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3 CREDIT BUBBLE
BULLETIN Awash with ignored
risk Commentary and weekly
watch by Doug Noland
So, US policymaking
feeds the bubble while at the same time creating a
systemic weak link. Fiscal policy has become so
contentious, I wouldn't be surprised if the course
of monetary policy becomes an increasingly heated
issue as well (especially if "risk on" spurs
bubbling markets and a stronger recovery). And the
more securities prices diverge from fundamentals -
and the deeper (rank) financial speculation
impairs the markets' pricing mechanisms and the
economy's resource allocation processes - the
greater the systemic vulnerability to myriad
shocks.
I've noted a few of the more
conspicuous "weak links" that might derail the
global bubble in 2013. But it could easily be - most
likely will be - something
unforeseen - "out of left field". Last year saw an
escalation of myriad global geopolitical risks.
The so-called "Arab spring" took a troubling turn.
Syria disintegrated, and the Iranian nuclear issue
seemed to almost come to a head.
It was
also a year of devastating drought and super storm
Sandy, along with unnerving weather developments
around the globe. I would expect speculative
markets to try to disregard geopolitical and other
issues, although I would also posit that this only
increases the vulnerability of a major negative
development to incite a big, revengeful "risk off"
backlash.
The backdrop would, at least for
this evening, seem to support the scenario where
markets resist responding to negative developments
until they're clobbered over the head with them.
It's an interesting juncture for a global bullish
pandemic. And a most unfortunate time for
history's greatest bubble.
WEEKLY
WATCH The S&P500 jumped 4.6% (up 2.5%
y-t-d), and the Dow gained 3.8% (up 2.5%). The
broader market again outperformed. The S&P 400
Mid-Caps surged 5.2% (up 3.5%) to a new all-time
high, and the small cap Russell 2000 rose 5.7% (up
3.5%), also a new record. The Morgan Stanley
Cyclicals surged 6.5% (up 4.2%), and the
Transports advanced 6.0% (up 4.3%). The Morgan
Stanley Consumer index rose 4.2% (up 2.9%), and
the Utilities gained 3.8% (up 2.4%). The Banks
were 6.2% higher (up 4.8%), and the Broker/Dealers
jumped 6.2% (up 4.7%). The Nasdaq100 was up 4.5%
(up 2.4%), and the Morgan Stanley High Tech index
jumped 4.7% (up 2.8%). The Semiconductors surged
5.5% (up 3.6%). The InteractiveWeek Internet index
gained 4.9% (up 3.0%). The Biotechs jumped 6.5%
(up 4.5%). With bullion unchanged, the HUI gold
index increased 0.4% (down 2.6%).
One-month Treasury bill rates ended the
week at about 5 bps and 3-month rates ended at 7
bps. Two-year government yields were up 2 bps to
0.265%. Five-year T-note yields ended the week10
bps higher to 0.81%. Ten-year yields jumped 20 bps
to 1.90%. Long bond yields jumped 23 bps to 3.10%.
Benchmark Fannie MBS yields increased 13 bps to
2.34%. The spread between benchmark MBS and
10-year Treasury yields narrowed 7 to 44 bps. The
implied yield on December 2013 eurodollar futures
was unchanged at 0.385%. The two-year dollar swap
spread was little changed at 14 bps, while the
10-year swap spread declined 3 to 3 bps. Corporate
bond spreads narrowed meaningfully. An index of
investment grade bond risk dropped 11 to 85 bps
(low since September). An index of junk bond risk
sank 53 bps to 443 bps (low since July '11).
Investment grade issuers included GE
Capital $4.0bn, Ford $2.0bn, Citigroup $1.75bn,
MetLife $2.0bn, and Crown America $800 million.
Junk bond funds saw outflows rise to $355
million (from Lipper). Junk issuers included
American Tower $1.0bn.
International
issuers included Country Garden $750 million.
Spain's 10-year yields dropped 18 bps this
week to 5.02% (down 65bps y-o-y), the low since
last March. Italian 10-yr yields sank 23 bps to
4.25% (down 285bps), low market yields since
November 2010. German bund yields jumped 23 bps to
1.53% (down 32bps), and French yields rose 15 bps
to 2.13% (down 122bps). The French to German
10-year bond spread narrowed 8 to 60 bps. Ten-year
Portuguese yields sank 58 bps to 6.17% (down
664bps). The new Greek 10-year note yield fell 54
bps to 10.82%. U.K. 10-year gilt yields jumped 30
bps to 2.11% (up 10bps).
The German DAX
equities index gained 2.2% for the week (up 2.2%
y-t-d). Spain's IBEX 35 equities index jumped 3.7%
(up 3.3%). Italy's FTSE MIB surged 4.2% (up 4.2%).
Japanese 10-year "JGB" yields rose 3 bps to 0.815%
(down 16 bps y-o-y). Japan's Nikkei jumped 2.8%
(up 2.8%). Emerging markets began 2013 on the
upside. Brazil's Bovespa equities index rose 2.6%
(up 2.6%), and Mexico's Bolsa gained 1.9% (up
2.0%). South Korea's Kospi index advanced 0.7% (up
0.7%). India's Sensex equities index gained 1.7%
(up 1.8%). China's Shanghai Exchange jumped 2.1%
(up 0.4%).
Freddie Mac 30-year fixed
mortgage rates slipped a basis point to 3.34%
(down 57bps y-o-y). Fifteen-year fixed rates were
down one basis point to 2.64% (down 59bps).
One-year ARM rates added one basis point to 2.57%
(down 23bps). Bankrate's survey of jumbo mortgage
borrowing costs had 30-yr fixed rates down 2 bps
to 4.06% (down 59bps).
Federal Reserve
Credit declined $8.9bn to $2.896 TN. Fed Credit
has increased $85.5bn in 8 weeks. Over the past
year, Fed Credit contracted $4.4bn.
Global
central bank "international reserve assets"
(excluding gold) - as tallied by Bloomberg - were
up $631bn y-o-y, or 6.2%, to $10.849 TN. Over two
years, reserves were $1.790 TN higher, for 20%
growth.
M2 (narrow) "money" supply jumped
$38.5bn to a record $10.432 TN. "Narrow money" has
expanded 8.3% ($795bn) over the past year. For the
week, Currency slipped $0.2bn. Demand and
Checkable Deposits jumped $30.9bn, and Savings
Deposits increased $2.1bn. Small Denominated
Deposits declined $2.9bn. Retail Money Funds
jumped $8.4bn.
Money market fund assets
jumped $38bn to $2.705 TN. Money Fund assets have
expanded $11.1bn y-o-y, or 0.4%.
Total
Commercial Paper outstanding jumped $16.2bn to
$1.082 TN CP was up $118bn in 8 weeks and $153bn,
or 16.4%, over the past year.
Currency
Watch January 4 - Bloomberg (Emma Charlton,
David Goodman and Simon Kennedy): "The world's
developed nations are stepping up efforts to
weaken their currencies, craving Switzerland's
success in blocking the franc's appreciation to
protect its economy. Japan's newly elected Prime
Minister Shinzo Abe raised the stakes in the
fourth quarter of 2012 as his call for aggressive
central-bank action to boost growth and inflation
triggered a 10% drop in the yen against the
dollar. An index compiled by Royal Bank of Canada
shows the level of 'verbal intervention' in the
Group of 10 nations has quadrupled since June
2010."
The US dollar index gained 1.0% to
80.50 (up 0.9% y-t-d). For the week on the upside,
the Mexican peso increased 2.2%, the New Zealand
dollar 1.5%, the Australian dollar 1.0%, the
Canadian dollar 1.0%, the Brazilian real 0.7%, and
the South Korean won 0.6%. For the week on the
downside, the Japanese yen declined 2.5%, the
Swiss franc 1.2%, the euro 1.1%, the Danish krone
1.1%, the South African rand 1.0%, the British
pound 0.5%, the Norwegian krone 0.3%, the Swedish
krona 0.3%, and the Singapore dollar 0.3%.
Commodities Watch December 31 -
Bloomberg (Nicholas Larkin and Debarati Roy):
"Gold rose, capping the longest annual gain since
at least 1920, on renewed concern that central
banks from Europe to China will take steps to spur
economic growth and as US leaders near a budget
deal ... "
December 31 - Bloomberg (Dan
Murtaugh): "Motorists in the US paid record high
prices for gasoline in 2012, as severe weather and
political tensions drove up the cost of fuel. The
national average price of gasoline in 2012 was
$3.60 a gallon, nine cents more than the previous
annual record set last year, said ... AAA ...
Prices touched $3.94 a gallon on April 5 and 6
after crude oil rallied as the US and European
nations imposed an embargo on Iranian oil exports
to pressure the Persian Gulf nation over its
nuclear program."
The CRB index slipped
0.2% this week (down 0.3% y-t-d). The Goldman
Sachs Commodities Index gained 0.4% (unchanged).
Spot Gold was little changed at $1,656 (down
1.2%). Silver was about unchanged at $29.95 (down
0.9%). February Crude jumped $2.29 to $93.09 (up
1.4%). February Gasoline added 0.2% (up 0.1%),
while February Natural Gas dropped 5.2% (down
1.9%). March Copper rallied 2.9% (up 1.1%). March
Wheat dropped 4.0% (down 4.0%), and March Corn
fell 2.0% (down 2.6%).
Fiscal Cliff
Watch January 4 - Bloomberg (Mike Dorning):
"Fresh from a budget fight so raw that the
Republican speaker of the US House cursed the
Democratic leader of the Senate outside the Oval
Office, President Barack Obama and Congress are
heading for an even bigger confrontation over
raising the nation's debt limit. US Treasury bond
investors ... aren't alarmed. In a sign of the
disconnect between Washington and Wall Street,
investors remain confident the two sides will
compromise rather than inflict what Obama called
'catastrophic' consequences."
January 3 -
Bloomberg (Richard Rubin): "Wind farms,
motorsports tracks, global banks and other
businesses won revived tax breaks in a $75.3
billion package included in a last-minute budget
deal passed by Congress and signed by President
Barack Obama ... The tax-break extensions, mostly
for companies, made it into the bill past
Republican demands for spending cuts and
Democratic resistance to business benefits. Both
parties have complained for years about some of
the special-interest provisions. The package of
tax extensions survived attempts to curb them to
reduce the US budget deficit that has exceeded $1
trillion for four years. Their beneficiaries and
lobbyists received a reprieve and a chance to
bargain for another extension this year."
Global bubble Watch January 4 -
Bloomberg (Julia Leite): "A gauge of US corporate
credit risk capped the biggest weekly drop in 13
months as employers added more workers in December
and the unemployment rate matched a four-year
low."
January 3 - Bloomberg (Sarika Gangar
and Matt Robinson): "The global rally in corporate
bonds is entering a record 14th month as a budget
agreement in the world's largest economy buoys the
confidence of credit investors. Bonds sold by
companies from the US to Europe and Asia have
returned 14.3% since the end of November 2011, the
last month in which the debt recorded a loss ... "
December 31 - Bloomberg (Andrew Reierson,
John Glover and Sarika Gangar): "Junk bonds around
the world outperformed investment-grade debt this
year by the biggest margin since 2010 as
record-low central bank rates pushed investors to
seek riskier, higher-yielding assets. Securities
from wireless carrier Sprint Nextel Corp. to
carmaker Fiat SpA returned 18.7%, compared with
10.9% for high-grade notes, Bank of America
Merrill Lynch index data show. That also beat the
4.4% investors made on government bonds and the
16% gain from stocks, based on the MSCI World
Index ... Sales of junk bonds worldwide soared 35%
to a record $425 billion this year as the global
default rate according to Moody's ... dropped to
2.7% from an average 4.8% since 1983."
January 2 - Bloomberg (Anchalee
Worrachate): "The world's leading economies will
have $220 billion less sovereign debt to refinance
in 2013, cutting supply after every major
government bond market rallied for the first time
since the 2008 financial crisis. The amount of
bills, notes and bonds coming due for the Group of
Seven nations plus Brazil, Russia, India and China
will drop to $7.38 trillion from $7.60 trillion in
2012 ... Japan, the U.K., Germany, France, Italy
and Brazil will see a decline, while the US,
Canada, Russia, India and China will face an
increase."
January 2 - Bloomberg (Matthew
G. Miller and Peter Newcomb): "The richest people
on the planet got even richer in 2012, adding $241
billion to their collective net worth, according
to the Bloomberg Billionaires Index ... The
aggregate net worth of the world's top moguls
stood at $1.9 trillion at the market close on Dec.
31, according to the index. Retail and
telecommunications fortunes surged about 20% on
average during the year. Of the 100 people who
appeared on the final ranking of 2012, only 16
registered a net loss for the 12-month period.
'Last year was a great one for the world's
billionaires,' said John Catsimatidis, the
billionaire owner of Red Apple Group ... 'In 2013,
they will continue looking for investments around
the world - and not necessarily in US - that will
give them an advantage.'"
December 31 -
Bloomberg (Michael Patterson): "Stocks in the
biggest developing markets are lagging behind
global equities for a record third year as faster
economic growth proves no lure for investors amid
concerns over government interference in markets.
The MSCI BRIC Index of shares in Brazil, Russia,
India and China rose 11% this year through Dec.
28, trailing the MSCI All-Country World Index by
1.6%age points ... 'This whole revolution of going
from a socialistic mentality to a market economy
mentality is not complete,' Mark Mobius, who
oversees about $40 billion as the executive
chairman of Templeton Emerging Markets Group ...
'We're still in the middle of that and have a long
way to go.'"
January 2 - Bloomberg (Tim
Catts): "Otis Elevator Co.'s quest to carry people
up skyscrapers twice as tall as the Empire State
Building hearkens back to a pivotal innovation by
its founder: ensuring that riders won't plummet
back to earth if something goes awry. The United
Technologies Corp. unit has to go beyond the
braking mechanism Elisha Otis demonstrated with a
rope and saber at the 1854 World's Fair. It's
working on systems able to stop 16 metric tons
(35,274 pounds) of elevator and cable falling from
the top of a kilometer-tall tower ... With
high-rises in China and Saudi Arabia poised to
surpass Dubai's record 2,717-foot (828-meter) Burj
Khalifa, the race to outfit the next generation of
super-tall buildings is spurring engineering leaps
at Otis, Kone Oyj and their elevator-making
competitors in a market valued at $66 billion in
2010."
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