Page 2 of
5 CREDIT BUBBLE
BULLETIN Crisis intermission - now for stage
two Commentary and weekly watch by Doug
Noland
surprise on the upside with
risks to global price instability increasing
markedly.
I would argue firmly that, in
the face of a rapidly weakening economic backdrop,
global inflation dynamics coupled with our highly
maladjusted economy ensure intractable trade
deficits. I would further argue that the current
inflationary backdrop will prove an impetus to
credit creation that then begets only more
heightened inflationary pressures.
There
are certainly indications that the over-liquefied
global system is not well situated today to handle
more dollar liquidity (akin to throwing gas on a
fire). Inflation and its consequences
have quickly become major
issues around the world.
With crude
hitting a record $117 at the end of last week,
there is every reason to expect that newly created
global liquidity will further inflate energy,
food, and commodity prices generally. The Goldman
Sachs Commodities index has gained 21% already
this year. But when it comes to monetary
instability, our financial markets might just
prove the unappreciated wildcard.
When the
Fed and Washington radically altered the rules of
US finance last month, they placed in jeopardy
huge positions that had been put in place to hedge
against and profit from systemic crisis. With the
end of stage one arises a major short squeeze in
the credit, equities, and derivatives markets. And
when it comes to contemplating the scope and
ramifications of today’s hedging activities, we’re
clearly in uncharted waters. It is not beyond
reason that a disorderly unwind of bearish credit
market positions could incite a mini bout of
liquidity, speculation, and credit excess that
exacerbates global monetary instability while
setting the backdrop for stage two of the crisis.
WEEKLY WATCH For the week, the
Dow (down 3.1% y-t-d) and the S&P500 (down
5.3%) each jumped 4.3%. The Transports surged 5.9%
(up 11.6%) and the Morgan Stanley Cyclicals 6.2%
(down 0.3%). The Morgan Stanley Consumer index
gained 1.9% (down 4.9%), and the Utilities rose
3.3% (down 4.8%). The broader market was strong.
The small cap Russell 2000 jumped 4.8% (down
5.9%), and the S&P400 Mid-Caps gained 4.4%
(down 2.7%). The NASDAQ100 jumped 5.6% (down 8.9%)
and the Morgan Stanley High Tech index 5.5% (down
9.1%). The Semiconductors increased 5.2% (down
7.5%), The Street.com Internet Index surged 7.4%
(down 5.4%), and the NASDAQ Telecommunications
index jumped 4.9% (down 7.5%). The Biotechs
declined 0.7% (down 3.0%). The Broker/Dealers
surged 7.2% (down 21%), and the Banks rallied 3.4%
(down 7.9%). Although Bullion declined $6.90, the
HUI Gold index increased 2.9% (up 11.4%).
One-month Treasury bill rates declined 2
bps this past week to 0.86%, while 3-month yields
rose 17 bps to 1.35%. Two-year government yields
jumped 39 bps to 2.13%. Five-year T-note yields
rose 33 bps to 2.90%, and ten-year yields
increased 24 bps to 3.71%. Long-bond yields gained
20 bps to 4.50%. The 2yr/10yr spread ended the
week at 158 bps. The implied yield on 3-month
December ’08 Eurodollars surged 53 bps to 2.86%
(high since January 14th). Benchmark Fannie MBS
yields jumped 27 bps to 5.48%. The spread between
benchmark MBS and 10-year Treasuries was 3 wider
at 177 bps. The spread on Fannie’s 5% 2017 note
narrowed 11 to 55 bps and the spread on Freddie’s
5% 2017 note narrowed 10 to 56 bps. The 10-year
dollar swap spread increased one to 65.5.
Corporate bond spreads were mostly narrower. An
index of investment grade bond spreads narrowed 23
to 105 bps. An index of junk bond spreads widened
to 662 bps.
Investment grade issuance
included GE Capital $12.5 billion, JPMorgan Chase
$6.0 billion, Lehman Brothers $2.5 billion, XTO
Energy $2.0 billion, Dell $1.5 billion, and Martin
Marietta Material $300 million.
Junk
issuers included Berry Plastics $680 million,
Plains All America Pipeline $500 million, and
Cobank $500 million.
Convert issuance this
week included Kinetic Concepts $600 million and
Steel Dynamics $500 million.
International
dollar bond issuance included E.On Intl. $3.0
billion, Barclays $2.0 billion, Evraz Group $1.6
billion and Monumental Global Funding $500
million.
German 10-year bund yields surged
22 bps to 4.13%, as the DAX equities index rallied
3.6% (down 15.2% y-t-d). Japanese 10-year "JGB"
yields added 2 bps to 1.40%. The Nikkei 225 gained
1.1% (down 12% y-t-d and 21.8% y-o-y). Emerging
debt markets held their own, while equities were
mostly higher. Brazil’s benchmark dollar bond
yields added 4 bps to 6.14%. Brazil’s Bovespa
equities index gained 3.7% (up 1.6% y-t-d). The
Mexican Bolsa added 1.6% (up 7.6% y-t-d). Mexico’s
10-year $ yields rose 8 bps to 4.75%. Russia’s RTS
equities index gained 3.0% (down 5.0% y-t-d).
India’s Sensex equities index rallied 4.3%,
reducing y-t-d losses to 18.8%. China’s Shanghai
Exchange sank 11%, with 2008 losses now at 41.2%.
Freddie Mac 30-year fixed mortgage rates
were unchanged at 5.88% for the second straight
week (down 29bps y-o-y). Fifteen-year fixed rates
dipped 2 bps to 5.40% (down 49bps y-o-y). One-year
adjustable rates dropped 8 bps to 5.10% (down
35bps y-o-y).
Bank Credit increased $2.9
billion to $9.440 trillion (week of 4/9). Bank
Credit has expanded $227 billion y-t-d, or 8.6%
annualized. Bank Credit posted a 38-week surge of
$797 billion (12.6% annualized) and a 52-week rise
of $1.031 trillion, or 12.3%. For the week,
Securities Credit increased $21.4 billion. Loans
& Leases declined $18.6 billion to $6.864
trillion (38-wk gain of $539 billion). C&I
loans slipped $2.9 billion, with one-year growth
of 22.2%. Real Estate loans gained $12.9 billion.
Consumer loans added $0.9 billion, while
Securities loans fell $14.8 billion. Other loans
dropped $14.7 billion. Examining the liability
side, Borrowings From Others dropped $28.4
billion.
M2 (narrow) "money" supply rose
$9.8 billion to $7.680 trillion (week of 4/7).
Narrow "money" has expanded $218 billion y-t-d, or
10.8% annualized, with a y-o-y rise of $469
billion, or 6.5%. For the week, Currency declined
$1.0 billion, and Demand & Checkable Deposits
dropped $23.7 billion. Savings Deposits rose $27.8
billion, while Small Denominated Deposits slipped
$1.1 billion. Retail Money Fund gained $7.9
billion.
Total Money Market Fund assets
(from Invest Co Inst) dropped $52.0 billion last
week to $3.484 trillion, posting a y-t-d gain of
$371 billion, or 41.3% annualized. Money Fund
assets have posted a 38-week rise of $901 billion
(48% annualized) and a one-year increase of $1.043
trillion (42.3%).
Asset-Backed Securities
(ABS) issuance was stable at about $4.0 billion.
Year-to-date total US ABS issuance of $57.4
billion (tallied by JPMorgan's Christopher
Flanagan) is running 25% of the comparable level
from 2007. Home Equity ABS issuance of $303
million is a minute fraction of comparable 2007's
$129 billion. Year-to-date CDO issuance of $11.7
billion compares to the year ago $131.4 billion.
Total Commercial Paper fell $10.2 billion
to $1.807 trillion. CP has declined $417 billion
over the past 36 weeks. Asset-backed CP dipped
$2.9 billion (36-wk drop of $417 billion) to $778
billion. Over the past year, total CP has
contracted $229 billion, or 11.2%, with ABCP down
$304 billion, or 28.1%.
Fed Foreign
Holdings of Treasury, Agency Debt last week (ended
4/16) jumped $21.7 billion to a record $2.240
trillion. "Custody holdings" were up $184 billion
y-t-d, or 29% annualized, and $324 billion
year-over-year (16.9%). Federal Reserve Credit
added $0.4 billion to $867 billion. Fed Credit has
contracted $6.3 billion y-t-d, while having
increased $16.0 billion y-o-y (1.9%).
International reserve assets (excluding
gold) - as accumulated by Bloomberg’s Alex Tanzi –
were up $1.418 trillion y-o-y, or 27%, to a record
$6.661 trillion.
Global Credit Market
Dislocation Watch April 15 – Bloomberg
(Neil Unmack and Sarah Mulholland): "The
credit-default swap market has become a lesson in
being careful what you wish for now that Wall
Street has taken $245 billion of losses partly
tied to such exotica. Rather than dispersing risk
and lowering borrowing costs as former Federal
Reserve Chairman Alan Greenspan predicted, the
contracts have exacerbated the debt crisis. What
was intended as a way for lenders to protect
against defaults spawned a market covering $45
trillion of bonds and loans where no one knows how
much is traded and speculators who bet on
deteriorating credit quality end up forcing that
reality. Some credit-default indexes have morphed
into what Wachovia Corp. analysts led by Glenn
Schultz call ‘Frankenstein’s monster’ because they
now often drive prices in the so-called cash bond
market, rather than the other way around… ‘The
indices are just trading on their own account with
no relationship whatsoever to an underlying cash
market that’s ceased to exist,’ Jacques Aigrain,
chief executive officer of…Swiss Reinsurance Co.,
said…"
April 15 – Financial Times (Krishna
Guha): "The credit crisis represents nothing less
than a loss of confidence in the financial system,
Federal Reserve governor Kevin Warsh said
yesterday, warning that the healing process ‘is
unlikely to be swift or smooth’. ‘Market
participants now seem to be questioning the
financial architecture itself,’ he said. The
fragility in short-term credit markets was ‘a
manifestation of that loss of confidence’… He
warned ‘public liquidity is an imperfect
substitute for private liquidity’. The markets
would return to normal only when private sector
institutions were willing again to lend each other
money and make markets in financial securities."
April 15 – Financial Times (Michael
Mackenzie): "Strains across money markets
intensified yesterday and are approaching levels
last seen in mid-December when central banks
announced liquidity provisions to alleviate
year-end funding pressures. This was illustrated
by higher swap rates, which compare the difference
between overnight lending rates set by central
banks and three-month Libor, the rate at which
banks lend to each other… ‘Despite the best
efforts of the Federal Reserve to lubricate the
wheels of the funding markets, the fact remains
that banks still hoard cash at nearly all costs,’
said William O'Donnell,
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