Page 2 of 3 CREDIT BUBBLE BULLETIN No dialing back
Commentary and weekly watch by Doug Noland
Corporate debt issuance picked up markedly to begin the month. Investment grade
issuers included CVS Caremark $1.5 billion, Prudential Financial $1.5 billion,
Met Life $1.0 billion, Kinder Morgan $1.0 billion, Midcontinent Express
Pipeline $800 million, Agilent Tech $750 million, Avalonbay Communities $500
million, National Rural Utilities $500 million, Airgas $400 million, Puget
Sound Energy $350 million, Timken $250 million, and Questar Pipeline $250
million.
Junk bond funds enjoyed inflows of $223 million (from AMG). Junk issuers
included Cablevision $900 million, Global Crossing $750 million, Harrahs $720
million, Ferrellgas $300 million, Plains
Exploration $400 million, and WR Berkley $300 million.
I saw no convert issues.
International dollar-denominated debt issuance was huge. Issuers included
Hutchinson Whampoa $3.0 billion, Commercial Bank of Australia $2.75 billion,
Spain $2.5 billion, Svenska Handelsbanken $2.5 billion, Iberdrola Ireland $2.0
billion, Swedish Export Credit $1.5 billion, Taqa Abu Dhabi $1.5 billion,
Tetroleos Mexica $1.5 billion, Vale Overseas $1.0 billion, and Petroplus $400
million.
U.K. 10-year gilt yields dipped one basis point to 3.61%, and German bund
yields declined one basis point to 3.23%. The German DAX equities index jumped
4.5% (up 16.9%). Japanese 10-year "JGB" yields declined 2 bps to 1.30%. The
Nikkei 225 gained 2.5% (up 17.9%).
Emerging markets were quite strong. Brazil's benchmark dollar bond yields sank
26 bps to 5.19%. Brazil's Bovespa equities index rose 2.9% (up 55.4% y-t-d).
The Mexican Bolsa surged 4.0% (up 31.6% y-t-d). Mexico's 10-year $ yields
dropped 21 bps to 5.55%. Russia's RTS equities index surged 12.5% (up 89.4%).
India's Sensex equities index gained 3.7% (up 68.6%). China's Shanghai Exchange
jumped 4.5%, increasing 2009 gains to 64.2%.
Freddie Mac 30-year fixed mortgage rates dipped one basis point to 5.07% (down
84bps y-o-y). Fifteen-year fixed rates fell 4 bps to 4.50% (down 104bps y-o-y).
One-year ARMs increased 2 bps to 4.64% (down 57bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 9 bps to 6.18%
(down 75bps y-o-y).
Federal Reserve Credit rose $6.3 billion last week to $2.070 trillion. Fed
Credit has declined $177 billion y-t-d, although it expanded $1.181 trillion
over the past 52 weeks (133%). Elsewhere, Fed Foreign Holdings of Treasury,
Agency Debt this past week (ended 9/7) declined $0.7 billion to $2.828
trillion. "Custody holdings" have expanded at a 17.9% rate y-t-d, and were up
$432 billion over the past year, or 18.1%.
M2 (narrow) "money" supply rose $11.3 billion to $8.294 trillion (week of
8/31). Narrow "money" has expanded at a 1.8% rate y-t-d and 7.6% over the past
year. For the week, Currency declined $2.3 billion, while Demand &
Checkable Deposits slipped $0.9 billion . Savings Deposits jumped $28.1
billion, while Small Denominated Deposits fell $9.5 billion . Retail Money
Funds declined $3.9 billion .
Total Money Market Fund assets (from Invest Co Inst) fell another $15.4 billion
to $3.543 trillion. Money fund assets have declined $287 billion y-t-d, or
10.8% annualized. Money funds fell $38.4 billion, or 1.1%, over the past year.
Total Commercial Paper outstanding increased $11.3 billion (4-wk gain of $99
billion ) to $1.174 trillion. CP has declined $508 billion y-t-d (44%
annualized) and $642 billion over the past year (35%). Asset-backed CP gained
$6.2 billion to $484 billion, with a 52-wk drop of $297 billion (38%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $252 billion y-o-y to a record $7.197 trillion. Reserves
have increased $432 billion year-to-date.
Global Credit Market Watch
September 8 - Bloomberg (Paul Armstrong and Esteban Duarte): "Corporate bond
sales surged in Europe, driving this year's record issuance above $1.23
trillion ... Issuance is now 11% ahead of the total for all of 2008 ... 'The
market is back on fire after its usual summer lull,' said Juan Esteban
Valencia, a credit analyst at Societe Generale ... 'Appetite for credit remains
unabated.'"
September 9 - Bloomberg (Laura Cochrane): "Emerging-market government and
state-backed companies will likely sell more than $100 billion of bonds this
year, according to Commerzbank AG. 'Investors are hungry for quasi-sovereign
risk,' said Luis Costa, emerging-market debt strategist at Commerzbank…said…"
September 8 - Bloomberg (Steve Scherer): "Italian Prime Minister Silvio
Berlusconi said curbing 'speculation' in financial markets is more important to
Group of 20 leaders than controlling bonuses for bank executives. G-20 leaders
meet in Pittsburgh later this month to discuss measures aimed at making the
global financial system more stable after the worst financial collapse since
the Great Depression."
September 10 - Bloomberg (John Glover): "Defaults among speculative-grade
companies and issuers of so-called leveraged loans will peak at about 15% this
year in Europe, Standard & Poor's said…"
September 10 - Bloomberg (Doug Alexander): "Stocks sales in Canada surged to
the highest in a decade this year after Barrick Gold Corp. and Fairfax
Financial Holdings Ltd. led the biggest one-day sale of equity in Canadian
history."
Government Finance Bubble Watch
September 11 - Bloomberg (Theophilos Argitis and Chris Donville): "Canadian
Prime Minister Stephen Harper's government, which faces defeat in Parliament as
early as next week, is delaying the country's exit from budget deficits... He
also projected cumulative deficits of C$164.4 billion ($152.5 billion) by then,
doubling his earlier forecasts."
September 10 - Bloomberg (Christian Vits): "European Central Bank council
member Axel Weber said returning to the pre-crisis debt level may take decades.
'When I look at the longer years it took us to reduce government debt, it's
pretty clear that reaching the same level of economic activity as before the
crisis can be done pretty quickly by 2013,' Weber ... said ... 'Reaching the
same level of debt to GDP will take at least one to two decades.'"
September 9 - Bloomberg (Rebecca Christie): "The Federal Deposit Insurance
Corp. proposed a six-month, emergency-only extension to its debt guarantee
program as regulators move to wean companies from federal aid approved at the
height of last year's credit crisis."
September 10 - Bloomberg (Svenja O'Donnell): "The Bank of England plans to keep
buying as much as 175 billion pounds ($290 billion) of assets to cement the
economy's recovery from the worst recession in a generation."
Currency Watch
September 7 - Bloomberg (Jonathan Tirone): "The dollar's role in international
trade should be reduced by establishing a new currency to protect emerging
markets from the 'confidence game' of financial speculation, the United Nations
said. UN countries should agree on the creation of a global reserve bank to
issue the currency and to monitor the national exchange rates of its members,
the Geneva-based UN Conference on Trade and Development said ... 'There's a
much better chance of achieving a stable pattern of exchange rates in a
multilaterally-agreed framework for exchange-rate management,' Heiner
Flassbeck, co-author of the report ... said ... 'An initiative equivalent to
Bretton Woods or the European Monetary System is needed.' The 1944 Bretton
Woods agreement created the modern global economic system and institutions
including the IMF and World Bank."
September 10 - Bloomberg (Jody Shenn): "Yuan deposits offer the largest
interest-rate premium over dollar accounts in 17 months, adding to pressure on
the Chinese government to end its currency's fixed-exchange rate ... Inflows of
hot money, funds that move across borders seeking short-term returns, may swell
to more than $160 billion in the second half, compared with $42 billion in the
first six months, Zhang Ming, a researcher at the Chinese Academy of Social
Sciences, said…"
The dollar index sank 1.9% this week to 76.67. For the week on the upside, the
New Zealand dollar increased 2.7%, the Japanese yen 2.6%, the Swedish krona
2.4%, the Swiss franc 2.2%, the South African rand 2.0%, the Danish krone 2.0%,
the Euro 2.0%, the British pound 1.7%, the South Korean won 1.6%, the
Australian dollar 1.4%, the Singapore dollar 1.2%, the Canadian dollar 1.1%,
and the Norwegian krone 1.1%. Losing against the dollar, the Argentine peso
declined 0.3% and the Turkish lira fell 0.2%.
Commodities Watch
September 9 - Bloomberg (Millie Munshi and Veronica Navarro Espinosa): "Gold
prices that jumped above $1,000 an ounce this week are signaling that investors
are buying metals to hedge against declines in currencies, former Federal
Reserve Chairman Alan Greenspan said. The gains are 'strictly a monetary
phenomenon,' Greenspan said ... Rising prices of precious metals and other
commodities are 'an indication of a very early stage of an endeavor to move
away from paper currencies,' he said ... 'What is fascinating is the extent to
which gold still holds reign over the financial system as the ultimate source
of payment,' Greenspan said ... 'China is turning out to be the 900-pound
gorilla in the energy and commodity market,' Greenspan said. 'The increase in
oil consumption in China has been quite extraordinary.'"
September 9 - Bloomberg (Aya Takada): "Japan, Asia's second-largest aluminum
importer, agreed to increase the fee it pays to producers by at least 53% to
the highest in 14 years as surging Chinese demand saps regional supplies."
September 8 - Bloomberg (Thomas Kutty Abraham): "A global tea shortage may
increase by 10% next year as droughts in Kenya, Sri Lanka and India, the top
exporters, damage crops and propel prices to a record, the world's biggest tea
plantation company said."
Gold gained 1.1% to close at $1,006 (up 14.0% y-t-d). Silver jumped 3.1% to
$16.79 (up 48.6% y-t-d). October Crude rose a volatile $1.18 to $69.20 (up 55%
y-t-d). October Gasoline declined 1.3% (up 65% y-t-d), while September Natural
Gas rallied 9.6% (down 47% y-t-d). December Copper declined 1.3% (up 101%
y-t-d). December Wheat fell 1.0% (down 24% y-t-d), while December Corn
recovered 4.4% (down 21% y-t-d). The CRB index gained 1.2% (up 9.4% y-t-d). The
Goldman Sachs Commodities Index (GSCI) jumped 2.8% (up 29.3% y-t-d).
China Bubble Watch
September 10 - Bloomberg: "China's Premier Wen Jiabao said the nation 'cannot
and will not' pull back from economic stimulus measures ... 'China's economic
rebound is unstable, unbalanced and not yet solid,' Wen said ... He cautioned
that some stimulus measures will 'fade' and others will take time to become
effective. Wen's remarks reflect a commitment last week from the world's
biggest nations to maintain unprecedented fiscal and monetary measures…"
September 10 - Bloomberg: "Bank of China Ltd, which led the nation's $1.1
trillion lending spree in the first half, said ample liquidity has caused
'bubbles' in stocks, commodities and real estate. 'The potential risk is that a
lot of liquidity goes to the asset market,' Vice President Zhu Min said ... 'So
you see asset bubbles in commodities, stocks and real estate, not only in
China, but everywhere.'"
September 10 - Bloomberg: "Bankers on Wall Street are suffering from 'over
confidence' and are 'myopic' in the face of a continuing financial crisis, Bank
of China Ltd. Vice President Zhu Min said. 'You go to Wall Street, the people
feel the crisis never happened,' Zhu said ... 'It's not only over-confidence,
it's over-myopic. This is too much.' Zhu's criticism reflects the growing
confidence of China…in scolding the U.S. for missteps that led to the financial
crisis and mounting federal debt."
September 10 - Bloomberg: "China's bank loans will post steady growth in the
second half of the year as big fluctuations would hurt the economic recovery,
the official Xinhua News Agency reported, citing Bank of China Vice President
Zhu Min. Zhu refuted speculation that banks will tighten credit in the second
half, saying bank loans will grow steadily in the next six-to-12 months…"
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
