End of an Era

By: Doug Noland | Fri, Jan 31, 2014
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Bernanke chairs his final FOMC meeting.

I hope to at some point offer a more complete review of Ben Bernanke's tenure at the Federal Reserve. I will be fascinated to see how future historians view the Bernanke doctrine. From my perspective, the Bernanke Era has been an abject failure. He was the most outspoken proponent of post-tech Bubble reflation. The noted academic was keen to use the government printing press - not to mention mortgage Credit - to fatefully drive asset inflation and stimulate a particularly unbalanced U.S. economic boom. I will give him less than zero Credit for then inciting an even greater Bubble, again in the name of system reflation, after the 2008 crisis.

Chairman Bernanke has been widely lauded for his "courage". Firemen entering burning buildings in search of trapped victims are brave. Our troops are courageous. I would see Bernanke and contemporary central bankers much more in terms of "daring." And it was the Bernanke doctrine of inflationism that basically provided open checkbooks to central bankers (and governments) around the globe. It's becoming a lot less thrilling now that the bills are starting to come due.

Let's first take a quick view of some of the notable market changes: For the week versus the dollar, the Hungarian forint declined 3.7%, the Polish zloty 2.7%, the Russian ruble 1.7%, the Czech koruna 1.6%, the Bulgarian lev 1.4%, the Colombian peso 1.1%, the Chilean peso 0.9% and the Brazilian real 0.6%. The yen was little changed this week against the dollar, notably holding last week's strong advance. Over two weeks versus the yen, the Argentine peso has declined 17.1%, the Russian ruble 6.6%, the Hungarian forint 6.1%, the Chilean peso 5.1%, the Brazilian real 5.0%, the Colombian peso 4.7%, the Polish zloty 4.6%, the South African rand 4.4%, the South Korean won 4.1% and the Indian rupee 3.9%.

Notable yield increases this week included Ukraine 10-year (dollar) yields jumping 55 bps to 9.85%. Russian yields rose 26 bps to 8.35%, Poland yields surged 30 bps to 4.70%, Hungary yields rose 36 bps to 6.0%, and South African yields rose 36 bps to 8.90%. As for equities, India's Sensex index dropped 2.9%. Stocks in Taiwan were down 1.8%, Thailand 3.1%, Philippines 2.0%, Turkey 4.0%, Russia 3.4% and Chile 4.4%,

We may be witnessing an End of an Era right before our eyes. Chairman Bernanke's last meeting had the Fed sticking with its tapering plan, in spite of heightened global market instability. Wednesday's FOMC statement was notable for a generally upbeat tone without even a mention of emerging market stress. And Friday from the Fed's most outspoken hawk, head of the Dallas Fed Richard Fisher: 'I was pleased that all members of the committee saw things closer to how I have seen things."

Thus far, it does seem consistent with the view that the FOMC is both determined to rein in balance sheet expansion and cognizant of the risks associated with so quickly jumping to the market's defense. Importantly, the "push back" against any "tightening of financial conditions" language from this past summer and fall has been missing in action.

When I broach "End of an Era", I'm actually not referring to Bernanke's chairmanship. I'll suggest instead that we might have reached the initial phase of the visible failure of inflationism. For years now, the Fed has been determined to ensure a rising "price level" to supposedly grow out of debt problems. This led to historic (and erratic) asset inflation in the U.S. that faltered back in 2008/2009. Subsequent massive reflationary measures worked to reflate U.S. asset prices, while inflating prices, markets and economies globally. Virtually all central banks and government joined in.

When I began referring to the "global government finance Bubble" back in April 2009, I had reason to fear that the unfolding Bubble would indeed prove to be the "Granddaddy of all Bubbles." In particular, unprecedented amounts of "money" were poised to flood into China and the developing economies. The Bernanke doctrine specifically sought dollar devaluation along with the impetus to coerce savers from the safety of their savings out to the inflating global risk markets. And, importantly, policies had once again created a highly conducive backdrop for leveraged securities speculation.

China, with its almost 1.4 billion citizens and already entrenched Bubble dynamics, had the capacity to inflate colossal Credit and economic Bubbles. Chinese officials had claimed they'd learned valuable lessons from the Japanese Bubble experience. But I fully expected it to be very difficult for the authorities to rein in increasingly powerful and systemic Bubble excesses.

I had hoped that our central bank had learned some lessons from previous reflationary policies and attendant destructive booms and busts. Yet a reading of economic history had me convinced that once aggressive monetary inflation has been commenced it becomes extremely difficult to stop. With the Bernanke doctrine of inflationism on the line, I also doubted the Fed's capacity to accept the errors of its ways. Mistakes would beckon bigger mistakes. Too predictably, instead of recognizing the damage wrought from "money" printing, the Fed was too quick to double down with the electronic printing press.

As it turned out, my worst fears from back in 2009 came to fruition. Truth be told, the global Bubble surpassed what I even thought possible. The Fed's balance sheet is on its way to $4.5 Trillion. The Chinese Bubble inflated to historic proportions - and is still rapidly inflating. Scores of EM countries, many with notably checkered pasts when it comes to monetary and economic management, were inundated with cheap global finance like never before. It was destined to be a fiasco from the start. Throughout it all, rarely would local authorities move to rein in overheated domestic Credit systems. Inflationism had enveloped the world like never before. And then Japan took "daring" to a whole new level of recklessness.

As already noted, the bills are beginning to come due. Inflationism's inevitable consequences have manifested to the point of being highly destabilizing. Late-cycle Credit excess has created enormous amounts of suspect debt and economic maladjustment. Worse yet, these days much of this debt trades in the marketplace. Likely huge quantities of potentially problematic securities are held by leveraged speculators.

On the fundamental side of things, wealth redistribution and inequalities have become more conspicuous and socially unsettling. Global monetary inflation is today having widely divergent effects on prices, currencies and economies. This is apparent today both domestically and internationally. Facebook beats Wall Street earnings estimates and Mark Zuckerberg's net worth jumps $3.2 billion - on Thursday. This week will see more wealth for scores of Facebook and Google millionaires to further bid up Silicon Valley home prices.

January 28 - Bloomberg (Ari Levy and Dan Levy): "The epicenter of the income inequality debate has shifted 2,600 miles west, from Wall Street to Market Street. Whether it's protesters targeting Twitter Inc.'s new San Francisco headquarters and Google Inc.'s buses or the criticism against these agitators by former venture capitalist Tom Perkins, the Bay Area's technology industry is attracting the kind of attention often reserved for New York's moneyed elite. Concern about the growing gap between the wealthiest and poorest Americans is erupting across San Francisco, where an influx of newly minted dot-com millionaires is boosting rents and property prices, putting affordable housing that much further out of reach. Rage over inequality has spilled into the streets, where demonstrators have blocked buses transporting Google employees, breaking the window in one in Oakland. 'All booms have their winners and losers,' said John Elberling, executive vice president of Todco, a San Francisco- based builder of affordable housing. 'Even if you have a good job, it's very likely you can't afford to buy a place in the city.'"

It's also becoming increasingly apparent that the global "system" has become acutely vulnerable to even a meager reduction in global monetary accommodation. Predictably, markets and economies around the world became highly dependent upon ultra-loose "money". Now, the inevitable faltering of Bubbles and attendant risk aversion see a problematic tightening of finance for the most susceptible at the "periphery." Rather quickly, those that have been on the receiving end of years of easy flowing cheap "hot money" now confront the harsh reality that they've actually been on the losing end of monetary inflation. And with the Fed at least at this point more determined to reduce its monetary inflation, trouble at the "periphery" is seeping into a little risk aversion (i.e. contagion) at the "core."

January 30 - Financial Times (John Aglionby and Delphine Strauss): "India's central bank governor has lashed out at policy makers in the US and other industrialised countries for their uncoordinated approach to economic policy as they recover from the financial crisis. Speaking a day after the US Federal Reserve took the latest step in reducing its programme of quantitative easing, Raghuram Rajan said emerging markets helped pull the world out of the 2008 financial crisis by supporting global growth and should not have to suffer now developed countries are starting to recover. India, Turkey and South Africa have all raised interest rates this week to counter sharp falls in their currencies as investors switch funds from emerging markets into recovering developed countries such as the US and UK. 'International monetary co-operation has broken down,' Mr Rajan, a former chief economist at the International Monetary Fund, said in a Bloomberg India TV interview, two days after the Reserve Bank of India raised its main interest rate by 25 bps to 8%. 'Industrial countries have to play a part in restoring that [co-operation], and they can't at this point wash their hands off and say, we'll do what we need to and you do the adjustment.' ... Mr Rajan's words will carry force: he has taken radical action since his appointment last September to restore investors' confidence in India. His comments underline the bitterness felt in many emerging markets that have struggled to manage both the inflows of hot money, while the Fed was ramping up its stimulus programme, and the prospect of their withdrawal."

Reporting on the same issue, a Friday Bloomberg article (Kartik Goyal) added this comment: "'The U.S. should worry about the effects of its polices on the rest of the world,' Rajan told a group of students... 'We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, broadly, rather than what is just right given the circumstances of that country.'"

For decades now, the U.S. has inundated the world with dollar balances. Our central bank was never held accountable. I fully expect acrimony to now play catch-up. To be sure, policy measures since the 2008 crisis only pushed this entrenched Dollar Bubble to "parabolic" extremes. The conventional view holds that EM is significantly less vulnerable today compared to back in 1997. From my perspective, excesses over recent years absolutely dwarf those that preceded the 1997/98 crisis. The numbers below from Reuters help put things into clearer perspective.

January 28 - Reuters (Sujata Rao, Daniel Bases and Vidya Ranganathan): "Emerging markets have attracted about $7 trillion since 2005 through a mix of direct investment in manufacturing and services, mergers and acquisitions, and investment in stocks and bonds, the Institute for International Finance estimates. JPMorgan estimates outstanding emerging market bonds at $10 trillion compared with just $422 billion in 1993. Assets of funds benchmarked to emerging debt indices stand at $603 billion, more than double 2007 levels, it said, and over $1.3 trillion now follows MSCI's main emerging equity index. Mutual fund data from Lipper... shows that in the past 10 years net inflows into debt and equity markets was in the region of $412 billion."

It's also worth noting that the global hedge fund community is today about 10 times larger than back in 1997. I believe the growth in sovereign wealth funds has been at least as dramatic. Exchange-traded funds (ETFs) weren't even a factor back in 1997. China hardly mattered to the global economy.

January 30 - Bloomberg (William Pesek): "Among the many reasons to dismiss President Xi Jinping's pledges to transform China's growth model, Gan Li may offer the best: an epic housing bubble that can't be allowed to pop. Gan, a professor at Southwestern University of Finance and Economics in Chengdu, Sichuan... recently crunched some disturbing numbers on the level and distribution of household income and wealth. After examining survey results from 28,000 households and 100,000 individuals, Gan believes that roughly 65% of China's household wealth is sitting in real estate. An astounding 90% of households in nation of more than 1.3 billion people already owns homes. In the first half 2012, he found, about 42% of demand for properties came from buyers who already owned at least one. Many of these homes and apartments... were bought in the midst of one of history's biggest real estate booms and bubbles. 'The Chinese housing market is clearly oversupplied,' Gan told Tom Orlik... 'Existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year. The housing bubble has to burst. No one knows when.' When it does, the damage to household wealth will reverberate across the second-biggest economy, devastate consumption and increase risks of social unrest. In other words, it's something the Communist Party can't allow to happen."

China remains a major wildcard. "The housing bubble has to burst." "...It's something the Communist Party can't allow to happen." Well, Bubbles do indeed always burst. And when it reaches the scope that a government can't allow it to happen, one should best be prepared for an eventual bust of devastating proportions.

Here at home, Bernanke is leaving Yellen and the FOMC in a very tough spot. The course of Federal Reserve policymaking is in a state of high uncertainty; U.S. markets are unsound; and global financial and economic systems are highly unstable. Of course, Bernanke is not fully to blame. Yet he has been the leading proponent - the intellectual mastermind - of contemporary inflationism that is today seemingly at a critical crossroads.

 


For the Week:

The S&P500 slipped 0.4% (down 3.6% y-t-d), and the Dow dropped 1.1% (down 5.3%). The Utilities surged 2.9% (up 3.0%). The Banks fell 1.6% (down 2.8%), and the Broker/Dealers dropped 2.2% (down 4.2%). The Morgan Stanley Cyclicals recovered 0.3% (down 4.4%), and the Transports gained 0.4% (down 1.5%). The S&P 400 Midcaps slipped 0.1% (down 2.2%), and the small cap Russell 2000 fell 1.2% (down 2.8%). The Nasdaq100 declined 0.6% (down 2.0%), and the Morgan Stanley High Tech index lost 1.0% (down 1.4%). The Semiconductors were little changed (down 1.1%). The Biotechs added 0.4% (up 8.8%). With bullion declining $26, the HUI gold index gave back 1.3% (up 9.7%).

One-month Treasury bill rates ended the week at 3 bps and three-month bills ended at 2 bps. Two-year government yields declined a basis point to 0.33% (down 5bps y-t-d). Five-year T-note yields fell 5 bps to 1.49% (down 25bps). Ten-year yields dropped 7 bps to 2.65% (down 38bps). Long bond yields declined 3 bps to 3.60% (down 37bps). Benchmark Fannie MBS yields fell 3 bps to 3.34% (down 27bps). The spread between benchmark MBS and 10-year Treasury yields widened 4 to 69 bps. The implied yield on December 2014 eurodollar futures sank 5 bps to 0.365%. The two-year dollar swap spread declined 2 to 13 bps, while the 10-year swap spread increased 2 to 14 bps. Corporate bond spreads were mixed. An index of investment grade bond risk declined one to 72 bps. An index of junk bond risk declined 2 to 351 bps. An index of emerging market (EM) debt risk jumped 17 to a 7-month high 360 bps.

Debt issuance has slowed. Investment-grade issuers included Goldman Sachs $4.0bn, US Bank $2.75bn, Manufacturers and Traders Trust $1.5bn, Bank of New York Mellon $1.25bn, BB&T $1.1bn and Texas Capital Bank $175 million.

Junk bond funds saw flows reverse to outflows of $909 million (from Lipper). Junk issuers included Forest Labs $1.8bn, Harland $815 million, North Atlantic Drilling $600 million, Westmoreland $425 million, Parsley Energy LLC $400 million, Radio One $335 million, SFX Entertainment $200 million and Elizabeth Arden $100 million.

Convertible debt issuers included Fluidigm $175 million.

International dollar debt issuers included Orange $1.6bn, Santander Brazil $1.25bn, Puma International $750 million, Empresa de Transporte $500 million, Ardagh Packaging $830 million, Comcel Trust $800 million and Minsur $450 million.

Ten-year Portuguese yields dropped 27 bps to 5.00% (down 113bps y-t-d). Italian 10-yr yields were down 15 bps to 3.77% (down 36bps). Spain's 10-year yields fell 14 bps to 3.66% (down 49bps). German bund yields were unchanged at 1.66% (down 27bps). Curiously, French yields fell 15 bps to 2.23% (down 15bps). The French to German 10-year bond spread narrowed 15 bps to 57 bps. Greek 10-year note yields jumped another 16 bps to a six-week high 8.61% (up 19bps). U.K. 10-year gilt yields fell 6 bps to 2.71% (down 31bps).

Japan's Nikkei equities index sank 3.1% (down 8.5% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 0.61% (down 13bps). The German DAX equities index declined 0.9% (down 2.6% y-t-d). Spain's IBEX 35 equities index recovered 0.5% (unchanged). Italy's FTSE MIB index rallied 0.3% (up 2.4%). Emerging equities markets were mostly lower. Brazil's Bovespa index slipped 0.3% (down 7.5%), and Mexico's Bolsa declined 0.2% (down 4.3%). South Korea's Kospi index was unchanged (down 3.5%). India's Sensex equities index sank 2.9% (down 3.1%). China's Shanghai Exchange declined 1.0% (down 3.9%). Turkey's Borsa Istanbul National 100 index sank 4.0% (down 8.8%)

Freddie Mac 30-year fixed mortgage rates declined 7 bps to 4.32% (up 79bps y-o-y). Fifteen-year fixed rates declined 4 bps to 3.40% (up 59bps). One-year ARM rates were up a basis point to 2.55% (down 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 9 bps to 4.59% (up 47bps).

Federal Reserve Credit jumped $13.49bn last week to a record $4.059 TN. Over the past year, Fed Credit expanded $1.070 TN, or 35.8%.

M2 (narrow) "money" supply jumped $29.3bn to a record $11.017 TN. It took M2 about 18 months to inflate from $10 TN to $11 TN. "Narrow money" expanded 5.9% ($614bn) over the past year. For the week, Currency increased $0.8bn. Total Checkable Deposits jumped $17.1bn, and Savings Deposits rose $18.5bn. Small Time Deposits declined $2.2bn. Retail Money Funds fell $4.2bn.

Money market fund assets slipped $1.8bn to $2.706 TN. Money Fund assets were up $10.8bn, or 0.4%, from a year ago.

Total Commercial Paper declined $4.5bn to $1.014 TN. CP was down $31.7bn year-to-date and declined $111bn over the past year, or 9.9%.

Currency Watch:

The U.S. dollar index gained 1.1% to 81.31 (up 1.6% y-t-d). For the week on the upside, the Australian dollar increased 0.8%, the Mexican peso 0.8%, the Japanese yen 0.3%, the Singapore dollar 0.1%. For the week on the downside, the Norwegian krone declined 2.2%, the Swedish krona 1.7%, the New Zealand dollar 1.6%, the euro 1.4%, the Danish krone 1.4%, the Swiss franc 1.3%, the Brazilian real 0.6%, the Canadian dollar 0.4%, the South African rand 0.3%, the British pound 0.3%, and the South Korean won 0.1%.

Commodities Watch:

The CRB index increased 0.3% this week (up 1.1% y-t-d). The Goldman Sachs Commodities Index slipped 0.4% (down 1.6%). Spot Gold fell 2.0% to $1,245 (up 3.2%). March Silver dropped 3.3% to $19.12 (down 1.3%). March Crude gained 85 cents to $97.49 (down 0.9%). March Gasoline dropped 1.5% (down 5.5%), and March Natural Gas gave back 1.1% (up 17%). March Copper fell 2.3% (down 6%). March Wheat declined 1.7% (down 8%). March Corn gained 1.0% (up 3%).

U.S. Fixed Income Bubble Watch:

January 29 - Bloomberg (Michelle Kaske): "Puerto Rico debt is rallying the most in two years, even under the threat of a cut to junk, as the commonwealth prepares to sell bonds for the first time since August. The debt has returned 3.1% in January... The gain follows a 4.9% tumble in December as yields soared to record highs, luring hedge funds and distressed-debt buyers... Even after lawmakers trimmed pension benefits, raised taxes and shrank budget gaps, the territory of 3.6 million risks losing its investment-grade ranking, potentially curbing the pool of buyers for its debt. About 70% of U.S. mutual funds that focus on city and state bonds own Puerto Rico securities, which are tax-exempt nationwide..."

January 30 - Bloomberg (Michelle Kaske): "Puerto Rico's general-obligation bonds are poised to be cut to junk within the next month, according to UBS AG. 'Given the myriad obstacles facing Puerto Rico, we believe that at least one rating agency will take such an action within the next 30 days,' analysts Thomas McLoughlin and Kristin Stephens at UBS Wealth Management... wrote... Puerto Rico, rated one step above speculative grade with a negative outlook by Moody's..., Standard & Poor's and Fitch Ratings, has been struggling to expand its economy since 2006"

January 29 - Bloomberg (Mary Childs Yui): "Assured Guaranty Ltd. and MBIA Inc.'s municipal insurance unit are sufficiently capitalized for losses on municipal debt if Puerto Rico is downgraded, according to Standard & Poor's. Assured has a capital cushion of $450 million to $500 million against exposure to Puerto Rico of $5.4 billion and MBIA's National Public Finance Guarantee Corp. has $350 million to $400 million with exposure of $5 billion..."

January 31 - Bloomberg (John Gittelsohn and Heather Perlberg): "Mark Takano saw how subprime mortgages devastated his hometown of Riverside, California, after Wall Street helped inflate a housing bubble that burst and left a trail of foreclosures among the worst in the U.S. Now a first-term Democratic Congressman representing a district east of Los Angeles, Takano said he worries about a repeat as banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. prepare to create securities based on the latest real estate boom: Rental homes. 'We should learn from history,' Takano, 53, said... 'We see a similar kind of instrument now being pioneered.' While Takano will find it difficult to gain traction in the Republican-controlled House of Representatives, other policy makers, regulators and investors are increasingly scrutinizing private-equity purchases of homes across the U.S. and the potential impact on neighborhoods and homeownership..."

Federal Reserve Watch:

January 30 - Dow Jones (Ben Leubsdorf): "Ben Bernanke got a unanimous vote Wednesday at the last meeting on his watch of the Federal Reserve's policy committee, but the U.S. public is a lot more split as he leaves office after eight years as chairman. About 40% approve of the way Mr. Bernanke has handled his job as chairman, versus 35% who disapprove and 25% who have no opinion, according to a Gallup poll... Alan Greenspan, was more popular when he stepped down in 2006: 65% approved of his work, 21% disapproved and 14% didn't have an opinion."

January 31 - Dallas News (Sheryl Jean): "Richard Fisher, president of the Federal Reserve Bank of Dallas, today said he'd like to see the central bank's bond buying fall to zero 'as soon as practicable,' which could be by the end of the year if economic conditions allow. As a new voting member of the Fed's policy setting committee, earlier this week he voted to reduce the central bank's monthly bond buying by $10 billion to $65 billion. However, the hawkish and outspoken Fisher argued last spring to start reducing the stimulus, saying it had lost its effectiveness... 'I was pleased that all members of the committee saw things closer to how I have seen things,' Fisher said. 'The economy has been better from my perspective.'"

January 31 - Bloomberg (Joshua Zumbrun): "Federal Reserve Bank of San Francisco President John Williams said the turmoil in emerging markets hasn't altered his forecast that the U.S. economy will improve this year. 'We shouldn't focus too much on the short-term developments in markets,' Williams...said... 'Monetary policy really does need to have a medium-term focus' on the outlook for employment and inflation, he said."

U.S. Bubble Economy Watch:

January 31 - Bloomberg (David de Jong): "Facebook Inc.'s three billionaire co-founders added $4.5 billion to their collective net worth yesterday after the world's largest social-networking company closed at a record. Mark Zuckerberg... gained $3.2 billion, elevating his fortune to $27.4 billion... He added $12.4 billion to his net worth in 2013."

January 28 - Bloomberg (Ari Levy and Dan Levy): "The epicenter of the income inequality debate has shifted 2,600 miles west, from Wall Street to Market Street. Whether it's protesters targeting Twitter Inc.'s new San Francisco headquarters and Google Inc.'s buses or the criticism against these agitators by former venture capitalist Tom Perkins, the Bay Area's technology industry is attracting the kind of attention often reserved for New York's moneyed elite. Concern about the growing gap between the wealthiest and poorest Americans is erupting across San Francisco, where an influx of newly minted dot-com millionaires is boosting rents and property prices, putting affordable housing that much further out of reach. Rage over inequality has spilled into the streets, where demonstrators have blocked buses transporting Google employees, breaking the window in one in Oakland. 'All booms have their winners and losers,' said John Elberling, executive vice president of Todco, a San Francisco- based builder of affordable housing. 'Even if you have a good job, it's very likely you can't afford to buy a place in the city.'"

January 28 - Bloomberg (Jeanna Smialek): "Home prices in 20 U.S. cities rose in November from a year ago by the most in almost eight years, providing a boost to household wealth. The S&P/Case-Shiller index of property prices in 20 cities climbed 13.7% from November 2012, the biggest 12-month gain since February 2006, after a 13.6% increase in the year ended in October..."

January 30 - MarketNews International (Isobel Kennedy): "Here are some statistics that may not sit well with people that went through the financial crisis in 2008: RealtyTrac's 2013 Home Flipping Report shows 156,862 single family home flips - where a home is purchased and subsequently sold again within six months in 2013, up 16% from 2012 and up 114% from 2011. Homes flipped in 2013 accounted for 4.6% of all U.S. single family home sales during the year, up from 4.2% in 2012 and up from 2.6% in 2011. Flips accounted for 3.8% of all sales in Q4."

Global Bubble Watch:

January 31 - Bloomberg (Sarika Gangar): "The rout in emerging markets is sending a chill over corporate bond sales worldwide as issuance slows and investors demand the highest extra yield to buy new debt in two months. Goldman Sachs Group Inc. to Forest Laboratories Inc. led $355.3 billion of offerings this month, down 20% from January 2013... Market turmoil from China to Turkey is bleeding into corporate bonds as investors pull back from riskier assets and seek havens in government securities. Average relative yields on the notes worldwide jumped last week by the most in seven months, while a gauge of stress in debt markets reached the highest since September."

January 29 - Bloomberg (Nichola Saminather and Iain McDonald): "Tina Ford, an Australian public servant, said she could hardly believe it when her three-bedroom apartment sold this month for A$1 million ($877,000) at an auction in which all 16 registered bidders were ethnic Chinese. 'I'm over the moon, I'm gobsmacked,' said Ford, 53, adding that she 'would have been ecstatic with A$940,000' and didn't expect to double what she had paid 14 years ago for her third-floor unit with a balcony 11 kilometers (7 miles) from downtown Sydney... Such buying by locally resident Chinese and those from mainland China is inflating housing bubbles in and around Sydney, where prices in some suburbs have surged as much as 27% in the past year. That's almost three times faster than the overall market."

January 31 - Bloomberg (Olga Tanas): "Russia's economy grew at less than half the previous year's pace in 2013, falling short of economist forecasts as investment fell... Gross domestic product advanced 1.3%, the least since a 2009 recession, compared with 3.4% in 2012... Russia's $2 trillion economy decelerated for a fourth year as investment sagged and demand weakened for oil and natural gas, which make up about 70% of the country's exports."

January 31 - Bloomberg (Ott Ummelas and Milda Seputyte): "The central bank of Estonia, where Swedish banks dominate the lending market, urged consumers to steer clear of Bitcoin, warning that the software and others like it could prove to be little more than a 'Ponzi scheme.' Bitcoin 'is a problematic scheme,' Mihkel Nommela, head of the Estonian central bank's payment and settlement systems department, said... 'All risks are assumed by the user, who has no one to turn to for help.' Regulators and banks are escalating warnings against Bitcoin, and other digital currencies, amid concern such software lends itself to financial crime."

EM Bubble Watch:

January 31 - Wall Street Journal (Ken Parks): "Argentina's central bank has lost $1 billion of its dwindling foreign currency reserves since it devalued the peso last week, even as the currency came under renewed pressure on Thursday. That could spell trouble for President Cristina Kirchner's latest attempt to head off a recession as inflation undermines confidence in the economy. The central bank, which tightly managed the peso, has defended the currency at around 8.00 per dollar after letting it slide 15% last week, but is burning through dollars doing so... Reserves are down almost $2.1 billion so far this year, after dropping by $4.1 billion in the fourth quarter of last year. 'Reserves are like the central bank's muscles,' said Luciano Cohan, chief economist at consultancy Elypsis. 'The rate of reserve loss has been very intense in recent days and that raises questions about whether [the bank] can maintain this new exchange rate.' ...Reserves, after peaking at $52.6 billion in January 2011, now stand at $28.5 billion. The Kirchner administration has borrowed more than $29 billion since 2010 from the central bank to pay its creditors, while government fuel imports and falling gold prices have also dented reserves."

January 28 - Reuters (Sujata Rao, Daniel Bases and Vidya Ranganathan): "Emerging markets may be unrecognizable from the small and fragile economies that fell like dominoes 15 years ago, but they are just as vulnerable today to the same sort of indiscriminate selling when investor panic sets in. As even the relatively robust economies of Mexico and Poland now feel the heat from disparate flashpoints from Turkey to Argentina, there are growing doubts that emerging markets have built any immunity to such contagion. The wildfire engulfing the developing world is starting to look very like the currency runs of the past, such as the Asian, Russian and Latin American collapses that began in 1997... Emerging markets have attracted about $7 trillion since 2005 through a mix of direct investment in manufacturing and services, mergers and acquisitions, and investment in stocks and bonds, the Institute for International Finance estimates. JPMorgan estimates outstanding emerging market bonds at $10 trillion compared with just $422 billion in 1993. Assets of funds benchmarked to emerging debt indices stand at $603 billion, more than double 2007 levels, it said, and over $1.3 trillion now follows MSCI's main emerging equity index. Mutual fund data from Lipper... shows that in the past 10 years net inflows into debt and equity markets was in the region of $412 billion."

January 30 - Bloomberg (Lu Wang and Ye Xie): "Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record... More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created..."

January 30 - Bloomberg (Maria Levitov and Harry Suhartono): "Emerging-market stocks fell, extending the worst start to a year since 2008, after the U.S. Federal Reserve reduced stimulus and a report showed Chinese manufacturing shrank for the first time in six months. The MSCI Emerging Markets Index... has dropped 6.9% in January, the biggest monthly decline since May 2012."

January 27 - Bloomberg (Ye Xie, Anchalee Worrachate and John Detrixhe): "It's less than a month into 2014 and already currency strategists are seeing their top trade recommendations for the year upended by the rout in emerging markets. Buying Mexico's peso versus the yen has lost about 1% since Bank of America Corp. named the trade one of its top picks in November... Of 31 major emerging-market currencies, 13 have already weakened beyond their median year-end forecasts in Bloomberg analyst surveys. 'Traders either made their year or lost their jobs in the last week,' Douglas Borthwick, the head of foreign exchange at Chapdelaine & Co. in New York, said..."

January 28 - Bloomberg (Ian Katz, Katia Porzecanski, Andrea Wong and Ye Xie): "When Argentina decided last week to ease limits on dollar purchases, it became the latest emerging-market nation to acknowledge that capital controls usually fail in masking an economy's flaws. Argentina allowed the peso to plunge 15% after the central bank began scaling back interventions in the foreign- exchange market on Jan. 22, spurring price increases of as much as 30% on consumer goods as international reserves fell to a seven-year low... 'Capital controls signal that a country is very worried about preserving its foreign exchange,' Steve Hanke, a professor of applied economics at... Johns Hopkins University and an adviser to the Argentine government in the 1990s, said... 'That means bad things are in the wind.' The restrictions spawn illegal traffic in the local currency that creates 'lying prices' in the economy, he said."

January 29 - Bloomberg (Andras Gergely and Krystof Chamonikolas): "A relief rally in Ukrainian bonds after Russian President Vladimir Putin affirmed his $15 billion bailout plan gave way to renewed declines as the resignation of the nation's prime minister failed to quell street protests. Yields on Ukrainian dollar bonds jumped today after rates on the June and April 2023 securities posted the biggest drops yesterday since Dec. 17, when Ukraine won the bailout pledge. The nation's dollar bonds had lost more than 6% in the 10 days through Jan. 27 as violence rocked Kiev and other cities... 'The biggest worry is that still no one is in control,' Dmitri Barinov, who oversees $2.5 billion of debt as a money manager at Union Investment Privatfonds in Frankfurt, said... 'The president doesn't rule the country anymore but neither does the opposition.'"

January 29 - Bloomberg (Blake Schmidt and Carla Simoes): "Brazil may sell bonds denominated in euros for the first time in eight years and yen for the first time in 12 years. 'We can work in euros or even other currencies, and I've talked about the possibility of the yen, Treasury Secretary Arno Augustin told..."

Turkey Watch:

January 29 - Bloomberg (Onur Ant and Selcan Hacaoglu): "Turkey's prime minister said he'll give the central bank's emergency interest-rate increase time to succeed in halting a market slump, before trying alternative measures that he said are ready to be deployed. Recep Tayyip Erdogan said his government will be 'patient' as it waits to see the impact of last night's decision to raise all Turkey's main rates... Erdogan said the government won't be able to maintain faith in the central bank's policy shift unless it leads to a revival in the lira and the country's stock market, and interest rates come back down. He said rates 'aren't the only instrument' and the government may announce alternative measures within a few weeks, without identifying them. Turkey's central bank raised the benchmark rate to 10% at midnight, seeking to halt a run on the lira that drove it to record lows amid a local corruption scandal and a global retreat from emerging markets."

China Bubble Watch:

January 30 - Bloomberg: "A Chinese manufacturing gauge signaled the first contraction in six months in January as companies cut jobs and credit-market stresses damped confidence in the world's second-biggest economy. A Purchasing Managers' Index fell to 49.5 from 50.5 in December, HSBC Holdings Plc and Markit Economics said... Credit Suisse Group AG this week cut its first-quarter growth forecast for China, citing anecdotal evidence of 'surprisingly slow' retail sales ahead of the week-long Lunar New Year holiday, which starts tomorrow. 'China's growth momentum will continue to weaken in coming quarters,' Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said... 'The market continues to underestimate the degree of the ongoing slowdown and further negative surprises are in stock as the year progresses.'"

January 28 - Bloomberg (Blake Schmidt and Carla Simoes): "China's eleventh-hour rescue of wealthy investors in a high-yield trust threatens to drive more money into the nation's $6 trillion shadow-banking industry, undermining regulators' efforts to deter excessive risk-taking. Industrial & Commercial Bank of China Ltd., the nation's largest lender, yesterday told customers who had invested in the 3 billion-yuan ($496 million) trust product that they can sell their rights to unidentified buyers to recoup the principal... Averting the nation's biggest trust default may reinforce investors' belief in implicit guarantees and the government's backing of such risky products, stoking their appetite for products in the $1.67 trillion trust market. The bailout underscores the pressure on authorities to maintain financial and social stability even as they aim to prune the government's role in the world's second-largest economy and curtail debt."

January 30 - Financial Times (Josh Noble): "Global rating agencies - often among the more sanguine voices on China - have warned that this week's bailout of a soured $500m trust loan was a wasted chance to address rising moral hazard in the country's shadow banking sector. The words of caution follow a last-minute deal to avert the default of a Rmb3bn trust product backed by loans to a now-defunct coal mining company. The product's issuer, China Credit Trust, on Monday said it had raised the cash needed to pay back investors from three unnamed backers... The shadow banking system has risen to account for roughly a third of new credit in China's debt-fuelled economy. About $660bn of trust loans are due for repayment or refinancing this year, according to estimates from Bank of America Merrill Lynch, raising the prospect that investor jitters over the sector could feed into the real economy."

January 29 - Bloomberg (Rachel Evans): "China may experience more distressed trusts this year as economic growth slows, after investors in a 3-billion-yuan ($495 million) product that faced default were bailed out, according to Standard & Poor's. 'We believe more trust products could come under distress this year as the economy slows,' credit analyst Liao Qiang wrote... 'The underlying risks to the assets of wealth management products and trust loans have yet to be alleviated.' ...A total of 3.5 trillion yuan of trust products will mature this year, Zhang Zhiwei, chief China economist at Nomura Holdings Inc., estimated... The bailout of the product sold by China Credit Trust is a 'temporary reprieve' that could prove counterproductive in the long run, according to S&P's report. 'The losses the investors incurred are too insignificant to instill market discipline,' the report said. 'Rather, it could encourage moral hazard and undermine the central government's efforts to rein in the growth of these types of investments.'"

January 27 - Bloomberg (David Yong): "Credit traders took out the most protection on China's debt in 14 months just as the world's second-biggest economy faces default tests in its $1.7 trillion market for trust products. The net notional amount of credit-default swaps outstanding on Chinese sovereign bonds totaled $9.125 billion on Jan. 17, the most since November 2012... December's 12% jump to $9.066 billion was the biggest monthly gain since October 2011, the figures indicate. The cost of the contracts surged 25 basis points since Dec. 31, poised for the largest monthly increase since a record cash crunch in June."

January 27 - Bloomberg: "Chinese property developers are leading a decline in dollar-denominated bonds sold by the nation's issuers this year as Asian credit risk climbs to the highest in almost four months. Notes sold by Yuzhou Properties Co., a builder based in the coastal city of Xiamen, fell almost 5 cents below its issue price, leading losses by 78% of fixed-rate bonds sold by Chinese and Hong Kong borrowers since Dec. 31..."

January 28 - Bloomberg (Blake Schmidt and Carla Simoes): "Shanghai sold a residential plot of land at a record price amid rising competition among developers for sites in cities with fast price gains as some local governments tighten property curbs. The 96,429-square-meter (1 million-square-foot) site, north of the city, was sold for 1O.1 billion yuan ($1.7 billion) to Franshion Properties China Ltd... 'Developers are optimistic about China's property market because land in core locations of major cities, such as Shanghai, is limited,' said Li Ying, a Shanghai-based land analyst at CRIC, in... 'Demand and the purchasing power of buyers in Shanghai are still strong.'"

January 29 - Bloomberg (Lulu Yilun Chen): "Alibaba Group Holding Ltd., China's online marketplace for products from Louis Vuitton bags to Boston lobsters, swung to a quarterly profit ahead of a potential initial public offering... Alibaba is competing with Tencent Holdings Ltd. and Baidu Inc. for China's 618 million Internet shoppers by making deals in its home market and the U.S. to extend its e-commerce reach to mobile games and messaging. The... company has been valued at as much as $190 billion as it considers moving toward the biggest IPO since Facebook Inc."

January 29 - Bloomberg: "China's biggest money-market fund has cut its holdings of corporate debt by more than 50% and sought safety in deposits as rising borrowing costs increase the threat of default. 'We won't touch high-risk bonds that can have credit risks,' said Wang Dengfeng, Beijing-based manager at Tianhong Asset Management Co., which oversees the Yu'E Bao fund sold online by Internet billionaire Jack Ma. 'Liquidity will remain relatively tight this year, as deleveraging continues to be the central bank's focus. Authorities' regulation of the interbank business and shadow banking may result in a period of pain.' Yu'E Bao, whose 250 billion yuan ($41 billion) of assets make it the world's 14th-largest money-market fund, cut corporate bills to 1.27% of holdings as of Dec. 31 from 3.18% on Sept. 30, according to its quarterly report. Bank deposits rose to 92% from 85%, and Wang said rates for such one-month interbank funds exceeded 6% this month... Investors have been favoring safer bonds this year. The yield on the 10-year government bond has fallen seven basis points to 4.48%, while the yield on similar-maturity AA corporate debt climbed nine basis points to 7.73%. That widened the spread to 325 bps on Jan. 27, the most in almost two years... 'As China has just started interest-rate liberalization, the money market will continue to be attractive this year, with rates expected to remain at elevated levels,' said Tianhong Asset's Wang. His fund, sold online by Alibaba Group Holding Ltd. affiliate Alipay.com, is open only to individual investors. Assets grew 35% in the first 15 days of this month, while the number of clients rose 14% to 49 million as of Jan. 15..."

January 17 - Bloomberg: "Yu'E Bao, an investment product offered through Alibaba Group Holding Ltd.'s third-party payment affiliate Alipay.com Co., is a threat to Chinese banks at a time they are already facing pressure from interest-rate liberalization, Gao Xu, chief economist at Everbright Securities, says... Yu'E Bao has attracted lots of funds because it hasn't had to face regulatory scrutiny and it's growth is 'negative' for lenders, Zhu Ning, researcher at the Shanghai Advanced Institute of Finance, says..."

January 28 - Financial Times (Simon Rabinovitch ): "The 'invisible man' who held one of the world's most important investment jobs for the past four years in leading the diversification of China's foreign currency wealth has resigned. Zhu Changhong had been the chief investment officer for the State Administration of Foreign Exchange, the agency that manages China's $3.8tn mountain of foreign exchange reserves. He left a starring role at Pimco... to join SAFE in late 2009 and is now expected to return to the private sector, according to two people familiar with his decision."

Japan Watch:

January 27 - Bloomberg (Chikako Mogi and Keiko Ujikane): "Japan, whose swelling trade surpluses stoked American ire in the 1980s and kept it from deeper stagnation during two decades of deflationary malaise, had a record deficit in 2013 thanks to a surging energy bill. Three decades of surpluses came to a halt in 2011, when the Fukushima meltdowns shuttered nuclear-power plants. With a 16% increase in crude oil shipments, Japan had a trade gap of 11.5 trillion yen ($113bn) in 2013, almost double the previous year... 'It's hard to anticipate when Japan can emerge from trade deficits at this point,' said Takeshi Minami, chief economist at Norinchukin Research Institute. 'If a trade deficit as a result of high energy import costs makes Japan look like a high-cost country, it may discourage moves by companies to have production centers in Japan and undermine Abenomics.'"

January 31 - Bloomberg (Finbarr Flynn and Monami Yui): "Moody's... says Japan's biggest banks need to cut bond holdings and boost loans to protect their balance sheets from potential losses should Prime Minister Shinzo Abe's stimulus spur yield surges. Lenders' stockpiles of sovereign debt were at 138.9 trillion yen ($1.36 trillion) in November, after peaking at a record 171 trillion yen in March 2012... Unprecedented buying of JGBs by the BOJ is allowing lenders such as Sumitomo Mitsui Financial Group Inc. to decrease holdings of the securities, while the world's lowest interest rates constrain profits in lending."

India Watch:

January 31 - Bloomberg (Anurag Joshi): "India's rupee bond market is the quietest since the global financial crisis as a selloff in emerging markets and inflation near 10% sap demand. Corporate issuance dropped 63% so far this year to 53 billion rupees ($849 million), the least since the same period in 2007... While consumer-price inflation cooled to 9.87% last month from 11.16% in November, it was still the highest among 18 Asia-Pacific economies tracked by Bloomberg. That prompted the Reserve Bank of India to raise its repurchase rate a quarter- point to 8% on Jan. 28."

Latin America Watch:

January 27 - Bloomberg (Pablo Gonzalez and Daniel Cancel): "A sign in the window of Quintex, a hardware store in the Wilde neighborhood of Buenos Aires, shows the effect of the peso's biggest devaluation since 2002. 'Out of respect for our clients, this store will remain closed until our providers set their prices,' it reads. Other shopkeepers chose not to wait to see the results of last week's 15% depreciation, raising prices as much as 30% on appliances, electronics, wine and other goods that aren't regulated by the government, while supermarkets seemed to abide by food-price accords reached earlier this month."

January 30 - Bloomberg (Katia Porzecanski and Camila Russo): "Argentina's decision to ratchet up interest rates to 24% is failing to convince Bank of America Corp. and Moody's Analytics Inc. the nation can stem demand for dollars in the wake of the peso's devaluation. Argentina needs to offer 37.5% to attract enough investors to halt peso losses, according to the average of five forecasters surveyed by Bloomberg News... Bank of America says a rate of 40% is needed to effectively compensate for consumer prices rising an estimated 28% annually."

January 30 - Bloomberg (Nathan Gill): "The rout in emerging-market currencies that's roiled financial markets around the world is now jeopardizing Ecuador President Rafael Correa's plan to sell bonds overseas for the first time in eight years. Ecuador's borrowing costs have soared 1.03 percentage points from a record low of 5.31% in October... Correa, who defaulted on $3.2 billion of bonds in 2008 and 2009, is seeking to drum up interest from debt buyers as falling crude oil prices undermine the OPEC nation's ability to finance a budget deficit forecast to swell to a record $4.94 billion."

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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