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Credit is Gold #1 and Icebergs

January 24, 2014

The evolving EM crisis took a turn for the worse.
  

Backdrops conductive to crises can drag on for so long – sometimes seemingly forever - as if they’re moving in ultra-slow motion. Invariably, they lull most to sleep. Better yet, such environments even work to embolden the optimists. This is especially the case when policy measures are aggressively employed along the way, repeatedly holding the forces of crisis at bay. In the face of mounting risk, heightened risk-taking and leveraging often work only to exacerbate underlying fragilities. But eventually a critical juncture arrives where newfound momentum has things unwinding at a more frenetic pace. It is the nature of such things that most everyone gets caught totally unprepared.

EM currencies came under intense selling pressure this week. Most dramatically, the Argentine peso sank 15.1%. The Turkish lira fell 4.4%, the Brazilian real 2.3%, the Russian ruble 2.9%, the South African rand 2.0%, the Chilean peso 2.0%, the Colombian peso 1.5%, the South Korean won 1.9%, the Indian rupee 1.8%, and the Mexican peso 1.6%.

Notable market yield increases included the 59 bps surge in Turkish 10-year (lira) yields to 10.58%; the 113 bps increase in Venezuela 10-year (dollar) yields to 16.26%; the 122 bps jump in Ukraine 10-year (dollar) yields to 9.54%; the 19 bps increase in Russian 10-year (ruble) yields to 8.13%; the 19 bps jump in Mexico 10-year (peso) yields to 6.58%; the 25 bps increase in Brazil’s 10-year (real) yields to 13.14%; the 30 bps jump in Hungary’s 10-year (forint) yields to 5.71%; and the 30 bps jump in Indonesian (rupiah) yields to 8.78%.

The apt Bloomberg currency market headline read: “Contagion Spreads in Emerging Markets as Crises Grow.” Note plural “crises” as opposed to a singular EM crisis. This is a pertinent issue. A popular CNBC contributor posited Friday that EM-related market stress was not as troubling because it was related to individual country issues as opposed to what would be more challenging “macro” forces. I would counter that the unfolding global crisis will be particularly problematic because of what has been a dangerous interplay between global “macro” and individual country “micro” Bubble dynamics.

Virtually the entire EM “complex” has been enveloped in protracted destabilizing financial and economic Bubbles. In particular, for five years now unprecedented “developed” world central bank-induced liquidity has spurred unsound economic and financial booms. The massive investment and “hot money” flows are illustrated by the multi-trillion growth of EM central bank international reserve holdings. There have of course been disparate resulting impacts on EM financial and economic systems. But I believe in all cases this tsunami of liquidity and speculation has had deleterious consequences, certainly including fomenting systemic dependencies to foreign-sourced flows. In seemingly all cases, protracted Bubbles have inflated societal expectations.

Thursday saw the Argentine central bank step away from what had been ongoing currency support operations. The Argentine peso quickly devalued 15%, before ending the session down about 12% (biggest fall in 12 years). The central bank’s decision to preserve its dwindling reserve position is reminiscent of South East Asian central bank actions back during the 1997 crisis. The dramatic market response was similarly reminiscent – ominously so.

For a while, central bank willingness to use reserves to support individual currencies bolsters market confidence in a country’s currency, bonds and financial system more generally. But at some point a central bank begins losing the battle to accelerating outflows. A tough decision is made to back away from market intervention to safeguard increasingly precious reserve holdings. Immediately, the marketplace must then contend with a faltering currency, surging yields, unstable financial markets and rapidly waning liquidity generally. Things unravel quickly.

Bloomberg headline: “Turkey’s ‘Embarrassing’ Intervention Fails to Curb Lira Selloff.” Thursday saw Turkey’s central bank aggressively intervene (first time in two years) to support its flagging currency. Estimates had the central bank buying $3.5 to $4.0 billion of lira in the marketplace, in what was called a “shock and awe” approach. The market was neither shocked, awed nor even mildly impressed, as the lira traded down 1.7% to yet another record low. As always, a key risk of aggressive market intervention is that a conspicuous lack of effectiveness will incite “hot money” outflows as well as aggressive bets against policy measures. Global policymakers take note.

After peaking at $115 billion in mid-December, Turkey’s international reserve holdings this week fell to $107 billion. Reminiscent of 1997, there reaches a point when shrinking reserves becomes a signal for a “hot money” rush for the exits. Central banks attempt to keep currency markets orderly, but such efforts risk a rapid drawdown of reserve holdings. A precipitous currency drop then opens cans of worms of difficult to control risks. A Friday Bloomberg headline: “Lira Intervention Seen Futile as Basci Lacks Ammo: Turkey Credit.”

Also Friday from Bloomberg (Taylan Bilgic): “Turkey Companies See Lira Ruin After Basci Miss: ‘The lira’s plunge has left Turkish companies struggling to service their foreign-currency debts as banks refuse to rollover loans, according to Suleyman Onatca, chairman of the Turkish Enterprise and Business Confederation. ‘Companies indebted in foreign currency are ruined,’ Onatca said… ‘This is an approaching disaster for small companies.’”

January 24 - Bloomberg (Anurag Joshi): "Indian companies facing some $300 billion-equivalent of debt maturing in two years are poised to extend the biggest dollar loan spree since 2010 to lock in rates as the Federal Reserve tapers stimulus. ONGC Videsh Ltd. leads companies seeking at least $5 billion in offshore bank debt this quarter after $10.5 billion was raised in the three months to Dec. 31, the most since the first quarter of 2010..."

The issue of EM sovereign and corporate borrowings in dollar (and euro and yen) denominated debt has speedily become a critical “macro” issue. More than five years of unprecedented global dollar liquidity excess spurred a historic boom in dollar-denominated borrowings. The marketplace assumed ongoing dollar devaluation/EM currency appreciation. There became essentially insatiable market demand for higher-yielding EM debt, replete with all the distortions in risk perceptions, market mispricing and associated maladjustment one should expect from years of unlimited cheap finance. As was the case with U.S. subprime, it’s always the riskiest borrowers that most intensively feast at the trough of easy “money.”

So, too many high-risk borrowers – from vulnerable economies and Credit systems - accumulated debt denominated in U.S. and other foreign currencies – for too long. Now, currencies are faltering, “hot money” is exiting, Credit conditions are tightening and economic conditions are rapidly deteriorating. It’s a problematic confluence that will find scores of borrowers challenged to service untenable debt loads, especially for borrowings denominated in appreciating non-domestic currencies. This tightening of finance then becomes a pressing economic issue, further pressuring EM currencies and financial systems – the brutal downside of a protracted globalized Credit and speculative cycle.

In many cases, this was all part of a colossal “global reflation trade.” Today, many EM economies confront the exact opposite: mounting disinflationary forces for things sold into global markets. Falling prices, especially throughout the commodities complex, have pressured domestic currencies. This became a major systemic risk after huge speculative flows arrived in anticipation of buoyant currencies, attractive securities markets, and enticing business opportunities. The commodities boom was to fuel general and sustained economic booms. EM was to finally play catchup to “developed.”

Now, Bubbles are faltering right and left - and fearful “money” is heading for the (closing?) exits. And, as the global pool of speculative finance reverses course, the scale of economic maladjustment and financial system impairment begins to come into clearer focus. It’s time for the marketplace to remove the beer goggles.

No less important is the historic – and ongoing - boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.

This week the markets seemed to begin taking the unfolding Chinese Credit crisis more seriously. There was talk early in the week of concerted efforts to save the troubled $496 million (“Credit Equals Gold No. 1”) trust product from a possible end-of-month default.

From Bloomberg: “Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing said the lender won’t compensate investors for losses tied to a troubled trust product distributed by the bank, CNBC reported… The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC… The… lender won’t take ‘rigid responsibility’ for the losses and will review all its partnerships in entities with which it does business, Jiang said…”

Savers, investors and speculators will indeed learn painful lessons in China Credit – and it’s difficult for me to envisage this learning process going smoothly. “Credit Equals Gold No.1” is the proverbial tip of the Iceberg for a Credit system today suffering from a historic gulf between saver perceptions of “moneyness” and the poor and deteriorating quality of much of underlying system Credit. Incredible quantities of finance have flowed freely into risky Credit vehicles with the expectation that the banks and governments (local and central) will not allow losses nor ever tolerate a crisis. This is precisely the recipe for Credit accidents and even disaster.

And while there will certainly be ongoing measures taken by the People's Bank of China and Chinese officials, the bottom line is that Credit conditions have meaningfully tightened for China’s corporate and local government borrowers. The weak reading on manufacturing conditions (HSBC PMI) earlier this week was viewed as confirmation that "Credit transmission" issues have begun impeding growth.

At the same time, data this week provided added confirmation (see “China Bubble Watch”) that China’s spectacular apartment Bubble continues to run out of control. When Chinese officials quickly backed away from Credit tightening measures this past summer, already overheated housing markets turned even hotter. Now officials confront a dangerous situation: Acute fragility in segments of its “shadow” financing of corporate and local government debt festers concurrently with ongoing “terminal phase” excess throughout housing finance. China’s financial and economic systems have grown dependent upon massive ongoing Credit expansion, while the quality of new Credit is suspect at best. It’s that fateful “terminal phase” exponential growth in systemic risk playing out in historic proportions. Global markets have begun to take notice.

There are critical market issues with no clear answers. For one, how much speculative “hot money” has and continues to flood into China to play their elevated yields in a currency that is (at the least) expected to remain pegged to the U.S. dollar? If there is a significant “hot money” issue, any reversal of speculative flows would surely speed up this unfolding Credit crisis. And, of course, any significant tightening of Chinese Credit would reverberate around the globe, especially for already vulnerable EM economies and financial systems.

Yet another crisis market issue became more pressing this week. The Japanese yen gained 2.0% versus the dollar. Yen gains were even more noteworthy against other currencies. The yen rose 4.2% against the Brazilian real, 3.9% versus the Chilean peso, 3.5% against the Mexican peso, 3.9% versus the South African rand, 3.8% against the South Korean won, 3.0% versus the Canadian dollar and 3.0% versus the Australian dollar.

I have surmised that the so-called “yen carry trade” (borrow/short in yen and use proceeds to lever in higher-yielding instruments) could be the largest speculative trade in history. Market trading dynamics this week certainly did not dissuade. When the yen rises, negative market dynamics rather quickly gather momentum. From my perspective, all the major speculative trades come under pressure when the yen strengthens; from EM, to the European “periphery,” to U.S. equities and corporate debt.

It’s worth noting that the beloved European “periphery” trade reversed course this week. The spread between German and both Spain and Italy 10-year sovereign yields widened 19 bps this week. Even the France to Germany spread widened 6 bps this week to an almost 9-month high (72bps). Stocks were slammed for 5.7% and 3.1% in Spain and Italy, wiping out most what had been strong January gains.

Even U.S. equities succumbed to global pressures. Notably, the cyclicals and financials were hit hard. Both have been Wall Street darlings on the bullish premise of a strengthening U.S. (and global) recovery and waning Credit and financial risk. Yet both groups this week seemed to recognize the reality that what is unfolding in China and EM actually matter – and they’re not pro-global growth. With recent extreme bullish sentiment, U.S. equities would appear particularly vulnerable to a global “risk off” market dynamic.

U.S. speculators and investors have become accustomed to hasty comments or policy measures in response to the first sign of market weakness. Chairman Bernanke’s (past June) Comment that the Fed would “push back” against any “tightening of financial conditions” worked wonders on market sentiment and “animal spirits.” But I don’t expect the exiting Bernanke to ride to the markets’ rescue. I also don’t expect Bill Dudley and fellow FOMC doves to upstage the new chair Janet Yellen. And it would as well appear alarming to the marketplace if Yellen felt the need for public statements prior to the official start of her reign. With a Fed meeting scheduled for next week, an “emergency” meeting or other public statement over the weekend would also seem unlikely. This might actually be the beginning of a new environment where Fed officials are reluctant to jump to the markets’ defense at the first sign of nervousness.

Last year was extraordinary on so many levels. Too be sure, a “couple” Trillion of global QE made for some abnormal market dynamics. Typically, trouble at the “periphery” would lead to de-risking, de-leveraging and resulting contagion effects that begin their journey toward the “core.” But in 2013, with unprecedented global liquidity coupled with unprecedented speculation, initial cracks in “periphery” Bubbles spurred a speculative onslaught on “core” equities and corporate debt markets.

I would argue that 2013 dynamics significantly exacerbated global systemic fragilities. Over all, global financial systems and economies became only further dependent upon abundant cheap liquidity. The liquidity backdrop may have held EM crisis dynamics somewhat at bay, but it also prolonged a dangerous expansion of late-cycle debt. Meanwhile, “developed” market speculative Bubbles inflated precariously. “Money” flowed freely into all types of risky securities, instruments and products. Most importantly, inflated securities prices became only further detached from deteriorating fundamental prospects.

Last year’s “May/June Dynamic” provided some indication of transmission mechanisms from EM trouble to our markets and economy. There were liquidity issues related to an abrupt reversal of flows away from various ETF products. In particular, outflows impacted liquidity and risk perceptions in U.S. municipal finance. It is worth noting that Puerto Rico Credit default swap (CDS) prices jumped 21 bps this week to a record 778 bps. Puerto Rican officials were on CNBC Friday stating their intention to tap the markets for financing next month. Good luck with that. They may have missed their timing.

In striking contrast to “The May/June Dynamic,” Treasury yields have recently been declining as opposed to moving higher. Treasuries, bunds and other “developed” sovereign debt are enjoying a safe haven bid, likely bolstered by heightened global disinflationary forces. And while this makes life somewhat easier for those managing so-called “risk parity” strategies, this important change in market behavior surely complicates myriad other strategies. Those short Treasuries or bunds as hedges (or funding sources) for various leveraged “carry trade” strategies suddenly face an unfavorable dynamic.

It’s worth noting that most spreads reversed course and widened meaningfully this week. This comes after what appeared to be the whole world coming to realize the fun and easy profits of selling/writing CDS and other forms of Credit insurance (“writing flood insurance during a drought”). This backdrop would seem ripe for a bout of risk aversion, where abruptly shifting markets force players to pare back some exposure to “alternative” Credit strategies and myriad leveraged trades. This would provide a more traditional mechanism for transmitting market tumult at the “periphery” toward the “core.”

In a year that at this point seems poised to see a significant reduction in Federal Reserve liquidity creation, I would expect a return of a more “risk on, risk off” trading dynamic. This would seem to ensure that increasingly serious problems at the “periphery” have contagion effects that risk engulfing the “core.”


For the Week:

The S&P500 was hit for 2.6% (down 3.14% y-t-d), and the Dow sank 3.5% (down 4.2%). The Utilities were little changed (up 0.1%). The Banks dropped 2.7% (down 1.2%), and the Broker/Dealers fell 2.6% (down 2.1%). The Morgan Stanley Cyclicals were clobbered for 4.0% (down 4.7%), and the Transports declined 2.3% (down 1.9%). The S&P 400 Midcaps fell 2.5% (down 2.1%), and the small cap Russell 2000 declined 2.1% (down 1.7%). The Nasdaq100 declined 1.4% (down 1.4%), and the Morgan Stanley High Tech index fell 2.1% (down 0.5%). The Semiconductors lost 1.7% (down 1.2%). The Biotechs declined 1.6% (up 8.4%). With bullion gaining $16, the HUI gold index advanced 1.1% (up 11.1%).

One and three-month Treasury bill rates ended the week at 5 bps. Two-year government yields were down 4 bps to 0.34% (down 4bps y-t-d). Five-year T-note yields fell 8 bps to 1.54% (down 20bps). Ten-year yields dropped 10 bps to 2.72% (down 31bps). Long bond yields fell 12 bps to 3.63% (down 34bps). Benchmark Fannie MBS yields declined 7 bps to 3.36% (down 25bps). The spread between benchmark MBS and 10-year Treasury yields widened 3 to 64 bps. The implied yield on December 2014 eurodollar futures slipped 1.5 bps to 0.41%. The two-year dollar swap spread increased 1.5 to 15.25 bps, and the 10-year swap spread increased one to 12.25 bps. Corporate bond spreads widened significantly. An index of investment grade bond risk jumped 8 to 73 bps. An index of junk bond risk surged 35 to 353 bps. An index of emerging market (EM) debt risk jumped 26 to 343 bps.

Debt issuance was decent. Investment-grade issuers included Anheuser-Busch Inbev $5.25bn, JPMorgan $4.25bn, Morgan Stanley $2.75bn, PNC Bank $1.75bn, Icahn Enterprises $1.35bn, Suntrust Bank $850 million, General Mills $750 million, Amphenol $750 million, Ares Capital $750 million, Textron $600 million, National Rural Utilities Cooperative Finance Corp $600 million, Kroger $500 million and Southern Cal Edison $300 million.

Junk bond funds saw inflows of $423 million (from Lipper). Junk issuers included Ally Financial $750 million, Jurassic Holdings $525 million, Northern Blizzard Resources $425 million, Intrepid Aviation Group $300 million and Waterjet Holdings $225 million.

Convertible debt issuers included Emergent Biosolutions $250 million and Colony Financial $200 million.

International dollar debt issuers included Caisse d'Amortissement de la Dette Sociale $5.0bn, European Investment Bank $3.5bn, Turkey $2.5bn, Ontario $2.0bn, Colombia $2.0bn, Asian Development Bank $1.5bn, Dexia Credit $1.5bn, Macquarie Group $500 million, Kookmin Bank $500 million, Delta Dutch $450 million, Export Development Canada $300 million and Favor Sea $150 million.

Ten-year Portuguese yields rose 4 bps to 5.28% (down 85bps y-t-d). Italian 10-yr yields were up 9 bps to 3.91% (down 21bps). Spain's 10-year yields gained 9 bps to 3.80% (down 36bps). German bund yields fell 10 bps to 1.66% (down 27bps). French yields declined 4 bps to 2.38% (down 18bps). The French to German 10-year bond spread widened 6 bps to an almost nine-month high 72 bps. Greek 10-year note yields surged 60 bps to 8.45% (up 3bps). U.K. 10-year gilt yields declined 6 bps to 2.77% (down 25bps).

Japan's Nikkei equities index dropped 2.2% (down 5.5% y-t-d). Japanese 10-year "JGB" yields declined 4 bps to 0.63% (down 11bps). The German DAX equities index sank 3.6% (down 1.7% y-t-d). Spain's IBEX 35 equities index was hit for 5.7% (down 0.5%). Italy's FTSE MIB index sank 3.1% (up 2.1%). Emerging equities markets were mostly lower. Brazil's Bovespa index fell 2.8% (down 7.2%), and Mexico's Bolsa dropped 2.2% (down 4.1%). South Korea's Kospi index dipped 0.2% (down 3.5%). India’s Sensex equities index increased 0.3% (down 0.2%). China’s Shanghai Exchange rallied 2.5% (down 2.9%). Turkey's Borsa Istanbul National 100 index dropped 1.8% (down 5.0%)

Freddie Mac 30-year fixed mortgage rates declined 2 bps to 4.39% (up 103bps y-o-y). Fifteen-year fixed rates dipped one basis point to 3.44% (up 73bps). One-year ARM rates were down 2 bps to 2.54% (down 3bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.59% (up 55bps).

Federal Reserve Credit jumped $37.7bn last week to a record $4.045 TN. Over the past year, Fed Credit expanded $1.069 TN, or 35.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $764bn y-o-y, or 7.0%, to $11.693 TN. Over two years, reserves were $1.507 TN higher for 15% growth.

M2 (narrow) "money" supply jumped $26.0bn to a record $10.988 TN. "Narrow money" expanded 5.1% ($529bn) over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits jumped $20.7bn, and Savings Deposits gained $7.8bn. Small Time Deposits slipped $2.2bn. Retail Money Funds were down $2.7bn.

Money market fund assets gained $6.4bn to $2.707 TN. Money Fund assets were up $11.2bn, or 0.4%, from a year ago.

Total Commercial Paper fell $17.1bn to $1.019 TN. CP was down $107bn over the past year, or 9.5%.

Currency Watch:

The U.S. dollar index declined 0.9% to 80.458 (up 0.5% y-t-d). For the week on the upside, the Japanese yen increased 2.0%, the Swiss franc 1.7%, the Danish krone 1.0%, the euro 1.0%, the Swedish krona 0.5%, the British pound 0.4%, the Norwegian krone 0.2%. For the week on the downside, the Brazilian real declined 2.3%, the South African rand 2.0%, the South Korean won 1.9%, the Mexican peso 1.6%, the Australian dollar 1.1%, the Canadian dollar 1.1%, the New Zealand dollar 0.5%, the Taiwanese dollar 0.5%, and the Singapore dollar 0.2%.

Commodities Watch:

The CRB index rallied 1.5% this week (up 0.8% y-t-d). The Goldman Sachs Commodities Index recovered 1.5% (down 1.2%). Spot Gold gained 1.3% to $1,270 (up 5.3%). March Silver fell 2.7% to $19.77 (up 2.0%). March Crude jumped $2.05 to $96.64 (down 1.8%). February Gasoline gained 1.6% (down 4.4%), and February Natural Gas surged 19.8% (up 22.5%). March Copper dropped 2.2% (down 3.7%). March Wheat increased 0.3% (down 6.6%). March Corn gained 1.3% (up 1.8%).

U.S. Fixed Income Bubble Watch:

January 23 – Bloomberg (Sridhar Natarajan): “More speculative-grade U.S. loans are trading above par than at any time since May, exposing investors who are funneling record amounts of cash into the debt to greater risks as rising prices encourage borrowers to refinance at lower interest rates. Spanish-language broadcaster Univision Communications Inc. and KKR & Co.-controlled First Data Corp. are among at least 30 companies seeking to reduce rates on $31 billion of bank debt as more than 80% of leveraged-loan prices exceed 100 cents on the dollar… That’s up from 40% at the beginning of October… ‘Loans are trading well above their call prices because the investor community is reaching out for existing loans,’ Jonathan Kitei, head of U.S. loan distribution at Barclays…said… Investors last year deposited about $63 billion into loan funds that invest in debt with rates that rise with benchmarks and have limited restrictions on early repayment.”

January 23 – Bloomberg (Lisa Abramowicz): “Bond investors are losing their aversion to difficult-to-trade corporate debt that handed them some of the biggest losses in the credit crisis. The extra yield note buyers demand to own older, smaller junk bonds that trade infrequently has shrunk to an average 0.25 percentage point this month from more than 1 percentage point a year ago, according to Barclays… The evaporating premium for illiquid assets is showing the depths to which money managers are reaching to boost returns after a five-year rally that pushed relative yields on junk bonds to the least since August 2007.”

January 23 – Bloomberg (Brian Chappatta): “The smallest wave of municipal note sales in seven years is poised to extend into 2014, signaling the brightest fiscal outlook for U.S. local governments since before the recession. From the nation’s capital to California, states and cities are using less short-term debt to bridge cash shortfalls more than four years after the longest recession since the 1930s. Last year, municipalities issued about $46 billion of fixed-rate debt maturing in 18 months or less, the least since 2006…”

U.S. Bubble Economy Watch:

January 24 – Bloomberg (Michael J. Moore and Hugh Son): “JPMorgan… gave Chief Executive Officer Jamie Dimon a 74% raise to $20 million last year, bringing his pay closer to where it stood before he was penalized for faulty oversight of botched derivatives bets. The board’s compensation package for Dimon… included $18.5 million in restricted stock… Board members decided to keep Dimon’s pay below previous peak levels after criminal and regulatory probes cost JPMorgan more than $23 billion in settlements during 2013.”

Global Bubble Watch:

January 20 – Bloomberg (Christina Larson): “The poorest half of the world’s population—that’s 3.5 billion people—control as much wealth as the richest 85 individuals. On the eve of World Economic Forum, when the global elite gather in Davos, Switzerland, to forecast international trends, Oxfam has released a new report, ‘Working for the Few,’ documenting yawning global wealth disparities. Other findings: The world’s richest 1% control nearly 50% of global wealth. In 24 out of 26 countries studied, the richest 1% has increased their share of national wealth since 1980. Only three in 10 people live in countries where economic inequality has not increased over the past three decades. In the U.S., 95% of post-financial crash wealth generated (i.e., since 2009) went into the bank accounts of the richest 1%. Nine in 10 people in the United States control less wealth in real terms than they did before the financial crash.”

January 20 – Bloomberg (Chris Larson): “Hedge-fund assets increased by 17% last year, reaching a record $2.63 trillion, according to Hedge Fund Research Inc. Global assets rose by $376 billion, including $63.7 billion in net inflows from investors and $312 billion in investment gains, the Chicago-based data provider said…”

January 21 – Bloomberg (Simon Kennedy): “International investors are the most upbeat about the global economy than at any time in almost five years, buoyed by the U.S.-led revival of industrial nations, according to the Bloomberg Global Poll. On the eve of the World Economic Forum’s annual meeting in Davos, Switzerland, 59% of Bloomberg subscribers surveyed last week said the economic outlook is improving. That’s up from 33% in November and marks the most optimistic result since the poll began in July 2009.”

January 21 – Financial Times (Anousha Sakoui): “The pile of unspent corporate cash that has built up since the start of the financial crisis is being held by an increasingly concentrated pool of companies that will be crucial to hopes of a pick-up in business investment to stimulate the world economy. About a third of the world’s biggest non-financial companies are sitting on most of a $2.8tn gross cash pile, according to… advisory firm Deloitte, with the polarisation between hoarders and spenders widening since the financial crisis.”

January 23 – Bloomberg (Nichola Saminather and Narayanan Somasundaram): “Australian homebuyers are borrowing at the fastest pace in four years amid record prices, straining debt levels already among the developed world’s highest as interest rates are set to climb. The value of new mortgage approvals jumped 25% in November from a year earlier, the fastest annual pace since September 2009…”

January 19 – Bloomberg (Frederik Balfour): “Sotheby’s said it sold a bottle of Macallan for HK$4.9 million ($631,850) in Hong Kong, setting a record for the most expensive bottle of single malt whisky sold at auction.”

EM Bubble Watch:

January 23 – Bloomberg (Katia Porzecanski): “Argentina devalued the peso the most in 12 years after the central bank scaled back its intervention in a bid to preserve international reserves that have fallen to a seven-year low. The peso has plunged 12.7% over the last two days to 7.8825 per dollar…, after falling to as low as 8.2435… The decline in the peso marks a policy turn for Argentina, which had been selling dollars in the market to manage the foreign-exchange rate since abandoning a one-to-one peg with the U.S. dollar in 2002.”

January 23 – Financial Times (Delphine Strauss, John Paul Rathbone, Jonathan Wheatley): “Argentina’s peso suffered its biggest one-day fall since the financial crisis of 2002 on Thursday, after the central bank stopped intervening in currency markets in an effort to preserve foreign exchange reserves that have fallen by almost a third over the past year. The peso, whose long-running decline has accelerated since November, plunged 17.5% to 8.1842 pesos to the dollar… ‘The risk of capital flight is rising by the minute. This will be very hard to control,’ wrote Dirk Willer, strategist at Citi, adding that liquidity had ‘largely disappeared’ with the risk of Venezuela-style capital controls.”

January 23 – Bloomberg (Anatoly Kurmanaev): “Venezuela devalued its currency for airline ticket purchases and foreign direct investment to halt a hemorrhaging of dollars that has pushed international reserves to a 10-year low. Bonds fell. Airlines, Venezuelans traveling abroad and foreigners sending remittances must use a secondary exchange rate determined at weekly auctions, Economy Vice President Rafael Ramirez said…”

January 24 – Bloomberg (Boris Korby, Veronica Navarro Espinosa and Gerson Freitas Jr.): “Brazil junk bond investors battered by defaults from Eike Batista’s OGX Petroleo & Gas Participacoes SA to Banco Cruzeiro do Sul SA in the past two years are now facing a collapse in sugar and ethanol company debt. Aralco SA Acucar & Alcool’s $250 million of notes due 2020 have plunged 26.2 cents this year to a record low 30 cents on the dollar, while Grupo Virgolino de Oliveira SA’s $300 million of debt due 2018 tumbled 12.5 cents to 56.8 cents. Since 1999, eight of 10 Brazilian companies have defaulted after their bonds sank below 40 cents… Brazil’s unprecedented string of insolvencies since 2012 is showing little sign of abating as yields surge on $1.4 billion of sugar producer bonds.”

January 22 – Bloomberg (Suttinee Yuvejwattana and Supunnabul Suwannakij): “Thai Prime Minister Yingluck Shinawatra declared a state of emergency in Bangkok yesterday as an escalation of attacks on anti-government protesters threatened to derail elections scheduled for Feb. 2. Bombings and shootings in the capital have killed one person and injured 70 over the past five days, prompting Army Chief Prayuth Chan-Ocha to call for restraint from protesters and security officials… A state of emergency ‘is a very risky move from a government that has generally been conciliatory of protesters,’ said Kevin Hewison, director of the Asia Research Centre at Australia’s Murdoch University. ‘The risk is escalating violence to goad the military to take sides.’”

January 21 – Reuters (Saeed Azhar and Khettiya Jittapong): “A local currency hit by months of political unrest, and skittish consumers spending less are keeping the pressure on Thai billionaire Dhanin Chearavanont, who heads Asia's most indebted food retailer. Dhanin's CP ALL PCL, which operates 7-Eleven convenience stores, last year took a 1-year $5.8 billion loan to fund the $6.6 billion acquisition of cash-and-carry wholesaler Siam Makro - paying 53 times earnings in Asia's most expensive consumer sector deal by multiple. At the time, Dhanin promised investors to more than halve CP ALL's leverage - its net debt to EBITDA ratio - to just above 3 times by 2017 from an estimated 8 times, the highest among all food and staples companies in Asia… Dhanin also took on a big dollar loan from UBS to part finance last year's $9.4 billion acquisition of HSBC's stake in Ping An, China's No. 2 insurer - part of a total $27 billion acquisition splurge by Dhanin and Thai beer tycoon Charoen Sirivadhanabhakdi in 2012-13.”

January 24 – Bloomberg (Robert Brand and Jaco Visser): “The rand’s slump to a five-year low is souring investor confidence toward South Africa, complicating Finance Minister Pravin Gordhan’s efforts to cut the fiscal deficit as government borrowing costs rise. The rand weakened past the 11 per dollar mark yesterday for the first time since October 2008, about a month after Lehman Brothers Holdings Inc. collapsed.”

Turkey Watch:

January 23 – Bloomberg (Taylan Bilgic and Selcuk Gokoluk): “Turkey’s central bank made an unscheduled intervention in the foreign-exchange market for the first time in more than two years to stem the lira’s slide. The bank bought the local currency because of ‘unhealthy price formations,’ according to a statement… Murat Yardimci, head of trading at ING Bank AS in Istanbul, said…it sold about $1.5 billion. The lira is the world’s worst-performing currency in the past five weeks since a corruption probe came to light, embroiling the government of Prime Minister Recep Tayyip Erdogan.”

China Bubble Watch:

January 24 – Bloomberg: “China’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, said two people with knowledge of the matter, signaling government concern about possible defaults. The China Banking Regulatory Commission also told its local branches to closely monitor risks from trust and wealth-management products, said the people… The commission issues such alerts for matters that it judges may pose significant risks to banks, the people said.”

January 20 – Bloomberg (Sridhar Natarajan): “China’s new home sales last year exceeded $1 trillion for the first time as property prices in cities the government considers first tier surged in the absence of more nationwide property curbs. The value of new homes sold in 2013 rose 27% from 2012 to 6.8 trillion yuan ($1.1 trillion)… New-home prices in December climbed 20% in Guangzhou and Shenzhen from a year earlier, and jumped 18% in Shanghai and 16% in Beijing… ‘Clearly, the real estate market in China remains hot,’ Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole CIB, said… ‘Urbanization and investment demand are leading to rising sales volumes, while prices continue to gain. China’s growth remains heavily dependent on the real estate market.’… New and existing home sales in the U.S. were about $1.1 trillion last year, including $149 billion of new homes sold…”

January 24 – Bloomberg (Sridhar Natarajan): “UBS AG’s China securities unit, the leading foreign underwriter of debt sales in the country, says the market wants policy makers to allow the first onshore bond default to reduce long-term hazards to the financial system. ‘Systematic risk will pile up without any default happening,’ Bi Xuewen, head of China debt capital markets at UBS Securities Co., said… ‘Market participants would like to see a default in China’s bonds. Only after defaults can the overall risk pricing system be normalized.’ …The yield premium on five-year AA- rated corporate bonds over similar-maturity sovereign securities has jumped to 404 basis points, the highest since May 2012, as concern mounts about trust defaults.”

January 22 – Bloomberg (Justina Lee): “Doubts over the Chinese government’s ability to cope with escalating debt are showing up in record borrowing costs for the nation’s policy banks. The average yield premium over the sovereign for five-year debt sold by China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China widened 90 bps from an August low to 142 bps on Jan. 17, the highest in Chinabond data going back to 2007… Yields have climbed on safer assets, including CDB’s, as delays in restructuring bad loans are stretching the central government’s ability to guarantee debt, Bank of America Merrill Lynch wrote… The blowout in borrowing costs accelerated as a government audit estimated regional liabilities surged 67% from the end of 2010 to 17.9 trillion yuan ($2.96 trillion) as of June 30 while trust banks struggled to recoup soured loans to coal mines.”

January 20 – Bloomberg (Sridhar Natarajan): “A doubling in China’s money-market funds in the past six months is draining bank deposits and raising the risk of financial failures during cash crunches, according to Fitch Ratings. The assets under management of such plans surged to a record 737 billion yuan ($122bn) on Dec. 31 from 304 billion yuan on June 30, said Roger Schneider, senior director at Fitch… Yu’E Bao, managed by Tianhong Asset Management Co. and sold online by Alibaba Group Holding Ltd., offers an annualized return of 6.7%, compared with the 3% official one-year savings rate. Some funds are offering higher rates, with news portal Eastmoney.com marketing a product that targets 10%.”

January 23 – Dow Jones (Shuli Ren): “A U.S. Securities and Exchange Commission judge has banned the Big Four accounting firms' Chinese joint ventures from auditing in the U.S. for six months. This could lead to the U.S.-traded Chinese companies without an auditor. In the worst-case scenario, the Chinese ADRs would have to find a new auditor; otherwise they would not be able to file financial statements, which could result in an eventual de-listing.”

January 23 – Bloomberg: “China Credit Trust Co. reported progress on securing payment for a troubled 3 billion-yuan ($495 million) trust product, according to the Securities Times, which may ease concerns that the nation’s first default on such high- yield investments is looming. A project backed by the trust product, Credit Equals Gold No. 1, obtained a new mining license, the newspaper said… Another coal mine project has won support from local authorities and the community, it said. Obtaining licenses will permit the mines to start operating and produce coal for sale.”

Japan Watch:

January 23 – New York Times: “Historians and columnists have made comparisons between Britain and a rising Germany in 1914 and the current tensions between Japan and China; a hot topic at the start of the centenary year of World War I. Prime Minister Shinzo Abe of Japan, in his appearance… at the World Economic Forum in Davos… raised the bar when he agreed with the thesis, saying that he saw a ‘similar situation’ between now and then. During a discussion with journalists, Mr. Abe said that the strong trade relations between Germany and Britain in 1914 were not unlike the economic interdependence today between Japan and China. In 1914, economic self-interest failed to put a brake on the strategic rivalry that led to the outbreak of war, Mr. Abe said.”

January 22 – Financial Times (Ben McLannahan): “The Bank of Japan has sounded a note of caution in its battle against deflation, warning that price rises may stall after the rapid gains of the past year… Since governor Haruhiko Kuroda unleashed a radical new monetary easing programme last April core consumer price inflation has surged from minus 0.5% to a five-year high of 1.2%, thanks mainly to energy costs pushed up by a big fall in the yen.”

January 22 – Bloomberg (Toru Fujioka and Andy Sharp): “The Bank of Japan refrained from boosting unprecedented easing as accelerating inflation marks progress in its bid to stamp out 15 years of falling prices in Asia’s second-biggest economy. Governor Haruhiko Kuroda’s board stuck to its pledge to expand the monetary base by an annual 60 trillion to 70 trillion yen ($671bn)…”

Latin America Watch:
January 23 – Bloomberg (Tariq Panja): “Brazil’s operating budget for the 2016 Summer Olympics in Rio de Janeiro has increased by 25% above initial estimates to about 7 billion reais ($2.91bn) as a result of new sports and inflation. The original spending plan was for 5.6 billion reais, mostly funded through sponsorships and an International Olympic Committee grant. The Rio 2016 organizing committee has ‘undertaken a line- by-line critical analysis of the budget, to balance known spending commitments and be able to meet new obligations as they arise,’ the organizing committee’s chief executive officer… told reporters.”


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