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QE Forever

"Congratulations Mr. Bernanke. I'm happy, my assets' values go up. But as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world." Marc Faber, investor, analyst and writer extraordinaire, September 14, 2012

The S&P 400 Mid-cap Index enjoyed a two-week gain of 5.7%, closing today at a new record high. The small cap Russell 2000 gained 6.5% in 9 sessions, with the Nasdaq composite up 3.8%. Notable sector gains include the 16.1% two-week surge by the S&P 500 Homebuilding index (up 99% y-t-d). The KWB Bank index jumped 9.4% in two weeks, increasing 2012 gains to 31%. The Morgan Stanley Cyclical index rose 8.1% over the past 9 sessions. The Morgan Stanley Retail Index gained 6.2% in two weeks and closed today at a record high (up 23.5% y-t-d). Gains have certainly not been limited to the U.S. Spain's IBEX 35 index has gained 14.7% in 10 sessions, outgained by the 14.9% rise in Italy's MIB index. Germany's DAX has gained 10.9% in two weeks to increase y-t-d gains to 25.7%. India's Sensex enjoyed a two-week gain of 8.8%, with South Korea's Kospi up 7.0%, Brazil's Bovespa up 9.4% and Mexico's Bolsa up 7.2%.

Thursday morning, as markets waited anxiously for the release of the FOMC policy statement, a CNBC anchor noted that a Twitter "Bernanke" imposter had tweeted something along these lines: "I put my pants on in the morning just like anyone else, one leg at a time. And when I have my pants on - I print money!"

If I can chuckle perhaps it will hold back the tears. It's difficult not to be reflective - to ponder how things could ever have come to this. Thursday was another historic day for policymaking, for markets and for the perpetuation of history's most spectacular financial mania. In the past I've noted that, in comparable circumstances, I have viewed my 14-year weekly chronicle of history's greatest Credit Bubble as pretty much a great waste of effort. I have tried to warn of the dangers of an unanchored global financial "system." I've done my best to illuminate the dangerous interplay between an unwieldy global pool of speculative finance and aggressive "activist" central bankers. I have forewarned of the perils of discretionary (as opposed to rules-based) policymaking - in particular highlighting the (long ago appreciated) fear that too much discretion ensures that monetary policy mistakes will only be followed by yet greater mistakes. I took strong objection to Dr. Bernanke's doctrine and framework when he arrived at the Fed in 2002 and protested in vein when he was appointed Federal Reserve Chairman in early-2006.

In my initial CBB back in 1999, I tried to explain how an unfettered explosion of non-bank liabilities was fueling a dangerous Credit Bubble. Back then the consensus view held that "only banks created Credit." What little Bubble analysis that existed at the time focused chiefly on Internet stocks. I was arguing that a radically changing financial landscape called for a new "Contemporary Theory of Money and Credit." I also warned that new finance beckoned for judicious monetary management. Some years later (2007) Pimco's Paul McCulley introduced the world to the phrase "shadow banking."

I've never been fond of the term "shadow banking," believing that the entire line of analysis was missing (avoiding) the most critical aspects of contemporary finance. From my analytical perspective, the issue was not so much that there were financial entities and institutions operating outside traditional banking channels and regulation. Rather, the momentous transformation of financial sector liabilities from ("staid") bank loans/deposits to ("dynamic") marketable debt instruments/obligations was altering traditional relationship between finance, the financial markets, asset prices and real economies. Importantly, unfettered Credit expansion was being driven by an explosion of securities and instruments changing hands - at, I might add, ever higher prices - in increasingly over-liquefied and ebullient markets. Certainly not coincidently, this was unfolding concurrently with the unprecedented proliferation of hedge funds, proprietary trading operations, derivatives and so forth. Our central bank was oblivious.

The confluence of proliferations in marketable debt and leveraged speculation profoundly altered the financial landscape. Fundamentally, there were no longer any restraints on Credit expansion. The old "fractional reserve banking" "deposit multiplier" was supplanted by the "infinite multiplier" associated with contemporary marketable Credit.

Essentially, speculative financial leveraging created an unlimited supply of Credit/marketplace liquidity. Unlimited supply, then, led to a wholesale mispricing (under-pricing) of finance. This was particularly problematic for asset markets, where the over-abundance of cheap Credit fueled asset price inflation. Higher asset prices, then, created heightened demand for additional Credit, which was satisfied at ongoing low borrowing costs. As Credit will do if not restrained, it all became self-reinforcing - or "recursive." And as the quantity of unlimited, mispriced and asset-centric Credit exploded, resources throughout the entire economy were badly misallocated. A decade or so ago I explained the dangers of "Financial Arbitrage Capitalism." Somehow, the notion that our system needs only greater quantities of mispriced and misallocated finance has yet to be discredited.

It was apparent by 1999 that the Greenspan Federal Reserve needed to respond aggressively to the changed financial landscape. The non-bank lenders, especially the GSEs, Wall Street firms and hedge funds, needed to come under more intensive regulation. Either that or Fed monetary management had to tighten significantly as part of a policy of "leaning against the wind" of rampant Credit expansion and associated asset inflation and Bubbles. Mounting systemic excesses were beckoning for tough love - but the Fed became comfortable doling out candy. It was always my hope that the Federal Reserve would eventually appreciate and respond to the increasingly obvious dangers associated with contemporary unfettered Credit and financial leveraging. As of approximately 12:30 p.m. Thursday, the little sliver of remaining hope was officially pronounced dead.

Instead of moving prudently to rein in egregious Credit and speculative excess, the Greenspan/Bernanke Fed's went in the opposite direction and repeatedly provided extraordinary accommodation. Amazingly, each bursting Bubble led to only more aggressive monetary largess and more power for dysfunctional (Bubble-prone) markets. Thursday's policy move by the Bernanke Fed essentially indicates full capitulation to what has become a highly speculative global marketplace. There is at this point no doubt in my mind that we are witnessing the greatest monetary fiasco ever.

In early-2009 I pleaded, "While I understand the necessity of stemming financial collapse, please don't go down the policy path of fueling a Treasury and government finance Bubble - one at the very heart of our Credit system." Never at the time could I have imagined the extent to which the Bernanke Fed would be willing to inflate history's greatest Bubble. Chairman Bernanke has gone from resorting to radical policies during a period of acute financial crisis to one of imposing only more radical policymaking three years into recovery. He has gone from trying to stem Credit contraction to aggressively promoting rapid (non-productive) Credit expansion. Dr. Bernanke has evolved from radical liquidity injections meant to reverse marketplace illiquidity, to pre-committing to years of open-ended money printing in the midst of heightened inflationary pressures and dangerously speculative financial markets. Of course, justification and rationalization are everywhere. History will be unkind.

I have no reason to doubt the commonly held view that Dr. Bernanke is a decent and honorable man. I wish he was a scoundrel - then perhaps someone would do something to rein him in. Many of our nation's leading economist lavish praise on Dr. Bernanke latest move, while some, amazingly, say he still hasn't done enough. Quite regrettably, it will require a terrible crisis for the establishment to change policy doctrine, along with economic analysis more generally.

There's no reasonable justification for Dr. Bernanke taking such extreme risks with financial and economic stability. And I struggle understanding how he doesn't see the likely consequences. After the cult of Greenspan, I thought we had learned a lesson from having one individual exert such power and influence. Indeed, the Federal Reserve has now grossly overstepped its role. Never was it anticipated that the Fed would resort to massive purchases of Treasury bonds and mortgage-backed securities in a non-crisis environment. Never was it contemplated that our central bank would resort to pre-committing to massive ongoing money printing in the name of reducing the unemployment rate.

I'll state what others hesitate to admit: this week our central bank took a giant leap from radical to virtual rogue central banking. If Bernanke's plan was to leapfrog the audacious Draghi ECB, our sinking currency - even against the euro - is confirmation of his success. If his goal was to provide markets a Benjamin Strong-like "coup de whiskey" - he should instead fear the dangerous instability central bankers have wrought on global markets and economies. And I am all too familiar to the adversities of being a naysayer in the midst of Bubble mania. I've read about it, I've lived it and I'm ok with it - and actually am motivated by it. I highlighted last week the ominous divergence between world fundamentals and the markets. And this week, well, global markets enjoyed just a spectacular time of it. Away from the Bloomberg screen, it sure seemed like a less than comforting week for the world at large.

As an analyst of Bubbles, I often quip that they tend to "go to incredible extremes - and then double." Timing the bursting of a Bubble is a very challenging - if not nearly impossible - proposition. Yet this in no way should cloud the harsh reality that the longer a Bubble is accommodated the more devastating the unavoidable consequences. It is, as well, the nature of speculative manias for things to turn crazy in the destabilizing terminal-phase. The past few weeks - with more than ample Bubble accommodation and craziness - really make me fear that eventual day of reckoning.


For the Week:

The S&P500 jumped 1.9% (up 16.6% y-t-d), and the Dow rose 2.2% (up 11.3%). The broader market continued to outperform. The S&P 400 Mid-Caps rose 2.2% (up 16.8%), and the small cap Russell 2000 jumped 2.7% (up 16.7%). The Morgan Stanley Cyclicals surged 4.3% (up 16.5%), and the Transports jumped 2.8% (up 3.9%). The Morgan Stanley Consumer index added 0.8% (up 10.0%), while the Utilities declined 0.4% (down 0.7%). The Banks were up 4.8% (up 31.1%), and the Broker/Dealers were 4.5% higher (up 7.6%). The Nasdaq100 was up 1.1% (up 25.4%), and the Morgan Stanley High Tech index increased 2.1% (up 19.8%). The Semiconductors gained 1.3% (up 11.6%). The InteractiveWeek Internet index rose 2.3% (up 16.2%). The Biotechs increased 2.1% (up 41.5%). With bullion gaining $35, the HUI gold index jumped 7.0% (up 3.8%).

One-month Treasury bill rates ended the week at 7 bps and three-month bills closed at 9 bps. Two-year government yields were unchanged at 0.25%. Five-year T-note yields ended the week up 7 bps to 0.72%. Ten-year yields jumped 20 bps to 1.87%. Long bond yields jumped 27 bps to 3.09%. Benchmark Fannie MBS yields dropped 6 bps to 2.23%. The spread between benchmark MBS and 10-year Treasury yields narrowed 26 to a record low 36 bps. The implied yield on December 2013 eurodollar futures declined 3.5 bps to 0.38%. The two-year dollar swap spread declined 3 to 12.5 bps, and the 10-year dollar swap spread sank 10 to 3 bps. Corporate bond spreads narrowed further. An index of investment grade bond risk dropped 7 to a 19-month low 83 bps. An index of junk bond risk sank 54 to a 14-month low 444 bps.

Debt issuance was exceptionally strong. Investment grade issuers this week included Walgreen $3.25bn, Merck $2.5bn, Transocean $1.5bn, Oneok Partners $1.3bn, Dominion Resources $1.15bn, News America $1.0bn, Tyco Flow Control $900 million, Nissan Motor Acceptance $750 million, Computer Sciences $700 million, Clorox $600 million, Conagra $500 million, Tech Data $350 million, Peco Energy $350 million, Agilent Technologies $400 million, Public Service Electric & Gas $350 million, Duke Realty $300 million, and Tuscon Electric Power $150 million, .

Junk bond funds saw inflows rise to $951 million (from Lipper). Junk issuers included Reynolds Group $3.25bn, First Data $2.15bn, Nuveen Investments $NRG Energy $990 million, Continental Rubber $950 million, Tesoro $925 million, Cablevision Systems $750 million, Midstate Petroleum $600 million, D.R. Horton $350 million, DJO $710 million, Ladder $325 million and American Gilsonite $270 million.

I saw no convertible debt issued.

International dollar bond issuers included Poland $2.0bn, Gazprom $1.5bn, Commonwealth Bank of Australia $3.25bn, Siam Commercial Bank $1.1bn, Drill Rig Holdings $800 million, Zambia $750 million, Korea Hydro & Nuclear $700 million, Iamgold $650 million, and Eurasian Development Bank $500 million.

Spain's 10-year yields jumped 16 bps to 5.73% (up 69bps y-t-d). Italian 10-yr yields declined 3 bps to 4.99% (down 204bps). German bund yields jumped 19 bps to 1.70% (down 12bps), and French yields rose 5 bps to 2.25% (down 89bps). The French to German 10-year bond spread narrowed 14 bps to 55 bps. Ten-year Portuguese yields declined 3 bps to 7.77% (down 501bps). The new Greek 10-year note yield sank 74 bps to 20.26%. U.K. 10-year gilt yields surged 28 bps to 1.96% (down one basis point). Irish yields were 40 bps lower to 5.08% (down 318bps).

The German DAX equities index jumped 2.74% (up 25.7% y-t-d). Spain's IBEX 35 equities index rose 3.5% (down 4.8%), and Italy's FTSE MIB gained 3.2% (up 10.2%). Japanese 10-year "JGB" yields declined 2 bps to 0.79% (down 19bps). Japan's Nikkei gained 3.2% (up 8.3%). Emerging markets were mostly much higher. Brazil's Bovespa equities index jumped 6.5% (up 9.4%), and Mexico's Bolsa increased 1.6% (up 9.8%). South Korea's Kospi index jumped 4.0% (up 10.0%). India's Sensex equities index surged 4.4% (up 19.5%). China's Shanghai Exchange slipped 0.2% (down 3.4%).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.55% (down 54bps y-o-y). Fifteen-year fixed rates slipped one basis point to 2.85% (down 45bps). One-year ARMs were unchanged at 2.61% (down 20bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.19% (down 60bps).

Federal Reserve Credit rose $8.3bn to $2.806 TN. Fed Credit was down $38bn from a year ago, or 1.3%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 9/12) slipped $1.9bn to $3.577 TN. "Custody holdings" were up $157bn y-t-d and $102bn year-over-year, or 2.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $380bn y-o-y, or 3.7% to a record $10.609 TN. Over two years, reserves were $2.030 TN higher, for 24% growth.

M2 (narrow) "money" supply jumped $17bn to a record $10.089 TN. "Narrow money" has expanded 6.8% annualized year-to-date and was up 6.3% from a year ago. For the week, Currency increased $1.3bn. Demand and Checkable Deposits jumped $96.6bn, while Savings Deposits sank $78.6bn. Small Denominated Deposits declined $2.5bn. Retail Money Funds were little changed.

Total Money Fund assets increased $8.0bn to $2.578 TN. Money Fund assets were down $117bn y-t-d and $55bn over the past year, or down 2.1% y-o-y.

Total Commercial Paper outstanding declined $6.6bn to $1.015 TN. CP was up $56bn y-t-d, while having declined $28bn from a year ago, or down 2.7%.

Currency Watch:

The U.S. dollar index dropped 1.8% to 78.847 (down 1.7% y-t-d). For the week on the upside, the euro increased 2.5%, the Danish krone 2.4%, the Mexican peso 2.1%, the New Zealand dollar 2.0%, the Swiss franc 1.9%, the Australian dollar 1.6%, the Taiwanese dollar 1.3%, the British pound 1.3%, the Singapore dollar 1.3%, the South Korean won 1.3%, the Brazilian real 0.8%, the Canadian dollar 0.7%, the Swedish krona 0.6% and the Norwegian krone 0.6%. On the downside, Japanese yen declined 0.2% and the South African rand 0.4%.

Commodities Watch:

September 12 - Bloomberg (Jeff Wilson): "The U.S. soybean crop will drop to the lowest in nine years after the hottest and driest June and July in the Midwest since 1936, the government said. Prices rose the most in three weeks. The harvest will total 2.634 billion bushels (71.69 million metric tons), down from 3.056 billion in 2011 and the lowest since 2003... 'A third straight year of reduced U.S. production means soybean buyers face an unprecedented tight supply for the next 12 months,' Jerry Gidel, the chief feed-grain analyst at Rice Dairy LLC in Chicago..."

September 12 - Bloomberg (Supunnabul Suwannakij and Luzi Ann Javier): "Thailand, the world's largest rice shipper, will sell more than half of its record inventory to governments including China, according to Commerce Minister Boonsong Teriyapirom... The country will sell a total of 7.328 million metric tons..."

September 14 - Bloomberg (Debarati Roy and Maria Kolesnikova): "Platinum rose, capping the longest rally in 25 years, after the Federal Reserve took steps to bolster the U.S. economy and as strikes halted output at mines in South Africa, the world's largest producer."

The CRB index jumped 3.0% this week (up 5.1% y-t-d). The Goldman Sachs Commodities Index rose 2.6% (up 7.6%). Spot Gold jumped 2.0% to $1,770 (up 13.2%). Silver gained 2.9% to $34.66 (up 2%). October Crude jumped $2.58 to $99.00 (unchanged). October Gasoline was little changed (up 14%), while October Natural Gas surged 9.7% (down 1%). December Copper jumped 5.1% (up 12%). September Wheat added 1.4% (up 38%), while September Corn declined 2.2% (up 20%).

Global Credit Watch:

September 12 - Bloomberg (Karin Matussek): "Germany's top constitutional court rejected efforts to block a permanent euro-area rescue fund, handing a victory to Chancellor Angela Merkel, who championed the 500 billion-euro ($645bn) bailout. The Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the European Stability Mechanism, while ruling Germany's 190 billion-euro contribution can't be increased without legislative approval. The court said Germany can ratify the ESM if it includes binding caveats that it won't be forced to assume higher liabilities without its consent. 'We are an important step closer to our goal of stabilizing the euro,' German Economy Minister and Vice Chancellor Philipp Roesler told reporters... 'It has always been the goal of this government' to establish a 'clear limit and to include parliament in all important decisions.'"

September 14 - Bloomberg (Emma Ross-Thomas): "Spanish regions' debt load continued to swell in the second quarter, as the cash-strapped local administrations urged the government to speed up its planned bailout fund. The regions' debt rose to 14.2% of gross domestic product from 13.8% in the first three months of the year, the Bank of Spain in Madrid said... The overall public debt load rose to 75.9% of GDP from 72.9% in the prior quarter."

September 11 - Bloomberg (Ben Sills): "Prime Minister Mariano Rajoy said he won't allow the European Union or the European Central Bank to stipulate how Spain narrows its budget deficit as a condition for buying the country's bonds. Rajoy pledged that Spain will meet its targets for reducing its budget shortfall this year and next and defended his government's right to set spending limits on individual policies, in his first television interview since taking office in December. 'We need to meet the budget deficit commitment, which is the most important challenge we have as a country,' Rajoy said... 'I won't accept them telling us which are the specific policies where we have to cut or not.'"

September 12 - Bloomberg (Emma Ross-Thomas): "Spanish leaders said they can delay a decision on seeking a bailout as its bond yields ease, with their focus on ensuring any rescue doesn't roil markets. Prime Minister Mariano Rajoy told Parliament it's not clear if Spain needs help as the European Central Bank's crisis plan has cut borrowing costs. There's no 'urgency' because the ECB's move put the Treasury in a more 'comfortable' position, Deputy Economy Minister Fernando Jimenez Latorre said. 'The important thing is that when whatever assistance that is needed is requested, that it should be well received in the markets,' Jimenez Latorre told reporters..."

September 14 - Bloomberg (Ben Sills and Emma Ross-Thomas): "Catalan President Artur Mas said Spain should debate staying in the euro as leaders consider seeking a European bailout, becoming the most senior Spanish official to question the nation's single-currency membership. 'If we want to have a serious debate, the first question has to be whether we want to be in the euro or not,' Mas said... 'If you say yes, you have to accept the rules of this game. You could say no.' Catalonia, which accounts for 20% of the nation's economy and is home to some of the country's biggest companies, is battling Prime Minister Mariano Rajoy for greater control over taxes as austerity measures have undermined voters' willingness to subsidize poorer regions. Mas raised the stakes this week, saying if Rajoy doesn't give his administration in Barcelona greater autonomy, he'll push for full independence. Mas said Catalonia and Spain are 'tired of each other'..."

September 13 - Bloomberg (Jeff Black and Stelios Orphanides): "European Central Bank Governing Council member Panicos Demetriades said the bank might not have to spend a cent on government bonds. The threat of unlimited buying under the ECB's new bond- purchase program may mean that 'in the end, action is not needed,' Demetriades, who heads the Central Bank of Cyprus... 'No one will speculate against the unlimited firepower of a central bank. This is what stabilizes currencies of countries where investors know that. One wouldn't gamble against the Federal Reserve, for example.' Spanish and Italian bond yields have plunged since ECB President Mario Draghi pledged on July 26 to do what's needed to preserve the euro."

Global Bubble Watch:

September 13 - Wall Street Journal (Jon Hilsenrath and Kristina Peterson): "The Federal Reserve, frustrated by persistently high U.S. unemployment and the torpid recovery, launched an aggressive program to spur the economy through open-ended commitments to buy mortgage-backed securities and a promise to keep interest rates low for years. In the most significant of its new moves, the Fed said Thursday it would buy $40 billion of mortgage-backed securities every month and would keep buying them until the job market improves, an unusually strong commitment by the central bank. 'We want to see more jobs,' Fed Chairman Ben Bernanke said... explaining the rationale for the Fed's actions. 'We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained.' The Fed's announcement sent investors piling into stocks, gold, the euro and other assets seen as likely to benefit from the extra liquidity."

September 14 - Associated Press: "Egan-Jones is downgrading its rating on U.S. debt to AA- from AA, citing Federal Reserve plans to try to stimulate the economy. The credit rating agency says the Fed's plans to buy mortgage bonds will likely hurt the economy more than help it. Egan-Jones says the plan will reduce the value of the dollar and raise the price of oil and other commodities, hurting businesses and consumers."

September 14 - Bloomberg (Sarika Gangar): "Corporate bond offerings in the U.S. soared this week to the busiest pace in six months as borrowing costs tumbled and the Federal Reserve unleashed its third round of quantitative easing to stimulate the economy. Walgreen... and ...AstraZeneca Plc led borrowers selling at least $43.2 billion in bonds, the most since $60 billion was issued in the week ended March 9... Yields on speculative-grade debt dropped to an unprecedented low, breaking the previous record set more than 15 months ago."

September 11 - Bloomberg (Bradley Keoun): "JPMorgan... and Bank of America... are helping clients find an extra $2.6 trillion to back derivatives trades amid signs that a shortage of quality collateral will erode efforts to safeguard the financial system. Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market. The solution: At least seven banks plan to let customers swap lower-rated securities that don't meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed 'collateral transformation.' That's raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead. 'The dealers look after their own interests, and they won't necessarily look after the systemic risks that are associated with this,' said Darrell Duffie, a finance professor at Stanford University who has studied the derivatives and securities-lending markets. 'Regulators are probably going to become aware of it once the practice gets big enough.'"

September 11 - Bloomberg (John Detrixhe): "Moody's... said it may join Standard & Poor's in downgrading the U.S.'s credit rating unless Congress next year reduces the percentage of debt- to-gross-domestic-product during budget negotiations. The U.S. economy will probably tip into recession next year if lawmakers and President Barack Obama can't break an impasse over the federal budget and if George W. Bush-era tax cuts expire in what's become known as the 'fiscal cliff,' according to a report by the nonpartisan Congressional Budget Office..."

September 14 - Bloomberg (Lisa Abramowicz): "Measures of [bond market] stress are at the lowest in more than two years following Federal Reserve Chairman Ben S. Bernanke's unveiling of additional stimulus measures."

September 14 - Bloomberg (Lisa Abramowicz): "Ben S. Bernanke is sending junk-bond bears into hiding. The number of shares borrowed to bet against State Street Corp.'s exchange-traded high-yield bond fund has plunged 49% since Aug. 30, pushing its price to a 15-month high... The most distressed securities are outperforming the highest speculative- grade tier this month by the most since February..."

September 12 - Bloomberg (Josiane Kremer): "Norway's banks may face stricter lending rules as the country's financial regulator fights to prevent a repeat of a 1980s housing market bust that triggered a banking crisis and plunged the economy into a recession. 'The longer a situation where debt is growing more than income and housing prices grow substantially more than income, the higher the risk is for this development to end in a bubble that eventually bursts,' Morten Baltzersen, director general at the Financial Supervisory Authority, said... 'This development gives reason for concern.' Property prices, already at a record, are rising an annual 8% on average as credit growth drives private debt burdens to more than 200% of disposable incomes next year, the central bank estimates. The FSA is stepping up its warnings one year after urging banks to rein in lending in the world's third-richest nation per capita amid evidence overheating is threatening financial stability."

September 14 - Bloomberg (Shamim Adam): "The Federal Reserve's third round of quantitative easing prompted Hong Kong to say the monetary stimulus risks pushing up the city's property prices while Thailand said it was a 'good sign' for the global economy. 'The launch of QE3 and the short-term improvement of the European debt crisis will increase the risk of overheating in Hong Kong's asset market,' Norman Chan, chief executive of the Hong Kong Monetary Authority, said..."

Germany Watch:

September 13 - Reuters: "Eurosceptical German media said... the country's top court had cast doubt on the legality of European Central Bank bond-buying in a ruling upholding the euro zone's bailout fund widely seen as political victory for Chancellor Angela Merkel. The Federal Constitutional Court gave the green light... to the European Stability Mechanism (ESM) in a verdict that brought relief to anxious financial markets. The respected judges insisted the German parliament must have a veto right over any increase in Berlin's contribution to the 500 billion euro ($644bn) ESM. But conservative newspapers opposed to bailouts of troubled euro zone member states highlighted a passage of the ruling which said that ECB bond-buying or leveraging the ESM at the central bank could be illegal. The judges said that for the ESM to deposit government bonds at the ECB as a security for loans would violate an EU treaty ban on direct financing of governments, effectively ruling out giving the rescue fund a bank licence as France has proposed. They also said ECB bond-buying on the secondary market 'aiming at financing the members' budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing'. Some German legal experts saw this as a veiled threat to the ECB..."

September 11 - Bloomberg (Dalia Fahmy and Tony Czuczka): "Billionaire investor George Soros said Berlin homes are at risk of becoming overvalued because demand is being fueled by buyers seeking a safe place to put their money amid the European sovereign-debt crisis. 'You have a serious danger of a housing bubble developing in Berlin,' he said... 'It has a lot to do with the flight of capital and negative real interest rates.' Private-equity firms, affluent individuals and insurance companies are buying Berlin apartments, attracted by cheaper prices than other European cities, a stable economy and a dearth of alternatives as central banks keep interest rates at record lows. Apartment prices in Berlin jumped about 17% in the past 12 months, compared with a 7% nationwide increase..."

China Watch:

September 11 - Bloomberg: "China's new lending was the highest of any August on record as the government tries to reverse an economic slowdown that threatens to cost jobs and undermine support for the Communist Party. New local-currency lending was 703.9 billion yuan ($111bn) last month... That was more than the 600 billion yuan median estimate... and 540 billion yuan in July. The pickup in lending follows interest-rate cuts in June and July, government approvals for subway and road projects and a warning from the labor ministry that the slowdown is starting to hit the job market."

September 12 - Bloomberg: "Chinese banks' profitability may 'slump' over the next few years as the economy falters after lenders built up 'massive latent credit risks,' Standard & Poor's said. Rising corporate delinquencies, narrower net interest margins and 'increasingly strained' liquidity management will test the resilience of Chinese banks over the next three to five years, the... ratings company said... China's 3,800 banks last month reported an increase in total non-performing loans for a third straight quarter, the longest deterioration in eight years, while profit growth slowed to 23% in the second quarter from 24% in the previous three months... 'A credit turndown is unfolding in China,' S&P's Hong Kong-based analyst Ryan Tsang wrote... 'Massive market-driven consolidation may be in the cards for many players as credit quality becomes dramatically polarized."

September 12 - Bloomberg: "Massive stimulus measures would be 'detrimental' to China's sustainable economic growth, the official Xinhua News Agency wrote... While growth in the world's second-biggest economy has slowed for six-straight quarters, such fiscal spending is unlikely, according to Xinhua. Authorities are aware of the limitations of a possible stimulus plan, Xinhua writer Liu Jie said... The 4 trillion yuan stimulus in 2008 led to large local-government debts and bad loan risks... This time steps are focused on invigorating the private sector and market forces through measures including tax cuts... There is room for further interest rate cuts, Xinhua added"

September 14 - Bloomberg: "China's largest steel mills are resorting to the most short-term funding in at least three years as slumping profits make it harder to repay debt. Listed steelmakers had 35% more outstanding loans maturing within 12 months on June 30 than a year earlier, according to a Sept. 4 report from China International Capital Corp. The number reporting net negative cash flow rose to 21 from 10... 'This is a bad sign for the steelmakers, as they may be forced to tap short-term loans to pay off longer-term debt,' said Luo Wei, an analyst at CICC. 'If the current situation lasts for two to three years, it would become a big issue for their liquidity.'"

September 13 - Bloomberg: "To live out his retirement years, He Zhongkui was counting on steady income from an investment that promised interest payments five times higher than what he could earn in a Chinese bank. Now He, a 62-year-old former municipal official in Wenzhou who rides a rusty bicycle, is cutting back on food and gasoline, having found himself one of a growing number of victims of China's nebulous world of shadow banking. A 'friend,' who he said had been paying him 2,400 yuan ($379) a month after He gave him one-third of his 600,000-yuan life savings to invest in real estate, suddenly disappeared. So did the payments and principal. 'I called, but the number was no longer in existence,' said He... China's slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest."

India Watch:

September 13 - Bloomberg (Unni Krishnan): "India's growth outlook is waning as the longest fall in capital-goods output since 2009 signals weaker investment, adding pressure on Prime Minister Manmohan Singh to salvage his development agenda. Capital-goods production... slid in July for a fifth straight month, the longest stretch since declines over most of 2009... India's economic growth potential may have fallen to 6% to 6.5% a year, below the Reserve Bank of India's 7.5% estimate, JPMorgan Chase & Co. said. Singh's attempts to implement policies to revive investment have been derailed by his fractious ruling coalition and graft allegations that paralyzed Parliament. Inflation near 7% has limited room for interest-rate cuts..."

September 12 - Bloomberg (Unni Krishnan): "Indian industrial production rose less than economists estimated in July, adding to signs that Asia's third-largest economy is faltering. Production at factories, utilities and mines climbed 0.1% from a year earlier..."

Latin America Watch:

September 12 - Bloomberg (Raymond Colitt): "Brazil's banking industry is ceding market share to the government as state-controlled rivals boost lending as part of President Dilma Rousseff's bid to stoke growth in Latin America's biggest economy. State banks led by Banco do Brasil SA and Caixa Economica Federal increased loans 12.3% this year through July, almost four times the 3.4% pace for non-government lenders. That helped boost state-backed lenders' share of outstanding loans to 45.4%, the most since 2000... Non-state banks are extending loans at the slowest pace in three years, ignoring the most aggressive interest-rate cuts among Group of 20 nations as default rates soar and lending margins shrink to the narrowest since December 2007. Brazil, whose 17.7% annual credit growth in July exceeded China's 16.1% increase, risks saddling the state banks with bad loans and prompting non-government lenders to retrench at a time when Rousseff is seeking to revive an economy posting its slowest growth since 2009, according CIBC World Markets."

September 14 - Bloomberg (Gabrielle Coppola and Blake Schmidt): "In Brazil's new bond market for infrastructure projects, the nation is counting on its own investors to spark demand for debt intended to finance a half-trillion dollars of roads, factories and airports... Brazil is seeking to finance construction of 1 trillion reais of highways, bridges and stadiums as it prepares to host the 2014 World Cup and 2016 Olympics."

September 14 - Bloomberg (Boris Korby): "Banco Cruzeiro do Sul SA will be liquidated by Brazil's central bank after attempts to find a buyer failed, prompting Latin America's biggest corporate-bond default in more than 10 years. Officials appointed to run the Sao Paulo-based company found a 'serious violation' and unfunded liabilities that made it impossible to resume normal operations, Brazil's central bank said..."

European Economy Watch:

September 14 - Bloomberg (Scott Hamilton): "Euro-area inflation accelerated for the first time in 11 months in August as rising energy costs threatened to exacerbate the economic slump. Consumer prices in the 17-nation currency bloc increased 2.6% from a year earlier..."

September 10 - Bloomberg (Lorenzo Totaro): "Italy's economy contracted more than initially reported in the second quarter, indicating the country's fourth recession since 2001 is deepening amid the biggest fall in household spending in almost two decades. Gross domestic product shrank 0.8% from the previous three months... From a year earlier, economic activity contracted 2.6%, instead of 2.5%, Rome-based Istat said today in its final report on the quarter. The euro-region's third-biggest economy entered a recession at the end of 2011..."

U.S. Bubble Economy Watch:

September 11 - Bloomberg (Martin Z. Braun): "Public pension funds in 16 states and the District of Columbia last year had assets of 80% or more of what is need to pay promised benefits to retirees, down from 18 in 2010, Loop Capital Markets said. The median ratio of assets to liabilities for 149 state- level pensions dropped to 73% in 2011 from 76% the year before... Eighty percent is a common threshold of sustainability for retirement plans, according to Loop. Illinois was the lowest- funded state, at 44%. 'State and local government pension plans' fiscal health continued to deteriorate slightly over the last year, although the falloff is not significant for the vast majority of plans,' Loop said..."

Fiscal Watch:

September 14 - Associated Press (Daniel Wagner): "The U.S. federal budget deficit increased by $191 billion in August and has topped $1 trillion for the fourth straight year. The deficit for the first 11 months of the 2012 budget year totaled $1.16 trillion... That's 6% less than the $1.23 trillion in the same period last year. The fiscal year ends Sept. 30.... The White House in July forecast that the budget gap will total $1.2 trillion this year, down from $1.3 trillion last year. Next year, the administration expects the deficit to fall just short of $1 trillion, at $991 billion. This year's gap is equal to about 7.4% of the U.S. Economy..."


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