Page 2 of
5 CREDIT BUBBLE
BULLETIN More
than one step
backwards Commentary and market
watch by Doug Noland
collapsing, and this
implosion was about to invalidate our system’s
underlying debt structure as well as the structure
of the underlying bubble economy.
But the
Federal Reserve and Washington policymakers
stepped in with radical measures. These included
the Federal Reserve’s guarantee of ample liquidity
for Wall Street firms and virtually limitless
"marketplace liquidity" throughout, as well as
explicit and implicit federal backing for much of
our mortgage credit system. It may not have
appeared momentous to most, but it basically
placed Federal Reserve and federal government
backing on trillions of securities and market
liquidity risk more generally. In Minsky
terminology, these measures at least temporarily
"validated" the existing
structure of financial arbitrage capitalism.
Success? No chance Will
policymaking succeed over the intermediate and
long term? Not a chance. Policymakers do today
retain capacity to convince the marketplace of
their power to inflate the value of debt
securities and asset prices more generally. But
reflationary polices and other assurances will not
rescue the system, specifically because there is
today nothing to stem the ongoing distortions to
the underlying real economy.
Validating
the current structure of financial arbitrage
capitalism simply perpetuates the same
dysfunctional incentives that got us into this
mess. It may in the short-term spur the necessary
credit growth to buoy household incomes, corporate
cash-flows and profits, government revenues, and
securities and asset prices - but it will add
relatively little in the way of real economic
wealth creating capacity. And, in the end, it’s
only real economy fundamentals that will determine
the soundness and sustainability of a system’s
credit and financial structure.
Acute
fragility Additional non-productive debt
growth will definitely not alleviate the acute
fragility associated with Ponzi finance credit
system dynamics. Additional non-productive debt
growth will also not stabilize dollar devaluation,
nor will it help in stabilizing myriad problems at
home and abroad associated with our monstrous
current account deficits. Instead, any extension
of this period of financial arbitrage capitalism
will ensure the prolonging of borrowing and
consuming excess, the gross misallocation of
resources, massive trade deficits, a ballooning
international pool of unwieldy speculative
finance, and even wilder global monetary disorder.
Indeed, Washington’s validation of the
current dysfunctional credit system structure
could very well lay the groundwork for extreme
global price distortions, volatility, and
social/political unrest. On the current course of
things, it’s difficult for me to not think in
terms of NASDAQ 1999 or subprime 2006. Throw
additional liquidity on overheated credit,
inflationary, and speculative "biases" and be
prepared for the spectacular.
When
financial arbitrage capitalism’s excesses were
spurring acute US securities market inflation, the
system enjoyed a period of perceived rising wealth
to go with a boom in Wall Street securities
issuance (to help offset inflated demand). When
this structure’s excesses were directed at the
mortgage finance bubble, the upshots were
inflating home prices along with attendant
construction and consumption booms. Now, however,
with acute inflationary effects prevailing
throughout global markets for food, energy, and
commodities, one should be prepared for the likes
of problematic supply bottlenecks and shocks,
hoarding, trade frictions and interruptions, and
generally heightened geopolitical instability.
I
argued back in 2002 that the overriding systemic
issue was not "deflation" but rather myriad risks
associated with an unfolding US credit bubble.
Now, some years later, these risks have expanded
alarmingly, as runaway credit bubbles have
ballooned both at home and abroad.
WEEKLY WATCH For the week, the Dow
gained 1.3% (down 1.6%) and the S&P500 1.1%
(down 3.7%). The Transports jumped 3.7% (up
16.1%), and the Morgan Stanley Cyclicals rose 0.9%
(down 0.9%). The Utilities gained 1.7% (down
3.9%), and the Morgan Stanley Consumer index added
0.3% (down 5.0%). The small cap Russell 2000 added
0.3% (down 5.3%) and the S&P400 Mid-Caps 0.8%
(down 0.9%). The NASDAQ100 jumped 3.3% (down 4.9%)
and the Morgan Stanley High Tech index 2.4% (down
4.9%). The Street.com Internet Index rose 3.6%
(down 2.7%); the NASDAQ Telecommunications index
jumped 4.5% (down 0.2%); and the Semiconductors
gained 2.2% (down 2.0%). The Biotechs added 0.8%
(down 3.7%). The financial stock surge continued,
with the Broker/Dealers jumping 4.3% (down 12.0%)
and the Banks rising 2.6% (down 2.6%). With
Bullion sinking $29.85, the HUI gold index
declined 2.7% (down 2.4%).
One-month
Treasury bill rates jumped 39 bps this past week
to 1.21%, and 3-month yields gained 6 bps to
1.50%. Two-year government yields added 4 bps
2.46%. Five-year T-note yields were little changed
at 3.18%, while ten-year yields dipped one basis
point to 3.86%. Long-bond yields declined one
basis point to 4.58%. The 2yr/10yr spread ended
the week at 140 bps. The implied yield on 3-month
December ’08 Eurodollars declined 16 bps to 2.98%.
Benchmark Fannie MBS yields fell 13 bps to 5.42%.
The spread between benchmark MBS and 10-year
Treasuries narrowed 10 to 156 bps (low since early
February). The spread on Fannie’s 5% 2017 note
narrowed one to 55 bps, while the spread on
Freddie’s 5% 2017 note was little changed at 55
bps. The 10-year dollar swap spread declined 3.25
to 61.0. Corporate bond spreads were narrower. An
index of investment grade bond spreads sank 11 to
a four-month low 88 bps. An index of junk bond
spreads widened 2 to 637 bps.
Investment
grade issuance included Bank America $6.0bn,
Credit Suisse NY $4.0bn, Lehman Brothers $2.0bn,
Bristol-Myers Squiibb $1.6bn, Chubb $1.2bn, New
York Life $1.0bn, Dow Chemical $800 million, KLA
Instruments $750 million, Prologis $600 million,
and Centerpoint Energy $300 million.
Junk
issuers included Ford Motor Credit $1.1bn,
Markwest Energy $500 million, Range Resources $250
million, and Axcan Intermediate $235 million.
I saw no convert issuance this week.
International dollar bond issuance
included Oester Kontrollbank $1.0bn, and Pearson
PLC $900 million.
April 30 - Bloomberg
(Lester Pimentel): "Argentine bonds show growing
speculation that the country will default for the
second time this decade as inflation and
anti-government protests swell. The nation’s $10.8
billion of floating-rate dollar bonds due in 2012
yielded 7.60 percentage points more than
Treasuries …"
German 10-year bund yields
added 2 bps to 4.20%, as the DAX equities index
rallied 3.3% (down 12.7% y-t-d). Japanese 10-year
"JGB" yields rose another 4 bps to 1.64%. The
Nikkei 225 surged 3.8% (down 8.2% y-t-d and 19.2%
y-o-y). Emerging debt markets were mostly quite
firm, while equities were generally higher. On the
back of the country's new investment-grade rating,
Brazil’s benchmark dollar bond yields sank 25 bps
to 6.0%. Brazil’s Bovespa equities index surged
7.4% (up 8.6% y-t-d). The Mexican Bolsa fell 3.8%
(up 3.4% y-t-d). Mexico’s 10-year $ yields
declined 8 bps to 4.85%. Russia’s RTS equities
index fell 1.7% (down 7.3% y-t-d). India’s Sensex
equities index rose 5.3%, reducing y-t-d losses to
13.2%. China’s Shanghai Exchange rallied 12.7%,
cutting 2008 losses to 29.8%.
Freddie Mac
30-year fixed mortgage rates rose 3 bps to 6.06%
(down 10bps y-o-y). Fifteen-year fixed rates
dipped 3 bps to 5.59% (down 28bps y-o-y). One-year
adjustable rates were unchanged at 5.29% (down
13bps y-o-y).
Bank Credit slipped $1.0bn
to $9.411 TN (week of 4/23). Bank Credit has
expanded $198bn y-t-d, or 6.6% annualized. Bank
Credit posted a 40-week surge of $767bn (11.5%
annualized) and a 52-week rise of $945bn, or
11.2%. For the week, Securities Credit increased
$1.9bn. Loans & Leases declined $2.8bn to
$6.878 TN (40-wk gain of $554bn). C&I loans
fell $5.8bn, with one-year growth of 21.8%. Real
Estate loans dropped $7.4bn (up 3.9% y-t-d).
Consumer loans dipped $0.7bn, while Securities
loans rose $10.8bn. Other loans were little
changed. Examining the liability side, Deposits
jumped $54.4bn, while "Net Due to Foreign" fell
$27bn.
M2 (narrow) "money" supply jumped
$27.9bn to $7.693 TN (week of 4/21). Narrow
"money" has expanded $231bn y-t-d, or 10.0%
annualized, with a y-o-y rise of $469bn, or 6.5%.
For the week, Currency was unchanged, while Demand
& Checkable Deposits surged $29.3bn. Savings
Deposits gained $15.1bn, while Small Denominated
Deposits declined $1.1bn. Retail Money Funds fell
$5.4bn.
Total Money Market Fund assets
(from Invest Co Inst) sank $65.4bn last week to
$3.418 TN, while posting a y-t-d gain of $305bn,
or 30% annualized. Money Fund assets have posted a
40-week rise of $834bn (42% annualized) and a
one-year increase of $971 TN (40%).
Asset-Backed Securities (ABS) issuance
increased to $6.6bn. Year-to-date total US ABS
issuance of $68bn (tallied by JPMorgan's
Christopher Flanagan) is running 25% of the
comparable level from 2007. Home Equity ABS
issuance of $303 million compares with 2007's
$146bn. Year-to-date CDO issuance of $12bn
compares to the year ago $151bn.
Total
Commercial Paper dropped $21.3bn to $1.764 TN -
the low since May 2006. CP has declined $460bn
over the past 38 weeks. Asset-backed CP fell
$17.7bn (38-wk drop of $446bn) to $749bn. Over the
past year, total CP has contracted $285bn, or
13.9%, with ABCP down $349bn, or 31.7%.
Fed Foreign Holdings of Treasury, Agency
Debt last week (ended 4/30) increased $10.5bn to a
record $2.263 TN. "Custody holdings" were up
$207bn y-t-d, or 29% annualized, and $337bn
year-over-year (17.5%). Federal Reserve Credit
declined $4.0bn to $864bn. Fed Credit has
contracted $9.1bn y-t-d and $2.5bn y-o-y (0.3%).
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