Page 2 of 3 CREDIT BUBBLE BULLETIN Difficult decisions ahead
Commentary and weekly watch by Doug Noland
Money market fund assets declined $4.9bn to $2.639 TN. Money Fund assets were up $69bn from a year ago, or 2.7%.
Total Commercial Paper outstanding fell $5.1bn to $1.015 TN. CP has declined $51bn y-t-d and $7bn, or 0.7%, over the past year.
Currency and 'Currency War' Watch
September 5 - Bloomberg (Neal Armstrong and John Detrixhe): ''Foreign-exchange trading surged to an average $5.3 trillion a day in April 2013, boosted by greater yen volumes, the Bank for International Settlements said. Trading increased 33% since the same period in 2010 ... That's an acceleration from a 20% increase in the three years through 2010. The yen had the biggest jump in trading activity among major currencies, while the euro's role as the second-most traded currency was reduced. Emerging-market currencies increased their share, with the Mexican peso
entering the top 10 most-actively traded currencies. Volumes in the global foreign-exchange market are increasing as traders expand activities in developing nations and banks focus on the currency markets while stricter regulations after the financial crisis threaten earnings from other divisions ... ''
The US dollar index added 0.1% to 82.146 (up 3.0% y-t-d). For the week on the upside, the New Zealand dollar increased 3.5%, the Brazilian real 3.4%, the Australian dollar 3.2%, the South African rand 2.6%, the Mexican peso 1.6%, the South Korean won 1.6%, the Canadian dollar 1.3%, the British pound 0.8%, the Norwegian krone 0.6%, the Taiwanese dollar 0.3% and the Singapore dollar 0.1%. For the week on the downside, the Japanese yen declined 1.0%, the Swiss franc 0.9% the euro 0.3%, the Danish krone 0.3% and the Swedish krona 0.2%.
The CRB index gained 0.7% last week (down 0.6% y-t-d). The Goldman Sachs Commodities Index jumped 1.1% (up 2.7%). Spot Gold slipped 0.2% to $1,392 (down 17%). Silver rose 1.6% to $23.89 (down 21%). October Crude gained $2.88 to $110.53 (up 20%). October Gasoline declined 1.3% (up 3%), and October Natural Gas fell 1.4% (up 5%). December Copper rallied 0.9% (down 11%). September Wheat dropped 1.3% (down 18%), and September Corn slipped 0.7% (down 30%).
US Fixed Income Bubble Watch
September 6 - Bloomberg (Sarika Gangar): ''Junk-bond sales are extending their lead over last year's record pace in the US as investors snap up debt that's been beating investment-grade securities for the longest stretch in more than a decade. Sprint Corp. raised $6.5 billion this week in the largest speculative-grade deal since 2008, leading $249.4 billion of issuance that is $44.8 billion ahead of offerings by this time last year ... The gap has more than doubled over the past four months, putting sales on track to surpass 2012's unprecedented $353.1 billion. Junk bonds, which have returned more than high-grade notes for seven straight months, are getting a boost from buyers seeking securities that offer better protection from rising interest rates.''
September 3 - Bloomberg (Lisa Abramowicz and Liz Capo McCormick): ''The worst losses in US debt in at least 37 years are being magnified by investors exiting the market at the same time new regulations prompt Wall Street firms to cut back on trading corporate bonds. Bank of America Merrill Lynch's US Broad Market Index is on pace to drop 4.41%, the biggest annual loss since at least 1976. Investors pulled $123 billion from bond funds since May, according to TrimTabs ... Trading in corporate fixed-income securities is the lowest ever as a proportion of outstanding debt, and volumes in Treasuries are little changed from 2007 levels even though the market has almost tripled to $11.5 trillion, Financial Industry Regulatory Authority and ICAP Plc data show. Bonds are getting riskier even with inflation at bay and corporate profits hitting new highs. 'When bond investors start to meaningfully divest themselves of their positions, it will be analogous to yelling fire in a crowded theater,' Michael Underhill, the chief investment officer at Capital Innovations LLC, which manages $1.5 billion, said ... ''
September 4 - Bloomberg (Brian Chappatta): ''The biggest losses since 1999 for municipal debt signal that Detroit's bankruptcy and 14 weeks of withdrawals from mutual funds are overwhelming historical trends pointing to a rebound in the $3.7 trillion market. Local debt lost 1.6% in August, the steepest drop for the month in 14 years ... It marked just the second time in 25 years that the obligations fell in both July and August, a period in which the market usually rallies as investors get cash from coupon and principal payments while issuance dwindles ... Benchmark yields are the highest since 2011 and exceed those on Treasuries and AAA company debt by the most in at least 20 months ... ''
September 4 - Bloomberg (Charles Mead and Matt Robinson): ''Verizon Communications Inc.'s plan to sell as much as $50 billion of bonds is helping to put a record year for global issuance back within reach following the slowest month in two years. An initial Verizon offering to help it take full control of its wireless unit may exceed Apple Inc.'s record $17 billion issue in April ... The Verizon bonds, along with sales this week by companies from Home Depot Inc. to Unilever, would boost offerings that have fallen $61 billion behind the pace in 2012, when an unprecedented $3.99 trillion was issued ... Sales this year had been exceeding 2012 by as much as $144 billion through May ... Borrowers would need to sell about $1.5 trillion of securities by year-end to match the record.''
US Bubble Economy Watch
September 3 - Bloomberg (Whitney Kisling and Nick Taborek): ''US companies, which have almost doubled profits since the financial crisis, are losing the benefit of record-low debt expenses as Federal Reserve plans to taper bond purchases send borrowing costs higher. Borrowing costs for Standard & Poor's 500 Index companies fell to 1.4% of sales the last 12 months, a record low in 11 years of data compiled by Bloomberg. While interest rates on corporate bonds are below the 5.7% average since the start of the financial crisis, yields are increasing the most since 2009 and rose to about 4.3% from a 17-year low of 3.35% in May, as economists project the Fed will start reducing economic stimulus this month. Higher debt costs will reduce buybacks and dividend increases that have boosted returns in the four-year bull market, investors say. Companies that repurchased the most shares or regularly increased payouts beat the benchmark for US equity by more than 27 percentage points since 2009. S&P 500 members returned $82.4 billion to shareholders in dividends last quarter, up from $71.2 billion a year earlier ... ''
September 5 - Bloomberg (Jeanna Smialek): ''Service industries in the US expanded in August at the fastest pace in almost eight years as a pickup in demand encouraged companies to step up hiring, showing the world's biggest economy is gaining momentum. The Institute for Supply Management's non-manufacturing index increased to 58.6 from 56 the prior month ... The August figure, which exceeded the median forecast of 55, was the strongest since December 2005 ... The ISM's measure of orders rose to the highest since February 2011.''
Federal Reserve Watch
September 6 - Bloomberg (Joshua Zumbrun): ''Kansas City Federal Reserve Bank President Esther George, who has consistently dissented against additional stimulus, called for tapering the Fed's $85 billion in monthly bond buying at its Sept. 17-18 meeting while cautioning that such reductions may prompt market volatility. 'An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month,' George said ... Such a move would be 'appropriate' at the next meeting, and future purchases could be 'split evenly between' Treasuries and mortgage-backed securities. George voted this year against all five decisions by the Federal Open Market Committee to press on with bond buying, saying the program risks creating imbalances in the economy and financial markets and pushing up long-term inflation expectations.''
September 6 - Bloomberg (Steve Matthews): ''Federal Reserve Bank of Chicago President Charles Evans, a voter on policy this year, said the Fed shouldn't taper its $85 billion in monthly bond buying until inflation and economic growth pick up. 'To start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,' Evans said ... He has consistently supported record stimulus.''
Global Bubble Watch
September 4 - Financial Times (Victor Mallet): ''Manmohan Singh, Indian prime minister, on Wednesday urged the developed world to help emerging markets by managing an 'orderly exit' from the monetary easing policies that have flooded the world with liquidity since the 2008 financial crisis. ... Mr Singh said he would emphasise 'the need for an orderly exit from the unconventional monetary policies being pursed by the developed world for the last few years, so as to avoid damaging the growth prospects of the developing world'.''
September 5 - Bloomberg (Scott Rose and Olga Tanas): ''China urged the US to limit global risks from shifts in monetary policy, with Indonesia warning the changing stance is spurring capital outflows as Group of 20 leaders met at a summit in St. Petersburg. An exit from monetary-easing policies poses a major challenge for the world economy, Chinese Vice Finance Minister Zhu Guangyao told reporters ... The US should be mindful of a possible 'very significant spillover effect,' said Zhu ... Emerging markets, which helped pull the world out of a recession after the global financial crisis, now face an exodus of cash and sliding currencies in anticipation of the Federal Reserve's eventual tapering of its $85 billion in monthly bond purchases.''
September 6 - Bloomberg (Unni Krishnan and Keiko Ujikane): ''India reached an agreement to more than triple its bilateral currency-swap line with Japan as Prime Minister Manmohan Singh's government seeks to stem a record slide in the rupee. The size of the swap agreement was increased to $50 billion from $15 billion ... The earlier accord was sealed in December 2011.''
Global Economy Watch
September 6 - Bloomberg (Greg Quinn): ''Canadian employment rose three times faster than economists forecast in August on gains in part-time work and service industries. Employment increased by 59,200 and the jobless rate fell to 7.1% from 7.2%...''
September 5 - Bloomberg (Theophilos Argitis): ''Home sales in Canada's two largest real estate markets continued their surge in August from a year earlier. Sales in Toronto, the largest market, rose 21% from August last year to 7,569 units ... , with average prices gaining 5.4%. Vancouver existing home sales rose 52%... Housing-market data are showing few signs of a hard landing after warnings from economists and policy makers that a bubble may have been forming.''
Bursting EM Bubble Watch
September 2 - Wall Street Journal (Sean McLain and I Made Sentana): ''Companies across Asia are facing a debt-repayment crunch as plunging local currencies make it more costly to repay foreign loans, a situation that is exacerbating stresses on the region's economies. Asian companies took out sizable foreign loans in recent years as the US Federal Reserve kept interest rates low and printed money. For firms in nations like India and Indonesia, rates on US-denominated debt were more attractive than local borrowing costs. But the current exodus of capital from emerging markets, amid expectations the Fed will end its period of extraordinary monetary stimulus later this year, has changed that equation. Foreign funds are pulling out of Asian bonds and other assets amid expectations US rates will rise further. That is pushing currencies in Asia sharply lower and raising the cost of repaying US-denominated borrowings.''
September 2 - Financial Times (Ben Bland ): ''The gloom surrounding Indonesia continued to deepen on Monday after southeast Asia's biggest economy posted a record monthly trade deficit and inflation climbed to a four-year high. The trade deficit jumped to $2.3bn, much higher than expected, in July as imports remained strong while exports fell because of the slowdown in China and ongoing troubles in Europe and the US. Annual consumer price inflation rose to 8.8% in August, from 8.6% one month earlier, with economists predicting that inflation may reach double digits by the end of the year, putting pressure on the central bank to continue hiking interest rates. Indonesia has been hit hard by the recent sell-off, which has also ensnared other emerging markets with large current account deficits and a need for foreign financing like Brazil, India, South Africa and Turkey.''