Saturday, December 6, 2014

Weekly Commentary, November 23, 2012: Following Weidmann, Lacker Takes a Stand

“As background for our monetary policy decisionmaking, we at the Federal Reserve have spent a good deal of effort attempting to understand the reasons why the economic recovery has not been stronger. Studies of previous financial crises provide one helpful place to start. This literature has found that severe financial crises--particularly those associated with housing booms and busts--have often been associated with many years of subsequent weak performance. While this result allows for many interpretations, one possibility is that financial crises, or the deep recessions that typically accompany them, may reduce an economy's potential growth rate, at least for a time. The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years.” Chairman Ben Bernanke, “The Economic Recovery and Economic Policy,” November 20, 2012

It is inaccurate to blame the 2008/09 financial crisis for the lagging U.S. recovery. Poor post-Bubble economic performance instead relates directly to previous boom-time excesses. And there should be little debate that loose Federal Reserve policies played prominently throughout the mortgage finance Bubble period. A system doesn't almost double total outstanding mortgage Credit in about six years without unleashing major distortions in the allocation of resources and spending/investing patterns throughout the real economy. And surely no one can argue that four years of zero rates and massive federal deficit spending have fostered sound resource allocation and significant economic wealth-creating investment.

Post-Bubble backdrops create a real mess in terms of policymaking. And, inevitably, the bigger the Bubble the more profound the messiness. We’ve been witnessing this dynamic play out around the world. Simplistically, when the pie is perceived to be shrinking, reaching political consensus becomes a constant battle. When previous policies and associated environments are viewed as having unjustly and inequitably distributed wealth, there will undoubtedly be a powerful backlash. Political and social forces will gather - determined to make amends.

With an underlying focus on redistribution, post-Bubble democracies will struggle promoting and implementing sound growth policies. And as we’ve witnessed at home and abroad, emboldened central bankers have been keen to exploit political impotence. Meanwhile, an already troubled backdrop is only compounded by the general confusion (along with a bevy of flawed theories) as to the causes of post-Bubble stagnation.

Here in the U.S., we’ve had an election and now our elected officials will be tasked with managing an increasingly problematic fiscal predicament. If voters are not satisfied, they’ll return to voting booths in two and four years. And while attention is these days fixated on the “fiscal cliff” drama, our unelected central bankers seem determined to push their grand experiment even further into uncharted waters. The dangers associated with discretionary monetary policy remain a prominent theme of my Macro Credit Theory. As recognized generations ago, too much discretion virtually ensures that errors in monetary policy will be compounded by only bigger mistakes.

President of the San Francisco Federal Reserve Bank John Williams has recently voiced support for increasing the Fed’s monthly quantitative easing (QE) operation to $85bn beginning in January, fully offsetting the expiration of the Fed’s “operation twist” (buy bonds, sell T-bills) support operation. Furthermore, comments this week from chairman Bernanke seemed to lend support to those on the committee (including ultra-doves Yellen and Evans) calling for more definitive numerical targets (i.e. unemployment rate) to drive policy decisions.

Employment growth has lagged badly during this recovery specifically because of deep Credit Bubble-associated structural economic maladjustment. It would be most regrettable to use the current elevated unemployment rate as justification for augmenting monetary looseness that is today clearly promoting government finance Bubble excess and maladjustment. Amazingly, after all these years the Fed somehow remains blind to the Bubbles it inflates.

You either believe in sound money and Credit or you don’t. As such, the Bundesbank has been fighting a lonely battle. And I’ll give another hat tip to its distinguished President for his determination to keep fighting the good fight.

Friday from Bloomberg (Scott Hamilton and Stefan Riecher): “European Central Bank Governing Council member Jens Weidmann said the bank’s crisis-fighting measures may encourage governments to delay tackling the root causes of the problem and make the situation worse. It is certainly true that if the house is burning, putting out the fire has to be the most pressing concern,’ Weidmann… said… ‘But we have to also make sure that with all the fire fighting and new fire insurance that we’re handing out, we’re not unwittingly preparing the ground for the next fire.’ Weidmann, an outspoken critic of the ECB’s planned bond-purchase program, cited the central bank’s 1 trillion euros ($1.29 TN) of three-year loans to banks as an example of the risks inherent in its crisis-fighting measures. While those loans averted a credit crunch, they were used by banks to buy government bonds, increasing the risks on their balance sheets and potentially exacerbating the debt crisis, he said. ‘The crisis has blurred the boundaries between monetary policy and fiscal policy… The impression that you can escape this with temporary easy policies, through monetary policies, just aggravates the problems we face in the future. Monetary policy is seen by politicians as an easy way out. It is not a panacea.”

November 19 – Dow Jones (Tom Fairless and Todd Buell): “Crisis-stricken euro zone states may do better by pushing through tough budget cuts early rather than seeking to stretch them out over a longer period, the head of Germany's central bank said… ‘It is sometimes better to have a hard cut at the beginning’ which leads to visible success, than to have a long process that seems never to end, said Jens Weidmann, President of Germany's Bundesbank and a member of the European Central Bank's governing council… Asked about the social costs of austerity in Greece and Spain, Mr. Weidmann said ‘one thing is clear. The adjustments in those countries cannot be avoided.’ The developments that took place prior to the crisis ‘and which led to the crisis can’t simply continue,’ he said.”

November 23 – MarketNews International: “Exiting from accommodative monetary policy will become more difficult over time… Weidmann said Friday. …Weidmann acknowledged that these were ‘not normal times’ but warned it is ‘important to keep in mind the long-term consequences of what we are doing.’ ‘The balance of risks and benefits will shift over time and it is getting more and more difficult to exit,’ Weidmann said, arguing that central bank actions continue to ‘distort’ markets… Weidmann… reiterated that monetary policy should not be ‘overburdened’ in the current crisis and warned that central bank interventions risked delaying government reforms. ‘Monetary policy is seen by many politicians as the easy way out…’ While it ‘buys you time,’ it might ‘lead to behaviour where you just sit and wait,’ he warned. Weidmann said the ‘experience so far is not very comforting in this buy time that is not being used.’”

Typically well said by Mr. Weidmann, with his “sound money” framework as pertinent here in the U.S. as it is in Europe. Much closer to home, I strongly commend Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, for this week taking a strong stand against the course of Federal Reserve policymaking. In his speech, “Perspectives on Monetary and Credit Policy,” at the Shadow Open Market Symposium in New York, Mr. Lacker took exception with various aspects of the Fed’s current policy approach, including the proposal for basing monetary stimulus on the unemployment rate. “Crisp numerical thresholds may work well in the classroom models used to illustrate policy principles, but one or two economic statistics do not always capture the rich array of policy-relevant information about the state of the economy.”

Mr. Lacker also delved into the important issue of Credit policy: “When the Fed expands reserves by buying private assets, it extends public sector credit to private borrowers. To the extent that purchases of private claims have any effect, they do so by distorting the relative cost of credit among different borrowers. Such differential effects are unlikely to be beneficial, on net, unless borrowers in the favored sector would otherwise face artificially high rates. I think it’s difficult to make this case for agency MBS, a sector that historically has benefited from heavy subsidies, which arguably contributed to dangerously high homeowner leverage. So I do not see the rationale for reducing the interest rates paid by conforming home mortgage borrowers relative to those paid by, say, small-business borrowers. Moreover, purchasing agency MBS encourages the continuation of a housing finance model based heavily on government-sponsored enterprises, at a time when the housing sector would be better served by a new model that relies less on government credit subsidies… An immediate consequence of a central bank’s independence is the capacity to use its balance sheet to direct the flow of credit toward particular market segments, circumventing the constitutional checks and balances that would otherwise apply to such fiscal initiatives.”

The decision to promote rapid mortgage Credit growth as an integral aspect of its post-tech Bubble (“mopping up”) monetary stimulus was arguably the greatest policy blunder in the history of the Federal Reserve system. Recent comments from Dr. Bernanke and other Fed officials make it clear that they are today more determined than ever to promote mortgage Credit growth in a desperate attempt to resuscitate a private-sector Credit boom. Not only does such a move again go beyond our central bank’s mandate, it indicates that critical lessons with respect to the dangers of loose money/Credit and government market intervention remain unlearned.

And, courageously, Mr. Lacker comes with a quite sound proposal: “If the Federal Reserve cannot limit credit policy of its own accord, legislation may be the best option. And the restraint of credit policy would not be complete unless limits on reserve bank lending are complemented by limits on the Fed’s ability to buy private sector assets.”

This is absolutely correct: Some basic rules of the game would go a long way toward containing the ongoing damages associated with profligate discretionary monetary management. This runaway experiment must be reined in; there has to be a return to trusted central banking principles. The Fed should be limited to government debt purchases, and there must be clear limitations on the size of its balance sheet. And I would argue that until there is a return to a sound monetary doctrine there will remain this pall of uncertainty overhanging the economy.

Interminable “fiscal cliff” and European infighting are not the only games in town. I hope others will bravely support Mr. Lacker in what could prove a fascinating – and critically important - battle brewing at the Federal Reserve.

For the Week:

The S&P500 jumped 3.6% (up 12.1% y-t-d), and the Dow gained 3.3% (up 6.5%). The Morgan Stanley Cyclicals surged 4.7% (up 14.7%), and the Transports rose 3.3% (up 0.6%). The Morgan Stanley Consumer index gained 3.1% (up 9.3%), while the Utilities declined 1.0% (down 7.8%). The Banks were up 4.3% (up 24.9%), and the Broker/Dealers were 3.8% higher (up 1.1%). The S&P 400 Mid-Caps rallied 3.9% (up 12.6%), and the small cap Russell 2000 jumped 4.0% (up 8.9%). The Nasdaq100 was up 4.2% (up 15.9%), and the Morgan Stanley High Tech index gained 4.3% (up 11.8%). The Semiconductors rallied 3.7% (up 1.3%). The InteractiveWeek Internet index jumped 4.2% (up 12.0%). The Biotechs rose another 6.2% (up 40.5%). With bullion up $39, the HUI gold index rallied 5.0% (down 7.2%).

One-month Treasury bill rates ended the week at 15 bps and three-month bills closed at 9 bps. Two-year government yields rose 3 bps to 0.27%. Five-year T-note yields ended the week up 8 bps to 0.69%. Ten-year yields gained 11 bps to 1.69%. Long bond yields jumped 10 bps to 2.83%. Benchmark Fannie MBS yields rose 9 bps to 2.23%. The spread between benchmark MBS and 10-year Treasury yields narrowed 2 bps 54 bps. The implied yield on December 2013 eurodollar futures increased 3 bps to 0.41%. The two-year dollar swap spread declined one to 13 bps, and the 10-year swap spread fell one to about 4 bps. Corporate bond spreads narrowed. An index of investment grade bond risk fell 10 bps to 99 bps. An index of junk bond risk sank 54 bps to 510 bps.

Debt issuance slowed for the holiday-shortened week. Investment grade issuers this week included Niagara Mohawk Power $700 million, DCP Midstream $500 million, DDR Corp $450 million, Avnet $350 million, and Airgas $250 million.

Junk bond funds enjoyed inflows of $253 million (from Lipper). Junk issuers included Legacy Reserves $300 million and American Piping Products $100 million.

Convertible debt issued included Encore Capital Group $100 million.

International dollar bond issuers included Baidu $1.5bn, Boligkreditt $1.25bn, Ukraine $1.25bn, British Sky Broadcasting $800 million, and Pentair $600 million.

Spain's 10-year yields dropped 27 bps to 5.58% (up 54bps y-t-d). Italian 10-yr yields fell 11 bps to 4.74% (down 229bps). German bund yields rose 11 bps to 1.44% (down 39bps), and French yields increased 9 bps to 2.15% (down 99bps). The French to German 10-year bond spread widened 2 bps to 71 bps. Ten-year Portuguese yields sank 88 bps to 7.69% (down 508bps). The new Greek 10-year note yield dropped 97 bps to 16.14%. U.K. 10-year gilt yields rose 11 bps to 1.84% (down 14bps). Irish yields declined 17 bps to 4.35% (down 391bps).

The German DAX equities index surged 5.2% (up 23.9% y-t-d). Spain's IBEX 35 equities index jumped 4.2% for the week (down 7.7%). Italy's FTSE MIB rallied 5.3% (up 3.6%). Japanese 10-year "JGB" yields added a basis point to 0.73% (down 25bps). Japan's Nikkei jumped 3.7% (up 10.8%). Emerging markets were also strong. Brazil's Bovespa equities index jumped 3.9% (up 1.4%), and Mexico's Bolsa rose 2.7% (up 13.1%). South Korea's Kospi index jumped 2.7% (up 4.7%). India’s Sensex equities index added 1.1% (up 19.8%). China’s Shanghai Exchange gained 0.6% (down 7.8%).

Freddie Mac 30-year fixed mortgage rates dropped 3 bps to 3.31% (down 67bps y-o-y). Fifteen-year fixed rates declined 2 bps to 2.63% (down 67bps). One-year ARMs increased a basis point to 2.56% (down 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 3 bps to 4.03% (down 65bps).

Federal Reserve Credit jumped $20.0bn to $2.839 TN, with a year-to-date decline of $81bn.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $571bn y-o-y, or 6.2% to a record $10.794 TN. Over two years, reserves were $1.758 TN higher, for 19% growth.

M2 (narrow) "money" supply was down $23.7bn to $10.270 TN. "Narrow money" has expanded 7.4% annualized year-to-date and was up 7.0% from a year ago. For the week, Currency declined $0.3bn. Demand and Checkable Deposits fell $22.7bn, while Savings Deposits were little changed. Small Denominated Deposits declined $2.7bn. Retail Money Funds gained $2.0bn.

Money market fund assets jumped $26.6bn to $2.602 TN. Money Fund assets have declined $93.4bn y-t-d, with a one-year decline of $44.6bn, or 1.7%.

Total Commercial Paper outstanding jumped $29bn to a nine-week high $998bn CP was up $39bn y-t-d, while having declined $2bn from a year ago.

Currency Watch:

November 23 – Bloomberg (Neal Armstrong): “The world’s largest currency traders say foreign-exchange revenue is sliding as central-bank policies stifle price swings and cut volumes by $300 billion a day. Deutsche Bank AG, the biggest dealer based on Euromoney Institutional Investor Plc data, says narrower margins cut revenue ‘significantly’ last quarter. Barclays Plc, the third- largest, says foreign-exchange sales are dropping and fourth- placed UBS AG says it has been hurt by lower volatility. Daily turnover as measured by CLS Bank, operator of the largest currency-transaction settlement system, slid 6% to $4.72 trillion in the third quarter from the year-earlier period.”

The U.S. dollar index declined 1.3% to 80.19 (unchanged y-t-d). For the week on the upside, the Swedish krona increased 2.5%, the Norwegian krone 2.2%, the Swiss franc 1.9%, the Danish krone 1.8%, the euro 1.8%, the New Zealand dollar 1.4%, the Mexican peso 1.3%, the Australian dollar 1.2%, the British pound 0.9%, the Canadian dollar 0.8%, the South Korean won 0.6%, the Singapore dollar 0.4%, the Taiwanese dollar 0.2%, and the Brazilian real 0.2%. For the week on the downside, the Japanese yen declined 1.3% and the South African rand slipped 0.1%.

Commodities Watch:

November 20 – Bloomberg (Nicholas Larkin and Debarati Roy): “Gold’s 12-year rally, the longest in at least nine decades, is poised to continue in 2013 as central bank stimulus spurs investors from John Paulson to George Soros to accumulate the highest combined bullion holdings ever… Soros Fund Management LLC increased its holdings by 49% in the third quarter…”

The CRB index rallied 1.9% this week (down 2.0% y-t-d). The Goldman Sachs Commodities Index rose 2.0% (up 0.8%). Spot Gold recovered 2.3% to $1,753 (up 12.1%). Silver jumped 5.4% to $34.21 (up 23%). January Crude rose $1.34 to $88.26 (down 11%). December Gasoline gained 1.2% (up 3%), and December Natural Gas rose 2.9% (up 31%). December Copper increased 2.2% (up 3%). December Wheat increased 1.2% (up 30%), and December Corn advanced 2.5% (up 15%).

Global Credit Watch:

November 21 – Bloomberg (James G. Neuger and Sandrine Rastello): “European finance ministers failed to agree on a debt-reduction package for Greece after battling with the International Monetary Fund over how to nurse the recession- wracked country back to fiscal health. With creditors led by Germany refusing to put up fresh money or offer debt relief, the finance chiefs were unable to scrape together enough funds from other sources to help alleviate Greece’s debt burden, set to hit 190% of gross domestic product in 2014. Greece’s fiscal woes have defied three years of rescue efforts, rekindling doubts about Europe’s crisis-containment strategy and maintaining a cloud over the euro, postwar Europe’s signature economic accomplishment.”

November 20 – Financial Times (Ralph Atkins): “Eurozone securitisation – the packaging-up and reselling of loans – has contracted to the lowest since at least the start of the region’s debt crisis as banks have reined back lending activity, especially to Spain’s housing market. Debt securities issued by special purpose vehicles used for securitisation shrank by €72bn during the three months to the end of September… The total amount outstanding at the end of the quarter was €1.68tn – the lowest since the ECB started compiling such figures at the start of 2010."

November 16 - The Economist: "[French] Public spending accounts for almost 57% of national output, the public debt stands at over 90% of GDP (and rising) and the country seems to be running a near-permanent budget deficit. It is no surprise that in January France lost its AAA grade from Standard & Poor’s, a rating agency. Wealth, profits and high incomes are heavily taxed, the rich are routinely abused and people are instinctively hostile to capitalism. Everything from the labour market to pharmacies to taxis is heavily regulated: no wonder would-be entrepreneurs feel discouraged. No entirely new company has entered the CAC-40 stockmarket index since it started in 1987; redundancies can lead to endless court proceedings; and trade unions and protesters tend to take to the streets at the first hint of reform. It adds up to a deeply anti-business culture.”

November 19 – Bloomberg (Charles Penty): “Spanish lenders saw bad loans as a proportion of total lending climb to a record 10.71% in September as the country’s five-year slump spurred non-payment by companies and real estate developers. The ratio increased from a revised 10.52% in August as 3.65 billion euros of loans turned sour in the month, the Bank of Spain said. The bad-loans ratio was 7.16% a year ago… Bank lending expanded 0.2% in September from August and dropped 4.9% from the same month a year ago, the Bank of Spain said.”

November 21 – Bloomberg (Emma Ross-Thomas): “Bank of Spain Governor Luis Maria Linde said the government risks missing its budget targets this year and next, adding to doubts on Prime Minister Mariano Rajoy’s ability to cut the deficit amid a five-year slump. The data ‘doesn’t allow us to rule out the possibility of some slippage,’ because the target depends on tax measures kicking in at the end of this year, Linde said… ‘Meeting the 2013 objectives could be put in danger if tax collection was affected by lower economic activity.’ Rajoy is trying to reduce the deficit by two thirds in three years even as he forecasts the economy will continue to contract next year amid a 26% unemployment rate. While the European Commission told Spain last week its budget measures were sufficient, Moody’s Investors Service said the EU’s stance was ‘credit negative’ for Spain…”

November 19 – Bloomberg (Neal Armstrong and David Goodman): “The 207 billion euros ($264bn) of debt Spain needs to sell next year will force it to request a bailout, according to investors from Pioneer Investments and BlueBay Asset Management Ltd. ‘Spain will ask for aid in January,’ said Tanguy Le Saout, who helps oversee 153 billion euros as head of European fixed income at Pioneer Investments… ‘The sooner they ask for help, the sooner the cost of their debt will reduce.’”

November 21 – Bloomberg (Emma Ross-Thomas): “Spain lacks data on evictions linked to mortgage defaults, Bank of Spain Governor Luis Maria Linde said, after the government announced emergency measures to prevent people losing their homes. ‘We don’t have good statistics on the judicial side, on the judicial procedures that affect mortgages,’ Linde told reporters… ‘We don’t have good data on evictions, we lack data on the scale of the problem.’ Spain’s government, responding to public outrage over suicides linked to repossessions, passed a decree last week to prevent low-income families losing their homes.”

November 21 – Bloomberg (Maria Petrakis): “Greek opposition leader Alexis Tsipras said the failure of European Union and International Monetary Fund officials yesterday to agree on a debt-reduction package for Greece shows that more and more people agree that Greece’s debt is unsustainable… Tsipras repeats Syriza party position that bailout accord must be cancelled, moratorium on debt payments, and then beginning new talks on debt.”

Spain Watch:

November 23 – Bloomberg (Emma Ross-Thomas): “Standard & Poor’s said its view of Spanish banks has become more negative and it expects credit risk to rise. ‘Spanish banks are facing higher credit risks as Spain’s weakening economy, public sector cuts, austerity measures, and high unemployment will likely hamper the creditworthiness and resilience of public and private sector borrowers,’ the company said…”

November 23 – Bloomberg (Ben Sills): “Voters in Catalonia head to the polls in two days in a regional election likely to advance nationalists’ push for independence and weaken Spanish Prime Minister Mariano Rajoy. Catalans are set to hand nationalist parties control of the 135-seat regional parliament, setting them on a collision course with Rajoy’s government in Madrid… Regional President Artur Mas, who’s pledged to hold a referendum on independence that Rajoy says would be illegal, had the support of 37% of voters and the Catalan Republican Left was at 12%, in a Metroscopia poll this month. ‘The Catalan government is likely to push for a legal referendum to be held within the next two years,’ Antonio Barroso, a political analyst at Eurasia in London and a former Spanish government pollster, said… Mas cannot backtrack once he is reelected.’”

November 22 – Financial Times (David Gardner): “This year’s surge of separatist sentiment in Catalonia and the Basque Country is reawakening what had appeared to be a dormant Spanish nationalism, led by rightwing forces in and around the ruling Popular party, with shrill salvos of rhetorical artillery between the two sides poisoning political debate. More modulated voices that subscribe to neither brand of nationalism are being drowned out by this increasingly atavistic discourse, which some feel summons up the spectres of Spain’s fractious past. Faced with a drive for independence by the home rule government of Catalonia ahead of a watershed election there on Sunday, the central government in Madrid is threatening to use the full force of the law to prevent Catalan plans for a subsequent plebiscite on the region’s future.”

Germany Watch:

November 19 – Bloomberg (Guy Johnson and Simone Meier): “Former European Central Bank chief economist Juergen Stark said President Mario Draghi’s bond- purchase plan compromises the bank’s independence and risks eroding its credibility to contain inflation. ‘I share those views which argue this is not monetary policy anymore,’ Stark said… Making the ECB’s purchases contingent on governments fulfilling certain conditions ‘undermines monetary policy, it undermines the independence of a central bank,’ he said. Draghi proposes to intervene in debt markets to lower borrowing costs and restore transmission of ECB policy only in countries that apply for financial aid and sign up to conditions. The plan, which has yet to be activated, was opposed by Germany’s Bundesbank, where Stark was once vice president. Stark, who resigned from the ECB at the end of last year over the bank’s previous bond-purchase program, was particularly critical of the conditionality of the new plan, which he said was introduced as a compromise. ‘To make interventions conditional on policy reforms in individual countries in my view changes the name of the game,’ Stark said. ‘This is not monetary policy any more. If the monetary policy transmission mechanism is impaired, the central bank should intervene’ and ‘should never make its own decisions dependent on the behavior of third parties.’”

November 19 – Bloomberg (Stefan Riecher and Gabi Thesing): “European Central Bank Governing Council member Jens Weidmann said a banking union can’t solve the euro-area debt crisis. ‘Done correctly, a banking union can be an important building block, even a pillar of a stable monetary union,’ Weidmann, who heads Germany’s Bundesbank, said… ‘But is it also the key to finding a solution to the crisis? No, it’s not, and we shouldn’t overburden it with this expectation.’”

November 19 – Bloomberg (Matthew Brockett): “Germany’s Bundesbank said any further aid for Greece has to come from governments and the European Central Bank can’t be involved. ‘It is clearly the responsibility of fiscal policy makers to decide on further help for Greece, as well as to provide the financing and assume the risks involved,’ the… Bundesbank said… ‘This is not the responsibility of monetary policy.’ The Bundesbank also reiterated its opposition to the ECB’s new bond-purchase plan, saying it is important to maintain a strict separation between fiscal and monetary policy ‘to avoid the impression of monetary policy being co-opted by fiscal policy interests.’ ‘The Bundesbank still remains critical of Eurosystem government-bond purchases and the stability risks these may entail, in particular if they are used to resolve government financial difficulties through monetary policy,’ it said.”

November 20 – Bloomberg (Niklas Magnusson): “The city of Hamburg, home to Germany’s largest port, is learning the price of bailouts as a financial crisis in global shipping cripples companies that the city state’s economy depends on for income. Hamburg, Germany’s richest city, and its northern neighbour, the federal state of Schleswig-Holstein, face covering losses of 1.3 billion euros ($1.7bn) at HSH Nordbank AG from 2019 to 2025 as clients of the world’s largest shipping bank default.”

November 19 – Bloomberg (Brian Parkin): “German Chancellor Angela Merkel’s plan to cut the country’s budget deficit to zero by 2016 may face its first hiccup next year by growing as economic growth stays weaker, the Bundesbank said. Germany’s economic outlook in 2013 may hurt revenue growth more than the government anticipates… Merkel’s government expects a composite deficit of about 30 billion euros ($38bn) this year and some 21 billion euros in 2013, according to a plan to balance the budget by 2016 in the latest.”

Global Bubble Watch:

November 21 – Bloomberg (Lisa Abramowicz and Devin Banerjee): “Private-equity firms responsible for issuing $366 billion of debt during the leveraged-buyout boom are trying their hand at managing sales of junk bonds and loans as waning takeover volumes prod them to seek new revenue. KKR & Co. has underwritten $2.7 billion of high-yield bond and loan sales this year, up 54% from last year… Leon Black’s Apollo Global Management LLC has helped syndicate two leveraged-loan offerings in 2012… The firms are jumping into a market ignited by Federal Reserve stimulus, including plans to hold benchmark interest rates at about zero percent until mid-2015.”

China Bubble Watch:

November 19 – Bloomberg: “Xi Jinping, the new head of China’s ruling Communist Party, told his fellow leaders that unless they address corruption social unrest may rise and it could lead to the demise of the party. ‘The preponderance of facts tell us that the more severe the corruption problem becomes, it will ultimately lead the party and the nation to perish!’ Xi told members of the ruling Politburo on Nov. 17… ‘We must be vigilant!’”

November 21 – Reuters (Fayen Wong): “Traders in China have defaulted on at least three Australian thermal coal shipments in recent weeks, trade sources said…, pressured by a dip in regional prices and high stocks in the world’s top coal importer. While analysts and traders said it was unlikely to signal the start of a wave of cancellations in deals, the defaults could put pressure on prices after signs of a revival earlier this month. Australia's Newcastle spot thermal coal index has fallen as much as 30% since the start of 2012 to a year-low of $81 a tonne, although prices have rebounded this week to about $84…”

November 19 – Bloomberg: “China’s new home prices rose in October in more cities than the previous month, indicating the government will refrain from relaxing curbs on the property market. Prices climbed in 35 of the 70 cities the government tracks, compared with 31 in September… Prices fell in 17 cities.”

Japan Watch:

November 21 – Bloomberg (Andy Sharp and James Mayger): “Japan is suffering its worst year for exports since the global contraction in 2009 as Europe’s crisis, China’s slowdown and a diplomatic dispute with the Chinese hurt manufacturers and deepen the risk of a recession. Shipments totaled 53.5 trillion yen ($653bn) for January through October, down 2.3% from the same period in 2011… The trade deficit for 2012 so far is a record 5.3 trillion yen. The so-called hollowing out of Japan’s export champions, highlighted by a cut in Panasonic Corp.’s debt rating to one step above junk status by Moody’s Investors Service yesterday, underscores the urgency of kindling domestic demand… ‘There’s no doubt that Japan’s economy is already in a recession,’ said Kiichi Murashima, chief economist at Citigroup Inc. in Tokyo… Exports in October fell for a fifth month, down 6.5% from a year earlier and leaving a trade deficit of 549 billion yen… Shipments to China, Japan’s largest export market, fell 11.6%... Exports to the European Union fell 20.1% on year, while those to the U.S. were up 3.1%.”

European Economy Watch:

November 23 – Bloomberg (James G. Neuger and Svenja O’Donnell): “European Union leaders failed to agree on the 27 nation bloc’s next seven-year budget, replaying the clash between rich and poor countries that has stymied the response to the euro debt crisis. National chiefs plan another summit early next year, when northern countries including Britain and Germany may have the upper hand in seeking to cut subsidies to lesser-developed southern and eastern economies clamoring for EU investment. ‘Anything short of admitting that our talks have been extraordinarily complex and difficult would not reflect reality,’ Jose Barroso, head of the European Commission, which manages the subsidy programs, told reporters after a two-day meeting in Brussels.”

November 22 – Bloomberg (James G. Neuger): “A sum equal to 1% of the European Union’s gross domestic product will devour 100% of the bloc’s political energy when leaders square off over subsidies for everything from bridges and windmills to olive trees and the dwindling honeybee population. The euro debt crisis and a deadlock over Greek aid raise the stakes for EU budget talks starting today in Brussels, testing whether the 27-nation bloc is heading for more integration and whether Britain, a foe of EU spending since the days of Margaret Thatcher, will finally say it’s had enough…The summit may run into the weekend and even then, as in 2005, end in stalemate.”

November 22 – Bloomberg (Fergal O’Brien): “Euro-area services and manufacturing output shrank for a 10th month in November as the debt crisis hurt confidence, underscoring divergences in the global economy as China’s factories showed the first growth in more than a year. A composite index based on a survey of purchasing managers in both industries in the euro zone was little changed at 45.8 compared with 45.7 in October…”

November 21 – Bloomberg (Svenja O’Donnell): “Britain’s budget deficit unexpectedly widened in October as government spending surged and the economic slump hit tax revenue from company profits. The shortfall excluding government support for banks was 8.6 billion pounds ($13.7bn) compared with 5.9 billion pounds a year earlier… Spending jumped 7.4% while tax income climbed just 1.8%. Britain’s deficit is on course to overshoot the 120 billion pounds forecast by the Office for Budget Responsibility for the fiscal year…”

U.S. Bubble Economy Watch:

November 21 – Bloomberg (Jeff Wilson and Elizabeth Campbell): “Even after the worst drought in a half century shriveled crops from Ohio to Nebraska, U.S. farmers are having their most-profitable year ever because of record- high prices and insurance claims. Farmer income probably will jump 6.9% to $144 billion, exceeding the government’s August estimate of $139.3 billion, said Neil Harl, an economist at Iowa State University. Parched fields that drove corn, soybean and wheat futures as much as 68% higher since mid-June mean insurance payouts may more than double to $28 billion, according to Doane Advisory Services Co., a farm and food-company researcher in St. Louis.”

Central Bank Watch:

November 23 – Wall Street Journal (Jon Hilsenrath): “John Williams, president of the San Francisco Federal Reserve Bank and one of the Fed's stronger advocates for continuing to use monetary policy to bolster the economy, said the central bank's securities portfolio hasn't grown "anywhere near" the kind of limits that might impede the Fed from carrying on with its bond-buying programs. ‘Our concern is to make sure our policies aren’t creating problems with market-functioning,’ he said… ‘In terms of how far you can go, I don't think that we’re anywhere near any kind of limit . . . . Conceptually, you could imagine some upper limit to this but I don't think we're getting anywhere near it.’"

November 20 – Bloomberg (Joshua Zumbrun): “Federal Reserve Chairman Ben S. Bernanke said U.S. central bankers are looking ‘very carefully’ at proposals to link changes in monetary policy to specific economic thresholds, such as the jobless rate… such an approach was ‘promising,’ while adding that ‘the committee is still discussing this particular approach. I don’t want to front-run those discussions, which are still ongoing.’”

November 21 – Bloomberg (Scott Hamilton): “The Bank of England voted 8-1 to stop expanding its bond-purchase program this month as the majority said uncertainty among consumers and companies may be affecting the impact of quantitative easing on the economy.”

Speculator Watch:

November 21 – Bloomberg (Bob Van Voris and Patricia Hurtado): “Steven A. Cohen’s SAC Capital Advisors LP is at the center of the biggest insider case ever, part of a sweeping U.S. crackdown on illicit hedge-fund trading that focuses on the burgeoning exploitation of secret data on volatile health care stocks. In doing so, the prosecution of a former Cohen lieutenant has brought the five year probe beyond the realm of technology stocks and into the busy underworld of health-care industry securities fraud. The charges against former SAC portfolio manager Mathew Martoma also place U.S. prosecutors closer than ever to Cohen, the hedge fund’s billionaire owner and founder, in the broadest insider trading investigation in a generation.”