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The Turkish lira sank 13.7% in chaotic Friday trading. The lira’s 21.0% “worst week in 17 years” collapse pushed y-t-d losses to 41.1%. Turkish 10-year yields spiked to almost 21%, before retreating somewhat. After beginning the year at 155, Turkey sovereign credit default swaps (CDS) spiked 166 bps during Friday trading (up 199 bps for the week) to 437 bps (high since Feb. 2009).

EM Contagion Effects gained momentum this week. Friday trading saw the Argentine peso hit 3.8% and the South African rand sink 2.7%. For the week, the Argentine peso fell 6.6%, the South African rand 5.5%, the Brazilian real 4.0%, the Hungarian forint 2.2%, the Romanian leu 2.1%, the Polish zloty 2.2% and the Mexican peso 1.8%. On the (local) bond yield front, 10-year yields in Brazil jumped 66 bps, Russia 40 bps, Hungary 15 bps and South Africa 13 bps. As global “hot money” frets faltering liquidity and the next shoe to drop, Brazilian equities sank 5.9% (as Brazil sovereign CDS jumped 24 bps to 237 bps).

August 10 – Bloomberg (Lionel Laurent): “Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country’s assets at an alarming pace, saying: ‘They have got dollars, we have got our people, our right, our Allah.’ European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time.”

Fears of contagion this week were not limited to the emerging markets. With significant exposure to Turkey, European bank stocks were slammed in Friday trading. Unicredit sank 4.7% and ING Groep fell 4.3%. The big German banks, Deutsche Bank and Commerzbank, dropped 4.1% and 3.5%. European Banks (STOXX600) fell 1.9% Friday.

August 10 – Financial Times (Claire Jones, Ayla Jean Yackley and Martin Arnold): “The eurozone’s chief financial watchdog has become concerned about the exposure of some of the currency area’s biggest lenders to Turkey – chiefly BBVA, UniCredit and BNP Paribas – in light of the lira’s dramatic fall…

…click on the above link to read the rest of the article…

Weekly Commentary: “Periphery to Core Crisis Dynamics”

August 4, 2018

Weekly Commentary: “Periphery to Core Crisis Dynamics”

The renminbi traded at 6.8935 in early-Friday trading, with intensified selling pushing the Chinese currency to its lowest level (vs. the $) since May 26, 2017. The People’s Bank of China (PBOC) was compelled to support their currency, imposing a 20% reserve requirement on foreign-exchange forward contracts (raising the cost of shorting the renminbi). The PBOC previously adopted this measure back during 2015 tumult, before removing it this past September.

The re-imposition of currency trading reserve requirements indicates heightened concern in Beijing. Officials likely viewed modest devaluation as a constructive counter to U.S. trade pressures. In no way, however, do they want to face disorderly trading and the risk of a full-fledged currency crisis.

The renminbi rallied 1% on the PBOC move, ending slightly positive for the day (but down for the eighth straight week). Trading strongly prior to the PBOC move, the dollar index reversed into negative territory. Many EM currencies moved sharply on the renminbi rally. The South African rand reversed course and posted a 1.2% gain. The Brazilian real also jumped 1%. Curiously, the Japanese yen gained about 0.5%.

Overnight S&P500 futures, having traded slightly negative, popped higher on the renminbi rally. But EM equities were the bigger beneficiary. Brazil Ibovespa index gained 2.3% Friday. It increasingly appears the fortunes of the renminbi and EM markets are tightly intertwined.

The unfolding trade war is turning more serious. Beyond Friday’s currency move, China’s Finance Ministry – in measures to “guard its interests” – announced plans for significantly broader retaliation tariffs on U.S. goods.

August 3 – CNBC (Michael Sheetz): “China is preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of U.S. goods. The import taxes would range in rates from 5% to 25%, China’s Ministry of Commerce said…
…click on the above link to read the rest of the article…

Weekly Commentary: Intimidate Nobody

July 21, 2018

Weekly Commentary: Intimidate Nobody

Strangely perhaps, but late in the week my thoughts returned to James Carville’s 1992 comment: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Things have changed so profoundly since then, though I get no sense that many appreciate the momentous ramifications. It seems like ancient history – the bond market king of imposing discipline. Bonds maintained an intimidating watchful eye. No crazy stuff – from politicians, central bankers or corporate managements. The bond market of old would have little tolerance for $1.0 TN deficits, QE or a prolonged boom in BBB corporate debt issuance. Contemporary markets seem to have only a burgeoning desire to tolerate.

July 19 – Reuters (Trevor Hunnicutt and Saqib Iqbal Ahmed): “Donald Trump’s comments that a strong dollar ‘puts us at a disadvantage’ caused an instant fall in the greenback on Thursday and marked another example of the U.S. president commenting directly – and sometimes contradictorily – on the country’s currency. Talking directly about the dollar is a break with typical practice by U.S. presidents, who are wary of being seen as interfering directly with financial markets… ‘There are certain comments most presidents wouldn’t make,’ said Michael O’Rourke, chief market strategist at JonesTrading. ‘They’d defer monetary policy to the Fed and the dollar to the Treasury secretary. But Donald Trump is not most presidents.'”

July 19 – CNBC (Jeff Cox): “President Donald Trump’s move to criticize the Federal Reserve is almost without precedent in a nation that places a high priority on the independence of monetary policy. Almost all of Trump’s predecessors steered clear of Fed critiques in the interest of making sure that interest rates were set to whatever was best for the economy and not to boost anyone’s political fortunes.
…click on the above link to read the rest of the article…

Weekly Commentary: $247 Trillion and (Rapidly) Counting

July 20, 2018

Weekly Commentary: $247 Trillion and (Rapidly) Counting

I chronicled mortgage finance Bubble excess on a weekly basis. Relevant data were right there in plain sight, much of it courtesy of the Federal Reserve. Yet only after the Bubble burst did it all suddenly become obvious. Flashing warning signs were masked by manic delusions of endless prosperity and faith in the almighty “inside the beltway”. These days, data for the global government finance Bubble is not as easily-accessible, though there is ample evidence for which to draw conclusions. It will all be frustratingly obvious in hindsight.

The Institute of International Finance is out with their latest data that, unfortunately, is not made available in detail to the general public. Global debt ended the first quarter at a record $247 Trillion, or 318% of GDP. Even after a decade of historic Credit inflation, global debt continues to expand at (“Terminal Phase”) double-digit rates (11.1% y-o-y).

Global debt growth accelerated during the first quarter to $8.0 Trillion – and surged $30 Trillion over just the past five quarters. In a single data point not to be disregarded, Global Debt Has Expanded (a difficult to fathom) $150 Trillion, or 150%, Over the Past Ten Years. Actually, the trajectory of Bubble-period Credit expansion may seem rather familiar. It’s been, after all, a replay of the reckless U.S. mortgage Credit episode, only on a much grander global scale.

July 10 – Financial Times (Jonathan Wheatley): “The amount of debt in the world increased by nearly $25tn in the year to the end of March, piling more pressure on a global financial system already struggling to deal with rising US interest rates, widening spreads for borrowers and a strengthening US dollar. The Institute of International Finance… said total debts owed by households, governments and financial and non-financial corporations amounted to $247.2tn at the end of March, up from $222.6tn a year earlier and an increase of nearly $8tn in the first quarter alone.

…click on the above link to read the rest of the article…

Weekly Commentary: BIS Annual Economic Report (for posterity)

July 8, 2018

Weekly Commentary: BIS Annual Economic Report (for posterity)

With attention focused on unfolding trade wars and summer vacations, the release of the Bank of International Settlement (BIS) Annual Report garnered scant notice (with the exception of Gillian Tett’s Thursday FT article, “Holiday Trading Lull Flashes Red for Financiers”).

From the BIS: “It is now 10 years since the Great Financial Crisis (GFC) engulfed the world. At the time, following an unparalleled build-up of leverage among households and financial institutions, the world’s financial system was on the brink of collapse. Thanks to central banks’ concerted efforts and their accommodative stance, a repeat of the Great Depression was avoided. Since then, historically low, even negative, interest rates and unprecedentedly large central bank balance sheets have provided important support for the global economy and have contributed to the gradual convergence of inflation towards objectives.”

As we near the 10-year financial crisis anniversary, I would approach back slapping with caution. The key issue today is not whether central bank post-Bubble reflationary policies avoided a repeat of the Great Depression. Rather, did the unprecedented concerted – and protracted – global central bank response increase the likelihood of a more destabilizing future crisis – one where the dark forces of global depression might prove difficult to escape?

I’m not interested in bashing the BIS. They strive to have a balanced approach. Yet when reading through their insightful annual report it’s apparent that major holes remain in the contemporary central banking analytical framework. To their Credit, they do recognize the unprecedented buildup of global debt and imbalances. In my view, however, they fail to appreciate how central bankers these days continue fighting the last war.

…click on the above link to read the rest of the article…

Weekly Commentary: Performance Chase

June 23, 2018

Weekly Commentary: Performance Chase

The Nasdaq Composite, Nasdaq 100, small cap Russell 2000, Value Line Arithmetic and the NYSE Arca Biotechnology were among U.S. indices trading to all-time highs during Wednesday’s session. In the real world, there is escalating risk of a destabilizing global trade war. The Shanghai Composite sank 4.4% this week to two-year lows. It was another week of instability for emerging market equities, bonds and currencies – especially in Asia.

Here at home, it’s difficult to envisage a more divided electorate or a more hostile political environment. Record securities and asset prices and such a sour social mood appear quite the extraordinary dichotomy. Yet I would argue that speculative financial market Bubbles, heightened global tensions and domestic social and political angst all have at their root cause decades of unsound “money” and Credit (an archaic notion, I fully appreciate).

“Inflation is always and everywhere a monetary phenomenon…”, Milton Friedman explained some 50 years ago. At the time, Dr. Friedman was contemplating goods and services inflation. Financial, monetary management and technological developments over recent decades ensured that asset inflation evolved into the much more destabilizing form of inflation. A Bubble collapse presented Dr. Bernanke the opportunity to test his academic theories, unleashing unprecedented monetary inflation specifically targeting securities markets. His policies spurred similar monetary inflation around the world that has continued for almost a full decade.

Cut short rates to zero, print “money,” buy bonds; force market yields lower; spur buying of risk assets and higher securities prices; orchestrate powerful wealth effects; households and businesses borrow and spend; the economy expands; inflation rises back to target – and all is good. Sure, there’s some risk that asset prices get ahead of the real economy. Not to worry. Central banks will ensure a steadily rising general price level – and inflating earnings and incomes – to catch up to elevated asset prices. All will be well.
…click on the above link to read the rest of the article…

Weekly Commentary: The Great Fallacy

June 17, 2018

Weekly Commentary: The Great Fallacy

A big week in the world of monetary management: The Federal Reserve raised rates 25 bps, the ECB announced plans to wind down its historic QE program, and the Bank of Japan clung to its “powerful monetary easing” inflationist scheme. A tense People’s Bank of China left rate policy unchanged, too weary to follow the Fed’s path.

The renminbi declined a notable 0.5% versus the dollar this week. More dramatic, the euro was hammered 1.9% on Draghi’s game plan. Also on Thursday’s dollar strength – and even more dramatic – the Argentine peso sank another 6.2% (down 34% y-t-d). The session saw the Brazilian real drop 2.2%, the Hungarian forint 2.6%, the Czech koruna 2.2%, the Polish zloty 2.0%, the Bulgarian lev 1.9%, the Romanian leu 1.9% and the Turkish lira 1.7%.

The FOMC, raising rates and adjusting “dot plots” higher, was viewed more on the hawkish side. The ECB, while announcing plans to conclude asset purchases by the end of the year, was compelled to add dovish guidance on rate policy (“…expects the key ECB interest rate to remain at present levels at least through the summer of 2019…”). Blindsided, the market dumped the euro. The Fed and ECB now operate on disparate playbooks, each focused on respective domestic issues. Anyone these days focused on faltering emerging market Bubbles, global contagion and the rising risk of market illiquidity?

June 13 – Financial Times (Sam Fleming): “Jay Powell put his personal stamp on the Federal Reserve on Wednesday, as the new chairman vowed to speak in plain English and hold more regular press conferences as he fosters ‘a public conversation’ about what the US central bank is up to. The Fed’s statement after the Federal Open Market Committee meeting, which detailed its decision to raise rates 0.25% and set a course for two more increases this year, also bore his imprint, as Mr Powell stripped away some of the economic verbiage that cluttered its communications in recent years. Mr Powell’s break from the approach of his predecessor… was more a stylistic one than a radical change of monetary policy strategy.”
…click on the above link to read the rest of the article…

Weekly Commentary: Q1 2018 Z.1 Flow of Funds

June 9, 2018

Weekly Commentary: Q1 2018 Z.1 Flow of Funds

The first-quarter 2018 Z.1 “flow of funds” report can be viewed in two ways. From one perspective, key conventional data are un-extraordinary. Household debt expanded at a 3.3% rate during the quarter, down from Q4’s 4.6%. Home Mortgage borrowings slowed from 3.4% to 2.9%. Total Business debt grew at a 4.4% pace, unchanged from Q4 and down from Q1 ’17’s 6.1%. Financial sector borrowings were little changed, after expanding 1.6% during Q4. Bank lending was, as well, unremarkable.

From another perspective, extraordinary Credit growth runs unabated. Total System (non-financial, financial and foreign) Credit expanded at a (record) seasonally-adjusted and annualized rate (SAAR) of $3.513 TN during 2018’s first quarter, compared to Q4’s SAAR $1.411 TN and Q1 ’17’s SAAR $860 billion. This booming Credit expansion was fueled by an SAAR $2.519 TN increase of federal borrowings. Granted, this was partially a makeup from Q4’s slight contraction in federal debt growth.

In nominal dollars, Total U.S. System Credit expanded a blazing $962 billion during Q1 to a record $69.717 TN (349% of GDP). Non-financial Debt (NFD) expanded a record (nominal) $874 billion, with one-year growth of $2.413 TN. One must return to booming 2007 for a larger ($2.508 TN) four quarter-period of Credit expansion. NFD ended Q1 at a record $49.831 TN, matching a record 250% of GDP. NFD expanded $4.086 TN over the past two years, the strongest expansion since ’07/’08.

Outstanding Treasury Securities ended Q1 at a record $17.046 TN, increasing a nominal $615 billion during the quarter. Treasury Securities jumped $1.172 TN during the past four quarters and $1.669 TN over two years. Outstanding Treasury Securities has increased $10.995 TN, or 182%, since the end of 2007. Treasury debt-to-GDP ended Q1 at 85%, more than double 2007’s 41%. It’s worth adding that total Treasury and Agency Securities ended Q1 at a record $25.920 TN, or 130% of GDP.

…click on the above link to read the rest of the article…

Weekly Commentary: Italian Drama

June 3, 2018

Weekly Commentary: Italian Drama

As I see it, cracks are opening in the greatest Bubble of all time. Serious fissures have developed in EM, Europe and China. Meanwhile, the stimulus-driven U.S. economic boom runs unabated. Global fragilities place downward pressure on U.S. market yields, while faltering Bubbles elsewhere stoke (self-reinforcing) outperformance – and speculative excess – within the U.S. equities market. The Fed faces a difficult challenge of weighing buoyant U.S. economic data and inflating asset prices against heightened global market fragilities.

Let’s begin with U.S. data. May non-farm payrolls increased a stronger-than-expected 223,000. The Unemployment Rate declined a tenth to 3.8%, matching the low going all the way back to 1969. Average hourly earnings were up 0.3% in May and 2.7% y-o-y. The ISM Manufacturing Index increased 1.4 points to a stronger-than-expected 58.7. There have been only nine stronger monthly readings looking all the way back to August 2004. Prices Paid rose slightly to 79.5, the high since April 2011. ISM New Orders jumped 2.5 points to 63.7, the high since February. The Employment component rose 2.1 points to a solid 56.3. The Chicago Purchasing Managers index surged 5.1 points to 62.7, the high since January. The Dallas Manufacturing Outlook recovered five points to the high since February. A Friday afternoon CNBC (Jeff Cox) headline: “The US economy suddenly looks like it’s unstoppable.”

April Construction Spending was up a much stronger-than expected 1.8% (strongest since January), led by an 8.7% y-o-y increase in residential construction. This followed stronger-than-expected S&P CoreLogic house price inflation (up 6.79% y-o-y). May Conference Board Consumer Confidence gained 2.4 points to 128, just below February’s 130, the strongest reading going all the way back to November 2000. The Conference Board Present Situation component jumped 4.2 points to 161.7, the high back to March 2001. Also indicative of boom time conditions, Personal Spending jumped 0.6% in April. May auto sales almost across the board surpassed expectations, with sales estimated up 5% from a year ago.
…click on the above link to read the rest of the article…

Weekly Commentary: Crisis Watch

May 19, 2018

Weekly Commentary: Crisis Watch

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.

EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey’s 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil’s dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico’s dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We’ll begin with Italy:

May 17 – UK Guardian (Jon Henley): “Italy’s new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces. From the EU’s perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government ‘contract’ include provision for a ‘conciliation committee’ to settle expected disagreements. Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership…

…click on the above link to read the rest of the article…

Weekly Commentary: Disequilibrium

May 12, 2018

Weekly Commentary: Disequilibrium

Much to the consternation of our allies, President Trump withdraws from the Iran nuclear deal. WTI crude adds another 1.5% (up 17% y-t-d) this week to the high since November 2014. Iran and Israel moved closer to direct military confrontation. With even 40% rates unable to staunch the bleeding, a stunned Argentine government warily negotiates an IMF bailout. Italy’s far right and far left parties – both populist, anti-establishment, anti-euro and anti-immigration – begin negotiations to form a coalition government. Malaysians elect 92-year old Mahathir Mohamad, ending the 60-year reign of the Barisan Nasional party (including Mahathir as prime minister between 1981 and 2003).

Some astounding developments, but not enough these days to shake financial markets. Why fret a complex and increasingly unstable world, not with the timely return of Goldilocks. She’s back… Headline U.S. April CPI was up 0.2% vs. expectations of 0.3%. Core CPI was up only 0.1% against expectations of 0.2%. April Import Prices were up 0.3% vs. estimates of 0.5%. Forget surging energy prices, rather quickly the rosy narrative shifts to peak inflation.

May 11 – Reuters (Howard Schneider): “St. Louis Federal Reserve Bank President James Bullard on Friday spelled out the case against any further interest rate increases, saying rates may already have reached a ‘neutral’ level that is no longer stimulating the economy… ‘We should be opening the champagne here,’ not raising interest rates with unemployment low and inflation in no seeming danger of accelerating, Bullard said… ‘The economy is operating quite well right now.'”

I suggest the Fed and global central bankers hold back on carting out the bubbly. “Opening the champagne” is reminiscent of Citigroup CEO Chuck Prince’s summer of 2007 “still dancing.” Bullard focuses on traditional yield curve analysis. “I would say the yield curve inversion is getting close to crunch time.” “The yield curve inversion would be a bearish signal for the US economy if that develops.”
…click on the above link to read the rest of the article…

Weekly Commentary: Old Roach Motel

May 8, 2018

Weekly Commentary: Old Roach Motel

One hundred and six months. The current expansion, having emerged in the aftermath of the collapse of the mortgage finance Bubble, is now the second-longest on record (lagging only the 120-month 1990’s Bubble period). The unemployment rate dropped to 3.9% last month, the lowest level since the 3.8% print in April 2000. Corporate earnings are at unprecedented levels and stock prices only somewhat below records. Home prices in most markets are at all-time highs. U.S. GDP is forecast to expand 2.8% this year, just below 2015’s (2.9%) 12-year high.

We should be leery of prolonged expansions. The longer a boom, the greater the opportunity for deep-rooted structural impairment. Back in 2013, I proposed the concept of “Government Finance Quasi-Capitalism.” This was updating previously updated Hyman Minsky analysis. Minsky’s “Stages of Development of Capitalist Finance” seems especially relevant these days:

Minsky: “In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure… To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures.”

Minsky saw the evolution of capitalist finance as having developed in four stages: Commercial Capitalism, Finance Capitalism, Managerial Capitalism and Money Manager Capitalism. “These stages are related to what is financed and who does the proximate financing – the structure of relations among businesses, households, the government and finance.” (CBB 12/28/2001 “Financial Arbitrage Capitalism”)

…click on the above link to read the rest of the article…

Weekly Commentary: Conventional Wisdom

April 30, 2018

Weekly Commentary: Conventional Wisdom

Conventional Wisdom is so often proved wrong. Thinking back over my career, it’s amazing how many times what is believed true without a doubt in the markets turns out completely erroneous. There’s no mystery behind this phenomenon. Responsibility lies foremost in flawed analytical frameworks. Fundamentally, bull market psychology rests on the basic premise that underlying fundamentals are sound – economic growth, earnings, inflation dynamics, new technologies, global trade, etc. No need to look further or dig any deeper.

When securities markets are strong (inflating), it’s taken as a given that the financial system is robust. The problem, however, is that the underlying finance fueling the recent bull market has been patently unsound – and has been so for three decades of recurring boom and bust cycles.

A wise person said that it’s not true that we don’t learn from history. It’s that our learning is dominated by recent history. It becomes too easy to ignore everything beyond the past few years. Over a relatively short time horizon, the previous bust cycle becomes ancient history. What matters for the markets – especially as the cycle evolves to the speculative phase – is the here and now. It’s assumed that everyone acquired understanding and insight from the crisis experience – especially policymakers. They’ll ensure there is no repeat; they have the tools and have amassed experience and comfort employing them. The previous crisis was a “100-year flood.” Good not to have to ponder a recurrence for a few generations.

Conventional Wisdom will look especially foolish when this protracted cycle comes to its fateful conclusion. Not only was the mortgage finance Bubble not the proverbial “100-year flood,” it set the stage for historic global government finance Bubble excesses. The real once-in-a-lifetime crisis lies in wait. Not only do we not learn from our mistakes, we instead seem to go out of our way to create bigger ones. This time much Bigger. This predicament was on full display this week.
…click on the above link to read the rest of the article…

Weekly Commentary: Nobody Thinks It Would Happen Again

March 17, 2018

Weekly Commentary: Nobody Thinks It Would Happen Again

WSJ: “Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again.”

Myriad changes to the financial structure have seemingly safeguarded the financial system from another 2008-style crisis. The big Wall Street financial institutions are these days better capitalized than a decade ago. There are “living wills,” along with various regulatory constraints that have limited the most egregious lending and leveraging mistakes that brought down Bear Stearns, Lehman and others. There are central bank swap lines and such, the type of financial structures that breed optimism.

March 17, 2008 – Financial Times (Gillian Tett): “In recent years, bankers have succumbed to the idea that the credit world was all about numbers and complex computer models. These days, however, this assumption looks ever more of a falsehood. For as anyone with a classical education knows, credit takes its root from the Latin word credere (“to trust”) And as the current credit turmoil now mutates into ever-more virulent forms, it is faith – or, rather, the lack of it – that has turned a subprime squall into a what is arguably the worst financial crisis in seven decades. Make no mistake: what we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns) or even an asset class (those dodgy subprime mortgage bonds). Instead, it stems from a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms. And this trend is not just damaging the credibility of banks, but the aura of omnipotence that has enveloped institutions such as the US Federal Reserve in recent years.”

Gillian Tett was the preeminent journalist during the waning mortgage finance Bubble period. She was seemingly alone in illuminating the degree of excess in subprime Credit default swaps and structured finance more generally. By March 2008, she had already recognized “the worst financial crisis in seven decades,” while Wall Street was trapped in denial. Ms. Tett also appreciated the damage being done to Federal Reserve credibility. Yet no one could have anticipated the evolution of policy measures adopted by the Fed and global central bankers over the following decade. Credibility’s New Lease on Life.

…click on the above link to read the rest of the article…

Weekly Commentary: Cracks

March 3, 2018

Weekly Commentary: Cracks

After posting an inter-week high of 25,800 on Tuesday, the DJIA then dropped 1,583 points (6.1%) at the week’s Friday morning low (24,218) – before closing the session at 24,538 (down 3.0% for the week). The VIX traded as low as 15.29 Tuesday. It then closed Wednesday at 19.85, jumped as high as 25.30 on Thursday and then rose to 26.22 in wild Friday trading, before reversing sharply to close the week out at 19.59.

Friday’s session was another wild one. The Nasdaq Composite rallied 2.6% off early-session lows to finish the day up 1.1%. The small caps were as volatile, with an almost 1% decline turning into a 1.7% gain. The Banks had a 2.8% intraday swing and the Broker/Dealers 2.4%. The Biotechs had a 3.7% swing, ending the session up 3.2%. The Semiconductors had a 3.3% swing, gaining 1.8% on the day.

Friday morning trading was of the ominous ilk. Stocks, Treasuries, commodities and dollar/yen were all sinking in tandem. The VIX was spiking. Japan’s Nikkei dropped 2.5% in Friday trading, with Germany’s DAX down 2.3% and France’s CAC losing 2.4%. The emerging markets (EEM) were down as much as 1.7%. For the week, the DAX sank 4.6% and the Nikkei fell 3.2%. Curiously, bank stocks outside of the U.S. came under notable pressure. European banks (STOXX) dropped 3.5%, Hong Kong’s Hang Seng Financial Index 4.5% and Japan’s TOPIX Bank index 3.4%.

There are cracks – cracks in the U.S. and cracks spread globally. This week’s market gyrations suggest these interconnected fissures will not prove transitory. VIX traders on edge. Risk parity and the CTA community on edge. ETF complex? Everything’s turned correlated. Hedges have become expensive, and the Treasury hedge isn’t working. The yen has taken on a life of its own. Central bankers playing coy. How long can all of this hold together?

This was never going to end well. It’s just that raging bull markets are willing to disregard so much. Fully inebriated by the bottomless libation of easy money, markets in speculative blow-off mode gleefully ignore about everything. President Trump had stated he wanted tariffs.

…click on the above link to read the rest of the article…

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