Sunday, December 14, 2014

Weekly Commentary, November 22: 2013 Plossers Limited Fed, A Statesman Takes a Stand

November 19, 2013: “From NPR News, this is All Things Considered. I’m Robert Siegel. And I’m Melissa Block. Americans are utterly fed up with Washington. That’s the takeaway from the latest round of public opinion polls. Approval ratings for just about every leader and political institution from the president to Congress are now at record lows. NPR’s national political correspondent Mara Liasson reports on why and what the consequences might be. Bill McInturff, the Republican half of The Wall Street Journal/NBC polling team calls it a public opinion shockwave. He’s never seen voters express such disgust at both parties and their leaders. Bill McInturff: ‘October was one of the most consequential months in the last 30 years in American public opinion. And the consequences are all negative. The President’s job approvals hit a new low. His personal approvals turned negative for the first time. Republicans became the first political party with a 50% negative and every person in the Congressional leadership hit new highs in their negatives. No one was spared. America’s fed up and very tired of what happens in Washington.’”

These days I think often of Adam Fergusson’s classic “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany.” One of the more fascinating and pertinent aspects of Fergusson’s historical account was how monetary policymakers somehow remained oblivious to the havoc they were instrumental in fomenting. Throughout the ordeal, top central bank officials believed monetary policy was responding to outside developments instead of being a root cause of deleterious processes that ended up tearing society apart. Despite what should have been an obvious disaster in the making, the central bank succumbed to constant pressure from various constituencies to step up its money printing operation.

Americans’ confidence in its politicians is at a multi-decade low. The popular refrain remains “Thank God for the Federal Reserve!” Somehow, it goes unappreciated that flawed monetary doctrine has been instrumental in fomenting societal stress, divisiveness and the steady erosion in the public’s faith in its institutions. A multi-decade period of unsound “money” and Credit has fueled an ongoing perilous cycle of asset Bubbles, booms and busts, gross misallocation of resources with resulting economic stagnation, and inequitable wealth distribution on a historic scale. Unfettered “money” and Credit on an unprecedented worldwide basis have been responsible for unmatched global financial and economic imbalances, including the deindustrialization and ever-growing debt overhang that hamstrings the U.S. economy. While it is difficult to hold much sympathy for today’s politicians, I’d argue strongly that years of unsound finance is at the root of today’s increasingly dysfunctional political landscape.

Fundamental to my “Granddaddy of all Bubbles” thesis are the momentous risks associated with governments’ and central banks’ reflationary policymaking – a policy course that for five years now has inflated the expansive “global government finance Bubble.” QE (“money”-printing) cost vs. benefit analysis has turned more topical of late. Again this week, top Fed officials (Evans and Rosengren) argued that QE benefits greatly exceed “marginal” potential costs. History will not be kind. At the end of the day, the loss of confidence in the Fed and central banking more generally will come at a very steep price.

In the spirit of “When Money Dies,” it is unwise for Fed officials to be so dismissive of the costs associated with its experiment in inflationary monetary policy. After all, monetary inflations unleash processes that are unpredictable both in course and eventual outcome. I adhere to the view that asset inflation is potentially more dangerous than traditional consumer price inflation.

Can the Fed actually wind down QE? Or is the Fed’s (prisoner to dysfunctional markets) balance sheet on its way to $10 TN? What would be the consequences? Fed officials have no idea at this point how any of this will play out. Indeed, I’ve seen no indication that they have much understanding of the impact of QE to this point – even with the benefit of hindsight. Officials seem to suggest that expanding the Fed’s balance sheet to almost $4 TN has had only modest impact other than to somewhat force long-term interest rates lower. At least publicly, they’re sticking with the story that so long as their QE “money” sits idly on the banking system’s balance sheet as “reserves” it’s having minimal inflationary effect. It’s just not credible that, with the Fed pumping “money” directly into the securities markets, the focus of cost analysis would remain on consumer prices rather than the myriad distortions and maladjustment associated with asset inflation and speculative Bubbles.

As master of the obvious, I would argue that QE has had profound, albeit disparate, impacts primarily on the financial markets. Moreover, the key is to appreciate that the effects of liquidity injections into the marketplace significantly depend on the prevailing market dynamics at the time. In this regard, there are important differences between “QE1,” “QE2” and the ongoing “QE3.”

“QE1” saw the Fed’s balance sheet expand from about $900bn in September 2008 to end ‘08 at almost $2.3 TN. De-risking and de-leveraging were the prevailing market dynamics at that time. Importantly, it was not a case of the Fed unleashing $1.4 TN of liquidity upon the real economy or even the financial markets. Basically, “QE1” accommodated a transfer of bond/MBS holdings from leveraged players (Wall Street firms, banks, hedge funds, mortgage REITs…) to the Fed’s balance sheet. From a cost/benefit perspective, one can argue that the “QE1” was instrumental in stemming a potential daisy-chain collapse of major financial institutions along with the global derivatives “marketplace” more generally.

“QE1” benefits were readily apparent, while most would argue the costs were minimal. I would counter that myriad associated costs were enormous if not evident. “QE1” was instrumental to the ongoing general expansion in global Credit and speculative excess, including the further ballooning of the “global leveraged speculating community” and global market and derivatives Bubbles more generally. “QE1” stopped in its tracks what would have been a painful but healthy cleansing of an “inflationary bias” and financial market speculation infrastructure that have been flourishing for the past twenty years. “QE1” also reversed what would have been a major restructuring of our services/consumption-based economy – and we would have been in a better place today because of it.

I’ll concede that the original QE was likely necessary to forego major financial and economic restructuring. Yet it was then critical for a diligent Fed to be on guard against speculative excess - rather than actively spurring speculation and asset inflation.

“QE2” saw the Fed’s balance sheet expand from $2.3 TN in October 2010 to $2.9 TN by June 2011, with market impacts pushed well into 2012 by an additional $400bn of long-term Treasury purchases associated with “Operation Twist” (Fed sells T-bills and buy bonds). To be sure, “QE2” pushed already potent “inflationary biases” to dangerous extremes. After trading as high as 3.6% in early 2011, 10-year Treasury yields sank to 1.45% in May of 2012. Benchmark MBS yields dropped from 4.40% to as low as 1.82%. Government, mortgage, corporate and municipal bond yields collapsed (prices spiked higher) as hundreds of billions flooded into myriad fixed-income funds and instruments.

It's certainly worth noting that “QE2” was instrumental in the surge of destabilizing late-cycle “hot money” flows into emerging market (EM) economies. International Reserve assets (indicative of EM inflows) jumped from about $8.6 TN in October 2010 to almost $10.5 TN by June 2012. It remains too early to gauge the true cost of “QE2” in terms of fixed-income excesses and EM financial and economic Bubble distortions. But the impacts were enormous and clearly of an altogether different nature than “QE1.”

The Fed began talking open-ended QE late in the summer of 2012. They claim it was in response to a stubbornly high US jobless rate. I still believe it was more related to acute global financial fragilities. The Fed’s balance sheet began 2013 at about $2.9 TN. Today it’s almost a Trillion higher, in by far history’s largest ever direct injection of central bank liquidity into the financial markets. As always, it’s fascinating to follow how speculative dynamics play out in the markets. With cracks surfacing in both bond and EM Bubbles, the prevailing 2013 “inflationary bias” shifted overwhelmingly (perhaps fatefully) to equities.

As an illustration, follow the trail of outflows from a somewhat less popular “Total Return Bond Fund” (TRBF). To fund outflows, TRBF sells Treasuries to the Federal Reserve. TRBF then transfers Fed liquidity to exiting investors that then use this “money” for investment in the now extremely popular “Total Stock Market Index Fund”. This fund then takes this “money” that originated with the Fed and bids up stock prices.

Or, how about an example where a hedge fund moves to exit an underperforming emerging bond market. Here the fund is unwinding a leveraged “carry trade” that involves selling the EM bond and liquidating the EM currency position. With the EM bonds and currency under intense (“hot money” outflow) pressure, the local EM central bank intervenes with currency purchases (sells dollars to buy the local currency). To fund these purchases, the EM central bank sells Treasuries to the Federal Reserve. The central bank then uses Fed liquidity for purchasing currency from the hedge fund, and the hedge fund then has “money” to rotate into 2013’s speculative vehicle of choice - US equities.

Any serious discussion of QE costs would now have to also consider the risks associated with a full-blown equities market Bubble. And, from my perspective, the Fed’s QE-induced equities Bubble joins a historic fixed-income Bubble to achieve virtually systemic distortion in the pricing and risk perceptions of financial assets generally. If Fed officials actually attempted a cost benefit analysis prior to commencing “QE3”, I seriously doubt they contemplated a 40% surge in the broader U.S. stock market.

It seems an increasing number of Fed officials recognize the need to rein in the growth of the Fed’s balance sheet. As Federal Reserve Bank of Atlanta president Dennis Lockhart (under)stated Friday: “There is a fair amount of uncertainty related to the longer-term consequences of growing the balance sheet. There could be some things that happen that are unanticipated.” You think?

I would also like to draw attention to a paper presented last week (Cato Institute’s 31st Annual Monetary Conference) by Federal Reserve Bank of Philadelphia President Charles Plosser, “A Limited Central Bank.” Mr. Plosser’s exceptional analysis is music to my analytical ears and has provided a glimmer of hope that some learned Statesmen will rise up and ensure this monetary inflation doesn’t spiral completely out of control. I can only hope his paper becomes a rallying cry throughout the Federal Reserve system.

From the “highlights”: “President Charles Plosser discusses what he believes is the Federal Reserve’s essential role and proposes how this institution might be improved to better fulfill that role. President Plosser proposes four limits on the central bank that would limit discretion and improve outcomes and accountability. First, limit the Fed’s monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective; Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities; Third, limit the Fed’s discretion in monetary policymaking by requiring a systematic, rule-like approach; And fourth, limit the boundaries of its lender-of-last-resort credit extension. These steps would yield a more limited central bank. In doing so, they would help preserve the central bank’s independence, thereby improving the effectiveness of monetary policy, and they would make it easier for the public to hold the Fed accountable for its policy decisions.”

For the Week:

The S&P500 added 0.4% (up 26.5% y-t-d), and the Dow gained 0.7% (up 22.6%). The S&P 400 Midcaps dipped 0.2% (up 28.3%), while the small cap Russell 2000 gained 0.8% (up 32.4%). The Utilities fell 2.1% (up 8.3%). The Banks rose 2.3% (up 32.2%), and the Broker/Dealers surged 3.3% (up 62.2%). The Morgan Stanley Cyclicals were little changed (up 35.5%), while the Transports slipped 0.2% (up 35.7%). The Nasdaq100 was unchanged (up 28.6%), while the Morgan Stanley High Tech index fell 0.9 % (up 25.2%). The Semiconductors declined 0.9% (up 31.4%). The Biotechs jumped 2.8% (up 47.8%). With bullion falling $47, the HUI gold index was hit for 7.8% (down 52.9%).

One-month Treasury bill rates ended the week at 2 bps, and three-month rates closed at 7 bps. Two-year government yields slipped a basis point to 0.28%. Five-year T-note yields ended the week little changed at 1.35%. Ten-year yields rose 4 bps to 2.74%. Long bond yields increased 4 bps to 3.83%. Benchmark Fannie MBS yields increased 5 bps to 3.37%. The spread between benchmark MBS and 10-year Treasury yields widened one to 63 bps. The implied yield on December 2014 eurodollar futures declined 2.5 bps to 0.36%. The two-year dollar swap spread was little changed at 10 bps, and the 10-year swap spread was unchanged at 7 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined one to 69 bps. An index of junk bond risk fell 4 bps to 341 bps. An index of emerging market (EM) debt risk declined 2 bps to 330 bps.

Debt issuance was quite strong. Investment grade issuers included Fifth Third Bank $2.5bn, Morgan Stanley $2.0bn, T-Mobile USA $2.0bn, AT&T $2.0bn, Mylan $2.0bn, Five Corners Funding $1.5bn, Caterpillar $1.0bn, Monongahela Power $1.0bn, Capital One $1.0bn, Branch Banking & Trust $875 million, Honeywell $1.0bn, Keybank $750 million, Lifespoint Hospitals $700 million, Sempra Energy $500 million, CBL Associates $450 million, Norfolk Southern $400 million, TRW Automotive $400 million, Primcoa Global Funding $350 million, Tyco Electronics $325 million, DTE Energy $300 million, DDR Corp $300 million, Camden Property Trust $250 million, Tanger Properties $250 million, Western Union $250 million, Domtar $250 million, Proassurance $250 million, National Rural Utilities Coop $250 million and Southern Electric Generating Company $100 million.

Junk bond fund saw inflows increase to $783 million (from Lipper). This week's issuers included Sabine Pass Liquefaction $1.5bn, American Airlines $512 million, Wesco Distribution $500 million, Forum Energy Technologies $400 million, Calumet Specialty Products $350 million, Avis Budget Car Rental $250 million, Norbord $240 million, Liberty Tire Recycling $225 million, US Concrete $200 million and Meritage Homes $100 million.

This week's notably long list of convertible debt issuers included Yahoo $1.5bn, Energy XXI Bermuda $350 million, WebMD Health Corp $300 million, Cardtronics $250 million, Blackstone Mortgage $150 million, Horizon Pharma $150 million, Albany Molecular Research $130 million, American Residential Properties $100 million, Gain Capital $70 million and Zais Financial $50 million.

International dollar debt issuers included Westpac Banking $3.25bn, Coca-Cola Femsa $2.125bn, Hungary $2.0bn, National Australia Bank $2.0bn, Croatia $1.75bn, Gaxprom Neft $1.5bn, Panama $1.5bn, Pacific Rubiales Energy $1.3bn, Vnesheconombank $2.0bn, Lloyds Bank $1.0bn, ICICI Bank $750 million, Empresa de Energia de Bogata $749 million, Korea East-West Power $500 million, AON $350 million and Tervita $325 million.

Ten-year Portuguese yields increased 3 bps to 5.90% (down 86bps y-t-d). Italian 10-yr yields slipped a basis point to 4.07% (down 43bps). Spain's 10-year yields were up 4 bps to 4.10% (down 117bps). German bund yields rose 4 bps to 1.75% (up 43bps). French yields gained 2 bps to 2.20% (up 20bps). The French to German 10-year bond spread narrowed 2 to 45 bps. Greek 10-year note yields jumped 32 bps to 8.57% (down 190bps). U.K. 10-year gilt yields were 4 bps higher to 2.79% (up 97bps).

Japan's Nikkei equities index gained 1.4% (up 48.0% y-t-d). Japanese 10-year "JGB" yields were down 2 bps to 0.62% (down 16bps). The German DAX equities index added 0.6% to another all-time high (up 21.1%). Spain's IBEX 35 equities index slipped 0.2% (up 18.5%). Italy's FTSE MIB gained 0.7% (up 15.7%). Emerging markets were mixed. Brazil's Bovespa index declined 1.2% (down 13.4%), while Mexico's Bolsa added 0.4% (down 5.7%). South Korea's Kospi index was unchanged (up 0.5%). India’s Sensex equities index declined 0.9% (up 4.1%). China’s Shanghai Exchange surged 2.8% (down 3.2%).

Freddie Mac 30-year fixed mortgage rates fell 13 bps to 4.22% (up 91bps y-o-y). Fifteen-year fixed rates were down 8 bps to 3.27% (up 64bps). One-year ARM rates were unchanged again at 2.61% (up 5bps ). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 6 bps to 4.46% (up 48bps).

Federal Reserve Credit jumped $35.1bn to a record $3.857 TN. Over the past year, Fed Credit was up $1.018 TN, or 35.8%.

M2 (narrow) "money" supply fell $24.9bn to $10.923 TN. "Narrow money" expanded 6.2% ($638bn) over the past year. For the week, Currency slipped $0.8bn. Total Checkable Deposits dropped $33.5bn, while Savings Deposits rose $10.7bn. Small Time Deposits declined $1.7bn. Retail Money Funds were little changed.

Money market fund assets declined $5.5bn to $2.663 TN. Money Fund assets were up $61bn from a year ago, or 2.4%.

Total Commercial Paper dropped $12.8bn to $1.054 TN. CP was down $12bn y-t-d, while increasing $56bn, or 5.6%, over the past year.

Currency Watch:

The U.S. dollar index slipped 0.2% to 80.71 (up 1.2% y-t-d). For the week on the upside, the Brazilian real increased 1.5%, the Swiss franc 0.9%, the South African rand 0.9%, the Swedish krona 0.8%, the Norwegian krone 0.5%, the British pound 0.7%, the Danish krone 0.5%, the euro 0.5% and the South Korean won 0.3%. For the week on the downside, the Australian dollar declined 2.0%, the New Zealand dollar 1.7%, the Japanese yen 1.1%, the Canadian dollar 0.7%, the Singapore dollar 0.3%, the Mexican peso 0.3% and the Taiwanese dollar 0.1%.

Commodities Watch:

The CRB index increased 0.3% this week (down 6.7% y-t-d). The Goldman Sachs Commodities Index gained 1.2% (down 3.4%). Spot Gold dropped 3.6% to $1,244 (down 25.8%). March Silver lost 4.2% to $19.90 (down 34%). January Crude gained 35 cents to $94.84 (up 3%). December Gasoline jumped 2.6% (down 1%), and December Natural Gas rose 3.0% (up 12%). March Copper gained 1.1% (down 12%). December Wheat recovered 0.8% (down 17%), while December Corn was little changed (down 40%).

U.S. Fixed Income Bubble Watch:

November 22 – Bloomberg (Sarika Gangar): “AT&T Inc. and Mylan Inc. led bond sales of $38.1 billion in the U.S. this week, 27% above average, as issuers lock in borrowing costs at about record lows, speculating that the Federal Reserve may start to curtail stimulus early next year… As the year draws to a close, sales of $1.43 trillion are poised to surpass the unprecedented $1.48 trillion issued in all of 2012 as borrowers act ahead of a reduction of the Fed’s $85 billion in monthly bond purchases…”

November 20 – Bloomberg (Sarah Mulholland): “With almost six weeks to go in 2013, sales of commercial-mortgage bonds are already surpassing Wall Street’s forecasts for the year… Issuance of the securities is poised to exceed $80 billion... CMBS issuance, which ceased for 16 months starting in June 2008 amid the seizure in credit markets, is poised to more than double from last year… Bank of America is forecasting $100 billion of offerings in 2014. The surge in sales is fueling concern that banks are allowing lending standards to slip.”

Federal Reserve Watch:

November 22 – Bloomberg (Joshua Zumbrun): “As Federal Reserve policy makers consider a world without quantitative easing, they are dusting off an idea similar to one proposed by Ben S. Bernanke a decade ago to ward off deflation. Policy makers discussed creating a program to buy short- term Treasury securities to keep yields in line with their policy intentions, according to minutes of their Oct. 29-30 meeting… Such a tool could help reinforce the Fed’s commitment to keep the benchmark overnight lending rate near zero even after it starts to reduce its $85 billion in monthly bond purchases. Fed officials are concerned that tapering those purchases, which focus on mortgage securities and Treasuries between four and 30 years, could cause a sudden increase in yields that would threaten the expansion.”

November 19 – Bloomberg (Caroline Salas Gage): “One of Janet Yellen’s first challenges as Federal Reserve chairman will be figuring out how to cushion against a lurch in interest rates when she pares the pace of the central bank’s bond buying. After sending 10-year Treasury yields more than a percentage point higher by fueling taper expectations in May and June, policy makers now are grappling with their options when they do reduce debt purchases that have swelled their balance sheet to a record $3.91 trillion… ‘Now, this is challenging: We’re in unprecedented circumstances, we’re using policies that have never really been tried before -- and multiple policies -- and we’re trying to explain to the public how we intend to conduct these policies,’ Yellen… told the Senate Banking Committee… ‘So, it is a work in progress, and sometimes miscommunication is possible.’”

November 21 – Dow Jones (Michael S. Derby): “Federal Reserve Bank of St. Louis President James Bullard said… The Fed's decision in the final month of 2008 to lower its overnight target rate to essentially zero percent appears to have ‘unwittingly committed the U.S. to an extremely long period at the zero lower bound similar to the situation in Japan, with unknown consequences for the macroeconomy,’ Mr. Bullard said.”

November 21 – Bloomberg (Steve Matthews and Matthew Winkler): “Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said lowering the unemployment threshold for a possible interest-rate increase would risk credibility when the focus should be on raising inflation. If the jobless level can be moved, ‘then how much credibility do you have for the threshold?’ Bullard said… ‘That is what I would be most nervous about. It might be a dangerous game to move thresholds around.’”

Central Bank Watch:

November 20 – Bloomberg (Jennifer Ryan): “Bank of England officials voted unanimously to keep policy unchanged this month and said a record-low interest rate may be needed even after unemployment falls to the threshold set under forward guidance. ‘There were uncertainties over the durability of the recovery… With the proviso that medium-term inflation expectations remained sufficiently well anchored, the projections for growth under constant bank rate underlined there could be a case for not raising bank rate immediately when the 7% unemployment threshold was reached.’”

U.S. Bubble Economy Watch:

November 21 – Bloomberg (Charles Stein): “Investors are pouring more money into stock mutual funds in the U.S. than they have in 13 years, attracted by a market near record highs and stung by bond losses that would deepen if interest rates keep rising. Stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, according to Morningstar… Rare losses this year in core bond portfolios, coupled with a 25% gain in the S&P 500, spurred the switch back to equities that some professionals call risky performance chasing. ‘The timing of retail investors tends to be terrible,’ said Jonathan Pond, an independent financial adviser in Newton, Massachusetts…”

November 21 – Bloomberg (James Nash): “California is poised to shake off a legacy of budget deficits with an operating surplus more than doubling to $2.2 billion by the end of June on tax increases and gains in stocks… The surplus, projected to reach $3.2 billion in the following year, should be used to expand programs and pay down $6.6 billion in recurring borrowing that Democratic Governor Jerry Brown calls a ‘wall of debt,’ the analyst said… Income taxes in the most populous U.S. state, fueled largely by capital gains from the performance of the stock market, provide the biggest share of revenue.”

November 21 – Bloomberg (Simon Kennedy and Rich Miller): “Asset bubbles are forming in Internet and social media stocks as well as in the housing markets of London and China, according to the latest Bloomberg Global Poll. Eighty-two percent of the responding investors, analysts and traders who are Bloomberg subscribers said Internet and social media shares are either at or near unsustainable levels. Seventy-three percent said the same of Chinese house prices and 69% identified London homes as already or almost frothy. They were less concerned about U.S. housing, with 31% seeing prices approaching or at excessive levels. ‘Liquidity is still plentiful and central banks are reflating,’ said Kenneth Broux, a strategist at Societe Generale SA in London and a poll participant. ‘Property is the obvious bubble candidate.’”

November 21 – Bloomberg (Leslie Picker, Mark Clothier and Tommaso Ebhardt): “Chrysler Group LLC’s advisers are discussing a valuation of about $10 billion for the carmaker before an initial public offering that could take place next month, people with knowledge of the matter said.”

November 21 – Bloomberg (Hui-yong Yu): “Hilton Worldwide Holdings Inc., the world’s largest hotel operator, plans to increase its U.S. initial public offering to about $2.25 billion to allow preferred shareholders to sell about $1 billion of stock, according to people with knowledge of the situation.”

November 21 – Bloomberg (Kathleen M. Howley): “The number of Americans who owe more on their mortgages than their homes are worth fell at the fastest pace on record in the third quarter as prices rose… The percentage of homes with mortgages that had negative equity dropped to 21% from 23.8% in the second quarter… The share of owners with at least 20% equity climbed to 60.8% from 58.1%, making it easier for them to list properties and buy a new place.”

Global Bubble Watch:

November 20 – Bloomberg: “The People’s Bank of China signaled it no longer benefits China to increase its foreign currency reserves that now exceed a record $3.7 trillion. ‘It’s no longer in China’s favor to accumulate foreign exchange reserves,’ Yi Gang, a deputy governor with the People’s Bank of China said in a speech… ‘The marginal cost of accumulating foreign exchange reserves has exceeded the marginal gains.’”

November 19 – Bloomberg (Fion Li): “The People’s Bank of China will ‘basically’ exit from normal intervention in the foreign-exchange market, Governor Zhou Xiaochuan said, without giving a timeframe. The nation will widen the yuan’s trading band in an ‘orderly’ way as it seeks to enhance the currency’s two-way flexibility, Zhou wrote in a book explaining reforms outlined last week following a meeting of Communist Party leaders. The central bank currently sets a daily reference rate for the yuan, which the spot rate is allowed to trade up to 1% on either side of.”

November 22 – Bloomberg (Wes Goodman and John Detrixhe): “The supply of bonds worldwide may exceed demand by $280 billion in 2014, double this year’s amount, as fewer purchases by the Federal Reserve, mutual funds and other investors offset smaller government deficits. Debt issuance by sovereign, corporate and other borrowers will decline by an estimated $600 billion next year to a net $1.77 trillion, while demand will fall by $750 billion to a net $1.49 trillion, according to… JPMorgan Chase & Co…. Bond investors have already gotten a taste of what the fixed-income market may look like as central banks and others pull back, with returns this year of less than 0.1% being the worst since 1999 and down from 5.7% in 2012…”

November 20 – Bloomberg (Joseph Ciolli and Andrea Wong): “Janet Yellen… is already proving to be a friend of foreign-exchange traders. Yellen told the Senate Banking Committee last week she’ll ensure the central bank’s unprecedented monetary stimulus isn’t removed too soon, and that policy makers ‘certainly want to diminish any unnecessary volatility.’ The comments helped widen the differences between three- and 12-month implied volatility for the Canadian dollar, Australian dollar and Mexican peso to the top of their recent ranges versus the U.S. currency… Muted price swings benefit so-called carry trades, in which traders borrow in currencies with low interest rates such as the greenback and use the proceeds to invest in economies with higher yields… ‘Now that volatility has pushed lower and the market has adjusted to the delay in tapering, carry trades are being put back on,’ Paresh Upadhyaya, the Boston-based director of currency strategy at Pioneer Investment Management Inc., said… ‘We sense an opportunity.’”

EM Bubble Watch:

November 19 – Bloomberg (Mark Deen): “The Organization for Economic Cooperation and Development cut its global growth forecasts for this year and next as emerging-market economies including India and Brazil cool. The world economy will probably expand 2.7% this year and 3.6% next year, instead of the 3.1% and 4% predicted in May… ‘Most of the emerging economies have underlying fragilities that mean they cannot continue growing as they used to,’ OECD Chief Economist Pier Carlo Padoan said… ‘They used to be an important support engine for global growth in bad times. Now the reverse is true and advanced economies can’t be said to be in very good times again.’”

China Bubble Watch:

November 20 – Bloomberg: “Chinese companies pulled more than twice the amount of bond sales in November than last month, an unintended casualty of Premier Li Keqiang’s effort to reform the banking system. Issuers have postponed or scrapped 73.5 billion yuan ($12bn) of notes… China Yangtze Power Co., owner of the world’s biggest hydropower project, was among borrowers delaying offerings. Five-year AAA corporate yields in the country have surged 49 bps this month to a record 6.11%. Globally, company debt yields 2.91%.”

November 20 – Bloomberg: “Robin Li, founder of China’s top Internet search engine Baidu Inc., has become the country’s second-richest man after his shares rose 63% this year. Li’s net worth advanced to $11.9 billion…”

November 21 – Bloomberg (Christoph Rauwald): “A Chinese manufacturing gauge declined for the first time in four months, adding headwinds to a recovery in the world’s second-largest economy as leaders start to implement the broadest policy reforms since the 1990s. The preliminary 50.4 reading for the November Purchasing Managers’ Index… compared with a 50.8 median estimate from analysts…”

November 19 – Bloomberg: “In China’s ‘Shipping Valley,’ where the Yangtze River empties into the sea north of Shanghai, the once-bustling home of the nation’s biggest private shipbuilder is deadly quiet on a recent morning. Rows of dilapidated five-story dormitories in the city of Nantong, previously housing China Rongsheng Heavy Industries Group Holdings Ltd.’s 38,000 employees, were abandoned after the shipbuilder teetering on collapse cut almost 80% of its workers… Most video arcades, restaurants and shops serving them have closed. A $6.6 trillion credit binge during the past five years, encouraged by Beijing policy makers as stimulus to combat a global economic slowdown, now threatens to stoke a debt crisis. At stake are trillions of yuan in bank loans that companies producing everything from ships to steel to solar power are struggling to repay as the world’s second-largest economy heads for the weakest annual expansion since 1999.”

Japan Bubble Watch:

November 20 – Bloomberg (Keiko Ujikane): “Japan posted its biggest October trade deficit on record, as a revival in exports to the U.S. and China was overwhelmed by the nation’s soaring costs for imported fuel in the wake of the nuclear industry’s shutdown. The shortfall of 1.09 trillion yen ($10.9bn) extended a record run of deficits to 16 months… Imports climbed 26.1% from a year earlier, while exports gained 18.6%.”

India Watch:

November 19 – Bloomberg (Unni Krishnan and Prabhudatta Mishra): “Record onion prices and the soaring cost of rice and coriander are frustrating Reserve Bank of India Governor Raghuram Rajan’s battle to curb inflation… The wholesale-price index for onions, a staple food for India’s 1.24 billion people, has climbed 155% this year, hitting an all-time high… The index, set at 100 in 2004, has almost quadrupled in 12 months. A broader measure for food is up 19% in 2013, while spot prices for coriander climbed about 29% and basmati rice advanced 40%. The RBI has said that it faces an ‘unenviable task’ of trying to address the slowest economic expansion in a decade while tackling the fastest price gains among the largest emerging markets.”

November 22 – Bloomberg (Darren Boey and Kartik Goyal): “Rising bad loans at Indian lenders remain ‘a major challenge’ amid a slowdown in Asia’s third-largest economy, the nation’s central bank said. Nonperforming loans rose to 986 billion rupees ($15.7bn) at the end of March from 652 billion rupees a year earlier… The ratio of sour debt to total lending swelled to 3.6% from 3.1%. More debtors are finding it harder to pay off loans in a $1.8 trillion economy that is projected to grow in the year ending March 2014 at the weakest pace in more than a decade.”

Europe Watch:

November 21 – Financial Times (Stefan Wagstyl): “The president of the European Central Bank on Thursday hit back at ‘nationalistic’ criticism of its recent rate cut in a strongly worded public response to attacks from German commentators over the ECB’s low-interest-rate policy. ‘Let me react towards what is a nationalistic undertone in some of our countries whereby we [are said to] act against the interests of some countries and in defense of our own countries,”’said Mario Draghi… ‘We are not German, neither French or Spaniards or Italian, we are Europeans and we are acting for the Eurozone as a whole.’ The Italian ECB president’s outspoken defense of the bank could exacerbate tensions in Germany over its policy, where official support for the ECB is at odds with many savers’ fears about the impact of ultra-low interest rates. Mr Draghi was responding to German media commentators’ criticism of the ECB’s decision earlier this month to cut rates by 25 bps to a record low of 0.25%... The two German members of the ECB’s 23-member governing council led a six-strong revolt against the move.”

Germany Watch:

November 20 – Reuters: “Printing money is not the way out of the euro zone crisis, European Central Bank policymaker Jens Weidmann said, resisting the possibility raised by others at the ECB of buying assets to aid a weak recovery… Last week, ECB Executive Board member Peter Praet raised the prospect of the euro zone’s central bank starting to buy assets to bring inflation closer to its target of just under 2%... Weidmann, chief of Germany’s Bundesbank…, pushed back against the idea. ‘We have lowered interest rates and are offering banks unlimited liquidity. But there are no easy and quick ways out of this crisis… The money printer is definitely not the way to solve it. It will still take years until the causes of the crisis are eliminated… Technically we are definitely not at the end of our possibilities. But the question is: what is sensible? The debate about further measures leads away from the real causes of the crisis.’ The euro zone's prolonged crisis was rooted in a lack of competitiveness in some member countries, high government debt and troubled banking systems, he told the paper. ‘Only politics can solve these problems, the central bank cannot,’ Weidmann said.”

November 21 – Dow Jones (Harriet Torry): “Chancellor Angela Merkel… vehemently defended Germany's export-driven surplus, which has drawn sharp criticism from the country's key trading partners. Speaking at a gathering of political and business leaders, Ms. Merkel said Germany's export strength was driven by appetite for the country's products and that it would be ‘absurd’ for companies to choke their production, adding ‘that can’t be the meaning of a successful Europe.’ Making it clear the government won’t be taking steps to ‘artificially reduce Germany's competitiveness,’ Ms. Merkel said cutting Germany’s total debt would remain a central objective of her next legislative term. She also rejected claims that German wages were too low.”

November 22 – Bloomberg (Christoph Rauwald): “Volkswagen AG, Europe’s largest automaker, will maintain a high level of spending on developing new vehicles and upgrading factories over the coming five years to underpin its bid to become the world’s largest automaker. VW plans to invest 84.2 billion euros ($114bn) through 2018, the Wolfsburg, Germany-based company said… ‘We will continue to invest strongly in our innovation and technology leadership,’ CEO Martin Winterkorn said… ‘This will give us extra power on our way to the top.’”

November 20 – Bloomberg (Patrick Donahue and Birgit Jennen): “German Chancellor Angela Merkel and the Social Democrats deadlocked on labor issues including setting a national minimum wage, jeopardizing their self-imposed deadline of forging a coalition deal in seven days. Merkel’s Christian Democrats, their CSU Bavarian sister party and the SPD collided over ‘areas of true dissent’ on a minimum wage, CSU General Secretary Alexander Dobrindt told reporters… ‘There’s a long way to go, more than one could have expected,’ Dobrindt said… Officials from all three parties said they still aim to have a deal by Nov. 27.”