Friday, March 10, 2017

Weekly Commentary: Unparalleled Credit and Global Yields

New Fed Q4 Z.1 Credit and flow data was out this week. For the first time since 2007, annual Total Non-Financial Debt (NFD) growth exceeded $2.0 TN – a bogey I’ve used as a rough estimate of sufficient new Credit to fuel self-reinforcing reflation. Based on some nebulous “neutral rate,” the Fed rationalizes that it’s not behind the curve. Robust “money” and Credit growth argues otherwise. A Bloomberg headline from earlier in the week: “Taylor Rule Suggests Fed is About 12 Hikes Behind.”

Though not so boisterous of late, there’s been recurring talk of “deleveraging” – “beautiful” and otherwise – since the crisis. Let’s update some numbers: Total Non-Financial Debt (NFD) ended 2008 at $35.065 TN, or a then record 238% of GDP. NFD ended 2016 at a record $47.307 TN, an unprecedented 255% of GDP. In the eight years since the crisis, NFD has increased $12.243 TN, or 35%. Including Financial Sector (that excludes the Fed) and Foreign U.S. borrowings, Total U.S. Debt has increased $11.422 TN to a record $66.079 TN, or 356% of GDP. It’s worth adding that the $2.337 TN post-crisis contraction in Financial Sector borrowings was more than offset by the surge in Federal Reserve liabilities.

For 2016, NFD expanded $2.117 TN, up from 2015’s $1.929 TN - to the strongest growth since 2007’s record $2.501 TN. Household borrowings increased $521bn, up from 2015’s $384bn, to the strongest pace since 2007’s $947bn. Household mortgage borrowings jumped to $248bn, up from 2015’s $129bn. On the back of an unusually weak Q4, total Business borrowings declined to $724bn last year from 2015’s $812bn (strongest since ‘07’s $1.117 TN).

The Bubble in Federal obligations runs unabated. Federal debt jumped $843bn in 2016, up from 2015’s $725bn increase to the strongest growth since 2013’s $857bn. It’s worth noting that after ending 2007 at $6.074 TN, outstanding Treasury debt has inflated more than 160% to $16.0 TN. As a percentage of GDP, Treasury debt increased from 42% to end 2007 to 86% to close out last year.

Yet Treasury is not Washington’s only aggressive creditor. GSE Securities jumped a notable $352bn in 2016 to a record $8.521 TN, the largest annual increase since 2008. In quite a resurgence, GSE Securities increased almost $1.0 TN over the past four years. Treasury and GSE Securities (federal finance) combined to increase $1.194 TN in 2016 to $24.504 TN, or 132% of GDP. For comparison, at the end of 2007 Treasury and Agency Securities combined for $13.449 TN, or 93% of GDP.

The unprecedented amount of system-wide debt is so enormous that the annual percentage gains no longer appear as alarming. Non-Financial Debt expanded 4.7% in 2016, up from 2015’s 4.4%. Total Household Debt expanded 3.6%, with Total Business borrowings up 5.6%. Financial Sector borrowings expanded 2.9% last year, the strongest expansion since 2008.

Securities markets remain the centerpiece of this long reflationary cycle. Total (debt and equities) Securities jumped $1.50 TN during Q4 to a record $80.344 TN, with a one-year rise of $4.80 TN. As a percentage of GDP, Total Securities increased to 426% from the year ago 415%. For comparison, Total Securities peaked at $55.3 TN during Q3 2007, or 379% of GDP. At the previous Q1 2000 cycle peak, Total Securities had reached $36.0 TN, or 359% of GDP.

The Household Balance Sheet also rather conspicuously illuminates Bubble Dynamics. Household Assets surged $6.0 TN during 2016 to a record $107.91 TN ($9.74 TN 2-yr gain). This compares to the peak Q3 2007 level of $81.9 TN and $70.0 TN to end 2008. Q4 alone saw Household Assets inflate $2.192 TN, with Financial Assets up $1.589 TN and real estate gaining $557bn.

With Household Liabilities increasing $473bn over the past year, Household Net Worth (assets minus liabilities) inflated a notable $5.518 TN in 2016 to a record $92.805 TN. As a percentage of GDP, Net Worth rose to a record 492%. For comparison, Household Net Worth-to-GDP ended 1999 at 435% ($43.1 TN) and 2007 at 453% ($66.5 TN). Net Worth fell to a cycle low 378% of GDP ($54.4TN) in Q1 2009. In terms of Credit Bubble momentum, it’s notable that Net Worth inflated over $2.0 TN in both Q3 and Q4.

March 5 – Bloomberg: “China’s credit engine will keep humming this year, adding the rough equivalent of Germany’s annual economic output to its already massive stock of total social financing, according to estimates derived from the nation’s 2017 targets. Adding higher equity market financing and about 5 trillion yuan ($725bn) worth of local government bond swaps to the official credit growth target of 12%, analysts at UBS Group AG see TSF expansion of 14.8% this year. They calculate that’s equal to a whopping 23 trillion yuan, or $3.3 trillion, addition to the amount of total credit already swishing around the world’s second-largest economy.”

UBS analysts forecast (above) $3.3 TN of 2017 Chinese Total Social Financing (TSF). And with TSF excluding national government deficit spending, let’s add another $300bn and presume 2017 Chinese system Credit growth of around $3.6 TN. As such, it’s possible that China and the U.S. could combine for Credit growth approaching an Unparalleled $6.0 TN. There are, as well, indications of an uptick in lending in the euro zone, and Credit conditions for the most part remain loose throughout EM. Importantly, the inflationary biases that have gained momentum in asset and securities markets and, increasingly, in consumer prices and corporate profits provide a tailwind for Credit expansion.

March 9 – Bloomberg (Hugh Son, Jennifer Surane, and Francine Lacqua): “Jamie Dimon said President Trump’s economic agenda has ignited U.S. business and consumer confidence and he expects at least some of the administration’s proposals to be enacted. ‘It seems like he’s woken up the animal spirits,’ Dimon, chairman and chief executive officer of JPMorgan Chase & Co., said Thursday… Confidence has ‘skyrocketed because it’s a growth agenda,’ Dimon said, adding that he’s not overly concerned about the possibility of a correction in equities markets…”

There are any number of developments that could bring this global Credit party to an end, including a spike in yields and resulting speculative de-leveraging. U.S. Credit expansion did slow meaningfully in Q4. With Business borrowings dropping to 2.6% (Q3 6.3%) and federal debt growth sinking to 2.9% (Q3 8.2%), NFD growth dropped to 2.9% from Q3’s 5.8%. But both should bounce back strongly in Q1. We’ve already seen a huge surge in corporate debt issuance. And it would be atypical if Credit growth failed to respond to surging stock prices and business confidence, loose financial conditions and strengthening inflation trends. And with the nation’s most influential commercial banker talking “animal spirits,” I’ll assume Jamie Dimon is currently observing generally robust demand for Credit.

Ten-year Treasury yields touched 2.61% during Thursday’s session, the high since 2014 (and above Bill Gross’s 2.60% bear market bogey). Five-year yields closed the week up nine bps to 2.10%, an almost six-year high. Finishing the week at the highest level since 2008, two-year Treasury yields jumped five bps this week to 1.36%.

Rising yields aren’t just a U.S. phenomenon. This week saw yields trade to at least one-year highs in Canada, France, Germany, Italy, Spain, Netherlands, Sweden, Norway, Denmark, Belgium, Switzerland, Japan, Australia, New Zealand, South Korea, Israel and China. Italian yields surged 27 bps this week to the high since November 2014. Spanish 10-year yields jumped 21 bps to 1.89%, the high since November 2015. French yields rose 18 bps to 1.12%, the high since July 2015. German yields rose 13 bps this week to 0.49%, the highest level since January 2016.

There’s a huge question as to how much leverage has accumulated globally throughout this Bubble period. Thus far, deleveraging fears have been held in check by the fundamental backdrop, faith in ultra-dovish central bankers and the ongoing enormous QE from the BOJ and ECB. This week saw the first indication that the ECB is preparing to back away from its extreme monetary stimulus.

March 10 – Financial Times (Mehreen Khan): “It has been nearly seven years but investors are finally beginning to focus on the prospect of a tightening in monetary policy for the eurozone. A subtle shift in the signalling from European Central Bank president Mario Draghi this week has pushed up the probability of a December 2017 rate rise to more than 50% from just odds of a tenth at the start of the month. Despite not changing much of its formal language about being ready to provide more monetary medicine to the eurozone, Mr Draghi declared victory over the deflation risks that had prompted the ECB to begin its trillion euro bond-buying programme two years ago… ‘There is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance,’ Mr Draghi told journalists… Analysts judged the remarks to be the start of a gradual shift in the ECB’s forward guidance on interest rate rises…”

March 10 – Bloomberg (Jana Randow and Alessandro Speciale): “European Central Bank policy makers considered the question of whether interest rates could rise before their bond-buying program comes to an end, according to people familiar with the matter. Governing Council members meeting on March 9 exchanged views on ways of communicating and sequencing an exit from unconventional stimulus, euro-area central-bank officials said, asking not to be identified…”

Crude dropped 9.1% ($4.84) this week, closing below $50 for the first time in three months. Fearing the impact lower energy prices have on leveraged energy-related borrowers, the high-yield sector experienced abrupt and meaningful outflows this week. Lipper had high-yield fund outflows surging to $2.12 billion ($2.8bn high-yield corporate outflows from EPFR).

March 10 - Bloomberg: “Exchange-traded funds focused on U.S corporate junk bonds saw net outflows of $2.8 billion in the week…, 6% of assets and the second-largest outflow in 12 months… The Bloomberg Barclays U.S. Corporate High Yield bond index is almost 25% allocated to energy and materials issuers. The index’s option-adjusted spread to Treasuries jumped 24 bps last week from a two-year low 344 bps.”

A timely reminder: It’s that combination of rising sovereign yields and widening Credit spreads that risks sparking de-risking/de-leveraging dynamics. So far the investment grade corporate debt market has remained bulletproof. Simultaneous losses in highly-correlated stocks, bonds and commodities would be problematic for “risk parity” and similar leveraged strategies. Considering that global bond yields are flirting with an upside breakout, complacency seems rather deeply embedded. Analyzing Credit trends, it's clear that monetary policy and global yields have barely even begun the long and treacherous path toward normalization.

I’m excited to announce my new endeavor working with David McAlvany of McAlvany Wealth Management.  This link ( will direct you to the first of four short weekly video presentations, leading up to our March 30th introductory conference call.  In Episode One, David McAlvany and I introduce our new segregated/separate account portfolio, the McAlvany Wealth Management (MWM) Tactical Short strategy, and discuss my background and analytical framework, and why I believe it’s time to refocus on risk.  We hope you enjoy Episode One, “The Tactical Short,” and look forward to next week’s Episode Two, “How It Works.”

To learn more about our Tactical Short strategy and view frequently asked questions please visit

For the Week:

The S&P500 slipped 0.4% (up 6.0% y-t-d), and the Dow declined 0.5% (up 5.8%). The Utilities fell 1.2% (up 3.8%). The Banks declined 1.0% (up 5.4%), and the Broker/Dealers fell 1.3% (up 6.0%). The Transports were hit 2.1% (up 2.7%). The S&P 400 Midcaps lost 1.6% (up 3.0%), and the small cap Russell 2000 dropped 2.1% (up 0.6%). The Nasdaq100 added 0.2% (up 10.7%), and the Morgan Stanley High Tech index increased 0.5% (up 11.4%). The Semiconductors advanced 1.8% (up 9.4%). The Biotechs added 0.5% (up 17.5%). With bullion down $30, the HUI gold index dropped 2.6% (up 2.4%).

Three-month Treasury bill rates ended the week at a nine-year high 73 bps. Two-year government yields rose five bps to 1.36% (up 17bps y-t-d). Five-year T-note yields gained nine bps to 2.10% (up 17bps). Ten-year Treasury yields jumped 10 bps to 2.58% (up 13bps). Long bond yields rose nine bps to 3.32% (up 25bps).

Greek 10-year yields jumped 14 bps to 7.09% (up 7bps y-t-d). Ten-year Portuguese yields rose 12 bps to 4.06% (up 31bps). Italian 10-year yields surged 27 bps to 2.37% (up 56bps). Spain's 10-year yields jumped 21 bps to 1.89% (up 51bps). German bund yields gained 13 bps to 0.49% (up 28bps). French yields jumped 18 bps to 1.12% (up 44bps). The French to German 10-year bond spread widened five to 63 bps. U.K. 10-year gilt yields increased five bps to 1.23% (unchanged). U.K.'s FTSE equities index slipped 0.4% (up 2.8%).

Japan's Nikkei 225 equities index increased 0.7% (up 2.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.09% (up 5bps). The German DAX equities index dipped 0.5% (up 4.2%). Spain's IBEX 35 equities index jumped 2.1% (up 7.0%). Italy's FTSE MIB index was unchanged (up 2.2%). EM equities were mostly lower. Brazil's Bovespa index dropped 3.2% (up 7.4%). Mexico's Bolsa declined 0.7% (up 3.2%). South Korea's Kospi rallied 0.9% (up 3.5%). India’s Sensex equities index increased 0.4% (up 8.7%). China’s Shanghai Exchange slipped 0.2% (up 3.5%). Turkey's Borsa Istanbul National 100 index was little changed (up 14.7%). Russia's MICEX equities index sank 4.0% (down 11.6%).

Junk bond mutual funds saw outflows jump to a notable $2.119 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to an eight-week high 4.21% (up 53bps y-o-y). Fifteen-year rates rose 10 bps to 3.42% (up 46bps). The five-year hybrid ARM rate gained nine bps to 3.23% (up 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 4.36% (up 58bps).

Federal Reserve Credit last week declined $6.0bn to $4.421 TN. Over the past year, Fed Credit fell $20.7bn (down 0.5%). Fed Credit inflated $1.610 TN, or 57%, over the past 226 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.6bn last week to $3.182 TN. "Custody holdings" were down $72bn y-o-y, or 2.2%.

M2 (narrow) "money" supply last week surged $50.8bn to a record $13.353 TN. "Narrow money" expanded $841bn, or 6.7%, over the past year. For the week, Currency increased $7.4bn. Total Checkable Deposits declined $7.7bn, while Savings Deposits jumped $49.7bn. Small Time Deposits were little changed. Retail Money Funds added $1.3bn.

Total money market fund assets gained $10.1bn to $2.688 TN. Money Funds fell $118bn y-o-y (4.2%).

Total Commercial Paper declined $7.4bn to $964bn. CP declined $121bn y-o-y, or 11.1%.

Currency Watch:

March 6 – Wall Street Journal (Shen Hong): “A subtle change to Beijing’s familiar language on its exchange-rate policy suggests that China’s leadership is preparing for more volatile currency moves this year, as global political and economic uncertainties mount. In his annual keynote speech to China’s National People’s Congress on Sunday, Premier Li Keqiang dropped a pledge he had made in similar speeches in the past three years to ensure that the yuan ‘remains generally stable at an appropriate and balanced level.’ The removal of the phrase suggests China’s government is ready to tolerate further declines in the yuan’s value against the dollar, as signs grow that the U.S. Federal Reserve is readying for a series of interest-rate increases this year.”

March 7 – Bloomberg: “China’s foreign-currency reserves unexpectedly halted a seven-month losing streak, rising in February amid tighter controls on capital outflows and a rally in the yuan. The stockpile increased by $6.9 billion to $3.005 trillion last month… ‘Strict capital controls have taken effect, as it has reduced outflows and helped market sentiment on the yuan,’ said Zhao Yang, Hong Kong-based chief China economist at Nomura… ‘Reserves still face pressures, as the nation won’t want to keep tight capital controls in place for the medium term as they create difficulties for firms and thus weigh on the economy.’”

The U.S. dollar index slipped 0.3% to 101.25 (down 1.1% y-t-d). For the week on the upside, the euro increased 0.5%. For the week on the downside, the Norwegian krone declined 2.0%, the New Zealand dollar 1.5%, the South African rand 1.2%, the British pound 1.0%, the Brazilian real 0.8%, the Australian dollar 0.7%, the Canadian dollar 0.7%, the Japanese yen 0.7%, the Mexican peso 0.5%, the Swedish krona 0.3%, the Swiss franc 0.3%, the Singapore dollar 0.1% and the South Korean won 0.1%.

Commodities Watch:

The Goldman Sachs Commodities Index sank 4.6% (down 4.6% y-t-d). Spot Gold dropped 2.4% to $1,205 (up 4.6%). Silver fell 4.6% to $16.92 (up 5.9%). Crude sank $4.84 to $48.49 (down 9.9%). Gasoline fell 3.2% (down 4%), while Natural Gas rallied 6.4% (down 20%). Copper dropped 3.8% (up 4%). Wheat fell 2.9% (up 8%). Corn dropped 4.3% (up 4%).

Trump Administration Watch:

March 8 – Wall Street Journal (Richard Rubin): “A fight is brewing among congressional Republicans over whether a planned tax overhaul should pay for itself. The plan favored by House Speaker Paul Ryan (R., Wis.) and Senate Majority Leader Mitch McConnell (R., Ky.) aims to be revenue-neutral: Lowering taxes without increasing the deficit—though their math comes with some caveats. But President Donald Trump hasn’t signed onto that budgetary straitjacket, and some lawmakers are sympathetic to the idea of dumping the revenue-neutral goal. ‘Revenue neutrality shouldn’t necessarily be a constraint,’ said Sen. Pat Toomey (R., Pa.) ‘The primary goal should be maximizing growth and thereby increasing the income for Pennsylvania families.’”

China Bubble Watch:

March 9 – Bloomberg: “China’s broadest measure of new credit moderated in February as shadow banking activities slumped, signaling policy makers are making good on pledges to cut leverage and deflate asset bubbles. Aggregate financing was 1.15 trillion yuan ($166bn), compared with a median estimate of 1.45 trillion yuan… New yuan loans stood at 1.17 trillion yuan versus median estimate of 950 billion yuan. M2 money supply increased 11.1% versus median estimate of 11.4%.”

March 9 – Bloomberg: “China’s producer prices surged at the fastest pace since 2008, further lifting the outlook for global reflation as manufacturers in the exporter to the world look to pass on higher costs. Producer price index rose 7.8% last month from a year earlier, compared with… 6.9% in January…”

March 8 – Bloomberg: “China’s imports surged in February from a year earlier with the nation posting a rare trade deficit as exports slipped. Analysts said seasonal factors mostly explain the swings. Imports soared 38.1% in U.S. dollar terms… Exports dropped 1.3%... Trade deficit was $9.15 billion, the first negative reading in three years. That compared with projections for a $27 billion surplus…”

March 5 – Bloomberg: “Premier Li Keqiang struck an upbeat note on China’s slowing expansion and rising debt Sunday even as he flagged the specter of ‘graver’ internal and external challenges ahead. Systemic risk is under control and economic fundamentals remain sound enough for the government to set a 2017 growth target of ‘around 6.5%, or higher if possible,’ Li said… Li warned of profound changes in the international political and economic landscape with rising protectionism and deglobalization, and said policy makers must be fully alert to building domestic risks from shadow banking to bond defaults and internet finance.”

March 6 – Wall Street Journal (Mark Magnier): “China is embracing tried-and-true economic-growth drivers, betting it can contain rising financial risks without making painful overhauls in what is shaping up to be a sensitive political year… Mr. Li made clear even one notch below 6.5% would be a disappointment and that the rate should be higher, if possible. The Communist Party has made growth a priority over economic and financial restructuring in advance of a party congress at the end of the year that will name China’s leaders for the next five years—and there is little tolerance for instability that could disrupt President Xi Jinping’s second-term mandate.”

March 5 – Reuters (Kevin Yao and Xiaochong Zhang): “China has cut its growth target this year as the world's second-largest economy pushes through painful reforms to address a rapid build-up in debt, and erects a ‘firewall’ against financial risks. China aims to expand its economy by around 6.5%, Premier Li Keqiang said… China set a target of 6.5 to 7% last year and ultimately achieved 6.7% growth, supported by record bank loans, a speculative housing boom and billions in government investment.”

March 5 – CNBC (Leslie Shaffer): “China's leaders may be touting efforts to offer foreign investors a level playing field, but on the ground, protectionism appears to be growing, Germany's ambassador to China told CNBC. ‘It doesn't matter which trading partner you talk to – be it the Japanese or the U.S. or neighboring countries or European countries. They all feel the same, that there's a growing protectionism here,’ Michael Clauss, the German ambassador to China, told CNBC… ‘The service sector is basically off limits. Many companies that would like to produce here in China and build a factory and start producing are forced into going in a joint venture… It's also frequently they're asked to transfer technology, which is against the rules of the WTO. And the tendency seems to be growing. That's the complaint we get from German businesspeople.’”

March 4 – New York Times (Kevin Yao and Xiaochong Zhang): “For years, China’s president, Xi Jinping, has talked the talk of economic reform. In January, he dazzled business executives in Davos, Switzerland, with a defense of international trade. Last month, he urged officials to ‘seize hold of reform and make it an even bigger priority.’ And the annual meeting of China’s legislature, starting Sunday, appears sure to echo that theme. But as Mr. Xi nears the end of his first five-year term as Communist Party leader, his record has not lived up to the bold statements, critics say. The question now is whether he was ever really serious about taking the painful steps needed to repair the economy, or merely paying lip service to reform to justify his tightening grip on power.”

March 5 – Financial Times (Gabriel Wildau): “China’s banking system has surpassed that of the eurozone to become the world’s largest by assets… ‘The massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks,’ said Eswar Prasad, economist at Cornell University and former China head of the International Monetary Fund. Chinese bank assets hit $33tn at the end of 2016, versus $31tn for the eurozone, $16tn for the US and $7tn for Japan. The value of China’s banking system is more than 3.1 times the size of the country’s annual economic output, compared with 2.8 times for the eurozone and its banks.”

March 8 – Bloomberg: “China’s central bank plans to apply a stricter method for assessing banks’ capital as part of efforts to contain financial-sector risks, people with knowledge of the matter said… China has put a new priority on containing financial-sector risks, including steps to control its rapidly expanding shadow banking sector. Regulators are drawing up measures to curb the nation’s $8.7 trillion of asset-management products, which include investments in bonds and risky off-balance-sheet lending by banks. Earlier this year, the central bank ordered the nation’s lenders to strictly control loans during the first quarter, especially their mortgage lending…”

March 8 – Bloomberg: “Chinese corporate chiefs are turning vocal critics of the nation’s capital controls as the pile of scrapped deals grows. While the restrictions have helped alleviate pressure on the yuan, they’ve also curbed overseas acquisitions. Executives in Beijing during the National People’s Congress bemoaned the measures, saying they’re derailing expansion abroad -- a key tenet of China’s long-term economic ambitions… The complaints reflect a tumble in foreign deals, with the $19 billion of acquisitions abroad announced by Chinese companies so far this year amounting to a 74% drop from a year ago…”

Global Bubble Watch:

March 7 – Bloomberg (Mark Deen): “The global economy may not be strong enough to withstand risks from increased trade barriers, overblown stock markets or potential currency volatility, according to the Organisation for Economic Cooperation and Development. While forecasting a pickup in growth this year and next, it said the pace is still too slow and warned there’s much that could derail it. The OECD expects global expansion to reach 3.3% this year, up from 3% in 2016… ‘We have acceleration but I’m concerned about this really soft foundation to the recovery,’ OECD Chief Economist Catherine Mann said… ‘We still have this slow, sluggish productivity growth and persistent inequality. Put those together and it’s hard to see the robust consumption and investment profile you need to really get things going.’”

Fixed Income Bubble Watch:

March 7 – Bloomberg (Brian Chappatta): “From traders in the $13.9 trillion U.S. Treasury market to those dealing currencies around the globe, signs are mounting that there’s little in the pipeline for them to get worked up about in the days ahead. Ever since Donald Trump gave his speech to a joint session of Congress last week and Federal Reserve officials including New York Fed President William Dudley ramped up odds of an interest-rate hike this month, volatility metrics across the board have plunged. The Merrill Lynch Option Volatility Estimate index, a gauge of expected price swings in U.S. debt, fell on Monday to the lowest level since October. Similarly, JPMorgan’s Global FX Volatility index dropped to the lowest since the U.S. election.”

March 7 – Bloomberg (Allison McNeely): “The market for high-yield mining and energy debt is suffering from the some of the same issues that sparked the 2008 crisis as investors turn a blind eye to poor credit in their desperation for fatter returns, according to an executive with one of Canada’s largest hedge funds. Fund managers are snapping up lower-quality debt in a bid to outperform their competitors and retail investors don’t understand the underlying credit risk, particularly in exchange-traded funds, said Rick Rule, chief executive officer of Sprott U.S. Holdings… ‘It wouldn’t take anything at all to have the same circumstance occur in mining and energy junk debt that happened in mortgage securities,’ Rule said… ‘Remember that nothing precipitously changed in the housing market in 2008. It’s just that people began to do the arithmetic.’”

Europe Watch:

March 6 – Financial Times (Izabella Kaminska): “Err. Awkward. ‘TARGET2 (T2) balances are again on the rise. Since early 2015, the T2 balances of euro area national central banks (NCBs) have risen steadily, in some cases exceeding the levels seen during the sovereign debt crisis… However, unlike then, record T2 balances should be viewed as a benign by-product of the decentralised implementation of the asset purchase programme (APP) rather than as a sign of renewed capital flight.’ That’s from the latest BIS Quarterly Review. It’s awkward because, for those who can remember, back in 2012 an exceptionally heated debate erupted about the importance and/or non importance of growing Target2 extremes. On team ‘not important’ was every mainstream analyst, economist, the ECB and most of civil Western society. On team ‘important/alarming’, meanwhile, there was…well, only one man: Hans Werner Sinn.”

March 6 – Bloomberg (Yalman Onaran): “Banks in the euro zone, flush with new deposits, have turned few of them into loans to companies and consumers. Instead they’ve parked most of the money at the European Central Bank, where they’re paying billions of euros for the privilege of keeping it there. Since June 2014, when the ECB cut rates below zero, deposits at euro-zone banks have jumped by 802 billion euros ($848bn)… Lending to nonfinancial companies and consumers in the currency area rose by 169 billion euros over the same period, while deposits at the ECB in excess of required reserves soared by 1.1 trillion euros.”

March 8 – Bloomberg (Gregory Viscusi): “The old order is fading in France. Every election since Charles de Gaulle founded the Fifth Republic more than half a century ago has seen at least one of the major parties in the presidential runoff and most have featured both. With Republicans and Socialists consumed by infighting and voters thoroughly fed up, polls suggest that neither will make it this year. For the past month, survey after survey has projected a decider between Emmanuel Macron, a 39-year-old rookie who doesn’t even have a party behind him, and Marine Le Pen, who’s been ostracized throughout her career because of her party’s history of racism. ‘We’ve gone as far as we can go with a certain way of doing politics,’ said Brice Teinturier, head of the Ipsos polling company and author of a book on voters’ disillusionment. ‘Everyone feels the system is blocked.’”

U.S. Bubble Watch:

March 8 – Wall Street Journal (Corrie Driebusch and Aaron Kuriloff): “Stocks are hitting record after record as investors bet the U.S. economy will soon be booming. But that hasn’t changed the woeful environment for some retirees. The Dow Jones Industrial Average has tripled since it bottomed out during the financial crisis eight years ago. Meanwhile, men and women who expected to live off income from certificates of deposit or municipal bonds have gotten no relief as interest rates remain low. To compensate, many have turned to riskier assets… The fall in interest rates since the financial crisis cost U.S. savers almost $1 trillion in lost income from savings accounts, CDs and bonds from the start of 2008 through 2015…”

March 10 – Wall Street Journal (Chris Dieterich and Ben Eisen): “Corporate executives are buying their own firms’ shares at the slowest pace in at least 29 years, the latest sign of uncertainty as the bull market in U.S. stocks enters its ninth year. Share purchases and sales by executives are parsed by investors searching for signals about what insiders expect from the market. Sales can show wariness about valuations, while purchases can signal confidence that more gains lie ahead. Insider buyers have been scant. There were a total of 279 insider buyers in January, the lowest number going back to 1988… Meanwhile, the number of sellers has been above average, pushing a ratio of buyers to sellers in February to its lowest since 1988.”

March 8 – Reuters (Lucia Mutikani): “The U.S. trade deficit jumped to a near five-year high in January as rising oil prices helped to push up the import bill… President Donald Trump took office with a pledge to boost annual economic growth to 4% and renegotiate trade deals in favor of the United States. Trump blames U.S. trade policy for the loss of American factory jobs and the import-driven surge in the trade gap could intensify the debate on a cross-border tax… The Commerce Department said on Tuesday the trade gap increased 9.6% to $48.5 billion, also buoyed by imports of cell phones and automobiles. That was the highest level since March 2012.”

March 7 – Bloomberg (Joseph Ciolli): “Here’s another way of thinking about how far stocks have come in nine years. Relative to balances in money market funds and cash among mutual fund managers, the value of global equities is the highest in almost two decades. That observation courtesy of Ned Davis Research, which framed the comparison as an indication ‘cash is underweight’ in Planet Earth’s asset portfolio. Another way of describing it is that equities have risen so much from the depths of the financial crisis that their value is blotting out everything else to an extent not seen since the dot-com bubble… At the end of January, the ratio of global equity values to money-market assets sat close to 10, the lowest reading since 1998… Since peaking in 2009, the multiple fell sharply throughout the bull market, with much of the slope reflecting the inflation of share prices. They’ve more than tripled to $26 trillion, while money market assets have fallen 31% to $2.7 trillion.”

March 9 – MarketWatch (Jeffry Bartash): “The price of imports rose in February for the third month in a row, and in a potentially worrisome sign, the increase spread beyond oil into other industrial and consumer goods… Over the past year, import prices have climbed 4.6%, registering the biggest 12-month gain since early 2012.”

Japan Watch:

March 6 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda is running short of time to lay out an exit strategy from the bank's massive stimulus, with just months before the departure of two key board members who want to slow an unsustainable pace of bond purchases. Takehiro Sato and Takahide Kiuchi have been thorns in Kuroda's side since he launched his radical monetary experiment in 2013, consistently warning of the demerits of the BOJ's huge asset purchases and dissenting to many proposals to ramp up stimulus. With inflation still stagnant and economic recovery fragile, Kuroda has no plan to tighten monetary policy any time soon. But he wants to ensure the BOJ's stimulus programme is made sustainable by laying the grounds for a gradual slowdown in its bond purchases, sources familiar with the BOJ's thinking say.”

EM Watch:

March 8 – CNBC (Karen Gilchrist): “Brazil's economy has fallen further into its worst ever recession, contracting by 3.6% in 2016 and pressure is mounting on policymakers to stimulate growth. The former Latin American powerhouse recorded a steeper-than-expected decline of 0.9%... in the final quarter of last year, intensifying the economic contraction that has imbued Brazil for eight consecutive quarters – the longest period of decline on record for the country. Brazil's economy is now 8% smaller than it was in December 2014. The two-year slump has hit almost all economic sectors, causing unemployment to rise 12.6%...”

Geopolitical Watch:

March 7 – New York Times (Gerry Mullany and Chris Buckley): “The United States said… that it had begun deploying an advanced and contentious missile defense system in South Korea, prompting China to warn of a new atomic arms race in a region increasingly on edge over North Korea’s drive to build a nuclear arsenal. The American announcement came a day after the simultaneous launch of four missiles by North Korea into waters off the Japanese coast, which Pyongyang said was a drill for striking American bases in Japan… Hours later, North Korea further unnerved the region by declaring it was blocking all Malaysians from leaving its soil…”

Friday Afternoon Links

[Bloomberg] U.S. Stocks Rise, Dollar Falls as Data Back Hike: Markets Wrap

[Bloomberg] ECB Said to Have Discussed If Rates Can Rise Before QE Ends

[Bloomberg] Yellen Claim Fed Isn't Behind Curve Challenged by Robust Hiring

[Bloomberg] U.S. Subprime Auto Loan Losses Reach Highest Level Since the Financial Crisis

[Reuters] China corporate debt levels excessively high, no quick fix: central bank governor

[Bloomberg] Oil's Plunge Below $50 Sends Options Trading Into a Frenzy

[NYT] Oil Price Drop Triggers a ‘Herd Mentality’ of Selling