Saturday, December 6, 2014

Weekly Commentary, December 21, 2012: Recalling John Law

“There are good reasons to think that the nature of money is not yet rightly understood.” John Law, 1720 (with the collapse of the Mississippi Bubble)

“Irredeemable paper money has almost invariably proved a curse to the country employing it.” Irving Fisher, 1911

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” John Maynard Keynes, 1920

“Since the time when President Richard Nixon broke the final tenuous link between the dollar and gold in 1971, no major currency, for the first time in history, has any connection to a commodity. Every currency is now a fiat currency…” Milton Friedman, 1991

“We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money.” Alan Greenspan, 2000

I included the above quotes back in a March 2000 CBB titled, “John Law and Alan Greenspan – The Great Inflationists.” I could not have imagined at the time that his successor would make Mr. Greenspan appear a most responsible central banker. The monetary theorist John Law introduced paper money to France in the early eighteenth century. As an historic monetary expansion and speculative Bubble ensued, Mr. Law was revered. But when he lost control of his experiment – when his Mississippi Bubble scheme and the French economy later collapsed – Law was run out of the country. The effects of this monetary fiasco lingered for decades. I have argued for years now that the U.S. and world are trapped in another historic monetary experiment run amuck. I believe this framework helps to explain a lot.

“Fiscal cliff” negotiations are in disarray and time is running short. Washington remains conspicuously dysfunctional – almost beyond belief. For much of the past several years, the political process throughout Europe has been dysfunctional. In Japan and elsewhere, there has been similar dysfunction. So why have global policymakers all seemingly been infected with incompetence? While it goes undiagnosed, I strongly argue that the world is suffering from the inevitable ill-effects associated with years of unsound “money.”

Thursday, an exasperated Maria Bartiromo pleaded with policymakers to get a deal done so investors could do what they clearly wanted to do, buy stocks. Interviewing a Congressman, Bartiromo pounced: “Are you guys just incompetent or what? If you can’t do what the American people pay you to do why don’t you step aside and put someone in there that can get a deal done?”

Our nation is deeply divided. It is, indeed, more divided than yesterday but less divided than tomorrow. There is no bill or series of legislation that will resolve our nation’s very serious fiscal problems. Of course, our speculative financial markets just want a deal – and, apparently, any deal will do. The markets are about to complete another strong year – so what’s the problem?

The reality is that years of unsound “money” and Credit have done their dirty work. The Great Credit Bubble has created a badly maladjusted economic structure. Our economy’s capacity to create real wealth has been badly diminished, while our debt load just spirals out of control. As a society, we’ve over-promised and do not have the capacity to deliver. Yet we still believe issuing additional financial claims improves the situation. Not unpredictably, we’ve reached the late and precarious stage of an inflationary cycle where more monetary inflation just demands more monetary inflation.

Yes, incredible fortunes were made. Meanwhile, much of our population saw the great boom reduce their standards of living and future prospects. It has left an unsettled society sharply divided, with no clear understanding of the root of the problem - let alone a path to a solution. With such a backdrop, it is virtually impossible to come to a consensus as to the best course of action – let alone passing requisite legislation. The “fiscal cliff” issue is somewhat bringing things to a head.

There are two philosophically irreconcilable views of how to deal with our nation’s problems. It doesn’t hurt to try to appreciate – perhaps even empathize with – the positions on both sides of this highly-charged debate. Both believe passionately in the soundness of their views, from an analytical, ideological and moral standpoint. We can amicably resolve the U.S. fiscal issue and then move on to religion and world peace.

On one side, you have those arguing that the system has for too long inequitably distributed economic rewards. The government must play an activist role to ensure that every American gets a fair shake. The wealthy, having so benefited from the boom period, must now contribute more to help support the unfortunate. Large deficits are not only justified, they are critical to jump-starting economic recovery. The market system has serious weaknesses that a large and assertive government sector must work to address.

On the other end is the philosophical view that big government is the problem. While the boom was unsound, this was largely because of the flawed policies of the Federal Reserve. They believe massive deficit spending is in the process of bankrupting this great country. After doubling the federal debt in four years of unprecedented fiscal stimulus, they are convinced that there is simply no alternative than to reduce spending. Future fiscal obligations are unmanageable. Tax increases hurt private-sector investment, while feeding the insatiable appetite of the government monster. Government expansion must be checked, to ensure free enterprise is allowed to grow the real economy. Federal Reserve money printing is devaluing our currency, weakening our nation’s moral fiber, and essentially financing the federal government’s takeover of the economy.

From my Credit Theory perspective, this was all too predictable. Unsound “money” and Credit invariably fuel Bubbles replete with economic malinvestment, inequitable wealth redistribution and economic wealth destruction. The other side of a major Credit boom is a festering political and societal nightmare. I’m sickened by the inequities and improprieties of the Bubble period. It is not unreasonable to expect those that most benefited from the boom to step up. I’m sympathetic to the view that the government does have a limited counter-cyclical role to play. The problem is we’re now year five into the greatest monetary and fiscal stimulus in history. Washington must stand down. There are very difficult decisions that must be made in order to stabilize our fiscal crisis before it’s too late. And there is today no short cut to the pain associated with financial and economic restructuring. The inflation palliative has become poisonous.

My thesis has been that Washington would cling tightly to fiscal profligacy until the day markets had finally had enough. But in a regrettable replay of mortgage finance Bubble dynamics, dysfunctional markets are more than content to finance perilous borrowing excesses. For me, it gets back to the root of the problem - unsound “money” and Credit and derelict monetary management. Surely, Washington and the markets will not take this dire predicament seriously so long as the Fed is determined to aggressively expand its debt monetization operations. And the more conspicuous the consequences from years of unsound finance, the more determined the Fed is to print more “money.”

It’s difficult not to be pessimistic on how this will all play out. I assume they’ll figure out some stopgap measure to dodge around the “cliff.” I have faith in our democracy, although I worry about post-boom misunderstandings, animosities and deep divides. At the same time, I have lost all confidence in our central bank. Their flawed doctrine is my biggest worry, as they operate unchecked and outside the democratic process. Our nation – and the world – is in this state of instability, uncertainty and confusion because contemporary money and Credit is so unsound and poorly managed. Admittedly, this sounds archaic. The root of the problem is not well understood. And, regrettably, the Bernanke Federal Reserve is in the process of only making the problem worse. Markets cheer.

For the Week:

The S&P500 rose 1.2% (up 13.7% y-t-d), and the Dow added 0.4% (up 8.0%). The broader market outperformed. The S&P 400 Mid-Caps rose 2.1% (up 16.3%), trading to a new record high on Thursday. The small cap Russell 2000 jumped 2.9% (up 14.4%). The Morgan Stanley Cyclicals jumped 1.8% (up 18.8%), and the Transports surged 3.0% (up 6.4%). The Morgan Stanley Consumer index added 0.2% (up 10.8%), and the Utilities gained 1.3% (down 3.7%). The Banks surged 4.1% (up 30.2%), and the Broker/Dealers jumped 5.6% (up 11.8%). The Nasdaq100 was up 1.4% (up 17.0%), and the Morgan Stanley High Tech index gained 2.0% (up 17.2%). The Semiconductors increased 1.2% (up 5.8%). The InteractiveWeek Internet index gained 1.0% (up 16.6%). The Biotechs advanced 1.2% (up 42.2%). With bullion sinking $39, the HUI gold index dropped 2.3% (down 14.3%).

One-month Treasury bill rates ended the week at one basis point and three-month bills closed at 6 bps. Two-year government yields were up 3 bps to 0.27%. Five-year T-note yields ended the week 7 bps higher at 0.76%. Ten-year yields increased 6 bps to 1.76%. Long bond yields rose 7 bps to 2.93%. Benchmark Fannie MBS yields gained 2 bps to 2.24%. The spread between benchmark MBS and 10-year Treasury yields narrowed 4 to 48 bps. The implied yield on December 2013 eurodollar futures rose 4 bps to 0.39%. The two-year dollar swap spread was one higher at 13 bps, and the 10-year swap spread was little changed at 6 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 2 to 93 bps. An index of junk bond risk dropped 8 bps to 473 bps.

Debt issuance slowed except for junk. Investment grade issuers this week included Precision Castparts $3.0bn, Wells Fargo $1.25bn, Tennessee Valley Authority $1.0bn, and Florida Power & Light $400 million.

Junk bond funds saw outflows of $345 million (from Lipper). Junk issuers included Dish $1.5bn, Tenet Healthcare $1.04bn, US Foodservice $975 million, Interactive Corp $500 million, Oil States International $400 million, EP Energy $350 million, Gulfport Energy $300 million, Global Gen $300 million, Avaya $290 million, Landry's $250 million, Prospect Capital $200 million and Dispensing Dynamics $130 million.

I saw no convertible debt issued.

International dollar bond issuers included Princess Juliana International $140 million.

Spain's 10-year yields dropped 15 bps this week to 5.20% (up 16bps y-t-d). Italian 10-yr yields fell 13 bps to 4.46% (down 257bps). German bund yields rose 3 bps to 1.37% (down 45bps), while French yields were unchanged at 1.97% (down 117bps). The French to German 10-year bond spread narrowed 3 bps to 60 bps. Ten-year Portuguese yields fell 12 bps to 6.77% (down 600bps). The new Greek 10-year note yield sank 131 bps to 11.40%. U.K. 10-year gilt yields added 2 bps to 1.88% (down 10bps). Irish yields dropped 16 bps to 4.38% (down 388bps).

The German DAX equities index added 0.5% for the week (up 29.5% y-t-d). Spain's IBEX 35 equities index gained 3.3% (down 3.2%). Italy's FTSE MIB jumped 2.7% (up 8.3%). Japanese 10-year "JGB" yields increased 3 bps to 0.76% (down 23bps). Japan's Nikkei advanced 2.1% (up 17.6%). Emerging markets were mostly higher. Brazil's Bovespa equities index rose 2.4% (up 7.5%), and Mexico's Bolsa increased 1.3% (up 17.7%). South Korea's Kospi index jumped 3.8% (up 8.5%). India’s Sensex equities index slipped 0.4% (up 24.5%). China’s Shanghai Exchange was little changed (down 2.1%).

Freddie Mac 30-year fixed mortgage rates jumped 5 bps to 3.37% (down 54bps y-o-y). Fifteen-year fixed rates slipped a basis point to 2.65% (down 56bps). One-year ARM rates dipped one basis point to 2.52% (down 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 3 bps to 3.98% (down 71bps).

Federal Reserve Credit surged $41.26bn to $2.900 TN (high since February). Over the past year, Fed Credit has expanded $14.8bn.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $567bn y-o-y, or 5.5%, to $10.846 TN. Over two years, reserves were $1.823 TN higher, for 20% growth.

M2 (narrow) "money" supply jumped $54.8bn to a record $10.356 TN. "Narrow money" has expanded 7.8% annualized year-to-date and was up 7.6% from a year ago. For the week, Currency increased $4.0bn. Demand and Checkable Deposits rose $4.3bn, and Savings Deposits surged $50.0bn. Small Denominated Deposits declined $2.2bn. Retail Money Funds fell $1.3bn.

Money market fund assets declined $8.8bn to $2.637 TN. Money Fund assets have declined $58bn y-t-d, with a one-year decline of $56bn, or 2.1%.

Total Commercial Paper outstanding rose $9.0bn to $1.058 TN CP was up $99bn y-t-d, or 10.5% annualized.

Currency Watch:

The U.S. dollar index was little changed at 79.62 (down 0.7% y-t-d). For the week on the upside, the Swedish krona increased 1.9%, the Norwegian krone 0.8%, the Brazilian real 0.3%, the Swiss franc 0.3%, the euro 0.2%, and the Danish krone 0.2%. For the week on the downside, the New Zealand dollar declined 2.8%, the Australian dollar 1.6%, the Mexican peso 1.4%, the Japanese yen 0.9%, the Canadian dollar 0.8%, and the Singapore dollar 0.1%.

Commodities Watch:

The CRB index slipped 0.3% this week (down 3.7% y-t-d). The Goldman Sachs Commodities Index increased 0.3% (down 0.9%). Spot Gold fell 2.3% to $1,657 (up 6.0%). Silver sank 6.5% to $30.20 (up 8%). February Crude rallied $1.41 to $88.66 (down 10%). January Gasoline gained 2.7% (up 3%), and January Natural Gas jumped 4.1% (up 16%). March Copper dropped 3.1% (up 4%). March Wheat fell 2.7% (up 21%), and December Corn sank 3.9% (up 9%).

Fiscal Cliff Watch:

December 21 – Bloomberg (Margaret Talev and Kathleen Hunter): “President Barack Obama, facing a budget stalemate with Republicans on taxes and spending, urged leaders of both parties to put together an interim bill to keep taxes from rising on middle-income Americans as they work on a more comprehensive package. Obama said ‘all of us agree’ that rates shouldn’t go up for 98% of taxpayers when the new year starts. He also wants unemployment insurance extended for about 2 million Americans who will lose benefits in January, and a commitment to deal with spending cuts next year.”

Global Bubble Watch:

December 20 – Bloomberg (Daniel Kruger): “Demand at Treasuries auctions rose to record levels in 2012, bolstered by a global economy beset by shifting headwinds and Federal Reserve monetary stimulus that put downward pressure on yields. The Treasury attracted $3.15 in bids for each dollar of the $2.153 trillion of notes and bonds sold this year, surpassing last year’s bid-to-cover ratio of 3.04 and the 2010 mark of 2.99.”

December 17 - Bloomberg (Sarika Gangar): “Corporate bond sales from the U.S to Europe and Asia surpassed 2009’s record to reach $3.89 trillion this year as borrowing costs plunged to the lowest ever. Global issuance is up from $3.29 trillion last year and $3.23 trillion in 2010… With central banks holding down benchmark interest rates to prop up the global economy, investors funneled an unprecedented $455.7 billion into bond funds this year, according to EPFR… Companies from the riskiest to the most creditworthy took advantage of yields that fell to 3.33% this month to lock in lower borrowing costs… The extra yield that investors demand to own corporate bonds rather than government debt is at 223 basis points, narrowing from 351 at the end of last year, according to Bank of America Merrill Lynch’s Global Corporate & High Yield index… Global issuance nudged ahead of 2009’s all-time high, when sales were stoked by government guarantees intended to rebuild confidence… Yields have declined to 3.34%, from 4.83% on Dec. 31 and after touching an unprecedented 3.33% on Dec. 6… Corporate bonds handed investors 11.5% this year, the most since they returned 20.5% in 2009 and following a 4.86% gain in 2011… In the U.S., issuance also reached a record, climbing to $1.45 trillion from $1.13 trillion in 2011 and exceeding the previous all-time high of $1.24 trillion in 2009…”

December 19 – Fitch: “Declining yields for U.S. corporate bonds have created the potential for a 'bond bubble' under which a rising interest rate scenario could result in significant valuation losses for institutional fixed-income investors, according to a Fitch Ratings study. The persistence of abnormally low interest rates - and the inevitable reversion to higher levels - is an issue with many dimensions, affecting financial markets, credit conditions, and economic growth. Fitch's study focuses on identifying, sizing, and contextualizing the risks of rising rates to fixed-income investors.”

December 20 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan expanded its asset-purchase program for the third time in four months, and will reconsider its objectives for inflation as incoming Prime Minister Shinzo Abe urges more action to end price declines. The central bank increased the asset-purchase fund to 76 trillion yen ($906bn) from 66 trillion yen... Abe, whose party swept to victory in this week’s election, will have a chance to reshape the BOJ early next year when the terms of Governor Masaaki Shirakawa and his two deputies expire. He’s pressing for a 2% inflation target, compared with an existing 1% goal.”

December 20 – Financial Times (Stephen Foley): “Junk bond salesmen are working right up to the last trading days of their record year, as companies take advantage of ultra-low interest rates to lower their borrowing costs and take out insurance against a dive over the US fiscal cliff. Preliminary figures from Dealogic… show global issuance of both high-yield, or junk, bonds and investment grade corporate bonds set records in 2012… In fact, investor demand remained so high for high-yielding assets that junk bond prices reached a new record in some parts of the market this week. The yield on the Barclays US High-Yield Index, which moves inversely to prices, hit an all-time low of 6.07% on Tuesday… Global investment grade corporate bond issuance was a record $1.71tn in 2012, according to Dealogic’s provisional tally, beating the 2009 record and up 46% from 2011. Global high-yield issuance reached $419.2bn. The previous record was $351.2bn in 2010.”

December 20 – Bloomberg (Lisa Abramowicz): “Trading in exchange-traded funds that buy junk bonds is increasing at a faster pace than transactions in the underlying debt as buyers seek a faster way to take advantage of a market returning 15.5% this year. Volumes in the three-biggest junk ETFs increased to a daily average of $587.83 million this year, equal to 11.5% of daily trading in the bonds… That’s up 90% from 2011… Speculative-grade bond ETFs are attracting record amounts of cash this year as Federal Reserve efforts to stimulate the economy by holding interest rates at almost zero since 2008 push investors into riskier assets.”

Global Credit Watch:

December 20 – Bloomberg (Hannah Benjamin): “Europe’s corporate bond market risks becoming a victim of its own success in the year ahead as reduced issuance by cash-rich treasurers offers slim pickings for investors accustomed to the double-digit returns of 2012. Credit Agricole SA is predicting a 37% slump in corporate bond issuance, Morgan Stanley forecasts a 15 percent drop and Societe Generale SA expects a 6% decline after the busiest year since the start of Europe’s credit crisis. Investors will earn a third of the 12.5% they received for holding investment-grade debt this year, analysts at Societe Generale and Royal Bank of Scotland Group Plc estimate. Sales of corporate securities soared to $383 billion this year as companies took advantage of record-low yields to sell bonds to investors seeking a haven from euro-area’s fiscal turmoil.”

December 19 - Bloomberg (Angela Cullen and Jeff Black): “European Central Bank Executive Board member Joerg Asmussen said Europe’s permanent bailout fund could act as a resolution mechanism as well as providing capital to ailing banks, as long as certain conditions are met. A so-called Single Resolution Mechanism ‘would have the legal and financial capacity, as well as the independence, to ensure that viable banks survive and non-viable banks are closed down,’ Asmussen said late Tuesday… Such a body could ‘concentrate decisions on resolution and act pre-emptively and quickly, helping to preserve the value of banks and save money for taxpayers.’”

December 18 - Bloomberg (Sarika Gangar): “Potential interest-rate rises pose a greater threat to investment-grade corporate bonds than credit risk and may trigger larger losses than in 2002, Fitch Ratings said in a research note today. With $974 billion of U.S. investment-grade debt sold this year through November at historically low borrowing costs, investors are at risk of a ‘bond bubble’ and a plunge in prices, according to the ratings company. ‘A rising rate scenario could result in significant market-value losses on their corporate bond portfolios, particularly given the increasing share of fixed-rate issuance,’ Fitch analysts led by Robert Grossman wrote… ‘As rates fall farther, the risks and severity of a potential correction mount.’”

December 21 – Bloomberg: “Standard & Poor’s cut Cyprus’s long- term debt rating for the third time in five months, citing a rising risk of default as the government’s short-term financing is ‘increasingly vulnerable.’ …Cyprus, the fifth euro-area nation to seek a financial rescue, faces a more serious fiscal situation than Greece, Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers, said…”

Germany Watch:

December 21 – Dow Jones: “Bundesbank President Jens Weidmann repeated his criticism of the European Central Bank's new bond-buying program… and cautioned against what he said was the growing tendency of euro zone countries to share risks. ‘We've put ourselves on a slippery slope’ with the bond-buying plan, Mr. Weidmann, a member of the ECB's governing council, said… Mr. Weidmann said the conditions attached to the use of the OMT aren't entirely credible. ‘Market pressure intensifies when countries veer from reforms. Either one refuses to buy (bonds) and takes an escalation of the crisis in stride, or one abandons conditionality… We should interpret our mandate narrowly so we aren't put in a comprising position to begin with,’ he said.”

Italy Watch:

December 17 - Bloomberg (Andrew Davis): “Tax evasion in Italy reached a record 41 billion euros ($54bn) this year and the state has only recovered 900 million euros from its anti-evasion crackdown, newspaper Corriere della Sera said…”

Spain Watch:

December 18 – Bloomberg (Charles Penty and Sharon Smyth): “Bad loans as a proportion of total lending at Spanish banks climbed to a record 11.23% in October as the country’s economic slump led more companies and homeowners to miss credit payments. he proportion rose from 10.71% in September as 7.4 billion euros ($9.8 billion) of loans soured in the month to take the total of doubtful credit in the banking system to 189.6 billion euros… The mortgage default rate jumped to 3.49% in the third quarter from 3.16 percent in the second quarter... he default rate on loans to companies jumped to 16.56% in the third quarter from 14.9% in the second quarter… Defaults on loans for real estate-linked activities surged to 30.33% from 27.39%.”

December 20 – Bloomberg (Emma Ross-Thomas): “Catalan President Artur Mas pledged to create the institutions needed for an independent state next year as he prepares for a referendum on secession from Spain. Catalonia’s government will create a tax agency and a public bank while transforming the regional police corps into a full force as part of preparations for the referendum, which he has pledged to be ready to hold as early as 2014. It will also draw up plans for social security, energy and justice, Mas told the regional parliament…”

December 20 – Bloomberg (Emma Ross-Thomas): “Spanish Prime Minister Mariano Rajoy is considering using legal steps to oust Catalan President Artur Mas and suspend the region’s autonomy, as he tries to prevent a vote on independence, El Mundo reported. The central government could seek to disqualify Mas from governing for disobedience or misuse of office, and could use measures set out in the constitution to take over the region’s government…”

European Economy Watch:

December 20 – Bloomberg (Helene Fouquet): “The French Parliament today passed President Francois Hollande’s 2013 budget law, imposing a 75% tax on income of more than 1 million euros ($1.33 million) and forcing a 10 billion-euro cut in public spending. Hollande’s 2013 blueprint relies on 20 billion euros in tax increases and new income tax brackets for high earners. The moves are aimed at bringing the budget deficit to 3% of gross domestic product next year from a projected 4.5% this year. The budget predicts growth of 0.8%.”

December 19 - Bloomberg (Oliver Staley): “In the Greek mountain town of Kastoria, less than an hour from the Albanian border, Kostas Tsitskos, 88, can’t afford fuel to heat his home against the winter’s cold. So he and his son live in a single bedroom, warmed by a small electric heater. ‘One room is enough,’ said Tsitskos, who lives on a 734 euro-a-month ($971) pension and doesn’t have the 1,000 euros a month he needs to buy heating oil. Greece is facing a heating-oil crisis. With an economy that has contracted for five years and an unemployment rate at a record 25%, residents in northern Greece can’t heat their homes. Kastoria hasn’t received funds from the central government to warm schools and the mayor said he will close all 53 of them rather than let children freeze, a step already taken in a nearby town. Truckloads of wood are arriving from Bulgaria as families search for alternative fuels.”

December 17 - Bloomberg (Stefan Riecher): “Euro-area exports fell for a second month in October as the economy struggled to pull out of its second recession in four years. Exports from the 17-nation currency bloc declined a seasonally adjusted 1.4% from September, when they fell 1.3%... Exports from Germany fell 3.6% in October from the prior month… France and Italy reported export declines of 2.1% and 1.4%.. Shipments from Spain rose 3.8%.”

December 21 – Bloomberg (Johan Carlstrom and Niklas Magnusson): “Sweden’s government cut its economic outlook for this year and next as the crisis in the euro zone erodes demand for exports from the largest Nordic economy. Gross domestic product will grow 0.9% this year, less than a previous forecast for 1.6%... The economy will expand 1.1% in 2013, versus an earlier estimate for 2.7%...”

China Bubble Watch:

December 17 - Bloomberg: “China said it will seek a higher ‘quality and efficiency’ of growth next year, signaling new leaders may accept a reduced pace of expansion in exchange for a more sustainable model. There was no mention of seeking ‘relatively fast’ growth, a policy in place since 2006… Leaders vowed to target ‘sustained and healthy development’ as they maintain a ‘prudent’ monetary policy and “proactive” fiscal stance, Xinhua said.”

December 19 – Wall Street Journal: “China's banking regulator has ordered banks to conduct internal risk inspections on their sales of high-yield investment products, following the high-profile default of a wealth management product sold through a local bank. The Beijing branch of the China Banking Regulatory Commission issued a notice dated Dec. 4… asking for rapid internal inspections of third-party investment products, especially those sold by banks as agents. Similar notices were issued to banks around the country, a person with knowledge of the matter said. The notice indicates that authorities are increasingly alarmed by potential risks from novel financing vehicles, especially the rapidly growing category of what are known as wealth management products. Such products promise higher returns than bank deposits because they are exempt from Beijing's cap on deposit rates, but banks disclose little of where the money is invested. According to estimates by Fitch Ratings, the total amount of outstanding wealth management products was around 12 trillion yuan ($1.9 trillion) at the end of the third quarter, compared with 8.5 trillion yuan as of last year… The regulatory move comes after the failure of a 140 million yuan wealth management product offered through a Shanghai branch of Huaxia Bank Co., which promised investors returns of between 11% and 13% but failed to pay them when the product matured late last month.”

December 20 – MarketNews International: “China's banking regulator has called on lenders to tighten up controls on the trust products they sell in response to several recent near-defaults. A circular issued by the China Banking Regulatory Commission has ordered banks to check third party products distributed via their branches, including trust, insurance and investment funds, the Southern Metropolis Daily reported. The… government newspaper paper said the internal circular issued last Friday has given banks 15 days to look over the products they are selling and to take action to resolve risks. Banks are the main channel for the marketing of wealth products by trust, insurance and fund management companies. Several products which have come close to default in recent weeks were sold through the branches of banks such as the Industrial and Commercial Bank of China and Huaxia Bank. The CBRC circular followed a warning in the official China Securities Journal last week that the government may take ‘timely measures’ to curb the rapid growth of shadow banking… UBS estimates Chinese shadow banking at between 26% and 46.5% of GDP, depending on definition. Outstanding wealth management products, which are often used to attract deposits into shadow banking, surged nearly 50% during the first nine months of this year to CNY6.7 trillion.”

December 20 – Bloomberg: “China’s top economic planning agency said it will restrict bond sales by companies with high levels of debt as authorities seek to limit default risks. The National Development and Reform Commission said it won’t approve bond sales by companies with liability-to-asset ratios higher than 90% and that have a ‘relatively high’ risk of not being able to repay debt, according to a statement posted on the agency’s website today. China has sought to expand its bond market to wean companies off a dependence on bank loans and to give smaller companies more fundraising options by allowing them to sell debt. That growth in China’s bond market, where no company has yet defaulted on a publicly-traded debt, has spurred concern that some issuers may have difficulty repaying borrowings.”

December 18 - Bloomberg: “China’s new home prices rose in the majority of cities the government tracks in November as property curbs slowed construction, reducing the supply available for sale. Prices climbed in 53 of the 70 cities from the previous month, compared with 35 in October… That was the most in 18 months. Prices fell in 10 cities.”

December 20 – Bloomberg (Stephanie Tong): “China’s inland region is seeing faster growth in the number of millionaires than Beijing and the coastal regions where wealth has been concentrated, according to Boston Consulting Group and China Construction Bank Corp. The number of high net worth households in Anhui, Gansu and Hunan provinces will increase by more than 30% in 2012… Nationwide the figure will grow by 17% to 1.74 million, slower than last year’s 30% pace.”

Japan Watch:

December 20 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan expanded its asset-purchase program for the third time in four months, and will reconsider its objectives for inflation as incoming Prime Minister Shinzo Abe urges more action to end price declines. The central bank increased the asset-purchase fund to 76 trillion yen ($906 billion) from 66 trillion yen… The BOJ kept its credit lending program unchanged at 25 trillion yen.”

India Watch:

December 17 - Bloomberg (Abhijit Roy Chowdhury and Kartik Goyal): “India’s economy will grow at the slowest pace in a decade in the current fiscal year, according to forecasts by the Finance Ministry… Asia’s third-largest economy will expand about 5.7% to 5.9% in the year through March, less than an earlier estimate of as much as 7.85%... That would be the smallest gain since the year ended March 31, 2003, when gross domestic product grew 4%.”

December 20 – Bloomberg (Kartikay Mehrotra and Anto Antony): “When Rashmi Deshmukh needed money for her hand-knit clothing business in Mumbai, she couldn’t wait for bank approval. Instead, she put up her wedding jewelry as collateral at a loan-for-gold company to get cash on the spot. Muthoot Fincorp Ltd., which advertises three-minute gold loans and has 3,125 branches across India, charged 24% annual interest. While a bank gets half that rate, it would have loaned her less and required paperwork, she said. ‘It’s faster, it’s easier, it isn’t cheaper, but I get more for my gold from Muthoot than the bank,’ said Deshmukh, 37, who borrowed 250,000 rupees ($4,576) in October… Assets at non-bank lenders such as Muthoot have increased 20% annually for the past five years to $670 billion… That makes India the world’s second-fastest-growing market, after Indonesia, for lending outside the banking system…”

Latin America Watch:

December 19 - Bloomberg (Matthew Malinowski): “Brazil’s credit market will expand at a pace in 2013 that will help fuel economic growth, said Tulio Maciel, head of economic research at the central bank. Credit had a significant expansion in 2012 and will continue to grow in 2013, Maciel told reporters…”

December 19 - Bloomberg (David Biller): “Consumer prices in Brazil jumped the most in 19 months, adding pressure on the central bank to raise interest rates next year to control inflation that’s quickening faster than economists have forecast. Prices as measured by the IPCA-15 index rose 0.69% in the month through mid-December… Inflation, which has remained above the bank’s 4.5% target since 2010, accelerated to 5.78%.”

U.S. Bubble Economy Watch:

December 17 - Bloomberg (Alison Vekshin, Elise Young and Rodney Yap): “California Highway Patrol division chief Jeff Talbott retired last year as the best-paid officer in the 12 most-populous U.S. states, collecting $483,581 in salary, pension and other compensation. Talbott, 53, received $280,259 for accrued leave and vacation time and took a new job running the public-safety department at a private university in Southern California. He also began collecting an annual pension of $174,888 from the state.”

December 20 – Bloomberg (John Gittelsohn): “Homes values gained an estimated 6% in the U.S. this year, the first increase since 2006, as the housing market began to recover from its worst slump since the 1930s, Zillow Inc. said… Values have climbed more than $1.3 trillion to $23.7 trillion since the end of last year and probably will continue to rise in 2013… Residential values had declined each year since 2007, with the biggest drop in 2008, when homes lost more than $3.2 trillion in value, Zillow said.”

December 19 - Bloomberg (Esme E. Deprez): “New York’s Metropolitan Transportation Authority raised its base fare for subways and buses by 25 cents to $2.50 and monthly unlimited passes by $8 to $112.”

California Watch:

December 18 - Bloomberg (Nadja Brandt): “California home prices rose 25% in the 12 months through November, the most in eight years, as demand rose in expensive coastal areas… The median price of an existing, single-family detached home was $349,300 last month, up from $279,910 a year earlier, the California Association of Realtors said… The last time prices had a larger gain was in June 2004… California’s median price was driven up by a decline in sales in lower-priced areas of the most populous U.S. state, and an increase in transactions involving mid- and higher-priced homes…”