For the week, the S&P500 jumped 3.0% (up 9.8% y-t-d), and the Dow gained 2.6% (up 9.1%). The Banks surged 7.7% (up 12.5%), and the Broker/Dealers jumped 5.2% (up 1.2%). The Morgan Stanley Cyclicals jumped 5.0% (up 20.6%), and the Transports rose 3.9% (up 23.6%). The Morgan Stanley Consumer index increased 2.1% (up 8.9%), and the Utilities added 1.3% (up 0.1%). The S&P 400 Mid-Caps rose 3.2% (up 22.0%), and the small cap Russell 2000 gained 3.2% (up 21.0%). The Nasdaq100 gained 1.7% (up 17.8%), and the Morgan Stanley High Tech index increased 2.1% (up 12.8%). The Semiconductors surged 4.1% (up 14.6%). The InteractiveWeek Internet index added 0.8% (up 32.1%). The Biotechs added 0.4%, increasing 2010 gains to 24.6%. With bullion surging $51, the HUI gold index jumped 7.7% (up 35.3%).
One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 13 bps. Two-year government yields declined 4 bps to 0.46%. Five-year T-note yields ended the week 9 bps higher to 1.56%. Ten-year yields jumped 14 bps to 3.01%. Long bond yields rose 11 bps to 4.32%. Benchmark Fannie MBS yields were 9 bps higher at 3.94%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 5 bps to 93 bps. Agency 10-yr debt spreads were little changed at 16.5 bps. The implied yield on December 2011 eurodollar futures fell 12 bps to 0.705%. The 10-year dollar swap spread increased 0.5 to 16.25. The 30-year swap spread increased 1 to negative 20.25. Corporate bond spreads narrowed. An index of investment grade bond risk declined 4 bps to 92 bps. An index of junk bond risk declined 50 to 475 bps.
Investment grade issuers included AIG $2.0bn, Hewlett-Packard $2.0bn, Citigroup $1.875bn, Apache Energy $1.0bn, CRH America $750 million, Cooper $650 million, Bank of New York Mellon $600 million, St. Jude Medical $500 million, Eastman Chemical $500 million, Harris Corp $700 million, Idex $300 million, Texas Eastern $300 million, Nisource $250 million, Cigna $250 million, and San Clemente Leasing $240 million.
Junk bond funds saw outflows of $450 million (from Lipper). Junk issuers included Clearwire Communications $2.925bn, Transdigm $1.55bn, International Lease Finance $1.0bn, American Tower $1.0bn, Murray Energy $690 million, AMC Entertainment $600 million, Puget Energy $450 million, National Amusements $400 million, Bresnan Broadband $250 million, Darling International $250 million, Adams Outdoor Advertising $350 million, and Vector Group $90 million.
Converts issues included Omnicare $500 million.
International dollar debt sales included Westpac Banking $2.5bn, BG Energy $1.0bn, Digicel $800 million, and Incitec Pivot $500 million.
U.K. 10-year gilt yields rose 7 bps this week to 3.41%, and German bund yields jumped 12 bps to 2.85%. Ireland yields sank 105 bps to 8.14%. Greek 10-year bond yields declined 21 bps to 11.55%. Ten-year Portuguese yields dropped 105 bps to 5.91%. The German DAX equities index increased 1.4% (up 16.6% y-t-d) to another 2010 high. Japanese 10-year "JGB" yields were little changed at 1.20%. The Nikkei 225 gained 1.4% (down 3.5%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index increased 2.3% (up 1.7%), and Mexico's Bolsa added 1.3% (up 16.4%). South Korea's Kospi index jumped 2.9% (up 16.3%). India’s equities index rallied 4.3% (up 14.3%). China’s Shanghai Exchange slipped 1.0% (down 13.3%). Brazil’s benchmark dollar bond yields declined 2 bps to 4.01%, and Mexico's benchmark bond yields fell 5 bps to 4.00%.
Freddie Mac 30-year fixed mortgage rates rose 6 bps last week to a 17-wk high 4.46% (down 25bps y-o-y). Fifteen-year fixed rates gained 4 bps to 3.81% (down 46bps y-o-y). One-year ARMs added 2 bps to 3.25% (down 100bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 13 bps to 5.37% (down 62bps y-o-y).
Federal Reserve Credit increased $0.4bn to $2.318 TN. Fed Credit was up $97.9bn y-t-d (4.8% annualized) and $138.8bn, or 6.0%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/1) increased $0.5bn to a $3.341 TN. "Custody holdings" have increased $386bn y-t-d (14.1% annualized), with a one-year rise of $409bn, or 14.0%.
M2 (narrow) "money" supply expanded $10.3bn to a record $8.809 TN. Narrow "money" has increased $276bn y-t-d, or 3.6% annualized. Over the past year, M2 grew 3.3%. For the week, Currency added $1.4bn, and Demand & Checkable Deposits increased $17.0bn. Savings Deposits added $1.0bn, and Small Denominated Deposits declined $5.8bn. Retail Money Fund assets fell $3.1bn.
Total Money Market Fund assets (from Invest Co Inst) declined $3.3bn to $2.810 TN. Year-do-date, money fund assets have dropped $483bn, with a one-year decline of $509bn, or 15.3%.
Total Commercial Paper outstanding sank $44bn to $1.021 TN. CP has declined $149bn year-to-date, and was down $215bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.469 TN y-o-y, or 19.6%, to a record $9.049 TN.
Global Credit Market Watch:
November 29 – Bloomberg (James G. Neuger and Simon Kennedy): “European governments sought to quell the market turmoil menacing the euro, handing Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to bear some cost of future bailouts. European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers…”
December 1 – Bloomberg (Lukanyo Mnyanda and Paul Dobson): “Bailouts for Ireland and Greece and speculation that Portugal and Spain may need aid are prompting investors to shun some of Europe’s highest-rated bonds. The cost of insuring German debt against default rose yesterday to the highest since May. The yield on 10-year French securities climbed to as much as 3.247 percent, the most in more than in six months, and the extra yield, or spread, investors demand to hold 10-year Belgian bonds instead of similar-maturity German bunds climbed to the most since at least 1993.”
December 1 – Bloomberg (Shannon D. Harrington): “The failure of European leaders to contain the region’s debt crisis with a bailout of Ireland has driven relative borrowing costs in the global corporate bond market to a 12-week high. Investors demand an extra 1.77 percentage points in yield to own company bonds instead of government debt, the most since Sept. 8…”
November 30 – Bloomberg (Charles Penty and Gavin Finch): “Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth- biggest economy may need an Irish-style bailout.”
November 30 – Bloomberg (Tim Catts): “Corporate bond sales worldwide are tumbling on concern Ireland’s debt crisis will spread across Europe as returns on the notes approach their worst month since credit markets froze two years ago. Issuance has slumped 29% since Nov. 15, compared with the same period a year earlier, after surging 34% in the first half of the month…”
November 30 – Bloomberg (Andres R. Martinez): “Mexico’s benchmark peso bonds are headed to their biggest monthly slide since February 2009, as investors shun riskier assets on concern the Irish debt crisis may spread to other European nations.”
December 1 – Bloomberg (Ron Harui): “Foreign-exchange losses from carry trades climbed to the highest level in more than two years as hedge funds and other large speculators unwound bets that the euro will strengthen amid Europe’s sovereign-debt crisis. Royal Bank of Scotland Plc’s index for carry trades… fell 9.7% in November, the biggest drop since October 2008.”
November 30 – Bloomberg (Krystof Chamonikolas): “Hungary’s bonds tumbled for a seventh day, lifting five-year yields to the highest since September 2009, as a row between the central bank and the government over interest rates undermined investor confidence. The yield on government bonds in forint due February 2015 jumped 20 basis points to 8.38%...”
Global Government Finance Bubble Watch:
December 3 – Bloomberg (Simon Kennedy and Simone Meier): “Jean-Claude Trichet is keeping the onus on governments to fix the debt crisis as the European Central Bank buys bonds to win politicians time to cut deficits. Warning European Union leaders that they can’t rely on ‘benign neglect’ to quell market turmoil, Trichet, the ECB’s president, is deploying a two-pronged strategy to ease roiled markets. The bank snapped up Portuguese and Irish bonds again today after Trichet yesterday assured investors that policy makers will delay the withdrawal of emergency liquidity.”
December 3 – Bloomberg (Alexandra Harris and Brendan A. McGrail): “U.S. states and cities scheduled sales of $22.6 billion in debt this week, almost the highest level in five years…”
November 30 – Bloomberg (Anchalee Worrachate): “The value of currency derivatives worldwide doubled in the past three years to $3.2 trillion amid the ‘turbulence’ of the credit crisis… The gross market value, or the cost to replace all open contracts such as swaps, options and forwards, jumped from $1.6 trillion in June 2007, according to… the BIS.”
The dollar index reversed course, declining 1.5% for the week (up 1.6% y-t-d) to 79.144. On the upside for the week, the South African rand increased 4.4%, the Norwegian krone 3.4%, the Swedish krona 3.0%, the Swiss franc 3.0%, the Australian dollar 3.0%, the Brazilian 2.4%, the New Zealand dollar 2.2%, the South Korean won 1.9%, the Japanese yen 1.8%, the Canadian dollar 1.8%, the Danish krone 1.4%, the Euro 1.3%, the Singapore dollar 1.3%, the Mexican peso 1.2%, the British pound 1.2%, and the Taiwanese dollar 0.5%.
December 2 – Bloomberg: “China’s gold imports jumped almost fivefold in the first 10 months from the entire amount shipped in last year as concern about rising inflation increased its appeal as a store of value, said the Shanghai Gold Exchange. Imports gained to 209 metric tons compared with 45 tons for all of 2009…”
November 29 – Bloomberg (Whitney McFerron, Elizabeth Campbell and Jeff Wilson): “This year’s agriculture boom is a bust for U.S. dairy farmers as surging costs for cattle feed compound a glut of milk products. While the 27% jump in wheat prices and 48% gain in cotton may send farm income to a record, dairies will lose money in 2011 for the second time in three years, said Mike Brown, an economist at Glanbia Foods… Corn, a feed ingredient, jumped 33% in the two months ended Oct. 31…Dairy farmers expanded herds following the 70 percent jump in prices to a record in 2007…”
December 3 – Bloomberg (Yi Tian): “Copper prices rose, capping the biggest weekly gain in more than four months…”
December 3 – Bloomberg (Whitney McFerron): “Wheat rose to the highest price in almost four months on renewed concern that unusually heavy rainfall in Australia will delay the harvest and reduce grain quality.”
December 3 – Bloomberg (Leslie Patton): “Cotton prices surged, capping the biggest weekly gain in 39 years, on mounting concern that exports will be limited from India, the world’s second-largest grower… Futures in New York have soared 75% this year as demand in China climbed and inventories plunged in the U.S…”
December 3 – Bloomberg (Whitney McFerron): “Rice futures rose, heading for the biggest weekly gain since 2009, on concern that global demand will outpace supplies as adverse weather cuts output from Asia to the U.S.”
November 29 – Bloomberg (Yuriy Humber): “Uranium rose to the highest in more than two years after China Guangdong Nuclear Power Co. agreed on long-term supply with the two largest producers and expectations Asia’s biggest economy will boost its reactor-building targets.”
The CRB index surged 5.0% (up 11.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 5.9% (up 16.0% y-t-d). Spot Gold rose 3.7% to $1,414 (up 29% y-t-d). Silver surged 9.8% to $29.40 (up 75% y-t-d). January Crude jumped $5.66 to $89.42 (up 13% y-t-d). January Gasoline gained 9.2% (up 15% y-t-d), while January Natural Gas slipped 1.8% (down 22% y-t-d). March Copper rose 6.6% (up 20% y-t-d). March Wheat surged 13.4% (up 44% y-t-d), and March Corn gained 3.7% (up 38% y-t-d).
China Bubble Watch:
December 1 – Bloomberg: “China’s manufacturing grew at a faster pace for a fourth straight month in November, indicating the economy can withstand higher interest rates as price pressures escalate. The Purchasing Managers’ Index rose to 55.2 from 54.7 in October…”
December 1 – Bloomberg: “China’s home prices rose 0.8% in November, gaining for a second month even as the central bank raised interest rate for the first time since 2007, said SouFun Holdings Ltd., the nation’s biggest real estate website owner.”
December 1 – Bloomberg: “China’s interest-rate swaps jumped the most in three years last month on speculation the central bank will raise borrowing costs further to rein in the fastest inflation since 2008 as foreign capital surges into the nation.”
November 30 – Bloomberg (Eunkyung Seo): “Rolls-Royce Motor Cars Ltd., Bayerische Motoren Werke AG’s ultra-luxury nameplate, plans to sell 800 cars in China in 2011 as it aims to raise sales eightfold in two years in the world’s largest auto market. The automaker delivered almost 500 cars in China in the first 10 months of 2010, compared with about 100 for the whole of last year…”
November 30 – Bloomberg (Kartik Goyal): “India’s economy grew more than economists estimated last quarter, adding to evidence of a strengthening in domestic demand that’s stoked inflation… Gross domestic product rose 8.9% in the three months through September from a year earlier…”
Asia Bubble Watch:
December 1 – Bloomberg (Eunkyung Seo): “South Korea’s exports expanded for the 13th consecutive month in November… Overseas shipments increased 24.6% from a year earlier…”
November 29 – Bloomberg (Novrida Manurung): “Indonesia’s economy may accelerate at least 6% in the fourth quarter and 6% for the full year 2010, Coordinating Minister for the Economy Hatta Rajasa said…”
December 1 – Bloomberg (Shamim Adam and Novrida Manurung): “Indonesia’s inflation accelerated in November, putting pressure on policy makers to raise interest rates and contain price increases… Consumer prices rose 6.33% last month from a year earlier…”
December 1 – Bloomberg (Suttinee Yuvejwattana): “Thailand unexpectedly raised interest rates for the third time this year, signaling policy makers view inflation as a bigger threat than slowing growth.”
Latin America Watch:
November 29 – Bloomberg (Andre Soliani and Iuri Dantas): “Brazil’s broadest measure of inflation quickened to the fastest pace in 28 months on a surge in raw materials and agricultural goods. Consumer, construction and wholesale prices, as measured by the IGP-M price index, jumped 1.45% in November… Prices rose 10.27% from a year ago.”
December 3 – Bloomberg (Andre Soliani and Iuri Dantas): “Brazil’s central bank raised reserve requirements on cash and time deposits to slow consumer lending that’s growing 20% annually and prevent a credit bubble.”
December 1 – Bloomberg (Drew Benson and Camila Russo): “Argentine inflation of almost 30% will drive local governments to borrow 18.4 billion pesos ($4.6 billion) next year to pay for rising wages and budget deficits.”
Unbalanced Global Economy Watch:
December 1 – Bloomberg (Jennifer Ryan): “U.K. manufacturing growth unexpectedly accelerated to the fastest pace in 16 years in November as export orders climbed.”
December 1 – Bloomberg (Simone Meier): “Europe’s manufacturing industries expanded at the fastest pace in four months in November, led by Germany… A gauge of manufacturing in the 16-nation euro area rose to 55.3 from 54.6 in the previous month…"
November 29 – Bloomberg (Simone Meier): “European confidence in the economic outlook improved to the highest in three years in November as Germany’s export-driven growth helped counter concerns that a spreading sovereign-debt crisis will hurt the recovery.”
November 30 – Bloomberg (Rainer Buergin): “German unemployment fell for a 17th month in November as business optimism improved, underscoring the gulf between Europe’s biggest economy and peripheral nations struggling to cut debt. The number of people out of work declined a seasonally adjusted 9,000 to 3.14 million, the lowest since December 1992…”
November 29 – Bloomberg (Toby Alder and Niklas Magnusson): “Sweden’s economic growth gained momentum in the third quarter as exports and private spending supported a rebound in the largest Nordic economy. Gross domestic product expanded 2.1% in the three months through September…”
U.S. Bubble Economy Watch:
December 3 – Bloomberg (Timothy R. Homan): “Employers added fewer jobs than forecast in November and the unemployment rate rose to 9.8%, pointing to economic weakness that’s likely to keep the Federal Reserve pumping money into the financial system. Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg… The unexpected gain in unemployment is likely to intensify political debate over extending Bush-era tax cuts, as well as the Fed’s $600 billion program of asset purchases intended to spur growth.”
Real Estate Bubble Watch:
December 2 – Bloomberg (John Gittelsohn): “U.S. homes in the foreclosure process sold for about 32% less than non-distressed properties in the third quarter, the biggest discount in five years, as buyer demand slumped, according to RealtyTrac Inc… A quarter of all U.S. transactions involved those types of homes, according to the Irvine, California-based data seller.”
Central Bank Watch:
December 3 – Bloomberg (Joshua Zumbrun): “Federal Reserve Chairman Ben S.
Bernanke defended the Fed’s decision to purchase $600 billion in Treasury securities and didn’t rule out expanding the program, in an interview for CBS television’s ‘60 Minutes,’ the network said. ‘He explains why the Fed announced its intention to buy $600 billion in Treasury securities, defending against charges the move will lead to inflation and not ruling out the purchase of more,’ according…CBS.”
November 29 – Bloomberg (Michael Heath and Robert Fenner): “Reserve Bank of Australia Governor Glenn Stevens said the nation’s mining industry may propel the economy over the long term with less volatility, fueled by ‘unprecedented’ demand for steel in China and India. ‘There is likely to be a further significant rise in business investment over the next few years, from a level that is already reasonably high as a share of gross domestic product,’ Stevens said…”
December 3 – Wall Street Journal (Corey Boles): “The president's U.S. deficit commission received the backing of a majority of its 18-strong panel, but fell short of the 14 votes needed to possibly trigger congressional votes on its recommendations."
November 26 – Bloomberg (Brian Faler): “Senate Republicans have endorsed a call for a constitutional amendment requiring the government to balance its budget after Tea Party candidates made erasing the deficit a rallying cry throughout the U.S. election campaign. While the calls may be urgent, even Washington’s leading deficit foes say it will take decades to balance the books. A proposal by the heads of President Barack Obama’s debt commission to cut the budget by $4 trillion wouldn’t wipe out the deficit for more than 25 years. Representative Paul Ryan, who’s in line to become chairman of the House Budget Committee, predicts it will take a half-century… ‘This budget is screwed up so badly you can’t balance it in the immediate future,’ said Ryan… Senator Dick Durbin of Illinois, the Senate’s No. 2 Democrat, said the problem is ‘pure demographics. Boomers are showing up old and sick and, as a consequence, costs are dramatic.’”
November 30 – Bloomberg (Lorraine Woellert and Clea Benson): “Fannie Mae and Freddie Mac are facing growing resistance as they attempt to push failed home loans off their books and onto the balance sheets of banks including Bank of America Corp. and JPMorgan Chase & Co. The two government-owned mortgage companies are enforcing contracts that require lenders to buy back loans that didn’t meet underwriting standards. At the end of September, the companies reported, banks hadn’t responded to $13 billion in buyback requests.”
December 3 – Bloomberg (Alexandra Harris): “Investors withdrew $469 million from municipal-bond mutual funds in the week ended Dec. 1, the third straight outflow, according to Lipper FMI…”
December 3 – Bloomberg (Tim Jones): “The Illinois General Assembly placed new demands on the funding of municipal retirement plans, even as it recessed until early January without acting on a $3.7 billion bond proposal to make payments into state employee pension funds.”
Kicking the Can:
Limited time to write, again (I just don’t know what I do with my free time…).
So, are policymakers making things better - or is policymaking simply kicking the can down the road? While this aspect of policy has not been adequately scrutinized, I am of the view that the Fed’s 2007 easing signals (beginning with the August 17, 2007 discount rate cut following an unscheduled meeting) directly contributed to the severity of the 2008 global financial crisis.
Recall that the CRB Commodities Index traded from about 300 in September 2007 to a record high of 474 by July 2008. Crude oil prices almost doubled to trade to 147, a destabilizing price shock for an increasingly susceptible U.S. economy. Global liquidity overabundance had the emerging markets on a rip. And in the face of a mounting crisis, U.S. stocks were on a mini-roar. The S&P500 rallied to a record high in October 2007. Liquidity-driven market excess – across the spectrum of asset classes all across the globe – had created unparalleled systemic vulnerability. In the end, the global financial system came to be detached from fundamentals. Instead, they were hinged tenuously on one gigantic “risk on” liquidity trade.
Sometimes it does seem like déjà vu all over again. I have addressed the discomforting parallels between the eruption of subprime problems in the spring of 2007 (the first crack in the mortgage/Wall Street finance Bubble) and this past spring’s Greek crisis (the initial crack in the global government finance Bubble).
It is worth noting that an aggressive loosening of monetary policy in 2007 - and into 2008 – had no positive effect on the underlying quality of U.S. mortgage Credit, although it likely prolonged the mortgage issuance boom (total mortgage Credit expanded almost $1.1 TN during 2007!). Irreparable damage had been done during the Bubble. Aggressive “activist” policymaking could only prolong market distortions and speculative excess.
The reemergence of financial stress with the Greek crisis incited an aggressive response from the ECB (liquidity support), the Fed (QE2), and global central bankers more generally (reluctance to move away from overly-stimulative policies). Clearly, liquidity operations, the Greek bailout, and ultra-loose financial conditions did not improve the Credit quality of Ireland’s debt (or that of Portugal, Spain, etc.). Yet, succumbing to market demands, the ECB yesterday (again) postponed the initiation of its “exit strategy” to at least April 2011. The markets triumphed yet again in a skirmish with policymakers - and celebrated with a big, emboldened rally.
This summer’s introduction of QE2 (and the death of “exit strategy”) fostered a dramatic loosening of financing conditions. Treasury yields collapsed. Mortgage and municipal borrowing costs sank to record lows. Meanwhile, corporate Credit spreads dropped to levels not seen since before the 2008 crisis. Corporate issuance boomed, with record junk sales. The S&P500 has rallied about 21% off of this summer’s lows and the S&P400 Mid-Cap index has gained 27%. Such a financial backdrop should be constructive for confidence, spending, and economic recovery, and recent data has, unsurprisingly, been generally upbeat. But today’s non-farm payroll report provides a timely reality check.
Considering the unmatched degree of fiscal and monetary stimulus, U.S. economic performance remains ominously dismal. Rising mortgage yields and a rising tide of austerity throughout municipal finance portend challenges for an economy already at 9.8% unemployed.
We’ve been witnessing further evidence of the seductiveness of Bubbles. Massive fiscal stimulus and ultra-loose monetary policy are supporting the most tepid of recoveries. Meanwhile, inflating securities prices ensure investors and analysts view the glass as at least half full. Policymaking works to inflate stock prices, and then policymakers take comfort that buoyant markets are a confirmation of the adeptness of their policies. Is it not apparent that the big winner here is financial speculation?
The bubbling Chinese economy faces its own issues. Entrenched Bubbles scoff at “tinkering” and timid policymaking – and China’s Mighty Credit Bubble is proving no exception. Today, China’s Politburo released a statement proclaiming that next year they “will adopt proactive fiscal policies and prudent monetary policy.” The country’s officials are increasingly aware that aggressive tightening is warranted. Home price inflation has proved resilient, while general consumer price inflation has become well-entrenched. Food price spikes have emerged as a serious problem.
When I read of Chinese policy moves intended to suppress Credit and financial flows going to speculative endeavors – while actively promoting lending to more productive enterprises and to ensure ongoing economic expansion – I am reminded of the failed course of U.S. monetary management in the latter years of the “Roaring Twenties.” It is the nature of Bubble economies that they become Credit gluttons. Credit growth and financial flows grow increasingly unwieldy – and the greater the inevitable imbalances the greater the overall Credit expansion required to sustain the boom. Efforts to sustain boom-time prosperity – while at the same time attempting to harness asset inflation and suppress increasingly destabilizing speculation – are prone to spectacular failure.
Chinese authorities recognize they have a problem – a serious monetary dilemma compounded and complicated by our QE2. Today’s Politburo statement adds further evidence that more aggressive tightening measures will commence in 2011. Yet the markets have turned numb to such warnings. And I’ll be the first to admit skepticism that the Chinese will administer the necessary harsh medicine. Chinese authorities have waited too long and allowed “terminal” Bubble excess to gain a powerful foothold. With the Fed and ECB kicking the can down the road, the markets can be forgiven for believing that Chinese policymakers will lack the fortitude to truly tighten system Credit and liquidity.
Global markets could be at a bit of a crossroad here. Commodities are on the move again, and mounting inflationary pressures – especially in China and Asia – are a serious issue. And it wouldn’t take much renewed dollar weakness to push this issue to the forefront. The European peripheral debt crisis has muddied the waters somewhat, but the upward bias on global yields was back in play this week. The U.S. municipal bond market has stabilized. Yet the small decline in yields following the big spike higher would seem to suggest further vulnerability. A huge list of municipal issuers is lined up to sell debt.
The gamey U.S. stock market has placed a big wager on the “risk on” trade. With QE2 in the early phase, greed has thus far held fear at bay. It surely won’t take months of disappointing data to spark QE3 banter. And there’s nothing like a world of synchronized speculative asset markets to embolden those banking on global policymaker liquidity backstops – the Fed, the ECB, BOJ, PBOC… Perhaps U.S. equities will begin to decouple from global asset inflation when the fragile U.S. economy and Credit system come to be viewed as relatively more vulnerable to surging commodities prices and rising global yields.
An important facet of my thesis holds that – with the post-Greek crisis global focus on structural debt issues - the U.S. is in the process of becoming a major focal point. In the grand scheme of things, Ireland may be only loud noise. Gold, silver and commodities prices don’t seem to be signaling sustainable dollar strength or overall confidence in the way things are heading.
It took months for mortgage Credit contagion to spread from subprime to attack the heart of the U.S. Credit system. Perhaps it’s a stretch to analyze in terms of an unfolding bursting of a global government finance Bubble - as opposed to a European peripheral debt crisis. I just don’t think so. And I fully expect that after market ebbs and flows – and near panics that incite more speculator-emboldening central bank market interventions/liquidity injections – the markets will inevitably discipline Washington. In the meantime, we are left with a game of counting the number of global policymakers kicking the can down the road.