For the week, two-year Treasury yields jumped 12.5 bps to 4.86%. Five-year yields rose 12 bps to 4.76%, and bellwether 10-year yields gained 10 bps to 4.80%. Long-bond yields increased 10 bps to 4.80%. The 2yr/10yr spread ended the week inverted 6 bps. The implied yield on 3-month December ’07 Eurodollars jumped 15.5 bps to 5.005%. Benchmark Fannie Mae MBS yields rose 8 bps to 5.99%, this week outperforming Treasuries. The spread on Fannie’s 4 5/8% 2014 note widened one to 32, and the spread on Freddie’s 5% 2014 note widened one to 32. The 10-year dollar swap spread increased 0.75 to 55.5. Corporate bonds outperformed, with junk spreads narrowing significantly.
Investment grade issuers included Conocophilips $1.875 billion, AIG $1.75 billion, Morgan Stanley $1.25 billion, Lehman Brothers $975 million, Baltimore Gas & Electric $700 million, SLM Corp $600 million, Principal Financial $500 million, John Deere $400 million, and MBIA $100 million.
October 12 – Financial Times (David Oakley and Gillian Tett): “Top-rated corporate debt has shrunk to an historically low proportion of the overall market, highlighting the growing willingness of investors and issuers to embrace more risk. Triple-A corporate issues account for 8 per cent of outstanding global debt against 15 per cent in the mid-90s, according to research by Merrill Lynch. The shift reflects the fact that many mainstream companies have been cash-rich in recent years and have seen less need to issue bonds. But it also reflects a flood of issues from companies with low credit ratings as it has become easier to sell risky assets to investors.”
Junk bond funds saw outflows of $62 million during the week (from AMG). Junk issuers included Soar Eagle Mining $400 million.
October 9 – Dow Jones (Cynthia Koons): “The default rate for global high-yield bonds hit a credit cycle low of 1.5% during the third quarter, Moody’s…reported… The trailing 12-month default rate had been range-bound between 1.6% and 2.1% prior to September’s results.”
October 11 – Financial Times (Paul J Davies and Saskia Scholtes ): “The cost of insuring corporate debt against default in Europe and the US has hit new lows as investors reassess their previously gloomy outlook for credit markets in the third quarter. The European non-investment grade index saw one of its biggest morning moves of the past few days as the rally of recent sessions gathered steam.”
Convert issuers included Five Star Quality Care $110 million and Finisar $100 million.
International dollar debt issuers included KFW $3.0 billion and Majapahit Holdings $1.0 billion.
October 11 – Financial Times (Michael Mackenzie): “US equity investors have shifted a record proportion of their funds into foreign share markets this year as investors chase returns from overseas and emerging markets which have been outstripping those on Wall Street. Of the $4,800bn in equities held by US mutual fund investors, $811bn, or 17 per cent, sit in funds containing foreign companies, according to AMG Data Services, which monitors mutual fund flows. ‘This is the highest percentage of international securities holdings by domestic mutual funds on record,’ Robert Adler, AMG’s president, said… It also represents a doubling of this share since August 2000. AMG data also show that of the $124bn invested so far this year into US equity mutual funds…fully $110bn, or 89 per cent, has gone into funds investing in overseas companies.”
Japanese 10-year “JGB” yields gained 6 bps this week to 1.76%. The Nikkei 225 index added 0.5% (y-t-d up 2.6%). German 10-year bund yields rose 8 bps to 3.83%. Emerging stock markets remain incredibly strong and debt markets notably resilient. Brazil’s benchmark dollar bond yields dipped 2 bps to 6.30%. The Bovespa equity index jumped 2.3% this week (up 16.1% y-t-d). The Mexican Bolsa rose 2.2% to another record high, increasing 2006 gains to 28.3%. Mexico’s 10-year $ yields rose 8 bps to 5.84%. The Russian RTS equities index jumped 3.6%, increasing y-t-d gains to 43% and 52-week gains to 72%. India’s Sensex equities index gained 2.9%, increasing 2006 gains to 35.5%. China’s Shanghai Composite index rose 1.8% this week, increasing y-t-d gains to 53.7%.
This week, Freddie Mac posted 30-year fixed mortgage rates increased 7 bps to 6.37%, up 34 bps from one year ago. Fifteen-year fixed mortgage rates were 8 bps higher to 6.06% (up 44 bps y-o-y). One-year adjustable rates jumped 10 bps to 5.56% (up 71bps y-o-y). The Mortgage Bankers Association Purchase Applications Index declined 5.3% this week. Purchase Applications were down 18% from one year ago, with dollar volume 19% lower. Refi applications dropped 5.8%. The average new Purchase mortgage declined to $225,800, and the average ARM dropped to $371,000.
Bank Credit jumped $31.0 billion last week (2wk gain of $62bn) to a record $8.065 TN. Year-to-date, Bank Credit has expanded $559 billion, or 9.7% annualized. Bank Credit inflated $668 billion, or 9.0%, over 52 weeks. For the week, Securities Credit surged $44.1 billion. Loans & Leases declined $13.1 billion during the week, with a y-t-d gain of $373 billion y-t-d (8.9% annualized). Commercial & Industrial (C&I) Loans have expanded at a 15.4% rate y-t-d and 13.8% over the past year. For the week, C&I loans gained $8.6 billion, and Real Estate loans surged $21.8 billion (3-wk gain of $54.1bn). Real Estate loans have expanded at an 11.4% rate y-t-d and were up 11.6% during the past 52 weeks. For the week, Consumer loans added $1.7 billion, and Securities loans rose $11.5 billion. Other loans posted an unusually large $56.8 billion decline. On the liability side, (previous M3 component) Large Time Deposits expanded $16.9 billion.
M2 (narrow) “money” supply jumped $14.4 billion to a record $6.904 TN (week of 10/2). Year-to-date, narrow “money” has expanded $217 billion, or 4.2% annualized. Over 52 weeks, M2 has inflated $293 billion, or 4.4%. For the week, Currency added $0.6 billion, and Demand & Checkable Deposits rose $7.4 billion. Savings Deposits increased $0.9 billion, while Small Denominated Deposits gained $5.3 billion. Retail Money Fund assets added $0.3 billion.
Total Money Market Fund Assets, as reported by the Investment Company Institute, jumped $18.5 billion last week to a record $2.264 Trillion (10-wk gain of $93bn!). Money Fund Assets have increased $207 billion y-t-d, or 12.8% annualized, with a one-year gain of $291 billion (14.7%).
Total Commercial Paper gained $5.7 billion last week (10-wk gain of $124bn, or 36% annualized) to a record $1.914 Trillion. Total CP is up $273 billion y-t-d, or 21% annualized, while having expanded $313 billion over the past 52 weeks (19.6%).
Asset-backed Securities (ABS) issuance slowed this week to $6.0 billion. Year-to-date total ABS issuance of $565 billion (tallied by JPMorgan) is running about 5% below 2005’s record pace, with 2006 Home Equity Loan ABS sales of $383 billion about 1% under comparable 2005. Also reported by JPMorgan, y-t-d US CDO (collateralized debt obligation) Issuance of $243 billion is running 74% ahead of 2005.
Fed Foreign Holdings of Treasury, Agency Debt jumped $12.5 billion to a record $1.687 Trillion (week of 10/11). “Custody” holdings were up $168 billion y-t-d, or 14.0% annualized, and $220 billion (15.0%) over the past 52 weeks. Federal Reserve Credit added $1.4 billion to $831.1 billion. Fed Credit is up $4.7 billion (0.7% annualized) y-t-d, while having expanded 3.7% ($29.7bn) over the past year.
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $626 billion y-t-d (19.6% annualized) and $695 billion (17.5%) in the past year to a record $4.672 Trillion.
October 13 – Bloomberg (Nerys Avery and Nipa Piboontanasawat): “China’s foreign-currency reserves surged to almost $1 trillion, the most ever held by a single country, driven by a record trade surplus… China had reserves of $988 billion at the end of September… That’s 28.5 percent higher than a year earlier.”
The dollar index rose 0.8% to 86.87. On the upside, the South African rand gained 4.8%, the Mexican peso 2.2%, Hungarian forint 2.0%, and Turkish lira 1.6%. On the downside, the Canadian dollar declined 1.3%, the Czech koruna 1.0%, Norwegian krone 0.9%, and Swiss franc 0.9%.
October 11 – Financial Times (Kevin Morrison and Lucy Warwick-Ching): “US wheat prices struck a 10-year high yesterday on fears of a further decline in global production at a time when world stockpiles are near 20-year lows. The latest rise is expected to lead to higher food prices, hitting bread, breakfast cereals, pizzas and pasta. Wheat harvests from Australia to Argentina, Europe and North America have been affected by drought, heatwaves and, in the case of Ukraine, infestation from the Eurygaster beetle. Global wheat supplies have fallen about 5 per cent - or 30m tonnes - from last year.”
October 11 – Bloomberg (Feiwen Rong and Jae Hur): “Wheat production in Australia may slump 58 percent this year as drought spreads, exacerbating a global shortage that drove prices to a 10-year high this week.”
October 9 – Bloomberg (Chia-Peck Wong): “Nickel prices rose to their highest in at least 19 years on the London Metal Exchange amid concern supply won’t meet demand after inventories dropped to a more than two-month low.”
October 12 – Bloomberg (Chanyaporn Chanjaroen): “Lead prices in London jumped to a record after a slide in inventories of the metal used in car batteries extended to 60 percent since late June.”
Commodities bear market? Wheat surged 13%, posting its biggest weekly gain in 10 years. Corn gained 16%, its strongest week since 1988. Orange juice rose almost 16%. Nickel this week traded to a 19-year high, tin a 17-year high and lead a record high. Gold gained 2.8% to $590.4 and Silver 4.5% to $11.68. Copper added 0.7%, increasing y-t-d gains to 77%. November crude declined $1.19 to end the week at $58.57. November Unleaded Gasoline fell 2.4%, and November Natural Gas sank 11.9%. For the week, the CRB index rallied 1.1% (down 8.6% y-t-d), and The Goldman Sachs Commodities Index (GSCI) gained 2.8% (up 0.7% y-t-d).
October 13 – Bloomberg (Mayumi Otsuma): “Japan’s producer prices rose the most in more than 25 years in September, increasing pressure on companies to pass on costs to consumers to protect profits. An index of prices that companies pay for energy and raw materials such as iron ore increased 3.6 percent in September from a year earlier…”
October 12 – Bloomberg (Lily Nonomiya): “Japan’s bank lending rose for an eighth month, extending its longest expansion in a decade, helping companies fund increases in capital spending. Loans climbed 1.6 percent in September from the same month a year earlier…”
October 12 – Bloomberg (Nipa Piboontanasawat and Irene Shen): “China had its second-largest trade surplus on record in September, adding funding to an investment boom the government is trying to cool. The gap narrowed to $15.3 billion from a record $18.8 billion in August…”
October 13 – Bloomberg (Nipa Piboontanasawat): “China’s money supply grew in September at the slowest pace in more than a year after the central bank stepped up efforts to drain funds from the financial system. M2…rose 16.8 percent last month after gaining 17.9 percent in August… Outstanding yuan loans rose 15.2 percent at the end of last month from a year earlier to 22.1 trillion yuan ($2.8 trillion)…”
October 12 – Associated Press (Elaine Kurtenbach): “China’s oil imports surged to a record 3.3 million barrels a day in September…as the country recently began filling its newly built strategic oil reserves. Preliminary data from the General Administration of Customs showed crude oil imports jumped 24 percent over the same month a year earlier to 13.5 million metric tons… That would be an all-time high for any month… China recently completed construction of a storage facility…the first of four planned strategic oil reserves. Filling of those tanks began in August with a shipment of Russian crude…”
October 12 – Bloomberg (Wing-Gar Cheng): “China imported 16 percent more crude oil in the first nine months than a year earlier to meet rising energy demand in the world's fastest-growing major economy.”
October 11 – Bloomberg (Josephine Lau and Patricia Cheng): “China Life Insurance Co. and the nation’s other insurers may triple their assets to 5 trillion yuan ($632 billion) by 2010, according to the China Insurance Regulatory Commission.”
October 11 – Bloomberg (Lee Spears): “China imported vehicles worth $4.84 billion in the first eight months of the year, 72 percent more than a year earlier, the official Xinhua News Agency said…”
October 9 – Bloomberg (Nipa Piboontanasawat): “An index measuring the performance of Chinese companies climbed the highest in almost eight years in the third quarter.”
Asia Boom Watch:
October 9 – Bloomberg (Cherian Thomas and Anand Krishnamoorthy): “Indian Prime Minister Manmohan Singh may struggle to convince investors to help fund $320 billion of infrastructure spending by 2010 because he can’t persuade his government to draw up investment rules.”
October 12 – Bloomberg (Cherian Thomas): “India’s industrial production rose less than expected in August as monsoon rains hampered construction and forced factories to close. Production at factories, utilities and mines rose 9.7 percent from a year earlier from a revised 12.7 percent in July…”
October 11 – Bloomberg (Theresa Tang): “Taiwan’s exports unexpectedly accelerated in September as companies such as Chi Mei Optoelectronics Corp. benefited from rising global electronics demand. Overseas shipments increased 18.1 percent from a year earlier to a record $20.1 billion after climbing 16.6 percent in August…”
October 10 – Bloomberg (Shamim Adam): “Singapore’s economy expanded faster than expected last quarter as companies such as Chartered Semiconductor Manufacturing Ltd. exported more electronics. Gross domestic product grew an annualized 6 percent last quarter…”
October 13 – Bloomberg (Jason Folkmanis): “Vietnamese exports to the U.S. jumped by a third in the eight months ended August, as U.S. refiners used more crude oil from the Southeast Asian nation and garment sales accelerated.”
Unbalanced Global Economy Watch:
October 12 – Bloomberg (Brian Swint): “An index of U.K. house prices rose to the highest level in four years in September as more buyers chased fewer properties, the Royal Institute of Chartered Surveyors reported.”
October 11 – Bloomberg (Greg Quinn): “Canadian new home prices rose at the fastest since 1989 in August, led by the western province of Alberta, where an energy boom has led to a housing shortage. New home prices jumped 12.1 percent in August from a year earlier, and advanced 1.5 percent from the previous month…”
October 9 – Bloomberg (Matthew Brockett): “Industrial production in Germany rose the most in almost three years in August as Europe’s largest economy heads for its fastest expansion since 2000. Production jumped 1.9 percent from July… From a year earlier, production rose 7.2 percent.”
October 10 – Bloomberg (Nadja Brandt): “German tax revenue in September climbed 7.9 percent from the previous month, Financial Times Deutschland said… Total tax revenue from January though September 2006 advanced by about 8.7 percent…”
October 10 – Bloomberg (Jonas Bergman): “Swedish unemployment declined for a second month in September as faster economic growth fueled demand for workers and the government boosted jobs training. The non-seasonally adjusted jobless rate fell to 4.2 percent from 4.6 percent in August…”
October 13 – Bloomberg (Tasneem Brogger): “Danish house prices may have risen an annual 20 percent last quarter, indicating the economy is at risk of overheating as low long-term interest rates sustain consumer spending, said economists at Denmark’s six biggest lenders.”
October 11 – Bloomberg (Tasneem Brogger): “Denmark’s economy expanded 3.5 percent in the first half, faster than previously estimated, as consumer spending, exports and investments all exceeded earlier calculations, the statistics office said.”
October 9 – Bloomberg (Svenja O’Donnell): “Russia’s trade surplus widened for a second consecutive month to $13.7 billion in August, from $12 billion a month earlier, the central bank said.”
October 12 – Bloomberg (Hans van Leeuwen and Fergus Maguire): “Australian employers hired six times as many workers as expected in September and the jobless rate held at a 30-year low…Employment increased 31,400 after gaining a revised 23,100 in August. The jobless rate was 4.8 percent…”
Latin American Boom Watch:
October 9 – Bloomberg (Valerie Rota): “Mexico’s monthly inflation soared to its highest level in almost six years in September after hurricanes that pummeled the country’s Pacific coast drove up the price of tomatoes and corn.”
October 12 – Bloomberg (Andrea Jaramillo): “Colombia’s imports rose 20 percent in August from a year earlier, boosted by purchases of vehicles and auto parts.”
Central Banker Watch:
October 13 – Bloomberg (Vivien Lou Chen and Steve Matthews): “Federal Reserve Bank of Chicago President Michael Moskow said central bankers may need more rate increases to curb inflation, bringing to five the number of Fed officials since Oct. 4 who have played down a possible rate cut. ‘Some additional firming of policy may yet be necessary to bring inflation back to a range consistent with price stability in a reasonable period of time,’ Moskow said…”
October 10 – Bloomberg (Craig Stirling): “Bank of England Governor Mervyn King said policy makers will need to watch prices and pay in the U.K. as inflation may pick up again after an expected dip last month… ‘We will need to keep our eye on the ball and monitor closely the evolution of wage and cost pressures,’ King said. ‘It is still not clear that earnings have been sufficiently restrained to accommodate the past rises in energy prices.’”
Bubble Economy Watch:
The August Trade deficit was up 19% y-o-y to a record $69.9 billion. Goods Imports were up 16% from August 2005 to a record $163.5 billion. Good Exports were up 15% y-o-y to $88.0 billion.
October 12 – Dow Jones (Michael S. Derby): “Confidence levels among the nation’s corporate leaders turned negative during the third quarter, marking the first retreat since the attacks of Sept. 11, a report…said. The Conference Board, a private research group, said that its chief executives confidence index fell to 44 from 50 during the second quarter and 57 in the first three months of the year. Readings below 50 represent a drop in confidence. This is the first time chief executives have been negative on the outlook since the final quarter of 2001.”
October 11 – Bloomberg (Cotten Timberlake): “E. Kelly Sanford, a sociology professor at Tennessee State University in Nashville, no longer has to go hundreds of miles to pull out his credit card at Tiffany’s and Louis Vuitton. Two months ago, the luxury retailers opened their first Nashville stores… ‘They have discovered the very latent factor of the wealth we have in the Nashville area that is more hidden than in large cities like New York,’ said Sanford, 48. ‘They could’ve been here earlier and done just as well as now.’ Watch out, Fifth Avenue. Luxury retailing, once dependent on exclusive big-city locales, is forging into ever smaller U.S. markets, gambling that demand for $995 Gucci boots and $2,495 Burberry coats will broaden and withstand a slowdown in consumer spending and declining home prices.”
October 12 – Dow Jones (John Connor): “A survey of city finance officers by the National League of Cities found 65% of respondents saying their cities are better able to meet their fiscal needs this year than they were last year. The survey found 76% of finance officers in the South and 75% in the West reporting improved conditions, compared to 52% in the Midwest and 36% in the Northeast. ‘City finance officers’ assessment of their cities’ fiscal conditions in 2006 improved dramatically since 2003, the low point after the fiscal recession, when only 19% of city finance officers said their cities were better able to meet financial needs than in the previous year,’ the NLC said…”
October 9 – Bloomberg (Duncan Moore): “The average cost of health care per employee will rise 7.7 percent for major companies in 2007, the lowest increase in eight years, said Hewitt Associates, a benefits consultant.”
October 13 – New York Times (Louise Story): “Some companies trying to attract M.B.A. students have been playing a version of beat the clock: offering bonuses that decline in value or disappear unless the student accepts the job by a certain date… The bonuses offered to the most promising summer interns, as much as $45,000 in some cases, will be cut in half or will be withdrawn if the students do not accept the job offers by an early deadline, typically the middle of October.”
Real Estate Bubble Watch:
October 13 – EconoPlay.com - (Congrats to Gary Rosenberger’s exceptional service this week celebrating their one-year anniversary!): “The nation’s housing market showed no sign of recovering in September, scant evidence that the worst of the slump is over, and plenty to suggest more rough patches to cross as the slow season approaches, residential builders say. A smattering of recent announcements from Wall Street – most prominently from former Fed Chairman Alan Greenspan – that the “worst is over” for housing baffles even the most optimistic of builders, who see things quite differently in the trenches… The nation’s largest builders continue to grapple with high cancellations, mounting inventories, and what to do about landholdings that were once a source of bragging rights but now appear overbought and overpriced. One credible industry source told EconoPlay that the inventory problem will persist for as long as the largest production builders continue to surreptitiously build speculative homes despite their public proclamations to the contrary.”
October 12 – Bloomberg (Daniel Taub): “Home prices in Southern California… rose 1.9 percent last month, the smallest year-over-increase in almost a decade. The median price for a home in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties was $484,000 in September, compared with $475,000 a year earlier…[from DataQuick]”
October 11 – EconoPlay.com (Gary Rosenberger): “The nation’s office market remained on a certain recovery path in the third quarter with vacancy rates dropping, rents rising – spiking in select markets – and building sales prices setting records, say property management firms… Strong corporate profits, ample investment capital, and a highly constrained supply of office space appear to have outweighed the stumbling blocks of a housing bust and $60 crude oil – and point favorably toward burgeoning construction activity for office high rises… Preliminary data point to average rents rising by about 5% annualized in the third quarter, about the same as the second quarter, with downtown Manhattan, Los Angeles and elsewhere galloping in double digit territory. Vacancy rates are seen dropping 30 to 40 basis points sequentially.”
October 12 – Bloomberg (Sharon L. Crenson and Brian Louis): “Homebuilder Toll Brothers Inc. opened sales of its first condominium building in Manhattan, the most expensive urban market in the U.S., as waning demand for its suburban luxury homes crimped earnings… ‘There’s no doubt that real estate is down but certain markets are doing well,’ said Chief Executive Officer Robert Toll… ‘New York has not gone down as the rest of the market has.’ The Toll building, a 21-story blue-green glass building at 110 Third Ave., is just south of Union Square Park in Greenwich Village. Toll, based in Horsham, Pennsylvania, began selling the condos to insiders on Sept. 28. Prices for the 77 units range from $887,990 for a one-bedroom apartment to $2.04 million for a three-bedroom unit with floor-to-ceiling windows…”
Financial Sphere Bubble Watch:
October 9 – Dow Jones (Rimin Dutt): “U.S. leveraged buyout activity in the first nine months of the year has set the stage for 2006 to top last year’s record… About 371 LBOs worth about $124.6 billion closed in the first nine months, up from 291 deals worth $83.1 billion that closed in the year-ago period, according to…Dealogic. That puts LBOs on track to easily best 2005’s record volume, when 356 deals worth $131.5 billion closed. In the third quarter, LBO deal volume was $44.6 billion across 113 deals, up from $34.1 billion in 100 deals in the year-ago period.”
October 12 – Bloomberg (Caroline Salas): “High-yield, high-risk companies this year are increasingly turning to the loan market to borrow money, with bank lending now outpacing bond issues by more than a 3-1 ratio, according to Moody’s… Below investment-grade companies issued 61 bonds amounting to $22.5 billion in the third quarter, compared with receiving 146 new loans totaling as much as $87.8 billion, Moody’s Chief Economist John Lonski said… ‘The rapid growth of bank lending to high-yield companies has been facilitated by the record low delinquency rate of bank commercial and industrial loans and by the strong demand for collateralized debt obligations that consist of bank business loans,’ Lonski…said… In the first nine months of the year, new high-yield loans totaled $293.1 billion, about 322 percent of the $91.1 billion of junk bonds issued… That ratio has increased from 84 percent in 2003, 153 percent in 2004 and 228 percent in 2005, according to [Lonski]…”
Energy Boom and Crude Liquidity Watch:
October 12 – Financial Times (Ed Crooks): “Europe faces the growing threat of electricity shortages because growth in demand has outstripped investment in new power stations, a leading consultancy has warned. Capgemini, the consultancy, said operating at such low margin levels raised the risk of power shortages, including interruption of supply to large industrial users, “brownouts” – reductions in supply voltage – and blackouts. Colette Lewiner of Cap¬gemini said the study should be a “wake-up call” for the energy industry, governments and regulators. “We are in a dangerous zone now,” she said. “We could have power cuts.”’
October 12 – Bloomberg (Wing-Gar Cheng): “China, the world’s second-biggest
energy user, and neighboring Russia may spend as much as $10 billion over the next five years to build power plants along the countries’ border. The power plants will supply electricity to China…”
October 12 – Bloomberg (Manash Goswami and Archana Chaudhary): “India will spend $12 billion to increase the nation’s power generation 13 percent by starting to build 16,000 megawatts of capacity this year to boost economic growth in Asia’s fourth-largest economy.”
October 9 – Bloomberg (Alex Kennedy): “Venezuela plans to invest $100 billion over the next six years in 120 infrastructure projects such as roads, ports and bridges as record oil income swells government coffers, Planning Minister Jorge Giordani said.”
October 12 – Bloomberg (Ian McKinnon): “EnCana Corp., Canada’s largest natural-gas producer, may spend as much as C$1 billion ($881 million) to build a new headquarters in Calgary, the financial hub of Canada’ biggest oil-producing province. The company plans to begin construction next year and occupy the 59-story building by 2011… The building, which would be Canada’s tallest west of Toronto, puts EnCana at the forefront of an office space boom in Calgary, where more than 12 million square feet are under development…”
October 13 – Financial Times (Kevin Morrison): “The world’s stockpiles of wheat are at their lowest level in more than a quarter century, according to the US Department of Agriculture, which on Thursday slashed its forecasts for global wheat and corn production. The lower forecasts were largely attributable to the severe drought in Australia, where the forecast for this year’s wheat crop was cut by 8.5m tons to 11m. That is less than half of the 24m produced last year, of which about 17m went to exports.”
The U.S. Treasury this week released preliminary 2006 budget data. For the fiscal year, the federal deficit shrank to $247.7 billion from 2005’s $423.2 billion. Total Receipts (on- and off-budget) were up 11.8% from 2005 to $2.407 Trillion. Individual Income Tax receipts jumped 12.6% to $1.044 Trillion, Corporate Tax receipts 27.2% to $353.9 billion and Social Insurance & Retirement receipts 5.7% to $790 billion. Total Outlays (on- and off-budget) were 7.4% above fiscal 2005 to $2.654 Trillion.
For September, total federal Receipts were up 12.6% y-o-y to $283.3 billion, with Individual Income Tax receipts up 14.2% to $111.0 billion and Corporate Tax receipts up 21.8% to $85.9 billion. Total federal spending (on-budget) was up 5.2% from September 2005 to $227.3 billion.
It is astounding to observe such wild swings in marketplace sentiment and perceptions. There is now at least some recognition that a weakened housing sector is not soon to implode U.S. and global (Bubble) economies. And there was more evidence this week of some unusually conflicting views at the Federal Reserve, as well as confirmation that key Fed officials remain leery of the bond market’s vision of faltering economic momentum, waning price pressures, and the imminent implementation of the next easing cycle. June ’07 eurodollar yields (indicative of prospective 3-month short-term interest-rates) jumped 32.5 basis points in seven sessions to 5.205%.
A record $70 billion (ok, $69.9bn) August Trade Deficit – a full year after housing's peak – and the strongest Consumer Confidence (Univ. of Michigan) reading in 15 months add to evidence that this is not your old granddad’s economy. U.S. shoppers looked $3 a gallon gas in the eye and refused to flinch. Today, scanning news of bursting housing Bubbles, consumers adopt that famously American attitude that things will surely work out just fine. No reason to alter one's habits and lifestyles. In the context of such a protracted, historic and rewarding financial and economic boom -- one that emerged out of the early 90’s financial and economic doldrum -- today’s disregard of risk and resiliency of “spirit” are denotative of late-cycle exaltation.
On so many levels, this cycle continues to rewrite the rules of finance, economics, and policymaking. Until only recently, it would have been totally unreasonable to ponder $70 billion monthly Trade Deficits; if the economy would have somehow had the capacity to create them, never would the markets ever have tolerated – or central bankers allowed - them. Certainly, conventional doctrine would have curtly dismissed any notion that a responsible central bank would ever contemplate lowering rates in the midst of such a gross imbalance. Today, however, buoyant financial markets dictate so many things, including the tenor of central bank decision-making. The bond market signals that 3.5% to 4.0% consumer price inflation is acceptable, and perhaps only the more determined Fed “hawks” have much of a beef.
As long as the financial markets acquiesce, there is apparently no imbalance worthy of tough policy action. Above all, don’t make foolish mistakes as the Fed did in ’29 and the BOJ did in ’89 – never pop Bubbles. And, to listen to some, the Fed has 525 basis points that virtually guarantee consumers, borrowers, lenders, speculators, investors, entrepreneurs, businessmen, executives, bankers, Wall Street and Congress needn’t brood over how a recession might affect their respective best-laid plans.
The dilemma is, at this late-stage of the Credit cycle, optimism and excess remain in abundant supply, assuring that it is too easy to match the booming demand for to ballooning supply of Credit/liquidity/purchasing power. At this “terminal phase” of boom-time excess, the continued availability of cheap finance will innately attract boundless ideas for how to procure it and create wealth from it. Earlier this decade, when stocks were no longer the ticket, the boom just shifted to houses, commodities and emerging markets. If houses no longer cut it, well, then why not office buildings, energy, or even telecom – again! It doesn’t really matter; the Financial Sphere profits in any case.
One lesson that will be learned from this experience: if the Fed persists in ignoring Credit and disregarding Bubbles, it will eventually have to accept that only quite tough/punishing policy action or bursting Bubbles will suffice when it comes to changing behavior (including interrupting boom-time Monetary Processes). And while the rationale for watching and waiting almost seems convincing, the exercise of anticipating a Bubble burning itself out is fraught with overwhelming risk. A case in point: the view today that U.S. housing market fragility might actually be working to bolster U.S. and Global Credit Bubble excesses should not be so contentious. A proper “risk management” policy approach dictates that Bubbles be addressed as early as possible. The contemporary fallout from “falling behind the curve” is runaway asset speculation, inflation and (Credit, asset, and speculative) Bubbles – that will inevitably burst.
As we’re witnessing, the profligate U.S. financial sector is no mood to back down. Of course not, they’re making too damn much “money.” As demand for home mortgage borrowing has waned, lenders have simply responded with more aggressive commercial real estate and C&I lending. Losses on energy trades have only impelled the leveraged speculating community to press bets in the bond and Credit markets. The upshot is that the housing slowdown has to this point proven a catalyst for only greater Credit Availability and Liquidity throughout corporate and global finance. Little wonder, then, that U.S. employment has held up so well, while Income Growth has accelerated at home and abroad. Ultra-loose Financial Conditions are spurring the hedge fund, proprietary trading, M&A, LBO, derivatives and stock repurchase booms that play a critical role in handing the asset inflation baton effortlessly from U.S. housing to global debt and equities markets.
Contemporary finance is certainly rewriting the book on “inflation.” No longer are consumer prices – especially “core” price indices – an even remotely accurate indicator of “monetary conditions.” Indeed, “Financial Conditions” is supplanting “monetary conditions” as the more suitable moniker for describing general Credit and Liquidity conditions. “Financial Conditions” are today largely dictated by the ballooning U.S. Financial Sphere (including foreign holders of U.S. financial claims), a process chiefly governed by the unconstrained multiplication and leveraging of U.S. marketable securities and non-traditional Credit instruments.
Contemporary Credit and Liquidity Dynamics have very little in common with those of the past. Traditionally, the Fed dictated “monetary conditions” by overt methods and mechanisms whereby (banking system) “money” was regulated by reserve requirements and open-market operations. The determined management of system reserves and bank deposit growth would under normal conditions hold sway over loan growth and Credit conditions generally.
Today, the Fed employs little authority over the expansion of bank, Wall Street, or securities Credit outside of small (non-threatening) adjustments to the cost of short-term funds. The Fed, instead, attempts to manage the general financial environment through the manipulation of interest-rates and financial profits. These days, however, the Financial and Economic Spheres have bloated to the precarious point that the Fed presumes it dare not turn parental and remove the punchbowl. Such a circumstance does not go unnoticed by the rambunctious and is exploited with increasing daring as late-stage excesses snowball. And as long as financial players perceive it is to their advantage - as they clearly do today - to expand (loans, securities, leverage, derivatives, etc.), the Financial Sphere Inflation will continue in earnest.
Some analysts describe Fed policy as “tight,” while forecasting that pricing pressures (generally “core” consumer price indices) will soon wane. And it is ridiculous that seasoned economists and market professionals continue to cite tepid growth in M2 as evidence of system “tightness” and Fed restraint. Why ignore that outstanding commercial paper has been expanding 21% annualized, Bank Credit 9.7%, and Money Market Funds 12.8% (as issuance booms for a variety of Credit instruments such as ABS, CDOs, corporates and Treasuries)? Truth be told, general Credit and liquidity (“Financial”) Conditions remain loose as ever, with indications of serious price distortions, not unexpectedly, as prominent as ever.
With monthly Trade Deficits having reached $70 billion, $1 Trillion annual Current Account Deficits are on the horizon. It is worth noting that monthly Trade Deficits averaged about $30 billion during the peak of King Dollar supremacy back in early 2002. Since then, already enormous Current Account Deficits doubled, notwithstanding a nearly 30% decline in the dollar index. Predictably, the efficacy of dollar devaluation as initiator and promoter of global imbalance rectification (or even stabilization) was a complete dud in the face of extremely loose Financial Conditions. Instead of dollar weakness in any way impinging demand for U.S. securities, the unprecedented U.S. Credit boom was “monetized” by the ballooning holdings of foreign central banks. The U.S. imported incredible amounts of goods and exported its Credit Bubble to the world. Who would have thought back in 2002 that Chinese reserve holdings would expand $776 billion, or 366%, to approach $1 Trillion by October 2006? Not me.
The dilemma today is that the Chinese, Japanese, Asians, oil exporters, and global finance generally -- having accommodated U.S. excesses for years -- will at some point face a most arduous task of weaning our consumers and their manufacturers – and all financial systems - off of Ultra-Easty Global Credit and Liquidity ("Financial") Conditions. Are the Chinese willing to take reserves to $2 Trillion and then to $3 and $4 Trillion. How about the Japanese and Koreans? Russia and the oil exporters?
The Chinese are certainly facing their own runaway boom. Attempts to cool lending and other excess have been repeatedly thwarted by an unrelenting torrent of hot “money” and investment finance inflows. Interestingly, their efforts to cool real estate speculation may finally be having some effect, although speculative impulses have now infected Chinese equities markets. Across the entire globe, loose Financial Conditions are fueling synchronized stock market Bubbles rarely experienced in history. Ultra-loose Financial Conditions in the U.S. and its Inflationary Manifestations (including Current Account Deficits) have unleashed Credit systems around the world.
And while consumers and securities markets are enjoying a respite from surging energy prices, I wouldn’t extrapolate today’s prices too far into the future. One only has to look at this week’s moves in wheat, corn, nickel, tin, lead, and orange juice for evidence of the Acute Inflationary Bias that continues to envelop the commodities market. Sure, there will be instances when perceived supply constraints fail to materialize and the speculators will be summarily beaten to a bloody pulp. But, as we saw again this week, supply shortages will incite spectacular price surges. In a world of basically unlimited finance and liquidity, how much is too much to pay for food, energy or important raw materials when there is not enough to go around? And I seriously doubt energy supply issues will not resurface, especially if the global economic boom surprises on the upside. Loose Global Financial Conditions seemingly guarantee as much. And I’ve run out of time this evening.