Sunday, December 14, 2014

Weekly Commentary, September 20, 2013 Financial Conditions

The Federal Reserve shocked the markets Wednesday with its decision to furlough QE “tapering.” The Bernanke Fed, having for years prioritized a clear communications strategy, threw unsettled global markets for a loop.

Much has been written the past few days addressing the Fed’s change of heart. I’ll provide my own take, noting first and foremost my belief that Wednesday’s decision likely marks a critical inflection point. A marketplace that had been willing to ignore shortcomings and give the Federal Reserve the benefit of the doubt must now reevaluate. After all the fun and games, the markets will have to come to terms with a divided and confused Fed that has lost its bearings. As much as the Bernanke Fed was committed to the notion of market-pleasing transparency, it had kind of come to the end of the rope and was forced to just throw up its hands.

I’ll make an attempt to place the Fed and markets’ predicament in some context – at least in the context of my analytical framework. This requires some background rehash.

Credit is inherently unstable. When Credit is expanding briskly, the underlying expansion of Credit works to validate the optimistic view (spurring borrowing, spending, investing, speculating and rising asset prices) – which tends to stimulate added self-reinforcing Credit expansion. When Credit contracts, asset prices and economic output tend to retreat, which works against confidence in system Credit and the financial institutions exposed to deteriorating Credit, asset prices and economic conditions. One can say Credit is “recursive.” And with Credit and asset markets feeding upon each another, I’ll paraphrase George Soros’ Theory of Reflexivity: Perceptions tend to create their own reality. Credit cycles have been around for a very, very long time. We’re in the midst of a historic one.

Credit fundamentally changed in the nineties, with the proliferation of market-based Credit (securitizations, the GSEs, derivatives, “repos”, hedge funds and “Wall Street finance”). Unbeknownst at the time – perhaps to this day - marketable securities-based Credit created additional layers of instability compared to traditional (bank loan-centric) Credit.

These new instabilities and attendant fragilities should have been recognized with the bursting of a speculative Bubble in bonds/MBS/derivatives (along with the Mexican collapse) back in 1994/5. Fatefully, policy measures moved in the direction of bailouts, market interventions and backstops. Credit and speculative excesses were accommodated, ensuring a protracted period of serial booms, busts and policy reflations.

Monetary policy fundamentally changed to meet the demands of this New Age marketable securities-based, highly-leveraged and speculation-rife Credit apparatus. The Greenspan Fed adopted its “asymmetric” policy approach, ensuring the most timid “tightening” measures in the face of excess and the most aggressive market interventions when speculative Bubbles inevitably faltered. Greenspan adopted a strategy of “pegging” short-term rates and telegraphing the future course of policymaking. This was apparently to help stabilize the markets. In reality, these measures were instrumental in a historic expansion of Credit, financial leveraging and speculation. The Fed has been fighting ever bigger battles – with increasingly experimental measures - to sustain this inflating monster ever since.

I am a strong proponent of “free market Capitalism.” I just don’t believe financial market pricing mechanisms function effectively within a backdrop of unconstrained Credit, unlimited liquidity and government backstops. I believe this ongoing period of unconstrained global Credit is unique in history. Indeed, this is an open-ended experiment in electronic/digitalized “money” and Credit. This experiment has necessitated an experiment in “activist” monetary management and inflationism. At the same time, these experiments have accommodated an experimental global economic structure. The U.S. economy is an experiment in a services and consumption-based structure with perpetual trade and Current Account Deficits. The global economy is an experiment in unmatched – and persistent - financial and economic imbalances.

U.S. and global economies are at this point dependent upon ongoing rampant Credit expansion. Highly interrelated global financial markets have grown dependent upon the rapid expansion of Credit and marketplace liquidity. The Fed and global central banks have for some time now been desperately trying about everything to spur ongoing Credit expansion (to inflate Credit). Curiously, they avoid discussing the topic and frame the issues much differently.

The Fed pushed short-term rates down to 3% to spur Credit inflation during the early-nineties. Rates were forced all the way down to 1% - and the Fed resorted to talk of the “government printing press” and “helicopter money” in desperate measures to spur sufficient reflationary Credit growth after the bursting of the “technology” Bubble. Even zero rates were insufficient to incite private Credit expansion after the collapse of the mortgage finance Bubble.

With this New Age (experimental) marketable Credit infrastructure crumbling, the Bernanke Fed resorted to a massive inflation of the Fed’s balance sheet – an unprecedented monetization of government debt and mortgage-backed securities. What unfolded was a historic reflation of global securities prices, along with further massive issuance of marketable debt securities. In spite of all the “deleveraging” talk, the growth of outstanding global debt securities went parabolic. Central bank holdings of these securities grew exponentially. Instrumental to the Credit boom, Fed policy spurred Trillions to leave the safety of “money” for long-term U.S. fixed income, international securities and the emerging markets (EM). It is unknown how many Trillions of leveraged speculative positions were incentivized by global central bankers. The combination of an unprecedented policy-induced inflation of prices across securities markets and a low tolerance for investor/speculator losses creates a very serious and ongoing dilemma for the Fed and its global central bank cohorts.

Over the years, I’ve chronicled monetary management descending down the proverbial “slippery slope.” Actually, monetary history is rather clear on the matter: Loose money and monetary inflations just don’t bring out the best in people, policymakers or markets. I definitely don’t believe a massive Bubble in marketable debt and equity securities is conducive to policymaker veracity. I don’t believe a multi-Trillion dollar pool of leveraged speculative finance – that can position bullishly leveraged long or abruptly sell and go short - promotes policy candor. Actually, let me suggest that a global Credit and speculative Bubble naturally promotes obfuscation and malfeasance. Invariably, it regresses into a grand confidence game with all the inherent compromises such an endeavor implies.

I titled a February 2011 CBB “No Exit.” This was in response to the details of the Fed’s plan for normalizing its balance sheet after it had bloated to $2.4 TN (from $875bn in June of ’08). There was simply no way the Fed was going to be able to sell hundreds of billions of securities into the marketplace without inciting risk aversion and de-leveraging. I assumed the Fed’s balance sheet would continue to inflate, though never did I contemplate the Fed resorting to $85bn monthly QE in a non-crisis environment.

I speculated a year ago that the Fed had told “a little white lie.” The Fed was responding to rapidly escalating global risks – right along with the Draghi ECB, the Bank of Japan, the Chinese and others. Open-ended QE was, I believe, wrapped in a veil of an American unemployment problem for political expediency. Meanwhile, the Fed has pushed forward with “transparency” believing it gave them only more control over market prices. And, at the end of the day, the $85bn monthly QE, the unemployment rate target, and long-term (zero rate) “forward guidance” provided a securities market pricing transmission mechanism that must have made Alan Greenspan envious.

The bottom line is that the $160bn (Fed and Bank of Japan) experiment in ongoing monthly QE (along with Draghi’s backstop) only worked to exacerbate global fragilities that were surfacing last summer. I believe increasingly conspicuous signs of excess had the Fed wanting to begin pulling back. Yet just the mention of a most timid reduction of QE had global markets in a tizzy. After backing away from an exit strategy, the Fed has for now backtracked on tapering. It seems I am on an almost weekly basis now restating how once aggressive monetary inflation is commenced it becomes almost impossible to stop.

In my July 12, 2013 CBB, “Bernanke’s Comment,” I highlighted what I thought at the time was a comment for the history books: “If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”

As someone who places “Financial Conditions” at the heart of market and economic analysis, I felt Bernanke had opened a real can of worms on the policy and communications front.

From Wednesday’s FOMC statement: “The committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

Have Financial Conditions really tightened in recent months? Stock prices have surged to all-time record highs. The S&P500 has gained 7.7% in three months, with Nasdaq up 12.4%. The small cap Russell 2000 has surged 11.3% in three months. The Nasdaq Biotech index has jumped 24.8%, increasing its 2013 gain to 53.3% (2-yr gain of 116%). Internet stocks enjoy a three-month gain of 12.6%. The average stock (Value Line Arithmetic) is up 11.2% in three months. Stock prices indicate the opposite of tightening.

Last week set an all-time weekly record for corporate debt issuance. The year is on track for record junk bond issuance and on near-record pace for overall corporate debt issuance. At 350 bps, junk bond spreads are near 5-year lows (5-yr avg. 655bps). At about 70 bps, investment grade Credit spreads closed Thursday at the lowest level since 2007 (5-yr avg. 114bps). It's a huge year for M&A. And with the return of “cov-lite” and abundant cheap finance for leveraged lending generally, U.S. corporate debt markets are screaming the opposite of tightening.

August existing home sales were the strongest since February 2007. National home prices are now rising at double-digit rates. An increasing number of local markets –certainly including many in California – are showing signs of overheating. Prices at the upper-end in many markets are back to all-time highs. And despite a backup in mortgage borrowing costs from record lows, housing markets have yet to indicate a tightening of Financial Conditions. Clearly benefiting from loose lending conditions, August auto sales were the strongest since 2006.

Provide the marketplace a policy target for the unemployment rate and let the economic analysis and forecasting begin. Ditto for CPI and GDP. But “Financial Conditions”? This is an altogether different animal, subjectively in the eye of the beholder - not easily quantified. In my analysis of Financial Conditions, I talk of a broad global “mosaic.” I closely examine scores of indicators, data and markets, doing my best to discern subtle changes in “Financial Conditions,” and speculative and market liquidity dynamics. And within this mosaic, the pertinent and key indicators are in a constant state of flux. I discuss such challenging analysis in terms of a science and an art. How does the Fed define Financial Conditions? Does this imply a market liquidity backstop? Which markets? Under what circumstances? How?

Within my Financial Conditions analytical framework, I view the “leveraged speculating community” as the marginal source of marketplace liquidity. When the hedge funds and others are embracing market risk and leverage, this ensures abundant liquidity and resulting loose Financial Conditions. A move to de-risking/de-leveraging implies a tightening of Financial Conditions. QE only complicates already challenging analysis. The initial QE chiefly involved accommodating speculative de-leveraging (a shifting of positions from the speculators to the Fed’s balance sheet). As such, it actually had a much more muted impact on market liquidity than most appreciated at the time.

Non-crisis QE, on the other hand, has had a profound impact. It has directly injected liquidity into the marketplace, while at the same time inciting additional risk-taking and speculative leveraging. Moreover, this added liquidity and heightened speculation hit already highly speculative/overheated global markets. In short, recent QE had a major inflationary impact on global speculative Bubbles. From this perspective, it’s not too difficult to appreciate why global markets convulsed on the mere talk of even timid Fed tapering. On the margin, today’s QE has unprecedented impact – and this market addiction will not be easily conquered.

So how is it possible that the Fed speaks of a tightening of Financial Conditions with stock prices at record highs, corporate debt yields near record lows and benchmark MBS yields at only 3.43% (10-yr avg. 4.60%)?

Here’s how I see it. For going on five years now, experimental Fed policy purposely inflated bond and stock prices. Bond prices/yields were pushed to unprecedented extremes, with artificially low market yields now suppressed only through ongoing aggressive Fed buying. Similarly, securities and asset price Bubbles have been inflated around the globe. Emerging markets and EM economies, in particular, have suffered from gross Bubble-related excess and maladjustment. Trillions have flowed into various (inflated) markets at home and abroad with little appreciation for the risks monetary policies have created. Just the prospect of a gradual reduction in QE was enough to instigate a destabilizing reversal of speculator and investor flows.

What the Fed likely views as a tightening of Financial Conditions, I see as initial – and inevitable - cracks in the "global government finance Bubble.” The Fed wants to “push back” against a rise in mortgage borrowing costs, while likely content to “push back” on EM fragility as well. A weaker dollar surely helps push back against the unwind of “carry trades” and other speculative de-leveraging. And the Fed surely would prefer to counter some of the tightening that has developed in municipal finance.

Bubble analysis plays prominently in my Financial Conditions analytical framework. Financial Conditions will typically tighten first at the “periphery” – as the weakest (“marginal”) borrower begins to lose access to cheap finance. This marks a key inflection point for Bubbles- and the Fed would clearly want to push back against any risk of a bursting Bubble. After all, faltering liquidity and heightened risk aversion at the fringes tend over time to have expanding contagion effects. May and June saw cracks, and Fed back-peddling continued through Wednesday’s meeting.

After trading as high as 6.37% in July 2007, benchmark MBS yields dropped all the way down to almost 5% by January 2008. The Fed’s response to initial cracks at the periphery of mortgage finance (subprime) actually only extended the problematic inflation at the Bubble’s core (almost $1.1 TN of risky mortgage Credit growth in ’07) – not to mention $145 crude and synchronized global risk market Bubbles. The initial European response to the Greek collapse extended the period of problematic excess and imbalances at Europe’s core. The Fed’s concern for the recent tightening of Financial Conditions at the “periphery” (EM, muni Credit and, perhaps, mortgages) ensures only more time for excess to build at the Bubble’s core (Treasuries, corporate debt, junk and leveraged lending, equities and, basically, anything with a yield).

My chronicling of the Greatest Bubble in History is going on five years now. This thesis is based upon the global nature of current Credit and speculative excess, along with attendant financial imbalances and economic maladjustment. My thesis is premised upon Bubble excess having, after decades, made it to the heart of government finance and contemporary “money.” This implies acute – and intransigent – fragilities, which ensure policymakers won’t have the grit to pull back. As was made even clearer Wednesday, the Fed is foremost determined to push back. And that’s precisely the mindset that has allowed the “granddaddy of all Bubbles” to get completely out of hand.

I believe the Bernanke Federal Reserve made yet another major blunder this week, and the likely price will be only greater market instability.

For the Week:

The S&P500 gained 1.3% (up 19.9% y-t-d), and the Dow added 0.5% (up 17.9%). The S&P 400 MidCaps gained 1.3% (up 22.1%), and the small cap Russell 2000 jumped 1.8% (up 26.3%). The Morgan Stanley Consumer index increased 0.9% (up 24.3%), and the Utilities advanced 1.8% (up 6.2%). The Banks slipped 0.1% (up 24.0%), while the Broker/Dealers gained 0.8% (up 48.1%). The Morgan Stanley Cyclicals were up 1.8% (up 27.1%), and the Transports jumped 2.6% (up 26.1%). The Nasdaq100 rose 1.5% (up 21.2%), and the Morgan Stanley High Tech index advanced 1.4% (up 21.0%). The Semiconductors gained 1.0% (up 28.4%). The InteractiveWeek Internet index increased 1.5% (up 28.8%). The Biotechs added 0.4% (up 43.3%). With bullion little changed, the HUI gold index was up 0.5% (down 47.5%).

One- and three-month Treasury bill rates ended the week at one basis point. Two-year government yields dropped 10 bps to 0.33%. Five-year T-note yields ended the week down 21 bps to 1.48%. Ten-year yields fell 15 bps to 2.74%. Long bond yields declined 7 bps to 3.76%. Benchmark Fannie MBS yields sank 20 bps to 3.43%. The spread between benchmark MBS and 10-year Treasury yields narrowed 7 to 69 bps. The implied yield on December 2014 eurodollar futures sank 17 bps to 0.56%. The two-year dollar swap spread was little changed at 16 bps, while the 10-year swap spread declined about one to 16 bps. Corporate bond spreads were mixed. An index of investment grade bond risk increased 3 to 80 bps. An index of junk bond risk fell 23 to 350 bps. An index of emerging market (EM) debt risk dropped 25 to 315 bps.

Debt issuance remained strong. Issuers included Union Bank $2.0bn, Spectra Energy Partners $1.9bn, Citigroup $1.75bn, SLM Corp $1.25bn, Cummins $1.0bn, HSBC USA $1.0bn, Hockey Merger $950 million, Branch Banking & Trust $750 million, Peco Energy $550 million, Bi-Lo Finance $475 million, Avalonbay Communities $400 million, Toyota Motor Credit $350 million, EDR $300 million and TTX $250 million.

Junk bond funds enjoyed strong inflows of $1.39bn (from Lipper). Junk issuers this week included Hilton Worldwide $1.5bn, Springleaf Finance $950 million, Nissan Motor Acceptance $1.0bn, Nielsen Finance $625 million, Walter Energy $450 million, Nexstar Broadcasting $525 million, Reinsurance Group of America $400 million, Pinnacle $375 million, American Capital $350 million, Hercules Offshore $300 million, Geo Group $250 million and Prospect Holding $150 million.

Convertible debt issuers included BPZ Resources $125 million and Green Plains Renewable $100 million.

International dollar debt issuers included Commonwealth Bank Australia $3.0bn, Svenska Handelsbanken $2.5bn, BNDES $2.5bn, ING Bank $2.0bn, Ontario $1.75bn, Colombia $1.6bn, Reckitt Benskiser $1.0bn, Interamerican Development Bank $850 million, Petroleos Mexicanos $750 million, Armenia $700 million, Eurasian Development Bank $500 million, Borets $420 million, National Australia Bank $200 million, Air Canada $700 million, Boart Longyear $300 million, Life Finance $275 million, and Wuzhou International Holdings $100 million.

Ten-year Portuguese yields dropped 24 bps to 7.02% (up 27bps y-t-d). Italian 10-yr yields fell 29 bps to 4.28% (down 22bps). Spain's 10-year yields declined 19 bps to 4.29% (down 98bps). German bund yields declined 3 bps to 1.94% (up 62bps). French yields fell 9 bps to 2.45% (up 45bps). The French to German 10-year bond spread narrowed 6 to 51 bps. Greek 10-year note yields sank 48 bps to 9.60% (down 87bps). U.K. 10-year gilt yields added one basis point to 2.92% (up 110bps).

Japan's Nikkei equities index ended the week up 2.3% (up 41.8% y-t-d). Japanese 10-year "JGB" yields declined 3 bps to 0.685% (down 10bps). The German DAX equities index jumped 2.0% for the week (up 14.0%). Spain's IBEX 35 equities index was up 2.6% (up 12.3%). Italy's FTSE MIB surged 2.4% (up 10.4%). Emerging markets were mostly higher. Brazil's Bovespa index was up 0.6% (down 11.2%), and Mexico's Bolsa gained 0.3% (down 5.7%). South Korea's Kospi index jumped 3.7% (up 0.4%). India’s volatile Sensex equities index rose 2.7% (up 4.3%). In a shortened trading week, China’s Shanghai Exchange fell 2.0% (down 3.4%).

Freddie Mac 30-year fixed mortgage rates dropped 7 bps to 4.50% (up 101bps y-o-y). Fifteen-year fixed rates were down 5 bps to 3.54% (up 77bps). One-year ARM rates were 2 bps lower to 2.65% (up 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 11 bps to 4.73% (up 58bps).

Federal Reserve Credit expanded $56.4bn to a record $3.672 TN. Over the past year, Fed Credit was up $865bn, or 30.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $564bn y-o-y, or 5.3%, to $11.174 TN. Over two years, reserves were $951bn higher, for 9% growth.

M2 (narrow) "money" supply was little changed at $10.790 TN. "Narrow money" expanded 6.7% ($682bn) over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits fell $23.3bn, while Savings Deposits jumped $22.1bn. Small Time Deposits slipped $2.1bn. Retail Money Funds added $0.1bn.

Money market fund assets declined $1.4bn to $2.658 TN. Money Fund assets were up $90bn from a year ago, or 3.5%.

Total Commercial Paper outstanding rose $11.7bn to $1.047 TN. CP has declined $19bn y-t-d, while increasing $38bn, or 3.8%, over the past year.

Currency Watch:

The U.S. dollar index fell 1.3% to 80.43 (up 0.8% y-t-d). For the week on the upside, the Brazilian real increased 3.2%, the Swedish krona 3.0%, the New Zealand dollar 2.9%, the Swiss franc 2.1%, the euro 1.7%, the Danish krone 1.7%, the Australian dollar 1.6%, the Singapore dollar 1.4%, the Mexican peso 1.4%, the South Korean won 1.1%, the British pound 0.8%, the Taiwanese dollar 0.8%, the Canadian dollar 0.5%, and the South Africa rand 0.4%. The Japanese yen and Norwegian krone were little changed.

Commodities Watch:

The CRB index fell 1.2% this week (down 2.6% y-t-d). The Goldman Sachs Commodities Index dropped 1.8% (down 1.2%). Spot Gold was unchanged at $1,326 (down 21%). Silver added 1.0% to $21.93 (down 28%). November Crude fell $2.79 to $104.75 (up 14%). October Gasoline dropped 3.1% (down 3%), while October Natural Gas added 0.3% (up 10%). December Copper rallied 3.7% (down 9%). December Wheat increased 0.7% (down 17%), while December Corn dropped 1.7% (down 35%).

U.S. Fixed Income Bubble Watch:

September 18 – Bloomberg (Michelle Kaske): “Puerto Rico bonds are staging their longest rally in two months after prices plummeted about 40% this year and yields soared above those on Greek debt. Interest rates on tax-exempt Puerto Rico general obligations that mature in July 2041 and are rated one step above junk climbed to a record 9.29% last week… That compares with about 9% on 30-year securities of Greece, which is graded six levels lower and has received billions of euros of rescue funds.”

Federal Reserve Watch:

September 19 – Financial Times (Michael Mackenzie): “The sudden dashing of carefully managed expectations by the FOMC means investors face a harder time trying to prepare for changes in policy intentions, which only fuels higher market volatility, market participants said. Ultimately, the FOMC’s delay of the taper on Wednesday stands to make it far harder for the central bank to withdraw smoothly from its quantitative easing policy as its credibility on guiding policy intentions has lost some sheen. ‘I was floored and it leaves their credibility in a shambles,” said Michael Kastner, principal at Halyard Asset Management. ‘They communicated the taper was coming and now it’s – ‘we changed our mind’.”

September 20 – Reuters (Jonathan Spicer and Steven C. Johnson): “An outspoken Federal Reserve hawk warned on Friday that the U.S. central bank had harmed its credibility by delaying a highly anticipated reduction in monetary stimulus this week, but another official argued it had been the right thing to do. Policymakers hit the speech circuit as financial markets continued to puzzle over Wednesday’s shock decision by the Fed not to scale back its massive bond buying program… Kansas City Fed President Esther George, the lone dissenter on Wednesday, said she had been ‘disappointed’ by the decision not to begin normalizing policy, after an unprecedented period of ultra-easy U.S. money that has already lasted five years. ‘The actions at this meeting, and the expectations that have been set relative to how markets were thinking about this, created confusion, created a disconnect,’ said George… She has dissented at every Fed meeting this year out of concern its policies could foster future asset bubbles and inflation. ‘Waiting for more evidence at this point in the face of continued economic growth unnecessarily discounts the very real progress that we see, and it also discounts the potential costs of the policy tool,’ she told the Shadow Open Market Committee, a group critical of the Fed's current policy stance.’”

Central Bank Watch:

September 18 – Bloomberg (Scott Hamilton): “Bank of England policy makers voted unanimously to keep policy unchanged this month as an improving economic outlook prompted agreement that no more stimulus was needed. In a switch from August, when some Monetary Policy Committee members saw a ‘compelling’ case for a loosening of policy, the minutes of the Sept. 3-4 meeting showed that ‘no member judged that further stimulus was appropriate at present.’”

U.S. Bubble Economy Watch:

September 20 – Bloomberg (Roxana Tiron and Richard Rubin): “The U.S. House set up what could be a prolonged showdown with the Senate and White House, voting to finance the federal government through Dec. 15 and choke off funding for President Barack Obama’s health-care law. House Republicans said they wouldn’t accept Senate Majority Leader Harry Reid’s plan to remove the health-care language from the bill next week and warned of a temporary government shutdown after the fiscal year ends Sept. 30. ‘We’ll add some other things that they hate and make them eat that, and we’ll play this game up until either Sept. 30, Oct. 3, somewhere in between,’ said first-term Representative Richard Hudson… ‘Harry Reid’s going to realize we’re serious and hopefully at that point, he’ll begin to negotiate with us.’”

September 18 – Bloomberg (Lisa Abramowicz): “America’s companies, from Apple Inc. to Verizon Communications Inc., are saving about $700 billion in interest payments with the Federal Reserve’s unprecedented stimulus. Corporate bond yields over the past four years have fallen to an average of 4.6% from 6.14% in the five years before Lehman Brothers Holdings Inc.’s demise, a savings equal to $15.4 million annually per every $1 billion borrowed. Businesses took advantage of the Fed’s largesse to lock in record low rates, extend maturities and raise cash by selling $5.16 trillion of bonds… ‘The stimulus was a huge saving grace in the economy overall,’ said J. Michael Schlotman, the chief financial officer at… Kroger Co., the grocery store operator that estimates it’s paying about $80 million less in interest than it would have pre-crisis. ‘It probably kept some businesses from failing because they were able to refinance their debt at lower interest payments.’”

September 18 – Associated Press (Bree Fowler): “Life is good for America's super wealthy. Forbes on Monday released its annual list of the top 400 richest Americans. While most of the top names and rankings didn’t change from a year ago, the majority of the elite club's members saw their fortunes grow over the past year, helped by strong stock and real estate markets. ‘Basically, the mega rich are mega richer,’ said Forbes Senior Editor Kerry Dolan. Dolan noted that list's minimum net income increased to a pre-financial crisis level of $1.3 billion, up from $1.1 billion in 2012, with 61 American billionaires not making the cut. ‘In some ways, it's harder to get on the list than it ever has been,’ she said.”

September 20 – Bloomberg (Anna-Louise Jackson and Anthony Feld): “More Americans took to the water in new boats this summer, often buying smaller, less expensive models, as the industry is showing signs of a recovery. Purchases of powerboats -- which include yachts, pontoons and fishing vessels -- rose 18.9% in July from a year earlier, according… Statistical Surveys…”

September 20 – Bloomberg (Cliff Edwards): “Take-Two Interactive Software Inc. said retail sales of its ‘Grand Theft Auto V’ video game surpassed $1 billion in three days, hitting that mark faster than any other game or movie. The title… ‘Call of Duty: Black Ops II,’ from Activision Blizzard Inc., took 15 days in 2012, while the Walt Disney Co. film ‘Marvel’s The Avengers’ made it in 19 days.”

Global Bubble Watch:

September 20 – Bloomberg (Weiyi Lim): “Global equity funds attracted the largest inflows since at least 2005 in the week ended Sept. 18 as investors piled into stocks before the Federal Reserve’s decision to maintain monetary stimulus. The funds lured a net $25.9 billion in the period, Wei Liang Chang, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd., said… citing data from EPFR Global. Developed markets posted $24.3 billion of inflows, while emerging-nation funds drew $1.6 billion… The MSCI All-Country World Index climbed to the highest level since 2008 on Sept. 16 after Lawrence Summers withdrew his bid to become the next Fed chairman… The gauge extended gains after the U.S. central bank unexpectedly maintained its $85 billion monthly bond-purchase program two days later.”

September 19 – Bloomberg (Masaki Kondo, Mariko Ishikawa and John Detrixhe): “Federal Reserve Chairman Ben S. Bernanke’s surprise decision yesterday to refrain from reducing the central bank’s unprecedented stimulus threatens one of the surest bets in currency markets this year. Traders borrowing funds in Japanese yen and using the proceeds to buy dollars earned an annualized 21% this year through Sept. 17, a record based on data compiled by Bloomberg back to 1990. That so-called carry trade was predicated on rising market interest rates in the U.S. as the Fed bought fewer and fewer bonds.”

September 18 – Bloomberg (Nikolaj Gammeltoft and Cecile Vannucci): “The next drop in U.S. equities may spur a bigger jump in the Chicago Board Options Exchange Volatility Index as investors rush to cover their record bets against the gauge, according to Societe Generale SA. Hedge funds and other large speculators have more than doubled short positions on VIX futures to 189,020 contracts since the end of June… The wagers reached a record last month… This year’s rally in U.S. stocks has led to a 19% plunge in the VIX, creating profitable strategies to bet against volatility futures. A decline in equities and subsequent increase in share-price swings would bring losses for VIX short sellers, which may drive them to cover the trades, according to Ramon Verastegui of Societe Generale. Increased demand for the contracts will push volatility higher and may exacerbate the stock-market selloff, he said. ‘The concentrated short in the VIX futures is like a red point if you look at a map of the market, signaling potential risk,’ Verastegui, head of engineering and strategy at the French bank, said… ‘A short squeeze in the VIX will have an impact on the volatility market and that can spill over into other markets, accelerating a move down in the S&P 500.’”

China Bubble Watch:

September 18 – Bloomberg: “New home prices in China’s four major cities rose the most since January 2011 last month, led by a 19% jump in Guangzhou, as the government refrains from imposing further curbs to cool the market. Beijing and Shanghai prices climbed 15% from a year earlier, while in Shenzhen they gained 18%, the National Bureau of Statistics said… Prices rose in 69 of 70 cities tracked by the government, the same as in July. Premier Li Keqiang has come up with no additional measures to rein in property prices since his predecessor Wen Jiabao stepped up a three-year campaign in March to cool the housing market… ‘The government is unlikely to take strong action nationwide to curb the property market, as that may damp economic growth,’ said Zhu Haibin, Hong Kong-based chief China economist with JPMorgan… ‘But local governments should come up with their own property policies by tightening in major cities and making some adjustments in smaller ones that have too much housing supply.’”

September 18 – Bloomberg: “China property developer Zhang Fuguo was rejected by banks for a loan to help keep building two office towers in the central city of Zhengzhou. So he turned to a manufacturer of water and gas meters. The 50 million yuan ($8.2 million) loan last month at a 20% interest rate will help Zhang pay workers and buy materials and was like ‘delivering coal on a snowy day,’ he said… So-called entrusted loans, in which banks are ‘entrusted’ with funds as middlemen between companies, increasingly grease the wheels of China’s economy, withstanding a crackdown on shadow banking this year and rising to a record 293.8 billion yuan in August. The increase was part of a surge in non-bank credit that may add to default risks threatening Premier Li Keqiang’s efforts to sustain 7% expansion this decade. ‘The more that we have financial activity taking place in the shadow-banking system, under the current regulatory standards and regime, the more risky that it is,’ said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. Entrusted loans and other financing outside the main banking system are ‘not so well regulated,’ and ‘people who hold the assets don’t always understand and don’t always know where the money is actually being used,’ said Kuijs, who previously was a World Bank economist in Beijing.”

September 18 – Bloomberg (Foster Wong): “Syndicated loans to Chinese companies are poised for their best quarter in two years, after a cash crunch curbed expansion in the bond market. Alibaba Group Holding Ltd. and Shuanghui International Holdings Ltd. led $21.3 billion of bank loans denominated in either U.S. dollars or yuan since June 30… Including $4 billion of deals in the pipeline, volumes this quarter are set to challenge the $26.8 billion raised in the three months ended Sept. 30, 2011… Premier Li Keqiang is seeking to ensure companies have access to sufficient funds for strategic projects and offshore acquisitions, even as he tightens cash supply to rein in expansion by property developers… ‘Financial stress caused the government to revert to its old lending- and investment-driven playbook,’ said Alaistair Chan, a Sydney-based economist for Moody’s Analytics Inc.”

India Watch:

September 20 – Bloomberg (Kartik Goyal): “India’s central bank Governor Raghuram Rajan surprised analysts by raising the benchmark interest rate in his first policy review, seeking to rein in inflation that’s hurt the poor and dimmed economic prospects. Rajan, who took office two weeks ago, boosted the repurchase rate by a quarter point to 7.5%, the first increase since 2011… Rajan acted even after the Federal Reserve’s decision two days ago to maintain U.S. monetary stimulus eased pressure on the rupee, which has tumbled since May. ‘It shows their clarity and seriousness in dealing with elevated inflation,’ said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore. The RBI is ‘sending the right hawkish signals’ and will probably raise the repo rate again, he said.”

September 16 – Bloomberg (Kartik Goyal): “Indian inflation unexpectedly accelerated to a six-month high in August as the rupee’s slide stoked import costs, adding pressure on central bank Governor Raghuram Rajan to sustain efforts to support the currency. The wholesale-price index rose 6.1% from a year earlier, compared with July’s 5.79% climb… Rajan unveils his first monetary-policy decision this week after becoming governor on Sept. 4 and inheriting interest-rate increases from July aimed at aiding the currency… ‘Monetary tightening can’t be reversed until we start seeing a consistent decline in inflationary pressures,’ said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai. ‘India has entered a stagflationary phase.’”

Latin America Watch:

September 18 – Bloomberg (Ben Bain): “Three years after Mexico took advantage of the Federal Reserve’s unprecedented stimulus effort to sell the world’s longest-dated government debt, the Latin America nation’s timing is proving to be prescient. Mexico’s bonds due 2110 have plunged 21.2 cents since Fed Chairman Ben S. Bernanke said on May 22 that policy makers may taper their asset purchases of $85 billion each month. On a total return basis, the 17.4% decline was the most among investment-grade sovereign notes maturing in 30 years or more… The correlation between the 30-year U.S. notes and the 100-year bonds reached an all-time high this month. Modified duration, which measures a bond’s sensitivity to rate changes, was 16 for Mexico’s 100-year notes, compared with 13.8 for Brazil’s longest-dated dollar-denominated notes, which mature in 2041.”

Europe Crisis Watch:

September 16 – Bloomberg (Rebecca Christie and Jim Brunsden): “European Central Bank President Mario Draghi put his weight behind a European Union banking union during a trip to Berlin, two days after Germany led an attack on a proposal to centralize control of failing lenders. German Finance Minister Wolfgang Schaeuble sought to keep responsibility for failing banks in national hands during two days of meetings… He led a chorus of dissent against the European Commission’s plan to give itself final say over when to close banks and to create a 55 billion-euro ($73bn) common fund for resolution costs. If Germany derails momentum towards a year-end deal on a Single Resolution Mechanism, it may imperil efforts to restore confidence in the euro zone’s financial system.”

September 16 – Bloomberg (Rebecca Christie and Jim Brunsden): “European Union attempts to centralize control of failing banks stumbled under a German-led attack that may imperil efforts to restore confidence in the euro zone’s financial system. If the plan doesn’t move forward quickly, the European Central Bank won’t be able to count on cross-border backstops if it encounters problems at euro-area banks. The ECB is scheduled to begin supervising lenders in the currency zone as soon as October 2014, forcing the EU to grapple with who should decide when to close a bank and who will pay for it. ‘There’s quite a lot to do,’ German Finance Minister Wolfgang Schaeuble told reporters… ‘The path that the commission has proposed toward a resolution mechanism is a rocky one. There can be no doubt about it: we need to be on a legally certain foundation.’ Schaeuble said the European Commission’s proposal for a Single Resolution Mechanism must be overhauled because it’s on shaky legal ground and could endanger national control of budgets. In Vilnius, the German was joined by critics from Sweden to Slovakia.”

September 18 – Bloomberg (Ben Sills and Esteban Duarte): “Spain’s budget deficit is slipping from its target, just as investors load up on its debt. The budget shortfall excluding town halls was 5.27% of gross domestic product in the first seven months… The target for the full year is 6.5%... ‘The market has been extraordinarily sanguine,’ said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. ‘There is a clear risk of an upturn in market concern about the euro zone. For Spanish yields, the risk is that they head up.’”

Germany Watch:

September 20 – Financial Times (Stefan Wagstyl in Tuttlingen): “Mechthild Wolber is defending the strongest redoubt of Germany’s beleaguered liberal Free Democrats. The blonde business training specialist is standing for parliament in the prosperous hills of Baden-Württemberg, close to the Black Forest. This is home turf for Germany’s Mittelstand, the legions of family-owned enterprises. And it has long been home turf for the FDP… In the 2009 election, the constituency gave the FDP its best result, 22%, compared with 14.7% nationally. But this time it is different. The FDP’s support has collapsed countrywide after it joined Angela Merkel’s Christian Democrats in government and failed to deliver promised tax reforms. A lacklustre election campaign has seen popular backing fall dangerously close to the 5% parliamentary threshold. If it fails for the first time in its 65-year history, it will send shockwaves through German politics.