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How Crazy?

I posed a rhetorical question in my "Issues 2013" piece: "How crazy do things get?" Granted, it's only been 13 trading sessions. But early Indications of "Crazy" abound.

The S&P Homebuilding index already enjoys a 2013 gain of 10.2%, with recent strength pushing the index's one-year advance to 90.8%. The Dow Jones Transports have posted a 7.3% y-t-d advance, and the Morgan Stanley Cyclical index has jumped 6.2%. Economically-sensitive stocks are out of the blocks quickly, as are financials. The NYSE Securities Broker/Dealer index ("XBD") has risen 6.4%. The KWB Bank ("BKX") index has gained 4.3%. The Nasdaq Financial index sports a 5.7% 13-session advance. And while Apple and a few key stocks have weighed on some technology indices, most tech stocks have performed quite well. The Philadelphia Semiconductor ("SOX") has a 2013 gain of 6.9%. The Nasdaq Telcom index has jumped 5.6%, and the Interactive Week Internet ("IIX") Index has gained 4.9%.

Overall, market strength has been notably broad-based. The S&P400 Midcap index has gained 5.2% and the small cap Russell 2000 has risen 5.1% - both ending the week at all-time record highs. The Value Line (arithmetic) Index (equally-weighted, average price change for the index's 1650 stocks) stands at 5.26% after only 13 sessions. The VIX Index (expectations for market volatility/risk) fell Friday to the lowest level since April 2007. The S&P500 ended the week at the high since December 2007 and now trades only about 5% below its all-time high.

Equity fund inflows have commenced 2013 at the strongest pace in recent memory. The "equities always outperform over the long-run" crowd again play prominently on the airways. Market watchers will closely monitor developments to see if 2013 finds the retail investor jumping aboard the equities bandwagon. And while Treasury and MBS prices have been under modest pressure, there is no indication that the corporate debt Bubble is in jeopardy. Flows into the "bond" fund complex have remained strong. Debt issuance this week was super strong. Financial conditions? Couldn't be looser.

I appreciated a Friday Forbes headline: "The World's Bubble Economy Getting Bubblier." An important part of my thesis holds that current Bubble manifestations increasingly permeate throughout the asset markets - financial and real. Evidence is mounting that select U.S. real estate markets have begun overheating. From Bloomberg, "San Francisco Bay Area Home Prices Surge Most Since at Least '88," with median prices up 32% year-over-year. From the Los Angeles Times: "December Home Prices Jump 19.6% in Southern California." Eye-opening data are not limited the Golden State. From Bloomberg, "Brooklyn Home Prices Jump Most Since '06 as Supply Drops."

There's clearly a "mix issue" at work, with a jump in upper-end transactions skewing median price data. Yet it's also apparent that there are, not surprisingly, indications of mounting housing market excesses. Indeed, the Fed's determination to reflate housing markets generally has reflated Bubbles particularly in "upper-end" markets across the country.

The monetary policy-induced housing recovery is at this stage poised to boost both the economy and the Credit system. At 954,000, December Housing Starts were much higher-than-expected (890k) and ended 2012 at the strongest level since June '08. So long as financial conditions remain ultra-loose, 2013 should see the first increase in Total Mortgage Credit since 2008. "Fitch: Strong Starts a Sign That U.S. Housing Now Firing On Most Cylinders."

I have argued against "New Normal" analysis. I have referred to deleveraging as largely a myth. I've theorized "Bubble, Bubble, and more Bubble" - and have seen confirmation and more confirmation of this thesis. It's almost indisputable that the system is now deeply into a re-leveraging cycle. Five years of unprecedented reflationary policymaking have spurred rejuvenated "animal spirits" throughout the markets and, increasingly, in parts of the real economy. As I attempted to explain last week, Fed monetary policy has become dangerously misaligned with today's robust Bubble Dynamics.

The Bubble topic was somewhat topical this week. Bloomberg examined the situation in a story headlined "Fed Concerned About Overheated Markets Amid Record Bond Buys." Clearly, though, members of the dove camp are not about to fold up tents. Boston Fed President Rosengren, in response to a Bloomberg TV interview question, stated that he doesn't believe Fed policy is creating Bubbles: "So we certainly should be looking for asset bubble issues. We're looking to see if there are any macroeconomic impacts. If we were seeing prices rising too rapidly in some sectors, the first question I'd ask is, 'should we have a supervisory response rather than macroeconomic response?' Even if a macroeconomic response was required, I think we'd have to see much more movement in asset prices than what we've seen to date. I'm really not seeing much evidence that we're having asset bubbles in any particular markets."

Chairman Bernanke was this week (Univ. of Michigan) also hit with The Bubble Question, responding along the same lines of Rosengren:

"Well, asset bubbles have been - they're very, very difficult to anticipate, obviously. But we can do some things. First of all, we can try to strengthen our financial system, say by... increasing the amount of capital liquidity the banks hold, but improving the supervision of those banks, by making sure that every important financial institution is supervised by somebody. There were some very important ones during the crisis that essentially had no effective supervision. So, you make the system stronger. Then if a bubble or some other financial problem emerges, the system will be able to be more resilient. It will be better able to survive the problem. Now, you can try to identify bubbles. And I think there's been a lot of research on that, a lot of thinking about that. We have created a council called the Financial Stability Oversight Council, the FSOC, which is made up of 10 regulators and chaired by the Secretary of the Treasury, one of whose responsibilities is to monitor the financial system as the Fed also does, and also to identify problems that emerge. So, you're not going to identify every possible problem for sure, but you can do your best and try to make sure the system is strong. And when you identify problems... the first line of defense needs to be regulatory and supervisory authorities... not only the Fed, but other organizations like the OCC, the FDIC and so on have as well. So, you can address these problems using regulatory and supervisory authorities.

Now, having said all that... there's a lot of disagreement about what role monetary policy plays in creating asset bubbles. It's not a settled issue. There are some people who think that it's an important source of asset bubbles, others who think it's not. Our attitude is that we need to be open-minded about it and to pay close attention to what's happening. And to the extent that we can identify problems... we need to address that. The Federal Reserve was created about 100 years ago now - in 1913. It was the law. Not a new monetary policy, but rather to address financial panics. And that's what we did for us in 2008 and 2009. And it's a difficult task. But I think going forward the Fed needs to think about financial stability and monetary economic stability as being in some sense the two key pillars of what the central bank tries to do. And so we will obviously be working very hard on our financial stability. We'll be using our regulatory supervisory powers. We'll be trying to strengthen the financial system. And if necessary, we'll adjust monetary policy as well. But I don't think that's the first line of defense."

Last week, I delved a little deeper into the thesis that the current Bubble phase is uniquely precarious, specifically because Bubble effects have turned so systemic and, ironically, also much less conspicuous. I was reminded by Bernanke's comments that I had failed to address a key analytical point: the government finance Bubble these days inflates largely outside of the private lending markets - outside the purview of traditional bank supervision and regulation. And while I would contend that the Fed remains uninformed in the nature of Bubble Dynamics, it is also clear that when it comes to Bubbles the Fed is at best fighting the last war.

From my point of view, the Federal Reserve System has essentially made no progress on the Bubble issue. Largely absolving responsibility, the Fed explains the "housing Bubble" as predominantly a failure in mortgage lending supervision and regulation. There is no recognition that Fed monetary policy had a profound impact on the pricing and trading of mortgage-related debt instruments - and that accommodation of a securities market speculative Bubble was a prevailing force behind the mortgage finance Bubble episode. There has been no recognition of the profound role the Fed plays in distorting risk perceptions throughout the marketplace, in the process encouraging leveraged speculation. There is no appreciation for how "activist" monetary policy has so impacted incentives throughout the securities markets and financial industry overall.

Apparently, the Bernanke Fed fails to recognize that its policies to this day foment even greater market distortions and Bubble excesses. And, clearly, "supervision and regulation" have not - and will not - protect the system from market-based excesses, whether it be over-issuance of suspect marketable debt instruments, speculative excess or destabilizing financial leveraging. Where are the supervisory and regulatory frameworks working to restrain the unprecedented issuance of federal debt? How about the hedge fund industry or leveraged speculation more generally? In general, where is the apparatus today working to restrain excess throughout global risk markets? The answer should be sound and properly functioning market pricing systems - markets that would boost yields (lower demand/prices) for over-issued non-productive debt. Chiefly because of Fed and global monetary policies, the world's securities market pricing systems have been rendered largely dysfunctional.

While Q4 data won't be available for a couple months, I expect total U.S. non-financial debt to have expanded about $1.60 TN in 2012. This would be up from 2011's $1.35 TN, the strongest Credit expansion since 2008's $1.9 TN. I don't think it's a completely crazy notion that, if the current Bubble is sustained, total Credit growth could surprise on the upside in 2013 - perhaps even approaching $2.0 TN. And considering what I suspect has been unfolding in the bowels of securities financing/leveraging, I can confidently posit the "System Re-leveraging" thesis. Recall that in responding to the 2008 crisis, policymakers enjoyed the capacity to aggressively reflate systems through the massive issue of government debt, aggressive use of government guarantees, and the unprecedented reliance on central bank monetization ("money printing").

I contend that this Re-Leveraging/Bubble cycle poses extreme system risk. Importantly, fiscal and monetary excess are instrumental to the current Credit inflation (the boom cycle). This ensures that excesses are more systemic, while creating the potential for the scope of excesses to surpass those of previous Bubble periods. From my analytical perspective, this greatly increases the likelihood of a very problematic future bust and attendant crisis of confidence. And if this future crisis is accompanied - as I would expect - with a crisis of confidence in government debt and the efficacy of monetary stimulus measures, the world would immediately face a grave situation. But I get ahead of myself.

Question to the Fed chairman at the University of Michigan: "...You came to your position with a real expertise as one of the world's experts on the Great Depression and how policymakers should react in the midst of a crisis. Now that you have actually lived through a major global crisis, I wonder if you could tell us what surprised you most?"

Chairman Bernanke: "The crisis. I was very engaged, very interested in financial crises as an academic. I worked on the Great Depression. I did theoretical work on the role of financial crises in macroeconomy, and I was very interested when I came to the Fed in addressing issues related to potential crises. But obviously this was a very large and complex crisis that was more severe than I anticipated certainly... I think it would be fair to say that most people anticipated. But we did learn some things from history. And I think there's a lot of value to studying history, particularly from our perspective economic history, because it helps you see what your predecessors did wrong and did right. Two things we learned from the Great Depression. One was not to let monetary policy get too tight. In the 30s, the Federal Reserve did not actively try to expand monetary policy accommodation. And as a result, there was a deflation of about 10% a year. Deflation, falling prices. Very damaging. The Fed also did not do very much in the 30s to try to stabilize the banking system, which about a third of all the banks in the country failed. So those were two lessons that we really tried to learn from. We of course have been discussing very aggressive on the monetary policy side, and we took strong actions to try to stabilize our financial system because we understood that if the financial system collapses then the economy is likely to collapse as well. So we took those actions learning from what had happened in the 30s. A couple of other things I think that were useful. During the 30s, in part because obviously the world was still recovering from World War I, there was a lot of international enmity. Cooperation among central banks, among governments was not very good. In fact, you may know - your audience may know - about the Smoot-Hawley tariff and the tariff wars and all the other things that happened during the 30s."

Noland comment: "The current U.S. and global current backdrop is regrettably more late-1920's than 1930's. Repeatedly, policymakers' ill-advised aggressive "post-Bubble" ("Keynesian") policy measures have unwittingly worked to perpetuate history's greatest Credit Bubble and financial mania. With the eventual bursting of today's global Bubble, there will surely be ample "international enmity." Cooperation and coordination will not be so abundant. In general, policy solutions and flexibility will be in depressingly short supply. Policy doctrine - actually, economic analysis in general - will be discredited. And today's unfolding battle in support of free market capitalism will seem like a trivial little skirmish. But, once again, I get somewhat ahead of developments."


For the Week:

The S&P500 rose 1.0% (up 4.2% y-t-d), and the Dow gained 1.2% (up 4.2%). The S&P 400 Mid-Caps increased 1.5% (up 5.2%), and the small cap Russell 2000 gained 1.4% (up 5.1%). The Morgan Stanley Cyclicals jumped 1.9% (up 6.1%), and the Transports gained 2.2% (up 7.3%). The Morgan Stanley Consumer index rose 2.1% (up 4.9%), and the Utilities added 0.7% (up 1.9%). The Banks were up 0.6% (up 4.3%), and the Broker/Dealers were 2.2% higher (up 6.4%). The S&P 400 Mid-Caps increased 1.5% (up 5.2%), and the small cap Russell 2000 gained 1.4% (up 5.1%). The Nasdaq100 was down 0.2% (up 3.1%), while the Morgan Stanley High Tech index rose 0.9% (up 5.0%). The Semiconductors surged 1.9% (up 6.9%). The InteractiveWeek Internet index gained 0.8% (up 4.9%). The Biotechs rose 1.5% (up 7.5%). Although bullion rallied $22, the HUI gold index fell 0.7% (down 3.2%).

One-month Treasury bill rates ended the week at 3 bps and 3-month rates closed at 7 bps. Two-year government yields were unchanged at 0.25%. Five-year T-note yields ended the week down 2 bps to 0.76%. Ten-year yields fell 3 bps to 1.84%. Long bond yields declined 2 bps to 3.03%. Benchmark Fannie MBS yields increased 5 bps to 2.35%. The spread between benchmark MBS and 10-year Treasury yields widened 7 to 51 bps. The implied yield on December 2014 eurodollar futures was little changed at 0.585%. The two-year dollar swap spread increased a basis point to 14.5 bps, and the 10-year swap spread increased 2 to 5 bps. Corporate bond spreads were mixed. An index of investment grade bond risk was unchanged at 87 bps. An index of junk bond risk declined 5 to 439 bps.

Debt issuance was quite strong. Investment grade issuers included Goldman Sachs $7.25bn, JPMorgan Chase $6.4bn, Freddie Mac $5.5bn, Conagra $4.0bn, Anheuser-Busch $4.0bn, Zoetis $2.3bn, Energy Transfer Partners $1.25bn, Penske Truck Leasing $1.0bn, Jefferies Group $1.0bn, John Deere $500 million, Carlyle Holdings $500 million, Pacific Lifecorp $500 million, and Toyota Motor Credit $300 million.

Junk bond funds saw inflows of $571 million. Junk issuers included Hexion $1.1bn, TPC Group $755 million, US Coat $750 million, Eagle Spinco $690 million, Gencorp $460 million, Georgia Gulf $450 million, Atlas Energy $275 million, Clearwater Paper $275 million, Brocade Communications $300 million, Regal Entertainment $250 million, Zachry Holdings $250 million, Wells Enterprises $235 million, Interface Security Systems $230 million, Gibraltar Steel $210 million, Oxford Finance $200 million, and Suncoke Energy $150 million.

Convertible debt issuers included Pacira Pharmaceuticals $110 million.

International issuers included National Australia Bank $2.25bn, InterAmerican Development Bank $2.0bn, Bank Nederlandse Gemeenten $1.5bn, ABN Amro Bank $1.0bn, Ardagh $1.07bn, Korea Development Bank $1.0bn, African Development Bank $1.0bn, Thai Oil $1.0bn, Minerva $850 million, Canada Imperial Bank $750 million, Marfrig Holding $600 million, Paraguay $500 million, Indio Energy $500 million, Yapi ve Kredi Bankasi $500 million, Aviation Capital Group $300 million, Tonon Bioenergia $300 million, and Royal Bank of Canada $100 million.

Spain's 10-year yields jumped 19 bps this week to 5.04% (down 15bps y-t-d). Italian 10-yr yields rose 4 bps to 4.16% (down 33bps). German bund yields declined 3 bps to 1.55% (up 25bps), and French yields dipped 2 bps to 2.12% (up 14bps). The French to German 10-year bond spread widened one to 57 bps. Ten-year Portuguese yields sank 25 bps to 6.00% (down 76bps). The new Greek 10-year note yield dropped 80 bps to 10.71%. U.K. 10-year gilt yields fell 7 bps to 2.01% (up 19bps).

The German DAX equities index slipped 0.2% for the week (up 1.2% y-t-d). Spain's IBEX 35 equities index declined 0.7% (up 5.3%). Italy's FTSE MIB added 0.3% (up 7.9%). Japanese 10-year "JGB" yields dropped 6 bps to 0.74% (down 4bps). Japan's volatile Nikkei added 1.0% (up 5.0%). Emerging markets were mostly higher. Brazil's Bovespa equities index rose 0.8% (up 1.7%), and Mexico's Bolsa gained 0.7% (up 3.5%). South Korea's Kospi index slipped 0.4% (down 0.5%). India's Sensex equities index advanced 1.9% (up 3.2%). China's Shanghai Exchange jumped 3.3% (up 2.1%).

Freddie Mac 30-year fixed mortgage rates declined 2 bps to 3.38% (down 50bps y-o-y). Fifteen-year fixed rates were unchanged at 2.66% (down 48bps). One-year ARM rates were down 3 bps to 2.57% (down 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.02% (down 50bps).

Federal Reserve Credit expanded $24.1bn to a record $2.930 TN. Fed Credit has increased $119bn in 10 weeks. Over the past year, Fed Credit expanded $25.9bn, or 0.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $748bn y-o-y, or 7.3%, to a record $10.933 TN. Over two years, reserves were $1.688 TN higher, for 18% growth.

M2 (narrow) "money" supply rose $8.8bn to a record $10.485 TN. "Narrow money" has expanded 7.4% ($727bn) over the past year. For the week, Currency increased $2.5bn. Demand and Checkable Deposits fell $19.7bn, while Savings Deposits gained $16.4bn. Small Denominated Deposits slipped $1.4bn. Retail Money Funds jumped $10.6bn.

Money market fund assets declined $15.2bn to $2.701 TN. Money Fund assets have expanded $7.6bn y-o-y, or 0.3%.

Total Commercial Paper outstanding jumped another $27.8bn to $1.133 TN CP was up a notable $169bn in 10 weeks and $165bn, or 17.0%, over the past year.

Currency Watch:

January 16 - Dow Jones (Andrey Ostroukh): "The budgetary policies of the world's central banks are leading to major global imbalances and could lead to currency wars, Russia's central bank's first deputy Chairman Alexei Ulyukayev said... 'We are on the verge of very serious and confrontational actions in the sphere, which is, not to get too emotional, called 'currency wars',' Mr. Ulyukayev said... Mr. Ulyukayev cited the recently elected Japanese government's stepped up efforts to stimulate Japan's deflation-dogged economy and talk down the yen, which has sent the currency tumbling. Quantitative easing by leading central banks including the U.S. Federal Reserve is also pressuring other major currencies like the dollar. 'This is not a way to unity of global macroeconomic regulations, but to separation, segregation, to a break-up into separate zones of influence--all the way to very strong competition, all the way to global trade and currency wars, which is indeed counterproductive,' he said."

The U.S. dollar index gained 0.6% to 80.04 (up 0.3% y-t-d). For the week on the upside, the New Zealand dollar increased 0.1%. For the week on the downside, the Swiss franc declined 2.2%, the South African rand 1.8%, the British pound 1.6%, the Norwegian krone 1.3%, the Japanese yen 1.0%, the Swedish krona 0.8%, the Canadian dollar 0.7%, the Brazilian real 0.4%, the Australian dollar 0.2%, the South Korean won 0.2%, the Singapore dollar 0.2%, the Danish krone 0.2%, the euro 0.2%, and the Mexican peso 0.1%.

Commodities Watch:

The CRB index gained 1.5% this week (up 2.1% y-t-d). The Goldman Sachs Commodities Index jumped 1.7% (up 2.2%). Spot Gold recovered 1.3% to $1,684 (up 0.5%). Silver jumped 1.5% to $31.93 (up 5.0%). February Crude rose $2.00 to $95.56 (up 4.1%). February Gasoline gained 2.1% (up 1.3%), and February Natural Gas surged 7.2% (up 6.4%). March Copper increased 0.7% (up 0.7%). March Wheat jumped 4.8% (up 1.7%), and March Corn gained 2.6% (up 4.2%).

Fiscal Watch:

January 18 - Washington Post (S. Helderman): "Under a bill to be considered next week, House Republicans will propose raising the debt ceiling for three months -- long enough, they say, to give both chambers time to pass a budget. The measure will provide that if either the Senate or the House fails to adopt a budget by April 15, members of Congress would not be paid."

Global Bubble Watch:

January 18 - Bloomberg (Leika Kihara and Tetsushi Kajimoto): "Japan's government and central bank have agreed to set 2% inflation as a new target next week, when the Bank of Japan will also consider making an open-ended commitment to buy assets until the target is in sight, sources familiar with the BOJ's thinking told Reuters."

January 14 - Bloomberg (Whitney Kisling): "Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008. Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to... Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show. The rising use of borrowed money shows that everyone from the biggest firms to individuals is willing to take more risks after missing the rewards of the bull market that began in 2009."

January 16 - Bloomberg (Michael McDonald): "Yale University, the second-wealthiest college, may increase its holdings of hedge funds after cutting them last year and shifting into cash, according to a report... Yale, whose $19.3 billion endowment is second in size only to Harvard University's, may boost hedge fund investments to 18% of its portfolio after cutting them to 14.5% in the year that ended in June, according to the report posted to the investments office website. The university also increased its target for private equity and real estate holdings."

January 16 - Bloomberg (Brian Chappatta): "Investors are pouring the most money since 2009 into U.S. municipal debt, putting the $3.7 trillion market on a pace for its longest rally versus Treasuries in three years... Investors added $1.6 billion to muni mutual funds in the week ended Jan. 9, the most since October 2009... The renewed appetite has propelled city and state debt to a 0.7% gain this month, beating a 0.4% loss for Treasuries..."

January 14 - Bloomberg (Abigail Moses): "Ardagh Group, the packaging company buying Cie. de Saint-Gobain SA's U.S. glass bottle unit, is selling the most high-yield bonds from a European issuer in two years as junk debt risk falls to an 18-month low... The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield ratings fell for a fifth day to the lowest since July 2011."

January 14 - Bloomberg (Sarah Mulholland): "What's old is new again on Wall Street as banks tap into soaring demand for commercial real estate debt by selling collateralized debt obligations, securities not seen since the last boom. Sales of CDOs linked to everything from hotels to offices and shopping malls are poised to climb to as much as $10 billion this year, about 10 times the level of 2012, according to Royal Bank of Scotland Group Plc."

January 16 - Bloomberg (Sabrina Willmer and David Carey): "Silver Lake Management LLC, the private-equity firm said to be discussing a potential buyout of computer maker Dell Inc., has raised more than $7 billion for its latest fund, according to two people briefed on the matter. The fund, which officially started gathering money in March, had raised $4.1 billion as of August, meaning Silver Lake won about $3 billion since then. Silver Lake Partners IV LP is seeking $7.5 billion, with the option of raising as much as $10 billion."

Global Credit Watch:

January 17 - Bloomberg (Julia Leite): "The market for corporate borrowing through commercial paper expanded for a 12th week as non- financial short-term IOUs rose to the highest level in four years. The seasonally adjusted amount of U.S. commercial paper advanced $27.8 billion to $1.133 trillion outstanding... That's the longest stretch of increases since the period ended July 25, 2007, and the most since the market touched $1.147 trillion on Aug. 17, 2011."

January 18 - Bloomberg (Katie Linsell): "Speculation that banks will start repaying European Central Bank loans early prompted futures traders to step up bets that borrowing costs will rise as liquidity is drained from the system. The implied rate on Euribor futures expiring in December rose as much as 18 bps over the past two days to 0.54%, the highest since July 10... That's the biggest jump since the yield started climbing in December, after a 29 basis-point drop in the preceding three months."

January 17 - Bloomberg (Jim Brunsden): "France may need to take additional measures to tackle its budget deficit, European Union Economic and Monetary Affairs Commissioner Olli Rehn said. 'Important steps have been taken which include consolidation measures aimed at bringing the deficit to 3% of GDP, measures on competitiveness to lower in particular the fiscal burden on companies and the on-going negotiation to reform the labor code,' Rehn said... 'In many cases, these reforms are still at a very early stage and additional efforts might still be needed.'"

January 17 - Bloomberg (Stefan Riecher): "Former European Central Bank Governing Council member Athanasios Orphanides said the ECB's bond-purchase plan may prompt governments to delay needed reforms. The program, dubbed Outright Monetary Transactions, has 'given governments yet another opportunity to postpone actions,' Orphanides said... 'Inadvertently, the OMT may have delayed the progress that I would have hoped to see at the end of last year.'"

China Bubble Watch:

January 18 - Bloomberg: "China's economic growth accelerated for the first time in two years as government efforts to revive demand drove a rebound in industrial output, retail sales and the housing market. Gross domestic product rose 7.9% in the fourth quarter from a year earlier..."

January 13 - Wall Street Journal: "China's local governments ramped up their efforts to borrow in 2012, raising concerns the rebound in growth in the world's No. 2 economy has come at the expense of increasing financial risks. In 2009 and 2010, China's local governments borrowed big, taking debt levels to around 10.7 trillion yuan ($1.7 trillion), as they financed a huge infrastructure stimulus... In 2011, with growth back on track, the government clamped down on local-government debt issuance. Recently released data suggest that in 2012, concern about another slowdown may have pushed up borrowing again. ...most Chinese local governments are forbidden from borrowing money directly. The creation of financial vehicles owned by local governments has provided a work-around. Bonds issued by local-government-controlled financing vehicles totaled 636.8 billion yuan in 2012, surging 148% from 2011... At the same time, loans from trusts -- a lightly regulated part of China's credit system -- made to fund infrastructure spending rose 376 billion yuan in the nine months to September, compared with a 17 billion yuan decrease in the period in 2011."

January 17 - Bloomberg (Andrea Wong and Kyoungwha Kim): "A seven-fold jump in last month's lending by China's trust companies is setting off alarm bells for regulators to guard against the risk of default. So-called trust loans rose 679% to 264 billion yuan ($42bn) from a year earlier... That accounted for 16% of aggregate financing, which includes bond and stock sales. The amount of loans in China due to mature within 12 months doubled in four years to 24.8 trillion yuan, equivalent to more than half of gross domestic product in 2011... 'Short-term financing instruments such as trust loans have been rising really quickly,' said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. 'Quite a number of companies resort to trust loans when they face financing troubles. A breakdown in this financing chain will eventually lead to a default on debt this year.' The growth in trust loans that are typically extended to higher-risk companies such as property developers or local- government investment vehicles pose a threat to banks selling wealth-management products that include such assets should insolvencies ripple through the economy, the International Monetary Fund said..."

January 14 - Bloomberg: "Beijing ordered government vehicles off the roads as part of an emergency response to ease air pollution that has smothered China's capital for the past three days... Hospitals were inundated with patients complaining of heart and respiratory ailments and the website of the capital's environmental monitoring center crashed... Official measurements of PM2.5, fine airborne particulates that pose the largest health risks, rose as high as 993 micrograms per cubic meter in Beijing on Jan. 12, compared with World Health Organization guidelines of no more than 25... Long-term exposure to fine particulates raises the risk of cardiovascular and respiratory diseases as well as lung cancer... 'Pollution levels this high are extreme even for Beijing,' Li Yan, Beijing-based head of Greenpeace East Asia's climate and energy campaign, said... 'Although the government has announced efforts to cut pollution, the problem is regional and to fix Beijing's problem, we also have to fix industrial pollution in neighboring regions like Hebei and Tianjin and even as far as Inner Mongolia.'"

January 18 - Bloomberg: "China's new home prices rose in December in the most cities in 20 months, renewing concerns that the government may issue new tightening measures. Prices climbed in 54 of the 70 cities the government tracks, compared with 53 in November... Prices fell in eight cities..."

January 18 - Bloomberg: "China's income gap narrowed for the fourth straight year in 2012, the country's statistics chief said today, the first time in a more than a decade the government has released the politically sensitive figure... The new generation of Communist Party leaders who took power in November have highlighted the need to narrow China's income gap and boost consumption as they wean the world's second-biggest economy off a dependence on investment."

January 18 - Bloomberg: "China's power output rose to the highest in four months in December as industrial production in the world's largest energy user grew more than forecast. Electricity production increased to 432.7 billion kilowatt- hours... That's up 7.6% from the same period last year."

January 14 - Bloomberg: "China's unexpected surge in exports last month renewed concern from analysts at Goldman Sachs Group Inc., UBS AG and Australia & New Zealand Banking Group Ltd. that statistics from the nation can be unreliable. The 14.1% jump from a year earlier was the biggest positive surprise since March 2011... The increase didn't match goods movements through ports and imports by trading partners according to UBS, while Goldman Sachs and Mizuho Securities Asia Ltd. cited a divergence from overseas orders in a manufacturing index."

January 15 - Bloomberg (Scott Reyburn): "A Chinese vase for which a bidder offered a record 51.6 million pounds ($83 million) at auction more than two years ago has been sold for less than half the price the original purchaser failed to pay. The elaborately decorated 18th-century porcelain vase, described as being made for the Qianlong Emperor, was auctioned by Bainbridges in Ruislip, west London, on Nov. 11, 2010."

Japan Bubble Watch:

January 14 - Bloomberg (Chris Cooper and Takashi Hirokawa): "Japanese Prime Minister Shinzo Abe seeks a 'bold policy leader' as the next Bank of Japan governor as he aims to end deflation and drive a recovery from recession. The choice of a successor to Masaaki Shirakawa, whose term ends in April, will be made after consultations with Yale Professor Emeritus Koichi Hamada and others, Abe said..."

India Watch:

January 16 - Bloomberg (Ye Xie): "India's financial system has been made vulnerable by a deterioration in bank assets and a lack of capital as the economy slowed, according to the International Monetary Fund. 'The main near-term risks to the financial system are a worsening of bank asset quality and renewed pressures on systemic liquidity,' the... lender said... Increasing involvement of the state in the financial industry leaves the government exposed to losses at banks and is acting as a brake on economic growth, the IMF said."

Latin America Watch:

January 16 - Bloomberg (Boris Korby and Gabrielle Coppola): "President Dilma Rousseff's insistence that Banco do Brasil SA boost lending is helping the state-controlled bank almost double its bond underwriting, giving the government a record share of the market. International debt sales managed by the bank surged to 10% of offerings last year from 5.6% in 2011... With Brazilian issuers leading emerging markets by selling a record $51.1 billion in bonds, Banco do Brasil rose six spots to become the third-largest underwriter... Banco do Brasil, Latin America's largest bank by assets, is profiting from the government's push to expand credit... The bank's total lending, which includes loans, bonds on its books and other guarantees to companies, surged 21% in the year through Sept. 30 to 523 billion reais ($257bn)..."

January 17 - Bloomberg (Matthew Malinowski and Raymond Colitt): "Brazil's central bank signaled it will keep borrowing costs at a record low this year as it tries to manage faster inflation amid a slower than expected recovery. The central bank board... kept the benchmark interest rate at 7.25% for the second straight meeting..."

U.S. Bubble Economy Watch:

January 17 - Bloomberg (Michelle Jamrisko): "The rebound in U.S. homebuilding accelerated in December, capping the best year for the industry since 2008 and adding to signs residential real estate is contributing to economic growth. Housing starts climbed 12.1% last month to a 954,000 annual rate, exceeding all forecasts in a Bloomberg survey... Other reports showed fewer Americans applied for jobless benefits last week and manufacturing in the Philadelphia region unexpectedly contracted in January."

January 15 - Los Angeles Times (Alejandro Lazo): "Southern California's housing market ended the year with sharp gains, rounding out the first solid year of sustained improvement after nearly five years of real estate malaise — and helping set up further improvement in 2013. The region's median home price registered a sizable 19.6% pop in December compared with the same month last year to hit $323,000... DataQuick reported.... A record level of cash buyers flooded into the market and more move-up homes sold last month."

January 16 - Bloomberg (Nadja Brandt): "San Francisco Bay area home prices surged 32% last month, the biggest increase from a year earlier in at least 24 years, as fewer distressed and more higher-end properties sold, DataQuick said. The median price paid for a home in the nine-county Bay area climbed to $442,750... The median was the highest since August 2008, when it was $447,000..."

January 15 - Bloomberg (John Gittelsohn): "Lennar Corp., the largest U.S. homebuilder by market value, said it plans to diversify into apartments with the construction of $1 billion of multifamily properties as rental demand climbs."

Central Banking Watch:

January 17 - Bloomberg (Craig Torres): "Federal Reserve officials are voicing increased concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases. Investors have been snapping up riskier assets since the Fed boosted its bond buying to reduce long-term borrowing costs after cutting its overnight rate target close to zero in December 2008. Enthusiasm for speculative-grade bonds is at unprecedented levels, driving a Credit Suisse index that tracks the yield on more than 1,500 issues to a record-low 5.9% last week. Now, as central bankers boost their stimulus with additional bond purchases, policy makers from Chairman Ben S. Bernanke to Kansas City Fed President Esther George are on the lookout for financial distortions that may reverse abruptly when the Fed stops adding to its portfolio and eventually shrinks it. 'Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,' George said... 'We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.'"

January 17 - Bloomberg (Aki Ito and Michael McKee): "Federal Reserve Bank of Dallas President Richard Fisher said the Fed needs to continually assess the costs and benefits of pushing forward with record accommodation. 'We don't want inflation to raise its ugly head,' Fisher said... adding he doesn't 'see that prospect right now.' The Dallas Fed president said he is concerned that monthly Fed purchases of Treasury notes and mortgage-backed securities may create a price bubble in the bond market. 'It's something we need to constantly analyze.'"

January 14 - Bloomberg (Steve Matthews): "Federal Reserve Bank of Atlanta President Dennis Lockhart said while he's supported the central bank's open-ended bond purchases so far, further expansion of a record stimulus could complicate the eventual shrinking of the balance sheet. 'Open-ended does not mean without bound,' Lockhart said... 'I do think the growth of the Fed's balance sheet could have longer-term consequences that are worrisome. While I've supported these policy decisions to date, I acknowledge legitimate concerns.'"

January 18 - Bloomberg (Steve Matthews and Caroline Salas Gage): "Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank will probably keep up its bond-buying program past mid-2013 to achieve sustained improvement in the labor market. 'It is probably going to be a struggle to see by mid- year' enough progress in the jobs outlook to warrant stopping, Lockhart said..."

January 14 - Bloomberg (Craig Torres and Jeff Kearns): "Federal Reserve Chairman Ben S. Bernanke said the benefits of quantitative easing may vary through time and the central bank is continuing to monitor the impact of its bond purchases. 'So far, we think we are getting some effect, it is kind of early,' Bernanke said... 'We are going to continue to assess how effective' the program is 'because it is possible that as you move through time and the situation changes that the impact of these tools could vary.'"

January 15 - Bloomberg (Joshua Zumbrun): "Federal Reserve Bank of Boston President Eric Rosengren said the Fed should press on with record accommodation even while he predicted economic growth will speed up to 3% during the second half of this year. 'Continued monetary accommodation is absolutely appropriate and indeed needed as long as we are projected to miss on both elements of the Fed's dual mandate, inflation and employment,' Rosengren said..."

January 15 - Bloomberg (Jeff Kearns): "Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank should do more to boost hiring by aiming to meet a lower jobless-rate threshold before policy makers raise their main interest rate. The Fed can 'provide more needed stimulus' by reducing the unemployment-rate threshold to 5.5% from 6.5%, Kocherlakota said... 'The FOMC could facilitate a faster return of the unemployment rate to its lower long-run level by adopting a more accommodative monetary policy that puts more upward pressure on employment... My outlook for unemployment and my outlook for inflation both point to a need for more accommodation.'"

January 16 - MarketNews International: "Boston Federal Reserve Bank President Eric Rosengren... said the key to the central bank raising interest rates is not simply that the unemployment threshold has been reached, but that the fall to a 6.5% unemployment rate is also accompanied by rapid growth in the economy."

January 14 - Bloomberg (Aki Ito and Eleni Himaras): "Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank should keep policy accommodative to support the economy while lawmakers reduce government spending to tame the country's budget deficit. The government should put 'in place policies that slowly but surely bring the prospects of future revenues into balance with future spending,' Evans said... 'Under this scenario, monetary policy has an important contribution to make.'"

January 18 - Bloomberg (Scott Hamilton and Jennifer Ryan): "Bank of England policy maker Ian McCafferty said officials must have an open mind about ways to help the recovery, signaling he may support new measures if needed to target specific weaknesses in the economy. 'We need to be open to considering other unorthodox means to conduct monetary policy if they become necessary,' McCafferty said..."

Germany Watch:

January 16 - Bloomberg (Jana Randow): "The Bundesbank will repatriate 674 metric tons of gold from vaults in Paris and New York by 2020 to restore public confidence in the safety of Germany's reserves. The phased relocation of the gold, currently worth about 27 billion euros ($36bn), will begin this year and result in half of Germany's reserves being stored in Frankfurt by the end of the decade... It will bring home all 374 tons of its gold held at the Banque de France and a further 300 tons from the New York Federal Reserve... 'With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time,' the Bundesbank said."

January 16 - Bloomberg (Rainer Buergin and Brian Parkin): "German Chancellor Angela Merkel's government cut its growth forecast for Europe's biggest economy as austerity policies in cash-strapped euro-region countries and cooling world trade damp exports. German gross domestic product growth will slow to 0.4% this year from 0.7% in 2012... 'We assume that the phase of weakness this winter will be overcome in the course of the year and that our economy gains traction again,' Economy Minister Philipp Roesler said..."

Italy Watch:

January 14 - Bloomberg (Lorenzo Totaro): "Italian industrial production fell more than forecast in November, signaling that the country's fourth recession since 2001 may have deepened in the final quarter of the year. Output declined 1% from October, when it dropped 1.1%..."

Spain Watch:

January 18 - Bloomberg (Charles Penty): "Bad loans as a proportion of total lending at Spanish banks jumped to a record 11.38% in November in a sign of the challenges still facing the country's banks even as their shares and bonds rally. The proportion rose from 11.23% in October as 2 billion euros ($2.67bn) of credit soured in the month to take the total amount of defaulted loans in the banking system to 191.6 billion euros..."

January 15 - Bloomberg (Ben Sills and Angeline Benoit): "The bond rally that has sent Spanish borrowing costs to 10-month lows has distracted attention from the nation's growing debt pile. Spain's budget deficit probably exceeded 9% for a fourth year in 2012 as Europe's highest unemployment rate, a third recession in four years and the cost of bailing out its banks offset almost all of the government's 62 billion euros ($83bn) of spending cuts and tax increases, according to economists at Societe Generale SA, Lombard Street Research and the Madrid-based Applied Economic Research Foundation. Total debt will reach 97% of gross domestic product this year, the International Monetary Fund forecasts. 'This is a classic example of the doom loop,' Societe Generale's... chief European economist, James Nixon, said... 'They just aren't making any progress.'"

European Economy Watch:

January 16 - Bloomberg (Mathieu Rosemain): "European car sales in December plunged the most in more than two years as recessions in the southern part of the region cut demand... Registrations fell 16% to 838,428 vehicles from 997,842 a year earlier... Full-year sales declined 7.8% to 12.5 million cars, with the slump in the European Union the worst in 19 years."

January 15 - Bloomberg (Stefan Riecher): "Euro-area exports increased in November for the first time in three months, even as the 17- nation currency bloc was mired in its second recession in four years. Exports rose... 0.8% from October, when they dropped a revised 1.2%... Imports fell 1.5% and the trade surplus widened to 11 billion euros ($14.7bn)..."


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