Sunday, December 14, 2014

10/04/2013 Night and Day *

The question arrived via and appeared simple enough: “Can you explain how QE funds are inflating the asset markets if these monies are being parked back with the Fed, collecting interest? Can they be in two places at the same time?”

The impact of the Fed’s experimental quantitative easing (QE) program is an issue of great interest. In his talk yesterday, Federal Reserve Bank of San Francisco president John Williams noted that considerable Fed resources have been devoted to researching the issue. Mr. Williams spoke of initial findings, stating the impact on Treasury yields in meager basis points. A cacophony of Fed comments leads me to believe Federal Reserve analysis is oblivious to the key impacts of its ongoing monetary inflation.

In early CBB’s, I was fond of employing my old CPA skills, as I used scores of debit and Credit journal entries (“double-entry bookkeeping”) to illustrate the “infinite multiplier” potential inherent to contemporary non-bank Credit expansion. In particular, I remember a rather exhaustive (exhausting) series of debit and Credit entries explaining how the growth of GSE IOUs (debt) intermediated through the money market and hedge fund channels was behind unconstrained growth in New Age “money” and Credit. I was convinced at the time this atypical monetary inflation was fundamental to a historic Credit Bubble and myriad attendant asset price and economic distortions. I still believe it was among some of my most insightful analysis, and I’ll note that it did seem to resonate strongly with perhaps a handful of readers (including Ed McCarthy, who became a dear friend).

I'll spare readers a tedious debit & Credit exposition. I will instead highlight “Flow” analysis in an attempt to illuminate some of the myriad systemic inflationary impacts from the Fed’s QE laboratory.

Let’s begin with a brief look at the Fed’s balance sheet – where Assets (as of 6/30: $3.526 TN) essentially equal Liabilities ($3.499 TN). On the Assets side, the Fed holds $34.3bn of “U.S. Official Reserve Assets.” There is also $228bn of “Other Miscellaneous Assets.” Yet the vast majority of Fed holdings are within its $3.214 TN portfolio of “Credit Market Instruments.”

As of the end of the second quarter, the Fed held $1.937 TN of Treasury notes and bonds, up from $476bn at the end of 2008. Fed holdings also included $1.277 TN of “Agency- and GSE-Backed Securities,” up from 2008’s $20bn. While the Asset side of the Fed’s balance sheet has ballooned in historic proportions, its holdings are for the most part straightforward.

Things tend to get murkier on the Liability side. The Fed is on the hook for tons of Federal Reserve notes - $60bn of “Vault Cash of Depository Institutions,” as well as $1.134 TN of “Currency Outside Banks.” The Fed also ended Q2 with Liabilities “Due to Treasury General Deposit Account” of $135bn and “Due to GSEs” at $20bn. Yet, at $2.013 TN (up from $21bn to end ’07), the Fed’s largest – and fasted growing – Liability is “Deposit Institution Reserves.”

The surge in Fed “Reserves” has in recent years been a hot topic. The conventional view holds that these Reserves, for now resting harmlessly in the bowels of the banking system, create a potential inflationary tinderbox once the recovery and bank lending gain a head of steam. The Fed has gone to great lengths to explain how it will contain potential inflation risks, most directly by increasing the interest-rate it pays banks on these reserve balances (hence incentivizing retaining Fed reserves rather than lending them in the real economy).

I don’t completely dismiss their inflationary potential, but the whole bank reserve discussion misses more salient points. First, there are the more immediate impacts Fed purchases have been cultivating throughout the financial markets. Second, with contemporary unfettered Credit having expanded outside traditional constraints (i.e. bank lending restricted by reserve and capital requirements) for years now, it’s difficult for me to get all worked up about so-called “latent” inflationary firepower. Again, I would argue the key inflationary effects are here and now – and today’s analytical focus should be fixated on the present.

It might be helpful to remind readers that what we’re really discussing here are electronic debit and Credit entries within an immense global “general ledger” accounting system. This globalized Credit system comprises myriad domestic and international relationships interconnected by various asset, liability and equity relationships. For the most part, innumerous financial, governmental, institutional, corporate and individual debtors have electronic IOUs that are the electronic assets of innumerous lenders.

The U.S. banking system's assets “Reserves at the Federal Reserve” – are simply the liabilities of our central bank – aka Federal Reserve IOUs. When the Federal Reserve goes into the marketplace to purchase Treasuries and MBS, it creates brand new Fed IOUs in the process. And these IOUs are in the form of electronic debit and Credit entries that, importantly, create immediately available new purchasing power in the system.

The conventional view holds that since these reserves are sitting inertly on bank balance sheets, they are basically having no inflationary impact. I would counter that they by definition exist only on bank balance sheet accounts, yet this in no way indicates that they haven’t had major pricing impacts. Think of it this way: when the Fed creates its new IOUs in the process of purchasing securities in the markets, this new electronic purchasing power is unleashed upon the system, initiating potentially a series of transactions (the Fed buys from A, A takes proceeds and buys from B who uses the “money” to buy From C, and so on).

As these various trades/transactions settle, the Fed’s electronic IOUs must make their way to institutions that have a direct accounting relationship with the Federal Reserve. The Fed’s newly created electronic purchasing power might in its journey be an electronic payment to a hedge fund, a home seller or even Samsung. But since they don’t have deposit accounts with the Federal Reserve, a series of debit and Credit entries will flow through various (“correspondent”) financial relationships until balances finally arrive at an institution within the Fed’s payment system (i.e. a U.S. bank or U.S. branch of a foreign financial institution). Reserves might not be at two places at the same time, but they can certainly make their way through multiple places and transactions along the way.

By definition, when the Fed creates new electronic (as opposed to paper currency) liabilities, the other side of the ledger is the creation of an asset within its system of electronic relationships – and this asset is identified as “bank reserves.” Importantly, however, this is only a static (level/“stock”) recording of accounting relationships at a point in time - and in no way indicates a lack of inflationary effect. Indeed, the creation of new system purchasing power has myriad (“flow”) impacts, both direct and indirect.

I have attempted to differentiate the impact of current QE operations from that of initial “QE1.” I have explained how the Fed’s original QE was essentially an operation that accommodated de-leveraging/de-risking. The Fed intervened in the marketplace, purchasing securities from banks, Wall Street firms, “special purpose vehicles,” hedge funds and the GSEs that needed to significantly pare back leverage after suffering major market losses. In one impactful operation, the Fed’s collapsing of interest rates incited a major refinancing boom for problematic “private-label” mortgages. Many of these newly refinanced mortgages were intermediated (guaranteed) through the GSEs, and then conveniently shifted from troubled institutions and speculators to the Federal Reserve (as agency-MBS).

Basically, the Fed accommodated a historic transfer from impaired leveraged players to the Fed’s impenetrable balance sheet. In that circumstance, much of the new purchasing power created by expanding Fed IOUs was used immediately to retire market borrowings (“securities finance”).

In the case of QE1, newly created Fed purchasing power/liquidity was largely “extinguished” – one could say it went to “money heaven” – as market-based (i.e. “repo”) borrowings were retired in a major collapse of speculative leverage. Hence, overall inflationary effects were muted, especially considering the unprecedented scope of the “liquidity” operations. The “flow” of purchasing power/liquidity analysis is rather short and Fed statistical studies of this period – focusing on Treasury bond yields – have come to the conclusion that quantitative easing measures are by and large benign.

Since mid-November (just prior to the Fed commencing its $85bn monthly QE), the Biotech index is up 56%. The small cap Russell 2000 has returned 42%. The InteractiveWeek Internet index is up about 41% and the Semiconductors 40%. The Securities Broker/Dealers index has surged 70%. The Mid-Caps have returned about 34% and the S&P500 27%. Treasury yields, well, they’re up about 1% (100bps) and benchmark MBS yields about 1.2% (120bps).

I have posited that today’s QE is having altogether more powerful inflationary effects than QE1. First and foremost, the Fed’s current monetary inflation is not accommodating financial sector de-leveraging – i.e. newly created Fed liquidity is not immediately extinguished through the retirement of securities speculative leveraging. Indeed, I would argue that the Fed’s $85bn is injecting new liquidity directly into the securities markets, while also incentivizing further risk-taking and speculative leveraging. 2009 QE is Night and Day to 2013 QE.

Today, when the Fed goes into the marketplace to purchase Treasury bonds, they create immediately available funds that the seller can then use to purchase other securities. A Fed transaction with a hedge fund, for example, would provide purchasing power for whatever asset class the manager believed offered the best (immediate) return opportunity. Importantly, if the Fed chooses to inject liquidity into a speculative marketplace, the new purchasing power will not gravitate to low-risk strategies. Indeed, some years ago I would write “Liquidity Loves Inflation,” noting the strong proclivity for liquidity to chase (outperforming) asset classes demonstrating the most acute “inflationary biases.” Since mid-November, SunPower is up 614%, Tesla 480%, Netflix 302%, Green Mountain 224% and Facebook 128%. Treasury and MBS prices are down slightly.

The Fed is delusional if it doesn’t believe QE is inflating speculative Bubbles. In a highly-charged “risk on” backdrop, QE converts to rocket fuel. And, amazingly, this rocket fuel is flooding into the markets at about a Trillion dollar annualized clip. The inflationary impact on various asset prices can be gauged to be in the multi-thousand basis points rather than the few contended by Fed research. Not only is there the direct impact of hedge funds using the proceeds from Treasury or MBS sales (to the Fed) to purchase outperforming stocks, there is the issue of the Fed’s liquidity backstop incentivizing leveraged speculation in higher-yielding junk, corporate bonds and leveraged lending more generally. The resulting ultra-loose market liquidity backdrop furthermore spurs aggressive mergers & acquisition activity.

Less directly, but no less importantly, the Fed rate and QE backdrop has created self-reinforcing investor flight away from lower-risk deposits and other low-yielding instruments out in search of higher market returns. These days, Fed QE purchases work to accommodate flows out of bond bunds and into equities. And if it had been up to household savings (as opposed to Fed monetization) to finance the massive surge in federal debt, it would be a very different financial landscape today (much higher Treasury, MBS and corporate yields - and significantly lower equity and asset prices). Pension funds wouldn’t have to rely on hedge fund and private-equity leverage in order to meet return bogies. And without all the speculative leveraging throughout fixed income, there’d be a lot less liquidity available to flow effortlessly into equities.

How many Trillions have flowed into higher-yielding corporate debt and equities, EM, various ETFs, commercial and residential real estate, leveraged lending, hedge funds, private equity and basically any investment that provides a yield after Fed QE and rate policies pushed the entire yield curve to such artificially low levels?

The Fed apparently does not buy bonds directly from the Treasury. But let’s say the Fed purchases Treasuries in the open market from a hedge fund or Wall Street “primary dealer” that had recently acquired these securities at Treasury auction. In this case, the Fed’s newly “minted” liquidity would flow to a speculator or dealer that could use these funds to acquire Treasuries at the next auction. The Treasury would then use this liquidity/purchasing power to make disbursements throughout the economy (i.e. federal worker and armed forces compensation, jobless and veteran benefits, social security, and Medicare), in the process boosting incomes, spending and savings. This spending boosts GDP, right along with corporate cash flows and earnings.

“Savings” (that indirectly originated with Fed purchases) then flow predominantly as buying power for risk market assets. Meanwhile, inflated corporate earnings/cashflows coupled with general loose finance (i.e. abundant inexpensive marketplace liquidity) spur corporate borrowing and stock buybacks. Corporate buybacks then work to inflate stock prices, directly as well as indirectly through inflating earnings per share growth along with increasing the attractiveness of speculative buying (i.e. a leveraged hedge fund increasing its equity allocation because of the bullish perception that ongoing stock repurchases significantly improve the equities market risk vs. reward calculus).

And if Fed liquidity injections and market backstops are ongoing, this ensures that speculative flows and trading dynamics become deeply entrenched in the marketplace. The bulls become more emboldened and the bears increasingly impaired. The chips shift to one side of the poker table, ensuring that the bulls raise the stakes and try to force the bears out of the game. Targeting the bears – with resulting “rip your face off” short squeezes - works to transform the marketplace into a speculative casino. Over time, QE ensures an unsound marketplace bereft of stabilizing supply/demand dynamics and typical checks and balances (including the shorting of over-valued securities). The upshot are market Bubbles with destabilizing inflationary biases. The Goldman Sachs Most Short Index is up 58% since November 15, 2012.

In a replay of the late-nineties, over-liquefied markets help enrich hundreds of thousands of insiders and fortunate employees at scores of companies enjoying hot stocks. Delving into more “flow” analysis, think of the Fed buying MBS from a hedge fund, and the fund then using this newly created liquidity to boost holdings of its best-performing positions. The sellers – say, employees from Tesla, Netflix, Facebook and Google cashing out of stock option grants – use sales proceeds for cash purchases of million-dollar three-bedroom homes in hot California real estate markets. The home sellers can then use this “cash” to pay down debt, as a down-payment for a larger home, or perhaps to take their own dive into the risk markets. And let’s not forget the Bubble’s impact on local, state and federal tax receipts, a temporary bounty quickly extrapolated and spent.

A rather long book could be written on this subject matter. My QE inflationary effects analysis would be lacking without at least brief mention of international consequences. I would argue that QE has had particularly momentous effects on global finance. QE worked first to reflate U.S. incomes and, more recently, to further inflate them. This has spurred spending and sustained large trade deficits. The weak dollar and resulting enormous trade, investment and speculative flows into the emerging markets (EM) worked to inflate historic Bubbles.

Mortgage finance was the “fledgling” Bubble that acted as an increasingly powerful magnet for liquidity and speculative excess during the Fed’s post-tech Bubble reflation. After the bursting of the mortgage finance Bubble, EM was the fledgling Bubble. Of late, serious cracks have formed in some emerging markets and economies, fragility that I believe has played a role in QE decisions over the past year. Over coming weeks and months we’ll stay focused on the comings and goings of “flow” analysis. Does the Fed’s ongoing QE help to reverse liquidity flows back to EM and their struggling economies? Or perhaps that’s just so 2012, with current animal spirits keener to play Bubbling U.S. stocks and corporate debt.

For the Week:

The S&P500 was little changed (up 18.5% y-t-d), while the Dow declined 1.2% (up 15.0%). The broader market remained strong. The S&P 400 MidCaps, trading to a record high on Tuesday, gained 0.9% (up 23.0%). Also posting all-time highs Tuesday, the small cap Russell 2000 ended the week up 0.4% (up 27.0%). The Morgan Stanley Consumer index slipped 0.5% (up 21.4%), and the Utilities declined 0.6% (up 4.9%). The Banks gained 0.9% (up 22.8%), while the Broker/Dealers fell 1.3% (up 44.7%). The Morgan Stanley Cyclicals added 0.2% (up 26.2%), and the Transports increased 0.2% (up 24.6%). The Nasdaq100 gained 0.4% (up 21.9%), and the Morgan Stanley High Tech index added 0.5% (up 21.0%). The Semiconductors jumped 1.4% (up 29.6%). The InteractiveWeek Internet index rose 1.6% (up 29.6%). The Biotechs added 0.5% (up 42.7%). With bullion sinking $26, the HUI gold index was down 3.8% (down 50.1%).

One-month Treasury bill rates ended the week up 10 bps to 11 bps, while three-month rates closed unchanged at two bps. Two-year government yields were unchanged at 0.33%. Five-year T-note yields ended the week up a basis point to 1.41%. Ten-year yields added 2 bps to 2.65%. Long bond yields rose 3 bps to 3.72%. Benchmark Fannie MBS yields were little changed at 3.31%. The spread between benchmark MBS and 10-year Treasury yields narrowed 2 to 66 bps. The implied yield on December 2014 eurodollar futures declined 2 bps to 0.505%. The two-year dollar swap spread was little changed at 13 bps, while the 10-year swap spread added one to 16 bps. Corporate bond spreads were mostly narrower. An index of investment grade bond risk declined one to 80 bps. An index of junk bond risk declined 13 to 383 bps. An index of emerging market (EM) debt risk was little changed at 334 bps.

Debt issuance slowed some. Investment grade issuers included American Honda Finance $2.75bn, IntercontinentalExchange $1.4bn, Origin Energy Finance $800 million, Toyota Motor Credit $1.0bn, Healthcare REIT $400 million, Nisource Finance $500 million, Megellan Midstream Partners $300 million, DCT Industrial Trust $275 million, Navigators Group $265 million, Southwest Gas $250 million, Interstate Power $250 million, Weingarten Realty $250 million, and Midland Cogeneration Venture LP $180 million.

Junk bond funds saw inflows slow to $238 million (from Lipper). This week's issuers included Calfrac Holdings $600 million, CNH Capital $500 million, Nisource Finance $500 million and TMS International $275 million.

Convertible debt issuers this week included Campus Crust Communities $85 million.

International dollar debt issuers included Hazine Mustesarligi $1.25bn, KFW $1.0bn, BPCE $900 million, Trans-Canada Pipeline $1.25bn, Petrofac $750 million, Korea Western Power $500 million, Stackpole International $360 million, and North American Development Bank $300 million.

Ten-year Portuguese yields sank 44 bps to 6.28% (down 47bps y-t-d). Italian 10-yr yields fell 11 bps to 4.29% (down 21bps). Spain's 10-year yields dropped 16 bps to 4.20% (down 107bps). German bund yields rose 6 bps to 1.84% (up 52bps). French yields gained 3 bps to 2.36% (up 36bps). The French to German 10-year bond spread narrowed 3 to 52 bps. Greek 10-year note yields fell 24 bps to 8.97% (down 150bps). U.K. 10-year gilt yields increased 3 bps to 2.74% (up 92bps).

Japan's Nikkei equities index was slammed for 5.0% (up 34.9% y-t-d). Japanese 10-year "JGB" yields fell 3 bps to 0.64% (down 14bps). The German DAX equities index slipped 0.4% for the week (up 13.3%). Spain's IBEX 35 equities index jumped 2.1% to a two-year high (up 15.4%). Italy's FTSE MIB surged 3.7%, also to a two-year high (up 12.5%). Emerging markets were mixed. Brazil's Bovespa index fell 1.7% (down 13.3%), while Mexico's Bolsa was unchanged (down 6.4%). South Korea's Kospi index slipped 0.7% (unchanged). India’s Sensex equities index gained 1.0% (up 2.5%). China’s Shanghai Exchange was closed for holiday (down 4.2%).

Freddie Mac 30-year fixed mortgage rates dropped 10 bps to a 15-week low 4.22% (up 86bps y-o-y). Fifteen-year fixed rates were down 8 bps to 3.29% (up 60bps). One-year ARM rates were unchanged at 2.63% (up 6bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 8 bps to 4.57% (up 56bps).

Federal Reserve Credit expanded $2.1bn to a record $3.697 TN. Over the past year, Fed Credit was up $912bn, or 32.7%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $545bn y-o-y, or 5.1%, to $11.207 TN. Over two years, reserves were $988bn higher, for 10% growth.

M2 (narrow) "money" supply rose $38.1bn to a record $10.832 TN. "Narrow money" expanded 7.0% ($711bn) over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits gained $12.6bn, and Savings Deposits jumped $26.3bn. Small Time Deposits slipped $2.3bn. Retail Money Funds were little changed.

Money market fund assets declined $8.5bn to $2.685 TN. Money Fund assets were up $122bn from a year ago, or 4.7%.

Total Commercial Paper outstanding fell $9.3bn to $1.055 TN. CP has declined $11bn y-t-d, while increasing $80bn, or 8.2%, over the past year.

Currency Watch:

October 4 – Bloomberg (Gavin Finch): “Switzerland’s financial markets regulator said it’s investigating ‘several’ financial firms over the possible manipulation of foreign exchange rates. The Swiss Financial Market Supervisory Authority ‘is coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated,’ the Bern, Switzerland-based regulator said…”

The U.S. dollar index declined 0.5% to 80.122 (up 0.4% y-t-d). For the week on the upside, the Brazilian real increased 1.8%, the Australian dollar 1.3%, the South African rand 1.0%, the Singapore dollar 0.8%, the Japanese yen 0.8%, the Taiwanese dollar 0.7%, the New Zealand dollar 0.5%, the Mexican peso 0.4%, the Norwegian krone 0.3%, the South Korean won 0.3%, the euro 0.3%, the Danish krone 0.2%, the Swedish krona 0.2% and the Canadian dollar 0.1%. For the week on the downside, the British pound declined 0.8% and the Swiss franc slipped 0.1%.

Commodities Watch:

The CRB index was little changed this week (down 2.9% y-t-d). The Goldman Sachs Commodities Index was up slightly (down 1.4%). Spot Gold dropped 1.9% to $1,311 (down 22%). Silver slipped 0.4% to $21.75 (down 28%). November Crude added 97 cents to $103.84 (up 13%). November Gasoline fell 2.0% (down 6%), and November Natural Gas dropped 2.3% (up 5%). December Copper declined 0.9% (down 10%). December Wheat increased 0.6% (down 12%), while December Corn dropped 2.4% (down 37%).

U.S. Fixed Income Bubble Watch:

October 1 – Bloomberg (Brian Chappatta): “Standard & Poor’s lowered its outlook on Puerto Rico’s sales-tax backed bonds to negative from stable, citing the commonwealth’s shrinking economy and population. The move follows Puerto Rico’s announcement last week of a plan to increase the percent of revenue that it allocates to its sales-tax credit to 3.5% from 2.75% to refinance debt. The proposal would give the territory of 3.7 million people an additional $2 billion of borrowing capacity through the Sales Tax Financing Corp.”

October 3 – Financial Times (Michael Mackenzie and Tracy Alloway): “The prospect of financial assets being dumped in a ‘fire sale’ has re-emerged as a substantial risk in a crucial $2tn funding market used by US banks, despite changes since the financial crisis to reduce risk. The tri-party repo market, where banks loan out their securities in exchange for short-term loans from investors, has been one of the key areas of financial reform after playing a major role in the 2008 collapse of Lehman Brothers. Banks use the market to pledge their assets as security, or collateral, in exchange for short-term loans from lenders that include money market funds, insurers and mutual funds. In 2008, much of that financing was suddenly pulled away after the value of mortgage-related collateral underpinning the loans was called into doubt. Fire sales, where assets are sold in a manner that can sharply depress prices and thereby pressure other investors into selling their assets, were a hallmark of the financial crisis."

September 30 – Financial Times (Alistair Gray): “The scale of the so-called shadow insurance sector in the US has been laid bare by research showing life assurers have offloaded more than $360bn worth of liabilities to subsidiaries in jurisdictions with weaker reserve requirements. Data seen by the Financial Times show a 33-fold rise in the use of such schemes between 2002 and 2012. Critics warn they allow insurers to set aside less premium income as reserves to pay future claims than they would otherwise need to. The arrangements expose policyholders to greater risks equivalent to three notches of an aggregate credit rating across the industry, the researchers estimated.”

October 4 – Bloomberg (Krista Giovacco): “Investors added $990 million this week to funds that purchase leveraged loans in the U.S., the only asset class to record an increase… Loan-fund deposits have increased 73% this year, bringing the total amount under management to $55 billion… Investors have made deposits into loan mutual funds every week this year, Bank of America data show. Leveraged loans are a form of high-risk debt that carry ratings of less than Baa3 by Moody’s… and below BBB- at S&P.”

October 2 – Bloomberg (Christine Idzelis): “Sears Holdings Corp. will pay double the interest cost on a new $1 billion loan as it seeks to bolster liquidity at a time when it’s forecast to run out of cash in as soon as six months. The unprofitable retailer controlled by Edward Lampert is obtaining the term loan at an interest rate of 5.5%, which will reduce borrowings under a $3.3 billion credit line that pays as much 2.5 percentage points more than benchmarks…”

October 1 – Bloomberg (Lisa Abramowicz): “Junk-bond trading in the U.S. has fallen the most since 2008 as the Federal Reserve keeps investors guessing on when it will slow bond purchases that bolstered demand for the debt. Daily transactions in speculative-grade notes have averaged $4.87 billion since June 30, 18.1% less than volumes in the first half of the year… Investment-grade trading, which has been supported by Verizon Communications Inc.’s record $49 billion sale last month, is down 13.6% during the same period.”

Federal Reserve Watch:

October 3 – Reuters: “When the time comes for the Federal Reserve to reduce its massive balance sheet, one of the big worries is the potential volatility and instability that paring those assets could bring to financial markets, a top Fed official said… ‘When you are on the buy side things look great,’ Dallas Fed President Richard Fisher said at a conference on uncertainty at the regional Fed bank. ‘When you are on the sell side, when we get to that point, things look different.’ The Fed’s bond-buying program has swollen the central bank’s balance sheet to more than $3.5 trillion. Fisher, who has opposed the bond-buying, said that he and his colleagues feel ‘angst’ at size of the balance sheet and the potential challenges when it comes time for the Fed to reduce it.”

October 3 – Bloomberg (Vivien Lou Chen): “Dallas Fed Pres. Richard Fisher said he was ‘not alone’ at FOMC’s Sept. 17-18 meeting in disagreeing with majority’s decision to keep $85b/mo. QE purchases intact. Fisher… says he told committee that no tapering decision may increase uncertainty about future path of policy, given improving labor market outlook and ‘widespread perception’ in financial markets that Fed would taper. ‘That was one argument raised against the decision not to taper. I know, because I made the argument, and I was not alone.’”

October 3 – Bloomberg (Aki Ito and James Nash): “Federal Reserve Bank of San Francisco President John Williams… said the U.S. economy will probably need sustained unconventional stimulus for the ‘next few years.’ ‘U.S. unemployment is still too high and inflation is too low,’ Williams said… ‘The appropriate stance of monetary policy is very accommodative and that will continue to be the case for quite some time,’ Williams said… ‘As the U.S. economy continues to improve, it will be appropriate for the Fed to start trimming its asset purchases and eventually stop them altogether,’ Williams said.”

October 2 – Wall Street Journal (Michael S. Derby): “In an economy still surrounded by storm clouds, the Federal Reserve should be prepared to offer even more support to growth if the economy falls short of expectations, a U.S. central bank official said… The policymaker, Federal Reserve Bank of Boston President Eric Rosengren, said he ‘strongly and unequivocally’ supported the Fed's decision last month to press forward with its $85 billion-a-month bond-buying stimulus program, because recent data has proved disappointing. ‘Most of the risks to the outlook remain on the downside,’ the official said. Should the economy pick up as officials predict, there should be ‘only a very slow removal of accommodation over the next several years,’ Mr. Rosengren said. But he also cautioned that ‘should the economy unexpectedly slow down, we can and should provide more accommodation than is currently anticipated.’ Mr. Rosengren also said if the economy doesn't pick up like the Fed expects, ‘we should not reduce the monetary policy accommodation. Doing so risks slowing the sectors of the economy that have shown the greatest strength: the interest-sensitive sectors that have been most responsive to policy actions,’ Mr. Rosengren said.”

September 30 – Bloomberg (Caroline Salas Gage): “It’s becoming increasingly clear why Federal Reserve Chairman Ben S. Bernanke should have avoided linking the central bank’s policy decisions to specific unemployment rates. Bernanke said in June he expected the Fed would complete its bond buying when the jobless level was around 7%, and policy makers have pledged since December they won’t consider raising interest rates as long as it exceeds 6.5%. With a decline in August to 7.3% for the wrong reason -- Americans giving up on finding work -- Fed officials are being forced to shift their guideposts.”

Central Bank Watch:

October 2 – Bloomberg (Paul Gordon): “European Central Bank President Mario Draghi said he’s ready to take any necessary measures to keep money-market rates in check as he tries to steer Europe’s banks through the early stages of an economic recovery. ‘We’ll remain particularly attentive to developments which may have implications to monetary policy and consider all available instruments,’ Draghi said… ‘We have a vast array of instruments to this extent and we exclude no option in order to address the needs as is most appropriate.’”

October 3 – Bloomberg (Jeff Black): “Mario Draghi has asked a European Central Bank panel to study options for new bank funding measures, as policy makers try to figure out how to deal with any future liquidity shortages… While the ECB president insisted that the institution ‘stands ready to act according to need,’ the governing council agreed that a technical committee should examine the size and maturity of new long-term refinancing operations, as well as other instruments…”

U.S. Bubble Economy Watch:

October 1 – Bloomberg (Anna Mukai): “After years of profiting from China’s appetite for high-priced toys, makers of hyper-luxury cars are shifting their focus back to more traditional markets such as the U.S. and Japan. ‘The U.S. is really getting back on track and getting more important for us,’ Lamborghini SpA Chief Executive Officer Stephan Winkelmann said… In China, ‘there is a slowdown in high-end luxury,’ he said. U.S. demand for Lamborghini’s $400,000-plus Aventador flagship is growing at a pace reminiscent of the years before the 2008 global financial crisis, Winkelmann said. And as Prime Minister Shinzo Abe kick-starts the economy, Japan also stands out, he said.”

October 3 – Bloomberg (Scott Reyburn): “A 1963 Ferrari 250 GTO racer has become the world’s most expensive car, selling for $52 million. The red competition car… was acquired by an unidentified buyer in a private transaction… The price is a 49% increase on the record for any auto, achieved last year for another 250 GTO. Values of classic cars, particularly Ferraris of the 1950s and 1960s, continue to grow, attracting new enthusiasts, investors and speculators -- and prompting fears of a bubble in the market.”

October 2 – Bloomberg (Oshrat Carmiel): “Manhattan home sales jumped in the third quarter to the highest level since 2007 as buyers rushed to make deals before rising interest rates push costs higher. Purchases of condominiums and co-ops surged 30% from a year earlier to 3,837, the second-biggest quarterly total in 24 years of record keeping, according to… appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. The number of homes on the market at the end of September fell 22% from a year earlier to 4,567, the lowest since Miller Samuel began tracking the data 13 years ago. An abrupt increase in mortgage rates tipped more buyers into the Manhattan market, where the supply was already tight, according to Jonathan Miller…of… Miller Samuel. “

October 4 – Bloomberg (Douglas MacMillan and Brian Womack): “Twitter Inc.’s initial public offering documents suggested a valuation of $12.8 billion for the microblogging service, underscoring the seven-year rise of a still unprofitable company that has helped revolutionize how people share information. In the most anticipated technology offering since Facebook Inc., San Francisco-based Twitter made public its S-1 prospectus yesterday and said it’s seeking to raise $1 billion… ‘Whether it’s worth $12 billion or not is really going to come down to how they can embrace this real-time news and information vision, how they can extend it to other revenue lines and how they can grow around the world,’ Brian Blau, a… technology analyst at Gartner Inc., said…”

October 2 – Bloomberg (Hui-yong Yu): “The U.S. office market showed little improvement in the third quarter as slow employment growth restrained gains in rents and occupancies, research firm Reis Inc. said… Tenants paid an average of $23.32 per square foot after landlord discounts, up 2.3% from a year earlier and 0.3% from the second quarter… It was the third consecutive quarter of slowing rent increases, Reis said. Office vacancies slipped to 16.9%, a four-year low, from 17% in the second quarter. ‘While this is technically an improvement versus last quarter, it is nonetheless a weak result,’ with rent increases not big enough to be meaningful, Ryan Severino, senior economist at Reis, said… ‘With the labor market’s ongoing struggles to create office-using jobs, demand for space remains muted.’ Most of this year’s employment growth has been in the service industry, at workplaces such as hotels and restaurants rather than offices, Reis said.”

Global Bubble Watch:

October 2 – Financial Times (Robin Harding): “The global economy is experiencing ‘transitions on an epic scale’, the International Monetary Fund managing director said…, warning that turbulence in emerging markets could knock 0.5 to 1 percentage point off their growth. Christine Lagarde’s remarks show the damage done to emerging markets by a recent round of ‘taper talk’, over the possibility of the US Federal Reserve slowing the pace of its asset purchases and their vulnerability to future changes in the pattern of global capital flows. ‘The immediate priority is to ride out the turbulence as smoothly as possible,’ said Ms Lagarde. ‘Currencies should be allowed to depreciate. Liquidity provision can help deal with dysfunctional market behaviour. Looser monetary policy can also help.’ But she warned that countries with inflationary pressures – such as Brazil, India, Indonesia and Russia – have less scope to use monetary policy and that high debt and deficits mean many developing countries have little space for fiscal stimulus either.”

October 1 – Financial Times (Sam Jones and Arash Massoudi): “Hedge funds’ bets on falling share prices have dropped to their lowest level in years as traders predict an extended bull run for equities over the coming months. According to data from Markit, the overall value of short positions on European shares has dropped to $133bn, the lowest level since the data provider began monitoring in 2006. In the US too, short positions are touching record lows. Just 2.4% of S&P 500 shares are on loan to short sellers…”

EM Bubble Watch:

October 3 – Bloomberg (Blake Schmidt and David Biller): “Brazil’s struggle to persuade privately run banks to finance $240 billion of infrastructure projects is fueling concern the nation’s indebtedness will swell as state lenders boost outlays to get the jobs done. The Treasury said Sept. 25 that it may transfer sovereign debt to state development bank BNDES to boost its ability to lend for infrastructure. With non-state lenders reluctant to fund the projects, BNDES said it will finance as much as 70% of the first phase of road, port and rail improvements at 7%, below the benchmark interest rate of 9%... ‘Gross debt has reached the limit at which it is becoming uncomfortable,’ said Marcilio Marques Moreira, who was finance minister from 1991 to 1992… ‘The government hasn’t given the due attention to this problem, and is more interested in the electoral outlook than even a minimum dose of austerity.’”

October 1 – Bloomberg (Ash Kumar and Christopher Condon): “BlackRock Inc., the world’s largest money manager, received the biggest month of deposits to its emerging-markets exchange-traded fund this year as continued Federal Reserve stimulus stoked investor demand. The iShares MSCI Emerging Markets ETF attracted $4.45 billion last month, the most since December, and brought its deposits to $4.62 billion in the third quarter…”

India Bubble Watch:

October 4 – Bloomberg (Unni Krishnan): “HSBC Holdings Plc and Markit Economics release purchasing managers’ index for Indian services in September. Index falls to 44.6 from 47.6 in August… Gauge at the lowest in more than four years, HSBC says…”

Japan Bubble Watch:

October 1 – Bloomberg (Chikako Mogi, Keiko Ujikane and Toru Fujioka): “Japanese Prime Minister Shinzo Abe’s reflation campaign shifted to structural domestic reforms after he unveiled a stimulus package offering a short-term cushion for the first sales-tax rise since 1997. Abe’s administration is honing legislation for its ‘growth strategy’ for the year’s final parliamentary session, an initiative companies will scrutinize for fresh reasons to invest in a domestic market burdened by a shrinking and aging population. For now, they get a slew of tax breaks unveiled with yesterday’s 5 trillion yen ($51bn) program… ‘What is needed is for the government to provide a long- term vision -- 10 years from now for example,’ said Nobuyasu Atago, a senior official at the Japan Center for Economic Research… ‘Unless the potential growth rate is raised, there is no guarantee that companies will really raise wages and boost capital investment just because of tax incentives.’”

October 4 – Bloomberg (Toru Fujioka): “The Bank of Japan refrained from adding to unprecedented monetary stimulus after business confidence surged and Prime Minister Shinzo Abe decided the economy was strong enough to weather a sales-tax increase. Governor Haruhiko Kuroda’s board retained a goal of expanding the monetary base by 60 trillion to 70 trillion yen ($720bn) a year, the central bank said…”

Latin America Watch:

October 1 – Bloomberg (Peter Millard): “OGX Petroleo & Gas Participacoes SA will miss a $45 million payment on dollar bonds today, moving Eike Batista’s oil and natural gas producer to the brink of the biggest corporate default in Latin America… ‘The company is in a process of revising its capital structure and, at the same time, its business plan,’ Rio de Janeiro-based OGX said… ‘In light of this fact, the company decided not to pay’ the coupon on $1.06 billion of dollar notes due 2022, it wrote. Batista fired his chief financial officer and hired his fifth restructuring adviser in the past two weeks. The oil producer’s $2.56 billion of debt due 2018 has tumbled 5 cents to 15.6 cents since Sept. 20…”

October 2 – Bloomberg (Boris Korby and Rodrigo Orihuela): “Eighteen months ago, bond investors staked $1.1 billion to Eike Batista’s goal of transforming his startup oil company into a profitable linchpin for his commodity empire. After just two interest payments, creditors are bracing themselves for Latin America’s biggest corporate default. OGX Petroleo & Gas Participacoes SA missed a $45 million coupon payment yesterday on its 8.375% notes due in 2022, prompting Standard & Poor’s to assign its default rating to the company and the bonds… Batista’s demand that creditors… provide as much as $500 million more in cash along with debt relief to keep OGX afloat is a sticking point that diminishes the likelihood the company will sign an agreement to avoid bankruptcy, Espirito Santo Investment Bank said. OGX needs the money so it can operate long enough to start pumping oil from its last viable field after previous wells fell short of output targets.”

September 30 – Bloomberg (Katia Porzecanski and Ben Bain): “Mexico’s homebuilders, the biggest losers in the $698 billion market for developing-nation corporate debt, are falling even more as speculation fades that they can recover from a combined $1.3 billion of defaults. Corp. Geo SAB’s debt due in 2022 has lost 62% since the end of June to 13 cents on the dollar as of Sept. 26, the most among 949 emerging-market bonds tracked by Bloomberg. The three-biggest homebuilders by revenue last year, which also include Desarrolladora Homex SAB and Urbi Desarrollos Urbanos SAB, accounted for six of the 10 biggest losses this quarter.”

Asian Bubble Watch:

October 1 – Bloomberg (Karl Lester M. Yap): “A slowdown in China and India is reverberating across the region with the Asian Development Bank forecasting expansion at a four-year low this year, putting pressure on policy makers to bolster their economies. Developing Asia, which excludes Japan, will probably expand 6% in 2013 and 6.2% next year… Growth this year will match the pace in 2009, according to the ADB. In July, it had forecast expansion of 6.3% this year and 6.4% in 2014.”

October 2 – Bloomberg (Tara Patel and Caroline Connan): “Singapore businessman Adrian Lee Chye Cheng, 33, is the super-yacht industry’s dream come true. Young, wealthy and passionate about boats, he embodies an emerging market that shipyards and brokers see looming large on the horizon. ‘The new market is in Asia,’ Lee said…on one of the panoramic decks of the Ocean Paradise, a 55-meter luxury yacht he and his brother Lionel acquired two months ago. Wealth among Asia-Pacific millionaires may top North America’s as soon as next year, according to a report published last month by Cap Gemini SA and Royal Bank of Canada. Asians with at least $1 million in investable assets are set to see their riches climb to $15.9 trillion by 2015 from $12 trillion last year… North American high net-worth individuals held $12.7 trillion in 2012. With rising riches has come an appetite for expensive toys. Take Lee’s yacht. With a charter price of $300,000 a week, the Ocean Paradise was custom-built by Benetti for 34 million euros ($46 million).”

Europe Crisis Watch:

September 30 – Reuters (Andrés González): “Spain’s debt will rise to almost 100% of national output by the end of next year, the highest level in more than a century, according to the 2014 budget proposal handed to Parliament… The ratio of debt-to-gross domestic product (GDP) will rise to 99.8% by the end of 2014 from 94.2% at the end of 2013. Debt stood at 92.2% of GDP at end-June. Spain's public debt has almost tripled since a decade-long property bubble burst in 2008…”

October 1 – Bloomberg (Ben Sills and Esteban Duarte): “Spain’s pension system will generate 36.5 billion euros ($50 billion) of losses by the end of 2016, adding to the stress on public finances, Labor Minister Fatima Banez said… The social-security system has lost 3.2 million contributors since 2007 and has been running an annual deficit since 2010… The system’s reserve funds are set to cover 23.6 billion euros of losses for 2012 and 2013, she said.”

September 30 – Bloomberg (Joao Lima): “Portugal’s debt will increase to 127.8% of gross domestic product this year from 124.1% in 2012, more than the country’s statistics institute reported six months ago. The National Statistics Institute said in a March 28 report that debt was forecast to be 122.4% of GDP in 2013…”

October 4 – Bloomberg (Anabela Reis): “Portugal’s plan to leave its bailout program and return fully to international markets risks being hindered by some investors making their own exit. Foreign money managers were net sellers in June and July after buying in May, increasing the proportion of securities owned by residents. Domestic banks held a record 33 billion euros ($45bn) of the nation’s government debt on Aug. 31…”

September 30 – Bloomberg (Joao Lima): “The Social Democratic Party of Portuguese Prime Minister Pedro Passos Coelho won fewer town halls in municipal elections yesterday than in the previous, 2009, vote. The Socialists, the biggest opposition party in parliament, won 36% of the vote and 132 town halls with 2,971 of the country’s 3,092 voting districts reporting… The ruling Social Democrats won 17% of the vote and 77 mayoralties when running alone… ‘The result was not what we wanted,’ Coelho said… ‘The Social Democratic Party had a national electoral defeat.’”

Germany Watch:

October 1 – Bloomberg (Jeff Black and Stefan Riecher): “German unemployment unexpectedly increased for a second month in September, in a sign of an uneven recovery in Europe’s largest economy… The adjusted jobless rate rose to 6.9% from 6.8%. While the German economy is growing, it’s not matching the pace of last quarter when it expanded 0.7%, the Bundesbank said…”

Italy Watch:

October 2 – Bloomberg (Alessandra Migliaccio, Lorenzo Totaro and Chiara Vassari): “Italian Prime Minister Enrico Letta won a confidence vote today after Silvio Berlusconi backtracked on a pledge to bring down the five-month old government as his party showed signs of deserting him.”