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All Eyes on Spain

"To talk about a bailout for Spain at the moment makes no sense. Spain is not going to be rescued. It's not possible to rescue Spain. There's no intention to, it's not necessary and therefore it's not going to be rescued." Spanish Prime Minister Marino Rajoy, April 12, 2012

The respite from the European debt crisis has run its course, and with the return of market stress comes a ratcheting up of vitriol directed at the Germans. I find it all worrying. For a moment today I tried to take comfort from a UK Telegraph headline that scrolled by on the Bloomberg screen: "Worrying Is Good for You and Reflects Higher IQ." I'm adding this to my list of notions that sound appealing and I only wish were true.

By this point in the ongoing global Credit crisis, it should be clear that the real villain is the anchorless global Credit "system" devoid of anything, any mechanism, or any sound money and Credit principles that might help to restrain excess. Self-adjustment and automatic self-correcting mechanisms would be invaluable. Instead, our central bank, steward of the world's so-called "reserve currency," indicates its willingness to become even more "activist" - and global finance spirals only further out of control. For decades now, global Credit has been allowed to expand unchecked - with no limit to either the quantity or quality of debt instruments. Perhaps the timing and sequencing of various crises was unknowable, though the end results were for the most part predictable.

Over the years I've been a fan of the euro. I'm saddened that my and others' hopes for a sustainable sound currency failed to materialize. It is surely not going to be part of any solution to a rudderless global monetary system but instead appears poised to become its biggest casualty yet. But to blame Europe's travails on the Bundesbank is really stretching the bounds of reasonableness - and sound analysis.

In hindsight, a common European currency was not a good idea. Yet European monetary integration is in jeopardy today because for too many years the dysfunctional global marketplace mispriced finance. Greece, Portugal, Ireland, Spain, Italy and others for too long had access to unlimited low-cost borrowings (along the lines of Fannie Mae and Freddie Mac, and the U.S. Treasury). This prolonged mispricing of Credit led to financial and economic imbalances and deep structural maladjustment, just as one would have expected analyzing the situation from an "Austrian" (or, even, German) economic perspective. I often recall the words of wisdom from the great economist, Dr. Kurt Richebacher: "The only cure for a Bubble is to not allow it to develop."

The nineties saw Credit crises ravage Mexico, Thailand, South Korea, Malaysia, Indonesia, Russia, Brazil, and many others. The developing economies were the "periphery" for that Credit crisis period. Their problems were blamed on ill-advised policies, "currency pegs," borrowing/spending excesses and other domestic shortcomings. Our and other developed world policymakers had complete understanding as to the causes of various crises, and the IMF delivered the harsh medicine. No one in power wanted to deal with the root of the problem - a dysfunctional global monetary apparatus. No one was willing to address the proliferation of leveraged speculation and derivatives that was integral to distorted market pricing, gross liquidity excesses and attendant systemic fragilities. Indeed, it appeared that officials from key developed countries were content to use the increasingly powerful leveraged players as political expedients and monetary transmission mechanisms.

In the U.S., the unprecedented expansion of (mispriced) mortgage debt and related leveraging was instrumental in fueling a New Paradigm economic expansion, complete with surging government revenues and budget surpluses (not to mention incredible wealth accumulations/redistributions). In Europe, leveraged speculation was critical to the historic yield convergence that permitted the introduction of a single currency. Policymakers on both sides of the pond were so enamored with their new tools and busy patting themselves on the back that they apparently did not have time to ponder long-term Bubble consequences.

As the historic global Credit Bubble gained momentum, I found it increasingly difficult to read bullish propaganda such as the "Bretton Woods II" and the "global savings glut" theses. And to this day, Washington is keen to blame the global "creditor" countries for currency manipulation and interest-rate distortions that they contend were instrumental in fueling our housing Bubble. These days in Europe analysts are keen to blame the big creditor country - Germany - for the terrible post-Bubble hardship now ravaging the European periphery. As someone who has followed developments closely for many years now, I find it quite ironic that some of the most eloquent economists warning of the dire consequences of Credit excess, "activist" central banking and global imbalances were indeed German (Drs. Kurt Richebacher and Otmar Issing come to mind).

Spain CDS surged 22 bps today (Friday) to surpass 500 bps for the first time, with CDS now up almost 150 bps since March 1. Spain 10-year bond yields jumped 22 bps this week, as the spread to German bunds widened 22 to 423 bps (wide since November 2011). Italian CDS rose 18 this week to 436 bps (high since January). The Italian to bund spread widened 7 to 378 bps (high since January). Spanish equities (IBEX 35 Index) were hit for 5.7% this week, increasing y-t-d losses to 15.4%. The IBEX 35 Index is now only 7.5% above 2008 lows. Italian stocks sank 6.0% this week, with the FTSE MIB Index now down 4.8% for 2012. The German DAX Index fell 2.9% this week and is down 5.2% already in April. Speculators have been hurt, as European markets provide support for the leveraged players with "weak hands" thesis.

Global markets turned unsettled this week. Consistent with the Bubble thesis, the U.S. stock market's attempt to downplay European and global risks is of little surprise. Yet U.S. and global markets were hit hard Tuesday, as surging Spanish and Italian yields weighed on the euro and risk markets more generally. Global markets somewhat stabilized Wednesday and then rallied strongly Thursday on comments from Benoit Coeure, a French member of the ECB executive board: "We have a new government in Spain that has taken very strong deficit measures. All this takes time. The political will is enormous. This is what leads me to say the market conditions are not justified. Will the ECB intervene? We have an instrument, the securities markets program, which hasn't been used recently but it still exists." Spanish and Italian bonds rallied; Spain bank bonds rallied; the dollar sold off and global risk markets surged.

Spanish and Italian bonds, the euro and global risk markets were right back on their heels Friday. Hopes that the ECB might be ready to backstop Spain's sovereign bonds were somewhat dashed by comments from ECB Governing Council member, and President of the Netherlands central bank, Klaas Knot. He stated that the ECB was not ready to revive its bond support program: "I think that we are very far from that situation. The instrument hasn't been used for some time, but it's still there. I hope we never have to use it again."

As I've tried to underscore, Spain is in dire straits. Its debts are spiraling out of control and its badly maladjusted economic structure is today incapable of producing sufficient real wealth to support itself, let alone to service its obligations. It's not Greece, but Spain's much more significant economy has begun to demonstrate similar post-Bubble "financial black hole" tendencies. LTRO euphoria has subsided, and I don't expect it to reemerge anytime soon. The troubled Spanish banks significantly increased their holdings of sovereign debt over the past few months, likely only increasing systemic vulnerabilities. The markets are increasingly of the view that the backdrop ensures a major banking system recapitalization and only greater fiscal strain at the local and national level. Basically, it's difficult to see Spanish debt appealing to the marketplace in the near-term.

So the backdrop points to ongoing European debt stress and financial/economic crisis. There will be enormous pressure on the ECB to bolster faltering debt markets. There will be more finger pointing at the Bundesbank and German politicians. There will be only louder calls for a larger "firewall," along with joint Eurobonds, special purpose vehicles and other sophisticated structures that would amount to risk-sharing by all member states. Basically, it still boils down to the marketplace expecting Germany to back the debt of weak euro zone member countries. And my thesis has been that the farther the world proceeds down the path of faltering Credit Bubbles the more determined the Germans will be to protect their own. If one looks at the world through the prism of a historic global Credit Bubble, with the epicenter in an increasingly fragile U.S., why should anyone fault the Germans for safeguarding the interests of their citizens and institutions?

No discussion of current Credit Bubble Dynamics would be complete without touching upon China. China's March bank lending data was out this week and such data continues to amaze. New lending surpassed 1.01 Trillion yuan, or $160bn, the strongest loan growth since January 2011 (1.04 TN). Lending was up 40% from February and was fully 25% above the consensus estimate (according to Bloomberg). Analysts were quick to point to the impact of policy loosening. As an analyst of Credit, I'm contemplating how a Credit system in the midst of a significant housing slowdown can nonetheless extend $160bn of loans in a single month.

From Bloomberg: "Aggregate financing, a measure of funding that includes bank lending, bond and stock sales, was 3.88 trillion yuan in the first quarter, down 8% from the same period last year." On an annualized basis, that's almost $2.5 TN of system Credit. I have posited the thesis that China succumbed to the "terminal phase" of Credit Bubble excess. System Credit has exploded since policymakers imposed the massive post-2008 crisis stimulus package. I am familiar with the bullish "soft landing" view, yet such a scenario is basically impossible from the perspective of a historic Credit Bubble. I continue to expect Chinese policymakers to tinker and loosen, yet I also anticipate that they will have an increasingly difficult time managing an unwieldy Credit system and maladjusted economic structure. My instincts tell me that we need to follow developments in China with even greater diligence.

The world is convinced that the Fed will do everything to ensure ongoing liquidity abundance and decent U.S. economic activity. This guarantees unrelenting massive trade deficits and resulting global liquidity abundance. The world is similarly convinced that China will do everything to ensure ongoing strong domestic growth, providing steadfast global demand for everything real and financial. Much of the world believes that Europe's (debtor/creditor) mess can be largely ignored so long as the world's key symbiotic debtor (US) and creditor (China) relationship is maintained. And it is rather obvious why folks are complacent and embracing risk.

Yet when one takes a step back and contemplates the backdrop, there is overwhelming support for the analysis of troubling parallels between Greece and U.S. subprime: the first cracks in respective historic Bubbles. And once the unavoidable downside of the Credit cycle takes hold, there's little policymakers can do but to postpone (and exacerbate) the inevitable. Federal Reserve rate cuts in '07 and early-2008 only made things worse. ZIRP, QE1, QE2, SMP, EFSF, ESM, LTRO - worse. From my framework, Greece was the catalyst for the bursting of the global government finance Bubble - global not just European. It wasn't going to stop with Greece, Portugal or Ireland. It won't end in Spain or Italy. And while it was all fun and games while it lasted, the LTRO spike to the punchbowl has the world again vulnerable to the hangover blues.


For the Week:

The S&P500 fell 2.0% (up 9.0% y-t-d), and the Dow declined 1.6% (up 5.2%). The Morgan Stanley Cyclicals were hit for 2.3% (up 11.6%), and the Transports declined 1.7% (up 3.5%). The Morgan Stanley Consumer index declined 1.2% (up 4.5%), and the Utilities lost 1.6% (down 4.6%). The Banks were down 3.5% (up 19.8%), and the Broker/Dealers were 3.6% lower (up 19.1%). The S&P 400 Mid-Caps declined 2.0% (up 9.7%), and the small cap Russell 2000 fell 2.7% (up 7.5%). The Nasdaq100 was down 2.3% (up 18.5%), and the Morgan Stanley High Tech index declined 1.5% (up 17.7%). The Semiconductors gave back 1.6% (up 14.3%). The InteractiveWeek Internet index declined 1.3% (up 14.1%). The Biotechs sank 5.7% (up 21.3%). With bullion regaining $22, the HUI gold index rallied 2.7% (down 9.1%).

One-month Treasury bill rates ended the week at 6 bps and three-month bills closed at 8 bps. Two-year government yields were down 5 bps to 0.27%. Five-year T-note yields ended the week 5 bps lower to 0.85%. Ten-year yields declined 7 bps to 1.98%. Long bond yields fell 9 bps to 3.13%. The implied yield on December 2013 eurodollar futures dropped 6 bps to 0.68%. The two-year dollar swap spread increased 0.75 to 29.75 bps. The 10-year dollar swap spread increased about 2 to 11.5 bps. Corporate bond spreads were notably volatile before ending the week wider. An index of investment grade bond risk ended the week up about 2 to 102 bps. An index of junk bond risk increased 10 to 625 bps (high since January).

Debt issuance was relatively light. Investment grade issuers included John Deere $1.0bn, Kroger $850 million, Ventas Realty $600 million, Pacific Gas & Electric $400 million, Idaho Power $150 million and Memorial Health Services $100 million.

Junk bond funds saw outflows ($1.3bn) for the first time in 19 weeks (from Lipper). Junk issuers included Everest $2.75bn, Constellation Brands $600 million, Audatex North America $400 million, Mack-Cali Realty $300 million, Sitel $200 million, and Parker Drilling $125 million.

Convertible debt issuance included Micron Technologies $480 million and DFC Global $200 million.

International dollar bond issuers included Intelsat Jackson $1.2bn, CNPC $1.15bn, Inmarsat Finance $850 million, International Bank of Reconstruction and Development $750 million, Turk Eximbank $500 million, and Terminales Portuarios $100 million.

Spain's 10-year yields jumped 22 bps this week to 5.96% (up 92bps y-t-d). Italian 10-yr yields rose 7 bps to 5.51% (down 152bps). Ten-year Portuguese yields surged 29 bps to 12.24% (down 53bps). The new Greek 10-year note yield declined 87 bps to 20.63%. German bund yields were unchanged at 1.73% (down 9bps), while French yields declined 4 bps to 2.94% (down 19bps). The French to German 10-year bond spread narrowed 4 to 121 bps. U.K. 10-year gilt yields dropped 12 bps to 2.04% (up 6bps). Irish yields were down 5 bps to 6.7% (down 156bps).

The German DAX equities index dropped 2.9% (up 11.6% y-t-d). Spain's IBEX 35 equities index sank 5.7% (down 15.4%), and Italy's FTSE MIB sank 6.0% (down 4.8%). Japanese 10-year "JGB" yields declined 5 bps to 0.94% (down 4bps). Japan's Nikkei slipped 0.5% (up 14%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index fell 2.5% (up 9.4%), and Mexico's Bolsa dropped 2.4% (up 3.7%). South Korea's Kospi index declined 1.0% (up 10%). India's Sensex equities index lost 2.2% (up 10.6%). China's Shanghai Exchange rallied 2.3% (up 4.3%). Brazil's benchmark dollar bond yields dropped 15 bps to 3.07%.

Freddie Mac 30-year fixed mortgage rates dropped 10 bps to 3.88% (down 103bps y-o-y). Fifteen-year fixed rates fell 10 bps to 3.11% (down 102bps). One-year ARMs were up 2 bps to 2.80% (down 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 10 bps to 4.58% (down 90bps).

Federal Reserve Credit expanded $1.0bn to $2.844 TN. Fed Credit was up $201bn from a year ago, or 7.6%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 4/11) increased $1.7bn to $3.489 TN. "Custody holdings" were up $69bn y-t-d and $71bn year-over-year, or 2.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $758bn y-o-y, or 7.9% to $10.407 TN. Over two years, reserves were $2.500 TN higher, for 32% growth.

M2 (narrow) "money" supply jumped $21.9bn to a record $9.858 TN. "Narrow money" has expanded 8.5% annualized year-to-date and was up 9.8% from a year ago. For the week, Currency increased $2.7bn. Demand and Checkable Deposits jumped $22.8bn, and Savings Deposits added $0.5bn. Small Denominated Deposits declined $2.8bn. Retail Money Funds slipped $1.2bn.

Total Money Fund assets fell $6.2bn to $2.584 TN (low since August). Money Fund assets were down $112bn y-t-d and $163bn over the past year, or 5.9%.

Total Commercial Paper outstanding declined $2.9bn to $929bn. CP was down $31bn y-t-d and $171bn from one year ago, or down 15.5%.

Global Credit Watch:

April 13 - Bloomberg (Abigail Moses): "The cost of insuring against a Spanish default jumped to a record as Prime Minister Mariano Rajoy struggles to prevent the nation from becoming the fourth euro-region member to need a bailout. Credit-default swaps on Spain rose 17 basis points to 498 as of 4 p.m. in London, surpassing the previous all-time high closing price of 493... The contracts are up from 431 at the start of the month and 380 at the end of 2011, signaling a deterioration in investor perceptions of credit quality."

April 13 - Bloomberg (Mark Deen): "European Central Bank executive board member Benoit Coeure suggested that the bank could revive bond purchases to support Spain in the face of rising borrowing costs. 'We have a new government in Spain that has taken very strong deficit measures,' Coeure said... 'All this takes time. The political will is enormous. This is what leads me to say the market conditions are not justified... Will the ECB intervene? We have an instrument, the securities markets program, which hasn't been used recently but it still exists,' he said."

April 13 - Bloomberg (Jurjen van de Pol and Gabi Thesing): "European Central Bank Governing Council member Klaas Knot said officials are 'very far' from reviving the government-bond purchase program. 'I think that we are very far from that situation,' Knot said... 'The instrument hasn't been used for some time, but it's still there. I hope we never have to use it again.' Economists expect the ECB to revive its controversial Securities Markets Program as concerns about Spain reignite the sovereign debt crisis, a Bloomberg News survey shows... 'I don't see a good reason' for buying government bonds, Knot said. 'I think there has been an overreaction to the unfortunate communication surrounding Spain.'"

April 13 - Bloomberg (Charles Penty): "Spanish banks' borrowings from the European Central Bank jumped by almost 50% in March, reaching the most on record, after the ECB boosted its support for the region's lenders with more three-year loans. Average net borrowings by Spanish banks climbed to 227.6 billion euros ($300bn) last month from 152.4 billion euros in February... Lenders in the whole euro system took 361.7 billion euros..."

April 10 - Dow Jones: "European Central Bank governing council member Klaas Knot... said Spain is currently the main risk in the euro zone and he urged that country to speed up reforms to restore market confidence... Knot... said the Spanish government failed to implement necessary reforms in the past months as the improved climate in financial markets took away some pressure. While markets may have overreacted to Spain's problems this week, Knot said that 'confidence has to be restored soon.' ...Knot reiterated that the ECB's Long-Term Refinancing Operation, or LTRO, which gave European Union banks cheap access to much-needed liquidity, provided no fundamental solution to the euro-zone debt crisis and only bought time. '[The LTRO's] success will depend on how this time will be used,' he said."

April 10 - Bloomberg (Chiara Vasarri and Angeline Benoit): "Prime Minister Mario Monti's efforts to overhaul the economy and protect Italy from the region's debt crisis may be overwhelmed by Spain's deepening fiscal woes and the fading effect of European Central Bank three-year lending. Monti sent parliament a plan last week to revamp the labor markets, which represents the most ambitious of his four major legislative efforts to make the Italian economy more competitive... 'Monti is spreading incense around, but behind the smoke there's a labor reform that is largely insufficient,' Alberto Mingardi, head of the Bruno Leoni research center in Turin, said... 'Markets are realizing that the ECB's liquidity has just bought time for the European banking system and the problems of some countries, like Spain, are still there.'"

April 12 - Bloomberg (Emma Ross-Thomas and Angeline Benoit): "Spanish power sharing between central and regional officials has undermined the nation's finances, a deputy minister said, as lawmakers prepared to pass a bill to allow intervention in regions that overspend. 'The biggest excess produced by the creation of regions in 1978 was to replicate a mini-state in each of the 17 regions,' Antonio Beteta, Spain's deputy minister for public administration and a former state budget chief, told a conference..."

April 9 - Bloomberg (Manuel Baigorri): "Spain plans to save more than 10 billion euros ($13bn) from health and education programs and will accelerate the sale of banking stakes to reduce the budget deficit amid the European debt crisis. Prime Minister Mariano Rajoy met today with ministers to discuss measures to eliminate overlaps and boost efficiencies in health and education, the government said... Rajoy, who took office in December, is trying to narrow the deficit to 5.3% of gross domestic product this year from last year's 8.5%."

April 12 - Bloomberg (Maria Petrakis and Natalie Weeks): "Greek Prime Minister Lucas Papademos urged Greeks to choose the path that secures their role in the European Union and its single-currency zone when they vote in elections May 6. 'I am certain that as a society we will invest in creativity, and not the opposite,' Papademos said... 'That means choosing the path that will ensure our place in the European Union and the euro.'"

April 10 - Bloomberg (Lucy Meakin): "German two-year note yields dropped to less than the rate on similar-maturity Japanese government bonds for the first time since Bloomberg began collecting the data in 1990, based on closing-market rates."

April 13 - Bloomberg (Jim Brunsden): "Europe's biggest banks may need to hold core-capital reserves of as much as 17% under plans being weighed by European Union lawmakers. The region's parliament is considering allowing regulators to impose capital surcharges of as much as 10% of a bank's assets, weighted for risk, according to a set of suggested compromises on a draft law prepared by Othmar Karas, an Austrian lawmaker guiding the adoption of global bank-capital and liquidity rules."

April 11 - Bloomberg (Wes Goodman, Monami Yui and Paul Dobson): "Japan's biggest investors, with $368 billion under management, say it's too early to buy bonds from Europe's most indebted nations as rising Spanish yields spark concern the region's fiscal crisis has further to run... Japanese investors sold a net $43.8 billion of euro- denominated bonds in the 12 months ended Feb. 29... 'I'm not planning to add Spanish or Italian bonds anytime soon,' said Masataka Horii, who runs the $21.2 billion Kokusai Global Sovereign Open Fund in Tokyo."

Global Bubble Watch:

April 10 - Bloomberg (Margaret Talev and Raymond Colitt): "Brazil's President Dilma Rousseff urged the U.S. to invest more in the world's sixth-biggest economy and told President Barack Obama that monetary conditions in rich nations are hurting global economic growth. Rousseff, speaking yesterday alongside Obama at the White House, said she is concerned about 'expansionist' monetary policies that 'lead to a depreciation in the value of the currencies of developed countries, thus impairing growth' in faster-growing emerging markets. Later, in comments to Brazilian reporters, Rousseff said that as policy makers in developed nations try to cut spending and budget deficits they've become too reliant on near-zero interest rates to stimulate growth. Such a policy mix is creating a 'monetary tsunami' that damages Brazil by driving up the value of its currency and depressing exports, she said in comments echoing those she made last month in a trip to Germany."

April 13 - MarketNews International (Vicki Schmelzer): "The world's problems are not going to be solved easily, with the implementation of fiscal, structural and institutional reforms in the eurozone and the U.S. still key, said European Central Bank Executive Board Member and Chief Economist Peter Praet... 'I am worried about a number of issues in the world economy,' he told an audience at the Levy Institute's annual Minsky Conference... While the eurozone has been at the 'epicenter' of market concerns recently, the U.S. fiscal situation remains precarious as well and may be back on the 'radar screen' later in the year, he said... When looking at the eurozone crisis, 'It is important not to be diverted' from the problems of other countries, he stressed."

April 13 - Bloomberg (Erik Schatzker, Christine Harper and Mary Childs): "JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has transformed the bank's chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes. Achilles Macris, hired in 2006 as the CIO's top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the... bank, three of the former employees said."

April 10 - Bloomberg (Christine Harper and Bradley Keoun): "Market-moving trades by JPMorgan Chase & Co.'s chief investment office probably will force regulators to seek more detail on banks' derivatives positions to help them distinguish risk management from speculation. Bruno Iksil, a London-based trader in the unit, has built derivatives positions linked to corporate credit that are so big he's moved markets, according to hedge fund managers and dealers. While Joe Evangelisti, a bank spokesman, said yesterday that the trades are part of the firm's hedging strategy, four market participants said they resemble proprietary bets, or wagers with the lender's own money."

April 11 - Bloomberg (Christine Idzelis): "Speculative-grade companies, owned by private-equity firms, got loans to pay dividend payments at the fastest pace in a year as buyouts wane. Borrowers owned by investors including Blackstone Group LP and Bain Capital LLC, got $12.6 billion in funding to pay distributions during the first quarter, following $25.5 billion in all of 2011..."

April 10 - Bloomberg (Thomas Black): "U.S. corporate profit growth stalled in the U.S. last quarter as companies from McDonald's Corp. to 3M Co. saw gains in the world's largest economy eroded by a slump in Europe. Earnings at Standard & Poor's 500 Index companies, excluding financials, are seen gaining 0.6% in the first and the second quarter from a year earlier, according to analysts' estimates... the slowest growth rate since 2009. The European debt crisis and a slowdown in China are hurting S&P 500 companies, which derive about 40% of profits from abroad."

Currency Watch:

The U.S. dollar index was unchanged this week at 79.89 (down 0.4% y-t-d). On the upside for the week, the Singapore dollar increased 1.0%, the Japanese yen 0.9%, the Australian dollar 0.6%, the New Zealand dollar 0.4%, and the Taiwanese dollar 0.1%. On the downside, the Mexican peso declined 1.5%, the Brazilian real 0.9%, the South African rand 0.8%, the Swedish krona 0.6%, the Canadian dollar 0.3%, the Swiss franc 0.2%, the British pound 0.2%, the euro 0.2%, and the Danish krone 0.1%.

Commodities Watch:

The CRB index declined 1.2% this week (down 0.8% y-t-d). The Goldman Sachs Commodities Index lost 1.0% (up 5.8%). Spot Gold rallied 1.3% to $1,658 (up 6%). Silver declined 1.1% to $31.39 (up 12.4%). May Crude lost 48 cents to $102.83 (up 4%). May Gasoline added 0.2% (up 26%), while May Natural Gas sank 5.2% to a decade low (down 34%). May Copper fell 4.4% (up 6%). May Wheat ended the week down 2.3% (down 5%), and May Corn sank 4.4% (down 3%).

China Watch:

April 12 - Bloomberg: "China's new yuan loans were the most in a year and money-supply growth quickened after Premier Wen Jiabao moved to bolster the economy by cutting banks' required reserves and helping smaller businesses get financing. Local currency-denominated loans were 1.01 trillion yuan ($160.1bn) in March... exceeding all 28 estimates... M2... grew 13.4% from a year earlier. China's foreign-exchange reserves, the world's largest, rose to a record $3.31 trillion as of March 31 after dropping for the first time in more than a decade in the fourth quarter."

April 13 - Bloomberg: "China's growth slowed more than forecast last quarter to the least in almost three years, prompting economists to predict a rebound as Premier Wen Jiabao loosens policy to counter weak domestic and European demand. Gross domestic product in the world's second-biggest economy expanded 8.1% from a year earlier after an 8.9% gain in the fourth quarter..."

April 11 - Bloomberg: "When a Chinese court sentenced 28-year-old Wu Ying, known as 'Rich Sister,' to death for taking $55.7 million from investors without paying them back, it sparked an unexpected firestorm that has drawn in China's top leadership. Her crime involved a common, illegal practice in China: raising money from the public with promises to pay back high interest rates. Known as shadow banking, these underground lending and investing networks are estimated to total $1.3 trillion, according to Ren Xianfang, an economist with IHS Global Insight Ltd. in Beijing."

April 10 - Bloomberg: "China reported an unexpected trade surplus last month as import growth trailed forecasts, underscoring risks of a deeper slowdown in the world's second-largest economy. Inbound shipments rose 5.3%, the customs bureau said... below the 9% median estimate... Exports increased 8.9% from a year earlier, more than forecast, leaving a trade surplus of $5.35 billion..."

India Watch:

April 11 - Bloomberg (Pooja Thakur and Ailing Tan): "The average Indian would need to work for three centuries to pay for a luxury home in Mumbai, making that city the least affordable in the world for locals, according to an analysis of real estate and wages. ...a 100-square-meter luxury residence in Mumbai costs about $1.14 million, or 308 times the average annual income in India, based on calculations from a housing index compiled using 63 markets by Knight Frank LLP..."

Latin America Watch:

April 10 - Bloomberg (Gabrielle Coppola and Nadja Brandt): "Brazil's five interest rate cuts and the use of 2.5 billion reais ($1.4bn) of workers' compensation funds to buy mortgage bonds are breathing life into the home loan market as the government seeks to address a shortage of 6.3 million homes. The central bank's plan to lower the benchmark lending rate this year to 9% would help drive investor demand for higher-yielding mortgage securities and increase the role of the private market..."

Europe Economy Watch:

April 11 - Bloomberg (Simon Kennedy and Jeff Black): "Germany's economic expansion is increasingly home-grown. Unemployment at a two-decade low, wages accelerating out of years of restraint and falling borrowing costs are spurring consumers in Europe's linchpin economy to spend more. Showcased by rising property prices, that's at odds with the rest of the euro area, where austerity and the bursting of debt-fueled asset bubbles are forcing households to cut back."

April 10 - Bloomberg (Josiane Kremer): "Norway's failure to prevent its oil wealth from stalling competitiveness is pushing wage growth above central bank estimates, prompting forecasters to predict last month's interest rate cut will be reversed in August. 'The central bank underestimates the pressure in the domestic economy at the moment,' Kjersti Haugland, an economist at DNB ASA in Oslo, Norway's biggest bank, and a former analyst at the central bank, said... 'Pressure from the oil sector will contribute to much higher wage growth in Norway than among our trading partners.'"

April 11 - Bloomberg (Frances Schwartzkopff): "Denmark's housing slump threatens to stifle the country's prospects of emerging from its recession as the highest foreclosure rate since 1995 shows homeowners are far from putting their woes behind them. Foreclosures jumped an annual 32%... in March, the highest level in 17 years... Nordic economy, which fell into a recession in the second half of last year, saw house prices sink an annual 8% in the fourth quarter and joblessness rise to 6.2% in February."

U.S. Bubble Economy Watch:

April 10 - Bloomberg (Ari Levy): "Silicon Valley is one of the few places where a 27-year-old Web entrepreneur can parlay a photo- sharing application with no known source of revenue into $1 billion -- in two years. Evidence of that came yesterday, when Facebook Inc. announced plans to buy Instagram, a startup co-founded in 2010 by Kevin Systrom, a Stanford University graduate and former Google Inc. employee."

April 9 - Bloomberg (Kevin Reynolds and Joanne Norton): "AOL Inc. said it agreed to sell more than 800 of its patents and related patent applications to Microsoft Corp. and grant the software maker a non-exclusive license to its retained patent portfolio for about $1.056 billion in cash."

Central Bank Watch:

April 13 - Bloomberg (Gabi Thesing and Jana Randow): "The European Central Bank will restart its controversial government bond purchases rather than offer banks another round of unlimited three-year loans as the sovereign debt crisis worsens, a survey of economists shows. Of 22 economists polled this week, 17 predicted the ECB will be forced to resume the Securities Markets Program, while only one forecast it will offer another batch of three-year cash. Nine said the central bank may consider shorter maturity loans of one or two years. 'Market stresses will eventually force the ECB to restart the bond program, but it's not imminent,' said Ken Wattret, chief euro-area economist at BNP Paribas... 'Trying to get consensus on the council for it will be difficult.'"

April 10 - Bloomberg (Joshua Zumbrun and Steve Matthews): "Federal Reserve Chairman Ben S. Bernanke called for new steps to curb 'shadow banking' operating beyond standard oversight while saying the economy has far to go before fully recovering from the credit crisis. 'The heavy human and economic costs of the crisis underscore the importance of taking all necessary steps to avoid a repeat of the events of the past few years,' Bernanke said..."

Fiscal Watch:

April 11 - Bloomberg (Meera Louis): "The U.S. government's budget deficit widened 5.3% in March, as outlays increased on recurring benefit payments and a subsidy re-estimate for the Troubled Asset Relief Program. The shortfall expanded to $198.2 billion from $188.2 billion a year earlier... 'The government budget deficit is still bursting at the seams with little chance that either side of the aisle is willing to shake hands and get a deal done,' Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi... said... 'The economy is growing again but we can't grow our way out of these trillion dollar deficits.'"

April 10 - Dow Jones (Ian Talley): "The U.S. and other governments are likely underestimating the life expectancy of their aging populations, a risk that could boost pension liabilities by nearly 10% and balloon already massive public debt levels, the International Monetary Fund warned... The IMF said many governments should act now to raise mandatory retirement levels and encourage pension plans to better hedge their risk. 'Delays would increase risks to financial and fiscal stability, potentially requiring much larger and disruptive measures in the future,' IMF economists wrote..."

Muni Watch:

April 10 - Financial Times (Hal Weitzman and Nicole Bullock): "US states are increasingly being blocked from changing public employees' retirement benefits as the fight over shoring up chronically underfunded public pension systems moves from state legislatures to the courts. While some states have successfully altered terms for future employees, plans to force all current public workers to contribute more to state pensions have been ruled unconstitutional in Florida, Arizona and New Hampshire in recent weeks, a significant victory for public sector employee unions. Other states are expected to face similar legal battles as they plan to close large holes in their public pension funds by redrawing benefits. US state and local pensions could face a shortfall of as much as $4.4tn, up from $3.1tn in 2009, according to some estimates."

April 10 - Bloomberg (Josh Barro): "Rod Blagojevich is in prison. But the worst things the former governor did to Illinois weren't even illegal. This month, the Teachers' Retirement System of the State of Illinois made a dire announcement to its members. TRS, which covers most public-school teachers in Illinois outside Chicago and has more than 360,000 members, said the following: 'If the General Assembly does not continue to provide all of the funding called for in state law, calculations done by TRS actuaries show that the System could become insolvent as soon as 2030. Preventing insolvency may include significant changes for TRS -- new revenues must be generated and if they are not benefits may have to be reduced.'"

April 9 - Bloomberg (Amanda J. Crawford): "Las Vegas's credit outlook was lowered to negative from stable on $561.2 million of debt by Fitch Ratings, which cited budget deficits and the lingering housing crisis."

California Watch:

April 10 - Financial Times (Dan McCrum): "California must increase contributions to teachers' pensions by more than half to close a $64.5bn funding hole in the country's second largest public retirement system, according to the actuarial valuation to be presented to the board of Calstrs this week. The $144bn of assets managed by the California State Teachers' Retirement System covered only 69% of future liabilities at the end of June 2011, a drop of 2 percentage points from the year before. In a sign of the problems faced by many public pension plans, the hole is too large to be covered by better investment performance."

April 9 - Bloomberg (James Nash): "The California State Teachers' Retirement System, the second-biggest U.S. public pension, said the gap between its assets and projected obligations rose $8.5 billion as investment gains failed to cover earlier losses. The unfunded liability climbed 13% to $64.5 billion as of June 30... The system had about 69% of assets needed to cover promises to current and future retirees at the end of fiscal 2011, down from about 71% a year earlier."

Real Estate Watch:

April 9 - Bloomberg (Sarah Mulholland): "Bonds backed by Fannie Mae and Freddie Mac tied to apartments soared to a record as the government-supported mortgage companies made low-cost loans on rental properties amid a continued slide in home values. Fannie Mae, Freddie Mac and Ginnie Mae sold $13.5 billion of securities tied to the buildings in the first quarter of 2012, an 81% increase from the year-earlier period and up from $5.2 billion issued in all of 2008... It's the highest quarterly issuance since records began in 1993."


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