Saturday, November 8, 2014

Weekly Commentary, May 18, 2012: The Jig is Up

May 18 – Wall Street Journal (Monica Langley): “J.P. Morgan & Co. Chairman and Chief Executive Officer James Dimon had just committed the most expensive blunder of his 30-year career, failing to detect the risk of trades that had begun to generate huge losses at the bank. On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses. But there were no details about the trades themselves. ‘I want to see the positions!’ he barked, throwing down the papers, according to attendees. ‘Now! I want to see everything!’ When Mr. Dimon saw the numbers, these people say, he couldn’t breathe. Those trading positions have produced losses that could total as much as $5 billion, tarnishing the record of an executive who had thrived through the global financial crisis and who has long been known for paying close attention to the bank’s trading activity, its risk profile and the activities of its senior employees.”

It’s stunning that Mr. Dimon had not closely examined J.P. Morgan’s high-profile trades prior to April 30th. The Wall Street Journal’s (Gregory Zuckerman and Katy Burne) “‘London Whale’ Rattles Debt Market” article acquainted the financial world to Bruno Iksil on April 6th. A follow-up article (Katy Burne) on the 10th further detailed Mr. Iksil’s “massive derivatives sales” and the intriguing revelation that “dozens of hedge funds” were now betting against J.P. Morgan. In response to a question during J.P. Morgan’s April 13th quarterly earnings conference call, Mr. Dimon made his regrettable comment, “It’s a complete tempest in a teapot. Every bank has a major portfolio. In those portfolios you make investments that you think are wise, that offset your exposures.” And fully two weeks later he apparently still had not seen the detailed positions.

Mr. Dimon has been incredibly complacent, but he’s not the focus of this CBB. It’s more important to contemplate how the  world has been incredibly complacent - for years now. I recall being bewildered when reading inside accounts of the months and weeks leading up to the collapse of LTCM back in 1998. How could so many operating in the bowels of derivatives and speculative trading have been so oblivious to what was unfolding? Where were the regulators? And then there was the spring and early-summer of ‘08 when the S&P 500 rose back above 1,400 (broader market indices posted record highs) and the VIX traded below 20. No worries, the Fed will handle it.

For years now, I’ve had a fascination with trying to better grasp how seemingly apparent crises invariably catch everyone unprepared. True, a crisis wouldn’t really be much of a crisis if the marketplace was prepared for it. But over the centuries there have been scores of major Bubbles and monetary fiascos. And having read numerous detailed accounts of manias and Credit busts, on virtually every occasion I would find myself asking, “How could they not have seen it coming?” Important insight is garnered from accounts of the weeks and months heading into the 1929 stock market crash. When stock traders were asked after the Crash why they weren’t worried about all the leverage, speculation and shenanigans, a general response went somewhat like this: “We were all worried about these issues in 1927, but you can only worry about things for so long.” Sure seems that way.

Faith in policymaking was an important aspect of 1929 complacency, as it is today. The Federal Reserve had intervened repeatedly in the marketplace during the “Roaring Twenties.” Similar to now, repeated Fed interventions had market players confident in the notion of a market liquidity backstop. And each intervention worked to enrich, enlarge and embolden the speculator community. By 1929, the financial Bubble had grown so enormous and economies so maladjusted that when the crash hit policymaking was to be found impotent.

It’s a different era of course, but the scope of global policy interventions over the past two decades (and especially since 2008) makes 1920’s policy measures look rather microscopic in comparison. It has been an important aspect of my thesis that aggressive fiscal and monetary stimulus has become increasingly ineffective, destabilizing and dangerous. Actually, a strong case can be made that “activist” policymaking some time ago turned dysfunctional. This, rather importantly, is in stark contrast to the conventional marketplace view that policy measures will continue to underpin global securities markets. This equates to a frightening gulf – and a widening one at that - between market perceptions and reality.

I highlight again J.P. Morgan as a microcosm of what today ails global finance. While details remain sketchy, there has been some reporting that J.P. Morgan’s trading strategy evolved over time. Some have noted that a couple years back J.P. Morgan assumed a more aggressive risk-taking posture. And apparently at junctures along the way, decisions were made to hedge its portfolio of risks (loans, securities and derivatives), only later to reverse course and move to hedge (offset) the risk hedges. As the market “whale,” said to dominate trading in many of the involved so-called “exotic” derivative instruments, it was apparently much easier for J.P. Morgan traders to initiate new trades (so-called “hedges”) than it was to unwind ones already on the books.

There were certainly liquidity issues associated with their big trades. Pricing surely played a prominent role in the accumulation of huge (less than liquid) trades on both sides of various markets, a vast portfolio of derivative trades that were to offset and counterbalance global market risks. To be sure, losses can mount (and “sharks” can gather) rather quickly when a major player moves to unwind big losing positions. And when markets dislocate, as they’re prone to do when there’s excessive leverage and rampant speculation, all bets are off when it comes to expected performance and cross-correlations of a portfolio of illiquid derivative exposures.

May 18 – Financial Times (Sam Jones, Tracy Alloway and Tom Braithwaite): “The unit at the centre of JPMorgan Chase’s $2bn trading loss has built up positions totaling more than $100bn in asset-backed securities and structured products – the complex, risky bonds at the centre of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses and have mired the bank in regulatory investigations and criticism. The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralized loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.”

From what I’ve been able to discern, it’s all consistent with traders being incentivized by policymakers to take an aggressive “risk on” approach in the marketplace. Yet resulting highly speculative markets and an evolving debt crisis in Europe at times led to bouts of market worry that policymakers didn’t in fact have things under control. Both 2010 and 2011 had serious albeit brief bouts of “risk off,” where J.P. Morgan and other speculators were likely forced into partially hedging major “risk on” market exposures. Importantly, late-2011 LTRO and concerted global central bank liquidity operations then likely incited many to offset/hedge their risk hedges to ensure full profits (and big bonuses), from what was anticipated to be yet another bout of reflationary “risk on” policymaking. But when things then unexpectedly began unraveling in Europe in April, at least for J.P. Morgan, the whole thing seems to have become an unmanageable mess. The Jig is Up.

So, global finance again approaches the brink of severe crisis. And we all know what that means. Market participants have been conditioned to expect aggressive policy responses – and policymakers have been conditioned to dare not disappoint the markets. So the critical question becomes how close we have come to that perilous juncture where policymakers are unable to deliver. When does the scope of market and economic imbalances overwhelm policy tools? Or, more precisely and critically, when do the markets begin to lose faith in the efficacy of policy measures (not to mention, the actual policymakers)?

There is overwhelming evidence supporting the view that European policymakers have lost control of their debt crisis. While LTRO altered the short-term market liquidity backdrop, a strong case can be made that it actually worsened the debt situation. “Periphery,” certainly now including Spain and Italy, banking systems today have much greater exposure to sovereign debt. Indeed, the sovereign and banking system nexus has become only more toxic. And with the ECB today highly exposed to Greece and Portugal, there are myriad issues that will have the European Central Bank treading cautiously when it comes to accumulating Spanish and Italian debt. The Europeans will have to use the “firewall” they had hoped was fashioned only for show.

It’s clear that policymaking has hit a wall in Greece. There will now be a second round of elections on June 17th, which has the potential to lead again to inconclusive results. Mr. Tsipras, head of Syriza, or “The Coalition of the Radical Left,” has in the limelight become only more radical and nationalistic. He is content to play hardball with the EU (and Germany, in particular) and dare them to cut off aid. European policymakers haven’t to this point had to deal with a character like Tsipras, and it would be seen as a bad precedent to let him win this game of chicken. The hope is that a majority of Greek voters will look for an alternative to Syriza’s obstinate approach. I was not comforted by today’s New York Times article (Rachel Donadio), “With Little to Lose, Many Greeks Shrug Off Dire Warnings.” The fear is that the “we have no fear. We have nothing to lose” view quoted in the article is becoming deeply entrenched in Greek society.

This week was replete with troubling talk of bank runs in Greece and Spain - and finance more generally on the move. There will be a lot of work to do to ensure a functioning Greek banking system. Bank runs, even the contemporary electronic version, are destabilizing. It is also clear that worries have engulfed Spanish and Italian banks, with very real concern that the uncertainty associated with a Greek exit from the euro could unleash enormous deposit flight. And it was leaked today that the EU is hard at work with an emergency plan for Greece’s exit from the euro system. Such extraordinary uncertainty beckons for “risk off.”

If the European debt fiasco wasn’t enough, it is increasingly clear that China is faltering. Recent economic data confirm the Chinese economy has commenced a meaningful downturn. Housing markets continue to weaken, and there has been increased focus on rising inventories of apartments, automobiles, steel, raw materials, commodities, etc. Shanghai News this week reported that China’s four largest banks essentially had zero net loan growth in the first two weeks of May, confirming that April’s sharp lending slowdown gained momentum. It is also apparent that, despite recent reductions in bank reserve requirements, finance has tightened throughout important markets for non-bank finance (including securitizations and corporate bonds). I don’t see China’s economic and financial systems responding well to an abrupt Credit slowdown.

Importantly, global markets have begun to question the widely-held assumption that Chinese policymakers have their economy and financial system under control. A counter-argument would be that the massive post-2008 Chinese stimulus package pushed China’s system to unwieldy Bubble status. There is ample support for the view of a historic Chinese Bubble replete with massive leverage, financial engineering, fraud and epic economic maladjustment. This is important because such a Bubble dynamic connotes acute fragility. And such latent fragility takes on much greater significance with Europe rapidly deteriorating and global finance now convulsing.

Working at my desk today was somewhat surreal. Global risk markets were closing out a dreadful week. Newswires were full of disconcerting articles – J.P. Morgan, Greece, Spain, Italy, China, etc. Meanwhile, CNBC was in the midst of blanket coverage of Facebook's initial public offering. Mark Zuckerberg rang the bell to open Nasdaq trading, while helicopters provided live video of the employee gathering at Facebook’s Menlo Park headquarters. Insiders are now worth billions, the “average” employee millions. Even U2’s Bono pocketed $1.2bn (with a “B”). I noted above how I see J.P. Morgan’s current predicament as a microcosm of global financial woes. Well, it is difficult for me today not to see Facebook as emblematic of the incredible transfer of wealth associated with Credit Bubbles. It’s almost as if this historic Bubble has been waiting to end with just such an exclamation point.

For the Week:

The S&P500 sank 4.3% (up 3.0% y-t-d), and the Dow fell 3.5% (up 1.2%). The Morgan Stanley Cyclicals dropped 6.9% (up 0.4%), and the Transports fell 5.2% (down 2.9%). The Morgan Stanley Consumer index lost 3.1% (up 0.9%), and the Utilities declined 1.3% (down 2.0%). The Banks were hit for 7.2% (up 9.4%), and the Broker/Dealers were down 6.6% (up 2.0%). The S&P 400 Mid-Caps fell 6.1% (up 3.0%), and the small cap Russell 2000 fell 5.4% (up 0.8%). The Nasdaq100 was down 5.3% (up 8.8%), and the Morgan Stanley High Tech index was hit for 5.5% (up 7.3%). The Semiconductors were clobbered 7.6% (unchanged). The InteractiveWeek Internet index fell 4.8% (up 3.7%). The Biotechs dropped 6.0% (up 30.2%). Although bullion ended up $14, the volatile HUI gold index declined 2.0% (down 20.5%).

One-month Treasury bill rates ended the week at 6 bps and three-month bills closed at 8 bps. Two-year government yields were up 2.5 bps to 0.30%. Five-year T-note yields ended the week little changed at 0.75%. Ten-year yields fell 11 bps to 1.72%. Long bond yields fell 21 bps to 2.80%. Benchmark Fannie MBS yields declined 9 bps to 2.67%. The spread between benchmark MBS and 10-year Treasury yields widened 2 to 94 bps. The implied yield on December 2013 eurodollar futures jumped 9 bps to 0.76%. The two-year dollar swap spread rose 2 to 37 bps. The 10-year dollar swap spread declined 3 to 12 bps. Corporate bond spreads widened significantly. An index of investment grade bond risk ended the week up 15 to 123 bps (high since 12/21). An index of junk bond risk jumped 80 to 709 bps (high since 12/20).

Debt issuance was decent considering... Investment grade issuers included Kellogg $1.45bn, Toyota Motor Credit $1.0bn, Progressive Energy Carolina $1.0bn, Oncor Electric $900 million, Republic Services $850 million, Westar Energy $550 million, Cameron International $500 million, Cardinal Health $500 million, and Murphy Oil $500 million.

Junk bond funds saw inflows slow to $182 million (from Lipper). Junk issuers included Sally $700 million, Frontier Communications $500 million, Rowan Companies $500 million, Speedy Cash $340 million, Northern Oil $300 million, and Momentive Performance $250 million.

I saw no convertible debt issued.

International dollar bond issuers included Inmit Mining $1.5bn, Kodiak Oil & Gas $800 million, Kommunalbanken $600 million, International Bank of Reconstruction & Development $500 million, and Aercap Aviation Solution $300 million.

European debt markets were in disarray. Spain's 10-year yields jumped 26 bps to 6.25% (up 121bps y-t-d). Italian 10-yr yields rose 30 bps to 5.80% (down 123bps). Ten-year Portuguese yields surged 127 bps to 11.96% (down 81 bps). The new Greek 10-year note yield jumped another 431 bps to 28.54%. German bund yields were down 9 bps to a record low 1.42% (down 40bps), while French yields rose 5 bps to 2.84% (down 29bps). The French to German 10-year bond spread widened 14 to 142 bps (widest since last November). U.K. 10-year gilt yields dropped 14 bps to 1.82% (down 15bps). Irish yields surged 46 bps to 7.26% (down 100bps).

The German DAX equities index sank 4.7% (up 6.3% y-t-d). Spain's IBEX 35 equities index was hit for 6.1% (down 23.3%), and Italy's FTSE MIB sank 7.1% (down 13.5%). Japanese 10-year "JGB" yields declined 2 bps to 0.825% (down 16bps). Japan's Nikkei fell 3.8% (up 1.8%). Emerging markets remained under selling pressure - in some cases severe pressure. For the week, Brazil's Bovespa equities index was hammered 8.3% (down 3.9%), and Mexico's Bolsa sank 5.2% (down 0.5%). South Korea's Kospi index fell 7.0% (down 2.3%). India’s Sensex equities index dipped 0.9% (up 4.5%). China’s Shanghai Exchange declined 2.1% (up 6.6%).

Freddie Mac 30-year fixed mortgage rates declined 4 bps to a record low 3.79% (down 83bps y-o-y). Fifteen-year fixed rates dipped a basis point to a new low 3.04% (down 76bps). One-year ARMs were unchanged at 2.78% (down 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 4.39% (down 74bps).

Federal Reserve Credit declined $4.8bn to $2.840 TN. Fed Credit was up $101bn from a year ago, or 3.7%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/16) declined $8.7bn to $3.490 TN. "Custody holdings" were up $70bn y-t-d and $48bn year-over-year, or 1.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $653bn y-o-y, or 6.7% to $10.469 TN. Over two years, reserves were $2.090 TN higher, for 25% growth.

M2 (narrow) "money" supply declined $1.7bn to $9.869 TN. "Narrow money" has expanded 6.6% annualized year-to-date and was up 9.3% from a year ago. For the week, Currency increased $0.5bn. Demand and Checkable Deposits dropped $34.4bn, while Savings Deposits jumped $31.0bn. Small Denominated Deposits declined $2.1bn. Retail Money Funds rose $3.5bn.

Total Money Fund assets were down $5.4bn to $2.563 TN. Money Fund assets were down $132bn y-t-d and $175bn over the past year, or 6.4%.

Total Commercial Paper outstanding jumped $27bn to a 17-week high $994bn. CP was up $34bn y-t-d, while it declined $190bn from one year ago, or down 16.0%.

Global Credit Watch:

May 16 – Bloomberg (Boris Groendahl): “Alexis Tsipras, the leader of Greece’s leftist Syriza party, said Greece has room to renegotiate the austerity program with official creditors, according to an interview in Austria’s Kleine Zeitung. ‘Greece must challenge the agreed austerity plan and start fresh talks with the troika,’ Tsipras was quoted as saying… referring to the trio of European Union, European Central Bank and International Monetary Fund. ‘There is still room for new negotiations because none of them wants to lose their money.’”

May 14 – Telegraph (Louise Armitstead): “Germany has threatened to halt financial aid to Greece unless a new government commits to the terms of the country's bail-out agreements. As politicians in Athens struggled to agree a coalition after the general elction, ministers in Berlin warned that they would withhold international aid to Greece in a move that could trigger a fresh, damaging countdown to default… Klaus Regling, chief executive of the EFSF, said: ‘There will be no further disbursement before there is an agreement with the Troika [officials from the EU, ECB and IMF].’”

May 16 – Bloomberg (Jeff Black and Jana Randow): “European Central Bank President Mario Draghi acknowledged that Greece could leave the euro area and signaled policy makers won’t compromise on their key principles to prevent an exit. While the bank’s ‘strong preference’ is that Greece stays in the euro area, ‘the ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet,’ Draghi said… Since the euro’s founding treaty does not envisage a member state leaving the monetary union, ‘this is not a matter for the Governing Council to decide,’ Draghi said.”

May 16 – Market News International: “Neither the European Central Bank nor the Eurosystem can be used as a mechanism Eurozone members to share risks, ECB Governing Council member Erkki Liikanen said… ‘Now in the crisis, the divergence of euro area economies has dramatically increased and the ECB could easily end up becoming subject to a risk-sharing mechanism,’ Liikanen said… ‘The ECB or the Eurosystem cannot become a mechanism for sharing fiscal risks between member states," Liikanen said, warning that such an action would compromise the central bank's independence. Liikanen also noted that there were ‘very good reasons’ for not monetizing budget deficits even in countries that do not share a common currency. ‘There are even more reasons for not doing so in monetary unions such as the euro area.’”

May 18 – Bloomberg (Abigail Moses): “The cost of insuring Spanish government and financial debt rose to records after Moody’s… downgraded 16 of the nation’s banks.”

May 18 – Bloomberg (Charles Penty): “More Spanish loans soured in March, fueling concern that the government’s focus on making banks clean up real estate was too narrow as the country’s economy entered a recession. Bad loans as a proportion of total lending jumped to 8.37% in March, the highest since August 1994, from a restated 8.30% in February…”

May 16 – Telegraph (Louise Armitstead): “Marinao Rajoy pleaded for an urgent ‘defence of the euro project’ yesterday as Madrid was close to being locked out of international markets by ‘astronomical’ borrowing costs. The prime minister of Spain called for European leaders to publicly back the so-called 'sinner states’ amid fears that contagion from Greece could trigger a highly-anticipated Spanish banking crisis and then a bail-out. Mr Rajoy told state television there was ‘a serious risk we will not be able to borrow - or borrow at astronomical prices’ unless they succeeded in bringing down the debt levels and regaining market confidence. ‘All these measures are to get out of the hole we find ourselves in,’ he said.”

May 16 – Bloomberg (Emma Ross-Thomas): “Spain will not end up blocking withdrawals of bank deposits as Argentina did after the 2001 crisis, Spanish Budget Minister Cristobal Montoro told a conference… in response to a question.”

May 18 – Bloomberg (Mark Deen): “German Finance Minister Wolfgang Schaeuble said that turmoil in the financial markets caused by Europe’s debt crisis may last another two years, as Group of Eight leaders prepared to discuss Greece and its impact on the global economy. More than 2 1/2 years after Greece revealed its bloated budget deficit, Europe has ‘known a lot of crisis,’ Schaeuble said… ‘It’s practically normal.’ Even so, ‘in 12 to 24 months we’ll see a calming of financial markets,’ he said.”

May 18 – Bloomberg (Ott Ummelas): “A Greek exit from the euro area wouldn’t have the same impact on financial markets as the collapse of Lehman Brothers Holdings Inc. in 2008, Estonian Finance Minister Juergen Ligi said. ‘Lehman was something where everything fell apart, there was real panic,’ Ligi told reporters… ‘We’ve been getting used to the idea’ of a Greek exit ‘for a while,’ he said. ‘There has been a massive writedown of Greek debt from balance sheets. Firewalls have been built.’”

May 17 – Bloomberg (Andras Gergely): “The forint capped the biggest five-day depreciation in more than four months and borrowing costs rose at an auction as the European debt crisis escalated and Hungary struggled to start bailout talks.”

May 17 – Bloomberg (Henry Meyer and Jason Corcoran): “Investors are fleeing Russia as demonstrators against President Vladimir Putin dig in, exacerbating the impact of Europe’s debt crisis on the country’s markets, money managers from Frankfurt to Moscow said… As the benchmark RTS equity index entered a bear market, Russia-focused equity funds recorded $251 million of outflows in the seven days to May 9, the most this year, while China lost $127 million, India $148 million and Brazil $167 million, EPFR Global data show.”

Global Bubble Watch:

May 17 - Wall Street Journal (Shayndi Raice, Anupreeta Das and John Letzing): “Facebook Inc. priced its shares at $38 apiece for an initial public offering that would make it the most valuable U.S. company at the time of its stock market debut. The social network priced at the top end of the range it set earlier this week, when it said it would price its IPO at $34 to $38 a share from $28 to $35 a share, in a sign of the tremendous investor appetite for the offering. At $38 a share, Facebook is valued at $104 billion…”

May 17 – Bloomberg (Jody Shenn and Tom Keene): “Investors should avoid highly rated shorter-maturity debt because the potential returns are too low, according to DoubleLine Capital LP’s Jeffrey Gundlach. ‘There is absolutely no reason to own any investment-grade bonds inside of three years for sure,’ Gundlach, chief executive officer of… DoubleLine, said… ‘And maybe even five years is getting to that category because it has no yield.’”

May 18 – Bloomberg (Oshrat Carmiel): “A duplex penthouse at a tower under construction on Manhattan’s West 57th Street went under contract for more than $90 million, setting a record for a single residence in the borough. The 11,000-square-foot unit, spanning the 89th and 90th floors of the building known as One57, sold at a price between $8,000 and $9,000 a square foot…”

May 17 – Bloomberg (Nadja Brandt): “A week after Christine Lynch listed her house in the Brentwood neighborhood of Los Angeles for $3.625 million, she had seven offers. Within 10 days, a deal was reached for the five-bedroom, six-bathroom home -- and for $225,000 more than she asked. ‘My first reaction was, ‘Wow, I guess we’re really doing this,’ Lynch, 55, said… Bidding wars are breaking out for luxury homes in such wealthy Los Angeles enclaves as Brentwood, Beverly Hills and Bel Air as an increasing number of buyers bet on rising home prices and investors return to the market. Even properties in need of extensive renovation are being fought over by shoppers who expect to resell them for more after a remodel or rebuild.”

Currency Watch:

May 17 – Bloomberg (Michael Patterson and Ye Xie): “The cost to borrow in dollars is rising at the fastest pace in five months as Europe’s debt crisis leads investors to seek shelter in U.S. assets, spurring companies from China to Brazil to cancel bond sales. One-year cross-currency basis swaps, the rate banks pay to convert euro interest payments into dollars, fell to 68 bps below the euro interbank offered rate yesterday… the biggest four-day drop since Dec. 14. Costs to exchange payments in South Korean won and South African rand for dollars reached the most expensive levels in at least three months.”

The U.S. dollar index gained 1.3% this week to 81.28 (up 1.4% y-t-d). For the week on the the upside, the yen increased 1.2%. On the downside, the New Zealand dollar declined 3.4%, the South African rand 2.9%, the Brazilian real 2.8%, the Swedish krona 2.6%, the South Korean won 2.2%, the Canadian dollar 2.1%, the Norwegian krone 1.8%, the Australian dollar 1.8%, the Singapore dollar 1.8%, the Mexican peso 1.8%, the British pound 1.6%, the euro 1.1%, the Danish krone 1.0% and the Taiwanese dollar 0.7%.

Commodities Watch:

May 17 – Bloomberg (Chanyaporn Chanjaroen and Madelene Pearson): “Gold demand in China may surge as much as 30% this year as rising incomes boost consumption, helping the country topple India as the world’s largest bullion market on an annual basis, according to the World Gold Council. Demand, which rose to a record in the first quarter, may gain to between 900 metric tons and 1,000 tons this year, from 769.8 tons in 2011…”

The CRB index slipped 0.5% this week (down 4.9% y-t-d). The Goldman Sachs Commodities Index fell 2.0% (down 2.4%). Spot Gold was quite volatile, while ending the week up 0.9% to $1,593 (up 1.9%). Silver declined 0.6% to $28.72 (up 2.9%). June Crude sank $4.65 to $91.48 (down 7.4%). June Gasoline fell 3.7% (up 9%), while June Natural Gas jumped 9.3% (down 8%). July Copper dropped 4.9% (up 1%). In the biggest weekly gain since 2007, June Wheat surged 16.5% (up 7%) and June Corn jumped 9.4% (down 2%).

China Watch:

May 16 – Bloomberg (Stephanie Tong): “China’s four biggest banks reported almost zero net new lending in the two weeks ended May 13, Shanghai Securities News reported… Two of the four lenders increased outstanding loans by less than 20 billion yuan ($3.16bn), while the others posted drops as repayments exceeded new credit… Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. account for about half of the loans in China… Deposits at the four lenders fell by about 200 billion yuan in early May, according to the newspaper. Yuan deposits at all Chinese banks decreased by 808 billion yuan in April from a year earlier, while new lending was 681.8 billion yuan, down from 1.01 trillion yuan in March…”

May 17 – Bloomberg: “Chinese companies have accumulated ‘alarming levels’ of debt and will have difficulty with payments in an economic downturn, Xinhua News Agency said, citing Li Yang, vice president of the Chinese Academy of Social Sciences. The debt-to-asset ratio of Chinese companies is about 105.4%, the highest among 20 countries examined in yearlong study by Li’s team of borrowing by China’s government, corporations and individuals, Xinhua reported.”

May 17 – Bloomberg: “China ZhengTong Auto Services Holdings Ltd. and Baoxin Auto Group Ltd., Chinese luxury auto dealers, canceled their debut sales of dollar-denominated bonds as yields on Chinese debt in the U.S. currency surged the most since November. The companies, which sell cars made by Bayerische Motoren Werke AG and Tata Motors Ltd.’s Land Rover and Jaguar, cited ‘market conditions’ for the delay… Yields on Chinese securities are headed for the biggest weekly increase since the period ending Nov. 25…”

May 18 – Bloomberg: “Chinese dealers are struggling with the rising number of unsold cars that’s threatening to deepen price cuts, according to the nation’s biggest automobile dealers’ association. Dealerships for Honda Motor Co., Chery Automobile Co., BYD Co. and Geely Automobile Holdings Ltd. carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts, Su Hui, vice president of the auto market division at the state-backed China Automobile Dealers Association, said…”

May 17 – Bloomberg (Michelle Wiese Bockmann): “China Shipbuilding Industry Corp., a state-controlled company with seven yards, said domestic vessel owners must renew their fleets to prevent new orders from slumping to a seven-year low. A decline in overseas business, falling ship prices and rising labor costs are ‘severely challenging,’ Han Guang, deputy head of the company’s Information Research Centre, said… Exports accounted for 82% of ships built and delivered last year, he said. ‘Domestic shipowners need to increase and optimize fleet structure,’ Han said. While the industry has ‘enormous room for further growth,’ 30% of yards have received no new business since the end of 2010, he said.”

May 17 – Bloomberg (Joshua Fellman): “China will ‘seriously handle’ health-care corruption, including bribery in the purchase of drugs and medical devices and in bidding for projects, the official Xinhua News Agency said…”

May 17 – Bloomberg (Kelvin Wong): “Mainland Chinese investors accounted for a smaller percentage of Hong Kong’s new home sales for a second quarter as the nation’s banks tightened lending while local buyers returned to the market, Midland Holdings Ltd. said. Mainland purchasers made up 36.8% of all new home sales by value in the first quarter… The figure reached 53.9% in the third quarter last year, Midland said.”

Muni Watch:

May 17 – Bloomberg (Martin Z. Braun): “New York state owes $72.2 billion for promised health benefits for retired government workers, a 29% increase from the year before, according to a financial statement. Future retiree benefit costs rose by $16.3 billion in the fiscal year ended March 31, exceeding the state’s outstanding debt by more than $15 billion… New York City’s retiree health-care liability was $84 billion for the fiscal year ended June 30.”

California Watch:

May 15 – Bloomberg (Michael B. Marois and James Nash): “California Governor Jerry Brown took office last year on a promise to deploy political skills honed over three decades to break the most populous U.S. state out of its annual fiscal crisis. After 16 months, the 74-year-old Democrat is having as little success as his Republican predecessor, Arnold Schwarzenegger, in governing the state with the world’s ninth- biggest economy as it slips into a $15.7 billion deficit, up 70% since January.”

May 17 – Bloomberg (Michael B. Marois): “The University of California, whose faculty and researchers have won 58 Nobel Prizes, may raise tuition for a third consecutive year as the state’s widening $15.7 billion deficit threatens deeper cuts. The university’s Board of Regents will consider a 6% boost in July if the state doesn’t lift funding by $125 million… That would follow increases of 9.6% approved in 2011 and 8% the previous year. The university… faces an $847 million shortfall this year.”

May 16 – Bloomberg (Alison Vekshin): “Stockton, the central California city on the brink of insolvency, weighed filing for bankruptcy as it faces a $26 million budget gap in the next fiscal year. A Chapter 9 bankruptcy filing, massive cuts to city departments or concessions that may emerge from negotiations with creditors are among the options for balancing the spending plan…”