Page 2 of 3 CREDIT BUBBLE BULLETIN
Old addiction untouched
Commentary and weekly watch by Doug Noland
UK 10-year gilt yields were little changed at 3.79%, while German bund yields
surged 21 bps to 3.51%. The German DAX equities index gained 2.4% (up 13.5%).
Japanese 10-year "JGB" yields increased 2.5 bps to 1.43%. The Nikkei 225 added
0.5% (up 17.5%). Emerging equities were mixed, while emerging bond markets were
notably resilient. Brazil's benchmark dollar bond yields sank 20 bps to 5.55%.
Brazil's Bovespa equities index rallied 2.9% (up 50.0% y-t-d). The Mexican
Bolsa jumped 4.2% (up 25.9% y-t-d). Mexico's 10-year $ yields fell 15 bps to
5.67%. Russia's RTS equities index rallied 6.2% (up 70.9%). India's Sensex
equities index declined 3.3% (up 57.1%). China's Shanghai Exchange fell 4.4%,
lowering 2009 gains to 79.1%.
Freddie Mac 30-year fixed mortgage rates declined 3 bps to
5.22% (down 130bps y-o-y). Fifteen-year fixed rates dropped 6 bps to 4.63%
(down 147bps y-o-y). One-year ARMs dipped 2 bps to 4.78% (down 44bps y-o-y).
Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates
up 2 bps to 6.38% (down 109bps y-o-y).
Federal Reserve Credit declined $32.1bn last week to $1.978 TN. Fed Credit has
declined $269bn y-t-d, although it expanded $1.089 TN over the past 52 weeks
(122%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 8/5) jumped another $17.0bn to a record $2.810 TN. "Custody holdings"
have been expanding at a 19.6% rate y-t-d, and were up $414bn over the past
year, or 17.3%.
M2 (narrow) "money" supply jumped $24.6bn to a record $8.366 TN (week of 7/27).
Narrow "money" has expanded at a 3.6% rate y-t-d and 8.5% over the past year.
For the week, Currency gained $2.1bn, and Demand & Checkable Deposits added
$0.8bn. Savings Deposits jumped $36.4bn, while Small Denominated Deposits fell
$8.1bn. Retail Money Funds declined $6.5bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $27.5bn to $3.606
TN (low since the week of 11/5). Money fund assets have declined $224bn y-t-d,
or 9.8% annualized. Money funds expanded $46bn, or 1.3%, over the past year.
Total Commercial Paper outstanding increased $10.7bn to $1.076 TN. CP has
declined $605bn y-t-d (60% annualized) and $649bn over the past year (38%).
Asset-backed CP declined $3.0bn to $435bn, with a 52-wk drop of $295bn (40%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $97bn y-o-y to a record $7.089 TN. Reserves have increased
$324bn year-to-date.
Global Credit Market Watch
August 3 - Bloomberg (Anna Rascouet): "A gauge of financial-market stress
dropped to the lowest level in more than two years ... The TED spread, the
difference between what banks and the Treasury pay to borrow for three months,
narrowed to 29.6 bps ... The measure has declined 434 bps since peaking in
October last year…"
August 4 - Bloomberg (Caroline Hyde): "Corporate bond sales surged to an
all-time high of $1.1 trillion in Europe, beating the previous record set for
the whole of 2007 ... Investors have been lured by the best returns since at
least 1998…"
August 6 - Bloomberg (Zijing Wu and Michael Patterson): "The biggest five-month
rally in emerging-market debt since 1996 has cut the ranks of 'distressed'
borrowers in developing nations by more than half. …The yield on bonds sold by
Argentina, Georgia, Pakistan and Ukraine dropped to less than 1,000 basis
points over US Treasuries in the past three weeks ... That leaves only Belize,
Ecuador and Venezuela among the 37 developing nations tracked by JPMorgan with
yield spreads above 1,000 bps…"
August 7 - Bloomberg (Christine Richard): "Ambac Financial Group Inc., the
second-largest bond insurer, posted a net loss for the second quarter of $2.4
billion after increasing its projections for claims on bonds backed by
home-equity loans."
August 5 - Bloomberg (Alan Purkiss): "The global financial crisis has blown a
hole in the 'efficient markets' theory on which modern economics and modern
finance have been based, said Richard Thaler, a professor of economics and
behavioral science at the University of Chicago. Writing in the Financial
Times, he said the theory assumes that everyone in the economy behaves
rationally, which is like leaving friction out of account when doing physics.
It consists of two assertions: that asset prices are right, in the sense that
they fully reflect available information and thus provide accurate signals for
allocation resources; and that market prices are impossible to predict, Thaler
said."
Government Finance Bubble Watch
August 6 - Bloomberg (Jennifer Ryan): "The Bank of England increased its bond
purchase program by 50 billion pounds ($84bn), saying the UK 's economic
recession is deeper than policy makers expected. The nine-member Monetary
Policy Committee, led by Governor Mervyn King, kept the key interest rate at
0.5% and said it will increase its purchase program to 175 billion pounds."
August 6 - Bloomberg (Matthew Brown and Frances Robinson): "Otmar Issing,
former chief economist of the European Central Bank, said inflation will pick
up as soon as the financial crisis has passed unless governments and central
banks remove economic stimulus measures promptly. 'Politicians and industry
might scream' when the measures are withdrawn, 'but this should not be an
argument for central banks and fiscal policies,' Issing said ... The exit 'has
to happen at a time when unemployment is still high or even still rising,
because of the lagged effect of the crisis on labor markets. As we have seen
the strongest expansionary policies, fiscal as well as monetary, in the history
of the world, I think it is rather straightforward that as soon as the crisis
is behind us, inflationary pressures will emerge unless policies change course
in a timely manner,' Issing said."
August 4 - Bloomberg (Jody Shenn): "The US government is likely to decide
within 18 months that Fannie Mae and Freddie Mac need to be wound down and
replaced with a similar entity that would support US housing, Moody's ... said.
The government-chartered mortgage-finance companies, which were seized by
regulators in September 2008 and since have used $85.7 billion of their capital
lifelines, face mounting losses that will mean 'it could take a decade or
longer' before they are able to emerge from US control as 'viable standalone
entities…' The increasing losses that will be caused in part by government
efforts to use ... Fannie Mae and Freddie Mac ... as tools to stem the housing
slump ... 'This is not bad news for Fannie Mae and Freddie Mac bondholders as
the US government has become entwined with these companies and the creation of
a new entity to support housing finance likely means the orderly conclusion of
Fannie Mae and Freddie Mac,' Brian L. Harris, Craig A. Emrick and Robert Young,
Moody's analysts, wrote…"
August 6 - Dow Jones: "The government's 'Cash for Clunkers' program sent the
auto industry's annualized US sales in the past two weeks to double what has
been seen in the first half of 2009, said ... Edmunds.com. It estimated the
recent rate annually at 19.6 million. That compares with the under 10-million
rate the industry had in the first half of this year."
August 5 - Wall Street Journal (Liz Rappaport and Meena Thiruvengadam): "The
Treasury ... said it will borrow less in the third quarter than it had
previously expected, in part because banks repaid billions of dollars of
government aid under the Troubled Asset Relief Program. The Treasury said it
plans to borrow an estimated $406 billion in the quarter, $109 billion less
than it had estimated."
August 4 - Wall Street Journal (Ruth Simon): "A report card…by the Treasury
Department showed wide variations in how quickly mortgage companies are helping
financially troubled borrowers under the Obama administration's
foreclosure-prevention plan. So far, more than 400,000 borrowers have been
offered help. More than 235,000 borrowers, or roughly 9% of those eligible for
the program and at least 60 days past due, have begun trial mortgage
modifications, the first step to getting a loan reworked."
August 4 - Bloomberg (Paul Abelsky): "Russia's 'unsustainable' budget deficit
in the next three years is a 'major threat to economic stability' and won't
spur economic growth, Troika Dialog said. 'Such fiscal policy leads straight
down the path to deadlock,' Moscow-based economists Evgeny Gavrilenkov and
Anton Stroutchenevski…said ... The government last week approved a plan to run
a deficit of 7.5% of gross domestic product next year ... This year's
shortfall, the country's first in a decade, may reach as much as 9.3%..."
Currency Watch
August 7 - Bloomberg (Laura Cochrane): "Investor demand for emerging-market
bonds is driving the cost of insuring against debt defaults below
industrialized governments for the first time. Credit-default swap prices from
Turkey to Indonesia are falling as bonds rise ... As the US and UK borrow
record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and
China have $3 trillion in reserves, up 19% from January 2008 and now 43% of the
worldwide total…"
The dollar index rallied 0.8% this week to 78.97. For the week on the upside,
the Brazilian real increased 2.5%, the Mexican peso 1.9%, the New Zealand
dollar 1.7%, the Swedish krona 0.3%, and the South Korean won 0.3%. On the
downside, the Japanese yen declined 2.9%, the South African rand 2.8%, the
Swiss franc 1.3%, the Euro 0.6%, and the Canadian dollar 0.5%.
Commodities Watch
August 7 - Bloomberg (Jana Randow and Nicholas Larkin): "European central banks
agreed to a third five-year cap on gold sales and said planned disposals by the
International Monetary Fund could be done within the accord. The European
Central Bank and 18 other banks agreed to sell no more than a combined 400
metric tons of the metal a year through September 2014. That's less than the
annual cap of 500 tons in the current agreement…"
August 6 - Bloomberg (Claire Leow): "US proposals to place curbs on commodities
trading will drive business overseas, particularly to Asia, said Jim Rogers,
chairman of Rogers Holdings. 'It is remarkable because America is shooting
itself in the foot again ... It's going to drive the business away and the rest
of the world is going to welcome it with open arms.'"
August 5 - Bloomberg (Rebecca Keenan): "BHP Billiton Ltd., the world's largest
mining company, said China's iron ore imports are increasing as steel
production 'rapidly' recovers because of the government's stimulus package ...
Iron ore cash prices have jumped 38% this year as China's 4 trillion-yuan ($586
billion) stimulus plan spurs mills to secure supplies to meet demand for
automobiles and buildings."
August 6 - Bloomberg (Yi Tian): "Sugar jumped to a 28-year high in New York as
low monsoon rainfall in India threatens to limit cane yields and excess
precipitation delayed harvesting in Brazil, prolonging a global production
deficit."
Gold ended the week little changed at $955 (up 8.2% y-t-d). Silver jumped 4.6%
to $14.59 (up 29.1% y-t-d). September Crude rose $1.13 to $70.58 (up 58%
y-t-d). September Gasoline slipped 0.8% (up 88% y-t-d), while September Natural
Gas gained 0.8% (down 34% y-t-d). September Copper jumped 5.3% (up 96% y-t-d).
September Wheat fell 6.3% (down 20% y-t-d), and September Corn dropped 5.2%
(down 21% y-t-d). The CRB index jumped 2.7% (up 15.2% y-t-d). The Goldman Sachs
Commodities Index (GSCI) rose 2.3% (up 34% y-t-d).
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