leveraged speculating community have
only begun to emerge.
What impact Fed
"reflationary" policies have on the ballooning
bubbles in the "money-like" credit sectors is a
less obvious but major issue in 2008. With Wall
Street risk intermediation now virtually out of
the equation, the ballooning bank, GSE, and money
fund complexes are left in a perilous position as
the prominent risk intermediators (of last resort)
for a US bubble economy at the precipice.
Delaying the inevitable (arduous)
financial and economic adjustment period through
aggressive Greenspan-style cuts
only
exacerbates the unmanageable risks
accumulating in institutions issuing enormous
quantities of perceived safe and liquid
liabilities ("money-like" debt instruments). The
difference between a deep recession and a
devastating depression hinges - as it has
historically - on maintaining market faith and
confidence in "money". A serious Issue 2008 has
the perceived soundness of ''money'' today in the
most serious jeopardy in almost 80 years.
It will be another year of fascinating
tests for macro credit theory and analysis. Is it
possible for our bubble economy to persevere
through 2008 without ever increasing quantities of
system credit growth? Assuming such massive credit
creation is in the offing (a major assumption
today), how does the credit system pull off such a
feat and what will be the consequences? Well, it
would certainly necessitate ongoing bubbles in
"money" market instruments, including Treasuries,
"repos", and agencies. It would also require a
massive issuance of agency MBS, along with another
year of double-digit (trillion plus!) bank credit
expansion. And we must also hope that our foreign
creditors will not completely back away from our
risk markets.
Today, ongoing credit
excess, current account deficits and financial
outflows inundate the world with dollar balances -
that are then recycled back to a limited supply of
perceived safe Treasuries and (to a somewhat
lesser extent) agencies. This resulting bubble has
severely distorted the fixed income marketplace,
creating one more facet to the unfolding financial
crisis and dislocation. The first three trading
sessions saw stocks in virtual freefall,
Treasuries in melt-up mode, the yen rallying
strongly, and many spreads widening meaningfully.
2008 has commenced with some key hallmarks
of impending financial dislocation - not a huge
surprise since we’ve for some time now been in the
midst of an unfolding financial crisis. The stock
market is in some serious trouble, and the US
bubble economy is in serious jeopardy. Myriad
global bubbles are accidents waiting to happen.
Worse yet, we're now officially in what will be a
decisively unbullish political campaign season.
There’s also increased talk of Wall Street
investigations - of which there will be plenty.
Disconcertingly, the public mood is turning
increasingly sour at home and the geopolitical
backdrop more problematic abroad. Get ready for
one of the consequence of bursting bubbles - a
public less trusting in "capitalism", a world
increasingly lured to "protectionism", and a
federal government much more intrusive in our
financial lives.
As for Issues 2008, there
are obviously many and they are unusually varied -
a wide spectrum of financial, economic, political,
environmental and geopolitical risks. I really
fear a major California bust has commenced. But
what worries me most at the present is the
possibility of a run on the leveraged speculating
community, a circumstance that could potentially
precipitate a seizing up of even the more
money-like debt markets at home and abroad. I
foresee chaotic markets. As always, I can only
hope my fears prove unfounded.
WEEKLY
WRAP
It was an ominous kickoff
to 2008. The Dow declined 3.5% during the first
three sessions of the year, and the S&P500
fell 3.9%. Recession fears pressured the
economically-sensitive sectors. The Transports
were hit for 6.7% and the Morgan Stanley Cyclicals
6.2%. The Morgan Stanley Consumer index slipped
3.4%,and the Utilities dipped 0.5%. The small cap
Russell 2000 dropped 5.8%, and the S&P400
Mid-Caps were down 4.7%. Air escaped from the
technology bubble. The NASDAQ100 dropped 5.8%, and
the Morgan Stanley High Tech index fell 6.3%. The
Semiconductors were smacked for 8.6%. The
Street.com Internet Index declined 5.5% and the
NASDAQ Telecommunications index 5.8%. The Biotechs
dipped only 1.6%. The Broker/Dealers were pummeled
7.2% and the Banks 6.0%. With Bullion surging
$19.10, the HUI Gold index began 2008 with an 8.4%
advance.
Three-month Treasury bill rates
rose 4 bps the past week to 3.19%. Two-year
government yields sank 35 bps to 2.75%. Five-year
T-Note yields dropped 31 bps to 3.19%, and
ten-year yields fell 20 bps to 3.87%. Long-bond
yields declined 12 bps to 4.38%. The 2yr/10yr
spread ended the week at a notable 112 bps. The
implied yield on 3-month December ’08 Eurodollars
sank 35 bps to 3.08%. Benchmark Fannie MBS yields
sank 27 bps to 5.29%, this week outperforming
Treasuries. The spread on Fannie’s 5% 2017 note
was one wider at 50 bps and Freddie’s 5% 2017 note
2 wider at 51 bps. The 10-year dollar swap spread
declined about 2 to 62.8. Corporate bond spreads
were generally wider, with the spread on an index
of junk bonds ending the week about 40 bps wider.
January 4 - Bloomberg (Kabir Chibber and
Shannon D. Harrington): "Credit derivatives headed
for the worst week in almost two months after a US
government report showed unemployment jumped to a
two-year high, driving concerns the housing slump
is dragging the economy into a recession."
December 31 - Bloomberg (Bryan Keogh):
"Bonds of high-yield, high-risk housing and
financial companies delivered the worst returns
this year on losses tied to subprime mortgage
defaults. Bonds of housing-related companies such
as Florida homebuilder Tousa Inc. and bankrupt
air-conditioner maker Fedders Corp. returned a
negative 12.5%, while financial company debt lost
8.07%..."
January 4 - Bloomberg (Bryan
Keogh): "Commonwealth Bank of Australia, the
Nation's largest home lender, sold $2.5 billion of
bonds this week, the only offering in what may end
up as the slowest start to a year for US corporate
bond issuance since at least 1998."
Convertible issuance included OSI
Pharmaceuticals $175 million.
German
10-year bund yields sank 20 bps this week to
4.13%, while the DAX equities index sank 3.2%
(down 3.2% y-t-d). Japanese ''JGB'' yields
declined 3.5 bps to 1.465%. The Nikkei 225 sank
4.0% to the lowest level since July 2006 (1-yr
decline 15.3%). Emerging equities were mostly
lower, while debt markets were mostly higher.
Brazil’s benchmark dollar bond yields fell 5 bps
to 5.64%. Brazil's Bovespa equities index began
the year down 4.5% (1-yr gain 38.7%). The Mexican
Bolsa fell 4.1% (1-yr gain 4.1%). Mexico's 10-year
$ yields sank 12 bps to 5.28%. Russia’s equities
markets were closed (1-yr gain 19.2%). India’s
Sensex equities index began the New Year with a
2.0% rise (1-yr gain 49%). China's Shanghai
Exchange rose 1.9%, increasing y-o-y gains to
103%.
January 3 - Dow Jones (Charles Roth
and Claudia Assis): "Traditionally, investors
would scramble from emerging markets at the first
signs of trouble within the asset class or in
response to global market volatility and
tightening credit. But after four straight years
of big annual gains, 2007 became not only the
fifth year of clear outperformance but the first
in which emerging markets became something of a
safe haven from the implosion in the US subprime
mortgage market and the subsequent fallout ..."
Freddie Mac posted 30-year fixed mortgage
rates dropped 10 bps this week to 6.07 (down 11bp
y-o-y). Fifteen-year fixed rates fell 11 bps to
5.68% (down 26bps y-o-y). One-year adjustable
rates declined 6 bps to 5.47% (up 5bps y-o-y).
Bank Credit expanded $30.4bn during the
most recent data week (12/26) to a record $9.260
TN (2-wk gain of $94.7bn). Bank Credit posted a
23-week surge of $617bn (16.1% annualized) and a
2007 rise of a record $964bn, or 11.6%. For the
week, Securities Credit fell $19.3bn. Loans &
Leases ballooned $49.6bn to a record $6.830 TN
(23-wk gain of $505bn). C&I loans gained
$12.4bn, increasing 2007 growth to a remarkable
21.7%. Real Estate loans rose $8.9bn, increasing
2007 growth to 7.6%. Consumer loans slipped
$3.2bn. Securities loans jumped $21.2bn, and Other
loans increased $10.3bn. On the liability side,
(previous M3) Large Time Deposits declined $8.2bn.
M2 (narrow) "money" supply rose $8.1bn to a record
$7.468 TN (week of 12/24). Narrow "money" expanded
$425bn during 2007, or 6.0%. For the week,
Currency declined $1.9bn, and Demand &
Checkable Deposits sank $18.0bn. Savings Deposits
increased $4.8bn, and Small Denominated Deposits
added $2.4bn. Retail Money Fund assets gained
$7.0bn.
Total Money Market Fund assets
(from Invest. Co Inst) added $2.5bn last week to
$3.113 TN. Money Fund assets have posted a 23-week
surge of $530bn (46% annualized) and a one-year
increase of $721bn (30.2%).
Total
Commercial Paper rose $13.3bn to $1.799 TN. CP has
declined $425bn over the past 21 weeks.
Asset-backed CP actually increased $26.2bn (21-wk
drop of $421bn) last week to $774bn. For 2007,
total CP contracted $193bn, or 9.7%, with ABCP
down $303bn (28%).
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 1/2)
increased $4.5bn to a record $2.061 TN. "Custody
holdings" are up $298bn year-over-year (16.9%).
Federal Reserve Credit surged $18.2bn last week to
a record $891.7bn. Fed Credit expanded $32.3bn
y-o-y (3.8%).
International reserve assets
(excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi - were up $1.30 TN y-o-y, or 27%, to a
record $6.104 TN, with a 2-year gain of about 50%.
Global
Credit Market Dislocation
Watch January 3 - Financial Times
(Jennifer Hughes): "Here we go. The books are
closed and 'busy season' for auditors has arrived.
As
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