Page 2 of 3 CREDIT BUBBLE BULLETIN Inflationism: Bane of capitalism
Commentary and weekly watch by Doug Noland
On the financial side, the focus should be on recapitalizing the banking system
and reducing the banks' unmanageable burden of bad assets. With the overriding
goal of not bankrupting the country, the broader securitization markets should
be left to their own devices. On the real economy side, stimulus should be
directed toward funding businesses, capital investment and national
infrastructure projects. The focus should be on stabilizing the economy as it
transitions away from a "services"/asset-based economic model. "Money" should
be directed toward jobs rather than home and asset prices.
The entire notion of the government and Fed manipulating market prices should
have been discredited by now. Granted, in past crises the Alan Greenspan Fed
was too successful at
manipulating the cost of finance and dictating the behavior (expanding
leveraging and risk-taking) of the speculating community. It may have worked
miraculously more than a few times, but that entire monetary process has now
collapsed. To be sure, we will not come out of today's mess by inflating
financial claims. Various forms of financial Keynesianism will do no more than
create phantom recovery and the need for only greater inflation not far down
the road.
Extraordinary government interventions were necessary to stabilizing the
financial system. But attempts to stimulate quick economic recovery and the
rejuvenation of assets prices come with great risks. There is no resurrecting
the old boom. The focus should instead be on supporting the financial and
economic systems toward a path of much less dependency on credit growth and the
asset markets.
WEEKLY WATCH
For another volatile week, the S&P500 ended down 0.7% (down 8.6%), and the
Dow fell 1.0% (down 8.8%). The Morgan Stanley Cyclicals fell 3.2% (down 13.3%),
and the Morgan Stanley Consumer index declined 1.2% (down 6.4%). The Transports
were little changed (down 16.2%), while the Utilities added 0.4% (down 1.3%).
The small cap Russell 2000 slipped 0.2% (down 11.2%), and the S&P400
Mid-Caps declined 0.5% (down 7.4%). Continuing to outperform, the Nasdaq100
added 0.4% (down 2.6%) and the Morgan Stanley High Tech index slipped only 0.5%
(down 1.8%). The Semiconductors were unchanged (down 1.8%); the InteractiveWeek
Internet index gained 1.0% (unchanged y-t-d); and the Nasdaq Telecommunications
index sank 3.7% (down 2.0%). The Biotechs gained 0.6% (down 1.9%). The
Broker/Dealers dipped 0.2% (down 0.2%), while the Banks recovered 1.0% (down
35.2%). While a resurgent Bullion gained $28, the HUI Gold index declined 1.3%
(down 0.8%).
One-month Treasury bill rates have "spiked" all the way to 13 bps, while
three-month bills ended the week at 23 bps. Two-year government yields rose 7
bps to 0.84%. Five-year T-note yields surged 22 bps this week to 1.81%.
Ten-year yields jumped 23 bps to 2.83%. Long-bond yields rose 28 bps to 3.67%.
The implied yield on 3-month December '09 Eurodollars jumped 20 bps to 1.535%.
Benchmark Fannie MBS yields rose 36 bps to 4.33%. The spread between benchmark
MBS and 10-year T-notes widened 13 to 147 bps. Agency 10-yr debt spreads
widened 6 to 89 bps. The 2-year dollar swap spread increased 4.25 to 69.75 bps;
the 10-year dollar swap spread increased 8.25 to 23.25 bps, while the 30-year
swap spread declined 1.25 to negative 21.25 bps. Corporate bond spreads were
mixed. An index of investment grade bond spreads narrowed 6 to 213 bps, while
an index of junk bond spreads widened 16 to 1,279 bps.
Investment grade issuance included Bank of America $8.35bn, ConocoPhillips
$6.0bn, AT&T $5.5bn, Goldman Sachs $2.0bn, Hell $1.25bn, General Mills
$1.15bn, Huntington National $600 million, Entergy Texas $500 million, and
Washington Post $400 million.
Junk issuers included Chesapeake Energy $1.0bn, Hess $250 million, and Inergy
$225 million.
International issuers included ING Bank $6.0bn, Petroleos Mexicanos $2.0bn and
Intelsat $400 million.
UK 10-year gilt yields added 2 bps to 3.70% (high since November), and German
bund yields increased 6 bps to 3.29%. The German DAX equities index rallied
3.8% (down 9.8%). Japanese 10-year "JGB" yields ended the week 6 bps higher at
1.29%. The Nikkei 225 gained 3.2% (down 9.8%). Emerging markets were mixed.
Brazil's benchmark dollar bond yields dipped one basis point to 6.62%. Brazil's
Bovespa equities index gained 3.1% (up 4.7% y-t-d). The Mexican Bolsa rallied
1.1% (down 12.6% y-t-d). Mexico's 10-year $ yields added 4 bps to 6.30%.
Russia's RTS equities index rallied 7.4% (down 15.3%). India's Sensex equities
index jumped 6.9% (down 2.3%). China's Shanghai Exchange increased 1.8% (up
9.3%).
Freddie Mac 30-year fixed mortgage rates dipped 2 bps to 5.10% (down 58bps
y-o-y), with a notable 13-wk decline of 136 bps. Fifteen-year fixed rates were
unchanged at 4.80% (down 37bps y-o-y). One-year ARMs declined 2 bps to 4.90%
(down 15bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had
30-yr fixed jumbo rates up 3 bps this week to 7.03% (up 47bps y-o-y).
Federal Reserve Credit dropped $59.4bn to $1.990 TN, with a historic 20-wk
increase of $1.1 Trillion. Fed Credit expanded $1.125 TN over the past 52 weeks
(130%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 1/28)
rose $7.0bn to a record $2.548 TN. "Custody holdings" were up $438bn over the
past year, or 21%.
Bank Credit fell $42.3bn to $9.801 TN (week of 1/21). Bank Credit expanded
$468bn year-over-year, or 5.0%. Bank Credit jumped $409bn over the past 20
weeks. For the week, Securities Credit sank $28.1bn. Loans & Leases
declined $14.2bn to $7.067 TN (52-wk gain of $198bn, or 2.9%). C&I loans
added $2.1bn, with 52-wk growth of 8.5%. Real Estate loans jumped $10.6bn (up
4.7% y-o-y). Consumer loans added $0.9bn, while Securities loans fell $9.7bn.
Other loans dropped $18.1bn.
M2 (narrow) "money" supply jumped $36.6bn to a record $8.257 TN (week of 1/19).
Narrow "money" has now inflated at a 20% rate over the past 18 weeks and has
jumped $794bn over the past year, or 10.6%. For the week, Currency jumped
$3.7bn, while Demand & Checkable Deposits slumped $55.2bn. Savings Deposits
surged $97.4bn, while Small Denominated Deposits declined $2.0bn. Retail Money
Funds fell $7.1bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $28.8bn to $3.904
TN, with a 52-wk expansion of $589bn, or 17.8% annualized.
Total Commercial Paper outstanding sank $98.9bn this week to a 13-wk low $1.590
TN. CP has declined $267bn over the past year (14.4%). Asset-backed CP declined
$7.2bn to $742bn, with a 52-wk decline of $94bn (11.3%).
Asset-Backed Securities (ABS) issuance is remains very light. Year-to-date
total US ABS issuance of $1.3bn (tallied by JPMorgan's Christopher Flanagan) is
a fraction of the $23.7bn for comparable 2008. There has been no home equity
ABS issuance in months. Year-to-date CDO issuance is less than $300 million.
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $468bn y-o-y, or 7.4%, to $6.757 TN. International
reserves have declined $190bn over the past 15 weeks.
Global Credit Market Dislocation Watch
January 29 - Bloomberg (Alan Purkiss): "George Soros, the billionaire US
investor, said President Barack Obama is confronted with challenges even more
daunting than those that faced Franklin D. Roosevelt in 1933. Writing in the
Financial Times, Soros said total credit outstanding at the onset of the crash
last year was 365%, compared with 260% in 1932, and it's certain to reach 500%.
The pervasive use of derivatives, which was absent in the 1930s, is a
complicating factor, he said."
January 27 - Wall Street Journal (Greg Hitt and Elizabeth Williamson): "The US
economic stimulus package neared $900 billion in the Senate, as President
Barack Obama wooed Republicans ahead of an expected House vote… The rare trip
by a president to Capitol Hill revealed the urgency in Congress and the White
House over a cure for the souring economy."
January 30 - Wall Street Journal: "What if nearly half of US banking assets
turn out to be bad? As the Obama administration readies a plan for the stressed
financial system, it is no doubt trying to work out the potential size of the
bad-asset pool. It is no longer just subprime mortgages and exotic credit-boom
securities that are considered toxic. A wide range of other assets -- from
certain prime mortgages to commercial real estate to plain old credit-card
loans -- are now experiencing soaring defaults as the economy worsens. Indeed,
Goldman Sachs Group estimates that troubled assets could exceed $5 trillion…"
January 30 - Bloomberg (Ari Levy): "Banks in Florida, Maryland and Utah were
closed today as regulators wrapped up the busiest month for failures since the
housing slump began in 2006. Ocala National Bank in Florida and Suburban
Federal Savings Bank of Crofton, Maryland, were shut by federal regulators…"
January 26 - Wall Street Journal (Mark Maremont): "In the latest effort to prop
up a sector of the finance industry, federal regulators… guaranteed $80 billion
in uninsured deposits at the powerful institutions that service the nation's
credit unions -- a maneuver that shows how the economic crisis continues to
ripple across the US Regulators also injected $1 billion of new capital into
the largest of these wholesale credit unions, US Central Federal Credit Union
of Lenexa, Kan., after the firm on Wednesday posted an unexpected $1.1 billion
loss for 2008. US Central serves essentially as a main clearinghouse for the
others in the network. The vast majority of regular credit unions -- the
bank-like cooperatives familiar to millions of account-holders nationwide --
are considered financially sound. Wednesday's moves affect only these wholesale
credit unions, which number 28 and operate in the background to service regular
credit unions."
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