CREDIT BUBBLE BULLETIN Blinkered bulls
Commentary and weekly watch by Doug Noland
The small cap Russell 2000 index has gained 18.6% so far this year, slightly
ahead of the S&P400 Mid-Cap's rise of 16.9%. The S&P 500 Homebuilding
index has surged 38.6%, and the Morgan Stanley Cyclical Index has advanced
16.5%. The Morgan Stanley Retail Index has jumped 28.0%, trading today to a new
record high.
The bullish contingent is these days increasingly confident that there is much
more to the recovery than a mere stimulus-induced "sugar high". The marketplace
now comfortably disregards bearish developments - and becomes further
emboldened by "market resiliency". The market this week
brushed aside issues with Greece, China, Goldman Sachs and financial reform.
Complacency abounds, in true bubble fashion. The US stock market dismisses that
there could be meaningful ramifications from the unfolding Greek debt crisis.
Chinese authorities' recent determination to restrict mortgage credit barely
garners a headline. And while allegations against Goldman generate great
interest and discussion, few believe they will have much general market impact.
Financial reform, well, it's an afterthought when the market is open. Market
participants are enamored with the notion that the securities markets and real
economy are now conjoined in the initial phase of a big bull cycle.
Count me a subscriber of the "sugar high" thesis. The combination of
double-digit (to gross domestic product - GDP) deficits, protracted near-zero
rates, and the Fed's unprecedented trillion-plus monetization has worked
wonders. Government stimulus stabilized the credit system, asset prices, system
incomes and economic output. The bulls today believe that a new expansionary
cycle has commenced, and fundamentals and prospects couldn't be much more
encouraging from their point of view. Surging stock prices have the optimists
disregarding the possibility of a systemic addiction to massive government
spending, ultra-low rates, and overabundant marketplace liquidity. Potential
issues in the area of risk intermediation are not on the radar screen.
Yet, the sustainability of this recovery will be determined by private-sector
credit - eventually. The markets assume private credit growth will snap back
after its long recuperation, as it always has in the past. But, mostly,
analysts expend little energy pondering this issue. Deficits of about 10% of
GDP, rapid expansion of government-backed credit (mortgage-backed securities,
"build America bonds," student loans, bank deposits, and so forth), and
near-zero rates have created a recovery backdrop where minimal private-sector
growth has sufficed. This won't always be the case.
Greek credit default protection began December at 176 basis points (bps). Not
many months ago there was little fear of a debt crisis and no worry of default.
Yet here we are today with Greek two-year debt yielding 11% and annual default
protection priced at about 600 bps. Markets fear insolvency and debt
restructuring.
The US Treasury borrows these days for three months at 15 bps and for two years
at 1.02%. No one dares contemplate how dramatically the world would change if
fear injected itself into the equation. While there is certainly more
recognition of the structural debt issues confronting our government borrowers
(local, state and federal), there is no concern for short-term funding issues.
There was an important aspect of the Wall Street/mortgage finance bubble that
receives little attention: The explosion of credit provided an enormous boost
to governmental receipts. Especially in the case of federal debt ratios,
boom-related revenues reduced borrowing requirements and distorted debt-to-GDP
ratios.
At about 70% of GDP, outstanding Treasury debt is not on the surface overly
alarming. Obviously, if one throws in government-sponsored enterprise (GSE)
liabilities and the massive future spending obligations related to social
security, healthcare, pensions, and so on, things are much worse. Yet it is
conventional wisdom that the US has the luxury of several years to get its
fiscal house in order. And there is today great faith that economic recovery
will, as it always does, lead a revival of government receipts and ensure
rapidly declining deficits. Count me skeptical. The previous bubble helped
disguise underlying structural debt issues at the state, local and federal
levels. Going forward it's payback time.
First of all, economic recovery on its own won't rectify the federal deficit
problem. Instead, the expansion of private-sector credit will prove the key.
Economic recovery is thus far having little impact on deficits specifically
because the current expansion is financed chiefly through government borrowing
and spending. It is the expansion of private-sector debt that creates
government receipts that are not offset by rising expenditures - thus reducing
fiscal deficits. The optimists take it for granted that this recovery will work
as they always do - that fretting over US structural debt problems is premature
by a number years.
There are important factors unique to this cycle that I believe make it
improbable that private-sector credit will expand sufficiently to promote
federal government debt relief. First, in the post-housing mania environment,
it will take years for a substantial rebound in private mortgage credit growth
- and perhaps decades to return to the 2005 and 2006 $1.4 trillion annual
expansions. The demand for borrowings is much reduced, while credit standards
have tightened meaningfully from the manic years.
Moreover, it was the historic expansion of mortgage credit over the past decade
that so inflated system credit and, in the process, altered the underlying
structure of the US "bubble economy". The inflation of asset prices, incomes,
corporate cash flows, and government receipts fashioned a system acutely
dependent on robust credit creation. The entire system became dependent on
enormous, uninterrupted and risky credit expansion. Today, the private-sector
credit mechanism suffers from severe post-bubble impairment. At the same time,
massive federal government intervention has sustained the bubble economic
structure with its outsized credit appetite.
In the current stock market frenzy, the economy's structure and the prospects
for private-sector credit hardly seem relevant. The underlying fragility of
private-sector credit is masked. The markets are buoyant, while economic
recovery gains momentum. Apparently, there's no reason to focus on Greek debt
woes, China's vulnerable bubble, Goldman's and Wall Street's trust issues, or
the uncertainties associated with financial reform - not with corporate
earnings surging and many stocks in virtual melt-up.
Expectations have adjusted sharply higher, with most now believing the markets
are discounting quite favorable economic prospects. I would instead hold the
view that reflated securities markets are again nurturing financial and
economic vulnerability.
Recent issues in Greece, China, Wall Street and Washington should not be
dismissed. Importantly, this confluence of developments holds the potential to
further restrict the capacity and stability of private-sector credit. The Greek
debt crisis appears to have created dislocation in the credit default swaps
marketplace. This will likely increase market volatility, along with heightened
susceptibility for market yields to lurch higher, while perhaps hurting
liquidity in government debt markets generally. This may not be an issue for
Treasuries today, but it could foster debt market vulnerability going forward
and make the inevitable bear market even more challenging.
The SEC's allegations against Goldman increase the odds of meaningful financial
reform. Risk-taking by the major financial institutions will be further reigned
in; trust in contemporary Wall Street finance will be further shaken. There
will be more intense efforts to crack down on over-the-counter (OTC)
derivatives and push derivative trading to the exchanges. None of this would
seem to have a major impact today - but I view these developments supporting my
expectation for restrained private-sector credit growth going forward.
Over the years, I've emphasized the prominent role "Wall Street alchemy" played
in fueling credit bubble excess. The Street's astounding capacity to transform
risky loans into perceived safe and liquid securities was absolutely
fundamental to the credit bubble. The OTC derivatives markets - including
collateralized debt obligations, asset-backed securities, credit default swaps,
auction-rate securities, and so on - were critical for the intermediation of
risky, high-yielding loans into "money"-like securities. This brand of risk
intermediation and distortion was instrumental to the historic boom and bust -
and this week it returned to the regulation spotlight.
As I've attempted to explain over the years, risk intermediation invariably
becomes a central issue inherent to protracted credit bubbles and their
resulting bubble economies. The amount of credit necessary to sustain the
bubbles rises each year. And each passing year requires an increasing
(exponentially-rising) amount of riskier credit. Our government's massive
injection of credit/purchasing power coupled with interest rate and market
liquidity intervention sustained the existing economic structure. As they say,
"that's the good news."
For the private-sector credit mechanism to supplant government credit will
require an enormous expansion of risky loans. These risky credits must then
either be held directly by the financial sector or intermediated and sold into
the marketplace. Admittedly, this may not be much of an issue today - with
government credit expansion and monetary stimulus abounding. But there is no
escaping the harsh reality that acute credit vulnerability is only held at bay
by trillion dollar deficits and ultra-loose financial conditions. I am
skeptical of notions of shrinking deficits and a graceful Fed exit.
The unfolding Greek debt crisis, China bubble vulnerability, and more intense
scrutiny of Wall Street risk intermediation now work in confluence to increase
the probability for a negative surprise in our risk markets.
Sure, the equities bulls have become intoxicated by some incredible stock and
sector performance. But equity market reflation must be approaching the point
of unnerving the bond market. And it can't help sentiment that, as reported
today by CNBC's Steve Liesman, a rising number of Federal Open Market Committee
members support a timely sale of assets and a removal of the Fed's
extraordinary liquidity measures - more bearish fundamentals for the
private-sector credit mechanism gladly ignored by a stock market bubble.
WEEKLY WATCH
For the week, the S&P500 jumped 2.1% (up 9.2% y-t-d), and the Dow gained
1.7% (up 7.4%). The broader market fire runs hot. The S&P 400 Mid-Caps
surged 3.6% (up 16.9%), and the small cap Russell 2000 gained 3.8% (up 18.6%).
The Banks surged 5.8% (up 35.7 %), and the Broker/Dealers gained 3.4% (up
7.8%). The Morgan Stanley Cyclicals rose 3.4% (up 16.5%), and the Transports
increased 2.3% (up 15.9%). The Morgan Stanley Consumer index gained 1.9% (up
9.0%), and the Utilities advanced 2.3% (down 2.1%). The Nasdaq100 increased
2.1% (up 10.5%), and the Morgan Stanley High Tech index added 0.9% (up 7.8%).
The Semiconductors gained 1.7% (up 11.3%). The InteractiveWeek Internet index
added 0.8% (up 10.3%). The Biotechs declined 2.5%, reducing 2010 gains to
26.9%. With bullion rallying $19, the HUI gold index gained 3.3% (up 2.8%).
One-month Treasury bill rates ended the week at 14 bps and three-month bills
closed at 15 bps. Two-year government yields jumped 11 bps to 1.025%. Five-year
T-note yields rose 12 bps to 2.56%. Ten-year yields gained 5 bps to 3.82%. Long
bond yields dipped one basis point to 4.66%. Benchmark Fannie MBS yields jumped
9 bps to 4.50%. The spread between 10-year Treasury and benchmark MBS yields
widened 4 bps to 68 bps. Agency 10-yr debt spreads widened 3.5 to 37 bps. The
implied yield on December 2010 eurodollar futures jumped 13.5 bps to 0.83%. The
10-year dollar swap spread increased 2.75 to end the week at zero. The 30-year
swap spread increased 3 to negative 18.5. Corporate bond spreads were mixed. An
index of investment grade bond spreads increased one to 88 bps, while an index
of junk spreads dropped 14 bps to 480 bps.
It was another strong week for debt sales. Investment grade issuers included
Regions Financial $750 million, Orix $750 million, and Biomed Realty $250
million.
Junk issuers included Agile Property Holdings $650 million, Phillips-Van Heusen
$600 million, Berry Plastics $500 million, Allbritton Communications $455
million, Gray Television $365 million, Kaisa Group $350 million, Telcordia
Technologies $350 million, Penn Virginia $300 million, Standard Pacific $300
million, Live Nation Entertainment $250 million, Kemet Corp $230 million,
Global Geophysical Services $200 million, Thermon Industries $210 million, and
Cleaver-Brooks $185 million.
Convert issues included MGIC $300 million and Evergreen Solar $165 million.
International dollar debt sales remain robust. Issuers included Russia $5.0bn,
Dexia $4.5bn, Standard Charter $2.0bn, Egypt $1.5bn, BNP Paribas $1.15bn, RBS
Global $1.1bn, Anglogold $1.0bn, Banco Brasil $950 million, Dtek Finance $500
million, MHP $330 million and Premier Aircraft $190 million.
U.K. 10-year gilt yields rose 6 bps to 4.04%, while German bund yields dipped 2
bps to 3.06%. Greek bond yields spiked 128 bps to 8.65%. The German DAX
equities index increased 1.3% (up 5.1% y-t-d). Japanese 10-year "JGB" yields
declined 3 bps to 1.31%. The Nikkei 225 declined 1.7% (up 3.5%). Emerging
markets were mixed to lower. For the week, Brazil's Bovespa equities index
declined 1.4% (up 1.3%), while Mexico's Bolsa gained 0.7% (up 5.4%). Russia’s
RTS equities index added 0.4% (up 11.3%). India’s Sensex equities index
increased 0.6% (up 1.3%). China’s Shanghai Exchange sank 4.7% (down 9.0%).
Brazil’s benchmark dollar bond yields declined 4 bps to 4.77%, while Mexico's
benchmark bond yields rose 7 bps to 4.88%.
Freddie Mac 30-year fixed mortgage rates were unchanged last week at 5.07% (up
27bps y-o-y). Fifteen-year fixed rates slipped one basis point to 4.39% (down
9bps y-o-y). One-year ARMs jumped 9 bps to 4.22% (down 60bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 3 bps
to 5.83% (down 48bps y-o-y).
Federal Reserve Credit jumped $20.5bn last week to a record $2.318 TN. Fed
Credit was up $98.3bn y-t-d (14.4% annualized) and $149bn, or 6.9%, from a year
ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 4/21) surged $21.8bn to a record $3.056 TN. "Custody holdings" have
increased $100.9bn y-t-d (11.1% annualized), with a one-year rise of $409bn, or
15.4%.
M2 (narrow) "money" supply sank $36.2bn to $8.467 TN (week of 4/12). Narrow
"money" has declined $45.9bn y-t-d. Over the past year, M2 grew 1.6%. For the
week, Currency added $2.1bn, while Demand & Checkable Deposits dropped
$22.7bn. Savings Deposits fell $7.8bn, and Small Denominated Deposits declined
$3.1bn. Retail Money Funds fell $4.7bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $35bn to $2.878
TN. In the first 16 weeks of the year, money fund assets have dropped $416bn,
with a one-year decline of $928bn, or 24.4%.
Total Commercial Paper outstanding added $1.5bn last week to $1.076 TN. CP has
declined $94bn, or 26.2% annualized year-to-date, and was down $396bn over the
past year (27%).
International reserve assets (excluding gold) - as tallied by Bloomberg's Alex
Tanzi - were up $1.261 TN y-o-y, or 18.9%, to a record $7.924 TN.
Global Credit Market Watch
April 22 - Bloomberg (Matthew Brown): "Greek bonds plunged, driving two- year
yields above 11%, after the nation's 2009 budget deficit was larger than
previously forecast and investors grew concerned the government will cut or
delay its debt payments. The cost of insuring against default soared, rising
above Ukraine and putting it closer to Argentina and Venezuela."
April 23 - Bloomberg (Jonathan Stearns and Maria Petrakis): "Greece called for
activation of a financial lifeline of as much as 45 billion euros ($60 billion)
this year in an unprecedented test of the euro's stability and European
political cohesion. The appeal for help from the European Union and
International Monetary Fund follows a surge in borrowing costs to what Greek
Prime Minister George Papandreou called unsustainable levels ... 'There was no
response from the markets, either because they didn't believe in the political
will of the EU or because they decided to go on with speculation,' Papandreou
said ... 'The situation threatens to demolish not only the sacrifices of the
people but also the regular course of the economy.'"
April 23 - Bloomberg (Bryan Keogh): "Financial markets face the risk of a
seizure similar to when Lehman Brothers Holdings Inc. went bankrupt if Greece
restructures its debt to the detriment of investors, Deutsche Bank AG said. The
surge in the cost of insuring the country from default shows traders aren't
convinced Greece will get a full bailout, Jim Reid, head of fundamental
strategy at Deutsche Bank, wrote ... A restructuring of Greek's debt, while
unlikely in the short-term, would have 'huge ramifications' for global
financial markets ... 'As soon as you set a restructuring template for stressed
sovereigns, then you run a huge risk of a Lehman-type event with confidence in
other stressed sovereigns evaporating,' including Portugal, Ireland and Spain,
Reid wrote. 'It's not just Greece that needs the bail-out, the others need it
as a first line of defense.'"
April 22 - Bloomberg (Matthew Brown): "Greece is likely to cut or delay
payments to bond investors even as the country negotiates a bailout package
with the European Commission and International Monetary Fund, according to
Goldman Sachs ... 'Look out for signs that the government might offer a
voluntary debt-restructuring arrangement sometime over the next few months,'
Erik F. Nielsen, chief European economist at Goldman ... wrote ... 'A large
multi-year official rescue package combined with a voluntary debt restructuring
would create a much longer breathing space for the government to undertake the
necessary reforms.'"
April 19 - Bloomberg (Sarah Mulholland): "Bonds backed by commercial real
estate loans are gaining as investors flush with cash seek higher returns and
the economic recovery gains steam. Yields on senior top-rated securities backed
by mortgage payments for skyscrapers, hotels and shopping malls fell 0.11
percentage point to 2.19 percentage points more than Treasuries ... The $700
billion market for commercial-mortgage backed securities 'has seen a violent
rally' as gains across credit markets push buyers toward investments with
higher yields, according to ... Bank of America Corp."
April 22 - Bloomberg (Denis Maternovsky, Sonja Cheung and Caroline Hyde):
"Russia priced $5.5 billion of bonds, the second biggest emerging-market dollar
debt offering on record, as the country seized on all-time low yields to return
to world capital markets for the first time since defaulting in 1998."
Global Government Finance Bubble Watch
April 22 - Bloomberg (Svenja O'Donnell): "Britain registered its biggest annual
budget deficit since the second world war as the political dispute over the
government finances intensified. The 152.8 billion-pound ($234 billion)
shortfall in the fiscal year through March was 76% higher than a year earlier
... "
April 22 - Bloomberg (Simone Meier): "The euro area's budget deficit widened to
more than double the European Union's 3% limit in 2009, led by Greece and
Ireland. The total budget gap for the 16-nation euro region widened to 6.3% of
gross domestic product last year, the biggest since the introduction of the
euro in 1999 ... "
April 20 - Bloomberg (Sandrine Rastello): "The International Monetary Fund
cautioned that rising government debt has replaced financial industry stress as
the biggest threat to the global economy ... "
April 22 - Bloomberg (Sandrine Rastello): "The International Monetary Fund
raised its forecast for global growth this year led by China and cautioned that
a failure of nations to contain soaring public debt might have 'severe'
consequences ... "
Currency Watch
The dollar index gained 0.7% this week to 81.42 (up 4.6% y-t-d). For the week
on the upside, the Canadian dollar increased 1.3%, the New Zealand dollar 1.2%,
the Mexican peso 0.8%, the Singapore dollar 0.4%, and the Australian dollar
0.3%. For the week on the downside, the Japanese yen declined 1.9%, the Swiss
franc 1.1%, the Danish krone 1.1%, and the euro 1.0%.
Commodities Watch
April 20 - Bloomberg (Henry Meyer): "Li Wei, a Chinese diplomat in Riyadh, had
only just seen off a Ministry of Commerce delegation to Saudi Arabia this month
when he started preparing for another Chinese governmental visit in two weeks.
'Every month we have delegations coming to Saudi Arabia,' said Li ... 'We are
too busy.' China, the world's second-largest oil consumer, and Saudi Arabia,
holder of about a fifth of global crude reserves, are forging ever closer ties
as the Persian Gulf kingdom responds to a Chinese drive to feed its rising
energy needs."
April 21 - Bloomberg: "Copper imports by China, the world's largest consumer of
the metal, rose for a second month ... Shipments of refined copper were 337,125
metric tons last month ... 14% more than in the same period of 2009 ... "
April 19 - Bloomberg (Patrick McKiernan): "Lumber prices rose, extending a
rally to the highest price since May 2006."
The CRB index gained 1.0% (down 1.5% y-t-d). The Goldman Sachs Commodities
Index (GSCI) rose 0.9% (up 4.6% y-t-d). Spot Gold rallied 1.7% to $1,156 (up
5.4% y-t-d). Silver jumped 3.3% to $18.29 (up 8.6% y-t-d). June Crude gained 42
cents to $85.09 (up 7.2% y-t-d). May Gasoline jumped 3.4% (up 14.6% y-t-d), and
May Natural Gas rose 5.6% (down 23.5% y-t-d). May Copper was little changed (up
6% y-t-d). May Wheat gained 0.6% (down 9% y-t-d), while May Corn declined 3.0%
(down 15% y-t-d).
China Bubble Watch
April 19 - Bloomberg (Chia-Peck Wong): "China told banks to stop loans for
third-home purchases as the government steps up measures to cool property
prices with some of the 'most draconian' orders yet. Shares of developers and
banks tumbled. Banks should also suspend lending to buyers who can't provide
tax returns or proof of social security contributions, the State Council said
... The latest measures come on top of orders to banks this year to set aside
more deposits as reserves and raise mortgage rates, and steps to re-impose a
sales tax on homes. 'These are the most draconian measures on the property
market in history," Jun Ma, Deutsche Bank AG's Greater China chief economist,
said ... Chinese press reports point to 'panic selling' by investors who own
more than one home in Shanghai, Beijing and Shenzhen, he said."
April 21 - Bloomberg: "China's banking regulator told larger banks to conduct
quarterly stress tests on property loans and ensure the risks attached to such
lending is strictly controlled after the government tightened credit rules to
crack down on real-estate speculation. Financial institutions must implement
the central government's property controls and use mortgage loan policies to
'strictly' limit housing speculation, Liu Mingkang, head of the China Banking
Regulatory Commission, said ... "
April 21 - Bloomberg (Chia-Peck Wong and Liza Lin): "China's 'excessive' credit
expansion and surging real estate prices are 'danger signals' that growth is
peaking, investor Marc Faber said. 'There are some symptoms of a bubble
building in China, with the increase in foreign exchange reserves, rapidly
rising property prices ... From here on, the China economy will slow down
regardless. Whether it will crash this year or later, I don't know ... If you
believe the government can steer the economy like a car, that's not my view,"
said Faber ... Government measures 'always lead to unintended consequences.'"
Japan Watch
April 22 - Bloomberg (Aki Ito): "Japan's exports grew for a fourth month in
March, evidence that sustained gains in overseas demand are fueling the
recovery as prices slump at home. Shipments abroad advanced 43.5% from a year
earlier ... "
India Watch
April 22 - Bloomberg (Unni Krishnan): "India's food inflation accelerated ...
An index measuring wholesale prices ... rose 17.65% in the week ended April 10
from a year earlier."
April 20 - Bloomberg (Cherian Thomas): "India's central bank raised interest
rates for the second time in a month ... to contain the fastest inflation among
the Group of 20 nations. The Reserve Bank of India increased the reverse
repurchase rate to 3.75% from 3.5%..."
April 21 - Bloomberg (Kartik Goyal and Unni Krishnan): "The Reserve Bank of
India's path of quarter-point interest-rate increases may fail to stem the
nation's accelerating inflation... The finance ministry plans to sell 1.64
trillion rupees ($37 billion) of bonds this quarter, 36% of the total issuance
planned for the financial year. 'If government borrowings weren't an issue,
they would have probably done a more aggressive tightening,' said Sonal Varma
... economist at Nomura Holdings Inc. 'Monetary conditions are too loose for
the current stage of economic cycle.'"
Latin America Bubble Watch
April 23 - Bloomberg (Thomas Black and Andres R. Martinez): "Brazilian credit
is growing at an unsustainable rate and will slow when the central bank begins
to raise rates at next week's meeting, said Emilson Alonso, chief of Latin
America for HSBC ... Brazil's credit as a percentage of the economy rose to 41%
last year from 23% in 2004, he said. 'Brazil is booming and it's not
sustainable,' Alonso said ... 'Inflation is showing signs of some increase.'
Brazil's banking assets had been growing at 20% to 25% a year ... "
April 22 - Bloomberg (Iuri Dantas and Arnaldo Galvao): "Brazil's current
account gap widened in March to the highest this year ... The deficit ... rose
to $5.1 billion in March after a $3.3 billion gap in February ... "
April 19 - Bloomberg (Daniel Cancel): "China ... will lend Venezuela $20
billion and form a venture to pump crude from the Orinoco Belt, President Hugo
Chavez said ... The financing from China is separate from a $12 billion
bilateral investment fund, Chavez said ... "
Unbalanced Global Economy Watch
April 20 - Bloomberg (Svenja O'Donnell): "The U.K.'s inflation rate jumped more
than economists forecast in March, breaching the government's upper limit for
the second time this year ... Consumer prices limbed 3.4% from a year earlier
...
April 20 - Bloomberg: "Russian billionaire Roman Abramovich's new yacht,
measuring nearly 560 feet long, is the biggest private yacht in the world. The
yacht ... reportedly features a missile defense system, an anti-paparazzi laser
shield and at least one mini-submarine."
B>US Bubble Economy Watch
April 20 - Bloomberg (Alexis Leondis): "Rising health-care costs are a top
concern for a majority of wealthy Americans, according to a Bank of America
Corp. survey."
Derivatives Watch
April 22 - Bloomberg (Phil Mattingly): "The Senate Agriculture Committee
approved derivatives legislation that would require US lenders such as JPMorgan
Chase & Co. and Bank of America Corp. to spin off their swaps trading
desks. The panel voted 13-8 to back a bill drafted by Committee Chairman
Blanche Lincoln ... The provision to make lenders separate swaps trading from
commercial bank operations has been among the most contentious issues as
lawmakers weigh new rules for Wall Street."
April 23 - Bloomberg (Jesse Westbrook): "Moody's ... and Standard & Poor's
were too influenced by Wall Street, had insufficient resources and used
outdated models to grade mortgage securities that blew up when the US housing
market collapsed in 2007, Senate investigators said in a report. The Senate
Permanent Subcommittee on Investigations concluded after an 18-month probe that
the credit-rating firms had conflicts of interest and ignored signs that fraud
and lax lending had infected the housing market ... . 'Credit-rating agencies
allowed Wall Street to impact their analysis, their independence and their
reputation for reliability,' Senator Carl Levin ... said ... 'They did it for
the money.'"
April 23 - Bloomberg (Jody Shenn): "Moody's ... cared more about losing market
share than potentially committing 'securities fraud,' even as the rating
company realized it needed to step up downgrades on subprime-mortgage bonds,
the former head of a structured-products group said. In September 2007, a
manager at the ... firm resisted a plan to grade new collateralized debt
obligations filled with mortgage bonds by including an assumption that Moody's
rankings on the underlying home-loan securities were no longer accurate, Eric
Kolchinsky told the Senate Permanent Subcommittee on Investigations in prepared
testimony.
Central Bank Watch
April 20 - Bloomberg (Jacob Greber): "Concern that Australia's mining boom will
stoke inflation was a key reason the central bank raised borrowing costs toward
'more normal levels' two weeks ago and signaled further moves in 2010, policy
makers said."
California Watch
April 23 - Bloomberg (James Kraus): "California state and local governments
have $325 billion in unfunded pension liabilities, the Los Angeles Times
reported, citing pension consultant Girard Miller. Miller, speaking to the
state's Little Hoover Commission, said the shortfall amounted to $22,000 for
every working adult in California ... "
New York Watch
April 21 - Bloomberg (Henry Goldman): "New York's general fund may run out of
cash in June and will for the first time in state history end the months of May
through August with a negative cash balance, state Comptroller Thomas DiNapoli
said."
April 19 - Bloomberg (Henry Goldman): "More than half of New York state's
electorate want to levy a temporary tax on bonuses of people earning $250,000
or more, a Siena College survey reported..."
April 19 - Bloomberg (Oshrat Carmiel): "Home sales in the Hamptons, the New
York oceanside resort favored by financiers and celebrities, more than doubled
in the first quarter ... Transactions climbed to 292 from 106 a year earlier
... according to ... Town & Country Real Estate. The median price ... was
$1.1 million, or 51% higher than a year ago ... "
Speculation Watch
April 20 - Financial Times (Sam Jones): "Assets managed by the global hedge
fund industry are just 2% shy of their previous all-time high, set in October
2007 ... Hedge funds collectively now manage about $1,670bn of assets,
according to HFR."
April 19 - Bloomberg (Bei Hu): "Sovereign wealth funds in Asia- Pacific,
Europe, Middle East and Africa increased assets by 19% over nine months,
according to a survey ... by State Street Corp ... Total assets of the funds
rose to $136 billion ... "
Doug Noland is a market strategist for the Prudent Bear Funds.
(Republished with permission from PrudentBear.com.
Copyright 2005-2010 David W Tice & Associates. All rights reserved.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
