Page 2 of 3 CREDIT BUBBLE BULLETIN Hard facts ignored
Commentary and weekly watch by Doug Noland
UK 10-year gilt yields dropped 13 bps to 3.68%, and German bund yields sank 19
bps to 3.315%. The German DAX equities index dropped 2.7% (up 10.4%). Japanese
10-year "JGB" yields declined 5.5 bps to 1.375%. The Nikkei 225 gained 1.8% (up
19.6%). Emerging markets were mixed. Brazil's benchmark dollar bond yields fell
another 6 bps to 5.52%. Brazil's Bovespa equities index added 0.5% (up 50.8%
y-t-d). The Mexican Bolsa declined 1.2% (up 24.5% y-t-d). Mexico's 10-year $
yields were little changed at 5.63%. Russia's RTS equities index declined 1.9%
(up 67.7%). India's Sensex equities index rose 1.7% (up 59.8%). China's
Shanghai Exchange sank 6.6%, lowering 2009 gains to 67.3%.
Freddie Mac 30-year fixed mortgage rates jumped 7 bps to a six-week high 5.29%
(down 123bps y-o-y). Fifteen-year fixed rates
rose 5 bps to 4.68% (down 139bps y-o-y). One-year ARMs dropped 6 bps to 4.72%
(down 46bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had
30-yr fixed jumbo rates down 9 bps to 6.29% (down 121bps y-o-y).
Federal Reserve Credit expanded $11.4bn last week to $1.989 TN. Fed Credit has
declined $257bn y-t-d, although it expanded $1.106 TN over the past 52 weeks
(125%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 8/12) increased $5.5bn to a record $2.816 TN. "Custody holdings" have
been expanding at a 19.3% rate y-t-d, and were up $421bn over the past year, or
17.6%.
M2 (narrow) "money" supply fell $42.0bn to $8.324 TN (week of 8/3). Narrow
"money" has expanded at a 2.6% rate y-t-d and 8.1% over the past year. For the
week, Currency added $1.1bn, and Demand & Checkable Deposits rose $28.8bn.
Savings Deposits dropped $57.6bn, and Small Denominated Deposits fell $9.6bn.
Retail Money Funds declined $4.7bn.
Total Money Market Fund assets (from Invest Co Inst) declined $12.8bn to $3.594
TN (low since the week of 10/27). Money fund assets have declined $237bn y-t-d,
or 10.0% annualized. Money funds expanded $19bn, or 0.5%, over the past year.
Total Commercial Paper outstanding dipped $1.8bn to $1.075 TN. CP has declined
$607bn y-t-d (59% annualized) and $672bn over the past year (39%). Asset-backed
CP dropped $12.3bn to $423bn, with a 52-wk drop of $302bn (42%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $89bn y-o-y to $7.085 TN. Reserves have increased $321bn
year-to-date.
Global Credit Market Watch
August 14 - Bloomberg (Ari Levy): "More than 150 publicly traded US lenders own
nonperforming loans that equal 5% or more of their holdings, a level that
former regulators say can wipe out a bank's equity and threaten its survival.
The number of banks exceeding the threshold more than doubled in the year
through June ... Almost 300 reported 3% or more of their loans were
nonperforming, a term for commercial and consumer debt that has stopped
collecting interest or will no longer be paid in full."
Government Finance Bubble Watch
August 11 - Wall Street Journal: "Much to their dismay, Americans learned last
year that they 'owned' Fannie Mae and Freddie Mac. Well, meet their cousin,
Ginnie Mae or the Government National Mortgage Association, which will soon
join them as a trillion-dollar packager of subprime mortgages. Taxpayers own
Ginnie too. Only last week, Ginnie announced that it issued a monthly record of
$43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph
Murin sounded almost giddy as he cheered this 'phenomenal growth.' Ginnie Mae's
mortgage exposure is expected to top $1 trillion by the end of next year - or
far more than double the dollar amount of 2007 ... Ginnie's mission is to
bundle, guarantee and then sell mortgages insured by the Federal Housing
Administration, which is Uncle Sam's home mortgage shop. Ginnie's growth is a
by-product of the FHA's spectacular growth. The FHA now insures $560 billion of
mortgages - quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and
Freddie, nearly nine of every 10 new mortgages in America now carry a federal
taxpayer guarantee."
August 11 - Dow Jones (Gabriele Parussini): "The French budget deficit more
than doubled in the first half of this year, as the recession cut tax income
and the financing of the government's EUR26 billion economic stimulus plan
boosted expenditure, the Budget Ministry said ... France's government budget
deficit is likely to swell to between 7% and 7.5% of gross domestic product
both this year and next, Budget Minister Eric Woerth said in June…"
Currency Watch
The dollar index declined 0.2% this week to 78.79. For the week on the upside,
the Japanese yen gained 2.9%, the Mexican peso 0.9%, the Swiss franc 0.8%, the
New Zealand dollar 0.7%, the Norwegian krone 0.6%, the Danish krone 0.1% and
the Euro 0.1%. On the downside, the Canadian dollar declined 1.6%, the
Brazilian real 1.6%, the South African rand 1.4%, the South Korean won 1.2%,
the British pound 0.9%, and the Australian dollar 0.7%.
Commodities Watch
August 11 - Bloomberg: "China bought record volumes of oil and iron ore in July
as automakers, steel producers and builders expanded output to meet rising
demand ... Oil imports jumped 18% to 19.6 million metric tons, and iron ore
purchases rose 5% to 58.1 million tons from a month ago…"
August 14 - Bloomberg (John Duce): "China ... will boost spending on oil and
mining acquisitions by at least half this year to take advantage of lower
valuations after commodity prices slumped. State-owned Yanzhou Coal Mining Co.
yesterday agreed to buy Australia's Felix Resources Ltd. for about A$3.5
billion ($2.9bn), a day after Sinochem Corp., China's biggest chemicals trader,
offered to buy Emerald Energy Plc for 532 million pounds ($881 million) to gain
oil fields in Syria and Colombia. China National Petroleum Corp.'s plan to buy
Repsol YPF SA's Argentine unit may push Chinese purchases of overseas commodity
assets to $43 billion this year, a 48% increase on 2008…"
Gold ended the week down 0.7% to $948 (up 7.5% y-t-d). Silver was little
changed at $14.68 (up 30% y-t-d). September Crude fell $3.30 to $67.63 (up 52%
y-t-d). September Gasoline declined 3.0% (up 84% y-t-d), and September Natural
Gas sank 11% (down 42% y-t-d). September Copper gained 1.7% (up 102% y-t-d).
September Wheat declined 1.6% (down 21% y-t-d), while September Corn rallied
0.7% (down 10% y-t-d). The CRB index retreated 2.5% (up 12.3% y-t-d). The
Goldman Sachs Commodities Index (GSCI) declined 2.1% (up 31.3% y-t-d).
China Bubble Watch
August 11 - Bloomberg: "China's industrial output and retail sales grew more
quickly as exports slumped, underscoring the economy's dependence on stimulus
spending and record bank lending to maintain a recovery. Industrial production
climbed 10.8% in July from a year earlier ... retail sales rose 15.2% ...
Exports fell 23%... China's economy will grow 9.4% this year, topping the
government's 8% target, Goldman Sachs Group Inc. said..."
August 11 - Bloomberg: "China's new lending in July fell to less than a quarter
of June's level as banks sought to limit credit risks and the flow of money
into stocks and property. Banks extended 355.9 billion yuan ($52 billion) of
local- currency loans, down from 1.53 trillion yuan in June ... M2, the
broadest measure of money supply, rose 28.4%."
August 12 - Bloomberg (Paul Abelsky and Alex Nicholson): "China's efforts to
boost domestic consumption can't completely offset slumping export demand, the
commerce ministry said. Local demand is unlikely 'to provide a full remedy for
the sharp contraction in external demand,' the ministry said…"
August 13 - Bloomberg: "Chinese companies will need to boost yields on some new
corporate bonds to make them more competitive as the government seeks to spur
investor interest in fixed- income securities. New five-year notes in the
interbank market - the biggest of China's three corporate bond markets - must
offer a minimum 4.2% yield…"
August 13 - Bloomberg: "China, the world's largest market for cellular phones,
may have as many as 240 million users of the so-called third generation mobile
devices, said the minister of industry and information technology Li Yizhong."
Japan Reflation Watch
August 14 - Bloomberg (Yusuke Miyazawa): "Japanese bond sales may exceed a
record $109 billion this year as companies led by Toyota Motor Corp. take
advantage of borrowing costs lowered by government efforts to end the nation's
worst postwar recession."
August 12 - Bloomberg (Mayumi Otsuma): "Japan's producer prices fell at a
record pace in July ... The costs companies pay for energy and unfinished goods
declined 8.5% from a year earlier…"
India Watch
August 12 - Bloomberg (Kartik Goyal): "India's industrial production increased
at the fastest pace in 16 months in June ... Output at factories, utilities and
mines jumped 7.8% from a year earlier after a revised 2.2% gain in May…"
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