[Washington Post] The big bust in the oil fields
[WSJ] Bond Offering Tied to Prosper Marketplace Loans Gets Chilly Reception
[Der Spiegel] Postcard from a Failed State? Attacks Cast Light on Belgium's State Crisis
[Reuters] Chinese activist says family 'taken away' over letter calling for Xi to quit
Saturday, March 26, 2016
Friday, March 25, 2016
Weekly Commentary: All is Not Well
The 1987 stock market crash raised concerns for the dangers associated with mounting U.S. “twin deficits.” Fiscal and trade deficits were reflective of poor economic management. Credit excesses – certainly including excessive government borrowings – were stimulating demand that was reflected in expanding U.S. trade and Current Account Deficits. Concerns dissipated with the revival of the bull market. These days we’re confronting the consequences of 30-plus years of mismanagement.
Japan was the early major recipient of U.S. Bubble excess (throughout the eighties). The world today would be a much different place if the policy onus had fallen upon the Fed and congress to rein in U.S. borrowing excesses. Instead, enormous pressure was placed on Japan (and, later, others) to ameliorate trade surpluses with the U.S. by stimulating domestic demand. Such stimulus measures were instrumental in (repeatedly) stoking already powerful Bubbles to precarious extremes.
Fiscal and Current Account Deficits exploded in the early-nineties post-Bubble period. And as the nineties reflation gathered momentum, the boom in Wall Street and GSE finance pushed the Current Account to previously unimaginable extremes. Then, as the decade progressed, the associated global boom in dollar-based finance proved ever more destabilizing. Always ignoring root causes, each new crisis provided an excuse to further stimulate/inflate.
The fundamentally unsound dollar proved pivotal for European monetary integration, as the strong euro currency coupled with global liquidity abundance ensured runaway Bubble excesses throughout Europe’s periphery. If the U.S. could run perpetual Current Account Deficits, why not Greece, Italy, Spain and Portugal? Having ignored problematic financial and economic imbalances for years, when European troubles erupted everyone turned immediately to pressure the big surplus economy (Germany) to further stimulate their Bubble economy.
Economists traditionally viewed persistent Current Account Deficits as problematic. But as New Paradigm and New Era thinking took hold throughout the nineties, all types of justification and rationalization turned conventional analysis on its head. The U.S. was the world’s lone superpower, leading the world into a golden age of new technologies and free-market Capitalism. The Greenspan Fed believed a paradigm shift of enhanced productivity boosted the economy’s “speed limit”. Financial conditions turned perpetually loose. And if the Bubble burst, just call upon some fanatical academic willing to evoke “helicopter money”.
With U.S. officials turning their backs on financial excesses, Bubble Dynamics and unrelenting Current Account Deficits, I expected the world to lose its appetite for U.S. financial claims. After all, how long should the world be expected to trade real goods and services for endless U.S. IOUs?
As it turned out, rather than acting to discipline the profligate U.S. Credit system, the world acquiesced to Bubble Dynamics. No one was willing to be left behind. Along the way it was learned that large reserves of U.S. financial assets were integral to booming financial inflows and attendant domestic investment and growth. The U.S. has now run persistently large Current Account Deficits for going on 25 years.
Seemingly the entire globe is now trapped in a regime of unprecedented monetary and fiscal stimulus required to levitate a world with unmatched debt and economic imbalances. History has seen nothing comparable. And I would strongly argue that the consequences of Bubbles become much more problematic over time. The longer excesses persist the deeper the structural impairment.
Not many months ago bullish Wall Street strategists and pundits were celebrating the backdrop. It appeared to many that global central bankers had mastered the perpetual “money” machine. Markets could only go higher. Yet one would have to be delusional not to recognize the darkening clouds overtaking the world and U.S. Look no further than global terrorist attacks, geopolitical tension and the sour U.S. political discourse as confirmation that All is Not Well.
Over the years, I’ve been accused of being a left-wing liberal as well as a right-wing conservative. I’m pretty determined to keep politics out of the CBB. Yet it’s fundamental to my analysis that years of monetary and fiscal mismanagement are elemental to today’s darkening social mood. The “establishment” is despised. Washington policymakers and Wall Street are held in complete contempt. And, importantly, Capitalism is under attack. Globalization is now viewed with deep suspicion. The establishment is shocked that trade deals are these days seen as disadvantageous to U.S. workers. Integration and cooperation has become a game for suckers.
Instead of the world turning against the ever inflating quantities of U.S. financial claims circulating around the globe, it’s the American working class that has become increasingly fed up with the structure of the economic system. Trading new financial claims for inexpensive imports worked almost miraculously. For longer than I ever imagined, unfettered global finance spurred a historic capital investment boom - in China, Asia and EM. But this Bubble has burst globally, while the U.S. economy is left with much of its industrial base gutted and workers suffering stagnant wages. Most now refuse to view the future through rose-colored glasses.
Many have just had enough of the BS – from politicians, from Wall Street, from “Big Business,” the media and the inflationist Federal Reserve. We now face the downside of years of monetary inflation, including the consequences of repeatedly inflating expectations. Folks are understandably disillusioned. The political season has cracked things wide open.
Gross global economic imbalances and maladjustment are being exposed. The rank inequities of the existing structure are feeding social, political and geopolitical instability. Wall Street can continue to pretend that all is well – while the backdrop clearly turns more disconcerting by the week.
My thesis remains that the global Bubble has burst. Current risks are extraordinary, and global officials are at this point wedded to desperate measures. The ECB increased QE to over $1.0 TN annually, while adding corporate debt to its shopping list. Chinese officials have stated their intention to stabilize their currency, while spurring 13% system Credit expansion (to ensure 6.5% GDP growth). Market perceptions hold that the Bank of Japan is willing to boast QE, while the Fed would clearly not hesitate to again call upon QE as necessary.
Global markets have rallied strongly over the past month. Bear market rally or a springboard to another bull run? Or has it all regressed to a sullied game where only the timing of unfolding fiasco is unknown. Fundamental to the Bursting Bubble Thesis is that a most protracted global Credit Cycle has finally succumbed. “Terminal Phase” excess has left conspicuous wreckage throughout the Chinese economy and financial system – with momentous global ramifications. China – along with the global Bubble - now faces the dreaded day of reckoning. Confidence in Chinese policymaking has waned – just as faith is fading in the capacity of QE to rectify the world’s ills.
I have viewed 2016’s pronounced weakness in global financial stocks as important validation of the Burst Bubble Thesis. After rallying with the market, financial underperformance has reemerged.
Here at home, the Securities Broker/Dealers (XBD) sank 3.1% this week, increasing y-t-d losses to 10.8%. The Banks (BKX) dropped 1.6%, with a 2016 decline of 11.3%. And while Chinese stocks mustered a small advance for the week, the Hang Sang Financial Index declined 1.1% (down 11.7% y-t-d). I have posited that a vulnerable Europe resides “at the margin” of the faltering global Bubble. With this in mind, European financial stocks deserve close attention. This week saw the STOXX Europe 600 Banks Index slammed 4.9%, increasing y-t-d losses to 19.8%. Italian banks were hit 3.8% (down 29% y-t-d).
While on the subject of vulnerable rallies and Europe, it’s worth noting that French and Spanish stocks dropped about 3% this week, while Italian equities fell 2.4%. German bund yields declined another three bps (to 18 bps), while periphery spreads widened (Greece +17, Spain +12, Portugal +6 and Italy +6).
March 25 – Bloomberg (Rich Miller and Alexandre Tanzi): “On the face of it, the latest government update on how the U.S. economy performed in the fourth quarter looked a bit more encouraging. Growth was revised to a 1.4% annualized pace from a previously estimated 1%... consumer spending rose more than previously thought. Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5% in the fourth quarter from the year-ago period, the biggest drop since a 31% collapse at the end of 2008 during the height of the financial crisis. For 2015 as a whole, pretax earnings fell 3.1%, the most in seven years…”
I view unfolding profit deterioration as a consequence of the secular downturn in U.S. and global Credit. The real earnings pain will unfold as securities markets succumb to the deteriorating domestic and global backdrop – the self-reinforcing downside of so-called “wealth effects” and financial engineering.
Acutely unstable currencies markets are also central to the Burst Global Bubble Thesis. This week saw the dollar lurch higher and recently strong currencies hit with losses, the type of unpredictability and volatility that are anything but conducive to leverage. And while on the subject of leverage:
March 23 – Financial Times (Izabella Kaminska): “The spike in US Treasury bond fails to deliver, which started earlier this year, is something we’ve been watching closely. It’s fair to say we’re now at a significant milestone and the story is beginning to go mainstream. From the WSJ on Tuesday: ‘Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repos through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised…’ Over at ADMISI Paul Mylchreest has dubbed it a $450bn plumbing problem…”
All is not well in leveraged speculation…
For the week:
The S&P500 slipped 0.7% (down 0.4% y-t-d), and the Dow declined 0.5% (up 0.5%). The Utilities added 0.4% (up 13.8%). The Banks fell 1.6% (down 11.3%), and the Broker/Dealers were hit 3.1% (down 10.8%). The Transports lost 1.8% (up 5.6%). The S&P 400 Midcaps dropped 1.1% (up 1.1%), and the small cap Russell 2000 sank 2.0% (down 5.0%). The Nasdaq100 slipped 0.1% (down 4.1%), and the Morgan Stanley High Tech index declined 0.1% (down 4.2%). The Semiconductors declined 1.3% (up 0.4%). The Biotechs gained 1.3% (down 24.6%). With bullion down $38, the HUI gold index sank 5.5% (up 54.2%).
Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields gained three bps to 0.87% (down 18bps y-t-d). Five-year T-note yields rose five bps to 1.38% (down 37bps). Ten-year Treasury yields increased three bps to 1.90% (down 35bps). Long bond yields slipped a basis point to 2.67% (down 35bps).
Greek 10-year yields rose 14 bps to 8.50% (up 118bps y-t-d). Ten-year Portuguese yields increased three bps to 2.94% (up 42bps). Italian 10-year yields gained three bps to 1.30% (down 29bps). Spain's 10-year yields jumped nine bps to 1.52% (down 25bps). German bund yields declined three bps to 0.18% (down 44bps). French yields fell three bps to 0.53% (down 46bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields were unchanged at 1.45% (down 51bps).
Japan's Nikkei equities index rallied 1.7% (down 10.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.10% (down 36bps y-t-d). The German DAX equities index declined 1.0% (down 8.3%). Spain's IBEX 35 equities index sank 2.9% (down 7.9%). Italy's FTSE MIB index was hit 2.4% (down 15.2%). EM equities equities were mixed. Brazil's Bovespa index dropped 2.3% (up 14.6%). Mexico's Bolsa added 0.4% (up 6.2%). South Korea's Kospi index slipped 0.4% (up 1.1%). India’s Sensex equities index gained 1.5% (down 3.0%). China’s Shanghai Exchange added 0.8% (down 15.8%). Turkey's Borsa Istanbul National 100 index fell 1.9% (up 13.5%). Russia's MICEX equities index declined 2.4% (up 6.0%).
Junk funds saw inflows $2.156 billion (from Lipper), the fourth straight week of big positive flows.
Freddie Mac 30-year fixed mortgage rates declined two bps to 3.71% (up 2bps y-o-y). Fifteen-year rates fell three bps to 2.96% (down 30bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 3.81% (down 31bps).
Federal Reserve Credit last week expanded $4.5bn to $4.451 TN. Over the past year, Fed Credit declined $2.5bn, or 0.1%. Fed Credit inflated $1.640 TN, or 58%, over the past 176 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $4.4bn to $3.256 TN. "Custody holdings" were up $22.4bn y-o-y, or 0.7%.
M2 (narrow) "money" supply last week jumped $22.8bn to $12.534 TN. "Narrow money" expanded $693bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $46.9bn, while Savings Deposits fell $23.7bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.8bn.
Total money market fund assets fell $14.8bn to $2.752 TN. Money Funds rose $71bn y-o-y (2.6%).
Total Commercial Paper declined $7.7bn to $1.090 TN. CP expanded $58 billion y-o-y, or 5.6%.
Currency Watch:
The U.S. dollar index rallied 1.1% this week to 96.13 (down 2.6% y-t-d). For the week on the downside, the British pound declined 2.4%, the Canadian dollar 2.0%, the New Zealand dollar 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Australian dollar 1.3%, the South African rand 1.2%, the Norwegian krone 1.3%, the euro 0.9%, the Swedish krona 0.9%, the Swiss franc 0.8% and the Mexican peso 0.8%. The Chinese yuan declined 0.7% versus the dollar.
Japan was the early major recipient of U.S. Bubble excess (throughout the eighties). The world today would be a much different place if the policy onus had fallen upon the Fed and congress to rein in U.S. borrowing excesses. Instead, enormous pressure was placed on Japan (and, later, others) to ameliorate trade surpluses with the U.S. by stimulating domestic demand. Such stimulus measures were instrumental in (repeatedly) stoking already powerful Bubbles to precarious extremes.
Fiscal and Current Account Deficits exploded in the early-nineties post-Bubble period. And as the nineties reflation gathered momentum, the boom in Wall Street and GSE finance pushed the Current Account to previously unimaginable extremes. Then, as the decade progressed, the associated global boom in dollar-based finance proved ever more destabilizing. Always ignoring root causes, each new crisis provided an excuse to further stimulate/inflate.
The fundamentally unsound dollar proved pivotal for European monetary integration, as the strong euro currency coupled with global liquidity abundance ensured runaway Bubble excesses throughout Europe’s periphery. If the U.S. could run perpetual Current Account Deficits, why not Greece, Italy, Spain and Portugal? Having ignored problematic financial and economic imbalances for years, when European troubles erupted everyone turned immediately to pressure the big surplus economy (Germany) to further stimulate their Bubble economy.
Economists traditionally viewed persistent Current Account Deficits as problematic. But as New Paradigm and New Era thinking took hold throughout the nineties, all types of justification and rationalization turned conventional analysis on its head. The U.S. was the world’s lone superpower, leading the world into a golden age of new technologies and free-market Capitalism. The Greenspan Fed believed a paradigm shift of enhanced productivity boosted the economy’s “speed limit”. Financial conditions turned perpetually loose. And if the Bubble burst, just call upon some fanatical academic willing to evoke “helicopter money”.
With U.S. officials turning their backs on financial excesses, Bubble Dynamics and unrelenting Current Account Deficits, I expected the world to lose its appetite for U.S. financial claims. After all, how long should the world be expected to trade real goods and services for endless U.S. IOUs?
As it turned out, rather than acting to discipline the profligate U.S. Credit system, the world acquiesced to Bubble Dynamics. No one was willing to be left behind. Along the way it was learned that large reserves of U.S. financial assets were integral to booming financial inflows and attendant domestic investment and growth. The U.S. has now run persistently large Current Account Deficits for going on 25 years.
Seemingly the entire globe is now trapped in a regime of unprecedented monetary and fiscal stimulus required to levitate a world with unmatched debt and economic imbalances. History has seen nothing comparable. And I would strongly argue that the consequences of Bubbles become much more problematic over time. The longer excesses persist the deeper the structural impairment.
Not many months ago bullish Wall Street strategists and pundits were celebrating the backdrop. It appeared to many that global central bankers had mastered the perpetual “money” machine. Markets could only go higher. Yet one would have to be delusional not to recognize the darkening clouds overtaking the world and U.S. Look no further than global terrorist attacks, geopolitical tension and the sour U.S. political discourse as confirmation that All is Not Well.
Over the years, I’ve been accused of being a left-wing liberal as well as a right-wing conservative. I’m pretty determined to keep politics out of the CBB. Yet it’s fundamental to my analysis that years of monetary and fiscal mismanagement are elemental to today’s darkening social mood. The “establishment” is despised. Washington policymakers and Wall Street are held in complete contempt. And, importantly, Capitalism is under attack. Globalization is now viewed with deep suspicion. The establishment is shocked that trade deals are these days seen as disadvantageous to U.S. workers. Integration and cooperation has become a game for suckers.
Instead of the world turning against the ever inflating quantities of U.S. financial claims circulating around the globe, it’s the American working class that has become increasingly fed up with the structure of the economic system. Trading new financial claims for inexpensive imports worked almost miraculously. For longer than I ever imagined, unfettered global finance spurred a historic capital investment boom - in China, Asia and EM. But this Bubble has burst globally, while the U.S. economy is left with much of its industrial base gutted and workers suffering stagnant wages. Most now refuse to view the future through rose-colored glasses.
Many have just had enough of the BS – from politicians, from Wall Street, from “Big Business,” the media and the inflationist Federal Reserve. We now face the downside of years of monetary inflation, including the consequences of repeatedly inflating expectations. Folks are understandably disillusioned. The political season has cracked things wide open.
Gross global economic imbalances and maladjustment are being exposed. The rank inequities of the existing structure are feeding social, political and geopolitical instability. Wall Street can continue to pretend that all is well – while the backdrop clearly turns more disconcerting by the week.
My thesis remains that the global Bubble has burst. Current risks are extraordinary, and global officials are at this point wedded to desperate measures. The ECB increased QE to over $1.0 TN annually, while adding corporate debt to its shopping list. Chinese officials have stated their intention to stabilize their currency, while spurring 13% system Credit expansion (to ensure 6.5% GDP growth). Market perceptions hold that the Bank of Japan is willing to boast QE, while the Fed would clearly not hesitate to again call upon QE as necessary.
Global markets have rallied strongly over the past month. Bear market rally or a springboard to another bull run? Or has it all regressed to a sullied game where only the timing of unfolding fiasco is unknown. Fundamental to the Bursting Bubble Thesis is that a most protracted global Credit Cycle has finally succumbed. “Terminal Phase” excess has left conspicuous wreckage throughout the Chinese economy and financial system – with momentous global ramifications. China – along with the global Bubble - now faces the dreaded day of reckoning. Confidence in Chinese policymaking has waned – just as faith is fading in the capacity of QE to rectify the world’s ills.
I have viewed 2016’s pronounced weakness in global financial stocks as important validation of the Burst Bubble Thesis. After rallying with the market, financial underperformance has reemerged.
Here at home, the Securities Broker/Dealers (XBD) sank 3.1% this week, increasing y-t-d losses to 10.8%. The Banks (BKX) dropped 1.6%, with a 2016 decline of 11.3%. And while Chinese stocks mustered a small advance for the week, the Hang Sang Financial Index declined 1.1% (down 11.7% y-t-d). I have posited that a vulnerable Europe resides “at the margin” of the faltering global Bubble. With this in mind, European financial stocks deserve close attention. This week saw the STOXX Europe 600 Banks Index slammed 4.9%, increasing y-t-d losses to 19.8%. Italian banks were hit 3.8% (down 29% y-t-d).
While on the subject of vulnerable rallies and Europe, it’s worth noting that French and Spanish stocks dropped about 3% this week, while Italian equities fell 2.4%. German bund yields declined another three bps (to 18 bps), while periphery spreads widened (Greece +17, Spain +12, Portugal +6 and Italy +6).
March 25 – Bloomberg (Rich Miller and Alexandre Tanzi): “On the face of it, the latest government update on how the U.S. economy performed in the fourth quarter looked a bit more encouraging. Growth was revised to a 1.4% annualized pace from a previously estimated 1%... consumer spending rose more than previously thought. Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5% in the fourth quarter from the year-ago period, the biggest drop since a 31% collapse at the end of 2008 during the height of the financial crisis. For 2015 as a whole, pretax earnings fell 3.1%, the most in seven years…”
I view unfolding profit deterioration as a consequence of the secular downturn in U.S. and global Credit. The real earnings pain will unfold as securities markets succumb to the deteriorating domestic and global backdrop – the self-reinforcing downside of so-called “wealth effects” and financial engineering.
Acutely unstable currencies markets are also central to the Burst Global Bubble Thesis. This week saw the dollar lurch higher and recently strong currencies hit with losses, the type of unpredictability and volatility that are anything but conducive to leverage. And while on the subject of leverage:
March 23 – Financial Times (Izabella Kaminska): “The spike in US Treasury bond fails to deliver, which started earlier this year, is something we’ve been watching closely. It’s fair to say we’re now at a significant milestone and the story is beginning to go mainstream. From the WSJ on Tuesday: ‘Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repos through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised…’ Over at ADMISI Paul Mylchreest has dubbed it a $450bn plumbing problem…”
All is not well in leveraged speculation…
For the week:
The S&P500 slipped 0.7% (down 0.4% y-t-d), and the Dow declined 0.5% (up 0.5%). The Utilities added 0.4% (up 13.8%). The Banks fell 1.6% (down 11.3%), and the Broker/Dealers were hit 3.1% (down 10.8%). The Transports lost 1.8% (up 5.6%). The S&P 400 Midcaps dropped 1.1% (up 1.1%), and the small cap Russell 2000 sank 2.0% (down 5.0%). The Nasdaq100 slipped 0.1% (down 4.1%), and the Morgan Stanley High Tech index declined 0.1% (down 4.2%). The Semiconductors declined 1.3% (up 0.4%). The Biotechs gained 1.3% (down 24.6%). With bullion down $38, the HUI gold index sank 5.5% (up 54.2%).
Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields gained three bps to 0.87% (down 18bps y-t-d). Five-year T-note yields rose five bps to 1.38% (down 37bps). Ten-year Treasury yields increased three bps to 1.90% (down 35bps). Long bond yields slipped a basis point to 2.67% (down 35bps).
Greek 10-year yields rose 14 bps to 8.50% (up 118bps y-t-d). Ten-year Portuguese yields increased three bps to 2.94% (up 42bps). Italian 10-year yields gained three bps to 1.30% (down 29bps). Spain's 10-year yields jumped nine bps to 1.52% (down 25bps). German bund yields declined three bps to 0.18% (down 44bps). French yields fell three bps to 0.53% (down 46bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields were unchanged at 1.45% (down 51bps).
Japan's Nikkei equities index rallied 1.7% (down 10.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.10% (down 36bps y-t-d). The German DAX equities index declined 1.0% (down 8.3%). Spain's IBEX 35 equities index sank 2.9% (down 7.9%). Italy's FTSE MIB index was hit 2.4% (down 15.2%). EM equities equities were mixed. Brazil's Bovespa index dropped 2.3% (up 14.6%). Mexico's Bolsa added 0.4% (up 6.2%). South Korea's Kospi index slipped 0.4% (up 1.1%). India’s Sensex equities index gained 1.5% (down 3.0%). China’s Shanghai Exchange added 0.8% (down 15.8%). Turkey's Borsa Istanbul National 100 index fell 1.9% (up 13.5%). Russia's MICEX equities index declined 2.4% (up 6.0%).
Junk funds saw inflows $2.156 billion (from Lipper), the fourth straight week of big positive flows.
Freddie Mac 30-year fixed mortgage rates declined two bps to 3.71% (up 2bps y-o-y). Fifteen-year rates fell three bps to 2.96% (down 30bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 3.81% (down 31bps).
Federal Reserve Credit last week expanded $4.5bn to $4.451 TN. Over the past year, Fed Credit declined $2.5bn, or 0.1%. Fed Credit inflated $1.640 TN, or 58%, over the past 176 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $4.4bn to $3.256 TN. "Custody holdings" were up $22.4bn y-o-y, or 0.7%.
M2 (narrow) "money" supply last week jumped $22.8bn to $12.534 TN. "Narrow money" expanded $693bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $46.9bn, while Savings Deposits fell $23.7bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.8bn.
Total money market fund assets fell $14.8bn to $2.752 TN. Money Funds rose $71bn y-o-y (2.6%).
Total Commercial Paper declined $7.7bn to $1.090 TN. CP expanded $58 billion y-o-y, or 5.6%.
Currency Watch:
The U.S. dollar index rallied 1.1% this week to 96.13 (down 2.6% y-t-d). For the week on the downside, the British pound declined 2.4%, the Canadian dollar 2.0%, the New Zealand dollar 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Australian dollar 1.3%, the South African rand 1.2%, the Norwegian krone 1.3%, the euro 0.9%, the Swedish krona 0.9%, the Swiss franc 0.8% and the Mexican peso 0.8%. The Chinese yuan declined 0.7% versus the dollar.
Commodities Watch:
The Goldman Sachs Commodities Index fell 2.2% (up 5.2% y-t-d). Spot Gold dropped 3.1% to $1,217 (up 14.7%). March Silver sank 3.9% to $15.20 (up 10%). April WTI Crude was little changed at $39.46 (up 7%). March Gasoline rose 2.7% (up 15%), while March Natural Gas fell 5.2% (down 23%). March Copper declined 2.3% (up 4%). May Wheat was unchanged (down 2%). May Corn increased 0.8% (up 3%).
Fixed-Income Bubble Watch:
March 21 – Wall Street Journal (Katy Burne): “Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repo through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised.”
March 20 – Bloomberg (Alexandra Scaggs and Liz McCormick): “The world’s biggest bond dealers are getting saddled with Treasuries they can’t seem to easily get rid of, adding to evidence of cracks in the $13.3 trillion market for U.S. government debt. The 22 primary dealers held more Treasuries last month than any time in the last two years… While at first glance that may suggest a bullish stance, the surge in holdings is more likely the result of investors including central banks dumping the debt on the firms, said JPMorgan… strategist Jay Barry. Foreign official accounts sold a net $105 billion of the securities in December and January, an unprecedented liquidation…”
March 23 – Bloomberg (Finbarr Flynn, Katie Linsell and Cordell Eddings): “Mario Draghi and Haruhiko Kuroda have handed a big gift to U.S. companies like Coca-Cola Co. and General Electric Co.: piles of money from European and Japanese investors. Nearly $8 trillion of bonds globally have negative yields now, which has spurred fund managers from around the world to buy corporate debt in the U.S… ‘Draghi has forced me as a European investor to look at overseas holdings that aren’t euro-denominated,’ said James Tomlins, a… high-yield money manager at M&G Investments… ‘The potential for returns is much better in the U.S.’…Demand from Asian and European investors has already helped cut risk premiums on U.S. investment-grade corporate bonds by about half a percentage point since mid-February, according to Bank of America Merrill Lynch…”
March 21 – Financial Times (Joe Rennison): “Investors in bonds backed by risky loans remain broadly positive on deals that include the debt of pharmaceutical company Valeant, despite this week’s warning from Moody’s. The… rating agency cautioned that roughly a third of the group’s loans had been packaged into collateralised loan obligations, securities in which loans are pooled together into bonds and sold to investors. Moody’s estimated $3.4bn worth of loans had been purchased by CLOs…”
Global Bubble Watch:
March 22 – Bloomberg (Simon Kennedy): “After more than 600 interest-rate cuts and $12 trillion of asset purchases failed to move the inflation needle enough, central banks may need to head even deeper into uncharted territory. The way to get the world out of its disinflationary rut could lie in them directly financing government stimulus -- a strategy known as deploying ‘helicopter money’ after a 1969 proposal from Nobel laureate Milton Friedman. Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks, while hedge fund titan Ray Dalio sees potential in the idea. European Central Bank officials are already squabbling about what President Mario Draghi calls a ‘very interesting concept.’ ‘We don’t know for certain that ‘helicopter money’ will be the next attempted silver bullet, however the topic is receiving considerably more attention,” said Gabriel Stein, an economist at Oxford Economics... ‘The likelihood is reasonably high of some form being implemented somewhere.’”
March 20 – Bloomberg (Katia Dmitrieva): “Buyers from China comprised about one-third of purchases of Vancouver’s hot housing market in 2015, according to ‘back of the envelope calculations’ by National Bank of Canada. Chinese investors spent about C$12.7 billion ($9.6bn) on real estate in the western Canadian city in 2015, or 33% of its C$38.5 billion in total sales, according to… analyst Peter Routledge… In Toronto, they made up 14% of purchases, or about C$9 billion of the C$63 billion in deals.”
March 23 – Bloomberg (Donal Griffin and Richard Partington): “Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said the firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business. ‘This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank’ when the firm laid out a strategy in October, Thiam, 53, said… ‘There needs to be a cultural change because it’s completely unacceptable,’ adding that there had been ‘consequences’ for some employees.”
Federal Reserve Watch:
The Goldman Sachs Commodities Index fell 2.2% (up 5.2% y-t-d). Spot Gold dropped 3.1% to $1,217 (up 14.7%). March Silver sank 3.9% to $15.20 (up 10%). April WTI Crude was little changed at $39.46 (up 7%). March Gasoline rose 2.7% (up 15%), while March Natural Gas fell 5.2% (down 23%). March Copper declined 2.3% (up 4%). May Wheat was unchanged (down 2%). May Corn increased 0.8% (up 3%).
Fixed-Income Bubble Watch:
March 21 – Wall Street Journal (Katy Burne): “Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repo through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised.”
March 20 – Bloomberg (Alexandra Scaggs and Liz McCormick): “The world’s biggest bond dealers are getting saddled with Treasuries they can’t seem to easily get rid of, adding to evidence of cracks in the $13.3 trillion market for U.S. government debt. The 22 primary dealers held more Treasuries last month than any time in the last two years… While at first glance that may suggest a bullish stance, the surge in holdings is more likely the result of investors including central banks dumping the debt on the firms, said JPMorgan… strategist Jay Barry. Foreign official accounts sold a net $105 billion of the securities in December and January, an unprecedented liquidation…”
March 23 – Bloomberg (Finbarr Flynn, Katie Linsell and Cordell Eddings): “Mario Draghi and Haruhiko Kuroda have handed a big gift to U.S. companies like Coca-Cola Co. and General Electric Co.: piles of money from European and Japanese investors. Nearly $8 trillion of bonds globally have negative yields now, which has spurred fund managers from around the world to buy corporate debt in the U.S… ‘Draghi has forced me as a European investor to look at overseas holdings that aren’t euro-denominated,’ said James Tomlins, a… high-yield money manager at M&G Investments… ‘The potential for returns is much better in the U.S.’…Demand from Asian and European investors has already helped cut risk premiums on U.S. investment-grade corporate bonds by about half a percentage point since mid-February, according to Bank of America Merrill Lynch…”
March 21 – Financial Times (Joe Rennison): “Investors in bonds backed by risky loans remain broadly positive on deals that include the debt of pharmaceutical company Valeant, despite this week’s warning from Moody’s. The… rating agency cautioned that roughly a third of the group’s loans had been packaged into collateralised loan obligations, securities in which loans are pooled together into bonds and sold to investors. Moody’s estimated $3.4bn worth of loans had been purchased by CLOs…”
Global Bubble Watch:
March 22 – Bloomberg (Simon Kennedy): “After more than 600 interest-rate cuts and $12 trillion of asset purchases failed to move the inflation needle enough, central banks may need to head even deeper into uncharted territory. The way to get the world out of its disinflationary rut could lie in them directly financing government stimulus -- a strategy known as deploying ‘helicopter money’ after a 1969 proposal from Nobel laureate Milton Friedman. Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks, while hedge fund titan Ray Dalio sees potential in the idea. European Central Bank officials are already squabbling about what President Mario Draghi calls a ‘very interesting concept.’ ‘We don’t know for certain that ‘helicopter money’ will be the next attempted silver bullet, however the topic is receiving considerably more attention,” said Gabriel Stein, an economist at Oxford Economics... ‘The likelihood is reasonably high of some form being implemented somewhere.’”
March 20 – Bloomberg (Katia Dmitrieva): “Buyers from China comprised about one-third of purchases of Vancouver’s hot housing market in 2015, according to ‘back of the envelope calculations’ by National Bank of Canada. Chinese investors spent about C$12.7 billion ($9.6bn) on real estate in the western Canadian city in 2015, or 33% of its C$38.5 billion in total sales, according to… analyst Peter Routledge… In Toronto, they made up 14% of purchases, or about C$9 billion of the C$63 billion in deals.”
March 23 – Bloomberg (Donal Griffin and Richard Partington): “Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said the firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business. ‘This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank’ when the firm laid out a strategy in October, Thiam, 53, said… ‘There needs to be a cultural change because it’s completely unacceptable,’ adding that there had been ‘consequences’ for some employees.”
Federal Reserve Watch:
March 23 – CNBC (Steve Liesman): “Fed Chair Janet Yellen has something of a mini revolt on her hands. Four of the 17 members of the Federal Open Market Committee have now publicly indicated their disagreement with the dovish guidance in last week's policy statement and in comments from Fed Chair Janet Yellen at her press conference. The latest dissenter is Patrick Harker, the new president of the Philadelphia Fed, who said… that the Fed should ‘get on with’ rate hikes and consider another move in April. He joins centrists John Williams of San Francisco and Dennis Lockhart of Atlanta who… said the Fed should consider an April hike. Esther George, the Kansas City Fed president… dissented at the meeting last week and called for a 25 bps hike.”
March 23 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets. ‘You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,’ Bullard, who votes on policy this year, said… ‘I think we are going to end up overshooting on inflation’ and the natural rate of unemployment, he said.”
U.S. Bubble Watch:
March 21 – CNBC (Jeff Cox): “If the stock market rally is going to continue the next couple of months, it will have to do so against an aggressively worsening profit backdrop. The corporate earnings picture is ugly and getting uglier in a hurry, with S&P 500 companies expected to post an 8.3% decline in first-quarter profits from the same period a year ago. While history suggests that earnings season always ends up looking better at the end than it did at the beginning, if the current trend holds up it will be the worst period since the third quarter of 2009, according to FactSet.
March 21 – Reuters (Caroline Valetkevitch): “U.S. companies are once again relying on a lot of financial engineering to boost earnings, suggesting that last year's weak profit picture may have been even worse than it seemed… S&P 500 companies reported adjusted earnings - which often exclude one-time charges and taxes - for the last 12 months that were 30% higher than income they reported based on generally accepted accounting principles, or GAAP, analysts at Evercore ISI… said. That is the biggest difference for a 12-month period since 2008, the year of the U.S. financial crisis, and the third highest since 1994… Fourth-quarter S&P 500 earnings declined 2.9% from a year ago, while revenue fell 3.6%, Thomson Reuters data showed.”
March 24 – Bloomberg (Selina Wang): “In recent months, venture capital firms and mutual funds have become choosier about which technology startups they’re prepared to back. Now hedge funds, after helping push valuations to dot-com-era heights, are getting more picky, too. Last month, hedge funds participated in the fewest number of venture capital rounds in U.S. tech companies since 2013, inking just two deals, according to… PitchBook Data… Like VCs, hedge funds are more circumspect because some startups have failed to live up to their billing. Plus, in the wake of several disappointing tech IPOs, many of the most promising firms are choosing to stay private longer, meaning it takes longer to cash out. Investors’ stinginess is forcing startups to cut costs, fire workers and accept more stringent terms when raising money. ‘We’ve completely stopped investing in private tech,’ said Jeremy Abelson, a portfolio manager at Irving Investors... ‘I’m done with intangible valuations, unknown exits, unknown liquidity, and I want something that if I put my money into it now, I’m not going to hit a grand slam, but I’m going to get something that’s immediately yielding.’”
March 24 – Bloomberg (Janet Lorin): “The managers of U.S. college endowments try hard to earn more for their schools than a plain-vanilla portfolio of stocks would. That’s never easy, and lately it’s been especially tough. Fifteen endowments that provided Bloomberg with total returns for the second half of 2015 lost 3.6% on average. In the same period, the Standard & Poor’s 500-stock index earned a slight gain with dividends.”
March 23 – Bloomberg (Romy Varghese): “New Jersey’s credit-rating outlook was revised to negative from stable by Standard & Poor’s, which cited the ‘significant long-term pressures’ the state is under from employee benefit liabilities and the risk the situation will worsen.”
China Bubble Watch:
March 23 – Nikkei Asian Review (Iori Kawate): “Excessive debt held by Chinese companies and households is highlighting a grave reality behind the country's economy. In a sign that this debt is being regarded as a risk to the global economy, it became a topic of discussion at a meeting of G-20 finance ministers and central bank governors held in February. China even appears to be taking steps similar to Japan's moves in its own post-bubble era. Total credit to the Chinese private non-financial sector stood at $21.5 trillion at the end of September 2015, accounting for 205% of the country's gross domestic product… In Japan, the figure accounted for more than 200% of the nation's GDP at the end of September 1989, when the country was in the late stage of its economic bubble. After that bubble burst, the number shot up to 221% by the end of December 1995… And now in China, the outstanding amount of total credit to the private sector has surged 300% from the end of December 2008.”
March 20 – Bloomberg (Ye Xie and Fox Hu): “Not since 1999 have China’s companies had so much trouble getting customers to actually pay for what they’ve bought. It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers. As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation’s public firms have swelled by 23% over the past two years to about $590 billion… The raft of unpaid bills -- bigger than at any time since former Premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century -- shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China’s vast web of interconnected supply chains.”
March 23 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets. ‘You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,’ Bullard, who votes on policy this year, said… ‘I think we are going to end up overshooting on inflation’ and the natural rate of unemployment, he said.”
U.S. Bubble Watch:
March 21 – CNBC (Jeff Cox): “If the stock market rally is going to continue the next couple of months, it will have to do so against an aggressively worsening profit backdrop. The corporate earnings picture is ugly and getting uglier in a hurry, with S&P 500 companies expected to post an 8.3% decline in first-quarter profits from the same period a year ago. While history suggests that earnings season always ends up looking better at the end than it did at the beginning, if the current trend holds up it will be the worst period since the third quarter of 2009, according to FactSet.
March 21 – Reuters (Caroline Valetkevitch): “U.S. companies are once again relying on a lot of financial engineering to boost earnings, suggesting that last year's weak profit picture may have been even worse than it seemed… S&P 500 companies reported adjusted earnings - which often exclude one-time charges and taxes - for the last 12 months that were 30% higher than income they reported based on generally accepted accounting principles, or GAAP, analysts at Evercore ISI… said. That is the biggest difference for a 12-month period since 2008, the year of the U.S. financial crisis, and the third highest since 1994… Fourth-quarter S&P 500 earnings declined 2.9% from a year ago, while revenue fell 3.6%, Thomson Reuters data showed.”
March 24 – Bloomberg (Selina Wang): “In recent months, venture capital firms and mutual funds have become choosier about which technology startups they’re prepared to back. Now hedge funds, after helping push valuations to dot-com-era heights, are getting more picky, too. Last month, hedge funds participated in the fewest number of venture capital rounds in U.S. tech companies since 2013, inking just two deals, according to… PitchBook Data… Like VCs, hedge funds are more circumspect because some startups have failed to live up to their billing. Plus, in the wake of several disappointing tech IPOs, many of the most promising firms are choosing to stay private longer, meaning it takes longer to cash out. Investors’ stinginess is forcing startups to cut costs, fire workers and accept more stringent terms when raising money. ‘We’ve completely stopped investing in private tech,’ said Jeremy Abelson, a portfolio manager at Irving Investors... ‘I’m done with intangible valuations, unknown exits, unknown liquidity, and I want something that if I put my money into it now, I’m not going to hit a grand slam, but I’m going to get something that’s immediately yielding.’”
March 24 – Bloomberg (Janet Lorin): “The managers of U.S. college endowments try hard to earn more for their schools than a plain-vanilla portfolio of stocks would. That’s never easy, and lately it’s been especially tough. Fifteen endowments that provided Bloomberg with total returns for the second half of 2015 lost 3.6% on average. In the same period, the Standard & Poor’s 500-stock index earned a slight gain with dividends.”
March 23 – Bloomberg (Romy Varghese): “New Jersey’s credit-rating outlook was revised to negative from stable by Standard & Poor’s, which cited the ‘significant long-term pressures’ the state is under from employee benefit liabilities and the risk the situation will worsen.”
China Bubble Watch:
March 23 – Nikkei Asian Review (Iori Kawate): “Excessive debt held by Chinese companies and households is highlighting a grave reality behind the country's economy. In a sign that this debt is being regarded as a risk to the global economy, it became a topic of discussion at a meeting of G-20 finance ministers and central bank governors held in February. China even appears to be taking steps similar to Japan's moves in its own post-bubble era. Total credit to the Chinese private non-financial sector stood at $21.5 trillion at the end of September 2015, accounting for 205% of the country's gross domestic product… In Japan, the figure accounted for more than 200% of the nation's GDP at the end of September 1989, when the country was in the late stage of its economic bubble. After that bubble burst, the number shot up to 221% by the end of December 1995… And now in China, the outstanding amount of total credit to the private sector has surged 300% from the end of December 2008.”
March 20 – Bloomberg (Ye Xie and Fox Hu): “Not since 1999 have China’s companies had so much trouble getting customers to actually pay for what they’ve bought. It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers. As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation’s public firms have swelled by 23% over the past two years to about $590 billion… The raft of unpaid bills -- bigger than at any time since former Premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century -- shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China’s vast web of interconnected supply chains.”
March 22 – Reuters (David Stanway): “China's campaign to slim down its bloated industries could be derailed by more than $1.5 trillion of debt in its steel, coal, cement and non-ferrous metal sectors, which threatens to overwhelm local banks. Tackling industrial overcapacity has become a priority for Beijing to make its slowing economy more efficient and address a supply glut that has hammered coal and steel prices. China is providing more than 100 billion yuan ($15bn) in the next two years to handle layoffs from coal and steel, but that will only be made available once debts have been settled. Critics say there is no clear mechanism for tackling the debt burden, which will put huge strain on the weakest sections of the banking sector.”
March 20 – Financial Times (Patti Waldmeir): “China’s central bank governor has warned that the country’s corporate debt levels are too high and are stoking risks for the economy, just as highly-leveraged Chinese companies have gone on an overseas takeover binge. Adding his voice to a recent chorus of concern by senior Chinese officials, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), told global business leaders meeting in Beijing that the ratio of lending to gross domestic product was becoming excessive. ‘Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side,’ he said… Corporate debt in China has risen to about 160% of GDP, while total debt is about 230%, according to Financial Times estimates.”
March 20 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan sounded a warning over rising debt levels, saying corporate lending as a ratio to gross domestic product had become too high and the country must develop more robust capital markets. China still has a problem with illegal fundraising and financial services are insufficient, Zhou said… He said the country still needs regulation to guard against excessive leverage in foreign currencies. ‘Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,’ Zhou said. He said a high leverage ratio is more prone to macroeconomic risk.”
March 25 – Bloomberg: “Shanghai officials announced stricter real-estate regulations Friday to help cool a market where new-home prices soared 21% in February from a year earlier. Buyers will need to show they’ve been in the city for five years, and some second homes will require down payments of at least 70%.”
ECB Watch:
March 23 – Reuters (Dhara Ranasinghe): “Expanding QE could see the European Central Bank owning up to 25% of the 7 trillion euro government bond market, analysts estimate, exacerbating worries about bond scarcity and thin market conditions. It could also hold as much as 10% of top-rated corporate debt in the euro area after announcing this month it will include bonds of investment-grade non-financial firms in its asset purchase scheme from the second quarter. The ECB has said it will increase its bond-buying by 20 billion euros (£16bn) to 80 billion euros per month from April.”
March 19 – Reuters (Michelle Martin): “‘Helicopter money’, or free cash dished out to citizens in a bid to stimulate spending and inflation, would end up costing euro zone states and therefore taxpayers, the head of Germany's central bank said in an interview with German newspapers. After years of increasingly desperate attempts to kick-start growth, some bankers and finance officials fear policymakers are running out of effective ammunition and future stimulus efforts could even be harmful. Economists say ‘helicopter money’ would be a last resort. ‘Helicopter money is not manna that falls from heaven - it would actually rip huge holes in central bank balance sheets… Ultimately euro zone states and therefore taxpayers would end up having to bear the costs because there wouldn't be central bank profits for a long time,’ said Weidmann…”
March 23 – Reuters (Jochen Elegeert and Toby Sterling): “Dutch Central Bank President Klaas Knot, who has voted against recent monetary easing by the European Central Bank, said… that the measure had reached the limit of its effectiveness. Knot said further bond purchases by the ECB would encroach on a ban on financing government spending that is enshrined in its charter. …Hhe said that, while further easing was technically possible, ‘the question is whether the added value of doing more is worth the side effects’. ‘I have my doubts,’ he added. He cited a list of problems caused by quantitative easing including financial bubbles, ‘an unhealthy hunt for yield, rolling of problem loans, increasing wealth inequality, and an addiction to low interest rates’.”
Europe Watch:
March 23 – Bloomberg (Tom Beardsworth): “Credit Suisse Group AG’s forecast for a second straight quarterly loss, mainly because of trading operations, has stoked perceived credit risk at European banks. Costs for insuring European lenders’ subordinated and senior bonds climbed to two-week highs on Thursday, based on Markit iTraxx indexes of credit-default swaps. Contracts tied to Deutsche Bank AG and UniCredit SpA have led increases in the past week.”
Japan Watch:
March 20 – Financial Times (Patti Waldmeir): “China’s central bank governor has warned that the country’s corporate debt levels are too high and are stoking risks for the economy, just as highly-leveraged Chinese companies have gone on an overseas takeover binge. Adding his voice to a recent chorus of concern by senior Chinese officials, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), told global business leaders meeting in Beijing that the ratio of lending to gross domestic product was becoming excessive. ‘Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side,’ he said… Corporate debt in China has risen to about 160% of GDP, while total debt is about 230%, according to Financial Times estimates.”
March 20 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan sounded a warning over rising debt levels, saying corporate lending as a ratio to gross domestic product had become too high and the country must develop more robust capital markets. China still has a problem with illegal fundraising and financial services are insufficient, Zhou said… He said the country still needs regulation to guard against excessive leverage in foreign currencies. ‘Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,’ Zhou said. He said a high leverage ratio is more prone to macroeconomic risk.”
March 25 – Bloomberg: “Shanghai officials announced stricter real-estate regulations Friday to help cool a market where new-home prices soared 21% in February from a year earlier. Buyers will need to show they’ve been in the city for five years, and some second homes will require down payments of at least 70%.”
ECB Watch:
March 23 – Reuters (Dhara Ranasinghe): “Expanding QE could see the European Central Bank owning up to 25% of the 7 trillion euro government bond market, analysts estimate, exacerbating worries about bond scarcity and thin market conditions. It could also hold as much as 10% of top-rated corporate debt in the euro area after announcing this month it will include bonds of investment-grade non-financial firms in its asset purchase scheme from the second quarter. The ECB has said it will increase its bond-buying by 20 billion euros (£16bn) to 80 billion euros per month from April.”
March 19 – Reuters (Michelle Martin): “‘Helicopter money’, or free cash dished out to citizens in a bid to stimulate spending and inflation, would end up costing euro zone states and therefore taxpayers, the head of Germany's central bank said in an interview with German newspapers. After years of increasingly desperate attempts to kick-start growth, some bankers and finance officials fear policymakers are running out of effective ammunition and future stimulus efforts could even be harmful. Economists say ‘helicopter money’ would be a last resort. ‘Helicopter money is not manna that falls from heaven - it would actually rip huge holes in central bank balance sheets… Ultimately euro zone states and therefore taxpayers would end up having to bear the costs because there wouldn't be central bank profits for a long time,’ said Weidmann…”
March 23 – Reuters (Jochen Elegeert and Toby Sterling): “Dutch Central Bank President Klaas Knot, who has voted against recent monetary easing by the European Central Bank, said… that the measure had reached the limit of its effectiveness. Knot said further bond purchases by the ECB would encroach on a ban on financing government spending that is enshrined in its charter. …Hhe said that, while further easing was technically possible, ‘the question is whether the added value of doing more is worth the side effects’. ‘I have my doubts,’ he added. He cited a list of problems caused by quantitative easing including financial bubbles, ‘an unhealthy hunt for yield, rolling of problem loans, increasing wealth inequality, and an addiction to low interest rates’.”
Europe Watch:
March 23 – Bloomberg (Tom Beardsworth): “Credit Suisse Group AG’s forecast for a second straight quarterly loss, mainly because of trading operations, has stoked perceived credit risk at European banks. Costs for insuring European lenders’ subordinated and senior bonds climbed to two-week highs on Thursday, based on Markit iTraxx indexes of credit-default swaps. Contracts tied to Deutsche Bank AG and UniCredit SpA have led increases in the past week.”
Japan Watch:
March 22 – Reuters (Stanley White): “Japan's manufacturing activity contracted in March for the first time in almost a year as new export orders shrank sharply, a preliminary business survey showed…, in a worrying sign that the global economy is weakening. The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 49.1 in March on a seasonally adjusted basis from a final 50.1 in February… The sub-index for new export orders fell to a preliminary 45.9 from 49.0 in February…”
Central Bank Watch:
March 21 – Bloomberg (Jill Ward): “The European Central Bank and the Bank of Japan are essentially trying to push down the values of their respective currencies with the use of negative interest rates, former Bank of England Governor Mervyn King said. ‘There are clearly limits’ to the effectiveness of negative rates, King said… ‘I think you can see with Japan and the euro area, that in essence, the central banks are trying to push down the exchange rate. Most countries in the world could say now, ‘If only the rest of the world was growing normally, we’d be fine. But since it isn’t, we aren’t. What’s left? Push down the exchange rate.’”
EM Bubble Watch:
March 23 – Bloomberg (Amogelang Mbatha): “South African inflation accelerated to 7% in February, the fastest pace since June 2009, adding to the central bank’s policy dilemma of rising consumer prices and slowing economic growth. The inflation rate jumped from 6.2% a month earlier…”
Leveraged Speculation Watch:
March 24 – Bloomberg (Nishant Kumar): “Investors allocated a net $4.4 billion to hedge funds in February, 80% less than the average pledged during the month since 2010, according to… eVestment. February typically sees increased inflows as investors rebalance their portfolios and the drop reflects investor dissatisfaction with returns last year… In the six years to 2015, investors added an average $22.6 billion in net new capital to hedge funds every February.”
March 24 – Bloomberg (Sabrina Willmer): “A Blackstone Group LP mutual fund that allocates money to hedge funds lost almost half of its assets this month as the fund’s biggest backer, Fidelity Investments, slashed its stake. Clients withdrew $585.5 million from the Blackstone Alternative Multi-Manager Fund in the first three weeks of this month, leaving it with $631.2 million in assets…”
Brazil Watch:
March 21 – Bloomberg (Simon Kennedy): “Petroleo Brasileiro SA, the oil producer at the center of Brazil’s largest corruption scandal, reported a record loss that surprised analysts and sent shares lower. The fourth quarter net loss of 36.9 billion reais ($10.2bn), caused by unprecedented asset writedowns linked to falling oil prices… At 46.4 billion reais, the impairments equated to more than a third of Petrobras’s market capitalization and exceeded the equity value of 97% of publicly-traded firms in Brazil.
Central Bank Watch:
March 21 – Bloomberg (Jill Ward): “The European Central Bank and the Bank of Japan are essentially trying to push down the values of their respective currencies with the use of negative interest rates, former Bank of England Governor Mervyn King said. ‘There are clearly limits’ to the effectiveness of negative rates, King said… ‘I think you can see with Japan and the euro area, that in essence, the central banks are trying to push down the exchange rate. Most countries in the world could say now, ‘If only the rest of the world was growing normally, we’d be fine. But since it isn’t, we aren’t. What’s left? Push down the exchange rate.’”
EM Bubble Watch:
March 23 – Bloomberg (Amogelang Mbatha): “South African inflation accelerated to 7% in February, the fastest pace since June 2009, adding to the central bank’s policy dilemma of rising consumer prices and slowing economic growth. The inflation rate jumped from 6.2% a month earlier…”
Leveraged Speculation Watch:
March 24 – Bloomberg (Nishant Kumar): “Investors allocated a net $4.4 billion to hedge funds in February, 80% less than the average pledged during the month since 2010, according to… eVestment. February typically sees increased inflows as investors rebalance their portfolios and the drop reflects investor dissatisfaction with returns last year… In the six years to 2015, investors added an average $22.6 billion in net new capital to hedge funds every February.”
March 24 – Bloomberg (Sabrina Willmer): “A Blackstone Group LP mutual fund that allocates money to hedge funds lost almost half of its assets this month as the fund’s biggest backer, Fidelity Investments, slashed its stake. Clients withdrew $585.5 million from the Blackstone Alternative Multi-Manager Fund in the first three weeks of this month, leaving it with $631.2 million in assets…”
Brazil Watch:
March 21 – Bloomberg (Simon Kennedy): “Petroleo Brasileiro SA, the oil producer at the center of Brazil’s largest corruption scandal, reported a record loss that surprised analysts and sent shares lower. The fourth quarter net loss of 36.9 billion reais ($10.2bn), caused by unprecedented asset writedowns linked to falling oil prices… At 46.4 billion reais, the impairments equated to more than a third of Petrobras’s market capitalization and exceeded the equity value of 97% of publicly-traded firms in Brazil.
Weekly Commentary: All is Not Well
The 1987 stock market crash raised concerns for the dangers associated with mounting U.S. “twin deficits.” Fiscal and trade deficits were reflective of poor economic management. Credit excesses – certainly including excessive government borrowings – were stimulating demand that was reflected in expanding U.S. trade and Current Account Deficits. Concerns dissipated with the revival of the bull market. These days we’re confronting the consequences of 30-plus years of mismanagement.
Japan was the early major recipient of U.S. Bubble excess (throughout the eighties). The world today would be a much different place if the policy onus had fallen upon the Fed and congress to rein in U.S. borrowing excesses. Instead, enormous pressure was placed on Japan (and, later, others) to ameliorate trade surpluses with the U.S. by stimulating domestic demand. Such stimulus measures were instrumental in (repeatedly) stoking already powerful Bubbles to precarious extremes.
Fiscal and Current Account Deficits exploded in the early-nineties post-Bubble period. And as the nineties reflation gathered momentum, the boom in Wall Street and GSE finance pushed the Current Account to previously unimaginable extremes. Then, as the decade progressed, the associated global boom in dollar-based finance proved ever more destabilizing. Always ignoring root causes, each new crisis provided an excuse to further stimulate/inflate.
The fundamentally unsound dollar proved pivotal for European monetary integration, as the strong euro currency coupled with global liquidity abundance ensured runaway Bubble excesses throughout Europe’s periphery. If the U.S. could run perpetual Current Account Deficits, why not Greece, Italy, Spain and Portugal? Having ignored problematic financial and economic imbalances for years, when European troubles erupted everyone turned immediately to pressure the big surplus economy (Germany) to further stimulate their Bubble economy.
Economists traditionally viewed persistent Current Account Deficits as problematic. But as New Paradigm and New Era thinking took hold throughout the nineties, all types of justification and rationalization turned conventional analysis on its head. The U.S. was the world’s lone superpower, leading the world into a golden age of new technologies and free-market Capitalism. The Greenspan Fed believed a paradigm shift of enhanced productivity boosted the economy’s “speed limit”. Financial conditions turned perpetually loose. And if the Bubble burst, just call upon some fanatical academic willing to evoke “helicopter money”.
With U.S. officials turning their backs on financial excesses, Bubble Dynamics and unrelenting Current Account Deficits, I expected the world to lose its appetite for U.S. financial claims. After all, how long should the world be expected to trade real goods and services for endless U.S. IOUs?
As it turned out, rather than acting to discipline the profligate U.S. Credit system, the world acquiesced to Bubble Dynamics. No one was willing to be left behind. Along the way it was learned that large reserves of U.S. financial assets were integral to booming financial inflows and attendant domestic investment and growth. The U.S. has now run persistently large Current Account Deficits for going on 25 years.
Seemingly the entire globe is now trapped in a regime of unprecedented monetary and fiscal stimulus required to levitate a world with unmatched debt and economic imbalances. History has seen nothing comparable. And I would strongly argue that the consequences of Bubbles become much more problematic over time. The longer excesses persist the deeper the structural impairment.
Not many months ago bullish Wall Street strategists and pundits were celebrating the backdrop. It appeared to many that global central bankers had mastered the perpetual “money” machine. Markets could only go higher. Yet one would have to be delusional not to recognize the darkening clouds overtaking the world and U.S. Look no further than global terrorist attacks, geopolitical tension and the sour U.S. political discourse as confirmation that All is Not Well.
Over the years, I’ve been accused of being a left-wing liberal as well as a right-wing conservative. I’m pretty determined to keep politics out of the CBB. Yet it’s fundamental to my analysis that years of monetary and fiscal mismanagement are elemental to today’s darkening social mood. The “establishment” is despised. Washington policymakers and Wall Street are held in complete contempt. And, importantly, Capitalism is under attack. Globalization is now viewed with deep suspicion. The establishment is shocked that trade deals are these days seen as disadvantageous to U.S. workers. Integration and cooperation has become a game for suckers.
Instead of the world turning against the ever inflating quantities of U.S. financial claims circulating around the globe, it’s the American working class that has become increasingly fed up with the structure of the economic system. Trading new financial claims for inexpensive imports worked almost miraculously. For longer than I ever imagined, unfettered global finance spurred a historic capital investment boom - in China, Asia and EM. But this Bubble has burst globally, while the U.S. economy is left with much of its industrial base gutted and workers suffering stagnant wages. Most now refuse to view the future through rose-colored glasses.
Many have just had enough of the BS – from politicians, from Wall Street, from “Big Business,” the media and the inflationist Federal Reserve. We now face the downside of years of monetary inflation, including the consequences of repeatedly inflating expectations. Folks are understandably disillusioned. The political season has cracked things wide open.
Gross global economic imbalances and maladjustment are being exposed. The rank inequities of the existing structure are feeding social, political and geopolitical instability. Wall Street can continue to pretend that all is well – while the backdrop clearly turns more disconcerting by the week.
My thesis remains that the global Bubble has burst. Current risks are extraordinary, and global officials are at this point wedded to desperate measures. The ECB increased QE to over $1.0 TN annually, while adding corporate debt to its shopping list. Chinese officials have stated their intention to stabilize their currency, while spurring 13% system Credit expansion (to ensure 6.5% GDP growth). Market perceptions hold that the Bank of Japan is willing to boast QE, while the Fed would clearly not hesitate to again call upon QE as necessary.
Global markets have rallied strongly over the past month. Bear market rally or a springboard to another bull run? Or has it all regressed to a sullied game where only the timing of unfolding fiasco is unknown. Fundamental to the Bursting Bubble Thesis is that a most protracted global Credit Cycle has finally succumbed. “Terminal Phase” excess has left conspicuous wreckage throughout the Chinese economy and financial system – with momentous global ramifications. China – along with the global Bubble - now faces the dreaded day of reckoning. Confidence in Chinese policymaking has waned – just as faith is fading in the capacity of QE to rectify the world’s ills.
I have viewed 2016’s pronounced weakness in global financial stocks as important validation of the Burst Bubble Thesis. After rallying with the market, financial underperformance has reemerged.
Here at home, the Securities Broker/Dealers (XBD) sank 3.1% this week, increasing y-t-d losses to 10.8%. The Banks (BKX) dropped 1.6%, with a 2016 decline of 11.3%. And while Chinese stocks mustered a small advance for the week, the Hang Sang Financial Index declined 1.1% (down 11.7% y-t-d). I have posited that a vulnerable Europe resides “at the margin” of the faltering global Bubble. With this in mind, European financial stocks deserve close attention. This week saw the STOXX Europe 600 Banks Index slammed 4.9%, increasing y-t-d losses to 19.8%. Italian banks were hit 3.8% (down 29% y-t-d).
While on the subject of vulnerable rallies and Europe, it’s worth noting that French and Spanish stocks dropped about 3% this week, while Italian equities fell 2.4%. German bund yields declined another three bps (to 18 bps), while periphery spreads widened (Greece +17, Spain +12, Portugal +6 and Italy +6).
March 25 – Bloomberg (Rich Miller and Alexandre Tanzi): “On the face of it, the latest government update on how the U.S. economy performed in the fourth quarter looked a bit more encouraging. Growth was revised to a 1.4% annualized pace from a previously estimated 1%... consumer spending rose more than previously thought. Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5% in the fourth quarter from the year-ago period, the biggest drop since a 31% collapse at the end of 2008 during the height of the financial crisis. For 2015 as a whole, pretax earnings fell 3.1%, the most in seven years…”
I view unfolding profit deterioration as a consequence of the secular downturn in U.S. and global Credit. The real earnings pain will unfold as securities markets succumb to the deteriorating domestic and global backdrop – the self-reinforcing downside of so-called “wealth effects” and financial engineering.
Acutely unstable currencies markets are also central to the Burst Global Bubble Thesis. This week saw the dollar lurch higher and recently strong currencies hit with losses, the type of unpredictability and volatility that are anything but conducive to leverage. And while on the subject of leverage:
March 23 – Financial Times (Izabella Kaminska): “The spike in US Treasury bond fails to deliver, which started earlier this year, is something we’ve been watching closely. It’s fair to say we’re now at a significant milestone and the story is beginning to go mainstream. From the WSJ on Tuesday: ‘Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repos through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised…’ Over at ADMISI Paul Mylchreest has dubbed it a $450bn plumbing problem…”
All is not well in leveraged speculation…
For the week:
The S&P500 slipped 0.7% (down 0.4% y-t-d), and the Dow declined 0.5% (up 0.5%). The Utilities added 0.4% (up 13.8%). The Banks fell 1.6% (down 11.3%), and the Broker/Dealers were hit 3.1% (down 10.8%). The Transports lost 1.8% (up 5.6%). The S&P 400 Midcaps dropped 1.1% (up 1.1%), and the small cap Russell 2000 sank 2.0% (down 5.0%). The Nasdaq100 slipped 0.1% (down 4.1%), and the Morgan Stanley High Tech index declined 0.1% (down 4.2%). The Semiconductors declined 1.3% (up 0.4%). The Biotechs gained 1.3% (down 24.6%). With bullion down $38, the HUI gold index sank 5.5% (up 54.2%).
Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields gained three bps to 0.87% (down 18bps y-t-d). Five-year T-note yields rose five bps to 1.38% (down 37bps). Ten-year Treasury yields increased three bps to 1.90% (down 35bps). Long bond yields slipped a basis point to 2.67% (down 35bps).
Greek 10-year yields rose 14 bps to 8.50% (up 118bps y-t-d). Ten-year Portuguese yields increased three bps to 2.94% (up 42bps). Italian 10-year yields gained three bps to 1.30% (down 29bps). Spain's 10-year yields jumped nine bps to 1.52% (down 25bps). German bund yields declined three bps to 0.18% (down 44bps). French yields fell three bps to 0.53% (down 46bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields were unchanged at 1.45% (down 51bps).
Japan's Nikkei equities index rallied 1.7% (down 10.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.10% (down 36bps y-t-d). The German DAX equities index declined 1.0% (down 8.3%). Spain's IBEX 35 equities index sank 2.9% (down 7.9%). Italy's FTSE MIB index was hit 2.4% (down 15.2%). EM equities equities were mixed. Brazil's Bovespa index dropped 2.3% (up 14.6%). Mexico's Bolsa added 0.4% (up 6.2%). South Korea's Kospi index slipped 0.4% (up 1.1%). India’s Sensex equities index gained 1.5% (down 3.0%). China’s Shanghai Exchange added 0.8% (down 15.8%). Turkey's Borsa Istanbul National 100 index fell 1.9% (up 13.5%). Russia's MICEX equities index declined 2.4% (up 6.0%).
Junk funds saw inflows $2.156 billion (from Lipper), the fourth straight week of big positive flows.
Freddie Mac 30-year fixed mortgage rates declined two bps to 3.71% (up 2bps y-o-y). Fifteen-year rates fell three bps to 2.96% (down 30bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 3.81% (down 31bps).
Federal Reserve Credit last week expanded $4.5bn to $4.451 TN. Over the past year, Fed Credit declined $2.5bn, or 0.1%. Fed Credit inflated $1.640 TN, or 58%, over the past 176 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $4.4bn to $3.256 TN. "Custody holdings" were up $22.4bn y-o-y, or 0.7%.
M2 (narrow) "money" supply last week jumped $22.8bn to $12.534 TN. "Narrow money" expanded $693bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $46.9bn, while Savings Deposits fell $23.7bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.8bn.
Total money market fund assets fell $14.8bn to $2.752 TN. Money Funds rose $71bn y-o-y (2.6%).
Total Commercial Paper declined $7.7bn to $1.090 TN. CP expanded $58 billion y-o-y, or 5.6%.
Currency Watch:
The U.S. dollar index rallied 1.1% this week to 96.13 (down 2.6% y-t-d). For the week on the downside, the British pound declined 2.4%, the Canadian dollar 2.0%, the New Zealand dollar 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Australian dollar 1.3%, the South African rand 1.2%, the Norwegian krone 1.3%, the euro 0.9%, the Swedish krona 0.9%, the Swiss franc 0.8% and the Mexican peso 0.8%. The Chinese yuan declined 0.7% versus the dollar.
Japan was the early major recipient of U.S. Bubble excess (throughout the eighties). The world today would be a much different place if the policy onus had fallen upon the Fed and congress to rein in U.S. borrowing excesses. Instead, enormous pressure was placed on Japan (and, later, others) to ameliorate trade surpluses with the U.S. by stimulating domestic demand. Such stimulus measures were instrumental in (repeatedly) stoking already powerful Bubbles to precarious extremes.
Fiscal and Current Account Deficits exploded in the early-nineties post-Bubble period. And as the nineties reflation gathered momentum, the boom in Wall Street and GSE finance pushed the Current Account to previously unimaginable extremes. Then, as the decade progressed, the associated global boom in dollar-based finance proved ever more destabilizing. Always ignoring root causes, each new crisis provided an excuse to further stimulate/inflate.
The fundamentally unsound dollar proved pivotal for European monetary integration, as the strong euro currency coupled with global liquidity abundance ensured runaway Bubble excesses throughout Europe’s periphery. If the U.S. could run perpetual Current Account Deficits, why not Greece, Italy, Spain and Portugal? Having ignored problematic financial and economic imbalances for years, when European troubles erupted everyone turned immediately to pressure the big surplus economy (Germany) to further stimulate their Bubble economy.
Economists traditionally viewed persistent Current Account Deficits as problematic. But as New Paradigm and New Era thinking took hold throughout the nineties, all types of justification and rationalization turned conventional analysis on its head. The U.S. was the world’s lone superpower, leading the world into a golden age of new technologies and free-market Capitalism. The Greenspan Fed believed a paradigm shift of enhanced productivity boosted the economy’s “speed limit”. Financial conditions turned perpetually loose. And if the Bubble burst, just call upon some fanatical academic willing to evoke “helicopter money”.
With U.S. officials turning their backs on financial excesses, Bubble Dynamics and unrelenting Current Account Deficits, I expected the world to lose its appetite for U.S. financial claims. After all, how long should the world be expected to trade real goods and services for endless U.S. IOUs?
As it turned out, rather than acting to discipline the profligate U.S. Credit system, the world acquiesced to Bubble Dynamics. No one was willing to be left behind. Along the way it was learned that large reserves of U.S. financial assets were integral to booming financial inflows and attendant domestic investment and growth. The U.S. has now run persistently large Current Account Deficits for going on 25 years.
Seemingly the entire globe is now trapped in a regime of unprecedented monetary and fiscal stimulus required to levitate a world with unmatched debt and economic imbalances. History has seen nothing comparable. And I would strongly argue that the consequences of Bubbles become much more problematic over time. The longer excesses persist the deeper the structural impairment.
Not many months ago bullish Wall Street strategists and pundits were celebrating the backdrop. It appeared to many that global central bankers had mastered the perpetual “money” machine. Markets could only go higher. Yet one would have to be delusional not to recognize the darkening clouds overtaking the world and U.S. Look no further than global terrorist attacks, geopolitical tension and the sour U.S. political discourse as confirmation that All is Not Well.
Over the years, I’ve been accused of being a left-wing liberal as well as a right-wing conservative. I’m pretty determined to keep politics out of the CBB. Yet it’s fundamental to my analysis that years of monetary and fiscal mismanagement are elemental to today’s darkening social mood. The “establishment” is despised. Washington policymakers and Wall Street are held in complete contempt. And, importantly, Capitalism is under attack. Globalization is now viewed with deep suspicion. The establishment is shocked that trade deals are these days seen as disadvantageous to U.S. workers. Integration and cooperation has become a game for suckers.
Instead of the world turning against the ever inflating quantities of U.S. financial claims circulating around the globe, it’s the American working class that has become increasingly fed up with the structure of the economic system. Trading new financial claims for inexpensive imports worked almost miraculously. For longer than I ever imagined, unfettered global finance spurred a historic capital investment boom - in China, Asia and EM. But this Bubble has burst globally, while the U.S. economy is left with much of its industrial base gutted and workers suffering stagnant wages. Most now refuse to view the future through rose-colored glasses.
Many have just had enough of the BS – from politicians, from Wall Street, from “Big Business,” the media and the inflationist Federal Reserve. We now face the downside of years of monetary inflation, including the consequences of repeatedly inflating expectations. Folks are understandably disillusioned. The political season has cracked things wide open.
Gross global economic imbalances and maladjustment are being exposed. The rank inequities of the existing structure are feeding social, political and geopolitical instability. Wall Street can continue to pretend that all is well – while the backdrop clearly turns more disconcerting by the week.
My thesis remains that the global Bubble has burst. Current risks are extraordinary, and global officials are at this point wedded to desperate measures. The ECB increased QE to over $1.0 TN annually, while adding corporate debt to its shopping list. Chinese officials have stated their intention to stabilize their currency, while spurring 13% system Credit expansion (to ensure 6.5% GDP growth). Market perceptions hold that the Bank of Japan is willing to boast QE, while the Fed would clearly not hesitate to again call upon QE as necessary.
Global markets have rallied strongly over the past month. Bear market rally or a springboard to another bull run? Or has it all regressed to a sullied game where only the timing of unfolding fiasco is unknown. Fundamental to the Bursting Bubble Thesis is that a most protracted global Credit Cycle has finally succumbed. “Terminal Phase” excess has left conspicuous wreckage throughout the Chinese economy and financial system – with momentous global ramifications. China – along with the global Bubble - now faces the dreaded day of reckoning. Confidence in Chinese policymaking has waned – just as faith is fading in the capacity of QE to rectify the world’s ills.
I have viewed 2016’s pronounced weakness in global financial stocks as important validation of the Burst Bubble Thesis. After rallying with the market, financial underperformance has reemerged.
Here at home, the Securities Broker/Dealers (XBD) sank 3.1% this week, increasing y-t-d losses to 10.8%. The Banks (BKX) dropped 1.6%, with a 2016 decline of 11.3%. And while Chinese stocks mustered a small advance for the week, the Hang Sang Financial Index declined 1.1% (down 11.7% y-t-d). I have posited that a vulnerable Europe resides “at the margin” of the faltering global Bubble. With this in mind, European financial stocks deserve close attention. This week saw the STOXX Europe 600 Banks Index slammed 4.9%, increasing y-t-d losses to 19.8%. Italian banks were hit 3.8% (down 29% y-t-d).
While on the subject of vulnerable rallies and Europe, it’s worth noting that French and Spanish stocks dropped about 3% this week, while Italian equities fell 2.4%. German bund yields declined another three bps (to 18 bps), while periphery spreads widened (Greece +17, Spain +12, Portugal +6 and Italy +6).
March 25 – Bloomberg (Rich Miller and Alexandre Tanzi): “On the face of it, the latest government update on how the U.S. economy performed in the fourth quarter looked a bit more encouraging. Growth was revised to a 1.4% annualized pace from a previously estimated 1%... consumer spending rose more than previously thought. Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5% in the fourth quarter from the year-ago period, the biggest drop since a 31% collapse at the end of 2008 during the height of the financial crisis. For 2015 as a whole, pretax earnings fell 3.1%, the most in seven years…”
I view unfolding profit deterioration as a consequence of the secular downturn in U.S. and global Credit. The real earnings pain will unfold as securities markets succumb to the deteriorating domestic and global backdrop – the self-reinforcing downside of so-called “wealth effects” and financial engineering.
Acutely unstable currencies markets are also central to the Burst Global Bubble Thesis. This week saw the dollar lurch higher and recently strong currencies hit with losses, the type of unpredictability and volatility that are anything but conducive to leverage. And while on the subject of leverage:
March 23 – Financial Times (Izabella Kaminska): “The spike in US Treasury bond fails to deliver, which started earlier this year, is something we’ve been watching closely. It’s fair to say we’re now at a significant milestone and the story is beginning to go mainstream. From the WSJ on Tuesday: ‘Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repos through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised…’ Over at ADMISI Paul Mylchreest has dubbed it a $450bn plumbing problem…”
All is not well in leveraged speculation…
For the week:
The S&P500 slipped 0.7% (down 0.4% y-t-d), and the Dow declined 0.5% (up 0.5%). The Utilities added 0.4% (up 13.8%). The Banks fell 1.6% (down 11.3%), and the Broker/Dealers were hit 3.1% (down 10.8%). The Transports lost 1.8% (up 5.6%). The S&P 400 Midcaps dropped 1.1% (up 1.1%), and the small cap Russell 2000 sank 2.0% (down 5.0%). The Nasdaq100 slipped 0.1% (down 4.1%), and the Morgan Stanley High Tech index declined 0.1% (down 4.2%). The Semiconductors declined 1.3% (up 0.4%). The Biotechs gained 1.3% (down 24.6%). With bullion down $38, the HUI gold index sank 5.5% (up 54.2%).
Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields gained three bps to 0.87% (down 18bps y-t-d). Five-year T-note yields rose five bps to 1.38% (down 37bps). Ten-year Treasury yields increased three bps to 1.90% (down 35bps). Long bond yields slipped a basis point to 2.67% (down 35bps).
Greek 10-year yields rose 14 bps to 8.50% (up 118bps y-t-d). Ten-year Portuguese yields increased three bps to 2.94% (up 42bps). Italian 10-year yields gained three bps to 1.30% (down 29bps). Spain's 10-year yields jumped nine bps to 1.52% (down 25bps). German bund yields declined three bps to 0.18% (down 44bps). French yields fell three bps to 0.53% (down 46bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields were unchanged at 1.45% (down 51bps).
Japan's Nikkei equities index rallied 1.7% (down 10.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.10% (down 36bps y-t-d). The German DAX equities index declined 1.0% (down 8.3%). Spain's IBEX 35 equities index sank 2.9% (down 7.9%). Italy's FTSE MIB index was hit 2.4% (down 15.2%). EM equities equities were mixed. Brazil's Bovespa index dropped 2.3% (up 14.6%). Mexico's Bolsa added 0.4% (up 6.2%). South Korea's Kospi index slipped 0.4% (up 1.1%). India’s Sensex equities index gained 1.5% (down 3.0%). China’s Shanghai Exchange added 0.8% (down 15.8%). Turkey's Borsa Istanbul National 100 index fell 1.9% (up 13.5%). Russia's MICEX equities index declined 2.4% (up 6.0%).
Junk funds saw inflows $2.156 billion (from Lipper), the fourth straight week of big positive flows.
Freddie Mac 30-year fixed mortgage rates declined two bps to 3.71% (up 2bps y-o-y). Fifteen-year rates fell three bps to 2.96% (down 30bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 3.81% (down 31bps).
Federal Reserve Credit last week expanded $4.5bn to $4.451 TN. Over the past year, Fed Credit declined $2.5bn, or 0.1%. Fed Credit inflated $1.640 TN, or 58%, over the past 176 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $4.4bn to $3.256 TN. "Custody holdings" were up $22.4bn y-o-y, or 0.7%.
M2 (narrow) "money" supply last week jumped $22.8bn to $12.534 TN. "Narrow money" expanded $693bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits jumped $46.9bn, while Savings Deposits fell $23.7bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.8bn.
Total money market fund assets fell $14.8bn to $2.752 TN. Money Funds rose $71bn y-o-y (2.6%).
Total Commercial Paper declined $7.7bn to $1.090 TN. CP expanded $58 billion y-o-y, or 5.6%.
Currency Watch:
The U.S. dollar index rallied 1.1% this week to 96.13 (down 2.6% y-t-d). For the week on the downside, the British pound declined 2.4%, the Canadian dollar 2.0%, the New Zealand dollar 1.7%, the Brazilian real 1.5%, the Japanese yen 1.4%, the Australian dollar 1.3%, the South African rand 1.2%, the Norwegian krone 1.3%, the euro 0.9%, the Swedish krona 0.9%, the Swiss franc 0.8% and the Mexican peso 0.8%. The Chinese yuan declined 0.7% versus the dollar.
Commodities Watch:
The Goldman Sachs Commodities Index fell 2.2% (up 5.2% y-t-d). Spot Gold dropped 3.1% to $1,217 (up 14.7%). March Silver sank 3.9% to $15.20 (up 10%). April WTI Crude was little changed at $39.46 (up 7%). March Gasoline rose 2.7% (up 15%), while March Natural Gas fell 5.2% (down 23%). March Copper declined 2.3% (up 4%). May Wheat was unchanged (down 2%). May Corn increased 0.8% (up 3%).
Fixed-Income Bubble Watch:
March 21 – Wall Street Journal (Katy Burne): “Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repo through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised.”
March 20 – Bloomberg (Alexandra Scaggs and Liz McCormick): “The world’s biggest bond dealers are getting saddled with Treasuries they can’t seem to easily get rid of, adding to evidence of cracks in the $13.3 trillion market for U.S. government debt. The 22 primary dealers held more Treasuries last month than any time in the last two years… While at first glance that may suggest a bullish stance, the surge in holdings is more likely the result of investors including central banks dumping the debt on the firms, said JPMorgan… strategist Jay Barry. Foreign official accounts sold a net $105 billion of the securities in December and January, an unprecedented liquidation…”
March 23 – Bloomberg (Finbarr Flynn, Katie Linsell and Cordell Eddings): “Mario Draghi and Haruhiko Kuroda have handed a big gift to U.S. companies like Coca-Cola Co. and General Electric Co.: piles of money from European and Japanese investors. Nearly $8 trillion of bonds globally have negative yields now, which has spurred fund managers from around the world to buy corporate debt in the U.S… ‘Draghi has forced me as a European investor to look at overseas holdings that aren’t euro-denominated,’ said James Tomlins, a… high-yield money manager at M&G Investments… ‘The potential for returns is much better in the U.S.’…Demand from Asian and European investors has already helped cut risk premiums on U.S. investment-grade corporate bonds by about half a percentage point since mid-February, according to Bank of America Merrill Lynch…”
March 21 – Financial Times (Joe Rennison): “Investors in bonds backed by risky loans remain broadly positive on deals that include the debt of pharmaceutical company Valeant, despite this week’s warning from Moody’s. The… rating agency cautioned that roughly a third of the group’s loans had been packaged into collateralised loan obligations, securities in which loans are pooled together into bonds and sold to investors. Moody’s estimated $3.4bn worth of loans had been purchased by CLOs…”
Global Bubble Watch:
March 22 – Bloomberg (Simon Kennedy): “After more than 600 interest-rate cuts and $12 trillion of asset purchases failed to move the inflation needle enough, central banks may need to head even deeper into uncharted territory. The way to get the world out of its disinflationary rut could lie in them directly financing government stimulus -- a strategy known as deploying ‘helicopter money’ after a 1969 proposal from Nobel laureate Milton Friedman. Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks, while hedge fund titan Ray Dalio sees potential in the idea. European Central Bank officials are already squabbling about what President Mario Draghi calls a ‘very interesting concept.’ ‘We don’t know for certain that ‘helicopter money’ will be the next attempted silver bullet, however the topic is receiving considerably more attention,” said Gabriel Stein, an economist at Oxford Economics... ‘The likelihood is reasonably high of some form being implemented somewhere.’”
March 20 – Bloomberg (Katia Dmitrieva): “Buyers from China comprised about one-third of purchases of Vancouver’s hot housing market in 2015, according to ‘back of the envelope calculations’ by National Bank of Canada. Chinese investors spent about C$12.7 billion ($9.6bn) on real estate in the western Canadian city in 2015, or 33% of its C$38.5 billion in total sales, according to… analyst Peter Routledge… In Toronto, they made up 14% of purchases, or about C$9 billion of the C$63 billion in deals.”
March 23 – Bloomberg (Donal Griffin and Richard Partington): “Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said the firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business. ‘This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank’ when the firm laid out a strategy in October, Thiam, 53, said… ‘There needs to be a cultural change because it’s completely unacceptable,’ adding that there had been ‘consequences’ for some employees.”
Federal Reserve Watch:
The Goldman Sachs Commodities Index fell 2.2% (up 5.2% y-t-d). Spot Gold dropped 3.1% to $1,217 (up 14.7%). March Silver sank 3.9% to $15.20 (up 10%). April WTI Crude was little changed at $39.46 (up 7%). March Gasoline rose 2.7% (up 15%), while March Natural Gas fell 5.2% (down 23%). March Copper declined 2.3% (up 4%). May Wheat was unchanged (down 2%). May Corn increased 0.8% (up 3%).
Fixed-Income Bubble Watch:
March 21 – Wall Street Journal (Katy Burne): “Settlement failures in Treasury repurchase transactions in March hit their highest level since 2008, underscoring concerns on Wall Street that trading conditions are apt to deteriorate in even the most-liquid markets under the acute stress evident early this year. Almost 13% of Treasury repo through primary dealers in the week ended March 9 included a failure by one party to deliver securities as promised.”
March 20 – Bloomberg (Alexandra Scaggs and Liz McCormick): “The world’s biggest bond dealers are getting saddled with Treasuries they can’t seem to easily get rid of, adding to evidence of cracks in the $13.3 trillion market for U.S. government debt. The 22 primary dealers held more Treasuries last month than any time in the last two years… While at first glance that may suggest a bullish stance, the surge in holdings is more likely the result of investors including central banks dumping the debt on the firms, said JPMorgan… strategist Jay Barry. Foreign official accounts sold a net $105 billion of the securities in December and January, an unprecedented liquidation…”
March 23 – Bloomberg (Finbarr Flynn, Katie Linsell and Cordell Eddings): “Mario Draghi and Haruhiko Kuroda have handed a big gift to U.S. companies like Coca-Cola Co. and General Electric Co.: piles of money from European and Japanese investors. Nearly $8 trillion of bonds globally have negative yields now, which has spurred fund managers from around the world to buy corporate debt in the U.S… ‘Draghi has forced me as a European investor to look at overseas holdings that aren’t euro-denominated,’ said James Tomlins, a… high-yield money manager at M&G Investments… ‘The potential for returns is much better in the U.S.’…Demand from Asian and European investors has already helped cut risk premiums on U.S. investment-grade corporate bonds by about half a percentage point since mid-February, according to Bank of America Merrill Lynch…”
March 21 – Financial Times (Joe Rennison): “Investors in bonds backed by risky loans remain broadly positive on deals that include the debt of pharmaceutical company Valeant, despite this week’s warning from Moody’s. The… rating agency cautioned that roughly a third of the group’s loans had been packaged into collateralised loan obligations, securities in which loans are pooled together into bonds and sold to investors. Moody’s estimated $3.4bn worth of loans had been purchased by CLOs…”
Global Bubble Watch:
March 22 – Bloomberg (Simon Kennedy): “After more than 600 interest-rate cuts and $12 trillion of asset purchases failed to move the inflation needle enough, central banks may need to head even deeper into uncharted territory. The way to get the world out of its disinflationary rut could lie in them directly financing government stimulus -- a strategy known as deploying ‘helicopter money’ after a 1969 proposal from Nobel laureate Milton Friedman. Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks, while hedge fund titan Ray Dalio sees potential in the idea. European Central Bank officials are already squabbling about what President Mario Draghi calls a ‘very interesting concept.’ ‘We don’t know for certain that ‘helicopter money’ will be the next attempted silver bullet, however the topic is receiving considerably more attention,” said Gabriel Stein, an economist at Oxford Economics... ‘The likelihood is reasonably high of some form being implemented somewhere.’”
March 20 – Bloomberg (Katia Dmitrieva): “Buyers from China comprised about one-third of purchases of Vancouver’s hot housing market in 2015, according to ‘back of the envelope calculations’ by National Bank of Canada. Chinese investors spent about C$12.7 billion ($9.6bn) on real estate in the western Canadian city in 2015, or 33% of its C$38.5 billion in total sales, according to… analyst Peter Routledge… In Toronto, they made up 14% of purchases, or about C$9 billion of the C$63 billion in deals.”
March 23 – Bloomberg (Donal Griffin and Richard Partington): “Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said the firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business. ‘This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank’ when the firm laid out a strategy in October, Thiam, 53, said… ‘There needs to be a cultural change because it’s completely unacceptable,’ adding that there had been ‘consequences’ for some employees.”
Federal Reserve Watch:
March 23 – CNBC (Steve Liesman): “Fed Chair Janet Yellen has something of a mini revolt on her hands. Four of the 17 members of the Federal Open Market Committee have now publicly indicated their disagreement with the dovish guidance in last week's policy statement and in comments from Fed Chair Janet Yellen at her press conference. The latest dissenter is Patrick Harker, the new president of the Philadelphia Fed, who said… that the Fed should ‘get on with’ rate hikes and consider another move in April. He joins centrists John Williams of San Francisco and Dennis Lockhart of Atlanta who… said the Fed should consider an April hike. Esther George, the Kansas City Fed president… dissented at the meeting last week and called for a 25 bps hike.”
March 23 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets. ‘You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,’ Bullard, who votes on policy this year, said… ‘I think we are going to end up overshooting on inflation’ and the natural rate of unemployment, he said.”
U.S. Bubble Watch:
March 21 – CNBC (Jeff Cox): “If the stock market rally is going to continue the next couple of months, it will have to do so against an aggressively worsening profit backdrop. The corporate earnings picture is ugly and getting uglier in a hurry, with S&P 500 companies expected to post an 8.3% decline in first-quarter profits from the same period a year ago. While history suggests that earnings season always ends up looking better at the end than it did at the beginning, if the current trend holds up it will be the worst period since the third quarter of 2009, according to FactSet.
March 21 – Reuters (Caroline Valetkevitch): “U.S. companies are once again relying on a lot of financial engineering to boost earnings, suggesting that last year's weak profit picture may have been even worse than it seemed… S&P 500 companies reported adjusted earnings - which often exclude one-time charges and taxes - for the last 12 months that were 30% higher than income they reported based on generally accepted accounting principles, or GAAP, analysts at Evercore ISI… said. That is the biggest difference for a 12-month period since 2008, the year of the U.S. financial crisis, and the third highest since 1994… Fourth-quarter S&P 500 earnings declined 2.9% from a year ago, while revenue fell 3.6%, Thomson Reuters data showed.”
March 24 – Bloomberg (Selina Wang): “In recent months, venture capital firms and mutual funds have become choosier about which technology startups they’re prepared to back. Now hedge funds, after helping push valuations to dot-com-era heights, are getting more picky, too. Last month, hedge funds participated in the fewest number of venture capital rounds in U.S. tech companies since 2013, inking just two deals, according to… PitchBook Data… Like VCs, hedge funds are more circumspect because some startups have failed to live up to their billing. Plus, in the wake of several disappointing tech IPOs, many of the most promising firms are choosing to stay private longer, meaning it takes longer to cash out. Investors’ stinginess is forcing startups to cut costs, fire workers and accept more stringent terms when raising money. ‘We’ve completely stopped investing in private tech,’ said Jeremy Abelson, a portfolio manager at Irving Investors... ‘I’m done with intangible valuations, unknown exits, unknown liquidity, and I want something that if I put my money into it now, I’m not going to hit a grand slam, but I’m going to get something that’s immediately yielding.’”
March 24 – Bloomberg (Janet Lorin): “The managers of U.S. college endowments try hard to earn more for their schools than a plain-vanilla portfolio of stocks would. That’s never easy, and lately it’s been especially tough. Fifteen endowments that provided Bloomberg with total returns for the second half of 2015 lost 3.6% on average. In the same period, the Standard & Poor’s 500-stock index earned a slight gain with dividends.”
March 23 – Bloomberg (Romy Varghese): “New Jersey’s credit-rating outlook was revised to negative from stable by Standard & Poor’s, which cited the ‘significant long-term pressures’ the state is under from employee benefit liabilities and the risk the situation will worsen.”
China Bubble Watch:
March 23 – Nikkei Asian Review (Iori Kawate): “Excessive debt held by Chinese companies and households is highlighting a grave reality behind the country's economy. In a sign that this debt is being regarded as a risk to the global economy, it became a topic of discussion at a meeting of G-20 finance ministers and central bank governors held in February. China even appears to be taking steps similar to Japan's moves in its own post-bubble era. Total credit to the Chinese private non-financial sector stood at $21.5 trillion at the end of September 2015, accounting for 205% of the country's gross domestic product… In Japan, the figure accounted for more than 200% of the nation's GDP at the end of September 1989, when the country was in the late stage of its economic bubble. After that bubble burst, the number shot up to 221% by the end of December 1995… And now in China, the outstanding amount of total credit to the private sector has surged 300% from the end of December 2008.”
March 20 – Bloomberg (Ye Xie and Fox Hu): “Not since 1999 have China’s companies had so much trouble getting customers to actually pay for what they’ve bought. It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers. As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation’s public firms have swelled by 23% over the past two years to about $590 billion… The raft of unpaid bills -- bigger than at any time since former Premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century -- shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China’s vast web of interconnected supply chains.”
March 23 – Bloomberg (Steve Matthews and Matthew Boesler): “Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets. ‘You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,’ Bullard, who votes on policy this year, said… ‘I think we are going to end up overshooting on inflation’ and the natural rate of unemployment, he said.”
U.S. Bubble Watch:
March 21 – CNBC (Jeff Cox): “If the stock market rally is going to continue the next couple of months, it will have to do so against an aggressively worsening profit backdrop. The corporate earnings picture is ugly and getting uglier in a hurry, with S&P 500 companies expected to post an 8.3% decline in first-quarter profits from the same period a year ago. While history suggests that earnings season always ends up looking better at the end than it did at the beginning, if the current trend holds up it will be the worst period since the third quarter of 2009, according to FactSet.
March 21 – Reuters (Caroline Valetkevitch): “U.S. companies are once again relying on a lot of financial engineering to boost earnings, suggesting that last year's weak profit picture may have been even worse than it seemed… S&P 500 companies reported adjusted earnings - which often exclude one-time charges and taxes - for the last 12 months that were 30% higher than income they reported based on generally accepted accounting principles, or GAAP, analysts at Evercore ISI… said. That is the biggest difference for a 12-month period since 2008, the year of the U.S. financial crisis, and the third highest since 1994… Fourth-quarter S&P 500 earnings declined 2.9% from a year ago, while revenue fell 3.6%, Thomson Reuters data showed.”
March 24 – Bloomberg (Selina Wang): “In recent months, venture capital firms and mutual funds have become choosier about which technology startups they’re prepared to back. Now hedge funds, after helping push valuations to dot-com-era heights, are getting more picky, too. Last month, hedge funds participated in the fewest number of venture capital rounds in U.S. tech companies since 2013, inking just two deals, according to… PitchBook Data… Like VCs, hedge funds are more circumspect because some startups have failed to live up to their billing. Plus, in the wake of several disappointing tech IPOs, many of the most promising firms are choosing to stay private longer, meaning it takes longer to cash out. Investors’ stinginess is forcing startups to cut costs, fire workers and accept more stringent terms when raising money. ‘We’ve completely stopped investing in private tech,’ said Jeremy Abelson, a portfolio manager at Irving Investors... ‘I’m done with intangible valuations, unknown exits, unknown liquidity, and I want something that if I put my money into it now, I’m not going to hit a grand slam, but I’m going to get something that’s immediately yielding.’”
March 24 – Bloomberg (Janet Lorin): “The managers of U.S. college endowments try hard to earn more for their schools than a plain-vanilla portfolio of stocks would. That’s never easy, and lately it’s been especially tough. Fifteen endowments that provided Bloomberg with total returns for the second half of 2015 lost 3.6% on average. In the same period, the Standard & Poor’s 500-stock index earned a slight gain with dividends.”
March 23 – Bloomberg (Romy Varghese): “New Jersey’s credit-rating outlook was revised to negative from stable by Standard & Poor’s, which cited the ‘significant long-term pressures’ the state is under from employee benefit liabilities and the risk the situation will worsen.”
China Bubble Watch:
March 23 – Nikkei Asian Review (Iori Kawate): “Excessive debt held by Chinese companies and households is highlighting a grave reality behind the country's economy. In a sign that this debt is being regarded as a risk to the global economy, it became a topic of discussion at a meeting of G-20 finance ministers and central bank governors held in February. China even appears to be taking steps similar to Japan's moves in its own post-bubble era. Total credit to the Chinese private non-financial sector stood at $21.5 trillion at the end of September 2015, accounting for 205% of the country's gross domestic product… In Japan, the figure accounted for more than 200% of the nation's GDP at the end of September 1989, when the country was in the late stage of its economic bubble. After that bubble burst, the number shot up to 221% by the end of December 1995… And now in China, the outstanding amount of total credit to the private sector has surged 300% from the end of December 2008.”
March 20 – Bloomberg (Ye Xie and Fox Hu): “Not since 1999 have China’s companies had so much trouble getting customers to actually pay for what they’ve bought. It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers. As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation’s public firms have swelled by 23% over the past two years to about $590 billion… The raft of unpaid bills -- bigger than at any time since former Premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century -- shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China’s vast web of interconnected supply chains.”
March 22 – Reuters (David Stanway): “China's campaign to slim down its bloated industries could be derailed by more than $1.5 trillion of debt in its steel, coal, cement and non-ferrous metal sectors, which threatens to overwhelm local banks. Tackling industrial overcapacity has become a priority for Beijing to make its slowing economy more efficient and address a supply glut that has hammered coal and steel prices. China is providing more than 100 billion yuan ($15bn) in the next two years to handle layoffs from coal and steel, but that will only be made available once debts have been settled. Critics say there is no clear mechanism for tackling the debt burden, which will put huge strain on the weakest sections of the banking sector.”
March 20 – Financial Times (Patti Waldmeir): “China’s central bank governor has warned that the country’s corporate debt levels are too high and are stoking risks for the economy, just as highly-leveraged Chinese companies have gone on an overseas takeover binge. Adding his voice to a recent chorus of concern by senior Chinese officials, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), told global business leaders meeting in Beijing that the ratio of lending to gross domestic product was becoming excessive. ‘Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side,’ he said… Corporate debt in China has risen to about 160% of GDP, while total debt is about 230%, according to Financial Times estimates.”
March 20 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan sounded a warning over rising debt levels, saying corporate lending as a ratio to gross domestic product had become too high and the country must develop more robust capital markets. China still has a problem with illegal fundraising and financial services are insufficient, Zhou said… He said the country still needs regulation to guard against excessive leverage in foreign currencies. ‘Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,’ Zhou said. He said a high leverage ratio is more prone to macroeconomic risk.”
March 25 – Bloomberg: “Shanghai officials announced stricter real-estate regulations Friday to help cool a market where new-home prices soared 21% in February from a year earlier. Buyers will need to show they’ve been in the city for five years, and some second homes will require down payments of at least 70%.”
ECB Watch:
March 23 – Reuters (Dhara Ranasinghe): “Expanding QE could see the European Central Bank owning up to 25% of the 7 trillion euro government bond market, analysts estimate, exacerbating worries about bond scarcity and thin market conditions. It could also hold as much as 10% of top-rated corporate debt in the euro area after announcing this month it will include bonds of investment-grade non-financial firms in its asset purchase scheme from the second quarter. The ECB has said it will increase its bond-buying by 20 billion euros (£16bn) to 80 billion euros per month from April.”
March 19 – Reuters (Michelle Martin): “‘Helicopter money’, or free cash dished out to citizens in a bid to stimulate spending and inflation, would end up costing euro zone states and therefore taxpayers, the head of Germany's central bank said in an interview with German newspapers. After years of increasingly desperate attempts to kick-start growth, some bankers and finance officials fear policymakers are running out of effective ammunition and future stimulus efforts could even be harmful. Economists say ‘helicopter money’ would be a last resort. ‘Helicopter money is not manna that falls from heaven - it would actually rip huge holes in central bank balance sheets… Ultimately euro zone states and therefore taxpayers would end up having to bear the costs because there wouldn't be central bank profits for a long time,’ said Weidmann…”
March 23 – Reuters (Jochen Elegeert and Toby Sterling): “Dutch Central Bank President Klaas Knot, who has voted against recent monetary easing by the European Central Bank, said… that the measure had reached the limit of its effectiveness. Knot said further bond purchases by the ECB would encroach on a ban on financing government spending that is enshrined in its charter. …Hhe said that, while further easing was technically possible, ‘the question is whether the added value of doing more is worth the side effects’. ‘I have my doubts,’ he added. He cited a list of problems caused by quantitative easing including financial bubbles, ‘an unhealthy hunt for yield, rolling of problem loans, increasing wealth inequality, and an addiction to low interest rates’.”
Europe Watch:
March 23 – Bloomberg (Tom Beardsworth): “Credit Suisse Group AG’s forecast for a second straight quarterly loss, mainly because of trading operations, has stoked perceived credit risk at European banks. Costs for insuring European lenders’ subordinated and senior bonds climbed to two-week highs on Thursday, based on Markit iTraxx indexes of credit-default swaps. Contracts tied to Deutsche Bank AG and UniCredit SpA have led increases in the past week.”
Japan Watch:
March 20 – Financial Times (Patti Waldmeir): “China’s central bank governor has warned that the country’s corporate debt levels are too high and are stoking risks for the economy, just as highly-leveraged Chinese companies have gone on an overseas takeover binge. Adding his voice to a recent chorus of concern by senior Chinese officials, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), told global business leaders meeting in Beijing that the ratio of lending to gross domestic product was becoming excessive. ‘Lending and other debt as a share of GDP, especially corporate lending and other debt as a share of GDP, is on the high side,’ he said… Corporate debt in China has risen to about 160% of GDP, while total debt is about 230%, according to Financial Times estimates.”
March 20 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan sounded a warning over rising debt levels, saying corporate lending as a ratio to gross domestic product had become too high and the country must develop more robust capital markets. China still has a problem with illegal fundraising and financial services are insufficient, Zhou said… He said the country still needs regulation to guard against excessive leverage in foreign currencies. ‘Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,’ Zhou said. He said a high leverage ratio is more prone to macroeconomic risk.”
March 25 – Bloomberg: “Shanghai officials announced stricter real-estate regulations Friday to help cool a market where new-home prices soared 21% in February from a year earlier. Buyers will need to show they’ve been in the city for five years, and some second homes will require down payments of at least 70%.”
ECB Watch:
March 23 – Reuters (Dhara Ranasinghe): “Expanding QE could see the European Central Bank owning up to 25% of the 7 trillion euro government bond market, analysts estimate, exacerbating worries about bond scarcity and thin market conditions. It could also hold as much as 10% of top-rated corporate debt in the euro area after announcing this month it will include bonds of investment-grade non-financial firms in its asset purchase scheme from the second quarter. The ECB has said it will increase its bond-buying by 20 billion euros (£16bn) to 80 billion euros per month from April.”
March 19 – Reuters (Michelle Martin): “‘Helicopter money’, or free cash dished out to citizens in a bid to stimulate spending and inflation, would end up costing euro zone states and therefore taxpayers, the head of Germany's central bank said in an interview with German newspapers. After years of increasingly desperate attempts to kick-start growth, some bankers and finance officials fear policymakers are running out of effective ammunition and future stimulus efforts could even be harmful. Economists say ‘helicopter money’ would be a last resort. ‘Helicopter money is not manna that falls from heaven - it would actually rip huge holes in central bank balance sheets… Ultimately euro zone states and therefore taxpayers would end up having to bear the costs because there wouldn't be central bank profits for a long time,’ said Weidmann…”
March 23 – Reuters (Jochen Elegeert and Toby Sterling): “Dutch Central Bank President Klaas Knot, who has voted against recent monetary easing by the European Central Bank, said… that the measure had reached the limit of its effectiveness. Knot said further bond purchases by the ECB would encroach on a ban on financing government spending that is enshrined in its charter. …Hhe said that, while further easing was technically possible, ‘the question is whether the added value of doing more is worth the side effects’. ‘I have my doubts,’ he added. He cited a list of problems caused by quantitative easing including financial bubbles, ‘an unhealthy hunt for yield, rolling of problem loans, increasing wealth inequality, and an addiction to low interest rates’.”
Europe Watch:
March 23 – Bloomberg (Tom Beardsworth): “Credit Suisse Group AG’s forecast for a second straight quarterly loss, mainly because of trading operations, has stoked perceived credit risk at European banks. Costs for insuring European lenders’ subordinated and senior bonds climbed to two-week highs on Thursday, based on Markit iTraxx indexes of credit-default swaps. Contracts tied to Deutsche Bank AG and UniCredit SpA have led increases in the past week.”
Japan Watch:
March 22 – Reuters (Stanley White): “Japan's manufacturing activity contracted in March for the first time in almost a year as new export orders shrank sharply, a preliminary business survey showed…, in a worrying sign that the global economy is weakening. The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 49.1 in March on a seasonally adjusted basis from a final 50.1 in February… The sub-index for new export orders fell to a preliminary 45.9 from 49.0 in February…”
Central Bank Watch:
March 21 – Bloomberg (Jill Ward): “The European Central Bank and the Bank of Japan are essentially trying to push down the values of their respective currencies with the use of negative interest rates, former Bank of England Governor Mervyn King said. ‘There are clearly limits’ to the effectiveness of negative rates, King said… ‘I think you can see with Japan and the euro area, that in essence, the central banks are trying to push down the exchange rate. Most countries in the world could say now, ‘If only the rest of the world was growing normally, we’d be fine. But since it isn’t, we aren’t. What’s left? Push down the exchange rate.’”
EM Bubble Watch:
March 23 – Bloomberg (Amogelang Mbatha): “South African inflation accelerated to 7% in February, the fastest pace since June 2009, adding to the central bank’s policy dilemma of rising consumer prices and slowing economic growth. The inflation rate jumped from 6.2% a month earlier…”
Leveraged Speculation Watch:
March 24 – Bloomberg (Nishant Kumar): “Investors allocated a net $4.4 billion to hedge funds in February, 80% less than the average pledged during the month since 2010, according to… eVestment. February typically sees increased inflows as investors rebalance their portfolios and the drop reflects investor dissatisfaction with returns last year… In the six years to 2015, investors added an average $22.6 billion in net new capital to hedge funds every February.”
March 24 – Bloomberg (Sabrina Willmer): “A Blackstone Group LP mutual fund that allocates money to hedge funds lost almost half of its assets this month as the fund’s biggest backer, Fidelity Investments, slashed its stake. Clients withdrew $585.5 million from the Blackstone Alternative Multi-Manager Fund in the first three weeks of this month, leaving it with $631.2 million in assets…”
Brazil Watch:
March 21 – Bloomberg (Simon Kennedy): “Petroleo Brasileiro SA, the oil producer at the center of Brazil’s largest corruption scandal, reported a record loss that surprised analysts and sent shares lower. The fourth quarter net loss of 36.9 billion reais ($10.2bn), caused by unprecedented asset writedowns linked to falling oil prices… At 46.4 billion reais, the impairments equated to more than a third of Petrobras’s market capitalization and exceeded the equity value of 97% of publicly-traded firms in Brazil.
Central Bank Watch:
March 21 – Bloomberg (Jill Ward): “The European Central Bank and the Bank of Japan are essentially trying to push down the values of their respective currencies with the use of negative interest rates, former Bank of England Governor Mervyn King said. ‘There are clearly limits’ to the effectiveness of negative rates, King said… ‘I think you can see with Japan and the euro area, that in essence, the central banks are trying to push down the exchange rate. Most countries in the world could say now, ‘If only the rest of the world was growing normally, we’d be fine. But since it isn’t, we aren’t. What’s left? Push down the exchange rate.’”
EM Bubble Watch:
March 23 – Bloomberg (Amogelang Mbatha): “South African inflation accelerated to 7% in February, the fastest pace since June 2009, adding to the central bank’s policy dilemma of rising consumer prices and slowing economic growth. The inflation rate jumped from 6.2% a month earlier…”
Leveraged Speculation Watch:
March 24 – Bloomberg (Nishant Kumar): “Investors allocated a net $4.4 billion to hedge funds in February, 80% less than the average pledged during the month since 2010, according to… eVestment. February typically sees increased inflows as investors rebalance their portfolios and the drop reflects investor dissatisfaction with returns last year… In the six years to 2015, investors added an average $22.6 billion in net new capital to hedge funds every February.”
March 24 – Bloomberg (Sabrina Willmer): “A Blackstone Group LP mutual fund that allocates money to hedge funds lost almost half of its assets this month as the fund’s biggest backer, Fidelity Investments, slashed its stake. Clients withdrew $585.5 million from the Blackstone Alternative Multi-Manager Fund in the first three weeks of this month, leaving it with $631.2 million in assets…”
Brazil Watch:
March 21 – Bloomberg (Simon Kennedy): “Petroleo Brasileiro SA, the oil producer at the center of Brazil’s largest corruption scandal, reported a record loss that surprised analysts and sent shares lower. The fourth quarter net loss of 36.9 billion reais ($10.2bn), caused by unprecedented asset writedowns linked to falling oil prices… At 46.4 billion reais, the impairments equated to more than a third of Petrobras’s market capitalization and exceeded the equity value of 97% of publicly-traded firms in Brazil.
Thursday, March 24, 2016
Friday's News Links
[Bloomberg] Behind U.S. GDP Data Is Reason for Recession Worry: Weak Profits
[Bloomberg] U.S. Economy Grew 1.4% in Fourth Quarter, Supported by Consumers
[Bloomberg] Offshore Yuan Heads for Biggest Weekly Decline Since January
[Bloomberg] Cash Piles Up in Japan While Spending and Investment Wane
[Bloomberg] Shanghai Tightens Non-Local Homebuyer Rules as Prices Surge
[Nikkei Asian Review] China's debt bubble threatens global economy
[Reuters] China-backed bank says more than 30 countries await membership
[Reuters] Lipper fund flows IG US$1.344bn inflow; HY US$2.156bn inflow
[Bloomberg] U.S. Economy Grew 1.4% in Fourth Quarter, Supported by Consumers
[Bloomberg] Offshore Yuan Heads for Biggest Weekly Decline Since January
[Bloomberg] Cash Piles Up in Japan While Spending and Investment Wane
[Bloomberg] Shanghai Tightens Non-Local Homebuyer Rules as Prices Surge
[Nikkei Asian Review] China's debt bubble threatens global economy
[Reuters] China-backed bank says more than 30 countries await membership
[Reuters] Lipper fund flows IG US$1.344bn inflow; HY US$2.156bn inflow
Thursday's News Links
[Bloomberg] U.S. Stocks Decline With Crude as S&P 500's Rebound Loses Steam
[Reuters] Oil slides on mounting U.S. stockpiles, strong dollar
[Bloomberg] Global Stocks Extend Loss as U.S. Rate Speculation Lifts Dollar
[Bloomberg] China's Stocks Drop Most in Two Weeks as Slowdown Hurts Profits
[Bloomberg] Offshore Yuan Drops as PBOC Cuts Fix, Pimco Warns of 7% Decline
[Bloomberg] Orders for U.S. Durable Goods Decline in Broad-Based Slowdown
[Bloomberg] Negative Rates Make Corporate America's Bonds Only Game in Town
[Bloomberg] Hedge Funds Pull Back in Silicon Valley as IPO Market Atrophies
[Bloomberg] A Rough Midterm for College Funds
[Bloomberg] Credit Suisse Loss Forecast Revives Europe Bank Credit Concerns
[Reuters] Dutch central bank president says ECB monetary easing at its limit
[Reuters] Another U.S. rate hike may be around corner: Fed's Bullard
[Reuters] Dollar rise hits commodities as Fed talks of tightening
[Bloomberg] SunEdison May Face $1.4 Billion Default If Earnings Delayed More
[Reuters] Chancellor: Lessons from the Mississippi Bubble
[Reuters] North Korea claims rocket engine success; South Korea on high alert
[Reuters] Oil slides on mounting U.S. stockpiles, strong dollar
[Bloomberg] Global Stocks Extend Loss as U.S. Rate Speculation Lifts Dollar
[Bloomberg] China's Stocks Drop Most in Two Weeks as Slowdown Hurts Profits
[Bloomberg] Offshore Yuan Drops as PBOC Cuts Fix, Pimco Warns of 7% Decline
[Bloomberg] Orders for U.S. Durable Goods Decline in Broad-Based Slowdown
[Bloomberg] Negative Rates Make Corporate America's Bonds Only Game in Town
[Bloomberg] Hedge Funds Pull Back in Silicon Valley as IPO Market Atrophies
[Bloomberg] A Rough Midterm for College Funds
[Bloomberg] Credit Suisse Loss Forecast Revives Europe Bank Credit Concerns
[Reuters] Dutch central bank president says ECB monetary easing at its limit
[Reuters] Another U.S. rate hike may be around corner: Fed's Bullard
[Reuters] Dollar rise hits commodities as Fed talks of tightening
[Bloomberg] SunEdison May Face $1.4 Billion Default If Earnings Delayed More
[Reuters] Chancellor: Lessons from the Mississippi Bubble
[Reuters] North Korea claims rocket engine success; South Korea on high alert
Wednesday, March 23, 2016
Wednesday Evening Links
[Bloomberg] Asia Stocks Fall as Oil Drops, Investors Weigh Higher U.S. Rates
[Bloomberg] Decade of Growth Poised to End for China Banks Stung by Bad Debt
[FT] Exorbitant privilege and the cost of renting America’s balance sheet
[Reuters] Exclusive: U.S. to charge Iran in cyber attacks against banks, New York dam - sources
[Bloomberg] Decade of Growth Poised to End for China Banks Stung by Bad Debt
[FT] Exorbitant privilege and the cost of renting America’s balance sheet
[Reuters] Exclusive: U.S. to charge Iran in cyber attacks against banks, New York dam - sources
Wednesday News Links
[Bloomberg] Asia Stocks Decline, Led by Industrials, After Brussels Attacks
[Bloomberg] Brazil Real Drops as Central Bank Moves to Weaken Currency
[Reuters] Energy slide drags down indexes
[Bloomberg] Bullard Sees Case for April Hike as Inflation Set to Overshoot
[CNBC] Fed Chair Yellen has a mini revolt on her hands
[Reuters] As ECB ramps up QE, its stake in government bond markets may double
[Bloomberg] New Jersey's Credit Rating Outlook Revised to Negative by S&P
[Reuters] Mounting debts could derail China plans to cut steel, coal glut
[Bloomberg] China Inc. `Bleeding' From Yuan Devaluation Seeks Hedging Help
[Bloomberg] Investors Dump Bohai Bonds on 192 Billion Yuan Debt Report
[Bloomberg] Credit Suisse CEO Blindsided as Bank Added to Risky Positions
[NYT] Russia, Light on Cash, Weighs Risks of a Heavy Tax on Oil Giants
[Bloomberg] South African Inflation Climbs to 7%, Highest Since 2009
[Bloomberg] Lloyd's of London Takes `Massive Hit' From Low Investment Return
[Bloomberg] Helicopter Money Takes Flight as Latest Drastic Monetary Idea
[Washington Post] Indonesia rebuffs China’s demand that fishermen be released
[Bloomberg] Brazil Real Drops as Central Bank Moves to Weaken Currency
[Reuters] Energy slide drags down indexes
[Bloomberg] Bullard Sees Case for April Hike as Inflation Set to Overshoot
[CNBC] Fed Chair Yellen has a mini revolt on her hands
[Reuters] As ECB ramps up QE, its stake in government bond markets may double
[Bloomberg] New Jersey's Credit Rating Outlook Revised to Negative by S&P
[Reuters] Mounting debts could derail China plans to cut steel, coal glut
[Bloomberg] China Inc. `Bleeding' From Yuan Devaluation Seeks Hedging Help
[Bloomberg] Investors Dump Bohai Bonds on 192 Billion Yuan Debt Report
[Bloomberg] Credit Suisse CEO Blindsided as Bank Added to Risky Positions
[NYT] Russia, Light on Cash, Weighs Risks of a Heavy Tax on Oil Giants
[Bloomberg] South African Inflation Climbs to 7%, Highest Since 2009
[Bloomberg] Lloyd's of London Takes `Massive Hit' From Low Investment Return
[Bloomberg] Helicopter Money Takes Flight as Latest Drastic Monetary Idea
[Washington Post] Indonesia rebuffs China’s demand that fishermen be released
Monday, March 21, 2016
Tuesday's News Links
[Bloomberg] Stocks, Pound Fall on Brussels Attack as Gold, Bonds Advance
[Bloomberg] Emerging Markets Fall as Belgium Blasts Spur Risk Aversion
[Bloomberg] Property Bubble Ghost Haunts Central Bankers Trying to Boost Prices
[WSJ] Repo Failures at Highest Level Since 2008
[Bloomberg] Shanghai Composite Drops in Heavy Turnover as 3,000 Level Tested
[Bloomberg] China's Hot Property Market Helps Cut Asian Junk Bond Yields
[Reuters] China considers Tobin tax to counter capital outflows - FX regulator
[Reuters] Bank of China loans over $50 billion for Chinese firms' overseas M&A
[Reuters] Brazilian police target Odebrecht in new anti-corruption raid
[Reuters] Japan March manufacturing activity contracts as export orders tumble: flash PMI
[Bloomberg] Sydney Home Values Have Biggest Quarterly Drop in Seven Years
[WSJ] Deutsche Bank on Review for Possible Downgrade From Moody’s
[Bloomberg] New York Fed Had `Major Lapse' in Theft, Bangladesh Says
[Bloomberg] Emerging Markets Fall as Belgium Blasts Spur Risk Aversion
[Bloomberg] Property Bubble Ghost Haunts Central Bankers Trying to Boost Prices
[WSJ] Repo Failures at Highest Level Since 2008
[Bloomberg] Shanghai Composite Drops in Heavy Turnover as 3,000 Level Tested
[Bloomberg] China's Hot Property Market Helps Cut Asian Junk Bond Yields
[Reuters] China considers Tobin tax to counter capital outflows - FX regulator
[Reuters] Bank of China loans over $50 billion for Chinese firms' overseas M&A
[Reuters] Brazilian police target Odebrecht in new anti-corruption raid
[Reuters] Japan March manufacturing activity contracts as export orders tumble: flash PMI
[Bloomberg] Sydney Home Values Have Biggest Quarterly Drop in Seven Years
[WSJ] Deutsche Bank on Review for Possible Downgrade From Moody’s
[Bloomberg] New York Fed Had `Major Lapse' in Theft, Bangladesh Says
Monday Evening Links
[Bloomberg] Deutsche Bank: This Indicator Is Sending Warning Signs for Household Incomes
[CNBC] Corporate profit ride turning into a train wreck
[Reuters] Accounting measures helping to boost weak U.S. results: analysts
[Bloomberg] ECB, BOJ Seeking to Push Down Exchange Rates, Mervyn King Says
[Bloomberg] PBOC Sought Information From Fed as Chinese Stock Market Plunged
[Bloomberg] Petrobras Posts Surprise Loss on Writedowns Amid Oil Rout
[FT] Moody’s warns bond managers over Valeant
[CNBC] Corporate profit ride turning into a train wreck
[Reuters] Accounting measures helping to boost weak U.S. results: analysts
[Bloomberg] ECB, BOJ Seeking to Push Down Exchange Rates, Mervyn King Says
[Bloomberg] PBOC Sought Information From Fed as Chinese Stock Market Plunged
[Bloomberg] Petrobras Posts Surprise Loss on Writedowns Amid Oil Rout
[FT] Moody’s warns bond managers over Valeant
Monday's News Links
[Bloomberg] U.S. Stocks Mixed as Global Volatility Wanes, Treasuries Fall
[Bloomberg] Exclusive: China central bank to Fed: A little help, please?
[Bloomberg] Yuan Declines After PBOC Weakens Fixing by Most Since January
[Bloomberg] Wall Street's Pile of Unwanted Treasuries Exposes Market Cracks
[Bloomberg] This Is What's Going On Beneath the Subprime Auto-Loan Turmoil
[Reuters] U.S. existing home sales tumble in warning sign for housing market
[Bloomberg] Valeant CEO Pearson Will Step Down, Ackman Added to Board
[Bloomberg] Brazilians Brace for More Drama at Top Court, Congress
[Reuters] China banking regulator tells lenders to rein in risks- sources
[Reuters, Larsen] China’s debt mountain will get even bigger
[Reuters] UK manufacturing output sees biggest drop since 2009, rebound expected - CBI
[Yahoo] Companies haven’t fudged their numbers this much since the financial crisis
[Bloomberg] Exclusive: China central bank to Fed: A little help, please?
[Bloomberg] Yuan Declines After PBOC Weakens Fixing by Most Since January
[Bloomberg] Wall Street's Pile of Unwanted Treasuries Exposes Market Cracks
[Bloomberg] This Is What's Going On Beneath the Subprime Auto-Loan Turmoil
[Reuters] U.S. existing home sales tumble in warning sign for housing market
[Bloomberg] Valeant CEO Pearson Will Step Down, Ackman Added to Board
[Bloomberg] Brazilians Brace for More Drama at Top Court, Congress
[Reuters] China banking regulator tells lenders to rein in risks- sources
[Reuters, Larsen] China’s debt mountain will get even bigger
[Reuters] UK manufacturing output sees biggest drop since 2009, rebound expected - CBI
[Yahoo] Companies haven’t fudged their numbers this much since the financial crisis
Sunday, March 20, 2016
Sunday's News Links
[Bloomberg] China's Central Bank Chief Sounds Warning Over Rising Debt
[Bloomberg] China Has a $590 Billion Problem With Unpaid Bills
[Bloomberg] China, Focused on Growth, Signals It Hasn’t Forgotten Leverage
[Bloomberg] Greek Bailout Talks End Without Deal as Migrant Challenges Grow
[FT] China bank governor warns over corporate debt
[Bloomberg] China Has a $590 Billion Problem With Unpaid Bills
[Bloomberg] China, Focused on Growth, Signals It Hasn’t Forgotten Leverage
[Bloomberg] Greek Bailout Talks End Without Deal as Migrant Challenges Grow
[FT] China bank governor warns over corporate debt
Friday, March 18, 2016
Saturday's News Links
[Bloomberg] Brazil Government to Fight Judge's Decision on Lula With Appeal
[Reuters] 'Helicopter money' is not manna from heaven, Bundesbank chief says
[Bloomberg] `Helicopter Money' Hurts Banks, ECB's Weidmann Tells Newspaper
[Reuters] China Central bank vice governor: G20 policy coordination will help global growth, curb risks
[Reuters] Struggling U.S. oil and gas companies eye rare financing deals
[CNBC/NYT] Carrier Workers See Costs, Not Benefits, of Global Trade
[Der Spiegel] A Painful Farewell: SPIEGEL Correspondent Forced to Leave Turkey
[Der Spiegel] The Next Disaster: Islamic State Expands as Libya Descends into Chaos
[Reuters] Risk of nuclear war in Europe growing, warns Russian ex-minister
[Reuters] 'Helicopter money' is not manna from heaven, Bundesbank chief says
[Bloomberg] `Helicopter Money' Hurts Banks, ECB's Weidmann Tells Newspaper
[Reuters] China Central bank vice governor: G20 policy coordination will help global growth, curb risks
[Reuters] Struggling U.S. oil and gas companies eye rare financing deals
[CNBC/NYT] Carrier Workers See Costs, Not Benefits, of Global Trade
[Der Spiegel] A Painful Farewell: SPIEGEL Correspondent Forced to Leave Turkey
[Der Spiegel] The Next Disaster: Islamic State Expands as Libya Descends into Chaos
[Reuters] Risk of nuclear war in Europe growing, warns Russian ex-minister
Weekly Commentary: Q4 2015 Flow of Funds
I’d been waiting patiently for the Fed’s Q4 2015 Z.1 “flow of funds” report. The fourth quarter was a period of financial instability and tightened financial conditions. What tracks would be left in the data? Moreover, would the report confirm a continuation of the broadening Credit slowdown that had turned more pronounced during Q3, a slowing that would portend weak GDP and corporate earnings. Would the data support the thesis of mounting financial fragility? This Z.1 did not disappoint.
Importantly, Credit did slow almost across the board. For starters, weak Corporate borrowings were evidence of a meaningful tightening of Credit conditions. Q4’s growth rate of 2.7% was the weakest Corporate Credit growth since Q4 2010 and was down significantly from Q3’s 4.6%, Q2’s 8.6% and Q1’s 8.5%. Household Mortgage Debt slowed to 1.5%, verses Q3’s 1.7% and Q2’s 2.5%. The fourth quarter’s 5.9% pace of Consumer (non-mortgage) Credit expansion compared to Q3’s 7.2%, Q2’s 8.5% and Q1’s 5.6%. There was even a marked stalling in State & Local borrowings, with Q4’s flat growth down from Q3’s 1.7%, Q2’s 1.0% and Q1’s 4.3%.
Federal debt was the big outlier in the “almost across the board” Credit slowdown. Federal borrowings expanded at an 18.5% rate, the strongest Washington Credit boom since Q2 2010. This more than offset the private-sector slowdown, ensuring that overall Non-Financial Debt (NFD) growth accelerated to an 8.6% pace in Q4. This reversed the trend that had seen Q3’s 2.1% at less than half of Q2’s 4.6% pace (Q1 2.6%).
Q4’s surge in Federal borrowing pushed 2015 Total Non-Financial Debt growth to 4.5%, matching 2014. NFD expanded 4.0% in 2013, 5.0% in 2012, 3.5% in 2011 and 4.4% in 2010. Total Business (corporate plus business financial) borrowings expanded a robust 6.6% (up from 2014’s 6.3%). Annual Federal borrowings slowed somewhat to 5.0% (from 2014’s 5.4%). State & Local borrowings expanded 1.8% after contracting 0.5% in 2014. Consumer Credit expanded 7.0%, the same rate as 2014 (strongest since 2001). Home Mortgage debt expanded 1.5% (strongest since 2007), up from 2014’ 0.5%.
In nominal dollars, NFD expanded $1.961 TN in 2015, up from 2014’s $1.848 TN to the strongest expansion since 2007 ($2.480 TN). Last year’s debt growth was led by $794 billion of total business borrowings, the strongest expansion since 2007. Federal borrowings increased $725 billion, down only slightly from 2014’s $736 billion. Household Mortgage borrowings expanded $137 billion last year, the strongest growth since 2007’s $734 billion. Consumer Credit grew a record $231 billion (up from 2014’s $218bn).
The Domestic Financial Sector saw borrowings slow to a 1.3% pace, down from Q3’s 1.9% and Q2’s 2.4%. Bank (“Private Depository Institutions”) lending ended 2015 on a strong note, expanding SAAR (seasonally-adjusted and annualized rate) $722 billion during Q4. This put 2015 annual loan growth at $674 billion, up from 2014’s $579 billion and the strongest expansion since 2007.
Certainly related the quarter’s financial market instability, there was a significant contraction in Foreign Banking Offices in U.S. Here, Assets contracted SAAR $562 billion (after Q3’s SAAR $59bn contraction). On the Foreign Bank asset side, Reserves at Federal Reserve dropped SAAR $732 billion. Liabilities saw a SAAR $445 billion contraction in Net Interbank Liabilities to Foreign Banks. “Money” on the move…
Especially during Q4, strong domestic bank lending was more than offset by a notable decline in market-based Credit. Q4 market instability clearly had a major impact on Wall Street. Securities Broker/Dealers saw assets contract SAAR $839 billion during the quarter, versus Q3’s $24 billion expansion, Q2’s $124 billion contraction and Q1’s $97 billion expansion. Broker/Dealer Debt Securities holdings contracted SAAR $168 billion, and Security Repurchase Agreement assets dropped SAAR $442 billion. Miscellaneous Assets contracted SAAR $266 billion. On the Liability side, Security Repurchase Agreements declined SAAR $502 billion and Other Miscellaneous Liabilities contracted SAAR $406 billion. Wild financial flows…
It’s been my view that policy and speculative market backdrops have unleashed intransigent Monetary Disorder. Z.1 data offer support for this thesis. The category Federal Funds and Security Repurchase Agreements saw a Q4 contraction of SAAR $333 billion, which followed Q3’s SAAR $575 billion expansion, Q2’s SAAR $214 billion contraction and Q1’s SAAR $181 billion expansion.
Waning marketplace liquidity was apparent in a marked drop in corporate debt issuance. Corporate Bonds expanded only SAAR $53 billion during Q4, down from Q3’s SAAR $107 billion, Q2’s SAAR $654 billion and Q1’s SAAR $645 billion. It’s also worth noting that outstanding Asset-Backed Securities (ABS) contracted SAAR $96 billion during Q4, this following Q3’s SAAR $150 billion decline.
In the category “the more things change, the more they stay the same,” waning marketplace liquidity spurred a surge in GSE activity. The GSEs increased assets SAAR $224 billion during Q4, up from Q3’s SAAR $144 billion to the strongest expansion since Q4 2014 ($283bn). On an annualized basis, 2015’s $85 billion GSE expansion was the strongest since 2008 ($234bn).
Agency- and GSE-Backed Mortgage Pools expanded SAAR $196 billion during the period, versus Q3’s SAAR $185 billion, Q2’s SAAR $122 billion and Q1’s SAAR $5.1 billion. For 2015, GSE MBS expanded $127 billion, up from 2014’s $75 billion.
Treasury Securities ended 2007 at $6.051 TN. By 2015’s conclusion, Treasuries had inflated to $15.141 TN, an increase of $9.090 TN, or 150%, in eight years. It’s worth noting that Agency Securities ended 2015 at $8.153 TN, having now almost recovered back to 2008’s record high.
Total Debt Securities (Treasuries, Agencies, Corporates & muni’s) ended 2015 at a record $38.741 TN. Total Debt Securities have increased $11.3 TN, or 41%, from what had been 2007’s record level. Total Debt Securities as a percent of GDP ended 2015 at a near record 217% of GDP. For perspective, this ratio began the eighties at 66%, the nineties at 110%, and the 2000’s at 140%.
Equities ended 2015 at $35.687 TN (down from 2014’s $37.612 TN), or 199% of GDP. This compares to Equities/GDP of 44% to begin the eighties, 67% to start the nineties and 200% to end Bubble Year 1999. Combining Debt and Equity Securities, Total Securities ended 2015 at a record $74.428 TN. This was up 40% from 2007 (a then record 366% of GDP) to 415% of GDP. This compares to 109% to begin the eighties, 178% to start the nineties and 341% to end the nineties.
Household (& non-profits) Assets ended 2015 at a record $101.306 TN, up $2.953 TN (3.0%) during the year. Household Assets have increased almost 50% since the end of 2008. And with Household Liabilities rising $345 billion, Household Net Worth jumped another $2.607 TN last year. For the year, Household holdings of Real Estate increased $1.562 TN (to a record $25.267 TN), with Financial Assets up $1.171 TN (to a near-record $70.327 TN). Household Net Worth as a percentage of GDP ended 2015 at 484% (little changed from 2014’s record). For comparison, Household Net Worth to GDP began the nineties at 379%, ended 1999 at 446% and closed Bubble Year 2007 at 461% of GDP.
Total Non-Financial Debt increased $1.912 TN in 2015 to a record $45.149 TN. NFD has increased $10.218 TN, or 29%, over the past seven years. NFD to GDP ended 2015 at a record 252%. For perspective, this ratio began the eighties at 138%, the nineties at 179% and the 2000’s at 179%.
March 18 – Bloomberg (Rich Miller): “Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.”
March 18 – Bloomberg (Luke Kawa): “According to economists at Goldman Sachs…, the Federal Reserve just delivered one of its most dovish decisions of the new millennium. The surprise, per Economists Zach Pandl and Daan Struyven, stemmed from the large reduction in where monetary policymakers expect interest rates to be at year-end if all things go according to plan. The median Federal Open Market Committee member thought that it would be appropriate for the midpoint of the federal funds rate range to be at 0.875% at the end of 2016, down from a median assessment of 1.375% back in December. Excluding two meetings during the depths of the financial crisis in late 2008 and early 2009, the shock of Wednesday's slash to the so-called ‘dot plot’ was only exceeded by introduction of calendar-based forward guidance in 2011, the decision to forego ‘Septaper’ in 2013, and last March's markdown…”
It’s unclear whether a “secret Shanghai Accord” emerged from last month’s G20 meeting. There’s no doubt, however, that leading global monetary officials have orchestrated concerted policy measures going back (at least) to the 2012 “European” crisis. It’s also clear that they became trapped in Bubble Dynamics of their own making. When de-risking/de-leveraging (“risk off”) dynamics materialize, market conditions now tend to turn sour rather abruptly. Yet when policy responses then incite short-squeezes and a reversal of market hedges, ensuing powerful rallies take on lives of their own. Under tremendous performance pressure, market participants have little alternative than to jump aboard. Rallies cannot be missed. The upshot is a backdrop of extreme market volatility and extraordinarily challenging market dynamics. To be sure, the fragile domestic and global Credit backdrops are not constructive for economic growth, corporate profits or equities prices.
For the week:
The S&P500 gained 1.4% (up 0.3% y-t-d), and the Dow jumped 2.3% (up 1.0%). The Utilities rose 1.9% (up 13.4%). The Banks increased 0.7% (down 9.9%), and the Broker/Dealers gained 1.4% (down 8.0%). The Transports surged 5.0% (up 7.5%). The S&P 400 Midcaps gained 1.6% (up 2.2%), and the small cap Russell 2000 rose rose 1.3% (down 3.0%). The Nasdaq100 advanced 1.1% (down 4.0%), and the Morgan Stanley High Tech index rose 1.5% (down 4.1%). The Semiconductors surged 2.4% (up 1.7%). The Biotechs lost 2.8% (down 25.6%). With bullion up $6, the HUI gold index added 3.4% (up 63.1%).
Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields dropped 12 bps to 0.84% (down 21bps y-t-d). Five-year T-note yields sank 16 bps to 1.33% (down 42bps). Ten-year Treasury yields fell 11 bps to 1.87% (down 38bps). Long bond yields declined seven bps to 2.68% (down 34bps).
Greek 10-year yields fell 21 bps to 8.36% (up 104bps y-t-d). Ten-year Portuguese yields rose two bps to 2.91% (up 39bps). Italian 10-year yields declined five bps to 1.27% (down 32bps). Spain's 10-year yields fell five bps to 1.43% (down 34bps). German bund yields dropped six bps to 0.21% (down 41bps). French yields fell six bps to 0.56% (down 43bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields sank 12 bps to 1.45% (down 51bps).
Japan's Nikkei equities index fell 1.3% (down 12.1% y-t-d). Japanese 10-year "JGB" yields dropped eight bps to negative 0.10% (down 36bps y-t-d). The German DAX equities index gained 1.2% (down 7.4%). Spain's IBEX 35 equities index slipped 0.4% (down 5.2%). Italy's FTSE MIB index lost 2.0% (down 13.1%). The EM equities rally continued. Brazil's Bovespa index jumped 2.4% (up 17%). Mexico's Bolsa rose 1.7% (up 5.8%). South Korea's Kospi index gained 1.1% (up 1.6%). India’s Sensex equities index increased 0.9% (down 4.5%). China’s Shanghai Exchange rallied 5.2% (down 16.5%). Turkey's Borsa Istanbul National 100 index jumped 4.5% (up 15.6%). Russia's MICEX equities rose 2.0% (up 8.7%).
Junk funds saw inflows $1.7 billion (from Lipper), the third straight week of big positive flows.
Freddie Mac 30-year fixed mortgage rates rose five bps to a seven-week high 3.73% (down 5bps y-o-y). Fifteen-year rates gained three bps to 2.99% (down 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 3.84% (down 33bps).
Federal Reserve Credit last week expanded $4.9bn to $4.446 TN. Over the past year, Fed Credit declined $14.9bn, or 0.3%. Fed Credit inflated $1.635 TN, or 58%, over the past 175 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $2.6bn to $3.252 TN. "Custody holdings" were up $28.4bn y-o-y, or 0.9%.
M2 (narrow) "money" supply last week was about unchanged at $12.512 TN. "Narrow money" expanded $680bn, or 5.7%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits sank $71.9bn, while Savings Deposits surged $74.5bn. Small Time Deposits declined $1.0bn. Retail Money Funds slipped $2.5bn.
Total money market fund assets sank $40bn to $2.763 TN. Money Funds rose $98bn y-o-y (3.7%).
Total Commercial Paper jumped $13.1bn to $1.098 TN. CP expanded $72 billion y-o-y, or 7.0%.
Currency Watch:
March 17 – Bloomberg (Filipe Pacheco, Arnaldo Galvao and Marisa Castellani): “Brazil’s central bank said it sees room to partially unwind a program aimed at boosting the real, prompting the currency to pare gains. Policy makers see the international economic environment creating an opportunity to unwind part of its foreign exchange swaps program by reducing its daily rollovers, the central bank press office told reporters…”
The U.S. dollar index dropped 1.2% this week to 95.06 (down 3.7% y-t-d). For the week on the upside, the Japanese yen increased 2.0%, the Mexican peso 1.7%, the Canadian dollar 1.6%, the Swiss franc 1.3%, the Swedish krona 1.3%, the euro 1.0%, the New Zealand dollar 0.8%, the British pound 0.7%, the Australian dollar 0.6% and the Norwegian krone 0.5%. For the week on the downside, the Brazilian real declined 1.1% and the South African rand slipped 0.3%. The Chinese yuan increased 0.4% versus the dollar.
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.2% (up 7.6% y-t-d). Spot Gold added 0.5% to $1,255 (up 18.3%). March Silver jumped 1.9% to $15.81 (up 14.6%). April WTI Crude rose another 98 cents to $39.44 (up 7%). March Gasoline slipped 1.2% (up 12%), while March Natural Gas jumped 6.1% (down 18%). March Copper rose 2.2% (up 7%). May Wheat dropped 2.7% (down 2%). May Corn increased 0.5% (up 2%).
Importantly, Credit did slow almost across the board. For starters, weak Corporate borrowings were evidence of a meaningful tightening of Credit conditions. Q4’s growth rate of 2.7% was the weakest Corporate Credit growth since Q4 2010 and was down significantly from Q3’s 4.6%, Q2’s 8.6% and Q1’s 8.5%. Household Mortgage Debt slowed to 1.5%, verses Q3’s 1.7% and Q2’s 2.5%. The fourth quarter’s 5.9% pace of Consumer (non-mortgage) Credit expansion compared to Q3’s 7.2%, Q2’s 8.5% and Q1’s 5.6%. There was even a marked stalling in State & Local borrowings, with Q4’s flat growth down from Q3’s 1.7%, Q2’s 1.0% and Q1’s 4.3%.
Federal debt was the big outlier in the “almost across the board” Credit slowdown. Federal borrowings expanded at an 18.5% rate, the strongest Washington Credit boom since Q2 2010. This more than offset the private-sector slowdown, ensuring that overall Non-Financial Debt (NFD) growth accelerated to an 8.6% pace in Q4. This reversed the trend that had seen Q3’s 2.1% at less than half of Q2’s 4.6% pace (Q1 2.6%).
Q4’s surge in Federal borrowing pushed 2015 Total Non-Financial Debt growth to 4.5%, matching 2014. NFD expanded 4.0% in 2013, 5.0% in 2012, 3.5% in 2011 and 4.4% in 2010. Total Business (corporate plus business financial) borrowings expanded a robust 6.6% (up from 2014’s 6.3%). Annual Federal borrowings slowed somewhat to 5.0% (from 2014’s 5.4%). State & Local borrowings expanded 1.8% after contracting 0.5% in 2014. Consumer Credit expanded 7.0%, the same rate as 2014 (strongest since 2001). Home Mortgage debt expanded 1.5% (strongest since 2007), up from 2014’ 0.5%.
In nominal dollars, NFD expanded $1.961 TN in 2015, up from 2014’s $1.848 TN to the strongest expansion since 2007 ($2.480 TN). Last year’s debt growth was led by $794 billion of total business borrowings, the strongest expansion since 2007. Federal borrowings increased $725 billion, down only slightly from 2014’s $736 billion. Household Mortgage borrowings expanded $137 billion last year, the strongest growth since 2007’s $734 billion. Consumer Credit grew a record $231 billion (up from 2014’s $218bn).
The Domestic Financial Sector saw borrowings slow to a 1.3% pace, down from Q3’s 1.9% and Q2’s 2.4%. Bank (“Private Depository Institutions”) lending ended 2015 on a strong note, expanding SAAR (seasonally-adjusted and annualized rate) $722 billion during Q4. This put 2015 annual loan growth at $674 billion, up from 2014’s $579 billion and the strongest expansion since 2007.
Certainly related the quarter’s financial market instability, there was a significant contraction in Foreign Banking Offices in U.S. Here, Assets contracted SAAR $562 billion (after Q3’s SAAR $59bn contraction). On the Foreign Bank asset side, Reserves at Federal Reserve dropped SAAR $732 billion. Liabilities saw a SAAR $445 billion contraction in Net Interbank Liabilities to Foreign Banks. “Money” on the move…
Especially during Q4, strong domestic bank lending was more than offset by a notable decline in market-based Credit. Q4 market instability clearly had a major impact on Wall Street. Securities Broker/Dealers saw assets contract SAAR $839 billion during the quarter, versus Q3’s $24 billion expansion, Q2’s $124 billion contraction and Q1’s $97 billion expansion. Broker/Dealer Debt Securities holdings contracted SAAR $168 billion, and Security Repurchase Agreement assets dropped SAAR $442 billion. Miscellaneous Assets contracted SAAR $266 billion. On the Liability side, Security Repurchase Agreements declined SAAR $502 billion and Other Miscellaneous Liabilities contracted SAAR $406 billion. Wild financial flows…
It’s been my view that policy and speculative market backdrops have unleashed intransigent Monetary Disorder. Z.1 data offer support for this thesis. The category Federal Funds and Security Repurchase Agreements saw a Q4 contraction of SAAR $333 billion, which followed Q3’s SAAR $575 billion expansion, Q2’s SAAR $214 billion contraction and Q1’s SAAR $181 billion expansion.
Waning marketplace liquidity was apparent in a marked drop in corporate debt issuance. Corporate Bonds expanded only SAAR $53 billion during Q4, down from Q3’s SAAR $107 billion, Q2’s SAAR $654 billion and Q1’s SAAR $645 billion. It’s also worth noting that outstanding Asset-Backed Securities (ABS) contracted SAAR $96 billion during Q4, this following Q3’s SAAR $150 billion decline.
In the category “the more things change, the more they stay the same,” waning marketplace liquidity spurred a surge in GSE activity. The GSEs increased assets SAAR $224 billion during Q4, up from Q3’s SAAR $144 billion to the strongest expansion since Q4 2014 ($283bn). On an annualized basis, 2015’s $85 billion GSE expansion was the strongest since 2008 ($234bn).
Agency- and GSE-Backed Mortgage Pools expanded SAAR $196 billion during the period, versus Q3’s SAAR $185 billion, Q2’s SAAR $122 billion and Q1’s SAAR $5.1 billion. For 2015, GSE MBS expanded $127 billion, up from 2014’s $75 billion.
Treasury Securities ended 2007 at $6.051 TN. By 2015’s conclusion, Treasuries had inflated to $15.141 TN, an increase of $9.090 TN, or 150%, in eight years. It’s worth noting that Agency Securities ended 2015 at $8.153 TN, having now almost recovered back to 2008’s record high.
Total Debt Securities (Treasuries, Agencies, Corporates & muni’s) ended 2015 at a record $38.741 TN. Total Debt Securities have increased $11.3 TN, or 41%, from what had been 2007’s record level. Total Debt Securities as a percent of GDP ended 2015 at a near record 217% of GDP. For perspective, this ratio began the eighties at 66%, the nineties at 110%, and the 2000’s at 140%.
Equities ended 2015 at $35.687 TN (down from 2014’s $37.612 TN), or 199% of GDP. This compares to Equities/GDP of 44% to begin the eighties, 67% to start the nineties and 200% to end Bubble Year 1999. Combining Debt and Equity Securities, Total Securities ended 2015 at a record $74.428 TN. This was up 40% from 2007 (a then record 366% of GDP) to 415% of GDP. This compares to 109% to begin the eighties, 178% to start the nineties and 341% to end the nineties.
Household (& non-profits) Assets ended 2015 at a record $101.306 TN, up $2.953 TN (3.0%) during the year. Household Assets have increased almost 50% since the end of 2008. And with Household Liabilities rising $345 billion, Household Net Worth jumped another $2.607 TN last year. For the year, Household holdings of Real Estate increased $1.562 TN (to a record $25.267 TN), with Financial Assets up $1.171 TN (to a near-record $70.327 TN). Household Net Worth as a percentage of GDP ended 2015 at 484% (little changed from 2014’s record). For comparison, Household Net Worth to GDP began the nineties at 379%, ended 1999 at 446% and closed Bubble Year 2007 at 461% of GDP.
Total Non-Financial Debt increased $1.912 TN in 2015 to a record $45.149 TN. NFD has increased $10.218 TN, or 29%, over the past seven years. NFD to GDP ended 2015 at a record 252%. For perspective, this ratio began the eighties at 138%, the nineties at 179% and the 2000’s at 179%.
March 18 – Bloomberg (Rich Miller): “Policy makers across the world are acting in ways that suggest there may have been more to last month’s Group of 20 meeting in Shanghai than mere platitudes about promoting global economic growth. In the past few weeks, officials from China, the euro area, Japan, the U.S. and the U.K. have taken a barrage of actions to keep the world economy afloat and currency markets calm. That’s led some analysts to conclude that there is indeed a secret Shanghai Accord, akin to those reached in an earlier era at the Plaza Hotel in New York and at the Louvre Museum in Paris. The Federal Reserve on Wednesday capped off the series of moves by global policy makers by forecasting a shallower-than-anticipated rise in interest rates this year, with Chair Janet Yellen stressing the risks from a weaker global outlook and market turbulence.”
March 18 – Bloomberg (Luke Kawa): “According to economists at Goldman Sachs…, the Federal Reserve just delivered one of its most dovish decisions of the new millennium. The surprise, per Economists Zach Pandl and Daan Struyven, stemmed from the large reduction in where monetary policymakers expect interest rates to be at year-end if all things go according to plan. The median Federal Open Market Committee member thought that it would be appropriate for the midpoint of the federal funds rate range to be at 0.875% at the end of 2016, down from a median assessment of 1.375% back in December. Excluding two meetings during the depths of the financial crisis in late 2008 and early 2009, the shock of Wednesday's slash to the so-called ‘dot plot’ was only exceeded by introduction of calendar-based forward guidance in 2011, the decision to forego ‘Septaper’ in 2013, and last March's markdown…”
It’s unclear whether a “secret Shanghai Accord” emerged from last month’s G20 meeting. There’s no doubt, however, that leading global monetary officials have orchestrated concerted policy measures going back (at least) to the 2012 “European” crisis. It’s also clear that they became trapped in Bubble Dynamics of their own making. When de-risking/de-leveraging (“risk off”) dynamics materialize, market conditions now tend to turn sour rather abruptly. Yet when policy responses then incite short-squeezes and a reversal of market hedges, ensuing powerful rallies take on lives of their own. Under tremendous performance pressure, market participants have little alternative than to jump aboard. Rallies cannot be missed. The upshot is a backdrop of extreme market volatility and extraordinarily challenging market dynamics. To be sure, the fragile domestic and global Credit backdrops are not constructive for economic growth, corporate profits or equities prices.
For the week:
The S&P500 gained 1.4% (up 0.3% y-t-d), and the Dow jumped 2.3% (up 1.0%). The Utilities rose 1.9% (up 13.4%). The Banks increased 0.7% (down 9.9%), and the Broker/Dealers gained 1.4% (down 8.0%). The Transports surged 5.0% (up 7.5%). The S&P 400 Midcaps gained 1.6% (up 2.2%), and the small cap Russell 2000 rose rose 1.3% (down 3.0%). The Nasdaq100 advanced 1.1% (down 4.0%), and the Morgan Stanley High Tech index rose 1.5% (down 4.1%). The Semiconductors surged 2.4% (up 1.7%). The Biotechs lost 2.8% (down 25.6%). With bullion up $6, the HUI gold index added 3.4% (up 63.1%).
Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields dropped 12 bps to 0.84% (down 21bps y-t-d). Five-year T-note yields sank 16 bps to 1.33% (down 42bps). Ten-year Treasury yields fell 11 bps to 1.87% (down 38bps). Long bond yields declined seven bps to 2.68% (down 34bps).
Greek 10-year yields fell 21 bps to 8.36% (up 104bps y-t-d). Ten-year Portuguese yields rose two bps to 2.91% (up 39bps). Italian 10-year yields declined five bps to 1.27% (down 32bps). Spain's 10-year yields fell five bps to 1.43% (down 34bps). German bund yields dropped six bps to 0.21% (down 41bps). French yields fell six bps to 0.56% (down 43bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields sank 12 bps to 1.45% (down 51bps).
Japan's Nikkei equities index fell 1.3% (down 12.1% y-t-d). Japanese 10-year "JGB" yields dropped eight bps to negative 0.10% (down 36bps y-t-d). The German DAX equities index gained 1.2% (down 7.4%). Spain's IBEX 35 equities index slipped 0.4% (down 5.2%). Italy's FTSE MIB index lost 2.0% (down 13.1%). The EM equities rally continued. Brazil's Bovespa index jumped 2.4% (up 17%). Mexico's Bolsa rose 1.7% (up 5.8%). South Korea's Kospi index gained 1.1% (up 1.6%). India’s Sensex equities index increased 0.9% (down 4.5%). China’s Shanghai Exchange rallied 5.2% (down 16.5%). Turkey's Borsa Istanbul National 100 index jumped 4.5% (up 15.6%). Russia's MICEX equities rose 2.0% (up 8.7%).
Junk funds saw inflows $1.7 billion (from Lipper), the third straight week of big positive flows.
Freddie Mac 30-year fixed mortgage rates rose five bps to a seven-week high 3.73% (down 5bps y-o-y). Fifteen-year rates gained three bps to 2.99% (down 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 3.84% (down 33bps).
Federal Reserve Credit last week expanded $4.9bn to $4.446 TN. Over the past year, Fed Credit declined $14.9bn, or 0.3%. Fed Credit inflated $1.635 TN, or 58%, over the past 175 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $2.6bn to $3.252 TN. "Custody holdings" were up $28.4bn y-o-y, or 0.9%.
M2 (narrow) "money" supply last week was about unchanged at $12.512 TN. "Narrow money" expanded $680bn, or 5.7%, over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits sank $71.9bn, while Savings Deposits surged $74.5bn. Small Time Deposits declined $1.0bn. Retail Money Funds slipped $2.5bn.
Total money market fund assets sank $40bn to $2.763 TN. Money Funds rose $98bn y-o-y (3.7%).
Total Commercial Paper jumped $13.1bn to $1.098 TN. CP expanded $72 billion y-o-y, or 7.0%.
Currency Watch:
March 17 – Bloomberg (Filipe Pacheco, Arnaldo Galvao and Marisa Castellani): “Brazil’s central bank said it sees room to partially unwind a program aimed at boosting the real, prompting the currency to pare gains. Policy makers see the international economic environment creating an opportunity to unwind part of its foreign exchange swaps program by reducing its daily rollovers, the central bank press office told reporters…”
The U.S. dollar index dropped 1.2% this week to 95.06 (down 3.7% y-t-d). For the week on the upside, the Japanese yen increased 2.0%, the Mexican peso 1.7%, the Canadian dollar 1.6%, the Swiss franc 1.3%, the Swedish krona 1.3%, the euro 1.0%, the New Zealand dollar 0.8%, the British pound 0.7%, the Australian dollar 0.6% and the Norwegian krone 0.5%. For the week on the downside, the Brazilian real declined 1.1% and the South African rand slipped 0.3%. The Chinese yuan increased 0.4% versus the dollar.
Commodities Watch:
The Goldman Sachs Commodities Index gained 1.2% (up 7.6% y-t-d). Spot Gold added 0.5% to $1,255 (up 18.3%). March Silver jumped 1.9% to $15.81 (up 14.6%). April WTI Crude rose another 98 cents to $39.44 (up 7%). March Gasoline slipped 1.2% (up 12%), while March Natural Gas jumped 6.1% (down 18%). March Copper rose 2.2% (up 7%). May Wheat dropped 2.7% (down 2%). May Corn increased 0.5% (up 2%).
Fixed-Income Bubble Watch:
March 17 – Bloomberg (Liz McCormick): “A shortage of benchmark 10-year notes in the market for borrowing and lending U.S. government debt caused uncompleted trades to surge last week to the highest since the financial crisis. Total settlement delivery failures for all Treasuries, excluding inflation-protected securities, were $456 billion for the week ended March 9, the most since 2008, when fails set a record $2.7 trillion, Federal Reserve Bank of New York data show.”
March 17 – Bloomberg (Dakin Campbell and Nabila Ahmed): “As Wall Street leaders warn publicly about this quarter’s plunging revenue from trading and deals, Goldman Sachs Group Inc., the bank most reliant on those operations, has provided no guidance. The mystery isn’t whether it is getting hit too -- it’s how hard. Goldman Sachs’s income from investment banking… is projected to tumble 32% this quarter from a year earlier, Credit Suisse Group AG analysts wrote... Internally, some senior executives are anticipating a drop of roughly 25% in that business… Firms including JPMorgan Chase & Co. and Citigroup Inc. have been warning that turbulent markets are battering their earnings, as stock swings, a slump in commodity prices and low interest rates prompt companies to delay share offerings and customers to pull back from trading.”
March 16 – Reuters (Jessica Dinapoli): “Peabody Energy Corp, the largest U.S. coal producer, may have to seek bankruptcy protection, the company said in a regulatory filing…, citing poor economies in countries that import coal and other factors battering the coal industry… Peabody, which flagged the possibility of bankruptcy under the ‘risk factors’ section of a filing with the U.S. Securities and Exchange Commission, said it had decided to skip $71.1 million in interest payments… The company, said there was ‘substantial doubt’ about its ability to continue as a going concern.”
March 17 – Reuters (Lynn Adler): “Troubled U.S. energy companies, maneuvering for stronger negotiating positions if filing for bankruptcy, are racing to tap cash still available under existing reserve-based loan commitments before banks cut their credit access next month. In April, lenders, in semi-annual valuations of oil and gas reserves backing these loans, are expected to cut available credit to many energy companies based on deeply depressed collateral prices. Earlier in March, Stone Energy joined a growing pack of companies… drawing down the full amount remaining under its credit facility… ‘Every company out there is nervous that if they don’t draw in the next couple of weeks, with determinations coming up, banks will finally start saying ‘no,’ an investor said.”
March 17 – Reuters (Kristen Haunss and Carl O’Donnell): “Creditors of Valeant Pharmaceuticals International, which has been in violation of lender agreements since Wednesday, are beginning to demand new terms that could further pressure the drugmaker's business model, according to three people familiar with the matter. Valeant said on Tuesday it would not meet a March 15 deadline for filing its annual financial statements with securities regulators, putting it in danger of defaulting on its $30 billion debt load… The shares have sunk to $33.54 from a high of $263.70 in August…”
March 16 – Bloomberg (Faris Khan): “Standard & Poor’s said it may lower its debt ratings for Valeant Pharmaceuticals International Inc. deeper into junk after the drugmaker slashed its earnings and revenue forecast for the year and warned that a delay in filing its annual report may breach debt agreements. Valeant’s B+ rating has been placed on negative credit watch reflecting ‘the preponderance of risks we see in the near term that could further weaken creditworthiness,’ S&P said…”
March 14 – Financial Times (Robin Wigglesworth): “Delinquencies on poor-quality US car loans have climbed to their highest level in almost two decades, according to Fitch…, reinforcing concerns over the rapidly growing market. The rate of ‘subprime’ auto loans overdue by more than 60 days rose to 5.16% in February. This surpassed the post-financial crisis peak and was the highest since the 5.96% reading in October 1996… Subprime auto loans have long been a concern for analysts, some of whom feared that rapid issuance since the crisis and weakening lending standards would cause problems in the market for securitised auto loans. There, banks repackage loans into asset-backed securities and sell them on to investors, much like they did with subprime mortgages in the 2000s… The overall US auto finance market passed $1tn in 2015, powered by strong car sales. Issuance of US auto loan-backed ABS climbed 17% to
March 17 – Bloomberg (Darrell Preston): “Houston’s $3 billion of general-obligation debt was cut one level by Moody’s…, which cited weakening economic performance due to lower oil prices, the city’s pensions obligations and restrictions on raising taxes. The fourth largest U.S. city was downgraded to Aa3, Moody’s fourth-highest level, and remains on watch for additional cuts, the rating company said… ‘The negative outlook reflects the recent weakness in economic and sales tax performance, fueled by energy companies’ reduced investments in personnel and capital, as oil prices have remained low,’ Moody’s said…”
Global Bubble Watch:
March 17 – Wall Street Journal (Timothy W. Martin): “Government debt in 20 industrialized countries stands at $44 trillion. But it’s actually a lot more than that, according to a new report. After factoring in public pension and other retirement liabilities, the debt levels nearly triple to a staggering $122 trillion. That’s the math according to a new report from Citigroup Inc report called, ‘The Coming Pensions Crisis,’ which analyzed government pension liabilities from 20 countries that are members of the Organisation for Economic Co-operation and Development . ‘It is really a ticking time bomb,’ said Charles Millard, Citi’s head of pension relations and former head of the Pension Benefit Guaranty Corporation…”
March 16 – Bloomberg (Nicholas Comfort): “Deutsche Bank AG shares dropped as much as 6.2% after co-Chief Executive Officer John Cryan said he doesn’t expect the German lender to report a profit this year. ‘We’ve said this year is not going to be a profitable year, we may make a small profit, we may make a small loss, we don’t know,’ Cryan said… ‘There’s a lot of stuff we have to get done this year, so this year we’re not going to be profitable.’ Cryan has already said the bank probably won’t pay a dividend for 2015 and 2016 as part of a plan to bolster finances…”
Federal Reserve Watch:
March 17 – Bloomberg (Craig Torres): “For the first time since the Asian and Russian crises rocked world financial markets in the late 1990s, U.S. monetary policy is as focused on the risks to global growth as it is on the domestic economy. Driving the resurgent internationalism inside the Federal Reserve is concern about how dollar strength -- reinforced by aggressive policy easing abroad -- could keep U.S. inflation too low when the Fed’s policy rate is close to zero. Another worry is a global economy that’s lumbering along without a prominent engine of growth, said Jon Faust, a former adviser to Fed Chair Janet Yellen.”
U.S. Bubble Watch:
March 17 – Financial Times (Attracta Mooney): “Analysis of 56 US public pension schemes has found that their funding deficits are set to grow by hundreds of billions of dollars this year, forcing some of America’s biggest states and cities to cut spending and raise taxes. Moody’s… said lacklustre returns in 2015 and 2016 will put severe pressure on the health of US public pension plans and force states and cities to act in order to plug their pension funding gaps. Tom Aaron, an analyst at Moody’s, said the funding deficit — the difference between the assets a pension fund has and what it has to pay out to current and future pensioners — will grow substantially this year.”
March 14 – Bloomberg (Lu Wang): “Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.”
March 14 – Bloomberg (Sarah Mulholland): “Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat. Banks are proceeding with caution as the specter of slowing economic growth rattles financial markets and shakes investor confidence in a six-year recovery that’s helped lift property values to records. Lenders are going to be more selective and discriminating as the year progresses, said Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., the largest U.S. commercial-property lender.”
March 14 – Bloomberg (Matt Scully): “Delinquencies on subprime auto debt packaged into securities reached a high not seen since October 1996, as late payments continued to worsen in February, according to Fitch Ratings. The number of car borrowers who were more than 60 days late on their bills in February rose 11.6% from the same period a year ago, bringing the delinquency rate to 5.16%... During the financial crisis delinquencies peaked at 5.04%, Fitch wrote.”
March 15 – Bloomberg (Asjylyn Loder): “The U.S. oil and gas industry, once a bright spot for the country’s economy, are employing the fewest workers since before the financial crisis. More than 100,000 jobs have disappeared in two years… Worldwide, there have been more than 265,000 layoffs since oil prices began tumbling in late 2014, according to Airswift…”
March 14 – Bloomberg (Tracy Alloway and Matt Scully): “In mid-December, shortly before Christmas, Moody's… gave a gift to investors in the fast-growing marketplace-lending space: the chance to buy a junior slice of a securitization of ‘peer-to-peer’ loans with a credit rating and a spread of 6% over benchmark swaps. Eight weeks later, investors found Moody's in a much less generous mood. The rating agency announced it was considering downgrading the riskiest portion of the deal, along with the junior tranches of two similar securitizations that had been previously sold to investors. The reviews for downgrade were ‘prompted by a faster buildup of delinquencies and charge-offs than expected,’ Moody's said… The move by Moody's and the deteriorating fortunes of some other marketplace-lending deals… have spurred fresh worries about the health of one of financial markets' newest asset classes.”
March 17 – Bloomberg (Caleb Melby): “Wall Street’s titans are still making enough to put food on the table. JPMorgan Chase & Co. gave Jamie Dimon a 35% pay raise to $27 million for 2015, eclipsing Goldman Sachs Group Inc.’s Lloyd Blankfein as the highest paid CEO at the six biggest U.S. banks. Wells Fargo & Co. gave John Stumpf $19.3 million for a fourth straight year. Bank of America Corp.’s Brian Moynihan was the lowest paid at $16 million.”
March 17 – Reuters (Herbert Lash): “The market for luxury homes in the Hamptons, the summer playground for Wall Street's wealthiest, is losing some of its luster as financial markets limp along for a second year. The average price of the 10 most expensive homes sold in this cluster of towns, villages and hamlets on Long Island's east end was $35.5 million in 2015, 20% lower than the $44.6 million recorded the year before, according to… Town & Country Real Estate in East Hampton.”
China Bubble Watch:
March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities… In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”
March 16 – Financial Times (Lucy Hornby): “Chinese Premier Li Keqiang… warned that a ‘dysfunctional’ real economy is the biggest threat to financial markets as he vowed to press on with industry restructuring while maintaining economic growth rates of 6.5-7%. Speaking at the end of China’s annual parliamentary meeting, Mr Li sought to reassure an anxious public that Beijing still has the firepower to meet its financial commitments despite economic ructions. ‘There may be small ups and downs but we can employ innovative means to deploy macroeconomic regulation to keep within our targets,’ Mr Li told reporters… ‘A dysfunctional real economy represents the biggest risk to financial markets.’”
March 14 – Bloomberg: “China’s annual legislative meetings, not known for vigorous public debate, have placed even more emphasis on conformity this year. Participants have been cautioned against impromptu discussions with foreign media in which they might stray from the script. ‘This year, we have stricter rules,’ Chen Jiping, party chief of the official China Law Society and a member of the country’s top political advisory body, told Bloomberg… ‘We’re advised not to take interviews during the meetings. You’d better apply online.’ The restrictions are a manifestation of a broad clampdown on dissent under President Xi Jinping that has gathered steam since the National People’s Congress last convened 12 months ago.”
March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities, before it wreaks damage to the wider economy. In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”
March 15 – Bloomberg: “China’s draft plan for a tax on currency trading is getting a cold reception in the foreign-exchange market. Mizuho Bank Ltd. says the so-called Tobin tax on yuan transactions would reduce liquidity in a currency with bid-ask spreads already five times wider than those of the yen. A levy would set back China’s push to make the yuan a reserve currency and could heighten investor anxiety over capital outflows, according to Commonwealth Bank of Australia. The proposal is ‘short sighted’ and would drive away foreign investors, Citi Private Bank said.”
March 17 – Reuters (Michelle Price and Engen Tham): “China's hedge fund industry has been thrown into disarray as managers rush to comply with stringent new rules, introduced overnight, that could see over half the industry shut down by August, fund managers and lawyers told Reuters. Domestic and foreign hedge fund managers are scrambling to secure legal advice, hire qualified staff and launch new products in a bid to save their licenses after the regulator threatened last month to close down around 17,000 ‘phantom’ fund managers as part of a broader government financial sector crackdown. The new hedge fund rules aim to shrink a vast industry insiders describe as a ‘Wild East’ rife with fraud… Private fund registrations more than doubled in 2015 to reach more than 25,000…”
March 17 – Bloomberg (Liz McCormick): “A shortage of benchmark 10-year notes in the market for borrowing and lending U.S. government debt caused uncompleted trades to surge last week to the highest since the financial crisis. Total settlement delivery failures for all Treasuries, excluding inflation-protected securities, were $456 billion for the week ended March 9, the most since 2008, when fails set a record $2.7 trillion, Federal Reserve Bank of New York data show.”
March 17 – Bloomberg (Dakin Campbell and Nabila Ahmed): “As Wall Street leaders warn publicly about this quarter’s plunging revenue from trading and deals, Goldman Sachs Group Inc., the bank most reliant on those operations, has provided no guidance. The mystery isn’t whether it is getting hit too -- it’s how hard. Goldman Sachs’s income from investment banking… is projected to tumble 32% this quarter from a year earlier, Credit Suisse Group AG analysts wrote... Internally, some senior executives are anticipating a drop of roughly 25% in that business… Firms including JPMorgan Chase & Co. and Citigroup Inc. have been warning that turbulent markets are battering their earnings, as stock swings, a slump in commodity prices and low interest rates prompt companies to delay share offerings and customers to pull back from trading.”
March 16 – Reuters (Jessica Dinapoli): “Peabody Energy Corp, the largest U.S. coal producer, may have to seek bankruptcy protection, the company said in a regulatory filing…, citing poor economies in countries that import coal and other factors battering the coal industry… Peabody, which flagged the possibility of bankruptcy under the ‘risk factors’ section of a filing with the U.S. Securities and Exchange Commission, said it had decided to skip $71.1 million in interest payments… The company, said there was ‘substantial doubt’ about its ability to continue as a going concern.”
March 17 – Reuters (Lynn Adler): “Troubled U.S. energy companies, maneuvering for stronger negotiating positions if filing for bankruptcy, are racing to tap cash still available under existing reserve-based loan commitments before banks cut their credit access next month. In April, lenders, in semi-annual valuations of oil and gas reserves backing these loans, are expected to cut available credit to many energy companies based on deeply depressed collateral prices. Earlier in March, Stone Energy joined a growing pack of companies… drawing down the full amount remaining under its credit facility… ‘Every company out there is nervous that if they don’t draw in the next couple of weeks, with determinations coming up, banks will finally start saying ‘no,’ an investor said.”
March 17 – Reuters (Kristen Haunss and Carl O’Donnell): “Creditors of Valeant Pharmaceuticals International, which has been in violation of lender agreements since Wednesday, are beginning to demand new terms that could further pressure the drugmaker's business model, according to three people familiar with the matter. Valeant said on Tuesday it would not meet a March 15 deadline for filing its annual financial statements with securities regulators, putting it in danger of defaulting on its $30 billion debt load… The shares have sunk to $33.54 from a high of $263.70 in August…”
March 16 – Bloomberg (Faris Khan): “Standard & Poor’s said it may lower its debt ratings for Valeant Pharmaceuticals International Inc. deeper into junk after the drugmaker slashed its earnings and revenue forecast for the year and warned that a delay in filing its annual report may breach debt agreements. Valeant’s B+ rating has been placed on negative credit watch reflecting ‘the preponderance of risks we see in the near term that could further weaken creditworthiness,’ S&P said…”
March 14 – Financial Times (Robin Wigglesworth): “Delinquencies on poor-quality US car loans have climbed to their highest level in almost two decades, according to Fitch…, reinforcing concerns over the rapidly growing market. The rate of ‘subprime’ auto loans overdue by more than 60 days rose to 5.16% in February. This surpassed the post-financial crisis peak and was the highest since the 5.96% reading in October 1996… Subprime auto loans have long been a concern for analysts, some of whom feared that rapid issuance since the crisis and weakening lending standards would cause problems in the market for securitised auto loans. There, banks repackage loans into asset-backed securities and sell them on to investors, much like they did with subprime mortgages in the 2000s… The overall US auto finance market passed $1tn in 2015, powered by strong car sales. Issuance of US auto loan-backed ABS climbed 17% to
March 17 – Bloomberg (Darrell Preston): “Houston’s $3 billion of general-obligation debt was cut one level by Moody’s…, which cited weakening economic performance due to lower oil prices, the city’s pensions obligations and restrictions on raising taxes. The fourth largest U.S. city was downgraded to Aa3, Moody’s fourth-highest level, and remains on watch for additional cuts, the rating company said… ‘The negative outlook reflects the recent weakness in economic and sales tax performance, fueled by energy companies’ reduced investments in personnel and capital, as oil prices have remained low,’ Moody’s said…”
Global Bubble Watch:
March 17 – Wall Street Journal (Timothy W. Martin): “Government debt in 20 industrialized countries stands at $44 trillion. But it’s actually a lot more than that, according to a new report. After factoring in public pension and other retirement liabilities, the debt levels nearly triple to a staggering $122 trillion. That’s the math according to a new report from Citigroup Inc report called, ‘The Coming Pensions Crisis,’ which analyzed government pension liabilities from 20 countries that are members of the Organisation for Economic Co-operation and Development . ‘It is really a ticking time bomb,’ said Charles Millard, Citi’s head of pension relations and former head of the Pension Benefit Guaranty Corporation…”
March 16 – Bloomberg (Nicholas Comfort): “Deutsche Bank AG shares dropped as much as 6.2% after co-Chief Executive Officer John Cryan said he doesn’t expect the German lender to report a profit this year. ‘We’ve said this year is not going to be a profitable year, we may make a small profit, we may make a small loss, we don’t know,’ Cryan said… ‘There’s a lot of stuff we have to get done this year, so this year we’re not going to be profitable.’ Cryan has already said the bank probably won’t pay a dividend for 2015 and 2016 as part of a plan to bolster finances…”
Federal Reserve Watch:
March 17 – Bloomberg (Craig Torres): “For the first time since the Asian and Russian crises rocked world financial markets in the late 1990s, U.S. monetary policy is as focused on the risks to global growth as it is on the domestic economy. Driving the resurgent internationalism inside the Federal Reserve is concern about how dollar strength -- reinforced by aggressive policy easing abroad -- could keep U.S. inflation too low when the Fed’s policy rate is close to zero. Another worry is a global economy that’s lumbering along without a prominent engine of growth, said Jon Faust, a former adviser to Fed Chair Janet Yellen.”
U.S. Bubble Watch:
March 17 – Financial Times (Attracta Mooney): “Analysis of 56 US public pension schemes has found that their funding deficits are set to grow by hundreds of billions of dollars this year, forcing some of America’s biggest states and cities to cut spending and raise taxes. Moody’s… said lacklustre returns in 2015 and 2016 will put severe pressure on the health of US public pension plans and force states and cities to act in order to plug their pension funding gaps. Tom Aaron, an analyst at Moody’s, said the funding deficit — the difference between the assets a pension fund has and what it has to pay out to current and future pensioners — will grow substantially this year.”
March 14 – Bloomberg (Lu Wang): “Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.”
March 14 – Bloomberg (Sarah Mulholland): “Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat. Banks are proceeding with caution as the specter of slowing economic growth rattles financial markets and shakes investor confidence in a six-year recovery that’s helped lift property values to records. Lenders are going to be more selective and discriminating as the year progresses, said Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., the largest U.S. commercial-property lender.”
March 14 – Bloomberg (Matt Scully): “Delinquencies on subprime auto debt packaged into securities reached a high not seen since October 1996, as late payments continued to worsen in February, according to Fitch Ratings. The number of car borrowers who were more than 60 days late on their bills in February rose 11.6% from the same period a year ago, bringing the delinquency rate to 5.16%... During the financial crisis delinquencies peaked at 5.04%, Fitch wrote.”
March 15 – Bloomberg (Asjylyn Loder): “The U.S. oil and gas industry, once a bright spot for the country’s economy, are employing the fewest workers since before the financial crisis. More than 100,000 jobs have disappeared in two years… Worldwide, there have been more than 265,000 layoffs since oil prices began tumbling in late 2014, according to Airswift…”
March 14 – Bloomberg (Tracy Alloway and Matt Scully): “In mid-December, shortly before Christmas, Moody's… gave a gift to investors in the fast-growing marketplace-lending space: the chance to buy a junior slice of a securitization of ‘peer-to-peer’ loans with a credit rating and a spread of 6% over benchmark swaps. Eight weeks later, investors found Moody's in a much less generous mood. The rating agency announced it was considering downgrading the riskiest portion of the deal, along with the junior tranches of two similar securitizations that had been previously sold to investors. The reviews for downgrade were ‘prompted by a faster buildup of delinquencies and charge-offs than expected,’ Moody's said… The move by Moody's and the deteriorating fortunes of some other marketplace-lending deals… have spurred fresh worries about the health of one of financial markets' newest asset classes.”
March 17 – Bloomberg (Caleb Melby): “Wall Street’s titans are still making enough to put food on the table. JPMorgan Chase & Co. gave Jamie Dimon a 35% pay raise to $27 million for 2015, eclipsing Goldman Sachs Group Inc.’s Lloyd Blankfein as the highest paid CEO at the six biggest U.S. banks. Wells Fargo & Co. gave John Stumpf $19.3 million for a fourth straight year. Bank of America Corp.’s Brian Moynihan was the lowest paid at $16 million.”
March 17 – Reuters (Herbert Lash): “The market for luxury homes in the Hamptons, the summer playground for Wall Street's wealthiest, is losing some of its luster as financial markets limp along for a second year. The average price of the 10 most expensive homes sold in this cluster of towns, villages and hamlets on Long Island's east end was $35.5 million in 2015, 20% lower than the $44.6 million recorded the year before, according to… Town & Country Real Estate in East Hampton.”
China Bubble Watch:
March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities… In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”
March 16 – Financial Times (Lucy Hornby): “Chinese Premier Li Keqiang… warned that a ‘dysfunctional’ real economy is the biggest threat to financial markets as he vowed to press on with industry restructuring while maintaining economic growth rates of 6.5-7%. Speaking at the end of China’s annual parliamentary meeting, Mr Li sought to reassure an anxious public that Beijing still has the firepower to meet its financial commitments despite economic ructions. ‘There may be small ups and downs but we can employ innovative means to deploy macroeconomic regulation to keep within our targets,’ Mr Li told reporters… ‘A dysfunctional real economy represents the biggest risk to financial markets.’”
March 14 – Bloomberg: “China’s annual legislative meetings, not known for vigorous public debate, have placed even more emphasis on conformity this year. Participants have been cautioned against impromptu discussions with foreign media in which they might stray from the script. ‘This year, we have stricter rules,’ Chen Jiping, party chief of the official China Law Society and a member of the country’s top political advisory body, told Bloomberg… ‘We’re advised not to take interviews during the meetings. You’d better apply online.’ The restrictions are a manifestation of a broad clampdown on dissent under President Xi Jinping that has gathered steam since the National People’s Congress last convened 12 months ago.”
March 14 – Financial Times (Don Weinland and Yuan Yang): “Chinese authorities are seeking to crack down on a surge of unregulated lending that is pushing up property prices in the country’s biggest cities, before it wreaks damage to the wider economy. In comments at the weekend Zhou Xiaochuan, head of the People’s Bank of China, denounced loans for down payments on homes as illegal. Pan Gongsheng, a central bank vice-president, said regulators will act against the peer-to-peer companies that grant such loans. But many experts are worried that property speculation in China’s four biggest cities has reached new highs, largely due to such shadow financing. Unregulated funds have ploughed billions of renminbi into the property market in recent months.”
March 15 – Bloomberg: “China’s draft plan for a tax on currency trading is getting a cold reception in the foreign-exchange market. Mizuho Bank Ltd. says the so-called Tobin tax on yuan transactions would reduce liquidity in a currency with bid-ask spreads already five times wider than those of the yen. A levy would set back China’s push to make the yuan a reserve currency and could heighten investor anxiety over capital outflows, according to Commonwealth Bank of Australia. The proposal is ‘short sighted’ and would drive away foreign investors, Citi Private Bank said.”
March 17 – Reuters (Michelle Price and Engen Tham): “China's hedge fund industry has been thrown into disarray as managers rush to comply with stringent new rules, introduced overnight, that could see over half the industry shut down by August, fund managers and lawyers told Reuters. Domestic and foreign hedge fund managers are scrambling to secure legal advice, hire qualified staff and launch new products in a bid to save their licenses after the regulator threatened last month to close down around 17,000 ‘phantom’ fund managers as part of a broader government financial sector crackdown. The new hedge fund rules aim to shrink a vast industry insiders describe as a ‘Wild East’ rife with fraud… Private fund registrations more than doubled in 2015 to reach more than 25,000…”
Europe Watch:
March 17 – Bloomberg (Liz McCormick): “European Central Bank President Mario Draghi told European Union leaders that the central bank has ‘no alternative’ to its recent rate cuts and monetary policy actions, according to two officials familiar with deliberations. Draghi told EU heads of government gathered in Brussels that the most important thing they could do would be to provide clarity on the future of the euro area during a closed-door session. He also encouraged them to support the central bank by reassuring savers, insurers and bankers about potential market distortions or risks to financial stability from the latest stimulus efforts. The officials asked not to be identified discussing private talks.”
March 13 – Bloomberg (Patrick Donahue, Rainer Buergin and Arne Delfs): “Chancellor Angela Merkel faces an increasingly splintered political landscape after voters punished her party and lifted the anti-immigration Alternative for Germany to its best showing yet in three state elections dominated by the refugee crisis. Support for Merkel’s Christian Democratic Union tumbled across the board Sunday as her candidates failed to capture two western states including Baden-Wuerttemberg, home to carmaker Daimler AG. Her party hung on to win the most votes in Saxony-Anhalt in the formerly communist east, though Alternative for Germany, or AfD, upended the coalition math there by winning 24.2% support in its first attempt in the state.”
March 17 – Bloomberg (Esteban Duarte and Maria Tadeo): “Catalonia is deliberately flirting with default on its bank loans as the region’s separatist government tries to force the Spanish state to deliver aid payments, according to two people familiar with the situation. Officials in the regional capital Barcelona are counting on Spain to step in and supply the funds they need to meet loan repayments coming due this year, betting the central government will be forced to back down because the costs of a default would be greater for the Spanish sovereign, the people said, asking not to be identified discussing confidential matters.”
Central Bank Watch:
March 17 – Bloomberg (Xola Potelwa and Amogelang Mbatha): “South Africa’s central bank raised its benchmark interest rate for a second time this year in a decision that split the Monetary Policy Committee and as a political crisis engulfing the country hurts the currency. The repurchase rate was increased to 7% from 6.75%...”
EM Bubble Watch:
March 14 – Bloomberg (Anto Antony and George Smith Alexander): “The day of reckoning is coming: The Reserve Bank of India is due to complete its audit of all 50 of the country’s banks by the end of this month, forcing them to lay bare their hidden non-performing loans, stop making new loans to deadbeat borrowers just to pay the interest on their already-bad ones, and set aside more cash to cover their write-offs. That means India’s already-ugly bad loan situation is set to get even worse. The banks so far have been willing to disclose that $131 billion, or about 14% of their total lending… Another $36 billion may yet be added to that total, bringing total non-performing loans to 18%, when the audit finishes on March 31, according to Credit Suisse Group AG.”
March 17 – Bloomberg (Liz McCormick): “European Central Bank President Mario Draghi told European Union leaders that the central bank has ‘no alternative’ to its recent rate cuts and monetary policy actions, according to two officials familiar with deliberations. Draghi told EU heads of government gathered in Brussels that the most important thing they could do would be to provide clarity on the future of the euro area during a closed-door session. He also encouraged them to support the central bank by reassuring savers, insurers and bankers about potential market distortions or risks to financial stability from the latest stimulus efforts. The officials asked not to be identified discussing private talks.”
March 13 – Bloomberg (Patrick Donahue, Rainer Buergin and Arne Delfs): “Chancellor Angela Merkel faces an increasingly splintered political landscape after voters punished her party and lifted the anti-immigration Alternative for Germany to its best showing yet in three state elections dominated by the refugee crisis. Support for Merkel’s Christian Democratic Union tumbled across the board Sunday as her candidates failed to capture two western states including Baden-Wuerttemberg, home to carmaker Daimler AG. Her party hung on to win the most votes in Saxony-Anhalt in the formerly communist east, though Alternative for Germany, or AfD, upended the coalition math there by winning 24.2% support in its first attempt in the state.”
March 17 – Bloomberg (Esteban Duarte and Maria Tadeo): “Catalonia is deliberately flirting with default on its bank loans as the region’s separatist government tries to force the Spanish state to deliver aid payments, according to two people familiar with the situation. Officials in the regional capital Barcelona are counting on Spain to step in and supply the funds they need to meet loan repayments coming due this year, betting the central government will be forced to back down because the costs of a default would be greater for the Spanish sovereign, the people said, asking not to be identified discussing confidential matters.”
Central Bank Watch:
March 17 – Bloomberg (Xola Potelwa and Amogelang Mbatha): “South Africa’s central bank raised its benchmark interest rate for a second time this year in a decision that split the Monetary Policy Committee and as a political crisis engulfing the country hurts the currency. The repurchase rate was increased to 7% from 6.75%...”
EM Bubble Watch:
March 14 – Bloomberg (Anto Antony and George Smith Alexander): “The day of reckoning is coming: The Reserve Bank of India is due to complete its audit of all 50 of the country’s banks by the end of this month, forcing them to lay bare their hidden non-performing loans, stop making new loans to deadbeat borrowers just to pay the interest on their already-bad ones, and set aside more cash to cover their write-offs. That means India’s already-ugly bad loan situation is set to get even worse. The banks so far have been willing to disclose that $131 billion, or about 14% of their total lending… Another $36 billion may yet be added to that total, bringing total non-performing loans to 18%, when the audit finishes on March 31, according to Credit Suisse Group AG.”
Leveraged Speculation Watch:
March 13 – Bloomberg: “The battle over the fate of China’s currency is starting to get bloody for the bears. Seven months after a shock devaluation spurred hedge funds and other speculators to wager on further declines, the yuan’s unexpected resilience has turned many of those bets into losers. At least $562 million of options that pay out if the currency drops below 6.6 per dollar… have expired worthless since August. Another $807 million will lapse within three months. While those figures provide just a glimpse into the potential losses for pessimistic speculators, what’s clear is that the Chinese government has proven a stronger adversary than many traders anticipated.”
March 14 – Bloomberg (Oliver Renick): “It’s well known that stocks with the most hedge funds ownership have been doing badly in the U.S. How badly might surprise you. While volatility has seeped into every corner of the market over the last year, no group has had it worse than equities where professional speculators are most concentrated. Since July, Russell 3000 Index companies in which hedge funds have the highest ownership percentage have plunged 31%, compared with a 2.8% decline in the Standard & Poor’s 500 Index, according to… Bloomberg.”
March 16 – Bloomberg (Beth Jinks): “Pershing Square Holdings Ltd., the publicly traded security of Bill Ackman’s activist hedge fund, lost 26.4% this year through March 15, hammered by losses at Valeant Pharmaceuticals International Inc., the beleaguered drugmaker whose shares plunged by more than half this week… Ackman’s fund, Pershing Square Capital Management, has been caught up in the controversy surrounding Valeant, whose shares fell 51% Tuesday after the drugmaker cut its 2016 guidance and warned it may breach some of its debt agreements… Pershing Square lost about $764 million on the common shares it owns in the March 15 stock collapse… Pershing Square Capital Management posted its worst annual performance in 2015, with a net loss of 20.5% for the year.”
March 17 – Bloomberg (Will Wainewright): “Hedge-fund shutdowns outnumbered startups last year for the first time since 2009, according to… Hedge Fund Research… In the last quarter, 305 funds closed compared with 257 a year earlier, taking the total for the year to 979. Startups totaled 968…”
Brazil Watch:
March 13 – Bloomberg: “The battle over the fate of China’s currency is starting to get bloody for the bears. Seven months after a shock devaluation spurred hedge funds and other speculators to wager on further declines, the yuan’s unexpected resilience has turned many of those bets into losers. At least $562 million of options that pay out if the currency drops below 6.6 per dollar… have expired worthless since August. Another $807 million will lapse within three months. While those figures provide just a glimpse into the potential losses for pessimistic speculators, what’s clear is that the Chinese government has proven a stronger adversary than many traders anticipated.”
March 14 – Bloomberg (Oliver Renick): “It’s well known that stocks with the most hedge funds ownership have been doing badly in the U.S. How badly might surprise you. While volatility has seeped into every corner of the market over the last year, no group has had it worse than equities where professional speculators are most concentrated. Since July, Russell 3000 Index companies in which hedge funds have the highest ownership percentage have plunged 31%, compared with a 2.8% decline in the Standard & Poor’s 500 Index, according to… Bloomberg.”
March 16 – Bloomberg (Beth Jinks): “Pershing Square Holdings Ltd., the publicly traded security of Bill Ackman’s activist hedge fund, lost 26.4% this year through March 15, hammered by losses at Valeant Pharmaceuticals International Inc., the beleaguered drugmaker whose shares plunged by more than half this week… Ackman’s fund, Pershing Square Capital Management, has been caught up in the controversy surrounding Valeant, whose shares fell 51% Tuesday after the drugmaker cut its 2016 guidance and warned it may breach some of its debt agreements… Pershing Square lost about $764 million on the common shares it owns in the March 15 stock collapse… Pershing Square Capital Management posted its worst annual performance in 2015, with a net loss of 20.5% for the year.”
March 17 – Bloomberg (Will Wainewright): “Hedge-fund shutdowns outnumbered startups last year for the first time since 2009, according to… Hedge Fund Research… In the last quarter, 305 funds closed compared with 257 a year earlier, taking the total for the year to 979. Startups totaled 968…”
Brazil Watch:
March 17 – CNN (Tim Hume, Vasco Cotovio and Marilia Brocchetto): “A Brazilian federal judge moved Thursday to block the controversial swearing-in of former President Luiz Inacio Lula da Silva as chief of staff to President Dilma Rousseff -- the latest twist in the country's deepening political crisis. ‘Lula,’ as the two-time former president is known, was sworn into the Cabinet post earlier Thursday amid heated protests by opponents, who say the move is an attempt to shield him from a corruption investigation. Under Brazilian law, senior political figures can only be tried in the Supreme Federal Court, meaning any prosecution against Lula da Silva would effectively be delayed if he were chief of staff.”
March 13 – Bloomberg (Anna Edgerton and Raymond Colitt): “Dilma Rousseff’s future as president of Brazil was cast into further doubt as millions of protesters, wearied by scandal and recession, staged some of the largest rallies in the country’s modern history. Brazilians demonstrated peacefully for Rousseff’s ouster in cities throughout the country on Sunday, with some estimates counting more than 3 million people on the streets.”
Geopolitical Watch:
March 15 – Reuters (Seyhmus Cakan): “Fighting between Turkish security forces and Kurdish militants spread on Tuesday, with tanks, helicopters and armored cars deployed after a suicide bombing that killed 37 people in the capital Ankara. The deadliest violence took place in Diyarbakir, the largest city in mainly Kurdish southeastern Turkey, where Kurdistan Workers Party (PKK) fighters blocked roads and clashed with security forces overnight as a police helicopter flew overhead, witnesses said.”
March 13 – Bloomberg (Anna Edgerton and Raymond Colitt): “Dilma Rousseff’s future as president of Brazil was cast into further doubt as millions of protesters, wearied by scandal and recession, staged some of the largest rallies in the country’s modern history. Brazilians demonstrated peacefully for Rousseff’s ouster in cities throughout the country on Sunday, with some estimates counting more than 3 million people on the streets.”
Geopolitical Watch:
March 15 – Reuters (Seyhmus Cakan): “Fighting between Turkish security forces and Kurdish militants spread on Tuesday, with tanks, helicopters and armored cars deployed after a suicide bombing that killed 37 people in the capital Ankara. The deadliest violence took place in Diyarbakir, the largest city in mainly Kurdish southeastern Turkey, where Kurdistan Workers Party (PKK) fighters blocked roads and clashed with security forces overnight as a police helicopter flew overhead, witnesses said.”
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