Friday, October 24, 2014

01/07/2011 Just the Facts *

For the week, the S&P500 gained 1.1%, and the Dow increased 0.8%. The Banks jumped 1.3%, and the Broker/Dealers gained 2.0%. The Morgan Stanley Cyclicals surged 2.6%, and the Transports advanced 1.4%. The Morgan Stanley Consumer index increased 0.4%, and the Utilities gained 0.9%. The S&P 400 Mid-Caps increased 0.4%, and the small cap Russell 2000 gained 0.5%. Tech was strong, with the Nasdaq100 jumping 2.7% and the Morgan Stanley High Tech index up 2.5%. The Semiconductors gained 3.4%. The InteractiveWeek Internet index jumped 3.1%. The Biotechs increased 0.8%. With bullion clobbered for $51, the HUI gold index started 2011 with a 7.2% loss.

One-month Treasury bill rates ended the year at 13 bps and three-month bills closed at 14 bps. Two-year government yields were little changed at 0.59%. Five-year T-note yields ended the week down 5 bps to 1.96%. Ten-year yields increased 3 bps to 3.33%. Long bond yields ended the week up 15 bps to 4.49%. Benchmark Fannie MBS yields were down 2 bps to 4.11%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 5 to 78 bps. Agency 10-yr debt spreads widened 2 bps to 10 bps. The implied yield on December 2011 eurodollar futures rose 6 bps to 0.79%. The 10-year dollar swap spread was little changed at 8 bps. The 30-year swap spread declined 6 to negative 29 bps. Corporate bond spreads were volatile but ended the week somewhat wider. An index of investment grade bond risk rose 4 to 89 bps. An index of junk bond risk increased 2 to 432 bps.

January 7 – Bloomberg (Tim Catts and Sapna Maheshwari): “Company bond sales in the U.S. reached a record this week and relative yields on investment- grade debt shrank to the narrowest since May… Issuance soared to $48.5 billion, eclipsing the $46.9 billion raised in the week ended May 8, 2009… Appetite for corporate debt is growing after annual sales topped $1 trillion for the second consecutive year…”

Investment grade issuers included GE Capital $6.0bn, Schlumberger $1.6bn, Toyota Motor Credit $1.6bn, Berkshire Hathaway $1.5bn, Met Life Global $1.5bn, Enterprise Products $1.5bn, Buckeye Partners $650 million, Plains All America Pipeline $600 million, Allegheny Technologies $500 million, Dr. Pepper Snapple $500 million, Healthcare Services $500 million, Tyco $500 million, Metlife $500 million, ERAC Finance $500 million, Amerigas $470 million, and Centerpoint Energy Resources $300 million.

Junk bond funds saw inflows of $743 million (from Lipper). A light week of junk issuance included CCO Holdings $1.1bn and Regal Entertainment $425 million.

Convertible debt issuers included WebMD Health Group $400 million.

International dollar debt issuers included Rabobank $2.75bn, Barclays Bank $2.0bn, Royal Bank of Scotland $2.0bn, Bank Nederlandse Gemeenten $2.0bn, Network Rail Infrastructure $1.5bn, Banco Bradesco $1.6bn, Bank Nova Scotia $1.25bn, Japan Municipal $1.0bn, Turkey $1.0bn, Australia New Zealand Bank $3.0bn, Macquarie Group $750 million, Sumitomo Mitsui Banking $1.5bn, BNP Paribas $1.0bn, Cemex $1.0bn, Bancolombia $520 million, Orix $400 million, and China South City $250 million.

U.K. 10-year gilt yields jumped 11 bps this week to 3.51%, while German bund yields fell 9 bps to 2.87%. Ten-year Portuguese yields surged 50 bps to 7.08%. Spanish yields jumped 16 bps to 5.50%, and Irish yields added a basis point to 9.07%. Greek 10-year bond yields jumped 15 bps to 12.60%. The German DAX equities index increased 0.5%. Japanese 10-year "JGB" yields jumped 8 bps to 1.195%. Japanese equities were out of the blocks quickly, with the Nikkei 225 jumping 3.1%. Emerging markets were mixed. For the week, Brazil's Bovespa equities index gained 1.1%, and Mexico's Bolsa increased 0.1%. South Korea's Kospi index dropped 4.0%. India’s equities index fell 2.1%. China’s Shanghai Exchange gained 1.1%. Brazil’s benchmark dollar bond yields fell 16 bps to 4.34%, while Mexico's benchmark bond yields dropped 13 bps to 4.35%.

Freddie Mac 30-year fixed mortgage rates dropped 9 bps last week to 4.77% (down 34bps y-o-y). Fifteen-year fixed rates fell 7 bps to 4.13% (down 37bps y-o-y). One-year ARMs dipped 2 bps to 3.24% (down 107bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 5 bps to 5.55% (down 54bps y-o-y).

Federal Reserve Credit increased $3.1bn to a record $2.411 TN (9-wk gain of $130bn). Fed Credit was up $194bn from a year ago, or 8.8%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/5) declined $6.1bn to $3.344 TN. "Custody holdings" were up $383bn from a year ago, or 12.9%.

M2 (narrow) "money" supply rose $14.0bn to a record $8.848 TN. Over the past year, "narrow money" grew 3.7%. For the week, Currency declined $2.1bn. Demand and Checkable Deposits surged $38.8bn, while Savings Deposits dropped $25.7bn. Small Denominated Deposits fell $3.7bn. Retail Money Funds added $6.6bn.

Total Money Market Fund assets (from Invest Co Inst) declined $12.2bn to $2.798 TN. Over the past year, money fund assets have dropped $509bn.

Total Commercial Paper outstanding declined $3.3bn to $966 billion. CP was down $101bn y-o-y, or 10.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.444 TN y-o-y, or 19.0%, to a record $9.059 TN.

Global Credit Market Watch:

January 7 - Financial Times (Aline van Duyn and Michael Mackenzie): “Bond markets have started the year with a bang. A rush of deals from blue-chip companies…and dozens of financial institutions have raised hopes that 2011 will be another big year for issuance. With $99bn of debt sold in the bond markets so far this week – about half of it denominated in dollars – it is clear that investor demand for bonds… remains solid. Indeed, many analysts expect that sales this year will match the roughly $6,000bn of new bonds that were issued in 2010.”

January 5 – Bloomberg (Joao Lima and Anabela Reis): “Portugal sold six-month bills today, the first of Europe’s high-deficit nations to test investor demand in 2011 after the threat of default forced Greece and Ireland to seek bailouts last year. The government debt agency, known as IGCP, auctioned 500 million euros ($665 million) of bills repayable in July. The yield jumped to 3.686% from 2.045% at a sale of similar maturity securities in September…”

January 7 – Bloomberg (Richard Bravo): “CommScope Inc., the telecommunications-equipment provider that Carlyle Group is buying, led companies this week seeking more than $2 billion in leveraged loans in the U.S. as borrowers take advantage of a rally in the debt to finance acquisitions. Demand for U.S. loans has pushed prices on the debt to a two-year high with the S&P/LSTA U.S. Leveraged Loan 100 Index rising 6.8% since the beginning of 2010.”

January 4 – Bloomberg (Ben Moshinsky): “The European Union may give regulators power to block new products and limit trading risks at banks deemed too big to fail, as part of plans to protect public finances from future financial crises. National regulators of cross-border banks may be able to require ‘changes to legal or operational structures’ if the lender would need ‘extraordinary public financial support’ during a crisis, according to draft proposals…”

Global Bubble Watch:

January 7 – Bloomberg (Simon Kennedy): “Fears of a sovereign default are ‘manifest’ in Europe and will soon spread to Japan and the U.S. as governments struggle to control deficits, according to Citigroup Inc. economists led by former Bank of England policy maker Willem Buiter. ‘Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving… There is absolutely no safe’ sovereign.”

January 3 – Bloomberg (Michael Tsang and Lee Spears): “More than half of the U.S. initial public offerings planned for this year are from private equity firms as KKR & Co., Blackstone Group LP and Carlyle Group try to sell some of their biggest leveraged buyouts. HCA Holdings Inc., Nielsen Holdings BV, Kinder Morgan Inc. and more than two dozen other companies owned by private equity firms have registered with the Securities and Exchange Commission to sell $14 billion of shares in IPOs…”

Currency Watch:

January 6 – Financial Times (Alan Beattie): “The International Monetary Fund has called for global guidelines on managing international capital flows, a sign of rising tensions as governments impose blocks on cross-border movements of speculative money. A report by IMF staff… said that the organisation needed to end its long silence on the matter. ‘In the aftermath of the global crisis, and especially now with resurgent capital flows requiring a considered policy response, it is not tenable for the fund to remain on the sidelines of a debate so central to global economic stability,’ the report concluded. Rapid surges of speculative money into emerging market currencies over the past year have produced a range of government responses. These include direct intervention in the currency markets, imposing taxes on short-term capital flows and increasing bank reserve requirements to damp down credit creation.”

January 4 – Bloomberg (Ron Harui and Wes Goodman): “Currency traders that seek profits by borrowing in nations with low interest rates to fund purchases in countries with higher yields are losing more money than at any time in at least a decade. The strategy lost 2.5% in 2010 as the dollar -- a favorite for financing the trades because of record low U.S. rates -- appreciated, according to an index compiled by UBS… That’s more than the 0.98% drop in 2008…”

The U.S. dollar index jumped 2.6% to 81.08. On the upside for the week, the Mexican peso increased 0.9%, the Canadian dollar 0.5%, and the South Korean won 0.3%. On the downside, the euro declined 3.6%, the Danish krone 3.5%, the Swiss franc 3.3%, the Swedish krona 3.3%, the Norwegian krone 2.8%, the Australian dollar 2.7%, the New Zealand dollar 2.6%, the South African rand 2.6%, the Japanese yen 2.4%, the Brazilian real 1.4%, the Singapore dollar 0.8%, the British pound 0.4%, and the Taiwanese dollar 0.2%.

Commodities and Food Watch:

January 5 – Bloomberg (Rudy Ruitenberg): “World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt. An index of 55 food commodities tracked by the Food and Agriculture Organization gained for a sixth month… The gauges for sugar and meat prices advanced to records. Sugar climbed for a third year in a row in 2010, and corn jumped the most in four years… Food prices may rise more unless the world grain crop increases ‘significantly’ in 2011, the FAO said…”

January 6 – Associated Press: “A giant bluefin tuna fetched a record 32.49 million yen, or nearly $396,000, in the first auction of the year at the world's largest wholesale fish market in Japan. The price for the 754-pound (342-kilogram) tuna beat the previous record set in 2001…”

The CRB index dropped 2.7%. The Goldman Sachs Commodities Index (GSCI) fell 1.8%. Spot Gold fell 3.6% to $1,370. Silver sank 7.2% to $28.71. February Crude fell $2.98 to $88.40. February Gasoline was little changed, while February Natural Gas added 0.2%. March Copper dropped 3.8%. March Wheat declined 2.5%, and March Corn sank 5.4%.

China Bubble Watch:

January 5 – Financial Times (Patti Waldmeir): “China’s automotive market, the largest in the world, is expected to grow strongly this year in spite of Beijing’s decision to phase out some tax incentives and restrict new car sales in the capital, analysts forecast… Beijing has gradually eroded tax incentives for small vehicles introduced in 2008 to help the Chinese market recover from a temporary hiatus… Other Chinese vehicle makers have yet to report annual sales for 2010 but motor analysts expect total sales of about 17.5m to 18m vehicles – up about 30% over 2009. Most car market analysts in China expect sales in the 20m range for 2011.”

January 5 – Bloomberg: “China’s efforts to stem inflation by curbing access to loans are driving companies to borrow record amounts in commercial paper, even as interest costs more than doubled in 2010. Sales of the short-term notes may rise about 20% this year following last year’s 45% increase to a record 678 billion yuan ($103 billion)…”

January 4 – Bloomberg: “Companies in China may raise more than 400 billion yuan ($61bn) this year from initial public offerings after first-time sales climbed to a record in 2010, PricewaterhouseCoopers LLP said.”

January 5 – Bloomberg: “China’s central bank will examine lending and capital levels at domestic banks each month to determine reserve requirements for individual lenders, the China Securities Journal reported. Banks may face higher requirements if their capital adequacy ratios fall below mandated levels…”

January 4 – Bloomberg: “China will likely see ‘strong’ increases in salaries in the five years through 2015 as the nation’s supply of labor dwindles and consumers begin to spend more and save less, Credit Suisse Group AG said… Wages may increase to be equal to 62% of China’s gross domestic product by 2015 from 50.5% last year… Economic growth may be about 9% a year from 2011 through 2015 as wages rise by 19% annually… Private consumption may climb to 41.7% of GDP in 2015 from 35.6% last year, it said. China’s leaders said last month that boosting incomes is a major task for the nation in its next five-year plan…”

India Watch:

January 7 – Bloomberg (Tushar Dhara and Kartik Goyal): “India may need to raise interest rates this month if inflation pressures continue, Chakravarthy Rangarajan, the prime minister’s top economic adviser, said after food prices jumped the most in almost six months.”

Asia Bubble Watch:

January 7 – Bloomberg (Chinmei Sung): “Taiwan’s exports rose 19.1% in December from a year earlier, the Ministry of Finance said…”

Latin America Watch:

January 5 – Bloomberg (Matthew Bristow): “Brazil’s industrial output rose more than economists expected in November… Production rose 5.3% in November from a year ago, led by a 14.2 percent jump in automobile production…”

January 7 – Bloomberg (Matthew Bristow and Alexander Ragir): “Brazil’s consumer prices rose more than economists expected in December, pushing last year’s inflation rate to the highest since 2004. Consumer prices… rose 5.91% last year…”

January 7 – Bloomberg (Alexander Cuadros and Iuri Dantas): “Brazilian financial shares tumbled in Sao Paulo, with the benchmark gauge heading to the biggest two-day drop in six months, on concern government measures to contain currency gains and restrict credit will hurt earnings.”

January 4 – Bloomberg (Carlos Manuel Rodriguez and Crayton Harrison): “Mexico expects to raise its economic growth estimate for 2011 from the current forecast of 3.9% as U.S. industrial production and internal demand improve, Finance Minister Ernesto Cordero said.”

January 5 – Bloomberg (Randy Woods): “Chile’s economy expanded faster than economists estimated in November… The central bank’s Imacec economic activity indicator rose 6.2% from a year earlier, exceeding the 5.3 percent median estimate…”

Unbalanced Global Economy Watch:

January 7 – Bloomberg (Greg Quinn): “Canadian employment rose for a third straight month in December, led by a surge in factory jobs, capping a year where all the positions lost in the 2009 recession were regained. Employment rose by 22,000… The jobless rate was unchanged from November’s 7.6%...”

January 7 – Bloomberg (Jana Randow and Jeff Black): “Germany’s recovery broadened in 2010 as consumer spending strengthened and companies increased investment in Europe’s largest economy. Retail sales may have increased as much as 1.6% in 2010…”

January 7 – Bloomberg (Kati Pohjanpalo): “Finland’s gross domestic product expanded an annual 5.5% in October, Helsinki-based Statistics Finland said…”

January 6 – Bloomberg (Paul Abelsky and Peter Laca): “Russia’s inflation rate rose to the highest in 2010 in December as more expensive food and increasing consumer demand spurred price growth, putting pressure on the central bank to raise borrowing costs. Inflation accelerated to 8.7%...

U.S. Bubble Economy Watch:

January 7 – Bloomberg (Simone Baribeau): “Employment at local governments, which provide almost 11% of all U.S. nonfarm jobs, fell to its lowest level in more than four years last month as municipalities cut payrolls to balance budgets. Workers employed by local government fell 0.1% to 14.2 million… after cities, towns and counties cut 20,000 jobs… ‘State and local government is just getting hit in every possible way on the revenue side,’ after the recession curbed property, income and sales tax receipts, said Heidi Shierholz, an economist with the Economic Policy Institute…”

January 7 – Bloomberg (Bob Willis): “Employers in the U.S. added fewer jobs than forecast in December, confirming Federal Reserve Chairman Ben S. Bernanke’s view that it will take years for the labor market to heal. Payrolls increased 103,000, compared with the median forecast of 150,000…"

Central Bank Watch:

January 7 – Bloomberg (Scott Lanman): “Federal Reserve Chairman Ben S. Bernanke said the unemployment rate will probably fall slowly even with a pickup in U.S. growth this year, signaling no change in the central bank’s monetary stimulus. At the pace of improvement projected by Fed officials, ‘it could take four to five more years for the job market to normalize fully,’ Bernanke said…"

Fiscal Watch:

January 7 – Bloomberg (Catherine Dodge and Peter Cohn): “U.S. House Republicans, who swept into power promising to rein in the federal deficit, have proposed policies in their first week that would make the shortfall worse. Moves to repeal President Barack Obama’s health-care law and promises to extend Bush-era tax cuts and offer other breaks would add more than $1 trillion to the deficit over the next 10 years, based on reports from the nonpartisan Congressional Budget Office and the Joint Committee on Taxation.”

Muni Watch:

January 7 – Bloomberg (Simone Baribeau and James Rowley): “Congressman Paul Ryan, the Budget Committee chairman in the U.S. House of Representatives, said Republicans don’t intend to save states from debt defaults. ‘We are not interested in a bailout,’ the Republican…said… Ryan said some states are ‘already telling us’ that, when asked how he would respond if he was told one was in danger of defaulting. U.S. states face a combined $140 billion in deficits in the next fiscal year…”

January 4 - New York Times (Steven Greenhouse) -- Faced with growing budget deficits and restive taxpayers, elected officials from Maine to Alabama, Ohio to Arizona, are pushing new legislation to limit the power of labor unions, particularly those representing government workers, in collective bargaining and politics. State officials from both parties are wrestling with ways to curb the salaries and pensions of government employees, which typically make up a significant percentage of state budgets.”

California Watch:

January 3 – Bloomberg (Alison Vekshin and Christopher Palmeri): “Jerry Brown took the oath of office as California’s governor, 36 years after he first stepped into the job, promising residents an ‘honest’ budget. Brown… takes command of the nation’s largest state by population at a time when California faces $28 billion in budget deficits during the next 18 months.

12/31/2010 Year in Review *

In an especially quiet final week of the year, the S&P500 was about unchanged (2010 gain of 12.8%), and the Dow was slightly positive (up 11.0%). The S&P 400 Mid-Caps gave back 0.4%, but finished the year up 24.9%. The small cap Russell 2000 slipped 0.7%, while ending 2010 with a gain of 25.3%. The Banks advanced 0.85% (up 22.2%), and the Broker/Dealers added 0.1% (up 5.6%). The Morgan Stanley Cyclicals increased 0.5% (up 25.6%), and the Transports gained 0.5% (up 24.6%). The Morgan Stanley Consumer index was little changed (up 12.4%), while the Utilities slipped 0.2% (up 0.9%). The Nasdaq100 dipped 0.6% (up 19.2%), while the Morgan Stanley High Tech index posted a small advance (up 14.9%). The Semiconductor index was unchanged (up 14.4%). The InteractiveWeek Internet index declined 1.1%, yet ended the year up 31.6%. The Biotechs fell 1.2%, reducing 2010 gains to 37.7%. With bullion jumping $39, the HUI gold index gained 2.4% (up 33.4%).

One-month Treasury bill rates ended the year at 5 bps and three-month bills closed at 12 bps. Two-year government yields dropped 10 bps to 0.54%. Five-year T-note yields ended the week down 7 bps to 1.95%. Ten-year yields dropped 10 bps to 3.30%. Long bond yields ended the week 13 bps lower at 4.34%. Benchmark Fannie MBS yields were 10 bps lower to 4.13%. The spread between 10-year Treasury yields and benchmark MBS yields was little changed at 83 bps. Agency 10-yr debt spreads narrowed 7 bps to 8 bps. The implied yield on December 2011 eurodollar futures sank 16 bps to 0.73%. The 10-year dollar swap spread was little changed at 8.5 bps. The 30-year swap spread increased 4.5 to negative 22.75 bps. Corporate bond spreads were mixed. An index of investment grade bond risk was little changed at 85 bps. An index of junk bond risk declined 7 to 430 bps.

There were no debt issues this week.

Junk bond funds saw inflows of $335 million (from EPFR).

U.K. 10-year gilt yields dropped 11 bps this week to 3.39%, and German bund yields dipped 2 bps to 2.96%. Ireland yields rose 5 bps to 9.05%. Greek 10-year bond yields jumped 27 bps to 12.46%. Ten-year Portuguese yields declined 2 bps to 6.58%, and Spanish yields dipped 2 bps to 5.44%. The German DAX equities index dropped 2.1% (up 16.1%). Japanese 10-year "JGB" yields declined 3 bps to 1.12%. The Nikkei 225 declined 0.5% (down 3.0%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index gained 1.2% (up 1.0%), and Mexico's Bolsa rose 1.2% to close the year at a 2010 high (up 20%). South Korea's Kospi index gained 1.0% (up 21.9%). India’s equities index jumped 2.2% (up 17.4%). China’s Shanghai Exchange declined 1.0% (down 14.3%). Brazil’s benchmark dollar bond yields were little changed at 4.62%, while Mexico's benchmark bond yields declined 7 bps to 4.48%.

Freddie Mac 30-year fixed mortgage rates rose 5 bps last week to a 7-month high 4.86% (down 28bps y-o-y). Fifteen-year fixed rates increased 5 bps to 4.20% (down 34bps y-o-y). One-year ARMs sank 14 bps to 3.26% (down 107bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 9 bps to 5.60% (down 60bps y-o-y).

Federal Reserve Credit jumped $19.2bn to a record $2.408 TN (8-wk gain of $127bn). Fed Credit was up $188bn for the year, or 8.5%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/29) declined $0.7bn to $3.350 TN. "Custody holdings" increased $395bn in 2010, or 13.4%.

M2 (narrow) "money" supply increased $4.9bn to a record $8.834 TN. Narrow "money" has increased $301bn y-t-d, or 3.6% annualized. Over the past year, M2 grew 3.3%. For the week, Currency slipped $0.5bn. Demand and Checkable Deposits jumped $14.2bn, while Savings Deposits declined $5.8bn. Small Denominated Deposits fell $3.9bn. Retail Money Funds added $1.0bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $22.4bn to $2.810 TN. For the year, money fund assets dropped $483bn.

Total Commercial Paper outstanding declined $5.0bn to $969 billion. CP declined $201bn this year, or 17.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.392 TN y-o-y, or 18.2%, to $9.024 TN.

Global Credit Market Watch:

December 29 – Bloomberg (Brendan A. McGrail and Ashley Lutz): “Tax-exempt municipal bonds are heading for their worst quarterly performance in more than 16 years as yields soared amid a U.S. Treasury selloff and the looming expiration of Build America Bonds. Municipal investments have lost 4.5% this quarter through Dec. 27…”

December 30 – Bloomberg (Tim Catts and Sapna Maheshwari): “Corporate bond sales worldwide topped $3 trillion for a second straight year, led by the highest-ever issuance of junk-rated debt… Ally Financial Inc., Ford Motor Credit Co. and 509 other speculative-grade companies sold $287 billion of debt in the U.S., smashing the previous record of $162.7 billion in 2009… Yields on investment-grade corporate bonds worldwide fell to an average of 3.36% on Oct. 11, the lowest ever level for the daily data that began in 1996… Companies in the U.S. sold $844 billion of investment-grade bonds denominated in dollars this year, a 21% decline from 2009, as borrowers built a $1.17 trillion cash hoard, the most on record…”

December 29 – Bloomberg (Tim Catts): “Companies sold almost twice as much debt with the lowest ratings this year as they took advantage of plunging yields to refinance looming maturities at lower costs. Sales of notes ranked Caa1 or less by Moody’s… accounted for 16% of all junk-rated sales this year, versus 8.5% in 2009… Junk issuance climbed to a record $289 billion this year, including $46.4 billion ranked in the CCC tier or lower… That compares with $162.7 billion sold last year, of which $13.9 billion had the lowest grades.”

December 29 – Bloomberg (Kristen Haunss): “Leveraged-loan issuance in the U.S. more than doubled this year… More than $369 billion of loans were raised as of Dec. 28… up from $170 billion in 2009… Interest rates fell to 3.91 percentage points more than the London interbank offered rate on average, from 10.28 percentage points at the end of 2009…”

December 27 – Bloomberg (Sarah Mulholland): “Bond offerings tied to automobile loans and leases are poised to dominate sales of asset-backed debt for a third straight year in 2011 after issuance of all types of the securities plunged 31% in 2009. Vehicle debt bundled into securities will likely total from $70 billion to $75 billion, up as much as 23% from 2010… according to Barclays Capital. Bond sales linked to auto and education loans, and credit cards may reach $115 billion in 2011… Total issuance fell to $92 billion this year from $134 billion as banks relied more heavily on deposits to fund credit card lending and the Federal Reserve ended its Term Asset-Backed Securities Loan Facility…”

Global Government Finance Bubble Watch:

December 31 – Financial Times (Kevin Brown and Toni O’Loughlin): “Emerging Asia’s central banks are imposing fresh administrative controls on local banks as fears rise of volatile currency movements and asset price bubbles caused by the knock-on effects of loose US monetary policy. In the latest sign of growing nervousness about the scale of financial inflows from the west, Indonesia announced more than 20 technical measures designed to minimise inflationary pressures and the risk of a sudden reversal of fund flows. The announcement followed moves by Taiwan to tighten curbs on exchange rate derivatives and rising expectations in Seoul that South Korea will significantly reduce limits on banks’ holdings of exchange derivatives in January. Thailand imposed a 15% withholding tax on capital gains and interest payments relating to government and state-owned company bonds, signalling that it was prepared to take tough measures to curb inflows of ‘hot money’.”

December 31 – Wall Street Journal (Arran Scott, Aries Poon, and Ditas Lopez): “Central banks in South Korea, Malaysia and Thailand are believed to have intervened in foreign-exchange markets Thursday as Asian currencies surged against the dollar on optimism about the region's economic outlook, underscored by strong economic data from China and signals that the yuan will continue to strengthen.”

December 30 – Bloomberg (Rita Nazareth): “Marc Faber… said U.S. Treasuries are a ‘suicidal’ investment. Government bonds are likely to decline, said Faber, who publishes the Gloom, Boom and Doom report… ‘This is a suicidal investment,’ Faber said… ‘Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S. long-term bonds.’”

Currency Watch:

December 30 – Bloomberg (Emma Charlton): “Switzerland’s franc jumped to a record against the euro and the dollar as investors bet its economy is set to outperform the euro zone and U.S. next year.”

December 30 – Bloomberg (Monami Yui): “The Australian dollar traded near the highest level since 1982 as signs the U.S. economic recovery is gaining momentum spurred demand for higher-yielding assets.”

December 29 – Bloomberg: “Chinese executives are reducing support for a stronger yuan as they criticize U.S. monetary easing for weakening the dollar and fueling asset bubbles in emerging-market economies. Shen Wenrong, chairman of Jiangsu Shagang Group Co., the nation’s biggest private steelmaker, said China should only allow a ‘token’ appreciation while the U.S. is ‘printing money to stoke inflation.’ Ma Weihua, chief executive officer of China Merchants Bank Co., said the yuan shouldn’t climb ‘too fast’ and the Federal Reserve must show more restraint after announcing plans to buy $600 billion of Treasuries.”

The dollar index dropped 1.9% in 2010's final week to 78.968, reducing the year's gain to 1.4%. On the upside for the week, the New Zealand dollar increased 4.1%, the Swiss franc 2.9%, the Norwegian krone 2.5%, the South Korean won 2.5%, the Japanese yen 2.2%, the Swedish krona 2.1%, the Euro 2.0%, the Danish krone 2.0%, the Australian dollar 1.9%, the Brazilian real 1.8%, the South African rand 1.6%, the Taiwanese dollar 1.3%, the Singapore dollar 1.2%, the British pound 1.1%, the Canadian dollar 1.0%, and the Mexican peso 0.2%.

Commodities Watch:

December 30 – Financial Times (Javier Blas): “Cereals, iron ore and oil. The three commodities, the most important for the day-to-day working of economies around the world, could derail the recovery next year. The cost of cereals, oil and iron ore has surged already to two-year highs, up between 40 and 150 per cent from the lows of 2009 at the height of the global financial crisis, and analysts and traders generally anticipate further increases into next year. The three are critical for the world – both in economic and political terms. For example, high prices for cereals… not only push up food inflation, but could also trigger food riots. The cost of iron ore, used to make steel, is critical to the global economy as it filters into steel prices and, ultimately, into the cost of everyday goods… The same is true for oil prices, which add inflation at the petrol station, but also along the supply chain due to higher power and transport costs.”

December 29 – Bloomberg (Claudia Carpenter): “Sugar extended gains to a 30-year high in New York, and climbed to a 21-year high in London, on speculation floods will prevent a bigger crop in Australia, the world’s third-largest exporter.”

December 29 – Bloomberg (Jeff Wilson): “Rice futures rose the most allowed by the Chicago Board of Trade after flooding reduced production in Thailand, the world’s biggest exporter… ‘Asian destinations are more aggressive buyers of U.S. rice,’ said Roy Huckabay, an executive vice president for the Linn group in Chicago.”

The CRB index gained 1.0%, increasing 2010 gains to 17.4%. The Goldman Sachs Commodities Index (GSCI) added 0.6% (up 20.4%). Spot Gold rallied 2.8% to a record $1,421 (up 29.5%). Silver surged 5.5% to $30.93 (up 84%). February Crude slipped 11 cents to $91.40 (up 15%). February Gasoline added 0.3% (up 19%), and February Natural Gas jumped 6.3% (down 21%). March Copper rose 4.1% to a new record high (up 33%). March Wheat gained 1.4% (up 47%), and March Corn rose 2.4% (up 52%).

China Bubble Watch:

December 27 – Bloomberg: “China continues to face an ‘arduous task’ in managing credit and liquidity next year, while containing financial risks, the central bank said today… The People’s Bank of China will ‘seriously’ implement prudent monetary policy and prioritize stabilizing overall price levels in 2011, it said in a statement posted… Premier Wen Jiabao said… that inflation expectations were ‘more dire’ than inflation and that government measures to curb the nation’s property market weren’t well implemented. The central bank will deploy various monetary instruments to manage liquidity and steer credit growth to normal levels, it said… Credit should grow in a ‘reasonable and moderate’ manner, the central bank said.”

December 27 – Bloomberg: “China’s Premier Wen Jiabao said measures to curb the country’s property market weren’t well implemented and reiterated his goal for home prices to return to a ‘reasonable level’ during his term that ends in 2012. The government will also increase the supply of affordable housing and introduce more measures to curb speculation, he said… China’s land sales are expected to top 2 trillion yuan ($302 billion) this year from 1.5 trillion yuan in 2009…”

December 27 – Bloomberg: “Chinese industrial companies’ profits rose 49.4% in the 11 months through November from a year earlier, putting pressure on the central bank to add to this year’s two interest-rate increases. Net income climbed to 3.88 trillion yuan ($585 billion)…”

December 28 – Bloomberg: “Beijing will raise the minimum wage by 20.8% in 2011, becoming the latest local government to lift pay in a country where inflation is running at the fastest clip in more than two years. The increase to 1,160 yuan ($175) a month… the second boost this year, will take effect on Jan. 1… The city will also raise pension and unemployment benefits… Local governments are augmenting wages to head off worker unrest and help households cope with accelerating inflation, which reached a 28-month high of 5.1% in November.”

Japan Watch:

December 28 – Bloomberg (Toru Fujioka and Keiko Ujikane): “Japanese Finance Minister Yoshihiko Noda renewed his warning to take “bold” action against the yen’s advance if needed, a sign of concern among policy makers about the currency’s climb slowing the recovery. The yen’s recent appreciation has been “one-sided,” Noda told reporters in Tokyo today, adding that the government will take “bold action when moves are excessive.” Economy Minister Banri Kaieda said “abrupt yen moves must be avoided.”

India Watch:

December 30 – Bloomberg (Kartik Goyal): “India’s inflation remains at ‘elevated levels,’ the central bank said, signaling it may resume raising interest rates after keeping them unchanged this month because of a cash crunch in the banking system.”

December 30 – Bloomberg (Tushar Dhara): “India’s Finance Minister Pranab Mukherjee raised his inflation forecast for the current year after an index of food prices surged to a 10-week high. The benchmark wholesale-price inflation rate may be ‘around’ 6.5% by March 31… more than the 6% prediction he made on Dec. 14. Food inflation rose 14.44% in the week to Dec. 18 from a year earlier…”

Asia Bubble Watch:

December 30 – Bloomberg (Eunkyung Seo and William Sim): “South Korea’s industrial production increased 10.4 percent in November from a year earlier…”

December 29 – Bloomberg: “Vietnam’s economic expansion accelerated in the fourth quarter, adding pressure on the central bank to curb credit growth to prevent overheating. Gross domestic product grew 7.34% in the three months through December from a year earlier…”

December 27 – Bloomberg (Joel Guinto): “The Philippine economy grew around 6.5% in the fourth quarter, driven by consumption, Economic Planning Secretary Cayetano Paderanga told reporters…”

December 29 – Bloomberg (Clarissa Batino and Francisco Alcuaz Jr.): “The Philippines plans to boost debt sales by 52% in the coming quarter, taking advantage of record-low borrowing costs to finance its budget deficit.”

Unbalanced Global Economy Watch:

December 29 – Bloomberg (Katya Kazakina and Scott Reyburn): “The value of the world’s most expensive items sold at auction more than doubled in 2010 as the top end of the market bounced back from the financial crisis. The priciest 10 lots amounted to $698.6 million, compared with the combined $326.1 million of 2009… Buyers around the globe snapped up works by trophy-name 20th-century artists, and historic Chinese art ousted European Old Masters as the other main contributor.”

December 30 – Bloomberg (Jones Hayden): “European retail sales increased at the fastest pace in 2 1/2 years in December, signaling consumer spending is gaining strength in the 16 nations using the euro.”

December 30 – Bloomberg (Charles Penty): “Spain has between 700,000 and 1.1 million unsold homes, an amount that will drag on a recovery in the housing market as prices will probably keep falling in 2011, the Bank of Spain said.”

December 30 – Bloomberg (Lorenzo Totaro): “Italian business confidence rose for a third month to the highest in almost three years as executives shared consumers’ optimism about the economic recovery.”

December 27 – Bloomberg (Paul Abelsky): “Russia’s manufacturing growth jumped in December, accelerating at the fastest pace since March 2008, as companies benefited from demand for exports and employers boosted hiring at the highest rate in more than four years.”

U.S. Bubble Economy Watch:

December 27 – Bloomberg (David Altaner): “U.S. health-insurance costs are rising more quickly than the ability of U.S. families to pay and the gap is widening, according to the Commonwealth Fund. …private-insurance premiums for families rose three times faster than median household income over six years… Deductibles… rose almost five times faster, the fund said. ‘Families are being priced out of the market,’ said Cathy Schoen, an economist with the fund… ‘The consequences are less adequate insurance coverage, costlier insurance coverage, higher rates of no coverage and growing stress on the family.’”

Central Bank Watch:

December 27 – Bloomberg (Toru Fujioka): “A Bank of Japan board member said there’s uncertainty about the U.S. Federal Reserve’s quantitative easing policy, minutes from the bank’s policy- setting meeting showed. One ‘member was of the view that the effects of the measure taken’ by the Fed ‘were highly uncertain and growth in the U.S. economy was still likely to remain low for some time…’”

New York Watch:

December 30 – Associated Press: “New York commuters are facing a double-whammy: a blizzard that paralyzed the transit system and fare increases that have left some riders fuming. The Metropolitan Transportation Authority fare hike for riding the city's subways, buses and commuter rails is increasing for the third time in three years. It comes just months after severe cuts to service.”

December 30 – Bloomberg (Michael Quint and Martin Z. Braun): “A state authority may decide today whether to assert control over Nassau County’s finances, moving beyond an oversight role because elected officials haven’t closed next year’s $343 million budget gap.”

Muni Watch:

December 28 – Bloomberg (Darrell Preston): “The cost of insuring Illinois’s bonds against default rose to the highest level in five months as the state headed for the new year without a plan to finance a $3.7 billion pension-fund contribution. The cost of credit-default swap insurance on the lowest-rated state after California has risen 16% to $330,000 to protect $10 million of debt…”

December 28 – Bloomberg (Tim Jones and Darrell Preston): “Illinois Governor Pat Quinn is considering borrowing $15 billion to pay overdue bills and balance the biggest budget deficit in the state’s history. The plan is among a range of proposals that Quinn is discussing with state lawmakers as they prepare to return to Springfield Jan. 3 for the final days of the legislative session… Illinois faces a budget shortfall of at least $13 billion because of declining tax revenue.”

December 30 – Bond Buyer (Caitlin Devitt): “Indiana cities would be allowed to file for Chapter 9 bankruptcy protection under a bill touted by Republican Gov. Mitch Daniels. Daniels this week called the measure - Senate Bill 150 - a ‘useful mechanism’ for helping fiscally stressed cities that would help provide clarity on the topic of municipal bankruptcy.”

December 28 - Bond Buyer (Caitlin Devitt): “Detroit has filed its annual audit on time for the first time in five years. The 237-page financial report… warns that the city faced a total deficit of $1.6 billion as of June 30… The deficit grew by $692 million over the previous year, the bulk of which was due to a change in accounting rules that requires governments to now report expected future costs of derivatives.”

Real Estate Watch:

December 28 – Bloomberg (Bob Willis): “Home prices dropped more than forecast in October, a sign housing will remain a weak link as the U.S. recovery accelerates into the new year. The S&P/Case-Shiller index of property values fell 0.8% from October 2009, the biggest year-over-year decline since December 2009… A wave of foreclosures waiting to reach the market means home prices will remain under pressure in 2011, representing a risk to household finances. Federal Reserve policy makers this month said ‘depressed’ housing and high unemployment remained constraints on consumer spending, reasons why they reiterated a plan to expand record monetary stimulus.”

Year in Review:

The return of Bubble Dynamics was the overriding thesis coming into 2010. The extraordinary global fiscal and monetary response to the 2008 bursting of the mortgage/Wall Street finance Bubble had unleashed the “global government finance Bubble.” This Bubble analysis implied bi-polar outcome possibilities: the Bubble would gain further momentum - or it would burst. “Muddling through” is simply not a Bubble earmark. And we’re not witnessing some “new normal” at work, but rather “The Latest Abnormal” in a prolonged cycle of policy-induced boom and bust dynamics. For this phase of the cycle, the Bubble has invaded the very heart of the Credit system. Normal does not apply.

It is the nature of Bubbles that, if accommodated by loose finance, they expand, broaden and gain increasing momentum. In a world of loose “money,” unchecked speculation will have a propensity for evolving into intense speculative excess. Yet fragile underpinnings - for global economies, Credit systems and markets - ensured acute vulnerability and the return to crisis conditions in the event of faltering confidence in marketplace liquidity conditions or waning faith in government stimulus measures.

Bullish optimism was running high to begin the New Year. Coming off of a spectacular stock market rally and 5.0% GDP growth in Q4 2009, the consensus view was calling for the type of typically robust recovery that would follow a steep economic pullback. Financial conditions were abnormally loose and mortgage rates unusually low, seemingly implying a strong recovery for our nation’s battered housing markets. Home sales had gained a head of steam into year-end 2009, and it appeared the worst of the storm had passed. A housing recovery was expected to work wonders on the financial sector and real economy.

The bears saw things differently. The most popular bearish view focused on ongoing mortgage troubles and “deleveraging.” Some of the more vocal bears spoke of persistent Credit contraction. Indeed, contracting household mortgage debt and stagnant corporate borrowings were leading to a highly unusual decline in private-sector Credit. Emboldening this line of analysis, bank Credit was continuing to contract and “money” supply growth remained tepid.

Yet the conventional bearish view tended to downplay the impact from the massive expansion of government debt. From my analytical perspective, a debt expansion of such magnitude should be the analytical centerpiece. Total Non-financial debt actually expanded 3.0% in 2009 and then accelerated to 4.3% annualized in Q1 2010 and 4.7% in Q2. On the back of unprecedented (double-digit to GDP) peacetime federal borrowings, total system Credit was expanding – not contracting. The bearish Credit collapse thesis was flawed.

Massive government borrowing and spending stabilized incomes, home prices, securities markets, household net worth, consumption and corporate earnings. And the unprecedented expansion of the Fed’s (and global central banks’) balance sheet ensured the type of liquidity overabundance necessary for the marketplace to accommodate our government’s insatiable borrowing appetite.

There was a lingering problem, however, in that the Federal Reserve expected to actually begin unwinding its crisis-period liquidity operations. I don't believe policymakers had any plans for ongoing market intervention and liquidity support mechanisms. Chairman Bernanke went to some lengths to explain the Fed’s so-called “exit strategy.” It was not to be.

Global markets were hit with another ill-timed shock when the Greek debt crisis became a systemic issue in late-April. Prior to the Greek crisis, the markets (especially within the global leveraged speculating community) presumed that policymakers had things well under control. Concerted global fiscal and monetary stimulus was supposed to have ensured highly-liquid markets and a sustainable recovery. “Risk on” was back on.

Suddenly, the market convulsed and the leveraged players were again caught on the wrong side of faltering markets. The Credit default swap (CDS) market for European sovereign debt dislocated and the entire debt marketplace was hit with another destabilizing bout of illiquidity. This wasn't supposed to happen; governments couldn't actually be shut out of the debt market and, perhaps, even default - could they? Deleveraging and de-risking returned with vengeance. Risk aversion and liquidity issues quickly resurfaced in the U.S. debt markets – jeopardizing the stock market and economic recoveries. Cracks were again forming in the foundation of the entire global Credit system.

What happened next will be debated for decades. The Federal Reserve began discussing – and later implementing – a second massive monetization of U.S. debt securities (in this case, $600bn of U.S. Treasurys). And I would add that, in this matter, size didn’t really matter all that much. What was critical, though, was that the Federal Reserve had completely scrapped the notion of removing crisis-period stimulus - and was instead content to solidify the markets’ premise that the Fed had become a steadfast backstop for marketplace liquidity. The Fed’s dramatic move – along with various market support measures by the ECB, BOJ and others – provided the missing piece for the unfolding global government finance Bubble.

The prospect of QE2 weakened the dollar and supported price inflation for risk assets the world over. And the weaker the dollar – the more required buying and “recycling” of surfeit global dollar balances right back into the Treasury market. The Treasury marketplace was pushed to even greater Bubble excess – in the process emboldening the analysts that had been trumpeting deflation risk. "Money" flooded out of money fund and deposits and into U.S. and global bond funds. Like tech stocks that could never go down and home prices that could only go up, the view took hold that bond yields would only go lower.

Meanwhile, dollar weakness and attendant global liquidity excess set off a major run in commodities markets (certainly not unlike the policy-induce reflation after the subprime eruption in the autumn of 2007). Both the precious and industrial metals went on a record run, although some of the biggest gains were posted by the agriculture commodities. Energy prices lagged somewhat but crude ended the year above $91. The CRB commodities index closed the year at the high since 2008. And by the end of the year it was clear that China, India and greater Asia had serious inflation and “hot money” issues. Cautious little baby step policy moves aren’t going to get the job done.

QE2 was met with rebuke at home and from abroad. As global equities surged higher, these protests mostly subsided. Looking at Treasury yields and commodities prices, a decent case can be made that QE2 was counterproductive. The last thing the U.S. household sector needs right now is higher mortgage rates and gas prices. But these issues were trumped by the stunning fourth quarter gains posted by U.S. stocks. And there’s nothing like a surging stock market to incite optimistic analysis and embolden the bulls.

From my bearish perspective, the marketplace has been disregarding some important developments. For starters, despite the massive $4 trillion increase in government liabilities in just nine quarters, an extended period of near zero interest rates, and unprecedented Federal Reserve quantitative easing, the unemployment rate will end the year near 9.8%. And despite extremely low mortgage yields, our nation’s housing market is barely treading water. Developments – or lack of them – in the real economy are disconcerting and supportive of the secular bear thesis.

There is also the important issue of rising global yields. Moreover, the debt markets have become increasingly discriminating. A few months back – in the heat of the euphoric “endless liquidity for everybody forever” backdrop – the markets were content to readily finance just about any borrower. More recently, in somewhat of a return to sobriety, the marketplace has looked increasingly askance at borrowers such as Ireland, Spain and U.S. municipalities. This is a serious development for the global government finance Bubble – but perhaps not as serious in the short-term.

The U.S. financial system these days is being completely dominated by the expansion of federal borrowings. This creates different financial and economic dynamics than we’re used to analyzing. In contrast to when mortgage Credit was playing a predominate role during that Bubble period, a rise in market yields today will have virtually no near-term impact on the quantity of (government) Credit being issued. And especially with the extension of Bush era tax cuts along with additional stimulus measures – the speculative U.S. stock market has taken great comfort from the seeming sustainability of the tepid (government-dominated) U.S. economic recovery.

I have written that policymakers were more than content in 2010 to Kick the Can Down the Road. In fact, it was a year where policymaking became completely unbounded. The 26% gain in the small cap Russell 2000 and 26% advance in the S&P400 Mid-Cap index support our contention that Bubble dynamics more than persevered through year 2010. The Bernanke Fed certainly ensured that financial speculation gained at the expense of savers. And the municipal debt market now confronts the dilemma resulting from Bubble-related risk distortions, misperceptions and investor disappointment – and a problematic flow reversal out of the sector. Was year-end dollar weakness a harbinger of things to come?

12/24/2010 Just the Facts *

For the week, the S&P500 gained 1.0% (up 12.7% y-t-d), and the Dow added 0.7% (up 11.0%). The S&P 400 Mid-Caps gained 0.9% (up 25.3%), and the small cap Russell 2000 rose 1.2% (up 26.2%). The Banks surged 3.3% (up 21.2%), and the Broker/Dealers rose 2.4% (up 5.5%). The Morgan Stanley Cyclicals gained 0.8% (up 25.1%), and the Transports added 0.5% (up 23.9%). The Morgan Stanley Consumer index increased 0.7% (up 12.4%), and the Utilities gained 0.9% (up 1.2%). The Nasdaq100 increased 0.5% (up 19.9%), and the Morgan Stanley High Tech index added 0.7% (up 14.8%). The Semiconductors were little changed (up 14.4%). The InteractiveWeek Internet index added 0.2% (up 33%). The Biotechs gained 0.9% (up 39.3%). With bullion up $6, the HUI gold index gained 0.5% (up 30.2%).

One-month Treasury bill rates ended the week at 6 bps and three-month bills closed at 14 bps. Two-year government yields rose 5 bps to 0.655%. Five-year T-note yields ended the week 9 bps higher to 2.05%. Ten-year yields rose 7 bps to 3.40%. Long bond yields ended the week 3 bps higher at 4.47%. Benchmark Fannie MBS yields were 5 bps higher to 4.24%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 2 bps to 84 bps. Agency 10-yr debt spreads declined 3 bps to 15 bps. The implied yield on December 2011 eurodollar futures rose 6 bps to 0.90%. The 10-year dollar swap spread declined one to 8.75 bps. The 30-year swap spread increased one to negative 27 bps. Corporate bond spreads were somewhat narrower. An index of investment grade bond risk declined one to 86 bps. An index of junk bond risk declined 9 to 437 bps.

December 23 – Dow Jones (John Kell and Kevin Kingsbury): “Long-term mutual funds had an estimated net outflow of $8.48 billion in the latest week as municipal-bond funds saw money rush from them at the fastest pace in at least four years… The data marked the fourth week since late November that investors pulled money from bond funds overall, which had seen a 99-week stretch of inflows….”

December 23 – Bloomberg (Charles Stein): “Bond mutual funds had the biggest client withdrawals in more than two years last week as a flight from fixed-income investments accelerated. U.S. bond funds experienced withdrawals of $8.62 billion in the week ended Dec. 15, up from $1.66 billion the week before…”

I saw no investment grade issues.

Junk bond funds saw inflows of $222 million (from Lipper). I saw no junk issues.

Converts issues included Ultrapetrol $70 million.

International dollar debt sales included Commonwealth Bank of Australia $250 million.

U.K. 10-year gilt yields declined 5 bps this week to 3.51%, and German bund yields fell 5 bps to 2.98%. Ireland yields surged 57 bps to 9.00%. Greek 10-year bond yields rose 28 bps to 12.18%. Ten-year Portuguese yields rose 17 bps to 6.61%, while Spanish yields declined 5 bps to 5.46%. The German DAX equities index added 1.1% (up 18.5% y-t-d). Japanese 10-year "JGB" yields declined 4 bps to 1.15%. The Nikkei 225 slipped 0.2% (down 2.5%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index gained 0.7% (down 0.1%), and Mexico's Bolsa added 0.2% to a 2010 high (up 18.6%). South Korea's Kospi index added 0.2% (up 20.6%). India’s equities index gained 1.1% (up 14.9%). China’s Shanghai Exchange dropped 2.0% (down 13.5%). Brazil’s benchmark dollar bond yields declined 4 bps to 4.61%, while Mexico's benchmark bond yields were little changed at 4.55%.

Freddie Mac 30-year fixed mortgage rates dipped 2 bps last week to 4.81% (down 24bps y-o-y). Fifteen-year fixed rates declined 2 bps to 4.15% (down 20bps y-o-y). One-year ARMs rose 5 bps to 3.40% (down 98bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 12 bps to 5.51% (down 46bps y-o-y).

Federal Reserve Credit jumped $14.2bn to a record $2.388 TN (7-wk gain of $108bn). Fed Credit was up $168.6bn y-t-d (7.7% annualized) and $174bn, or 7.9%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/22) rose $14.0bn to a record $3.351 TN. "Custody holdings" have increased $396bn y-t-d (13.7% annualized), with a one-year rise of $393bn, or 13.3%.

M2 (narrow) "money" supply rose $16.5bn to a record $8.830 TN. Narrow "money" has increased $296bn y-t-d, or 3.6% annualized. Over the past year, M2 grew 3.1%.

Total Money Market Fund assets (from Invest Co Inst) declined $9.3bn to $2.788 TN. Year-do-date, money fund assets have dropped $506bn, with a one-year decline of $484bn, or 14.8%.

Total Commercial Paper outstanding declined $8.0bn to $974 billion. CP has declined $196bn year-to-date, and was down $186bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.395 TN y-o-y, or 18.3%, to $9.023 TN.

Global Credit Market Watch:

December 23 – Bloomberg (Joe Brennan): “Ireland’s High Court said Allied Irish Banks Plc can be taken over by the government without shareholder approval as the lender became the fourth bank to fall under state control since 2008.”

December 24 – Bloomberg: “China’s government failed to draw enough demand at a bill sale for the second time in a month as seasonal demand for funds and higher reserve-requirement ratios left banks with less cash.”

December 21 – Financial Times (Lina Saigol and Helen Thomas): “Dealmaking in emerging markets helped power a 16% rise in global mergers and acquisitions activity this year as companies moved to spend their cash piles outside of their home markets. Overall global deal value rose to $1,927.4bn – the highest level in two years and 16% more than the $1,656.8bn transactions announced during the same period last year.”

December 20 – Bloomberg (Alexander Ragir and Dawn Kopecki): “The first investigation into Brazil’s asset-backed securities industry, rising consumer delinquencies and the biggest rout of a bank stock in more than a decade are opening cracks in the country’s financial system. Funding costs for smaller banks have climbed since a Nov. 9 bailout of Banco Panamericano SA triggered the probe, pushing average yields on certificates of deposit to 12.9% from 11.8%. The market for selling loan portfolios has dried up, and funds of asset-backed commercial paper have had 2.3 billion reais ($1.3 billion) in redemptions since the rescue, according to Brazil’s capital markets association.”

Global Government Finance Bubble Watch:

December 21 – Bloomberg: “China backs the European Union’s efforts to ensure financial stability, Vice Premier Wang Qishan said… China supports the International Monetary Fund’s measures and ‘has taken concrete action to help some EU members counter the sovereign-debt crisis,’ Wang said…”

December 21 – Bloomberg (Svenja O’Donnell): “Britain’s budget deficit swelled to a record in November, underscoring the challenge facing Prime Minister David Cameron as his government prepares to implement the deepest spending cuts since World War II. Net borrowing was 22.8 billion pounds ($35.4 billion), compared with 16.7 billion pounds a year earlier…”

Currency Watch:

The dollar index added 0.1% for the week (up 3.4% y-t-d) to 80.474. On the upside for the week, the South African rand increased 2.1%, the New Zealand dollar 1.8%, the Australian dollar 1.7%, the Brazilian real 1.4%, the Japanese yen 1.3%, the Singapore dollar 1.2%, the Swiss franc 0.7%, the Canadian dollar 0.6%, the Taiwanese dollar 0.5%, the Norwegian krone 0.4%, the Mexican peso 0.3% and the South Korean won 0.2%. On the downside, the British pound declined 0.6%, the Danish krone 0.6%, and the euro 0.5%.

Commodities Watch:

December 21 – Wall Street Journal (Tatyana Shumsky and Carolyn Cui): “As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world’s stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion… Single traders also own large holdings of other metals. One trader holds as much as 90% of the exchange's aluminum stocks. In the nickel, zinc and aluminum alloy markets, single traders own between 50% and 80% of those metals, and one firm has 40%-50% of the LME's tin stockpiles.”

December 22 – Bloomberg (Mark Shenk): “Crude oil rose to the highest level in more than two years after government reports showed that U.S. supplies dropped and the country’s economy grew more than previously estimated in the third quarter."

December 20 – Bloomberg: “China’s coal imports may jump 60% in 2011 on strong demand from power plants, said UOB Kay Hian Ltd… The world’s largest consumer and producer of coal boosted imports by 38% to 133.93 million tons in the first 10 months of 2010…”

December 22 – Bloomberg (Jake Lloyd-Smith): “Farm-commodity prices including corn will extend rallies next year driven by increased demand from emerging markets including China… and higher energy costs, according to Rabobank Groep NV. There was ‘rampant demand’ for agricultural commodities from China, and rising corn prices may drive gains in other grains, according to a report… Surging crude-oil costs, low global food stockpiles and a weakening dollar may also bolster prices…”

December 22 – Financial Times (Javier Blas): “Mexico has taken the unusual step of insuring itself against the effect of rising corn prices on tortilla, a food staple for millions in the country, in the latest sign of growing concern about food inflation in emerging countries. Rising food inflation has become a big headache in countries from Mexico to China and India as bad weather has ruined crops, forcing prices up. Food accounts for up to half of all household spending in emerging countries, compared to just 10 to 15% in Europe and the US.”

December 22 – Bloomberg (Katia Cortes): “Coffee production in Brazil, the world’s biggest grower, may drop to the least in four years in 2011, pushing up prices as trees enter the lower-yielding half of a two-year cycle, Agriculture Minister Wagner Rossi said. Growers will harvest 37 million bags, down 23%...”

The CRB index surged 2.7% (up 16.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.8% (up 19.8% y-t-d). Spot Gold added 0.4% to $1,381 (up 26% y-t-d). Silver gained 0.7% to $29.33 (up 74% y-t-d). January Crude jumped to $91.51 (up 15% y-t-d). January Gasoline surged 5.4% (up 19% y-t-d), and January Natural Gas increased 0.4% (down 27% y-t-d). March Copper rose 2.4% (up 27% y-t-d). March Wheat jumped 3.5% (up 45% y-t-d), and March Corn rose 2.9% (up 48% y-t-d).

China Bubble Watch:

December 24 – Bloomberg: “China needs to return to a ‘prudent monetary policy’ to curb prices and control total money supply, the People’s Bank of China said…”

December 20 – Bloomberg: “China’s inflation may exceed 5% to 6% in some months of next year, the People’s Daily reported today, citing Ba Shusong, a researcher at the State Council’s Development Research Center.”

December 21 – Bloomberg: “China must prepare for a long-term fight against inflation as price gains this year will exceed the government’s target, the nation’s top planning agency said… Full-year inflation will be 3.3% , CCTV cited Peng Sen, vice chairman of the National Development and Reform Commission... China will have a more complicated task managing prices in the future, Peng was cited as saying.”

December 22 – Bloomberg: “China raised gasoline and diesel prices today by less than half of what crude oil has gained in the past month as the world’s fastest-growing major economy seeks to contain inflation. The price of gasoline will rise by as much as 4%..., the third increase this year in the world’s second-largest oil consumer.”

December 21 – Bloomberg: “Auto sales in China may outstrip the U.S. for a third consecutive year in 2011 as the world’s largest carmakers… estimate sales will grow by as much as 15%.”

December 24 – Bloomberg (John Duce): “Hong Kong will record the worst year for roadside pollution since the city started collecting readings in 1999, according to calculations made by Bloomberg based on government data.”

Japan Watch:

December 24 – Bloomberg (Toru Fujioka): “Japanese Prime Minister Naoto Kan plans to cap new bond sales at 44.3 trillion yen ($534 billion) in 2011 to finance a record budget as he tries to spur corporate demand and bolster growth.”

India Watch:

December 23 – Bloomberg (Tushar Dhara and Pratik Parija): “India’s food inflation accelerated to a six-week high, adding pressure on authorities to curb a jump in onion prices that has forced the nation to halt exports of the staple this week and toppled governments in the past. An index measuring wholesale prices of agricultural products including lentils, rice and vegetables compiled by the commerce ministry rose 12.13%... from a year earlier..."

December 21 – Bloomberg (Jason Gale): “A lack of toilets costs India more than $50 billion a year, mostly through premature deaths and hygiene-related diseases, a study found. Illness, lost productivity and other consequences of fouled water and inadequate sewage treatment trimmed 6.4% from India’s gross domestic product in 2006, or the equivalent of $53.8 billion, according to the study by the World Bank’s Water and Sanitation Program.”

December 24 – Bloomberg (Rajesh Kumar Singh and Abhishek Shanker): “India’s government is planning to make an unsolicited bid to counter a A$3.9 billion ($3.9 billion) offer from Rio Tinto Group for Riversdale Mining Ltd.”

Asia Bubble Watch:

December 24 – Bloomberg (Jake Lloyd-Smith): “Increased demand for food in Asia will help to boost prices next year, fuelling faster consumer inflation, according to Yougesh Khatri at Nomura… Costlier food was likely to hit Asia hard as edible goods account for ‘a fairly large chunk’ of the baskets that governments use to calculate the pace of price changes, said Khatri… ‘That is likely to show up as particularly severely impacting CPI next year,’ Khatri said…”

December 24 – Bloomberg (William Sim and Frances Yoon): “South Korea may face the risk of a foreign capital influx and asset bubbles if borrowing costs are increased further to curb inflation, the finance ministry said. ‘Raising interest rates to contain inflation could easily cause herd behavior in foreign capital inflow and create asset bubbles,’ the Ministry of Strategy and Finance said…”

December 21 – Bloomberg (Chinmei Sung): “Taiwan’s export orders increased 14.34% in November from a year earlier, the Ministry of Economic Affairs said…”

December 23 – Bloomberg (Shamim Adam): “Singapore’s inflation rate rose to the highest level since January 2009… The consumer price index climbed 3.8% in November from a year earlier…”

December 24 – Bloomberg: “Vietnam’s inflation rate accelerated to the highest level in 22 months after currency devaluations stoked import costs and credit expansion spurred domestic demand. Prices increased 11.75% in December from a year earlier…”

Latin America Watch:

December 22 – Bloomberg (By Iuri Dantas and Matthew Bristow): “Brazil’s central bank signaled today it may start increasing interest rates next month, after forecasting inflation next year will be faster than previously expected. Policy makers raised their 2011 inflation forecast to 5%, up from 4.6% in September…”

December 22 – Bloomberg (Katia Cortes): “Farmers in Brazil, the world’s second-biggest crop exporter after the U.S., are increasing borrowing to buy equipment at the fastest pace in at least seven years as prices for coffee, soybeans and sugar advance. Loans for tractors, harvesters and plows jumped 64% to 8.2 billion reais ($4.8 billion) in July to November from the same period a year earlier…”

December 22 – Bloomberg: “State Grid Corp. of China completed the purchase of seven electricity distribution businesses in Brazil for $989 million, the government said. Beijing-based State Grid will run electricity transmission services in the southeast of Brazil and supply power to Brasilia, Sao Paolo and Rio de Janeiro…”

Unbalanced Global Economy Watch:

December 21 – Bloomberg (Scott Reyburn): “Christie’s International sold a record 3.2 billion pounds ($5 billion) of art and other collectibles in 2010… The total, comprising worldwide auction and private sales, surpassed the company’s previous high of 3.1 billion pounds for 2007, said Christie’s… The provisional 2010 sales rose 52% from 2.1 billion pounds a year earlier.”

December 20 – Bloomberg (Paul Dobson and Keith Jenkins): “France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut, analysts and investors said. Moody’s … said Dec. 15 it may lower Spain’s rating, citing ‘substantial funding requirements,’ and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Credit default swaps show it’s more expensive to insure French debt than lower-rated securities from countries such as the Czech Republic and Chile.”

December 24 – Bloomberg (Angus Whitley): “Takeovers in Australia surged to a record this quarter, renewing investment bankers’ hopes that 2011 will uncork a backlog of deals in a commodities-led revival.”

U.S. Bubble Economy Watch:

December 24 – Bloomberg (Cotten Timberlake): “U.S. online sales jumped 15% this holiday season, spurred by ‘aggressive’ marketing by Web- based retailers, a research firm said.”

December 20 – Bloomberg (Mary Schlangenstein): “The six largest U.S. airlines have built a $23.8 billion cash hoard to cut debt and build a cushion against future shocks, bucking a pattern in other industries of returning money to investors. As the carriers dig out from two years of collective losses, stockholders must be content with the knowledge that the group led by United Continental Holdings Inc. may be better protected against fuel-price surges and recessions, according to analysts at Fitch Ratings and Standard & Poor’s.”

Central Bank Watch:

December 23 – Bloomberg (Ben Livesey and Ken McCallum): “Bank of England Markets Director Paul Fisher said U.K. interest rates will rise ‘to a normalized position’ of about 5%, the Daily Telegraph reported… The central bank won’t ‘be putting up rates so quickly’ as to cause ‘negative reaction’ and will only tighten policy quickly if the strength of the economy demands it, Fisher said…”

Fiscal Watch:

December 21 – Reuters (David Lawder): “The U.S. government fell deeper into the red in fiscal 2010 with net liabilities swelling more than $2 trillion as commitments on government debt and federal benefits rose… The Financial Report of the United States, which applies corporate-style accrual accounting methods to Washington, showed the government's liabilities exceeded assets by $13.473 trillion. That compared with a $11.456 trillion gap a year earlier. Unlike the normal measurement of government intake of receipts against cash outlays, accrual accounting measures costs such as interest on the debt and federal benefits payable when they are incurred, not when funds are actually disbursed.”

California Watch:

December 23 – Bloomberg (Michael B. Marois and Greg Giroux): “California, facing $28 billion in deficits, may see its congressional clout wane as slowing population growth deprives it of a new seat in the U.S. House of Representatives for the first time in its 160-year history. The U.S. Census Bureau reported this week that California’s population climbed 10% in the last decade to 37.3 million people, its slowest rate ever. The Golden State’s growth cooled because of souring housing prices, technology-industry job losses and lower levels of migration.”

Muni Watch:

December 23 – Bloomberg (Terrence Dopp): “New Jersey’s pension-funding deficit increased by $8.05 billion, or 18%, this year to $53.9 billion as the state failed to make contributions. The unfunded pension liability was $45.8 billion as of June 2009. New Jersey also faces an unfunded liability of $66.8 billion for providing medical care to retired public employees…”

December 20 – Bloomberg (Terrence Dopp): “New Jersey Governor Chris Christie said U.S. states face a ‘day of reckoning’ as they contend with looming budget deficits in the wake of the longest recession since the 1930s. Christie, who cut $1.3 billion in aid to schools and municipalities this year to close a $10.7 billion deficit, said states’ pension and debt costs have grown to be ‘unsustainable.’ Benefits, education and health care will be reduced in many states, he said… ‘The day of reckoning has arrived,’ said Christie… Areas such as education and pensions ‘were third rails of politics. We are now left with no alternatives.’”

December 21 – Bloomberg (Peter Cohn): “Cash-strapped states and municipalities will lose tax revenue of about $8 billion in 2011 under the extension of Bush-era income tax cuts. Revenue- generators excluded from the measure include subsidies for taxable Build America Bonds and payments to state housing authorities. Those provisions were scuttled in final negotiations on the $858 billion tax-cut extension measure…”

December 22 – Bloomberg (Christopher Palmeri and Pat Wechsler): “Washington State may not pay for glasses anymore. Massachusetts already chopped dentures. As of Oct. 1, North Carolina no longer covers surgery for the clinically obese. Governors nationwide are taking a scalpel to Medicaid, the jointly run state and federal health-care program for 48 million poor Americans, half of whom are children. The single biggest expense for states, Medicaid consumes about 22% of their total $1.6 trillion in expenditures, more than what is allocated to elementary and secondary education…”

December 22 – New York Times (David M. Halbfinger and Noah Rosenberg): “A state oversight board… moved a step closer to seizing control of Nassau County's finances, saying the county had failed to close a $350 million budget deficit despite months of dire warnings.”

Speculator Watch:

December 22 – Bloomberg (Cristina Alesci and Zachary R. Mider): “Cerberus Capital Management LP’s bet on Chrysler survived bankruptcy and the 2008 financial crisis to recoup about 90% of the original investment… The hedge-fund and buyout manager said yesterday it will sell Chrysler’s former auto-lending unit to Toronto-Dominion Bank for $6.3 billion cash.”

12/10/2010 The Fed and Money *

For the week, the S&P500 gained 1.3% (up 11.2% y-t-d), and the Dow added 0.2% (up 9.4%). The broader market continues to outperform the S&P500. The S&P 400 Mid-Caps gained 1.4% (up 23.7%), and the small cap Russell 2000 jumped 2.7% (up 24.2%). The Banks surged 6.0% (up 19.2%), and the Broker/Dealers rose 2.1% (up 3.3%). The Morgan Stanley Cyclicals increased 1.7% (up 22.6%), and the Transports added 0.6% (up 24.4%). The Morgan Stanley Consumer index gained 1.0% (up 10.0%), while the Utilities dipped 0.8% (down 0.7%). The Nasdaq100 gained 1.1% (up 19.1%), and the Morgan Stanley High Tech index rose 1.3% (up 14.2%). The Semiconductors increased 1.0% (up 15.8%). The InteractiveWeek Internet index rose 1.9% (up 34.6%). The Biotechs added 0.6% (up 25.4%). With bullion falling $28, the HUI gold index declined 1.9% (up 32.7%).

One-month Treasury bill rates ended the week at 8 bps and three-month bills closed at 11 bps. Two-year government yields jumped 15 bps to 0.61%. Five-year T-note yields ended the week up 36 bps to 1.92%. Ten-year yields jumped 32 bps to 3.33%. Long bond yields rose 12 bps to 4.43%. Benchmark Fannie MBS yields were 24 bps higher at 4.16%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 8 bps to 83 bps. Agency 10-yr debt spreads widened 2 bps to 19 bps. The implied yield on December 2011 eurodollar futures jumped 19 bps to 0.905%. The 10-year dollar swap spread declined 5.25 to 11.0. The 30-year swap spread declined 3 to negative 30.75. Corporate bond spreads narrowed. An index of investment grade bond risk declined 4 bps to 87 bps. An index of junk bond risk fell 16 to 458 bps.

Investment grade issuers included Merck $2.0bn, IBM $1.0bn, Kellogg $1.0bn, Constellation Energy $550 million, Berkshire Hathaway $500 million, Bio-Rad Labs $425 million, Florida Power & Light $400 million, Life Technologies $800 million, Cardinal Health $500 million, Healthcare Realty Trust $400 million, Albemarle $350 million, Hershey $350 million, Carlisle Companies $250 million, Church & Dwight $250 million and Snap-On $250 million.

Junk bond funds saw inflows of $229 million (from EPFR). Junk issuers included Kinder Morgan $750 million, Seagate $750 million, Nalco $750 million, Standard Pacific $675 million, Bumble Bee $605 million, Chonco Resources $600 million, AK Steel $550 million, Tenneco $500 million, Hertz $500 million, Pilgrim's Price $500 million, CDW $450 million, Dean Foods $400 million, Citadel Broadcasting $400 million, Questar $250 million, Aspen Insurance $250 million, Southwest Gas $125 million and Affinia Group $100 million.

Converts issues included Heartware International $125 million.

International dollar debt sales included National Australia Bank $2.5bn,Societe Generale $2.0bn, Ontario $1.25bn, Novelis $2.5bn, Canadian Imperial Bank $1.0bn, Development Bank of Kazakstan $500 million, E.CL $400 million, Ceva Group $450 million, Trinidad Drilling $450 million, and Saneamento Basico $350 million.

U.K. 10-year gilt yields jumped 11 bps this week to 3.52%, and German bund yields rose 10 bps to 2.95%. Ireland yields dipped 6 bps to 8.08%. Greek 10-year bond yields jumped 13 bps to 11.68%. Ten-year Portuguese yields jumped 33 bps to 6.24%. The German DAX equities index gained 0.8% (up 17.6% y-t-d) to another 2010 high. Japanese 10-year "JGB" yields dipped one basis point to 1.195%. The Nikkei 225 added 0.3% (down 3.2%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index declined 2.0% (up 0.4%), while Mexico's Bolsa gained 0.8% (up 17.3%). South Korea's Kospi index gained 1.5% (up 18.0%). India’s equities index declined 2.3% (up 11.7%). China’s Shanghai Exchange was little changed (down 13.3%). Brazil’s benchmark dollar bond yields jumped 34 bps to 4.37%, and Mexico's benchmark bond yields rose 29 bps to 4.29%.

Freddie Mac 30-year fixed mortgage rates jumped 15 bps last week to a 6-month high 4.61% (down 20bps y-o-y). Fifteen-year fixed rates surged 17 bps to 3.96% (down 36bps y-o-y). One-year ARMs added 2 bps to 3.27% (down 97bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 9 bps to 5.46% (down 36bps y-o-y).

Federal Reserve Credit surged $33.9bn to a record $2.352 TN. Fed Credit was up $132bn y-t-d (6.3% annualized) and $184bn, or 8.5%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/8) declined $0.3bn to a $3.341 TN. "Custody holdings" have increased $385bn y-t-d (13.8% annualized), with a one-year rise of $397bn, or 13.5%.

M2 (narrow) "money" supply added $3.0bn to a record $8.812 TN. Narrow "money" has increased $279bn y-t-d, or 3.5% annualized. Over the past year, M2 grew 3.3%. For the week, Currency increased $1.4bn, and Demand & Checkable Deposits jumped $25.2bn. Savings Deposits dropped $20.1bn, and Small Denominated Deposits declined $5.2bn. Retail Money Fund assets increased $1.0bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $25.3bn to a 13-wk high $2.836 TN. Year-do-date, money fund assets have dropped $458bn, with a one-year decline of $485bn, or 14.6%.

Total Commercial Paper outstanding declined $13.3bn to $1.008 TN. CP has declined $162bn year-to-date, and was down $202bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.390 TN y-o-y, or 18.2%, to $9.014 TN.

Global Credit Market Watch:

December 8 – Bloomberg (Lee Spears and Cecile Vannucci): “ Inc. surged in the biggest gain for a U.S. initial public offering in five years and E- Commerce China Dangdang Inc. almost doubled in its debut, the latest sign of booming demand for Chinese Internet companies., China’s largest online video company, soared 161% to $33.44 today, after completing a $203 million IPO.”

December 9 – Bloomberg (Brendan A. McGrail and Michael McDonald): “San Francisco’s Public Utilities Commission, which supplies water to 2.5 million people in the Bay Area, postponed $524 million in competitive offerings, including $350 million in Build America Bonds, as yields soared. The average yield on taxable Build Americas climbed to 6.35 percent Dec. 7, the highest since Jan. 7…”

Global Government Finance Bubble Watch:

December 7 – Bloomberg (Cordell Eddings and Daniel Kruger): “Treasuries tumbled, pushing the two- year note yield up the most since March, after President Barack Obama agreed to extend tax cuts for two years and the three-year note sale drew the lowest demand since February… The compromise will add $148 billion to the shortfall, pushing it to $1.34 trillion for fiscal 2011, Credit Suisse strategists Scott Sherman, Ira Jersey and Jay Feldman… wrote… The forecast is near the $1.42 trillion and $1.29 trillion deficits in the 2009 and 2010 fiscal years.”

December 9 – Bloomberg (Simon Kennedy): “The global economy faces an imminent end to three decades of low interest rates as emerging markets embark upon a building boom and aging populations drain savings, according to McKinsey & Co. A shift toward investment and away from savings is set to drive up the cost of capital with long-term interest rates possibly starting to rise within the next five years, the research division of McKinsey… said in a study… ‘Everyone who is in business has lived in a 30-year period when rates of interest have declined and that world is coming to an end,’ said Richard Dobbs, a Seoul-based director of McKinsey Global Institute and co-author of the report.”

Currency Watch:

December 8 – Bloomberg (Masaki Kondo and Shigeki Nozawa): “China bought a net 262.5 billion yen ($3.1 billion) of Japanese bonds in October, the first time in three months the nation increased holdings of yen-denominated assets as that currency outperformed the dollar and euro.”

The dollar index gained 0.9% for the week (up 2.8% y-t-d) to 80.06. On the upside for the week, the Taiwanese dollar increased 0.6%, the South African rand 0.2%, and the British pound 0.2%. On the downside, the New Zealand dollar declined 2.3%, the Japanese yen 1.7%, the Swedish krona 1.7%, the Danish krone 1.7%, the Euro 1.4%, the Brazilian real 1.2%, the Mexican peso 1.0%, the Norwegian krone 0.9%, the Australian dollar 0.8%, the Swiss franc 0.7%, the Canadian dollar 0.6%, the South Korean won 0.4%, and the Singapore dollar 0.3%.

Commodities Watch:

December 9 – Bloomberg: “Crude stockpiling for commercial and emergency use may account for 300,000 barrels a day of China’s incremental oil demand in the next two years, the nation’s largest investment bank said. Stockpiling for emergency use will contribute a 140,000 barrel-a-day increase to China’s demand growth, while commercial inventory building will account for a gain of about 160,000 barrels a day, Kong Qingying, an analyst at China International Capital Corp., wrote … The country finished filling the first phase of its emergency crude stockpiles of 16.4 million cubic meters last year, or 103 million barrels… The second phase of 26.8 million cubic meters is expected to be completed in 2012 to 2013, Kong said.”

The CRB index slipped 0.4% (up 11.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 0.6% (up 15.4% y-t-d). Spot Gold dropped 2.0% to $1,386 (up 26% y-t-d). Silver fell 1.9% to $28.71 (up 70% y-t-d). January Crude gave back $1.47 to $87.72 (up 10.5% y-t-d). January Gasoline declined 1.7% (up 13% y-t-d), while January Natural Gas gained 1.8% (down 20% y-t-d). March Copper jumped 3.0% (up 23% y-t-d). March Wheat dipped 0.4% (up 43% y-t-d), and March Corn slipped 0.1% (up 38% y-t-d).

China Bubble Watch:

December 10 – Bloomberg: “China’s leaders will in coming days lay a course for policy in 2011 that will help determine whether the world’s fastest-growing major economy will succeed in reining in inflation without hobbling the nation’s expansion. President Hu Jintao and Premier Wen Jiabao convene the so- called Central Economic Work Conference, a three-day conclave in Beijing, starting today…”

December 10 – Bloomberg: “China ordered lenders to park more money with the central bank for the third time in five weeks to counter the threat from inflation after November’s lending and trade surplus topped analysts’ estimates. Reserve requirements will increase 50 basis points starting Dec. 20…”

December 10 – Bloomberg: “China’s trade surplus and lending exceeded forecasts in November, underscoring the case for higher interest rates and a stronger exchange rate to stem the nation’s escalating inflation. Exports rose 35% to a record $153.3 billion from November 2009 and imports advanced 38% to an unprecedented $130.4 billion, leaving a $22.9 billion excess… Loans were 564 billion yuan ($85 billion).”

December 7 – Bloomberg: “China’s inflation cycle is at a ‘critical point,’ requiring ‘disciplined and comprehensive policies,’ China Daily cited Stephen Roach, non-executive Asia chairman at Morgan Stanley, as saying… The Asian nation needs to convince the market that its shift to a ‘prudent’ monetary policy ‘has teeth’ by adopting tougher anti-inflationary measures, Roach said…”

December 10 – Bloomberg: “China’s property prices rose at the slowest pace in a year in November after the government raised the reserve-ratio requirement for banks twice and expanded measures to limit the risk of asset bubbles. Home prices in 70 cities climbed 7.7% from a year earlier and increased 0.3% from October…”

Japan Watch:

December 9 – Bloomberg (Keiko Ujikane): “Japan’s economy expanded more than the government initially calculated in the third quarter because of a bigger-than-reported increase in capital spending. Gross domestic product grew at an annualized 4.5% rate…”

December 8 – Bloomberg (Shigeki Nozawa): “The world is entering a recession that may last up to eight years as the U.S. heads toward a ‘lost decade’ similar to Japan’s slowdown in the 1990s, said Eisuke Sakakibara, formerly Japan’s top currency official. ‘The world is set for a long-term structural slump reminiscent of the 1870s’ when average annual growth was about 1%, Sakakibara, who is a professor at Aoyama Gakuin University, said…”

India Watch:

December 7 – Bloomberg (Kartik Goyal and Abhijit Roy Chowdhury): “India’s finance ministry raised its economic growth forecast for the current financial year… The South Asian economy may expand as much as 9.1% in the year ending March 31…”

December 10 – Bloomberg (Kartik Goyal): “India’s industrial production grew at the fastest pace in three months, threatening to strain power and transportation capacities and stoke inflation. Stocks rose. Output at factories, utilities and mines rose 10.8% in October from a year earlier…”

December 8 – Bloomberg (Thomas Kutty Abraham): “Tea prices in India, the top grower after China, may climb 20% in the next five months as lower output and rising demand worsens a shortage, according to McLeod Russel India Ltd., the largest tea-plantation owner.”

Asia Bubble Watch:

December 10 – Bloomberg (Eunkyung Seo): “South Korea’s economic growth is set to slow and inflation is poised to accelerate next year, the Bank of Korea said a day after leaving borrowing costs unchanged. Gross domestic product is likely to expand 4.5% in 2011…”

December 7 – Bloomberg (Shamim Adam): “Singapore’s central bank spent an estimated $17 billion buying foreign currencies in October as capital inflows rose at the fastest pace since March 2008, according to DBS Group Holdings Ltd.”

Latin America Watch:

December 8 – Bloomberg (Iuri Dantas and Matthew Bristow): “Brazil’s consumer prices rose at the fastest pace in over five years in November, cementing expectations that the central bank will raise interest rates at the start of next year. Inflation last month accelerated to 0.83% from 0.75% in October…”

December 8 – Bloomberg (Daniel Cancel): “Venezuelan President Hugo Chavez threatened to nationalize any bank should they fail to provide housing loans, including a unit of Spain’s Banco Bilbao Vizcaya Argentaria SA and Banesco Banco Universal, the country’s largest lender. BBVA Provincial and Banesco are among banks that could be taken over if they fail to comply with government-set lending requirements for homebuyers, Chavez said… ‘Any bank that slips will be expropriated, whether it´s called Banesco, Provincial or whichever,’ Chavez said yesterday on state television.”

Unbalanced Global Economy Watch:

December 8 – Bloomberg (Christian Vits): “Industrial production in Germany… rose almost three times as much as economists forecast in October, led by demand for investment goods such as machinery. Production jumped 2.9% from September… From a year earlier, output increased 11.7%...”

December 7 – Financial Times (John Reed): “Many of Germany’s biggest carmakers are planning shorter Christmas shutdowns this year to meet surging demand, led by China, for their products. Carmakers say they will be shutting down only briefly or working through the holidays to address bulging order books and long waiting periods for their most popular cars.”

December 9 – Bloomberg (Toby Alder): “Sweden’s inflation rate rose in November as consumer demand picked up in the largest Nordic economy and supporting the central bank’s signal it will continue raising interest rates. Headline inflation accelerated to 1.8% from 1.5% in October…”

December 10 – Bloomberg (Michael Heath): “Employment in Australia is headed for the biggest annual increase on record, boosting prospects of an acceleration in wage gains that forces the central bank to resume raising interest rates. Payrolls soared by 366,000 in the first 11 months of this year to 11.4 million, the most since records began in 1978…”

U.S. Bubble Economy Watch:

December 7 – Bloomberg (John Hechinger): “Fifteen-year-old students in the U.S. ranked 25th of 34 countries on an international math test and scored in the middle of the pack in science and reading, raising concerns the U.S. isn’t prepared to succeed in the global economy. Teenagers from South Korea and Finland led in almost all academic categories on the 2009 Program for International Student Assessment, according to the… Organization of Economic Cooperation and Development…”

December 10 - Bloomberg (Eben Novy-Williams): “The original rules of basketball, written by James Naismith in 1891, were auctioned today for $4.4 million at Sotheby’s in New York. The 13 rules are on a two-page typed document with Naismith’s handwritten notes… The Associated Press said the pre-sale estimate for the rules was $2 million.”

Real Estate Bubble Watch:

December 9 – Bloomberg (Hui-yong Yu and John Gittelsohn): “U.S. home values are poised to drop by more than $1.7 trillion this year amid rising foreclosures and the expiration of homebuyer tax credits, said Zillow… This year’s estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion…”

Central Bank Watch:

December 6 – Financial Times (Robin Harding ): “Ben Bernanke, chairman of the US Federal Reserve, said that ‘it’s certainly possible’ that the Fed will increase its new round of asset purchases beyond an initial $600bn. But he made clear it could be decreased as well. ‘It depends on the efficacy of the programme. It depends on inflation. And finally it depends on how the economy looks,’ Mr Bernanke said… The rare interview with the Fed chairman reflects a push to connect with ordinary Americans in the wake of attacks on the Fed’s new effort to stimulate the economy by buying assets to push down long-term interest rates… Some Republican politicians and economists argue that this new round of quantitative easing will not work and could cause inflation but Mr Bernanke dismissed their concerns. ‘One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing,’ Mr Bernanke said.”

December 9 – Bloomberg (Joshua Zumbrun): “A majority of Americans are dissatisfied with the nation’s independent central bank, saying the U.S. Federal Reserve should either be brought under tighter political control or abolished outright, a poll shows. The Bloomberg National Poll underlines the extent to which the central bank’s standing has suffered…”

Fiscal Watch:

December 10 - Bloomberg (Vincent Del Giudice): “The U.S. government posted a wider budget deficit in November… The deficit was $150.4 billion last month… compared with $120.3 billion in November 2009… For the first two months of the 2011 fiscal year, the shortfall narrowed to $290.8 billion from $296.7 billion in the same period last year…”

California Watch:

December 8 – Bloomberg (Michael Marois): “California’s budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown… A cash shortage may force the use of IOUs by July, Controller John Chiang said. The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said… The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento. ‘I don’t want to say it, but this could mean IOUs and more tax-refund deferrals,’ Chiang said.”

New York Watch:

December 7 – Bloomberg (Michael Quint): “New York state’s $132.8 billion pension plan is underfunded by $71 billion and annual taxpayer payments to keep it sound may more than double to almost $4 billion during the next five years, a report says.”

December 6 – Bloomberg (Henry Goldman): “New York City’s projected budget deficit for fiscal 2012 may widen by $2 billion, to $4.5 billion, because of cuts in state aid, Budget Director Mark Page said.”

Muni Watch:

December 8 – Bloomberg (William Selway): “U.S. states are preparing for more budget cuts next year as tax revenue isn’t likely to rebound enough to replace almost $38 billion in aid that will be gone as federal economic stimulus ends, according to a report. At least 31 states and Puerto Rico are forecasting deficits of $82.1 billion in the next fiscal year even as tax receipts are picking up, the National Conference of State Legislatures said… Under a temporary mandate since 2009, the U.S. has provided economic aid to states, helping to pay government workers and shoulder the cost of the Medicaid program to provide health care for the poor… The fiscal 2012 deficits come on top of at least $110.6 billion in gaps that have been dealt with or are pending for the current year….”

December 10 – Wall Street Journal (Mike Spector and Michael Corkery ): “Times have gotten so tough for the Illinois state government that it has begun turning to Wall Street trading houses and hedge funds to help pay its bills. The state owes more than $4.5 billion to vendors large and small, ranging from prison-cleaning crews to schools for the disabled. Tax shortfalls and pension obligations continue to leave the state light on cash. Quietly, aides to Illinois Gov. Pat Quinn have begun reaching out to Wall Street with a novel plan to plug this shortfall. Instead of further tapping the public debt markets, Illinois is trying to borrow from private sources for short-term interest loans that could carry higher interest rates than the state pays its bond investors.”

December 6 – Bloomberg (Darrell Preston): “Illinois, which has the worst-funded pension system among U.S. states, may face further deterioration because contributions will be below the amount needed, even if it sells bonds next year to close the gap, Moody’s Investors Service said…”

December 9 – Associated Press: “There’s now a better estimate of how wide the gap between expected revenues and expenses could be in North Carolina state government in 2011. Fiscal experts at the Legislature announced… the preliminary gap for the year starting July 1 is $3.7 billion. That's $500 million more than the minimum budget gap discussed after the current year's $19 billion budget was approved last summer.”

December 8 – Dow Jones Newswire: “State economists… projected Florida's budget deficit would grow to $3 billion next year in the wake of declining sales tax collections and an increase in Medicaid costs, the Miami Herald reported…”

December 6 – Bloomberg (Alison Vekshin): “Washington Governor Christine Gregoire intends to call a special legislative session before Christmas to deal with a $1.1 billion projected budget deficit for the current fiscal period…”

December 6 – Bond Buyer (Caitlin Devitt): “Minnesota faces a $6.2 billion budget deficit over the next two years that is about $590 million more than previously projected, according to a new revenue forecast…”

The Fed and Money:

“One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing.” Federal Reserve Chairman Ben Bernanke, December 5, 2010.

Dr. Bernanke was pilloried this week for his “we’re not printing” comment from Sunday evening’s 60 Minutes interview. I’ll pile on, but from a different angle. It seems strange to me – perhaps disingenuous – for our Fed Chairman to suddenly take such a narrow view of “money.” At $917bn, outstanding currency comprises just over 10% of the “M2” monetary aggregate (savings deposits are the largest component at $5.343 TN). And I have argued over the years that “M2” is a much too narrow definition of “money” to provide a useful barometer of overall Credit and liquidity conditions. Certainly, the expansion of paper currency has been inconsequential to the grand scheme of Washington stimulus.

In the “old days,” the banking system dominated system Credit creation. Bank lending was integral to Credit growth, with new bank deposits created through the process of expanding bank loans. “M2” provided a good indication of bank lending - that was a decent indicator of overall Credit conditions. As such, the Fed reigned supreme over the Credit mechanism through its careful regulation of bank reserves. Rather mechanically, our central bank would add reserves – the fodder for new bank loans – when it sought a boost in lending. It would extract reserves when it preferred to lean against the wind. Bank deposits were the critical component of “money” supply, and our central bank judiciously monitored their expansion.

The financial world – certainly including monetary management - was turned upside down with the unleashing of (unconstrained) non-bank Credit instruments. No longer did the banks dominate system Credit creation. In a process that gained fateful momentum throughout the nineties, the bank loan was relegated to second class citizen in the age of the booming Wall Street securitization marketplace. Meanwhile, the Fed’s entire process of manipulating bank reserves became moot. Fed policy immediately gravitated toward manipulating the securities markets, and Alan Greenspan – “The Maestro” – absolutely relished his new “activist” role.

I have defined contemporary “money” as the most precious of Credit instruments. “Money” is as “money” does. The great Austrian economist Ludwig von Mises recognized the crucial monetary role played by “fiduciary media” that had the economic functionality of a more narrowly defined stock of money. Especially with the advent of non-bank Credit, the definition of what might operate as “money” in the markets and real economy had to be broadened significantly. And the greater the boom in marketable debt instruments the more paramount the role of market perceptions in determining the stability of our financial markets and real economy.

Over the years, I have explored the concept of the “moneyness of Credit.” Moneyness is driven by the marketplace’s perception of safety and liquidity. Generally speaking, “money” is a debt instrument perceived as a highly liquid store of nominal value. Money has always enjoyed a special role and, hence, unique demand characteristics: folks simply can’t get enough of it, which nurtures a propensity to create it in overabundance. Money operates with its own problematic supply and demand dynamics, and never has moneyness enjoyed such capacity to wreak global havoc as it does today. With all their good intentions, central bankers are nonetheless at the root of the problem.

The Fed may not be running the currency printing press around the clock, but Fed policies have certainly been instrumental to the unending expansion of Treasury borrowings. And, clearly, any meaningful definition of contemporary “money” must include government debt instruments. Indeed, with bank (and, more generally, private-sector) Credit suffering from post-housing mania stagnation, never before has government debt so dominated system “money” and Credit creation.

Importantly, the Federal Reserve’s zero-rate policy and massive monetization program have been instrumental in maintaining the perception of “moneyness” in the face of unprecedented Treasury debt issuance. I can’t envisage a more powerful Bubble Dynamic: The Fed intervenes and manipulates the Treasury market – the predominant debt market underpinning fixed income and securities markets more generally. Enormous fiscal stimulus then works to stabilize system incomes, corporate cash flows, state & local tax receipts, and asset prices more generally. In the final analysis, Trillions of dollars of government-created purchasing power ensure that a structurally maladjusted U.S. economy has, at the minimum, the appearance of viability – and the stock market booms.

The Fed may not be “printing,” but its operations as “backstop bid” are fundamental to the U.S. and Global Government Finance Bubbles. In a replay of how the Fannie, Freddie, the Fed and Treasury “backstop bid” created the “moneyness of Credit” for mortgages and related securitizations, the Fed’s quantitative easing program distorts market perceptions of various risks (Credit, interest rate, liquidity and systemic) and promotes over-issuance. From this perspective, our central bank’s operations are more dangerous than the traditional printing press.

“Moneyness” was fundamental to the doubling of mortgage debt in just about six years during the mortgage finance Bubble. Over time, the expanding gulf between market perceptions of moneyness and the true underlying state of the mortgage Credit ensured a crisis of confidence. Moreover, the Trillions of additional mortgage Credit had played havoc with spending and investing patterns and, increasingly over time, the underlying economic structure. These days, the attribute of “moneyness” in Treasury debt is on track to ensure the doubling of federal borrowings in the neighborhood of four years. For this round, the “expanding gulf” is much more pernicious and the consequences of a crisis of confidence potentially more devastating.

Money has throughout history demonstrated its dangerous side. Abuse money and “moneyness” at your own peril – although this fundamental lesson is invariably unlearned given enough time (and the seductiveness of monetary booms). The fiascos are always a little different, inevitably created by clever new wrinkles in the many faces of “money” and Credit. We are in the midst of another sordid episode. John Law’s experimentation with paper “money” in France ended with the spectacular bursting of the Mississippi Bubble in 1720. Today’s backdrop is much more complex: The Fed and global central bankers are working diligently to control an experiment in electronic “money” and Credit gone terribly awry. If it were only the printing press, it would be easier to appreciate what was developing and how to administer some restraint. Instead, the Fed has banked everything on its capacity to inflate marketplace liquidity, sustain massive government debt issuance, and maintain market perceptions of moneyness.