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Terminal Phases

Record highs for the S&P 500, the S&P 400 Midcaps, and small cap Russell 2000.

Upon this week's legislation to reopen the government and raise the debt ceiling, the President stated that there were "no winners." Yet equities (and, more generally, financial asset) investors and speculators did just fine. This week saw the S&P500, the S&P 400 Mid-Cap Index and the small cap Russell 2000 all trade to record highs. The week's 2.8% advance increased the small caps' year-to-date gain to 31.3%. Google added about 140 points and $38.5bn of market cap this week (to $338bn) to reach an all-time high (up 43% y-t-d). The more speculative "beta" stocks continue to outperform. Chipotle rose 15% this week, increasing 2013 gains to 71%, and First Solar jumped 8.7% to boost y-t-d gains to 82%. The NASDAQ 100 (up 3.7% this week), Morgan Stanley High Tech Index (up 2.6%) and The Interactive Week Internet Index (3.4%) all traded to the highest levels since 2000. Treasury, MBS, and corporate debt prices were higher as well.

The QE-enhanced 2013 version of "how crazy do things get?" is outshining even the 1999 speculative melee. The (post-LTCM bailout) year 1999 saw the small cap Russell 2000 Index jump from 422 to 505 (19.7%). This year, it has already run from 849 to 1,114 (up 31.3%). The S&P400 Midcap Index jumped from 392 to 445 in 1999 (13.5%). With more than two months to go, so far it's 1,020 to 1,290 for the midcaps (up 26.5%).

It was not only U.S. investors that were enriched this week from Washington dysfunction. Germany's DAX equities index added 1.6% to a new all-time high (up 16.5% y-t-d). Italian stocks jumped 2.1% (up 18.4% y-t-d) and Spanish stocks surged 3.5% (up 22.5%), both to more than two-year highs. Australian stocks gained 1.7% (up 14.5% y-t-d). Despite major economic issues, India's stocks jumped 1.7% this week to within a couple percent of new highs. Stocks jumped 4.2% in Brazil and 4.3% in Argentina. Indonesian stocks rallied 4.5%. Around the globe, most equities markets pushed higher. Fueled by huge ETF flows, total equity mutual fund inflows this past week jumped to a whopping $12.7bn (from AMG/Lipper).

On a weekly basis, I track global central bank International Reserve Assets (data from Bloomberg). This data provide a decent proxy for global financial flows, especially to the emerging markets (EM). From $6.63 TN back in April of 2009, International Reserves surged this week to a record $11.415 TN. Reserves have inflated 330% in ten years.

Reserve Assets showed atypically slow growth between May 10th ($11.124 TN) and September 20th ($11.174 TN), not coincidently a period a heightened EM instability. Courtesy of the Fed, BOJ, and Chinese, the "money" spigot was reopened. Though the data tends to be lumpy, it is worth noting that Reserves jumped $240bn over the past month. Indonesian 10-year yields have declined about 100bps since September 30th to 7.34%. Yields in Turkey are down about 130 bps from August highs to 8.70%. In general, EM markets have bounced back strongly from May/June tumult. The Fed's taper deferral and China's retreat from Credit tightening reversed the "hot money" EM exodus - for now.

China's International Reserves jumped a notable $164bn during the third quarter to a record $3.660 TN (from $250 billion when Dr. Bernanke joined the Fed back in 2002). This compares to Q2 growth of $54bn. The People's Bank of China this week stated that trade and capital-related inflows were again bolstering excess: "The pressure for monetary and credit expansion is still large." Myriad data, including stronger-than-expected 7.8% Q3 growth, support the view of a meaningful pickup in Chinese activity. And while the consensus sees China's recovery as fundamental to a bullish global backdrop, I'll offer a contrary opinion.

My Macro Credit thesis holds - and there is ample fundamental support for - the view that we're now five years into history's greatest global Bubble. I have posited that China is deep into its "Terminal Phase" of Credit excess. With China's 1.35 billion people and Trillions of unrestrained Credit expansion, I'll argue China's "Terminal Phase" is integral to the overall "Terminal Phase" of a most protracted and dangerous global Credit Bubble. In general, post-2008 global monetary inflation pushed EM to precarious "Terminal Phase" Bubble excess, leaving deep wounds of economic maladjustment and financial fragility.

I believe the initial cracks in the EM Bubble developed this spring. Market turbulence from May and June provoked further global monetary accommodation, which somewhat reshuffled the deck in the global liquidity chase. And I wouldn't be surprised if history looks back at this period as a final manic speculative blow-off in U.S. and global equities.

Despite generally bullish sentiment, I continue to believe that China faces serious imminent issues. Chinese officials in early June moved belatedly to try to rein in runaway Credit excesses. Not surprisingly, an increasingly powerful Credit expansion and attendant asset Bubbles were impervious to cautious attempts to restrain mortgage and local government borrowing. When they resorted to more aggressive actions in June, financial and economic fragilities forced officials to quickly retreat from tightening measures. And, again not surprisingly, Credit excess bounced right back as powerful as ever.

The value of China's September residential apartment sales surged 34% from August to $113bn. Year-to-date sales are running up about 35% from 2012. After bouncing back strongly in August (almost doubling July), September's total system Credit growth ("social financing") was reported at a stronger-than-expected $230bn. This puts year-to-date "social financing" at about $2.25 TN, a pace almost 20% above a record 2012. Some reports have mortgage Credit growing at a rate about 50% faster than last year. Forecasts are calling for Q4 corporate bond issuance to jump to $135bn from Q3's $40bn.

There are multiple facets of "Terminal Phase" Credit Bubble excess at play today in China. In asset-based lending Bubbles, the rapid growth in both transactions and prices combine for exponential growth in underlying mortgage Credit. It's worth recalling that annual U.S. mortgage Credit growth increased annually from 1997's $313bn to 2003's $1.011 TN to 2006's $1.410 TN. Importantly, along with the exponential rise in mortgage borrowing comes a corresponding spike in the riskiness of late-cycle lending booms. Indeed, and fundamental to Credit Bubble analysis, "Terminal Phase" excesses foster an unsustainable parabolic rise in Credit and economic risks. Systemic stability becomes a major concern anytime circumstances dictate that officials prolong the "Terminal Phase."

The surge in risky Credit tends to have myriad distorting effects on financial and economic systems. On the financial side, increasingly creative/aggressive risk intermediation is required to transform progressively risky mortgage debt into more "money"-like instruments palatable to savers, speculators and institutional holders. In the U.S. and now in China, so called "shadow banking" came to play an instrumental role. Here in the U.S., 2006's $1.0 TN of subprime CDOs (collateralized debt obligations) provided the fateful risk intermediation mechanism. In China's historic "shadow bank" Bubble, there is huge ongoing growth in trust deposits and various "wealth management" vehicles. A rapidly expanding chasm - between the perceived safety of "money"-like deposits/savings vehicles and the mounting risks inherent in system Credit - is fundamental to "Terminal Phase" processes and fragilities.

There is another key "Terminal Phase" dynamic at work in the Chinese Bubble, as was (and remains) the case in the U.S and elsewhere. As late-cycle financial and economic Bubble risks grow exponentially, policymakers turn increasingly timid. Powerful Bubble Dynamics become impervious to policy "tinkering," while officials come to see the environment as too risky to implement the type of stringent (pain-inflicting) tightening measures required to quash (now well-entrenched) inflationary biases and rein in increasingly destabilizing excess.

The above reference to "serious imminent issues" reflects my expectation that the Chinese are likely gearing up for another stab at restraining Credit Bubble excess. It's reasonable to presume they won't do anything that would cause serious disruption. Yet, from my perspective, if they are serious about disrupting an increasingly destabilizing Bubble, there is no way around major global ramifications. And with international securities markets turning more intensely overheated by the week, this creates a potentially volatile dynamic.

There were more rumblings out of Beijing this week. At this point, it's difficult to gauge whether they are more frustrated with Congress or the Federal Reserve. One of these days they may even be willing to rein in their Credit system and let the global chips fall where they will. Perhaps even one of these days global policymakers may actually part ways in what has been to this point concerted efforts to reflate global economies and markets. Over time, when monetary inflation's fog begins to break, those on the losing end of inflationary processes begin to see things a little more clearly.

The dollar was hit relatively hard this week. Newfound dollar weakness may prove an important market development - perhaps even a crucial inflection point. Many speculators were positioned bullish the dollar, expecting a safe haven bid in the midst of unfolding EM instability. Months back I posited that a huge bearish short position had accumulated betting against the Japanese yen. There are mixed opinions as to how much the yen short has been reversed. Things could turn more interesting if dollar weakness spurs a short-covering rally in the Japanese currency.

Above I noted the possibility of a somewhat "reshuffled deck" in the resurgent global financial Bubble. While the liquidity high tide has so far elevated most markets, I would be surprised by a sustained reemergence of a generalized EM Bubble. We'll closely monitor for a destabilizing "periphery" and "core" dynamic, expecting finance to flood into the inflating "core" (i.e. China) at the expense of the fragile "periphery" (i.e. Brazil, India, Turkey?). And there has been another out of "periphery" (EM) and into "core" (Europe) dynamic at play over recent months. Euro strength has been further bolstered by Washington dysfunction and resulting dollar weakness. Strong financial flows have been good for European stock and bond prices (Spain and Italy, in particular), although a euro at about 1.37 to the dollar is particularly unhelpful for export competitiveness in struggling Italian, Spanish, Portuguese and French economies. Might dollar weakness push the ECB to counter with more aggressive monetary stimulus?

It's been only about three weeks, but the fourth quarter has already shown itself worthy of the history books. If the leveraged speculating community can hold gains through year-end, the ranks of billionaires are sure to inflate further. No winners?


For the Week:

The S&P500 jumped 2.4% (up 22.3% y-t-d), and the Dow gained 1.1% (up 17.5%). The S&P 400 Midcaps gained 2.3% (up 26.5%), and the small cap Russell 2000 jumped 2.8% (up 31.3%), both to new record highs. The Morgan Stanley Consumer index rose 2.2% (up 26.1%), and the Utilities gained 0.7% (up 8.4%). The Banks surged 3.1% (up 27.8%), and the Broker/Dealers jumped 3.0% (up 50.6%). The Morgan Stanley Cyclicals were up 2.2% (up 29.2%), and the Transports rose 2.7% (up 28.7%). The Nasdaq100 surged 3.7% (up 26.0%), and the Morgan Stanley High Tech index advanced 2.6% (up 23.5%). The Semiconductors gained 1.8% (up 31.9%). The InteractiveWeek Internet index jumped 3.4% (up 31.9%). The Biotechs rose 3.3% (up 39.7%). With bullion gaining $44, the HUI gold index rallied 6.6% (down 49.1%).

One-month Treasury bill rates ended the week down 17 bps to less than a basis point, and three-month rates closed down 3 bps to 2.5 bps. Two-year government yields were 4 bps lower to 0.31%. Five-year T-note yields ended the week down 9 bps to 1.33%. Ten-year yields fell 11 bps to 2.58%. Long bond yields dropped 11 bps to 3.64%. Benchmark Fannie MBS yields dropped 11 bps to 3.25%. The spread between benchmark MBS and 10-year Treasury yields was unchanged at 67 bps. The implied yield on December 2014 eurodollar futures declined 4 bps to 0.475%. The two-year dollar swap spread was little changed at 13 bps, while the 10-year swap spread increased one to 14.5 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 6 to 71 bps. An index of junk bond risk sank 25 to 345 bps. An index of emerging market (EM) debt risk fell 9 to 312 bps.

Debt issuance slowed. Investment grade issuers included WM Wrigley $3.0bn, Leucadia National $750 million, Packaging Corp of America $700 million, million, million.

Junk bond funds saw inflows increase to $626 million (from Lipper). This week's issuers included Bank of America $3.0bn, Mariposa $1.56bn, Dominion Gas Holdings $1.2bn, Calpine $750 million, CSX $500 million, Audatex North America $476 million, KB Home $450 million, Gray Television $375 million, and Allied Specialty Vehicles $200 million.

Convertible debt issuers this week included Solarcity $200 million, Resource Capital Group $100 million and Aegean Marine Petroleum $75 million.

International dollar debt issuers included BPCE $1.5bn, Comision Federal de Electricidad $1.25bn, MMC Finance $1.0bn, OAS Investment $875 million, Global A&T Electronics $500 million and Modernland Overseas $150 million.

Ten-year Portuguese yields increased 2 bps to 6.15% (down 60bps y-t-d). Italian 10-yr yields fell 11 bps to 4.16% (down 34bps). Spain's 10-year yields declined 4 bps to 4.24% (down 103bps). German bund yields slipped 3 bps to 1.83% (up 51bps). French yields declined 3 bps to 2.34% (up 34bps). The French to German 10-year bond spread was unchanged at 51 bps. Greek 10-year note yields sank another 46 bps to 8.19% (down 228bps). U.K. 10-year gilt yields were down 2 bps to 2.71% (up 89bps).

Japan's Nikkei equities index gained 1.1% (up 40.1% y-t-d). Japanese 10-year "JGB" yields dropped 4 bps to to 0.61% (down 17bps). The German DAX equities index rose 1.6% to a record high (up 16.5%). Spain's IBEX 35 equities index jumped 3.5% to a two-year high (up 22.5%). Italy's FTSE MIB rose 2.1%, also to a two-year high (up 18.4%). Emerging markets were mostly higher. Brazil's Bovespa index rallied 4.2% (down 9.1%), while Mexico's Bolsa declined 1.4% (down 7.5%). South Korea's Kospi index gained 1.4% (up 2.8%) to the high since July 2011. India's Sensex equities index jumped 1.7% (up 7.5%) to a near all-time high. China's Shanghai Exchange fell 1.5% (down 3.3%).

Freddie Mac 30-year fixed mortgage rates rose 5 bps to 4.28% (up 91bps y-o-y). Fifteen-year fixed rates were up 2 bps to 3.33% (up 77bps). One-year ARM rates dipped a basis point to 2.63% (up 3bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates 2 bps higher to 4.51% (up 48bps).

Federal Reserve Credit jumped $51.1bn to a record $3.762 TN. Over the past year, Fed Credit was up $942bn, or 33.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $662bn y-o-y, or 6.2%, to a record $11.415 TN. Over two years, reserves were up $1.192bn, for 12% growth.

M2 (narrow) "money" supply jumped $25.7bn to a record $10.905 TN. "Narrow money" expanded 7.1% ($723bn) over the past year. For the week, Currency declined $1.7bn. Total Checkable Deposits fell $47.1bn, while and Savings Deposits surged $71.9bn. Small Time Deposits were little changed. Retail Money Funds added $2.9bn.

Money market fund assets sank $52.3bn to a 10-week low $2.613 TN. Money Fund assets were up $45bn from a year ago, or 1.8%.

Total Commercial Paper dropped $32.0bn to $1.034TN. CP was down $31.9bn y-t-d, while increasing $90.0bn, or 9.5%, over the past year.

Currency Watch:

October 17 - Reuters (Wayne Arnold and Leika Kihara): "Deal or no deal, the U.S. Congress' dance with default impressed policymakers and investors in China and Japan with just how vulnerable their own economic revival plans are to the next political tantrum on Capitol Hill... 'We're glad a deal has been struck,' said a Japanese policymaker... 'But the uncertainty will remain and it will be the same thing all over again early next year.' He and other Japanese officials say they have already developed contingency plans that include flooding Japan's banking system with cash to keep markets functioning however panicked investors become. And analysts say China, whose Communist leaders are due to hold a key policy meeting next month, may step up a push for global acceptance of its currency, the yuan or renminbi, as an alternative to the U.S. dollar in international trade."

October 18 - Bloomberg (Fion Li): "The yuan had its biggest weekly gain in a year as data showed China's economic expansion accelerated in the third quarter. The currency climbed to a 20-year high today after the People's Bank of China boosted its fixing by 0.1% to 6.1372 per dollar, the strongest since a peg to the greenback ended in 2005."

The U.S. dollar index declined 0.9% to 79.65 (down 0.1% y-t-d). For the week on the upside, the Australian dollar increased 2.2%, the New Zealand dollar 2.2%, the Norwegian krone 1.7%, the British pound 1.3%, the Swiss franc 1.1%, the South African rand 1.1%, the Danish krone 1.1%, the euro 1.1%, the Mexican peso 1.1%, the South Korean won 1.0%, the Swedish krona 0.9%, the Japanese yen 0.9%, the Canadian dollar 0.6%, the Singapore dollar 0.5%, the Brazilian real 0.2% and the Taiwanese dollar 0.1%.

Commodities Watch:

The CRB index was little changed this week (down 2.7% y-t-d). The Goldman Sachs Commodities Index was unchanged (down 1.2%). Spot Gold rallied 3.5% to $1,316 (down 21%). Silver gained 3.1% to $21.91 (down 28%). November Crude fell $1.21 to $100.81 (up 10%). November Gasoline added 0.2% (down 3%), while November Natural Gas slipped 0.3% (up 12%). December Copper increased 0.9% (down 10%). December Wheat rallied 2.0% (down 9%), and December Corn recovered 1.9% (down 37%).

U.S. Fixed Income Bubble Watch:

October 16 - Bloomberg (Lisa Abramowicz): "Corporate bonds that lost $214 billion of market value in the second quarter are being tossed a lifeline on speculation Congress's fiscal turmoil will prompt the Federal Reserve to maintain its stimulus longer than analysts anticipated. JPMorgan Chase & Co.'s chief market strategist is recommending credit investments as a stalemate among U.S. lawmakers shut down parts of the U.S. government... As recent as last month, the JPMorgan strategists led by Jan Loeys were bearish on the debt. Investors funneled $1.6 billion into U.S. investment-grade funds last week, the most in almost three months, after yanking as much as $2.4 billion in June..."

October 17 - Bloomberg (Brian Chappatta): "The $188 billion market for Build America Bonds is set to trail the rest of municipal debt for the first time as issuers face cuts to their federal subsidies while investors bet interest rates will rise. The taxable debt created under President Barack Obama's 2009 stimulus plan has lost 6.1% this year, compared with a 3.7% drop for the $3.7 trillion municipal market..."

Federal Reserve Watch:

October 15 - Bloomberg (Joshua Zumbrun and Eric Martin): "Federal Reserve Bank of New York President William C. Dudley said central banks can fend off political interference by using unconventional policies to spur economic growth. 'The best way for central banks to maintain their independence is to use all their available monetary policy tools to best achieve their objectives,' Dudley said... 'I do not see the use of these tools as creating significant new risks to our independence.'"

October 17 - Dow Jones (Michael S. Derby): "Federal Reserve official clashed again over the likely path of monetary policy in speeches Thursday. The officials who spoke over the course of the day included Chicago Fed leader Charles Evans and Kansas City Fed chief Esther George... 'I expect our overall stance of monetary policy to remain highly accommodative for some time to come,' Mr. Evans said... 'It is not yet time to remove accommodation. The data are still not definitive enough to say that now is time to adjust' the pace of the Fed's ongoing bond-buying stimulus program, the official said... The shutdown has also broken the stream of government-generated data the Fed needs to make a choice on policy. 'Only the data can tell us how much progress we've made, and they aren't saying much right now: The data available in September were inconclusive, and since then, incoming information has been silenced with the federal government shutdown,' Mr. Evans said. Ms. George, who has dissented at every FOMC meeting this year, took the opposing view in the debate. 'The benefits of quantitative easing have been quite small, and the potential costs of the program grow each month as we buy those assets,' Ms. George said... When it comes to cutting the pace of the purchases, 'it would be important to start now, to start slowly to allow markets time to adjust, to recognize this is likely to be a long process in terms of unwinding' the bond purchases..."

October 17 - Bloomberg (Vivien Lou Chen): "Fed officials must do 'whatever it takes' to push for faster return to full employment while keeping inflation near 2%, including possibly providing more stimulus, Minneapolis Fed Pres. Narayana Kocherlakota said. Fed should keep current stimulus in place even if asset prices rise to unusually high levels, leading to concerns about 'bubbles,' Kocherlakota said... 'It may not be easy to stick to this path,' yet benefits in terms of employment gains 'will be significant'... 'Doing whatever it takes in the next few years' means FOMC 'is willing to continue to use the unconventional monetary policy tools that it has employed'... Low levels of inflation show FOMC has 'lot of room' to provide 'much needed stimulus to the labor market'... there's 'considerable monetary policy capacity'..."

Central Bank Watch:

October 16 - Bloomberg (Theophilos Argitis): "Canadian Finance Minister Jim Flaherty's criticism of U.S. monetary policy, which he ramped up last week in Washington, may be putting him at odds with the Bank of Canada and the Group of 20. Flaherty said he criticized the Federal Reserve's use of unconventional monetary policy known as quantitative easing at a private dinner of G-20 officials on Oct. 10, with U.S. Federal Reserve Chairman Ben S. Bernanke in attendance. 'I was fairly clear' at the meeting, Flaherty told reporters... 'It's not good public policy,' he said, describing quantitative easing as 'the printing of money.' The comments raise questions about how Canada would respond if the global economy faced a shock... The central bank would need the consent of the finance department to pursue [quantitative easing] because it could require the bank to buy riskier assets than usual."

U.S. Bubble Economy Watch:

October 18 - Washington Times (Stephen Dinan): "U.S. debt jumped a record $328 billion on Thursday, the first day the federal government was able to borrow money under the deal President Obama and Congress sealed this week. The debt now equals $17.075 trillion, according to figures the Treasury Department posted online on Friday. The $328 billion increase shattered the previous high of $238 billion set two years ago. The giant jump comes because the government was replenishing its stock of 'extraordinary measures' — the federal funds it borrowed from over the last five months as it tried to avoid bumping into the debt ceiling. Under the law, that replenishing happens as soon as there is new debt space. In this case, the Treasury Department borrowed $400 billion from other funds beginning in May, awaiting a final deal from Congress and Mr. Obama."

October 14 - Bloomberg (Thomas Black): "Prospects for a recovery in U.S. corporate profits this year are dimming after third-quarter earnings growth slowed and the federal government's shutdown hindered trade and threatened to crimp consumer spending. Earnings rose an estimated 1.4% for Standard & Poor's 500 Index companies last quarter, trailing gains of 3.8% in the previous three months and an average 10% over 15 years. Analysts have reduced the quarterly estimate by 75% since June..."

October 17 - Bloomberg (Prashant Gopal): "Home flipping, in which a buyer quickly resells a property for a profit, is becoming more popular for high-end houses in the U.S. as deals for cheaper residences slow. There were 968 single-family houses priced at $750,000 or more that were sold by flippers in the third quarter, according to RealtyTrac... The figure was up 34% from a year earlier..."

October 17 - Bloomberg (Guy Collins): "A single bottle of Screaming Eagle Cabernet Sauvignon from the California grower's 1997 vintage, its most expensive since 1992, sold for $3,936 at a New York sale this month as demand for rare wines pushed prices higher... A bottle of the same vintage cost $3,690 at an Acker sale in June, $3,485 in both April and September and $3,198 in February..."

Global Bubble Watch:

October 18 - Bloomberg (Jeff Kearns, Joshua Zumbrun and Catarina Saraiva): "The Federal Reserve will delay the first reduction in its bond purchases until March after the government shutdown slowed fourth-quarter growth and interrupted the flow of data, economists said. Policy makers will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of 40 responses in a Bloomberg News survey..."

October 16 - Bloomberg (Katie Linsell): "Corporate treasurers are making the most of near record-low borrowing costs in Europe as they anticipate nascent economic growth will put pressure on benchmark interest rates to climb. 'It's almost money for nothing,' said Henrik Hanche, head of corporate finance at Deutsche Post AG, Europe's largest postal service... 'I don't think it will get any better. There's huge demand and opportunity.' Non-financial borrowers issued 241 billion euros ($325bn) of bonds this year as average yields on investment- grade debt dropped to an all-time low of 1.6% in May... They have since risen to 2.1%, leaving borrowing costs at almost half their average during the past decade."

October 18 - Bloomberg (Katie Linsell): "The cost of insuring junk-rated corporate bonds against losses fell to the lowest since January 2008 in Europe... The Markit iTraxx Crossover Index of credit-default swaps on 50 high-yield companies fell 3 bps to 350 bps..., taking the weekly drop to 21 bps. The Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings fell as much as 1.6 bps to 86 bps, the lowest since April 2010."

October 18 - Bloomberg (John Detrixhe): "Carry trades are making investors the most money in more than a year after U.S. budget brinkmanship pushed back estimates of when the Federal Reserve will begin paring its monetary stimulus program. Deutsche Bank AG's G-10 FX Carry Basket index has gained 4.6% since Aug. 30, poised for its biggest two-month gain since rising 4.8% from June to July 2012. Confidence in trades where investors borrow in countries with low interest rates and use the proceeds to invest in those with higher rates has also been supported by the lowest volatility since January."

October 17 - Bloomberg (Nikolaj Gammeltoft and Alex Barinka): "The biggest single-day decline in U.S. equity volatility since 2011 enriched options traders who spent the month doubling down on bets the bull market in stocks would survive the default deadline. The most-owned contract on the Chicago Board Options Exchange Volatility Index, November 14 puts, soared 129% yesterday, while wagers the VIX will drop to 12 over the next month rose fivefold..."

October 18 - Bloomberg (David M. Levitt and Kelvin Wong): "JPMorgan Chase & Co. has agreed to sell 1 Chase Manhattan Plaza, the tower built by David Rockefeller, to Fosun International Ltd., the investment arm of China's biggest closely held industrial group, for $725 million."

October 18 - Bloomberg: "National Basketball Association Commissioner David Stern said Chinese investors inquiring about stakes in teams is a 'very good thing' for the league as it seeks to boost sales in the world's second-biggest economy."

October 17 - Bloomberg (Niklas Magnusson and Veronica Ek): "The Nobel Foundation, which said last year it was using hedge funds to help boost capital, is now considering charitable donations after previous strategies failed to bring in enough money. The Stockholm-based institution, which earlier this month rounded off its 2013 awards, cut the prize money by 20% last year in an effort to preserve capital. Since then, laureates have had to make do with 8 million kronor ($1.23 million) in each category."

EM Bubble Watch:

October 15 - Bloomberg (Jonathan Levin and Ben Bain): "Corporate bond sales in Mexico's local debt market plunged by almost half this year as growth in Latin America's second-biggest economy faltered... Issuance tumbled 46% to 299.3 billion pesos ($23bn) through yesterday after sales climbed to a record in 2012... Emerging-market bond sales dropped 11% to $460.2 billion over the same period... Mexico is heading for its weakest economic expansion since a 2009 recession... The International Monetary Fund reduced its 2013 growth forecast for Mexico on Oct. 8 to 1.2% from 2.9%. Mexican companies have delayed capital-intensive projects that may have been financed in the local bond market after the government was 'very slow in the designing and executing of its budget,' said Vinicio Alvarez, head of debt capital markets at Scotiabank's Mexico unit."

China Bubble Watch:

October 16 - Bloomberg: "China faces pressure for faster credit growth because of capital inflows stemming from the Federal Reserve's decision to hold off from reducing stimulus, the People's Bank of China said. 'The pressure for monetary and credit expansion is still large' as the trade surplus climbs and capital flows in, the central bank said..., citing the Fed's 'delayed' exit from monetary easing... China's foreign-exchange reserves rose last quarter by the most in more than two years, a sign the government's efforts to protect growth attracted money even as developing nations from India to Indonesia saw capital exit. Inflation and new lending exceeded analysts' estimates last month."

October 16 - Bloomberg: "Delayed U.S. QE exit and higher trade surplus have led to 'significant' increase in foreign-exchange inflows, PBOC says in a Q&A statement on the current credit situation... PBOC reiterated it will continue 'prudent' monetary policy... Upward pressure on China's credit expansion is 'relatively big' because of trade surplus and forex inflows, PBOC says..."

October 18 - Bloomberg: "China's economic growth accelerated for the first time in three quarters, as Premier Li Keqiang spurred factory output and investment to meet the government's expansion goal for 2013. Gross domestic product rose 7.8% in the July-September period from a year earlier... Industrial production advanced in September by 10.2%, in line with projections, while retail sales gained 13.3%. The pickup reflects Li's implementation of what Bank of America Corp. called a 'mini fiscal stimulus,' including railway spending and tax cuts..." Today's figures also showed home sales jumped 34% in September from the previous month even amid restrictions aimed at preventing a bubble, adding to signs of imbalances that may cast doubt on the recovery's staying power."

October 18 - Bloomberg: "China's home sales jumped 34% in September from the previous month, as the government refrained from adding to property curbs, emboldening buyers. The value of homes sold climbed to 691.1 billion yuan ($113bn) last month from 514.6 billion yuan in August... Housing sales in the first nine months surged 34.5% to 4.54 trillion yuan from a year earlier... The government in March stepped up a three-year campaign to cool the housing market by ordering the central bank to raise down-payment requirements for second mortgages in cities with excessive cost gains... 'Home sales have been gathering pace since the end of August after banks loosened lending' as the government tried to stem an economic slowdown, Luo Yu, a Shanghai-based analyst at advisory CEBM Group, said... Home prices rose 9.5% last month from a year ago, the most since December..."

October 15 - Bloomberg: "China's agency that manages the nation's $3.66 trillion of foreign-exchange reserves is looking to make more investments in European property, two people familiar with the situation said. The State Administration of Foreign Exchange, seeking to diversify the nation's investments, is looking at real estate and infrastructure projects with a focus on the U.K., France, Germany, Poland and the Czech Republic... The agency is considering investing more of the world's biggest reserve stockpile in Europe while wrangling over the U.S. government's borrowing limit raises the risk of a default in Treasury holdings that stood at $1.28 trillion in July... The safety of investments is the foreign-exchange agency's top priority, the people familiar with the matter said."

October 14 - Bloomberg (Fion Li): "China's money-supply growth slowed in September and new local-currency loans were more than forecast... M2, China's broadest measure of money supply, rose 14.2% from a year earlier... New yuan loans were 787 billion yuan, compared with the 675 billion yuan median analyst estimate and 623.2 billion yuan a year earlier. Aggregate financing, the government's broadest measure of credit, was 1.4 trillion yuan, compared with the 1.35 trillion yuan median projection and 1.65 trillion yuan a year ago."

October 16 - Reuters: "China's central bank said... it will keep monetary policy largely stable but warned that rising capital inflows are putting pressure on credit expansion. The People's Bank of China (PBOC), in the wake of data showing robust bank loan growth in September, said it will stick to its prudent policy with some fine-tuning and keep banking system liquidity at appropriate levels. 'We must realize that bank lending has increased at a relatively fast pace recently and the rising trade surplus as well as massive foreign exchange inflows have also added more pressure on credit expansion,' the central bank said... Chinese banks made 787 billion yuan ($128.6bn) worth of new yuan loans in September, higher than a forecast of 650 billion yuan and more than August's 711.3 billion yuan... Large foreign exchange purchases by the PBOC, which regularly intervenes in the market to slow yuan rises, amount to creation of base money and can fuel inflation unless the central bank soaks up the excess yuan injected into the system."

October 14 - Bloomberg (Fion Li): "China's exports unexpectedly fell in September and inflation jumped on food prices, signaling constraints on the nation's recovery as Premier Li Keqiang seeks to sustain growth without adding monetary stimulus. Overseas shipments dropped 0.3% from a year earlier... Consumer prices rose 3.1% as food costs advanced the most since May 2012... 'A big risk for China now is that the government has to scale back its domestic pro-growth policies while external demand fails to grow to make up the gap,' said Xu Gao, chief economist with Everbright Securities Co. in Beijing, who previously worked at the World Bank. 'If that happens, it will result in very weak growth starting next year.'"

October 16 - Bloomberg: "Office rents in Shanghai's designated free-trade zone have doubled in three months as building owners take advantage of companies rushing to register an address in the region, according to CBRE Group... Shanghai, the nation's commercial hub, last month inaugurated the zone as a testing ground for free-market policies that Premier Li Keqiang has signaled may later be implemented more broadly in the world's second-largest economy. HSBC Holdings Plc, Citigroup Inc. and Bank of China Ltd. are among financial institutions that have won approval to set up a sub-branch in the region... 'There's definitely lot of speculation,' Sam Xie, a research director at CBRE, said... 'As long as it's office space, no matter how small, it rents out quickly for companies to register there..."

October 16 - Bloomberg (Kelvin Wong): "Hong Kong home prices will fall as much as 25% from their peak as housing supply increases and the possibility of rising interest rates grows, according to Bank of America Corp.'s Merrill Lynch unit. Prices will drop 5% this year and another 15% in 2014, Raymond Ngai, a property analyst, told reporters... Hong Kong home prices have fallen about 3% since March and transactions are at the lowest in almost two decades, after the government in February imposed its toughest yet measures to curb concerns of a real estate bubble. Prices have more than doubled since early 2009..."

Japan Bubble Watch:

October 17 - Financial Times (Ben McLannahan): "Aggressive monetary easing by the Bank of Japan has pushed up demand for the debt of low-quality borrowers, paving the way for SoftBank and other junk-rated companies to raise money at record-low prices. The telecoms company controlled by Masayoshi Son has done a dozen deals in the past year, topped by its $21.6bn acquisition of Sprint in July... Much of that activity has been funded by debt, amid an unprecedented campaign by Japan's central bank to stir inflation by pushing down the cost of borrowing. Last month SoftBank, considered a speculative-grade issuer by Moody's and Standard & Poor's, registered to sell up to Y500bn ($5bn) of bonds, having sold Y400bn as recently as June. The yield on those June bonds was 1.74% at issuance and has since dropped to 1.26%, as investors in Japan's debt markets have flocked towards the bonds of less creditworthy companies in search of precious income."

Asia Bubble Watch:

October 16 - Bloomberg (Shamim Adam and Karl Lester M. Yap): "Asia's exporters are failing to benefit from a recovery in advanced nations, putting the onus on policy makers to shift reliance to domestic demand as a driver of economic growth. China's exports unexpectedly fell last month, while overseas shipments from Taiwan and South Korea also declined. Asia's export-led growth engine is showing 'signs of serious defects, according to Frederic Neumann... co-head of Asian economics at HSBC Holdings Plc, who says the region's trade data has disappointed over the past couple of years and may be evidence of a loss in competitiveness..."

October 17 - Bloomberg: "Climate change will lead to more flooding and drought in East Asia and could chop 5.3% off annual gross domestic product by the year 2100 if measures aren't adopted to tackle it, according to the Asian Development Bank. Rising temperatures in China, Japan, Mongolia and South Korea will spur more flooding and tropical storms in coastal areas and make northern agricultural regions more prone to drought, the ADB said... in its 'Economics of Climate Change in East Asia' report."

Europe Watch:

October 16 - UK Telegraph (Martin Banks): "Marine Le Pen aims to set up radical, anti-Europe faction in the European parliament with help of Geert Wilders, the Dutch MP. The leader of France's far-Right party has vowed that the European Union would 'fall like the Soviet Union' as she conspired to form what would be the most radical faction yet seen in the European parliament. Marine Le Pen, buoyed by a weekend by-election triumph in southern France, criticised the EU as a 'global anomaly' and pledged to return the bloc to a 'cooperation of sovereign states'. She said Europe's population had 'no control' over their economy or currency, nor over the movement of people in their territory. 'I believe that the EU is like the Soviet Union now: it is not improvable,' she said. 'The EU will collapse like the Soviet Union collapsed.'"

October 18 - Bloomberg (Jim Brunsden): "In their campaign to bring the financial industry under control, European Union policy makers have a deadline problem. The EU, which took three decades to clear such milestones as defining chocolate and setting up a common patent, has just months to create a system to handle failing lenders. It's the biggest step toward building a banking union that its leaders say is essential to preventing a rerun of the euro debt crisis. Without a deal before European Parliament elections in May, the politicians and bureaucrats who have been working on the project since it was announced in June 2012 risk leaving the European Central Bank lacking a critical tool when it starts supervising euro-area lenders next year."

October 16 - Bloomberg (Jeff Black and Boris Groendahl): "The European Central Bank is sizing up just how tough it wants to get with the region's lenders. Policy makers at the... ECB will this week try to agree on the ground rules of its three-pronged probe into the health of the 130 banks it will start supervising next year. The process will stress-test balance sheets for exposure to sovereign debt as well as push institutions to admit to more of their bad debt than they have before, according to three officials who spoke on condition of anonymity. The check-up due in early 2014 is the ECB's precondition for assuming the burden of overseeing banks from Deutsche Bank AG to Intesa Sanpaolo SpA, and the first assessment of the industry since a round of stress tests two years ago."

October 15 - Bloomberg: "China's foreign-exchange reserves rose last quarter by the most in more than two years, a sign the government's efforts to protect growth attracted money even as developing nations from India to Indonesia saw capital exit. Reserves were a record $3.66 trillion at the end of September... up from $3.5 trillion in June... The data suggest Premier Li Keqiang's efforts to boost expansion stoked capital inflows while emerging markets suffered outflows on concern the U.S. Federal Reserve would taper monetary stimulus."

October 16 - Bloomberg (Dorothee Tschampa): "European monthly car sales rose the most in more than two years as the end of a recession in the region, price cutting and a government incentive program in Spain helped lift demand. Registrations in September jumped 5.5% to 1.19 million vehicles... That narrowed the decline this year to 4%, for total deliveries of 9.34 million cars."

October 17 - Bloomberg (Veronica Ek and Niklas Magnusson): "Swedes are stepping up use of text message loans with interest rates that can rise far above 100% to pay for luxury items, play online poker and even to cover basics such as electricity bills. Consumer credits have more than doubled in the past 12 years to 171 billion kronor ($26bn)... The enforcement agency is now sounding the alarm as household debt levels in the largest Nordic economy reach a record. 'This is a big problem,' Johan Krantz, controller at Stockholm-based debt enforcer, said..."

Germany Watch:

October 16 - Bloomberg (Alan Crawford and Brian Parkin): "German Chancellor Angela Merkel was left with the Social Democrats as her sole potential governing partner after the Greens dropped out of coalition talks citing irreconcilable differences over tax policy. Merkel and her Christian Democratic negotiators ended their meeting with Greens party leaders in the early hours today after failing to identify enough common ground to begin formal coalition negotiations... 'There was some astonishing movement toward our position' from Merkel, Claudia Roth, the Greens co-leader, said... 'But on the specifics of energy, the minimum wage and a citizen's insurance, there was no movement and that's why we said it's no basis for us' to continue talks to form a government, she said."

October 17 - Reuters (Andreas Rinke and Holger Hansen): "Leaders from German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) agreed at a meeting on Thursday to begin formal negotiations next week on forming a 'grand coalition' government... Full-blown negotiations could then begin on Wednesday... They are expected to last between one and two months."

Italy Watch:

October 18 - Bloomberg (Andrew Frye): "Former Prime Minister Mario Monti, the economics professor who imposed austerity on Italy in 2011, quit the leadership of his political party after criticizing the policies of his successor, Prime Minister Enrico Letta. Monti stepped down as president of Civic Choice, the third- biggest party in Letta's coalition, because his objection to the government's 2014 budget put him at odds with 12 of the party's senators, Monti said... The 12 senators gave what amounted to 'a motion of no confidence in me' when they expressed satisfaction with the budget, Monti said. 'I accept it.'"


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