December 14 - Dow Jones: "German Finance Minister Wolfgang Schaeuble said the euro is stable, and the current crisis isn't one of the currency itself. He made his comments as the euro dipped as low as $1.2994--its lowest point since January this year. 'We don't have a crisis of the euro. What we have is a crisis and problems in a series of member states,' Schaeuble said at a speech to mark the tenth anniversary of the introduction of euro notes and coins Introducing the euro and giving up the deutschmark was no easy decision, he said. 'But already then it was the right decision,' Schaeuble said. The finance minister stressed that inflation during the euro years has been low. 'The euro is a stable currency,' he said."

For months now, European political leaders and central bankers have repeatedly reassured the marketplace that the euro was a "strong" and "stable" currency. We were ensured that confidence in the euro was not an issue - and for months this view was bolstered by the euro's resiliency in currency trading. But talk of euro confidence rings increasingly hollow. I believe that market perceptions have changed, and faltering European Central Bank (ECB) and euro confidence now likely marks the next phase of the unfolding global financial crisis.

The loss of confidence in currency markets played a critical role in previous financial crises. One can look back not that many years to devastating crises in Mexico, Thailand, Indonesia, Malaysia, South Korea, Russia, Argentina and Iceland (to name only a few) for examples of how currency tumult can become the epicenter of a general crisis of confidence. In each case, there reached a key inflection point when the markets no longer believed policymakers (especially central bankers) had the situation under control.

The evolution of a crisis from Credit issues to broader currency fears marks a major escalation from the standpoint of policymaking. A strong/resilient currency affords policymakers important flexibility, both fiscal and monetary. Importantly, and as we've witnessed in the case of the ECB, a central bank has significant capacity to monetize (expand asset holdings) so long as the marketplace trusts the stability of the underlying currency. As a crisis of confidence deepens, this monetization can play an important role in both bolstering debt and equities markets and financing government spending programs. And, of course, relatively stable markets and economies are critical to currency stability.

The ECB is no "developing" central bank. And as one of the world's predominant "reserve currencies," the euro is no peso, baht, won or ruble. Global markets have afforded the euro the benefit of the doubt for much of 2011, perceptions of "too big to fail" again prevalent in the marketplace. The euro has been bolstered both by the perception that European policymakers would eventually (when all other options were exhausted) come together with sufficient resolve to deal with the crisis, as well as the perception that China, the U.S., the IMF and others would join in to ensure the crisis did not spiral out of control. The euro is not a pegged currency regime vulnerable to a destabilizing de-pegging, but instead trades freely against currencies such as the dollar and yen that have their own serious structural issues.

But the euro is the handiwork of a historic experiment in monetary integration. Its origins go back to an era of optimism, cooperation and, importantly, financial (including monetary policymaking) innovation. I would argue it is a creature borne from the halcyon upside phase of an epic Credit cycle. A global backdrop of easy Credit, unprecedented leveraged speculation, liquidity abundance and attendant policymaking flexibility/accommodation was instrumental in the convergence of borrowing costs and deficits throughout the eurozone prior to euro introduction. It is worth recalling that the Bank of Italy was an investor in Long Term Capital Management (LTCM) and LTCM was a major operator in Italian debt instruments.

The pegged currency regimes from the nineties fostered major market distortions that were later resolved through financial and economic calamity. Yet when it comes to distortions, nothing compares to what unfolded under the "pegging" of 17 individual currencies and market yields in the process of euro monetary integration. In particular, yields collapsed in Greece, Portugal, Ireland, Belgium, Spain and Italy - as their funding costs "converged" toward the "stability anchor," "AAA," and disciplined manufacturing powerhouse - the Federal Republic of Germany. And while improved fundamentals no doubt played a role, the perception both that the euro was here to stay and that sovereign default would always be held at bay was instrumental in the collapse of risk premiums across the euro region.

Until more recently, one could argue that the European debt crisis was largely a tug-o-war. On one end, markets were imposing more reasonable risk premiums upon profligate sovereigns. On the other, policymakers were taking increasingly desperate measures to pull borrowing costs back down to artificially low levels. The stakes were extraordinarily high. Considering the enormous debt loads coupled with maladjusted economic structures, a significant jump in market yields would raise questions as to the viability of debt structures for many sovereigns. And a crisis of confidence in "periphery" debt markets, Italy in particular, would raise liquidity and solvency issues for the European banking system. The stakes were so high that the markets had been largely content to presume that policymakers would eventually exert sufficient pull to win the war.

But the longer policymakers went without tug-o-war triumph the more the markets recognized the complexities and gravity of the situation. Greece was the tip of the proverbial iceberg - and economic structures were much more impaired than had been earlier assumed. If little Greece had become a formidable financial black hole, what might lie ahead with Italy? And if Italian solvency was at issue, the solvency of the European banks was in jeopardy - and suddenly the world looked like a very uncertain and over-leveraged place. The markets came to appreciate the enormity of the problem - more recently recognizing their dream of Germany backing Italy would amount to a nightmare for the euro's "stability anchor." Germany could not - and would not - put their guarantee on multi-trillions of now suspect sovereign and banking system obligations. Perhaps a major inflection point in the Credit cycle had been reached, with ominous portents for markets, economics, politics and the social mood more generally. Over the past few weeks, doubt has been cast on the viability of the euro monetary experiment.

My thesis is that, with the sustainability of euro integration now a pressing issue, capital flight has begun in earnest. There is evidence that huge flows have left the "periphery" banks in search of the safety of German and other "core" institutions. A fascinating Bloomberg article yesterday ("Germany's Hidden Risk" by Peter Coy) introduced the term "Target2." "It's the name for the European Central Bank's suddenly important interbank payment system, which before the crisis was just a lowly bit of financial plumbing. The bottom line: Germany's Bundesbank -- BuBa for short -- has quietly, automatically lent 495 billion euros ($644bn) to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal -- and lately Spain, Italy, and even France. They are technically 'claims,' not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone."

As Bloomberg's Peter Coy explains it, "Target2" is basically the system for tallying and settling obligations between euro region central banks. And, clearly, there's been lots of tallying and too little settling, as fellow euro central banks accumulate enormous debts to Germany's Bundesbank. Say, for example, a wealthy Italian - or multinational corporation - decides it's now safer to park their euros in German bank deposits rather than to leave them in Italy. The fund transfer would see balances shifted to Germany, although the Italian bank (where the funds are exiting) would likely be suffering funding issues. So this transfer would require the local bank to borrow from the Italian central bank. Through the ECB's Target2 system, the end result would be a new payable claim whereby the Italian central bank owes euro funds to the Bundesbank.

It is my view that heightened euro disintegration risk has unleashed destabilizing capital flight - within the euro region and without. I'll presume the flow out of Italian, Spanish, Greek, Portuguese and other "periphery" banks to Germany will equate to only more astonishing growth in "Target2" balances. And I'm not sure why this wouldn't turn into a serious issue for the ECB, the Bundesbank and for an already unsettled German political landscape. The high standing in which the Bundesbank is held by the German populace could be at risk. For now, the ballooning of both the ECB balance sheet and claims to the Bundesbank will likely be a source of market worry, weighing further on the euro and creating greater momentum for capital flight out of the European financial system.

Interestingly, European periphery bonds rallied strongly into week's end - while, uncharacteristically in such a circumstance, the euro struggled for a bid. The ECB last week announced its Long-Term Refinancing Operation (LTRO). This is an unlimited three-year liquidity facility the European banks will have the opportunity to tap next week. Borrowing estimates vary from 100bn to as high as 350bn euros. According to the Financial Times ("Doubts Over ECB Move to Boost Bond Sales" by Tracy Alloway), about half of a euro 614bn longer-term facility from 2009 was used to finance (mostly periphery) sovereign debt. There has been talk that much of the demand for this week's strong Spanish debt auctions had come from banks that will use this debt as collateral against this new ECB lending facility. Especially in today's liquidity challenged marketplace, LTRO-related buying may explain the rather dramatic decline in Spain and Italian yields, especially at the shorter end of yield curves (Spain 2-yr yields down 120 bps and Italian 2-yr down 76 bps this week).

But what about the euro? Well, if capital flight has become a serious issue then the markets will appreciate that ECB liquidity operations now might work to exacerbate outflows. There reaches a point where central bank monetization morphs from a stabilizing force in the securities markets (bolstering prices and confidence) to being a potentially destabilizing provider of additional liquidity that might immediately seek safer havens in competing currencies. It was, after all, capital flight and faltering currencies that over the years hamstrung central banks from Brasilia to Seoul.

For months now, market participants have waited patiently for European political resolve and crisis resolution. Federal Reserve-like monetization from the ECB has been viewed as the trump card to be called upon in the event of political failure. With failure at this point the base-case, attention has turned to a surprisingly unsteady ECB. It is increasingly apparent that the ECB has much less flexibility and firepower than had previously been assumed, while the scope of the problem seems to expand by the week. There is at this point alarmingly little to show for the massive ballooning of the ECB's balance sheet (and "Target2" balances owed to the Bundesbank). One is left pondering how the ECB/Bundesbank can be expected to backstop an almost unfathomable amount of vulnerable European sovereign debt and banking system obligations - not to mention potentially enormous capital outflows.

There was more focus this week on Europe's "plumbing." How will markets and payment systems function in the event of major change - one or more countries exiting or complete disintegration - in the euro regime? I expect this to be a major issue for the coming weeks and months. If the euro as we know it today does not survive, there will be major market dislocations and bank failures.

If global market participants and business interests are forced to handicap the sustainability of the euro, then they will also have to contemplate the viability of European financial institutions. Will the ECB backstop the banking system, or would it be left to individual national central banks? Will there be massive monetization/"money printing" - and if so, will it be before or after euro-related financial dislocation - by the ECB or individual central banks? To what extent would central banks back their national banking systems? How would various scenarios impact myriad bank obligations, including senior and subordinated debt, along with Trillion upon Trillion of derivative obligations?

I'm rather confident that the more time analysts contemplate such issues the more apprehensive they will become. Counterparty and derivative issues now take center stage. And the more concerning these issues become, the more likely the rational outcome is capital flight. The Russian banks were major players in ruble derivatives, providing insurance that proved worthless as the banks collapsed right along with the currency.

There are hard decisions to be made. Going forward, will one hedge euro and European risk exposures in the derivatives markets? Or does it reach a point where it becomes more rational to avoid counter-party issues and simply exit the region. And for a hedge fund industry that for too long has operated as the marginal source of market liquidity around the globe, how do they game it? Hedge fund operators will need to decide if they're going to bet (or, more likely, stick with bets) on the "plumbing" functioning - and I guess their investors will decide if they agree with the premises of their fund managers. It's ironic that the big European "banks" used the carnage of the 2008 fiasco to boost their presence in the global (hedge fund and securities financing) prime brokerage and derivatives businesses. It shouldn't be too difficult to see the linkages from Europe and the euro to a very problematic global crisis.

For the Week:

The S&P500 dropped 2.8% (down 3.0% y-t-d), and the Dow lost 2.6% (up 2.5%). The Morgan Stanley Cyclicals sank 4.9% (down 17.7%), and the Transports declined 1.0% (down 3.9%). The Morgan Stanley Consumer index dipped 1.0% (down 1.8%), and the Utilities slipped 0.2% (up 9.8%). The Banks were down 3.6% (down 27.8%), and the Broker/Dealers sank 6.4% (down 33.5%). The S&P 400 Mid-Caps dropped 3.4% (down 5.7%), and the small cap Russell 2000 fell 3.1% (down 7.9%). The Nasdaq100 was hit for 3.5% (up 0.9%), and the Morgan Stanley High Tech index sank 5.2% (down 12.2%). The Semiconductors were hit for 6.1% (down 14.3%). The InteractiveWeek Internet index dropped 4.3% (down 10.6%). The Biotechs declined 2.6% (down 21.1%). With bullion down $113, the HUI gold index was hammered for 9.1% (down 11.0%).

One and three-month Treasury bill rates ended the week near zero. Two-year government yields were unchanged at 0.22%. Five-year T-note yields ended the week down 9 bps to 0.78%. Ten-year yields dropped 21 bps to 1.85%. Long bond yields sank 26 bps to 2.83%. Benchmark Fannie MBS yields were down 9 bps to 2.92%. The spread between 10-year Treasury yields and benchmark MBS yields widened 13 bps to107 bps. Agency 10-yr debt spreads increased 11 bps to seven bps. The implied yield on December 2012 eurodollar futures jumped 10 bps to 0.755%. The two-year dollar swap spread increased 7 bps to 49.5 bps. The 10-year dollar swap spread rose about 6 bps to 18 bps. Corporate bond spreads widened meaningfully. An index of investment grade bond risk increased 10 bps to 131 bps. An index of junk bond risk jumped 52 bps to 747 bps.

Debt sales slowed. Investment-grade issuance this week included JPMorgan $1.25bn, Caterpillar $600 million, and PPL Energy Supply $500 million.

Junk bond funds inflows declined to $456 million (from Lipper). Junk issuance included Coffeyville Resources $450 million and Number Merger $250 million.

Convertible debt issuers included Amtrust Financial $175 million and Castle & Co. $50 million.

International dollar bond issuers included Canadian Housing Trust $5.5bn, Banco de Bogata $600 million, and Boldini $250 million.

Italian 10-yr yields ended the week up 22 bps to 6.55% (up 173bps y-t-d). Spain's 10-year yields dropped 45 bps to 5.26% (down 18bps). Greek two-year yields ended the week 41 bps higher to 134.32% (up 12,208bps). Greek 10-year yields declined 45 bps to 31.84% (up 1,938bps). German bund yields dropped 30 bps to 1.85% (down 111bps), and French yields declined 21 bps to 3.05% (spread to bunds widened 9 bps to 120bps). U.K. 10-year gilt yields fell 12 bps to 2.04% (down 147bps). Ten-year Portuguese yields added 2 bps to 12.49% (up 591bps). Irish yields fell 23 bps to 8.29% (down 76bps).

The German DAX equities index sank 4.8% (down 17.5% y-t-d). Japanese 10-year "JGB" yields fell 4 bps to 0.98% (down 14bps). Japan's Nikkei declined 1.6% (down 17.9%). Emerging markets were lower. For the week, Brazil's Bovespa equities index was hit for 3.7% (down 19.1%), and Mexico's Bolsa fell 3.3% (down 6.5%). South Korea's Kospi index declined 1.9% (down 10.3%). India's Sensex equities index dropped 4.5% (down 24.5%). China's Shanghai Exchange sank 3.9% (down 20.8%). Brazil's benchmark dollar bond yields jumped 12 bps to 3.41%, while Mexican benchmark yields were little changed at 3.53%.

Freddie Mac 30-year fixed mortgage rates dropped 5 bps to a record low matching 3.94% (down 91bps y-o-y). Fifteen-year fixed rates fell 6 bps to 3.21% (down 96bps y-o-y). One-year ARMs added a basis point to 2.81% (down 54bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down one basis point to 4.69% (down 83bps y-o-y).

Federal Reserve Credit surged $69.2bn to a record $2.867 TN. Fed Credit was up $459bn y-t-d and $493bn from a year ago, or 20.2%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/14) declined $12.3bn to $3.434 TN (13-wk decline of $32.5bn). "Custody holdings" were up $92.3bn y-t-d and $105.6bn from a year ago, or 3.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $1.267 TN y-o-y, or 14.1% to $10.284 TN. Over two years, reserves were $2.658 TN higher, for 35% growth.

M2 (narrow) "money" supply jumped $19.1bn to $9.640 TN. "Narrow money" has expanded at a 9.7% pace y-t-d. For the week, Currency increased $0.7bn. Demand and Checkable Deposits declined $2.2bn, while Savings Deposits jumped $23.5bn. Small Denominated Deposits dipped $2.3bn. Retail Money Funds slipped $0.6bn.

Total Money Fund assets were little changed at $2.678 TN. Money Fund assets were down $132bn y-t-d and $119bn over the past year, or 4.3%.

Total Commercial Paper outstanding declined $5.6bn (22-wk decline of $245bn) to $9bn. CP was up $20bn y-t-d, with a one-year rise of $10bn, or 1.0%.

Global Credit Crisis Watch:

December 12 - Bloomberg (Abigail Moses and Shannon D. Harrington): "The fifth agreement in 19 months intended to resolve Europe's sovereign crisis is failing to ease stress in the debt markets. A credit-default swaps index tied to Greece, Italy, Spain and 12 other western European nations rose today, extending a reversal of its biggest drop ever and approaching the record reached Nov. 25. A gauge of banks' reluctance to lend to one another in euros remains at about the highest since February 2009. The premium they pay to convert euro payments into dollars jumped the most in five weeks and is more than double this year's average. European leaders at last week's summit in Brussels stopped short of providing the comprehensive solution that investors have sought and didn't receive unanimous support for the measures they did take 'We've had five mother-of-all resolutions and they've done nothing but bring more stress,' said Gary Jenkins, head of fixed income at Evolution Securities 'They've been a lot of hot air and not a lot of substance. From what we've seen before, this is likely to be more of the same.'"

December 14 - Bloomberg (Chiara Vasarri): "Italy had to pay the most in 14 years to sell five-year bonds as Parliament rushes to pass a 30 billion-euro ($39bn) budget plan that Prime Minister Mario Monti says will bring down record borrowing costs. The Rome-based Treasury sold 3 billion euros of the bonds, the maximum for the sale, to yield 6.47%, the most since May 1997 Monti's Cabinet approved a sweeping budget plan on Dec. 4 aimed at raising revenue and boosting Italy's anemic growth to persuade investors Italy can tame the region's second-biggest debt and avoid a bailout 'Italy's predicament is dire: it has become a proxy for euro-zone risk at a time when its funding requirements are about to balloon,' Nicholas Spiro, managing director of Spiro Sovereign Strategy said 'Every bond auction in January and February is going to be scrutinized for signs that Italy is having trouble maintaining market access.'"

December 12 - Bloomberg (Emma Charlton): "Italy holds the key to the euro's survival, shouldering one-third of the region's first-quarter funding burden as the debt crisis saps demand for its assets and shrinks its investor base. The euro zone's third-largest nation has to repay about 53 billion euros ($70.5bn) in the first quarter from the region's total maturing debt of 157 billion euros, according to UBS It owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months The first three months of 2012 'will be a very painful auction experience, which is detrimental to investor confidence,' said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV... The nation's debt-servicing costs will rise by about 30 billion euros in the next two years, Confindustria, Italy's employers' lobby, said Those costs will eat up 5.1% of gross domestic product next year, up from 4.2% this year, and climb to 5.6% in 2013, the report said."

December 14 - Bloomberg (Jeff Black and Rainer Buergin): "European Central Bank policy makers are becoming more skeptical about the efficacy of the bank's bond-purchase program, ECB council member Jens Weidmann said. 'I am not a fan of the SMP,' Weidmann said , referring to the ECB's Securities Markets Program. 'The fans of the SMP are becoming increasingly skeptical.' With Italy and Spain needing to sell a combined 20 billion euros ($26bn) of debt in January, according to Citigroup Inc., the ECB has come under pressure to step up its bond purchases to contain the debt crisis while politicians seek a longer-term solution. ECB policy makers including President Mario Draghi have emphasized the bond buying is 'limited' and can't return confidence to the market in the absence of government reforms. The race against market demands to deploy ever larger weapons can't be won, Weidmann said."

December 14 - Bloomberg (Emma Charlton and Keith Jenkins): "The European Central Bank's bond- buying efforts will need to accelerate to match a torrent of Spanish and Italian debt sales early next year. The central bank's purchases have been worth about the same as Spain and Italy's borrowing needs during the past 12 weeks Italy's 10-year funding cost has increased by two percentage points in the past year 'If you look at the issuance in January, it is going to pick up, and the ECB buying can offset that,' said Jamie Searle, an interest-rate strategist at Citigroup 'ECB buying has pretty much matched issuance over the last three months. What they are doing is helping to support the primary issuance and make sure the auctions go smoothly.'"

December 15 - Bloomberg (Patrick Donahue and Brian Parkin): "German Chancellor Angela Merkel is being buffeted by domestic political turbulence, threatening to distract her efforts to follow through on a European summit agreement last week to tackle the euro debt crisis. Christian Lindner, the general secretary of Merkel's Free Democratic coalition partner, unexpectedly quit yesterday amid a party tussle over bailouts. Separately, Merkel's spokesman said the chancellor had full confidence in Christian Wulff, Germany's president, after a Bild report that he misled lawmakers over a 500,000 euro ($650,000) home loan. The political turmoil engulfed Merkel's administration five days after she secured what she called a 'breakthrough' European deal to enforce stricter budget rules and to stem the financial contagion now in its third year."

December 15 - Bloomberg (Rainer Buergin): "European Central Bank President Mario Draghi said there is no 'external savior' for countries that don't implement structural reforms to bring back confidence to debt markets. 'There is no external savior for a country that doesn't want to save itself," Draghi said I will never tire of saying the first response should come from the countries.'"

December 14 - Bloomberg (Maryam Nemazee and Dara Doyle): "Irish Finance Minister Michael Noonan said any referendum on the new European Union accord may effectively be a vote on the country's continued euro membership. The Irish government will start assessing whether it needs to hold a vote after it receives a first draft of the text by the end of the year, Noonan said "

December 14 - Dow Jones: "Greek Prime Minister Lucas Papademos said the country's recession in 2011 will be worse than the government forecast, with annual economic output seen contracting by more than 5.5%. 'Challenges faced by the Greek economy are massive. Greece has a short- and medium-term plan but time is against us,' he told a conference "

December 13 - Bloomberg (Anabela Reis): "Portugal's government may have to partly nationalize crisis-hit banks, even as it sells assets as part of the 78 billion-euro ($102.8bn) bailout agreement The nation's three biggest banks have lost a combined 6.3 billion euros, or 68%, of market value this year, while Portugal's 10-year bond yield almost doubled to 13%."

December 15 - Financial Times (Ajay Makan): "Foreign-owned banks operating in the US have suffered their largest six month fall in deposits on record in what some analysts have described as a 'flight to safety' from European banks to domestic institutions. Cash on deposit at foreign-owned banks fell $290bn, or 25%, to $871bn from the end of May to the start of December, the first time deposits in the sector have fallen for six consecutive months since 2002, according to Federal Reserve data."

December 16 - Bloomberg (Demian McLean): "Australia's banks have been given 1 week by regulators to stress test how they would handle a spike in joblessness, plunge in home prices spurred by EU debt crisis, Australian Financial Review reports, citing unidentified bank executives."

Global Bubble Watch:

December 15 - Bloomberg (Devin Banerjee): "Private-equity exits, the process of selling or taking public a company owned by a buyout firm, fell to their lowest global level in seven quarters after a record high earlier this year, according to Preqin Ltd. In the fourth quarter, private-equity firms completed 170 exits valued at $28.4 billion That compares with a record 326 exits valued at $121.8 billion in the second quarter of 2011."

Currency Watch:

December 12 - Bloomberg (Lukanyo Mnyanda and Catarina Saraiva): "Foreign-exchange strategists are reducing their forecasts for the euro at the fastest pace this year as European Central Bank President Mario Draghi's interest-rate cuts remove one of the currency's pillars of support."

The dollar index jumped 2.1% to 80.26 (up 1.6%). On the downside, South African rand declined 3.6%, the Norwegian krone 3.5%, the Brazilian real 2.9%, the Swedish krona 2.9%, the euro 2.5%, the Danish krone 2.5%, the Australian dollar 2.3%, the Mexican peso 2.2%, the Canadian dollar 2.1%, the New Zealand dollar 1.8%, the Swiss franc 1.4%, the South Korean won 1.0%, the Singapore dollar 1.0%, the British pound 0.8%, the Taiwanese dollar 0.5%, and the Japanese yen 0.1%.

Commodities and Food Watch:

The CRB index dropped 3.7% this week (down 11.4% y-t-d). The Goldman Sachs Commodities Index sank 4.5% (down 2.2%). Spot Gold was drilled for 6.6% to $1,599 (up 12.5%). Silver was pummeled for 8.0% to $29.67 (down 4%). January Crude fell $5.88 to $93.53 (up 2%). January Gasoline dropped 4.2% (up 1%), and January Natural Gas sank 5.7% (down 29%). March Copper sank 6.4% (down 25%). March Wheat declined 2.1% (down 26%), and March Corn fell 1.9% (down 7%).

China Bubble Watch:

December 16 - Reuters: "Deposits fell sharply at China's big four state banks early this month, partly due to an outflow of hot money from China, local media reported The big four banks, which account for half of total bank deposits in China, reported a 400 billion yuan ($62.76bn) fall in deposits in the first 10 days of December, the 21st Century Business Herald reported."

December 13 - Bloomberg (Scott Reyburn): "The most expensive Chinese work of art at auction is still not paid for, more than a year after it was bid to 51.6 million pounds ($83 million) Its price was more than 50 times the presale estimate and the auction house ceased to comment after several months passed without payment."

Japan Watch:

December 15 - Bloomberg (Monami Yui, Masaki Kondo and Shigeki Nozawa): "The cost of insuring Japan's bonds against losses is poised to rise this year by the most on record amid concern a shrinking current-account surplus may push the world's most indebted nation toward a crisis like Europe's. Five-year credit-default swaps tied to Japanese government bonds have jumped 64 basis points to 136 basis points this year through Dec. 14 Germany's contracts have climbed 46 to 106 as European leaders struggle to contain borrowing costs and bolster investor confidence in the region's biggest economies."

Latin America Watch:

December 12 - Bloomberg (Arnaldo Galvao, Andre Soliani and Adriana Arai): "Brazil has taken the bulk of stimulus measures needed to reignite economic growth next year and sees no need to rely on state banks to help boost credit, Deputy Finance Minister Nelson Barbosa said. 'A great deal of what we think is necessary for next year has already been done,' Barbosa, 42, said Brazil's economy, the world's second-largest emerging market after China, contracted for the first time in 2 1/2 years in the third quarter As a result, economic growth for the whole of 2011 will slow to 3% from 7.5% last year, according to Banco Bradesco SA."

December 13 - Bloomberg (Alexander Ragir): "Brazil's retail sales unexpectedly stalled in October as consumer purchases of clothing and pharmaceuticals declined amid a slowdown in Latin America's biggest economy. Sales were unchanged from September Sales rose 4.3% from a year earlier. The broader retail index, which includes the sale of cars and construction materials, fell 0.4% from the previous month."

December 15 - Bloomberg (Eliana Raszewski): "Argentina's economy grew 9.3% in the third quarter from a year earlier, President Cristina Fernandez de Kirchner said "

Unbalanced Global Economy Watch:

December 14 - Dow Jones (Paul Vieira): "Canada's Finance Minister Jim Flaherty warned households to refrain from taking on too much mortgage and consumer-loan debt, cautioning interest rates will eventually rise. Flaherty said Canadians are taking advantage of historically low borrowing rates to take on bigger mortgages. 'We need to caution Canadians not to overextend themselves, because interest rates will eventually go up,' he said. His warning emerged a day after Statistics Canada reported the ratio of household credit market debt to disposable income increased to a record 150.8% in the third quarter, from 148.5% in the previous three-month period, as consumers loaded up on mortgage obligations and consumer loans while income remained unchanged."

December 15 - Bloomberg (Richard Weiss): "German homebuilding permits soared to records this year as investors sought real estate as a hedge against inflation and a refuge from the sovereign debt crisis. Permits rose 22% in the first nine months, while privately owned apartments gained 43%, the most in more than two decades 'It's fear of inflation,' Heiko Stiepelmann, deputy chief executive officer for Germany's Construction Industry Association, said 'The strong rise is explained by a lack of profitable, and especially safe, alternatives for investing.'"

December 15 - Bloomberg (Esteban Duarte): "Repossessed houses in Spain are worth 43% less on average than the valuations assigned on the mortgages for the properties, according to Fitch Ratings. Price declines range from 20% to 58%, analysts Juan David Garcia and Carlos Masip in Madrid wrote in a report analyzing 8,235 properties funded by loans from banks The mortgages are in asset-backed securities with high loan-to-value ratios."

December 13 - Bloomberg (Colm Heatley): "English butlers are answering more calls from super-rich Chinese and Russian clients as wealth shifts between east and west. The Guild of Professional English Butlers has trained 20% more butlers this year than last, placing them with clients as soon as they are ready As Europe struggles with a debt crisis and the U.S. tries to revive its economy, burgeoning growth in emerging markets is boosting spending on luxuries like never before, and creating opportunities for more people to look after them."

Real Estate Watch:

December 15 - Bloomberg (Chris Spillane): "Chinese investors' share of prime London home purchases in the city's most expensive neighborhoods fell by more than half in the third quarter as stock market declines hurt spending power, Hamptons International said. Buyers from the world's second-largest economy accounted for 4.9% of sales in Chelsea, Kensington, Knightsbridge and Belgravia in the three months through September, down from 12.6% in the previous quarter They represented 10.6% of the purchases in the three months through March. 'A lot of Asian wealth that's spent on property is tied to the performance of equity markets,' Challis said 'When they wobble, there's less money to spend.'"

Central Bank Watch:

December 12 - Bloomberg (Scott Lanman and Bradley Keoun): "For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank's emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself. As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn't track where the dollars ultimately end up, and European officials don't share borrowers' identities outside the continent. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed's largest crisis-loan programs. The European Central Bank's three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point."

December 14 - Bloomberg (Josiane Kremer): "Norway's central bank slashed its benchmark interest rate by half a percentage point as the euro area's debt crisis saps economic growth in the world's second- wealthiest nation. 'The turbulence in financial markets has intensified and external growth is now expected to be clearly weaker, particularly in the euro area,' Deputy Governor Jan F. Qvigstad said "

Muni Watch:

December 12 - Bloomberg (Jerry Hart): "U.S. state governments' spending and revenue will lag behind recession levels and restrain their borrowing in 2012. The BGOV Barometer shows projected outlays of $666.6 billion for fiscal 2012, which ends June 30 for most states, will be 3% less than in fiscal 2008. The back-to-back spending declines were the first since the organization's semi-annual survey began in 1979. 'While state fiscal conditions are slowly improving in fiscal 2012, they are likely to remain constrained due to the lack of a strong national economic recovery and the withdrawal of federal stimulus funds,' the survey said."

December 15 - Bloomberg (Henry Goldman): "New York City may face increased budget deficits because of falling Wall Street profits, an 'uncertain economic recovery' and the prospect of reduced federal and state aid, state Comptroller Thomas DiNapoli said. The securities industry lost almost $3 billion in the third quarter of 2011, reducing year-to-date profits to $9.6 billion He predicted profits will fall 'significantly short' of the $20 billion the city forecast for 2011 in its financial plan. 'With its prospects dimming, the industry has begun to cut costs and reduce employment and employee compensation, actions which will ripple through the New York City economy,' DiNapoli's office said 'Cash bonuses paid to securities-industry employees in the city are likely to be substantially smaller than last year.'"