My Weekly Commentary: Just the Facts

Total Commercial Paper slipped $1.3bn to $944bn. CP declined $95bn over the past year, or 9.1%.

Currency Watch:

The U.S. dollar index declined 0.6% to 96.35 (up 6.7% y-t-d). For the week on the upside, the Swedish krona increased 1.6%, the euro 1.2%, the Brazilian real 1.1%, the British pound 0.1% and the Canadian dollar 0.1%. For the week on the downside, the South African rand declined 3.5%, the Norwegian krone 2.3%, the Mexican peso 2.2%, the Japanese yen 1.2%, the New Zealand dollar 0.8%, the Australian dollar 0.3% and the Swiss franc 0.1%.

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.4% (up 3.5% y-t-d). Spot Gold fell 1.9% to $1,168 (down 1.4%). July Silver sank 4.3% to $15.98 (up 2.4%). June Crude lost $1.17 to $59.13 (up 11%). June Gasoline dropped 2.7% (up 38%), and June Natural Gas fell 1.9% (down 10%). July Copper lost 1.3% (down 5%). July Wheat rallied 8.4% (down 12%). July Corn recovered 2.6% (down 8%).

Fixed Income Bubble Watch:

June 5 – Bloomberg (Simon Kennedy): “There’s a $400 billion reason to worry if you’re a bond investor. That’s how much global currency reserves have shrunk since reaching a record $12 trillion last August… The decline is another potential source of volatility in debt markets rocked this week in part by ebbing deflation fears in Europe and speculation the U.S. Federal Reserve will soon raise interest rates. That’s because contracting reserves leave countries with less money to recycle into bonds, removing a key support, strategists at… Pavilion Global Markets Ltd., said in a note… titled ‘Falling Reserves, Rising Yields.’ Periods of falling reserves historically coincided with increased fixed-income volatility, as measured by a market stress indicator created by the ECB and based on fluctuations in the German 10-year bond, according to the Pavilion team, led by Pierre Lapointe.”

June 3 – Bloomberg (Alexandra Scaggs): “More Wall Street executives are sounding alarms about the bond market. The latest to warn were Gary Cohn, president of Goldman Sachs Group Inc., and Anshu Jain, co-chief executive officer of Deutsche Bank AG. The concern is bond investors looking to buy, or especially to sell, will face wide prices swings and higher costs to get a transaction done. ‘The problem is on the days when you need liquidity, it probably won’t be there,’ said Cohn… Large Wall Street banks, or dealers, are carrying a smaller share of bonds on their books, as regulations restrict the capital they can hold on their balance sheets. Money managers, meanwhile, are holding a lot more of them. Dealer inventories dropped by 27% between 2007 and early 2015 while assets held by bond mutual funds and exchange-traded funds almost doubled.”

June 3 – Bloomberg (Michelle Davis): “A dark shadow is lurking behind the happy façade of rising stock prices. U.S. companies are borrowing money faster than they’re earning it — and they’re doing it at the quickest pace since the aftermath of the financial crisis. Instead of deploying the debt to build factories, hire new workers or expand product lines, companies are funneling more of their money to shareholders or using it to fund deals. Stock buybacks reached an all-time high last year and the volume of global mergers and acquisitions announced so far this year would make it the second-busiest ever… The debt undermines future growth and could dent company income when borrowing costs rise… The consequence: profitability, buoyed by cheap money since rates went to near-zero in 2008, will sink. ‘Companies have said, ‘We don’t have an ability to grow organically, so we can distract shareholders instead,’’ according to Jody Lurie, a credit analyst at Janney Montgomery Scott… ‘When they buy back shares, all it does is optically make earnings per share look better.’”

June 1 – Financial Times (James Fontanella-Khan and Robin Wigglesworth): “US dealmaking hit an all-time monthly record in May, surpassing the previous highs seen during the peak of the dotcom bubble and the zenith of the debt boom that led to the 2008 financial crisis. The overall value of deals in US-bound mergers and acquisitions activity amounted to $243bn in May compared to $226bn during the same month in 2007 and $213bn in January 2000, the previous biggest and second biggest months respectively, according to Dealogic… The data underline how frenzied US dealmaking has become as cheap debt and bullish boardrooms fuel an M&A boom of a size not seen since just before the last two equity market crashes.”

June 3 – Bloomberg (Laura J Keller): “For the hedge funds and money managers that pick over the credit market’s scrap heaps, Puerto Rico has become the new ground zero. Some of the same distressed-debt buyers that started battling seven years ago over the remains of Lehman Brothers… are now girding for a rematch over the U.S. territory’s $72 billion of debt… The conflict is heating up after the Puerto Rico Electric Power Authority, known as Prepa, met with the financial adviser to its creditors Monday to restart talks toward a restructuring that may ask bondholders to take a loss or wait longer to be repaid. Hedge funds now hold as much as 30% of the obligations of Puerto Rico and its agencies, Barclays Plc municipal-debt strategist Mikhail Foux estimates. ‘It’s extremely disorderly and nasty,’ said Joseph Rosenblum, director of municipal-credit research at AllianceBernstein… This ‘messy approach to trying to resolve something with no clear structure or guidance doesn’t give a bondholder any kind of confidence,’ he said.”

U.S. Bubble Watch:

June 3 – New York Times (Noam Scheiber and Dalia Sussman): “Americans are broadly concerned about inequality of wealth and income despite an economy that has improved by most measures, a sentiment that is already driving the 2016 presidential contest, according to a New York Times/CBS News poll. The poll found that a strong majority say that wealth should be more evenly divided and that it is a problem that should be addressed urgently. Nearly six in 10 Americans said government should do more to reduce the gap between the rich and the poor, but they split sharply along partisan lines…These findings help explain the populist appeals from politicians of both parties, but particularly Democrats, who are seeking to capitalize on the sense among Americans that the economic recovery is benefiting only a handful at the very top.”

June 3 – Bloomberg (Hugh Son and Pamela Roux): “Jamie Dimon, who helped assemble Citigroup Inc. and then improved on the experiment with JPMorgan Chase & Co., is responsible for two of the biggest banks the world has ever seen. His life’s work also made him rich. With JPMorgan shares near a record high, Dimon’s net worth is about $1.1 billion… Dimon’s fortune derives from a $485 million stake in… JPMorgan… and an investment portfolio seeded by proceeds from Citigroup stock sales. Dimon’s status is unusual because, with the exception of former mentor Sanford ‘Sandy’ Weill, few bank managers accumulate that much wealth. Most finance-industry billionaires start businesses or investment firms, such as hedge-fund tycoon George Soros, who is worth $28.5 billion, or Blackstone Group LP co-founder Steve Schwarzman, worth $13.4 billion.”

June 1 – USAToday (Greg Gardner): “New-car sales are running at near-peak levels, partly because many consumers are financing their purchases for longer terms. The average new car loan has reached a record 67 months, reports Experian… The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier. Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.”

June 5 – Bloomberg (Prashant Gopal and John Gittelsohn): “The sales office for condominiums at Miami’s Brickell City Centre attracted more than 100 visitors daily last year, with prospective buyers crowding in and snapping selfies beside a scale model of the $1 billion project. Now, the flow of people has trickled to about a quarter of what it once was. ‘Buyers are asking really good questions’ instead of rushing into deals, said Stephen Owens, president of the U.S. unit of Hong Kong-based Swire Properties Ltd., the developer of the 9-acre condo, hotel, office and shopping complex. ‘Two years ago, it was, ‘Where can I sign?’.’ Downtown Miami’s luxury-condo boom — fueled by buyers from Latin America and Europe willing to pay half the purchase price up front — is becoming a casualty of the year-long climb in the U.S. dollar. Diminished purchasing power and rising prices are holding back the overseas investors that make up the bulk of sales at new towers, cooling a frenzied market.”

Federal Reserve Watch:

June 4 – Wall Street Journal (Kevin Brady): “In 1913 President Woodrow Wilson favored the creation of a central bank, but the legacy of President Andrew Jackson—who vetoed a bill to renew the charter of the Second Bank of the United States in 1832—still stood firm in some parts of the country. So to get Congress to pass the Federal Reserve Act, Wilson had to retain the support of pro-central bank northeastern lawmakers while convincing southern and western Democrats that legislation would not, in fact, create a central bank. Wilson’s ingenious solution was federalism: a Federal Reserve composed of 12 district banks under the supervision of a board in Washington. Though arising out of political necessity, the structure of shared decision making and decentralized economic analysis has proved beneficial by ensuring that input into monetary policy comes from the diverse regions of the complex U.S. economy. But this balance is being upset by the growing power of the Board of Governors in Washington, D.C., and one district bank, the Federal Reserve Bank of New York.”

Global Bubble Watch:

June 3 – Bloomberg (Kasia Klimasinska): “The Federal Reserve should hold off from raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time in three months. The lender also said that the dollar was ‘moderately overvalued’ and a further marked appreciation would be ‘harmful,’ in a statement released in Washington on Thursday on its annual checkup of the U.S. economy. ‘The FOMC should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,’ the IMF said. Based on the fund’s economic forecast, and ‘barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.’”

June 3 – Bloomberg (Susanne Walker Barton and David Goodman): “With an insouciant turn of phrase, Mario Draghi whipped up a frenzy of selling in government bonds that left German securities with their worst two-day slump in the history of the euro era. Benchmark Treasury 10-year note yields had the biggest two-day increase in four months after the European Central Bank President said markets must get used to periods of higher volatility… Traders in New York canceled meetings Wednesday as the bond rout intensified. ‘The ECB doesn’t seem too concerned with recent volatility, and so that’s a green light for that volatility to continue without the ECB reacting,’ said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin.”

June 3 – Bloomberg (Tracy Alloway): “Petrobras, the scandal-ridden, junk-rated, state-controlled Brazilian oil producer, surprised markets to sell $2.5bn worth of bonds with a 100-year maturity on Monday. Here’s what the unusual debt sale can tell us about markets. Investors are still craving returns – The new Petrobras debt sold like hot cakes thanks to the juicy returns on offer. …the company issued the bonds to yield 8.45% — that’s far higher than Mexico’s 100-year bonds, which are trading at a yield of 5.59% or 30-year U.S. Treasuries yielding 2.94%. But that 8.45% yield was also 0.4 percentage point less than the price guidance provided by the deal’s bankers.”

May 31 – Bloomberg (Jason Scott): “Sydney is in the grip of a housing bubble, Australia’s most-senior economic bureaucrat said in one of the strongest warnings yet by a government official. ‘When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney — unequivocally,’ Treasury Secretary John Fraser said… ‘Frankly, whatever the data says, just casual observation would tell you that’s the case.’ Home prices in Sydney rose 15% in May from a year earlier… Australia’s major banks have said they will curb growth in home loans to investors after the country’s financial services regulator asked lenders to limit expansion of these mortgages to 10% a year.”

June 2 – Bloomberg (Katya Kazakina): “In November, a painting of a pensive young woman by French artist Francis Picabia sold for 145,000 euros ($181,159) at auction in Paris. Six months later, the same 1940s work appeared at Christie’s in New York, and at least three bidders pushed the price to $580,000. The anonymous seller scored a 220% gain… The practice of flipping art, popular among some buyers of inexpensive emerging artists, is increasingly reaching the market for established masters such as Andy Warhol, Gerhard Richter and Picabia. Driving it are record prices for high-end artworks and Wall Street investors who are prioritizing rapid returns over long-term collecting. Trophy works that quickly returned to auction were once perceived as ‘a woman who has been divorced three times,’ said Frances Beatty, vice president of Richard L. Feigen & Co., a New York gallery. “Because art is seen as an asset class, the more rapid turnover is considered encouraging. There’s a whole new generation of collectors who are playing the art market.”

Europe Watch:

June 5 – Reuters (Karolina Tagaris and Angeliki Koutantou): “Greek Prime Minister Alexis Tsipras on Friday spurned ‘absurd’ terms of proposed aid from lenders and delayed a debt payment to the International Monetary Fund, prolonging an impasse that threatens to push Greece into default and out of the euro zone. In a defiant speech aimed at winning parliament’s backing for his rejection of the austerity-for-aid package, Tsipras balanced indignation with confidence that a deal was ‘closer than ever before’ to keep his country inside the currency bloc. The contradictory message underscored the growing pressure on Tsipras to quickly sign a deal before cash-strapped Athens runs out of money, while also trying to placate hardliners in his leftist party who oppose the terms creditors are demanding. One far-left deputy minister suggested snap elections as a way out, by obtaining public legitimacy for difficult decisions to secure aid. But Tsipras made no mention of elections in an address that focused on attacking the aid plan offered by euro zone and IMF creditors. ‘The Greek government cannot consent to absurd proposals,’ Tsipras told parliament. ‘I want to believe that this proposal was a bad moment for Europe or at the very least a bad negotiating trick and will soon be withdrawn by the masterminds themselves,’ he said.”

China Bubble Watch:

June 4 – Bloomberg: “China has granted another 1 trillion yuan ($161bn) quota to provinces to swap high-interest debt into low-cost bonds, doubling the previous amount, according to people familiar with the matter. The increase comes as the first stage of the bond swap is under way. Commercial banks have been buying such bonds after the central bank flooded the interbank market with cheap funds… The expansion will help the government cut risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The process — which includes inducements for banks to buy new, longer-maturity, lower yielding bonds — is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown. Local-government obligations may have reached 25 trillion yuan, bigger than the size of the German economy, according to estimates from Mizuho Securities… That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office.”

June 3 – Bloomberg (Ye Xie and Bonnie Cao): “China’s initial public offerings are such hot commodities that a company seeking $2 billion attracted bids approaching the entire annual economic output of Hong Kong. China National Nuclear Power Co., the country’s second-biggest atomic power operator, locked up 1.69 trillion yuan ($273 billion) in bids for its IPO… The offering may be the biggest in China since August 2010. Individual investors are piling into newly-issued stocks on mainland exchanges after regulators discouraged companies from selling equity at high valuations. Shares of the 144 firms that went public this year have jumped an average 539% so far, including a 44% increase on the first day of trading, the maximum amount allowed by local bourses…”

June 1 – Bloomberg: “One of the many mysteries behind the share price collapse of the solar panel maker controlled by Li Hejun is this: Which of the Chinese billionaire’s many creditors risk losing every yuan they put into his company? A plethora of Chinese lenders are exposed to Hanergy Thin Film Power Group Ltd. and its parent company… On May 20, 47% of Hanergy Thin Film’s market value vanished in minutes and it’s now under probe by the Hong Kong Securities & Futures Commission. Creditors are nervous: A group of 11 lenders have asked for a meeting to voice their concerns and discuss their $82 million loan… ‘The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,’ said Charles Yonts, an analyst with CLSA Asia-Pacific Markets… ‘The opacity about parent finances and billings is extraordinary.’ …Hanergy Group has given no public accounting of all its debt or the debt scattered among its units.’”

June 4 – Bloomberg: “Guangxi Nonferrous Metals Group Co. may have difficulty repaying its bonds on its own, China Credit Rating Co. said, highlighting the risk of it becoming the second state-owned firm to default. The company, based in Nanning in China’s southern Guangxi province, must repay 1.3 billion yuan ($210 million) of principal and 62.92 million yuan of interest on its 4.84% notes due June 13… A bottle maker that supplies Coca-Cola Co. became the fourth company to miss obligations in the onshore bond market last week and a maker of smoked duck leg cited increasing difficulty getting credit as it defaulted on bank loans ahead of a bond deadline June 12. ‘Lower-rated issuers are facing big pressure to repay debt,’ said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. ‘But given the loose monetary environment, there won’t be a surge in bond defaults in China.’”

EM Bubble Watch:

June 3 – CNN: “Venezuela’s economy is imploding. Its currency, the bolivar, is literally worth less than a penny. Just a month ago, $1 was worth 279 bolivars. That was already pretty dismal for Venezuela. Now $1 equals 408 bolivars, according to the unofficial exchange rate, which most Venezuelans get when they try to trade currency. Put another way, one bolivar equals $0.002 — less than a penny. The country’s currency has lost nearly half its value since the beginning of May…”

June 1 – AFP: “Saudi Arabia’s foreign currency reserves dropped by $49 billion in the first four months of 2015 following the dive in world oil prices, a report said… The reserves, piled up in the past decade due to high crude prices, dropped from $732 billion at the end of 2014 to $683 billion at the end of April, Saudi firm Jadwa Research said in a report. In March and April alone, the reserves dipped $31 billion, it said.”

June 4 – Bloomberg (Deema Almashabi): “Saudi Arabia’s oil-fueled economic boom is showing signs of losing steam. Official data released last week showed demand for loans growing at the slowest pace since 2011 and the kingdom’s currency reserves plunging for a third month in a row. An index reflecting the performance of the non-oil private economy fell to the lowest level in a year in May. The numbers signal that the drop in oil prices is starting to hurt the biggest Arab economy at a time when the kingdom is undergoing sweeping political changes at home and waging a regional war. The government is moving ahead with spending plans that will widen the budget deficit to 20% of economic output…”

June 3 – Bloomberg (Onur Ant and Selcan Hacaoglu): “Turkey’s consumer price inflation accelerated in May to the highest level this year, led by price gains in transportation and housing. The annual rate of inflation rose to 8.09% from 7.91% in the previous month…”

Brazil Watch:

June 3 – Bloomberg (Mario Sergio Lima): “Brazil raised interest rates for a sixth straight time as policy makers work to convince investors that inflation will reach target. The bank’s board… raised the benchmark rate by a half-point to 13.75% Wednesday, the highest since January 2009… Economists and traders bet the deepest recession in 25 years will prevent Tombini from raising interest rates as much as needed to slow inflation to the 4.5% target next year. Meanwhile, Tombini has pledged to do what it takes to meet the goal even as unemployment rises. ‘The central bank needs to regain credibility to help confidence rise, and they are on the right path,’ Flavio Serrano, senior economist at BESI Brasil… ‘Wrong economic policies are to blame for the economic state right now.’”

Geopolitical Watch:

June 3 – Reuters (Kiyoshi Takenaka): “Philippine President Benigno Aquino made a veiled comparison… between China’s activities in the South China Sea and Nazi Germany’s expansionism before World War Two, echoing similar remarks he made last year that outraged Beijing. Aquino, who is expected to agree beefed up defense ties with Japan when he meets Prime Minister Shinzo Abe on Thursday, also urged Beijing to rethink its land reclamation projects in the disputed waters… Asked about Washington’s strategic ‘rebalance’ to Asia and China’s maritime moves, Aquino suggested the U.S. role was key, and alluded to Nazi Germany’s territorial expansion before World War Two and Western appeasement. ‘If there was a vacuum, if the United States, which is the superpower, says ‘We are not interested’, perhaps there is no brake to ambitions of other countries,’ he said… Recalling documentaries on Germany’s expansionism before the war, Aquino added: ‘The commentators on these documentaries were saying, ‘If somebody said stop to (Adolf) Hitler at that point in time, or to Germany at that time, could we have avoided World War Two?’ ‘So, I say again, America’s rebalancing sends a definite signal that we are all supposed to be living under norms that we agreed upon.’”

June 5 – Reuters (Siva Govindasamy): “Vietnam is in talks with European and U.S. contractors to buy fighter jets, maritime patrol planes and unarmed drones, sources said, as it looks to beef up its aerial defenses in the face of China’s growing assertiveness in disputed waters. The battle-hardened country has already taken possession of three Russian-built Kilo-attack submarines and has three more on order as part of a $2.6 billion deal agreed in 2009. Upgrading its air force would give Vietnam one of the most potent militaries in Southeast Asia.”

June 5 – Bloomberg (Michael A Riley and John Walcott): “The disclosure by U.S. officials that Chinese hackers stole records of as many as 4 million government workers is now being linked to the thefts of personal information from health-care companies. Forensic evidence indicates that the group of hackers responsible for the U.S. government breach… likely carried out attacks on health-insurance providers Anthem Inc. and Premera Blue Cross that were reported earlier this year, said John Hultquist of iSight Partners Inc., a cyber-intelligence company… The thefts are believed to be part of a larger effort by Chinese hackers to get health-care records and other personal information on millions of U.S. government employees and contractors from various sources, including insurers, government agencies and federal contractors, said an American intelligence official…”

Russia and Ukraine Watch:

June 4 – Reuters (Richard Balmforth and Pavel Polityuk): “Ukraine’s president told his military on Thursday to prepare for a possible ‘full-scale invasion’ by Russia all along their joint border, a day after the worst fighting with Russian-backed separatists in months. His address in parliament was one of the first times Petro Poroshenko has used the word ‘invasion’ to refer to Russia’s behavior since the start of a separatist rebellion in the east… Referring to a 12-hour firefight involving artillery on both sides on Wednesday when Ukraine says the rebels tried to take the town of Maryinka, Poroshenko said: ‘There is a colossal threat of a renewal of large-scale military operations from the side of the Russian-terrorist groups.’ ‘The military must be ready as much for a renewal of an offensive by the enemy in the Donbass as they are for a full-scale invasion along the whole length of the border with Russia. We must be truly ready for this.’”

Japan Watch:

June 4 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The excessive strength in the yen that damaged Japanese manufacturing in recent years has now been corrected, according to an ally of Bank of Japan Governor Haruhiko Kuroda. ‘The abnormally strong yen has been corrected,’ said Yutaka Harada, who joined the central bank’s policy board in March… Harada’s remarks underscore that Japanese policy makers aren’t seeking further declines in the currency… Since reaching a postwar high of 75.35 in 2011, the yen has fallen 40%, aided by unprecedented monetary easing that Kuroda’s using to reflate the world’s third-biggest economy. ‘Harada’s comments indicate that the BOJ sees no need for additional easing anytime soon,’ said Kazuhiko Ogata, an economist at Credit Agricole SA. ‘The government has become increasingly aware of the negative effects of the weak yen on households and small companies, and that’s something the BOJ can’t ignore.’”