Doug Nolan
Friday, March 13, 2015
With the (king) U.S. dollar index trading Friday above 100 for the first time since 2003, the unfolding EM - ongoing “global reflation trade” - unwinds broadened and turned more disorderly. Brazil is now lurching toward crisis. Friday trading saw the Brazilian real slammed for 2.6% to the low since April 2003, boosting y-t-d losses to 18.2% (down 27.2% y-o-y). Brazil sovereign CDS surged 13 bps Friday to 302, the high since early-2009. Notably, Brazil’s dollar yields surged 23 bps Friday to a multi-year high 5.08%. For the week, Brazilian (real) yields jumped 43 bps to 13.40% (traded as high as 13.79% intraday Friday).
May 13 – Bloomberg (Filipe Pacheco and Paula Sambo): “Bonds and stocks of Petroleo Brasileiro SA fell after a newspaper reported that the company is in talks with creditors to extend a deadline for publishing audited results and avoid a possible acceleration of payments. Petrobras’s $2.5 billion in bonds due 2024 declined 2.7 cents to 90.55 cents per dollar, the biggest daily drop since Jan. 30. Yields on the notes jumped 0.45 percentage point to 7.74%.
The preferred shares of the company at the center of the nation’s biggest corruption probe slid 2.5%... extending this week’s slump to 10%. The Rio de Janeiro-based oil driller has held negotiations with about 15 banks and investment firms in the past few weeks to extend the deadline, Folha de S. Paulo reported…”
The Bloomberg Commodity Index dropped 3.1% this week to the lowest level since August 2002. This index is now down 44% from 2011 highs. Weakness was notably broad-based. The week saw heating oil hit for 7.3%, coffee 6.7%, lean hogs 6.0%, sugar 5.9%, cocoa 3.8%, cotton 3.4%, natural gas 3.9%, lead 2.3%, nickel 1.7%, silver 2.0%, orange juice 1.5%, corn 1.4% and soybeans 1.2%. With crude (WTI) crushed 9.6% to the low since early-2009, there was notable pressure on EM energy and commodities-related bonds. Troubled Petroleo Brasileiro (Petrobras) CDS surged 70 bps Friday and were up 120 bps for the week to a record 711 bps.
Vale CDS jumped 55 bps this week to the high since early-2009 (331bps). Markets are increasingly nervous of the major Brazilian lenders, including the state-directed banks. Banco do Brasil CDS jumped 62 bps this week to 442 bps. Brazilian development bank BNDES CDS jumped 48 bps. It’s also worth mentioning that Petroleos Mexicanos CDS jumped 24 bps to 207 bps.
Venezuela dollar yields jumped 66 bps Friday and were up 220 bps for the week to 28.65%. Pricing imminent default, Venezuela CDS surged 1,294 bps this week to 5,506 bps. Colombia CDS jumped 21 bps to 175 bps, Peru 22 bps to 145 bps, and Panama 20 bps to 149 bps. Jumping 20 bps, Mexican CDS this week traded to the highest level since July 2013 (136 bps)
EM currency weakness was broad-based. In Latin America, the Brazilian real this week fell 5.7%, the Colombian peso 3.2% and the Chilean peso 1.8%. Eastern European currencies were under heavy pressure. The Polish zloty was hit for 3.6%, the Bulgarian lev 3.2%, the Hungarian forint 3.2%, the Romanian leu 3.2%, the Czech koruna 3.1% and the Iceland krona declined 2.4%. The Russian ruble reversed course and declined 2.9% this week.
EM bonds were also under pressure. The lira’s 1.9% Friday decline wiped out the Turkey currency’s earlier rally, as Turkish lira yields jumped 14 bps this week to a three-month high 8.36%. Turkey CDS traded to an almost one-year high earlier in the week. In Asia, Indonesia CDS rose 12 bps to a two-month high 160 bps. Interestingly, China CDS gained 5 bps to 89 bps.
EM stocks were not spared. Russian stocks were hit for 5.8% and Turkish equities were slammed for 4.6%. India’s Sensex index fell 3.2%. Brazil's Bovespa declined 2.8%. Eastern European equities were under pressure almost across the board. Things were not much better in Latin America and Asia.
The euro was slammed for 3.2% this week, trading to the lowest level versus the dollar since 2002. Greek five-year yields surged 329 bps to 15.15%. Greek CDS jumped 350 bps to 1,708 – not far from the highest levels since 2012.
The Federal Reserve released its Q4 Z.1 “flow of funds” report Thursday.
Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized (SAAR) rate of $1.938 TN, the strongest growth since Q4 2012. Total Business borrowings expanded SAAR $845bn, up from Q3’s SAAR $581bn to the highest level since Q1 2008. Federal government borrowed at SAAR $700bn, down from Q3’s SAAR $913bn. Total Household borrowings increased SAAR $361bn, little changed from Q3.
For all of 2014, NFD expanded $1.701 TN, up from 2013’s $1.463 TN. With 2014 federal borrowings ($667bn) about half the 2012 level, 2014 NFD growth somewhat lagged 2012’s $1.828 TN. Yet 2014 Household borrowings of $376bn were up significantly from 2013’s $197bn to the highest level since 2007 ($913bn). Total 2014 Business borrowings of $672bn were up from 2013’s $546bn to the strongest growth since 2007 ($1.116 TN).
On a percentage basis, NFD expanded 4.3% in 2014, up from 2013’s 3.8%. Business debt growth accelerated to 7.2% from 2013’s 5.0%. Although mortgage debt growth remained below 1%, total Household borrowings increased 2.9%. Outstanding State & Local borrowings contracted 0.5% in 2014.
Bank Credit growth slowed during Q4, with Banking Assets expanding $954bn during 2014, or 6.0%. Bank loans, however, posted another strong quarter, with notable 2014 growth of 12.3% ($308bn). For the year, Credit Union assets expanded 5.9%, REIT liabilities 8.3%, and Security Credit 7.7%. A significant Q4 decline pushed Securities Broker/Dealer Assets to a 4.5% 2014 contraction.
Despite only modest growth from most traditional sources of system Credit, inflationary forces continue to buttress securities markets. My proxy for “Total Debt Securities” – Treasuries, Agency Securities, Corporate Bonds and Muni debt – increased $1.25 TN during 2014 to a record $36.15 TN. Total Debt Securities have increased $8.075 TN, or 29%, since the end of 2008. Total Equities have jumped $20.816 TN, or 133%, since 2008.
As such, my proxy of “Total Securities” jumped $4.08 TN in 2014 to a record $72.608 TN. Total Securities have increased $28.9 TN since the end of 2008, or 66%.
“Total Securities” as a percentage of GDP is helpful Bubble Analysis. After beginning the nineties at 173% of GDP, “Total Securities” ended the Bubble year 1999 at an unprecedented 341%. The bursting “tech” Bubble saw this ratio decline to 267% to end 2002. Mortgage finance Bubble reflation then pumped this ratio to a record 360% by the end of 2007.
This Bubble burst, and “Total Securities” ended 2008 at 297% of GDP. Six years of incredible monetary inflation had Total Securities ending 2014 at a record 417% of GDP.
I have on a quarterly basis chronicled the inflation of Household sector Net Worth as a key facet of Federal Reserve reflationary policies. Household Assets inflated another $1.61 TN during Q4, with a 2014 gain of $4.431 TN. For the year, Household Real Estate assets increased $1.223 TN and Financial Assets rose $3.045 TN.
And with Household Liabilities growing $363bn, Household Net Worth (assets minus liabilities) jumped another $4.068 TN in 2014 to a record $82.912 TN. Since the end of 2008, Household Net Worth has inflated $26.403 TN, or 47%. This “wealth creation” goes a long way in explaining the economic recovery – as well as its vulnerability to asset market weakness.
As a percentage of GDP, Household Net Worth began the nineties at 379% ($21.5 TN). Net Worth rose to 446% ($43.1 TN) of GDP to end 1999, only to fall back down to 398% ($43.7 TN) to close 2002. Net Worth inflated to a record 461% ($66.7 TN) to end 2007. Household Net Worth closed 2014 at a record 476% of GDP ($82.9 TN).
Federal Reserve Asset growth slowed to $48bn during the quarter, with 2014 growth of $482bn, or 11.8%. Amazingly, the Fed’s balance sheet inflated $1.601 TN, or 54%, over the past two years. And since the end of 2007, Fed liabilities have inflated $3.604 TN, or 379%.
Curiously, GSE borrowings (debt as opposed to MBS) expanded SAAR $316bn during Q4, the most rapid GSE growth in years. Is the GSE ramp up coincident with the wind down of Fed QE? The GSEs posted three straight quarters of strong growth. As hard as it is to believe, GSE activities should be monitored closely in 2015.
Overall, 2015 is destined to be a fascinating and challenging year for macro Credit and flow analysis. After six years of extraordinary monetary stimulus, the U.S. asset markets and Credit system have attained a degree of momentum. Thus far, the (temporary?) conclusion of Fed QE has had little apparent liquidity impact. I believe ongoing liquidity abundance owes much to global “hot money” flowing into (hot) king dollar securities markets. Faltering Bubbles at the Periphery have incited self-reinforcing robust flows to the “Core.”
But as bursting EM Bubble contagion now gathers momentum, there’s potential for a more globalized Risk Off dynamic to surprise U.S. markets with a bout of destabilizing de-risking and de-leveraging. This week did see a modest widening of Credit spreads. I continue to believe a reversal and strengthening yen would likely spur more aggressive speculative de-leveraging.
May 13 – Bloomberg (Filipe Pacheco and Paula Sambo): “Bonds and stocks of Petroleo Brasileiro SA fell after a newspaper reported that the company is in talks with creditors to extend a deadline for publishing audited results and avoid a possible acceleration of payments. Petrobras’s $2.5 billion in bonds due 2024 declined 2.7 cents to 90.55 cents per dollar, the biggest daily drop since Jan. 30. Yields on the notes jumped 0.45 percentage point to 7.74%.
The preferred shares of the company at the center of the nation’s biggest corruption probe slid 2.5%... extending this week’s slump to 10%. The Rio de Janeiro-based oil driller has held negotiations with about 15 banks and investment firms in the past few weeks to extend the deadline, Folha de S. Paulo reported…”
The Bloomberg Commodity Index dropped 3.1% this week to the lowest level since August 2002. This index is now down 44% from 2011 highs. Weakness was notably broad-based. The week saw heating oil hit for 7.3%, coffee 6.7%, lean hogs 6.0%, sugar 5.9%, cocoa 3.8%, cotton 3.4%, natural gas 3.9%, lead 2.3%, nickel 1.7%, silver 2.0%, orange juice 1.5%, corn 1.4% and soybeans 1.2%. With crude (WTI) crushed 9.6% to the low since early-2009, there was notable pressure on EM energy and commodities-related bonds. Troubled Petroleo Brasileiro (Petrobras) CDS surged 70 bps Friday and were up 120 bps for the week to a record 711 bps.
Vale CDS jumped 55 bps this week to the high since early-2009 (331bps). Markets are increasingly nervous of the major Brazilian lenders, including the state-directed banks. Banco do Brasil CDS jumped 62 bps this week to 442 bps. Brazilian development bank BNDES CDS jumped 48 bps. It’s also worth mentioning that Petroleos Mexicanos CDS jumped 24 bps to 207 bps.
Venezuela dollar yields jumped 66 bps Friday and were up 220 bps for the week to 28.65%. Pricing imminent default, Venezuela CDS surged 1,294 bps this week to 5,506 bps. Colombia CDS jumped 21 bps to 175 bps, Peru 22 bps to 145 bps, and Panama 20 bps to 149 bps. Jumping 20 bps, Mexican CDS this week traded to the highest level since July 2013 (136 bps)
EM currency weakness was broad-based. In Latin America, the Brazilian real this week fell 5.7%, the Colombian peso 3.2% and the Chilean peso 1.8%. Eastern European currencies were under heavy pressure. The Polish zloty was hit for 3.6%, the Bulgarian lev 3.2%, the Hungarian forint 3.2%, the Romanian leu 3.2%, the Czech koruna 3.1% and the Iceland krona declined 2.4%. The Russian ruble reversed course and declined 2.9% this week.
EM bonds were also under pressure. The lira’s 1.9% Friday decline wiped out the Turkey currency’s earlier rally, as Turkish lira yields jumped 14 bps this week to a three-month high 8.36%. Turkey CDS traded to an almost one-year high earlier in the week. In Asia, Indonesia CDS rose 12 bps to a two-month high 160 bps. Interestingly, China CDS gained 5 bps to 89 bps.
EM stocks were not spared. Russian stocks were hit for 5.8% and Turkish equities were slammed for 4.6%. India’s Sensex index fell 3.2%. Brazil's Bovespa declined 2.8%. Eastern European equities were under pressure almost across the board. Things were not much better in Latin America and Asia.
The euro was slammed for 3.2% this week, trading to the lowest level versus the dollar since 2002. Greek five-year yields surged 329 bps to 15.15%. Greek CDS jumped 350 bps to 1,708 – not far from the highest levels since 2012.
The Federal Reserve released its Q4 Z.1 “flow of funds” report Thursday.
Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized (SAAR) rate of $1.938 TN, the strongest growth since Q4 2012. Total Business borrowings expanded SAAR $845bn, up from Q3’s SAAR $581bn to the highest level since Q1 2008. Federal government borrowed at SAAR $700bn, down from Q3’s SAAR $913bn. Total Household borrowings increased SAAR $361bn, little changed from Q3.
For all of 2014, NFD expanded $1.701 TN, up from 2013’s $1.463 TN. With 2014 federal borrowings ($667bn) about half the 2012 level, 2014 NFD growth somewhat lagged 2012’s $1.828 TN. Yet 2014 Household borrowings of $376bn were up significantly from 2013’s $197bn to the highest level since 2007 ($913bn). Total 2014 Business borrowings of $672bn were up from 2013’s $546bn to the strongest growth since 2007 ($1.116 TN).
On a percentage basis, NFD expanded 4.3% in 2014, up from 2013’s 3.8%. Business debt growth accelerated to 7.2% from 2013’s 5.0%. Although mortgage debt growth remained below 1%, total Household borrowings increased 2.9%. Outstanding State & Local borrowings contracted 0.5% in 2014.
Bank Credit growth slowed during Q4, with Banking Assets expanding $954bn during 2014, or 6.0%. Bank loans, however, posted another strong quarter, with notable 2014 growth of 12.3% ($308bn). For the year, Credit Union assets expanded 5.9%, REIT liabilities 8.3%, and Security Credit 7.7%. A significant Q4 decline pushed Securities Broker/Dealer Assets to a 4.5% 2014 contraction.
Despite only modest growth from most traditional sources of system Credit, inflationary forces continue to buttress securities markets. My proxy for “Total Debt Securities” – Treasuries, Agency Securities, Corporate Bonds and Muni debt – increased $1.25 TN during 2014 to a record $36.15 TN. Total Debt Securities have increased $8.075 TN, or 29%, since the end of 2008. Total Equities have jumped $20.816 TN, or 133%, since 2008.
As such, my proxy of “Total Securities” jumped $4.08 TN in 2014 to a record $72.608 TN. Total Securities have increased $28.9 TN since the end of 2008, or 66%.
“Total Securities” as a percentage of GDP is helpful Bubble Analysis. After beginning the nineties at 173% of GDP, “Total Securities” ended the Bubble year 1999 at an unprecedented 341%. The bursting “tech” Bubble saw this ratio decline to 267% to end 2002. Mortgage finance Bubble reflation then pumped this ratio to a record 360% by the end of 2007.
This Bubble burst, and “Total Securities” ended 2008 at 297% of GDP. Six years of incredible monetary inflation had Total Securities ending 2014 at a record 417% of GDP.
I have on a quarterly basis chronicled the inflation of Household sector Net Worth as a key facet of Federal Reserve reflationary policies. Household Assets inflated another $1.61 TN during Q4, with a 2014 gain of $4.431 TN. For the year, Household Real Estate assets increased $1.223 TN and Financial Assets rose $3.045 TN.
And with Household Liabilities growing $363bn, Household Net Worth (assets minus liabilities) jumped another $4.068 TN in 2014 to a record $82.912 TN. Since the end of 2008, Household Net Worth has inflated $26.403 TN, or 47%. This “wealth creation” goes a long way in explaining the economic recovery – as well as its vulnerability to asset market weakness.
As a percentage of GDP, Household Net Worth began the nineties at 379% ($21.5 TN). Net Worth rose to 446% ($43.1 TN) of GDP to end 1999, only to fall back down to 398% ($43.7 TN) to close 2002. Net Worth inflated to a record 461% ($66.7 TN) to end 2007. Household Net Worth closed 2014 at a record 476% of GDP ($82.9 TN).
Federal Reserve Asset growth slowed to $48bn during the quarter, with 2014 growth of $482bn, or 11.8%. Amazingly, the Fed’s balance sheet inflated $1.601 TN, or 54%, over the past two years. And since the end of 2007, Fed liabilities have inflated $3.604 TN, or 379%.
Curiously, GSE borrowings (debt as opposed to MBS) expanded SAAR $316bn during Q4, the most rapid GSE growth in years. Is the GSE ramp up coincident with the wind down of Fed QE? The GSEs posted three straight quarters of strong growth. As hard as it is to believe, GSE activities should be monitored closely in 2015.
Overall, 2015 is destined to be a fascinating and challenging year for macro Credit and flow analysis. After six years of extraordinary monetary stimulus, the U.S. asset markets and Credit system have attained a degree of momentum. Thus far, the (temporary?) conclusion of Fed QE has had little apparent liquidity impact. I believe ongoing liquidity abundance owes much to global “hot money” flowing into (hot) king dollar securities markets. Faltering Bubbles at the Periphery have incited self-reinforcing robust flows to the “Core.”
But as bursting EM Bubble contagion now gathers momentum, there’s potential for a more globalized Risk Off dynamic to surprise U.S. markets with a bout of destabilizing de-risking and de-leveraging. This week did see a modest widening of Credit spreads. I continue to believe a reversal and strengthening yen would likely spur more aggressive speculative de-leveraging.
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