Page 2 of 3 CREDIT BUBBLE BULLETIN Electronic blindness
Commentary and weekly watch by Doug Noland
Today, bubbles proliferate throughout the securities and asset markets. It's all become one big historic global bubble. Yet the Bernanke Fed won't even begin tapering its $85 billion monthly "money printing" operation in the midst of increasingly conspicuous market excesses.
Federal Reserve Bank of Chicago president Charles Evans: "You talked about monitoring markets at great length. A major cause of the recent financial crisis was the failure to identify the housing bubble, and you spoke on that. Could you expand a little bit more on what's being done to identify current and future asset bubbles, and are you optimistic that we've identified them and nothing like
that is going on at the moment?"
Chairman Bernanke: "Well, our monitoring - there's really two parts to it. So the first is that we do, in fact, do what we can to try - I would say the word 'bubbles' is a freighted word. And let me just say we try to identify situations where asset valuations relative to fundamentals are historically anomalous, where, for example, in the case of housing, we would have seen house prices relative to rents as being much higher than historically normal.
"So we have an extensive program to try to assess whether major asset classes are in fact within historically normal ranges... In the stocks and equities, we look at dividend rates and earnings and the equity premium, those various kinds of standard finance indicators. In corporate debt, we look at measures that would help us assess the amount of default risk and therefore to assess whether spreads are appropriate or not. In more complex instruments like structured credit products, we look at a variety of things, including the terms and conditions.
"Are we seeing, for example, as we are in some cases, covenant-lite types of agreements in certain kinds of structured credit products. So we do try to identify, much more so than in the past, whether major asset classes are deviating in terms of their price or valuation from historical norms.
"Now, that being said, two comments. One is that I think it would be hubristic to believe that we could always identify such deviations. On the one hand, sometimes changes in price-to-earnings ratios are justified by some fundamentals. You know, Microsoft stock is worth more than it was some time ago, and this may still yet prove to be a bubble. But so far so good, right? At the same time - it's not evident that having a misalignment or historically unusual relationship is a problem, though it may be. But of course, we can also miss changes in valuation that are, in some sense, not fundamentally justified."
WEEKLY WATCH
The S&P500 gained 1.2% (up 14.6% y-t-d), and the Dow added 1.0% (up 15.4%). The broader market outperformed. The S&P 400 MidCaps advanced 2.1% (up 16.6%), and the small cap Russell 2000 rose 2.2% (up 14.8%). The Morgan Stanley Consumer index increased 0.4% (up 21.0%), while the Utilities were hit for 2.8% (up 13.4%). The Banks jumped 2.8% (up 14.1%), and the Broker/Dealers surged 3.0% (up 26.9%). The Morgan Stanley Cyclicals rose 3.5% (up 15.9%), and the Transports gained 2.5% (up 20.1%). The Nasdaq100 gained 1.2% (up 12.0%), and the Morgan Stanley High Tech index jumped 1.9% (up 10.3%). The Semiconductors surged 3.3% (up 21.3%). The InteractiveWeek Internet index gained 2.2% (up 15.4%). The Biotechs jumped 2.5% (up 29.2%). Although bullion fell $23, the HUI gold index was able to recover 1.0% (down 37.0%).
One-month Treasury bill rates ended the week at one basis point and 3-month rates closed at four bps. Two-year government yields were up two bps to 0.24%. Five-year T-note yields ended the week nine bps higher to 0.82%. Ten-year yields jumped 16 bps to 1.90%. Long bond yields were up 14 bps to 3.10%. Benchmark Fannie MBS yields jumped 17 bps to 2.56%. The spread between benchmark MBS and 10-year Treasury yields widened one to 66 bps. The implied yield on December 2014 eurodollar futures was up 2.5 bps to 0.47%. The two-year dollar swap spread was little changed at 13 bps, while the 10-year swap spread was down three to 14 bps. Corporate bond spreads were mixed. An index of investment grade bond risk increased one to 72 bps. An index of junk bond risk declined 2 to 350 bps. An index of emerging market debt risk fell 5 to 264 bps.
Debt issuance was huge. Investment grade issuers included JPMorgan $2.0bn, State Street $1.5bn, Berkshire Hathaway $1.0bn, Northeast Utilities $750 million, General Motors Finance $2.5bn, Brinker International $600 million, Perrigo $600 million, Bank of New York Mellon $500 million, Public Service Electric & Gas $500 million, XL Energy $450 million, Toll Brothers $400 million, PACCAR $400 million, Johnson & Son $400 million, Caterpillar $350 million, Hyatt Hotels $350 million, Piedmont $350 million, Alpha Natural Resources $345 million, Oklahoma Gas & Electric $250 million, University of Chicago $205 million and Oncor Electric Delivery $100 million.
Junk bond funds saw inflows increase to $789 million (from Lipper). Junk issuers included Ford Motor Credit $1.5bn, Ball Corp $1.0bn, First Quality Finance $600 million, Atlas Pipeline $400 million, Penn Virginio Resource $400 million, Commercial Metals $330 million, Claire's Stores $320 million, Cash America International $300 million, Istar Financial $565 million, Sonic Automotive $300 million, Harron Communications $290 million, BOE Intermediate $285 million, Federal Realty Investment Trust $275 million, Rolta $200 million, Gastar Exploration $200 million, Ion Geophysical $175 million, Tops Holding $150 million, Brunswick $150 million, Penta Aircraft Leasing $140 million, and Iracore International $125 million.
Convertible debt issuers included Dana Gas Sukuk $425 million.
The long list of international dollar debt issuers included European Investment Bank $5.0bn, BP Capital $3.0bn, Statoil $3.0bn, Australia & New Zealand Bank $2.5bn, Nordea Bank $2.5bn, HSBC Bank $2.0bn, Network Rail $1.75bn, Neder Waterschapsbank $1.5bn, Femsa $1.0bn, Leaseplan $750 million, NXP $750 million, Banco Del Estado $750 million, Want Want China Finance $600 million, Harvest Operations $600 million, Instituto Costarricense $500 million, Inversiones $500 million, Dana Gas Sukuk $425 million, Seven Generations Energy $400 million, LBC Tank Terminal $350 million, CHC Helicopter $300 million and VCH Lease $155 million.
Italian 10-yr yields increased 7 bps to 3.89% (down 61bps y-t-d). Spain's 10-year yields rose 16 bps to 4.18% (down 109bps). German bund yields jumped 14 bps to 1.38% (up 6bps), and French yields rose 13 bps to 1.95% (down 1bps). The French to German 10-year bond spread narrowed one to 57 bps. Ten-year Portuguese yields declined 3 bps to 5.38% (down 13bps). Greek 10-year note yields fell 19 bps to 9.36% (down 111bps). U.K. 10-year gilt yields were 17 bps higher at 1.89% (up 7bps).
The German DAX equities index jumped 1.9% for the week (up 8.8% y-t-d). Spain's IBEX 35 equities index was unchanged (up 4.6%). Italy's FTSE MIB gained 2.1% (up 6.2%). Japanese 10-year "JGB" yields ended the week up a notable 13 bps to 0.686% (down 9bps). Japan's Nikkei surged 6.7% (up 40.5%). Emerging markets were mixed. Brazil's Bovespa equities index declined 0.7% (down 9.6%), and Mexico's Bolsa fell 2.0% (down 4.5%). South Korea's Kospi index declined 1.1% (down 2.6%). India's Sensex equities index jumped 2.6% (up 3.4%). China's Shanghai Exchange rose 1.9% (down 1.0%).
Freddie Mac 30-year fixed mortgage rates jumped 7 bps to 3.42% (down 41bps y-o-y). Fifteen-year fixed rates were up 5 bps to 2.61% (down 44bps). One-year ARM rates fell 3 bps to a 13-week low 2.53% (down 20bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 3.91% (down 47bps).
Federal Reserve Credit jumped $10.4bn to a record $3.276 TN. Fed Credit expanded $491bn over the past 31 weeks. Over the past year, Fed Credit expanded $431bn, or 15.2%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $629bn y-o-y, or 6.0%, to a record $11.102 TN. Over two years, reserves were $1.282 TN higher, for 13% growth.
M2 (narrow) "money" supply jumped $33.6bn to a record $10.535 TN. "Narrow money" expanded 6.5% ($645bn) over the past year. For the week, Currency increased $2.5bn. Demand and Checkable Deposits rose $21.5bn, and Savings Deposits gained $9.4bn. Small Denominated Deposits declined $2.1bn. Retail Money Funds increased $2.5bn.
Money market fund assets rose $19.6bn to $2.583 TN. Money Fund assets were up $14.1bn from a year ago.
Total Commercial Paper outstanding fell $4.9bn in the week to a six-month low $993bn. CP has declined $73bn y-t-d, while having expanded $26bn, or 2.7%, over the past year.
Currency and 'Currency War' Watch
May 8 - Bloomberg: "China's central bank will resume bill sales for the first time in 17 months as overseas investors pump money into the country to take advantage of the yuan's rise. The People's Bank of China said it will issue 10 billion yuan ($1.6bn) of three-month notes... 'Foreign capital inflows are too big,' said Shi Lei... head of fixed-income research at Ping An Securities... 'The central bank needs more tools to mop up excess liquidity.'"
May 7 - Bloomberg (Michael Heath): "The Reserve Bank of Australia cut its benchmark interest rate to a record low, driving down a currency that has damaged manufacturing and boosted unemployment. Governor Glenn Stevens reduced the overnight cash-rate target by a quarter percentage point to 2.75%, saying in a statement that the Aussie's record strength 'is unusual given the decline in export prices and interest rates.'"
May 9 - Wall Street Journal (Alex Frangos): "Central banks in Asia, Australia and New Zealand are ratcheting up moves to deal with an influx of capital that is keeping currencies strong and complicating efforts to manage growth. New Zealand's central bank said Wednesday it intervened in foreign-exchange markets to blunt the rise of its currency and would continue to do so, a day after Australia's central bank cut interest rates to a record low and noted the stubborn strength of the Australian dollar. Elsewhere, China is moving to curb bets on the rising yuan, while Thailand is considering efforts to curb the strongest baht since the 1997 Asian financial crisis."
May 9 - Bloomberg (Eunkyung Seo and Cynthia Kim): "The Bank of Korea cut interest rates, following the lead of policy makers in Australia, Europe and India this month, as strength in the won and weakness in the yen dim the outlook for the nation's exports. Governor Kim Choong Soo and his board lowered the benchmark seven-day repurchase rate to 2.5% from 2.75%... As central banks around the world move to counter currency appreciation, the won's 24% jump against the yen in six months is hampering South Korean exporters of autos and electronics and aiding their Japanese rivals. In Seoul, ruling New Frontier Party floor leader Lee Hahn Koo yesterday urged a 'more active role' for the BOK, adding to political pressure that the central bank resisted last month."
The US dollar index jumped 1.2% to 83.14 (up 4.2% y-t-d). For the week on the upside, the Norwegian krone increased 0.2%. For the week on the downside, the Australian dollar declined 2.9%, the New Zealand dollar 2.7%, the Japanese yen 2.6%, the South African rand 2.3%, the Swiss franc 2.2%, the Swedish krona 1.4%, the British pound 1.4%, the Danish krone 1.0%, the euro 1.0%, the South Korean won 0.8%, the Brazilian real 0.6%, the Taiwanese dollar 0.4%, the Singapore dollar 0.4%, the Canadian dollar 0.2%, and the Mexican peso 0.1%.
Commodities Watch
May 7 - Bloomberg: "Gold imports by China from Hong Kong more than doubled to an all-time high in March as buyers in the biggest consumer after India boosted purchases, underscoring increased bullion demand in the world's second-largest economy. Mainland buyers purchased 223,519 kilograms (223.52 metric tons), including scrap, compared with 97,106 kilograms in February... "
The CRB index declined 0.5% last week (down 2.1% y-t-d). The Goldman Sachs Commodities Index slipped 0.3% (down 2.7%). Spot Gold fell 1.5% to $1,448 (down 13.6%). Silver was 1.5% lower to $23.66 (down 22%). June Crude dipped 43 cents to $96.04 (up 5%). June Gasoline was up 1.2% (up 4%), while June Natural Gas fell 3.2% (up 17%). July Copper gained 1.2% (down 8%). May Wheat fell 2.0% (down 10%), and May Corn declined 1.7% (down 1.5%).
US Bubble Economy Watch
May 9 - Bloomberg (Prashant Gopal): "Prices for single-family homes increased in 89% of US cities in the first quarter as the housing market extends a recovery from a five-year slump. The median sales price rose from a year earlier in 133 of 150 metropolitan areas measured... A year earlier, 74 areas had gains... The national median price for an existing single-family home was $176,600 in the first quarter, up 11.3% from the same period last year. That was the biggest gain since the fourth quarter of 2005... 'Some of the previously hard-hit markets like Phoenix, Sacramento and Miami continue to experience a dramatic turnaround, while a new set of areas like Atlanta, Minneapolis and Seattle have begun to show strong signs of upward momentum,' Lawrence Yun, chief economist for the National Association of Realtors, said... At the end of the first quarter, 1.93 million previously owned homes were available for sale, 16.8% fewer than a year earlier... "
May 6 - Bloomberg (Joshua Zumbrun): "US banks eased standards and terms on loans to businesses as commercial lending led a credit thaw, according to a Federal Reserve survey. 'Domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months,' the central bank said... The fraction of banks easing standards for business loans was described as 'relatively large.'"
Federal Reserve Watch
May 9 - Reuters (Luciana Lopez and Rodrigo Campos): "Wealthy money managers bashed Federal Reserve Chairman Ben Bernanke's easy money policies at a closely watched annual investment conference... The Sohn Investment Conference, which raises money for pediatric cancer research, gets big name hedge fund managers to share their 'best ideas' with other wealthy investors. This year's conference was sprinkled with criticisms of the Fed's $85 billion in monthly purchases of Treasuries and mortgage securities... 'Ben Bernanke is running the most inappropriate monetary policy in the history' of the developed world, said Stanley Druckenmiller, the retired head of Duquesne Capital Management... Bernanke took a drubbing from the start, with the first speaker, Paul Singer, setting the tone. Singer... said the Fed's monetary policies are distorting the prices of long-term bonds and the global recovery. 'Everyone wants a safe haven... There is no such thing in today's markets and that's one of the elements of the distortion.'"
May 7 - Bloomberg (Joshua Zumbrun and Craig Torres): "A group of bankers that advises the Federal Reserve's Board of Governors has warned that farmland prices are inflating 'a bubble' and growth in student-loan debt has 'parallels to the housing crisis.' ...Their alarm adds to a debate on the Federal Open Market Committee about whether the benefits from their monthly purchases of $85 billion in bonds outweigh the risk of financial instability. While Chairman Ben S. Bernanke has argued the program is worth pursuing, Fed Governor Jeremy Stein and Kansas City Fed President Esther George are among those who have voiced concerns that an extended period of low interest rates is heightening the risk of asset bubbles. 'Agricultural land prices are veering further from what makes sense,' according to minutes of the council's Feb. 8 gathering. 'Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.'"
May 8 - Bloomberg (Jeff Kearns and Aki Ito): "Federal Reserve Bank of Dallas President Richard Fisher said the Fed needs to set a limit on the size of its assets, and that he favors reducing purchases of mortgage-backed securities in any tapering of bond-buying. 'There somewhere have to be practicable limits in terms of how far we build our balance sheet,' Fisher said... 'We're moving in the direction of having a $4 trillion balance sheet so we know we can't go on forever... 'We've had a rebound in housing,' Fisher... said of the impact from Fed purchases of mortgage bonds. 'It's done its job and we're at risk of overkill. And we're accumulating so much, the question is what do we do with it?'"
Fiscal Watch
May 9 - Bloomberg (Gregory Mott): "Fannie Mae, the mortgage-financier seized by US regulators in 2008, will pay the Treasury Department $59.4 billion after reporting a first-quarter profit driven by rising home prices and declining delinquencies. The government-sponsored enterprise, which is operating under US conservatorship, had net income of $8.1 billion for the three-month period that ended March 31... The... company had net worth of $62.4 billion, and is required to turn over to Treasury everything above $3 billion. Fannie Mae's net worth was boosted by release of a valuation allowance on deferred-tax assets... "
Central Bank Watch
May 6 - Bloomberg (Jana Randow and Lorenzo Totaro): "European Central Bank President Mario Draghi said policy makers are ready to cut interest rates again if needed after reducing them to a record low last week. 'We will be looking at all the data that arrives from the euro-area economy in the coming weeks and if necessary, we are ready to act again,' Draghi said... 'Monetary policy will remain accommodative."
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