Sunday, December 14, 2014

Weekly Commentary, December 13, 2013: Q3 2013 Flow of Funds

Total (Non-Financial and Financial) Market Credit jumped $406bn (nominal) during Q3 to a record $58.082 TN. On a seasonally-adjusted and annualized (SAAR) basis, Total Credit expanded $1.571 TN, up from Q2’s $1.478 TN and compared to SAAR $1.155 TN in Q3 2012. As a percentage of GDP, Total Market Credit was little changed year-over-year at 344%.

Total Non-Financial Debt (NFD) jumped $377bn during the quarter to a record $41.384 TN. NFD was up $1.745 TN over the past year, or 4.4%. NFD jumped $6.860 TN in four years. In five years, NFD as a percentage of GDP has increased to 245% from 227%. So much for “deleveraging.”

On a percentage basis, non-financial debt expanded at a 3.5% pace during the quarter, up from Q2’s 3.4% and compared to Q3 2012’s 3.0%. Federal borrowings slowed to a rate of 1.5%, the weakest level since Q2 2007. Corporate borrowings expanded at a 9.2% rate, up from Q2’s 8.7% and Q3 2012’s 6.8%. Household (non-mortgage) Credit increased at a 6.0% pace, up from Q2’s 5.9%. Household Mortgage debt growth turned positive (0.9%) for the first time since Q1 2009. Total Household borrowings are on pace for the strongest annual growth since 2007. Interestingly, State & Local borrowings contracted at a 3.9% annual rate, down from Q2’s 1.1% growth.

On an annualized basis, NFD increased SAAR $1.431 TN during the quarter, up from Q2’s $1.372 TN and compared to SAAR $1.197 TN during Q3 2012. The change in the composition of Credit growth is noteworthy. Treasury borrowings slowed to SAAR $174bn during Q3, down from Q2’s $299bn and Q3 2012’s $788bn. State & Local government borrowings contracted SAAR $117bn.

Meanwhile, Corporate Credit growth is the strongest since 2007. Nonfinancial Business borrowing jumped to SAAR $981bn, up from Q2’s $934bn and Q3 2012’s $619bn. For comparison, Nonfinancial Business debt increased a record $1.317 TN in boom-time 2007, before turning negative in 2009 ($256bn). Nonfinancial Business debt increased $170bn in 2010, $543bn in 2011 and $718bn in 2012. Household debt expanded SAAR $393bn during the quarter, up from Q2’s SAAR $105bn and compared to Q3 2012’s $203bn contraction.

In 21 quarters, GDP increased 17% ($2.393TN) to $16.891 TN. Over this period, Treasury debt jumped 128% ($6.706 TN) to $11.957 TN. Federal Liabilities have increased 135% ($9.012 TN) to $15.710 TN. In 21 quarters, Federal Liabilities surged from 46% to 93% of GDP. Over this period, State & Local Liabilities jumped 76% ($2.127 TN) to $4.940 TN. Combined Federal and State & Local Liabilities have increased from 66% of GDP to 122% in 21 quarters. Over this period, Federal Reserve Assets have expanded $2.835 TN, or 298%, to $3.787 TN.

Government-Sponsored Enterprises (GSE) Agency Securities (debt and MBS) increased $52.9bn during Q3 to a four-year high $7.714 TN. Agency Securities were up $170bn y-o-y, or 2.2%. Outstanding Asset-Backed Securities (ABS), which include “private-label” MBS, declined $35bn during Q3 and fell $173bn y-o-y (to $1.629 TN). Interestingly, Home Mortgage ABS was down $150bn y-o-y, or 15.4%, to a multi-year low $819bn. Home Mortgage ABS is now about half the level compared to the end of 2009, as “private-label” MBS either default or are refinanced into lower-rate conventional mortgages.

Rest of World (ROW) holdings of U.S. assets jumped $419bn during Q3 to a record $21.996 TN, with over half of the increase explained by the increase in Equities holdings. Total ROW holdings were up $1.502 TN, or 7.3%, year-over-year. Total ROW Official (central bank) Treasury holdings jumped $1.153 TN, or 40%, between the end of 2008 to 2012 (to $4.032 TN). It is worth noting that ROW Official Treasury holdings declined $7.5bn during 2013’s first three quarters. Over the past year, Official holdings of Agency Securities declined $65bn, or 11.8%, to a multi-year low $484bn. Total ROW holdings of Agency Securities declined $145bn, or 14.1%, to a multi-year low $883bn.

Even in the face of booming equities and corporate Credit, the real economy struggles to gain momentum. National Income expanded at a 3.7% pace during the quarter (to $14.597 TN), with year-over-year growth of $635bn, or 4.5%. Compensation expanded at a 2.4% rate during Q3 (to $8.889 TN), with y-o-y growth of $298bn, or 3.5%.

Q3 federal Receipts were up 11.9% year-over-year to SAAR $2.972 TN, while Federal Spending increased just 1.3% y-o-y to SAAR $3.825 TN. Payments from the GSEs and other special items have made fiscal improvement appear better than reality. It is worth noting that Q3 State & Local receipts were up only 3.2% y-o-y, with spending rising 1.6%.

Not much notable action within the miscellaneous financials. Credit Union Assets were up 5.7% y-o-y to $1.005 TN. Finance Company Assets were down 1.7% from a year ago to $1.488 TN. Benefiting from strong securities markets, Life Insurance Assets were up 5.3% y-o-y to $5.866. The REITs were down 3.8% in four quarters to $764bn. Security Credit expanded at a 7% pace during the quarter to a near-record $1.536 TN. Securities Broker/Dealer Assets were little changed year-over-year at $2.060 TN. Funding Corp Assets were up 7.3% ($146bn) y-o-y to a two-year high $2.149 TN.

While the Corporate Balance Sheet is now expanding rapidly, the key Bubble Dynamic remains the interplay between the Fed’s Balance Sheet and the Household Balance Sheet. In one of history’s incredible “wealth” creations, a Trillion dollar expansion of Federal Reserve Liabilities – and corresponding injection of this “money” into the financial markets – saw an extraordinary one-year $7.854 TN surge in Household Net Worth.

To be sure, the Household Balance Sheet is something to behold. Household Net Worth was up another $2.122 TN (nominal!) during Q3 to a record $77.459 TN. Household Net Worth is today more than triple the level from 1994. At 459% of GDP, Household Net Worth is also not far from the year-end 2007 level (484%). In just the past two years, Household Net Worth inflated $18.631 TN, or 31.7%. It is worth noting that Household Net Worth jumped $23.807 TN during the historic four-year Bubble period 2003-2007. For further perspective, Household Net Worth increased an annual averaged $1.862 TN for the 13 years 1989 to 2002, a period notable for a historic securities bull market.

For Q3, Household Financial Assets holdings were up $1.496 TN, or 9.1% annualized, to a record $63.894 TN. Financial Asset holdings jumped $5.356 TN, or 9.1%, over the past year. Combined Equities and Mutual Fund holdings increased $917bn during the quarter to $18.299 TN, while Credit Market Instruments declined $103bn during the quarter (to $5.500 TN) and fell $41bn year-over-year. Household Deposits increased $437bn, or 4.9%, y-o-y to $9.275 TN. Since the end of 2008, combined Equities and Mutual Fund holdings were up 98% ($9.061 TN), while Credit Market Instruments increased only 6.6% ($341bn). Deposits have expanded 15.3% ($1.231 TN) since the end of 2008.

It is not only Financial Asset prices that are inflating these days. Household Real Estate holdings increased $502bn, or 9.5% annualized, during Q3 to a record $21.611 TN. Over the past year, Real Estate holdings were up $2.332 TN, or 12.1%.

The Fed’s Balance Sheet (assets) ended 1995 at $472bn, 1998 at $567bn, 2000 at $636bn, 2002 at $753bn, 2004 at $841bn, 2006 at $908bn and closed 2007 at $951bn. Fed Assets then surged to $2.271 TN in 2008 – and then ended 2009 little changed at $2.267 TN. Total Fed Assets closed 2010 at $2.453 TN, jumped to $2.947 TN in 2011 and were little changed in 2012 at $2.955 TN.

Federal Reserve Assets this week surpassed $4.0 Trillion. The vast majority of the Fed’s Assets are securities. After liquidating its T-bill portfolio, the Fed currently holds $2.178 TN of Treasury notes and other federal securities, up about $500bn over the past year. The Fed also holds about $1.70 TN of MBS, up more than $500bn from a year ago.

On the Liability side of the Fed’ s Balance Sheet, Currency in Circulation was up $72.8bn over the past year to $1.230 TN. There are a few miscellaneous Liabilities (i.e. reverse "repos" $113bn, Deposits $62bn), but the vast majority of Fed Liabilities are now “Reserve Balances with Federal Reserve Banks.” Reserves were $2.541 TN this week, an increase of over $1.0 TN from a year ago.

This additional Trillion of “Reserves” is the (electronic) “money” the Fed has injected into the securities markets over the past year. These are digital/electronic “Credit” entries in the general ledger balances between the Federal Reserve Banks and its member banks and financial institutions. These electronic IOUs are created in the process of the Fed expanding its balance sheet holdings (purchasing securities in the marketplace with newly created “money”).

There’s great confusion regarding these “Reserves.” It is a popular misconception that, since these balances sit benignly as “Excess Reserves” (surplus "cash") on bank balance sheets, this “money” is having no impact on transactions or prices. There’s discussion at the Fed to now use the interest-rate paid on these balances as a policy tool. Former Fed vice chair Alan Blinder would like the Fed to charge banks to hold these reserves, thus incentivizing the banks to lend these “reserves” rather than to do nothing with them.

I am these days reminded of when the expansion of short-term GSE liabilities (electronic IOUs) became a powerful marketplace liquidity-creation mechanism back during the nineties – yet it for years remained virtually unrecognized (was it ever recognized?). Importantly, the massive increase in the Fed’s Liability “Reserves” is a direct “money”-creation mechanism with profound effects on securities market prices (and speculative dynamics). Moreover, these “Reserves” must remain banking system Assets until the Fed sells Assets (securities) and uses the proceeds to partially extinguish its Liabilities. Said differently, Fed “Reserves” IOUs will remain in existence until the Fed extracts liquidity from the marketplace – i.e. collapses some of the liquidity it created – and reduces the quantity of its Liabilities.

To claim the Fed’s “Reserves” are large because banks are failing to lend is factually incorrect. Reserves are gigantic for only one reason: The Fed has created enormous quantities of “money” in its misguided quantitative easing program. If these $2.4 TN of “Reserves” are just sitting there innocuously, why then doesn’t the Fed commence the process of “normalizing” its balance sheet? Why is it continuing to add $85bn a month? Because once monetary inflation takes root it is extremely difficult to stop.

For the Week:

The S&P500 dropped 1.7% (up 24.5% y-t-d), and the Dow fell 1.7% (up 20.2%). The broader market was under pressure. The S&P 400 Midcaps dropped 1.6% (up 26.4%), and the small cap Russell 2000 was hit for 2.2% (up 30.3%). The Utilities sank 2.5% (up 4.6%). The Banks declined 1.2% (up 29.9%), and the Broker/Dealers slipped 0.6% (up 62.5%). The Morgan Stanley Cyclicals dipped 0.5% (up 33.9%), and the Transports fell 1.6% (up 33.5%). The Nasdaq100 declined 1.4% (up 29.9%), and the Morgan Stanley High Tech index dropped 2.0% (up 24.9%). The Semiconductors fell 2.0% (up 31.6%). The Biotechs sank 2.8% (up 43.6%). With bullion up $10, the HUI gold index recovered 1.5% (down 56%).

One-month Treasury bill rates ended the week at one basis point, and three-month rates closed at 6 bps. Two-year government yields were up 2 bps to 0.33%. Five-year T-note yields ended the week up 4 bps at 1.53%. Ten-year yields added a basis point to 2.87%. Long bond yields slipped 2 bps to 3.87%. Benchmark Fannie MBS yields increased one basis point to 3.52%. The spread between benchmark MBS and 10-year Treasury yields was little changed at 65 bps. The implied yield on December 2014 eurodollar futures was 3 bps higher to 0.385%. The two-year dollar swap spread was little changed at 10 bps, and the 10-year swap spread was little changed at 6 bps. Corporate bond spreads were mixed. An index of investment grade bond risk was unchanged at 70 bps. An index of junk bond risk increased one to 342 bps. An index of emerging market (EM) debt risk dropped 10 bps to 322 bps.

Debt issuance remained strong. Investment grade issuers included Devon Energy $2.25bn, John Deere Capital $1.25bn, Time Warner $1.0bn, SLM Corp $1.0bn, Discover Bank $1.0bn, Cameron International $750 million, Crane $550 million, Arch Capital $500 million, Massmutal Grobal $250 million, APX Group $250 million, and CubeSmart LP $250 million.

Junk bond funds saw small inflows of $16 million (from Lipper). I big week of junk issuance included Sprint $2.5bn, Rockwell Collins $1.1bn, Ashtead Captial $900 million, Salix Pharmaceuticals $750 million, Endo Finance $700 million, Inventive Health $625 million, Opal Acquisition $610 million, Walter Investment $575 million, Ashton Woods $350 million, Kenan Advantage Group $350 million, Memorial Resource Development $325 million, Churchill Down $350 million, Simmons Food $315 million, Tesoro Logistics LP $250 million, CTP Transportation Products $250 million, and Chassix $150 million.

Another long list of convertible debt issuers included Sunedison $1.0bn, Yandex $600 million, American Realty Capital $600 million, Arch Coal $350 million, Alpha Natural Resources $300 million, Finisar $220 million, Trulia $200 million, and E-House China Holdings $135 million.

International dollar debt issuers included Digicel $2.0bn, Societe Generale $1.75bn, Bank of Novia Scotia $1.75bn, Kommunalbanken $1.2bn, Jaguar Land Lover $700 million, Honduras $500 million, Neder Waterschapsbank $500 million, Trinidad & Tobago $350 million, Eletson Holdings $300 million, and Grupo Idesa $300 million.

Ten-year Portuguese yields rose 4 bps to 5.98% (down 77bps y-t-d). Italian 10-yr yields fell 9 bps to 4.09% (down 41bps). Spain's 10-year yields declined 7 bps to 4.09% (down 118bps). German bund yields slipped one basis point to 1.83% (up 51bps). French yields declined 2 bps to 2.43% (up 43bps). The French to German 10-year bond spread narrowed one to 60 bps. Greek 10-year note yields were down 13 bps to 8.58% (down 189bps). U.K. 10-year gilt yields were unchanged at 2.89% (up 107bps).

Japan's Nikkei equities index added 0.7% (up 48.2% y-t-d). Japanese 10-year "JGB" yields were up 3 bps to an almost 3-month high 0.69% (down 9bps). The German DAX equities index fell 1.8% (up 18.3%). Spain's IBEX 35 equities index was down 1.4% (up 13.5%). Italy's FTSE MIB fell 1.8% (up 9.4%). Emerging markets were under pressure. Brazil's Bovespa index fell 1.8% (down 17.9%), and Mexico's Bolsa dropped 1.7% (down 4.2%). South Korea's Kospi index lost 0.9% (down 1.7%). India’s Sensex equities index declined 1.3% (up 6.6%). China’s Shanghai Exchange sank 1.8% (down 3.2%).

Freddie Mac 30-year fixed mortgage rates declined 4 bps to 4.42% (up 110bps y-o-y). Fifteen-year fixed rates fell 4 bps to 3.43% (up 77bps). One-year ARM rates sank 8 bps to 2.51% (down 2bps ). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates rising 4 bps to 4.57% (up 62bps).

Federal Reserve Credit jumped $21.1bn to a record $3.905 TN. Over the past year, Fed Credit was up $1.047 TN, or 36.6%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $691bn y-o-y, or 6.4%, to a record $11.538 TN. Over two years, reserves were up $1.255 TN, for 12% growth.

M2 (narrow) "money" supply expanded $20.0bn to $10.954 TN. "Narrow money" expanded 6.1% ($630bn) over the past year. For the week, Currency increased $7.7bn. Total Checkable Deposits rose $10.1bn, and Savings Deposits increased $3.1bn. Small Time Deposits declined $1.0bn. Retail Money Funds were little changed.

Money market fund assets increased $7.5bn to $2.710 TN. Money Fund assets were up $64bn from a year ago, or 2.4%.

Total Commercial Paper jumped $31.6bn to $1.081 TN. CP was up $32bn over the past year, or 3.1%.

Currency Watch:

December 9 – Bloomberg (David Goodman): “Fund managers and electronic traders for the first time account for more than half the $5.3 trillion- a-day currency market as regulators investigate at least 11 dealers for alleged collusion on benchmark rates. Hedge funds, pension managers, central banks and smaller lenders made up 67% of the increase in daily trading, from about $4 trillion in 2010, the Bank for International Settlements said… Their share rose to 53% from 48%, while dealer banks, which buy and sell from clients, held steady with 39%.”

The U.S. dollar index was little changed at 80.21 (up 0.6% y-t-d). For the week on the upside, the Canadian dollar increased 0.5%, the South Korean won 0.5%, the Mexican peso 0.4%, the Swiss franc 0.3%, the South African rand 0.3%, the euro 0.3%, the Danish Krone 0.3% and the Brazilian real 0.1%. For the week on the downside, the Australian dollar declined 1.5%, the Swedish krona 1.1%, the Singapore dollar 0.5%, the British pound 0.3%, the Japanese yen 0.3%, the Norwegian krone 0.3%, and the New Zealand dollar 0.2%.

Commodities Watch:

The CRB index added 0.4% this week (down 5.2% y-t-d). The Goldman Sachs Commodities Index declined 1.3% (down 3.6%). Spot Gold rallied 0.8% to $1,239 (down 26%). March Silver gained 0.4% to $19.60 (down 35%). January Crude fell $1.05 to $96.60 (up 5%). January Gasoline fell 3.6% (down 5%), while January Natural Gas jumped 5.8% (up 30%). March Copper gained 2.0% (down 9%). March Wheat fell 3.4% (down 19%), and March Corn dropped 2.0% (down 39%).

U.S. Fixed Income Bubble Watch:

December 11 – Bloomberg (Charles Stein): “Bond mutual funds are headed for record redemptions in 2013 amid signals the U.S. Federal Reserve will reduce its stimulus. Investors have removed $70.7 billion so far this year from bond funds, TrimTabs Investment Research said… Unless the trend reverses, the redemptions would surpass a record $62.5 billion that investors removed from bond mutual funds in 1994… Investors have been pulling money from bond funds since May, when Federal Reserve Chairman Ben S. Bernanke first hinted that the central bank might begin scaling back its unprecedented asset purchases. The yield on the 10-year Treasury note is 2.8%, up from 1.93% on May 21, the day before Bernanke spoke about the possibility of tapering its stimulus.”

December 10 – Bloomberg (Sarika Gangar): “Sales of investment-grade corporate bonds in the U.S. reached an all-time high for a second straight year as issuers took advantage of borrowing costs that touched record lows to offer deals of unprecedented size. Deere & Co.’s $1.25 billion offering today sent sales for the year to $1.125 trillion, exceeding the $1.122 trillion in 2012… Last week, dollar-denominated high-yield offerings also reached an annual record, pushing U.S. corporate bond sales to the most ever.”

December 11 – Bloomberg (Sarika Gangar and Matt Robinson): “Back-to-back records for U.S. investment-grade bond sales probably will fall short of a trifecta next year as the Federal Reserve curtails stimulus that’s fueled $5 trillion of issuance since the end of 2008. Strategists at JPMorgan Chase & Co., the largest arranger of the debt, project about a 1% drop in 2014 issuance while second-ranked Bank of America Corp. expects sales to plummet 16%. Barclays Plc estimates an 8% decline.”

December 9 – Bloomberg (Katie Linsell): “Record sales of high-yield payment- in-kind bonds is triggering uneasiness among international regulators who are concerned investors may suffer losses when central banks tighten monetary policy. Issuance of the notes, which give borrowers the option to repay interest with more debt, more than doubled this year to $16.5 billion from $6.5 billion in 2012… About 30% of issuers before the 2008 financial crisis have since defaulted…”

December 12 – Bloomberg (Michael B. Marois and Michelle Kaske): “Puerto Rico’s general-obligation bond rating may be lowered to junk, Moody’s… said, if the commonwealth’s finances continue to deteriorate and it isn’t able to access credit markets soon. Moody’s said its decision to put the island’s credit under review would affect $52 billion of rated debt… Puerto Rico’s securities are held by more than three-quarters of mutual funds that invest in municipal bonds, according to Morningstar… The territory’s ‘weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy,’ Moody’s said…”

Federal Reserve Watch:

December 9 – Bloomberg (Elizabeth Campbell and Aki Ito): “Federal Reserve Bank of Dallas President Richard Fisher said the U.S. central bank should begin dialing back its asset purchases as soon as possible in an economy that doesn’t need any more monetary stimulus. ‘We should get started as soon as possible,’ Fisher said…, referring to when the Fed should begin reducing the pace of its bond buying. The economy has ‘enough firepower already if it’s properly used.’ …Fisher… repeated his view that the Federal Open Market Committee should announce a ‘clear and defined path’ that informs the public how the committee intends to slow and end the so-called quantitative easing program… The Dallas Fed chief said he’s becoming concerned about rising housing prices. ‘I wouldn’t say it’s nationwide, but in certain areas, we’re beginning to see a little bit of a boil. There’s beginning to be a little bit of turbulence in terms of affordability.’”

December 9 – Bloomberg (Steve Matthews and Aki Ito): “Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year, said the odds of tapering bond purchases have risen along with gains in the labor market, and any reduction should be modest to account for low inflation. ‘A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,’ Bullard, a supporter of record stimulus, said… ‘Should inflation not return toward target, the committee could pause tapering at subsequent meetings.’”

December 11 – Bloomberg (Joshua Zumbrun and Caroline Salas Gage): “Federal Reserve officials are renewing a debate over cutting interest paid to banks on excess reserves, a move aimed at convincing investors that tapering its bond-buying isn’t the same as tightening its monetary policy. Lowering the rate, now 0.25%, is among ‘ideas that are still in play’ as the central bank seeks to improve the way it communicates the outlook for interest rates, Atlanta Fed President Dennis Lockhart said… The debate was revived as the Fed successfully tests a new policy involving so-called reverse repurchase transactions that would give it greater control over short-term borrowing costs. That may ease concern that cutting the interest rate on excess reserves could wreak havoc by pushing rates to zero or lower in money markets.”

December 12 – Bloomberg (Joshua Zumbrun and Rich Miller): “Stanley Fischer, said to be the leading candidate for the No. 2 job at the Federal Reserve, offers crisis-fighting experience and a dose of skepticism about efforts to shape expectations on the outlook for interest rates. The former Bank of Israel governor, though a newcomer to the Fed, also brings continuity and strong academic credentials: as a professor of economics at Massachusetts Institute of Technology, he taught Fed Chairman Ben S. Bernanke, whose term ends in January, and European Central Bank chief Mario Draghi.”

U.S. Bubble Economy Watch:

December 11 – Bloomberg (David J. Lynch): “The widening gap between rich and poor is eroding faith in the American dream. By almost two to one – 64% to 33% -- Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to a Bloomberg National Poll. And some say the government isn’t doing much to help. ‘There’s a lot of policies that make it easier for the rich to get richer and the poor to go nowhere,’ says Ryan Sekac, 26, a mechanical engineer in Westerly, Rhode Island.”

December 9 – Bloomberg (Kathleen M. Howley): “Jim Pietrocini has joined the jumbo adjustable-rate mortgage party. In early December, he refinanced his 4,600-square-foot Carlsbad, California, home that overlooks the Pacific Ocean. Pietrocini, a computer software consultant, couldn’t resist the deal on the jumbo, a loan exceeding the limit the government will buy. His $744,000 mortgage at 3.5%, which adjusts annually after seven years, will save him almost $8,000 a year compared with a fixed rate loan at 5%... Jumbo loans, both adjustable and fixed-rate, increased by 34% to $216 billion in the first nine months of this year, with ARMs comprising the majority of the gain, said Guy Cecala, publisher of Inside Mortgage Finance…”

December 12 – Bloomberg (Dan Levy): “Foreclosure filings in the U.S. plunged last month to the lowest level in almost eight years as investor purchases and an improving economy brought the end of the housing crisis within sight.”

Global Bubble Watch:

December 11 – Financial Times (Stephen Foley): “Hedge fund managers are attracting new money and preparing expansion plans, even though their performance has fallen behind roaring equity markets this year, thanks to a shift in how investors view the industry. Funds brought in $360bn this year in investment returns and inflows from investors, an increase of 15.7% on their assets under management at the end of 2012, according to… Preqin. The continued growth comes as investors lower their expectations of returns from hedge funds and instead view them as a way of increasing diversification and reducing volatility in their portfolio… The data, which will be published in Preqin’s 2014 Global Hedge Fund Report in January, shows hedge funds’ assets have risen to almost $2.7tn this year, with growth coming almost exclusively in North America.”

December 11 – Financial Times (Tracy Alloway): “The global search for yield has spurred some of the loosest lending conditions in credit markets since before the crisis, the Bank for International Settlements has warned. Sales of riskier assets surged after the Federal Reserve opted to postpone the ‘tapering’ of its bond purchases, forcing investors to once again seek additional returns… ‘After a brief pause, the search for yield has continued largely unabated,’ said Claudio Borio, head of the monetary and economic department at the BIS… ‘So far investing in corporate debt has paid off but we think we don’t know how long lower default rates will prevail.’ ‘Leveraged loans’ granted to the riskiest corporate borrowers accounted for about 40% of syndicated lending from July to November – a higher proportion than during the pre-crisis period from 2005 to 2007.”

December 10 – Bloomberg (Rachel Evans and Tanya Angerer): “Dollar-denominated bond sales in Asia are poised for another record next year as the appeal of emerging markets outweighs any reduction in the Federal Reserve’s stimulus… Borrowers from the region outside Japan have already issued an unprecedented $127.1 billion in 2013”

December 9 – Bloomberg (Jeremy Kahn): “Sanna Andersson was looking for new digs. The 23-square-meter (248-square-foot) studio apartment that she shared with her boyfriend in Soedermalm -- the central Stockholm district best known outside of Sweden as the backdrop for Stieg Larsson thrillers -- had grown too cramped. In May, after months of fruitless searching, the couple found the perfect place: a 69-square-meter (742-square-foot) three-room apartment on the top floor of a 1970s building with ample light… Listed for 3.995 million kronor ($623,000), it was within their budget -- barely. Two other couples were interested, and a bidding war ensued. Phone calls and text messages shot back and forth between bidders and broker as the price spiraled upward in leaps of 10,000, 50,000 and 100,000 kronor.”

EM Bubble Watch:

December 11 – Bloomberg (Blake Schmidt and Marisa Castellani): “Brazil’s real fell the most in emerging markets as foreign-exchange outflows in the first week of December exceeded the amount coming into the country last month, weighing on the currency’s outlook… The currency has fallen 5.4% in the fourth quarter on concern fiscal deterioration will lead to a reduced credit rating and amid speculation the U.S. will curtail stimulus. Brazil’s central bank reported today net foreign-exchange outflows of $2.7 billion this month through Dec. 8, more than the net inflows for all of November.”

December 12 – Bloomberg (Andras Gergely): “Ukraine’s search for international aid has taken it from the International Monetary Fund to Russia to China and back again to the IMF. Citigroup Inc. says the former Soviet republic is running out of time to land a deal, estimating its cash stockpile may, in as little as three months, fall below levels that could lead to a default. Yields on the country’s dollar notes due June 2014 jumped to a record 21.3%..., or 16 percentage points more than similarly rated Egyptian debt due next year… Soaring credit risk, rising bond yields and the weakening currency amid the biggest anti-government demonstrations in a decade are piling pressure on President Viktor Yanukovych, who said yesterday he’s seeking a return to IMF aid negotiations after breaking them off in April.”

China Bubble Watch:

December 12 – Bloomberg: “China’s new yuan loans and broadest measure of credit exceeded estimates last month… New local-currency loans were 624.6 billion yuan ($103bn), the People’s Bank of China said…, compared with the 580 billion yuan median estimate of 41 analysts surveyed… Aggregate financing was 1.23 trillion yuan, topping all economists’ estimates, while M2 money supply increased 14.2% from a year earlier.”

December 9 – Bloomberg (Michael B. Marois and Michelle Kaske): “Chinese company debt twice the size of Ireland’s economy will come due in 2014, spurring concern the nation is on the cusp of its first corporate bond default. A record 2.6 trillion yuan ($427bn) of interest and principal on securities issued by non-financial companies must be repaid next year, 19% more than this year and the most since China International Capital Corp. began compiling the data in 2008. Ten-year AAA corporate bond yields surged 89 bps since Dec. 31 to 6.18%, touching a record 6.23% on Nov. 27.”

December 13 – Bloomberg (Fion Li): “Dim Sum sales may surge past 500 billion yuan ($82bn) for the first time in 2014 as China’s companies seek to take advantage of a widening gap in cross-border funding costs, say the securities’ top arrangers. Issuance of yuan bonds and certificates of deposit outside mainland China will rise to between 520 billion yuan and 570 billion yuan next year, from 324 billion yuan so far in 2013, according to top-ranked HSBC…”

December 12 – Bloomberg (Jasmine Wang): “China ordered the nation’s commercial pilots to learn to ‘land blind’ in smoggy conditions to help alleviate chronic flight delays. Pilots flying to Beijing’s international airport from the nation’s 10 busiest airports must be qualified to land when visibility falls below 400 meters… Smog is hurting efforts to improve on-time performance in China, where about one in four flights is delayed because of airspace congestion.”

December 10 – Bloomberg: “China’s industrial output rose less than estimated in November while retail sales unexpectedly accelerated, giving a mixed picture of growth as leaders gather in Beijing to set economic policies for the coming year. Factory production rose 10% from a year earlier… Retail sales advanced 13.7%, while fixed-asset investment excluding rural households showed a slowdown.”

December 12 – Bloomberg (Bei Hu): “China Cinda Asset Management Co., leading the nation’s four state-owned bad-loan managers to go public, had the biggest debut gain among large Asia-Pacific new stocks in more than two years after completing the region’s second-biggest initial public offering in 2013. Shares of the Beijing-based company closed… 26% above the HK$3.58 IPO price.”

Japan Bubble Watch:

December 9 – Wall Street Journal (Toko Sekiguchi): “Prime Minister Shinzo Abe's political support has eroded dramatically for the first time since he came to power, several opinion polls show, as a messy feud over a secrecy bill dominated the final days of a parliament session that was supposed to be about reforms to cement Japan's economic recovery. Until recently, Mr. Abe had enjoyed approval ratings of around 60%. National polls taken over the weekend universally showed a rapid downturn. Kyodo News reported that support for Mr. Abe fell 10.3 percentage points to 47.6%...”

December 10 – Bloomberg (Finbarr Flynn): “Japan is guaranteeing Samurai bonds sold by China’s resource-rich neighbor Mongolia, offering financial and military aid as tensions rise in East Asia. Backing by a state-owned Japanese lender is allowing Development Bank of Mongolia LLC, rated junk by Moody’s…, to market yen notes this month at a yield premium of 60 to 65 bps over yen swaps… Japanese Prime Minister Shinzo Abe is bolstering ties with Mongolia, signing a strategic partnership pact in September, as he seeks to counter China’s growing presence in the region and tap resources in the Central Asian nation.”

India Watch:

December 13 – Bloomberg (Michael B. Marois and Michelle K Unni Krishnan and Kartik Goyal aske): “India’s consumer-price inflation exceeded 11% last month, adding pressure on central bank Governor Raghuram Rajan to raise interest rates again next week even as industrial output slid more than expected. Consumer prices rose a more-than-estimated 11.24% in November from a year earlier…”

Europe Watch:

December 11 – Bloomberg (Jim Brunsden and Rebecca Christie): “European Union finance ministers headed toward a showdown with the bloc’s parliament over a bank- failure fund as they struggled to put together a blueprint for their leaders to agree upon next week. In more than 15 hours of talks that ended inconclusively early today, ministers in Brussels sketched out a compromise that European Parliament leaders say keeps too much power in national capitals and undermines EU law. The finance chiefs return on the eve of a Dec. 19-20 summit to hammer out a deal before a self-imposed year-end deadline.”

Germany Watch:

December 9 – Bloomberg (Stefan Riecher): “German industrial production unexpectedly dropped for a second month in October, signaling an uneven recovery in Europe’s largest economy. Output… decreased 1.2% from September, when it fell a revised 0.7%... Economists predicted a gain of 0.7%...”