Page 2 of 3 CREDIT BUBBLE BULLETIN Mistakes beget greater mistakes
Commentary and weekly watch by Doug Noland
massive stimulus and monetization, the expectation is that the financial system
and asset prices will stabilize. The economy will be, it is anticipated, not
far behind. And the seductive part of this view is that unprecedented policy
measures may actually be able to somewhat rekindle an artificial boom - perhaps
enough even to appear to stabilize the system. But seeming "stabilization" will
be in response to massive Washington stimulus and market intervention - and
will be dependent upon ongoing massive
government stimulus and intervention. It's called a debt trap. The great Hyman
Minsky would view it as the ultimate Ponzi finance.
As I've argued on these pages, our highly inflated and distorted system
requires $2.0 trillion or so of credit creation to hold implosion at bay. It is
my belief that this will ONLY be possible with trillion-plus annual growth in
both Treasury debt and Federal Reserves liabilities. Private sector credit
creation simply will not bounce back sufficiently to play much of a role.
Mortgage, consumer, and business credit - in this post-bubble environment -
will not return to much of a force for getting total system credit near this $2
trillion bogey.
In this post-bubble backdrop, only government finance has a sufficient
inflationary bias to get trillion-plus issuance. But the day that policymakers
try to extract themselves from massive stimulus and monetization will be the
day they risk an erosion of confidence and a run on both government and private
credit instruments.
Also as I've written, once the government printing press gets revved up, it's
very difficult to get it to slow down. Last week currency markets finally took
this threat seriously.
WEEKLY WATCH
Yet another wild one. For the week, the Dow gained 0.8% (down 17.1% y-t-d), and
the S&P500 rallied 1.6% (down 14.9%). The Morgan Stanley Cyclicals surged
6.7% (down 25.3%) and the Transports 4.0% (down 28.8%). The Utilities jumped
8.1% (down 13.3%), and the Morgan Stanley Consumer index increased 3.0% (down
12.4%). The S&P400 Mid-Caps rallied 1.7% (down 13.7%), and the Russell 2000
small caps gained 1.8% (down 19.9%). The Nasdaq100 increased 1.6% (down 2.0%),
and the Morgan Stanley High Tech index jumped 3.8% (up 4.2%). The
InteractiveWeek Internet Index gained 3.4% (up 6.6%), while the Semiconductors
slipped 0.6% (up 3.1%). The Biotechs rose 3.5% (down 3.6%). The Broker/Dealers
added 0.6% (down 7.2%), and the Banks rallied 1.8% (down 41.2%). With Bullion
surging $23, the HUI Gold index surged 13.6% (up 8%).
One-month Treasury bill rates ended the week at 8 bps, and three-month bills
were at 21 bps. Two-year government yields declined 9 bps to 0.84%. Five year
T-note yields sank 23 bps to 1.60%. Ten-year yields dropped 24 bps to 2.65%.
The long-bond was not as thrilled with the Fed, with yields slipping only 3 bps
to 3.71%. The implied yield on 3-month December '09 Eurodollars fell 19 bps to
1.395%. Benchmark Fannie MBS yields fell 22 bps to 3.94%. The spread between
benchmark MBS and 10-year T-notes widened 2 to 129 bps. Agency 10-yr debt
spreads widened 2 to 80 bps. The 2-year dollar swap spread declined 6 to 63.75
bps; the 10-year dollar swap spread increased 8.5 to 31.75 bps, and the 30-year
swap spread declined 5.5 to negative 28 bps. Corporate bond spreads narrowed
further. An index of investment grade bond spreads narrowed 8 to 261 bps, and
an index of junk spreads narrowed 16 to 1,252 bps. GE Capital Credit default
swap prices fell below 700 bps.
It was a another large week for corporate debt sales. Investment grade issuance
included Pfizer $13.5bn, State Street Bank & Trust $2.45 TN, UPS $2.0bn,
Smith International $1.0bn, Duke Energy $900 million, Progress Energy $750
million, Southern Cal Edison $750 million, Marsh & McLennan $400 million,
John Hopkins $400 million, and Peco Energy $250 million.
Junk issuers included Barrick Gold $750 million.
International debt issues this week included Societe Financement (SFEF) $4.0bn,
BHP $3.25bn, Shell $2.5bn, Panama $1.47bn, Swedish Housing Finance $1.1 TN, and
Posco $700 million.
U.K. 10-year gilt yields rose 8 bps to 3.03%, while German bund yields dropped
9 bps to 2.97%. The German DAX equities index increased 2.9% (down 15.4%).
Japanese 10-year "JGB" yields fell 5 bps to 1.26%. The Nikkei 225 surged 10.4%
(down 10.3%). Emerging markets rallied. Brazil's benchmark dollar bond yields
sank 43 bps to 6.56%. Brazil's Bovespa equities index gained 2.7% (up 6.7%
y-t-d). The Mexican Bolsa rallied 2.6% (down 13.5% y-t-d). Mexico's 10-year $
yields dropped 31 bps to 6.19%. Russia's RTS equities index jumped 6.8% (up
10.3%). India's Sensex equities index gained 2.4% (down 7.1%). China's Shanghai
Exchange surged 7.2% (up 25.3%).
Freddie Mac 30-year fixed mortgage rates declined 5 bps to 4.98% (down 89bps
y-o-y). Fifteen-year fixed rates dipped 3 bps to 4.61% (down 66bps y-o-y).
One-year ARMs jumped 11 bps to 4.91% (down 24bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down a notable 45
bps this week to 6.47% (down 65bps y-o-y).
Federal Reserve Credit inflated $164bn last week to an 8-wk high $2.041 TN. Fed
Credit has dropped $205bn y-t-d, while having expanded $1.163 TN over the past
52 weeks (11%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last
week (ended 3/18) dipped $1.2bn to $2.590 TN. "Custody holdings" have been
expanding at a 13.9% rate y-t-d, and were up $422bn over the past year, or
19.4%.
Bank Credit added $1.7bn to $9.810 TN (week of 3/11). Bank Credit rose $318bn
year-over-year, or 3.3%. Bank Credit increased $418bn over the past 27 weeks.
For the week, Securities Credit increased $3.5bn. Loans & Leases slipped
$1.8bn to $7.139 TN (52-wk gain of $221bn, or 3.2%). C&I loans increased
$1.6bn, with 52-wk growth of 5.0%. Real Estate loans jumped $16.1bn (up 5.7%
y-o-y). Consumer loans added $2.9bn, while Securities loans dropped $24.2bn.
Other loans increased $1.8bn.
M2 (narrow) "money" supply surged $39.8bn to a record $8.343 TN (week of 3/9).
Narrow "money" has now inflated at an 18% rate over the past 25 weeks and
$766bn over the past year, or 10.1%. For the week, Currency increased $2.5bn,
and Demand & Checkable Deposits rose $13.3bn. Savings Deposits jumped
$23bn, while Small Denominated Deposits slipped $2.2bn. Retail Money Funds
increased $3.3bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $42.9bn to an
11-wk low $3.863 TN. The 52-wk expansion was reduced to $396bn, or 11.4%
annualized. Money Funds have expanded at a 4.1% rate y-t-d.
Asset-Backed Securities (ABS) issuance jumped to almost $10bn. Year-to-date
total US ABS issuance of $16.5bn (tallied by JPMorgan's Christopher Flanagan)
is a fraction of the $42.8bn for comparable 2008. There has been no home equity
ABS issuance in months.
Total Commercial Paper outstanding declined $7.5bn this past week to $1.477 TN.
CP has declined $205bn y-t-d (58% annualized) and $354bn over the past year
(19.3%). Asset-backed CP sank $17.4bn to $700bn, with a 52-wk drop of $105bn
(13%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $190bn y-o-y, or 2.9%, to $6.634 TN. Reserves have
declined $313bn over the past 22 weeks.
Global Credit Market Dislocation Watch
March 18 - Bloomberg (Liz Capo McCormick): "Federal Reserve Chairman Ben S.
Bernanke faces additional headwinds while seeking to repair the link between
the easing of monetary policy and lower consumer borrowing costs, as foreign
investors take money home. ... According to international capital flow data
reported by the Treasury Department ... Foreign investors withdrew $148.9
billion in funds from the U.S. in January, after purchasing $86.2 billion the
prior month."
March 20 - Bloomberg (Scott Lanman and Sarah Mulholland): "The Federal
Reserve's effort to unfreeze markets for securities backed by loans kicked off
with requests for $4.7 billion of financing, a total that officials hope will
surge to as much as $1 trillion after investors resolve contract terms with
dealers and other concerns. Investors could have used the Term Asset-Backed
Securities Loan Facility to finance purchases of as much as $8.3 billion of
securities. They asked for $1.9 billion in loans to buy securities backed by
auto loans and $2.8 billion for debt linked to credit-card loans ... "
March 20 - Bloomberg (Bill Koenig): "Wells Fargo & Co. said it extended $51
billion in loans and loan commitments to customers in January. The company said
it has extended $144 billion in loans in the past four months."
March 16 - Bloomberg (Gabrielle Coppola): "Non-financial investment-grade
companies seeking to replace $300 billion of debt maturing over the next three
years face higher refinancing risk because of weakening economic conditions and
tightened credit markets, according to Moody's ... About $99 billion of the
debt is maturing in 2009, $83 billion in 2010 and $117 billion in 2011 ... "
March 17 - Bloomberg (Mayumi Otsuma): "The Bank of Japan said it may provide as
much as 1 trillion yen ($10 billion) of subordinated loans to banks to
replenish capital depleted by falling stock prices and revive lending. The
central bank will provide details of the 'extremely extraordinary' measure, the
length of the loans and the interest rate it will charge 'as soon as possible,'
Governor Masaaki Shirakawa told reporters ... "
March 18 - Bloomberg (Caroline Binham): "Financial Services Authority Chairman
Adair Turner has promised to start a 'revolution' in financial regulation with
new rules for banks and
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