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4 CREDIT BUBBLE
BULLETIN Late-90s
redux Commentary and weekly
watch by Doug Noland
Record incomes have
supported record corporate profits and, basically,
record stock and bond prices. And record stock and
bond prices have supported record corporate debt
issuance. Meanwhile, record incomes, spending,
securities prices, and bond issuance have
bolstered the perception that the US economy is
fundamentally sound and federal debt levels
supportable. In short, "government finance bubble"
credit creation has been "validating" tens of
trillions of outstanding US debt.
There is
another important facet to this "government
finance bubble" thesis beyond inflating government
expenditures and system income growth. Bubbles are
about the self-reinforcing
over-issuance of mis-priced
finance. Recall the notion of "crowding out"? If
the government borrowed too much, this would
supposedly reduce the availability (increase the
cost!) of credit for private-sector borrowers.
Well, in an era of unlimited finance "crowding
out" no longer applies.
Indeed, despite
the federal government's unprecedented borrowing
binge, 2011 federal total net interest was
actually down 3% from the 2007 level to $230
billion. And this doesn't even reflect the
remittance of interest income from the Federal
Reserve back to the Treasury ($90 billion last
year!). It is worth noting that debt service in
the past would make up a large amount of federal
deficit spending. In 1992, for example, total net
interest of $199 billion accounted for a majority
of the total deficit.
This is an age where
our central bank sets interest-rates at
artificially low levels, while monetizing
trillions of federal (and mortgage) debt. It is
worth noting that today relatively little flows
from the Treasury to the holders of federal debt.
In the past, these payments were a large part of
deficit spending and were essentially
"payment-in-kind" debt - with a muted overall
income/spending/economic impact.
Conversely, the current monetary policy
regime ensures that the vast majority of
government expenditures actually feed directly
through to incomes and spending throughout the
economy. The bond holder gets cheated with low
coupons, but makes it up with inflated bond prices
courtesy of Fed and global central bank purchases.
Savers, well, they just get cheated.
This
is essentially a scheme that monetizes system-wide
income inflation. Previous Credit Bubble Bulletins
have attempted to explain how the "government
finance bubble" has become much more systemic
while at the same time much less obvious. Above I
noted how enormous government-supported income
inflation has been instrumental in sustaining the
maladjusted US bubble economy. This, in turn, has
sustained huge ongoing US current account
deficits.
Unrelenting trade and "capital"
account deficits have ensured the ongoing
injection of dollar financial claims into inflated
global financial systems, markets and economies.
Unending dollar flows have, in particular,
bolstered "developing" credit systems, economies
and bubbles.
China and "developing"
central banks have, then, continued the recycling
of Trillions of surplus dollar balances directly
back into US Treasury and agency debt markets, in
the process helping to monetize US income growth,
inflate securities markets and sustain the US
bubble economy. All along the way, perilous global
imbalances know only one direction: bigger. And
the greater the imbalances, the lower global
central bankers peg rates and the more they resort
to unfathomable "quantitative easing"/"money
printing".
I'm OK if every analyst in the
world disagrees. It doesn't change the reality
that we've experienced another historic
transformation in US and global finance - and we
are these days witnessing the consequence:
history's greatest synchronized credit, market and
economic bubbles.
WEEKLY
WATCH The S&P500 gained 0.7% (up 6.1%
y-t-d), and the Dow increased 0.8% (up 6.9%). The
S&P 400 Mid-Caps added 0.5% (up 8.0%), and the
small cap Russell 2000 gained 0.7% (up 7.3%). The
Morgan Stanley Cyclicals slipped 0.3% (up 7.3%),
and the Transports dipped 0.2% (up 10.4%). The
Morgan Stanley Consumer index jumped 1.3% (up
7.7%), and the Utilities gained 0.8% (up 4.5%).
The Banks rose 1.1% (up 6.7%), and the
Broker/Dealers surged 2.8% (up 12.4%). The
Nasdaq100 was 1.0% higher (up 3.9%), while the
Morgan Stanley High Tech index was down 0.6% (up
6.2%). The Semiconductors gained 1.2% (up 9.5%).
The InteractiveWeek Internet index declined 1.0%
(up 9.1%). The Biotechs added 0.1% (up 8.7%). With
bullion up $9, the HUI gold index recovered 0.2%
(down 10.0%).
One-month Treasury bill
rates ended the week at 2 bps and 3-month rates
closed at 7 bps. Two-year government yields were
down a basis point to 0.26%. Five-year T-note
yields ended the week up 4 bps to 0.89%. Ten-year
yields rose 7 bps to 2.02%. Long bond yields
jumped 9 bps to 3.23%. Benchmark Fannie MBS yields
rose 11 bps to 2.60%. The spread between benchmark
MBS and 10-year Treasury yields widened 4 to 58
bps. The implied yield on December 2014 eurodollar
futures was unchanged at 0.65%. The two-year
dollar swap spread was unchanged at 16 bps, while
the 10-year swap spread increased 2 to 8.5 bps.
Corporate bond spreads widened a little. An index
of investment grade bond risk increased one to 86
bps. An index of junk bond risk gained 4 to 434
bps.
Debt issuance remained strong.
Investment grade issuers included Berkshire
Hathaway $3.6bn, General Mills $1.0bn, Key Bank
$1.0bn, FMR $700 million, Mohawk Industries $600
million, Carnival Cruise $500 million, Air
Products & Chemicals $400 million, Firstmerit
$250 million and Yale $130 million.
Junk
bond funds saw inflows slow to $92 million (from
Lipper). Junk issuers included Sibine Pass $1.5bn,
HD Supply $1.27bn, Lennar $800 million, First Data
$785 million, Atlas Pipeline $650 million, Air
Lease Corp $400 million, D.R. Horton $700 million,
H&E Equipment Services $630 million, Antero
Resources $525 million, Ashton Woods $300 million,
Talos Production $300 million, Unifrax $205
million, Premium Holdings $200 million, Beazer
Homes $200 million, Weekley Homes $200 million and
Union 16 Leasing $150 million.
I saw no
convertible debt issued.
Another long list
of international issuers included Gazprom $1.7bn,
MCE Finance $1.0bn, Akbank $1.0bn, Reliance
Industries $800 million, Emirates Airlines $750
million, Turkiye Halk Bankasi $750 million, Global
A&T Electronics $625 million, NXP $500
million, Hana Bank $500 million, ESAL GMBH $500
million, Ontario $500 million, Orion Engineered
$425 million Cementos Pacasmayo $300 million, NCL
$300 million, GCC $260 million and Nord Anglia
Education $150 million.
Spain's 10-year
yields this week increased 3 bps to 5.18% (down
2bps y-t-d). Italian 10-yr yields jumped 20 bps to
4.32% (down 16bps). German bund yields rose 4 bps
to 1.67% (up 36bps), and French yields increased 3
bps to 2.24% (up 27bps). The French to German
10-year bond spread narrowed one to 57 bps.
Ten-year Portuguese yields rose 7 bps to 6.06%
(down 70bps). The new Greek 10-year note yield
jumped 37 bps to 10.47%. U.K. 10-year gilt yields
gained 4 bps to 2.09% (up 28bps).
The
German DAX equities index slipped 0.3% for the
week (up 2.9% y-t-d). Spain's IBEX 35 equities
index sank 5.7% (up 0.8%). Italy's FTSE MIB fell
2.3% (up 6.4%). Japanese 10-year "JGB" yields rose
4 bps to 0.76% (down 2 bps). Japan's volatile
Nikkei jumped 2.4% (up 7.7%). Emerging markets
were mixed to higher. Brazil's Bovespa equities
index declined 1.3% (down 1.0%), while Mexico's
Bolsa added 0.4% (up 4.7%). South Korea's Kospi
index rallied 0.6% (down 2.0%). India's Sensex
equities index declined 1.6% (up 1.8%). China's
Shanghai Exchange surged 5.6% (up 6.6%).
Freddie Mac 30-year fixed mortgage rates
jumped 9 bps to a 19-wk high 3.53% (down 34bps
y-o-y). Fifteen-year fixed rates rose 10 bps to
2.81% (down 33bps). One-year ARM rates were up 2
bps to 2.59% (down 17bps). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed
rates up 12 bps to 4.15% (down 21bps).
Federal Reserve Credit jumped $13.4bn to a
record $2.989 trillion. Fed Credit has increased
$203bn in 17 weeks. Over the past year, Fed Credit
expanded $83.3bn, or 2.9%.
Global central
bank "international reserve assets" (excluding
gold) - as tallied by Bloomberg - were up $726bn
y-o-y, or 7.1%, to $10.938 trillion. Over two
years, reserves were $1.667 trillion higher, for
18% growth.
M2 (narrow) "money" supply
dropped $55.0bn to $10.404 TN. "Narrow money" has
expanded 6.7% ($655bn) over the past year. For the
week, Currency increased $2.5bn. Demand and
Checkable Deposits gained $12.5bn, while Savings
Deposits sank $58.9bn. Small Denominated Deposits
declined $1.8bn. Retail Money Funds fell $9.3bn.
Money market fund assets were little
changed at $2.695 TN. Money Fund assets have
expanded $38bn y-o-y, or 1.4%.
Total
Commercial Paper outstanding was little changed at
$1.125 TN CP was up a notable $161bn in 12 weeks
and $153bn, or 15.7%, over the past year.
Currency Watch January 30 -
Bloomberg (Neal Armstrong and David Goodman): "The
world's biggest currency traders are reporting a
jump in volumes in 2013 as a slide in the yen,
pound and Swiss franc increase anticipation of
future price swings to a five-month high. Barclays
Plc, the third-largest dealer based on Euromoney
Institutional Investor Plc data, said this month
that volumes for the yen versus the euro climbed
to a daily record and trading across all
currencies has risen to the most in a year."
The US dollar index declined 0.8% to 79.13
(down 0.8% y-t-d). For the week on the upside, the
Swedish krona increased 2.4%, the Brazilian real
2.1%, the Swiss franc 2.0%, the Danish krone 1.3%,
the euro 1.3%, the Norwegian krone 1.2%, the South
African rand 1.2%, the Canadian dollar 0.9%, the
New Zealand dollar 0.9% and the Mexican peso 0.8%.
For the week on the downside, the South Korean won
declined 2.1%, the Japanese yen 2.0%, the
Taiwanese dollar 1.5%, the British pound 0.7%, the
Singapore dollar 0.5% and the Australian dollar
0.2%.
Commodities Watch The CRB
index gained 1.9% this week (up 3.4% y-t-d). The
Goldman Sachs Commodities Index jumped 2.5% (up
5.0%). Spot Gold recovered 0.5% to $1,667 (down
0.5%). Silver rallied 2.4% to $31.96 (up 5.7%).
March Crude gained another $1.89 to $97.77 (up
6.5%). March Gasoline surged 5.7% (up 11%), while
February Natural Gas sank 4.7% (down 2%). March
Copper jumped 3.6% (up 3.6%). March Wheat declined
1.5% (down 1.7%), while March Corn gained 2.1% (up
5.4%).
US Bubble Economy
Watch January 31 - Bloomberg (Michael B.
Marois): "California is on track to collect $5
billion more in tax revenue this month than
estimated in Governor Jerry Brown's budget, and
the state's fiscal analyst's office said it can't
say why, yet."
January 29 - Bloomberg
(Shobhana Chandra): "Home prices in 20 US cities
rose in November from a year earlier by the most
in more than six years, indicating the US housing
rebound is gaining ground. The
S&P/Case-Shiller index of property values
increased 5.5% from November 2011, the biggest
year-over-year gain since August 2006... "
January 29 - FICO : "Research by FICO Labs
into the growing student lending crisis in the US
has found that, as a group, individuals taking out
student loans today pose a significantly greater
risk of default than those who took out student
loans just a few years ago. The situation is
compounded by significant growth in the amount of
debt that new graduates are carrying. The
delinquency rate today on student loans that were
originated from 2005-2007 is 12.4%. The comparable
figure for student loans that were originated from
2010-2012 is 15.1%, representing an increase in
the delinquency rate by nearly 22%. While the
delinquency rate is climbing, the average amount
of student loan debt is increasing even faster. In
2005, the average US student loan debt was
$17,233. By 2012, it had ballooned to more than
$27,253 - an increase of 58% in seven years."
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