Record Surge in CFS Money Growth

CFS Divisia money growth soared across the board – hitting a historic high not witnessed in the 53-year period analyzed by our Advances in Monetary and Financial Measurement (AMFM) team. CFS Divisia M4, which is the broadest and most important measure of money, grew by a record 22.0% in April 2020 on a year-over-year basis versus an unrevised 10.0% in March 2020.

Today’s release represents the first time that all of our monetary aggregates reached new records.

In the last month, since our highlighting a future of nuanced changes surrounding the inflation versus deflation debate, a surge of articles and pieces have appeared.

Disinflation will likely dominate in the near term with jobless claims hitting highs and oil prices remaining relatively low for an extended period of time. Nonetheless, the passthrough from monetary policy into inflation is meaningfully more complex than often thought. My remarks at the Society of Economic Measurement conference in Thessaloniki shed some light on the interplay between CFS Divisia Money and inflation over time – http://centerforfinancialstability.org/research/why_cfs_divisia_071316.pdf

Our data suggest that recent monetary measures will prove far from costless. Higher inflation is likely in coming months.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Apr20.pdf

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

Financial Timeline: 13 years of Official and Market Action

The CFS Financial Timeline, created and managed by senior fellow Yubo Wang, is likely the longest continuous financial timeline freely available. It covers over 1,300 international events from early 2007 to the present. The timeline curates essential inputs from established public sources to seamlessly link financial markets, financial institutions, and public policies.

The CFS Financial Timeline has become an integral part of the work done by scholars, students, government officials, and market analysts, who seek to:

  • Uncover relationships among market reactions, institutional activities, and public policies
  • Accurately analyze developments, in one place, as they happen,
  • Put current events in a historical context, and gain insights on future developments.

View the Timeline at:
http://centerforfinancialstability.org/timeline.php

FT Letter: The faultlines of the crisis are complex and varied

Today my letter in the FT responds to Martin Wolf’s “Coronavirus crisis lays bare the risks of financial leverage, again.”  Martin clearly highlights segments in capital markets creating fragilities before the recent shock.

The role of central bank policy distorting incentives in 2019 was absent.  Skewed investing incentives began on December 18, 2018 – when the FOMC statement misread the global economy and markets and balance sheet expansion resumed.

“The faultlines of the crisis are complex and varied”
https://www.ft.com/content/48e41d0c-8bb4-11ea-a01c-a28a3e3fbd33

For more on Fed policy and markets after December 18, 2018 – see pages 5-6 of my Boston Economic Club remarks
http://centerforfinancialstability.org/speeches/BEC_Now_What_031820.pdf

SEC Identifies Investment Risks Concerning Emerging Markets

The SEC identified risks to be considered by market participants recommending or making investments in emerging markets.

In a joint SEC statement, Chair Jay Clayton, Public Company Accounting Oversight Board (“PCAOB”) Chair William D. Duhnke III, Chief Accountant Sagar Teotia, Division of Corporation Finance Director William Hinman and Division of Investment Management Director Dalia Blass highlighted the limitations on the SEC’s ability to enforce high-quality disclosure standards in emerging markets.

According to the SEC, such emerging markets, including China, often present disclosures that are in “substantially” the same form as those of U.S. domestic companies. However, the SEC warned that the disclosure information may often be “incomplete or misleading.” The SEC identified the below risks and related considerations as to emerging markets.

– Associated Risks and Disclosures. The SEC stated that companies operating in emerging markets experience greater risks, and therefore encouraged (i) issuers to disclose such matters to investors and (ii) funds investing in emerging markets to ensure that their material risk disclosures are in compliance with federal securities laws. The SEC emphasized that boilerplate disclosures are often insufficient in such circumstances.
– Variation in Quality of Financial Information, Requirements and Standards. The SEC recommended that (i) investors and financial professionals examine the nature and quality of financial information (e.g., financial reporting and audit requirements) when considering certain investments to make or recommend and (ii) issuers discuss related financial reporting matters with independent auditors or audit committees, if necessary.
– The Continual Inability of the PCAOB to Assess Audit Work Papers in China. The SEC urged investors to consider the PCAOB’s inability to inspect PCAOB-registered accounting firms in China.
– Limitations of U.S. Authorities to Bring Action. The SEC advised issuers to make clear the “substantial” difficulties experienced by U.S. authorities, including the SEC, in bringing enforcement actions against non-U.S. companies or non-U.S. persons.
– Shareholders’ Limitation of Rights. The SEC stated that shareholder claims, such as class action securities law and fraud claims, are generally “difficult or impossible” to pursue legally or logistically in many emerging markets. As a result, the SEC noted that issuers should explicitly state such risks to shareholders.
– Passive Investing Strategies. The SEC cautioned investors that index funds typically do not weight securities based on (i) investor protection limitations or (ii) variations in the quality of financial reporting and oversight mechanisms available.
– Considerations Overall. The SEC advised investment advisers, broker-dealers and market participants in general to consider the limitations and risks associated with emerging markets when recommending investments in such markets.

The SEC noted that these considerations, while not an exhaustive list, are often significant, and vary based on jurisdiction.

LOFCHIE COMMENTARY

Though the statement concerns emerging markets generally, a quick search turns up 29 references to China and none to Brazil, Russia, or India. Chinese issuers seeking to offer securities in the United States may expect to face closer scrutiny of their offering documents. Firms participating in such offerings must anticipate the risks of review of their diligence should an offering go badly. Likewise, funds that invest offshore should review their disclosures. Advisers and broker-dealers that recommend investments in Chinese issuers should take account of suitability considerations in light of the SEC’s statement.

CFS Money Growth Soars to double digits

CFS Divisia money growth soared across the board with broad money expanding at a double-digit pace in March (10.0%) – for the swiftest gain since October 2008 (10.6%). CFS Divisia M4, which is the broadest and most important measure of money, grew by 10.0% in March 2020 on a year-over-year basis versus 7.2% in February.

Large infusions of Federal Reserve liquidity led to the largest gain in narrow money since the start of our data begins in 1967. Here, CFS Divisia M1 advanced by 15.1% in March from the year earlier, relative to a scant increase of 1.0% in March 2019 over the preceding year. The second largest increase in the history of CFS Divisa M1 occurred in August 2011 in the aftermath of the Global Financial Crisis during the height of QE.

An odd mix exists between gigantic infusions of Federal Reserve liquidity and agents in the economy flocking to safety.

Lastly, the inflation versus deflation debate will become more nuanced as time elapses. To be sure, disinflation will dominate in the near term with jobless claims hitting highs and oil prices likely to remain low for an extended period of time. Nonetheless, the passthrough from monetary policy into inflation is meaningfully more complex than often thought. My remarks at the Society of Economic Measurement conference in Thessaloniki shed some light on the interplay between CFS Divisia Money and inflation over time – http://centerforfinancialstability.org/research/why_cfs_divisia_071316.pdf

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Mar20.pdf

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

SEC Adopts Amendments to Offering Process for BDCs and Closed-End Funds

The SEC adopted rule and form amendments to “modify the registration, communications, and offering processes” for business development companies (a type of closed-end investment company that is not registered, “BDCs”) and registered closed-end investment companies. The benefits of these rule changes were available to operating companies and are now being extended to funds, in accordance with a 2018 Congressional mandate expressed in the Small Business Credit Availability Act (the “BDC Act”) and the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRA Act”).

The new rule amendments include:

– expanding the definition of “well-known seasoned issuer” to capture eligible funds (generally, those having a public float of at least $700 million and meeting certain other regulatory conditions) to permit them to quickly sell securities “off the shelf” using short-form registration statements, provided that such funds include certain disclosures in their annual reports;

– making Securities Act Rule 486 (“Effective Date of Post-Effective Amendments and Registration Statements Filed by Certain Closed-End Management Investment Companies”) available to registered closed-end funds and BDCs that are involved in continuous offerings, so that they may immediately make effective changes to a registration statement;

– allowing certain funds to use communications rules designed to reduce regulatory costs and provide information to investors more quickly (e.g., permitting the use of the “free writing prospectus”);

– permitting closed-end funds that function as interval funds to register an indefinite number of shares and pay SEC fees only when the shares are actually sold;

– eliminating the requirement that funds provide new purchasers with copies of all previously filed materials, which may instead be made available on a website; and

– imposing certain tagging requirements concerning registration statement information.

Affected funds will also be required to tag certain data in their registration statement. BDCs will be required to submit financial information of the same type that operating companies submit.

Broker-Dealer Research Reports
The SEC made the Securities Act Rule 138 research safe harbor available for broker-dealers publishing research about certain categories of a seasoned fund’s securities when the fund is distributing certain other securities.

No Form 8-K Requirements
Closed-end funds will not be required to file periodic reports on Form 8-K. The SEC determined that this additional reporting burden, to which operating companies are subject, was not necessary in light of current funds’ practices.

Commissioner Statements
SEC Chair Jay Clayton said that the extension of the disclosure and regulatory framework to BDCs would improve investor protections.

SEC Commissioner Elad Roisman praised the final rule amendments for making the BDC offering rules consistent with those applicable to operating companies.

SEC Commissioner Hester M. Peirce largely supported the relief provided by this rulemaking, but noted that the agency could have “offered additional relief without compromising investor protection.” Specifically, she stated that the SEC “unnecessarily restrict[s]” the amount of funds that will be able to benefit from the final rule amendments.

SEC Commissioner Allison Herren Lee criticized the final rule amendments for (i) “roll[ing] back investor protections”, (ii) failing to include the proposed Form 8-K reporting requirements, and (ii) allowing certain funds to make material changes in their registration statements that would become automatically effective without staff review. In addition, she objected to adopting a rulemaking during the COVID-19 pandemic.

The rule and form amendments will go into effect on August 1, 2020. The amendment regarding registration fee payments by interval funds and certain exchange-traded products will go into effect on August 1, 2021. Certain of the regulatory reporting requirements will not go into effect until 2022 or 2023.

LOFCHIE COMMENTARY

These rules are consistent with recent efforts to support the economy and small businesses. If the regulators are going to provide a means for retail investors to invest in small companies, supporting BDCs and closed-end investment funds seems one of the more promising paths; particularly as Regulation Best Interest and similar state suitability requirements may discourage broker-dealers from recommending individual investors buy securities issued by small issuers.

Notwithstanding Commissioner Lee’s objection that the rule amendments not be adopted during the pandemic seem, these rule amendments are not being rushed to market; they were proposed a year ago. When bad global events happen, the stock markets drop and investors lose money. SEC rule changes such as these would not provide protection against that.

Now What? Three Vectors for Investors and Officials

In the middle of financial crises, one often hears “Now What?”

At the Boston Economic Club, I discussed the evolution of three vectors (policy, markets, and the Coronavirus). These vectors offer officials a blueprint to stabilize markets and asset managers a roadmap for investment decisions. To be sure, the Coronavirus is only part of the reason behind the fierce market response.

Six big “Now Whats” or action items are discussed.

For full remarks:
http://centerforfinancialstability.org/speeches/BEC_Now_What_031820.pdf

CFS Monetary Measures for February 2020

Today we release CFS monetary and financial measures for February 2020. CFS Divisia M4, which is the broadest and most important measure of money, grew by 7.3% in February 2020 on a year-over-year basis versus 7.0% in January.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Feb20.pdf

For more information about the CFS Divisia indices and the data in Excel:
http://www.centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) {ALLX DIVM }
2) {ECST T DIVMM4IY}
3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

FINRA Conducts Review of Firm’s “Zero Commissions”

In a targeted examination, FINRA is seeking information on the practices of firms that charge zero commission on client trades and “the impact that not charging commissions has or will have on the Firm’s order routing.”

In this latest targeted exam, also referred to as a “sweep,” FINRA’s Market Regulation Department’s Trading & Financial Compliance Examinations Department issued a sample exam letter of the information requested. The letter is intended to elicit information about the scope of the trades on which no commission is charged, as well as information concerning how the firm makes money, whether clients understand how the firm makes money, and whether the firm’s revenue practices may be detrimental to customers; e.g., whether the firm is less focused on obtaining best execution for customers because it is more dependent on obtaining revenue through trade rebates or payments for order flow arrangements.

LOFCHIE COMMENTARY

This is actually quite a significant targeted exam letter. It has relevance well beyond those firms that have a zero commission offering. FINRA is asking very detailed questions about how the firm makes money, and how the firm’s revenue stream affects the manner in which the firm does business and treats customers.

The type of information that the letter is intended to elicit includes information that would be relevant to the completion of Form CRS that is to be provided to clients.

In short, all firms, not only those that are potential recipients of the letter, should give careful consideration to how they would answer the questions raised, and as to how those answers would look to the regulators and their customers.

CFS Monetary Measures for January 2020

Today we release CFS monetary and financial measures for January 2020. CFS Divisia M4, which is the broadest and most important measure of money, grew by 6.9% in January 2020 on a year-over-year basis versus 6.7% in December.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Jan20.pdf

For more information about the CFS Divisia indices and the data in Excel:
http://www.centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) {ALLX DIVM }
2) {ECST T DIVMM4IY}
3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’