Saturday, November 8, 2014

Weekly Commentary, March 16, 2012: Flow of Funds and More

The U.S. system enjoyed respectable Credit growth during 2011's fourth quarter. Total Credit Market Debt Outstanding (non-financial and financial) increased $306bn during the quarter to a record $54.134 TN. As a percentage of GDP, total marketable debt declined about 100bps to 353%. This is down from 2009 peak levels of about 375%. It is worth noting, however, that the 300% barrier wasn’t surpassed until 2003. The year 1998 began with total debt already highly elevated at nearly 250% of GDP.

For the quarter, Total Non-Financial Debt expanded at a seasonally-adjusted and annualized rate (SAAR) of $1.867 TN, the strongest debt expansion since Q4 2008 (SAAR $2.123 TN). Debt growth during the quarter of 4.9% compares to Q3’s 4.4%, Q2’s 3.0% and Q1’s 2.3%. Notably, Consumer Credit (non-mortgage) expanded at a 6.9% rate, up sharply from Q3’s 1.4% to the strongest pace in at least five years. For 2011, Consumer Credit expanded 3.5%, the first growth since 2008’s 1.5%.

Corporate (non-financial) debt expanded at a 6.0% pace during Q4, up from Q3’s 4.7%. For the year, Corporate borrowings expanded 6.0%, the strongest growth since 2007’s 13.5%. For comparison, Corporate debt expanded 4.0% in 2010, declined 1.8% in 2009, and increased 4.9% in 2008. In nominal dollars, Corporate borrowings increased $444.9bn in 2011 to a record $7.800 TN, up meaningfully from 2010’s growth of $285bn.

Household mortgage debt continues its steady contraction. For Q4, Household Mortgage Debt fell at a 1.5% rate, the smallest pace of decline since Q4 2009. In nominal dollars, Household Mortgage Debt declined SAAR $150bn to $9.841 TN, down from the Q1 2008 peak of $10.615 TN. For all of 2011, mortgage debt contracted $213bn, or 2.1%. I would expect mortgage debt to post a small advance in 2012.

And while ultra-loose financial conditions have spurred (non-mortgage) consumer credit and corporate debt back to robust growth, these sectors alone provide insufficient Credit growth to sustain the U.S. economy. As it has for the past four years, federal debt continues to dominate.

For the quarter, federal government borrowings increased SAAR $1.321 TN, a 13.1% pace, to a record $10.454 TN. Federal borrowings accounted for 71% of total Non-Financial Credit growth during the quarter, down from Q3’s 85%. Federal debt increased $1.068 TN during calendar 2011, down from 2010’s $1.580 TN, 2009’s $1.444 TN, and 2008’s $1.239 TN. For the year, federal borrowings accounted for 78% of Non-Financial Debt growth, after accounting for more than 100% in both 2009 and 2010.

Total Treasury marketable debt has now doubled in only 14 quarters. Federal government liabilities (that includes non-marketable debt held by various government trust funds) jumped 83% in 14 quarters to $12.282 TN. After beginning 2008 at 47%, federal liabilities have rapidly grown to 80% of GDP (of course, these do not include enormous contingent federal liabilities).

In nominal dollars, federal liabilities increased almost $5.60 TN in only three and one-half years. Over this period, State & Local liabilities increased $900bn, or 32%, to $3.715 TN (24% of GDP). One cannot overstate the impact this unprecedented expansion of public sector Credit has had on national incomes, corporate earnings/cash-flows, state and local finances, GDP and the markets overall (securities and real estate).

National Income increased 4.6% in 2011 to a record $13.428 TN. This growth rate was down slightly from 2010’s 5.7%, but up considerably from 2009’s 3.7% decline and 2008’s 1.7% increase. Total “Compensation of Employees” (Total Comp) increased $103bn during the quarter to a record (annualized) $8.441 TN. The 4.9% annualized growth in Total Comp was the strongest since Q3 2007. Total Q4 Comp was up 4.9% y-o-y ($390bn). For all of 2011, Total Comp increased 4.0%, the strongest gain since 2007’s 5.7%. For comparison, Total Comp increased 2.1% in 2010, declined 3.2% in 2009, and increased 2.7% during 2008.

M2 narrow “money supply” increased 9% last year to a record $9.596 TN. In one of history’s most spectacular monetary expansions, M2 has tripled since the beginning of 1990. Yet the monetary aggregates don’t come close to doing justice. Over the years, I have highlighted the analytical significance of the “moneyness of Credit” and the momentous role played by money-like Credit throughout this historic Credit Bubble. During the mortgage finance Bubble years, the obligations of the government-sponsored enterprises (GSEs) enjoyed implicit federal government backing. The marketplace perceived “moneyness” in GSE debt and mortgage-backed securities – allowing these obligations to be issued in astonishing quantities (especially during periods of market stress). “Moneyness” is integral to Bubbles past and present.

One critical dynamic saved the system from collapse back during the 2008 bursting of the mortgage finance Bubble: federal debt retained the market perception of “moneyness.” Even in the face of a general crisis of confidence, the marketplace was willing to accumulate as much debt as the federal government was willing to sell – and boy were they willing to issue it like never before. As such, our Credit system’s capacity to issue incredible quantities of “money” was not interrupted - for even a day.

For this week’s monetary analysis, I will combine money-like Treasury and agency/GSE obligations. To begin 1990, Treasury ($2.228 TN) and GSE ($1.267 TN) liabilities totaled $3.50 TN. With the banking system impaired in the early-nineties from late-‘80s (“decade of greed”) excess, Washington “money” proved a potent elixir. This money-like debt grew 12.0% in 1990, 10.8% in 1991, 10.6% in 1992, 8.8% in 1993, and 8.6% in 1994. When the resulting late-nineties’ Bubble burst, Washington “money” reemerged as the key source of stabilizing monetary expansion. Treasury/GSE liabilities expanded 8.3% in 2001, 9.6% in 2002 and 9.1% in 2003. Rampant private-sector debt growth then pushed Washington “money” to the sideline for a few years. But with the eruption of mortgage debt issues, Treasury/GSE debt expanded 10.1% in 2007, 16.1% in 2008, 9.5% in 2009, 6.7% in 2010 and 6.1% in 2011.

Importantly, over the years Washington “money” has been instrumental in ensuring uninterrupted system Credit growth. Uninterrupted Credit expansion has proven invaluable for both the economy and markets. I would argue the world would be an altogether different place today had it not been for the “moneyness” of Washington “money” and attendant system resiliency. And, amazingly, since the beginning of the nineties Washington “money” has inflated $14.495 TN, or 415%, to $17.989 TN. Over this period, Washington “money” has grown from 64% of GDP to almost 120%, leaving a swath of historic inflationary effects across U.S. and global economies and markets.

“Core” CPI was up 0.1% in February and was 2.2% higher year-over-year. And I am confident that every reader of this Bulletin appreciates that this narrow measure of inflation is basically irrelevant when it comes to the true inflationary effects unleashed through the historic expansion of Washington “money.” Economic history is replete with warnings of the myriad dangers associated with monetary inflation. Inflation has repeatedly proven corrosive to economic performance and destructive to social stability. Currencies have collapsed, governments have fallen and societies have disintegrated. And while harbingers of these types of consequences are increasingly apparent at home and abroad, very few analysts link such developments to the world’s unprecedented inflation of “money” and Credit.

From what I’ve read, Greg Smith is an upstanding individual. He is accomplished and holds quite impressive credentials – and this week he made a name for himself with his “Why I am Leaving Goldman Sachs” op-ed piece in the New York Times. Mr. Smith was pilloried for breaking the industry taboo by “going public.” Many assume he is chasing fame and financial gain – ready for a lucrative speaking tour and book and movie deals. Yet when I read his piece I sense an earnest but deeply discouraged man. He’s lashing out – like so many millions would do if they had similar access. Goldman Sachs’ culture and, in particular, management are the target of his frustration. I can’t help but to believe Mr. Smith is onto something extremely important - and much beyond Goldman.

Irrespective of current stock market euphoria, I believe global financial markets are broken and dysfunctional. I am not alone in this view. Mr. Smith has issues with Goldman’s “toxic and destructive” culture – I’ll retort that it’s the “culture” of Wall Street/global securities markets that is today noxious and destructive. And, admittedly, I have a difficult time pointing blame at the Blankfeins, Cohns and Dimons of the world. They just happen to sit at the top of the pecking order for a massive “financial services” infrastructure operating in an environment where “money” and monetary management have gone terribly bad. Uncontrolled monetary inflations have always led to greed, corruption, malfeasance, anger and instability. Credit Bubbles always inequitably redistribute wealth - before their inevitable implosions reveal the massive wealth destructions associated with monetary inflations and financial manias. At the end of the day, unsound “money” will have torn lots of things apart.

And I’ll take some poetic license here. Mr. Smith laments “ripping eyeballs out” of “muppet” clients – the decline of “the firm’s moral fiber.” I believe a crucial facet of what’s unfolding is that employees throughout Wall Street, and global finance more generally, are working diligently to extract as much “money” as quickly as possible before the whole thing blows up. It’s as reprehensible as it is perfectly rational in light of today’s monetary and policymaking environment. In a backdrop where politicians spend as much as they want and central bankers “print” as much as they want – where prudence, fairness and reasonableness have been completely abandoned - of course those working amidst this monetary profligacy will feel perfectly compelled to take as much as they can get. Read monetary history.

Regrettably, most no longer think in terms of a long-term career judiciously serving the interests of their client-base. Instead, it’s dog-eat-dog – everyone working first and foremost for their immediate self-enrichment. Isn’t that the way Capitalism is suppose to function? It's just a broken incentive structure – powered by the confluence of ultra-easy “money” slushing about the system today and extraordinary uncertainties darkly clouding the outlook for tomorrow. This ensures a destabilizing short-sighted fixation by Wall Street associates, traders, speculators, investors, business executives and society generally. Greed may or may not be good, but it is certainly an upshot of unsound money.

And, I’ll assume, the closer individuals are to the belly of the beast the more jaded they must become. Mr. Smith’s expertise is in derivatives – “to trade any illiquid, opaque product…” If there is one area where I most fear obfuscation and the deleterious effects of monetary inflation, policy intervention and market degradation, it’s in this creature referred to as the “global derivatives market.” This demonstrated - and at times rather corrupt - monster has nonetheless been nurtured and promoted to the epicenter of contemporary global markets. It’s no coincidence that this realm has remained largely impervious to tighter regulatory oversight – even after 2008.

Mr. Smith protested selling products that were wrong for his clients. Whether it’s a derivative salesman, politician, or central banker, obfuscation has become commonplace at this disorienting phase of uncontrolled monetary inflation. After all, how can sound analysis and serving one’s clients remain the devoted focus when the current monetary backdrop incentivizes something quite different? How does one go about modeling future cash flows and valuing assets when there is every indication that the current monetary backdrop is both unstable and unsustainable?

Indeed, the market backdrop has regressed to little more than a “money” game. Speculative dynamics rule, and those that play (or associate with those that play) the game the best attain unimaginable financial wealth. How can one reasonably do analysis these days when so much depends on the extent to which global central bankers proceed further down the path of unlimited “money” creation? Do you want to bet that the Fed (and ECB, BOE, BOJ, PBOC, etc.) is largely through its crisis-induced money creation operations? Or is the Fed’s balance sheet on its way to $10 TN? These provide two altogether different scenarios to contemplate. Clearly, with central bankers propping up markets with Trillions of liquidity injections, one can toss traditional analysis (and market participant behavior) out the backdoor.

Credit Bubbles and attendant monetary inflations invariably risk a loss of trust – trust in “Wall Street” and the financial system; trust in politicians and the political process; trust in central bankers and monetary management; trust in institutions and “money” more generally. These dynamics are increasingly on full display, here at home and abroad. And it’s not Goldman’s culture and moral fiber that I worry about.

For the Week:

The S&P500 jumped 2.4% (up 11.7% y-t-d), and the Dow rose 2.4% (up 8.3%). The Morgan Stanley Cyclicals surged 3.2% (up 19.1%), and the Transports rallied 3.7% (up 6.6%). The Banks rocketed 8.8% higher (up 26.3%), and the Broker/Dealers surged 5.4% (up 29.1%). The Morgan Stanley Consumer index increased 1.6% (up 4.7%), while the Utilities slipped 0.5% (down 3.5%). The S&P 400 Mid-Caps gained 1.6% (up 13.8%), and the small cap Russell 2000 increased 1.6% (up 12.0%). The Nasdaq100 was up 2.5% (up 19.1%), and the Morgan Stanley High Tech index increased 2.4% (up 19.6%). The Semiconductors rose 3.0% (up 19.5%). The InteractiveWeek Internet index jumped 2.6% (up 14.6%). The Biotechs increased 1.5% (up 22.9%). With bullion down $54, the HUI gold index sank 6.6% (down 4.5%).

One-month Treasury bill rates ended the week at 7 bps and three-month bills closed at 8 bps. Two-year government yields were up 4.5 bps to an eight-month high 0.365%. Five-year T-note yields ended the week 22 bps higher to 1.115%. Ten-year yields jumped 27 bps to 2.30%. Long bond yields surged 23 bps to 3.41%. Benchmark Fannie MBS yields rose 25 bps to 3.13%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 2 bps to 83 bps. The implied yield on December 2012 eurodollar futures increased 1.5 bps to 0.545%. The two-year dollar swap spread was little changed at 25 bps. The 10-year dollar swap spread declined one to 6 bps. Corporate bond spreads were narrower. An index of investment grade bond risk declined 7 to 88.5 bps. An index of junk bond risk fell 33 to 542 bps.

Yet another week of strong debt issuance. Investment grade issuers included JPMorgan $2.0bn, Plains All American Pipeline $1.25bn, Medtronic $1.075bn, Wyndham Wordwide $650 million, Norfolk Southern $600 million, ERAC USA Finance $600 million, Pacifcorp $450 million, Rock-Tenn $400 million, BB&T $300 million and Duke Energy $250 million.

Junk bond funds saw inflows slow to $487 million (from Lipper). Junk issuers included International Lease Finance $1.5bn, CIT Group $1.5bn, Philip Morris $1.25bn, MGM Resorts $1.0bn, Air Lease Corp $1.0bn, Neuberger Berman $800 million, Rite Aid $480 million, Monitronics International $410 million, US Steel $400 million, Host Hotels & Resorts $350 million, Berkley $350 million, Spectrum Brands $300 million, CCM $275 million, DJO Finance $230 million and Aviv Healthcare $100 million.

I saw no convertible debt issuance.

International dollar bond issuers included Bank Nova Scotia $2.75bn, FMG Resources $2.0bn, Nordea Bank $3.75bn, Bank Nederlandse $2.5bn, KFW $2.0bn, Mizuho Corp Bank $1.5bn, Swedbank Hypotek $1.5bn, Itau Unibanco $1.25bn, Vodafone $1.0bn, DBS Bank $750 million, Transportdra de Gas $750 million, Macquarie Bank $700 million, Siam Commercial Bank $600 million, Goodman Funding $500 million, and General Shopping $150 million.

Ten-year Portuguese yields declined 7 bps to 13.27% (up 50bps y-t-d). Spain's 10-year yields jumped 20 bps to 5.18% (up 14bps). Italian 10-yr yields ended the week 3 bps higher at 4.85% (down 218bps). German bund yields jumped 26 bps to 2.05% (up 22bps), and French yields rose 12 bps to 3.01% (down 13bps). The French to German 10-year bond spread narrowed 14 bps to 96 bps. The new Greek 10-year note yield fell 137 bps to 17.78%. U.K. 10-year gilt yields surged 29 bps to 2.44% (up 47bps). Irish yields were down 6 bps to 6.78% (down 148bps).

The German DAX equities index surged 4.0% (up 21.4% y-t-d). Japanese 10-year "JGB" yields rose 6 bps to 1.04% (up 6bps). Japan's Nikkei jumped 2.0% (up 19.8%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index gained 1.5% (up 19.3%), and Mexico's Bolsa increased 1.5% (up 3.2%). South Korea's Kospi index added 0.8% (up 11.4%). India’s Sensex equities index slipped 0.2% (up 13.0%). Notably, China’s Shanghai Exchange declined 1.4% (up 9.3%). Brazil’s benchmark dollar bond yields rose 13 bps to 3.12%.

Freddie Mac 30-year fixed mortgage rates rose 4 bps to 3.92% (down 84bps y-o-y). Fifteen-year fixed rates added 3 bps to 3.16% (down 81bps). One-year ARMs gained 8 bps to 2.79% (down 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 10 bps to 4.57% (down 81bps).

Federal Reserve Credit expanded $6.7bn to $2.872 TN. Fed Credit was up $303bn from a year ago, or 11.8%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 3/13) rose $4.9bn to $3.466 TN (6-wk gain of $56.3bn). "Custody holdings" were up $65bn year-over-year, or 1.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $889bn y-o-y, or 9.5% to $10.267 TN. Over two years, reserves were $2.45 TN higher, for 31% growth.

M2 (narrow) "money" supply increased $15.3bn to a record $9.80 TN. "Narrow money" has expanded 8.9% annualized year-to-date and was up 9.8% from a year ago. For the week, Currency increased $2.2bn. Demand and Checkable Deposits dipped $2.2bn, while Savings Deposits jumped $19.8bn. Small Denominated Deposits declined $3.3bn. Retail Money Funds slipped $1.2bn.

Total Money Fund assets declined $8.2bn to a 19-wk low $2.637 TN. Money Fund assets were down $58bn y-t-d and $103bn over the past year, or 3.7%.

Total Commercial Paper outstanding jumped $11.2bn to $937bn. CP was down $23bn y-t-d and $139bn from one year ago, or down 12.9%.

Global Credit Watch:

March 15 – Bloomberg (Yalman Onaran): “Delaying Greece’s debt restructuring by more than a year reduced banks’ potential losses as firms trimmed their holdings and most of the risk shifted to European taxpayers. When Greece was first rescued by the European Union and the International Monetary Fund in May 2010, lenders in other EU nations held $68 billion of its sovereign debt… If Greece had defaulted, banks would have lost $51 billion at a 25% recovery rate. Banks’ holdings of Greek bonds fell by more than half to about $31 billion over the next 15 months…, cutting creditors’ losses at last week’s swap by at least 45%. Lenders are protected against further losses thanks to sweeteners from the EU to encourage the exchange. Meanwhile, Greece’s debt remains almost unchanged and the risk of future default is now mostly borne by the public. The same playbook is being used with Portugal and Ireland. ‘This is a horrible deal for the EU taxpayer,’ said Raoul Ruparel, chief economist at Open Europe… ‘The longer we wait for these restructurings, the worse the deal gets for the public. There’s an ongoing risk transfer from the banks to the taxpayers.’”

March 14 – Bloomberg (Emma Ross-Thomas): “Spanish Prime Minister Mariano Rajoy repeated his plea for greater European efforts to protect nations from debt-crisis fallout after Germany described such calls as a ‘diversionary tactic.’ ‘We need to advance in the design of the European firewall,’ Rajoy told Parliament… ‘Spain considers it to be of utmost importance to increase the limit as soon as possible and is working on that.’ Spain and Italy are pushing for the rescue mechanism to be boosted beyond the 500 billion-euro ($653bn) ceiling as they fight to bring down borrowing costs amid contagion from the Greek crisis. German Finance Minister Wolfgang Schaeuble said… that demands for bigger backstops were used as a ‘diversionary tactic’ to distract from the need for budget cuts.”

March 14 – Bloomberg (Emma Ross-Thomas): “Spanish banks’ borrowings from the European Central Bank rose in February to the most on record with Spain-based banks taking almost half the total for the region as the central bank stepped up its emergency lending. Average net borrowings by banks in Spain climbed to 152.4 billion euros ($199bn) in February from 133.2 billion euros in January…”

March 16 – Bloomberg (Nicholas Dunbar and Elisa Martinuzzi): “When Morgan Stanley said in January it had cut its ‘net exposure’ to Italy by $3.4 billion, it didn’t tell investors that the nation paid that entire amount to the bank to exit a bet on interest rates. Italy, the second-most indebted nation in the European Union, paid the money to unwind derivative contracts from the 1990s that had backfired… The cost, equal to half the amount to be raised by Italy’s sales tax increase this year, underscores the risk derivatives countries use to reduce borrowing costs and guard against swings in interest rates and currencies can sour and generate losses for taxpayers. Italy, with record debt of $2.5 trillion, has lost more than $31 billion on its derivatives at current market values…”

March 14 – Financial Times (Peter Spiegel in Brussels and Matt Steinglass): “After an initial burst of enthusiasm from Europe’s leaders that a just-signed fiscal discipline treaty would be the first step towards a eurozone economic union, the pact has hit political headwinds, raising concerns that support is thin and ratification could fail in several countries. The most recent complication came… in the Netherlands, where both frontrunners for the pro-European Labour party said they would vote against the pact if the government capitulated to a Brussels-mandated deficit target of 3% of economic output in 2012, which would require new cuts.”

March 12 – Bloomberg (Alex Kowalski and Tom Keene): “Talks about a second international bailout for Portugal may begin later this year, according to Thomas Mayer, chief economist at Deutsche Bank… ‘With Portuguese bond yields still in the double digits, this summer we will have a discussion about the need for a new Portuguese program,’ Mayer said… The current plan is only funded through September 2013, and the International Monetary Fund ‘cannot disburse if a twelve-month funding outlook is not guaranteed,’ he said.

March 15 – Dow Jones: “Portugal’s public debt won’t surpass 110% of gross domestic product by 2020 even if it misses deficit targets for this year and next, the European Central Bank said… In a monthly update, the ECB said that even if Portugal's GDP projections are lowered by two percentage points in 2012 and 2013, public debt would peak at 124% of GDP in 2013 and progressively fall to 110% in 2020.”

March 16 – Bloomberg (Patrick Donahue): “German Chancellor Angela Merkel is facing a growing number of critics in her own party to her debt- crisis policies, potentially hindering a European compromise on the firewall to limit contagion from Greece. Three lawmakers in Merkel’s bloc defied party leaders to reject the Greek bailout on Feb. 27 after voting to strengthen the rescue fund in September. Merkel depended on the opposition to push through the 130 billion-euro ($172bn) package due to defectors in her caucus, made up of the Christian Democratic Union and its Bavarian sister party, the Christian Social Union.”

Global Bubble Watch:

March 13 – Bloomberg (John Glover): “German angst is growing as an entry on the Bundesbank’s balance sheet swells to a sum worth about 20% of economic output, a sign of the extent to which Europe’s largest economy is funding the region’s laggards. The European Central Bank’s Target2 system, which calculates debts between the euro region’s central banks, shows the Bundesbank is owed 489 billion euros ($656bn), up almost 65% from a year earlier. German central bank President Jens Weidmann wrote to ECB President Mario Draghi last month to warn about growing systemic risks... ‘The Germans are very much justified in their concern,’ said John Whittaker, an economist at Lancaster University Management School, who drew attention to the growing imbalances in papers published last year. ‘The Target2 liabilities are just as risky and just as real as holding the government bonds of Greece and other peripherals.’”

March 13 – Bloomberg (Jana Randow and Simone Meier): “European Central Bank council member Jens Weidmann said policy makers are already discussing ways to withdraw some of the emergency cash they injected into the banking system to fight the sovereign debt crisis. ‘All council members are aware that non-standard measures create risks and have to be unwound,’ Weidmann, who heads Germany’s Bundesbank, said… ‘We need this discussion and it is taking place. The timeframe depends on several things, including how the environment develops.’ …The Bundesbank has set aside an additional 4.1 billion euros to cover risks stemming from the ECB’s crisis-fighting measures, which include 218 billion euros of government bond purchases.”

March 16 – Bloomberg (Josiane Kremer and Kristin Myers): “Norway is moving closer to a housing bubble as the central bank’s strategy of cutting interest rates to weaken the krone spurs credit growth and bloats property values. A day after Norway’s financial regulator said the biggest domestic threat to the economy comes from an overheated property market as borrowers bet rates will stay low, Norges Bank Governor Oeystein Olsen… demonstrated he won’t allow further krone gains by cutting the bank’s main interest rate a quarter of a percentage point to 1.5%.”

March 14 – Bloomberg (Sapna Maheshwari): “Apple Inc…. led U.S. corporations in amassing a record $1.24 trillion of cash last year as memories of the 2008 credit crisis linger, according to Moody’s… Excluding Apple, with $97.6 billion of cash and no outstanding debt, the figure was relatively unchanged at $1.15 trillion, even as revenue and cash flow from operations rose to a record, Moody’s analysts led by Richard Lane said… Investment-grade companies graded A3 or higher by Moody’s hold $594.3 billion, or 54%...”

March 15 – Bloomberg (Jody Shenn and Sarah Mulholland): “The riskiness of securities backed by assets from car loans to commercial mortgages is rising from the lows seen after Lehman Brothers Holdings Inc.’s 2008 collapse, according to Moody’s… Easing underwriting standards and ‘untested’ issuers and assets are contributing to the trend, along with structural features of transactions that can boost risk… Greater dangers are likely to follow, analysts Claire Robinson and Joseph Snailer wrote.”

Currency Watch:

March 12 – Bloomberg (Anchalee Worrachate and David Goodman): “Currency trading may have risen to a record $5 trillion a day in September, surpassing the peak reached before Lehman Brothers Holdings Inc.’s collapse in 2008, according to the Bank for International Settlements. Trading then declined to about $4.7 trillion a day in October and is likely to have fallen considerably in early 2012… The surveys found currency trading kept increasing in the first year of the financial crisis, before reaching about $4.5 trillion a day in September 2008, shortly before Lehman’s collapse, Morten Bech, a senior economist at the BIS, wrote… Average daily trading volume then plunged to $3 trillion in April 2009, he wrote. ‘By mid-2009, global foreign-exchange activity had started to pick up again and it rose to $4 trillion a day in April 2010,’ Bech wrote.”

The dollar index slipped 0.3% this week to 79.78 (down 0.5% y-t-d). On the upside, the British pound increased 1.1%, the Swedish krona 0.9%, the euro 0.4%, the Danish krone 0.4%, the New Zealand dollar 0.4%, the Swiss franc 0.4%, the South African rand 0.2%, and Australian dollar 0.1%. On the downside, the Japanese yen declined 1.2%, the South Korean won 0.7%, the Norwegian drone 0.5%, the Brazilian real 0.5%, the Singapore dollar 0.3%, the Mexican peso 0.2%, the Taiwanese dollar 0.2%, and the Canadian dollar 0.1%.

Commodities Watch:

The CRB index was little changed this week (up 4.1% y-t-d). The Goldman Sachs Commodities Index increased 0.4% (up 10.2%). Spot Gold dropped 3.1% to $1,660 (up 6.2%). Silver sank 4.7% to $32.60 (up 17%). April Crude declined 34 cents to $107.06 (up 8%). April Gasoline added 0.4% (up 26%), while April Natural Gas was about unchanged (down 22%). May Copper increased 0.5% (up 13%). May Wheat rallied 4.5% (up 2.9%), and May Corn recovered 4.3% (up 4.1%).

China Watch:

March 14 – Bloomberg: “China is easing restrictions on lending capacity at three of the nation’s four biggest banks after new loans dropped to a four-year low… The regulator is letting the lenders use more of their deposits to make loans, the bank officials said, after China’s exports, industrial production and retail sales declined in the first two months. Loan growth has slowed this year as depositors seeking higher returns removed money from savings accounts and the economy’s expansion at the smallest pace in 10 quarters curtailed demand.”

March 14 – Bloomberg: “Chinese Premier Wen Jiabao said that home prices remain far from a reasonable level and relaxing curbs could cause ‘chaos’ in the market, indicating no imminent relaxation of cooling measures. We must not slacken our efforts in regulating the housing sector,’ Wen said… A bursting property bubble would hurt the entire economy, and the government wants ‘long- term steady and sound growth’ in housing, he said.”

March 14 – Bloomberg (Weiyi Lim): “China’s economy is already in a so- called ‘hard landing,’ according to Adrian Mowat, JPMorgan Chase & Co.’s chief Asian and emerging-market strategist. ‘If you look at the Chinese data, you should stop debating about a hard landing,’ Mowat… said… ‘China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact.’”

India Watch:

March 14 – Bloomberg (Unni Krishnan): “India’s inflation accelerated for the first time in five months in February, weakening the case for an interest-rate cut to counter slower economic growth. The benchmark wholesale-price index rose 6.95% from a year earlier…”

Europe Economy Watch:

March 12 – Bloomberg (Oliver Staley): “In the universities of Athens, the city where Plato taught and Cicero studied, campuses are covered in anarchist graffiti, stray dogs run through buildings and students take lessons in Swedish with the aim of emigrating. Higher education in Greece, as in much of Europe, has been battered by the recession and austerity measures. Budget cuts of 23% since 2009 mean buildings aren’t heated in the winter, schools have slashed faculty salaries and newly hired professors can wait more than a year to be appointed. Students say it’s hard to be hopeful with youth unemployment surpassing 50% and protesters seizing university buildings. ‘People are pessimistic and sad,’ said Konstantinos Markou, a 19-year-old law student, speaking in a lobby at the University of Athens, where dogs fought nearby and students say drug dealers and users congregate. ‘The sadness is all around the air.’”

March 15 – Bloomberg (Jeff Black): “The European Central Bank said inflation in the euro area will probably exceed the bank’s 2% limit this year… ‘Inflation rates are now likely to stay above 2% in 2012, with upside risks prevailing,’ the Frankfurt-based central bank said… While risks to the economic outlook remain on the downside, the ECB said it sees ‘signs of a stabilization in the euro-area economy.’”

March 16 – Bloomberg (Angeline Benoit): “Spain’s public debt burden exceeded the government’s forecast in 2011 as the regions’ borrowing surged to a record, hampering efforts to reorder public finances. Spain’s overall debt amounted to 68.5% of gross domestic product at the end of the year, compared with 66% in the third quarter and 61.2% at the end of 2010… Of the total 735 billion euros ($960bn) of public debt, regional governments’ borrowing rose 17% from a year earlier to 140.1 billion euros… as the states overshot their budget-deficit goals. The European Commission forecasts that Spain’s debt will have almost doubled to 78% of GDP by next year from where it was when Europe’s sovereign debt crisis began.”

March 15 – Bloomberg (Angeline Benoit and Sharon Smyth): “Spanish home prices fell the most on record in the fourth quarter as the euro area’s fourth- largest economy shrank and a reduction in mortgage lending crimped demand for property. The average price of houses and apartments declined 11.2% from a year earlier, the most since the measurement began in 2008… Prices dropped 4.2% from the previous quarter and are down 21.7% from the market’s peak in the third quarter of 2007.”

Latin America Watch:

March 13 – Bloomberg (Adriana Lopez Caraveo): “Mexican domestic sales of cars and light trucks rose 11.5% in February from the same month a year earlier, the nation’s Automobile Industry Association… said.”

U.S. Bubble Economy Watch:

March 14 – Bloomberg (Timothy R. Homan): “The current-account deficit in the U.S. widened more than forecast in the fourth quarter to $124.1 billion, the biggest in three years. The gap, the broadest measure of international trade because it includes income payments and government transfers, grew 15% from a revised $107.6 billion shortfall in the prior quarter…”

March 16 – Bloomberg (Alex Kowalski): “The cost of living in the U.S. rose in February by the most in 10 months, reflecting a jump in gasoline that failed to spread to other goods and services. The consumer-price index climbed 0.4%… The biggest jump in gasoline in more than a year accounted for about 80% of the increase in prices last month, leaving households with less money to spend on other goods and services… Consumer prices increased 2.9% in the 12 months ended in February…”

March 12 – Wall Street Journal (Josh Mitchell): “States are moving to cut jobs and other spending to close budget deficits, even though their protracted fiscal crisis is easing a bit in an improving economy. State governments are confronting a combined $47 billion gap between projected revenue and costs for the fiscal year that starts in July, according to the Center on Budget and Policy Priorities… While that figure is high historically, it is less than half the budget shortfall that states confronted a year ago and down from $191 billion three years ago. For the coming year 29 states have projected deficits; that is down from 42 a year ago and 46 the year before. Tax receipts in many states have risen in recent months… But for many, revenue gains haven’t kept up with surging costs for health care and pensions. Meanwhile, federal stimulus funding is drying up.”

Fiscal Watch:

March 13 – Bloomberg (Brian Faler): “The U.S. budget deficit this year will total $1.2 trillion, about $93 billion more than projected two months ago, according to the Congressional Budget Office. The increase is largely attributable to a reduction in workers’ payroll taxes for the rest of 2012… The revised estimate means the government will run a trillion-dollar deficit for the fourth consecutive year…”

Central Bank Watch:

March 14 – Bloomberg (Josiane Kremer): “Norway’s central bank cut its benchmark interest rate for a second consecutive meeting as policy makers deem the threat of krone appreciation to be more serious than the risk of a credit-driven housing bubble… The overnight deposit rate was lowered a quarter percentage point to 1.50%, following a half point cut in December…”

March 16 – Bloomberg (Andre Soliani and Adriana Arai): “Brazil anticipates keeping its benchmark borrowing cost near a record low for the next 18 months, a government official said… Policy makers said… that inflation will slow to around their 4.5% target in 2012, giving the central bank room to reduce the Selic rate to ‘slightly above’ the historical low of 8.75%. Analysts expect Brazil’s consumer prices to rise 5.3% in 2012 and 5.5% in 2013..."

Muni Watch:

March 14 – Bloomberg (Terrence Dopp): “New Jersey’s state and local governments may need to cut services by 20% to close growing budget deficits over the next five years, a panel that includes former top-level state officials said… The state will confront gaps between revenue and spending of as much as $8.1 billion by 2017, while towns and cities may face shortfalls as great as $2.8 billion, said the group, which was convened by the Council of New Jersey Grantmakers. Counties’ budget gaps may be as much as $1.1 billion while schools’ deficits will reach nearly $1 billion, the group said.”

California Watch:

March 13 – Wall Street Journal (Michael J. Boskin and John F. Cogan): “Long a harbinger of national trends and an incubator of innovation, cash-strapped California eagerly awaits a temporary revenue surge from Facebook IPO stock options and capital gains. Meanwhile, Stockton may soon become the state’s largest city to go bust. Call it the agony and ecstasy of contemporary California. California's rising standards of living and outstanding public schools and universities once attracted millions seeking upward economic mobility. But then something went radically wrong as California legislatures and governors built a welfare state on high tax rates, liberal entitlement benefits, and excessive regulation. The results, though predictable, are nonetheless striking. From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000. California's economy, which used to outperform the rest of the country, now substantially underperforms. The unemployment rate, at 10.9%, is higher than every other state except Nevada and Rhode Island. With 12% of America's population, California has one third of the nation’s welfare recipients.”

March 14 – Bloomberg (Nadja Brandt): “Connie Wang paid about $960,000 last June for a new four-bedroom, four-bath house in a sprawling swath of Southern California that’s home to Disneyland and Pimco. Now she may buy a second as an investment. ‘You know why Orange County is doing better?’ said Wang, a native of Taiwan who splits her time between Shenzhen in southern China, where she oversees a toy-manufacturing business, and Irvine, California, where she raised her three children. ‘It’s because all my neighbors are from China and Taiwan, and they all bought their homes in cash.’”