Saturday, November 8, 2014

Weekly Commentary, July 13, 2012: Game Theory and Crowded Trades

It was, to say the least, another interesting week. JP Morgan restated its first quarter earnings, as the company’s “London Whale” synthetic derivative loss jumped to $5.8bn. Another city in California can’t pay its bills and readies for bankruptcy. China reported second quarter growth at 7.6%, a three-year low, while articles abound questioning the veracity of Chinese data. Moody’s downgraded Italy’s sovereign debt rating two notches to not much better than junk. Apparently, Silvio Berlesconi is preparing for another run at the Italian presidency, as the competent Mario Monti states he’s not interested. Spain’s fledgling President Rajoy announced yet another austerity plan, this time hoping to trim a (stubbornly) huge budget deficit by $80bn.

From my perspective, the most meaningful of this week’s data was Friday’s report from the ECB showing that Spanish bank borrowings had reached a record 337bn euro ($411bn), up almost 50bn euros ($61bn) during June. Spanish institutions have now increased ECB borrowings by 204bn euro ($250bn) in only five months. There’s no mystery surrounding President Rajoy’s snappy acquiescence to EU demands for additional painful deficit-cutting measures. Spain’s banking system is suffering a run on deposits and liquidity. The euro traded to two-year lows Friday morning, before rallying somewhat to close out another losing week.

From Friday’s WSJ Heard on the Street column (Simon Nixon): “Feeling more relaxed about the euro crisis since last month's summit? Think again. The risk of a euro-zone breakup may actually be rising rather than falling, according to Bank of America Merrill Lynch strategists David Woo and Athanasios Vamvakidis. Using game theory to consider how the situation might evolve, they believe the crisis will boil down to a game of bluff between Italy and Germany in which neither country has an incentive to back down. That doesn't mean this would be the best outcome for either side; in game theory, the most likely outcome isn't always what economists call ‘Pareto optimal,’ one that will bring maximum benefit to all players. Instead, the ‘Nash equilibrium’ for the euro zone—the situation in which no player has an incentive to change strategy because to do so unilaterally would leave them worse off—is that Italy refuses to undertake the overhauls needed to enable its economy to grow and Germany refuses to provide the bailouts to persuade it to stay.”

From Wikipedia: “It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies. If economic allocation in any system is not Pareto efficient, there is potential for a Pareto improvement—an increase in Pareto efficiency: through reallocation, improvements can be made to at least one participant's well-being without reducing any other participant's well-being. …In practice, ensuring that nobody is disadvantaged by a change aimed at achieving Pareto efficiency may require compensation of one or more parties. For instance, if a change in economic policy eliminates a monopoly and that market subsequently becomes competitive and more efficient, the monopolist will be made worse off… This means the monopolist can be compensated for its loss while still leaving a net gain for others in the economy, a Pareto improvement. In real-world practice, such compensations have unintended consequences. They can lead to incentive distortions over time as agents anticipate such compensations and change their actions accordingly.”

I’d prefer that this analysis was not too technical, but the “Pareto optimal” and “Nash equilibrium” concepts – and game theory more generally - are critical for analyzing both the unfolding European crisis and the extraordinary global macro Credit environment. Besides, it doesn’t hurt to ponder whether reasonable explanations exist that help explain why post-Bubble policymakers are generally cast as such nincompoops. I dove deeper into Credit theory last week, attempting to illuminate how the nature of policymaking/politics can change profoundly depending upon the evolutionary phase of the Credit Cycle. In particular, the idea of European political cooperation and monetary integration resonated during the potent upside of the global Credit boom. Credit, economic output and asset prices were expanding – the economic pie was seen as growing ever larger. Optimism and extrapolation reigned supreme – as they do.

In game theory terms, players were willing to compromise and, in some cases, “reallocate.” Politicians and central bankers recognized that individual country benefits – and gains to the integrated system overall – would greatly outweigh the associated costs. Cooperation, after all, was certain to spur system-wide efficiencies and enhanced economic wealth. Europe’s wealthier countries were willing to subsidize the poorer, confident of the overwhelming benefits to economic, financial and monetary integration. China, Asia and others were more than willing to monetize ongoing U.S. trade deficits, believing the overall benefits to growth and prosperity outweighed gradual devaluation of their dollar holdings.

But the downside of the Credit cycle radically alters rules of the game. Over time, reality sinks in that the previous prosperity was in fact an unsustainable boom-time phenomenon. The downside of the Credit cycle ensures faltering asset prices, deflating household net worth and financial sector deficiencies, along with the revelation of problematic economic imbalances and maladjustment. It’s not long into the bust before many see themselves as losers – and to have lost unjustly at the hands of an unfair system. The growing ranks of losers become an increasingly powerful political force.

The pie - recognized as having been previously inflated by excess and policy largess – is seen as vulnerable and shrinking, much to the dismay of the general public whose expectations were so inflated during the previous Bubble. The Credit cycle’s downside ushers in a period where individual players become acutely focused on ensuring that they get the largest possible share of what they view as a contracting pie. The backdrop no longer incentivizes cooperation, cohesion and integration. As has been demonstrated by political stalemates in Brussels, as well as in Washington, ‘Nash equilibrium’ dynamics prevail, “the situation in which no player has an incentive to change strategy because to do so unilaterally would leave them worse off.”

But let’s not limit game theory analysis primarily to Europe. And, importantly, the upside of the global Credit Bubble has not yet fully run its course. So, from a more global macro point of view, a ‘Pareto optimality’ mindset still holds sway. Global central bankers remain predominantly of the view that the overall benefits from cooperation, monetization and currency devaluation outweigh the costs. Ultra-low rates compensate borrowers at the expense of savers, a cost policymakers view as easily outweighed by the systemic benefits of sustained global Credit expansion. And, astutely, from Wikipedia above: “In real-world practice, such [‘Pareto optimal’] compensations have unintended consequences. They can lead to incentive distortions over time as agents anticipate such compensations and change their actions accordingly.”

“Incentive distortions” don’t get deserved attention. The conventional view holds that inflation poses the predominant risk emanating from loose monetary policy. Yet with Chinese and Asian mega-factories seemingly capable of forever saturating the world with inexpensive goods, central bankers and analysts these days easily dismiss inflationary risks. Essentially free money is, basically, costless, or so the thinking goes. And if it all seems too good to be true, it’s because no one wants to delve into the true costs associated with monetary policy incentives having so maligned global financial markets.

Previous CBBs have focused on the dysfunctional nature of the “risk on, risk off” – Roro – market trading dynamic. Instead of a fleeting fad, Roro has become only more deeply entrenched – seemingly becoming a permanent fixture. Arguably, the market backdrop has regressed only further into a casino of wagers either on or against the capacity of policy responses to incite market rallies. Risk markets have become only more highly correlated – and the bets only more fixated on red or black (or, more accurately, the flashing red or green from the Bloomberg screen). And the two biggest outgrowths from years of monetary policy incentives - the mammoth leveraged speculating community and global derivatives markets - are struggling to perform as expected. This comes as no surprise.

An era of “incentive distortions” - years of loose money and decades now of “activist” central bank market intervention – has severely distorted the underlying structure of Credit, financial market, and economic systems. Beginning back in the early 1990s, the Greenspan Fed actively “reallocated” financial returns to the impaired banking system by slashing short-term borrowing costs and orchestrating a steep yield curve (“free money” from borrowing short and holding longer-term debt instruments). Intervening in the markets to boost depleted bank capital was seen as providing extraordinary system benefits. Little attention was thus paid to the fact that this also incentivized leveraged speculation. And the hedge fund industry hasn’t looked back since, with assets exploding from about $50bn to surpass $2.1 TN. And with the Fed and the cadre of global central banks guaranteeing “liquid and continuous” markets, the derivatives and risk insurance marketplaces exploded to unfathomable hundreds and hundreds of Trillions. And the larger these Bubbles and associated risks inflated, the more confident the speculator community became that more aggressive policy measures and market interventions would be forthcoming.

I would today argue there is a momentous unappreciated cost to central bankers’ “reallocations” and “incentive distortions:” they’ve nurtured one massive, and now hopelessly unwieldy, “crowded trade” throughout global risk markets. And, as seasoned traders appreciate, once a trade becomes “crowded” the nature of how a trade – how a market – performs tends to turn highly unpredictable, erratic and, in the end, unsatisfying. Over time, fundamental developments are overshadowed by the brute force of market technicals. For example, “crowded” short positions will tend to “melt-up” into dramatic short squeezes before eventually collapsing. And crowded longs tend to turn highly speculative, yet inevitably susceptible to air-pockets and abrupt downdrafts. Locate a “crowded trade” and you’ve found a captivating place where it’s easy to lose money. In general, crowded trades fuel speculation, unpredictability, and Bubble Dynamics – along with a lot of frustration and eventual disenchantment.

Global central bankers have ensured that way too much money now chases limited global risk asset market returns (contemporary prevailing inflation). With global short-term rates pushed near zero, hundreds of billions have flooded into more speculative instruments and ventures, certainly including the global hedge fund community. Not surprisingly, funds have struggled with performance. After a poor 2011, scores of funds have crowded into similar trading strategies and are these days under intense pressure to make money. Many are desperate not to miss a tradable market trend, while at the same time suffering from an unusually low tolerance for losses. Funds, careers, businesses and dreams are at stake – and the “tape” shows it.

It’s all created an extraordinarily mercurial backdrop. The game of seeking to extract speculative trading profits from “crowded trades,” trend-following derivative trading strategies, and generally weak-handed participants has, itself, become one massive and dysfunctional crowded trade. “Crowded Trade Squared,” a creature of prolonged policy interventions and incentive distortions, is a perilous predicament posing as a functioning marketplace. Meanwhile, the backdrop seems to ensure the type of “Roro” volatility that wears down managers, performance and investor confidence. This is the case for markets across the globe, in an era where market-based finance has never been as critical to global financial, economic and social stability. And that amounts to an incredible accumulating cost the “inflationists” will continue to disregard.

For the Week:

The S&P500 added 0.2% (up 7.9% y-t-d), while the Dow ended little changed (up 4.6%). The Banks jumped 1.5% (up 16.6%), while the Broker/Dealers were down 0.6% (up 3.0%). The Morgan Stanley Cyclicals dropped 1.7% (up 2.8%), while the Transports slipped 0.1% (up 3.4%). The Morgan Stanley Consumer index was unchanged (up 4.9%), while the Utilities gained 1.5% (up 3.5%). The S&P 400 Mid-Caps slipped 0.5% (up 7.2%), and the small cap Russell 2000 declined 0.8% (up 8.1%). The Nasdaq100 was down 1.1% (up 13.5%), and the Morgan Stanley High Tech index fell 1.6% (up 5.3%). The Semiconductors dropped 5.1% (down 2.0%). The InteractiveWeek Internet index fell 2.8% (up 3.1%). The Biotechs slipped 0.4% (up 36.1%). Although bullion was up $6, the HUI gold index sank 4.5% (down 18.9%).

One-month Treasury bill rates ended the week at 6 bps and three-month bills closed at 9 bps. Two-year government yields were down 3 bps to 0.24%. Five-year T-note yields ended the week down 2 bps at 0.62%. Ten-year yields fell 6 bps to 1.49%. Long bond yields dropped 8 bps to 2.58%. Benchmark Fannie MBS yields dropped 7 bps to 2.39%. The spread between benchmark MBS and 10-year Treasury yields narrowed one to 90 bps. The implied yield on December 2013 eurodollar futures declined 5 bps to 0.51%. The two-year dollar swap spread declined 2 to 23 bps. The 10-year dollar swap spread declined 2 to 13 bps. Corporate bond spreads narrowed slightly. An index of investment grade bond risk ended the week down one to 112 bps. An index of junk bond risk declined 3 to 587 bps.

Debt issuance picked up after the holiday week. Investment grade issuers included Anheuser-Busch $7.5bn, Penske Truck Leasing $1.1bn, ING US $850 million, Cabot Corp $600 million, Monsanto $500 million, Transcontinental Gas Pipeline $400 million, Primerica $375 million, Principal Life $350 million, and Westlake Chemical $250 million.

Junk bond funds saw inflows jump to $1.49bn (from Lipper). Junk Issuers included Community Health Services $1.2bn, Wideopenwest $1.02bn, SBA Telecom $800 million, Beazer Homes $300 million, Icahn Enterprises $300 million, and Eagle Rock Energy $250 million.

I saw no convertible debt issued.

International dollar bond issuers included Takeda Pharmaceutical $3.0bn, Sumitomo Mitsui Banking $3.0bn, America Movil $2.0bn, Codelco $2.0bn, Westpac Banking $2.0bn, Macquarie Bank $1.4bn, BE Aerospace $1.3bn, Gazprom $1.0bn, Nippon Telegraph & Telephone $750 million, Industrial Bank of Korea $500 million, Korea East-West Power $500 million and Tunisia $485 million.

German bund yields fell 7 bps to 1.26% (down 57bps y-t-d), and French yields sank 16 bps to 2.21% (down 93bps). The French to German 10-year bond spread narrowed 9 to 95 bps. Spain's 10-year yields dropped 34 bps to 6.57% (up 153bps). Italian 10-yr yields added 2 bps to 6.03% (down 100bps). Ten-year Portuguese yields increased 4 bps to 10.05% (down 272bps). The new Greek 10-year note yield fell 115 bps to 24.04%. U.K. 10-year gilt yields declined 4 bps to 1.55% (down 43bps). Irish yields fell 16 bps to 6.00% (down 226bps).

The German DAX equities index rallied 2.3% (up 11.2% y-t-d). Spain's IBEX 35 equities index declined 1.1% (down 22%), and Italy's FTSE MIB slipped 0.1% (down 9.1%). Japanese 10-year "JGB" yields declined 2 bps to 0.77% (down 21bps). Japan's Nikkei fell 3.3% (up 3.2%). Emerging markets were mostly lower. Brazil's Bovespa equities index sank 1.9% (down 4.3%), while Mexico's Bolsa rallied 1.7% (up 9.2%). South Korea's Kospi index dropped 2.4% (down 0.7%). India’s Sensex equities index lost 1.8% (up 11.4%). China’s Shanghai Exchange fell 1.7% (down 0.6%).

Freddie Mac 30-year fixed mortgage rates declined 6 bps to a record low 3.56% (down 105bps y-o-y). Fifteen-year fixed rates declined 3 bps to 2.86% (down 79bps). One-year ARMs added a basis point to 2.69% (down 26bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 6 bps to 4.20% (down 86ps).

Federal Reserve Credit rose $3.6bn to $2.849 TN. Fed Credit was down $10.4bn from a year ago, or 0.4%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 7/11) increased $1.1bn to $3.514 TN. "Custody holdings" were up $93bn y-t-d and $63bn year-over-year, or 1.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $396bn y-o-y, or 3.9% to $10.436 TN. Over two years, reserves were $1.987 TN higher, for 24% growth.

M2 (narrow) "money" supply surged $43.2bn to a record $9.992 TN. "Narrow money" has expanded 7.1% annualized year-to-date and was up 8.2% from a year ago. For the week, Currency increased $1.0bn. Demand and Checkable Deposits jumped $20.5bn, and Savings Deposits rose $27.5bn. Small Denominated Deposits declined $3.1bn. Retail Money Funds fell $2.7bn.

Total Money Fund assets rose $18.2bn to $2.551 TN. Money Fund assets were down $144bn y-t-d and $145bn over the past year, or 5.4%.

Total Commercial Paper outstanding rose $9.1bn to $982bn. CP was up $22.6bn y-t-d, while having declined $255bn from a year ago, or down 20.6%.

Global Credit Watch:

July 13 – Bloomberg (Emma Ross-Thomas): “Spanish lenders’ net borrowings from the European Central Bank jumped to a record 337 billion euros ($411bn) in June as the European bailout agreement failed to ease their access to funding. Net average ECB borrowings climbed from 288 billion euros in May… Gross borrowing was 365 billion euros, up from 325 billion euros in May, accounting for 30% of borrowing in the euro region.”

July 10 – Dow Jones (David Roman and Matthew Walter): “Spain's Finance Minister said… that Madrid will keep working to ensure Spanish banks receive direct capital injections from the European Union bailout fund in the future, rather than through the country's own fund, setting the stage for a confrontation with Germany and other countries who oppose the idea. The European Commission supports Madrid's stance on the issue and a memorandum for the banking bailout to be signed on July 20 will include an explicit reference to direct capital injections as agreed at the last European Union leaders' summit, Finance Minister Luis De Guindos told reporters at the close of two days of meetings here… Mr. De Guindos said… the entire recapitalization process will be completed in 18 months with only minor details of the memorandum still being discussed. That leaves the dispute over direct injections of money to banks versus to the country's fund as a key point of contention. For Spain, in particular, it is important because of concerns that lending to the country rather than its banks would put the sustainability of its sovereign debt in question. Mr. De Guindos' comments come after Germany’s… Schaeuble said that Spain should retain final liability for any losses incurred by its banks receiving aid--even after the EU bailout fund is allowed to inject capital directly into them, which in any case may not happen before late 2013, when a planned EU banking union is effective. Mr. Schaeuble's statement… indicates an ongoing divide between northern European countries taking on the role of creditors in the EU and southern countries like Italy consistently supporting Spain on such key issues amid worries that it may also need assistance in future.”

July 12 – Financial Times (Miles Johnson): “The Spanish government unveiled €65bn ($90bn) worth of tax increases and public spending cuts as part of a deal to secure European aid to rescue its banking system as thousands of miners marched on the centre of Madrid to protest against austerity measures. Facing heckles from opposition politicians Mariano Rajoy, prime minister, issued stark warnings about the risk to Spain’s future as he announced a rolling back of unemployment benefits, an increase in value added tax would rise from 18 to 21%, and cuts to local government to achieve the savings over two and a half years. ‘I know that the measures that I have announced are not pleasant but they are necessary,’ Mr Rajoy said when announcing what is his government’s fourth set of austerity measures in the seven months it has held power.”

July 10 – Bloomberg (Jim Brunsden): “The European Central Bank said the European Commission’s plans to handle the failure of large lenders may threaten its independence and could damage confidence in national guarantee programs for bank deposits. ECB Vice President Vitor Constancio made the remarks during a debate on a draft law with finance ministers… Some ministers also raised concerns about the proposal, which Michel Barnier, the European Union’s financial services chief, has described as a ‘cornerstone’ of the bloc’s efforts to build a so-called banking union. There is a ‘potential difficulty’ with how Barnier’s proposal would interact with deposit-guarantee programs, Constancio said. It’s necessary to avoid ‘any doubts of the citizens’ on the capacity of such plans to honor their commitments, he said.”

July 13 – Bloomberg (Angeline Benoit): “Spain’s government threatened to take control of budgets in regions that fail to meet austerity targets, while offering financing to help them avoid default as the nation battles to restore investor confidence. Regions projected to miss deficit goals this year were given a week to take action or risk intervention, Budget Minister Cristobal Montoro said… Local officials, including some from the ruling People’s Party, resisted his demands.”

July 11 – Bloomberg (Henrique Almeida): “Portugal’s international creditors may soon have to ease terms of the country’s bailout to prevent the plan from derailing as the government faces setbacks in attaining its deficit goals. Prime Minister Pedro Passos Coelho’s struggle to meet deficit pledges were further hampered last week when about 2 billion euros ($2.5bn) of planned cuts to pensions and civil servants’ holiday pay were ruled unconstitutional. With Portugal’s 10-year bond yield above 10%, returning to the markets next year may be untenable, requiring more international aid despite the premier’s insistence he won’t seek concessions.”

July 11 – Bloomberg (Ben Moshinsky): “European banks increased their capital reserves by 94.4 billion euros ($116bn) in the first half, the European Banking Authority said, as it seeks to boost confidence in the region’s financial system. Banks raised about 72 billion euros by selling shares, holding on to profits and converting lower-quality capital to common equity… The rest came from adjusting models lenders use to measure the riskiness of their liabilities.”

Global Bubble Watch:

July 13 – Bloomberg (Sarika Gangar): “Companies worldwide are selling bonds at the second-fastest pace on record with investors seeing the debt as an alternative to traditional havens such as government securities that are now paying negative yields. Anheuser-Busch… lead sales this week of at least $65.8 billion, bringing this year’s total to $2.08 trillion… That’s second only to the $2.37 trillion issued at this point in 2009.”

July 13 – Bloomberg (Anchalee Worrachate): “Investors are relinquishing the sanctuary of AAA bonds as yields near or below zero on German, Dutch and Finnish debt drive them to seek higher returns on Belgian and French securities. ‘Investors may seek security, but not at all costs,’ said Johannes Jooste, a senior strategist at Merrill Lynch Wealth Management in London, which oversees $1.8 trillion globally. Longer-term investors are looking at yields and thinking what possible gain is there in essentially paying some governments to look after their cash.”

July 11 – Bloomberg (Charles Stein): “Before they discovered hedge funds, pension funds and endowments typically held portfolios with 60% in equities and 40% in bonds. Many would be better off if they had stuck with the old formula. Hedge funds have trailed both the Standard & Poor’s 500 Index and a Vanguard index fund with the same 60/40 mix over the past five years… The balanced fund beat the main Bloomberg hedge-fund index in six of the last seven calendar years… ‘People hear about the top-performing hedge funds and they assume those results hold true for the whole industry,’ George Sauter, chief investment officer for Vanguard Group Inc., said… ‘It turns out that on average hedge funds are about average.’”

July 10 – Bloomberg (Kelly Bit): “John Paulson, the billionaire hedge-fund manager seeking to reverse record losses in 2011, is digging himself into a deeper hole with a bet that Europe is facing a financial crisis. The $22 billion firm had losses in all its funds last month as stock markets rose. The losses were led by a 7.9% drop in his Advantage Plus Fund… That leaves the fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, down 16% this year.”

July 12 – Bloomberg (Matt Robinson): “U.S. structured note sales fell to the lowest in at least three years in the first half as record- low interest rates made it harder to create higher-yielding securities. Issuance of $21 billion in the first six months was down 17% from the same period last year, the slowest start since at least the beginning of 2010…”

July 12 – Financial Times (Alexandra Stevenson): “An important area of global funding for companies is at risk of drying up as issuances of convertible bonds hit new lows. The bonds, which pay a fixed income but convert into shares at an agreed price, accounted for nearly half of funds raised in equity capital markets at the peak of their popularity nearly a decade ago. But with interest rates low, companies are opting to issue more conventional debt despite strong demand from investors for convertible bonds. Some fund managers worry that the fall in issuance is so great it could threaten the viability of the market."

Currency Watch:

The U.S. dollar index was little changed this week at 83.35 (up 4.0% y-t-d). For the week on the upside, the Mexican peso increased 0.8%, the Japanese yen 0.6%, the Singapore dollar 0.6%, the Canadian dollar 0.5%, the British pound 0.5%, the Norwegian krone 0.3% and the Australian dollar 0.1%. On the downside, the the South Korean won declined 1.1%, the Brazilian real 0.4%, the euro 0.3%, the Taiwanese dollar 0.3%, the Danish krone 0.3%, the Swiss franc 0.3%, the New Zealand dollar 0.2%, the Swedish krona 0.2%, and the South African rand 0.1%.

Commodities Watch:

July 13 – Bloomberg (Jeff Wilson): “Corn futures rallied to a 10-month high, wheat reached the highest since February 2011, and soybeans gained on signs that a drought is expanding in the main growing region of the U.S., the world’s biggest exporter. A ‘large-scale, intense heat wave’ will affect most of the central U.S. during the next 10 days, increasing stress on crops after the seventh driest May-to-June period since 1895, T- Storm Weather LLC said… At least 50% of the growing region was pressured by temperatures above 90 degrees Fahrenheit in 10 of the last 14 days. This month may be the warmest July in 117 years, the forecaster said.”

The CRB index rallied 2.5% this week (down 3.7% y-t-d). The Goldman Sachs Commodities Index jumped 2.6% (down 3.7%). Spot Gold increased 0.4% to $1,590 (up 1.7%). Silver was up 1.7% to $27.37 (down 2.0%). August Crude jumped $2.65 to $87.10 (down 12%). August Gasoline gained 3.5% (up 6%), and July Natural Gas rose 3.5% (down 4%). September Copper rallied 2.8% (up 2%). September Wheat rose another 5.0% (up 30%) and September Corn jumped another 6.5% (up 15%).

China Watch:

July 9 – Bloomberg (Alexandra Stevenson): “Chinese Premier Wen Jiabao said downward pressure on the economy is still ‘relatively large’ and the government will intensify fine-tuning of policies even as measures taken since April are helping stabilize a slowdown. Wen’s comments, four days after the central bank announced the second interest-rate cut in a month, were made during an inspection tour of eastern Jiangsu province… The premier also pledged to ‘unswervingly’ continue property controls and prevent prices from rebounding, Xinhua said.”

July 13 – Bloomberg (Alexandra Stevenson): “The figures that go into China’s gross domestic product are ‘man-made’ and ‘for reference only,’ Li Keqiang, then a regional Communist Party head, said in 2007. The comments by Li, now a vice premier who’s expected to become premier next spring, were revealed in a diplomatic cable published by WikiLeaks in late 2010. Li’s remarks are especially relevant now as Chinese officials are forecast to announce today that the economy grew by 7.7% in the second quarter, a three-year low.”

July 13 – Bloomberg: “China’s new loans exceeded estimates in June, boosting odds the government will secure an economic rebound after growth probably slowed for a sixth quarter. Banks extended 919.8 billion yuan ($144.3bn) of local-currency loans… That compares with the 880 billion yuan median forecast… Foreign-exchange reserves fell to $3.24 trillion at the end of June… a record quarter-to-quarter drop.”

July 10 – Bloomberg: “China’s benchmark price for power-station coal fell for a ninth week, the longest period of losses since at least 2008, as slowing economic growth and increased use of hydropower crimped electricity demand.”

Asia Bubble Watch:

July 13 – Bloomberg (Eunkyung Seo): “The Bank of Korea unexpectedly cut borrowing costs for the first time in more than three years… Governor Kim Choong Soo’s officials lowered the benchmark seven-day repurchase rate by a quarter percentage point to 3%, the first cut since February 2009.”

July 13 – Bloomberg (Karl Lester M. Yap): “Singapore’s economy shrank last quarter as manufacturing fell, adding to signs of a deepening slowdown in Asian expansion as Europe’s debt crisis curbs demand for the region’s goods.”

Latin America Watch:

July 12 – Bloomberg (Raymond Colitt and Matthew Malinowski): “Brazil cut its benchmark interest rate for the eighth straight time and signaled it will continue to lower borrowing costs, as spillover from a global economic slowdown limits inflation risks. Central bank board members voted unanimously yesterday to cut the benchmark Selic rate by a half-point to a record 8%...”

European Economy Watch:

July 11 – Bloomberg (Ben Sills): “Secundino Menendez Fernandez, a coalminer with a sunburned face, may represent the biggest threat to Prime Minister Mariano Rajoy’s plan to balance Spain’s books. Menendez… arrived in Madrid with about 160 fellow miners after trudging 285 miles under the blazing summer sun from the northern region of Asturias. They are protesting Rajoy’s cuts to subsidies… Union leaders aimed to draw more than 100,000 protesters to a rally in the capital. The demonstration tests Rajoy’s attempt to maintain order as he pushes through the most severe budget cuts since the country returned to democracy 35 years ago.”

July 10 – Bloomberg (Ambereen Choudhury, Elena Logutenkova and Aaron Kirchfeld): “Investment bankers in Europe are girding for a second wave of job cuts in less than a year after the euro area’s debt crisis drove fees from mergers and securities underwriting to a nine-year low. Credit Suisse Group AG and UBS AG, Switzerland’s biggest lenders, face the most pressure to boost efficiency as that country runs ahead of others in introducing tougher capital and liquidity rules…”

July 13 – Bloomberg (Mathieu Rosemain): “PSA Peugeot Citroen plunged to a new 23-year low over concerns that the French government may step in after Europe’s second-largest carmaker announced plans to close a factory and cut jobs. Peugeot shares fell as much as 9.2% to 6.37 euros…”

Global Economy Watch:

July 10 – Bloomberg (Theophilos Argitis): “Canadian Finance Minister Jim Flaherty’s efforts to avert a housing bubble are hastening the end of a six-year streak of outperforming the U.S. economy. Changes implemented yesterday include shortening the maximum length of government-insured mortgages to 25 years from 30 years to quell demand for new homes and curb record household borrowing that Flaherty said has become a greater risk to the economy than slowing growth.”

Central Bank Watch:

July 9 – Bloomberg (Mark Deen and Caroline Connan): “The European Central Bank sees no immediate need for further non-standard measures to support the economy or counter the debt crisis, executive board member Benoit Coeure said. ‘The view of the governing council is that we don’t need additional non-standard measures at the current juncture,’ Coeure said when asked if the ECB may implement quantitative easing. ‘It’s not on the table at the current juncture,’ he said…”

U.S. Bubble Economy Watch:

July 10 – Reuters (Anjuli Davies): “Chronically weak stock markets and record low bond yields have pushed company pension deficits in the United States and Britain sharply higher, adding to the burden of retirees living longer than ever before, reports said… In the United States the aggregate deficit of S&P 1500 companies grew $59 billion in the first half of the year to $543 billion, consultancy Mercer said. Corporate America is sitting on total liabilities of $2.09 trillion against total assets of $1.55 trillion… The picture is no less bleak in Britain, where the combined deficit of FTSE 100 companies more than doubled over the past year to 41 billion pounds ($64bn)…”

July 12 – Bloomberg (Henry Goldman): “New York City’s Taxi & Limousine Commission approved a 17% fare increase for yellow cabs, giving drivers their first raise since 2006.”

July 12 – Bloomberg (Oshrat Carmiel and Noah Rayman): “Manhattan apartment rents rose the most in five years as would-be homeowners struggling to get mortgages lingered in the leasing market, competing for space with transplants and new college graduates. The median monthly rent climbed 7.9% in the second quarter from a year earlier to $3,125, according to… Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate. It was the biggest jump since the second quarter of 2007, when rents rose 11%.”

July 13 – Bloomberg (Dawn Kopecki and Michael J. Moore): “JPMorgan Chase & Co.’s investment bank cut the amount earmarked for compensation by 22% to$2.01 billion in the second quarter as the division generated 7% less revenue. The investment bank set aside 33% of revenue excluding accounting gains for compensation, down from 35% a year earlier…”

California Watch:

July 11 – Bloomberg (Michael B. Marois and Alison Vekshin): “San Bernardino’s City Council voted to become the third California municipality this year to seek bankruptcy protection after officials learned they might not have enough cash to pay workers… The city of 209,000, about 65 miles east of Los Angeles, is so broke it can’t make its payroll, interim City Manager Andrea Travis-Miller said. A filing by San Bernardino would follow ones by Stockton, a community of 292,000 east of San Francisco, which on June 28 became the biggest U.S. city to go into bankruptcy. Mammoth Lakes, a mountain resort of 8,200, filed for protection from creditors July 3…”

July 10 – Bloomberg (James Nash): “When an earthquake jolted Mammoth Lakes, California, in 1980, it caused $1.5 million in damage and kindled fears of volcanic eruption that scared off visitors to what’s now the third-most-popular U.S. ski resort. That pales in comparison with the latest troubles facing the High Sierra mountain town of 8,200. The second-lowest snowfall in 20 years kept tourists away in the 2011-2012 season. Home prices are down one-quarter from their peak and a $43 million breach-of-contract judgment threatens to wipe the municipal government off the map. Mammoth Lakes, about 250 miles north of Los Angeles, was the second California municipality to seek bankruptcy protection in as many weeks. It followed Stockton, which was battered by rising employee costs and falling property values.”