Saturday, December 6, 2014

Weekly Commentary, December 14, 2012: Hotel California

At least for today (perhaps because I’m a little under the weather), when it comes to the Fed I’m about all ranted out. So this isn’t supposed to be a rant, but more an effort to tie together some loose analytical ends. Key facets of my Macro Credit Theory analysis seem to be converging: The myth of deleveraging, “liquidationist” historical revisionism, Rules vs. Discretion monetary management, and “Keynesian”/inflationist dogma.

The Bernanke Fed this week increased their quantitative easing program to monthly purchases of $85bn starting in January. “Operation Twist” – the Fed’s clever strategy of purchasing $667bn of bonds while selling a like amount of T-bills - is due to expire at the end of the month. The Fed will now continue buying Treasury bonds ($45bn/month). It just won’t be selling any bills, while continuing with $40bn MBS purchases each month. The end result will be an unprecedented non-crisis expansion of our central bank’s balance sheet (monetization). It’s Professor Bernanke’s “government printing press” and “helicopter money” running at full tilt.

During his Wednesday press conference, chairman Bernanke downplayed the significance of the change from “twist” to outright balance sheet inflation. Wall Street analysts have generally downplayed this as well. Truth be told, no one has a clear view of the consequences of taking the Fed’s balance sheet from about $3.0 TN to perhaps $4.0 TN over the coming year or so. It’s worth noting that in previous periods of rapid balance sheet expansion, the Fed was essentially accommodating de-leveraging by players (hedge funds, banks, proprietary trading desks, REITs, etc.) caught on the wrong side of a market crisis. Does the Fed’s next Trillions worth of liquidity injections spur more speculation in bonds, stocks and global risk assets? Or, instead, will our central bank again provide liquidity for leveraged players looking to sell (many increased holdings with the intention of eventually offloading to the Fed)? It’s impossible to know today the ramifications of the Fed’s latest tack into uncharted policy territory. It will stoke some inflationary consequence no doubt, although the impact on myriad Credit Bubbles around the globe is anything but certain.

Clearer is that the Fed has again crossed an important line. There has been previous talk of Fed “exit strategies.” I’ll side with Richard Fisher, president of the Federal Reserve Bank of Dallas, who Friday warned of “Hotel California” risk ("...Going back to the Eagles song which is, you can check out any time you want but you can never leave…"). There has also been this notion that the U.S. economy is progressing through a (“beautiful”) deleveraging process. Yet there should be little doubt that the Fed has now resorted to blatantly orchestrating a further leveraging of the U.S. economy. It will now become only that much more difficult (think impossible) for the Federal Reserve to extricate itself from this Inflationary Process.

I’ve read quite sound contemporaneous analysis written during the “Roaring Twenties.” There was keen appreciation at the time for the risks associated with rampant Credit growth and speculative excesses throughout the markets and economy. The “old codgers” argued that a massive Credit inflation that commenced during the Great War (WWI) was being precariously accommodated by loose Federal Reserve policies. Chairman Bernanke has throughout his career disparaged these “Bubble poppers.” To this day the “liquidationists” are pilloried for their view that there was no viable alternative than to wring financial excess and economic maladjustment out of the system through wrenching adjustment periods. Through their empirical studies, quantitative models, and sophisticated theories, contemporary academics – led by Dr. Bernanke – have proven (without a doubt!) that the misguided “Bubble poppers” and “liquidationists” were flat out wrong. Our central bankers are now determined to prove them (along with their contemporary critics) wrong in the real world. Yet there remains one rather insurmountable dilemma: The contemporaneous Credit Bubble antagonists were right.

The Dallas Fed’s Fisher stated Friday that the “FOMC is probably the most academically driven in history.” Well, I’ll say that a world of unconstrained market-based finance “regulated” by inventive and activist academics has proved one explosive monetary concoction. The Wall Street Journal’s Jon Hilsenrath (with Brian Blackstone) had two insightful pieces this week, “MIT Forged Activist Views of Central Bank Role and Cinched Central Banker Ties,” and “World Central Bankers United by Secret Basel Talks and MIT Connections.”

Inflationary cycles always create powerful constituencies. After all, Credit booms and the government printing press provide incredible wealth-accumulating opportunities for certain segments of the economy. Moreover, it is the nature of things that late in the cycle the pace of wealth redistribution accelerates as the monetary inflation turns more unwieldy. Throw in the reality that asset inflation (financial and real) has been a prevailing inflationary manifestation throughout this extraordinary Credit boom, and you’ve guaranteed extraordinarily powerful constituencies.

By now, “activist” central banking doctrine – with pegged rates, aggressive market intervention/manipulation and blatant monetization - should already have been discredited. Instead, policy mistakes lead to only bigger policy mistakes, just as was anticipated generations ago in the central banking “Rules vs. Discretion” debate. Today, a small group of global central bank chiefs can meet in private and wield unprecedented power over global markets, economies and wealth distribution more generally. They are said to somehow be held accountable by politicians that have proven even less respectful of sound money and Credit. In the U.S., Europe, the UK, Japan and elsewhere, central bankers have become intricately linked to fiscal management. As such, disciplined and independent central banking, a cornerstone to any hope for sound money and Credit, has been relegated to the dustbin of history.

Considering the global monetary policy backdrop, it’s not difficult to side with the view of an unfolding inflation issue. At the same time, the “liquidationist” perspective - that to attempt sustaining highly inflated market price and economic structures risks financial and economic catastrophe - has always resonated. The markets’ response to Wednesday’s dramatic Fed announcement was notably underwhelming. This could be because it was already discounted. Perhaps “fiscal cliff” worries are restraining animal spirits. Then again, perhaps the more sophisticated market operators have been waiting for this opportunity to reduce their exposures. After all, the Fed moving to $85bn monthly QE five years into an aggressive fiscal and monetary reflationary cycle is pretty much an admission of defeat.

I’ve argued that, primarily due to unrelenting fiscal and monetary stimulus, the U.S. economy has been avoiding a necessary deleveraging process. Some highly intelligent and sophisticated market operators have argued the opposite. They point to growth in incomes and GDP, while total (non-financial and financial) system Credit has contracted marginally. I can point specifically to Total Non-Financial Debt that closed out 2008 at $34.441 TN and ended September 30, 2012 at a record $39.284 TN. But the deleveraging debate will not be resolved with data.

The old “liquidationists” (and “Austrians”) would have strong views about contemporary “deleveraging”. They would shout “inflated price levels,” “non-productive debt,” “unsupportable debt loads,” “excess consumption,” “distorted spending patterns and associated malinvestment,” “deep economic structural imbalances” and “intractable Current Account Deficits!” They would argue that to truly “deleverage” one’s economy would require a tough weaning from system Credit profligacy.

Only by consuming less and producing more can our economy reduce its debt dependency and get back on a course toward financial and economic stability. The “Bubble poppers” would profess that in order to commence a sustainable cycle of sound Credit and productive investment first requires a cleansing (“liquidation”) of unproductive ventures and unserviceable debts. It’s painful and, regrettably, shortcuts only short-circuit the process. I’m convinced that they would hold today’s so-called “deleveraging” – replete with massive deficits, central bank monetization and ongoing huge U.S. trade deficits - in complete and utter disdain.

In a CNBC interview Wednesday evening, the Wall Street Journal’s Jon Hilsenrath called Dr. Bernanke a “gunslinger.” Our Fed chairman is highly intelligent, thoughtful, polite, soft-spoken, seemingly earnest and a huge, huge gambler. And he’s not about to fold a bad hand. Almost four years ago, I wrote that Fed reflationary measures were essentially “betting the ranch.” This week they again doubled down.

With his perspective and theories, Dr. Bernanke has pushed the envelope his entire academic career. He is now surrounded by a group of likeminded “Keynesian” academics, and they together perpetuate groupthink in epic proportions. These issues will be debated for decades to come – and who knows how that will all play out. But as a contemporary analyst and keen observer, there’s no doubt these unchecked “academics” are operating with dangerously flawed theories and doctrine. It’s not the way central banking was supposed to work. Ditto Capitalism and democracies. Whatever happened to sound money and Credit?

For the Week:

The S&P500 slipped 0.3% (up 12.4% y-t-d), and the Dow declined 0.2% (up 7.5%). The Morgan Stanley Cyclicals gained 1.4% (up 16.7%), and the Transports rose 1.2% (up 3.3%). The Morgan Stanley Consumer index declined 0.4% (up 10.6%), and the Utilities fell 0.8% (down 4.9%). The Banks were little changed (up 25.1%), while the Broker/Dealers were 0.5% higher (up 5.9%). The S&P 400 Mid-Caps slipped 0.1% (up 13.9%), while the small cap Russell 2000 added 0.2% (up 11.2%). The Nasdaq100 was down 0.5% (up 15.4%), while the Morgan Stanley High Tech index gained 0.5% (up 14.9%). The Semiconductors increased 0.4% (up 4.6%). The InteractiveWeek Internet index gained 1.1% (up 15.4%). The Biotechs rose 0.5% (up 40.6%). While bullion declined $8, the HUI gold index recovered 0.8% (down 12.3%).

One-month Treasury bill rates ended the week at one basis point and three-month bills closed at 3 bps. Two-year government yields were little changed at 0.24%. Five-year T-note yields ended the week 7 bps higher to 0.69%. Ten-year yields were up 8 bps to 1.70%. Long bond yields rose 5 bps to 2.87%. Benchmark Fannie MBS yields increased 3 bps to 2.22%. The spread between benchmark MBS and 10-year Treasury yields narrowed 5 to 52 bps. The implied yield on December 2013 eurodollar futures were little changed at 0.355%. The two-year dollar swap spread was unchanged at 12 bps, and the 10-year swap spread was little changed at 5 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 2 to 95 bps. An index of junk bond risk fell 16 bps to 481 bps.

Debt issuance was decent. Investment grade issuers this week included HSBC USA $1.5bn, Simon Properties $1.25bn, Intel $925 million, Mylan $750 million, Brown-Forman $750 million, Equifax $500 million, North American Development Bank $480 million, Ecolab $500 million, Michael Foods $275 million, and Santa Rosa Leasing $120 million.

Junk bond funds saw inflows of $259 million (from Lipper). Junk issuers included CC Holdings $1.5bn, Cequel $1.5bn, Access Midstream $1.4bn, Williams Companies $850 million, Six Flags Entertainment $800 million, Harbinger Group $700 million, Sawgrass $655 million, Inventive Health $600 million, AMC Networks $600 million, Brookfield Residential $600 million, Fage Dairy $400 million, Tempur-Pedic $375 million, Igloo Holdings $350 million, Newmarket $350 million, Sequa Corp $350 million, Taminco $250 million, and Highwoods Realty $250 million.

Convertible debt issuers included Cobalt International Energy $1.2bn.

International dollar bond issuers included Westpac Banking $2.0bn, Teva Pharmaceutical $2.0bn, Bank of Nova Scotia $1.0bn, QTEL International $1.0bn, Zoomlion $600 million, Eldorado Gold $600 million, Inmet Mining $500 million, Rain Carbon $400 million, Dematic $265 million, Cleaver-Brooks $300 million and Magnum Hunter Resources $100 million.

Spain's 10-year yields declined 7 bps this week to 5.36% (up 32bps y-t-d). Italian 10-yr yields rose 7 bps to 4.59% (down 244bps). German bund yields rose 5 bps to 1.35% (down 48bps), and French yields increased 2 bps to 1.97% (down 117bps). The French to German 10-year bond spread was 3 narrower at 62 bps. Ten-year Portuguese yields sank 45 bps to 6.90% (down 588bps). The new Greek 10-year note yield fell 115bps to 12.70%. U.K. 10-year gilt yields jumped 12 bps to 1.86% (down 12bps). Irish yields increased 7 bps to 4.54% (down 372bps).

The German DAX equities index rose another 1.1% for the week (up 28.8% y-t-d). Spain's IBEX 35 equities index rallied 2.2% (down 6.3%). Italy's FTSE MIB recovered 1.3% (up 5.4%). Japanese 10-year "JGB" yields rose 3 bps to 0.725% (down 26bps). Japan's Nikkei gained 2.2% (up 15.2%). Emerging markets were mostly higher. Brazil's Bovespa equities index rose 1.9% (up 5.0%), and Mexico's Bolsa added 0.6% (up 16.1%). South Korea's Kospi index jumped 1.9% (up 9.3%). India’s Sensex equities index slipped 0.6% (up 25%). China’s Shanghai Exchange surged 4.3% (down 2.2%).

Freddie Mac 30-year fixed mortgage rates declined 2 bps to 3.32% (down 62bps y-o-y). Fifteen-year fixed rates slipped a basis point to 2.66% (down 55bps). One-year ARM rates were down 2 bps to 2.53% (down 28bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 4 bps to 3.95% (down 75bps).

Federal Reserve Credit jumped $15.0bn to a 33-week high $2.858 TN, although Fed Credit has contracted $8.7bn over the past year.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $564bn y-o-y, or 5.5%, to a record $10.848 TN. Over two years, reserves were $1.831 TN higher, for 20% growth.

M2 (narrow) "money" supply jumped $36.2bn to $10.300 TN. "Narrow money" has expanded 7.3% annualized year-to-date and was up 7.3% from a year ago. For the week, Currency increased $1.2bn. Demand and Checkable Deposits surged $100.4bn, while Savings Deposits dropped $65.8bn. Small Denominated Deposits slipped $2.6bn. Retail Money Funds rose $2.8bn.

Money market fund assets increased $1.5bn to $2.645 TN. Money Fund assets have declined $50bn y-t-d, with a one-year decline of $33bn, or 1.2%.

Total Commercial Paper outstanding jumped another $13.8bn to $1.049 TN CP was up $90bn y-t-d and $58bn over the past year, or 5.8%.

Currency Watch:

The U.S. dollar index declined 1.0% to 79.58 (down 0.7% y-t-d). For the week on the upside, the euro increased 1.8%, the Swiss franc 1.8%, the Danish krone 1.8%, the New Zealand dollar 1.7%, the Norwegian krone 1.0%, the Mexican peso 0.9%, the British pound 0.8%, the Australian dollar 0.7%, the South Korean won 0.6%, the Canadian dollar 0.3%, the Singapore dollar 0.1% and the Swedish krona 0.1%. For the week on the downside, the Japanese yen declined 1.2% and the Brazilian real 0.5%.

Commodities Watch:

December 11 – Bloomberg (Jeff Wilson): “Three consecutive years of smaller U.S. corn harvests are driving inventories of the world’s most- consumed grain to a 39-year low and spurring Goldman Sachs Group Inc. to predict that prices will rise near record highs. Global stockpiles will drop 11% to 117.61 million metric tons by Oct. 1, or 13.6% of what will be used for food, ethanol and livestock feed, the lowest ratio since 1974… Prices surged 43% since mid-June as U.S. farmers endured their worst drought in 56 years, and heat waves and dry weather seared crops from Australia to Europe.”

The CRB index was little changed this week (down 3.4% y-t-d). The Goldman Sachs Commodities Index rallied 0.7% (down 1.2%). Spot Gold declined 0.5% to $1,696 (up 8.5%). Silver fell 2.5% to $32.30 (up 16%). January Crude gained 80 cents to $86.73 (down 12%). January Gasoline jumped 2.5% (unchanged), while January Natural Gas dropped 7% (up 11%). March Copper increased 0.5% (up 7%). December Wheat sank 5.1% (up 23%), and December Corn dropped 1.9% (up 11%).

Fiscal Cliff Watch:

December 14 – Bloomberg (James Rowley): “Senate Republicans are discussing a legislative strategy to break the U.S. budget stalemate that would let Congress extend tax cuts for all except the highest income levels, said two Republican aides who spoke on condition of anonymity. Under this scenario, the Republican-controlled House would vote on two separate bills, the aides said. One would extend tax cuts for all income levels. That would have wide Republican support though President Barack Obama has said he won’t accept it.”

Global Bubble Watch:

December 12 – Wall Street Journal (Jon Hilsenrath): “The Massachusetts Institute of Technology in the 1970s and 1980s was the center of a generational shift in economic thinking that ascribed substantial influence to central banks for managing economic turbulence. MIT, in Cambridge, Mass., became home to many ‘New Keynesians,’ economists immersed in the real-world complexities of markets and sympathetic to government intervention. They helped modernize the work of Depression-era economist John Maynard Keynes, whose views had come under attack for advocating a strong government hand. Their activist and pragmatic approach became ‘dominant among the central bankers today,’ said Stanley Fischer, head of the Bank of Israel, and a former MIT professor. With words and deeds, the MIT economists say, central banks can jolt households and businesses out of deflationary downturns and stimulate short-run economic growth.”

December 14 - Bloomberg (Jeff Kearns): “Federal Reserve Bank of Dallas President Richard Fisher said the central bank may never be able to exit its unprecedented bond-buying program and that the efficacy of the stimulus measure is ‘declining over time.’ ‘Since we’re going to have an engorged balance sheet we may never be able to leave this position,’ the reserve bank chief said… ‘We were at risk of what I call a ‘Hotel California’ monetary policy, going back to the Eagles song which is, you can check out any time you want but you can never leave… Their efficacy is declining over time… With each new announcement there’s less of a reaction… ‘I thought we had done enough already,’ Fisher said. ‘Businesses are awash in liquidity.’”

December 10 – Standard & Poor's: “Global corporate new bond issuance had another strong month in November… ‘Strong Investor Demand Pushes Global Corporate New Bond Issuance To $2.8 Trillion Through November 2012.’ Buoyed by robust investment-grade issuance, $301 billion in new corporate bonds came to market in November, compared with $259 billion in October and $339 billion in September,’ said Diane Vazza, head of… Global Fixed Income Research. ‘Global investment-grade new bond issuance (those rated 'BBB-' and higher) totaled $207 billion in November (68.6% of the total bonds issued globally)--the highest monthly total since 2009. Speculative-grade new bond issuance declined to $36 billion in November (12.1% of the total bonds issued globally) from $50 billion in October and $56 billion in September. The remaining $58 billion (19.3%) comprised new bonds that Standard & Poor's Ratings Services did not rate. The 2012 total global corporate new bond issuance through November exceeded $2.8 trillion. ‘By year-end 2012, the full-year total will likely be the second highest on record, since the start of our data series in 1970, following the $3.3 trillion issued in 2009 when strong government incentives spurred corporate new issuance,’ said Ms. Vazza.”

December 10 – Dow Jones (Patrick McGee): “A bond deal by the maker of Jack Daniel’s whiskey will push high-grade corporate-debt issuance to an annual record Monday: $1.024 trillion, outpacing the $1.024 trillion from 2009…”

December 12 – Bloomberg (Kristen Haunss): “The biggest year for debt backed by leveraged loans since the peak in 2007 will be eclipsed in 2013 as firms from Bank of America Corp. to JPMorgan Chase & Co. predict rising demand from investors seeking alternatives to record-low corporate bond yields. Sales of collateralized loan obligations total $49.2 billion this year, a more than fourfold increase from 2011… Bank of America expects $75 billion of CLOs created next year, while JPMorgan predicts as much as $70 billion and Morgan Stanley forecasts $60 billion. The market for CLOs, which has helped finance some of the biggest leveraged buyouts in history, is expanding at a faster rate than U.S. corporate bonds, where issuance has grown around 24% this year.”

December 11 – Bloomberg (Lisa Abramowicz and Mary Childs): “Corporate-bond trading is failing to keep up with unprecedented issuance, accounting for the lowest proportion of outstanding debt since at least 2005. Average volumes of bonds changing hands each day this year represent 0.29% of the market’s face value… That’s down from 0.32% in 2011 and 0.5 in 2005. The drop in trading underscores the complacency among investors who funneled cash into bonds at what Bank of America Corp. strategists in August said were reaching ‘bubble levels.’”

December 11 – Bloomberg (Elizabeth Campbell): “The value of agricultural land in Iowa rose 24% to an average of $8,296/acre in the year ended Nov. 1, according to an Iowa State University survey… The previous all-time high was $6,708/acre in 2011”

December 14 - Bloomberg (Dan Levy): “The cost of occupying office space in San Francisco soared the most of any market in the world as technology companies such as and Mozilla Corp. fueled leasing in the city, according to broker CBRE Group Inc. Occupancy costs -- rents plus local taxes and service charges -- surged 36.4% in downtown San Francisco to $90 a square foot in the year to Sept. 30… That was the biggest jump among 133 areas globally.”

December 14 - Bloomberg (Kevin Dugan): “More than $241 million of structured notes tied to Apple Inc. face losses after a 27% drop in the stock of the world’s most valuable company eroded built-in cushions that protect investors. Banks issued 76 U.S. notes linked to Apple stock during the seven weeks starting Aug. 20 when the company was valued at $650 a share or more… Banks issued $1.66 billion of notes in the U.S. tied to… Apple this year, almost three times as many as the year-earlier period…”

December 12 – Bloomberg (Simon Kennedy and Emma Charlton): “European investors may finally be hardened to the debt crisis after three years of turmoil. Even Silvio Berlusconi’s bid to become prime minister again barely registered a blip. Italian government bonds climbed yesterday, rebounding from the previous day’s slump… If Italy’s political skirmish happened six months earlier, we’d have expected contagion,’ said John Bilton, a European investment strategist at Bank of America Merrill Lynch. ‘Markets are prepared to look through events like this.’ Investors are still betting on European Central Bank President Mario Draghi to keep the peace after his September pledge to buy the bonds of governments willing to sign up to reform. While none has so far, traders see the Draghi pledge as a reason to limit the sale of stocks and bonds when new euro- area flashpoints erupt.”

Global Credit Watch:

December 14 - Bloomberg (Michael James G. Neuger): “European Union leaders capped a third year of debt-crisis management with Greece obtaining fresh financial aid, a euro bank regulator taking shape, and Germany and France sparring over what to do next. German Chancellor Angela Merkel and French President Francois Hollande, stewards of the euro area’s top two economies, promoted conflicting visions of how to revamp economic management once the fiscal crisis subsides. ‘A split opened between member states that want to put in place a solidarity mechanism for countries affected by external shocks or internal negative developments and those that support national solutions,’ Luxembourg Prime Minister Jean-Claude Juncker said… ‘We gradually moved closer together but in the details this was difficult.’”

December 13 - Bloomberg (Chiara Vasarri): “Italy’s debt load, the second biggest in the euro area, rose in October to a record 2.015 trillion euros ($2.6 TN) from 1.995 trillion euros last month, the Bank of Italy reported… The debt is set to reach 126.5% of gross domestic product this year, second only to Greece, and peak at 127.6% next year…, the European Commission forecast… To service that debt and cover the deficit, the Treasury needs to sell at least 400 billion euros in bonds and bills next year, averaging more than 1 billion euros a day.”

Italy Watch:

December 10 – Bloomberg (Lorenzo Totaro): “Italy’s economy shrank for a fifth quarter in the three months through September as slumping household spending pushed the country’s recession into its second year. Gross domestic product contracted 0.2% from the previous three months… From a year earlier, economic activity contracted 2.4%... In the three months through September, household spending decreased 1.0% from the previous quarter and 4.8 percent from a year earlier.”

December 10 – Bloomberg (Chiara Vasarri): “Italian industrial output declined more than forecast in October, as the country’s fourth recession since 2001 extended into a second year. Output fell 1.1% from September, when it dropped a revised 1.3%... Consumer confidence declined in November to the lowest since records began in 1996 amid rising pessimism among households on the outlook for growth and jobs.”

Spain Watch:

December 12 – Bloomberg (Emma Ross-Thomas): “Spanish regional governments have accumulated EU13b of unpaid supplier bills in first nine months of year, El Economista reports, citing Budget Ministry data.”

European Economy Watch:

December 14 - Bloomberg (Mathieu Rosemain): “European Union car sales fell to a 19-year low, with French companies PSA Peugeot Citroen and Renault SA and Italian competitor Fiat SpA posting the biggest drops, as a recession in countries using the euro hurt demand. Eleven-month registrations in the 27-nation EU fell 7.6% to 11.3 million vehicles… The decline was propelled by a 10% plunge in November.”

December 10 – Bloomberg (Mark Deen): “French business confidence and industrial production unexpectedly declined as President Francois Hollande grapples with a budget deficit and an economy that is on the verge of recession… Industrial output dropped 0.7% in October, leaving it down 3.6% from a year earlier… The declines show the economy is on the edge of its second recession in three years as Hollande struggles to cut the deficit and improve competitiveness. With French car registrations down about a fifth in November, companies… are cutting thousands of jobs at a time when jobless claims are at a 14-year high and climbing. ‘Clearly things are not great and the car industry in particular is a disaster,’ said Dominique Barbet, an economist at BNP Paribas SA in Paris…”

China Bubble Watch:

December 11 – Bloomberg: “China’s new yuan loans trailed forecasts last month, restraining the pace of recovery in the world’s second-biggest economy after a seven-quarter slowdown. Banks extended 522.9 billion yuan ($84bn) of local-currency loans… That compares with a 550 billion yuan median estimate in a Bloomberg News survey… and 562.2 billion yuan the same month last year… Aggregate financing, an indicator designed to capture other funding sources apart from the bank loans such as trust loans and bond and stock issuance, was 1.14 trillion yuan in November… That’s the lowest since August and compares with 1.29 trillion yuan in October and 958.1 billion yuan in November 2011. Trust loans, one component of aggregate financing, more than doubled from a year earlier to 199.5 billion yuan last month. Net bond issuance fell to 181.7 billion yuan and non-financial company stock sales declined to 10.7 billion yuan.”

December 12 – Bloomberg (Eleni Himaras): “Hong Kong is at risk of an abrupt decline in house prices after they doubled to a record in the past four years, climbing 20% in 2012 even as the economy cooled, the International Monetary Fund said. ‘The property sector is the main source of domestic economic risk,’ the IMF said… Hong Kong’s apartment prices have surged to become the world’s most expensive after low interest rates and limited supply fueled demand…”

Japan Watch:

December 14 - Bloomberg (Andy Sharp): “Big Japanese manufacturers are the most pessimistic in almost three years after a diplomatic dispute with China and Europe’s austerity measures dragged exports to a fifth monthly decline in October. The quarterly Tankan index for large manufacturers fell to minus 12 in December from minus 3 in September…”

U.S. Bubble Economy Watch:

December 11 – Bloomberg (Lorraine Woellert): “The trade deficit in the U.S. widened in October as the biggest slump in exports in almost four years outweighed a drop in imports, evidence of the slowdown in global growth. The trade gap grew 4.9% to $42.2 billion from a revised $40.3 billion in September… Exports declined 3.6%, the most since January 2009.”

Central Bank Watch:

December 14 – Bloomberg (Aki Ito): “Federal Reserve Bank of Richmond President Jeffrey Lacker said he opposed linking monetary policy to the unemployment rate because no single indicator can provide a ‘complete picture’ of the labor market. ‘I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC’s price stability and maximum employment mandates,’ Lacker said… Lacker was the only policy maker to dissent against the FOMC’s Dec. 12 decision to keep the main interest rate near zero as long as the jobless rate remains above 6.5% and the outlook for inflation stays at no more than 2.5% one or two years in the future. The central bank also said this week it will keep buying $40 billion in mortgage bonds each month, and will purchase $45 billion in longer-term Treasuries every month after its Operation Twist Program expires at the end of December. Lacker said he opposed both moves. ‘With economic activity growing at a modest pace and inflation fluctuating close to 2% -- the Committee’s inflation goal -- further monetary stimulus runs the risk of raising inflation and destabilizing inflation expectations,’ Lacker said. The Fed takes on an ‘inappropriate role’ by purchasing mortgage-backed securities and ‘tilting the flow of credit to one particular economic sector…’”

Muni Watch:

December 13 - Bloomberg (Brian Chappatta): “Illinois had the outlook on about $28 billion of general-obligation bonds revised to negative from stable by Moody’s… Moody’s, which already rates Illinois the lowest among U.S. states, cited its underfunded pension systems and said the shortfall is ‘likely to persist and perhaps worsen.’”

December 13 - Bloomberg (Elise Young): “New Jersey’s pension contribution may consume almost one-fifth of its annual budget by 2018 under a law enacted by Republican Governor Chris Christie, according to a group led by… Paul Volcker and Richard Ravitch… The contribution must rise by about $4.5 billion over the next five years, from $1.03 billion in 2013, to comply with the 2010 law…”

California Watch:

December 14 - Bloomberg (Michael B. Marois and Rodney Yap): “When psychiatrist Gertrudis Agcaoili retired last year from a state mental hospital in Napa, California, she took with her a $608,821 check for unused leave banked in a career that spanned three decades. She wasn’t alone. More than 111,000 people who left jobs as employees of the 12 most populous U.S. states collected $711 million last year for unused vacation and other paid time off, according to payroll data on 1.4 million public workers compiled by Bloomberg. California employees accounted for 39% of that total.”

December 12 – Bloomberg (Freeman Klopott, Rodney Yap and Terrence Dopp): “Mohammad Safi, a graduate of a medical school in Afghanistan, began working as a psychiatrist at a California mental hospital in 2006, making $90,682 in his first six months. Last year, he took home $822,302, all of it paid by taxpayers. Safi benefited from what amounted to a bidding war after a federal court forced the state to improve inmate care. The prisons raised pay to lure psychiatrists, the mental health department followed suit to keep employees, and costs soared. Last year, 16 California psychiatrists, including Safi, made more than $400,000, while only one did in the other 11 most-populous states, according to data compiled by Bloomberg.”