Page 2 of 3 CREDIT BUBBLE BULLETIN Dollar dilemma
Commentary and weekly watch by Doug Noland
Total Commercial Paper outstanding jumped $67.7bn (8-wk gain of $225bn) to a
21-wk high $1.299 TN. CP has declined $382bn y-t-d (30% annualized) and $251bn
over the past year (16%). Asset-backed CP rose $9.1bn to $531bn, with a 52-wk
drop of $176bn (25%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $360bn y-o-y to a record $7.257 TN. Reserves have
increased $493bn year-to-date.
Global Credit Market Watch
October 8 - Bloomberg (Brian Faler and Julianna Goldman): "The US government
ended its 2009 fiscal year with a deficit of $1.4 trillion, the biggest since
1945 ... The deficit amounted to 9.9% of the nation's economy, triple the size
of the shortfall for 2008. The
nonpartisan CBO said ... the government was squeezed on both sides of the
budget ledger ... Tax revenue fell by $420 billion, or 17%, to the lowest level
in more than 50 years. Individual income taxes, the biggest source of tax
receipts, fell by 20% ... Corporate income taxes dropped by 54%... At the same
time, federal spending rose by 18%, the CBO said."
October 5 - Bloomberg (Rebecca Christie and Christine Harper): "Federal Deposit
Insurance Corp. Chairman Sheila Bair said regulators should consider making
secured creditors carry more of the cost of bank failures. 'This could involve
potentially limiting their claims to no more than, say, 80% of their secured
credits,' Bair said… 'This would ensure that market participants always have
some skin in the game, and it would be very strong medicine indeed.' Bair's
comments go beyond any of her previous proposals for changing the way large and
so-called systemically important financial institutions are regulated."
October 8 - Bloomberg (Ott Ummelas): "Latvia's plan to cap mortgage holders'
liability has damaged the Baltic state's chances of convincing investors it can
meet the terms of its bailout and avoid a devaluation, said James Oates, chief
executive officer of… Cicero Capital. 'By trying to change the legislation so
that the debts can only be limited to the collateral total, that kind of gives
the game away, and that, together with the Swedes' saber-rattling, they really
are out there on the edge now,' said Oates, former head of east European
equities at UBS…"
October 7 - Bloomberg (Jon Menon and Andrew MacAskill): "A year ago today,
Royal Bank of Scotland Group Plc and HBOS Plc were close to collapse, causing a
chain reaction that could have ended with riots in U.K. cities, security
analysts and economists said. Bank failures would have forced the government to
cancel police leave and deploy troops as the breakdown of the financial
payments system threatened the ability of utilities to provide essential
services, said David Livingstone, a fellow at the Royal Institute for
International Affairs in London, a former adviser to the government's Cobra
crisis response committee. 'You are talking about a situation with mass
disorder and panic,' the former Royal Navy officer said ... There would be
'riots, pandemonium, everyone fending for themselves.'"
September 30 - Bloomberg (David Yong and Lilian Karunungan): "Emerging-market
bonds posted the best quarterly gain in more than six years… The extra yield
investors demand to own developing-nation securities rather than Treasuries
shrank to 3.27 percentage points, from a seven-year high of 8.65 points on Oct.
Government Finance Bubble Watch
October 6 - Bloomberg (Mike Dorning and Nicholas Johnston): "President Barack
Obama is considering a mix of spending programs and tax cuts to respond to
widening job losses that would amount to an additional economic stimulus
without carrying that label. The discussion of the initiatives, including a
boost in transportation spending and an extension of an expiring tax credit for
first-time homebuyers, comes as the White House is balancing rising concern
about unemployment and a budget deficit the Congressional Budget Office
estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010."
October 8 - Bloomberg (Simon Kennedy and Gabi Thesing): "Jean-Claude Trichet
needs governments to walk through the emergency exit first if he's going to be
able to keep nurturing Europe's recovery with record low interest rates and
cash injections. As an economic rebound allows policy makers to mull how they
will withdraw stimulus measures, the European Central Bank President is
demanding that when growth takes hold, lawmakers execute 'ambitious' plans to
reverse the region's largest budget deficit since the euro began trading in
1999. Failure by politicians to devise a plan and then carry it out may fuel
debt and inflation…"
October 6 - Bloomberg (Camilla Hall): "Saudi Arabia hasn't held talks with
China and other countries on dropping the dollar as the currency for pricing
oil, Saudi Central Bank Governor Muhammad al-Jasser said, denying a report in
the U.K.'s Independent newspaper. The Independent report is 'absolutely
incorrect' and there has been 'absolutely nothing' of that nature discussed
between Saudi Arabia, the world's biggest oil exporter, and other countries,
al-Jasser told reporters… The… newspaper said…. that Gulf oil producers and
nations including China, Japan, Russia and Brazil had held secret talks on a
nine-year plan to phase out the dollar in oil trade, and move toward pricing
the fuel in a basket of currencies plus gold. It cited unidentified Gulf
officials and unidentified Chinese bankers."
October 6 - Bloomberg (Francine Lacqua and Mark Deen): "European Central Bank
President Jean-Claude Trichet led the region's finance chiefs in pushing China
to let the yuan strengthen amid mounting concern the euro is shouldering too
much of the burden of a sliding dollar. Some currencies 'have in the medium run
to appreciate,' Trichet said…"
Despite today's rally, the dollar index ended the week down 0.7% to 76.45. For
the week on the upside, the Australian dollar increased 4.5%, the Canadian
dollar 3.5%, the South African rand 3.1%, the Norwegian krone 2.7%, the New
Zealand dollar 2.6%, the Brazilian real 2.6%, the Mexican peso 2.5%, the
Singapore dollar 1.5%, and the Euro 1.0%. On the downside, the dollar gained
0.6% on the British pound.
October 7 - Bloomberg (Pham-Duy Nguyen): "Gold's rally to a record shows
commodity investors remain concerned that the US economic recovery will spur
inflation even as Wall Street forecasts and government bonds suggest stable
prices. Bullion has jumped 19% this year, heading for a ninth annual gain,
after futures touched a record $1,045 an ounce yesterday… Demand for gold is
increasing as US government debt reaches record levels and the Federal Reserve
keeps interest rates near zero percent. Inflation surged to a 14.8% annual rate
in March 1980 after a four-year gain in gold that included a then-record $873
in January 1980."
October 8 - Bloomberg (Luzi Ann Javier): "Protests over high food prices, which
swept the world from Haiti to Bangladesh last year, may return to Asia in 2010
as drought in India and crop losses in the Philippines may cause price spikes,
CWA Global Markets Pty said. 'We wouldn't be surprised to see a return to the
rice riots across Asia sometime in 2010,' Peter McGuire, managing director at
CWA Global Markets Pty., said ... Declining output in India 'coupled with the
recent weather issues in the Philippines will cause price spikes for the rice
market toward the second quarter of 2010,' he said."
October 7 - Bloomberg (Carli Lourens): "China's share of global demand for
diamonds is set to double…, RBC Capital Markets said. China's share of demand
for diamonds in jewelry, measured in polished wholesale prices, will probably
climb to 16% after 2015 from 8% this year…analyst Des Kilalea said… citing De
Beers… India's share will probably increase to 11% after 2015 from 7% this
year, he said."
Great week for commodities. Gold jumped 4.6% to close at $1,049 (up 18.9%
y-t-d). Silver surged 9.3% to $17.74 (up 57% y-t-d). November Crude gained
$2.29 to $72.24 (up 62% y-t-d). November Gasoline added 2.2% (up 68% y-t-d),
and November Natural Gas increased 1.3% (down 15% y-t-d). December Copper
jumped 6.5% (up 102% y-t-d). December Wheat recovered 6.1% (down 23% y-t-d),
and December Corn rallied 8.6% (down 11% y-t-d). The CRB index gained 3.8% (up
14.4% y-t-d). The Goldman Sachs Commodities Index (GSCI) surged 4.0% (up 35.3%
China Bubble Watch
October 9 - Bloomberg (Sophie Leung): "China's banking regulator said it's too
soon for the government to start winding down stimulus efforts even as growth
in the world's third-largest economy accelerates to more than 8%. 'It's far too
early to talk about an exit strategy,' Liu Mingkang, chairman of the China
Banking Regulatory Commission, told a banking conference… The economy 'may face
a bumpy road ahead.'"
October 5 - Bloomberg (Rob Delaney): "Chinese central bank official Yi Gang
said the strength of lending in the country isn't a cause for concern and will
stabilize, reflecting the government's reluctance to rein in economic stimulus
measures. 'I think overall, the situation will converge to a sustainable
level,' Deputy Central Bank Governor Yi told Bloomberg… 'In August, it was
already not too much. June and August were pretty flat.'"
October 6 - Bloomberg (Sophie Leung and Theresa Tang): "Luxury-home sales in
Hong Kong almost tripled in September from a month earlier as mainland Chinese
residents bought properties in the city. The registered sales of homes worth
more than HK$10 million ($1.3 million) rose to 1,351 from 500… A one-bedroom
apartment in the Kowloon district sold for a record HK$24.5 million, Centaline
Property Agency Ltd. said last month."
October 8 - Bloomberg (Keiko Ujikane): "Japan's current-account surplus widened
in August ... The surplus widened 10.4% to 1.171 trillion yen ($13.2 billion)
in August from a year earlier... Renewed demand from China and other emerging
nations is helping Japan emerge from its worst postwar recession."
October 9 - Bloomberg (Cherian Thomas): "India's Finance Minister Pranab
Mukherjee said that the central bank shouldn't "compromise" on the nation's
economic growth in its efforts to tame inflation."
October 6 - Bloomberg (Cherian Thomas and Pooja Thakur): "India faces a dilemma
on when to raise borrowing costs to contain inflation pressures as the economic
recovery 'remains weak', central bank Governor Duvvuri Subbarao said. 'While
there is a broad agreement that we need to exit from the present excessively
accommodative monetary and fiscal policies, there is less agreement on when and
how we should exit," Subbarao said… 'An early exit on inflation concerns runs
the risk of derailing the fragile growth, while a delayed exit may endanger
October 8 - Bloomberg (Kartik Goyal): "India's wholesale prices rose for a
fourth week, making it harder for central bank Governor Duvvuri Subbarao to
keep interest rates low and boost economic growth without fanning inflation."
Asia Bubble Watch
October 7 - Bloomberg (Netty Ismail): "Asian hedge funds will attract a 'wave'
of new money that could more than double the industry's assets from its peak of
$250 billion as the region leads the world's emergence from the deepest
recession since World War II, according to GFIA Pte. The industry in Asia will
grow to two-to-three times its peak within the next five years as investors
outside the region with little or no investments in Asian alternative
strategies allocate to the funds, said Peter Douglas, principal of GFIA, a
Singapore-based hedge-fund consulting firm."
October 5 - Bloomberg (Shamim Adam and Francine Lacqua): "South Korea still
needs expansionary economic policy and the central bank has other tools
available before raising interest rates if it decides it needs to contain
rising asset prices, Finance Minister Yoon Jeung Hyun said. Any winding back of
fiscal stimulus by the government or interest-rate increases from the Bank of
Korea would be 'premature' because the economy still faces uncertainties, Yoon