Sunday, December 14, 2014

Weekly Commentary, November 1, 2013: The May - June Dynamic

From Q&A: “In the spirit of simple questions, you’re spending a Trillion dollars a year on this asset purchase program…”

Federal Reserve Bank of St. Louis President James Bullard: “It’s worse than that. We’re manufacturing it out of the blue.”

Continuation of question: “That’s my question. Where does that money come from? And given that it’s presumably our money – taxpayer money – should we be troubled that then half of it is going to prop up government spending, which is also our money?”

Bullard: “We’re creating the money. So you’ve got a Treasury bond and I (the Fed) want to buy it. So you have an account with me at the Fed, so I Credit your account and buy your piece of paper. So what that does is that increases base money – which is reserves held at the Fed. That’s your account with me – plus all the cash that’s out there circulating. So that’s the monetary base and the monetary base is off the charts – absolutely off the charts. The monetary base by itself doesn’t create inflation. It’s only when that starts becoming money and circulates out in the economy. And the St. Louis Fed is famous for looking at different measures of the money supply – M1, M2, all that stuff. Those measures of the money supply have not gone off the charts. So, where’s the missing link? What has happened is that the banks have a lot of reserves but they are perfectly content to just leave them at the Fed – and they’re not turning around and making a lot of loans. If they do turn around and start making a lot of loans, money supplies will go up dramatically. And, presumably, if that goes on for too long, that will lead to a lot of inflation. So that’s the conventional story about why this is so dangerous in creating inflation. However, the truth – the empirical matter is – over the last five years these central bank balance sheets have been very large and that lending process has not gotten going. The money supplies have not been ramping up and you have not seen inflation. In fact, inflation has stayed at low levels. Inflation is close to 1.2% on our headline inflation measure per PCE [personal consumption expenditure] right now. So it’s very low and it’s below our 2% inflation target… So the inflation hasn’t materialized. And, believe me, I’m the biggest inflation hawk. That’s how I grew up and I came out of the St. Louis Fed research department and I’m at the North Pole of inflation hawks. But that isn’t the problem we’ve had, so far.” Federal Reserve Bank of St. Louis President James Bullard, November 1, 2013, speaking in St. Louis

The conventional view holds that massive QE has not caused inflation because the Fed’s monetary fuel has remained unused as “reserves” on bank balance sheets. From this viewpoint, inflation risks lurk somewhere out in the future: when the banks eventually lend these “reserves” and the monetary fuel finally makes its way into the real economy. Moreover, the optimistic view holds that the Fed has the tools to adeptly manage any future inflation issue.

I take a much different view. QE is anything but benign. The Fed’s monetary fuel certainly doesn’t just sit inertly on bank balance sheets. Indeed, this monetary inflation is immediately unleashed upon the financial markets, with the newly created “money” setting off a chain-reaction of transactions, flows and market impacts. Over time, this dynamic foments huge distortions in marketplace liquidity, risk perceptions, speculative financial flows, asset prices and market stability. And, somehow, when Fed officials discuss QE they avoid any mention of what have become conspicuous inflationary effects on securities prices.

Fundamentally, the repeated injection of Fed liquidity over time – and especially at key junctures - into the financial markets has created Bubbles increasingly vulnerable to even subtle changes in market perceptions and/or changes to the risk-taking and speculative leveraging backdrop. This is the essence of the so-called “addiction” induced by the Fed’s historic monetary inflation.

I continue to believe the May/June period marked an important inflection point in global Credit and asset market Bubbles. Latent market fragilities – including QE dependencies – turned widely evident, forcing both the Fed and Chinese to back-peddle from their planned somewhat less accommodative policy stance. And, in both cases, respective Bubbles bounced right back more powerful than ever. Still, I believe the spring period marks the initial bursting of a historic Bubble throughout the “emerging markets” (EM) – at the “periphery” of the “global government finance Bubble”. And while speculative flows have returned to EM in recent weeks, I believe this has only temporarily masked what will remain ongoing financial and economic fragilities.

Rising Treasury yields (falling prices) in the face of EM instability was integral to May/June market fragility. In short, the disappearance of Treasury safe haven status caught the marketplace by surprise. After accumulating Trillions of international reserves over recent years, the reversal of “hot money” and other speculative flows saw EM central banks selling Treasuries (and other reserve assets) as part of efforts to support their faltering currencies. This dynamic was instrumental in what was emerging as a problematic global jump in market yields.

Myriad methods of leveraged speculation, including popular so-called “risk parity” strategies, were performing poorly with heightened risk of a problematic reversal of flows. Suddenly, the risk of leveraging fixed income securities appeared much higher. Moreover, the capacity for leveraged holdings of Treasuries and fixed income to hedge against risk market exposures appeared much diminished. Significant market losses and a reversal of flows out of the leveraged speculating community was a real possibility. However, confidence – along with speculative inflows - was restored when the Bernanke Fed stated it was willing to even increase the size of QE to “push back” against any tightening of financial conditions.

This week was somewhat reminiscent of the early-days of the May/June “risk off” market dynamic. EM bonds and currencies were under some pressure, while Treasury yields jumped. The U.S. dollar abruptly caught a bid and commodities were hit hard. As for EM currencies, the Hungarian forint declined 4.1%, the South African rand 3.6%, the Indonesian rupiah 2.8%, the Czech koruna 2.9%, the Brazilian real 3.0%, the Policy zloty 2.7%, the Bulgarian lev 2.3%, the Romanian leu 2.2%, the Chilean peso 2.0%, the Russian Ruble 1.8% and the Turkish lira 1.7%. On the EM bond front, Indonesian 10-year yields jumped 67bps to a 7.76%. South African yields rose 35 bps to 7.78%. Brazilian 10-year yields gained 35 bps to 11.88%, and yields in Mexico jumped 35 bps to 6.09%. Turkish 10-year yields jumped 37 bps to 8.81%.

The CRB Commodities index this week dropped 2.7% to a 15-month low. From a Bubble analysis perspective, this week saw the reemergence of some risk-aversion at the “periphery” of the “periphery.” Perhaps it was only market noise. But, then again, this is precisely where I would expect a more general market “risk off” dynamic to initially materialize.

There’s a decent case to be made that the reemergence of the May/June Dynamic could prove surprisingly problematic for the markets. After all, the “all’s clear” - “no taper ‘till March or even June” - siren has been blasted, perhaps erroneously. The market over recent months has given 1999 excesses more than a run for their money.

With only two months to wrap up a potentially historic market year, the calendar may prove an issue. Of course, the widely anticipated melt-up into year-end scenario remains a possibility. The markets surely could turn wildly volatile and gamey. Yet, at this point, an unexpected sharp downside reversal would be the proverbial “pain trade” catching the complacent crowd extraordinarily exposed.

The global leveraged speculating community would appear particularly susceptible to year-end performance dynamics. Funds that have posted big years might move aggressively to lock in 2013 gains and ensure huge paychecks. At the same time, there are an unusually large number of funds struggling with lackluster performance despite the big year in equities. When the Fed backtracked on tapering, even the most cautious had little alternative but to jump aboard the equities melt-up. This creates a backdrop of unstable markets and a bevy of potentially “weak-handed” traders and portfolio managers. Scores of funds would likely have low tolerance for losses, creating the possibility for a mercurial market backdrop. I suspect many view the current market environment as an accident in the making.

The Fed’s taper reversal incited a significantly more speculative equity market dynamic. To be sure, trend-following and performance-chasing trading shifted into high gear. The hedge funds and market speculators threw caution to the wind. Equities, and U.S. stocks in particular, became the speculative vehicle of choice. And even mutual fund flows, fearful of losses in EM, bonds and municipal debt, turned strongly in favor of perceived U.S. equities market stability. In what has become a typical market Bubble Dynamic, the first major crack at the “periphery” (EM) provoked a policy response that exacerbated dangerous excess at the “core” (i.e. U.S. stocks and corporate debt).

It’s worth noting that between June 24th trading lows to this Wednesday’s intraday highs, the small cap Russell 2000 gained 19.2% (increasing y-t-d returns to almost 35%). This period saw a major short squeeze, highly speculative trading activity and the type of market capitulation and exuberance consistent with a major market topping process. Tesla almost tripled in three months, while Netflix gained over 80% from June lows.

The Fed’s failure to begin tapering in September will come back to bite. Already highly speculative markets became only more vulnerable and Bubble Dynamics only more conspicuous. This week from BlackRock’s Larry Fink: “It’s imperative that the Fed begins to taper. We’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically.”

Federal Reserve Bank of Philadelphia President Charles Plosser made notably cautious comments Friday on CNBC. “I think many people - myself included – I’m not alone in this - are beginning to worry about the consequences of how we unwind ourselves from all this stuff… It’s not because that we know what’s going to happen. It’s because unintended consequences or the build-up of risks can be very important. I think we have to balance, not just the risks in the economy, but our own risks that we’re creating down the road.” And in music to my ears, Mr. Plosser spoke of the need to take some discretion away from the Fed and of making policymaking more “systematic.” He admitted to being dumbfounded by the FOMC’s move to $85bn monthly QE, and said the hurdle to increase QE would be “very high.”

There is growing acceptance that the Fed has gone too far with its experimental policymaking – and the costs associated with overheated markets are mounting. In the “old” days, there was appreciation for the risks associated with a diffident central bank finding itself “behind the curve.” The essence of the analysis was that if the Fed were slow to tighten, our central bank would eventually face cumulative excesses and the need for more aggressive tightening measures. And while the Fed has removed “tightening” from its vocabulary, the analytical premise remains valid: With monetary policy having remained ultra-loose for way too long, the risks associated with cumulative excesses have begun to expand rapidly. The Fed doesn’t have until March or June to start winding down increasingly destabilizing QE.

Q&A: “What do you think is the biggest unintended consequence of QE?

Federal Reserve Bank of Richmond President Jeffrey Lacker: “Which one? That’s just to buy me some time. I think one of the underappreciated, perhaps, consequences of QE has been the sense it’s given rise to that the central bank has responsibilities for real outcomes – real economic growth outcomes. I think the effect of monetary policy on real growth is – except for just us avoiding disasters – as long as we are at reasonably close to appropriate policy, I think our effects are modest and transitory. So the idea that we can have a sustained effect on the unemployment rate at a horizon of a couple of years I think is an unfortunate consequence of the degree to which we’ve conducted policy seemingly motivated by the desire to do what we can for the labor market.” (November 1, 2013)

For the Week:

The S&P500 added 0.1% (up 23.5% y-t-d), and the Dow gained 0.3% (up 19.2%). The Morgan Stanley Consumer index was unchanged (up 26.1%), while the Utilities slipped 0.4% (up 10.0%). The Banks declined 0.8% (up 25.5%), and the Broker/Dealers dipped 0.5% (up 50.0%). The Morgan Stanley Cyclicals added 0.4% (up 32.3%), and the Transports gained 0.6% (up 32.8%). The S&P 400 Midcaps slipped 0.3% (up 26.5%), and the small cap Russell 2000 dropped 2.0% (up 29.0%). The Nasdaq100 (up 27.0%) and the Morgan Stanley High Tech index (up 23.3%) were little changed. The Semiconductors jumped 1.8% (up 31.5%). The InteractiveWeek Internet index declined 0.5% (up 29.5%). The Biotechs fell 1.5% (up 40.7%). With bullion down $35, the HUI gold index was hammered for 7.8% (down 48.9%).

One-month Treasury bill rates ended the week at 2 bps, and three-month rates closed at 4 bps. Two-year government yields were a basis point higher at 0.31%. Five-year T-note yields ended the week up 9 bps to 1.37%. Ten-year yields jumped 11 bps to 2.62%. Long bond yields rose 10 bps to 3.70%. Benchmark Fannie MBS yields gained 10 bps to 3.27%. The spread between benchmark MBS and 10-year Treasury yields narrowed one to 65 bps. The implied yield on December 2014 eurodollar futures declined 2 bps to 0.435%. The two-year dollar swap spread declined one to 12 bps, and the 10-year swap spread fell one to 14 bps. Corporate bond spreads widened somewhat. An index of investment grade bond risk rose about 2 bps to 73 bps. An index of junk bond risk jumped 11 bps to 357 bps. An index of emerging market (EM) debt risk was little changed at 315 bps.

Debt issuance remained strong. Investment grade issuers included Coca-Cola $5.0bn, Altria Group $3.2bn, Procter & Gamble $2.0bn, Altera $1.0bn, Liberty Mutual $1.0bn, Diamond Offshore Drilling $1.0bn, Northern Trust $750 million, Lab Corp $700 million, Citigroup $500 million, National Rural Utilities Coop $400 milion, USG $350 million, Farmers Exchange Capital $335 million, Colgate-Palmolive $350 million and Flowserve $300 million.

Junk bond fund inflows slowed somewhat to $753 million (from Lipper). This week's issuers included First Data $1.75bn, Kinder Morgan $1.5bn, Freescale Semiconductor $960 million, Level 3 $640 million, Calpine $490 million, Pittsburgh Glass Works $360 million, UAL $300 million, Vantage Oncology $300 million and Zions Bancorp $160 million.

I saw no convertible debt issued this week.

International dollar debt issuers included Inter-American Development Bank $2.0bn,Toronto Dominion Bank $1.6bn, Santander $1.5bn, International Bank of Reconstruction & Development $1.25bn, Intesa Sanpaolo $1.25bn, Jordan $1.25bn, Norddeutsche Landesbank $1.0bn, Bank Nederlandse Gemeenten $1.0bn, Meg Energy $1.0bn, Export Development Canada $1.0bn, Seagate HDD $800 million, Neder Waterschapsbank $1.7bn, Tullow Oil $650 million, Canadian National Railroad $600 million, Navios Maritime $610 million, Dexia Credit $500 million, Capsugel $465 million, Bank of Georgia $400 million, Cementos Progreso $350 million, Garda World Security Corp $300 million, San Miguel Industrias $200 million, Anton Oilfield Services Group $250 million and Vingroup $200 million.

Ten-year Portuguese yields fell 8 bps to 6.03% (down 72bps y-t-d). Italian 10-yr yields dropped 15 bps to 4.07% (down 43bps). Spain's 10-year yields sank 18 bps to 3.96% (down 131bps). German bund yields fell 6 bps to 1.69% (up 37bps). French yields dropped 10 bps to 2.15% (up 15bps). The French to German 10-year bond spread narrowed 4 to 46 bps. Greek 10-year note yields sank 64 bps to 7.71% (down 276bps). U.K. 10-year gilt yields were up 3 bps to 2.64% (up 82bps).

Japan's Nikkei equities index increased 0.8% (up 36.6% y-t-d). Japanese 10-year "JGB" yields were down 2 bps to 0.59% (down 19bps). The German DAX equities index added 0.3% to another all-time high (up 18.3%). Spain's IBEX 35 equities index increased 0.2% (up 20.5%). Italy's FTSE MIB rallied 1.5% (up 17.8%). Emerging markets were mixed. Brazil's Bovespa index declined 0.3% (down 11.4%), while Mexico's Bolsa gained 1.0% (down 6.0%). South Korea's Kospi index added 0.3% (up 2.1%). India’s Sensex equities index jumped 2.5% (up 9.1%). China’s Shanghai Exchange recovered 0.8% (down 5.3%).

Freddie Mac 30-year fixed mortgage rates declined 3 bps to an 19-week low 4.10% (up 71bps y-o-y). Fifteen-year fixed rates were down 4 bps to 3.20% (up 50bps). One-year ARM rates rose 4 bps to 2.64% (up 6bps ). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to a four-month low 4.34% (up 30bps).

Federal Reserve Credit expanded $12.9bn to a record $3.795 TN. Over the past year, Fed Credit was up $985bn, or 35%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $695bn y-o-y, or 6.5%, to a record $11.463 TN. Over two years, reserves were $1.238 TN higher, for 12% growth.

M2 (narrow) "money" supply surged $55.9bn to a record $10.989 TN, with a notable nine-week rise of $250bn. "Narrow money" expanded 7.4% ($753bn) over the past year. For the week, Currency increased $0.7bn. Total Checkable Deposits jumped $30.5bn, and Savings Deposits rose $26.8bn. Small Time Deposits declined $3.0bn. Retail Money Funds were up $0.9bn.

Money market fund assets added $1.2bn to $2.669 TN. Money Fund assets were up $123bn from a year ago, or 4.8%.

Total Commercial Paper jumped $19.6bn to a 35-week high $1.082 TN. CP was up $16bn y-t-d, and increased $136bn, or 14.3%, over the past year.

Currency Watch:

The U.S. dollar index rallied 1.9% to 80.72 (up 1.2% y-t-d). For the week on the upside, the Canadian dollar increased 0.3% and the South Korean won increased 0.1%. For the week on the downside, the South African rand declined 3.6%, the Swedish krona 3.4%, the Brazilian real 3.0%, the euro 2.3%, the Danish krone 2.3%, the Swiss franc 2.2%, the Australian dollar 1.5%, the British pound 1.5%, the Mexican peso 1.4%, the Norwegian krone 1.3%, the Japanese yen 1.3%, the Singapore dollar 0.6%, the Taiwanese dollar 0.2% and the New Zealand dollar 0.1%.

Commodities Watch:

The CRB index sank 2.7% this week (down 6.8% y-t-d). The Goldman Sachs Commodities Index fell 1.9% (down 5.3%). Spot Gold dropped 2.6% to $1,316 (down 21%). Silver sank 3.5% to $21.84 (down 28%). December Crude fell $3.24 to $94.61 (up 3%). December Gasoline slipped 0.9% (down 8%), and December Natural Gas sank 7.8% (up 5%). December Copper increased 0.9% (down 10%). December Wheat sank 3.3% (down 14%), and December Corn dropped 2.9% to a new three-year low (down 39%).

U.S. Fixed Income Bubble Watch:

October 30 – Bloomberg (Sridhar Natarajan): “Speculative-grade companies in the U.S. are replacing junk bonds with leveraged loans at the fastest pace ever amid unprecedented investor demand for the floating-rate debt. Toys “R” Us Inc., the world’s largest toy retailer, Las Vegas real-estate developer CityCenter Holdings LLC, and about 33 other borrowers have obtained about $20 billion in loans in 2013 to repay notes, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data… While loans have lower interest rates than bonds, they typically come due sooner, exposing borrowers to refinancing risk earlier. That hasn’t stopped investors from clamoring for the debt, which have rates that rise with benchmarks… Issuance of loans that are sold to non-bank lenders such as hedge funds and collateralized loan obligations has climbed to $553 billion this year, compared with $369 billion in all of 2012… Junk-bond sales at $317.5 billion are poised to surpass last year’s volume of $356.6 billion. The average yield on loans issued in September was 5.6%, according to S&P LCD. That compares with an average yield to maturity of 6.6% for notes in the Bloomberg junk bond index.”

October 31 – Bloomberg (Brian Chappatta and Tim Jones): “Chicago plans to issue at least $1.5 billion in municipal debt next year, offering the securities with a Moody’s… rating three levels lower than when it sold bonds in 2012. The third-most-populous U.S. city expects to pay an extra $1 million annually for each $100 million of general-obligation bonds because of the Moody’s rating cut… The… company dropped its rank in July to A3, the fourth-lowest investment grade, citing pension burdens and the costs of crime.”

Federal Reserve Watch:

October 30 – Bloomberg (Craig Torres and Caroline Salas Gage): “Financial-market bubbles are proving a more pressing threat than inflation to Federal Reserve officials who’ve bought trillions of dollars in bonds and kept the target for short-term interest rates near zero since 2008. ‘There is a threshold out there somewhere’ where markets will become too frothy or the balance sheet becomes too large and the central bank will have to react, said Michael Gapen, a former member of the Fed board’s Division of Monetary Affairs and now a senior U.S. economist at Barclays… ‘The problem since the beginning of quantitative easing three is there isn’t significant enough clarity for what is the stopping rule.’ Policy makers and regulators see worrisome signs. The Fed and Office of the Comptroller of the Currency are recommending lenders strengthen underwriting standards for leveraged corporate loans, as the amount of this high-risk debt approaches levels not seen since before the financial crisis and their quality deteriorates. Kansas City Fed President Esther George, who has dissented against every Federal Open Market Committee decision this year, has highlighted an increase in farmland prices as a concern, and Richard Fisher, president of the Dallas Fed, has pointed to rising home prices in Dallas and Houston as a sign of a U.S. housing bubble. Fed Governors Jeremy Stein and Jerome Powell also have warned this year that some bond yields might be too low for the risk investors are taking.”

Central Bank Watch:

October 30 – Financial Times (Ben McLannahan): “There are few bigger bond bulls than Haruhiko Kuroda. The governor of the Bank of Japan told a New York forum this month that flat or falling yields in Japan’s Y936tn ($10tn) government bond market ‘can, and should continue’ – even as inflation keeps edging toward the bank’s target of 2%. ‘Long-term yields are bound to rise at some point,’ he said, ‘but we can curb it when it happens.’ Assurances like these have echoed around the market since April, when the BoJ stunned investors by unveiling plans to double Japan’s monetary base through massive purchases of longer-term bonds… Some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness. Under its previous governor, Masaaki Shirakawa, the BoJ was always sensitive to the charge that it was indulging a profligate government. Under Mr Kuroda, the bank still argues that because the purchases are not made directly from the finance ministry, they do not fall foul of a 1947 law that banned central bank underwriting. But it is an increasingly fine distinction, say analysts.”

October 30 – Bloomberg (Jana Randow): “Mario Draghi’s quest for new liquidity tools is proving more complex than two years ago. When the European Central Bank president decided in 2011 to provide euro-region banks with three-year loans to ease a credit crunch, liquidity and interest-rate policies were separate issues. Now, cheap funding has the potential to affect the ECB’s interest-rate guidance and prompt banks to shore up their balance sheets rather than boost lending to companies and households as they undergo a review of their accounts. ECB officials are drawing up plans to keep money flowing to banks to head off a liquidity squeeze when the first round of emergency long-term loans comes due in early 2015.”

U.S. Bubble Economy Watch:

October 30 – Reuters (Luke Baker and Stephen Adler): “Persistent doubts about the ability of the United States to resolve its debt problems are putting U.S. credibility in the world at stake, European Commission President Jose Manuel Barroso has warned… Barroso, who heads the European Union executive and has been at the frontline of efforts to resolve Europe's debt crisis over the past three years, said the uncertainty was making investors risk averse, with potentially damaging economic consequences. ‘What is at stake is fundamental, not only for the American economy, but also for the credibility of the United States in the world,’ he told Reuters… ‘I hope that American democracy will work and will deliver what I think is critically important, not only for America but also for the world, because of the size and the impact of the American economy in the world."

October 28 – Bloomberg (Tim Jones and John McCormick): “Nothing thrives in Illinois like local government -- almost 7,000 units that tax, spend and drive up debt in a state struggling to pay off vendors and cover almost $100 billion of unfunded pension liabilities. More than any other state, Illinois illustrates how local taxing bodies flourish across the U.S., whether urban or rural, Republican or Democrat. The governments duplicate services and burn tax dollars at the same time states slash money for education and Washington cuts discretionary spending. In Illinois, which has the 11th highest state and local tax burden in the U.S., overlapping government agencies managing everything from mosquito abatement to fire protection collect billions of dollars, employ tens of thousands and consume resources that could help pay pension deficits and $7.5 billion in outstanding government bills. ‘The big focus is on Washington D.C. and deficits and tax increases,’ said Dan Cronin, chairman of the DuPage County board… ‘But people frequently overlook a significant chunk represented by under-the-radar government -- quiet, sleepy, unaccountable.’ Across the country, there are 38,266 special purpose districts, or government units distinct from cities, counties and schools, each with its own ability to raise money.”

October 29 – Financial Times (Tracy Alloway): “Regional banks in the US have sharply increased their corporate lending at the expense of underwriting standards and loan pricing, Moody’s warned… Rating agencies and regulators have been saying that banks are making riskier corporate loans in an effort to boost their flatlining profits and fight off tough competition from other lenders and the bond market… Supervisors including the Federal Reserve and the Office of the Comptroller of the Currency are already closely scrutinising banks’ lending practices, especially in the booming but potentially worrisome ‘leveraged loan’ area of the market. ‘Commercial loan growth has led to heightened competition, resulting in weaker underwriting standards and narrower pricing,’ Moody’s analyst Megan Snyder said. ‘This growth has occurred while corporate borrowers have become more levered as their debt has increased more than their profits.’”

October 30 – Bloomberg (Lorraine Woellert): “Home prices in 20 U.S. cities rose in August from a year ago by the most since February 2006 as stronger demand boosted values. The S&P/Case-Shiller index of property prices in 20 cities increased 12.8% from August 2012, more than forecast, after a 12.3% gain in the year ended in July…”

October 31 – Bloomberg (James S. Russell): “Two duplex apartments at the One57 condo tower have sold for more than $90 million each -- a staggering number even in Manhattan’s super-luxe market. One57, just steps from New York’s Carnegie Hall, is not only crazy expensive, it’s super-tall for a residential building. Designed by Paris architect Christian de Portzamparc, the tower rises to 1,000 feet, with panoramas of Central Park and midtown Manhattan. The new building is one of perhaps a dozen needle-thin towers planned for New York. Carol Willis, the founder of Manhattan’s Skyscraper Museum, calls them ‘a new type in the history of the skyscraper.’ Super-slims are unique to Manhattan.”

Global Bubble Watch:

October 31 – Bloomberg (Jeff Black and Shamim Adam): “Central banks from the Group of Seven nations said emergency currency-swap lines established during the global financial crisis will be made permanent, providing backstops to safeguard against future turbulence. Temporary, bilateral arrangements between the European Central Bank, the Federal Reserve, the Bank of Canada, the Bank of England and the Bank of Japan will be converted into standing facilities, allowing lenders access to global currencies when needed, according to statements today from the central banks. The Swiss National Bank will also be part of the framework.”

October 29 – Bloomberg (John McCormick): “BlackRock Inc. Chief Executive Officer Laurence D. Fink, whose company is the world’s largest money manager with $4.1 trillion in assets, said Federal Reserve policy is contributing to ‘bubble-like markets.’ ‘It’s imperative that the Fed begins to taper,’ Fink said… ‘We’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically.’”

October 30 – Bloomberg (Shamim Adam and Lilian Karunungan): “Southeast Asian central banks are rebuilding their foreign-currency reserves, raising the prospect they will boost holdings of U.S. Treasuries for the first time since February. Singapore, Thailand, Indonesia, Malaysia and the Philippines reported increases of about 1% to 3% in their international foreign-exchange holdings in September from the previous month, paring the combined decline this year to 2.6%. Monetary authorities in Asia are among the most aggressive sellers of U.S. debt in 2013 as Malaysia, Thailand and Singapore each reduced ownership by between 20% and 28% through August…”

October 28 – Bloomberg (Lisa Abramowicz): “Debt investors are funneling 17 times more cash into hedge funds than into junk-bond funds that returned more in each year since the crisis, heralding a shift from chasing yields to preserving cash as interest rates rise. Hedge funds that seek to profit without making large bets on the direction of debt prices received $20.6 billion in the first nine months of 2013, compared with a net $1.2 billion put into junk-bond mutual funds, according to… Hedge Fund Research Inc. and EPFR Global. The flows are a reversal from 2012, when $72.1 billion deposited into the mutual funds was almost twice the $41.4 billion allocated to hedge funds. Pension plans, endowments and other institutional investors facing the sparsest bond gains since 2008 are leading the charge into hedge funds that returned about half as much as a broad index of high-yield bonds in the four years after the seizure in credit markets.”

November 1 – Reuters (Alan Wheatley and Tim Reid): “From China to Canada and London, fast-rising property markets are haunting the global economy again, five years after the U.S. subprime mortgage bubble burst and triggered the worst financial crisis since the 1930s… Plentiful cheap credit is just one more inducement to home buyers who, in many countries, can deduct mortgage interest from their taxable income or are exempted from capital gains tax when they sell their house, said Andrew Oswald, a professor of economics at Warwick University in Britain. ‘We're stoking up a huge bubble. It’s quite extraordinary. We virtually ruined the Western world by having high house price inflation and now we’re determined to do it again,’ he said.”

October 31 – Bloomberg (Katie Linsell): “U.S. borrowers are raising twice as much debt in Europe this year than in 2012 as renewed confidence in the region’s economy helps cut the cost of converting the proceeds into dollars to the lowest in more than five years. Issuers… sold 32 billion euros ($44bn) of bonds this year, paying average yields of 2%, below the 3.2% for dollar-denominated notes, Bank of America Merrill Lynch index data show.”

EM Bubble Watch:

October 31 – Bloomberg (Michael Bathon): “OGX Petroleo & Gas Participacoes SA’s bankruptcy filing puts $3.6 billion of dollar bonds into default in the largest corporate debt debacle on record in Latin America… Yesterday’s filing by the oil company that transformed Batista into Brazil’s richest man followed a 16-month decline that wiped out more than $30 billion of his personal fortune.”

November 1 – Bloomberg (David Biller): “Brazil’s industrial production expanded at almost half the pace analysts expected as the central bank raises borrowing costs and the government dials back stimulus. Industrial output rose 0.7% in September from the previous month after remaining unchanged in August…”

October 31 – Financial Times (Javier Blas): “The International Monetary Fund has for the first time warned that sub-Saharan African countries are becoming ‘increasingly vulnerable to global financial shocks’ as they intensify their reliance on foreign investors. The warning in its twice yearly review of the region comes as African frontier markets such as Nigeria, Ghana and Kenya fret about the side-effects of tighter monetary policy in the US. African countries have benefited over the past three years from investors’ hunger for yield due to ultra-loose monetary policies in the US, Japan and Europe. Governments from the region have raised a record $8bn in global sovereign bonds… this year, up from just $1bn a decade ago. And foreign investors have for the first time become active players in some domestic bond and equity markets there.”

China Bubble Watch:

October 30 – Bloomberg: “China’s ruling Communist Party said a key meeting to discuss economic-policy reforms will run for four days through Nov. 12 in Beijing… The gathering will be the third full meeting of the party’s current Central Committee, including President Xi Jinping and Premier Li Keqiang, who took over in a once-a-decade power transition that started in late 2012. Thirty-five years ago, a similar Communist Party gathering saw Deng Xiaoping and his allies inaugurate a series of reforms that began to open up China to foreign investment and loosen state controls over the economy.”

October 30 – Bloomberg: “China’s money-market rates jumped to four-month highs as corporate tax payments tied up funds amid uncertainty over the central bank’s policy stance. The one-year government bond yield climbed to a record as demand weakened at a sale of the securities… The one-year interest-rate swap, the fixed payment needed to receive the floating seven-day repo, rose four basis points, or 0.04 percentage point, to 4.23%... It touched 4.27% earlier, the highest level since June 24, and reached a record 5.06% in June as a cash crunch fanned concern some banks would struggle to meet debt payments. The seven-day repurchase rate, a gauge of funding availability in the banking system, rose 55 bps to 5.55%... That was the 10th increase in a row, the longest run of gains since 2007. The overnight repo rate jumped 53 bps to 5.21%.”

October 31 – Bloomberg: “China’s top four banks posted their biggest increase in soured loans since at least 2010 as a five-year credit spree left companies with excess manufacturing capacity and slower profit growth amid a cooling economy. Bad debts at Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. rose 3.5% in the third quarter to a combined 329.4 billion yuan ($54bn)… Profit rose to 209 billion yuan while their average bad-loan ratio widened to 1.02%.”

October 31 – Bloomberg: “China lodged an official protest with Japan after its ships entered an area in the west Pacific Ocean and disrupted military exercises being conducted there… Japan’s actions also endangered the safe navigation of ships and planes, the statement said. Japanese Prime Minister Shinzo Abe said earlier this week he wouldn’t permit China to use force to resolve territorial spats, as Chinese aircrafts’ renewed presence near disputed islands led the Japanese to dispatch their fighter jets.”

October 28 – Bloomberg: “Companies from IBM to Starbucks are struggling with new obstacles in China as Communist Party officials tussle over the direction and depth of economic reforms. China’s state-controlled media last week accused Starbucks Corp. with charging too much for coffee and said Samsung Electronics Co.’s smartphones don’t work properly. International Business Machines Corp. IBM’s China revenue slipped 22% in the third quarter, contributing to the first-ever sales decline in the company’s growth-markets division, as state-owned companies started delaying orders… ‘The operating environment for foreign firms has deteriorated in the last year in a serious way,’ said Shaun Rein, managing director of China Market Research Group in Shanghai. ‘In my 16 years in China, it’s some of the worst business sentiment among foreign executives. They don’t feel as welcome as they used to.’”

October 28 – Bloomberg (Kelvin Wong): “Barclays Plc joined UBS AG and Bank of America Corp. in forecasting a Hong Kong property slump, predicting home prices will fall at least 30% by the end of 2015 as income growth stalls and supply increases. A ‘downward spiral of home prices is likely’ as developers and homeowners adjust expectations, analysts Paul Louie and Zita Qin wrote… Hong Kong home prices more than doubled since the start of 2009 on record- low interest rates and lack of supply, prompting the government to impose extra taxes and tighten lending restrictions. ‘The magnitude of the fall is underestimated,’ the Barclays analysts wrote.”

Japan Bubble Watch:

October 30 – Financial Times (Demetri Sevastopulo and Jonathan Soble): “When Prime Minister Shinzo Abe told Japanese troops on Sunday that Tokyo opposed the use of force to change the status quo in Asia, his real audience was in Beijing. The Chinese foreign ministry responded on Monday by accusing Japan’s leaders of ‘repeatedly making provocative remarks’ and displaying ‘wild arrogance’. The Global Times, a nationalistic Communist party mouthpiece, said the chance that friction between the powers would ‘escalate into military clashes is growing’… At the weekend, tensions flared again as Japan scrambled fighter jets to shadow Chinese jets in the area. Last month, China flew a drone near the Senkaku, leading Japan to say it would consider shooting down unmanned aircraft that violate its airspace. China said that would be an ‘act of war’ and that it would take ‘decisive action to strike back’.”

October 28 – Bloomberg (Isabel Reynolds and Takashi Hirokawa): “Japanese Prime Minister Shinzo Abe warned he wouldn’t permit China to use force to resolve territorial spats, as the renewed presence of Chinese aircraft near disputed islands led its neighbor to dispatch fighter jets. Japan sent up fighter jets for a third day yesterday after Chinese aircraft flew between its southern islands without entering Japanese airspace… Abe said yesterday the country would not allow any shift in the status quo regarding islands both governments claim in the East China Sea… ‘We will show the nation’s determination not to allow any change in the current situation by force,’ Abe told Japanese troops… , saying Japan would cooperate with countries that share its values of freedom, democracy and basic human rights. He has previously used such phrases in reference to Japan’s territorial dispute with China.”

October 30 – DPA: “Japan’s unemployment rate declined by 0.1 percentage points to 4.0% from the previous month, for the first decline in two months… The number of unemployed people dropped by 170,000 from a year earlier to 2.58 million, falling year-on-year for the 40th consecutive month…”

India Watch:

October 28 – Bloomberg (Tanya Angerer and Anurag Joshi): “HDFC Bank Ltd. sold India’s shortest-dated benchmark-sized dollar debt since 2007 as concern the rupee’s rally won’t last damped investor appetite for longer-dated bonds. The nation’s largest lender by market value issued $500 million of three-year securities on Oct. 24 at a spread of 255 bps more than Treasuries, 25 bps wider than what it paid for five-year debt in February…”

Asia Bubble Watch:

October 28 – Bloomberg (Pratish Narayanan, Ramsey Al-Rikabi and Yuji Okada): “Asian oil refiners from SK Innovation Corp. to JX Holdings Inc. face shrinking margins next year as China triples new processing capacity and Saudi Arabia opens plants. Profit from processing oil will drop by an average of 11% in 2014, according to… refiner and analyst estimates… China is adding plants even as economists predict its economic growth will to slow to the weakest since 1990. Middle East nations also are expanding capacity, seeking to be more self-sufficient in everything from gasoline to jet fuel.”

Europe Watch:

October 28 – Bloomberg (Sharon Chen and Eshe Nelson): “Britain risks repeating the debt-fueled binge that led to the credit crisis as the government relies on a hair-of-the-dog remedy for the economy, said former Financial Services Authority Chairman Adair Turner. ‘We had a fantastic party, we got a whacking great hangover, and we’ve decided that the best cure is a really stiff drink,’ Turner said… ‘Which is the same all over again -- get the housing market going again.’ …In London, prices are soaring amid demand from cash-rich international buyers.”

October 31 – Bloomberg (Fergal O’Brien): “Euro-area unemployment held at a record high in September, worse than economists had estimated. The jobless rate stood unchanged at 12.2%...”

October 28 – Bloomberg (Stefan Riecher and Lorenzo Totaro): “Euro-area jobless numbers this week may lay bare a fault line scarring the region’s recovery as evidence of Germany’s employment muscle contrasts with the scourge of political quagmire destroying work in Italy. While the currency bloc’s longest-ever recession has ended, unemployment held at 12% in September… Within that data lies a rift between two of its largest economies, with Italy’s rate seen by economists to have reached 12.3%, the highest since records began in 1977 -- and more than double Germany’s comparable level. Italy will ‘critically determine the fate of the euro area’ and the region won’t prosper if that country can’t restore economic growth, ECB Executive Board member Joerg Asmussen said last week. Italian officials predict joblessness in the euro zone’s third-biggest economy will keep rising… ‘We are still in a very discouraging situation for most of the euro area,’ said Anatoli Annenkov, an economist at Societe Generale… ‘That’s particularly true for Italy, where politics has come to a rest and necessary structural reforms are not kicking in at all.’”

Germany Watch:

October 31 – Wall Street Journal (Ian Talley and Jeffrey Sparshott): “Employing unusually sharp language, the U.S…. openly criticized Germany’s economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy. In its semiannual currency report, the Treasury Department identified Germany’s export-led growth model as a major factor responsible for the 17-nation currency bloc's weak recovery. The U.S. identified Germany ahead of its traditional target, China, and the most-recent perceived problem country, Japan, in the ‘key findings’ section of the report. The U.S. is itself dealing with persistently weak growth and has faced complaints from some countries about its attempts at reviving a sluggish economy, including the Federal Reserve’s easy money policies… With the latest report, the Treasury Department has now criticized the world's three largest economies after the U.S. for their economic policies. The focus on Germany represents a stark shift in the Obama administration's economic engagement with one of its most important allies. Since the early stages of the euro-zone debt crisis in 2010, U.S. officials often avoided public criticism of Germany given its central role in keeping the currency bloc intact.”

November 1 – Bloomberg (Brian Parkin and Patrick Donahue): “The International Monetary Fund joined the U.S. Treasury Department in rebuking Germany’s trade surpluses, rebuffing the claim of Chancellor Angela Merkel’s government that booming exports are a sign of economic health. As Germany bristled yesterday over a Treasury report critical of its current-account surpluses, the fund’s First Deputy Managing Director David Lipton urged Merkel’s government to reduce export surplus to an ‘appropriate rate’ to help its euro-area partners cut deficits. The Treasury report berated Germany’s export focus during Europe’s debt crisis, saying its neglect of domestic demand has delayed ending the misery.”

October 30 – Bloomberg (Jeff Black): “German unemployment rose for a third month in October, adding to signs of a slowdown in Europe’s largest economy. The number of people out of work climbed a seasonally-adjusted 2,000 to 2.97 million, after gaining by a revised 24,000 in September… The adjusted jobless rate was unchanged at 6.9%.”