Page 2 of 4 CREDIT BUBBLE BULLETIN Greenspan in dreamland
Commentary and weekly watch by Doug Noland
Ultra-loose financial conditions tend to benefit the most aggressive investor, speculator and company management team. And the longer central bankers prolong loose "money" policies, the greater the flow of finance to the riskiest stocks and debt instruments, the larger the amount of speculative leverage employed and the more susceptible the business models driving growth in the real economy.
From both a financial system and economic system standpoint, protracted periods of loose "money" create heightened vulnerabilities. But as long as credit expansion, risk-taking and leveraging are uninterrupted, it doesn't hurt to assume a "normal distribution" world. But it's a mirage. The system is becoming
progressively vulnerable to any development that might spark a bout of risk-aversion and de-leveraging.
Truth be told, I enjoyed reading Greenspan's first book (The Age of Turbulence: Adventures in a New World) and I'm sure I'll be enthralled by his new one (The Map and the Territory: Risk, Human Nature, and the Future of Forecasting) But let there be no doubt, he remains the master of artful spin, obfuscation and blatant historical revisionism. And I'll keep fighting what I believe is the good fight against revisionism. I never doubted that Greenspan would choose his legacy over statesmanship. I hold a small amount of hope for a different course at some point from Professor Ben Bernanke.
One of these days the Fed and its flawed doctrine will be held accountable. For now, I guess, the Fed and Wall Street can continue to pretend this massive ongoing monetary inflation makes sense. They can pretend that you can't recognize a bubble until after it bursts - that pegging short-term rates at zero for years doesn't foment massive financial distortions and economic maladjustment - that this is not a redistribution of wealth on an unprecedented scale - that central bankers should rely on regulation instead of monetary policy to address mounting financial excess - and that aggressive reflationary measures can always be employed to counter bursting bubbles.
They can pretend that we're not witnessing the greatest financial bubble in history - that trust in "money," financial assets and central banking isn't at stake. And they can pretend that they'll retain effective tools for stabilizing the "system" the day this massive global bubble begins to really unwind. If there is historic precedent for aggressive inflationism employed over an extended period without catastrophic consequences - that would be news to me.
The S&P500 gained 0.9% (up 23.4% y-t-d), and the Dow rose 1.1% (up 18.8%). The S&P 400 Midcaps added 0.4% (up 26.9%), and the small cap Russell 2000 increased 0.3% (up 31.7%). The Morgan Stanley Consumer index was unchanged (up 26.1%), while the Utilities jumped 1.8% (up 10.4%). The Banks declined 1.0% (up 26.5%), while the Broker/Dealers added 0.1% (up 50.7%). The Morgan Stanley Cyclicals were up 2.0% (up 31.8%), and the Transports surged 2.6% (up 32.1%). The Nasdaq100 gained 0.9% (up 27.2%), while the Morgan Stanley High Tech index slipped 0.1% (up 23.4%). The Semiconductors fell 2.0% (up 29.2%). The InteractiveWeek Internet index declined 1.3% (up 30.2%). The Biotechs jumped 2.3% (up 42.9%). With bullion jumping $35, the HUI gold index rallied 8.9% (down 44.6%).
One-month Treasury bill rates ended the week at 2 bps, and three-month rates closed at 3 bps. Two-year government yields were down a basis point to 0.30%. Five-year T-note yields ended the week 5 bps lower to 1.28%. Ten-year yields declined 7 bps to a three-month low 2.51%. Long bond yields fell 4 bps to 3.60%. Benchmark Fannie MBS yields sank 9 bps to 3.17%. The spread between benchmark MBS and 10-year Treasury yields declined 2 bps to 66 bps. The implied yield on December 2014 eurodollar futures fell 2 bps to 0.455%. The two-year dollar swap spread was little changed at 13 bps, while the 10-year swap spread increased one to 15 bps. Corporate bond spreads were little changed. An index of investment grade bond risk was about unchanged at 72 bps. An index of junk bond risk increased one to 346 bps. An index of emerging market (EM) debt risk rose 3 to 315 bps.
Debt issuance was strong. Investment grade issuers included Wells Fargo $3.5bn, Citigroup $2.0bn, Toyota Motor Credit $1.5bn, Bristol-Myers Squibb $1.5bn, PNC Bank $1.25bn, Suntrust Banks $750 million, Branch Banking & Trust $650 million, Yum Brands $600 million, Northwestern University $600 million, Prologis $500 million, Blackboard Inc $365 million, Leucadia National $250 million, Catholic Health Initiative $540 million, Union Pacific $500 million, and Sammons Financial Group $200 million.
Junk bond funds saw inflows jump to $2.02bn (from Lipper). This week's issuers included Antero Resources $1.0bn, Crestwood Midstream Partners $600 million, Ferrellgas $325 million, Alliant Techsystems $300 million, Penn National Gaming $300 million, Dole Food $300 million, Sally Holdings $200 million, Jack Cooper Finance $150 million, and William Lyon $100 million.
Convertible debt issuers this week included Sandisk $1.3bn.
International dollar debt issuers included International Bank of Reconstruction & Development $6.0bn, KFW $4.0bn, European Investment Bank $3.0bn, Brazil $3.2bn, ABN Amro $2.5bn, GLP Capital $2.05bn, Banque Federative du Credit Mutuel $1.75bn, Bank Nova Scotia $1.5bn, European Bank of Reconstruction & Development, Network Rail Infrastructure $1.25bn, JBS Investments $1.3bn, Empresa Nacional de Telecomunicaciones $1.0bn, Banco Nacional de Costa Rica $1.0bn, Dominican Republic $500 million, Turkiye Vakiflar Bankasi $500 million, Caisse Centrale Desjardins $500 million, Petroleos Mexicanos $350 million, Topaz Marine $350 million, Exopack $325 million, Kansas City Southern Mexico $250 million and Bank Caspian $200 million.
Ten-year Portuguese yields declined 4 bps to 6.11% (down 65bps y-t-d). Italian 10-yr yields rose 6 bps to 4.22% (down 28bps). Spain's 10-year yields fell 10 bps to 4.15% (down 112bps). German bund yields declined 8 bps to 1.75% (up 43bps). French yields dropped 9 bps to 2.25% (up 25bps). The French to German 10-year bond spread narrowed one to 50 bps. Greek 10-year note yields jumped 16 bps to 8.35% (down 212bps). U.K. 10-year gilt yields were down 10 bps to 2.61% (up 79bps).
Japan's Nikkei equities index sank 3.25% (up 35.5% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.61% (down 17bps). The German DAX equities index rose 1.4% to another all-time high (up 18.0%). Spain's IBEX 35 equities index reversed course and fell 1.9% (up 20.2%). Italy's FTSE MIB dropped 2.1% (up 16.0%). Emerging markets were mostly under pressure. Brazil's Bovespa index sank 2.2% (down 11.2%), while Mexico's Bolsa added 0.6% (down 6.9%). South Korea's Kospi index declined 0.9% (up 1.9%). India's Sensex equities index fell 1.0% (up 6.5%). China's Shanghai Exchange dropped 2.8% (down 6.0%).
Freddie Mac 30-year fixed mortgage rates fell 15 bps to an 18-week low 4.13% (up 72bps y-o-y). Fifteen-year fixed rates were down 9 bps to 3.24% (up 52bps). One-year ARM rates declined 3 bps to 2.60% (up one bp). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 16 bps to a four-month low 4.35% (up 34bps).
Federal Reserve Credit jumped $20.4bn to a record $3.782 TN. Over the past year, Fed Credit was up $953bn, or 33.7%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $673bn y-o-y, or 6.3%, to a record $11.4424 TN. Over two years, reserves were $1.196bn higher, for 12% growth.
M2 (narrow) "money" supply jumped $28.8bn to a record $10.933 TN. "Narrow money" expanded 7.0% ($712bn) over the past year. For the week, Currency increased $5.1bn. Total Checkable Deposits surged $95.0bn, while Savings Deposits fell $67.2bn. Small Time Deposits declined $3.7bn. Retail Money Funds were little changed.
Money market fund assets rose $54.5bn to $2.668 TN. Money Fund assets were up $99bn from a year ago, or 3.8%.
Total Commercial Paper jumped $28.2bn to $1.062TN. CP was down $4bn y-t-d, while increasing $138bn, or 14.9%, over the past year.
October 23 - Bloomberg (Daniel Kruger): "China, the largest foreign lender to the US, reduced its holdings of Treasuries as yields on the debt rose for a fourth month amid speculation the Federal Reserve would reduce the pace of its bond purchases. China's holdings fell by $11.2 billion, or 0.9 percent, in August to $1.268 trillion, the fewest since February. The Chinese position has dropped by $29.2 billion since peaking this year at $1.297 trillion in May... Foreign holdings of Treasuries declined for a fifth month for the first time since 2001... Overseas holdings have fallen by $133 billion during that period. 'Central banks are like any other investor -- they're charged with preserving the value of the assets they hold,' said Aaron Kohli, an interest-rate strategist BNP Paribas... "
The US dollar index slipped 0.6% to 79.19 (down 0.7% y-t-d). For the week on the upside, the Swedish krona increased 1.6%, the Swiss franc 1.0%, the euro 0.8%, the Danish krone 0.8%, the Japanese yen 0.3%, the Singapore dollar 0.3%, the Norwegian krone 0.1% and the Taiwanese dollar 0.1%. For the week on the downside, the New Zealand dollar declined 2.6% the Canadian dollar 1.6%, the Australian dollar 1.0%, the Brazilian real 0.8%, the South African rand 0.4%, the Mexican peso 0.2% and the South Korean won 0.1%.
October 22 - Bloomberg (Jen Skerritt): "Canadian wheat and canola grower Mike Bast spent five years building silos to store 100,000 bushels on his 2,000-acre farm in La Salle, Manitoba. It wasn't enough. He's already dumping grain into his neighbor's bins. Harvests this year across the Prairie provinces of Canada, the world's top canola producer and the second-largest exporter of wheat, will jump 14% to a record 80.8 million metric tons... The supply surge is eroding prices and testing the limits of domestic storage. Farmers are leaving crops in uncovered mounds amid a shortage of silage bags and a lack of space at grain elevators and export depots. 'I've never seen this much grain out in fields, in bags or in piles,' said Tyler Russell, the national grain-marketing manager for processor Cargill Inc.'s Canadian unit... 'We have a monster crop.' Most storage space will be 'pretty much full' during harvest months, he said. Bin-busting output in Canada is compounding record global supplies as planting expanded from Brazil to Ukraine to the US"
The CRB index was down 1.5% this week (down 4.2% y-t-d). The Goldman Sachs Commodities Index fell 2.2% (down 3.4%). Spot Gold gained 2.6% to $1,351 (down 19.4%). Silver jumped 3.3% to $22.64 (down 25%). December Crude dropped $3.26 to $97.85 (up 7%). November Gasoline sank 3.2% (down 6%), and November Natural Gas fell 1.5% (up 11%). December Copper declined 0.9% (down 11%). December Wheat fell 2.1% (down 11%), and December Corn slipped 0.3% (down 37%).
US Fixed Income Bubble Watch
October 22 - Bloomberg (Bill Faries, Martin Z. Braun and Michelle Kaske): "Seven years ago, in the wake of a government shutdown caused by a $740 million budget deficit, Puerto Rican officials vowed to fix the island's finances by 2010. Now investors are calling their bluff. In the $3.7 trillion municipal-bond market, Puerto Rico and its agencies more than doubled their borrowing since 2004 to $70 billion this year. Even as the island's population shrank and the economy contracted 16% since 2004, the government kept selling enough bonds to saddle each man, woman and child with $19,000 in debt. Wall Street banks selling Puerto Rican bonds to mutual funds, money managers and individuals fueled the borrowing. Investors were lured by the debt's tax-exempt status in all 50 US states and yields above those on the mainland. In August, the binge collided with shockwaves from Detroit's record bankruptcy and prospects for higher interest rates, sending tax- equivalent yields on the commonwealth's bonds higher than those of Venezuela and forcing the island to turn to private lenders."
October 23 - Bloomberg (Michelle Kaske): "Hedge funds such as Maglan Capital LP and MeehanCombs LP are helping fuel a rally in Puerto Rico debt... As yields on obligations of the struggling US territory soared to records in recent weeks, David Tawil, 38, co-founder of... Maglan Capital, has been buying. The purchases mark the first foray into municipal debt for the fund, which typically focuses on distressed US companies. The moves add demand to the $3.7 trillion municipal market at a time of record withdrawals by individuals."
October 22 - Bloomberg (Kristen Haunss): "Safeguards on speculative-grade debt are weakening at a record pace as the neediest US companies obtain financings that don't offer typical lender protection. Peabody Energy Corp., the largest US coal producer, Apollo Global Management LLC-controlled industrial components maker Rexnord Corp. and other companies have raised $238.4 billion in covenant-light loans this year, more than double the amount in 2012... A Moody's... index of covenant quality on bonds sold by North American companies rose to a record 4.05 last month from 3.85 in August, where a reading of 5 is the weakest and 1 is the strongest... Mutual funds that buy the senior ranking debt have received $55.6 billion in deposits this year... "
October 25 - Bloomberg (Sarah Mulholland): "Wall Street banks that package commercial mortgages into bonds are forgoing a ranking from Moody's ... on the riskier portions of the deals, a sign the credit grader isn't willing to stamp the debt investment-grade amid deteriorating underwriting standards. Moody's didn't grade the lower-ranking debt in 9 of the 14 commercial-mortgage bond transactions it's rated since mid-July, according to Jefferies... 'We have been observing a degradation in credit quality for some time' in the CMBS market, said Stuart Lippman, the chief investment officer and founder of hedge-fund firm TIG Advisors's securitized-assets fund."