Issues 2012

By: Doug Noland | Fri, Jan 6, 2012
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If you haven't carefully read Bill Gross's latest, I suggest you dive into his analysis and then return to my "Issues 2012" if you still have some time to spare. As an analyst of Credit, I'll give Credit where Credit is due. It has to be the best piece he's written.

A snippet from Mr. Gross: "The New Normal... was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It's as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012."

I never bought into the notion of "New Normal." I chose "The Newest Abnormal" for the title of a CBB back in October 2009. My premise then was that unprecedented global fiscal and monetary stimulus had unleashed a fateful global Bubble fueled by runaway government finance. The stunning growth in government debt and central bank balance sheets seemed to ensure ongoing high probabilities for so-called "low probability tail events." And, sure enough, U.S. and other stock markets doubled in price. Gold more than doubled, and global risk asset markets generated extraordinary (in what were viewed as very low probability outcomes back in early-'09) returns.

One might refer to these as "right tail" developments (in a normal bell-shaped distribution of possible outcomes), unexpected positive market surprises that by their nature do more to embolden animal spirits than to raise Bubble concerns. For awhile, massive government deficits, ultra-low rates, central bank monetization and other market interventions can dramatically contain "left tail" market risk. Importantly, George Soros' theory of reflexivity helps explain how the markets' perception that policymakers will prevent a crisis works wonders in forestalling the onset of crisis dynamics. But there's no free ride. When cumulative excesses eventually turn unwieldy and Bubbles falter, as they began to do in 2011, market concerns can rather abruptly shift right back to the bad kind of tail risk. Shifting perceptions as to the competence and capacity for policymakers to control developments play a profound role in the return of "left tail" fragilities and developments.

The '08 crisis is considered a low-probability "tail event" - a so-called rare "black swan" or "hundred-year flood." Yet I would argue that such a financial crisis was in reality a high probability outcome. Bubbles burst - plain and simple. It is the act of predicting the timing of their demise that tends to be an exercise in low probability outcomes. This is especially the case when government policymaking is a major factor fueling Credit and asset Bubble excess, and when market participants furthermore believe that policymakers will respond aggressively in the event of heightened systemic stress/risk of a bursting Bubble. Market participants become conditioned to place their bets on policymakers enjoying at least short-term success in averting crisis (and prolonging Bubbles), and this bias dictates the pricing skew of derivative instruments throughout the marketplace (in the process creating opportunities for speculation, reducing the cost of market "insurance" and thereby fostering risk-taking more generally). Over an extended period of Bubble excess, heightened fragility and resulting vigorous government market interventions - those most willing to bet on the efficacy of policy control over the marketplace end up managing (and personally accumulating) incredible sums of money.

Meanwhile, the longer a Bubble is accommodated, the greater the associated financial, economic and marketplace maladjustment (and these risks tend to grow exponentially). A culture of aggressive government intervention and resulting marketplace distortions provide fertile ground for a cataclysmic "black swan." Policy-induced "right tails" are inevitably followed by "left tails." We continue to refer to these events as "tails" not because they are low probability occurrences, but rather because the distorted risk markets maintain a self-reinforcing bias of pricing them as low probability outcomes.

Euro disintegration is a key Issue 2012. I no longer believe the current structure of euro monetary integration is viable over the long-, or even intermediate-, term. Yet the financial and economic dislocation associated with a breakdown of the euro would be sufficiently catastrophic that the markets assume policymakers will not tolerate such an outcome. This recalls the market perception that Washington would never allow a U.S. housing bust. Such backdrops seem to ensure that the most destabilizing circumstances. These eventually unfold after policy measures are belatedly recognized as having lost the capacity to control developments and hold crisis at bay.

There is a common view that European policymakers, especially the ECB, have successfully bought time. And over time policy measures will prove more effective, it is believed, and supportive of a more rational and normally functioning marketplace. I am again reminded of the Fed's aggressive monetary easing in '07 and early-2008. Responding to the unfolding mortgage crisis, the FOMC began slashing rates in the summer of 2007 and had pushed rates all the way down to 2.0% by late-April 2008. The S&P500 traded above 1,400 in May 2008, as market focus fatefully turned to profiting from policy moves and away from fearing the unfolding crisis. Policy responses (to major crises) will tend to become more aggressive over time, corresponding conveniently with the markets' limited capacity to worry about a particular crisis risk for too long.

I believe strongly that instead of "buying time" aggressive policymaking in the face of an unfolding Credit bust tends to only buy a more destabilizing crisis. Policy measures are, once again, providing market participants ample time (and market liquidity) to hedge exposures to various European-related financial risks, certainly including a weaker euro. And while these hedges tend to have a comforting effect on market sentiment in the near-term, the buildup of derivative exposures becomes an integral aspect of mounting systemic stress. As we've witnessed in global markets repeatedly over the past couple decades, a very big problem unfolds when a risk scenario that the marketplace had significantly hedged against actually comes to fruition. There is no way for the market to offload market risk. The crisis becomes acute - and dislocation begins in earnest - when participants begin to lose confidence in the capacity of those who have written market insurance to fulfill their obligations.

I would be sticking my neck out if I downplayed the risk of a European financial meltdown. Similarly, I would be playing it too safe to not highlight the risk in 2012 for a brutal global financial crisis. The ECB's massive Long-Term Refinancing Operation may have bought some time, but results so far are not encouraging. Long-term yields in Spain and Italy remain elevated, and yields in France, Austria and elsewhere are moving higher. Confidence remains fragile, whether it is with Italian finances or European bank solvency more generally. A tightening of Credit conditions in Eastern Europe is taking an increasing toll. Exposures to Hungary and other nations now add to European bank woes. The Italian and French bank stocks, in particular, have performed poorly to commence the New Year. How many bullets does the ECB have left to fire? Capital flight out of Europe is an Issue 2012.

The euro trades miserably. Assuming that there has been enormous protection written against a declining euro, a derivative-related market dislocation is not a low probability scenario. Yet a view has gained traction that a weak euro is nothing to be feared. Indeed, it is a consequence of the ECB finally responding with sufficient resolve. And it is certainly true that the European debt crisis has been a gift to U.S. Treasuries and our debt markets generally. This dramatic loosening of financial conditions in government and mortgage finance has given a boost to U.S. growth. And there is, as well, newfound dollar strength that only emboldens the view that our markets and economy have become the envy of the world - and the indisputable "safe havens."

And this returns us to the so-called "right tail." I have posited that the European debt crisis gave a new lease on life to the U.S. Credit Bubble. The scenario that global liquidity continues to find its way into bubbling U.S. stocks and bonds cannot be ruled out. And the Chinese may very well respond to the troubling confluence of faltering global growth and its own festering domestic Credit issues by easing policy and implementing more aggressive stimulus measures. The markets generally perceive that both the U.S. and Chinese Credit systems maintain an inflationary bias - with policymakers keen to sustain Credit and economic expansions. Stated differently, U.S. and Chinese Credit Bubbles so far remain intact - providing policymakers both power and flexibility. The possibility for a "right tail" speculative melee in global risk markets cannot be completely dismissed as an Issue 2012 (such an occurrence would automatically qualify it as a major "left tail" Issue 2013).

I find it disconcerting that, at such a late stage in a historic Credit cycle, ongoing U.S. and Chinese Credit booms remain central to the bullish market thesis. Back in '07 and '08, we watched how a crisis of confidence at the periphery of mortgage Credit eventually brought down the core. In 2010 and 2011, a crisis in Greece rather methodically enveloped Europe's periphery before setting its sights on the core. This irrepressible periphery-to-core dynamic will remain A Key Issue 2012.

From a European sovereign debt standpoint, the vulnerable core includes, of course, Italy and Spain, but increasingly Austria, Belgium and France, as well. More from a financial system standpoint, the core includes the nebulous ("AAA") repurchase agreement (repo) marketplace. As confidence in the European banking system wanes, trust in a wider number of previously perceived riskless securities and financial arrangements suffers. And if confidence falters in various European instruments and obligations comprising contemporary "structured finance," one could see a scenario where similar fears jump the Atlantic and infect the core market for such products on Wall Street.

It is difficult for me to believe we won't be hearing a lot more about counterparty and derivative issues over the coming weeks and months. And while there's a case to be made that U.S. Credit and economic activity may have even benefited from Europe's woes, our financial markets and economy are anything but immune to Credit bust dynamics. A more general crisis of confidence in global financial claims could perhaps even unleash panic buying of hard assets and claims to more reliable stores of value.

I've argued that several years of excess have left "developing" markets more susceptible to market and economic contagion dynamics than they were in 2008. This thesis will be tested in 2012. I worry about China. My base case remains that aggressive monetary and fiscal stimulus delays the downside of their Credit cycle. Increasingly, however, there appears heightened vulnerability. About $2.0 TN of total system Credit growth is expected in China this year. It has reached the point where incredible amounts of new finance are required to sustain the current economic, asset market and financial structures. It could become quite a challenge to sustain such historic Credit expansion in a scenario of a burst housing Bubble and faltering confidence in global finance. China and the "developing" world, as a stabilizing force or source of added contagion instability, is a Key Issue 2012.

When market stress becomes an issue, the markets predictably flock to perceived risk-free U.S. Treasury, agency and related debt. It is not clear where financial flows will gravitate in China in the event of banking system concerns and a crisis of confidence. Capital flight from China could be an Issue 2012 - or perhaps 2013. I also see vulnerabilities to tightened global financial conditions in India, South Korea and developing Asia more generally. The incredible regional marketable debt issuance boom has fostered vulnerabilities.

Here in the U.S., I see a Bernanke Federal Reserve eager for QE3. They will intelligently discuss the prominent role played by healthy housing markets - and likely announce a program to support the household sector and employment through the purchase of additional mortgage-backed securities (MBS). I assume their real fear is an escalation of global de-risking/de-leveraging - and they must worry that a strong dollar only worsens the situation (i.e. forcing the unwind of leveraged dollar "carry trades"). But there is a risk that such a move could backfire by adding additional artificial support to our debt markets, in the process inciting additional flows out of Europe and elsewhere and into our currency and inflated Credit system.

The U.S. economy today enjoys a rather atypical resilience. Because of strange debt, economic and policymaking structures, our system has developed some degree of immunity to global crisis dynamics. Exports are a relatively small component of economic activity, while Treasury and government-related finance dominate system Credit creation (and system spending, incomes and corporate profits) like never before. It is a circumstance that captivates the bullish imagination, especially in an election year. And, from my analytical perspective, it is also clearly a Bubble - and a rather vulnerable one at that.

How susceptible the "core" U.S. Credit system is to global financial fears and contagion effects is certainly a Key Issue 2012. There is, after all, no system where faith in policymaking is more responsible for ongoing Credit expansion, economic resilience, inflated securities markets valuations and general confidence than here in the U.S. The biggest risk Issue for 2012 is that the crisis of confidence in policymakers now playing out in Europe makes its way to Washington, the core of both world policymaking and finance.

 


For the Week:

The S&P500 gained 1.6%, and the Dow rose 1.2%. The Banks jumped 5.6%, and the Broker/Dealers rose 4.0%.The Morgan Stanley Cyclicals jumped 4.0%, and the Transports increased 1.0%. The Morgan Stanley Consumer index added 0.4%, and the Utilities dropped 2.9%. The S&P 400 Mid-Caps gained 1.4%, and the small cap Russell 2000 rose 1.2%. The Nasdaq100 was up 3.4%, and the Morgan Stanley High Tech index gained 2.1%. The Semiconductors jumped 3.0%. The InteractiveWeek Internet index gained 2.4%. The Biotechs surged 6.6%. With bullion rallying $54, the HUI gold index recovered 3.8%.

One and three-month Treasury bill rates ended the week near one basis point. Two-year government yields rose 2 bps to 0.25%. Five-year T-note yields ended the week up 2 bps to 0.81%. Ten-year yields jumped 8 bps to 1.96%. Long bond yields ended 12 bps higher at 2.99%. Benchmark Fannie MBS yields were down 8 bps to 2.80%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed a notable 16 bps to 84 bps. Agency 10-yr debt spreads declined 3 bps to negative 4 bps. The implied yield on December 2012 eurodollar futures declined 6.5 bps to 0.69%. The two-year dollar swap spread declined about 6.5 bps to 41.8 bps. The 10-year dollar swap spread fell 3 bps to 13.75 bps. Corporate bond spreads were mixed. An index of investment grade bond risk was unchanged at 120 bps. An index of junk bond risk dropped 15 bps to 666 bps.

Debt issuance picked up to begin the New Year. Investment grade issuers included GE $5.75bn, Ford Motor Credit $3.5bn, Citigroup $2.5bn, Daimler Finance $1.65bn, Kraft Foods $800 million, Met-Life $750 million, Pacificorp $650 million, Memorial Sloan-Kettering $400 million and UDR $400 million.

Junk bond funds saw small outflows of $18 million (from Lipper). Junk issuers included Icahn Enterprises $500 million.

Convertible issuers included Corsicanto $150 million.

International dollar bond issuance included Export-Import Bank of Korea $2.25bn, Inter-American Brazil $2.9bn, Development Bank $2.25bn, Mexico $2.0bn, Philippines $1.5bn, Sumitomo Mitsui Banking $1.5bn, Bank of Montreal $1.5bn, Vale Overseas $1.0bn, and Celulosa Arauco $500 million.

Italian 10-yr yields ended the week up 7 bps to 7.10%. Spain's 10-year yields surged 63 bps to 5.67%. German bund yields increased 4 bps to 1.85%, and French yields jumped 22 bps to a six-week high 3.36% (spread to bunds widened 18 bps to 151bps). Greek two-year yields ended the week down 101 bps to 124.53%. Greek 10-year yields rose 23 bps to 31.54%. U.K. 10-year gilt yields rose 4 bps to 2.02%. Ten-year Portuguese yields gained 4 bps to 12.81%. Irish yields dropped 29 bps to 7.97%.

The German DAX equities index rose 2.7%. Japanese 10-year "JGB" yields slipped one basis point to 0.98%. Japan's Nikkei slipped 0.8%. Emerging markets were mixed. For the week, Brazil's Bovespa equities index jumped 3.3%, while Mexico's Bolsa declined 0.7%. South Korea's Kospi index gained 1.0%. India's Sensex equities index rallied 2.7%. China's Shanghai Exchange declined 1.6%. Brazil's benchmark dollar bond yields rose 8 bps to 3.41%.

Freddie Mac 30-year fixed mortgage rates declined 4 bps to 3.91% (down 86bps y-o-y). Fifteen-year fixed rates slipped a basis point to 3.23% (down 90bps y-o-y). One-year ARMs added two basis points to 2.80% (down 44bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 13 bps to 4.54% (down 99bps y-o-y).

Federal Reserve Credit dropped $19.6bn to $2.901 TN. Fed Credit was up $490bn from a year ago, or 20.3%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/4) fell $15.0bn to $3.405 TN (16-wk decline of $70bn). "Custody holdings" were up $61bn year-over-year, or 1.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $1.159 TN y-o-y, or 12.8% to $10.219 TN. Over two years, reserves were $2.603 TN higher, for 34% growth.

M2 (narrow) "money" supply added $1.9bn to $9.664 TN. "Narrow money" has expanded at a 9.6% pace year-over-year. For the week, Currency increased $1.1bn. Demand and Checkable Deposits rose $29.5bn, while Savings Deposits sank $32.7bn. Small Denominated Deposits declined $2.5bn. Retail Money Funds gained $2.6bn.

Total Money Fund assets slipped $1.9bn to $2.693 TN. Money Fund assets were down $106bn over the past year, or 3.9%.

Total Commercial Paper outstanding dropped $30.1bn (25-wk decline of $307bn) to $929bn. CP was down $41bn year-over-year, or 4.2%.

Global Credit Watch:

January 2 - Bloomberg (Patrick Donahue): "European leaders return to work this week seeking to buy time for the Spanish and Italian governments to wrest control over their debt and rescue the single currency from fragmentation in its 10th anniversary year. Some 157 billion euros ($203bn) in debt will mature in the 17-member euro area in the first three months of 2012, according to UBS AG. By the end of that period, leaders have pledged to draft a stricter rulebook for controlling government spending. German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet in Berlin Jan. 9 to work out details. 'The road to overcoming this won't be without setbacks, but at the end of this path Europe will emerge stronger from the crisis than before,' Merkel said..."

January 5 - Bloomberg (Sharang Limaye and Tushar Dhara): "Billionaire investor George Soros said a fracturing of the euro area would have 'catastrophic' consequences and that markets have started pricing in the possibility of the region breaking up. The disintegration of the 17-nation currency bloc would affect Europe and the 'entire global financial system,' Soros said..."

January 5 - Bloomberg (Maria Petrakis and Natalie Weeks): "Prime Minister Lucas Papademos told Greeks that cuts in income are the only way to stay in the euro and get more financing from international creditors to avert an economic collapse that may otherwise come as soon as March. 'We have to give up a little so we don't lose a lot... Without this agreement with the troika and subsequent financing, Greece in March faces the immediate risk of a disorderly default,' Papademos said."

January 5 - Bloomberg (Sonia Sirletti and Elisa Martinuzzi): "UniCredit SpA fell to the lowest in Milan trading in more than 19 years as investors kept selling shares after the bank priced its 7.5 billion euro ($9.7bn) rights offer at a discount. UniCredit shares plunged for the second day, declining as much as 16%... Trading in the lender, which yesterday slumped 14%, was halted at least three times. Italy's biggest bank has dropped about 45% since it announced the offering on Nov. 14."

January 6 - Bloomberg (Gabi Thesing): "The European Central Bank took a record amount of overnight deposits yesterday as the region's financial institutions entrusted funds amassed from emergency lending operations. Euro-area banks parked 455.3 billion euros ($582bn) with the... ECB, the most since the euro's introduction in 1999 and up from 443.7 billion euros reported yesterday."

January 6 - Bloomberg (Ragnhild Kjetland): "Otmar Issing, the European Central Bank's former chief economist, described the idea that European Union member-states should pool their currency reserves as 'shocking,' the Frankfurter Allgemeine Zeitung reported... Issing said using monetary reserves for state funding would be a 'plain breach of contract,' the FAZ reported."

January 3 - Bloomberg (Sharon Smyth): "Spanish Interior Minister Jorge Fernandez Diaz estimates that the country's public deficit in 2011 may reach 8.2% of gross domestic product..."

January 4 - Financial Times (Victor Mallet): "Spain says it expects its banks to set aside up to €50bn in further provisions on their bad property assets as part of a new round of reforms for the country's financial sector. Luis de Guindos, economy minister in the centre-right government that took office two weeks ago... said... it was essential that the banks clean up their balance sheets without imposing a burden on the treasury."

January 5 - Bloomberg (Jason Webb and Michael Patterson): "Hungary's failure to secure an international bailout has pushed the cost of insuring its debt against default above that of Ireland for the first time since September 2010. ...Credit-default swaps on Hungary rose to 720 bps..., compared with 709 for Ireland..."

Global Bubble Watch:

January 6 - Bloomberg (Susanne Walker and Daniel Kruger): "Treasuries rose after Federal Reserve Bank of New York President William Dudley said more monetary accommodation is appropriate even after a report showed the economy added more jobs than forecast last month."

January 3 - Bloomberg (Keith Jenkins and Anchalee Worrachate): "Governments of the world's leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs. Led by Japan's $3 trillion and the U.S.'s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year..."

January 6 - Bloomberg (Jody Shenn): "Fannie Mae and Freddie Mac mortgage bonds that guide home-loan rates gained while those backed by high-cost debt declined on speculation the U.S. government may boost efforts to aid the housing market. Yields on Fannie Mae's current-coupon 30-year fixed-rate mortgage securities... declined about 4 bps to 84 bps more than 10-year U.S. government debt... the tightest spread since May 19..."

January 3 - Bloomberg (Tim Catts): "General Electric Co. and Ally Financial Inc. lead U.S companies that have $620 billion of bonds and loans coming due in 2012 as borrowing costs start to rise from record lows with the economy strengthening... Borrowers must refinance $498 billion of debt in 2013 and $505 billion in 2014..."

January 6 - Bloomberg (Charles Stein): "U.S. stock mutual funds that invest in domestic equities had their second-worst redemptions last year as record market swings sent investors to the perceived safety of bond funds. Investors pulled an estimated $132 billion from mutual funds that invest in U.S. stocks, the fifth straight year of withdrawals for domestic funds, according to preliminary data from the Investment Company Institute..."

Currency Watch:

To begin the New Year, the dollar index jumped 1.3%. On the upside, the Mexican peso increased 1.4%, the New Zealand dollar 0.4%, the Brazilian real 0.4%, the Australian dollar 0.2%, the Singapore dollar 0.2%, and the Taiwanese dollar 0.2%. On the downside, the euro declined 1.9%, the Danish krone 1.9%, the Swiss franc 1.8%, the South African rand 1.1%, the Norwegian krone 1.0%, the South Korean won 0.9%, the Swedish krona 0.8%, the British pound 0.8%, the Canadian dollar 0.7%, and the Japanese yen 0.1%.

Commodities and Food Watch:

January 5 - Bloomberg: "China, the world's second-largest gold jewelry market, may boost consumption of the precious metal by 35% in 2012 to a record on rising incomes and continuing urbanization, according to Frost & Sullivan."

The CRB index recovered 1.4% this week. The Goldman Sachs Commodities Index rallied 2.6%. Spot Gold jumped 3.5% to $1,618. Silver gained 2.8% to $28.68. February Crude rose $2.73 to $101.56. February Gasoline jumped 3.5%, and February Natural Gas, believe it or not, increased 2.4%. March Copper was little changed. March Wheat sank 4.3%, and March Corn dipped 0.5%.

China Bubble Watch:

January 5 - Bloomberg (Weiyi Lim): "China's stocks fell to the lowest level since March 2009 on concern the European debt crisis will curb exports and a potential cash crunch before the Chinese new year holidays may boost lending costs for small companies."

January 4 - MarketWatch: "China's total national financing, a measure of growth in overall credit in the country, will likely rise to around CNY14 trillion this year from an estimated CNY13 trillion last year, according to a research report... The report, jointly released by China Development Bank, the State Information Center and Shanghai Securities News, said the broadest measure of money supply, M2, will likely grow 15% this year, up from the 14% rise forecast for last year..."

January 5 - Bloomberg: "China's home prices fell for a fourth month in December as the government prolonged a crackdown on speculation that risks deepening the slowdown in the world's second-biggest economy. Property values dropped 0.25% from November... Prices slid in 60 of 100 cities, and all of the 10 biggest, including Beijing and Shanghai."

January 5 - Bloomberg (Andrea Wong and Fox Hu): "Companies raised nine times more selling bonds than stock in China in the past 12 months, the widest gap since 2005, and this year may be no different as borrowing costs extend last quarter's decline. Corporate debt offerings rose 47% to a record 2.68 trillion yuan ($425bn) last year, 13% of the $3.18 trillion global total... Equity issuance slid 43% to 292 billion yuan as the Shanghai Composite Index declined 22%."

January 6 - Financial Times (Simon Rabinovitch): "Land sales slowed sharply in China last year, according to a series of industry reports that highlight the deepening woes of debt-laden local governments that depend on land auctions as a crucial revenue source. While the falling sales are still far from reaching crisis point, analysts say, authorities are increasingly under pressure to choose between costly help for the worst-hit cities and an unpalatable relaxation of policies aimed at preventing a dangerous property bubble. Nearly 900 land auctions failed in 2011, about three times more than in 2010... Meanwhile, government revenues from land sales fell 13% in 130 big cities to Rmb1,900bn ($300bn), according to the China Index Academy..."

India Watch:

January 5 - Bloomberg (Anoop Agrawal): "International investors are demanding the highest yields in almost two years to hold bonds of India's lenders after the central bank warned that bad debts may more than double in Asia's third-largest economy."

January 3 - Reuters (Henry Foy): "From farmers who swapped fields for cash to 20-something CEOs that inherited the family business, hot new money is flooding India's luxury car market as roaring sportscar engines announce the country's growing wealth on its roads. No senior Indian executive feels complete without his sleek German-made saloon, while Italian sportscars are the new calling cards for the country's rich young things at exclusive nightclubs... 'There is a rush to luxury,' says Mohan Mariwala, managing director of Auto Hangar... 'Farmers, tiny industrial families, the younger generation with different value systems...You can't imagine the kind of people who invest in extremely exotic cars today.'"

Asia Bubble Watch:

January 5 - Bloomberg (Netty Ismail and Bei Hu): "Asia's hedge-fund industry is set to shrink in 2012 after a year in which growth stagnated, performance faltered and managers struggled to raise capital. There were 123 Asian hedge funds that closed in the first 10 months of 2011, compared with 125 in all of 2010 and a record 184 in 2008... according to... Eurekahedge Pte."

Latin America Watch:

January 6 - Bloomberg (Cristiane Lucchesi): "Brazilian investment bankers defecting to competitors won pay increases of as much as 25% in 2011 amid a shortage of experienced executives in Latin America's largest economy."

Europe Economy Watch:

January 3 - Bloomberg (Brian Parkin): "German unemployment fell more than forecast in December as exports of cars and machinery boomed and one of the mildest winters on record helped support jobs in construction... The adjusted jobless rate dropped to 6.8%."

January 6 - Bloomberg (Rainer Buergin): "German factory orders dropped the most in almost three years in November as the euro region economy edged toward a recession and global demand weakened. Orders... slipped 4.8% from October..."

Unbalanced Global Economy Watch:

January 6 - Bloomberg (Greg Quinn): "Canada's unemployment rate rose for a third month in December, the longest advance in two years... The jobless rate increased to 7.5% from November's 7.4% and the recent low of 7.1% in September..."

January 3 - Bloomberg (Steve Bryant and Ali Berat Meric): "Inflation in Turkey accelerated to almost double the official target as the central bank sells dollars and squeezes liquidity to halt a decline in the lira that's pushing prices up. The inflation rate rose to 10.5% in December from 9.5%..."

Central Banking Watch:

January 3 - Bloomberg (Rainer Buergin): "Bundesbank President Jens Weidmann said it would be 'profoundly wrong' for the European Central Bank to become a lender of last resort and step up its purchases of government bonds to contain the fiscal crisis. 'It may appear tempting from the point of view of highly-indebted states and the banks that hold their paper if central banks assume their role of lender of last resort,' Weidmann wrote... 'However, the Eurosystem would throw its principles overboard and ignore the existing legal framework. This would be the profoundly wrong way.'"

January 5 - Bloomberg (Lorraine Woellert): "A report from Federal Reserve Chairman Ben S. Bernanke called the weakness in the housing market a 'significant barrier' to U.S. economic health and said Fannie Mae and Freddie Mac might have to bear greater losses to stoke a broader recovery. The study... noted 'tension' between aiding the economy and minimizing losses of the failed government-sponsored enterprises, which depend on taxpayer aid for survival. 'Some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery,' according to the study."

U.S. Bubble Economy Watch:

January 3 - Bloomberg (Erik Matuszewski): "Participating in the New York City Marathon this year will cost about $60 more than in 2011 because of increased staging costs... The entry fee for members of the New York Road Runners, which organizes the Nov. 4 race, is $216, up from $156 last year."

Real Estate Watch:

January 6 - Bloomberg (Hui-yong Yu): "U.S. apartment vacancies dropped to a 10-year low in the fourth quarter, allowing for rent increases that are likely to continue this year, Reis Inc. said. The vacancy rate fell to 5.2%..."

January 4 - Bloomberg (Oshrat Carmiel): "Manhattan apartment sales fell 12% in the fourth quarter from a year earlier as Europe's debt crisis and sluggish U.S. job growth dimmed buyer appetites... The median price of units that changed hands in the final three months of 2011 climbed 1.2% from a year earlier, to $855,000."

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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