Saturday, December 6, 2014

Weekly Commentary, May 3, 2013: Too Much Asset Inflation

We’re now well into the fifth year of unprecedented monetary and fiscal stimulus – with, incredibly, no end in sight! Predictably, economic results have been disappointing. Also, and just as predictable, the most outspoken proponents of aggressive “Keynesian” measures are these days claiming the limited success is due to stimulus not being administered in sufficiently powerful doses. This is regrettably consistent with the history of monetary inflations. They corrupt money, minds, markets and economies.

Thoroughly relishing his “I told you so” moment, Paul Krugman titled his Friday New York Times piece “Not Enough Inflation”: “Ever since the financial crisis struck, and the Federal Reserve began ‘printing money’ in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types. Thus, in 2009, the influential conservative monetary economist Allan Meltzer warned that we would soon become ‘inflation nation.’ In 2010, the… Organization for Economic Cooperation and Development urged the Fed to raise interest rates to head off inflation risks… In 2011, Representative Paul Ryan… raked Ben Bernanke… over the coals over looming inflation and intoning solemnly that it was a terrible thing to ‘debase’ the dollar. And now, sure enough, the Fed really is worried about inflation. You see, it’s getting too low.”

Well, I’ll follow Dr. Krugman’s “told you so” lead. In CBB writings more than four years ago, I pleaded that the Fed not orchestrate a Credit Bubble resurgence and warned of the major risks associated with the unfolding “global government finance Bubble.” Rising consumer price inflation has never been the major risk from deficits and Fed monetization. Rather, the risks were of a similar nature to those that fashioned the 2008 crisis and so-called “great recession”: gross over-issuance of mis-priced finance, speculative excess and destabilizing asset Bubbles. We’re now in a full-fledged unwieldy Bubble environment on a global basis.

Lots of energy has been expended debating “inflation vs. deflation.” Deflation adherents have the ball and are running with newfound confidence. The proponents of fiscal responsibility and sound finance are pilloried - and are these days left pondering “what the heck just happened?” Ridiculously, Rogoff and Reinhart, with their apt warning of the dangers associated with high national debt levels, are tarred, feathered and very publicly rebuked. In Europe and here at home, “austerity” has become a four-letter word and economic “analysis” has regressed to little more than ideological mudslinging. Meaningful discussion/debate would immediately shift focus to inflationism and asset Bubbles.

A serious dialogue regarding what ails global finance and economies would begin with the premise that finance fundamentally changed during the nineties. There was a proliferation of non-bank Credit instruments (ABS, MBS, “repos,” derivatives, etc.) and much of this new Credit was directed to the securities and real estate markets. This new finance was inherently unstable. The Fed responded, fundamentally shifting its policy doctrine in order to underpin booming financial markets. In the process, central banks nurtured financial speculation and the emergence of a commanding “global leveraged speculating community.” The world of finance had never experienced such powerfully destabilizing innovations in Credit, monetary policy and market dynamics.

The following data remain key to Macro Credit Analysis: 1995: $654bn; 1997: $793bn; 1998: $999bn; 1999 $1.012 TN; 2002: $1.429 TN; 2004: $2.096 TN; 2006: $2.388 TN: 2007: $2.552 TN. These were the annual increases in U.S. Non-Financial Credit – the amount of new Credit fuel driving an evolving Bubble Economy Structure. Between 1995 and 2007, Non-Financial Credit inflated from $13.141 TN to $32.621 TN, or 148%. This massive and prolonged Credit inflation remade the global financial landscape, not to mention the structure of the U.S. and global economy.

Prolonged Credit Bubbles inflate myriad price levels and fuel atypical (and Bubble-dependent) spending, investing and financial flow patterns. Importantly, the resulting financial and economic Bubbles are sustained only through ongoing Credit inflation and associated asset price inflation. A Credit slowdown exerts downward pressure on inflated price and activity levels. Invariably, declining asset prices become problematic, especially late in the inflationary cycle, as falling price levels incite de-leveraging and risk aversion. Mature Bubbles require ongoing leveraging and risk-embracement – or else. And it is today almost unbelievable that asset Bubble risks are so easily disregarded.

When the mortgage finance Bubble burst in 2008/09, policymakers essentially confronted two alternative courses of policymaking. Washington could have allowed the economy to go through a wrenching de-leveraging and economic adjustment period. Considering the degree of Credit excess and economic maladjustment fomented during the protracted boom, to wean the U.S. (and global) economy from rampant Credit excess would have taken some years

As one would expect after a massive Credit inflation, the post-Bubble workout period would have featured significant downward pressure on some price levels and on economic activity. The end result, however, would have been a more balanced economy that produces more, while requiring significantly less ongoing Credit expansion and financial leveraging. There would have been difficult, trying years, although the upshot would have been a sounder economic structure, reduced systemic fragilities and diminished global imbalances. But this scenario was politically unpalatable. Dr. Bernanke spent much of his academic career building a thesis that massive monetary inflation would eliminate much of the traditional downside of bursting Bubbles. What most today refer to as “deflation” I call the inevitable consequence of inflationary Bubbles.

Policymakers, of course, chose scenario #2, resuscitating Credit Bubble dynamics and asset inflation. This involved basically nationalizing mortgage debt; backstopping the financial system; doubling Federal debt in four years; zero rates and inequitable wealth redistribution from savers to borrowers; incentivizing speculation; and the monetization of Trillions of Treasuries and MBS. As it's been throughout history, monetary inflation was viewed as the readily available expedient. The massive shot of federal debt and Fed liquidity supported home prices, inflated stock and bond prices and incentivized financial leveraging. Importantly, monetary and fiscal policy inflated aggregate household incomes, in the process ensuring a resurgent consumer, inflated corporate cash flows and earnings. In short, resuscitating the Credit Bubble and asset inflation was the least painful path to sustaining the Bubble Economy structure and avoiding protracted economic restructuring.

I have over recent years posited that annual non-financial growth would have to return back to the neighborhood of $2.0 TN to rejuvenate a more system-wide economic expansion. Last year saw Total Non-Financial Credit jump to $1.848 TN (up from 2011’s $1.351 TN and the low-mark $1.078 TN during 2009). Monetary policy in particular has inflated stock, bond and even real estate prices. The surge in system Credit growth has benefitted state & local finances. Exemplifying how Credit and asset inflations seemly improve fundamentals, the more recent jump in private-sector Credit expansion has somewhat improved the near-term fiscal outlook at the federal level. Considering the degree of fiscal and monetary stimulus and asset market recovery, economic performance has been notably unimpressive.

We’re now witnessing some of the downside of resuscitating Credit and asset Bubbles. First, an enormous infrastructure evolved over the past two decades that profited from asset inflation. In my nomenclature, the asset markets enjoy a much more robust “inflationary bias” than maladjusted real economies. As we’ve seen, massive stimulus will generate perhaps a couple percent of U.S. GDP growth while spurring stock and bond prices to all-time record highs.

The Fed dug itself a deeper hole this week when it opened up the possibility of actually increasing its $85bn monthly “money” printing. When I argued a few years back that a Federal Reserve “exit strategy” was little more than a myth, never did I imagine the monetary insanity that was about to unfold. But, then again, this is consistent with the nature of inflationism. Once it takes root, monetary expansion enjoys powerful momentum and powerful constituents. The bias is always to get bigger, with system deficiencies amply available for justification and rationalization.

The Fed and global central banks have made an incredible mess of things. Global asset markets today enjoy robust inflationary biases, while stagnant real economies suffer from deep structural deficiencies and maladjustment. Dismal economic performance and related fragilities provoke hyper-aggressive “activist” monetary measures that now work predominantly to feed financial speculation and inflate asset Bubbles. This has nurtured the Great Divergence – a huge and expanding gulf between inflating asset prices and anesthetized real economies. And, importantly, by stoking the Great Divergence, monetary stimulus today exacerbates global fragilities and instabilities.

Dr. Krugman and others argue that the Fed is not doing enough and point to Europe as evidence of the fallacy of so-called “austerity.” When I look at Europe, I see the dire consequences of Credit excess and asset Bubbles on full display. In particular, Spain is locked in depression after housing and mortgage finance Bubbles so badly distorted the Spanish real economy. For too long, easy “money” and buoyant asset markets masked deep structural issues in Greece, Portugal, Spain, Italy, France and throughout the Eurozone.

It is worth noting a couple of inflationism’s major fallacies. First, there is a belief that monetary expansion can inflate THE price level. An inflating aggregate price level is then seen boosting economic activity, in the process allowing borrowers to grow their way out of excessive debt levels. The Bernanke Fed has taken inflationism way beyond Keynes, believing that direct intervention to inflate risk market prices boosts wealth effects and stimulates economic activity.

First of all, there is no overall price level for central bankers to manipulate. It might work in models, but it’s just not the way economic systems function – definitely not in contemporary economies. Especially in a highly globalized economy – and even more particularly with the many nuances of the technology, “digital” and services-oriented structure of contemporary economies – a big inflationary increase in “money” will have widely disparate impacts on myriad price levels throughout the economy and asset markets. As already noted, securities and asset markets today see the strongest price effects. And, for example, if surging securities markets and associated loose finance spur only further over- and mal-investment, the end result could be further downward price pressure on key goods prices (i.e. technology and products from China).

The inflationists fail to appreciate Monetary Disorder’s myriad negative consequences. It’s the nature of liquidity to gravitate to where it believes it will most benefit from prevailing inflationary forces and dynamics. And with global central banks backstopping the securities markets, liquidity is today further incentivized to play securities inflation as opposed to seeking risky real economy investment returns. Furthermore, I would argue that speculative and inflated asset markets – along with an expanding Great Divergence – only magnifies the uncertainties already inhibiting investment and economic growth for many key economies. On a more micro basis, inflating stock and bond prices prod company managements to boost returns through stock buybacks and dividends - as opposed to hiring and expanding operations.

This week I found myself thinking back to the 2004-2006 marketplace and the Fed’s last “tightening” cycle. The Fed had (again) missed its timing, having waited too long to begin removing extraordinary accommodation, only to then move too timidly. After bumping rates 25bps in June 2004 to 1.25%, rates were still at only 4.25% to begin 2006. Meanwhile, mortgage Credit and home prices were inflating almost exponentially. The Fed boosted rates another 25 bps in January, March, May and June (to 5.25%). After beginning 2006 at about 4.4%, 10-year Treasury yields jumped to almost 5.25% by June.

Then an intriguing dynamic unfolded. In the face of a runaway mortgage finance Bubble, 10-year yields reversed course and were back down to about 4.4% by early December 2006. I recall at the time thinking that it was as if the Treasury market recognized mounting Bubble risk. And, ironically, as the bond market began discounting the gathering storm, the drop in market yields worked only to throw gas on (“terminal”) late-stage mortgage finance Bubble excess. Importantly, the over-liquefied and speculation-rife Bubble Markets had turned hopelessly dysfunctional. Having missed its timing, the Fed had in the process lost control of asset inflation and Bubble Dynamics more generally.

With the crowd today celebrating the stock market’s record run, I warn of a return of Bubble Dysfunction. Despite a troubling global economic backdrop, equity prices have surged to record highs while Credit market risk premiums have collapsed to multi-year lows. Risk markets have appeared to dislocate. And I believe the Fed will rue the day it spurred the flight of savers out of safety and into these markets. The Fed believed encouraging risk-taking would be good for economic recovery, somehow ignoring the clear risk of fueling yet another Bubble.

Well, the Fed is now dealing with historic – and, I believe, precarious - securities market Bubbles. And they’re Bubbles that will demand unending QE – or else risk a very problematic Bubble deflation. This is a dysfunctional Bubble that likes good economic news but loves weak data that ensures more monetary inflation for longer. And the greater the Great Divergence – the Greater the Dysfunction – the more the speculator community can leverage and speculate, confident that central banks are trapped by highly speculative markets, weak economies and acute fragilities. I was really, really hoping the Fed, global central banks and international markets wouldn’t drift down this troubling path.

For the Week:

The S&P500 jumped 2.0% (up 13.2% y-t-d), and the Dow gained 1.8% (up 14.3%), both to record highs. The S&P 400 MidCaps gained 2.1% (up 14.2%), and the small cap Russell 2000 rose 2.1% (up 12.4%). The Morgan Stanley Consumer index rose 1.6% to an all-time record high (up 20.6%), while the Utilities slipped 0.3% (up 16.6%). The Banks increased 0.6% (up 11.0%), and the Broker/Dealers surged 4.5% (up 23.2%). The Morgan Stanley Cyclicals were up 2.3% (up 12.0%), and the Transports rose 1.7% (up 17.2%). The Nasdaq100 surged 3.7% (up 10.7%), and the Morgan Stanley High Tech index jumped 3.4% (up 8.3%). The Semiconductors advanced 3.6% (up 17.4%). The InteractiveWeek Internet index jumped 2.9% (up 12.9%). The Biotechs gained 1.7% (up 26.0%). With bullion gaining $9, the HUI gold index increased 0.3% (down 37.6%).

One-month Treasury bill rates ended the week at one basis point and 3-month rates closed at 5 bps. Two-year government yields were little changed at 0.22%. Five-year T-note yields ended the week up about 5 bps to 0.73%. Ten-year yields increased 8 bps to 1.74%. Long bond yields were up 10 to 2.96%. Benchmark Fannie MBS yields increased 3 bps to 2.39%. The spread between benchmark MBS and 10-year Treasury yields narrowed 5 to 65 bps. The implied yield on December 2014 eurodollar futures was little changed at 0.445%. The two-year dollar swap spread was down slightly to 14 bps, and the 10-year swap spread was about unchanged at 18 bps. Corporate bond spreads narrowed to multi-year lows. An index of investment grade bond risk fell 7 to a five-year low 71bps. An index of junk bond risk sank 30 to 352 bps (low since 9/07). An index of emerging market debt risk fell 17 to 270 bps.

Debt issuance remained strong. Investment grade issuers included Apple $17.0bn, IBM $2.25bn, Texas Instruments $1.0bn, Loews $1.0bn, Altria Group $1.0bn, Praxair $950 million, Colgate-Palmolive $800 million, LKQ $600 million, Pearson Funding $500 million, Boeing $500 million, PNC Financial $500 million, TJX $500 million, President & Fellows of Stanford $400 million, Corporate Office Properties $350 million, Mack-Cali Realty $275 million, Johns Hopkins Health Systems $150 million, and Stanford University $150 million.

Junk bond funds saw inflows of $474 million (from Lipper). Junk issuers included Constellation Brands $1.55bn, Sirius XM Radio $1.0bn, Landry's $660 million, Fidelity Bank $300 million, UAL $300 million, Compucom Systems $250 million and Rent-A-Center $250 million.

I saw no convertible debt issued.

International issuers included Slovania $3.5bn, CNOOC $3.25bn, Toronto Dominion Bank $3.0bn, Royal Bank of Canada $1.5bn, Barrick Gold $3.0bn, Ineos Group $670 million, Transmantaro $550 million, Globe Luxembourg $500 million, Nord Gold $500 million, SISECAM $500 million, Gestamp $350 million, Avianca $300 million, and Aralco Finance $250 million.

Italian 10-yr yields sank 24 bps to 3.81% (down 69bps y-t-d). Spain's 10-year yields dropped 24 bps to 4.02% (down 125bps). German bund yields increased 3 bps to 1.24% (down 8bps), and French yields jumped 8 bps to 1.81% (down 19bps). The French to German 10-year bond spread widened 8 to 57 bps. Ten-year Portuguese yields sank 37 bps to 5.41% (down 134bps). Greek 10-year note yields sank 163 bps to 9.54% (up 93bps). U.K. 10-year gilt yields were up 5 bps to 1.72% (down 10bps).

The German DAX equities index jumped 3.9% for the week and was up 8.9% in two weeks (up 6.7% y-t-d). Spain's IBEX 35 equities index gained 3.0% for the week and 8.0% for two weeks (up 4.6%). Italy's FTSE MIB rose 2.2% and 7.4% (up 4.0%). Japanese 10-year "JGB" yields ended the week down 3 bps to 0.555% (down 23bps). Japan's Nikkei declined 1.4% (up 31.7%). Emerging markets were higher. Brazil's Bovespa equities index advanced 2.3% (down 9.0%), and Mexico's Bolsa gained 1.7% (down 2.5%). South Korea's Kospi index rose 1.3% (down 1.6%). India’s Sensex equities index gained 1.0% (up 0.8%). China’s Shanghai Exchange rallied 1.3% (down 2.8%).

Freddie Mac 30-year fixed mortgage rates dropped 5 bps to a 17-week low 3.35% (down 49bps y-o-y). Fifteen-year fixed rates were down 5 bps to 2.56% (down 53bps). One-year ARM rates fell 6 bps to a 12-week low 2.56% (down 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates 2 bps lower to 3.90% (down 52bps).

Federal Reserve Credit declined $4.8bn to $3.266 TN. Fed Credit expanded $481bn over the past 30 weeks. Over the past year, Fed Credit expanded $420bn, or 14.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $637bn y-o-y, or 6.1%, to $11.093 TN. Over two years, reserves were $1.315 TN higher, for 13% growth.

M2 (narrow) "money" supply dropped $49.6bn to $10.501 TN. "Narrow money" expanded 6.8% ($667bn) over the past year. For the week, Currency increased $3.2bn. Demand and Checkable Deposits jumped $25.7bn, while Savings Deposits sank $76.2bn. Small Denominated Deposits declined $2.9bn. Retail Money Funds increased $0.5bn.

Money market fund assets dropped $30.2bn to a six-month low $2.563 TN. Money Fund assets were down $4.5bn from a year ago.

Total Commercial Paper outstanding dropped $12.5bn this week to a six-month low $997bn. CP has declined $68bn y-t-d, while having expanded $58bn, or 6.1%, over the past year.

Currency and 'Currency War' Watch:

The U.S. dollar index slipped 0.5% to 82.13 (up 3.0% y-t-d). For the week on the upside, the South African rand increased 2.2%, the South Korean won 1.4%, the Swedish krona 1.0%, the Norwegian krone 0.9%, the Canadian dollar 0.9%, the Swiss franc 0.8%, the Danish krone 0.7%, the British pound 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the Mexican peso 0.6%, the Australian dollar 0.4%, and the Singapore dollar 0.2%. For the week on the downside, the Brazilian real declined 0.5% and the Japanese yen fell 1.0%.

Commodities Watch:

The CRB index rallied 1.7% this week (down 1.6% y-t-d). The Goldman Sachs Commodities Index recovered 1.4% (down 2.4%). Spot Gold increased 0.6% to $1,471 (down 12.2%). Silver was up 1.0% to $24.01 (down 21%). June Crude jumped $2.61 to $95.61 (up 4%). May Gasoline was little changed (up 2%), while May Natural Gas dropped 4.3% (up 21%). July Copper rallied 4.1% (down 9%). May Wheat jumped 4.1% (down 9%), and May Corn surged 8.6% (unchanged).

U.S. Bubble Economy Watch:

April 30 – Bloomberg (Alex Kowalski): “Residential real-estate prices increased in February by the most since May 2006, showing the U.S. housing market is strengthening. The S&P/Case-Shiller index of property values in 20 cities rose 9.3% from February 2012… Compared with the prior month, prices rose the most since October 2005.”

April 30 – New York Times (Terry Pristin): “Of the 22,000 condos created in downtown Miami during the boom years, only about 600 remain unsold — thanks mainly to an influx of Latin American investors seeking a safe haven for their money. Developers are reacting to the unexpectedly swift condo recovery in a predictable way: they are building more condos. The most ambitious project by far is the $1.05 billion Brickell CityCentre, a 5.4-million-square-foot mixed-use development that will add about 800 condo units in two 43-story towers to the central business district, a hotel, a luxury movie theater, and a wellness center aimed at tourists from Latin America… Prices of condos in downtown Miami increased to $440 a square foot in the last quarter, compared with $400 in the same quarter a year ago, according to Condo Vultures…”

May 1 – Bloomberg (Sarah Mulholland): “Automakers are giving subprime buyers the most long-term loans in at least eight years, sparking concern losses will curtail returns in the $149 billion U.S. market for packaging the debt into bonds. The average maturity for car loans to borrowers with blemished credit contained in asset-backed securities surpassed 70 months last year for the first time since at least 2005, according to Moody’s… All loans longer than 72 months more than doubled to 14% as of April 20 from 6% in 2010… Lenders are loosening loan terms, giving buyers more time to pay off debt and enabling U.S. households to purchase cars at the fastest pace in more than five years. Asset-backed sales linked to auto debt are surging…”

April 30 – Bloomberg (Shobhana Chandra): “Business activity in the U.S. unexpectedly shrank in April for the first time in more than three years, a sign manufacturing may be a smaller contributor to economic growth this quarter. The MNI Chicago Report’s business barometer fell to 49 in April, the lowest since September 2009, from 52.4 last month.”

April 30 – Bloomberg (John Gittelsohn): “U.S. residential vacancy rates declined in the first quarter as housing demand rebounded faster than new construction after the five-year real estate slump… The rate for rented homes dropped to 8.6% from 8.8% a year earlier, while vacancies for owner-occupied houses fell to 2.1% from 2.2%. The share of Americans who own their homes was 65.0%, down from the 15-year low of 65.4% in the fourth quarter and a year earlier… Builders broke ground on new homes at an annual pace of 1.04 million in March, the first time housing starts have exceeded a million since 2008…”

May 1 – Bloomberg (Alan Bjerga): “When dry weather destroyed Leonard McKissick’s soybeans last year, U.S. government-backed insurance paid him $40,000, the bulk of his loss. Across the Arkansas Delta this spring, farmers such as McKissick are sowing fields that suffered the worst drought in more than half a century. Even though crops may fail again, landowners are shielded by taxpayers from the full burden of their bad bets. Drought helped drive the cost of crop insurance to a record $17.2 billion…”

Federal Reserve Watch:

May 3 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Richmond President Jeffrey Lacker voiced opposition to bond purchases by the Fed, saying the buying probably won’t spur growth beyond 2% while making an exit from stimulus more challenging. ‘The benefit-cost trade-off associated with further monetary stimulus does not look promising… The Fed seems to be unable to improve real growth, despite striving mightily over the last few years, and further increases in the size of our balance sheet raise the risks associated with the ‘exit process’ when it’s time to withdraw stimulus.’”

May 1 – Bloomberg (Fergal O’Brien): “Harvard Economics Professor Martin Feldstein comments on Federal Reserve in CNBC interview: The Fed has ‘stopped talking about early exits or slowing down but frankly I think they’re not accomplishing very much and they are adding to risks in economy… There’s good reason -- not in the way they think about it there’s good reason to be slowing down this process. There are some serious bubbles developing in this economy.’ Feldstein says 10-year Treasury yield not sustainable. ‘I think it has risks and it’s spreading over into things like the stock market.’”

April 29 – Bloomberg (Willow Bay, Jeff Kearns and Jeanna Smialek): “Former Federal Reserve Governor Kevin Warsh said the central bank will probably press on with its ‘aggressive’ easing as growth this year may fall short of the pace needed to put millions of Americans back to work. Job growth requires a 3% to 3.5% expansion that won’t be in reach for the world’s largest economy this year, Warsh said…”

April 29 – Bloomberg (Susanne Walker): “Federal Reserve policy makers may shift discussion away from when to reduce monetary stimulus, given data showing the economy is weakening, according to Pacific Investment Management Co.’s Mohamed A. El-Erian. ‘The inherent momentum of the economy is still weak and you don’t want to taper off too quickly,’ El-Erian said… ‘They are going to try to change the narrative away from the Fed is taking its foot off the accelerator, to the Fed is maintaining its foot on the accelerator. It could even press it harder.’”

Central Bank Watch:

May 3 – Bloomberg (Simon Kennedy and Jana Randow): “European Central Bank President Mario Draghi is signaling he may go negative in his campaign to rescue the euro-area economy. With the ECB cutting its benchmark interest rate to a record low yesterday as the euro-area recession deepens, Draghi said policy makers have an ‘open mind’ on reducing their so-called deposit rate below zero for the first time. Forcing banks to pay when parking cash at the central bank would be aimed at spurring them into lending rather than saving, yet economists say the step may backfire. That it’s even being considered highlights the weakness of the 17-nation economy and rekindles Draghi’s reputation for unorthodoxy. Draghi has shifted the ECB’s stance on the potential floor for interest rates,’ said Marchel Alexandrovich, senior European economist at Jefferies International…”

Global Bubble Watch:

May 3 – Bloomberg (Victoria Stilwell): “A gauge of U.S. corporate credit risk declined to the lowest level in more than five years… The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, decreased 2.9 bps to a mid-price of 71.4 bps… The index is closing at the lowest level since Nov. 6, 2007, when it reached 68.8.”

April 30 – Bloomberg (Sarika Gangar): “Corporate bond sales are approaching the fastest pace on record as central bank stimulus from the U.S. to Japan and Europe stokes demand and prompts economists to scale back forecasts for interest-rate increases. …Offerings from the most creditworthy to the riskiest borrowers surge to $1.39 trillion this year, topping last year’s $1.38 trillion tally in the same period and exceeding every year apart from the $1.47 trillion in the first four months of 2009… Sales of bonds from the U.S. to Europe and Asia exceeded 2012’s pace after offerings surged this month to at least $304 billion, compared with $205.3 billion in the similar period last year… The S&P/LSTA U.S. Leveraged Loan 100 Index rose to the highest level since July 2007…”

May 3 – Bloomberg (Kristine Aquino and Charles Mead): “Cnooc Ltd., China’s largest offshore energy explorer, sold $4 billion of bonds in the biggest dollar-denominated offering from Asia outside of Japan in more than nine years. Investors bid for about $23.8 billion of notes…”

May 1 – Bloomberg (Charles Mead and Sarika Gangar): “Apple Inc. paid higher interest rates on a record $17 billion bond sale than Microsoft Corp. did a week ago as the iPhone maker’s slowing growth overshadowed annual cash flow that’s more than twice the amount of the issue. While Apple matched an unprecedented low coupon of 0.45% for corporate three-year debt…, investors demanded higher yields for the fixed-rate portions of five, 10- and 30-year securities… Apple… plans to use the money to help finance $100 billion in dividends and buybacks after its shares plunged 44% in seven months.”

May 3 – Bloomberg (Peter Burrows): “Apple Inc. avoided as much as $9.2 billion in taxes by financing part of a $55 billion stock buyback with debt rather than offshore cash that would have been billed by the U.S. government, Moody’s… estimates. Based on current rates, Apple will pay interest of about $308 million a year on the $17 billion bond offering, said Gerald Granovsky, a senior vice president at Moody’s. ‘From a pure corporate-finance theory perspective, this was a no-brainer,’ Granovsky said.

April 29 – Bloomberg (Anchalee Worrachate): “At a time when politicians are squeezing budgets to cut borrowing, the bond market is clamoring for more debt, pushing yields on almost $20 trillion of government securities to less than 1%. The average yield to maturity for the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index fell to a record-low 1.34% last week from 3.28% five years ago. Even though the amount of bonds in the index has more than doubled to $23 trillion -- bigger than the gross domestic product of the U.S. and China combined -- countries from Germany to Rwanda sold debt in the past month at their lowest yields.”

May 3 – Bloomberg (Abigail Moses): “The cost of insuring against losses on corporate debt fell to the lowest in three years after European Central Bank President Mario Draghi cut the benchmark rate to a record 0.5%. The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings dropped 3 bps to 92, the lowest since May 2010. The decline follows the biggest monthly fall since January 2012.”

April 30 – Bloomberg (Abigail Moses): “The cost of insuring against losses on corporate and financial debt is heading for its biggest monthly fall since January 2012. The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with high-yield credit ratings declined to a two-year low of 401 basis points from 486 at the end of last month.”

May 2 – Bloomberg (David Wilson): “Borrowing to buy U.S. stocks is close enough to a record to cause concern that prices may not rise much longer, according to Cullen Roche, founder of Orcam Financial Group LLC… Margin debt amounted to $379.5 billion in March… The total was the second-highest in the history of the NYSE’s figures, going back to 1959. The highest was the $381.4 billion recorded in July 2007.”

May 2 – Bloomberg (Peter Levring and Frances Schwartzkopff): “Denmark’s central bank lowered its benchmark lending rate following a cut from the European Central Bank as policy makers in Copenhagen defend the krone’s peg to the euro… ‘The low monetary policy rates leave a limited leeway for a reduction of Denmark’s Nationalbank’s lending rate,’ the central bank said… ‘In the current situation where the monetary policy counterparties have a large need to place funds at Danmark’s Nationalbank, the monetary deposit rates determine the money market rates and the exchange rate.”

April 29 – Bloomberg (Scott Hamilton): “London homes changed hands at the fastest pace since 2007 in April as the capital’s property market drove a third month of U.K. house-price increases, according to Hometrack Ltd… ‘The real driver of price rises in April has been the London market where demand has grown three times faster than supply over the last quarter,’ said Richard Donnell, director of research at Hometrack. In the city, ‘key market indicators, such as the time on the market, are now back to levels last seen’ during the peak in 2007, he said.”

May 1 – Bloomberg (Neil Callanan): “Investors bought more commercial real estate in central London last year than in the rest of Britain for the first time as buyers from the U.S. to Malaysia favored the U.K. capital, according to broker DTZ. Investors purchased a record 16.1 billion pounds ($25bn) of income-producing office buildings, stores, and warehouses in London last year, a 48%...

May 2 – Bloomberg (Nikolaj Gammeltoft and Whitney Kisling): “Historical relationships between U.S. equity and options prices have come under increasing strain in the past week, with the record rally in the Standard & Poor’s 500 Index awakening demand among both speculators and hedgers. The Chicago Board Options Exchange Volatility Index moved in the same direction as the S&P 500 for four straight days through April 29, including three advances and one drop. That’s the longest stretch of lockstep moves since February 2007… The indexes swing in the opposite direction about 80% of the time.”

Global Credit Watch:

April 30 – Bloomberg (Yalman Onaran): “Slovenia, the first former Communist nation in the euro zone, is facing a typically capitalist dilemma: whether to protect creditors of big banks. Rising loan losses resulting from a housing bust and a second recession in two years have left a hole of about 7.5 billion euros ($9.8bn) at Slovenia-based lenders, investment bank Keefe Bruyette & Woods estimates. That’s a lot for a 35 billion-euro economy: A bank bailout would push government debt above 70% of economic output.”

May 1 – Bloomberg (Benjamin Purvis): “Companies are selling the least bonds in Australia in five years, snubbing record-low yields and casting doubt on central bank optimism that stimulus can support the economy as mining falters. Corporate borrowers raised A$19.6 billion ($20.3bn) from bonds in Australia since Dec. 31, down 34% from the same period of 2012…”

Global Economy Watch:

May 1 – Bloomberg (Michael Heath): “A gauge of Australian manufacturing slumped to a four-year low in April as the sustained strength of the nation’s currency weighed on exporters. The manufacturing index plunged 7.7 points to 36.7 last month… The export index was the lowest since 2004…”

China Bubble Watch:

May 1 – Financial times (Jamil Anderlini): “Growth in China’s manufacturing sector slowed in April, providing further evidence of weakness in the world’s second-largest economy. China’s official purchasing managers' index (PMI) fell to 50.6 in April from 50.9 in March, indicating a slowdown in manufacturing activity that was led by a slump in new export orders… Some analysts took the disappointing PMI reading as a positive signal for future growth prospects, arguing that it could prompt the government to introduce more policies to boost growth. But others pointed to a flood of credit in the economy in the first quarter of 2013 that did not help to pump up growth, suggesting Beijing will not be able to stimulate growth through looser monetary policy. ‘The most worrying aspect of this is not that growth is weak, but that growth is weak despite a torrent of new credit issuance,’ said Alistair Thornton, economist at IHS Global Insight. In the first quarter, the Chinese government’s measure of overall credit in the economy known as ‘total social financing’ increased 58% from the same period a year earlier.”

May 3 – Bloomberg: “China’s service industries expanded at a slower pace last month, adding to the drag on growth in the world’s second-biggest economy after manufacturing lost momentum. The non-manufacturing Purchasing Managers’ Index fell to 54.5 from 55.6 in March… A deceleration in service industries may fuel concern that China’s economic slowdown will extend into a second quarter after two manufacturing indexes declined. Risks that include surging credit, overcapacity and an overheating property market may limit the government’s room to stimulate growth.”

May 2 – Bloomberg: “China’s new home prices jumped in April by the most since December, defying the government’s tightened property curbs, according to SouFun Holdings Ltd. Prices jumped 5.3% from a year earlier last month, 1.4 percentage points faster than March and the biggest gain since housing costs ended eight months of declines in December… Home prices in March rose in the most cities tracked by the government since September 2011 and housing sales jumped 69% in the first quarter, even as the government has accelerated implementing curbs to control prices.”

May 2 – Bloomberg: “Growth in China’s less-developed inland provinces weakened last quarter while expansion in some coastal areas picked up and all regions reported faster gains than nationwide figures… Expansion in southwestern Sichuan was 10.2% in the first quarter, compared with 2012 full-year growth of 12.6%, while neighboring Guizhou’s gross domestic product gains eased to 12.6% from 2012’s 13.6%. Eastern Zhejiang reported 8.3 % growth in the first three months after 8% in 2012 and export-dependent Guangdong showed 8.5%, up from 8.2% last year.”

May 3 – Los Angeles Times (Don Lee): “Feasting on strips of mutton dropped in a simmering pot is a popular dining pastime in China, but what if the meat served is actually made of rat? That may be on the minds of diners after the latest stomach-churning food scandal to hit China. Authorities said that traders bought rat, fox, mink and other uninspected meats -- and after adding red coloring and other chemicals -- sold them as lamb rolls for markets in Shanghai and neighboring Jiangsu province. Police arrested 63 suspects and seized 10 tons of meats and additives, but not before the operation had sold about $1.6 million worth of fake meat over the last four years… The fake lamb scheme in eastern China was among 382 meat-related offenses uncovered during a three-month national campaign that began in late January… Police have arrested 904 suspects, closed 1,721 factories, and seized about 20,000 tons of fake, diseased or otherwise adulterated meat.”

April 29 – Bloomberg: “China will ban the use of military number plates on luxury cars, including Porsche and Bentley, in a crackdown on abuse of vehicle management within the armed forces amid President Xi Jinping’s campaign against corruption.”

India Watch:

May 3 – Bloomberg (Kartik Goyal): “India cut interest rates for a third straight meeting to revive growth, extending the only reduction in borrowing costs among major emerging nations this year. Governor Duvvuri Subbarao lowered the repurchase rate to 7.25% from 7.50%...”

Asia Bubble Watch:

May 1 – Bloomberg (Nichola Saminather): “China led a jump in investment in Asia-Pacific commercial properties to $4.2 trillion in 2012 as economic growth drove up capital values and supported new construction, according to London-based broker DTZ. Investors bought $300 billion of commercial property across the Asia-Pacific region, an 8% increase from 2011 in U.S. dollar terms… China overtook Japan to become the region’s largest market with $1.5 trillion of investments, up from $1.3 trillion in 2011… Tenant demand for high-quality offices in Beijing led to a 23% increase in rents in 2012, while in Shanghai, rising demand from global companies pushed some companies to outer areas in search of lower rents…”

Latin America Watch:

May 1 – Bloomberg (Jonathan Levin and Ben Bain): “Arturo Sandoval, a 25-year-old homeowner in one of Mexico’s low-income developments outside the capital, commutes two hours each way to his job at a Mexico City soap factory. In the Parque San Mateo community where Sandoval bought his home from builder Desarrolladora Homex SAB for about 350,000 pesos ($29,000), neighbors play soccer in the street between rows of abandoned properties. His commute starts with a van to the station, then a bus into the city… Life in the housing development ‘isn’t everything they said it would be,’ he said. San Mateo’s deserted homes are evidence of the exodus from commuter towns that sprang up across Mexico during the last six-year presidential administration as a record 3 million government-backed mortgages and housing credits helped turn builders into billionaires.”

April 30 – Bloomberg (Veronica Navarro Espinosa): “Mexico’s highest-rated junk bonds are saddling investors with the biggest losses in emerging markets as the nation’s homebuilders collapse. Dollar-denominated notes sold by Mexican companies in the BB category have lost 10.5% this month, versus a 0.82% return for similarly rated developing-nation debt, according to Credit Suisse… Homebuilder bonds sank an average of 31.7 cents on the dollar in April as Urbi Desarrollos Urbanos SAB and Corp. Geo SAB defaulted on debt payments. The homebuilder rout, coupled with phone company Maxcom Telecomunicaciones SAB’s warning it may seek bankruptcy protection, threatens to damp Mexican junk bond sales that are off to their fastest start in two years, according to Aberdeen Asset Management and Oppenheimer & Co.”

Europe Watch:

May 3 – Bloomberg (Rebecca Christie): “The euro-area economy will shrink more than previously estimated in 2013 as part of a two-year slump that has pushed up unemployment to a record, according to the European Commission. Gross domestic product in the 17-nation currency bloc will fall 0.4% this year, compared with a February prediction of 0.3%... France, now projected to shrink 0.1% instead of growing by the same amount, joined seven other euro-area economies expected to contract this year.”

April 30 – Bloomberg (Angeline Benoit): “The euro-area jobless rate rose to a record in March, increasing pressure on the European Central Bank to take additional measures to boost growth. The euro-area unemployment rate advanced to 12.1% from 12% in the previous two months… Today’s report showed that 19.2 million people were jobless in the euro area in March, up 62,000 from the previous month. Youth unemployment was at 24%.”

Italy Watch:

May 1 – Bloomberg (Andrew Davis): “Italian Prime Minister Enrico Letta pledged measures to boost economic growth in his first speech to parliament that would cost the government more than 10 billion euros ($13 billion) in lost revenue this year, newspaper La Republicca supported. Possible elimination of IMU tax on primary residences for this year would cost EU4b…”

April 30 – Bloomberg (Lorenzo Totaro): Italy’s unemployment rate remained near a 20-year high in March as companies refrained from hiring amid political gridlock and the longest economic recession in two decades. Joblessness was unchanged at 11.5% after the February reading was revised down from an initial 11.7%... The euro region’s third-biggest economy will shrink 1.8% this year amid rising unemployment and low consumer and investor confidence, Moody’s… forecast April 26.”

April 29 – Bloomberg (Lorenzo Totaro): “Italian banks’ corporate loan book will worsen this year as the euro region’s third-biggest economy remains mired in its longest recession in two decades, according to the nation’s central bank. Non-performing loans as a proportion of total corporate lending will keep rising, the Bank of Italy said… ‘Leading indicators suggest that a further deterioration is under way,’ the report said… The deterioration, especially in ‘the construction sector,’ is mainly linked to the decline in the economy, the central bank said.”

Germany Watch:

April 29 – Bloomberg (Patrick Donahue): “Europe may accelerate a shift away from its austerity-first agenda this week as the new Italian government changes course and a German-Spanish investment pact underscores a renewed focus on combating record unemployment. Yesterday’s swearing in of Italian Prime Minister Enrico Letta ends a political deadlock nine weeks after voters rejected the country’s budget-cutting course. German Finance Minister Wolfgang Schaeuble, a champion of austerity, will travel to Spain today to unveil a plan aimed at spurring investment in Spanish companies… ‘You have to react to economic developments -- we do so in Germany,’ Schaeuble told members of Chancellor Angela Merkel’s Christian Democratic Union… ‘We are not bureaucratic; we are not stupid.’”

April 29 – Bloomberg (Stefan Riecher and Jana Randow): “Germany’s inflation rate slumped to the lowest in more than 2 1/2 years in April, just days before the European Central Bank is due to decide on interest rates. The inflation rate in Europe’s largest economy, calculated using a harmonized European Union method, fell to 1.1% from 1.8% in March. That’s the lowest since August 2010.”