Page 2 of
5 CREDIT BUBBLE
BULLETIN The
meaning of stage II Commentary
and weekly watch by Doug Noland
They are,
of course, fixated on domestic concerns and are
willing to do any and everything in a desperate
attempt to sustain the US bubble economy. They are
oblivious to both the heightened risks associated
with today's current account deficits and to the
various linkages of their policies to heightened
international monetary disorder. stage II is
fraught with great but not easily recognizable
risks.
It is my view that there are
significant risks associated with postponing the
inevitable adjustment to the US bubble economy. As
I've attempted to explain previously, the amount
of credit necessary to sustain our uniquely
maladjusted economic
structure is
unmanageable. It is unmanageable for our troubled
banking system, for our troubled GSEs (government
sponsored enterprises such as mortgage agencies
Fannie Mae and Freddie Mac), and for the expansive
money-fund complex - for risk intermediation
generally.
stage II means great risk to
the heart of contemporary "money." The problem
rests on the reality that pre-adjustment credit
(borrowings associated with many businesses and
enterprises that will be uneconomic come the
arrival of the post-bubble backdrop) is inherently
weak and vulnerable. And as discussed above,
today's US credit is extraordinarily destabilizing
in its effects upon the global credit bubble and
resulting monetary disorder.
I am at this
point more convinced than ever that only a severe
crisis will instigate the necessary adjustment to
the distorted and imbalanced US and global
economies. One is then left with the disconcerting
view that stage II will lead our authorities to
exhaust all policy measures in a futile attempt to
sustain the unsustainable.
The obvious
question: how long does the lead up to crisis
stage II last? I would today guess a number of
months, although I wouldn't at all be surprised if
it was rather short. What will be the impetus for
crisis stage II? A spike in interest rates, a run
from US Treasury and agency debt, a disorderly
drop in the dollar, another bout of derivative and
credit market implosion, or acute global financial
tumult should be considered leading candidates
based upon stage II ramifications. Or it could
easily be something completely unexpected, perhaps
even war.
WEEKLY WATCH For the
week, the Dow added 0.3% (down 2.8% y-t-d), and
the S&P500 increased 0.5% (down 4.8%). The
Transports gained 0.3%, increasing y-t-d gains to
12.0%. The Morgan Stanley Cyclical index declined
1.6% (down 1.8%), and the Utilities fell 0.8%
(down 5.5%). The Morgan Stanley Consumer index
dipped 0.4% (down 5.3%). The small cap Russell
2000 added 0.1% (down 5.8%), and the S&P400
Mid-Caps gained 1.1% (down 1.7%). The NASDAQ100
rose 1.0% (down 8.0%), and the Morgan Stanley High
Tech index jumped 2.0% (down 7.1%). The
Semiconductors surged 3.7% (down 4.1%), the
Street.com Internet Index declined 0.7% (down
6.1%), and the NASDAQ Telecommunications index
jumped 3.1% (down 4.6%). The Biotechs declined
1.5% (down 4.4%). Financials rallied. The
Broker/Dealers jumped 6.4% (down 15.7%), and the
Banks rallied 3.0% (down 5.1%). With Bullion down
$30.80, the HUI gold index was smacked for 9.9%
(up 0.4%).
One-month Treasury bill rates
fell 8 bps this past week to 0.78%, and 3-month
yields declined one basis point to 1.36%. Two-year
government yields surged 28 bps to a three-month
high 2.42%. Five-year T-note yields jumped 28 bps
to 3.18%, and ten-year yields increased 16 bps to
3.87%. Long-bond yields added 10 bps to 4.59%. The
2yr/10yr spread ended the week at 145 bps. The
implied yield on 3-month December '08 Eurodollars
surged 22.5 bps to 3.14% (high since 1/3).
Benchmark Fannie MBS yields rose 7 bps to 5.54%.
The spread between benchmark MBS and 10-year
Treasuries narrowed 10 to 167 bps. The spread on
Fannie's 5% 2017 note narrowed 3 to 55 bps and the
spread on Freddie's 5% 2017 note narrowed 2 to 54
bps. The 10-year dollar swap spread declined 1.75
to 64.75. Corporate bond spreads were mostly
narrower. An index of investment grade bond
spreads narrowed 5 to a 3-month low 100 bps. An
index of junk bond spreads narrowed 9 to 617 bps.
Investment grade issuance included Merrill
Lynch $9.55bn, Citigroup $6.0bn, Goldman Sachs
$4.0bn, Bank of America $4.0bn, Wachovia $3.5bn,
JPMorgan Chase $2.5bn, Xerox $1.4bn, Great River
$400 million, and Textron $300 million.
Junk issuers included Firekeepers
Development $340 million, CCS Inc. $300 million,
and Inergy $200 million.
Convert issuance
this week included Airtran Holding $65 million.
International dollar bond issuance
included KFW $3.0bn, Export Development Canada
$1.0bn, International Finance Corp $1.0bn,
Canadian National Railways, and Nine Dragons $300
million.
April 25 - Bloomberg (Theresa
Barraclough and Yumi Teso): "Japanese government
bonds tumbled, causing the biggest jump in
five-year yields in nine years, after inflation
accelerated, stocks climbed and the dollar rallied
against the yen. Ten-year bond futures plunged as
much as 1.8%, forcing the Tokyo Stock Exchange to
order a 15-minute halt in trading for the first
time since September 2002… 'The market is in a bit
of a panicked state,' said Masahiro Sato, joint
general manager of the treasury division at Mizuho
Trust & Banking Co… 'I can't say how far
Japanese bond yields will rise, because they've
already broken through my forecast levels and the
selling pressure could snowball from here.'"
German 10-year bund yields rose 4 bps to
4.18%, as the DAX equities index added 0.8% (down
14.5% y-t-d). Japanese 10-year "JGB" yields surged
21.5bps to 1.60%. The Nikkei 225 rallied 2.9%
(down 9.4% y-t-d and 19.6% y-o-y). Emerging debt
markets came under pressure, while equities were
mixed. Brazil's benchmark dollar bond yields
jumped 13 bps to 6.26%. Brazil's Bovespa equities
index gained 1.0% (up 2.0% y-t-d). The Mexican
Bolsa declined 2.5% (up 5.0% y-t-d). Mexico's
10-year $ yields rose 12 bps to 4.96%. Russia's
RTS equities index fell 2.1% (down 7.0% y-t-d).
India's Sensex equities index jumped 3.9%,
reducing y-t-d losses to 15.6%. China's Shanghai
Exchange rallied 15.0%, cutting 2008 losses to
32.4%.
Freddie Mac 30-year fixed mortgage
rates were unchanged again at 5.88% (down 28bps
y-o-y). Fifteen-year fixed rates declined 2 bps to
5.40% (down 47bps y-o-y). One-year adjustable
rates dropped 8 bps to 5.10% (down 33bps y-o-y).
Bank Credit dropped $36.5bn to $9.404 TN
(week of 4/16). Bank Credit has expanded $191bn
y-t-d, or 6.7% annualized. Bank Credit posted a
39-week surge of $761bn (11.7% annualized) and a
52-week rise of $954bn, or 11.3%. For the week,
Securities Credit sank $45.5bn (3-wk drop of
$74bn). Loans & Leases increased $9.0bn to
$6.875 TN (39-wk gain of $550bn). C&I loans
jumped $11.6bn, with one-year growth of 22.4%.
Real Estate loans declined $2.7bn. Consumer loans
gained $4.3bn, while Securities loans fell $6.1bn.
Other loans added $1.8bn. Examining the liability
side, Deposits jumped $43.1bn, while "Borrowings"
fell $21.5bn and "Net Due to Foreign" dropped
$31.7bn.
M2 (narrow) "money" supply
declined $15bn to $7.665 TN (week of 4/14). Narrow
"money" has expanded $203bn y-t-d, or 9.4%
annualized, with a y-o-y rise of $466bn, or 6.5%.
For the week, Currency declined $0.8bn, and Demand
& Checkable Deposits dipped $1.7bn. Savings
Deposits dropped $10.1bn, and Small Denominated
Deposits decreased $1.5bn. Retail Money Fund
declined $1.1bn.
Total Money Market Fund
assets (from Invest Co Inst) were little changed
last week at $3.484 TN, posting a y-t-d gain of
$370bn, or 38.7% annualized. Money Fund assets
have posted a 39-week rise of $900bn (46.4%
annualized) and a one-year increase of $1.049 TN
(43.1%).
Asset-Backed Securities (ABS)
issuance was stable at about $4.0bn. Year-to-date
total US ABS issuance of $61bn (tallied by
JPMorgan's Christopher Flanagan) is running 25% of
the comparable level from 2007. Home Equity ABS
issuance of $303 million compares with 2007's
$136bn. Year-to-date CDO issuance of $11.7bn
compares to the year ago $138bn.
Total
Commercial Paper dropped $21.9bn to $1.785 TN. CP
has declined $439bn over the past 37 weeks.
Asset-backed CP fell $10.8bn (37-wk drop of
$428bn) to $767bn. Over the past year, total CP
has contracted $261bn, or 12.8%, with ABCP down
$321bn, or 29.5%.
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 4/23) rose
another $12.7bn to a record $2.253 TN. "Custody
holdings" were up $197bn y-t-d, or 29.2%
annualized, and $335bn year-over-year (17.5%).
Federal Reserve Credit expanded $1.2bn to $868bn.
Fed Credit has contracted $5.1bn y-t-d, while
having increased $18.4bn y-o-y (2.2%).
International reserve assets (excluding
gold) - as accumulated by Bloomberg's Alex Tanzi -
were up $1.422 TN y-o-y, or 27%, to a record
$6.669 TN.
Global Credit Market
Dislocation Watch April 25 - Bloomberg
(Bryan Keogh and Gabrielle Coppola): "Citigroup
Inc. and Merrill Lynch & Co. led $43.3 billion
of US corporate bond sales, the busiest week on
record, as financial companies sold debt at the
highest yields since May 2001."
April 22 -
Bloomberg (Esteban Duarte): "The European Central
Bank said it increased lending to banks in Europe
last week to the highest in more than three
months. The ECB loaned 499.52 billion euros ($795
billion) through monetary operations compared with
424.99 billion euros a week earlier… It said 204.5
billion euros were lent in the main refinancing
operation and 295 billion euros in longer-term
auctions."
April 22 - Financial Times
(Chris Giles and Peter Thal Larsen): "The Bank of
England yesterday made an almost unlimited offer
to acquire UK banks' mortgage-backed securities
for up to three years in return for Treasury
bills. Mervyn King, governor, said the plan would
'take the liquidity issue off the table in a
decisive way'. The plan is designed to support
banks' liquidity rather than their solvency. The
facility will be open for six months and the Bank
of
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
