Saturday, December 6, 2014

Weekly Commentary, January 25, 2013: Liquidity Bubble

Ray Dalio is one of the foremost economic thinkers and investors of this era. His hedge fund empire now manages $130bn. He has taken on a higher public profile of late, including notable interviews and speaking engagements this week at Davos (43rd World Economic Forum Annual Meeting). In previous CBBs, I highlighted Mr. Dalio’s “beautiful deleveraging” thesis. His comments Thursday and Friday from Davos raised some eyebrows – and are certainly worthy of analytical focus.

From his January 24, 2013, CNBC TV interview:

CNBC’s Andrew Ross-Sorkin: “When you talk about the economic machine, what is that, exactly?”

Ray Dalio: “So everything is a transaction, right? Every good, service or financial asset, somebody’s buying, and they buy with money or they buy with credit. And so you go in to a store and you buy a suit. You buy it with money or you buy with credit. Credit is a promise to deliver money. You and I can make up credit. If I say, listen, you can have the suit and you just pay me back later, that will calculate as GDP or a sale, but yet there’s no payment made. So, as a result credit grows a lot faster than money, and credit grows faster than income. And when credit grows faster than income – when debt grows faster than income - that can’t go on for long. At some point, you can’t service [the debt], because it’s a promise to deliver money. When that money can’t -- you can’t come up - you have a deleveraging. So what happened in 2007 was they ran a bubble. We had credit growing much faster than money - money or income. And we had that bubble, and so now we’re going through an adjustment. Let me explain that adjustment… So, in a deleveraging - and de-leveragings have happened throughout time - it just didn’t happen in our lifetime before. But it happened in Japan; it happened in the '30s; happened in Latin America. They happen all the time. How do they work? Too much debt relative to income. So there are four things you can do - all of them are the same. You can either transfer wealth from the haves to the have-nots. So Germany can help Spain. You can do that or you can write down debts, because if there’s too much debt you have to reduce it. So you can write it down. But the problem with writing it down - is one man’s debt is another man’s assets. So you write down assets, and it feeds on itself and it has a problem. It causes pain. The third way you can deal with it is that you can spend less. So, I'll borrow less: Austerity. And we go through austerity. And the fourth way you can deal with it is you can print money. So central banks can come and they can give money to Spaniards who may not be able to pay the debt, and that helps them do that. So there are always those four ways that happen. In all deleveraging they all happen. So what we’ve gone through, the bubble was obvious, because it couldn’t extend -- you can’t raise debt relative to income and the leveraging couldn’t continue. And the deleveraging that was taking place had to happen in those four ways. It has largely happened…"

"The capacity of lenders to lend, to meet the borrowing requirements, has largely been adjusted. So, Spain’s borrowing has fallen. Italy’s borrowing has fallen. Those types of borrowings have collapsed. With that is, of course, the collapse of their economies. That’s what the depression is. You have to spend less, because you have less ability to borrow. So that causes a collapse in those economies. It was still, even with that, not enough money to service the debt. So, I use Spain as an example because it’s representative. If you take Spain, but the ECB came in and put in 450 billion of money. They put in about 350bn to the Spanish banks… That was the right thing to do. The policy so far - there was a gap - an irreconcilable gap - an unbridgeable funding gap. So now what we have is a situation where the borrowing needs and the debt rollover needs and the borrowing are approximately in line, and a cushion has been created. The ECB took over - filled the gap where normally the free market does fill it, and that has now moved it along to a different condition…”

“The way I look at it is first of all, there’s economics of the cause effect and so, this will be a long problem. Now I'll talk the economics and I'll talk about the markets independently, but they’re connected. The economics means that there will be a long period of adjustment and what will happen most importantly is productivity. Does Europe work hard, can they do the things that are necessary to raise its living standards because it can’t be on money. And there will be a social challenge, social, political challenge of ten years or so, maybe it’s 15 years. Japan has made it go on for longer. The fundamental thing that they need to do most is to make sure that the nominal interest rate is at or below the nominal growth rate. I won’t get technical, but otherwise what you’re going to have is the debt compounding at a rate which is faster than the economy is growing. So, anyway, that picture - there was a tremendous change, but it will be a terrible economy. Because the balance is, the preventing of chaos, we came very close to having chaos right at the edge of it, because there was not a backstop. We got past that point. So now as we move forward, we can -- that can be managed, and it’s going to be very difficult and very painful. As far as the markets go, now, the question in the markets is, how do events transpire relative to what's discounted…”

“Currently what we have is a lot of money is in cash. And cash is a bad thing and it’s not natural that it came to be cash because the central banks printed a lot of money - so they put out a lot of cash. That’s what Japan is doing, too, because it needs to do that. So it produces a lot of cash within the system. In addition, because you have the risks, people want to be safe. So they put their money in cash - and there’s a lot of cash hanging around… It’s a natural consequence, and what will happen is the next big moves in the markets, and the next big moves in the economy, will be based on how the cash moves. Because [cash] is a bad investment. It has a negative real return. It has a return that’s substantially lower than the economy’s growth rate. And at the same time, we’re in a situation where risks are being reduced. So the fear, the desire, to hold that cash is reduced. You can go out on the risk spectrum, because they’re reduced for the reasons we’re talking about. At the same time, if you’re an investor, you can start to move out of the cash, because you’re missing out on returns… As that happens, I think 2013 is likely to be a transition year. Where that cash, large amounts of cash… that will start to change. It will also move. It will move to stuff. It will move to all sorts of stuff. It will move to goods, services and financial assets. So, that will include most goods, services and financial assets. People will spend more with the cash. They will -- and that will help the economy. It will move into equities. It will move into gold. It will move… out onto that curve. As that happens, what happens is, it makes the Federal Reserve’s concerns begin to change. Because, by putting the cash in they’ve lessened the risks. As the risks have lessened and that movement starts to move then the tilt starts to change. That’s probably something that won’t happen immediately. This is like a classic transition year, I think. And then as you get later into the year, I think that we’re going to see more of that.”

Clearly, Dalio has been operating with an exceptional analytical framework. His success speaks for itself. He recognized the U.S. mortgage finance Bubble and European Bubble fragilities. He and his team have understood how global markets and economies would function throughout this extraordinary environment. And Dalio has understood policymaker doctrine, policy responses and market impacts.

As much as I respect Mr. Dalio’s analytical framework, I’ll continue to take exception with the general thesis that the U.S. has been moving through a successful “deleveraging” period. I have argued deleveraging is largely a myth. I contend unprecedented policy measures have only made the grand scope of a historic Bubble much more unwieldy. In Davos Friday, Mr. Dalio stated “we don’t have a credit bubble” but instead a “bubble in liquidity.” This is critical subject matter worthy of discussion.

I have noted that key facets of today’s Global Credit Bubble are recognizable to very few. Some would argue that a Bubble doesn’t exist today because Credit is not growing in excess of incomes and/or GDP. I have argued that the Bubble has evolved to become deeply systemic, in particular by inflating incomes and expenditures on a generalized basis. Hence, ratios of debt-to-income and to output won’t be particularly illuminating. Actually, such ratios have become deceptive.

At the heart of today’s Bubble is the confluence of ongoing massive issuance of non-productive government debt and monetary policy-induced price distortions. I have argued that this debt coupled with policymaker systemic backstops has distorted incomes, spending, and asset prices throughout the U.S. and global economy. And, importantly, this systemic reflation has sustained maladjusted economic structures and global imbalances. In simple terms, it’s a Bubble primarily because of the ongoing massive issuance of mis-priced Credit – an unsustainable Credit inflation that fuels global market Bubbles and deep structural economic impairment and imbalances. U.S. and Chinese Credit growth could approach $2.0 TN this year. Global hedge fund assets will set new records.

At the end of the day, my Credit Bubble framework/thesis will be proven insightful or otherwise on the issue of “economic structure.” Fundamentally, contemporary economies are structured differently than in the past, and this has added layers of complexity to already challenging analysis. What counts these days as economic output? In gross domestic product (GDP), a dollar of “services” counts the same as a dollar of long-term capital investment. But when it comes to Credit, if I’m a lender I’d much rather lend to someone investing in long-term wealth creating capacity than someone borrowing to buy season tickets to the Philadelphia Eagles. From an economy standpoint, would you rather lend long-term to Germany or Spain?

Eventually, Credit system robustness or fragility will be determined not by monetary and fiscal policy (or the “reserve” status of one’s currency) but by the wherewithal of the real economy. For years, chairman Greenspan trumpeted the U.S. “productivity miracle” and the incredible efficiency by which our limited amount of “capital” was invested. And each year our nation’s “New Paradigm” economy consumed more than it produced, ran up huge debts, played games with risk intermediation, and watched asset prices inflate and the Credit Bubble grow to dangerous extremes.

From Mr. Dalio: “The fundamental thing that [policymakers] need to do most is to make sure that the nominal interest rate is at or below the nominal growth rate.” Well, I would argue that such a policy regime may help - or it might actually make things a whole lot worse. What are the consequences of extreme policy measures? What is being incentivized – in the markets and throughout the real economy?

More specifically, are artificially low rates assisting in real economy restructuring through the financing of sound investment? Are they promoting the overall reduction in system debt - or accommodating further profligate borrowing and spending? Is the policy and market backdrop incentivizing a more favorable mix of investment versus consumption? Production vs. services? Is the manipulated cost of finance spurring greater distortions in market pricing mechanisms and further economic mal-investment?

Is the policy backdrop supporting a more robust Credit system, with financial claims increasingly backed by real economic wealth creating capacity? Or is government sector dominance only fostering greater quantities of non-productive debt and myriad distortions and imbalances? Does virtual government control over the pricing of finance have, on balance, positive or negative ramifications? Are underlying risks being effectively recognized and priced in the marketplace – or are risk perceptions dictated by government liquidity and market backstops? Are the securities markets promoting an effective allocation of resources or are the markets more akin to a “whirlwind of speculation?”

Well, these are no doubt incredibly complex and difficult concepts to contemplate – let alone gauge. Different viewpoints, frameworks, analytical perspectives and ideologies will come to radically different - often directly opposing and irreconcilable - conclusions. That is the unsettled world in which we live. But keep in mind that we’re at the stage of the cycle where those that have most adroitly profited from policymaking now control Trillions of assets – while enjoying a commensurate impact on how the financial media view the world.

Mr. Dalio believes we’re at some risk of a “liquidity bubble.” “Money” seems to play an important role in his analytical framework. But Dalio, like many of us, ponders the question “what is money?” The role of “money” is fundamental to my analytical framework and Bubble thesis.

Contemporary “money” and Credit are essentially electronic-based. Outside of currency, what we think of as “money,” Credit and “finance” are electronic debit and Credit entries in a complex global accounting system. It’s essentially a comprehensive system of liabilities and corresponding assets – one person’s IOU is another’s financial asset; one institution’s…; one government’s…; and so on.

“Money” is special – always has been. It’s “precious.” But, importantly, contemporary money is made precious in a much different manner than had been the case historically. Money traditionally enjoyed preciousness because it was “backed” – it was a claim supported by either gold, precious metals or other forms of tangible economic wealth. Trust in money was maintained only when it was issued in limited quantities. Importantly, money is dangerous specifically because of its preciousness – faith that it won’t be over-issued and conspicuously debased. To a point, demand for money is almost insatiable. And too many times throughout history the government printing press has been used as a political expedient.

There is today seemingly little that differentiates “money” from Credit. They’re all just electronic entries. Contemporary “money” is Credit – but it’s special Credit. It’s special because of the perception that it’s a safe and liquid store of nominal purchasing power. It’s precious these days specifically because of the perception that policymakers – especially central bankers – will ensure that it maintains its essentially “risk free” attributes. It has indeed enjoyed insatiable demand – and this has allowed Trillions of “money” to be issued in the post-2008 crisis environment. And this “money” inflation has been absolutely instrumental in sustaining the global Credit expansion – in the process reflating markets, economies and animal spirits. It has again proved invaluable as an “expedient.”

Dalio is calling 2013 a “transition year” and a “game changer.” I’m sticking with my “Bubble Year.” From Dalio: “There’s a lot of money in a place that’s getting a very bad return and in this particular year there’s going to be, in my opinion, a shift. The complexion of the world will change as that money goes from cash into other things. The landscape will change particularly later in the year and beyond.”

I’m OK with “liquidity Bubble” terminology - and I’d be alright with “money Bubble.” The key to the analysis is to recognize it remains an unprecedented monetary Bubble – an integral facet to sustaining a global Credit Bubble. I agree with Dalio that a flight out of this “money” holds the potential for an extraordinary 2013. I just wish I could be as sanguine. I worry about what this “money” might do. But my greater fear is that global policymakers have impaired the creditworthiness of “money” – the foundation of global finance. They fell for the same monetary inflation trap that has cursed humanity throughout history.

Unprecedented “money printing” has continued for too many years. The debits and Credit add to the Trillions. Along the way, the Fed has tried to assure that they do indeed have an exit strategy. I have all along the way argued there would be No Exit. The Fed has theorized how they would withdraw liquidity before it could fuel higher inflation. From a global Bubble perspective, I’ve seen the greater risks in asset inflation and rejuvenated market Bubbles.

The Fed and global central bankers have essentially been in the business of creating Trillions of market-based liquidity. When they’re content to sit patiently in “cash” accounts, all these debits and Credits are seductively benign. Inevitably, however, they’re also a tinderbox. After all, it is the nature of return-seeking market-based liquidity to chase the inflating asset market (“liquidity loves inflation”). And if enormous amounts of trend-following and performance-chasing “money” flow into already speculative and increasingly dislocated financial markets, well, some will rejoice a new secular bull market.

The Fed, of course, would never admit it has fomented another major Bubble. They will, once again, see inflating asset prices as confirmation of the success of their policymaking regime. The (highly unstable) rate of market price inflation will continue to play a backseat to the (relatively stable) high rate of unemployment. But you’d think they’d begin questioning the necessity of their $85bn monthly “money printing” in an environment where it is increasingly obvious that there’s way too many Trillions of “money” looking to chase too few global risk assets.

The Fed would be well served to go immediately back its drawing board and try to figure out how to stop all this liquidity from turning inflated and highly speculative global risk markets into a completely out of control mania. I’m not holding my breath. 

For the Week:

The S&P500 rose 1.5% (up 5.4% y-t-d), and the Dow jumped 2.2% (up 6.0%). The broader market continued to outperform. The S&P 400 Mid-Caps gained 2.4% (up 7.5%), and the small cap Russell 2000 rose 1.7% (up 6.6%). The Morgan Stanley Cyclicals gained 1.4% (up 7.6%), and the Transports surged 3.3% (up 10.6%). The S&P Homebuilders jumped 3.5%, boosting January gains to 13.7%. The Morgan Stanley Consumer index increased 1.9% (up 6.3%), and the Utilities jumped 2.6% (up 3.7%). The Banks were up 0.9% (up 5.5%), and the Broker/Dealers were 3.3% higher (up 8.3%). On the back of Apple’s 12% decline, the Nasdaq100 slipped 0.4% (up 2.9%). The Morgan Stanley High Tech index gained 1.6% (up 6.8%). The Semiconductors added 0.7% (up 8.2%). The InteractiveWeek Internet index surged 5.3% (up 10.2%). The Biotechs gained 1.5% (up 8.6%). With bullion down $26, the HUI gold index sank 7.0% (down 10.2%).

One-month Treasury bill rates ended the week at 6 bps and 3-month rates closed at 7 bps. Two-year government yields were up 2 bps to 0.27%. Five-year T-note yields ended the week up 9 bps to 0.85%. Ten-year yields rose 11 bps to 1.95%. Long bond yields jumped 10 bps to 3.13%. Benchmark Fannie MBS yields jumped 14 bps to 2.49%. The spread between benchmark MBS and 10-year Treasury yields widened 3 to 54 bps. The implied yield on December 2014 eurodollar futures increased 6 bps to 0.65%. The two-year dollar swap spread increased 2 to 16 bps, and the 10-year swap spread increased one to 6 bps. Corporate bond spreads narrowed further. An index of investment grade bond risk declined 2 bps to 85 bps. An index of junk bond risk dropped 9 to 430 bps.

Debt issuance was decent, led by international borrowers. Investment grade issuers included SLM Corp $1.8bn, PNC Bank $1.75bn, KKR $500 million, New York Life $350 million, and First American Financial $250 million.

Junk bond funds saw inflows slow somewhat to $512 million (from Lipper). Junk issuers included Denbury Resources $1.2bn, Tenet Healthcare $850 million, DigitalGlobe $600 million, BC Mountain $450 million, Wex Inc. $400 million and Coeur D'Alene Mines $300 million.

Convertible debt issuers included Auxilium Pharmaceuticals $350 million, KB Home $200 million, OPKO Health $175 million and Molycorp $150 million.

The long list of international issuers included Caisse D'Amort Dette $3.5bn, Electricite de France $3.0bn, Petroleos Mexicanos $2.1bn, Banco Brasil $2.0bn, Trinseo $1.33bn, Colombia $1.0bn, QTEL International $500 million, Gajah Tunggal $500 million, Jaguar Land Rover $500 million, Banco Davidienda $500 million, El Fondo Mivivienda $500 million, Shinhan Bank $350 million, Ship Finance International $350 million, BBVA Banco Continental $300 million, BC Luxco $300 million, Grupo Posadas $275 million, Pesquera Exalmar $200 million, and Future Land Development $200 million.

Spain's 10-year yields this week rose 10 bps to 5.15% (down 5bps y-t-d). Italian 10-yr yields declined 4 bps to 4.12% (down 36bps). German bund yields rose 8 bps to 1.64% (up 33bps), and French yields jumped 9 bps to 2.22% (up 24bps). The French to German 10-year bond spread widened one to 58 bps. Ten-year Portuguese yields slipped a basis point to 5.98% (down 77bps). The new Greek 10-year note yield sank 60 bps to 10.10%. U.K. 10-year gilt yields rose 4 bps to 2.05% (up 24bps).

The German DAX equities index rose 2.0% for the week (up 3.2% y-t-d). Spain's IBEX 35 equities index increased 1.4% (up 6.8%). Italy's FTSE MIB gained 1.0% (up 8.9%). Japanese 10-year "JGB" yields declined 3 bps to 0.715% (down 7bps). Japan's volatile Nikkei added 0.1% (up 5.1%). Emerging markets were mixed. Brazil's Bovespa equities index declined 1.3% (up 0.4%), while Mexico's Bolsa added 0.8% (up 4.3%). South Korea's Kospi index fell 2.1% (down 2.5%). India’s Sensex equities index added 0.3% (up 3.5%). China’s Shanghai Exchange declined 1.1% (up 1.0%).

Freddie Mac 30-year fixed mortgage rates rose 4 bps to 3.42% (down 56bps y-o-y). Fifteen-year fixed rates gained 5 bps to 2.71% (down 53bps). One-year ARM rates were unchanged at 2.57% (down 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 4.03% (down 52bps).

Federal Reserve Credit expanded $46.0bn to a record $2.976 TN. Fed Credit has increased $164.8bn in 11 weeks. Over the past year, Fed Credit expanded $70.4bn, or 2.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $743bn y-o-y, or 7.3%, to $10.929 TN. Over two years, reserves were $1.682 TN higher, for 18% growth.

M2 (narrow) "money" supply declined $26.6bn to $10.459 TN. "Narrow money" has expanded 7.4% ($716bn) over the past year. For the week, Currency increased $1.2bn. Demand and Checkable Deposits jumped $34.1bn, while Savings Deposits sank$55.8bn. Small Denominated Deposits slipped $2.4bn. Retail Money Funds declined $3.6bn.

Money market fund assets declined $5.0bn to $2.696 TN. Money Fund assets have expanded $17bn y-o-y, or 0.6%.

Total Commercial Paper outstanding declined $7.3bn to $1.126 TN CP was up a notable $162bn in 11 weeks and $154bn, or 15.9%, over the past year.

Currency Watch:

January 24 – Bloomberg (Andy Sharp and Takashi Hirokawa): “Japan’s deputy economy minister said that a yen at 100 to the dollar wouldn’t be a problem, indicating global criticism may fail to convince Prime Minister Shinzo Abe to temper his push to weaken the currency. ‘The current level around 90 can be said to be a correction of the strong yen, but it isn’t over yet,’ Yasutoshi Nishimura said… He said a level of 110 to 120 would raise import costs, echoing the view of Abe’s adviser Koichi Hamada and suggesting that the government won’t back a currency free-fall.”

The U.S. dollar index declined 0.4% to 79.75 (unchanged y-t-d). For the week on the upside, the Norwegian krone increased 1.4%, the Danish krone 1.1%, the euro1.1%, the Swedish krona 0.9%, the Swiss franc 0.8%, the Brazilian real 0.6% and the New Zealand dollar 0.1%. For the week on the downside, the South Korean won declined 1.6%, the Canadian dollar 1.4%, the Japanese yen 0.9%, the Australian dollar 0.8%, the South African rand 0.7%, the Taiwanese dollar 0.7%, the Singapore dollar 0.6%, the British pound 0.5%, and the Mexican peso 0.4%.

Commodities Watch:

The CRB index declined 0.6% this week (up 1.5% y-t-d). The Goldman Sachs Commodities Index added 0.3% (up 2.5%). Spot Gold fell 1.5% to $1,659 (down 1.0%). Silver dropped 2.3% to $31.206 (up 3.2%). March Crude declined 16 cents to $95.88 (up 4.4%). February Gasoline jumped 2.8% (up 4.1%), while February Natural Gas dropped 3.4% (up 2.8%). March Copper slipped 0.7% (unchanged). March Wheat dropped 1.9% (down 0.2%), and March Corn declined 0.9% (up 3.2%).

Fiscal Watch:

January 23 – Washington Post (Lori Montgomery and Rosalind S. Helderman): “A plan to suspend the federal debt limit cleared a key hurdle in the House…, easing the threat of a government default for at least four months. But congressional leaders were already looking toward the next crisis: deep automatic spending cuts that look increasingly likely to hit the Pentagon and other federal agencies on March 1. Leaders in both parties predicted Wednesday that the cuts, known as sequestration, will take effect at least briefly while policymakers try to restart talks over a far-reaching plan to lower the national debt. ‘It’s going to happen,’ said Sen. Richard J. Durbin (Ill.), the No. 2 Democrat in the Senate, noting that Republicans in both chambers are determined to let the cuts take effect, saving $1.2 trillion over the next decade.”

Global Bubble Watch:

January 25 – Bloomberg (Joshua Zumbrun and Jeff Kearns): “Federal Reserve Chairman Ben S. Bernanke’s unprecedented bond buying pushed the Fed’s balance sheet to a record $3 trillion as he shows no sign of softening his effort to bring down 7.8% unemployment. The Fed is purchasing $85 billion of securities every month, using the full force of its balance sheet to stoke the economic recovery. The central bank began $40 billion in monthly purchases of mortgage-backed securities in September and added $45 billion in Treasury securities to that pace this month.”

January 22 – Bloomberg (Rich Miller and Simon Kennedy): “International investors are the most bullish on stocks in at least 3 1/2 years, with close to two-thirds planning to raise their holdings of equities during the next six months, according to a Bloomberg survey. As the global financial and business elite gather in Davos for their annual forum, 53% of respondents to the Bloomberg Global Poll also say equities will offer the highest return in the next year. That’s a 17 percentage point jump from the last poll in November and the most since the quarterly survey of investors, analysts and traders who subscribe to Bloomberg began in July 2009.”

January 23 – Bloomberg (Sandrine Rastello): “The International Monetary Fund cut its global growth forecasts and now projects a second year of contraction in the euro region… The world economy will expand 3.5% this year, less than the 3.6% forecast in October… It expects the 17-country euro area to shrink 0.2% in 2013, instead of growing 0.2% as forecast in October, as Spain leads the contraction and Germany slows. ‘Is Europe on the mend? I think the answer is yes and no,’ IMF Chief Economist Olivier Blanchard said… ‘Something has to happen to start growth.’”

January 24 – Bloomberg (Lisa Abramowicz): “Exchange-traded funds, which have amassed $33.3 billion in junk bonds, are contributing to distortions in prices and yields as concern rises that speculative-grade debt is poised for a reversal of fortune. Yields over benchmarks for the debt owned by ETFs are 2.03 percentage points less than those they don’t hold, the widest gap on record after reaching 0.14 percentage point in May, according to Bank of America Corp. Spreads on Sprint Nextel Corp.’s 6% notes, part of BlackRock Inc.’s $16.2 billion ETF, are 61 bps narrower than the wireless carrier’s securities not held by the fund that mature the same year. ETFs that received $5.6 billion of deposits since May are adding to a flood of money seeking extra yield as the Federal Reserve has suppressed borrowing costs with interest rates at about zero since 2008.”

January 25 – Bloomberg (Tanya Angerer): “Chinese corporate dollar-denominated bond sales are off to a record start as an accelerating economy allays default concerns, driving down borrowing costs by the most in Asia. Yuexiu Property Co., whose projects include the Guangzhou International Finance Center, led $5.35 billion of offerings since Dec. 31…”

Global Credit Watch:

January 25 – Bloomberg (Stefan Riecher): “The European Central Bank said banks will next week repay more of its emergency three-year loans than economists forecast in another sign the euro region’s debt crisis is abating. Some 278 financial institutions will return 137.2 billion euros ($184.4bn) on Jan. 30, the first opportunity for early repayment of the initial three-year loan… The ECB’s first loan totalled 489 billion euros and banks can continue to make early repayments in coming weeks.”

January 24 – Bloomberg (John Glover): “Lenders repaying cash borrowed from the European Central Bank via its Longer-Term Refinancing Operations are poised to underline the north-south divide that characterizes the euro region. Banks can start paying back this week more than 1 trillion euros ($1.33 trillion) of three-year money they borrowed in two portions during 2012. Only banks able to raise funds at less than the 75 bps the ECB charges are likely to repay, and they will probably be from northern Europe, said Richard McGuire, a strategist at Rabobank International in London.”

China Bubble Watch:

January 24 – Bloomberg: “China’s manufacturing is expanding at the fastest rate in two years… bolstering prospects that economic growth will accelerate for a second straight quarter. The preliminary reading of a Purchasing Managers’ Index was 51.9 in January, according to… HSBC… and Markit Economics… That compares with the 51.5 final reading for December… The data suggest that China’s expansion at the start of 2013 will equal or exceed its 7.9% clip in the fourth quarter.”

January 25 – Dow Jones (Aaron Back): “China has seen an increase in capital inflows since September, but it is difficult to determine to what extent this reflects speculative ‘hot money,’ the country’s foreign exchange regulator said… Chinese banks bought a net $86.9 billion of foreign exchange from clients in the September-December period… The figures indicate bank clients' eagerness to swap into the local currency accelerated toward the end of last year.”

January 23 – Bloomberg: “China’s economic risks have shifted back to growing too quickly as new regional-government officials try to boost development, a former central bank adviser said. ‘The new problem is how to prevent overheating,’ which would stoke inflation and asset bubbles while pushing the government to enact controls, Fan Gang, a People’s Bank of China academic adviser from 2006 to 2010, said today in… Davos, Switzerland… ‘That kind of complication has come back again.’ Fan’s comments mark a resurfacing of concerns that had receded last year as growth, inflation and the housing market cooled. The world’s second-largest economy may expand by 8% to 8.5% this year, Fan said, following the weakest pace since 1999.”

January 23 – Bloomberg (David Yong): “China’s plan to allow a 50% jump in its budget deficit to stimulate the economy is driving government bond yields higher, just as inflation accelerates. Ten-year yields may rise 43 bps to 4% by year-end, a level last seen in September 2011, according to HSBC…, Deutsche Bank AG and Standard Chartered Plc… HSBC estimates the government will expand its domestic bond sales by an extra 400 billion yuan ($64.3bn) this year to plug a 1.2 trillion yuan deficit, the biggest shortfall since the 2008 global financial crisis.”

Japan Bubble Watch:

January 23 – Bloomberg (Toru Fujioka and Isabel Reynolds): “The Bank of Japan’s decision to hold off on fresh monetary stimulus for a year puts pressure on the Abe administration to revive growth through fiscal measures and risks capping losses in the yen that aid export competitiveness. Governor Masaaki Shirakawa, whose term ends in less than 11 weeks, yesterday agreed to set the 2% inflation target urged by Prime Minister Shinzo Abe, while stopping short of immediate action to achieve it. The BOJ plans to start open-ended asset purchases in January next year.”

January 23 – Financial Times (Jonathan Soble ): “Japan’s trade deficit nearly tripled in 2012 to Y6.93tn ($77bn), an unprecedented shortfall for the traditional export powerhouse as it faces criticism that it is weakening the yen to favour Toyota and other Japanese manufacturers. The sharp expansion of the deficit, from Y2.56tn in 2011, in part reflected falling sales of Japanese goods abroad, a problem that has been traced to a strong yen, the weak economy in Europe and anti-Japanese boycotts by consumers in China. It was only the third year since 1980 that export sales failed to cover the cost of imports… Exports to China… fell 15.8%… The growth in imports has complicated the calculations surrounding efforts to shrink the trade deficit. A weaker yen makes imports more expensive, and will help only if it spurs a much greater increase in foreigners’ appetite for exports."

Latin America Watch:

January 24 – Bloomberg (Matthew Malinowski and Raymond Colitt): “Brazil’s central bank said additional monetary policy stimulus will fail to boost economic growth that is recovering more slowly than expected due to limited supply. Policy makers… reiterated that the best policy for bringing consumer price increases to the 4.5% target is to keep rates at a record low for a ‘sufficiently prolonged period.’”

U.S. Bubble Economy Watch:

January 24 – CNBC (Robert Frank): “The Hamptons real-estate market has not only recovered. It’s soaring past its pre-crisis peaks. Sales of homes priced at $2.5 million or more jumped 98% in the fourth quarter on Long Island's East End, according to the luxury realty agency Brown Harris Stevens. Prices in some Hamptons communities have doubled, with the average home price passing $2.1 million in the South Fork. More than 90 homes sold for more than $2.5 million in the Hamptons East End in the quarter. ‘A lot of the deals and bargains are gone,’ said Christopher Burnside, senior director of Brown Harris in the Hamptons. ‘It’s been very sudden.’”

January 22 – Bloomberg (Alex Kowalski): “Sales of U.S. existing homes unexpectedly dropped in December, restrained by the lowest supply of properties in more than a decade. Purchases fell 1% to a 4.94 million annual rate last month… The reading was still the second-highest since November 2009… Even with December’s slip, 4.65 million homes were purchased for all of 2012, the most since 2007 and a sign the housing market is making steps toward recovery… Sales last year climbed 9.2% from 4.26 million in 2011. The median price of an existing home rose 11.5% to $180,800 from $162,200 in December 2011… The number of previously owned homes on the market dropped to 1.82 million, the fewest since January 2001… At the current sales pace, it would take 4.4 months to sell those houses, the lowest since May 2005…”

January 23 – Bloomberg (Prashant Gopal): “U.S. home prices climbed 5.6% in the 12 months through November as buyers competed for a dwindling inventory of properties, according to the Federal Housing Finance Agency. Prices rose 0.6% from October on a seasonally adjusted basis…”

Federal Reserve Watch:

January 24 – Bloomberg (Caroline Salas Gage and Steve Matthews): “Federal Reserve Chairman Ben S. Bernanke and his fellow policy makers will probably forge ahead with their unprecedented bond buying when they meet next week, even as they pick up a debate that began in December on when to end the purchases. The job market has yet to show the ‘substantial’ gains Bernanke said he wants to see before halting asset purchases. Unemployment has persisted at 7.8% or higher since January 2009 while Bernanke held the main interest rate near zero and expanded the Fed’s assets to a record $2.97 trillion. Meanwhile, all 19 Federal Open Market Committee participants see no immediate threat from inflation, now at 1.4%. The Fed chairman can count on the FOMC to endorse the current program to buy $45 billion in Treasury notes and $40 billion in mortgage bonds each month, said Nathan Sheets, Bernanke’s top adviser on international economics from 2007 to 2011.”

Europe Watch:

January 25 – Bloomberg (Scott Hamilton): “Britain’s economy shrank more than forecast in the fourth quarter as the boost from the Olympic Games unwound and oil and gas output plunged, leaving the country on the brink of an unprecedented triple-dip recession. Gross domestic product dropped 0.3% from the three months through September, when it grew 0.9%...”

Germany Watch:

January 22 – Bloomberg (Jeff Black): “Bundesbank President Jens Weidmann said the Bank of Japan’s independence is under threat and warned that government interference in monetary policy could start to impact on exchange rates. ‘Already, alarming attacks can be seen, for example in Hungary or in Japan, where the new government is interfering massively in the affairs of the central bank, pressuring for a yet more aggressive monetary policy that’s threatening the end of central bank autonomy,’ Weidmann… said in a speech… ‘A consequence, whether intended or not, could be the increasing politicization of the exchange rate… ‘Until now, the international monetary system has come through the crisis without rounds of competitive devaluations… I very much hope it stays that way.’”

January 24 – Bloomberg (Tony Czuczka and Rainer Buergin): “German Chancellor Angela Merkel said the Japanese government’s call for monetary easing and central- bank cash that’s been unleashed to stem Europe’s debt crisis constitute risks to the global economic recovery. ‘I can’t say I’m completely free of worry when I look at Japan right now,’ Merkel said… For Europe, the ‘large amount of liquidity’ pumped into the financial system last year, particularly to help banks, has to be mopped up again,’ she said.”

January 24 – Bloomberg (Simon Kennedy): “The central bankers who saved the world economy are now being told they risk hurting it. Even as the International Monetary Fund cuts its global growth outlook, a flood of stimulus is running into criticism at the World Economic Forum’s annual meeting in Davos. Among the concerns: so-called quantitative easing is fanning complacency among governments and households, fueling the risk of a race to devalue currencies and leading to asset bubbles. ‘Central banks can buy time, but they cannot fix issues long-term,’ former Bundesbank President Axel Weber… There’s a perception that they are the only game in town.’ The warnings, louder this year than last, come as U.S. stocks hit the highest since late 2007, London house prices jump and junk bond yields fell below 6% for the first time. The challenge for policy makers in Davos and beyond is to decide whether it’s time to act on those moves now or to keep pushing measures to shore up a still-ailing global economy.”

January 22 – Dow Jones: “Cyprus’ financial challenges could destabilize the entire euro zone, a top central banker from the European Central Bank said… ‘Disorderly developments in Cyprus could undermine progress made in 2012 in stabilizing the euro area,’ Joerg Asmussen, an executive board member with the ECB, told Reuters… ‘Cyprus could well be systemic for the rest of the euro area despite its size,’ he added. Mr. Asmussen’s warning comes just one day after German Finance Minister Wolfgang Schaeuble questioned whether Cyprus represents a danger to the monetary union.”

January 22 – Bloomberg (Stefan Riecher): “Germany’s Bundesbank said it’s concerned that a false rumor about its president resigning may have been spread to manipulate the market. ‘We can’t rule out that the market has been manipulated on purpose,’ a spokesman for the… Bundesbank said… The rumor that president Jens Weidmann had resigned was totally false, he said.”

Spain Watch:

January 23 – Bloomberg (Angeline Benoit and Charles Penty): “Spain’s recession deepened in the last quarter of 2012 after Prime Minister Mariano Rajoy’s government approved its fifth austerity package in a year to reduce the second-largest budget deficit in the euro area. Gross domestic product shrank for a sixth quarter, contracting 0.6% from the previous three months, when it slipped 0.3%... Output may have contracted 1.3% in 2012 as budget cuts weighed on economic activity, the… Bank of Spain said. While it’s not yet clear if Spain will meet its 2012 deficit target set by the European Union, satisfying this year’s goal ‘will require a very ambitious additional fiscal effort from the central government and the regions,’ it said.”

January 24 – Bloomberg (Angeline Benoit): “Spanish unemployment rose to a record in the final quarter of 2012… The number of jobless approached 6 million people, or 26.02%, from 25.01% in the previous three months… It is now the highest since at least 1976, the year after dictator Francisco Franco’s death heralded Spain’s transition to democracy.”

January 23 – Bloomberg (Andrea Gerlin and Alex Morales): “Carlos Hernandez Sonseca studied six years for a bachelor’s degree and couldn’t find a job near his home outside Madrid when he graduated in 2011. Last year, he took an increasingly well-worn path to the U.K. The 27-year-old journalist now washes and chops vegetables eight hours a day at the Vital Ingredient salad bar in London’s financial district, making 260 pounds ($418) before taxes in a 40-hour week. Thirteen other Spaniards are among a workforce of 17… U.K. fast-food jobs and other low-wage roles have been dominated by Poles and others who arrived after the European Union expanded eastward in 2004. Now they’re joined by young Spaniards who can’t find work at home… ‘We are a lost generation, for sure,’ Hernandez Sonseca said. ‘Spain has nothing to offer us, so we go abroad and we work as salad makers and kitchen porters. They are losing money and they are losing skilled people.’”

Italy Watch:

January 23 – Bloomberg (Sonia Sirletti and Elisa Martinuzzi): “Banca Monte dei Paschi di Siena SpA, the Italian bank seeking a second state bailout in four years, hid documents from regulators on financial transactions that may prompt the lender to restate profit. ‘The nature of some transactions involving Monte dei Paschi di Siena reported by the press has been disclosed only recently after hidden documents were found by new executives,’ the Bank of Italy said… ‘The transactions are now being reviewed by the central bank’s oversight division as well as judicial authorities.’ Monte Paschi said on Jan. 17 it will review its accounts after Bloomberg News reported the lender engaged in a derivative with Deutsche Bank AG in 2008, dubbed ‘Project Santorini,’ that obscured losses before it sought a government bailout the next year.”

January 25 – Bloomberg (Andrew Davis and Sonia Sirletti): “Banca Monte dei Paschi di Siena SpA’s 3.9 billion-euro ($5.2bn) government bailout may face a delay after Prime Minister Mario Monti called for a further review of the bank’s accounts. Monti said the Bank of Italy will take another look at the bank’s books after the company disclosed this week it may face more than 700 million euros of losses related to structured finance transactions hidden from regulators. Monte Paschi shareholders are voting on a capital increase today to pave the way for the emergency government loans.”

January 24 – Financial Times (Rachel Sanderson): “Mario Monti, Italy’s prime minister, was forced to offer to recall parliament yesterday amid questions about his government’s handling of the financial crisis at Monte dei Paschi di Siena and the role of the central bank. Shares in Italy’s third largest bank by assets, which has requested a second state bailout in four years, have fallen more than 22% in the past few days since revelations five days ago of derivatives transactions that may force the 500-year-old bank to restate hundreds of millions of euros of losses. Supervision of the struggling institution by the Bank of Italy, while Mario Draghi, European Central Bank president, was governor has come under attack as an increasingly fierce political outcry erupts in the run up to national elections next month.”