Page 3 of 3 CREDIT BUBBLE BULLETIN Face to face with reality Commentary and weekly review by Doug Noland
December 11 – Bloomberg (Nipa Piboontanasawat): "China’s inflation accelerated
at the quickest pace in 11 years and the trade surplus swelled, adding pressure
on the central bank to raise interest rates and let the currency appreciate
faster to cool the economy... Surging food and fuel costs and a record $238
billion surplus in the first 11 months have prompted the government to name
inflation and overheating as the biggest threats to growth."
December 10 – Bloomberg (Zhang Dingmin): "China faces ‘big’ inflation pressures
in 2008 and an ‘arduous’ task in preventing
price gains from broadening, the nation’s top planning agency said. Increases
in global commodity prices, strong domestic demand and planned changes to
China’s pricing of resources will add to the pressure, the National Development
and Reform Commission said…"
December 11 – Bloomberg (Xiao Yu): "China’s central bank has instructed the
country’s commercial banks to tighten rules for real estate loans to help rein
in rising property prices and curb fraudulent lending…"
December 11 – Market News International: "Chinese banks should learn a lesson
from the ongoing US subprime mortgage crisis and avoid risky property lending,
government regulators warned… ‘Current property lending growth is too fast and
there is too much competition and too many irregularities. In particular, some
commercial banks are offered second mortgage services without approval, which
greatly increases the risks in the property lending business,’ the People’s
Bank of China and the China Banking Regulatory Commission said… ‘We should
learn a lesson from the US subprime crisis ... (and) enhance risk management in
the property lending business,’ said Jiang Dingzhi, deputy chairman of the
CBRC…"
December 11 – Financial Times (Richard McGregor): "The surge in Chinese
electricity demand continued unabated this year, with the country building
enough new power plants to surpass the capacity of the UK’s entire electricity
grid. About 85% of the new generating capacity of 90GW is coal-fired… Although
its economy is one-quarter to one-third the size of the US, China will take
over as the world’s largest greenhouse gases emitter this year… Even with the
surge in capacity, the newly generated power has easily been absorbed by a
fast-growing economy still propelled by large investments in energy-intensive
industries, such as steel, aluminium and cement… Power demand this year so far
has grown at an annualised rate of 16.2%, well ahead of the 2006 rate of
13.7%..."
December 14 – Associated Press: "China may be losing its competitive advantage,
mainly because of rising costs, according to a survey of companies compiled by
the American Chamber of Commerce in Shanghai."
India Watch
December 14 – Bloomberg (Kartik Goyal): "India’s inflation accelerated to a
three-month high as the prices of fruits, vegetables and oil products
increased, the government said. Wholesale prices rose 3.75%..."
Asia Bubbles Watch
December 14 – Bloomberg (Berni Moestafa): "Asian stocks fell this week,
dragging a key stock index to its biggest decline in four months as a U.S.
interest-rate cut failed to ease concern that the world's largest economy will
slide into a recession… The MSCI Asia Pacific Index this week declined 4.7%..."
Unbalanced Global Economy Watch
December 14 – Bloomberg (Fergal O’Brien): "European inflation accelerated more
than initially estimated in November, to the fastest pace since May 2001,
preventing central bankers from cutting interest rates as economic growth
slows. The inflation rate in the 13-nation euro area rose to 3.1% from 2.6% in
October…"
December 10 – Bloomberg (Brian Swint and Svenja O’Donnell): "U.K. factories
increased prices at the fastest annual pace since 1991 in November as companies
passed on higher costs of food and oil. Manufacturing output prices rose 4.5%
from a year ago after a 3.8% gain in October… ‘It’s clear that inflation is
going to go even higher,’ said Samra Al Harthy, an economist at Standard
Chartered Plc…"
December 13 – Bloomberg (Brian Swint): "Britons’ inflation expectations rose to
the highest in at least eight years in a Bank of England survey last month,
making it harder for the central bank to lower interest rates further after the
first cut since 2005. Consumers predict prices will increase 3% in the next 12
months, the highest median forecast since the report started in 1999…"
December 13 – Bloomberg (Svenja O’Donnell): "U.K. real-estate agents and
surveyors became the most pessimistic about house prices since at least 1998
last month as a property-market decline spread to London, the Royal Institution
of Chartered Surveyors said."
December 13 – Associated Press: "Inflation in Ireland rose last month to 5.0% —
the highest rate in Western Europe — on the back of higher fuel and food
prices… The rise from October’s rate of 4.8 percent increased Ireland's
long-standing run as the price-rise leader of Western Europe dating back seven
years, when inflation peaked here at 7.0 percent. Only new euro-zone entrant
Slovenia, with 5.8% inflation, has a higher current rate than Ireland within
the 13-nation zone that uses the European common currency. Inflation throughout
the euro zone is averaging 3.0%, itself a 6 1/2-year high that reflects global
rises in the cost of oil and agricultural goods."
December 14 – Bloomberg (Gabi Thesing): "German inflation accelerated in
November to the fastest pace in 12 years, led by surging oil and food costs.
Consumer prices, measured using a harmonized European Union method, rose 3.3%
from a year ago…"
December 11 – Bloomberg (Gabi Thesing): "Investor confidence in Germany dropped
to the lowest in almost 15 years in December as rising credit costs dimmed the
outlook for economic growth."
December 10 – Bloomberg (Tasneem Brogger): "Denmark’s inflation rate rose to
the highest in more than four years in November as fuel and food prices
increased and accelerating wage growth added to pressure on costs. Inflation
quickened to 2.5%, the highest annual rate since March 2003… ‘We’ve quite
clearly passed a milestone with this inflation rate,’ said Jes Asmussen, chief
economist at Svenska Handelsbanken AB…"
December 11 – Bloomberg (Jonas Bergman): "Sweden’s inflation rate rose to a
four-year high of 1.9% in November, adding to pressure on the central bank to
raise interest rates further."
December 10 – Bloomberg (Robin Wigglesworth): "Norway’s annual inflation rate
rose to 1.5% in November as the fastest pace of economic growth in 22 years
fuels wage growth and prices… The economy expanded 6.6% in the third quarter,
the fastest since 1985, threatening to stoke inflation."
December 14 – Bloomberg (Kati Pohjanpalo): "Finland’s annual inflation rate
rose to 2.9% in November, the highest since June 2001, as higher oil costs
began to show in fuel prices."
December 10 – Bloomberg (Marketa Fiserova): "The Czech inflation rate climbed
in November to the highest in more than six years, driven by food and motor
fuels… The rate gained to 5 percent…"
December 11 – Bloomberg (Balazs Penz): "Hungarian inflation accelerated in
November because of rising food and oil prices… The inflation rate rose to 7.1%
from 6.7%..."
December 11 – Financial Times (Vincent Boland): "Turkey’s economic growth
slowed in the third quarter to its lowest level since a devastating financial
crisis six years ago… Gross domestic product in the third quarter of 2007 was
1.5%..."
December 14 – United Press International: "Australian Treasurer Wayne Swan said
inflation is likely to remain a problem for the country for the next 18 months.
Swan, making his first major address since the Labor Party’s electoral victory
three weeks ago, said the underlying inflation rate was running at about 3% and
faced further pressure throughout 2008… Swan said the inflation threat was not
just of interest to economists. ‘It’s one of those measures I think that
Australian families are intensely interested in. They know as well as we do
that inflation puts our prosperity - individual, business and national -- at
risk,’ he said."
Latin America Watch
December 12 - Bloomberg (Guillermo Parra-Bernal): "Brazil's economy expanded in
the third quarter at the fastest pace in more than three years, stoking
speculation that the central bank may keep borrowing costs unchanged for most
of 2008 to cap inflation. Gross domestic product rose 5.7% in the third
Quarter…"
Bubble Economy Watch
December 14 – Bloomberg (Shobhana Chandra): "U.S. consumer prices rose the most
in more than two years last month on record energy costs, reinforcing the
Federal Reserve’s concern that inflation will erode confidence in the economy.
The consumer price index increased 0.8% in November… Consumer prices increased
4.3% in the 12 months to November… ‘It puts the Fed between a rock and a hard
place,’ Ethan Harris, chief U.S. economist at Lehman Brothers… ‘They say they
are worried about inflation, but that doesn’t stop them from cutting rates."
December 12 - Dow Jones (Brian Blackstone): "U.S. import prices soared last
month at their fastest pace since 1990 on sharp gains in petroleum, natural gas
and industrial supply prices. And in a troubling sign for Federal Reserve
officials, prices of other imported goods like consumer products, capital goods
and automobiles also rose…a sign that the weak dollar is feeding into import
prices. Import prices jumped 2.7% in November… In the 12 months through
November, import prices soared 11.4%, a sharp acceleration from the 1.3% gain
registered between November 2005 and November 2006 and the fastest annual
increase since the series was first published in 1982."
December 13 - Dow Jones: "PPI soars in Nov, with price pressures seeping beyond
just energy. Headline index up 3.2% vs. expected 1.7% rise, biggest gain since
Aug. 1973. On the year, PPI up 7.2%, largest increase since Nov 1981. Core was
up 0.4% on month and up 2% on year… Energy prices in Nov up a record 14.1%,
gasoline prices up 34.8% also a record. Prices for passenger cars (+0.6%),
trucks (+2.3%)and raw materials (+8.7%) all on the rise."
December 12 – Bloomberg (Joe Richter): "The U.S. trade deficit widened in
October as the value of imported crude oil rose to a record. The gap grew 1.2%
to $57.8 billion… Imports, exports and the shortfall with China were the
biggest ever."
Central Banker Watch
December 13 – Financial Times (Martin Wolf): "The central bank helicopters are
planning a co-ordinated drop of liquidity on troubled market waters. The money
to be dropped now is not that large. But if this does not work, more will
surely follow. The helicopters will fly again and again and again. One point is
clear: central banks must be pretty worried to take such a joint action. For
what is remarkable about yesterday’s statement is that five central banks - the
Bank of Canada, the Bank of England, the European Central Bank, the Federal
Reserve and the Swiss National Bank - are co-ordinating their (different)
interventions. Their hope must be that this action will trigger not panic
(‘What do the central banks know that I do not?’) but confidence (‘Now that the
central banks are prepared to intervene in this way, I can at last stop
worrying’). It is easy to understand why central banks should have decided to
take heroic action. Confidence has fled the markets in a four-month long
episode of ‘revulsion’."
December 13 – Financial Times (Krishna Guha): "The Federal Reserve is prepared
to increase the size of its new liquidity support operations beyond the $40bn
in credit auctions and $24bn in currency swaps if necessary to contain
pressures in the interbank money markets. Top Fed officials believe that once
they have the new mechanisms in place, they will be able to ramp up the volume
of funds distributed through them as required. The US central bank is also
prepared to increase the term of future credit auctions, for instance to two or
three months, if needed…"
December 13 – Bloomberg (Craig Torres and Anthony Massucci): "Federal Reserve
Bank of New York President Timothy Geithner said central bankers are looking at
‘additional instruments’ to provide funds to banks in times of stress. Central
bankers around the world have started a ‘coordinated review’ on how regulations
may be influencing liquidity risk and whether they need ‘additional
instruments’ to ‘mitigate marketwide liquidity problems,’ Geithner said…"
December 12 - Bloomberg (Matthew Brown): "Four Gulf states followed the U.S.
Federal Reserve and cut their key interest rates by a quarter point, helping to
maintain their currency pegs to the dollar… Saudi Arabia, the United Arab
Emirates, Qatar and Bahrain cut rates today to stem speculation they would
revalue their currencies following a slump in the dollar."
December 14 – Market News International: "With consumer prices spiking on the
back of rising oil and food prices, there is a danger the eurozone economy
could fall into an inflationary wage-price spiral despite the strength of the
euro, European Central Bank Governing Council member Klaus Liebscher said…
Liebscher…said he was ‘worried’ about the recent spike in eurozone consumer
price inflation to above 3%. ‘Something’s gone amiss,’ he said."
GSE Watch
December 13 – Market News International (Margaret Chadbourn): "The federal
regulator for Fannie Mae and Freddie Mac… said current mortgage market
conditions have heightened the credit risks for the two companies and they have
been stretched further by mortgage product models that were ill equipped to
foresee a turn for the worse. ‘It’s no surprise that credit risk is increasing
rapidly. The ‘06 books and the first half of ‘07 books were not well written
across the industry. It’s not just subprime, but I think the underwriting
standards were lower because the competition on Wall Street and other places,’
said the Director of the Office of Federal Housing Enterprise Oversight, James
Lockhart. Although significant progress has occurred on managing operational
risks, the government-sponsored enterprises have to make progress on monitoring
model risks for pricing, evaluation, and accounting, he said. ‘The enterprises,
like every participant in the mortgage market, are facing growing risks,’ he
said."
December 12 – Financial Times (Krishna Guha, Saskia Scholtes, and Gillian
Tett): "A little-known network of government-sponsored bank co-operatives
founded during the Great Depression is playing a critical role keeping the
private sector US mortgage industry open for business - and some mortgage
lenders out of financial trouble - in spite of the brutal slump in the housing
sector. The Federal Home Loan Banks are pumping hundreds of billions of dollars
into the mortgage industry in the form of loans against mortgage collateral at
a time when purely private sources of finance are offered only at punitive
terms for many lenders… The scale of the cash infusion by the FHLBs vastly
exceeds the few billion dollars of cash lent to banks by the Federal Reserve
through its direct lending facility. Indeed some officials privately admit that
the FHLBs have, in effect, replaced the US central bank as the lender of last
resort for the financial system in the credit crisis. By making vast amounts of
cash available on a routine basis against a wide range of mortgage securities,
with none of the stigma associated with going cap in hand to the Fed, the FHLBs
have reduced the risk of a liquidity crisis at the most stressed institutions…
‘The Federal Home Loan Banks have been leading a minor revolution in the
financing of the US commercial banking system, providing funding for mortgages
when other markets have been closed,’ said Steven Abrahams, head of liquid
products research at Bear Stearns… Michael Feroli, an economist at JP Morgan,
said: ‘It is almost like the socialisation of housing finance.’"
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch
December 13 – Bloomberg (Neil Unmack): "U.S. homebuilder credit rating cuts may
force investors to unwind collateralized debt obligations with the top
investment-grade rankings at a loss, according to a report by Barclays Capital
analysts. CDOs that pool credit-default swaps tied to the debt of homebuilders
may lose their AAA grades, triggering a selloff, if ratings firms
‘significantly’ downgrade the underlying debt… As much as $5 billion of CDOs
sold since 2006 reference homebuilders… CDO ratings ‘are particularly sensitive
to downgrades in homebuilders,’ the analysts led by Jeff Meli…wrote. Some deals
‘could get downgraded to the point where ratings-conscious investors might
choose to unwind their trades.’"
Mortgage Finance Bust Watch
December 13 – Bloomberg (David Mildenberg): "Countrywide Financial Corp…said
foreclosures doubled in November and late payments continued to rise amid the
U.S. housing slump… Foreclosures measured by unpaid principal climbed to 1.3%
from 0.6% a year earlier… Late payments of at least 60 days advanced to 6.5% of
unpaid balances from 4.2%."
Real Estate Bubbles Watch
December 10 – BusinessWire: "Single-family home sales in Connecticut continued
their steady drop in October, reaching the lowest number of sales during that
month since 1993…according to The Warren Group… ‘Clearly, Connecticut's
immunity to the national housing problem is over,’ said Timothy Warren Jr., CEO
of the Warren Group. ‘The state is showing all the symptoms of having caught
this housing flu, and it looks like the fever is getting worse.’"
December 10 – Bloomberg (Peter Woodifield): "Investment in U.K. commercial real
estate may slump 60% in the fourth quarter as buyers shun large acquisitions of
shops and offices, Jones Lang Lasalle…said… Investment for all of 2007 may fall
24%..."
Financial Sphere Bubble Watch
December 13 – Financial Times (Chris Hughes and Ben White): "Goldman Sachs
yesterday began celebrating confirmation of bumper bonuses for this year, with
the chairman and chief executive, Lloyd Blankfein, expected to lead the pack
with a 30% increase in his pay to about $70m."
December 12 - Bloomberg (Yalman Onaran): "Lehman Brothers Holdings Inc. awarded
Chief Executive Officer Richard Fuld $35 million in stock for 2007 after the
largest U.S. underwriter of mortgage bonds reported lower losses than its
competitors from the collapse of the subprime home-loan market."
California Watch
December 12 – Los Angeles Times (Jordan Rau): "Gov. Arnold Schwarzenegger told
social service advocates Tuesday that the state's anticipated budget shortfall
-- already feared to be the worst since he took office -- has widened to $14
billion, according to people at the meetings. That new figure indicates that
the state's fiscal fortunes are declining even more rapidly than many leaders
had expected. Less than a month ago, the Legislature's chief budget analyst
calculated that California is on track to come up $10 billion short… A
$14-billion budget gap would translate to more than 12% of the state’s budget
if spending continues to rise as projected."
December 14 – Bloomberg (Michael B. Marois): "California Governor Arnold
Schwarzenegger will declare a state of fiscal emergency under never-before-used
rules that would force lawmakers into a special session to address a $14
billion deficit. The governor…said he will declare the emergency in January
when lawmakers return from recess. Under the action, the Legislature would have
45 days to find ways to plug the shortfall, including cutting spending from the
current budget. If they fail to find a solution in that time, they are barred
from doing any other legislative work or adjourn until they do."
Fiscal Watch
December 12 – The Wall Street Journal (Peter R. Orszag, Director of the
Congressional Budget Office): "The nation’s economic outlook may look troubling
in the short run, but these difficulties pale beside the economic consequences
that will follow if we don’t address the nation’s long-term fiscal gap… The
fiscal gap does not arise, as many believe, primarily from the coming
retirement of the baby boomers. Rather, the rate at which health-care costs
grow will be the primary determinant of the nation’s long-term budget picture…
CBO projects that under current law, federal spending on Medicare and Medicaid
measured as a percentage of gross domestic product will rise to 12% in 2050 and
almost 20% around 2080 from 4% today. The bulk of that projected increase
arises from steadily growing health-care costs per beneficiary."
Crude Liquidity Watch
December 10 – Bloomberg (Matthew Brown): "Saudi Arabian inflation accelerated
to 5.4% in October from 4.9% in September as the cost of rents and food
increased… Rents jumped an annual 12% in October… Food and beverage costs
increased 7.5%..."
December 10 – Bloomberg (Matthew Brown): "Qatar’s annual M2 money supply
growth, an indicator of future inflation, slowed to 29% in June from 33% in
May, the emirate’s central bank said."
Speculator Watch
December 14 – Bloomberg (Jenny Strasburg): "Tudor Investment Corp. clients
pulled more than $1 billion from its Raptor hedge fund after manager James
Pallotta lost 8.5% this year, mostly on U.S. equities, according to two of the
firm’s investors."
December 13 – Bloomberg (Jenny Strasburg): "Moore Capital Management Inc.
closed its Canadian hedge-fund unit, which was run by former Amaranth Advisors
LLC traders, after its managers lost 15% in November… The Toronto-based team of
about 15 people ‘did not meet the risk-reward parameters that have guided Moore
since inception,’ a spokesman for Moore founder Louis Bacon told Bloomberg…"
December 13 – Bloomberg (Saijel Kishan): "Red Kite Metals, the hedge fund that
almost tripled investors’ money last year, lost about 22% last month as copper
prices fell, according to two investors in the fund. The drop brings Red Kite's
decline to about 50% this year…"
Doug Noland is a market strategist for the Prudent Bear Funds.
(Republished with permission from PrudentBear.com.
Copyright 2005-2007 David W Tice & Associates. All rights reserved.)
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