Saturday, November 8, 2014

Weekly Commentary, April 27, 2012: The Many Facets of Roro

April 21 – Financial Times (Bryce Elder): “Markets are broken. Accepted investment wisdom has been overturned and the basic tenets of value and diversification no longer work. The financial crisis put the market into a volatile ‘risk on, risk off’ – or Roro – mode for which there is no cure. For many investors, this has made stock picking seemingly an impossible task. Markets once responded to their fundamentals. Now, disparate assets have a much greater tendency to move together, individual characteristics lost. Trusted strategies such as relative value and currency carry trades are nearly useless, overwhelmed by daily market-wide volatility.”

The above is the introductory paragraph to an FT article, “‘Roro’ Reduces Trading to Bets on Black or Red.” Market players have by now become seasoned to the “risk on, risk off” (“Roro”) dynamic. Yet few are willing to concede (publicly) that global markets are indeed broken – and likely irreparably. As highlighted in the article, this trend began to take root with the unfolding financial crisis back in 2007. The investing world then turned essentially bimodal with the Lehman Brothers collapse. Approaching four years later, the market landscape is providing no indication that it has even the slightest inclination to return to normal. This is a critical issue.

From HSBC strategist Stacy Williams (noted by the FT): “Assets now behave as either risky assets or safe havens, and their own fundamentals are secondary. In a world where most asset classes are synchronized, it becomes very difficult to achieve diversification. It also means that since most individual assets are dominated by a common price component, it becomes increasingly futile to invest in them based on their usual fundamentals.”

Most investment professionals appreciate that there have been fundamental changes in the marketplace, although there are disparate views as to the root cause. From the FT: “The [post-Lehman] uncertainty helped turn investing bimodal, where every price has been contaminated by systemic risk. Everything became a bet on whether we were closer to a global recovery or to deeper crisis.”

Few would disagree that extraordinary uncertainty plays an integral role. I would underscore, however, that the epicenter of this dilemma of uncertainty lies within the realm of policymaking. I take exception to the reasonable notion that market prices have been "contaminated by systemic risk.” Instead, contamination is predominantly a phenomenon associated with ongoing and, indeed, escalating government market interventions. I would argue that persistently elevated systemic risk is a product of unrelenting policy “activism.” Moreover, market faith in ever grander government responses is the only thing holding a problematic risk off – “little ro” - at bay. Those that believe market uncertainties are predominantly a product of systemic stress see these risks subsiding naturally over time. I believe today’s untenable policymaking course is the true culprit – and resolution will come with a major global crisis.

The essence of “Roro” boils down to red or black market outcome bets based chiefly on three related factors: First, there is the timing of policymaker interventions. Second, is the nature and scope of policy responses. And, third, the expected near-term consequences of policy measures both from market and economic perspectives. The interplay of these three factors and how it plays upon market perceptions tend to be complex and, at times, mercurial. For example, as systemic risk becomes a concern the marketplace will tend to place bets in a rather measured and straightforward manner. But as market stress begins to elevate, the timing of policy moves becomes increasingly critical and the interplay with the market perceptions more complex.

A delay in a policy pronouncement (additional QE, for example) might create acute risk that market conditions rapidly deteriorate. A day or two can make a huge difference. At the core of the problem, a highly leveraged and speculative marketplace creates a tenuous – and policy intervention-dependent – backdrop. And as systemic risk and the scope of wagers rise in concert, the divergences between possible outcomes becomes increasingly extreme (i.e. the volume of speculation and systemic risk hedging directly raises the probabilities for both major upside and downside market outcomes).

Importantly, however, a major escalation of systemic stress (think Q4 2012 Europe and the LTRO) would most likely be met eventually with an overwhelming policy response (“bazooka” or the Bernanke/Draghi put), setting the stage for a major reversal of bearish bets and systemic hedges. Policy dithering and delays on the one hand create significant market risk (and heightened hedging/betting), yet at the same time also increase the probability for the type of panicked policymaker response sure to incite a dramatic market reversal (short squeeze, upside dislocation and intense speculation). As such, the great “Roro” trade essentially becomes a calculus on the interplay between market fragility, “activist” policymaking and market technicals (especially with respect to bearish/hedging positioning).

Mr. Elder’s provocative article also addresses how investors might best approach “risk on, risk off”: “The most obvious way to deal with Roro is not to fight it. Pick a side, boom or bust, and build a portfolio to give the cleanest possible exposure to the trade. The investor still has to choose the correct side – but at least their investment is straightforward and sincere.” True enough, and I do appreciate the use of the word “sincere.” But in such an uncertain and volatile world, most market professionals shy away from such potentially career-shortening wagers.

Which leaves us with the alternative: “Another option is to seek out an investment strategy that still works. Momentum investing – in effect, buying the winners and selling the losers – is a method that HSBC analysts highlight as having been largely impervious to the risk trade. To chase a trend aims to harvest small but systematic mis-pricing of assets, and there is no reason to suppose these anomalies would disappear in bimodal markets… (In this context, the growth of high-frequency trading since the start of the crisis is unlikely to be coincidental.)”

So, essentially, the marketplace faces a single decision: Make a big red or black bet or, if you have a functioning brain, do what “still works” – “momentum investing.” And this does a respectable job of explaining why markets have evolved into pathological trend-following speculative Bubbles – everywhere - and why hedge funds, ETFs and other market wagering vehicles proliferate. And the bigger the Bubbles inflate, the greater the systemic fragilities – and the more confident the speculators become that policymakers have no alternative than to continue delivering the goods. And, at this point, the powerful sophisticated players just love that “Roro” holds policymakers securely hostage.

Europe is an unmitigated disaster. And, increasingly, there is recognition that true structural reform is the region’s only real hope. The Wall Street Journal’s Wednesday op-ed page had an exceptional editorial, “Europe’s Phony Growth Debate.”

From the WSJ: “Growth or austerity? That’s the choice facing Europe these days—or so the Keynesian consensus keeps saying. According to this view, which has dominated world economic councils since the 2008 crisis began, ‘growth’ is mainly a function of government spending. Spend more and you’re for growth, even if a country raises taxes to pay for the spending. But dare to cut spending as the Germans suggest, and you’re for austerity and thus opposed to growth. This is a nonsense debate that misconstrues the real sources of economic prosperity and helps explain Europe’s current mess. The real debate ought to be over which policies best produce growth.”

It’s increasingly obvious that the so-called “Keynesian” (I think Keynes would be appalled) approach of massive fiscal deficits and monetary inflation is an abject failure. Policies have only delayed necessary adjustments, while fomenting acute financial, economic and political risks. Much of Europe remains in desperate need of deep structural adjustment, and it’s a travesty that years of government profligacy have left little capacity to assist in financing reform measures. As the Journal article noted, labor, tax, political and monetary reform would work to promote sound investment, capital formation and more productive and flexible economic systems.

But here’s my rub. Deep economic reforms tend to be arduous and, at least initially, destabilizing affairs. They unfold – and enrich societies - over years – while “Roro” thinks in terms of market hours, days and weeks. Reform and “Roro” seem incompatible – perhaps adversarial. To improve economic structures will require enormous private-sector investment. “Roro,” with its fixation on policymaking, financial speculation and inflating Bubbles, has precariously set its course in the opposite direction. “Roro” is incentivized by short-term speculative market returns, especially leveraged spread trades and other so-called price anomaly “arbitrage.” “Roro” is antagonistic to long-term investing and real economic returns achieved through investment in capital formation. “Roro,” a creature of financial and economic imbalances, exacerbates excesses and acts as an adversary to economic prosperity.

Meaningful economic reform is bolstered by confidence that things are moving on the right path – and it’s stopped dead in its tracks from fear of looming calamity. “Roro” foments only greater uncertainty and trepidation. And I am convinced that monetary instability is a powerful reform inhibitor. Reform is instead supported by trust in the course of policymaking and the stability of the political process more generally. I would argue that “activist” policymaking and its “Roro” offspring are contributing to a dangerous distrust in government, institutions and free market Capitalism more generally. I see “Roro” as antidemocratic, creating risks of destabilizing electoral backlashes in democracies worldwide. Increasingly, frustrated Europeans see speculators and “international finance” as unethically siphoning away vital resources.

It is approaching 20 years since James Carville famously quipped that he would “…want to come back as the bond market. You can intimidate everyone.” In the late-nineties, many (including Paul Volcker) worried that the global economy had become dangerously dependent upon a speculative U.S. stock market. If one takes a step back and examines the scope of global debt markets and the nature of speculative excess that today commands global securities markets, one is forgiven for taking a quite pessimistic view. Crisis repeatedly followed by bigger crisis – greater government control over everything, and only talk of true reform. Amazingly, the amount of debt just continues to mushroom – while the scope of global leveraged speculation runs unchecked. The unwieldy interplay between uncontrolled debt expansion and epic financial speculation some years back enticed global policymakers down a very precarious path. It is within this context that we should contemplate “Roro.”

Well, just another week at the casino. A Socialist took a giant leap toward the French Presidency. Spanish unemployment jumped to a near-record, a depressionary 24.4%, and S&P downgraded Spain’s debt two notches to near junk status. The Dutch government became the latest political casualty. The United Kingdom fell into double-dip recession, as economic data throughout the region has turned almost universally dismal. But with rattled officials rather abruptly now espousing more growth measures and less austerity, European markets enjoyed a bit of a breather.

Here at home, Chairman Bernanke assured the market master that the Fed was ready to inject another round of quantitative easing when demanded, while deflecting criticism from Paul Krugman that the Fed hasn’t been printing enough. U.S. stocks rallied (although with less than confidence-inspiring market underpinnings), with “Roro” mo players and bullish speculators further emboldened. This, of course, ensures that when “little ro” inevitably emerges on the scene he’ll pose a giant problem. As the Financial Times’ Bryce Elder astutely noted, “Roro – mode for which there is no cure.”

For the Week:

The S&P 500 jumped 1.8% (up 11.6% y-t-d), and the Dow advanced 1.5% (up 8.3%). The broader market was strong. The S&P 400 Mid-Caps jumped 2.4% (up 13.7%), and the small cap Russell 2000 rose 2.7% (up 11.4%). The Morgan Stanley Cyclicals gained 1.5% (up 13.2%), and the Transports added 0.6% (up 4.9%). The Morgan Stanley Consumer index increased 0.8% (up 6.8%), and the Utilities gained 1.7% (down 1.1%). The Banks were up 2.7% (up 24%), and the Broker/Dealers were 1.1% higher (up 19.6%). The Nasdaq100 was up 2.4% (up 20.3%), and the Morgan Stanley High Tech index rose 2.4% (up 19.9%). The Semiconductors rallied 2.7% (up 14.1%). The InteractiveWeek Internet index rose 1.9% (up 16.5%). The Biotechs surged 3.5% (up 35.7%). With bullion rising $19, the HUI gold index rallied 1.7% (down 9.9%).

One-month Treasury bill rates ended the week at 7 bps and three-month bills closed at 9 bps. Two-year government yields declined a basis point to 0.26%. Five-year T-note yields ended the week down about 2 bps to 0.83%. Ten-year yields declined 3 bps to 1.94%. Long bond yields were little changed at 3.12%. Benchmark Fannie MBS yields fell 4 bps to 2.86%. The spread between benchmark MBS and 10-year Treasury yields narrowed one to 92 bps. The implied yield on December 2013 eurodollar futures declined 2 bps to 0.65%. The two-year dollar swap spread was little changed at 29 bps. The 10-year dollar swap spread rose 2 to 13 bps. Corporate bond spreads narrowed. An index of investment grade bond risk ended the week down about 6 to 94 bps. An index of junk bond risk sank 46 to 578 bps.

Debt issuance remained on the slow side. Investment grade issuers included GE Capital $2.3bn, Molson Coors Brewing $1.6bn, and Zions Bancorp $400 million.

Junk bond funds saw inflows of $644 million (from Lipper). Junk issuers included Plains Exploration $750 million, Viasystems $550 million, Laredo Petroleum $500 million, Levi Strauss $385 million, Prospect Medical $325 million, Radiation Therapy Services $325 million, Anixter $300 million, Tenet Healthcare $300 million, and D.R. Horton $350 million.

I saw no convertible debt issued.

International dollar bond issuers included CNOOC $2.0bn, Pertamina $2.5bn, Ineos $775 million, Kommunalbanken $500 million, Bank of Ceylon $500 million, Brakem $300 million and Banco do Nordest Brazil $300 million.

Spain's 10-year yields declined 8 bps this week to 5.85% (up 81bps y-t-d). Italian 10-yr yields slipped 2 bps to 5.63% (down 140bps). Ten-year Portuguese yields sank 120 bps to 10.22% (down 255bps). The new Greek 10-year note yield fell 78 bps to 20.12%. German bund yields were down a basis point to 1.70% (down 13bps), and French yields dropped 9 bps to 2.99% (down 14bps). The French to German 10-year bond spread narrowed 8 to 130 bps. U.K. 10-year gilt yields declined 5 bps to 2.12% (up 15bps). Irish yields rose 3 bps to 6.76% (down 150bps).

The German DAX equities index increased 0.8% (up 15.3% y-t-d). Spain's IBEX 35 equities index recovered 1.5% (down 16.6%), and Italy's FTSE MIB rallied 2.6% (down 2.1%). Japanese 10-year "JGB" yields fell 4 bps to 0.89% (down 9bps). Japan's Nikkei slipped 0.4% (up 12.6%). Curiously, emerging markets were mostly lower. For the week, Brazil's Bovespa equities index fell 1.3% (up 8.7%), and Mexico's Bolsa slipped 0.1% (up 6.1%). South Korea's Kospi index was unchanged (up 8.2%). India’s Sensex equities index fell 1.4% (up 10.9%). China’s Shanghai Exchange declined 0.4% (up 9.0%).

Freddie Mac 30-year fixed mortgage rates dipped 2 bps to 3.88% (down 90bps y-o-y). Fifteen-year fixed rates declined a basis point to 3.12% (down 85bps). One-year ARMs were down 7 bps to 2.74% (down 41bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 2 bps to a record low 4.45% (down 93bps).

Federal Reserve Credit declined $5.5bn to $2.860 TN. Fed Credit was up $189bn from a year ago, or 7.1%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 4/25) fell $9.0bn to $3.482 TN. "Custody holdings" were up $62bn y-t-d and $47bn year-over-year, or 1.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $776bn y-o-y, or 8.0% to $10.436 TN. Over two years, reserves were $2.511 TN higher, for 32% growth.

M2 (narrow) "money" supply jumped $26.1bn to a record $9.854 TN. "Narrow money" has expanded 7.4% annualized year-to-date and was up 9.7% from a year ago. For the week, Currency increased $2.5bn. Demand and Checkable Deposits rose $6.6bn, and Savings Deposits jumped $21.3bn. Small Denominated Deposits decreased $3.2bn. Retail Money Funds slipped $0.9bn.

Total Money Fund assets were little changed at $2.582 TN. Money Fund assets were down $113bn y-t-d and $145bn over the past year, or 5.3%.

Total Commercial Paper outstanding declined $6.7bn to $926bn. CP was down $33bn y-t-d and $180bn from one year ago, or down 16.3%.

Global Credit Watch:

April 25 – Bloomberg (Helene Fouquet and Tony Czuczka): “French Socialist Francois Hollande, the leading presidential candidate, said France won’t ratify the European agreement pushed by Germany to tighten budget rules if he’s elected. ‘There will be a re-negotiation,’ Hollande told journalists… ‘Either there will be a new treaty, or there will be a modification of the existing treaty. It’s about negotiation.’ The comments put Hollande on a collision course with German Chancellor Angela Merkel, who has championed debt reduction as the key to ending the region’s fiscal crisis.”

April 27 – Bloomberg (Cordell Eddings and Cheyenne Hopkins): “Spain’s sovereign credit rating was cut for the second time this year by Standard & Poor’s on concern that the country will have to provide further fiscal support to banks as the economy contracts. S&P lowered Spain to BBB+ from A, with a negative outlook… The nation’s 10-year borrowing costs have climbed about 70 bps this year as Prime Minister Mariano Rajoy struggles to convince investors he can control public finances amid soaring unemployment and a contracting economy. Banks threaten to disrupt the premier’s efforts as bad loans reach the highest levels in almost two decades. ‘Spain’s budget trajectory will likely deteriorate against a background of economic contraction,’ S&P wrote… ‘At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector…”

April 23 – Bloomberg (James G. Neuger): “Europe’s backlash against austerity gained momentum, in a challenge to German Chancellor Angela Merkel’s budget-cutting prescriptions for resolving the debt crisis. French President Nicolas Sarkozy lost the first round of his re-election bid and a revolt against extra spending cuts in the traditionally budget-conscious Netherlands propelled Prime Minister Mark Rutte’s coalition toward an early breakup. Together with anti-austerity rumblings in a campaign for elections in Greece, the shift in grass-roots sentiment at the heart of Europe generated fresh doubts about the German-driven strategy for getting to grips with the two-year-old crisis. ‘We have organized the track of discipline, that’s very good and we have to continue on that, but we need desperately also to organize the second track, the track of growth, solidarity, investment,’ former Belgian Prime Minister Guy Verhofstadt, now a member of the European Parliament, said…”

April 27 – Bloomberg (Andrew Davis and Guy Johnson): “Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, said the European Central Bank can’t solve the region’s fiscal crisis, with challenges to leaders ‘rising fast.’ ‘Whatever the ECB does, the ECB cannot solve the crisis,’ he said… ‘Only European policy makers can do so. I think we are seeing some encouraging signs in terms of structural reforms, including in Spain, but the challenges are rising and rising fast.’”

April 26 – Bloomberg (Emma Charlton and Lukanyo Mnyanda): “As Spain’s recession undermines efforts to cut the deficit, the risk of bank losses is keeping 10-year yields at almost 6% as investors speculate the government will be forced to bail out the financial system. The nation’s 10-year borrowing costs have climbed about 70 bps this year as Prime Minister Mariano Rajoy struggles to convince investors he can control public finances amid soaring unemployment and a contracting economy. Banks threaten to disrupt the premier’s efforts as bad loans reach the highest levels in almost two decades.”

April 26 – New York Times (Landon Thomas Jr. and Raphael Minder): “By any measure, the Spanish real estate boom was one of the headiest ever. Spurred by record-low interest rates, Spaniards piled into holiday villas along the Costa Blanca, gaudy apartments in Madrid and millions of starter homes throughout the country. But since the frenzy drove Spanish home prices to a peak in 2007, they have fallen by at least one-fourth, and the bottom seems nowhere in sight. As Spain endures its second recession in three years and unemployment nears 25%, an increasing number of debt-heavy Spaniards can no longer meet monthly payments on the mortgages that their banks were all too eager to give… Borja Mateo, author of a recent book on the Spanish real estate market, said there were now 1.9 million housing units for sale in Spain and about 3.9 million that could go on to the market in the coming years. With current housing demand now at about 175,000 units a year, Mr. Mateo predicted the glut would cause home prices eventually to fall by 60%.”

April 26 – Bloomberg (Emma Ross-Thomas): “Spain may need to use more public money to shore up its banks, the International Monetary Fund said, as it raised the possibility of lenders offloading toxic assets into separate vehicles. While the largest banks ‘appear sufficiently capitalized,’ the capacity to deal with adjustments ‘differs significantly across the system,’ the Washington-based lender said… ‘Greater reliance on public funding may be needed’ to avoid the costs of the overhaul becoming too high for the industry, the IMF said.”

April 25 – Bloomberg (Liam Vaughan and Gavin Finch): “European lenders, more reliant than ever on emergency aid after borrowing $1.3 trillion from their central bank, may need additional cash infusions until policy makers stem the crisis engulfing Spain and Italy. After more than 30 bond sales in the first quarter, no bank has sold unsecured debt this month, and the cost of insuring against default has soared to levels last seen in January. Financial stocks, which rallied 20% following the European Central Bank’s December decision to provide unlimited three-year loans, are now 2% lower since then.”

April 24 – MarketNew International: “German Finance Minister Wolfgang Schaeuble… strongly rejected calls by the International Monetary Fund for an introduction of eurobonds in the Eurozone. ‘This would be wrong,’ Schaeuble said… The minister argued that joint bonds would weaken incentives for countries like Spain or Italy to continue on their harsh austerity path.”

April 26 – Bloomberg (Jonathan Stearns): “Italian Prime Minister Mario Monti stepped up calls for the European Union to complement budget-austerity policies with measures to spur economic growth. ‘Now, Europe needs policies for the increase of potential growth,’ Monti told a conference… ‘This needs to be done both at the EU level and the national level.’”

Global Bubble Watch:

April 24 - Dow Jones: “The balance sheet of euro zone central banks, which swelled this year as a result of capital injections aimed at containing Europe's sovereign debt crisis, shrank marginally in the week ending Friday but is still near a record high. The total balance sheet of the so-called Eurosystem, which includes the ECB and 17 euro-zone national central banks, fell by EUR7.75 billion, or less than 0.3%, to EUR2.967 trillion… That is EUR1.079 trillion, or 57%, greater than 12 months ago…”

April 23 – Bloomberg (Andrew Davis): “The debt of the euro region rose last year to the highest since the start of the single currency as governments increased borrowing to plug budget deficits and fund bailouts of fellow nations… The debt of the 17 euro nations climbed to 87.2% of gross domestic product in 2011 from 85.3% the previous year, official European Union figures showed… That’s the highest since the euro was introduced in 1999. Greece topped the list with debt at 165.3% of GDP, while Estonia had the least at 6% of GDP. Euro-region nations are on the hook for the bulk of the 386 billion euros ($508bn) in bailouts for Greece, Ireland and Portugal after those nations were forced to seek rescues when their borrowing costs become unsustainable… ‘The different debt trajectories of the euro-area countries crystallize the process of great divergence between the periphery and the core of the euro area and even more markedly between Germany and the rest of the region,’ Silvio Peruzzo, an economist at Royal Bank of Scotland…said…”

April 27 – Bloomberg (Sridhar Natarajan and Sarika Gangar): “Global corporate bond issuance is poised for the slowest April in six years as companies reduce their reliance on debt markets while sitting on cash reserves that are about the highest on record. Company bond sales worldwide have declined 53 percent to $190 billion through yesterday, the least for an April since 2006, according to data compiled by Bloomberg. The slowdown follows a record $1.17 trillion of deals in the first quarter, when strains from Europe’s debt crisis eased and companies borrowed at interest rates that approached the lowest ever.”

Currency Watch:

The U.S. dollar index declined 0.6% this week to 78.71 (down 1.8% y-t-d). On the upside for the week, the Japanese yen increased 1.6%, the Canadian dollar 1.2%, the Mexican peso 1.0%, the British pound 0.9%, the Australian dollar 0.9%, the South African rand 0.9%, the Singapore dollar 0.9%, the Taiwanese dollar 0.7%, the New Zealand dollar 0.5%, the South Korean won 0.4%, the Swiss franc 0.3%, the euro 0.3%, and the Danish krone 0.3%. On the downside, the Norwegian krone declined 0.1%, the Swedish krona 0.4%, and the Brazilian real 0.8%.

Commodities Watch:

The CRB index rallied 1.4% this week (up 0.1% y-t-d). The Goldman Sachs Commodities Index rose 1.2% (up 6.1%). Spot Gold recovered 1.2% to $1,663 (up 6.3%). Silver declined 1.0% to $31.41 (up 12.5%). June Crude gained $1.05 to $104.93 (up 6%). May Gasoline advanced 2.0% (up 21%), and June Natural Gas rallied 8.5% (down 27%). July Copper rose 3.2% (up 11%). May Wheat ended the week up 4.3% (down 1.6%), and May Corn surged 6.6% (up 1.0%).

China Watch:

April 26 – Bloomberg: “Investors are demanding higher yields for Chongqing city investment companies than for similar-rated Chinese corporate issuers amid concern a probe into its former Communist Party boss Bo Xilai will expose irregularities. State-owned Chongqing Land Properties Co. is selling 5 billion yuan ($793 million) of seven-year bonds rated AA+ at a yield of 7.35% this week… That compares with a yield of 5.78% for similar-rated corporate notes. Chongqing Nan’an District City Construction Development Group Co.’s AA notes maturing in 2019 were issued at 8.2% on April 9, compared with the 6.52% average yield in indexes compiled by Chinabond. The sales are the first since the downfall of Bo, whose focus on state-led infrastructure projects achieved economic growth of 16.4% for the city last year. Nine financing vehicles set up by the municipality of 29 million people together have total debt of more than 157 billion yuan, 16% of Chongqing’s gross domestic product. Total borrowing may exceed 100 percent of GDP, said Victor Shih, a professor at Northwestern University… ‘Investors are worried that Chongqing’s debt is too much and that recent events will affect the attitude on Chongqing’s future investment,’ said Guo Chenglai, a credit analyst at China Chengxin International Credit Rating Co… ‘The financial model they’ve used in the past will be different in the future.’”

Japan Watch:

April 27 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan expanded its plan for government-bond purchases by 10 trillion yen ($124bn) after the world’s third-largest economy showed signs of slowing and lawmakers pressed for more aggressive steps. The BOJ will boost its asset-purchase fund to 40 trillion yen by June 2013, compared with the previous target of 30 trillion yen by year-end, it said in a statement today in Tokyo. A separate central bank program providing funds to banks was pared by 5 trillion yen amid lackluster demand for loans.”

Latin America Watch:

April 26 – Bloomberg (Matthew Bristow and Raymond Colitt): “Brazil’s central bank signaled today that it could continue cutting its benchmark lending rate to historic lows as the economy recovers more slowly than expected… In the minutes to its April 17-18 meeting, the bank said that given the delayed effects of rate cuts carried out so far, any further reductions should be “conducted with parsimony.’”

Europe Economy Watch:

April 26 – Bloomberg (Adria Cimino): “Pierre Mouton, a fund manager at Notz Stucki & Cie. in Geneva, looks at the rise of anti- European, anti-austerity parties across the border in France with concern. It may keep him out of the country’s stock market. ‘We’re cautious on French stocks,’ Mouton, whose firm manages $7.5 billion and has been reducing its holdings in France, said… ‘If the new president breaks under pressure from these groups, stocks will suffer. We prefer not to take that risk.’”

April 25 – Bloomberg (Jennifer Ryan): “The U.K. economy shrank in the first quarter as a slump in construction pushed Britain into its first double-dip recession since the 1970s. Gross domestic product fell 0.2% from the fourth quarter of 2011, when it declined 0.3%...”

April 24 – Bloomberg (Scott Hamilton): “Britain’s budget deficit unexpectedly widened in March, intensifying pressure on Chancellor of the Exchequer George Osborne to keep squeezing spending as austerity strains governments across Europe. Net borrowing excluding support for banks was 18.2 billion pounds ($29.4bn), up from 18 billion pounds a year earlier and the most since November 2010… Spending rose 4.2% and tax revenue climbed 1.4%.”

April 23 – Bloomberg (Oliver Staley): “When Alex Winning learned that her university tuition in England for the 2012-2013 year would be triple what her friends in college now pay, she says the idea of that much debt upset her. ‘It’s a lot of money to pay back compared to people my age who won’t have that debt,’ said Winning, 19, the granddaughter of Jamaican immigrants who will shell out as much as 9,000 pounds ($14,450) a year to study Korean language and politics. ‘It doesn’t seem fair.’ As the U.S. grapples with record-high college costs and outstanding student loans of $1 trillion, England is embarking on a plan this year that shifts much of the government’s burden of paying for higher education to students and saddles graduates with unprecedented debt.”

U.S. Bubble Economy Watch:

April 26 – Bloomberg (Oshrat Carmiel): “Home prices in New York’s Hamptons, the Long Island oceanside retreat for summering Manhattanites, increased almost 12% the first quarter from a year earlier as the most expensive properties attracted buyers.”

Central Bank Watch:

April 24 – Bloomberg (Jeff Black and Tony Czuczka): “Jens Weidmann is no longer his master’s voice. Almost a year into his new job as the head of Germany’s Bundesbank, Weidmann, 44, has matured from Chancellor Angela Merkel’s discreet right-hand man at global economic meetings into one of the few European policy makers warning that governments are failing to do what’s needed to rescue the euro. Weidmann’s public criticism of measures such as the ‘fiscal compact’ -- hailed by its architects as the first step to economic union -- has pitted him against Merkel and European Central Bank President Mario Draghi as they struggle to hold the 17-nation euro region together. With Europe in recession and rising Spanish bond yields threatening to reignite the debt crisis after a three-month lull, the Bundesbank’s youngest-ever president says greater fiscal and monetary rectitude is the only way to win back investors’ trust. ‘When he was appointed, the press pounced on him and cried ‘Merkel’s man’ because he had worked for her for a few years,’ said Manfred Neumann, the professor of international economics at Bonn University who supervised Weidmann’s 1997 doctoral thesis… ‘He has shown that he isn’t.’”

April 23 – Bloomberg (Jeff Black and Rainer Buergin): “European Central Bank council member Jens Weidmann said calls for the central bank to do more to fight the sovereign debt crisis overestimate its capacity. ‘Monetary policy is not a panacea and central bank firepower is not unlimited, especially not in a monetary union,’ Weidmann said… ‘We can only win back confidence if we bring down excessive deficits and boost competitiveness. And it is precisely because these things are unpopular that makes it so tempting for politicians to rely instead on monetary accommodation.’ ECB policy makers have brushed off demands from the International Monetary Fund and the U.S. for more action to stem the debt crisis, as markets push Spain’s borrowing costs toward levels that prompted Greece, Ireland and Portugal to seek international bailouts.”

Real Estate Watch:

April 27 – Bloomberg (Oshrat Carmiel): “Real estate investors competing to buy Manhattan apartment buildings have sent prices to record highs as rental demand surges, reducing yields on the properties to the lowest in more than six years. The capitalization rate, a measure of investment return that declines as prices rise, averaged 4.4% for Manhattan multifamily buildings in first three months of this year… ‘It’s the strongest of all asset classes,’ said Doug Harmon, senior managing director at Eastdil Secured LLC… ‘There is still plenty of room to run on rents, and I see absolutely no reason why this action will or should stop anytime soon.’”

Muni Watch:

April 24 – Bloomberg (Tim Jones and Brian Chappatta): “Illinois residents, whose income taxes rose by a record last year to help close a budget deficit, are paying the price again for the state’s fiscal mismanagement. With its pile of unpaid bills growing about 30% this year, the weakest pension-funding ratio among states and falling federal aid, Illinois and its municipalities are paying a penalty above AAA debt that’s twice their five-year average. Illinois plans to issue $1.8 billion of debt as soon as next week…”

April 26 – Bloomberg (Michelle Kaske): “U.S. municipalities from California to Florida are selling the most debt in three years to pay for their workers’ retirements in a bet that investment returns will exceed borrowing costs. Fort Lauderdale, Florida, is among issuers considering a sale this year, following an offer by Pasadena, California, last month. Illinois borrowed a combined $7.2 billion in 2010 and 2011. The governments are placing taxpayers at risk by papering over pension deficits with taxable securities. The strategy can backfire if the proceeds don’t earn enough to pay off the bonds.”