Page 3 of 5 CREDIT BUBBLE BULLETIN
A new inflationary epoch
Commentary and weekly watch by Doug Noland
Bank Credit rose $9.8bn to $9.426 TN (week of 4/30). Bank Credit has expanded
$213bn y-t-d, or 6.7% annualized. Bank Credit posted a 41-week surge of $782bn
(11.5% annualized) and a 52-week rise of $942bn, or 11.1%. For the week,
Securities Credit dropped $28.8bn. Loans & Leases jumped $38.6bn to $6.927
TN (41-wk gain of $602bn, or 12.1% annualized). C&I loans dipped $0.7bn,
with one-year growth of 21.3%. Real Estate loans rose $15.9bn (up 5.1% y-t-d).
Consumer loans added $2.9bn, and Securities loans gained $13.9bn. Other loans
were up $6.5bn. Examining the liability side, Deposits dropped $43.4bn, while
"Net
Due to Foreign" increased $35bn.
M2 (narrow) "money" supply declined $39.2bn to $7.654 TN (week of 4/28). Narrow
"money" has expanded $191bn y-t-d, or 7.8% annualized, with a y-o-y rise of
$455bn, or 6.3%. For the week, Currency was unchanged, while Demand &
Checkable Deposits increased $7.8bn. Savings Deposits dropped $40.2bn, and
Small Denominated Deposits declined $1.4bn. Retail Money Funds declined $5.4bn.
Total Money Market Fund assets (from Invest Co Inst) surged $54bn last week to
$3.472 TN, while posting a y-t-d gain of $359bn, or 33% annualized. Money Fund
assets have posted a 41-week rise of $889bn (44% annualized) and a one-year
increase of $1.006 TN (41%).
Asset-Backed Securities (ABS) issuance increased to a respectable $7.0bn.
Year-to-date total US ABS issuance of $76bn (tallied by JPMorgan's Christopher
Flanagan) is running 28% of the comparable level from 2007. Home Equity ABS
issuance of $303 million compares with 2007's $151bn. Year-to-date CDO issuance
of $12bn compares to the year ago $157bn.
Total Commercial Paper declined $9.7bn to $1.754 TN, the lowest level going
back to April 2006. CP has declined $470bn over the past 39 weeks. Asset-backed
CP sank $15.9bn (39-wk drop of $462bn) to $734bn. Over the past year, total CP
has contracted $328bn, or 15.8%, with ABCP down $376bn, or 33.9%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 5/7) increased
$16.3bn to a record $2.278 TN. "Custody holdings" were up $223bn y-t-d, or
29.7% annualized, and $349bn year-over-year (18.1%). Federal Reserve Credit
expanded $3.2bn to $868bn. Fed Credit has contracted $5.9bn y-t-d, while having
increased $14.1bn y-o-y (1.7%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi - were up $1.439 TN y-o-y, or 27%, to a record $6.769 TN.
Global Credit Market Dislocation Watch
May 7 - Financial Times (Paul J Davies): "The growing refrain that ‘the worst
is over’ for the credit crunch is as warm and welcome among banks, investors
and policymakers as the arrival of spring sunshine. But in some quarters there
is concern that in their relief, many market participants might be ignoring one
great dark storm cloud on the horizon - the growing chances of a significant
jump in problems with corporate credit. Banks may have taken the majority of
writedowns they are likely to take on mortgage, buy-out loan and structured
credit exposures… However, the type and volume of funding the financial system
can provide to the real economies of the US and Europe undoubtedly remains
constrained. Many fear that the real-world version of the credit crunch is yet
to begin."
May 9 - Bloomberg (Oliver Biggadike): "Fannie Mae, seeking new capital after
reporting three straight quarterly losses, raised $4.5 billion in a sale of
common and preferred shares. The government-chartered firm, which owns or
guarantees one of every five US home loans, sold $2.25 billion of new common
shares and $2.25 billion of convertible preferred stock, according to a
statement yesterday. Fannie Mae raised the capital after credit and derivative
losses increased fivefold to $8.9 billion in the first three months of the
year. The...company said May 6 it planned to raise a total of $6 billion amid a
deepening of the worst housing slump since the Great Depression."
May 8 - Bloomberg (Hugh Son): "American International Group Inc., the world's
largest insurer by assets, plans to will raise $12.5 billion after posting its
second straight record quarterly loss... AIG had a first-quarter net loss of
$7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or
$1.58, a year earlier... Standard and Poor's lowered AIG's credit rating after
the insurer reduced the value of contracts it sold to protect fixed-income
investors by $9.11 billion and marked down other holdings by $6.09 billion."
May 6 - The Wall Street Journal (Jeffrey McCracken and Tamara Audi): "Casino
operator Tropicana Entertainment LLC sought Chapter 11 protection…in the
largest corporate filing of the year, a startling reversal of fortune for the
new owner of one of the most historic casinos in Las Vegas… The problems at
Tropicana, which has 11,000 employees and about $1 billion in annual sales,
come as the casino industry as a whole is struggling. They also underscore weak
performance in Las Vegas, which has seen major casino projects canceled or
delayed and gambling revenue decline as the economy stumbles."
May 6 - Bloomberg (Bill Rochelle and Bob Willis): "US business bankruptcy
filings in April increased 49% from a year earlier, the biggest gain so far
this year, as the slowing economy prompted more companies to shut down.
Business filings rose to 5,173 during the month… Total bankruptcy filings,
including those by individuals, were up 31% from a year earlier to 93,096, the
group said."
May 5 - Bloomberg (Caroline Salas and Ari Levy): "Residential Capital LLC, the
mortgage- finance company owned by GMAC LLC, said it may not be able to meet
debt obligations unless it comes up with an additional $600 million by the end
of June… To finance the debt restructuring, ResCap is seeking a new $3.5
billion credit line from its parent GMAC… ‘There is a significant risk that we
will not be able to meet our debt service obligations, be unable to meet
certain financial covenants in our credit facilities, and be in a negative
liquidity position in June 2008,’ ResCap said…"
May 8 - Financial Times (Ralph Atkins, Paul J Davies and Gillian Tett): "A
clutch of influential bank investors will congregate this week in Marbella,
Spain, to attend a private seminar that is hosted each year by Swiss bank UBS
to discuss the health of the leading financial groups. This year’s discussions
over tapas could be fraught. For these days, a distinct paradox is haunting the
way that markets are treating major banks - including UBS itself, as it reels
from its recent massive writedowns. On the one hand, some key market indicators
suggest that investor panic about the banking system is falling… ‘Frankly, the
behaviour of the interbank market is something of a mystery,’ admits one senior
policymaker… ‘In understanding why unsecured term cash is so precious and hard
to get - despite easing credit tensions of late - we believe that it is crucial
to note the current phase of money market tensions is different from the first
two phases,’ says Christoph Reiger, a money markets analyst at Dresdner
Kleinwort… ‘In contrast to the bouts of tightness witnessed in September and
November, systemic bank credit risk and mistrust have lost in prominence as
drivers for money market spreads. Instead, banks’ desire to hoard liquidity has
gained in prominence ever since the fall of Bear Stearns.’"
May 6 - Financial Times (Michael Mackenzie): "The raw ingredients for inflation
can easily be found, from surging oil prices to record costs for buying food.
Yet government bond markets, where prices are in large part determined by
inflationary expectations, have all but shrugged off those risks, for now. The
steady upswing in commodity prices since 2003 has been marked by a surge in oil
and food prices to record levels this year. Commodity prices have boomed on a
slumping dollar, hurt by the Federal Reserve’s aggressive rate cuts and
infusion of cash into the financial system. The decline in the world’s reserve
currency has propelled US import prices sharply higher in the past year,
reversing the era of deflation from emerging market economies… Once the credit
dust fully settles, inflation could well become a much hotter topic. Chris
Watling, chief executive officer at Longview Economics, says: ‘Once this
immediate credit crisis has passed, bond investors are likely to start to ask
why in an environment of long-term global inflationary pressures, are bond
yields at record 60-year lows?’"
Global Inflation Turmoil Watch
May 6 - Financial Times (Roel Landingin): "The Philippines is preparing an
ambitious plan to guarantee the supply of cheap, subsidised rice to Manila slum
dwellers as the government seeks to restore calm among extremely poor
households that are cutting back on food amid soaring prices for rice and other
items. Subsidised rice is currently sold in public markets but stocks are being
bought up by middle-class buyers… The new scheme aims to establish a network of
state rice shops where only poor households will be able to shop… Local
officials and social workers are in the midst of a massive effort to identify
and sign up more than 500,000 ‘food-poor’ families in the capital."
May 7 - Financial Times (Roula Khalaf): "Saudi Arabia’s central bank
governor…called on the government to fight inflation by curbing public
expenditure, warning that economic policies in the kingdom faced ‘a critical
situation’. The call by Hamad al-Sayari
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