Saturday, December 6, 2014

Weekly Commentary, October 12, 2012: The Myth of Deleveraging

A Bloomberg headline from earlier in the week caught my attention: “U.S. Downgrade Seen as Upgrade as $4 Trillion Debt Dissolved.” As someone that analyzes the data closely – and disputes the entire notion of deleveraging – I had to read on:

“U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating. Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago… Private-sector borrowing is down by $4 trillion to $40.2 trillion. Reduced borrowing means there is less competition for the U.S. Treasury Department as it sells debt to fund spending programs to help the nation recover from the worst financial crisis since the Great Depression. Credit-rating firms are discounting the improvement even as debt, equity and currency markets suggest the U.S. is more creditworthy than before Standard & Poor’s stripped the nation of its AAA grade in 2011. Deleveraging in the private sector may allow households to boost spending, which accounts for about 70% of the economy, and increase their capacity to pay taxes.”

The data and Macro Credit Analysis always pose challenges, so I figured it was worth a deeper dive. This requires going directly to the Federal Reserve’s own Z.1 data.

Total system Credit Market Debt Outstanding ended Q2 2012 at a record $55.031 TN. As a percentage of GDP, this was 352.6%, down from 371.6% at the end of 2008. I’ll attempt to explain why this actually does not reflect system debt deleveraging.

Total system-wide Credit Market Debt combines Total Non-Financial Market Debt along with Financial Sector Credit Market Debt (FSCMD). Total Non-Financial Market Debt ended Q2 at a record $38.924 TN - and 249% of GDP. This compares to Q4 2008 total Non-Financial debt of $34.479 TN - and 240% of GDP. The post-2008 decline in total debt and the improvement in the ratio of total debt/GDP are predominantly explained by the contraction in Financial Sector Credit Market borrowings. Total FSCMD peaked at $17.123 TN during Q4 2008, or 119% of GDP. Total FSCMD ended Q2 2012 at $13.838 TN, down $3.285 TN to 89% of GDP. There are crucial Credit Dynamics at work here worth exploring.

Combining Non-Financial and Financial Sector debt incorporates an element of double counting. Say a new homeowner takes out a $100,000 mortgage to buy a new home. This would add $100,000 to Household Mortgage debt (a component, along with Corporate and Governmental borrowings, of Non-Financial debt). If this mortgage was then securitized and sold into the marketplace, this would as well add $100,000 to Financial Sector (MBS or ABS) Market liabilities/debt.

Perhaps there’s still some value in using Total System Credit, despite the double counting. Yet it has become a flawed aggregate for the purpose of supporting the “deleveraging” thesis. Interestingly, during the Mortgage Finance Bubble, most analysts were content to proclaim “double counting!” – and then conveniently disregard myriad ramifications of an unprecedented financial sector expansion. In fact, the combination of Non-Financial and Financial proved among the best indicators of mounting systemic fragilities. Why? Because it captured the “double the risk” dynamic associated with aggressively (I’m being kind here) intermediating Bubble-period Credit risk. Indeed, the total debt aggregate went parabolic right along with systemic risks during the “terminal” phase of Mortgage Finance Bubble excess.

Importantly, the doubling of FSCMD between 2001 and 2007 reflected the intensive risk intermediation required to transform increasing quantities of risky mortgage debt into instruments perceived as safe and liquid (“money”-like) stores of value in the marketplace. Even poor quality mortgage loans were pooled and structured into mostly top-rated marketable securities. Indeed, “Wall Street Alchemy” and the “Moneyness of Credit” were instrumental in creating the capacity for the Credit system to easily double mortgage debt during the Bubble. And from the Financial Sector perspective, this dynamic was fundamental to the near doubling of FSCMD during this period, largely through the expansion of MBS, ABS, GSE obligations, and sophisticated Wall Street off-balance sheet “special purpose vehicles” and such.

Financial Sector Credit Market Debt ended year 2000 at $8.168 TN. GSE issues (agency debt and MBS) and Asset-Backed Securities (ABS) ended 2000 at $4.320 TN and $1.504 TN, respectively. The market debt of Depository Institutions, Finance Companies and REITs combined for $1.506 TN, while Brokers & Dealers, Holding Companies, and Wall Street Funding Corps ended at a combined $831bn.

Let’s fast-forward to December 31, 2008, after mortgage Credit had more than doubled. FSCMD ended the year at $17.123 TN, up 110% in eight years of historic “Wall Street Alchemy.” The process of transforming increasingly risky debt into beloved instruments (specially-made for leveraged speculation) saw GSE debt/MBS jump 89% to $8.142 TN. ABS, largely “private-label” Wall Street mortgage-backed securities, ballooned 174% to $4.123 TN. Depository Institutions, Finance Companies and REITs saw their combined Market Debt increase 70% to $2.227 TN. Meanwhile, at the heart of the “alchemy,” Brokers & Dealers, Holding Companies, and Wall Street Funding Corps combined for Market Debt of $2.204 TN, an increase of 165% in eight years.

Now, let’s update the data for the post-Mortgage Finance Bubble backdrop. As noted above, Total FSCMD ended Q2 2012 at $13.838 TN, a decline of $3.285 TN since the conclusion of 2008. GSE debt/MBS declined $626bn, or 8%, to $7.517 TN, a rather modest contraction considering their dismal financial circumstances. Notably, ABS dropped $2.267 TN, or 55%, to $1.856 TN.

The three Trillion-plus contraction in FSCMD did reduce Total System Market Debt – in the process seemingly improving debt-to-GDP ratios. It is not, however, indicative of true system deleveraging and surely doesn’t reflect an improvement in our nation’s overall Credit standing. Far from it. From a Macro Credit Analysis perspective, the decline in FSCMD is instead reflective of fundamental changes in both the type of debt now fueling the boom and the corresponding nature of system risk intermediation.

First of all, mortgage debt is about to wrap up its fourth straight year of post-Bubble contraction. Problem loan charge-offs have played a significant role, as have individuals using lower debt service costs (and near-zero returns on savings!) to speed the repayment of outstanding mortgages. And, importantly, the decline in home values and the steep drop in transaction volumes have reduced demand for new mortgage debt – hence the need to intermediate mortgage Credit. That said, the biggest factor behind the drop in FSCMD has been the activist Federal Reserve.

The Fed’s balance sheet is separate from the Financial Sector. Federal Reserve Assets ended 2007 at $951bn. Fed holdings ended Q2 2012 at $2.882 TN, up $1.931 TN, or 203%, in 18 quarters. The Fed essentially transferred $2 TN of Financial Sector liabilities to a secure new home on its balance sheet. Some may refer to this as “deleveraging,” but I won’t.

Importantly, the Fed’s moves to collapse interest rates and monetize debt (in conjunction with mortgage assistance programs) incited a major wave of mortgage refinancing. And through the refi process, large quantities of private-label mortgages (previously included in FSCMD as ABS) were essentially transformed into sparkling new GSE-backed mortgage securities – and many then conveniently found their way onto the Federal Reserve’s rapidly inflating balance sheet. This provided critical liquidity that allowed highly-leveraged Wall Street proprietary trading desks, hedge funds and banks to de-risk/de-leverage. This bailout accommodated deleveraging for the financial speculators, yet for the real economy the boom in Non-Financial debt ran unabated.

As noted above, Total Non-Financial Market debt ended this year’s second quarter at $38.924 TN and 249% of GDP – both all-time records. Garnering all the focus from the deleveraging crowd, Total Household Debt has indeed declined since 2008 – having dropped $787bn, or 5.8%, to $12.896 TN. At the same time, Federal debt has increased $4.689 TN to $11.050 TN. Non-Financial Corporate debt increased $434bn since ’08 to end Q2 2012 at a record $11.990 TN. State & Local debt has expanded $101bn since ’08, ending Q2 at about $3.0 TN. The data is the data - and Deleveraging is a Myth.

A 100% increase in Federal debt and 200% growth in the Federal Reserve’s balance sheet are surely not indicative of system de-leveraging. Such extraordinary Credit developments do, however, have profound effects throughout the markets and real economy. The ongoing Credit expansion has inflated incomes, spending, corporate earnings and securities prices, in the process sustaining for now the U.S. economy’s Bubble structure. And I would argue strongly that the data support the thesis that our system remains dominated by Bubble Dynamics.

Also keep in mind that, in contrast to risky mortgage debt, federal debt requires little intermediation. The marketplace absolutely loves it just the way it is, conspicuous warts and all. For now, at least, it is “money” and shares money’s dangerous attribute of enjoying virtually insatiable demand. The only alchemy necessary is to keep those electronic “printing presses” running 24/7. It is, after all, the massive inflation of federal debt that is inflating incomes, cash-flows and profits, equities and fixed-income securities prices, and government tax receipts and expenditures – in the process validating the “moneyness” of the ever-expanding level of system debt (Ponzi Finance).

The history of money is a sad state of affairs. Failing to learn from a litany of previous monetary fiascos, “money” is these days being abusively over-issued. And when the marketplace inevitably decides that over-issuance (in conjunction with only deeper structural maladjustment) has sufficiently impaired the “moneyness” of federal and related debt, there will be no one to step in to backstop Washington’s Creditworthiness. There will be no entity left with the wherewithal for backstopping system “moneyness,” as the Treasury and Federal Reserve have done for Trillions of intermediated mortgage debt since the bursting of the previous Bubble. Moreover, in the meantime, outrageous fiscal and monetary policies will continue to foment uncertainties that will impinge the type of sound investment and wealth creation necessary to get our economy on sounder footing.

For the Week:

The S&P500 declined 2.2% (up 13.6% y-t-d), and the Dow fell 2.1% (up 9.1%). The Morgan Stanley Cyclicals dropped 2.2% (up 10.9%), while the Transports were little changed (up 0.5%). The Morgan Stanley Consumer index declined 1.5% (up 10.7%), and the Utilities dipped 0.8% (unchanged). The Banks were down 2.7% (up 27.0%), and the Broker/Dealers were 2.1% lower (up 0.1%). The S&P 400 Mid-Caps declined 2.1% (up 11.0%), and the small cap Russell 2000 dropped 2.4% (up 11.1%). The Nasdaq100 was down 3.3% (up 19.4%), and the Morgan Stanley High Tech index sank 3.4% (up 12.4%). The Semiconductors were hit for 4.3% (up 0.6%). The InteractiveWeek Internet index declined 3.2% (up 11.7%). The Biotechs were slammed for 5.1% (up 39.5%). With bullion down $26, the HUI gold index dropped 3.6% (down 0.6%).

One-month Treasury bill rates ended the week at 12 bps and three-month bills at 10 bps. Two-year government yields were little changed at 0.26%. Five-year T-note yields ended the week down a basis point to 0.66%. Ten-year yields fell 9 bps to 1.66%. Long bond yields fell 14 bps to 2.83%. Benchmark Fannie MBS yields dropped 7 bps to 2.08%. The spread between benchmark MBS and 10-year Treasury yields widened 2 bps to 42 bps. The implied yield on December 2013 eurodollar futures declined 1.5 bps to 0.395%. The two-year dollar swap spread was down about 2 to 12 bps, and the 10-year dollar swap spread declined one to 6 bps. Corporate bond spreads widened. An index of investment grade bond risk rose 3 to 98 bps. An index of junk bond risk jumped 19 to 506 bps.

Debt issuance slowed somewhat. Investment grade issuers this week included John Deere $1.0bn, Erac USA Finance $1.25bn, MassMutual $500 million, American Honda Finance $400 million, NStar Electric $400 million, PPL Capital Funding $400 million, Private Export Funding $400 million, Alabama Power $400 million, and Reed Elsevier $250 million.

Junk bond funds saw outflows of $114 million (from Lipper). Junk issuers included HD Supply $1.0bn, Western Gas Partners $670 million, Transdigm $550 million, Jaguar Holding $525 million, CVR Refining $500 million, Jo-Ann Stores $325 million, and Banco Continental $200 million.

I saw no convertible debt issued.

International dollar bond issuers included Mizuho Bank $2.5bn, Norddeutsche Landesbank $1.0bn, and Shelf Drill Holdings $475 million.

Spain's 10-year yields declined 6 bps to 5.58% (up 54bps y-t-d). Italian 10-yr yields fell 7 bps to 4.96% (down 207bps). German bund yields dropped 8 bps to 1.44% (down 38bps), and French yields fell 12 bps to 2.14% (down 100bps). The French to German 10-year bond spread narrowed 4 bps to 70 bps. Ten-year Portuguese yields sank 18 bps to 7.80% (down 497bps). The new Greek 10-year note yield declined 33 bps to 17.69%. U.K. 10-year gilt yields were down 5 bps to 1.72% (down 26bps). Irish yields dropped 21 bps to 4.58% (down 368bps).

The German DAX equities index declined 2.2% (up 22.6% y-t-d). Spain's IBEX 35 equities index dropped 3.8% (down 10.7%), and Italy's FTSE MIB lost 2.3% (up 2.8%). Japanese 10-year "JGB" yields declined a basis point to 0.76% (down 23bps). Japan's Nikkei sank 3.8% (down 3.3%). Emerging markets were mostly lower. Brazil's Bovespa equities index gained 1.0% (up 1.2%), while Mexico's Bolsa slipped 0.6% (up 12.4%). South Korea's Kospi index dropped 3.1% (up 5.9%). India’s Sensex equities index fell 1.4% (up 20.8%). China’s Shanghai Exchange gained 0.9% (down 4.3%).

Freddie Mac 30-year fixed mortgage rates increased 3 bps to 3.39% (down 73bps y-o-y). Fifteen-year fixed rates rose a basis point to 2.70% (down 67bps). One-year ARMs were up 2 bps to 2.59% (down 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.01% (down 82bps).

Federal Reserve Credit expanded $11.8bn to $2.797 TN. Fed Credit was down $42bn from a year ago, or 1.5%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 10/10) declined $5.9bn to $3.587 TN. "Custody holdings" were up $167bn y-t-d and $184bn year-over-year, or 5.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $468bn y-o-y, or 4.6% to a record $10.695 TN. Over two years, reserves were $1.763 TN higher, for 20% growth.

M2 (narrow) "money" supply surged $74.0bn to a record $10.197 TN. "Narrow money" has expanded 7.6% annualized year-to-date and was up 6.9% from a year ago. For the week, Currency increased $2.8bn. Demand and Checkable Deposits slipped $1.4bn, while Savings Deposits surged $73.1bn. Small Denominated Deposits declined $2.4bn. Retail Money Funds rose $2.0bn.

Money market fund assets were little changed at $2.562 TN. Money Fund assets were down $132bn y-t-d, with a one-year decline of $74bn, or 2.8%.

Total Commercial Paper outstanding fell $10.2bn to $995 billion CP was up $6bn y-t-d, while having declined about a billion from a year ago.

Currency Watch:

The U.S. dollar index increased 0.4% to 79.67 (down 0.6% y-t-d). For the week on the upside, the Singapore dollar increased 0.6%, the South African rand 0.6%, the Australian dollar 0.5%, the Japanese yen 0.3%, and the Taiwanese dollar 0.1%. For the week on the downside, the Swedish krona declined 1.4%, the Danish krone 0.8%, the euro 0.7%, the Brazilian real 0.6%, the Mexican peso 0.6%, the Norwegian krone 0.5%, the Swiss franc 0.5%, the British pound 0.4%, the New Zealand dollar 0.2% and the Canadian dollar 0.2%.

Commodities Watch:

October 11 – Bloomberg (Jeff Wilson): “Corn futures jumped the most in two weeks after a government report showed global inventories will drop more than expected as the worst U.S. drought in more than 50 years cuts output by the most since 1996. Worldwide inventories on Oct. 1 will be 117.27 million metric tons, down from 123.95 million predicted a month ago and 131.54 million estimated this year… Reserves in the U.S., the largest grower and exporter, will fall 37% to 619 million bushels…”

The CRB index slipped 0.3% this week (up 0.4% y-t-d). The Goldman Sachs Commodities Index gained 0.9% (up 3.2%). Spot Gold was hit for1.5% to $1,754 (up 12.2%). Silver fell 2.6% to $33.67 (up 21%). November Crude rallied $1.98 to $91.86 (down 7%). November Gasoline dropped 2.0% (up 9%), while November Natural Gas jumped 6.3% (up 21%). December Copper declined 2.0% (up 8%). December Wheat was little changed (up 31%), while December Corn added 0.6% (up 16%).

Global Credit Watch:

October 8 – Dow Jones (Matina Stevis and Gabriele Steinhauser): “Greece’s public debt may be even higher than previously feared in 2020, three senior European officials said… The officials said debt could be as high as 150% of gross domestic product by 2020 under a distressed economic scenario, up from a projection of 146% GDP in March and way above the 120% GDP mark described as ‘sustainable’ according the International Monetary Fund's analysis… The IMF has revised its projections of the crucial figure upwards following a worse-than-expected recession in Greece and despite a EUR100 billion ($130bn) restructuring of Greece's privately held debt earlier this year… The IMF can’t, by statute, continue funding a program if a country’s debt isn’t deemed ‘sustainable’ based on macroeconomic analysis.”

October 9 – Bloomberg (Ben Sills): “The black hole in Spain’s budget has grown faster than Prime Minister Mariano Rajoy’s attempt to cut it, portending the same dynamic that has squeezed Greece. The harshest austerity since the return to democracy in 1978 has failed to contain the deficit as the economy sinks deeper into recession. The shortfall rose in the first half of the year, as it did in the previous 12 months. Even after a sales-tax increase and health-care cuts kick in this quarter, it may still approach last year’s 9.4% of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid.”

October 9 – Bloomberg (Sharon Smyth and Charles Penty): “Home foreclosures in Spain, which disproportionately affected lower-income immigrants after the real estate bubble burst, are spreading to formerly well-to-do families and businessmen as they run out of ways to pay mortgages in a deepening recession. Spanish business people, upper middle class families and their loan guarantors, typically parents of first-time buyers, now account for 60% of foreclosures in Madrid, according to AFES, an association that advises homeowners facing repossession. Three years ago, 80% of foreclosures were on the homes of immigrants, usually the first to lose jobs and fall behind on loan payments in a souring economy. They now comprise 40% of the total… ‘Repossessions are encroaching further into the city centers, like an overflowing river,’ said Emilio Miravet, head of real estate finance at the Spanish property unit of advisory and investment firm Catella AB.”

October 9 – Wall Street Journal (Matthew Dalton): “France, Spain and several other euro-zone governments won't hit budget deficit targets agreed to with European authorities, the International Monetary Fund said… setting the stage for a contentious debate over whether the governments should pursue more cuts or allow the targets to slip. Governments across the European Union have been slashing spending and raising taxes to bring their deficits back in line with the bloc's budget rules, which call for deficits to remain under 3% of gross domestic product… The IMF said in its semiannual economic outlook that it expects France’s deficit to be 4.7% of GDP this year…”

October 9 – Dow Jones (Stephen L. Bernard): “Even if European officials begin to buy Spanish sovereign debt, the country might not avoid having to take more drastic action to alleviate stress in its bond markets, according to a new report… co-authored by a highly influential sovereign-debt lawyer who played an instrumental role in Greece's recent debt restructuring. Spain is now likely headed for what Cleary Gottlieb attorney Lee Buchheit and G. Mitu Gulati consider the second of five options for sovereign-debt crises. Spain is likely to be forced to seek active, official sector intervention--such as bond purchases by the European Central Bank and the region's bailout fund, the European Stability Mechanism… now that the first option--the most palatable one--is failing. That more enticing option was for politicians and officials to verbally persuade investors Spain eventually would find financial footing and have enough faith in future budget adjustments for yields to be driven lower immediately… Mr. Buchheit, who is the architect behind the legal strategy of Greece's debt restructuring and many other sovereign-debt restructurings over the past 20 years, said the ECB's outright-monetary-transaction program announced last month to buy short-term bonds in the secondary market likely needs to happen soon for Spain.”

October 8 – Bloomberg (James G. Neuger and Stephanie Bodoni): “European governments set up a full-time 500 billion-euro ($648bn) fund to aid debt-swamped countries and, not for the first time in the three-year crisis, expressed confidence that the extra financial muscle won’t be needed anytime soon. Finance ministers from the 17 euro countries declared the European Stability Mechanism operational, while saying that Spain, its biggest potential near-term customer, isn’t on the verge of tapping it. Decisions were also put off on Greece’s next aid payment and on an assistance program for Cyprus. Creation of the ESM ‘makes the strategy of member states credible and equips the euro area with much better tools to appropriately respond to future crises,’ Luxembourg Prime Minister Jean-Claude Juncker told reporters… The ESM will replace the temporary European Financial Stability Facility, which has spent 192 billion euros of its 440 billion euros on loans to Ireland, Portugal and Greece. The two funds will run in parallel until the EFSF is phased out in mid-2013.”

October 11 – Bloomberg (Radoslav Tomek and John Glover): “Spain’s downgrade threatens to undermine the European Stability Mechanism by accelerating the slide in collective ratings of nations backing the bailout fund. The… debt crisis dragged the average grade almost three steps lower since the fund was given the go ahead in 2010 to the border of single A, compared with the top ranking the ESM holds. Standard & Poor’s downgraded Spain yesterday for the third time this year, with the euro area’s fourth-largest economy now at the cusp of junk.”

October 10 – Bloomberg (Sandrine Rastello and Simone Meier): “The International Monetary Fund said European banks may need to sell as much as $4.5 trillion in assets through 2013 if policy makers fall short of pledges to stem the fiscal crisis, up 18% from its April estimate. Failure to implement fiscal tightening or set up a single supervisory system in the timing agreed could force 58 European Union banks from UniCredit SpA to Deutsche Bank AG to shrink assets, the IMF wrote… That would hurt credit and crimp growth by 4 percentage points next year in Greece, Cyprus, Ireland, Italy, Portugal and Spain, Europe’s periphery. ‘There is definitely a need for deleveraging in Europe,’ said Michael Seufert, an analyst at Norddeutsche Landesbank in… Germany, with a ‘negative’ rating on the European banking sector. ‘The danger is that this produced a downward spiral as the regulation gets stricter and stricter and the global economy cools, potentially meaning more writedowns for banks. States in the periphery are hit hardest.’”

Germany Watch:

October 10 – New York Times (Jack Ewing): “In what could be interpreted as a subtle escalation of tension among top central bankers in the euro zone, the German Bundesbank said… that it welcomed plans by the country’s Constitutional Court to determine whether it was legal for the European Central Bank to buy government bonds. The euro zone crisis has eased considerably since Mario Draghi, the president of the central bank, announced plans last month to hold down borrowing costs for Spain and other troubled countries by buying their bonds on the open market. But Jens Weidmann, the president of the Bundesbank, has objected loudly… Germany’s Federal Constitutional Court said last month that it would consider the legality of bond buying as part of a larger suit brought by citizens and some euro-skeptic members of the German Parliament. The suit challenges Germany’s participation in the euro zone rescue fund. In an initial ruling, the court refused to block Germany’s participation in the rescue measures. But it has not ruled on the underlying constitutional issues raised by the suit. The Bundesbank, while emphasizing that it did not ask for a ruling on bond buying, said… that it would welcome clarity.”

October 11 – Spiegel: “Chancellor Angela Merkel had been hoping that her trip to Athens earlier this week would help demonstrate Germany's solidarity with Greece as it struggles to overcome its debt crisis. Just two days later, however, leading economic institutes in Germany have darkened the mood considerably. The institutes presented their autumn economic forecast…, and cast doubt on whether Greece would be able to remain part of the euro. ‘We believe that Greece cannot be saved,’ said Joachim Scheide from the Kiel Institute for the World Economy, one of several top economic institutes tasked by the German government with examining the state of the country's economy twice a year. Oliver Holtemöller, of the Halle Institute for Economic Research, was also pessimistic… He said it is unlikely that Greece will ever be able to free itself from its debt burden -- and called for a new debt haircut for the country.”

October 8 – Bloomberg (Stefan Riecher): “German industrial production declined in August as the sovereign debt crisis damped euro-area economic growth and prompted companies to scale back investment. Production fell 0.5% from July, when it gained 1.2%... From a year earlier, production fell 1.4%...”

Global Bubble Watch:

October 8 – Bloomberg (Rodney Jefferson and Lukanyo Mnyanda): “Investment strategists in Scotland overseeing more than $850 billion have seen the future and it works -- by central banks around the world maintaining their bond-buying programs. Policy makers and politicians globally introduced 270 ‘easing initiatives’ in past 13 months, according to International Strategy & Investment… ‘It’s continually buying time, all these policies they are putting in place,’ said Mike Turner, head of strategy at Aberdeen Asset Management Ltd. in Edinburgh, Scotland’s largest fund company. ‘It will be a long, long road and the stimulatory policy measures will double or treble by the end of it.’”

October 10 – Reuters (Sam Forgione): “Investors in U.S.-based mutual funds pumped the most new money into bond funds in nearly three years as the exodus from stock funds continued amid renewed global economic jitters, data from the Investment Company Institute showed… Bond funds took in $10.87 billion in estimated new money in the week ended Oct. 3… The big move into bond funds comes even after the Federal Reserve took steps in September to push down borrowing costs with its plan to buy up to $40 billion in mortgage securities each month. Stock funds, meanwhile, had outflows of $11.08 billion, the most since Aug. of 2011…”

October 8 – Bloomberg (Sarika Gangar): “The global default rate for speculative-grade debt increased 0.1 percentage point during the third quarter to 3% in September, the highest level in almost two years, according to Moody’s… The ratings company’s trailing 12-month global speculative-grade default rate increased from 2.9% in the second quarter and compares with 1.8% a year ago… The rate remains less than a historical average of 4.8% in data going back to 1983…”

October 11 – Bloomberg (Sarika Gangar and David Holley): “A type of financing that peaked before credit markets seized up four years ago is staging a comeback just as concern mounts that corporate profits are falling and the global economy is losing steam. Offerings of $2.1 billion in the past 30 days of so-called payment-in-kind notes, which allow borrowers to pay interest with extra debt, account for more than a third of this year’s $6 billion of deals… Sales of high-yield, high-risk bonds are soaring to a record pace as interest rates hover at unprecedented lows send investors toward riskier assets. JPMorgan Chase & Co. says credit metrics are deteriorating, with leverage at investment- grade borrowers potentially approaching financial crisis levels by year-end…”

China Bubble Watch:

October 8 – Bloomberg: “China’s new home prices rose for a fourth month as a rebound in property sales eased developers’ funding woes, according to SouFun Holdings Ltd. Prices in September climbed 0.17% from August to 8,753 yuan ($1,393) per square meter (10.76 square feet)…”

October 10 – Bloomberg (Sanat Vallikappen and Stephanie Tong): “China may become the world’s wealthiest country by household assets after the U.S. in five years as the nation’s middle-class consumers grow richer, Credit Suisse Group AG forecast. The nation will add $18 trillion in household wealth by 2017, taking its total to $38 trillion… That would surpass Japan’s $35 trillion, and be less than half of the U.S.’s $89 trillion.” 

Japan Watch:

October 11 – Bloomberg (Aibing Guo and Rakteem Katakey): “China and Japan sat down for talks and agreed to jointly develop a natural gas field under the East China Sea, defusing a dispute between Asia’s biggest economies over who owns the reserves. That was in 2008. The accord, hailed as a model for cooperation at the time, has yet to be carried out and the countries now face a new territorial dispute, also in the East China Sea. The quarrel over who owns the uninhabited islands called Diaoyu by China and Senkaku by Japan is again linked to a prize beneath the ocean that may hold enough oil to keep China running for 45 years. China is the world’s largest energy consumer and is running out of oil because its aging onshore fields cannot keep pace with near double-digit economic growth.”

October 11 – MarketNews International: “Outstanding bank loans in Japan rose 1.2% from a year earlier to Y397.7 trillion in September, marking a 12th straight rise… The pace of increase accelerated from a 1.1% rise in August and remained the highest rise since October 2009, when lending was up 1.5%.”

India Watch:

October 10 – Bloomberg (Kartik Goyal): “Indian growth may weaken to a decade-low this year after investment stalled, the International Monetary Fund said… Gross domestic product will rise 4.9% in 2012, the… lender said…, less than a July forecast of 6.1%.”

Asia Bubble Watch:

October 8 – Bloomberg (Karl Lester M. Yap): “The World Bank said policy makers in Asia’s emerging economies have room to provide more fiscal stimulus as China’s slowdown drags the region’s growth to an estimated 11-year low in 2012. Growth in developing East Asia, which excludes Japan and India, will probably ease to 7.2% from 8.3% in 2011… That is the slowest pace since 2001… and lower than a forecast in May of 7.6%.”

October 10 – Bloomberg (Cynthia Kim): “South Korea’s workforce expanded last month, with the unemployment rate unchanged from August. The jobless rate was at 3.1% in September…”

European Economy Watch:

October 8 – Bloomberg: “New-car registrations in Spain fell to 35,146 in September, a decline of 37% y-o-y and the lowest monthly volume in at least 23 years.”

October 11 – Bloomberg (Marcus Bensasson): “Greece’s unemployment rate climbed to more than a quarter of the workforce in July, extending its record high as the country’s five-year recession deepened. The jobless rate rose to 25.1% from a revised 24.8% in June…”

Global Economy Watch:

October 9 – Bloomberg (Sandrine Rastello): “The International Monetary Fund cut its global growth forecasts as the euro area’s debt crisis intensifies and warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies. The world economy will grow 3.3% this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said…, compared with July predictions of 3.5% in 2012 and 3.9% in 2013. The… lender now sees ‘alarmingly high’ risks of a steeper slowdown… As the IMF urged measures to boost confidence, uncertainties out of Europe show no sign of abating, with leaders still divided over a banking union and Spain resisting a bailout. ‘Confidence in the global financial system remains exceptionally fragile,’ the IMF said. ‘Bank lending has remained sluggish across advanced economies’ and increased risk aversion has damped capital flows to emerging markets, it said.”

U.S. Bubble Economy Watch:

October 11 – Bloomberg (Oshrat Carmiel): “Manhattan apartment rents surged in September, coming within 2.1% of the peak, as improving employment boosted competition among tenants. The median monthly rent jumped to $3,195, up 10% from a year earlier and 3.2% from August, according to… Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate. The number of new leases signed last month jumped 55% from a year earlier to 2,535… as renters facing sharp renewal increases moved out in search of better deals, said. ‘This is not a fluke,’ [Jonathan Miller, president of… Miller Samuel] said. ‘This is where the die has been cast for the next year or two years.’”

October 10 – Bloomberg (Jim Snyder): “U.S. households that use heating oil will face record prices this winter as weather forecasters predict colder temperatures in the Northeast after an unusually warm season last year… The Energy Information Administration, which tracks and analyzes energy data, projects households will spend 19% more on average for heating oil and 15% more for natural gas from Oct. 1 to March 31…”