The Treasury market took it on the chin. Two-year Treasury yields rose for an eighth straight week, adding 16 basis points to 3.71%. Five-year Treasury yields surged 24 basis points this week to 4.20%, the first break above 4% since last June. Five-year yields are up 60 basis points so far this year to their highest level since June 2002. Ten-year Treasury yields rose 22 basis points this week to 4.54%. Long-bond yields jumped 16 basis points to 4.81%. The spread between 2 and 30-year government yields widened one basis point to 110. Benchmark Fannie Mae MBS yields increased a notable 23 basis points. The spread (to 10-year Treasuries) on Fannie’s 4 5/8% 2014 note narrowed 4 basis points to 30, while the spread on Freddie’s 5% 2014 note narrowed 1 basis point to 27. The 10-year dollar swap spread gained 1.75 to 42.5, the high since November. Corporate bonds generally outperformed Treasuries and MBS, with junk doing the best. The implied yield on 3-month December Eurodollars jumped 15 basis points to 4.135%.
Corporate issuance slowed to about $9 billion. Investment grade issuers included Nexen $1.04 billion, Citigroup $750 million, Kinder Morgan $750 million, Corrections Corp $375 million, Monument Global $700 million, Con Edison of NY $350 million, Caterpillar Finance $250 million, Alabama Power $250 million, Gables Realty $150 million, and Realty Income $100 million.
Junk bond funds saw outflows increase to $141 million. Junk issuers included Noble Group $700 million, Titan Petroleum $400 million, Levi Strauss $380 million, Nash Finch $322 million, Revlon $310 million, Telcordia $300 million, AEP Industries $175 million, Delta Petroleum $150 million, Fraser Papers $150 million, and Activant Solutions $120 million.
Convert issuers included Jetblue $250 million, Encysive Pharmaceutical $115 million, and Playboy Enterprises $100 million.
Foreign dollar debt issuers included Export-Import Bank of Korea $1.0 billion, and Chinatrust Bank $500 million.
Japanese 10-year JGB yields dipped one basis point to 1.48%. Emerging market debt, that had been holding up well, was slammed at the end of the week. Brazilian benchmark dollar bond yields surged 52 basis points this week to 8.25%. Mexican govt. yields ended the week up 29 basis points to 5.42%. Russian 10-year dollar Eurobond yields rose 8 basis points to 6.01%.
Freddie Mac posted 30-year fixed mortgage rates increased 6 basis points to 5.85% (up 28 bps in 4 weeks) to the highest level since August. Fifteen-year fixed mortgage rates rose 5 basis points to 5.38%. One-year adjustable rates jumped 10 basis points to 4.24%. The Mortgage Bankers Association Purchase Applications Index gained 2.7% the past week to the highest level in 10 weeks. Refi applications declined 4.6%. The average new Purchase mortgage rose slightly to $235,700. The average ARM declined to $322,500. The percentage of ARMs was little changed at 30.5% of total applications.
Broad money supply (M3) rose $16 billion to a record $9.527 Trillion (week of February 28). Year-to-date, M3 has expanded at a 3.8% rate, with M3-less Money Funds growing at an 8% pace (up 9.6% over 52 weeks). For the week, Currency added $2.3 billion. Demand & Checkable Deposits increased $2.4 billion, while Savings Deposits declined $4.4 billion. Small Denominated Deposits gained $2.7 billion, while Retail Money Fund deposits were up $0.2 billion. Institutional Money Fund deposits declined $2.0 billion. Large Denominated Deposits jumped $14.1 billion. Repurchase Agreements dipped $1.5 billion, while Eurodollar deposits rose $4.5 billion.
Bank Credit has expanded $230 billion during the first 9 weeks of the year (19.7% annualized). Bank Credit gained $5.0 billion for the week of March 2 to a record $6.975 Trillion. Securities Holdings added $3.1 billion, with gains of $44.6 billion over the past five weeks. Loans & Leases gained $2.0 billion. Commercial & Industrial (C&I) loans dipped $0.3 billion. Real Estate loans surged $18.4 billion, with a two-week gain of $45.6 billion. Real Estate loans have expanded at a 17.4% rate during the first nine weeks of 2005. Real Estate loans are up $349 billion, or 15.4%, over the past 52 weeks. For the week, consumer loans were about unchanged, and Securities loans declined $9.0 billion. Other loans declined $7.4 billion.
Total Commercial Paper jumped $10.3 billion last week to $1.444 Trillion, the highest level since January 2002. Total CP has expanded at an 11.4% rate y-t-d, and increased 8.6% over the past 52 weeks. Financial CP surged $13.4 billion last week to $1.304 Trillion. Non-financial CP declined $3.1 billion to $140.9 billion.
Fed Foreign Holdings of Treasury, Agency Debt rose $1.7 billion to $1.304 Trillion for the week ended March 9. “Custody” holdings are up $44.5 billion, or 17% annualized, year-to-date (up $220bn, or 19%, over 52 weeks). Federal Reserve Credit dropped $6.2 billion for the week to $777.6 billion (up $48bn, or 6.6%, over 52 weeks).
ABS issuance jumped to $13 billion (from JPMorgan). Year-to-date issuance of $119 billion is running 5% ahead of comparable 2004. At $75 billion, y-t-d home equity ABS issuance is 21% above the comparable year ago level.
Currency Watch:
In an especially unimpressive performance, the dollar index dropped 1.3% this week despite the jump in market yields. For the week, the Iceland krona gained 3%, with the Swiss franc, Norwegian krone, Canadian dollar, and euro up about 2%. On the downside, the Brazil real declined 1.3%, the Turkish lira 1.2%, and the Mexican peso 0.4%.
Commodities Watch:
March 11 – Bloomberg (Wing-Gar Cheng): “China’s oil demand this year may rise 7.9 percent to 6.88 million barrels a day as economic growth boosts demand, the International Energy Agency said, raising its prediction by 100,000 barrels a day from a month ago.”
March 11 – Bloomberg (Alejandro Barbajosa): “The International Energy Agency raised its forecast for world oil demand for a third consecutive month as cold weather and faster economic growth in the U.S. and China strains the ability of producers to keep up. The IEA…forecast oil consumption will be 84.3 million barrels a day this year, 330,000 a day more than last expected. Use will rise by 1.81 million barrels a day, or 2.2 percent…”
April Crude Oil rose 65 cents this week to $54.43. Coffee jumped to a five-year high. The Goldman Sachs Commodities index increased 2.3%, increasing year-to-date gains to 20.4%. Commodities price gains were broad-based, with the CRB index surging 4.1%. The CRB is up 12.2% already this year.
China Watch:
March 7 – Bloomberg (John Brinsley and Yumi Kuramitsu): “Chinese yuan trading surged in the past three years and the currency may rival the yen as the most important Asian influence on the region’s exchange rates, according to the Bank for International Settlements. Daily average trading in the yuan, including forward contracts, rose to $1.8 billion in 2004, up 530 percent from 2001…”
March 10 – Bloomberg (Rob Delaney): “China’s export growth gathered pace in the first two months… Exports rose 37 percent from a year earlier to $95.3 billion after climbing 33 percent in December, the Beijing-based customs bureau said… Imports increased 8.3 percent to $84.2 billion and the trade surplus reached $11.1 billion.”
March 9 – Bloomberg (Le-Min Lim and Samuel Shen): “China may offer tax breaks and use money from its foreign reserves to help state-owned banks write down bad loans and prepare for initial public offerings, Finance Minister Jin Renqing said. ‘China’s economy and fiscal income have grown to such a scale that we are capable or supporting the reform of state banks,’ Jin said… ‘But we want to ensure the money we spend buys good results.’”
Asia Inflationary Boom Watch:
March 9 – Bloomberg (Sangim Han): “South Korean banks posted their biggest monthly increase in deposits in a year in February because the government boosted spending and foreigners increased investment in Asia's third-largest economy, the central bank said.”
March 8 – Bloomberg (Sangim Han): “South Korean household debt had its biggest gain in two years in the fourth quarter, suggesting cuts in taxes and interest rates are spurring spending in Asia’s third-largest economy.”
March 10 – Bloomberg (Cherian Thomas and Kartik Goyal): “India expects exports to grow 22 percent in the year to March 31, 2006, overcoming a gain in the rupee against the U.S. dollar, Commerce and Industry Minister Kamal Nath said today.”
March 9 – Bloomberg (Kartik Goyal): “India’s direct tax revenue from company and personal income tax rose 27 percent between April 1 and Feb. 15 from a year earlier, boosted by industrial production, Junior Finance Minister S.S. Palanimanickam said.”
March 10 – Bloomberg (Yumi Kuramitsu): “The Philippine peso rose to its highest point since July 2003 as a government report showed export growth picked up in January. Central bank Governor Rafael Buenaventura said the peso has also benefited from overseas demand for the nation’s stocks amid optimism the government will follow through efforts to curb its budget deficit. Exports in January rose 15.4 percent from a year earlier to $3.3 billion...”
Global Reflation Watch:
March 8 – Bloomberg (Lily Nonomiya): “The number of full-time workers in Japan rose in January for the first time since 1997 and wages also increased, adding to evidence of a recovery from recession. The full-time labor workforce rose 0.8 percent in January from the same month a year ago to 32.1 million workers… Wages rose 0.4 percent to 284,934 yen ($2,700) in January from the same month a year earlier, the second gain in three months”
March 10 – Bloomberg (Kathleen Chu): “Tokyo office vacancies fell in February for a seventh straight month of decline on growing demand for office space by small- and medium-sized companies, according to Miki Shoji Co., a privately held office brokerage company. The vacancy rate for office space declined to 5.8 percent…”
March 9 – CNW: “Pre-approved home financing remains one of the best tools for homebuyers entering the still highly competitive housing market. Today’s announcement by the Canadian Mortgage and Housing Corporation that housing starts will continue to remain strong this year is a reminder that buyers who may face bidding wars for properties in highly sought-after neighbourhoods need to be able to react quickly if they want to secure their dream home.”
March 10 – Market News: “Highly excessive levels of liquidity and strong private sector credit growth could potentially fuel strong rises in asset prices in the medium term, the European Central Bank warned… ‘The low level of interest rates also contributed to a further strengthening of credit growth,’ it said. ‘Overall, there remains significantly more liquidity in the euro area than is needed to finance non-inflationary growth. This could pose risks to price stability over the medium term.’ The ECB also noted that the annual growth rate of a measure of M3 corrected for the estimated impact of portfolio shifts continued to exceed the official M3 annual growth rate.”
March 9 – Bloomberg (Brian Swint): “German industrial production rose the most in almost a decade in January after factory orders surged the previous month, a sign the country's economy may return to growth this quarter. Production at factories, construction sites, utilities and mines in Europe’s largest economy increased 3.1 percent from December, when it rose 0.9 percent…”
March 10 – Bloomberg (Brian Swint): “Exports from Germany, Europe’s largest economy, rose the most in more than two years in January, boosted by global expansion and the euro’s decline from a record. Exports, adjusted for work days and seasonal changes, gained 6.1 percent from December…”
March 9 – Bloomberg (Andrea Friedli): “The Swiss construction industry…said fourth quarter orders rose as demand for new apartments surged. Building activity rose 5.3 percent in the fourth quarter, the Zurich-based Swiss Builders’ Association said… Residential construction increased 14 percent in the three months through December…”
March 7 – Bloomberg (Fergal O’Brien): “Companies…built a record number of homes in Ireland last year, helping to meet demand and stem the pace of house price growth. The number of new houses and apartments built in 2004 was 76,954 compared with 68,819 the previous year… Ten years ago, fewer than 27,000 houses were built in a year.”
March 10 – Bloomberg (Jonas Bergman): “The Norwegian krone strengthened against the euro after a government report showed economic growth in the fourth quarter expanded at the fastest pace since the beginning of 2001.”
March 9 – Bloomberg (Jonas Bergman and David Kroon): “Swedish Finance Minister Paer Nuder raised the government’s forecast for economic growth as exports such as Ericsson AB phone gear and Volvo AB trucks climb. The economy will expand 3.2 percent this year, up from a September forecast of 3 percent… ‘We’ve seen strong exports and now the domestic economy will do the pulling,’ Nuder said… ‘Household optimism is up and private consumption will grow.’”
March 10 – Bloomberg (Marketa Fiserova): “The Czech Republic’s economy grew an annual 4.3 percent in the fourth quarter, the fastest in eight years, as exports jumped…”
March 10 – Bloomberg (Radoslav Tomek): “The Slovak economy expanded 5.8 percent in the fourth quarter, the fastest pace in more than six years, as lower borrowing costs prompted households to spend more.”
March 9 – Bloomberg (Halia Pavliva): “Russia’s January foreign trade surplus rose to $9.1 billion from $7.1 billion the same month a year ago, as exports rose faster than imports because the country pumped more oil and sold it at higher prices. Exports rose 25.2 percent to $13.7 billion and imports increased 21.5 percent to $4.8 billion…”
March 9 – Bloomberg (Bryan Bradley): “Latvia’s economy remained the European Union’s fastest-growing in the fourth quarter, led by the transportation of goods between the former Soviet Union and Western Europe as well as construction and retail sales. Gross domestic product grew 8.6 percent from a year earlier…”
Latin America Reflation Watch:
March 7 – Bloomberg (Alex Kennedy): “Venezuela sold 1 billion euros ($1.32 billion) of 10-year bonds today, its first sale in the European currency since 2001… The bonds have a coupon of 7 percent and were priced to yield at 7.1 percent…”
March 9 – Bloomberg (Andrea Jaramillo): “Colombia’s exports rose 31.2 percent in December, boosted by high prices for oil and a jump in coal sales abroad.”
Dollar Consternation Watch:
March 10 – Bloomberg (Tatsuo Ito and Mayumi Otsuma): “Japan should ‘in general’ consider the necessity of diversifying how it invests foreign reserves, Prime Minister Junichiro Koizumi said. A Ministry of Finance official said Japan has no plans to diversify. ‘I think it’s necessary to diversify the investment destinations’ of foreign reserves, Koizumi said… ‘At the same time, we have to make a judgment in general, considering what’s profitable and what’s stable.’”
March 10 – UPI: “South Korea on Thursday called for concerted international actions to counter the U.S. dollar’s weakness… ‘I think a form of international action is necessary under which developed and underdeveloped countries can cooperate (to counter the weakening dollar),’ Bank of Korea Governor Park Seung told a news briefing.”
Bubble Economy Watch:
March 9 – Dow Jones (Stan Rosenberg): “The national economy this year could receive a strong shot in the arm from an unexpected source - state and local governments recovering from their worst fiscal crisis in the last 60 years. ‘We are on the cusp of a powerful rebound in state and local spending,’ said Deutsche Bank’s chief U.S. fixed-income economist Joseph A. LaVorgna… State general fund tax revenues have expanded sharply, posting a 7.5% growth rate in fiscal 2004, according to the Nelson A. Rockefeller Institute of Government.”
March 11 – San Francisco Chronicle (George Raine): “Total spending on advertising in all media in the United States in 2004 increased 9.8 percent from 2003 to $141.1 billion, industry research released Wednesday showed. The growth is more than twice that of the economy. The report, from TNS Media Intelligence, a provider of advertising and marketing information to clients, said the Internet is the category with the greatest growth, 21.4 percent, up from $6.1 billion in 2003 to $7.4 billion in 2004.”
March 9 – Bloomberg (Rip Watson): “The Port of Seattle moved 54 percent more standard-sized containers in January than a year earlier, in a sign of continued Asian import growth. Container carriers such as South Korea’s Hanjin Shipping Co. shipped 170,565 containers…”
March 9 – UPI: “An unidentified U.S. coin collector has purchased an 1894 dime minted in San Francisco for more than $1.3 million… The coin was consigned to the auctioneers David Lawrence Rare Coins of Virginia Beach, Va., by Bradley Hirst of Richmond, Ind., who bought it for $825,000 six years ago.”
March 7 – Bloomberg (Andy Burt): “U.S. used vehicle prices increased in February according to Manheim Auctions, the world’s largest reseller of used vehicles. The used vehicle index increased 1.4 percent in February from a month earlier. From a year earlier the index was up 5.2 percent.”
Mortgage Finance Bubble Watch:
Countrywide posted a strong February. At $2.33 billion, Average Daily Applications rose to the highest level since last April. The Total Pipeline of $54.77 billion was the largest also going back to April. Total Fundings were down slightly from January to $27.13 billion, a 17% increase from February 2004. ARM fundings were up 37% from one year ago, with 52% of loan volume adjustable-rate. Home Equity fundings were up 60% from one year ago to $2.62 billion. Curiously, subprime fundings were down 32% from January to $2.60 billion, up only 23% from one year ago. Bank Assets expanded $2.6 billion during the month to $45.9 billion, more than double the year ago level.
This week from Freddie Mac’s chief economist Frank Nothaft: “We see originations falling from $2.7 trillion in 2004 to $2.4 trillion in 2005 and $2.2 trillion in 2006. Adding to this drop in origination volumes is that fact that fewer families are refinancing… We expect refinancing to comprise 41% of new loan activity in 2005 and then fall to around 31% in 2006. Slowing mortgage volumes and slightly slower home price appreciation should cause mortgage debt outstanding to grow at a slower pace than in 2004 -- currently we are forecasting mortgage debt outstanding to grow at 11.9%.” Mr. Nothaft also increased his forecast for 2005 home appreciation to 8.0% from the month ago 7.8%.
Q4 2004 “Flow of Funds”
With the bond market under pressure and analytical viewpoints unusually diverse, it’s beneficial to step back and judiciously examine the flows of finance and the system’s inflationary backdrop. And what better way to accomplish such a pursuit than with a brand new fourth quarter “Flow of Funds” report from our Federal Reserve! For us Credit and finance junkies, well, it’s simply awesome - if not comforting.
Total (non-financial and financial) Credit Market Debt (CMD) increased a record $2.81 Trillion (24% of GDP!), or 8.2%, during 2004 to $36.912 Trillion. This is more than double the nineties average annual growth of $1.27 Trillion. The growth in CMD has averaged $2.28 Trillion annually during the past five years in a “textbook” Credit Inflation Blow-off. CMD has increased to 315% of GDP, after beginning year-2000 at about 275%. And during the fourth quarter, CMD growth accelerated to $856 billion, or 9.5% annualized.
Total Non-financial debt increased a record $573 billion, or 9.7% annualized, during the fourth quarter. Non-financial debt jumped a record $1.93 Trillion during 2004, or 8.7%. To beat this percentage gain, one must look all the way back to 1988’s 9.0% non-financial debt growth. In nominal dollars, 1988’s debt growth was $783 billion, or about 40% of last year’s increase. The Household sector continues to lead the debt binge. And to surpass 2004’s 11% increase in Total Household Debt one must go back 18 years to 1986’s 11.4%. Yet, in nominal dollars, 2004’s $1.02 Trillion Household Debt growth is almost four times 1986’s $260 billion. Federal government debt expanded at a 9% rate last year, down slightly from 2003’s 10.9% increase. Federal debt outstanding has increased 30% in just three years.
Only the uninformed or analytically stubborn fails to appreciate that we long ago exited the transitory disinflationary period. Interestingly, Corporate borrowings grew at an 8.4% rate during the fourth quarter, the strongest showing since the booming second quarter of 2000. For the year, Corporate debt increased a respectable 4.8%. This compares to 2003’s growth of 3.0%, 2002’s 0.6%, and 2001’s 4.9%. State & Local government debt increased 7.4% during 2004. State & Local Receipts were up almost 5% during the year, with Expenditures up 5.7%.
Household Mortgage Debt (HMD) increased at an 11.2% rate during the fourth quarter. For the year, HMD increased 13.3%, the strongest showing since 1987’s 13.4%. Total (home, multi-family, and commercial) Mortgage Debt (TMD)increased a record $1.19 Trillion, or 12.8%. TMD growth has averaged just above $1 Trillion during the past three years. To put this into perspective, TMD growth averaged $270 billion during the nineties. TMD is up 40% in three years and 104% in seven, in what is arguably one of history’s “great” inflations.
It is fascinating to examine the source and nature of the financial sector claims created in this massive Credit Inflation. For the year, Domestic Financial Sector Debt growth declined from 2003’s 10.4% to 7.2%. This is chiefly because of the abrupt slowdown in GSE asset growth and attendant Credit market borrowings. It is important to note, however, that the GSE slowdown has been more than compensated for by the ballooning of bank deposits (not included in the Fed’s tally of financial sector debt) and other financial sector claims.
Total GSE assets increased only $109 billion during 2004, or 3.9%, to $2.90 Trillion (and were basically flat during the fourth quarter). This compares to 1998’s growth of 28%, 1999’s 23%, 2000’s 15%, 2001’s 17%, 2002’s 11%, and 2003’s 9%. GSE mortgage-backs expanded only $54 billion during 2004, or 1.5%, to $3.54 Trillion. At the same time, outstanding ABS growth surged a record $331 billion, or 13.3%, to $2.82 Trillion. ABS is up $600 billion, or 27% in two years. During the past seven years, ABS is up 185%, GSE assets 164%, and agency MBS 94%.
And while “structured finance” was the financial genesis for the Great Credit Bubble, the banks (and brokers and their clients) are these days keeping it afloat. Bank Credit expanded by 9.2% during 2004, the strongest showing since 1997’s 9.2%. Bank Credit expanded 8.6% during 2000, 4.0% during 2001, 7.4% during 2002, and 6.7% during 2003. During 2004, Bank Credit increased a record $569 billion. This compares to 2003’s increase of $391 billion, 2002’s $400 billion, 2001’s $211 billion, and 2000’s $412 billion. Bank Credit expanded at a 9.4% rate during the fourth quarter, with Government Securities holdings increasing at a 9.3% rate, Bank loans at a 7.5% rate, and Corporate bonds at a 23% rate.
For the year, Bank Loans expanded a record $403 billion, or 9.1%, the strongest percentage increase since 2000’s 10.6%. Corporate bond (including ABS) holdings increased $77 billion, or 16%. Bank Mortgages surged a record $339 billion, or 15%, to $2.60 Trillion, with a two-year gain of 26%. For comparison, Bank Mortgage growth averaged $146 billion annually during the preceding eight years. On the Bank Liability side, total Deposits increased a record $510 billion, or 11.3%, during 2004 to $5.03 Trillion (up 19% in 2 yrs). Credit Market borrowings increased $77 billion, or 11.7%, to $739 billion. Misc. Liabilities jumped $165 billion, or 10.7%, to $1.72 Trillion.
Securities Broker/Dealer Assets expanded at a 14% rate during the quarter to $1.84 Trillion, and were up $223 billion, or 14%, for the year. Broker/Dealer assets were up $500 billion, or 37%, over two years. During 2004, Miscellaneous Assets jumped $130 billion, or 15%, to $989 billion. Repo assets were up $50 billon, or 11%, to $528 billion, with a two-year gain of 53%. Security Credit jumped $81 billion (44%) during the year to $263 billion, with a 2-year gain of 78%. Corporate bonds increased $24 billion, or 10%. Agency debt and MBS increased $24 billion, or 28%, to $107 billion. Treasury holdings dropped $77 billion. On the Brokers’ Liability side, Due to Affiliates increased $77.5 billion (13%) to $680 billion, Security Credit rose $78.5 billion (11%) to $767 billion, and Repos gained $50.3 billion (11%) to $528 billion.
Examining others within the financial sector, REIT assets expanded at a 21% rate during the fourth quarter, and were up 56% for the year to $223 billion. Finance Company assets increased at a 14.2% rate during the fourth quarter and were up 5.3% last year to $1.46 Trillion. During 2004, Life Insurance Assets surged $387 billion, or 10.3%, to $4.16 Trillion. Credit Union assets increased $37 billion, or 6.0%, to $654 billion. Funding Corporation assets increased $97.3 billion, or 8.3%, to $1.76 Trillion.
The Household Balance Sheet continues to offer invaluable Bubble Economy insights. For the quarter, Household (including “non-profits”) Assets jumped $2.27 Trillion, or 16% annualized, to a record $59.2 Trillion. During the year, Household Assets surged $5.07 Trillion, or 9.4%. This places the two-year gain at $10.9 Trillion (23%), surpassing the $9.4 Trillion rise during the 1998/99 Bubble Hyper-Inflation. Household Real Estate holdings increased a record $2.12 Trillion last year (12.9%) to $18.65 Trillion. This was 40% above 2003’s (previous record) $1.53 Trillion increase in real estate holdings. Household Real Estate asset values were up 24% in two years and 92% in seven years. Elsewhere, Household Financial Assets expanded $1.8 Trillion, or a rate of 21%, to $36.76 Trillion during the fourth quarter and were up $2.67 Trillion (7.8%) for the year. Bank Deposits expanded at a 15% rate during the quarter to $5.69 Trillion (up 8.4% for the year), while Credit Market Instruments grew at a 9.5% rate during the quarter to $2.27 Trillion (up 1% for the year).
Examining Household Liabilities, we see record growth of $336 billion during the fourth quarter, an eye-opening 13% rate to $10.7 Trillion. For the year, Liabilities increased $1.12 Trillion, or 11.7%. Debt growth was 24% greater than 2003’s (previous record) increase of $906 billion. For comparison, annual Household debt growth averaged $343 billion during the decade of the nineties. We now borrow this amount in one quarter.
In nominal dollars, Assets inflated almost seven times ($2.27TN) the amount of household borrowings ($336bn) during the fourth quarter. Oh, The Seductive Magic and Peril of Asset Inflation and Bubbles… Household Net Worth surged $1.94 Trillion, or 17% annualized, during the fourth quarter to a record $48.53 Trillion. For the year, Net Worth increased $3.95 Trillion (9%), almost four times the increase in Liabilities. Net Worth increased $8.9 Trillion (23%) over two years. This surpasses even 1998/99’s two-year $8.38 Trillion surge. During the past seven years, Household Liabilities increased $4.9 Trillion (84%), while Assets inflated $19.5 Trillion (49%). Over this period, Household Net Worth ballooned an historic $14.6 Trillion (43%).
Not coincidently, Rest of World (ROW) holdings of U.S. financial Assets last year expanded by a similar amount as Household Liabilities ($1.09TN vs. $1.12TN). ROW holdings of U.S. assets increased 13.4% for the year to $9.29 Trillion, with a two-year gain of 25% ($1.85TN). Official Holdings increased a record $290 billion, or 25.3%, to $1.44 Trillion during 2004, with an unprecedented two-year gain of $537 billion (60%). For comparison, Official Holdings increased $22 billion during 1998, $24 billion in 1999, $62 billion in 2000, $75 billion in 2001, and $67 billion during 2002. Official Holdings now rise more in one quarter than they did on average each year from 1998 to 2002. It is also worth noting that ROW Repo holdings jumped 41% during 2004 to $647 billion and have more than doubled in two years.
For the year, ROW holdings of U.S. Credit Market instruments expanded a record $807 billion (21%) to $4.7 Trillion, while Foreign Direct Investment (FDI) increased $163 billion (10.5%) to $1.72 Trillion. Over two years, Credit Market holdings jumped 39%, while FDI increased 14%. If the U.S. is in reality perceived to be the “best place in the world to invest,” then foreigners much prefer Treasuries, agencies and ABS to direct investment. And, increasingly, this supposed love affair with U.S. “investment” largely touches the hearts of “Official” foreign central bankers. This is much more a case of a shot-gun wedding of dollar “recycling” than agreeable “investment.”
During the fourth quarter, ROW holdings of U.S. financial assets increased at a record (seasonally-adjusted) annualized pace of $1.33 Trillion. By major category, Net Interbank Assets increased an annualized $118 billion, Checkable Deposits $103 billion (ann.), and Security Repos $189 billion (ann.). Holdings of Credit Market Instruments increased a record $937 billion annualized, with Treasuries holdings increasing $226 billion (ann.), Agencies $264 billion (ann.), and Corporate bonds (including ABS) $329 billion (ann.). Foreign Direct Investment increased at an annualized $268 billion during the quarter. The scope of these financial flows (dollar recycling) is becoming incomprehensible.
Curiously, ROW dollar liabilities increased only $52 billion during 2004, down from a 1996-2002 annual average of $280 billion. As such, ROW net holdings of U.S. financial assets surged an unprecedented $1.04 Trillion during 2004. This was 55% above 2002’s record $670 billion increase in Net Holdings, and compares to the 1996-2002 annual average growth of $292 billion. ROW Net holdings increased a staggering 25% during 2004 to $5.17 Trillion. Net holdings increased an amazing 50% in two years and better than 150% since the beginning of 1998. Mr. Greenspan and Dr. Bernanke, there is no room for either complacency or disinformation on this issue.
According to the “flow of funds,” nominal GDP expanded 6.6% during 2004, the strongest showing since 1989’s 7.5%. Fed funds began 1989 at 9.0% and rose to as high as 9.75%. Not that rates will anytime soon approach such levels, but it does provide historical perspective with respect to today’s extraordinarily low market yields.
Never ceasing to amaze, Dr. Bernanke last night claimed that a “global savings glut” was largely responsible for the U.S. Current Account Deficit. In a separate speech, Mr. Greenspan refined his incredible Pollyannaish view of the U.S. Current Account and global imbalances. I proffer tonight, with rising confidence, that such nonsense is corrosive to market confidence.
Our leading Fed officials – individually and as a group - are either misinformed or obfuscating. And especially now with heightened unrest in the bond and currency markets, the marketplace is left fearing that the Fed has simply checked out. They seemingly don’t grasp important issues and developments, let alone have any strategy for dealing with them. There is, as well, a curious contempt for straight talk. Sure, Fed nonsense sufficed just fine during 2004 – The Year When Things Didn’t Matter. But it will be an increasing cause for lament now that Things are Beginning to Matter.
Last night from Dr. Bernanke: “Over the past decade, a combination of diverse forces has created a significant increase in the global supply of saving – a global saving glut – which helps explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates I the world today.”
Well, from the Fed’s own “Flow of Funds” we know that – “over the past decade” - Total U.S. Credit Market Debt has increased $19.4 Trillion, or 115%. Broken down, Non-financial Credit Market Debt increased $11.2 Trillion, or 86%; while Financial Sector Credit Market Debt jumped $8.2 Trillion, or 214%. What Dr. Bernanke refers to as a “global glut of savings” is actually a historic surfeit of dollar IOUs. That these IOUs are predominantly backed by non-productive assets is a huge problem. That a large amount of these IOUs are held by foreigners compounds the problem. That a significant but unknown portion of these IOUs are held or, importantly, hedged by highly leveraged financial players and speculators creates – in the words of Hyman Minsky – “acute financial fragility.”
There is a confluence of developments – most developing recently – that are problematic with respect to financial stability. For the first time in awhile, the dollar and bond prices now decline in tandem. No longer do rising bond prices help to offset our foreign Creditors’ currency losses. There is also the issue of increased foreign dollar angst. This week Japanese Prime Minister Koizumi spoke of diversifying his nation’s foreign reserves. At some point, foreign politicians – if not central bankers – will be forced to confront the dollar dilemma. And, here at home, for the first time in more than a decade, the Credit market is faced with rising yields and widening MBS spreads without the “backstop bid” from the Mighty & Powerful GSEs (and their blank checkbooks). You know, it’s just rather remarkable how bullish everyone turned - - right smack into some decidedly bearish developments.
