Page 3 of 3 CREDIT BUBBLE BULLETIN Mistakes beget greater mistakes
Commentary and weekly watch by Doug Noland
hedge funds to address the worst economic crisis in 80 years. The U.K.
regulator said last month that a report to be issued today will discuss
liquidity and capital rules, compensation, accounting, and how the FSA and the
Bank of England can monitor risks to the financial system. 'This will be a very
polite revolution,' said Simon Gleeson, a regulatory lawyer at ... Clifford
Chance LLP. 'It'll be a very British revolution, where not much is going to
happen and everyone will be nice to each other.'"
March 18 - Bloomberg (Paul Abelsky): "Russia's government will increase
spending this year to tackle the country's first recession
in a decade even as plunging commodity prices threaten to pare revenue by 28%.
The federal deficit should total 2.98 trillion rubles ($86.5 billion), or 7.4%
of gross domestic product, the Finance Ministry said ... "
March 18 - Bloomberg (Bob Ivry and Jody Shenn): "General Electric Co.'s future
may depend on folks like Yelena Zoshchenko. GE Capital, the financial services
unit of the world's biggest maker of jet engines and power turbines, gave the
Moscow real estate agent a car loan at a 15% interest rate in June 2007. Then
the Russian currency collapsed. 'The banks here used to literally grab you by
your lapels and ask you to borrow,' said Zoshchenko ... 'But not since the
crisis started.'"
March 18 - AFP: "Another long, hot summer is looming for Pakistan's 160 million
people, who are bracing for an inferno as the government yet again fails to
meet basic electricity demand. 'This summer is going to be a nightmare and even
more horrible than the one we suffered last year,' said Mohammad Atif, an
official in the already steamy port city of Karachi."
Currency Watch
March 18 - Wall Street Journal: "Chinese Premier Wen Jiabao created a useful
stir late last week when he said he's a 'little bit worried'about the safety of
U.S. assets -- meaning the Treasury bonds his government owns. Whatever Mr.
Wen's political motives, his concerns about the integrity of U.S. sovereign
debt are timely and apt. U.S. debt held by the public has now hit $6.6 trillion
-- up from $5.3 trillion only a year ago. That doesn't count another $5.3
trillion in Fannie Mae and Freddie Mac liabilities ... And it doesn't count the
many ways that both the Federal Reserve and Treasury have guaranteed financial
assets more broadly -- such as $29 billion in Bear Stearns paper, $301 billion
in dodgy Citigroup assets, and hundreds of billions in Federal Housing
Administration loans."
March 18 - Bloomberg (Judy Chen): "China's foreign-exchange reserves fell by
about $30 billion in January, the China Business News reported ... The reserves
totaled $1.95 trillion at the end of last year ... "
March 20 - Bloomberg (Kim-Mai Cutler): "Currencies of countries that are using
quantitative easing, or printing money to buy government or corporate bonds,
are plunging against those of nations sticking to conventional monetary policy
... 'The foreign-exchange market has clearly gotten its arms around the notion
that quantitative easing is a negative for currencies,' said Jim McCormick,
Citigroup Inc.'s ... global head of currencies. 'It's clearly a moment of
selling the quantitative easing currencies -- the franc, sterling and the
dollar -- against all others.'"
March 17 - Financial Times (Bertrand Benoit): "Mounting public debt and
excessive liquidity in the economy could tip the US into an inflationary
spiral, a senior economic adviser to Angela Merkel, German chancellor, has
warned. The comments by Christoph Schmidt, one of the five 'wise men' who
advise the German government on economic policy, cast fresh light on the
transatlantic rift over how to tackle the global economic crisis ... 'I see an
inflationary risk in the US in the medium term because of the development of
money supply there ... There is a danger that [governments] could start
considering inflation as a way to reduce the burden of public debt.' The ...
economist did not see such a risk in Europe."
The dollar index sank 4.1% this week to 83.8 (up 3.1% y-t-d). For the week on
the upside, the Norwegian krone increased 6.8%, the New Zealand dollar 6.3%,
the Swedish krona 5.8%, the Swiss franc 5.1%, the Danish krone 5.1%, the Euro
5.0%, the South Korean won 5.0%, the Australian dollar 4.3%, the British pound
3.1%, the Canadian dollar 2.7%, and the Japanese yen 2.2%. On the downside, the
Iceland krona decilned 0.6%.
Commodities Watch
March 19 - Bloomberg (Claudia Carpenter and Glenys Sim): "Gold jumped the most
since September and oil exceeded $50 a barrel for the first time in two months
on speculation the Federal Reserve's steps to spur growth will revive demand
for commodities as a hedge against inflation."
Gold jumped 2.5% this week to $953 (up 8% y-t-d), and silver surged 4.3% to
$13.78 (up 22% y-t-d). April Crude surged $5.03 to $52.06 (up 17% y-t-d). April
Gasoline gained 7.7% (up 37% y-t-d), and April Natural Gas rose 7.9% (down 25%
y-t-d). May Copper surged 8.4% (up 28% y-t-d). May Wheat rose 6.2% (down 10%
y-t-d), and May Corn increased 2.1% (down 3% y-t-d). The CRB index rallied 7.1%
(down 1.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) surged 8.6% (up
6.6% y-t-d).
China Reflation Watch
March 16 - Bloomberg (Michael Patterson): "China, the world's third-largest
economy, is in the early stages of a 'credit-fueled investment bubble' that may
boost banks' profits and shares, according to JPMorgan Chase & Co. analyst
Sunil Garg ... . Banks extended 1.07 trillion yuan ($156 billion) of local-
currency loans in February after a record 1.62 trillion yuan the previous month
... Garg estimates credit in China may expand twice as fast as the economy this
year as banks finance the government's 4 trillion yuan stimulus package with
new loans."
March 20 - Bloomberg (Tom Kohn): "China's banks may increase lending by as much
8 trillion yuan ($1.2 trillion) this year on demand from government-backed
investment projects, according to JPMorgan ... 'The extent of credit easing at
China's banks since November last year has been remarkable,' JPMorgan analysts
led by Frank Gong said ... 'China's loan growth has been surprisingly strong in
recent months, and new loan creation is likely to stay elevated in the coming
months.'"
March 20 - Bloomberg (Li Yanping): "The Organization for Economic Cooperation
and Development may cut its forecast for China's economic growth this year to
as little as 6% because of the deepening global slump, Secretary-General Angel
Gurria said. In November, the estimate was 8%."
Japan Watch
March 18 - Bloomberg (Toru Fujioka): "When Yumiko Iwate's pay was cut last
year, she and her female colleagues all agreed there was only one thing to do:
find a husband. 'I want to get married soon, hopefully by the end of this
year,' said Iwate, a 36-year-old employee at a mail-order retailer in Tokyo.
'The recession made me realize I'm not going to make as much money as I
expected, and I'd be more stable financially if I had double income to fall
back on.' ... Marriages surged to a five-year high of 731,000 in 2008 as wages
stagnated and the unemployment rate rose for the first time in six years."
India Watch
March 17 - Financial Times (James Lamont ): "India faces as much as a $190bn
shortfall in financing key infrastructure projects as the global financial
crisis starves them of urgently-needed capital, according to ... McKinsey ...
Infrastructure development is one of the most important challenges facing India
as it strives to sustain high levels of economic growth. The Indian government
has identified the need for $500bn in infrastructure spending between 2007 and
2012. But a liquidity squeeze in the local banking system and the draining away
of foreign investment has brought reaching anywhere near this goal into doubt."
March 18 - Bloomberg (Kartik Goyal): "India may fail to achieve the
government's 7.1% economic growth forecast if crop harvests don't meet
expectations, according to the finance ministry's top economist."
Asia Reflation Watch
March 19 - Bloomberg (Seyoon Kim and Kevin Cho): "South Korea is planning an
extra spending package of as much as 29 trillion won ($21 billion) to support
an economy headed for its first recession since the Asian financial crisis a
decade ago."
Latin America Watch
March 18 - Bloomberg (Thomas Black and Crayton Harrison): "Mexico will apply
tariffs of 10% to 45% on at least 90 products from the U.S. in retaliation for
the U.S. scrapping a test program allowing Mexican trucks to deliver goods
beyond a U.S. border zone."
March 19 - Bloomberg (Matthew Walter and Daniel Cancel): "Venezuela is holding
up payments to contractors, oil services companies and targets of President
Hugo Chavez's nationalization drive, indicating the country is running short of
cash after petroleum prices collapsed. Service providers to the state oil
company are idling rigs for nonpayment, and Brazil's Odebrecht SA said last
week it's slowing work on the Caracas metro because the government is past due
on its bills. Chavez also owes $10.2 billion for companies he's taken over,
according to ... consulting company Ecoanalitica."
Central Banker Watch
March 19 - Washington Post (Neil Irwin): "The Federal Reserve yesterday
escalated its massive campaign to stabilize the economy, saying it would flood
the financial system with an additional $1.2 trillion ... Combined with the
billions already deployed by the Fed, the new money dwarfs even the biggest
government bailouts of financial companies ... The new purchases come with
risks. They will balloon the value of the assets the Fed holds by about 50%, to
more than $3 trillion ... The newest intervention includes a plan for the Fed
to buy up to $300 billion of long-term U.S. Treasury bonds over the next six
months ... The Fed said it will increase its purchases of mortgage-backed
securities by $750 billion, on top of $500 billion previously announced, and
double, to $200 billion, its purchases of debt in housing-finance firms such as
Fannie Mae and Freddie Mac. At the current pace of home-purchase and
refinancing activity, the central bank could end up funding 60 to 70% of
mortgages issued this year, Wachovia economists estimated ... The steps are the
latest in the Fed's attempt to stimulate the economy through unconventional
means, many of which include massive expansions of the central bank's balance
sheet. At the beginning of September, before the financial crisis deepened, the
Fed had $894 billion in assets. That figure had risen to $1.9 trillion last
week, and will rise above $3 trillion ... "
Fiscal Watch
March 20 - Bloomberg (John Hughes): "General Motors Corp. and Chrysler LLC,
which have requested as much as $21.6 billion in additional government aid, may
need 'considerably' more than that, said Steven Rattner, the Treasury's chief
auto adviser. 'It could be considerably higher, I won't deny that,' Rattner
said, when asked whether U.S. aid sought could rise."
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch
March 18 - Bloomberg (Michael McDonald): "South County Hospital Chief Financial
Officer Thomas Breen thought he'd seen the worst of the credit market's seizure
when the interest rate on $52 million of its debt doubled to 12% a year ago.
That was just the start. The ... hospital has also been forced to give Merrill
Lynch & Co. $12.7 million of collateral for an interest-rate swap that
backfired. South County could have used those funds to counter a drop in state
aid for treating uninsured patients, compensate for declining admissions or buy
four years' of orthopedic supplies. Instead, the facility is firing workers and
cutting pay."
Unbalanced Global Economy Watch
March 17 - Bloomberg (Greg Quinn): "Canada's household net worth fell the most
since at least 1990 in the fourth quarter ... The value of families' assets,
such as houses and savings accounts, minus their liabilities fell 4.4% between
October and December, Statistics Canada said ... This represented a loss of
C$252 billion ($199 billion) in Canadians' net worth."
March 17 - Bloomberg (Svenja O'Donnell and Brian Swint): "U.K. unemployment
rose at the fastest pace since at least 1971 in February ... The jobless figure
rose 138,400 to 1.39 million ... "
March 19 - Bloomberg (Gonzalo Vina): "Britain had a 9 billion-pound ($12.8
billion) budget deficit in February, the largest for the month since at least
1993 ... The deficit in the first 11 months of the fiscal year reached a record
75.2 billion pounds from 23 billions pounds."
March 16 - Bloomberg (Svenja O'Donnell): "U.K. households have lost 1.9
trillion pounds ($2.7 trillion) of their wealth since July 2007 because of the
financial crisis, PricewaterhouseCoopers LLP said ... The value of Britons'
housing and stocks has fallen by 28%, a total loss of around 130% of gross
domestic product ... This is equivalent to an average 40,000-pound loss per
person."
March 20 - Bloomberg (Jurjen van de Pol): "European industrial production
dropped by the most on record in January ... Production in the euro region fell
17.3% from the year-earlier month, the biggest decline since the data series
began in 1986..."
March 17 - Bloomberg (Zoltan Simon): "Hungarian industrial production slumped
in January as western Europe's recession cut export demand and helped drag the
economy into its worst decline in 15 years. Output fell a workday-adjusted 21%
from a year ago ... "
Bursting Bubble Economy Watch
March 19 - Bloomberg (Timothy R. Homan): "The number of Americans collecting
jobless benefits swelled to a record 5.47 million ... The number of people
staying on benefit rolls jumped by 185,000 in the week ended March 7 ...
Initial jobless applications last week topped 600,000 for a seventh straight
time, the worst performance since 1982 ... "
March 20 - Wall Street Journal (Kelly Evans): "Spending on travel and tourism
declined last year for the first time since the Sept. 11, 2001, terrorist
attacks, the Commerce Department said ... Spending fell at a 22% annualized
rate in the October through December quarter ... The decline was the sharpest
since the government's quarterly records began in 2001, topping the 19% drop
after the terrorist attacks that year."
Real Estate Bust Watch
March 19 - Bloomberg (Oshrat Carmiel): "Manhattan apartment sales declined 23%
last year ... Now co-operative and condominium prices are dropping as Wall
Street firms cut the bonuses that contributed to the property market boom of
the past decade. A 50% reduction in bonuses would push down prices by about 24%
from their peak through mid-2010, said Sam Chandan, chief economist at ... Real
Estate Economics ... That would mark the biggest slide since 1980 when
appraiser Miller Samuel Inc. started tracking Manhattan prices. 'This will
probably be the worst price correction the city has seen,' said Marisa Di
Natale, senior economist at Moody's ... When bonuses climbed 114% between 1998
and 2000, Manhattan co-op and condo prices followed, rising 51% during those
years, data ... by Miller Samuel show."
California Watch
March 20 - Bloomberg (Bob Willis): "California's jobless rate surged in
February to the highest level since 1983 while unemployment in Oregon and
Nevada climbed above 10% for the first time in more than two decades.
Unemployment in California rose to 10.5% from 10.1% in January ... "
Speculator Watch
March 19 - Bloomberg (Tomoko Yamazaki): "Investors pulled out a total of $25
billion from hedge funds in February, the seventh consecutive month of
redemptions, as stocks worldwide tumbled and a global recession deepened, an
industry report shows. Total hedge-fund assets stood at $1.36 trillion at the
end of February, down about $600 billion from their peak in June 2008,
according to ... Eurekahedge Pte. In January, final net withdrawals totaled $95
billion ... "
March 18 - Bloomberg (Saijel Kishan): "Hedge-fund liquidations rose to an
all-time high last year as managers posted record losses, according to Hedge
Fund Research Inc. About 1,471 funds, including fund of hedge funds ... The
closures exceeded by 70% the previous record of 848 set in 2005 ... In the
fourth quarter, about 778 hedge funds closed as investors withdrew $150 billion
from the investment pools ... "
Inflationist Watch
March 18 - Bloomberg (Gabi Thesing): "Bill Gross, manager of Pacific Investment
Management Co.'s $138 billion Total Return Fund, said the European Central Bank
should turn its focus to the dangers of deflation, 'the true enemy of the
economy,'Manager Magazin reported ... Gross, who also advises the U.S.
government, said inflation is 'the only way out of the crisis,' according to a
pre- release of the article ... "
Crude Liquidity Watch
March 18 - Bloomberg (Camilla Hall): "The United Arab Emirates central bank
plans to cut interest rates as the economy, the second largest in the Arab
world, may contract this year, Governor Sultan bin Nasser al-Suwaidi said. 'The
current financial crisis will reduce the horizons for economic growth in the
UAE in 2009 from a growth level of a high single digit to a low growth level or
even a contraction.'"
Doug Noland is a market strategist for the Prudent Bear Funds.
(Republished with permission from PrudentBear.com.
Copyright 2005-2009 David W Tice & Associates. All rights
reserved.)Mistakes Beget Greater Mistakes
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