The Dog That's Not Barking

By: Doug Noland | Fri, Aug 10, 2012
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The "go ahead, make my day," Draghi "will do everything to save the euro" rally saw Spanish and Italian stocks jump 10.6% and 9.5%, respectively, in six sessions. The S&P500 rose 2.0%, with the Goldman Sachs "Most Short" index surging 7.4% (in six sessions). Spain's two-year yields sank 160 bps in four sessions and Italy's fell 100 bps. Crude, gold and commodities popped. Somewhat the dog that didn't bark, the euro closed today at 1.2252, up little since Draghi's comments and only about 2% above recent trading lows. Spain's 10-year yields ended the week at a problematic 6.85%, and at 5.88% Italy's 10-year yields were only somewhat less discouraging.

There appears to be a meaningful shift in market thinking regarding global monetary stimulus. Recent events have further (it that's possible) emboldened those believing that policymakers will do everything to backstop global risk markets. To be sure, the "risk on, risk off" dynamic has become only more dominant. Draghi's plan may have done little to bolster the euro, but it did incite another powerful "rip your face off" short squeeze in many risk markets. Policymakers may very well take satisfaction in wielding such extraordinary market power, although there will be a heavy price to be paid for interventions that feed increasingly unwieldy markets. And, by the way, it's also apparent that monetary policy is having waning effect on real economies.

Actually, it's no coincidence that policymaking takes an increasingly commanding role of global markets even as policy measures show diminished economic impact. And that's a fundamental bullish tenet of the "risk on, risk off" speculation phenomena: The greater the economic and systemic risks, the more powerful the policy liquidity response available to stoke global risk markets. Market participants grapple with the question of how long this game will continue working so well.

Data out of China this week was unimpressive. Bank lending slowed sharply from June (to $85bn from $150bn). Weakness was apparent in industrial production, retail sales and housing transaction volumes. Most alarming was the sharp slowdown in exports. At a positive 1% year-over-year, July export growth sank from June's 11% and was significantly below expectations of 8%. And with exports to Europe down 16%, this data point is one of the clearest indications yet of how the rapidly deteriorating European situation is hitting China. An article from Friday's Wall Street Journal, "Trade Slowdown Squeezes Asia", did a commendable job of describing how "the slowdown under way in China is already rippling across Asia..."

There's a common perception in the marketplace that Chinese authorities can flick a switch and reflate their economic boom on command. I have tried to make the case that China - and "developing" economies more generally - are in an altogether different circumstance these days than they were back in 2008/9 (fragile instead of robust, from a Credit Bubble perspective). Importantly, these Credit systems and economies were previously enjoying robust inflationary biases. As such, "developing" systems proved extraordinarily responsive to stimulus measures - and were well-positioned to assume the desperately needed role of global locomotive coming out of the '08 crisis-induced global recession. I see only added support for the view that "developing" financial and economic fragility will be one of the big surprises unearthed by the unfolding "European" crisis.

Especially in China, as the downturn gathers momentum, markets confidently anticipate aggressive stimulus measures. A Bloomberg headline captured the sanguine mood: "Slide in China's Export Growth Increases Odds of More Stimulus." Deteriorating economic fundamentals have been the first surprise to the bullish consensus view, and a tepid response to stimulus measures will likely prove the second.

The impotence of post-Bubble stimulus measures remains solidly on display here in the U.S. I have not been as bearish as others on near-term U.S. economic prospects. Yet it's ominous that zero interest rates, the nationalization of mortgage Credit, massive Federal Reserve monetization and market intervention, and 8-10% annual fiscal deficits equate to such a feeble recovery.

Throughout Europe, things proceed methodically from bad to worse. Spanish and Italian economic data, in particular, continue to be depressing. Meanwhile, it is increasingly apparent that the German economic juggernaut is showing the region's ill-effects. Market participants pay little attention to the data, though, as they now wait anxiously for the unveiling of the game-changing Draghi Plan. Many anticipate the positive impact a new liquidity push could have on securities prices, although few expect much help for the real economies.

But the cautious consensus view believes that the Draghi Plan at least protects against "tail risk." Cleverly, the ECB bought a few weeks by assigning details of the plan to various committees. This was sufficient to run the bears, reverse risk hedges and, again, run things amuck for so-called "market neutral" strategies. And especially now that the Merkel government is seen as having capitulated, Mr. Draghi is thought to enjoy a window to pursue more open-ended Fed-like quantitative easing. Moreover, with an isolated Germany holding only one vote in a newfound, majority-rules ECB, the hope is that the Draghi ECB can finally move decisively toward assuming the role of buyer of last resort for European (for now, chiefly Spanish and Italian) debt.

The Draghi Plan could very well support European debt markets. Yet I really struggle with the notion of the ECB as savior for the euro. Desperate central banks are easily more apt to hurt rather than help their currencies. In a crisis environment, a central bank often must choose between flooding a system with liquidity to bolster debt and asset markets - or instead restraining liquidity creation in hope of stemming capital flight and stabilizing the value of its currency. Mr. Draghi would like to tough talk both securities markets and the euro higher. But confidence in European policymaking is depleted. So markets will force his hand into coming with a substantial bond-buying strategy. Such a plan risks liquidity abundance fanning problematic capital flight.

And this gets back to The Dog That's Not Barking. The euro has thus far struggled to retreat from the precipice. I have speculated that there are likely huge derivative trades written to provide protection in the event of a major euro decline. It's reasonable that significant "insurance" has been written at the 1.20, 1.15 and 1.10 (to the dollar) strikes. If correct, this analysis infers that potentially enormous selling pressure might be unleashed if the euro falls much below current levels.

European economies are spiraling downward, and I expect economic activity to remain largely impervious to monetary stimulus. I don't believe the Draghi Plan will reverse the crisis of confidence in eurozone debt or the European banking system. And, as I mentioned above, I fear a desperate ECB may increasingly jeopardize the euro (see Mr. Issing's comments below). Mr. Draghi invoked "convertibility risk" as justification for monetizing government borrowings. Such measures, however, will not allay market fears regarding the sustainability of the euro currency. Increasingly destabilizing capital flight remains a serious risk.

Interestingly, (former Bundesbank and ECB Chief Economist) Otmar Issing maintained a high-profile this week. He was interviewed by Dow Jones/The Wall Street Journal, and then appeared live on CNBC. He said little that markets would find comforting, although participants to this point have been dismissive of his influence. This week only added to my suspicions that Mr. Issing and some of the old guard from the Bundesbank may feel the situation has deteriorated to the point that they must become part of the debate.

From the Wall Street Journal (8/9/12 - Christian Grimm): "Mr. Issing said that from a historical perspective Germany indeed is 'in a special position' but 67 years after the war ended 'Germany can't be blackmailed with its past,' he said. This is especially true of aid for troubled euro zone states, 'which does not solve the problems in these states...' Mr. Issing said it was wrong to expect the European Central Bank, tasked primarily with maintaining price stability in the euro zone, to step into the breach and buy the bonds of troubled euro zone states. 'This does not solve the problems and is not legitimate,' he said, adding that it violates EU treaties... Mr. Issing rejected the idea that any country could stay in the euro zone at any price. This 'creates the possibility of blackmail. The participation in the shared currency must be permanently earned,' he said."

And from his upcoming book: "The less politicians address the root of the problems, the more they look with their expectations and demands to the ECB, which is not made for this. It is a central bank and not an institution to rescue governments threatened by bankruptcy. A central bank always also acts as a lender of last resort for the banking system - but it does not rescue governments."

From CNBC (8/10/12 - Silvia Wadhwa and Catherine Boyle): "'A break up of the euro area would be a major disaster - no doubt about that. But the alternative to that, [is] being a monetary union in which the reputation of the ECB would be undermined, or even destroyed. The euro would tumble and governments would pile up debts without any limit. I think this is a scenario - a horror scenario - which comes close to the disaster of a break up... The euro itself does not need to be saved. What has to be saved is the stability of the euro and the euro area. The question - how many countries can participate, this is the challenge with which Europe is confronted,' Issing said... Politicians who blame German Chancellor Angela Merkel for creating turmoil in the markets by not taking further action on issues like Eurobonds should 'shut up,' Issing said. 'They (politicians) always give the impression that they have the right medicine, which is more money, and markets will always ask for more. So this will be an endless game and politics will always be seen as prisoners of this process. It should be reversed. Politics should say what will not happen. This total mutualisation of debt - this is something which must not happen,' Issing added."

 


For the Week:

The S&P500 gained 1.1% (up 11.8% y-t-d), and the Dow rose 0.90% (up 8.1%). The Morgan Stanley Cyclicals jumped 3.3% (up 8.1%), while the Transports slipped 0.5% (up 0.9%). The Morgan Stanley Consumer index increased 0.8% (up 7.2%), while the Utilities fell 1.1% (up 3.3%). The Banks were up 1.2% (up 18.4%), and the Broker/Dealers rallied 2.1% (down 3.8%). The S&P 400 Mid-Caps gained 1.8% (up 9.4%), and the small cap Russell 2000 rose 1.7% (up 8.2%). The Nasdaq100 was 1.8% higher (up 19.5%), and the Morgan Stanley High Tech index jumped 3.3% (up 15.7%). The Semiconductors surged 4.1% (up 11.4%). The InteractiveWeek Internet index gained 2.2% (up 10.8%). The Biotechs rose 0.9% (up 32.2%). With bullion rising $17, the HUI gold index rallied 5.6% (down 13.8%).

One-month Treasury bill rates ended the week at 9 bps and three-month bills closed at 10 bps. Two-year government yields were up 2 bps to 0.26%. Five-year T-note yields ended the week 4 bps higher to 0.71%. Ten-year yields rose 9 bps to 1.66%. Long bond yields jumped 10 bps to 2.75%. Benchmark Fannie MBS yields increased 2 bps to 2.38%. The spread between benchmark MBS and 10-year Treasury yields narrowed 7 to a six-month low 72 bps. The implied yield on December 2013 eurodollar futures rose 3 bps to 0.50%. The two-year dollar swap spread was little changed at 21 bps. The 10-year dollar swap spread declined 4 to 11 bps. Corporate bond spreads narrowed a little. An index of investment grade bond risk declined 1 to 102.5 bps. An index of junk bond risk fell 7 to 550 bps.

Debt issuance was decent. Investment grade issuers included Altria Group $2.8bn, Enterprise Products $1.75bn, Celgene $1.5bn, Time Warner Cable $1.25bn, Omnicom $1.25bn, Tennessee Valley Authority $1.0bn, Prudential $1.0bn, Northern Star Power $800 million, Centerpoint Energy Houston $800 million, BB&T $750 million, Williams Partners $750 million, Hospitality Property Trust $500bn, AMD $500 million, Ecolab $500 million, Georgia Power $400 million, National Retail Properties $325 million, Ingram Micro $300 million, and PHH Corp $275 million.

Junk bond funds saw inflows rise to $809 million (from Lipper). Junk Issuers included Ally Financial $1.6bn, Sprint Nextel $1.5bn, Sandridge Energy$1.1bn, Markwest Energy $750 million, Iron Mountain $1.0bn, Nuance Communications $700 million, Constellation Brands $650 million, H&E Equipment Services $530 million, Energy Future $250 million, Wavedivision $250 million and Olin $200 million.

I saw no convertible debt issued.

International dollar bond issuers included UBS $2.0bn, Sberbank $1.3bn and Westpac Banking $1.25bn.

Spain's 10-year yields ended the week up 8 bps to 6.85% (up 181bps y-t-d). Italian 10-yr yields declined 14 bps to 5.88% (down 115bps). German bund yields fell 4 bps to 1.38% (down 44bps), and French yields declined 4 bps to 2.06% (down 108bps). The French to German 10-year bond spread was unchanged at 68 bps. Ten-year Portuguese yields sank 101 bps to 9.56% (down 321bps). The new Greek 10-year note yield fell 114 bps to 23.39%. U.K. 10-year gilt yields dipped 2 bps to 1.54% (down 44bps). Irish yields were little changed at 5.82% (down 244bps).

The German DAX equities index rose 1.2% (up 17.7% y-t-d). Spain's IBEX 35 equities index jumped 4.3% (down 17.7%), and Italy's FTSE MIB rose 3.0% (down 3.6%). Japanese 10-year "JGB" yields jumped 6 bps to 0.79% (down 19bps). Japan's Nikkei rallied 3.9% (up 5.2%). Emerging markets were higher. Brazil's Bovespa equities index surged 3.5% (up 4.5%), although Mexico's Bolsa slipped 0.4% (up 10.2%). South Korea's Kospi index rallied 5.3% (up 6.6%). India's Sensex equities index increased 2.1% (up 13.6%). China's Shanghai Exchange gained 1.7% (down 1.4%).

Freddie Mac 30-year fixed mortgage rates rose 4 bps to 3.9% (down 73bps y-o-y). Fifteen-year fixed rates added a basis point to 2.84% (down 66bps). One-year ARMs were down five bps to 2.65%ra (down 24bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 4 bps to 4.22% (down 74bps).

Federal Reserve Credit added $1.5bn to $2.835 TN. Fed Credit was down $85.5bn from a year ago, or 4.8%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 8/8) increased $9.4bn to a record $3.536 TN. "Custody holdings" were up $116bn y-t-d and $66bn year-over-year, or 1.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $406bn y-o-y, or 4.0% to a record $10.532 TN. Over two years, reserves were $1.989 TN higher, for 23% growth.

M2 (narrow) "money" supply increased $5.7bn to $10.036 TN. "Narrow money" has expanded 7.0% annualized year-to-date and was up 6.3% from a year ago. For the week, Currency increased $1.1bn. Demand and Checkable Deposits dropped $20.3bn, while Savings Deposits surged $28.6bn. Small Denominated Deposits declined $1.8bn. Retail Money Funds fell $1.9bn.

Total Money Fund assets gained $11bn to $2.562 TN. Money Fund assets were down $133bn y-t-d and $59bn over the past year, or 2.3%.

Total Commercial Paper outstanding dropped $20.6bn to $1.014 TN. CP was up $54bn y-t-d, while having declined $156bn from a year ago, or down 13.3%.

Global Credit Watch:

August 6 - Dow Jones (Margit Feher and Liis Kangsepp): "The European Central Bank will tie future purchases of troubled governments' securities to strict conditions to be set by the region's bailout funds, but these purchases could be 'substantial' and 'sustainable,' ECB Governing Council member Ardo Hansson said... 'It should be big enough to deal with the problems you want to solve but you also have to look at risk considerations [for the ECB]. What you don't want is little piecemeal things. It should be substantial and sustainable enough so it would actually make a difference,' said Mr. Hansson, 54, a Harvard alumnus who grew up in Chicago and Canada."

August 10 - Bloomberg (Andrew Frye): "Italian Prime Minister Mario Monti's frustrations with the bond market are surfacing as spending cuts destroy growth without the reward of cheaper borrowing costs. Italian gross-domestic product contracted an annual 2.5% in the second quarter as Monti sought to appease lenders by trimming the budget and increasing taxes. Even though Monti will bring the deficit within European Union limits this year, Italy still pays 452 bps more than Germany to borrow for 10 years... Monti, with eight months left to serve, is campaigning to prevent a bailout on his watch."

August 6 - Bloomberg (Gregory Viscusi and Rainer Buergin): "Italy's Prime Minister Mario Monti warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs, as a standoff over European Central Bank help for Italy and Spain hardened. Monti, in an interview with Germany's Der Spiegel magazine... 'The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe," Monti told Der Spiegel. While he backed the ECB's willingness to address "severe malfunctioning" in the government bond market, Monti said the problems "have to be solved quickly now so that there's no further uncertainty about the euro zone's ability to overcome the crisis."

August 8 - Bloomberg (Emma Charlton): "European Central Bank President Mario Draghi's bid to bring down Spanish and Italian yields may spur the nations to sell more short-dated notes, swelling the debt pile that needs refinancing in the coming years... The average maturity of Spanish debt is the shortest since 2004 as Spain, like Italy, hasn't issued 15- or 30-year bonds all year. As Prime Ministers Mario Monti and Mariano Rajoy fight to avoid bailouts that may threaten the euro's survival, the ECB's plan risks adding to pressure on the two nations' treasuries. 'In a way what the ECB has done is making the situation worse,' said Nicola Marinelli, who oversees $160 million at Glendevon King Asset Management... 'Focusing on the short-end is very dangerous for a country because it means that every year after this they will have to roll over a much larger percentage of their debt.'"

August 8 - UK Telegraph (Matthew Sparkes): "One of the founding fathers of the euro admits that some states may be forced to abandon the single currency, but insists Germany would be better off staying in. Otmar Issing, a former European Central Bank chief economist, warned that the eurozone could be heading towards fracture in a book called How we save the euro and strengthen Europe published this week . 'Everything speaks in favour of saving the euro area. How many countries will be able to be part of it in the long term remains to be seen,' said Mr Issing... Mr Issing is one of the founding fathers of the euro, but also predicted potential problems with the plan and argued that political union ought to precede a shared currency to ensure its stability in the long-term. The economist has now said there is a case for some countries to leave the union in order to solve their own debt problems, but that Germany would do best to remain a member... 'The less politicians address the root of the problems, the more they look with their expectations and demands to the ECB, which is not made for this. It is a central bank and not an institution to rescue governments threatened by bankruptcy. A central bank always also acts as a lender of last resort for the banking system - but it does not rescue governments,' he said."

August 9 - Bloomberg (Patrick Henry): "Former National Bank of Belgium Governor Guy Quaden said no national central bank has a veto on European Central Bank policy decisions, Le Soir reported. 'The Bundesbank is opposed to certain measures, an objection that is not only statutory, but also and primarily ideological,' Quaden told the... newspaper... 'The ECB is the only truly federal European institution,' Quaden told Le Soir. 'No partner, even the most important central bank, has a veto. It's always preferable to make decisions by consensus, but when that's not possible, and a large majority of governors think a measure is appropriate, they have to move forward.'"

August 8 - Bloomberg (Sonia Sirletti and Giovanni Salzano): "Italian banks' purchases of the country's sovereign debt rose to a record in June as concerns that Italy may be forced to seek a bailout discouraged foreign investors. Banks boosted their holdings of Italian government bonds by about 14 billion euros ($17 billion) in June to 316 billion euros... Italian banks 'have been holding the fort at government debt auctions in the absence of foreign investors,' said Nicholas Spiro managing director of Spiro Sovereign Strategy... 'The run on the bond markets of Spain and Italy continues unabated and domestic banks have been left to pick up the slack. The question is how much longer they will be able to plug the gap if foreign investors continue to steer clear of Spanish and Italian debt.'"

August 8 - Bloomberg (Sonia Sirletti): "Italian banks' bad loans rose 15.8% in June from yr earlier, BOI says in report today."

August 9 - Bloomberg (Jonathan Stearns and Natalie Weeks): "In the mountains of northern Greece lies an $800 million power plant whose future may help determine whether the country can salvage its euro status. The facility near Florina, a town known as 'Where Greece Begins,' is the most modern of four production units that state-controlled Public Power Corp. SA is scheduled to sell to competitors to meet four-year-old European Union demands that the country deregulate its energy market. The most powerful Greek union is now threatening nationwide blackouts at the height of the summer tourist season to derail the plan."

Germany Watch:

August 10 - Bloomberg (Rainer Buergin): "The German economy faces 'considerable risks' after its expansion slowed in the second quarter, Handelsblatt cited the Economy Ministry..."

August 10 - Bloomberg (Dalia Fahmy): "Asking prices for German apartments rose in July as buyers sought a safe investment amid the euro zone crisis, with values in Berlin and Hamburg gaining the most. Prices demanded for previously owned apartments jumped 7% in July from a year earlier... Berlin and Hamburg prices rose 16.8% in July from a year earlier... German real estate has been among the biggest beneficiaries of Europe's sovereign-debt crisis as investors bet that land and buildings will retain value even if inflation spikes."

August 8 - Bloomberg (Rainer Buergin): "Georg Fahrenschon, president of the DSGV association of savings banks that represents more than 400 lenders, said he's worried about the European Central Bank abandoning its mandate to keep the euro currency stable. 'What worries me is whether the European Central Bank can live up to its responsibilities,' Fahrenschon, a member of the Christian Social Union, the sister party of Chancellor Angela Merkel's Christian Democratic Union, said... 'The fact that it's buying government bonds, that it's flooding markets with lots of liquidity, that's what worries me.'

August 10 - Bloomberg (Nicholas Comfort): "Germany's Zentralverband des Deutschen Handwerks, a skilled trades lobby group, said support for rescuing the euro may dwindle if the cost exceeds the benefits, Handelsblatt reported, citing... Otto Kentzler, the ZDH's president. Stabilizing the currency union cannot be a goal in itself, wrote Kentzler, who represents about a million companies and 5 million workers..."

Currency Watch:

The U.S. dollar index added 0.2% to 82.55 (up 3.0% y-t-d). For the week on the upside, the Norwegian krone increased 1.1%, the Canadian dollar 1.0%, the Swedish krona 0.7%, the South African rand 0.7%, the Brazilian real 0.6%, the Mexican peso 0.4%, the South Korean won 0.4%, the British pound 0.3%, the Japanese yen 0.2%, the Australian dollar 0.1% and the Taiwanese dollar 0.1%. On the downside, the euro declined 0.8%, the Danish krone 0.8%, the Swiss franc 0.7%, the New Zealand dollar 0.7% and the Singapore dollar 0.2%.

Commodities Watch:

August 9 - Bloomberg (Jeff Wilson and Daniel Kruger): "Corn surged to a record and soybeans and wheat prices jumped on mounting signs the U.S. drought will erode production. Treasuries pared earlier losses after the U.S. sold $16 billion of 30-year bonds, while the Standard & Poor's 500 Index advanced a fifth day and the euro weakened. Corn for December delivery settled up 0.9% at $8.2375 a bushel and touched an all-time high of $8.2975 while soybeans and wheat climbed more than 1% to lead the S&P GSCI Index of commodities to a fifth straight gain."

August 9 - Bloomberg (Tony C. Dreibus and Elizabeth Campbell): "Stockpiles of the biggest crops will decline for a third year as drought parches fields across three continents, raising food-import costs already forecast by the United Nations to reach a near-record $1.24 trillion. Combined inventories of corn, wheat, soybeans and rice will drop 1.8% to a four-year low before harvests in 2013, the U.S. Department of Agriculture estimates."

The CRB index added 0.4% this week (down 1.1% y-t-d). The Goldman Sachs Commodities Index rose 1.3% (up 1.8%). Spot Gold gained 1.0% to $1,620 (up 3.6%). Silver increased 0.9% to $28.06 (up 0.5%). September Crude gained $1.47 to $92.87 (down 6%). August Gasoline jumped 2.5% (up 13%), while September Natural Gas dropped 3.7% (down 7%). September Copper rallied 0.7% (down 1%). September Wheat slipped 0.7% (up 36%), and September Corn declined 1.2% (up 24%).

China Watch:

August 10 - Wall Street Journal (Tom Orlik and Aaron Back): "Concerns about China's economy intensified Friday on signs that Beijing's attempt to kick-start growth aren't working and fresh evidence of weakness in the crucial export sector, putting more pressure on Beijing to move aggressively to boost growth. New loans by China's banks fell to 540.1 billion yuan ($85.1 bn) in July, down from 919.8 billion yuan in June, and the lowest level since September 2011..."

August 10 - Bloomberg: "China's export growth collapsed and imports and new yuan loans trailed estimates in July, adding to signs the global economy is weakening and raising the odds the government will step up measures to support expansion. Outbound shipments increased 1% from a year earlier and imports rose 4.7%..."

August 9 - Bloomberg: "China's home sales transaction value dropped 14.5% in July from the previous month as the government vowed to maintain curbs on the property market. The value of homes sold fell to 454.4 billion yuan ($71.5bn) from 531.3 billion yuan in June... Housing sales from January to July declined 1.1% to 2.4 trillion yuan from a year earlier, according to the data."

August 9 - Bloomberg: "China's industrial-output growth unexpectedly slowed in July to a three-year low while investment and retail sales missed estimates... Factory production increased 9.2% in July from a year earlier... below all 32 analyst forecasts in a Bloomberg News survey."

August 10 - Bloomberg: "Sixty-nine-year-old Li Qingyuan has it pretty good. He and his wife live in a cozy apartment in Beijing. Since he retired in 2003 from a state-owned textile machinery factory, his pension has grown by about 10% a year, well above inflation. His monthly 2,800 yuan ($440) check is more than enough to get by. With the extra cash, he buys high-end cameras and lenses... Despite happy retirees like Li -- and partly because of them -- China's pension program is becoming unsustainable... The projected shortfall for future pension payments will reach 18.3 trillion yuan by next year, according to economists at Deutsche Bank AG and Bank of China Ltd. People older than 60 already make up 13% of China's population, and by 2050, the World Bank estimates that they will account for 34%."

India Watch:

August 9 - Bloomberg (Kartik Goyal): "The weakest monsoon since 2009 is set to prevent Prime Minister Manmohan Singh from reducing the biggest budget deficit among the largest emerging markets, increasing the risk of a downgrade of India's debt rating. All the seven economists in a Bloomberg News survey predict the government will overshoot its deficit target of 5.1% of gross domestic product in the year to March 2013."

August 9 - Bloomberg (Kartik Goyal): "Indian industrial production slid in June for the third time in four months, with output of capital goods plunging the most on record, adding to signs of faltering growth in Asia's third-largest economy. Production... declined 1.8% from a year earlier, after a revised 2.5% rise in May..."

August 9 - Bloomberg (Rakteem Katakey): "Indian Oil Corp. posted the nation's biggest quarterly loss of 224.5 billion rupees ($4.1bn) after the government failed to compensate it for capping fuel prices and processing margins turned negative."

European Economy Watch:

August 10 - Bloomberg (Andrew Davis): "Fallout from the euro region's debt crisis has led to more corporate insolvencies in Italy than in countries in northern Europe, the European Central Bank said in its monthly report. Corporate defaults increased 'substantially' in the second half of 2011 as the crisis intensified, compounding the effects of weakening economic growth, the... ECB said... 'Across the larger euro-area countries, this rise was particularly pronounced for Italian firms, while it was rather subdued for Dutch and German firms,' according to the report."

August 7 - Bloomberg (Chiara Vasarri): "Italian industrial production declined more than forecast in June, signaling the euro region's third-biggest economy probably contracted for a fourth quarter. Output dropped 1.4% from May... Production fell 8.2% from a year ago..."

Latin America Watch:

August 9 - Bloomberg (Nacha Cattan): "Mexico's annual inflation rate rose to a 28-month high in July as a bird-flu outbreak and drought pushed up food costs. Inflation accelerated to 4.42% from 4.34% the month before..."

Global Economy Watch:

August 8 - Bloomberg (Brian K. Sullivan): "July was the hottest month in the lower 48 states in records going back 117 years, capping the hottest 12 months ever in the continental U.S., the National Oceanic and Atmospheric Administration said. The average temperature in the 48 states was 77.6 degrees Fahrenheit (25.3 Celsius), or 3.3 degrees above normal.... The old record was set in July 1936... The first seven months of 2012 have also been the warmest start for any year in records going back to 1895."

U.S. Bubble Economy Watch:

August 6 - Bloomberg (Martin Z. Braun): "U.S. state and local-government pensions ended the 2012 fiscal year with a median gain of 1.15% as the European debt crisis and a slowing global economy damped stock returns, Wilshire Associates said. It was a reversal after two years of gains for the retirement funds, which have $2.8 trillion in assets... The performance... may add to political pressure on public workers to accept benefit cuts and increase contributions to the plans ...State and local government pensions count on returns of 7% to 8.5% to pay retirement benefits for teachers, police officers and other civil employees. To make up for losses suffered during the 2008 financial crisis and the recession, municipal officials had to contribute more to the funds, straining budgets and leaving less money available for services."

August 8 - Bloomberg (Jeff Kearns): "Banks in the U.S. are lending the most since the recession ended in June 2009, supporting an economy weighed down by 8.3% unemployment. Borrowing by consumers and businesses rose in the week ending July 25 to $7.1 trillion, within 2.9% of its October 2008 peak... New lending for autos jumped to $134.3 billion in the first four months of the year, up 56% from the same period in 2009, according to credit bureau Equifax Inc."

August 9 - Bloomberg (Prashant Gopal): "Prices for single-family homes climbed in three-quarters of U.S. cities and values nationally jumped the most since 2006 as real estate markets stabilized. The median sales price increased in the second quarter from a year earlier in 110 of 147 metropolitan areas measured... In the first quarter, 74 areas had gains."

August 9 - Bloomberg (John Gittelsohn): "The U.S. mortgage delinquency rate increased for the first time in a year as slowing economic growth left more borrowers struggling to pay their bills. The share of home loans at least 30-days late rose to 7.58% in the second quarte... up from 7.4% in the previous three months..."

Central Bank Watch:

August 8 - Bloomberg (Caroline Fairchild and Jeff Kearns): "Federal Reserve Bank of Dallas President Richard Fisher said adequate economic stimulus already is in place and that global central banks may not have the capacity to undertake additional measures to boost growth. 'We're at the risk of overburdening the central banks,' Fisher said... 'We keep applying what I call monetary Ritalin to the system. We all know there's a risk of over-prescribing.' Fisher said the largest banks have $1.5 trillion in excess reserves that they would like to put to work and that the private sector now must take the next steps to boost growth after the Fed purchased $2.3 trillion in bonds and held its main interest rate near zero since December 2008... 'We have done our job,' said Fisher...'We have done enough. Just doing more doesn't solve the problem. The problem is engaging the transmission. We provided the gas, the gas tank is full.'"

August 8 - Bloomberg (Julie Hirschfeld Davis): "Federal Reserve Chairman Ben Bernanke calls it his 'nightmare scenario.' One of Mitt Romney's top economic advisers called it 'trouble.' Yet as they look to their national convention starting in Tampa on Aug. 27, Republicans are considering including a plank in their party platform calling for a full audit of the central bank. Prodded by the failed primary bid of longtime Fed critic Ron Paul -- and the grassroots enthusiasm the Texas congressman's cause inspired among bail-out weary Tea Party activists and small government advocates -- Republicans are entertaining a prospect that has long made them and some of their financial supporters cringe."

Fiscal Watch:

August 9 - Bloomberg (Laurence Kotlikoff and Scott Burns): "Republicans and Democrats spent last summer battling how best to save $2.1 trillion over the next decade. They are spending this summer battling how best to not save $2.1 trillion over the next decade. In the course of that year, the U.S. government's fiscal gap -- the true measure of the nation's indebtedness -- rose by $11 trillion. The fiscal gap is the present value difference between projected future spending and revenue. It captures all government liabilities, whether they are official obligations to service Treasury bonds or unofficial commitments, such as paying for food stamps or buying drones."

August 9 - Bloomberg (Angela Greiling Keane): "Postal Service 'liquidity challenges' remain in 2013, U.S. Acting Postal financial chief Steve Masse says in Washington. USPS has said it would run out of cash in Oct., assuming it wouldn't make $11.6b in required payments to the U.S. Treasury for future retirees' health-care costs."

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/