Three-month Treasury bill rates rose 4 bps the past week to 3.19%. Two-year government yields sank 35 bps to 2.75%. Five-year T-Note yields dropped 31 bps to 3.19%, and ten-year yields fell 20 bps to 3.87%. Long-bond yields declined 12 bps to 4.38%. The 2yr/10yr spread ended the week at a notable 112 bps. The implied yield on 3-month December ’08 Eurodollars sank 35 bps to 3.08%. Benchmark Fannie MBS yields sank 27 bps to 5.29%, this week outperforming Treasuries. The spread on Fannie’s 5% 2017 note was one wider at 50 bps and Freddie’s 5% 2017 note 2 wider at 51 bps. The 10-year dollar swap spread declined about 2 to 62.8. Corporate bond spreads were generally wider, with the spread on an index of junk bonds ending the week about 40 bps wider.
January 4 – Bloomberg (Kabir Chibber and Shannon D. Harrington): “Credit derivatives headed for the worst week in almost two months after a U.S. government report showed unemployment jumped to a two-year high, driving concerns the housing slump is dragging the economy into a recession.”
December 31 – Bloomberg (Bryan Keogh): “Bonds of high-yield, high-risk housing and financial companies delivered the worst returns this year on losses tied to subprime mortgage defaults. Bonds of housing-related companies such as Florida homebuilder Tousa Inc. and bankrupt air-conditioner maker Fedders Corp. returned a negative 12.5%, while financial company debt lost 8.07%...”
January 4 – Bloomberg (Bryan Keogh): “Commonwealth Bank of Australia, the Nation’s largest home lender, sold $2.5 billion of bonds this week, the only offering in what may end up as the slowest start to a year for U.S. corporate bond issuance since at least 1998.”
Convertible issuance included OSI Pharmaceuticals $175 million.
German 10-year bund yields sank 20 bps this week to 4.13%, while the DAX equities index sank 3.2% (down 3.2% y-t-d). Japanese “JGB” yields declined 3.5 bps to 1.465%. The Nikkei 225 sank 4.0% to the lowest level since July 2006 (1-yr decline 15.3%). Emerging equities were mostly lower, while debt markets were mostly higher. Brazil’s benchmark dollar bond yields fell 5 bps to 5.64%. Brazil’s Bovespa equities index began the year down 4.5% (1-yr gain 38.7%). The Mexican Bolsa fell 4.1% (1-yr gain 4.1%). Mexico’s 10-year $ yields sank 12 bps to 5.28%. Russia’s equities markets were closed (1-yr gain 19.2%). India’s Sensex equities index began the New Year with a 2.0% rise (1-yr gain 49%). China’s Shanghai Exchange rose 1.9%, increasing y-o-y gains to 103%.
January 3 – Dow Jones (Charles Roth and Claudia Assis): “Traditionally, investors would scramble from emerging markets at the first signs of trouble within the asset class or in response to global market volatility and tightening credit. But after four straight years of big annual gains, 2007 became not only the fifth year of clear outperformance but the first in which emerging markets became something of a safe haven from the implosion in the U.S. subprime mortgage market and the subsequent fallout…”
Freddie Mac posted 30-year fixed mortgage rates dropped 10 bps this week to 6.07% (down 11bp y-o-y). Fifteen-year fixed rates fell 11 bps to 5.68% (down 26bps y-o-y). One-year adjustable rates declined 6 bps to 5.47% (up 5bps y-o-y).
Bank Credit expanded $30.4bn during the most recent data week (12/26) to a record $9.260 TN (2-wk gain of $94.7bn). Bank Credit posted a 23-week surge of $617bn (16.1% annualized) and a 2007 rise of a record $964bn, or 11.6%. For the week, Securities Credit fell $19.3bn. Loans & Leases ballooned $49.6bn to a record $6.830 TN (23-wk gain of $505bn). C&I loans gained $12.4bn, increasing 2007 growth to a remarkable 21.7%. Real Estate loans rose $8.9bn, increasing 2007 growth to 7.6%. Consumer loans slipped $3.2bn. Securities loans jumped $21.2bn, and Other loans increased $10.3bn. On the liability side, (previous M3) Large Time Deposits declined $8.2bn.
M2 (narrow) “money” supply rose $8.1bn to a record $7.468 TN (week of 12/24). Narrow “money” expanded $425bn during 2007, or 6.0%. For the week, Currency declined $1.9bn, and Demand & Checkable Deposits sank $18.0bn. Savings Deposits increased $4.8bn, and Small Denominated Deposits added $2.4bn. Retail Money Fund assets gained $7.0bn.
Total Money Market Fund assets (from Invest. Co Inst) added $2.5bn last week to $3.113 TN. Money Fund assets have posted a 23-week surge of $530bn (46% annualized) and a one-year increase of $721bn (30.2%).
Total Commercial Paper rose $13.3bn to $1.799 TN. CP has declined $425bn over the past 21 weeks. Asset-backed CP actually increased $26.2bn (21-wk drop of $421bn) last week to $774bn. For 2007, total CP contracted $193bn, or 9.7%, with ABCP down $303bn (28%).
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 1/2) increased $4.5bn to a record $2.061 TN. “Custody holdings” are up $298bn year-over-year (16.9%). Federal Reserve Credit surged $18.2bn last week to a record $891.7bn. Fed Credit expanded $32.3bn y-o-y (3.8%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $1.30 TN y-o-y, or 27%, to a record $6.104 TN, with a 2-year gain of about 50%.
Global Credit Market Dislocation Watch:
January 3 - Financial Times (Jennifer Hughes): “Here we go. The books are closed and ‘busy season’ for auditors has arrived. As you read this, crack teams of balance-sheet boffins are hunched over laptops, clutching checklists, scrolling through spreadsheets and asking awkward questions in the final push to the big year-end reporting season. There is no mistake it is crunch time for the auditing profession. A slowing economy and banks’ rising caution over lending is expected to spark a rise in business failures - which inevitably will produce the age-old question of ‘where were the auditors?’ On top of this, the profession is uncomfortably aware it is not far enough away from the era of the Enron and WorldCom scandals to be safe from suspicions of systemic weakness should something be shown to have gone wrong this time. Small wonder then that an informal poll I conducted of global and UK large accounting firm heads showed most put some form of credit crunch worries at the top of their list of issues for 2008.”
December 31 – Financial Times (Peter Thal Larsen): “The world’s banks issued a record amount of equity in the second half of the year as they sought funds for large deals and rebuilt their balance sheets in the wake of the global credit squeeze. According to data from Dealogic, commercial and investment banks raised equity worth $83bn in the final six months of 2007… an increase of more than 20% on the same period last year, and more than was issued by the banking sector in all of 2005… The figures underline a growing shift in the banking sector towards issuing equity as lenders grapple with turmoil in the credit markets and the need to consolidate assets previously stored in off-balance sheet vehicles.”
January 2 – Telegraph (Ben Harrington): “The amount of bonds issued by companies fell by 8% last year as the fallout from credit crunch wreaked havoc in debt markets. According to data provider Dealogic, the volume of bonds sold globally by companies totalled $6,000bn in 2007 compared with $6,500bn the year before.”
January 3 – Breakingviews.com (John Foley): “The M&A business started 2007 with a bang—and ended it with a crunch. The gumming up of the credit markets has left investment bankers facing a gloomy economic outlook, and the withdrawal from the dealmaking scene of private equity buyers, a major source of fees. But, they needn’t be crying into their cups…. Deal volumes beat last year’s record and hit $4.7 trillion, according to…Dealogic.”
January 3 – Dow Jones (Michael Wilson and Mark Brown): “Global issuance of structured finance securities fell 24% in 2007, with new issues totaling $2.14 trillion from $2.8 trillion in 2006 – a record high, according to…Dealogic. Structured finance includes mortgage-backed bonds and structured credit products such as collateralized debt obligations, or CDOs, which have been at the center of the subprime-driven credit crunch… Following a bumper first-half, in which new issues totaled $1.58 trillion, higher than in any previous half-year, volumes declined 44% and 75% in the third and fourth quarters respectively, compared with the same period in 2006… Issuance of bonds backed by U.S. subprime mortgages fell 50% during 2007 and totaled $191.8 billion, compared with $382.3 billion issued in 2006. Fourth-quarter volumes were the lowest for any quarter in more than seven years… European issuance was down 21% from 2006 at $446 billion. And issuance of CDOs…dropped 21% to $305.7 billion. Fourth-quarter CDO issuance fell 84% in 2007, compared with the fourth quarter of 2006.”
January 3 – Dow Jones (Aparajita Saha-Bubna, Anusha Shrivastava and Lingling Wei): “Keith Johnson, president of mortgage-analysis provider Clayton Holdings Inc. (CLAY), spent the last four months visiting some 400 investors in the mortgage-bond market - including hedge funds, mutual funds and insurance companies - to promote the firm's services. But the message he received was a stark one. ‘Those investors are very frustrated and surprised by the amount of defaults and losses they’re seeing,’ he says. ‘They are not certain about what to believe.’ Not only that, in many cases, investors also don’t know what exactly they own, what it is worth and who else might be holding it - an all-around lack of confidence caused by less-than-perfect transparency… The lack of confidence among investors represents a major obstacle for the trillion dollar asset-backed market to come back… Sales of CDOs…plunged 85% to $15.69 billion in the fourth quarter… The sputtering Wall Street debt machine, in turn, has exacerbated the funding pressure on banks and further reduced credit for everybody from corporate borrowers to home buyers.”
January 3 – Bloomberg (Neil Unmack): “Sales of bonds backed by mortgages and loans will fall 39% this year in the U.S. as losses on subprime-related debt curbs investor demand for the securities, according to Barclays Capital analysts. Banks and companies will issue $382 billion of the debt this year in the U.S. while sales in Europe will decline 43% to 185 billion euros ($273 billion)… U.S. sales totaled $625 billion in 2007 while issuance in Europe slowed to 326 billion euros, the first-ever decline, the analysts said.”
January 3 – Dow Jones (Donna Kardos): “Issuance of so-called Alt-A mortgages tumbled in the third quarter as the credit crunch peaked, according to… S&P …which projected more declines into early 2008, citing limited liquidity. The value of Alt-A mortgages…issued in the third quarter fell 64% to $39.3 billion from the second quarter’s record high of $109.5 billion… The third quarter’s issuance was less than half that seen in the same period of 2005 and 2006. However, the mortgages still made up 28% of all mortgages originated in the quarter… S&P expects further declines of Alt-A issuance in the fourth quarter and early 2008 as the industry continues to be affected by limited liquidity in the residential mortgage-backed securities market. S&P said the dramatic drop is the result of ‘unprecedented credit and liquidity disruptions’ for both borrowers and lenders…”
January 3 – Bloomberg (Pierre Paulden): “For investors stung by $28 billion of losses on high-yield, high-risk loans, it’s payback time. Creditors are making borrowers from Carlyle Group’s LifeCare Holdings Inc. to casino owner Tropicana Entertainment LLC increase the interest on their debt by an average 0.83 percentage point to change the terms of their loans, the highest price since at least 1997… The penalties are four times higher than six months ago, S&P said. A total of 179 North American companies have a high risk of default or may need to change details of their debt agreements, Moody’s Investors Service said.”
January 3 – Bloomberg (Svenja O’Donnell and Jennifer Ryan): “U.K. lenders told the Bank of England they plan to reduce the supply of credit to consumers and companies in the first quarter, threatening to deepen the economic slowdown. Banks curbed secured credit for households ‘materially’ and cut debt to companies ‘significantly’ in the past three months, the central bank said… They plan to pare loans to those borrowers further, the report showed.”
December 31 – Bloomberg (Laura Cochrane): “Australian mortgage-backed bond sales fell to the lowest in three years as the fallout from the U.S. housing recession cut demand for the assets in the second half of the year. Sales of bonds backed by Australian home loans plunged 87% in the last six months to A$5.9 billion ($5.2bn), from a record high of A$44.4 billion in the first half… according to Deutsche Bank AG. Issuance fell 12% this year to A$50.3 billion, the lowest since 2004… ‘This is definitely the biggest challenge the Australian securitization industry has faced,’ said Phil Vernon, chairman of the Australian Securitization Forum.”
January 2 – Economic Times: “Australian dollar bond issuance fell 40% in 2007 from the year before, data from Thomson Financial shows, reflecting the global credit crunch… A total of A$66 billion ($58bn) worth of Australian dollar denominated bonds, including securitisations but excluding Australian government debt, was raised worldwide from 143 issues… Supply figures since credit markets froze are even more telling. Volume between July and December slumped 72.5% and reached a five-year record low for a half-year supply…”
January 3 - Financial Times (Paul Betts): “Last spring, the Spanish property developer Astroc started the ball rolling. Its debt servicing problems triggered the first serious plunge in the shares of Spain’s financially over-stretched property and construction companies. Before crashing, Astroc shares had increased 10-fold since first listing in 2006. Its chairman, Enrique Banuela, who had been catapulted into the Fortune 100 list of the world’s richest tycoons… Then, in the autumn, it was the turn of Llanera to bite the dust…. Now, it is Colonial, another small property fish that has grown by aggressive debt-financed acquisition into the country’s second biggest property group… Luis Portillo, its chairman and largest shareholder, has been sacked. The company is selling assets to cut its huge debt burden accumulated during the heady years of expansion and to reassure investors who have seen the value of their Colonial holdings crumble… It has become clear the heavily indebted business model behind the spectacular rise in Spanish property companies will simply cease to function in the current environment.”
January 2 - Financial Times (Martin Arnold and Henny Sender): “A $1.8bn deal between General Electric and Blackstone to acquire PHH, a mortgage and leasing business, became the latest casualty of turmoil in the credit markets as PHH said yesterday it had terminated the agreement. Blackstone Group immediately issued a statement suggesting that it held its banks responsible for the failure of the deal to go through. ‘Blackstone was prepared to close its end of the transaction using the financing that in March was originally committed to be made available,’ it said. ‘We regret that the banks are now unwilling to provide financing under the terms they originally agreed to.’”
January 4 – Bloomberg (Caroline Salas and Pierre Paulden): “Mutual funds that buy bank loans turned in the smallest gains of any fixed-income group in 2007 after subprime-mortgage losses scared off high-yield debt investors.”
January 3 - Financial Times (Peter Smith): “Centro Properties, the second-largest shopping mall owner in Australia and the fifth-biggest in the US, has put itself on the auction block ahead of a February 15 deadline to refinance $3.4bn of short-term debt. The heavily indebted Australia-listed property trust last month failed to refinance $1.3bn of loans that were used to fund expansion in the US, becoming a casualty of tough credit market conditions arising from the US subprime mortgage market.”
January 3 – Bloomberg (Brian Louis): “Tousa Inc., the Florida homebuilder that lost 99% of its market value in the past year, missed interest payments on $485 million in debt. Debt holders may accelerate payment of the notes outstanding if the company doesn’t pay the interest in 30 days… Tousa…has $1.7 billion in debt…”
January 3 - Financial Times (Javier Blas and Michael Mackenzie): “Crude oil prices briefly hit the $100-a-barrel level and gold prices jumped to an all-time high as investors yesterday poured money into commodities following deepening fears about the weakness of the US dollar… The dollar’s fragility, which makes dollar-denominated commodities cheaper to non-US investors, comes after the US manufacturing sector slumped to its lowest level in five years during December… ‘People seem scared from a number of factors - an inflation spike, further US dollar weakness or systemic financial risk,’ [UBS strategist John] Mr Reade said.”
December 31 - Financial Times (Ralph Atkins): “The euro has fast gained ground against the dollar in international official foreign exchange reserves in recent months, according to official statistics highlighting the nine-year-old currency’s growing global importance. Reflecting its increasing strength on foreign exchange markets, the euro’s share of known foreign exchange holdings rose to 26.4% in the third quarter of this year… That was up from 25.5% in the previous three months and from 24.4% in the third quarter of 2006. The dollar’s share of known official foreign reserves…fell to 63.8% in the third quarter, down from 66.5% in the same three months of 2006.”
The dollar declined 0.6% over the past week to 75.79. For the week, the Japanese yen increased 2.9%, the Swiss franc 2.3%, the Norwegian krone 1.7%, the Swedish krona 1.7%, the Brazilian real 1.3%, the Danish krone 1.2%, and the Euro 1.0%. On the downside, the South Korean won declined 0.6%, the British pound 0.6%, the Canadian dollar 0.5%, and the Australian dollar 0.3%.
January 3 – Bloomberg (Millie Munshi and Mark Shenk): “Commodities surged to a record for a second straight day as crude oil and gold climbed to the highest ever and the dollar slumped, increasing the allure of raw materials as a hedge against inflation. The UBS Bloomberg Constant Maturity Commodity Index rose as much as 1.7% to a record 1,327.21. Oil reached $100.09 a barrel as U.S. inventories tumbled more than forecast. Spot gold climbed as high as $868.89 an ounce. Industrial metals, sugar and wheat also gained. The dollar approached a one-month low versus the euro on speculation U.S. borrowing costs will drop.”
January 3 – Bloomberg (Feiwen Rong): “China’s three commodity futures exchanges traded record volumes last year as demand for raw materials from soybeans to copper increased and new contracts were introduced in the fastest-growing major economy. A total of 728 million contracts changed hands in 2007 on the Shanghai Futures Exchange, the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange, up 62% from a year ago…”
December 31 – Bloomberg (Glenys Sim and Feiwen Rong): “The Shanghai Futures exchange, China’s biggest commodity bourse by value, will introduce gold futures on Jan. 9, underscoring the increased sophistication of the nation’s financial markets and rising investor interest in the metal.”
Commodities began the year as they ended 2007. Over the holiday-shortened week, Gold surged 2.3% to $859.6 and Silver 3.8% to $15.46. March Copper rose 2.8%. February Crude gained $1.82 to $97.91. February Gasoline added 1.3%, and January Natural Gas jumped 6.2%. March Wheat rallied 5.3%. For the week, the CRB index jumped 2.2%, increasing one-year gains to 25.8%. The Goldman Sachs Commodities Index (GSCI) rose 2.4%, increasing its 52-week surge to 53%.
January 1 - AFP (Robert J. Saiget): “Chinese President Hu Jintao has vowed ‘forceful measures’ to curb rising food prices and address a booming real estate market that has seen property prices sky-rocket… ‘The central government attaches great importance to commodity prices and has made it an important task to stabilise them,’ Hu said… ‘A series of forceful measures have been taken and will continue to be taken to ensure the normal life of the masses,’ Hu was quoted… He also vowed to curb rising housing prices to help low-income families and to provide them with better health care benefits, two other top concerns of ordinary Chinese. ‘The (Communist) Party and government are very much concerned about the housing problem of the low-income masses,’ Hu said.”
January 4 – Kyodo: “A report published by a Chinese government think tank has suggested that rising inflation could threaten social stability if action is not taken to control food prices… The study by the Chinese Academy of Social Sciences says about half of poor families’ income goes for food so rising prices are hitting them particularly hard, the China Daily reported. Li Peiyuan, director of the academy’s sociological research department, said: ‘'Controlling food prices and maintaining their stability are extremely important foundations for our social stability.’”
January 3 – Wall Street Journal (Michelle Ng): “China’s tax revenue jumped 31% last year to 4.94 trillion yuan (US$676.33 billion) as the country's economic boom raised corporate profits.”
December 31 – Market News International: “The steam has finally come off the Chinese residential market as would-be buyers weigh up the impact of the government’s ongoing campaign to bring to heel one of the major drivers of economic activity. Real estate agents working in China’s largest property markets said transaction volumes have fallen through the floor in recent months…”
December 31 – Bloomberg (Chia-Peck Wong): “Hong Kong lending rose 19% in November to the highest level since January 1999… The city’s biggest banks cut interest rates three times in the first 11 months, spurring borrowing. By comparison, loan growth in China was 17 percent in November.”
January 3 – Bloomberg (Wendy Leung): “Hong Kong retail sales grew at the fastest pace in more than three years as falling unemployment, higher wages and a property market boom stoked consumer spending. Sales by value climbed 19.5% to HK$20.3 billion ($2.6 billion) in November from a year earlier…”
January 4 – Bloomberg (Joi Preciphs): “Japan and India agreed to a currency swap valued at $6 billion to offset a potential financial crisis, Nikkei English News reported… The agreement, Japan’s first for a currency swap with a nation outside East Asia, is aimed at stabilizing Asian financial markets, the news service said.”
January 4 – Bloomberg (Anoop Agrawal): “India’s foreign-exchange reserves rose $2.84 billion to $275.6 billion in the week ended Dec. 28…”
January 4 – Bloomberg (Anil Varma): “Money supply growth in India quickened in the two weeks ended Dec. 21… The M3 measure… increased 22.8% from a year earlier…”
Asian Bubble Watch:
January 3 - Financial Times: “The dominoes are starting to fall. Singapore, one of Asia’s most open economies, yesterday revealed a sharp slowdown in growth, which fell to 6% year-on-year in the fourth quarter from 9% in the third quarter. Singapore is first out of the traps, but its neighbours are set to exhibit a similar trend of decelerating growth in the fourth quarter. South Korean export growth is softening. Malaysia, coming off a relatively strong third quarter, is now seeing a slowdown in exports and industrial production… JPMorgan reckons that fourth quarter growth in emerging Asia will decelerate to 5.2% year-on-year, compared with an average of 9.3% in the first three quarters of the year. Stripping out China and India, the fourth quarter number falls to just 3.3%.”
December 31 – Bloomberg (Seyoon Kim): “South Korea’s inflation accelerated in December as crude oil prices climbed. The consumer price index jumped 3.6% from a year earlier… The increase was the biggest since October 2004…”
January 3 - Singapore Straits Times (Fiona Chan): “Home hunters can ring in the new year with some cheer - the roaring property market is finally showing signs of slowing. Prices of all categories of homes grew at a lower rate at the end of last year, after months of climbing at a breakneck pace. Growth braked the most at the highest end of the market… Even with the slowdown, private home prices still beat most forecasts by shooting up 31% for the whole year…”
December 31 – Bloomberg (Beth Thomas): “Vietnam’s economy expanded this year at the fastest pace since 1996… Gross domestic product increased 8.5% in 2007…”
Unbalanced Global Economy Watch:
January 4 – Bloomberg (Fergal O’Brien): “European inflation stayed at the highest in more than six years in December as food and energy costs soared, heightening concern among central-bank policy makers that rising prices will fuel bigger wage increases. The inflation rate in the euro area was 3.1%...”
January 3 – Bloomberg (Gabi Thesing): “Money-supply growth in the euro region held at the fastest pace in 28 years in November, adding to the European Central Bank’s inflation concerns. M3 money supply, which the ECB uses as a gauge of future inflation, grew 12.3 percent from a year earlier, unchanged from October, the Frankfurt-based central bank said today. That’s the highest rate since July 1979… ‘The credit crunch has not crimped credit growth in the euro area,’ said Thorsten Polleit, chief Germany economist at Barclays Capital… While the annual rate of loan growth to the private sector slowed to 11% in November from 11.2% in the previous month…”
January 4 – Market News International: “The number of UK mortgage approvals slumped further in November, to their lowest level since January 2005… M4 rose 0.5% on the month and 11.7% on the year in November. M4 lending also eased up, rising… 12.8% on the year…”
January 3 – Financial Times (Delphine Strauss): “[UK] Manufacturing activity slowed more than expected last month as growth in new orders slackened, according to a survey that raised hopes of a further swift cut in interest rates and added to downward pressures on sterling.”
December 31 – Bloomberg (Dara Doyle): “Irish mortgage lending grew at the slowest pace in at least a decade in November as rising borrowing costs and concern about a property slump deterred prospective homebuyers. Home loans increased an annual 14.2%... Total lending to households and companies grew an annual 17.1% in November…”
January 3 – Bloomberg (Dara Doyle): “Irish second-hand house prices fell 6.8% in 2007, declining for the first time in at least 16 years, said realtor Sherry FitzGerald. Costs in Dublin fell 9.9%... Prices in Cork, the second-biggest city, declined 4.5%.”
January 3 – Bloomberg (Andreas Cremer): “Germany’s unemployment rate fell to the lowest in almost 15 years in December as manufacturers of cars and industrial equipment hired staff to work off a backlog of orders. The jobless rate…slid to 8.4%...”
January 4 – Bloomberg (Simone Meier): “Swiss inflation unexpectedly accelerated to the fastest pace in more than 12 years in December, led by higher energy costs. Consumer prices increased 2% from a year earlier…”
January 3 – Bloomberg (Ben Sills): “Spanish inflation accelerated to the fastest pace in more than a decade in December even after economic growth slowed, led by higher food and energy costs. The inflation rate rose to 4.3%, the highest since the European-standard index was introduced in 1997…”
January 3 – Bloomberg (Jonas Bergman): “Swedish household credit growth accelerated in November as falling unemployment and tax cuts fueled borrowing. The growth rate rose to 11.9% from 11.7% in October…”
January 3 – Bloomberg (Tasneem Brogger): “Denmark’s jobless rate dropped to 2.8% in November, the lowest since 1974, adding to pressure on employers to raise salaries and threatening to undermine the economy’s competitiveness.”
January 4 – Bloomberg (Robin Wigglesworth): “Norway’s domestic credit growth unexpectedly accelerated to 14.7% in November on increased corporate borrowing.”
January 3 – Bloomberg (Ali Berat Meric and Ayla Jean Yackley): “Turkish electricity prices will rise by as much as 20% this year, more than the figures previously announced by the government, the energy regulator said.”
Bursting Bubble Economy Watch:
January 5 - New York Times (Peter S. Goodman and Michael M. Gyrnbaum): "The unemployment rate surged to 5% in December as the economy added a meager 18,000 jobs, the smallest monthly increase in four years, the Labor Department reported... Economists viewed the report as the most powerful indication to date that the United States could well be falling into a recessionary downturn."
January 3 – Washington Post (Neil Irwin): “For anyone who is worried about the economy, 2008 is off to a lousy start. The price of oil briefly rose to $100 a barrel for the first time yesterday and fresh evidence emerged that the economy is slowing. To investors, the news raised the specter of stagflation, the toxic mix of stagnant economic growth and price inflation that made for hard times in the 1970s.”
January 2 - Financial Times (Gillian Tett): “A decade ago, Tadashi Nakamae, a prominent Japanese economist, was fretting about a credit crunch: a property bubble had burst in Japan, leaving local banks engulfed in bad loans and prompting a financial crisis. Ten years later, Mr Nakamae feels an unexpected sense of déjà vu. For as 2008 gets under way, bad loans are yet again undermining major banks, partly due to falling property prices. But this time, the epicentre of the shock is on the other side of the Pacific, in America. ‘Japan’s banking crisis in the 1990s might prove an important lesson for America's subprime woes,’ Mr Nakamae concludes… Wall Street financiers have generally assumed that their own financial system was greatly superior to that in Japan (or almost anywhere else in the world). Indeed, confidence in American finance was so high that in recent years Washington officials have regularly travelled to Tokyo to ‘tell the Japanese what to do with their banks,’ admits one former US Treasury official. However, with America’s subprime saga now entering its seventh month, this latest crunch has turned far uglier than initially thought. Consequently, while Japan is not the only historical parallel for the current woes - banking crises have actually been fairly common in the past century - the events in Tokyo offer a useful prism for analysing events. In particular, they raise a crucial question: will Washington and Wall Street prove better at dealing with their banking shock than Tokyo? Or is the west now destined to face years of financial pain - as Japan did a decade ago? By any standards, the challenges dogging western policymakers are huge.”
January 4 – Bloomberg (William Selway): “From Sacramento and Albany to Boston and Tallahassee, politicians in state capitals across the U.S. are wrestling with the biggest increase in borrowing costs in three years as they struggle to shore up budget deficits widening on the national housing slump. The extra yield investors require on 10-year bonds from California, Florida, Massachusetts and New York relative to benchmark tax-exempt rates doubled since July to the widest since at least 2004…”
January 3 – Bloomberg (Bill Koenig and Alan Ohnsman): “General Motors Corp., Ford Motor Co. and Toyota Motor Corp. said U.S. auto sales fell in December, capping the worst year in a decade, and predicted that 2008 probably won't be any better.”
January 3 – Dow Jones (Jacqueline Palank): “Chapter 11 filings jumped by nearly 25% in 2007, hitting the highest levels since Congress enacted laws in 2005 designed in part to discourage bankruptcy filings… The total number of new bankruptcies in 2007 -- both consumer and business -- increased by 40% from 2006, according to AACER. Last year saw 826,578 new filings, compared with 590,568 in 2006.”
December 31 – The Wall Street Journal (Laura Mandaro): “Market analysts warn that more U.S. businesses are likely to hang ‘in bankruptcy’ signs this year as slower economic growth and pricey commodities force the weakest companies to seek refuge from creditors. The pain, they predict, is likely to spread beyond mortgage lenders, home builders and consumer-oriented companies, which contributed to a 40% jump in bankruptcy filings in 2007. While these industries are expected to play a role in 2008’s misery, Global Insight Inc… puts electronics makers, coal miners, agriculture companies and makers of durable goods such as machinery among the industries at risk for the biggest increases in Chapter 11 filings this year.”
January 2 - Reuters (Anastasija Johnson): “U.S. states, cities and counties were able to sell a record $423 billion of debt in 2007 to pay for schools, roads and other public projects despite credit market turbulence… Municipal bond issuance was up 10.5% in 2007 from $383 billion sold in 2006… Thomson Financial said… Debt volume broke the previous record of $406 billion set in 2005 even though some issuers were forced to postpone or delay deals in the second part of the year due to turbulent market conditions.”
January 3 – Bloomberg (Zachary R. Mider): “Foreign investors exploited the declining U.S. dollar during the past three months to snap up American companies at the fastest pace in at least a decade. Buyers from Dubai to the Netherlands accounted for 46% of the $230.5 billion of U.S. mergers and acquisitions announced in the fourth quarter, the biggest share since 1998 when Bloomberg started compiling the data. The total excludes $17.9 billion of so-called passive investments by state-run funds in Asia and the Middle East in U.S. banks, including New York-based Citigroup Inc.”
Latin America Watch:
January 2 – Bloomberg (Eliana Raszewski): “Argentina's tax revenue rose to a record in December, fueled by a jump in sales tax collection as the economy heads to its sixth straight year of growth. Tax revenue climbed 39% to 19.6 billion pesos ($6.2bn)…”
January 3 – Bloomberg (Alex Emery): “Peru’s inflation accelerated last year at the fastest pace since 1998, increasing the chances the country’s central bank may raise lending rates this week. Consumer prices climbed 3.93% in 2007…”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
January 2 – Bloomberg (Jody Shenn): “Moody’s Investors Service is reviewing a collateralized debt obligation managed by NIBC Holding NV as investors fight over how they will be repaid following a decision by some owners to accelerate the notes’ maturity… The trustee for the Orion CDO 2006-2 Ltd. is seeking a court opinion on the terms to resolve ‘differing views regarding the distribution’ of interest and principal, Moody’s said, after the CDO’s controlling class decided all notes should be immediately due following a so-called default event.”
January 3 – Bloomberg (Jody Shenn): “Fannie Mae and Freddie Mac… guaranteed a record amount of new securities backed by interest-only mortgages last year, newsletter Inside Mortgage Finance reported. The share of…Fannie Mae’s home-loan securities backed by interest-only debt rose to 16%, from 14.9% in 2006… The share for…Freddie Mac rose to 22.6%, from 16.7%...”
Mortgage Finance Bust Watch:
January 2 – The Wall Street Journal (Greg Ip): “U.S. house prices ‘likely would have to fall considerably’ to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists. The study…suggests prices would have to fall 15% over five years, assuming rents rose 4% a year.”
December 31 – Bloomberg: “Defaults on privately insured U.S. mortgages rose 35% in November from the same month last year… The number of insured borrowers falling more than 60 days late on payments jumped to 61,033 last month from 45,325, according to data from…the Mortgage Insurance Companies of America.”
Financial Sphere Bubble Watch:
January 3 – Bloomberg (Kabir Chibber): “ICAP Plc, the world’s largest broker of transactions between banks, said trading on its computer-based systems rose 27% last year to a record $806 billion a day… Trading soared as investors bet on or hedged against losses linked to record U.S. home foreclosures.”
January 1 – Reuters: “Most Californians believe the state is in a poor economic condition that will continue through 2008, according to a recent poll. Fifty-two percent said California was in bad economic times, and 20% said it was in good economic times. When asked about the next 12 months, 70% said they expected the state’s economy to worsen or stay the same.”
January 3 - Financial Times: “Is ‘quant’ a busted flush? Since last summer’s crisis, when fund managers following quantitative strategies started blaming black swans, most have suffered net outflows, while many of the weaker funds have been badly hurt. Even where money has stayed put, no fund-of-funds manager or other investor is looking at quant in quite the same way. Quant strategies have been around in various guises for more than 20 years, but managers have rarely seen anything like the turmoil of that single week in August. The problem was an overcrowded market where a lot of funds had similar positions, especially in US small and mid-capitalisation equities… Globally, there is at least $1,000bn invested in quant strategies, and probably double that.”
Crude Liquidity Watch:
January 3 – The Wall Street Journal (Neil King Jr., Chip Cummins and Russell Gold): “The surging price of oil, from just over $10 a barrel a decade ago to $100 yesterday, is altering the wealth and influence of nations and industries around the world. These power shifts will only widen if prices keep climbing… Costly oil already is forcing sweeping changes in the airline and auto sectors. It is intensifying the politics of climate change and adding urgency to the search both for fresh sources of crude and for oil alternatives once deemed fringe. The long oil-price boom is posing wrenching challenges for the world’s poorest nations, while enriching and emboldening producers in the Middle East, Russia and Venezuela. Their increasing muscle has a flip side: a decline of U.S. clout in many parts of the world.”
January 3 – Bloomberg (Arif Sharif and Sean Cronin): “Gulf Arab states…face the prospect of higher prices as $100 crude floods the region with petrodollars, Standard Chartered Plc said… High oil prices will result in more money flowing into the region and ‘translate into greater pressure on inflation and on goods and asset prices,’ Marios Maratheftis, Standard Chartered Plc's head of research for the Middle East, said…”
I’ll cut to the chase somewhat and highlight three of the major themes for what will surely be a tumultuous and historic 2008: An ongoing bust in “Wall Street-backed” finance; mounting recessionary forces imperiling the U.S. Bubble economy; and worsening Global Monetary Disorder. It is a confluence of extraordinary developments that will keep policymakers discombobulated and impotent, with financial market participants increasingly aghast at what they perceive as ineffectual policymaking. This year will fundamentally change the Greenspan/Bernanke Fed’s (fallacious) doctrine that Bubbles are to be ignored because of the confidence in the effectiveness of post-Bubble “mopping up” measures. Going forward, an appropriate “risk management” approach to central banking will give much greater weight to restraining Credit and speculative excess.
Last year was a watershed year for both U.S. and global finance. Spectacular breakdowns in the gigantic markets for Wall Street’s “private label” mortgage securitizations and mortgage-related derivatives fundamentally and profoundly altered the financial and economic landscape – for years to come. The loss of trust in “structured Credit products'” ratings, pricing, leveraging, financial guarantees, counterparties, and marketplace liquidity is an ongoing saga that will for some time significantly restrain both Credit Availability and Marketplace Liquidity. U.S. risk asset market (financing and speculating) dynamics have been altered and myriad Bubbles are in now jeopardy. Resulting recessionary forces are so powerful I am confounded as to why the vast majority of analysts and strategists maintain ridiculously low probabilities for recession for 2008. It’s upon us. And a key economic Issue 2008 is how rapidly and deeply the Bubble economy falters, a dynamic that will be greatly influenced by the performance of the financial markets.
As we begin 2008, I believe the U.S. Bubble economy is unusually susceptible to stock market weakness. Consumer confidence has waned right along with home prices, yet I’ll suggest that equities market resiliency had worked to support the general view that U.S. economic fundamentals remained sound. Prolonging the equities market Bubble also played a role in cushioning the Credit market crisis. Faltering stock prices will now batter fragile consumer and debt market sentiment, creating a spiral of market weakness begetting and reinforcing economic weakness. Moreover, I expect negative sentiment to be reinforced by what will soon be a steady stream of headline-grabbing job cuts, especially in the financial and retail sectors. I would argue that, in the case of both the stock market and corporate America, last year’s disregard for the true ramifications of the bursting Credit Bubble will make for a more problematic 2008 in the markets and otherwise.
Consumer spirits are certainly not being heartened by headlines of $100 crude oil. And while the bloated consumer sector of the economy will initially suffer the brunt of recessionary headwinds, other dimensions of economic activity (i.e. energy, alternative energy, agriculture, metal & mining, and exports in general) will be governed by powerful inflationary dynamics. Wall Street is keen to ridicule the Fed’s (or at least a faction at the FOMC) attention to inflation risk. The reality of the situation is that global inflationary pressures have become the most robust in decades. In 2008, economies with weak currencies, huge trade deficits, and large imported energy requirements will face outsized inflationary risks.
Attempting to illuminate dynamics associated with today’s problematic Global Monetary Disorder, I’ll use an analogy to the Mortgage Finance Bubble. The GSE’s – with their quasi-government status (hence market perceptions of superior debt quality) – were for years instrumental in nurturing market distortions and powerful inflationary biases throughout American housing markets (homes and mortgages). By the time GSE accounting irregularities brought an abrupt halt to their ballooning Credit expansion back in 2004, inflationary biases had become more than sufficiently powerful to accommodate the shift to massive issuance of Wall Street-backed “private-label” MBS. This Credit onslaught was, at least for awhile, sufficient to sustain the Bubble. I have discussed how Wall Street grabbed the Mortgage Finance Bubble “baton” from the GSEs (and ran like crazed lunatics).
Well, U.S. Credit Bubble excesses – manifesting into asset Bubbles, unprecedented spending & “investment” distortions, massive Current Account Deficits, and highly leveraged speculation – over a period of years nurtured increasingly robust Global Credit Bubble Dynamics. And just as mortgage/housing Inflationary Biases invited wild and destabilizing (“blow-off”) Credit excesses from an emboldened Wall Street, U.S. Bubble-induced Global Inflationary Forces (i.e. securities markets, energy, commodities, and economies) have encouraged domestic Credit systems around the globe to partake in an Unparalleled Global Credit Boom. With few exceptions, double-digit Credit growth has become the global norm, with “bric” (Brazil, Russia, India, and China) Credit expansion likely in the 20 to 30% range. To be sure, “Wall Street” Monetary Disorder evolved into an even more Unwieldy Strain of Global Monetary Disorder. Wall Street today wishes desperately that the Fed will completely disregard global issues and aggressively reflate. It is the nature of Bubbles that such easy “money” policies would work to exacerbate Bubble excess, with minimal impact on those that had already burst.
There are today great – and apparently unappreciated - risks associated with aggressive Fed rates cuts further aggravating global liquidity, financial flows, and currency market excesses and instabilities. This is not 2001/02 or 1998, and the current backdrop is the antithesis of the early-nineties global “disinflationary” backdrop that provided the Greenspan Federal Reserve the flexibility to orchestrate a historic banking system recapitalization and economic reflation.
For one, the Fed today risks inciting a crisis of confidence for our degraded dollar and currency market dislocation more generally. Second, there are the enormous financial, economic and geopolitical risks associated with the continuation of rampant energy and commodities inflation. Third, aggressive Fed rate cuts risk exacerbating increasingly destabilizing financial flows (teaming with now rampant domestically-induced excesses) to Asia and the emerging markets (Brazil, Russia, India and China – in particular). The last thing an increasingly unstable Chinese Bubble needs is another year of massive financial inflows. Fourth, with Monetary Disorder and general inflationary pressures mounting rapidly across the globe, reflationary policies here at home today have a much greater propensity for feeding into traditional measures of consumer price inflation than they’ve had in decades.
Returning to my Credit Bubble “baton” analogy, it is instructive to contemplate how precarious it became when Wall Street-backed Credit supplanted (quasi-govt.) GSE Credit at the (“terminal”) blow-off phase of Mortgage Finance Bubble excess. This period of Acute Monetary Disorder was fueled by unfettered inflation (issuance) of Wall Street securitizations conjoining with manic speculative impulses. Inflating home prices, market euphoria and accompanying economic distortions masked the fundamental fragility of the underlying Credit instruments, debt structures and asset prices.
Today, similar dynamics enshroud acute asset market, Credit system and economic vulnerabilities on a global basis. The U.S. Credit system handed the Global Credit Bubble Baton to domestic financial systems the likes of China, Russia, India, Brazil, the oil/commodity producing economies, and the emerging markets more generally. These immature and unsound “contemporary” financial systems are today perpetrating a Credit fiasco paralleling U.S. subprime but on a much grander scale. Keep in mind that only deep-seated underlying U.S. systemic weakness (manifesting into massive financial outflows and a depreciating currency) could have engendered the profligate backdrop where (fundamentally deficient) Credit systems across the globe could inflate with such reckless abandon. The bottom line is that Credit Bubble and “Ponzi” dynamics are working their seductive and disastrous effects now on an unprecedented international scale. To those arguing that aggressive Fed rates cuts pose inconsequential risk, I have the following retort: “only if you exclude the risk of global financial and economic collapse.”
Analysts of the bullish persuasion have been trumpeting the U.S. economy’s resiliency in the face of the “subprime” crisis. As I have addressed over the past few months, our Bubble Economy has been bolstered by significant ongoing Credit creation – even in the face of the bust in Wall Street-backed finance. Importantly, the liabilities of some key sectors have retained their “moneyness” throughout the crisis, spurring a rapid expansion of the thus far immune debt instruments. Bank Credit has expanded at a 16.1% rate over the past 23 weeks and finished 2007 with one-year growth of a record $964bn, or 11.6% (2-yr growth of 23.4%!). Money fund assets ballooned at a 46% rate over this same 23-week period (to $3.1 TN), with one-year growth of 30.2%. Fannie and Freddie’s Combined Books of Business (BofB) expanded on average almost $55bn monthly between March and November, in what will be a record year of BofB growth. The Federal Home Loan Bank System likely expanded Credit at a 30 to 40% annualized rate during the second half, capping off what will also be record annual growth.
The ongoing bust in Wall Street-backed finance will undoubtedly be a major Issue for 2008. No amount of Fed rate cutting can reverse this spectacular debt collapse. The fallacies of so many aspects of “contemporary finance” have been exposed. Going forward, the viability of many firms involved in Wall Street Risk Intermediation will be in doubt. The financial guarantors are in serious trouble. The Credit default marketplace will attempt to forestall implosion. Problems that will beset the colossal leveraged speculating community have only begun to emerge.
What impact Fed “reflationary” policies have on the ballooning Bubbles in the “money-like” Credit sectors is a less obvious but Major Issue 2008. With Wall Street Risk Intermediation now virtually out of the equation, the ballooning Bank, GSE, and money fund complexes are left in a perilous position as the prominent risk intermediators (of last resort) for a U.S. Bubble economy at the precipice. Delaying the inevitable (arduous) financial and economic adjustment period through aggressive Greenspan-style cuts only exacerbates the unmanageable risks accumulating in institutions issuing enormous quantities of perceived safe and liquid liabilities (“money-like” debt instruments). The difference between a deep recession and a devastating depression hinges – as it has historically – on maintaining market faith and confidence in “money.” A serious Issue 2008 has the perceived soundness of “money” today in the most serious jeopardy in almost 80 years.
It will be another year of fascinating tests for Macro Credit Theory and Analysis. Is it possible for our Bubble Economy to persevere through 2008 without ever increasing quantities of system Credit growth? Assuming such massive Credit creation is in the offing (a major assumption today), how does the Credit system pull off such a feat and what will be the consequences? Well, it would certainly necessitate ongoing Bubbles in “money” market instruments, including Treasuries, “repos,” and agencies. It would also require a massive issuance of agency MBS, along with another year of double-digit (Trillion plus!) bank Credit expansion. And we must also hope that our foreign Creditors will not completely back away from our risk markets.
Today, ongoing Credit excess, Current Account Deficits and financial outflows inundate the world with dollar balances - that are then recycled back to a limited supply of perceived safe Treasuries and (to a somewhat lesser extent) agencies. This resulting Bubble has severely distorted the fixed income marketplace, creating one more facet to the unfolding financial crisis and dislocation. The first three trading sessions saw stocks in virtual freefall, Treasuries in melt-up mode, the yen rallying strongly, and many spreads widening meaningfully.
2008 has commenced with some key hallmarks of impending financial dislocation – not a huge surprise since we’ve for some time now been in the midst of an unfolding financial crisis. The stock market is in some serious trouble, and the U.S. Bubble Economy is in serious jeopardy. Myriad global Bubbles are accidents waiting to happen. Worse yet, we’re now officially in what will be a decisively unbullish political campaign season. There’s also increased talk of Wall Street investigations – of which there will be plenty. Disconcertingly, the public mood is turning increasingly sour at home and the geopolitical backdrop more problematic abroad. Get ready for one of the consequence of bursting Bubbles – a public less trusting in “Capitalism,” a world increasingly lured to “protectionism,” and a federal government much more intrusive in our financial lives.
As for Issues 2008, there are obviously many and they are unusually varied – a wide spectrum of financial, economic, political, environmental and geopolitical risks. I really fear a major California bust has commenced. But what worries me most at the present is the possibility of a “run” on the leveraged speculating community, a circumstance that could potentially precipitate a “seizing up” of even the more “money-like” debt markets at home and abroad. I foresee chaotic markets. As always, I can only hope my fears prove unfounded.