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What Happened to Deleveraging?

Bloomberg's Simon Kennedy did a nice job with "A World Overflowing With Debt," as did the Financial Times' Ralph Atkins with "Debt Mountains Spark Fears of Another Crisis."

Kudos to Richard Dobbs, Susan Lund, Jonathan Woetzel and Mina Mutafchieva, of the McKinsey Global Institute, for their comprehensive (136 page!) report: "Debt and (Not Much) Deleveraging." Preferring to let quality research speak for itself, I've excerpted extensively:

"What Happened to Deleveraging? The global financial crisis of 2007-08 was sparked by the accumulation of excessive debt and leverage in many advanced economies, particularly in the household and financial sectors. After the September 2008 collapse of Lehman Brothers, governments took unprecedented actions to preserve the financial system. One reasonable expectation in the years following the crisis and the ensuing global recession was that actors across the economy would reduce their debts and deleverage. However, rather than declining, global debt has continued to increase. Total global debt rose by $57 trillion from the end of 2007 to the second quarter of 2014, reaching $199 trillion, or 286% of global GDP. Rising government debt in advanced economies explains one-third of the overall growth, as falling tax revenue and the costs of financial sector bailouts raised public sector borrowing. Growing debt of developing economies accounts for half of the growth. China's total debt has quadrupled since 2007, reaching $28 trillion, accounting for 37% of growth in global debt."

"Government debt has grown by $25 trillion since 2007, and will continue to rise in many countries, given current economic fundamentals... Government debt in advanced economies increased by $19 trillion between 2007 and the second quarter of 2014 and by $6 trillion in developing countries."

"The value of corporate bonds outstanding globally has grown by $4.3 trillion since 2007, compared with $1.2 trillion from 2000 to 2007."

"There are few indicators that the current trajectory of rising leverage will change, especially in light of diminishing expectations for economic growth. This calls into question basic assumptions about debt and deleveraging and the adequacy of the tools available to manage debt and avoid future crises."

"It is clear that deleveraging is rare and that solutions are in short supply."

"A large body of academic research shows that high debt is associated with slower GDP growth and higher risk of financial crises. Given the magnitude of the 2008 financial crisis, it is a surprise, then, that no major economies and only five developing economies have reduced the ratio of debt to GDP in the 'real economy' (households, non?financial corporations, and governments, and excluding financial-sector debt). In contrast, 14 countries have increased their total debt-to-GDP ratios by more than 50 percentage points."

"Developing economies have accounted for 47% of all the growth in global debt since 2007--and three quarters of new debt in the household and corporate sectors."

The McKinsey report does a commendable job with Chinese data:

"Until recently, China's unprecedented economic rise was not accompanied by a significant expansion in leverage. From 2000 to 2007, total debt grew only slightly faster than GDP, reaching 158% of GDP, a level in line with that of other developing economies. Since then, debt has risen rapidly. By the middle of 2014, China's total debt had reached 282% of GDP, far exceeding the developing economy average and higher than some advanced economies, including Australia, the United States, Germany, and Canada. The Chinese economy has added $20.8 trillion of new debt since 2007, which represents more than one-third of global growth in debt. The largest driver of this growth has been borrowing by non?financial corporations, including property developers. At 125% of GDP, China now has one of the highest levels of corporate debt in the world. Throughout history and across countries, rapid growth in debt has often been followed by financial crises. The question today is whether China will avoid this path and reduce credit growth in time, without unduly harming economic growth."

"China's household debt has nearly quadrupled, rising from $1 trillion in 2007 to $3.8 trillion in the second quarter of 2014... Since 2007, the stock of mortgages has grown by 21% per year."

"We estimate that nearly half of the debt of Chinese households, corporations, and governments is directly or indirectly related to real estate, collectively worth as much as $9 trillion."

"Property prices have risen by 60% since 2008 in 40 Chinese cities, and even more in Shanghai and Shenzhen."

"Two particular aspects of China's local government debt raise questions about risk: reliance on land sales and use of off-balance sheet local government financing vehicles. These financing vehicles fund infrastructure and other projects, using public land as collateral. By the second quarter of 2014, loans to local government financing vehicles had grown to $1.7 trillion, from $600 billion in 2007. In addition, local governments have begun to borrow via newer entities, which accounted for an additional $1.1 trillion of debt. Local governments use land sales to repay debt because of limitations in the municipal finance system... The ability of local government financing vehicles to repay their $1.7 trillion in loans is in question... In our analysis, we found that, in 2013, eight provinces were running fiscal deficits of at least 15% of revenue and that most provinces had debt-to-revenue ratios of more than 100%."

"The third element of risk to China's financial stability comes from the growing volume of loans by non?bank financial institutions--so-called shadow banking... By the second quarter of 2014, loans from these institutions reached $6.5 trillion, or 30% of total loans outstanding ['and half of new lending'] to households, non?financial corporations, and governments."

"Most of the loans are for the property sector. The main vehicles in shadow banking include trust accounts, which promise wealthy investors high returns; wealth management products marketed to retail customers; entrusted loans made by companies to one another; and an array of financing companies, microcredit institutions, and informal lenders. Both trust accounts and wealth management products are often marketed by banks, creating a false impression that they are guaranteed."

"Overall, non?bank lending grew by 36% per year from 2007 to the second quarter of 2014, compared with 18% per year for bank lending. The rapid growth of shadow banking in China is in large part driven by the high demand for higher-yield investment products among Chinese investors. The People's Bank of China sets the maximum rate that banks can offer on deposits, currently 3.3%..."

"The third potential risk in China is the growing debt accumulated in off-balance sheet local government financing vehicles, which are used to fund infrastructure (airports, bridges, subways, industrial parks), social housing, and other projects. Local governments rely on these off-balance sheet entities because they have limited taxing authority, must share revenue with the central government, and until recently have not been permitted to issue municipal bonds. Since China's 2009 stimulus program, lending to local governments has surged, reaching $2.9 trillion."

"Debt and (Not Much) Deleveraging" is loaded with data that should be quite alarming to global policymakers and market participants. It is not, however, "alarmist." The report works to strike a balanced approach.

"One bright spot in our research is progress in financial-sector deleveraging. In the years prior to the crisis, the global financial system became ever more complex and interconnected. Credit intermediation chains become very long, involving multiple layers of securitization, high levels of leverage, and opaque distribution of risk. This was reflected in growing debt issued by financial institutions to fund their activities. Financial-sector debt grew from $20 trillion in 2000 to $37 trillion in 2007, or from 56% of global GDP to 71%. Much of this debt was in the so-called shadow banking system, whose vulnerability was starkly exposed by the financial crisis. It is a welcome sign, then, that financial-sector debt relative to GDP has declined in the United States and a few other crisis countries, and has stabilized in other advanced economies."

As one might expect, the McKinsey report is tilted toward conventional thinking and economic doctrine. From my analytical perspective, it is short on critical Credit analysis. It is, understandably, bereft of Credit Theory. And there's palpable complacency regarding the U.S. markets and economy. I take exception with some details of the analysis, not to be critical but only in the spirit of expanding what I see as crucial aspects of the ongoing "global government finance Bubble."

"The financial sector has deleveraged."

From a Credit analysis perspective, central bank balance sheets are fundamental to "the financial sector" and should be included in leverage calculations. As I've argued for several years now, deleveraging is a myth, albeit in the financial sector, real economy, securities markets or otherwise.

"Financial system leverage and complexity have declined since the crisis."

I would counter that the unprecedented expansion in central bank Credit/leverage has created extreme complexity and uncertainty. Policymaking has been instrumental in fomenting epic divergences between inflating securities markets and disinflating real economy price dynamics. The upshot has been unappreciated securities market leveraging and latent financial and economic fragilities. Never has finance (and analysis!) been as complex - not even close.

"The riskiest elements of shadow banking have declined since the crisis."

This conventional viewpoint suffers from "fighting the last war" syndrome. The analysis focuses on the post-Bubble reduction of mortgage finance intermediation: "Securitization and structured credit instruments," "Special-purpose vehicles and structured investment vehicles" (i.e. CMOs & CDOs), Credit default swaps, money market funds and repurchase agreements (repos). I saw no mention of record hedge fund industry assets or the explosive growth in the ETF (exchange-traded fund) complex. The issue of central bank-induced Trillions flowing into global risk markets was excluded. I believe the general implication of reduced speculative leveraging is flawed. Omitting discussion of potential market liquidity issues is a serious analytical shortcoming.

"New forms of non?bank credit are growing rapidly but remain small... such as credit funds operated by hedge funds and other alternative asset managers. Assets in credit funds for a sample of eight alternative asset managers have more than doubled since 2009 and now exceed $400 billion."

Here's where I see the biggest void: I believe "non-bank" securities-based finance is these days enormous and, on a global basis, actually much larger than 2007. Importantly, one of this Bubble cycle's key sources of leverage goes unreported and unanalyzed. But I can't fault McKinsey's analysts. After all, central bankers appear oblivious to the proliferation of market-based leverage in global securities "carry trades" and derivatives markets.

"China's challenge today is to enact reforms to deflate the growing credit and property bubbles, increase transparency and risk management throughout the financial system, and create efficient bankruptcy courts and other mechanisms to resolve bad debt without provoking instability or financial crises."

Credit Analysis & Theory would argue the impossibility of deflating China's "growing credit and property bubbles... without provoking instability or financial crises." Chinese officials a few years back completely lost control of their Credit Bubble. Stating their intention to avoid Japan's mistakes, they instead unleashed a historic Bubble that dwarfs their rival's eighties' excesses. "Debt and (Not Much) Deleveraging" doesn't broach the subject of China's endemic fraud and corruption. Yet resulting Credit system impairment and economic maladjustment ensure far-reaching additional risks and uncertainties that will surely manifest into acute instability and a precarious financial and economic mess.

To address a key issue from the report: "Whether China will avoid this path [Credit boom followed by financial crisis] and reduce credit growth in time, without unduly harming economic growth." At this point, global policymakers and macro analysts have witnessed enough Credit Bubbles and busts to be alarmed by the prognosis.

A Friday afternoon Financial Times headline, "Greece is Just Part of the Global Debt Challenge", provides a convenient segue to another interesting week in the markets. After closing last week at 14.80%, Greek five-year yields surged above 15.25% on Monday, before reversing course and sinking to 12.67% intraday Tuesday - before ending the week at 13.97%. Markets were heartened by the more conciliatory tone adopted early in the week by Greek officials. General complacency that the EU and ECB would cave into pressure was challenged with the European Central Bank's Wednesday afternoon surprise move to end the waiver on accepting high-risk Greek debt as loan collateral. The meeting between Greek and German Finance Ministers saw no narrowing of differences. And the market week ended with an S&P debt downgrade and less conciliatory language out of Athens. It will be an intriguing few weeks.

This week saw continued pressure on two key EM markets. The Brazilian real was slammed for 3.6%, trading to the low since 2004 (down 4.5% y-t-d). The Turkish lira lost 1.3% to a record low (down 5.6% y-t-d). Brazil's local (real) 10-year yields surged 47 bps to 12.46%, with Brazil dollar yields up 13 bps to a six-week high 4.37%. It's worth noting that the major Brazilian banks saw CDS prices increase, as unfolding corruption investigations moved closer to the major state-directed lenders. Petrobas' stock was hit another 7% Friday on the (non-confidence inspiring) appointment of Banco do Brasil's CEO to head the troubled company.

Turkey's lira yields jumped 49 bps to 7.51%, with 10-year dollar yields up 16 bps to 4.17%. Turkish stocks were slammed for 4.5%. The Shanghai Composite was hit for 4.2%. From Bloomberg: "China Sees Biggest Outflow of Capital Since at Least 1998." Discerning analysts increasingly fear worsening Credit woes, deflation risk and Chinese currency devaluation. Yet the bulls want to interpret the PBOC's move this week to reduce bank reserve requirements as the start of more aggressive Chinese stimulus measures.

At least for the week, the bulls were not dissuaded by China, EM travails or advancing Games of Chicken (Greece v EU; Russia v the West in Ukraine). Crude surged 8.5% on what appeared a decent short squeeze, while squeeze dynamics were in play as well in U.S. equities. The energy sector along with financials went fully into "rip your face off" squeeze mode. The Goldman Sachs most short index gained about 5% on the week.

But for the most part, it appeared more of the same: unstable markets levitated by the self-reinforcing momentum of speculative finance flowing into king dollar and U.S. markets. Friday's payroll data provided added confirmation that the Fed is oh so far behind the curve. At the same time, global developments embolden those believing that the Fed dare not even begin to normalize rates. Yet Friday trading did see five-year Treasury yields jump 18 bps. The session saw the Utilities slammed 4.1% and the REITs hit for about 3%. Expanding divergences between the U.S. and global economies now foster heightened market instability for the beloved - and "Crowded Trade" - yield and income sectors.


For the Week:

The S&P500 jumped 3.0% (down 0.2% y-t-d), and the Dow surged 3.8% (unchanged). The Utilities sank 4.1% (down 1.7%). The Banks rallied 6.9% (down 4.0%), and the Broker/Dealers advanced 7.9% (down 3.1%). The Transports recovered 3.3% (down 2.3%). The S&P 400 Midcaps gained 2.9% (up 1.7%), and the small cap Russell 2000 rose 3.4% (unchanged). The Nasdaq100 increased 1.9% (down 0.2%), and the Morgan Stanley High Tech index gained 3.4% (down 1.0%). The Semiconductors rose 2.9% (down 2.2%). The Biotechs were hit for 2.7% (up 4.9%). With bullion losing $50, the HUI gold index was slammed for 4.4% (up 17.6%).

One- and three-month Treasury bills rates ended the week at about one basis point. Two-year government yields jumped 20 bps to 0.65% (down 2bps y-t-d). Five-year T-note yields surged 32 bps to 1.48% (down 17bps). Ten-year Treasury yields rose 32 bps to 1.96% (down 21bps). Long bond yields jumped 31 bps to 2.53% (down 22bps). Benchmark Fannie MBS yields rose 26 bps to 2.70% (down 13bps). The spread between benchmark MBS and 10-year Treasury yields narrowed six to 74 bps. The implied yield on December 2015 eurodollar futures surged 19 bps to 0.855%. Corporate bond spreads narrowed. An index of investment grade bond risk declined four to 66 bps. An index of junk bond risk sank 21 bps to 350 bps. An index of EM debt risk fell 31 bps to 367 bps.

Greek 10-year yields sank 104 bps to 9.94% (up 20bps y-t-d). Ten-year Portuguese yields dropped 23 bps to 2.40% (down 22bps). Italian 10-yr yields slipped a basis point to 1.58% (down 31bps). Spain's 10-year yields rose seven bps to 1.48% (down 13bps). German bund yields gained seven bps to 0.37% (down 17bps). French yields rose eight bps to 0.61% (down 21bps). The French to German 10-year bond spread widened one to 24 bps. U.K. 10-year gilt yields surged 32 bps to 1.65% (down 11bps).

Japan's Nikkei equities index slipped 0.15% (up 1.1% y-t-d). Japanese 10-year "JGB" yields rose six bps to 0.33% (down 29bps y-o-y). The German DAX equities index gained 1.4% (up 10.6%). Spain's IBEX 35 equities index rallied 1.6% (up 2.9%). Italy's FTSE MIB index rose 1.3% (up 9.2%). Emerging equities were mixed. Brazil's Bovespa index jumped 4.0% (down 2.4%). Mexico's Bolsa gained 4.3% (down 1.0%). South Korea's Kospi index added 0.3% (up 2.1%). India's Sensex equities index dropped 1.6% (up 4.4%). China's volatile Shanghai Exchange was hit for 4.2% (down 4.9%). Turkey's Borsa Istanbul National 100 index was slammed for 4.5% (down 0.9%). Russia's MICEX equities index surged 6.5% (up 25.7%).

Debt issuance was strong. Investment-grade issuers included Merck $5.5bn, MUFG Americas $2.2bn, IBM $2.0bn, Tencent Holdings $2.0bn, Manufacturers & Traders Trust Company $1.5bn, Costco $1.0bn, GATX $900 million, PNC $600 million, Northrop Grumman $600 million, Reliance Standard Life $550 million, Memorial Sloan-Kettering $550 million, D.R. Horton $500 million, Trinity Health Credit Group Midas $350 million, $300 million and Jackson National Life $125 million.

Convertible debt issuers included Microchip Technology $1.5bn and Immunomedics $85 million.

Junk funds saw a second straight week of big inflows, at $2.67bn according to Lipper. Junk issuers included Family Tree $3.25bn, XPO Logistics $900 million, Acadia Healthcare $375 million, Crownrock LP $350 million and Western Refining $300 million.

International debt issuers included Caisse d'Amortissement de la Dette Sociale $7.0bn, International Bank of Reconstruction & Development $4.0bn, European Investment Bank $3.0bn, YPF Sociedad Anonima $2.0bn, Royal Bank of Canada $1.75bn, Eskom Holdings $1.25bn, African Development Bank $1.0bn, Japan Bank for International Cooperation $1.0bn, Japan Finance Organization for Municipalities $1.0bn, Oesterreichische Kontrollbank $1.0bn, New York National Life $750 million, Inter-American Development Bank $600 million, Rentenbank $500 million, Kommunalbanken $500 million, Turkiye Halk Bankasi $500 million, Cencosud $1.0bn, James Hardie International $325 million, Intercorp Peru $250 million and Export Development Canada $100 million.

Freddie Mac 30-year fixed mortgage rates fell seven bps to an 18-month low 3.59% (down 64bps y-o-y). Fifteen-year rates declined six bps to 2.92% (down 41bps). One-year ARM rates were up a basis point 2.39% (down 12bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 19 bps to 4.44% (up one basis point).

Federal Reserve Credit last week declined $7.3bn to $4.461 TN. During the past year, Fed Credit inflated $399bn, or 9.8%. Fed Credit inflated $1.651 TN, or 59%, over the past 117 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $13.0bn to a 10-month low $3.258 TN. "Custody holdings" were down $66.3bn over the past year, or 2.0%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were down $53bn y-o-y, or 0.5%, to a one-year low $11.652 TN. Reserve Assets are now down about $380bn from the August 2014 peak. Over two years, reserves were $692bn higher, for 6% growth.

M2 (narrow) "money" supply expanded $11.7bn to a record $11.714 TN. "Narrow money" expanded $658bn, or 5.9%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits jumped $32.7bn, while Savings Deposits fell $22.4bn. Small Time Deposits were little changed. Retail Money Funds were down slightly.

Money market fund assets dropped $16.4bn to a 10-week low $2.85 TN. Money Funds were down $19.5bn over the past year, or 0.7%.

Total Commercial Paper dropped $18.7bn to a one-year low $989bn. CP contracted $1bn over the past year, or 0.1%.

Currency Watch:

February 6 - Bloomberg (Simon Kennedy): "The global currency war is threatening to prove a silent killer. So says David Woo, head of global rates and currencies research at Bank of America Merrill Lynch... While some question the existence of any conflict -- arguing that falling exchange rates merely reflect efforts by central banks to spur lackluster domestic economies -- Woo expresses concern. 'There is a growing consensus in the market that an unspoken currency war has broken out,' he said in a report ... 'The reason why this is a war is that it is ultimately a zero-sum game -- someone gains only because someone else will lose.' The standard view on war-mongering is that by easing monetary policy, central banks from Asia to Europe are hoping to weaken their currencies to boost exports and import prices. Trade rivals then retaliate, creating a spiral of devaluations as witnessed in the 1930s."

February 6 - Bloomberg (Chikako MogiHiroko Komiya): "Add the Bank of Japan to the list of central banks taking currency traders by surprise. The yen's 2% gain versus the dollar this year, second only to the Swiss franc among the Group-of-10 currencies, is a rally strategists didn't forecast and investors were betting against. After the yen's steepest three-year drop on record, markets were used to the idea that the currency was only going down as Japan's policy makers unveiled ever-greater stimulus to reverse deflation."

February 6 - Bloomberg: "The People's Bank of China raised the yuan's reference rate to a level that forced appreciation, deterring capital outflows that complicate monetary policy. The currency touched a two-week high after the fixing was boosted by 0.17% to 6.1261 a dollar, 2.06% stronger than Thursday's close in Shanghai. The onshore exchange rate can deviate from the reference rate by a maximum 2%. The yuan is still down for the year, after losing 2.4% in 2014. Options traders this week turned the most bearish they've been since the global financial crisis."

Another unsettled week for the currencies. The U.S. dollar index slipped 0.2% to 94.70 (up 4.8% y-t-d). For the week on the upside, the Canadian dollar increased 1.6%, the New Zealand dollar 1.4%, the Norwegian krone 1.3%, the South African rand 1.3%, the British pound 1.2%, the Mexican peso 0.9%, the Australian dollar 0.4%, the South Korean won 0.4%, the Danish krone 0.3%, the Taiwanese dollar 0.3% and the euro 0.2%. For the week on the downside, the Brazilian real declined 3.6%, the Japanese yen 1.4%, the Swedish krona 1.3% and the Swiss franc 0.7%.

Commodities Watch:

The Goldman Sachs Commodities Index rallied 5.3% (down 1.8% y-t-d). Spot Gold lost 3.9% to $1,234 (up 4.1%). March Silver dropped 3.0% to $16.69 (up 7%). March Crude surged $3.45 to $51.69 (down 3.0%). March Gasoline rallied 5.4% (up 6%), while March Natural Gas dropped 4.2% to a multi-year low (down 11%). March Copper gained 3.6% (down 9%). March Wheat surged 4.8% (down 11%). March Corn jumped 4.3% (down 3%).

U.S. Fixed Income Bubble Watch:

February 1 - Bloomberg (Elizabeth McCormickDaniel Kruger): "Trading Treasuries keeps getting tougher and tougher. For decades, the $12.5 trillion market for U.S. government debt was renowned for its 'depth,' Wall Street's way of talking about a market's ability to handle large trades without big moves in prices. But lately, that resiliency has practically vanished -- and that's a big worry. Less depth has meant greater volatility. So Treasuries -- the world's haven asset during turmoil -- may be prone to more disruptions, particularly as the Federal Reserve prepares to raise interest rates... How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan... Now, it's $80 million. 'It's something that we all have to deal with,' James Sarni, a money manager at Payden & Rygel... 'There's a possibility that we may want to get out of things at a time when we can't get out.'"

U.S. Bubble Watch:

February 6 - Bloomberg (James Nash): "Terminal operators at the 29 U.S. West Coast ports won't handle cargo this weekend as a labor dispute with dockworkers escalates, their bargaining agent said. Loading and unloading of vessels at ports from San Diego to Bellingham, Washington, will be suspended from Friday through Monday morning... The ports handle more than 40% of U.S. cargo and are responsible for about 12.5% of gross domestic product, the maritime association said. Cargo has been piling up amid stalled talks with the International Longshore and Warehouse Union, which represents 20,000 dockworkers. The two sides began negotiating last May."

February 1 - Bloomberg (Rebecca Penty): "Oil and natural gas producers confronting a cash drain are auctioning off the family silver: pipelines and processing plants. Bakken shale billionaire Harold Hamm and Canadian gas giant Encana Corp. are among the latest to peddle some of their most valuable assets and steadiest earners. They don't have much choice -- as the oil price collapse deflates the value of drilling operations, pipes and plants are about the only things attracting big payments for producers vying to stay afloat. The deals for quick cash are another facet of the energy industry meltdown leading to more than $40 billion in spending cuts and thousands of job losses... 'At some point they all get desperate enough,' said Michael Formuziewich, a fund manager at Leon Frazier & Associates Inc. in Toronto. Low prices will spur a rise in deals, he said. 'The longer it goes on, the more we'll see.'"

February 5 - Bloomberg (Victoria Stilwell): "The U.S. trade deficit increased unexpectedly in December to a two-year high on a pickup in imports of motor vehicles and fewer shipments overseas. The gap widened 17.1% to $46.6 billion, the biggest shortfall since November 2012..."

February 2 - Reuters (Time McLaughlin): "At least 40 major U.S. companies have substantial exposure to Venezuela's deepening economic crisis, and could collectively be forced to take billions of dollars of write downs...The companies, all members of the S&P 500, and including some of the biggest names in Corporate America such as autos giant General Motors and drug maker Merck & Co Inc , together carry at least $11 billion of monetary assets in the Venezuelan currency, the bolivar, on their books."

February 5 - Bloomberg (Dana Hull and Julie Johnsson): "Call it Space Race 2.0. Almost a half-century since the Apollo moon flights, entrepreneurs are expanding the boundaries of rocket and satellite technology as the U.S. makes room for private enterprise. The result is a wave of innovation that echoes the leap in computing from key-punch mainframes to hand-held devices, with startups from San Francisco to Sydney pursuing new engines and Earth-orbiting probes as small as softballs. Buoyed by billionaire Elon Musk's SpaceX, the industry has surged more than sixfold since 2010 to more than 800 companies, according to market researcher NewSpace Global, with investment in private ventures in that span poised to reach $10 billion by year's end."

February 3 - Bloomberg (Oshrat CarmielHeather Perlberg): "When Related Cos. began selling condominiums at one of its former rental buildings last month, 50 people showed up in the first two days for an only-in-Manhattan bargain: almost all the homes cost less than $3 million... 'We are flooded with requests from buyers to come look at the property,' said Benjamin Joseph, the Related senior vice president who oversaw the conversion of 368 rental homes to 325 condos at 94th Street and Third Avenue. 'We're so busy, our sales agents can't even schedule them all.'"

Global Bubble Watch:

February 5 - Financial Times (Ralph Atkins): "The world is awash with more debt than before the global financial crisis erupted in 2007, with China's debt relative to its economic size now exceeding US levels, according to a report. Global debt has increased by $57tn since 2007 to almost $200tn -- far outpacing economic growth, calculates McKinsey & Co, the consultancy. As a share of gross domestic product, debt has risen from 270% to 286%. McKinsey's survey of debt across 47 countries... highlights how hopes that the turmoil of the past eight years would spur widespread "deleveraging" to safer levels of indebtedness were misplaced. The report calls for 'fresh approaches' to preventing future debt crises. 'Overall debt relative to gross domestic product is now higher in most nations than it was before the crisis,' McKinsey reports. 'Higher levels of debt pose questions about financial stability.' Overall, almost half of the increase in global debt since 2007 was in developing economies, but a third was the result of higher government debt levels in advanced economies... 'There are few indications that the current trajectory of rising leverage will change,' the report says. 'This calls into question basic assumptions about debt and deleveraging and the adequacy of tools available to manage debt and avoid future crises.'"

Europe Watch:

February 5 - Financial Times (Stefan Wagstyl in Berlin and John Aglionby, Mark Odell and Michael Hunter): "A showdown between the finance ministers of Greece and Germany on Thursday ended with the two sides as far apart as ever in solving Greece's financing crisis. In a terse opening to a press conference after a meeting in Berlin, Mr said he and Mr Varoufakis 'agreed to disagree' over the proposals of the Syriza-led anti-austerity government in what he described as 'long and intensive' discussions. However, Mr Varoufakis rejected Mr Schäuble's interpretation of the two-hour meeting, saying they did not 'even agree to disagree', adding: 'We did not reach agreement because it was never on the cards that we would.' 'We agreed to enter into deliberations as partners with the orientation of a joint solution to European problems that's going to put the interests of Europe at the helm.' The stand-off leaves Athens and its eurozone partners facing great uncertainty about financing Greece after its current rescue programme expires at the end of the month."

February 6 - UK Guardian (Katie Allen and Graeme Wearden): "Greece's radical Syriza government has vowed to keep fighting pressure from its eurozone neighbours to stick to the strict terms of its bailout package as battle lines were drawn ahead of crunch debt talks next week. Eurozone finance ministers have called an emergency meeting for next Wednesday night in Brussels to discuss the Greek crisis after a whistlestop tour of Europe by Greece's new finance minister, Yanis Varoufakis, made little headway. Germany wants Athens to arrive with a plan on the repayment of Greece's €240bn (£180bn) in bailout loans it received from the international community. The special debt meeting will be followed on Thursday and Friday by a summit of European leaders, the first with the new Greek prime minister, Alexis Tsipras. But a government official ruled out accepting a plan based on the old bailout and said Varoufakis would ask for a bridge agreement to tide Athens over until it can present a new debt and reform programme. 'We will not accept any deal which is not related to a new programme,' an official told Reuters news agency."

February 6 - Financial Times (Kerin Hope): "Like many young Athenians, Costas Nikoloudis has not had much to cheer about of late. At 25, the physical education graduate has survived on odd jobs, such as a part-time post as a security guard. He is currently unemployed and living with his parents. But he was strangely chipper, even ebullient, this week after watching Greece's new government, led by the leftwing Syriza party, in action. 'It was great to see how they talked straight to the big guys, [French President François] Hollande and [German finance minister Wolfgang] Schäuble,' Mr Nikoloudis said. 'It made you feel a lot better.' Never mind that Alexis Tsipras, the Greek premier, and his flamboyant finance minister, Yanis Varoufakis, ran into a wall of resistance during a bruising European roadshow. They tried, and failed, to win leniency from the European Central Bank and the German government over the terms of the country's international bailout. But in the process, they seemed to restore some sense of dignity to Greeks beaten down by four years of unremitting austerity."

ECB Watch:

February 7 - The Economist: "As part of his campaign to present a more conciliatory face to Greece's European creditors, Yanis Varoufakis, the new Greek finance minister, dropped by the European Central Bank (ECB)... on February 4th. He met Mario Draghi, its president, in an encounter Mr Varoufakis described as 'fruitful'. But there are sweet fruits and bitter ones. After his visit, the ECB's governing council served up a bitter variety by deciding to make life tougher for Greek banks, already beset by big outflows of deposits. The decision was a warning shot to the new government over its unwillingness to abide by Greece's bail-out arrangements. When banks borrow from the ECB, they must provide eligible collateral. As a result of this week's decision, from February 11th Greek banks will no longer be able to present bonds that have been issued or guaranteed by the Greek government. Their ability to do so until now, in spite of the fact that junk-rated Greek debt is not strictly eligible, has rested on a waiver of the ECB's rules. That waiver has in turn depended upon the Greek government's compliance with the terms of a rescue undertaken by the euro area and the IMF. The ECB's council has rescinded the waiver on the grounds that is no longer possible to assume a successful conclusion of the review of that programme."

China Bubble Watch:

February 3 - Bloomberg: "China's capital account posted the widest deficit since at least 1998 in the fourth quarter... The capital account shortfall was $91.2 billion in the three months ended December... The current account surplus shrank to $61.1 billion... 'This signals a shift in China's economic structure,' said Shen Jianguang, chief Asia economist at Mizuho Securities Asia... 'The expectation of yuan depreciation has appeared and that helped the capital outflow.' ...The central bank has halted regular foreign-exchange purchases, with foreign reserves falling last quarter."

February 3 - Bloomberg: "China's central bank views with concern the risk of volatile flows of capital into and out of the nation in coming months, and is preparing steps to help address the danger, according to people familiar with the matter. Two options under consideration are widening the band in which China's currency, the yuan, is allowed to fluctuate and guiding the exchange rate gradually lower by adjusting the fixing against the greenback...The yuan is now subject to a maximum 2% divergence on either side of a daily reference rate set by the People's Bank of China."

February 2 - Reuters: "The People's Bank of China is using its official guidance rate to put a floor under the yuan, a move that suggests Beijing is worried enough about mounting capital outflows to resume intervention in the forex market. The new strategy - or more accurately, the return to an old one - represents a step back from Beijing's repeated commitments to meddle less in the foreign exchange market, but the central bank lacks attractive alternatives. Letting the yuan slide sharply will only accelerate capital outflows, which would put upward pressure on interest rates just as the central bank wants to make money cheaper in order to stimulate the slowing economy and ease huge debt loads at many Chinese companies."

February 4 - Financial Times (Gabriel Wildau): "China's anti-corruption campaign is spreading to the country's financial sector following the arrest of two senior bank officials in recent days. Financial elites had been largely immune from the sweeping anti-corruption campaign that has claimed hundreds of scalps within the government, military and state-owned energy companies. But the recent arrests of bankers appear to be targeting patronage networks linked to specific political figures, rather than signalling a broader crackdown on the financial sector."

February 3 - Bloomberg: "Financing companies for China's cities are venturing overseas as the government clamps down on fundraising onshore amid mounting concern about record debt. Qingdao City Construction Investment Group Co., a local government financing vehicle on the country's east coast, is meeting with international bond investors this week... Zhuhai Da Heng Qin Co., a builder of bridges and roads in the city of Zhuhai near Hong Kong, issued 1.5 billion yuan ($239.5 million) of offshore yuan bonds in December. Beijing Infrastructure Investment Co. sold $1 billion of notes in the U.S. currency in November after becoming the first LGFV to issue Dim Sum securities in June. 'Issuing offshore bonds is another financing channel for the LGFVs given the tight liquidity in the onshore market,' said Joe Poon, an associate director of corporate ratings at Standard & Poor's."

February 3 - Bloomberg: "In the heart of Macau stands a 56-story tower with soaring gold-trimmed arches. On the second floor of the L'Arc Macau, there's a sight that would have been unimaginable a year ago: An abandoned room for high-end gamblers. There are no tables, no dealers and no players. Carpets have been rolled up, leaving a trash-covered concrete floor. A sign on the VIP room reads 'Heng Sheng Group,' one of Macau's top junket operators, which shuttle Chinese high-rollers to exclusive gaming venues and finance their bets. The dimming fortunes of Heng Sheng, whose name in Chinese translates to 'everlasting rise,' reflects those of an industry that had soared since it was opened to foreign operators in 2002."

Russia/Ukraine Watch:

February 2 - Bloomberg (Marton EderDaryna Krasnolutska): "Ukraine loosened its grip on the hryvnia currency, allowing it to slump by a third in a move backed by the International Monetary Fund amid talks for a new bailout. The hryvnia retreated 33% to a record 25 per dollar... Ukraine's dollar-denominated bonds due in July 2017 advanced to a five-day high of 53.366 cents on the dollar, reducing the yield to 41.13%."

February 2 - Bloomberg (Anna Andrianova): "Russian manufacturing slipped to a 5 1/2-year low as the nation's worst currency crisis since 1998 stokes inflation and weighs on businesses already facing a recession. The Purchasing Managers' Index fell to 47.6 last month, the lowest since June 2009... 'Signs of contracting business activity became more visible,' said Alexander Morozov, HSBC's chief economist for Russia and the Commonwealth of Independent States. 'Meanwhile, price pressures intensified further, increasing the probability of a 'bad equilibrium:' high price growth amid falling demand.'"

February 5 - Bloomberg (Olga Tanas): "Russian inflation topped forecasts by economists, accelerating to the fastest pace in almost seven years as the country's worst currency crisis since 1998 ignited price growth. Consumer prices rose 15% in January from a year earlier, compared with 11.4% in December..."

Brazil Watch:

February 6 - Bloomberg (David Biller): "Brazil's inflation in January accelerated to the fastest pace in nearly 12 years, as the central bank continues to raise rates in the world's second-biggest emerging market. Swap rates rose. Monthly inflation as measured by the benchmark IPCA index accelerated to 1.24% from 0.78% in December... Annual inflation accelerated to 7.14% from 6.41% a month earlier..."

February 6 - Financial Times (Joe Leahy): "When Petrobras chief executive officer, Maria das Graças Foster, was meeting Brazilian President Dilma Rousseff this week to discuss her resignation from the state-controlled oil group, it was boasting about its technical prowess. The company that is at the centre of the biggest corruption scandal in Brazil's history said it had won a coveted award for deepwater exploration. For Ms Rousseff, the award might serve as a reminder of the two faces of Petrobras. At the technical level, it is a national champion and a symbol of Brazilian excellence in oil exploration and production. But at the corporate level, it is a national catastrophe, a company so mismanaged and, allegedly, corrupted by politicians that it is on the verge of implosion. So acute is the crisis in Petrobras created by Ms Rousseff's Workers Party (PT), and its allies that she will need to bring it quickly under control or risk seeing her own government implode."

February 5 - Bloomberg (Julia Leite, David Biller and Tariq Panja): "When Brazil emerged from the global financial crisis as one of the world's great rising powers, Petrobras was the symbol of that growing economic might. The state-run oil giant was embarking on a $220 billion investment plan to develop the largest offshore crude discovery in the Western hemisphere since 1976 and was, in the words of then-President Luiz Inacio Lula da Silva, the face of 'the new Brazil.' Today the company epitomizes everything that is wrong with a Brazilian economy that has been sputtering for the better part of four years: It's mired in a corruption scandal that cost the CEO her job this week; it has failed to meet growth targets year after year; and it's saddling investors with spectacular losses. Once worth $310 billion at its peak in 2008, a valuation that made it the world's fifth-largest company, Petroleo Brasileiro is today worth just $48 billion."

February 2 - Bloomberg (Julia Leite): "Petroleo Brasileiro SA's days as an investment-grade company may be running out. In lowering the state-controlled oil producer's credit rating to the cusp of junk on Jan. 29, Moody's... gave the company a month to provide more clarity on its earnings or risk another downgrade. Its $3.5 billion of notes due 2023 plummeted by the most on record. The cut shows the growing strain on Petrobras, which is reeling from the nation's largest corruption investigation. Not only has Petrobras delayed reporting unaudited third-quarter results for two months, the company has yet to determine how much it overpaid suppliers that allegedly paid bribes in return for contracts. By some estimates, the writedowns could exceed tens of billions in dollars. 'Losing investment grade would be a traumatic matter,' Michael Roche, a strategist at Seaport Group LLC, said..."

February 6 - Bloomberg (Paula SamboFilipe Pacheco): "Brazil hasn't been held in such low esteem among bond investors in more than seven years. The nation's overseas borrowing costs have surged to within 0.3 percentage point of junk-rated countries. That's the closest that Brazil has been since July 2007... The backsliding in the bond market is evidence of how anemic economic growth, soaring inflation and an unprecedented corruption probe have taken their toll on Latin America's biggest country. Moody's... put Brazil's credit grade on negative outlook in September, six months after Standard & Poor's cut its rating to the cusp of junk. 'It has been a steady erosion in creditworthiness," Nicholas Spiro, a managing director at Spiro Sovereign Strategy, said..."

February 6 - Wall Street Journal (Reed Johnson, Luciana Magalhaes and Jeffrey Lewis): "Ask rich Brazilians why they are relocating to South Florida, and they cite Brazil's high crime rates and moribund economy. But there is another one-word explanation that Alyce M. Robertson, executive director of the Miami Downtown Development Authority, heard frequently on a recent business trip to Brazil: 'Dilma.' That would be Dilma Rousseff , the center-left president who was re-elected in October and is generally loathed by Brazil's elites. 'After the last election, we were talking to a lot of people concerned about getting their capital out of Brazil," Ms. Robertson said..."

EM Bubble Watch:

February 3 - Bloomberg (Ali Berat MericOnur Ant): "Turkish President Recep Tayyip Erdogan renewed his attacks of the central bank.., criticizing policy makers for keeping interest rates high to curb inflation. The lira deepened its losses after his remarks. Inflation will ease if the central bank cut borrowing costs, not the opposite, Erdogan said... 'There are still those who don't understand that if you cut interest rates you'll cut inflation,' Erdogan said... 'Some are trying to hold Turkey back with high interest rates.' Following a month of rate cuts from India to Peru to Egypt, Erdogan urged central bank Governor Erdem Basci Jan. 16 to follow suit to counter slowing economic growth. When Basci did so, lowering the bank's benchmark rate by half of a percentage point to 7.75% last week, Erdogan said bigger cuts were necessary... 'Unfortunately, this is the point we come to when the institution is independent," Erdogan said."

February 5 - Bloomberg (Olga Tanas): "Turkish President Recep Tayyip Erdogan's yearlong campaign against his archnemesis, the U.S.-based preacher Fethullah Gulen, culminated... in the government's seizure of control over Bank Asya, an Islamic lender founded by Gulen's supporters. What does it mean for Turkish stability? Gulen is a former ally of Erdogan. The two collaborated in the past decade to help counter Turkey's secularist military through a series of trials for alleged coup attemps. They attended the opening of Bank Asya together in 1996, when Erdogan was mayor of Istanbul. Gulen has lived in Pennsylvania since 1999, presiding over a network of devoted followers with interests in business, schools, media, and government. His public fight with the Turkish leader dates to the start of a corruption probe in Turkey in 2013, which Erdogan blames on Gulen, calling it a coup attempt carried out by Gulen's followers in Turkey's police and judiciary."

February 5 - Bloomberg (Rieka RahadianaHerdaru Purnomo): "Indonesia's economy shrank last quarter from the previous three months, capping the weakest year since at least the global financial crisis, on falling commodity prices and cooling investment. Southeast Asia's biggest economy shrank 2.06% last quarter from the previous three months..."

Geopolitical Watch:

February 1 - New York Times (Michael R. Gordon and Eric Schmitt): "With Russian-backed separatists pressing their attacks in Ukraine, NATO's military commander, Gen. Philip M. Breedlove, now supports providing defensive weapons and equipment to Kiev's beleaguered forces, and an array of administration and military officials appear to be edging toward that position, American officials said... President Obama has made no decisions on providing such lethal assistance. But after a series of striking reversals that Ukraine's forces have suffered in recent weeks, the Obama administration is taking a fresh look at the question of military aid."

February 6 - Financial Times (Philip Stephens): "Europe thinks it has a Ukraine problem. In truth, it has a Russia, or more precisely, a Vladimir Putin problem. Moscow's war against Kiev is a fragment of a bigger picture. The Russian president's revanchism reaches well beyond Ukraine. The bigger goal is to tear up the continent's post-communist settlement. European hesitation about confronting Russia is readily explained. Economic self-interest, history, cultural affinity, and latent anti-Americanism have persuaded many Europeans to look at Mr Putin as the leader they hoped for rather than the one who saw the fall of the Soviet Union as the geopolitical catastrophe of the 20th century."

February 6 - Bloomberg (Michael Riley and Jordan Robertson): "Investigators of Anthem Inc.'s data breach are pursuing evidence that points to Chinese state-sponsored hackers who are stealing personal information from health-care companies for purposes other than pure profit... The breach, which exposed Social Security numbers and other sensitive details of 80 million customers, is one of the biggest thefts of medical-related customer data in U.S. history. The attack appears to follow a pattern of thefts of medical data by foreigners seeking a pathway into the personal lives and computers of a select group -- defense contractors, government workers and others, according to a U.S. government official familiar with a more than year-long investigation into the evidence of a broader campaign."


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