Page 1 of 4 CREDIT BUBBLE BULLETIN Hoping there's hope
Commentary and weekly watch by Doug Noland
This is the first all-encompassing global dislocation of contemporary finance,
impacting virtually all economies, markets and asset classes. The media are now
all over the "Wall Street" and "banking" crisis. I am of the view, however,
that the collapse of the hedge fund industry has moved to the forefront - that
it is now at the epicenter of global market upheaval.
To watch silver lose more than 20% of its value on Friday in intraday trading;
to see the collapse in energy prices; to see the entire commodities complex
absolutely routed; to view global currency markets in complete disarray, with
double-digit intraday drops in the Brazilian real and Mexican peso; to witness
major currencies such as the Australian and Canadian dollars suffer
precipitous declines; for benchmark Fannie Mae mortgage-backed security yields
to surge 62 basis points (bps) in three days; to see Brazilian dollar bond
yields jump almost 200 bps in four sessions; for global equities indices to
suffer rapid double-digit drops throughout both the developed and "emerging"
markets; to witness a 1,000 point intraday swing in the DJIA. All the favorite
trades are blowing up, and the leveraged speculating community is in a panic
de-leveraging.
There is no doubt that markets are in the midst of an unprecedented liquidation
of positions across virtually all asset classes and a vicious unwind of a
multitude of investment and trading strategies. The massive pool of global
speculative finance is being drained. Investors and speculators alike are
desperate to flee risk.
Having watched the ballooning of the hedge fund industry over the past few
years in absolute awe, I can say today that an industry collapse would entail
the sale (voluntary and forced by the margin clerk) and unwind of literally
trillions of positions. It has been history's most spectacular speculative
bubble and, especially over the past few years, it became very much global in
nature and infiltrated virtually all asset classes. This bubble is in a
full-fledged collapse - entailing unprecedented liquidations - and it's taking
global markets down with it.
The situation is dire, as is now commonly recognized. The media are in a tizzy,
and Wall Street makes for an easy and generally deserving villain. I fear the
rapidly mounting anger. But I guess, on a Friday evening, there is something
about coming home after a distressing week and spending time with my little
four-month-old baby. My wife and I gave our smiling and laughing little guy a
bath and I just kissed them goodnight. I just don't have it in me right now to
analyze and to write gloom and doom. I'd rather hope there is hope.
Perhaps things will stabilize once the hedge fund liquidations run their
course. Treasury (TARP) purchases will commence soon. It appears that Fannie
and Freddie will be expanding their market purchases. The Fed is now buying
commercial paper, and the Fed and Treasury are working to resolve the
dislocation in the "repo" market. Across the globe, governments are in full
crisis-management mode. There appears universal resolve to bolster financial
sectors and stem the collapse. And there were actually some positive
indications of stabilization in our credit system late in the week.
I also hold out hope that the trillions of reserves held by global central
bankers will provide some buffer to stem financial system collapse. In
particular, I am hoping that China, India, Russia, Brazil and the Middle East
have today sufficient reserves to somehow avoid a 1990s style financial and
economic meltdown.
I am hoping that demand from China, India, Asia and Latin America will help
offset inevitable economic downturns in the US and Britain and, hopefully to a
lesser extent, Europe.
I am hoping that the collapse in energy and commodities prices is more a
reflection of acute financial market dislocation rather than a harbinger of
synchronized global economic upheaval.
I am hoping there is more substance to the dollar's rally than simply an unwind
of bearish dollar bets. And I am hoping that with large capital infusions our
deeply impaired banking system will retain the capacity to finance a much less
robust but at least functioning US economy. I really hope everything is not as
dire as it appears.
WEEKLY WATCH
For the tumultuous week, the Dow (down 36.3% y-t-d) and S&P500 (down 38.8%
y-t-d) sank 18.2%. There was no place to hide. The Morgan Stanley Consumer
index dropped 14.5% (down 26.2%) and the Utilities were hit for 20.3% (down
39.2%). The Transports declined 9.4% (down 18.1%), and the Morgan Stanley
Cyclical index fell 15.4% (down 41.5%). The small cap Russell 2000 declined
15.6% (down 31.8%), and the S&P400 Mid-Caps dropped 16.9% (down 35.9%). The
NASDAQ100 fell 13.7% (down 39.1%), the Morgan Stanley High Tech index 15.9%
(down 41.6%), and the Semiconductors 13.6% (down 39.7%). The Street.com
Internet Index (down 34.8%) and the NASDAQ Telecommunications index (down
38.3%) each fell 14.8%. The Biotechs dropped 15.8% (down 21.4%). The
Broker/Dealers collapsed 25.6% (down 57.7%) and the Banks sank 21.7% (down
40.3%). With Bullion down $13.60, the HUI dropped 7.8% (down 39.4%).
One-month Treasury bill rates dipped to 0.08% and three-month yields sank to
0.21%. Two-year government yields added 4 bps to 1.64%. Five-year T-note yields
jumped 12 bps this week to 2.75%, and 10-year yields surged 22 bps to 3.87%.
Long-bond yields added 4 bps to 4.12%. The 2yr/10yr spread increased 22 to 223
bps. The implied yield on 3-month December '09 Eurodollars declined 11.5 bps to
2.90%. Benchmark Fannie MBS yields jumped 39 bps to a 7-wk high 5.92%. The
spread between benchmark MBS and 10-year T-notes widened 23 to 204 bps. Agency
10-yr debt spreads widened 8 to 90 bps. The 2-year dollar swap spread declined
1.75 to 149, and the 10-year dollar swap spread sank 11.25 to 55. Corporate
bond spreads were wider. An index of investment grade bond spreads widened 40
to 207 bps, and an index of junk bond spreads surged 70 to 757 bps.
Debt markets remain pretty much frozen. Investment-grade debt issuance included
IBM $4.0bn, Southern Cal Edison $500 million and Detroit Edison $250 million.
I saw no junk or convert issuance this week.
International debt issuance included Export Development Canada $1.0bn.
October 10 - Bloomberg (Gabrielle Coppola and John Detrixhe): "The US corporate
bond market remained effectively closed for the fifth straight week as the
deepening credit crisis sent yields to record highs above Treasuries ... IBM,
the biggest non-financial company to sell US bonds since June 24, raised $4
billion. The ... company paid its highest yields over benchmark rates ... The
offering included ... 10-year notes that priced to yield 387.5 bps above
similar-maturity Treasuries, as well as $1 billion of 8%, 30-year bonds with a
spread of 400 bps ... "
October 8 - Bloomberg (John Detrixhe): "Yields over benchmark rates on high-
yield, high-risk corporate bonds rose to a record for a sixth straight day,
Merrill Lynch & Co. data show. The difference between yields on junk bonds
and US Treasuries widened 33 bps to 1,351 bps ... The bonds yielded 16.3% on
average, the highest since March 1991."
October 6 - Bloomberg (Sree Vidya Bhaktavatsalam): "Investors pulled a record
$20.5 billion from emerging-market stock funds in the third quarter as the
seizure of global credit markets threatened to push developing countries into
recession. The withdrawals exceeded the $12.3 billion in outflows during the
first half of 2008 ... "
German 10-year bund yields rose 7 bps to 3.99%. The German DAX equities index
sank 21.6% (down 43.7% y-t-d). Japanese 10-year "JGB" yields increased 7 bps to
1.52%. The Nikkei 225 collapsed 24.3% (down 45.9% y-t-d). Emerging markets are
in crisis. Brazil's benchmark dollar bond yields surged 234 bps to 9.15%.
Brazil's Bovespa equities index sank 20% (down 44.3% y-t-d). The Mexican Bolsa
dropped 13.4% (down 32.6% y-t-d). Mexico's 10-year $ yields jumped 138 bps to
7.52%. Russia's RTS equities index dropped 21% (down 63.1% y-t-d). India's
Sensex equities index sank 19.4%, with y-t-d losses rising to 48.1%. China's
Shanghai Exchange fell 12.8%, boosting y-t-d losses to 62%.
Freddie Mac 30-year fixed mortgage rates dropped 16 bps to 5.94% (down 46bps
y-o-y). Fifteen-year fixed rates declined 15 bps to 5.63% (down 43bps y-o-y),
while one-year ARMs added 3 bps to 5.15% (down 58bps y-o-y). Bankrate's survey
of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates this week up a
notable 26 bps to 7.38% (up 55bps y-o-y).
Bank Credit surged $284bn to $9.864TN (week of 10/1), with a 4-wk gain of
$472bn. Bank Credit has now expanded $651bn y-t-d, or 9.2% annualized. Bank
Credit posted a 52-week rise of $885bn, or 9.9%. For the week, Securities
Credit jumped $78.2bn. Loans & Leases ballooned $206bn to $7.258 TN (52-wk
gain of $647bn, or 9.8%). C&I loans increased $21.1bn, with y-t-d growth of
12%. Real Estate loans jumped a notable $165bn (up 7.4% y-t-d). Consumer loans
rose $9.2bn, while Securities loans declined $16.7bn. Other loans jumped $27bn.
M2 (narrow) "money" supply dipped $4.0bn to $7.860 TN (week of 9/29). Narrow
"money" has expanded $397bn y-t-d, or 7.1% annualized, with a y-o-y rise of
$476bn, or 6.4%. For the week, Currency increased $2.4bn, and Demand &
Checkable Deposits rose $29.1bn. Savings Deposits sank $49.5bn, while Small
Denominated Deposits increased $13.4bn. Retail Money Funds added $0.9bn.
Total Money Market Fund assets (from Invest Co Inst) jumped $58.6bn to $3.458
TN, with a y-t-d expansion of $345bn, or 14.4% annualized. Money Fund assets
have posted a one-year increase of $549bn (18.9%).
There was little Asset-Backed Securities (ABS) issuance again this week.
Year-to-date total US ABS issuance of $129bn (tallied by JPMorgan's Christopher
Flanagan) is running at 26% of comparable 2007. Home Equity ABS issuance of
$351 million compares with 2007's $225bn. Year-to-date CDO issuance of $24bn
compares to the year ago $286bn.
Total Commercial Paper outstanding sank another $56.4bn this week to a 3-year
low $1.551 TN (4-wk decline $264bn), with CP down $235bn y-t-d. Asset-backed CP
declined $17.6bn last week to $707bn, with 2008 showing a decline of $66bn.
Over the past year, total CP has contracted $314bn, or 16.8%.
Federal Reserve Credit ballooned another $106bn to a record $1.495 TN, with a
historic 4-week increase of $606.4bn. Fed Credit has expanded $621bn y-t-d (90%
annualized) and $636bn y-o-y (74%). Fed Foreign Holdings of Treasury, Agency
Debt last week (ended 10/7) jumped $19.5bn to $2.485 TN. "Custody holdings"
were up $429bn y-t-d, or 26.4% annualized, and $481bn y-o-y (24%).
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