Saturday, November 8, 2014

12/30/2011 2011 in Review *

Coming into the year, I held to the thesis that 2011 was a “Bubble Year.” If the Bubble ran uninterrupted, global risk markets would likely turn only more speculative, with an upward “inflationary” bias. On the other hand, if the Bubble burst the markets might rather abruptly find themselves right back in a de-leveraging-induced crisis. I have for some time noted the parallels between Greece and U.S. subprime, the first cracks in respective Bubbles whereby the marginal high-risk borrower lost access to cheap finance. My analytical bias coming into the year was that the Greek situation would worsen, contagion effects would be unleashed and the “Global Government Finance Bubble” would be at risk. From this analytical perspective, we end the year with as many questions as answers - and the situation anything but resolved.

Global Credit, policymaking and market dynamics are extraordinarily complex. I believe we are at a critical juncture in financial history. A multi-decade global Credit Bubble and Financial Mania has reached the point of serious fragility. With stakes that seemingly couldn’t be higher, increasingly desperate policymakers can be counted on to do everything possible to try to sustain the Credit and asset markets.

Especially considering the degree of fiscal and monetary stimulus, the U.S. economic recovery has remained unimpressive. First quarter 2011 GDP slowed to a stall-speed 0.4%, and remained below 2.0% during Q2 and Q3. The Fed has abandoned all precepts of an “exit strategy” from the post-2008 crisis-period monetization. Federal Reserve “QE2” operations were largely responsible for Fed assets having jumped $513bn during the year, or 21% growth, to a record $2.92 TN. Moreover, the experimental Bernanke Fed pre-committed to essentially zero rates out to 2013, while also boosting holdings of long-term Treasuries in “operation twist” (with more tinkering on the way). These aggressive policy measures emboldened the view that the Fed was both backstopping the financial markets and essentially committed to pegging long-term U.S. yields at extremely low levels. This backdrop ensured an incredibly accommodative marketplace for Washington to pursue its ongoing massive borrowing and spending programs.

Those that were bearish Treasuries in early-2011 became the butt of jokes. Yet our policymakers did do everything imaginable to impair the long-term value of our currency and debt obligations. Unending fiscal stimulus and empty talk on deficit reform find today's situation at nothing but previously unimaginable deficits as far as the eye can see. It is worth noting that y-o-y Producer Prices were running up about 7% for much of the year, with Consumer Prices up almost 4.0% y-o-y in September. In a world of ultra-loose monetary policy and ongoing dollar weakness, the continuation of “Risk On” seemed like a pretty sure bet (and an extremely “crowded trade”).

Across the Atlantic, a (relatively) principled European Central Bank (ECB) was trying to hold the line as consumer price inflation reached a problematic 3.0%. In the category “be careful for what you wish for,” the ECB eventually succumbed to market pressure. The liquidity flood gates were opened wide in an attempt to offset the forces of de-leveraging, risk aversion and a crisis of confidence in the European debt markets and banking system. Total ECB assets ended the year up $947bn (euro 729bn), or 36%, to a record $3.553 TN (euro 2.722TN). The markets will now perceive that maintaining market liquidity and stability – as opposed to price stability – is the ECB’s top priority. While the euro ended 2011 with a loss versus the U.S. dollar of only 3.2%, irreparable damage has been done to one of the world’s preeminent currencies.

While the terrible Japanese disaster garnered the markets’ focus early in the year, the major storyline of 2011 unfolded in Europe. What began as a bout of market revulsion to the debt of tiny Greece morphed into a full-fledged crisis of confidence in European finance, policymaking and, even, euro monetary integration. The markets’ faith that Germany (and, to a lesser extent, France and the other “AAA’s”) would eventually backstop periphery debt finally succumbed to the reality that problems ran so deep that the Creditworthiness of the “core” was in jeopardy.

Europe this year provided valuable confirmation with respect to the nature of Credit Bubble Dynamics. First, economic structure – or, more specifically, Credit excess-induced economic maladjustment – finally became a critical market issue. As the Greek debacle unfolded, the markets began to appreciate that badly distorted (“Bubble”) economies were financial black holes in terms of the need for ongoing stimulus and bailouts. The Greek economy simply had little capacity to create wealth and sustain itself. Not only was there recognition of the enormous scope of ongoing bailouts, rising market yields were worsening the situation for the over-indebted throughout Europe. Italy, the third largest sovereign borrower in the world, was “too big to bail” – and the market’s move to impose a reasonable risk premium on Italian debt quickly incited worries that the nation’s (120% of GDP) debt load was unmanageable. The European debt crisis took a dramatic turn for the worse in November as Italian yields surged to 7.5%. If Italy was in trouble, the “core” was in trouble - and European highly-exposed banks and the euro currency were in trouble.

The notion of a “ring-fence” to protect Italy and Spain really amounted to desperate policy measures intent on returning market yields back to artificially low levels. But with market participants having moved significantly up the Credit Bubble Dynamics learning curve, even a well-functioning system of policymaking would have faced a seemingly insurmountable challenge. The markets had lost confidence in Italy, and the German taxpayer was not going to stamp its guarantee on Italian debt obligations to satisfy the marketplace. Additionally, the market was not about to accommodate gimmicks and sophisticated (pre-2008 style) risk structures from the European Financial Stability Facility (EFSF) or anyone else. Market risk perceptions had changed, with 2011 seeing the notions of “risk free” Credit and default-free sovereign debt challenged. Quietly, contemporary “structured finance” suffered another destabilizing body blow.

In the year’s final month, many began to question the viability of monetary integration between 17 European nations of different cultures, financial disciplines, economic structures, fiscal positions and political realities. The new head of the ECB (an institution stung in 2011 by the resignations of two prominent German central bankers) orchestrated a massive long-term liquidity facility, while leaders of Germany and France pushed forward a plan for further integration and fiscal restraint. Pimco’s Tony Crescenzi likened the situation to a couple “signing a prenup” with the intention of marrying. Harvard’s Martin Feldstein instead sees a “failed marriage.” To me, it is more a failed marriage where one side is saying “let’s now sign a prenup and renew our wedding vows - and I’ll promise this time to be a faithful and responsible partner. Trust me.” The euro dropped almost 4% in December, as the issue of capital flight (within and out of the eurozone) became a serious issue.

The bursting of Europe’s debt Bubble proved a catalyst for another round of global de-risking/de-leveraging. Rewarded and emboldened by the 2008 crisis policy response, the global leveraged speculating community had reloaded. Global hedge fund assets reached a record $2.0 TN in early 2011. But the unfolding crisis proved over-optimistic the presumption that global policymakers had the situation under control and could ensure liquid and buoyant risk markets. “Risk On” succumbed to “Risk Off.” The big bets turned into big losers: Europe, emerging equities and currencies, financial stocks, gold stocks and commodities, and shorting Treasuries (and the U.S. dollar) to fund various “carry trades” (to name only a few).

Bubbles are complex and forever tricky. I believe the European debt crisis created major fissures in the “Global Government Finance Bubble.” Yet it is also clear that the U.S. Treasury market has to this point been a major beneficiary. There is a strong case to be made that the unfolding global crisis granted an extended lease on life for the Treasury Bubble, fostering only greater risk mispricing and fiscal profligacy accommodation. Importantly, global de-risking/de-leveraging (not to mention Fed policymaking) actually incited a dramatic loosening of financial conditions in anything and everything U.S. government finance-related (Treasuries, agency debt, MBS, municipal debt, etc.).

Keep in mind that since the ’08 crisis Treasury Credit has been the dominant source of finance (and associated spending power) fueling the U.S. economy. It is also helpful to appreciate that U.S. mortgage finance has essentially been nationalized (with borrowing costs held artificially low). This year’s collapse in U.S. bond yields benefited the sputtering U.S. economy through various channels. First, our Washington policymakers enjoyed the opposite of “austerity,” with ongoing borrowing and spending underpinning economic expansion. Massive deficits continued to bolster incomes, consumption, GDP and corporate profits (while doing little to stimulate investment and job creation). Record low mortgage rates were also much responsible for recently trumpeted signs of a pulse in our moribund housing markets. And, finally, there were not insignificant wealth effects associated with the collapse of market yields.

With the consumption-based U.S. (“Bubble”) economy relatively immune to slowing global growth, it became easy for those of a bullish persuasion to view the U.S. economy and markets as the envy of the world. To each his own, but for me the degree of complacency has been rather astounding.

The year was also notable for Chinese Bubble nuances. Consumer inflation surpassed 6.0% mid-year. Facing rising inflationary pressures and an increasingly precarious housing (apartment) Bubble, Chinese policymakers increased bank reserve requirements and implemented other timid “tightening” measures. China’s equities markets performed poorly and fissures appeared in many real estate markets. Issues of over-indebted local governments, unscrupulous real estate developers and various shenanigans seemed to take their toll on confidence. With global growth slowing, the manufacturing and export sectors showed increasing vulnerability. There were even hints of susceptibility to a reversal of “hot money” flows. Nonetheless, bank lending will post another year of Trillion-plus growth.

Year 2011 was most notable for the increasing impotence of government policymaking. European policymakers appeared incompetent, although the salient issue is that government policy measures will be markedly less successful in resolving a sovereign debt crisis than they have been in solving private debt problems. When a crisis of confidence in government debt and policy becomes the critical issue, aggressive monetary and fiscal measures will tend more toward instigating unintended consequences than fostering stabilization. Warren Buffet has said that “you only find out who is swimming naked when the tide goes out.” After swimming in Credit and speculative excess, you soon find out the areas of vulnerability when Credit growth decelerates. This year saw Europe’s myriad vulnerabilities in full view, while U.S. (Treasury debt) and China (bank lending) Credit growth largely shrouded what I believe are serious mounting instabilities.

As 2011 was coming to its end, the list of the vulnerable seemed to lengthen by the day. Despite the year-end rally in U.S. equities, December was a notably rough month for many “developing” currencies. Faltering confidence in the euro – with ramifications for European bank stability, lending to emerging markets and global “hot money” flows more generally – saw the Hungarian forint drop 7.1%, the Czech koruna 4.6%, and the Russian ruble 4.5% during the month. For the year, the Turkish lira fell 18.4%, the South African rand 17.9%, the Indian rupee 15.8%, the Hungarian forint 14.4%, the Polish zloty 14.0%, the Mexican peso 11.7%, the Brazilian real 11.0%, and the Chilean peso 9.9%. While the final verdict will come later, I have seen some confirmation of the thesis that the “developing” markets and economies will prove less robust and resilient than they were throughout the ’08/’09 crisis.

There is no doubt that de-risking/de-leveraging is taking its toll. It is an inhospitable environment for leverage. The MF Global fiasco proves that too little has changed here at home. And I take the drubbing unleashed upon the major U.S. financial stocks as confirmation of festering problems throughout U.S. and global finance. While the stock market ended little changed for the year, the extraordinary volatility connotes inherent instability. Yet even on this the final trading day of the year, much is left unclear, uncertain, unresolved and open to interpretation. Has impressive U.S. market and economic resiliency been signaling inherent strength and a stage set for a banner 2012? Or have complacency and the market’s inability to discount troubled waters ahead once again set the marketplace up for disappointment? Next week: “Issues 2012”

For the Week:

The S&P500 slipped 0.6% to end a volatile 2011 about unchanged. The Dow declined 0.6% (2011 gain of 5.5%). The Morgan Stanley Cyclicals were unchanged (down 16.2%), while the Transports dipped 0.7% (down 1.7%). The Morgan Stanley Consumer index declined 0.4% (up 0.7%), while the Utilities added 0.4% (up 14.1%). The Banks were down 1.4% (down 24.6%), and the Broker/Dealers were hit for 1.8% (down 31.5%). The S&P 400 Mid-Caps declined 0.7% (down 3.1%), and the small cap Russell 2000 fell 1.0% (down 5.5%). The Nasdaq100 dipped 0.4% (up 2.7%), and the Morgan Stanley High Tech index lost 0.7% (down 11.3%). The Semiconductors dropped 1.1% (down 11.5%). The InteractiveWeek Internet index fell 0.8% (down 8.4%). The Biotechs rallied 1.5% (down 15.9%). With bullion getting hit for $43, the HUI gold index sank 2.6% (down 13.0%).

One and three-month Treasury bill rates ended the week near zero. Two-year government yields fell 4 bps to 0.23%. Five-year T-note yields ended the week down 14 bps to 0.79%. Ten-year yields fell 15 bps to 1.88%. Long bond yields ended down 16 bps to 2.86%. Benchmark Fannie MBS yields were down 17 bps to 2.88%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 2 bps to100 bps. Agency 10-yr debt spreads were little changed at negative one basis point. The implied yield on December 2012 eurodollar futures declined 6 bps to 0.76%. The two-year dollar swap spread declined 3 bps to 48.3 bps. The 10-year dollar swap spread was little changed at 16.75 bps. Corporate bond spreads narrowed slightly. An index of investment grade bond risk declined one basis point to 120 bps. An index of junk bond risk dropped 4 bps to 681 bps.

I saw no debt issued this week.

Junk bond funds saw inflows of $455 million (from Lipper).

Italian 10-yr yields ended the week up 10 bps to 7.03% (up 221bps y-t-d). Spain's 10-year yields dropped 28 bps to 5.04% (down 40bps). Greek two-year yields ended the week down 890 bps to 125.54% (up 11,330bps). Greek 10-year yields fell 37 bps to 31.31% (up 1,885 bps). German bund yields fell 13 bps to 1.825% (down 114bps), while French yields jumped 16 bps to 3.14% (spread to bunds widened 29 bps to a 5-wk high 131bps). U.K. 10-year gilt yields declined 6 bps to 1.975% (down 154bps). Ten-year Portuguese yields rose 16 bps to 12.77% (up 619bps). Irish yields declined 4 bps to 8.26% (down 80bps).

The German DAX equities index slipped 0.3% (down 14.7% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.98% (down 14bps). Japan's Nikkei rallied 0.7% (down 17.3%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index declined 1.7% (down 18.1%), while Mexico's Bolsa was little changed (down 3.8%). South Korea's Kospi index lost 2.3% (down 11.0%). India’s Sensex equities index dropped 1.8% (down 24.6%). China’s Shanghai Exchange slipped 0.2% (down 21.7%). Brazil’s benchmark dollar bond yields were little changed at 3.33%, and Mexican benchmark yields were little changed at 3.54%.

Freddie Mac 30-year fixed mortgage rates rose 4 bps to 3.95% (down 91bps y-o-y). Fifteen-year fixed rates were up 3 bps to 3.24% (down 96bps y-o-y). One-year ARMs added a basis point to 2.78% (down 48bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down one basis point to 4.67% (down 89bps y-o-y).

Federal Reserve Credit surged $35.4bn to a record $2.920 TN. Fed Credit was up $512.6bn from a year ago, or 21.3%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/28) dropped $20.3bn to $3.420 TN (15-wk decline of $54.9bn). "Custody holdings" were up $69.9bn y-t-d, or 2.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.200 TN y-o-y, or 13.3% to $10.224 TN. Over two years, reserves were $2.592 TN higher, for 34% growth.

M2 (narrow) "money" supply declined $6.4bn to $9.666 TN. "Narrow money" has expanded at a 9.6% pace y-t-d. For the week, Currency added $0.4bn. Demand and Checkable Deposits declined $1.8bn, and Savings Deposits fell $1.8bn. Small Denominated Deposits dipped $2.0bn. Retail Money Funds declined $1.2bn.

Total Money Fund assets increased $2.6bn to $2.695 TN. Money Fund assets were down $115bn for the year, or 4.1%.

Total Commercial Paper outstanding sank $27.2bn (24-wk decline of $277bn) to $959bn. CP was down $12bn y-t-d, or 1.3%.

Global Credit Watch:

December 29 – Wall Street Journal (David Enrich and Sara Schaefer Munoz): “Even after the European Central Bank doled out nearly half a trillion euros of loans to cash-strapped banks last week, fears about potential financial problems are still stalking the sector. One big reason: concerns about collateral. The only way European banks can now convince anyone—institutional investors, fellow banks or the ECB—to lend them money is if they pledge high-quality assets as collateral. Now some regulators and bankers are becoming nervous that some lenders’ supplies of such assets, which include European government bonds and investment-grade non-government debt, are running low.”

December 28 – Bloomberg (Gabi Thesing): “The European Central Bank said overnight deposits from the region’s financial institutions increased to an all-time high. Euro-area banks parked 452 billion euros ($591bn) with the… ECB yesterday… The ECB last week lent 523 banks a record 489 billion euros for three years to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis.”

December 30 – Bloomberg (Paul Dobson): “Italian 10-year bond yields stayed at more than 7% for a second day, with the debt set to complete its worst year since at least 1992 as fallout from Europe’s debt crisis infected the region’s larger economies. Italian bonds handed investors a 5.7% loss this year…”

December 29 – Bloomberg (Anchalee Worrachate): “The gap between the highest and the lowest rates that banks say they can borrow from each other in dollars is close to a 2 ½-year high, a sign Europe’s failure to end the debt crisis is straining the financial industry. The divergence from reported fixings by the 18 banks contributing to the three-month London interbank offered rate reached 28 bps today, within two bps of the widest since May 2009.”

December 28 – Bloomberg (Angeline Benoit): “Spanish residential mortgages decreased for an 18th month in October as banks reined in lending amid a surge in borrowing costs and bad loans. The number of home loans fell 43.6% from a year earlier after a 42% drop in September…”

December 29 – Bloomberg (Andras Gergely): “Hungary raised less than half as much as planned at a debt auction and the forint dropped to a month low on concern the government may not obtain international aid after two credit downgrades to junk status… Standard & Poor’s cut Hungary to non-investment grade last week, following a similar downgrade by Moody’s… after the International Monetary Fund and the European Union suspended bailout talks with Hungary, citing proposed bills curbing the central bank’s independence.”

December 29 – Bloomberg (Sarah McDonald): “The cost to insure against default of Australian corporate bonds is poised for the biggest annual increase since 2008 as the nation’s economy comes under threat from Europe’s sovereign debt crisis.”

Global Bubble Watch:

December 28 – Bloomberg (Tim Catts): “Corporate bond sales around the world surpassed $3 trillion for the third straight year as yields plunged, belying concern that Europe’s fiscal crisis would lock out borrowers. General Electric… and… Rabobank Nederland led $3.18 trillion of offerings… Global sales of $3.16 trillion compare with $3.2 trillion in 2010 and $3.91 trillion in 2009… Sales have totaled $157.5 billion this month, following $258.1 billion in November… Offerings in the U.S. fell to $1.11 trillion in 2011 from $1.13 trillion last year and a record $1.23 trillion in 2009... The decline in issuance was led by a 15% drop in junk-bond offerings from a record $287.7 billion in 2010, with sales all but stalled in August and September.”

December 27 – Bloomberg (Krista Giovacco): “The amount of leveraged loans made in the U.S. reached the highest this year since 2007 as companies rushed to refinance $197.7 billion of debt amid concern that Europe’s sovereign crisis would damp the availability of credit. More than $373.1 billion of high-yield, high-risk loans were made this year as of Dec. 21, a 58.5% increase from 2010 and the most since $535.2 billion four years ago, according to Standard & Poor’s…”

December 28 – Bloomberg (Michael Patterson and Shiyin Chen): “In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor’s 500 Index and the economies grew four times faster than America’s. Now Goldman Sachs… says the best is over for the largest emerging markets. BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 24%, EPFR Global data show.”

December 30 – Bloomberg (Ben Martin): “Junk bonds worldwide underperformed investment-grade debt this year for the first time since credit markets froze in 2008 as the rebound in the global economy faded and Europe’s sovereign crisis intensified.”

December 29 – Bloomberg (Serena Saitto): “The value of global takeovers dropped to the lowest level in more than a year this quarter, and dealmakers say Europe’s debt crisis may hamper a recovery in 2012… Mergers and acquisitions have slumped 16% from the previous three months to $457.1 billion, putting the fourth quarter on course to be the slowest since at least mid-2010… For the year to date, announced takeover volume has risen less than 3% to $2.25 trillion after regulatory hurdles scuttled AT&T Inc.’s bid for T-Mobile USA, which would have been 2011’s biggest deal.”

December 29 – Bloomberg (Nina Mehta, Whitney Kisling and Katia Porzecanski): “Trading of a new class of contracts that expire a week after they’re listed pushed U.S. options volume to a ninth-straight annual record as investors turned to shorter maturities to hedge risk. About 4.5 billion contracts changed hands through Dec. 27, beating last year by 16%...”

December 28 – Bloomberg (Lee Spears): “Facebook Inc. and Yelp Inc. are set to lead the biggest year for U.S. initial public offerings by Internet companies since 1999… With Facebook considering the largest Internet IPO on record and regulatory filings showing that at least 14 other Web-related companies are planning sales, the industry may raise $11 billion next year… That would be the most since $18.5 billion of IPOs in 1999, just before the dot-com bubble burst.”

December 30 – Bloomberg (Whitney Kisling, Nandini Sukumar and Nina Mehta): “The biggest wave of takeover offers ever for publicly traded stock and derivatives exchanges has done little for investors in 2011, as more than $21 billion of equity value was erased and only one deal closed.”

December 29 – Bloomberg (Andrew Mayeda and Chris Fournier): “Sales of mortgage bonds by Canada Housing Trust rose 4.7% this year and may approach a record in 2012 as banks take advantage of cheaper financing and investors look for assets with high credit ratings. Canada Housing Trust, the financing arm of the nation’s housing agency, issued C$41.3 billion ($40.3bn) in debt this year, up from C$39.4 billion in 2010… Sales by the trust reached a record C$46.9 billion in 2009 amid a credit crunch for banks and mortgage lenders.”

December 28 – Bloomberg (Jason Webb): “Ruble bonds are set for the lowest returns since 2008 as protests against election results add to concern Europe’s debt crisis is damping demand for Russia’s oil exports. The government’s bonds gained an average 2.4% this year in dollar terms… The return compares with a 4.3% advance for Brazil and 10.5% for China. The ruble has weakened 3.6% against the dollar in 2011.”

Currency Watch:

For the week, the dollar index added 0.2% (2011 gain of 1.5%). On the upside, the Japanese yen increased 1.5%, the South African rand 0.9%, the Australian dollar 0.6%, and the New Zealand dollar 0.4%. On the downside, the Mexican peso declined 0.7%, the euro 0.6%, the Danish krone 0.6%, the Brazilian real 0.5%, the Singapore dollar 0.3%, the British pound 0.3%, the South Korean won 0.2%, the Swiss franc 0.2%, the Swedish krona 0.1%, and the Canadian dollar 0.1%. The Norwegian krone and the Taiwanese dollar were little changed.

For 2011 on the upside, the Japanese yen increased 5.5%. On the downside, the South African rand declined 18.1%, the Mexican peso 11.5%, the Brazilian real 11.0%, the Taiwanese dollar 3.2%, the euro 3.2%, the Danish krone 3.2%, the Norwegian krone 2.9%, the Swedish krona 2.6%, the South Korean won 2.3%, the Canadian dollar 2.3%, the Singapore dollar 1.0%, the British pound 0.4%, the New Zealand dollar 0.4%, the Swiss franc 0.3%, and the Australian dollar 0.2%.

Commodities and Food Watch:

December 30 – Bloomberg (Glenys Sim and Millie Munshi): “Commodities posted the first annual drop since 2008, paced by declines in cotton, copper and cocoa, on concern that the sovereign-debt crisis in Europe and a cooling Chinese economy will sap demand for raw materials.”

December 28 – Bloomberg (Jeff Wilson): “Milk was the best-performing major commodity this year, topping gains in crude oil, cattle and gold, as surging U.S. exports of dairy products sent prices to their biggest annual gain in four years. …Milk futures jumped 41% this year… almost twice the 21% gain for feeder cattle…”

The CRB index slipped 0.3% this week (down 8.3% for 2011). The Goldman Sachs Commodities Index dipped 0.2% (up 2.1%). Spot Gold dropped 2.7% to $1,564 (up 10.1%). Silver sank 4.0% to $27.92 (down 10%). February Crude declined 85 cents to $98.83 (up 8%). February Gasoline lost 0.8% (up 8%), and February Natural Gas sank 5.0% (down 32%). March Copper declined 1.0% (down 23%). March Wheat rallied 4.9% (down 18%), and March Corn jumped 4.4% (up 3%).

China Bubble Watch:

December 30 – Bloomberg: “China’s foreign direct investment may exceed $110 billion this year, a record high, Xinhua News Agency cites the Ministry of Commerce as saying. FDI outlook for 2012 is ‘not optimistic,’ Xinhua says…”

India Watch:

December 30 – Bloomberg (Tushar Dhara): “India’s current-account deficit widened to near a record last quarter as a weakening rupee made imports more expensive. The measure of trade and investment flows posted a $16.89 billion shortfall in the three months through September… The current-account deficit is under pressure to widen further in coming months as Europe’s protracted sovereign-debt crisis hurts demand for Indian exports while a 15.8% plunge in the currency this year, Asia’s worst performance, boosts oil and gold import costs. India’s export growth slumped to a two-year low in October.”

December 28 – Bloomberg (Anoop Agrawal): “Derivatives that track the risk of owning India’s bonds and the rupee are surging the most since 2008 as economists predict the nation’s current-account deficit will widen to a record… The rupee tumbled 16% this year in Asia’s worst currency performance after export growth slumped to a two-year low and factory output contracted for the first time since 2009.”

Japan Watch:

December 28 – Bloomberg (Yusuke Miyazawa): “Credit rating companies issued a record number of downgrades in Japan this year… Standard & Poor’s lowered assessments 109 times this year, the most in at least a decade, while lifting them 14 times…”

December 28 – Bloomberg (Aki Ito): “Japan’s rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the nation’s return to the deflation that first took hold a decade ago. Industrial output slumped 2.6% from October… Retail sales slid 2.1%.”

Asia Bubble Watch:

December 29 – Bloomberg (Shamim Adam): “Asian policy makers eager to sustain growth in 2012 may put their economies at risk with interest- rate cuts or fiscal stimulus that some can ill-afford. The likelihood of ‘policy mistakes’ in 2012 may increase as a slowing global expansion puts pressure on officials to lower borrowing costs even as inflation remains elevated in some economies, said Lim Su Sian… strategist at Royal Bank of Scotland Group Plc. In India, where the central bank has paused raising rates, monthly inflation has held above 9%; prices in China exceeded the government’s full-year target of 4% every month this year. Asian nations from Thailand to Indonesia and Malaysia have reduced interest rates or left them unchanged in recent meetings to shield their economies from the protracted European debt crisis.”

Latin America Watch:

December 30 – Bloomberg (Eliana Raszewski): “Argentina’s central bank plans to keep injecting cash into the economy at the current pace, a move that may further stoke inflation that’s already among the fastest in the world. The bank… said it aims to expand the M2 money supply… by 26.4% in 2012. This year it targeted 28% monetary growth.”

Unbalanced Global Economy Watch:

December 27 – Bloomberg (Chiara Vasarri): “Italian retailers had the worst Christmas in 10 years, consumer group Codacons said, as austerity measures to combat the sovereign debt crisis prompted households to cut spending. Italians spent 48 euros ($62.75) less per person this holiday season than the average of the past five years…”

U.S. Bubble Economy Watch:

December 28 – Bloomberg (Ilan Kolet and Bob Willis): “Workers in the U.S. earning the minimum wage are worse off now than they were four decades ago. …Adjusting for inflation, the federal minimum wage dropped 20% from 1967 to 2010, even as the nominal figure climbed to $7.25 an hour from $1.40, a 418% gain.”

Fiscal Watch:

December 28 – Bloomberg (Mike Dorning): “The war in Iraq is officially over. The costs will go on. Eight years of dodging improvised explosive devices, repelling insurgent ambushes and quelling sectarian strife already has drained the U.S. of more treasure than any conflict in the nation’s history except World War II. Even though the last U.S. combat troops have left Iraq, American taxpayers will face decades of additional expenses, from veterans’ health care and disability benefits to interest on the debt accumulated to finance the war… Spending so far on the war and related interest payments make up about a tenth of the U.S. Treasury’s $10.4 trillion in publicly held debt. Direct federal spending on the war through 2012 will reach $823 billion… Not counted in that is the interest of more than $200 billion the federal government has already had to pay on the resulting debt…”