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Diverging Like It's 1929

Spanish 10-year yields dropped 123 bps this week to 5.57%. Yields are now down 194 bps from July 24 highs (7.51%). Italian 10-year bond yields sank 80 bps this week to 5.02%, and are down 153 bps from July highs (6.55%). Spanish stocks (IBEX) have rallied 34% off July lows, slashing its 2012 loss to only 8%. And after its 32% rally from July lows, Italian stocks (MIB) now sport a 6.8% y-t-d gain. The German DAX has gained 14% from July lows, increasing its 2012 gain to 22.3%.

Here in the U.S., tens of Trillions of (government, corporate, and mortgage-related) bonds are priced at or near record high levels (low yields). The S&P 400 Mid-Cap equities index, up 14.3% y-t-d, is only 0.4% below its all-time high. The small cap Russell 2000 (up 13.7% y-t-d) is 0.6% below its record high. The S&P 500 traded this week to the highest level since May 2008. The Nasdaq ("NDX") 100 now enjoys a 2012 gain of 24.0% - and traded this week to the highest level going all the way back to 2000. Junk bond spreads traded this week to a 13-month low.

As regional and global economic downturns gain momentum, the ECB this week significantly lowered its forecasts for Eurozone growth. ECB staff now project 2012 economic activity to contract in the range of between 0.2% and 0.6%. Thursday the Organization for Economic Cooperation and Development (OECD) revised downward its estimates for G7 economic growth. The German economy is now projected to slip into recession, with Q3 GDP forecast at an annualized negative 0.5%. Economic activity is expected to weaken further to negative 0.8% in Q4. The French economy is expected to contract 0.4% in Q3, before recovering for 0.2% growth in Q4. The Italian economy is forecast to contract 2.9% during Q3 and 1.4% in Q4. The British economy is seen contracting 0.7% in Q3, before recovering for 0.2% growth in Q4. Japan's economy is now expected to contract 2.3% (annualized). U.S. growth is expected to improve mildly to a 2.0% rate during Q3 and 2.4% in Q4. Outside of the G7, the Greek and Spanish economies are unmitigated disasters.

With the financial world fixated on Draghi, Bernanke and endless QE, global markets now wildly diverge from economic fundamentals. Many are content to celebrate, holding firm to the view that financial conditions tend to lead economic activity. Markets discount the future, of course. And, traditionally, an easing of monetary policy would loosen Credit and financial conditions - spurring lending, spending, investing and stronger economic activity.

Importantly, traditional rules and analysis no longer apply. Monetary policy has been locked in super ultra-loose mode now entering an unprecedented fifth year. Here in the U.S., financial conditions can't get meaningfully looser. The Federal Reserve has pushed corporate and household borrowing costs to record lows. Liquidity abundance will ensure near-record 2012 corporate debt issuance. "Loose money" has already had too long a period to impact decision making throughout the economy - with decidedly unimpressive results. Arguably, previous unfathomable monetary measures some time ago created dependencies and addictions that are increasingly difficult to satisfy.

Clearly, monetary policy is exerting a much greater impact on the financial markets than it is on real economic activity. In the U.S. and globally, market gains are in the double-digits, while economic growth is measured in dinky decimals. The vulnerability associated with elevated securities markets has tended to only compound the issue of systemic fragility, and policymakers have responded to heightened stress with only more extraordinary policy measures. Recent weeks have provided important confirmation in the Bubble Thesis.

Amazingly, in the face of exceptionally buoyant securities markets and an expanding economy, the Federal Reserve is apparently at about to embark on yet another round of quantitative easing ("money printing"). Few expect this to have much impact on the real economy, but it is clearly having a major impact on already speculative financial markets.

I've always feared such a scenario: Severely maladjusted Bubble Economies responding poorly to aggressive monetary stimulus, spurring policymakers into only more aggressive stimulus measures. Meanwhile, financial fragility mounts, as Credit systems continue to rapidly expand non-productive debt. Securities markets become dangerously speculative and detached from underlying fundamentals.

Students of the late-1920s appreciate how late-cycle policy-induced market and economic distortions laid the groundwork for financial collapse and depression. Especially in 1928 and early-1929, highly speculative financial markets diverged from faltering global economic fundamentals. Our nation's business came to be precariously dominated by "money changers," financial leveraging and market speculation.

But we don't have to look back to late-cycle "Roaring Twenties" excess for examples of the danger of markets disconnecting from fundamentals. From April 1997 to July 1998 the Nasdaq Composite jumped 90%. The marketplace had turned quite speculative, although excesses began the process of being wrung out during the August-October 1998 Russian collapse and LTCM crisis. Fatefully, the Federal Reserve bailed out LTCM and the leveraged speculating community, while orchestrating a liquidity backstop for financial markets generally. The consequences continue - and they're no doubt momentous.

Rather than chastened, the speculator community was emboldened back in late-1998. Not surprisingly, loose monetary policy combined with a market backstop had the greatest impact on the fledging Bubble at the time gathering momentum in technology stocks. The Nasdaq Composite rose from about 1,000 in early-October 1998 to its historic March 2000 high of 4,816.

It's certainly not uncommon for individual stocks - or markets - to enjoy their most spectacular gains right as they confront rising fundamental headwinds. Indeed, whether it was the DJIA in 1929 or technology stocks in late-99/early-2000, deteriorating fundamentals actually played an instrumental role in respective dramatic market rallies. In both case, bearish short positions had been initiated in expectation of profiting from the wide gulf between inflating stock prices and deflating fundamental backdrops. In both cases, short squeezes played a prevailing role in fueling "blow off" speculative rallies.

Actually, the most precarious backdrops unfold during a confluence of serious fundamental deterioration, perceived acute systemic fragilities, aggressive monetary policymaking and an already highly speculative market environment. This was the backdrop during 1929 and 1999, and I would argue it is consistent with the current environment. Excess liquidity and rampant speculation drove prices higher in '29 and '99, as the unwinding of short positions (and the attendant speculative targeting of short squeezes) created rocket fuel for a surging market. Over time, intense greed and fear and episodes of panic buying overwhelmed the marketplace. Would be sellers moved to the sidelines and markets dislocated (extraordinary demand and supply imbalances fostered dramatic spikes in market pricing and emotions). Market dislocations - and resulting price gains - were only exacerbated when those watching prudently from the sidelines were forced to capitulate and jump aboard.

The technology Bubble was spectacular - but it was also more specific to an individual sector than it was systemic. Today's Bubble is unique in the degree to which it encompasses global markets and economies. Systemic fragilities these days make 1999 appear inconsequential in comparison. The backdrop has more similarities to 1929 - and, not coincidently, policymakers are absolutely resolved to avoid a similar fate. Thus far, policy measures have notably succeeded in fostering over-liquefied and highly speculative markets on a manic course divergent from troubling underlying fundamentals.

The Draghi Plan was unveiled this week, and expectations have the Fed coming imminently with QE3. I don't anticipate measures from the ECB or the Fed to have much effect on economic fundamentals. At the same time, Drs. Draghi and Bernanke already have had huge impacts on global risk markets. Their policies have dramatically skewed the markets in the direction of rewarding the "bulls" and severely punishing the "bears". History will not be kind. Policies have, once again, incentivized speculation and emboldened speculators. Policymakers have further energized the global "government finance" Bubble.

There are many articles discussing the details of the Draghi Plan. I will instead focus my attention on the interplay between ECB and Federal Reserve policymaking and dysfunctional global markets.

The markets' immediate response to Friday's weak U.S. payrolls report was telling: bonds rallied strongly, the dollar weakened, gold jumped, and the stock market melt-up ran unabated - as markets readied for QE3. Ongoing dollar devaluation is critical for sustaining the inflationary bias throughout global commodities and non-dollar securities markets - not to mention incredibly inflated bond and fixed income prices. Fed policymaking seemingly ensures ongoing enormous trade deficits that expel liquidity around the globe. Fed-induced weakness also works to stem "safe haven" and speculative inflows to the dollar, flows that have risked inciting problematic capital flight and risk aversion in markets around the world.

For some time now, the global speculator community has been successfully positioned for ongoing dollar liquidity abundance and devaluation. For the past two years, the unfolding European debt crisis has repeatedly been at the precipice of unleashing powerful global de-risking/de-leveraging dynamics. The Draghi Plan is being crafted specifically to backstop troubled Spanish and Italian debt, faltering markets that were in the process of inciting a catastrophic crisis of confidence in the euro currency.

In unsubtle terms, the Draghi Plan has directly targeted those with bearish positions in European debt instruments and the euro. In this respect, it has been both effective and destabilizing. Draghi has dramatically skewed the marketplace to the benefit of the longs and to the detriment of the shorts - throughout European debt, equity and currency markets. And with simultaneous "open-ended QE" rhetoric from the Bernanke Federal Reserve, shorts suddenly found themselves in the crosshairs worldwide. A huge short squeeze has unfolded, fomenting market dislocation - and an only wider divergence between inflating market prices and deteriorating underlying fundamentals. Panicked covering of short positions and the unwind of derivative hedges has thrown gasoline on already wildly speculative securities markets.

In previous CBBs I have noted how asymmetrical central bank policymaking and market backstops over the past two decades nurtured a multi-trillion global leveraged speculating community. I have also explained how massive central bank liquidity injections have bypassed real economies on their way into an increasingly unwieldy global pool of speculative finance. I have further noted how global markets have regressed into one big dysfunctional "crowded trade." And now the Draghi and Bernanke Plans have dealt a severe blow to those positioned bearishly around the globe. We can now contemplate the behavior of highly speculative and over-liquefied markets perhaps operating without the typical checks and balances provided by shorting and bearish positioning.

Draghi and European policymakers must be giddy watching bears get completely run over. The truth of the matter, however, is that the bears are in no way responsible for what ails Europe. Indeed, the deep financial and economic structural deficiencies were created during environments where long-side debt market speculation was rife - and an over-abundance of mispriced finance sowed the seeds of future crises. Regrettably, this process remains very much alive as policymaking ensures Bubble Dynamics further embed themselves around the world.

From my perspective, the key issue is not whether the ECB finally has a plan that will resolve Europe's debt crisis - its coveted big bazooka. Monetary policy won't solve Europe's deep structural problems anymore than QE will resolve U.S. economic maladjustment and global imbalances. Indeed, there is little doubt that the Draghi and Bernanke Plans are only exacerbating global systemic fragilities. They've bought some more time, but at rapidly inflating costs. We desperately needed global policymakers working assiduously to extricate themselves from market interventions and manipulations. They've again done the very opposite.


For the Week:

The S&P500 jumped 2.2% (up 14.3% y-t-d), and the Dow gained 1.6% (up 8.9%). The broader market outperformed. The S&P 400 Mid-Caps jumped 3.4% (up 14.3%), and the small cap Russell 2000 rose 3.7% (up 13.7%). The Morgan Stanley Cyclicals rallied 3.6% (up 11.7%), and the Transports gained 1.1% (up 1.1%). The Banks surged 4.4% (up 25.1%), and the Broker/Dealers jumped 5.7% (up 3.0%). The Morgan Stanley Consumer index rose 1.5% (up 9.1%), and the Utilities gained 0.5% (down 0.3%). The Nasdaq100 was up 1.9% (up 24%), and the Morgan Stanley High Tech index gained 2.3% (up 17.4%). The Semiconductors increased 1.3% (up 10.1%). The InteractiveWeek Internet index jumped 3.2% (up 13.7%). The Biotechs gained 3.3% (up 38.5%). With bullion surging $44, the HUI gold index jumped 5.5% (down 3.1%).

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 3 bps to 0.25%. Five-year T-note yields ended the week 5 bps higher to 0.64%. Ten-year yields gained 12 bps to 1.67%. Long bond yields jumped 15 bps to 2.82%. Benchmark Fannie MBS yields increased 2 bps to 2.29%. The spread between benchmark MBS and 10-year Treasury yields narrowed 10 to 62 bps. The implied yield on December 2013 eurodollar futures increased a basis point to 0.415%. The two-year dollar swap spread declined 3 to 15 bps, while the 10-year dollar swap spread was little changed at 11 bps. Corporate bond spreads narrowed meaningfully. An index of investment grade bond risk sank 9 to a 5-month low 93 bps. An index of junk bond risk sank 45 to a 13-month low 499 bps.

Debt issuance began September with a bang. Investment grade issuers this week included GE Capital $4.0bn, Wellpoint $3.25bn, Berkshire Hathaway $2.28bn, EOG Resources $1.25bn, John Deere $1.0bn, SLM Corp $800 million, Norfolk Southern $600 million, Waste Management $500 million, American Honda Finance $1.5bn, Public Service Colorado $800 million, CMR Group $750 million, Rock-Tenn $700 million, Nissan Motor Acceptance $650 million, Principal Financial $600 million, NVR $600 million, Flowserve $500 million, Union Electric $485 million, Avalonbay Communities $450 million, Air Products & Chemicals $400 million, Verisk Analytics $350 million, Marriott International $350 million, Portmarnock Leasing $190 million, and Associate Banc-Corp $155 million.

Junk bond funds saw inflows slow to $201 million (from Lipper). Junk issuers included QEP Resources $650 million, American Axle & Manufacturing $550 million, Starz $500 million, Catalent Pharma Solution $350 million, and Carrizo Oil & Gas $300 million.

I saw no convertible debt issued.

International dollar bond issuers included Vale $1.5bn, Digicel Group $1.5bn, BNP Paribas $1.25bn, Kommunalbanken $1.2bn, Banco Santander $1.3bn, Bancolombia $1.15bn, Inter-American Development Bank $1.0bn, Overseas Chinese Banking $1.0bn, Korea Development Bank $750 million, Australia & New Zealand Bank $3.0bn, Smurfit Kappa $300 million, WPP Finance $800 million, Hub International $740 million, Banco Cred Inver $600 million, Hudbay Minerals $500 million and Aruba $250 million.

Spain's 10-year yields sank 123 bps to 5.72% (up 53bps y-t-d). Italian 10-yr yields dropped 80 bps to 5.02% (down 201bps). German bund yields rose 19 bps to 1.52% (down 31bps), and French yields increased 5 bps to 2.19% (down 94bps). The French to German 10-year bond spread narrowed 14 bps to 68 bps. Ten-year Portuguese yields fell 119 bps to 7.80% (down 497bps). The new Greek 10-year note yield sank 172 bps to 21.00%. U.K. 10-year gilt yields jumped 22 bps to 1.68% (down 30bps). Irish yields were down 29 bps to 5.48% (down 278bps).

The German DAX equities index jumped 3.5% (up 22.3% y-t-d). Spain's IBEX 35 equities index surged 6.2% (down 8.0%), and Italy's FTSE MIB jumped 6.7% (up 6.8%). Japanese 10-year "JGB" yields rose 3 bps to 0.81% (down 17bps). Japan's Nikkei increased 0.4% (up 4.9%). Emerging markets were higher. Brazil's Bovespa equities index gained 2.2% (up 8.1%), and Mexico's Bolsa rose 1.6% (up 8.0%). South Korea's Kospi index rose 1.3% (up 5.7%). India's Sensex equities index gained 1.5% (up 14.4%). China's Shanghai Exchange jumped 3.9% (down 3.3%).

Freddie Mac 30-year fixed mortgage rates fell 4 bps to 3.55% (down 57bps y-o-y). Fifteen-year fixed rates were unchanged at 2.86% (down 47bps). One-year ARMs were down 2 bps to 2.61% (down 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 4.18% (down 69bps).

Federal Reserve Credit declined $5.6bn to $2.798 TN. Fed Credit was down $42.8bn from a year ago, or 1.5%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 9/5) jumped $11.1bn to a record $3.579 TN. "Custody holdings" were up $159bn y-t-d and $101bn year-over-year, or 2.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $375bn y-o-y, or 3.7% to a record $10.600 TN. Over two years, reserves were $2.028 TN higher, for 24% growth.

M2 (narrow) "money" supply jumped $26.3bn to a record $10.070 TN. "Narrow money" has expanded 6.7% annualized year-to-date and was up 5.5% from a year ago. For the week, Currency increased $3.2bn. Demand and Checkable Deposits declined $3.6bn, while Savings Deposits jumped $19.9bn. Small Denominated Deposits dipped $1.5bn. Retail Money Funds added $1.1bn.

Total Money Fund assets were little changed at $2.570 TN. Money Fund assets were down $125bn y-t-d and $79bn over the past year, or 3.0%.

Total Commercial Paper outstanding declined $9.8bn to $1.022 TN. CP was up $63bn y-t-d, while having declined $44bn from a year ago, or down 4.1%.

Currency Watch:

The U.S. dollar index dropped 1.2% to 80.25 (up 0.1% y-t-d). For the week on the upside, the South African rand increased 2.8%, the Danish krone 1.9%, the euro 1.9%, the Mexican peso 1.6%, the Norwegian krone 1.4%, the New Zealand dollar 1.1%, the Swiss franc 1.1%, the Singapore dollar 0.9%, the British pound 0.9%, the Canadian dollar 0.8%, the Australian dollar 0.6%, the Taiwanese dollar 0.5%, the Swedish krona 0.5%, the South Korean won 0.4%, the Japanese yen 0.2% and the Brazilian real 0.1%.

Commodities Watch:

September 4 - Bloomberg (Claudia Carpenter): "Trading in iron ore, the world's second-biggest commodity cargo after oil, rose to a record last month as prices dropped to a two-year low on slowing demand from China, the world's biggest user of the steel ingredient... Ore with 62% iron content delivered to the Chinese port of Tianjin dropped 24 percent last month, the most in 10 months, and fell to $86.90 a so-called dry ton today, the lowest since October 2009."

September 5 - Bloomberg (Jack Kaskey): "There's 'mounting evidence' that Monsanto Co. corn that's genetically modified to control insects is losing its effectiveness in the Midwest, the U.S. Environmental Protection Agency said. The EPA commented in response to questions about a scientific study last month that found western corn rootworms on two Illinois farms had developed resistance to insecticide produced by Monsanto's corn. Rootworms affect corn's ability to draw water and nutrients from the soil and were responsible for about $1 billion a year in damages and pesticide bills until seeds with built-in insecticide were developed a decade ago."

The CRB index added 0.7% this week (up 2.1% y-t-d). The Goldman Sachs Commodities Index added 0.2% (up 4.9%). Spot Gold surged 2.6% to $1,736 (up 11%). Silver rose 7.1% to $33.69 (up 21%). October Crude slipped 5 cents to $96.42 (down 2%). October Gasoline jumped 1.5% (up 14%), while October Natural Gas fell 4.2% (down 10%). December Copper rallied 5.4% (up 6%). September Wheat rose 1.7% (up 36%), while September Corn declined 1.0% (up 23%).

Global Credit Watch:

September 7 - Bloomberg: "European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond-purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup. The program 'will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,' Draghi said... 'Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area."

September 7 - Bloomberg (Emma Ross-Thomas): "Spanish Deputy Prime Minister Soraya Saenz de Santamaria said the government needs time to decide whether to take a bailout as the nation's business lobby urged the government to accept help. 'This is a decision that can't be made without considering all the elements,' Saenz told reporters after a Cabinet meeting in Madrid... 'It's an issue on which the future of the country and many Spaniards depends."

September 5 - Bloomberg (Maria Petrakis): "Greek Prime Minister Antonis Samaras faces a week of wrangling as his coalition government tries to find common ground on two more years of austerity to persuade international lenders to keep the country in the euro. Inspectors from the European Commission, European Central Bank and International Monetary Fund, known as the troika, are due back in Athens on Sept. 7 to complete a review begun in July. They are likely to find that the three coalition partners are still working on an 11.5 billion-euro ($14.5bn) blueprint that may test the cohesion of Samaras's government."

September 5 - Financial Times (Guy Dinmore): "Italy's worsening economic crisis and high debt costs have led senior officials in Rome to warn that the country may be forced by the end of the year to apply for an EU bond-buying programme in exchange for implementing further tough economic reforms. Rome's public position is that it does not need to request purchases of its sovereign bonds by the eurozone's bailout fund - for the moment - but that if it did, only 'light' conditions should be attached, given the measures already adopted by Mario Monti since he became prime minister last November. But Mr Monti's hand could be forced within months, according to officials involved in internal discussions, who say Germany, among others, is likely to insist on tough conditions... For the time being, Italy and investors holding its €2tn sovereign debt are waiting to see if the European Central Bank will reveal more details of its planned bond-purchasing programme..."

September 5 - Bloomberg (Jeff Kearns and Tom Keene): "Italy may be 'first and foremost' among European nations with unsustainable debt, said Simon Johnson, a former International Monetary Fund chief economist. Resolving Europe's financial crisis will 'take a long time' and involves 'a major shift in how people think about debt and how they think about risk around the world," Johnson said... 'These countries will try and do many things to avoid that kind of restructuring and this is going to be a long and painful process,' said Johnson, a professor at the Massachusetts Institute of Technology... 'These countries haven't had major debt defaults since the 1930s.'"

September 4 - Bloomberg (Angeline Benoit): "Jerez de La Frontera, a Spanish town of 214,000 in southern Andalusia, is negotiating with unions to fire 13% of the 2,000 government workers who absorb 80% of its budget. 'It's not easy because these are people and families,' said deputy mayor Antonio Saldana. With a quarter of Spain's workforce already jobless, Prime Minister Mariano Rajoy's efforts to retain investor confidence by shaving more than two-thirds off the nation's budget deficit by 2014 will worsen the highest unemployment rate in the European Union... 'There's going to be less hiring and more firing for the spending cuts to be made,' said Ricardo Santos, an economist at BNP Paribas SA in London who sees unemployment climbing to 27% next year from 24.6% currently."

Germany Watch:

August 7 - Reuters: "Germany's conservative newspapers on Friday accused ECB chief Mario Draghi of writing a "blank cheque" to troubled euro zone states that could put the entire currency at risk, with top-selling Bild warning his policies could make the euro 'kaputt'... For the country's conservative newspapers, many of which have taken an increasingly euro-sceptic stance as the three-year-old euro zone debt crisis wears on, Draghi's latest measures went too far. 'Help without end for crisis countries,' said Bild on its front cover, adding that Draghi had signed a 'blank cheque' and that his policy endangered the independence of the ECB. It cited German politicians saying the ECB had gone beyond its mandate of safeguarding the stability of the currency. 'Draghi sets off Germany's alarm bell,' was the headline in the conservative daily Die Welt. Business daily Handelsblatt, which often voices concern at the financial burden of the bailouts on German taxpayers and business, had a cover story on 'the Rise, Fall and Resurrection of the Bundesbank' and gave prominence to Weidmann's warnings. Inside, Handelsblatt criticized 'the democratic deficit of the euro rescuers' - and linked the ECB's chosen path to next week's ruling by Germany's Constitutional Court on the legality of the euro zone's new bailout mechanism and budget rules."

September 7 - Bloomberg (Brian Parkin): "European Central Bank President Mario Draghi's plan to shore up the euro by buying bonds is a 'black day' for the currency 'with no turning back, said Germany's Bild newspaper, siding with the Bundesbank. The newspaper's chief political columnist, Nikolaus Blome, said in an editorial that the blueprint outlined by Draghi yesterday undermines conditions tied to bailout programs. Draghi's plan turns the currency's rescue program 'on its head' by letting states like Spain dodge strict terms for gaining help... 'No, Herr Draghi, you're not returning the euro to health by doing this -- you're making it sick!,' said Blome... The plan 'is as ludicrously wrong as putting sugar cubes in the salt shaker,' said Blome... An ARD television poll published today showed 13% of Germans support ECB bond buying. Germany's Frankfurter Allgemeine Zeitung newspaper shares Bild's observation, saying in an editorial today that implementing Draghi's plan means 'there will no longer be a separation between fiscal and monetary' policy in the euro area. 'First the no-bailout ban for states in the EU treaty was dropped and now the ban on the ECB financing states via monetary policy.'"

September 5 - Bloomberg (Patrick Donahue and Francine Lacqua): "Germany will back European Central Bank bond purchases to help overcome the euro-area debt crisis only if such an operation is limited and recipient countries agree to strict conditions, said a senior ally of Chancellor Angela Merkel. Michael Fuchs, a deputy parliamentary caucus leader in Merkel's Christian Democratic Union, said that Germany would oppose any ECB plan that foresaw 'too much' bond buying without ensuring countries in need of help commit to overhaul their economies. 'Germany is a country which is very much afraid about inflation,' Fuchs told Bloomberg... 'We don't want to have the ECB just buy on the market, either in the primary or secondary market... The ECB can do it only if there are certain conditionalities, if the countries are really doing their homework.'"

September 4 - MarketNews International: "Further European integration may require popular referenda to ensure democratic legitimacy, European Central Bank Executive Board member Joerg Asmussen said Friday... We can only head towards further integration 'when this is democratically legitimized - when the population wants this,' Asmussen said. 'There will be a point, especially in Germany, when the population will have to be asked directly,' he said, adding that he expects German Finance Minister Wolfgang Schaeuble to make this clear."

September 6 - DPA: "Germans give European Central Bank (ECB) president Mario Draghi low ratings, an opinion poll for Stern magazine said Thursday. Some 42% had little or no trust in him, the weekly said, as against just 18% who rate him highly."

European Economy Watch:

September 7 - Bloomberg (Angeline Benoit): "Spanish industrial production fell for an 11th straight month in July amid a second recession in the euro area's fourth-largest economy since 2009 and increased budget cuts to curb the nation's borrowing costs. Output at factories, refineries and mines adjusted for the number of working days fell 5.4% from a year earlier, after declining a revised 6.1% in June..."

September 6 - Bloomberg (Mark Deen): "French unemployment rose to a 13-year high in the second quarter as companies cut staff to cope with a stalled economy, adding pressure on President Francois Hollande to fulfil a campaign pledge to revive growth. The jobless rate... climbed to 10.2% of the population from 10% in the previous three months..."

September 5 - Bloomberg (Kati Pohjanpalo): "Finland's economy shrank the most in three years last quarter as the euro area debt crisis hits even the bloc's top rated nations through falling exports. Gross domestic product... contracted 1.1% from the prior three months, when it grew a revised 0.9%..."

U.S. Bubble Economy Watch:

September 4 - Bloomberg (Alan Bjerga): "A record 46.7 million Americans received food stamps in June, up 0.4% from the previous month... Participation was 3.3% higher than a year earlier... Food-stamp spending, which has more than doubled in four years to a record $75.7 billion in the fiscal year ended Sept. 30, 2011, is the USDA's biggest annual expense."

September 5 - Bloomberg (Alison Vekshin): "Police officers and firefighters in San Jose, California, are rushing to get in on a disability retirement program that dozens have used to obtain lifetime pension payments before taking jobs elsewhere. The benefit allows the city's public-safety workers to retire in their 30s and 40s after citing injuries and collect pensions partially exempt from state and federal taxes. It also provides a way for former police and fire employees who are already retired to change their pensions to claim the tax break. 'People are trying to get their applications considered under the old system, which is very, very loose,' San Jose Mayor Chuck Reed, 64, said... 'Anybody who wants it can make the application and it's almost always granted.' San Jose, California's third-largest city... is among communities throughout the state struggling to contain pension costs as the recession and housing meltdown erode sales and property tax revenue... With a population of about 971,000, San Jose has seen retirement costs surge in the past decade to $245 million in fiscal 2012 from $73 million in fiscal 2002. Benefits consume more than 50% of payroll and account for more than 20% of the general fund, according to the city's website."

September 4 - United Press International: "...Visa said its survey indicates the 'Tooth Fairy' left an average $3-per-tooth for U.S. children this year. Jason Alderman, Visa's senior director of global financial education, said the company's telephone survey of 2,000 U.S. adults indicates the amount of money left by the 'Tooth Fairy' this year increased 15% over the average from 2011. 'The Tooth Fairy may be the canary in the economic coal mine. She's showing signs of life by leaving 40 cents more per tooth this year,' Alderman said. 'This is not only good news for kids, but an ideal teachable moment for parents to engage their children in thinking about how to budget their windfall by saving a portion.'"

Central Bank Watch:

September 6 - Bloomberg (Johan Carlstrom and Josiane Kremer): "Sweden's Riksbank cut its benchmark interest rate for the first time since February, caving in to calls from exporters, as the krona's strength and deepening euro crisis threaten the nation's trade competitiveness. The repo rate was cut by a quarter point to 1.25%..."

September 6 - Bloomberg (Scott Hamilton and Svenja O'Donnell): "The Bank of England persisted with its quantitative-easing program today after Prime Minister David Cameron reiterated his budget plans, leaving the central bank carrying the burden of reviving Britain's economy. With Cameron reaffirming his strategy to reduce the deficit, ministers are stressing the role of the central bank in getting the U.K. out of a recession. The Monetary Policy Committee kept its bond-purchase target at 375 billion pounds ($596bn)..."


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