Saturday, December 6, 2014

Weekly Commentary, December 7, 2012: Q3 2012 Flow of Funds

In further proof that I don’t pander to readers, I’ll dive into the Fed’s Q3 2012 “Flow of Funds” data.

For the quarter, the growth in Total Non-Financial Debt (TNFD) slowed to a rate of 2.4%, less than half the 5.1% pace from Q2 2012, but close to the 2.5% rate from Q3 2011. After expanding at a 10.9% rate in Q2, Federal debt growth slowed sharply to 6.2%. State & Local borrowings about flat-lined (negative 0.1%), a marked slowdown from Q2’s 3.1% rate of expansion. Interestingly, after expanding at a 1.2% rate in Q2 (strongest since Q1 ’08), Total Household debt contracted 2.0% annualized during Q3. Home mortgage debt contracted at a 3.0% rate (vs. Q2’s 2.1% contraction), while non-mortgage Household debt growth slowed to 4.3% (from Q2’s 6.5%, the strongest since Q3 2007’s 7.6%). Corporate debt expanded at a robust 6.2% pace during Q3, little changed from Q2 (6.3%).

In seasonally-adjusted and annualized rates (SAAR), Total Non-Financial Debt (TNFD) growth slowed to $952bn, down from Q2’s $1.971 TN. This places average growth for the first 9 months of the year at SAAR $1.564 TN, which compares to 2011’s $1.325 TN, 2010’s $1.438 TN, 2009’s $1.059 TN, and 2008’s $1.891 TN. Keep in mind that annual TNFD growth was in the neighborhood of $650bn back in the mid-nineties. In the first nine months of 2012, Total Non-Financial Debt expanded a nominal (non-annualized) $1.163 TN. By sector, Federal borrowings increased $825bn (71% of total) in nine months, Total Business $374bn (32%), State & Local $18bn (2%), and Total Household negative $58bn (negative 5%). The federal government’s unprecedented dominance of system Credit is now well into its fifth year.

I’m going to somewhat cut to the chase and jump to the Household Balance Sheet. Typically, a sharp deceleration in Credit growth would be associated with general Credit market weakness. And early in Q3 there was some Europe-related market stress and modest financial conditions tightening. This was, however, met with overwhelming policy measures in Europe (“whatever it takes”), with the Fed (“QE infinity”) and elsewhere. The end result was a period of significantly loosened finance, higher asset prices and, importantly, a policy-induced inflation in Household Net Worth.

For the quarter, Household sector Assets jumped $1.711 Trillion to $78.204 TN. Over the past year, Household Assets have inflated $6.073 TN, or fully 39% of GDP, to now having almost recovered back to late-2007 record highs. And with Household Liabilities contracting slightly to $13.436 TN, Household Net Worth gained $1.722 TN during the quarter to a record $64.769 TN. Household Net Worth was up $6.103 TN, or 10.4%, over the past year and $10.084 TN, or 18.4%, over two years. To explain the strength in retail sales over the past couple years, one need not venture much beyond the extraordinary $10 TN increase in perceived Household Net Worth. It is also worth noting that 82% of this gain can be explained by the rise in Household holdings of Financial Assets.

The profound role fiscal and monetary stimulus has had on bolstering incomes, spending, corporate earnings and asset prices is fundamental to the “government finance Bubble” thesis. Total National Income expanded at a 3.9% pace during the quarter to a record SAAR $13.912 TN. Total Compensation increased at a 3.0% pace to a record SAAR $8.568 TN, with Total Comp up $250bn over the previous year, or 3.0%. Over two years, Total Compensation jumped $546bn, or 6.8%. For comparison, Total Comp expanded about $820bn during the booming two-year period 2005-2006.

Driving the two-year inflation in Household Net Worth and Incomes was a $2.463 TN jump in Federal Liabilities, to a record $13.111 TN. Federal Liabilities inflated 23.1% in two years, with a 17-quarter increase of $6.614 TN, or 96%. Outstanding Treasury Debt was up $1.153 TN over the past year (11.4%), $2.262 TN over two-years (25.1%), and $6.005 TN over 17 quarters (114.4%). Federal Debt-to-GDP increased to 83%, yet this of course excludes most of our government’s massive contingent liabilities. A Wall Street Journal op-ed from last week (Chris Cox and Bill Archer) noted “actual liabilities of the federal government – including Social Security, Medicare, and federal employees’ retirement benefits – already exceed $86.8 trillion, or 550% of GDP.”

At SAAR $3.757 TN, federal government expenditures were up 0.4% from Q3 2011, and federal receipts were 6.8% higher to SAAR $2.683 TN. Going back five years (to Q3 2007), federal expenditures have inflated $847bn, or 29%, while receipts have gained only $18bn, or 1%.

Credit Bubbles are at their core about an unsustainable expansion of Credit - the inflation of financial claims spurred by market misperceptions and associated mispricing. During the Bubble, the rapid expansion of Credit is self-reinforcing specifically because financial profligacy will ensure that most “fundamentals” (i.e. corporate profits, GDP, stock prices, etc.) appear supportive. And, importantly, major Credit Bubbles are invariably created through heightened government intervention in “money,” the markets and throughout the real economy. The perception that Treasury, Congress and the Fed would never tolerate a housing bust was the critical fallacy that ensured a historic boom and bust cycle. In somewhat different dynamics than those of the mortgage finance Bubble period, extraordinary fiscal and monetary measures have convinced the marketplace that the historic confluence of massive issuance of (non-productive government) debt and record high debt security prices is both sensible and sustainable. Once again, market price distortions are driven by the perception of all-powerful intervention, in this case that the Federal Reserve and foreign central banks will indefinitely accumulate this debt at record high prices.

For Q3 2012, Rest of World (ROW) accumulated U.S. Financial Assets at SAAR $625bn to a record $19.388 TN. In what would not appear a great vote of confidence, demand was predominantly for low-yielding government debt. Treasury holdings expanded SAAR $624bn (to $5.445 TN). Agency-GSE-backed securities increased SAAR $21bn ($1.067 TN), while Corporate Bonds declined SAAR $4bn ($2.444 TN) and Loans to Corporate Business fell SAAR $29bn ($164bn). Holdings of U.S. Equities increased SAAR $186bn ($3.471 TN), Mutual Fund Shares increased SAAR $44bn ($646bn) and Foreign Direct Investment grew SAAR $86bn ($2.998 TN). Other Miscellaneous Assets dropped SAAR $354bn ($1.539 TN).

The foreign accumulation of our nation’s Financial Assets has been integral to sustaining the great Credit Bubble. Foreign holdings of U.S. financial assets began the ‘90s at about $1.9 TN before ending the decade at $5.776 TN. Balances swelled incredibly during the mortgage and government finance Bubbles. ROW holdings more than doubled between 2002 and 2007, expanding $8.673 TN during the mortgage Bubble period to end 2007 at $16.038 TN. ROW holdings dropped almost $800bn during 2008 and expanded only $567bn in 2009. Net annual purchases then swelled to $1.599 TN in 2010 and $1.396 TN in 2011. Markets today retain faith that foreign central banks and others will maintain their insatiable appetite for U.S. financial claims – no matter the quantity or quality of issuance.

Treasury and U.S. fixed-income prices have certainly been inflated by the perception of a Federal Reserve market backstop. While the Fed’s balance sheet contracted $46bn during the quarter to $2.838 TN, asset growth has returned during Q4 – and the Fed is apparently determined to commence another aggressive balance sheet inflation cycle beginning in January (talk of $85bn monthly purchases). Perhaps the sharp Q3 slowdown in system Credit expansion contributed to the latest bout of acute dovishness afflicting our central bankers. Maybe they examined recent mortgage debt trends and fretted, “How on earth can we ever orchestrate a handoff of the Credit baton from the public sector back to the private sector if mortgage Credit is not expanding! Yields must be pushed lower still!”

It is worth noting that the Fed’s balance sheet closed out the nineties at $697bn, and then ended 2004 at $841bn, 2006 at $908bn, 2007 at $951bn, 2008 at $2.271 TN, 2009 at $2.267 TN, 2010 at $2.453 TN and 2011 at $2.947 TN. 2013 $3.500 TN? I couldn’t suppress a chuckle after reading a Friday Bloomberg headline: “Ballooning Balance Sheet Brings Fed Closer to Exit-Plan Overhaul.” Well, that’s one way of looking at it.

I’ve essentially ignored the (stagnant) banking system in my “flow of funds” analyses over recent quarters. Total Bank Assets grew only $66bn during Q3 to $14.762 TN – and were up only $197bn (1.4%) over the past year. Yet I would be remiss for not noting the 9.7% y-o-y increase in business loans (to $2.174 TN) or the 8.3% y-o-y increase in government securities holdings (to $2.231 TN). Meanwhile, Corporate Bond holdings were down 4.1% y-o-y (to $776bn), mortgage loans contracted 2.0% (to $4.334 TN) and Misc. Assets fell 11.0% y-o-y (to $1.267 TN). On the Bank Liability side, Total Deposits were up $495bn, or 4.9%, y-o-y to $10.532 TN.

With federal government liabilities now locked in an historic inflationary cycle, there’s at this point a significantly reduced need for the traditional workings of the U.S. financial sector. The vast majority of system Credit growth remains governmental. In stark contrast to the mortgage finance Bubble, this Credit for the most part need not be intermediated (transformed from risky Credit to perceived safe instruments) through the banking system, or through asset-backed (ABS) and mortgage-backed (MBS) securitization. It is also worth noting that, at $7.544 TN, total GSE Securities (debt and MBS) were little changed during the quarter and declined only 0.5% over the past year. And while Total Home Mortgage Credit has contracted $660bn over the past two years, GSE securities have declined only $54bn. Despite talk of “winding down” Fannie and Freddie, total GSE securities are about where they were in early 2008. It is worth noting that GSE securities began year-2000 at $1.723 TN.

Monitoring the financial sector for signs of rejuvenation remains less than fruitful. Finance Companies were stagnant for the quarter and year. Securities Broker/Dealer assets were down slightly during the quarter (assets up $70bn, or 3.5% y-o-y, to $2.051 TN). The ABS market continues to contract (down $216bn y-o-y to $1.824 TN). Money Market Funds expanded $39bn during the quarter to $2.507 TN, reducing the year-over-year contraction to $170bn. Fed Funds and Repo increased $32bn y-o-y, or 2.9%, to $1.134 TN. Funding Corps increased $70bn y-o-y, or 3.6%, to $2.256 TN. Credit Union Assets did see year-over-year growth of 5.5% to $897bn. Real Estate Investment Trust (REITs) Liabilities jumped $67bn to $792bn, with one-year growth of $172bn, or 28%.

From my analytical perspective, the SAAR $299bn contraction of Home Mortgage Credit was the biggest surprise for the quarter. This compares to Q2’s $214bn contraction and Q3 2011’s $200bn decline. With mortgage borrowing costs having taken another leg down to historic lows – and all the talk of an unfolding housing recovery – I was anticipating a return to positive mortgage Credit growth in Q3 or Q4. But, then again, with negative real returns on savings and such highly uncertain policy, market and economic backdrops, it remains perfectly rational to pay down mortgages and other borrowings. That extreme fiscal and monetary policy measures foster extraordinary uncertainty – thus incentivizing a cautious approach for many individuals and businesses - reminds one of the Law of Unintended Consequences. And a “fiscal cliff” compromise, while perhaps spurring the markets’ speculative reflexes, would do little to resolve ongoing uncertainties.

For the Week:

The S&P500 added 0.1% (up 12.8% y-t-d), and the Dow gained 1.0% (up 7.7%). The Morgan Stanley Cyclicals slipped 0.2% (up 15.0%), while the Transports added 0.2% (up 2.2%). The Morgan Stanley Consumer index gained 0.8% (up 11.0%), and the Utilities increased 0.2% (down 4.2%). The Banks jumped 1.6% (up 25.3%), and the Broker/Dealers added 0.4% (up 5.4%). The S&P 400 Mid-Caps increased 0.3% (up 14.1%), while the small cap Russell 2000 was little changed (up 11.0%). With Apple down almost 9%, the Nasdaq100 was hit for 1.4% (up 15.9%). The Morgan Stanley High Tech index jumped 1.6% (up 14.3%). The Semiconductors increased 1.4% (up 4.1%). The InteractiveWeek Internet index added 0.1% (up 14.2%). The Biotechs declined 0.8% (up 39.9%). With bullion down $11, the HUI gold index fell 3.7% (down 13.0%).

One-month Treasury bill rates ended the week at 5 bps and three-month bills closed at 8 bps. Two-year government yields slipped one basis point to 0.24%. Five-year T-note yields ended the week unchanged at 0.62%. Ten-year yields were little changed at 1.62%. Long bond yields added one basis point to 2.81%. Benchmark Fannie MBS yields rose 4 bps to 2.19%. The spread between benchmark MBS and 10-year Treasury yields widened 4 to 57 bps. The implied yield on December 2013 eurodollar futures declined 1.5 bps to 0.355%. The two-year dollar swap spread was little changed at 12 bps, while the 10-year swap spread increased one to 6 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 2 to 97 bps. An index of junk bond risk dropped 14 bps to 486 bps.

Debt issuance remained strong. Investment grade issuers this week included Intel $6.0bn, AT&T $4.0bn, Conocophillips $2.0bn, GE Capital $1.7bn, NetApp $1.0bn, Humana $1.0bn, Ventas Realty $500 million, Sherwin-Williams $1.0bn, People's United $500 million, Volcano Corp $400 million, Rowan Companies $1.1bn, American Honda $750 million, Plains All America Pipeline $750 million, Western Union $750 million, Citigroup $750 million, Principal Life $500 million, Cliffs Natural Resources $500 million, Starwood Hotels $350 million, Camden Property Trust $350 million, Charles Schwab $350 million, Liberty Properties $300 million, Wisconsin Electric Power $250 million, Avalon Bay $250 million, Narragansett Electric $250 million, Entergy Mississippi $250 million, and El Paso Electric $150 million.

Junk bond funds saw inflows rise to $653 million (from Lipper). Junk issuers included MGM Resorts $1.25bn, HCA $1.0bn, McClatchy $910 million, Caesars $750 million, PVH Corp $700 million, Targa Resource Partners $600 million, New Academy $500 million, NCR $500 million, Tops Markets $460 million, Cinemark $400 million, Resolute Energy $400 million, Prince Mineral $285 million, Rex Energy $250 million, ERA Group $200 million, Kenan Advantage Group $200 million, Atlas Pipe $175 million, and Kennedy-Wilson $100 million.

Convertible debt issuers included Seacor Holdings $300 million and Bottomline Technologies $165 million.

International dollar bond issuers included Turkey $3.0bn, BNP Paribas $2.0bn, Abu Dhabi National Energy $2.0bn, Kommunalbanken $1.75bn, Morocco $1.5bn, Turkiye Vakiflar $900 million, Scotiabank Peru $400 million and Telfon Celuar $300 million.

Spain's 10-year yields reversed course, climbing 14 bps this week to 5.42% (up 38bps y-t-d). Italian 10-yr yields rose 3 bps to 4.51% (down 252bps). German bund yields fell 9 bps to 1.29% (down 53bps), and French yields dropped 9 bps to 1.95% (down 119bps). The French to German 10-year bond spread was unchanged at 66 bps. Ten-year Portuguese yields fell 9 bps to 7.35% (down 542bps). The new Greek 10-year note yield sank another 199 bps to 13.85%. U.K. 10-year gilt yields declined 3 bps to 1.74% (down 24bps). Irish yields jumped 10 bps to 4.46% (down 380bps).

The German DAX equities index rose 1.5% (up 27.5% y-t-d) for the week. Spain's IBEX 35 equities index declined 1.1% (down 8.4%). Italy's FTSE MIB slipped 0.7% (up 4.0%). Japanese 10-year "JGB" yields dipped a basis point to 0.695% (down 29bps). Japan's Nikkei gained 0.9% (up 12.7%). Emerging markets moved higher. Brazil's Bovespa equities index jumped 1.8% (up 3.1%), and Mexico's Bolsa rose 2.3% (up 15.4%). South Korea's Kospi index gained 1.3% (up 4.1%). India’s Sensex equities index added 0.4% (up 25.7%). China’s Shanghai Exchange rallied 4.1% (down 6.3%).

Freddie Mac 30-year fixed mortgage rates increased 2 bps to 3.34% (down 65bps y-o-y). Fifteen-year fixed rates gained 3 bps to 2.67% (down 60bps). One-year ARM rates were down a basis point to 2.55% (down 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 6 bps to 3.99% (down 73bps).

Federal Reserve Credit increased $2.3bn to a 19-week high $2.843 TN, with a one-year expansion of $45.5bn, or 1.6%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $563bn y-o-y, or 6.4% to a record $10.839 TN. Over two years, reserves were $1.782 TN higher, for 20% growth.

M2 (narrow) "money" supply was up $13.8bn to $10.264 TN. "Narrow money" has expanded 7.1% annualized year-to-date and was up 6.9% from a year ago. For the week, Currency increased $0.9bn. Demand and Checkable Deposits sank $41.3bn, while Savings Deposits jumped $49bn. Small Denominated Deposits declined $3.0bn. Retail Money Funds rose $8.2bn.

Money market fund assets jumped $32.3bn to $2.644 TN (high since sept. '11). Money Fund assets have declined $51.1bn y-t-d, with a one-year decline of $34bn, or 1.3%.

Total Commercial Paper outstanding increased $9.9bn to $1.036 TN CP was up $76bn y-t-d and $38bn over the past year, or 3.8%.

Currency Watch:

December 6 – Bloomberg (Alaa Shahine): “The Egyptian pound weakened to the lowest level in eight years and stocks the most in a week as the country’s worst unrest since last year’s uprising turned violent. All shares on the benchmark index declined.”

The U.S. dollar index increased 0.3% to 80.41 (up 0.3% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the South African rand 2.9%, the New Zealand dollar 1.5%, the Mexican peso 0.9%, the Canadian dollar 0.6%, the Australian dollar 0.6%, the British pound 0.2%, and the South African rand 0.1%. For the week on the downside, the Swiss franc declined 0.7%, the euro 0.5%, the Danish krone 0.4%, the Swedish krona 0.3%, and the Singapore dollar 0.1%.

Commodities Watch:

The CRB index declined 1.0% this week (down 3.1% y-t-d). The Goldman Sachs Commodities Index sank 2.6% (down 1.9%). Spot Gold lost 0.6% to $1,704 (up 9.0%). Silver slipped 0.4% to $33.13 (up 19%). January Crude sank $2.98 to $85.93 (down 13%). January Gasoline fell 4.9% (down 2%), and December Natural Gas slipped 0.3% (up 19%). March Copper increased 0.4% (up 7%). December Wheat was little changed (up 29%), while December Corn dropped 2.0% (up 13%).

Fiscal Cliff Watch:

December 7 – Bloomberg (Michelle Kaske): “The value of the $3.7 trillion municipal-bond market may drop by $200 billion, or about 5%, under President Barack Obama’s plan to limit income-tax deductions to 28%, according to Citigroup Inc. To make up for reducing the amount of investment earnings that can be deducted from federal income taxes, investors will demand that tax-exempt yields rise by at least 0.6 percentage point, George Friedlander, senior muni strategist at… Citigroup, wrote…”

Global Bubble Watch:

December 3 - Bloomberg (Caroline Salas Gage): “Federal Reserve Bank of Boston President Eric Rosengren said he sees a ‘strong case’ for the central bank to buy bonds at the current monthly pace of $85 billion after its Operation Twist program expires. ‘Given the tepid economic recovery, high unemployment, and subdued inflation -- and the uncertainty around fiscal policy -- I believe an accommodative monetary policy is quite appropriate,’ Rosengren said… ‘We want to see continued improvement in labor markets in the near term, and monetary policy should encourage faster economic growth to achieve that objective.’”

December 4 – Dow Jones (Katy Burne): “Low-rated companies raised more money this year by issuing high yielding bonds and loans than any year in the last two decades, locking in low borrowing costs to tackle debt, finance mergers and pay dividends. Through the end of November, U.S. companies with below investment-grade ratings sold $854 billion in junk-rated bonds and ‘leveraged’ loans, a record amount that outpaces the $785 billion sold in all of 2011 and even the $825 billion sold in 2007… ‘It's been a good marriage between investors who are seeking yield and issuers that are focused on taking advantage of a very liquid market,’ said Gautam Khanna, a high yield portfolio manager at Cutwater Asset Management… Funds dedicated to these assets have seen a record $41.6 billion of inflows this year… up from $27.3 billion in 2011.”

December 7 – Wall Street Journal (Patrick McGee): “Investors have been flocking to buy bonds issued by top-rated companies, putting them on pace for a record year of debt raising in the U.S. But some of the biggest fund managers warn that dangers are lurking in what were once seen as the safest investments. Amid the rush of bond deals, which already have topped $1 trillion in value, these managers—from BlackRock to Federated Investment Management Co.—are pointing to unusual wrinkles suggesting that now could be one of the most dangerous times in decades to lend to investment-grade companies… Investors have been piling into bonds sold by investment-grade rated companies for the past few years, pouring a total of $976 billion into corporate-bond mutual funds since the end of 2008…”

December 4 – Financial Times (Stephen Foley and Vivianne Rodrigues): “Companies are issuing long-duration bonds at a record pace this year, in a development that could increase the volatility of investors’ fixed-income portfolios. Since the start of 2012, non-financial companies have sold $734bn of bonds that mature in 10 years or more, already 36% more than was issued in the whole of last year, according to…Dealogic. The previous annual record was $561bn in 2010.”

December 5 - Bloomberg (Charles Mead and Ian King): “Intel Corp. is taking advantage of bond interest rates below its dividend yield as the world’s largest semiconductor maker borrows to buy back stock battered by its lagging share in the smartphone and tablet markets. The firm issued $6 billion of debentures in a four-part sale yesterday with an average coupon of 2.38% that will help fund its stock buyback program… Intel is enriching shareholders with borrowed money for the second time in 15 months after selling $5 billion of debt in September 2011.”

December 4 - Bloomberg (Toby Alder and Niklas Magnusson): “The Nobel Foundation, which this year lopped 20% off its cash prizes, is planning to invest more money through hedge funds to boost its returns and restore the award to its previous size. ‘When we look at the analysis we see that we can get more return with less risks by doing that,’ Executive Director Lars Heikensten said…”

Global Credit Watch:

December 6 - Bloomberg (David Goodman and Emma Charlton): “Spain is still dependent on Mario Draghi to keep its bond yields under control a year after he started an extraordinary lending program to buy the government time to implement reforms and win back market confidence. After becoming European Central Bank president in November 2011, Draghi’s measures to ease Europe’s debt turmoil include 1 trillion euros ($1.3 trillion) to banks via two Longer-Term Refinancing Operations, and a bond-buying plan for nations that request aid. ‘Spain is 100% reliant on the perception that official sector support will be there if needed,’ said Russel Matthews, a fund manager at BlueBay Asset Management Ltd. in London… ‘The fundamentals have become so bad, there is a lack of belief that Spain can stand on its own two feet. If it hadn’t have been for the ECB, Spain would have been left with a difficult choice between going into a full program or leaving the euro.’”

December 5 - Dow Jones (David Roman): “Spain's government is ready to ask immediately for a European Union bailout if it receives a guarantee that the European Central Bank would intervene in bond markets on a sufficient scale to lower the country's borrowing costs significantly, a top government official said… The government has sought, and so far failed to secure, EU and ECB commitments to reduce the country's so-called risk premium--the spread in the market yields between the benchmark Spanish and German 10-year bonds--by 200 bps, the official added. ‘This is why the Spanish government has these doubts, and is wondering what to do next. If they guarantee the risk premium would be kept 200 basis points lower, it would ask for a bailout tomorrow,’ the official added… Germany has also signaled that it doesn't want Spain to ask for a bailout at this moment, the official said.”

December 5 - Bloomberg (Patrick Donahue): “The European debt crisis has given way to a new wave of corruption as some of the most hard-hit countries in the turmoil have tumbled in an annual graft ranking, watchdog group Transparency International said. Greece, in its fifth year of recession and crippled by rounds of austerity, fell to 94th place from 80th -- ranking it below Colombia and Liberia… Ireland, Austria, Malta and Italy were also among member states in the single currency to slide. ‘Transparency International has consistently warned Europe to address corruption risks in the public sector to tackle the financial crisis, calling for strengthened efforts to corruption-proof public institutions,’ the Berlin-based group said…”

Italy Watch:

December 7 – Bloomberg (Andrew Frye): “Billionaire Silvio Berlusconi’s top political deputy called for an ‘orderly end’ to Prime Minister Mario Monti’s government, saying the administration failed to develop a strategy to halt the recession. The speech in parliament by Angelino Alfano, general secretary of Berlusconi’s People of Liberty party, increases pressure on the government and sets the stage for his party’s election campaign message. Former Premier Berlusconi threatened the government yesterday by partially withdrawing the People of Liberty’s parliamentary support in two confidence votes. ‘The experience of Monti’s government has concluded in our estimation,’ Alfano said… People of Liberty, Monti’s biggest backer in parliament, didn’t fully withdraw its support yesterday because ‘we don’t want the country and the institutions to go to the dogs.’”

December 7 – Financial Times (Guy Dinmore): “Silvio Berlusconi’s centre-right party has abruptly withdrawn its support from Mario Monti’s technocrat government in parliament for the first time in over a year, plunging Italian politics deeper into confusion and raising the possibility of snap elections. Amid stormy scenes in the senate and then in the lower house, members of the former prime minister’s People of Liberty (PDL) party – with notable exceptions – attacked Mr Monti’s economic policies and stayed away or abstained in voting on two key reform bills. The separate pieces of legislation, on stimulating economic growth and cutting spending by regional authorities, passed with support of the centre-left Democratic party but left Mr Monti’s government looking vulnerable.”

December 7 – Bloomberg (Andrew Frye): “Italian Prime Minister Mario Monti said he plans to keep his government intact as his biggest parliamentary supporter, billionaire media magnate Silvio Berlusconi, threatens to withdraw his backing. The two have put the dispute in the hands of President Giorgio Napolitano, who met today with the general secretary of Berlusconi’s People of Liberty Party, Angelino Alfano. Neither side made comments after the meeting Monti’s government, which will expire by May, survived two confidence votes yesterday after People of Liberty, or PDL, gave its partial support. ‘We’re doing our ordinary work,’ Monti told reporters… ‘I have been in touch with the president of the republic and I am awaiting his evaluation.’”

December 4 - Dow Jones (Giovanni Legorano): “Italian new car registrations plunged in November, data from the country's infrastructure and transport ministry showed…highlighting the longevity of the crisis and the effect it has had on consumer confidence. Registrations in continental Europe's third-biggest market totaled 106,491 units, a fall of 20.1% on the year. Since January, they have fallen by 19.72%...”

Spain Watch:

December 5 - Bloomberg (Angeline Benoit): “Spanish regions will add at least 30 billion euros ($39bn) to the nation’s 207 billion-euro funding needs next year as the nation extends its bailout of cash-strapped states, according to consulting company AFI. The 30 billion-euro estimate is based on regions such as Madrid maintaining market access and not having to apply for aid from Spain’s most recent rescue fund for the regions, known as the FLA, said Cesar Cantalapiedra Lopez, an Analistas Financieros Internacionales partner in Madrid… ‘If things become very complicated, the Treasury will have to centralize everything.’ As most large regions remain locked out of financial markets, Prime Minister Mariano Rajoy plans to extend the fourth one-off bailout mechanism he’s created this year into 2013.”

December 3 - Bloomberg (Gabi Thesing and Mark Barton): “Former European Central Bank policy maker Nout Wellink said Spain can’t realistically expect officials to narrow the bond spread with Germany to as little as 200 bps, as he predicted ‘execution problems’ with the ECB’s bond program. If Prime Minister Mariano Rajoy envisages ‘that the maximum difference with the Germans is 200 bps, then he makes a mistake,’ Wellink, the former Netherlands central bank governor who retired from the post in 2011, said… Spain is still resisting asking for aid, a prerequisite to trigger the ECB’s Outright Monetary Transactions program, its new government bond-purchasing program.”

December 4 - Bloomberg (Emma Ross-Thomas): “Spain has raised 1.2 billion euros ($1.6bn) from an amnesty on tax evaders, half the amount the government set out to recover with the measure designed to help shrink the euro region’s second-largest budget gap.”

December 4 - Bloomberg (Sharon Smyth): “Home prices in Spain fell 9.1% in the 11 months through November, real-estate website and IESE Business School said…”

Germany Watch:

December 7 – Bloomberg (Jana Randow): “The Bundesbank sliced more than 1 percentage point off its forecast for economic expansion in Germany next year after the sovereign debt crisis pushed the euro area into recession and global growth slowed. The Bundesbank cut its 2013 projection to 0.4% from the 1.6% predicted in June and said the economy, Europe’s largest, will grow 0.7% this year, down from its previous forecast of 1%. The economy will contract in the fourth quarter and stagnate in the first…”

December 7 – Bloomberg (Jana Randow): “German industrial production unexpectedly dropped in October as a recession in the euro area and weaker global growth damped demand. Production fell 2.6% from September, when it declined 1.3%...”

European Economy Watch:

December 6 - Bloomberg (Matthew Brockett): “The European Central Bank cut its economic and inflation forecasts and President Mario Draghi said weakness will persist into next year… The ECB chief said the ECB now forecasts the economy will shrink 0.5% this year, more than the 0.4% contraction it predicted in September. The ECB cut its 2013 forecast to a contraction of 0.3% from 0.5% growth…”

December 6 - Bloomberg (Mark Deen): “French unemployment climbed to a 13-year high in the third quarter as a economy that has barely grown in more than a year prompted companies to cut staff. The unemployment rate rose 0.1 points to 10.3%...”

December 7 – Bloomberg (Jeff Black): “Mario Draghi isn’t just battling to save Europe’s monetary union, he’s being asked to run it. The European Central Bank president is taking on more and more responsibility to keep the currency bloc afloat, from propping up bond markets to monitoring fiscal policies and assuming supervision of the region’s 6,000 banks. Economists, academics and officials past and present say the ECB is at risk of becoming overloaded, which could erode the credibility it needs to achieve its primary goal of price stability.”

December 7 – Bloomberg (Boris Groendahl): “European Central Bank Governing Council member Ewald Nowotny said it was a ‘great challenge’ that several of the countries sharing the euro currency will contract this year and next. ‘There are clearly problematic developments in the realm of the real economy,’ Nowotny told journalists… ECB forecasts underwent ‘a dramatic deterioration, a significant downward revision to an extent we rarely see… There is a multitude of countries that will shrink’ this year and next, he said. ‘That’s a significant challenge.’”

December 7 – Bloomberg (Scott Hamilton): “U.K. manufacturing production fell more than economists forecast in October as food and alcohol slumped, indicating weakness in the economy at the start of the fourth quarter. Factory output dropped 1.3% from September, the most in four months…”

December 6 – Bloomberg (Oliver Staley): “Anastasia Karagaitanaki… is a former model and cafe owner in Thessaloniki, Greece. After losing her business to the financial crisis, she now sleeps on a daybed next to the refrigerator in her mother’s kitchen and depends on charity for food and insulin for her diabetes. ‘I feel like my life has slipped through my hands,’ said Karagaitanaki, whose brother also shares the one-bedroom apartment. ‘I feel like I’m dead.’ For thousands of Greeks like Karagaitanaki, the fabric of middle-class life is unraveling. Teachers, salaries slashed by a third, are stealing electricity. Families in once-stable neighborhoods are afraid to leave their homes because of rising street crime.”

China Bubble Watch:

December 4 - Bloomberg: “Huaxia Bank Co. will negotiate possible repayment with investors who lost money on the default of an illegal savings vehicle that a former employee is suspected of promoting. Huaxia Bank will take its share of responsibility after police and regulators complete an investigation, a spokesman for the Beijing-based lender’s Shanghai branch said… The bank is also trying to retrieve the remaining assets of the investment product, he said. Banks use so-called wealth management products, which offer higher returns than benchmark deposit rates, to dissuade households from moving their savings elsewhere. Chinese banks issued 22,912 such products in the first nine months, a faster pace than last year, when they sold a record 24,041… ‘We view this incident as a watershed moment for the banking sector,’ China International Capital Corp. analysts led by Mao Junhua and Luo Jing wrote… ‘The industry must bust the myth surrounding the rigid honoring system and the expectation that there will always be bailouts. Otherwise risk appetite will soar and the problems will be too big for financial institutions to cope with.’”

December 4 - Bloomberg (Joshua Gallu and Eleni Himaras): “U.S. regulators probing potential fraud by China-based companies increased pressure on their auditors by formally accusing affiliates of Big Four firms of withholding documents from investigators. Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. have refused to cooperate with accounting investigations into nine companies whose securities are publicly traded in the U.S., the Securities and Exchange Commission said… The auditors claim Chinese law prevents them from assenting to the SEC’s demands, hindering U.S. efforts to probe allegations of fraud that have wiped 61% from a gauge of Chinese and Hong Kong stocks traded in North America since January 2011.”

Japan Watch:

December 2 – Financial Times (Patrick Jenkins and Michiyo Nakamoto): “The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure. Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it. ‘This is analysts’ main concern… A default of Japanese government bonds would have a severe impact on us. But we need to be responsible to keep that market in order.’ According… the Bank for International Settlements… the holdings of JGBs by Japan’s banks equate to 900% of their tier one capital, compared with about 25% for UK banks’ exposure to gilts and 100% for US banks’ exposure to US Treasuries.”

Latin America Watch:

December 7 – Bloomberg (David Biller): “Brazil’s inflation accelerated in November for the third month, as prices rose more than all forecasts… limiting the central bank’s room to provide more stimulus for the struggling economy… Prices as measured by the benchmark IPCA index rose 0.6% in the month… Annual inflation accelerated to 5.53% from 5.45% the previous month.”

December 7 – Bloomberg (Matthew Malinowski and Andre Soliani): “After reducing interest rates by more than any country in the Group of 20, Brazil is readying a second round of cuts to jumpstart an economy growing half as fast as the government predicted, according two of the nation’s biggest banks…”

U.S. Bubble Economy Watch:

December 6 – Bloomberg (Esmé E. Deprez and Martin Z. Braun): “In March 2009, Elliot Sander stood in Lower Manhattan outside South Ferry, New York’s newest subway station. Addressing a crowd, the head of the Metropolitan Transportation Authority hailed it as the first major transit project to open downtown since the Sept. 11 terrorist attacks. ‘This artistically beautiful and highly functional station is a tangible reminder that when the MTA is provided with adequate capital funding, we build monumental works that will benefit generations of New Yorkers for many decades to come,’ Sander said that day. Three-and-a-half years later, the station lies in ruins. A tidal surge from Hurricane Sandy Oct. 29 turned it into what current MTA Chairman Joseph Lhota called a ‘large fish tank.’ Dispatch equipment was destroyed, tiles ripped from the wall and surfaces coated with East River muck. The state agency pegs the rebuilding cost at $600 million…”

Central Bank Watch:

December 7 – Bloomberg (Craig Torres and Josh Zumbrun): “A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month old blueprint for an exit from record monetary stimulus. Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit -- increasing the risk that a jump in interest rates would crush the economic recovery. ‘There is certainly an issue about unwinding the balance sheet’ in a way that ‘is effective and continues to support the recovery without creating inflation,’ St. Louis Fed Bank President James Bullard said… The central bank might have to ‘revisit’ the 2011 strategy, he added.”

December 7 – Bloomberg (Jana Randow and Jeff Black): “A majority of European Central Bank policy makers were open to cutting the benchmark rate yesterday and there is a possibility of a reduction early next year if the economy doesn’t pick up, three officials… said. Rates were kept on hold because of concerns about the negative signal a cut might send in conjunction with the significant downward revisions to the ECB’s growth and inflation forecasts… Lowering rates will be considered again next month, one of the officials said.”