Saturday, November 8, 2014

Weekly Commentary, August 24, 2012: Do Whatever it Takes

I believe it was the History Channel, but it may have been Discovery. It was one of those restless nights where sleep wasn’t coming easy – a couple years back, as I recall. The subject of the program was an intellectual framework for better understanding the escalation of aerial attacks against civilians during World War II.

Prior to the war, it was generally accepted that there was a moral imperative to protect civilians. Memories of “Great War” atrocities were fresh in leaders’ minds, while major technological advancements in aeronautics and ballistics were recognized as creating unprecedented capacity to inflict devastation upon population centers.

In September of 1939, President Roosevelt issued an “Appeal… on Aerial Bombardment of Civilian Populations” to the governments of France, Germany, Italy, Poland and Britain: “If resort is had to this form [aerial bombardment] of inhuman barbarism during the period of the tragic conflagration with which the world is now confronted, hundreds of thousands of innocent human beings who have no responsibility for, and who are not even remotely participating in, the hostilities which have now broken out, will lose their lives. I am therefore addressing this urgent appeal to every government which may be engaged in hostilities publicly to affirm its determination that its armed forces shall in no event, and under no circumstances, undertake the bombardment from the air of civilian populations or of unfortified cities…”

As the war commenced, efforts were indeed made by most “belligerents” to limit aerial attacks to military targets away from innocent civilians. It wasn’t long, however, before civilian deaths mounted as bombs were unleashed ever closer to population centers. And then not much time elapsed before industrial targets were viewed as fair game, with civilians paying a progressively devastating price. Somehow, an increasingly desperate war mindset saw targeting population centers in much less unacceptable terms. Soon it was perfectly acceptable. War-time justification and rationalization saw conventional bombing of civilian targets regress into direct firebombing and incendiary raids on major cities in Europe and Asia. Less than six years passed between President Roosevelt’s “Appeal” and the dropping of nuclear bombs on Hiroshima and Nagasaki.

I have no interest in debating the politics of World War II. It’s just that I often contemplate the dynamics of this horrific war-time escalation and how it might in a way pertain to what we’ve been witnessing in global monetary management.

History is littered with devastating monetary fiascos. I have shelves stacked with books that recount in lurid detail the havoc wrought from money and Credit-induced boom and bust dynamics. Each episode has its own nuances – i.e. differences in the nature of prevailing Credit instruments, financial institutions, leveraging methods, governmental oversight and responsibility, and varying market, economic and societal ill-effects. Yet in virtually all cases, the post-mortem was similarly unequivocal: the inflation of “money” (various monetary instruments) was understood as a root cause of booms that ended with great economic and social hardship. In most cases, there were aspects of an increasingly unwieldy escalation of money printing/debasement – along with, of course, all the attendant rationalizations, justifications and assurances.

Federal Reserve Credit ended 1990 at $291bn. Monetary stimulus, viewed as necessarily extraordinary at the time of the ‘91/92 recession (deflation risk!), saw Fed Credit post a two-year increase of $51bn (to $342bn). The Fed expanded $35bn during the crisis-year 1998 (to $511bn) and then Y2K worries were behind 1999’s at the time unprecedented $108bn increase. The ‘01/02 recession saw a two-year $120bn surge in Fed Credit, to $747bn. Yet nothing in the history of central banking could compare to the Federal Reserve’s four-month $1.36 TN increase in Credit back in 2008 (to end ’08 at a then incredible $2.247 TN).

As the foremost academic expert on reflationary monetary policy strategies, Dr. Bernanke was uniquely prepared for the 2008 crisis. His “helicopter Ben” references to the government’s electronic printing press caused a bit of a stir when the prolific new governor arrived at the Fed in 2002. The implementation of his radical policies in 2008 was controversial and generated intense debate. The chairman placated his critics with earnest discussion of the details of the Fed’s “exit strategy.”

MarketNews International’s Steven Beckner reported on Dr. Bernanke’s response to questions during the May 6, 2009 appearance before the Congressional Joint Economic Committee: “…Bernanke faced several questions about the potential inflationary implications of the Fed's expansionary monetary policies, which he answered with reassurances. The Fed is spending ‘enormous time’ on crafting an exit strategy from its credit easing programs that have more than doubled the size of the Fed balance sheet, he said. He revealed that the FOMC once again spent the first day of its two-day meeting last week discussing its balance sheet and its ‘exit strategy’ for shrinking the balance sheet and the excess reserves that have been generated as the Fed increased loans and asset purchases over the past year. He said ‘we have a plan in place’ and said the Fed is ‘trying to strengthen and improve it.’ ‘I want to assure the American people that we are very focused -- like a laser beam if I may -- on this issue of the exit and of making sure we have price stability in the medium term… We are working very hard to make sure that, while on the one hand it's very important for us to provide a lot of support for this economy right now because it needs support, but at the same time we understand the necessity of winding this down in an orderly way at the appropriate moment so we will not have an inflation problem on the other side.”

As a student of monetary history, I was comfortable back in 2009 writing that it was all a myth: there would be no exit. The Fed’s inflationary measures would inflate securities markets and reignite Bubble dynamics. And the newfound “global government finance Bubble” would ensure systemic fragility to any meaningful effort by the Fed to dislodge the punchbowl from a Credit system wasted from egregious leveraging and speculation and an economy debilitated by severe structural economic deficiencies (a consequence of preceding Bubbles). And here we are today with not only the Fed’s balance sheet much larger than it was back in 2009, the Bernanke Fed is hankering to embark on yet another round of quantitative easing (electronic money printing).

The Bernanke Fed’s radical policy approach has taken the world by storm. The ECB’s balance sheet (essentially ECB Credit) ended 2003 at $835bn, having expanded only $32bn over the preceding four years. ECB assets today surpass $3.0 TN and counting (perhaps rapidly). The Bank of England has been a leading-edge experimenter in quantitative easing, although with results sufficiently unimpressive to ensure QE proponents clamor for greater munitions. Meanwhile, China and “developing” central bank balance sheets have inflated tremendously, largely because of an unprecedented increase in foreign reserve assets (chiefly the IOU’s from profligate borrowers). Central bank international reserve holdings have increased 50% in the past four years to $10.533 TN. Predictably, China and others now face the serious dilemma of hangovers from previous stimulus programs having created fragilities and, apparently, the desperate need for only more stimuli.

Dr. Bernanke in 2008 justified the unprecedented inflation of Federal Reserve Credit as a necessary and temporary response to extraordinary deflation risks. Especially with global food and energy prices again surging higher, the Fed and global central bankers these days have dropped all pretense that their measures are to combat falling price levels. In a letter to Congressman Darrell Issa that was released today, chairman Bernanke explained that “there is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.” At the ECB, a radical plan to monetize debt from troubled sovereigns is rationalized as somehow now within its strict (“no bailout” and “no financing of governments”) mandate because of “convertibility risk” and a malfunctioning “monetary transfer mechanism.” As they say, “rules were meant to be broken” and, apparently, well-earned credibility was destined to be forever abandoned.

There is more vocal chatter from dovish Federal Reserve officials as to the benefits of open-ended quantitative easing. Seasoned analysts that should know better even suggest that it is advisable for the Fed to expand its securities holdings (“monetization”/“money printing”) so long as the unemployment rate remains below a targeted level, as if somehow this offers a cure for what ails our economy. At the Draghi ECB, there is a desire for a huge “bazooka” of unlimited bond buying capacity and yield caps to ensure that no one dare be tempted into a bearish bet against European bond prices. And, amazingly, there is hardly a word of protest against the prospect for a major escalation in what is already the most radical monetary policy the world has ever experienced. The prolonged battle has numbed the senses – on both sides.

Chronicling the mortgage finance Bubble over a number of years, I was often sickened by the thought that millions of innocent fellow Americans would see their financial positions devastated come the inevitable bust. History had so proven the moral and ethical imperative of stable money and Credit, and I simply couldn’t comprehend the ineptness of policymakers throughout the Bubble period. And we have worked so diligently to avoid learning lessons from the experience, failing in particular to appreciate how central bank command over interest-rates and market interventions distorts market pricing mechanisms and fuels dangerous speculation and Bubble excesses.

Historical accounts of monetary fiascos often delved into the role of monetary quackery and the contemporary charlatans from those fateful boom periods. I am struck of late by the relative silence of the critics as compared to the vociferous confidence of those claiming that the only problem with monetary inflation is that central banks haven’t been sufficiently committed to it.

Federal Reserve Bank of Chicago President Charles Evans is distinguishing himself as an inflationist extraordinaire. Yet even he is being outdone by some current and former Bank of England (BOE) officials, certainly including outgoing member Adam Posen, who apparently sees no limit to the amount or type of securities a central bank should monetize. “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content,” as quoted by the Financial Times. In an article highlighting comments from Dr. Posen and former BOE member Danny Blanchflower, the UK Telegraph went with the headline “‘No clue’ Bank of England urged to drop ‘anguished religious ethics’ over QE.”

But I’ll delve into another comment from Dr. Posen that goes beyond monetary quackery to touch upon a critical issue. Wednesday from Bloomberg (Karin Matussek): “It is in Germany’s commercial and economic interest to restructure the debt of euro-zone countries in trouble, Posen said, according to the transcript of an interview released by the [BBC]… The debt crisis is the result of decisions by the Germans who acted similarly to sub-prime lenders in the US… ‘It was German government decisions and German banks who lent the money to all these countries so they could buy German exports,’ said Posen. Germany has ‘been running a scheme and so just as everywhere around the world you want to restructure the debt, you can’t make it all on the borrower.’ Lenders have to ‘take a hit’ as well, he said."

Curious how those contemptible subprime lenders and Germans all contracted the same lending disease. Does Dr. Posen somehow absolve the role that extraordinarily loose global monetary policy played in incentivizing the so-called “schemes” run by U.S. subprime lenders and the German banks to finance their respective Bubbles? Will Dr. Posen and others accept the reality that inflationary monetary policy is locked into a precarious state of exacerbating global imbalances, where excess liquidity and mispriced finance incentivize the ongoing accumulation of untenable debts by borrowers and uncollectable financial holdings by lenders (not to mention leveraged positions by the inflated speculator community)?

It may today be rational for mortgage lenders to take a hit and renegotiate mortgages with U.S. subprime borrowers, and perhaps for Germany as well to forgive debts from Greece, Portugal, Ireland, Cyprus, Spain, Italy and so on. And, while we’re at it, China, Japan and the developing nations might as well begin to prepare for hits to be taken on U.S. Treasury and agency holdings. And let’s go ahead and have the Japanese public take a hit on their nation’s untenable debt load. Geez, I guess U.S. banks and corporations might as well get working on the write-downs that will be necessary on their inflating holdings of government obligations as well. And there are these tens of trillions of pension benefits…

This gets to the heart of the issue I have with today’s monetary charlatans: They are content to completely ignore history, including the now 20-year sordid experience with contemporary “activist” central banking and resulting monetary inflations. At this point, there is clearly no end point and certainly no “exit strategy.” They are experts supposedly with solutions, of course unwilling to admit that their policies have directly contributed to losses by millions upon millions of innocent victims around the world. They prescribe more potent doses of what we have already repeatedly witnessed ends in calamity. And somehow they have turned the monetary inflation debate upside down, intimating that it would be immoral and unethical to not keep printing.

There might be some casualties and unfortunate collateral damage, but the increasing stakes associated with the war against recession and deflation justifies a dramatic escalation, we are to believe. This is no time to turn soft – to waiver in the face of great adversity. The backdrop beckons for strong leadership and decisive action. The enemy of humanity must be confronted and terminated. Predictably, the answer is for more and more – more only cheaper money and now even the “nuclear option” of unlimited, costless quantitative easing by resolute central banks the world over. “Do whatever it takes!”

For the Week:

The S&P500 slipped 0.5% (up 12.2% y-t-d), and the Dow declined 0.9% (up 7.7%). The Morgan Stanley Cyclicals gave back 1.2% (up 9.1%), and the Transports fell 1.5% (up 2.0%). The Morgan Stanley Consumer index dipped 0.7% (up 7.3%), and the Utilities fell 1.4% (up 0.2%). The Banks slipped 0.2% (up 19.8%), while the Broker/Dealers added 0.1% (down 2.9%). The S&P 400 Mid-Caps declined 0.8% (up 10.4%), and the small cap Russell 2000 dropped 1.3% (up 9.2%). The Nasdaq100 was about unchanged (up 22.0%), while the Morgan Stanley High Tech index declined 1.2% (up 15.9%). The Semiconductors fell 1.5% (up 9.5%). The InteractiveWeek Internet index dropped 1.6% (up 11.3%). The Biotechs gained 1.5% (up 34.7%). With bullion rising $55, the HUI gold index jumped 4.8% (down 8.6%).

One and three-month Treasury bill rates ended the week at 9 bps. Two-year government yields were down 2 bps to 0.27%. Five-year T-note yields ended the week down 9 bps to 0.71%. Ten-year yields fell 12 bps to 1.69%. Long bond yields fell 13 bps to 2.80%. Benchmark Fannie MBS yields dropped 13 bps to 2.45%. The spread between benchmark MBS and 10-year Treasury yields narrowed one to 76 bps. The implied yield on December 2013 eurodollar futures declined 6.5 bps to 0.475%. The two-year dollar swap spread declined 3 bps 18 bps, and the 10-year dollar swap spread was little changed at 11 bps. Corporate bond spreads ended somewhat wider. An index of investment grade bond risk increased one to 101 bps. An index of junk bond risk increased 5 to 547 bps.

Debt issuance finally succumbed to the late-summer doldrums. Investment grade issuers included Illinois Tool Works $1.1bn, Lab Corp $1.0bn, Fidelity National $400 million, Mayo Clinic $300 million, PPL Electric Utilities $250 million, Domtar $250 million, AIG $250 million, Unum $250 million, Northern Natural Gas $250 million, and Baylor College $110 million.

Junk bond funds saw inflows of $583 million (from Lipper). Junk Issuers included VWR $750 million.

I saw no convertible debt issued.

International dollar bond issuers included BBVA Banco Continental $500 million and International Bank of Reconstruction & Development $100 million.

Spain's 10-year yields ended another volatile week down 3 bps to 6.36% (up 132bps y-t-d). Italian 10-yr yields fell 7 bps to 5.66% (down 134bps). German bund yields sank 14 bps to 1.35% (down 47bps), and French yields declined 8 bps to 2.04% (down 110bps). The French to German 10-year bond spread widened 6 bps to 69 bps. Ten-year Portuguese yields sank 37 bps to 9.01% (down 376bps). The new Greek 10-year note yield fell 36 bps to 23.19%. U.K. 10-year gilt yields dropped 15 bps to 1.52% (down 45bps). Irish yields were down 11 bps to 5.73% (down 253bps).

The German DAX equities index declined 1.0% (up 18.2% y-t-d). Spain's IBEX 35 equities index fell 3.3% (down 14.7%), and Italy's FTSE MIB declined 1.6% (down 1.4%). Japanese 10-year "JGB" yields declined 3 bps to 0.80% (down 18bps). Japan's Nikkei lost 1.0% (up 7.3%). Emerging markets were mostly lower. Brazil's Bovespa equities index declined 1.1% (up 3.0%), and Mexico's Bolsa fell 0.8% (up 8.5%). South Korea's Kospi index dropped 1.4% (up 5.2%). India’s Sensex equities index added 0.5% (up 15.1%). China’s Shanghai Exchange fell 1.1% (down 4.9%).

Freddie Mac 30-year fixed mortgage rates rose 4 bps (4-wk rise of 17bps) to 3.66% (down 56bps y-o-y). Fifteen-year fixed rates added a basis point to 2.89% (down 55bps). One-year ARMs were down 3 bps to 2.66% (down 27bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 5 bps to 4.27% (down 68bps).

Federal Reserve Credit fell $29.0bn to $2.811 TN. Fed Credit was down $31.9bn from a year ago, or 1.1%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 8/22) jumped another $17.2bn to a record $3.563 TN. "Custody holdings" were up $143bn y-t-d and $72bn year-over-year, or 2.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $397bn y-o-y, or 3.9% to a record $10.533 TN. Over two years, reserves were $2.000 TN higher, for 23% growth.

M2 (narrow) "money" supply surged $51.6bn to a record $10.070 TN. "Narrow money" has expanded 7.1% annualized year-to-date and was up 6.3% from a year ago. For the week, Currency increased $1.9bn. Demand and Checkable Deposits jumped $47.6bn, and Savings Deposits increased $2.4bn. Small Denominated Deposits slipped $2.4bn. Retail Money Funds added $2.1bn.

Total Money Fund assets were little changed at $2.574 TN. Money Fund assets were down $121bn y-t-d and $55bn over the past year, or 2.1%.

Total Commercial Paper outstanding gained $4.7bn to $1.025 TN. CP was up $66bn y-t-d, while having declined $92bn from a year ago, or down 8.2%.

Global Credit Watch:

August 22 – Bloomberg (David Goodman): “Record unemployment is cementing Spain’s position as Europe’s most miserable nation, widening the gap over twice-bailed-out Greece, as the debt crisis deepens. …A composite gauge of Spanish jobless and inflation rates, known as the misery index, is rising quicker than those of other European economies, and as Greece’s retreats from a 2012 high. Globally, only South Africa is faring worse… Europe’s fourth-largest economy ‘has been caught in a pernicious circle for some time,’ said Nicholas Spiro, managing director of Spiro Sovereign Strategy… ‘The weakness of its public finances, the vulnerability of its banks, the severity of the recession and the uncertainty about the funding environment are all feeding on each other. The underlying problem is a lack of growth coupled with an excess of austerity.’”

August 24 – Bloomberg (Ben Sills): “Half an hour before a bond auction last month, Spanish Budget Minister Cristobal Montoro told lawmakers that the country was running out of cash. Now he’s blowing open divisions within Prime Minister Mariano Rajoy’s administration. Montoro… this week sparked a political storm after slamming a fellow minister for encroaching on his turf with plans to tax solar energy companies. The comments drew a riposte from his cabinet colleague, forced the deputy prime minister to intercede, and prompted El Pais, Spain’s most-read daily, to say that the country needs just one finance minister to set policy. Rajoy is struggling to impose order on a government hamstrung by his decision to split the finance ministry in two after winning last year’s election and on internal squabbles over who runs the economy… This week’s controversy ‘is a smoking gun,’ said Luis Garicano, a professor of economics and strategy at the London School of Economics. ‘It brings into the open what’s been happening since the first day: there are two completely different views on policy.’”

August 22 – Bloomberg (Angeline Benoit): “Quarrels over who bears the brunt of cuts worth more than 10% of Spain’s annual gross domestic product threaten Prime Minister Mariano Rajoy’s plan to tackle the euro area’s third-largest deficit as a second bailout looms. A seven-day rally that has driven Spain’s 10-year yield to 6.2%... from 6.9% may falter as squabbles between the government, regions and towns about spending and tax receipt allocations hobble deficit reduction… ‘As budget deficit targets look unachievable, the risk of a potential full bailout of the Spanish economy is still there,’ Jaime Becerril and Axel J. Finsterbusch, analysts at JPMorgan Chase…wrote… ‘Further measures must be taken to restore market confidence.’ Five regions will boycott rules depriving illegal immigrants of free health care, while towns such as Hospital de Orbigo and Cartagena are trying to alleviate the austerity burden on families, one by paying for school books, the other by compensating civil servants for wage cuts.”

August 21 – Bloomberg (Ben Sills): “Euro-area peripheral nations are ‘at best’ halfway through correcting the economic imbalances that helped cause the debt crisis and must press on with structural reforms, Moody’s… said. ‘Adjustments, both in the periphery and the core, have already taken place -- in some cases, to a significant degree,’ Moody’s analysts including by Sovereign Chief Economist Lucio Vinhas de Souza… said… The process ‘is at best only half complete.’ …The European Union and the International Monetary Fund have pledged at least 393 billion euros ($485bn) in aid to Greece, Ireland, Portugal and Spain to help them pay their bills while they implement reforms. While Moody’s noted progress in some countries’ trade balances and labor competitiveness, it said that governments cannot ease back on the pace of reform… ‘A comparison with the crises faced by Sweden and Finland in the 1990s shows that the complete unwinding of the periphery countries’ accumulated imbalances –- which were due to the dis-saving behavior in their respective domestic private sectors rather than their governments –- may still take several years,’ Moody’s said.”

August 21 – Bloomberg (Ben Sills): “Spain’s Budget Minister Cristobal Montoro said tackling the nation’s budget deficit should take precedence over reform of the country’s electricity industry. Spain is seeking to close a gap between power-industry costs and revenue, which has resulted in debts of 24 billion euros ($30bn) as of the end of 2011… On the timeframe for completing the power-market reform: ‘We have much bigger issues facing us as a country and as a government. This isn’t going to be decisive in resolving the financing of the Spanish economy. ‘We shouldn’t get distracted by this, or by clashes within the government.”

Global Bubble Watch:

August 23 – Bloomberg (Charles Mead): “Yields on corporate bonds worldwide fell to a record low yesterday after Federal Reserve policy makers signaled readiness to boost stimulus options. Borrowing costs for the most creditworthy to the riskiest companies fell to an unprecedented 3.76% yesterday, from 3.8% on Aug. 21… Yields on global investment-grade debt dropped to a record 2.97%.”

Germany Watch:

August 20 – UK Telegraph: “The Bundesbank has showed no signs of lowering its resistance to a European Central Bank plan to buy billions of euros worth of Spanish and Italian government bonds to reduce those countries’ crippling borrowing costs. Europe's most powerful central bank kept up its opposition even after Germany's political leaders voiced some support for ECB President Mario Draghi's plan to resume buying bonds. ‘The Bundesbank remains critical of the purchase of euro system sovereign bonds, which comes with considerable risks for stability,’ the Bundesbank wrote in its monthly report. ‘Decisions about a possible broader mutualization of solvency risks should be... with the governments and parliaments, and should not occur via central bank balances.’”

August 20 – Dow Jones (Tom Fairless and Todd Buell): “The German government and the European Central Bank both hit back Monday at a weekend report that the ECB was planning to cap the borrowing costs of fiscally-strained countries with its unlimited resources. A report in German magazine Der Spiegel at the weekend had re-opened a painful debate over how far the ECB--widely perceived as the only institution capable of holding Europe's currency union together--can go in its attempts to keep interest rates low in those countries that have lost the markets' trust and are struggling with acute recessions. The report had suggested that the ECB's governing council would discuss a plan to cap the borrowing costs of struggling euro-zone governments by buying unlimited amounts of their bonds to keep interest rates at a reasonable level. That would test the limits of a grand plan to support euro-zone debt markets that was sketched out with deliberate vagueness by ECB President Mario Draghi earlier this month. It would also appear to cross a red line drawn by Germany's Constitutional Court stopping any euro-zone attempts to stack up unlimited amounts of liabilities for future generations of German taxpayers.”

August 23 – MarketNews International: “The European Central Bank should not become the EU's top bank supervisory authority, as this could undermine its independence and create conflicting policy goals, Bundesbank board member Andreas Dombret said… While the ECB does have a role to play in bank supervision, ‘monetary policy should in any case be separated as much as possible from supervision,’ Dombret said… Giving the ECB primary responsibility for supervision would require a level of democratic accountability that could weaken its independence, since ‘supervisory rights imply wide-ranging intervention rights that require direct democratic legitimacy,’ he explained. ‘If the central bank has final, sovereign responsibility, its independence would have to be curbed,’ Dombret said. ‘And please do not overlook that monetary policy decisions can have influence over the robustness of banks. This can very well lead to conflicting goals.’ ‘These are all good reasons, I believe, to give the final responsibility not to the ECB, but to a different authority, led by a council in which the banks' home countries are adequately represented,’ he said.”

Currency Watch:

The U.S. dollar index dropped 1.3% to 81.49 (up 1.6% y-t-d). For the week on the upside, the Swiss franc increased 1.5%, the Norwegian krone 1.5%, the euro 1.4%, the Danish krone 1.4%, the Japanese yen 1.1%, the Swedish krona 1.0%, the British pound 0.7%, the New Zealand dollar 0.5%, the Singapore dollar 0.2%, and the Taiwanese dollar 0.1%. On the downside, the South African rand declined 1.0%, the Brazilian real 0.6%, the Mexican peso 0.4%, the Canadian dollar 0.3%, and the Australian dollar 0.2%.

Commodities Watch:

August 21 – Bloomberg (Whitney McFerron): “Global soybean supplies are set for ‘unprecedented’ tightness as demand outpaces production while drought persists in the U.S., Oil World said. World soybean supplies may shrink by 33 million to 35 million metric tons in the September-to-February time period, compared with a year earlier… ‘The tightness of world soybean supplies will be very severe and unprecedented,’ Oil World said. ‘Much will depend, of course, on the Chinese buying policy and at what price level consumers will cut back.’ Soybean prices have surged 41% this year…”

August 23 – Bloomberg (Carli Cooke and Sikonathi Mantshantsha): “About a fifth of global platinum production capacity was idled in South Africa today as the nation held a day of mourning for 44 miners and policemen killed in the deadliest police violence since apartheid ended… Rustenburg and Lonmin Plc’s Marikana mine, where police killed 34 protesters on Aug. 16, both tap the world’s richest platinum reserves…”

August 22 – Financial Times (Helen Thomas and Neil Hume): “BHP Billiton has called a halt to one of its so-called ‘mega-projects’, going back to the drawing board on its $20bn Olympic Dam copper-uranium development in South Australia as falling commodities prices weigh on the miner’s full-year results… The company… said net profit, including write-downs on its US shale gas assets and a $346m before-tax charge on the Olympic Dam project, fell 34.8% to $15.4bn for the year ended June 30… The decision comes as BHP signalled a broad-based retreat from plans to spend $20bn a year on large growth projects for several years.”

The CRB index increased 0.8% this week (up 0.2% y-t-d). The Goldman Sachs Commodities Index added 0.4% (up 4.0%). Spot Gold jumped 3.4% to $1,671 (up 6.8%). Silver surged 9.3% to $30.71 (up 10%). September Crude slipped 17 cents to $96.15 (down 3%). September Gasoline increased 1.7% (up 16%), while September Natural Gas slipped 0.6% (down 10%). December Copper jumped 1.8% (up 2%). September Wheat dipped 0.8% (up 33%), while September Corn added 0.5% (up 24%).

European Economy Watch:

August 23 – Bloomberg (Simone Meier): “Euro-area services and manufacturing output contracted for a seventh straight month in August, adding to signs of a deepening economic slump as European leaders struggle to contain the fiscal crisis. A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area rose to 46.6 from 46.5 in July… Europe’s economy is edging toward a recession as budget cuts from Spain to Ireland undermine consumer spending and company investment just as global demand shows signs of cooling.”

August 21 – Bloomberg (Scott Hamilton): “Britain unexpectedly posted a budget deficit in July as corporation-tax receipts plunged… Tax revenue fell 0.8% and corporation tax plunged 19.3%. Government spending rose 5.1%.”

China Watch:

August 24 – Bloomberg (Weiyi Lim): “China’s stocks fell, dragging down the benchmark index to the lowest level since March 2009, after companies from Maanshan Iron & Steel Co. to Shanxi Coal International Energy Group Co. reported weaker earnings.”

August 23 – New York Times (Keith Bradsher): “After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses. The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home. The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors. But the main nongovernment survey of manufacturers in China showed… that inventories of finished goods rose much faster in August than in any month since the survey began in April, 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases. ‘Across the manufacturing industries we look at, people were expecting more sales over the summer and it just didn’t happen,’ said Anne Stevenson-Yang, the research director for J Capital Research… With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.’”

August 21 – Bloomberg (Patrick Harrington): “China is entering a ‘danger zone’ where a financial crisis may become more likely because of increases in loans and property prices coinciding with an aging of the population, a Bank of Japan official said. ‘If a demographic change, a property-price bubble, and a steep increase in loans coincide, then a financial crisis seems more likely,’ BOJ Deputy Governor Kiyohiko Nishimura said… ‘And China is now entering the danger zone.’ China is at risk of emulating crises in Japan in the 1990s and the U.S. in the 2000s, according to Nishimura… Demographic changes can provide fertile ground for ‘malign property bubbles’ because of the effect on demand for real estate, he said.”

August 22 – Reuters (Koh Gui Qing): “China can afford to deliver a fiscal stimulus for its sagging economy, but would risk making bad investments, ratings agency Standard & Poor’s said… as Chinese media fuelled speculation that a fresh spending boost was on the way. In its new report, S&P said a mountain of debt left behind by a stimulus package that helped China fend off global recession four years ago has curbed Beijing's appetite for a big stimulus this time round. ‘Inefficient spending can impair China's future growth trend,’ the report said. ‘It could also deepen the damage of the last round of stimulus spending by further weakening the balance sheets of governments and commercial banks and raising future financing costs across the economy.’ S&P's comments came as local media reported that Tianjin… was planning a multi-year investment programme worth $236 billion… equivalent to around 150% of the city's annual economic output…”

August 21 – Bloomberg: “Tianjin announced a multi-year target of 1.5 trillion yuan ($236bn) for industrial investment, joining a similar plan by Chongqing amid local efforts that may help reverse China’s growth slowdown. Tianjin, in northeast China, plans the investment over four years in 10 industries including petrochemicals and aerospace… Chongqing, in the southwest, will boost industrial investment to 1.5 trillion yuan in the five years through 2015… The spending builds on reports last month that Changsha city will invest 829 billion yuan in projects including an airport and subway lines while Nanjing and Ningbo will introduce measures to boost consumption.”

Japan Watch:

August 22 – Bloomberg (Andy Sharp and Keiko Ujikane): “Japan had a wider-than-estimated trade deficit in July as Europe’s sovereign-debt crisis and a slowdown in China dragged down exports and nuclear shutdowns boosted energy imports. The shortfall was 517.4 billion yen ($6.5bn)… Exports fell 8.1% from a year earlier, compared with an estimated 2.9% drop. Imports rose 2.1%... Shipments to the European Union fell 25% in July from a year earlier, the biggest decline since October 2009, while those to China slipped 12%... The trade deficit was the biggest for any July in data going back to 1979, it said."

India Watch:

August 23 – Bloomberg (Kartik Goyal): “The Indian government may exceed its budget-deficit target because of higher spending on petroleum subsidies and a weak economic growth outlook that could lead to a tax shortfall, the Reserve Bank of India said. ‘There is no scope for complacency as fiscal slippage is likely’ in the year through March 2013… The shortfall in the current account, the broadest measure of trade, is set to remain above a sustainable level, it said. These risks must be tackled ‘forthwith’ to contain threats to economic stability… The Reserve Bank left interest rates unchanged in July to fight an inflation rate that has averaged more than 7% for most of 2012.”

U.S. Bubble Economy Watch:

August 21 – Bloomberg (Cordell Eddings and Daniel Kruger): “The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with more funds to buy bonds and temper the biggest sell-off in Treasuries since 2010. As deposits increased 3.3% to $8.88 trillion in the two months ended July 31, business lending rose 0.7% to $7.11 trillion… The record gap of $1.77 trillion has expanded 15% since May… Banks have already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.”

August 21 – Bloomberg (Brian Womack and Ari Levy): “Facebook Inc. director Peter Thiel sold most of his stake in the operator of the world’s largest social-networking website, bringing his proceeds to more than $1 billion… Thiel, one of Facebook’s earliest investors, sold about 20.1 million shares in the company on Aug. 16 and Aug. 17, raising $395.8 million… Thiel, a venture capitalist and hedge-fund manager, had already generated $640.1 million in sales during the initial public offering.”

August 23 – Bloomberg (Sarika Gangar): “Another bubble may be forming in the U.S. housing market, this time in the bonds of homebuilders. Not since July 2007, before the subprime mortgage market collapsed and credit markets froze, have investors accepted relative yields as low as they are now for debt of the nation’s biggest homebuilders. So-called spreads at 4.82 percentage points on debt of borrowers from D.R. Horton Inc., the largest U.S. homebuilder by volume, to Toll Brothers Inc. have tightened nine times faster than the overall high-yield market since February…”

Central Bank Watch:

August 21 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Dennis Lockhart said U.S. policy makers face a risk of easing too much while trying to spur a ‘disappointing’ three- year-old economic recovery. ‘There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources,’ Lockhart said… While ‘monetary policy can exert a powerful positive influence on an economy,’ it ‘is not a panacea.’ Lockhart’s comments contrast with remarks he made in July…”

August 23 – Bloomberg: “Federal Reserve Bank of Chicago President Charles Evans urged easier monetary policy around the world, including in China, to guard against economic shocks, broadening his call for more stimulus in the U.S. ‘I don’t need to see any more data to know that I think we should have more accommodation,’ Evans said… ‘I certainly would applaud anybody who takes action in order to strengthen their economies’ around the world, including China, he said… ‘This is a time where the most vibrant economies possible would be a good defense against unanticipated negative shocks,’ Evans said…”

August 21 – Bloomberg (Tom Keene and Jeff Kearns): “Federal Reserve Chairman Ben S. Bernanke should assure investors next week that ‘he’ll do whatever it takes’ to stimulate the slowing economy, said Vincent Reinhart, chief U.S. economist at Morgan Stanley. Bernanke should use his Aug. 31 speech at the Fed symposium in Jackson Hole, Wyoming, to expand his commitment to providing additional accommodation if needed because the central bank is falling short of its mission, Reinhart… ‘The Federal Reserve should provide a conditional commitment that says as long as it is short of its goals it is willing to expand its balance sheet,’ Reinhart, a former head of the Fed board’s Division of Monetary Affairs, said… ‘What you want to be is conditional, you want to be able to say as long as the economy is not performing relative to what the Congress told you to do, you’ll continue to act.’”

Fiscal Watch:

August 22 – Bloomberg (Brian Faler): “The U.S. budget deficit will reach $1.1 trillion this year, slightly less than anticipated… The nonpartisan Congressional Budget Office said… in a biannual analysis that the shortfall will be about $100 billion narrower than it had projected in March. The deficit would be less than last year’s $1.3 trillion, in part because tax revenue has risen by almost 6% and spending is down by about 1% this year. It would be the fourth consecutive year the U.S. would run a trillion-dollar budget deficit.”