Friday, October 3, 2014

03/13/2009 Q4 2008 Flow of Funds *

For the week, the Dow jumped 9.0% (down 17.7% y-t-d) and the S&P500 rallied 10.7% (down 16.2%). The Morgan Stanley Cyclicals surged 16.4% (down 30%), and the Transports jumped 10.0% (down 31.6%). The S&P Homebuilding index rose 28.2% (down 6.0%), and the Morgan Stanley Retail index gained 15.4% (down 5.0%). The Morgan Stanley Consumer index advanced 8.4% (down 14.9%), and the Utilities increased 1.3% (down 19.8%). The broader market rallied sharply. The S&P400 Mid-Caps jumped 11.9% (down 15.2%), and the small cap Russell 2000 surged 12% (down 21.3%). The Nasdaq100 gained 9.8% (down 3.6%), and the Morgan Stanley High Tech index jumped 11.3% (up 0.4%). The Semiconductors surged 12.9% (up 3.7%), and the InteractiveWeek Internet index gained 8.5% (up 3.2%). The Biotechs gained 6.9% (down 6.8%). Financials rallied spectacularly. The Broker/Dealers surged 25.5% (down 7.8%), and the Banks rallied 37.4% (down 42.3%). Although Bullion declined $10, the HUI Gold index mustered a 0.9% gain (down 4.9%).

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.”
Currency Watch:

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%.
Commodities Watch:

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.”
Japan Watch:

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.”
India Watch:

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.”
Fiscal Watch:

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.”
GSE Watch:

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.”
Muni Watch:

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.”
California Watch:

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.”
Speculator Watch:

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.

03/06/2009 A Washington-Induced Bubble *

For the week, the Dow sank 6.1% (down 24.5% y-t-d) that the S&P500 was hammered for 7.0% (down 24.3%). The Transports sank 12.2% (down 37.9%), and the Morgan Stanley Cyclicals tanked 13.7% (down 39.8%). The Utilities declined 8.3% (down 20.8%), and the Morgan Stanley Consumer index fell 5.0% (down 21.5%). The S&P 400 Mid-Caps sank 9.1% (down 24.2%), and the small cap Russell 2000 dropped 9.8% (down 29.7%). The Nasdaq100 lost 4.7% (down 12.1%), and the Morgan Stanley High Tech index fell 3.7% (down 9.8%). The Semiconductors declined 2.0% (down 8.1%), and the InteractiveWeek Internet index fell 3.9% (down 4.9%). The Biotechs dropped 5.5% (down 12.9%). The Broker/Dealers sank 11.6% (down 26.5%), and the Banks were drilled for 22.9% (down 58%). With Bullion down about $4, the HUI Gold index declined 1.7% (down 5.8%).

One-month Treasury bill rates ended the week at 9 bps, and three-month bills were at 18 bps. Two-year government yields were down 2 bps to 0.90%. Five year T-note yields ended the week 9 bps lower to 1.82%. Ten-year yields dropped 13 bps to 2.87%. Long-bond yields fell 16 bps to 3.56%. The implied yield on 3-month December ’09 Eurodollars increased 6 bps to 1.605%. Benchmark Fannie MBS yields sank 20 bps to 4.25%. The spread between benchmark MBS and 10-year T-notes narrowed 6 to 138 bps. Agency 10-yr debt spreads widened 12 to 74 bps. The 2-year dollar swap spread increased 8 to 77.5 bps; the 10-year dollar swap spread declined 6 to 25.5bps, and the 30-year swap spread declined 7.25 to negative 31.75 bps. Corporate bond spreads widened notably. An index of investment grade bond spreads widened 35 to 280 bps, and an index of junk spreads widened 38 to 1,289 bps. GE Capital Credit default swap prices traded above 1,000 bps.

Yet another week of decent corporate debt issuance. Investment grade issuance included Eli Lilly $2.5bn, Coca-Cola $2.25bn, State Street $1.5bn, PG&E $550 million, FLP Group $500 million, Consumers Energy $500 million, Cargill $450 million, Appalachian Power $350 million, Pitney Bowes $300 million, George Washington University $200 million, and Mississippi Power $125 million.

Junk issuers included Nisource $600 million and Plains Exploration $365 million.

March 6 – Bloomberg (Laura Cochrane): “Emerging-market borrowing costs rose, heading for the biggest weekly increase in three months… The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries climbed 3 bps to 6.96 percentage points (up 47bps on the week)…”

International debt issues this week included KFW $4.0bn, International Bank of Reconstruction and Development $3.0bn, BP Capital $3.25bn, Barclays Bank $2.35bn, and Swedish Housing Finance $250 million.

U.K. 10-year gilt yields collapsed 56 bps to 3.06%, and German bund yields dropped 19 bps to 2.92%. The German DAX equities index fell 4.6% (down 23.8%). Japanese 10-year "JGB" yields added one basis point to 1.28%. The Nikkei 225 sank 5.2% (down 19%). Emerging markets were mixed to lower. Brazil’s benchmark dollar bond yields rose 12 bps to 6.98%. Brazil’s Bovespa equities index declined 2.8% (down 1.2% y-t-d). The Mexican Bolsa dropped 4.0% (down 23.8% y-t-d). Mexico’s 10-year $ yields surged 28 bps to 6.76%. Russia’s RTS equities index rallied 5.8% (down 8.7%). India’s Sensex equities index dropped 6.4% (down 13.7%). China’s Shanghai Exchange jumped 5.3% (up 20.4%).

Freddie Mac 30-year fixed mortgage rates rose 8 bps to 5.15% (down 88bps y-o-y). Fifteen-year fixed rates gained 4 bps to 4.72% (down 75bps y-o-y). One-year ARMs increased 5 bps to 4.86% (down 8bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 8 bps this week to 6.91% (down 8bps y-o-y).

Federal Reserve Credit declined $8.8bn last week to $1.891 TN. Fed Credit expanded $1.018 TN over the past 52 weeks (116%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last week (ended 3/4) jumped $15.7bn to a record $2.596 TN. "Custody holdings" were up $446bn over the past year, or 21%.

Bank Credit declined $16.6bn to $9.766 TN (week of 2/25). Bank Credit expanded $400bn year-over-year, or 4.3%. Bank Credit increased $391bn over the past 25 weeks. For the week, Securities Credit dropped $15.1bn. Loans & Leases slipped $1.6bn to $7.111 TN (52-wk gain of $220bn, or 3.2%). C&I loans fell $5.9bn, with 52-wk growth of 7.4%. Real Estate loans gained $2.7bn (up 5.3% y-o-y). Consumer loans added $2.3bn, while Securities loans declined $1.3bn. Other loans added $0.5bn.

M2 (narrow) "money" supply declined $5.7bn to $8.275 TN (week of 2/23). Narrow "money" has now inflated at an 16.7% rate over the past 23 weeks and $719bn over the past year, or 9.5%. For the week, Currency added $1.2bn, while Demand & Checkable Deposits dropped $14.6bn. Savings Deposits rose $16.9bn, while Small Denominated Deposits slipped $0.9bn. Retail Money Funds fell $8.2bn.

Total Money Market Fund assets (from Invest Co Inst) rose $17.7bn to $3.906 TN, with a 52-wk expansion of $455bn, or 13.2% annualized.

Asset-Backed Securities (ABS) issuance remains about dead. Year-to-date total US ABS issuance of $2.9bn (tallied by JPMorgan's Christopher Flanagan) is a fraction of the $34.8bn for comparable 2008. There has been no home equity ABS issuance in months. Year-to-date CDO issuance totals only $1.2bn.

Total Commercial Paper outstanding sank $44.2bn this past week to a 19-wk low $1.480 TN. CP has declined $201bn y-t-d (69% annualized) and $380bn over the past year (20.4%). Asset-backed CP declined $2.0bn to $722bn, with a 52-wk drop of $95bn (11.6%).

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $259bn y-o-y, or 4.1%, to $6.661 TN. Reserves have declined $285bn over the past 20 weeks.
Global Credit Market Dislocation Watch:

March 4 – Bloomberg (Dan Levy): “More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, First American CoreLogic said. An additional 2.2 million borrowers will be underwater if home prices decline another 5%...Households with negative equity or near it account for a quarter of all mortgage holders.”

March 4 – Wall Street Journal (Liz Rappaport and Jon Hilsenrath): “The U.S. launched a program to finance up to $1 trillion in new lending to consumers and businesses, in an ambitious attempt to jump-start credit for everything from car loans to equipment leases. The Federal Reserve and the Treasury Department hope to revive the moribund market for so-called securitized lending, which until last year was central to providing consumer and business loans. Starting March 17, large investors -- including hedge funds and private-equity firms -- can obtain cheap credit from the Fed and use the money to buy newly issued securities backed by such loans.”

March 3 – Wall Street Journal: “If you missed the first hedge-fund boom, now may be the time to put up your shingle. Looking at the terms of the Federal Reserve’s new Term Asset-Backed Securities Loan Facility, investors using it should be able to generate hefty returns with little risk. The TALF effectively turns the Fed into a generous prime brokerage. The central bank lends money for up to three years to investment firms to buy bonds backed by assets like auto or credit-card loans. The Fed needs to lure investors back into the market for these asset-backed securities, or ABS, where new issuance has almost disappeared.”

March 5 – Wall Street Journal (Michael M. Phillips and Ruth Simon): “The Obama administration announced details of a housing-rescue plan it said would help as many as one in nine homeowners, from low-income Americans struggling to avoid foreclosure to well-off borrowers who owe more than their homes are worth. The announcement came two weeks after President Barack Obama said he would spend $75 billion on the housing component of an emergency economic plan that includes a financial-system bailout and a $787 billion spending-and-tax-cut package."

March 2 – Bloomberg (Scott Lanman and Hugh Son): “American International Group Inc… will get as much as $30 billion in new government capital in a revised bailout after posting a record fourth-quarter loss. The loss widened to $61.7 billion… The government will also exchange its $40 billion in preferred stock for new shares that ‘resemble common equity,’ the Treasury and Federal Reserve said. AIG was paying a 10% dividend on the preferred stock.”

March 4 – Bloomberg (Shannon D. Harrington): “The cost to protect against a default by the finance division of General Electric Co. rose for the fourth day to a record. Traders of contracts protecting against a default by GE Capital Corp. for five years demanded 20% upfront in addition to 5% a year… That means it would cost $2 million initially and $500,000 annually to protect $10 million of the unit’s debt.”

March 3 – Dow Jones: “U.S. corporate defaults continued to increase through February, Standard & Poor’s said… as the year-to-date number equaled the total number of defaults in 2007. Nine companies defaulted in February, bringing the year-to-date total to 27... S&P also raised its estimate for the 12-month trailing junk-grade default rate to 5.4% in February, up from 4.66% in January and 1.23% in February 2008.”
Currency Watch:

The dollar index ended the week 0.6% higher to 88.51 (up 8.9% y-t-d). For the week on the upside, the Swiss franc increased 0.7%, the Taiwanese dollar 0.5%, the Brazilian real 0.5% and the New Zealand dollar 0.5%. On the downside, the South African rand declined 3.1%, the Swedish krona 2.0%, the British pound 1.6%, the South Korean won 1.0%, the Japanese yen 0.8%, and the Canadian dollar 0.8%. The Euro declined 0.2%.
Commodities Watch:

March 4 – Bloomberg (Luo Jun and Zhang Dingmin): “China Investment Corp., the $200 billion sovereign wealth fund, may invest in ‘undervalued’ commodity assets, joining other Chinese companies in taking advantage of a seven-year low in prices. ‘Many commodities are undervalued and are among our considerations for potential investments,’ Executive Vice President Jesse Wang told reporters…”

March 5 – Bloomberg (Helen Yuan): “Chinese steelmakers, the largest buyers of iron ore, want Cia. Vale do Rio Doce, BHP Billiton Ltd. and Rio Tinto Group to cut prices of the material by between 40% and 50% this year, Anshan Iron & Steel Group said.”

Gold slipped 0.4% this week to $939 (up 6% y-t-d), and silver added 1.7% to $13.33 (up 18% y-t-d). April Crude gained $1.04 to $45.80 (up 3% y-t-d). April Gasoline fell 2.6% (up 26% y-t-d), and April Natural Gas dropped 6.3% (down 30% y-t-d). March Copper surged 9.8% (up 20% y-t-d). March Wheat rallied 1.1% (down 16% y-t-d), and Corn gained 0.6% (down 13% y-t-d). The CRB index declined 0.9% (down 8.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) was little changed (down 3.8% y-t-d).
China Reflation Watch:

March 4 – Bloomberg (Li Yanping): “China’s budget spending may more than double over last year’s planned expenditure as the government implements its 4 trillion yuan ($585 billion) stimulus package, data given by a spokesman for the nation’s lawmakers show. The government has earmarked 480.7 billion yuan for defense this year, accounting for 6.3% of total budgetary expenditure, Li Zhaoxing, spokesman for the National People’s Congress…said…”

March 3 – Bloomberg (Jun Luo and Yidi Zhao): “China’s budget deficit this year may be about 3% of gross domestic product, Jia Kang, head of the Insitute of Fiscal Science at the Ministry of Finance said…”

March 3 – Bloomberg (Li Yanping and Nipa Piboontanasawat): “A Chinese manufacturing index climbed for a third month, adding to evidence that a 4 trillion yuan ($585 billion) stimulus package is pushing the world’s third-biggest economy closer to a recovery.”
Japan Watch:

March 5 – Bloomberg (Jason Clenfield): “Japanese companies cut spending last quarter at the fastest pace in a decade… Capital spending excluding software fell 18.1% in the three months ended Dec. 31 from a year earlier…”

March 2 – Bloomberg (Toru Fujioka): “Japan’s wage declines accelerated in January as companies pared production… Monthly wages, including overtime and bonuses, fell 1.3% from a year earlier…”

March 2 – Bloomberg (Naoko Fujimura and Tetsuya Komatsu): “Toyota… and Honda… led a drop in the country’s monthly vehicle sales… to the lowest level in 35 years. Sales of cars, trucks and buses, excluding minicars, fell 32% to 218,212 vehicles in February…”

March 3 – Bloomberg (Tetsuya Komatsu and Naoko Fujimura): “Toyota…, forecasting its first loss in 59 years, is seeking loans from the Japanese government as private investors demand up to 50% more in interest for the company’s debt. The company’s financial unit may ask for 200 billion yen ($2bn) in loans, public broadcaster NHK reported…”
India Watch:

March 6 – Wall Street Journal (Abhrajit Gangopadhyay): “India’s deficit is likely to be 6% of gross domestic product in the next financial year… Junior Finance Minister P.K. Bansal said… ‘There is a sense within the government that a 6% fiscal deficit is acceptable, given the current conditions,’ Mr. Bansal told Dow Jones…”
Asia Reflation Watch:

March 2 – Bloomberg (Seyoon Kim): “South Korea’s exports fell for a fourth month in February, the longest run of declines since 2002, on weaker demand from the U.S., Japan and Europe. Overseas shipments decreased 17.1% to $25.8 billion from a year earlier…”

March 3 – Bloomberg (Kyunghee Park and Seonjin Cha): “South Korea’s biggest port is running out of room to store shipping containers… The bigger concern is that the boxes are almost all empty. Container trade at Busan, the world’s fifth-largest port, has fallen about 40% in recent months…”

March 3 – Wall Street Journal (Evan Ramstad): “Shinchang Electrics Co. offered union leaders a proposal that would reduce wages at the auto-parts company by 20% in exchange for no layoffs among its 810 workers this year. Eight days later, the union agreed. The deal is one sign of the unusual way South Korea is grappling with the global economic crisis. Across the country, executives, salaried employees and hourly workers at companies from banks to shipbuilders are joining to slash wages and other costs with the goal of avoiding layoffs. ‘We have to go through this together. We are colleagues and friends,’ says Shim Ho-yong, a seven-year employee who molds ignition components for Shinchang.”

March 3 – Bloomberg (Shinhye Kang and Heejin Koo): “South Korea’s inflation unexpectedly accelerated in February for the first time in seven months because of increased costs for food, furnishings and clothing. The consumer price index rose 4.1%...”

March 2 – Bloomberg (Aloysius Unditu and Arijit Ghosh): “Indonesia’s exports fell the most in more than 22 years in January and inflation slowed the following month, increasing scope for the central bank to reduce its benchmark interest rate this week. Overseas shipments plunged 35.5% to $7.15 billion from a year earlier…”

March 4 – Bloomberg (Ta Bao Long): “Vietnam’s government said it will spend 300 trillion dong ($17 billion) this year to halt a slowdown in economic growth amid the global financial crisis. The amount, almost a quarter of the Southeast Asian nation’s $71 billion economy, will be used to develop infrastructure, spur exports, and fund other social security projects, Prime Minister Nguyen Tan Dung said…”
Latin America Watch:

March 2 – Bloomberg (Eliana Raszewski): “Argentina’s financing options may dry up next year as the global financial crisis erodes tax revenue from commodity exports, Moody’s Investors Service said. ‘Argentina should have more than enough to finance 2009 needs, but if the crisis continues to dampen revenues, 2010 will be much more challenging,” Moody’s analyst Gabriel Torres said…”
Central Banker Watch:

March 5 – Bloomberg (Jennifer Ryan): “The Bank of England reduced the benchmark interest rate to the lowest ever and said it would start purchasing 75 billion pounds ($105 billion) in assets, printing money to fight the recession. The bank’s nine-member panel… cut the rate a half point to 0.5%, the lowest since the bank was founded in 1694… ‘In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels,’ King wrote…”

March 6 – Bloomberg (Brian Swint and Jennifer Ryan): “Bank of England Governor Mervyn King, criticized for his initial response to the credit crisis, is now embarking on one of the biggest risks in British economic history. The central bank yesterday won authority to print as much as 150 billion pounds ($212 billion) and pump it into an economy facing its worst recession since World War II, after cutting interest rates close to zero. With markets clogged and economic activity shriveling, King can’t be sure the gamble will work.”

March 2 – Bloomberg (Craig Torres and Steve Matthews): “The Federal Reserve may need to hand over emergency credit programs to the U.S. Treasury to keep its focus on monetary policy and protect against political interference, Richmond Fed Bank President Jeffrey Lacker said. An accord with the Treasury ‘could stipulate that the emergency lending is transferred to the books of the Treasury after a brief period of time has elapsed,’ Lacker said…”
Fiscal Watch:

March 6 – Wall Street Journal (Damian Paletta): “Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.”
Unbalanced Global Economy Watch:

March 6 – Bloomberg (Adam Haigh): “Profits in the U.K. will plunge more than during the Great Depression… Earnings will fall 60 percent from peak to trough, London- based equity strategists Graham Secker and Charlotte Swing wrote…”

March 4 – Bloomberg (Fergal O’Brien): “Irish jobless claims rose to a seasonally adjusted 352,800 in February, the country’s statistics office said on its Web site today. The unemployment rate was 10.4%.”

March 3 – Bloomberg (Andrew MacAskill): “Northern Rock Plc, the first U.K. lender nationalized during the credit crunch, said new residential lending plunged 90% last year… The company registered a quadrupling of bad loan impairments, which more than tripled to 894 million pounds from 239.7 million ponds a year earlier.”

March 5 – Bloomberg (Emma Ross-Thomas): “Spain’s industrial production fell by 20% in January, matching a record drop the month before, after automakers cut jobs and output in the deepening recession.”

March 5 – Bloomberg (Alex Nicholson): “Russia’s inflation rate rose to a four-month high in February as the weaker ruble drove up the price of imports. The rate jumped to 13.9%...”

March 4 – Bloomberg (Victoria Batchelor): “Australian sales of new cars and light trucks slumped 21.9% in February from a year earlier as slowing economic growth and faltering confidence reduced demand.”
Bursting Bubble Economy Watch:

March 6 – Bloomberg (Bob Willis): “The U.S. unemployment rate jumped in February to 8.1 percent, the highest level in more than a quarter century, a surge likely to send more Americans into bankruptcy and force further cutbacks in consumer spending. Employers eliminated 651,000 jobs, the third straight month that losses surpassed 600,000 -- the first time that’s happened since the data began in 1939…”

March 5 – Bloomberg (Matt Townsend): “Interior designer J.C. Trabanco began applying for sales jobs after his Wall Street clients stopped calling last year. ‘It’s humbling,’ Trabanco said… The 50-year-old, who said he used to earn more than $100,000 a year, only briefly considered leaving when he realized he was among the oldest people in line for a chance at a job that may pay as little as $9 an hour. “You can’t be proud,’ he said. As Macy’s Inc. eliminates 7,000 positions, Sears Holdings Corp. shuts 24 stores and furniture merchants slash payrolls by 11%, retail jobs are disappearing at a faster rate in this recession than in any other since the U.S. government began keeping track in 1939.”

March 4 – Bloomberg (Bill Rochelle and Bob Willis): “Bankruptcy filings in the U.S. surged 37% in February from a year earlier… Total filings for individuals and companies rose to more than 103,000, according to… Automated Access to Court Electronic Records… Commercial filings rose to 6,303, up 47% from the same month a year earlier, the group said.”

March 3 – Wall Street Journal (Alex P. Kellogg and Matthew Dolan): “U.S. auto sales plunged yet again in February, falling 41% to 688,000 vehicles, according to Autodata Corp… General Motors Corp.’s sales fell 53% from February 2008 to 126,170… while Ford Motor Co.’s dropped 48% to 99,050… Toyota Motor Corp.’s sales slid 40% to 109,583, Honda Motor Co.’s fell 38% to 71,575 and Nissan Motor Co.’s dropped 37% to 54,249.”

March 5 – Bloomberg (Mary Jane Credeur): “United Airlines and American Airlines led the six biggest U.S. carriers to a combined 11% drop in passenger traffic last month as the worsening recession spurred businesses and consumers to curb spending.”

March 3 – Bloomberg (David Evans): “Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy. The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year. The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 % less than that, at $2 trillion.”

March 5 – Bloomberg (Gillian Wee): “U.S. college and university endowments lost an average of 24.1% in the last six months of 2008, more than in any year since the returns have been tracked… Endowments had their worst full year in 1974, when they reported an average loss of 11%.”

March 3 – Bloomberg (Sree Vidya Bhaktavatsalam): “The value of college-savings plans fell 21% last year, a loss of $23.4 billion… Assets in the savings accounts, called 529 plans, declined to $88.5 billion from $111.9 billion at the end of 2007…”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

March 6 – Bloomberg (Christine Harper): “Myron Scholes, the Nobel prize- winning economist who helped invent a model for pricing options, said regulators need to ‘blow up or burn’ over-the-counter derivative trading markets to help solve the financial crisis. The markets have stopped functioning and are failing to provide pricing signals, Scholes, 67, said… The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said…”
GSE Watch:

March 5 – Bloomberg (Dawn Kopecki): “Fannie Mae and Freddie Mac are being used by the Obama administration to help dig the U.S. out of an economic ‘hole,’ yet that public policy role won’t affect the mortgage-finance companies’ future, House Financial Services Committee Chairman Barney Frank said.”
Real Estate Bust Watch:

March 3 - UPI: “The percentage of U.S. homeowners 60 days behind on their mortgages increased 16% in the fourth quarter of 2008, said… The loan delinquency rate jumped to a national average 4.58%, up sharply from the third quarter’s 3.96% and dramatically higher than the fourth quarter of 2007, when the delinquency rate was 2.99%.”
Muni Watch:

March 5 – Bloomberg (William Selway): “Arizona Governor Jan Brewer is seeking to raise taxes and slash government spending to meet a $3 billion deficit in the coming fiscal year caused by the slumping economy. ‘We cannot afford the size of government we now have, and even a slowly recovering economy won’t fix the problem…’”
California Watch:

March 6 – San Francisco Chronicle (Tom Abate): “Unemployment rates in the Bay Area jumped into record territory in January, reaching 9.4% in the San Jose area, 9.2% in the East Bay and 7.5% in San Francisco and its vicinity.”
Speculator Watch:

March 2 – Bloomberg (Helen Yuan): “The Carlyle Group may lose 500,000 yuan ($73,068) per house on the sale of 100 villas in Shanghai, China Business News said… Carlyle has paid $120 million, or 9.5 million yuan each, for the villas…”

A Washington-Induced Bubble:

March 5 – Bloomberg (Dawn Kopecki): “The ‘phenomenon of securitization’ must be curtailed by lawmakers to prohibit banks and mortgage lenders from shifting all the risk on loans they originate and sell to investors, U.S. House Financial Services Committee Chairman Barney Frank said. ‘I will be pushing for legislation that will make it illegal for anybody to securitize 100% of anything,’ Frank… told reporters… Securitization is a ‘large part’ of the problem in the housing market, he said.”

March 5 – Bloomberg (Scott Lanman and Craig Torres): “Federal Reserve Vice Chairman Donald Kohn came under fire from Democratic and Republican senators for rescuing American International Group Inc. without providing cost estimates or enough openness, risking public confidence in government. Federal aid to AIG ‘appears to be a bottomless pit,’ said Mark Warner… Regulators ‘are asking for an open-ended check and’ are ‘not going to get’ it, said Senator Robert Menendez… ‘The people want to know what you have done with this money,’ said Senator Richard Shelby… The $163 billion AIG rescue… may worsen prospects for congressional approval of more spending on bank rescues beyond the $700 billion Troubled Asset Relief Program, lawmakers said…”

Our Washington policymakers have too belatedly recognized the perils associated with unregulated Credit and speculative finance. They now come down hard on our Federal Reserve and Treasury Department officials, quickly losing sight of the Mountains of Blame to be spread around. Let us not forget that Congress repealed the Depression era Glass-Steagall Act back in 1999. And it is fair to remind leaders from both parties and both Houses that they are directly culpable for the spectacular rise and unfolding fall of the Government-Sponsored Enterprises (GSEs). I get no sense that a coherent understanding of the Credit Bubble is manifesting in Washington.

I could on a weekly basis come with dire predictions, but there’s more than enough of this type of reading available these days. I’ll stay focused on (contemporaneously) analyzing this historic Credit Bubble from every angle, with The Objective of Contributing to Lessons Learned. And I believe quite strongly that gleaning The Key Lessons from Major Bubbles is incredibly more challenging than one would ever imagine – that confusion, flawed analysis, ideologies and The Overwhelming Forces of Historical Revisionism create imposing obstacles to understanding. One can point to the 80 years or so of writings examining the Roaring Twenties and the Great Depression (what Chairman Bernanke refers to as the “Holy Grail of Economics”) to support this view.

There is no doubt the securitization and CDS (Credit default swap) markets were key facets of the Credit boom and are today at the heart of the devastating bust. Financial “innovation” always plays a critical role in major Bubbles – and this process of experimentation and innovation is consistently evolutionary in nature. While it is in many ways reasonable to cast blame upon these markets and their operators, Lessons Learned requires an understanding as to how these markets came to play such decisive roles. What critical features of the financial landscape contributed to the marketplace’s enthusiasm for these types of instruments? More specifically, how was it that Total Mortgage Credit growth surpassed $1.5 TN annualized during the first-half of 2006? How did asset-backed securities (ABS) issuance balloon to $900bn annualized in late-2006? How was it that Wall Street asset growth surpassed $1.0 TN annualized during the first-half of 2007? How could CDO issuance have possibly reached $1.0 TN in 2007 – and that the CDS market mushroomed to more than $60 Trillion at the very top of the Credit cycle?

The ratings agencies provide such easy and browbeaten scapegoats. They adorned “AAA” ratings on Trillions of MBS, ABS, and CDOs (collateralized debt obligations) during the heyday of the boom – back when home prices were forever rising, incomes were surging, Credit losses were disappearing, and New Era Babble was as unnerving as it was alluring. The rating agencies, Wall Street, Congress and virtually everyone else believed the boom was sustainable. But the radically-altered Post-Bubble backdrop now finds the rating agencies appearing as nincompoops complicit with shady Wall Street operators. Such a post-boom spotlight is predictable. From an analytical perspective, however, focus on the idiocies and malfeasance of the boom is certain to neglect key Bubble nuances.

From a “Moneyness of Credit” perspective, the Wall Street Credit mechanism evolved to the point of creating virtually endless debt instruments perceived by the marketplace as safe and liquid stores of nominal value (contemporary “money”). One cannot overstate the principal role top-rated money-like debt instruments played in fueling the Bubble, although let’s not get carried away and convince ourselves that the rating agencies had much at all to do with market psychology and speculative dynamics. For more culpable villains I suggest Washington look in the mirror. The “moneyness” enjoyed by Wall Street finance was either explicitly or implicitly underwritten within the beltway.

It was said back in the sixties that Alan Greenspan blamed the Great Depression on the Federal Reserve repeatedly placing “Coins in the Fuse Box” – repeated market interventions with the intention of perpetuating the 1920s boom. Going back at least to the 1987 stock market crash, our policymakers cultivated the markets’ view that Washington was right there to nurture and forever protect the “free” market. And the greater the prosperity and the higher asset prices went – the more certain the market became that policymakers would never let it all come crashing down.

The Greenspan Federal Reserve, in particular, nurtured the market perception that Washington was there to backstop marketplace liquidity. Greenspan pegged the cost of finance and essentially promised liquid and continuous markets. Mr. Greenspan became a leading proponent for securitizations, derivatives and “contemporary finance” more generally. “Liquid and continuous” markets were the lifeblood of these momentous Credit system innovations - and Washington seemingly delivered the goods.

Importantly, the GSEs – with their implied government guarantees – became commanding market operators and quasi-central banks, aggressively intervening to stem varying degrees of financial stress in 1994, 1998, 1999, 2000, 2001, 2002, and 2003. Congress was enamored with the virtues of deregulation, while turning a blind eye to the most glaring market distortions and excesses. Both sides of the isle were elated with the newfound capacity for the Federal Reserve and GSEs’ to jam Coins in our system’s “Fusebox.”

Congress steadfastly refused to address the issue of the GSEs’ implicit government backing, thus endorsing the most dangerous distortion to a “free” market pricing mechanism in the history of finance. All along, market confidence that Washington was backstopping system liquidity became more ingrained and problematic. Trillions of “money-like” agency debt and MBS securities were accumulated, with operators (and GSE “enablers”) cocksure that this market was much too big to stumble. The GSEs eventually did falter and were hamstrung by their accounting issues. By that time, however, the inflationary bias within mortgage finance and housing had become so powerful that the boom in Wall Street “private-label” mortgages/MBS easily supplanted GSE-related Credit creation.

This Credit boom – along with the GSE’s (and Fed’s) capacity for intervening to stem market liquidity crises – played a fundamental role as the market’s evolving perception of “moneyness” branched out to Wall Street's private-label mortgages and ABS more generally. Or, said another way: “No GSEs, then no uninterrupted Credit expansion; no rampant housing inflation and current account deficits; no massive global pool of speculative finance; no endless demand for perceived safe and liquidity mortgage securities of all stripes; and no evolving mortgage/housing/ABS/CDS Bubble.” There is plenty of blame to share with New York, London and elsewhere, but a strong case can be made that this was, at its core, A Washington-Induced Credit Bubble.

The securitization and CDS markets are the financial crisis’ current focal point. The markets’ misperception of liquid and continuous markets – that was instrumental in fueling the explosion of debt issuance and Credit insurance – has come home to roost in a very bad way. The securitization market’s basic premise was that the Creditworthiness of Trillions of Credit instruments would be supported by the capacity of borrowers to forever refinance and/or increase debt loads (Minskian “Ponzi Finance”). The basic premise of the CDS market was twofold: One, that contemporary securitization markets (backstopped by Washington) would provide borrowers endless quantities of inexpensive finance. And, second, that liquid securities markets would provide an effective means of (“dynamically”) hedging Credit exposures sold into the (“wild west”) CDS marketplace.

Today, those on the wrong side of the CDS market (having written Credit insurance) are getting killed and this dynamic is seemingly taking the entire system down with it. Corporate bond (bear) market liquidity is scarce, while the viability of scores of participants on all sides of the market is very much up in the air. This means that the hundreds of billions of default protection sold against troubled debt issuers (i.e. GMAC, Ford Motor Credit, GE Capital, AIG, etc.) today confront a serious dilemma when it comes to hedging rapidly escalating losses (and unwieldy “books” of derivatives and counter-party exposures). Originally, the writers of this Credit protection would have assumed only a remote possibility that any one of a number of major institutions would default. They also would have expected that, in the event of rising default risk, short positions would be established in the bond market to hedge Credit risk. They wrongly assumed benefits from diversifying Credit risks, the availability of market liquidity, and various forms of “too big to fail.”

Today, those on the wrong side of these trades and dislocated markets confront an environment that their models would have suggested was impossible: A domino collapse of major debt issuers in the face of near illiquidity throughout the corporate bond marketplace. During the boom, market participants would have assumed the opposite of an impotent Washington rummaging market wreckage for villains.

I’ll surmise that the CDS market is now in complete dislocation. I’ll also assume the sellers of CDS (and various Credit insurance) have resorted to shorting equities (individual stocks, ETFs and futures) in a desperate attempt to hedge escalating losses. This has likely placed additional pressure on sickly equities markets – and it goes without saying that it is especially damaging to market confidence when the stocks of our nation’s (and the world’s) major borrowers and financial institutions are all locked together in a death spiral. This dynamic has surely led to another round of forced de-leveraging. And, importantly, this type of market dynamic incites an acute case of “animal spirits.” While perhaps not as gigantic as before, the global pool of speculative finance (that accumulated over the boom) remains a force to be reckoned with. The dynamic of panic liquidations, de-leveraging and market operators seeking to profit from systemic dislocation creates a problematic deluge of selling.

02/27/2009 A Week of Big Numbers *

For the week, the Dow dropped 4.1% (down 19.5% y-t-d), and the S&P500 fell 4.5% (down 18.6%). The Transports were hit for 7.4% (down 29.3%) and the Morgan Stanley Cyclicals 6.0% (down 30.3%). The Morgan Stanley Consumer index declined 5.8% (down 17.3%), and the Utilities lost 3.5% (down 12.6%). The S&P400 Mid-Cap index dropped 3.7% (down 16.5%), and the small cap Russell 2000 declined 5.3% (down 22.1%). the Nasdaq100 sank 4.8% (down 7.8%), and the Morgan Stanley High Tech index dipped 2.2% (down 6.3%). The Semiconductors gained 1.2% (down 5.9%), while the InteractiveWeek Internet index slipped 0.7% (down 1.0%). The Biotechs were hammered for 9.5% (down 7.8%). The Broker/Dealers dropped 4.5% (down 16.8%), while the Banks rallied 11.3% (down 45.5%). With Bullion down $48, the HUI Gold index sank 9.8% (down 4.2%).

One-month Treasury bill rates ended the week at 16 bps, and three-month bills were at 26 bps. Two-year government yields were unchanged at 0.92%. Supply worries had five-year T-note yields ending the week up 12 bps to 1.92%. Ten-year yields surged 23 bps to 3.02%. Long-bond yields rose 15 bps to a 3-month high 3.77%. The implied yield on 3-month December ’09 Eurodollars increased 7 bps to 1.53%. Benchmark Fannie MBS yields jumped 20 bps to 4.45% (high since 12/09). The spread between benchmark MBS and 10-year T-notes narrowed 3 to 143 bps. Agency 10-yr debt spreads narrowed 2 to 61 bps. The 2-year dollar swap spread increased 3.25 to 69 bps; the 10-year dollar swap spread increased 6.25 to 31.5bps, and the 30-year swap spread increased 6.25 to negative 24.5 bps. Corporate bond spreads were wider. An index of investment grade bond spreads widened 9 to 244 bps, and an index of junk spreads widened 26 to 1,233 bps.

It was another week of strong corporate debt issuance. Investment grade issuance included Chevron $5.0bn, JPMorganChase $4.8bn, Hewlett Packard $2.75bn, PepsiCo $1.0bn, Noble Energy $1.0bn, Waste Management $800 million, Danaher $750 million, Nevada Power $500 million, Western Union $500 million, Baxter $350 million, and Vanderbilt University $250 million.

Junk issuers included Williams Companies $600 million and Oneok Partners $500 million.

International debt issues this week included Royal Bank of Scotland $1.0bn and Videotron $260 million.

U.K. 10-year gilt yields jumped 21 bps to 3.62%, and German bund yields rose 10 bps to 3.11%. The German DAX equities index sank another 4.3% (down 20.1%). Japanese 10-year "JGB" yields were little changed at 1.24%. The Nikkei 225 rallied 2.1% (down 14.6%). Emerging markets were under further pressure. Brazil’s benchmark dollar bond yields rose 6 bps to 6.875%. Brazil’s Bovespa equities index dropped 3.6% (up 1.9% y-t-d). The Mexican Bolsa fell 3.5% (down 21% y-t-d). Mexico’s 10-year $ yields dropped 11 to 6.48%. Russia’s RTS equities index dipped 0.8% (down 13.8%). India’s Sensex equities index declined 1.7% (down 7.8%). China’s Shanghai Exchange dropped 7.9% (up 14.4%).

Freddie Mac 30-year fixed mortgage rates gained 3 bps to 5.07% (down 117bps y-o-y). Fifteen-year fixed rates were unchanged at 4.68% (down 104bps y-o-y). One-year ARMs added one basis point to 4.81% (down 20bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 25 bps this week to 6.83% (up 7bps y-o-y).

Federal Reserve Credit declined $7.1bn last week to $1.900 TN. Fed Credit expanded $1.034 TN over the past 52 weeks (119%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last week (ended 2/25) increased $4.6bn to a record $2.581 TN. "Custody holdings" were up $439bn over the past year, or 20.5%.

Bank Credit dropped $41.4bn to $9.776 TN (week of 2/18). Bank Credit expanded $444bn year-over-year, or 4.8%. Bank Credit increased $384bn over the past 24 weeks. For the week, Securities Credit increased $14.8bn. Loans & Leases sank $56.2bn to $7.109 TN (52-wk gain of $223bn, or 3.2%). C&I loans fell $4.8bn, with 52-wk growth of 7.8%. Real Estate loans dropped $11.2bn (up 5.3% y-o-y). Consumer loans added $2.2bn, while Securities loans fell $48.4bn. Other loans increased $6.0bn.

M2 (narrow) "money" supply jumped $16bn to a record $8.280 TN (week of 2/16). Narrow "money" has now inflated at an 17.7% rate over the past 22 weeks and has jumped $753bn over the past year, or 10.0%. For the week, Currency increased $1.8bn, while Demand & Checkable Deposits fell $13bn. Savings Deposits jumped $33.8bn, while Small Denominated Deposits slipped $0.5bn. Retail Money Funds dropped $5.7bn.

Total Money Market Fund assets (from Invest Co Inst) increased $9.4bn to $3.888 TN, with a 52-wk expansion of $460bn, or 13.4% annualized.

Asset-Backed Securities (ABS) issuance remains about dead. Year-to-date total US ABS issuance of $2.9bn (tallied by JPMorgan's Christopher Flanagan) is a fraction of the $31.5bn for comparable 2008. There has been no home equity ABS issuance in months. Year-to-date CDO issuance remains less than $1.0bn.

Total Commercial Paper outstanding added $3.3bn this past week to $1.524 TN. CP has declined $157bn y-t-d and $316bn over the past year (17.2%). Asset-backed CP increased $1.7bn to $724bn, with a 52-wk decline of $90bn (11%).

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $364bn y-o-y, or 5.7%, to $6.716 TN. Reserves have declined $231bn over the past 19 weeks.
Global Credit Market Dislocation Watch:

February 24 – Wall Street Journal (Gerald F. Seib): “When President Barack Obama delivers his initial speech to Congress Tuesday night, a giant and unresolved question will hang over the proceedings: What’s the proper role for the government in today’s troubled economy? In fact, this is the megaquestion of our time. Yet it is increasingly clear that neither the lawmakers the president will be addressing, nor the nation beyond them, have come close to consensus on an answer. Look up and down Pennsylvania Avenue this week and you can see how the issue is dividing not just the two political parties, but factions within them.”

February 23 – Bloomberg (Walid el-Gabry): “Billionaire investor George Soros said the current economic upheaval has its roots in the financial deregulation of the 1980s and signals the end of a free-market model that has since dominated capitalist countries… The global recession, triggered by the collapse of the U.S. housing market, has ‘damaged the financial system itself,’ he said. Regulators are in part to blame because they ‘abrogated’ their responsibilities, Soros.. said. ‘We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,’ Soros said.”

February 26 – New York Times (Eric Lipton): “The federal government’s bank insurance fund dropped by the end of last year to the lowest point in more than 25 years, and the number of banks at risk of failure nearly doubled… ‘There is no question this is one of the most difficult periods we have encountered during the F.D.I.C.’s 75 years of operation,’ Sheila Bair, the [FDIC’s] chairwoman, said… Overall, the nation’s banks lost $26.2 billion in the fourth quarter, the biggest quarterly lost since the F.D.I.C. began collecting data on quarterly earnings. Almost one in three banks lost money… Ms. Bair said that the agency had placed 252 institutions on its watch list — meaning they were at risk of failure—compared to 76 banks at the end of 2007. With all of the bank failures, the F.D.I.C.’s insurance fund has dropped to $19 billion… The insurance fund had $52 billion at the end of 2007.”

February 27 – USA Today (Sue Kirchhoff): “U.S. banks reported a net loss of $26.2 billion in the final quarter of 2008 — the worst performance since 1990 — as the number of troubled institutions climbed. Fully 252 commercial banks and savings institutions, with total assets of $159 billion, were termed problem banks at the end of last year, ‘overwhelmed’ by staggering real estate losses and the faltering economy, the Federal Deposit Insurance Corp. said…”

February 26 – Bloomberg (Margaret Chadbourn and Alison Vekshin): “U.S. savings and loans reported a record $13.4 billion loss last year as they set aside more funds for loan losses amid the recession and worsening financial crisis…”

February 23 – Bloomberg (Gonzalo Vina): “Chancellor of the Exchequer Alistair Darling ordered Northern Rock Plc to expand lending by 14 billion pounds ($20 billion), the first in a series of measures due this week to revive the U.K. banking industry. ‘This is against a background where a lot of the foreign- based banks have withdrawn’ from Britain, Darling told BBC Radio 4… ‘What I want to do here is use Northern Rock to help fill that gap.’”

February 26 – Bloomberg (Jeff Green and Alex Ortolani): “General Motors Corp., surviving on $13.4 billion in U.S. aid, reported a $9.6 billion fourth-quarter loss... GM posted an annual loss of $30.9 billion, the second largest in its 100-year history.”

February 26 – Bloomberg (Jon Menon): “Royal Bank of Scotland Group Plc will put 325 billion pounds ($462 billion) of investments into a state insurance program and shift toxic assets to a new unit after posting the biggest loss in British history.”

February 27 – Bloomberg (Balazs Penz and Agnes Lovasz): “Hungarian Prime Minister Ferenc Gyurcsany wants the European Union to arrange a package of as much as 180 billion euros ($230 billion) to help east European economies, banks and companies weather the financial crisis.”

February 25 – Bloomberg (Patrick Henry): “Delinquent loans account for about 10% of all loans issued by Russian banks, Interfax reported, citing Finance Minister Alexei Kudrin.”

February 25 – Bloomberg (Daryna Krasnolutska): “Ukraine’s credit rating was cut two levels by Standard & Poor’s, a day after Latvia was downgraded to junk, because political turmoil poses growing risks to the country’s International Monetary Fund loan.”
Currency Watch:

The dollar index ended the week up 1.8% to 88.01 (up 8.2% y-t-d). For the week on the upside, the South African rand increased 0.4%. On the downside, the Japanese yen declined 4.3%, the Norwegian krone 3.2%, the Swedish krona 3.1%, the Mexican peso 3.1%, the New Zealand dollar 2.1%, the South Korean won 1.8%, the Canadian dollar 1.6%, the Danish krone 1.3%, the Euro 1.3%, and the Swiss franc 1.3%.
Commodities Watch:

Gold dropped 4.9% this week to $945 (up 7% y-t-d), and silver sank 9.7% to $13.125 (up 16% y-t-d). April Crude rallied $4.34 to $44.37 (down 0.5% y-t-d). April Gasoline rose 14.6% (up 28% y-t-d), and April Natural Gas gained 4.0% (down 25% y-t-d). March Copper jumped 7.2% (up 9% y-t-d). March Wheat declined 3.0% (down 15% y-t-d), and Corn fell 3.6% (down 14% y-t-d). The CRB index gained 4.5% (down 7.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) rallied 6.7% (down 3.7% y-t-d).
China Reflation Watch:

February 24 – Bloomberg (Belinda Cao): “China’s insurance regulator plans to allow insurers to buy unsecured corporate notes for the first time to spur economic growth and development of the debt market…”

February 25 – Bloomberg (Zhang Dingmin and Luo Jun): “China aims to prevent a ‘massive rebound’ in non-performing loans, even as the world’s financial crisis deepens, the nation’s top banking regulator said. The non-performing loan ratio at Chinese banks fell to 2.45% at the end of December, from 6.17% a year earlier…”

February 27 – Bloomberg (Li Yanping): “China plans to hand out 20 billion yuan ($2.9 billion) of subsidies this year for farmers’ home- appliance purchases as the government tries to drive up consumption to revive the world’s third-biggest economy.”

February 23 – Bloomberg (Nariman Gizitdinov): “China agreed to give a $5 billion yuan denominated credit line to Kazakhstan’s National Wellbeing Fund Samruk-Kazyna, Kazakhstan Today reported.”

February 26 – Bloomberg (Nipa Piboontanasawat): “Hong Kong’s exports plunged by the most in 50 years… Shipments fell 21.8% in January from a year earlier…”
Japan Watch:

February 27 – Bloomberg (Jason Clenfield and Toru Fujioka): “Japan headed for its worst postwar recession in January as manufacturers cut production by an unprecedented 10% and consumers slashed spending.”

February 25 – Bloomberg (Jason Clenfield): “Japan’s exports plunged 45.7% in January from a year earlier, resulting in a record trade deficit… The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980… The drop in shipments abroad eclipsed a record 35% decline set the previous month.”
India Watch:

February 27 – Bloomberg (Cherian Thomas): “India’s economy grew at the slowest pace since 2003 last quarter… Asia’s third-largest economy expanded 5.3% in the three months to Dec. 31…”

February 24 – Bloomberg (Kartik Goyal and Cherian Thomas): “India reduced excise and service tax to revive economic growth, less than an hour after Standard & Poor’s said the nation’s credit rating may be cut to junk as government debt is reaching a level that’s “not sustainable.’”

February 24 – Bloomberg (Cherian Thomas): “India’s credit rating may be cut to junk by Standard & Poor’s, which said government spending plans to help shield the economy from the global recession and win voter support in elections were ‘not sustainable.’”
Asia Reflation Watch:

February 27 – Bloomberg (Kim Kyoungwha): “South Korea’s won tumbled to the lowest level in 11 years on concern sliding exports will curb the supply of dollars and hinder the ability of local banks and companies to repay overseas debt.”

February 24 – Bloomberg (Yu-huay Sun and Janet Ong): “Taiwan’s export orders dropped by a record in January… Orders fell 41.67% from a year earlier after December’s 33% plunge…”

February 26 – Bloomberg (Shamim Adam): “Singapore’s economy shrank the most in at least 33 years last quarter… Gross domestic product declined an annualized 16.4% last quarter from the previous three months…”
Latin America Watch:

February 23 – Bloomberg (Jens Erik Gould): “Mexican retail sales declined in December at the sharpest pace in more than six … Retail sales dropped 3.3% from the same month a year earlier…”
Central Banker Watch:

February 26 – Bloomberg (Reed Landberg): “Bank of England Governor Mervyn King said he’s ready to act to increase the supply of money to bolster the U.K. economy. ‘The amount of money in the economy is growing too slowly,’ King told lawmakers… He said he expected the government to give him the authority to boost money supply over ‘the next few months.’”
Fiscal Watch:

February 26 – Associated Press (Martin Crutsinger): “Pledging ‘a new era of responsibility,’ President Barack Obama unveiled a multi-trillion-dollar spending plan Thursday that would boost taxes on the wealthy, curtail Medicare, lay the groundwork for universal health care and leave a string of deficits dwarfing any in the nation’s history. In addition to sending Congress his $3.55 trillion budget plan for 2010, Obama proposed more immediate changes that would push spending to $3.94 trillion in the current year. That would result in a record deficit Obama projects will hit $1.75 trillion, reflecting the massive spending being undertaken to battle a severe recession and the worst financial crisis in seven decades.”

February 27 – Bloomberg (Gabrielle Coppola and Jody Shenn): “The Federal Deposit Insurance Corp. plans to back new debt sold by banks that would later convert into common shares in an expansion of its Temporary Liquidity Guarantee Program.”
Unbalanced Global Economy Watch:

February 23 – Bloomberg (Alexandre Deslongchamps): “Canadian retail sales fell twice as fast as expected in December, and posted the biggest drop since January 1991… Retail sales tumbled 5.4% from December…”

February 27 – Bloomberg (Theophilos Argitis): “Canada recorded its first current account deficit in almost a decade in the fourth quarter as exports and profits that companies earned abroad fell.”

February 25 – Bloomberg (Jana Randow): “German exports slumped in the fourth quarter, causing Europe’s largest economy to contract the most in 22 years. Exports dropped 7.3% from the previous quarter…”

February 24 – Bloomberg (Gabi Thesing): “German business confidence dropped to a 26-year low in February as the worst recession since World War II prompted companies to curb production and lay off workers.”

February 24 – Bloomberg (Ben Sills): “Spain’s budget deficit totaled 3.82% of gross domestic product last year…”

February 25 – Financial Times (Charles Clover): “Russia’s economy contracted at an annual rate of 8.8% in January, according to the economy minister.”

February 23 – Bloomberg (Aaron Eglitis): “Latvia, Estonia and Lithuania, facing a prolonged recession, say they will protect their currency pegs whatever the cost. That strategy may be as crippling as the alternative, economists say. The three-nation Baltic region is in its deepest crisis since breaking from the Soviet Union in 1991…”
Bursting Bubble Economy Watch:

February 27 – Bloomberg (Timothy R. Homan): “The U.S. economy shrank in the fourth quarter at a faster pace than previously estimated as consumer spending plunged, companies cut inventories and exports sank. Gross domestic product contracted at a 6.2% annual pace from October through December…”

February 24 – Bloomberg (Aliza Marcus): “Health-care spending in the U.S. this year will grow 5.5%, the least since 1997… The projected increase, to $2.5 trillion, compares with annual gains of 6.1% in 2008 and 2007… The calculations include stepped-up government spending to cover more elderly and poor through programs such as Medicare and Medicaid…”

February 24 – Wall Street Journal (Richard Gibson): “The recession is bruising businesses across the franchising industry. From ice-cream parlors to tanning salons, franchisees’ defaults on loans guaranteed by the U.S. Small Business Administration are piling up in amounts unseen in years. A list of loans at 500 franchises shows the number of defaults by franchisees increased 52% in the fiscal year ended Sept. 30, 2008, from fiscal 2007.”

February 26 – Dow Jones: “The National Football League has cut its administrative staff by 15%, or 169 positions, and frozen all salaries, including that of commissioner Roger Goodell…”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

February 24 – Bloomberg (Timothy R. Homan and Courtney Schlisserman): “Home prices in 20 U.S. cities declined 18.5% in December from a year earlier, the fastest drop on record…”

February 26 – Bloomberg (David M. Levitt): “Office building sales in the U.S. fell in January to the lowest since at least 2000… About $744.6 million in office property sold last month, an 86% drop from a year earlier.”
GSE Watch:

February 26 – Bloomberg (Dawn Kopecki): “Fannie Mae, the mortgage-finance company seized by regulators in September, asked the U.S. Treasury for $15.2 billion in capital and raised the possibility of requesting more aid after a sixth consecutive quarterly loss drove its net worth below zero. A wider fourth-quarter net loss of $25.2 billion… pushed the company to make its first draw from a $200 billion federal lifeline… Credit quality deteriorated and debt costs soared, forcing the company to record higher expenses and write down the value of its assets. ‘We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth,’ Fannie said…”
Real Estate Bust Watch:

February 26 – Bloomberg (David M. Levitt): “New York’s biggest banks and securities firms may relinquish 8 million square feet of office space this year, deepening the worst commercial property slump in more than a decade… JPMorgan Chase & Co., Citigroup Inc., bankrupt Lehman Brothers Holdings Inc. and industry rivals have vacated 4.6 million feet, a figure that may climb by another 4 million as businesses leave or sublet space they no longer need, according CB Richard Ellis…”

February 22 – Crains NY (Amanda Fung): “Residents of a 54-unit Upper East Side co-op got the bad news last month—despite the board’s intense efforts to trim expenses, maintenance fees are rising 15%, nearly double last year’s hike. ‘People are furious,’ says Steven Sladkus, president of the co-op board… It’s an increasingly common problem. Even as the city’s economy sinks, maintenance fees and common charges for co-ops and condos, respectively, are rising at the highest rates in years. Co-op managers blame soaring expenses, primarily property taxes.”
Muni Watch:

February 26 – Bloomberg (Jeremy R. Cooke): “CPS Energy, San Antonio’s power and gas utility, leads U.S. tax-exempt borrowers today as this year’s sales of fixed-rate municipal bonds pass the $40 billion mark a week sooner than in 2008.”
California Watch:

February 27 – Associated Press (Don Thompson): “California’s unemployment rate jumped to 10.1% in January, the state’s first double-digit jobless reading in a quarter-century. The jobless rate… represents an increase from… 8.7% in December.”

February 26 – Bloomberg (Daniel Taub): “California home sales doubled in January from a year earlier as buyers took advantage of a 41% decline in the median price of an existing home, the California Association of Realtors said… The median price dropped to $254,350 from $427,200.”
New York Watch:

February 25 – Bloomberg (Henry Goldman): “New York state’s economy deteriorated so rapidly that anticipated tax revenue declined by $1 billion since December… The third-largest U.S. state faces a $14 billion gap in its $122.7 billion budget for the fiscal year beginning April 1.”
Crude Liquidity Watch:

February 24 – Bloomberg (Henry Meyer): “A $10 billion bailout from neighbor Abu Dhabi threatens to cost Dubai its autonomy and the free- wheeling economic system that helped establish it as the Middle East’s main business hub.”

February 26 – Bloomberg (Zainab Fattah): “Dubai rents reached ‘unrealistic’ levels and are expected to fall as much as 40% in high-end areas this year after the global financial crisis slowed a property boom in the Gulf business hub, the head of Dubai’s Real Estate Regulatory Authority said.”
A Week of Big Numbers:

February 24 – Bloomberg (Mark Pittman and Bob Ivry): “…the U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months, according to data compiled by Bloomberg. Changes from the previous table, published Feb. 9, include a $787 billion economic stimulus package. The Federal Reserve has new lending commitments totaling $1.8 trillion. It expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to $1 trillion and announced a $1 trillion Public-Private Investment Fund to buy troubled assets from banks. The U.S. Treasury also added $200 billion to its support commitment for Fannie Mae and Freddie Mac…”

The Administration’s new budget projects an astounding $1.75 TN fiscal 2009 federal deficit - or about 12% of GDP. Federal outlays are expected to surge 32% this year to $3.94 TN. In nominal terms, the deficit is set to quadruple the previous all-time record. In percentage terms one has to return back to the war economy of the 1940s to find anything comparable.

Yesterday, Fannie Mae reported a fourth quarter loss of $25.2bn, bringing the company’s second-half 2008 shortfall to more than $50bn. Non-performing assets surged a stunning 87% during the quarter to $119.2bn, a three-fold increase in just 12 months. Having more than depleted its razor-thin capital base, Fannie requested $15.2bn of additional Treasury support (from the $200bn promised).

The FDIC announced yesterday a $26.2bn Q4 2008 loss for the banking system. The Office of Thrift Supervision reported that our nation’s Savings & Loans lost $3.0bn during the final quarter of the year, increasing 2008 losses to a record $13.4bn. General Motors announced a $9.6bn Q4 loss, increasing its annual loss to a staggering $30.9bn. Analysts are expecting even greater losses to be reported at AIG and Citigroup.

The dimensions of the reported deficits and losses are not easily digested; the scope of the today’s systemic problems not so easily comprehended. I’ll push ahead with efforts to use the Credit Bubble Framework as an analytical tool for making some sense of the historic nature of the unfolding bust.

Let’s try to place the various huge – and increasingly numbing – deficit/loss numbers (attendant with this bust) into coherent context. For such an endeavor it is imperative to first examine the preceding boom. This week, in particular, seems an appropriate time to summarize, in Credit terms, the incredible dimensions of the fateful inflationary Bubble.

From the Federal Reserve’s “flow of funds” report, we can see that Total System Credit (non-financial and financial) ended 1995 at $18.475 TN. By the end of 2007, this number had inflated to $49.882 TN, for growth of 170% in only 12 years. During this period, Household Debt swelled 184% to $8.959 TN; Non-farm Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings 109% to $2.192 TN. Federal debt expanded “only” 41% to $5.122 TN. Rest of World holdings of U.S. assets inflated 365% to $16.048 TN. While significantly trailing Credit growth, GDP nonetheless bulged 87% during this period.

Over the past decade, the “optimists” often cited the federal government’s positive fiscal position as evidence of the health of the overall economy and soundness of our prosperity. It should be clear these days that the protracted boom's massive inflation of private-sector Credit had grossly inflated government receipts (among other things). Indeed, over the 12-year period Federal Receipts inflated 88% (to $2.651 TN) and State & Local receipts increased 92% (to $1.903bn). This crucial facet of the inflationary boom spurred federal and state & local spending growth of 80% and 93%, respectively.

State & Local governments will now attempt to maintain these inflated levels of expenditures, while the federal government will move aggressively to grossly inflate already inflated spending. The budget now calls for federal expenditures this year to approach $4.0 TN. This compares to spending of about $1.6 TN back in 1995. The federal deficit is projected to expand by a combined $3.0 TN during fiscal years ’09 and ’10. This would amount to a 60% increase in federal debt in only two years.

Today’s unparalleled expansion of federal debt and obligations is being dressed up as textbook “Keynesian.” It’s rather obvious that we are in dire need of some new books, curriculum and economic doctrine. But from a political perspective, the title is appropriate enough. From an analytical framework perspective such policymaking is more accurately labeled “inflationism” – a desperate attempt to prop inflated asset prices, incomes, business revenues, government receipts, and economic “output”. There have been many comparable sordid episodes throughout history, and I am not aware of any positive outcomes.

The Administration’s budget earmarks an additional $750 billion as a contingency for added financial sector bailouts. Fed data nicely illuminate the dimensions of the financial sector's problem. Between 1996 and 2007, Total Mortgage Debt expanded 220% to $10.061 TN. Total GSE Agency Securities (debt and MBS) tripled to $7.397 TN. The ABS market inflated 580% to $4.50 TN. Over this 12-year period, Bank Assets swelled 150% to $11.194 TN. Securities Broker/Dealer assets ballooned 440% to $3.10 TN. In 12 years, Total Financial Sector borrowings expanded 300% to $16.90 TN – in the process creating a Credit and liquidity junky out of U.S. asset markets and the real economy. Today, the deeply impaired financial sector is incapable of assuaging the system's bloated Credit needs.

For perspective, a little compare and contrast is in order. Total Mortgage Debt increased $188bn in 1995, compared to $1.437 TN growth in 2005, $1.410 TN in 2006, and $1.098 TN in 2007. Agency MBS increased $98bn in 1995, compared to $609bn growth last year. The ABS market grew $127bn in 1995, in contrast to the $725bn growth in 2005 and 2006’s $808bn. Bank Credit expanded $273bn in 1995, compared to 2007’s $788bn and 2008's $1.294 TN. Broker/Dealer assets expanded $113bn in 1995, a small fraction of 2007’s fateful $615bn growth.

This unprecedented Credit explosion inflated asset prices as well as incomes. Between 1996 and 2007 National Incomes inflated 90% to $12.271 TN. Compensation of Employees surged 86% to $7.812 TN. Bubble Impacts were even more dramatic with respect to the Household (including non-profits) Balance Sheet. In twelve short years, Household Sector Asset holdings inflated $43.685 TN, or 133%, to $76.549 TN. Despite Household Liabilities surging 185% to $14.379 TN, Household Net Worth (assets minus liabilities) inflated $34.360 TN, or 124%, to $62.170 TN. Importantly, this Massive Inflation of Perceived Financial Wealth over years glossly distorted the quantity and pattern of spending throughout the real economy.

This historic Credit-induced inflation of Household Incomes and Net Worth was at the core of deep structural maladjustment to the U.S. “Bubble” economy. The implosion of “Wall Street finance” (in particular the collapse of Broker/Dealer financing, private-label MBS and other ABS, and various methods of leveraging mortgage, corporate and other securities) marked the demise of various Bubbles, including ones in private-sector debt securities, residential and commercial real estate, equities, and Household Net Worth more generally. In the final analysis, the bust has left multi-Trillion dollar holes in various sector balance sheets. Moreover, Patterns of Spending throughout the economy have been forever altered. Year-after-year of reckless lending has quickly come home to roost in a Big way.

Our federal government has commenced the process of attempting to fill holes through the massive inflation of government Credit and obligations (by the Trillions). Depending on the reader’s perspective, I risk appearing either the master of the obvious or a rabid sensationalist. Yet the stakes associated with the current course of fiscal and monetary policy are absolutely momentous. And I am compelled to write that “if you’re not confused you don’t understand the nature of the problem.”

What are the ramifications and consequences associated with U.S. deficits approaching 12% of GDP? Over the short and intermediate terms? Will unprecedented fiscal and monetary measures stem financial sector implosion? Will Washington’s efforts work to bolster a faltering Bubble Economy, or will they instead only tend to delay unavoidable structural adjustment? Will the Treasury market continue to so easily accommodate reflationary efforts? How long will the dollar remain relatively stable in the face of massive growth in U.S. Non-Productive Credit? Will multi-Trillions of government debt and obligation expansion help to resuscitate private-sector Credit creation - or will it instead simply destroy the Creditworthiness of the entire economy?

Not uncharacteristically, I pose more questions than I have answers. But I do fear that we now face Trillion dollar deficits as far as the eye can see. I don’t expect “Keynesian” policies to have much success in reinvigorating busted asset markets. I’ll be surprised if private-sector Credit creation bounces back anytime soon. I fear policymaking will do more harm than good when it comes to needed economic restructuring. And my worst fears of policymaking (fiscal and monetary, democrat and republican, national and local) bankrupting the country are being anything but allayed. Similar to my belief that mortgage Credit growth should have been limited to, say, no more than 4 or 5% annually during the boom, there is today a very serious need to incorporate some reasonable limits on the expansion of federal debt and obligations.