Saturday, November 8, 2014

Weekly Commentary, July 27, 2012: Monetary Madness

In commemoration of M2 surpassing $10.0 TN for the first time – not to mention the unfolding confrontation between ECB President Draghi and Germany’s Bundesbank - this week’s CBB will focus on Monetary Analysis. It is worth noting that M2, the Fed’s narrow measure of “money” supply, surpassed $1 TN for the first time in 1975. It made it past $2 TN in 1983, $4TN in 1997, $8 TN in 2008 and $9 TN in April 2011. M2 has inflated another Trillion during the past 15 months.

To set the backdrop, it is worth noting that early economic thinkers were obsessed with money. These days, monetary analysis is little more than a footnote in contemporary economic doctrine. Generations ago, great minds were trying to come to grips with monetary phenomena. They came to appreciate that money and Credit had profound impacts on economies and societies, although throughout history even the most astute struggled with the complexity of it all. These days, “monetary stimulus” is seen as good for the markets and, yes, good again for GDP. Inflation, if it ever were to return, is not so good. Today’s monetary analysis is not good but it is shallow.

Thinkers of things economic long ago appreciated that the functioning of economies was literally transformed by the introduction of money. An economy dominated by barter operated altogether differently after units of exchange entered the fray. They further understood that the introduction of bank lending – where new purchasing power and bank liabilities were created by the act of borrowing – added great complexities to how economies functioned. Finance mattered and it mattered a lot. Keen attention was paid to the role Credit played in economic cycles.

For centuries, the seemingly straightforward issues of money and Credit were recognized as extraordinarily, incredibly complex. Analyses that various monetary fiascos and inevitable collapses came to similar conclusions: sound money and Credit were paramount. Credit and speculative excesses were recognized as primary culprits to financial collapse and the Great Depression. Regrettably, incredibly important lessons learned through devastation and hardship were relegated to the dustbin of history.

Early analysis of “wildcat banking” was quite insightful. Especially as banks proliferated along with the development of the Wild West, individual banks’ bills of exchange and promissory notes garnered considerable attention. These types of bank liabilities differed greatly, based on their backing and the perceived soundness of individual institutions – depending as well on the phase of the Credit cycle. In the end, there were too many bank failures, too much worthless wildcat currency and too little confidence in these Credit instruments and institutions.

Importantly, however, wildcat fiat “money” was initially a crucial facet of impressive wealth creation. Many a prospector borrowed from a local bank to clear land, buy seeds and invest in animals and tools. Many businesses flourished. Early economic thinkers, however, also recognized that unsound money would inevitably prove destabilizing and detrimental. Monetary inflations could not be controlled. Lending volumes – along with outstanding fiat currency - would inevitably grow larger and larger, financing speculative activities and uneconomic ventures – fueling inflation and sowing the seeds of boom and bust dynamics. This is a common theme throughout monetary history, although monetary analysis is always burdened by the fact that every cycle has its own financial and economic nuances. The nature of the analysis is prone to historical revisionism.

But I’ll conclude the shallowest analysis of monetary history - and jump right to the present. I’ve for years posited that we live in an extraordinary period of “global wildcat finance.” Fiat electronic Credit – much of it marketable debt instruments – has expanded unlike anything previously experienced. In the “developed” West, inflated real and financial assets were a primary inflationary consequence. In China and “developing Asia,” an unprecedented expansion of manufacturing capacity was integral to the incredible inflation of incomes and wealth. As for fundamental “nuances” of this monetary and economic Bubble, one can point to so-called “globalization,” the explosion of computer and communications technologies, enterprising financial innovation, deregulated Credit and speculation, and monetary policy activism.

Myriad forces worked to break the traditional link between monetary excess and rapidly rising consumer prices. The “developing” world, enjoying access to unlimited cheap finance, built manufacturing capacity to inundate the world with manufactured goods and technology products. Global financial excesses allowed developed nations to indulge in cheap imports by issuing endless IOUs, while transforming economic systems from production-based to Credit-driven consumption and services. And the seeming New Paradigm victory over “inflation” emboldened New Age central bankers. They unwittingly nurtured an epic monetary inflation, and as this Credit Bubble has begun to buckle they have moved with extraordinary force to sustain it. Especially after the 2008 crisis response, global policymakers lost control.

The eurozone is today locked in a disastrous monetary crisis. The marketplace simply no longer trusts the liabilities issued by some its members. Analysts continue to lambast European officials for failing to learn from our successful navigation through the 2008 crisis. This is flawed analysis.

Europe is suffering from a late-cycle sovereign debt crisis. In ‘08/’09, U.S. policymakers enjoyed unprecedented demand for Treasury (and even agency) debt securities. Through the massive issuance of federal government debt along with Federal Reserve monetization, the U.S. system was able to sustain ongoing Credit growth. U.S. non-financial debt expanded $1.9 TN in 2008 and, despite huge mortgage write-downs, U.S. non-financial Credit still grew almost $1.1 TN in 2009. With federal debt expanding a then record $1.4 TN, total non-financial debt expanded 3.1% in 2009. Washington was willing to jeopardize the creditworthiness of federal debt and the Fed was willing to risk its reputation - and a downward spiral was thwarted. A new phase of monetary inflation was commenced, this time through the massive injection of federal government and Federal Reserve finance.

There are unappreciated costs associated with injecting such massive sums of unproductive Credit into a (maladjusted) system, which I return to below. Today, because they now lack creditworthiness in the marketplace, Spain and Italy no longer have the capacity to inject sufficient new Credit into their economic systems. This is a potentially devastating dynamic, as the lack of sufficient ongoing monetary inflation is illuminating deep structural economic impairment following years of Credit excess and attendant maladjustment.

Earlier this week, with Spanish and Italian yields spiking higher and their markets turning illiquid, the European debt crisis was again spiraling out of control – only months after the ECB implemented its latest $1.3 TN liquidity facilities. And, once again, acute financial stress has provoked tough talk. ECB president Draghi Thursday morning stated, “…the ECB is ready to do whatever it takes to preserve the euro… Believe me, it will be enough.” German Finance Minister Schaeuble said he supported Draghi’s statement, while Chancellor Merkel and President Hollande came forward Friday with their own “bound by the deepest duty” to do everything to protect the euro. And then there was this afternoon’s unconfirmed report that Mr. Draghi is prepared to present a “game changing” multi-prong plan at next week’s European Central Bank governing council meeting that will include ECB bond purchases and a banking license for the ESM.

Shifting 180 degrees from earlier in the week, rather than fearing Credit collapse the markets moved quickly in anticipation of yet another crisis-induced bout of monetary inflation. And, seemingly, only the Bundesbank remains capable of taking a measured approach. Friday morning (before afternoon reports of a Draghi’s “game changer”), from a Bundesbank spokesperson: “There haven’t been any changes in our positions on bond purchases of the Eurosystem, bond purchases by the EFSF, or giving a banking licence to the ESM… The Bundesbank has repeatedly expressed in the past that it views bond purchases critically because they blur the line between monetary and fiscal policy… The Bundesbank continues to view the SMP [securities market program] in a critical fashion. The mechanism of bond purchases is problematic because it sets the wrong incentives… A banking license for the bailout fund would factually mean state financing via the printing press and would be a fatal route, which therefore is prohibited by the EU treaty.”

No doubt about it, the Bundesbank is increasingly isolated. They are at odds with most European politicians and they are at odds with other central bankers. They are clearly not on the same page with Mr. Draghi. And no group of government officials anywhere more clearly appreciates myriad risks associated with monetary inflations. The German/“Austrian” view of economics just has a very different perspective, and it goes way beyond some fixation on Weimar hyperinflation. The focus is on how real wealth is created and how wealth is destroyed. Monetary inflations are powerfully destructive. And as a deepening European crisis applies incredible pressure on politicians throughout the region – certainly including Germany's Merkel and Schaeuble – I suspect the Bundesbank will hold its ground. They are both right on the analysis and have the support of the German people. They understand that the German economy cannot support the massive debt of the entire eurozone.

Italian 2-year yields jumped from 3.80% on Monday morning to 5.18% by Wednesday morning. By Friday afternoon they had sunk back down to 3.6%. Spanish stocks dropped 5.8% last Friday, declined 1.1% Monday and another 3.6% on Tuesday. They gained 0.8% Wednesday, before jumping 6.1% Thursday and 3.9% Friday. Italian stocks dropped about 10% in three sessions, before rallying 10% in the next three sessions. U.S. stocks dropped 3% in three sessions and then gained 3.5% in two. German 10-year yields ended the week up 23 bps. Throughout already volatile global debt, equities, currencies and commodities markets, things have turned only more unstable.

And there is no doubt in my mind that ongoing monetary injections – albeit European, American, Chinese, or others – come with the cost of increasingly unstable – I would argue perilously dysfunctional - global financial markets. And there should be little doubt where Mr. Draghi was directing his “trust me, it will be enough” tough talk (kind of reminded me of, “go ahead, make my day”). The Europeans believe hedge fund and other speculator bets against their bonds, stocks and euro currency are a major contributing factor to the region’s woes. There wasn’t an issue back when speculators were leveraged long Europe’s (Greece’s, Spain’s, Italy’s, etc.) securities during the upside of the cycle.

This week demonstrated an even more powerful “risk on, risk off” dynamic. For lack of attractive alternatives, ongoing global monetary injections ensure only more “money” flows to the global leveraged speculating community. From there, the bets on red or black - either on or against policymakers’ capacity to sustain global risk market Bubbles - become bigger by the week. Draghi and European policymakers this week hit the panic button – and those with bearish hedges and bets were again forced to run for cover. Risk on wins again.

And as policymaking turns increasingly desperate, it is almost guaranteed that “risk on, risk off” turns only more unwieldy. Indeed, it is clear at this point that the more global policymakers turn to monetary inflation to thwart the downside of the Credit cycle the greater the amount of fuel injected into a dangerous global speculative Bubble. In anticipation of next week’s scheduled Federal Reserve and ECB meetings, CNBC’s Steve Liesman today referred to “Monetary Madness.” I’ll use the term to describe the past couple decades.

For the Week:

The S&P500 gained 1.7% (up 10.2% y-t-d), and the Dow rose 2.0% (up 7.0%). The Morgan Stanley Cyclicals rallied 1.4% (up 4.6%), and the Transports increased 1.1% (up 2.1%). The Morgan Stanley Consumer index gained 1.7% (up 7.3%), and the Utilities increased 0.9% (up 5.2%). The Banks were up 2.7% (up 17.1%), and the Broker/Dealers were 2.8% higher (up 0.5%). The S&P 400 Mid-Caps gained 1.0% (up 8.0%), and the small cap Russell 2000 increased 0.6% (up 7.4%). The Nasdaq100 gained 1.1% (up 16.2%), and the Morgan Stanley High Tech index jumped 2.9% (up 11.1%). The Semiconductors rallied 5.3% (up 5.4%). The InteractiveWeek Internet index gained 3.0% (up 8.7%). The Biotechs added 0.6% (up 38.7%). With bullion rally $38, the HUI gold index recovered 3.3% (down 17.4%).

One-month Treasury bill rates ended the week at 7 bps and three-month bills closed at 10 bps. Two-year government yields were up 4 bps to 0.24%. Five-year T-note yields ended the week 8 bps higher to 0.65%. Ten-year yields jumped 9 bps to 1.55%. Long bond yields rose 8 bps to 2.63%. Benchmark Fannie MBS yields increased 5 bps to 2.34. The spread between benchmark MBS and 10-year Treasury yields narrowed 4 to 79 bps. The implied yield on December 2013 eurodollar futures increased 1.5 bps to 0.485%. The two-year dollar swap spread declined 4 to 20 bps. The 10-year dollar swap spread declined one to 12.25 bps. Corporate bond spreads were volatile before ending down for the week. An index of investment grade bond risk declined six to 105 bps. An index of junk bond risk dropped 27 to 564 bps.

Debt issuance slowed somewhat. Investment grade issuers included Bristol-Myers Squibb $2.25bn, GE Capital $1.75bn, IBM $1.0bn, Fedex $1.0bn, and Wake Forest University $125 million.

Junk bond funds saw inflows jump to $2.0bn (from Lipper). Junk Issuers included Biomet $1.0bn, SBA Tower $610 million, Universal Hospital Service $425 million, KB Home $350 million, SPL Logistics $450 million, Aurora USA Oil & Gas $365 million, Isle of Capri Casinos $350 million, QR Energy $300 million, Pantry Inc. $250 million and Sabra Health $100 million.

I saw no convertible debt issued.

International dollar bond issuers included Daimler Finance $2.25bn, Schlumberger $2.0bn, National Australia Bank $1.25bn, State Bank India $1.25bn, Anglogold $750 million, and GNB Sudameris Bank $250 million.

With an extraordinary 100 bps high-to-low swing between Wednesday and Friday, Spain's 10-year yields closed the week down 53 bps to 6.66% (up 162bps y-t-d). Italian 10-yr yields declined 22 bps (87bps Wednesday to Friday swing) to 5.92% (down 111bps). German bund yields jumped 23 bps to 1.40% (down 43bps), and French yields rose 14 bps to 2.20% (down 93bps). The French to German 10-year bond spread narrowed 9 to 80 bps. Ten-year Portuguese yields surged 82 bps to 10.89% (down 188bps). The new Greek 10-year note yield jumped 111 bps to 25.84%. U.K. 10-year gilt yields increased 5 bps to 1.53% (down 44bps). Irish yields declined 5 bps to 5.98% (down 237bps).

The German DAX equities index rose 0.9% (up 13.4% y-t-d). Spain's IBEX 35 equities index ended a wild week up 5.9% (down 22.8%), and Italy's FTSE MIB rose 4.1% (down 9.9%). Japanese 10-year "JGB" yields increased one basis point to 0.74% (down 24bps). Japan's Nikkei declined 1.2% (up 1.3%). Emerging markets were mixed to higher. Brazil's Bovespa equities index jumped 4.4% (down 0.4%), and Mexico's Bolsa rallied 1.6% (up 11.9%). South Korea's Kospi index increased 0.3% (up 0.3%). India’s Sensex equities index fell 1.9% (up 9.0%). China’s Shanghai Exchange fell 1.8% (down 3.2%).

Freddie Mac 30-year fixed mortgage rates declined 4 bps to a record low 3.49% (down 106bps y-o-y). Fifteen-year fixed rates fell 3 bps to 2.80% (down 86bps). One-year ARMs were up 2 bps to 2.71% (down 24bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one to 4.21% (down 78bps).

Federal Reserve Credit declined $10.4bn to $2.844 TN. Fed Credit was down about $9bn from a year ago, or 0.3%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 7/25) increased $3.3bn to $3.519 TN. "Custody holdings" were up $99bn y-t-d and $66bn year-over-year, or 1.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $387bn y-o-y, or 3.8% to $10.450 TN. Over two years, reserves were $2.005 TN higher, for 24% growth.

M2 (narrow) "money" supply jumped $41.8bn to a record $10.035 TN. "Narrow money" has expanded 7.4% annualized year-to-date and was up 8.4% from a year ago. For the week, Currency increased $2.3bn. Demand and Checkable Deposits declined $5.9bn, while Savings Deposits jumped $49.9bn. Small Denominated Deposits fell $2.1bn. Retail Money Funds declined $2.5bn.

Total Money Fund assets rose $16bn to $2.555 TN. Money Fund assets were down $140bn y-t-d and $79bn over the past year, or 3.0%.

Total Commercial Paper outstanding jumped $20.2bn to $1.003 TN. CP was up $43.4bn y-t-d, while having declined $203bn from a year ago, or down 16.9%.

Global Credit Watch:

July 27 – Bloomberg (Jana Randow and Matthew Brockett): “European Central Bank President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in the coming days in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said. Having secured the backing of governments in Spain, France and Germany, Draghi is now seeking to win over ECB policy makers for a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, the officials said late yesterday on condition of anonymity because the talks are private. Draghi’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the officials said. Further ECB rate cuts and long-term loans to banks are also up for discussion, one of the officials said.”

July 27 – Bloomberg (Jana Randow and Lukanyo Mnyanda): “European Central Bank President Mario Draghi has boxed himself into a corner. Spanish and Italian bond markets rallied… as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today. ‘Draghi is damned if he does and damned if he doesn’t,’ said Carsten Brzeski, senior economist at ING Group in Brussels. ‘He maneuvered himself into an extremely difficult situation. Expectations are very high.’”

July 24 – Bloomberg (Emma Ross-Thomas): “Spain’s bailout of its regions risks pushing the nation closer to a full international rescue after investors charged the nation more to borrow for five years than for a decade, threatening its access to debt markets. Spain’s five-year borrowing costs briefly rose above 10- year yields… Bonds issued by Catalonia continued to fall after the region said it may tap the government’s rescue fund. ‘It’s almost a waiting game now until they seek a sovereign bailout,’ Lyn Graham-Taylor, a fixed income strategist at Rabobank… The regional bailout plan was ‘the straw that broke the camel’s back,’ he said.”

July 26 – Bloomberg (Rainer Buergin): “German coalition lawmakers Frank Schaeffler and Klaus-Peter Willsch, who’ve voted against measures to bail out cash-strapped euro-region nations, criticized European Central Bank President Mario Draghi’s announcement that the bank will do whatever is needed to preserve the euro, the Handelsblatt newspaper reported. Schaeffler, a Free Democrat, said Draghi is pillaging German savings as his policies will boost inflation, according to the newspaper. Willsch, a budget-committee member from Chancellor Angela Merkel’s Christian Democratic Union, said rising prices for houses, farmland, gold, coins and classic cars in Germany reflect a flight to tangible assets as a precursor to accelerating inflation.”

July 26 – Bloomberg (Cheyenne Hopkins): “Citigroup Inc. said there’s now a 90% chance that Greece will leave the euro in the next 12 to 18 months, with prolonged economic weakness and spillover for the currency bloc. In an analyst note, Citigroup updated its forecast for a Greek exit from the 17-nation currency union from a previous estimate of 50% to 75%, and said it would most likely happen in the next two to three quarters.”

July 25 – Bloomberg (Brian Parkin): “Greece may need a second debt restructuring to stay in the euro, a leading political ally of Chancellor Angela Merkel said. The comments by Norbert Barthle, the Christian Democratic Union’s parliamentary budget spokesman, are the first indication by a senior German official that additional help for Greece may be forthcoming…”

July 23 – Dow Jones (Philip Pangalos and Nektaria Stamouli): “Greece's main opposition leader… ruled out a meeting with international creditors when they arrive in Athens this week to inspect the country's finances for the first time since political uncertainty put economic reforms on hold. The European Union, the European Central Bank and the International Monetary Fund have questioned Greece's ability to carry out reforms tied to its bailout without broad-based political support. But the left-wing Syriza party says the measures will only aggravate the country's economic plight. Meeting with Syriza lawmakers for the first time since last month's elections, Alexis Tsipras accused the new conservative-led government of mishandling the economy and leading the country toward disaster. ‘The troika is coming tomorrow to interrogate the government and enforce their catastrophic recipes that have led the country to the cliff's edge,’ the opposition leader said, referring to the three institutions. ‘We refuse to meet them; no political party should meet them.’”

July 26 – Bloomberg (Charles Penty): “Rodrigo Rato was grilled in Spain’s parliament over the bailout of Bankia group, deflecting blame for Spain’s biggest banking collapse… Rato, a former managing director of the International Monetary Fund who led the seven-way savings bank merger in 2010 that formed Bankia, appeared… before lawmakers probing how the lender that was nationalized last month after seeking 23.5 billion euros ($28.5bn) of state aid helped trigger a new stage of Europe’s debt crisis. Rato, Bankia’s ex-chairman, said the government pressured him to push ahead with an initial public offering in which retail investors lost money and said the Bank of Spain encouraged the merger. ‘We did the right thing, in collaboration and under the control of the corresponding public regulators, supported by the advice and supervision of auditing and consultant firms,’ Rato, 63, told the committee…”

Global Bubble Watch:

July 26 – Bloomberg (Simon Kennedy and Rich Miller): “Central banks are digging deeper into their tool kits in search of innovative ways to unclog bank lending and keep a weakening world economy afloat. With the fifth anniversary of the financial crisis approaching in August, policy makers from the Federal Reserve, the European Central Bank and the Bank of England all meet within 24 hours next week. Central banks, facing a global recovery that’s sputtering even after they delivered trillions of dollars of liquidity and near-zero interest rates, are having to consider fresh strategies to combat the slowdown.”

July 26 – Bloomberg (Andrew Blackman, Kelvin Wong and Klaus Wille): “Jean Liu’s plan to buy a Hong Kong apartment was derailed by the 2008 global financial crisis. It was an opportunity lost as prices surged instead of dropping as they did in many of the world’s property markets, leaving the 32-year-old corporate banker still searching for an affordable home four years later. ‘I originally set my budget at HK$3 million,’ or $390,000, Liu said… ‘Now that’s barely enough for a down payment.’ Liu’s plight is shared by homebuyers as far away as Canada, Switzerland and Norway as a flood of money supplied by central banks globally to prop up the financial system finds its way into markets regarded as havens from economic turmoil and Europe’s sovereign-debt crisis, pushing down borrowing costs and driving up home values.”

July 25 – Bloomberg (Alastair Marsh): “Sales of securities that package debt with derivatives and provide banks with fees that average 2 1/2 times what they receive underwriting corporate bonds are tumbling as credit downgrades of the world’s largest financial companies curb investors’ appetite. Issuance of the structured notes, which offer customized bets tied to stocks, currencies, commodities and interest rates, have fallen 34% to $65.8 billion this year from the same period of 2011… Buyers of structured notes, which include institutional investors as well as high net-worth individuals, bear the risk both of the bank selling the securities and of the underlying assets. Eight of the 10 largest issuers have been downgraded this year, making the notes less attractive to investors seeking safe assets as the economy slows and Europe’s crisis deepens… U.S. issuance fell 23% this year to $21.7 billion, the lowest level since 2010, when Bloomberg started tracking the market… In Europe and Asia, where numbers go back to 1999, sales fell 38% to $44.1 billion. That’s the least since 2002…”

July 24 – Bloomberg (Mary Childs and Shannon D. Harrington): “Trading surges that temporarily boosted the value of credit derivatives held by JPMorgan Chase & Co. may provide clues about whether traders at the bank masked losses that have spiraled to $5.8 billion. Spikes in late January and again at the end of February, which more than doubled the volume of trades in an index tied to the creditworthiness of companies, lowered the cost of the index, raising the value of the bank’s holdings. The surges came just before end-of-the-month bank audits to verify prices. The trading patterns offer a road map for investigators after the biggest U.S. bank by assets restated first-quarter earnings to account for a larger loss on the derivatives than previously disclosed.”

July 24 – Bloomberg (Jody Shenn): “The rally in U.S. home-loan securities without government backing is accelerating as investors wager the housing bust is over and supply is sopped up by bond dealers emboldened by new capital rules. Gains on subprime-mortgage bonds from 2005 through 2007, the years that produced the most defaults leading to the worst financial crisis since the Great Depression, have soared to 5.4% in July, bringing returns for the year through last week to 21.6%, according to Barclays…”

July 27 – Bloomberg (Brian Swint, Edward Klump and Rebecca Penty): “The record slump in natural-gas prices signals companies from BHP Billiton Ltd. to Ultra Petroleum Corp. are at risk of writing off billions of dollars of assets following a bubble in U.S. shale-gas acreage. The clearest sign came yesterday, when BG Group Plc and Encana Corp. said they were writing down a total of $3 billion in the value of their gas properties in North America.”

Currency Watch:

The U.S. dollar index retreated 0.9% to 82.709 (up 3.2% y-t-d). For the week on the upside, the South African rand increased 1.6%, the euro 1.4%, the Danish krone 1.4%, the Swiss franc 1.3%, the New Zealand dollar 1.3%, the Swedish krona 1.1%, the Australian dollar 1.0%, the Mexican peso 0.9%, the Canadian dollar 0.9%, the British pound 0.7%, the Singapore dollar 0.3%, the Norwegian krone 0.3%, the South Korean won 0.3% and the Brazilian real 0.1%. On the downside, the Taiwanese dollar declined 0.4%.

Commodities Watch:

July 24 – Bloomberg (Rudy Ruitenberg): “Heat waves in southern Europe are withering the corn crop and reducing yields in a region that accounts for 16% of global exports at a time when U.S. drought already drove prices to a record. Temperatures in a band running from eastern Italy across the Black Sea region into Ukraine reached 35 degrees Celsius (95 degrees Fahrenheit) or more this month, about 5 degrees above normal…”

The CRB index declined 1.6% this week (down 1.9% y-t-d). The Goldman Sachs Commodities Index fell 1.5% (down 0.5%). Spot Gold rallied 2.4% to $1,623 (up 3.8%). Silver increased 0.7% to $27.50 (down 1.5%). September Crude declined $1.70 to $90.13 (down 8.8%). August Gasoline declined 1.9% (up 8.7%), and July Natural Gas fell 2.0% (up 0.9%). September Copper slipped 0.6% (down 0.3%). September Wheat dropped 4.8% (up 38%) and September Corn declined 3.2% (up 24%).

China Watch:

July 26 – Bloomberg: “The central Chinese city of Changsha unveiled an 829.2 billion yuan ($130bn) investment plan, joining peers seeking to shore up local economies as national growth slows. Changsha, the capital of Hunan province, is wooing banks to finance 195 projects, which include an airport and subway lines and will take several years to complete… Local governments are stepping up efforts to bolster the economy, with the cities of Nanjing and Ningbo saying over the last two weeks that they will introduce measures including tax cuts and incentives to boost consumption… ‘We expect Changsha, Nanjing and Ningbo to be the start of a wave of nationwide stimulus packages, with more announcements from other local governments to come,’ Shen Jianguang… chief Asia economist for Mizuho Securities Asia Ltd., said… ‘With the central government’s tight controls on local government lending previously, there has been widespread panic among local governments in regard to the recent downturn.’ …Guizhou, one of China’s poorest provinces, is considering more than 2,300 projects involving total investment of 3 trillion yuan related to eco-tourism…”

European Economy Watch:

July 27 – Bloomberg (Angeline Benoit): “Spanish unemployment rose to the highest on record… Unemployment, already the highest in the European Union, rose to 24.6% in the second quarter from 24.4% in the prior three months…”

Global Economy Watch:

July 26 – Wall Street Journal (Sam Schechner and Kate Linebaugh): “Europe's deepening economic crisis is cutting into corporate earnings, with the continent's woes threatening to exert a drag on multinational corporations around the world into next year. This week, U.S. companies ranging from Ford Motor to Apple Inc. have blamed disappointing results on slowed spending by European consumers. Meanwhile European heavyweights including steelmaker ArcelorMittal and pharmaceutical company GlaxoSmithKline PLC said they are suffering more than expected on their home turf.”

U.S. Bubble Economy Watch:

July 27 – Bloomberg (Shobhana Chandra): “The world’s largest economy cooled in the second quarter as limited job growth prompted Americans to curb spending while state and local governments cut back. Gross domestic product, the value of all goods and services produced, rose at a 1.5% annual rate after a revised 2% gain in the prior quarter…”

July 25 – Bloomberg (Alan Bjerga): “U.S. consumers may pay 3% to 4% more for food next year, as the effects of the country’s worst drought since the 1950s work their way onto supermarket shelves, the Department of Agriculture said… Beef may rise as much as 5% in response to tight supplies of corn, which is used to feed cattle… The price of the grain, the country’s biggest crop, has surged more than 50% since June 15.”

July 25 – Bloomberg (Donal Griffin and Christine Harper): “… ‘Sandy’ Weill, whose creation of Citigroup Inc. ushered in the era of U.S. banking conglomerates a decade before the financial crisis, said it’s time to dismantle the nation’s largest lenders. ‘What we should probably do is go and split up investment banking from banking,’ Weill, 79, said… ‘Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.’ Weill helped engineer the 1998 merger of Travelers Group Inc. and Citicorp, a deal that required repeal of the Depression-era Glass-Steagall law that forced deposit-taking companies backed by government insurance to be separate from investment banks. The… company became the biggest lender in the world before almost failing and taking a $45 billion taxpayer bailout in 2008.”

July 25 – Bloomberg (Esmé E. Deprez and Brian Chappatta): “When New York’s Metropolitan Transportation Authority asks riders to pay more in fares and tolls next year for the second time since 2011, the extra revenue won’t go toward maintaining its aging fleet. Instead, the $450 million in additional cash that the agency expects to net annually from the 7.5% boost will be swallowed by growing health-care, debt-service and pension costs… Such expenses are ‘the root cause of why I say our financial plan is fragile,’ MTA Chairman Joseph Lhota told reporters… ‘We’re looking to raise about $450 million to deal with the nondiscretionary costs.’”

July 26 – Bloomberg (Oshrat Carmiel and Noah Rayman): “Home sales in the Hamptons, the Long Island beach retreat for summering Manhattanites, jumped to a five-year high as both the priciest mansions and entry-level properties attracted buyers. There were 539 transactions in the second quarter, up 9.6% from a year earlier and the most since the first three months of 2007… Purchases of properties priced at more than $5 million totaled 38, matching the level at the end of 2010. That was the highest since the firms began tracking the data five years ago.”

Muni Watch:

July 26 – Bloomberg (Freeman Klopott and Michelle Kaske): “New York is set to topple California from its two-decade reign as the biggest borrower in the $3.7 trillion municipal bond market. Wall Street’s home state and its local governments are on a pace to sell more debt than their California counterparts for an unprecedented second straight year, according to Citigroup Inc. data starting in 1991. The relative shortage of securities from the most-populous state is fueling gains that are beating the rest of the tax-exempt market.”