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Ready for Year-End Fiscal Cliff Drama?

It's imperative to constantly test one's thesis - in my case, an unconventional view of the world of finance, the markets and the global economy. Does one's analytical framework help explain system behavior? Of course, various perspectives come replete with biases, blurry vision and potentially perilous blind spots. Often it is too easy to simply see what one wants to see. At the same time, a sound framework and proper perspective create the opportunity for more objective analysis. I'll add that history has shown that this all becomes keenly relevant during manias.

The U.S. stock market has more than doubled from 2009 lows. Financial conditions seemingly couldn't be looser. November saw a record $165bn of U.S. corporate debt issuance. This year will see near record corporate debt sales. Junk bond issuance will be a new all-time high. System Credit growth will be the strongest since 2008. Recently, consumer confidence has jumped to a four-year high. The nation's housing markets are showing signs of life. GDP would be generally OK, except for the matter of the unprecedented fiscal and monetary excess necessary to generate such limited economic expansion.

The conventional bullish view holds that 2008 was the proverbial "100-year flood." A new secular bullish cycle has commenced that will, again, prove the naysayers wrong. The bullish view holds Dr. Bernanke's unrelenting monetary stimulus in high regard. And while most would claim they prefer an end to fiscal profligacy, most also hold to the notion that actual fiscal tightening should be done gradually so as to not impinge the fledgling recovery. There will be a more opportune time to address fiscal issues later. Ongoing fiscal and monetary stimuli are viewed as essential for bolstering a post-Bubble economy buffeted by various headwinds from home and abroad.

The bearish thesis perspective sees things altogether differently. Fundamentally, I disagree with the post-Bubble backdrop premise - and not for the first time. When Dr. Bernanke emerged onto the scene back in 2002 to fight so-called post-Bubble deflation, it was clear to me that aggressive monetary stimulus would inflate the incipient mortgage finance Bubble. It became clear in early-2009 that even more incredible fiscal and monetary stimulus would inflate the fledgling "government finance Bubble." With today's confluence of years of Trillion dollar deficits and historically inflated bond prices, the benefit of the doubt belongs with the Bubble thesis.

It was another eventful week in the realm of the global government finance Bubble. Here at home, we're now 31 short days (counting holidays!) from dropping off the "fiscal cliff." This predicament has been on the horizon for many months, though it's obvious that Washington has not been dealing seriously with this issue. And while pundits have been quick to explain that both sides are merely posturing, it appears that last minute negotiations are beginning with both sides somehow miles apart. The democrats are emboldened, while the republicans are no less determined. One side is focused on increasing taxes on the wealthy, the other on spending cuts. In a world of deep philosophical and irreconcilable differences, it has all the makings of a tense year-end drama.

From my distant vantage point, I ("master of the obvious") see a low likelihood of meaningful spending restraint. The serious entitlement spending issue will, not unexpectedly, be left for another day - and then another. Even republican proposals have most so-called "savings" occurring a decade out. Not surprisingly, at least from the "government finance Bubble" perspective, the previous huge inflationary surge in federal outlays has essentially become today's new baseline. Off the table. Non-negotiable. Instead, "cuts" are basically commitments to somehow - and in some undetermined ways - reduce future (generally 10-20 years) expenditure growth.

Not coincidently, dysfunctional fiscal policy was conjoined this week with dysfunctional monetary policy. Clearly, serious fiscal restraint will not be forthcoming until the markets forcibly squeeze it out of Washington. The bond and stock markets should today be pressuring the Administration and Congress - yet that's not in the cards with the Fed talking $85bn of monthly QE starting in January.

This week, Bill Dudley, president of the Federal Reserve Bank of New York, joined the ranks of Fed policymakers signaling support for greater monetary stimulus. At the same time, Mr. Dudley confidently stated that "we will absolutely take away the punchbowl when the time is right." Well, I can state with confidence that the Fed absolutely won't. Factually, the Federal Reserve repeatedly hasn't (i.e. 1988, 1993, 1999, 2005/'06).

Tuesday from Paul Volcker (CNBC interview): "It's [when to remove stimulus] a very hard judgment to make. Sometimes you'll be wrong. But you've got to-- I think that is the chronic problem of any central bank because the implication is you have to begin tightening before the excess demand, before the bubbles, before the inflationary process is under way because it's more difficult if you're too late. But if you do it, by definition, people are going to complain. 'Why are you removing the proverbial punch bowl before the party's really gotten drunken?' But that's what a responsible host does. He waters the punch bowl in time.'"

I respect Mr. Volcker. He is among a select very few with real inflation-fighting credentials. Yet I also don't believe he recognizes the nature of current inflationary manifestations. Mr. Volcker warns of the need for reducing stimulus before the "inflationary process" commences, without appreciating the monetary Bubble already unleashed by profligate Federal spending coupled with profligate Federal Reserve monetary policy. Dudley, Volcker and others can surmise a timely removal of the punchbowl, yet I recall Mr. Henry Kaufman arguing convincingly back in 1999 that there would be severe consequences associated with the Fed having badly missed its timing. Little did we know at the time...

My thesis remains that we are at the late-stage of a historic multi-decade global Credit Bubble. At its core, this monetary fiasco is about a failed experiment with unconstrained global electronic-based finance. Using history as a guide, Credit Bubbles and associated manias tend to turn highly unstable near the cycle's end. From an inflationary cycle perspective, one can expect increasingly desperate policy measures in a fateful effort to sustain the unwieldy Credit boom. One would also hope to see more vocal dissent from those opposing a further ratcheting up of monetary inflation.

Last week, I profiled a refreshingly hawkish view espoused by Jeffrey Lacker, President of the Richmond Fed. I was encouraged further by similar thinking this week from another prominent Federal Reserve official.

Tuesday from Bloomberg (Stefan Riecher and Aki Ito): "Federal Reserve Bank of Dallas President Richard Fisher said he advocates putting limits on U.S. quantitative easing. The Fed could announce 'a limit as to how much we are going to acquire of treasuries and mortgage-backed securities, say up to a limit of X, up to a point where our balance sheet reaches that,' Fisher said... 'It is my personal preference to do it sooner than later, perhaps at the next meeting.' Fed officials plan to meet Dec. 11-12 to assess whether record accommodation is fueling economic growth and reducing 7.9% unemployment, and to debate whether to extend the Operation Twist stimulus plan, which expires next month. Fisher... has been among the most vocal Fed officials against more easing. Fisher said there are lessons to be drawn from Germany's experience of hyperinflation during the 1920s. While today's situation is different and he wasn't suggesting accommodative monetary policies would lead to inflation, Fisher said they can't be left in place forever. 'There is no such thing as QE infinity,' he said. 'QE infinity gets you into trouble.'"

One can hope that perhaps the more responsible Federal Reserve officials have seen about enough. Despite loose financial conditions, booming debt markets, strong/speculative risk markets, massive federal deficits and robust system-wide Credit growth - the dovish contingent is nonetheless hell-bent on significantly boosting its "money printing" operations. After Mr. Lacker's speech and Mr. Fisher's comments, I was hopeful that the December 11/12 FOMC meeting might provide the venue for the hawks to finally take a stand. This hope was crushed (like a bug) at 3:24 pm Wednesday with the posting of Jon Hilsenrath's "Fed Stimulus Likely in 2013" article on WSJ.com: "Three months after launching an aggressive push to restart the lumbering U.S. economy, Federal Reserve officials are nearing a decision to continue those efforts into 2013 as the U.S. faces threats from the fiscal cliff at home and fragile economies elsewhere in the world."

Hilsenrath's article generously quotes ultra-doves John Williams (SF Fed pres.) and Charles Evans (Chicago Fed pres.). It mentions Bernanke, Yellen and Lockhart (Atlanta Fed pres.). Curiously absent, however, was any reference to Lacker or Fisher. Not a peep of any internal debate regarding the size of the Fed's balance sheet. The article instead implied the decision to loosen further had all but been made: additional QE begins in January, with total bond/MBS purchases in the neighborhood of $85bn a month. After trading down 100 points in the morning, the DJIA closed Wednesday's session up 107. The dollar, having seemed to catch a Lacker/Fisher bid, reversed sharply lower. "RoRo" pivoted back toward risk on, confident as ever in the policy-based liquidity backstop. "Fiscal cliff" worries? Well, once again, worry ensures more QE. It's become a bad habit.

From my perspective, there's ample confirmation that we're at the wild "blow off" phase of speculative market excess. Whether we're late in the party - with markets rather numb to the punchbowl - or there's still more of the manic endgame to endure, only time will tell. But it has reached the point where monetary stimulus has much more impact on the markets than it does on real economies. From a global perspective, the dismal economic news out of Europe is unrelenting. From China comes more stories and anecdotes of corruption and financial rot. It is also worth noting that both India and Brazil posted disappointing growth numbers this week, even more notable since both economies have stagnated in the face of ongoing rampant Credit expansion.

Also noteworthy this week - particularly from the perspective of unstable global finance - were two stories highlighting the ongoing difficulties experienced within the hedge fund community:

Tuesday from Reuters (Laurence Fletcher): "Hedge funds' glory days seem a long way off as they head into a tricky 2013, with bumper profits likely to remain elusive in markets now dominated by political and central bank action. Speakers at the Reuters Global Investment 2013 Outlook Summit said the $2 trillion industry, which has disappointed investors with below-market returns this year and losses last year, faces a headache making money in an environment where markets are choppy and not as buoyant. 'We're now (in) a world where we recognize that the ability to make money is a lot more difficult and there aren't that many people who can do it. There simply aren't enough, it just doesn't exist,' said Saker Nusseibeh, CEO of Hermes Fund Managers... Funds have lost money in two of the four calendar years prior to 2012, according to HFRI. This year the average fund is up just 2.24% to November 23..."

And from Thursday's Financial Times (Sam Jones): "Dismal Year for Quantitative Hedge Funds." "Quantitative hedge fund managers are facing up to one of their worst years on record as losses mount for many of the sector's biggest names." The article highlighted a noteworthy list of some of the most successful "quant" funds suffering 2012 losses. "Unorthodox monetary policy and widespread political intervention in markets have left many unable to ride trends long enough to make money. Rangebound "RoRo" - risk on, risk off - conditions have proved particularly tricky for computers to judge."

I have in past CBBs posited that prolonged aggressive ("activist") monetary stimulus - and the associated atypical "inflationary process" that has inundated global risk markets - has created highly speculative/dysfunctional markets and a "crowded trade" predicament. As global policymakers have witnessed diminishing returns from their inflationary measures, they have (as historical experience would have suggested) simply ratcheted up their "money printing" operations. And, again as history has taught us, the consequence has been only heightened financial and economic instability - and greater impetus for additional monetary inflation. Moreover, the deeper Credit Bubble-related maladjustment, the easier it is for policymakers to justify only more outrageous fiscal and monetary excess.

I'll conclude with an excerpt from David Wessel's piece from Wednesday's WSJ: "Fed's Easing Yields a Hidden Benefit:"

"The Federal Reserve has been explicit about why it has been holding short-term interest rates near zero and has purchased $2.5 trillion in Treasury and government-backed mortgage bonds to push long-term rates to once-unimaginable lows: Not only does it hope cheap money will make borrowing and spending more attractive to businesses and consumers. It also wants to chase investors out of super-safe U.S. Treasurys and mortgages and into stocks, corporate bonds and other assets riskier than Treasurys. Boosting those prices, the central bank figures, will make households richer, increase the value of collateral that banks hold against loans and encourage executives -- always happier when stock prices are rising -- to invest. Chairman Ben Bernanke and his allies at the Fed think all this is working as they had hoped, though they caution regularly that it isn't enough to resuscitate the U.S. economy nor is it without risks."

History will not be kind.


For the Week:

The S&P500 gained 0.5% (up 12.6% y-t-d), and the Dow added 0.1% (up 6.6%). The broader market outperformed. The S&P 400 Mid-Caps rose 1.0% (up 13.8%), and the small cap Russell 2000 jumped 1.8% (up 10.9%). The Morgan Stanley Cyclicals increased 0.5% (up 15.3%), and the Transports rose 1.3% (up 2.0%). The Morgan Stanley Consumer index gained 0.8% (up 10.1%), and the Utilities jumped 3.7% (down 4.4%). The Banks were down 1.2% (up 23.3%), while the Broker/Dealers were up 3.8% (up 5.0%). The Nasdaq100 was up 1.5% (up 17.6%), and the Morgan Stanley High Tech index gained 0.7% (up 12.6%). The Semiconductors rose 1.4% (up 2.7%). The InteractiveWeek Internet index jumped 1.8% (up 14.0%). The Biotechs added 0.4% (up 41.0%). With bullion down $38, the HUI gold index fell 2.7% (down 9.7%).

One-month Treasury bill rates ended the week at 11 bps and three-month bills closed at 8 bps. Two-year government yields slipped 2 bps to 0.25%. Five-year T-note yields ended the week down 7 bps to 0.62%. Ten-year yields fell 8 bps to 1.61%. Long bond yields declined 2 bps to 2.81%. Benchmark Fannie MBS yields dropped 8 bps to 2.15%. The spread between benchmark MBS and 10-year Treasury yields narrowed one to 54 bps. The implied yield on December 2013 eurodollar futures declined 3.5 bps to 0.37%. The two-year dollar swap spread was little changed at 12 bps, while the 10-year swap spread increased one to 5 bps. Corporate bond spreads were mixed. An index of investment grade bond risk was little changed at 99 bps. An index of junk bond risk declined 10 bps to 500 bps.

Debt issuance surged. Investment grade issuers this week included Chevron $4.0bn, Costco $3.5bn, Amazon $3.5bn, Healthcare REIT $1.2bn, Walt Disney $3.0bn, Murphy Oil $1.5bn, CVS Caremark $1.25bn, McKesson $900 million, Apache $2.0bn, Cox Communications $1.5bn, Raytheon $1.1bn, Swiss RE $750 million, Dun & Bradstreet $750 million, and Carnival Corp $500 million, Memorial Sloan $400 million, Newell Rubbermaid $350 million, American Electrical Power $850 million, Alabama Power $350 million, Wisconsin Public Service $300 million, Oglethorpe Power $250 million, and Entergy $200 million.

Junk bond funds saw inflows of $264 million (from Lipper). Junk issuers included Clean Harbors $600 million, US Air $550 million, Inergy $500 million, Ally Financial $500 million, Alere $450 million, Meritor $250 million and Syncreon Global $100 million.

I saw no convertible debt issued.

International dollar bond issuers included Rosneft Oil $3.0bn, Royal Bank of Scotland $2.25bn, Royal Bank of Canada $1.5bn, Mongolia $1.5bn, ING Bank $1.5bn, Cencosud $1.2bn, Yapi Ve Kredi Bankasi $1.0bn, Development Bank of Kaza $1.0bn, Export Development Canada $1.0bn, Uruguay $850 million, Corp Financi De Desarrol $500 million, Grupo Kuo SAB $350 million, Ethiopian Leasing $275 million, Grupo Posadas $250 million and CFR International $300 million.

Spain's 10-year yields sank 29 bps to 5.28% (up 24bps y-t-d). Italian 10-yr yields fell 25 bps to 4.49% (down 254bps). German bund yields declined 5 bps to 1.38% (down 44bps), and French yields fell 11 bps to 2.04% (down 110bps). The French to German 10-year bond spread narrowed 6 bps to 66 bps. Ten-year Portuguese yields sank 25 bps to 7.44% (down 533bps). The new Greek 10-year note yield fell 30 bps to 15.84%. U.K. 10-year gilt yields declined 7 bps to 1.77% (down 20bps). Irish yields added a basis point to 4.36% (down 390bps).

The German DAX equities index rose 1.3% (up 25.6% y-t-d). Spain's IBEX 35 equities index increased 0.3% for the week (down 7.4%). Italy's FTSE MIB gained 1.1% (up 4.8%). Japanese 10-year "JGB" yields fell 3 to 0.70% (down 28bps). Japan's Nikkei gained 0.9% (up 11.7%). Emerging markets were mixed. Brazil's Bovespa equities index slipped 0.2% (up 1.3%), and Mexico's Bolsa rose dipped 0.2% (up 12.8%). South Korea's Kospi index gained 1.1% (up 5.9%). India's Sensex equities index surged 4.3% (up 25.1%). China's Shanghai Exchange fell 2.3% (down 10.0%).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.32% (down 68bps y-o-y). Fifteen-year fixed rates also added one basis point to 2.64% (down 66bps). One-year ARM rates were unchanged at 2.56% (down 22bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 2 bps to 4.05% (down 60 bps).

Federal Reserve Credit added $1.8bn to an 18-week high $2.841 TN, with a one-year gain of $47.9bn, or 1.7%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $617bn y-o-y, or 6.0% to a record $10.831 TN. Over two years, reserves were $1.782 TN higher, for 20% growth.

M2 (narrow) "money" supply was down $19.3bn to $10.250 TN. "Narrow money" has expanded 7.1% annualized year-to-date and was up 6.8% from a year ago. For the week, Currency increased $1.2bn. Demand and Checkable Deposits rose $20.1bn, while Savings Deposits sank $41.0bn. Small Denominated Deposits declined $2.0bn. Retail Money Funds increased $2.1bn.

Money market fund assets rose $10.1bn to $2.612 TN. Money Fund assets have declined $83bn y-t-d, with a one-year decline of $41bn, or 1.5%.

Total Commercial Paper outstanding jumped $27.7bn to a 12-week high $1.026 TN CP was up $66bn y-t-d and $23bn over the past year, or 2.3%.

Currency Watch:

November 27 - Bloomberg (Cynthia Kim and Jiyeun Lee): "South Korea tightened limits on the amount of currency forward positions banks are allowed to hold as won gains threaten exports. Authorities will cap transactions at branches of overseas lenders at 150% of equity, compared with 200% currently..."

The U.S. dollar index was little changed at 80.15 (unchanged y-t-d). For the week on the upside, the South Korean won increased 0.3%, the Taiwanese dollar 0.3%, the Singapore dollar 0.2%, and the euro 0.1%. For the week on the downside, the Brazilian real declined 2.6%, the Swedish krona 0.6%, the New Zealand dollar 0.4%, the South African rand 0.4%, the Australian dollar 0.3%, the Norwegian krone 0.2%, the Canadian dollar 0.2%, the Japanese yen 0.1% and the British pound 0.1%.

Commodities Watch:

November 27 - Bloomberg (Jeff Wilson): "The states of Kansas, Oklahoma and Nebraska had their driest May-to-October period in at least 118 years, increasing stress on winter-wheat crops planted during the last two months, according to T-Storm Weather LLC. Rainfall in the three states, which produced 59% of U.S. hard, red winter wheat last year, was 8.6 inches (22 centimeters) below the average since records began in 1895, Mike Tannura, T-Storm's president, said... That's worse than the dry spells in 1952, 1956, 1934 and 1939. The six months ending Nov. 30 also are set to be the driest for that period, and the drought probably will expand, Tannura said."

The CRB index was unchanged this week (down 2.1% y-t-d). The Goldman Sachs Commodities Index was little changed (up 0.8%). Spot Gold dropped 2.2% to $1,715 (up 9.7%). Silver fell 2.7% to $33.28 (up 19.2%). January Crude increased 63 cents to $88.91 (down 10%). January Gasoline added 0.4% (up 3%), while December Natural Gas sank 11.7% (up 19%). March Copper rallied 3.1% (up 6%). December Wheat slipped 0.4% (up 29%), while December Corn added 0.3% (up 16%).

Fiscal Cliff Watch:

November 30 - Bloomberg (Roxana Tiron and Margaret Talev): "House Speaker John Boehner said budget talks are at a 'stalemate' and that the Obama administration's tax-and-spending offer yesterday wasn't a 'serious' proposal. 'Right now we're almost nowhere,' Boehner, an Ohio Republican, told reporters... Less than an hour earlier, President Barack Obama warned of "prolonged negotiations" ahead on how to avoid more than $600 billion in spending cuts and tax increases, known as the fiscal cliff, scheduled to begin in January."

November 30 - Bloomberg (Margaret Talev and Roxana Tiron): "President Barack Obama and House Speaker John Boehner stood their ground with opposing plans to avert the fiscal cliff and warned there was no quick path to a solution. 'In Washington, nothing's easy so there's going to be some prolonged negotiations,' Obama said today from the floor of a toy factory in Hatfield, Pennsylvania. 'There's a stalemate, let's not kid ourselves,' Boehner said less than 30 minutes later during a news conference at the Capitol in Washington."

Global Bubble Watch:

November 30 - Bloomberg (Sarika Gangar): "Corporate bond sales in the U.S. capped the busiest November on record as issuance climbed to $45 billion this week, while relative yields narrowed as companies sought to lock in borrowing costs at almost unprecedented lows... Sales of at least $165.1 billion this month topped the previous November record of $124.7 billion set in 2006..."

November 27 - Bloomberg (Shobhana Chandra): "Consumer confidence rose in November to the highest level in more than four years, a sign U.S. household spending will keep growing."

November 29 - Wall Street Journal (Jon Hilsenrath): "Three months after launching an aggressive push to restart the lumbering U.S. economy, Federal Reserve officials are nearing a decision to continue those efforts into 2013 as the U.S. faces threats from the fiscal cliff at home and fragile economies elsewhere in the world... Central bank officials face critical decisions at their next policy meeting Dec. 11-12. The most pressing is whether to move forward with bond-buying programs in which the Fed is accumulating immense stockpiles of long-term mortgage-backed securities and Treasury bonds. The bond-purchase programs are meant to drive down borrowing costs, and in turn boost the prices of assets like stocks and homes, and stimulate hiring, spending and investment."

November 29 - Bloomberg (Caroline Salas Gage): "Federal Reserve Bank of New York President William C. Dudley said he is weighing 'unacceptably high' joblessness as he considers whether the central bank should increase its asset purchases."

November 29 - Dow Jones (Michael S. Derby): "The U.S. economy is likely to take a modest and ultimately transitory near-term hit from Hurricane Sandy, a key Federal Reserve official said... in remarks reiterating his continued support for central bank stimulus to aid an economy that's growing too slowly. 'The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course' when it comes to pursuing a monetary stance aimed at promoting growth, Federal Reserve Bank of New York President William Dudley said."

November 27 - Bloomberg (Aki Ito and Eric Lam): "Federal Reserve Bank of Chicago President Charles Evans said the central bank should keep interest rates near zero until unemployment falls to 6.5% or below as long as inflation is under 2.5%... Evans previously had proposed 7% for the jobless rate and 3% for inflation. 'I now think the 7% threshold is too conservative,' Evans said... 'We have the ability to go even further in reassuring financial markets and the general public that policy will stay appropriately accommodative and that such steps would provide the stimulus to growth...' It's important to maintain the current pace of bond purchases -- with $40 billion in mortgage-backed securities and $45 billion in longer-term government debt -- even after the expiration of Operation Twist, Evans added..."

Global Credit Watch:

November 27 - New York Times (James Kanter): "Finance ministers from the euro zone and the International Monetary Fund bridged their main differences over a bailout for Greece early Tuesday, bringing closer the release of long-delayed emergency aid. But what they left undecided in their 12-hour meeting means this long-running Greek drama -- and the cohesion of the euro currency union -- is far from settled. The deal allows Greece to avoid an imminent default on its debts and diminishes the prospect of a Greek exit from the euro union. But analysts said Greece could still be forced eventually to leave the euro, largely because the agreement would do little to revive its stricken economy or wean the government from the need for outside financial aid for years to come."

November 30 - Bloomberg (Craig Stirling): "The European Stability Mechanism and European Financial Stability Facility were downgraded by Moody's..., which cited a high correlation in credit risk present among the entities' largest financial supporters. The ESM was cut to Aa1 from Aaa, while the EFSF provisional rating was lowered to (P)Aa1 from (P)Aaa. Moody's said... it would maintain a negative outlook on each. The EFSF has about 161.8 billion euros ($210.1bn) of bonds outstanding... The move follows downgrades of the EFSF's second-biggest contributor after France lost its top grade at Moody's and Standard and Poor's this year."

November 29 - Bloomberg (Angeline Benoit): "Spain's regions are adding to pressure on Prime Minister Mariano Rajoy to seek a European bailout as the funding needs of the country's cash-strapped states swamp government expectations. Nine of the 17 states have already requested support worth 93% of Spain's 18 billion-euro ($23bn) regional rescue fund... While the 10-year Spanish bond yield has fallen 251 bps from a euro-era record of 7.75% on July 25, most of the states remain shut out of markets, forcing the government to weigh the cost of extending the rescue facility for another year."

November 27 - MarketNews International: "The European Financial Stability Facility (EFSF) said... it will launch a new 1-year bond in the 'near future' as an alternative to the 3-year bond it was forced to postpone last week after Moody's downgrade of France left the EFSF statutorily unable to issue longer-term paper.'"

Spain Watch:

November 27 - UK Telegraph (Fiona Govan): "Catalans set their region on the road to independence last Sunday, electing pro-separatist parties that will push for a referendum on breaking away from Spain. Artur Mas, the incumbent regional president, secured a second term, and with it a mandate to seek secession from Spain in defiance of Prime Minister Mariano Rajoy. But his centre-Right Convergence and Union (CIU) party fell short of an absolute majority, winning only 50 of the 62 seats they secured in the 135-seat assembly at the last election two years ago. The separatist Left-wing ERC party, which also strongly supports self-rule, doubled its share of the vote, securing 21 seats, however. Two smaller parties that also back a referendum secured at least 15 seats between them."

November 30 - Bloomberg (Angeline Benoit): "Spanish inflation slowed in November for the first time in five months, even as the headline rate remained above the government's forecast, presenting a pension bill that risks undermining budget targets. Consumer prices... rose 3% from a year earlier compared with 3.5% in October..."

Germany Watch:

November 28 - Bloomberg (Brian Parkin and Patrick Donahue): "German Finance Minister Wolfgang Schaeuble signaled that Greece may need additional help as the country's most-read newspaper slammed a rescue accord as a 'never-ending story' financed by German taxpayers. Euro-area governments may provide additional funding through the European Union structural fund and further interest-payment reduction..., Schaeuble wrote in a letter to German lawmakers... They may confront increased public resistance as Bild- Zeitung, a tabloid that's called in the past for Greece's exit from the currency union, pilloried yesterday's late-night agreement in Brussels to ease terms on emergency aid for Greece. 'The Greek patient is beyond help,' Bild said..., adding that the ever-rising costs were falling on German taxpayers. 'One hardly needs to imagine the worst scenario: the patient dies, the paramedic goes bust.'"

November 29 - Bloomberg (Joseph de Weck): "German unemployment climbed for an eighth straight month in November as Europe's debt crisis curbed company investment and economic growth... The adjusted jobless rate held at 6.9%."

China Bubble Watch:

November 29 - Bloomberg: "A Chinese village official accused of accumulating personal assets of more than 2 billion yuan ($321 million) denied online reports that he had some 80 homes and 20 cars, the official Xinhua News Agency said. 'Among the eight properties that were made public online, five to six are mine,' Zhou Weisi said... He acknowledged that he has more than 10 cars, including Porsche, BMW and Mercedes-Benz vehicles."

November 27 - Bloomberg (Ye Xie, Tom Keene and Stephanie Ruhle): "Carson Block, founder of Muddy Waters LLC, said he's lost interest in betting against Chinese stocks and speculates the government is protecting fraudulent companies. 'China has gotten harder in the sense that the government has really taken the side of the fraud,' Block said... 'The government is working with a number of these companies to try to conceal records that are public. When you are up against that sort of strength of the ability to revise history, it becomes difficult. That is one of the reasons we're not that interested in China anymore.'"

November 27 - Bloomberg (Kelvin Wong and Stephanie Tong): "Investors reacting to the Hong Kong government's campaign to curb home buying in the world's most expensive market are shifting money into parking spaces, pushing up prices that in high-end neighborhoods can match the cost of two U.S. homes. The average price of a previously owned parking spot in residential complexes rose 6.7% to HK$640,000 ($82,600) in the third quarter... from the prior three months... A space in the exclusive Repulse Bay area sold in May for HK$3 million ($387,000), the most for a single transaction and more than double the median U.S. home price..."

India Watch:

November 30 - Bloomberg (Unni Krishnan and Tushar Dhara): "Indian expansion slowed last quarter to match a three-year low as growth in domestic spending and exports moderated... Gross domestic product rose 5.3% in the three months... from a year earlier... down from 5.5% in the previous quarter..."

November 26 - Bloomberg (Kartik Goyal, Pradipta Mukherjee and Jeanette Rodrigues): "Indian officials pledged to cut the widest budget deficit among the world's largest emerging markets and curb public debt... The government is 'optimistic' it will rein in the shortfall for the year through March 31 to 5.3% of gross domestic product from the previous year's 5.8%..."

Latin America Watch:

November 30 - Bloomberg (David Biller): "Brazil's economy expanded in the third quarter at half the pace forecast by economists, as government stimulus efforts fail to revive investment that fell for the fifth straight period... Gross domestic product grew 0.6% in the third quarter... That was less than the forecasts of all 54 economists surveyed by Bloomberg..."

European Economy Watch:

November 27 - Bloomberg (Helene Fouquet): "French Industry Minister Arnaud Montebourg sparked a furor by calling for the nationalization of a troubled local unit of ArcelorMittal, the world's largest steelmaker. ArcelorMittal Chief Executive Officer Lakshmi Mittal meets today with French President Francois Hollande after Montebourg told Les Echos yesterday that 'we don't want Mittal in France anymore.' Montebourg accused the Indian CEO of going back on his word to protect jobs and said the company's Florange site in north-eastern France should be under temporary state control."

November 27 - Bloomberg (Mark Deen): "French jobless claims jumped to a 14-year high as a stalled economy prompted companies to trim payrolls and investment. The number of people actively looking for work rose by 45,400, or 1.5%, to 3.103 million, the Labor Ministry said..."

November 29 - Dow Jones: "Net lending to Greek businesses and households in October shrank 4.8% on the year, as demand for bank loans continued to slide... The decline was slightly bigger than the 4.5% drop recorded in September."

November 27 - Bloomberg (Johan Carlstrom): "Swedish consumer confidence fell for a fourth month in November as exporters cut jobs amid deteriorating demand from crisis-riddled Europe."

U.S. Bubble Economy Watch:

November 28 - Wall Street Journal (Josh Mitchell): "The federal lending program designed to make college education available to everyone is creating a pile of debt so large it is fanning worries that it has become too easy to borrow too much. U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion in the third quarter... Overall household borrowing fell during that period. Payments on 11% of student-loan balances were 90 or more days behind at the end of September, up from 8.9% at the end of June, a rate that now exceeds that for credit cards... Nearly all student loans -- 93% of them last year -- are made directly by the government, which asks little or nothing about borrowers' ability to repay, or about what sort of education they intend to pursue."

November 27 - Bloomberg (Angela Greiling Keane): "While the Hostess Twinkie may not be as central to the U.S. economy as the mail, Postmaster General Patrick Donahoe sees uncomfortable parallels of iconic products within unworkable organizational structures. 'Companies and industries have gone over their own fiscal cliff because they can't sit down and work out their differences,' Donahoe said... 'Like Hostess.' Like Hostess Brands Inc., where a labor impasse prompted the snack-food maker's liquidation, the Postal Service, with 28 times Hostess's workforce of 18,000, has been squeezed by labor costs and changing consumer tastes to the brink of extinction."

November 29 - Bloomberg (Chris Christoff): "Detroit had its bond ratings cut deeper into noninvestment-grade territory by Moody's..., citing a cash crisis that may mean bankruptcy or default in the next 12 to 24 months."

November 27 - Bloomberg (Michelle Jamrisko): "Home prices rose in the year ended in September by the most since July 2010, showing the recovery in the U.S. real estate market is a source of strength for the economy. The S&P/Case-Shiller index of property values in 20 cities climbed 3% from September 2011..."

November 30 - Bloomberg (Christopher Palmeri and Mary Jane Credeur): "California ports handling about a third of U.S. container shipments were largely closed because of a strike, stranding vessels carrying last-minute cargos for the holiday-shopping season. Seven of eight terminals at the Port of Los Angeles are shut, Phillip Sanfield, a spokesman for the... facility, said... At the adjacent Port of Long Beach, three of six are closed... Longshoremen and clerical workers walked out Nov. 27 amid an impasse in contract talks."

November 27 - United Press International: "Erosion caused by Hurricane Sandy eroded 30 years worth of sand at beaches in parts of New York, the U.S. Geological Survey found. The USGS conducted surveys of the Fire Island National Seashore along Long Island using light detection and ranging lasers to examine elevation changes in dunes."

Central Bank Watch:

November 27 - MarketNews International: "The U.S. Federal Reserve should clarify what it is seeking to achieve and its limitations in doing so, Richard Fisher, President of the Federal reserve Bank of Dallas, said... Speaking to journalists on the margins of a speaking engagement in the German capital, Fisher said, 'I think it's time for us to make clear what our objectives and limits are.... There are two ways to do so. One is to state that we will continue to conduct policy along the current line until we have achieved certain markers...as long as inflation expectations remain contained.' One option would be to define explicitly not just the long-term inflation target, but an unemployment target, he said. "I do believe that would be very difficult to do, but it is one option," he said. Another possibility, he said, is for monetary authorities to explain that 'we're willing to expand our balance sheet up to x and buy y more in securities and that is the limit.' 'There is no such thing as 'QE infinity',' he said. 'The question is, 'What is the limit?' And I think it would be healthy at this juncture to provide' such guidance. Asked about the likelihood of this happening, he replied, 'My preference would be to do it in December...but I'll see how my colleagues feel.' ...Fisher made clear his opposition to Operation Twist, the Federal Reserve initiative to stimulate the economy by buying longer-term Treasuries while selling previously held shorter-dated issues so as to lower long-term interest rates. 'I am not in favor of extending Operation Twist and I was not in favor of Operation Twist to begin with,' he declared. Fisher also questioned the Fed's MBS purchase program. 'I doubt the efficacy of mortgage-backed security purchases,' he said."

November 27 - Bloomberg (Stefan Riecher and Aki Ito): "Federal Reserve Bank of Dallas President Richard Fisher said he advocates putting limits on U.S. quantitative easing. The Fed could announce 'a limit as to how much we are going to acquire of treasuries and mortgage-backed securities, say up to a limit of X, up to a point where our balance sheet reaches that,' Fisher said... 'It is my personal preference to do it sooner than later, perhaps at the next meeting.' Fed officials plan to meet Dec. 11-12 to assess whether record accommodation is fueling economic growth and reducing 7.9% unemployment, and to debate whether to extend the Operation Twist stimulus plan, which expires next month. Fisher, who doesn't vote on policy this year, has been among the most vocal Fed officials against more easing. Fisher said there are lessons to be drawn from Germany's experience of hyperinflation during the 1920s. While today's situation is different and he wasn't suggesting accommodative monetary policies would lead to inflation, Fisher said they can't be left in place forever. 'There is no such thing as QE infinity,' he said. 'QE infinity gets you into trouble.'"

November 28 - Bloomberg (Simon Kennedy and Paul Badertscher): "Mark Carney may be more willing to look further into the future than Mervyn King. As Carney prepares to take control of the Bank of England, former central bank economists say his five years atop the Bank of Canada suggest he will be more inventive and open than the current governor in outlining plans to spur the U.K. recovery. Although King pursues quantitative easing, the Bank of England rejects a Canadian crisis-fighting strategy -- later adopted by Federal Reserve Chairman Ben S. Bernanke -- of specifying how long interest rates will remain low.


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