Saturday, December 6, 2014

Weekly Commentary, January 4, 2013: Issues 2013

“The Federal Reserve is heading in the wrong direction. What the central bank describes as ‘unconventional monetary policy’ is creating dangerous bubbles in asset markets that will lead to higher future inflation and is supporting the explosive growth of the national debt.” Martin Feldstein, Wall Street Journal, January 3, 2013

I applaud Dr. Feldstein’s intentions, but the poor soul has a problem: the marketplace is rather smitten with Bubbles and doesn’t these days have an inflation worry in the world. Might as well be another Mayan prophesy. Indeed, Feldstein’s warning today resonates about as well as my (repeated) warnings of Bubbles and bipolar outcome possibilities. But here it goes, nonetheless: the financial system, as we know it, is doomed on December 21, 2013.

In all seriousness, it is difficult to imagine a backdrop more poised for the extraordinary. Bolstered by unprecedented global monetary radicalism, the global Bubble gathered important momentum in 2012. This ensures that the dysfunctional “risk on, risk off” (“roro”) speculative dynamic turns only more unwieldy in 2013. Policy measures guarantee that the historic “crowded trade” in international risk markets will only more forcefully crowd the manic crowd on one side of the crowded boat – or the other. This implies fatter “tail risks” – with emphasis on the “s” – the plural – of left (Bubbles burst) and right (inflating Bubbles turn much more unwieldy) “tail” developments.

Let’s start with a little “right tail” pontification. In simplest terms, how crazy could things get this year? I recall how crazy the SE Asian Bubbles turned in the fateful post-Mexican bailout year of 1996. Then NASDAQ almost doubled in the crazy, post-LTCM bailout speculative melee of 1999. And when the Fed made it clear that it would disregard mortgage and housing Bubbles, excesses grew exponentially – 2004, 2005, 2006… until the Bubble finally began to collapse under the weight of subprime Credit craziness in 2007. The long history of speculative Bubbles favors the scenario where they end in self-destructive “blow-off” excess.

According to Bloomberg, “Hedge funds on average climbed 1.6% through November, lagging global stocks by almost tenfold as managers were whipsawed by market reaction to the economic and political events…” While not repeating the losses suffered during a challenging (“roro”) 2011, the hedge fund industry overall badly lagged global risk market gains in 2012. Those that tried to judiciously manage risk again suffered the consequences. “Don’t ask why, just buy!” won the day.

Twenty Thirteen will see thousands of hedge funds locked in a rather ferocious fight for survival. Human nature would dictate that managers will increasingly err on the side of dismissing risk – determined (for many, desperate) to instead participate in every rally. They may be dragged kicking and screaming, but an ongoing equities rally would force even the more bearish hedge fund, mutual fund, and sovereign wealth fund managers – along with enterprising traders everywhere – to jump aboard. Moreover, 2012’s policy-induced market divergence (weakening fundamentals vs. inflating securities prices) pretty much pulverized those aggressively positioned short global risk markets. This fomented market dislocation, whereby stock prices turned increasingly detached from fundamentals. Importantly, if typical sources of selling pressure (i.e. the “bears,” “market neutral” players, hedging strategies, etc.) have backed away, the marketplace becomes only more susceptible to market dislocations and speculative “blow-off” excess.

At the same time, a low tolerance for losses will remain a latent issue. An even greater propensity for performance-chasing and trend-following dynamics would seem a safe bet. But the dilemma of “weak handed” traders will continue to leave markets vulnerable to sudden (think “flash crash”) market downdrafts. Moreover, I suspect that many of the more sophisticated market operators are in this to play “blow-off” excesses for all they’re worth – yet with one eye planted on the exits. I’ll paraphrase hedge fund titan Leon Cooperman’s apropos comments this week from his CNBC interview: In the hedge fund industry, if you’re early you get killed. And if you’re late you get killed.

The Masters of the Universe, naturally, believe they will identify bearish catalysts ahead of the crowd. But as the Masters’ assets under management swell to unimaginable dimensions, they’ll have reason to fret more about market liquidity and the tactics of fellow Masters. But for now, with the world awash in liquidity and the Draghi Plan having smothered European “tail risk,” they may be keen to keep playing – for “dancing.” “Right tail” happenings are not a low probability scenario.

With little fanfare, the broader U.S. equity market this week pranced to all-time record highs. Already 3.5% higher in just the first three sessions of 2013, the S&P400 Mid-Cap average enjoyed a “break out” right through 2011 and 2012 double tops. The small cap Russell 2000 (up 3.5%) also traded to a new all-time high to begin 2013 trading. It is, as well, worth noting that the Goldman Sachs Most Short Index gained 3.9% in the first three sessions of the year, indicating an ongoing “squeeze” and market dislocation. Curiously, the “New Normal” investment return framework continues to be popular in marketplace pontification circles. Yet last year again supported my “Newest Abnormal” thesis of risk market Bubbles and returns detached from underlying fundamentals.

The last thing the world’s fragile economy and financial apparatus need today is a period of “blow-off” excess. Indeed, it is integral to my (and others’) Bubble analysis that the downside of a Credit Cycle is commensurate with the excesses of the preceding boom (I owe the crux of this analysis to the late Dr. Richebacher and other “Austrian” thinkers). A “right tail” beginning to 2013 would only increase the probabilities of a “left tail” end. I’ll posit that 2013 is a year of fat tail risks, believing that the backdrop contains an unusual confluence of factors that would seem to increase the probability of the blow-off boom and bust scenario.

For the past two years, I’ve viewed the unfolding European crisis as a possible/likely catalyst for a problematic bout of de-risking/de-leveraging. I believe the worst of the crisis is still to come, although the current respite could prove somewhat less fleeting than the others. The economic diagnosis is terrible – and 2013 could see the “core” French economy particularly susceptible. The region – certainly including its bloated banking system - will continue to battle with Trillions (and counting) of suspect financial claims/debt. The political backdrop will continue to deteriorate. Italian politics will make for good drama.

Especially if the situation continues to stabilize, I would expect a more cautious ECB to reconsider its expanded mandate. If Spain does request a bailout, the markets will see the OMT (Outright Monetary Transactions) in action. Who’s getting favorable treatment and how the pie is being divided will ensure recurring stresses and fractures. I still don’t believe the euro makes it. Yet Draghi changed the rules and altered the backdrop. His bold plan to use the ECB printing press to backstop the markets changed short-term speculative dynamics.

The speculating community covered their European shorts and commenced building long exposure. This (certainly including the powerful short squeeze) incited robust financial flows into the region’s bonds, equities and currency. Such a backdrop opens the possibility that the resulting dramatic loosening of financial conditions proves constructive to confidence and even the real economy, along with further inflating securities markets. And these things tend to take on a life of their own, with unpredictable consequences.

At the same time, this dynamic only exacerbates systemic risk to future de-risking/de-leveraging. The global response to last year’s worsening crisis was integral to increasingly unwieldy market Bubble dynamics all around the world. Moreover, Europe now – with the leveraged players back on the long side - becomes only more acutely vulnerable to a reversal of speculative flows and associated de-leveraging dynamics, a crisis of confidence and capital flight. The proverbial can was kicked – and indeed this time it appears a pretty good wallop.

Last year saw the faltering European economy and banking system increasingly impinge global growth, especially in China, Asia and the “developing” economies more generally. Importantly, this pressured Chinese authorities, again, to accommodate dangerous Bubble excess. And such an historic Bubble will simply brush aside timid policymaking. The estimated 50% year-on-year growth of China’s so-called – and now enormous - “shadow banking” complex is rather text-book late-cycle “terminal” excess. The consensus view is that Chinese authorities have the situation well under control. I’m not convinced. Twenty twelve was a year when the world became more aware of the depth of corruption in China. I fear there is unappreciated financial, economic and social fragility associated with what could be one of history’s most degenerate financial Bubbles.

Bursting Bubbles inflict social hardship and provoke a search for scapegoats and villains. We’ve witnessed this sad dynamic come to life in Europe. I fear for future Chinese and Japanese relations. The disputed island issue heated up in 2012, with Chinese protests against Japanese products having a meaningful impact on Japan’s frail economy. The return of Japanese Prime Minister Abe assures an intense focus on fiscal and monetary stimulus. It also comes with a harder line toward China.

So in a year where I see extraordinary global uncertainties, a surprisingly unstable Japan has potential to play a prominent role. It’s my view that the yen and Japanese economy were major beneficiaries of the Chinese boom. This dynamic has reversed, with unclear ramifications and risks. The new government has a mandate for aggressive stimulus. The world now watches the yen weaken meaningfully, while watching nervously for cracks in the nation’s incredibly bloated (and mispriced) bond market. I will now monitor Japan closely, with the view that it has (rather briskly) moved up the list of potential “global government finance Bubble” weak links.

In somewhat of an adaptation of 2012, I see an increasingly synchronized global Bubble now at risk to multiple “weak links.” Europe remains fragile, while China, Japan and the “developing” economies have turned increasingly vulnerable. In “2012 in Review,” I noted the troubling dynamic of rapidly decelerating economic booms in the face of ongoing rampant Credit expansion. This dynamic implies vulnerability – but it more than anything engenders major uncertainties. Many “developing” economies are demonstrating late-stage Bubble dynamics. As such, if the global financial “system” proceeds into a potent “risk on” period, the “developing” world’s loose monetary backdrop might induce a reflexive spurt of activity. At the same time, unrelenting Credit excesses foment fragilities that ensure a painful downside cycle.

Warnings by a few of unfolding “currency wars” resonate. The major currencies, of course, all have major issues. Our currency is suppressed by the prospect of endless QE, although the dollar is these days in the running to on occasion win the least ugly contest. In a world or unleashed central banks and unleashed speculators, one would expect unstable “hot money” financial flows – between currencies; between developed and developing economies; between stocks and bonds, various assets classes and individual stocks and sectors. A pronounced “risk on” move might be met with a surprising jump in sovereign yields. The potential confluence of heightened inflation concerns, waning demand for safe havens, greater demand for Credit, and overall policy uncertainty could prove problematic. The Fed’s convoluted policy approach seems to beckon for market confusion and unsettled conditions.

As a “Bubble economy,” I view the U.S. situation as also highly uncertain. With astounding monetary policy largess and attendant loose financial conditions, I do not dismiss the scenario where the U.S. recovery gains momentum. Housing and autos are in a cyclical upturn, which should support accelerating private-sector Credit growth. So long as corporate Credit conditions remain ultra-loose, the slow but steady increase in employment should continue. Unrelenting fiscal stimulus continues to bolster consumption. And, importantly, inflating assets markets continue to support household spending.

I have repeatedly stated, “I’ll believe fiscal austerity when I see it.” Phase one of the “fiscal cliff” drama has passed with austerity a most notable no show. Yet the big battles lie ahead: debt ceiling, sequester and “continuing resolution.” It could get bloody. I would not be surprised by a government shut-down. The ratings agencies will confront difficult decisions. The markets will face crosscurrents and major uncertainties. Especially if the markets proceed on their merry speculative way, there will be pressure to ignore risks and assume eventual political capitulation, compromise and resolution. And this is precisely the backdrop with the potential to create the greatest instabilities.

Market participants have become increasingly numb to all varieties of risk. Monetary policy now runs the show. Chairman Bernanke has already stated that he would respond to “fiscal cliff” headwinds with additional accommodation. And the Fed this month commences its $85bn monthly QE program. “Printing”-induced numbness virtually ensures that speculative markets resist the process of discounting future negative outcomes. Indeed, today’s unmatched fiscal and monetary policy environment assures that markets become only more gamey and dysfunctional. Twenty thirteen would seem poised to provide an even larger kitty to be enjoyed by those betting most successfully on the course of policymaking and market reactions.

So, U.S. policymaking feeds the Bubble while at the same time creating a systemic weak link. Fiscal policy has become so contentious, and I wouldn’t be surprised if the course of monetary policy becomes an increasingly heated issue as well (especially if “risk on” spurs bubbling markets and a stronger recovery). And the more securities prices diverge from fundamentals – and the deeper (rank) financial speculation impairs the markets’ pricing mechanisms and the economy’s resource allocation processes – the greater the systemic vulnerability to myriad shocks.

I’ve noted a few of the more conspicuous “weak links” that might derail the global Bubble in 2013. But it could easily be – most likely will be - something unforeseen – “out of left field.” Last year saw an escalation of myriad global geopolitical risks. The so-called “Arab spring” took a troubling turn. Syria disintegrated, and the Iranian nuclear issue seemed to almost come to a head. It was also a year of devastating drought and super storm Sandy, along with unnerving weather developments around the globe. I would expect speculative markets to try to disregard geopolitical and other issues, although I would also posit that this only increases the vulnerability of a major negative development to incite a big, revengeful “risk off” backlash.

The backdrop would, at least for this evening, seem to support the scenario where markets resist responding to negative developments until they’re clobbered over the head with them. It’s an interesting juncture for a global bullish pandemic. And a most unfortunate time for history’s greatest Bubble.

For the Week:

The S&P500 jumped 4.6% (up 2.5% y-t-d), and the Dow gained 3.8% (up 2.5%). The broader market again outperformed. The S&P 400 Mid-Caps surged 5.2% (up 3.5%) to a new all-time high, and the small cap Russell 2000 rose 5.7% (up 3.5%), also a new record. The Morgan Stanley Cyclicals surged 6.5% (up 4.2%), and the Transports advanced 6.0% (up 4.3%). The Morgan Stanley Consumer index rose 4.2% (up 2.9%), and the Utilities gained 3.8% (up 2.4%). The Banks were 6.2% higher (up 4.8%), and the Broker/Dealers jumped 6.2% (up 4.7%). The Nasdaq100 was up 4.5% (up 2.4%), and the Morgan Stanley High Tech index jumped 4.7% (up 2.8%). The Semiconductors surged 5.5% (up 3.6%). The InteractiveWeek Internet index gained 4.9% (up 3.0%). The Biotechs jumped 6.5% (up 4.5%). With bullion unchanged, the HUI gold index increased 0.4% (down 2.6%).

One-month Treasury bill rates ended the week at about 5 bps and 3-month rates ended at 7 bps. Two-year government yields were up 2 bps to 0.265%. Five-year T-note yields ended the week10 bps higher to 0.81%. Ten-year yields jumped 20 bps to 1.90%. Long bond yields jumped 23 bps to 3.10%. Benchmark Fannie MBS yields increased 13 bps to 2.34%. The spread between benchmark MBS and 10-year Treasury yields narrowed 7 to 44 bps. The implied yield on December 2013 eurodollar futures was unchanged at 0.385%. The two-year dollar swap spread was little changed at 14 bps, while the 10-year swap spread declined 3 to 3 bps. Corporate bond spreads narrowed meaningfully. An index of investment grade bond risk dropped 11 to 85 bps (low since September). An index of junk bond risk sank 53 bps to 443 bps (low since July '11).

Investment grade issuers included GE Capital $4.0bn, Ford $2.0bn, Citigroup $1.75bn, MetLife $2.0bn, and Crown America $800 million.

Junk bond funds saw outflows rise to $355 million (from Lipper). Junk issuers included American Tower $1.0bn.

International issuers included Country Garden $750 million.

Spain's 10-year yields dropped 18 bps this week to 5.02% (down 65bps y-o-y), the low since last March. Italian 10-yr yields sank 23 bps to 4.25% (down 285bps), low market yields since November 2010. German bund yields jumped 23 bps to 1.53% (down 32bps), and French yields rose 15 bps to 2.13% (down 122bps). The French to German 10-year bond spread narrowed 8 to 60 bps. Ten-year Portuguese yields sank 58 bps to 6.17% (down 664bps). The new Greek 10-year note yield fell 54 bps to 10.82%. U.K. 10-year gilt yields jumped 30 bps to 2.11% (up 10bps).

The German DAX equities index gained 2.2% for the week (up 2.2% y-t-d). Spain's IBEX 35 equities index jumped 3.7% (up 3.3%). Italy's FTSE MIB surged 4.2% (up 4.2%). Japanese 10-year "JGB" yields rose 3 bps to 0.815% (down 16 bps y-o-y). Japan's Nikkei jumped 2.8% (up 2.8%). Emerging markets began 2013 on the upside. Brazil's Bovespa equities index rose 2.6% (up 2.6%), and Mexico's Bolsa gained 1.9% (up 2.0%). South Korea's Kospi index advanced 0.7% (up 0.7%). India’s Sensex equities index gained 1.7% (up 1.8%). China’s Shanghai Exchange jumped 2.1% (up 0.4%).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.34% (down 57bps y-o-y). Fifteen-year fixed rates were down one basis point to 2.64% (down 59bps). One-year ARM rates added one basis point to 2.57% (down 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 2 bps to 4.06% (down 59bps).

Federal Reserve Credit declined $8.9bn to $2.896 TN. Fed Credit has increased $85.5bn in 8 weeks. Over the past year, Fed Credit contracted $4.4bn.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $631bn y-o-y, or 6.2%, to $10.849 TN. Over two years, reserves were $1.790 TN higher, for 20% growth.

M2 (narrow) "money" supply jumped $38.5bn to a record $10.432 TN. "Narrow money" has expanded 8.3% ($795bn) over the past year. For the week, Currency slipped $0.2bn. Demand and Checkable Deposits jumped $30.9bn, and Savings Deposits increased $2.1bn. Small Denominated Deposits declined $2.9bn. Retail Money Funds jumped $8.4bn.

Money market fund assets jumped $38bn to $2.705 TN. Money Fund assets have expanded $11.1bn y-o-y, or 0.4%.

Total Commercial Paper outstanding jumped $16.2bn to $1.082 TN CP was up $118bn in 8 weeks and $153bn, or 16.4%, over the past year.

Currency Watch:

January 4 – Bloomberg (Emma Charlton, David Goodman and Simon Kennedy): “The world’s developed nations are stepping up efforts to weaken their currencies, craving Switzerland’s success in blocking the franc’s appreciation to protect its economy. Japan’s newly elected Prime Minister Shinzo Abe raised the stakes in the fourth quarter of 2012 as his call for aggressive central-bank action to boost growth and inflation triggered a 10% drop in the yen against the dollar. An index compiled by Royal Bank of Canada shows the level of ‘verbal intervention’ in the Group of 10 nations has quadrupled since June 2010.”

The U.S. dollar index gained 1.0% to 80.50 (up 0.9% y-t-d). For the week on the upside, the Mexican peso increased 2.2%, the New Zealand dollar 1.5%, the Australian dollar 1.0%, the Canadian dollar 1.0%, the Brazilian real 0.7%, and the South Korean won 0.6%. For the week on the downside, the Japanese yen declined 2.5%, the Swiss franc 1.2%, the euro 1.1%, the Danish krone 1.1%, the South African rand 1.0%, the British pound 0.5%, the Norwegian krone 0.3%, the Swedish krona 0.3%, and the Singapore dollar 0.3%.

Commodities Watch:

December 31 – Bloomberg (Nicholas Larkin and Debarati Roy): “Gold rose, capping the longest annual gain since at least 1920, on renewed concern that central banks from Europe to China will take steps to spur economic growth and as U.S. leaders near a budget deal…”

December 31 – Bloomberg (Dan Murtaugh): “Motorists in the U.S. paid record high prices for gasoline in 2012, as severe weather and political tensions drove up the cost of fuel. The national average price of gasoline in 2012 was $3.60 a gallon, nine cents more than the previous annual record set last year, said… AAA… Prices touched $3.94 a gallon on April 5 and 6 after crude oil rallied as the U.S. and European nations imposed an embargo on Iranian oil exports to pressure the Persian Gulf nation over its nuclear program.”

The CRB index slipped 0.2% this week (down 0.3% y-t-d). The Goldman Sachs Commodities Index gained 0.4% (unchanged). Spot Gold was little changed at $1,656 (down 1.2%). Silver was about unchanged at $29.95 (down 0.9%). February Crude jumped $2.29 to $93.09 (up 1.4%). February Gasoline added 0.2% (up 0.1%), while February Natural Gas dropped 5.2% (down 1.9%). March Copper rallied 2.9% (up 1.1%). March Wheat dropped 4.0% (down 4.0%), and March Corn fell 2.0% (down 2.6%).

Fiscal Cliff Watch:

January 4 – Bloomberg (Mike Dorning): “Fresh from a budget fight so raw that the Republican speaker of the U.S. House cursed the Democratic leader of the Senate outside the Oval Office, President Barack Obama and Congress are heading for an even bigger confrontation over raising the nation’s debt limit. U.S. Treasury bond investors… aren’t alarmed. In a sign of the disconnect between Washington and Wall Street, investors remain confident the two sides will compromise rather than inflict what Obama called ‘catastrophic’ consequences.”

January 3 – Bloomberg (Richard Rubin): “Wind farms, motorsports tracks, global banks and other businesses won revived tax breaks in a $75.3 billion package included in a last-minute budget deal passed by Congress and signed by President Barack Obama… The tax-break extensions, mostly for companies, made it into the bill past Republican demands for spending cuts and Democratic resistance to business benefits. Both parties have complained for years about some of the special-interest provisions. The package of tax extensions survived attempts to curb them to reduce the U.S. budget deficit that has exceeded $1 trillion for four years. Their beneficiaries and lobbyists received a reprieve and a chance to bargain for another extension this year.”

Global Bubble Watch:

January 4 – Bloomberg (Julia Leite): “A gauge of U.S. corporate credit risk capped the biggest weekly drop in 13 months as employers added more workers in December and the unemployment rate matched a four-year low.”

January 3 – Bloomberg (Sarika Gangar and Matt Robinson): “The global rally in corporate bonds is entering a record 14th month as a budget agreement in the world’s largest economy buoys the confidence of credit investors. Bonds sold by companies from the U.S. to Europe and Asia have returned 14.3% since the end of November 2011, the last month in which the debt recorded a loss…”

December 31 – Bloomberg (Andrew Reierson, John Glover and Sarika Gangar): “Junk bonds around the world outperformed investment-grade debt this year by the biggest margin since 2010 as record-low central bank rates pushed investors to seek riskier, higher-yielding assets. Securities from wireless carrier Sprint Nextel Corp. to carmaker Fiat SpA returned 18.7%, compared with 10.9% for high-grade notes, Bank of America Merrill Lynch index data show. That also beat the 4.4% investors made on government bonds and the 16% gain from stocks, based on the MSCI World Index… Sales of junk bonds worldwide soared 35% to a record $425 billion this year as the global default rate according to Moody’s… dropped to 2.7% from an average 4.8% since 1983.”

January 2 – Bloomberg (Anchalee Worrachate): “The world’s leading economies will have $220 billion less sovereign debt to refinance in 2013, cutting supply after every major government bond market rallied for the first time since the 2008 financial crisis. The amount of bills, notes and bonds coming due for the Group of Seven nations plus Brazil, Russia, India and China will drop to $7.38 trillion from $7.60 trillion in 2012… Japan, the U.K., Germany, France, Italy and Brazil will see a decline, while the U.S., Canada, Russia, India and China will face an increase.”

January 2 – Bloomberg (Matthew G. Miller and Peter Newcomb): “The richest people on the planet got even richer in 2012, adding $241 billion to their collective net worth, according to the Bloomberg Billionaires Index… The aggregate net worth of the world’s top moguls stood at $1.9 trillion at the market close on Dec. 31, according to the index. Retail and telecommunications fortunes surged about 20% on average during the year. Of the 100 people who appeared on the final ranking of 2012, only 16 registered a net loss for the 12-month period. ‘Last year was a great one for the world’s billionaires,’ said John Catsimatidis, the billionaire owner of Red Apple Group… ‘In 2013, they will continue looking for investments around the world -- and not necessarily in U.S. -- that will give them an advantage.’”

December 31 – Bloomberg (Michael Patterson): “Stocks in the biggest developing markets are lagging behind global equities for a record third year as faster economic growth proves no lure for investors amid concerns over government interference in markets. The MSCI BRIC Index of shares in Brazil, Russia, India and China rose 11% this year through Dec. 28, trailing the MSCI All-Country World Index by 1.6 percentage points… ‘This whole revolution of going from a socialistic mentality to a market economy mentality is not complete,’ Mark Mobius, who oversees about $40 billion as the executive chairman of Templeton Emerging Markets Group… ‘We’re still in the middle of that and have a long way to go.’”

January 2 – Bloomberg (Tim Catts): “Otis Elevator Co.’s quest to carry people up skyscrapers twice as tall as the Empire State Building hearkens back to a pivotal innovation by its founder: ensuring that riders won’t plummet back to earth if something goes awry. The United Technologies Corp. unit has to go beyond the braking mechanism Elisha Otis demonstrated with a rope and saber at the 1854 World’s Fair. It’s working on systems able to stop 16 metric tons (35,274 pounds) of elevator and cable falling from the top of a kilometer-tall tower… With high-rises in China and Saudi Arabia poised to surpass Dubai’s record 2,717-foot (828-meter) Burj Khalifa, the race to outfit the next generation of super-tall buildings is spurring engineering leaps at Otis, Kone Oyj and their elevator-making competitors in a market valued at $66 billion in 2010.”

January 4 – MarketWire: “PLS Inc. in conjunction with Derrick Petroleum Services reports that Global M&A activity for upstream oil and gas deals in 2012 totaled $254 billion in 679 deals… According to Brian Lidsky, Managing Director with… PLS Inc., ‘Total deal value in 2012 surged 50% higher versus 2011 to a record $254 billion, eclipsing the prior record of $212 billion in 2010.”

January 3 – Bloomberg (Lisa Abramowicz): “Wall Street’s largest banks boosted their corporate bond inventories last month in the biggest year- end increase in six years, positioning themselves for mounting demand at the start of 2013. The 21 primary dealers that trade with the Federal Reserve increased their company debt holdings by $5.99 billion in December…”

Global Credit Watch:

December 31 – Bloomberg (John Glover): “European Union policy makers approved more than 5 trillion euros ($6.6 trillion) of state aid to banks since 2008, with Ireland and Denmark leading recipients… The payments comprise recapitalizations, funding guarantees and treatment of toxic assets. More than 1.6 trillion euros was actually used by the end of last year. Ireland needed to pump more than 60 billion euros into its banks after a housing bubble burst following the 2008 collapse of Lehman Brothers Holdings Inc. Denmark used 145 billion euros in guarantees and put 10.8 billion euros into lenders as capital. ‘Guaranteeing a financial system after a crisis is one thing; if banks have to actually take losses it’s another entirely,’ said Christian Schulz, an economist at Berenberg Bank… ‘If bank losses migrate onto the public balance sheet, then they’ll have an impact.’ The Commission approved aid of 571 billion euros, or 365% of 2011 output, to banks in Ireland, and agreed to 613 billion euros of state aid to Denmark, the equivalent of 256% of GDP.”

January 3 – Bloomberg (Yalman Onaran): “The first Basel agreement on global banking regulation, adopted in 1988, was 30 pages long and relied on simple arithmetic. The latest update, known as Basel III, runs to 509 pages and includes 78 calculus equations. The complexity is emblematic of what happened over the past four years as governments that injected $600 billion to rescue failing banks during the worst financial crisis since the Great Depression devised ways to make the global banking system safer. Those efforts have been stymied by conflicting laws, divergent accounting standards and clashing rules adopted by nations to protect their interests, all of which have created new risks.”

January 2 – Bloomberg (Charles Mead): “The amount of corporate debt coming due this year in the U.S. will fall 28% after a record $1.47 trillion in bond sales in 2012 helped companies from AT&T Inc. to H&R Block Inc. refinance and extend maturities. U.S. issuers led by General Electric Co. have $449 billion of bonds and loans maturing in 2013, after confronting $620 billion last year… Companies have $484 billion of debt due in 2014 and $495 billion in 2015, Bloomberg data show.”

January 2 – Financial Times (Mary Watkins): “US money market funds increased their exposure to eurozone banks for five months in a row at the end of last year, underscoring how confidence in the region has improved in the wake of actions by the European Central Bank. New figures from Fitch Ratings show that US money market funds raised their exposure to eurozone banks by 8% as of the end of November compared with the previous month, the fifth consecutive monthly increase. The amount allocated to German banks jumped 26% on a dollar basis, while funds raised their exposure to French lenders by 6% over the same period."

Germany Watch:

December 31 – Bloomberg (Rainer Buergin): “German Chancellor Angela Merkel said the economic environment will be more difficult in 2013 than this year, and that Europe’s sovereign debt crisis is ‘far from over,’ though progress has been made. ‘The reforms that we’ve agreed on are starting to take effect,’ Merkel, who faces federal elections in September, said… ‘Nevertheless, we still need a lot of patience. The crisis is far from over.’”

January 2 – Bloomberg (Patrick Donahue): “German Chancellor Angela Merkel is opening her re-election campaign year by putting voters on notice that Europe’s financial crisis threatens to make their lives tougher. As the euro-region recession bruises its biggest economy, Merkel said her austerity-first crisis-fighting agenda means ‘European policy becomes domestic policy.’ ‘It’s politically astute for her to play down expectations,’ Horst Teltschik, deputy chief of staff and adviser on reunification to former Chancellor Helmut Kohl, said… ‘If things go poorly, then she can tell voters they were warned. But if things go well, she can say it’s all due to her policies.’”

January 3 – Bloomberg (Joseph de Weck): “Peer Steinbrueck, the Social Democrat challenging German Chancellor Angela Merkel, is scaling back calls for common euro bonds as the incumbent extends her lead in opinion polls. The finance minister in Merkel’s first coalition, Steinbrueck has dropped jointly sold European debt as a talking point, suggesting little change in Germany’s crisis-fighting strategy should he win. Election day probably will be scheduled for around late September.”

January 2 – Bloomberg (Stefan Riecher): “Inflation accelerated in six German states in December on prices for food and travel. The inflation rate in Bavaria increased to 2.2% from 2.1% in November… Consumer prices rose 0.9% in the month.”

Italy Watch:

January 2 – Dow Jones (Liam Moloney): “Italian new car registrations in 2012 fell to their lowest point in more than 30 years… Registrations in continental Europe's third-biggest market totaled 1.402 million units and a fall of 19.9% compared with the 1.749 million units sold in 2011. In December, 86,735 cars were sold, a fall of 22.5% compared with the year-earlier month…”

January 2 – Bloomberg (Lorenzo Totaro and Chiara Vasarri): “Prime Minister Mario Monti said he is not seeking Italy’s presidency as his decision to try for a second term in elections in February hinders his chances of being appointed to the non-partisan post. ‘It’s obvious that I have never aimed’ to succeed Giorgio Napolitano, whose seven-year term expires in May, Monti told Radio Uno’s Radio Anch’io program… ‘Some political observers said that was likely; it’s certainly less likely today,’ he said. Monti first declared on Dec. 28 that he would guide a coalition of centrist parties in the Feb. 24-25 vote. His bloc trails the Democratic Party in all opinion polls… Italy’s election law makes it difficult for a party to gain a majority in the Senate, meaning Monti’s forces may end up in a position to bargain with the Democrats over forming a coalition government if the elections produce a hung parliament.”

Spain Watch:

January 3 – Bloomberg (Angeline Benoit): “Eight of Spain’s 17 semi-autonomous regions show signs of deficit slippage compared with the 2012-2014 budget plans they approved this year, according to data for 15 regions…” 

European Economy Watch:

January 3 – Bloomberg (Gabi Thesing): “Lending to households and companies in the euro area contracted for a seventh month in November as the recession damped demand for credit. Loans to the private sector fell 0.8% from a year earlier after dropping a revised annual 0.8% in October… Loans fell 0.1% in the month. The 17-nation euro area entered its second recession in four years in the third quarter as the sovereign debt crisis prompted governments to cut spending.”

December 31 – Bloomberg (Alan Katz): “A court’s rejection of President Francois Hollande’s 75% millionaire tax shows the limits on his ability to tap high earners, even as the ruling is unlikely to attract investors and executives back to France. ‘For investors and entrepreneurs, it shows that France can’t be confiscatory, that there are rules that have to be followed,’ says Laurent Dubois, a professor at the Institute of Political Studies in Paris. Still, ‘the government won’t drop the idea, and the commentary from the highest levels of government is anti-rich, and that’s a red flag.’ The tax, one of Hollande’s campaign promises, had become a focal point of discontent among entrepreneurs and other wealth creators, some of whom have quit French shores as a result.”

January 2 – Financial Times (Hugh Carnegy): “New car sales in France tumbled to their lowest level for 15 years in 2012 with little, if any, improvement expected this year… Figures from CCFA, the French constructors’ association, showed new car registrations fell 14% over the year to 1.9m, the lowest since 1997… CCFA said: ‘For now our expectation is that 2013 will be at best the same as 2012, but if the economy weakens further it could be worse.’”

China Bubble Watch:

December 30 – Bloomberg: “China’s central bank said it will focus on controlling risks in the financial system and will seek ‘stable and appropriate’ growth in aggregate financing, a measure of funding that includes loans, stock and bond sales. The People’s Bank of China also said it will stick to a prudent monetary policy next year and try to stabilize growth, rebalance the economy and contain inflation… The PBOC’s addition of ‘controlling risks’ as a policy objective may signal growing concern that a surge in non-bank lending over the past two years will lead to defaults that could trigger social unrest… Regulators ‘may tighten control on the quality and quantity of credit supply, particularly through non-bank channels such as trust loans’ in the first half of 2013, Zhang Zhiwei, chief China economist at Nomura Holdings… said… A slowdown in credit growth would feed through to a moderation in economic expansion, he said.”

January 4 – Bloomberg: “China plans to set up an agency to buy shares on the stock market, allowing regulators to exercise the rights of shareholders as they seek to protect the retail investors who hold most of the country’s freely traded shares. The new body would give the China Securities Regulatory Commission rights including bringing civil suits against companies… The plan is part of an effort to build a “relief mechanism” for investors…”

January 3 – Bloomberg: “China’s new home prices rose for a seventh month as buyers concerned that prices will surge again boosted sales, according to SouFun Holdings Ltd.”

January 2 – Financial Times (Simon Rabinovitch): “Land prices have soared at recent auctions in Beijing in a sign that the Chinese property market is heating up again despite a long campaign by the government to cool it down. A large parcel of land in Tongzhou, a Beijing suburb, sold this week for Rmb1bn ($160m), 491% more than the starting price – the highest premium paid at an auction in the capital in two years. A recovery in the Chinese land market began towards the end of last year and is a welcome development for local governments, which rely on land sales as an important source of fiscal revenue.”

January 3 – Bloomberg: “China’s services industries expanded at the fastest pace in four months, adding to manufacturing gains that may help sustain an economic rebound this year. The non-manufacturing purchasing managers’ index was at 56.1 in December after a 55.6 reading the previous month…”

January 3 – Bloomberg (Stephanie Tong): “Hong Kong’s luxury sales rebounded in the latest sign of confidence returning to China’s economy after a seven-quarter slowdown. Sales of goods including jewelry and watches jumped 13.7% in November from a year earlier after a 2.9% fall in October, Hong Kong’s government said in a statement on its website today. The role of mainland tourists in driving the city’s retail sales makes the figures one gauge of sentiment in the world’s second-biggest economy. In November, visitor arrivals from China jumped to more than 3 million, an increase of 30% from a year earlier.”

January 2 – Bloomberg (Vinicy Chan): “Macau casino revenue rose 20% to a record last month, beating analyst estimates, as Christmas promotions drew more holiday-makers to the world’s biggest gambling hub. Casino revenue in the Chinese city jumped to 28.2 billion patacas ($3.5bn) in December…”

India Watch:

January 4 – Bloomberg (Kartik Goyal): “India’s record current-account deficit threatens to weigh on the rupee and curb the magnitude of interest-rate cuts forecast to begin this month in support of government policies seeking faster growth. The shortfall swelled to $22.31 billion in the quarter ended Sept. 30, the widest in Reserve Bank of India data beginning 1949. The rupee is down 5.6% against the dollar in the past three months, fanning price gains…”

January 2 – Bloomberg (Unni Krishnan and Kartik Goyal): “Indian manufacturing expanded at the fastest pace in six months in December… The purchasing managers’ index rose to 54.7 from 53.7 in November, HSBC Holdings Plc and Markit Economics said… Prime Minister Manmohan Singh’s government has stepped up efforts since September to lure more foreign investment, pare a budget deficit and spur exports. The central bank has signaled it may ease monetary policy in coming months as inflation cools, to boost an economy that the Finance Ministry predicts will expand at the weakest pace in a decade this fiscal year.”

Latin America Watch:

January 3 – Associated Press: “Brazil says its 2012 trade surplus is the lowest in 10 years. The Trade Ministry said Wednesday that Brazil, posted a surplus of $19.5 billion last year, compared to the $29.8 billion surplus registered in 2011.”

U.S. Bubble Economy Watch:

January 2 – Bloomberg (David M. Levitt): “The availability of top-quality office space in Manhattan rose to the highest in almost two decades as a new skyscraper at the World Trade Center site neared completion, according to brokerage Studley Inc. The Class A availability rate jumped to 14.5% in the fourth quarter from 12.3% the previous three months… The increase was largely driven by a rise in available space in lower Manhattan, where 4.3 million square feet (399,000 square meters) is being marketed at the new 4 World Trade Center tower and Brookfield Office Properties Inc.’s World Financial Center. Almost 1 out of 5 square feet of offices downtown are unclaimed…”

January 3 – Bloomberg (Oshrat Carmiel): “Manhattan’s inventory of homes for sale plunged to the lowest in at least 12 years, a sign that prices may rise in 2013 if buyer demand intensifies. There were 4,749 apartments on the market at the end of December, a 34% decline from a year earlier and the lowest number since Miller Samuel Inc. began tracking the data in 2000… Fourth-quarter sales surged 29% to 2,598, the highest for the period since at least 1987, as buyers rushed to finish deals before expected tax increases this year.”

Central Banking Watch:

January 4 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said purchases of sovereign debt by the European Central Bank would amount to fiscal policy that is better conducted by democratically elected governments. ‘This is ‘fiscalization’ of monetary policy: Asking the central bank to take actions far outside the remit of monetary policy,” Bullard said… ‘Assistance like this from a central authority to a region is best brokered through the political process in democratically elected bodies.’”