Sunday, December 14, 2014

Weekly Commentary, November 29, 2013: Pertinent Bubble Insights from the Roaring Twenties

“To understand the Great Depression is the Holy Grail of macroeconomics. Not only did the Depression give birth to macroeconomics as a distinct field of study, but also—to an extent that is not always fully appreciated—the experience of the 1930s continues to influence macroeconomists' beliefs, policy recommendations, and research agendas. And, practicalities aside, finding an explanation for the worldwide economic collapse of the 1930s remains a fascinating intellectual challenge.” Ben. S Bernanke, Essays on the Great Depression, 2000

No longer is the understanding of the Great Depression the “Holy Grail” of economics.” It’s been supplanted by understanding today’s extraordinary ongoing global Credit and speculative Bubble cycles.

Dr. Bernanke and others focus primarily on what they believe were policy errors during the Thirties, with surprisingly little attention paid to “Roaring Twenties” policies and excesses. If only the Fed had understood the need to open up the monetary floodgates, they claim. Fed money printing could have been used to recapitalize the banking system, rectify insufficient demand and reflate consumer and asset prices. The Great Depression could have and should have been avoided.

Indeed, today’s policymakers believe they are adeptly fighting and winning an epic battle against 1930’s-type deflationary forces. They are determined to “do whatever it takes.” Having failed to learn from misguided 1920’s policies that sustained dangerous financial Bubbles and attendant economic maladjustment, they today replay them.

A Federal Reserve that was created in 1913 to regulate Credit fatefully accommodated a historic Credit boom that became increasingly unwieldy in the latter years of the ‘20s. Over time, speculation and asset Bubbles were recognized as increasingly problematic. Yet there was a critical compounding problem: the ongoing downward pressure on commodities and consumer prices. Global financial and economic backdrops had become increasingly unstable and confusing. Competing interests, analytical frameworks and ideologies ensured policymaker impotence at the Federal Reserve. In the end, a historic Bubble was allowed to run unchecked.

Benjamin Strong, president of the New York Fed and the leading figure at the Fed, administered his famous stock market “coup de whiskey” in 1927. The results were spectacular. The Dow Jones Industrial Average more than doubled in 18 months. Yet Fed stimulus had little impact other than to significantly exacerbate the divergence between inflating asset prices and weakening fundamental prospects. Looking back, a rather obvious lesson went unlearned: No shots of whiskey, especially into a speculative backdrop. Market operators are today fully intoxicated by the latest Trillion dollar body shot.

Policymakers today struggle with a serious dilemma uncomfortably reminiscent of what manifested during the late-Twenties: How to administer monetary policy in a backdrop with downward pressure on some prices (as opposed to the general price level in the late-20s) yet intensifying speculative excess propelling a securities market Bubble. Similar to today, policymakers were confounded by a complex interplay of Credit, speculative and economic dynamics. There was general acceptance that market speculation was posing an increasingly dangerous systemic risk. Yet faltering global growth and a weak pricing backdrop were viewed as the more pressing issues.

The longer it was left unchecked the more apprehensive central bankers were to pricking the Bubble. Moreover, virtually everyone was oblivious to the degree of fragility associated with protracted financial excess - fragility that was greatly exacerbated by a final speculative blow-off.

There was a crucial debate within the Fed: How to spur Credit growth for the real economy without feeding market speculation. One school of thought held that proper Credit allocation was the key. The Fed should channel Credit for investment in the real economy, while working to tighten broker call lending and other speculative Credit feeding into stocks. An opposing view held that such Credit allocation efforts were destined to fail. No matter the avenue of how money and Credit initially made their way into the system, there was little the Fed could do to thwart the intense magnetic pull into an inflating market Bubble. As the guardian of system stability, the Fed needed to pop the speculative Bubble - and the sooner the better.

My objective is not to rehash history but to offer insight to help explain today’s confounding environment. Top Fed officials have stated their objective of focusing monetary policy on system reflation, while relying of regulatory means to ward off potential asset Bubbles. They have apparently discerned no Bubbles in bonds and fixed income over recent years. Now, with U.S. stocks having become a primary recipient of QE3 liquidity, the Fed’s policy doctrine has turned more openly suspect.

With the average stock (The Value Line Arithmetic index) up 40% in 12 months, “global government finance Bubble” excess has certainly turned more publicly conspicuous. Predictably, there is more than ample rationalization and justification. Valuations are not at “Bubble extremes”, is the popular refrain. But at least there’s some superficial attention paid to the “Bubble” issue. At the same time, the predominant attitude in the markets seems to be “if there’s a lot of talk of Bubbles, then the markets surely have much further to run.” I found Byron Wein’s Wednesday comment on CNCB telling: “You don’t stay out of the market waiting for the moment of truth.”

There are several aspects of the “granddaddy of all Bubbles” thesis that have been more prominent of late. As noted previously, with the equity market Bubble now in full force, the Bubble in securities markets has turned fully systemic. As part of the irony of speculative Bubbles, market participants assume more intense speculation ensures central bankers will tread even more gingerly when it comes to withdrawing stimulus. In the U.S. as well as on a global basis, central bankers must now contend with excess liquidity gravitating to unwieldy speculative financial Bubbles. Friday from Bloomberg: “Abe No Friend to Emerging Bonds as Nikkei Jumps Most Since 1972.” With Japanese investors jumping on the equities train, flows into emerging bond funds are running half the pace of recent years. We’ll have to see how significantly the push into equities comes at the expense of bond flows.

The late-stage of protracted Credit Bubbles takes on troubling dynamics. The late-stage of protracted speculative Bubbles takes on troubling dynamics. When the two combine on a more globalized basis – as they did in the late-twenties – the upshot is a precarious situation and monumental policy dilemma.

First of all, after repeated market bailouts over the years market participants have become fully conditioned to presume central banks will eagerly backstop global securities markets. This is one of those rare instances where the global economy is seen as vulnerable and atypically susceptible to any general waning of financial market liquidity. This backdrop seemingly provides market operators a bright green light to speculate. So-called “moral hazard” has never been as predominant. I have argued that “too big to fail” risk distortions have evolved to encompass global securities markets generally.

There is by now abundant evidence supporting the thesis of a global environment uniquely conducive to systemic speculative excess. Clearly, speculative dynamics have built powerful momentum over the years – while policymakers have essentially promised to look the other way. Is the Fed really pre-committing to keeping rates near zero for another several years?

While there’s a good book to be written on late-stage Credit cycle dynamics, I’ll attempt a few pertinent insights. In general, things really run amuck late in a Credit boom - and policymakers extend the Bubble’s duration at all of our peril. To be sure, finance is over-issued and misallocated. The poor allocation of Credit throughout the real economy ensures maladjustment and progressive stagnation (i.e. less economic bang for the Credit and speculation buck). And as we’ve witnessed, if policymakers throw only looser “money” at the problem the end result will be more speculative asset markets and runaway Bubbles. Maladjusted economic structure coupled with asset Bubbles ensure a problematic redistribution of wealth toward a small segment of society. Meanwhile, the mountain of suspect financial claims grows ever taller.

Today’s conventional economic thinking (“inflationism”) believes that so-called “insufficient demand” can be rectified by monetary policy. Yet the additional late-cycle “money” printing gravitates predominantly to inflating securities markets. At the corporate level, various forms of financial engineering are employed with the objective of supporting higher stock prices. On the one hand, little of the liquidity makes its way to the type of sound investment necessary to support sustainable wealth creation. On the other hand, that much of the population fails to benefit from monetary inflation becomes an important facet of late-cycle economic stagnation.

A globalized boom, as has been the case over the past couple decades, adds another important dynamic. Loose “money” and Credit globally ensure ongoing investment boom distortions in the more manufacturing-based economies (China and Asia, in particular). This helps explain – today, as it did in the late-Twenties - some of the downward price pressure on manufacturing goods in the face of abundant system Credit and marketplace liquidity. To be sure, prolonged Credit and speculative booms progressively raise of the risk of devastating busts. And a policy course focused on “money” printing and reflation to combat perceived deflation risks only more precarious Bubbles and economic maladjustment.

The Fed plans to use “forward guidance” to hold down long-term interest rates as it winds down QE. Perhaps such talk will exert some impact on Treasury bond prices. I doubt when they were formulating this strategy the Fed anticipated a stock market melt-up scenario. An increasingly unstable equities market Bubble will require ongoing real liquidity buying power beyond assurances of low rates. That’s the nature of speculative Bubbles.

For the Week:

The S&P500 was slightly positive (up 26.6% y-t-d), and the Dow added 0.1% (up 22.8%). The S&P 400 Midcaps slipped 0.4% (up 27.8%), while the small cap Russell 2000 jumped 1.6% (up 34.6%). The Morgan Stanley Cyclicals were up 1.0% (up 36.8%), and the Transports increased 0.5% (up 36.4%). The Banks added 0.3% (up 32.6%), while the Broker/Dealers were about unchanged (up 33.4%). The Utilities dropped 1.8% (up 6.4%). The Nasdaq100 rose 1.9% (up 31.1%), and the Morgan Stanley High Tech index gained 1.0% (up 26.5%). The Semiconductors advanced 1.1% (up 32.9%). The Biotechs gained 1.1% (up 49.5%). Although bullion recovered $10, the HUI gold index was little changed (down 53.0%).

One-month Treasury bill rates ended the week at 5 bps, and three-month rates closed at 6 bps. Two-year government yields were little changed at 0.28%. Five-year T-note yields ended the week up 2 bps to 1.37%. Ten-year yields were unchanged at 2.75%. Long bond yields slipped 2 bps to 3.81%. Benchmark Fannie MBS yields rose 7 bps to 3.44%. The spread between benchmark MBS and 10-year Treasury yields widened 7 bps to 69 bps. The implied yield on December 2014 eurodollar futures was little changed at 0.35%. The two-year dollar swap spread declined one to 9 bps, and the 10-year swap spread increased 2 to 9 bps. Corporate bond spreads were mixed. An index of investment grade bond risk increased one to 70 bps. An index of junk bond risk declined one to 340 bps. An index of emerging market (EM) debt risk rose 5 bps to 334 bps.

Debt issuance slowed for the shortened week. Investment grade issuers included Goldman Sachs $1.0bn, Advance Auto Parts $450 million, Stanley Black & Decker $400 million, and Duke Realty $250 million.

Junk bond issuers included Wise Metals $650 million and HT Intermediate $110 million.

This week's convertible debt issuers included Nvidia $1.5bn and Songa Offshore $150 million.

International dollar debt issuers included Rabobank $3.0bn, Schlumberger $1.5bn, Alcatel-Lucent $1.0bn, Macquarie Group $1.0bn, Yapi ve Kredi Bankasi $500 million, Afren PLC $360 million, and Pacific Rubiales Energy $300 million.

Ten-year Portuguese yields dropped 10 bps to 5.80% (down 96bps y-t-d). Italian 10-yr yields slipped 2 bps to 4.05% (down 45bps). Spain's 10-year yields increased 2 bps to 4.11% (down 116bps). German bund yields fell 5 bps to 1.69% (up 37bps). French yields declined 5 bps to 2.15% (up 15bps). The French to German 10-year bond spread was unchanged at 46 bps. Greek 10-year note yields were little changed at 8.58% (down 189bps). U.K. 10-year gilt yields were down 2 bps to 2.77% (up 95bps).

Japan's Nikkei equities index jumped another 1.8% (up 50.7% y-t-d). Japanese 10-year "JGB" yields were down 2 bps to 0.60% (down 19bps). The German DAX equities index jumped 2.0% to another all-time high (up 23.6%). Spain's IBEX 35 equities index advanced 1.7% (up 20.5%). Italy's FTSE MIB gained 1.1% (up 16.9%). Emerging markets were mostly higher. Brazil's Bovespa index slipped 0.6% (down 13.9%), while Mexico's Bolsa surged 3.2% (down 2.8%). South Korea's Kospi index advanced 1.9% (up 2.4%). India’s Sensex equities index jumped 2.8% (up 7.0%). China’s Shanghai Exchange rose 1.1% (down 2.1%).

Freddie Mac 30-year fixed mortgage rates rose 7 bps to 4.29% (up 97bps y-o-y). Fifteen-year fixed rates were up 3 bps to 3.30% (up 66bps). One-year ARM rates dipped a basis point to 2.60% (up 4bps ). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates one basis point lower at 4.45% (up 40bps).

Federal Reserve Credit jumped $25.0bn to a record $3.882 TN. Over the past year, Fed Credit was up $1.041 TN, or 36.6%.

M2 (narrow) "money" supply declined $4.0bn to $10.919 TN. "Narrow money" expanded 6.3% ($648bn) over the past year. For the week, Currency increased $0.4bn. Total Checkable Deposits gained $23.5bn, while Savings Deposits fell $24.5bn. Small Time Deposits slipped $0.8bn. Retail Money Funds declined $2.7bn.

Money market fund assets jumped $15.1bn to $2.678 TN. Money Fund assets were up $66bn from a year ago, or 2.5%.

Total Commercial Paper increased $5.1bn to $1.059 TN. CP was down $6bn y-t-d, while increasing $34bn, or 3.3%, over the past year.

Currency Watch:

The U.S. dollar index was little changed at 80.65 (up 1.1% y-t-d). For the week on the upside, the British pound increased 0.9%, the Swedish krona 0.5%, the euro 0.2%, the Danish krone 0.2%, the South Korean won 0.1% and the Swiss franc 0.1%. For the week on the downside, the Brazilian real declined 2.4%, the Japanese yen 1.1%, the Mexican peso 1.1%, the Norwegian krone 1.0%, the South African rand 1.0%, the Canadian dollar 0.9%, the New Zealand dollar 0.9%, the Australian dollar 0.8%, the Singapore dollar 0.5% and the Taiwan dollar 0.1%.

Commodities Watch:

The CRB index was little changed this week (down 6.8% y-t-d). The Goldman Sachs Commodities Index declined 0.7% (down 4.1%). Spot Gold gained 0.8% to $1,253 (down 25%). March Silver gained 0.7% to $20.03 (down 34%). January Crude sank $2.12 to $92.72 (up 1%). January Gasoline fell 1.8% (down 4%), while January Natural Gas jumped 3.8% (up 18%). March Copper slipped 0.4% (down 12%). December Wheat increased 0.8% (down 16%), while December Corn declined 1.7% (down 41%).

U.S. Fixed Income Bubble Watch:

November 27 – Bloomberg (Wes Goodman): “The extra yield corporate bonds offer over Treasuries was one basis point away from the narrowest level in six years as the Federal Reserve’s pledge to keep interest rates low drives a search for income.”

November 29 – Bloomberg (Matt Robinson and Sarika Gangar): “Corporate bond sales in the U.S. are poised to eclipse last year’s record as issuers rush to raise cash before the Federal Reserve curtails stimulus that’s held borrowing costs close to all-time lows. Royal Dutch Shell… and… Cheniere Energy Partners LP are leading $120.2 billion of issuance this month, leaving offerings in 2013 about $32 billion shy of last year’s $1.48 trillion… Sales globally are lagging behind the unprecedented $4 trillion of issuance in 2012 by $426 billion.”

November 26 – Bloomberg (Kristen Haunss): “The biggest year for collateralized loan obligations since 2007 is being propped by deals managed by Blackstone Group LP and Carlyle Group LP, which started funds that pledge to boost interest rates on the debt. While $87 billion of CLOs have been issued globally this year…, coupons on the highest- rated portions have risen to as much as 1.5 percentage points over the benchmark from at least a three-year low of 1.1 percentage points in May… Money managers and banks are finding new ways to ensure investors keep buying CLOs -- which bundle junk-rated loans used to back buyouts -- after the Federal Deposit Insurance Corp. asked lenders in April to designate AAA rated portions of the notes as ‘higher-risk’ assets. Regulators are now considering more rules targeting the funds, which helped push issuance of leveraged loans this year to a record $277.1 billion…”

November 26 – Financial Times (Tracy Alloway): “Creating bonds backed by income generated from a variety of assets is a technique that has a long history. While securitisation has helped funnel private capital into everything from office buildings to home loans, it has also been criticised for the role it played in exacerbating the subprime boom which spurred the financial crisis of 2008. Five years on, and bankers are beginning to experiment with new assets that can be bundled up and sold to investors as they rush to take advantage of resurgent demand for higher-yielding products. In recent weeks, the cash flows from solar panel leases, single-family rental homes and ‘peer-to-peer’ loans have all been sliced and diced into investable bonds. The experimentation with new assets follows a broader recovery in many areas of traditional structured finance. Issuance of collateralised loan obligations (CLOs), which pool together leveraged loans made to companies, has reached the highest level since 2007. Sales of commercial mortgage-backed securities (CMBS) have multiplied from $4bn in 2008 to $86bn so far this year, according to Dealogic… Adam Ashcraft, head of credit risk management at the Federal Reserve Bank of New York, warned at a conference last week of the dangers of bankers not heeding the lessons of history. ‘We’re not learning the lessons we need to learn,’ he said. We haven’t done anything meaningful to prevent the securitisation market from doing what it just did.’”

November 26 – Wall Street Journal (Matt Wirz): “Investment funds aimed at individual investors are barreling into collateralized loan obligations, a complex and volatile type of security that was shaken by the financial crisis. Lured by annual returns of as high as 20%, some mutual-fund managers are buying CLOs through investment funds that purchase stakes in loans to companies with low credit ratings. Another type of loan investment fund, business-development companies, also have begun buying CLOs, according to securities filings. The biggest buyers of these securities usually are hedge funds, insurers and banks. But mutual funds and business-development companies, which pitch themselves to individual, or retail, investors, have collected more than $60 billion in money from clients this year, according to Keefe, Bruyette & Woods… ‘The retail broker community doesn't know to ask those questions,’ says Carlynn Finn, vice president for investor relations at Prospect Capital Corp. ‘They are focused on dividend and yield.’”

November 28 – Financial Times (Tracy Alloway): “US banks accelerated their purchases of structured products in the third quarter of the year, pushing their holdings of the higher-yielding assets to record levels as they seek to offset continued profit pressure from ultra-low interest rates. Structured finance investments surged to $69bn in the three months to September… – a 45% increase on the same period last year and the highest level since the FDIC began breaking the individual figure out in 2009.”

Federal Reserve Watch:

November 27 – Wall Street Journal (Jeffrey Sparshott): “The shakeup at the Federal Reserve Bank of Minneapolis research department hasn’t been shocking only to the people out of a job. Nobel-Prize winning economist Edward Prescott called bank President Narayana Kocherlakota’s decision to dismiss top researchers ‘crazy.’ ‘Rationalizing the behavior of the president I find impossible,’ said Mr. Prescott, a professor at Arizona State University and a senior monetary adviser at the Minneapolis Fed. Last month, the bank fired economist Patrick Kehoe and demoted Kei-Mu Yi from his position as senior vice president and research director to a job as special policy adviser. Monetary adviser Ellen McGrattan won’t be retained when her contract comes up for renewal. The moves upset some of the bank’s economists and led to questions about Mr. Kocherlakota’s vision for the research department.”

Central Bank Watch:

November 28 – Bloomberg (Ben Moshinsky): “Bank of England Governor Mark Carney took action to restrain the U.K.’s house-price boom by ending incentives for mortgage lending in a package aimed at curbing “evolving risks” to financial stability. ‘This will help keep the housing market on a sustainable path and ensure the broader economy continues to receive the stimulus it needs, for as long as it needs, to sustain the recovery,’ Carney told… ‘By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later.’”

November 27 – Financial Times (Claire Jones): “The risks to the eurozone’s financial system from outside the currency bloc have grown on the back of the Federal Reserve’s talk of tapering its bond purchases, despite a general improvement in market conditions, the European Central Bank said… In the latest edition of its twice-yearly financial stability report, the ECB said risks from of turbulence from within the euro area had receded since its previous report was published in May. However, the threat from global financial market turbulence had increased as a result of the market uncertainty resulting from Federal Reserve chair Ben Bernanke’s comments, first made in late May, that the US central bank could soon begin to slow its $85bn a month programme of bond buying. ‘Starting in May, there was a significant repricing in global bond markets, which took place largely because of changing monetary policy expectations in the United States – with increased foreign exchange market volatility and stress borne largely by emerging market economies,’ the ECB said.”

U.S. Bubble Economy Watch:

November 27 – New York Times (David Streitfeld): “These are fabulous times in Silicon Valley. Mere youths, who in another era would just be graduating from college or perhaps wondering what to make of their lives, are turning down deals that would make them and their great-grandchildren wealthy beyond imagining. They are confident that even better deals await. ‘Man, it feels more and more like 1999 every day,’ tweeted Bill Gurley, one of the valley’s leading venture capitalists. ‘Risk is being discounted tremendously.’ That was in May, shortly after his firm, Benchmark, led a $13.5 million investment in Snapchat, the disappearing-photo site that has millions of adolescent users but no revenue. Snapchat, all of two years old, just turned down a multibillion-dollar deal from Facebook and, perhaps, an even bigger deal from Google…. Benchmark is the venture capital darling of the moment, a backer not only of Snapchat but the photo-sharing app Instagram (sold for $1 billion to Facebook), the ride-sharing site Uber (valued at $3.5 billion) and Twitter ($22 billion), among many others. Ten of its companies have gone public in the last two years, with another half-dozen on the way… In Silicon Valley, it may not be 1999 yet, but that fateful year — a moment when no one thought there was any risk to the wildest idea — can be seen on the horizon, drifting closer. No one here would really mind another 1999, of course. As a legendary Silicon Valley bumper sticker has it, ‘Please God, just one more bubble.’ But booms are inevitably followed by busts.”

November 26 – Bloomberg (Jeanna Smialek): “Home prices in 20 U.S. cities rose by the most since February 2006 in the 12 months through September… The S&P/Case-Shiller index of property values advanced 13.3% after increasing 12.8% a month earlier… Sellers are standing firm on asking prices as buyers compete for a limited number of available properties. Higher home values are helping propel gains in Americans’ net worth, boosting confidence among homeowners and creating momentum for consumer spending.”

UK Bubble Economy Watch:

November 29 – UK Telegraph (Szu Ping Chan): “Approvals climb to highest level since February 2008, while household debt touches a record level. The amount of household debt in the UK hit a record high of £1.43 trillion in October, surpassing levels seen during the depths of the financial crisis… The rise reflects the willingness of consumers to borrow more, and came as mortgage approvals rose to the highest level in almost six years in October, amid record low mortgage rates that have fuelled Britain's housing market revival… The data were released a day after Mark Carney, the Governor of the Bank of England, announced it would pull the plug on one half of the Government’s Funding for Lending Scheme (FLS), amid fears that the housing market could overheat. The Bank unexpectedly said it was ending incentives for banks to provide mortgages as part of the FLS and would focus exclusively on lending to businesses.”

November 29 – Bloomberg (Emma Charlton): “Mark Carney is moving the Bank of England in a direction it hasn’t taken in more than six years. The governor took steps yesterday to head off a potential housing bubble by diluting a credit-boosting program… Underpinning the need for the move were data today showing house values at the highest level in more than five years, and banks approving the most mortgages since 2008”

Global Bubble Watch:

November 27 – Bloomberg (Olga Kharif): “The price of Bitcoins surpassed $1,000 on the Mt. Gox online exchange, fueled by speculators snapping up the virtual currency as it gains wider acceptance. Bitcoins, which exist as software and aren’t regulated by any country or banking authority, surged to a record $1,030 today, up more than 80-fold from a year earlier. The currency has rallied on growing interest from investors in China and the U.S., while merchants are starting to accept Bitcoins for everything from Gummi bears to tuition fees. The closing in October of the Silk Road Hidden Website, where people could obtain drugs, guns and other illicit goods using Bitcoins, also generated interest in the currency… New Bitcoins can only be created by solving complex problems embedded in the currency, keeping total growth limited. There are more than 12 million Bitcoins in circulation, according to Bitcoincharts… Bitcoins can be traded without being tracked…”

November 29 – Bloomberg (Lilian Karunungan and Yumi Teso): “Emerging-market bonds are losing their allure among Japanese investors as Prime Minister Shinzo Abe’s stimulus policies drive the biggest domestic stock rally in four decades. Investors in the world’s third-largest economy bought a net 1.8 trillion yen ($18bn) of debt in Asia, Latin America, Africa, Eastern Europe and Russia during the first nine months of 2013… That is less than half the amount purchased in each of the last three years and is on course to be the smallest annual total since 2009.”

November 25 – Wall Street Journal (Enda Curran): “Asia’s market for foreign-currency loans is booming. Banks across the region are lending record sums in the ‘G3 currencies’—the U.S. dollar, the yen and the euro—even as economic growth slows and bad debts continue to rise in places like China and Korea. So far this year, loans in these currencies amounting to $133.4 billion have been issued in Asia, excluding Japan—54% more than during the same period a year earlier and more than in all of 2011, the record year for such loans, according to… Dealogic.”

November 27 – Bloomberg (Bei Hu): “Global banks and asset managers are opening hedge funds in Asia for the first time since the 2008 financial crisis… Goldman Sachs Group Inc., UBS AG and GLG Partners Inc. are gathering investor money for debut hedge funds dedicated to the region. Highbridge Capital Management LLC and Pine River Capital Management LP are restarting or expanding their Asian offerings.”

November 28 – Bloomberg (Frederik Balfour): “A series of art auctions in Hong Kong by Christie’s International Plc raised HK$3.82 billion ($493 million), almost twice as much as estimated, as affluent collectors from China and elsewhere in Asia paid record prices for several items. The six-day sale, which concluded last night, included a recording-breaking price of HK$3.675 million paid for case of Romanee-Conti 1978, a HK$64.52 million Qing dynasty porcelain jar and a HK$4.24 million Patek Philippe wristwatch… ‘The room was buzzing,’ said London-based dealer William Qian…”

November 27 – Bloomberg (Scott Reyburn): “The racer in which Michael Schumacher won the first of his seven Formula 1 titles is estimated to sell for more than $1 million at an auction in London as the values of classic cars continue to set records… Single-seat classic cars with big-name associations and distinguished race histories have recently fetched high prices. In July, a 1954 Mercedes-Benz W196 that Juan Manuel Fangio drove to two Grand Prix victories sold at Bonhams for 19.6 million pounds ($29.7 million), a record for any car at auction.”

EM Bubble Watch:

November 27 – Bloomberg (Matthew Malinowski): “Brazil’s central bank raised its key interest rate for a sixth time, extending the world’s biggest tightening cycle as a weaker currency and widening budget deficit spur inflation pressures. The bank’s board… raised the benchmark Selic today to 10% from 9.5%... Brazil’s central bank has raised borrowing costs by 275 bps since April as the real dropped the most among major currencies and deteriorating fiscal accounts sparked concern of a credit downgrade.”

November 29 – Bloomberg (Veronica Navarro Espinosa): “Overseas bond sales from Brazil are heading for their biggest plunge in five years as the prospect of a sovereign downgrade triggers a surge in borrowing costs. Brazilian borrowers have issued just $553 million of debt in November, leaving 2013 sales down 25% from 2012, when offerings reached a record $50.7 billion… Speculation is deepening that Brazil will have its credit rating cut for the first time in a decade as economic growth flags and the nation’s budget deficit swells to a four-year high.”

November 26 – Bloomberg (Gabrielle Coppola): “The worst rout in Brazil’s inflation-linked bonds in at least a decade is poised to saddle the nation’s $275 billion pension-fund industry with its first annual losses since 2008. Local debt tied to Brazil’s benchmark consumer price index has tumbled 11.5% in 2013, or more than double the drop in similar Mexican bonds… Plc. Brazilian pension funds, which have 61% of their 630 billion reais of assets in debt securities, may suffer a full-year decline after losing 0.69% in the first half…”

November 28 – Bloomberg (Robert Brand): “The slowest economic growth in four years and the prospect of higher inflation fueled by the rand’s decline are prompting foreign investors to dump South African bonds at the fastest pace in more than two years. Foreigners sold 13.4 billion rand ($1.3bn) of South African debt in November, the most in a month since September 2011… The securities have lost 1% this month, the second-worst performance among 26 bond indexes… South African core inflation, which strips out food and energy costs, has climbed since August even as consumer inflation slowed, spurred by the rand’s 17% drop this year…”

November 27 – Bloomberg (Chong Pooi Koon): “Standard & Poor’s cut its credit outlook for four Malaysian lenders on concern that rising home prices and household debt are contributing to economic imbalances in the country… ‘The negative outlook recognizes the potential for deterioration in the banks’ asset quality and financial profile, if the consumer debt burden proves excessive in an unfavorable economic scenario,’ S&P analysts Ivan Tan and Deepali V. Seth wrote…”

November 27 – Bloomberg (Tanya Angerer): “Indonesia is planning a sale of U.S. dollar-denominated global bonds next year as Barclays Plc predicts issuance in 2014 will exceed this year’s record. Southeast Asia’s largest economy expects to raise 19% of its debt financing next year from notes denominated in dollars, euro or yen… The Philippines yesterday hired six banks to arrange a series of investor updates next week… U.S. currency note sales in the region outside Japan this year reached a record $123.6 billion last week, exceeding 2012’s all-time high of $121.4 billion…”

China Bubble Watch:

November 25 – Bloomberg (Scott Reyburn): “China traded barbs with the U.S. and Japan over its newly announced air defense zone in the East China Sea as escalating tensions between Asia’s largest economies risked damaging a resurgence in trade. China’s Defense Ministry filed protests to both nations’ embassies, calling Japan’s remarks ‘unreasonable’ and the U.S. comments ‘wrong,’ according to a statement… Japan and South Korea said the zone, announced Nov. 23, wasn’t binding on them while the U.S. called its creation a destabilizing move. The war of words further strained ties days after China announced the defensive zone and said aircraft entering the area must report flight plans and identify themselves.”

November 27 – Bloomberg (Scott Reyburn): “China’s move to create an air defense zone over islands also claimed by Japan gives impetus to Prime Minister Shinzo Abe’s effort to further increase defense spending and expand his country’s military reach. Abe said he was ‘very concerned’ by the new zone, which overlaps with Japan’s in the East China Sea and where China said aircraft must now report flights and identify themselves. ‘It’s extremely dangerous,’ he told parliament… China’s actions may spur Abe to take a more hard-line stance as his government studies changing how it interprets the U.S.-imposed pacifist constitution to deploy the country’s armed forces more freely. With China’s military expanding, Abe is undertaking a review for a 10-year defense plan to be announced next month that may see Japan’s government add ballistic missile defense ships and refueling planes.”

November 26 – Bloomberg: “China has drafted rules banning banks from evading lending limits by structuring loans to other financial institutions so that they can be recorded as asset sales, two people with knowledge of the matter said. The regulations drawn up by the China Banking Regulatory Commission impose restrictions on lenders’ interbank business by banning borrowers from using resale or repurchase agreements to move assets off their balance sheets, said the people… The rules would add to measures this year tightening oversight of lending, such as limits on investments by wealth management products and an audit of local government debt, on concerns that bad loans will mount… ‘China’s banks and regulators are playing this cat-and- mouse game in which the banks constantly come up with new gimmicks to bypass regulations,’ Wendy Tang… analyst at Northeast Securities Co., said… ‘The CBRC has no choice but to impose bans on their interbank business, which in recent years has become a high-leverage financing tool and may at some point threaten financial stability.’ …The proposed rules target a practice where one bank buys an asset from another and sells it back at a higher price after an agreed period… The proposed regulations would also limit a bank’s total lending to other financial institutions to 50% of its total deposits, and cap loans to non-bank financial companies at 25% of its net capital… Mid-sized Chinese banks got 23% of their funding and capital from the interbank market at the end of 2012, compared with 9% for the largest state-owned banks, Moody’s… said in June. The ratings company forecast a further increase in non-performing loans as weaker borrowers find it hard to refinance.”

November 27 – Bloomberg (Justina Lee): “Chinese companies’ borrowing costs are climbing at a record pace relative to the government’s, increasing the risk of defaults and prompting state newspapers to warn of a limited debt crisis. The extra yield investors demand to hold three-year AAA corporate bonds instead of government notes surged 35 bps last week to 182 bps, the biggest increase since data became available in September 2007… ‘Existing interest-rate levels and tighter credit conditions will pose downward pressure on growth,’ said Kewei Yang, head of Asia-Pacific interest-rate strategy at Morgan Stanley in Hong Kong. ‘Any potential defaults or bankruptcies in 2014 will trigger the market to reprice credit risk.’ …The debt of listed companies excluding financial firms has doubled since 2009 to some $2 trillion. Local governments may owe 20 trillion yuan ($3.3 trillion), Liu Yuhui, a researcher at the Chinese Academy of Social Sciences, said in September. Borrowing ratios at some Chinese corporations are already relatively high, and rising interest rates may cause a ‘partial debt crisis to explode,’ the China Securities Journal said… The central bank should take a ‘mild’ approach to deleveraging as the economy is still delicately balanced, said the Economic Information Daily.”

November 29 – Bloomberg (David Yong): “Investors are buying insurance against default on China’s debt at the fastest pace among BRIC nations as concern builds over territorial disputes and a surge in borrowing costs in the world’s second-largest economy. The net amount of credit-default swaps outstanding on Chinese bonds jumped $985 million, or 13.4%, to $8.4 billion on Nov. 22 from Oct. 25…”

November 26 – Bloomberg (Scott Reyburn): “China’s dollar-denominated debt sales are surging as the nation’s richest man and its biggest lender seek lower borrowing costs amid record yuan bond yields. Dalian Wanda Commercial Properties… contributed to a 53% jump in U.S. currency offerings to $12.6 billion this quarter. Yields on five-year AAA yuan debt surged 59 bps this month to a record 6.21%, while A rated notes pay 11.21%. That tops the 5.98% average for China’s dollar securities, including junk debt… Chinese issuers pulled twice the amount of yuan note offerings in November than last month as the central bank curbs fundraising to limit surging property prices and living costs. ‘The cheap funding cost in the dollar versus the onshore yuan is attractive for Chinese issuers,’ said Crystal Zhao… analyst at HSBC Holdings Plc, the biggest manager of dollar offerings in Asia ex-Japan this year. ‘If Chinese regulators give more flexibility to companies’ overseas financing against a neutral-to-tight-bias local monetary stance, there should be more bonds issued by Chinese entities offshore.’”

November 26 – Financial Times (Simon Rabinovitch): “Chinese regulators are set to place new limits on interbank loans after banks exploited a loophole to ratchet up leverage in the financial system, according to draft rules. The rules, which are not yet public… would mark the latest move by regulators to crack down on the burgeoning business of off-balance sheet lending. However, as with previous such attempts, analysts say there appears to be enough leeway in the new regulations for banks to continue their off-balance sheet business in slightly different guises. The result is expected to be a slowdown, not a halt, in the rapid build-up of credit in the Chinese financial system seen in recent years. China’s regulatory focus on interbank lending follows a 140% increase in interbank assets at listed Chinese banks over the past three years… The steepest rise has been at mid-tier banks, where interbank exposures have more than tripled since 2008 and now form 21% of their assets, according to Bernstein Research. The reason for the explosion in interbank financing is that it allows banks to evade a series of regulatory limits. By routing corporate loans through other banks and hence booking them as interbank products, they can post less capital and also do not need to count the credit towards the loan-to-deposit ceiling that might otherwise tie their hands… Despite all the various restrictions in place, the total amount of credit in China is likely to reach 218% of gross domestic product by the end up 2013, up from just about 130% in 2008, according to Fitch Ratings.”

November 28 – Bloomberg: “In the same month China’s leaders pledged to rein in local debt estimated at 20 trillion yuan ($3.3 trillion), a Shanghai suburb of only 65,000 people sold its first bond. Shanghai Chenjia Town Construction Development Co., a financing arm of a settlement about 45 kilometers from the city, issued 800 million yuan of six-year notes, highlighting a trend for ever smaller regions to pursue debt-fueled expansion. Nationwide, local-government financing vehicles have sold 951.7 billion yuan of bonds this year, the most for any similar period since at least 2008… Central bank efforts to deleverage the economy have driven borrowing costs for AA borrowers up 164 bps this half to 7.25%. Yet note sales by LGFVs this quarter exceeded the previous period, bucking a 30% decline in overall issuance in China. Liu Yuhui, a researcher at the Chinese Academy of Social Sciences, said in September that total liabilities may exceed 20 trillion yuan, up from 10.7 trillion yuan at the end of 2010 in the government’s last audit. ‘Chenjia town is probably the smallest issuer I’ve ever seen,’ said Li Ning… analyst at Haitong Securities… ‘Many third- and fourth-tier cities have joined bigger cities in tapping the bond market this year. The rising issuance will definitely increase the credit risk of bonds sold by LGFVs.’”

November 27 – Bloomberg (Scott Reyburn): “China’s eastern cities of Nanjing and Hangzhou raised the minimum down payment required for second homes to 70% from 60% as more cities tighten property policies because of surging prices. The cities will continue to ban mortgage lending for third homes and will maintain a 30% down payment for buyers of first homes…”

November 25 – Bloomberg (Scott Reyburn): “Chinese property developers including Gemdale Corp. and Beijing Capital Development Co. denied a China Central Television report, which claimed they were among 45 firms that failed to pay at least 3.8 trillion yuan ($624bn) in land taxes between 2005 and 2012.”

November 25 – Bloomberg (Kelvin Wong): “Hutchison Whampoa Ltd. sold a second house in Hong Kong’s upmarket Victoria Peak area in a week for more than HK$500 million ($64 million), as developers accelerate sales amid expectations property prices are peaking. The 5,706-square-foot (530-square-meter) house in the seven-home, 28 Barker Road project was sold to an unidentified buyer…”

Japan Bubble Watch:

November 29 – Bloomberg (Keiko Ujikane): “A gauge of Japan’s prices rose the most in 15 years as higher energy costs fueled broader inflation pressures, in a sign Prime Minister Shinzo Abe is making progress in stamping out deflation. Prices excluding energy and fresh food rose 0.3% in October on year, boosted by a weaker yen and electricity costs that have risen 22% since March 2011…The focus is turning to salary negotiations early next year that may determine the success of Abe’s bid to reflate the world’s third-largest economy.”

November 25 – Bloomberg (Shigeki Nozawa): “Japanese Prime Minister Shinzo Abe’s reliance on fiscal and monetary easing to defeat deflation may precipitate a ‘plunge’ in the yen and sovereign bonds, said Noriko Hama, an economics professor at Doshisha University’s Business School… ‘The Bank of Japan is no longer functioning as a proper central bank,’ Hama said at a speech…, referring to the BOJ’s doubling of monthly bond purchases to more than 7 trillion yen ($68.8bn) in April. ‘The scariest scenario, and the one we should be most wary of, is a bottomless crash in the yen,’ as the global financial community loses faith in the currency, Hama said.”

November 27 – MarketNews International (Scott Reyburn): “Bank of Japan board member Takahide Kiuchi said… that there is room for the BOJ to review its 2% price stability target in the future, depending on how economic growth and longer-term inflation expectations will evolve. Kiuchi repeated his argument that it is ‘neither easy nor appropriate’ for Japan to try to boost its annual inflation rate to 2% from under 1% ‘in a short time frame of about two years.’ …‘The recent rise in prices is partly attributed to some strength in demand, but so far it has largely been attributed to other factors such as increases in energy prices and the effects of changes in foreign exchange rates,’ he said.”

November 26 – Bloomberg (Chris Cooper and Kiyotaka Matsuda): “Japan’s government told its domestic airlines to stop reporting flight plans of aircraft traveling through a new air-defense zone set up by China that Prime Minister Shinzo Abe rejects. Japan can’t accept China’s ‘false’ impositions on its airlines and the government told carriers to stop providing information to the Chinese, Chief Cabinet Secretary Yoshihide Suga said… in Tokyo today. ANA Holdings Inc. began giving information on Nov. 24 and Japan Airlines Co. a day before.”

India Watch:

November 26 – Bloomberg (Unni Krishnan): “India’s economic growth probably held below 5% for a fourth straight quarter, the longest stretch in data going back to 2005, as Prime Minister Manmohan Singh struggles to boost investment and tame elevated inflation. Gross domestic product rose 4.6% in July through September from a year earlier…”

November 26 – Bloomberg (Pooja Thakur): “India’s slowing economy has left its big cities with a glut of office space, pushing up vacancy rates, freezing development and prompting some builders to convert commercial projects into housing. Vacancy rates in the financial center of Mumbai and capital New Delhi topped 20% in the third quarter, the highest in Asia after Chengdu, China, where 32% of offices are empty, according to… Cushman & Wakefield… Six Indian cities are among the 10 office markets with the worst vacancies in the region, according to Cushman. Demand for offices in India has been declining as Asia’s third-largest economy -- labeled a ‘dream market’ by Warren Buffett two years ago -- faces the slowest expansion in 11 years, the fastest inflation rate among large emerging markets, and the risk of its debt ratings being cut to junk.”

November 28 – Bloomberg (Rajesh Kumar Singh): “India will halt a $20 billion plan by Tata group and Jindal Steel & Power Ltd. to turn coal into crude oil after scrapping rights to two mining blocks allotted to the companies, two people familiar with the matter said.”

Europe Watch:

November 29 – Bloomberg (Ben Sills and Lucy Meakin): “The Netherlands lost its top rating at Standard & Poor’s amid weakening economic growth prospects… The Netherlands was cut to AA+ from AAA, leaving Germany, Finland and Luxembourg as the only euro-area countries with a AAA rating at the three main ratings companies.”

November 29 – Bloomberg (Katie Linsell): “Companies sold the most debt in Europe since the start of the year in November as borrowing costs approached a five-month low. AT&T… was among borrowers issuing 87 billion euros ($118bn) of bonds, up from 72 billion euros in October…”

November 28 – Bloomberg (Stephen Morris): “Companies in Europe have amassed almost $1 trillion through earnings, bond sales and by refinancing credit lines, foreshadowing a potential surge in acquisitions and investment. Glencore Xstrata Plc, Siemens AG and Daimler AG are among at least 50 companies in the region that refinanced 143 billion euros ($194bn) of credit facilities this year paying an average interest margin of 0.59 percentage point, the lowest since 2007…”

Germany Watch:

November 26 – Bloomberg (Jana Randow and Janelle Lawrence): “Bundesbank President Jens Weidmann said the European Central Bank’s Governing Council should only temporarily be responsible for banking supervision. ‘The decision-making body responsible for monetary policy should not be in charge of supervising banks as well,’ Weidmann said… ‘To avoid possible conflicts of interest, this should not become a permanent solution.’ The… ECB will assume oversight over euro- area banks in November 2014 and started a three-stage review of balance sheets this month… ‘A change of the European treaties is required to allow for a body within the ECB other than the Governing Council to have the final say in supervisory matters,’ Weidmann said… ‘If this avenue is not taken, an independent supervisory institution will become necessary, in my view.’