Saturday, November 8, 2014

Weekly Commentary, January 27, 2012: Policy Deserving of a Rant

It has been labeled an intellectual exercise and ridiculed as “intelligentsia.” I’ll stick defiantly to the view that it remains one of the most important issues of our time: Are the Treasury and government-related debt markets part of a historic Credit Bubble and global financial mania?

There are reasons why Jean-Claude Trichet over the years repeatedly stated “the ECB would never pre-commit” on interest-rate policy. The Federal Reserve this week moved further to the opposite polar extreme, essentially pre-committing to near-zero rates through late-2014. The ECB has historically believed that market speculation based upon future policy expectations works to foment market excesses, imbalances and attendant fragilities. In contrast, the activist Federal Reserve believes that it has a fundamental obligation to intervene and manipulate to achieve market outcomes the committee believes will spur growth.

Unprecedented operations back in late-2008 took the Fed’s balance sheet from about $900bn to $2.2 TN. We were assured that the Fed had an “exit strategy.” I’ve always presumed “no exit,” and here we are today with Fed holdings at $2.9 TN. The economy is expanding, financial markets are strong and consumer price inflation is rather undeflationary – yet Dr. Bernanke is again signaling he is prepared for additional monetization.

The Fed has for years operated with the premise that aggressive “Keynesian” stimulus has been necessary to stabilize a system hamstrung by post-Bubble headwinds. I’ve for as many years argued that the problem was being dangerously misdiagnosed. From my perspective, it has been much more a case of ongoing misguided “inflationism” sustaining history’s greatest Credit Bubble. And history is unequivocal: inflationism has an end-game problem. Again, it is analysis easily dismissed, although I am nonetheless convinced it will go a long way in determining what kind of world we and our children have to look forward to.

While I was chronicling the emergence of the mortgage finance Bubble back in 2002, Fed Governor Bernanke was crafting the Fed’s case for novel reflationary policymaking. Mortgage Credit was already expanding at double-digit rates when Dr. Bernanke introduced his intellectual basis for the government printing press and helicopter money. The subsequent decade, replete with a historic Credit boom and bust, has seen radical monetary policy doctrine become the mainstream. But didn’t the policy experiment fail miserably?

Accommodating gross mortgage Credit excesses in the name of system reflation is one of the greatest blunders ever committed in monetary management. The Fed has not been held accountable – either in terms of a seriously flawed analytical framework or the associated policy mistakes. Instead, the Bernanke Fed has become only more radical and domineering in the markets. Public confidence and trust in the Federal Reserve have suffered mightily, yet this has thus far had no impact. Importantly, the power players in political circles and the securities markets have benefited tremendously, ensuring ongoing support for the Fed’s controversial reflationary policy course. The financial mania has reached the point where the completely unreasonable is accepted as perfectly reasonable.

The housing Bubble was obvious, or at least this has become the commonly held view. As someone who chronicled the Bubble on a weekly basis for a number of years, I have a clearer view of how things went down. There was actually tremendous hostility for Bubble analysis. I was “lunatic fringe.” The analysis that the GSEs, mortgage insurers and sophisticated Wall Street debt structures were part of a historic episode of “Ponzi Finance” did not resonate. And the more conspicuous the mortgage finance Bubble became, the more elaborate the arguments against the Bubble thesis.

Chairman Greenspan became fond of arguing that housing markets were local and, hence, the notion of a national housing Bubble was misguided. I often wondered if the king of all economic data ever took a glance at the Fed’s Z.1 “flow of funds” report. The Greenspan/Bernanke Fed fashioned “white papers” and such explaining how it was impossible to recognize a Bubble until after it burst. To them, the proper and prudent policy course was to avoid the risk of intruding on prosperity and functioning markets, being ready instead to implement a “mopping up” strategy in the event such measures were ever required. It was the ridiculous bordering on negligence.

When it comes to Credit and Bubble analysis, the Fed has proven itself incompetent. After the Fed-induced steep yield curve from 1991 to early-1994 fomented a destabilizing speculative Bubble, they should have focused keenly on how their policy measures were inciting leveraging and speculation. After the 1995 Mexican bailout further emboldened speculative excess and fomented the catastrophic Bubble throughout SE Asia (and beyond), policymakers should have been fixated on the risks associated with destabilizing “hot money” flows, derivatives and a ballooning global “leveraged speculating community.” After the LTCM fiasco, the danger was conspicuous. It was also conspicuously apparent that the LTCM bailout and the Federal Reserve market backstop were instrumental in inciting the tech Bubble. And the Fed’s response to that burst Bubble was integral to the scope of the mortgage finance Bubble. As obvious as this chain of cause and effect has been, the Fed dogmatically refuses to have any part of such analysis.

I have seen overwhelming support for the “global government finance Bubble” thesis. Fiscal and monetary policy has been out of control for going on four years now. And with parallels to the mortgage finance Bubble, the more prolonged the Bubble period the more dismissive the crowd becomes to the notion that they might be participants to a manic Bubble. That’s ok. As an analyst of speculative Bubbles, I am well aware of the nuances. Objectively, it is possible to recognize Bubble dynamics in real time. Realistically, however, it is the nature of things that this analysis will be dismissed and disparaged. As I’ve written in the past, “Bubbles tend to go to unimaginable extremes - and then double!” I am comfortable with the analysis that we are in the late stage of a historic global financial mania.

Let’s talk a little Bubble analysis. First of all, most that use the term “Bubble” are implying an imminent bursting. I subscribe to a different analytical framework. The baseline assumption, especially in today’s extraordinary global financial and policy backdrop, is that Bubbles will enjoy momentum and longevity. Anchor-less global finance and incredible policy activism will tend to support ongoing (compounding) excess. My thesis further holds that the global government finance Bubble is the “granddaddy” – the crescendo Bubble that will conclude this Credit cycle. Students of previous monetary experiments and manias appreciate that authorities will commonly resort to increasingly desperate measures in order to bolster waning confidence. This week I recalled reading accounts of how John Law devalued hard money coinage that was competing with his “Mississippi Bubble” paper monetary scheme in a last chance gambit to force players to stick with his faltering Credit instruments.

Most Bubble analysis focuses on valuation: “A Bubble is created when prices move beyond that which is supported by underlying fundamentals.” Again, my framework is altogether different: A Credit Bubble is about a mis-pricing (under-pricing) of finance. These mis-pricing supports the over-issuance of debt instruments. And, importantly, Credit Inflation is self-reinforcing, in that the associated increase in purchasing power bolsters the fundamental factors central to the bullish premise. Credit excess begets Credit excess. Tech stocks always looked cheap compared to earnings growth rates, and the greater the mania in tech-related equity and debt securities the greater the capacity for industry expansion to justify ever increasing industry price-to-earnings ratios and stock prices.

Throughout the mortgage finance Bubble, the expansion of mortgage debt led to inflating home prices. And the greater the number of housing transactions the greater the growth in household equity extraction and consumption. GDP and corporate profits surged, ensuring higher stock prices and heightened demand for houses and mortgage Credit. For the most part, home prices at the time didn’t look dangerously extended compared to boom-time fundamentals (i.e. surging household net worth, income growth, stock prices, GDP prospects, etc.). And the meager risk premiums on mortgage-related finance seemed to be justified by minimal Credit losses, robust housing price trends and prospects for ongoing prosperity. Home prices only go up.

The bottom line was, however, that multi-Trillions of finance were mis-priced based on faulty market perceptions. In the end, faith that Washington (the Fed, Treasury, Congress, Fannie, Freddie, Ginnie, the FHLB, FHA, etc.) would never tolerate a housing bust proved instrumental in the market’s mis-pricing of the debt underlying the historic Bubble. Government intervention, market misperceptions, mis-priced finance, self-reinforcing over-issuance and seductively inflated fundamentals are Credit Bubble hallmarks.

At this point, only a lunatic would take issue with the market premise that the Fed and global central bankers would never tolerate a problem in the Treasury or agency debt market. In a replay of mortgage finance Bubble dynamics – with only greater ramifications and inevitable consequences - the perception of ongoing government market intervention is allowing the self-reinforcing issuance of Trillions of debt at the most meager of risk premiums. Systemic risk rises exponentially, as the price of government finance is pushed to the floor.

It has reached the point where the Fed (along with fellow global central banks) has completely abrogated the market pricing mechanism - and with it the capacity for the self-regulation of debt issuance through higher borrowing costs. Why on earth would we expect Washington politicians to take deficit reduction seriously? And, to be sure, the massive expansion of newly created purchasing power is bolstering fundamentals, including consumption, economic output, corporate profits, stock prices, and household net worth. Strong markets, in particular, underpin the view that future growth will provide a backdrop conducive to Washington getting its fiscal house in order. There are many facets to the Bubble.

The Fed committed yet another major error this week. The worsening European crisis last year created a major artificial bid to perceived “safe haven” Treasury (and related) securities. This amounted to a major loosening of financial conditions for the commanding sector of U.S. Credit expansion. The Fed should have recognized how this dynamic had created heightened Bubble risk throughout our government debt markets (Treasury, agency, MBS, muni, etc.). Instead, the Fed has administered gas to the fire – along with pronouncing that it’s content to stand gas can in hand for some years to come. The Bernanke Fed has created a backdrop further supportive of speculative leveraging – and global risk market speculation more generally. Worse yet, our central bank is determined to punish savers into submission.

Responding to the Fed announcement, Treasury, agency debt and fixed income prices rose; U.S. stock prices rose; gold, energy and commodities prices rose; and emerging debt, equity and currency prices rose. The dollar was one of the few losers. Forgive me for believing the Fed secretly fears a stronger dollar. And forgive me further for contemplating a scenario where the Fed’s incessant market circumventions backfire. Let’s contemplate LTRO 1&2-induced bullish market sentiment meeting disappointment at the hand of faltering European economic performance – and European debt markets finding themselves, there we go again, re-pricing risk higher. At some point, might global investors perhaps find a highly governed U.S. Credit market more appealing than dealing with the whims of ungovernable debt markets in Europe and elsewhere? And forgive me one last time for thinking that the invincible hand of the Federal Reserve – along with unfathomable global central bank liquidity creation – further bolsters boom and bust dynamics and heightens the risk of further rounds of global de-leveraging and de-risking. If it looks like a Bubble, smells like a Bubble…

For the Week:

The S&P500 was little changed (up 4.7% y-t-d), while the Dow dipped 0.5% (up 3.6%). The broader market remained quite strong. The S&P 400 Mid-Caps advanced 1.2% (up 7.2%), and the small cap Russell 2000 gained 1.8% (up 7.8%). The Morgan Stanley Cyclicals added 0.8% (up 12.0%), and the Transports gained 1.2% (up 6.5%). The Morgan Stanley Consumer index declined 0.4% (up 2.3%), while the Utilities were little changed (down 3.9%). The Banks gave back 1.4% (up 8.9%), and the Broker/Dealers fell 3.0% (up 11%). The Nasdaq100 was up 1.0% (up 8.1%), and the Morgan Stanley High Tech index added 0.3% (up 9.2%). The Semiconductors slipped 0.2% (up 13.4%). The InteractiveWeek Internet index increased 0.8% (up 7.2%). The Biotechs jumped 5.4% (up 20%). With bullion surging $72, the HUI gold index jumped 9.4% (up 10%).

One-month Treasury bill rates ended the week at 4 bps and three-month bills closed at 5 bps. Two-year government yields declined 3 bps to 0.21%. Five-year T-note yields ended the week down 14 bps to 0.75%. Ten-year yields dropped 13 bps to 1.89%. Long bond yields ended down 4 bps to 3.06%. Benchmark Fannie MBS yields sank 21 bps to 2.61%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 8 bps to 72 bps. The implied yield on December 2012 eurodollar futures declined 5.5 bps to 0.525%. The two-year dollar swap spread declined about 3 to 32.45 bps. The 10-year dollar swap spread declined one to about 11.75 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 6 to a 5-month low 100bps. An index of junk bond risk fell 33 bps to a 5-month low 560 bps.

Debt issuance slowed somewhat. Investment grade issuers included Berkshire Hathaway $1.7bn, Oneok $700 million, Charles Schwab $400 million, South Carolina E&G $250 million, and University of Chicago $190 million.

Junk bond funds enjoyed inflows of $1.9bn (from Lipper). Junk issuers included SLM Corp $1.5bn, Realogy $925 million, JBS $700 million, Clearwire Communications $300 million, Prestige Brands $250 million, Summit Materials $250 million, and Westmoreland Coal $125 million.

I saw no convertible issuance this week.

International dollar bond issuance included Bank of Montreal $2.0bn, Peru $1.5bn, Lithuania $1.5bn, Petrobakken Energy $900 million, Odebrecht Finance $800 million, Grupo Aval $600 million, and Welltec $325 million.

Ten-year Portuguese yields jumped 76 bps to 14.65% (up 187bps). Italian 10-yr yields ended the week down 35 bps to 5.88% (down 115bps y-t-d). Spain's 10-year yields sank 52 bps to 4.93% (down 11bps). German bund yields declined 7 bps to 1.86% (up 3bps), and French yields declined 6 bps to 3.03% (down 11 bps). The French to German 10-year bond spread widened a basis point to 117bps. Greek two-year yields ended the week down 690 bps to 158.16% (up 3,262bps). Greek 10-year yields rose 13 bps to 30.99% (down 33bps). U.K. 10-year gilt yields fell 5 bps to 2.07% (up 9bps). Irish yields fell 16 bps to 7.16% (down 110bps).

The German DAX equities index added 1.7% (up 10.4% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 0.965% (down 2bps). Japan's Nikkei gained 0.9% (up 4.6%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index gained 1.0% (up 10.8%), while Mexico's Bolsa slipped 0.5% (up 0.3%). South Korea's Kospi index rose 0.8% (up 7.6%). India’s Sensex equities index jumped 3.0% (up 11.5%). China’s Shanghai Exchange was closed for holiday (up 5.4%). Brazil’s benchmark dollar bond yields declined 2 bps to 3.28%, and Mexico's dollar bond yields fell 12 bps to 3.52%.

Freddie Mac 30-year fixed mortgage rates jumped 10 bps to 3.98% (down 82bps y-o-y). Fifteen-year fixed rates rose 7 bps to 3.24% (down 85bps y-o-y). One-year ARMs were unchanged at 2.74% (down 52bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 4 bps to 4.46% (down 105bps y-o-y).

Federal Reserve Credit increased $1.5bn to $2.905 TN. Fed Credit was up $486bn from a year ago, or 20.1%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/25) jumped $14.4bn to $3.406 TN (19-wk decline of $69bn). "Custody holdings" were up $55bn year-over-year, or 1.6%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $939bn y-o-y, or 10.2% to $10.186 TN. Over two years, reserves were $2.371 TN higher, for 30% growth.

M2 (narrow) "money" supply rose $8.0bn to a record $9.763 TN. "Narrow money" expanded 10.2% from a year ago. For the week, Currency increased $3.0bn. Demand and Checkable Deposits fell $12.6bn, while Savings Deposits jumped $29.3bn. Small Denominated Deposits declined $2.4bn. Retail Money Funds fell $9.2bn.

Total Money Fund assets dropped $14.7bn to $2.679 TN. Money Fund assets were down $79bn over the past year, or 2.9%.

Total Commercial Paper outstanding increased $3.4bn to $971bn. CP was down $17bn from one year ago, or down 1.7%.

Global Credit Watch:

January 27 – Bloomberg (Abigail Moses): “Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default. Any agreement between the Greek government and the… Institute of International Finance on debt writedowns will only bind 50% of investors in the 206 billion euros ($270bn) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts.”

January 25 – Bloomberg (Lucy Meakin): “Portugal’s five-year notes slid, pushing the yield to a record-high 18.78%.”

January 25 – Bloomberg (Andrew Davis and Chiara Vasarri): “Italian Prime Minister Mario Monti said new European Union rules forcing governments with excessive debt to reduce it to within an acceptable level have ‘elements of flexibility’ that may make the regime less of a burden. The rule forces countries with debt over the EU limit of 60% of gross domestic product to cut the excess by 1/20th a year. The new measures will be phased in over three years, meaning Italian debt won’t be gauged by the 1/20th standard until approximately 2015.”

January 25 – Bloomberg (Charles Penty): “Spanish Prime Minister Mariano Rajoy’s proposal to force banks to recognize further losses from real estate holdings may backfire by saddling healthy lenders with the bill. ‘The plan is for a massive effort in provisioning of real estate and consolidation, and that has to be paid for,’ said Daragh Quinn… analyst at Nomura International. By refusing to use public funds to help purge a system burdened with 176 billion euros ($228bn) of what the Bank of Spain calls ‘troubled’ assets linked to real estate, Rajoy may not do the job properly or he may hurt solvent banks by leaving them with the costs, said David Moss, director of European equities at F&C Investments…”

January 24 – Bloomberg (Emma Ross-Thomas and Jones Hayden): “Spain must meet its 2012 deficit goal, European Union Economic and Monetary Affairs Commissioner Olli Rehn said, rejecting calls from Budget Minister Cristobal Montoro to ease the target as the economy shrinks. Montoro urged the EU… to review the 4.4% goal, which was set by the previous government amid forecasts of economic growth. The gap amounted to 8% of gross domestic product last year, more than the last administration’s 6% target, as the economy slipped back toward a recession.”

January 24 – Bloomberg (Henrique Almeida): “Portugal’s government owes 1.3 billion euros ($1.7bn) to construction companies that are struggling to survive the country’s economic slump, according to the head of the country’s biggest building industry group. The delayed payments are adding to difficulties in obtaining bank financing and stifling recovery in an industry where about 200 workers lose their jobs each day…”

January 25 – Bloomberg (Jeff Black and Gabi Thesing): “The European Central Bank remains firmly opposed to any restructuring of its Greek bond holdings as the debt was acquired for monetary policy purposes, according to two people familiar with the Governing Council’s stance. While the ECB faces pressure to join private-sector investors in taking losses on Greek debt, the central bank sees this as potentially damaging to confidence in the institution… International Monetary Fund Managing Director Christine Lagarde said… that European governments and other public holders of Greek debt may have to increase support if private creditors don’t go far enough.”

January 24 – Bloomberg (Adam Ewing): “Europe can’t let efforts to strike a deal with creditors in Greek debt disable the region’s credit default swap market, said Christian Clausen, the president of the European Banking Federation. ‘You have to make sure the documentation is right so it can be a functioning market,’ Clausen said… ‘We need a functioning CDS market, even though some politicians don’t like it, we need it. That is the only way we can hedge risk.’”

January 24 – Bloomberg (Dakin Campbell): “Societe Generale SA and Credit Agricole SA were among French banks to have their credit grades cut by Standard & Poor’s after France was stripped of its top rating earlier this month. Societe Generale, France’s second-largest bank by market value, and Credit Agricole, the third-biggest, had their debt downgraded to A from A+…”

January 24 – Bloomberg (Zeke Faux and Sridhar Natarajan): “Bank bonds are rallying the most in more than two years as the U.S. economy gains strength and the European Central Bank’s emergency loans ease pressure that threatened to overwhelm the global financial system. Bank of America Corp. and Milan-based UniCredit SpA lead average returns of 1.46% this month through Jan. 20, following a gain of 2% in December…”

January 26 – Bloomberg (Joseph Ciolli): “Junk-bond trading volumes are rebounding to the highest level in 11 months as optimism the U.S. economy can weather Europe’s debt crisis kindles investor appetites for riskier assets. The average daily volume of publicly traded speculative- grade bonds rose to $4.92 billion this month, a 74% increase from December…. Sales of new junk bonds are accelerating at the fastest pace since September, and exchange-traded funds focused on the debt are growing at the fastest two-month pace since 2009.”

Global Bubble Watch:

January 27 – Bloomberg (Tim Catts): “Corporate bond sales worldwide have slowed from their record pace in the middle of the month as everyone from the Federal Reserve to the International Monetary Fund cuts forecasts for economic growth. General Electric Co., SABMiller Plc and Bayerische Motoren Werke AG led $287.8 billion of offerings this month, the slowest start to a year since 2008…”

January 27 – Bloomberg (Brian Womack and Douglas MacMillan): “Facebook Inc., the world’s largest social-networking service, is aiming to file for its initial public offering as early as next week… The company is discussing a valuation of $75 billion to $100 billion, said two people…”

Currency Watch:

The dollar index this week fell 1.6% (down 1.7% y-t-d). On the upside, the South African rand increased 2.5%, the Swiss franc 2.4%, the New Zealand dollar 2.3%, the Danish krone 2.3%, the euro 2.2%, the Mexican peso 2.1%, the Australian dollar 1.7%, the Singapore dollar 1.6%, the Canadian dollar 1.1%, the Brazilian real 1.1%, the British pound 1.0%, the South Korean won 1.0%, the Swedish krona 0.6%, the Taiwanese dollar 0.5%, and the Japanese yen 0.4%.

Commodities and Food Watch:

The CRB index rallied 2.5% this week (up 4.0% y-t-d). The Goldman Sachs Commodities Index rose 2.2% (up 3.4%). Spot Gold jumped 4.3% to $1,739 (up 11.2%). Silver surged 6.7% to $33.79 (up 21%). March Crude gained $1.23 to $99.56 (up 0.7%). February Gasoline rallied 5.0% (up 10%), and March Natural Gas recovered 15.2% (down 7.8%). March Copper gained 3.8% (up 13%). March Wheat jumped 6.0% (down 1%), and March Corn rose 4.9% (down 1%).

Japan Watch:

January 25 – Bloomberg (Cheng Herng Shinn): “An exodus of manufacturing jobs from Japan may prolong trade-balance concerns after the nation reported its first annual trade deficit in 31 years. Panasonic… is moving the headquarters of its $57 billion procurement operation to Singapore… Honda… said this month it will build its new NSX ‘supercar’ in Ohio as the company shifts more output to North America.”

January 26 – Bloomberg (Kyoko Shimodoi and Mayumi Otsuma): “Japan’s new bond sales may exceed 50 trillion yen ($644bn) in the year starting April 2015 should policy makers fail to implement a sales-tax increase, the Finance Ministry estimates.”

India Watch:

January 24 – Bloomberg (Kartik Goyal): “India’s economic growth is weakening more than anticipated and inflation remains ‘high’ as the rupee’s fall threatens to stoke price pressures, the central bank said… ‘The growth slowdown, high inflation and currency pressures, complicate policy choices,’ the Reserve Bank of India said… The ‘critical factors’ ahead will be ‘core inflation and exchange rate pass-through,’ it said, adding that keeping the ‘liquidity deficit’ in acceptable limits is also a priority.”

Asian Bubble Watch:

January 26 – Bloomberg (Seonjin Cha and Eunkyung Seo): “South Korea’s economy grew the least in two years in the fourth quarter as exports sank… Gross domestic product expanded 0.4% from the third quarter, when it gained 0.8%.”

January 25 – Bloomberg (Shamim Adam): “Singapore’s inflation rate exceeded 5% for a seventh month, and policy makers said prices will remain “elevated.”

Latin America Watch:

January 25 – Bloomberg (Karen Eeuwens): “Domestic flight demand in Brazil grew 16% in 2011 and 7% in December, compared with a year earlier, according to Brazil’s civil aviation authority.”

January 26 – Bloomberg (Camila Russo): “Argentines are borrowing record amounts to buy cars as they park their savings in Volkswagens, Chevrolets and Fords to protect against inflation that economists say is running at about 25 percent a year. Secured loans… soared 61% last year to 16.6 billion pesos ($3.8bn), the biggest jump and the highest total in at least a decade… Vehicle sales in Argentina jumped 30% last year to a record…”

Unbalanced Global Economy Watch:

January 24 – Bloomberg (Sandrine Rastello): “The International Monetary Fund cut its forecast for the global economy as Europe slips into a recession and growth cools in China and India. The world economy will expand 3.3% this year and 3.9% in 2013, compared with September forecasts of 4% and 4.5%.”

January 24 – Bloomberg (Agnes Lovasz): “The International Monetary Fund cut its growth forecast for central and eastern Europe, which as other regions in the world is threatened by ‘strains in the euro area,’… Central and eastern European economies will expand a combined 1.1% this year, down 1.6 percentage points from a September forecast, the IMF predicted… The revision mirrors a 1.6 percentage-point cut in the estimate for the euro region, which the IMF forecasts will contract 0.5%.”

January 25 – Bloomberg (Scott Hamilton and Jennifer Ryan): “The U.K. economy shrank more than economists forecast in the fourth quarter…, leaving Britain on the brink of another recession. Gross domestic product fell 0.2% from the third quarter, when it increased 0.6%.”

January 26 – Bloomberg (Chiara Vasarri): “Italian consumer confidence held at a 16-year low in January as Europe’s debt crisis forced austerity measures that may help push the economy into a recession this year.”

Central Banking Watch:

January 24 – Bloomberg (Carla Simoes and Andre Soliani): “Brazil will make room for a more ‘flexible’ monetary policy as the government seeks to ensure economic growth of at least 4% this year, Finance Minister Guido Mantega said.”

January 26 – Bloomberg (Matthew Bristow and Raymond Colitt): “Brazil’s central bank said there is a ‘high’ chance its benchmark rate will drop below 10%, signaling it remains focused on spurring economic growth even as record-low unemployment pressures consumer prices. Yields on interest rate futures plunged.”

January 25 – Bloomberg (Suttinee Yuvejwattana and Yumi Teso): “The Bank of Thailand cut interest rates for the second consecutive meeting… The central bank reduced its one-day bond repurchase rate by a quarter of a percentage point to 3%.”

January 24 – Bloomberg (Kartik Goyal): “India’s central bank unexpectedly cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signaled future interest-rate cuts, joining BRIC nations in shielding growth. Stocks rose. The Reserve Bank of India reduced the cash reserve ratio to 5.5% from 6%.”

U.S. Bubble Economy Watch:

January 24 – Bloomberg (Timothy R. Homan): “Unemployment dropped in 37 U.S. states in December, pointing to broad-based improvement in the job market as the economy picks up… Payrolls increased in 25 states, led by Texas.”

Fiscal Watch:

January 26 – Bloomberg (Kathleen M. Howley): “In Honolulu… there’s a four-bedroom home priced at $785,000 that has views of the sun setting over the Pacific Ocean. The beaches of Waikiki are 15 minutes away. Starting this month, the property is available to buyers with a subprime credit score, limited cash reserves and a 3.5% down payment using a loan backed by the Federal Housing Administration. Without the agency, a buyer would need a 20% down payment and an unblemished financial history for a jumbo mortgage… The agency increased the size of mortgages it’s willing to insure to as high as $793,750 in Hawaii and $729,750 in the costly real estate markets of states including California, Florida, and Virginia.”

Muni Watch:

January 25 – Bond Buyer (Yvette Shields): “The combined burden of unfunded local and state pension liabilities on Chicago taxpayers rose to $103 billion in fiscal 2010 from just $19 billion a decade ago… The local and state toll of unfunded obligations on Chicagoans rose to $14,897 per capita in 2010 from $10,037 in 2008 and marked a dramatic jump from just $2,442 in fiscal 2000. Two of Chicago’s four funds and Cook County’s fund remain on course to run out of sufficient assets to cover obligations in the coming years. The total unfunded obligations of 10 Chicago-area public pension funds combined with the state rose to $103 billion based on fiscal 2010 actuarial figures, according to the Civic Federation of Chicago.”

January 26 – Bloomberg (Brian Chappatta): “U.S. state tax collections rose 6.1% from July to September, the seventh straight quarter of growth, and now exceed pre-recession levels, the Nelson A. Rockefeller Institute of Government said… Preliminary figures from 44 states also show revenue growth of 5.2% in October and November compared with the year-earlier period...”