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4 CREDIT BUBBLE
crazy? Commentary and weekly
watch by Doug Noland
I contend that this
re-leveraging/bubble cycle poses extreme system
risk. Fundamentally, fiscal and monetary excess
are instrumental to the current credit inflation
(the boom cycle). This ensures that excesses are
more systemic, while creating the potential for
the scope of excesses to surpass those of previous
bubble periods. From my analytical perspective,
this greatly increases the likelihood of a very
problematic future bust and attendant crisis of
If this future crisis is
accompanied - as I would expect - with a crisis of
confidence in government debt and the efficacy of
monetary stimulus measures,
the world would immediately face a grave
situation. But I get ahead of myself.
Question to the Fed chairman at the
University of Michigan: "... You came to your
position with a real expertise as one of the
world's experts on the Great Depression and how
policymakers should react in the midst of a
crisis. Now that you have actually lived through a
major global crisis, I wonder if you could tell us
what surprised you most?"
Bernanke: "The crisis. I was very engaged, very
interested in financial crises as an academic. I
worked on the Great Depression. I did theoretical
work on the role of financial crises in
macroeconomy, and I was very interested when I
came to the Fed in addressing issues related to
potential crises. But obviously this was a very
large and complex crisis that was more severe than
I anticipated certainly... I think it would be
fair to say that most people anticipated.
"But we did learn some things from
history. And I think there's a lot of value to
studying history, particularly from our
perspective on economic history, because it helps
you see what your predecessors did wrong and did
"Two things we learned from the
Great Depression. One was not to let monetary
policy get too tight. In the 30s, the Federal
Reserve did not actively try to expand monetary
policy accommodation. And as a result, there was a
deflation of about 10% a year. Deflation, falling
prices. Very damaging. The Fed also did not do
very much in the '30s to try to stabilize the
banking system, which about a third of all the
banks in the country failed. So those were two
lessons that we really tried to learn from.
"We of course have been discussing very
aggressive [action] on the monetary policy side,
and we took strong actions to try to stabilize our
financial system because we understood that if the
financial system collapses then the economy is
likely to collapse as well. So we took those
actions learning from what had happened in the
"A couple of other things I think
that were useful. During the '30s, in part because
obviously the world was still recovering from
World War I, there was a lot of international
enmity. Cooperation among central banks, among
governments was not very good. In fact, you may
know - your audience may know - about the
Smoot-Hawley tariff and the tariff wars and all
the other things that happened during the 30s."
Noland comment: The current US and global
backdrop is regrettably more late-1920s than
1930's. Repeatedly, policymakers' ill-advised
aggressive "post-Bubble" ("Keynesian") policy
measures have unwittingly worked to perpetuate
history's greatest credit bubble and financial
mania. With the eventual bursting of today's
global bubble, there will surely be ample
coordination will not be so abundant. In general,
policy solutions and flexibility will be in
depressingly short supply. Policy doctrine -
actually, economic analysis in general - will be
discredited. And today's unfolding battle in
support of free-market capitalism will seem like a
trivial little skirmish. But, once again, I get
somewhat ahead of developments.
WATCH The S&P500 rose 1.0% (up 4.2%
y-t-d), and the Dow gained 1.2% (up 4.2%). The
S&P 400 Mid-Caps increased 1.5% (up 5.2%), and
the small cap Russell 2000 gained 1.4% (up 5.1%).
The Morgan Stanley Cyclicals jumped 1.9% (up
6.1%), and the Transports gained 2.2% (up 7.3%).
The Morgan Stanley Consumer index rose 2.1% (up
4.9%), and the Utilities added 0.7% (up 1.9%). The
Banks were up 0.6% (up 4.3%), and the
Broker/Dealers were 2.2% higher (up 6.4%). The
Nasdaq100 was down 0.2% (up 3.1%), while the
Morgan Stanley High Tech index rose 0.9% (up
5.0%). The Semiconductors surged 1.9% (up 6.9%).
The InteractiveWeek Internet index gained 0.8% (up
4.9%). The Biotechs rose 1.5% (up 7.5%). Although
bullion rallied $22, the HUI gold index fell 0.7%
One-month Treasury bill rates
ended the week at 3 bps and 3-month rates closed
at 7 bps. Two-year government yields were
unchanged at 0.25%. Five-year T-note yields ended
the week down 2 bps to 0.76%. Ten-year yields fell
3 bps to 1.84%. Long bond yields declined 2 bps to
3.03%. Benchmark Fannie MBS yields increased 5 bps
to 2.35%. The spread between benchmark MBS and
10-year Treasury yields widened 7 to 51 bps. The
implied yield on December 2014 eurodollar futures
was little changed at 0.585%. The two-year dollar
swap spread increased a basis point to 14.5 bps,
and the 10-year swap spread increased 2 to 5 bps.
Corporate bond spreads were mixed. An index of
investment grade bond risk was unchanged at 87
bps. An index of junk bond risk declined 5 to 439
Debt issuance was quite strong.
Investment grade issuers included Goldman Sachs
$7.25bn, JPMorgan Chase $6.4bn, Freddie Mac
$5.5bn, Conagra $4.0bn, Anheuser-Busch $4.0bn,
Zoetis $2.3bn, Energy Transfer Partners $1.25bn,
Penske Truck Leasing $1.0bn, Jefferies Group
$1.0bn, John Deere $500 million, Carlyle Holdings
$500 million, Pacific Lifecorp $500 million, and
Toyota Motor Credit $300 million.
bond funds saw inflows of $571 million. Junk
issuers included Hexion $1.1bn, TPC Group $755
million, US Coat $750 million, Eagle Spinco $690
million, Gencorp $460 million, Georgia Gulf $450
million, Atlas Energy $275 million, Clearwater
Paper $275 million, Brocade Communications $300
million, Regal Entertainment $250 million, Zachry
Holdings $250 million, Wells Enterprises $235
million, Interface Security Systems $230 million,
Gibraltar Steel $210 million, Oxford Finance $200
million, and Suncoke Energy $150 million.
Convertible debt issuers included Pacira
Pharmaceuticals $110 million.
International issuers included National
Australia Bank $2.25bn, InterAmerican Development
Bank $2.0bn, Bank Nederlandse Gemeenten $1.5bn,
ABN Amro Bank $1.0bn, Ardagh $1.07bn, Korea
Development Bank $1.0bn, African Development Bank
$1.0bn, Thai Oil $1.0bn, Minerva $850 million,
Canada Imperial Bank $750 million, Marfrig Holding
$600 million, Paraguay $500 million, Indio Energy
$500 million, Yapi ve Kredi Bankasi $500 million,
Aviation Capital Group $300 million, Tonon
Bioenergia $300 million, and Royal Bank of Canada
Spain's 10-year yields
jumped 19 bps this week to 5.04% (down 15bps
y-t-d). Italian 10-yr yields rose 4 bps to 4.16%
(down 33bps). German bund yields declined 3 bps to
1.55% (up 25bps), and French yields dipped 2 bps
to 2.12% (up 14bps). The French to German 10-year
bond spread widened one to 57 bps. Ten-year
Portuguese yields sank 25 bps to 6.00% (down
76bps). The new Greek 10-year note yield dropped
80 bps to 10.71%. U.K. 10-year gilt yields fell 7
bps to 2.01% (up 19bps).
The German DAX
equities index slipped 0.2% for the week (up 1.2%
y-t-d). Spain's IBEX 35 equities index declined
0.7% (up 5.3%). Italy's FTSE MIB added 0.3% (up
7.9%). Japanese 10-year "JGB" yields dropped 6 bps
to 0.74% (down 4bps). Japan's volatile Nikkei
added 1.0% (up 5.0%). Emerging markets were mostly
higher. Brazil's Bovespa equities index rose 0.8%
(up 1.7%), and Mexico's Bolsa gained 0.7% (up
3.5%). South Korea's Kospi index slipped 0.4%
(down 0.5%). India's Sensex equities index
advanced 1.9% (up 3.2%). China's Shanghai Exchange
jumped 3.3% (up 2.1%).
Freddie Mac 30-year
fixed mortgage rates declined 2 bps to 3.38% (down
50bps y-o-y). Fifteen-year fixed rates were
unchanged at 2.66% (down 48bps). One-year ARM
rates were down 3 bps to 2.57% (down 17bps).
Bankrate's survey of jumbo mortgage borrowing
costs had 30-yr fixed rates unchanged at 4.02%
Federal Reserve Credit
expanded $24.1bn to a record $2.930 TN. Fed Credit
has increased $119bn in 10 weeks. Over the past
year, Fed Credit expanded $25.9bn, or 0.9%.
Global central bank "international reserve
assets" (excluding gold) - as tallied by Bloomberg
- were up $748bn y-o-y, or 7.3%, to a record
$10.933 TN. Over two years, reserves were $1.688
TN higher, for 18% growth.
"money" supply rose $8.8bn to a record $10.485 TN.
"Narrow money" has expanded 7.4% ($727bn) over the
past year. For the week, Currency increased
$2.5bn. Demand and Checkable Deposits fell
$19.7bn, while Savings Deposits gained $16.4bn.
Small Denominated Deposits slipped $1.4bn. Retail
Money Funds jumped $10.6bn.
fund assets declined $15.2bn to $2.701 TN. Money
Fund assets have expanded $7.6bn y-o-y, or 0.3%.
Total Commercial Paper outstanding jumped
another $27.8bn to $1.133 TN CP was up a notable
$169bn in 10 weeks and $165bn, or 17.0%, over the
Watch January 16 - Dow Jones (Andrey
Ostroukh): "The budgetary policies of the world's
central banks are leading to major global
imbalances and could lead to currency wars,
Russia's central bank's first deputy Chairman
Alexei Ulyukayev said… 'We are on the verge of
very serious and confrontational actions in the
sphere, which is, not to get too emotional, called
'currency wars',' Mr. Ulyukayev said… Mr.
Ulyukayev cited the recently elected Japanese
government's stepped up efforts to stimulate
Japan's deflation-dogged economy and talk down the
yen, which has sent the currency tumbling.
Quantitative easing by leading central banks
including the US Federal Reserve is also
pressuring other major currencies like the dollar.
'This is not a way to unity of global
macroeconomic regulations, but to separation,
segregation, to a break-up into separate zones of
influence - all the way to very strong
competition, all the way to global trade and
currency wars, which is indeed counterproductive,'
The US dollar index gained 0.6%
to 80.04 (up 0.3% y-t-d). For the week on the
upside, the New Zealand dollar increased 0.1%. For
the week on the downside, the Swiss franc declined
2.2%, the South African rand 1.8%, the British
pound 1.6%, the Norwegian krone 1.3%, the Japanese
yen 1.0%, the Swedish krona 0.8%, the Canadian
dollar 0.7%, the Brazilian real 0.4%, the
Australian dollar 0.2%, the South Korean won 0.2%,
the Singapore dollar 0.2%, the Danish krone 0.2%,
the euro 0.2%, and the Mexican peso 0.1%.
Commodities Watch The CRB index
gained 1.5% this week (up 2.1% y-t-d). The Goldman
Sachs Commodities Index jumped 1.7% (up 2.2%).
Spot Gold recovered 1.3% to $1,684 (up 0.5%).
Silver jumped 1.5% to $31.93 (up 5.0%). February
Crude rose $2.00 to $95.56 (up 4.1%). February
Gasoline gained 2.1% (up 1.3%), and February
Natural Gas surged 7.2% (up 6.4%). March Copper
increased 0.7% (up 0.7%). March Wheat jumped 4.8%
(up 1.7%), and March Corn gained 2.6% (up 4.2%).
Fiscal Watch January 18 -
Washington Post (S. Helderman): "Under a bill to
be considered next week, House Republicans will
propose raising the debt ceiling for three months
- long enough, they say, to give both chambers
time to pass a budget. The measure will provide
that if either the Senate or the House fails to
adopt a budget by April 15, members of Congress
would not be paid."
Watch January 18 - Bloomberg (Leika Kihara
and Tetsushi Kajimoto): "Japan's government and
central bank have agreed to set 2% inflation as a
new target next week, when the Bank of Japan will
also consider making an open-ended commitment to
buy assets until the target is in sight, sources
familiar with the BOJ's thinking told Reuters."