Page 3 of 3 CREDIT BUBBLE BULLETIN A red herring
Commentary and weekly watch by Doug Noland
May 14 - Bloomberg (Telma Marotto): "Banco do Brasil SA, Latin America's
largest bank by assets, posted a 67% increase in first- quarter profit on more
borrowing by consumers and farmers and a one-time gain from selling a stake in
Visa Inc. Net income increased to 2.35 billion reais ($1.4 billion) Demand
for credit increased with gains in employment and household income. Bank
lending in the country, which has expanded every month since February 2004,
rose 6.1% in the quarter and 31% in the 12 months ending in March "
May 15 - Bloomberg (Joe Carroll): "Petroleo Brasileiro SA, Brazil's
state-controlled oil company, leased about 80% of the world's deepest-drilling
offshore rigs to explore prospects including the Western Hemisphere's biggest
discovery in decades. Petrobras is hiring rigs that can drill in at least
3,000 meters of water The world has 21 such vessels, according to
Rigzone.com, which
tracks the offshore drilling industry. The company's 'insatiable' demand is
forcing producers including Exxon Mobil Corp. and BP Plc to pay more as they
compete for the remaining units, said Kjell Erik Eilertsen and Truls Olsen,
analysts at Fearnley Fonds AS Explorers that don't have rigs under contract
may delay projects or pay rents of more than $600,000 a day. 'The oil majors
have their backs against the wall as Petrobras has aggressively locked up
significant rig capacity,' said Omar Nokta, head of maritime research at
Dahlman Rose & Co."
May 14 - Bloomberg (Valerie Rota): "Mexico's peso-denominated bonds fell,
pushing the yield on the benchmark security to a four-month high, on
speculation rising tortilla prices will fuel faster inflation. the Milenio
newspaper reported that prices of tortillas, a Mexican staple, are poised to
increase by 40% over the next few weeks because of higher global grain costs."
May 15 - Bloomberg (Carlos Barletta): "Panama's consumer prices rose 8.5% in
April from a year earlier, driven by rising food and transportation costs."
Unbalanced Global Economy Watch
May 15 - Bloomberg (Patrick Donahue): "First came the booming economies. Then
came the rush of investors. Now the so-called BRIC nations -- Brazil, Russia,
India and China -- are talking about forming a political alliance. The four
largest emerging economies are sending their foreign ministers to
Yekaterinburg, Russia, to meet on May 16 for the first time outside the venue
of the United Nations. On the agenda are such non-economic issues as weapons
proliferation, counter-terrorism, energy and climate change In the past two
years stocks in the BRIC nations have risen 70 percent, versus the 42 percent
increase of emerging markets overall. 'It's really a group that first existed
as a concept in the minds of analysts and subsequently came to exist as a
practice between the countries,' Brazilian Foreign Minister Celso Amorim said
'The meeting is recognition of the fact that we are four big economies with a
large influence in the world.'"
May 12 - Bloomberg (Jennifer Ryan): "U.K. producer prices climbed in April at
the fastest annual pace since at least 1986 as raw-material costs jumped,
adding to the case for the Bank of England to moderate the pace of
interest-rate cuts. Prices charged by factories rose 7.5% from a year earlier
"
May 14 - Bloomberg (Svenja O'Donnell and John Fraher): "The Bank of England
said inflation will accelerate, breaching the government's 3% limit for
'several quarters,' making it harder for policy makers to cut interest rates as
economic growth slows."
May 13 - Bloomberg (Jennifer Ryan): "London's property market had the most
widespread price declines in at least 14 years last month as the slump in
financial services deepened and banks curbed lending, the Royal Institution of
Chartered Surveyors said The reading for the whole country fell to minus
95.1, the least since the series began in 1978."
May 13 - Bloomberg (Simon Packard): "The office market of London's main
financial district faces a 'tidal wave' as leasing demand slows and developers
struggle to line up tenants for new construction, consultant Drivers Jonas said
Eleven developments were started in the City of London district during the
past six months These will add 1.3 million square feet taking total space
under construction to 7 million square feet. Half the space being built is
scheduled for completion this year and there is 'minimal' pre-leasing for such
projects, Drivers Jonas said. Banks and financial services companies may cut as
many as 40,000 jobs, sub-leasing of unwanted space is increasing, rents are
declining and landlords offer more incentives to tenants, the consultant said."
May 16 - Bloomberg (Peter Woodifield): "Scottish house prices fell in the first
quarter, the second straight decline, as mortgages became more expensive and
harder to obtain. The cost of an average home dropped 5.1% in the first three
months of the year to 150,257 pounds ($292,881) "
May 15 - Bloomberg (Simon Kennedy and Fergal O'Brien): "European economic
growth accelerated more than economists forecast in the first three months of
2008 as stronger expansions in Germany and France masked slowdowns in Spain and
Italy. Gross domestic product in the euro area increased 0.7% from the previous
three months 'After the strong data in the first quarter there is definitely
no room for the ECB to cut rates,' said Joerg Kraemer, chief economist at
Commerzbank AG "
May 15 - Bloomberg (Gabi Thesing): "Economic growth in Germany accelerated to
the fastest pace in 12 years in the first quarter as companies stepped up
spending on machinery and construction. Gross domestic product rose 1.5% from
the fourth quarter "
May 13 - Financial Times (Richard Milne): "Germany, renowned for its high
standards of engineering, is facing an acute shortage of skilled engineers.
Franz Fehrenbach, chief executive of Bosch, became the latest businessman to
sound the alarm when he warned this week that the lack of engineers was 'the
key problem for the future'."
May 14 - Bloomberg (Ben Sills): "Spain's economy expanded at the slowest pace
in almost eight years as the global credit shortage exacerbated the country's
housing slump. The Spanish economy expanded 0.3% from the previous three months
"
May 13 - Bloomberg (Robin Wigglesworth and Kati Pohjanpalo): "Sweden's
inflation rate rose to 2.4% in April, the highest in five years, adding to
pressure on the central bank to keep its benchmark interest rate at a six-year
high."
May 13 - Bloomberg (Robin Wigglesworth and Kati Pohjanpalo): "Sweden's
unemployment rate dropped more than expected in April, reaching the lowest in
at least 15 years The rate fell to 2.9% from 3.2% in March "
May 15 - Bloomberg (David Rosenberg): "Israel's inflation rate rose more than
expected to 4.7% in April, the highest in 5 years The inflation rate rose
from 3.7% in March "
May 12 - Bloomberg (Tracy Withers): "New Zealand house sales slumped to a
16-year low in April and prices fell from the year earlier for the first time
in almost seven years The number of homes sold dropped 45.5%..."
Bursting Bubble Economy Watch
May 16 - Bloomberg (Courtney Schlisserman): "US consumer confidence was the
weakest this month since Jimmy Carter was president, and single- family home
construction fell to a 17-year low in April."
May 13 - Bloomberg (David Mildenberg): "Bank of America Corp., the nation's
biggest consumer bank, said losses on home-equity loans will be even worse than
predicted three weeks earlier More customers are under financial stress and
using credit cards to pay for necessities, said Liam McGee, president of the
consumer and small business division Credit and debit-card purchases for
'necessary' items, including fuel, food and utilities, grew by 13% in the first
quarter, while spending for retail, travel and entertainment increased 0.5%..."
May 12 - The Wall Street Journal (Rachel Dodes and Ray A. Smith): "The hottest
trend in footwear this season? Inflation. After a decade of declining prices,
footwear makers at all levels are raising prices. The mass-market Payless
recently increased prices on shoes in stores, though it won't say by how much.
Brown Shoe Co plans an increase of 5% to 12% for fall. And the Nine West shoe
label plans to boost prices on some styles by 15% next year. The moves reflect
higher costs in China, which makes about 85% of shoes sold in the US, as well
as higher fuel costs and the weak US dollar. And they could presage price
increases of other goods soon: Handbags, belts and other leather accessories
are made in the same region in China. The shoe price increases follow 10 years
in which US footwear prices fell 4.3%..."
May 12 - The Wall Street Journal (Jeffrey McCracken): "Two of the country's
largest recreational-vehicle makers, pummeled by high gasoline prices and the
slumping housing market, face serious cash crunches and are taking drastic
measures to ease the strain. Coachmen Industries Inc is borrowing against the
value of life-insurance policies it holds on employees and retirees. So far,
the company has tapped about half the cash value of those policies "
Central Banker Watch
May 14 - Financial Times (James Politi and Chris Bryant): "The Federal Reserve
should forcefully tackle the risk of inflation and the weakness of the dollar
now to avoid the stagflation experienced in the late 1970s, according to Paul
Volcker Testifying before Congress Volcker warned of a 'resemblance'
between the inflation outlook today and in the early 1970s Mr Volcker said
the response from the Fed at the time had not been 'forceful enough' in terms
of tightening monetary policy. He added: 'If we lose confidence in the ability
and the willingness of the Fed to deal with inflationary pressures and sustain
confidence in the dollar, we'll be in trouble.'"
May 14 - Bloomberg (Craig Torres): "Former Federal Reserve Chairman Paul
Volcker warned that Ben S. Bernanke's interventions in securities markets
opened the door to political interference that may threaten the Fed's
independence in setting interest rates. 'Intervention in a broad range of
credit-market instruments may imply official support for a particular sector of
the market or the economy,' Volcker said in testimony to the congressional
Joint Economic Committee Support for specific markets 'throws them into
political battles,' he said Volcker's comments are his most detailed warning
yet about the consequences of the Fed's rescue of Bear Stearns Cos. and taking
on mortgage securities from bond dealers 'Independence is integral to the
central responsibility of the Federal Reserve' for 'the conduct of monetary
policy,' said Volcker "
May 13 - Bloomberg (Craig Torres and Steve Matthews): "Federal Reserve Chairman
Ben S. Bernanke said financial markets remain unsettled and the central bank
will increase its auctions of cash to banks as needed. While markets have
improved, they remain 'far from normal,' Bernanke said 'We stand ready to
increase the size of the auctions if further warranted by financial
developments.'"
May 13 - Bloomberg (Craig Torres and Margot Habiby): "Central bankers face a
'major challenge' in containing inflation Federal Reserve Bank of Kansas City
President Thomas Hoenig said 'Inflation has increased' to levels that are
'unacceptable There is a real danger that the psychology around inflation is
beginning to change.'"
May 15 - Financial Times (Bertrand Benoit and James Wilson): "One market bubble
may be an accident; two in the space of a decade begins to look like
carelessness. After the internet bubble that burst in 2000, and last year's
collapse of a credit and house price bubble, every sane central banker around
the world must surely think again about whether to act against over-exuberant
asset prices. That the US Federal Reserve is looking at this topic is welcome -
but the correct conclusion is still far from clear. The past couple of decades
have seen a growing international consensus about monetary policy: central
banks should be independent, their goal should be low but stable inflation, and
they should use interest rates to achieve it. But as to what central banks
should do about asset price bubbles - which damage economic growth and
stability when they burst - controversy still rages."
May 14 - Financial Times (Krishna Guha): "The US Federal Reserve is
reconsidering the way it deals with asset price bubbles in the wake of the
housing and credit bust, in a move that could see the central bank using extra
regulation - or even interest rates - to fight unjustified increases. Top
officials are re-examining the Alan Greenspan doctrine that central banks
should not try to tackle asset bubbles and should focus on mitigating the
fallout when they burst. They are open to the possibility that the Fed might
have to adopt a different approach in future, deploying either interest rates
or more likely enhanced regulatory powers to put the brake on emerging bubbles.
However, they have not reached any conclusions yet and could end up reaffirming
their traditional hands-off stance."
Mortgage Finance Bubble Watch
May 14 - Financial Times (Paul J Davies): "Piggy-back mortgage loans used in
the US by some borrowers to act as deposits on home purchases are seeing such
poor performance that the majority of bonds backed by such loans have been
downgraded, according to Moody's 'Moody's now expects 2005 vintage subprime
second lien loan pools to lose 17% on average, 2006 vintage pools to lose 42%
on average, and 2007 pools to lose 45% on average In a worse-case scenario,
Moody's is projecting loss rates for 2006 and 2007 of 67% and 64%
respectively."
Real Estate Bubble Watch
May 13 - Bloomberg (Kathleen M. Howley): "Housing prices fell in two-thirds of
US cities in the first three months of the year as a rise in foreclosures
depressed property values and home sales tumbled 22%, the National Association
of Realtors said. The median price for a single-family home fell in 100 of 149
metropolitan areas studied "
May 14 - Bloomberg (Dan Levy): "US foreclosure filings climbed 65 percent and
bank seizures more than doubled in April from a year earlier as rates on
adjustable mortgages increased and vacated homes added to a glut of unsold
homes, RealtyTrac Inc. said. More than 243,300 properties, or one in every 519
households, were in some stage of foreclosure California and Florida had the
highest rates. Filings rose 4% from March. Properties in foreclosure
'contribute to already bloated inventories of homes for sale, and put downward
pressure on home values,' RealtyTrac Chief Executive Officer James Saccacio
said The collapse of the US housing market, the worst since the Great
Depression, is contributing to the economic slowdown Median prices for a
single- family home fell 7.7% in the first quarter, the biggest drop in 29
years There were 4.06 million US homes for sale at the end of March, 40,000
more than the prior month 'Inventory levels have soared to unprecedented
levels' Brian Fabbri, chief North American economist for BNP Paribas, said
'Builders and homeowners have to lower their prices significantly to sell that
inventory out.'"
May 14 - RealtyTrac: " Foreclosure filings default notices, auction sale
notices and bank repossessions were reported on 243,353 properties, a 4%
increase from the previous month and a nearly 65% increase from April 2007
Although only about 2% of households nationwide are in foreclosure, these
properties contribute to already bloated inventories of homes for sale, and put
downward pressure on home values. Areas of California, Florida, Nevada and
Arizona continue to be particularly hard-hit. Property tax bases are eroding,
putting municipal budgets in peril "
GSE Watch
May 14 - Bloomberg (Dawn Kopecki): "Freddie Mac posted a loss that was
narrower than analysts estimated and said it will raise $5.5 billion in capital
to help overcome rising credit costs Accounting changes had a 'significant
positive effect,' and helped reduce losses from rising delinquencies, Freddie
Mac said One accounting rule change, called FAS 157, which allows companies
to estimate a value on holdings that aren't traded, reduced some credit losses
by $1.3 billion, Freddie Mac said. Another, FAS 159, lets companies pick and
choose which financial assets and liabilities to measure at fair value on a
recurring basis, added $1 billion to retained earnings. 'What that gets us to
is something that more closely reflects what we believe the underlying
economics are,' Chief Financial Officer Anthony Piszel said 'It really
conveys better what's going on. It also serves to protect our capital base,
which then enables us to be more active in deploying capital to grow our
business.'"
Muni Watch
May 16 - Bloomberg (Adam L. Cataldo): "US states owe at least $400 billion for
health-care and other benefits promised to retired government employees,
Standard & Poor's said The total from 41 states surveyed doesn't include
an additional $371 billion owed to worker pension plans, S&P said States'
benefits liabilities are rising as retirees live longer and health-care costs
increase. At least 25 states face budget shortfalls of as much as $40 billion
for the 2009 fiscal year, according to Center on Budget and Policy Priorities
"
California Watch
May 15 - Reuters (James Saft): "As it did when the housing bubble began to
burst, California is leading the way in the next leg: a consumer bust. Squeezed
by rising unemployment, inflation in food and energy costs and plunging home
values, Californians are cutting back on spending. Besides causing woes for
state and local government, the cutback is giving California's economy another
knock and makes further job losses, home repossessions and banking problems
more likely. The figures are pretty bad. The median home price has fallen by
29% in the year to March and repossessions are increasing. Unemployment hit
6.2% in March, up 1.2 percentage points from the same month last year. But most
important, in the 10 months to the end of April, sales tax receipts in
California are actually down in absolute terms."
May 14 - Bloomberg (Michael B. Marois): "California Governor Arnold
Schwarzenegger, citing an economy squeezed by the worst housing slump in 26
years, said the state must borrow $15 billion or raise taxes to close a
widening deficit in the next fiscal year. Schwarzenegger said borrowing
against future lottery profits is the best alternative to raising taxes to
eliminate a deficit that he said will exceed $17 billion by July 1. The plan
would need voter approval in November. If voters reject it or if it falters, he
said he will seek a temporary, 1 cent increase of the state's 7.25% sales tax
'Our crisis is real, and it is very serious As the deficit grew, I also knew
we couldn't make it with cuts alone, and we need additional revenue and that we
need to get creative.'"
May 14 - Bloomberg (Ryan Flinn): "Northern California's East Bay Municipal
Utility District passed its first water-rationing resolution in 16 years,
asking residents and businesses to conserve as drought saps reservoir levels
The district, with 1.3 million customers in a 325-square- mile area on the
eastern bay of San Francisco, encompasses the cities of Berkeley and Oakland
'This is the worst situation we've seen in almost 20 years,' McCrea said."
Speculator Watch
May 15 - Financial Times (Martin Arnold): "The president of Intel Capital, one
of the biggest venture capital investors, has warned that his industry is on
the brink of another dangerous asset price bubble, particularly in so-called
'cleantech' environmentally friendly technologies. Arvind Sodhani told the
Financial Times : 'The biggest challenge for venture capital companies is when
valuations get out of whack - this always ends in pain, and we've started to
see a little bit of that in the recent past. 'It is particularly the case in
cleantech/greentech. These areas are hugely overvalued for their fundamentals
Mr Sodhani compared the rush to invest in areas such as solar power and waste
management to the overheating of the internet boom, when venture capitalists
were burnt by hundreds of failed investments after the dotcom bubble burst."
Crude Liquidity Watch
May 14 - Bloomberg (Alex Nicholson): "Russia's foreign currency and gold
reserves, the world's third largest, rose to a record $536.8 billion, the
central bank said."
May 12 - Bloomberg (Ayesha Daya): "Costs to build Dolphin Energy Ltd.'s
pipeline carrying Qatari gas to the United Arab Emirates reached $4.8 billion,
37% higher than previously expected."
Doug Noland is a market strategist for the Prudent Bear Funds.
(Republished with permission from PrudentBear.com.
Copyright 2005-2008 David W Tice & Associates. All rights reserved.)
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