Page 2 of 4 CREDIT BUBBLE BULLETIN Weber's invaluable insight
Commentary and weekly analysis by Doug Noland
Then the bursting of the technology bubble (and deflation hysteria) was followed with even more aggressive fiscal and monetary stimulus - that propelled the historic mortgage finance bubble. These days, a protracted period of post-bubble inflationary fiscal and monetary policies literally knows no bounds. And, you know what, Mr Summers' justifications and rationalizations sound similar to those espoused by inflationists and monetary quacks throughout history.
Axel Weber's analysis is more credible. At this point, no one should be able to convince us that aggressive monetary and fiscal policies don't risk inflating problematic bubbles. Five years into an aggressive reflationary cycle, it is clear that past policy mistakes have been responsible for deep structural impairment. And deep
structural issues have provided a backdrop where the inflationists believe they're justified in running the electronic printing presses around the clock.
This issue of cyclical versus structural doesn't get the attention it deserves. If, as I believe, our economy faces deep structural weaknesses and imbalances, throwing more money, risk-taking and asset inflation at the problem only worsens the situation. Regrettably, Washington didn't listen to Issing - and they clearly have no interest in advice from Axel Weber.
Weekly Watch
The S&P500 gained 0.8% (up 10.0% y-t-d), and the Dow increased 0.5% (up 11.3% y-t-d). The S&P 400 MidCaps advanced 1.2% (up 13.1%), and the small cap Russell 2000 increased 0.6% (up 12.0%). The Banks slipped 0.6% (up 9.8%), and the Broker/Dealers fell 1.1% (up 14.4%). The Morgan Stanley Cyclicals added 0.2% (up 11.9%), and Transports jumped 1.2% (up 17.9%). The Morgan Stanley Consumer index rose 1.5% (up 16.3%), and the Utilities surged 2.3% (up 11.7%). The Nasdaq100 gained 0.6% (up 5.9%), and the Morgan Stanley High Tech index rose 1.1% (up 7.5%). The Semiconductors jumped 1.5% (up 13.7%). The InteractiveWeek Internet index increased 0.5% (up 11.1%). The Biotechs advanced 2.0% (up 18.1%). With bullion down $10, the HUI gold index declined 0.8% (down 19.6%).
One-month Treasury bill rates ended the week at 3 bps and 3-month rates closed at 7 bps. Two-year government yields were down a basis point to 0.24%. Five-year T-note yields ended the week down 3 bps to 0.765%. Ten-year yields fell 8 bps to 1.85%. Long bond yields dropped 5 bps to 3.10%. Benchmark Fannie MBS yields declined 4 bps to 2.62%. The spread between benchmark MBS and 10-year Treasury yields widened 4 bps to 77 bps (wide since August). The implied yield on December 2014 eurodollar futures declined 2 bps to 0.545%. The two-year dollar swap spread increased one to 18.25 bps (high since August), and the 10-year swap spread increased 3 to 16.0 bps (high since August). Corporate bond spreads were mostly wider. An index of investment grade bond risk was unchanged at 91 bps. An index of junk bond risk jumped 32 to 431 bps. An index of emerging market debt risk rose 8 to 300 bps (high since September).
March 28 - Bloomberg (Jennifer Joan Lee): ''Credit-default swaps insuring against losses on European financial debt climbed for a 10th day, the longest streak since August 2011, as the bank crisis in Cyprus and political turmoil in Italy alarm investors. The Markit iTraxx Financial Index of swaps protecting the senior debt of 25 banks and insurers rose four basis points to 205, with the gauge heading for its worst month since November 2011. Contracts on Italy jumped to the highest since Nov. 16.''
Investment grade issuers included GE Capital $1.4bn, First Data $815 million, Carlyle Holdings $400 million, Graphic Packaging Intl $425 million, American Campus Communities $400 million, and Assurant $350 million.
Junk issuers included Navistar International $1.2bn, Frontier Communications $750 million, RHP Hotel Properties $700 million, and Wilton RE Finance $300 million.
I saw no convertible debt issued this week.
International issuers included Saudi Electricity Global $2.0bn, Bharti Airtel Intl $1.5bn, TSMC Global $1.5bn, Croatia $1.5bn, Swedish Export Credit $1.3bn, SES $1.0bn, OAO TMK $500 million, RCI Banque $600 million, Arcelik $500 million, Banco de Credito $350 million, SOC Quimica $300 million, TBG Global $300 million, and Lulwa $140 million.
Italian 10-yr yields jumped 25 bps to 4.75% (up 25bps y-t-d). Spain's 10-year yields surged 21 bps to 5.04% (down 23bps). German bund yields fell to the lowest level since last August, down 9 bps to 1.29% (down 3bps), while French yields added a basis point to 2.02% (up 2bps). The French to German 10-year bond spread widened 9 to 73 bps (wide since November). Ten-year Portuguese yields jumped 33 bps to 6.24% (down 51bps). The Greek 10-year note yield surged another 56 bps to 11.53% (up 106bps), with a two-week gain of 156 bps. U.K. 10-year gilt yields were down 8 bps to 1.77% (down 5bps).
With financial stocks getting hammered, Spain's IBEX 35 equities index was down another 4.9% (down 3.0% y-t-d). Italy's FTSE MIB sank 4.4% (down 5.7%). The German DAX equities index fell 1.5% for the week (up 2.4%). Japanese 10-year "JGB" yields declined 2 bps to 0.54% (down 24bps). Japan's Nikkei added 0.5% (up 19.3%). Emerging markets were mixed to higher. Brazil's Bovespa equities index rallied 2.0% (down 7.6%), and Mexico's Bolsa recovered 3.3% (up 0.9%). South Korea's Kospi index gained 2.3% (up 0.4%). India's Sensex equities increased 0.5% (down 3.0%). China's Shanghai Exchange sank 3.9% (down 1.4%).
Freddie Mac 30-year fixed mortgage rates rose 3 bps to 3.57% (down 42bps y-o-y). Fifteen-year fixed rates were 4 bps higher to 2.75% (down 47bps). One-year ARM rates slipped one basis point to 2.62% (down 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 16 bps to 4.07% (down 70bps).
Federal Reserve Credit jumped $20.9bn to a record $3.187 TN. Fed Credit expanded $402bn over the past 25 weeks. In the past year, Fed Credit jumped $315bn, or 11.0%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $658bn y-o-y, or 6.4%, to $10.952 TN. Over two years, reserves were $1.570 TN higher, for 17% growth.
M2 (narrow) "money" supply expanded $16.7bn to $10.429 TN. "Narrow money" expanded 6.7% ($655bn) over the past year. For the week, Currency increased $0.7bn. Demand and Checkable Deposits slipped $1.0bn, while Savings Deposits jumped $18.4bn. Small Denominated Deposits added $0.2bn. Retail Money Funds declined $1.6bn.
Money market fund assets increased $0.4bn to $2.629 TN. Money Fund assets were up $24bn from a year ago.
Total Commercial Paper outstanding gained $5.2bn this week to $1.022 TN. CP has declined $44bn y-t-d, while having expanded $84bn, or 9.0%, over the past year.
Currency and 'Currency War'
March 26 - Bloomberg (Mike Cohen and Ilya Arkhipov): ''The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund. The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that starts today... They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises. ‘The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,' Martyn Davies, chief executive officer of... Frontier Advisory... said... ‘There's a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.'''
March 25 - Bloomberg (Cynthia Kim): ''South Korea's newly appointed finance minister, Hyun Oh Seok, revived his nation's concerns over weakness in the yen and said that the Group of 20 nations should revisit the issue. ‘Japan's expansionary policies are having various ripple effects on many countries,' Hyun, 62, told reporters... on his second day as finance chief. ‘The yen is depreciating while the won is gaining and this is flashing a red light for Korea's exports.'''
The US dollar index rose 0.7% to 82.98 (up 4.0% y-t-d). For the week on the upside, the South Korean won increased 0.7%, the South African rand 0.7%, the Singapore dollar 0.6%, the Canadian dollar 0.6%, the Japanese yen 0.3%, the Mexican peso 0.3%, the Taiwanese dollar 0.2% and the New Zealand dollar 0.1%. For the week on the downside, the Danish krone declined 1.4%, the euro 1.3%, the Swiss franc 0.9%, the Norwegian krone 0.8%, the Brazilian real 0.6%, the Swedish krona 0.5%, the Australian dollar 0.2%, and the British pound 0.3%.
Commodities Watch
The CRB index increased 0.6% this week (up 0.5% y-t-d). The Goldman Sachs Commodities Index rallied 1.3% (up 1.3%). Spot Gold declined 0.6% to $1,599 (down 4.6%). Silver fell 1.3% to $28.32 (down 6%). May Crude jumped $3.52 to $97.23 (up 6%). May Gasoline rose 1.9% (up 13%), and April Natural Gas gained 1.8% (up 20%). May Copper declined 1.7% (down 7%). May Wheat sank 5.8% (down 12%), and May Corn fell 4.3% (unchanged).
US Bubble Economy Watch
March 29 - Bloomberg (Nick Summers): ''Data point No. 1: Banks are back to hawking complex derivatives that magnify bets on corporate debt. Data point No. 2: For the first time since the financial crisis, JPMorgan Chase & Co. is set to resume selling securities tied to home loans that aren't government-backed. Add a third development -- the feverish revival of the US housing market, with new home sales surging to levels not seen since August 2008 -- and a meltdown-minded observer could reasonably get to thinking, ‘Here we go again.' The return of financial products that played a role in the 2008 credit bubble provides a measure of how far the economy has come since then -- and how tempting it is for Wall Street and investors to return to old habits. It may also provide grist to lawmakers and commentators pushing to end the ‘too big to fail' era and break up the big banks before they require another public rescue.''
March 26 - Bloomberg (Alex Kowalski): ''Residential real estate prices increased in January by the most since June 2006, indicating the US housing market strengthened at the start of the year. The S&P/Case-Shiller index of property values in 20 cities climbed 8.1% in January from the same month in 2012 after rising 6.8% in the year ended in December... ''
March 26 - Bloomberg (Kathleen M. Howley): ''More American homeowners will be able to use their properties as cash machines again after real estate equity jumped last year by the most in 65 years. Property owners recaptured $1.6 trillion as home values climbed to the highest levels since 2007. The amount by which the value of the houses exceeds their underlying mortgages rose to $8.2 trillion last year, a gain of 25%, according to Federal Reserve data.''
March 28 - Bloomberg (Heather Perlberg): ''Gary Kain spent 20 years at Freddie Mac managing as much as $800 billion of bonds before the US took over the company. Since 2009, he's used his knowledge of the home-loan market to help turn American Capital Agency Corp. into the fastest growing mortgage debt investor. American Capital's assets grew to $100.5 billion at the end of last year from less than $5 billion three years earlier, making the Bethesda, Maryland-based real estate investment trust the largest after Annaly Capital Management Inc., in an industry that's drawing attention from investors and the Federal Reserve for its double-digit yields and rapid expansion. REITs bought more than $100 billion of government-backed mortgage securities in 2012, the most since at least the credit crisis, and will purchase another $60 billion in 2013, JPMorgan... estimated... ''
March 25 - Financial Times (Stephen Foley): ''Investors who bought the riskiest portions of one of the most exotic credit market instruments sold in the run-up to the financial crisis actually made more money than they forecast, despite the meltdown... The data, published by JP Morgan, helps to explain the recent soaring demand for equity in so-called ‘collateralised loan obligations', a highly-leveraged investment vehicle that buys corporate bank loans. Demand has been so strong that CLO issuance this year so far is already close to half the total for the whole of 2012, and near the record level set in 2007. Most of the financing for CLOs comes in the form of debt, which has first claims on the interest and principal payments from the underlying loans.''
March 26 - Bloomberg (Freeman Klopott and Esmé E. Deprez): ''New York is listing climate change as a risk for bondholders after Hurricane Sandy caused more than $40 billion in damage in the state... The state may be the first US state to inform investors of the danger posed by rising sea levels, flooding and erosion tied to climate change, said Rich Azzopardi, a Cuomo spokesman... Sandy caused the worst flooding in the more than 100-year history of the New York City subway system, which is run by the state, and devastated coastal areas.''
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
