Friday, March 16, 2018

Weekly Commentary: Nobody Thinks It Would Happen Again

WSJ: "Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again."

Myriad changes to the financial structure have seemingly safeguarded the financial system from another 2008-style crisis. The big Wall Street financial institutions are these days better capitalized than a decade ago. There are "living wills," along with various regulatory constraints that have limited the most egregious lending and leveraging mistakes that brought down Bear Stearns, Lehman and others. There are central bank swap lines and such, the type of financial structures that breed optimism.

March 17, 2008 - Financial Times (Gillian Tett): "In recent years, bankers have succumbed to the idea that the credit world was all about numbers and complex computer models. These days, however, this assumption looks ever more of a falsehood. For as anyone with a classical education knows, credit takes its root from the Latin word credere ("to trust") And as the current credit turmoil now mutates into ever-more virulent forms, it is faith - or, rather, the lack of it - that has turned a subprime squall into a what is arguably the worst financial ­crisis in seven decades. Make no mistake: what we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns) or even an asset class (those dodgy subprime mortgage bonds). Instead, it stems from a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms. And this trend is not just damaging the credibility of banks, but the aura of omnipotence that has enveloped institutions such as the US Federal Reserve in recent years."

Gillian Tett was the preeminent journalist during the waning mortgage finance Bubble period. She was seemingly alone in illuminating the degree of excess in subprime Credit default swaps and structured finance more generally. By March 2008, she had already recognized "the worst financial crisis in seven decades," while Wall Street was trapped in denial. Ms. Tett also appreciated the damage being done to Federal Reserve credibility. Yet no one could have anticipated the evolution of policy measures adopted by the Fed and global central bankers over the following decade. Credibility's New Lease on Life.

What I remember most vividly from the Bear Stearns episode was how well the markets took the spectacular collapse of a $400 billion Wall Street institution. After beginning 2008 at 1,468, the S&P500 closed at 1,277 on Monday, March 17. The index then rallied double-digits to 1,440 by May 19th. I recall about that time being informed that I needed to "get on with my life." Bear Stearns had been resolved. The Fed had it all under control. The crisis was over - before it even got started.

It was not over. I was convinced the overriding issue was Trillions of mispriced securities and derivatives throughout the markets - the enormous gap between perceptions and reality. Both the financial system and economy had grown dependent on rapid Credit growth. Moreover, mortgage lending had come to dominate overall system Credit, while debt growth was increasingly vulnerable to risk intermediation fragilities. Speculative leverage, also closely interlinked with risk intermediation, had evolved into a major source of marketplace liquidity.

Risk aversion had begun to significantly restrict access to Credit for the weakest borrowers, and home price declines had commenced in many locations. The financial system was highly levered in risky Credit, while the real economy was severely maladjusted from previous distortions in the flow of spending and investment. At the time, the Fed-orchestrated Bear Stearns bailout only reinforced the misperception that Washington could forestall financial dislocation. This ensured that the inevitable crisis of confidence would prove catastrophic.

I have long argued that a Bubble in junk bonds would not be perilous from a systemic standpoint. Only so many obviously risky bonds would be issued before the marketplace declares, "No more!" Functioning market mechanisms regulate the scope and duration of such booms, thereby limiting structural financial and economic maladjustment.

A boom funded by "money" is inherently problematic - and potentially disastrous. The insatiable demand for perceived safe and liquid stores of value creates the scope for prolonged systemic booms. So long as confidence is sustained in the underlying money-like financial instruments, ongoing monetary expansion (inflation) can continue to inflate securities and asset prices, spending, investment and economic output.

All the sophisticated mortgage finance Bubble-era Credit structures and risk intermediation distorted risk perceptions, spurring inordinate demand for Credit (and finance more generally). Underpinning all the lending, leveraging and speculation was the belief that Washington wouldn't tolerate a crisis in either mortgage finance or housing. Both the Fed and Wall Street had faith that monetary stimulus could resolve any hangover from a period of excess. This confidence was badly shaken by the crisis.

Importantly, however, 10-years of previously unimaginable stimulus measures - culminating in "whatever it takes" Trillions of (non-crisis) QE, negative rates and market manipulation - ensured that faith in central bank power reemerged stronger than ever. There is a critical lesson that went unlearned from the previous crisis episode: government and central bank-related risk distortions are fundamental to self-reinforcing Bubble inflation and resulting deep structural maladjustment.

One can age the mortgage finance Bubble period at about six years, commencing around governor Bernanke's 2002 "helicopter money" speeches and the Fed's focus on mortgage Credit as the expedient for (post-"tech" Bubble) systemic reflation. It would not, however, be unreasonable to date the Bubble genesis back to 1994/95, with the rapid expansion of GSE and Wall Street Credit.

We'll soon be approaching 10 years of what I back in 2009 labeled the "global government finance Bubble." Importantly, this Bubble originated at the heart of "money" and Credit, only to metastasized into the risk markets. The abuse and impairment has been unprecedented. Government debt and central bank Credit were expanded with reckless abandon. Insatiable demand for "money" granted governments at home and abroad blank checkbooks. Central banks have monetized about $15 TN of government debt, flooding speculative global securities markets with excess liquidity. Securities values have inflated to unprecedented levels. The more Credit supplied the greater its price - and the prices of virtually all assets.

Stocks rallied back (post-Bear Stearns bailout) in the spring of 2007, with players confident the Fed would backstop market liquidity. Despite widening cracks and mounting signs of looming crisis, markets were emboldened. I have argued that the collapse of two Bear Stearns structured Credit funds in the summer of 2007 was a key Bubble inflection point. I would argue further that market complacency surrounding the Bear Stearns corporate collapse ensured a catastrophic crisis of confidence. Faith in liquidity backstops and bailouts blinds the markets to risk and impedes the ability to self-adjust and correct.

"I would buy king dollar and I would sell gold." Larry Kudlow, March 14, 2018

March 14 - Bloomberg (Jeanna Smialek and Alister Bull): "The Federal Reserve's independence and monetary-policy approach had a White House ally in Gary Cohn. His successor Larry Kudlow may be a different story. 'Just let it rip, for heaven's sake,' Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. 'The market's going to take care of itself. The whole story's going to take care of itself. The Fed's going to do what it has to do, but I hope they don't overdo it.'"

The current backdrop beckons for humility. It has now been almost a decade of experimental massive expansions in both government debt and central bank Credit. The economy is strong, and the financial system appears robust. Through the prism of the 2008 crisis, the big financial institutions today have less risk and more capital. But that's not the appropriate prism. Government debt and central bank Credit have been this cycle's prevailing source of Bubble fuel. Securities market inflation has been a primary inflationary manifestation. For the most part, private-sector lending is not today's pressing issue.

I understand why Mr. Kudlow would say "buy king dollar" and "sell gold." Washington is on a trajectory of dollar devaluation, with massive twin deficits stoking the risk of a dollar crisis of confidence. A loss of faith in the U.S. currency would spur selling in U.S. financial assets, certainly including Treasuries and corporate Credit. Interest rates would spike higher, revealing the scope of speculative leverage that has accumulated over the past decade. And a crisis of confidence in financial assets would surely create a boon for gold and precious metals. Washington, of course, wants none of that. Inflate Credit while saluting king dollar.

Kudlow is seasoned, articulate and media savvy. He knows Washington, Wall Street and propaganda. "Just let it rip, for heaven's sake." Over the years I've felt Kudlow would say just about anything. At times I respect his analysis; too often over the years I've grouped him with the other charlatans.

He's an ideologue with an enticing message: "Just cut taxes." Kudlow is considered a "supply-side" free market proponent, but I've always viewed him more of an inflationist. A conservative that seemingly has absolutely no issue with loose "money;" never a Bubble he doesn't adore. And to say he was detached from reality during the critical late-stage of the mortgage finance Bubble is an understatement. He was blinded by his deep ideological biases. His sight remains distorted.

Wall Street takes comfort from the notion that Kudlow might be able to pull the President back somewhat from major tariffs and trade confrontations. He is certainly a master of touting the stock market. He, as well, seems the obvious perfect spokesman for "Phase 2" of the Trump tax cuts. Why not slash capital gains rates and make individual tax cuts permanent? Deficits don't matter. Lower taxes will spur growth and pay for themselves - with plenty to spare for infrastructure and a military buildup. There is absolutely no doubt about this; no open discussion or dialogue necessary.

We're now well into the high-risk phase of the boom cycle. The February blow-up of the "short vol" funds marked an inflection point, one I have compared to the collapse of Bear Stearns structured Credit funds in the summer of 2007. Ten-year Treasury yields have jumped 44 bps so far this year, and the dollar has been under pressure. The VIX, Treasury market and greenback have calmed down of late, which has supported an equity market recovery. Corporate Credit, however, has been notably less resilient.

March 15 - Bloomberg (Molly Smith, Brian Smith and Austin Weinstein): "For years, investors have gorged on corporate debt. Now they're showing signs of being full. Fewer orders are coming in for new bonds, relative to what's for sale. Companies that sell notes are paying more interest compared with their other debt, according to data compiled by Bloomberg, and once the securities start trading, prices by one measure have been falling about half the time. It's the latest signal that the investment-grade debt market is losing steam after years of torrid gains, as rising rates and talk of tariffs weigh on the outlook for corporate profit. 'Investors are starting to be a little more disciplined,' said Bob Summers, a portfolio manager at Neuberger Berman… 'They aren't just waving in every deal now." Money managers' restraint amounts to more pain for companies. The average yield on corporate bonds is around its highest levels since January 2012…"

March 15 - Reuters (Richard Leong): "A gauge of stress in the U.S. money markets grew to its highest level in more than six years on Thursday, bolstering the risk of further increase in the costs for banks and other companies to borrow dollars. The spread between the three-month dollar London interbank offered rate and three-month overnight indexed swap rate widened to 50.65 bps, a level not seen since January 2012. At the end of 2017, it was 27.83 bps."

And a Friday headline from Bloomberg: "Libor-OIS Spread Expands to Widest Level Since May 2009." LIBOR - a benchmark short-term interbank lending rate - is increasing (27 straight sessions) and rising more rapidly than the overnight indexed swap (OIS) rate (indicative of a risk-free borrowing rate). Essentially, short-term borrowing rates are rising while Credit risk premiums are increasing. Liquidity is becoming less abundant, and there are numerous explanations posited: The Fed is raising rates and reducing its balance sheet, massive T-bill issuance, tax cuts have incentivized U.S. multinational repatriation of funds (selling short-term instruments in the process) and less QE from the ECB.

I suspect this rate and spread development is not unrelated to the rising costs of hedging currency exposures. When markets are placid and leverage is expanding, liquidity remains abundant and cheap market hedges/protection readily available. But when markets turn more volatile and less predictable, sellers of risk protection become more cautious. Hedging costs rise, a dynamic that reduces the attractiveness of underlying securities and derivatives holdings, especially those held on leverage. In particular, the rising cost to hedge dollar exposures reduces the attractiveness of U.S. fixed income investment by foreign investors/speculators. Less demand for T-bills, overseas inter-bank dollar balances and dollar LIBOR contracts manifests into rising short-term rates and expanding spreads. As we've seen, bank funding costs begin to rise. On the margin, there is less impetus to embrace risk and leverage.

The big unknown is the scope of financial leverage and embedded leverage in derivatives markets that have accumulated over this long boom cycle. The dynamics of this Bubble contrast meaningfully from those of the last. The big financial institutions are not sitting on huge holdings of potentially toxic securities and mortgage-related derivatives. Myriad risks these days are more complex and concealed - and, importantly, even more esoteric.

I would argue that the Bubble in government finance has distorted pricing and liquidity throughout the securities and derivatives markets. Securities markets have succumbed to systemic mispricing, a circumstance fostered by liquidity misperceptions and readily available market risk "insurance." The previous cycle's "Moneyness of Credit" evolved into central bank-induced "Moneyness of Risk Assets." And while virtually everyone takes comfort from the apparent soundness of financial institutions, crisis lurks in the tangled world of securities and derivatives markets liquidity.

About a decade ago, runs on Bear Stearns and then Lehman fomented the '08 market crisis. I suspect the next U.S. crisis will unfold with "runs" on stocks and corporate Credit. We've already witnessed how quickly the VIX and equities derivatives markets can dislocate. I'm curious to see how interest-rate and Credit derivatives perform in a backdrop of faltering equities, illiquidity and derivatives market stress. And considering the direction of policymaking in Washington, don't be all too surprised by an unexpected bout of market tumult in Treasuries and the dollar.

Larry Kudlow's "king dollar" and "let it rip" might play well domestically, surely in the oval office. But I suspect it's not confidence inspiring to our lowly foreign creditors. We're at the stage of the cycle that would seem to beckon for caution, contemplation and prudence. How much trouble could Team Trump and Kudlow provoke? There's ample arrogance and ideology to risk plenty.

For the Week:

The S&P500 declined 1.2% (up 2.9% y-t-d), and the Dow fell 1.5% (up 0.9%). The Utilities rallied 2.5% (down 4.9%). The Banks dropped 2.7% (up 5.8%), and the Broker/Dealers declined 1.5% (up 12.0%). The Transports slipped 0.5% (up 0.7%). The S&P 400 Midcaps dipped 0.7% (up 1.8%), and the small cap Russell 2000 declined 0.7% (up 3.3%). The Nasdaq100 fell 1.1% (up 9.7%).The Semiconductors slipped 0.6% (up 13.5%). The Biotechs dropped 1.7% (up 13.5%). With bullion down $9, the HUI gold index lost 1.0% (down 11.0%).

Three-month Treasury bill rates ended the week at 1.74%. Two-year government yields added three bps to 2.29% (up 41bps y-t-d). Five-year T-note yields slipped a basis point to 2.64% (up 44bps). Ten-year Treasury yields were down five bps to 2.85% (up 44bps). Long bond yields fell eight bps to 3.08% (up 34bps).

Greek 10-year yields were little changed at 4.17% (up 10bps y-t-d). Ten-year Portuguese yields sank 11 bps to 1.76% (down 19bps). Italian 10-year yields declined three bps to 1.98% (down 3bps). Spain's 10-year yields fell six bps to 1.38% (down 19bps). German bund yields dropped eight bps to 0.57% (up 14bps). French yields fell seven bps to 0.82% (up 3bps). The French to German 10-year bond spread widened one to 25 bps. U.K. 10-year gilt yields dropped six bps to 1.43% (up 24bps). U.K.'s FTSE equities index declined 0.8% (down 6.8%).

Japan's Nikkei 225 equities index gained 1.0% (down 4.8% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.04% (down 1bp). France's CAC40 increased 0.2% (down 0.6%). The German DAX equities index gained 0.3% (down 4.1%). Spain's IBEX 35 equities index rose 0.8% (down 2.8%). Italy's FTSE MIB index added 0.5% (up 4.6%). EM markets were mixed. Brazil's Bovespa index fell 1.7% (up 11.1%), and Mexico's Bolsa dropped 2.2% (down 3.8%). South Korea's Kospi index rose 1.4% (up 1.1%). India’s Sensex equities index slipped 0.4% (down 2.6%). China’s Shanghai Exchange dropped 1.1% (down 1.1%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 1.6%). Russia's MICEX equities index declined 0.7% (up 8.8%).

Investment-grade bond funds saw inflows of $2.316 billion, and junk bond funds had inflows of $11 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined two bps to 4.44% (up 14bps y-o-y). Fifteen-year rates fell four bps to 3.90% (up 40bps). Five-year hybrid ARM rates gained four bps to 3.67%, the high since April 2011 (up 39bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.57% (up 14bps).

Federal Reserve Credit last week gained $5.1bn to $4.359 TN. Over the past year, Fed Credit contracted $69.1bn, or 1.6%. Fed Credit inflated $1.549 TN, or 55%, over the past 280 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $11.8bn last week to $3.452 TN. "Custody holdings" were up $254bn y-o-y, or 8.0%.

M2 (narrow) "money" supply jumped $29.9bn last week to a record $13.905 TN. "Narrow money" expanded $572bn, or 4.3%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits surged $55.7bn, while savings Deposits dropped $25.8bn. Small Time Deposits added $1.9bn. Retail Money Funds fell $4.7bn.

Total money market fund assets sank $36.3bn to $2.820 TN. Money Funds gained $143bn y-o-y, or 5.3%.

Total Commercial Paper fell $12.6bn to $1.081 TN. CP gained $119bn y-o-y, or 12.3%.

Currency Watch:

The U.S. dollar index gained 0.2% to 90.233 (down 2.1% y-o-y). For the week on the upside, the Norwegian krone increased 0.8%, the Japanese yen 0.8%, the British pound 0.7%, the Swedish krona 0.6%, and the South Korean won 0.3%. For the week on the downside, the Canadian dollar declined 2.2%, the Australian dollar 1.7%, the South African rand 1.3%, the New Zealand dollar 0.9%, the Brazilian real 0.8%, the Mexican peso 0.4%, the euro 0.1% and the Singapore dollar 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 2.71% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was about unchanged (up 0.5% y-t-d). Spot Gold slipped 0.7% to $1,314 (up 0.9%). Silver fell 2.0% to $16.272 (down 5.1%). Crude increased 30 cents to $62.34 (up 3%). Gasoline rose 2.2% (up 8%), while Natural Gas fell 2.2% (down 9%). Copper declined 0.9% (down 5.8%). Wheat sank 4.4% (up 10%). Corn lost 2.0% (up 9%).

Trump Administration Watch:

March 13 - Bloomberg (Nick Wadhams): "President Donald Trump ousted U.S. Secretary of State Rex Tillerson on Tuesday, ending a rocky tenure in an abrupt move that stunned the former Exxon Mobil Corp. CEO and set in motion a shakeup of the administration's foreign policy team. Trump announced Tillerson's ouster in a tweet shortly before 9 a.m. after weeks of staff turmoil, saying he would nominate CIA Director Mike Pompeo as secretary of state. But it was several hours before Trump discussed his decision with Tillerson, who said he'll hand over all responsibilities to Deputy Secretary John Sullivan at midnight Tuesday."

March 13 - Politico (Adam Behsudi and Andrew Restuccia): "President Donald Trump is getting ready to crack down on China. Trump told Cabinet secretaries and top advisers during a meeting at the White House last week that he wanted to soon hit China with steep tariffs and investment restrictions in response to allegations of intellectual property theft, according to three people familiar with the internal discussions. During the meeting… U.S. Trade Representative Robert Lighthizer presented Trump with a package of tariffs that would target the equivalent of $30 billion a year in Chinese imports. In response, Trump urged Lighthizer to aim for an even bigger number - and he instructed administration officials to be ready for a formal announcement in the coming weeks…"

March 14 - Reuters (David Lawder): "The Trump administration is pressing China to cut its trade surplus with the United States by $100 billion, a White House spokeswoman said…, clarifying a tweet last week from President Donald Trump. Last Wednesday, Trump tweeted that China had been asked to develop a plan to reduce its trade imbalance with the United States by $1 billion, but the spokeswoman said Trump had meant to say $100 billion. The United States had a record $375 billion trade deficit with China in 2017…"

March 15 - Bloomberg (Justin Sink and Steve Matthews): "Larry Kudlow wasted no time in showing Wall Street and Washington that he's ready to serve as an unabashed economic warrior for President Donald Trump. Within minutes of being named as top White House economic adviser…, Kudlow was on the airwaves to push a tough stance toward China and promise a new phase of tax cuts -- hitting two of Trump's favorite talking points and making clear why he was chosen for the job. Trump confirmed the selection… on Twitter. 'Our Country will have many years of Great Economic & Financial Success, with low taxes, unparalleled innovation, fair trade and an ever expanding labor force leading the way! #MAGA,' Trump tweeted. Kudlow… has demonstrated a Trump-like willingness to ignore taboos. In a rare departure for someone about to take a senior government job, he questioned Federal Reserve monetary policy and even offered a trading recommendation: 'I would buy King Dollar and I would sell gold.'"

March 14 - Bloomberg (Sarah Ponczek): "President Donald Trump's push for import tariffs and the recent White House personnel upheaval increase the chance of a global trade war -- and traders need to stay alert, because the end result could be the reappearance of inflation, according to at least one market analyst. 'We've gone a long time with a zero percent chance of a trade war, it's now higher than that -- probably significantly higher than that,' Matt Maley, a Miller Tabak equity strategist, said… 'The internationalists have lost and the nationalists have won.'"

March 14 - Financial Times (Katrina Manson): "Mike Pompeo's appointment as America's top diplomat puts a populist hawk in charge of foreign policy at a critical point in the country's strained relations with Iran, North Korea and Russia. The former Central Intelligence Agency director has touted the benefits of regime change in Iran and North Korea, and will probably push for a much tougher posture on both than his ousted predecessor Rex Tillerson. 'Pompeo wants to further the president's agenda,' said an administration official, contrasting him with Mr Tillerson, whose few fans saw him as a bulwark for a liberal global order under attack from a nationalistic and isolationist president."

March 13 - CNBC (Chloe Aiello): "President Donald Trump killed Broadcom's proposed buyout of Qualcomm, citing national security concerns, according to a statement issued by the White House… 'There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom)...through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States,' the statement said. Both companies were ordered to immediately abandon the proposed deal. The order, an unusual move by any sitting U.S. president, also prohibits all 15 of Broadcom's proposed candidates for Qualcomm's board from standing for election."

U.S. Bubble Watch:

March 13 - Wall Street Journal (Justin Baer and Ryan Tracy): "A major investment bank careens toward bankruptcy. It has $400 billion in assets, 85 years of history and deep ties to every major bank on Wall Street. As word of its troubles spreads, a run begins, sending its stock plummeting. Ten years ago Wednesday, that was Bear Stearns Cos., a once-storied firm whose excessive leverage had helped put it on the brink. The Federal Reserve tried to limit the damage with extraordinary actions, first extending the firm credit before forcing it into a hasty weekend shotgun marriage to JPMorgan…, with $29 billion in assistance. It was the first time the Fed had intervened with a noncommercial bank since the Great Depression. 'Industry participants didn't want to see Bear Stearns go down, and they didn't want to see others go down,' says Alan Schwartz, then Bear's chief executive."

March 12 - Bloomberg (Sarah McGregor): "The U.S. recorded a $215 billion budget deficit in February -- its biggest in six years -- as revenue declined. Fiscal income dropped to $156 billion, down 9% from a year earlier, while spending rose 2% to $371 billion… The deficit for the fiscal year that began in October widened to $391 billion, compared with a $351 billion shortfall the same period a year earlier… The data underscore concerns by some economists that Republican tax cuts enacted this year could increase the U.S. government debt load, which has surpassed $20 trillion. The tax changes are expected to reduce federal revenue by more than $1 trillion over the next decade, while a $300 billion spending deal reached by Congress in February could push the deficit higher."

March 12 - Reuters (Jonathan Spicer): "U.S. inflation expectations edged higher last month, with one measure hitting its highest level in a year, according to a Federal Reserve Bank of New York survey published Monday that adds to signs of price pressures. The survey of consumer expectations, which the Fed considers among other data as it continues to gradually raise interest rates, showed median one-year ahead inflation expectations rose to 2.83% from 2.71% in January, the highest reading since February 2017."

March 13 - Bloomberg (Katia Dmitrieva): "U.S. consumer prices continued to firm in February, indicating inflation is creeping up toward the Federal Reserve's target without the kind of breakout that would warrant a faster pace of interest-rate hikes. Both the main consumer price index and the core gauge, which excludes food and energy, rose 0.2% from January, matching the median estimates… The CPI was up 2.2% in the 12 months through February, compared with 2.1% in January, while the core index increased 1.8% from a year earlier for a third month."

March 14 - Reuters (Lucia Mutikani): "U.S. producer prices increased slightly more than expected in February as a rise in the cost of services offset a decline in the price of goods. The Labor Department said… its producer price index for final demand rose 0.2% last month after increasing 0.4% in January. That lifted the year-on-year increase in the PPI to 2.8% in February from 2.7% in January."

March 15 - Bloomberg (Prashant Gopal): "Home prices in the U.S. surged 8.8% in February -- the biggest gain in four years -- as buyers battled for an increasingly scarce resource: homes. While sales were little changed amid the thin inventory, the median price across 172 large metropolitan areas jumped to $285,700, according to… brokerage Redfin Corp. It was the 72nd straight month of year-over-year increases since the market bottomed in 2012. U.S. home prices are now 6.3% higher than their peak in July 2006 and 46% above their trough in February 2012, according to the S&P CoreLogic Case-Shiller national home-price index."

March 13 - CNBC (Matthew J. Belvedere): "Not enough for-sale signs in front yards are driving residential home prices higher, the chief economist at the Mortgage Bankers Association said… Compounding the problem is that Americans' wage growth is being left far behind, according to the MBA's Mike Fratantoni. 'We're still seeing home prices increase at twice the rate of income growth,' he told CNBC… 'The major constraint in the market right now is the lack of supply,' Fratantoni said. 'The absolute number of units on the market is near an all-time record low.' Fratantoni said homebuilders are trying to increase their pace of construction but 'not fast enough.'"

March 14 - CNBC (Diana Olick): "Higher interest rates caused applications to refinance a home loan to fall 2% for the week and 18% from a year ago, when rates were lower. The refinance share of all mortgage applications fell to 40%, the lowest since 2008. Mortgage applications to purchase a home did manage to eke out a slight gain, up 3% for the week and also up 3% from a year ago."

March 15 - Reuters: "U.S. import prices rose more than expected in February as the largest increase in the cost of capital goods since 2008 offset a drop in petroleum prices, bolstering views that inflation will pick up this year. …Import prices increased 0.4% last month after a downwardly revised 0.8% surge in January. Economists… had forecast import prices climbing 0.2% in February… In the 12 months through February, import prices increased 3.5% after rising 3.4% in the 12 months through January."

March 13 - Bloomberg (Scott Lanman and Christopher Condon): "Optimism among chief executive officers of large U.S. companies has reached a record high, a Business Roundtable survey showed… Index advanced to 118.6, highest since the survey began in 2002, from 96.8 in the fourth quarter… Gauge of capital spending plans in the next six months rose to 115.4 from 92.7; sales outlook jumped to 141.9 from 122. Measure of hiring expectations increased to 98.5 from 75.7."

March 14 - Bloomberg (Adam Tempkin): "More Americans are falling behind on their car payments and that's making it more expensive for subprime auto lenders to sell bundled loans. On average, AAA bond investors last year demanded insulation from the first 51% of losses on subprime-auto asset-backed securities, up more than seven percentage points from 2016, according to Wells Fargo NA. Prime lenders needed to offer enhancements on just 6%, Fitch Ratings said. The demands come as investors have grown weary of a market that's worsening at the same time that the extra interest offered over safer debt has started to shrink to levels last seen before the financial crisis. Delinquencies have steadily increased over the last five years, according to S&P Global Ratings, with losses rising to 8.32% for subprime-auto bonds in 2017 from 8.13% in 2016."

March 12 - CNBC (Jeff Cox): "Companies have been feverishly putting the savings they reaped from the tax breaks passed in December into their investors' pockets this year. Share buybacks in 2018 have averaged $4.8 billion a day, double the pace for the same period last year, according to… TrimTabs. That comes following Congress's move to slash the corporate tax rate from the highest-in-the-world 35% to 21%. The buyback announcements also have happened amid a volatile backdrop for the stock market… The share repurchases have helped keep the market afloat, as investors have pulled $23.5 billion out of funds that focus on U.S. stocks this year, according to Bank of America Merrill Lynch."

March 15 - Reuters (Pete Schroeder): "The U.S. Senate voted 67 to 31… to ease bank rules, bringing Congress a step closer to passing the first rewrite of the Dodd-Frank reform law enacted after the 2007-2009 global financial crisis. The draft legislation now heads to the U.S. House of Representatives where Republicans in the majority say they want to add more provisions to ease financial regulations. Those changes have some of the bill's backers worried that late alterations could upend the deal struck in the Senate between Republicans and Democrats."

March 13 - Bloomberg (Carolina Wilson): "A whopping 44% of all flows into U.S.-listed ETFs this year has gone to four low-cost funds from BlackRock Inc. At the top is the iShares Core MSCI EAFE ETF, known by its ticker IEFA, which has taken in $13.7 billion… Not far behind is the iShares Core S&P 500 ETF, or IVV, which has swelled by $12.2 billion. The iShares Core MSCI Emerging Markets ETF (IEMG) and the iShares Core U.S. Aggregate Bond ETF (AGG) also make the cut, taking in $5.1 billion and $2.4 billion respectively, the data show."

March 15 - Bloomberg (Emma Orr and Tiffany Kary): "IHeartMedia Inc., the biggest U.S. radio-station owner, filed for bankruptcy with a plan to halve its debt load of more than $20 billion, the legacy of a leveraged buyout that hobbled the company as the digital era spawned new rivals. IHeart, with about 850 radio stations and 17,000 employees worldwide, filed for Chapter 11 protection…, a move that allows iHeart to keep operating while it tries to cement its turnaround plan."

China Watch:

March 13 - Wall Street Journal (Tom Hancock and Lucy Hornby): "China has unveiled a sweeping revamp of its government bureaucracies, breaking up traditional power structures as President Xi Jinping attempts to fuse the ruling Communist party into the day-to-day operations of the state. The changes are aimed at streamlining the civil government and closing regulatory gaps that have frustrated Beijing's attempts to implement central policy. However, they will also allow closer alignment between the party and the civil bureaucracies, giving the CCP a greater role in day-to-day governance. Among the biggest changes is the creation of a National Supervision Commission that subjects a wider-range of government staff, such as hospital managers and university staff, to the party's internal disciplinary apparatus, reversing a division of labour that has been in place for decades."

March 12 - Bloomberg: "China unveiled a 'revolutionary' government restructuring plan that consolidates Communist Party authority, giving President Xi Jinping more direct control over the levers of money and power. The plan put before China's rubber-stamp parliament… calls for giving the People's Bank of China greater oversight in the $43 trillion banking and insurance industry and merging regulators that oversee the sector. The plan's goal was 'strengthening the Communist Party's overall leadership' of the state, the document said."

March 12 - Bloomberg: "China is giving its central bank the power to write the rules for the financial sector, as part of a sweeping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries. The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be merged in the biggest industry overhaul since 2003. Some of their functions, including drafting key regulations and prudential oversight, will move to the People's Bank of China… A new regulatory structure with the PBOC as the pivot is emerging as the annual legislative meetings progress through their second week. Still to come are personnel appointments…"

March 12 - Bloomberg (Enda Curran): "When Zhou Xiaochuan hands over the reins of the People's Bank of China after 15 years in control, his successor will take charge of a central bank with unprecedented global influence. The economy's size has ballooned from $1.5 trillion in 2002 when he started… to about $12 trillion today. China is estimated to have contributed more than a third of global growth last year… The nation surpassed the U.S. as the world's biggest oil importer last year, buying about 8.43 million barrels a day. It's also the world's biggest trading nation with total trade of $3.82 trillion in 2016, ahead of $3.58 trillion for the U.S. Other central banks are scrambling to deepen links and decipher PBOC policies. Reserve managers including the Bundesbank are buying yuan, Thailand has joined countries extending a currency swap arrangement while the Bank of Indonesia is opening a representative office in Beijing this year -- the ninth central bank to establish an office in China."

March 12 - Financial Times (Gideon Rachman): "The foundations of America's relationship with China crumbled last week. The key developments were a lurch by the US towards protectionism and a swing by China towards one-man rule. For the past 40 years, the world's two largest economies have both embraced globalisation, based on understandings about how the other would behave. The Chinese assumed that the US would continue to support free trade. The Americans believed that economic liberalisation in China would eventually lead to political liberalisation. Both of these assumptions are now shattered. On Sunday, China's National People's Congress rubber-stamped a constitutional change that would allow President Xi Jinping to rule for life. Three days earlier, President Donald Trump announced tariffs on steel and aluminium and tweeted that 'trade wars are good and easy to win'."

March 15 - Financial Times (Gabriel Wildau and Jane Pong): "China is not immune to the charms of symbolic gestures when they serve a diplomatic purpose. From 2005 to 2014, when US criticism of China for undervaluing its currency was a big bilateral issue, Beijing frequently pushed the renminbi higher in advance of international summits and state visits, only to revert once international attention had faded. But this time - faced with demands by President Donald Trump to cut the bilateral trade deficit by $100bn - Beijing has few easy options. 'If you look at China's overall trade or current account surplus, we can't really call that a mercantilist or excess-saving economy,' says Louis Kuijs, head of Asia economics at Oxford Economics... 'China now runs trade deficits with many countries, but it happens to run big surpluses with US, Europe and India - three regions where there is now increasing momentum towards protectionism.'"

March 11 - Reuters (Elias Glenn): "Any trade war with the United States will only bring disaster to the world economy, Chinese Commerce Minister Zhong Shan said…, as Beijing stepped up its criticism on proposed metals tariffs by Washington amid fears it could shatter global growth."

March 13 - Bloomberg (Blake Schmidt, Pei Yi Mak and Venus Feng): "HNA Group Co., the poster child for runaway corporate debt in China, is increasingly drawing attention to another of the nation's financial ills: trading halts that leave stock investors trapped for weeks on end. Seven listed units of HNA have halted their shares for seven weeks or more, creating the largest swathe of frozen stock tied to a single business group in China. The suspensions, which affect $31 billion of equity, have prevented minority shareholders from selling at a time of mounting financial stress for the aviation-to-hotels conglomerate."

March 11 - Associated Press: "The day China's ruling Communist Party unveiled a proposal to allow President Xi Jinping to rule indefinitely as Mao Zedong did a generation ago, Ma Bo was so shaken he couldn't sleep. So Ma, a renowned writer, wrote a social media post urging the party to remember the history of unchecked one-man rule that ended in catastrophe. 'History is regressing badly,' Ma thundered in his post. 'As a Chinese of conscience, I cannot stay silent!' Censors silenced him anyway, swiftly wiping his post from the internet. As China's rubber-stamp legislature prepares to approve constitutional changes abolishing term limits for the president…, signs of dissent and biting satire have been all but snuffed out."

Central Bank Watch:

March 13 - Bloomberg (Birgit Jennen, Alessandro Speciale, and Chris Reiter): "By all rights, it's Germany's turn for one of the biggest political plums in Europe: the chance to name the next president of the European Central Bank. Chancellor Angela Merkel may be prepared to trade that for other items on her agenda. Merkel's political partners say they're potentially willing to concede Germany's chit. The tradeoff: more influence on French President Emmanuel Macron's push to create closer ties among euro countries. The party leaders asked not to be identified because Merkel hasn't announced her plans publicly. The man who could be left out of the equation is Bundesbank chief Jens Weidmann, a leading contender to become the fourth head of the ECB."

March 14 - Financial Times (Claire Jones): "Mario Draghi has set out his intent for how the European Central Bank will raise interest rates, advocating a moderate series of rises after the bank ends its extraordinary stimulus measures. A commitment to slow and cautious rises could set the path of ECB policy beyond the end of Mr Draghi's term of office next year and make it more difficult for his successor to deviate from his dovish monetary policy. Mr Draghi reiterated… that the central bank would not raise rates until 'well past' the end of its bond-buying programme, known as quantitative easing, which is expected by the latter stages of this year."

March 14 - Bloomberg (Piotr Skolimowski): "Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and U.S. trade policies and a stronger euro are concerns. 'Adjustments to our policy will remain predictable, and they will proceed at a measured pace,' the institution's president said in his opening speech at the annual ECB and Its Watchers conference… 'We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.'"

March 13 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda… voiced confidence the central bank could engineer a smooth exit from its ultra-loose monetary policy, but said it was too early to debate specifics with inflation still distant from its target. 'By combining various tools, it's possible to shrink the BOJ's balance sheet at an appropriate pace while keeping markets stable,' Kuroda told parliament…"

March 11 - Reuters (Marc Jones): "The recent volatility in global financial markets should not deter top central banks from lifting interest rates or ending years of unprecedented stimulus, the Bank for International Settlements said… The latest report from the… group said that after such a long period of calm there were bound to be more market wobbles and that trade war worries were making the 'delicate task' of trying to normalize policy more complicated. Nevertheless, the move toward higher interest rates, which started in the United States and is gradually gaining traction elsewhere, should continue. 'Treading the path (of policy normalization) will call for a great deal of skill, judgment and, yes, also a measure of good fortune,' said Claudio Borio, the head of the BIS' monetary and economic department."

Global Bubble Watch:

March 11 - Reuters (Claire Milhench): "Chinese banks have significantly stepped up their lending activities in recent years to rank now as the sixth-largest international creditor group, the Bank for International Settlements (BIS) said… The BIS, an umbrella body for global central banks, said in its latest report that Chinese banks had cross-border financial assets worth about $2 trillion as of the third quarter of 2017. As Chinese banks lend abroad largely in U.S. dollars, in absolute terms this makes them the third-largest provider of U.S. dollars to the international banking system… 'Their global footprint encompasses not just emerging market economies, but also advanced economies and offshore centers worldwide,' the BIS said."

March 11 - Bloomberg (John Glover): "China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements. Canada -- whose economy grew last year at the fastest pace since 2011 -- was flagged thanks to its households' maxed-out credit cards and high debt levels in the wider economy. Household borrowing is also seen as a risk factor for China and Hong Kong… 'The indicators currently point to the build-up of risks in several economies,' analysts Inaki Aldasoro, Claudio Borio and Mathias Drehmann wrote in the BIS's latest Quarterly Review…"

March 12 - Bloomberg (Narae Kim, Lianting Tu, and Carrie Hong): "After complaints of 'drive-by' deals, weaker covenants and abbreviated roadshows in Asia's booming dollar-bond market, some participants are starting to see scope for demanding bigger premiums from weaker borrowers. The landscape may be changing, with a jump in volatility and benchmark 10-year Treasury yields climbing toward 3%. At least two issuers delayed deals last week as scrutiny rises. 'That's investors being selective,' said Ashley Perrott, head of pan-Asia fixed income at UBS Asset Management… 'Rising tides lifted all boats' during the record issuance last year, he said. 'Those days are kind of finished for now.'"

March 12 - Bloomberg (David Goodman and Sharon R Smyth): "London house prices are falling at the fastest pace since the depths of the recession almost a decade ago, with the capital's most expensive areas seeing the biggest declines. Average prices fell to 593,396 pounds ($820,000) in January, an annual decline of 2.6%... That's the most since August 2009."

Fixed-Income Bubble Watch:

March 15 - Bloomberg (Edward Bolingbroke): "For traders focused on the short end of the U.S. rates market, next week's Federal Reserve policy meeting is turning into a sideshow amid a relentless march higher in the London interbank offered rate and other money-market benchmarks. With a quarter-point Fed hike largely priced in by the overnight index swaps market, all eyes are now on the surging dollar Libor rate and its spread over the OIS rate. A spread known as FRA/OIS, which measures market expectations for the Libor/OIS gap, this week breached 50 bps for the first time since January 2012 and extended through 52 bps Thursday. The increase, partly a result of climbing T-bill issuance, is distorting the market for eurodollar futures, which are used to speculate about Fed policy and which settle based on Libor. Three-month dollar Libor jumped 3.25 bps Thursday to 2.17750 percent, the highest since 2008, prompting a flurry of sales in March and June eurodollar contracts."

March 13 - Bloomberg (Liz McCormick and Sid Verma): "While many fixed-income investors may be focused on the specter of higher long-term Treasury yields, there's a sea change afoot at the shorter end -- in U.S. money markets. The London interbank offered rate, or Libor, and rates on Treasury bills are around levels not seen since 2008. The Federal Reserve's move to tighten policy forms the backdrop for the increase, but an added force behind the surge this year has come from a deluge of supply as U.S. deficits widen. Higher short-term borrowing costs have implications for investors and also for banks, which find themselves paying up to borrow through the commercial-paper market as they compete to lure cash. 'We are in a new paradigm,' said Jerome Schneider, head of the short-term and funding desk at Pacific Investment Management Co. 'The clear focus for the market is where will incremental demand come from to meet this supply.'"

March 12 - Wall Street Journal (James Mackintosh): "It's easy to lend money. The trick to successful finance is getting it back-and lenders, egged on by politicians, are once again forgetting how hard it can be to recover debts in a downturn… The excesses are becoming visible. Leveraged lending hit a new high of $1.6 trillion last year, spreads over the interbank lending rate neared postcrisis lows and lenders showed an unprecedented willingness to waive the usual protections. Just as in the high-yield bond market, covenants designed to prevent the most egregious behavior of borrowers were scrapped and investors took more on faith: Half of U.S. leveraged loans and 60% of Europe's are 'covenant-lite'…'This is a market with a ton of cash chasing too few deals,' says one major underwriter. 'It feels awfully frothy, going back to the days of 2006, 2007.'"

March 12 - Reuters (Max Bower): "Senior participants are warning that today's market could be as good as it gets, despite a robust global economic backdrop and buoyant mood in the private equity and leveraged loan markets. Comparisons to 2007's pre-crisis conditions are becoming more common and industry figures are debating whether today's robust conditions constitute a bubble, as purchase prices rise, jumbo buyouts proliferate and deal terms become more aggressive. 'I think we're now in bubble territory,' said Frode Strand-Nielsen, founder of Nordic private equity firm FSN Capital. Leveraged buyout purchase price multiples hit a record high of 11.2 times average Ebitda in 2017 and average buyout sizes also hit a new record of US$675m in the third quarter of 2017, up from 10 times in 2016, according to… Bain & Co."

Europe Watch:

March 14 - Reuters (Gavin Jones and Claudia Cristoferi): "The leader of Italy's eurosceptic League said on… a government deal with the anti-system 5-Star Movement was possible after an inconclusive election, raising the prospect of two radical groups running the country. The March 4 vote ended in gridlock, with 5-Star and the League emerging as the top two parties in parliament, but no bloc or group securing a majority to govern alone."

Japan Watch:

March 12 - Bloomberg (Andy Sharp): "Japan's government said… that the names of Prime Minister Shinzo Abe, his wife and his finance minister were deleted from documents at the heart of a land scandal that erupted last year, a revelation that threatens to derail his administration and its economic strategy. Finance Minister Taro Aso apologized and said an internal investigation was ongoing as opposition lawmakers called for him to resign. He admitted that staff in his department tampered with the documents, but said all the blame rests with one of his subordinates who resigned last week. Abe also sought to limit the damage. 'We'll continue the investigation to get to the bottom of why this happened -- I want Finance Minister Aso to take responsibility for that,' Abe told reporters… 'This situation has shaken public trust in the whole administration, and as its head, I feel responsibility and deeply apologize to the people.'"

Leveraged Speculator Watch:

March 13 - Bloomberg (Sridhar Natarajan and Nabila Ahmed): "A group of powerful hedge funds is banding together to repair the credit-default swaps market after a spate of manufactured defaults has threatened the usefulness of the product. Elliott Capital Management and Apollo Global Management are among firms working on closing loopholes that have allowed investors to profit from engineering defaults on a company's debt… Companies' failures to make payments on their borrowings can trigger CDS payouts. Investors have previously complained that these maneuvers spur defaults from companies that are still very much alive, when credit derivatives were meant to protect money managers against the borrowers' demise. Those complaints are translating to action now after a controversial trade late last year from Blackstone Group's GSO Capital, where it loaned money to Hovnanian Enterprises Inc. and planned to induce a default on a portion of that company's debt."

March 12 - Bloomberg (Dani Burger): "Chalk one up for the humans. Hedge funds that use artificial intelligence and machine learning in their trading process posted the worst month on record in February, according to a Eurekahedge index that's tracked the industry from 2011. The first equity correction in two years upended their strategies as once-reliable cross-asset correlations shifted. While computerized programs are feared for their potential to render human traders obsolete, the AI quants lagged behind their discretionary counterparts. The AI index fell 7.3% last month, compared to a 2.4% decline for the broader Hedge Fund Research index."

Geopolitical Watch:

March 14 - Financial Times (Claire Jones): "Russia considers the British government to be engaging in 'very serious provocation' in its response to the poisoning of a former double agent earlier this month, the Russian ambassador to the UK has told Sky News. Describing the UK response to the nerve gas attack in Salisbury as 'absolutely unacceptable', the ambassador said: 'I had a meeting in the Foreign Office. Everything that is done today by the British government is absolutely unacceptable and we consider this a provocation. The UK should follow international law.'"

March 13 - Reuters (Andrew Osborn): "Russia said on Tuesday it had information that the United States planned to bomb the government quarter in Damascus on an invented pretext, and said it would respond militarily if it felt Russian lives were threatened by such an attack. Valery Gerasimov, head of Russia's General Staff, said Moscow had information that rebels in the enclave of eastern Ghouta were planning to fake a chemical weapons attack against civilians and blame it on the Syrian army."

Friday Evening Links

[Reuters] Wall St higher as financial stocks gain on strong data

[Bloomberg] Job Openings in U.S. Rose to Record in January, Above Forecast

[Bloomberg] Hangover Grips U.S. Corporate Bond Market After Investors’ Binge

[Bloomberg] Why It Matters That the Libor-OIS Spread Is Widening: QuickTake