Sunday, December 14, 2014

Weekly Commentary, November 21, 2014: Memories - of 2012 and 2007 (Edit)

November 21 – Reuters (John O'Donnell and Eva Taylor): “European Central Bank President Mario Draghi threw the door wide open on Friday for more dramatic action to rescue the euro zone economy, saying ‘excessively low’ inflation had to be raised quickly by whatever means necessary… ‘We will continue to meet our responsibility – we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us,’ Draghi said… ‘If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.’ ‘Draghi all but announced that the central bank will step up monetary easing soon. Mr Maybe has become Mr Definitely,’ said Nick Kounis, an economist with ABN Amro. …Draghi's remarks were almost as dramatic as his ‘whatever it takes’ speech in the summer of 2012 with which he pulled the euro zone back from the brink. Having earlier in the week pointed to early signs of improvements, Draghi on Friday said the economic situation remained difficult and the latest business survey suggested a stronger recovery was unlikely in the coming months.”

November 21 – Bloomberg: “China cut benchmark interest rates for the first time since July 2012 as leaders step up support for the world’s second-largest economy… The one-year lending rate was reduced by 0.4 percentage point to 5.6%, while the one-year deposit rate was lowered by 0.25 percentage point to 2.75%, effective tomorrow… The reduction puts China on the side of the European Central Bank and Bank of Japan in deploying fresh stimulus and contrasts with the Federal Reserve, which has stopped its quantitative easing program. Until today, the PBOC had focused on selective monetary easing and liquidity injections as China heads for its slowest full-year growth since 1990… ‘This interest rates adjustment is a neutral operation and doesn’t mean any change in monetary policy direction,’ the central bank said… As China is still able to keep medium to high growth rates, it ‘has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,’ the central bank said.”

In a global financial backdrop I view as the most fragile since 2012, we’ve now seen 2012-style aggressive concerted central bank stimulus measures. It will be imperative to closely monitor the various effects. One of these days, such measures will not have their desired impact. We might be getting close.

Last week I dove into somewhat theoretical “Financial Sphere vs. Real Economy Sphere” analysis. I also often fall back on the “Periphery vs. Core” framework that has been informative in an era of highly speculative markets. So after Friday’s moves by Draghi and the PBOC, let’s this week meld some analysis and segue from the more theoretical to the real.

While the policy responses are similar, there are notable differences between now and the 2012 backdrop. Importantly, following a two-year period of QE-induced “parabolic” global securities market inflation, I am arguing that the global Bubble now has serious cracks (irrespective of monetary stimulus). The S&P500 is at record highs, up almost 64% from June 2012 lows. U.S. investor bullishness is at extreme levels. Those believing policymakers have everything well under control have been repeatedly emboldened. The notion of Bubbles – worse yet, bursting Bubbles – is viewed with contempt and ridicule.

It’s worth noting that the Goldman Sachs Commodities Index is off 28% from 2012 highs, with crude down 30%. Commodities and energy complexes have been crushed, portending serious issues for scores of heavily indebted companies, industries and economies. From early-March 2012 levels, the Russian ruble is down 36%, the Brazilian real 32%, the Argentine peso 49%, the Venezuelan bolivar 32%, the South African rand 31%, the Indonesian rupiah 25%, the Turkish lira 20% and the Indian rupee 20%. I contend the (“Periphery”) EM Bubble has begun deflating, with notable fragility emerging from the likes of Russia, Brazil, Venezuela and others. I expect ongoing contagion.

The global Bubble has entered a particularly unstable phase. Desperate policy measures are exacerbating liquidity and speculative excesses. Not surprisingly, monetary stimulus has it greatest impact where Bubble dynamics retain strong inflationary biases – notably U.S. securities markets, but also stocks, corporate debt and sovereign bonds around the globe. Meanwhile, “hot money” continues to exit faltering Bubbles. Importantly, this dynamic is reinforced by king dollar and the flight of speculative finance into bubbling U.S. markets.

The Treasury reported its monthly TIC (Treasury International Capital) data this past Tuesday. September saw a record $164bn inflow into U.S. “Net Long-Term Portfolio Securities.” I was reminded of the then record $136bn inflow in May 2007. With faltering Bubbles and “hot money” again on the move, we don’t have to look that far back for an insightful example of how aggressive monetary measures (responding to a faltering Bubble) fueled precarious “Terminal Phase” excess.

It’s especially instructive to recall how Bubble Dynamics played out in that fateful 2007/2008 period. The Fed’s Z.1 “flow of funds” data do a nice job. The mortgage finance Bubble was initially pierced in the spring of 2007, as losses on subprime securities initiated a self-reinforcing reversal of “hot money” flows, a tightening of mortgage Credit and waning home price inflation. The Fed slashed the discount rate 50 bps in an unscheduled meeting in August 2007.

Confident that Bernanke was ready with aggressive “helicopter” monetary stimulus, market participant were happy (gross understatement) to disregard ominous fundamental developments and focus instead on lucrative securities speculation.

First of all, the faltering Bubble was readily apparent in rapidly slowing household mortgage borrowings. After expanding at double-digit annual rates from 2001 through 2006, the home mortgage slowdown was apparent by early 2007. The rate of Household mortgage Credit growth slowed to 7.4% in Q1 2007 and was down to 5.0% by Q4.

In nominal dollars, Home mortgage debt expanded $1.080 TN in 2006. Indicative of a faltering Bubble, Q1 2007 saw Home mortgage growth slow to SAAR $831bn, Q2 to SAAR $808bn, Q3 to SAAR $536bn and Q4 to SAAR $648bn. With multi-family and commercial mortgage Credit growth still brisk, total system mortgage Credit growth remained enormous. After expanding $1.416 TN in 2006 (close to 2005’s record), growth slowed to SAAR $1.120 TN in Q1 ‘07, $1.222 TN in Q2, $999bn in Q3 and $992bn in Q4 (compared to 1990’s avg. $265bn).

It’s worth noting that air was also attempting to come out of highly speculative securities markets in 2007. There was a bout of stock market selling during the first quarter and then a much more significant downturn late in the summer, as the scope of systemic fragility began to be better appreciated. Indeed, a necessary de-leveraging had commenced – only to be reversed by Fed stimulus measures.

After expanding $326bn in 2005, $406bn in 2006 and a seasonally-adjusted and annualized (SAAR) $726bn in Q1 2007, the growth in “Fed Funds & Security Repo” (used for securities leveraging) began slowing sharply. Q2 saw growth drop to SAAR $181bn, before turning negative in Q3 (SAAR -$142bn) and Q4 (SAAR -$797bn). After “Security Brokers/Dealers” expanded holdings a record $615bn in 2006 (double 2005 growth!), holdings grew another SAAR $1.145 TN in Q1 and SAAR $826bn in Q2. Security Brokers/Dealers ballooning hit the wall in Q3 (SAAR $42bn) before contracting in Q4 (SAAR -$625bn). Some beneficial de-risking was also apparent in Security Credit. After record expansions in 2005 and 2006, Security Credit contracted slightly during Q3 2007.

I am convinced that desperate policy responses to bursting Bubbles only make things worse. Certainly, the prospect of aggressive monetary stimulus from the Bernanke Fed had major ramifications for the flow of funds and system excess during the second-half of 2007 and into 2008. Importantly, slowing mortgage Credit, a faltering Bubble and the prospect for activist monetary policy combined to throw gas on a powerful corporate debt Bubble. After expanding a blistering 9.6% during 2006, Corporate debt growth slowed to a 9.5% rate in Q1 2007. Growth increased to 10.9% in Q2. And with the market then anticipating aggressive stimulus measures, corporate Credit growth surged to a 12.0% pace during ‘07’s second-half. In gross excess that would come back to bite, U.S. “Corporate and Foreign Bonds” issuance surged to a record $1.256 TN in 2007 (up 46% from 2006 growth).

It’s interesting to recall how the policy response (actual and anticipated) to the faltering mortgage finance Bubble fueled dangerous “Terminal Phase” (“still dancing”) excess throughout corporate finance (issuance, junk, M&A, financial engineering, etc.). Nowhere, however, was the “Periphery vs. Core” Bubble Dynamic more apparent than in the securitization marketplace. After almost doubling between 2003 and 2006, the (largely subprime mortgage) ABS market began to falter in 2007. Following 2006’s record $808bn expansion, ABS growth slowed to SAAR $205bn by Q2 2007 and actually began a painful contraction in Q4. Importantly, serious issues at the “Periphery” of mortgage Credit initially spurred (as market yields sank) rampant “Terminal Phase” excess at the Bubble’s “Core”. In the six quarters Q1 ’07 through Q2 ’08, GSE MBS expanded $924bn, or 24%. Total GSE Securities (MBS and debt) over this 18-month period expanded $1.400 TN, or 21.6%. I believe strongly that this central bank-incited (late-cycle) excess at the “Core” significantly contributed to the severity of the 2008/09 crisis.

Thinking in terms of “Financial Sphere Bubble” analysis, it should be noted that Financial Sector market borrowings expanded 10.0% in 2006, up from 2005’s 9.0%. Subprime and ABS issues were behind a marked slowdown in Financial Sector borrowings during 2007’s first-half. Yet with monetary policy poised to shift into overdrive, the Financial Sector expanded at a blistering 15.8% rate during Q3 2007, powered by the invigorated “Core” (GSEs, MBS and Corporate Bonds).

Credit growth could have – should have – slowed markedly during 2007. Instead, fueled by record “Core” (Terminal Phase) expansion, total system Credit inflated at an unprecedented rate – right in the face of a faltering mortgage Finance Bubble! Total Non-Financial Credit expanded a record $2.540 TN in 2007 (‘90’s avg. $720bn), while Financial Sector market borrowings grew a record $1.795 TN (90’s avg. $497bn). There was, however, a momentous problem: the Credit Bubble was unsustainable. When the overheated “Core” eventually succumbed to the forces of Bubble collapse, the system’s highly inflated price levels (throughout the Financial and Real Economy Spheres) created extreme systemic fragilities. Key risk intermediation processes were discredited (GSEs, CMOs, highly leveraged securities holdings, etc.), which ensured a collapse in private-sector Credit growth.

What pertinent lessons can be drawn from the 2007/2008 experience? First of all, policy measures that extend the life of “Terminal Phase” excess can prove catastrophic. In particular, heavy Financial Sector risk intermediation (2007: GSE, MBS, CMO) play a critical role late in the Bubble cycle, ensuring ongoing Credit expansion – hence prolonging the boom cycle. This capacity to transform high-risk Credit, market and liquidity risks into perceived “money-like” instruments seems virtually miraculous. Moreover, this process is instrumental in nurturing problematic euphoria and complacency. And as things tend to regress into late-cycle craziness, leveraged speculation and “hot money” come to play a decisive role throughout increasingly unstable markets.

Indeed, the stage had been set for very serious problems. When the down cycle’s contagion eventually arrived at the “Core,” key intermediation processes faltered – leaving a highly inflated system extremely vulnerable to a crisis of confidence and Credit collapse. Importantly, when it comes to Bubbles, the sooner they come to an end the better. Systemic risk grows exponentially, a harsh reality that central bankers refuse to acknowledge.

The scope of today’s “global government finance Bubble” dwarfs the 2007’s mortgage finance Bubble. There’s a lot more to lose in this international Bubble and so much more to worry about. Instead of “subprime,” today’s “Periphery” includes tens of Trillions of vulnerable debt encompassing many countries and billions of people. Instead of U.S. prime mortgages and corporate debt, today’s “Core” includes central bank Credit and the greatest securities Bubble the world has ever experienced.

At the “Core of the Core,” historic market euphoria has pushed excess in U.S. equities and corporate Credit to precarious extremes (relative to rapidly deteriorating global financial and economic fundamentals). To be sure, concerted global central bank stimulus measures have exacerbated the divergence between inflated securities prices and deflating prospects for global growth and profits. Worse yet, the redistribution of wealth that accompanies the policy-induced inflation of the “Global Financial Sphere” is worsening already alarming geopolitical tensions. Global central banking and “risk free” government debt are at risk of being discredited.

Why would I contemplate that central bank measures might be losing ability to keep the global Bubble afloat? Over recent weeks we’ve seen the concerted efforts of team Yellen, Draghi, Kuroda and the PBOC have minimal impact on the fragile “Periphery.” Even Friday, on the back of Draghi and the Chinese, crude oil gave back much of an earlier 2.6% gain to close the week up only 69 cents. The Goldman Sachs Commodities index was only slightly positive for the week near multi-year lows. Curiously, Italian CDS added a basis point this week. Greek CDS traded to a 13-month high Thursday. Eastern European currencies traded down again this week. Data out of Europe has been just dreadful. Ukraine looks dangerous.

The Mexican peso declined 60 bps this week, trading at the lowest level versus the dollar since the summer of 2012. Mexico succumbing to EM contagion would be a major development. Meanwhile, here at the Bubble’s “Core,” this week saw the S&P Homebuilding Index jump 3.9% and the Morgan Stanley Retail Index rise 2.1% (to a record high). Yet there were a few interesting Bloomberg headlines: “Riskiest Junk Borrowers Imperiled as Yields Jump…;” “Munis Facing First Losses of 2014 as Record Win Streak Imperiled;” “Corporate Bond Spread Versus Treasuries Widens to Most in 2014;” “Bond Record in Sight as Sales Near $4 Trillion.” Now that’s something to ponder: A record $4.0 TN of international corporate bond issuance in the face of a faltering global Bubble. Like many things these days, it brings back (bad) memories of 2007.

For the Week:

The S&P500 gained 1.2% (up 11.6% y-t-d), and the Dow rose 1.0% (up 7.4%). The Utilities jumped 1.8% (up 19.2%). The Banks were unchanged (up 5.0%), while the Broker/Dealers fell 0.8% (up 9.4%). Transports added 0.4% (up 22.9%). The S&P 400 Midcaps gained 1.0% (up 7.6%), while the small cap Russell 2000 slipped 0.1% (up 0.8%). The Nasdaq100 increased 0.6% (up 18.4%), and the Morgan Stanley High Tech index added 0.3% (up 10.4%). The Semiconductors jumped 2.7% (up 23.9%). The Biotechs rose 2.7% (up 43.5%). With bullion up $13, the HUI gold index jumped 4.1% (down 11.3%).

One-month Treasury bill rates closed the week at four bps and two-month rates ended at one basis point. Two-year government yields slipped a basis point to 0.50% (up 12bps y-t-d). Five-year T-note yields were unchanged at 1.61% (down 14bps). Ten-year Treasury yields were down a basis point to 2.31% (down 72bps). Long bond yields declined three bps to 3.02% (down 95bps). Benchmark Fannie MBS yields fell three bps to 2.96% (down 65bps). The spread between benchmark MBS and 10-year Treasury yields narrowed two to 65 bps. The implied yield on December 2015 eurodollar futures declined 3.5 bps to 0.79%. The two-year dollar swap spread was little changed at 22 bps, and the 10-year swap spread was little changed at 12 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined two to 63.5 bps. An index of junk bond risk ended the week two lower to 342 bps. An index of emerging market (EM) debt risk fell five to 396 bps.

Greek 10-year yields fell 17 bps to 7.93% (down 49bps y-t-d). Ten-year Portuguese yields sank 19 bps to 2.99% (down 314bps). Italian 10-yr yields were down 13 bps to 2.21% (down 191bps). Spain's 10-year yields dropped 11 bps to 2.01% (down 214bps). German bund yields declined two bps to a record low 0.77% (down 116bps). French yields declined three bps to a new low 1.11% (down 145bps). The French to German 10-year bond spread narrowed one to 34 bps. U.K. 10-year gilt yields dropped seven bps to 2.05% (down 97bps).

Japan's Nikkei equities index slipped 0.8% (up 6.5% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.46% (down 29bps). The German DAX equities index surged 5.2% (up 1.9%). Spain's IBEX 35 equities index jumped 3.7% (up 6.1%). Italy's FTSE MIB index rallied 5.2% (up 5.2%). Emerging equities were higher. Brazil's Bovespa index ended the week up 8.3% (up 8.9%). Mexico's Bolsa gained 2.9% (up 4.5%). South Korea's Kospi index rose 1.0% (down 2.3%). India’s Sensex equities index gained 1.0% to another record (up 33.8%). China’s Shanghai Exchange increased 0.3% (up 17.5%). Turkey's Borsa Istanbul National 100 index added 2.6% (up 22.8%). Russia's MICEX equities index rose 2.5% (up 2.3%) to a 2014 high.

Debt issuance remained strong. Investment-grade issuers included Johnson & Johnson $3.2bn, Citigroup $2.0bn, Parker-Hannifin $1.5bn, Dominion Resources $1.2bn, Scripps Networks Interactive $1.0bn, Consolidated Edison $1.0bn, Key Bank $750 million, Suncor Energy $750 million, Fluor $500 million, Caterpillar $750 million, Duke Energy $700 million, Albemarle $600 million, Huntington Ingalls Industries $600 million, Oceaneering International $500 million, Trimble Navigation $400 million, Ares Capital $400 million, Nationwide Finance $400 million, Boardwalk Pipelines LP $350 million, Inter-American Development Bank $300 million, DTE Energy $300 million, NYU Hospitals $300 million, Entergy Louisiana First $250 million, Retail Opportunity Investments LP $250 million, Merit Bank $250 million, Interstate Power & Light $250 million, Education Realty LP $250 million, Overseas Private Investment Corp $125 million and OGE Energy $100 million.

Junk funds saw outflows of $281 million (from Lipper). Junk issuers this week included Equinix $1.25bn, MGM Resorts $1.15bn, HD Supply $1.25bn, KLX $1.2bn, Owens-Brockway $800 million, Lear Corp $650 million, Sears Holdings $625 million, Level 3 Communications $600 million, American Energy $515 million, MarkWest Energy Partners LP $500 million, Mercer International $650 million, Asbury Automotive Group $400 million, Lennar $350 million, Woodside Homes $305 million, Moog $300 million and Multi-Color Corp $250 million.

Convertible debt issuers included Redwood Trust $200 million, Lexicon Pharmaceuticals $80 million, and LGI Homes $75 million.

International dollar debt issuers included Alibaba $8.0bn, International Bank of Reconstruction & Development $4.0bn, Mexico $2.0bn, Westpac Banking $2.0bn, European Bank of Reconstruction & Development $1.0bn, Turkey $1.0bn, Israel Chemicals $800 million, Empresa Electrica Angamo $800 million, Axis Bank $500 million, Elementia $425 million, Gruma S.A.B. $400 million and SK E&S Company $300 million.

Freddie Mac 30-year fixed mortgage rates slipped two bps to 3.99% (down 23bps y-o-y). Fifteen-year rates declined three bps to 3.17% (down 10bps). One-year ARM rates were up a basis point to 2.44% (down 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.21% (down 24bps).

Federal Reserve Credit last week jumped $14.8bn to a record $4.462 TN. During the past year, Fed Credit inflated $605bn, or 15.7%. Fed Credit inflated $1.652 TN, or 59%, over the past 106 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $1.9bn last week to $3.308 TN. "Custody holdings" were down $46bn year-to-date, and fell $26.7bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $297bn y-o-y, or 2.6%, to $11.795 TN. Over two years, reserves were $1.001 TN higher for 9% growth.

M2 (narrow) "money" supply jumped $63.5bn to $11.552 TN. "Narrow money" expanded $579bn, or 6.1%, over the past year. For the week, Currency increased $3.5bn. Total Checkable Deposits dropped $48.4bn, while Savings Deposits jumped $109.3bn. Small Time Deposits were down $1.1bn. Retail Money Funds were little changed.

Money market fund assets gained $9.8bn to $2.654 TN. Money Funds were down $64.8bn y-t-d and dropped $9.0bn from a year ago, or 0.3%.

Total Commercial Paper jumped another $11.1bn to a 2014 high $1.091 TN. CP expanded $45bn year-to-date and was up $37bn over the past year, or 3.5%.

Currency Watch:

The U.S. dollar index gained 0.9% to 88.31 (up 10.3% y-t-d). For the week on the upside, the Brazilian real increased 3.4%, the South African rand 1.3% and the Canadian dollar 0.5%. For the week on the downside, the Japanese yen declined 1.3%, the South Korean won 1.2%, the Swiss franc 1.1%, the Swedish krona 1.1%, the euro 1.1%, the Danish krone 1.0%, the Australian dollar 0.9%, the Taiwanese dollar 0.8%, the Norwegian krone 0.8%, the Mexican peso 0.6%, the New Zealand dollar 0.3%, the Singapore dollar 0.1% and the British pound 0.1%.

Commodities Watch:

November 18 – Bloomberg (Jasmine Ng): “Iron ore extended a tumble to the lowest level in more than five years as declining home prices in China added to concern that an economic slowdown in the biggest buyer will deepen, exacerbating an oversupply… It’s 47% lower this year, heading for the biggest annual drop in price data that started in May 2009. The raw material fell into a bear market this year as BHP Billiton Ltd., Rio Tinto Group and Vale SA boosted output, spurring a global glut just as economic growth slowed in China. Prices may drop to less than $60 a ton next year as output rises further and demand remains weak, Citigroup Inc. said.”

The Goldman Sachs Commodities Index recovered 0.8% (down 16.9%). Spot Gold rallied 1.1% to $1,202 (down 0.3%). December Silver gained 0.9% to $16.459 (down 15%). December Crude increased 69 cents to $76.51 (down 22%). December Gasoline gained 0.7% (down 26%), and December Natural Gas jumped 6.1% (up 1%). December Copper slipped 0.3% (down 11%). December Wheat declined 2.4% (down 10%). December Corn fell 2.4% (down 12%).

U.S. Fixed Income Bubble Watch:

November 18 – Bloomberg (Susanne Walker and Lisa Abramowicz): “In a flash, the bond market went wild. What began on Oct. 15 as another day in the U.S. Treasury market suddenly turned into the biggest yield fluctuations in a quarter century, leaving investors worrying there will be turbulence ahead. The episode exposed a collision of forces -- the rise of high-frequency trading and the decline of Wall Street dealers -- that are reshaping the world’s biggest and most important bond market. Money managers say the $12.4 trillion Treasury market is becoming less liquid, meaning securities can no longer be traded as quickly and easily as they used to be, thanks in part to the Federal Reserve’s bond-buying program.”

November 19 – Bloomberg (Sridhar Natarajan): “Buyers in the riskiest part of the U.S. corporate bond market are demanding the highest relative yields in almost two years, a sign the era of wide-open funding to the neediest borrowers may be nearing an end. Company bonds rated CCC or lower in the U.S. now yield 5.6 percentage points more than the highest-rated junk notes, jumping from a seven-year low of 3.9 percentage points in June… After six years of easy-money policies by the Federal Reserve opened the debt markets to the least-creditworthy companies, investors are becoming more discriminating as the prospect of higher interest rates boosts the likelihood of defaults… ‘You are starting to see cracks develop at the very bottom,’ Thomas Byrne, director of fixed-income at Wealth Strategies and Management LLC, said… ‘People are moving up in credit quality. Nobody wants to be the last one in the burning room.’”

November 19 – Bloomberg (Sridhar Natarajan): “Buyers in the riskiest part of the U.S. corporate bond market are demanding the highest relative yields in almost two years, a sign the era of wide-open funding to the neediest borrowers may be nearing an end. Company bonds rated CCC or lower in the U.S. now yield 5.6 percentage points more than the highest-rated junk notes, jumping from a seven-year low of 3.9 percentage points in June… Companies most vulnerable to default have sold $10.5 billion of bonds this quarter, less than half the quarterly average in the past two years… After six years of easy-money policies… opened the debt markets to the least-creditworthy companies, investors are becoming more discriminating…”

November 19 – Bloomberg (Wes Goodman and David Goodman): “The extra yield U.S. corporate bonds offer over Treasuries climbed to the highest level this year as companies including Johnson & Johnson borrow while Alibaba Group Holding Ltd. prepares an $8 billion sale. Securities in the Bloomberg U.S. Corporate Bond Index of investment-grade debt yielded 133 bps more than benchmark government debt yesterday, the widest spread since December.”

November 20 – Bloomberg (Lisa Abramowicz): “What’s worse for the U.S. economy: More bankruptcies in the near term or an overheated market that portends another credit crisis in the longer run? That’s a conundrum facing Federal Reserve officials, who’ve been trying to get banks to tighten their underwriting standards for speculative-grade loans as the market shows signs of froth. So far, the increased oversight hasn’t prevented companies including Caesars Entertainment Corp. and Charter Communications Inc. from raising money at a record pace through new high-yield, high-risk loans this year… Almost one third of the loans in the past year had features cited as weak by federal examiners in an annual review.”

November 18 – Bloomberg (Brian Chappatta): “The $3.7 trillion municipal market is on pace for its first monthly loss of 2014 and trailing gains in Treasuries amid a glut of issuance by states and localities. Benchmark 10-year munis yield 2.28%, compared with 2.32% on similar-maturity Treasuries… The ratio of the two interest rates, a gauge of relative value between the asset classes, climbed above 100% yesterday for the first time since February.”

November 21 – Bloomberg (Michelle Kaske): “The biggest rally in Puerto Rico debt in five years is at risk as the struggling U.S. territory piles up debt costs and moves toward a historic restructuring of its electric utility. While lawmakers in the junk-rated commonwealth plan a sale of as much as $2.9 billion of bonds backed by petroleum taxes to boost cash, investors say a spiral of fiscal strains may halt the bond gains. Debt service consumes 15% of the budget, triple the median for U.S. states, and the pension system has only 3% of the assets needed to pay current and future retirees.”

Federal Reserve Watch:

November 19 – Wall Street Journal: “Federal Reserve Bank of Dallas President Richard Fisher , approaching mandatory retirement, announced last week that he’ll step down in March. Philadelphia Fed President Charles Plosser will retire the same month. Since the two have been stalwart advocates for sound money and economics, unions and their allies want to ensure that their successors aren’t as sensible. These forces have gathered under something called the Center for Popular Democracy, which includes the AFL-CIO, the teachers unions, the Service Employees International Union and the Working Families Organization. The center is demanding that ‘members of the public’ be included on search committees for the successors to Messrs. Fisher and Plosser.”

U.S. Bubble Watch:

November 18 – Wall Street Journal (Dana Mattioli and Dana Cimilluca): “The most active mergers-and-acquisitions market in years sped into an even higher gear Monday, as companies took advantage of rising stock prices to announce more than $100 billion in takeover deals. A pair of giant tie-ups pushed global M&A volume over the $3 trillion mark for the year, in a sign the corporate buying spree is alive and well despite recent market volatility, tighter regulation and the collapse of some large attempted combinations… At roughly $3.1 trillion, the current dollar volume of announced deals and offers globally is higher than in any full year since 2007, according to… Dealogic… ‘The CEO is saying right now: ‘If I can acquire that company, and I can use my stock to buy it, then that’s a fair trade,’’ said Joseph Perella, a longtime Wall Street banker. ‘The seller is saying, ‘I can get a good price, and no tree grows to the sky forever.’’ The deal market is on a tear. Global takeover activity has increased 32% over last year’s total at this point, according to Dealogic.”

November 20 – Bloomberg (Cheyenne Hopkins, Silla Brush and Jesse Hamilton): “Wall Street’s biggest banks have used their ownership of metals warehouses, oil tankers and other commodities businesses to gain unfair trading advantages and dominate markets, according to a U.S. Senate investigation. In a report on Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., a Senate panel said the firms have eroded the line separating banking from commercial activities to the detriment of consumers and the financial system. The holdings give banks access to non-public information that could move markets and increase the likelihood that industrial accidents will spur taxpayer bailouts, the report said. ‘We simply cannot allow a large, powerful Wall Street bank the power to influence the price of a commodity essential to our economy,’ Senator Carl Levin, who chairs the Permanent Subcommittee on Investigations, told reporters…”

November 20 – Bloomberg (Michael B. Marois): “Higher taxes and an improving economy will boost California’s revenue $2 billion above the income Governor Jerry Brown projected in the budget he signed in June… The state’s general fund, which pays for most core operations, will reach $107.4 billion in the year ending June 30, compared with $105.5 billion in Brown’s budget, the independent Legislative Analyst’s Office said… The higher figure underscores California’s fiscal turnaround. The state has gone from a $25 billion deficit three years ago to a $3.9 billion surplus going into this fiscal year. Propelled by capital-gains taxes, which vary with the performance of the stock market, along with higher income- and sales taxes, California will have surpluses through at least fiscal 2016, Taylor said. Brown boosted total spending in the world’s eighth-largest economy by almost 6% to a record $156 billion, while depositing $1.6 billion into a rainy-day fund, the first installment since 2007.”

November 17 – Associated Press (Marcy Gordon): “The federal agency that insures pensions for about 41 million Americans saw its deficit nearly double in the latest fiscal year. The agency said the worsening finances of some multi-employer pension plans mainly caused the increased deficit. At about $62 billion for the budget year ending Sept. 30, it was the widest deficit in the 40-year history of the Pension Benefit Guaranty Corp…. That compares with a $36 billion shortfall the previous year. Multi-employer plans are pension agreements between labor unions and a group of companies, usually in the same industry. The agency said the deficit in its multi-employer insurance program jumped to $42.4 billion from $8.3 billion in 2013.”

November 20 – Bloomberg (Romy Varghese): “Philadelphia finance director Rob Dubow likens pensions to the ‘Blob’ devouring the budget. City council is making it harder for him to channel Steve McQueen, who battled the alien life form in the 1958 horror film. The council last month rejected holding hearings on a proposed $1.86 billion sale of the Philadelphia Gas Works, stymying a deal whose proceeds would have bolstered a pension system that’s 47% funded. The city spends more on retirement obligations than on police as contributions swelled to 16% of the general fund last year from 6% a decade ago…”

November 18 – Bloomberg (Asjylyn Loder): “Shale drillers are planning on production growth with fewer rigs despite a worldwide glut that has sent crude prices to a four-year low. Companies including Devon Energy Corp., Continental Resources Inc. and EOG Resources Inc. said they expect to pump more from their prime properties while cutting back in their least productive prospects. That puts the onus on OPEC nations, led by Saudi Arabia, to cut output if they want to stem the slide in global oil prices. ‘There’s a lot more production coming online this year and in the first half of 2015,’ said Jason Wangler, an analyst at Wunderlich Securities… ‘This isn’t a machine that you can turn on and off with a switch. It’s going to take months, if not quarters, to turn it around.’”

November 21 – Bloomberg (Richard Rubin): “The top 400 taxpayers in the U.S. paid an average tax rate of 18% in 2010, the lowest since 2007, according to Internal Revenue Service data…”

ECB Watch:

November 21 – Bloomberg (Paul Gordon, Jeff Black and Stefan Riecher): “Mario Draghi said the European Central Bank must drive inflation higher quickly, and will broaden its asset-purchase program if needed to achieve that. ‘We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,’ the ECB president said… Shorter-term inflation expectations ‘have been declining to levels that I would deem excessively low,’ he said. Any new action would follow a flurry of activity since June that has included interest-rate cuts, long-term bank loans, and covered-bond purchases, with buying of asset-backed securities due to start as soon as today.”

November 19 – Financial Times (Christopher Thompson): “Contingent convertible bond deals have nearly tripled this year as banks take advantage of the low-interest rate environment to issue bumper volumes of riskier but higher yielding debt. European financial institutions’ coco issuance stands at $31.8bn via 20 deals for the year-to-date, compared to $15bn via 14 deals for all of 2013, according to… Dealogic. Contingent convertible, or coco, bonds, are loss-absorbing debt instruments that can be converted into equity or written off entirely if the issuing bank’s capital drops below a pre-agreed threshold. Banks use them to raise capital because they are often cheaper than issuing equity.”

Russia/Ukraine Watch:

November 17 – Bloomberg (Kateryna Choursina and James G. Neuger): “Russian President Vladimir Putin warned he won’t allow rebels in eastern Ukraine to be defeated by government forces as European Union ministers met to consider imposing more sanctions on the separatists. ‘You want the Ukrainian central authorities to annihilate everyone there, all of their political foes and opponents,’ Putin said… ‘Is that what you want? We certainly don’t. And we won’t let it happen.’ German Chancellor Angela Merkel said yesterday the EU will keep its economic sanctions on Russia ‘for as long as they are needed.’ EU foreign ministers convened today in Brussels to discuss adding to sanctions that have limited access to capital markets for some Russian banks and companies and blacklisted officials involved in the conflict. New measures will likely target pro-Russian separatist leaders, the EU said.”

November 17 – Bloomberg (Ksenia Galouchko and Stephen Bierman): “Russia’s financial crisis has become so severe that President Vladimir Putin found himself reassuring investors late last week that the government would provide the support needed to the world’s largest oil company. With OAO Rosneft facing $21 billion of mostly foreign- currency debt maturities before April, Putin said the government will ‘definitely’ help the company if necessary… After yields on Rosneft’s benchmark dollar bonds due in 2022 surged to a record 7.34% that day as oil sank to a four-year low, the statements may help restore investor confidence in the company, according to Commerzbank AG.”

Brazil Watch:

November 16 – Bloomberg (Raymond Colitt): “The investigation of corruption at state-run oil producer Petroleo Brasileiro SA will permanently change Brazil, President Dilma Rousseff said. ‘It will forever change the relationship between Brazilian society, the Brazilian government and private companies,’ she told reporters… ‘This will end impunity. This, to me, is the main feature of this investigation.’ Police found evidence that at least seven construction companies formed a cartel to win public contracts, including a combined 59 billion reais ($23bn) in orders from Petrobras as the state company is known, officers including Commissioner Igor Romario de Paula said last week… About 10,000 protesters gathered yesterday on Sao Paulo’s main street, calling for her impeachment with some pleading for military intervention.”

November 19 – Dow Jones (Dimitra DeFotis): “The Brazilian economy is in a perilous state, concludes Nomura's Tony Volpon after a recent trip to Brazil. Volpon writes: ‘The Brazilian economy is in a perilous state. With a negative CAGED (General Register of Employed and Unemployed Individuals) employment number for October, now the robust labor market seems to be weakening. In addition, the inflation rate is above the upper bound of the official target, the economy is on the edge of recession, fiscal accounts show a primary deficit, external accounts show a trade deficit, and there is a corruption scandal affecting the country's largest corporation [Petrobras], so one could conclude that the Brazilian economy is unraveling… Recent comments about the ongoing corruption investigation involving Petrobras could have serious political consequences. Just as important, but less commented on, are the possible near-term economic consequences. The scandal involves the largest company in the country, alongside some of the largest infrastructure companies that do business with Petrobras. Other companies, such as in the electricity and financial sector, may become involved…”

November 19 – Bloomberg (Elizabeth Campbell and Kate Smith): “Louisiana, which gets as much as 15% of its revenue from taxing oil extraction, is selling debt as slumping crude prices threaten to strain budgets of U.S. energy-producing states. This week’s planned offering of about $200 million of general-obligation bonds follows officials’ decision last week to reduce projected revenue for the year through June 2015… Moody’s… last month cited Texas, North Dakota, Alaska, Oklahoma and New Mexico as states where collections are at risk.”

November 19 – Reuters (Guillermo Parra-Bernal): “Petróleo Brasileiro SA could slash the value of its assets by as much as 21 billion reais ($8.1bn) and cut dividends as a result of an ongoing investigation into alleged graft and money-laundering at Brazil's state-controlled oil producer, analysts at Morgan Stanley & Co said… Analyst Bruno Montanari put the price target for U.S.-traded shares of Petrobras, as the company is known, under review and was reassessing earnings estimates as a consequence of the scandal.”

November 19 – Bloomberg (Paula Sambo and Filipe Pacheco): “The growing bribery investigation in Brazil is engulfing the nation’s biggest construction companies and prompting some bondholders to flee. Benchmark notes issued by OAS SA and Odebrecht SA suffered their biggest losses on record since Nov. 14, when Commissioner Igor Romario de Paula said police found ‘strong evidence’ that at least seven builders formed a cartel to win public contracts, including a combined 59 billion reais ($23bn) in orders from state-owned oil producer Petroleo Brasileiro SA. Police announced 27 arrest warrants and conducted 11 searches at offices including OAS and Odebrecht… The probes are fueling concern that the builders will be cut off from the government contracts they rely on if they’re found guilty of wrongdoing, said Joe Kogan, an emerging-market strategist at Bank of Nova Scotia.”

November 16 – Bloomberg (Raymond Colitt): “Brazil will cut public spending that doesn’t support domestic consumption or investment to meet its fiscal target next year, President Dilma Rousseff said. ‘We will make an adjustment, but we don’t think the best policy to exit the crisis is restricting demand,’ Rousseff told reporters… ‘You can’t think that with restrictions, the economy will recover.’ …Brazil is at risk of losing its investment-grade status after Moody’s… in September lowered its outlook to negative on slower economic growth.”

EM Bubble Watch:

November 21 – Bloomberg (Eric Martin and Brendan Case): “Protests brought tens of thousands into Mexico City’s streets last night demanding that the government strengthen the rule of law after the apparent mass murder of 43 students by a drug gang working with police. On a day marking the start of the Mexican Revolution 104 years ago, demonstrators marched from a monument commemorating that struggle to the capital’s central square, or Zocalo, imploring President Enrique Pena Nieto to improve security in a nation racked by a drug war. Banging drums and waving flags, demonstrators shouted ‘the people are rising’ and ‘justice.’ One group arrived at the Zocalo carrying a 20-foot tall paper-mache effigy of Pena Nieto in a dark suit, with the red, white and green presidential sash on his shoulder and blood on his hands. As chants of ‘Pena, get out’ intensified, they set it ablaze.”

November 19 – Bloomberg (Brendan Case and Eric Martin): “President Enrique Pena Nieto’s wife said she will sell her rights to a house held under the name of a contractor that won part of a $4.3 billion Mexican high-speed rail award before her husband canceled the deal. Angelica Rivera, a former soap opera star, said she didn’t want the home to ‘continue to be a pretext to offend and defame my family.’ The Mexico City house is held by a unit of Grupo Higa, a member of a China Railway Construction Corp.-led consortium that won the railroad contract…”

November 21 – Bloomberg (Brendan Case and Eric Martin): “The Mexican government cut its forecast for 2014 growth after the economy expanded less than analysts estimated for the eighth time in 10 quarters… Mexico will grow 2.1% to 2.6% this year, down from a previous forecast of 2.7%... Growth faltered in September, with the IGAE indicator, a proxy for GDP that was also reported today, dropping 0.1% from a month earlier, the second straight decline. Latin America’s second-largest economy is struggling to rebound from 1.4% growth last year, the slowest expansion since the 2009 recession, even after the central bank cut its key rate to a record low 3% in June.”

November 21 – Bloomberg (Eric Martin): “With oil prices plunging to a four-year low, Petroleos Mexicanos’s plan to take on a record amount of debt to bolster production is fueling concern among its bondholders. The state-owned company, whose debt load reached an all- time high of $74 billion at the end of September, said this week it will boost net borrowings next year by $15 billion. Pemex’s $2.1 billion of bonds due in 2023 have fallen since the announcement, pushing up yields by 0.34 percentage point this week…”

November 21 – Bloomberg (Julia Leite): “Not even Marfrig Global Foods SA, the McDonald’s Corp. hamburger meat supplier that’s won upgrades from two ratings companies in the past five weeks, could overcome investors’ growing discontent over Brazil. The… company said yesterday it canceled plans to sell seven-year bonds abroad after the yields demanded by investors didn’t meet its target, extending an almost two-month drought in junk debt offerings from Brazil.”

Europe Watch:

November 18 – Bloomberg (Nikos Chrysoloras): “Greece’s government and its international creditors are deadlocked over a final round of measures required to release the last tranche of the country’s bailout, two people familiar with the negotiations said. Prime Minister Antonis Samaras’s government is resisting pressure from the so-called troika of creditors for additional budget savings in 2015 of as much as 2.5 billion euros ($3.1bn)… The impasse risks leaving Greece without a backstop on Jan. 1 after the program ends, they said. Troika representatives are furious because the Greek government has failed to come up with any concrete measures to plug the fiscal gap since euro-area finance ministers warned earlier this month about a lack of progress in Greece meeting its commitments, one person said… The talks are in a ‘difficult phase,’ as the country shifts to a new relationship with its creditors, Finance Minister Gikas Hardouvelis told reporters… ‘It’s crucial that Greek authorities work with the troika to complete the current review,’ Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of euro finance ministers, said… While reviews by the troika of the International Monetary Fund, the European Commission and the European Central Bank have been characterized by unforeseen twists and deadlock, the difference now is that Greece’s second bailout from the euro area, worth 144.6 billion euros, is due to expire in a matter of weeks. A parallel program from the IMF is scheduled to continue through 2016, though the prime minister has said Greece plans to put an early end to its bailout and forsake aid tranches as of next year, a proposal that prompted Greek government bond yields to soar.”

November 20 – Financial Times (Claire Jones): “The pace of the eurozone’s recovery has slowed to its lowest level in almost a year and a half in November, with a closely watched poll of purchasing managers signalling activity would remain weak in the months ahead. The flash composite purchasing managers’ index for the currency area, compiled by data firm Markit, fell from 52.1 in October to 51.4 this month… the lowest level in 16 months… A separate reading for new orders – a bellwether for activity in the months ahead – fell below 50 for the first time since last July. Businesses across sectors continued to slash prices, a worrying trend… Earlier on Thursday, separate readings for the eurozone’s two largest economies, Germany and France, indicated activity remained weak in both member states."

November 19 – Reuters (Gavin Jones): “Italy's social fabric is fraying. People worn down by years of economic stagnation and austerity are suddenly giving vent to their frustrations with a spate of strikes and spontaneous protests which have taken politicians by surprise. Scarcely a day goes by without Italy's main cities being disrupted by workers, students or angry citizens' groups. Centre-left Prime Minister Matteo Renzi has been wrong-footed by the souring mood and his approval ratings are falling. The CIGL and UIL union confederations… called a nationwide strike against Renzi's policies for Dec. 12. The third big confederation, the CISL, will join them in a separate strike for public sector workers on a date to be announced. The strikes promise to be the largest show of union muscle since 2011… Yet there is something deeper going on: a mood of public anger which is often not channelled through unions that mainly represent pensioners and a shrinking pool of workers on regular contracts in large companies.”

November 18 – Bloomberg (Zoltan Simon): “Voters in the European Union’s east, taught by decades of communist oppression to be wary of leaders abusing authority, are telling politicians looking to consolidate their power to think again. Romania on Nov. 16 became the second country in the region this year where voters torpedoed a bid by a sitting prime minister to become president. Premier Victor Ponta followed in the footsteps of Slovak counterpart Robert Fico… Eastern Europeans, reeling from the global economic crisis that dashed illusions of catching up with the rest of the EU, gave leaders like Ponta, Fico and Hungarian Prime Minister Viktor Orban strong parliamentary mandates after they promised to improve living standards. Now… eastern Europeans are clipping leaders’ ambitions. ‘In eastern Europe, there are growing numbers who feel there’s a sort of elite conspiracy involving too much concentration of power, too much corruption and too much neglect of the interest of ordinary people,’ said Ognyan Minchev, an analyst at the Sofia-based Institute for Regional and International Studies. “We’re having strong anti-status quo moments.’”

November 17 – Bloomberg (Neil Callanan): “Ruth Marchand said her six-bedroom house in the leafy south London village of Dulwich would have sold within six weeks if she’d offered it earlier this year. Instead, she’s still waiting for the first bid two months after the property went on the market. ‘Nothing is selling now,’ said Marchand… ‘Any comparable houses in the area are still on the market.’ London’s soaring home prices, which peaked this year, have pushed buyers to the sidelines. Lending restrictions and sluggish wage growth have also curbed demand, now at a more than six-year low, as buyers wait for values to decline further. It costs about 25% more a month to pay a 95% loan-to-value mortgage on a London property than to rent the equivalent home, according to… Cushman & Wakefield Inc.”

Global Bubble Watch:

November 18 – Bloomberg (Andrew Mayeda): “Group of 20 leaders pledged over the weekend to do everything they can to boost the global recovery. Japan’s descent into a recession is the latest reminder of how elusive that goal is proving to be. Less than 24 hours after heads of state gathering in Brisbane, Australia, agreed to take measures that would boost their economies by a collective $2 trillion by 2018, the Cabinet Office delivered news in Tokyo that Japan’s gross domestic product unexpectedly shrank an annualized 1.6% in the three months through September, the second straight contraction. Disappointment is becoming routine for the global economy, with the International Monetary Fund last month cutting its 2014 world-growth outlook for the sixth time since January 2013… ‘People are misreading the strength of these economies,’ said Steven Ricchiuto, chief economist for Mizuho Securities USA… ‘Monetary policy is not capable of dealing with a world of excess supply. You need proper fiscal policies and nowhere in the world are we applying proper fiscal policies.’”

November 20 – Bloomberg (Matt Robinson and Katherine Chiglinsky): “Global corporate bond issuance has surpassed all of 2013, with the annual record now in sight as investors reap the biggest gains since 2002. Led by Apple Inc. and Verizon…, companies have fueled debt sales worldwide of $3.8 trillion this year, which is about $174 billion away from the peak in 2012 and on pace to exceed $4 trillion for the first time… Corporate bonds are defying predictions made at the beginning of the year that higher borrowing costs would curb debt offerings as the Federal Reserve pulled back from its unprecedented stimulus. Yields instead tumbled to a record last month as the central bank maintains its policy of keeping benchmark interest rates near zero.”

November 18 – Bloomberg (Oliver Renick, Joseph Ciolli and Callie Bost): “Shinzo Abe has helped make investors in Japanese stocks $1 trillion richer over the last two years, and many are betting he will make them even richer. Abe, Japan’s prime minister, is moving to safeguard his political future at the same time government data show the economy unexpectedly sank into a recession last quarter. In a press conference today, he called for an early election and delayed an unpopular sales-tax increase. Global investors, for their part, are standing by Abe and his campaign to restore growth. Since November 2012, his efforts to weaken the yen, restore profits and revive the economy -- collectively known as Abenomics -- sent the Topix index up 93%, the biggest gain in developed markets.”

November 18 - Financial Times (Andrew Bolger): “The enthusiasm with which investors pounced this month on the first euro-denominated bonds offered by Apple speaks to their apparently unquenchable thirst for investment grade debt. The big theme of the European bond market this year has been the growth of high yield bonds, issuance of which has already exceeded last year’s level, which was itself a record. But the strength of the high yield market in the first half fuelled concerns that a bubble was developing, and wobbles over the summer and again last month led to a sharp drop in high yield issuance. By contrast the investment grade market has performed solidly throughout the year, with yields dropping to record lows… In recent weeks blue-chip corporates such as SAP, Anheuser-Busch InBev, Roche and Bayer have issued investment grade bonds with some tranches offering yields of little more than 1%.”

November 19 – Bloomberg (Thomas Biesheuvel and Jesse Riseborough): “Chinese President Xi Jinping obviously wasn’t speaking for the world’s iron-ore producers when he pronounced this month that the risks from his country’s slowing growth ‘aren’t that scary.’ Mining giants have wagered $120 billion on belief that steel production in China won’t peak until as late as 2030. As the price of the key steelmaking raw material continued its descent to a five-year low today, it increasingly looks like they got that wrong. It’s a miscalculation that could have huge consequences for companies led by BHP Billiton Ltd. and Rio Tinto Group… Iron ore is the worst-performing commodity this year and the slowing economy has persuaded some analysts and steelmakers that peak steel is nearing in China, the world’s largest producer. Output in China will reach its zenith in as little as three years, prompting plant closures rather than expansions, according to Wolfgang Eder, chairman of the World Steel Association… ‘There has to be a restructuring of the Chinese steel industry,’ Eder said. ‘The iron-ore producers are getting more and more aware that their growth expectations have to be redefined. There are enormous over-capacities and more is coming on stream. This will increase the pressure.’ It’s a big change. Every year for the past decade, China has added new mills with the capacity to exceed the annual production of Germany, the largest steelmaker in Europe.”

November 21 – Bloomberg (Sridhar Natarajan and Katherine Chiglinsky): “Alibaba Group Holding Ltd. raised $8 billion in its first sale of bonds at yields that were lower than originally offered after investors submitted orders of at least $57 billion to the e-commerce company… Alibaba’s debt offering adds to a banner year for corporate bonds with worldwide issuance of $3.8 trillion on pace to exceed $4 trillion for the first time.”

November 18 – Bloomberg (Piotr Bujnicki and Maciej Martewicz): “Two delayed Eurobond sales by Polish coal producers this month risk being followed by a third amid a slump in prices for the commodity… Appetite for the deals suffered with coal prices near five-year lows. The plunge in coal revenue has deepened losses at the companies, triggering labor unrest amid the threat of industry restructuring to reduce costs. Kompania Weglowa SA and JSW SA, the two biggest producers in Poland, which count more than 77,000 employees, will come back to the market next year…”

Geopolitical Watch:

November 19 – Dow Jones (Harriet Torry): “Germany's top diplomat said… efforts must continue to mitigate the conflict in eastern Ukraine to avoid it spiraling, warning that momentum to reduce its intensity is threatening to wane. ‘Unfortunately we're still far away from a sustainable defusing of the conflict and from a political solution,’ German Foreign Minister Frank-Walter Steinmeier said… ‘We must stand by our common European position... we must pressure when one side doesn't seem capable of finding a way out of such a conflict, or indeed [is] further fuelling the conflict,’ Mr. Steinmeier added.”

November 19 – Financial Times (Jamil Anderlini): “China and Russia have vowed to strengthen bilateral military co-operation and hold joint naval exercises to counter US influence in the Asia-Pacific region as a growing chorus of voices warns of a looming ‘new cold war’. During a visit to Beijing where he met his Chinese counterpart and Premier Li Keqiang, Russian defence minister Sergei Shoigu said the two sides ‘expressed our concern with the US attempts to reinforce its military political influence in the Asia-Pacific region… Our co-operation in the military spheres has great potential and the Russian side is ready to develop it across the broadest possible spectrum of areas,’ Mr Shoigu said… The Russian delegation also drew a parallel between ongoing pro-democracy demonstrations in Hong Kong and so-called ‘colour revolutions’ in former Soviet states, including Ukraine, which China and Russia blame on instigation from the US and its allies."

November 19 – Bloomberg (Zulfugar Agayev): “Azerbaijan, the third-largest oil producer in the former Soviet Union, will look past falling crude prices and increase military spending by more than a quarter next year as tensions escalate with neighboring Armenia. Defense outlays will grow 27%..., Finance Minister Samir Sharifov said… ‘Azerbaijan’s armed forces need better equipment as Armenia continues its occupation policy in defiance of international law,” Sharifov said today, according to state news service Azartac.”

China Bubble Watch:

November 20 – Bloomberg: “A Chinese factory gauge fell to a six-month low in November, adding to signs broader stimulus is needed to halt a slowdown in the world’s second-largest economy. The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.0… Following readings that showed fixed-asset investment in the first ten months expanded the least since 2001 and credit growth weakened last month, the manufacturing report suggests targeted monetary easing is failing to boost growth… ‘It’s clear that the effects of targeted easing measures are waning,’ said Hua Changchun, a China economist at Nomura…”

November 17 – Bloomberg: “China’s bad loans jumped by the most since 2005 in the third quarter, fueling concern that a cooling economy will be further weakened as banks limit lending to avoid credit risks. Nonperforming loans rose by 72.5 billion yuan ($11.8bn) from the previous quarter to 766.9 billion yuan… Soured credit accounted for 1.16% of lending, up from 1.08% three months earlier. As China heads for the weakest economic expansion since 1990, Communist Party leaders have discussed lowering the nation’s growth target for 2015… Bankers’ low appetite for risk and their rising concerns about asset quality are leading to a ‘sluggish’ expansion in credit, according to UBS AG. ‘We are still suffering from the aftermath of the credit binge and massive stimulus measures put in place in 2008,’ said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities… ‘Banks have accelerated recognition of their bad loans in the last two quarters so that they could start the clean-up process.’”

November 20 – Bloomberg: “Wages at Chen Fengying’s sock factory on China’s east coast have soared almost sixfold in seven years. The 20% increase she expects in 2015 may doom her seven-year-old company as profit and revenue fall. ‘If things go on like this, we’ll just close down,’ said Chen from Zhuji in Zhejiang province, the so-called Sock City that produces 17 billion pairs annually, more than 35% of global production. ‘Many factories have already died.’ The plight of Chen’s Zhejiang Zhuji Luyi Knitwear Co. highlights the clash between government policies to encourage rapid wage growth and those to spur private enterprise. While both were possible as China’s low-cost manufacturing engine surged, a loss of competitiveness and the slowest economic expansion in a generation is squeezing profitability for credit- constrained small- and medium-sized companies… China uses minimum wages to influence private-sector pay checks as part of its strategy to boost consumption and reduce inequality. Its 12th five-year plan to 2015 mandated that minimum wages should increase by an annual average exceeding 13%.”

November 20 – Financial Times (Gabriel Wildau): “About half of China’s local governments may warrant junk-level credit ratings, according to the rating agency Standard & Poor’s, potentially hampering the central government’s efforts to develop a municipal bond market. Municipal bonds are at the heart of China’s efforts to inject transparency and market discipline into local government finance, after local debt ballooned to Rmb17.9tn by mid-2013 from Rmb10.7tn at the end of 2010… Most local borrowing in recent years has occurred through opaque special-purpose vehicles, a structure used to skirt a 20-year ban on borrowing by provinces and cities. But the S&P analysis, which suggests 15 of 31 localities surveyed deserve junk status, casts doubt on when and whether many less wealthy provinces and cities will be able to transition to bond issuance. ‘We can see that the central government so far only allows selected local governments to issue bonds by themselves,’ said Zhong Liang, sovereign ratings director at S&P… ‘They’re very aware of the difference in credit strength of provincial governments. So they’re going to take a gradual approach in reforming the borrowing regime.’”

November 18 – Bloomberg: “Beijing home prices fell for the first time in almost two years as China’s property slowdown deepened, prompting developers to offer discounts to cut inventories. New-home prices dropped in October in 67 cities of 70 tracked by the government from a year earlier, and in 69 from September… Home prices will continue to decline ‘modestly’ next year as developers offer promotions or discounts to reduce stock that will remain high, according to Moody’s… Housing sales slumped 10% in the first 10 months of this year from the same period in 2013 amid tight credit and an economic slowdown, prompting the government to ease curbs on an industry that has become a drag on growth. ‘Many developers are still using price adjustments to at least get closer to their annual sales targets, although few can achieve them,’ Donald Yu, Shenzhen-based analyst at Guotai Junan Securities Co., said. ‘Sales are rebounding, but not by that much. The oversupply issue remains quite severe.’”

Japan Bubble Watch:

November 21 – Bloomberg (Toru Fujioka and Simon Kennedy): “When Japanese economist Etsuro Honda heard that Paul Krugman was planning a visit to Tokyo, he saw an opportunity to seize the advantage in Japan’s sales-tax debate. With a December deadline approaching, Prime Minister Shinzo Abe was considering whether to go ahead with a 2015 boost to the consumption levy. Evidence was mounting that the world’s third-largest economy was struggling to shake off the blow from raising the rate in April… Honda, 59, an academic who’s known Abe, 60, for three decades and serves as an economic adviser to the prime minister, had opposed the April move and was telling him to delay the next one. Enter Krugman, the Nobel laureate who had been writing columns on why a postponement was needed. ‘That nailed Abe’s decision -- Krugman was Krugman, he was so powerful’ Honda said… ‘I call it a historic meeting.’ It was in a limousine ride from the Imperial Hotel -- the property near the emperor’s palace… that Honda told Krugman, 61, what was at stake for the meeting. The economist… had the chance to help convince the prime minister that he had to put off the 2015 increase.”

November 18 – Bloomberg (Isabel Reynolds and Maiko Takahashi): “Japanese Prime Minister Shinzo Abe called an early election in a bid to extend his term and salvage his Abenomics policies after the country fell into recession. Abe also delayed for 18 months a second planned sales-tax increase after the first installment in April led consumer spending to stagnate and the economy to contract for two straight quarters. Parliament will be dissolved on Nov. 21…, less than two years into his four-year term. The announcement came after preliminary data yesterday showed the world’s third-biggest economy contracted 1.6% in the third quarter. The recession didn’t mean Abenomics -- his policy of unprecedented monetary easing, stimulus spending and structural reform -- was a failure, he said. ‘I thought we should test the will of the people,’ Abe said. ‘If the LDP-Komeito coalition doesn’t keep its majority, we cannot push forward the three arrows and Abenomics. If we don’t get a majority, it would be a rejection of Abenomics, and I would resign.’ He’ll probably pick Dec. 14 for the election, according to people with knowledge of the ruling party’s strategy.”

November 19 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after Prime Minister Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. ‘It’s the responsibility of parliament and the government, not an issue for the central bank to be held responsible for,’ Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said… Abe’s move to pursue boosting growth before raising the sales levy puts a spotlight on Japan’s ability to manage the world’s heaviest debt burden. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse Group AG economist Hiromichi Shirakawa.”

November 17 – Bloomberg (Keiko Ujikane and Toru Fujioka): “Japan unexpectedly sank into a recession last quarter as the world’s third-largest economy struggled to shake off the impact of an April sales-tax boost, raising the odds of a delay in a second bump in the levy. Gross domestic product shrank an annualized 1.6 percent in the three months through September, a second straight drop… ‘No part of Japan’s economy looks encouraging,’ said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute… ‘Today’s data will leave another traumatic memory for Japanese politicians about sales tax hikes.’”