Saturday, December 6, 2014

Weekly Commentary, November 6, 2012: When Money Dies

November 16 – Wall Street Journal (Damian Paletta and Carol E. Lee): “White House officials are in advanced internal discussions about a plan to replace the sweeping spending cuts set to begin in January with a smaller, separate package of targeted spending cuts and tax increases… They would cut spending by roughly $100 billion next year, and then for eight additional years… Democrats and Republicans have separately tried to design plans to replace the sequester. The discussions are just one part of a complicated set of possibilities as Washington deals not only with the looming spending cuts but also the expiration of the Bush tax cuts and other traditional year-end priorities, such as finding a way to halt the scope of the Alternative Minimum Tax… By postponing the sequester cuts, Washington would essentially push off a number of large deficit-reduction decisions into mid-2013.”

Finally, the post-election “fiscal cliff” predicament has arrived at our doorstep. I’ll assume at this point that tough negotiations unfold over the coming weeks. There are clearly “irreconcilable” and “deep philosophical” differences between the two sides. The democrats and the republicans just see the world quite differently, as do competing political factions around the globe. And, right along with global policymakers, I think it’s safe to assume that Washington will resort to the popular (and habit-forming) “kick the can” strategy of extending stimulus measures and postponing structural reform. The markets were encouraged by Friday’s conciliatory political tone.

It’s been 14 years of chronicling history’s greatest Credit Bubble. From early on, the Bubble thesis was dismissed and ridiculed. More recently (April ’09), the thesis that the Treasury market had succumbed to Bubble dynamics was denounced by a well-known strategist as “intelligentsia,” suggesting it was removed from real world market analysis. Over the years many have castigated my analytical framework as “theoretical” and “academic,” although I do not recall anyone ever seriously challenging the analysis. I today believe more strongly than ever in the profound ramifications of the Macro Credit Analysis Framework and historic Bubble thesis.

For much of the past 14 years, while I have been documenting the greatest Credit inflation the world has ever experienced, policymakers and Wall Street strategists have been fixated on the “scourge of deflation.” The “Keynesians” (aka Inflationists) have used post-Bubble “mopping up” strategies to repeatedly resuscitate and promulgate history’s greatest Credit inflation. Amazingly, the disease has been misdiagnosed virtually from day one. More amazingly, no one will even contemplate a reexamination; just stronger narcotics. The great risk has not been – and it’s not today – either deflation or inflation. The risk has fully materialized – and it’s the unavoidable downside of a runaway global Credit Bubble and financial mania.

Over the years, I’ve often been asked to predict how this will all end: will it be either hyperinflation or deflation? My response has always been “we’ll have to carefully monitor how things unfold.” From my perspective, there have been two critical unknowns. First, I’ve never felt comfortable predicting to what extent global policy measures would be used to prolong the Bubble (Fed balance sheet on the way to $10 TN?). Second, I’ve believed it’s unknowable as to how long extraordinarily speculative financial markets would play along. There has been a crucial interplay at work between aggressive “activist” policymaking and sustained confidence in the suspect financial claims piling up virtually all over the world.

I highly recommend Adam Fergusson’s classic “When Money Dies – The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany.” It’s just a wonderfully written account of a most-catastrophic inflationary cycle. This recommendation is not, though, an indication that I’m leaning toward the hyperinflation outcome. The relevance today of “When Money Dies” rests with it having so clearly illuminated the profound financial, economic, social and political costs associated with major inflationary cycles. And once this cycle gathered momentum, there was nothing to hold it back. Inflationary psychology, as it has a strong propensity of doing, was self-reinforcing and pathologic. Then, as the cycle progressed, various constituencies supportive of ongoing inflation gained only greater power. Weimar policymakers were stunningly clueless as to the consequences of their money printing.

Mr. Fergusson explained with great insight how, in the end, the inflationary cycle could not be concluded without horrendous pain and upheaval. The inflation had profoundly destroyed and redistributed wealth. The underlying economic structure had been badly maligned by distorted price structures and dysfunctional resource allocation. People’s confidence in money, policy, democracy, Capitalism and civil society had been shattered.

No two inflationary cycles are alike. Each is nuanced, with different types of Credit instruments, modes of financial intermediation, methods of speculation, fallacies, malfeasance, policy doctrines and economic structures. At the same time, I would argue that inflationary cycles also share important common ground that is critical to a better understanding of today’s unique global inflationary cycle. To be sure, the longer they last the deeper the maladjustment to economic structures. They also always invite destabilizing speculation. And the longer the cycle is allowed to unfold, the greater the redistribution of wealth and associated social/political consequences. While this important reality is masked throughout the inflationary boom, Credit Bubbles are powerful yet seductive machines of wealth destruction. Importantly, various constituencies develop that are determined to perpetuate inflationary excess, complete with flawed policy doctrines and fallacious theories. And the grander the cycle the more conspicuous the necessity for perpetually postponing the inevitable day of reckoning.

The Weimar Germany hyperinflation is infamous for unbelievable money printing ($1 to 42,000 TN marks!). The “Roaring Twenties” and Japan 1980’s Credit inflations were notable for seemingly tame “inflation” that worked to confuse and disable policymakers. All three, however, shared deeply impaired financial and economic structures. All three saw runaway inflationary excess late in the cycle. And, in hindsight, all experienced devastating system impairment during the inflationary boom’s waning months.

The current inflationary boom is unique. It is global in nature unlike anything previously experienced. The global Credit Bubble completely engulfed the “dollar reserve” global financial “system.” The massive inflation of dollar financial claims fomented a corresponding historic inflation in various currency Credit systems worldwide. Unprecedented global Credit inflation has been fueled by a globalized system of electronic “money” and Credit. This prolonged cycle has been unique in terms of a global Credit expansion unconstrained by a monetary anchor, gold backing or even restraint imposed by bank reserve and capital requirements. It’s been runaway non-productive debt growth on a scale never before seen.

The global nature of this Credit inflation has been responsible for atypical inflationary manifestations. Importantly, unhinged global Credit has ensured an historic investment boom. Manufacturing capacity, especially technology production throughout Asia, has ensured an endless supply of computers, televisions, cell phones, Ipads, electronics, communications technologies, etc. Technological innovation has also spurred digital and downloadable media and content, with “globalization” and the “technology revolution” ensuring that historic Credit inflation has not for the most part translated into worrying consumer price inflation. Yet this has in no way diminished the distortions and risks associated with the current inflationary cycle.

Indeed, generally quiescent “CPI” has ensured that policymakers and most analysts have remained comfortably oblivious throughout this most protracted inflationary period. Credit systems have, in general, inflated in tandem globally. The corresponding synchronized currency devaluation has also worked somewhat to synchronize – to balance out - inflationary effects. The collapse of the German mark in international trading played a profound role during the Weimar hyperinflation. Today, powerful global central banks intervene aggressively in order to stabilize trading relationships between the major currencies. This has worked magically to mask imbalances and distortions. Importantly, it has also worked to perpetuate them, while delaying badly-needed financial and economic adjustment.

There is a reasonable chance that we are again near a critical Credit Bubble inflection point. Inflations need ongoing monetary fuel. Indeed, it is the nature of major inflations that they require ever-increasing amounts of “money” and Credit. Today’s aged global Credit Bubble requires massive and ever-increasing quantities of global Credit expansion. For three years now, we’ve watched the unfolding downside of the Credit cycle in Europe. More recently, developing economies have weakened, especially in China, India and Brazil. Perhaps there will even be a little fiscal tightening here at home. As such, it is not a sure thing that sufficient new global Credit will be forthcoming.

For the past two years, Europe has been playing the role of “marginal” Credit provider. Private-sector Credit growth has plummeted throughout much the region, although this has been countered by aggressive policy interventions. First, there were the Greek, Irish and Portuguese bailouts – and later more Greek bailouts. Then a bigger EFSF and an ESM. This was followed by the $1.3 TN long-term Refinancing Operations (LTRO) – with a notably short half-life. As the European - and global - crisis began to spiral out of control this past summer, the world was introduced to the “do whatever it takes” Draghi Plan and “QE infinity” from the Bernanke Fed (and others). And a not-so-funny thing happened: global risk markets rallied abruptly – only then to trade unimpressively.

Today, the CRB Commodities index (down 3.8% y-t-d) trades at about the same level as it did two years ago. Despite troubling geopolitical developments in (throughout) the Middle East, crude (down 11% y-t-d) trades near the level from three years ago, despite a significant decline in Iranian crude production. The industrial commodities trade poorly. Global equities markets are showing vulnerability, and it is as well worth noting that Credit spreads and risk premiums generally have begun to widen. That such “non-inflationary” market reactions unfold just months after desperate inflationary policy measures is worthy of consideration.

I have in the past noted an important peculiarity of this global inflationary cycle: Rather than the more conventional currency printing press, the Global Credit Bubble has been fueled in large part by (electronic-entry) marketable debt instruments. This has created key advantages in terms of this cycle’s durability and longevity. For one, it has tended to isolate the greatest inflationary effects within the global securities and asset markets. Second, this dynamic has provided policymakers with incredible power to intervene in the markets to bolster confidence and spur the ongoing inflation of financial instruments (both quantity and price).

But any inflationary cycle “advantage” comes with a significant downside. For one, never in the history of mankind has an inflationary cycle so spurred and rewarded financial speculation. Global risk markets have evolved into essentially one historic policy-induced speculative Bubble. Financial speculation was nurtured into one gigantic “crowded trade,” which manifested into the dysfunctional “risk on, risk off” trading dynamic. Increasingly aggressive policy responses over too many years created a speculation monster that will not be easily contained or tamed.

As noted above (and in previous CBBs), a Credit Bubble is sustained only through ever-increasing quantities of “money” and Credit. The greater the Bubble, the greater the required policy response to sustain the inflation. But, importantly, the greater the policy measures imposed the greater the market reaction – and the greater the market reaction the greater the necessity for even bigger policy interventions in the future. I’ve posited that there’s an element of central banks “fighting a losing battle.”

There was talk this week of the need for even larger monthly QE from the Fed. The markets also anxiously await the firing up of Dr. Draghi’s bazooka. A new Japanese government could see the Bank of Japan further crank up their white-hot electronic printing press. With new leadership in China, perhaps they’ll be ready to push further on the accelerator. It all seems rather late-cycle to me. And, I’ll suggest, a loss of confidence in all these electronic journal entries - the global financial system more generally – is this historic cycle’s greatest vulnerability. As we witnessed not many years ago, one day everyone is so enjoying the dance party and the next they’re fighting for the exits. It’s a spiking the punch rather than removing the punchbowl dilemma.

For the Week:

The S&P500 declined 1.5% (up 8.1% y-t-d), and the Dow lost 1.77% (up 3.0%). The Morgan Stanley Cyclicals dropped 3.1% (up 9.6%), and the Transports fell 2.5% (down 2.6%). The Morgan Stanley Consumer index declined 1.1% (up 6.0%), and the Utilities fell 1.3% (down 6.9%). The Banks were hit for 2.0% (up 19.7%), and the Broker/Dealers were down 1.2% (down 2.6%). The S&P 400 Mid-Caps fell 1.7% (up 8.4%), and the small cap Russell 2000 dropped 2.4% (up 4.8%). The Nasdaq100 was down 1.9% (up 11.3%), and the Morgan Stanley High Tech index fell 1.5% (up 7.2%). The Semiconductors lost 3.7% (down 2.3%). The InteractiveWeek Internet index declined 0.9% (up 7.4%). The Biotechs were unchanged (up 32.2%). Although bullion was down only $17, the HUI gold index was pounded for 8.4% (down 11.6%).

One-month Treasury bill rates ended the week at 12 bps and three-month bills closed at 8 bps. Two-year government yields dipped 2 bps to 0.24%. Five-year T-note yields ended the week down 3 bps to 0.61%. Ten-year yields fell 3 bps to 1.58%. Long bond yields slipped a basis point to 2.73%. Benchmark Fannie MBS yields rose one basis point to 2.14%. The spread between benchmark MBS and 10-year Treasury yields widened 4 bps to a 2-month high 56 bps. The implied yield on December 2013 eurodollar futures declined a basis point to 0.38%. The two-year dollar swap spread rose 2 bps to 14 bps, and the 10-year swap spread increased one to 5 bps. Corporate bond spreads were wider. An index of investment grade bond risk increased 3 bps to a 16-wk high 109 bps. An index of junk bond risk jumped 14 to a 15-wk high 565 bps.

It was another decent week of debt issuance. Investment grade issuers this week included Turlock $4.9bn, National Oilwell $3.0bn, Goldman Sachs $1.75bn, Prudential $1.5bn, Macy's $1.0bn, Principal Financial $900 million, HCP $800 million, Roper Industries $500 million, Floria Power $650 million, BB&T $500 million, Dr Pepper Snapple $500 million, Alliance Data $400 million, AK Steel $350 million, Ainsworth Lumber $350 million, Carlisle Companies $350 million, Plum Creek Timber $325 million, Mack-Cali Realty $250 million and TTX $250 million.

Junk bond funds saw outflows jump to $1.22bn (from Lipper), the largest since June. Junk issuers included Studio Energy $825 million, Walter Energy $500 million, Sealed Air $425 million, Arch Coal $375 million, Thompson Creek Metals $350 million, Graftech International $300 million, Antero Resources $300 million, and Amsurg $250 million.

I saw no convertible debt issued.

International dollar bond issuers included Barclays $3.0bn, Volkswagen $2.6bn, Statoil $2.35bn, Export-Import Bank of Korea $1.0bn, Perusahaan Penerbit $1.0bn, Costa Rica $1.0bn, Serbia $750 million, Alpek $650 million, and Uruguay $500 million.

Spain's 10-year yields rose 5 bps to 5.84% (up 80bps y-t-d). Italian 10-yr yields fell 11 bps to 4.85% (down 218bps). German bund yields slipped 2 bps to 1.33% (down 50bps), and French yields fell 6 bps to 2.07% (down 107bps). The French to German 10-year bond spread narrowed 4 bps to 74 bps. Ten-year Portuguese yields added 2 bps to 8.57% (down 420bps), with a four-week gain of 119 bps. The new Greek 10-year note yield dropped 45 bps to 17.11%. U.K. 10-year gilt yields were unchanged at 1.73% (down 25bps). Irish yields dropped 13 bps to 4.52% (down 374bps).

The German DAX equities index dropped 3.0% (up 17.8% y-t-d). Spain's IBEX 35 equities index slipped 0.6% for the week (down 11.4%). Italy's FTSE MIB fell 2.1% (down 1.6%). Japanese 10-year "JGB" yields declined a basis point to 0.72% (down 27bps). Japan's Nikkei jumped 3.0% (up 6.7%). Emerging markets were mostly under pressure. Brazil's Bovespa equities index sank 3.5% (down 2.4%), while Mexico's Bolsa added 0.4% (up 10.1%). South Korea's Kospi index fell 2.3% (up 1.9%). India’s Sensex equities index dropped 2.0% (up 18.5%). China’s Shanghai Exchange was hit for 2.6% (down 8.4%).

Freddie Mac 30-year fixed mortgage rates dropped 6 bps to 3.34% (down 66bps y-o-y). Fifteen-year fixed rates fell 4 bps to 2.65% (down 66bps). One-year ARMs declined 4 bps to 2.55% (down 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 7 bps to 4.00% (down 75bps).

Federal Reserve Credit expanded $8.5bn to $2.819 TN, with a year-to-date decline of $101bn.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $570bn y-o-y, or 6.3% to a record $10.794 TN. Over two years, reserves were $1.760 TN higher, for 19% growth.

M2 (narrow) "money" supply was up $36.4bn to a record $10.291 TN. "Narrow money" has expanded 7.9% annualized year-to-date and was up 7.3% from a year ago. For the week, Currency increased $400 million. Demand and Checkable Deposits dropped $22.8bn, while Savings Deposits surged $59.8bn. Small Denominated Deposits slipped $0.8bn. Retail Money Funds increased $2.7bn.

Money market fund assets were down about $3bn to $2.575 TN. Money Fund assets have declined $120bn y-t-d, with a one-year decline of $70bn, or 2.6%.

Total Commercial Paper outstanding increased $5.0bn to $969bn CP was up $9.3bn y-t-d, while having declined $31bn from a year ago.

Currency Watch:

November 13 – Bloomberg (Joseph Ciolli): “The foreign-exchange market is signaling more pain ahead for currencies that benefit from a sustained global recovery, five years after the onset of the worst financial crisis since the Great Depression. HSBC Holdings Plc’s Global Hazard Indicator, which combines implied volatility readings in options for the dollar, euro and yen, shows wider price swings in currencies over the next year than in the coming three months. If history is any guide, that means the dollar and yen will strengthen and higher-yielding, higher-risk currencies such as the Brazilian real and South African rand will depreciate.”

The U.S. dollar index added 0.3% to a 10-wk high 81.26 (up 1.3% y-t-d). For the week on the upside, the Mexican peso increased 0.2%, the Swiss franc 0.4%, the Danish krone 0.2%, the euro 0.2% and the Canadian dollar 0.1%. For the week on the downside, the Japanese yen declined 2.3%, the Brazilian real 1.9%, the South African rand 1.8%, the Norwegian krone 0.7%, the Taiwanese dollar 0.7%, the Swedish krona 0.7%, the Australian dollar 0.5%, the South Korean won 0.4%, the Singapore dollar 0.2%, the New Zealand dollar 0.2%, and the British pound 0.1%.

Commodities Watch:

The CRB index gained 0.5% this week (down 3.8% y-t-d). The Goldman Sachs Commodities Index was little changed (down 1.2%). Spot Gold fell 1.0% to $1,714 (up 9.6%). Silver declined 0.7% to $32.37 (up 16%). January Crude increased 37 cents to $86.92 (down 12%). December Gasoline added 0.4% (up 2%), and December Natural Gas jumped 8.2% (up 27%). December Copper increased 0.2% (up 1%). December Wheat dropped 5.5% (up 28%), and December Corn declined 1.6% (up 13%).

Global Credit Watch:

November 16 – Bloomberg (Ian Katz): “Treasury Secretary Timothy F. Geithner said he is optimistic a deal on averting the fiscal cliff could be reached within weeks after talks today between President Barack Obama and congressional leaders. ‘It was a good meeting, and the tone was very good,’ Geithner said… ‘I think this is doable within several weeks.’ ‘This is within our grasp, within our reach,’ he said. ‘It’s not that complicated.’ Geithner said that the fiscal cliff is creating a ‘huge cloud of uncertainty’ for the economy that is harming consumer confidence. Asked if the cliff threatens to curb spending during the Christmas shopping season, he said: ‘You’d want to do it as soon as you can.’”

November 15 – Bloomberg (Aki Ito): “Federal Reserve Bank of San Francisco President John Williams said the central bank will probably buy about $85 billion in bonds per month starting in early 2013 and continue purchasing securities well into the second half of the year. ‘I expect it will be some time until the job market makes substantial progress towards our congressionally mandated maximum employment goal,’ Williams said… ‘I anticipate that we will need to continue our purchases of mortgage-backed securities and longer-term Treasury securities past the end of this year and likely well into the second half of next year.’ A number of Fed officials said the central bank may need to expand its monthly bond purchases after the expiration in December of a program known as Operation Twist…”

November 14 – Bloomberg (David Goodman and Brian Parkin): “Germany sold two-year notes at a negative yield for the second time on record… The nation auctioned 4.3 billion euros ($5.5bn) of the debt at an average yield of minus 0.02%... It’s the first time since July the rate has been below zero. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.”

November 13 – Bloomberg (James G. Neuger and Stephanie Bodoni): “Euro-area finance ministers gave Greece two extra years to wrestle down its budget deficit, pledging to plug the resulting financing gaps in order to keep the country in the single currency and prevent a renewed flareup of the debt crisis. Finance ministers granted Greece until 2016 to cut the deficit to 2% of gross domestic product. They put off until Nov. 20 a decision on how to cover additional Greek needs of as much as 32.6 billion euros ($41bn) and left unclear whether the International Monetary Fund will continue to contribute.”

November 14 – Bloomberg (Marcus Bensasson): “Greece’s economy contracted for a 17th straight quarter, as the country’s slump deepened amid austerity measures tied to the country’s 240 billion-euro ($306bn) bailouts from the European Union and International Monetary Fund. Gross domestic product declined 7.2% in the third quarter from the same period last year after dropping 6.3% in the second…”

November 16 – Bloomberg (Jeff Black and Brian Parkin): “European Central Bank Governing Council member Jens Weidmann said Greece may need a second debt writeoff after policy makers in Athens enact economic reforms. ‘One should ask, if it would create trust if Greece were to receive a debt writedown today,’ Weidmann said… ‘Would it not make more sense to give the prospect of a writedown that one would need to regain market access when the reforms are actually carried out?’ Weidmann, who heads Germany’s Bundesbank, said Greece’s debt sustainability and financing gap need to be ‘honestly’ discussed by European leaders. The finance ministers of the 17 euro-area nations meet on Nov. 20 to discuss how to pay for a two-year extension of Greek budget targets.”

November 14 – Bloomberg (Radoslav Tomek): “European Central Bank Governing Council member Jozef Makuch said the ECB can ‘only buy time,’ and ‘not solve the reasons for the crisis.’ The turmoil is exacerbated by banks not trusting each other, Makuch said… ‘we can’t calculate how much to throw on the market to restore trust.’ To solve the crisis indebted nations must push on with structural reforms and banks need to be recapitalized.”

November 15 – Bloomberg (Jeff Black): “European Central Bank Executive Board member Joerg Asmussen said euro-area states need to fix economic imbalances so that monetary policy can function properly. ‘The broken monetary policy transmission mechanism can only be repaired if the underlying macroeconomic imbalances are tackled,’ Asmussen said… The ECB will therefore only activate its bond-buying program if countries ‘keep to the conditions implicit’ in future European bailout programs, he said. ECB Governing Council member Luc Coene said… that Spain should ‘urgently’ seek a bailout, as the country struggles with a deepening recession amid budget cuts.”

November 15 – Bloomberg (Angeline Benoit): “Spain said its recession dragged into a fifth quarter even as the European Union endorsed the country’s efforts to reduce the second-biggest deficit in the euro area… Gross domestic product fell 0.3% in the three months through September from the previous quarter, when it declined 0.4%... Consumer spending dropped 0.5% in the quarter.”

November 14 – Bloomberg (Emma Ross-Thomas and Joao Lima): “Spanish workers staged a second general strike this year as unions across Europe prepared the biggest coordinated protests yet against budget cuts that policy makers say are needed to end the region’s debt crisis. In Spain, unions said most auto and metal workers joined the strike, even as demand for electricity was just 12% below usual. One of Portugal’s two biggest labor groups also called a strike. Partial walkouts are planned in Greece and Italy, and French unions are urging workers to join protest marches.”'

November 12 – Bloomberg (Emma Ross-Thomas): “Spanish Foreign Minister Jose Manuel Garcia-Margallo said any referendum on independence called by Catalonia would amount to a coup d’etat. Garcia-Margallo said Spain’s Constitutional Court would annul any referendum called by Catalan President Artur Mas’s government in Barcelona. That means any vote would be ‘clearly illegal, a coup d’etat in legal terms,’ he said… The government in Catalonia, Spain’s largest regional economy, called early elections for Nov. 25 that will focus on whether the region should seek independence.”

November 16 – Bloomberg (Sharon Smyth): “Spain, responding to street protests and reports of suicides linked to foreclosures, introduced rules to help protect families from eviction, increasing the risk of creditor losses and weakening an already fragile banking system. Banks won’t be able to remove families who can’t pay their mortgages for two years, Deputy Prime Minister Soraya Saenz de Santamaria said… Spain is trying to balance the threat of social unrest with protecting the banks…”

November 9 – Bloomberg (John Glover): “Europe’s corporate bond market is shrinking as redemptions outstrip issuance, banks borrow and lend less, and companies stockpile cash rather than invest in their businesses. Banks have sold about 335 billion euros ($427bn) of bonds in the common currency and pounds this year, down from 443 billion euros last year, 503 billion euros the year before and a record 671 billion euros in 2009. Banks cut their lending to euro-area companies by 45 billion euros in the third quarter from a year earlier…”

November 16 – Bloomberg (Andrew Frye): “Italian Prime Minister Mario Monti faces a deadline today to reverse his plan to separate regional and national voting or risk a rebellion by his supporters that could force early elections. Former Prime Minister Silvio Berlusconi’s People of Liberty Party, which supports the premier’s non-elected government, has demanded Monti reverse his position favoring regional ballots in February with the national elections to follow in April… Monti’s coalition of rivals is coming apart as Berlusconi and his backers, the most powerful political force in Italy over the last two decades, sink in opinion polls.”

Germany Watch:

November 14 – Bloomberg (Dalia Fahmy): “German home prices may be in danger of overheating in some regions, even though the nationwide risk is low, the Bundesbank said. Banks are increasing their lending as demand for residential property accelerates, the German central bank said… Germany’s residential property boom is being fueled in part by low interest rates and a lack of investment alternatives.”

Global Bubble Watch:

November 12 – Bloomberg (Alastair Marsh): “Central bank stimulus that’s helping push corporate bond sales toward a record is undermining the market for structured notes that package debt with derivatives, cutting issuance to the lowest since 2003. German lenders DZ Bank AG and Deutsche Bank AG together with UBS AG of Switzerland led sales of $68.6 billion in Europe and Asia this year, down from $97.8 billion in the same period of 2011. In the U.S., where the market is based on equity-linked securities, issuance totaled $34 billion, the least since Bloomberg began tracking the data.”

November 12 – Bloomberg (Roben Farzad): “It’s kind of Orwellian that anyone would rapaciously buy an ETF with the ticker JNK—branding shorthand for ‘junk,’ Wall Street’s sobriquet for high-yield, the riskiest layer of corporate bonds. Nevertheless, JNK, the SPDR Barclays Capital High Yield Bond ETF, and competitor offerings are a hot destination in these yield-famished days. The appeal is irrefutable: You’ll get precious little income from Treasuries and muni bonds. Creditworthy corporations are borrowing at record lows. Why not then pile into riskier, higher-yielding debt, especially if you can do so via one tidy, exchange-traded ticker? (No need to ring Michael Milken.) What’s more, Moody’s sees the global default rate for ‘speculative-grade’ debt ending the year at 2.8%, compared with an average of 4.8% since 1983. Yields have fallen 1.65 percentage points this year, to 7.05% on Nov. 1, according to Bank of America Merrill Lynch data.”

November 16 – Bloomberg (Sarika Gangar): “The fiscal cliff may have arrived early in the $1 trillion market for U.S. junk bonds. Companies sold at least $2.6 billion of speculative-grade debt this week, down 81% from the prior period and below the 2012 average of $6.9 billion… Investors are demanding higher interest rates to lend to the neediest borrowers as JPMorgan Chase & Co. says the U.S. will tumble into recession if lawmakers fail to avoid $600 billion in mandated spending cuts and tax increases... Sales of speculative-grade debt in the U.S. this year totals $312.5 billion, more than the $243.8 billion sold in all of 2011 and topping the previous record of $288.2 billion in 2010… Issuance in October reached $48.3 billion, a monthly record.”

November 12 – Bloomberg (Boris Korby): “The hunger for returns from yield- starved investors is emboldening the riskiest Brazilian companies to try selling bonds at the highest rates in more than a decade… Chinese companies are also tapping into the demand, with six dollar-bond sales at coupons of 11% or higher since Sept. 1, compared with two in the first eight months of 2012.”

November 15 – Bloomberg (Andrew Mayeda and Theophilos Argitis): “Canadian existing home sales slipped in October from the previous month while prices were little changed on the year, adding to evidence of a cooling in the country’s real estate market…”

China Bubble Watch:

November 14 – Bloomberg: “China began installing a new economic leadership by indicating that Governor Zhou Xiaochuan will step aside and Vice Premier Wang Qishan, the top finance official, will move to a new role. Commerce Minister Chen Deming and Finance Minister Xie Xuren were absent from the Communist Party central committee named today, suggesting they are likely to exit those jobs. Liu He, a senior government economic adviser, joined for the first time, while Wang may head the party disciplinary body. Mark Williams, a former adviser to the U.K. Treasury on China, sees Zhou stepping down ‘fairly soon.’ The composition of China’s new leadership, decided in a once-a-decade transition of power, may determine the pace of change on issues such as deregulating interest rates and breaking up state monopolies. The make-up of the Politburo Standing Committee, to be unveiled tomorrow, will provide more evidence on policy direction as the world’s second-biggest economy shows signs of rebounding from a seven-quarter slowdown. ‘One of the biggest challenges will be pushing through reforms in the financial sector while keeping the banks stable and not causing too many problems for state-owned enterprises that rely on cheap bank credit,’ said Williams, a London-based economist for Capital Economics Ltd. ‘Different constituencies are pulling the financial regulators and the central bank in different directions.’”

November 12 – Bloomberg: “China’s new yuan loans unexpectedly fell in October from a year earlier and money supply rose less than forecast, damping signs the world’s second-biggest economy is recovering after a seven-quarter slowdown. Banks extended 505.2 billion yuan ($81.1bn) of local- currency loans, down 14% from a year earlier… The median estimate was 590 billion yuan… ‘The data support the view that the economic rebound will be mild this quarter,’ said Zhu Haibin, chief China economist at JPMorgan… in Hong Kong…”

November 14 – Bloomberg: “China’s vehicle prices fell for the sixth straight month in October… as dealerships cut prices to clear inventories. Prices of locally produced vehicles fell 1.3% from a year earlier, with passenger-vehicle prices dropping 1.8%...” Dealerships for carmakers including Toyota Motor Corp. and General Motors Co. have come under pressure to increase discounts as vehicle buying slows in the world’s largest auto market… ‘Market demand this year has been weak and dealers’ inventories at both the local carmakers and foreign brands have been piling up,’ Cheng Xiaodong, head of vehicle-price monitoring at the NDRC, said… ‘Discounting is the most effective way to lure buyers back.’”

November 12 – Bloomberg (Masatsugu Horie and Ma Jie): “After anti-Japan protesters in China smashed cars and torched dealerships, Koito Manufacturing Co. suspended a plan to triple output in the country. With a new factory half-built, Koito -- a Toyota Motor Corp. supplier -- reasoned that it may no longer need it. ‘Demand from automakers is unclear, so we don’t know how long we will have to freeze the project,’ said Shinji Karasawa… Along with Koito, Japanese parts-makers including Sumitomo Electric Industries Ltd. and Toyo Tire & Rubber Co. are rethinking plans to expand in China, where Toyota’s sales plunged 41% in September as demonstrations over disputed East China Sea islands flared.”

Japan Watch:

November 16 – Bloomberg (Isabel Reynolds and Takashi Hirokawa): “Shinzo Abe, head of Japan’s biggest opposition party, said elections set for next month will focus on the economy as he seeks to unseat Prime Minister Yoshihiko Noda as head of the world’s third-largest economy. ‘This election will be a fight to win back Japan,’ Abe told reporters… Abe advocates ‘bold’ monetary easing to try to reverse more than a decade of falling prices and said he would consider revising a law guaranteeing the independence of the Bank of Japan.”

November 15 – Bloomberg (Isabel Reynolds and Takashi Hirokawa): “Japanese Prime Minister Yoshihiko Noda will dissolve parliament tomorrow, triggering an election that polls show his party will lose three years after ending the Liberal Democratic Party’s (LDP) half-century grip on power. The ruling Democratic Party of Japan decided the national vote for the lower house will be held Dec. 16… An LDP win would reinstate Abe, who advocates a tougher policy toward China and greater central bank monetary stimulus, to the premiership he quit in 2007 after 12 months… An election means three of Asia’s four largest economies will have new governments in 2013. South Korea’s vote for president is Dec. 19, with the winner taking office in February… The lower house today approved the bill to issue 38.3 trillion yen ($477bn) in debt to cover about 40% of government spending for the year ending in March, and the opposition-controlled upper chamber will vote tomorrow. The yen today sank to a six-month low against the dollar after Abe called on the Bank of Japan to provide unlimited monetary stimulus until deflation is overcome… The next government will get a chance to reshape the central bank’s leadership, with Governor Masaaki Shirakawa’s term scheduled to end in April and his two deputies’ tenures set to end in March.”

November 12 – Bloomberg (Keiko Ujikane and Masahiro Hidaka): “Japan’s economy shrank last quarter as exports tumbled and consumer spending slumped, putting pressure on the central bank to add stimulus and hurting Prime Minister Yoshihiko Noda’s record as he prepares for elections. Gross domestic product fell an annualized 3.5%, the most since the earthquake and tsunami in early 2011… Shipments to Asia, Europe and the U.S. all slid, as did capital spending.”

India Watch:

November 15 – Bloomberg (Kartikay Mehrotra and Tushar Dhara): “India raised less than 25% of its target from an auction of airwaves, a sale Finance Minister Palaniappan Chidambaram was counting on to avert a sovereign credit downgrade… The government raised 94.08 billion rupees ($1.7bn) after operators stayed away from bidding for a CDMA band and for the nation’s two biggest cities… That falls short of the 400 billion rupees targeted… to help narrow the budget deficit to 5.3% of gross domestic product in the year to March 31, from 5.8% in the previous 12 months.”

November 12 – Bloomberg (Tushar Dhara and Unni Krishnan): “Indian industrial production unexpectedly fell in September and the trade deficit widened to a record last month as exports declined, adding to signs that Asia’s third-largest economy is struggling. Output at factories, utilities and mines dropped 0.4% from a year earlier… The trade deficit was $20.96 billion in October…”

European Economy Watch:

November 15 – Bloomberg (Marcus Bensasson): “The euro-area economy slipped into a recession for the second time in four years as governments imposed tougher budget cuts and leaders struggled to contain the debt crisis that broke out in October 2009. Gross domestic product in the 17-nation single-currency bloc slipped 0.1% in the third quarter after a 0.2% decline in the previous three months…”

November 12 – Bloomberg (Ben Sills and Charles Penty): “Prime Minister Mariano Rajoy said he will rush through measures to stem evictions in Spain after a woman committed suicide as officials tried to seize her home. A bipartisan committee will meet today to draw up plans to reduce the number of people being evicted from their homes as Rajoy, who faces a general strike this week amid mounting protests, tries to control a growing sense of outrage at mortgage foreclosures. Spain’s banking association responded today by announcing a two-year freeze on repossessions in cases of extreme need for ‘humanitarian reasons.’”

November 14 – Bloomberg (Manuel Baigorri): “Last Christmas, Juan Carlos Samano gave his wife a 50-euro ($64) bottle of Calvin Klein perfume from a tony department store. This year, he’s planning to spend no more than 10 euros on a set of beauty products from discounter Carrefour SA. ‘We used to buy whatever we wished without thinking much about the money,’ said Samano, 37, who last month lost his job as a heavy equipment operator in the northern Spanish city of Santander. ‘We now look for bargains.’ As Spain approaches its sixth year of economic crisis, Spaniards like Samano are reining in spending… The average Spanish family last year spent 500 euros to 600 euros on gifts and special meals during the holidays, versus 950 euros in 2007, according to research by Esade business school in Barcelona.”

November 14 – Bloomberg (White and Emma Ross-Thomas): “Spanish power demand was 13% below that of a normal… as a nationwide labor strike started, data from Red Electrica show.”

November 14 – Bloomberg (Joao Lima and Henrique Almeida): “Portugal’s economy shrank for an eighth quarter and unemployment rose to a euro-era record as the government implemented austerity measures in an attempt to rein in its budget deficit and curb debt. Gross domestic product declined 0.8% in the third quarter from the second quarter, when it fell 1.1%... The jobless rate rose to 15.8% in the three months through September from 15% in the second quarter…”

November 13 – Bloomberg (Svenja O’Donnell): “U.K. inflation accelerated more than economists forecast in October as higher university tuition fees pushed consumer-price growth away from the Bank of England’s target. Consumer prices rose 2.7% from a year earlier, the fastest since May, compared with a near three-year low of 2.2% in September…”

November 12 – Bloomberg (Christian Wienberg): “Denmark’s weekend budget accord is provoking a backlash among business groups and economists who warn the measures agreed on risk depriving the flagging economy of future growth drivers. ‘Denmark is on the edge of a recession,’ Steen Bocian, head of economic research at Danske Bank A/S in Copenhagen, said… ‘This is not a budget that will help Denmark boost growth.’ Instead, ‘there’s a risk that the measures agreed on will weaken incentives for people to work and therefore will be negative for the economy in the long run,’ he said.”

Fiscal Watch:

November 15 – Wall Street Journal (Nick Timiraos): “The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies… a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history… Though the agency guarantees fewer mortgages than either Fannie or Freddie, it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed. The FHA's annual audit estimates how much money the agency would need to pay off all claims on projected losses, against how much it has in reserves. Last year, that buffer stood at $1.2 billion, representing around 0.12% of its loan guarantees. Federal law requires the agency to stay above a 2% level, which it breached three years ago."

November 15 – Bloomberg (Angela Greiling Keane): “The U.S. Postal Service said its net loss last year widened to $15.9 billion, more than the $15 billion it had projected… Without action by Congress, the service will run out of cash on Oct. 15, 2013, after it makes a required workers compensation payment to the U.S. Labor Department…The service, whose fiscal year ended Sept. 30, lost $5.1 billion a year earlier.”

Central Bank Watch:

November 15 – Bloomberg (Joshua Zumbrun and Jeff Kearns): “The Federal Reserve is embarking on the next step in Chairman Ben S. Bernanke’s journey toward greater transparency -- tying its outlook for borrowing costs to measures of employment and inflation. Policy makers ‘generally favored the use of economic variables’ to provide guidance on the when they are likely to approve their first interest-rate increase since 2008… Such measures might replace or supplement a calendar date, currently set at mid-2015.”

November 14 – Bloomberg (Scott Hamilton and Jennifer Ryan): “Bank of England Governor Mervyn King said the U.K. economy may shrink in the current quarter and its recovery will be subdued, prompting officials to keep open the option of further asset purchases to aid growth. ‘We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while,’ King told reporters… ‘There are limits to the ability of domestic policy to stimulate private-sector demand as the economy adjusts to a new equilibrium. But the committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.’”