It was a chaotic day on Thursday, punctuated by the European Central Bank’s announcement that it would further cut interest rates and increase the size of its quantitative easing program.
Initially markets rallied on this news but eventually sold both as investors “sold the news,” and markets reacted negatively to ECB president Mario Draghi’s suggestion that interest rates would not be cut further anytime soon.
First, the scoreboard:
- Dow: 16,969.9, -30, (-0.2%)
- S&P 500: 2,987, -2, (-0.1%)
- Nasdaq: 4,657, -16, (-0.4%)
- WTI crude oil: $37.90, -1%
- EURUSD: $1.1179, +1.6%
European Central Bank president Mario Draghi did not disappoint.
After markets built up expectations for Thursday’s policy announcement from the ECB, the euro area’s central bank delivered, cutting interest rates further — its deposit rate now sits at -0.4%, down from -0.3% previously — and expanding the size of its quantitative easing program.
The ECB will now buy €80 billion of assets each month, up from €60 billion previously. This program will now include a wide swath of European corporate debt and the ECB also announced a new round of refinancing operations — known as Targeted Longer-Term Refinancing Operations, or TLTROs — that will see banks in Europe get a chance to borrow money at the prevailing deposit rate.
And, given that the deposit rate is -0.4%, banks will be paid for borrowing money to refinance some of their debt. And this is really the big innovation in the ECB’s QE program as it at least paves a way towards “getting around” the issue of rates inside the banking system going negative such that activity in the system seizes up.
The ECB’s announcement was also followed by a press conference from Draghi during which he sort of slipped up and said that a further cut in interest rates is unlikely. Markets didn’t like this. And so while the initial expected reaction of stocks higher and euros lower followed the initial announcement, this price action reversed and then some during the press conference.
Draghi is most often remembered for his 2012 proclamation that the ECB would do “whatever it takes” to keep the euro intact, but Thursday’s announcement should be thought of as the second act in his bold, innovative approach to monetary policy.
Fittingly, as Bloomberg’s Luke Kawa noted, Draghi wore the same tie today that he wore when he first said he’d be there for the euro.
I know it’s been a particularly barren week for US economic data, but Thursday morning still saw the weekly report on initial jobless claims. And it was a show stopper.
Initial filings for unemployment insurance totaled 259,000 last week, down from 275,000 the prior week and indicating that the US labour market is simply a powerhouse.
Daniel Silver at JP Morgan noted Thursday that the insured unemployment rate ticked back to down to 1.6% last week, returning to the most favourable level reported in the history of the series dating back to 1971 that has been reached many times over the past year.
So that’s good!
On the other side of the coin, Matthew Mish at UBS was out with his latest overview of the US credit markets and his view is, well, not good.
Mish examined the non-bank lending market, arguing that this is the place you begin to see the first cracks in the credit markets and the signs there are worrying. This chart from Mish shows the explosion in nonfinancial debt over the last several years and much of this takes the form of consumer debt.
And while household indebtedness looks very good compared to the pre-crisis level, there has been an uptick in student loan balances and auto loan debt, and Mish said the increase in consumer indebtedness has been accompanied by a loosening of standards among lenders.
Looking then at the banking sector, Mish looked at the latest SLOOS report and wrote that what he and his team found, “have kept us up some nights.”
Here’s Mish (emphasis ours):
The survey concludes underwriting standards eased at a significant number of banks for the three-year period from mid-2013 to mid-2015, broadly similar to that experienced from 2005 to 2007 before the financial crisis. Loan portfolios that experienced the most easing in underwriting standards included indirect consumer, credit cards, leveraged loans, other CRE loans, and CRE construction, and competition was the predominant reason for relaxing pricing and terms. With respect to the level of credit risk examiners focused primarily on commercial loan products, citing real estate lending products as the most frequent area of concern.
In short, we believe non-bank lending is indeed the tip of the iceberg as it relates to this credit cycle. They comprise a majority of the lending to the US private nonfinancial sector, and their presence is important not only in corporate but also increasingly in household lending. In particular, they are heavily involved originating in the lower quality segments across products. And our evidence suggests if bank lending conditions were lax, then by extension non-bank lending standards were what we would define as dangerously loose this cycle … And, while the banks are in a better position than they were last cycle to withstand a downturn, we think more work needs to be done to understand the interconnectedness between banks and non-banks before the next downturn.
You were warned.
Ray Dalio’s Bridgewater hedge fund, the world’s largest, has a new co-CEO: former tech executive Jon Rubinstein.
In a memo, Bridgewater said Rubinstein brings the kind of tech expertise the firm needs as it moves in that direction. Rubinstein will bring the firm’s co-CEO count to three.
Bridgewater added: “Technology is pervasively important at Bridgewater, especially since one of our major strategic initiatives in the coming years is to continue building out the systemized decision-making that has been so successful in our investment area and to extend it to our management as well. Jon’s track-record of building world class products will be a tremendous boost to the efforts we already have underway.”
Elsewhere in Bridgewater’s memo was a long explanation of what the firm believes have been misrepresentations in the media about its commentary on China and reports about discontent in its leadership ranks.
Of note is that the firm operates under what they call “radical transparency,” which means what it sounds like: everyone knows everything about everything.
Reports circulated last month about a “schism” atop the firm, and, well, they think this is wrong.
Here’s Bridgewater (at length, emphasis mine):
As you know, we have a radically transparent culture so that everyone in the company can see our deliberations. This led to our deliberations being leaked to the media, which resulted in an inaccurate picture being painted and us getting unwanted attention. It also made it appear that something unique was happening. While it was correct that we were deliberating our next steps, how these deliberations were going was distorted in a way that failed to convey key dimensions of what was going on. At the same time, we were in the process of determining next steps and negotiating the employment arrangement with Jon Rubinstein (see accompanying announcement) and we’re not yet in a position to share our next steps.
Those who know us know that we strive to have meaningful work and meaningful relationships through radical truth (especially about our mistakes and weaknesses) and radical transparency (so there is no spin). They also know that this approach is the reason for our success. Some people in the media who don’t know us mischaracterize that culture, either because of lack of knowledge of it or because of the intent to sensationalize it.
To reiterate, we believe that China is going through the same sort of debt and economic adjustment processes that all countries have gone through at one time or another. These adjustments are healthy and China will come out of them stronger, though it will be weaker while it is going through them. We believe that to characterise China either as not having significant challenges or as facing a terrible situation would be inaccurate. Yet, because many in the media prefer to use more dramatic characterizations, they distort and take our comments out of context.
I think in the context of an organisation that desires to keep outsiders in the dark about what they do and keep insiders completely aware of what happens, the complaints that things were taken out of context to serve another aim are exactly what you’d expect.
It seems, in large part, to basically be — to use the blunt and (I’ll admit) lazy idiom — a clash of cultures between how the media does their job and how Bridgewater does it.
Of course no one would be exploring your firm if it wasn’t successful.
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