Saturday, December 6, 2014

04/12/2013 Things Have Gone Too Far *

“The Fed has been talking about asset bubbles since the ‘irrational exuberance’ speech which was 1996. So it’s nothing new. We had a big bubble in the nineties. A big bubble in the two thousands. Those two bubbles ended very differently. The Fed’s been talking, talking, talking about this. So it’s certainly been a concern. It is a concern today. But it’s like nothing new. This has been going on for 20 years. Frankly, there aren’t good answers because we don’t have great models of financial instability.” Federal Reserve Bank of St. Louis President James Bullard (February 21, 2013, in reference to a question on Fed governor Jeremy Stein’s paper)

The Fed’s been talking, while I’ve been doing my best to study bubble and Credit dynamics. I know we’ve again reached the stage of the cycle where those warning of Bubble risks have been discredited. This type of analysis tends to be humbling, a dynamic I became comfortable with some years ago. And at risk of sounding arrogant, I am comfortable stating that Federal Reserve officials remain for the most part dangerously uniformed when it comes to Credit, speculative market dynamics and Bubbles. At the heart of the problem, the Fed lacks an analytical framework for understanding the causes and consequences of financial instability. And especially with how global markets have been behaving, these issues deserve keen ongoing focus.

As difficult as it may be for most to believe, the world’s preeminent central bankers are a select group of highly intelligent public servants that suffer from a huge void in their understanding of contemporary finance. And the issue goes much beyond the lack of “great models of financial instability.” They subscribe to an erroneous and outdated doctrine of how finance operates and seem to share a flawed perspective with respect to the interplay of contemporary finance, financial markets and economies. Worse yet, Dr. Bernanke is wedded to a (Milton) “Friedmanite” revisionists view that the “Roaring Twenties” was the “Golden Age of Capitalism” brought needlessly to an end by negligent central bankers unwilling to print and inflate. His fixation has been with policy mistakes in the 1930s – with little apparent interest in those from the 20s, 70s, 80s, 90s or 2000s.

To be sure, finance fundamentally changed during the ‘90s. And while this trend had been in play for some time, the explosion of market-based finance took the world by storm throughout the 1990s with the huge growth in securitizations, the GSEs, derivatives, “repos,” “Wall Street finance”, and the hedge funds. Importantly, the Greenspan Fed moved to a market-friendly regime with transparent pre-commitments to pegged short-term interest-rates, market liquidity backstop assurances, and asymmetrical policy responses.

The impaired banking system (from late-80’s excess) certainly was an important factor in the “activist” Fed incentivizing non-bank Credit growth early in the decade. The deregulation wave played an integral role. Surging stock prices and attendant Notions of New Eras and New Paradigms created a backdrop supportive of financial and policy experimentation. There was, as well, Washington’s use of the ballooning GSEs to promote economic, social and political agendas.

The upshot was an unprecedented explosion of market-based Credit, much of it directed toward the asset markets. A complacent Federal Reserve failed to recognize the profound changes in finance until it was too late. The S&P500 returned 423% during the nineties, and by the end of the decade a full-fledged mania had taken hold in Nasdaq and tech stocks. There was by that point, apparently, no turning back. The world had entered An Era of Mispriced Finance.

Far too little analytical attention is paid to nineties’ novelties and transgressions. The 2008 collapse of the mortgage financial Bubble highlighted huge policy blunders, but the seeds for that (and future) crisis were planted in the previous decade’s financial and policy transformations. Federal Reserve policy had become integral to a dangerous regime of over-expanding mispriced finance, asset inflation and Bubbles.

Dr. Bernanke was brought in as the preeminent academic authority in deflations and post-Bubble “mopping up” reflationary measures. He didn’t for a moment consider adjusting for previous policy and market shortcomings – nor dare to move policy back in the direction of sounder and time-tested doctrine. The pricing or mispricing of finance was of no concern; he was just determined to have much more of it.

The Bernanke Federal Reserve became a laboratory for testing radical academic theories. Rather than recognize the clear risks of aggressive central bank financial system and market interventions, the Fed became the biggest inflator of asset Bubbles the world has ever known. They remain hard at work, steadfast and uncompromising in the face of conspicuous shortcomings and potential catastrophic failure. And, ironically, the greater the global dominance by inflated securities markets, the further the shift of central banking governance to academics with little experience or practical understanding of the functioning of contemporary market-based finance.

The enterprising Greenspan Fed committed monumental errors. It monkeyed too much with system mechanisms for pricing finance and risk - and it monkeyed too much with the financial markets. Fed policies were pro-Credit, pro-aggressive risk intermediation, pro-risk distortions, pro-asset inflation and pro-Bubbles. Greenspan’s policies incentivized leveraged speculation, an explosion of non-productive debt growth and problematic resource misallocation. The Bernanke Fed became only more pro-asset inflation, pro-government debt and pro-Bubbles, moving to only further incentivize speculation in securities markets around the world.

The Greenspan Fed ensured speculators predictable low-cost funding that was used to leverage MBS and higher-yielding Credit instruments. This ensured unlimited cheap borrowings for home (and other asset) purchases. The Bernanke Fed pre-commits to years of near zero cost finance for leveraged speculation, while monetizing Trillions of debt and MBS. The Greenspan equity market “put” was expanded to include Treasuries, MBS, muni debt, junk, student loans, etc. Bernanke significantly compounded Greenspan’s monumental errors.

Financial markets came to play an increasingly dominant role throughout the nineties. Leveraged speculation evolved to an all encompassing role in debt, equities and commodities markets. This should have been clear after the 1998 LTCM fiasco - and was made obvious with fragilities that manifested during the 2000-2002 bursting of the “technology” and corporate debt Bubbles. Serious errors didn’t so much as slow the move away from traditional central bank doctrine and policymaking. That Bernanke’s (“mopping up” and “printing”) reflationary doctrine only exacerbated myriad costs associated with mispriced finance and asset markets’ dominance was made abundantly clear in 2008/09.

So, we’re now in the fifth year of the Bernanke Fed’s experimental effort to directly inflate asset markets. Somehow, policymakers, economists and market pundits still argue that low CPI inflation affords global central bankers unusual flexibility to implement aggressive money printing operations. This completely ignores what should be, at this point, rather conspicuous asset Bubble risks.

Market commentators and the media are these days in a nineties-like fixation with record U.S. stock prices. Meanwhile, global markets show ongoing signs of heightened instability. Two-year German yields ended the week at one basis point, with 10-year yields not too far off record lows at 1.26%. The emerging markets continue to trade unimpressively. Key commodities, meanwhile, trade like death. The CRB Commodities Index closed Friday at the lowest level since last July. Friday saw crude hit for $2.22, gasoline 3.3%, copper 2.7%, palladium 3.3%, platinum 2.6%, aluminum 2.5%, nickel 2.6% and tin 3.7%. And the precious metals made the industrial metals look precious. Gold was hammered for $78 on Friday and $98 for the week, while silver was hit for 4.9% and 3.3%. The HUI Gold index now sports a 2013 decline of 32.2%.

With global central bankers “printing” desperately, the collapse in gold stocks and sinking commodities prices were not supposed to happen. Is it evidence of imminent deflation? How could that be, with the Fed and Bank of Japan combining for about $170bn of monthly “money printing.” Are they not doing enough? How is deflation possible with China’s “total social financing” expanding an incredible $1 Trillion during the first quarter? How is deflation a serious risk in the face of ultra-loose financial conditions in the U.S. and basically near-free “money” available round the globe?

Well, deflation is not really the issue. Instead, so-called “deflation” can be viewed as the typical consequence of bursting asset and Credit Bubbles. And going all the way back to the early nineties, the Fed has misunderstood and misdiagnosed the problem. It is a popular pastime to criticize the Germans for their inflation fixation. Well, history will identify a much more dangerous fixation on deflation that spread from the U.S. to much of the world.

I see sinking commodities prices as one more data point supporting the view of failed central bank policy doctrine. For one, it confirms that unprecedented monetary stimulus is largely bypassing real economies on its way to Bubbling global securities markets. I also see faltering commodities markets as confirmation of my “crowded trade” thesis. For too many years (going back to the 90’s) the Fed and global central bank policies have incentivized leveraged speculation. This has fostered a massive inflation in this global pool of speculative finance that has ensured too much market-based liquidity (“money”) has been chasing a limited amount of risk assets. Speculative excess today encompasses all markets, including gold and the commodities. Over recent months, these Bubbles have become increasingly unwieldy and unstable. Commodities are the first to crack.

IMF head Christine Lagarde this week made an interesting comment: “Thanks to the actions of policymakers, the economic world no longer looks quite as dangerous as it did six months ago.” I was convinced things looked dangerous on a globally systemic basis this past summer, yet policymakers and analysts at the time admitted to only a bout of manageable stress in Europe. Well, in the past six or so months we’re seen the “do whatever it takes” Draghi market backstop, an unprecedented $85bn a month of Fed QE and now the Bank of Japan’s samurai version of “do whatever it takes” “shock and awe” $80bn monthly printing. Economies aren’t buying it.

The Bank of Japan’s Kuroda positioned himself as the poster child for central bankers gone wild. When central banks imitate Dirty Harry and others are determined to shock and awe the marketplace, well, you have to think things have gone far off kilter. When the Fed obfuscates and ties massive money printing to a politically palatable unemployment rate – things have gone too far. When policymakers, economists and pundits around the globe ramble on and on about low inflation and completely disregard dangerous asset inflation and Bubbles, things have definitely gone too far.

Japanese 10-year yields jumped 8 bps this week. The markets are keen to gauge whether the BOJ just went too far in the minds of investors in long-term Japanese debt. The Chinese Credit system is in the midst of a historic year of Bubble excess. Have things gone so far that Chinese officials will finally respond with meaningful (and Bubble-jeopardizing) tightening measures? In Cyprus, a country of less than a million faces bailout costs of $23bn, more than a year’s GDP. Have these bailouts about gone far enough – for the troubled countries sickened by “austerity” measures and “troika” control? And how about the others sick and tired of writing bailout checks and participating in a dysfunctional “transfer union”? How far is too far for runaway U.S. equities, bond and asset Bubbles that bring new meaning to the phrase “systemic Credit and economic Bubble”? How long will the Bank of Japan’s shot of opium numb the world’s senses?

From my perspective, recent desperate measures from the BOJ, Fed and ECB put an exclamation mark on twenty years of failed monetary management. The view that this ends rather badly is confirmed by unrelenting bids for bunds, Treasuries and “safe haven” sovereign debt around the globe. It is further confirmed by the widening gulf emerging between highly inflated and speculative global securities markets and notably moribund (and increasingly stimulus-resistant) real economies.

Forecasting Bubble behavior is a tricky, tricky business. Yet I’ll stick with the view that Europe is the initial major crack in the “global government finance Bubble.” And while Draghi resuscitated “risk on” throughout Europe, this actually works to exacerbate fragilities as that region struggles with a deep and evolving crisis. I’ll stick with the view that five years of global financial excess has helped push China to the status of a crazy dangerous Bubble. And I see no reason to back away from the analysis that the emerging economies in general suffer from a dangerous Bubble mix of rampant Credit excess, problematic imbalances and deteriorating economic performance. Moreover, I’m content with the view that the “global leveraged speculating community” is one huge accident in the making.

Perhaps the crack in commodities markets is indicative of a confluence of unfolding faltering Bubble risk in Europe, China, the emerging markets and the hedge fund community. The Bank of Japan’s obtrusive market intervention provided a huge windfall for some while hammering others, not unlike recent obtrusive interventions by the ECB and Fed. All along the way, global risk markets become increasingly unstable - if not hopelessly dysfunctional. At this point, risks associated with repeated attempts to cure post-asset Bubble stagnation with “helicopter money” should not be all that difficult to discern.

For the Week:

The S&P500 rallied 2.3% (up 11.4% y-t-d), and the Dow gained 2.1% (up 13.4% y-t-d). The Morgan Stanley Cyclicals gained 2.7% (up 11.%), and Transports rose 1.8% (up 15.8%). The Morgan Stanley Consumer index jumped 3.0% (up 18.6%), and the Utilities added 1.8% (up 15.2%). The Banks rose 1.9% (up 9.6%), and the Broker/Dealers surged 3.7% (up 19.1%). The S&P 400 MidCaps advanced 2.3% (up 12.6%), and the small cap Russell 2000 increased 2.1% (up 11.0%). The Nasdaq100 jumped 3.1% (up 7.4%), and the Morgan Stanley High Tech index gained 2.3% (up 6.9%). The Semiconductors surged 3.5% (up 12.9%). The InteractiveWeek Internet index rose 3.2% (up 11.1%). The Biotechs surged 3.8% (up 21.3%). With bullion down $98, the HUI gold index sank 8.1% (down 32.2%).

One-month Treasury bill rates ended the week at 4 bps and 3-month rates closed at 6 bps. Two-year government yields were little changed at 0.23%. Five-year T-note yields ended the week unchanged at 0.69%. Ten-year yields increased a basis point to 1.72%. Long bond yields rose 4 bps to 2.92%. Benchmark Fannie MBS yields rose 4 bps to 2.44%. The spread between benchmark MBS and 10-year Treasury yields widened 3 bps to 72 bps. The implied yield on December 2014 eurodollar futures was little changed at 0.47%. The two-year dollar swap spread was little changed at 14.5 bps, and the 10-year swap spread was about unchanged at 17.5 bps. Corporate bond spreads narrowed. An index of investment grade bond risk fell 5 to 82 bps. An index of junk bond risk dropped 26 to 399 bps. An index of emerging market debt risk declined 12 to a one-month low 278 bps.

Debt issuance was strong. Investment grade issuers included Fidelity National $1.2bn, US Air $820 million, Penn Virginia $775 million, FedEx $750 million, Nisource Finance $750 million, Reliance Steel & Aluminum $500 million, National Retail Properties $350 million, Essex Portfolio $300 million, Topaz Solar Farms $250 million and Sutter Health $300 million.

Junk issuers included Sabine Pass $3.0bn, Dollar General $1.3bn, Verisign $750 million, CNH Capital $600 million, Taylor Morrison $550 million, Hecla Mining $500 million, Athlon $500 million, New Cotai $380 million, Rentech $320 million, Memorial Production Partners $300 million, NES Rentals $300 million, Affinia Group $250 million and AAR Corp $150 million.

Convertible debt issuers included RTI International Metals $350 million.

The long list of international issuers included Indonesia $3.0bn, CNPC General Capital $2.0bn, African Development Bank $1.6bn, Turkey $1.5bn, Credit Agricole $1.4bn, Ukraine $1.25bn, Dominican Republic $1.0bn, State Bank of India $1.0bn, EADS $1.0bn, Evraz Group $1.0bn, Mallinckrodt Intl $900 million, ESAL GMBH $775 million, Gerdau Trade $750 million, Metalloinvest Finance $1.0bn, BTG Investments $750 million, Turkiye Vakiflar Bankasi $600 million, EDC Finance $600 million, Kommuninvest $500 million, Sensata Technologies $500 million, Mriya Agro $400 million, Bluescope Steel $300 million and Corp Lindley $260 million.

Italian 10-yr yields declined 5 bps to 4.32% (down 19bps y-t-d). Spain's 10-year yields fell 6 bps to 4.67% (down 60bps). German bund yields rose 5 bps to 1.26% (down 6bps), and French yields increased 6 bps to 1.80% (down 20bps). The French to German 10-year bond spread increased one to 54 bps. Ten-year Portuguese yields fell 7 bps to 6.18% (down 57bps). Greek 10-year note yield dropped 84 bps to 11.06% (up 59bps). U.K. 10-year gilt yields were up 9 bps to 1.72% (down 10bps).

Spain's IBEX 35 equities index rallied 3.1% (down 1.6% y-t-d). Italy's FTSE MIB recovered 3.5% (down 3.0%). The German DAX equities index increased 1.1% for the week (up 1.7%). Japanese 10-year "JGB" yields ended the week up a notable 8 bps to a one-month high 0.60% (down 18bps). Japan's Nikkei surged 5.1% (up 29.7%). Emerging markets were mixed to lower. Brazil's Bovespa equities index slipped 0.2% (down 9.9%), while Mexico's Bolsa gained 1.8% (up 0.7%). South Korea's Kospi index sank 3.0% (down 3.7%). India’s Sensex equities fell 1.1% (down 6.1%). China’s Shanghai Exchange declined 0.8% (down 2.8%).

Freddie Mac 30-year fixed mortgage rates dropped 7 bps to an 11-week low 3.43% (down 45bps y-o-y). Fifteen-year fixed rates were down 9 bps to 2.65% (down 46bps). One-year ARM rates slipped a basis point to 2.62% (down 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 5 bps to 3.96% (down 52bps).

Federal Reserve Credit jumped $15.1bn to a record $3.206 TN. Fed Credit expanded $420bn over the past 27 weeks. In the past year, Fed Credit expanded $362bn, or 12.7%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $674bn y-o-y, or 6.5%, to a record $11.082 TN. Over two years, reserves were $1.433 TN higher, for 15% growth.

M2 (narrow) "money" supply surged $67.8bn to a record $10.518 TN. "Narrow money" expanded 7.0% ($684bn) over the past year. For the week, Currency increased $1.3bn. Demand and Checkable Deposits jumped $51.7bn, and Savings Deposits increased $17.2bn. Small Denominated Deposits declined $2.9bn. Retail Money Funds increased $0.5bn.

Money market fund assets fell $8.9bn to a 19-week low $2.622 TN. Money Fund assets were up $38bn from a year ago.

Total Commercial Paper outstanding jumped $19.5bn this week to $1.022 TN. CP has declined $43.9bn y-t-d, while having expanded $93bn, or 10.0%, over the past year.

Currency and 'Currency War' Watch:

April 12 – Bloomberg (Andy Sharp, Mayumi Otsuma and Kyoko Shimodoi): “Japan’s new top currency official said the nation will be able to convince trading partners that the central bank’s unleashing of unprecedented monetary stimulus last week is not intended to weaken the yen. ‘The monetary policy being carried out by the Bank of Japan is clearly aimed at getting Japan out of deflation,’ Mitsuhiro Furusawa, the vice-finance minister for international affairs, said…”

The U.S. dollar index slipped 0.2% to 82.31 (up 3.2% y-t-d). For the week on the upside, the New Zealand dollar increased 1.9%, the South African rand 1.7%, the Swedish krona 1.5%, the Australian dollar 1.2%, the euro 0.9%, the Danish krone 0.9%, the Mexican peso 0.8%, the Brazilian real 0.8%, the Swiss franc 0.8%, the Canadian dollar 0.4%, the Norwegian krone 0.4%, the Singapore dollar 0.3%, and the South Korean won 0.2%. For the week on the downside, the Japanese yen declined 0.8%.

Commodities Watch:

April 12 – Bloomberg (Lu Wang and Tony C. Dreibus): “Metals and energy sank, sending a gauge of commodities to an eight-month low and extending a slump that Citigroup Inc. said may mark the ‘death bell’ for the four-year rally in materials… The S&P/GSCI Index tumbled 1.3% to the lowest level since July. Gold futures plunged as much as 5.3% to trade below $1,500 for the first time since 2011…”

The CRB index slipped 0.4% this week (down 2.6% y-t-d). The Goldman Sachs Commodities Index fell 0.8% (down 3.6%). Spot Gold sank 6.2% to $1,483 (down 11.5%). Silver fell 3.3% to $26.33 (down 13%). May Crude dropped $1.41 to $91.29 (down 0.6%). May Gasoline fell 2.2% (up 2%), while May Natural Gas rose 2.4% (up 26%). May Copper added 0.2% (down 8%). May Wheat rallied 2.3% (down 8%), and May Corn jumped 4.7% (down 6%).

U.S. Bubble Economy Watch:

April 8 – Bloomberg (Amanda J. Crawford): “Distrust of the Federal Reserve and concern that U.S. dollars may become worthless are fueling a push in more than a dozen states to recognize gold and silver coins as legal tender. Lawmakers in Arizona are poised to follow Utah, which authorized bullion for currency in 2011. Similar bills are advancing in Kansas, South Carolina and other states… They reflect lingering dollar concerns, amplified by the Fed’s unconventional moves in recent years to stabilize the economy, said Loren Gatch, who teaches politics at the University of Central Oklahoma. ‘The legislation is about signaling discontent with monetary policy and about what Ben Bernanke is doing… There is a fear that the government, or Bernanke in particular and the Federal Reserve, is pursuing a policy that will lead to the collapse of the dollar. That’s what is behind it.’”

April 11 – Bloomberg (Janet Lorin): “Mark Moy came to the U.S. from China, paid his way through medical school at the University of Illinois in the 1970s and became an emergency room physician. His son Matthew, a third-year medical student, has racked up $190,000 in debt and still has a year to go. Accrued interest on his medical-school loans has swelled his balance by 13% over three years. ‘When I think about it, it will keep me up at night,’ said Matthew Moy… ‘I’m dreading the exit interview when I will find out exactly how much I’ll have to pay back.’ The next generation of U.S. physicians is being saddled with record debt amid a looming shortage of doctors needed to cope with a rising elderly population.”

April 11 – Bloomberg (Oshrat Carmiel): “Manhattan apartment rents jumped in March at the fastest pace in six months, sending rates to within about 2% of their peak, as limited inventory in the sales market fueled competition among tenants. The median monthly rent climbed 6.7% from a year earlier to $3,195, according to… Miller Samuel Inc. and… Douglas Elliman Real Estate. The increase was the biggest since September. The number of new leases signed surged 10% from March 2012 to 3,697. Rent gains have accelerated since the start of the year as tenants aspiring to own property are thwarted by the lack of homes on the market, said Jonathan Miller, president of… Miller Samuel. The number of apartments for sale in Manhattan tumbled 34% in the first quarter, the most in more than 12 years of record keeping…”

April 10 – Bloomberg (James Nash): “California, the most-indebted U.S. state, began a $2 billion tax-exempt general-obligation bond sale as income taxes, which account for 63% of revenue, outpace projections… California’s second general-obligation sale this year comes as individual income-tax payments have exceeded both projections and 2012 levels before the April 15 filing deadline…”

April 8 – Washington Post (Kathy Orton): “The median price of a home in the District reached its highest point in history last month, according to the latest data from RealEstate Business Intelligence, a subsidiary of MRIS. D.C.’s median sale price soared to $460,000 from $405,000 in February, an increase of 13.6% month over month.”

Fiscal Watch:

April 10 – Bloomberg (Richard Rubin): “President Barack Obama wants to again rely on the top-earning U.S. households for most of the tax increases he’s proposing. Obama’s budget plan… would cap tax deductions for top earners, increase the estate tax, eliminate private-equity managers’ ability to receive lightly taxed carried interest and require those earning more than $1 million to pay a minimum tax rate.”

April 10 – Dow Jones (Nick Timiraos): “The Federal Housing Administration, a major provider of mortgages to homebuyers throughout the housing downturn, will exhaust its reserves this year, according to White House budget projections… The Obama administration projects the agency’s reserves will run a shortfall of $943 million this year. The FHA’s main mortgage program hasn’t required taxpayer support in its 79-year history.”

Federal Reserve Watch:

April 11 – Bloomberg (Joshua Zumbrun): “Philadelphia Federal Reserve President Charles Plosser said the Fed should begin reducing the pace of bond buying, citing gains in the labor market since the start of a third round of asset purchases in September. ‘We have seen sufficient improvement to begin tapering our asset purchase program with the objective of bringing it to an end before year-end,’ Plosser said… Several Fed officials favored cutting back bond purchases this year and halting the record stimulus by year-end, according to minutes of the March 19-20 meeting of the Federal Open Market Committee…”

April 10 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Dennis Lockhart said it’s too early for the central bank to consider reducing its pace of bond purchases following a weakening in the labor market. ‘I do think too much focus on that at the moment is a bit premature… I have emphasized I think we have to wait and watch the data come in and see how the economy evolves.’”

Global Bubble Watch:

April 8 – Bloomberg (Peter Levring and Frances Schwartzkopff): “Policy makers steering the global economy have pumped the financial system with so much liquidity that any exit risks popping potential asset bubbles or stunting a recovery, Danish central bank Governor Lars Rohde said. ‘The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation,’ Rohde, 59, said… Though there are no current signs of consumer price inflation ‘there is inflation, perhaps a bubble, in some asset classes,’ he said. ‘Equities are trading close to all-time highs. Segments of property markets across the globe, for example London, also display symptoms of this. How do we exit this without killing whatever nascent recovery there might be at that time? …We’re in a landscape where we’ve never been before, with regard to extreme monetary accommodation over a very, very long period of time… What does that end up doing to a society? It’s been a necessary policy, but I have my concerns about what the long-term risks are.’”

April 10 – Bloomberg (John Detrixhe): “Japanese and investors following them may have purchased about $13.5 billion of non-Japanese bonds since the Bank of Japan announced its unprecedented stimulus last week, 10 times more than the previous period, according to a Societe Generale SA estimate. Speculation has intensified that money will flow out of Japan in search of higher yields elsewhere after BOJ Governor Haruhiko Kuroda said… the central bank will double its monthly bond purchases to 7.5 trillion yen ($76bn).”

April 9 – Bloomberg (Anchalee Worrachate): “Euro-area bonds are rallying as the Bank of Japan’s unprecedented stimulus pushes Japanese investors to Europe for higher returns, neutralizing the impact of Cypriot bank meltdowns and an Italian political stalemate. The BOJ said last week it plans to purchase 7.5 trillion yen ($75.8bn) of bonds a month. That strategy exceeded economists’ median estimate of 5.2 trillion yen a month and is the biggest such move since the nation began a program of so-called quantitative easing in 2001 to stimulate its economy.”

April 11 – Bloomberg (Katie Linsell): “The world’s biggest fund managers see Europe’s junk-bond boom continuing as the prospect of further interest-rate cuts and sustained demand for higher- yielding assets push issuance to a record. BlueBay Asset Management LLP predicts sub-investment grade European companies will sell more than $100 billion of debt this year to lock in cheap funding, beating a 2011 record of $70.5 billion…”

April 11 – Bloomberg (Lisa Abramowicz): “Investors are favoring the riskiest, hardest-to-trade junk bonds by the most in 17 months as confidence mounts that central banks from Japan to the U.S. will prop up debt markets through year-end. The extra yield investors demand to buy the least-traded bonds with the lowest speculative-grade ratings instead of more liquid securities narrowed to 1.2 percentage points on April 9, the smallest gap since November 2011… Yields on the smallest and oldest CCC rated notes contracted by 1.9 percentage points this year, three times the drop on yields for more active notes with comparable grades. Bond buyers seeking to escape the financial repression brought on by near zero interest rates are venturing deeper into the market in search of returns.”

April 12 – Bloomberg (Boris Korby and Julia Leite): “Gerdau SA and JBS SA are leading a revival in overseas corporate debt sales from Brazil as unprecedented bond buying from Japan fuels the biggest drop in emerging-market borrowing costs since November. After the slowest start to a year since 2009, at least six Brazilian companies have sold or are marketing debt abroad this week.”

April 11 – Bloomberg (Yumi Teso and Fion Li): “Borrowing costs in emerging markets sank to record lows as Japan’s unprecedented monetary easing spurs demand for higher-yielding assets. The average yield on developing-nation local-currency debt tracked by JPMorgan Chase & Co. fell 16 basis points since April 3, the day before the Bank of Japan expanded its asset-purchase program, to an all-time low of 5.39 percent yesterday. Ten-year government yields dropped to levels not seen before in Mexico, Czech Republic, Poland and South Africa this week, while comparable rates in South Korea and the Philippines touched all- time lows in the past month. The BOJ said last week it will buy 7.5 trillion yen ($75 billion) of bonds a month and double its monetary base in two years…”

April 10 – Reuters (Caniel Bases and Steven C. Johnson): “Global growth is likely to remain tepid this year and central banks should keep their easy monetary policies in place, the head of the International Monetary Fund said… ‘Thanks to the actions of policymakers, the economic world no longer looks quite as dangerous as it did six months ago,’ IMF Managing Director Christine Lagarde told the Economic Club of New York. But while there were signs that financial conditions are improving, Lagarde said those changes are not yet translating into improvements in the real economy. ‘In present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative,’ Lagarde said… ‘We know that inflation expectations are well anchored today, giving central banks greater leeway to support growth,’ she added.”

April 10 – Bloomberg (Jason Scott and Matthew Winkler): “Australian Treasurer Wayne Swan said he supports Federal Reserve Chairman Ben S. Bernanke’s quantitative easing and Japanese Prime Minister Shinzo Abe’s reflation policy, in contrast to Europe’s hazardous pursuit of austerity as the world economy struggles to shake off the global financial crisis. ‘Expansionary monetary policy can bring about a depreciation of the currency, but that doesn’t mean it is manipulation,’ Swan said… when asked about concern Japan is driving down the yen. ‘Thank god for the Fed,’ he said…”

April 12 – Bloomberg (Fergal O’Brien): “London’s property market powered a seventh month of increases in U.K. house prices in March as values reached a five-year high…”

April 8 – Bloomberg (Sridhar Natarajan): “A Goldman Sachs Group Inc. unit is joining firms from Ares Capital Corp. to Fifth Street Finance Corp. in raising about $2 billion to lend to companies unable to tap public markets as investors seek to extract high yields. Goldman Sachs Liberty Harbor Capital LLC, which is organized as a so-called business-development company and primarily lends to companies earning less than $75 million, plans to raise money in an initial public offering…”

Global Credit Watch:


April 11 – Associated Press (Juergen Baetz): “The cost of bailing out Cyprus has swollen to euro 23 billion ($30bn), with the crisis-hit country having to take on the lion's share of the measures needed to avoid bankruptcy… The draft document, obtained by The Associated Press… says the country will have to find 13 billion euros ($17bn) — an increase on the 7 billion euro contribution agreed during the country's chaotic bailout talks last month. The money will be raised by imposing heavy losses on large bank deposits, levying additional taxes, privatizations and a part- sale of the central bank's gold reserves.”

April 11 – Bloomberg (Finbarr Flynn): “Dutch Finance Minister Jeroen Dijsselbloem said there needs to be a debate on what countries can use the euro-area’s bank recapitalization ‘instrument’ after it is set up. Many issues remain outstanding in relation to the European Stability Mechanism’s use to recapitalise banks, Dijsselbloem, who chairs the euro-area finance ministers meetings, said… European banks need to strengthen their balance sheets so that they can deal with risks, he said.”

April 10 – Bloomberg (Boris Cerni): “Slovenia’s default risk jumped after the country missed its target at a debt offering, reigniting concern that it will become the next euro nation to need international assistance… The yield on Slovenia’s dollar-denominated benchmark bond maturing in 2022 held above 6% after yesterday surging past that level the first time this month.”

April 10 – Bloomberg (James G. Neuger): “The European Commission warned of ‘excessive’ risks to the economic health of Slovenia and Spain, calling on both governments to take urgent action to stem the spread of the euro crisis. Slovenian banks are likely to need fresh capital injections as over-indebted corporate borrowers struggle to pay back loans amid a double-dip recession, the… commission said. It said Spain is encumbered by public and private debt.”

Volcker Watch:

April 8 – CNNMoney (Maureen Farrell): “Former Federal Reserve chairman Paul Volcker warned… about potential dangers from what he calls ‘unorthodox’ and aggressive moves by central banks around the world. Central banks, including the Fed, could eventually inflict more harm by ‘what they’re doing with their portfolio to save the world economy,’ said Volcker… ‘Central banks are no longer central banks… I think it gets dangerous when they lose sight of the basic function of the central bank.’ Volcker said that rather than trying to stay out of the market as much as possible and simply tinker from the sidelines, central banks have been aggressively trying to influence economic growth and even inflation. ‘The central bank is not an all-powerful tool,’ he warned.”

April 8 - Reuters (Jonathan Spicer): “Paul Volcker’s inflation-fighting era as chairman of the Federal Reserve is quite the opposite of today’s U.S. central bank, which is battling to kick start growth and even stave off deflation with trillions in bond purchases. And it is polar opposite of where the Bank of Japan finds itself today, doubling down on easing to lift inflation expectations after two decades of Japanese stagnation. After all, Volcker ratcheted up interest rates in 1979 and the early 1980s to tame the inflation that had been choking the United States. So it may come as no real surprise that, talking to students and faculty at New York University on Monday, he had a few concerns about where the world’s ultra accommodative central banks are headed. ‘There are going to be big losses at central banks at someplace along the line,’ he said. ‘You do all this support of buying longer term securities at very low interest rates; long term interest rates aren’t going to stay where they are forever; at some point losses are going to be taken.’ For the Fed, the BoJ, the European Central Bank and the Bank of England, he said, the money-printing will inevitably raise questions about limiting activities of central banks. ‘These central banks are no longer central banks. The Federal Reserve is the world’s biggest financial intermediary, it is dominating the long term credit market in the United States, and it is dominant in the residential mortgage market…’ he said.”

China Bubble Watch:

April 10 – Financial Times (Josh Noble and Simon Rabinovitch): “China’s sovereign credit rating has been cut by a major international agency for the first time since 1999 with Fitch raising concerns… that the country’s rising debt problems will require a government bailout. Fitch downgraded China’s long-term local currency rating from AA- to A+, citing a number of ‘underlying structural weaknesses’ in the Chinese economy, including low average incomes, lagging standards of governance, and a rapid expansion of credit. The agency also warned of the growing risks from the rise of shadow banking, and said that total credit in China may have reached 198% of gross domestic product by the end of last year, up from 125% in 2008.”

April 11 – Bloomberg: “China’s new yuan loans and money supply exceeded analyst estimates last month… New local-currency lending in March was 1.06 trillion yuan ($171bn)… That compares with the 900 billion yuan median estimate in a Bloomberg News survey of 34 economists and 620 billion yuan in February. M2, China’s broadest measure of money supply, rose 15.7%... ‘China’s monetary policy makers are in a tough position to balance short-term growth stability, market worries and long- term economic health,’ said Lu Ting… chief economist for Greater China at Bank of America Corp… Aggregate financing, a broader measure of credit that includes non-bank lending such as trust loans, bond and stock sales, was 2.54 trillion yuan in March, close to a record, compared with the median analyst estimate of 1.8 trillion yuan.”

April 11 – Wall Street Journal (Tom Orlik): “China's economy has new leaders, not yet new ways. The first quarter brought a surge in credit creation. Total social finance, a measure that includes new loans as well as bond issuance and other forms of credit, increased 6.2 trillion yuan ($1 trillion)—a record high... It all looks like a throwback to China under its previous set of leaders. The People’s Bank of China is in the markets buying dollars, resulting in larger foreign-exchange reserves and more liquidity in the financial system.”

April 11 – Financial Times (Simon Rabinovitch): “China is once again facing heavy capital inflows after its foreign exchange reserves posted their biggest quarterly increase since the second quarter of 2011. Reserves jumped $130bn to $3.44tn – roughly equivalent to the size of the German economy – in the first quarter, helping to fuel a surge in credit growth amid concerns about the level of debt in the economy… The increase marks a sharp reversal from last year when money exited China. The return of cash from abroad helped stoke fast credit growth in the first quarter, according to the government. Total new financing in the economy increased 58% to Rmb6.2tn ($1tn) compared with the first three months of 2012.”

April 12 – Reuters (Gabriel Wildau): “Fitch Ratings' estimate of China's local government debt is vastly more pessimistic than other analyses, but recent statements from government officials suggest that even Fitch may be too optimistic. The agency, which downgraded the country's sovereign credit rating this week, puts China's overall sovereign debt at 74% of GDP by the end of 2012, of which 49% is central government and 25% is local. Dealing with the systemic risk posed by local government debt is seen as one of the key priorities for the administration of China's new president, Xi Jinping.

April 8 - Reuters (Gabriel Wildau and Shengnan Zhang): “China’s banks are feeding unwanted assets into the country’s ‘shadow banking system’ on an unprecedented scale, reinforcing suspicions that bank balance sheets reflect only a fraction of the actual credit risk lurking in the financial system. Banks’ latest earnings reports only added to concerns. Despite the slowest economic growth in 13 years in 2012, the banking system’s official non-performing loan (NPL) ratio actually declined, renewing a debate about how reliable those figures are. But the key question is no longer how much risk banks are carrying. Rather, it’s how many risky loans have been shifted to the lightly regulated shadow banking institutions - mainly trust companies, brokerages and insurance companies. The risk to the overall financial system is not clear, because of insufficient data about the quality of credit in the shadow banking sector… Trust assets increased 55% in 2012 to 7.5 trillion yuan ($1.21 trillion), according to the China Trustee Association… ‘There is absolutely an impact on NPL figures from the ability to offload stuff through these channels,’ said Charlene Chu, China banks analyst for Fitch Ratings.”

April 10 – Bloomberg: “Schroders Plc’s fund venture in China predicts banks will switch into corporate debt after a crackdown on wealth-management products dabbling in risky loans. The average yield on five-year AAA-rated corporate bonds fell 20 bps to a seven-month low of 4.65% since the China Banking Regulatory Commission said March 27 that at least 65% of the capital in wealth-management products should be invested in publicly issued debt. Sanford C. Bernstein & Co. estimated in an April 8 research note that as much as 800 billion yuan ($129bn) of funds parked in so-called non- standard credit assets could be reinvested.”

April 9 – Bloomberg: “China’s surging wages and other costs are showing signs of undermining the competitiveness of the nation’s economy, threatening its growth potential, the Asian Development Bank said. Average inflation-adjusted wages have more than tripled in a decade and non-wage costs for procedures such as hiring and firing have risen since the introduction of a 2008 labor law, the ADB said… The labor market is being squeezed across the nation as the pool of working-age people shrank last year… ‘Rapid aging of the population is taking its toll on the labor market,’ Hamid L. Sharif, the ADB’s country director for China, said… ‘Unless compensated by rising labor productivity, high wages would erode the economy’s competitiveness and growth potential, hampering government development plans.’”

April 10 – Bloomberg: “China’s exports rose less than forecast for the first time in four months, fueling concerns about the outlook for trade as the government said it’s investigating reports of inflated figures. Shipments abroad increased 10% in March from a year earlier… while imports rose by an above-forecast 14.1%, leaving an unexpected trade deficit of $880 million… Sales to the U.S. and Europe both fell for the first time since November, leaving the world’s second-largest economy with weaker global demand to support a recovery.”

April 11 – Bloomberg: “China’s passenger-vehicle sales rose 13% in March as steeper discounts spurred car demand in the world’s biggest auto market. Wholesale deliveries of cars, multipurpose and sport- utility vehicles, climbed to 1.59 million units in March…”

April 9 – Bloomberg (James Nash): “China’s inflation eased more than forecast from a 10-month high as food-price gains ebbed, reducing pressure on policy makers to tighten credit as the world’s second-largest economy recovers from a slowdown. The consumer price index rose 2.1% in March from a year earlier…”

April 10 – Associated Press: “British retailers are limiting purchases of baby milk powder to prevent customers from bulk-buying and exporting it to China for profit. Leading supermarket chains Tesco and Sainsbury’s say they have started advising customers to buy no more than two tins of milk powder in each transaction. The British Retail Consortium said… other retailers are imposing similar limits to ensure there is enough stock for everyone wanting baby milk. Dairy manufacturer Danone said the increased demand is believed to be caused by unofficial exports to China to satisfy the needs of Chinese parents who want international brands for their babies.”

Japan Watch:

April 10 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Bank of Japan Governor Haruhiko Kuroda said that while policy makers will continually monitor whether additional stimulus is needed, steps taken last week are sufficient to achieve the bank’s 2% inflation goal. The central bank has taken all ‘necessary’ and ‘possible’ measures, Kuroda told reporters… While officials will change policy as needed, he doesn’t expect adjustments each month, he said… The central bank governor said… the BOJ’s campaign to fuel prices and growth isn’t targeting the yen and monetary policy won’t be altered because of currency moves… ‘We will monitor closely what happens with the currency’s rate, and how that affects the economy… I don’t think monetary policy would change because of what was happening with the currency,’ he said, adding that the government is responsible for the yen.”

April 12 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Governor Haruhiko Kuroda said the Bank of Japan will not set a time limit for easing and will continue until it achieves sustainable inflation. ‘It is not appropriate to say that the monetary easing will only last for two years,’ Kuroda said… ‘The bank will continue with monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary.’”

April 12 – Bloomberg (Masaki Kondo, Mariko Ishikawa and Shigeki Nozawa): “Options are signaling concern that Bank of Japan Governor Haruhiko Kuroda lacks an exit strategy to minimize losses from any market collapse when he ends stimulus. Five-year implied volatility on 10-year interest-rate swaps climbed to 36% last week, the highest since July 2003, showing increased expectations for price swings.”

India Watch:

April 12 – Bloomberg (Kartik Goyal and Unni Krishnan): “By the end of this month, Indian Finance Minister Palaniappan Chidambaram will have completed a tour of the world’s biggest financial centers as he seeks investors for Asia’s No. 3 economy. He has no time to lose. The steepest foreign-direct-investment drop in more than a decade has increased India’s reliance on more volatile stock and bond inflows to plug a record current-account deficit. Such a shift is exposing the economy to disruption and currency swings if short-term investors pull out, according to central bank Governor Duvvuri Subbarao.”

April 10 – Financial Times (James Crabtree ): “A sharp reversal in India’s once-booming car market has been confirmed as industry data show sales in Asia’s third-largest economy contracting last year for the first time in more than a decade… Car sales in India have expanded rapidly over the past five years, attracting extensive investment from global motor groups hoping that the country’s market will match the fast growth seen in China in the past decade. However, data from the Society of Indian Automobile Manufacturers show sales for the year to March fell by about 7% to 1.9m compared with the year before, providing a stark contrast to the industry body’s prediction of growth of about 10% a year ago.”

Asia Bubble Watch:


April 11 – Financial Times (Jeremy Grant): “When a team of analysts at Credit Suisse visited Indonesia a few weeks ago to take the temperature of Southeast Asia’s biggest economy, they were startled by what they were told by one of the country’s biggest property developers. Ciputra Development, which builds luxury condominiums, said that, while prices in central Jakarta, the capital, had been growing at a rapid clip – about 30-40% a year – a new trend had emerged. Demand had started to spill over to greater Jakarta and even to so-called second-tier cities, where Ciputra had seen property prices jump by 50% last year. ‘We felt this was evidence of a property bubble,’ says Robert Prior-Wandesforde, director of research… While the economies of the 10-nation Association of Southeast Asian Nations grew by an average of 5.6% last year… there are dark clouds gathering. ‘The price of key assets, such as property, is rising fast as monetary easing in developed countries continues to send ‘hot’ money from advanced economies in the west, chasing anything that will produce yield.”

April 10 – Bloomberg (Pooja Thakur): “Wing Tai Holdings Ltd. Chairman Cheng Wai Keung is seeking a record S$300 million ($242 million) for a home near Singapore’s Orchard Road shopping belt, betting that developers may profit from dividing the site. The 85,000-square-foot site on an elevated lot at 33 Nassim Road, near the city’s Botanic Gardens, includes a two-story home, swimming pool and tennis court, according to Jones Lang LaSalle…”

Latin America Watch:

April 11 – Bloomberg (David Biller): “Brazil’s retail sales declined in February, surprising analysts who had forecast an increase, as accelerating inflation in Latin America’s largest market reduces consumers’ purchasing power. The volume of sales fell 0.4%, after rising a revised 0.5% in January…”

April 12 – Bloomberg (Boris Korby and Jonathan Levin): “Corp. Geo SAB, Mexico’s second-largest publicly traded homebuilder, said it will seek to restructure debt after bleeding cash for a third straight year, sparking a selloff that sent its bonds to record lows… Geo’s $400 million of notes due 2022 tumbled 30.16 cents to 49.95 cents on the dollar… leading a rout in bonds from Mexican builders.”

Global Economy Watch:

April 12 – Bloomberg (Olga Tanas and Ilya Arkhipov): “Russia’s economy will face a recession risk in the autumn unless it adopts stimulus measures, Economy Minister Andrei Belousov said. Russia expects growth to slow to 2.4% this year compared with a previous estimate of 3.6%... In the worst case scenario, gross domestic product will increase 1.7% in 2013. ‘We will propose economic stimulus measures,’ Belousov told reporters… ‘We need to get out of the situation we are in to avoid recession.’”

Europe Watch:

April 11 – Telegraph (Bruno Waterfield): “The financial crisis ravaging Cyprus deepened on Thursday after the cost of the country's bail-out surged from €17.5bn to €23bn - larger than the size of the country’s economy. Cyprus will have to find an €6bn extra to contribute to its own bail-out, less than a month after the original EU-IMF deal was agreed, putting the already teetering economy in danger of collapse and further endangering large bank depositors. It also emerged that the government in Nicosia has agreed to sell gold reserves to raise around €400m to help finance its part of its own bail-out. The Cypriot developments came as Portugal was disclosed to be facing a second bail-out.”

April 8 – Bloomberg (Joao Lima and Anabela Reis): “Portugal will carry out more spending cuts this year and ruled out further tax increases after the Constitutional Court blocked a plan to suspend a monthly salary payment to state workers and pensioners. ‘I will give instructions to the ministries to proceed with the necessary reductions in operating expenses to compensate for what was blocked by the Constitutional Court’s ruling,’ Prime Minister Pedro Passos Coelho said… ‘The government does not accept more tax increases, which seems to be the solution that the Constitutional Court favors in its interpretation.’”

April 11 – Bloomberg (Tom Stoukas): “Greece’s unemployment rate increased to a record in January as the country’s economic downturn entered a sixth year. The… rate rose to 27.2% from a revised 25.7% in December…”

April 10 – Bloomberg (Mark Deen): “President Francois Hollande, facing a mutiny within his cabinet, slapped down suggestions from three ministers that France needs to slow deficit-cutting and promised to be relentless in revamping the economy. ‘I want to make it clear that this is the direction the government and I will not deviate from,’ Hollande said… ‘No government minister can question the policies we’ve put in place, which are not austerity measures.’”

April 8 – Reuters: “The European Central Bank denied… a media report that central banks in Spain and Italy had lent to banks on overly generous terms which could have given them a financial advantage of up to 12.4 billion euros. German newspaper Welt am Sonntag reported… that the Italian and Spanish central banks had interpreted the rules for lending to banks against collateral in the form of government-backed bank bonds too generously. The central banks had based the valuation of the collateral on the corresponding sovereign rating rather than the less-favorable bank rating, the newspaper said, adding that this also exposed the ECB to greater risk.”

Italy Watch:

April 10 – Bloomberg (Andrew Davis and Lorenzo Totaro): “Italy’s debt will reach a postwar record this year as the recession-hit country borrows to contribute to bailouts and pay arrears to suppliers. The public debt will rise to 130.4% of gross domestic product in 2013 from 127% last year… The budget deficit will drop to 2.9% of GDP this year, putting Italy within the European Union’s 3% limit.”

Spain Watch:

April 9 – Bloomberg (Angeline Benoit): “Spain’s failure to honor budget-deficit goals has hurt the country’s credibility and justifies a negative outlook on the sovereign’s credit rating, Moody’s… said. ‘The continued deviations from agreed budgetary targets as well as the repeated revisions of budget-deficit outcomes are weakening the credibility of the Spanish government in the area of public finance,’ Moody’s analysts Kathrin Muehlbronner and Bart Oosterveld wrote…”

April 9 – Financial Times (Tobias Buck in Madrid and Michael Steen): “Mariano Rajoy, the Spanish prime minister, has called for the European Central Bank to be handed more powers, highlighting renewed north-south political tensions about the bank’s role in battling the eurozone debt crisis. ‘I think in Europe we must all ask ourselves whether the ECB should have the same powers as other central banks around the world,’ the Spanish leader said…”

April 10 – Bloomberg (Angeline Benoit): “Spanish industrial output declined more than economists expected in February as Prime Minister Mariano Rajoy struggles to haul the economy out of a six-year slump. Production at factories, refineries and mines adjusted for the number of working days fell 6.5% from a year earlier, after declining a revised 4.9% in January…”

Germany Watch:


April 9 – Bloomberg (Jeff Black): “German exports fell more than economists forecast in February as the euro area, the country’s biggest trading partner, struggled to emerge from recession. Exports… dropped 1.5% from January, when they gained 1.3%...”