11/18/2005 Content with the Status Quo *

The Dow gained 0.75%. The S&P500 rose 1.1%, trading to its highest level since June 2001. The Transports gained 1.7% to a new record high. The Utilities gained 2%. The Morgan Stanley Cyclical index jumped 2.7%, with a one-month gain of 11%. The Morgan Stanley Consumer index was about unchanged. The small cap Russell 2000 added 0.8%. The S&P400 Mid-cap index increased 1.3%, closing today at a new record high. Technology stocks were strong. The NASDAQ100 gained 1.6% to the highest level since February 2002. The Morgan Stanley High Tech index gained 2%, and the Semiconductors surged 3.8%. The Street.com Internet Index rose 1.9%, while the NASDAQ Telecommunications index was about unchanged. The Biotechs rose 1.9%, increasing y-t-d gains to 26%. The Broker/Dealers added 0.3%, increasing 2005 gains to 26.5%. With gold surging $17.10, the HUI gold index jumped 4.6% this week. For the week, two-year Treasury yields declined 4 basis points to 4.39%. Five-year government yields fell 5 basis points to 4.43%, and bellwether 10-year yields declined 7 basis points for the week to 4.49%. Long-bond yields dropped 6 basis points to 4.68%. The spread between 2 and 10-year government yields narrowed 3 to 10bps. Benchmark Fannie Mae MBS yields dipped 1.5 basis points to 5.86%, again underperforming Treasuries. The spread (to 10-year Treasuries) on Fannie’s 4 5/8% 2014 note increased one to 36 and the spread on Freddie’s 5% 2014 note increased one to 37. The 10-year dollar swap spread rose 1.5 to 54.75. Corporate bonds generally underperformed, with junk bond spreads widening noticeably. The implied yield on 3-month December ’06 Eurodollars dropped 8.5 basis points to 4.80%. Investment grade corporate issuance declined to $16 billion. Issuers included HSBC Finance $2.65 billion, Bank of America $2.0 billion, Ameriprise Financial $1.5 billion, Residential Capital $1.25 billion, Pfizer $1.0 billion, Boston Scientific $750 million, CIT Group $500 million, Marsh & Ilsley $500 million, Stanley Works $450 million, Con Edison of New York $350 million, Southern California Gas $250 million, Kansas City Power & Light $250 million, Kimco Realty $250 million, AMB Property $175 million, EPL $165 million, Vectren Utility $150 million, and Mack-Cali Realty $100 million, and Pricoa Global Funding $100 million. Junk bond fund outflows rose to $162 million (from AMG). Issuers included Compton Petro $300 million, Accellent $305 million, E*Trade $300 million, Private Export Funding $250 million, SS&C Tech $205 million, Commercial Net Lease Realty $150 million, Encore Acquisition $150 million, Avista $100 million, and Wisconsin Gas $90 million. Convert issues included Compucredit $300 million, EDO Corp $175 million, Sonic Automotive $150 million, and Pantry Inc $135 million. Foreign dollar debt issuers included Turkey $2.25 billion, Japan Bank for International Cooperation $1.0 billion, Panama $980 million, Woolworths $725 million, Korea Development Bank $500 million, Uruguay $200 million, and Banco Continental Panama $150 million. November 15 – Bloomberg (Steve Rothwell): “Junk bond sales in Europe will reach a record this year as defaults drop and yields on government debt fall to the lowest levels since World War II. Investors bought $25 billion of European bonds with ratings below investment grade so far this year, compared with $25.5 billion in all of 2004” Japanese 10-year JGB yields dropped 11 basis points this week to 1.455%. Emerging debt and equity markets were impressive. Brazil’s benchmark dollar bond yields declined 5 basis points to 7.58%. Brazil’s Bovespa equity index added 1.2%, increasing y-t-d gains to 18.7%. The Mexican Bolsa jumped 2.5%, with 2005 gains rising to 28%. Mexican govt. yields dropped 16 basis points to 5.44%. Russian 10-year dollar Eurobond yields dipped one basis point to 6.48%. The Russian RTS equity index surged 4.6%, increasing y-t-d gains to 65%. Freddie Mac posted 30-year fixed mortgage rates increased one basis point to 6.37%. Rates were up 66 basis points in ten weeks and were 63 basis points above the year ago level. Fifteen-year fixed mortgage rates added one basis point to 5.90% and were up 75 basis points in a year. One-year adjustable rates jumped 8 basis points to 5.20%. One-year ARM rates were up 72 basis points in eight weeks and 103 basis points from one year ago. The Mortgage Bankers Association Purchase Applications Index rose 2.6% last week. Purchase Applications were about unchanged from one year ago, with dollar volume up 2.7%. Refi applications dropped 5.4%. The average new Purchase mortgage declined to $239,700, while the average ARM fell to $352,900. The percentage of ARMs rose to 32.9% of total applications. Broad money supply (M3) declined $13.6 billion (week of November 7) to $10.062 Trillion. Over the past 25 weeks, M3 has surged $437 billion, or 9.4% annualized. Year-to-date, M3 has expanded at a 7.1% rate, with M3-less Money Funds expanding at an 8.0% pace. For the week, Currency dipped $0.2 billion. Demand & Checkable Deposits fell $27.1 billion. Savings Deposits surged $37.8 billion. Small Denominated Deposits increased $2.2 billion. Retail Money Fund deposits added $0.4 billion, while Institutional Money Fund deposits dropped $14.1 billion. Large Denominated Deposits declined $6.8 billion. Year-to-date, Large Deposits are up $259 billion, or 27.7% annualized. For the week, Repurchase Agreements fell $5.1 billion, and Eurodollar deposits declined $0.6 billion. I’ll make a brief comment regarding the Fed’s decision to discontinue reporting M3. As someone who enjoys the convenience of using the M3 data on a weekly basis, I am disappointed. It made my analysis nice and too simple. Frankly, the monetary aggregates are losing their relevance. As a broad-based measurement of monetary instruments, M3 leaves a lot to be desired and has this year grossly under-represented actual monetary inflation. Moreover, I have no confidence in the Fed’s compilation of banking system “net” repurchase agreement positions, and that it generally excludes Wall Street “repos” makes this quite worthwhile number worthless. There are also issues with “eurodollar deposits.” Additionally, any broad measure of “money-like” instruments today must at the minimum include CP, some ABS and should include some “structured products.” Increasingly, I’ve come to believe that M3 is seriously flawed and definitely an inadequate measurement of “broad money supply” and system liquidity. Better to just get rid of it. It will force us into better, more comprehensive analysis. Bank Credit increased $12.1 billion last week. Year-to-date, Bank Credit has inflated $646 billion, or 11.0% annualized (up 10.1% from a year earlier). Securities Credit rose $9.9 billion during the week, with a year-to-date gain of $150 billion (9.0% ann.). Loans & Leases have expanded at a 12.1% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 15.3%. For the week, C&I loans were unchanged, while Real Estate loans jumped $11.5 billion. Real Estate loans have expanded at a 14.4% rate during the first 45 weeks of 2005 to a record $2.858 Trillion. Real Estate loans were up $345 billion, or 13.7%, over the past 52 weeks. For the week, Consumer loans dipped $1.1 billion, and Securities loans fell $2.6 billion. Other loans declined $5.6 billion. Total Commercial Paper declined $4.8 billion last week to $1.656 Trillion. Total CP has expanded $242.7 billion y-t-d, a rate of 19.4% (up 19.8% over the past 52 weeks). Financial CP declined $5.9 billion last week to $1.490 Trillion, with a y-t-d gain of $205.8 billion, or 18.1% annualized (up 19.2% from a year earlier). Non-financial CP rose $1.1 billion to $166.4 billion (up 32.2% ann. y-t-d and 25.7% over 52 wks). ABS issuance surged to $33 billion (from JPMorgan). Year-to-date issuance of $693 billion is 21% ahead of comparable 2004. Home Equity Loan ABS issuance of $452 billion is 22% above comparable 2004. November 17 – Financial Times (Jennifer Hughes ): "Issuance of asset-backed securities in the US is set to top $1,000bn for the first time this year, according to figures that show ABS issuance is up 23 per cent this year compared with 2004. The Bond Market Association said $831.9bn of the securities were issued in the first three quarters of this year compared with $676.7bn in the same period last year. Micah Green, the association’s president, predicted the market would top $1,000bn by year-end. Deals based on home equity loans still dominated the market, up slightly from 2004 and accounting for 40 per cent of the total volume at $329.3bn… Student loan issuance rose 21 per cent to $45.7bn… Credit card issuance was worth $41.8bn by the end of September compared with $37.8bn in 2004." Fed Foreign Holdings of Treasury, Agency Debt jumped $10.2 billion to $1.490 Trillion for the week ended November 16. “Custody” holdings are up $152.3 billion y-t-d, or 12.9% annualized (up $174.4bn, or 13.3%, over 52 weeks). Federal Reserve Credit rose $9.5 billion to $808.9 billion. Fed Credit has expanded 2.6% annualized y-t-d (up $30.3bn, or 3.9%, over 52 weeks). International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $577 billion, or 16.8%, over the past 12 months to $4.005 Trillion. Eurosystem reserves were down 3.6% over the past year to $171.8 billion. Currency Watch: Currency markets were volatile, although the dollar index ended the week about unchanged. On the upside, the Jamaica dollar gained 2.8%, the South African rand 1.7%, the New Zealand dollar 1.2%, and the Polish zloty 1.2%. On the downside, the British pound declined 1.1%, the Indonesia rupiah 1.0%, the Brazil real 0.8%, and the Taiwan dollar 0.7%. Commodities Watch: November 15 – Bloomberg (Danielle Rossingh): “Russia’s central bank may double its gold reserves, a bank official said today at the London Bullion Market Association Conference in Johannesburg.” Platinum rose to the highest level since 1980. Gold traded to an 18-year high, and copper to a record high. December crude oil declined $1.27 to $57.21. December Unleaded Gasoline fell 2.4%, and December Natural Gas dropped 2.5%. For the week, the CRB index declined 0.9%, reducing y-t-d gains of 10.1%. The Goldman Sachs Commodities index fell 1%, with 2005 gains declining to 33.3%. China Watch: November 17 – New York Times (Keith Bradsher): “Guangzhou, China - Abby Chan, a 23-year-old advertising copywriter, took a break from shopping for Levi’s jeans at a mall here on Wednesday evening and relaxed at a table in a Starbucks restaurant. Aside from coffee and denim, there were not many American brand products that interested her. She covets Chanel clothing and Louis Vuitton bags, dreams of owning a BMW or Mercedes-Benz someday, and struggles to think of an American brand that appeals to her. ‘There are more choices for European brands, more styles, so they are more interesting,’ she said. When President Bush arrives in Beijing on Saturday, he is expected to press China to reduce its large and growing trade surplus with the United States, on track to hit a record $200 billion this year. But for a long list of reasons, American products are struggling these days in the Chinese market, where they have trouble measuring up to European brands and even some Chinese brands... ‘The only U.S.-produced items that I can think of that exist in large quantities in China are dollar bills,’ said Matthew Crabbe, the managing director of Access Asia Ltd., a market research firm.” November 16 – Associated Press: “China’s main measure of investment in construction, factory equipment and other fixed assets rose 27.2 percent in October from a year earlier... Fixed asset spending rose 27.6 percent year-on-year in the first 10 months of the year to 5.58 trillion yuan ($689 billion)… The biggest share went to local projects, where investment rose 29.3 percent over a year earlier to 4.9 trillion yuan ($605 billion). The fastest growth in spending was in coal mining, up 76.3 percent on-year. Investment in electricity and other utilities rose 33 percent, spending on oil and natural gas exploration and development climbed 31 percent and investment in railways jumped 44 percent…” November 15 – Bloomberg (Philip Lagerkranser): “China’s industrial production rose to a record in October, led by autos and steel. Production rose to 632 billion yuan ($78 billion), 16.1 percent more than a year earlier, the statistics bureau said…Output of passenger cars surged 68 percent and that of steel products climbed 24 percent. Factory output is rising as retailers in the U.S., Japan and Europe buy more toys, clothing and electronics from China, and higher incomes spur spending at home. Both exports and retail sales hit records in October…” November 15 – Bloomberg (Philip Lagerkranser): “China’s retail sales rose to a record in October, helping draw investment from abroad, as higher incomes spurred spending on cars, clothing and televisions. Sales increased 12.8 percent from a year earlier to 584.7 billion yuan ($72 billion) after gaining 12.7 percent in September…” November 13 – Bloomberg (Tian Ying): “China needs 6,000 railcars in the next five years in a 500 billion yuan ($62 billion) plan to build 50 metro networks in major cities, as the country expands public transport to cater for a growing urban population. The government plans to build 1,500 kilometers of city metro lines by 2010…” November 17 – Bloomberg (Philip Lagerkranser): “Hong Kong’s unemployment rate fell to a four-year low last month, the government said. The seasonally adjusted jobless rate declined to 5.3 percent from 5.5 percent in September…” Asia Boom Watch: November 16 – Bloomberg (Mayumi Otsuma and Tatsuo Ito): “Japan, the most indebted nation in the industrialized world, plans to limit sales of bonds at auctions to about 120 trillion yen ($1 trillion) next fiscal year as the economy accelerates.” November 16 – Bloomberg (Cherian Thomas): “India’s economy will expand at 7 percent to 7.5 percent in the financial year to March 31, helped by faster manufacturing growth, Finance Minister P. Chidambaram said today… Prime Minister Manmohan Singh has said industrial production needs to expand more than 10 percent annually over a decade to achieve the 7 percent to 8 percent annual economic growth rate required to end poverty in a nation where almost a third of 1.1 billion people earn less than $1 a day.” November 16 – Bloomberg (Cherian Thomas and Kartik Goyal): “India’s exports grew 28 percent in October from a year earlier… Exports rose to $8.08 billion last month… Overseas sales had grown 7.5 percent in September. Imports rose 32 percent to $11.37 billion in October, widening the trade deficit to $3.28 billion from $2.3 billion a year ago, the ministry said.” November 17 – Bloomberg (Theresa Tang and Shamim Adam): “Taiwan and Singapore raised their 2005 growth forecasts after both economies expanded at the fastest pace in a year on increased electronics sales.” November 17 – Bloomberg (Theresa Tang and Katy Chang): “Taiwan’s economy expanded in the third quarter at the fastest pace in a year as a pickup in global electronics demand boosted exports and falling unemployment spurred spending at home. Gross domestic product rose 4.4 percent from a year earlier after climbing 3 percent in the second quarter…” November 17 – Bloomberg (Shamim Adam): “Singapore’s economy grew in the third quarter at more than double the pace initially estimated (7.1% annualized) led by increased production of pharmaceuticals and demand for financial and business services.” November 17 – Bloomberg (Shamim Adam): “Singapore’s exports grew in October for the first month in three as companies…shipped more electronics and pharmaceuticals. Non-oil domestic exports rose a seasonally adjusted 9.9 percent from September…” November 15 – Bloomberg (Shamim Adam): “Singapore’s retail sales rose in September for the seventh consecutive month as consumers increased spending at department stores and cheaper automobile prices lured buyers. The 8.9 percent increase from a year earlier in the Statistics Department’s retail sales index followed a 6.8 percent expansion in August…” Unbalanced Global Economy Watch: November 18 – Bloomberg (Riad Hamade): “European Central Bank council member Axel Weber comments on global imbalance[s]… Weber, who also heads Germany’s Bundesbank, spoke at a banking conference in Frankfurt today:” ‘Many economists tend to view globalization as a basically benign phenomenon and take comfort in the fact that the global economy has been marked by robust growth and tame core inflation in the past few years. That is certainly true. But, on the other hand, we are witnessing several instances of possible imbalances: commodity prices have reached new record highs, yet government bond yields are low and corporate bond spreads and emerging market bond spreads are also low by historical standards, in some economies, low interest rates are fuelling housing price booms, additionally, the world economy is awash with liquidity, last but not least, global current account imbalances are at unprecedented levels. With regard to that last point: The question of sustainability and the unwinding of the US current account deficit is crucial not only for the US economy itself, but also for the world economy. And it will have repercussions for Asia as well as for Europe…” “…the topic of global imbalances is closely aligned to current account developments in the United States. This does not mean, however, that possible causes of global imbalances are purely an US phenomenon. And it does not mean that appropriate policy responses should be required only of the US authorities. Nevertheless, it is the development of the US current account deficit that lies at the heart of widely discussed concerns among policy makers and economists. There is one reason for this: it is the question of whether the US current account trajectory is sustainable. And unsustainability, of course, means that ‘things that can’t go on forever, don’t’ as Stein’s law of policy reminds us…” “Taking everything together: The current trend in the US current account deficit is unsustainable. This is hardly in dispute. Realistically, we should not expect the US deficit to move soon to levels that would stabilise the net foreign asset position of the US economy. However, the explanations advanced to explain why the current situation might nevertheless be stable for the foreseeable future all have their drawbacks and shortcomings. As central bankers are paid for paying attention to risks, we should be aware that an abrupt unwinding of the current imbalances could mean massive exchange rate and interest rates movements -- and, of course, a shake-up of the global economy.” “Adjusting to current global imbalances will be the easier when all players stick to their responsibilities… With regard to measures to reduce the current global imbalances the most urgent policy steps have to be taken by the US authorities.” November 16 – Bloomberg (Tasneem Brogger and Jonas Bergman): “Danish lenders will sell a record $52 billion in mortgage notes in an annual auction next month as falling interest rates spur demand for the securities… The amount of one-year loans outstanding at the auction tripled since 2002 as interest rates slid from more than 4 pct to a low of almost 2 percent. Mortgage bond rates are set annually in Denmark’s $283 billion mortgage bond market, the world’s third largest after the U.S. and Germany.” November 13 – Bloomberg (Tracy Withers): “New Zealand house prices rose 14.5 percent in October from a year earlier, lagging behind the increase in September…” Latin America Watch: November 17 – Bloomberg (Guillermo Parra-Bernal): “Brazilian retail sales rose a faster-than-expected 5.6 percent in September as increasing employment and household income spurred purchases of clothing, footwear and personal care goods.” November 16 – Bloomberg (Thomas Black): “Mexico’s economy grew at its fastest pace in three quarters in the July-to-September period, spurred by a surge in bank lending to consumers. The economy expanded 3.3 percent in the quarter…” November 17 – Bloomberg (Joshua Krongold): “Derivatives traded on Mexico’s peso increased by 55 percent in the first half of this year, according to the Bank for International Settlements. The amount of Mexican peso derivatives increased to $459 billion from December 2004 to June 2005…” November 17 – Dow Jones (Liz Rappaport): “Argentine industrial production expanded at a fast clip in October, blowing past forecasts and confirming that the country’s economy still has strong momentum in its third year of recovery. Data released Thursday by INDEC, the national statistics agency, show industrial output shot up 9.5% in October from a year earlier…” Bubble Economy Watch: The October Consumer Price index was up 4.3% from October 2004. October Producer Prices were up 5.9% from October 2004. October Retail Sales were up 5.7% from the year ago October, with Retail Sales Ex-Autos up 9.9% y-o-y. November 16 – Bloomberg New York Stock Exchange: “A seat sold today on the New York Stock Exchange for $3,250,000, marking a new historic high over the previous record sale of $3,025,000 set on Nov. 14, 2005.” November 16 – Bloomberg (Christine Harper): “Top derivatives marketers who sell to hedge funds and senior investment bankers that talk with clients about more than one product are in line for the best bonuses at investment banks in Europe, an annual survey found. Salespeople who generate the most income selling interest rate derivatives to hedge funds will get bonuses of as much as $4 million this year… Senior coverage bankers at the managing director level may receive more than $3 million if they have diverse product knowledge...” November 16 – Bloomberg (Curtis Eichelberger): “The football booster club at Springdale High School takes the game seriously. It raised $2.7 million over four years to give the Springdale, Arkansas, team new artificial turf and a scoreboard featuring video replays. Paid corporate logos ring Bulldog Stadium, where the latest expansion plan includes an indoor practice field and an improved press box with a hospitality suite. Top U.S. high school sports programs like Springdale’s have made bake-sale fund raising a relic. As government financing shrinks, public schools are turning to high-powered booster clubs that tap local businesses and wealthy donors to build amenities such as luxury seating and weight rooms. Some high schools, mimicking college programs, generate almost $1 million annually through ticket sales, booster-club gifts and the sale of personal licenses to stadium seats.” November 15 – Bloomberg (Tony Capaccio): “The U.S. military faces a ‘cascading’ series of difficulties with its major weapons programs, increasing the possibility of big cuts amid federal budget constraints, according to congressional auditors. The evidence can be seen in the 89 percent surge in costs between 2001 and 2006 in the Pentagon's top five weapons programs, leading to ``a significant reduction in buying power,’ Government Accountability Office Director Katherine Schinasi said. ‘Today we are at a crossroads,’ Schinasi said…The Pentagon ``is facing a cascading number of problems in managing its acquisitions,' she said.” Speculator Watch: November 17 – Financial Times (Jennifer Hughes): “The use of privately-traded derivatives reached a record in the first half of this year with the notional amount of outstanding trades worth $270,000bn, the Bank for International Settlements said… Dealing in credit derivatives jumped particularly sharply but there was also strong growth in equity and commodity instruments.” November 17 – Bloomberg (Hamish Risk): “The $12.4 trillion credit derivatives market is dominated by too few banks, making it vulnerable to a crisis if one of them fails to pay out on the contracts that insure creditors from companies defaulting, Fitch Ratings said. JPMorgan Chase & Co., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley, were the most cited traders in a market where the top 10 firms accounted for more than two-thirds of the debt-insurance contracts bought and sold last year, Fitch said in its Global Derivatives Survey for 2004…” November 17 – Bloomberg (Katherine Burton): “Hedge funds that chase macroeconomic trends by investing in the stock, bond, currency and commodity markets posted their worst returns of the year in October as managers bet wrongly that the U.S. dollar would drop in value. The funds declined by an average 0.86 percent last month, according to the Credit Suisse First Boston/Tremont Index. Some of the industry’s largest funds, including those run by money managers Paul Tudor Jones and Bruce Kovner, fell more than 2 percent.” November 16 – Dow Jones (Liz Rappaport): “The bell just rang to kick off the last round of this year’s battle between hedge funds and the convertible bond market. Hedge funds that invest in convertible bonds are bracing themselves again for investors pulling their money out of a once popular strategy that has dominated the convertible bond market. Market participants expect large scale redemptions in the next month, which will lead to significant selling pressure in the market as the funds sell off assets to meet the cash withdrawals.” “Project Energy” Watch: November 16 – Bloomberg (Greg Chang): “Los Angeles, the second-largest U.S. city, plans to spend $240 million on a system that will bring in electricity produced by geothermal generators in southeastern California.” Mortgage Finance Bubble Watch: November 16 – American Banker (Jody Shenn): “After months of warnings from federal regulators about loosening home-loan underwriting standards, many observers and industry executives say most lenders have not significantly changed their practices. By most accounts, fierce competition, coupled with banks’ general comfort with the practices, has kept the industry from changing its product offerings or lending criteria much… Observers say regulators may be moving slowly for several reasons. One is a fear of pushing bankers too far in the opposite direction and causing a credit crunch like the one in the early 1990s – or even simply curtailing access to equity, which has been a boom to the economy in recent years… Anther possible reason for regulatory restraint is that reining in lending practices could put banks at a severe disadvantage against unregulated lenders… Another issue is that as long as banks are selling most of their riskiest loans, safety-and-soundness worries are muted.” November 15 – National Association of Realtors (NAR): “Total state existing-home sales set a record in the third quarter, with 44 states and the District of Columbia showing higher sales compared to a year ago… NAR’s quarterly report on total existing-home sales, which include single-family and condos, shows that the national seasonally adjusted annual rate was 7.24 million units in the third quarter, up 6.5 percent from 6.80 million in the third quarter of 2004. The previous record was 7.22 million units in the second quarter of this year.” November 15 – National Association of Realtors (NAR): “Strong annual increases in median existing-home prices were common in most metropolitan areas during the third quarter… The association’s third-quarter median existing single-family home price survey, covering changes in 147 metropolitan statistical areas, shows 69 areas with double-digit annual price increases. Six metros had small price declines. The national median existing single-family home price was $215,900 in the third quarter, up 14.7 percent from the third quarter of 2004 when the median price was $188,200… David Lereah, NAR’s chief economist, said the pace of price appreciation in the third quarter is far from being normal over time. ‘These historically high home price gains are the simple result of more buyers than sellers in the market,’ he said.” November 17 – Mortgage Bankers Association: “Commercial and multifamily mortgage bankers’ loan originations set a new record during the third quarter of 2005… The $58.3 billion in loan originations reported for the third quarter was 64 percent higher than the third quarter of 2004 and 31.2 percent higher than the second quarter of 2005… MBA also reported that year-to-date loan originations were 43.6 percent higher than they were last year at this time. ‘Capital continues to flow into the commercial and multifamily real estate markets on both the debt and equity sides,’ noted Douglas G. Duncan, MBA chief economist and senior vice president of research and business development… The increase in commercial/multifamily lending activity during the third quarter was across all property types. The $22.8 billion increase over the third quarter of 2004 included a 55 percent increase in loans for office buildings, a 45 percent increase in loans for multifamily properties, a 33 percent increase in loans for retail and an 80 percent increase in loans for industrial space. The largest percentage increase in lending was for hotel properties…” November 15 – Bloomberg (David M. Levitt): “Construction spending in New York City may exceed $21 billion in each of the next three years, a 14 percent jump over this year’s record projection… The boom is paced by residential construction, the New York Building Congress said… Almost 30,000 individual units are projected for 2008, the study said, up from this year’s record-setting 27,500 new units. From 1995 to 1998, construction in New York averaged about $10 billion… New York’s residential market continues to grow with ‘no end in sight,’ said Richard Anderson, the building Congress president… Increases in institutional construction, such as schools and hospitals, along with infrastructure spending including sewers, roads and mass transit, ‘is very teassuring,’ he said. New York is in the midst of a construction renaissance not seen since at least the 1960s, with activity in all five boroughs, Anderson said. ‘The city is transforming before our eyes -- socially, demographically and physically,’he said.” Bond Market Association Research Quarterly “Bond issuance in the third quarter of 2005 reached $1.46 trillion, an increase of 4.3 percent from the $1.40 trillion issued in the second quarter [up 17.7% from Q3 2004 issuance]. Volume for the first three quarters of the year totaled $4.18 trillion, slightly lower than the $4.21 trillion issued in the same period one year ago. ABS and mortgage-related market issuance surged… ABS issuance is on a record pace, led by the home equity loan sector. The municipal market [is] also on a record pace… Corporate bond issuance was slightly lower than in 2004 as ample corporate liquidity dampened the demand for external financing…” “Gross issuance of U.S. Treasury coupon securities totaled $591.3 billion in the first three quarters…7.5 percent below…the same period of 2004… Daily trading volume of Treasury securities by primary dealers averaged $559.7 billion in the first nine months of the year, up 12.6 percent…” “Total short-and long-term municipal securities issuance reached $344.8 billion in the first three quarters…up 8.7 percent… At this pace, total 2005 issuance would top the record $452.6 billion in 2003.” “Corporate bond issuance declined through the first three quarters…as corporations have been able to generate funds internally as a result of strong cash positions and robust profit growth… Through three quarters, M&A activity totaled $770.3 billion, 38.3 percent higher than the $557.1 billion in deals in 2004… Issuance in the corporate bond market slowed to $522.8 billion through the first three quarters…5.3 percent lower…than the same period a year ago.” “Issuance of asset-backed securities (ABS) totaled $831.9 billion in the first three quarters of 2005, up 22.9 percent…and still on pace to break last year’s record of $902.6 billion… Home equity loan issuance in the first three quarters…totaled $329.3 billion, compared to $317.8 billion during the same period one year ago… Issuance in the auto loan sector increased to $66.4 billion in the first three quarters of the year, up 25.1 percent… The student loan sector continued to benefit from higher education costs in 2005, with issuance totaling $45.7 billion, up 20.6 percent… New issue activity in the credit card sector increased to $41.8 billion in the first three quarters of the year, up from $37.8 billion…” “Issuance of mortgage-related securities, which included agency and non-agency pass-throughs and CMOs, increased 32.5 percent in the third quarter, to $569.8 billion… New issue activity volume in the third quarter was the highest since the third quarter of 2003, which pushed year-to-date volumes to $1.41 trillion… According to the Mortgage Bankers Association, mortgage originations increased to an estimated $838 billion in the third quarter, up from the $784 billion in the second quarter… A noticeable and relatively new trend is the recent surge in private-label, or non-agency, issuance. Private-label MBS new issue activity totaled $415.4 billion in the first three quarters of the year, up 52.7 percent… Through the first three quarters…private-label mortgage-related securities have accounted for nearly one-third of total mortgage-related issuance, compared to approximately 20 percent in 2004. Third quarter volume increased to $176.7 billion, 42.4 percent higher than the second quarter… The growth can be attributed to increases in jumbo mortgages above the conforming loan limit and adjustable rate, sub-prime and Alt-A mortgage volumes. Private-label issuers have the flexibility to focus on the larger and more credit-sensitive market niches. Fannie Mae, Freddie Mac and Ginnie Mae increased issuance of MBS in the third quarter by 25.5 percent. Driven by origination volume growth, agency issuance totaled $287.4 billion…” “Daily outstanding repurchase agreements averaged $3.17 trillion through the first nine month of this year, a 17.1 percent increase over the same period of 2004… The data represent financing activities of the primary dealers reporting to the Federal Reserve Bank of New York… Through the third quarter of 2005, over $305.9 trillion in repo trades were submitted by GSD (Fixed Income Clearing Corporation’s Government Securities Division) participants, with an average daily volume of approximately $1.6 trillion…” “The outstanding volume of money market instruments, including commercial paper (CP), large time deposits and bankers’ acceptances, totaled $3.28 trillion at the end of the third quarter, a 4.1 percent increase from the total at the end of June 2005 [and up 19.7% y-o-y]. CP outstanding totaled $1.57 trillion…an increase of 4.0 percent [up 18.9% y-o-y]… The outstanding level of large time deposits rose to an estimated $1.71 trillion as of September 30, 2005, a 4.3 percent increase over the volume at the end of June [up 20.4% y-o-y].” Inflationists Watch: November 18 – Bloomberg (Scott Lanman): “Paul McCulley, a managing director at Pacific Investment Management Co., which runs the world’s biggest bond fund, is among the candidates for two vacancies on the Federal Reserve Board of Governors, the Financial Times reported. Ben Bernanke, the nominee to succeed Fed Chairman Alan Greenspan and the current chairman of the White House Council of Economic Advisers, recommended McCulley…” Content with the Status Quo: Dr. Bernanke: “In my statement, I emphasize three elements of the Greenspan strategy. They are, first of all, maintaining low and stable inflation in the medium term. Secondly, the use of flexibility and judgment in making monetary policy. I do not subscribe to any rigid or mechanical rule in policymaking. And the third is the use of transparency to inform the public and to inform the markets about policy and its intentions. In all these respects, I intend to be continuous with Chairman Greenspan. I expect also, though, not to be static; to evolve over time. In the case of Chairman Greenspan, transparency changed over time. It became a greater degree of transparency. I expect, going forward, to look for other opportunities to increase the transparency of the Federal Reserve.” Senator Jack Reed, from the confirmation hearing Q&A session: “Now, just recently, I think Chairman Greenspan has talked about the potential for foreign lenders to become disenchanted. Won’t interest rates have to rise substantially in our current posture if foreign lenders are not forthcoming? Is that almost axiomatic? Dr. Bernanke: “I don’t expect to see foreign lenders change their holdings very significantly. The foreign holders are not doing us a favor. What they are doing is they’re choosing a set of assets which they consider to be highly liquid, highly safe, from a country with a safe, strong legal system. So it’s for that reason that American assets make up the bulk of…international reserves. So I don’t expect to see major changes in that. Moreover, there’s broad interest in holding U.S. assets, both by Americans, but also by foreign nonofficial sources as well. So I don’t expect to see any such shift in demand for U.S. assets.” Senator Debbie Stabenow: “I wanted to talk a little bit more about this whole question of our U.S. assets, financial assets, and other assets being held by foreign investors. We’re told that about $9 trillion in all. If you look at financial assets - large portions of which are easily sold and highly susceptible to shifts in the market sentiment, interest rates, other variables - even a modest slowdown in the net new inflows from private and official foreign sources could have a negative impact on an economy where foreign investment is about 25 percent of our gross national product - very alarming. And I would argue that since a large portion of that is China and Japan, that that unduly impacts our ability to enforce trade laws, to address other issues with them. Whether we want to acknowledge that or not, I have a hard time believing it doesn’t have some impact there. But it would appear to many of us that our trade deficits are leading us down an incredibly alarming path, as well as our budget deficits. When you’re looking back, do you see any instances where alternative monetary policy choices by the Fed could have moderated the build-up of these imbalances or had an impact on what’s happening in terms of deficits?” Dr. Bernanke: “No, I don’t think that the Federal Reserve – whose mandate, after all, is domestic price stability and employment - has much role in terms of the current account deficit. The current account deficit is a very complex phenomenon. I believe it arises from, essentially, a global imbalance of saving and investment. Countries outside the United States have a lot of savings that they want to put into international capital markets and insufficient investment to make use of those savings. The United States has been the recipient of those savings. And that is, in some sense, a good thing because the U.S. is a very attractive destination for foreign capital flows. But it has also created this imbalance that we call the current account deficit. I do believe the current account deficit needs to come down over a period of time. I think there are a number of elements needed to do that. Part of it would be to increase United States national savings through both private savings and public savings. It would also be useful for our trading partners to do a number of things, including allowing their exchange rates to float more freely and be determined by the market and to rely less on exports as a source of demand for their economies. So we need to rebalance the global international system. I believe that can be done over a period of time. But it won’t happen overnight. And I think the Federal Reserve’s main objective should be to maintain domestic employment and price stability and to allow other factors to be predominant in curing the current account situation.”  Dr. Bernanke received almost universal praise for his performance at Tuesday’s confirmation hearing. He demonstrated his impressive intellectual aptitude and capacity for clear speaking, along with some real political savvy. The prospective chairman was characteristically well-prepared. To be sure, Dr. Bernanke’s spoke confidently and decisively, espousing some of the most spurious notions of central banking in the history of the Federal Reserve System. It is not surprising that Dr. Bernanke answers “no” to the question “do you see any instances where alternative monetary policy choices by the Fed could have moderated the build-up of these imbalances or had an impact on what’s happening in terms of deficits?” After all, he led the charge for momentous “post-Bubble” reflation and the war on deflation, despite the reality that the Credit system remained very much in Bubble mode. Predictably, unprecedented monetary accommodation badly exacerbated myriad Credit inflation excesses, most notably a virtual doubling of the Current Account Deficit. The Greenspan/Bernanke Federal Reserve absolutely blew it, compounding historic policy error on top of policy error. Now he’s beloved and soon running the show. It is incredible – and history will surely not be kind - that Dr. Bernanke today disavows the precariousness of our Current Account, as well as the Fed’s predominant role in nurturing it. But then again, he is an ardent (wolf in sheep’s clothing) inflationist and Devout Anti-Bubble Popper. Dovishly, in regard to previous oil shocks, he stated that “the Fed responded somewhat in a panicked way by raising interest rates enormously, which then contributed to the deep recessions of 1975 and 1981-’82.” And while selling inflation targeting, he sheepishly assured our lawmakers that tough measures would not be brought to bear against outsized inflation gains: “I would certainly not try to return inflation to a target within a short period of time. I would simply try to assure the markets that over a long period of time that the Federal Reserve was committed to price stability…” He doesn’t come across as all too Volckerish. Of course, Dr. Bernanke is an enthusiastic follower of chairman Greenspan’s “risk-management policy approach [that] attempts to take into account the possible consequences of not only the most likely forecasted outcomes but also of a range of lower-probability outcomes. Implementing this approach requires sophisticated judgments about possible risks to the economy, as well as the flexibility to respond quickly to new information or unexpected developments.” Or, said another way, all measures must be employed to avoid the risky proposition of restraining destabilizing excess or piercing the ongoing Credit Bubble. Too risky…simply much too risky, and we’ll make sure to telegraph our every move as to not interfere with any risk-taking endeavors. This is all comforting music to Wall Street’s ears. The problem is that Dr. Bernanke’s central banking framework is fabricated around the justification of permanent accommodation and Bubble Perpetuation, whereas gross U.S. and global imbalances beckon for (courageously) sound American policies to initiate what will unfortunately be a wrenching but unavoidable adjustment process. Importantly, it is the very nature of contemporary finance and the highly integrated global economic system that Current Account imbalances are a predominant inflationary manifestation. To be sure, the essence of contemporary (“Wall Street finance”) asset-lending centric, securities leveraged-speculation and market-based financial systems ensure that asset inflation and over-abundant marketplace liquidity are the prevailing consequence of protracted loose monetary conditions. At the same time, unparalleled (liquidity excess-induced) global investment in goods-producing capacity generally weighs on goods prices, garnering “core CPI” a particularly inaccurate indicator of the general monetary backdrop and the appropriateness of monetary policy. And, most importantly, the longer that The Wall Street Finance and Asset Bubbles inflate, the more secure our policymakers are in invoking the “risk management” and “inflation targeting” subterfuges and perpetuating conspicuous Bubble accommodation. Dr. Bernanke informs us that he is basically ok with $800 billion Current Account Deficits, unprecedented derivative positions and myriad Bubbles as long as “core CPI” inflation is contained - over the long-term. He is Content with the Status Quo. He believes the world will always fancy our dollar-denominated financial claims, demonstrating yet again his total disregard for the harsh lessons of financial history. Surely he appreciates that the Bubble-induced explosion of suspect dollar financial claims – largely backed by exceedingly vulnerable real estate (Bubble) loans - guarantees future foreign creditor disappointment, disenchantment, liquidation and revulsion. He must, let’s hope, understand the paramount role today played by global “carry trades” and the “repo” market in both fostering demand for U.S. securities and fueling The Unwieldy Global Liquidity Glut. For now, global speculators are content to play interest-rate differentials (borrowing cheap in Japan and throughout Europe) and to ride the dollar bear market rally. But to finance a massive Current Account with conspicuous “hot money” flows is very, very risky business that will end badly, debt denominated in our own reserve currency not withstanding. Recall how abruptly marketplace sentiment turned against technology stocks and telecom debt and how rapidly market dynamics evolved from spectacular Bubble to market collapse. Truth be told, it is a Bubble Perpetuation Calamity that – after years of the Fed accommodating enormous Current Account Deficits – the global liquidity backdrop is today such that (belated) Fed rate increases incite an irrepressible deluge of “hot money” (interest-rate differential and other speculative) flows. It is instructive to contrast Dr. Bernanke’s sanguine and tolerant views with comments made today by Bundesbank President and European Central Bank council member Axel Weber (see “Global Imbalances Watch” above): “With regard to measures to reduce the current global imbalances, the most urgent policy steps have to be taken by the US authorities.” Of course! The impetus for Intractable U.S. Current Account Deficits resides not in Chinese factories, with their workers’ savings or the value of their currency, but within our very own obstinate Credit Bubble and Bubble Economy. Regrettably, however, such competent and incontrovertible central banker insight, as provided by Mr. Weber, will be nowhere to be found at the Bernanke Federal Reserve. It’s a sad state of affairs, to say the least. Dr. Bernanke: “The Federal Reserve has important responsibilities for maintaining financial stability. That involves ensuring ex ante, that banks, for example, are managing their portfolios safely, that the clearing and settlement systems are well-designed and secure, that there are good arrangements in place for dealing with some kind of financial crisis, no matter what its source might be, and that, ex post, should there be a problem, that there be plenty of liquidity provided to the banking system and that the Fed would make sure that whatever problems arise be brought to some venue where they can be unwound and discussed and assistance be given.” The Federal Reserve’s responsibility “for maintaining financial stability” must begin long before there is an $800 billion Current Account Deficit, $3.6 Trillion of “repos,” $270 Trillion of derivative contracts, a too powerful Mortgage Finance Bubble, all-encompassing leveraged speculation and a terribly distorted Bubble Economy. Financial stability is a daily and ongoing discipline – an uncompromising commitment to broad-based financial and economic soundness, stability and sustainability, not some theoretical post-Bubble “mop-up” strategy.