Page 2 of 3 CREDIT BUBBLE BULLETIN A red herring
Commentary and weekly watch by Doug Noland
Bank Credit declined $8.0bn to $9.417 TN (week of 5/7). Bank Credit has
expanded $204bn y-t-d, or 6.1% annualized. Bank Credit posted a 42-week surge
of $773bn (11.1% annualized) and a 52-week rise of $885bn, or 10.4%. For the
week, Securities Credit increased $2.1bn. Loans & Leases fell $9.0bn to
$6.917 TN (42-wk gain of $592bn, or 11.6% annualized). C&I loans added
$1.1bn, with one-year growth of 20.1%. Real Estate loans dropped $9.2bn (up
4.2% y-t-d). Consumer loans increased $2.7bn, while Securities loans declined
$2.9bn. Other loans slipped $1.7bn. Examining the liability side, Deposits
dropped $30.4bn.
M2 (narrow) "money" supply was little changed at $7.655 TN (week of 5/5).
Narrow "money" has expanded $192bn y-t-d, or 7.4% annualized, with a y-o-y rise
of $439bn, or 6.1%. For the week, Currency was about unchanged, while Demand
&
Checkable Deposits declined $7.1bn. Savings Deposits jumped $18.5bn, while
Small Denominated Deposits declined $2.1bn. Retail Money Funds fell $8.4bn.
Total Money Market Fund assets (from Invest Co Inst) surged $26bn last week to
$3.498 TN, while posting a y-t-d gain of $385bn, or 33.8% annualized. Money
Fund assets have posted a one-year increase of $1.013 TN (40.8%).
Asset-Backed Securities (ABS) issuance jumped to $9.0bn. Year-to-date total US
ABS issuance of $85bn (tallied by JPMorgan's Christopher Flanagan) is running
29% of the comparable level from 2007. Home Equity ABS issuance of $303 million
compares with 2007's $156bn. Year-to-date CDO issuance of $13bn compares to the
year ago $161bn.
Total Commercial Paper dropped $19.7bn to two-year low $1.734 TN. CP has
declined $489bn over the past 40 weeks. Asset-backed CP sank $11.1bn (40-wk
drop of $473bn) to $722bn. Over the past year, total CP has contracted $353bn,
or 16.9%, with ABCP down $399bn, or 35.6%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 5/14) dipped
$1.1bn to $2.279 TN. "Custody holdings" were up $222bn y-t-d, or 28.1%
annualized, and $339bn year-over-year (17.5%). Federal Reserve Credit declined
$1.4bn to $866bn. Fed Credit has contracted $7.3bn 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 $1.428 TN y-o-y, or 27%, to a record $6.790 TN.
Global Credit Market Dislocation Watch
May 15 - Financial Times (Bertrand Benoit and James Wilson): "Global financial
markets have become 'a monster' that 'must be put back in its place', the
German president has said, comparing bankers with alchemists who were
responsible for 'massive destruction of assets'. In some of the toughest
comments by a leading European politician since the start of the subprime
crisis, Horst Kohler - a former head of the International Monetary Fund -
called for tougher regulations and the reconstruction of a 'continental
European banking culture' 'The complexity of financial products and the
possibility to carry out huge leveraged trades with little own capital have
allowed the monster to grow . . . also responsible [is] the grotesquely high
compensation of individual finance managers ' Bankers 'have made huge
mistakes', Mr Kφhler told Stern magazine 'I am still waiting for a clear,
audible mea culpa. The only good thing about this crisis is that it has made
clear to any thinking, responsible person in the sector that international
financial markets have developed into a monster that must be put back in its
place,' Mr Kφhler said The German president's spectacular attack reflects the
broader feeling of contempt among German politicians towards bankers since the
start of the subprime crisis "
May 16 - Financial Times (Paul J Davies, Norma Cohen and Anousha Sakoui): "The
European Central Bank yesterday voiced its 'high concern' at growing evidence
that banks are exploiting its efforts to unblock the frozen funding markets by
using its liquidity scheme to offload more risky assets than it envisaged. Yves
Mersch, a governing council member, said the ECB was now 'looking very hard at
whether there is not a specific deterioration of collateral' which the central
bank is accepting in return for funds. He was speaking amid signs of some banks
creating low-rated assets specifically so they can be traded for treasuries at
the European Central Bank."
May 12 - Bloomberg (Ryan J. Donmoyer and Alison Fitzgerald): "US and European
banks and financial institutions have 'enormous losses' from bad loans they
haven't yet recognized and may have a harder time wooing sovereign-fund
rescuers, Carlyle Group Chairman David Rubenstein said. 'Based on information I
see,' it will take at least a year before all losses are realized, and some
financial institutions may fail, Rubenstein said 'The sovereign wealth funds
are not likely to jump into the fray again to bail out these institutions,'
Rubenstein said. 'Many financial institutions aren't going to be able to
survive as independent institutions.'"
May 14 - Bloomberg (Pierre Paulden and Christine Harper): "Banking fees for
leveraged finance deals are down 90% as banks struggle to sell a backlog of
high-yield, high-risk debt from last year's buyouts, according to Deutsche Bank
AG global banking head Michael Cohrs. 'That revenue engine we built is not
going to function for some period of time,' Cohrs told investors adding 'that
business is effectively closed.'"
May 15 - Financial Times (Michael Mackenzie and Gillian Tett): "Interest rates
in dollar money markets rose sharply yesterday amid a welter of speculation
over changes to the calculation of Libor Rates in the money markets have been
moving in an increasingly volatile manner ahead of a crucial meeting at the end
of the month of the British Bankers Association, which calculates the
benchmark. The BBA is due to submit a report on Libor to an advisory committee
on May 30, which will be used as the basis for a discussion about whether this
index needs to be changed. Pressure has been rising to change the dollar Libor
system because of concern the benchmark does not accurately reflect conditions
in the American markets."
May 14 - Bloomberg (Gavin Finch and Ben Livesey): "ICAP Plc, the biggest broker
of transactions between lenders, has no 'concrete timetable' for a US
alternative to the London interbank offered rate as it seeks to sign up banks.
'We hope to launch it soon, but we don't have a concrete timetable,' Lou
Crandall, chief economist at the company's New York research unit, said
'We're having individual discussions with banks who understandably want to make
sure they know what they're getting into before taking the jump.' ICAP plans to
start the New York Funding Rate as the accuracy of Libor, a benchmark for
corporate loans, at least $347 trillion of derivatives and 6 million US
mortgages, is being called into question. For the first time since 1998, the
British Bankers' Association, which oversees Libor, is considering changing the
way it sets the measure, according to Chief Executive Officer Angela Knight."
May 13 - Bloomberg (Ben Livesey and Gavin Finch): "The benchmark interest rate
for $62 trillion of credit derivatives and mortgages for 6 million US
homeowners faces its biggest shakeup in a decade as lawmakers question if banks
are understating borrowing costs. For the first time since 1998, the British
Bankers' Association is considering changing the way it sets the London
interbank offered rate "
May 13 - Financial Times (Saskia Scholtes): "MBIA, Ambac Financial and other
bond insurers have suffered huge losses on complex structured securities they
guaranteed known as collateralised debt obligations. CDOs package other types
of debt securities, such as mortgages or corporate bonds, into a portfolio
against which new bonds are issued. And in some cases, such vehicles package
bonds from other CDOs in a structure known as a 'CDO-squared.' MBIA has
projected that 55-100% of CDOs backed by mortgage assets contained within its
insured CDO-squared transactions will default, and that losses resulting from
these defaults will be as high as 75 to 100%."
May 14 - Bloomberg (Christine Richard and Jody Shenn): "Moody's said
deepening losses at MBIA Inc. and Ambac Financial Group Inc. may imperil their
Aaa credit ratings less than three months after affirming the top grade. The
two largest bond insurers recorded a total $6.7 billion of first-quarter
charges for losses on home-equity loans and collateralized debt obligations,
'elevating existing concerns about capitalization levels relative to the Aaa
benchmark,' Moody's said "
May 16 - Bloomberg (Sarah Mulholland): "Ford Motor Co.'s finance unit sold $5.3
billion in auto-loan bonds, the automaker's biggest sale in more than six
years, indicating investor demand for asset-backed securities is returning."
Global Inflation Turmoil Watch
May 13 - Financial Times (Simeon Kerr): "Inflation has replaced unemployment as
the most pressing short-term problem facing the oil-rich Gulf economies, which
are reaping the benefits of record oil revenues but do not have the tools
available to cap rising prices, the International Monetary Fund warned
'Inflation is now a serious problem - because there are very few ways of
tackling it,' Mr Khan told the Financial Times. He warned that increasing wages
to cope ran the risk of locking the region into an inflationary spiral. The IMF
predicts the Arab Gulf states' consumer price index will average 7.1% this
year, up from 6.1% in 2007 - while the broader Middle East and north Africa
region will reach 10.4% this year."
May 12 - Bloomberg (Naila Firdausi): "Indonesian police used water cannons to
break up a student protest in Jakarta against the government's proposal to
raise fuel prices by as much as 30%. About 6,000 students protested against
rising inflation and the plan to cut fuel subsidies A 47% rise in local crude
oil prices in the past five months is forcing President Yudhoyono, who faces
elections next year, to renege on a pledge not to increase pump prices."
May 12 - Bloomberg (Farhan Sharif): "Pakistan's inflation accelerated at the
fastest pace in at least 25 years in April because of surging food and fuel
prices, straining a six-week-old coalition government already on the brink of
collapse. Consumer prices jumped 17.21% from a year earlier "
May 14 - Bloomberg (Rattaphol Onsanit): "The benchmark price for rice exported
from Thailand, the world's biggest supplier, breached $1,000 a metric ton for
the first time today as importers rushed to secure supplies, heightening
concern about a global food crisis."
May 12 - Bloomberg (Soraya Permatasari): "Malaysia, which relies on Thailand
for most of its rice imports, extended price caps to more varieties of the
staple and raised the amount paid to local farmers to safeguard domestic
supplies and rein in inflation. 'Actions need to be taken to ensure there is
adequate supply,' Prime Minister Abdullah Ahmad Badawi said "
May 14 - New York Times (Heather Timmons): "Instead of blaming India and other
developing nations for the rise in food prices, Americans should rethink their
energy policy - and go on a diet. That has been the response, basically, of a
growing number of politicians, economists and academics here, who are angry at
statements by top United States officials that India's rising prosperity is to
blame for food inflation. The global food problem has clearly been created by
Americans, who take in far more calories than the typical person in India, said
Pradeep S. Mehta, secretary general of the center for international trade,
economics and the environment of CUTS International, an independent research
institute center Mr Mehta's comments reflected ballooning criticism of the
United States in India "
Currency Watch
The dollar index declined 0.3%, ending the week at 72.84. The "commodities"
currencies led the gainers. For the week on the upside, the South African rand
increased 1.9%, the Brazilian real 1.3%, the Mexican peso 0.8%, the Australian
dollar 0.8%, the Taiwanese dollar 0.5%, the Norwegian krone 0.5%, and the
Canadian dollar 0.4%. On the downside, the Japanese yen declined 0.4%, the
Swiss franc 0.4%, and the Singapore dollar 0.3%.
Commodities Watch
May 12 - Bloomberg (Wang Ying): "China increased its crude oil imports by 9.8%
in the first four months to 59.8 million metric tons, the government said."
May 12 - Bloomberg (Marianne Stigset and Nina de Roy): "Jonathan Fenby, China
director at Trusted Sources UK Ltd, comments on the outlook for food inflation
and supply of agricultural commodities in China 'Food has been the big driver
of inflation, starting with pork this time last year. Pork is now up 68%
year-on-year. But the really worrying thing is that inflation seems to be
spreading to other sectors. So there is an inflationary momentum going there
Natural disasters such as today's earthquake 'will affect food resources. China
has a lot of natural disasters. There's a much more serious drought going on,
particularly in northern China, that's been affecting 14 provinces and has had
an effect on food supplies. Flooding in other parts of China has also affected
food supplies China 'has an ongoing water problem. There's huge land erosion
'Zimbabwe would be quite a possibility for China to go in and develop land
there. The idea is being discussed. 'We should go abroad, buy land, plant food
there and bring it back to China.' In the last couple of months, the Chinese
have been clamping down quite hard on food exports, doubled the export duty on
fertilizer. They are definitely trying to hoard all the food that they can.'"
May 13 - Bloomberg (Diana Kinch): "Chinese demand for metallurgical coal and
coke will drive a record-setting price rally for the raw materials used to make
steel, consultants and analysts say China reduced exports this year because
of bad weather and to meet rising domestic demand as steel output climbs
'Current prices are becoming unworkable for steelmakers,' Andrew Jones, a coal
market analyst with Belgian research organization Resource-Net, said
'Steelmakers may introduce production cuts if coke prices, which are set
monthly, continue to rise.'"
May 14 - Bloomberg (Irene Shen and Helen Yuan): "Chinese shipments of steel,
copper and other commodities were disrupted after the country's worst
earthquake in 58 years closed the main railway in the country's central region.
'The available capacity should be used for aid as a first priority,' Wang
Yongping, a Ministry of Railways spokesman, said 'The railway disruption will
boost metal prices,' said Xu Minle, BOC International Ltd.'s steel analyst."
May 15 - Bloomberg (Alistair Holloway and Alaric Nightingale): "Commodity
shipping rates jumped to a record on increasing Chinese demand for iron ore and
may advance further as rising finance costs curb growth in shipbuilding. The
Baltic Dry Index, a measure of costs to move everything from coal to grain,
gained 418 points, or 3.9%, to 11,067 points on the Baltic Exchange in London."
May 13 - Financial Times (Robert Wright and Javier Blas): "Consumers of basic
commodities face some of the highest ever costs to ship goods after a
combination of port delays, strong demand and ship shortages last week sent
bulk shipping rates back close to record levels. The increases - an almost 80%
jump in the past year - come after iron ore producers in Brazil won large price
increases from steelmakers, encouraging them to make more ore available for
shipment."
Gold rallied 2.0% to $902.40, and Silver added 0.3% to $16.96. June Crude added
65 cents to a record $126.61. June Gasoline gained 1.0% to a record high (up
31% y-t-d), while June Natural Gas declined 3.9% (up 48% y-t-d). July Copper
rose 2.9%. July Wheat fell 3.6%. The CRB index was little changed (up 18.9%
y-t-d). The Goldman Sachs Commodities Index (GSCI) added 0.1% to another record
high (up 28.3% y-t-d and 63.6% y-o-y).
China Watch
May 15 - Bloomberg (Li Yanping): "China's factory and property spending climbed
25.7% in the four months through April and may accelerate as southwestern
Sichuan province rebuilds after the country's worst earthquake in more than 50
years."
May 13 - Bloomberg (Nipa Piboontanasawat): "China's wholesale-price inflation
accelerated in April to the fastest since at least 1999. The wholesale price
index rose 10.3% from a year earlier after gaining 10.2% in March "
May 12 - MarketNews International: "The rebound in Chinese money supply growth
in April underlines the challenge facing the People's Bank of China in reining
in excess liquidity and curbing inflation Chinese money supply growth
rebounded to a 16.9% rate in April from March's 16.3%..."
May 13 - Bloomberg (Paul Panckhurst): "China's retail sales climbed at the
fastest pace since at least 1999, signaling that domestic consumption may help
to buffer the world's fourth-biggest economy against an export slowdown. Sales
rose 22% to a record 814.2 billion yuan ($116 billion) in April "
May 12 - Bloomberg (Irene Shen): "China's vehicle sales rose 14% in April, the
slowest pace in almost two years, as a combination of inflation and a slumping
stock market curbed demand for passenger cars."
May 12 - Bloomberg (Nipa Piboontanasawat): "China ordered banks to set aside
larger reserves for the fourth time this year after inflation accelerated to
close to the fastest pace since 1996. The requirement will rise to a record
16.5% of deposits from 16%..."
May 14 - Bloomberg (Kevin Hamlin): "China's industrial production growth slowed
more than economists estimated Output rose 15.7% in April from a year earlier
after climbing 17.8% in March Weaker industrial output growth 'doesn't
justify a change in the government's tight monetary policy stance,' said Shuji
Tonouchi, senior economist at Mitsubishi 'Inflation is the biggest issue.'"
May 14 - Bloomberg (Melinda Cao and Judy Chen): "Overseas investors placing
money in China's bank accounts betting on yuan gains will face 'risks' because
the regulators may change the rules, said China Banking Regulatory Commission's
Li Fuan 'Money inflows for pure speculative purposes will face policy risks,'
said Li 'The regulators will make appropriate control rules if needed."
May 12 - Bloomberg (Li Yanping): "China's exporters face a rising number of
payment defaults in the US because of the subprime crisis, China Central
Television reported Total delayed overseas payments are now more than $100
billion, and are rising by $15 billion annually, CCTV reported, citing a
research institute affiliated with the trade ministry."
Japan Watch
May 16 - Bloomberg (Jason Clenfield): "Japan's economy grew 3.3% last quarter,
faster than economists estimated, as exports to Asia and emerging markets
helped the nation weather the US slowdown."
May 14 - Bloomberg (Mayumi Otsuma): "Japan's wholesale prices rose at close to
the fastest pace in almost three decades in April, prompting companies to pass
higher costs onto clients or absorb them by sacrificing profits. Producer
prices climbed 3.7% from a year earlier, after a 3.9% gain in March "
India Watch
May 16 - Bloomberg (Cherian Thomas): "India's inflation rate unexpectedly rose
to the highest in 3 1/2 years Wholesale prices gained 7.83% in the week from
a year earlier "
May 12 - Bloomberg (Kartik Goyal): "India's industrial production grew at the
slowest pace since 2002 in March Production at factories, utilities and mines
rose 3% from a year earlier after gaining 8.6% in February "
Asia Watch
May 14 - Bloomberg (Arijit Ghosh and Aloysius Unditu): "Indonesia's new car
sales rose 47% in April to a three-year high as the lowest interest rates in
three years encouraged consumers to borrow to buy cars before a proposed
increase in fuel prices."
May 16 - Bloomberg (Jason Folkmanis): "Accelerating inflation in Vietnam has
caused builders to halt residential property projects that they no longer view
as economically viable, Morgan Stanley said. Vietnam's year-on-year inflation
rate reached 21.4% last month, the highest since at least 1992 "
Latin America Watch
May 15 - Financial Times (David Oakley): "Brazil is pricing bond deals at lower
spreads than Berkshire Hathaway The country priced a 10-year bond on
Wednesday last week at 15 bps tighter than a deal of the same maturity launched
by triple A rated Berkshire Hathaway Finance the previous day. The Brazilian
deal, which was priced 600bp tighter than similar bonds five years ago, is a
sign of the country's growing reputation as a place to channel money "
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