Sunday, December 14, 2014

Weekly Commentary, May 2, 2014: Serial Booms and Busts

After beginning 1987 near 104, the U.S. dollar index dropped almost 10% in nine months. From 7.5% in late-March 1987, 30-year Treasury yields surged more than 270 bps in seven months to trade as high as 10.22% in early October. During this period of currency and bond market instability, stocks set off on a fateful speculative run. At record highs in late-August 1987, the S&P500 enjoyed a year-to-date gain of 39%. This spectacular rise was more than wiped out over a two-week self-off that culminated on “Black Monday,” October 19, 1987.

Back in 1998, an increasingly exuberant U.S. equities marketplace was happy to ignore mounting risk of a Russian collapse (“The West will never allow Russia to collapse”). From January ’98 lows, the S&P500 rallied 30% by early-August to a new record high. Completely ignoring the unfolding crisis, the U.S. bank index (BKX) rallied 40% off of January lows to trade at a record high on July 17, 1998. But as the Russian and LTCM crisis erupted, the bank index fell 43% from July highs to October 8, 1998 lows.

From the October 1998 low to the end of 1999, Nasdaq surged 200%. And after ending ’99 at 4,069 – and in the face of conspicuous Bubble excess coupled with rapidly deteriorating industry fundamentals – Nasdaq disregarded reality to trade to its still all-time high of 5,132 on March 10, 2000. From its record high, panic and collapse ensued as Nasdaq lost half its value by year-end.

Major cracks (subprime) erupted in the mortgage finance Bubble in the early-spring of 2007. Stocks suffered from heightened volatility, including meaningful self-offs in the spring and summer. Still, the S&P500 mustered a double-digit year-to-date gain and record highs by mid-October 2007. Stocks rallied back after the failure of Bear Stearns and had posted only modest year-to-date declines by mid-2008. Only a few short months later, all bloody financial market hell broke loose.

Markets are fascinating creatures. Speculative marketplaces, if not suppressed, inherently regress into wild animals. And over the years I’ve drawn an analogy between speculative Bubbles (“bull markets”) and bull fights. After the bull is penetrated by that first sword, the eventual outcome is in little doubt. Yet before succumbing he’s going to turn crazy wild and inflict as much damage as possible.

The concept of “terminal phase” excess plays prominently in my Macro Credit Analytical Framework. From a monetary standpoint, things just really run amuck at the end of long Credit cycles. The growth of Credit surges uncontrollably, while quality rapidly deteriorates. Even as problems begin to surface, the massive financial infrastructure that built up during the long boom gets stuck in overdrive. This ensures that too much “money” whimsically rides roughshod through the financial and economic systems.

To be sure, a hypothetical chart of systemic risk spikes higher. Short-term, the surge in unstable finance fuels asset price inflation, speculation and manic behavior, while dulling the senses to important fundamental developments. The market discounting mechanism malfunctions. Speculative blow-offs tend to be at least partially fueled by short squeezes (short positioning driven by worsening fundamentals), while rampant monetary expansion (including speculative leveraging) covertly exacerbates systemic dependency to readily abundant liquidity. From a monetary standpoint, I believe these dynamics help explain why markets notoriously turn highly unstable near the end of the cycle – with a propensity for destabilizing blow-off tops soon followed by collapses.

With this as the backdrop, first to China. The historic Chinese Credit Bubble has followed a troubling course. In the face of rapidly deteriorating fundamental prospects, overall Credit growth expanded at a record pace throughout 2013 (and into early-2014). In particular, mortgage-related Credit continued to expand rapidly despite weakening growth and heightened financial stress. As it turned out, the apartment Bubble’s “terminal phase” was extended. From a systemic standpoint, the ongoing rapid growth in real estate-related Credit took on added significance in the face of tightening Credit for corporations and troubled local governments. I’ve been monitoring for signs of an end to apartment price inflation – and with it a downturn in transactions. From my framework, this would mark an important juncture for Chinese Credit and economic Bubbles.

May 1 – Financial Times (Simon Rabinovitch): “The biggest concerns are focused on property, a sector that fueled nearly a quarter of the country’s growth last year, according to Moody’s…. Sales have slowed sharply just as a large supply of new homes has come on to the market. In the first three weeks of April, sales volumes in China’s 40 top cities were down 24% year on year, according to Soufun, a property information company. ‘We do not believe that economic conditions have stabilised. The biggest direct pressure on the economy is coming from the property market,’ analysts with CEBM, a Shanghai-based advisory, wrote… ‘Even big developers have started cutting housing prices by about 10-15%, and price cuts in the primary (new) home market have led to a clear worsening of the secondary housing market.”

April 30 – Dow Jones (Esther Fung): “China’s housing market saw slower growth in April as new data indicated that more cities are experiencing price declines and weaker sales, prompting some local authorities to loosen regulations originally aimed at curbing overheated property sales. Average new home prices rose 9.1% in April from a year earlier, decelerating for the fourth straight month after March’s 10.0% rise and February's 10.8% gain… Sales remained sluggish in April after a 7.7% decline in the first quarter, analysts said, as home buyer interest waned amid expectations of further price cuts and more hurdles getting mortgages as banks tighten lending requirements in the face of credit concerns and slower growth. China's property market accounted for about 23% of China’s gross domestic product last year…”

May 2- UK Telegraph (Ambrose Evans-Pritchard): “So now we know what China’s biggest property developer really thinks about the Chinese housing boom. A leaked recording of dinner speech by Vanke Group’s vice-chairman Mao Daqing more or less confirms what the bears have been saying for months. It is a dangerous bubble, and already deflating. Prices in Beijing and Shanghai have reached the same extremes seen in Tokyo just before the Nikkei boom turned to bust, when the (quite small) Imperial Palace grounds were in theory worth more than California, and the British Embassy grounds (legacy of a good bet in the 19th Century) were worth as much as Wales… The numbers of flats and houses for sale has suddenly doubled. ‘Many owners are trying to get rid of high-priced houses as soon as possible, even at the cost of deep discounts. As a result, ordinary people who want to sell homes in the secondary market must face deep price cuts,’ he said.”

When it comes to Credit Bubbles, I subscribe to a few basic tenets. These include: “They tend to go to unimaginable extremes – then double!” Collapse is unavoidable once Bubbles succumb to “terminal phase” excess. The more protracted the “terminal phase” the greater the impairment to the financial system and economic structure – and the more painful the inevitable bust. And while analysts of Bubbles are invariably viewed as “extremists,” in the end things are always worse than even the Bubble analysts had suspected.

With the above in mind, it would appear the unfolding Chinese boom turned bust may be approaching a critical juncture. Thus far, overall very strong Credit growth has been sustained. Sinking apartment prices, a change in market psychology and a resulting slowing in sales volumes would lead to an abrupt downturn in new mortgage Credit. A more general slowdown in system Credit growth would surely expose myriad problems (“When the tide goes out…”).

May 2 – Wall Street Journal (Lingling Wei and Dinny McMahon): “With credit tight in China, companies in industries beset by overcapacity are turning to an unconventional source for cash—other companies—in a new rising risk for the country's financial system. These company-to-company loans, known as entrusted lending, have emerged as the fastest-growing part of China’s shadow-banking system… Net outstanding entrusted loans increased by 715.3 billion yuan ($115.4bn) in the first three months of 2014 from a year earlier… The increase in entrusted loans last year was equivalent to nearly 30% of local-currency loans issued by banks—almost double the portion in 2012… Officials at the People’s Bank of China, the central bank, have warned that much of the intracompany lending is flowing to sectors where the regulators have urged banks to reduce lending: the property market, infrastructure and other areas burdened by excess capacity. In central Shanxi province, 56% of entrusted loans in the past few years have gone to power producers, coking companies and steelmakers, among others, according to a recent paper by Yan Jingwen, an economist at the PBOC… In an analysis for The Wall Street Journal, ChinaScope Financial, a data provider partly owned by Moody’s…, found that 10 publicly traded Chinese banks disclosed that the value of entrusted loans facilitated by them reached 3.7 trillion yuan last year, up 46% from the previous year. Compared with 2011, the amount was more than two-thirds higher.”

May 2 – Wall Street Journal (Kate O-Keeffe): “The disappearance of a Macau junket figure believed to owe up to 10 billion Hong Kong dollars ($1.3bn) is roiling the world’s largest casino market and putting a spotlight on the opaque network of middle men who drive nearly two-thirds of the Chinese territory’s gambling revenue. Unlike other gambling hubs like Las Vegas, Macau depends on junkets for many of its customers. These companies bring high-spending gamblers to the casinos from mainland China, issue them credit and collect players' debts in exchange for commissions. The system took root there because the Chinese government imposes restrictions on how much cash its citizens can take out of the mainland and because gambling debts aren't considered valid inside China.”

Shifting the analysis back closer to home, economic data this week were notably mixed. The initial estimate of Q1 GDP was a dismal annual 0.1%. And while weather had an impact, the bottom line is that relative to $1 TN of annual QE, surging stock prices, inflating real estate and asset prices, record household “wealth” and some of the loosest financial conditions imaginable – the economy performed miserably. At the same time, it’s good to see the job market improve. But considering the ongoing strong pace of corporate borrowings, the overall lack of employment growth remains ominous.

Throughout the financial markets, Bubble excess seems to turn more conspicuous by the week. From star hedge fund manager David Einhorn: “There is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.” Obvious Bubble excess in the Credit market also garners increased attention. Bloomberg quoted Apollo Global Management co-founder Marc Rowan from this week’s Milken Institute Global Conference: “All the danger signs are there of a future crisis. We’re back to doing exactly the same things that were done in the credit markets during the crisis.”

It’s been my view that a going on six-year old “global government finance Bubble” last year suffered its first subprime-like cracks (EM and China). It’s worth recalling Citigroup CEO Chuck Prince’s infamous quote from July 2007 (via the FT): “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Why was Mr. Prince - and about everyone else - still dancing in the summer of 2007 – when it seemed rather clear the environment was in the process of changing? Because there was so much money to be made. Because the cautious were being left in the dust. Because it seemed irrational not to be participating in one of the most lucrative financial backdrops ever. Because not participating in the industry boom was career jeopardizing. Because, as Keynes noted a long time ago, if you’re going to be wrong you’d better be wrong right along with the group. The exuberant Crowd had convinced themselves that the Fed had everything under control (“Would never allow a housing bust!”)

I see ample ongoing confirmation of the “Granddaddy of all Bubbles” thesis. The stock market is reminiscent of 1999 – except today’s excesses are more broadly based (and the risks much greater!). Credit market excesses recall 2007, with record leveraged lending fueling record M&A. In total, financial asset prices have inflated to unprecedented levels – in nominal terms and as a percentage of GDP. Globally, record low bond yields in Italy and Spain are indicative of a historic Bubble in European debt and financial assets more generally. Reckless Japanese monetary inflation has made an absolute mess out of Japanese stock and bond markets. Throughout EM, I see financial asset prices that in no way reflect the huge risks overhanging vulnerable Credit systems and real economies. I believe China is an unfolding financial disaster with history’s most maladjusted economic structure. Throughout Asia, massive overcapacity portends trouble for financial assets.

But with central banks still pumping and speculators still leveraging, the mirage of unending cheap liquidity (and central bank backstops!) ensures everyone buoyantly dances the night away. I’m convinced that the ’08/‘09 crisis would have been less damaging had markets begun discounting the changing environment back when subprime first faltered in early-2007. Instead, Fed accommodation spurred another year of “terminal phase” excess and attendant distortions.

These days, “accommodation” doesn’t do justice to ongoing unprecedented monetary stimulus, which ensures that manic equities and Credit markets completely disregard major fundamental changes in the global landscape. China doesn’t matter. Ukraine and Russia don’t matter. A conspicuously underperforming U.S. economy doesn’t matter. The approaching end to QE doesn’t matter. An alarmingly deteriorating geopolitical environment doesn’t matter. As they say, “It doesn’t matter until it does.” Yet, through it all, don’t lose track of an important fact: They all matter – and together they will matter a great deal. 

For the Week:

The S&P500 gained 1.0% (up 1.8% y-t-d), and the Dow increased 0.9% (down 0.4%). The Utilities reversed course and dropped 1.9% (up 11.2%). The Banks were unchanged (down 1.0%), while the Broker/Dealers advanced 1.1% (down 2.8%). The Morgan Stanley Cyclicals added 0.6% (up 2.9%), and the Transports jumped 1.5% (up 4.0%). The S&P 400 Midcaps rallied 1.1% (up 1.4%), and the small cap Russell 2000 increased 0.5% (down 3.0%). The Nasdaq100 jumped 1.5% (down 0.1%), and the Morgan Stanley High Tech index rose 1.2% (unchanged). The Semiconductors added 0.6% (up 7.6%). The Biotechs rallied 3.3% (up 7.1%). With bullion declining $4, the HUI gold index was down 1.0% (up 14.6%).

One-month Treasury bill rates ended the week at one basis point and three-month rates closed at two bps. Two-year government yields declined a basis point to 0.42% (up 4bps y-t-d). Five-year T-note yields fell 6 bps to 1.66% (down 38bps). Ten-year Treasury yields were down 8 bps to 2.59% (down 44bps). Long bond yields dropped 8 bps to 3.37% (down 60bps). Benchmark Fannie MBS yields declined 7 bps to 3.28% (down 33bps). The spread between benchmark MBS and 10-year Treasury yields widened one to 69 bps. The implied yield on December 2015 eurodollar futures was little changed at 1.085%. The two-year dollar swap spread increased two to 13 bps, and the 10-year swap spread increased one to 12 bps. Corporate bond spreads somewhat narrowed. An index of investment grade bond risk declined 3 bps at 64 bps. An index of junk bond risk fell one to 346 bps. An index of emerging market (EM) debt risk declined 2 to 296 bps.

Debt issuance was steady. Investment-grade issuers included Apple $12bn, Bank of New York Mellon $1.25bn, Citigroup $1.0bn, Stryker $1.0bn, Private Export Funding $1.0bn, Morgan Stanley $934 million, El Paso Pipeline Partners $600 million, Mattel $500 million, Ryder Systems $400 million, Goldman Sachs $150 million and Stanford University $150 million.

Junk funds saw outflows of $631 million (from Lipper). Junk issuers included Sirius XM Radio $1.5bn, Lifepoint Hospitals $1.1bn, Service Corp $550 million, CCU $850 million, Suncoke Energy Partners LP $250 million and Century Communications $200 million.

I saw no convertible debt issues this week.

International dollar debt issuers included Abu Dhabi National Energy $1.5bn, Lenovo $1.5bn, Neder Waterschapsbank $1.3bn, State Grip Overseas $3.5bn, Toronto Dominion Bank $2.25bn, Inter-American Development Bank $1.0bn, Groupe Office Cherifien des Phosphates $600 million, Fermaca Enterprises $550 million, CGG $500 million, Oleoducto Central $500 million, Oleoducto Central $500 million, Korea Land & Housing $500 million, Consolidated Minerals $400 million, Constellium $400 million, Minera Metalurgica $340 million, Masisa $300 million and Armor Re $200 million.

Ten-year Portuguese yields dropped six bps to 3.63% (down 251bps y-t-d). Italian 10-yr yields fell six bps to a record low 3.04% (down 108bps). Spain's 10-year yields dropped nine bps to a record low 2.98% (down 118bps). German bund yields declined three bps to 1.45% (down 48bps). French yields fell five bps to 1.93% (down 63bps). The French to German 10-year bond spread narrowed two to 48 bps. Greek 10-year yields sank another 20 bps to 6.13% (down 229bps). U.K. 10-year gilt yields were unchanged at 2.64% (down 38bps).

Japan's Nikkei equities index increased 0.2% (down 11.3% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.61% (down 13bps). The German DAX equities index rallied 1.6% (unchanged). Spain's IBEX 35 equities index jumped 1.6% (up 5.6%). Italy's FTSE MIB index rose 1.6% (up 14.8%). Emerging equities were mixed. Brazil's Bovespa index jumped 3.1% (up 2.9%). Mexico's Bolsa gained 1.9% (down 4.1%). South Korea's Kospi index declined 0.6% (down 2.0%). India’s Sensex equities index fell 1.3% (up 5.8%). China’s Shanghai Exchange dipped 0.5% (down 4.2%). Turkey's Borsa Istanbul National 100 index surged 5.3% (up 10.9%). Russia's MICEX equities index rallied 1.9% (down 13.3%).

Freddie Mac 30-year fixed mortgage rates declined four bps to 4.29% (up 94bps y-o-y). Fifteen-year fixed rates slipped one basis point to 3.38% (up 82bps). One-year ARM rates added a basis point to 2.45% (down 11bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up two bps to 4.66% (up 79bps).

Federal Reserve Credit last week expanded $4.6bn to a record $4.250 TN. During the past year, Fed Credit expanded $984bn, or 30.1%. Fed Credit inflated $1.440 TN, or 51%, over the past 77 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt fell $15.6bn to $3.279 TN. "Custody holdings" were down $42.1bn during the past eight weeks (down $15.9bn from a year ago).

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $806bn y-o-y, or 7.3%, to a record $11.899 TN. Over two years, reserves were $1.443 TN higher for 14% growth.

M2 (narrow) "money" supply fell $25.8bn to $11.191 TN. "Narrow money" expanded $690bn, or 6.6%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits increased $3.5bn, while Savings Deposits dropped $26.8bn. Small Time Deposits slipped $1.1bn. Retail Money Funds declined $2.9bn.

Money market fund assets declined $10.2bn to an almost one-year low $2.574 TN. Money Fund assets were down $145bn y-t-d, while gaining $10.9bn from a year ago, or 0.4%.

Total Commercial Paper fell $11.2bn to $1.032 TN. CP was down $14.1bn year-to-date, while increasing $34bn over the past year, or 3.4%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 79.52 (down 0.6% y-t-d). For the week on the upside, the South African rand increased 1.8%, the Norwegian krone 1.4%, the Swedish krona 1.2%, the South Korean won 1.1%, the Brazilian real 1.0%, the Mexican peso 0.9%, the Canadian dollar 0.6%, the Swiss franc 0.4%, the Taiwanese dollar 0.4%, the British pound 0.4%, the Singapore dollar 0.3%, the Danish krone 0.3% and the euro 0.3%. For the week on the downside, the New Zealand dollar declined 0.1%. The Japanese yen and Australian dollar were about unchanged.

Commodities Watch:

The CRB index declined 1.1% this week (up 9.6% y-t-d). The Goldman Sachs Commodities Index fell 1.0% (up 2.9%). Spot Gold slipped 0.3% to $1,300 (up 7.8%). July Silver was down 0.9% to $19.55 (up 1%). May Crude declined 84 cents to $99.76 (up 1%). June Gasoline fell 2.7% (up 6%), while June Natural Gas added 0.3% (up 11%). July Copper lost 0.7% (down 10%). May Wheat gained 1.0% (up 17%). May Corn dropped 2.6% (up 17%).

U.S. Fixed Income Bubble Watch:

April 30 – Bloomberg (David Carey and Sabrina Willmer): “The failure of Energy Future Holdings Corp., known as TXU Corp. when KKR & Co., TPG Capital and Goldman Sachs Capital Partners acquired it for $48 billion in 2007, and the stumbles of other huge deals of the past decade have reshaped how major buyout firms go about their trade. The… utility’s bankruptcy yesterday ended the biggest leveraged buyout on record and will wipe out most of the $8.3 billion of equity that investors led by three of the world’s largest private-equity firms sank into the company. ‘Energy Future is emblematic of the peak of the buyout boom, when firms did very high-priced, over-leveraged deals that left little room for error,’ said Steven Kaplan, professor at the University of Chicago Booth School of Business. ‘When you buy into a cyclical industry at the peak and you get the bet wrong, bad things happen.’ TXU marked the climax of an era when buyouts stretched into the tens of billions on dollars and Carlyle Group LP’s David Rubenstein predicted there would be a $100 billion LBO.”

May 1 – Bloomberg (Christine Idzelis): “Investors pulled $664 million from U.S. leveraged-loan funds in the week ended yesterday, the biggest withdrawal since August 2011, according to Lipper. It’s the third-straight week of outflows from the funds, which last month snapped an unprecedented 95 consecutive weeks of inflows… Investors have deposited a net $7.5 billion into funds that buy leveraged loans in the first four months of this year, compared with a record $62.9 billion in all of 2013… The tide is turning in the market for speculative-grade loans as investors refuse to buy some deals deemed too risky. At least three were pulled in the past month…”

April 30 – Financial Times (Tom Braithwaite, Ed Hammond, Tracy Alloway and Martin Arnold): “A US regulatory crackdown on the $600bn leveraged loan market is driving borrowers to alternative lenders known as ‘shadow banks’, according to market participants. Bankers said the Federal Reserve and Office of the Comptroller of the Currency had stepped up their policing of the market, which provides financing for big corporate buyouts. Bankers said the Federal Reserve and Office of the Comptroller of the Currency had stepped up their policing of the market, which provides financing for big corporate buyouts. Following a review, officials told banks in January that they were not satisfied with their lending practices and instructed them to make only ‘rare’ exceptions to 2013 guidelines that warned against granting loans greater than six times a company’s earnings. Senior executives at two of the top US banks said buyout firms had responded by seeking leveraged loans from less-regulated entities, including foreign banks, hedge funds and broker-dealers… ‘Is it really bad that JPMorgan has a lot of people on the street trying to find loans and then a lot of people trying to find investors?’ said one banker, not from JPMorgan. ‘That’s the essence of the US capital markets. Instead we’re going to find 100 hedge funds to go do it.”

April 30 – Bloomberg (Sarah Mulholland): “The growing din surrounding loosening standards in the commercial-mortgage bond market is doing little to deter buyers. Investors are lapping up the securities and accepting less interest to do so even as Moody’s… warns that risks are building in debt linked to properties ranging from shopping malls and skyscrapers to hotels… ‘There is no doubt underwriting is getting weaker,’ Keerthi Raghavan, a debt analyst at Barclays… said… The pace of deterioration ‘really picked up steam starting in the middle of 2013.’ Banks are loosening terms for property owners amid rising competition to underwrite loans and package them into bonds, sparking concern that standards are slipping back toward the lax norms that precipitated the real estate crash in 2008. That’s allowing landlords to pile on more debt… The size of loans relative to property values, a measure known as loan-to-value, or LTV, has climbed to within five percentage points of the 2007 boom-era peak of 117.5 percent, Moody’s said…”

May 1 – Bloomberg (Christine Idzelis and Kristen Haunss): “The tide is turning in the market for speculative-grade loans as investors refuse to buy some deals deemed too risky. Rocket Software Inc. pulled $725 million of loans from the market this week that would have refinanced debt and paid for a dividend to its co-founders and private-equity firm Court Square Capital… The deal is at least the third to be withdrawn in the last month, with cable TV provider WideOpenWest Finance LLC canceling $1.97 billion in loans and Dutch LLC scrapping a $200 million debt offering. The loan market is starting to show signs of tightening more than six months after the Federal Reserve and Office of the Comptroller of the Currency sent letters to banks telling them to improve their deteriorating underwriting standards. Investors are demanding better terms and pulled cash from leveraged-loan funds the last two weeks, snapping an unprecedented 95 straight weeks of inflows.”

Federal Reserve Watch:

April 29 – Bloomberg (Jeff Kearns): “Janet Yellen’s effort to provide clarity on the outlook for the Federal Reserve’s main interest rate by publishing policy makers’ forecasts is instead creating confusion. Fed officials released projections last month showing their benchmark interest rate rising faster than they previously estimated, pushing bond yields higher. Within an hour, Chair Yellen played down the projections and told investors to instead focus on the central bank’s policy statement, which emphasized keeping the rate low… Further mixed signals risk a surge in bond-market volatility as policy makers begin what will be ‘an extraordinarily complicated tightening cycle,’ said Drew Matus, a former markets analyst at the Federal Reserve Bank of New York. ‘The Fed’s communications challenges have gotten worse over time as they’ve tried to become more transparent,’ said Matus… deputy chief U.S. economist at UBS AG.”

U.S. Bubble Watch:

May 2 – Bloomberg (Victoria Stilwell): “Even the strongest job growth in two years isn’t enough to entice more people into the labor force, one of the biggest conundrums of the U.S. economic expansion. The share of the working-age population either employed or seeking a job declined in April for the first time this year, helping drive the unemployment rate down to 6.3%, the lowest since September 2008. At 62.8%, the so-called participation rate matches the lowest since March 1978. A shrinking workforce saps the U.S. of the manpower needed to boost the expansion to a higher level, keeping the world’s largest economy merely plodding along.”

May 2 – Wall Street Journal (Joe Light): “Retirement investors are putting more money into stocks than they have since markets were slammed by the financial crisis six years ago. Stocks accounted for 67% of employees' new contributions into retirement portfolios in March, according to the most-recent data from Aon Hewitt, which tracks 401(k) data for 1.3 million people at large corporations. That is the highest percentage since March 2008… and compares with 56% in March 2009, when the market hit bottom.”

April 30 – Reuters (Margaret Chadbourn): “Mortgage finance companies Fannie Mae and Freddie Mac could need to draw as much as $190 billion in additional taxpayer aid if the economy suffered a severe downturn, their regulator said… The Federal Housing Finance Agency, which oversees the two taxpayer-owned companies, offered the estimate as the worst-case scenario in an analysis modeled on the stress tests conducted on the nation's biggest banks. The analysis relies heavily on U.S. home price projections. The stress tests are required by the Dodd-Frank Act and are designed to determine whether regulated entities have enough capital to weather adverse economic conditions… So far, Fannie Mae and Freddie Mac have drawn $187.5 billion from the U.S. Treasury, while returning $202.9 billion in dividends after posting record profits.”

April 29 – Bloomberg (Rob Gloster): “A stock based on the earning potential of San Francisco 49ers tight end Vernon Davis gained $2 to close its first day of trading at $12, Fantex Inc. said… Fantex said 496 of the 421,100 shares based on the future earnings of the National Football League player sold yesterday. Fantex said last October that it had agreed to buy 10% of the future earnings of Davis, a two-time Pro Bowl selection, for $4 million.”

Global Geopolitical Watch:

May 1 – Bloomberg (Daryna Krasnolutska and Kateryna Choursina): “Ukraine’s east is slipping out of the government’s grasp as separatists take over more official buildings, with the International Monetary Fund warning extra financing may be needed if control over the industrial heartland is lost. Armed men stormed the Donetsk regional prosecutors’ office today, throwing stones and stun grenades. Pro-Russian rebels in nearby Slovyansk said they’d begun talks to swap international monitors abducted last week, the Interfax news service said. German Chancellor Angela Merkel urged Russian President Vladimir Putin today to help free the observers. ‘The government doesn’t control the situation in Donetsk as well as part of the Donetsk region,’ acting Ukrainian President Oleksandr Turchynov said… ‘Because there is a real threat of Russia starting a continental war, our army is on full combat alert.’”

April 30 – Reuters (Ben Blanchard): “China said on Wednesday it would conduct joint naval drills with Russia in the East China Sea off Shanghai in late May, in what it called a bid to deepen military cooperation. China’s defense ministry did not give an exact location in the East China Sea, where Beijing is locked in an increasingly bitter dispute with Japan over the ownership of a group of uninhabited islets… China alarmed Japan, South Korea and the United States last year when it announced an air defense identification zone for the East China Sea, covering the islands. The Beijing government, which is swiftly ramping up military spending, has regularly dispatched patrols to the East China Sea since it established the defense zone. China was angered last week after U.S. President Barack Obama assured ally Japan that Washington was committed to its defense, including the disputed isles.”

May 1 – Reuters: “Japan will conduct a military exercise this month to practice defending an island, the Defense Ministry said on Thursday, underscoring concern about East China Sea islands controlled by Japan but claimed by China. The dispute over the islands, called the Senkaku in Japan and Diaoyu in China, has raised fears of a clash between the Asian neighbors which could even drag in the United States… Japan’s Defense Ministry said the island defense exercise would run from May 10 to May 27 on a small uninhabited island in the Ryukyu chain, some 600 km (375 miles) northeast of the disputed isles… It will be the first time that Japan's military, known as the Self-Defense Forces, will use an actual island for island defense training involving its ground, air and maritime divisions.”

May 1 – Reuters: “Russia staged a huge May Day parade on Moscow’s Red Square for the first time since the Soviet era on Thursday, with workers holding banners proclaiming support for President Vladimir Putin after the seizure of territory from neighboring Ukraine. Thousands of trade unionists marched with Russian flags and flags of Putin's ruling United Russia party onto the giant square beneath the Kremlin walls, past the red granite mausoleum of Soviet state founder Vladimir Lenin. Many banners displayed traditional slogans for the annual workers' holiday, like: ‘Peace, Labour, May’. But others were more directly political, alluding to the crisis in neighboring former Soviet republic Ukraine… Unlike Kremlin leaders in Soviet times, Putin did not personally preside at the parade from atop the mausoleum. But he carried out another Soviet-era tradition by awarding ‘Hero of Labour’ medals to five workers at a ceremony in the Kremlin. He revived the Stalin-era award a year ago.”

April 29 – Bloomberg (Stephen Bierman): “Exxon Mobil Corp.’s dream of drilling in the Russian Arctic may risk running aground on the politics of Ukraine. The company plans to start drilling in August in the Arctic’s remote Kara Sea -- the centerpiece of Exxon’s global alliance with Russian state-controlled OAO Rosneft. The partnership, which includes shale exploration in Siberia and joint venture fields in Texas, will come under greater scrutiny after the U.S. placed sanctions on Rosneft’s Chief Executive Officer Igor Sechin… Russian President Vladimir Putin said today that further sanctions may force Russian to reconsider Western companies’ participation in key industries, including energy. He told reporter he sees no need for retaliatory sanctions now.”

May 2 – Dow Jones (Matthew Karnitschnig): “Angela Merkel is carrying a clear message from Germany's business lobby to the White House: No more sanctions. Several of the biggest names in German business--including chemical giant BASF SE, engineering group Siemens AG, Volkswagen AG, Adidas AG and Deutsche Bank AG--have made their opposition to broader economic sanctions against Russia clear in recent weeks… As a result, Germany's position on additional, tougher sanctions is unlikely to shift, barring a dramatic escalation of the conflict in Ukraine--a message Ms. Merkel is expected to deliver to President Barack Obama when they meet in Washington on Friday, officials in Berlin say.”

April 30 – Bloomberg (Natasha Doff): “The U.S. is holding off on sanctions against some Russian companies because it doesn’t want to hurt American holders of their debt, according to Fitch… ‘We’ve heard quite a lot of anecdotal evidence that there’s actually a lot of consultation with big investors and bondholders in terms of what sanctions might be imposed by the U.S.,’ James Watson, a managing director at Fitch, told reporters… ‘It seems there has been a significant push back on potentially sanctioning companies that have significant foreign debt.’”

China Bubble Watch:

May 1 – Financial Times (Simon Rabinovitch): “When the Chinese economy stumbled out of the gate this year, slowing more than expected and serving up the country’s first-ever bond default, investors took the bad news in their stride. It was only a matter of time, they reckoned, before the government would come to the rescue. But a month has passed since talk swirled of a mini-stimulus plan and there has been little in the way of policy moves to justify such a billing. The more subdued reality – that Beijing cannot and does not want to indefinitely prop up growth – is beginning to sink in, casting a pall over Chinese asset prices from equities to property… The biggest concerns are focused on property, a sector that fuelled nearly a quarter of the country’s growth last year, according to Moody’s…. Sales have slowed sharply just as a large supply of new homes has come on to the market. In the first three weeks of April, sales volumes in China’s 40 top cities were down 24% year on year, according to Soufun, a property information company. ‘We do not believe that economic conditions have stabilised. The biggest direct pressure on the economy is coming from the property market,’ analysts with CEBM, a Shanghai-based advisory, wrote… ‘Even big developers have started cutting housing prices by about 10-15%, and price cuts in the primary (new) home market have led to a clear worsening of the secondary housing market.”

April 30 – Dow Jones (Esther Fung): “China’s housing market saw slower growth in April as new data indicated that more cities are experiencing price declines and weaker sales, prompting some local authorities to loosen regulations originally aimed at curbing overheated property sales. Average new home prices rose 9.1% in April from a year earlier, decelerating for the fourth straight month after March’s 10.0% rise and February's 10.8% gain… Sales remained sluggish in April after a 7.7% decline in the first quarter, analysts said, as home buyer interest waned amid expectations of further price cuts and more hurdles getting mortgages as banks tighten lending requirements in the face of credit concerns and slower growth. China's property market accounted for about 23% of China's gross domestic product last year, fueling everything from construction to sales to furniture purchases. Home buyers who earlier might have purchased a second or third home for investment purposes are increasingly turning to alternative investments, some said, including wealth management products that offer higher yield or homes abroad. Others with several properties are looking to unload them in hopes of getting higher returns elsewhere.”

April 29 – Bloomberg: “Almost all Chinese provinces failed to meet their growth targets in the first quarter even after scaling back their ambitions as the government instructs officials to focus on reining in debt and curbing pollution. Thirty of 31 provinces and municipalities reported missing their goals, with the biggest shortfall in northeastern Heilongjiang, where an expansion of 4.1% compared with an 8.5% target for the year. Most localities’ targets are lower than in 2013… Premier Li Keqiang risks the nation sliding into a deeper slowdown as the government cracks down on overcapacity in the steel industry, wrestles with shadow banking risks and rolls out economic restructuring measures.”

April 30 – Bloomberg: “Moody’s… said the risk more Chinese property developers will default, after the collapse of Zhejiang Xingrun Real Estate Co., will make it harder for them to raise funds just as apartment sales cool. The builders have issued $500 million of offshore yuan or dollar bonds this month, compared with $1.6 billion in the same period last year and a record $9.2 billion in the first quarter… ‘Investors are concerned certain developers will go into more defaults,’ Franco Leung, an analyst at Moody’s said…, predicting a drop in developers’ offshore debt issuance in the coming six months. ‘While China’s economy is slowing, there will be stress on companies with weaker credit profiles.’ …Property sales in the period fell 5.2% from a year earlier and the floor space of new property construction dropped 25.2%...”

April 29 – Dow Jones: “China's banking regulator warned of growing financial risk from bad loans as the economy posts slower growth. The China Banking Regulatory Commission said… banks should pay more attention to repayment risks, adding that banks needed to be alert to potential problems in the property sector as well as from local government financing vehicles. The slowing economy is ‘exacerbating operational difficulties of some enterprises,’ the banking regulator said.”

April 29 – Financial Times (Lucy Hornby): “China plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. The China Banking Regulatory Commission warned banks to tighten controls over letters of credit for iron ore imports in a document that caused iron ore futures in China to drop 5% on Monday… Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds. But the bulk and difficulty of transporting iron ore makes it a cumbersome material for raising money, limiting its flexibility as a financing tool compared with copper or gold.”

April 29 – MarketNews International: “The People’s Bank of China said… that a stable and orderly exit by the US Federal Reserve from its quantitative easing program would help to boost China's export competitiveness and lower its economic costs. In its 200-page financial stability report, the Chinese central bank also warned that Chinese banks' asset quality was worsening, noting that bad loans to steel, solar panel and shipping industries were growing rapidly. The PBOC said its stress test with 17 major Chinese banks at the end of last year found that three banks failed to meet regulatory requirements in the worst-scenario liquidity test, but that all of them were good in the credit-risk test and when facing rising interest rates.”

April 29 – Associated Press (Christopher S. Rugaber): “Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it. That's the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing's high-stakes drive to reform its economy - the world's second-largest - will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run… On Monday, the International Monetary Fund issued a warning about China's private debt. It released a report citing ‘rising vulnerabilities’ in China's financial system, including lending outside traditional banks. Lending by that ‘shadow’ banking system now equals one-quarter of China's economy, the report said. The IMF also pointed to recent defaults in credit card and other debt sold to investors by banks and heavy debts owed by local governments. If it continues, ‘this could spark adverse financial market reaction both in China and globally,’ the IMF said. The bubble has caused land prices in China to double in five years… Outstanding credit surged from 130% of the economy in 2008 to 200% in 2013, according to Capital Economics, a forecasting firm.”

May 1 – Bloomberg: “China’s manufacturing grew less than analysts estimated in April, highlighting weakness in the economy from exports to construction… The Purchasing Managers’ Index was at 50.4, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing… Today’s data showed weakness in export orders that may make it harder for Premier Li Keqiang to avoid a deeper slowdown after property construction plunged in the first quarter and economic growth cooled.”

Global Bubble Watch:

May 2 – Bloomberg (Hugh Son): “JPMorgan…, the biggest U.S. bank, said second-quarter trading revenue probably will fall about 20% from a year earlier. The projection reflects ‘a continued challenging environment and lower client activity levels,’ the… company said… ‘Actual results will depend heavily on performance throughout the remainder of the quarter, which can be volatile.’ Chief Executive Officer Jamie Dimon, 58, was the first head of a major U.S. bank to warn investors of a slump in trading this year, saying in February that revenue had fallen 15% at that point. Continued weakness has spurred analysts including Chris Mutascio of Stifel Financial Corp.’s KBW unit to ponder whether the drop in fixed-income trading might be lasting.”

April 28 – Bloomberg (Jodi Xu, Will Robinson and Tara Lachapelle): “The value of takeovers announced in 2014 hit the $1 trillion mark today, reaching that level at the fastest pace in seven years. That threshold was crossed 54 days earlier than in 2013, after more than $300 billion in purchases were announced by companies… in April… That total excludes another $175 billion in proposals by Pfizer Inc., Mylan Inc. and others that have been rebuffed or are still awaiting final agreements… If dealmaking continued at April’s rate for the rest of the year, 2014 would see almost $4 trillion of deals announced, making it the second most active year for M&A ever, behind 2007, data compiled by Bloomberg show.”

May 1 – Bloomberg (Sarika Gangar): “Bonds from the Americas to Asia and Europe are generating their best returns through the first four months of a year on record, as slower-than-forecast growth and declining inflation vindicate the bulls. Returns of 0.54% in April on debt ranging from corporate and government bonds to mortgage-backed securities bring gains for the year to 2.7%, according to the Bank of America Merrill Lynch Global Broad Market Index. That has more than erased the losses of 0.31% investors were handed in 2013 after the Federal Reserve started preparing to withdraw five years of unprecedented stimulus measures.”

April 29 – Financial Times (Josh Noble): “Hong Kong has supplanted New York as the city that never sleeps – at least for bankers on the city’s bond syndicate desks. Asian companies have borrowed more in bond markets this month than ever before as the hunt for yield gets back into full swing following the Easter lull. Some banks are so busy that their bond desks are effectively open 24 hours a day. So far in April, Asian borrowers have tapped credit investors to the tune of $27bn, according to… Dealogic, surpassing the previous record for a single month set in January this year. That brings the total volume for US dollar bond deals in Asia ex-Japan up to $68bn year to date, also a record for the region.”

April 29 – Bloomberg (Tara Lachapelle and Brooke Sutherland): “Drugmakers on an acquisition spree have created a combined $24 billion for shareholders this month, gains that will encourage even more dealmaking. Pfizer Inc. and GlaxoSmithKline Plc are among pharmaceutical companies whose shares advanced after announcing $115 billion of acquisition plans since the end of March.”

May 1 – Bloomberg (Peter Levring): “Carsten Stendevad, chief executive officer of Denmark’s biggest pension fund, says some of the world’s biggest bond markets are becoming dangerously illiquid. Overseeing $130 billion in assets, the 41-year-old former Citigroup Inc. banker is urging policy makers to take seriously evidence that even the safest assets are getting harder to offload amid tighter regulatory requirements. He says ATP struggled to find buyers for about 7 billion euros ($9.7bn) in German government bonds at the end of last year. ‘It was amazing,’ Stendevad said… ‘One of the world’s biggest banks, which before 2008 would have been able to trade any quantity of German government bonds at any time of day, was not even willing to offer a quote for a reasonable size.’”

EM Bubble Watch:

May 2 – Bloomberg (Ksenia Galouchko and Natasha Doff): “Russian bonds fell, sending yields to a seven-week high, and the ruble weakened as Ukraine sent troops to retake the eastern city of Slovyansk from pro-separatist forces in defiance of President Vladimir Putin. The yield on ruble-denominated government debt due February 2027 jumped 20 bps to 9.67%, four bps from the record on March 14, the last trading day before Crimeans voted to join Russia.”

May 2 – Bloomberg (Krystof Chamonikolas and Natasha Doff): “Ukrainian bonds fell, pushing yields to a six-week high, as an offensive against pro-Russia separatists in the country’s east eclipsed investor optimism over the approval of an International Monetary Fund bailout. The yield on the government’s benchmark dollar-denominated notes due in April 2023 rose 25 bps to 10.90%... The yield surged a record 173 bps last month and is up 67 bps this week…”

April 29 – Bloomberg (Lorraine Woellert and Sharon Chen): “The income gap between the rich and poor in China has surpassed that of the U.S. and is among the widest in the world, a report showed, adding to the challenges for President Xi Jinping as growth slows. A common measure of income inequality almost doubled in China between 1980 and 2010 and now points to a ‘severe’ disparity, according to researchers at the University of Michigan. The finding conforms to what many Chinese people already say they believe -- in a 2012 survey, they ranked inequality as the nation’s top social challenge, above corruption and unemployment, the report showed.”

April 28 – Bloomberg (Blake Schmidt and Filipe Pacheco): “President Dilma Rousseff can add another distinction to her tumultuous 3 1/2-year tenure: She has presided over more corporate bond defaults in Brazil than any of her predecessors. Auto-parts maker Sifco SA’s decision to halt payments on its dollar-denominated bonds last week has pushed the amount of defaulted debt to $8 billion during Rousseff’s first term, which ends this year. That’s at least double the amount during the two-term presidencies of predecessors Luiz Inacio da Silva and Fernando Henrique Cardoso, according to Moody’s…”

Japan Watch:

April 30 – Financial Times (Ben McLannahan): “The Bank of Japan kept its policy settings on hold on Wednesday, defying calls from some quarters to take additional action to offset the impact of Japan’s rise in consumption tax, the first in 17 years. At the one-day monetary policy meeting, the second in April, the BoJ elected to keep buying as many long-term government bonds as necessary to pump up the monetary base at an annual pace of about Y60-70tn ($586bn-$684bn), in pursuit of its 2% target for inflation.”

May 2 – Bloomberg (Craig Trudell, Masatsugu Horie and Ma Jie): “Call it Japan’s Great Hangover. Vehicle deliveries last month in Asia’s second-largest auto market fell to the lowest since December 2012 after Japan raised its consumption tax for the first time 17 years… In the run-up to the levy being increased 3 percentage points to 8% on April 1, sales had surged for seven straight months.”

Europe Watch:

April 29 – Bloomberg (Stefan Riecher and Brian Parkin): “European Central Bank President Mario Draghi told German lawmakers that a quantitative-easing program isn’t imminent and is relatively unlikely for now, according to a euro-area official present at the meeting. The central bank stands ready to embark on QE if needed, Draghi said…”

April 29 – Bloomberg (Stefan Riecher): “German inflation accelerated less than economists forecast in April, increasing pressure on the European Central Bank to take action to add stimulus in the euro area. Inflation, calculated using a harmonized European Union method, was 1.1%, up from 0.9% in March, the Federal Statistics Office in Wiesbaden said… Economists predicted a rate of 1.3%...”

April 29 – Bloomberg (Gregory Viscusi): “France’s parliament is due to vote on President Francois Hollande’s plan to cut 50 billion euros ($69bn) of spending to fund lower payroll taxes, a test of his ability to hold his fractured Socialist Party together. While some Socialist members of parliament have grumbled about cuts to welfare payments, Prime Minister Manuel Valls will probably get the go-ahead to implement the cuts…”