Monday, December 15, 2014

Weekly Commentary, November 7, 2014: Back to the Nineties

From the perspective of my macro Credit analytical framework, history’s greatest Credit Bubble advances almost methodically toward the worst-case scenario. After more than two decades, the Bubble has gone to the heart of contemporary “money” and perceived safe government debt. The Bubble has fully encompassed the world – economies as well as securities and asset markets. And we now have the world’s major central banks all trapped in desperate “nuclear-option” “money”-printing operations. Moreover, serious cracks at the “periphery” of the global Bubble now feed “terminal phase” Bubble excess at the “core.” Indeed, “hot money” finance exits faltering periphery markets to play Bubbling king dollar securities markets. Euphoria reigns. In many ways, the Bubble that gathered powerful momentum in the Nineties (with king dollar) has come full circle.

Alan Greenspan was interviewed by the Financial Times’ Gillian Tett at the Council on Foreign Relations, October 29, 2014:

Greenspan: “In 1775 we printed a whole bushel full of continentals. And one of the fascinating things about that period is the fact that for the first year or two there was very little evidence that they had any effect on prices. Meaning that that paper currency circulated with the same value as specie (gold and silver). There is an extraordinary lag which exits between actions of that type and consequences. Now, eventually a continental was not worth a continental. But it took a long while, and I think that we’re looking at very similar things now. This again is human propensity. One of the things that I used this book (“The Map and the Territory”) to write was to develop a concept of how do you shift from a system where everybody is acting rationally – which is what all our models basically said – to one where reality is where people are acting intuitively, various different types of forms. Irrationality is in many respects systematic – you can model it. And indeed I show in many cases why for example fear is demonstrably a much stronger force than euphoria… This is the type of thing that I think we’ve got to understand. And one of the reasons why I say, as a conclusion in this book, that the non-financial parts of our economy behave very well. They are highly capitalized, and essentially it is a financial system which is totally divorced – a different function than the type of things we do in the non-financial area. One (the financial sector) has to do with the allocation of savings into investment. That is where “animal spirits” really run wild. And we have to understand that better than we do now. This is the reason why – everybody knew there was a Bubble in 2008 but, to my knowledge, nobody - even when we knew on a Monday morning that Lehman was going to default - did we get the reactions right away. It took several days before the whole system broke down. If you can’t forecast something like that what good is forecasting.

Gillian Tett: “Do you regret not having pricked the Bubble in, say, 2005?”

Greenspan: “No. Because of by then – one of the things I conclude in the book is that pricking the Bubble – short of collapsing the economy – doesn’t do anything. We tried at the Fed, for example, in 1994. We raised the Federal Funds rate by 300 basis points –which is a huge amount in a short period of time. We went up 50 basis points, 75 basis points. And we did slow what was - we can call it an incipient rise in the Dow, for example. It stabilized. And we thought we got a previously unachieved safe landing. And so we started patting ourselves on the back, and low and behold as soon as we stopped tightening the Dow took off again. And the reason is that markets are very complex. The markets observing the fact that 300 basis points did not disrupt the economy changed the equilibrium level of the Dow Jones Industrial Average from here to there (raising his hand higher), and the markets just took off. There is no evidence of which I’m aware of where central banks have incrementally tightened. The only occasion where we actually saw something is when Paul Volcker’s Fed hit in late-1979 and early-1980 - put a clamp on the economy. And it’s only by bringing the economy down that you could burst the Bubble. And that is very bad news in a sense that – the only place where incremental tightening actually defuses Bubbles is in econometric models. And that’s because they are mis-specified.

I have a weekly chronicle of the Great Credit Bubble going back to 1999 ready to do battle against historical revisionism. I began my “blog” in 1999 in part because I had witnessed profound changes in finance, policymaking and the markets that were going completely unreported and unanalyzed. Today’s out-of-control global Bubble arose from the Nineties Bubble in U.S. Credit and asset markets. And no one played a greater role in nurturing the Bubble than Alan Greenspan.

Greenspan remains impressively sharp. Interestingly, he has become a fan of gold. He doesn’t see the euro monetary experiment succeeding. Greenspan is clearly concerned about the current stance of monetary policy and “fiat” currencies. That he would raise the issue of our nation’s terrible experience printing “Continentals” is fascinating. That he would point responsibility to “human propensity” is incredible. Greenspan has expended considerable energy absolving himself of responsibility, in the process revising history. I’ll attempt a few clarifications.

Greenspan states that “everybody knew there was a Bubble in 2008.” As someone that studied, chronicled and warned of the Bubble, I recall things quite differently. Will everybody have known it was a Bubble in 2014? And, actually, wasn’t it perfectly rational to participate in stocks, bonds and asset markets – even on a leveraged basis – during the Nineties and right up to 2008, with the Fed (and Washington policymaking) manipulating, intervening and backstopping finance and the securities markets? Is it not similarly rational to speculate in stocks, bonds, corporate Credit and derivatives today? I would strongly argue that rational responses to government-induced market distortions are instrumental to major Bubbles.

Greenspan was the father of contemporary “activist” central banking. His market assurances and “asymmetrical” policy approach were godsends to speculative markets. An aggressive rate collapse and yield curve manipulation (stealth banking system bailout) were instrumental in fostering historic expansions in both non-bank “Wall Street finance” and leveraged speculation. It’s easy these days to forget the scope of the Nineties Bubble that inflated under Greenspan’s watch.

The S&P500 returned 429% during the decade of the Nineties. The Nasdaq Composite gained almost 800%. Total system (non-financial and financial) debt doubled during the decade to $25 TN. The Asset-Backed Securities (ABS) market expanded 525% to $1.3 TN. Securities Broker/Dealers assets surged 320% to $1.2 TN. Rest of World holdings of U.S. financial assets jumped $3.7 TN, or 370%, to $5.64 TN. Corporate (non-financial) borrowings surged 141% during the decade to $9.319 TN.

If not for the spectacular Nineties Bubble I seriously doubt Bernanke would have become a leading figure. He was brought into the Fed in 2002 when the scope of the post-Nineties Bubble landscape came into clearer view. Bernanke had the academic creed the Fed would adopt as it took central bank “activism” to a whole new level of experimentation. In the name of fighting the scourge of deflation, the Greenspan/Bernanke Fed fueled a reflationary mortgage finance Bubble that left even the Nineties Bubble in the dust.

I’m compelled to amend a few of Greenspan’s comments. Yes, the Greenspan Fed did raise rates 300 basis points between February 4, 1994 and February 1, 1995. But the Fed had previously cut rates 600 basis points – from 9% in October 1989 to 3% by September 1992 (in the end slashing 300 bps in seventeen months).

I certainly concur with Greenspan’s comment that “markets are complex.” I simply don’t buy into Greenspan’s attempt to distance the markets’ propensity for destabilizing “animal spirits” from “activist” government policymaking. Government actions repeatedly throughout the decade backstopped the markets and resuscitated the Bubble. There was the extraordinary use of the U.S. Treasury’s Exchange Stabilization Fund as part of the 1995 Mexican bailout. There was the Federal Reserve orchestrated bailout of Long-term Capital Management. There were scores of (Washington-based) IMF bailouts. There was the February 1999 “Committee to Save the World,” with Greenspan on the cover of Time magazine positioned in front of Robert Rubin and Larry Summers.

In some key ways, these days it’s Back to the Nineties. King dollar is again flourishing, fueled by Federal Reserve “activism” coupled with faltering Bubbles around the globe. U.S. securities markets are once again bolstered by the perception that policymakers will guarantee marketplace liquidity and quash incipient crises. And, importantly, the Bubble is again being dangerously fueled by an underlying source of finance that is both unrecognized and unsustainable.

Back in 1999, there was absolutely no doubt in my mind that the system was in the midst of a historic Bubble. At the same time, the bull story was compelling (in contrast to today): the “technology revolution,” unprecedented productivity gains, robust growth, globalization, contained inflation and newfound confidence in astute policymaking. There was the collapse of the Soviet Union, European integration and the rise of Capitalism around the globe. But there was as well one major unappreciated problem: The underlying finance encompassing the world’s reserve “currency” was unsound.

GSE assets were up $1.27 TN, or 280%, during the nineties (to $1.72 TN). Notably, GSE holdings increased an unprecedented $150bn, or 24%, during 1994. I can state confidently that the incipient U.S. Credit, securities and speculative Bubbles would have been suppressed had the GSE’s not been there to backstop increasingly speculative markets. Without the GSEs, the 1994 bursting of the bond/derivatives Bubble would have been a major problem (and an invaluable learning experience for market participants and policymakers). Operating as quasi-central banks, GSE assets increased $112bn in 1997, $305bn in 1998 and $317bn in 1999.

To this day, there is no recognition of the profound role the GSE backstop played in distorting markets and promoting risk-taking and speculation. Including GSE MBS, total GSE securities increased about $2.7 TN during the nineties, providing the key source of system Credit underpinning the Nineties Bubble. The Technology and stock market Bubbles burst in 2000. The “miracle” U.S. economy fell into recession. Instead of running budget surpluses and paying off all federal debt (part of the bullish view at the time), deficits returned with a vengeance. By 2002, the U.S. corporate debt market was in crisis. Enter Dr. Bernanke.

There is still little appreciation for the how GSE Credit fueled the securities markets, housing prices, the real economy and government receipts throughout the Nineties. These days, there’s a similar lack of understanding for how almost $3.6 TN of Federal Reserve Credit has stoked securities markets, the real economy and Federal receipts. The view in the Nineties was that the GSEs didn’t matter – “only banks create Credit.” The view today is that QE-related Federal Reserve “money” just sits there inertly on the U.S. banking system’s balance sheet.

We’re at a critical juncture in the global Bubble. Serious cracks have developed at the periphery. The Russian ruble sank another 8.0% this week (two-week decline 10.5%). The Ukrainian Hryvnia dropped 10.5%. The week saw the Brazilian real fall 3.2%, the South Korean won 2.3%, the Colombian peso 2.0%, the Malaysian ringgit 1.7% and the Chilean peso 1.7%. The Iceland krona, Romanian leu and Hungarian forint all lost about 1%.

Last week saw the Bank of Japan’s Kuroda (after a 5 to 4 vote) shock the markets with a major boost in QE. This week, with various reports of serious dissension within the Governing Council, Mario Draghi emerged from committee policy discussions more determined than ever to push through with his Trillion euro increase in ECB holdings.

I struggle believing Kuroda and Draghi are driven by domestic considerations alone. I am not alone in discerning an element of desperation. Their aggressive measures have definitely thrown gas on the king dollar fire. And the week saw further acute pressure on commodities markets. King dollar and sinking crude helped incite crisis dynamics for Russia’s currency. The Russian central bank spoke of the ruble under attack from “speculative strategies” and “threats to the nation’s financial stability.” Putin on Thursday claimed “politics prevail in oil pricing.” By Friday, there were reports of Russian tanks again entering Ukraine.

In Back to the Nineties-type analysis, emerging markets contagion now seems to gain momentum by the week. This week’s ruble collapse certainly seemed to pull down the vulnerable Brazilian real. The sinking real then tugged at Colombian and Chilean pesos – and even the Mexican peso (trading at a 15-month low early Friday). EM bonds also showed some vulnerability. After beginning the week at 12.1%, Brazilian 10-year (real) yields traded to almost 13% Friday morning (closed the week at 12.56%). Venezuela yields jumped 232 bps to 18.50% (high since March ’09). Other EM markets were hinting at contagion vulnerability. The Turkish lira declined 1.6% this week, as Turkish 10-year yields jumped 17 bps to 8.61%. Turkey’s major equities index was hit for 3.25%. On the back of a Moody’s debt downgrade, South Africa’s currency lost 2.1%, while bond yields rose 11 bps (to 8.0%).

European equities popped somewhat on Draghi but posted another unimpressive week. Notably, Spanish stocks were down 3.4% and Italian stocks were hit for 3.5%. And with German yields down another 2.5 bps to a record low 0.815%, bond spreads widened in Spain (11bps), Italy (6bps) and Portugal (9bps). It’s worth noting that Italian CDS rose four basis points this week to 132bps, up 46 bps from September lows (only 9bps below the “panic” 10/16 close).

Meanwhile, U.S. equities bulls just love (Back to the Nineties) king dollar. Scoffing at global crisis dynamics, those seeing the U.S. as the only place to invest are further emboldened. And, no doubt about it, “hot money” flows could further inflate the U.S. Bubble. Speculative flows (underpinned by Kuroda and Draghi) have surely helped counter the removal of Federal Reserve stimulus. Yet this only increases systemic vulnerability to de-risking/de-leveraging dynamics. At the end of the day, it’s difficult for me to look ahead to 2015 and see how the household, corporate and governmental sectors generate sufficient Credit growth to keep U.S. asset prices levitated and the Bubble economy adequately financed. Perhaps this helps explain why - with stocks at record highs, the economy expanding and unemployment down to 5.8% - 10-year Treasury yields closed Friday at a lowly 2.30%.

For the Week:

The S&P500 gained 0.7% (up 9.9% y-t-d), and the Dow rose 1.1% (up 6.0%). The Utilities rose 1.3% (up 20.6%). The Banks advanced 1.4% (up 5.6%), and the Broker/Dealers added 0.6% (up 9.4%). The Transports jumped 2.2% (up 20.9%). The S&P 400 Midcaps gained 0.8% (up 6.5%), while the small cap Russell 2000 was unchanged (up 0.8%). The Nasdaq100 was up slightly (up 15.8%), and the Morgan Stanley High Tech index added 0.3% (up 8.4%). The Semiconductors slipped 0.5% (up 19.2%). The Biotechs retreated 2.2% (up 40.7%). With bullion recovering about $5, a wild week of trading saw the HUI gold index rally 5.3% (down 16.8%).

One-month Treasury bill rates closed the week at three bps and two-month rates ended at two bps. Two-year government yields added a basis point to 0.50% (up 12bps y-t-d). Five-year T-note yields declined three bps to 1.58% (down 16bps). Ten-year Treasury yields were down four bps to 2.30% (down 73bps). Long bond yields fell four bps to 3.03% (down 94bps). Benchmark Fannie MBS yields slipped two bps to 3.00% (down 61bps). The spread between benchmark MBS and 10-year Treasury yields widened two to 70 bps. The implied yield on December 2015 eurodollar futures was unchanged at 0.835%. The two-year dollar swap spread was little changed at 21 bps, and the 10-year swap spread was about unchanged at 14 bps. Corporate bond spreads were mixed. An index of investment grade bond risk added about two to 65 bps. An index of junk bond risk ended the week down one to 342 bps. An index of emerging market (EM) debt risk jumped a notable 14 bps to 309 bps.

Greek 10-year yields added two bps to 8.07% (down 35bps y-t-d). Ten-year Portuguese yields rose six bps to 3.28% (down 285bps). Italian 10-yr yields increased three bps to 2.38% (down 175bps). Spain's 10-year yields were up eight bps to 2.16% (down 200bps). German bund yields declined three bps to a record low 0.815% (down 111bps). French yields were unchanged at 1.18% (down 137bps). The French to German 10-year bond spread widened three to about 37 bps. U.K. 10-year gilt yields fell four bps to 2.20% (down 82bps).

Japan's Nikkei equities index jumped 2.8% to the high since 2007 (up 3.6% y-t-d). Japanese 10-year "JGB" yields gained two bps to 0.47% (down 27bps). The German DAX equities index slipped 0.4% (down 2.7%). Spain's IBEX 35 equities index sank 3.4% (up 2.1%). Italy's FTSE MIB index fell 3.5% (up 0.7%). Emerging equities were mostly lower. Brazil's Bovespa index ended the week down 2.6% (up 3.3%). Mexico's Bolsa declined 0.9% (up 4.4%). South Korea's Kospi index declined 1.3% (down 3.6%). India’s Sensex equities index posted slight gains to a new all-time high (up 31.6%). China’s Shanghai Exchange was little changed (up 14.3%). Turkey's Borsa Istanbul National 100 index dropped 3.3% (up 15%). Russia's MICEX equities index gained 0.6% (down 0.5%).

Debt issuance really picked up with about $50bn of sales. Investment-grade issuers included Walgreens $8.0bn, ConocoPhillips $3.0bn, General Motors $2.5bn, Philip Morris $2.0bn, Georgia-Pacific $2.1bn, Noble Energy $1.5bn, Cardinal Health $1.3bn, Thermo Fisher $800 million, Aflac $750 million, Aetna $750 million, American Express $750 million, Suntrust Banks $500 million, Pacific Gas & Electric $500 million, Discover Financial $500 million, Northwestern Corp $450 million, Owens Corning $400 million, Leggett & Platt $300 million, PPG Industries $300 million, National Rural Utilities Coop $300 million, First American Financial $300 million, Enlind Midstream Partners $300 million, Southwest Airlines $300 million, Commonwealth Edison $250 million, Public Service Electric $250 million, Cytec Industries $250 million and Federal Farm Credit Bank $100 million.

Junk funds saw strong inflows of $2.44bn (from Lipper). Junk issuers this week included Dish $2.0bn, Navient $1.0bn, MSCI $800 million, Omnicare $700 million, Blue Racer Midstream $550 million, Standard Pacific $300 million, Nexteer Auto Group $250 million and Avis Budget Car Rental $175 million.

Convertible debt issuers included Linkedin $1.15bn.

International dollar debt issuers included Bank of China $3.0bn, Statoil $3.0bn, HSBC $2.45bn, Industrial & Commercial Bank of China $2.25bn, Barclays $2.0bn, Israel Electric $1.25bn, Council of Europe Development Bank $1.0bn, Vietnam $1.0bn, Bank Nederlandse Gemeenten $1.0bn, Mauritius Investments $750 million, Gazprom $700 million, NCL Corp $680 million, Canadian National Railway $600 million, Mubadala GE Capital $500 million, Sixsigma Networks Mexico $500 million, European Bank of Reconstruction & Development $435 million, Global Liman Isletmeleri $250 million and Associates Banc-Corp $500 million.

Freddie Mac 30-year fixed mortgage rates rose four bps to 4.02% (down 14bps y-o-y). Fifteen-year rates jumped eight bps to 3.21% (down 6bps). One-year ARM rates gained two bps to 2.45% (down 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to 4.25% (down 16bps).

Federal Reserve Credit last week declined $5.8bn to $4.445 TN. During the past year, Fed Credit inflated $642bn, or 16.9%. Fed Credit inflated $1.634 TN, or 58%, over the past 104 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $11.4bn last week to $3.303 TN. "Custody holdings" were down $51bn year-to-date, and fell $29bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $322bn y-o-y, or 2.8%, to a seven-month low $11.817 TN. Over two years, reserves were $1.022 TN higher for 9% growth.

M2 (narrow) "money" supply jumped $33.6bn to a record $11.554 TN. "Narrow money" expanded $616bn, or 5.6%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits fell $17.2bn, while Savings Deposits surged $39.8bn. Small Time Deposits were little changed. Retail Money Funds jumped $8.8bn.

Money market fund assets increased $5.9bn to $2.634 TN. Money Funds were down $85bn y-t-d and dropped $38bn from a year ago, or 1.4%.

Total Commercial Paper gained $8.7bn to $1.073 TN. CP expanded $27bn year-to-date and was up $2.8bn over the past year.

Currency Watch:

November - 7 – Reuters (Patrick Graham): “The rouble plummeted on Friday, falling over 3% against both the dollar and the euro after the central bank relaxed its exchange rate policy, with analysts warning a self-fulfilling currency crisis could be under way. The rouble weakened to over 48 roubles per dollar for the first time in the opening minutes of trading… ‘This is full-blown panic, with signs of a self-fulfilling currency crisis,’ Dmitry Polevoy, chief Russia economist at ING Bank in Moscow, said… ‘At such times, the central bank should intervene, after all if this isn't a risk to financial stability, then what is?’”

The U.S. dollar index gained 0.8% to 87.64 (up 9.5% y-t-d). For the week on the downside, the Brazilian real declined 3.2%, the South Korean won 2.3%, the South African rand 2.1%, the Japanese yen 2.0%, the Australian dollar 1.8%, the Norwegian krone 1.0%, the British pound 0.8%, the Taiwanese dollar 0.6%, the euro 0.6%, the Canadian dollar 0.6%, the Danish krone 0.5%, the New Zealand dollar 0.5%, the Mexican peso 0.4%, the Swiss franc 0.4%, the Singapore dollar 0.3% and the Swedish krona 0.2%.

Commodities Watch:

The Goldman Sachs Commodities Index lost another 1.0% (down 15.5%). Spot Gold recovered 0.4% to $1,178 (down 2.3%). December Silver dropped 2.4% to $15.71 (down 19%). December Crude fell another $1.89 to $78.65 (down 20%). December Gasoline slipped 0.6% (down 23%), while December Natural Gas surged 13.9% (up 4%). December Copper dipped 0.3% (down 11%). December Wheat dropped 3.4% (down 15%). December Corn fell 2.5% (down 13%).

U.S. Fixed Income Bubble Watch:

November 3 – Bloomberg (Lisa Abramowicz): “When it gets tough to maneuver in the junk-bond market, traders can either give up or get creative. Plenty of them seem to be opting for creativity this time around. There’s been a surge in demand for a relatively new index of derivatives that aims to replicate the risk and return of high-yield bonds. As volatility soars to the most in more than a year, trading in a total-return swaps index reached a record $4 billion in September from almost nothing in May… The demand is in part coming from fund managers who are looking for ways to be agile as individual investors become more fickle, pulling money out and then putting it back in, said Sivan Mahadevan, a credit strategist at Morgan Stanley… For example, investors have yanked $24 billion from high-yield bond mutual funds this year…”

November 6 – Bloomberg: “Crude oil’s 25% plunge since July has pushed spreads on high-yield energy bonds wider, and they're now at a level relative to the broader speculative-grade market that they haven't reached since 1999, when oil was $20 a barrel.”

November 6 – Bloomberg (Sridhar Natarajan and Katherine Chiglinsky): “The riskiest corporate borrowers in the U.S. are returning to the bond market after being shut out amid the biggest price swings in a year. Scientific Games Corp. and Dish Network Corp. are among the companies that have sold or are marketing at least $9.2 billion of junk-rated notes this week, putting speculative-grade bonds on pace for the busiest week since sales plunged 95% in the period ended Oct. 17…”

November 4 – Bloomberg (Matt Robinson and Thomas Black): “U.S. companies are turning more to the bond market to fund expansions than at any time since 2008… Of the $1.27 trillion of investment-grade bonds issued in the first nine months of the year, companies… earmarked as much as 16% for capital spending, according to… Moody’s Analytics and Bloomberg. That compares with 9% during the same period in 2013. Companies have invested $900 billion in their businesses this year, a 52% increase from 2009…”

Federal Reserve Watch:

November 4 – Dow Jones (Michael S. Derby): “Federal Reserve Bank of St. Louis President James Bullard said… that he is upbeat about the economy and doesn't think any new central bank stimulus is needed to help keep the U.S. on track for 3% growth. The Fed's decision last week to end its bond-buying program was ‘probably the right judgment for that meeting,’ Mr. Bullard told Fox Business… Mr. Bullard rattled markets and central-bank watchers going into the Fed meeting, saying in an interview that falling inflation expectations might argue for the Fed to continue its bond-buying effort for a bit longer.”

November 7 – Bloomberg (Matthew Boesler): “New York Fed President William C. Dudley, acknowledging the U.S. central bank failed to stem the credit bubble that gave rise to the 2008 financial crisis, said it has an obligation to support global stability. ‘Given the dollar’s role as the global reserve currency, the Federal Reserve has a special responsibility to manage U.S. monetary policy in a way that helps promote global financial stability,’ Dudley said… ‘Our actions have global implications that feed back into the U.S. economy and financial markets.’”

November 5 – Bloomberg (Jeff Kearns and Craig Torres): “When Janet Yellen was preparing to take over the Federal Reserve, she got some advice from the departing chairman, Ben Bernanke: Remember that ‘Congress is our boss.’ Yellen would do well to heed his words after Republicans gained majority control of the Senate in yesterday’s midterm elections, giving fresh impetus to congressional efforts to constrain the Fed’s powers to supervise the financial system and make monetary policy. While any threat to the central bank’s independence would be subject to a veto by President Barack Obama, Yellen, 68, is likely to face pressure to hasten the Fed’s exit from the most aggressive stimulus in its 100-year history. ‘A Republican House and Senate will make life more difficult for Janet Yellen and the Fed,’ said Sarah Binder, who studies the relationship between Congress and the central bank as a senior fellow at the Brookings Institution in Washington. ‘Greater scrutiny of the Fed’s decisions and GOP pressures to tighten monetary policy more quickly and rapidly will constrain the Fed’s autonomy and encourage second-guessing of Yellen’s leadership,’ Binder said.”

U.S. Bubble Watch:

November 7 – Washington Post (Dina ElBoghdady): “Want to get a good rate on a new mortgage? Two tips: Be wealthy, and borrow more. For the first time in recent memory, lenders are offering well-heeled buyers large ‘jumbo’ mortgages at the same — or even better — interest rates as smaller loans. The trend is helping fuel a resurgence at the high end of the real estate market. Sales of homes priced $1 million or more are soaring as lower-priced properties lag, accentuating the uneven nature of the economic recovery. The share of homes selling for at least $1 million fell when the 2008 financial crisis hit, but it recovered faster than the rest of the market during the past two years. It now hovers at a level last seen near the housing boom's peak in 2007… The number of homes sold for $1 million or more climbed 8% this year while those at every other price point combined fell 4%...”

November 4 – Bloomberg (Christopher Condon): “Robust economic growth has helped push the U.S. budget deficit down to the lowest level since 2008, marking the sharpest turnaround in the government’s fiscal position in at least 46 years. The shortfall of $483.4 billion in the 12 months ended Sept. 30 was 2.8% of the nation’s gross domestic product of $17.2 trillion over the same period… The figure peaked at 10.1% of GDP in December 2009."

November 7 – Bloomberg (Lynn Doan): “Signs are starting to mount that the plunge in oil prices is curtailing record drilling in the U.S. Rigs targeting oil sank by 14 to 1,568 this week, the lowest level since Aug. 22, Baker Hughes Inc. said… The Eagle Ford shale formation in south Texas lost the most, dropping by six to 212. The nation’s oil rig count reached a peak of 1,609 on Oct. 10. Drillers are slowing down as crude prices tumbled 25% in the past four months.”

ECB Watch:

November 7 – Financial Times (Claire Jones in Frankfurt and Ferdinando Giugliano): “Mario Draghi secured unanimous support from the European Central Bank’s governing council for his plan to inject €1tn to rescue the eurozone economy from stagnation, as he sought to dispel concerns over growing divisions within the central bank. All 23 policy makers backed the president’s idea to bring back the ECB’s balance sheet to levels last seen in 2012, a pledge that Mr Draghi first floated two months ago but subsequently softened. A harmonious council could pave the way for more aggressive action, including large-scale government bond-buying, should the threat of Japanese-style deflation continue.”

November 5 – UK Telegraph (Ambrose Evans-Pritchard): “If the ECB tries to press ahead with QE, Germany's central bank chief will resign… Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe's creditor bloc or the political assent of Germany. The counter-attack is in full swing. The Frankfurter Allgemeine talks of a ‘palace coup’, the German boulevard press of a ‘Putsch’… Mr Draghi is accused of withholding key documents from the ECB's two German members, lest they use them in their guerrilla campaign to head off quantitative easing… David Marsh, author of a book on the Bundesbank and now chairman of the Official Monetary and Financial Institutions Forum, says the Bundesbank has been quietly seeking legal advice on whether it can block full-scale QE. It is looking at Articles 10.3 and 32 of the ECB statutes, arguably relevant given the scale of liabilities. The let-out clauses would make QE the sole decision of the 18 national governors - shutting out Mr Draghi - based on the shareholder weightings. Germany would have 26% of the votes, easily enough to mount a one-third blocking minority. Mr Draghi would not even have a say.”

November 4 – Reuters (Eva Taylor and Paul Taylor): “National central bankers in the euro area plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources said. The bankers are particularly angered that Draghi effectively set a target for increasing the ECB's balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public, the sources said. ‘This created exactly the expectations we wanted to avoid,’ an ECB insider said. ‘Now everything we do is measured against the aim of increasing the balance sheet by a trillion (euros)... He created a rod for our own backs.’ Irritation among national governors who hold a majority on the 24-member council could limit Draghi's space for bolder policy action in the coming months as the bank faces crucial choices about whether to buy sovereign bonds to combat falling inflation and economic stagnation… Many people at the central bank… welcomed Draghi's greater informality when he took over from Jean-Claude Trichet of France in 2011. His efforts to keep meetings short, delegate and brainstorm more, were received as a breath of fresh air. However, as decisions to loosen monetary policy and resort to further unconventional measures have become more contentious, insiders say the Italian ECB chief has acted increasingly on his own or with just a handful of trusted aides, sidelining even key heads of department. ‘Mario is more secretive... and less collegial. The national governors sometimes feel kept in the dark, out of the loop,’ said one veteran ECB insider.”

November 4 – Bloomberg (Steven McPherson): “ECB Governing Council Member Ewald Nowotny said the central bank shouldn’t start buying euro nation sovereign bonds this year… Nowotny warns against giving in to financial market pressure… Says ECB has already taken various steps to ease credit… Need time to assess impact of steps taken… Nature of monetary union presents challenges for full-blown bond-buying program…”

November 5 – Bloomberg (Kevin Buckland and Anchalee Worrachate): “Mario Draghi has something new to worry about as he prepares for tomorrow’s European Central Bank policy meeting: the euro-yen exchange rate. The yen approached a six-year low versus the shared European currency after Bank of Japan Governor Haruhiko Kuroda surprised investors late last week by extending his record stimulus program. Kuroda’s actions jeopardize the weaker euro that analysts say Draghi needs to reflate the economy, heaping pressure on him to come up with a policy response. ‘Kuroda has thrown down the gauntlet to Draghi,’ Robert Rennie, the head of currency and commodity strategy at Westpac Banking Corp., said… ‘Whether Draghi will, or can, accept the challenge remains to be seen.’”

Central Bank Watch:

November 5 – Wall Street Journal (Tatsuo Ito): “In his first public speech since the central bank surprised markets with additional easing measures, Bank of Japan Gov. Haruhiko Kuroda stressed the importance of doing whatever it takes to eliminate deflation and said the bank won’t hesitate to act again if needed. Mr. Kuroda said on Wednesday that the BOJ’s decision last week to ease credit demonstrated its ‘unwavering commitment’ to achieving its 2% inflation target at all costs, likening the central bank’s measures to a doctor trying to cure a patient.”

Russia Watch:

November 7 – Bloomberg (Kateryna Choursina and Daryna Krasnolutska): “Ukraine’s military said it killed as many as 200 rebels in an attack in Donetsk, inflicting the biggest blow from either side in the conflict in more than two months and removing pretense that a Sept. 5 truce is holding. Accusing Russia of sending dozens of tanks and other military vehicles across its border yesterday into separatist- held areas in eastern Ukraine, military spokesman Andriy Lysenko said Ukraine’s army was preparing for ‘an adequate reaction.’ Lysenko said artillery strikes had killed the rebels and destroyed tanks and other armored vehicles after Ukrainian forces took fire at the Donetsk airport…”

November 6 – Tass: “Russia and China have identical positions on key international issues, President Vladimir Putin said in an interview with the Chinese leading media outlets. ‘We take similar or even identical stands on major global and regional issues on the international agenda,’ Putin said. ‘Our countries have pursued efficient cooperation on various multilateral platforms and close coordination in addressing relevant international concerns.’ He said that strengthening ties with China is a foreign policy priority of Russia. ‘Today, our relations have reached the highest level of comprehensive equitable trust-based partnership and strategic interaction in their entire history. We are well aware that such collaboration is extremely important both for Russia and China,’ he added.”

Brazil Watch:

November 4 – Reuters (Guillermo Parra-Bernal): “For decades, Brazilian companies large and small have been hooked on cheap credit from state development bank BNDES. That reliance weakens public finances and squeezes private banks out of credit markets. Critics say that instead of forcing them to kick the habit, President Dilma Rousseff has plowed more and more money into BNDES since taking office in 2011. With the economy now stagnant, she faces pressure to clean up the budget and reduce state intervention in the economy. In the first nine months of this year, Brazil's government spent more than it raised even before debt payments, its first primary budget deficit since 1994. Credit rating agencies warn they could downgrade Brazil as early as next year and are closely looking at whether a smaller role for BNDES will be among Rousseff's policy shifts in her second term, which begins in January. ‘Redefining the BNDES role is a key signal that the government is serious on the fiscal front,’ said Alberto Ramos, chief Latin America economist with Goldman Sachs. ‘Investors will be very attentive to any steps toward addressing the bank's overwhelming presence in credit markets.’ Since its launch in 1952, BNDES has been practically Brazil's sole source of corporate credit. On Rousseff's watch, it has lent over 570 billion reais ($233bn) at subsidized rates funded mainly by government bond sales, sparking a jump in debt. The gap between the interest rate Brazil pays investors in order to fund BNDES and what the bank pays for that support has reached 6.25%, costing taxpayers 35 billion reais a year, and it is expected to widen further over the next year.”

November 4 – Bloomberg (David Biller): “Brazil’s industrial output in September unexpectedly fell, as the central bank raises rates to combat above-target inflation. Production fell 0.2% after increasing a revised 0.6% in August… Output declined 2.1% from the year before, compared with a 1.7% drop forecast by analysts.”

EM Bubble Watch:

November 3 – Bloomberg (Ken Kohn and Minh Bui): “Investors pulled money out of U.S. exchange-traded funds that invest in emerging markets last month for the first time since March. Redemptions from ETFs that invest across developing nations as well as those that target specific countries totaled $994.9 million in October compared with inflows of $977.9 million in September… The last time emerging-market ETFs had outflows was in March, with $147 million. In February, losses reached $3.32 billion, the data show.”

November 5 – Dow Jones (By Johanna Bennett): “Even as Latin American companies have issued more bonds in 2014, far fewer are junk. …Moody's says that while the total new issuance volume of corporate bonds for Latin American non-financial companies rose 2% so far this year, the issuance of high yield debt during the first nine months of 2014 has dropped 25% compared to the same period last year…”

Europe Watch:

November 4 – Financial Times (Peter Spiegel): “The European Commission slashed its economic outlook for the eurozone on Tuesday, predicting the currency bloc would grow only 1.1% next year, down from a 1.7% forecast just six months ago. The revisions were particularly big in the two largest eurozone economies, Germany and France, for which the commission cut its projections by nearly a full percentage point for 2015. The gross domestic product forecast for Germany, the common currency’s economic engine, was cut from 2% in May to 1.1%; France went from 1.5% to 0.7%.”

November 5 – Reuters (Jan Strupczewski): “Euro zone retail sales were much weaker than expected in September, data showed on Wednesday, and the monthly August rise was revised downwards, pointing to soft household demand in the third quarter. The European Union's statistics office said retail sales in the 18 countries sharing the euro fell 1.3% month-on-month in September for a 0.6 percent year-on-year rise.”

November 5 – Bloomberg (Alessandra Migliaccio and Lorenzo Totaro): “The European Commission cut Italy’s economic forecasts for this year and next, saying the country will need to rely on an increase in exports to return to growth in 2015. The country’s economy will contract 0.4% in 2014 and expand 0.6% next year… That compares with a May forecast predicting a 0.6% expansion this year and a 1.2% increase next year. ‘Accelerating external demand is expected to drive a fragile recovery in 2015,’ the EU said… ‘Growth prospects could benefit from a successful implementation of the reform process’ started by Prime Minister Matteo Renzi’s government.”

November 3 – Bloomberg (Ben Sills): “Spanish Prime Minister Mariano Rajoy is being challenged on a second front as support for the anti-establishment Podemos party surges before an informal ballot on Catalonian independence. Podemos was formed less than a year ago to channel Spaniards’ disaffection with Rajoy’s People’s Party and the opposition Socialists, who between them have run the country for the past 32 years. With corruption allegations again swirling around the PP, that discontent may be reaching tipping point: a poll for El Pais newspaper… showed Podemos doubled its support in a month to a record 28%. In doing so, it’s overtaken both main parties, while challenging European attempts to restore political stability after years of debt crisis… The sea change in voter opinion last month followed the emergence of evidence bolstering Podemos’s argument that ‘the caste’ -- the PP, the Socialists and their associates, in Podemos rhetoric -- shared out lucrative jobs, particularly in the former savings banks, as they drove Spain’s economy into the wall.”

November 3 – Bloomberg (Svenja O’Donnell and Jonathan Ferro): “Business Secretary Vince Cable said European leaders are frustrated by U.K. attempts to pick apart key aspects of the European Union’s founding principles, branding it a ‘dangerous’ course for Britain to take. German Chancellor Angela Merkel and other EU leaders ‘simply can’t understand why the British are reopening this debate,’ Cable said… ‘It’s dangerous to do so.’ Cable’s comments were the first by a U.K. cabinet minister following a report by Germany’s Der Spiegel magazine yesterday that Merkel had expressed concerns for the first time that Britain might quit the 28-nation EU. Prime Minister David Cameron is pushing to curb free movement within the bloc.”

November 6 – Dow Jones (Frances Robinson): “Belgian police used water cannons and tear gas on protesters on the fringes of a march against austerity plans set out by the country's new government… Prime Minister Charles Michel and his cabinet were due to meet unions leading the protests in the late afternoon… The FGTB, one of Belgium's biggest trade unions, said 120,000 protesters took part in the march through Brussels. ‘Employers have been handed a blank check by the government, without guaranteeing to create jobs,’ the FGTB said… ‘The message is clear--no to an antisocial, unbalanced and unfair government plan which will rob us."

November 7 – Bloomberg (Nicholas Brautlecht): “The scenes sent a chill through Germany: more than 4,000 soccer hooligans and neo-Nazis raging through the streets of Cologne, hurling bottles and stones at police, who had gathered in their hundreds to fend off the attacks from a protest rapidly spiraling out of control. It was the afternoon of Oct. 26 and the violence appeared to take the authorities by surprise.”

Global Bubble Watch:

November 3 – Financial Times (Jamil Anderlini): “China’s cooling economy has already roiled global commodity markets and prompted slowdowns in places such as Latin America, Australia and Germany that had been big beneficiaries of the Chinese boom. The Chinese economy grew at its slowest pace since the depths of global financial crisis last quarter and is almost certain this year to register its weakest annual growth rate since 1990. But continued rapid and unsustainable growth in a range of important indicators suggests strongly that China’s slowdown has a long way to go before it levels off. The current deceleration has happened even as credit is still expanding faster than gross domestic product, local governments continue to borrow far more than they can afford and investment in everything from steel production to real estate is rising fast, even as sales slump. Given falling demand, the rise in all these indicators is unsustainable and at some point soon they will have to come down, inevitably causing China’s growth to slow more sharply.’

Geopolitical Watch:

November 6 – ABC News (Jack Cloherty and Pierre Thomas): “A destructive ‘Trojan Horse’ malware program has penetrated the software that runs much of the nation’s critical infrastructure and is poised to cause an economic catastrophe, according to the Department of Homeland Security. National Security sources told ABC News there is evidence that the malware was inserted by hackers believed to be sponsored by the Russian government, and is a very serious threat. The hacked software is used to control complex industrial operations like oil and gas pipelines, power transmission grids, water distribution and filtration systems, wind turbines and even some nuclear plants. Shutting down or damaging any of these vital public utilities could severely impact hundreds of thousands of Americans."

November 3 – Financial Times (Pilita Clark): “Crucial supplies of water in China, the US, India and other major economies are dwindling so fast that the threat to the world’s water security is far worse than is commonly understood, a prominent hydrologist has warned. The groundwater stored below the earth’s surface in soil and aquifers accounts for up to one-third of the water used globally and is the main source of water for more than 2bn people. It accounts for around half the irrigation water used to grow the world’s food and is an especially important reserve during serious droughts, such as those gripping California and Brazil at the moment. But it is being pumped out so rapidly in some of the driest regions that it can no longer be easily replenished naturally, according to research by Professor Jay Famiglietti, senior water scientist at NASA’s jet propulsion laboratory at the California Institute of Technology. ‘Many of the largest aquifers on most continents are being mined,’ Prof Famiglietti wrote in the latest edition of the journal Nature Climate Change. ‘Without a sustainable groundwater reserve, global water security is at a far greater risk than is currently recognised.’”

November 3 – Financial Times (Roman Olearchyk): “Russia on Monday moved swiftly to recognise results of controversial elections in Ukraine’s breakaway eastern regions, defying pressure from the west urging Moscow not to give credence to an ‘illegitimate’ vote. ‘We respect the will of the people . . . elections in the Donetsk and Lugansk regions were . . . carried out in organised fashion with a high voter turnout,’ Russia’s foreign ministry said… Moscow’s decision to recognise the controversial vote is certain to rankle western governments… Grigory Karasin, deputy foreign minister, said the election gave the separatist leaders a ‘mandate to negotiate with the central Ukrainian authorities and resolve through political dialogue all the problems that have accumulated over many months’. He added that Russia was ‘ready to facilitate this to the maximum extent’. However, a spokesperson for Angela Merkel, German chancellor, insisted Sunday’s elections were ‘illegitimate’ and said Russia’s decision to recognise the polls would make efforts to resolve the crisis in Ukraine more difficult. Steffen Seibert said it was ‘incomprehensible that there are official Russian voices that are respecting or recognising these so-called elections’.”

November 6 – Bloomberg (Kateryna Choursina): “Consumer prices in Ukraine rose in October at the fastest rate since February 2009 as a separatist conflict in the east hit the currency, drove up food prices, and pushed the country deeper into recession. Inflation rose 19.8% on an annual basis last month compared with 17.5% in September… Ukraine’s central bank sees the economy declining 7% this year. An eight-month military conflict with pro-Russian separatists has wiped out almost a quarter of industrial output.”

China Bubble Watch:

November 6 – Bloomberg: “China’s Central Bank confirmed it pumped 769.5 billion yuan ($126bn) to the country’s lenders in the last two months… The People’s Bank of China said it provided the funds via a newly-created tool called the Medium-term Lending Facility… The central bank said state banks, joint-stock banks and big city and rural commercial lenders got the funds, all termed at three months with an interest rate of 3.5%.”

November 2 – Bloomberg: “China’s manufacturing slowed further in October, as a property slump and slowdown in investment growth put the world’s second-largest economy on course for the slowest full-year growth since 1990. The government’s Purchasing Managers’ Index was at 50.8 in October, trailing the 51.2 median estimate… ‘The biggest drivers of growth such as fixed-asset investment are still slowing,’ Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd., said… ‘Heavy industries like steel and coal are contracting on lower prices, and the negative impact of the weak property market is becoming more pronounced.’”

November 3 – Bloomberg: “A gauge of China’s services industry fell to a nine-month low in October, joining manufacturing in signaling a broadening economic slowdown. The government’s non-manufacturing Purchasing Managers’ Index fell to 53.8 last month from 54 in September.”

November 7 – Bloomberg (Lilian Karunungan): “Yuan bears have added Chinese companies’ record dollar borrowings to the list of reasons why the currency may weaken. Chinese firms raised $203 billion from loans and bonds this year, 11 times more than the $17.7 billion of 2008… Societe General SA, Daiwa Capital Markets and Royal Bank of Canada predict the yuan, which is headed for its first annual decline in five years, will drop further in coming months as the outlook for rising U.S. interest rates and a weakening Chinese economy expose the risk of overseas liabilities.”

November 4 – Financial Times (Gabriel Wildau): “China’s small-loan providers have virtually halved lending as the slowing economy turns both lenders and borrowers more wary of risk. New loans from China’s 8,591 small-loan providers came to just Rmb89bn ($14.5bn) in the first nine months of 2014, virtually half the Rmb161bn level in the same period last year… Small and medium-sized enterprises account for about 60% of China’s gross domestic product and 75% of new jobs but have long struggled to access credit through traditional banks, which favour large state-owned companies and require land or fixed assets as collateral.”

Japan Bubble Watch:

November 5 – Financial Times: “In his first public appearance since unleashing a new wave of stimulus measures on Halloween, Bank of Japan Governor Haruhiko Kuroda pledged to stamp out the ‘deflationary mindset’ that has plagued Japan for almost two decades. Mr Kuroda described deflation as a ‘vicious cycle’ that, once embedded, contributes to economic stagnation in a self-fulfilling way. The key quote from his speech… ‘First, the Bank will do whatever it can to overcome the deflation that has long undermined Japan’s economy. Second, it is making a strong and clear commitment to achieve the price stability target as its responsibility. Third, to underpin the commitment, the Bank is carrying out monetary easing in a new phase both in terms of quantity and quality, which is different from past policies.’ … Mr Kuroda promised to ‘drastically convert the deflationary mindset’ with monetary easing ‘that is totally different from past policies.’ In short, this isn’t your grandfather's Bank of Japan. Few analysts were expecting the central bank to expand its stimulus programme last week. To the question of ‘why now?’, My Kuroda said he wanted to preempt any downward pressure on prices…’”

November 6 – Bloomberg (Toru Fujioka): “Hours after the Bank of Japan caught central-bank watchers off guard by boosting stimulus, officials were fending off complaints about its communications. A meeting on Oct. 31 with about 50 analysts and economists on the BOJ’s new outlook ran on for two hours -- twice the usual time -- as the discussion turned to how well Governor Haruhiko Kuroda and other officials telegraphed their views before the decision… The questions came like a torrent, with some complaining about the BOJ’s bond purchase plan and its communications with the market… While Kuroda said he didn’t intend to surprise anyone with the decision to bolster already-unprecedented easing, springing the news on the market added to the punch… ‘We shouldn’t take Kuroda’s comments at face value,’ said Noriatsu Tanji, chief rates strategist at RBS Securities Japan… ‘He offered a completely different view from what he said just three days earlier. Instead of listening to Kuroda, we should look at prices and the distance to the BOJ’s inflation target.’”