Page 2 of 3 CREDIT BUBBLE BULLETIN In short, crisis reaches bedrock level
Commentary and market watch by Doug Noland
'underestimated both the scope and severity of the decline in residential
mortgage markets that became increasingly acute in 2007.'"
July 18 - Financial Times (Paul J Davies): "Almost a year into the widespread
financial deleveraging sparked by the credit and liquidity crisis, the markets
for bonds backed by mortgages and other debt are yet to see an invasion of
bargain hunters. Even for the safest, supposedly bomb-proof, triple A rated
bonds backed by the least risky home loans have not seen a sustained revival in
fortunes. In fact, a recovery in April and May for some such deals has proved
short-lived. This is not what many analysts and investors expected. The worst
of the forced selling is thought to
have been over by the end of the first quarter. And the height of fears about
systemic risk and a potential collapse of large parts of the financial system
were supposed to have passed with the rescue of Bear Stearns in March. However,
across the board in markets for asset-backed securities, it is increasingly
fundamental credit risk that is now coming to the fore."
July 17 - Bloomberg (Josh P. Hamilton and Daniel Taub): "IndyMac Bancorp Inc.'s
collapse may spur withdrawals from banks ranging from First BanCorp in Puerto
Rico to Los Angeles-based Nara Bancorp Inc. as customers trim accounts below
the $100,000 limit on deposit insurance, according to Sandler O'Neill ...
'IndyMac's failure has people worried about others,' Mark Fitzgibbon, a
principal at Sandler O'Neill, said ... The result could be a liquidity squeeze
at banks that rely on 'jumbo' deposits, Fitzgibbon said."
July 18 - Bloomberg (Vernon Wessels): "The Federal Deposit Insurance Corp. set
new rules for US banks that lets regulators take charge of paying off
depositors in a move to prevent spillover in the event of a large failure. The
rules, which apply to 159 banks with at least $2 billion in US deposits and
either $20 billion in assets or 250,000 account holders, start Aug. 18, the...
regulator said... Banks have 18 months to comply. The change will help pay off
insured deposits as soon as possible and help 'maintain public confidence in
the banking industry,' the regulator said. It will also 'mitigate the spillover
effects of a failure, such as risks to the payments system, problems stemming
from depositor illiquidity and a substantial reduction in credit
availability.'"
July 15 - Wall Street Journal (Joanna Slater): "A long history of bank bailouts
around the world provides some models for what could unfold in the US as the
government becomes more directly involved in fixing a damaged financial system.
This history shows it is almost always a painful process ... Since the 1990s,
countries like Japan, Sweden, South Korea and Thailand have all experienced
banking crises. The US had its own financial upheaval during the
savings-and-loan debacle in the 1980s. Each of these predicaments required
dramatic moves, including bank closures and nationalizations, efforts to buy
bad assets, plus injections of capital by governments that the market wouldn't
provide. Often, depositors and creditors of ailing financial institutions get
protection and shareholders get the worst deal of all. The US government has
tiptoed toward some of these measures with its handling of the Fannie Mae and
Freddie Mac crisis."
July 18 - Dow Jones (Marshall Eckblad): "Federal banking regulators are girding
for a new challenge to the nation's beleaguered banking system: rising
inflation. Banks already face a historic collapse of the nation's housing
markets, and a resulting wave of consumers defaulting on their mortgage, car
and credit-card loans. Now, a prolonged spike in food and fuel prices threatens
to push short-term interest rates higher, and squeeze operating income for
banks. Higher short-term rates stemming from inflation are 'the next issue'for
banks, said Sheila Bair, chairman of the Federal Deposit Insurance Corp ... .
'We are focused on that and encourage banks to' do the same, she said."
July 18 - Bloomberg (Lenka Ponikelska): "Receivers for Cheyne Finance Plc, the
first of the structured investment vehicles to auction assets after collapsing
last year, accepted bids at 43.9% of face value. Deloitte & Touche LLP
asked banks to bid for $2.29 billion, or 30.9%, of the SIV's debt holdings this
week. The auctioned holdings include asset-backed securities and collateralized
debt obligations, according to Moody's ... "
July 14 - Bloomberg (Bradley Keoun): "At an investor presentation in May,
Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's
$2.2 trillion balance sheet, the biggest in the US, was a cornerstone of his
turnaround plan. Nowhere mentioned in the accompanying 66-page handout were the
additional $1.1 trillion of assets that ... Citigroup keeps off its books:
trusts to sell mortgage-backed securities, financing vehicles to issue
short-term debt and collateralized debt obligations, or CDOs, to repackage
bonds ... 'If you start adding up all the potential exposures, it's a huge
number,' said Sam Golden, a former ombudsman for the US Office of the
Comptroller of the Currency ... 'The banks will say that it was disclosed.
Investors are saying, `Yeah, but it was cryptic. We really didn't know what you
were telling us.'"
July 18 - Financial Times (Daniel Pimlott): "Merrill Lynch has pulled out of
talks to locate its headquarters at the new World Trade Center after suffering
billions of dollars of writedowns. Merrill had been expected to take one of
three buildings in development by Larry Silverstein at the World Trade Center.
The decision to hold off on building offices - at a likely cost of as much as
$3bn - is the second time in less than a year that the troubled investment bank
has vetoed new headquarters."
July 17 - Bloomberg (Erik Holm): "Record tornado damages, the weakening economy
and a drop in premiums may reduce insurers' earnings by 30%, the steepest
second-quarter decline since 2002 ... Losses from catastrophes, including the
most tornadoes in the US since at least 1950, were about $5.5 billion. At the
same time, investment returns and opportunities to sell residential and
corporate coverage declined as the economy slowed and home sales dropped.
'We're going to see amazingly bad numbers from the property insurers in the
second quarter,' said Meyer Shields, an analyst at Stifel Nicolaus ... 'There
are lots and lots of losses out there.'"
July 14 - Bloomberg (Mark Herlihy): "More than three quarters of UK chief
financial officers said credit has become 'hard to obtain' as a result of
turmoil in financial markets, according to a survey by Deloitte and Touche LLP.
The survey found that 77% of CFOs said credit was hard to obtain, compared with
63% in March and 48% in September, Deloitte said ... Some 89% of respondents
rated credit as 'costly,' compared with 72% in March and 59% last September.
Conditions are likely to get 'worse,' Deloitte said."
July 18 - Bloomberg (Svenja O'Donnell): "UK mortgage lending fell 32% in June
from a year earlier, the Council of Mortgage Lenders said. Gross lending
against property declined to 23.8 billion pounds ($47.44bn) ... Lending fell 3%
from May."
Global Inflation Turmoil Watch
July 18 - Bloomberg (Li Yanping and Zhang Dingmin): "China tightened scrutiny
of foreign direct investment to prevent 'fake' ventures that the government
said are acting as channels for speculative capital and endangering the world's
fastest-growing major economy. Sham joint ventures and shell companies are
among the conduits ... 'Hot money' from investors attracted by a strengthening
currency and interest rates at a decade high threatens to stoke inflation and
destabilize the financial system in the event of sudden outflows."
July 18 - Bloomberg (Drew Benson and Lester Pimentel): "Chilean central bank
President Jose de Gregorio may have to abandon his plan to boost exports by
weakening the peso after inflation accelerated to the fastest pace in 14 years.
The peso has become the world's worst performing currency, tumbling 11.8% in
the three months since de Gregorio told traders at Banco Central de Chile to
buy $50 million a day. Annual inflation soared to 9.5% in June, the highest
since 1994 ... 'They have a very serious inflation problem,' said Igor Arsenin,
an emerging-markets strategist at Credit Suisse ... 'The next step for them is
to scrap those dollar purchases.'"
Currency Watch
The dollar index added 0.1% to 71.19. For the week on the upside, the Mexican
peso increased 1.2%, the South African rand 0.9%, the Brazilian real 0.5%, the
Taiwanese dollar 0.3%, and the British pound 0.2%. On the downside, the South
Korean won declined 1.0%, the Japanese yen 0.8%, the Swiss franc 0.7%, the New
Zealand dollar 0.4%, and the Euro 0.4%.
Commodities Watch
July 15 - Bloomberg (Scott Reyburn): "Diamonds, like art, are a commodity that
is gaining attention as an alternative investment. Increases in the price of
the rarest colorless and colored diamonds are attracting wealthy investors and
structured funds as stock markets and real-estate values decline. The price of
5-carat gems with the potential to be sold at $1 million or more has risen
76.5% in the year to May 2008, according to ... the Web site of the
International Diamond and Jewelry Exchange ... Five years ago, dealers were
paying $70,000 per carat for colorless diamonds of 10 carats and more ... 'Now
we're paying over $200,000 per carat ... '"
Gold declined 0.9% to $955 and Silver fell 3.3% to $18.20. August Crude sank
$16.34 to $128.74. August Gasoline sank 11.5% (up 27.8% y-t-d), and August
Natural Gas dropped 10.2% (up 42.9% y-t-d). September Copper declined 1.9%.
September Wheat fell 3.2% and August Corn sank 11.8%. The CRB index was hit for
7.4% (up 19.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) sank 9.5% (up
30.5% y-t-d and 55% y-o-y).
China Watch
July 14 - Bloomberg (Nipa Piboontanasawat and Li Yanping): "China's
foreign-exchange reserves climbed ... to a record $1.81 trillion at the end of
June ... Currency holdings rose 35.7% from a year earlier ... Chinese
regulators are adding controls this month to limit 'hot money' inflows from
investors betting the yuan will keep appreciating after 25 straight monthly
gains. The trade surplus, foreign direct investment and speculative capital
have flooded the world's fourth-biggest economy with cash ... "
July 17 - MarketNews International: "China's enterprise commodity price index,
which measures prices at the wholesale level, rose 9.5% year-on-year in June
... "
July 17 - Bloomberg (Kevin Hamlin and Li Yanping): "China's economy grew at the
slowest pace since 2005 in the second quarter ... Gross domestic product rose
10.1% from a year earlier, down from 10.6% in the first quarter, as exports
weakened and the government curbed lending."
July 18 - Bloomberg (Wang Ying and Winnie Zhu): "China, the world's
second-biggest energy consumer, may face a worse-than-expected power shortfall
when demand peaks in summer, the nation's largest electricity distributor
said."
July 18 - Bloomberg (Tian Ying): "China's stockpile of unsold new vehicles rose
about 50% in the six months ended June, hitting a four-year high, as automakers
expanded production and sales growth slowed. The backlog reached 170,000
vehicles ... First-half sales totaled 5.18 million."
Japan Watch
July 13 - Wall Street Journal (Tomoyuki Tachikawa): "Japan's consumer sentiment
worsened to its lowest level ever in June ... signaling that growing
inflationary pressures world-wide will likely further hurt Asia's biggest
economy ... Consumer spending accounts for 55% of Japan's gross domestic
product."
India Watch
July 18 - Bloomberg (Anil Varma): "Money supply in India grew 20.5% in the two
weeks ended July 4 from a year earlier ... "
Asia Bubble Watch
July 15 - Bloomberg (Seyoon Kim): "South Korea's import prices surged by the
most in more than 10 years because of rising oil costs. Prices of imported
goods surged 49% in June after a 44.6% gain in May, the Bank of Korea said ...
From a month earlier, prices climbed 2.7%, the central bank said."
July 17 - Bloomberg (Shamim Adam and Karl Lester M. Yap): "The Philippine
central bank raised its benchmark interest rate by the most since 2000 and
forecast inflation will exceed last month's 14-year high on record oil and food
prices. Bangko Sentral ng Pilipinas increased the rate it pays banks for
overnight deposits by 0.5 percentage point to 5.75%..."
Latin America Watch
July 18 - Bloomberg (Jens Erik Gould): "Mexico's central bank raised its
benchmark interest rate for the second straight month to curb the highest
inflation rate in more than three years. The bank's five-member board ...
raised the key lending rate by a quarter percentage point to 8%..."
Unbalanced Global Economy Watch
July 15 - Wall Street Journal Europe (Elga Bartsch and Joachim Fels): "The main
driver behind rising global inflation pressures is well understood: a very lax
global monetary policy stance, particularly in the US and in many
emerging-market countries. This has fueled higher food and energy prices, and
other prices are likely to follow - especially as most central banks around the
world are unlikely to tighten policy sharply anytime soon. So it is not
surprising that inflation is rising everywhere. What does appear puzzling is
that, at 4%, euro-area inflation is at about the same level as that in the US
and has actually risen by a greater amount over the past year. That's despite a
significant appreciation of the euro against the dollar during the same period
... "
July 15 - Bloomberg (Jennifer Ryan and Brian Swint): "UK inflation accelerated
to the fastest pace in at least 11 years and the housing slump worsened, making
it harder for the Bank of England to stave off a recession by cutting interest
rates. Consumer prices climbed 3.8% from a year earlier ... Property- price
declines stayed close to the most widespread in 30 years and transactions
dropped, a separate report showed."
July 16 - Bloomberg (Svenja O'Donnell): "UK unemployment jumped the most in
June since the aftermath of the last recession in 1992 as the economic slowdown
forced companies to cut jobs and stop hiring. Claims for jobless benefits
climbed for a fifth month, increasing 15,500 from May ... "
July 18 - Bloomberg (Svenja O'Donnell): "UK money supply increased at the
quickest pace since 1988 in June, five times as fast as economists forecast ...
M4, the broadest gauge of money supply in Britain ... rose 2% from May ... From
a year earlier, it rose 11.5%..."
July 18 - Bloomberg (Mark Deen and Gonzalo Vina): "The UK budget deficit
ballooned to the widest since records started in 1946 ... The shortfall was
24.4 billion pounds ($49bn) in the three months through June ... Last month,
the deficit expanded to 9.2 billion pounds ... "
July 18 - Bloomberg (Ian Guider): "Ireland's unemployment rate may rise to 7%
in 2009 as more companies fire workers in response to a slumping economy, the
country's job training agency said. 'There are already signs that some of the
external problems facing the economy are having a direct impact on the labor
market,' said Brian McCormick, FAS senior economist ... "
July 16 - Bloomberg (Fergal O'Brien): "Inflation in Europe accelerated to the
fastest in more than 16 years in June, led by a 53% surge in the cost of
heating oil. The inflation rate in the euro area rose from 3.7% in May, the
European Union statistics office ... said."
July 16 - Bloomberg (Cecile Gutscher and John Glover): "If there is any doubt
European shoppers are following their US counterparts into a recession, look no
further than ... Chain stores ... are the worst performers among the region's
140 billion euros ($220 billion) of leveraged-buyout loans, according to Markit
Group Ltd. and S&P data ... 'We're going into a consumer-led slowdown,
which is just now starting to show its signs,' said ... Pilar Gomez- Bravo, who
is in charge of credit funds for Europe at Lehman Brothers Asset Management."
July 18 - Bloomberg (Bernd Bergmann): "German producer prices rose at the
fastest pace in 26 years in June, adding to pressure on the European Central
Bank to keep interest rates high even as economic growth slows. Prices for
goods from newsprint to plastics increased 6.7% from a year earlier, the most
since March 1982, after rising an annual 6% in May ... "
July 18 - Bloomberg (Charles Penty): "Spain's stock of mortgage loans rose an
annualized 10% in May, the slowest growth in at least 15 years, as the
country's real estate boom ended. Mortgage growth in May halved from 20.5% a
year earlier ... "
July 15 - Bloomberg (Sharon Smyth and Ben Sills): "Home prices in Spain fell
for the first time in almost 10 years in the second quarter after higher
borrowing costs and restrictions on mortgage lending eased demand. The average
price of new and used houses and apartments declined 0.1% from the previous
quarter ... Prices rose 2.4% from a year earlier ... 'This is happening much
faster than expected and much faster than is desirable,' said Jose Carlos Diez,
chief economist at Intermoney SA."
July 14 - Bloomberg (Elizabeth Konstantinova): "Bulgaria's inflation
accelerated to a decade-high in June as higher transport and tobacco prices
outweighed a seasonal drop in food costs. The inflation rate rose to 15.3%, the
second-highest in the European Union after Latvia, from 15% in May."
July 17 - Bloomberg (Farhan Sharif): "Pakistan investors stormed out of the
Karachi Stock Exchange, smashed windows and cursed regulators after the
benchmark index fell for a 15th day, the worst losing streak in at least 18
years. 'I have lost my life savings in the last 15 days and no one in the
government or regulators came to help us,' said Imran Inayat, 45, a protester
and a former banker who retired early and said he lost 300,000 rupees ($4,175)
on the market. Police surrounded the exchange after hundreds of investors
stoned the building and shouted anti-government slogans."
July 15 - Bloomberg (Tracy Withers): "New Zealand's consumer prices rose at the
fastest pace in 18 years in the second quarter, fanned by fuel and food costs,
adding to signs the economy is facing stagflation as it slips into recession.
The consumer prices index rose 1.6% from the first quarter ... "
Bursting Bubble Economy Watch
July 16 - Bloomberg (Bob Ivry): "The US housing crisis may accomplish what
years of parental hectoring couldn't: Turn Americans from spenders into savers.
Spending will fall because homeowners can no longer use rising real estate
values to borrow cash - $837.5 billion in 2006, according to a report by former
Federal Reserve Chairman Alan Greenspan and senior Fed economist James Kennedy.
With mortgage lenders requiring down payments of 20%, the average household,
which puts away less than 1% of after- tax pay, will have to save 10% for 10
years to buy a home."
July 16 - Bloomberg (Shobhana Chandra and Timothy R. Homan): "US consumer
prices surged 5% in the past year, the biggest jump since 1991, just as
households struggled with falling home values and the credit crunch. Spiraling
expenses for food and fuel spurred the increase in June ... "
July 16 - Bloomberg (Timothy R. Homan): "Misery hasn't had this much company in
more than 15 years. The jump in consumer prices reported today by the Labor
Department means the so-called Misery Index, the sum of the unemployment and
inflation rates, is the highest since ... January 1993 ... The figures
underscore Federal Reserve Chairman Ben S. Bernanke's comment to lawmakers
yesterday that US households are under 'tremendous pressure.' 'You add that to
what's going on with home prices and that's just a huge stress on consumers,'
said Robert Dye, senior economist at PNC Financial Services ... "
July 16 - Time (Bill Saporito): "You would expect Americans, in a period of
falling home prices, a wobbly stock market and an ongoing war, to be less than
satisfied with the direction of the country. It's natural. But Americans are
not simply dissatisfied. They are very unhappy. O.K., deeply, pessimistically
unhappy. Un-American Dreamy unhappy: 85% of respondents in an exclusive
TIME/Rockefeller Foundation poll believe that the country is on the wrong
track. It's an unprecedented downer from an optimistic nation, and depending on
whom you talk to, the numbers simply get worse."
July 14 - Bloomberg (Chris Dolmetsch): "Amtrak, the US national passenger
railroad, raised fares on 13 routes in the Midwest and Northeast by 5%, a
spokeswoman said ... The fares went up this month because of agreements with
labor unions reached this year and the rising cost of fuel on routes served by
diesel locomotives ... "
Central Banker Watch
July 15 - Bloomberg (Craig Torres and Scott Lanman): "Federal Reserve Chairman
Ben S. Bernanke abandoned his June assessment that the threat of an economic
downturn had
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