April 10, 2020: When Money Died

April 10, 2020: When Money Died
Doug Noland Posted on April 11, 2020

Sitting at the dinner table, our eleven-year old son inquired: “If a big meteor was about to hit the earth, how much money would the Fed print?” I complimented his sense of humor. Yet it was a sad testament to the historic monetary fiasco that will haunt his generation.

Federal Reserve Assets surpassed $6.0 TN for the first time, having inflated another $272 billion for the week (to $6.083 TN). Fed Assets inflated an astonishing $1.925 TN, or 46%, in only six weeks. Bank of American analysts this week suggested the Fed’s balance sheet could reach $9.0 TN by year-end.

M2 “money supply” surged another $371 billion for the week (ending 3/30) to a record $16.669 TN. M2 expanded an unprecedented $1.136 TN over five weeks (up $2.123 TN, or 14.6%, y-o-y). For some perspective, M2 has expanded more during the past six months than it did the entire nineties (no slouch of a decade in terms of monetary inflation). Not included in M2, Institutional Money Fund Assets expanded an unparalleled $676 billion in five weeks to a record $2.935 TN. Total Money Fund Assets were up $1.375 TN, or 44%, over the past year to a record $4.473 TN.

There was a sordid process – rather than a specific date – for When Money Died. But it’s dead and buried. There are a few things that should remain sacrosanct. Money is absolutely one of them. Money is special. Sound Money is precious – to be coveted and safeguarded. As a stable and liquid store of value, Money is the bedrock of Capitalism, social cohesion and stable democracy. Society trusts Money – and with that trust comes great responsibility and risk.

Analysis I read some years back on the Gold Standard resonates even more strongly today: Limiting the capacity for inflating its supply, the structure of backing Money with the precious metal worked to promote monetary and economic stability. Yet just as critical were the officials, bankers, businesspeople, market operators and common citizens all adhering to norms and behaviors fundamental to sustaining the monetary regime and resulting Sound Money.

In particular, there was a crucial corrective dynamic that would emerge as a system began to stray from monetary stability. Recognizing that policymakers (fully committed to the regime) would be employing measures to defend stability, market participant behavior in anticipation of policy moves would tend to reinforce stability. For example, if market participants expected officials to respond to Credit and speculative excess with tighter policies, markets would exhibit a self-correcting dynamic (i.e. reduced lending and risk-taking) prior to the adoption of restrictive policy measures.

I’ve been an avowed naysayer of this global experiment in unfettered global finance for more than 25 years. We have witnessed a unique period in financial history. Never before has the world operated without limits to either the quantity or quality of “money” and Credit. Global finance moved to a massive ledger of electronic debits and credits virtually divorced from real economic wealth – debit and credit entries backed by little; and little holding back the creation of Trillions of additional new “money.” Credit is inherently unstable, and this new “system” early on proved highly destabilizing.

As degraded private Credit turned increasingly unstable, government-based “money” (central bank Credit and government debt) was employed in expanding quantities in repeated attempts to bolster waning market confidence. Witnessing the extent governments were willing to go in post-Bubble reflationary measures, just about 11 years ago I began warning of the unfolding “global government finance Bubble.”

Early on in the Bubble reflation, I warned that QE would distort markets and fuel asset price Bubbles. I would repeatedly get similar pushback: “Doug, how is it possible for QE to be distorting the markets when these Fed liabilities are just sitting (inertly) within the banking system? How can Federal Reserve “money” be in two places at once?”.

Recent weeks have offered a rather straightforward example of the mechanics. When the Fed creates new liabilities (Rothbard’s “money out of thin air”) to purchase Treasuries (along with MBS, corporate bonds, bond ETFs, municipal debt and, going forward, junk bonds and “main street” loans), these “immediately available funds” flow into the banking system where they are exchanged for bank deposits (new bank deposit liabilities matched against an asset “reserves at the Fed”). Some of these deposits will flow immediately into the money markets, especially to institutional money funds after Federal Reserve market purchases from the institutional investor community. It is certainly no coincidence that M2 plus Institutional Money funds have increased $1.81 TN in five weeks as Fed Credit inflated $1.82 TN.

Questions following Chairman Powell’s April 9, 2020, speech, “COVID-19 and the Economy”:

David Wessel, Director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institute: “The Fed has cut interest rates to zero – you’ve bought hundreds of billions worth of Treasury bonds and mortgages; you’ve launched an alphabet soup of lending programs – including some new ones today for state and local governments and mid-sized businesses – that you say could lend up to $2.3 TN. Is there any limit to how much money the Fed can create – how much it can lend – without having some unwelcomed side effects – like inflation or asset price Bubbles?

Powell: “These programs that we’re using – under the law we do these…, as I mentioned in my remarks, with the consent of the Treasury Secretary and with fiscal backing from the Congress through Treasury, and we’re doing it to provide Credit to households, businesses, state and local governments, as we are directed by the Congress. And we’re using that fiscal backstop to absorb any losses that we have. And what we’ve been doing is looking for places that are very important to the real economy – things that really affect people’s lives and economic output – and where Credit to those parts of the economy has broken down… That’s essentially what we’re doing. And we can keep doing that as long as those needs arise. Our ability to do that is, really, limited by the law. We have to find unusual and exigent circumstances. The Treasury Secretary has to agree. And we are using this fiscal backdrop. But there are really no limits to how much we can do other than it must meet the test under the law as amended by Dodd Frank.”

Wessel: “Isn’t there a risk that with all of this money coming out of Congress – the money and lending – that we’ll end up with something that we don’t like, as in more inflation than we’d like or asset Bubbles?”

Powell: “Inflation has been an interesting phenomenon. Back 12 years ago, when the financial crisis was getting going and the Fed was doing quantitative easing, many people feared that the increases in the money supply, as a result of quantitative easing asset purchases, would result in high inflation. Not only did it not happen, the challenge has become that inflation has been below our target. So that is – globally the challenge has been inflation below target. Honestly, it is not a first-order concern for us today that too high inflation might be coming our way in the near-term. Far from it. These are programs that we’re developing at a high rate of speed. We don’t have the luxury of taking our time the way we usually do. We’re trying to get help quickly to the economy as it’s needed. I worry that in hindsight you will see that we could have done things differently. One thing I don’t worry about is inflation right now.”

The Fed Chair ducked the “asset Bubble” question – twice. AP: “Wall Street Caps Best Week Since 1974 on Fed Stunner” – and in only four trading sessions. Bloomberg: “U.S. Junk Bonds Rally Most in Two Decades with Fed Now a Buyer.”

There are important reasons why the Federal Reserve (and central banks generally) traditionally limited purchases to T-bills. Any central bank purchase outside of money-like instruments will impact its price along with market perception of safety. And the farther a central bank goes out the risk spectrum the greater the distortion. A popular high-yield ETF (HYG) surged 12% this week with the Fed announcing it would begin purchasing some junk bonds, a glaring example of a distorted market diverging from underlying fundamentals. And the greater the divergence, the more destabilizing the eventual collapse back to reality.

In stark contrast to gold standard dynamics, contemporary markets move only further away from stability in anticipation of only more vigorous inflationary policy measures (unsound “money” promoting the opposite of self-correcting market dynamics).

Dr. Bernanke argues that had the Federal Reserve recapitalized the banking system early in the downturn, the U.S. would have avoided the Great Depression. I have posited the key issue was not replacing some finite quantity of depleted bank capital – but rather a much greater amount of ongoing system-wide Credit required to sustain maladjusted financial and economic structures following the historic “Roaring Twenties” Credit inflation.

Non-Financial Debt (NFD) expanded $2.485 TN in 2019. This was the strongest Credit growth since 2007’s record $2.521 TN, and 42% above average annual NFD growth over the previous decade. Asset markets (stocks, bonds, corporate Credit, residential and commercial real estate, etc.) have never been so inflated. The Fed, the Trump administration and Congress are determined to immediately reflate the U.S. economy and asset markets back to where they believe are sound and sustainable levels.

This will prove a Herculean endeavor. The Fed’s aggressive liquidity measures and resulting market recovery have created a precarious dynamic whereby badly distorted and inflated markets will require persistent liquidity support. Never have such incredible “money” creation operations been used only weeks from record stock prices and economic boom conditions. I believe to sustain recovery of such an economic structure will require unending massive fiscal deficits. Regrettably, there’s no end in sight for today’s reckless monetary inflation – consequences of this Scourge of Inflationism to unfold over months, years and decades.

I worry greatly about exacerbating already threatening inequality (a consequence of When Money Died). One of the cruelest aspects COVID-19 is how hard it is hitting our minority and poorer communities. The Fed will create Trillions and Washington will spend Trillions more, and large segments of our population will undoubtedly have issues with how all this “money” was allocated. The Fed knows better than to be in the allocation game – Credit, “money” or otherwise. And I doubt their new “Main Street” program will absolve the Fed of responsibility in the eyes of the general population. The Fed now “owns” these dreadfully unstable markets – placing its institutional credibility – and trust in “money” – in peril.

When Money Died globally…

April 9 – Reuters (Judy Hua and Kevin Yao): “New bank lending in China rose sharply to 2.85 trillion yuan ($405bn) in March, with total social financing hitting a record, as the central bank pumped in more liquidity and cut funding costs to support the coronavirus-ravaged economy… New loans in March far exceeded market expectations of 1.8 trillion yuan and were three times more than February’s 905.7 billion yuan. That nudged bank lending in the first quarter to a record 7.1 trillion yuan, beating a previous peak of 5.81 trillion yuan in the first quarter of 2019… Household loans, mostly mortgages, rebounded sharply to 989.1 billion yuan in March from a net decline of 413.3 billion yuan in February… Corporate loans almost doubled to 2.05 trillion yuan from 1.13 trillion yuan the previous month. Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, quickened to 11.5% in March from a year earlier and from 10.7% in February.”

I’m left to ponder how the Chinese renminbi would trade in this environment against a sound U.S. dollar. First quarter new Chinese Bank Loans of $1.008 TN were up 22% from Q1 2019 – a truly incredible expansion in the face of collapsing economic activity. Total Q1 Aggregate Financing was up 29% y-o-y to an amazing $1.574 TN. In a number difficult to fathom, Chinese M2 “money supply” surged $2.720 TN, or 10.1%, over the past year to $29.382 TN.

Fed and PBOC “money” notwithstanding, global financial conditions have tightened. Borrowers, stung by job losses, collapsing demand and risks unforeseen, will add debt more cautiously going forward. Lenders, shocked by the prospect of massive defaults across business lines, will extend Credit more cautiously. Unappreciated risks associated with myriad sophisticated financial structures have been exposed. Moreover, confidence in central banks’ capabilities has been shaken. Even in the face of massive central bank liquidity injections and market support, I still believe the risk vs. reward calculus for global leveraged speculation has been fundamentally altered. If this is correct, the Fed’s balance sheet will be getting a whole lot bigger as it continues to struggle mightily to sustain unsustainable market Bubbles.

I often highlight how the “Terminal Phase” of Credit Bubble excess experiences an exponential rise in systemic risk, with ever-expanding quantities of increasingly risky Credit. I fear we’ve commenced the “Terminal Phase” of monetary inflation, with systemic risk now rising parabolically. When Money Died.


For the Week:

The S&P500 surged 12.1% (down 13.6% y-t-d), and the Dow rose 12.7% (down 16.9%). The Utilities vaulted 17.2% (down 4.6%). The Banks spiked 25.0% (down 33.6%), and the Broker/Dealers rose 14.2% (down 18.2%). The Transports jumped 12.8% (down 24.4%). The S&P 400 Midcaps surged 18.6% (down 23.1%), and the small cap Russell 2000 jumped 18.5% (down 25.3%). The Nasdaq100 gained 9.4% (down 5.7%). The Semiconductors jumped 11.0% (down 13.4%). The Biotechs increased 7.3% (down 6.6%). With bullion surging $76, the HUI gold index surged 16.1% (down 3.8%).

Three-month Treasury bill rates ended the week at 0.19%. Two-year government yields slipped a basis point to 0.23% (down 134bps y-t-d). Five-year T-note yields added two bps to 0.41% (down 129bps). Ten-year Treasury yields jumped 12 bps to 0.72% (down 120bps). Long bond yields rose 13 bps to 1.34% (down 105bps). Benchmark Fannie Mae MBS yields fell eight bps to 1.69% (down 102bps).

Greek 10-year yields dropped 15 bps to 1.77% (up 34bps y-t-d). Ten-year Portuguese yields added a basis point to 0.91% (up 46bps). Italian 10-year yields gained four bps to 1.59% (up 18bps). Spain’s 10-year yields rose four bps to 0.78% (up 31bps). German bund yields jumped nine bps to negative 0.35% (down 16bps). French yields increased three bps to 0.11% (down 1bp). The French to German 10-year bond spread narrowed six to 46 bps. U.K. 10-year gilt yields slipped one basis point to 0.31% (down 52bps). U.K.’s FTSE equities index rallied 7.9% (down 22.5%).

Japan’s Nikkei Equities Index recovered 9.4% (down 17.6% y-t-d). Japanese 10-year “JGB” yields gained three bps to 0.02% (up 3bps y-t-d). France’s CAC40 rallied 8.5% (down 24.6%). The German DAX equities index jumped 10.9% (down 20.3%). Spain’s IBEX 35 equities index gained 7.4% (down 26.0%). Italy’s FTSE MIB index rallied 7.6% (down 25.0%). EM equities were mostly higher. Brazil’s Bovespa index surged 11.7% (down 32.8%), and Mexico’s Bolsa increased 4.5% (down 20.6%). South Korea’s Kospi index jumped 7.8% (down 15.3%). India’s Sensex equities index surged 12.9% (down 24.5%). China’s Shanghai Exchange increased 1.2% (down 8.3%). Turkey’s Borsa Istanbul National 100 index rose 7.7% (down 15.7%). Russia’s MICEX equities index jumped 4.1% (down 12.1%).

Investment-grade bond funds saw outflows of $15.134 billion, while junk bond funds posted inflows of $214 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.33% (down 79bps y-o-y). Fifteen-year rates fell five bps to 2.77% (down 83bps). Five-year hybrid ARM rates were unchanged at 3.40% (down 40bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 3.86% (down 39bps).

Federal Reserve Credit last week surged $393bn to a record $5.968 TN, with a 31-week gain of $2.246 TN. Over the past year, Fed Credit expanded $2.071 TN, or 53%. Fed Credit inflated $2.764 Trillion, or 98%, over the past 387 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $22.2 billion last week to 30-month low $3.316 TN (five-week drop $141bn). “Custody holdings” were down $155bn, or 4.5%, y-o-y.

M2 (narrow) “money” supply surged another $371bn last week to a record $16.669 TN, with an unprecedented five-week gain of $1.136 TN. “Narrow money” surged $2.123 TN, or 14.6%, over the past year. For the week, Currency declined $16.1bn. Total Checkable Deposits surged $188bn, and Savings Deposits expanded $161bn. Small Time Deposits slipped $1.2bn. Retail Money Funds jumped $39.7bn.

Total money market fund assets gained $76.3bn to a record $4.473 TN. Total money funds jumped $1.375 TN y-o-y, or 44.4%.

Total Commercial Paper declined $6.7bn to $1.099 TN. CP was up $26bn, or 2.4% year-over-year.

Currency Watch:

April 7 – Reuters (Judy Hua and Gabriel Crossley): “China’s foreign exchange reserves fell more than expected in March to a 17-month low as the yuan weakened and global asset prices plunged amid the coronavirus pandemic. The country’s reserves – the world’s largest — fell $46.085 billion in March to $3.061 trillion… Economists… expected reserves would fall by $6.718 billion…”

For the week, the U.S. dollar index dipped 1.1% to 99.482 (up 3.1% y-t-d). For the week on the upside, the Mexican peso increased 7.3%, the South African rand 6.0%, the Australian dollar 5.9%, the Brazilian real 4.8%, the Norwegian krone 4.0%, the New Zealand dollar 3.5%, the Swedish krona 2.6%, the Singapore dollar 1.9%, the South Korean won 1.9%, the Canadian dollar 1.8%, the British pound 1.5%, the euro 1.3%, the Swiss franc 1.2%, and the Japanese yen 0.1%. The Chinese renminbi increased 0.79% versus the dollar this week (down 1.03% y-t-d).

Commodities Watch:

April 10 – Reuters (Vladimir Soldatkin, Alex Lawler, and Rania El Gamal): “Top oil nations struggled to finalise record output cuts at G20 talks on Friday to boost prices slammed by the coronavirus crisis, as Saudi Arabia clashed with Mexico despite U.S. President Donald Trump’s mediation offer. OPEC led by Saudi Arabia and its allies led by Russia… had forged a pact to curb crude production by 10 million barrels per day (bpd) or 10% of global supplies in marathon talks on Thursday. Russia and OPEC said they wanted other producers including the United States and Canada to cut a further 5%. But efforts to conclude the deal hit the buffers when Mexico said it would only cut output by a quarter of the amount demanded by OPEC+.”

The Bloomberg Commodities Index recovered 2.1% (down 21.5% y-t-d). Spot Gold surged 4.7% to $1,697 (up 11.8%). Silver rallied 12.1% to $16.242 (down 9.4%). WTI crude sank $5.58 to $22.76 (down 63%). Gasoline declined 2.1% (down 60%), while Natural Gas rallied 6.9% (down 21%). Copper rose 3.1% (down 19%). Wheat gained 1.5% (unchanged). Corn recovered 1.8% (down 13%).

Coronavirus Watch:

April 9 – Wall Street Journal (Jon Hilsenrath): “The full impact of the coronavirus pandemic may take years to play out. But one outcome is already clear: Government, businesses and some households will be loaded with mountains of additional debt. The federal government budget deficit is on track to reach a record $3.6 trillion in the fiscal year ending Sept. 30, and $2.4 trillion the year after that, according to Goldman Sachs… Businesses are drawing down bank credit lines and tapping bond markets. Preliminary signs are emerging that some households are turning to credit for funds, too. The debt surge is set to shape how governments and the private sector function long after the virus is tamed. Among other things, it could be a weight on the expansion that follows.”

April 8 – CNBC (Catherine Clifford): “It might not be until fall 2021 that Americans ‘can be completely safe’ from COVID-19, Bill Gates said in a Tuesday interview with Judy Woodruff on PBS Newshour. That’s because it will take more than a year before a vaccine can be developed and deployed… ‘The vaccine is critical, because, until you have that, things aren’t really going to be normal,’ the billionaire philanthropist told Woodruff. ‘They can open up to some degree, but the risk of a rebound will be there until we have very broad vaccination.’”

April 8 – CNBC (Noah Higgins-Dunn and Kevin Breuninger): “New York Gov. Andrew Cuomo said… the coronavirus outbreak could ‘stabilize’ within weeks if the state maintains strict social distancing policies, even as he announced the highest daily death count yet and said life for New Yorkers will never be the same. ‘I don’t think we return to normal. I don’t think we return to yesterday,’ Cuomo said… ‘I think if we’re smart, we achieve a new normal.’”

April 6 – New York Times (Jim Tankersley): “How long can we keep this up? …There is no good answer yet, in part because we don’t even have the data needed to formulate one. Essentially, economists say, there won’t be a fully functioning economy again until people are confident that they can go about their business without a high risk of catching the virus. ‘Our ability to reopen the economy ultimately depends on our ability to better understand the spread and risk of the virus,’ said Betsey Stevenson, a University of Michigan economist who worked on the White House Council of Economic Advisers under President Barack Obama. ‘It’s also quite likely that we will need to figure out how to reopen the economy with the virus remaining a threat.’”

April 8 – Bloomberg (Janet Lorin): “The coronavirus pandemic threatens to remake U.S. higher education, speeding the closure of small, financially weak colleges and forcing others to make tough decisions about what they can afford. Even state schools may no longer be immune as tax revenue falls. The most immediate challenge is one that could soon spiral into a crisis: It’s hard to sign up this fall’s freshman class when families can’t travel to visit campuses and many international students are shut out of the U.S. The longer lockdowns continue, the more uncertain schools are about the size of their classes, how much aid they’ll need to offer to fill seats, and the tuition revenue they can count on. ‘Everybody’s worried,’ says Kevin Cavanagh, vice president for enrollment management at Bloomfield College… ‘You don’t know what the variables will be.”

April 10 – Reuters (Elizabeth Piper): “British Prime Minister Boris Johnson is in ‘very good spirits’ after returning to a hospital ward from intensive care but his recovery is at an early stage, his spokesman said… ‘The prime minister is back on a ward and continuing his recovery which is at an early stage. He continues to be in very good spirits,’ the spokesman told reporters.”

April 10 – Reuters (Josh Smith and Sangmi Cha): “South Korean officials on Friday reported 91 patients thought cleared of the new coronavirus had tested positive again. Jeong Eun-kyeong, director of the Korea Centers for Disease Control and Prevention (KCDC), told a briefing that the virus may have been ‘reactivated’ rather than the patients being re-infected. South Korean health officials said it remains unclear what is behind the trend, with epidemiological investigations still under way.”

April 8 – Wall Street Journal (Rajesh Roy and Vibhuti Agarwal): “Two weeks into the world’s biggest lockdown, India’s food supply chain is struggling with a shortage of one of its crucial commodities: people. Essential industries—such as growing, harvesting and delivering food—are allowed to operate under the lockdown but the people who move the essentials from farm to fork aren’t showing up for work. Stores say some basics such as eggs, yogurt and cooking oil are increasingly hard to find, a development they say could point to bigger problems ahead if things don’t return to normal in the coming month.”

April 9 – The Guardian (Daniel Boffey): “Italy’s prime minister, Giuseppe Conte, has warned of the break-up of the European Union, as unprecedented pressure was piled on northern states to give way and unlock €500bn (£438bn) of economic support for the countries hit hardest by the coronavirus pandemic… ‘It’s a big challenge to the existence of Europe,’ Conte told the BBC. ‘If Europe fails to come up with a monetary and financial policy adequate for the biggest challenge since world war two, not only Italians but European citizens will be deeply disappointed.’ The negotiations on the latest element of the EU’s fiscal response to the epidemic has exposed deep divisions between north and south, and reignited feelings of bitter enmity last experienced during the financial crisis.”

April 8 – Financial Times (Bryan Harris and Andres Schipani): “Military police are now a fixture outside São Paulo governor João Doria’s home in the city’s tree-lined Jardins neighbourhood. Since last week, the leader of Brazil’s largest and wealthiest state has received death threats after he publicly criticised President Jair Bolsonaro’s flouting of international health guidelines on self-isolation and social distancing. The stand-off between the two men is just one flashpoint in a growing conflict between the populist leader and Brazil’s political establishment, most notably influential state governors, over how to respond to the coronavirus crisis… One month into an almost nationwide shutdown, Mr Bolsonaro is increasingly insistent on reopening schools and businesses and getting Brazilians back to work. He has called lockdowns a ‘crime’ and excoriated governors as ‘job killers’.”

Market Instability Watch:

April 9 – Reuters (Sumita Layek): “Gold prices surged over 2.5% to their highest in a month on Thursday after the U.S. Federal Reserve announced a massive stimulus to combat the economic toll of the coronavirus pandemic. Spot gold jumped 2.5% to $1,686.85 per ounce…, having earlier hit its highest since March 9 at $1,690.03. It has risen about 4.2% so far this week.”

April 8 – Bloomberg (Kyoungwha Kim): “The decade-long surge in foreign-exchange reserves among emerging markets is coming to an end, highlighting the danger posed by future currency depreciation. China’s holdings fell by $46.1 billion in March, the most since late 2016… The drawdown accounted for the largest share of the $110 billion that 11 emerging-market central banks, including those in Turkey, India, Brazil and Egypt, yanked from their reserves last month to stem currency losses… Emerging markets suffered about $83 billion of outflows in March, a figure that may grow to between $500 billion and $750 billion if the exodus is anything like 2008 and 2015, according to Bank of New York Mellon Corp.”

April 9 – Bloomberg (Natalie Harrison): “U.S. junk bonds rallied the most since 1998 after the Federal Reserve’s historic move to begin buying some of the speculative-grade corporate debt. The extra yield investors demand to own the securities instead of Treasuries narrowed 86 bps Thursday to 785 bps, the lowest level since March 13… The Fed’s announcement that it would buy a limited amount of recently downgraded junk debt gave the market its biggest boost since spreads surged to distressed levels last month amid a pandemic that has shut down large parts of the economy. Average yields on the debt fell by almost a percentage point to 8.48%…”

April 9 – Bloomberg (Katherine Greifeld): “A surprise pledge from the Federal Reserve to buy recently downgraded corporate bonds boosted some of the biggest ETFs tracking the securities. The $14.8 billion iShares iBoxx High Yield Corporate Bond ETF, or HYG, surged about 7.5% — the most since January 2009 — after the Fed said… it will expand its corporate bond buying program to include debt from companies that recently lost their investment-grade rating.”

April 6 – Bloomberg (Marcus Ashworth): “The financial fallout from the coronavirus is spreading rapidly and that’s ugly news for many developing countries. The risk of contagion, where the collapse of one currency triggers a global panic, is very real. Outflows from emerging market funds totaled more than $83 billion in March ($53bn in bonds, $31bn in equities), according to… the International Institute of Finance. The last thing the world needs is an emerging markets crisis, yet all the conditions are there: collapsing commodity prices, a sudden economic shock, over-indebtedness and fragile currencies.”

Global Bubble Watch:

April 9 – Reuters (Andrea Shalal and David Lawder): “The pandemic sweeping the world will turn global economic growth ‘sharply negative’ in 2020, triggering the worst fallout since the 1930s Great Depression, with only a partial recovery seen in 2021, the head of the International Monetary Fund said. IMF Managing Director Kristalina Georgieva painted a far bleaker picture of the social and economic impact of the new coronavirus than even a few weeks ago, noting governments had already undertaken fiscal stimulus measures of $8 trillion, but more would likely be needed. She said the crisis would hit emerging markets and developing countries hardest of all, which would then need hundreds of billions of dollars in foreign aid.”

April 5 – Financial Times (Robin Wigglesworth): “Back in the days of British rule in India, Delhi was overrun with cobras. Frustrated colonial officials put a bounty on them, paying out for every snake head the locals could deliver. But the scheme quickly backfired. The story goes that entrepreneurial natives started breeding cobras to collect the reward, eventually forcing the British to scrap the scheme. Then Delhiites released all their cobras, leaving the city with an even worse infestation than it had started with. The possibly apocryphal tale was made famous by German economist Horst Siebert in his book The Cobra Effect, on how poor policies can lead to negative unintended consequences. Perhaps future economists will point to the recent mayhem in financial markets as another example of the cobra effect — efforts to make the financial system safer in the wake of the 2008 crisis may instead have conspired to make it more brittle.”

April 9 – Bloomberg (Vivien Lou Chen): “Foreign official holdings of Treasuries stashed at the Federal Reserve declined $21.7 billion during the first week of April, as the economic consequences of the coronavirus roiled governments and central banks around the world… That’s the sixth straight week of declines and follows a $109 billion drop in March that was the largest monthly fall on record.”

April 7 – CNBC (Huileng Tan): “The price of rice — a staple food in Asia — has hit 7-year highs due to the coronavirus outbreak as importers rush to stockpile the grain while exporters curb shipments. According to the Thai Rice Exporters Association, price of the 5% broken white rice — the industry benchmark — rose 12% from March 25 to April 1. Rice prices are now the highest since late April 2013…”

April 6 – Dow Jones (Jing Yang): “Banks stand to lose more than $100 million from a loan they made to the chairman of Chinese coffee chain Luckin Coffee Inc., whose share price plunged after the company said much of its 2019 sales were fabricated. On Monday, Goldman Sachs… said a group of lenders is putting 76.3 million of Luckin’s American depositary shares up for sale, after an entity controlled by Luckin Chairman Charles Zhengyao Lu defaulted on the terms of a $518 million margin loan.”

April 8 – Bloomberg (Denise Wee, Chanyaporn Chanjaroen, and Alfred Liu): “A popular investment among Asia’s wealthy in the years of rock-bottom interest rates has been upended in the recent market rout, leaving investors facing losses estimated to be in the billions of dollars. Structured products called fixed coupon notes attracted scores of private banking clients in Hong Kong and Singapore in recent years… Promised regular coupons even in turbulent times, some put 20% or more of their portfolios into the instruments, they said. One catch: the principal was tied to swings in assets like stocks, and losses could mount quickly during deep market declines. About 5%, or more than $80 billion, of Asian private banking assets outside mainland China is probably tied to such notes, estimates University of Hong Kong Professor Dragon Tang. They worked smoothly until Covid-19 struck.”

April 7 – Bloomberg (Yoojung Lee): “The Tangs are a classic Singapore power couple. Gordon… and his wife Celine moved from China in the 1990s, founded trading firm Tang Dynasty and then established a real estate empire… Then the coronavirus pandemic hit. The value of their holdings in four real estate investment trusts has dropped by more than $300 million this year… The pandemic and the drastic containment measures has roiled REITs, long considered a safe haven because of their high yields and prosperous property markets. The 249 REITs trading on stock exchanges across the Asia-Pacific region have posted an average decline of 25% this year, wiping $100 billion from their market value.”

April 6 – Bloomberg (Lisa Lee): “Societe Generale SA sought to sell leveraged loans to unwind swaps tied to the debt, following other banks that have offloaded such credit investments to undo the risky wagers, according to people familiar with the matter. The French bank joins firms such as Citigroup Inc. and Truist Financial Corp. which in recent weeks have unwound total return swaps linked to leveraged loans. Citigroup and Truist sought out buyers for around $1.3 billion of leveraged loans in two separate auction sales…”

Trump Administration Watch:

April 8 – Reuters (Jeff Mason, Steve Holland and Eric Beech): “U.S. President Donald Trump said… he would like to reopen the U.S. economy with a ‘big bang’ but that the death toll from the coronavirus needs to be on the down slope before that can happen. Trump did not give a timeframe on when he would like to reopen the economy, but his chief economic adviser, Larry Kudlow, said… it was possible this could happen in four to eight weeks… ‘We’re ahead of schedule,’ Trump said… He said the economy could be reopened in phases but that ‘it would be nice to open with a big bang.’ But he said, ‘We have to be on the down side of the slope’ of infections and that he will rely heavily on experts in determining how to proceed.’”

April 9 – Reuters (David Lawder): “The Trump administration’s top economic officials said on Thursday they believe the U.S. economy could start to reopen for normal business in May, despite health experts’ emphasis on prolonged social distancing measures to defeat the coronavirus.”

April 10 – Wall Street Journal (Yuka Hayashi): “Despite the Trump administration’s promise to deliver aid quickly, small-business owners who have applied for federally guaranteed loans to keep them afloat during the coronavirus pandemic are still largely waiting for the money, according to business advocates and banking industry officials. The $350 billion Paycheck Protection Program opened a week ago with loans to companies with 500 or fewer employees and expands Friday to include independent contractors and self-employed individuals. Yet even as the program expands, the first applicants are still waiting for funding, fueling anxiety among business owners whose revenue has tanked and whose bills are piling up…”

April 9 – Reuters (Susan Heavey, Doina Chiacu, Richard Cowan, Susan Cornwell and David Morgan): “Efforts to push a further $250 billion of coronavirus aid for small businesses through the U.S. Congress were stalling on Wednesday as top Democrats said they would back the measure only if it was coupled with a similar amount for hospitals and local governments. House of Representatives Speaker Nancy Pelosi and Senate Democratic leader Chuck Schumer proposed, in a statement, more than $500 billion in total interim aid that could be followed with another measure expanding relief down the road. But as the day wore on, Republicans and Democrats appeared far from agreement…”

April 6 – Reuters (Eric Beech, Jeff Mason and Phil Stewart): “U.S. President Donald Trump said… a second round of direct payments from the federal government to Americans was under serious consideration to help limit the economic fallout from the coronavirus pandemic. Asked if he would consider a second round of direct payments, Trump told a news conference: ‘We could very well do a second round of direct (payments).’”

April 7 – Reuters (Diane Bartz): “U.S. Treasury Secretary Steven Mnuchin said on Tuesday that he would seek an additional $250 billion to support small businesses hurt by the widespread economic slowdown.”

Federal Reserve Watch:

April 9 – Reuters (Jonnelle Marte and Ann Saphir): “The Federal Reserve’s balance sheet increased to a record $6.13 trillion this week as the central bank used its nearly unlimited buying power to soak up assets and keep markets functioning smoothly, even as efforts to contain the coronavirus pandemic cut deeply into employment and economic output. In the four weeks since the Fed slashed interest rates to zero, restarted bond purchases and rolled out an unprecedented range of programs to limit the economic damage from the outbreak, the central bank’s balance sheet has jumped by about $1.7 trillion. Bond holdings surpassed $5 trillion for the first time.”

April 9 – Wall Street Journal (Nick Timiraos): “The Federal Reserve unveiled an array of programs Thursday that it said would provide $2.3 trillion in loans, expanding the Fed’s operations to reach small and midsize businesses and U.S. cities and states. The Fed also said it would expand previously announced corporate lending programs to include some classes of riskier debt that had been excluded, including allowing firms that until recently had been rated as investment-grade to participate in those facilities. They take the Fed well beyond the lender-of-last-resort functions it played in 2008 to prevent a financial panic from deepening the economic downturn and rely on hundreds of billions of dollars in Treasury money that Congress made available in the recent $2 trillion economic-relief legislation… The Fed said it would allow new classes of debt in the previously announced Term Asset-Backed Securities Lending Facility, or TALF, that were excluded from that facility when it was used after the 2008 financial crisis to support consumer and business credit markets. The Fed will now accept triple-A rated tranches of existing commercial mortgage-backed securities and newly issued collateralized loan obligations.”

April 9 – Financial Times (James Politi and Colby Smith): “Jay Powell said the Federal Reserve would use its powers ‘forcefully, proactively and aggressively’ until the economy recovers from the coronavirus shock, as the US central bank moved to offer an extra $2.3tn in credit and support the market for high-yield corporate debt. …The Fed chairman said the emergency measures being rolled out in recent weeks were necessary given the ‘very unusual circumstances’ of severe economic and financial dislocations, but would be rolled back once the crisis eased. ‘We are deploying these once lending powers to an unprecedented extent, enabled in large part by the financial backing of Congress and the Treasury. We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,’ Mr Powell said.”

April 9 – Reuters (Howard Schneider): “The U.S. Federal Reserve… announced a broad, $2.3 trillion effort to bolster local governments and small and mid-sized businesses, the latest in an expanding suite of programs meant to keep the U.S. economy intact as the country battles the coronavirus pandemic. Announcing details of a promised effort to put its financial weight behind ‘Main Street,’ the Fed said it would work through banks to offer four-year loans to companies of up to 10,000 employees, and begin to directly lend to state governments and more populous counties and cities to help them respond to the crisis.”

April 5 – Financial Times (Colby Smith): “The Federal Reserve’s balance sheet is expected to balloon this year after its dramatic interventions to shield capital markets and the world’s biggest economy from the effects of the coronavirus outbreak… Analysts at Bank of America say these actions, taken together, could result in the Fed’s balance sheet topping $9tn by the end of the year, or more than 40% of US gross domestic product… BofA’s estimate could be conservative. Krishna Guha, vice-chairman at Evercore ISI, expects the balance sheet to hit the $9tn milestone by mid-year. Should the economic shutdown become ‘prolonged’, and the Fed is forced to increase its emergency purchases, Mr Guha said he could see the balance sheet soaring to as much as $12tn by June, and rising from there.”

April 9 – Bloomberg (Brian Chappatta): “The Federal Reserve is not leaving any corner of the U.S. bond market behind in this crisis. There’s no other way to interpret the central bank’s sweeping measures announced Thursday, which together provide as much as $2.3 trillion in loans to support the economy. It will wade into the $3.9 trillion U.S. municipal-bond market to an unprecedented degree, can now purchase ‘fallen angel’ bonds from companies that have recently lost their investment-grade ratings, and has expanded its Term Asset-Backed Securities Loan Facility to include top-rated commercial mortgage-backed securities and collateralized loan obligations.”

April 6 – New York Times (Jeanna Smialek and Emily Flitter): “The Federal Reserve said… it would help backstop a new government effort aimed at encouraging banks to lend to small businesses, moving in to support a new federal program that has gotten off to a rocky start. Congress has dedicated $350 billion to make small business loans as part of the $2 trillion coronavirus support package it passed in March. The effort, known as the Paycheck Protection Program, is intended to encourage banks to lend to companies that agree to keep workers on the payroll. Most — and in some cases, all — of a loan would be forgiven if the borrower retained its workers and didn’t cut their wages. The government would repay lenders for the forgiven portions of the loans.”

April 7 – Reuters (Matt Scuffham): “Members of an influential financial markets advisory panel are pressing the Federal Reserve to give mortgage service companies emergency funding as struggling borrowers rush to delay their repayments, two people involved in the talks told Reuters. On Tuesday, the Mortgage Bankers Association (MBA) said borrower requests to delay mortgage payments rose 1,900% in the second half of March…”

U.S. Bubble Watch:

April 9 – Associated Press (Christopher Rugaber): “With a startling 6.6 million people seeking unemployment benefits last week, the United States has reached a grim landmark: More than one in 10 workers have lost their jobs in just the past three weeks to the coronavirus outbreak. The figures collectively constitute the largest and fastest string of job losses in records dating to 1948. By contrast, during the Great Recession it took 44 weeks — roughly 10 months — for unemployment claims to go as high as they now have in less than a month.”

April 9 – CNBC (Patti Domm): “JPMorgan economists issued an even more dire forecast, now foreseeing a 40% decline in the nation’s gross domestic product for the second quarter and a surge in April’s unemployment rate to 20% with 25 million jobs lost. In an earlier forecast, they said second-quarter GDP would be down 25%. The economists, however, continue to see a second-half recovery, based on the assumption that disruptions from the pandemic fade by June.”

April 8 – Reuters (Kate Duguid): “The forced closure of businesses across the United States and surge in unemployment due to the coronavirus pandemic will force U.S. growth to contract by 30% in the second quarter and 5% overall in 2020, Pacific Investment Management Co (PIMCO) wrote…”

April 7 – Bloomberg (Prashant Gopal): “The number of U.S. homeowners with mortgages who have stopped making payments is surging under the federal government’s new forbearance program, according to… the Mortgage Bankers Association. The total number of loans in forbearance grew to 2.66% as of April 1… On March 2, the rate was 0.25%. For loans backed by Ginnie Mae, which serves low- and moderate-income borrowers, the rate was 4.25%.”

April 8 – Dow Jones (Will Parker): “Nearly a third of U.S. apartment renters didn’t pay any of their April rent during the first week of the month, according to… the National Multifamily Housing Council and a consortium of real-estate data providers… The data come in the first of weekly reports on unpaid rent from NMHC, a landlord trade group. Only 69% of tenants paid any of their rent between April 1 and 5, compared with 81% in the first week of March and 82% in April 2019… The count includes renters who only made partial payments.”

April 8 – Bloomberg (Danielle Moran): “America’s state and cities will likely need to sell billions of dollars of short-term debt to keep running as the fallout from the coronavirus deals a massive hit to tax collections. With local economies grinding to a virtual halt and tax-filing deadlines pushed back until July, governments across the country are likely to face severe financial strains during a time of the year when they’re usually flush with cash. In New York, where the pandemic is projected to add as much as $7 billion to the budget deficit in the current fiscal year, Budget Director Robert Mujica said on April 1 that the state has ‘no choice but to issue short term borrowing to bridge the gap’ for the three months until annual income-tax payments are due.”

April 6 – Wall Street Journal (Konrad Putzier): “When the coronavirus started spreading in the U.S., office owners with long-term, stable leases hoped their buildings would become a haven for skittish investors. But nearly a month into the pandemic, the opposite has happened. Investors are dumping shares of major office real-estate investment trusts. Sales of skyscrapers are unraveling, and office tenants across the country are negotiating to lower their rent bills. The recent trouble in the sector belies office buildings’ reputation as a safe holding because they are mostly leased to long-term tenants. But as the U.S. economy shrinks and businesses shutter, investors are asking: What good is a long-term lease if the tenant won’t pay rent? And what is an office building worth if no one can use it?”

April 5 – Wall Street Journal (Collin Eaton and Jon Hilsenrath): “Texas had one of the best economic records of any U.S. state after the 2008 financial crisis. In this crisis, it faces the prospect of a deep and prolonged downturn. The Lone Star State is exposed to many of the pandemic and shutdown’s economic ill consequences, with three cities—Austin, Houston and Dallas—home to an abundance of service-sector jobs, especially at risk. A downturn in the oil industry and other businesses big in Texas, including airlines and ports, will likely amplify its pain. Industry analysts expect the oil downturn to outlast the current viral outbreak.”

April 7 – Bloomberg (Rachel Adams-Heard and Catarina Saraiva): “Almost 40% of oil and natural gas producers face insolvency within the year if crude prices remain near $30 a barrel, according to a new survey by the Federal Reserve Bank of Kansas City.”

April 9 – Bloomberg (Patrick Clark): “The swelling ranks of unemployed Americans and images of shuttered shops and empty streets have begun to tell the grim tale of the economic destruction caused by the Covid-19 pandemic. They also presage a brewing real estate crisis. About $81 billion in commercial rent comes due in a typical month in the U.S. The delay of a sizable portion of that will put an enormous strain on the complex systems for financing real estate and highlight how quickly the pain caused by social distancing has spread. Just 69% of renters paid their rent by April 5, according to data from 13 million units published by the National Multifamily Housing Council, compared with 81% who paid by March 5… At least 2,600 commercial real estate borrowers have already touched base with mortgage servicers about potential debt relief on more than $49 billion in loans, according to Fitch… More than 75% of those inquiries, made during the last two weeks of March, were for hotels and retail real estate, Fitch said.”

April 8 – Bloomberg (Natalie Wong and John Gittelsohn): “New York City’s construction shutdown has derailed a $66 billion industry, increasing the risk on billions in loans issued to fund projects across the city. Before the virus outbreak, more than 450 construction projects were underway in New York, where lenders… originated roughly $8 billion in construction debt in the past two years, according to Real Capital Analytics In. For now, work has stopped. That includes construction on new offices for Google in Hudson Square, luxury condos on Billionaires’ Row and a years-in-the-making transformation of the area around Grand Central Terminal. With non-essential workers ordered to stay at home at least through the end of April, contractors and vendors might not be able to survive. Lenders, meanwhile, are left to wonder whether they’ll get paid as construction deadlines are missed with the city locked down.”

April 8 – Financial Times (Darren Todd): “Frances Katzen, one of New York’s top luxury property brokers, had made a brisk start to the year. Then, coronavirus struck. Within weeks, Ms Katzen saw $80m in sales evaporate as the pandemic put the city on lockdown. She has since regained $58m of those, including a $20m deal for a downtown penthouse that closed last week. But most buyers have fled. ‘The sky has fallen,’ said Ms Katzen… ‘We’re there.’ For New York developers, the dread is that a prolonged pandemic shutdown will not only scare away potential buyers but also prompt those who have already agreed deals — but not yet closed — to walk away. That, in turn, could cause lenders to seek recourse as developers fall behind sales milestones spelt out in their loan agreements. ‘There’s going to be a world of pain,’ one New York developer predicted… For developers, who are typically highly leveraged, the inability to complete construction or close deals could spell doom: sales contracts typically contain clauses that allow buyers to walk away with their deposits if a building has not been finished by a certain deadline. That is known as the ‘outside date’ and enforced by the New York state attorney-general.”

April 10 – Bloomberg (Anita Sharpe): “Bankruptcies related to Covid-19 shutdowns will set records in the next 12 months, according to Edward Altman, the professor emeritus at New York University’s Stern School of Business who developed a widely used method called the Z-score for predicting business failures. ‘Whether it’s corporate bankruptcies or personal, this is unprecedented,’ Altman said… ‘We will break the record in dollar amounts because there are much greater amounts of debt outstanding now than in any prior downturn.’”

April 4 – Wall Street Journal (Ben Eisen): “Wells Fargo… substantially curtailed its program for making large loans this week, one of the most pronounced signs yet of how the recent market turmoil is cutting off access to some types of mortgages. America’s largest mortgage lender will only refinance jumbo mortgages for customers who hold at least $250,000 in liquid assets with the bank… The change is effective immediately.”

April 7 – Financial Times (Richard Henderson): “Big US companies will spend half as much buying back their own stock this year compared with 2019, Goldman Sachs analysts predict, weakening a vital prop for the market as companies shore up their balance sheets. Share repurchases for companies in the benchmark S&P 500 index will hit $371bn by the end of the year, 50% lower than the $730bn spent last year, according to Goldman estimates…”

April 9 – Reuters (David French and Imani Moise): “Major U.S. lenders are preparing to become operators of oil and gas fields across the country for the first time in a generation to avoid losses on loans to energy companies that may go bankrupt, sources aware of the plans told Reuters. JPMorgan…, Wells Fargo…, Bank of America Corp and Citigroup Inc are each in the process of setting up independent companies to own oil and gas assets… The banks are also looking to hire executives with relevant expertise to manage them, the sources said.”

April 7 – Reuters (Lawrence Delevingne): “San Francisco-based Colchis Capital Management LP, a pioneer backer of online direct lending platforms, is winding down its main funds as disruptions caused by the novel coronavirus have started to hit its consumer and real estate loans…”

Fixed-Income Bubble Watch:

April 6 – Financial Times (Joe Rennison): “On a sunny day in May 2012, Ford employees dressed in a mix of blue and white T-shirts gathered on the lawn outside the company’s headquarters… celebrating the restoration of its investment-grade credit rating… Downgrades by S&P and Moody’s this month stripped the company of its investment-grade status once again, sending $36bn of debt back into junk territory. At the same time, the cuts have fed fears over the effects of a series of fallen angels — the moniker given to companies that lose their investment-grade title… A record $90bn of debt fell to junk status in March, according to Deutsche Bank… BofA warns that the total for the year could reach $200bn. Investors appear to be set for even higher tallies. At the end of last week, $360bn of triple B rated bonds, the lowest rung of investment grade, were trading with yields comparable to that of double B rated debt.”

April 7 – Bloomberg (Shruti Singh): “The risk of Illinois falling into junk territory is growing amid the economic toll and costs from battling the coronavirus pandemic. The lowest-rated U.S. state is ‘increasingly likely’ to be the first to carry a non-investment-grade rating on its general-obligation bonds, according to a Municipal Market Analytics report. Covid-19 threatens to reverse Illinois’s fiscal progress and could hurt the prospects of voters approving a progressive income tax in November to bring in more revenue, MMA analysts Matt Fabian and Lisa Washburn said…”

April 4 – Wall Street Journal (Jean Eaglesham): “A ‘sleeping risk’ on the books of U.S. businesses could be awakened by the pandemic, as the sudden cash crunch exposes a hidden type of financing that makes balance sheets look better, credit-rating firms are warning. The three biggest ratings firms each issued reports last month highlighting the dangers of supply-chain financing, a fast-growing, opaque technique for delaying payments to suppliers to improve cash flow. S&P Global Inc. called supply-chain finance a ‘sleeping risk’ that can ‘mask episodes of financial stress.’ A prime concern is that the banks or other lenders may yank the financing from struggling companies, cutting off a source of cash at a time when it is desperately needed. ‘If banks stop these facilities, it’s like cutting credit lines and we might see some companies run into heightened liquidity problems as a result,’ said Frédéric Gits, a group credit officer at… Fitch… Supply-chain financing has been around for decades but really took off after the financial crisis.”

April 8 – Bloomberg (Yakob Peterseil): “The biggest oil crash in almost three decades is all but wiping out investors in a complex structured product that’s traditionally marketed to savers and retirees. As the crude market reels from both the raging price war between exporting powers and the historic collapse in demand, debt securities tied to the commodity are trading at fire-sale prices. Structured notes worth hundreds of millions of dollars are effectively trading in distressed territory, often with just weeks or months left until they mature…”

China Watch:

April 5 – Wall Street Journal (Stella Yifan Xie and Xie Yu): “China is edging toward what could be its first credit downturn in decades, as personal-loan delinquencies in the country climb during the coronavirus pandemic. In recent weeks, executives at some Chinese banks and online lending platforms said more consumers have fallen behind on their credit-card and loan payments, which could snowball into higher defaults in the coming months. Some lenders have reduced loan originations as a result, despite regulators’ calls to keep credit flowing across the economy.”

April 9 – Bloomberg: “Chinese firms are joining a global legion of debt-saddled companies hammered by credit downgrades as the coronavirus pandemic weakens their finances. S&P Global Ratings, Moody’s… and Fitch… on aggregate issued over 50 downgrades on Chinese companies in the first quarter of this year.”

April 7 – Bloomberg: “Beijing’s grip over capital markets is being tested by Chinese companies’ exposure to the offshore bond market, where $87.3 billion owed by the nation’s firms comes due this year. Corporate credit held up well domestically as the coronavirus pandemic smashed global financial markets, with spreads for AA-rated local bonds (the equivalent of junk) falling to a three-year low. But the opposite was true for offshore debt. Yields for China junk bonds soared to as high as 14.1% in late March, an eight-year record and highest among the world’s other big markets. The divergence shows the limits of the government’s influence outside of mainland China’s borders.”

April 8 – Bloomberg: “Developers in China were in a weakened state even before this year’s coronavirus hit, adding to challenges as they head into what’s shaping up to be the worst economic slump in more than four decades. A Bloomberg analysis of 10 large real estate firms’ full-year earnings showed margins declined and liquidity buffers weakened in the 12 months ended Dec. 31. Now, property companies are facing more turbulence with apartment showrooms still shuttered amid the pandemic and buyers unwilling to make home purchases. Market watchers say some developers will have to offer deep discounts to meet sales targets, which is likely to further erode margins. At the same time, many companies have big debt loads they need to service.”

April 10 – Reuters (Zhang Yan, Cheng Leng, and Ryan Woo): “China’s Bank of Gansu has agreed to loan 30 billion yuan ($4.26bn) to state firms over the next three years, after the Gansu provincial government reportedly agreed to provide a capital injection following a spate of withdrawals at one branch last week. The Hong Kong-listed bank, which is controlled by the provincial government, pledge the loans in an agreement signed on Thursday with the Gansu branch of the State-owned Assets Supervision and Administration Commission and nine companies owned by the provincial government…”

April 8 – Bloomberg (Sofia Horta e Costa): “China’s second accounting scandal in less than a week is underscoring concern over lax corporate governance at some of the country’s fastest-growing companies. TAL Education Group, a tutoring business whose success turned founder Zhang Bangxin into one of China’s richest people, delivered the latest bombshell on Tuesday after saying a routine internal audit found an employee had inflated sales by forging contracts. The company’s American depositary receipts sank as much as 18%… The sell-off follows the 83% slump in Nasdaq-listed Luckin Coffee Inc. since the company announced that its chief operating officer and some underlings may have fabricated billions of yuan in sales for 2019.”

April 7 – Bloomberg (Nisha Gopalan): “Investors have been scalded by Luckin Coffee Inc.’s news this month that it inflated revenue numbers, a revelation that came less than a year after the chain went public on the Nasdaq exchange. Shares in the company — whose $645 million IPO was the second largest in the U.S. by a Chinese firm in the last 12 months — have swooned 74%. Suddenly, Chinese companies’ opaque numbers are dinner-table conversation again, with the scandal sending other listings from the nation into a tailspin and threatening to close off the overseas market for new issuers.”

April 9 – Reuters (Se Young Lee and Yawen Chen): “China’s factory gate prices fell the most in five months in March, with deflation deepening and set to worsen in coming months as the economic damage wrought by the coroanvirus outbreak at home and worldwide shuts down many countries… Friday’s data… suggested a durable recovery was some way off, with China’s producer price index (PPI) falling 1.5% from a year earlier, the biggest decline since October last year.”

April 8 – Bloomberg: “Amid all China’s efforts to contain the economic damage of the coronavirus outbreak, a crucial development slipped by almost unnoticed — the creation of the first national bad-debt asset manager in 20 years. Galaxy Asset Management Co. won approval in mid-March to convert into a financial asset management firm, gaining a much-coveted license to buy bad loans directly from banks nationwide, and the ability to borrow at relatively low rates. The economic dislocation from Covid-19 threatens to add 5.6 trillion yuan ($790bn) of bad debt — more than double the amount Chinese banks already sit on — according to S&P Global Inc.”

April 7 – Reuters (Kevin Yao): “China’s central bank will ramp up its policy easing to support the coronavirus-ravaged economy but debt worries and property risks will prevent it from following the U.S. Federal Reserve’s steep rate cuts or quantitative easing moves, policy sources said… ‘The PBOC will step up monetary policy easing, but it’s impossible for it to follow the Federal Reserve,’ said one of the sources. ‘The PBOC will take a step by step approach and reserve some ammunition.’”

April 6 – Bloomberg (Denise Wee and Rebecca Choong Wilkins): “It’s tough to find a bigger bull on delinquent Chinese debt than Benjamin Fanger. The Mandarin-speaking founder of ShoreVest Partners, a Guangzhou-based asset manager, built his firm around the idea that there’s money to be made from the nation’s growing pile of distressed credit. He says the opportunity is larger now than at any time in the 15 years since he started analyzing China’s nonperforming loans, or NPLs. He predicts it will only get bigger. Fanger also says the $1.5 trillion-plus market is full of pitfalls. ‘If you don’t have experience, it can be very risky…’”

April 6 – Reuters (Stephanie Nebehay): “China was the biggest source of applications for international patents in the world last year, pushing the United States out of the top spot it has held since the global system was set up more than 40 years ago, the U.N. patent agency said…”

Central Bank Watch:

April 6 – Financial Times (Chris Giles): “Bank of England governor Andrew Bailey has rejected suggestions the central bank should use monetary financing to protect and boost the economy amid the coronavirus crisis, saying it would ‘damage credibility on controlling inflation’…. Mr Bailey signalled he would oppose any calls for the BoE to print money to allow the government to run up a bigger deficit as it seeks to support companies, workers and households.”

April 7 – Reuters (Padraic Halpin): “Providing free cash for citizens, or the so-called dropping of ‘helicopter money’, is not a monetary policy tool fit for the coronavirus economic crisis, Irish central bank chief Gabriel Makhlouf said… ‘What we need here are measures to support households and firms through the crisis and it needs to be targeted,’ Makhlouf, who sits on the European Central Bank’s rate-setting Governing Council, told Irish national broadcaster RTE. ‘Helicopter money is not targeted and I don’t think it’s a tool that is fit for this particular crisis,’ he said…”

April 9 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank policymakers feared a rapid deterioration of the euro zone economy amid the coronavirus crisis but were far from united when they approved emergency measures last month, the accounts of their late-night March 18 meeting showed. With financial markets in meltdown and borrowing costs soaring for the euro zone’s weaker members, the ECB agreed at the meeting to discard many of its previous stimulus rules and buy up to 1.1 trillion euros ($1.2 trillion) of debt this year to help struggling firms and governments.”

April 7 – Bloomberg (Sotiris Nikas): “The European Central Bank said it would accept junk-rated Greek government bonds as collateral as part of wide-ranging measures to ease lenders’ access to liquidity. The… institution said it would temporarily increase its risk tolerance in order to support credit to the economy.”

April 9 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… warned that uncertainty over the country’s economic outlook was ‘extremely high,’ with corporate funding strains worsening. ‘The spread of the coronavirus is having a severe impact on Japan’s economy through declines in exports, output, demand from overseas tourists and private consumption,’ Kuroda said in a speech to a quarterly meeting of the central bank’s regional branch managers.”

Europe Watch:

April 8 – Financial Times (Darren Todd): “Negotiations between eurozone leaders to end an impasse over emergency lending procedures ended without agreement this morning, further delaying a broader report for EU27 leaders on measures to fight the crisis. The talks… are crucial for the survival of the eurozone and the entire post-1945 project of European unity, writes the FT editorial board…. Tensions are not confined to finance. The FT revealed today that the bloc’s science chief had quit — although Brussels disputes the reasons for his departure — lamenting ‘the complete absence of co-ordination of healthcare policies among member states, the recurrent opposition to cohesive financial support initiatives, the pervasive one-sided border closures’. Santander chief Ana Botín… says the failure to agree a common response is fuelling dissatisfaction in countries such as Italy over the perceived lack of solidarity from Brussels. The EU, she says, faces ‘a moment of truth’. ‘The test is very simple: do all member states believe that we are in this together?’”

April 8 – Bloomberg (Viktoria Dendrinou and William Horobin): “Europe’s finance chiefs agree the economic fallout from locking down a continent to tackle the coronavirus will eclipse all previous crises. Yet there’s an all-too-familiar pattern to their talks as divisions of old impede their ability to unite behind a response. A deal on joint action is still possible… Some officials said it’s closer than others have portrayed it to be. But it will require a compromise that’s been elusive as the Dutch lead the resistance against Italy burdening northern Europe’s taxpayers with helping out the poorer south… On the table are recovery funds, credit lines and, albeit less likely, joint ‘coronabond’ sales. Key for beneficiaries like Italy is to secure vital economic aid while the Netherlands and its allies want strings attached.”

April 8 – New York Times (Liz Alderman and Jack Ewing): “Cavernous factories devoid of workers. Cranes frozen in midair over construction sites. Millions of people confined to their homes, spending a fraction of what they used to before the coronavirus hit. Europe’s pandemic-induced lockdowns were widely expected to throw the continent into a deep recession. On Wednesday, Germany and France, the largest economies, showed just how bad it’s about to get, warning that they were headed toward their sharpest downturns since World War II.”

April 8 – Financial Times (Martin Arnold and David Keohane): “The German and French economies are in the grip of historic recessions which are set to wipe out many years of growth in only a few months… Germany’s economy will shrink by almost 10% in the three months to June, according to the country’s top economic research institutes — the sharpest decline since quarterly national accounts began in 1970 and double the size of the biggest drop in the 2008 financial crisis.”

April 4 – Bloomberg (Tommaso Ebhardt and Sonia Sirletti): “Italy is finalizing new measures aimed at providing liquidity to companies, Finance Minister Roberto Gualtieri said. The government will guarantee loans of up to 800,000 euros at 100%, and will boost guarantees to 90% on another 200 billion euros ($216bn) in loans, Gualtieri said… Companies will be able to seek bank loans for as much as 25% of their revenue, and those new benefits could be combined with the other measures the government is studying to help Italian businesses.”

EM Watch:

April 8 – Bloomberg (Eric Martin and Saleha Mohsin): “The International Monetary Fund is going into overdrive heading into its spring meetings next week as the global pandemic spurs urgent aid requests from a record number of developing countries. IMF Managing Director Kristalina Georgieva is focused on winning board approval for tools to lend money as quickly as possible. One plan would double the $50 billion available through two emergency financing mechanisms because countries have requested about half the existing resources already. Another would make available short-term loans to a small group of strongest nations to avoid a cash crunch. Georgieva has pledged to deploy the IMF’s $1 trillion lending capacity to counter a recession that she says will be far worse than the 2008-09 global financial crisis.”

April 5 – Financial Times (Steve Johnson): “As the coronavirus crisis deepens in emerging economies around the world, collapsing currencies, commodity prices, export earnings and tourism revenues threaten to shred the finances of many governments, leaving them scrambling to avoid default. Zambia has already called in advisers to restructure its debt while Ecuador has asked for more time to make coupon payments on three dollar bonds. Few analysts believe they will be the last. Tunisia, Bahrain and Angola are among the other emerging and frontier countries that some economists fear will struggle to meet impending payments on their cross-border debt… The plunge in most emerging market currencies against the dollar has sharply increased the cost of servicing hard-currency debts, creating a serious threat to financially weaker states.”

April 6 – Financial Times (Benedict Mander and Colby Smith): “Argentina unilaterally postponed until next year the payment on $10bn of dollar-denominated debt governed by local law on Monday in what some analysts have called a technical default. The move has raised new concerns about Argentina’s approach to debt restructuring as it negotiates the fate of $83bn in debt issued under foreign law.”

April 6 – Bloomberg (Dana Khraiche): “Lebanon’s foreign-exchange crisis is intensifying, prompting another appeal by the government for financial aid after its debt default last month. Local banks have reduced the amount of dollars customers can withdraw from their accounts and even forced them to accept conversions into the local currency in some instances.”

April 6 – Bloomberg (Subhadip Sircar): “India’s sovereign bond yields are climbing just as the government is kicking-off its record borrowing plan, in a sign of market discomfort with the heavy debt supply. The benchmark 10-year yield extended rise on Tuesday, after jumping by the most in over a year in the previous session, in reaction to the government’s 4.88 trillion rupees ($64bn) fund-raising plan for April-September. That’s despite the Reserve Bank of India’s recent reduction in key policy rate by 75 bps and liquidity inducing measures to shield the economy from the coronavirus impact.”

April 6 – Reuters (Jamie McGeever): “S&P Global Ratings lowered its outlook on Brazil’s sovereign debt to ‘stable’ on Monday, citing huge government spending to soften the economic blow from the coronavirus, but said a credit rating upgrade is still more likely than a downgrade. While the fiscal deficit is expected to double this year to 12% of gross domestic product, S&P remains confident that the government will resume its drive to get public finances in order once the crisis is over.”

Japan Watch:

April 6 – Reuters (Tetsushi Kajimoto): “Japanese Prime Minister Shinzo Abe pledged… to roll out an unprecedented economic stimulus package, equal to 20% of economic output, as his government vowed to take ‘all steps’ to battle deepening fallout from the coronavirus. The package… will total 108 trillion yen ($989bn), far exceeding one compiled in the wake of the 2009 financial crisis totalling 56 trillion yen in size, with fiscal spending of 15 trillion yen.”

April 7 – Bloomberg (Paul Jackson): “Even with a record stimulus package, Japan’s economy is heading toward a record contraction of 25% this quarter following Prime Minister Shinzo Abe’s declaration of a state of emergency in Tokyo, Osaka and some other parts of the country, according to Goldman Sachs.”

Leveraged Speculation Watch:

April 9 – Bloomberg (Lisa Lee): “There’s a huge catch to the Federal Reserve’s purchasing program that has been widened to include collateralized loan obligations: The central bank will only buy AAA bonds of CLOs that hold newly-originated leveraged loans. The expanded Term Asset-Backed Securities Loan Facility (TALF)… was welcomed by the $690 billion CLO market with Wells Fargo analysts led by Dave Preston hailing it an ‘early Easter present.’ Yet there’s already skepticism, including from Preston, about how quickly it can help kick-start the new issue machine that has sputtered amid volatility caused by the coronavirus with only a couple of deals surfacing in the past few weeks.”

Geopolitical Watch:

April 9 – New York Times (Peter S. Goodman, Katie Thomas, Sui-Lee Wee and Jeffrey Gettleman): “As they battle a pandemic that has no regard for borders, the leaders of many of the world’s largest economies are in the thrall of unabashedly nationalist principles, undermining collective efforts to tame the novel coronavirus. The United States, an unrivaled scientific power, is led by a president who openly scoffs at international cooperation while pursuing a global trade war. India, which produces staggering amounts of drugs, is ruled by a Hindu nationalist who has ratcheted up confrontation with neighbors. China, a dominant source of protective gear and medicines, is bent on a mission to restore its former imperial glory. Now, just as the world requires collaboration to defeat the coronavirus — scientists joining forces across borders to create vaccines, and manufacturers coordinating to deliver critical supplies — national interests are winning out.”

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