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     Dec 9, '13

Page 2 of 3
The tapering countdown
Commentary and weekly watch by Doug Noland

Federal Reserve Credit added $2.2bn to a record $3.884 TN. Over the past year, Fed Credit was up $1.041 TN, or 36.6%.

M2 (narrow) "money" supply rose $15.4bn to $10.935 TN. "Narrow money" expanded 6.2% ($640bn) over the past year. For the week, Currency slipped $1.1bn. Total Checkable Deposits gained $8.9bn, and Savings Deposits expanded $12.6bn. Small Time Deposits were little changed. Retail Money Funds declined $5.0bn.

Money market fund assets jumped $24.2bn to $2.702 TN. Money Fund assets were up $58bn from a year ago, or 2.2%.

Total Commercial Paper fell $9.4bn to $1.050 TN. CP was down

$16bn y-t-d, while increasing $14bn, or 1.4%, over the past year.

Currency Watch
December 3 - Bloomberg (Fion Li): "China's yuan overtook the euro to become the second-most used currency in global trade finance in 2013, according to the Society for Worldwide Interbank Financial Telecommunication. The currency had an 8.66% share of letters of credit and collections in October, compared with 6.64% for the euro ... China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance ... The yuan's share of global trade finance was 1.89% in January 2012, while the euro's was 7.87%, Swift said."

The US dollar index declined 0.5% to 80.315 (up 0.7% y-t-d). For the week on the upside, the New Zealand dollar increased 2.0%, the Swiss franc 1.6%, the Mexican peso 1.4%, the euro 0.9%, the Danish krone 0.8%, the Swedish krona 0.7%, the Singapore dollar 0.5%, and the Brazilian real 0.2%. For the week on the downside, the South African Rand declined 1.4%, the Norwegian Krone 0.6%, the Japanese yen 0.5%, the Canadian dollar 0.2% the British pound 0.1% and the Australian dollar 0.1%.

Commodities Watch
The CRB index rallied 1.4% last week (down 5.5% y-t-d). The Goldman Sachs Commodities Index gained 1.9% (down 2.3%). Spot Gold fell 1.9% to $1,229 (down 27%). March Silver dropped 2.5% to $19.52 (down 35%). January Crude rallied $4.93 to $97.65 (up 6%). January Gasoline gained 2.4% (down 1%), and January Natural Gas jumped 4.0% (up 22.8%). March Copper advanced 1.4% (down 11%). December Wheat sank 2.7% (down 18%), while December Corn recovered 2.1% (down 39%).

US Fixed Income Bubble Watch
December 5 - Bloomberg (Sarika Gangar): "Sales of dollar-denominated corporate bonds soared to a record for the second straight year, led by high-yield borrowers ... Forest Laboratories Inc.'s $1.2 billion offering today of 5% notes brought issuance of bonds from the riskiest to the most creditworthy companies to $1.480 trillion, eclipsing last year's unprecedented $1.479 trillion ... Speculative-grade sales of $359.2 billion surpassed the record $356.9 billion from 2012. Bond buyers have been scooping up corporate debt as the central bank has held benchmark interest rates between zero and 0.25% for five years ... Corporate bonds have lost 0.05% this year on the Bank of America Merrill Lynch US Corporate & High Yield Index as speculation mounts that the central bank will begin to trim its monthly purchases of $85 billion of mortgage bonds and Treasuries."

December 6 - Bloomberg (Charles Mead and Matt Robinson): "Corporate-bond buyers are accepting the lowest relative yields since before the 2008 financial crisis to own dollar-denominated notes that face declining returns as the Federal Reserve considers paring record stimulus. The extra yield investors demand to own debt of the most- creditworthy to riskiest borrowers instead of similar-maturity Treasuries has narrowed 31 bps this year to 200 bps, the lowest since October 2007

"... The Fed is pushing investors into riskier securities by adding to the more than $3 trillion it's pumped into the financial system through asset purchases the past five years. By pushing spreads below the average of the 10 years before 2008, bond buyers are leaving themselves more vulnerable to a potential surge in yields on US Treasuries when the central bank starts curtailing its $85 billion of monthly debt purchases."

December 5 - Financial Times (Vivianne Rodrigues): "Corporate borrowers with weaker credit quality are taking advantage of investors' relentless search for higher yields to raise their last batch of funds in 2013 in the coming days. A flurry of low-rated borrowers ... have announced new offerings this week in combined sales expected to surpass the $5bn mark. The new crop of junk bonds is helping push this year's total sales of the debt to a fresh record of $339bn, according to Dealogic ... Bonds with lower credit ratings and higher probability of default have soared in popularity with investors, who have been diverted from top tier government and corporate debt where central banks are suppressing interest rates."

December 6 - Bloomberg (Brian Chappatta and Priya Anand): "A historic exodus from municipal mutual funds is propelling the biggest jump in trading in local debt since 2011 as individuals and money managers bet an expanding economy will drive up interest rates. Individuals yanked $52 billion from the funds in the first 11 months of 2013, the most since at least 1992 ... The withdrawals accelerated starting in May on speculation the Federal Reserve will curb its monthly bond purchases. Outflows through year-end would extend the worst losses in the $3.7 trillion municipal market since 2008. With AAA yields almost doubling in the past year, trading surged 23% last quarter from a year earlier, the most in at least two years ..."

December 3 - Bloomberg (Jody Shenn): "The first annual losses in US government-backed mortgage bonds since 1994 are deepening as the dual threats of a new regulator and a Federal Reserve pullback leave buyers navigating around what JPMorgan Chase & Co. calls a modern-day Scylla and Charybdis. The $5.4 trillion of securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae lost an average 0.7% in November ... That's the biggest drop since a 0.9% decline in June, when the debt was finishing its worst quarter in 19 years as concern grew the Fed would slow monthly bond purchases that include $40 billion of the notes."

December 3 - Bloomberg (Katie Linsell): "Microsoft Corp. and Bank of America Corp. are marketing bonds in euros, spurring deals in the currency from US borrowers to the most since 2008. American companies have raised 39 billion euros ($53bn) from debt sales this year, compared with 20 billion euros in 2012 ..."

Federal Reserve Watch
December 6 - Dow Jones (Pedro da Costa): "The Federal Reserve should soon announce a cap on the amount of bonds it will buy through its currently open-ended program, Charles Plosser, president of the Philadelphia Fed said ... Limiting the program to some dollar amount would reduce the uncertainty about it, which is damaging its effectiveness, Mr. Plosser told reporters ... Mr. Plosser said he was encouraged by the November employment report ... The figures fueled market speculation that the Fed might start scaling back its $85 billion per month in bond purchases at its next meeting on Dec. 17-18.

"But Mr. Plosser, a critic of the program, said that he would rather limit its size than gradually reduce, or ‘taper,' the amount of monthly purchases. ‘I was never a big fan of this program in the first place. So part of me says the sooner we can end this thing the better ... But the sooner we can say we're going to end this program once we've purchased X, the better. Don't even taper -- just reduce the uncertainty."

December 6 - Dow Jones (Doug Cameron): "A senior Federal Reserve policymaker said Friday that the latest dip in the unemployment rate probably overstates the improvement in the US economy, and backed continuing its accommodative monetary policy. Federal Reserve Bank of Chicago President Charles Evans also said he had ‘no strong preference' about whether the Fed winds down its $85 billion-per-month bond-buying program by gradually reducing the size of monthly purchases or by setting a time limit to the current program that would result with same total amount of bond purchases."

December 5 - Bloomberg (Steve Matthews and Aki Ito): "Two Federal Reserve regional bank presidents who have disagreed on the need for additional easing said any decision to taper bond buying should be accompanied by a limit on the size of the program or a timetable for ending it. ‘If and when the FOMC arrives at a decision to wind down asset purchases, it's my view that it will be helpful to the transition process to provide as much certainty as possible about how this will be done,' said Atlanta Fed President Dennis Lockhart ... Dallas Fed President Richard Fisher, an opponent of additional bond buying who will vote on policy next year, said ... that the Fed at the start of tapering purchases should provide ‘a definite path as to when we reach zero.'"

December 5 - Bloomberg (Steve Matthews): "Federal Reserve Bank of Atlanta President Dennis Lockhart, a backer of record stimulus, said the Fed when considering tapering $85 billion in monthly bond buying should announce a total limit on purchases or a timetable for dialing down the program... Lockhart said he is among FOMC participants who favor announcing a ‘total size of remaining purchases or a timetable for winding down the program.'"

Central Bank Watch
December 5 - MarketNew International (Johanna Treeck): "European Central Bank President Mario Draghi signaled ... the Eurotower is in no rush to launch additional policy measures in the absence of any downside surprises to the broader economy ... While Draghi stressed that ECB stands ready to act should developments require, he also underlined the increasing complexity of its remaining policy options, suggesting that bar for further easing measures has been raised even higher. The Governing Council is ‘fully aware', Draghi said, of the downside risks ... ‘The message is that we are ready and able to act within the forward guidance framework,' Draghi said ...

"Nevertheless, he revealed that ‘there was basically no proposal to cut rates' in Thursday's meeting ... At the same time, he particularly highlighted the complexity of quantitative easing in the euro area in response to a question about additional liquidity measures. ‘It's like when people say 'ah the ECB should buy assets.' Which assets?' Draghi also poured cold water on a much less controversial policy: fresh long-term liquidity operations in the very near term ... ‘If we are to do an operation similar to the LTRO we want to be sure it's being used for the economy and that it's not going to be used to subsidise capital formation for the banking system through carry trades,' Draghi said."

US Bubble Economy Watch
December 5 - Bloomberg (Katya Kazakina): "Hollywood producer Brian Grazer, the Oscar winner who has collected art for more than a decade, made his first trip to the Art Basel Miami Beach fair yesterday. He chatted with entertainer-entrepreneur Sean John Combs, music producer Jimmy Iovine and Google Chairman Eric Schmidt at the Gagosian gallery booth, where an $8.5 million sculpture by Henry Moore and a $9 million candy egg sculpture by Jeff Koons awaited buyers. ‘I am overwhelmed,' said Grazer ... ‘I've never been here before. The prices are crazy.'

"...Held at Miami Beach Convention Center, the fair's 12th edition features 258 galleries from 31 countries and offers more than $3 billion of mostly postwar and contemporary works, with a bull market for art driving prices for some items above $20 million. Early visitors included billionaire philanthropist Eli Broad, private-equity executive Wilbur Ross, real estate mogul Michael Shvo, hedge-fund manager Adam Sender, former Walt Disney Co. Chief Executive Officer Michael Eisner and actors Val Kilmer and Michelle Williams ... ‘Someone described today as the ‘Black Friday' of the art world,' said Maxwell Anderson, director of the Dallas Museum of Art. ‘It has the same pent-up demand and finite moment of opportunity.'"

December 5 - New York Times (Carol Vogel): "Three paintings by Norman Rockwell celebrating homey, small-town America, among the most popular of his 322 covers for The Saturday Evening Post, sold at Sotheby's ... for a total of nearly $57.8 million, about twice their high estimate. he auction house's York Avenue salesroom in Manhattan, filled with American art dealers and collectors, went dead quiet while a tense nine-and-a-half-minute bidding battle played out for ‘Saying Grace,' one of Rockwell's best-loved scenes. It brought $46 million, well over its high estimate of $20 million and the most ever paid at auction for his work."

December 5 - Bloomberg (Mark Niquette and William Selway): "Bev Johns sat before Illinois lawmakers and asked why they hated teachers. The 67-year-old retired special-education teacher and administrator from Jacksonville thought she had a secure pension in return for 34 years of work ... ‘You are punishing people who devoted their lives to educating children,' Johns told a committee ... The legislature's vote that day to approve the $160 billion restructuring, on the same day that a federal judge ruled that bankrupt Detroit may cut retirement benefits, shows the erosion of a social compact. For generations, public employees accepted modest wages for the promise of a secure retirement."

December 5 - Bloomberg (Victoria Stilwell): "The US economy expanded in the third quarter at a faster pace than initially reported, led by the biggest increase in inventories since early 1998. Consumer spending slowed. Gross domestic product climbed at a 3.6% annualized rate, up from an initial estimate of 2.8% and the strongest since the first quarter of 2012 ..."

UK Bubble Economy Watch
December 6 - Bloomberg (Scott Hamilton): "U.K. house prices rose for a 10th month in November as the supply of properties for sale failed to keep pace with demand, Halifax said. Home values increased 1.1% to an average 174,910 pounds ($285,800) ... The Bank of England took action last week to restrain Britain's strengthening property market by ending incentives for mortgage lending under its credit-boosting program."

Global Bubble Watch
December 6 - Bloomberg (Saijel Kishan and Kelly Bit): "The $2.5 trillion hedge-fund industry, whose money managers are among the finance world's highest paid, is headed for its worst annual performance relative to US stocks since at least 2005. The funds returned 7.1% in 2013 through November ... That's 22 percentage points less than the 29.1% return of the Standard & Poor's 500 Index, with reinvested dividends, as markets rallied to records. ‘It has been difficult for hedge funds on the short side,' said Nick Markola, head of research at Fieldpoint Private, a $3.5 billion ... private bank and wealth-advisory firm ... Hedge funds, which stand to earn about $50 billion in management fees this year based on industrywide assets, are underperforming the benchmark US index for the fifth year in a row ... Billionaire Stan Druckenmiller, who produced annual returns averaging 30% for more than two decades, last month called the industry's results a ‘tragedy' and questioned why investors pay hedge-fund fees for annual gains closer to 8%."

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