Page 2 of 3 CREDIT BUBBLE BULLETIN Reflation issues heat up
Commentary and weekly watch by Doug Noland
The focus remains on financing the old structure. Indeed, I would argue that
the current course of policymaking and market interventions only works to delay
the unavoidable economic adjustment process.
I believe the unfolding risks to the US and global economy are enormous. Most
seem rather oblivious to the risks, believing both that our asset markets are
not overvalued and that economic recovery is only a matter of time. But we are
taking an economy that had become dependent on massive mortgage credit and
housing inflation and making it equally addicted to zero interest
rates, massive federal deficits, and tenuous global reflationary dynamics.
Or let's look at it from a different angle. From the perspective of stock
market valuation - massive credit growth, the resulting flow of finance, and
the course of policymaking basically created no additional wealth over the past
10 years. We now appear determined to repeat this dismal performance over the
next decade. Repeating what I wrote above, I believe the costs associated with
prolonged zero rates are much greater than the benefits.
WEEKLY WATCH
For the week, the S&P500 slipped 0.2% (up 20.8% y-t-d), while the Dow added
0.5% (up 17.6% y-t-d). The Morgan Stanley Cyclicals dipped 0.5% (up 64.2%), and
Transports slipped 0.4% (up 11.5%). The Morgan Stanley Consumer index gained
0.4% (up 21.8%), while the Utilities declined 0.4% (down 1.8%). The Banks rose
1.2% (down 1.5%), while the Broker/Dealers declined 1.6% (up 49.5%). The
S&P 400 Mid-Caps fell 1.5% (up 27.7%), and the small cap Russell 2000
declined 0.3% (up 17.1%). The Nasdaq100 gave back 1.4% (up 45.6%), and the
Morgan Stanley High Tech index fell 1.7% (up 59.6%). The Semiconductors sank
3.0% (up 45.2%). The InteractiveWeek Internet index declined 1.3% (up 67.1%).
The Biotechs fell 2.8% (up 33.9%). With bullion up another $31, the HUI gold
index gained 2.6% (up 56.3%).
One-month Treasury bill rates ended the week at 3 bps, and three-month bills
closed at 2 bps. Two-year government yields declined 7.5 bps to 0.675%.
Five-year T-note yields dropped 8 bps to 2.14%. Ten-year yields were down 6 bps
to 3.37%. Long bond yields fell 6 bps to 4.30%. Benchmark Fannie MBS yields
dipped one basis point to 4.12%. The spread between 10-year Treasuries and
benchmark MBS yields widened 5 to 75 bps. Agency 10-yr debt spreads widened one
to 46 bps. The implied yield on December 2010 eurodollar futures sank 17 bps to
1.185%. The 10-year dollar swap spread narrowed 0.5 to 11 bps; and the 30-year
swap spread increased 2 to negative 11.5 bps. Corporate bond spreads were
somewhat wider. An index of investment grade bond spreads widened 3 bps to 151,
and an index of junk spreads widened 4 bps to 573 bps.
The week saw an enormous quantity of debt issuance. Investment grade issuers
included Morgan Stanley $2.0bn, Boeing $1.2bn, Progress Energy $950 million,
Duke Energy $750 million, Delta Airlines $690 million, Republic Services $600
million, US Bancorp $500 million, Fortune Brands $400 million, Transatlantic
Holdings $350 million, Private Export Funding $300 million, Healthsouth $290
million, Public Service E&G $250 million, Kellogg $500 million,
Harley-Davidson $500 million, AMB Property $500 million, Amerisourcebergen $400
million, Thomas & Betts $250 million, Oaktree Capital $250 million, Idaho
Power $130 million, and Rowan Companies $125 million.
Junk issuers included Clearwire $1.6bn, United Airlines $800 million, Cascades
Inc $500 million, Landry's Restaurant $400 million, Johnsondiversey $650
million, Easton-Bell Sports $350 million, TRW Automotive $250 million, Graham
Pack $250 million, Altra Holdings $210 million, Alliance Health $190 million,
Montana RE $175 million, Stonemore $150 million, and Universal Corp $100
million.
Convert issues this week included TRW Automotive $260 million and Kilroy Realty
$150 million.
International dollar-denominated debt issuers included Qatar $7.0bn, CDP
Financial $5.0bn, Westpac Banking $4.0bn, Royal Bank of Scotland $7.0bn,
Barclays Bank $2.0bn, Total Capital $1.3bn, Commercial Bank of Australia
$1.25bn, European Investment Bank $1.0bn, Panama $1.0bn, BBVA $1.0bn, Gerdau
Holdings $1.25bn, UPC Germany $845 million, Temasek Financial $500 million,
Vodafone $500 million, Opti Canada $425 million, Bahamas $300 million, and
Cayman Islands $300 million.
U.K. 10-year gilt yields sank 16 bps to 3.64%, and German bund yields fell 13
bps to 3.25%. The German DAX equities index slipped 0.4% (up 17.7% y-t-d).
Japanese 10-year "JGB" yields declined 3 bps to 1.30%. The Nikkei 225 dropped
2.8% (up 7.2%). Emerging markets were mixed. Brazil's Bovespa equities index
increased 1.5% (up 76.6%), and Mexico's Bolsa declined 1.1% (up 37.0%).
Russia's RTS equities index gave up 2.6% (up 128.5%). India's Sensex equities
index increased 1.0% (up 76.4%). China's Shanghai Exchange jumped 3.8%,
boosting 2009 gains to 81.7%. Brazil's benchmark dollar bond yields dropped 13
bps to 4.94%, and Mexico's benchmark bond yields sank 39 bps to 4.81%.
Freddie Mac 30-year fixed mortgage rates dropped 8 bps to a 26-wk low 4.83%
(down 121bps y-o-y). Fifteen-year fixed rates declined 4 bps to 4.32% (down
141bps y-o-y). One-year ARMs sank 11 bps to a 4-year low 4.35% (down 94bps
y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed
jumbo rates up 4 bps to 5.95% (down 160bps y-o-y).
Federal Reserve Credit jumped $75.7bn last week to $2.191 TN. Fed Credit has
declined $55bn y-t-d, although it expanded $12.5bn over the past 52 weeks.
Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended
11/18) increased $11.3bn to a record $2.928 TN. "Custody holdings" have
expanded at an 18.5% rate y-t-d, and were up $427bn over the past year, or
17.1%.
M2 (narrow) "money" supply added $1.6bn to $8.389 TN (week of 11/9). Narrow
"money" has expanded at a 2.8% rate y-t-d and 5.6% over the past year. For the
week, Currency declined $1.7bn, while Demand & Checkable Deposits jumped
$24.6bn. Savings Deposits fell $12.4bn, and Small Denominated Deposits declined
$7.8bn. Retail Money Funds dipped $1.2bn.
Total Money Market Fund assets (from Invest Co Inst) increased $3.8bn to $3.339
TN. Money fund assets have declined $492bn y-t-d, or 14.5% annualized. Money
funds dropped $343bn, or 9.3%, over the past year.
Total Commercial Paper outstanding jumped $28.5bn (14-wk gain of $193bn) to
$1.267 TN. CP has declined $414bn y-t-d (27.8% annualized) and $347bn over the
past year (21.5%). Asset-backed CP declined $14.0bn last week to $496bn, with a
52-wk drop of $245bn (33.0%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $776bn y-o-y to $7.514 TN. Reserves have increased $749bn
year-to-date.
Global Credit Market Watch
November 18 - New York Times (Zachery Kouwe): "Ten months ago, President Obama
said a time would come for Wall Street to make profits and pay bonuses, but
'now's not that time.' But it appears that was exactly when Wall Street began
to return to profitability. In a report… by Thomas P. DiNapoli, the comptroller
of New York State, Wall Street profits in 2009 are on track to exceed the
record set three years ago, at the height of the credit bubble. The report
noted that the four largest investment firms in Manhattan…earned $22.5 billion
in the first nine months… 'The national economy is slowly improving, but Wall
Street has recovered much faster than anyone had envisioned,' Mr. DiNapoli
said…"
November 17 - Bloomberg (Caroline Hyde): "Sales of high-yield bonds are surging
in Europe as companies… tap investor demand for riskier assets that's driven
borrowing costs to the lowest this year. Sales of junk-rated debt more than
tripled to 3.4 billion euros ($5.1 billion) last week from the previous seven
days… That's taken the year's tally to 21 billion euros, an almost four-fold
jump from the same period in 2008. Sales by US companies with sub-investment
grade ratings doubled to $132 billion from the previous year."
November 17 - Bloomberg (Linda Shen): "US banks may face defaults on 10% of
their $1.1 trillion of commercial property loans, with regional lenders
vulnerable to 'significant' cuts in their credit grades, Fitch Ratings said.
Commercial mortgages represent as much as half of total loans at banks followed
by Fitch… Among the 36 banks with less than $20 billion in assets evaluated by
Fitch, commercial property exceeded 25% of total loans, compared with 10% or
less at the nation's four biggest lenders."
November 19 - Bloomberg (Sarah McDonald and Yusuke Miyazawa): "Debt sold by
Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. is among
the $450 billion of securities that Moody's… said it may downgrade. Some 775
hybrid and subordinated notes issued by 170 'bank families' in 36 countries are
on review after Moody's altered the assumptions it uses to rate the debt…"
Global Government Finance Bubble Watch
November 17 - Bloomberg (Scott Lanman): "Federal Reserve Chairman Ben S.
Bernanke's diagnosis of a weak US economy and labor market signaled that the
central bank's extended period of low borrowing costs may get even longer.
Bernanke said 'significant economic challenges remain,' with lending
constrained and the jobless rate above 10%. Speaking in New York… he said US
asset prices aren't out of line with underlying values, and central bank policy
will ensure that the 'dollar is strong.'"
November 17 - Bloomberg: "Financial officials in Japan and China, Asia's two
largest economies, warned the Federal Reserve's interest-rate policy risks
spurring speculative capital that may inflate asset prices and derail the
global economic recovery. Emerging economies 'might overheat and experience
financial turmoil,' Bank of Japan Governor Masaaki Shirakawa said… Low rates
and the dollar's depreciation present 'new, real and insurmountable risks to
the recovery of the global economy,' Liu Mingkang, China's top banking
regulator, said… The comments reflect concern that the Fed's pledge to keep
rates near zero for an 'extended period' may lead to a repeat of the financial
crisis. MSCI's emerging-markets stock index has risen 71% this year and Asian
countries from Singapore to South Korea are trying to rein in surging
real-estate prices. 'The continuous depreciation in the dollar, and the US
government's indication that, in order to resume growth and maintain public
confidence, it basically won't raise interest rates for the coming 12 to 18
months, has led to massive dollar arbitrage speculation,' Liu, chairman of the
China Banking Regulatory Commission, said…"
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