Page 3 of 3 CREDIT BUBBLE BULLETIN The Greenspan episode
Commentary and weekly watch by Doug Noland
April 10 - Bloomberg (Kartik Goyal): "India’s passenger car sales rose for a
sixth consecutive year to a record… Car sales gained 12% to 1.2 million in the
year ended March 31…"
Asia Bubble Watch
April 8 - Bloomberg (James Peng): "Taiwan’s export growth unexpectedly
accelerated in March, rising at the fastest pace in two years as customers in
China, Southeast Asia and India bought more of the island's electronics.
Overseas shipments rose 22.8% from a year earlier after gaining 18.5% in
February…"
April 9 - Bloomberg (Yu-huay Sun): "Taiwan’s energy use rose for the eighth
straight month in February on increased demand from manufacturers… Energy
consumption climbed 10.1% to the
equivalent of 8.83 million kiloliters of oil, or about 1.92 million barrels a
day…"
April 10 - Bloomberg (Shamim Adam): "Singapore’s economy rebounded in the first
quarter… Gross domestic product grew an annualized 16.9% in the three months
ended March…"
April 8 - Bloomberg (Francisco Alcuaz Jr.): "Philippine President Gloria Arroyo
vowed to crack down on hoarding of rice and announced plans to import another 1
million metric tons of the grain to bolster government stockpiles and prevent
social tension as prices rise. ‘I am leading the charge’ against any officials
and businessmen who divert supplies or distort the price of the staple food,
Arroyo said… ‘Anyone stealing rice from the people we will seek to throw in
jail.’"
April 9 - Bloomberg (Clarissa Batino): "The Philippine government plans to
initiate wage increases to help workers cope with rising food and fuel costs,
Economic Planning Secretary Augusto Santos said. ‘The wage board will ask the
regions to consider wage increases so that workers’ pay would catch up with
prices,’ Santos said…"
Unbalanced Global Economy Watch
April 11 - Bloomberg (Courtney Schlisserman): "Confidence among US consumers
sank to a 26-year low in April as the labor market continued to weaken and
gasoline prices rose. The Reuters/University of Michigan preliminary index of
consumer sentiment decreased to 63.2 from 69.5 in March."
April 10 - The Wall Street Journal (Andrew Batson): "After several years of
relative stability, a wave of rising prices is washing over the world economy.
It comes at a most inconvenient time. The Federal Reserve is sharply cutting
U.S interest rates…to prevent the housing bust and credit crisis from causing a
deep, prolonged recession. That’s making the global response to inflation more
complicated… In the US, consumer prices in February were 4% above year-ago
levels. The 15 countries that share the euro currently see inflation of 3.5%, a
decade high and well above the European Central Bank's preferred range. Even
Japan…is seeing modest inflation. Rising prices for food, energy and other raw
materials account for much of the pickup in inflation rates… On Wednesday, the
World Bank estimated global food prices have risen 83% over the past three
years… The IMF forecast consumer prices in emerging and developing countries
will rise 7.4% this year, the most inflation since 2001…"
April 8 - Bloomberg (Svenja O’Donnell and Brian Swint): "U.K. house prices fell
by the most since 1992 in March, a sign banks’ restrictions on loans are
curbing demand for residential property, HBOS Plc said. The average cost of a
home in Britain declined 2.5% to 191,556 pounds ($379,000) from February..."
April 10 - Bloomberg (Jennifer Ryan): "U.K. companies’ pricing intentions
reached the highest in more than a decade, presenting the Bank of England with
‘difficult choices’…the British Chambers of Commerce said."
April 10 - Bloomberg (Fergal O’Brien): "Irish inflation accelerated in March to
the highest in more than four years as energy and food costs rose. The
inflation rate…rose to 3.7% from 3.5% in February…"
April 9 - Bloomberg (Fergal O’Brien): "European economic growth cooled in the
last three months of 2007, as tighter credit conditions and the euro’s gains
began to weigh on the region's expansion. Gross domestic product increased 0.4%
from the previous three months, when it grew 0.7%... Consumer spending, which
accounts for almost 60% of the economy, and government spending both declined."
April 9 - Financial Times (Ralph Atkins): "Europe’s economic ‘weather map’ is
showing widening divergences, complicating the task of policymakers as global
financial market turmoil sends storm warning signals. Economic confidence
indicators, as well as other recent data, have pointed to startling differences
in performance across the 15-country eurozone and beyond…"
April 9 - Bloomberg (Gabi Thesing): "The turmoil on financial markets resulting
from the US mortgage crisis will cost the German state 10 billion euros ($16
billion) in lost revenue, Financial Times Deutschland said, citing unidentified
tax appraisers."
April 10 - Bloomberg (Tasneem Brogger): "Denmark’s March inflation rate stayed
at the highest in seven and a half years… Inflation held at 3.1%..."
April 11 - Associated Press: "Spain’s inflation rate continued to accelerate in
March, with consumer prices up at an annual rate of 4.5%..."
April 8 - Bloomberg (Aaron Eglitis): "Latvia’s March inflation rate rose to the
highest level in 11 1/2 years as prices for food, heating, and clothing
advanced, adding to concern the economy is overheating. The rate, the highest
in the 27-nation European Union, rose to 16.8%…"
April 7 - Bloomberg (Daryna Krasnolutska): "Ukraine’s inflation rate rose to
26.2% in March, the fastest in eight years, as global food prices surged and
the government repaid people who lost savings when the Soviet Union collapsed."
April 10 - Bloomberg (Maria Levitov): "The Russian government’s budget surplus
accounted for 6.6% of gross domestic product in the first quarter, the Finance
Ministry said… The surplus rose to 548.94 billion rubles ($23.41 billion)…"
April 10 - Bloomberg (Abeer Allam and Abdel Latif Wahba): "Egyptian inflation
accelerated to 15.8% in March… The rate rose from 12.1% in February…"
April 10 - Bloomberg (Farhan Sharif): "Pakistan’s inflation accelerated at the
fastest pace in at least five years in March… Consumer prices jumped 14.1% from
a year earlier after gaining 11.3% in February…"
April 10 - Bloomberg (Nasreen Seria and Vernon Wessels): "South Africa’s
central bank raised its benchmark interest rate by a half point, the fifth
increase in 10 months, forecasting that rising energy costs would keep
inflation outside the target range until the end of next year."
April 9 - Bloomberg (Jacob Greber): "Australian consumer confidence fell in
April to the lowest since 1993, reinforcing the central bank’s view that the
highest interest rates in 12 years will slow the $1 trillion economy."
April 11 - Bloomberg (Tracy Withers): "New Zealand house sales slumped to a
seven-year low in March… The number of homes sold dropped 53% to 5,129 last
month…"
Bursting Bubble Economy Watch
April 8 - New York Times (Keith Bradsher): "The free ride for American
consumers is ending. For two generations, Americans have imported goods
produced ever more cheaply from a succession of low-wage countries — first
Japan and Korea, then China, and now increasingly places like Vietnam and
India. But mounting inflation in the developing world, especially Asia, is
threatening that arrangement, and not just in China, where rising energy and
labor costs have already made exports to the United States more expensive…
‘Inflation is the major threat to Asian countries,’ said Jong-Wha Lee, the head
of the Asian Development Bank’s office of regional economic integration. It is
also a threat to Western consumers because Asian exporters, even in very poor
countries, are passing their rising costs on to customers. Developing countries
have had bouts of inflation before. Indeed, some are famous for them, like
Brazil, which experienced triple-digit inflation in the late 1980s and early
1990s. But two things make this time different, and together promise to send
prices higher at Wal-Mart and supermarkets alike in the United States, just as
the possibility of recession looms. First, developing countries now produce
nearly half of all American imports. Second, inflation in these countries is
coming at the same time that many of their currencies are rising against the
dollar. That puts American consumers in a double bind, paying at least some of
producers’ higher costs for making their goods, and higher prices on top of
that because the dollar buys less in those countries. Asian businessmen say
they do not have a choice about charging more."
April 8 - Financial Times (John Plender): "Income inequality in the US is at
its highest since that most doom-laden of years: 1929. Throughout the main
English-speaking economies, earnings disparities have reached extremes not seen
since the age of The Great Gatsby. Much like this decade, the 1920s were a
period of strong corporate profits growth and increasing household debt. Awash
with easy money, Wall Street became hooked on what the economist J.K. Galbraith
in that subsequent seminal work on the period - The Great Crash- called ‘the
magic of leverage’: the ability to increase returns through borrowing.
Investment trusts provided the vehicle for this financial merry-go-round, in
which one investment trust would ‘sponsor’ another investment trust, which
would in turn sponsor a further investment trust. This paper-shuffling
multiplication of risk bears a remarkable resemblance to the slicing and dicing
of risk in highly leveraged structured credit markets today. In the 1930s, it
ended with bank failures and the Great Depression. Now, after decades of
‘financialisation’ in the US and other Anglophone economies, whereby financial
services have increased their share of gross domestic product, banks are being
bailed out - using public money - in an effort to ensure the same does not
happen again. From a political perspective the notable feature of the
inegalitarian, free-market era that began in the 1980s is how little backlash
there has been against the stagnation of ordinary people’s earnings… Yet there
are signs that the mix of policies and economic circumstances that gave a
protracted laisser-passer to the rich and to business is coming to an end. This
is potentially dangerous territory."
April 9 - Bloomberg (Courtney Schlisserman): "The difference in incomes between
the richest and poorest US families has widened since 1998 as unemployment
failed to decline to prior lows and tax cuts benefited the wealthy, a private
study showed. Average incomes for the bottom fifth, adjusted for inflation,
dropped 2.5% in the eight years that ended in 2006, compared with a 9.1% gain
for the top group, according to…the Economic Policy Institute…"
April 10 - The Wall Street Journal (Jane J. Kim): "The credit crunch has made
it harder for Americans to indulge in their love affair with debt. So what are
they doing? Borrowing more. While tighter lending standards have cut off all
but the most credit-worthy borrowers from auto loans and home loans, many
people are turning to credit cards and tapping more of their home-equity lines
of credit to dig themselves in deeper. And lenders, once eager to lend to those
with even spotty credit records, are trying to rein in borrowing by cutting
consumers’ available credit lines. Average balances on credit cards and
home-equity lines of credit are growing rapidly, rising 9.5% and 8.1%,
respectively, in the first quarter from a year earlier, according…Equifax Inc.
and Moody’s Economy.com."
April 8 - Bloomberg (Lauren Coleman-Lochner): "US retail sales advanced at the
slowest pace in five years last week as shoppers facing rising gasoline prices
and the worst housing market in a quarter century curbed spending, an industry
group said. Sales at stores open at least a year advanced 0.3% last week from a
year earlier… ‘It’s pretty bad out there,’ Britt Beemer, chairman of America’s
Research Group…said… ‘There is no area where the consumer is getting any
relief.’"
April 9 - Bloomberg (Bill Koenig and Greg Bensinger): "US auto sales will fall
to 14.9 million this year, the lowest since 1995, as rising fuel costs and a
seize-up in lending erode demand, S&P said. We expect car sales to keep
sliding,’ Standard & Poor’s chief economist David Wyss said… Sales of cars
and light trucks totaled 16.1 million in 2007, the lowest in a decade."
April 9 - Bloomberg (Chris Burritt): "Las Vegas Strip casino gambling revenue
fell 3.1% to $556.6 million in February, the second consecutive monthly drop,
as higher gasoline prices and shrinking home values crimped consumer spending.
Gambling revenue for all of Nevada dropped 3.9% to $1.01 billion in February
from a year earlier…"
Central Banker Watch
April 8 - Bloomberg (Lily Nonomiya and Scott Lanman): "Former Federal Reserve
Chairman Alan Greenspan said the current credit crisis is the worst in at least
50 years. ‘The current credit crisis is the most wrenching in the last half
century and possibly more,’ Greenspan told a conference in Tokyo…"
April 9 - Dow Jones: "Former Federal Reserve Chairman Alan Greenspan continued
to defend his legacy Tuesday, saying he has ‘no regrets’ over Fed policy
conducted during his tenure. He added that there was little the central bank or
regulators could’ve done to avert the US housing crisis. ‘I have said to many
questions of this nature that I have no regrets on any of the Federal Reserve
policies that we initiated back then because I think they were very
professionally done,’ Greenspan said…"
April 10 - Financial Times (Ralph Atkins and Krishna Guha): "Rarely have the
world’s two main central banks appeared to act in such a contradictory fashion.
Making growth its top concern, the US Federal Reserve has slashed its main
interest rate by 3 percentage points to 2.25% since global financial turmoil
erupted last August. But when the European Central Bank meets today…leaving
rates at 4 per cent, as it has every month since last June, and em-phasising
instead the risks to inflation. At a time when globalisation has interlinked
the world’s economies, such a divergence looks at first glance incomprehensible
- and raises the question of whether one or other institution has got its
strategy wrong. Could Ben Bernanke, the Fed chairman, be risking an
inflationary spiral in the US and sowing the seeds of the next bubble in
financial markets? Is Jean-Claude Trichet, ECB president, underestimating the
impact of the crisis and risking killing off a eurozone recovery that could
have helped balance a US recession? Or are they both acting judiciously in
response to a different mix of economic risks? The most immediate risk, says
Thomas Mayer, chief European economist at Deutsche Bank, is that the central
banks’ competing strategies result in a currency shock… While policymakers at
both the Fed and the ECB would say differences in the economic situation in the
US and the 15-country eurozone account for the divergent policies, some
private-sector economists point to something deeper. ‘There is a different way
of thinking,’ says Jim O’Neill, chief economist at Goldman Sachs, adding that
this reflects the banks’ histories and legal mandates."
April 10 - Bloomberg (Christian Vits): "ECB President Jean- Claude Trichet
signaled he’s still not ready to cut interest rates even as the credit squeeze
poses a greater threat to economic growth than policy makers anticipated. ‘We
are experiencing a rather protracted period of temporarily high annual rates of
inflation,’ Trichet said… While financial-market tension may have ‘a broader
than currently expected impact on the real economy.’"
April 10 - Bloomberg (John Fraher): "European Central Bank President
Jean-Claude Trichet said policy makers have no plans to purchase
mortgage-backed securities to ease tensions in money markets. ‘We don’t
envisage at all this solution,’ Trichet told a press conference… ‘We consider
that we have all the instruments that are necessary. At this stage we are
reasonably satisfied with the present framework.’"
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch
April 7 - Bloomberg (Jody Shenn): "Four collateralized debt obligations
composed mainly of home-loan bonds were liquidated, and proceeds probably won’t
be enough to pay off the most senior classes in full, according to S&P. The
unwinding of Ansley Park ABS CDO Ltd., Arca Funding 2006-II Ltd., Kefton CDO I
Ltd. and Markov CDO I Ltd. most likely will result in no payments at all to
securities junior to the ‘super-senior’ classes… Some of the securities were
originally rated AAA."
Real Estate Bubble Watch
April 10 - EconoPlay.com (Gary Rosenberger): "Housing took another bad turn in
March as the realities of recession dawned on buyers - and no amount of
discounting could get things up-righted for the launch of the spring selling
season, residential builders say. The best intentions from the Fed and Congress
to restore confidence in banking and housing came to naught… Indeed, government
moves to fix the housing mess may have set off even more alarms, opening more
sinkholes on the path toward recovery. Any glimmerings of a bottoming in
January and February dissipated in March, leaving builders to extend their
recovery window further out - by as much as two years into the future. Buyers
are not responding to lower home prices… Average 30-year fixed-rate mortgages
dropped below 6.00% for the second time this year…but aggrieved builders see
banks lathering on ‘risk premiums’ that in reality raise the cost of a loan.
The only improved markets are those tied to the boom in energy and agricultural
commodities, with Texas and Iowa among the markets that appear to be
inoculated."
GSE Watch
April 8 - Bloomberg (Adam Haigh): "Fannie Mae and Freddie Mac, the two largest
sources of US home loans, will have their credit losses ‘increase rapidly,’
according to analysts at Goldman Sachs… Credit losses this year should exceed a
previous peak in the early 1990s, analysts including James Fotheringham wrote…
‘Losses this cycle should be higher than those reported for previous cycles
given the riskier portfolio mix and a broader national housing predicament,’
they wrote."
Fiscal Watch
April 10 - Financial Times (James Politi): "A plan by senior Democratic
lawmakers to offer federal guarantees for between $300bn and $400bn of
refinanced mortgages was largely endorsed by a panel of US banking regulators
at a congressional hearing yesterday… ‘Current circumstances may dictate that
the federal government take a more direct role in facilitating solutions for
many thousands of troubled mortgages to avoid more dire consequences for all
Americans,’ said Sheila Bair, chairman of the Federal Insurance Deposit
Corporation… The White House has resisted calls for more direct use of public
funds in the troubled US housing market, saying it could amount to bailing out
speculators. Amid growing pressure for Congress to tackle the mortgage
crisis…Barney Frank, the committee chairman, and Chris Dodd, chairman of the
Senate banking committee, last month proposed allowing the Federal Housing
Administration to guarantee the refinancing of mortgages for struggling
borrowers at a lower price agreed by the lender."
Muni Watch
April 7 - Bloomberg (Jeremy R. Cooke): "US state and local borrowers from
Denver to Atlanta, battered by rising interest costs from the collapse of the
auction-rate bond market, now face rising fees to replace the debt. Denver
found only five banks willing to provide backing for new variable debt to
replace $208 million of auction bonds, down from 30 five months ago… The cost
to line up a buyer of last resort in case such bonds, variable-rate demand
obligations, go unsold when yields are reset jumped as much as fourfold to
$400,000 on $100 million of securities a year, borrowers say."
Speculator Watch
April 10 - The Wall Street Journal (Jenny Strasburg and Cassell Bryan-Low):
"Stock picker Charles Jobson has sailed through past bear-market tempests,
quietly amassing $2.4 billion in assets and reinvesting millions of dollars in
personal profit into his Boston hedge funds. The recent stock-market turbulence
has turned out to be the test of his career. His biggest funds, called Prism,
which started the quarter with assets of more than $2 billion, had losses of
24% to 29% last quarter… Credit-market unrest and stock volatility have hurt
big funds managed by such names as Farallon Capital Management LLC, the $36
billion San Francisco hedge-fund firm, and Ivy Asset Management of New York,
which has $15 billion in client money farmed out to hedge funds. Managers who
focus their bets on rising and falling stocks collectively had their worst
quarter since 2001, sliding an average of 5.8%, according to Hedge Fund
Research… Moreover, these so-called long/short stock pickers, who control more
assets than any other strategy, fared worse overall than their peers. Hedge
funds world-wide across all investment styles posted losses of 2.8% on average,
after fees, last quarter."
April 10 - Reuters (Jeffrey Hodgson): "Asian hedge fund managers will likely
close down or be bought out in growing numbers this year in a painful bout of
consolidation triggered by financial market turmoil. Combined with tougher
barriers for potential start ups, the number of Asian hedge funds could
actually shrink in the near term…industry executives told the Reuters Hedge
Funds and Private Equity Summit this week."
Crude Liquidity Watch
April 11 - Financial Times (Andrew England): "What started as an ambitious
dream, for a desert nation bereft of rivers and lakes to become self-sufficient
in wheat, became a reality with the aid of billions of dollars from the first
oil boom in the 1970s. Today, however, Saudi Arabia is preparing to phase out
production by 2016. The volte face could make the Gulf nation one of the
world’s top 15 importers of the cereal - even as countries across the globe
grapple with high wheat prices. Officials say they had few options - it was
wheat or water, the most precious of resources in Saudi Arabia. Now that the
kingdom is enjoying a second oil boom, they say, the government has the
financial clout to ensure it meets its cereal requirements from international
markets."
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