Page 2 of 3 CREDIT BUBBLE BULLETIN Party like it is 1991
Commentary and weekly watch by Doug Noland
Freddie Mac 30-year fixed mortgage rates increased 2 bps to 5.14% (down 126bps
y-o-y). Fifteen-year fixed rates added 2 bps to 4.58% (down 135bps y-o-y).
One-year ARMs were unchanged at 4.69% (down 64bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 5 bps to 6.22%
(down 118bps y-o-y).
Federal Reserve Credit rose $14.1bn last week to $2.049 TN. Fed Credit has
declined $198bn y-t-d, although it expanded $1.165 TN over the past 52 weeks
(132%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 8/26) jumped $12.5 to a record $2.825 TN. "Custody holdings" have been
expanding at an 18.7% rate y-t-d, and were up $420bn over the past year, or
17.5%.
M2 (narrow) "money" supply declined $5.9bn to $8.312 TN (week of 8/17). Narrow
"money" has expanded at a 2.3% rate y-t-d and 8.1% over the past year. For the
week, Currency added $1.4bn, while Demand & Checkable Deposits fell $6.9bn.
Savings Deposits jumped $19.3bn, while Small Denominated Deposits dropped
$8.0bn. Retail Money Funds declined $11.8bn.
Total Money Market Fund assets (from Invest Co Inst) dipped $2.5bn to $3.579
TN. Money fund assets have declined $251bn y-t-d, or 10.0% annualized. Money
funds expanded $6.4bn, or 0.2%, over the past year.
Total Commercial Paper outstanding jumped $43.7bn (2-wk gain of $80bn) to
$1.154 TN. CP has declined $527bn y-t-d (48% annualized) and $640bn over the
past year (36%). Asset-backed CP rose $41.5bn to $458bn, with a 52-wk drop of
$301bn (40%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $118bn y-o-y to $7.088 TN. Reserves have increased $323bn
year-to-date.
Global Credit Market Watch
August 27 - Wall Streeet Journal (Craig Karmin, Carrick Mollenkamp and David
Roman): "Borrowing in dollars has become cheaper than borrowing in Japanese yen
for the first time in 16 years, a sign that fear in the credit markets, which
drove borrowing costs sharply higher, has eased significantly ... On Wednesday,
banks seeking dollars had to pay 0.37188%, which is the three-month dollar
Libor, while yen borrowers needed to pay 0.38813%."
August 25 - Wall Street Journal (Michael Aneiro): "With syndicate desks
churning out bond deals all summer, September may be left with little room to
produce its customary run-up in new issuance ... It has been the busiest August
since the record volume seen in August 2006, with 27 'junk,' or high-yield,
bond deals valued at $10.1 billion so far, according to Dealogic. That compares
with just two deals worth $500 million last August. Similarly, July brought
$13.3 billion of new deals, more than three times the amount seen in July
2008."
August 25 - Bloomberg (Sophie Leung): "China's economic growth may exceed 10%
in the first quarter of next year on a 'moderately loose' monetary policy, a
government research agency forecast. The policy will stay in place in the short
term to ensure a 'stable recovery,' Ba Shusong, deputy director of the
Development Research Center ... said…"
Government Finance Bubble Watch
August 28 - Bloomberg (Vivien Lou Chen and Steve Matthews): "The Federal
Reserve may not need to buy the full $1.25 trillion in mortgage-backed
securities the central bank has authorized by year-end, two regional Fed bank
chiefs said. The Fed's program to buy $1.25 trillion in mortgage bonds
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae is aimed at reducing
home-finance costs and arresting the housing slump that triggered the recession
... Net purchases totaled $25.4 billion in the week ended Aug. 26, compared
with a weekly average of $23.3 billion since the Fed began the initiative in
January…"
August 28 - Bloomberg (Sandrine Rastello): "The International Monetary Fund
said it today pumped about $250 billion into foreign-exchange reserves
worldwide, acting on an April call from leaders of the Group of 20 nations to
boost global liquidity. Countries will be able to convert the money, to come
from so-called Special Drawing Rights, into hard currencies through 'voluntary
trading arrangements' with other members…"
August 25 - Bloomberg (Alan Crawford): "Germany's budget swung to a 17.3
billion-euro ($24.7bn) deficit in the first half of this year as the government
boosted subsidies for companies to keep workers on the payroll during the
recession. Spending by Germany's federal, state and local governments rose 3.5%
and revenue fell 1.1% compared with the first half of 2008, the first decline
since 2004…"
Currency Watch
August 26 - Wall Street Journal (Neil Shah): "The US economy may be showing
signs of recovering from the financial crisis, but the jury is still out on the
future of the US dollar. While many analysts expect the dollar to strengthen in
coming months as the crisis fades and the US economy turns toward growth, a
growing chorus of investors is expressing concern about the longer-term outlook
for the greenback. In a new twist to an old refrain among economists, who have
long worried about the effects of growing US debt, they say that the huge
liabilities the US is taking on to dig its way out of crisis could ultimately
undermine faith in the dollar."
The dollar index gained 0.3% this week to 78.30 For the week on the upside, the
Australian dollar increased 0.8%, the Japanese yen 0.8%, the South African rand
0.8%, the South Korean won 0.5%, and the New Zealand dollar 0.2%. On the
downside, the Mexican peso declined 3.1%, the Brazilian real 2.6%, the British
pound 1.4%, the Canadian dollar 1.0%, the Swedish krona 0.9%, and the Norwegian
krone 0.6%.
Commodities Watch
Gold ended the week up 0.2% to $956 (up 8.3% y-t-d). Silver rallied 4.2% to
$14.80 (up 31% y-t-d). October Crude slipped $1.10 to $72.79 (up 63% y-t-d).
September Gasoline gained 3.4% (up 94% y-t-d), while September Natural Gas
dropped 6.1% (down 46% y-t-d). December Copper gained 2.6% (up 111% y-t-d).
December Wheat rallied 1.6% (down 19% y-t-d), and December Corn increased 0.8%
(down 19% y-t-d). The CRB index dipped 0.6% (up 12.3% y-t-d). The Goldman Sachs
Commodities Index (GSCI) fell 0.8% (up 33.7% y-t-d).
China Bubble Watch
August 24 - Reuters: "China will maintain its stimulative policy stance because
the economy, far from being on solid footing, is facing fresh difficulties,
Premier Wen Jiabao said ... In a downbeat statement on the government's website
... Wen said Beijing would ensure a sustainable flow of credit and a
'reasonably sufficient' provision of liquidity to support growth ... 'We must
clearly see that the foundations of the recovery are not stable, not solidified
and not balanced. We cannot be blindly optimistic…Therefore, we must maintain
continuity and consistency in macroeconomic policies, and maintaining stable
and quite fast economic growth remains our top priority. This means we cannot
afford the slightest relaxation or wavering.'"
August 24 - Bloomberg (Sophie Leugn): "Chinese Premier Wen Jiabao said the
government will maintain its fiscal and monetary policies as the economic
recovery isn't stable yet and faces many 'uncertainties.' Authorities can't be
'blindly' optimistic as a 'decline in external demand may continue for a longer
time' and excess production capacity may restrain industrial growth, Wen was
quoted ... China has yet to cement a recovery as factories have too much
capacity and exports are weakening, officials said this month."
August 26 - Bloomberg: "China said it's studying curbs on overcapacity in
industries including steel and cement, adding to concern policy makers may seek
to rein in growth fueled by record credit expansion this year. The government
will increase 'guidance' of industries including steel, cement, coal chemical,
plate glass and wind power equipment, the State Council, China's cabinet,
said…"
August 24 - Bloomberg: "China Construction Bank Corp. said excessive banking
liquidity has caused bubbles, underscoring concern that lenders will rein in
credit after the Shanghai Composite Index rose 64% this year. 'There are
uncertainties in the economy and bubbles in the capital market,' Guo Shuqing,
chairman of the nation's second-largest bank, told reporters ... 'China's
banking system still has excessive liquidity.' Chinese banks handed out a
record $1.1 trillion of new loans in the first half to support the nation's
$585 billion economic stimulus package."
August 25 - Bloomberg: "China's plan to tighten capital requirements for banks
by capping cross holdings of subordinated bonds may cut lending by as much as
700 billion yuan ($102 billion), China International Capital Corp. estimated.
The nation's 14 publicly traded banks may have 376.6 billion yuan of
subordinated bonds outstanding by the end of this year ... The banking
regulator sent draft rule changes to banks on Aug. 19 that would require
lenders to deduct all existing holdings of subordinated and hybrid debt sold by
other lenders from supplementary capital…"
August 24 - Bloomberg (Chris Bourke and Chia-Peck Wong): "China outpaced the US
and the UK combined in commercial property sales in the first half of the year,
Real Capital Analytics Inc. said. China's transactions totaled $31.2 billion
following a surge in land sales after the government eased credit terms ... US
sales were $16.2 billion in the first half ... and the UK 's were $13.7
billion."
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