Sunday, December 14, 2014

Weekly Commentary, May 23, 2014: How the Euro was (actually) Saved

“To the astonishment of almost everyone in the room, Angela Merkel began to cry. ‘Das ist nicht fair.’ That is not fair, the German chancellor said angrily, tears welling in her eyes. ‘Ich bringe mich nicht selbst um.’ I am not going to commit suicide. For those who witnessed the breakdown in a small conference room in the French seaside resort of Cannes, it was shocking enough to watch Europe’s most powerful and emotionally controlled leader brought to tears. But the scene was even more remarkable, those present said, for the two objects of her ire: the man sitting next to her, French President Nicolas Sarkozy, and the other across the table, U.S. President Barack Obama. It would be the low point in a brutal, recrimination-filled night, one many participants would recall as the nadir of the three-year eurozone crisis. Mr Sarkozy had hoped his leadership of the Group of 20 summit would cement his standing on the global stage en route to re-election. Instead, everything was falling apart. Greece was imploding politically; Italy, a country too big to bail out, appeared just days away from being cut off from global financial markets; and Ms. Merkel, try as Mr. Sarkozy and Mr. Obama might, could not be convinced to increase German contributions to the eurozone’s ‘firewall’ – the ‘big bazooka’ or ‘all of money’ they believed had to grow dramatically to fend off attacks by panicking bond traders.”

“It Was the Point Where the Eurozone Could have Exploded,” read the headline for the first of Peter Spiegel’s terrific six-part Financial Times series “How the Euro was Saved.”

It’s an interesting juncture to revisit the 2011-2012 Eurozone crisis. Italian and Spanish sovereign bond yields are these days near record lows. Italy's 10-year yields ended the week at 3.16%, down from the crisis-period high of about 7.50%. Yields in Spain closed below 3%, after trading above 7% in 2012. European stock prices are generally not far from record highs. The bullish view is that sustainable recovery has taken hold and the threat posed to the euro and European integration has long passed. Meanwhile, Italy, with sovereign debt at 133% of GDP, has had one positive quarter of growth (0.1%) in the past 11. And despite extraordinary monetary stimulus and booming securities markets, the French economy has stagnated with unemployment above 10%.

I believe history will be written in a way that surprises most of today’s pundits and analysts. Things are not as commonly perceived (in our “money”-induced “Truman Show” World). Spiegel’s behind-the-scenes account confirms the dire Eurozone prognosis back in 2011/12 - that at the time was really downplayed in the media and by analysts. And from my perspective, the so-called “Draghi Plan” (unlimited ECB backstop support for troubled bond markets) gets too much Credit for resolving the crisis. I actually believe concerted global central bank liquidity operations were primarily responsible for reversing the destabilizing outflow of funds from periphery European bonds, banks and the euro.

Without Ben and Haruhiko, Mario’s “bazooka” would have lacked street credibility. Indeed, the flooding of the global system with central bank liquidity resuscitated Bubble Dynamics throughout the Eurozone – and global markets more generally. It’s premature to celebrate.

It was July 26, 2012 that Draghi stated his now famous “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” A week later, under the headline “Synchronized Central Banking?,” The Wall Street Journal’s Jon Hilsenrath and Kristina Peterson wrote: “On back-to-back days this week, U.S. Federal Reserve officials, followed by the head of the European Central Bank, signaled they were edging closer to taking new actions to support their slices of the global economy. So it’s a fair time to ask: How much do global central banks work together?”

Around the time the Bernanke Fed signaled an extraordinary round of “open-ended” QE, the Bank of Japan began their unprecedented “money” printing operation. Fed Credit has now expanded $1.466 TN, or 52%, since November 2012. And since the summer of 2012, Bank of Japan Credit has expanded 70%, or almost $1.0 TN, to $2.4 TN. It is as well worth noting that global central banks’ “international reserves” have surged $1.5 TN since the summer of 2012. The world has indeed been awash in central bank liquidity like never before. How this all plays out is anything but clear.

I believe central bank measures implemented in the summer of 2012 will go down in history as a catastrophic mistake – akin to Benjamin Strong’s infamous 1927 market “coup de whiskey.” These measures unleashed powerful “Terminal Phase” Bubble excess in U.S. stocks, Credit and assets markets; Japanese equities; Chinese Credit; European stocks and bonds; EM Credit, etc. Already destabilizing speculation was further stoked, while necessary global financial and economic adjustments were obstructed.

Importantly, Draghi’s “ready to do whatever it takes… And believe me, it will be enough” was a direct threat aimed at speculators that had accumulated large bets against European debt and the euro. It’s my view that the Fed and BOJ’s extraordinary measures to devalue the dollar and yen – as the ECB refrained from QE - were instrumental in bolstering the vulnerable euro. And with global central banks supporting the euro coupled with Draghi promising a bond backstop, suddenly European periphery bonds were transformed into an incredible opportunity for speculation - in a world awash in free-flowing speculative finance. Stated differently, the major central banks dictated that the hedge funds and speculators reverse their bearish euro-related bets and instead go leveraged long. This powerful Bubble flourishes to this day.

Call me a nut, but I’m convinced the world is a much more dangerous place today than back in 2012. I don’t believe serious structural issues can be resolved by central bank monetary inflation. And I don’t view central bank market backstops as conducive to financial stability. Quite the opposite: increase the scope of a market backstop and you’ll correspondingly increase the size of the speculative Bubble. From Spiegel’s reporting, we now know that it was the U.S. and Italy that first pressed for a big (Fed-like) ECB/Eurozone financial backstop. Germany balked.

Now viewed as “one of the most successful monetary policies” ever, I believe the ECB backstop ensured only more dangerous excess. Financial asset mis-pricing has gone to greater extremes and speculative excesses have intensified. Underlying debt fundamentals have continued to deteriorate. Yet complacency is only more deeply entrenched. This creates latent financial and economic fragility. Meanwhile, global Bubbles stoke inequality and animosity around the world.

Central to my current macro thesis is the precarious divergence between inflated global securities prices – versus mounting risks associated with a rapidly deteriorating geopolitical backdrop and weakened fundamental prospects. This week saw the imposition of martial law followed by military coup in Thailand. I can only cringe when I read the suggestion of an “Asian spring.” In Libya, an escalating civil war risks exacerbating already frightening regional instability. Crude oil prices jumped $2.33 this week to a near three-year high.

May 23 – AFP: “‘In the modern, interconnected world, economic sanctions as an instrument of political pressure can have a boomerang effect, and in the end they have an impact on the businesses and economies of the countries that initiated them,’ Putin told an economic forum in Saint Petersburg. He also lashed out at the global influence of the United States. ‘The model of a unipolar world has failed. Everyone can easily see it today, even those who try to act in the usual manner, to keep their monopoly, to dictate their rules of the game in politics, commerce and finance, to impose their cultural and behavioral norms,’ he said. ‘The world is multipolar, people want to decide their own destinies, preserve their cultural and historical identities and civilizations,’ Putin said.”

It will be an interesting weekend in Europe. The Ukraine presidential vote will be decided Sunday. Throughout the European Union elections are being held for the European Parliament. To ‘save’ the euro, a small group of individuals had to push rules and democratic principles aside. Central bankers gambled that their massive ‘money’ printing experiment and market intervention would jumpstart a self-sustaining recovery. There are steep costs associated with such desperate acts, certainly including an increasingly polarized Europe and world. It is quite possible that so-called ‘fringe’ parties will be the biggest winners in EU elections. The European parliament could face a powerful anti-euro, anti-establishment contingent.

May 23 - Washington Post (Griff Witte): “It’s an election like no other: One continent; 28 nations; 16,000 candidates; 350 million eligible voters. The European parliamentary elections only come around once every five years, and every time they do, the world reacts with a giant, collective shrug. As ever-lower turnout rates show, even Europeans seem indifferent to their one chance to directly choose the E.U.'s leaders… And yet, this year’s vote… could be far more interesting than most. It could also matter more… If fringe parties do especially well in the European vote, it could also give them momentum going into national elections. Britain’s vote, for instance, is now just a year away, and UKIP is positioning itself to play the spoiler. Vladimir is watching: Perhaps no one outside Europe is paying closer attention to the European elections than Russia’s president. Ukraine’s crisis has hardly been a blip in the election campaign, but it could become a major issue in parliament if the anti-establishment parties do well. That’s because those on both the far right and the far left are serious admirers of Putin, who they see as just the sort of nationalist, tradition-minded, Alpha male that Europe so sorely lacks. A strong showing by the fringe could drive a wedge through Europe at exactly the moment the continent’s leaders are trying to hold the line against Moscow.”

Financial Times (Peter Spiegel): “…Less than a year after that November 2011 night, the existential crisis for Europe’s single currency would, for all intents and purposes, be over. The markets that once threatened to tear the euro apart would be tamed… When the history of the eurozone crisis is written, the period from late 2011 through 2012 will be remembered as the months that forever changed the European project. Strict budget rules were made inviolable; banking oversight was stripped from national authorities; and the printing presses of the European Central Bank would become the lender of last resort for failing eurozone sovereigns.”

There’s a far-reaching contradiction that I fear is going to come back to bite Europe. To “save” the euro, a small cadre of officials, including President Obama, had to impose a more unified and uniform Europe. More rules, restraints and operations dictated from Brussels and Frankfurt; less individuality and sovereignty for citizens, politicians and governments throughout a diverse and unsettled continent. Yet powerful secular forces – in Europe and globally – are pulling persistently in the exact opposite direction: less integration and less cooperation – deeper animosities and separatist proclivities. The perception is of a shrinking economic pie – an unjust “zero sum game” world – which dictates a more determined struggle to procure one’s share. The jury remains out on European integration and the euro currency experiment – awaiting the outcome of the global monetary experiment.

Friday Putin gave another intriguing speech and responded to a series of pointed questions. Bloomberg went with the market-friendly headline “Putin Says Russia Will Work with Elected Ukrainian President.” I would instead focus on more substantive comments, including the quotes provided above. This man is emboldened and has a message that resonates much more around the world than most in the West are willing to accept. He clearly has friends in Beijing, with a number of “rogue” nations, and likely as well in Brasilia, New Delhi and elsewhere. Putin has his sights focused way beyond Ukraine. He thinks he’s in the process of changing the world. In the U.S., well, we seem overly preoccupied with one heck of a market Bubble.

For the Week:

The S&P500 gained 1.2% (up 2.8% y-t-d), and the Dow added 0.7% (up 0.2%). The Utilities dropped 1.2% (up 8.2%). The Banks rallied 2.0% (down 1.7%), and the Broker/Dealers recovered 2.8% (down 4.7%). The Morgan Stanley Cyclicals were up 1.2% (up 3.7%), and the Transports jumped 1.8% (up 7.9%). The S&P 400 Midcaps advanced 1.3% (up 2.0%), and the small cap Russell 2000 jumped 2.1% (down 3.2%). The Nasdaq100 surged 2.5% (up 3.4%), and the Morgan Stanley High Tech index gained 2.4% (up 2.5%). The Semiconductors jumped 2.4% (up 10.3%). The Biotechs gained 1.9% (up 9.4%). With bullion about unchanged, the HUI gold index slipped 0.4% (up 9.3%).

One- and three-month Treasury bill rates ended the week at three bps. Two-year government yields slipped two bps to 0.34% (down 4bps y-t-d). Five-year T-note yields declined three bps to 1.525% (down 22bps). Ten-year Treasury yields increased one basis point to 2.53% (down 50bps). Long bond yields gained five bps to 3.39% (down 58bps). Benchmark Fannie MBS yields were down a basis point to 3.21% (down 40bps). The spread between benchmark MBS and 10-year Treasury yields narrowed two to 68 bps. The implied yield on December 2015 eurodollar futures fell four bps to 0.885%. The two-year dollar swap spread increased one to 16 bps, while the 10-year swap spread declined one to nine bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined two to 63 bps. An index of junk bond risk sank 25 to 321 bps. An index of emerging market (EM) debt risk fell four to 280 bps.

Debt issuance was big. Investment-grade issuers included Amgen $4.5bn, Time Warner $2.0bn, AmerisourceBergen $1.1bn, Cimarex Energy $750 million, CSC Holdings $750 million, Macy's $500 million, Eneable Midstream Partners LP $1.1bn, NASDAQ OMX Group $500 million, Sanmina $375 million, Comerica $350 million, ACE INA $700 million, Kimberly-Clark $600 million, ERAC Finance $500 million, KKR Group $500 million, South Carolina E & G $300 million, and Highwoods Realty $300 million.

Junk funds saw inflows of $744 million (from Lipper). Junk issuers included Transdigm $2.35bn, Post Holdings $1.26bn, Ceridian $855 million, 24 Hour Holdings $500 million, Rosetta Resources $500 million, Enova International $500 million, Laredo Petroleum $450 million, DriveTime Automotive Group $400 million, Scientific Games International $350 million, Triumph Group $300 million and Live Nation Entertainment $250 million.

Convertible debt issuers this week included Live Nation Entertainment $250 million and Amyris $75 million.

International dollar debt issuers included KFW $6.0bn, Petroleos de Venezuela $5.0bn, Deutsche Bank $3.5bn, Japan Bank for International Cooperation $2.5bn, Royal Bank of Scotland $2.25bn, Credit Suisse $2.0bn, Ecopetrol $2.0bn, Sweden $1.5bn, Telecom Italia $3.0bn, PT Pertamina $1.5bn, Inmarsat $1.0bn, Kommunalbanken $1.0bn, Seagate $1.0bn, Empresas ICA $700 million, Bank Nederlandse Gemeenten $700 million, AON $800 million, Nakama RE $300 million, Keekay Offshore Partners $275 million and Sanders RE $200 million.

Ten-year Portuguese yields increased two bps to 3.76% (down 237bps y-t-d). Italian 10-yr yields rose 9 bps to 3.16% (down 97bps). Spain's 10-year yields gained three bps to 2.99% (down 117bps). German bund yields jumped eight bps to 1.41% (down 52bps). French yields increased three bps to 1.82% (down 74bps). The French to German 10-year bond spread narrowed five to 40 bps. Greek 10-year yields fell 37 bps to 6.49% (down 193bps). U.K. 10-year gilt yields rose seven bps to 2.64% (down 38bps).

Japan's Nikkei equities index rallied 2.6% (down 11.2% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.59% (down 15bps). The German DAX equities index jumped 1.4% (up 2.3%). Spain's IBEX 35 equities index was up 0.8% (up 6.5%). Italy's FTSE MIB index gained 0.5% (up 9.4%). Emerging equities were mostly higher. Brazil's Bovespa index sank 2.5% (up 2.2%). Mexico's Bolsa was little changed (down 1.9%). South Korea's Kospi index increased 0.2% (up 0.3%). India’s Sensex equities index jumped another 2.4% to a new record high (up 16.6%). China’s Shanghai Exchange increased 0.4% (down 3.9%). Turkey's Borsa Istanbul National 100 index surged 4.1% (up 15.1%). Russia's MICEX equities index advanced 1.8% (down 4.3%).

Freddie Mac 30-year fixed mortgage rates declined six bps to a six-month low 4.14% (up 55bps y-o-y). Fifteen-year fixed rates fell 4 bps to 3.25% (up 48bps). One-year ARM rates were unchanged at 2.43% (down 12bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 31 bps to 4.51% (up 48bps).

Federal Reserve Credit last week rose $2.7bn to a record $4.277 TN. During the past year, Fed Credit expanded $940bn, or 28.2%. Fed Credit inflated $1.466 TN, or 52%, over the past 80 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt dropped $12.0bn to $3.272 TN. "Custody holdings" were down $81.6bn year-to-date, with a one-year decline of $39.5bn, or 1.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $787bn y-o-y, or 7.1%, to $11.119 TN. Over two years, reserves were $1.442 TN higher for 14% growth.

M2 (narrow) "money" supply increased $4.6bn to a record $11.270 TN. "Narrow money" expanded $716bn, or 6.8%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits dropped $25.3bn, while Savings Deposits grew $25.6bn. Small Time Deposits were little changed. Retail Money Funds gained $3.1bn.

Money market fund assets declined $3.9bn to $2.584 TN. Money Fund assets were down $135bn y-t-d and dropped $17.3bn from a year ago, or 0.7%.

Total Commercial Paper slipped $1.3bn to $1.037 TN. CP was down $8.8bn year-to-date, while increasing $4.0bn over the past year, or 0.3%.

Currency Watch:

The U.S. dollar index added 0.4% to 80.39 (up 0.4% y-t-d). For the week on the upside, the South African rand increased 0.5%, the Mexican peso 0.4%, the British pound 0.1% and the Taiwanese dollar 0.1%. For the week on the downside, the Australian dollar declined 1.4%, the Swedish krona 1.2%, the euro 0.5%, the Japanese yen 0.5%, the Danish krone 0.5%, the Norwegian krone 0.4%, the Brazilian real 0.4%, the Swiss franc 0.4%, the Singapore dollar 0.2% and the South Korean won 0.1%.

Commodities Watch:

The CRB index gained 0.8% this week (up 10.0% y-t-d). The Goldman Sachs Commodities Index added 0.9% (up 4.1%). Spot Gold was about unchanged at $1,293 (up 7.2%). July Silver gained 0.5% to $19.42 (up 0.2%). June Crude jumped $2.33 to $104.35 (up 6%). June Gasoline gained 1.7% (up 9%), while June Natural Gas slipped 0.2% (up 4%). July Copper gained 0.7% (down 7%). July Wheat sank 3.2% (up 8%). July Corn declined 1.1% (up 13%).

U.S. Fixed Income Bubble Watch:

May 21 – Wall Street Journal (Gillian Tan): “Wall Street banks are financing more private-equity takeovers with high levels of debt, despite warnings by regulators to reduce the amount of risky loans they make. The Federal Reserve and the Office of the Comptroller of the Currency last year issued guidance urging banks to avoid financing leveraged buyouts in most industries that would put debt on a company of more than six times its earnings before interest, taxes, depreciation and amortization, or Ebitda. The Fed and the OCC also told banks to limit borrowing agreements that stretch out payment timelines or don’t contain lender protections known as covenants. Still, 40% of U.S. private-equity deals this year have used leverage above that six-times ratio deemed the upper acceptable limit by regulators, according to data compiled by S&P Capital IQ LCD. That is the highest percentage since the prefinancial-crisis peak of 52% of buyout loans in 2007… In recent months, bank regulators have impressed upon banks that they aren’t happy with the amount of loans fueling buyouts, in which private-equity firms borrow money to buy companies with the intention of later selling them for a profit.”

May 21 – Wall Street Journal (Al Yoon): “The latest place where investors are taking on more risk in exchange for apparently meager returns: the U.S. housing market. Bond buyers on Tuesday jockeyed to get a piece of $1.6 billion of riskier Fannie Mae securities, enabling the government-backed mortgage company to twice cut the yields it offered on the debt. The offering is Fannie's third sale of so-called risk-sharing certificates that enlist investors to pay for potential defaults on the home loans Fannie guarantees. The riskiest of the securities, linked to loans to home purchasers who paid as little as 3% cash upfront, drew 19 times the bids necessary to complete the sale before yields were cut, said people familiar with the offering."

May 19 – Bloomberg (Lisa Abramowicz): “Mom-and-Pop investors have had it with junk-rated loans. Professional money managers, meanwhile, are still piling in and using borrowed money to buy them up. History will decide who’s the smart money here. For now, the Wall Street crowd is winning: Hedge funds and other institutions using leverage to boost returns have overwhelmed the impact of five consecutive weeks of withdrawals from mutual-fund investors… ‘In the leveraged-loan market, strength has returned,’ in part because buyers are using more leverage, Barclays Plc credit strategists Jeffrey Meli and Bradley Rogoff wrote… While this will be concerning over the longer term, ‘we do not expect any downside from this trend in 2014.’”

May 21 – Bloomberg (Lisa Abramowicz): “It’s getting harder to trade bonds. Hours, sometimes days can go by before investors can complete a transaction. That’s not dissuading them from piling into the most-illiquid debt out there. Junk-bond investors are earning practically nothing extra to own older, smaller bond issues that don’t typically trade as often as bigger, newer debt offerings, according to Barclays Plc data. The gap has collapsed to almost zero from a 1.05 percentage point premium for the less-liquid notes in the fourth quarter of 2011. That means bondholders aren’t really being compensated for the risk that there might be no one who wants to buy their obscure securities if demand dries up and they’re forced to sell… ‘The ‘roach motel’ dynamic is as pernicious as ever,’ Pacific Investment Management Co.’s Christian Stracke wrote… ‘Investors should beware of credit funds that offer daily liquidity where managers are reaching for yield and are not paying close attention to the prospective liquidity profile of what they buy.’”

Federal Reserve Watch:

May 17 – Reuters (Jonathan Spicer and Svea Herbst-Bayliss): “In a series of quarter-million-dollar dinners with wealthy private investors, Ben Bernanke has been clearer than he ever was as chairman of the Federal Reserve on his expectations that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance. Bernanke… has predicted the Fed will only very slowly move to raise rates, and probably do so later than many forecast because the labor market still has a lot more room to recover from the financial crisis and recession. The accounts of the discussions come from attendees as well as those who heard second-hand what was said at the dinners, where hedge fund managers and others willing to foot the roughly $250,000 bill for each event asked the former Fed chairman questions in a free-flowing round-table fashion over recent weeks. Bernanke has no constraints on expressing his views in public or private, providing he does not talk about confidential Fed matters… The demand for Bernanke's time shows that many of Wall Street's highest-profile brokers and investors see him as holding rare insight on how the Fed will react in the months and years ahead - and are prepared to pay big bucks to get private access to those views. At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4% in Bernanke’s lifetime…”

May 19 – Washington Post (Ylan Q. Mui): “Former Federal Reserve Chairman Ben S. Bernanke is famous for being a die-hard Nationals fan. …At a joint speech Monday at the George W. Bush Presidential Center in Dallas, Bolten divulged that he has noticed Nationals star right fielder Jayson Werth always tips his hat to Bernanke before heading onto the field. Bernanke offered this explanation: Last year, former Nationals manager Davey Johnson was ushering him around the team’s batting practice and introducing him to players. Among them was Werth… Johnson introduced Bernanke as the head of the Federal Reserve. Werth repeated the title, as if to make sure he had heard right. Then, Bernanke recalled, ‘Jayson looks at me and says, 'Well, what’s the deal with QE3 anyway?' Since then, whenever Werth sees Bernanke in the stands, he gives him a tip of the hat -- from one great beard to another.”

May 19 – Reuters (ANN Saphir): “The Federal Reserve does not need to shrink its $4 trillion-plus balance sheet by even ‘a dime’ for it to normalize monetary policy when the time comes, former Fed Chair Ben Bernanke said… ‘The Fed has worked very carefully to figure out how to raise rates at the appropriate time,’ Bernanke told a monetary policy conference. ‘That will eventually happen - we hope it happens because that means the economy is going back to normal.’ When the Fed does tighten, he said, ‘you can have some bumpiness’ as markets potentially react to the changes. But in all, he said, ‘it will be a fairly normal process.’”

May 21 – MarketWatch (Jeffrey Bartash): “Easy money in doesn’t necessarily mean easy money out. So says a top Federal Reserve official who’s been critical of the central bank’s massive bond-buying stimulus campaign to keep U.S. interest rates ultra low. Kansas City Fed President Esther George says the longer interest rates remain low, the greater the risk for the central bank once it begins to revert to a more normal monetary policy. The Fed ‘is going to be challenged with its timing,’ she said… George is worried that low rates have spurred investors to pile money into riskier investments in search of a higher returns… ‘In my part of the country farmland values have shown extraordinary increases over the last five years,’ she said. A quarterly Kansas City Fed survey, for instance, shows that the average price of cropland has soared as much as 112% since the beginning of 2009… ‘When I see money flowing in, not from Nebraska farmers necessarily, but from other parts of the country and the world, it is to me a demonstration of this desire to look for yield and to look for return on money, which today globally is searching for its most productive use… Now we are in a process where getting into this unconventional policy was uncharted waters, and I can assure you that getting out of it will be equally experimental for us in trying to figure out what the right balance is,’ George said.”

U.S. Bubble Watch:

May 20 – Bloomberg (Christopher Condon and Mary Childs): “BlackRock Inc.’s Chief Executive Officer Laurence D. Fink said the U.S. housing market is ‘structurally more unsound’ today than before the financial crisis because it depends more on government-backed mortgage companies such as Fannie Mae and Freddie Mac. ‘We’re more dependent on Fannie and Freddie than we were before the crisis,’ Fink said…, noting that he was one of the first Freddie Mac bond traders on Wall Street.”

May 22 – Bloomberg (Michael P. Regan): “Trading in online brokerage accounts that cater to individual investors is at an all-time high and they attracted new assets every quarter since 2010, according to analyst Ana Avramovic at Credit Suisse Group AG. Overall, U.S. equity trading volume is on pace to snap a four-year slump. ‘Despite talk of flagging investor confidence and increased scrutiny of market participants, data from retail brokers show that the retail crowd is more engaged than ever,’ Avramovic wrote… Combined daily average revenue trades at E*Trade Financial Corp., Charles Schwab Corp. and TD Ameritrade Holding Corp. rose 24% in the first quarter from the previous year and reached the highest level ever, according to Raymond James Financial Inc. analyst Patrick O’Shaughnessy…”

May 22 – Bloomberg (Zeke Faux): “Doug Naidus made his fortune selling a mortgage company to Deutsche Bank AG months before the U.S. housing market collapsed. Now he’s found a way to profit from loans to business owners with bad credit. From an office near New York’s Times Square, people trained by a veteran of Jordan Belfort’s boiler room call truckers, contractors and florists across the country pitching loans with annual interest rates as high as 125%... When borrowers can’t pay, Naidus’s World Business Lenders LLC seizes their vehicles and assets, sometimes sending them into bankruptcy. Naidus isn’t the only one turning to subprime business lending. Mortgage brokers and former stock salesmen looking for new ways to make fast profits are pushing the loans…”

Central Bank Watch:

May 21 – Bloomberg (Jeff Black): “New risks to financial stability could emerge from the combination of generous central bank policies and investors’ search for yield in a low-interest rate environment, Bundesbank board member Andreas Dombret said. ‘We do see risks, despite the fact that the markets are calm,’ Dombret said… Real-estate markets in some European countries are pretty high, corporate bond valuations seem stretched and high. The low volatility leads to market participants thinking that they don’t need to hedge.’”

May 21 – Bloomberg (Scott Hamilton): “Bank of England Deputy Governor Charlie Bean said policy makers face potential ‘potholes’ when it comes to exiting the extraordinary stimulus measures they implemented during the recession, many of which put central banks into uncharted territory. ‘I do not expect central banks’ collective management of the exit from the present exceptionally stimulatory monetary stance will be easy,’ Bean said… ‘Market interest rates are bound to become more volatile along the exit path, however well central banks communicate their intentions.’”

May 19 – Wall Street Journal (Ian Talley): “U.S. Federal Reserve Chairwoman Janet Yellen isn’t too worried about the possibility of China’s financial system collapsing, but thinks it’s enough of a risk that it ‘bears monitoring closely.’ …Many economists worry that China’s credit boom, combined with slowing growth, could go bust, leaving the financial system with a pile of bad loans. If the pile were big enough, it might hurt the world’s second largest economy and send tremors though the global economy. The opaqueness of China’s financial system, however, has left observers around the world guessing about the true depth of the potential problem.”

Ukraine & Russia Watch:

May 23 – Reuters (Anatole Kaletsky): “‘Checkmate.’ As Vladimir V. Putin signed Russia’s historic $400 billion gas-supply agreement with China, he must have felt the satisfaction of a chess grandmaster revealing the inexorable outcome of a complicated endgame. In theory, the next phase of the chess game between Russia and the West in Ukraine will begin with the Ukrainian presidential election on Sunday, but Mr. Putin’s positioning of the pieces means the outcome is preordained, no matter who emerges as the next president in Kiev. No wonder that the Russian stock market and the ruble have both rebounded, with the MSCI Russia index gaining 20% percent in dollar terms since its low point on March 14. Having secured the territorial windfall of Crimea in March, Mr. Putin went on to achieve his main tactical objective in April. This was to destabilize Ukraine to the point where nobody could seriously contemplate the country’s joining the European Union, much less NATO. Just as important, from Mr. Putin’s standpoint, the combination of internal chaos and improvised referendums with Russian military exercises on the Ukrainian border distracted Western attention from the Crimean issue. They also deflected the threat of additional sanctions.”

May 23 – Bloomberg (Henry Meyer and Ott Ummelas): “Russia will take measures against a buildup of NATO forces on its borders as regional and global security weakens with the rupture of ties between the former Cold War enemies, the country’s top military commander said. The Ukrainian conflict is ‘practically a civil war’ as the authorities in Kiev are using the army against ‘unarmed civilians,’ Valery Gerasimov, the head of the Russian military’s General Staff, told a security conference… Internal conflicts ‘are no longer purely domestic and take on an increasingly international character.’”

May 23 – Bloomberg (Daryna Krasnolutska and Ilya Arkhipov): “Russia raised doubts over Ukraine’s presidential election on Sunday as President Vladimir Putin said the country is in full-scale civil war after government troops suffered their worst losses in battles with separatists. Russian Foreign Minister Sergei Lavrov… said the Kremlin would only decide whether to recognize Ukraine’s vote after the polling takes place.”

May 22 – Bloomberg (Henry Meyer): “Georgia has sovereign right to conclude any agreements it wishes, Russian Foreign Ministry spokesman Alexander Lukashevich tells reporters in Moscow. Lukashevich: ‘However, it’s important to understand what consequences will result from the implementation of the association agreement with the EU…’”

Geopolitical Watch:

May 23 – Bloomberg: “China will vet technology companies operating in the country for potential national-security breaches after the government threatened retaliation for a U.S. indictment of Chinese officers on cyberspying claims. The checks… are meant to stop suppliers from using their products ‘to illegally control, disrupt or shut down their clients’ systems,’ the official Xinhua News Agency said… On May 20, a spokesman from the same office said the U.S. indictment was groundless and China would take countermeasures if the U.S. ‘goes its own way.’ Such checks would mark a major escalation in tensions between China and the U.S. after prosecutors indicted five Chinese military officers for allegedly stealing secrets of American companies. That may put at risk U.S. sales in the world’s largest market for personal computers…”

May 22 – Bloomberg (Anuchit Nguyen and Chris Blake): “Thailand’s army chief took control of the country after a six-month crisis that has sapped economic growth and caused political paralysis, staging the military’s 12th coup since 1932. Two days after declaring martial law and saying there was no coup, Army Chief Prayuth Chan-Ocha announced on national television alongside senior military officials that he was seizing control in order to restore peace.”

May 22 – Washington Post (Sharif Abdel Kouddous): “Powerful militias aligned with the Islamist-dominated parliament deployed in the Libyan capital Thursday, raising the specter of an all-out war with forces loyal to a renegade former general who wants the legislative body disbanded. Known collectively as the Libya Central Shield, the militias from the western city of Misurata were heeding a call by the head of parliament, Nouri Abu Sahmein, to protect Tripoli after gunmen loyal to the ex-general, Khalifa Hifter, stormed it Sunday. It marked the first time the Libya Central Shield has deployed to Tripoli since November, when its fighters opened fire on peaceful protesters outside their base… The group's main rivals, the Qaqa and Sawaiq brigades from the western city of Zintan, have allied with Hifter, threatening a confrontation in Tripoli between two of the country's most powerful militia forces.”

May 23 – Bloomberg (Selcan Hacaoglu): “A second person died today of injuries received as protesters clashed with Turkish police over last week’s deadly mine fire. The person was wounded in an explosion late yesterday in Istanbul’s Okmeydani district as demonstrators denounced the deaths of 301 miners in the blaze… Stone-throwing protesters clashed with riot police for a second day today, Hurriyet newspaper reported. Prime Minister Recep Tayyip Erdogan vowed to retaliate against protesters who he said were using the mine disaster in the western town of Soma as a pretext to stir chaos.”

China Bubble Watch:

May 20 – Bloomberg (Keiichi Yamamura): “Japanese Finance Minister Taro Aso speaks in parliament today in response to a question from a lawmaker about the impact on Japan should China’s real estate bubble burst. Aso: ‘Not just in China, but once a bubble starts in any country, it is bound to burst.’ Aso: The bubble in China will definitely burst…”

May 20 – Bloomberg: “China plans to cut reliance on local government financing vehicles for regional fundraising, according to a statement posted on the state council’s website. Authorities will establish a local financing mechanism mainly based on government bonds… Regional governments in the world’s most-populous nation have established more than 10,000 financing units to fund construction projects after they were barred from directly issuing bonds under a 1994 budget law. Local authorities are responsible for some 80% of spending while they get only about 40% of tax revenue, the legacy of a 1994 tax- sharing system, according to World Bank data.”

May 21 – Bloomberg (Christopher Condon and Mary Childs): “Moody’s… revised its credit outlook for Chinese developers to negative from stable, citing a slowdown in home sales growth as liquidity weakens and inventories rise in the coming 12 months. The outlook change is the first by the credit rating provider on China’s property market since November 2012, it said… Home sales growth will decelerate to 5% at most on a year-on-year basis over the next year, ‘materially lower’ than 27% growth last year, it said. ‘The liquidity of developers with relatively weak credit quality will be more vulnerable in 2014, and their refinancing risk will increase as banks became more selective in credit extension following recent defaults in China,’ Franco Leung, …analyst at Moody’s, said…”

Global Bubble Watch:

May 21 – Financial Times (Miles Johnson): “It was meant to be the year of the hedge fund. After near indiscriminate gains for shares in 2013, the choppier markets of this year were hailed as the perfect conditions for the specialist and skilled active fund manager. It has not turned out that way. While equity markets in the developed world have gyrated, many of the world’s most acclaimed stock pickers have underperformed. At the same time, the hedge funds that specialise in predicting the direction of the global economy have struggled as winning trades in interest rates and currency markets have gone into reverse. ‘A lot of people were hoping this year would turn out to be a stockpickers’ market, but that has turned out to be anything but the case so far,’ says Troy Gayeski, partner and senior portfolio manager at SkyBridge… With the average hedge fund suffering the worst start to the year since the financial crisis, making just 1.2%..., only a few managers, many concentrated in trading in concentrated company-specific events, have prospered…”

May 20 – Bloomberg (Katie Linsell): “The cheapest long-term borrowing costs on record are enticing companies into the bond market and allowing them to lock in rates for up to 100 years. ‘My treasurer tells me always borrow when you can, not when you have to,’ said Simon Henry, chief financial officer at Royal Dutch Shell Plc. Global borrowers from Shell…to… Caterpillar Inc. raised a record $368 billion this year from bonds maturing in 10 years or more… The average yield companies pay to raise long-dated debt worldwide fell 59 bps this year to 4.4%, approaching the low of 4.1% reached in 2013…”

May 20 – Reuters: “Low levels of volatility in financial markets are "eerily reminiscent" of the run-up to the financial crisis, even as central banks face the challenge of unwinding their huge stimulus programs, a Bank of England policymaker said. But BoE Deputy Governor Charlie Bean also said in a speech that "the risk of major financial problems crystallizing in the advanced countries should be much lower" thanks to a combination of better-capitalized banks, lower leverage levels and more powers for regulators to deal with troubled lenders. Bean, who is due to retire from the bank at the end of June, said his fellow central bankers would face the tough challenge of communicating their intentions as the time approaches to undo their support for their economies. ‘I do not expect central banks' collective management of the exit from the present exceptionally stimulatory monetary stance will be easy,’ he said.”

May 19 – Bloomberg (Gaspard Sebag): “JPMorgan Chase & Co., HSBC Holdings Plc and Credit Agricole SA were accused today by the European Union’s antitrust arm of colluding to manipulate interbank lending rates. The trio received antitrust complaints alleging they participated in a cartel to rig Euribor. The so-called statement of objections is the next step in the EU enforcement process after the lenders dropped out of settlement talks last year. The European Commission ‘has concerns that the three banks may have taken part in a collusive scheme which aimed at distorting the normal course of pricing components for euro interest rate derivatives,’ it said…”

EM Bubble Watch:

May 20 – Financial Times (Henny Sender): “The growth in Asia’s bond market has been driven in large part by Chinese issuers, whether in US dollars or local Asian currencies. Up to half of all issuance year-to-date has been from Chinese companies, leading Morgan Stanley to note ‘Asia is evolving into a China-centric investment grade credit market’… Offshore bond markets have been a huge source of capital for property companies like Central China. As the property market slows in China, might there be big defaults that could shake the rosy projections of analysts anticipating a $1tn Asian credit market by 2017? …Many property developers went offshore to raise money because of strict rules in China about how land acquisition and development can be financed. Banks are not allowed to finance land acquisition. That has led developers to the shadow market or offshore. Beijing is hardly likely to be as sympathetic to the claims of foreign investors as Chinese investors when these developers run out of cash.”

May 23 – Bloomberg (Selcan Hacaoglu): “A second person died today of injuries received as protesters clashed with Turkish police over last week’s deadly mine fire. The person was wounded in an explosion late yesterday in Istanbul’s Okmeydani district as demonstrators denounced the deaths of 301 miners in the blaze… Stone-throwing protesters clashed with riot police for a second day today, Hurriyet newspaper reported. Prime Minister Recep Tayyip Erdogan vowed to retaliate against protesters who he said were using the mine disaster in the western town of Soma as a pretext to stir chaos.”

May 19 – Bloomberg (Suttinee Yuvejwattana): “Thailand’s political turmoil is wreaking greater damage on the economy than analysts had estimated, raising the stakes for leaders of the nation’s two main political camps to reach an accommodation. Gross domestic product shrank 0.6% in the three months through March from a year earlier… Thai production and tourism have been damaged by months of unrest, as opponents of ex-Prime Minister Yingluck Shinawatra mounted public protests and legal challenges that succeeded in removing her from office.”

May 23 – Bloomberg (Matthew Malinowski): “Brazil’s current account deficit widened more than analysts forecast in April after the real strengthens more than any other major emerging market currency against the dollar this year. The deficit in the current account… widened to $8.3 billion from a revised $6.3 billion a month earlier… Brazil’s annual current account deficit is hovering near a record as the nation’s exports drop amid an uneven global recovery and a stronger currency.”

May 21 – Bloomberg (Nacha Cattan and Eric Martin): “Mexican policy makers lowered their 2014 growth forecast for the second time as a drop in consumer spending holds back the economy’s recovery. Gross domestic product will rise 2.3% to 3.3% this year, down from the previous forecast of 3% to 4%...”

Japan Watch:

May 21 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Japan’s central bank refrained from boosting stimulus and raised its view of business investment as the economy shows signs of weathering the impact of the first sales-tax increase since 1997. The Bank of Japan will continue to expand the monetary base at a pace of 60 trillion yen to 70 trillion yen ($691bn) per year, it said… ‘Kuroda made no reference to additional stimulus’ at a press conference following the decision, said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo. ‘If he continues to refrain from giving any hints about further easing, the risks of the yen strengthening will grow.’”

India Watch:

May 23 – Bloomberg (Unni Krishnan and Andrew MacAskill): “Narendra Modi fought back tears during a speech accepting his party’s nomination to become India’s next leader, a display of emotion that contrasted with his predecessor who had limited interaction with the public during a decade in office… Modi, 63, ran a presidential-style campaign based on his record in bringing higher-than-average economic growth rates to Gujarat, the western state he has run since 2001. His party ended up winning the first majority in 30 years last week after his message of development resonated across social divisions in a country with a third of the world’s poor.”

Europe Watch:

May 23 – New York Times (Stephen Castle): “The populist U.K. Independence Party made sweeping gains in local elections in Britain, according to preliminary results… shaking the country’s political establishment and leaving its mainstream parties scrambling for a response. The right-wing party took far more votes than expected from the two parties in the center-right coalition government and from the opposition Labour Party, and won at least 150 local council seats; it held 2 before. The voting on Thursday coincided with elections for Britain’s representatives in the European Parliament. Though those results will not be announced until Sunday night, they appeared likely to reflect similar sweeping gains…”

May 23 – Bloomberg (Eleni Chrepa and Nikos Chrysoloras): “Prime Minister Antonis Samaras, who presided over Greece’s return to capital markets, faces a test of his ruling coalition’s stability in European and local elections this weekend amid a challenge from bailout opponents. With more than half of Greece’s youth still out of work, the Syriza opposition party led by Alexis Tsipras is the front- runner in voting for European Union lawmakers… Syriza rejects the fiscal-austerity terms that came with Greece’s bailouts after the country’s finances set off the euro- area debt crisis in 2010. At the same time, support for Samaras’s Pasok coalition partner has slumped, increasing the fragility of his government’s majority of 152 lawmakers in the 300-seat parliament in Athens.”

May 21 – Bloomberg (Rainer Buergin and Karin Matussek): “Lawmakers from Chancellor Angela Merkel’s party are criticizing European Central Bank policies as a German anti-euro party gains support before elections across Europe this week. Misgivings by Finance Minister Wolfgang Schaeuble about the ECB’s threat of unlimited bond-buying and Merkel’s warning of ‘deceptive calm’ in financial markets are the latest signs that German policy makers and economists don’t want to discount the lingering risk to taxpayers from the debt crisis. As polls suggest the anti-euro Alternative for Germany may win as much as 7% of the German vote for the European Parliament on May 25, members of Merkel’s Christian Democratic Union in the Bundestag, or lower house, questioned the underpinnings of ECB President Mario Draghi’s pledge in July 2012 to do ‘whatever it takes’ to save the euro. ‘The Bundestag would certainly have major concerns to clear the way for unlimited bond purchases by the ECB,’ Norbert Barthle, the budget spokesman… said… ‘I said back then that the ECB is making itself strongly dependent on political decisions’ because lawmakers in Berlin would have a say in the process if the central bank ever decided it wants to buy a euro-area country’s bonds as part of an aid package, he said.”

May 23 – Bloomberg (Alessandro Speciale): “German business confidence declined more than economists forecast amid signs that growth in the euro area’s largest economy will slow this quarter… Germany is key to the recovery in the 18-nation euro area, which is struggling to pick up pace amid near-record unemployment and subdued pricing power."

May 22 – Bloomberg (Mark Deen): “French manufacturing and services unexpectedly shrank this month, highlighting President Francois Hollande’s struggle to revive the euro area’s second-largest economy… Hollande is grappling with an economy that stagnated in the first quarter as both investment and consumer spending fell. After two years in office, his government has yet to achieve two consecutive quarters of expansion, a performance that has driven jobless claims to an all-time high of 3.3 million and his own popularity to a record low. ‘France’s stuttering economic performance continued in May,’ said Jack Kennedy, a senior economist at Markit. ‘With new orders and employment both falling at sharper rates in the latest month, the malaise looks set to persist.’”