Saturday, December 6, 2014

Weekly Commentary, October 19, 2012: 25 Year Anniversary

I spent a memorable October 19, 1987 in front of Quotron and Telerate screens as a Treasury analyst at Toyota’s U.S. headquarters in Torrance, California. After ending my stint as a Price Waterhouse CPA and heading south, I was introduced to the financial markets and macro analysis in 1986. It was impassioned love at first sight.

And 1987 simply could not have been a more fascinating environment for learning. Global currency and fixed income markets were in disarray. The dollar index, which had traded above 160 in March of 1985, had fallen below 100 by January of ’87. Bond yields, after beginning the year at 7%, were above 8% by May, and over 9% in September before jumping to 10.2% in mid-October. Stock markets were increasingly unstable, as speculative excess gained a foothold. At its August ’87 high, the S&P500 was sporting a frothy 39% y-t-d gain.

There were a few good articles this Friday commemorating the 25 year anniversary of “Black Monday.” I particularly appreciated Floyd Norris’ “A Computer Lesson Still Unlearned,” from the New York Times. Bloomberg (Nina Mehta, Rita Nazareth, and Whitney Kisling) did nice work with “Black Monday Echoes as Computers Fail to Restore Confidence.” I’ll take a different tack, focusing more on that period’s extraordinary macro backdrop – one that is highly relevant to today’s even more extraordinary backdrop.

Portfolio insurance played an important role in the precipitate sell orders that overwhelmed and helped crash the market. It was, however, a festering macro backdrop that had set the stage. Importantly, global stock markets had turned highly speculative, having diverged from troubling fundamentals. Global financial and economic imbalances had become a major issue. The U.S., West Germany, the UK, France and Japan had agreed in the September 1985 “Plaza Accord” to take measures to devalue the over-extended dollar. By early 1987, the dollar was seemingly trapped in a downward spiral. “G6” (including Canada) countries reconvened in February 1987 (“Louvre Accord”) to try to stabilize global markets and halt the dollar’s fall. The West Germans and others were worried that the U.S. was pointing fingers at its trading partners instead of addressing its own economic maladies.

The “twin deficits” were a major concern. The U.S. fiscal situation had deteriorated significantly during the 1981/82 recession. Our nation’s fiscal position then did not improve as expected by 1986, with the federal deficit still running at close to 5% of GDP. The U.S. trade balance had deteriorated in tandem. After running an almost balanced position for the period 1979-1982, the U.S. Current Account began to spiral out of control. Our Current Account deficit jumped to $39bn in 1983, $94bn in 1984, $118bn in 1985, and $147bn in 1986. By 1987, the U.S. was running quarterly Current Account shortfalls the size of its annual deficit from only four years earlier.

Credit excesses were certainly not limited to government finance. Total Non-Financial Debt expanded 14.8% in 1984, 15.6% in 1985 and 15.6% in 1986. The Credit boom was broad-based, with Federal, State & Local, Household, and Corporate debt all expanding at double-digit rates throughout the period. Financial Sector Credit Market Debt was exploding, with growth of 17.5% in ’84, 19.3% in ’85, and 26.2% in ’86. Importantly, this growth reflected the commencement of a historic expansion of non-bank Credit, led by (Agency/GSE) MBS and ABS, along with finance company and (“captive finance”) corporate borrowings.

The market and U.S. economic environments troubled Toyota executives back in 1987. They were also plenty worried about Japan. Japanese policymakers were under intense American pressure to stimulate their economy in order to remedy their widening trade surplus with the U.S. After beginning 1986 at about 13,000, Japan’s Nikkei equities index surpassed 26,000 in the autumn of 1987. The Japanese real estate balloon was also rapidly inflating, even as consumer prices remained well contained. Toyota officials were increasingly worried that loose monetary policy and other stimulus measures had fostered a dangerous Bubble in Japan. The 1987 crash proved but a minor setback for the Japanese Bubble, as “terminal phase” excesses in 1988 and 1989 sealed Japan’s fate. The Nikkei ended 1989 at 38,916. The Nikkei closed Friday, some 23 years later, at 9,003.

I’ve often contemplated where I might “officially” pinpoint a starting point for the prolonged U.S. and global Credit Bubble. There is strong justification for choosing the early eighties, on the back of that period’s explosions in U.S. federal debt, non-bank Credit creation, and destabilizing Current Account Deficits. I’ll instead propose October 20, 2012 as the 25 Year Anniversary of the Great Credit Bubble. It was, after all, 25 years ago, on the Tuesday following “Black Monday,” that a statement changed history: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

There were myriad critical issues that needed immediate attention by 1987 - and certainly in the Crash’s aftermath: the root cause of problematic market distortions, including excessive speculation and new derivatives strategies (i.e. “portfolio insurance”); excessive system Credit expansion, especially the rapid growth of non-traditional Credit creation; federal deficits and attendant Current Account Deficits that had begun to fuel dangerous global imbalances, including the Bubble engulfing our important ally and trading/financing partner in Japan.

Yet, the fixation at the Federal Reserve and Washington was with the markets and the imperative of ensuring no repeat of the Great Depression. The Greenspan Fed was willing to overlook serious fundamentals issues and instead ensure that market participants were emboldened by the Fed’s liquidity backstop. Besides flooding the system with liquidity (concurrent with other measures), the Fed cut rates in the months following the Crash (from 7.25% before the crash to 6.5% in February ’88). After surging above 10% in October of ’87, 10-year Treasury yields dropped to almost 8% in early ’88. Financial conditions remained loose and the markets (and speculation) bounced right back. Total Non-Financial Debt growth remained strong (9.1% in both ’87 and ’88). Importantly, Federal Reserve largess ensured that areas of fledgling excess throughout the system actually gained critical momentum. These included the Drexel Burnham junk bond scheme, the Wall Street “Gordon Gekko” M&A boom, and real estate lending excesses, especially on both coasts.

When this Bubble phase eventually burst in the early-nineties, eighties period excesses were referred to as “the decade of greed.” In the name of fighting the scourge of deflation and depression, the Greenspan Fed responded even more aggressively. The Fed went from guaranteeing marketplace liquidity to ensuring a steep yield curve (short-term rates pegged significantly below market bond yields). This (manufactured borrow short/lend long "carry trade" profits) worked like magic to recapitalize a banking system deeply impaired from the late-80’s Credit boom. It also provided spectacular returns for financial speculators and essentially unleashed the modern era of hedge funds and leveraged speculation, of which there has been no turning back.

Furthermore, the Fed’s activist market interventions/manipulations spurred rampant growth in non-bank Credit, including MBS, ABS, GSE balance sheets, “repos” and securities finance, and Wall Street finance more generally. Indeed, the Fed’s statement the day following the ’87 Crash proved a seminal inflection point for finance and the global economy. Amazingly, the Greenspan Federal Reserve even became outspoken proponents of New Age finance, including derivatives, hedge funds and Wall Street risk intermediation. And the leverage speculating community, global derivatives and securities trading, and the proliferation of unconstrained marketable debt instruments changed the world.

The Greenspan Fed’s 1987 promise of market liquidity was the precursor for today’s zero rates, the Fed’s almost $3 TN balance sheet, and recent promises of “open-ended” quantitative easing (QE). Over the years – and through every crisis – the Fed became only more zealous activists supporting the uninterrupted expansion of marketable debt. The bigger the securities markets – and the more dominant the leveraged speculators – the more Fed policy revolved around ensuring a favorable liquidity and rate backdrop for unending leveraging and speculating.

Especially after the ’87 Crash, the Federal Reserve and other regulators should have moved decisively to nip the derivatives boom in the bud, especially in the area of the dynamic hedging (i.e. selling S&P500 futures into a rapidly falling market to hedge market insurance derivatives written) of myriad market risks. “Black Monday” provided unequivocal evidence of the serious flaws and dangers associated with the premise of “liquid and continuous” markets – an assumption that is really the foundation for contemporary derivative hedging strategies. Instead of the Crash destroying this market fallacy, the Fed’s day-after statement validated the view that derivative contracts could be written and risk-strategies pursued on the belief that policymakers would be there to counterbalance market illiquidity and neutralize “tail risks” and system shocks. This fundamentally changed finance, the pricing and trading of risk instruments, and risk-taking more generally. The unprecedented proliferation of market risk insurance took the world by storm and played a pivotal role in runaway Credit excesses and associated global imbalances and economic distortions.

The Fed’s statement on October 20, 1987 commenced 25 years of serial (and escalating) booms and busts around the world. We’re nowadays in the midst of “melt-up” Credit debasement, a “blow-off” top in global speculative excess, and complete policy capitulation in hope of holding the downside of the global Credit cycle at bay. For a few years now, I’ve referred to the “global government finance Bubble” as the granddaddy of them all. What started as excesses at the fringes of U.S. bank and junk bond finance back in the late-eighties eventually made its way to terminally infect Treasury and related debt at the core of our entire monetary system. Global excesses, having fueled precarious Bubbles in Japan, SE Asia, Europe and the emerging economies over the years, afflicted China with its estimated population of 1.3 billion. Today’s historic Bubble phase risks the loss of market trust in sovereign debt. The current global “inflationist” policy regime risks being completely discredited. And the historic Chinese Bubble risks a precarious post-Bubble day of reckoning.

Unlike the 80’s and 90’s, there’s no longer any attempt to fashion a coordinated strategy to deal with global excesses and imbalances. Policymakers have thrown in the towel - and these days have no strategy beyond reflation and Bubble perpetuation. U.S. policymakers pay little more than lip service to incredible federal deficits. This, however, is actually more than is paid to the massive Current Account Deficits that have been the root cause of now deep structural global imbalances and economic impairment. More than 25 years later, our nation’s policy prescription for unmatched global imbalances is even looser monetary policy and added stimulus for all nations, everywhere, all-the-time.

And the way I see it, the Fed, ECB and global central bankers today fight a losing battle. The mountain of global debt, securities, and derivatives, along with this destabilizing global pool of speculative finance, just inflate larger by the year – and after each policy response. And the more outrageous the policies implemented to try to resolve each crisis, the more these desperate measures further inflate the global Bubble. Ironically, the ongoing assurances of central bank liquidity seem to ensure an eventual crisis beyond the liquidity capacity of central banks. Happy 25th Anniversary, you aged and ornery Credit Bubble. They’ll be reading, writing about and studying you for at least the next century.

For the Week:

The S&P500 increased 0.3% (up 14.0% y-t-d), and the Dow added 0.1% (up 9.2%). The Morgan Stanley Cyclicals jumped 2.5% (up 13.6%), and the Transports gained 0.7% (up 1.2%). The Morgan Stanley Consumer index increased 0.4% (up 11.1%), and the Utilities jumped 2.0% (up 2.0%). The Banks were up 0.9% (up 28.1%), and the Broker/Dealers were 0.8% higher (up 0.9%). The S&P 400 Mid-Caps rose 1.2% (up 12.3%), while the small cap Russell 2000 slipped 0.3% (up %). The Nasdaq100 dropped 1.5% (up 17.6%), and the Morgan Stanley High Tech index fell 1.0% (up 11.2%). The Semiconductors slipped 0.5% (up 0.1%). The InteractiveWeek Internet index sank 2.2% (up 9.3%). The Biotechs declined 0.9% (up 38.2%). Although bullion declined $33, the HUI gold index was unchanged (down 0.6%).

One-month Treasury bill rates ended the week at 10 bps and three-month bills at 9 bps. Two-year government yields were up 3 bps to 0.30%. Five-year T-note yields ended the week 9 bps higher to 0.75%. Ten-year yields rose 11 bps to 1.77%. Long bond yields jumped 10 bps to 2.94%. Benchmark Fannie MBS yields rose 15 bps to 2.23%. The spread between benchmark MBS and 10-year Treasury yields widened 4 bps to 46 bps. The implied yield on December 2013 eurodollar futures increased 2.5 bps to 0.42%. The two-year dollar swap spread declined 2 to 10 bps, and the 10-year swap spread declined 2 to 3 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 4 to 94 bps. An index of junk bond risk dropped 23 to 483 bps.

Debt issuance was strong. Investment grade issuers this week included Oracle $5.0bn, JPMorgan Chase $2.85bn, Morgan Stanley $2.0bn, Bank of New York Mellon $1.5bn, CSX $800 million, Owens Corning $600 million, Texas Eastern Transmission $500 million and RPM International $300 million.

Junk bond funds saw inflows of $300 million. Junk issuers included HCA $2.5bn, Nuance Communications $1.05bn, Sungard Data $1.0bn, CNH Capital $750 million, IMS Health $500 million, Energy Future $500 million, Aleris International $500 million, Lennar $350 million, EPL Oil & Gas $300 million, Radio Systems Corp $250 million and Nortek $235 million.

I saw no convertible debt issued.

International dollar bond issuers included Extrata $4.5bn, Ontario $2.25bn, Sberbank $2.0bn, Kommuninvest $1.75bn, British Columbia $1.25bn, Rentenbank $1.25bn, Offshore Group $1.15bn, PTT PCL $1.1bn, Akbank $1.0bn, Sydney Airport $600 million, Home Credit & Finance Bank Eurasia $500 million, Korea Expressway $500 million, Dufry Finance $500 million, Anadolu Efes $500 million, Leaseplan $500 million, BR Malls $405 million, Albea Beauty Holdings $385 million, Mood Media $350 million, Mirrow Pik $275 million and NA Development Bank $250 million.

Spain's 10-year yields dropped 26 bps to a six-month low 5.33% (up 29 bps y-t-d). Italian 10-yr yields fell 20 bps to 4.76% (down 227bps). German bund yields jumped 15 bps to1.59% (down 23bps), and French yields rose 6 bps to 2.20% (down 94bps). The French to German 10-year bond spread narrowed 9 bps to 61 bps. Ten-year Portuguese yields sank another 42 bps to 7.38% (down 539bps). The new Greek 10-year note yield fell 154 bps to 16.15%. U.K. 10-year gilt yields were 16 bps higher at 1.88% (down 10bps). Irish yields declined a basis point to 4.57% (down 369bps).

The German DAX equities index gained 2.1% (up 25.1% y-t-d). Despite Friday's 2.3% drop, Spain's IBEX 35 equities index gained 3.4% for the week (down 7.6%). Italy's FTSE MIB rose 2.3% (up 5.1%). Japanese 10-year "JGB" yields gained 2 bps to 0.775% (down 2bps). Japan's Nikkei surged 5.5% (up 6.5%). Emerging markets were mixed. Brazil's Bovespa equities index slipped 0.4% (up 3.8%), while Mexico's Bolsa jumped 1.7% (up 14.3%). South Korea's Kospi index added 0.6% (up 6.5%). India’s Sensex equities index was unchanged (up 20.9%). China’s Shanghai Exchange gained 1.1% (down 3.2%).

Freddie Mac 30-year fixed mortgage rates dipped 2 bps to 3.37% (down 74bps y-o-y). Fifteen-year fixed rates fell 4 bps to 2.66% (down 72bps). One-year ARMs added a basis point to 2.60% (down 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 2 bps to 4.03% (down 85bps).

Federal Reserve Credit jumped $22.6bn to $2.820 TN. Fed Credit was down $18bn from a year ago, or 0.6%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 10/17) rose $15.9bn to $3.603 TN. "Custody holdings" were up $183bn y-t-d and $195bn year-over-year, or 5.7%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $530bn y-o-y, or 5.2% to a record $10.752 TN. Over two years, reserves were $1.802 TN higher, for 20% growth.

M2 (narrow) "money" supply declined $12.5bn to $10.182 TN. "Narrow money" has expanded 7.2% annualized year-to-date and was up 6.8% from a year ago. For the week, Currency increased $1.8bn. Demand and Checkable Deposits rose $40.9bn, while Savings Deposits fell $55.5bn. Small Denominated Deposits dipped $1.8bn. Retail Money Funds increased $2.0bn.

Money market fund assets rose $6bn to $2.568 TN. Money Fund assets were down $127bn y-t-d, with a one-year decline of $66bn, or 2.5%.

Total Commercial Paper outstanding dropped $21.3bn to $944 billion CP was up $42bn y-t-d, while having declined about $6bn from a year ago.

Currency Watch:

The U.S. dollar index was little changed at 79.62 (down 0.7% y-t-d). For the week on the upside, the Swedish krona increased 1.75%, the Australian dollar 1.0%, the Norwegian krone 0.9%, the South African rand 0.8%, the Brazilian real 0.8%, the South Korean won 0.7%, the euro 0.6%, the Danish krone 0.6%, the Swiss franc 0.5%, and the Taiwanese dollar 0.1%. For the week on the downside, the Canadian dollar declined 1.4%, the Japanese yen 1.1%, the British pound 0.4%, the Mexican peso 0.1%, and the New Zealand dollar 0.1%.

Commodities Watch:

The CRB index dipped 0.2% this week (up 0.2% y-t-d). The Goldman Sachs Commodities Index dropped 1.4% (up 1.7%). Spot Gold was down 1.9% to $1,722 (up 10.1%). Silver fell 2.0% to $32.10 (up 15%). November Crude declined $1.81 to $90.05 (down 9%). November Gasoline sank 6.8% (up 2%), while November Natural Gas added 0.2% (up 21%). December Copper dropped 1.8% (up 6%). December Wheat rose 1.8% (up 34%), and December Corn gained 1.2% (up 18%).

Global Credit Watch:

October 18 – Bloomberg (Charles Penty): “Spain’s banks face more loan losses as the pace of an economic slump risks turning a worst-case scenario dismissed in stress tests into reality. Bad loans as a proportion of total lending jumped to a record 10.5% in August from a restated 10.1% in July as 9.3 billion euros ($12.2bn) of loans were newly classified as being in default… The ratio has climbed for 17 straight months from 0.72% in December 2006… Spanish bank stress tests by management consultants Oliver Wyman have factored in an economic contraction totaling 6.5% from 2012 to 2014 in an adverse scenario that the government and Bank of Spain said has a probability of about 1%. Analysts at Nomura and Citigroup Inc. disagree, saying spending cuts and economic conditions mean the worst-case outcome already looks feasible… Lending in Spain’s banking system fell 1.1% in August from July and 5 percent from the same month a year earlier, the Bank of Spain said. Deposits dropped 1.1% in the month and 8.7% from a year ago.”

October 17 – Bloomberg (Mark Deen): “French President Francois Hollande backed Spain’s demand for clarity on the conditions it would face in return for financial support, underscoring a divide with Germany as European leaders prepare to gather in Brussels. ‘Spain needs to know the precise conditions under which it would receive financial help,’ Hollande said… Chancellor Angela Merkel’s government believes that terms should be negotiated once a request is made… By throwing his support behind Spanish Prime Minister Mariano Rajoy and calling for budgetary easing from countries that can afford it, Hollande is setting out a challenge for Merkel similar to the one he made at the last summit in June.”

October 18 – Bloomberg (Rebecca Christie): “The French-backed effort to fast- track a European bank supervisor is running into German-led concern over potential costs as the region’s leaders tussle over putting their crisis-fighting blueprint into action. The 27-nation European Union has struggled to maintain momentum on a June plan to spur investor confidence by putting the European Central Bank in charge of banks across the euro area. Skeptics have questioned the scope of the ECB’s supervisory powers and how losses would be shared. As leaders gather in Brussels for a two-day summit, French President Francois Hollande says efforts to stem the turmoil that began in 2009 could unravel if the EU fails to deliver on its promises. He called on the EU to press ahead on banking union, provide economic help to countries that rein in budget deficits, and show investors that Greece will be able to stay in the euro zone if it keeps its commitments.”

October 17 – Bloomberg (Ben Sills): “Germany is pressuring Italy to request European aid alongside Spain so that the government of Prime Minister Mario Monti doesn’t reap the benefit of lower borrowing costs without being tied to tougher economic reforms, La Vanguardia reported.”

Germany Watch:

October 19 – Wall Street Journal (Gabriele Steinhauser): “German Chancellor Angela Merkel took a hard line on Spain Friday, saying that Madrid will have to keep on its own balance sheet the tens of billions of dollars it is about to inject into its banks and won't be able to transfer them to the euro-zone bailout fund. That position, laid out after a two-day summit of European Union leaders in Brussels, would mean that Spanish borrowing from the euro zone to bolster the capital of shaky banks—estimated to be as much as €60 billion ($78.72bn)—will swell the country's already-heavy debt load. Germany's stance appeared to dash hopes, fostered by the leaders at a summit in June, that the government's capital injections into the banks could later be transferred to the bailout fund once an effective euro-wide bank supervisor is in place…”

October 19 – Bloomberg (Rebecca Christie and Tony Czuczka): “German Chancellor Angela Merkel said it’s an open question whether European policy makers can meet the deadline they’d set hours earlier to establish a euro-area bank supervisor by year-end. ‘There are complicated questions to clarify and we’ll see in December if we complete it or not,’ Merkel told reporters… ‘For now, the political will is there.’ The comments underscore Germany’s go-slow approach that may stymie plans laid down in June to break the link between banks and governments that has worsened the region’s debt crisis.”

October 18 – Financial Times (Quentin Peel): “Angela Merkel, the German chancellor, refused to be rushed on Thursday into rapid creation of a fully-fledged banking union in Europe, despite strong pressure from President Francois Hollande of France and other European leaders. While insisting that while Germany would engage ‘urgently’ in negotiations for a single European bank supervisor, she said the new system must be proved ‘effective’ before taking the next step: giving a green light for eurozone rescue funds to be used to recapitalize banks directly. ‘I want to say very clearly: merely agreeing on the legal procedure for banking supervision is not enough,’ Ms Merkel told the German parliament… The new system must be ‘effective and independent of national banking supervision’ before the €500bn European Stability Mechanism could be used for recapitalization.”

October 17 – Bloomberg (Brian Parkin and Patrick Donahue): “The German government cut its economic outlook for next year, citing stalling effects from the debt crisis in the euro area and slower growth in Asia hurting exports. Europe’s largest economy will expand 1% in 2013, compared with a forecast… of 1.6% projected in May…”

October 19 – Bloomberg (Annette Weisbach): “The outlook for German banks remains negative as ‘intense competition’ and low interest rates weigh on earnings, according to Moody’s… ‘Intense competition and low interest rates are causing margin pressure that will likely further erode the banks’ already-weak revenues and profits over the 12-18 month outlook period,’ Moody’s wrote… While the German economy remains stable, Moody’s said banks face ‘challenging conditions’ because of the nation’s dependence on other European Union countries for export markets… ‘Rising risk charges in individual bank results in 2012 to date indicate that domestic asset quality is gradually deteriorating,’ Moody’s said. Exposure to stressed euro-area countries, plus commercial real estate and shipping, make the nation’s lenders ‘vulnerable to a worsening of the sovereign debt crisis in Europe,’ the ratings company said.”

Global Bubble Watch:

October 18 – Bloomberg (Sarika Gangar): “Xstrata Plc and Oracle Corp. led borrowers raising at least $20 billion in the second-busiest day this year for U.S. corporate bond sales.”

October 19 – Bloomberg (Sarika Gangar): “Sales of corporate bonds in the U.S. doubled this week as relative yields narrowed to the tightest level in more than 17 months. Xstrata Plc, the world’s largest exporter of coal burned by power stations… led at least $39.4 billion of new issues… Sales compare with a 2012 weekly average of $27.8 billion.”

October 17 – Bloomberg (Boris Korby and Drew Benson): “Corporate bonds in Brazil are becoming more vulnerable to losses than any major developing nation as companies exploit record-low borrowing costs to sell the longest-dated overseas debt in three years. The so-called duration of Brazilian company bonds, a measure of how much prices change as yields rise or fall, which increases with longer maturities, climbed to a 13-month high of 6.12 years… That exceeds the average of 5.18 years for company debt in China and is about 40% higher than in Russia and India.”

October 19 – Bloomberg (Charles Mead): “Relative yields on U.S. investment-grade bonds are poised to tighten to the least since 2007 as the Federal Reserve’s program to buy up mortgage debt boosts demand for company obligations, according to JPMorgan Chase & Co… While a ‘frenzy’ for high-grade debt that has pushed borrowing costs to record lows will probably slow considerably, the Fed’s open-ended mortgage purchases announced last month to support housing and boost employment ‘is a powerful force for lower spreads,’ the strategists wrote.”

October 17 – Bloomberg (John Glover): “Junk bonds are proving cheap even with yields at record lows, helping to explain the record sums flowing into the securities as firms from Morgan Stanley to BlackRock Inc. say it may be time to pull back. While non-financial, speculative-grade corporate debt yields about 7.15% on average, some 87% of that consist of spread, or the amount above benchmark rates... Investors put $64.8 billion into high-yield bond funds globally this year through Oct. 10, more than double the previous record of $31.7 billion in 2009…”

October 17 – Bloomberg (Sarika Gangar): “Sales of convertible securities are accelerating from the slowest pace on record as the Federal Reserve’s efforts to steer investors toward riskier assets stokes demand for debt tied to stocks. WellPoint… and… Stillwater Mining Co. are leading sales of $2.9 billion worldwide this month that are up four-fold from the same period last year… That follows $10.3 billion of convertible bond offerings in September that were the most for a month since March 2011.”

China Bubble Watch:

October 16 – Bloomberg: “China’s citizens are increasingly worried about growing income inequality and official corruption, according to a Pew Research Center survey… Forty-eight percent of 3,177 adults surveyed said the gap between rich and poor in China is a ‘very big problem,’ up seven percentage points from a 2008 survey… Fifty percent said official corruption was a very big problem, compared with 39% four years ago… The poll results, released today, reflect growing public disenchantment with a rich-poor divide that has widened as growth accelerated…”

October 18 – Wall Street Journal: “China’s power output grew at a slower pace in September on the back of a sluggish economy, reflecting third-quarter gross domestic product growth that was at its slowest since the first quarter of 2009. The power consumption growth rate slumped to its lowest level in at least two years… China generated 390.7 billion kilowatt-hours in September, up 1.5% from a year earlier, compared with a 2.7% growth rate in August and 2.1% in July.”

October 17 – Bloomberg (Stephanie Tong): “Hong Kong Chief Executive Leung Chun-ying pledged more measures to tackle record home prices, after a surge this year made accommodation unaffordable for many people in the city. The number of applicants on the city’s public housing waiting list is approaching 200,000, Leung said… Hong Kong is the world’s most expensive place to buy a home after prices advanced more than 90% since early 2009 on a lack of new supply, an influx of buyers from China and record low mortgage rates.”

Japan Watch:

October 17 – Bloomberg (Isabel Reynolds, Keiko Ujikane and Mayumi Otsuma): “Japan’s government plans to tap discretionary budget funds to counter an economic slowdown as a legislative stalemate threatens to leave the Noda administration running out of cash as soon as next month… Noda’s room for fiscal maneuver is limited by the political opposition’s refusal to give the government authority to borrow to pay for this year’s deficit.”

European Economy Watch:

October 18 – Bloomberg (Zoe Schneeweiss): “Swatch Group AG and Cie. Financiere Richemont SA fell after Swiss watch exports dropped for the first time in almost three years, led by a 20% decline to Hong Kong, the biggest market for timepieces.”

U.S. Bubble Economy Watch:

October 17 – Bloomberg (Alex Kowalski and Prashant Gopal): “Housing starts in the U.S. surged 15% in September to the highest level in four years, adding to signs of a revival in the industry at the heart of the financial crisis.”

October 17 – Bloomberg (Alan Bjerga): “The worst U.S. drought since the 1950s may trigger record crop insurance payouts, concentrated in corn-producing states led by Illinois, Indiana and Missouri. Industry payouts from companies including Ace Ltd., American Financial Group Inc. and Wells Fargo & Co. may reach a record $25 billion this year, according to Kansas State University.”

Central Bank Watch:

October 18 – Bloomberg (Suttinee Yuvejwattana, Yumi Teso and Shamim Adam): “Thailand’s central bank voted to cut interest rates four days after Governor Prasarn Trairatvorakul said no easing was needed, adding to evidence Asia’s outlook has worsened and supporting a government push to shore up growth. The Bank of Thailand lowered its one-day bond repurchase rate by a quarter of a percentage point to 2.75%...”