Saturday, December 6, 2014

Weekly Commentary, March 15, 2013: Insights from Former Fed Chairmen

CNBC’s Andrew Ross-Sorkin, March 15, 2013: “The question of the morning: Do you want to break out the phrase again, ‘irrational exuberance’?”

Alan Greenspan: “No, I don’t think it’s quite appropriate in this type of environment. In fact, a basic way of looking at this degree of exuberance or non-exuberance is to take a look at what we call the equity premium. As you know, it’s the extent of the measure of whether stocks are overvalued or undervalued. And right now, by historical calculation, we are significantly undervalued. The reason why the stock market has not been significantly higher is there are other factors compressing it lower. But irrational exuberance is the last term I would use to characterize what’s going on at the moment.”

Ross-Sorkin: “Is this a Fed-fueled rally?”

Greenspan: “I think you can fully explain the rally in terms of basically the issue of the removal of what economists call 'tail risk.' That is, what has been sitting out there virtually most of this year – and part of last as well – has been the European problems which have every characteristic of caving in the economies of the world as a whole, and that has been temporarily removed. The result is removing of that key factor has allowed the markets to move up. It’s not because earnings are moving all that well, as you know, earnings –expectations at least – have been either been flat or down for awhile. What’s basically been doing – the valuation structure and it still’s got a way to go as far as I can see.”

Paul Volcker, March 4, 2013, upon receiving the Lifetime Achievement Award for Economic Policy from the National Association of Business Economics (NABE):

“I have two other things on my mind, at least one of them may strike you as a bit unusual. But I think it is a too much neglected subject despite the fact that it seems to me to have been a major underlying ingredient in the financial and economic crisis we have. And what I’m talking about is the international monetary system. Of course you know it’s hard to call it a system. A system concerns itself with some interrelated parts and a mechanism that are working together to produce some stability and progress. That’s hardly a description of the international monetary system. And as many people have said, “international non-system.” The reason I say it – I’m not going to elaborate on it right now – just look at one characteristic of that system: in the first seven or eight years of this century, where the biggest characteristic of this system was a big surplus on the part of China, a huge accumulation and employing those surpluses into U.S. dollars. And, looking at the other side, the United States running the biggest deficits that it had run – in my memory anyway. The biggest economy in the world running current account deficits some years 5% or 6% of GDP, financing most of the large federal deficit by foreign purchases – so happy to lend at very low interest rates in a seemingly prosperous world. Now would anybody really design a system that would permit the Chinese to run cumulative surpluses – and Japan on top of it – in Trillions of dollars cumulatively over a few years? And we ran deficits of that size for a period of time without suspecting that something is going to happen in a serious way to upset the system. It’s all very nice to be able to finance your external deficits very easily while it happens. But sooner or later the world is giving you a lot of rope for this exorbitant privilege of the reserve currency. But at what point does the rope get to the point where it strangles you? And we’ve tried to avoid that. I’m not sure that’s true yet. But the lack of discipline in this system – which is replicated within Europe where deficits can go along more or less indefinitely in the euro zone until finally, finally something happens to interrupt the parade and we find ourselves with a degree of international indebtedness that is not easy to manage.”

From the NABE Q&A session moderated by CNBC’s Steve Liesman: “Let’s get to the subject you like talking about most in public: Monetary policy… When you were Fed Chairman – in that time period could you have imagined…”

Volcker: “No”

Liesman: “…purchasing…”

Volcker: “No”

Liesman: “…the amount of assets…”

Volcker: “No”

Liesman: “…the Federal Reserve has purchased today and ballooning the balance sheet to almost three Trillion dollars and buying $85bn of assets in a month.”

Volcker: “The answer to that question is clearly 'no…' When I first got involved with the Federal Reserve in the 1950s, the big issue in central banking was something called the ‘bills only doctrine.’ And the bills only doctrine was the central bank should only intervene in the money market in short-term securities, namely Treasury bills. Thou shall never touch a Treasury bond – or a mortgage bond. There was a big fight about it and the ‘bills only doctrine’ won. We’re a long ways away.”

Liesman: “You’ve talked about various areas of potential instability from accounting to the banking system. When you look at the financial landscape here, do you see the Fed’s balance sheet and its monetary policy as a potential source of financial instability?”

Volcker: “It’s obviously a potential problem. The way I look at this, rightly or wrongly, I hope not too optimistically: they are obviously doing things that were beyond my imagination some years ago in response to their perception of a very unusual situation that I did not envisage some years ago. But they have a very large balance sheet - very large amount of excess reserves… It’s OK for the moment. We have no inflationary problem at the moment. They want to support growth in the economy and so forth. The crucial question for a central bank anytime – but it is going to come in spades this time: OK, have easy money when we have a recession or when there’s a lot of unemployment. But at some point when the worm turns and the party is getting under way – to use that old analogy – at what point do you begin retreating and you retreat decisively enough? You can make a mistake and go too quick. But the much more frequent mistake, in my judgment, it’s been that you go too slow. Because it’s never popular to take the so-called ‘punchbowl’ away – or to weaken the liquor. And there’s a lot of liquor out there now. Mechanically, sure it can be done. They can put it in; they can pull it out. Will it be done at the crucial time in a delicate kind of way that can be done without creating expectations in the other direction that will be harmful? It’s going to be a big challenge.”

Below are some of Paul Volcker’s comments from a March 13, 2013 economic conference sponsored by the Atlantic magazine:

“Obviously, the Federal Reserve has come to play an extraordinary role in maintaining the economic recovery. In doing so, it stepped out of the long-established but more limited institutional role of a central bank. Instead of confining its operations to intervention in the money markets and control of bank reserves, attention is today directed toward massive support directly and indirectly of capital markets – and most particularly the market for residential mortgages. What it amounts to is that the Fed has become the principal intermediator in American financial markets. It’s acquiring several Trillion dollars of securities of varying maturities on the basis of short-term monetary liabilities that it itself has created. In the common vernacular, that is termed ‘printing money.’ Those efforts are not unique in today’s world. In Europe and Japan, where recovery is weak and the possibility of renewed recession is evident, sweeping commitments have been made to do ‘whatever it takes’ to hold the euro together and to speed expansion. And, in Japan, even by explicitly seeking inflation. All of us in the United States and Europe and Japan – and indeed the entire world economy – have a large stake in the success of those really unprecedented steps toward monetary expansion. Clearly, there are obstacles and risks - those obstacles notably in the underlying imbalances within and among developed economies and the inevitably slow progress in dealing with the overhang of excessive indebtedness and the remaining dislocations in the financial system and the pervasive fiscal deficits. Those are matters, unfortunately, that are not easily corrected or corrected at all by monetary policy, however aggressively that policy may be managed. Indeed, extreme monetary easing and the suggestion that the approach will continue indefinitely could encourage elements of speculative activity undermining the very process of restoring sustainable growth and financial stability. And I make that point because I believe the Federal Reserve – or any central bank - must not minimize or neglect its responsibilities for oversight in the financial system as it devotes attention to the conduct of monetary policy. In retrospect, a heavy cost has been paid for failure to recognize the implications of behavior patterns and speculative excesses in the financial markets that culminated in the crisis. The complexities and opacity imposed by rapid innovation and financial engineering requires skills and depth of personnel beyond previous experience and the regulators have to be equipped to attain them…”

“Let me say a word about the independence of central banks, which I obviously think is important. When central banks depart from their more traditional role as they’ve felt forced to do during these difficult problems – if that was maintained over a period of time and then you really raise the question of the independence of the bank because they’re getting into the allocation of resources and the dominance of the markets in a way that isn’t really as intended when associated with independent central banks.”

Q&A with an astute question from iconoclast economist and author (“Debunking Economics”) Dr. Steve Keen: “To what extent should the mandate of price stability extend to the stability of asset prices when compared to consumer prices?”

Volcker: “When people talk about stability and when I talk about stability – I’m often thinking of price stability by some measure. But the word stability in my mind encompasses financial stability something more than price stability. The stability of financial relationships, institutional relationships and all the rest. And when you use the word ‘stability’ in that context, which I do, then I get worried about the excesses that might arise - and the Federal Reserve should worry about them. It doesn’t mean it’s easier to deal with them. It’s a big matter of judgment. First of all, when you identify some unsustainable boom in some sector of the economy, even if you identify it what do you do about it? They are both difficult questions and they are both questions I don’t think can be ignored. And I think the Federal Reserve now realizes it…”

“I do see a risk of what I consider a strange theory that these all-powerful central banks can play a little game. And when you want to expand – let’s have a little inflation that peps it up. But, of course, as soon as it gets a little big we’ll shut it off and then we’ll bring it down again. There is no central bank that I know of that has ever exhibited the capacity for that kind of fine-tuning. And if they lose sight of the basic role of a central bank is to maintain price stability, stability generally – the game will sooner or later be lost. That doesn’t mean you’re going to off in the next few years on some great inflationary boom – an inflationary process. But this hubris that somehow we have the tools that can manage in a very defined way little increases or decreases in the inflation rate to manage the real economy is nonsense. Did I say that strongly enough?”

Good stuff! A few years back when he began assuming a higher political profile, an inside-politics analyst suggested that Mr. Volcker was becoming “senile.” This saddened me, as I’ve been a long-time admirer of the former Fed Chairman. He was not only a tough and disciplined central banker demonstrating outstanding leadership in an unusually challenging environment. I respected him as a true statesman – in an era where statesmanship has, sadly, been in short supply. He is a man of impressive intellect and with a brilliant understanding of finance, qualities I value in individuals irrespective of their “left” or “right” political leanings. After listening keenly to his most recent speeches and Q&A sessions, I can state unequivocally that Mr. Volcker is as sharp – and deeply insightful - as ever. I hope very much that he takes an active role in the unfolding monetary policy debate.

And while Mr. Volcker raises the critical but somehow “too much neglected” issues of a dysfunctional global financial “system,” destabilizing market speculation and waning central bank independence, his successor talks about an equities valuation model and today’s significantly undervalued equities market. Demonstrating uncharacteristic restraint, I will only repeat my view that history will not be kind.

For me, there so much these days that’s pretty much déjà vu all over again. As stock markets again turn highly speculative and the latest and greatest Bubble enters a more euphoric (dangerous) phase, it’s increasingly back to New Age, New Era and New Paradigm-like news and analysis. There is this week’s cover story – and special report - from The Economist, “The America That Works – Luckily, dysfunction in Washington is only one side of the story.” The article notes recent encouraging data from the jobs and housing markets. “The stock market has just hit a record high…. Beyond the District of Columbia, the rest of the country is starting to tackle some of its deeper competitive problems.”

I dearly hope – we all do – that this is in fact an “America that Works.” Unfortunately, the truth of the matter is that no one knows at this point how the current economic structure is going to work out. After all, the underlying finance driving the U.S. economy is extraordinarily distorted and unstable. What are the future consequences from unparalleled deficits, monetization and market manipulation? And as Mr. Volcker noted, the global financial “system” is dysfunctional, hence inevitably unsustainable. The U.S. economy recorded a Q4 2012 Current Account Deficit of $110bn, the 86th consecutive quarterly shortfall. There’s no historical precedent for such massive and protracted deficits in a country’s external account. There is no precedent for such a consumption and services-dominated economic structure. And there’s no precedent for anything remotely comparable to the current fiscal and monetary policy regime.

Decades of unfettered global finance have, not unpredictably, fostered progressive financial and economic fragilities. These policy-induced deficiencies have incited increasingly desperate policy measures - and attendant market exuberance. Indeed, it’s all evolved into one epic experiment in unanchored international finance, unchecked speculation and financial leveraging, new paradigm economic structures, ballooning global imbalances and ever expanding monetary inflation. So I especially appreciate Mr. Volcker’s pertinent insights. And to see Greenspan on CNBC touting an equities valuation model and market undervaluation – well, it was just more of the ridiculous.

For the Week:

The S&P500 added 0.6% (up 9.4% y-t-d), and the Dow gained 0.8% (up 10.8% y-t-d). The S&P 400 MidCaps rose 0.9% (up 11.9%), and the small cap Russell 2000 gained 1.1% (up 12.1%). The Banks jumped 1.6% (up 12.%), and the Broker/Dealers increased 0.9% (up 17.7%). The Morgan Stanley Cyclicals gained 1.4% (up 12.6%), and Transports jumped 2.1% (up 18.2%). The Morgan Stanley Consumer index gained 0.8% (up 13.6%), and the Utilities advanced 1.4% (up 9.1%). The Nasdaq100 slipped 0.2% (up 5.2%), while the Morgan Stanley High Tech index increased 0.3% (up 8.1%). The Semiconductors dipped 0.3% (up 13.1%). The InteractiveWeek Internet index fell 1.1% (up 11.5%). The Biotechs added 0.5% (up 16.2%). With bullion recovering $13, the HUI gold index increased 0.6% (down 20.7%).

One-month Treasury bill rates ended the week at 7 bps and 3-month rates closed at 8 bps. Two-year government yields were unchanged at 0.25%. Five-year T-note yields ended the week down 5 bps to 0.83%. Ten-year yields fell 5 bps to 1.99%. Long bond yields slipped 3 bps to 3.21%. Benchmark Fannie MBS yields were down 8 bps to 2.66%. The spread between benchmark MBS and 10-year Treasury yields narrowed 3 bps to 67 bps. The implied yield on December 2014 eurodollar futures declined 3.5 bps to 0.56%. The two-year dollar swap spread was little changed at 14 bps, and the 10-year swap spread was little changed at 9 bps. Corporate bond spreads narrowed further. An index of investment grade bond risk declined 2 to a three-year low 79 bps. An index of junk bond risk fell 11 to a two-year low 393 bps.

Debt issuance was strong. Investment grade issuers included GlaxoSmithKline $3.0bn, Enterprise Products $2.25bn, Discovery Communications $1.2bn, Nissan Motor Acceptance $1.0bn, Union Pacific $650 million, Georgia Power $650 million, DCP Midstream $500 million, Private Export Funding $500 million, GATX $500 million, Maxim Integrated $500 million, Virginia Electric & Power $500 million, Principal Life $400 million, Viacom $550 million, Ventas Realty $500 million, Metropolitan Edison $300 million, Kansas City P&L $300 million, Potomac Electric $250 million, Duke Realty $250 million, Indiana Michigan Power $250 million, GE Capital $200 million and VCA Lease $151 million.

Junk bond funds saw outflows of $418 million (from Lipper). Junk issuers included McGraw-Hill $800 million, CBRE Services $800 million, Sun Products $575 million, Ceridian $475 million, Hornbeck Offshore Services $450 million, Steel Dynamics $400 million, Western Refining $350 million, Aurora USA Oil & Gas $300 million, GEO Group $300 million, Seitel $250 million, and Nana Development $275 million.

Convertible debt issuers included $1.0bn, Blucora $175 million and Meadowbrook Insurance $85 million.

International issuers included Rabo Bank $2.5bn, DNB Boligkreditt $2.0bn, Svenska Handelsbanken $2.0bn, Bank Nederlandse Gemeenten $1.75bn, Goldcorp $1.5bn, Skandinaviska Enskilda $1.25bn, Mizuho Bank $1.5bn, Wesfarmers $750 million, Severstal $600 million, Cemex $600 million, Kaisa Group $550 million, MDC Partners $550 million, Bank of India $500 million, Honduras $500 million, Consorcio de Alimentos $450 million, and International Bank of Reconstruction & Development $250 million.

Italian 10-yr yields were unchanged this week at 4.59% (up 9bps y-t-d). Spain's 10-year yields rose 16 bps to 4.90% (down 37bps). German bund yields declined 7 bps to 1.45% (up 13bps), and French yields fell 6 bps to 2.06% (up 6bps). The French to German 10-year bond spread widened one to 61 bps. Ten-year Portuguese yields gained 2 bps to 5.83% (down 92bps). The Greek 10-year note yield rose 15 bps to 10.52% (up 5bps). U.K. 10-year gilt yields were down 13 bps to 1.93% (up 11bps).

Italy's FTSE MIB declined 0.9% (down 1.3% y-t-d). The German DAX equities index added 0.7% for the week (up 5.7%). Spain's IBEX 35 equities index was little changed (up 5.5%). Japanese 10-year "JGB" yields declined 2 bps to 0.615% (down 17bps). Japan's Nikkei jumped another 2.3% (up 20.8%). Notably, emerging markets were under pressure. Brazil's Bovespa equities index fell 2.7% (down 6.7%), and Mexico's Bolsa sank 3.9% (down 2.6%). South Korea's Kospi index declined 1.0% (down 0.5%). India’s Sensex equities index fell 1.3% (unchanged). China’s Shanghai Exchange dropped 1.7% (up 0.4%).

Freddie Mac 30-year fixed mortgage rates jumped 8 bps to an almost 7-month high 3.63% (down 29bps y-o-y). Fifteen-year fixed rates were up 3 bps to 2.79% (down 37bps). One-year ARM rates were a basis point higher to 2.64% (down 15bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 11 bps to 4.24% (down 33bps).

Federal Reserve Credit jumped another $25.3bn to a record $3.110 TN. Fed Credit expanded $324.6bn over the past 23 weeks. In the the past year, Fed Credit jumped $239bn, or 8.3%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $676bn y-o-y, or 6.6%, to $10.943 TN. Over two years, reserves were $1.564 TN higher, for 17% growth.

M2 (narrow) "money" supply jumped $19.5bn to $10.410 TN. "Narrow money" expanded 6.4% ($626bn) over the past year. For the week, Currency declined $0.5bn. Demand and Checkable Deposits rose $12.4bn, and Savings Deposits gained $9.6bn. Small Denominated Deposits slipped $3.0bn. Retail Money Funds increased $0.9bn.

Money market fund assets gained $5.3bn to $2.652 TN. Money Fund assets were up $14bn from a year ago (0.5%).

Total Commercial Paper outstanding declined $2.6bn this week to a 16-week low $1.018 TN CP has declined $48bn y-t-d, while having expanded $81bn, or 8.7%, over the past year.

Currency and 'Currency War' Watch:

March 14 – Bloomberg (Catherine Bosley): “The Swiss central bank pledged to keep up its defense of the franc cap after almost doubling its currency holdings to shield the country from the fallout caused by the euro zone’s crisis. The Swiss National Bank cut its forecasts for inflation and said it will take all necessary measures to keep the ‘high’ franc within the limit of 1.20 per euro.”

The U.S. dollar index gave back 0.5% to 82.26 (up 3.1% y-t-d). For the week on the upside, the Australian dollar increased 1.7%, the Mexican peso 1.6%, the Swiss franc 1.4%, the British pound 1.3%, the Canadian dollar 0.9%, the Japanese yen 0.8%, the New Zealand dollar 0.6%, the euro 0.6%, the Danish krone 0.5% and the Swedish krona 0.2%. For the week on the downside, the Brazilian real declined 2.0%, the South Korean won 1.8%, the South African rand 1.0%, the Norwegian krone 0.6%, and the Taiwanese dollar 0.2%.

Commodities Watch:

The CRB index gained 0.7% this week (up 0.5% y-t-d). The Goldman Sachs Commodities Index increased 0.6% (up 0.9%). Spot Gold rose 0.8% to $1,592 (down 5.0%). Silver slipped 0.3% to $28.85 (down 4.6%). April Crude advanced $1.50 to $93.45 (up 1.8%). April Gasoline declined 1.2% (up 15%), while April Natural Gas jumped 6.7% (up 16%). May Copper increased 0.3% (down 4%). March Wheat rallied 3.5% (down 8%), and March Corn gained 1.0% (up 5%).

U.S. Bubble Economy Watch:

March 15 – Bloomberg (Heather Perlberg): “Ben S. Bernanke’s efforts to revive housing are making real estate bulls even more bullish. JPMorgan Chase & Co. more than doubled its forecast for U.S. home price gains in 2013 to 7% this week, and predicts a more than 14% increase through 2015. Bank of America Corp. said… property values will jump 8% this year, up from a prior estimate of 4.7% in a report titled ‘Someone say house party?’ The two biggest U.S. banks are predicting an accelerating rebound as homebuyers and investors rush to acquire a dwindling supply of properties and the Federal Reserve pushes down borrowing costs by buying mortgage bonds.”

March 14 – Los Angeles Times (Andrew Khouri): “Southern California once again saw strong home price increases last month as the percentage of absentee buyers hit a record high and cash buyers remained a dominant force. The six-county Southland saw the median home price rise nearly 21% over the year… DataQuick said… A total of 15,945 new and resale homes and condos sold in February — the highest volume for a February in six years. Buyers in Southern California paid a median of $320,000 last month… ‘Most every gauge shows prices are up significantly over the past year, even after adjusting for changes in the types of homes selling,’ DataQuick President John Walsh said…”

March 13 – Bloomberg (Kathleen M. Howley): “Homeowners with underwater mortgages in U.S. states worst-hit by foreclosures are leading refinancing after the government expanded programs to aid borrowers, strengthening the weakest link in the housing recovery. In Nevada… the government’s Home Affordable Refinance Program, or HARP, accounted for 68% of refinancing in December… For Florida, 58% went through HARP.”

Federal Reserve Watch:

March 11 – Bloomberg (Caroline Salas Gage and Joshua Zumbrun): “When Ben S. Bernanke asserted last month that the Federal Reserve doesn’t ever have to sell assets, he raised questions about how the central bank can withdraw its record monetary stimulus without stoking inflation. The Fed may decide to hold the bonds on its balance sheet to maturity as part of a review of the exit strategy Bernanke expects will be done ‘sometime soon,’ he told lawmakers… This would help address concerns that dumping assets on the market will lead to a rapid rise in borrowing costs. It also allows the Fed to avoid realizing losses on its bond holdings as interest rates climb. Removing asset sales from the exit plan Fed officials agreed to in June 2011 means the central bank would stop prices from accelerating by relying primarily on its ability to pay interest on the cash it holds for banks.”

Fiscal Watch:

March 13 – Bloomberg (Meera Louis and Kasia Klimasinska): “The U.S. budget deficit narrowed 12% last month from a year earlier as Congress and President Barack Obama allowed payroll taxes to increase and individual refunds fell. Receipts exceeded outlays by $203.5 billion, compared with a $231.7 billion deficit in February 2012…”

Global Bubble Watch:

March 15 – Bloomberg (Aki Ito): “The Federal Reserve’s record monetary stimulus has compelled central banks from Mexico to Japan to follow suit, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. The Fed’s ‘artificially low’ benchmark interest rate has put upward pressure on several currencies, threatening to erode the competitiveness of those nations’ economies, El-Erian said… ‘Ultimately, they are forced -- Mexico has been forced, Brazil has been forced, Korea has been forced, Japan has been forced -- into doing exactly the same thing’ as the Fed. The U.S. central bank has kept its main interest rate near zero since December 2008 and is engaged in a third round of bond purchases… As a result, the Fed has become the equity investors’ ‘best friend’ and a ‘price-setter’ in financial markets, El-Erian said. Chairman Ben S. Bernanke ‘pivoted’ in 2010 and started using ‘imperfect tools,’ leaving the balance of benefits and costs unclear, El-Erian said… He compared Bernanke’s approach to a pharmaceutical company that releases inadequately-tested drugs."

March 15 – Dow Jones (Patrick McGee): “Yields on junk bonds fell to a new record low, hitting 5.56% after dipping below 6% for the first time in January. The record--reached Tuesday, the latest data available--signals that a wave of demand is lifting prices on riskier sectors of the market, sending yields to new lows and enabling companies to borrow cash at the cheapest rates ever. Bond yields move inversely to prices.”

March 14 – Financial Times (Vivianne Rodrigues): “Sales of risky pools of securities backed by car loans have jumped this year as investors’ search for yield takes them to corners of the market that boomed in the build-up to the financial crisis. Sales of subprime auto asset-backed securities in the US have increased year-to-date to nearly $4bn, almost double the volume during the same period of 2012… Subprime auto sales now account for 34% of all auto ABS issuance, surpassing levels last seen in 2007.”

March 13 – Bloomberg (Sarah Mulholland): “Wall Street banks are selling commercial-mortgage bonds linked to single borrowers at a record pace, enabling U.S. landlords to pay off debt on properties from Wilshire Boulevard in Los Angeles to central Florida. Lenders including Morgan Stanley and Deutsche Bank AG have arranged $7.5 billion of the deals in 2013, compared with $4.1 billion in all of 2012… Issuance is poised to surpass the $11 billion offered during the market’s 2007 peak, according to Jefferies.”

March 13 – Bloomberg (Krista Giovacco): “H.J. Heinz Co., the ketchup maker being acquired by Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc., set guidance on the rate it will pay on $12 billion of loans to support the purchase… An $8.5 billion term loan, which will be split into a six- year B-1 portion and a seven-year B-2 slice, will pay interest at 2.75 percentage points or 3 percentage points more than the London interbank offered rate…”

March 14 – Bloomberg (Jesse Westbrook): “Hedge-fund liquidations rose to a three-year high in 2012 as the European debt crisis and concerns about global economic growth hurt performance for the $2.3 trillion industry, according to Hedge Fund Research Inc. The number of firms shut jumped to 873… Still, the net number of hedge funds increased after money managers started 1,108 firms last year, it said.”

March 12 – Bloomberg (Nikolaj Gammeltoft and Cecile Vannucci): “The number of bearish options on an iShares exchange-traded fund of junk bonds has risen to a record after yields dropped to an all-time low and companies sold more of the debt than ever before. Outstanding puts giving the right to sell the iShares iBoxx $ High Yield Corporate Bond Fund rose to 456,910 on March 7, almost 10 times the total of calls to buy. The number of bearish contracts has more than doubled since the Jan. 18 options expiration and reached an all-time high last month… The securities have returned 124% since the end of 2008, more than double the 54% gain for investment-grade bonds…”

Global Credit Watch:

March 15 – Bloomberg (Sarika Gangar): “GlaxoSmithKline Plc and Nissan Motor Co. led sales of at least $34 billion this week with investors allocating money to corporate bond funds… Offerings increased from $31.6 billion last week and compare with a 2013 weekly average of $31.4 billion.”

March 15 – Bloomberg (Cheyenne Hopkins): “JPMorgan Chase & Co. engaged in high-risk proprietary trading under the guise of ordinary hedging, said Senate investigators, who urged U.S. regulators to strengthen the proposed ban on such trades known as the Volcker rule. Regulators should require banks that hold federally insured deposits to explicitly link positions in derivatives to the underlying risk they are hedging, the Senate’s Permanent Subcommittee on Investigations recommended in a 300-page report… The issue of which trades are hedges and which are risky bets that could destabilize a bank is the crux of a stalemate over the Volcker rule, which was adopted as part of the 2010 Dodd-Frank Act designed to rein in systemic risks.”

March 15 – Bloomberg (Sridhar Natarajan): “Investors holding almost $1 trillion of the lowest-rated U.S. investment-grade corporate bonds are at a greater risk of losses as the pace of buyouts surges to the fastest pace in six years because the debt offers few protections. About $940 billion, or 58% of the $1.6 trillion of securities in the Bank of America Merrill Lynch US Corporate Index with ratings in the BBB tier, lack safeguards that would allow creditors to sell the debt back to the issuer at a premium in the event of a merger… Leveraged buyout deals from H.J. Heinz Co. and Virgin Media Inc., totaled $51 billion last month, the most since April 2007… Investors who have seen gains in the debt of almost 59% since the 2008 collapse of Lehman Brothers Holdings Inc., now face the threat of their claims being weakened by more senior-ranking lenders financing buyouts. Borrowers have already obtained more than $160 billion in speculative-grade loans this year, compared with $300 billion in all of 2012…”

China Bubble Watch:

March 14 – Bloomberg: “Xi Jinping was named China’s president by the national legislature, replacing Hu Jintao in the country’s most rapid formal transfer of power in more than a generation. Xi, 59, added the largely ceremonial title of president to his portfolio today after taking over the top post in the ruling Communist Party as well as chairmanship of the party’s military commission in November. It took Hu almost two years to get all top three positions. Jiang Zemin, who ruled China before Hu, had to wait almost four years to assume all the top posts.”

March 13 – Bloomberg: “China should be on ‘high alert’ over inflation after February’s figures exceeded forecasts, central bank Governor Zhou Xiaochuan said, signaling a heightened focus on controlling prices. Monetary policy is ‘no longer relaxed’ and is ‘relatively neutral’ as demonstrated by a 13% target for money-supply growth that’s tighter than expansion in the last two years, Zhou, head of the People’s Bank of China, said… Zhou’s comments add to signs that officials are tightening policies even as the recovery in the world’s second-biggest economy shows signs of weakness. While the central bank has left interest rates and lenders’ reserve requirements unchanged since July last year, the government this month intensified a campaign to control home prices. ‘The central bank has always attached great importance to consumer prices,’ Zhou said. ‘Therefore we will use monetary policy and other measures to hopefully stabilize prices and inflation expectations.’”

March 13 – Financial Times (Simon Rabinovitch): “China must be ‘on high alert’ against inflation, central bank governor Zhou Xiaochuan said…, striking a hawkish tone at his most important news conference of the year. Speaking the week after China reported a jump in inflation to a 10-month high of 3.2%, Mr Zhou said the increase in prices had been larger than expected and that experience had taught him not to delay the fight against inflation. His comments were the latest sign that the Chinese government is willing to tolerate slightly slower growth in order to keep prices and the property market in check… ‘In the past some of us thought it was no big deal if inflation was a little bit high, growth will be a little faster and then we can control inflation afterwards,’ Mr Zhou said…”

March 15 – Bloomberg: “China’s new leaders are inheriting a challenge that stymied the outgoing government: deflating a bubble in big-city home prices without damping economic growth. In one of its final acts before the leadership change, China’s State Council on March 1 imposed tough new measures intended to cool the market, a step that sent property stocks tumbling. While curbs initiated last year had some success, prices resumed climbing in the second half as the central bank cut interest rates to reverse an economic slowdown. Real estate and related industries such as construction account for about a fifth of China’s gross domestic product, while cities, especially smaller ones, rely on land sales to raise revenue.”

March 12 – Bloomberg: “China’s lower-than-forecast bank lending in February was ‘normal’ for a holiday-affected month and the fastest inflation since April last year was mainly seasonal, said Yi Gang, a vice governor of the central bank. Growth was ‘relatively stable’ in February and China can meet its target for a 7.5% expansion in 2013, Yi said… China’s new lending of 620 billion yuan ($99.6bn) in February compared with analysts’ median estimate of 700 billion yuan, fanning concerns that a rebound in the world’s second- largest economy may be moderating.”

March 12 – Bloomberg (Bruce Einhorn): “Never mind the dead pigs, drink the water. That seems to be the message from the Shanghai government on Tuesday, after thousands of hog and piglet carcasses floated into town in the Huangpu River, a source of the city’s drinking water. The swine started floating to town late last week and their volume increased over the weekend. Now the Shanghai government says it has removed most of the carcasses from the river and says water from a section of the river is once again clean and safe to drink. There’s never a good time for about 3,000 dead pigs to float into a country’s financial hub, but the timing of this flotilla is especially bad for the Chinese government. Beijing is hosting the annual meeting of the National People’s Congress, an event that is the final part of the transition of power from outgoing President Hu Jintao’s team to the country’s new leadership, led by new President Xi Jinping. Pictures of water-soaked carcasses threaten to spoil the debut."

March 15 – Bloomberg: “Shanghai stepped up checks on its food supplies after authorities pulled a further 944 dead pigs from the Huangpu river yesterday, taking the total number of carcasses to more than 7,500. The municipal government said it strengthened inspections of raw pork and checks on the transportation of animals and animal products…”

Japan Watch:

March 15 – Bloomberg (Shamim Adam): “Japanese Prime Minister Shinzo Abe’s plan to beat deflation with money printing by the central bank is bound to fail as the root causes are more structural, said Eisuke Sakakibara, a former Ministry of Finance official. Haruhiko Kuroda was confirmed as Bank of Japan governor today along with two deputies, ushering in new leadership to pursue Abe’s plan to boost growth by achieving 2% gains in the consumer price index. ‘They will continue easy monetary policy, but CPI will never reach 2%,’ Sakakibara, known as ‘Mr. Yen’… ‘This deflation is structural. It’s a result of the integration of the Japanese economy with the rest of east Asia and it has taken place for the last 20 years.”

March 15 – Bloomberg (Mayumi Otsuma and Toru Fujioka): “Japanese Prime Minister Shinzo Abe’s initiative to end two decades of economic stagnation took its biggest step yet as Parliament confirmed his picks for a new Bank of Japan leadership team. Haruhiko Kuroda, who advocated an inflation target more than a decade before the central bank set one, won a majority of votes in the upper house a day after his nomination as governor was endorsed by the lower body. Abe’s picks for two deputies were also approved, with BOJ critic Kikuo Iwata prevailing after being opposed as too radical by some lawmakers. Kuroda, the outgoing Asian Development Bank chief, has repeatedly said monetary policy alone can end the deflation that has afflicted the world’s third-largest economy for 15 years.”

India Watch:

March 14 – Bloomberg (Kartik Goyal): “India’s non-food inflation eased last month even as the benchmark gauge accelerated from a three- year low, sustaining scope for the central bank to cut interest rates… The wholesale-price index rose 6.84% from a year earlier, after climbing 6.62% in January…”

Latin America Watch:

March 15 – Bloomberg (Camila Russo): “Moody’s… downgraded Argentina’s foreign bonds to seven levels below investment grade, as a U.S. court case with holdout creditors increases the chances the country will default... The outlook on both ratings is negative. The Caa1 rating is in line with Cuba, Ecuador and Pakistan."

March 15 – Bloomberg (Katia Porzecanski and Camila Russo): “Argentina’s decision to scrap constraints on the central bank’s printing press has inundated the nation with pesos, destroying the value of the currency and threatening the reserves it uses to pay overseas debt. The amount of money in Argentina has surged 40% in the past year to 300 billion pesos… That implied exchange rate is 45% weaker than the official rate of 5.0863 pesos per dollar as net reserves fell by $621 million.”

Global Economy Watch:

March 15 – Bloomberg (Michael Patterson, Julia Leite and Rajhkumar K Shaaw): “The 2.5 million rupees ($45,984) Nirav Vora had in the Indian stock market six years ago have plunged by 72%. Now the 39-year-old father of two in Mumbai, who depends on investment income for his livelihood, is plowing money into government bonds. ‘The confidence of small investors is rock bottom,’ Vora said… ‘They have no faith in the markets.’ Vora’s exit from equities is being repeated across the biggest emerging markets as disappointing profits and growing state intervention cause stocks to trail global shares for a fourth year. Trading by Brazilian individuals has dropped to the lowest level since 1999… Russian mutual funds posted 16 straight months of outflows, the most since at least 1996, and withdrawals in India are the biggest in more than two years. Chinese investors emptied more than 2 million stock accounts in the past 12 months.”

Central Bank Watch:

March 12 – Dow Jones (Christopher Lawton and Todd Buell): “European Central Bank Governing Council member Jens Weidmann said the euro zone cannot look to monetary policy to fix its structural problems and solve the sovereign debt crisis, defending the ECB's current monetary policy stance. ‘What we are seeing in the peripheral countries is a structural adjustment process, and we have to let this structural adjustment process happen,’ Mr. Weidmann… told The Wall Street Journal… ‘It is fiscal policy, not monetary policy that will decide the overcoming of the crisis… Our monetary policy is appropriate.’”

March 11 – Wall Street Journal (Richard Barley): “Is the European Central Bank’s Outright Monetary Transactions plan the most successful central-bank operation ever? When this sovereign-debt-market backstop was introduced in September, it was widely assumed that it would be a matter of weeks before Spain asked for aid. Six months on, not a cent has been spent, and Spanish 10-year yields are at their lowest in at least a year despite hefty bond issuance, Italian political turmoil and a deepening euro-area recession. To add to the puzzle, many investors have doubts about how well the program will work in practice, should it ever be activated. The ECB's previous bond-buying facility, the Securities Markets Program, defused market tensions at critical moments but failed to lower bond yields in a sustainable way, particularly after the ECB refused to take losses on its Greek bonds.”

Europe Watch:

March 15 – Bloomberg (James G. Neuger and Gregory Viscusi): “European governments loosened the shackles on national budgets as the euro-area recession deepens and unemployment climbs, with pro-growth appeals coming even from German Chancellor Angela Merkel, the leader most closely associated with austerity. European Union leaders endorsed ‘structural’ budgetary assessments, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits.”

March 15 – Bloomberg (Marcus Bensasson): “Greece’s unemployment rate increased to 26% in the fourth quarter, compared with 24.8% in the third quarter…”

March 12 – Bloomberg (Maria Petrakis and Marcus Bensasson): “Greece is locked in talks with international creditors in Athens about shrinking the government workforce by enough to keep bailout payments flowing. Identifying redundant positions and putting in place a system that will lead to mandatory exits for about 150,000 civil servants by 2015 is a so-called milestone that will determine whether the country gets a 2.8 billion-euro ($3.6bn) aid installment due this month. More than a week of talks on that has so far failed to clinch an agreement.”

March 13 – Bloomberg (Patrick Henry): “Euro-area industrial output fell more than economists forecast in January, adding to signs that the region’s recession extended into the first quarter. Factory production in the 17-nation euro zone dropped 0.4% from December… Production fell 1.3% in January from a year earlier.”

March 13 – Bloomberg (Simeon Bennett and Andrea Gerlin): “Europeans are the world’s biggest smokers and drinkers, according to a World Health Organization report… On average, 27% of people over 15 smoke across the 53 nations that make up the WHO’s European region… Europeans also consume an average of 10.6 liters of alcohol a year, more than in any other region…”

Italy Watch:

March 15 – Bloomberg (Andrew Davis): “Italian legislators, meeting for the first time since inconclusive elections last month, failed to select parliamentary leaders as the country’s political gridlock deepened. Both the Senate and Chamber of Deputies held two votes that failed to produce a speaker in either house… Lawmakers from the Democratic Party, which led the winning coalition in the February election, abstained to keep their options open for an agreement with other parties.”

March 13 – Bloomberg (Lorenzo Totaro and Patrick Donahue): “Italy is ‘already de facto’ outside the euro and runs the risk of being ‘dropped’ by the region’s wealthiest members as soon as their banks recoup what they invested in the nation’s bonds, Germany’s Handelsblatt cited comic-turned-politician Beppe Grillo as saying. ‘Italy is de facto outside the euro already,’ Grillo, whose anti-austerity Five Star Movement got 25% of the vote in elections last month, said… ‘The northern European states will back us only until they have recouped the investments of their banks in Italy’s sovereign bonds. Then they will drop us like a hot potato.’”

Spain Watch:

March 15 – Bloomberg (Angeline Benoit): “Spain’s public sector debt surged 20% last year as the government sought European aid for its banks and backstopped the nation’s municipalities as well as its tax-funded pensions and jobless-benefit systems. Borrowings rose to 884.4 billion euros ($1.15 trillion) at the end of December from 736.5 billion euros a year earlier… That represents 84.1% of gross domestic product, up from 69.3% a year earlier and 77.3% in the third quarter… Spain’s debt load will beat the euro-area average for the first time in the currency’s history this year and top 100% of output in 2014, the commission says.”

March 11 – Bloomberg (Charles Penty): “Spain’s decision to suspend the sale of the nationalized lender Catalunya Banc SA is negative for the country’s banks because it shows a dearth of belief in the clean-up process, Moody’s… said. Halting the auction ‘is credit negative for the entire banking system because it can be interpreted as the private-sector’s lack of confidence in the success of the restructuring and clean-up of weaker banks,’ Moody’s said… Spain’s bank rescue fund, known as Frob, said last week it was suspending the sale of Catalunya Banc, which was nationalized in 2011. Spain has spent about 40 billion euros ($52bn) to bail out lenders… that were taken over by the state as a property crash inflicted mounting losses on the financial system.”

March 15 – Bloomberg (Andrew Davis): “Spanish house prices fell 1.4% in the fourth quarter from previous three months, statistics office Ine said. Home prices slide 12.8% from year earlier in the quarter…”

France Watch:

March 11 – Bloomberg (Mark Deen and Stefan Riecher): “French industrial production fell more than expected in January as Europe’s second-largest economy teetered on the brink of its third recession in four years. Output… fell 1.2% in the month from December…”

Germany Watch:

March 13 – UK Telegraph (Denise Roland): “Jens Weidmann, ECB Governing Council Member and head of Germany's Bundesbank, has warned that France's economic reforms are stalling and the eurozone crisis is ‘not over’. The German central bank head criticized eurozone members who had failed to stick to reform plans, urging them to rein in spending rather than rely on the ECB for help, singling out France, the bloc's second largest economy. ‘The crisis is not over despite the recent calm on financial markets,’ Mr Weidmann told a news conference. He said there was uncertainty about progress with reforms in Italy and Cyprus, adding: ‘The reform course in France seems to have floundered’. His caution echoed that of the ECB's other German policymaker, Joerg Asmussen, who last month pressed France to take ‘concrete and measurable’ steps to bring down its budget deficit. Mr Weidmann said the German central bank had set aside billions in new provisions against what it sees as a risky ECB pledge to buy back bonds to lower struggling eurozone countries’ borrowing costs, a measure it has not yet executed.”

March 14 – Financial Times (Quentin Peel, Hugh Carnegy and Peter Spiegel): “Germany ignored calls from its eurozone partners for more economic stimulus… by tabling plans to cut spending and balance its budget ahead of schedule on the eve of an EU summit dedicated to growth. Wolfgang Schäuble, German finance minister, said that his budget for 2014, involving spending cuts of more than €5bn to trim the total below €300bn, was ‘a strong signal for Europe’.”

March 13 – Bloomberg (Leon Mangasarian): “German Chancellor Angela Merkel may be preparing to ditch her current coalition partner in favor of a rerun of her alliance with the Social Democrats after this year’s election, said Reiner Haseloff, the prime minister of Saxony-Anhalt state. With her Free Democratic coalition partner polling about a third of the 14.6% support it won to enter government in 2009, Merkel will probably be forced to look for an alternative after the Sept. 22 ballot, said Haseloff, a Merkel confidant and executive board member of her Christian Democratic Union party.”