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4 CREDIT BUBBLE
BULLETIN Z1, QE3 and
deleveraging Commentary and
weekly watch by Doug Noland
The "raging"
debate is whether recent elevated unemployment is
a "cyclical" or "structural" phenomenon. Academic
"white papers" are not required. After all, find a
system that doubles mortgage credit in about six
years and then proceeds to double federal debt in
four - and you'll no doubt locate a deeply
maladjusted economic structure.
Such gross
financial imbalance ensures economic imbalance.
And, importantly, the longer such imbalances are
accommodated/incentivized by loose fiscal and
monetary policies the deeper the structural
impairment. Throw massive fiscal stimulus and
monetize trillions and such a structure will surely
demonstrate historic
deficiencies and fragilities.
Deleveraging
- the process of unwinding the economic damage
wrought from years of excess - will be a quite
arduous economic process; one that will commence
at some unknown date in the future. Oh, I guess I
failed to mention that total (financial and
non-financial) credit ended Q2 at a record $55.031
trillion, or 353% of GDP. And Rest of World
holdings of our financial assets ended the quarter
at a record $19.100 trillion, a $3.860 trillion
increase from the end of 2008.
WEEKLY
WATCH The S&P500 slipped 0.4% (up 16.1%
y-t-d), and the Dow dipped 0.1% (up 11.2%). The
Morgan Stanley Cyclicals fell 1.9% (up 14.1%), and
the Transports sank 5.9% (down 2.2%). The Morgan
Stanley Consumer index rose 0.7% (up 10.7%), while
the Utilities declined 0.2% (down 0.9%). The Banks
were down 2.8% (up 27.5%), and the Broker/Dealers
were 4.9% lower (up 2.4%). The broader market gave
back some of recent outperformance. The S&P
400 Mid-Caps fell 2.0% (up 14.4%), and the small
cap Russell 2000 declined 1.1% (up 15.5%). The
Nasdaq100 was up 0.2% (up 25.6%), while the Morgan
Stanley High Tech index declined 1.0% (up 18.6%).
The Semiconductors dropped 2.8% (up 8.4%). The
InteractiveWeek Internet index lost 1.1% (up
15.0%). The Biotechs jumped 3.6% (up 46.6%). With
bullion little changed, the HUI gold index gained
1.6% (up 5.4%).
One-month Treasury bill
rates ended the week at 4 bps and three-month
bills closed at 10 bps. Two-year government yields
were up a basis point to 0.26%. Five-year T-note
yields ended the week down 3 bps to 0.67%.
Ten-year yields fell 11 bps to 1.75%. Long bond
yields dropped 15 bps to 2.94%. Benchmark Fannie
MBS yields declined 31 bps to 1.82%. The spread
between benchmark MBS and 10-year Treasury yields
narrowed 20 to a record low 7 bps. The implied
yield on December 2013 eurodollar futures rose 2
bps to 0.40%. The two-year dollar swap spread was
little changed at 13 bps, and the 10-year dollar
swap spread declined 2 to one basis point.
Corporate bond spreads widened from last week's
multi-month lows. An index of investment grade
bond risk jumped 13 to 96 bps. An index of junk
bond risk rose 14 to 458 bps.
Debt
issuance remained exceptionally strong. Investment
grade issuers this week included JPMorgan $3.0
billion, Novartis $2.0 billion, Ford Motor Credit
$1.0 billion, Duke Energy Carolinas $650 million,
Franklin Resources $600 million, Sempra Energy
$500 million, Nextera Energy $500 million, New
York Life $500 million, Church & Dwight $400
million, Southern Cal Gas $350 million, Digital
Realty Trust $300 million, Torchmark $300 million,
Ingredion $300 million, Tampa Electric $250
million, System Energy Resources $250 million, and
North Shore Long Island $135 million.
Junk
bond funds saw inflows jump to $1.3 billion (from
Lipper). The long list of junk issuers included
Biomet $2.6 billion, VPI $1.75 billion, Rockwood
Specialties $1.25 billion, Nielsen $800 million,
Continental Airlines $800 million, Hovnanian
Enterprises $800 million, Sabre $800 million, FMC
Technologies $800 million, Fiserv $700 million,
Harley-Davidson $600 million, General Cable $600
million, Serta Simmons $650 million, Valeant
Pharmaceuticals $500 million, SBA Communications
$500 million, Sky Growth $490 million, Jones Group
$400 million, Air Lease Corp $400 million, Kohl's
$350 million, Amkor Technology $300 million,
Sotheby's $300 million, CNO Financial Group $275
million, Ryland Group $250 million, P.H.
Glatfelter $250 million, Michaels Stores $200
million and Baker & Taylor $145 million.
I saw no convertible debt issued.
International dollar bond issuers included
Ukraine $2.6 billion, National Bank Australia $2.5
billion, Bank Nederlandse Gemeenten $2.25 billion,
ING Bank $2.0 billion, Corp Andina de Fomento $1.5
billion, Hazine Mustesarligi $1.5 billion, Total
Capital International $1.5 billion, Banco
Santander $1.35 billion, Vodafone $2.0 billion,
Kommunalbanken $1.25 billion, Ontario $1.25
billion, Westpac Banking $2.25 billion, Grupo Aval
$1.0 billion, PKO Finance $1.0 billion, Nordea
Bank $1.0 billion, Bangkok Bank $1.2 billion,
Korea Finance $800 million, Schneider Electric
$800 million, Banko Pactual $800 million, Colombia
Telecom $750 million, Alpha Bank $750 million,
Banco del Peru $650 million, Intelsat Jackson $640
million, Anglo American $1.35 billion, Development
Bank of Japan $500 million, Novolipetsk Steel $500
million, Rentenbank $250 million and Maestro Peru
$200 million.
Spain's 10-year yields
declined 3 bps to 5.70% (up 66bps y-t-d). Italian
10-yr yields added 3 bps to 5.03% (down 200bps).
German bund yields fell 11 bps to 1.60% (down
23bps), and French yields added a basis point to
2.26% (down 88bps). The French to German 10-year
bond spread widened 12 bps to 66 bps. Ten-year
Portuguese yields jumped 49 bps to 8.26% (down
451bps). The new Greek 10-year note yield sank 80
bps to 19.46%. U.K. 10-year gilt yields fell 13
bps to 1.83% (down 14bps). Irish yields were 31
bps lower to 4.77% (down 349bps).
The
German DAX equities index added 0.5% (up 26.3%
y-t-d). Spain's IBEX 35 equities index gained 0.9%
(down 3.9%), while Italy's FTSE MIB fell 3.8% (up
6.0%). Japanese 10-year "JGB" yields were
unchanged at 0.79% (down 19bps). Japan's Nikkei
declined 0.6% (up 7.7%). Emerging markets were
mostly lower. Brazil's Bovespa equities index
declined 1.3% (up 8.1%), and Mexico's Bolsa fell
0.9% (up 8.8%). South Korea's Kospi index slipped
0.3% (up 9.7%). India's Sensex equities index rose
1.6% (up 21.3%). China's Shanghai Exchange sank
4.6% (down 7.9%). Freddie Mac 30-year
fixed mortgage rates dropped 6 bps to 3.49% (down
60bps y-o-y). Fifteen-year fixed rates fell 8 bps
to 2.77% (down 52bps). One-year ARMs were
unchanged at 2.61% (down 21bps). Bankrate's survey
of jumbo mortgage borrowing costs had 30-yr fixed
rates down 4 bps to 4.15% (down 62bps).
Federal Reserve Credit added $1.0 billion
to $2.807 trillion. Fed Credit was down $33
billion from a year ago, or 1.2%. Elsewhere, Fed
Foreign Holdings of Treasury, Agency Debt this
past week (ended 9/19) rose $7.4 billion to $3.584
trillion. "Custody holdings" were up $164 billion
y-t-d and $116 billion year-over-year, or 3.4%.
Global central bank "international reserve
assets" (excluding gold) - as tallied by Bloomberg
- were up $387 billion y-o-y, or 3.8% to a record
$10.611 trillion. Over two years, reserves were
$2.032 trillion higher, for 24% growth.
M2
(narrow) "money" supply jumped $34.6 billion to a
record $10.124 trillion. "Narrow money" has
expanded 7.1% annualized year-to-date and was up
6.7% from a year ago. For the week, Currency
increased $1.6 billion. Demand and Checkable
Deposits fell $16.4 billion, while Savings
Deposits surged $53.6 billion. Small Denominated
Deposits declined $1.8 billion. Retail Money Funds
fell $2.8 billion.
Total Money Fund assets
declined $10 billion to $2.568 trillion. Money
Fund assets were down $127 billion y-t-d and $53
billion over the past year, or down 2.0% y-o-y.
Total Commercial Paper outstanding fell
$7.2 billion to $1.008 trillion. CP was up $49
billion y-t-d, while having declined $22 billion
from a year ago, or down 2.1%.
Currency
Watch The US dollar index recovered 0.6% to
79.328 (down 1.1% y-t-d). For the week on the
upside, the Japanese yen increased 0.3%, the
Taiwanese dollar 0.3%, and the British pound 0.1%.
For the week on the downside, the Danish krone
declined 1.2%, the euro 1.1%, the Mexican peso
1.1%, the Norwegian krone 1.0%, the Australian
dollar 0.9%, the South African rand 0.9%, the
Swiss franc 0.7%, the Brazilian real 0.5%, the
Canadian dollar 0.5%, the South Korean won 0.2%,
and the Swedish krona 0.1%.
Commodities
Watch September 20 - Bloomberg: "China
passed the US last year for the first time to
become the biggest importer of agricultural
products and also increased its exports… Imports,
including food and beverages, rose 34% to $144.7
billion in 2011 from $108.3 billion in 2010…
Exports gained 25% to $64.6 billion, beating
Canada to become the sixth largest..."
The
CRB index dropped 3.7% this week (up 1.2% y-t-d).
The Goldman Sachs Commodities Index sank 4.4% (up
3.0%). Spot Gold added 0.2% to $1,773 (up 13.4%).
Silver was little changed at $34.64 (up 24%).
November Crude dropped $6.44 to $92.89 (down 6%).
October Gasoline declined 2.4% (up 11%), and
October Natural Gas fell 2.0% (down 4%). December
Copper declined 1.1% (up 10%). December Wheat fell
2.9% (up 37%), and December Corn dropped 4.3% (up
16%).
Global Credit
Watch September 21 - Wall Street Journal
(Marcus Walker and Matina Stevis): "A
confrontation is brewing among Greece's
international creditors over who will provide the
financing needed to keep the country afloat. A
report by international inspectors, due in
October, will state how big the funding shortfall
is in Greece's bailout program, but European
officials say the deficit is far too big for
Greece to close on its own. That means the
International Monetary Fund, the European Central
Bank, and euro-zone governments such as Germany
will have to negotiate over which of them will
make painful concessions to ease Greece's
debt-service burden. That is intended to avoid a
Greek bankruptcy that could force the country out
of the euro and reignite financial panic across
the currency bloc."
September 21 -
Bloomberg (Anchalee Worrachate): "The European
Central Bank's plan to buy bonds is proving more
successful at keeping borrowing costs for France
and Belgium near record lows than persuading
investors to lend to Spain and Italy for less.
Spain's three-year yield is back up to 3.83% after
dipping to 3.37% on Sept. 7… The cost of insuring
French debt against default has declined 24%,
almost twice the 13% drop in Italian default-swap
costs."
September 21 - New York Times
(Raphael Minder): "Prime Minister Mariano Rajoy,
already under pressure from his European
counterparts to clean up Spain's banks and public
finances, failed on Thursday to ease what has
recently turned into his biggest domestic
challenge: a separatist push by the nation's most
economically powerful region, Catalonia. Instead,
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