One-month Treasury bill rates ended the week at 9 bps, and three-month bills were at 21 bps. Two-year government yields were up one basis point to 0.93%. Five year T-note yields were little changed at 1.82%. Ten-year yields increased one basis point to 2.88%. Long-bond yields jumped 14 bps to 3.75%. The implied yield on 3-month December ’09 Eurodollars were little changed at 1.59%. Benchmark Fannie MBS yields dropped 10 bps to 4.17%. The spread between benchmark MBS and 10-year T-notes narrowed 9 to 127 bps. Agency 10-yr debt spreads widened 4 to 78 bps. The 2-year dollar swap spread declined 8 to 69.25 bps; the 10-year dollar swap spread declined 1.5 to 23.5bps, and the 30-year swap spread declined 1.25 to negative 33.5 bps. Corporate bond spreads narrowed. An index of investment grade bond spreads narrowed 10 to 270 bps, and an index of junk spreads narrowed 54 to 1,246 bps. GE Capital Credit default swap prices narrowed about 250 bps to around 700 bps.
It was a big week for corporate debt sales. Investment grade issuance included Bank of America $8.5bn, GE Capital $6.5bn, Goldman Sachs $5.0bn, Morgan Stanley $5.0bn, Boeing $1.85bn, Halliburton $2.0bn, Medtronic $1.25bn, CVS Caremark $1.0bn, U.S. Bank $750 million, Eaton $600 million, Union Bank $1.0bn, Florida Power & Light $500 million, South Carolina E&G $535 million, Disney $500 million, Sysco $500 million, Keycorp $430 million, Private Export Funding $400 million, AND PG&E $350 million.
Junk issuers included Valero Energy $1.0bn, Dole Foods $350 mllion, Union Electric $350 million, and Mystic RE $225 million.
International debt issues this week included Bank of England $2.0bn, ING Bank $2.0bn, Inter-American Development Bank $1.0bn, African Development Bank $500 million, Digicel $335 million, and Oriental Bank & Trust $105 million.
U.K. 10-year gilt yields dropped 9 bps to 2.95%, while German bund yields jumped 13 bps to 3.06%. The German DAX equities index surged 7.8% (down 17.8%). Japanese 10-year "JGB" yields added 2 bps to 1.31%. The Nikkei 225 rallied 5.5% (down 14.6%). Emerging markets were mostly higher. Brazil’s benchmark dollar bond yields dropped 13 bps to 6.93%. Brazil’s Bovespa equities index rallied 5.1% (up 3.9% y-t-d). The Mexican Bolsa surged 14.0% (down 13.2% y-t-d). Mexico’s 10-year $ yields sank 23 bps to 6.50%. Russia’s RTS equities index jumped 16.7% (up 3.3%). India’s Sensex equities index rose 3.7% (down 9.2%). China’s Shanghai Exchange fell 2.9% (up 16.9%).
Freddie Mac 30-year fixed mortgage rates dropped 12 bps to 5.03% (down 110bps y-o-y). Fifteen-year fixed rates declined 8 bps to 4.64% (down 96bps y-o-y). One-year ARMs fell 6 bps to 4.80% (down 34bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up one basis point this week to 6.92% (down 9bps y-o-y).
Federal Reserve Credit fell $13.8bn last week to $1.878 TN. Fed Credit has dropped $369bn y-t-d, while having expanded $1.009 TN over the past 52 weeks (116%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last week (ended 3/11) declined $5.1bn to $2.591 TN. "Custody holdings" were up $440bn over the past year, or 21%.
Bank Credit jumped $38.2bn to $9.812 TN (week of 3/4). Bank Credit rose $384bn year-over-year, or 4.1%. Bank Credit increased $420bn over the past 26 weeks. For the week, Securities Credit increased $6.3bn. Loans & Leases gained $31.9bn to $7.143 TN (52-wk gain of $231bn, or 3.3%). C&I loans declined $4.2bn, with 52-wk growth of 5.5%. Real Estate loans rose $16bn (up 5.8% y-o-y). Consumer loans fell $4.9bn, while Securities loans jumped $28bn. Other loans slipped $3.1bn.
M2 (narrow) "money" supply jumped $29.5bn to a record $8.304 TN (week of 3/2). Narrow "money" has now inflated at an 16.9% rate over the past 24 weeks and $738bn over the past year, or 9.8%. For the week, Currency added $1.7bn, and Demand & Checkable Deposits grew $15.8bn. Savings Deposits rose $14.2bn, while Small Denominated Deposits declined $2.6bn. Retail Money Funds added $0.7bn.
Total Money Market Fund assets (from Invest Co Inst) were little changed at $3.906 TN, with a 52-wk expansion of $452bn, or 13.1% annualized. Money Funds have expanded at a 10.3% rate y-t-d.
Asset-Backed Securities (ABS) issuance picked up a bit. Year-to-date total US ABS issuance of $8.3bn (tallied by JPMorgan's Christopher Flanagan) is a fraction of the $40.6bn for comparable 2008. There has been no home equity ABS issuance in months. Year-to-date CDO issuance totals only $660 million.
Total Commercial Paper outstanding increased $3.9bn this past week to $1.484 TN. CP has declined $197bn y-t-d (61% annualized) and $361bn over the past year (19.6%). Asset-backed CP declined $4.9bn to $717bn, with a 52-wk drop of $90bn (11.2%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $207bn y-o-y, or 3.2%, to $6.639 TN. Reserves have declined $307bn over the past 21 weeks.
Global Credit Market Dislocation Watch:
March 13 – Bloomberg (Belinda Cao and Judy Chen): “China, the U.S. government’s largest creditor, is ‘worried’ about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said. ‘We have lent a huge amount of money to the United States,’ Wen said at a press briefing… ‘I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.’”
March 10 – Financial Times (Tony Barber, Alan Beattie and George Parker): “Disagreements between the European Union and the US over how to combat the global recession widened on Tuesday as EU governments made clear they had little appetite for piling up more debt to fight the collapse in output and jobs. Finance ministers from the 27-nation bloc insisted in Brussels that it was doing enough to support world demand and did not need at present to adopt another fiscal stimulus plan, as Washington is urging… It also emerged that Gordon Brown, UK prime minister, was struggling to organise the summit. Britain’s most senior civil servant claimed it was hard to find anyone to speak to at the US Treasury. Sir Gus O’Donnell, cabinet secretary, blamed the ‘absolute madness’ of the US system where a new administration had to hire new officials from scratch, leaving a decision-making vacuum. ‘There is nobody there. You cannot believe how difficult it is,’ he told a conference…”
March 9 – Bloomberg (Hugh Son and Scott Lanman): “American International Group Inc. appealed for its fourth U.S. rescue by telling regulators the company’s collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers’ stake in the firm. AIG needed immediate help from the Federal Reserve and Treasury to prevent a ‘catastrophic’ collapse that would be worse for markets than the demise last year of Lehman Brothers Holdings Inc., according to a 21-page draft AIG presentation dated Feb. 26, labeled as ‘strictly confidential’ and circulated among federal and state regulators.”
March 12 – Wall Street Journal (Scott Patterson and Leslie Scism): “The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies’ capital and erode investor confidence. A dozen life insurers have pending applications for aid from the government’s $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn’t said whether insurers will be eligible for the program. Life insurers have taken a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 all-time high. The Dow Jones Industrial Average has lost 21% year to date, off 51% since its October 2007 record.”
March 9 – Bloomberg (Gabrielle Coppola and John Detrixhe): “Bank of America Corp., the largest U.S. bank by assets, sold $8.5 billion of debt backed by the Federal Deposit Insurance Corp., according to… Bloomberg.”
March 9 – Bloomberg (Wes Goodman): “Investor Jim Rogers said the Federal Reserve will probably start buying Treasuries to keep borrowing costs down, postponing a rout in U.S. government debt. Fed Chairman Ben S. Bernanke said March 7 the central bank will use ‘all the tools’ available to revive economic growth, indicating the central bank is closer to buying, Rogers said. Record government borrowings will lead to losses later, said the chairman of Singapore-based Rogers Holdings and author of the books “Hot Commodities” and “Adventure Capitalist.’ ‘He’s setting things up for a gigantic fall down the line, but that does not mean he can’t drive long-term interest rates to zero,” Rogers said. “Governments are printing money everywhere, borrowing stupendous amounts. Throughout history that has led to problems in the bond markets, and it will this time too.’”
March 9 – United Press International: “The ripple effects of a burst U.S. housing bubble will traverse the globe in 2009, economists at the World Bank said. Countries from Africa to Latin America to Asia will find credit shrinking and export markets in decline, a World Bank report said… As a result, for the first time in fifty years, both the global production and worldwide trade volume would shrink in the same year.”
March 9 – Bloomberg (Jeremy van Loon): “Nobel laureate Joseph Stiglitz said the world needs to develop a currency reserve and financial system that relies less on the dollar and more on input from developing countries. ‘The current system is breaking down,” Stiglitz said… ‘Replacing it with a mix of dollar and euro won’t solve the problem either.’”
The dollar index ended the week 1.2% lower at 87.43 (up 7.5% y-t-d). For the week on the upside, the Swedish krona increased 6.7%, the South African rand 4.8%, the Mexican peso 4.6%, the New Zealand dollar 4.6%, the South Korean won 4.5%, the Nowegian krone 3.3%, the Brazilian real 3.3%, the Australian dollar 2.7%, and the Euro 2.1%. On the downside, the Swiss franc declined 2.3% and the British pound 0.7%.
March 9 – Bloomberg (Alistair Holloway): “The Baltic Dry Index, a measure of shipping costs for commodities, rose to the highest since Oct. 9 on demand to ship South American grains.”
Gold slipped 1.0% this week to $930 (up 5.4% y-t-d), and silver declined 1.0% to $13.20 (up 16.9% y-t-d). April Crude gained 34 cents to $45.86 (up 3% y-t-d). April Gasoline rose 1.6% (up 28% y-t-d), while April Natural Gas slipped 0.4% (down 30% y-t-d). March Copper fell 1.7% (up 18% y-t-d). March Wheat declined 1.9% (down 17% y-t-d), while Corn firmed 6.3% (down 8% y-t-d). The CRB index gained 0.7% (down 8.0% y-t-d). The Goldman Sachs Commodities Index (GSCI) rallied 2.1% (down 1.8% y-t-d).
China Reflation Watch:
March 12 – Reuters: “China’s industrial output growth ground almost to a standstill at the start of the year… but a continued surge in bank lending in February spurred optimism that business activity could soon rebound… Annual growth in China’s broad M2 measure of money supply rose to 20.5% rate in February from 18.8% in January… New yuan loans in February totalled 1,070bn yuan ($157bn), down from the record of 1,620bn yuan in January, but still very high by historical standards. With 10 months to go in 2009, China is already more than halfway towards reaching its goal of at least 5,000bn yuan in new bank lending.”
March 11 – Bloomberg (Li Yanping): “China’s investment spending surged as the nation poured money into roads, railways and power grids to counter a plunge in exports, which a separate report showed fell by a record in February. Urban fixed-asset investment climbed a more-than-estimated 26.5% in January and February combined to 1.03 trillion yuan ($150 billion) from a year earlier… Exports tumbled 25.7%.”
March 10 – Bloomberg (Chia-Peck Wong): “Chinese home prices fell by a record last month, paced by a 15% plunge in the southern export hub of Shenzhen, where factories closed as growth in the world’s third-biggest economy slowed. The 1.2% decline in prices in 70 major cities is the most since the government started issuing the data in August 2005…”
March 10 – Bloomberg (Tian Ying): “China vehicle sales surged 25% in February, the first gain in four months, after the government cut taxes on some models, helping the country extend its lead as the world’s largest auto market this year.”
March 9 – Bloomberg (Keiko Ujikane): “Japan’s public debt may exceed 1,000 trillion yen ($10.2 trillion) next fiscal year, Finance Minister Kaoru Yosano said in parliament…”
March 9 – Bloomberg (Keiko Ujikane): “Japan posted its first current- account deficit in 13 years in January after exports collapsed amid the global recession. The deficit stood at 172.8 billion yen ($1.8 billion)…”
March 12 – Bloomberg (Finbarr Flynn and Takako Taniguchi): “The funding crunch for Japanese businesses is intensifying as foreign-currency financing dries up, forcing larger firms to turn to the nation’s state policy bank for emergency loans, the head of the lender said. ‘Not just automakers, but electrical and chip companies, and also other manufacturers, are coming to us in large numbers,’ Hiroshi Watanabe, chief executive officer of…Japan Bank for International Cooperation, said… As part of a government program, the bank is lending to ‘essentially blue-chip firms that are having trouble with cash flow.’”
March 11 – Bloomberg (Finbarr Flynn, Katsuyo Kuwako and Shingo Kawamoto): “Japan’s financial regulator will make unprecedented inspections of banks to avert a loan drought that would increase bankruptcies, as real estate manager Pacific Holdings Co. collapsed after failing to raise funds. The Financial Services Agency will visit Japan’s biggest lenders including Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. and examine their records to ensure they provide credit and don’t force borrowers to repay loans early as the recession deepens, the regulator said yesterday.”
March 9 – Bloomberg (Vipin V. Nair and Kartik Goyal): “India’s passenger-car sales climbed for the first time in five months in February as lower auto-loan rates spurred demand for Maruti Suzuki India Ltd. and Hyundai Motor Co. vehicles. Sales rose 22% to 115,386…”
Asia Reflation Watch:
March 10 – Bloomberg (Clarissa Batino and Karl Lester M. Yap): “Philippine exports fell the most in at least 28 years in January, deepening the country’s economic slowdown as demand for Asia’s electronics and other goods plunge amid the global recession. Overseas sales dropped 41%...”
Latin America Watch:
March 10 – Bloomberg (Joshua Goodman and Andre Soliani): “Brazil’s economy shrank the most on record in the fourth quarter, going against predictions that Latin America’s largest economy would be a bright spot in the deepening global recession. Gross domestic product fell 3.6% in the fourth quarter…”
March 9 – Bloomberg (Jens Erik Gould): “Mexico reported the fastest annual core inflation in more than seven years last month, possibly limiting the central bank’s room to lower the benchmark interest rate. Underlying inflation, which excludes some fresh food and energy costs, was 5.78% in February, the highest since November 2001…”
Central Banker Watch:
March 12 – Market News International: “The Swiss National Bank… said it cut its target range for three-month Swiss franc Libor by 25 bps to 0.0%-0.75% with immediate effect. The central bank will ‘use all means at its disposal to gradually bring the Libor down to the lower end of the new target range, i.e. to approximately 0.25%.’ To achieve this goal, the SNB will increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers, and purchasing foreign currency on the foreign exchange markets.”
March 12 – Bloomberg (Tracy Withers): “New Zealand’s central bank cut its benchmark interest rate by half a percentage point to a record-low 3% to help steer the economy out of it worst recession in more than 30 years.”
March 10 – Wall Street Journal (Greg Hitt, Damian Paletta and Jonathan Weisman): “The Obama administration is looking to steer new assistance to the nation's small-business community, Treasury Secretary Timothy Geithner told members of Congress Monday night. In a closed-door meeting with House Democrats on Capitol Hill, Mr. Geithner said Obama officials are working on plans to boost liquidity for small businesses as part of the administration’s broadening efforts to spur lending and arrest the pace of job losses, said individuals familiar with the meeting.”
Unbalanced Global Economy Watch:
March 12 – Bloomberg (Brian Lysaght): “Police in London’s financial district are battling a ‘massive’ increase in fraud as the recession bites and lures more people into crime. ‘The cases we are investigating involve potential losses of around a billion pounds ($1.39 billion),’ said Detective Chief Superintendent Steve Head, who heads the City of London’s Economic Crime unit. ‘While the rest of the force has seen crime declining, in fraud reporting we’ve seen a massive increase.’”
March 10 – Bloomberg (Brian Swint): “U.K. housing sales dropped to the lowest since at least 1978 as the recession pushed prices down further, the Royal Institution of Chartered Surveyors said.”
March 9 – Bloomberg (Peter Woodifield): “London luxury home prices fell the most in more than three decades in the year through February as the credit crunch deterred wealthy buyers, property broker Knight Frank LLP said. The average value of homes costing more than 1 million pounds ($1.4 million) in London’s most expensive neighborhoods dropped 23%...”
March 10 – Bloomberg (Louisa Nesbitt): “Ireland’s economy will shrink by more than 6% during 2009, European Central Bank governing council member John Hurley said…”
March 12 – Bloomberg (Gabi Thesing): “Industrial production in Germany, Europe’s largest economy, dropped the most on record in January as the global recession sapped demand for goods at home and abroad. Output slumped a seasonally adjusted 7.5% from December…”
March 12 – Bloomberg (Helene Fouquet): “French companies shed the most jobs in 40 years in the fourth quarter as manufacturing slumped and employers braced for the worst recession since World War II. Payrolls, excluding government employees, farm workers and the self-employed, dropped by 117,300, or 0.7%, to 15.89 million…”
March 10 – Bloomberg (Kati Pohjanpalo): “Finland’s industrial production plummeted the most on record after recessions in the U.S. and Europe undermined demand for the country’s exports. The annual 19.5% decline…”
March 11 – Bloomberg (Ott Ummelas): “Estonia’s economy contracted an annual 9.7% in the fourth quarter, more than previously reported, as a decline in consumer spending and investments deepened the Baltic nation’s recession.”
March 11 – Bloomberg (Aaron Eglitis): “Latvia’s economy shrank a revised annual 10.3% in the fourth quarter, the steepest drop in the European Union, as domestic demand and manufacturing fell. The contraction compared with a preliminary estimate of 10.5% for the fourth quarter…”
March 12 – Bloomberg (Paul Abelsky): “Moscow lost its title as the billionaire capital of the world to New York after Russian asset prices fell further than almost anywhere else last year. The ranks of billionaire Muscovites thinned to 27 in Forbes magazine’s annual rich list from 74 last year. New York’s total slid to 55 from 71. A year ago, Russia had 87 billionaires, more than any other country except the U.S. Now it has 32.”
Bursting Bubble Economy Watch:
March 11 – Bloomberg (Alexis Leondis): “The millionaires’ club in the U.S. became more exclusive last year after a 38% drop in the Standard & Poor’s 500 Index helped thin their ranks to the fewest since 2003. Families with a net worth of at least $1 million, excluding primary residences, declined to 6.7 million in 2008, a decrease from 9.2 million a year earlier, according to a survey… conducted by Spectrem Group. That is the lowest number of millionaires since 2003…”
March 12 – Wall Street Journal (Brody Mullins and T.W. Farnam): “The recession has hit K Street, home of the Washington influence business. The number of active lobbyists declined 2% in 2008 to 15,900, recording its first yearly drop in seven years… ‘For the first time, people are saying that Washington is not recession-proof, and this industry is not recession-proof,’ said Michael Herson, president of lobbying firm American Defense International. ‘Companies have cut back, and one of the first things they cut back on is lobbyists,’ he said.”
March 10 – Bloomberg (Katherine Burton and Saijel Kishan): “Hedge funds may cut 20,000 workers worldwide this year, a record 14% of the industry’s jobs, as investment losses and client withdrawals erode fees.”
March 12 – Bloomberg (Alex Ortolani and Bill Koenig): “As many as 500 of the largest U.S. automotive suppliers may be at risk of failing because of plummeting U.S. car and truck sales, the consulting firm Grant Thornton LLP said.”
March 11 – Bloomberg (Dawn Kopecki): “Freddie Mac...said it will tap an additional $30.8 billion in federal aid after loan holdings and other assets deteriorated. More capital may be needed, and the $200 billion in total financing pledged by the U.S. Treasury may not be enough, the... company said... Freddie, which owns or guarantees more than 20% of U.S. home loans, posted a wider fourth- quarter net loss of $23.9 billion... ‘These numbers are so mind-boggling,’ said Paul Miller, an analyst at FBR Capital Markets… ‘You can’t even begin to analyze it.”
Real Estate Bust Watch:
March 12 – Dow Jones (Dawn Wotapka): “Delays stalling the foreclosure process are prolonging the U.S. housing downturn, RealtyTrac said… Slightly more than 290,000 properties - one in every 440 housing units - were slapped with a foreclosure filing in February, up nearly 30% from a year earlier. That total, a roughly 6% increase from January, was the third-highest monthly total… ‘We’re not making progress,’ said Rick Sharga…with… RealtyTrac. ‘We have seen artificial forces that have been basically muddying the waters.’”
March 11 – Bloomberg (Oshrat Carmiel): “Greenwich, Connecticut, home sales dropped 77% in February from a year earlier as Wall Street firms cut jobs and buyers retreated from multimillion-dollar purchases, Prudential Connecticut Realty said. Seventeen homes sold last month, down from 75 a year earlier, the broker said in a report. Sales of houses priced from $2 million to $3 million fell 80%, with two properties selling last month.”
March 12 – Wall Street Journal: “On March 24, a judge may push Jefferson County, Ala., into the largest U.S. municipal bankruptcy in history. Warren Buffett has warned investors not to be beguiled by the muni sector’s history of low default rates. Monoline insurance, once a mainstay of the muni market, is a shadow of its former self. No wonder muni bonds have been under pressure. There is some merit to Mr. Buffett’s warning. Some 58% of the $2.67 trillion pool of muni bonds is covered by monoline insurers or other guarantors, according to Municipal Market Advisors, a research and consultancy firm.”
March 9 – Bloomberg (Terrence Dopp): “New Jersey Governor Jon Corzine, facing a $7 billion state deficit and re-election in November, will propose a budget tomorrow that may include higher taxes and hinge on concessions from government workers.”
March 9 – Dow Jones (Stan Rosenberg): “California plans to borrow $1.5 billion to meet state payments for the balance of the current fiscal year ending June 30, State Controller John Chiang said… But he warned at the same time that the recently enacted legislation to remedy the state’s $42 billion budget deficit ‘won’t solve a cash flow crisis for next year’ and could leave the state on the brink of default over the longer term. ‘If the governor and lawmakers do not take action before July, we could be accelerating towards the very cliff that we just stopped short of falling over,’ Chiang said…”
March 11 – Bloomberg (Oliver Staley): “The University of California system raised tuition for its courses that begin in May by 9.3%, working to help close a $115 million budget shortfall… The state of California is closing a $42 billion deficit after tax collections plummeted because of rising unemployment and decreased consumer spending.”
New York Watch:
March 9 – Bloomberg (Henry Goldman): “New York City revenue will decline 7% this year, opening a $4.8 billion budget deficit in 2010, even after the city increased real estate and hotel room taxes, the Independent Budget Office said. The IBO, a public financial monitor, said the deficit will be $1.6 billion more than Mayor Michael Bloomberg estimated when he presented a $59 billion preliminary budget in January.”
March 12 – Bloomberg (Camilla Hall): “Bernard Madoff, scheduled to plead guilty today to masterminding the largest Ponzi scheme in history, ‘has killed the hedge funds,’ Qatar Investment Authority said. ‘Private equity is finished for the next three years,’ the fund’s Executive Director Hussain Ali Al-Abdullah said… ‘We should all go for a long holiday and come back in 2010.’”
Crude Liquidity Watch:
March 10 – Bloomberg (Margot Habiby): “OPEC members, the suppliers of about 40% of the world’s oil, may take in $383 billion from oil exports this year, down 61% from 2008, the U.S. Energy Department said…”
March 9 – Bloomberg (Haris Anwar): “The United Arab Emirates’ faces a 110 billion dirhams ($30 billion) gap between loans and stable deposits as the credit crisis prompted foreign investors to withdraw their money from the regional banks, central bank governor said.”
Q4 2008 Flow of Funds:
The Federal Reserve’s Z.1 “Flow of Funds” reports are no less fascinating in today’s Post-Bubble landscape. The basic thrust of my Credit Bubble analysis these days is that the highly maladjusted U.S. (finance and “services-”driven) Bubble Economy requires in the neighborhood of $2.0 TN of annual Credit growth to hold implosion at bay. Recent dramatic financial and economic tumult – especially during the fourth quarter – supports this view. But it is, at the same time, important to differentiate today’s economic backdrop from the dynamics that fomented financial and economic collapse throughout the emerging markets during the nineties and earlier this decade (i.e. Mexico, SE Asia, Russia, Brazil, Argentina, etc.). The U.S. economy is in severe crisis, but it is not today collapsing. We are not in another Great Depression. We are not yet witnessing the worst-case scenario.
The “Flow of Funds” illuminates why the collapse of the Greatest Credit Bubble in history has not yet translated into one of the greater economic collapses. Despite financial panic and the freezing up of Credit markets, Total Non-Financial Credit expanded at a 6.3% annualized rate during the fourth quarter. While down from Q3’s 8.1% pace, I would argue that 6% plus Credit expansion was about the minimum required to forestall systemic implosion. Importantly, this feat was achieved by the federal government expanding borrowings at a 37% annualized rate.
Some would argue that this massive federal Credit expansion has had minimal impact. They would point to moribund markets for housing and autos, the steep rise in unemployment, and the sharp economic slowdown. Sure enough, Household Mortgage Debt contracted at a 1.6% rate during the quarter, with Household (non-mortgage) Credit sinking at a 3.2% pace. And Corporate debt growth, having expanded at a double-digit rate during the first half of 2007, slowed markedly to 1.2%. Yet, despite collapsing markets for private-sector Credit, Total (economy-wide) Compensation for the 4th quarter was actually up 1.9% y-o-y to a record (annualized) $8.096 TN. For the year, National Income was up 1.5% to a record $12.453 TN, with Total Compensation up 3.1% to $8.058 TN. How was it possible for such a deeply impaired Credit system to sustain such an inflated level of National Income in the face of a housing and asset market collapse?
Remarkably, Domestic Financial Sector Debt Growth accelerated from Q3’s 6.8% pace to a 7.2% rate of expansion. On a Seasonally-Adjusted and Annualized Rate (SAAR) basis, Total Financial Sector borrowings jumped to $1.222 TN during the quarter. This was in the face of the Asset-Backed Securities (ABS) market contracting SAAR $616bn. This critical contraction in private sector Credit was, however, largely offset by combined GSE debt and MBS growth of SAAR $569bn. Bank Commercial Loans expanded SAAR $858bn, while Open Market Paper increased SAAR $341bn.
For all of 2008, Treasury securities outstanding increased an unprecedented $1.239 TN, or 24.3%. Meanwhile, Agency securities (GSE debt and MBS) jumped $716bn, or 9.6%. Combined federal and quasi-federal securities outstanding ballooned an incredible $1.955 Trillion in just one year. For comparison, Treasury and the Agencies combined to increase debt securities $1.146 TN during 2007, $514bn in 2006 and $390bn in 2005. This ramp up of government Credit growth is outdoing even the historic surge in mortgage Credit during the Mortgage Finance Bubble years.
Federal debt growth offset a contraction in several key sectors of private-sector Credit intermediation/creation. Total Mortgage Debt (TMD) expanded only $78bn during 2008. TMD Growth reached about $1.4 TN annually during ’05 and ’06 and averaged $1.177 TN annually during the six Bubble Years 2002 through 2007. For comparison, TMD expanded on averaged $270bn annually during the nineties. With the Mortgage Finance Bubble now burst, the ABS (including Wall Street’s “private-label” mortgage-backed securities) market is in disarray. Through the first eight years of the decade, the ABS market ballooned 240% to $4.50 TN. Annual growth peaked in 2006 at $912bn. In an historic reversal of fortunes, the ABS market contracted SAAR $616bn during the fourth quarter and declined $442bn for all of 2008.
Nowhere was the implosion of “Wall Street finance” more apparent than it was with the Securities Broker/Dealers. Broker/Dealer assets contracted nominal (non-annualized!) $785bn during the final three months of the year, although much of this was likely reclassification of Lehman and Merrill assets. It is worth noting that Miscellaneous Broker/Dealer Assets contracted SAAR $1.726 TN, while Treasury holdings expanded SAAR $774bn. For the year, Broker/Dealer assets were down $875bn, or 28%, to $2.217 TN.
With the “moneyness” of Wall Street finance having disappeared, the (offsetting) issuance of government “money” has amounted to nothing less than a historic explosion of debt issuance. For the year, Agency debt expanded 9.0% to $3.459 TN. GSE MBS grew 11.2% to $4.965 TN. Over the past two years, Agency debt expanded $585bn, or 20%, and GSE MBS ballooned an unprecedented $1.128 TN, or 29%. Combined with Treasury’s two-year debt issuance of $1.477 TN, one tabulates incredible 2-year federal government (“money”) issuance of $3.20 TN (28%). And this already incredible debt growth is now poised to really accelerate. At the Federal Reserve, Total Assets expanded an unmatched $729bn during the quarter to $2.270 TN, with one-year growth of 139%. Washington should feel quite fortunate that the markets continue to accommodate such alarming debt expansion at such meager little interest rates. There is no mystery why the Chinese and our other creditors are increasingly disturbed by our government’s borrowing habits.
The Unfolding Government Finance Bubble has been somewhat able to mitigate the implosion of Wall Street finance. But the greater dilemma is two-fold: On the one hand, the distorted economy requires massive ongoing Credit creation. Here, government finance can and has taken up the slack. However, the nature of spending created by the inflation of government obligations will remain quite dissimilar to that spurred by the runaway inflation of Wall Street finance. The flow of finance has been permanently altered. There will be no rejuvenating the previous asset inflation and consumption booms. Indeed, the Household (and non-profits) balance sheet rather starkly illustrates the nature of the problem.
During the fourth quarter, Total Household Assets dropped a record $5.419 TN, or 31% annualized, to $65.719 TN. Wow… Financial Asset values sank a record $4.537 TN (to $40.814 TN), and Real Estate dropped a record $871bn (to $20.512 TN). Little wonder auto purchases and retail spending went into a tailspin, as Household Net Worth shrank a record $5.110 TN during the quarter (to $51.477 TN). For the year, Household Assets collapsed $11.30 TN (14.7%), while Liabilities were little changed at $14.242 TN. For the year, $11.213 TN of Household Net Worth ("perceived financial wealth") disappeared. This compares to the average annual increase in Household Net Worth of $5.444 TN during the period 2003 through 2006. The Household Balance Sheet continues to offer invaluable insight on the workings of a Bubble Economy.
Rest of World (ROW) data document a quarter of mayhem in global finance. ROW holdings of U.S. financial assets increased SAAR $738bn (to $16.897 TN), down from Q3’s $1.010 TN and Q4 2007’s $804bn. But there were some abrupt shifts in the composition of holdings. Net Interbank Assets jumped SAAR $1.344 TN, while Securities Repos dropped SAAR $1.273 TN. Treasury holdings surged SAAR $1.094 TN (to $3.187 TN), while Agency and GSE MBS holdings dropped SAAR $1.006 TN (to $1.331 TN). Miscellaneous Assets expanded SAAR $407bn during the quarter to $5.409 TN. For the year, ROW holdings of U.S. assets increased $857bn, down from 2007’s $2.081 TN increase – to the slowest rate of growth in more than a decade.
Chaos on Wall Street has thrown an additional layer of complexity upon an already challenging Banking sector “flow of funds” analysis. I’m forced to keep it simple. Banking system assets were up $1.033 TN (nominal) during the quarter to $13.417 TN, with 2008 growth of $2.225 TN (20%). Bank Credit expanded 15.2% for the year to $9.680 TN, while Miscellaneous Assets jumped 65% to $2.858 TN. On the Liability side, Total Deposits were up 8.9% for the year to $7.180 TN. Miscellaneous Liabilities jumped 62% to $2.933 TN.
The Fed’s and Treasury’s move to bolster the money fund complex was critical to averting financial collapse. Retaining their “moneyness,” Money Fund assets expanded at a 45% rate during the fourth quarter to a record $3.757 TN. For the year, Money Fund assets jumped $724bn, or 24%.
Elsewhere, the enigmatic Funding Corps had a huge quarter and year. Funding Corp assets increased $1.057 TN during the quarter to $3.571 TN, with total 2008 growth of $1.735 TN. Credit Union assets expanded 7.3% last year to $814bn, while Finance Companies were about unchanged at $1.912 TN. REITs contracted about 10% in 2008 to $523bn. Savings Institution assets fell 16% to $1.526 TN. Life Insurance assets declined 6% last year to $4.411 TN.
I suppose I’ll for now reside in the camp that believes the system is perhaps not today as acutely unstable as many fear. The unfolding Government Finance Bubble is - until it isn't - a major stabilizing force. Government finance by its nature will not exert sufficient stimulus to rejuvenate deflating asset markets, but it is nonetheless playing a major role in underpinning wages and incomes. Moreover, the massive inflation of government finance is thus far bolstering the markets’ perception of “moneyness” for tens of Trillions of Treasury, agency debt, MBS, municipal, corporate and household debt securities, along with another ten Trillion or so of bank deposits and money fund liabilities. This “bolstering” of “moneyness” is also likely central to the resilience of the dollar. But such extraordinary stabilization does not come without a heavy price. I am firmly in the camp that believes that Washington is now trapped in a massive inflation of government obligations – the latest round of historic Credit inflation captured clearly throughout the Q4 2008 “Flow of Funds” data. The worst case scenario unfolds when our creditors and the marketplace turn against these government obligations.