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Financial Euphoria

Tepper stokes the melt-up.

"I am definitely bullish. The budget deficit is shrinking massively. Guys who are short, they better have a shovel to get out of the grave." Hedge fund manager David Tepper, CNBC, May 14, 2013

Mr. Tepper has every reason to be euphoric. His $7bn estimated net worth places him #53 on the Forbes U.S. Billionaires list (and ascending briskly). Few have profited more from central bank monetary largess and attendant asset inflation. Few are currently benefitting more from the Fed's $85bn monthly quantitative easing program.

I'll view Tepper's Tuesday CNBC appearance as confirmation of the U.S. stock market officially attaining "Financial Euphoria." So it's not an inopportune time to reread John Kenneth Galbraith's little gem "A Short History of Financial Euphoria." There is a long history of manias and, as Galbraith points out, there are common themes and common conclusions.

The commonly accepted view sees manias as episodes of irrational crowd behavior (i.e. a bunch of lunatics running around trading tulip bulbs). Mr. Galbraith sees the "mass escape from sanity by people in pursuit of profit." Fair enough, though I tend to view perfectly rational behavior as the more typical yet unappreciated theme of major financial Bubbles. Bouts of irrationality would be far less dangerous.

Sure, speculative episodes do in fact appear irrational; though, I would argue, mostly in hindsight. Mr. Tepper doesn't appear to be a raving mad speculator. Now a full-fledged market legend of our gilded age, Tepper is a bit manic, kind of annoying, incredibly successful at speculating and definitely rational. He and those of his fortunate ilk are at the precipice of potentially adding billions more to their colossal treasure troves. And what if they're wrong about the markets and the all-powerful cadre of global central banks? Well, they could lose an enormous amount of money and survive with more than ample resources for the "good life" (with, perhaps, fewer collectables and trophy properties). The point is, at this stage of a long inflationary asset market boom, it's perfectly rational to double-down with the "house's money" and play for the spectacular big win. They're just electronic chips, for heaven's sake.

Today, with markets at all-time highs, Tepper exudes unequivocal financial genius. Having enjoyed years to master their craft, it's perfectly rational for the successful market operators these days to use this bout of unprecedented ultra-loose finance and government backstops to accumulate as much financial wealth as possible. That's the norm for speculators going back centuries. It's worth noting, however, that when filthy rich market speculators were in the past celebrated for their brilliance and extraordinary market acumen - well, it proved a decent juncture to start worrying about the future. This spectacular cycle of speculator wealth accumulation has been going on for so long now that everyone has simply stopped worrying.

Understanding the dynamics of market euphoria and crowd behavior remain a fascinating and worthwhile endeavor. From an analytical perspective, however, I've always focused more on the finance underpinning the boom. Show me a manic Bubble period in the markets and I'll show you underlying monetary disorder. And perhaps it's easy to see and perhaps it's not. And throughout about every historic Bubble episode, there inevitably reaches a manic point of Financial Euphoria that corresponds to an unsustainable manic expansion of suspect finance. Financial Euphoria and unstable finance make dicey bedfellows.

Euphoria has reached the point where the markets have become largely immune to bad news and negative fundamental developments. Actually, negatives are nowadays welcomed to the party. On a macro basis, weak economic data ensures a longer period of aggressive global monetary stimulus. On a micro stock basis, deteriorating fundamentals equate with larger short positions. And right now, nothing has the equities markets more ebullient than squeezing the shorts. No reason to fret stagnant earnings, a stronger dollar, faltering global growth and myriad developments that could bring this party to a rapid conclusion.

Yet bullish market pundits these days argue that market speculation has not yet reached dangerous levels. Some admit to "pockets of froth." "No sign of public exuberance." Heck, the public hasn't even succumbed yet. Market excess is "certainly not at 1999 levels."

Well, one has to go all be way back to 1999 for an environment so rife with short squeezes. Indeed, no game in the markets these days is as remotely profitable as buying heavily shorted stocks and forcing the shorts to buy back their borrowed shares (and bonds?) at higher prices. Squeezing shorts has become the hot topic on day-trading discussion boards. It has become popular sport throughout the leveraged speculating community. And I suspect that buying baskets of heavily shorted stocks has become a hot venue for algorithmic ("algo") trading. Why not just buy a basket of heavily shorted stocks at the open and then gun the S&P futures?

Short squeezes can play a major role in destabilizing markets - equities and fixed income. On the one hand, widespread buying (short covering) provides a powerful boost to marketplace liquidity. This is the proverbial "throwing gas on a fire" - for markets already gorging on liquidity and speculative excess. As for market psychology, having the bears on the run helps jolt sentiment past optimism to exuberance and Euphoria. With the depleted bears largely out of the way, a potential source of selling pressure is removed from the marketplace. And as market dislocations see an increasing number of stocks experience spikes and upside gaps, long sellers are prone to think twice before selling. A short seller panic and attendant sellers' strike is the stuff of Financial Euphoria.

Why did Nasdaq collapse in 2000? Because of several years of excess that culminated in a historic market squeeze and speculative free-for-all in 1999. It's "funny" how market dynamics work. With industry fundamentals turning increasingly problematic in 1999 and stock prices diverging markedly from underlying fundamentals, short positions were expanding. But in the post-LTCM bailout backdrop the Fed was incentivizing long-side speculation, while impairing the bears.

With short positions in "weak hands," a Fed-induced market rally evolved into a powerful short squeeze and precarious bout of Financial Euphoria. Along the way, myriad hedging strategies combined with leveraged long-side speculation in a bustling derivatives marketplace. As the market broke loose on the upside, those on the wrong side of derivative trades were forced to buy stocks into a frantically advancing market.

Deteriorating fundamentals were easily disregarded, as stocks marched ever higher on an almost daily basis. When the speculative Bubble eventually burst, the crisis of confidence in the market was exacerbated by virtually collapsing fundamentals. The gulf that had widened dramatically during Financial Euphoria was quickly rectified by a panic collapse in stock prices.

Abruptly, buyers disappeared and sellers were left wondering how the liquidity backdrop had been so transformed almost overnight. The liquidity surge from short squeezes and panic covering had set the stage for payback time. Derivatives trading that had helped fuel market melt-up suddenly was fueling meltdown. And as it has accomplished so often in history, Financial Euphoria ensured that virtually everyone found themselves with too much long (not enough short) exposure come the inevitable abrupt market reversal. The technology stock crash was then exacerbated by shorts pouncing on what were clearly unsustainable stock prices and a bursting industry Bubble.

Investors, the equities marketplace, corporate debt, the technology industry and the U.S. economy were in a much weaker position because of 1999 market Euphoria. And at risk of blasphemy, it's worth noting that some of the most sophisticated market operators were punished by a Bubble that had somehow burst prematurely.

I don't mean to imply that today's environment is comparable to 1999. The U.S. economy was sounder in 1999 - and the global economy was a whole lot more stable. Global imbalances in 1999 were insignificant compared to the present. The U.S. economic and Credit systems had yet to be degraded by a doubling of mortgage debt and a massive misallocation of resources. The federal government hadn't doubled its debt load in four years. Europe had not yet terribly impaired itself with a decade of runaway non-productive debt growth. China and the "developing" economies had not yet succumbed to historic Credit booms, overinvestment and economic maladjustment. Central banks hadn't yet resorted to really dangerous measures.

In "A Short History...," Galbraith so eloquently describes the rebuke and vitriol lavished upon naysayers during periods of Financial Euphoria. These are the despicable folks who not only dare to challenge conventional wisdom - they simply refuse to accept that they've categorically been proven wrong. I will temporarily remove the dunce cap and calmly place it over in the corner - and then move to explain that I see nothing in the environment inconsistent with my view that this is the biggest, most precarious Bubble in history.

I've briefly addressed excesses that led to the 2000 collapse. Well, there's a bevy of relatively recent (from a historical perspective) booms and busts to compare to: the stock market crash of 1987; the late-eighties Japanese Bubble; the 1992/3 bond Bubble; Mexico; SE Asia; Russia; Argentina, Brazil and Latin America; Iceland; U.S. mortgage finance; European debt, etc. Nothing, however, even remotely compares to the current global Bubble environment.

From my perspective, the global nature of excesses and fragilities is the most worrying aspect to the current Financial Euphoria. Essentially, the entire world faces acute financial and economic instability. The entire world suffers from a widening gulf between inflating asset prices and mounting economic vulnerabilities. Seemingly the entire world suffers from an increasingly protracted period of near-zero rates, aggressive central bank monetary stimulus and a desperate search for market returns. The entire global financial "system" is an over-liquefied speculative Bubble - stoked by central bankers responding desperately to acute financial and economic fragilities.

As noted above, find a speculative Bubble and there will be an underlying source of monetary disorder. From my perspective, Bubbles are at their core about a self-reinforcing over-issuance of mispriced finance. Major market misperceptions are integral to fueling Bubbles - and these misperceptions are often associated with some form of government support/backing of the underlying Credit financing the boom.

These days, the dynamic of over-issued, mispriced finance is a global phenomenon - the U.S., Europe, Japan, China, Asia and the "developing" economies. The perception that central bankers will ensure ongoing asset inflation is an unprecedented global phenomenon. The collapse in yields and risk premiums in debt markets across the globe is unlike anything I've ever witnessed or studied historically. These days, asset inflation, speculation and Bubbles prevail virtually everywhere. Moreover, the gulfs between inflating assets and weakening economic fundamentals seemingly widen everywhere, as Financial Euphoria engulfs debt and equity securities markets around the world. As noted this week by the great market watcher and historian Art Cashin: This market is unlike anything we've ever experienced.


For the Week:

The S&P500 jumped 2.1% (up 16.9% y-t-d), and the Dow rose 1.6% (up 17.2%). The Morgan Stanley Consumer index rose 1.9% (up 23.3%), and the Utilities added 0.7% (up 14.2%). The Banks surged 4.4% (up 19.2%), and the Broker/Dealers jumped 4.6% (up 32.7%). The Morgan Stanley Cyclicals were 1.9% higher (up 18.1%), and the Transports jumped 2.7% (up 23.4%). The S&P 400 MidCaps gained 1.8% (up 18.7%), and the small cap Russell 2000 jumped 2.2% (up 17.3%). The Nasdaq100 increased 1.6% (up 13.8%), and the Morgan Stanley High Tech index advanced 2.3% (up 12.8%). The Semiconductors gained 1.0% (up 22.5%). The InteractiveWeek Internet index jumped 2.9% (up 18.8%). The Biotechs added 0.4% (up 29.7%). With bullion hit for $89, the HUI gold index sank 12.1% (down 44.6%).

One-month Treasury bill rates ended the week at one basis point and 3-month rates closed at three bps. Two-year government yields were up slightly to 0.24%. Five-year T-note yields ended the week up two bps to 0.83%. Ten-year yields increased 5 bps to 1.95%. Long bond yields increased 7 bps to 3.17%. Benchmark Fannie MBS yields jumped 12 bps to 2.69%. The spread between benchmark MBS and 10-year Treasury yields widened 7 to 74 bps. The implied yield on December 2014 eurodollar futures increased two bps to 0.49%. The two-year dollar swap spread increased one to 14.5 bps, while the 10-year swap spread declined about one to 13 bps. Corporate bond spreads were mostly narrower. An index of investment grade bond risk declined 2 to 70 bps. An index of junk bond risk fell 8 to 341 bps. An index of emerging market debt risk rose 3 to 267 bps.

Debt issuance remained extremely strong. Investment grade issuers included Merck $6.5bn, Morgan Stanley $2.0bn, American Express $1.85bn, Toyota Motor Credit $1.5bn, Total System Services $1.1bn, ING $750 million, American Honda Finance $750 million, Fifth Third Bank $600 million, Wynn Las Vegas $500 million, Lorillard Tobacco $500 million, Consumers Energy $425 million, Northern States Power $400 million, Kimco Realty $350 million, Golondrina Leasing $311 million, DDR $300 million, Hershey $250 million, and Nstar Electric $200 million.

Junk bond funds saw outflows of $403 million (from Lipper). Junk issuers included Dish $2.6bn, Tenet Healthcare $1.05bn, Cequel Communications $750 million, AES Corp $750 million, First Data $750 million, Univision Communications $700 million, Select Medical $600 million,DCP Midstream $550 million, Freescale Semiconductor $500 million, SM Energy $500 million, Hawaiian Airlines $450 million, Supervalu $400 million, Murray Energy $350 million, Builders Firstsource $350 million, Bon-Ton Dept Stores $350 million, Magnetation $325 million, Earthlink $300 million, Jefferies Loancore $300 million, Harland Clarke $285 million, SugarHouse Gaming $240 million, Amkor Technology $500 million, Cooper Standard $200 million, Stonemor Partners $175 million and Neehan Paper $175 million.

Convertible debt issuers included Tesla $600 million, Shutterfly $270 million, Ryland Group $250 million and Vivus $220 million.

The long list of international dollar debt issuers included Petrobras $11.0bn, Pertamina Persero $3.25bn, Kommunalbanken $2.0bn, China State Grid $2.0bn, Inter-American Development Bank $1.6bn, Stadshypotek $1.25bn, Sberbank of Russia $1.0bn, Kazagro National $1.0bn, Seagate HDD $1.0bn, Thomson Reuters $850 million, Covidien $750 million, Pacific Drilling $750 million, NII International Telecom $700 million, Far Eastern Shipping $550 million, BRF $500 million, Ukrzaliznytsya $500 million, AGL Capital $500 million, Ukraine Railways $500 million, Barminco $485 million, Alere $425 million, Golden Eagle Retail Group $400 million, and Nitrogenmuvek $200 million.

Italian 10-yr yields were little changed at 3.89% (down 61bps y-t-d). Spain's 10-year yields were unchanged at 4.18% (down 109bps). German bund yields declined 5 bps to 1.33% (unchanged), and French yields fell 10 bps to 1.85% (down 15bps). The French to German 10-year bond spread narrowed 5 to 52 bps. Ten-year Portuguese yields dropped 21 bps to 5.17% (down 158bps). Greek 10-year note yields sank another 130 bps to 8.06% (down 242bps). U.K. 10-year gilt yields slipped a basis point to 1.88% (up 6bps).

The German DAX equities index rose 1.4% for the week (up 10.3% y-t-d). Spain's IBEX 35 equities index added 0.4% (up 5.1%). Italy's FTSE MIB jumped 1.9% (up 8.2%). Japanese 10-year "JGB" yields ended the week up a notable 10 bps to 0.785% (down 9bps). Japan's Nikkei jumped 3.6% (up 45.6%). Emerging markets were mostly higher. Brazil's Bovespa index was little changed (down 9.5%), while Mexico's Bolsa added 0.2% (down 4.4%). South Korea's Kospi index jumped 2.2% (down 0.5%). India's Sensex equities index rose 1.0% (up 4.4%). China's Shanghai Exchange gained 1.6% (up 0.6%).

Freddie Mac 30-year fixed mortgage rates jumped 9 bps to 3.51% (down 28bps y-o-y). Fifteen-year fixed rates were up 8 bps to 2.69% (down 35bps). One-year ARM rates increased 2 bps to 2.55% (down 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 5 bps to 3.96% (down 44bps).

Federal Reserve Credit jumped $26.8bn to a record $3.303 TN. Fed Credit expanded $463bn over the past 32 weeks. Over the past year, Fed Credit expanded $463bn, or 16.3%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $656bn y-o-y, or 6.3%, to a record $11.126 TN. Over two years, reserves were $1.310 TN higher, for 13% growth.

M2 (narrow) "money" supply increased $5.2bn to a record $10.540 TN. "Narrow money" expanded 6.6% ($651bn) over the past year. For the week, Currency slipped $0.6bn. Demand and Checkable Deposits fell $56.4bn, and Savings Deposits jumped $66.7bn. Small Denominated Deposits declined $3.0bn. Retail Money Funds dipped $1.8bn.

Money market fund assets declined $1.0bn to $2.582 TN. Money Fund assets were up $19bn from a year ago, or 0.7%.

Total Commercial Paper outstanding jumped $21.1bn this week to $1.014 TN. CP has declined $52bn y-t-d, while having expanded $20bn, or 2.0%, over the past year.

Currency and 'Currency War' Watch:

May 16 - Bloomberg: "China's commerce ministry signaled concern that weakness in the yen is limiting Japanese demand for exports just as a stronger yuan weighs on Chinese manufacturers' global sales. Japan's policy of monetary easing 'makes it hard for China to increase exports to Japan,' Shen Danyang, a ministry spokesman, said... The rising yuan is eroding profit margins of Chinese exporters, he said."

The U.S. dollar index jumped 1.3% to 84.25 (up 5.6% y-t-d). For the week on the downside, the South African rand declined 3.0%, the Australian dollar 2.9%, the New Zealand dollar 2.9%, the Mexican peso 2.1%, the Canadian dollar 1.8%, the Singapore dollar 1.7%, the Swiss franc 1.6%, the Japanese yen 1.5%, the Swedish krona 1.4%, the British pound 1.2%, the euro 1.2%, the Danish krone 1.1%, the Taiwanese dollar 1.1%, the Norwegian krone 1.1%, the South Korean won 1.0% and the Brazilian real 0.7%.

Commodities Watch:

The CRB index slipped 0.4% this week (down 2.5% y-t-d). The Goldman Sachs Commodities Index gained 0.4% (down 2.2%). Spot Gold sank 6.1% to $1,360 (down 19%). Silver was hit for 5.5% to $22.35 (down 26%). June Crude was little changed at $96.02 (up 5%). June Gasoline gained 1.6% (up 5%), and June Natural Gas jumped 3.7% (up 21%). July Copper slipped 0.9% (down 9%). July Wheat dropped 3.0% (down 12%), while May Corn gained 2.6% (down 7%).

U.S. Bubble Economy Watch:

May 17 - Bloomberg (Lorraine Woellert): "Americans' confidence in the economy climbed in May to the highest level in almost six years as rising real estate values and record stock prices boosted household wealth... The gain in confidence shows Americans are overcoming the effects of higher taxes and a package of federal spending cuts, known as sequestration, that threatens to take a toll on jobs."

May 16 - Bloomberg (Prashant Gopal and Kathleen M. Howley): "Just a year since the U.S. housing market hit bottom after the biggest plunge in eight decades, signs of excess are re-emerging. An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007. The U.S. spring homebuying season has been marked by a frenzy of demand fueled by the Federal Reserve's drive to push down borrowing costs, a scarcity of listings and Wall Street's new appetite for foreclosed homes... 'It's a big change from a year ago,' said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. 'You've gone from hearing horror stories about people losing money to hearing stories of frenzy -- lots of traffic and multiple offers.'"

May 14 - Bloomberg (Dan Levy): "Leasing by San Francisco-area technology firms is slowing just as developers are poised to add 6.5 million square feet of office space to the city and Silicon Valley, the most construction in a dozen years. Twenty-six projects are under way, from glass towers in downtown San Francisco to suburban office parks in Sunnyvale and Santa Clara, California, according to... CBRE Group Inc. About 3.4 million square feet (316,000 square meters) of the new development, or more than half, is speculative, meaning landlords broke ground without signing tenants, CBRE data show. The building boom comes after three years of expansion by companies including Google Inc., Apple Inc. and Salesforce.com Inc. spurred a surge in rents, making San Francisco the top U.S. office market in 2012 based on forecasts for future increases..."

May 17 - Dow Jones (Juliet Chung and Alyssa Abkowitz): "A group led by billionaire hedge-fund manager William Ackman is the mystery buyer behind the penthouse apartment in Manhattan that is in contract to sell for more than $90 million... The purchase price is believed to be a record for a residence in Manhattan. The previous record was the $88 million purchase by Russian billionaire Dmitry Ryboloblev of the penthouse owned by former Citigroup... chief Sandy Weill."

Federal Reserve Watch:

May 17 - Bloomberg (Aki Ito and Jeff Kearns): "Federal Reserve Bank of San Francisco President John Williams said quickening economic growth and gains in the job market may prompt the Fed in the next few months to start reducing its $85 billion in monthly bond-buying. 'It's clear that the labor market has improved since September' when the Fed began its third round of asset purchases, Williams said... 'We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer' and end the program late this year 'if all goes as hoped.'"

May 16 - Bloomberg (Jeff Kearns): "Federal Reserve Bank of Richmond President Jeffrey Lacker said additional stimulus won't necessarily spur economic growth while increasing the challenges for the Fed when it begins to withdraw the record accommodation. 'The Fed seems to be unable to improve real growth, despite striving mightily over the last few years,' Lacker said... 'Further increases in the size of our balance sheet raise the risks associated with the 'exit process' when it's time to withdraw stimulus.'"

May 17 - Bloomberg (Vivien Lou Chen): "Tightening Fed policy now would lead to 'tangible and significant costs,' and policy makers still haven't lowered real interest rates enough despite all their actions, said Minneapolis Fed Pres. Narayana Kocherlakota. 'Financial stability considerations provide little support for reducing accommodation at this time,' Kocherlakota said... Tightening might push employment/prices further below Fed's goals, benefits of such move would be 'speculative and slight'..."

May 17 - Bond Buyer: "Minneapolis Federal Reserve Bank President Narayana Kocherlakota Friday maintained his support for the Fed's aggressive measures to spur faster economic growth, warning that the costs of tightening monetary policy now would significantly outweigh any benefits for financial stability. ...Kocherlakota also argued that given the soaring demand for safe assets -- but shrinking supply -- the Fed has not lowered the real interest rate sufficiently."

Global Bubble Watch:

May 17 - Bloomberg (Sarika Gangar): "Petroleo Brasileiro SA, the Brazilian state-run oil producer, and drugmaker Merck & Co. led at least $54 billion of bond sales in the U.S. this week, the most in more than four months... Sales rose from last week's $45.6 billion and compare with an average of $29.5 billion during the past 12 months."

May 15 - Financial Times (Michael Mackenzie): "China is forecast to surpass the US as the world's largest corporate debt market for non-financial companies in the next two years, according to... Standard & Poor's. The rating agency expects the debt needs of companies in China to reach upwards of $18tn by the end of 2017, accounting for a third of the forecast $53tn in new debt and refinancing needs of global companies in the next five years... Based on a stronger rate of economic growth that propels debt issuance, China's non-financial corporations could owe $13.8tn by the end of 2014, eclipsing US corporations' outstanding debt of $13.7tn... Globally, companies are seen refinancing $35tn of existing debt that consists of bonds and bank loans, with a further $15tn to $19tn in new money being raised by the end of 2017."

May 14 - Financial Times (Josh Noble): "Already awash with capital from previous rounds of quantitative easing, countries across Asia are readying for a fresh wave of cash as 'Abenomics' forces Japanese investors and banks to look overseas. The scale of potential outflows is hard to gauge, but the Bank of Japan itself, under new governor Haruhiko Kuroda, has vowed to increase the country's monetary base by $1.4tn by the end of next year... 'At the moment all that liquidity is being internalised - into equities and Japanese government bonds,' said John Woods, chief Asia strategist at Citi Private Bank. 'But if indeed [Mr Kuroda] is successful in getting close to that 2% inflation target, we'll start to see that liquidity looking outside.'"

May 17 - Bloomberg (Katie Linsell): "The penalty that companies from Europe's most indebted nations pay to borrow has shrunk to near the least in three years, alarming investors who are concerned that the region's financial crisis is far from over. Buyers of bonds from companies in the region's periphery are being paid 63 bps more yield than they're getting from companies in core nations such as France and Germany, down from 319 bps a year ago..."

May 14 - Bloomberg (Matt Robinson, Jody Shenn and Sarah Mulholland): "Almost six years after the start of the worst financial crisis since the Great Depression, bond issuers are again exploiting credit ratings by seeking firms that will provide high grades on debt backed by assets from auto loans to office buildings considered inappropriate by rivals. Fitch Ratings isn't grading a deal linked to a Manhattan skyscraper after saying investors needed more protection. The securities won top grades from Moody's... and Kroll Bond Rating Agency Inc. Blackstone Group LP's Exeter Finance Corp. got top-tier ratings from Standard & Poor's and DBRS Ltd. in the past 15 months on $629 million of bonds backed by car loans to people with bad credit histories, even as Moody's and Fitch said they wouldn't grant such rankings. Borrowers are finding more options than ever to get the top ratings that many investors require after U.S. regulators doubled the number of companies sanctioned to assess securities to 10 since 2006."

May 17 - Bloomberg (Sridhar Natarajan): "Investors poured $870 million this week into funds that purchase bank loans, according to Bank of America Corp. The increase brought deposits this year to about $25 billion, pushing the asset's gains to more than 32%, the...bank said..."

Global Credit Watch:

May 15 - Bloomberg (Lyubov Pronina): "Moody's... said it's assessing the risk of currency depreciation damaging the creditworthiness of emerging-market companies after record foreign bond sales. Companies from 15 emerging markets sold a record $130 billion of bonds in dollars and euros last year, Moody's said... Total corporate and government international issuance may soar to a peak of $600 billion this year from $430 billion last year, and reach $1 trillion in three years, Hakan Wohlin, global head of debt origination at Deutsche Bank... said... 'The amount of U.S. dollar and euro debt outstanding has increased considerably year-by-year, and with it the risk of currency mismatch,' Moody's analysts including Philip Robinson in London said... While companies are benefiting from plunging bonds yields spurred by interest rates in the U.S., Europe and Japan at virtually zero, issuers may be vulnerable to increased repayment costs if their revenue isn't in the same currency as they're borrowing in, according to Moody's."

May 16 - Financial Times (Tobias Buck): "Spanish banks are bracing themselves for a fresh financial hit, amid rising pressure from the Bank of Spain on lenders to write down the value of their €200bn portfolio of restructured loans to the country's troubled companies and struggling households. The move is likely to trigger a further rise in bad loan ratios across the system and reduce earnings at a time when most Spanish banks are already suffering from low profitability. Analysts believe the crackdown could also shine a harsh new light on the capital position of some of the weaker banks, forcing them to sell assets to avoid the need to raise fresh capital. The move reflects concern among Spanish regulators that banks are still shying away from admitting the full extent of the damage inflicted on their loan books by Spain's long-running economic crisis."

May 15 - Bloomberg (Raymond Colitt and Matthew Malinowski): "Brazil is drafting rules that would wipe out some creditors of failing banks in an effort to avoid taxpayer rescues, echoing European proposals to make bondholders shoulder more costs after three bailouts in as many years. The central bank said... it had prepared a draft of a 'bail-in' proposal that would impose losses on holders of subordinated and unsecured bonds in case of insolvency and use their investments to revive the lenders... The proposal, similar to one being considered by European Union lawmakers, comes after seven Brazilian banks became insolvent in the past three years..."

May 14 - Bloomberg (Benjamin Harvey and Taylan Bilgic): "Turkey paid its last loan installment to the International Monetary Fund after a 52-year relationship, a triumph for Prime Minister Recep Tayyip Erdogan as government debt falls even as private borrowing surges... A decrease in government debt to about 40% of gross domestic product from 78% when he came to power a decade ago has helped drive lira borrowing costs below higher-rated countries including India, Russia, Brazil and Chile. The decrease is countered by a surge in corporate borrowing over the period, leaving Turkey 'one of the most leveraged economies in the emerging-market universe,' Goldman Sachs Group Inc. said..."

China Bubble Watch:

May 14 - Bloomberg: "China's shadow banking poses systemic risks to the nation's financial industry after expanding by more than 67% over the past two years, according to Moody's... A broad measure of the shadow industry, which includes private lending, trust loans, credit from non-bank institutions and banks' off-balance-sheet deposits known as wealth management products, totaled 29 trillion yuan ($4.7 trillion) by the end of last year, Moody's said... That compared with 17.3 trillion yuan in 2010. Moody's last month lowered its outlook for China's credit rating to stable from positive, saying the nation had made less progress than expected in reducing risks from credit expansion and local-government debt... 'Given the substantial scale and growth of shadow banking activities in China, we are doubtful of the banks' ability to isolate themselves from a significant increase in defaults in the shadow banking domain," Moody's analysts led by Hu Bin wrote..."

May 15 - Bloomberg: "Chinese Premier Li Keqiang signaled policy makers are reluctant to use stimulus to counter a slowdown in the world's second-largest economy because the risks outweigh the benefits. 'To achieve this year's targets, the room to rely on stimulus policies or government direct investment is not big -- we must rely on market mechanisms,' Li said... Relying on government-led investment for growth 'is not only difficult to sustain but also creates new problems and risks,' he said. Li's most extensive economic comments in almost two months indicate China may be unlikely to boost government spending or follow central banks across Asia in cutting interest rates as he tries to pare the state's role in the economy... Li made the remarks at a nationwide teleconference on reducing's the government's role in economic development. The government will cut unnecessary checks and approvals to boost private investment, Li said. The country's growth is under 'relatively large' downward pressure, he said."

May 15 - Bloomberg (Rachel Evans): "Chinese corporate borrowing will probably exceed that of U.S. companies within the next two years, according to Standard & Poor's. Non-financial institutions from the world's second-largest economy will need $18 trillion of debt during the five years ending 2017, the ratings company said... Chinese and Hong Kong borrowers sold $41.2 billion of U.S. dollar-denominated bonds since December, the busiest start to a year on record... Cnooc Ltd., the nation's biggest offshore energy explorer, raised $4 billion this month with the largest offering out of Asia in a decade... 'High levels of investment, primarily in manufacturing, real estate, and infrastructure, have supported the country's strong economic growth rate, particularly over the past five years - and credit is fueling this investment,' S&P said... 'While China is now on a lower growth trajectory than in the prior decade, the trajectory is still very high by global standards.'"

May 14 - Bloomberg: "Renewable energy companies from China and Hong Kong need to repay $3.5 billion of debt this year, prompting global investors to fret that another issuer will follow Suntech Power Holdings Co. into default. Solar, wind, hydro and nuclear companies also have the equivalent of $5.3 billion of notes due next year, data compiled by Bloomberg show."

May 16 - Bloomberg (David Yong): "China's investment-grade dollar bonds are trailing their U.S. counterparts by the most in seven quarters after Morgan Stanley showed concern over the debt load of the largest companies, which has doubled in five years... The yield gap between Chinese and U.S. investment-grade securities shrank to a two-year low of 19 basis points on May 7, driven by a flood of money seeking higher yields in emerging markets. 'The increasing leverage is starting to become enough of a headwind to notice,' Viktor Hjort, head of Asian credit research in Hong Kong, said... Borrowing by the biggest Chinese companies is five times a measure of their operating earnings, twice the leverage ratio in 2007... Among 102 non-financial companies in the MSCI China Index, total debt over earnings before interest, taxes, depreciation and amortization rose to 5.3 times last year from 2.5 times in 2007... The ratio for state-owned enterprises tripled in that period to 4.6 times in 2012, a level that surpassed that of U.S. high-yield companies, Morgan Stanley said... Total short- and long-term debt accumulated by 4,019 Chinese publicly traded non-financial companies surged to $1.81 trillion in their latest filings from $609 billion in 2007..."

May 13 - Bloomberg: "China's fixed-asset investment unexpectedly decelerated last month while industrial output trailed estimates, adding to concerns that the economy will fail to show much of a recovery this quarter. Fixed-asset investment excluding rural households in the first four months of the year increased 20.6%..., compared with 20.9% in the first quarter. Production grew 9.3% in April from a year earlier and retail sales climbed 12.8%... The central bank warned last week that while the foundation for stable growth isn't yet solid, stimulus policies could trigger inflation. 'China's economic recovery remains weak,' said Li Wei, a Shanghai-based economist at Standard Chartered Plc. 'The government will stay vigilant on local-government debt, keep property-market controls and discourage public spending. All of those measures will restrain China's growth rebound.'"

May 14 - Bloomberg: "China's home sales transaction value fell 13% in April from the previous month as the government's new property curbs started to take effect. The value of homes sold declined to 494.6 billion yuan ($80bn) from 569.4 billion yuan in March... The value of sales from January to April rose 65% to 1.69 trillion yuan from a year earlier... Thirty-five city governments issued details of property measures by an April 1 deadline in response to the central government's toughest property curbs in a year imposed in March. They include ordering the central bank to raise down-payment requirements and interest rates for second mortgages in cities with excessive price gains and enforcing a property-sales tax."

May 16 - Bloomberg (David Yong): "China's benchmark money-market rate rose the most in three weeks after a central bank auction to drain excess cash from the financial system.... A central bank report this month indicated foreign capital inflows increased for a fifth month in April to a record. 'The surge in hot-money inflows has been very strong and the PBOC will have to act,' said Eliza Liu, a Hong Kong-based economist at CCB International Securities. 'The money is not getting into the real economy but just into assets seeking a risk-free return.'"

Japan Bubble Watch:

May 15 - Bloomberg (Mayumi Otsuma): "Prime Minister Shinzo Abe's stimulus probably helped the Japanese economy grow the most in a year, adding to pressure on 2013's worst-performing bond market. Gross domestic product likely expanded an annualized 2.7% in the three months through March, according to the median forecast... Japanese bonds declined 14.5% in dollar terms this year, versus a 0.4% loss in Treasuries and a 1.9% drop in German bunds... Inflation expectations rose to the most since at least 2009."

May 16 - Bloomberg (Mariko Ishikawa, Masaki Kondo and Yumi Ikeda): "Bank of Japan Governor Haruhiko Kuroda's stimulus policies pushed bond yields above analyst forecasts for the first time since at least July as the widest price swings in a decade halted two debt offerings. Benchmark 10-year Japanese government bond yields reached 0.92% yesterday, the highest since April 2012... Kuroda's doubling of bond purchases last month to achieve 2% inflation in two years has failed to cap borrowing costs, with the 10-year yield rising the most since August 2003 in the three sessions through May 14."

May 14 - Bloomberg (Takahiko Hyuga): "Nomura Holdings Inc. increased retail client assets to a record 90.3 trillion yen ($889bn) in April... The country's biggest brokerage added 6.5 trillion yen of assets under management last month, the biggest jump since... Nomura started compiling the data in 2002... The increase underscores why securities firms are the biggest beneficiaries of Prime Minister Shinzo Abe's stimulus policies as a surge in trading volume boosts brokerage commissions."

Asia Bubble Watch:

May 17 - Bloomberg (Rachel Evans): "The amount of dollar-denominated bonds issued by companies in Asia is growing almost 10 times faster than the global corporate debt market, raising concern that investors are lowering their standards as they seek to take advantage of the region's relatively high yields. The face value of securities in the Bank of America Merrill Lynch Asian Dollar Corporate Index has almost tripled to $260.6 billion since June 2009... Total borrowing by 15,032 publicly traded non-financial companies in Asia excluding Japan has jumped to $3.6 trillion from $1.53 trillion in 2007... As central banks from the U.S. and U.K., and the euro region to Japan keep benchmark interest rates near zero, an increasing number of investors are targeting Asia for high yields and an economy forecast to grow more than three times faster than America this year."

Latin America Watch:

May 17 - Bloomberg (Ney Hayashi): "Brazilian companies are posting their longest stretch of earnings disappointments, adding to signs the recovery in Latin America's largest economy is faltering. Thirty-seven of the 65 companies, or 57%, on the Ibovespa index posted results that trailed analysts' estimates in the first quarter... It was the sixth straight quarter in which more than half the members of the gauge missed forecasts, the longest span since 2005..."

May 14 - Bloomberg (Boris Korby and Veronica Navarro Espinosa): "Petroleo Brasileiro SA is paying higher interest rates in a record $11 billion bond sale than its closest rival as government policies intended to spur growth restrain the state-controlled oil producer's profit. Investors demanded 2.6 percentage points more in interest relative to U.S. Treasuries to buy the company's 10-year notes yesterday, part of the largest-ever offering by an emerging- market borrower. That compares with a 1.7 percentage point spread that state-owned counterpart Petroleos Mexicanos paid on Jan. 23."

May 16 - Bloomberg (Boris Korby and Joshua Goodman): "Brazil's state development bank, known as BNDES, is considering selling bonds abroad for the first time since 2011 to help finance its international lending program... The lender is studying tapping international capital markets after Petroleo Brasileiro SA, also controlled by Brazil's government, sold $11 billion of bonds earlier this week, a record for an emerging-market company... BNDES, founded six decades ago to finance Brazilian industry and infrastructure, disbursed 156 billion reais in loans last year, twice as much as the World Bank. The total credit portfolio of the bank expanded to 492 billion reais ($243bn) in 2012. The bank has 716 billion reais in total assets."

May 16 - Reuters (Gabriela Lopez): "Struggling with slowing home sales and a lack of liquidity, Mexico's top three homebuilders may have to seek bankruptcy protection if they fail to reach an agreement with creditors in the short term. Home sales at Geo, Urbi and Homex plummeted in the first quarter, exacerbating the companies' long-running cash shortfalls and, in some cases, leading them to miss payments on debt and derivatives. Analysts are skeptical that restructuring efforts will work, arguing that at least in the cases of Geo and Urbi, the companies will likely have to rely on protection under Mexico's version of U.S. Chapter 11, known as Concurso Mercantil."

May 16 - Bloomberg (Brendan Case): "Empresas ICA SAB's bond plunge is showing that Mexican homebuilders aren't the only construction companies losing favor in the country's debt market because of President Enrique Pena Nieto's policies. ICA's $500 million of notes due in 2021 have tumbled 9.37 cents in the past two months as the company reported quarterly earnings that fell short of analysts' estimates, pushing up yields 1.59 percentage points to 8.96 percent... Bond buyers are souring on ICA, Mexico's biggest construction company, after it said revenue from building projects dropped 41% in the first quarter..."

Global Economy Watch:

May 17 - Bloomberg (Scott Rose and Olga Tanas): "Russia's economy grew at the weakest pace since 2009 in the first quarter as investment at companies including OAO Gazprom cooled and the euro area's longest recession hurt demand for commodity exports. Gross domestic product rose 1.6% from a year earlier, slowing for a fifth consecutive quarter..."

Europe Watch:

May 14 - Bloomberg (Jim Brunsden and Rainer Buergin): "The European Central Bank set up a clash with Germany as Executive Board member Joerg Asmussen pushed back against the country's incremental approach to building a banking union. Asmussen called... for the European Union to create a central agency and a common backstop for handling failing banks by 'the summer of next year.' This is in marked contrast to warnings from German Finance Minister Wolfgang Schaeuble that the bloc cannot venture into such territory without changing its current treaties, and should instead target a less ambitious, networked approach."

France Watch:

May 14 - Bloomberg (Rebecca Christie): "France's frustration with Europe has soared as French attitudes diverge from German public opinion, a Pew Research Center report shows. 'No European country is becoming more dispirited and disillusioned faster than France,' according to the report... 'The French are negative about the economy, with 91% saying it is doing badly, up 10 percentage points from 2012.' France's malaise with the European Union's outlook is more similar to sentiment in Spain, Italy and Greece than it is to the mood in Germany, which is the only EU nation of eight surveyed where at least half the public backed giving more power to Brussels to deal with the economic crisis. 'The prolonged economic crisis has created centrifugal forces that are pulling European public opinion apart, separating the French from the Germans and the Germans from everyone else...'"

May 14 - Telegraph (Henry Samuel and Bruno Waterfield): "France has fallen spectacularly out of love with the European Union and is now more Eurosceptic than Britain, a new study has found. The European project 'now stands in disrepute across much of Europe', concluded the Pew Research Centre, which described the EU as 'the sick man of Europe'. Overall support for the EU has fallen among the French from 60% in 2012 to 45% in 2013. Germany is now the only country where a majority backs granting more power to Brussels. No European country, however, has become more swiftly 'dispirited and disillusioned' than France, the study of eight EU countries found. As economic gloom grips the country under Socialist president François Hollande, that support has plummeted to just 41%, making the French less in favour of the EU than the British, on 43%. 'The stereotypical view is of Eurosceptics in Britain while we don't think about Eurosceptics in France except for the (far-Right) Le Pen phenomenon,' Bruce Stokes of Pew Research told the Daily Telegraph. 'Perhaps we should take Euroscepticism in France more seriously than we have in the past,' he said."

Italy Watch:

May 14 - Bloomberg (Alessandra Migliaccio and Lorenzo Totaro): "Italy's government debt rose to a record high of 2.035 trillion euros ($2.65 trillion) in March from 2.017 trillion euros in February, the Bank of Italy said... Foreign ownership of Italy's debt rose to 35.2% in February from 35.1% in January."

May 14 - Bloomberg (Sonia Sirletti): "Italy banks' gross non-performing loans as proportion of total lending rose to 6.6% in March from 5.4% yr earlier, Italian Banking Association ABI says... Bad loans rose 21.7% YoY in March to EU131bn..."

Germany Watch:

May 17 - Bloomberg (Jana Randow and Rainer Buergin): "European Central Bank Executive Board member Joerg Asmussen said policy makers should be aware of the risks related to keeping interest rates low for an extended period of time. The ECB has to 'keep an eye on the fact that a long, lasting phase of low interest rates carries risks because it tempts investors to look for rising proceeds elsewhere,' Asmussen said... 'This can lead to a misallocation of capital. One also has to realize that monetary policy is no economic policy all-purpose weapon."


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