Page 3 of 5 CREDIT BUBBLE BULLETIN Froth comes off latte economy
Commentary and market watch by Doug Noland
Hendersonville, North Carolina, can no longer sell trust-preferred stock to
raise capital for loans so customers can buy airplanes or build veterinary
clinics, Gibson said. The bank, with $650 million in assets, is among
more than 8,000 across the US caught for the past six months in the shutdown of
the $117 billion market for the securities, a hybrid of debt and equity. The
fallout from the subprime-mortgage collapse is spreading from global
lenders to local ones. Less capital for such hometown banks may
stymie Federal Reserve Chairman Ben Bernanke's effort to prevent a credit
crunch. 'There is no question there is a problem,' said Chris Cole, senior
regulatory counsel for the Independent Community Bankers of America.
'Banks need the capital to lend. So that
problem of raising capital causes a further slowdown. This inability to raise
capital points to a damping of the whole economy.'"
July 2 - Bloomberg (Pierre Paulden): "Prices of high-risk, high-yield loans
fell to the lowest levels since April in the past week on concern company
defaults will rise as the economy slows. The average actively traded loan fell
to 89.32 cents on the dollar."
June 27 - Bloomberg (Rebecca Christie): "Transactions have climbed 45% in a
portion of the $7 trillion-a-day repurchase agreement market, used by bond
dealers to finance positions, since procedures were put in place on May 8 to
secure payments between the bond market's two trade-clearing banks. Average
daily trading in general collateral finance repurchase agreements, known as GCF
Repo, increased to $735.3 billion in the 30 days since the interbank
transactions resumed, compared to the first four months of 2008. The data comes
from. Depository Trust & Clearing Corp., which processes about $3.3
trillion in repos a day."
July 1 - Bloomberg (Elizabeth Hester and Edgar Ortega): "Initial public
offerings came to market in the first half of the year at the slowest pace
since 2003, and few investors expect a rebound as economic growth tapers off
and loan losses mount. Through June, 333 companies went public, down from 702 a
year earlier. The $73.2 billion raised was 41% less than during the
first half of last year and the least since 2005. For the first time since
1978, US venture capital funds failed to take a company public last quarter."
June 30 - Bloomberg (Martin Z. Braun): "Municipal borrowers� shifted out
of $3.4 billion of auction-rate debt last week, as more than half of the market
has evaporated since its collapse four months ago. State and local government
borrowers converted, refinanced or marked for redemption by Aug. 18 at least
$87.2 billion of auction-rate securities, or about 53% of the $166 billion
outstanding earlier this year�"
July 4 - Bloomberg (Neil Unmack): "Leveraged-buyout loan defaults may be
'significantly higher' than ratings companies' estimates as about $500 billion
of debt used to fund the takeovers comes due, the Bank for International
Settlements said. Companies bought by private-equity firms worldwide must repay
the high-risk, high-yield loans and bonds by 2010� They may find it hard
to raise the cash because of a slump in demand for collateralized debt
obligations that pool the loans� Investors are shunning structured debt
instruments such as CDOs, the main buyers of leveraged loans, after the
credit-market seizure caused by the US subprime mortgage collapse, the BIS
said. The ability of LBO firms to refinance may be crimped further as banks
tighten lending criteria after reporting $402 billion of credit losses and
asset writedowns. 'We've come out of an egregiously lax period in lending,'
said Jamie Stuttard, who manages $13bn� at Schroders Plc� 'We
expect an increase in defaults because of the wave of very leveraged LBOs.'"
July 4 - Bloomberg (Alexis Xydias and Ambereen Choudhury): "European banks may
need to raise as much as 90 billion euros ($141 billion) to restore their
capital after the US subprime mortgage collapse caused credit markets to seize
up, according to Goldman Sachs Group Inc. European banks have already raised
$115 billion from investors to replenish capital after reporting $134 billion
in writedowns, Goldman analysts led by Christoffer Malmer said in a note to
clients today. They may now seek more than 60 billion euros to increase their
Tier 1 capital, a measure of financial strength, to about 9 percent, the
analysts said. They could need to raise as much as 90 billion euros were credit
losses to rise to levels last seen in the recession of the early 1990s.
July 2 - Bloomberg (Patricia Kuo): "Credit rating profiles of companies in
Asia-Pacific region will deteriorate in the second half of the year, Moody's
Investors Service said. Almost a quarter of the companies Moody's rates in the
region outside of Japan now have negative rating outlooks or face possible
downgrade, ``setting the stage for more negative actions in the coming
months,'' Moody's said..."
July 1 - Bloomberg (Laura Cochrane): "Australian sales of bonds backed by
mortgages slumped to a record low in the first half as the fallout from the US
housing market collapse reduced demand for the assets and issuers were forced
to pay higher yields. Companies sold A$1.90 billion ($1.82bn) of bonds backed
by Australian home loans to investors in the six months� down from
A$4.87 billion in the second half of last year� Issuance fell almost 96%
from the first six months of 2007, when a record A$45 billion was sold, more
than half overseas."
Global Inflation Turmoil Watch
July 3 - Financial Times (Raphael Minder): "Inflation is accelerating in Asia,
according to June figures released yesterday by four countries, raising the
likelihood that central banks will be obliged to increase interest rates in
spite of rising fears of slowing growth."
July 2 - Bloomberg (Brian Lysaght): "Hundreds of U.K. truckers were converging
on London to protest diesel fuel prices, meet with government officials and tie
up traffic in the city's center."
July 2 - Bloomberg (Kartik Goya): "Indian truckers, who haul the majority of
the nation's goods, went on strike today to protest against taxes and rising
fuel costs, a union official said. More than 4 million heavy and light
commercial vehicles are staying off the nation's roads from today after talks
with the government to avert the strike failed last night, said Charan Singh
Lohara, president of the All India Motor Transport Congress, an umbrella
organization representing the truckers."
Currency Watch
June 30 - Bloomberg (Zhang Shidong): "Jim Rogers, who in April 2006 correctly
predicted oil would reach $100 a barrel and gold $1,000 an ounce, said
investors should steer clear of the dollar as the US economy slows and favor
commodities this year. Avoid the dollar 'at all costs,' Rogers
said. 'The best investments in 2008 are commodities and natural
resources. Agricultural prices have much higher to go over the next decade. We
have a shortage of everything, including seeds.'"
June 30 - Bloomberg (Kim-Mai Cutler): "A disorderly decline in the dollar
remains a possibility as losses on US assets pile up and the current-account
deficit triggers ``a sudden rush for the exits,'' the Bank for International
Settlements said. A plunge in the currency may happen even after its
'remarkably orderly' 14% slide against the euro in the past year, the Basel,
Switzerland-based BIS said� 'Foreign investors in US dollar assets have
seen big losses measured in dollars, and still bigger ones measured in their
own currency,' the BIS said. 'While unlikely, indeed highly improbable for
public-sector investors, a sudden rush for the exits cannot be ruled out
completely.'"
The dollar index rallied 0.5% to 72.73. For the week on the upside, the South
African rand increased 1.0%, the Swedish krona 0.6%, the Australian dollar
0.5%, the Norwegian krone 0.2%, and the Canadian dollar 0.2%. On the downside,
the Japanese yen declined 0.5%, the British pound 0.5%, the New Zealand dollar
0.4%, the Euro 0.4%, and the Danish krone 0.4%.
Commodities Watch
July 4 - Financial Times (Javier Blas): "The number of financial market bets on
crude oil prices hitting $200 a barrel before the end of this year has almost
doubled in the past month, a further sign of growing concern that oil prices
will continue to rise sharply in the near term. The strong buying of these call
options comes as spot oil prices in London yesterday hit a record high
around the $146 a barrel level."
July 2 - Bloomberg (Greg Walters): "Russian oil production declined in June,
bringing the world's second-largest crude exporter closer to its first annual
drop since 1998. Production fell to 9.77 million barrels a day, 1% less than in
June last year."
July 3 - Bloomberg (Thomas Kutty Abraham): "India, the world's sixth-biggest
corn supplier, banned exports of the grain to boost domestic supplies and curb
inflation that accelerated to a 13-year high."
Gold added 0.6% to $933.20 and Silver 2.6% to $18.165. August Crude rose $3.91
to a record $144.12. August Gasoline added 0.9% (up 43% y-t-d), and August
Natural Gas rose 2.8% (up 81% y-t-d). September Copper slipped 0.4%. September
Wheat fell 2.7% and August Corn declined 1.3%. The CRB index increased 1.7% to
a new record high (up 31.7% y-t-d). The Goldman Sachs Commodities Index (GSCI)
surged 2.7% to a new record (up 45.9% y-t-d and 77.8% y-o-y).
China Watch
July 3 - Financial Times (Geoff Dyer): "On the face of it, China might not seem
the obvious place to invest at the moment. The local stock market has
collapsed, property markets are weak and the interest rate on bank deposits is
about half the rate of inflation. Yet that has not prevented a record flood of
capital inflows even higher than China's huge accumulation of reserves in
recent years. In the first quarter, foreign exchange reserves rose by $154bn.
On top of that, according to usually reliable figures leaked to Reuters,
reserves jumped by $75bn in April and $40bn in May to a total of $1,800bn.
Given that the inflows far outstrip trade and direct foreign investment, China
appears to be receiving vast amounts of speculative 'hot money'. China has two
big attractions for foreign investors - interest rates are higher than in the
US and the currency is expected to appreciate. 'China's FX reserves seem to
have turned into some kind of massive black hole for the world's liquidity,'
says Stephen Green, economist at Standard Chartered� Logan Wright at
Stone&McCarthy analysts in Beijing estimates that hot money entering in the
first five months could be as high as $150bn-$170bn."
July 3 - Bloomberg (William Bi): "China, the world's most populous nation, will
increase crop subsidies, boost rural spending and allow grain prices to rise to
ensure farmers grow enough to feed its 1.3 billion people for at least the next
12 years. The country must continue to produce at least 95% of the grain it
consumes, the State Council said."
July 3 - China Knowledge: "The average price of new houses hit a record RMB
16,988 (US$2,498) per square meter in Shanghai last month, up 21.9%, while
sales volume remained almost the same as the previous month, according to
Shanghai Youwin Real Estate Information Service Co."
June 30 - Bloomberg (Chia-Peck Wong): "Hong Kong lending rose 24% in May to the
highest in more than nine years as the city's economic growth and low interest
rates drove demand for credit."
Japan Watch
July 4 - Bloomberg (Toru Fujioka): "Japan's accelerating inflation may prompt
households to cut spending rather than buy more to beat further price
increases. A record 88.9% of consumers expect prices to climb this year
and an unprecedented 58.7% said they will cut spending, the Bank of Japan said
in a quarterly report. Both levels are the highest since the bank
started asking the questions about inflation and purchasing in 1997. 'Japan's
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