Sunday, December 14, 2014

Weekly Commentary, April 18, 2014: Stabilizer?

Fundamental to modern thinking on central banking is the idea that monetary policy is more effective when the public better understands and anticipates how the central bank will respond to evolving economic conditions. Specifically, it is important for the central bank to make clear how it will adjust its policy stance in response to unforeseen economic developments in a manner that reduces or blunts potentially harmful consequences. If the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments. Monetary policy will thus have an ‘automatic stabilizer’ effect that operates through private-sector expectations. It is important to note that tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain. But by responding to changing circumstances, policy can be most effective at reducing uncertainty about the course of inflation and employment. Recall how this worked during the couple of decades before the crisis--a period sometimes known as the Great Moderation. The FOMC's main policy tool, the federal funds rate, was well above zero, leaving ample scope to respond to the modest shocks that buffeted the economy during that period. Many studies confirmed that the appropriate response of policy to those shocks could be described with a fair degree of accuracy by a simple rule linking the federal funds rate to the shortfall or excess of employment and inflation relative to their desired values.” Janet Yellen, April 16, 2014

Watching (via CNBC) Janet Yellen’s appearance before the Economic Club of New York on Wednesday just seemed surreal. Contemporary central bankers’ experiment with monetary inflation has spiraled ominously out of control, yet the new Fed chair was welcomed in New York with joy and reverence. She was repeatedly commended for delivering such a clear message. Dr. Yellen smiled. A controlled Q&A had questions coming from Goldman Sachs’ Abby Joseph Cohen and Harvard economist Martin Feldstein. After lavishing praise upon Dr. Yellen, Goldman’s Cohen asked a softball question about the unemployed. Dr. Feldstein took his turn, pitching his softball on how the Fed might respond in the event of higher-than-expected inflation. The Fed chair provided the typical canned response and Feldstein responded that he was “comforted.” I found the whole exercise discomforting: part of history’s most sophisticated and elaborate doctrine of inflationism.

It would be appropriate these days for the Fed to be under intense scrutiny. But with securities prices basically at all-time highs and “The Street” again showered with “money,” there will be no tough questions from the Big Apple crowd. I was struck by the following sentence from Yellen’s talk: “Fundamental to modern thinking on central banking is the idea that monetary policy is more effective when the public better understands and anticipates how the central bank will respond to evolving economic conditions.” It’s a ruse to suggest “public” understanding. Monetary policy has evolved over the years to pander directly to Wall Street and the financial markets. Everything – talk of unemployment, inflation, QE, forward guidance – revolves around maintaining market confidence.

During one of last week’s IMF panel discussions (Charles Evans participated), a member of the audience (from Germany) took exception to Fed policymaking. He stated his view that the Fed’s use of the unemployment rate for targeting monetary policy was “naive.” When the Fed initially discussed using unemployment as a key policy target, I posited that it was mainly for political cover. Heading into the 2012 elections, the Fed’s “money” printing was already under fire. Tying the unemployed with Fed stimulus was clever politics.

I am surely boring readers with my recent focus on central banking. When Fridays arrive and I need to transfer thoughts from brain to keyboard, I find monetary policy weighing particularly heavy on my mind these days. I’m compelled to return to an exchange from an IMF panel discussion I highlighted last week:

Citigroup chief economist Willem Buiter: “Financial stability is a key responsibility of every central bank. And if it’s a choice between inflation or whatever – and financial stability, then financial stability comes first.”

Federal Reserve Bank of Chicago President Charles Evans “Wow, that’s amazing! That’s amazing to me! Are you kidding me?”

Increasingly, monetary policy is regressing into a tradeoff between Financial Stability and the Fed’s obsession with what it considers unacceptably low inflation. Financial Stability has always been elemental to central banking. It was so fundamental that it went without being explicitly stated. Similarly, it was never legislated that our central bank be forbidden from aggressively printing money on a whim. Never was it contemplated that the Federal Reserve would inflate its balance sheet from $900bn to $4.5 TN in six years.

Last week, Chicago Fed head Evans made what is commonly viewed as an obvious statement: “What we own as a central bank is inflation.” But similar to about everything these days in the markets, economy and policymaking, things just aren’t what they seem. What may have been true traditionally no longer applies. The Fed doesn’t own inflation. They actually lost control some time ago.

Inflation is actually an extremely complex issue. The old “Austrians” always had the best grasp of inflation dynamics. Inflation problems come in many varieties: rising consumer prices, asset inflation and Bubbles, over and mal-investment, trade and current account deficits, currency devaluation, etc. Credit excess is at the root of inflationary dynamics. And the interplay between Credit, monetary processes and economic structure plays prominently in determining the types of prevailing inflationary forces. For years I’ve argued that asset inflation and Bubbles were the most prominent inflationary risks associated with the structure of contemporary Credit, monetary policy and financial flows. Unprecedented post-2008 global monetary and fiscal stimulus pushed over and mal-investment into the realm of a primary inflationary manifestation. Dangerously, the resulting global downward pressure on aggregate consumer price levels further feeds today’s dominant inflationary risk: a globalized central bank liquidity-induced Bubble in securities and asset prices.

I have a difficult time hearing Yellen say “when the public better understands.” The public doesn’t have a clue about “modern” central banking. I seriously question whether our own central bankers understand the ramifications of contemporary monetary policy. I’m increasingly convinced they fail to grasp the key facets of Financial Stability. Early in my career the Federal Reserve would subtly signal changes in monetary policy by adding or subtracting “reserves” into the banking system. Traditionally, system Credit was dominated by bank lending, and bank Credit expansion was restrained by reserve and capital requirements. If the economy, consumer prices or market speculation started running a little hot, central banks would “lean against the wind” by extracting some reserves and tightening bank finance. The nineties explosion of unconstrained non-bank Credit changed everything.

I would strongly argue that central banks only really “owned” inflation when they were willing to use their control over reserves to restrain bank lending, hence system Credit growth. This would come with a political price, something less disciplined Federal Reserve chairmen were not willing to pay. The tendency to tolerate creeping inflation led to a specific mandate to keep inflation below a certain level. It was never contemplated that the Fed would use the inflation mandate as justification for massive “money” printing operations.

Tested and proven central banking no longer applies to U.S. monetary management. Beginning in the nineties, ad hoc policymaking gravitated toward managing the financial markets. This was dictated both by the shift away from bank loans to non-bank and securitized Credit, as well as the attendant propensity for market crisis. To be sure, the deeper the Fed drifted into market intervention the bigger the eventual crises.

Dr. Evans stated that the Fed “owns” inflation, while believing the notion of placing Financial Stability ahead of inflation is today tantamount to central banking heresy. Ironically, when Fed policymaking gravitated away from bank reserves to managing the securities markets more generally, the Fed actually came to “own” “Financial Stability”. And when I write “own,” I'm thinking in terms of the old adage “you break it you own it!”

It’s amazing that monetary policy got to the point where the Bernanke Fed explicitly sought to force savers out of safety and into stocks and higher-yielding risk assets. It all started subtly with Greenspan nurturing non-bank Credit expansion. He moved to openly pegging rates, manipulating the yield curve and backstopping the markets. Policy transparency and asymmetrical policies (disregard asset inflation, speculation and Bubbles, but assure the markets the Fed would aggressively backstop the markets in the event of trouble) provided a boon to leveraged speculation, hence Financial Instability.

Now the Fed is trapped and the crowd at the Economic Club of New York is comforted. “If you owe the bank a million, the bank owns you. If you owe billions, you own the bank.” Wall Street owns the Fed. With total system securities now valued in excess of 400% of GDP (an all-time high and up from what was a record 350% in 1999), the sophisticated market operators must believe that the Fed, at this point, will not have the courage to attempt to restrain what has become conspicuous financial excess.

I was disappointed in (departing) Fed governor Jeremy Stein’s paper “Incorporating Financial Stability Considerations into a Monetary Policy Framework.” Stein had previously broached the possibility that Fed rate increases might be necessary to counter Credit market excess. In his paper he raised the issue of using indictors of financial excess (particularly bond market risk premiums) as a factor that might sway a central bank toward preemptive rate increases. “These variables have the potential to serve as simple proxies for a particular sort of financial market vulnerability that may not be easily addressed by supervision and regulation.” But he then basically threw up his hands and accepted that this type of framework – the empirical research, the construction of models - was at an “early stage” – “there is a ways to go.” Well, it’ll be too late. We don’t need academic studies or econometric models; we need traditional disciplined central banking.

In a section titled “Okay, But How Do You Measure Financial Market Vulnerability,” Stein delves into “Financial Sector Leverage.”

At an abstract level, the framework that I have sketched corresponds closely to that in Woodford's work… When it gets down to implementation, Woodford suggests that the most natural measure of financial market vulnerability is a variable that captures ‘leverage in the financial sector.’ In other words, faced with unemployment above target, he would have monetary policy be less accommodative, all else being equal, when financial-sector leverage is high. This recommendation rests on three key premises. First, when financial-sector leverage is high, the probability of a severe crisis in which multiple large intermediaries become insolvent is elevated--that is, we are more likely to have a replay of what happened in 2008 and 2009. Second, easy monetary policy is asserted to increase the incentives for the financial sector to lever up. And, third, focusing on leverage as opposed to asset prices avoids putting the central bank in the position of having to ‘spot bubbles’: Even if it is impossible for the central bank to know when an asset class is overvalued, the risks to the economy associated with overvaluation are presumably greater when intermediaries are highly levered.

In the post-2008 crisis backdrop, there’s been considerable (belated) attention paid to financial leverage. Federal Reserve analysis holds that flawed regulation was primarily responsible for the crisis. So, so-called “macro-prudential” policies are now supposed to ensure that for this cycle banks are better capitalized, carefully regulated and avoidant of inordinate risk-taking. The Fed is confident that financial sector leverage is being contained. And it’s all classic “fighting the last war.”

Meanwhile, the hedge fund industry continues to balloon – with unknown amounts of speculative leverage. The Federal Reserve’s balance sheet is on its way to $4.5 Trillion, leverage that is conveniently outside the purview of the Fed’s framework for assessing financial sector leverage risks.

There’s two ways to look at leverage. The traditional framework is to equate financial leverage with vulnerability. A highly leveraged banking system would be at risk of large losses in the event of declining securities prices or problem loans. As we saw during the 2008 crisis, highly leveraged speculative positions are susceptible to faltering market confidence and self-reinforcing liquidations. The problem with a speculative “risk on” market backdrop – especially when large amounts of leverage are employed – is vulnerability to “risk off” risk aversion and deleveraging. The Fed believes that the 2008 crisis could have been avoided with proper regulation of both mortgage lending and bank risk management. The system would not have been highly leveraged in problematic high-risk mortgages, they believe.

But there’s A Second Way to analyze leverage - overlooked but vitally important. The process of “leveraging” – the expansion of Credit – creates new purchasing power. This “leveraging” could be a bank extending new loans (funding capital investment, auto loans, tuition, mortgages, etc.). Or it could be new securities Credit for leveraging bets on stocks and bonds (or derivatives). Importantly, there is as well the Fed’s leveraging of its balance sheet as it creates new liquidity to implement its QE operations. These various forms of leveraging provide new liquidity/purchasing power for their respective parts of the real economy and asset markets. This liquidity then spurs a series of financial and economic transactions throughout the entire system.

Fed officials don’t appreciate the risks involved in their experimental balance sheet leveraging. For one, officials don't believe inflation is an issue. Moreover, the Fed anticipates no scenario that would force a problematic liquidation of its holdings (largely Treasuries and MBS). The market doesn’t see risk either. I see considerable risk, risks associated with The Second Way of looking at leverage. Fed balance sheet expansion has created incredible amounts of liquidity/purchasing power that have been slushing around the markets and economy for years now. This liquidity has inflated asset prices, spending, corporate cash flows and earnings, and system incomes more generally.

Worse yet, Fed QE operations (“leveraging”) have incentivized what I believe is unprecedented leveraged speculation on a global basis. This additional leveraging has unleashed only more liquidity/purchasing power that has exacerbated inflationary distortions. I argue strongly that all this leveraging has created a deep systemic (financial markets and real economy) dependency to ongoing balance sheet growth (liquidity creation) by the Fed. It has reached the point where even zero rates, massive QE, highly speculative securities markets, pockets of overheated real estate and asset markets, and record securities values spur only modest growth in the general economy.

From Yellen: “If the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments. Monetary policy will thus have an ‘automatic stabilizer’ effect that operates through private-sector expectations.”

The traditional gold standard was so effective because it in fact provided an “automatic stabilizer.” If Credit was created in excess, an economy would suffer a loss of gold. The reduced gold reserve would dictate higher rates and a (stabilizing) contraction in lending. Bankers and politicians understood the mechanics of the system (and were committed to sustaining the monetary regime), so they would tighten their belts when excess first emerged. In this way, the gold standard for the most part provided a stabilizing and self-correcting system. These days, everyone knows the Fed will not respond to excess. Our central bank, however, will be predictably quick to print additional “money” at the first sign of a faltering Bubble, liquidity that will further reward financial speculation. Excess begets excess. Today’s system is the very opposite of “automatic stabilizer.”

This all could sound too theoretical. But with the Fed intending to conclude balance sheet leveraging later in the year, this theory might soon be tested.

For the Week:

The S&P500 jumped 2.7% (up 0.9% y-t-d), and the Dow rose 2.4% (down 1.0%). The Utilities added 1.5% (up 11.3%). The Banks gained 1.4% (down 0.4%), and the Broker/Dealers surged 5.1% (down 3.9%). The Morgan Stanley Cyclicals were up 3.4% (up 2.4%), and the Transports surged 3.7% (up 3.2%). The S&P 400 Mid-caps gained 2.5% (up 0.7%), and the small cap Russell 2000 increased 2.4% (down 2.2%). The Nasdaq100 rose 2.5% (down 1.6%), and the Morgan Stanley High Tech index jumped 2.7% (up 1.4%). The Semiconductors gained 3.2% (up 8.1%). The Biotechs rallied 3.0% (up 5.0%). With bullion sinking $24, the HUI gold index was hit for 2.5% (up 11.2%).

One- and three-month Treasury bill rates ended the week at two bps. Two-year government yields rose four bps to 0.40% (up 2bps y-t-d). Five-year T-note yields surged 16 bps to 1.735% (down one basis point). Ten-year Treasury yields were up 10 bps to 2.72% (down 31bps). Long bond yields rose four bps to 3.52% (down 45bps). Benchmark Fannie MBS yields jumped 11 bps to 3.44% (down 17bps). The spread between benchmark MBS and 10-year Treasury yields increased one to 72 bps. The implied yield on December 2015 eurodollar futures jumped 10 bps to 1.105%. The two-year dollar swap spread increased two to 15 bps, while the 10-year swap spread was little changed at 12 bps. Corporate bond spreads reversed after the previous week's widening. An index of investment grade bond risk declined two to 68 bps. An index of junk bond risk fell 13 to 341 bps. An index of emerging market (EM) debt risk declined seven to 288 bps.

Debt issuance slowed for the shortened week, with the exception of continued notably robust junk sales. Investment-grade issuers included Wells Fargo $4.15bn, Wal-Mart $2.5bn, Plains All American Pipeline LP $700 million, Reliance Standard Life $500 million, Kimco Realty $500 million, Biomed Realty LP $400 million, Nationwide Mutual Insurance $400 million, and Connecticut Light & Power $250 million.

Junk issuers included Denbury Resources $1.25bn, Florida East Coast Holdings $1.15bn, Rice Energy $900 million, Time $700 million, Caesars Growth Properties $675 million, Athlon Holdings LP $650 million, Parsley Energy $550 million, Endeavor Energy Resource LP $500 million, and Interactive Data Corp $350 million.

I saw no convertible debt issued this week.

International dollar debt issuers included Bank Nederlandse Gemeenten $1.5bn, Groupe Office Cherifien $1.5bn, KT Corp $1.0bn, Braskem Finance $750 million, MIE Holdings $500 million, Kilimanjaro RE $450 million, and Golden Legacy PTE $200 million.

Ten-year Portuguese yields sank another 23 bps to 3.74% (down 239bps y-t-d). Italian 10-yr yields fell nine bps to 3.12% (down 100bps). Spain's 10-year yields dropped 10 bps to 3.09% (down 107bps). German bund yields increased a basis point to 1.52% (down 41bps). French yields declined two bps to 1.99% (down 57bps). The French to German 10-year bond spread narrowed three to 47 bps. Greek 10-year yields sank 21 bps to 6.06% (down 236bps). U.K. 10-year gilt yields rose 6 bps to 2.67% (down 35bps).

Japan's Nikkei equities index surged 4.0% (down 10.9% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.60% (down 14bps). The German DAX equities index rallied 1.0% (down 1.5% y-t-d). Spain's IBEX 35 equities index increased 0.9% (up 3.8%). Italy's FTSE MIB index rose 2.0% (up 14.0%). Emerging equities were mixed. Brazil's Bovespa index increased 0.5%, with a one-month gain of 15.5% (up 1.2%). Mexico's Bolsa gained 1.3% (down 4.3%). South Korea's Kospi index increased 0.3% (down 0.4%). India’s Sensex equities index was little changed (up 6.9%). China’s Shanghai Exchange was down 1.5% (down 0.9%). Turkey's Borsa Istanbul National 100 index gained 1.0% (up 8.4%). Russia's RTS equities index recovered 0.9% (down 9.8%).

Freddie Mac 30-year fixed mortgage rates dropped seven bps to 4.27% (up 86bps y-o-y). Fifteen-year fixed rates declined five bps to 3.33% (up 69bps). One-year ARM rates increased three bps to 2.44% (down 19bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.62% (up 69bps).

Federal Reserve Credit last week jumped $39.7bn to a record $4.238 TN. During the past year, Fed Credit expanded $997bn, or 30.8%. Fed Credit inflated $1.427 TN, or 51%, over the past 75 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt fell $15.2bn to $3.301 TN. "Custody holdings" were up $4.6bn from a year ago, or 0.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $784bn y-o-y, or 7.1%, to a record $11.866 TN. Over two years, reserves were $1.459 TN higher for 14% growth.

M2 (narrow) "money" supply surged $41.5bn to a record $11.194 TN. "Narrow money" expanded $689bn, or 6.6%, over the past year. For the week, Currency increased $1.7bn. Total Checkable Deposits gained $19.6bn, and Savings Deposits rose $18.7bn. Small Time Deposits were little changed. Retail Money Funds increased $2.0bn.

Money market fund assets sank $35.0bn to $2.577 TN, an almost one-year low. Money Fund assets were down $136bn in nine weeks and $18bn from a year ago, or 0.7%.

Total Commercial Paper increased $6.4bn to $1.045 TN. CP was down $1.2bn year-to-date, while increasing $29bn over the past year, or 2.9%.

Currency Watch:

The U.S. dollar index increased 0.5% to 79.87 (down 0.2% y-t-d). For the week on the upside, the British pound increased 0.4%. For the week on the downside, the New Zealand dollar declined 1.2%, the Swedish krona 1.0%, the Norwegian krone 0.9%, the Swiss franc 0.8%, the Brazilian real 0.8%, the Japanese yen 0.8%, the Australian dollar 0.7%, the euro 0.5%, the Danish krone 0.5%, the Taiwanese dollar 0.4%, the Canadian dollar 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Mexican peso 0.1%.

Commodities Watch:

April 15 – Bloomberg: “China has delayed or defaulted on as many as 23 soybean cargoes it ordered from the U.S. and South America so far this April, agriculture research company Shanghai JC says… The delays are due to buyers struggling to get credit amid losses in processing beans, the report says. More cargoes may be defaulted by Chinese buyers as crushers continue to suffer losses, it says…”

The CRB index increased 0.7% this week (up 11.2% y-t-d). The Goldman Sachs Commodities Index jumped 1.4% (up 4.6%). Spot Gold lost 1.8% to $1,294 (up 7.3%). May Silver was down 1.8% to $19.60 (up 1%). May Crude added 56 cents to $104.30 (up 6.0%). May Gasoline gained 1.3% (up 10%), and May Natural Gas jumped 2.6% (up 12%). July Copper was little changed (down 11%). May Wheat surged 4.7% (up 14%). May Corn slipped 0.8% (up 17%).

U.S. Fixed Income Bubble Watch:

April 14 – Financial Times (Vivianne Rodrigues and Michael Mackenzie): “A bruising drop in US equities at the end of last week is fanning concern that investors are poised to reassess lofty valuations in the junk bond market, potentially triggering a sell-off in the riskiest kind of company debt. Historically, equities and prices for bonds of companies with low quality ratings have moved in tandem. Although demand for speculative-rated debt has so far remained solid, analysts and investors fear that continued weakness in the S&P 500… could hit the junk bond market. Junk bonds could be particularly vulnerable to declines following a multiyear rally in the securities that pushed valuations to levels that did not compensate investors adequately for the risks attached to the debt.”

April 16 – Bloomberg (Christine Idzelis): “The U.S. junk-loan market has never fueled so much dealmaking. A total of $85 billion of loans have been raised this year to finance acquisitions, topping 2007’s record pace… Issuance is set to accelerate as Avago Technologies Ltd. locks in the year’s second-biggest loan for its takeover of chipmaker LSI Corp. as soon as today… Leveraged loans are booming as the value of takeovers in the U.S. reaches levels last seen in 2008. While regulators have warned excesses may be emerging in riskier parts of the market as the Federal Reserve’s zero-interest rate policy extends into a sixth year, the loan surge underscores renewed confidence in the ability of the least-creditworthy companies to expand as the world’s largest economy strengthens. ‘There’s a lot of money waiting to be put to work,’ Judith Fishlow Minter, co-head of U.S. loan capital markets at Royal Bank of Canada, said… ‘The market is exceptionally strong.’”

Federal Reserve Watch:

April 13 – Wall Street Journal (ByVictoria McGrane): “The Federal Reserve doesn’t need to expand its focus from its dual mandate to take financial-stability concerns into account, Fed governor Jeremy Stein said… Mr. Stein, who has expressed worries that the Fed’s easy-money policies could spark instability across the financial system, said his ‘first instinct’ would be not to add financial stability as some sort of separate task for the central bank to carry out. Approaching financial stability through the lens of the Fed’s dual mandate to achieve maximum employment and price stability ‘will give you a little bit of analytical discipline,’ he said… In other words, Fed officials should only take action on financial-stability concerns when there is evidence that the activity in question is threatening to spur higher unemployment or push inflation significantly above or below the central bank’s 2% target. During the panel, Mr. Stein reprised a proposal he first unveiled in a speech last month: The Fed should look to the bond market for guidance on when financial excesses are building, and the central bank should raise interest rates to tamp down emerging threats. Specifically, Mr. Stein argues that interest-rate markets can reveal to the Fed signs of excess that could signal future instability. Trouble may be brewing when long-term interest rates are unusually low compared to the outlook for short-term interest rates, or when investors demand small premiums on risky debt such as corporate bonds or mortgage bonds relative to low-risk debt like Treasurys, he said. Mr. Stein… argued during the discussion Sunday that his proposal is really just a shift in emphasis in what the Fed is already doing. Fed officials take asset prices and risk premiums into account implicitly when making policy decisions because these factors have implications for the economic outlook, he said.”

April 15 – Bloomberg (Kartik Goyal, Arijit Ghosh and Adi Narayan): “The U.S. Federal Reserve considers developments in emerging markets when formulating policies, former Fed chairman Ben S. Bernanke said. ‘There is a perception in some quarters that the U.S. doesn’t listen to emerging markets,’ Bernanke said… ‘Nothing could further from the truth. We have always listened to what emerging markets have had to say.’”

U.S. Bubble Watch:

April 18 – Bloomberg (Simon Kennedy): “The wealth effect isn’t what it once was for the U.S. economy. While the wealth of American households has jumped more than $25 trillion since early 2009 amid rising equity and home prices, the pass-through to consumer spending is lagging the $1 trillion fillip that would have been anticipated historically, according to Michael Feroli, chief U.S. economist at JPMorgan… This means consumer spending has been exceptionally weak once wealth is accounted for, he said. With wealth gains now moderating, consumer spending could revert to what is already a weak trend, Feroli said… His calculations show that since the recession ended in 2009, households have spent 1.7 cents of every extra $1 earned in wealth. That’s less than half the 3.8-cent average implied by data between 1952 and 2009… One reason for the adjustment may be that those enjoying gains in wealth are already rich, so have less propensity to increase spending incrementally. Withdrawing equity from homes has also been negative for five years.”

April 15 – Bloomberg (Michael B. Marois): “California’s state public employee pension funds, the largest in the U.S., have grown so big that their total asset value is on pace to exceed the gross domestic product of Argentina and are equivalent to the 27th largest economy in the world. The… combined investment funds of the $285.5 billion California Public Employees’ Retirement System and the $181 billion California State Teachers’ Retirement System top the estimated size of the Austrian economy for 2013, and are poised to overtake the $497 billion projected output of Argentina…”

April 16 – Bloomberg (Steve Matthews): “To hire 10 to 15 project coordinators this year, Sabre Commercial Inc. has boosted pay 10% and added a 401(k) retirement plan. ‘It is an employee’s market,’ said John Cyrier, co- founder and president of the 48-employee Austin, Texas-based builder. ‘We are definitely seeing a labor shortage in Austin and central Texas. I see it only getting worse.’ Companies across the U.S. from Texas to Virginia and Nebraska are struggling to fill positions with metropolitan jobless rates below the 5.2% to 5.6% level the Federal Reserve regards as full employment nationally.”

April 15 – Wall Street Journal (Shira Ovide): “ Inc., Microsoft Corp. and Google… are warring over the future of corporate computing, and executives like Michael Simonsen are reaping the benefits. Mr. Simonsen, chief executive of real-estate startup Altos Research, rents computing horsepower and data storage from Amazon to crunch data on about 100 million U.S. home listings. Three weeks ago, Amazon cut Altos's bill nearly in half. That enabled Mr. Simonsen to add two programmers to develop new services. ‘Nobody ever gives you a 40% price break overnight,’ Mr. Simonsen says. ‘Our direct benefit is the opportunity to create more products, faster.’”

April 14 – Financial Times (Richard Waters): “Insiders at some of the hottest private and publicly traded internet companies unloaded substantial personal stakes ahead of the slump in tech stocks that started at the beginning of March. The selling has stirred unease among some investors, who see the sales as opportunistic moves revealing a lack of confidence in their companies’ stock prices as shares in the fastest-growing internet companies soared in 2013. Selling by founders and other insiders at private companies – taking advantage of a bubble in valuations in start-ups thought to be close to launching an initial public offering – raises some of the biggest concerns, according to investors.”

April 15 – California Association of Realtors: “Southern California home sales quickened last month compared with February, as they normally do, but remained far below average and at the lowest level for a March in six years. The median sale price rose to a more-than-six-year high, driven up by demand that continues to exceed supply in many areas, as well as a shift toward a greater share of sales in middle and high-end markets… The median has risen on a year-over-year basis for 24 consecutive months. Those gains have been double-digit – between 10.8% and 28.3% - over the past 20 months. The 15.8% year-over gain in the median last month marked the lowest increase for any month since September 2012…”

April 15 – Bloomberg (Leslie Patton): “Penny pinchers will be forgiven for skipping the shrimp scampi this season. Prices for shrimp have jumped to a 14-year high in recent months, spurred by a disease that’s ravaging the crustacean’s population. At Noodles & Co., a chain with locations across the country, it costs 29% more to add the shellfish to pastas this year, and shrimp-heavy dishes at places like the Cheesecake Factory Inc. are going up as well.”

Ukraine/Russia Watch:

April 17 - New York Times (David M. Herszenhorn): “President Vladimir V. Putin of Russia emphasized on Thursday that the upper chamber of the Russian Parliament had authorized him to use military force if necessary in eastern Ukraine, and also stressed Russia’s historical claim to the territory, repeatedly referring to it as ‘new Russia’ and saying that only ‘God knows’ why it became part of Ukraine… ‘I remind you that the Federation Council has given the president the right to use armed forces in Ukraine,’ he said… ‘I really hope that I do not have to exercise this right and that by political and diplomatic means we will be able to solve all of the sharp problems.’ Mr. Putin said that Russia felt an obligation to protect ethnic Russians in the region, who are a sizable minority. ‘We must do everything to help these people to protect their rights and independently determine their own destiny,’ he said. ‘Can a compromise be found on the Ukrainian question between Russia and America?’ Mr. Putin asked. ‘Compromise should only be found in Ukraine… The question is to ensure the rights and interests of the Russian southeast. It’s new Russia. Kharkiv, Lugansk, Donetsk, Odessa were not part of Ukraine in Czarist times, they were transferred in 1920. Why? God knows. Then for various reasons these areas were gone, and the people stayed there — we need to encourage them to find a solution.’”

April 16 – Bloomberg (Jones Hayden): “The Russian propaganda is more aggressive than at the time of the Cold War and it is also more dangerous because it is not contained anymore by the Iron Curtain of the Cold War, neither are its effects and implications,” European Union Enlargement Commissioner Stefan Fule says… ‘We are witnessing economic coercion, threats and a covert action to instigate protests and instability, which are meant to dissuade the Ukrainian people from taking up new opportunities, but also meant to dissuade us from defending their freedom of choice, to convince us to drop our policies, values and principles, and accept the logic of the spheres of influence. But this would be equal to ignoring the lessons of the last century in this continent,’ Fule says…”

April 16 – Bloomberg (Vladimir Kuznetsov and Ekaterina Shatalova): “Sanctions over Ukraine may threaten Russia’s investments in assets denominated in euros and U.S. dollars, Economy Minister Alexei Ulyukayev said, urging the use of the nation’s wealth funds for domestic projects. ‘We should now very attentively study the risks of investing into dollar and euro securities, given the geopolitical situation we have right now,’ Ulyukayev told lawmakers in Moscow… With tensions escalating in the worst standoff since the Cold War, the U.S. and its European allies are threatening a new round of penalties against Russian interests if the crisis continues. Russia’s two sovereign wealth funds, which held the equivalent of $175 billion as of March 31, are allowed to invest in securities denominated in dollars, euros and British pounds, according to the Finance Ministry…”

April 16 – Bloomberg (Vladimir Kuznetsov): “Russia canceled its eighth bond sale this year as Finance Minister Anton Siluanov said the nation is facing the toughest conditions since 2008, when Lehman Brothers Holdings Inc.’s collapse sparked the financial crisis. Yields on local currency 10-year bonds jumped 84 bps since Russia’s incursion into Ukraine’s Crimea region at the start of March.”

Global Bubble Watch:

April 17 – Financial Times (Miles Johnson): “Hedge funds have had their worst start to the year since the start of the financial crisis as political uncertainly in Ukraine, steep falls in US technology and biotechnology shares and a whipsaw reversal in the value of the Japanese yen caught many managers by surprise.  Following a year of almost uninterrupted gains, the onset of volatile trading across many markets soured many popular hedge fund trades in March, compounding a difficult start to the year for several high profile managers.”

April 14 – Bloomberg (Stefan Riecher and Rainer Buergin): “Mario Draghi’s patience with the euro has snapped. ‘The strengthening of the exchange rate requires further monetary stimulus,’ European Central Bank President Draghi told reporters… ‘That’s an important dimension for our price stability.’ The warning, which prompted the biggest drop in the single currency in three weeks, marked the strongest stance yet taken by Draghi since he and fellow policy makers began complaining in early March about the euro’s rise… The elevated rhetoric, echoed by other ECB officials, was a theme of weekend meetings of the International Monetary Fund and World Bank that global policy makers used to urge European officials to address lackluster inflation before it turns into Japanese-style deflation.”

April 14 – Bloomberg (Lisa Abramowicz): “Bill Gross and Larry Fink manage a $3 trillion pile of bonds -- an amount almost as big as Germany’s economy. Their firms, Pacific Investment Management Co. and BlackRock Inc., doubled holdings since 2008, outpacing the market’s growth of 50%. Some of the largest hedge-fund firms, including Bridgewater Associates LP and BlueCrest Capital Management LLP, have also more than doubled their investments in debt… At the same time, Wall Street banks are shrinking their stakes in bonds, Federal Reserve data show. The lopsided bond market has caught the attention of the U.S. Securities and Exchange Commission. Not only is the SEC examining whether the biggest players get preferential prices and access because of their influence, it’s also worried about what happens when the five-year bond rally ends as U.S. policy makers prepare to raise interest rates.”

EM Bubble Watch:

April 14 – Bloomberg (Boris Korby): “Brazil is leading a revival in junk bond sales from Latin America at a time when the International Monetary Fund is warning of the growing risks faced by emerging-market companies as borrowing costs rise… Yields for the region’s junk-rated bond issuers plunged an average 0.4 percentage point in the past month to 7.94%... The sales pickup is part of a dozen speculative-grade offerings from Latin America in the past month as investors pile back into developing-nation debt.”

China Bubble Watch:

April 15 – Bloomberg: “Ensuring national security is the Communist Party’s top priority, Xinhua News Agency reports, citing President Xi Jinping as saying at the first meeting of the national security committee…”

April 15 – Bloomberg: “China’s broadest measure of new credit fell 19% from a year earlier and money supply grew at the slowest pace on record, underscoring risks of a deeper slowdown as the government tries to curb financial dangers. Aggregate financing was 2.07 trillion yuan ($333bn) in March…, down from 2.55 trillion yuan a year ago. M2, China’s broadest gauge of money supply, rose 12.1% from a year earlier, compared with the 13% median estimate of analysts… and 13.3% in February.”

April 16 – Bloomberg: “China’s home sales fell and new property construction declined 25% in the first quarter, as credit remained tight, adding to signs of a slowdown in the world’s second-largest economy. The value of homes sold fell 7.7% to 1.1 trillion yuan ($177bn) in the three months to March from the same period a year ago… The last time home value sales dropped in the first quarter was in 2012. New property construction declined to 291 million square meters (3.1 billion square feet) in the quarter.”

April 18 - Bloomberg: “China’s new-home price increases eased across the country last month amid tighter credit that prompted developers to give discounts. Home prices from the first-tier cities to those less affluent all weakened in March… Prices in the capital city of Beijing rose 10% from a year earlier, the slowest since April last year, while those in Shanghai added 13%, the smallest since June. The eastern city of Wenzhou fell 3.9% from a year ago… Developers… cut home prices in some eastern Chinese cities this year as market sentiment weakened on tight liquidity. China’s broadest measure of new credit fell 19% in March from a year earlier and money supply grew at the slowest pace on record… ‘Mortgage availability is really constrained,’ Michael Klibaner, greater China research head at Jones Lang LaSalle Inc., said… ‘Right now, the buyers are still willing, they’re just constrained because they can’t get the debt. If sentiments start deteriorating, that’s a much bigger problem.’”

April 16 – Reuters (Gabriel Wildau and Lu Jianxin): “Chinese companies that have lent money to other companies are facing a potential wave of defaults, with several listed firms already reporting missed loan repayments. Shipbuilder Sainty Marine… became the latest listed firm to report that it had failed to receive principal and interest repayments on a 900 million yuan ($144.7 million) loan to a property developer… Chinese companies granted a net 2.55 trillion yuan ($411bn) in so-called entrusted loans in 2013, nearly double the 1.28 trillion yuan total in 2012, making them the second- biggest source of domestic credit behind bank loans, according to Reuters' calculations based on published central bank data. Entrusted loans require banks to serve as an intermediary, but a company serves as the ultimate lender and records the loan asset on its balance sheet… Entrusted loans require banks to serve as an intermediary, but a company serves as the ultimate lender and records the loan asset on its balance sheet. ‘Companies offering entrusted loans typically want to lend while bypassing official restrictions for credit, such as lending quotas,’ said Zhang Weigang, head of investment at Shanghai Securities. ‘That means they typically lend to risky industries such as property, solar panel manufacturing and non-ferrous metals.’”

April 14 – Reuters (Hongmei Zhao): “China has issued stricter guidelines governing trust companies, two sources with direct knowledge of the rules told Reuters…, in a bid to counter systemic risks posed by the biggest players in the country's shadow-banking sector. Trust companies are non-bank lenders that raise funds by selling high-yielding investments known as wealth management products (WMPs) and use the proceeds to fund loans to risky borrowers such as property developers, local governments and others to whom banks are reluctant to lend. The new rules from the China Banking Regulatory Commission (CBRC) aim to reduce liquidity risks associated with off-balance-sheet WMPs by forbidding trusts from operating so-called ‘fund pools’ that enable them to fund cash payouts on maturing products with the proceeds from new WMP sales.”

April 14 – Bloomberg: “China’s banking regulator ordered owners of the nation’s 68 trust companies to be prepared to provide funding or sell their stakes as the risk of defaults rises in the $1.9 trillion industry for high-yield investment. The China Banking Regulatory Commission told trust companies to either restrict their businesses and reduce net assets or have shareholders replenish capital when the firms suffer losses… The regulator will also impose a ‘strict’ approval process on trust firms’ entry into new businesses and products starting this year, according to the document… About 5.3 trillion yuan ($853bn) of products are due to mature this year, up from 3.5 trillion yuan in 2013, Haitong Securities Co. estimated in a January report, warning that firms can no longer shoulder all the risk tied to implicit guarantees associated with the trusts.”

April 16 – Bloomberg (Vladimir Kuznetsov): “Chinese investors demanding their money back from a troubled 973 million-yuan ($156 million) high- yield product in Shanxi province were confronted by police in front of a China Construction Bank Corp. branch. People wearing white masks with the words ‘despicable bank’ and ‘pay back our money’ were among at least 30 investors facing special-forces officers in dark uniforms in Taiyuan city… The unrest underscores the stress in China’s $1.75 trillion trust industry as loans sour in an economy that grew at the slowest pace in six quarters.”

April 15 – Bloomberg (Jasmine Wang and Rachel Evans): “China Southern Airlines Co., the nation’s third-largest carrier, estimated a loss in the first quarter, compared with a profit in the same period last year, as a weaker yuan caused foreign-exchange losses.”

April 18 - Bloomberg: “China’s soil is laced with pollutants including mercury and arsenic, according to a nine-year government survey, posing a threat to agriculture and human health and raising new concern about the environmental costs of China’s three decades of economic growth. Safety guidelines were breached in 16% of the 6.3 million square meters of land tested, with toxic pollutants also including cadmium, a radioactive material, the Ministry of Land and Resources said… The government initially refused to publish results from the survey, which it called a state secret, said Wu Yixiu, head of Greenpeace East Asia’s toxics campaign.”

Japan Watch:

April 16 – Bloomberg (Isabel Reynolds): “Japan’s population slid for a third year with the proportion of people over the age of 65 rising to a record, underscoring the challenge the world’s most-indebted economy faces in financing its aging society. The population declined by 0.17% to 127.3 million as of Oct. 1, as the country maintains one of the world’s lowest birth rate. People age 65 or older made up one fourth of the total, the highest-ever percentage… Japan’s debt has swelled to more than twice the size of the country’s economic output, due partly to expanding health and social security costs associated with its aging population.”

April 15 – Bloomberg (Maiko Takahashi and Toru Fujioka): “Bank of Japan Governor Haruhiko Kuroda said he told Prime Minister Shinzo Abe that the central bank won’t hesitate to adjust monetary policy if needed, after the pair met for lunch in Tokyo today. ‘We are on track to achieve our 2% price-stability target, but only halfway,’ Kuroda told reporters…”

Europe Watch:

April 17 – Reuters (Paul Carrel): “As recently as last November, Jens Weidmann steadfastly opposed any move by the European Central Bank to print money to buy assets and buoy the euro zone economy. No longer. The Bundesbank chief, known for his hardline stances at the ECB and as head of the German central bank, is now ready to support such quantitative easing (QE) if he and his ECB colleagues deem it necessary. What has changed is that ‘the situation has changed’, according to one person familiar with the German’s thinking… Euro zone inflation has slowed to 0.5% from 0.9% in November, falling far below the ECB's target of just under 2% and stoking fears the bloc could become