Friday, April 2, 2021

Weekly Commentary: Archegos and Ponzi Finance

I’ve been a longtime enthusiast for Hyman Minky’s analysis. His work plays prominently in my analytical framework. Financial structures evolve over time, and there is an innate propensity for this evolution to regress into a cycle of ever-increasing excess, fragility and instability. Success in finance – by borrowers, lenders, speculators, investment bankers, investors, businesses, central bankers and the like – ensures only more exuberant risk embracement over the course of the cycle. Importantly, debt structures degenerate over time, as the boom is perpetuated by expanding quantities of debt of deteriorating quality.

Minsky’s “financial instability hypothesis” models three categories of debt structures: Sound “hedge finance” - where “cash flows are expected to exceed the cash flow commitments on liabilities for every period.” Less sound “speculative finance” - where cash flows, although inadequate to fully service debt in the short-run, are generally sufficient over the longer-term. And unsound “Ponzi finance” - “cash flows from assets in the near-term fall short of cash payment commitments” and only with some future “bonanza” will cash flows ever be sufficient to service debts and provide any realistic hope of generating profits.

Importantly, “a ‘Ponzi’ finance unit must expand its debt load to meet its financial obligations.” New money and credit in abundance are a necessity for perpetuating the scheme. The greater the ratio of speculative and Ponzi finance, the greater the fragility of the financial sector to rising interest rates and/or other shocks. Ponzi financed assets, in particular, are highly sensitive to both changing perceptions and higher interest rates. Traditionally, higher rates are problematic as debt service costs rise at the same time the present value of future cash flows drops. Quoting Minsky, “The rise in long term interest rates and the decline in expected profits play particular havoc with Ponzi units, for the present value of the hoped for future bonanza falls sharply.”

Minsky: “It can be shown that if hedge financing dominates, then the economy may well be an equilibrium seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system… Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.”

Minsky witnessed a lot, but he surely never imagined an environment of zero rates and endless Trillions of Fed monetization, and how such a backdrop – the perpetual “bonanza” - would extend the “deviation amplifying” Ponzi phase. The Archegos fiasco had me this week sharpening my focus on Minskian analysis. The facts are not altogether clear. But from numerous reports it appears Archegos had fund equity of around $10 billion. Positions have been estimated in the range of $50 billion to $100 billion, meaning a leverage ratio between 5 and 10 to one.

After an insider-trading settlement back in 2012, the hedge fund was converted to a so-called “family office” that enjoys much less onerous reporting requirements. Archegos maintained highly concentrated positions, with upwards of a $10 billion (equal to fund equity!) position in Viacom. And with a second huge position in Discovery, Archegos was willing to accept the risk of having media exposure significantly in excess of fund equity. Furthermore, Archegos held substantial exposures to volatile Chinese Internet stocks (including Baidu and Tencent).

Bill Hwang, the founder of Archegos, has operated in the markets since the nineties. Hwang was a protégé of hedge-fund legend Julian Robertson at Tiger Asset Management, before founding Tiger Asia Management (a so-called “Tiger Cub”) in 2001. In Hwang’s long and distinguished career, he has been in the catbird's seat for extraordinary market cycles – including spectacular booms along with devastating bursting Bubbles.

Why would Archegos employ such a risky strategy – basically reckless leveraging of volatile equities exposure? We can only assume the firm was emboldened by the hyper-loose policy and liquidity backdrop. And why would the dominant global securities firms (including Nomura, Credit Suisse, Goldman Sachs, Deutsche Bank, Morgan Stanley and Wells Fargo) so readily provide the financing for such a daring scheme? It does support the view that repeated Federal Reserve market bailouts, along with unfathomable liquidity injections, have numbed the entire marketplace to risk.

It has been my thesis that we’re in the throes of a “blow-off” period of unprecedented speculative leveraging. And Archegos provides yet another anecdote that the expansive global derivatives marketplace is at the epicenter of leverage and speculative excess. Archegos could employ such egregious leverage through “over-the-counter” derivatives positions with various securities firms – in what are called “basis” or “total return” swaps.

These types of derivatives are big business for Wall Street. From the FT (Robert Armstrong): “Global banks earned an estimated $11bn in revenue in 2019 from synthetic equity financing including total return swaps, double the level of 2012… The business, which has grown rapidly since the financial crisis, accounts for more than half of banks’ total equity financing revenue… — more than traditional margin lending and lending out shares for shorting combined. Synthetic financing continued to take share from other forms of equity financing in the first half of this year.”

Pulling from my Q4 Z.1 analysis from a few weeks back: “Broker/Dealer Loans expanded a record $100 billion, or 84% annualized, during Q4 to a record $574 billion. For 2020, Broker/Dealer Loans surged a record $164 billion, or 40%. This compares to previous cycle peak growth of $79 billion in 2006 and $75 billion in Bubble year 1999. Total Broker/Dealer Assets jumped $168 billion, or 19% annualized, during Q4 to a record $3.676 TN.”

This is the Fed’s own data. Do they not have a team ready to investigate such extraordinary Wall Street lending growth during a period of conspicuous exuberance and speculative excess? Since the “great financial crisis,” Fed chairs have repeatedly expounded the view that monetary policy is not an appropriate tool to counter asset inflation and Bubbles. It was, instead, macro-prudential polices that were to safeguard financial stability. Archegos is one more example of the serious shortcomings of this approach. How many times have we been told how closely the Fed on a daily basis monitors for risks to financial stability?

The FT’s Gillian Tett posed the relevant question: “So was Archegos an anomaly? Or a trend?” I give her credit for being diplomatic. This was utter craziness. A long-term trend that more recently achieved powerful momentum; a perilous sign of the times.

Some have drawn comparisons to Long-Term Capital Management’s 1998 blowup. Archegos is smaller and its derivatives exposure only a fraction of the Trillion or so (notional) LTCM positions. It had not borrowed in the money markets and was not levered in Credit instruments, which would generally indicate less systemic impact. Yet, on its surface, Archegos’ positioning and leverage are more audacious than even LTCM.

There have been no allegations that outright fraud is involved. No humongous “fat finger” trading flub, or the shenanigans of an overzealous hedge fund titan wannabe. There were no flaws in risk models or aberrant market dislocation that blew up the strategy. Instead, it was one crazy roll of the dice by a seasoned operator betting on the perpetual bull market – gleefully financed by the who’s who of global speculative finance.

Archegos is emblematic of an out of control mania and a complete breakdown of responsible lending and regulatory oversight. It may not have posed a systemic risk, yet the Archegos fiasco is certainly an indictment of the entire system from the speculators to the financiers to the regulators and – most importantly – the institution entrusted as guardian of our “money” and financial stability more generally.

March 31 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen is facing pressure from Democrats to revive tougher scrutiny of hedge funds and other large pools of capital as she heads her first meeting of the premier grouping of U.S. financial regulators… The meltdown of leveraged hedge fund Archegos Capital Management this week… gives the Financial Stability Oversight Council fresh evidence to review. The council, led by Treasury and including heads of the Fed, the Securities and Exchange Commission and other major financial regulators, is scheduled to meet… to privately discuss hedge fund activity and the performance of open-end mutual funds during the coronavirus pandemic.”

What are the ramifications of the Archegos implosion? We can assume regulators will take a sharpened approach with leveraged institution oversight – hedge funds and “family offices,” in particular. Lending conditions in levered “securities finance” will tighten. JPMorgan analysts estimate losses to the big securities firms could approach $10 billion – with the largest hits to Nomura and Credit Suisse. For Credit Suisse, it’s somewhat a “third (fourth) strike” (Greensill Capital, York Capital Management and Luckin Coffee). At least at the margin, the big securities firms will be somewhat more circumspect in extending Credit to highly levered market operators.

Perhaps the most consequential near-term changes will unfold stealthily in the derivatives marketplace. Regulators will more carefully scrutinize the types of derivatives that allowed Archegos to go nuts with leverage. This should spur a more cautious approach from derivative counterparties (i.e. the big securities firms), with the upshot a tightening of conditions for the leveraged speculating community.

From the FT: “‘There is never just one cockroach,’ warns Andrea Cicione, head of strategy at research house TS Lombard. ‘If all this sounds familiar, it is because of the similarities with the beginning of the global financial crisis, when two hedge funds…had to be bailed out by their sponsor, Bear Stearns, following margin calls they could not meet.’ He adds: ‘To be absolutely clear, we are not calling [another financial crisis] here — there simply is not enough evidence to conclude that Archegos is anything more than an isolated case.’”

There is every reason to believe Archegos is but the tip of the iceberg. While not obvious, the comparison to the Bear Stearns Credit fund blowups in June 2007 is apt. Those two funds had employed egregious leverage in their subprime mortgage derivatives holdings. And this type of speculative leveraging had acted as a marginal source of liquidity during the “Terminal Phase” of mortgage finance Bubble excess. And while the Fed’s aggressive monetary loosening was instrumental in sustaining general Bubble excess well into 2008, the implosion of the Bear Stearns funds marked a momentous inflection point – a tightening of lending conditions at the margin (subprime) that marked the beginning of the end for a historic Bubble.

There’s a case to be made for characterizing Archegos as an egregious employer of leverage at the fringe of an epic Bubble in leveraged speculation – having provided a marginal source of marketplace liquidity. The collapse and resulting tightening of lending conditions will now mark an inflection point for the historic Bubble in leveraged speculation across the securities and derivatives markets.

My fascination with Bubbles goes back to the late-eighties Japanese Bubble period. A similar dynamic held through the many Bubbles I’ve analyzed over several decades: U.S. bond market 1992/3, Mexico, the SE Asian “Tigers,” the nineties “tech” Bubble, the mortgage finance Bubble, and others. In each case, I became convinced the amount of Credit, speculation and other egregious excess was extraordinary. And years ago I adopted a Bubble maxim: “I knew things were really bad. It was invariably much worse than even I imagined.”

April 2 – Financial Times (Katie Martin, Robin Wigglesworth and Laurence Fletcher): “The super-rich face challenges that the rest of us do not have to consider: yacht maintenance, selecting the right fleet of private jets, finding boarding schools for their offspring. Thanks to their roughly $6tn in combined family wealth, they now have to worry about Bill Hwang too. Hwang has shot from relative obscurity to become the key figure in global markets over the past two weeks, as the implosion of his Archegos investment house has hammered a handful of stocks and punched multibillion-dollar holes out of Credit Suisse and Nomura.”

I was unaware that “family office” assets had inflated to $6 TN – through an astounding confluence of policy-induced wealth redistribution and asset inflation. From the FT: “That golden age has brought a proliferation. In a report issued a year ago, business school Insead noted that the number of single family offices had grown by 38% between 2017 and 2019, to reach more than 7,000. Assets under management stood at some $5.9tn in 2019.”

We can safely assume assets are, at a minimum, now approaching $7 TN – and, with some leverage, the size of holdings could be double or even triple. And while many “family offices” would be cautiously focused on wealth preservation, there’s an element of “regulatory arbitrage” that we all should find troubling. As Archegos has illuminated, this structure creates a loophole for avoiding regulatory oversight and reporting requirements. Most of these operations are domiciled in lax off-shore financial centers outside the purview of credible regulators.

I have proffered tens of Trillions of speculative leverage have accumulated over this protracted Bubble period. The so-called “family office” universe has clearly become a key operator in global leveraged speculation. But let’s not lose sight of the big picture.

March 29 – Reuters (Gina Chon): “But broadly global watchdogs are eyeing opaque areas of the market. Assets among shadow banks have increased following the financial crisis, totaling more than $200 trillion in 2019, now making up about 50% of the global financial system, according to the Financial Stability Board, compared to 42% in 2008.”

Archegos is also a reminder of latent liquidity issues. For the most part, the fund trafficked in exposures to liquid equity securities. For example, Viacom traded 38 million shares on March 23rd, trading at $96 late that Tuesday afternoon. By Friday, some 20 trading hours later, the stock had been more than cut in half to $40.

Clearly, the large “margin call” block trades to unwind Archegos positions were a major factor. But how much selling came out of the woodwork in an attempt to “front run” this forced liquidation? Some smelled blood, and others panicked – and the market in Viacom stock turned illiquid, then quickly dislocated. It was the inverse of spectacular speculative melt-ups we became so accustomed to during the quarter.

It made me recall the March 2020 implosion of some popular corporate bond and small cap equities ETFs. After beginning the year at $37, Viacom was trading at $100 only nine sessions ago. Importantly, it was the speculative melt-up that set the stage for the inevitable reversal, dislocation and Archegos blowup/deleveraging. We should all be worried by the ongoing proliferation of ETFs gorging on wildly volatile and speculative company stocks. It’s all late-cycle “Moneyness of Risk Assets” “Terminal Phase” egregious excess. Just wait until the “front running” (selling/shorting/put buying), illiquidity and dislocation when these funds suffer major losses and panicked outflows (“runs”).

Q1 2021 – another quarter for the history books. The Banks (BKX) surged 23.5% (Nasdaq Bank Index up 28.6%), with the Broker/Dealers (XBD) gaining 16.9%. The small cap Russell 2000 jumped 12.7%, and the “average stock” Value Line Arithmetic Index rose 14.8%. The NYSE Arca Oil Index jumped 28.4%, while the Semiconductors rose 12.1%. The Dow Transports advanced 17.3%. Gamestop surged 908%, AMC Entertainment 382%, and Express 342%.

Vaccinations reached 100 million, while 900,000 jobs were added in March. Mind-boggling fiscal stimulus, and the Fed holding doggedly to $120 billion of monthly QE (for months to come). The Treasury five-year inflation “breakeven rate” jumped 66 bps during the quarter to 2.64% (high since 2008) – with manufacturing survey price indexes surging to multi-decade highs.

Ten-year Treasury yields spiked 83 bps to 1.74%. The Brazilian real and Turkish lira each dropped 8.9%. Erdogan threw a tantrum and sacked Turkey’s chief central banker. Turkish lira bond yields spiked about 500 bps during the quarter to 17.4%. Brazilian real yields rose 253 bps to 9.40%. Supply-chain finance leader Greensill Capital collapsed during the period, while Archegos imploded spectacularly at quarter-end. Melvin Capital and other hedge funds suffered at the hands of wildly unstable markets.

As Warren Buffet is fond of saying: “You find out who’s swimming naked when the tide goes out.” Get the women and children off the beach! It’s high tide, yet things are turning nasty already. Hyman Minky’s “Ponzi Finance” on a systemic (and global) basis – and the abhorrent scheme is showing its age.

For the Week:

The S&P500 gained 1.1% (up 7.0% y-t-d), and the Dow added 0.2% (up 8.3%). The Utilities increased 0.9% (up 1.7%). The Banks slipped 0.2% (up 24.0%), while the Broker/Dealers rallied 1.3% (up 19.2%). The Transports rose 1.0% (up 17.9%). The S&P 400 Midcaps gained 0.8% (up 14.8%), and the small cap Russell 2000 recovered 1.5% (up 14.1%). The Nasdaq100 advanced 2.7% (up 3.4%). The Semiconductors surged 4.3% (up 15.9%). The Biotechs rallied 1.8% (down 2.9%). Though bullion slipped $4, the HUI gold index jumped 3.1% (down 7.8%).

Three-month Treasury bill rates ended the week at 0.0125%. Two-year government yields jumped five bps to 0.187% (up 7bps y-t-d). Five-year T-note yields surged 11 bps to 0.978% (up 62bps). Ten-year Treasury yields rose five bps to 1.72% (up 81bps). Long bond yields declined two bps to 2.36% (up 71bps). Benchmark Fannie Mae MBS yields jumped five bps to 2.06% (up 72bps).

Greek 10-year yields fell four bps to 0.82% (up 20bps y-t-d). Ten-year Portuguese yields increased three bps to 0.21% (up 18bps). Italian 10-year yields added a basis point to 0.63% (up 9bps). Spain's 10-year yields increased two bps to 0.31% (up 26bps). German bund yields gained two bps to negative 0.33% (up 24bps). French yields rose two bps to negative 0.08% (up 26bps). The French to German 10-year bond spread was little changed at 25 bps. U.K. 10-year gilt yields rose four bps to 0.80% (up 60bps). U.K.'s FTSE equities index was little changed (up 4.3% y-t-d).

Japan's Nikkei Equities Index rallied 2.3% (up 8.8% y-t-d). Japanese 10-year "JGB" yields jumped four bps to 0.13% (up 11bps y-t-d). France's CAC40 rose 1.9% (up 9.9%). The German DAX equities index jumped 2.4% (up 10.1%). Spain's IBEX 35 equities index gained 0.9% (up 6.2%). Italy's FTSE MIB index rose 1.3% (up 11.1%). EM equities were mostly higher. Brazil's Bovespa index increased 0.4% (down 3.2%), while Mexico's Bolsa slipped 0.3% (up 7.2%). South Korea's Kospi index advanced 2.4% (up 8.3%). India's Sensex equities index jumped 2.1% (up 4.8%). China's Shanghai Exchange rose 1.9% (up 0.3%). Turkey's Borsa Istanbul National 100 index rallied 3.5% (down 3.2%). Russia's MICEX equities index rose 2.0% (up 8.2%).

Investment-grade bond funds saw inflows of $1.687 billion, and junk bond funds posted positive flows of $809 million (from Lipper).

Federal Reserve Credit last week declined $43.2bn to $7.642 TN. Over the past 81 weeks, Fed Credit expanded $3.915 TN, or 105%. Fed Credit inflated $4.831 Trillion, or 172%, over the past 438 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $15.1bn to $3.552 TN. "Custody holdings" were up $213bn, or 6.4%, y-o-y.

Total money market fund assets jumped $49.2bn to $4.497 TN. Total money funds rose $100bn y-o-y, or 2.3%.

Total Commercial Paper sank $33.5bn to $1.100 TN. CP was down $5.5bn, or 0.5%, year-over-year.

Freddie Mac 30-year fixed mortgage rates added a basis point to a nine-month high 3.18% (down 15bps y-o-y). Fifteen-year rates were unchanged at 2.45% (down 37bps). Five-year hybrid ARM rates were unchanged at 2.84% (down 56bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 3.29% (down 68bps).

Currency Watch:

March 31 – Financial Times (Hudson Lockett): “China’s currency is set for its worst month against the dollar in more than a year and a half, as investors fret that a clampdown on borrowing could slow the country’s swift economic recovery from Covid-19. The tightly regulated onshore-traded renminbi fell 1.4% against the greenback in March to about Rmb6.57, marking its worst one-month drop since August 2019… The recent drop also erased the Chinese currency’s gains against the dollar since the new year.”

For the week, the U.S. dollar index added 0.3% to 93.004 (up 3.4% y-t-d). For the week on the upside, the South African rand increased 2.1%, the Mexican peso 1.3%, the Brazilian real 0.8%, the New Zealand dollar 0.5%, the Norwegian krone 0.5%, the British pound 0.3%, and the South Korean won 0.2%. For the week on the downside, the Swedish krona declined 1.0%, the Japanese yen 1.0%, the Australian dollar 0.4%, the Swiss franc 0.3%, and the euro 0.4%. The Chinese renminbi declined 0.4% versus the dollar this week (down 0.61% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.4% (up 7.4% y-t-d). Spot Gold slipped 0.2% to $1,729 (down 8.9%). Silver dipped 0.2% to $25.01 (down 5.3%). WTI crude rallied 48 cents to $61.45 (up 27%). Gasoline jumped 2.8% (up 43%), and Natural Gas roses 3.2% (up 4%). Copper fell 1.9% (up 13%). Wheat declined 0.4% (down 5%). Corn gained 1.3% (up 16%). Bitcoin surged $4,872, or 9.0%, this week to $58,875 (up 103%).

Coronavirus Watch:

March 31 – CNBC (Berkeley Lovelace Jr.): “The highly contagious coronavirus variant first identified in the U.K. is starting to become the predominant strain in many regions of the U.S., the head of the Centers for Disease Control and Prevention said… The variant, known as B.1.1.7, now accounts for 26% of Covid-19 cases circulating across the nation, CDC Director Dr. Rochelle Walensky told reporters… It is the predominant strain in at least five regions, she added.”

March 30 – CNBC (Emily DeCiccio): “Brazil just reached a grim Covid-19 milestone, and a reporter based in Sao Paulo doesn’t see the situation improving in the near future. ‘We have people dying because of lack of oxygen, people are literally suffocating,’ Patricia Campos Mello, a reporter for Folha de Sao Paulo, told CNBC… ‘There are no medications for intubation, there are no ICU beds. It’s a combination of lack of planning and just denialism of the seriousness of the disease.’ ‘The situation is completely out of control,’ Campos Mello added. Campos Mello comments came after Brazil registered… a daily record…”

Market Mania Watch:

March 31 – Reuters (Joshua Franklin and Pamela Barbaglia): “Mergers and acquisitions (M&A) activity surged globally in the first quarter of 2021 to a year-to-date record, as companies and investment firms rushed to get ahead of changes in how people work, shop, trade and receive healthcare during the COVID-19 pandemic. While the number of deals was up only 6% from a year ago, the total value of pending and completed deals rose 93% to $1.3 trillion, the second-biggest quarter on record, according to… Refinitiv. Dealmakers said a boom in the stock market and low borrowing costs - driven by the Federal Reserve’s loose monetary policies - emboldened companies, private equity funds and blank-check acquisition firms to pursue their dream deals.”

March 31 – Financial Times (Kaye Wiggins and Ortenca Aliaj): “Global dealmaking activity had its strongest start to the year in four decades, fuelled by a flurry of US acquisitions and Spac mergers… Deals worth $1.3tn were agreed in the three months to March 30, more than any first quarter since at least 1980 and topping even the heady levels of the dotcom boom at the turn of the millennium, according to figures from Refinitiv.”

March 29 – Bloomberg (Vildana Hajric and Claire Ballentine): “A secretive money pool craters, causing billions of dollars of potential losses for global banks. Two storied names of American media post their worst days ever in the stock market. Securities regulators say they’re monitoring the situation. And halfway through the afternoon on Monday, the S&P 500 Index was little changed. For investors, the Archegos Capital Management blowup is proving to be just one more example of the uncanny resilience in the U.S. stock market, where neither pandemic nor hedge-fund tumbles can pierce the protective shield of Federal Reserve stimulus. Enjoy it while it lasts, warn the pros. The Fed can’t keep this fight going forever.”

March 31 – Wall Street Journal (Akane Otani): “Financial markets went into overdrive in the first quarter of the year. Meme stocks such as GameStop Corp. surged. Celebrities dived into blank-check companies. Christie’s auctioned off a nonfungible token attached to a digital image for $69 million. And just before the quarter’s end, a fire sale of stocks that Archegos Capital Management had bet on caused well-known companies like ViacomCBS Inc. and Discovery Inc. to tumble. If there is a unifying theme to all this, it is that investors big and small showed no fear of risk-taking to start 2021. In fact, they embraced it.”

March 27 – Bloomberg (Matthew Leising): “A swathe of shadow banks in the $1.6 trillion cryptocurrency market have figured out how to generate returns of 12% with minimal risk: Lend U.S. dollars to hedge funds so they can buy Bitcoin. Some of the largest non-bank firms in cryptocurrency including BitGo, BlockFi, Galaxy Digital and Genesis are stepping up to meet investor demand for dollars amid a long-standing weariness by banks to lend to individuals or companies associated with Bitcoin and other digital assets. In this case, they’re lending to hedge funds that need cash to buy Bitcoin for a trade that is almost guaranteed to pay out at annualized returns that have recently hit 20% to 40%.”

March 31 – Bloomberg (Heather Perlberg, Crystal Tse, Ben Bain and Gillian Tan): “Anxiety is growing that the wellspring of special-purpose acquisition companies, a 2020s echo of the dot-com mania of the 1990s, is bumping up against the limits of both Wall Street and Washington. The pipeline of SPACs rushing to market is getting so clogged that bankers, lawyers and auditors are turning away business as they struggle to keep pace… As founders of blank-check companies wait in line, the deep-pocketed investors needed to take them public have grown squeamish. About 300 SPACs launched this quarter on U.S. exchanges, raising almost $100 billion -- more than all of last year. Yet since the start of last week, four deals have been postponed, and roughly half the SPACs that proceeded are trading below their offering prices.”

April 1 – Bloomberg (Paula Seligson): “The first quarter was a great time to bet on bonds from companies with the weakest credit ratings… High-yield bonds rated in the CCC tier, usually the lowest-graded bonds that trade, gained 3.58% year-to-date… They performed better than leveraged loans, which saw returns of 1.78%, and high-grade bonds, which posted a 4.65% loss. They outperformed mortgage bonds and Treasuries too.”

April 1 – Bloomberg (Irene García Pérez, Laura Benitez and Nimra Shahid): “Investors are piling into junk-rated debt at the fastest pace in nine months as the clamor for anything with a yield reaches fever pitch. High-yield debt funds with a global focus recorded inflows of $1.19 billion in the week ended March 24…, according to… EPFR Global data.”

March 30 – Bloomberg (Claire Ballentine): “Cathie Wood’s Ark Investment Management launched its first new exchange-traded fund in two years…, a key test of the money manager’s appeal after a choppy few months of both flows and performance. The actively managed ARK Space Exploration ETF (ticker ARKX), which tracks U.S. and global companies engaged in space exploration and innovation, saw more than $294 million worth of shares change hands in Tuesday trading, the eighth-best debut in ETF history. When Ark filed for the fund in January it triggered an industry-wide rally -- such was the hype surrounding Wood, whose ETFs were among the best-performing of 2020.”

Market Instability Watch:

March 30 – Bloomberg (Katherine Burton and Tom Maloney): “From his perch high above Midtown Manhattan… Bill Hwang was quietly building one of the world’s greatest fortunes. Even on Wall Street, few ever noticed him -- until suddenly, everyone did. Hwang and his private investment firm, Archegos Capital Management, are now at the center of one of the biggest margin calls of all time… Hwang’s most recent ascent can be pieced together from stocks dumped by banks in recent days -- ViacomCBS Inc., Discovery Inc. GSX Techedu Inc., Baidu Inc. -- all of which had soared this year, sometimes confounding traders who couldn’t fathom why. One part of Hwang’s portfolio… was worth almost $40 billion last week. Bankers reckon that Archegos’s net capital -- essentially Hwang’s wealth -- had reached north of $10 billion. And as disposals keep emerging, estimates of his firm’s total positions keep climbing: tens of billions, $50 billion, even more than $100 billion. It evaporated in mere days.”

March 30 – Bloomberg (Jan-Patrick Barnert and Marion Halftermeyer): “Banks roiled by the Archegos Capital fallout may see total losses in the range of $5 billion to $10 billion, according to JPMorgan. Losses from trades unwinding related to Archegos will be ‘very material’ in relation to lending exposure for a business that is mark-to-market and holds liquid collateral, analysts… wrote... They added that Nomura Holdings Inc.’s indication of potentially losing $2 billion and press speculation of a $3 billion to $4 billion loss at Credit Suisse AG is ‘not an unlikely outcome.’”

April 1 – Financial Times (Robert Armstrong): “The Archegos Capital debacle has exposed the hidden risks of the lucrative but opaque equity derivatives business through which banks empower hedge funds to make outsize bets on stocks and related assets. The soured wagers made by Bill Hwang’s family office have triggered significant losses at Credit Suisse and Nomura, underscoring how these tools can cause a chain reaction that cascades across financial markets. Archegos was able to take on tens of billions of dollars of exposure to stocks including ViacomCBS through total return swaps, a type of ‘synthetic’ financing that is popular with hedge funds since it allows them to make very large bets without buying the shares or disclosing their positions… Global banks earned an estimated $11bn in revenue in 2019 from synthetic equity financing including total return swaps, double the level of 2012, according to Finadium…”

March 29 – Financial Times (Emma Boyde): “The surge in ETF investment is beginning to spark concerns that retail investors will not be able to differentiate between exchange traded funds that own securities which are easy to trade and those that have illiquid holdings. The fear is that some funds, particularly those that have narrow investment objectives, can amass very large holdings in companies that are barely traded. ‘If you hold an ETF that has illiquid securities then your selling price might be far lower than expected if you’re part of a wave of selling,’ said Elisabeth Kashner, director of ETF research and analytics at FactSet… The underlying illiquidity is not easy for an ordinary investor to spot because of the way that ETFs operate.”

Inflation Watch:

April 1 – CNBC (Jeff Cox): “March brought the strongest manufacturing growth in more than 37 years, and with it increasing indications about inflation pressures in the months ahead… Survey respondents said ‘their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus ... impacts limiting availability of parts and materials,’ ISM Chair Timothy Fiore said. ‘Extended lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are affecting all segments of the manufacturing economy,’ he added.”

March 31 – Bloomberg (Anjani Trivedi): “There’s an underappreciated side effect of all the disruptions across global supply chains: the cost of producing and distributing everything from furniture and foam to cars and machinery is rising. While that has thrown off the plans of companies, the effect on consumer wallets is much more subtle and uneven — for now. In the U.S., 3M Co. has pointed to rising freight costs to ship its goods while Mattel Inc. has said plastic is more expensive. In China, the cost of products like furniture are going up because chemicals and metals for foam are rising. Some toy wholesalers in the country have raised prices by as much as 15%. Factory gate prices have been edging up there too.”

March 29 – Financial Times (Aziza Kasumov, Colby Smith and Eric Platt): “Investors are fretting over inflation. Scores of US companies are saying they are right to. A growing list of businesses are warning that supply-chain bottlenecks, increasing raw material costs and higher labour expenses are beginning to bite. Manufacturing behemoth 3M has flagged rising air and freight costs to ship its goods, while Walmart has warned on the congestion in US ports. Mobile home manufacturer Legacy Homes and Williams-Sonoma, the purveyor of Breville espresso machines and Wüsthof knife sets, have seen an uptick in wage costs. And Barbie Doll-maker Mattel has warned on the rise in plastics prices… ‘Costs are going up everywhere,’ said Ted Doheny, chief executive of packaging maker Sealed Air. ‘It’s DefCon 4 [for] us right now. It’s a big deal.’”

March 31 – Wall Street Journal (Kara Dapena and Dylan Moriarty): “The giant container ship that blocked the Suez Canal for six days was freed Monday, but another bottleneck in the supply chain remains, this one in Southern California. On Monday morning, 24 container ships—with a combined maximum carrying capacity nearly 10 times that of the newly freed ship—were anchored off the coast waiting for space at the ports of Los Angeles and Long Beach… The ships are carrying tens of thousands of boxes holding millions of dollars’ worth of washing machines, medical equipment, consumer electronics and other of the goods that make up global ocean trade, all of it idling in the waters in sight of docks that are jammed with still more containers. One was on its 12th day of waiting in the seemingly unending queue. And the vessels keep coming.”

March 30 – Financial Times (Kathrin Hille): “The global shortage of electronics components is worsening and is expected to last until next year, Apple supplier Foxconn has said, suggesting the shortfall squeezing global carmakers is starting to be felt by leading technology brands. ‘In the first two months of the first quarter, the impact [of the shortage] was not so palpable, but we are gradually seeing that change,’ Young Liu, Foxconn chair, told investors… He added that the shortage would persist until 2022…”

March 31 – Bloomberg (Kim Chipman): “Soybean and corn futures in Chicago surged about 5% after USDA forecast planting estimates for the new season that fell short of analyst expectations… Soybeans rose as much as 5.1%, the most since May 2016.”

March 31 – Bloomberg (Marcy Nicholson): “The maker of Scott toilet paper and Huggies diapers will soon start charging more for its consumer products to counter rising commodity costs. Kimberly-Clark Corp… told U.S. and Canadian customers that it’s raising prices for most consumer products to offset ‘significant’ commodity cost inflation, with percentage increases in the mid-to-high single digits. Nearly all price hikes take effect in late June and impact baby and child care, adult care and Scott bathroom tissue businesses…”

Biden Administration Watch:

March 31 – Reuters (Steve Holland and Jarrett Renshaw): “President Joe Biden… called for a sweeping use of government power to reshape the world’s largest economy and counter China’s rise in a $2 trillion-plus proposal that has been met with swift political resistance. Biden’s proposal would put corporate America on the hook for the tab for projects putting millions of Americans to work building infrastructure such as roads as well as tackling climate change and boosting human services like elder care. ‘It’s a once-in-a-generation investment in America, unlike anything we’ve seen or done,’ Biden said… ‘It’s big, yes. It’s bold, yes. And we can get it done.’ Biden’s second multi-trillion dollar legislative proposal in two months in office aimed to provide support to an economy walloped by the coronavirus pandemic.”

April 1 – The Hill (Jonathan Easley, Brett Samuels and Amie Parnes): “The White House is pushing an infrastructure bill that could reshape the discussion around capitalism as it seems to reestablish the federal government as a primary driver of how the economy should grow and function. In addition to traditional infrastructure projects, Biden’s $2.25 trillion American Jobs Plan would make government investments in broadband, electric vehicles, climate change, elderly care, child benefits, housing and developing future technologies. It would redefine classic infrastructure projects to include investments in workers and families paid for by tax hikes on corporations. The ambitious proposal effectively transforms the relationship between the government and the private sector, making radical changes to key sectors of the economy that could be felt for years down the road.”

March 31 – Reuters (Heather Timmons): “The infrastructure plan… includes $2.3 trillion in investments aimed at everything from fixing 10,000 bridges to tearing lead pipes out of millions of homes in the United States. The plan would modernize 20,000 miles of highways and roads, the top 10 ‘economically significant bridges’ and 10,000 other bridges. It includes $20 billion for road safety programs to reduce fatalities for cyclists and pedestrians, and $20 billion to reconnect neighborhoods divided by highway projects. It would double federal funding for public transit with a $85 billion investment and invest $80 billion in Amtrak. The plan includes $25 billion for airports, $17 billion for inland waterways, coastal ports and ferries, and investments in cleaning port air pollution. There’s another $25 billion for ‘ambitious’ transportation projects ‘too large for current funding programs.’ And, in a boost to electronic vehicle makers, a $174 billion investment to ‘win the EV market’ by spurring domestic supply chains and giving consumers rebates to buy them. $650 billion for ‘home infrastructure’. These funds would go to broadband, clean water, the electric grid, and high-quality housing.”

March 31 – Wall Street Journal (Andrew Restuccia and Tarini Parti): “President Biden unveiled a $2.3 trillion infrastructure plan centered on fixing roads and bridges, expanding broadband internet access and boosting funding for research and development, plus higher corporate taxes to pay for the package. ‘It’s not a plan that tinkers around the edges,’ Mr. Biden said… ‘It’s a once-in-a-generation investment in America.’ The Democratic president cast his plan as a fundamental shift in economic thought away from the small-government, tax-cutting approach embraced decades ago under Ronald Reagan, a Republican. ‘Here’s the truth: We all will do better when we all do well,’ Mr. Biden said, arguing that the pandemic had exposed longstanding inequalities in the country. ‘It’s time to build our economy from the bottom up and from the middle up, not the top down.’ He said his plan isn’t an attack on wealthy Americans. ‘This is not to target those who’ve made it, not to seek retribution,’ he said. ‘This is about opening opportunities for everybody else.’”

April 1 – Reuters (David Morgan): “President Joe Biden… faced the prospect of all-out political war with Republicans over his $2 trillion blueprint to revitalize America’s infrastructure, with a top Democrat also offering only partial support over how to pay for the package. A day after the Democratic president unveiled his ‘American Jobs Plan’…, the Senate’s top Republican said Biden has no public mandate for the proposal and predicted that Republicans would not support it… ‘I’m going to fight them every step of the way, because I think this is the wrong prescription for America,’ Senate Minority Leader Mitch McConnell told a news conference…”

March 31 – Bloomberg (Laura Davison): “The corporate tax-cut party President Donald Trump kicked off will soon be over if his successor proves able to enact proposals to roll back half of the 2017 domestic income-tax reduction and to radically revamp levies on profits earned abroad. President Joe Biden’s $2.25 trillion infrastructure-centered plan… relies on higher corporate levies to pay for it. The proposals would change tax benefits that were at the center of the 2017 Tax Cuts and Jobs Act passed solely with Republican votes. Along with boosting the corporate income tax rate to 28% from 21%, businesses would pay significantly more on their global earnings than they did before Trump took office, experts said. ‘They’re not just rolling back the tax cuts from 2017,’ said David Noren, a former legislative counsel to the congressional Joint Committee on Taxation… ‘They are putting companies in a much much tougher spot than even before TCJA.’ The administration is also proposing to eliminate all fossil-fuel tax breaks and repealing incentives to move assets and jobs offshore.”

March 31 – Bloomberg (Daniel Avis and Robert Schmidt): “President Joe Biden’s council of financial regulators signaled a sharpened focus on hedge funds and whether their trading poses dangers to markets. Treasury Secretary Janet Yellen, speaking at a… meeting of the Financial Stability Oversight Council, said the group has revived a task force on hedge funds so agencies can better ‘share data, identify risks and work to strengthen our financial system.’ …‘The pandemic showed that leverage of some hedge funds can amplify stresses,’ said Yellen, who leads FSOC. Her comments come as the power of lightly regulated investment firms to roil financial markets was on full display in recent days.”

March 31 – Bloomberg (Matt Robinson and Ben Bain): “The U.S. Securities and Exchange Commission opened a preliminary investigation into Bill Hwang over his leveraged trades that have roiled Wall Street. The SEC started the civil probe in recent days after Hwang’s Archegos Capital Management made a series of wrong-way wagers that prompted brokers to liquidate his positions… The examination is in its early stages and is being led by the asset-management group in the SEC’s enforcement division. It’s fairly routine after a major market blowup for the SEC to launch a review.”

March 30 – Yahoo Finance (Brian Cheung): “Regulators in DC are starting to feel the pressure to address the fallout from Archegos Capital, the faltering family firm that could inflict up to $10 billion in losses on some of the world’s largest banks. ‘We need transparency and strong oversight to ensure that the next hedge fund blowup doesn't take the economy down with it,’ Sen. Elizabeth Warren (D-Mass.) said… Senate Banking Committee Chairman Sherrod Brown (D-Ohio) said… he expects the Securities and Exchange Commission and other regulators ‘to take a closer look.’”

March 30 – Reuters (Michelle Price and Katanga Johnson): “The implosion of… Archegos Capital Management and the resulting losses for global banks is likely to intensify regulatory efforts to curtail the ballooning shadow banking sector and shed light on its risks. Scrutiny of nonbanks was already a priority for Democratic lawmakers and Treasury Secretary Janet Yellen after hedge funds were involved in last year’s Treasury market turmoil, dislocations in the repurchase agreement market in 2019, and January’s GameStop saga. The meltdown at Archegos… is another strike against the lightly regulated nonbank sector, said analysts.”

March 30 – CNBC (Brian Schwartz): “Sen. Elizabeth Warren is taking aim at Archegos Capital Management and the lightly regulated hedge-fund industry after their stock trades sent the market into a frenzy late last week. ‘‘Archegos’ meltdown had all the makings of a dangerous situation — largely unregulated hedge fund, opaque derivatives, trading in private dark pools, high leverage, and a trader who wriggled out of the SEC’s enforcement,’ Warren told CNBC…”

March 31 – Bloomberg (Laura Davison): “The corporate tax-cut party President Donald Trump kicked off will soon be over if his successor proves able to enact proposals to roll back half of the 2017 domestic income-tax reduction and to radically revamp levies on profits earned abroad. President Joe Biden’s $2.25 trillion infrastructure-centered plan… relies on higher corporate levies to pay for it. The proposals would change tax benefits that were at the center of the 2017 Tax Cuts and Jobs Act passed solely with Republican votes. Along with boosting the corporate income tax rate to 28% from 21%, businesses would pay significantly more on their global earnings than they did before Trump took office, experts said.”

Federal Reserve Watch:

March 29 – Financial Times (Andrew Parlin): “US Federal Reserve chair Jay Powell gives the impression of being a measured and cautious policymaker. But beneath the grey suit and mild manner is a man pursuing one of the highest-risk policy experiments in economic history. Powell is betting that economic growth will come roaring back later this year as the economy reopens, but that inflation, after a brief overshoot of target, will fall obediently back to about 2% and stay there… Only in 2024 does Powell foresee the need for the first hike. In Powell’s outlook, a 2021 growth rate of 6.5% and unemployment of 4.5% coexist with full-on monetary stimulus, complete with zero interest rates and yearly Fed asset purchases of $1.4tn. If this policy stance seems incongruous, that’s because it is. Powell’s policy bet encompasses four distinct flaws of reasoning. First, the risk-reward of his experiment is wholly asymmetrical, skewed hugely to the downside… Second, the level of inflation vigilance on the part of a Fed chair is a critical component in keeping inflation expectations firmly anchored… Third, Powell has repeatedly stated, as cause for his relaxed stance, that inflation has surprised on the downside since the 2008 collapse… Fourth and finally, Powell should be especially distrustful of himself and his own judgments, for he has first-hand experience in applying the wrong policy prescription.”

March 29 – Bloomberg (Catarina Saraiva and Craig Torres): “Republican Senator Patrick Toomey said the San Francisco Federal Reserve’s research into topics including climate change and racial justice is ‘politically charged’ and could result in ‘mission creep’ from the independent agency into policy matters usually left to elected officials… ‘Several Federal Reserve banks, including the FRBSF, have increasingly been engaged in research on social-policy topics reflective of the political and normative leanings of unelected Federal Reserve Bank officials,’ Toomey wrote… ‘This approach has inserted the Federal Reserve into the emotionally charged political arena -- a place where the Federal Reserve seldom has ventured, and for good reason.’”

March 30 – Bloomberg (Alister Bull): “Federal Reserve Vice Chair for Supervision Randal Quarles says that investors should take the U.S. central bank at its word that it will deliver an overshoot of its 2% inflation target. ‘I think it is very credible to expect the committee to be comfortable with inflation somewhat over our 2% target,’ he said… ‘Over time we will look to average, and I think that is a very credible commitment from the committee and I am very supportive of it.’”

March 29 – Reuters (Howard Schneider): “The Federal Reserve is ‘a long way from raising interest rates at this point,’ Fed Governor Christopher Waller said…, in remarks that put him among the core of U.S. central bank officials ready to leave support for the economy in place until the recovery from the coronavirus pandemic is complete. Waller said he saw no evidence at this point that U.S. inflation expectations were rising in a worrisome way, or that bond yields or asset prices were prompting concerns about financial instability.”

March 30 – Reuters (Ann Saphir): “Richmond Federal Reserve Bank President Thomas Barkin… said he is very ‘bullish’ on the U.S. economy this year, and expects household savings accumulated during the COVID-19 pandemic to help fuel growth in 2022 and 2023 as well. ‘People just have a lot of money in their pockets,’ Barkin told the Montgomery County Chamber of Commerce. As vaccinations accelerate and people feel more comfortable going out to dinner and getting on airplanes, he said, they’ll spend more of that money, but there’s ‘no way’ it will all get spent this year.”

U.S. Bubble Watch:

April 2 – Bloomberg (Reade Pickert): “U.S. employers added the most jobs in seven months with improvement across most industries in March, as more vaccinations and fewer business restrictions supercharged the labor market recovery. Nonfarm payrolls increased by 916,000 last month and February employment was revised up to a 468,000 gain… The unemployment rate fell to 6%... The payroll figures showed broad-based gains across industries, led by a 280,000 surge in leisure and hospitality. Construction payrolls jumped 110,000 after dipping in February amid severe winter weather. Education employment also climbed as more schools reopened. Manufacturing employment increased by 53,000 last month, the biggest advance since September… Even with the sharp advance in March, payrolls remained 8.4 million below the pre-pandemic peak of about 152.5 million.”

March 30 – CNBC (Diana Olick): “Home price gains are accelerating at an alarming pace, fueled by Covid pandemic-related inflation, which some claim is not getting enough attention from the Federal Reserve. Home prices nationally in January rose 11.2% year over year, according to… the S&P CoreLogic Case-Shiller Index. That is the largest annual gain in nearly 15 years. As a comparison, annual price gains were 10.4% in December, 9.5% in November, 8.4% in October, 7% in September, 5.8% in August and 4.8% last July. In January 2020, the annual gain was just 3.9%... ‘In more than 30 years of S&P CoreLogic Case-Shiller data, January’s year-over-year change is comfortably in the top decile. That strength is reflected across all 20 cities,’ noted Craig Lazzara, managing director… at S&P Dow Jones Indices. ‘January’s price gains in every city are above that city’s median level, and rank in the top quartile of all reports in 18 cities.’”

March 30 – Wall Street Journal (Nicole Friedman): “U.S. home prices are rising at the fastest pace in 15 years, reflecting how fiercely buyers are competing for a limited supply of homes in nearly every corner of the country. From small cities like Bridgeport, Conn., to large ones like Seattle, prices have been steadily moving higher. Two closely-watched house-price indicators… posted double-digit national price growth, demonstrating the widespread strength of the market. A number of forces have merged to fuel the red hot housing market… Millions of millennials are aging into their prime-homebuying years in their 30s. New-home construction has lagged behind demand and homeowners are holding on to their houses longer.”

March 30 – Wall Street Journal (Nicole Friedman): “U.S. home prices are rising at the fastest pace in 15 years, reflecting how fiercely buyers are competing for a limited supply of homes in nearly every corner of the country. From small cities like Bridgeport, Conn., to large ones like Seattle, prices have been steadily moving higher. Two closely-watched house-price indicators released Tuesday posted double-digit national price growth, demonstrating the widespread strength of the market.”

March 31 – Yahoo Finance (Alexis Christoforous): “Home prices are rising at a historic rate, putting the dream of owning a home out of reach for millions of Americans. According to the latest S&P CoreLogic Case-Shiller National Home Price Index, home prices rose at the fastest pace in 15 years. The index rose 11.2% in January, the highest annual gain since February 2006. The price growth is being fueled by a record low number of available homes for sale on the market. ‘It’s a real crisis,’ Moody’s Analytics Chief Economist Mark Zandi told Yahoo Finance. ‘We have a very severe shortage of homes, particularly affordable homes.’ The median price of an existing home sold during February was $313,000, up 15.8% from the same month a year ago…”

March 30 – CNN (Anna Bahney): “Ellen Coleman had never received so many offers on a house in her 15 years of selling real estate. She listed a fixer-upper in suburban Washington, DC for $275,000 on a Thursday. By Sunday evening, she had 88 offers. ‘The offers just kept coming,’ she said. ‘I felt like Lucy with the chocolates. I’m thinking, ‘This is just out of control.’’ Of those 88 offers, 76 were all-cash, said Coleman… There wasn't even enough time for all of the bidders to visit the property. She said 15 offers were sight unseen.”

April 1 – Bloomberg (Vince Golle): “U.S. manufacturing expanded in March at the fastest pace since 1983, catapulted by the firmest orders and production readings in 17 years… A gauge of factory activity jumped to 64.7 from 60.8 a month earlier… The ISM’s measure of U.S. order backlogs climbed in March to the strongest reading in records back to 1993 and a gauge of supplier delivery times reached an almost 47-year high. Both indexes underscore supply challenges faced by producers that are also paying more for raw materials and shipping… At 85.6 in March, the group’s index of prices paid for inputs was little changed from February’s 86 reading that was the highest since July 2008.”

March 31 – Wall Street Journal (Christina Rogers): “Ford Motor Co. is scheduling more downtime at several U.S. factories, including its two major truck plants, as a global shortage of semiconductors upends vehicle manufacturing… The company said… it would halt production for two weeks in April at its truck plant in Dearborn, Mich., and take a week of downtime on the truck side of its Kansas City, Mo., assembly plant, starting Monday. It also plans to suspend work temporarily and cancel planned overtime at several other factories in North America, attributing the work stoppages to tight chip supplies.”

March 28 – Wall Street Journal (Jesse Newman): “In a resurgent American Farm Belt, the hottest commodity around is dirt. Across the Midwest, prices to buy and rent farmland are climbing as demand is driven by rallying grain markets, historic government payments and low interest rates… The battle for farmland is playing out in small town community centers, online portals and parking lots, where bids in Covid-19-era auctions are placed with a wave from the window of a pickup truck or a quick flashing of headlights. There, auctioneers are peddling parcels of land to farmers eager to cash in on the best commodity prices in nearly a decade.”

March 30 – Bloomberg (Prashant Gopal and Shahien Nasiripour): “After riding the $3 trillion refinancing wave to its best year ever in 2020, U.S. mortgage lenders have hit a snag: rising rates. For Thuan Nguyen, a mortgage broker in… California, it’s humbling. He sold about $2 billion in mortgages last year -- more than any industry sales person in at least a decade, by one ranking. Now the phones are going quiet. ‘I expected the good times would continue,’ said Nguyen, 48, who quadrupled his staff and expanded to almost 20 states last year. ‘Rates went up and all refinance almost disappeared. Everybody got shocked.’”

March 31 – Financial Times (Joe Rennison): “Private equity groups including Ares and Golden Gate Capital have raised more than $20bn in the US leveraged loan market through the companies they own to award themselves a bumper payday. Dividend deals in the loan market have reached a total of $21.7bn, according to… LevFin Insights, a unit of… Fitch Ratings. It marks a new quarterly high for data going back to 2016.”

April 1 – Bloomberg (Natalie Wong): “The amount of office space available in Manhattan is at the highest level in at least 30 years. The availability rate jumped to 17.2% in the first quarter, according to… Savills. Much of that was driven by a surge in sublease space, which reached 22 million square feet, 62% higher than before the pandemic… ‘Abundant short- and long-term options are driving price reductions,’ Savills said…”

Fixed Income Watch:

March 30 – Bloomberg (Amanda Albright): “Mom and pop investors are helping the municipal-debt market stand firm in the face of broader fixed-income pain in 2021. State and local debt is poised to outperform U.S. Treasuries by the most in any quarter since 2009… While municipals have been pressured by the selloff in Treasuries -- they’re on pace for a 0.3% quarterly loss -- the flood of cash coming in has helped the market avoid a major slump. Treasuries… are down 4.2%. Muni funds have pulled in a net $26.18 billion this year through the week ended March 24, according to Refinitiv Lipper… State and local-debt ETFs alone are poised for their second-best quarter of inflows on record, reaping about $5.1 billion…”

March 29 – Bloomberg (Greg Ritchie, Jill Ward, Saijel Kishan and Alice Gledhill): “In a booming global bond market, there are few segments that are growing quite like the money-minting machine for green bonds. So eager are investors to buy up these notes that they’re willing to pay a premium -- and accept lower interest payments -- for the privilege. The risk is that in this mad rush they’re letting a feel-good label obscure the reality of their investments. At the forefront of concerns among a small but growing contingent of bond buyers is greenwashing: the possibility that governments and companies are exaggerating or misrepresenting their environmental credentials or sustainability bona fides to tap feverish demand, lower borrowing costs and boost their reputation.”

April 2 – Financial Times (Philip Georgiadis and Claire Bushey): “Airlines tapped a wave of investor enthusiasm to raise more than $16bn from bond markets in the first quarter, shoring up their finances as travel disruption stretches into a second year. The figures highlight how the world’s biggest carriers have been able to raise a wall of money to help them through a period of unprecedented turmoil, with a third of the world’s fleet of commercial aircraft still in storage as passenger numbers collapse.”

China Watch:

April 1 – CNBC (Evelyn Cheng): “China’s central bank warned… of financial risks in the country that have accumulated over the years, as well as shocks from overseas uncertainties. These risks include ‘oscillation’ in the stock and fixed income markets and potential bond defaults in real estate companies, said Zou Lan, director of the People’s Bank of China’s financial markets department. The detailed comments mark the latest warning from high-level officials... ‘The stock, bond and commodities markets face oscillation risks,’ he said… ‘A small number of large-scale enterprise groups are still in a period of risks being exposed, middle and low-quality enterprises still face financing difficulties, and the risk of default is rather high.’”

April 2 – Bloomberg: “China’s financial regulators plan to impose additional capital requirements on the nation’s systemically important banks, seeking to curb risks and safeguard stability of the $49 trillion industry. Banks considered too big to fail will be put into five categories and face a surcharge of between 0.25% and 1.5% on top of the mandatory capital adequacy ratios, the People’s Bank of China and the China Banking and Insurance Regulatory Commission said…”

March 28 – Reuters (Samuel Shen and Ryan Woo): “China moved to tighten scrutiny over its credit rating business…, issuing draft rules aimed at bolstering an industry long blamed for inflating ratings in the country’s $4.4 trillion corporate bond market. China’s credit rating agencies are urged to improve their credit rating models, strengthen corporate governance and bolster information disclosure, according to rules jointly published by five government agencies including the central bank and the finance ministry.”

April 2 – New York Times (Keith Bradsher): “To defend against accusations by Washington and others that it doesn’t play fair on trade, Beijing could point to the banks. Chinese leaders have been steadily lowering the barriers they had erected around the country’s vast financial system, giving Wall Street and European lenders a greater shot at winning business in the world’s second-largest economy. Now the walls are going up again. New Chinese rules have sharply limited the ability of foreign banks to do business there, making them less competitive against local rivals, according to three people with knowledge of the directives. One set of rules enacted in December and January restricts how much money foreign banks can transfer into China from overseas. Another that took effect on Wednesday required many foreign banks to make fewer loans and sell off bonds and other investments…”

March 30 – Reuters (Stella Qiu and Gabriel Crossley): “Activity in China’s services sector expanded at a much faster pace in March… The official non-manufacturing Purchasing Managers’ Index (PMI) surged to 56.3 from 51.4 in February… China’s services sector, which includes many smaller and private companies, has lagged the recovery in manufacturing. The Chinese consumers, however, have started to perk up recently after months of hesitation.”

March 30 – Reuters (Stella Qiu and Gabriel Crossley): “China’s factory activity expanded at a faster-than-expected pace in March…, as factories that had closed for the Lunar New Year holiday resumed production to meet improving demand. The official manufacturing Purchasing Manager’s Index (PMI) rose to 51.9 from 50.6 in February…”

Global Bubble Watch:

April 1 – CNBC (Jeff Cox): “The Treasury Department is working with the International Monetary Fund to help provide up to $650 billion in currency aid to countries hit hardest by the Covid-19 pandemic. An announcement Friday from Treasury indicated it is aiding the IMF toward an allocation of $650 billion in Special Drawing Rights that would ‘help build reserve buffers, smooth adjustments, and mitigate the risks of economic stagnation in global growth.’ SDRs are reserve assets that countries can use to supplement their foreign exchange assets, such as gold and U.S. dollars.”

March 31 – Financial Times (Leo Lewis, Tabby Kinder, Stephen Morris): “Credit rating agencies have downgraded their outlooks for Nomura and Credit Suisse, citing concerns over risk management as the banks confront multibillion dollar losses from the Archegos Capital Management debacle. The move by Moody’s and Fitch… comes amid intensifying scrutiny of Nomura’s international operations and its appetite for profitable but more risky trading activity. Nomura and Credit Suisse were among banks that allowed Archegos… to amass billions of dollars of exposure to equities through swap contracts.”

March 28 – Bloomberg (Ian King, Debby Wu and Demetrios Pogkas): “A six-decade-old invention, the lowly chip, has gone from little-understood workhorse in powerful computers to the most crucial and expensive component under the hood of modern-day gadgets. That explosion in demand—unexpectedly goosed during the Covid-19 pandemic for certain industries like smartphones and PCs—has caused a near-term supply shock triggering an unprecedented global shortage. In February, lead times… stretched to 15 weeks on average for the first time since data collection started in 2017… Lead times for Broadcom Inc.—a barometer for the industry because of its involvement across the supply chain—extended to 22.2 weeks, up from 12.2 weeks in February 2020.”

March 30 – Bloomberg (Debbie Wu): “Global efforts to develop national self-sufficiency in chip production are ‘economically unrealistic’ and U.S.-China trade tensions have contributed to the chip shortage currently snarling entire industries, according to Taiwan Semiconductor Manufacturing Co. Chairman Mark Liu. Speaking… at an industry event in Hsinchu in his role as chairman of the Taiwan Semiconductor Industry Association, Liu said uncertainty around the U.S.-China relationship led to a supply chain shift and pushed some companies to double up on orders to secure inventory. Others rushed to fill the market gap left by Huawei Technologies Co. after sanctions crippled its consumer business.”

March 28 – Wall Street Journal (Mike Cherney and Patricia Kowsmann): “As the U.S. housing market booms, a parallel rise in residential real-estate prices across the world from Amsterdam to Auckland is raising fears of possible bubbles and prompting some governments to intervene to prevent their markets from overheating. Policy makers were already worried about high property prices in parts of Europe, Asia and Canada before the pandemic… But now the trillions of dollars of stimulus deployed world-wide to fight the effects of Covid-19… are turbocharging markets further. That is putting policy makers in a bind. Many want to keep interest rates low to sustain the post-pandemic recovery, but they worry about people taking on too much debt to buy houses…”

March 31 – Reuters (Jonathan Cable, Leika Kihara and Daniel Leussink): “Factories across Europe and Asia ramped up production in March as a solid recovery in demand helped manufacturers move past the setbacks of the pandemic, although escalating costs and supply- chain disruptions were creating challenges and driving prices.”

March 31 – Bloomberg (Finbarr Flynn and Ameya Karve): “Asia joins other regions racking up unprecedented debt to lock in cheap financing costs before any further rise in rates. Borrowers have sold at least $138 billion so far this year, up 35% from the same period of 2020 and the most for any quarter ever…”

April 1 – Financial Times (Cynthia O’Murchu and Robert Smith): “Greensill Capital’s administrator has been unable to verify invoices underpinning loans to Sanjeev Gupta, after companies listed on the documents denied that they had ever done business with the metals magnate. Greensill, whose collapse last month has become a corporate and political scandal, provided financing to Gupta’s companies backed by payments to his suppliers and from his customers. The disputed invoices raise questions over other transactions underpinning billions of pounds of loans from Greensill to Gupta.”

March 31 – Reuters (Ben Blanchard and Sayantani Ghosh): “Contract chipmaker TSMC said… it plans to invest $100 billion over the next three years to increase capacity at its plants, days after Intel Corp announced a $20 billion plan to expand its advanced chip making capacity. Taiwan Semiconductor Manufacturing Co Ltd, whose customers include Apple Inc and Qualcomm Inc, had already flagged a plan to spend of between $25 billion-$28 billion this year, to develop and produce advanced chips.”

Europe Watch:

March 29 – Bloomberg (Alessandra Migliaccio): “Italy’s budget deficit is likely to be close to 10% of gross domestic product for a second year as successive lockdowns force the country to boost spending… Such a projection may feature in Prime Minister Mario Draghi’s new public-finance targets in mid-April, which will also include a higher debt tally for 2021, pushing towards 159% of output… The figures aren’t final and could still change before they’re unveiled. Both those numbers are noticeably higher than in the previous outlook released in October…”

March 30 – Financial Times (Ben Hall): “It is too early to say whether the investment agreement the EU struck with China at the end of December is dead, although it is clearly badly wounded. Beijing last week hit European lawmakers from each of the main party groups in retaliation for EU sanctions against four Chinese officials involved in human rights abuses in Xinjiang. It made it all but impossible for the European Parliament to ratify the treaty.”

EM Watch:

March 30 – Financial Times (Chris Giles): “The world should be ready for an emerging market debt crisis as the global economy emerges from the coronavirus pandemic and interest rates rise, drawing capital away from vulnerable countries, the head of the IMF has warned. In a virtual speech… Kristalina Georgieva said… a tightening of financial conditions could trigger ‘significant’ capital outflows… Capital outflows from emerging economies as US interest rates rise — similar to the taper tantrum of 2013 — ‘would pose major challenges, especially to middle-income countries with large external financing needs and elevated debt levels’, Georgieva said.”

March 30 – Bloomberg (Chester Yung, Grace Sihombing and Farah Elbahrawy): “The latest Treasury selloff is undercutting bond deals in far-flung corners of the world with Indonesia selling its smallest deal in at least five years. Rather than paying a higher interest rate, the Asian nation chose to shrink the size of its debt offering… It comes a week after a canceled bond sale in Russia and a South African debt auction that saw lower demand than usual. The highest 10-year Treasury yields in more than a year and a stronger dollar are raising all-in financing costs for new deals and spurring some borrowers to change their issuance plans. ‘Eventually, governments have come to terms that financing costs are on the rise and the sweet spot is behind us,’ Trieu Pham, …emerging markets strategist at ING Bank NV. ‘We will probably have to monitor the situation for another few weeks.’”

March 30 – Wall Street Journal (Luciana Magalhaes and Samantha Pearson): “The heads of Brazil’s army, navy and air force resigned…, rocking a right-wing government that is already facing public fury over President Jair Bolsonaro’s inability to contain the fast-spreading coronavirus pandemic. Brazil’s Defense Ministry said the three commanders would be substituted… A person close to the ministry said the men had stepped down. The announcement came a day after Mr. Bolsonaro replaced six of his cabinet members, including a surprise move to dismiss the defense minister.”

March 30 – Financial Times (Ayla Jean Yackley and Adam Samson): “Turkey’s currency dropped after President Recep Tayyip Erdogan fanned further uncertainty over monetary policy by sacking the deputy governor of the central bank 10 days after dismissing its head.”

Japan Watch:

March 30 – Reuters (Daniel Leussink): “Japan’s factory output fell in February as an earthquake and semiconductor shortage led to declines in the production of cars and electrical machinery, adding to worries for an economy struggling to recover from the coronavirus pandemic… Official data… showed factory output shrank 2.1% from the previous month in February…”

Leveraged Speculation Watch:

March 29 – Bloomberg (Sridhar Natarajan and Donal Griffin): “Alarms were blaring inside Wall Street’s corridors of power in the middle of last week, as executives realized they might be facing the biggest hedge fund blowup since Long-Term Capital Management in the 1990s. Global investment banks, gathering in a hastily arranged call, needed a swift truce to deal with Bill Hwang’s Archegos Capital Management if they were to head off billions of dollars in losses for banks and a potential chain reaction across markets. Yet by Friday, it was everyone for themselves. The forced liquidation that sent bellwether stocks tumbling last week and continues to send shock waves across capital markets, was preceded by bickering in the highest rungs of international finance that quickly devolved into finger-pointing and now fury…”

March 29 – Bloomberg (Sofia Horta e Costa, Tracy Alloway and Bei Hu): “The forced liquidation of more than $20 billion in holdings linked to Bill Hwang’s investment firm is drawing attention to the covert financial instruments he used to build large stakes in companies. Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps and so-called contracts-for-difference… It means Archegos may never actually have owned most of the underlying securities -- if any at all. While investors who own a stake of more than 5% in a U.S.-listed company usually have to disclose their holdings and subsequent transactions, that’s not the case with positions built through the type of derivatives apparently used by Archegos.”

March 29 – Financial Times (Tabby Kinder and Leo Lewis): “In 2012…, hedge fund Tiger Asia Management pleaded guilty to using inside information to trade Chinese bank stocks, resulting in a massive settlement with US regulators. It marked a fall from grace for its founder Bill Hwang, one of the so-called ‘Tiger Cub’ veterans of Julian Robertson’s Tiger Management fund. In theory Hwang might have found himself permanently blacklisted by investment banks everywhere. But just 12 months after he was forced to return money to investors, Hwang was back in the game. He set up a secretive new family office called Archegos Capital Management. And soon many of the world’s top investment banks were fiercely competing for its business.”

March 29 – Bloomberg (Erik Schatzker and Sridhar Natarajan): “Bill Hwang, a former hedge fund manager who’d pleaded guilty to insider trading, was deemed such a risk by Goldman Sachs Group Inc. that as recently as late 2018 the firm refused to do business with him. Those misgivings didn’t last. Wall Street’s premier investment bank, lured by the tens of millions of dollars a year in commissions that a whale like Hwang paid to rival dealers, removed his name from its blacklist and allowed him to become a major client. Just as Morgan Stanley, Credit Suisse Group AG and others did, Goldman fueled a pipeline of billions of dollars in credit for Hwang to make highly leveraged bets on stocks such as Chinese tech giant Baidu Inc. and media conglomerate ViacomCBS Inc.”

March 28 – New York Times (Eshe Nelson, Jack Ewing and Liz Alderman): “The courthouse should have already been closed for the day. At a hearing that began at 5 p.m. on March 1, lawyers for Greensill Capital desperately argued before a judge in Sydney, Australia, that the firm’s insurers should be ordered to extend policies set to expire at midnight. Greensill Capital needed the insurance to back $4.6 billion it was owed by businesses around the world, and without it 50,000 jobs would be in jeopardy, they said. The judge said no… A week later, Greensill Capital — valued at $3.5 billion less than two years ago — filed for bankruptcy in London. A firm with 16 offices around the world, from Singapore to London to Bogotá, was insolvent. Greensill’s dazzlingly fast failure is one of the most spectacular collapses of a global finance firm in over a decade.”

March 31 – Wall Street Journal (Gregory Zuckerman): “Enormous losses at Archegos Capital Management have cast a rare spotlight on the growing influence of below-the-radar institutions around the globe called family offices. These firms, which manage huge piles of wealth for individuals or families, are proving to be increasingly important to the financial system. Just 121 of the largest single-family offices represent an estimated net worth of $142.4 billion… Sixty-nine percent of these offices were established since 2000… As they have grown in size, some family offices have embraced the riskier investment strategies used in previous decades by the most aggressive hedge funds. This is a departure from more traditional family office investments in stocks and bonds—as well as private equity and venture capital…”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 2 – Bloomberg (Brian K Sullivan): “California’s reservoirs are half-empty and dryness has reached levels similar to 2014 and 2015, when the state suffered an historic drought. The state… is facing its third driest year on record, according to a report issued by the Department of Water Resources Thursday. The last time California was this dry, the state imposed widespread water-use restrictions, some of which have since become law.”

Geopolitical Watch:

March 28 – Wall Street Journal (Nathaniel Taplin): “Relations between China and the West are off to a rocky start in 2021. Observers watching China and the U.S. trade accusations in Alaska, and Europe and China trade sanctions days later can be forgiven for a cold feeling in the pit of their stomach. Beijing’s tolerance for economic risk in the service of nationalism has rarely looked higher. That could bode ill for many, not least Taiwan and the littoral states of the South China Sea. The trade conflict between the U.S. and China has metastasized into a broader geopolitical confrontation—while China’s armed forces are nearing parity with the U.S. in the former’s backyard. Chinese incursions into Taiwan’s air defense identification zone have at times become a near daily occurrence since late 2020, while the U.S. is busy rallying allies such as Japan to plan for contingencies.”

March 29 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “The Biden administration is preparing to issue guidelines that would make it easier for US diplomats to meet Taiwanese officials by adopting some of the changes introduced by Donald Trump, in a move China is likely to see as a provocation. In one of his final acts in office, Trump significantly loosened constraints that had made it difficult for US diplomats to hold such meetings. Experts were waiting to see if Joe Biden would reverse course. But the Biden administration has decided to keep many of the Trump changes in place… The limits on contacts between American diplomats and Taiwanese officials had been in effect for decades until Trump loosened them.”

April 1 – Financial Times (Kathrin Hille): “China has stepped up its military posturing around Taiwan over the past week, a trend that is set to fuel growing concerns that Beijing might move closer to attacking the island. Taiwan and Japan on Monday both reported incursions into their respective air defence identification zones, the first simultaneous announcement from Taipei and Tokyo. Taipei said that ten Chinese military aircraft… had flown into its ADIZ, while Japan recorded an ASW plane inside its zone just east of Taiwan.”

March 27 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “The US is concerned that China is flirting with the idea of seizing control of Taiwan as President Xi Jinping becomes more willing to take risks to boost his legacy. ‘China appears to be moving from a period of being content with the status quo over Taiwan to a period in which they are more impatient and more prepared to test the limits and flirt with the idea of unification,’ a senior US official told the Financial Times. The official said the Biden administration had reached the conclusion after assessing Chinese behaviour during the past two months.”

March 27 – NBC (Dan De Luce and Ken Dilanian): “China's massive arms buildup has raised doubts about America's ability to defend Taiwan if a war broke out, reflecting a shifting balance of power in the Pacific where American forces once dominated, U.S. officials and experts say. In simulated combat in which China attempts to invade Taiwan, the results are sobering and the United States often loses, said David Ochmanek, a former senior Defense Department official who helps run war games for the Pentagon at the RAND Corp. think tank. In tabletop exercises with America as the ‘blue team’ facing off against a ‘red team’ resembling China, Taiwan's air force is wiped out within minutes, U.S. air bases across the Pacific come under attack, and American warships and aircraft are held at bay by the long reach of China's vast missile arsenal, he said.”

March 29 – Bloomberg (Jennifer Jacobs, Jennifer A. Dlouhy and Michael Riley): “The Biden administration is escalating efforts to safeguard the U.S. power grid from hackers, developing a plan to better coordinate with industry to counter threats and respond to cyber attacks… Top administration officials, including Energy Secretary Jennifer Granholm and Deputy National Security Adviser Anne Neuberger, briefed top utility industry executives on the efforts in a March 16 meeting, said the people, who requested anonymity… The plan, which could prompt widespread changes in standards and cyber defense strategies, is set to be issued within weeks.”

April 1 – Reuters (Andrey Ostroukh): “Russian Foreign Minister Sergei Lavrov said… any attempts to start a new military conflict in Ukraine’s war-torn east could end up destroying Ukraine… The comments come amid tensions after Ukraine’s commander-in-chief this week accused Moscow of building up forces near their shared border and said that pro-Russian separatists were systematically violating a ceasefire. The Kremlin said… recent Russian troop and military hardware movements near Russia’s borders with Ukraine were aimed at ensuring Moscow’s own security and were not a threat to anyone.”

March 31 – Financial Times (Max Seddon and Roman Olearchyk): “Ukraine’s smouldering seven-year war with Russian-backed separatists on its eastern border has flared up sharply in recent days, following the worst clashes in months. Four Ukrainian soldiers were killed — the largest daily death toll for government forces since the latest shaky ceasefire took effect last July — after an hours-long battle last Friday... Kyiv and Moscow accuse each other of triggering the escalation in the conflict, which has claimed about 14,000 lives since Russia annexed the Crimean peninsula from Ukraine in 2014.”

March 28 – Bloomberg (Arsalan Shahla): “China and Iran signed an overarching deal aimed at charting the course of their economic, political and trade relations over the next 25 years. The Chinese government plans to invest in Iran and buy oil from the Islamic Republic, further straining ties with the U.S. already frayed by China’s imports of covertly-shipped Iranian crude. The ‘Comprehensive Strategic Partnership’ agreement, signed in Tehran… has been in the works since 2016, when President Xi Jinping became the first Chinese leader to visit the Iranian capital in over a decade.”

Friday Evening Links

[Reuters] Dollar, U.S. Treasury yields edge higher on strong U.S. labor report 

[Reuters] U.S. factories desperate for workers, even as ranks of jobless remains high

[Reuters] Timeline - Diary of a meltdown: how the Archegos Capital fire sale went down

[Reuters] White House: U.S. watching Russia disinformation about Ukraine

[FT] ‘They can do what they want’: Archegos and the $6tn world of the family office

[FT] Biden offers support to Ukraine and warns of Russian ‘aggression’