynge and Hudson Lockett): “Just one month ago, China appeared to be reeling under the impact of the coronavirus epidemic… Just how quickly the situation has changed was demonstrated last week by Aleksandar Vucic. With the virus now classified as a pandemic and its epicentre having shifted from Asia to Europe, the Serbian president issued a public appeal that has become a much-needed propaganda boost for Beijing. Citing the ‘centennial and strong-as-steel friendship’ between Serbia and China, he called on his ‘brother and friend’ Xi Jinping… to assist in battling the disease… It was just what China had been looking for — an opportunity to start reframing its role from that of the country that accelerated the virus’s spread through cover-ups, to that of the magnanimous global power offering leadership at a time of panic and peril in much of the rest of the world.”

March 23 – Financial Times (Gideon Rachman): “Kenichi Ohmae’s book The Borderless World was published in 1990, the year after the fall of the Berlin Wall. It became one of the classic texts of the globalisation era. But borders are now returning with a vengeance — driven by coronavirus. When the pandemic passes, the most extreme barriers to travel will be lifted. But it is unlikely that there will be a full restoration of the globalised world… The nation-state is making a comeback, fuelled by this extraordinary crisis… First, the pandemic is demonstrating that in times of emergency people fall back on the nation-state… Second, the disease is revealing the fragility of global supply chains. It is hard to believe that large, developed countries will continue to accept a situation in which they have to import most of their vital medical supplies. Finally, the pandemic is reinforcing political trends that were already potent before the crisis broke — in particular the demand for more protectionism, localisation of production and tougher frontier controls.”

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