For the week, the S&P500 dropped 1.8% (up 1.5% y-t-d), and the Dow fell 1.4% (up 2.1). The broader market was stronger this week. The S&P 400 Mid-Caps increased 0.4% (up 1.2%), and the small cap Russell 2000 gained 0.3% (down 1.1%). The Banks declined 2.2% (up 0.4%), and the Broker/Dealers lost 1.4% (up 0.9%). The Morgan Stanley Cyclicals added 0.2% (up 1.3%), while the Transports fell 1.0% (down 2.2%). The Morgan Stanley Consumer index declined 1.8% (down 1.6%), and the Utilities fell 1.1% (up 0.8%). The Nasdaq100 added 0.1% (up 2.4%), and the Morgan Stanley High Tech index gained 0.6% (up 3.4%). The Semiconductors jumped 1.6% (up 6.5%). The InteractiveWeek Internet index was little changed (up 0.9%). The Biotechs fell 1.3% (down 2.4%). With a volatile bullion market ending the week down $7, the HUI gold index rallied back 1.0% (down 11.1%).
One-month Treasury bill rates ended the week at 12 bps and three-month bills closed at 14 bps. Two-year government yields were down 7 bps to 0.55%. Five-year T-note yields ended the week 13 bps lower to 1.85%. Ten-year yields fell 8 bps to 3.33%. Long bond yields ended the week down 3 bps to 4.53%. Benchmark Fannie MBS yields were 2 bps lower to 4.15%. The spread between 10-year Treasury yields and benchmark MBS yields jumped 6 to 82 bps. Agency 10-yr debt spreads declined 3 bps to 8 bps. The implied yield on December 2011 eurodollar futures fell 10 bps to 0.645%. The 10-year dollar swap spread was unchanged at 15.75 bps. The 30-year swap spread was little changed at negative 27.5 bps. Corporate bond spreads were somewhat wider. An index of investment grade bond risk rose 3 bps to 86 bps. An index of junk bond risk jumped 7 to 421 bps.
Investment grade issuers included Bank of America $1.5bn, Marathon Petroleum $3.0bn, Bank of New York Mellon $1.2bn, Anheuser-Busch $1.65bn, US Bancorp $675 million, Kimberly-Clark $700 million, Family Dollar $300 million and Steelcase $250 million.
Junk bond funds saw inflows of $466 million (from Lipper). Issuers included Reynolds Group $2.0bn, Dana Holding $750 million, Realogy $700 million, Fresensius Medical $650 million, Hertz $500 million, Oasis Petroleum $400 million, Great Lakes Dredge & Docks $250 million, DirectBuy $335, Bi-Lo $285 million, Casella Waste Systems $200 million and Aviv Healthcare Properties $200 million.
I saw no convertible debt issued this week.
International dollar debt issuers included ABN Amro Bank $2.0bn, Vimplecom $1.5bn, Itau Unibanco $1.2bn, National Bank Canada $1.0bn, Development Bank of Kazakh $777 million, UBS $1.75bn, 750 million, El Salvador $650 million, Novatek Finance $600 million, Isbank $500 million, Afren $450 million, Bakrie Telecom $380 million, and Targeta Naranja $200 million.
U.K. 10-year gilt yields declined 4 bps this week to 3.65% (up 26bps y-t-d), and German bund yields dipped 3 bps to 3.15% (up 19bps). Ten-year Portuguese yields jumped 25 bps this week to 6.95%. Spanish yields rose 14 bps to 5.44%, and Irish yields jumped 34 bps to 8.95%. Greek 10-year bond yields gained 16 bps to 11.33%. The German DAX equities index added 0.6% (up 2.7% y-t-d). Japanese 10-year "JGB" yields were little changed at 1.21% (up 10bps y-t-d). Japan's Nikkei rose 0.8% (up 1.3%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index sank 3.7% (down 3.8%), while Mexico's Bolsa declined 1.3% (down 4.4%). South Korea's Kospi index jumped 1.8% (up 2.8%). India’s equities index fell 3.3% (down 10.3%). China’s Shanghai Exchange gained 1.4% (down 2.0%). Brazil’s benchmark dollar bond yields jumped 15 bps to 4.62%, and Mexico's benchmark bond yields rose 10 bps to 4.50%.
Freddie Mac 30-year fixed mortgage rates jumped 6 bps last week to 4.80% (down 18bps y-o-y). Fifteen-year fixed rates rose 4 bps to 4.09% (down 30bps y-o-y). One-year ARMs added one basis point to 3.26% (down 103bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 9 bps to 5.41% (down 49bps y-o-y).
Federal Reserve Credit increased $3.1bn to $2.419 TN (12-wk gain of $184.7bn). Fed Credit was up $185bn from a year ago (8.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/26) jumped $7.8bn to $3.351 TN. "Custody holdings" were up $403bn from a year ago, or 13.7%.
M2 (narrow) "money" supply jumped $46.6bn to a record $8.862 TN. Over the past year, "narrow money" grew 4.5%. For the week, Currency added $2.3bn. Demand and Checkable Deposits jumped $28.0bn, and Savings Deposits surged $29.2bn. Small Denominated Deposits declined $4.4bn. Retail Money Funds fell $8.7bn.
Total Commercial Paper outstanding jumped $71.1bn to $988 billion. CP was down $158bn y-o-y, or 16.1%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.432 TN y-o-y, or 18.3%, to a record $9.247 TN.
Global Credit Market Watch:
January 26 – Bloomberg (Kati Pohjanpalo): “European leaders are winning over investors as they try to keep the single-currency bloc intact, raising the appeal of the region’s so-called rescue bonds, said Timo Loeyttyniemi, the head of Finland’s state pension fund. ‘European policymakers are very motivated and decisive and will solve these problems… The risk is euro-area risk, but I think it’s very manageable as Europe is very determined.’ The European Financial Stability Facility is selling the top-rated bonds -- which are backed by euro nations -- in an effort to give the bloc’s most indebted members access to affordable funding and quell speculation the region may face defaults… Yesterday’s debut EFSF bond sale attracted orders for 44.5 billion euros ($60.7 billion) -- almost nine times the amount offered -- from more than 500 investors…”
January 25 – Bloomberg (Gabrielle Coppola and Ben Bain): “Record overseas dollar bond offerings from Brazilian companies are hurting the government’s effort to stem inflows that sparked the real’s 39% rally in the past two years. Sales from Itau Unibanco Holding SA, Latin America’s biggest bank by market value, and state-run oil company Petroleo Brasileiro SA are pushing January issuance to $10.4 billion, the busiest month on record…”
January 26 – Bloomberg (Kristen Haunss): “Carlyle Group and KKR & Co. are getting leveraged loans for buyouts at terms similar to those before the credit crisis as investors plow record amounts into funds that buy the debt, driving prices to a three-year high. The private-equity firms are obtaining so-called covenant lite loans, which lack typical protections for creditors, to back their leveraged buyouts…”
Global Bubble Watch:
January 28 – Bloomberg (Aaron Kirchfeld and Serena Saitto): “Deutsche Bank AG Chief Executive Officer Josef Ackermann said unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn’t increased. ‘You have an unregulated area which becomes -- as a consequence of all the regulatory changes -- more and more important,” Ackermann… said… ‘You may one day wake up and realize that the systemic challenges are so big that you will have to bail out or at least help support the unregulated sector.’ Ackermann’s warning echoes comments made by former U.S. Treasury Secretary Lawrence Summers, who said this week in Davos that regulators haven’t paid enough attention to problems that could emerge in “a large, less healthy buccaneer sector.’ Hedge funds have dodged the brunt of new global banking regulation aimed at avoiding a repeat of the worst global financial crisis since the Great Depression.”
January 27 – Bloomberg (Soraya Permatasari and Dana El-Baltaji): “Plans by Saudi Arabia, Malaysia and Qatar to spend almost $1 trillion on development projects over the next decade will overwhelm the amount banks can provide in loans, reviving sales of sukuk, according to HSBC Holdings Plc and BNP Paribas SA.”
January 28 – Dow Jones (Lynn Cowan): “The amount of money raised through initial public offerings, or IPOs, of stock around the world in January is on track to set a record this year, according to… Dealogic… Proceeds from 81 IPOs so far this month stand at $10 billion, the second-largest amount on record.”
Muni Watch:
January 26 – Financial Times (Nicole Bullock): “Fundraising by US states, cities, hospitals and other public bodies has plunged as fears of defaults and bankruptcies have intensified this month. ‘It is likely to be the worst month in about a decade,’ said Matt Fabian, managing director of Municipal Market Advisers, citing expectations for less than $11bn of issuance. That would be a monthly level not seen since 2000… In 2010, municipal issuers sold an average of $36bn a month. ‘The market has been in disarray and issuers have avoided it,’ said George Friedlander, chief municipal strategist, at Citigroup.”
January 28 – Bloomberg (Brendan A. McGrail and Matt Robinson): “Investors this month are trading the lowest volume of municipal bonds in more than eight years as new issues dwindle with the end of Build America Bonds and demand cools on speculation about state and local defaults. About $4 billion a day has been traded this month, the least since November 2002… States and local governments plan to sell about $15.6 billion in fixed-rate debt this month… A year ago, about $31.9 billion was sold in the month.”
January 24 – Bloomberg (David Mildenberg): “The Texas Senate proposed a $79.7 billion budget that cuts education and health spending and doesn’t raise taxes, mirroring a plan issued by the state House of Representatives. The draft two-year budget would slash general-revenue spending on schools by 7.6%, to $45.6 billion, from the current biennium. It would slash health and human services costs by 12%.
January 25 – Bond Buyer (Jim Watts): “The Oklahoma budget-stabilization fund has been so depleted that it's no longer enough to cover the cost of a cup of coffee at most restaurants, let alone help balance the state budget. The rainy-day fund, which topped out at the legal limit of $596.6 million two years ago, now consists of $2.03. As in two dollars, three cents. No billion. No million. No pocket lint.”
January 24 – Bloomberg (William Selway): “Hamtramck, a city of 20,000 largely ringed by Detroit that has asked the state to let it file for bankruptcy protection, doesn’t have enough spare cash to repave a single street, according to Mayor Karen Majewski. Money for payrolls will run out in March in the Michigan municipality where General Motors Co. builds Chevrolet’s Volt… ‘There is no money for fixing anything,’ Majewski said. ‘Finding money to fix roads, it’s just an impossibility.’”
Currency Watch:
January 27 – Bloomberg (Simon Kennedy): “China Investment Corp. Vice Chairman Gao Xiqing said that central banks’ quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries. ‘You know money is gradually becoming not worth the paper it’s printed on,’ Gao said… Recent gains in commodity and food prices reflect the ‘long-term view’ of investors that prices will accelerate, he said… ‘We’ve started collecting Zimbabwe notes,’ Gao said, referring to an economy whose currency was scrapped in 2009 after inflation reached 500 billion percent. He noted investors are also discussing whether central banks will pursue more rounds of quantitative easing.”
The U.S. dollar index was little changed at 78.15 (down 1.1%), with another week of notable variance in currency performance. On the upside for the week, the New Zealand dollar increased 1.9%, the Swiss franc 1.8%, the South Korean won 0.9%, the Swedish krona 0.9%, the Japanese yen 0.6%, the Australian dollar 0.4% and the Taiwanese dollar 0.4%. On the downside, the South African ran declined 1.7%, the Mexican peso 1.2%, the British pound 0.9%, the Canadian dollar 0.8%, the Brazilian real 0.3%, the Singapore dollar 0.1%, the Danish krona 0.1%, and the Euro 0.1%.
Commodities and Food Watch:
January 27 – Bloomberg: “ China may expand its range of state commodity stockpiles, possibly adding reserves of meat and sugar, to help stabilize expectations for inflation, Caijing magazine reported, citing the nation’s commerce minister. The country may start reserves for more ‘important’ commodities… citing an interview with Chen Deming. China may boost imports of goods that are rare locally, and also make it easier for companies to buy bulk goods from overseas, including grains and cotton, Chen said…”
January 24 – Bloomberg (Rudy Ruitenberg): “Speculation and price swings in agricultural markets may threaten food security, 48 farm ministers meeting in Berlin said a month after a United Nations gauge of global costs reached a record. There is a risk of more food riots unless the surge in prices is contained, including through trading regulations, French Agriculture Minister Bruno Le Maire told reporters… ‘Food markets may not be the object of gamblers,’ German Agriculture Minister Ilse Aigner said… Food and agricultural commodities are not like anything else. Sometimes it’s about pure survival.’”
January 27 – Bloomberg (Luzi Ann Javier): “Bangladesh, South Asia’s biggest rice buyer, doubled its import target for this year to cool domestic prices that surged to a record in December as consumers and farmers hoarded supplies… The import target was raised to 1.2 million metric tons… That’s triple the U.S. Department of Agriculture’s estimate of 400,000 tons.”
January 28 – Bloomberg (Elizabeth Campbell): “Hog futures extended a rally to the highest in at least 24 years on speculation that U.S. pork exports will climb amid tightening supplies. Cattle also rose. South Korea, the sixth-largest buyer of U.S. pork in 2009, will cull 2.9 million animals to deal with the country’s worst outbreak of foot-and-mouth disease… Before today, hogs rose 31% in the past year.”
January 27 – Financial Times (Jack Farchy): “Sugar prices approached a fresh 30-year high on Thursday as the European Union said it could boost imports of the sweetener in order to address a regional scarcity. Any additional European sugar imports could put further strain on global supplies at what was seasonally their tightest point of the year, traders said. Global sugar inventories have fallen to their lowest levels in decades, helping push raw sugar futures up 145% from June to a 30-year high of 34.77 cents a pound in December.”
January 24 – Bloomberg (Jae Hur and Debarati Roy): “Cotton futures soared to a record on speculation that global supplies will fail to keep pace with rising demand in China, the world’s largest user. Chinese imports in 2010 surged 86% from a year earlier as economic growth lifted demand from textile mills and adverse weather hurt the domestic crop.”
The CRB index gained 0.4% (up 0.8% y-t-d). The Goldman Sachs Commodities Index rallied 1.2% (up 1.6%). Spot Gold declined 0.5% to $1,336 (down 6.0%). Silver rallied 1.9% to $27.955 (down 9.6%). March Crude increased 21 cents to $89.32 (down 2.3%). February Gasoline slipped 0.2% (up 1.0%), and February Natural Gas dropped 8.7% (down 1.7%). March Copper gained 1.1% (down 2.0%). March Wheat was little changed (up 4.0%), while March Corn declined 2.0% (up 2.4%).
China Bubble Watch:
January 26 – Bloomberg: “The minimum wages in 30 Chinese provinces were raised last year by an average of 22.8%, the official Shanghai Securities News reported…”
January 25 – Bloomberg: “China’s 2010 urban unemployment rate was 4.1% with 9.08 million people registered as jobless, Xinhua News Agency reported today…”
January 26 – Bloomberg (Simon Packard): “China attracted the most real estate investment in the world for a second straight year as purchases of development sites helped lift global commercial property sales by 43%, Real Capital Analytics Inc. said. China had $197.1 billion of transactions last year, 23% more than in 2009… That represented 34% of the $582 billion of deals worldwide… Larger down-payment requirements and efforts to clamp down on property speculation slowed transactions in China in the second and third quarters. In the final three months, the deal flow ‘reached the second highest in four years,’ RCA said.”
January 28 – Bloomberg (Elizabeth Campbell): “China may order its biggest lenders, including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., to raise capital ratios to as high as 14% when credit growth is judged excessive, said a person familiar with the matter. Newly proposed rules would require increasing capital adequacy buffers by as much as 2.5 percentage points when the banking regulator determines loan growth to be too fast…”
January 26 – Bloomberg: “China increased the minimum down payment for second-home purchases and asked local governments to boost land supply, seeking to further limit the risk of asset bubbles forming in the world’s fastest-growing major economy. ‘China will continue to effectively curb investment and speculative purchases of houses to consolidate and expand on previous measures,’ the State Council said… The minimum down payment for second house purchases rises to 60% from 50%, it said.”
Japan Watch:
January 27 – Bloomberg (Lily Nonomiya): “Japan’s sovereign credit rating was cut for the first time in nine years on concern that Prime Minister Naoto Kan hasn’t done enough to curb an $11 trillion debt burden, the world's largest. The nation’s debt is now ranked AA-, the fourth-highest level and alongside China, by Standard & Poor’s. The reduction from AA was announced by S&P in a statement today. The move fuels concern that policy makers may struggle to finance debt projected to swell to 943 trillion yen, or about twice the size of gross domestic product. Kan may need to speed efforts to raise revenue with a higher consumption tax to prevent a debt crisis like that of Europe.”
January 26 – Bloomberg (Shimodoi and Toru Fujioka): “Japan’s new bond sales may surpass 50 trillion yen ($609bn) in the year starting April 2013, above the government’s current target, according to the Finance Ministry.”
India Watch:
January 25 – Bloomberg (Kartik Goyal): “India’s central bank raised the benchmark interest rate to a two-year high and signaled further increases in borrowing costs as it boosted the country’s inflation forecast. Stocks fell. Governor Duvvuri Subbarao lifted the repurchase rate to 6.5% from 6.25%...”
January 25 – Financial Times (James Lamont): “India has responded to persistently high inflation and an economy exceeding its growth forecasts by continuing its aggressive campaign of raising interest rates. The Reserve Bank of India… raised its policy rate by 25 bps… The move takes the repo rate, the rate at which the central bank lends to commercial banks, to 6.5%, its highest since early 2008.”
January 26 – Bloomberg (Kartik Goyal): “India’s central bank urged the government to cut subsidies that are preventing inflation from easing as Governor Duvvuri Subbarao increased interest rates for the seventh time in a year. ‘Monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control,’ Subbarao said… Finance Minister Mukherjee is scheduled to announce in February the budget for the financial year starting April 1. The minister is aiming to narrow the budget deficit to 5.5% of gross domestic product in the current year ending March 31.”
Asia Bubble Watch:
January 28 – Wall Street Journal (Soofian J. Zuberi): “For years, East Asia's lack of viable bond markets and its companies' consequent reliance on bank lending sparked concern about the region's financial stability. But in the past few years bond issuance has accelerated dramatically. From 2000-2010, Asian credit market issuance as a share of global issuance has grown to 23% from 5%, the result of an annual growth rate of 27%... In 2010, Asian issuers raised a staggering $2.8 trillion via the bond markets—3.3 times the amount raised in the equity markets. The largest Asian nonsovereign credit deal was a $4.4 billion bond by Chinese electric utility State Grid."
January 26 – Bloomberg (Katrina Nicholas): “Inflation in China could hinder Asia’s economic growth and damage the ratings outlook for countries in the region this year, according to Fitch… China’s policy makers are likely to face greater difficulty as the world’s fastest-growing major economy battles ‘hot money inflows’ and consumer prices that rose 4.6% in December after advancing 5.1% in November…”
January 24 – Bloomberg (Stanley James): “Taiwan’s industrial production increased 18.18% in December from a year earlier, the Ministry of Economic Affairs said…”
January 25 – Bloomberg (Suryani Omar and Soraya Permatasari): “Record car sales in Indonesia helped fuel 50% growth in Shariah-compliant banking assets last year and Islamic lenders are setting up booths at automobile shows to further develop the market. PT Bank Muamalat Indonesia, the country’s oldest Shariah- compliant lender, said consumer loans jumped 40% in 2010…”
January 24 – Bloomberg (Shamim Adam): “Singapore’s inflation rate last month rose to the highest level since December 2008, adding pressure on the central bank to damp price gains by allowing greater currency appreciation. The consumer price index increased 4.6% in December from a year earlier…”
Latin America Watch:
January 26 – Bloomberg (Andre Soliani): “Brazil’s mid-month inflation rate jumped more than economists expected, increasing pressure on the central bank to quicken the pace of interest rate increases… Consumer prices, as measured by the benchmark IPCA-15 index, rose 0.76% in the month through mid-January, pushing the annual rate to 6.04%...”
January 26 – Bloomberg (Iuri Dantas and Andre Soliani): “Brazilian credit expansion slowed last month after policy makers raised reserve and capital requirements to prevent a credit bubble and slow inflation. State and non-state bank lending expanded 1.6% in December to a 1.7 trillion reais ($1 trillion)… Altamir Lopes, head of the bank’s research department, told reporters that credit will grow 15% this year, slower than the 20.5% pace in 2010.”
January 24 – Bloomberg (Camila Russo and Eliana Raszewski): “The shortage of Argentine pesos, driven by accelerating inflation, is pushing up credit card debt to a record as consumers struggle to obtain cash for purchases. Argentines charged 26 billion pesos ($6.6bn) on credit cards in December, 49% more than in the same month a year before…”
Unbalanced Global Economy Watch:
January 26 – Bloomberg (Greg Quinn): “Canadian house prices fell for a third month in November, the Teranet-National Bank Composite House Price Index showed, on declines in four of the six cities it tracks. Prices fell 0.2% during the month, following declines of 0.4% in October and 1.1% in September...”
January 25 – Telegraph (Robert Winnett): “Household’s face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned… as he reacted to the shock disclosure that the economy was shrinking again. Families will see their disposable income eaten up as they ‘pay the inevitable price’ for the financial crisis, Mervyn King warned. With wages failing keep pace with rising inflation, workers' take home pay will end the year worth the same as in 2005 the most prolonged fall in living standards for more than 80 years, he claimed.”
January 26 – Bloomberg (Matthew Brockett and Jeff Black): “German import prices rose at the fastest annual pace in more than 29 years in December, driven by soaring costs for commodities such as energy and metal. Import-price inflation accelerated to 12%, the highest rate since October 1981…”
January 25 – Dow Jones (Jonathan House): “Spain is beating its own deficit-reduction targets in the clearest sign to date that its reform efforts are paying off, the Spanish government said… According to advance data from the finance ministry, the central government's 2010 budget deficit was equal to 5.1% of gross domestic product, ahead of its 5.9%-of-GDP target, and down from 9.4% of GDP in 2009… The better-than-expected result was the largely the result of a 10.9% rise in 2010 tax revenue, compared with a forecast increase of 8.1%. The government last year raised its general sales tax rate by two percentage points to 18%, eliminated a tax rebate and raised capital gains taxes."
U.S. Bubble Economy Watch:
January 25 – Bloomberg (Bob Willis): “Payrolls decreased in 35 U.S. states while the unemployment rate rose in 20, showing the labor market recovery is slow to gather momentum. New York led the nation with 22,800 job cuts last month, followed by Minnesota with 22,400 firings, and Florida with 17,900…”
Real Estate Watch:
January 25 – Bloomberg (Sarah Mulholland): “Debt investors are wagering that the worst is over for commercial real estate, driving prices on mortgage bonds to the highest in more than two years. ‘Investors have gotten more comfortable and have started putting money back into CMBS,’ Chris Callahan, head of commercial-mortgage backed bond trading at Credit Suisse… ‘It has gone from being the red-headed stepchild to being a viable asset class again.’”
Fiscal Watch:
January 26 – New York Times: “The nation’s budget deficit will widen to nearly $1.5 trillion this year, and the country faces ‘daunting economic and budgetary challenges,’ the nonpartisan Congressional Budget Office said… The budget office noted that ‘the deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product, the largest since 1945 - representing 10% and 8.9% of the nation's output.’ …Senator Kent Conrad, Democrat of North Dakota and chairman of the Budget Committee, described the new deficit figures as sobering. ‘CBO's report should be another wake-up call to the nation,’ Mr. Conrad said… ‘In the near-term, due to passage of the tax extension package and the slow pace of the economic recovery, CBO is now expecting to see deficits of more than $1 trillion a year continuing through at least 2012. And as disturbing as those near-term deficits are, the long-term outlook is even worse. It is the deteriorating long-term outlook that is the biggest threat to the country's economic security.’”
January 28 – Bloomberg (Robert Greene): “The U.S. government’s debt is likely to reach $15.1 trillion by year-end, exceeding gross domestic product for the first time since the years immediately after World War II… The forecast assumes Congress will again raise the statutory limit on federal debt. The time for another vote is approaching: as of Jan. 26, debt subject to the $14.29 trillion limit set last year was slightly more than $14 trillion… The limit could be reached as early as March 31 and no later than May 16, the department says.”
January 28 – Bloomberg (Christine Richard): “Moody’s Investors Service said it may need to place a ‘negative’ outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens. The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt… ‘Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,’ wrote Steven Hess, a senior credit officer…”
January 27 – Bloomberg (Pat Wechsler and Christopher Palmeri): “President Barack Obama faces a new challenge from deficit-plagued states over Medicaid costs just as he squares off with Republicans trying to repeal his 2010 health-care law, which extends coverage to 32 million Americans. Arizona Governor Jan Brewer asked for U.S. permission on Jan. 25 to reduce Medicaid eligibility and drop coverage for 280,000 people. That would save $541.5 million for the state, which projects a $1.2 billion budget deficit for the coming fiscal year. U.S. states must confront potential budget gaps of more than $140 billion for fiscal 2012 because tax collections declined by the most on record during the recession… That may prompt more to seek release from some Medicaid obligations, their biggest expense, as federal aid that has helped them cover the costs for the last three years ends. ‘There are other states contemplating” requests for waivers, said Dan Mendelson… former associate director for health in the Office of Management and Budget under President Bill Clinton. ‘Letters are coming from some big states reaching the point of no return.’ Mendelson declined to name them, saying ‘border states’ such as Texas were in ‘fiscally impossible situations.’”
January 26 – Bloomberg (Carol Wolf): “The federal Highway Trust Fund, which pays for U.S. road and mass transit construction, faces insolvency sometime next year as revenue from fuel taxes declines for the sixth year… The Highway Trust Fund will run a deficit of $7 billion this year, compared with a surplus of $11 billion in 2010… The highway and mass transit portions of the fund will probably be unable to meet their obligations in 2012 and 2013…”
California Watch:
January 26 – Bloomberg (Michael B. Marois): “California’s capital city of Sacramento, facing a $35 million deficit, will bill out-of-town drivers whose traffic accidents require rescue crews, the latest U.S. municipality turning to a ‘crash tax’ for revenue. The fees, ranging from $435 to $2,275 if a helicopter is needed, may generate as much as $500,000 a year, according to city data.”
Monetary Disorder and Global Fragilities:
January 27 – Bloomberg (Mary Childs): “Rising food prices that are causing riots in developing nations from Tunisia to Yemen are sending credit-default swaps soaring on Campbell Soup Co., General Mills Inc. and Darden Restaurants Inc. The cost of protecting bonds from... Campbell Soup reached a record last week…”
January 27 – Financial Times (Javier Blas and Chris Giles): “Governments across the developing world are stockpiling food staples in an attempt to contain panic buying, inflation and social unrest. But the hoarding is driving agricultural commodity prices even higher. The cost of wheat, the world’s most important staple, reached a fresh two-and-a-half-year high on Thursday, after countries from Algeria to Saudi Arabia announced extraordinary purchases. High food prices have been a contributing factor to the recent wave of social unrest across North Africa and the Middle East. In Algeria earlier this month, young rioters chanted ‘Bring us sugar!’ The cost of the sweetener in the wholesale market is at its highest in 30 years. Earlier this week, Algeria bought 800,000 tonnes of wheat – much more than usual – and Saudi Arabia announced plans to double the size of its wheat stockpile. Bangladesh and Indonesia joined the rush on Thursday, placing extraordinary on rice orders.”
There’s been this festering dichotomy. Sentiment within the U.S. stock market has moved to bullish extremes. With the Fed still early in its QE2 program, participants perceive that the favorable market liquidity backdrop is safe for at least the near-term. As for the economy, the combination of some “animal spirit” green shoots and the massive $1.5 TN federal deficit seems to ensure that there is minimal downside risk to growth this year. Aggressive fiscal and monetary policies have bolstered the perception of systemic stability.
In reality, the world is an extraordinarily unstable place: unwieldy finance, extreme economic imbalances and related wealth disparities – along with acute inflation - have created a geopolitical tinderbox.
The unprecedented – and ongoing - global expansion of debt has created myriad risks and vulnerabilities. The ballooning of central bank balance sheets has over-liquefied markets and distorted risk perceptions worldwide. This liquidity backstop has also rejuvenated and emboldened the leveraged speculating community. Ignoring risk has been a fruitful tactic throughout the global market landscape.
The combination of massive debt growth and central bank monetization has nurtured an enormous pool of speculative finance that fuels boom and bust dynamics across virtually all risk markets and economies. This backdrop has created what I have often referred to as “Monetary Disorder.” One current facet of this monetary phenomenon is acute price pressures globally for food and energy. This inflation exacerbates unrest and social instability. Today’s developments in Egypt demonstrate how social instability has engendered political instability in a most volatile region of the world.
Today, crude oil surged $3.70 and gold jumped $23. Emerging equities, in particular, were under pressure. While unimpressive, the dollar did enjoy somewhat of a safe haven bid. For the week, sugar and cotton gained about 5%, adding to already spectacular gains. U.S. equities were under selling pressure, although most will question how street protests in Egypt could have much impact on our economic recovery.
Well, heightened unrest in Egypt and beyond adds additional uncertainty for susceptible global markets. Unstable currency markets now have another development to contend with. The possibility for safe haven bids for the dollar, Treasurys, and bunds has increased, which causes additional uncertainty all along the daisy chain of leveraged bond spread trades and currency “carry trades.” Moreover, spreading regional unrest increases the probability for spikes and instability for oil and energy prices. Recent developments also have the potential to exacerbate the trend toward price inflation and hoarding throughout the commodities complex, especially in the metals, energy and agriculture commodities arenas.
No one knows what the weekend and next week holds for Cairo. What is clearer, however, is that this crisis is now unfolding at a juncture already demonstrating heightened market vulnerability. As I attempted to highlight last week, 2011 has begun with a number of markets moving abruptly against the “crowd” (i.e. euro, European CDS, precious metals, etc.). Additional uncertainty and related marketplace volatility has the potential to accelerate the process of de-risking and de-leveraging.
I would add that global Bubble Dynamics have been an unappreciated factor fueling U.S. equity prices. In an environment already demonstrating rising bond yields and incipient liquidity issues, the emerging markets may prove especially susceptible to the unfolding geopolitical backdrop. And a pullback in emerging bonds and equities would surely put significant additional pressure on the leveraged players. As such, I don’t believe it would take all that much for a bout of “risk off” trading to provide the catalyst for a long-overdue correction in inflated U.S. stock prices. Associated fragilities are an inescapable downside to Monetary Disorder and attendant speculative excess.
Saturday, November 1, 2014
02/04/2011 Just the Facts *
For the week, the S&P500 jumped 2.7% (up 4.2% y-t-d), and the Dow advanced 2.3% (up 4.4%). Market strength was broad-based. The S&P 400 Mid-Caps jumped 3.0% (up 4.2%), and the small cap Russell 2000 rose 3.2% (up 2.1%). The Banks gained 3.3% (up 3.7%), and the Broker/Dealers increased 1.4% (up 2.3%). The Morgan Stanley Cyclicals rose 3.4% (up 4.7%), and the Transports added 1.2% (down 1.0%). The Morgan Stanley Consumer index gained 1.9% (up 0.2%), and the Utilities increased 0.5% (up 1.3%). The Nasdaq100 rose 3.0% (up 5.4%), and the Morgan Stanley High Tech index surged 4.0% (up 7.5%). The Semiconductors jumped 5.6% (up 12.5%). The InteractiveWeek Internet index rose 4.6% (up 5.6%). The Biotechs gained 2.0% (down 0.4%). With bullion up $12, the HUI gold index rallied 3.6% (down 7.9%).
One-month Treasury bill rates ended the week at 13 bps and three-month bills closed at 15 bps. Two-year government yields were up 20 bps to 0.75%. Five-year T-note yields ended the week 34 bps higher to 2.26%. Ten-year yields jumped 31 bps to 3.64%. Long bond yields ended the week up 20 bps to 4.73%. Benchmark Fannie MBS yields were 24 bps higher to 4.39%. The spread between 10-year Treasury yields and benchmark MBS yields declined 7 to 75 bps. Agency 10-yr debt spreads widened 4 bps to 12 bps. The implied yield on December 2011 eurodollar futures rose 13.5 bps to 0.78%. The 10-year dollar swap spread increased 0.75 to 10.25 bps. The 30-year swap spread increased 3.5 bps to negative 24 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 5 bps to 82 bps. An index of junk bond risk declined 22 to 399 bps.
Investment grade issuers included Goldman Sachs $2.5bn, Morgan Stanley $2.35bn, Microsoft $2.25bn, Johnson Controls $1.6bn, Tennessee Valley Authority $1.5bn, Noble Holdings $1.1bn, L-3 Communications $650 million, State Street $500 million, and First Citizens $175 million.
Junk bond funds saw inflows of $511 million (from EPFR). Issuers included Blue Merger $1.3bn, Ford Motor Credit $1.25bn, Valeant Pharmaceuticals $650 million, Aleris $500 million, Denbury Resources $400 million, SM Energy $350 million, Geo Group $300 million, Basic Energy Services $275 million, Kraton Polymers $250 million, Medipact $230 million, CPI International $215 million, Energy Partners $210 million, GMX Resources $200 million, Westmoreland Coal $150 million, and Hovnanian Enterprises $155 million.
Convertible debt issues included Savient Pharmaceuticals $230 million, Avatar Holdings $100 million, and Jaguar Mining $90 million.
International dollar debt issuers included Group BPCE $1.1bn, Transnet $750 million, Empresa ICA $400 million, and BBVA Paraguay $100 million.
U.K. 10-year gilt yields jumped 17 bps this week to 3.82% (up 42bps y-t-d), and German bund yields rose 11 bps to 3.26% (up 30bps). Ten-year Portuguese yields were unchanged at 6.95%. Spanish yields sank 31 bps to 5.13%, and Irish yields fell 26 bps to 8.69%. Greek 10-year bond yields sank 51 bps to 10.82%. The German DAX equities index gained 1.6% (up 4.4% y-t-d). Japanese 10-year "JGB" yields rose 7 bps to 1.28% (up 16bps y-t-d). Japan's Nikkei rose 1.8% (up 3.1%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index declined 2.1% (down 5.8%), while Mexico's Bolsa gained 1.7% (down 2.9%). South Korea's Kospi index declined 1.7% (up 1.0%). India’s equities index fell 2.1% (down 12.2%). China’s Shanghai Exchange gained 1.7% (down 0.3%). Brazil’s benchmark dollar bond yields rose 8 bps to 4.70%, and Mexico's benchmark bond yields rose 12 bps to 4.57%.
Freddie Mac 30-year fixed mortgage rates added one basis point last week to 4.81% (down 20 bps y-o-y). Fifteen-year fixed rates increased one basis point to 4.08% (down 32bps y-o-y). One-year ARMs were unchanged at 3.26% (down 96bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 4 bps to 5.37% (down 55bps y-o-y).
Federal Reserve Credit jumped $19.1bn to a record $2.438 TN (13-wk gain of $157bn). Fed Credit was up $207bn from a year ago (9.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 2/4) increased $4.8bn to a record $3.356 TN. "Custody holdings" were up $409bn from a year ago, or 13.9%.
M2 (narrow) "money" supply dropped $33.2bn to $8.829 TN. Over the past year, "narrow money" grew 4.0%. For the week, Currency added $1.2bn. Demand and Checkable Deposits increased $7.5bn, while Savings Deposits sank $38.2bn. Small Denominated Deposits declined $4.0bn. Retail Money Funds added $0.6bn.
Total Commercial Paper outstanding increased $7.8bn to $996 billion. CP was down $126bn y-o-y, or 11.3%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.457 TN y-o-y, or 18.6%, to a record $9.271 TN.
Global Credit Market Watch:
January 31 – Bloomberg (Michael Patterson and Ron Harui): “Money-market rates in developing nations are increasing at the fastest pace since 2008 as central banks from China to Brazil lift borrowing costs and banks hoard cash on concern unrest in Egypt may destabilize the Middle East. The yield on JPMorgan Chase & Co.’s ELMI+ Index of short- term debt in emerging markets rose to 2.5% on Jan. 28, from a record-low 1.74% on Dec. 31.”
February 2 – Bloomberg (Jody Shenn and Prashant Gopal): “Home loans that inflated the U.S. housing bubble by giving borrowers the choice of cutting interest payments in exchange for higher balances are fueling the fastest gains in the mortgage-bond market. Prices for senior bonds tied to option adjustable-rate mortgages, called ‘toxic’ by a government commission, typically jumped 6 cents to 64 cents on the dollar in the past month… Option-ARM debt tumbled to as low as 33 cents in 2009.”
February 1 – Bloomberg (Tim Catts): “The lowest-rated corporate borrowers face mounting bond and loan maturities over the next five years even as speculative-grade issuers slash their debt, according to Moody’s… Companies ranked Caa1 or lower have about $130 billion of bonds and loans coming due through 2015, up 8% from a year ago… Debt maturing during that period at all high-yield, high-risk borrowers fell about $100 billion to $690 billion, analysts led by Kevin Cassidy wrote…”
Global Bubble Watch:
February 2 – Financial Times (Michael Mackenzie): “The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing… … the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips. … China holds $896bn and Japan owns $877bn. ‘By June [the Fed] will have accumulated some $1,600bn of Treasury securities, likely to be in the vicinity of China and Japan’s combined holdings,’ said Richard Gilhooly, a strategist at TD Securities.”
February 4 – Bloomberg (Masahiro Hidaka): “Japan is in a ‘bond bubble’ that may burst in a few years if the government doesn’t increase taxes to cut its debt burden, said Masayuki Matsushima, a former executive director at the Bank of Japan. Any collapse of the bubble would boost long-term borrowing costs and lengthen the time it takes for the government to fix its finances, Matsushima, currently the Japan chairman of Credit Suisse Group AG in Tokyo, told reporters…”
Muni Watch:
February 3 – Bloomberg (Brendan A. McGrail and Matt Robinson): “Municipal bondholders in January unloaded assets at the fastest daily pace in at least 14 years as record mutual fund redemptions and speculation of widespread defaults drove tax-exempt yields to a 19-month high. Bondholders sought buyers for an average $838 million in municipal securities daily from Jan. 3 through Feb. 1, the most on record… Sellers wanted bids for $783 million on average in March 2008, the second-highest daily tally, following the demise of the auction-rate securities market. ‘We are raining bids-wanted right now,’ said Bud Byrnes, chief executive officer of… RH Investment Corp. ‘The market is all over the place. It’s not a happy time in the market.’”
February 4 – Bloomberg (Brendan A. McGrail and Matt Robinson): “Sales of municipal bonds this week plummeted to a five-month low as issuers hesitated to come to market amid the steepest interest-rate rise since 2009. States and municipalities offered about $3.27 billion in fixed-rate debt this week…”
February 2 – Bloomberg (Darrell Preston): “New Jersey Governor Chris Christie said he doesn’t mind breaking promises to pensioners to close a $10.5 billion budget deficit -- even if they sue. ‘I have bigger issues than who sues me,’ said Christie… who wants to end cost-of-living increases for retirees. ‘Get in line.’ Public workers in Colorado, South Dakota and Minnesota are already suing their states, which are among 18 that want to pare pension costs by increasing employee contributions, raising the retirement age or curbing cost-of-living increases.”
Currency Watch:
The U.S. dollar index slipped 0.1% to 78.04 (down 1.3%). On the upside for the week, the Australia dollar increased 2.0%, the Mexican peso 1.8%, the British pound 1.6%, the Canadian dollar 1.4%, the Norwegian krone 1.1%, the South Korean won 1.0%, the Singapore dollar 0.8%, the Swedish krona 0.7%, and the Brazilian real 0.6%. On the downside, the Swiss franc declined 1.4%, the South African rand 1.0%, the New Zealand dollar 0.5%, the Danish krone 0.2%, the Euro 0.2%, and the Japanese yen 0.1%.
Commodities and Food Watch:
February 3 – Bloomberg (Tony C. Dreibus): “World food prices rose to a record in January on higher dairy, sugar and cereal costs and probably will remain elevated, the United Nations said. An index of 55 food commodities climbed 3.4% from December to 231 points, the seventh straight increase… Dairy prices led advances among five food categories, rising 6.2%...”
February 4 – Bloomberg (Phoebe Sedgman): “New Zealand wool prices may surge as much as 25% in the next two years as China, the biggest buyer, boosts stockpiles on expectations supply will remain crimped, according to a wool broking group. Crossbred wool prices, which have more than doubled since July 2009, reached about NZ$5.60 ($4.33) a kilogram at auction yesterday in Christchurch…”
The CRB index gained 1.0% (up 1.8% y-t-d). The Goldman Sachs Commodities Index added 0.9% (up 2.6%). Spot Gold rallied 0.9% to $1,349 (down 5.1%). Silver rallied 4.1% to $29.059 (down 6.1%). March Crude slipped 31 cents to $89.03 (down 2.6%). March Gasoline declined 2.0% (up 0.2%), and March Natural Gas dipped 0.13 (down 2.2%). March Copper jumped 4.7% (up 3.0%). March Wheat gained 3.4% (up 7.5%), and March Corn surged 5.4% (up 7.9%).
China Bubble Watch:
February 2 – Financial Times (Leslie Hook and Jack Farchy): “China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world’s largest consumer of the precious metal. The growth in demand is being attributed in part to Chinese families giving each other gifts of gold instead of traditional red envelopes filled with cash. Fears of inflation have also driven demand for gold as a retail investment. Precious metals traders in London and Hong Kong said… they were stunned by the strength of Chinese buying in the past month. ‘The demand is unbelievable. The size of the orders is enormous,’ said one senior banker, who estimated that China had imported about 200 tonnes in three months.”
Asia Bubble Watch:
February 1 – Bloomberg (Eunkyung Seo and William Sim): “South Korean inflation accelerated more than forecast in January, breaching the central bank’s 4% ceiling and adding to the case for another increase in borrowing costs as early as next week. The consumer-price index rose 4.1% from a year earlier, after gaining 3.5% in December…”
February 1 – Bloomberg (Novrida Manurung and Widya Utami): “Indonesia’s inflation accelerated to a 21-month high… Consumer prices in Southeast Asia’s biggest economy rose 7.02% last month from a year earlier…”
February 4 – Bloomberg (Widya Utami and Novrida Manurung): “Indonesia’s central bank unexpectedly raised its benchmark interest rate for the first time in more than two years after inflation climbed to a 21-month high. The central bank increased its reference rate by a quarter percentage point, to 6.75%...”
Latin America Watch:
February 4 – Bloomberg (Alexander Emery): “Peruvian bank lending will grow as much as 20% this year, said Alvaro Correa, chief financial officer of financial holding company Credicorp Ltd. Slowing economic growth may curb loans this year after overall lending jumped 24% in 2010…”
Unbalanced Global Economy Watch:
February 4 – Bloomberg (Greg Quinn): “Canadian job creation was more than four times what economists predicted in January… Employment rose by 69,200 and the labor force increased by 106,400… The jobless rate rose to 7.8% from December’s 7.6%.”
February 2 – Bloomberg (Jeff Black): “Germans feel prices are rising almost twice as fast as the official rate, fueling wage demands and making it harder for the European Central Bank to keep a rein on inflation, according to UniCredit Bank AG. … so-called ‘perceived inflation’ jumped to 3.3% in December compared with Germany’s official rate of 1.7%. UniCredit calculates perceived inflation by giving greater weight to the goods people buy most often, such as fuel, food and clothing. ‘The rise in perceived inflation increases the likelihood of higher wage demands,’ said Alexander Koch, an economist at UniCredit… ‘An excessive round of wage increases would certainly make the ECB nervous.’”
U.S. Bubble Economy Watch:
February 2 – Bloomberg (Barbara Powell): “U.S. gasoline at the pump may rise 13% by May as crude oil in New York tops $100 a barrel… according to analysts… The highest price for regular gasoline this year will be $3.50 a gallon, based on the median estimate of 14 analysts. The motor fuel hasn’t reached that level since Oct. 6, 2008, according to AAA, the nation’s largest motoring organization.”
Central Banking Watch:
February 1 – Dow Jones (Anthony Harrup): “Mexican billionaire Carlos Slim, considered last year by Forbes as the world's richest man, said… that loose U.S. monetary policy that has allowed the dollar to weaken against other currencies is ‘mistaken’ as it causes commodities prices to rise and affects other countries. Asked about the effects of a stronger Mexican peso against the U.S. currency, Slim said the problem ‘isn't that the peso is appreciating, it's that the dollar is devaluing with a clear, I would say aggressive, policy of the U.S. government.’ … Lack of confidence in the dollar is pushing up commodities prices, such as grains, with ‘social consequences everywhere.’ Higher metals prices--copper, steel and others--are causing underlying inflation pressures, he said.”
February 4 – Bloomberg (Jennifer Ryan): “Bank of England official Andrew Sentance’s drive for higher interest rates to tame inflation may gain traction at next week’s policy meeting after reports indicated the U.K. recovery has reignited.”
New York Watch:
February 4 – Bloomberg (Michael Quint): “Governor Andrew Cuomo plans to pay part of New York’s pension contributions with $884 million of IOUs, joining California’s Orange County in borrowing to meet retirement costs… The… governor… included the IOUs that pay 5% interest in his $132.9 billion budget, which he said closed a $10 billion deficit without borrowing.
One-month Treasury bill rates ended the week at 13 bps and three-month bills closed at 15 bps. Two-year government yields were up 20 bps to 0.75%. Five-year T-note yields ended the week 34 bps higher to 2.26%. Ten-year yields jumped 31 bps to 3.64%. Long bond yields ended the week up 20 bps to 4.73%. Benchmark Fannie MBS yields were 24 bps higher to 4.39%. The spread between 10-year Treasury yields and benchmark MBS yields declined 7 to 75 bps. Agency 10-yr debt spreads widened 4 bps to 12 bps. The implied yield on December 2011 eurodollar futures rose 13.5 bps to 0.78%. The 10-year dollar swap spread increased 0.75 to 10.25 bps. The 30-year swap spread increased 3.5 bps to negative 24 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 5 bps to 82 bps. An index of junk bond risk declined 22 to 399 bps.
Investment grade issuers included Goldman Sachs $2.5bn, Morgan Stanley $2.35bn, Microsoft $2.25bn, Johnson Controls $1.6bn, Tennessee Valley Authority $1.5bn, Noble Holdings $1.1bn, L-3 Communications $650 million, State Street $500 million, and First Citizens $175 million.
Junk bond funds saw inflows of $511 million (from EPFR). Issuers included Blue Merger $1.3bn, Ford Motor Credit $1.25bn, Valeant Pharmaceuticals $650 million, Aleris $500 million, Denbury Resources $400 million, SM Energy $350 million, Geo Group $300 million, Basic Energy Services $275 million, Kraton Polymers $250 million, Medipact $230 million, CPI International $215 million, Energy Partners $210 million, GMX Resources $200 million, Westmoreland Coal $150 million, and Hovnanian Enterprises $155 million.
Convertible debt issues included Savient Pharmaceuticals $230 million, Avatar Holdings $100 million, and Jaguar Mining $90 million.
International dollar debt issuers included Group BPCE $1.1bn, Transnet $750 million, Empresa ICA $400 million, and BBVA Paraguay $100 million.
U.K. 10-year gilt yields jumped 17 bps this week to 3.82% (up 42bps y-t-d), and German bund yields rose 11 bps to 3.26% (up 30bps). Ten-year Portuguese yields were unchanged at 6.95%. Spanish yields sank 31 bps to 5.13%, and Irish yields fell 26 bps to 8.69%. Greek 10-year bond yields sank 51 bps to 10.82%. The German DAX equities index gained 1.6% (up 4.4% y-t-d). Japanese 10-year "JGB" yields rose 7 bps to 1.28% (up 16bps y-t-d). Japan's Nikkei rose 1.8% (up 3.1%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index declined 2.1% (down 5.8%), while Mexico's Bolsa gained 1.7% (down 2.9%). South Korea's Kospi index declined 1.7% (up 1.0%). India’s equities index fell 2.1% (down 12.2%). China’s Shanghai Exchange gained 1.7% (down 0.3%). Brazil’s benchmark dollar bond yields rose 8 bps to 4.70%, and Mexico's benchmark bond yields rose 12 bps to 4.57%.
Freddie Mac 30-year fixed mortgage rates added one basis point last week to 4.81% (down 20 bps y-o-y). Fifteen-year fixed rates increased one basis point to 4.08% (down 32bps y-o-y). One-year ARMs were unchanged at 3.26% (down 96bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 4 bps to 5.37% (down 55bps y-o-y).
Federal Reserve Credit jumped $19.1bn to a record $2.438 TN (13-wk gain of $157bn). Fed Credit was up $207bn from a year ago (9.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 2/4) increased $4.8bn to a record $3.356 TN. "Custody holdings" were up $409bn from a year ago, or 13.9%.
M2 (narrow) "money" supply dropped $33.2bn to $8.829 TN. Over the past year, "narrow money" grew 4.0%. For the week, Currency added $1.2bn. Demand and Checkable Deposits increased $7.5bn, while Savings Deposits sank $38.2bn. Small Denominated Deposits declined $4.0bn. Retail Money Funds added $0.6bn.
Total Commercial Paper outstanding increased $7.8bn to $996 billion. CP was down $126bn y-o-y, or 11.3%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.457 TN y-o-y, or 18.6%, to a record $9.271 TN.
Global Credit Market Watch:
January 31 – Bloomberg (Michael Patterson and Ron Harui): “Money-market rates in developing nations are increasing at the fastest pace since 2008 as central banks from China to Brazil lift borrowing costs and banks hoard cash on concern unrest in Egypt may destabilize the Middle East. The yield on JPMorgan Chase & Co.’s ELMI+ Index of short- term debt in emerging markets rose to 2.5% on Jan. 28, from a record-low 1.74% on Dec. 31.”
February 2 – Bloomberg (Jody Shenn and Prashant Gopal): “Home loans that inflated the U.S. housing bubble by giving borrowers the choice of cutting interest payments in exchange for higher balances are fueling the fastest gains in the mortgage-bond market. Prices for senior bonds tied to option adjustable-rate mortgages, called ‘toxic’ by a government commission, typically jumped 6 cents to 64 cents on the dollar in the past month… Option-ARM debt tumbled to as low as 33 cents in 2009.”
February 1 – Bloomberg (Tim Catts): “The lowest-rated corporate borrowers face mounting bond and loan maturities over the next five years even as speculative-grade issuers slash their debt, according to Moody’s… Companies ranked Caa1 or lower have about $130 billion of bonds and loans coming due through 2015, up 8% from a year ago… Debt maturing during that period at all high-yield, high-risk borrowers fell about $100 billion to $690 billion, analysts led by Kevin Cassidy wrote…”
Global Bubble Watch:
February 2 – Financial Times (Michael Mackenzie): “The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing… … the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips. … China holds $896bn and Japan owns $877bn. ‘By June [the Fed] will have accumulated some $1,600bn of Treasury securities, likely to be in the vicinity of China and Japan’s combined holdings,’ said Richard Gilhooly, a strategist at TD Securities.”
February 4 – Bloomberg (Masahiro Hidaka): “Japan is in a ‘bond bubble’ that may burst in a few years if the government doesn’t increase taxes to cut its debt burden, said Masayuki Matsushima, a former executive director at the Bank of Japan. Any collapse of the bubble would boost long-term borrowing costs and lengthen the time it takes for the government to fix its finances, Matsushima, currently the Japan chairman of Credit Suisse Group AG in Tokyo, told reporters…”
Muni Watch:
February 3 – Bloomberg (Brendan A. McGrail and Matt Robinson): “Municipal bondholders in January unloaded assets at the fastest daily pace in at least 14 years as record mutual fund redemptions and speculation of widespread defaults drove tax-exempt yields to a 19-month high. Bondholders sought buyers for an average $838 million in municipal securities daily from Jan. 3 through Feb. 1, the most on record… Sellers wanted bids for $783 million on average in March 2008, the second-highest daily tally, following the demise of the auction-rate securities market. ‘We are raining bids-wanted right now,’ said Bud Byrnes, chief executive officer of… RH Investment Corp. ‘The market is all over the place. It’s not a happy time in the market.’”
February 4 – Bloomberg (Brendan A. McGrail and Matt Robinson): “Sales of municipal bonds this week plummeted to a five-month low as issuers hesitated to come to market amid the steepest interest-rate rise since 2009. States and municipalities offered about $3.27 billion in fixed-rate debt this week…”
February 2 – Bloomberg (Darrell Preston): “New Jersey Governor Chris Christie said he doesn’t mind breaking promises to pensioners to close a $10.5 billion budget deficit -- even if they sue. ‘I have bigger issues than who sues me,’ said Christie… who wants to end cost-of-living increases for retirees. ‘Get in line.’ Public workers in Colorado, South Dakota and Minnesota are already suing their states, which are among 18 that want to pare pension costs by increasing employee contributions, raising the retirement age or curbing cost-of-living increases.”
Currency Watch:
The U.S. dollar index slipped 0.1% to 78.04 (down 1.3%). On the upside for the week, the Australia dollar increased 2.0%, the Mexican peso 1.8%, the British pound 1.6%, the Canadian dollar 1.4%, the Norwegian krone 1.1%, the South Korean won 1.0%, the Singapore dollar 0.8%, the Swedish krona 0.7%, and the Brazilian real 0.6%. On the downside, the Swiss franc declined 1.4%, the South African rand 1.0%, the New Zealand dollar 0.5%, the Danish krone 0.2%, the Euro 0.2%, and the Japanese yen 0.1%.
Commodities and Food Watch:
February 3 – Bloomberg (Tony C. Dreibus): “World food prices rose to a record in January on higher dairy, sugar and cereal costs and probably will remain elevated, the United Nations said. An index of 55 food commodities climbed 3.4% from December to 231 points, the seventh straight increase… Dairy prices led advances among five food categories, rising 6.2%...”
February 4 – Bloomberg (Phoebe Sedgman): “New Zealand wool prices may surge as much as 25% in the next two years as China, the biggest buyer, boosts stockpiles on expectations supply will remain crimped, according to a wool broking group. Crossbred wool prices, which have more than doubled since July 2009, reached about NZ$5.60 ($4.33) a kilogram at auction yesterday in Christchurch…”
The CRB index gained 1.0% (up 1.8% y-t-d). The Goldman Sachs Commodities Index added 0.9% (up 2.6%). Spot Gold rallied 0.9% to $1,349 (down 5.1%). Silver rallied 4.1% to $29.059 (down 6.1%). March Crude slipped 31 cents to $89.03 (down 2.6%). March Gasoline declined 2.0% (up 0.2%), and March Natural Gas dipped 0.13 (down 2.2%). March Copper jumped 4.7% (up 3.0%). March Wheat gained 3.4% (up 7.5%), and March Corn surged 5.4% (up 7.9%).
China Bubble Watch:
February 2 – Financial Times (Leslie Hook and Jack Farchy): “China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world’s largest consumer of the precious metal. The growth in demand is being attributed in part to Chinese families giving each other gifts of gold instead of traditional red envelopes filled with cash. Fears of inflation have also driven demand for gold as a retail investment. Precious metals traders in London and Hong Kong said… they were stunned by the strength of Chinese buying in the past month. ‘The demand is unbelievable. The size of the orders is enormous,’ said one senior banker, who estimated that China had imported about 200 tonnes in three months.”
Asia Bubble Watch:
February 1 – Bloomberg (Eunkyung Seo and William Sim): “South Korean inflation accelerated more than forecast in January, breaching the central bank’s 4% ceiling and adding to the case for another increase in borrowing costs as early as next week. The consumer-price index rose 4.1% from a year earlier, after gaining 3.5% in December…”
February 1 – Bloomberg (Novrida Manurung and Widya Utami): “Indonesia’s inflation accelerated to a 21-month high… Consumer prices in Southeast Asia’s biggest economy rose 7.02% last month from a year earlier…”
February 4 – Bloomberg (Widya Utami and Novrida Manurung): “Indonesia’s central bank unexpectedly raised its benchmark interest rate for the first time in more than two years after inflation climbed to a 21-month high. The central bank increased its reference rate by a quarter percentage point, to 6.75%...”
Latin America Watch:
February 4 – Bloomberg (Alexander Emery): “Peruvian bank lending will grow as much as 20% this year, said Alvaro Correa, chief financial officer of financial holding company Credicorp Ltd. Slowing economic growth may curb loans this year after overall lending jumped 24% in 2010…”
Unbalanced Global Economy Watch:
February 4 – Bloomberg (Greg Quinn): “Canadian job creation was more than four times what economists predicted in January… Employment rose by 69,200 and the labor force increased by 106,400… The jobless rate rose to 7.8% from December’s 7.6%.”
February 2 – Bloomberg (Jeff Black): “Germans feel prices are rising almost twice as fast as the official rate, fueling wage demands and making it harder for the European Central Bank to keep a rein on inflation, according to UniCredit Bank AG. … so-called ‘perceived inflation’ jumped to 3.3% in December compared with Germany’s official rate of 1.7%. UniCredit calculates perceived inflation by giving greater weight to the goods people buy most often, such as fuel, food and clothing. ‘The rise in perceived inflation increases the likelihood of higher wage demands,’ said Alexander Koch, an economist at UniCredit… ‘An excessive round of wage increases would certainly make the ECB nervous.’”
U.S. Bubble Economy Watch:
February 2 – Bloomberg (Barbara Powell): “U.S. gasoline at the pump may rise 13% by May as crude oil in New York tops $100 a barrel… according to analysts… The highest price for regular gasoline this year will be $3.50 a gallon, based on the median estimate of 14 analysts. The motor fuel hasn’t reached that level since Oct. 6, 2008, according to AAA, the nation’s largest motoring organization.”
Central Banking Watch:
February 1 – Dow Jones (Anthony Harrup): “Mexican billionaire Carlos Slim, considered last year by Forbes as the world's richest man, said… that loose U.S. monetary policy that has allowed the dollar to weaken against other currencies is ‘mistaken’ as it causes commodities prices to rise and affects other countries. Asked about the effects of a stronger Mexican peso against the U.S. currency, Slim said the problem ‘isn't that the peso is appreciating, it's that the dollar is devaluing with a clear, I would say aggressive, policy of the U.S. government.’ … Lack of confidence in the dollar is pushing up commodities prices, such as grains, with ‘social consequences everywhere.’ Higher metals prices--copper, steel and others--are causing underlying inflation pressures, he said.”
February 4 – Bloomberg (Jennifer Ryan): “Bank of England official Andrew Sentance’s drive for higher interest rates to tame inflation may gain traction at next week’s policy meeting after reports indicated the U.K. recovery has reignited.”
New York Watch:
February 4 – Bloomberg (Michael Quint): “Governor Andrew Cuomo plans to pay part of New York’s pension contributions with $884 million of IOUs, joining California’s Orange County in borrowing to meet retirement costs… The… governor… included the IOUs that pay 5% interest in his $132.9 billion budget, which he said closed a $10 billion deficit without borrowing.
01/21/2011 Recalling January 2008 *
For the week, the S&P500 declined 0.8% (up 2.0% y-t-d), while the Dow gained 0.7% (up 2.5%). The Banks declined 2.1% (up 2.6%), and the Broker/Dealers fell 2.3% (up 2.3%). The Morgan Stanley Cyclicals dropped 2.3% (up 1.1%), and the Transports were hit for 3.6% (down 1.2%). The Morgan Stanley Consumer index slipped 0.1% (up 0.2%), and the Utilities declined 1.4% (up 2.0%). The S&P 400 Mid-Caps dropped 1.8% (up 0.8%), and the small cap Russell 2000 sank 4.4% (down 1.3%). The Nasdaq100 fell 2.4% (up 2.3%), and the Morgan Stanley High Tech index dropped 2.5% (up 2.9%). The Semiconductors were smacked for 4.6% (up 4.8%). The InteractiveWeek Internet index sank 4.0% (up 0.8%). The Biotechs lost 2.1% (down 1.1%). With bullion down $19, the HUI gold index slid another 2.2% (down 12.0%).
One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 15 bps. Two-year government yields were 3 bps higher to 0.585%. Five-year T-note yields ended the week 9 bps higher to 1.98%. Ten-year yields rose 8 bps to 3.41%. Long bond yields ended the week up 3 bps to 4.56%. Benchmark Fannie MBS yields were 8 bps higher to 4.17%. The spread between 10-year Treasury yields and benchmark MBS yields was little changed at 76 bps. Agency 10-yr debt spreads were about a basis point wider to 11 bps. The implied yield on December 2011 eurodollar futures rose 2 bps to 0.745%. The 10-year dollar swap spread was little changed at 7.0 bps. The 30-year swap spread increased 2 to negative 38 bps. Corporate bond spreads were relatively quiet. An index of investment grade bond risk was little changed at 83 bps. An index of junk bond risk rose 2 to 414 bps.
Investment grade issuers included Morgan Stanley $5.25bn, Goldman Sachs $2.5bn, HCP $2.45bn, Oneok Partners $1.3bn, Fifth Third Bank $1.0bn, Private Export Funding $500 million, Progress Energy $500 million, and South Carolina E&G $250 million.
Junk bond funds saw inflows of $739 million (from Lipper). Issuers included Vanguard Health $1.1bn, Inergy $750 million, Crown America $700 million, American Airlines $650 million, Floria East $475 million, Targa Resources $325 million, Phibro Animal Health $300 million, CCO Holdings $300 million, Speedway Motorsports $150 million, Empire Today $150 million, and Constellation Enterprise $130 million.
Convertible debt issuers included Areas Capital $500 million and Apollo Corp $175 million.
International dollar debt issuers included Petrobras $6.0bn, Ontario $3.5bn, Petroleos de Venezuela $3.15bn, Lloyds Bank $2.0bn, Total Capital Canada $2.0bn, CIBC $2.0bn, Bank of Montreal $1.5bn, Buenos Aire $750 million, Hyundai $700 million, Banco Safra $500 million, Nigeria $500 million, Halyk Savings Bank $500 million, West China Cement $400 million, Bacardi $300 million, Virgolino $300 million, Banco Daycoval $300 million, BR Properties $285 million, and Energisa $200 million.
U.K. 10-year gilt yields rose 9 bps this week to 3.69% (up 30bps y-t-d), and German bund yields jumped 15 bps to 3.17% (up 21bps). Ten-year Portuguese yields fell 11 bps this week to 6.70%. Spanish yields sank 16 bps to 5.17%, while Irish yields jumped 28 bps to 8.61%. Greek 10-year bond yields increased 7 bps to 11.18%. The German DAX equities index slipped 0.2% (up 2.1% y-t-d). Japanese 10-year "JGB" yields added one basis point to 1.21% (up 9bps y-t-d). Japan's Nikkei fell 2.1% (up 0.4%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index dropped 2.5% (down 0.2%), while Mexico's Bolsa declined 1.8% (down 3.2%). South Korea's Kospi index declined 1.8% (up 0.9%). India’s equities index rallied 0.8% (down 7.3%). China’s Shanghai Exchange dropped 2.7% (down 3.3%). Brazil’s benchmark dollar bond yields jumped 14 bps to 4.47%, while Mexico's benchmark bond yields fell 15 bps to 4.39%.
Freddie Mac 30-year fixed mortgage rates increased 3 bps last week to 4.74% (down 25bps y-o-y). Fifteen-year fixed rates slipped 3 bps to 4.05% (down 35bps y-o-y). One-year ARMs added 2 bps to 3.25% (down 107bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 11 bps to 5.50% (down 59bps y-o-y).
Federal Reserve Credit declined $16.1bn to $2.416 TN (11-wk gain of $136bn). Fed Credit was up $185bn from a year ago (8.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/19) fell $7.3bn to $3.343 TN. "Custody holdings" were up $397bn from a year ago, or 13.5%.
M2 (narrow) "money" supply increased $6.9bn to $8.815 TN. Over the past year, "narrow money" grew 4.0%. For the week, Currency increased $1.8bn. Demand and Checkable Deposits fell $11.2bn, while Savings Deposits jumped $22.6bn. Small Denominated Deposits slipped $3.8bn. Retail Money Funds declined $2.4bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $35.1bn to $2.761 TN. Over the past year, money fund assets have sank $489bn, or 14.9%.
Total Commercial Paper outstanding dropped $19.9bn to $916 billion, the lowest level going all the way back to 1998. CP was down $176bn y-o-y, or 16.1%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.424 TN y-o-y, or 18.2%, to a record $9.244 TN.
Global Credit Market Watch:
January 21 – Bloomberg (John Detrixhe): “Borrowers from China to Brazil to Nigeria are boosting dollar bond sales, taking advantage of investor demand for assets from the fastest-growing economies amid growing concern that U.S. junk debt is overpriced. Emerging-market borrowers are poised to raise at least $13.9 billion in the U.S. corporate bond market this month…”
January 21 – Bloomberg (Emre Peker): “Bain Capital LLC is leading private- equity firms in capitalizing on investor demand for leveraged loans in the U.S. to extract payouts from companies they own. Styron, taken private by Bain for $1.63 billion in June, is raising a $1.3 billion term loan to refinance debt and pay back a portion of the Boston-based firm’s investment in the maker of polystyrene and latex. TowerCo LLC is marketing $390 million of loans with $150 million slated for a payout to its backers…”
Global Bubble Watch:
January 21 – Bloomberg (Bryan Keogh): “Credit-default swaps on Europe’s deficit-ridden nations are rallying the most on record on speculation policy makers will let governments buy back their bonds at a discount to avoid restructuring their debts. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 countries fell 12.75 bps this week to 180.25, following a 26.5 bps drop in the previous period…”
January 21 – Bloomberg: “China’s benchmark money-market rate surged to the highest since October 2007 as lenders ran short of cash after the central bank’s four increases in their reserve requirements in the past three months. The seven-day repurchase rate, which measures money availability between banks, surged 4.7 percentage points in the past five days…”
Muni Watch:
January 21 – Dow Jones (Kelly Nolan): “Investors pulled $4 billion out of municipal bond funds in the week ended Wednesday… Lipper FMI said… The outflow comes on the heels of a $1.5 billion pullout in the week ended Jan. 12. It marks the 10th straight week of outflows, which total roughly $20.6 billion.”
January 19 – Bloomberg (Alison Vekshin and Steven Church): “Vallejo, California, the biggest U.S. municipality in bankruptcy, filed a reorganization plan intended to pay creditors and end court control of its finances. The city would pay general unsecured creditors about 5% to 20% of their claims… The creditors, who include retirees and former employees, will be paid $6 million over two years…”
Currency Watch:
The U.S. dollar index declined 1.3% to 78.124 (down 1.1%), although individual currency performance varied widely. On the upside for the week, the euro increased 1.7%, the Danish krone 1.7%, the Swedish krona 1.1%, the British pound 0.8%, the Brazilian real 0.4%, the Norwegian krone 0.4%, the Japanese yen 0.4%, the Singapore dollar 0.3% and the Australian dollar 0.1%. On the downside, the South African rand declined 1.7%, the New Zealand dollar 0.9%, the South Korean won 0.9%, the Taiwanese dollar 0.3%, the Canadian dollar 0.2%, and the Mexican peso 0.1%.
Commodities and Food Watch:
January 19 – Bloomberg (Alan Bjerga and Tony Dreibus): “The same record food prices causing riots in Algeria and export bans in India are allowing President Barack Obama to combine the biggest-ever U.S. farm exports with the tamest inflation since the 1960s. Global food costs jumped 25% last year to an all- time high in December, according to the United Nations. Countries probably spent at least $1 trillion on imports, with the poorest paying as much as 20% more than in 2009, the UN says. In the U.S., the largest exporter, retail food rose 1.5% last year and will gain as little as 2% in 2011… Governments from Beijing to Belgrade are boosting imports, limiting sales or releasing stockpiles to curb food inflation.”
January 21 – Bloomberg (Maria Kolesnikova): “Cotton and wheat are leading agriculture product price gains this year and outpacing metals as frost in China, floods in Australia, rains in India and dry weather in Brazil hamper crop prospects… Cotton more than doubled and wheat futures climbed 47% in 2010 while silver jumped 83% and gold rose 30%.”
January 21 – Bloomberg (Maria Kolesnikova): “Tin rose to a record in London on speculation that a shortfall of the metal used to make solders may worsen.”
The CRB index added 0.3% (up 0.4% y-t-d). The Goldman Sachs Commodities Index declined 1.3% (up 0.5%). Spot Gold fell 1.4% to $1,342 (down 5.5%). Silver dropped 3.1% to $27.45 (down 11.3%). February Crude fell $3.40 to $89.17 (down 2.4%). February Gasoline declined 1.3% (up 1.3%), while February Natural Gas jumped 5.2% (up 7.0%). March Copper declined 2.3% (down 3.1%). March Wheat jumped 6.6% (up 3.8%), and March Corn added 1.3% (up 4.5%).
China Bubble Watch:
January 21 – Bloomberg: “China’s 10.3% economic growth last year drove the biggest increase in the nation’s rural incomes in a quarter century, bolstering efforts to spur consumption in the world’s most populous nation. In the countryside, per capita net income rose 10.9% to 5,919 yuan ($898)… The gain was faster than for urban incomes for the first time since 1997. The report also showed an acceleration in retail sales and industrial production at the end of last year.”
January 19 – Bloomberg: “Yolkie Sun’s addiction to Facebook Inc. cost China Mobile Communications Corp. a longtime customer. Sun… switched to China United Network Communications Group… to access the social networking site. Her smartphone accesses the website through a virtual private network that can take three times longer to run on China Mobile… The… company plans to more than triple its Wi-Fi hotspots this year… China Mobile may increase its number of hotspots to 1.1 million by year’s end from the 300,000 it had in June… Its capital expenditures of 111 billion yuan ($16.8 billion) this year may be 13% above previous projections, he said.”
January 21 – Bloomberg (Kelvin Wong): “Sarah Cheung was bracing for a rent increase on her apartment in Hong Kong’s Happy Valley district ahead of the expiration of her lease this month. She still wasn’t prepared when her landlord demanded 43% more. ‘We’ve looked around and this is still one of the better deals, even after the raise’ to HK$40,000 ($4,890) a month… Rents of Hong Kong luxury homes… are growing faster than in London, fuelling lease increases in the broader market, fanning inflation and hampering government efforts to cool housing prices. Hong Kong luxury rents may jump as much as 15% this year after a 13% gain in 2010…”
Japan Watch:
January 21 – Bloomberg (Toru Fujioka): “Japanese Prime Minister Naoto Kan is projected to break his fiscal promise of capping bond sales as he struggles to secure revenue, boosting the case for higher taxes to contain the world’s largest public-debt burden. Japan’s new bond sales will expand to 46.7 trillion yen ($563bn) in the year starting April 2012, surpassing Kan’s target of 44.3 trillion yen…”
January 20 – Bloomberg (Takahiko Hyuga): “Japanese housewives’ ‘secret savings’ fell 18% to the lowest in three years in 2010 as slumping family incomes and rising prices for food and energy forced them to tap reserves, a survey shows. The value of so-called hesokuri, the cash and investments that housewives stash without telling their husbands, fell to an average 3.1 million yen ($37,700) in 2010…”
India Watch:
January 20 – Bloomberg (Kartikay Mehrotra): “Indian power developers are seeking financing from China to fuel expansion as rupee interest rates soar and local banks say they can’t keep up with demand to fund about $45 billion of equipment orders from China needed by 2017… Utilities are turning to China as they buy boilers and turbines to help meet India’s 100,000 megawatt capacity-addition target in the five years ending March 2017.”
Asia Bubble Watch:
January 19 – Bloomberg (Eunkyung Seo): “South Korea must continue efforts to reduce threats from cross-border capital flows to shield the nation’s economy from external shocks, Bank of Korea Governor Kim Choong Soo said…”
January 21 – Bloomberg (Suttinee Yuvejwattana): “Thailand’s economy expanded at the top end of the central bank’s forecast range last year… Gross domestic product probably increased 8%...”
Latin America Watch:
January 20 – Bloomberg (Iuri Dantas and Gabrielle Coppola): “The heaviest rainfall in Brazil since 1967, already a disaster that has killed 741 people, is adding to the fastest inflation in two years. Storms that dropped at least 17.6 inches of rain this month in the hardest-hit areas triggered mudslides that washed away highways and damaged crops, igniting concern food prices may rise as much as 17% in the first quarter, according to Fabio Romao, an economist with LCA Consultoria in Sao Paulo. ‘The shock in food prices caused by rains is hitting an already heated economy,’ Ures Folchini, the head of fixed income investments at Banco WestLB do Brasil SA in Sao Paulo, said…”
January 20 – Bloomberg (Gabrielle Coppola): “Petroleo Brasileiro SA plans to raise $6 billion on international markets in Brazil’s largest corporate bond offering.”
Unbalanced Global Economy Watch:
January 21 – Bloomberg (Greg Quinn): “Canadian retail sales rose faster than economists predicted in November, with widespread advances led by gains at new car dealers. Sales advanced 1.3% to a seasonally adjusted C$37.3 billion ($37.4bn), the sixth gain in a row…”
January 18 – Bloomberg (Jennifer Ryan): “U.K. inflation accelerated more than economists forecast to an eight-month high in December as fuel and food prices rose, adding to pressure on the Bank of England to raise the key interest rate from its record low. Consumer prices rose 3.7% from a year earlier after a 3.3 percent increase in November…”
January 21 – Bloomberg (Jana Randow): “German business confidence unexpectedly rose to a record high in January as booming exports to Asia and stronger household spending bolstered growth in Europe’s largest economy.”
January 19 – Financial Times (Gerrit Wiesmann): “Germany’s public sector deficit looks set fall below the European Union’s 3% limit in 2011 – one year ahead of schedule – according to data that the government hopes will send a strong signal that the eurozone is getting to grips with its debt problem. Rainer Brüderle, the Germany’s economy minister, said another year of strong growth and declining joblessness would ‘probably’ narrow the gap between public spending and tax receipts to 2.5% of gross domestic product, from 3.5% in 2010. Since the global crisis saw governments pile up debt to fund bank bail-outs and stimulus spending, Berlin has been intent on leading the eurozone out of its borrowing binge as soon as possible.”
U.S. Bubble Economy Watch:
January 18 – Bloomberg (Shobhana Chandra and Anthony Feld): “Rich shoppers are driving an increase in consumer spending, bolstering a recovery that masks reluctance among less affluent Americans to join in. Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy. At the other end of the economic spectrum, Wal-Mart… reports ‘everyday Americans’ are living paycheck to paycheck as they await an improvement in job prospects. ‘The heavy lifting is being done by the upper-income households,’ said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase… ‘They’re the ones benefiting the most from the stock market rally, and they’re spending.’”
January 19 – Bloomberg (David Mildenberg): “Texas lawmakers plan to unveil a $79.3 billion two-year general-fund budget that would cut spending by 10% from the current fiscal biennium and not raise taxes… The draft budget would slash education spending by 10%, to $44.3 billion, and health and human services by 7.7%...”
January 20 – Bond Buyer (Jim Watts): “Dallas is facing a revenue gap in fiscal 2012 of at least $41 million… In the worst-case scenario presented to the council… revenue would fall by $44.7 million and expenditures would be $51.3 million more than in fiscal 2011, producing a $96 million shortfall.”
Real Estate Watch:
January 21 – Bloomberg (Hugh Son): “Bank of America Corp., the largest U.S. bank by assets, reported a $1.24 billion fourth-quarter loss as costs mounted for refunds, writedowns and litigation tied to faulty mortgages.”
Central Bank Watch:
January 19 – Bloomberg (James G. Neuger): “Axel Weber’s candidacy for the European Central Bank presidency got a boost after two smaller countries laid claim to an ECB Executive Board post, saving the top job for one of the European Union’s powers. Belgium and Slovakia nominated candidates for an ECB seat becoming vacant in May, clearing an obstacle to a bid by the German banker for the top job when Jean-Claude Trichet’s term ends in October.”
January 19 – Bloomberg (Scott Hamilton and Jennifer Ryan): “U.K. lawmakers who scrutinize Bank of England officials including Governor Mervyn King said they’re concerned about accelerating price gains and want reassurance the central bank isn’t losing control of inflation. ‘This is a big test for them now and they need to weather this to ensure that credibility is maintained,’ John Thurso, a Liberal Democrat member of the British Parliament’s Treasury Committee, said… ‘I’m looking for reassurance’ that ‘we’re not just quietly abandoning the inflation target.’”
GSE Watch:
January 21 – Bloomberg (Clea Benson): “Fannie Mae and Freddie Mac’s combined inventory of foreclosed residential property has quadrupled in just three years and now stands at a record $24 billion. The number of properties on their rolls -- now at nearly 242,000 -- has increased fivefold. That’s roughly a third of the total U.S. portfolio of repossessed homes. And it’s growing because the two mortgage companies operating under U.S. conservatorship aren’t finding buyers faster than new foreclosures come in.”
Recalling January 2008:
The first few weeks of 2011 have me recalling early-2008. It’s as if someone reached over, flicked a switch and changed market dynamics. Abruptly, last year’s outperformers have come under heavy selling pressure, while the underperformers have in many cases caught strong bids. Things are unsettled and there are divergences. And I’m not just talking U.S. equities.
Peripheral European debt markets have enjoyed a dramatic reversal of fortune. Greek Credit default prices (CDS) are down a notable 173 bps so far this year (down 210 bps in the past 9 sessions). Portugal’s 10-year CDS price was down 116 bps in nine sessions and 64 bps y-t-d. Spanish CDS has declined 94 bps in 9 sessions (down 83bps y-t-d). Peripheral bond spreads (to German bunds) have collapsed. Bond spreads have declined 150bps in Greece, 95bps in Portugal and 49 bps in Spain – in only three weeks!
The dollar index jumped 2.5% the first week of the year, sank 2.3% the second week and declined a further 1.3% this past week. Reminiscent of currency market volatility back in January 2008, the euro has gained 1.8% y-t-d against the dollar, this despite a 3.5% decline the first week of the year. Last year’s strongest currencies have lagged so far in 2011. The “safe haven” Japanese yen and Swiss franc have declined 1.8% and 2.4%, respectively. The “commodities currencies,” also strong 2010 performers, have stumbled out of the blocks. The Australian dollar has declined 3.3% and the New Zealand dollar 2.9%.
After a stellar 2010, the precious metals stocks have suffered thus far in 2011. Silver has been hit for 11.30% and gold is down 5.5%. Many of the metals stocks have been hit harder. The HUI “Gold Bugs” index is down 12.0% y-t-d. And defying those that had believed that year-end anomalies had created exceptional buying opportunities, municipal bond prices have been slammed further to begin the year.
Equities markets have seen significant volatility and sector divergences. After a big 2010, the broader U.S. stock market is lagging. The small cap Russell 2000 has declined 1.3%, while the S&P400 Mid-Cap index is up only 0.8%. Some of last year’s laggards have sprung to life. The S&P Homebuilding index has gained 6.5%. The NYSE Financials have outperformed, gaining 3.8%. The Semiconductors are up 4.8% y-t-d.
Selling pressure in the stock market has certainly not been as heavy as that experienced in January 2008. Yet the past few weeks have been reminiscent of how volatility and rather abrupt changes in market underpinnings caught market players – especially the leveraged speculating community – flat footed.
Players began 2008 out of synch, with trading conditions across various asset classes turning challenging - and progressively frustrating. Almost overnight, uncertainty seemed to take root throughout equities, fixed-income, currency and commodities markets. Breathtaking moves and abrupt market reversals began to subtly take their toll. Things that had worked quit working. An increasingly uncomfortable crowd of speculators saw their various long exposures lag and their shorts outperform.
And it wasn’t all that long before losses began to mount and defensiveness became the order of the day – with inflated markets hanging in the balance. De-risking and de-leveraging then fueled atypically high correlations amongst various markets, causing considerable angst for the leveraged players and others dependent upon "quant" models. The “wrecking ball” of high volatility and highly-synchronized global risk markets began working against systemic stability. This dynamic fed - and was being fed by - the concurrent rapid slowing of mortgage Credit. Instability took on a life of its own, as markets dependent upon abundant liquidity and speculation began to suffer withdrawals.
There have been various recent reports suggesting that hedge fund assets and leverage have returned to near pre-crisis levels. Record industry assets seem reasonable to me; near record leverage does not. A major increase in speculative leverage is not apparent from ongoing stagnation in Wall Street balance sheets, bank Credit, and reported “repo” positions. There is, at the same time, the huge unknown of “carry trade” leverage embedded throughout global currency and fixed-income markets. And while I doubt the leveraged players are today the marginal source of marketplace liquidity to the extent they were in 2008, they are surely a major force to be reckoned with.
I’ll assume that many leveraged players came into the year positioned short the euro, short peripheral Europe CDS, short European financials, and long precious metals, mining and energy stocks. In global equities, those short Spanish (IBEX 35 up 9.8% y-t-d) and Italian (FTSE MIB up 9.5% y-t-d) equities have suffered losses. Those caught short some of the major European banks have been badly stung. There are also some losses for those long U.S. small caps and American retailers and/or short banks and homebuilders.
With parallels to 2008, the success or failure of the leveraged players takes on additional prominence now that there are cracks in the global government finance Bubble. On the margin, global yields continue to have an upward bias. Our ten-year Treasury yield is up 11 bps so far in January, while the long-bond has seen yields jump 23 bps to a near nine-month high 4.58%. Few sectors, however, are showing the effects of waning marginal liquidity than U.S. municipal finance.
The Bloomberg 20-year municipal bond yield composite index has jumped 33 bps in three weeks to a near 2-year high 4.72%. Muni yields are now up 150 bps in about three months. Muni funds saw $3.9bn of outflows this past week (from Lipper), with over $20bn having exited over the last ten weeks. The heated debate regarding the number of prospective defaults misses the point: the important – and vulnerable – U.S. municipal finance sector has suffered a decisive reversal of flows and liquidity dynamics. Whether it turns out to be hundreds of defaults or merely a few, the reality is that market-imposed “austerity” will now provide headwinds against economic growth. This dynamic also creates heighted uncertainty and potential financial instability.
I have argued that the Fed’s “activist” policymaking from the second-half of 2007 actually exacerbated systemic fragilities and contributed directly to the severity of the 2008 crisis. The overabundance of liquidity, coupled with the perception that policymaking would restrain the unfolding debt crisis, proved destabilizing and, inevitably, devastating. They fostered intense speculative excess, inflated market prices, unsustainable financial flows, and Bubble Dynamics. Myriad booms were fun while they lasted, although the heavy costs included heightened uncertainty and fragilities. Last year’s discussion and then implementation of “QE2” has had similar effects.
Marketplace liquidity can be steadfast or fickle. Market confidence varies between incredibly resilient to stunningly fleeting. To be sure, crises of confidence are difficult to predict. But one can monitor and gauge the forces that create susceptibility to abrupt shifts in market sentiment and altered trading conditions. Policymaker responses to structural problems (i.e. zero rates, massive monetization, federal stimulus and “Build America Bonds”) created distortions in risk perceptions and the flow of finance to the muni sector, while in the process delaying needed structural reform. The muni debt issue was allowed to fester; financial market distortions worsened.
For now, QE2 reliably generates additional liquidity for the liquidity-dependant markets. Somewhat ironically – yet altogether Bubble-like - rising bond yields and unfolding problems in municipal finance have bolstered flows into equities. And on the back of ongoing federal spending excess, economic prospects look ok and earnings appear swell. Yet recent developments do beckon for heightened diligence when it comes to monitoring for fissures developing below the surface of our fragile financial system. At least from my perspective, one can now discern unsettling parallels to early 2008.
One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 15 bps. Two-year government yields were 3 bps higher to 0.585%. Five-year T-note yields ended the week 9 bps higher to 1.98%. Ten-year yields rose 8 bps to 3.41%. Long bond yields ended the week up 3 bps to 4.56%. Benchmark Fannie MBS yields were 8 bps higher to 4.17%. The spread between 10-year Treasury yields and benchmark MBS yields was little changed at 76 bps. Agency 10-yr debt spreads were about a basis point wider to 11 bps. The implied yield on December 2011 eurodollar futures rose 2 bps to 0.745%. The 10-year dollar swap spread was little changed at 7.0 bps. The 30-year swap spread increased 2 to negative 38 bps. Corporate bond spreads were relatively quiet. An index of investment grade bond risk was little changed at 83 bps. An index of junk bond risk rose 2 to 414 bps.
Investment grade issuers included Morgan Stanley $5.25bn, Goldman Sachs $2.5bn, HCP $2.45bn, Oneok Partners $1.3bn, Fifth Third Bank $1.0bn, Private Export Funding $500 million, Progress Energy $500 million, and South Carolina E&G $250 million.
Junk bond funds saw inflows of $739 million (from Lipper). Issuers included Vanguard Health $1.1bn, Inergy $750 million, Crown America $700 million, American Airlines $650 million, Floria East $475 million, Targa Resources $325 million, Phibro Animal Health $300 million, CCO Holdings $300 million, Speedway Motorsports $150 million, Empire Today $150 million, and Constellation Enterprise $130 million.
Convertible debt issuers included Areas Capital $500 million and Apollo Corp $175 million.
International dollar debt issuers included Petrobras $6.0bn, Ontario $3.5bn, Petroleos de Venezuela $3.15bn, Lloyds Bank $2.0bn, Total Capital Canada $2.0bn, CIBC $2.0bn, Bank of Montreal $1.5bn, Buenos Aire $750 million, Hyundai $700 million, Banco Safra $500 million, Nigeria $500 million, Halyk Savings Bank $500 million, West China Cement $400 million, Bacardi $300 million, Virgolino $300 million, Banco Daycoval $300 million, BR Properties $285 million, and Energisa $200 million.
U.K. 10-year gilt yields rose 9 bps this week to 3.69% (up 30bps y-t-d), and German bund yields jumped 15 bps to 3.17% (up 21bps). Ten-year Portuguese yields fell 11 bps this week to 6.70%. Spanish yields sank 16 bps to 5.17%, while Irish yields jumped 28 bps to 8.61%. Greek 10-year bond yields increased 7 bps to 11.18%. The German DAX equities index slipped 0.2% (up 2.1% y-t-d). Japanese 10-year "JGB" yields added one basis point to 1.21% (up 9bps y-t-d). Japan's Nikkei fell 2.1% (up 0.4%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index dropped 2.5% (down 0.2%), while Mexico's Bolsa declined 1.8% (down 3.2%). South Korea's Kospi index declined 1.8% (up 0.9%). India’s equities index rallied 0.8% (down 7.3%). China’s Shanghai Exchange dropped 2.7% (down 3.3%). Brazil’s benchmark dollar bond yields jumped 14 bps to 4.47%, while Mexico's benchmark bond yields fell 15 bps to 4.39%.
Freddie Mac 30-year fixed mortgage rates increased 3 bps last week to 4.74% (down 25bps y-o-y). Fifteen-year fixed rates slipped 3 bps to 4.05% (down 35bps y-o-y). One-year ARMs added 2 bps to 3.25% (down 107bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 11 bps to 5.50% (down 59bps y-o-y).
Federal Reserve Credit declined $16.1bn to $2.416 TN (11-wk gain of $136bn). Fed Credit was up $185bn from a year ago (8.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/19) fell $7.3bn to $3.343 TN. "Custody holdings" were up $397bn from a year ago, or 13.5%.
M2 (narrow) "money" supply increased $6.9bn to $8.815 TN. Over the past year, "narrow money" grew 4.0%. For the week, Currency increased $1.8bn. Demand and Checkable Deposits fell $11.2bn, while Savings Deposits jumped $22.6bn. Small Denominated Deposits slipped $3.8bn. Retail Money Funds declined $2.4bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $35.1bn to $2.761 TN. Over the past year, money fund assets have sank $489bn, or 14.9%.
Total Commercial Paper outstanding dropped $19.9bn to $916 billion, the lowest level going all the way back to 1998. CP was down $176bn y-o-y, or 16.1%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.424 TN y-o-y, or 18.2%, to a record $9.244 TN.
Global Credit Market Watch:
January 21 – Bloomberg (John Detrixhe): “Borrowers from China to Brazil to Nigeria are boosting dollar bond sales, taking advantage of investor demand for assets from the fastest-growing economies amid growing concern that U.S. junk debt is overpriced. Emerging-market borrowers are poised to raise at least $13.9 billion in the U.S. corporate bond market this month…”
January 21 – Bloomberg (Emre Peker): “Bain Capital LLC is leading private- equity firms in capitalizing on investor demand for leveraged loans in the U.S. to extract payouts from companies they own. Styron, taken private by Bain for $1.63 billion in June, is raising a $1.3 billion term loan to refinance debt and pay back a portion of the Boston-based firm’s investment in the maker of polystyrene and latex. TowerCo LLC is marketing $390 million of loans with $150 million slated for a payout to its backers…”
Global Bubble Watch:
January 21 – Bloomberg (Bryan Keogh): “Credit-default swaps on Europe’s deficit-ridden nations are rallying the most on record on speculation policy makers will let governments buy back their bonds at a discount to avoid restructuring their debts. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 countries fell 12.75 bps this week to 180.25, following a 26.5 bps drop in the previous period…”
January 21 – Bloomberg: “China’s benchmark money-market rate surged to the highest since October 2007 as lenders ran short of cash after the central bank’s four increases in their reserve requirements in the past three months. The seven-day repurchase rate, which measures money availability between banks, surged 4.7 percentage points in the past five days…”
Muni Watch:
January 21 – Dow Jones (Kelly Nolan): “Investors pulled $4 billion out of municipal bond funds in the week ended Wednesday… Lipper FMI said… The outflow comes on the heels of a $1.5 billion pullout in the week ended Jan. 12. It marks the 10th straight week of outflows, which total roughly $20.6 billion.”
January 19 – Bloomberg (Alison Vekshin and Steven Church): “Vallejo, California, the biggest U.S. municipality in bankruptcy, filed a reorganization plan intended to pay creditors and end court control of its finances. The city would pay general unsecured creditors about 5% to 20% of their claims… The creditors, who include retirees and former employees, will be paid $6 million over two years…”
Currency Watch:
The U.S. dollar index declined 1.3% to 78.124 (down 1.1%), although individual currency performance varied widely. On the upside for the week, the euro increased 1.7%, the Danish krone 1.7%, the Swedish krona 1.1%, the British pound 0.8%, the Brazilian real 0.4%, the Norwegian krone 0.4%, the Japanese yen 0.4%, the Singapore dollar 0.3% and the Australian dollar 0.1%. On the downside, the South African rand declined 1.7%, the New Zealand dollar 0.9%, the South Korean won 0.9%, the Taiwanese dollar 0.3%, the Canadian dollar 0.2%, and the Mexican peso 0.1%.
Commodities and Food Watch:
January 19 – Bloomberg (Alan Bjerga and Tony Dreibus): “The same record food prices causing riots in Algeria and export bans in India are allowing President Barack Obama to combine the biggest-ever U.S. farm exports with the tamest inflation since the 1960s. Global food costs jumped 25% last year to an all- time high in December, according to the United Nations. Countries probably spent at least $1 trillion on imports, with the poorest paying as much as 20% more than in 2009, the UN says. In the U.S., the largest exporter, retail food rose 1.5% last year and will gain as little as 2% in 2011… Governments from Beijing to Belgrade are boosting imports, limiting sales or releasing stockpiles to curb food inflation.”
January 21 – Bloomberg (Maria Kolesnikova): “Cotton and wheat are leading agriculture product price gains this year and outpacing metals as frost in China, floods in Australia, rains in India and dry weather in Brazil hamper crop prospects… Cotton more than doubled and wheat futures climbed 47% in 2010 while silver jumped 83% and gold rose 30%.”
January 21 – Bloomberg (Maria Kolesnikova): “Tin rose to a record in London on speculation that a shortfall of the metal used to make solders may worsen.”
The CRB index added 0.3% (up 0.4% y-t-d). The Goldman Sachs Commodities Index declined 1.3% (up 0.5%). Spot Gold fell 1.4% to $1,342 (down 5.5%). Silver dropped 3.1% to $27.45 (down 11.3%). February Crude fell $3.40 to $89.17 (down 2.4%). February Gasoline declined 1.3% (up 1.3%), while February Natural Gas jumped 5.2% (up 7.0%). March Copper declined 2.3% (down 3.1%). March Wheat jumped 6.6% (up 3.8%), and March Corn added 1.3% (up 4.5%).
China Bubble Watch:
January 21 – Bloomberg: “China’s 10.3% economic growth last year drove the biggest increase in the nation’s rural incomes in a quarter century, bolstering efforts to spur consumption in the world’s most populous nation. In the countryside, per capita net income rose 10.9% to 5,919 yuan ($898)… The gain was faster than for urban incomes for the first time since 1997. The report also showed an acceleration in retail sales and industrial production at the end of last year.”
January 19 – Bloomberg: “Yolkie Sun’s addiction to Facebook Inc. cost China Mobile Communications Corp. a longtime customer. Sun… switched to China United Network Communications Group… to access the social networking site. Her smartphone accesses the website through a virtual private network that can take three times longer to run on China Mobile… The… company plans to more than triple its Wi-Fi hotspots this year… China Mobile may increase its number of hotspots to 1.1 million by year’s end from the 300,000 it had in June… Its capital expenditures of 111 billion yuan ($16.8 billion) this year may be 13% above previous projections, he said.”
January 21 – Bloomberg (Kelvin Wong): “Sarah Cheung was bracing for a rent increase on her apartment in Hong Kong’s Happy Valley district ahead of the expiration of her lease this month. She still wasn’t prepared when her landlord demanded 43% more. ‘We’ve looked around and this is still one of the better deals, even after the raise’ to HK$40,000 ($4,890) a month… Rents of Hong Kong luxury homes… are growing faster than in London, fuelling lease increases in the broader market, fanning inflation and hampering government efforts to cool housing prices. Hong Kong luxury rents may jump as much as 15% this year after a 13% gain in 2010…”
Japan Watch:
January 21 – Bloomberg (Toru Fujioka): “Japanese Prime Minister Naoto Kan is projected to break his fiscal promise of capping bond sales as he struggles to secure revenue, boosting the case for higher taxes to contain the world’s largest public-debt burden. Japan’s new bond sales will expand to 46.7 trillion yen ($563bn) in the year starting April 2012, surpassing Kan’s target of 44.3 trillion yen…”
January 20 – Bloomberg (Takahiko Hyuga): “Japanese housewives’ ‘secret savings’ fell 18% to the lowest in three years in 2010 as slumping family incomes and rising prices for food and energy forced them to tap reserves, a survey shows. The value of so-called hesokuri, the cash and investments that housewives stash without telling their husbands, fell to an average 3.1 million yen ($37,700) in 2010…”
India Watch:
January 20 – Bloomberg (Kartikay Mehrotra): “Indian power developers are seeking financing from China to fuel expansion as rupee interest rates soar and local banks say they can’t keep up with demand to fund about $45 billion of equipment orders from China needed by 2017… Utilities are turning to China as they buy boilers and turbines to help meet India’s 100,000 megawatt capacity-addition target in the five years ending March 2017.”
Asia Bubble Watch:
January 19 – Bloomberg (Eunkyung Seo): “South Korea must continue efforts to reduce threats from cross-border capital flows to shield the nation’s economy from external shocks, Bank of Korea Governor Kim Choong Soo said…”
January 21 – Bloomberg (Suttinee Yuvejwattana): “Thailand’s economy expanded at the top end of the central bank’s forecast range last year… Gross domestic product probably increased 8%...”
Latin America Watch:
January 20 – Bloomberg (Iuri Dantas and Gabrielle Coppola): “The heaviest rainfall in Brazil since 1967, already a disaster that has killed 741 people, is adding to the fastest inflation in two years. Storms that dropped at least 17.6 inches of rain this month in the hardest-hit areas triggered mudslides that washed away highways and damaged crops, igniting concern food prices may rise as much as 17% in the first quarter, according to Fabio Romao, an economist with LCA Consultoria in Sao Paulo. ‘The shock in food prices caused by rains is hitting an already heated economy,’ Ures Folchini, the head of fixed income investments at Banco WestLB do Brasil SA in Sao Paulo, said…”
January 20 – Bloomberg (Gabrielle Coppola): “Petroleo Brasileiro SA plans to raise $6 billion on international markets in Brazil’s largest corporate bond offering.”
Unbalanced Global Economy Watch:
January 21 – Bloomberg (Greg Quinn): “Canadian retail sales rose faster than economists predicted in November, with widespread advances led by gains at new car dealers. Sales advanced 1.3% to a seasonally adjusted C$37.3 billion ($37.4bn), the sixth gain in a row…”
January 18 – Bloomberg (Jennifer Ryan): “U.K. inflation accelerated more than economists forecast to an eight-month high in December as fuel and food prices rose, adding to pressure on the Bank of England to raise the key interest rate from its record low. Consumer prices rose 3.7% from a year earlier after a 3.3 percent increase in November…”
January 21 – Bloomberg (Jana Randow): “German business confidence unexpectedly rose to a record high in January as booming exports to Asia and stronger household spending bolstered growth in Europe’s largest economy.”
January 19 – Financial Times (Gerrit Wiesmann): “Germany’s public sector deficit looks set fall below the European Union’s 3% limit in 2011 – one year ahead of schedule – according to data that the government hopes will send a strong signal that the eurozone is getting to grips with its debt problem. Rainer Brüderle, the Germany’s economy minister, said another year of strong growth and declining joblessness would ‘probably’ narrow the gap between public spending and tax receipts to 2.5% of gross domestic product, from 3.5% in 2010. Since the global crisis saw governments pile up debt to fund bank bail-outs and stimulus spending, Berlin has been intent on leading the eurozone out of its borrowing binge as soon as possible.”
U.S. Bubble Economy Watch:
January 18 – Bloomberg (Shobhana Chandra and Anthony Feld): “Rich shoppers are driving an increase in consumer spending, bolstering a recovery that masks reluctance among less affluent Americans to join in. Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy. At the other end of the economic spectrum, Wal-Mart… reports ‘everyday Americans’ are living paycheck to paycheck as they await an improvement in job prospects. ‘The heavy lifting is being done by the upper-income households,’ said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase… ‘They’re the ones benefiting the most from the stock market rally, and they’re spending.’”
January 19 – Bloomberg (David Mildenberg): “Texas lawmakers plan to unveil a $79.3 billion two-year general-fund budget that would cut spending by 10% from the current fiscal biennium and not raise taxes… The draft budget would slash education spending by 10%, to $44.3 billion, and health and human services by 7.7%...”
January 20 – Bond Buyer (Jim Watts): “Dallas is facing a revenue gap in fiscal 2012 of at least $41 million… In the worst-case scenario presented to the council… revenue would fall by $44.7 million and expenditures would be $51.3 million more than in fiscal 2011, producing a $96 million shortfall.”
Real Estate Watch:
January 21 – Bloomberg (Hugh Son): “Bank of America Corp., the largest U.S. bank by assets, reported a $1.24 billion fourth-quarter loss as costs mounted for refunds, writedowns and litigation tied to faulty mortgages.”
Central Bank Watch:
January 19 – Bloomberg (James G. Neuger): “Axel Weber’s candidacy for the European Central Bank presidency got a boost after two smaller countries laid claim to an ECB Executive Board post, saving the top job for one of the European Union’s powers. Belgium and Slovakia nominated candidates for an ECB seat becoming vacant in May, clearing an obstacle to a bid by the German banker for the top job when Jean-Claude Trichet’s term ends in October.”
January 19 – Bloomberg (Scott Hamilton and Jennifer Ryan): “U.K. lawmakers who scrutinize Bank of England officials including Governor Mervyn King said they’re concerned about accelerating price gains and want reassurance the central bank isn’t losing control of inflation. ‘This is a big test for them now and they need to weather this to ensure that credibility is maintained,’ John Thurso, a Liberal Democrat member of the British Parliament’s Treasury Committee, said… ‘I’m looking for reassurance’ that ‘we’re not just quietly abandoning the inflation target.’”
GSE Watch:
January 21 – Bloomberg (Clea Benson): “Fannie Mae and Freddie Mac’s combined inventory of foreclosed residential property has quadrupled in just three years and now stands at a record $24 billion. The number of properties on their rolls -- now at nearly 242,000 -- has increased fivefold. That’s roughly a third of the total U.S. portfolio of repossessed homes. And it’s growing because the two mortgage companies operating under U.S. conservatorship aren’t finding buyers faster than new foreclosures come in.”
Recalling January 2008:
The first few weeks of 2011 have me recalling early-2008. It’s as if someone reached over, flicked a switch and changed market dynamics. Abruptly, last year’s outperformers have come under heavy selling pressure, while the underperformers have in many cases caught strong bids. Things are unsettled and there are divergences. And I’m not just talking U.S. equities.
Peripheral European debt markets have enjoyed a dramatic reversal of fortune. Greek Credit default prices (CDS) are down a notable 173 bps so far this year (down 210 bps in the past 9 sessions). Portugal’s 10-year CDS price was down 116 bps in nine sessions and 64 bps y-t-d. Spanish CDS has declined 94 bps in 9 sessions (down 83bps y-t-d). Peripheral bond spreads (to German bunds) have collapsed. Bond spreads have declined 150bps in Greece, 95bps in Portugal and 49 bps in Spain – in only three weeks!
The dollar index jumped 2.5% the first week of the year, sank 2.3% the second week and declined a further 1.3% this past week. Reminiscent of currency market volatility back in January 2008, the euro has gained 1.8% y-t-d against the dollar, this despite a 3.5% decline the first week of the year. Last year’s strongest currencies have lagged so far in 2011. The “safe haven” Japanese yen and Swiss franc have declined 1.8% and 2.4%, respectively. The “commodities currencies,” also strong 2010 performers, have stumbled out of the blocks. The Australian dollar has declined 3.3% and the New Zealand dollar 2.9%.
After a stellar 2010, the precious metals stocks have suffered thus far in 2011. Silver has been hit for 11.30% and gold is down 5.5%. Many of the metals stocks have been hit harder. The HUI “Gold Bugs” index is down 12.0% y-t-d. And defying those that had believed that year-end anomalies had created exceptional buying opportunities, municipal bond prices have been slammed further to begin the year.
Equities markets have seen significant volatility and sector divergences. After a big 2010, the broader U.S. stock market is lagging. The small cap Russell 2000 has declined 1.3%, while the S&P400 Mid-Cap index is up only 0.8%. Some of last year’s laggards have sprung to life. The S&P Homebuilding index has gained 6.5%. The NYSE Financials have outperformed, gaining 3.8%. The Semiconductors are up 4.8% y-t-d.
Selling pressure in the stock market has certainly not been as heavy as that experienced in January 2008. Yet the past few weeks have been reminiscent of how volatility and rather abrupt changes in market underpinnings caught market players – especially the leveraged speculating community – flat footed.
Players began 2008 out of synch, with trading conditions across various asset classes turning challenging - and progressively frustrating. Almost overnight, uncertainty seemed to take root throughout equities, fixed-income, currency and commodities markets. Breathtaking moves and abrupt market reversals began to subtly take their toll. Things that had worked quit working. An increasingly uncomfortable crowd of speculators saw their various long exposures lag and their shorts outperform.
And it wasn’t all that long before losses began to mount and defensiveness became the order of the day – with inflated markets hanging in the balance. De-risking and de-leveraging then fueled atypically high correlations amongst various markets, causing considerable angst for the leveraged players and others dependent upon "quant" models. The “wrecking ball” of high volatility and highly-synchronized global risk markets began working against systemic stability. This dynamic fed - and was being fed by - the concurrent rapid slowing of mortgage Credit. Instability took on a life of its own, as markets dependent upon abundant liquidity and speculation began to suffer withdrawals.
There have been various recent reports suggesting that hedge fund assets and leverage have returned to near pre-crisis levels. Record industry assets seem reasonable to me; near record leverage does not. A major increase in speculative leverage is not apparent from ongoing stagnation in Wall Street balance sheets, bank Credit, and reported “repo” positions. There is, at the same time, the huge unknown of “carry trade” leverage embedded throughout global currency and fixed-income markets. And while I doubt the leveraged players are today the marginal source of marketplace liquidity to the extent they were in 2008, they are surely a major force to be reckoned with.
I’ll assume that many leveraged players came into the year positioned short the euro, short peripheral Europe CDS, short European financials, and long precious metals, mining and energy stocks. In global equities, those short Spanish (IBEX 35 up 9.8% y-t-d) and Italian (FTSE MIB up 9.5% y-t-d) equities have suffered losses. Those caught short some of the major European banks have been badly stung. There are also some losses for those long U.S. small caps and American retailers and/or short banks and homebuilders.
With parallels to 2008, the success or failure of the leveraged players takes on additional prominence now that there are cracks in the global government finance Bubble. On the margin, global yields continue to have an upward bias. Our ten-year Treasury yield is up 11 bps so far in January, while the long-bond has seen yields jump 23 bps to a near nine-month high 4.58%. Few sectors, however, are showing the effects of waning marginal liquidity than U.S. municipal finance.
The Bloomberg 20-year municipal bond yield composite index has jumped 33 bps in three weeks to a near 2-year high 4.72%. Muni yields are now up 150 bps in about three months. Muni funds saw $3.9bn of outflows this past week (from Lipper), with over $20bn having exited over the last ten weeks. The heated debate regarding the number of prospective defaults misses the point: the important – and vulnerable – U.S. municipal finance sector has suffered a decisive reversal of flows and liquidity dynamics. Whether it turns out to be hundreds of defaults or merely a few, the reality is that market-imposed “austerity” will now provide headwinds against economic growth. This dynamic also creates heighted uncertainty and potential financial instability.
I have argued that the Fed’s “activist” policymaking from the second-half of 2007 actually exacerbated systemic fragilities and contributed directly to the severity of the 2008 crisis. The overabundance of liquidity, coupled with the perception that policymaking would restrain the unfolding debt crisis, proved destabilizing and, inevitably, devastating. They fostered intense speculative excess, inflated market prices, unsustainable financial flows, and Bubble Dynamics. Myriad booms were fun while they lasted, although the heavy costs included heightened uncertainty and fragilities. Last year’s discussion and then implementation of “QE2” has had similar effects.
Marketplace liquidity can be steadfast or fickle. Market confidence varies between incredibly resilient to stunningly fleeting. To be sure, crises of confidence are difficult to predict. But one can monitor and gauge the forces that create susceptibility to abrupt shifts in market sentiment and altered trading conditions. Policymaker responses to structural problems (i.e. zero rates, massive monetization, federal stimulus and “Build America Bonds”) created distortions in risk perceptions and the flow of finance to the muni sector, while in the process delaying needed structural reform. The muni debt issue was allowed to fester; financial market distortions worsened.
For now, QE2 reliably generates additional liquidity for the liquidity-dependant markets. Somewhat ironically – yet altogether Bubble-like - rising bond yields and unfolding problems in municipal finance have bolstered flows into equities. And on the back of ongoing federal spending excess, economic prospects look ok and earnings appear swell. Yet recent developments do beckon for heightened diligence when it comes to monitoring for fissures developing below the surface of our fragile financial system. At least from my perspective, one can now discern unsettling parallels to early 2008.
01/14/2011 Issues 2011 *
For the week, the S&P500 advanced 1.7% (up 2.8% y-t-d), and the Dow gained 1.0% (up 1.8%). The S&P 400 Mid-Caps jumped 2.3% to a new all-time record high (up 2.6%), and the small cap Russell 2000 rose 2.5% (up 3.1%). The Banks surged 3.4% (up 4.8%), and the Broker/Dealers jumped 2.6% (up 4.7%). The Morgan Stanley Cyclicals added 0.8% (up 3.3%), and the Transports gained 1.0% (up 2.4%). The Morgan Stanley Consumer index slipped 0.2% (up 0.2%), and the Utilities added 0.4% (up 1.3%). The Nasdaq100 rose 2.1% (up 4.8%), and the Morgan Stanley High Tech index gained 2.9% (up 5.4%). The Semiconductors surged 6.1% (up 9.7%). The InteractiveWeek Internet index increased 1.7% (up 4.9%). The Biotechs gained 1.2% (up 1.9%). Although bullion was down only $8, the HUI gold index dropped 3.0% (down 10.0%).
One-month Treasury bill rates ended the week at 13 bps and three-month bills closed at 15 bps. Two-year government yields were one basis point lower at 0.54%. Five-year T-note yields ended the week down 4 bps to 1.87%. Ten-year yields were little changed at 3.33%. Long bond yields ended the week 4 bps higher to 4.53%. Benchmark Fannie MBS yields were down one basis point to 4.09%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed one to 76 bps. Agency 10-yr debt spreads were little changed at 9.5 bps. The implied yield on December 2011 eurodollar futures fell 7.5 bps to 0.715%. The 10-year dollar swap spread declined somewhat to 7.2 bps. The 30-year swap spread declined one to negative 30 bps. Corporate bond spreads were narrower. An index of investment grade bond risk declined 5 to 83 bps. An index of junk bond risk sank 20 to 412 bps.
The debt selling machine was at full throttle. Investment grade issuers included JPMorgan Chase $3.25bn, SLM Corp $2.0bn, Commonwealth Edison $600 million, O'Reilly Automotive $500 million, Texas Gas Transmission $325 million, Chevron Phillips $300 million, Georgia Power $300 million, Public Service Oklahoma $250 million, and Senior Housing Realty Trust $250 million.
Junk bond funds saw inflows of $323 million (from EPFR). Issuers included Cequel Communications $1.82bn, Commscope $1.5bn, Citicenter Holdings $1.5bn, Petrohawk Energy $1.22bn, NRG Energy $1.2bn, Grifols $1.1bn, Calpine $1.2bn, Univision Communications $815 million, Exide Technologies $675 million, RSC Equipment Rental $650 million, Polymer Group $560 million, Elm Road Generating Station $420 million, Verso Paper $360 million, Laredo Petroleum $350 million, Level 3 Communications $305 million, Valassis Communications $260 million, Elizabeth Arden $250 million, Dycom $190 million, AS Americas $190 million, Cogent Communications $175 million, Nuveen Investment $150 million, and Columbus Mckinnon $150 million.
Convertible debt issuers included Dendreon $540 million.
International dollar debt issuers included Lloyds Bank $4.75bn, HSBC $4.0bn, Nordea Bank $2.75bn, BNP Paribas $2.0bn, Japan Finance Corp $1.5bn, Nomura $1.25bn, Credit Suisse $2.0bn, Credit Agricole $650 million, Commonwealth Bank of Australia $1.0bn, Cencosud $750 million, Banco Santander $500 million, Banco Cruzeiro $1.05bn, Inversiones $500 million, Uncle Acquisition $400 million, Navios Maritime $350 million, BR Malls $230 million, Texhong Textile $200 million and State Bank India $100 million.
U.K. 10-year gilt yields jumped 10 bps this week to 3.61%, and German bund yields rose 16 bps to 3.03%. Ten-year Portuguese yields dropped 27 bps to 6.81%. Spanish yields fell 17 bps to 5.33%, and Irish yields sank 72 bps to 8.33%. Greek 10-year bond yields collapsed 150 bps to 11.11%. The German DAX equities index gained 1.8% (up 2.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 1.195%. Japan's Nikkei slipped 0.4% (up 2.6%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index gained 1.3% (up 2.4%), while Mexico's Bolsa dropped 1.6% (down 1.4%). South Korea's Kospi index added 1.1% to a record high (up 2.8%). India’s equities index sank 4.2% (down 8.0%). China’s Shanghai Exchange declined 1.7% (down 0.6%). Brazil’s benchmark dollar bond yields declined 2 bps to 4.33%, and Mexico's benchmark bond yields declined 2 bps to 4.34%.
Freddie Mac 30-year fixed mortgage rates declined 6 bps last week to a 5-wk low of 4.71% (down 35bps y-o-y). Fifteen-year fixed rates fell 5 bps to 4.08% (down 37bps y-o-y). One-year ARMs dipped one basis point to 3.23% (down 116bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 6 bps to 5.61% (down 41bps y-o-y).
Federal Reserve Credit jumped $21.6bn to a record $2.432 TN (10-wk gain of $151.7bn). Fed Credit was up $207bn from a year ago (9.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/12) rose $6.2bn to $3.350 TN. "Custody holdings" were up $400bn from a year ago, or 13.5%.
M2 (narrow) "money" supply dropped $23.1bn to $8.826 TN. Over the past year, "narrow money" grew 4.0%. For the week, Currency increased $1.3bn. Demand and Checkable Deposits increased $4.1bn, while Savings Deposits dropped $24.8bn. Small Denominated Deposits declined $4.5bn. Retail Money Funds added $1.1bn.
Total Money Market Fund assets (from Invest Co Inst) slipped $2.0bn to $2.796 TN. Over the past year, money fund assets have dropped $509bn, or 15.4%.
Total Commercial Paper outstanding dropped $29.7bn to $936 billion. CP was down $166bn y-o-y, or 15.1%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.60 TN y-o-y, or 21.0%, to a record $9.243 TN.
Global Credit Market Watch:
January 12 – Bloomberg (Tony Czuczka and Patrick Donahue): “Chancellor Angela Merkel indicated that Germany is ready to revise the terms of a 750 billion-euro ($973 billion) rescue fund for indebted states, saying Europe’s biggest economy will do whatever is necessary to protect the euro… ‘We support whatever is needed to support the euro, also with respect to the bailout package,’ Merkel told reporters… ‘We’re saying what we’ve always said since the Greek crisis: We will stand by the euro,’ Merkel said. ‘We will do whatever is necessary -- and everything else will be discussed step by step.’”
January 12 – Bloomberg (Joao Lima): “Portugal’s borrowing costs fell and demand rose at a sale of 10-year bonds after European Central Bank debt purchases helped push down yields in the last two days.”
January 13 – Bloomberg (Emre Peker and Lisa Abramowicz): “Leveraged-loan prices rose to the highest in more than three years, returning more than junk bonds as investors seek protection from a possible increase in interest rates.”
January 11 – Bloomberg (Dara Doyle): “Irish commercial real estate values have fallen by 60% since peaking in the third quarter of 2007, Jones Lang LaSalle Inc. said.”
Global Bubble Watch:
January 12 – Financial Times (Gregory Meyer, Javier Blas and Jack Farchy): “The world has moved a step closer to a food price shock after the US government surprised traders by cutting stock forecasts for key crops, sending corn and soyabean prices to their highest level in 30 months. The price jump comes after the UN’s Food and Agriculture Organisation warned last week that the world could see repetition of the 2008 food crisis if prices rose further. The trend is becoming a major concern in developing countries. While officials are drawing comfort from stable rice prices, key for feeding Asia, they warn that a sustained period of high prices, especially in grains such as wheat, would hit poorer countries. Food price hikes have already led to riots in Algeria and Mozambique. ‘Stocks of corn and soyabean are at incredibly tight levels ... and the markets are surging to incredibly strong prices,’ Chad Hart, agricultural economist at Iowa State University, said.”
January 13 – Bloomberg (Jana Randow and Jeff Black): “European Central Bank President Jean-Claude Trichet signaled he’s prepared to raise interest rates if needed to fight inflation even as leaders struggle to contain the region’s sovereign debt crisis. ‘We are permanently alert, we are never pre-committed not to move interest rates and our level of interest rates is designed to deliver price stability,’ Trichet said…”
January 10 – Bloomberg (Daniel Kruger): “Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004 as the world’s biggest bond firms bet that the economy will strengthen and demand for higher-yielding assets will increase. The 18 primary dealers that trade with the Federal Reserve reported that holdings of U.S. government debt tumbled to a net $2.34 billion on Dec. 29 from $81.3 billion on Nov. 24…”
January 10 – Bloomberg (Matt Walcoff and Lynn Thomasson): “Following the advice of equity analysts may be perilous for your profits. Companies in the Standard & Poor’s 500 Index that analysts loved the most rose 73% on average since the benchmark for U.S. equity started to recover in March 2009, while those with the fewest ‘buy’ recommendations gained 165%... Now, banks’ favorites include retailers and restaurant chains, the industry that did best in last year’s rally and that are more expensive than the S&P 500 compared with their estimated 2011 profits.”
Currency Watch:
January 12 – Bloomberg: “China said it would ‘welcome’ a positive statement from the U.S. on the stability of Chinese- held dollar assets during next week’s summit in Washington between President Hu Jintao and President Barack Obama. ‘If the U.S. makes a positive statement on this issue we surely will welcome that,’ Chinese Vice Foreign Minister Cui Tiankai said… ‘China follows very closely the economic health of the United States and vice versa.’”
January 9 – Financial Times (Jonathan Wheatley and Joe Leahy): “Brazil has warned that the world is on course for a full-blown ‘trade war’ as it stepped up its rhetoric against exchange rate manipulation. Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new measures to prevent further appreciation of its currency… and would raise the issue of exchange-rate manipulation at the World Trade Organisation and other global bodies. He said the US and China were among the worst offenders. ‘This is a currency war that is turning into a trade war,’ Mr Mantega said… His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe.”
The U.S. dollar index dropped 2.5% to 79.07 (up 0.1%). On the upside for the week, the Swedish krona increased 4.2%, the Danish krone 3.7%, the euro 3.7%, the Norwegian krone 2.6%, the British pound 2.1%, the Mexican peso 1.5%, the Taiwanese dollar 1.2%, the New Zealand dollar 0.8%, the Singapore dollar 0.5%, the Swiss franc 0.4%, the Japanese yen 0.3% and the Canadian dollar 0.3%. On the downside, the South African rand declined 1.9%, the Australian dollar 0.7%, and the Brazilian real 0.1%.
Commodities and Food Watch:
January 10 – Bloomberg: “China, the biggest soybean buyer, boosted imports by 29% to a record in 2010 as the domestic crushing industry expanded to supply higher consumption of livestock feed and cooking oil.”
January 10 – Bloomberg (Mike Lee and Jim Polson): “U.S. natural-gas companies are getting hit with the highest costs in four years as they shift more production to oil to escape low gas prices. EOG Resources Inc., Chesapeake Energy Corp. and SandRidge Energy Inc. each have announced $1 billion transactions in the past year to ramp up onshore production of higher-profit oil and other petroleum liquids as booming gas production deflated prices.”
January 12 – Bloomberg (Ben Sharples): “Coal used by steelmakers may jump to $330 a ton, compared with first-quarter contract levels of $225 and a spot price of $280, amid shortages caused by Australia's floods, Bank of America Merrill Lynch said.”
January 11 – Bloomberg (Aya Takada and Supunnabul Suwannakij): “Rubber extended its rally to a record after data showed China’s car sales jumped by a third last year, boosting expectations that demand for the commodity used in tires will keep expanding amid tight supply.”
The CRB index rallied 2.8% (up 0.1% y-t-d). Spot Gold declined 0.6% to $1,362 (down 4.2%). Silver fell 0.7% to $28.48 (down 7.9%). February Crude gained $3.64 to $91.67 (up 0.3%). February Gasoline jumped 3.3% (up 2.5%), and February Natural Gas gained 1.4% (up 1.8%). March Copper rallied 3.5% (down 0.3%). March Wheat slipped 0.1% (down 2.6%), while March Corn jumped 9.0% (up 3.1%).
China Bubble Watch:
January 14 – Bloomberg: “China told banks to set aside more deposits as reserves for the fourth time in two months, stepping up efforts to rein in liquidity after foreign-exchange reserves rose by a record and lending exceeded targets.”
January 12 – Reuters: “Chinese banks continued their lending frenzy in the beginning of the year, doling out 500 billion yuan ($75.6bn) in new loans in the first week of January alone… The overall lending figure would roughly equal the new loans extended during all of December. New lending in December reached 480.7 billion yuan, meaning China overshot the government's target of keeping bank loans to 7.5 trillion yuan in 2010. The surge in lending in the first week of 2011 continues a pattern seen in recent years of Chinese banks rushing out lending at the start of the year, after they built up a backlog of potential loans at the end of the previous year due to credit curbs and as they sought to extend credit ahead of any further official restrictions. New loans extended in the first quarter have accounted for an average of 33% of the full-year total over the past decade… Banks lent 7.95 trillion yuan ($1.2 trillion) in 2010… In the past, China used loan quotas to keep a handle on lending. This year, the central bank has pledged to refine that system with regular calibrations of reserve requirements and capital ratios targeted at individual lenders. Li Daokui, an academic adviser to the People's Bank of China, said the government wants to rein in bank lending, but added that setting a full-year credit quota by itself was insufficient. ‘China's economic structure is complicated today, so it is not sufficient to only set a lending target this year to control the economic performance,’ Li said.”
January 12 – Bloomberg: “The People’s Bank of China should focus more on regulating the aggregate volume of financing in the economy, Xia Bin an adviser to the central bank, said… China has excessive growth in M2… Xia said. To maintain a steady and stable monetary policy ‘we must use aggregate volume as the figure to be studied,’ said Xia who is director of the Research Institute of Finance at the State Council’s Development and Research Center and a member of the central bank monetary policy committee. Policy makers in the world’s fastest-growing major economy are struggling to control cash flooding the nation from an unprecedented two-year lending spree and surging capital inflows that have boosted foreign-exchange reserves to a record. China’s encouragement of fundraising through bond issues and initial public offerings to cut reliance on bank lending is complicating efforts to rein in liquidity and curb inflation. ‘China’s economic structure is so complex now that only controlling credit isn’t sufficient for macro-economic management,’ Li Daokui, an academic adviser to the People’s Bank of China, told reporters… The government may need to look at managing the total volume of financing in the system this year and not only bank lending, he said.”
January 11 – Bloomberg: “China’s vehicle sales jumped 32% in 2010 as government stimulus measures and economic growth helped the nation stay the world’s largest auto market for a second year. Total auto sales… rose to 18.06 million, while passenger-car deliveries gained 33% to 13.8 million… Sales of cars and light trucks in the U.S. gained 11% to 11.6 million in 2010, according to researcher Autodata Corp.”
January 11 – Bloomberg: “China’s property market isn’t a bubble because household incomes are rising in line with housing prices, according to Andy Rothman, CLSA Asia-Pacific Markets’ China macro strategist. Housing prices in so-called second-tier cities, where most urban Chinese live, are about 75% lower than in larger cities such as Beijing and Shanghai, and price increases are slower, Rothman said… ‘With leverage this low and with house prices rising in line with income, these are not bubbles,’ said Rothman. ‘There are obviously individual segments of the market which have problems. But in terms of systematic problems, I don’t see it.’”
January 10 – Bloomberg: “China reported a less-than-forecast $13.1 billion trade surplus for December… Exports rose 17.9% to $154.2 billion from a year earlier and imports climbed 25.6% to $141.1 billion…”
Japan Watch:
January 12 – Bloomberg (Toru Fujioka and Kyoko Shimodoi): “Japan may extend purchases of bonds sold by a European financial aid fund in coming months to support the region’s recovery from the sovereign debt crisis, two government officials familiar with the matter said. Finance Minister Yoshihiko Noda said yesterday Japan intends to buy more than a fifth of the bonds to be sold later in January to fund the bailout of Ireland.”
India Watch:
January 13 – Bloomberg (Madelene Pearson and Jay Shankar): “Record imports of gold by India show the central bank may be losing the battle to tame inflation, spurring investors to sell government bonds. Shipments into Asia’s third-biggest economy may have increased to 800 metric tons from 557 tons in 2009 and exceeding the previous all-time high of 769 in 2007, according to Ajay Mitra, managing director for… the World Gold Council… ‘Gold is being used as a store of value to protect against never-ending inflation,’ Ritesh Jain, the… head of fixed income at Canara Robeco Asset Management…said ‘Inflation is the biggest concern in the minds of investors and savers.’”
Asia Bubble Watch:
January 13 – Bloomberg (Eunkyung Seo and William Sim): “South Korea’s third interest-rate increase since the global financial crisis and the government’s planned price controls may fail to curb inflation unless the won appreciates further… The Bank of Korea raised borrowing costs by a quarter of a percentage point to 2.75% yesterday and the government said it aims to freeze utility prices and reduce food tariffs to damp quickening inflation.”
January 11 – Bloomberg (Eunkyung Seo): “South Korea’s producer-price inflation rate accelerated to a two-year high, adding to the case for the central bank to raise borrowing costs again. Producer prices increased 5.3% in December from a year earlier…”
January 12 – Bloomberg (Suttinee Yuvejwattana): “Thailand raised its benchmark interest rate for the fourth time in seven months and signaled it will boost borrowing costs further to contain inflation… The Bank of Thailand increased the one-day bond repurchase rate by a quarter of a percentage point to 2.25%... ‘Inflationary pressure going forward is still expected to increase as the economy continues to grow and oil and commodity prices are on an uptrend,’ Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said…”
Latin America Watch:
January 13 – Bloomberg (Matthew Bristow and Jens Erik Gould): “Central banks in Latin America are ‘overburdened’ by capital inflows that reached $203 billion last year, restricting their ability to use interest rates to curb inflationary pressure, the World Bank said. The… lender said Brazil and other Latin American economies may need to contain spending to ease pressure for higher interest rates that could exacerbate the flows… Low interest rates in rich countries, along with the strong growth outlook for Latin America, are attracting flows of money that may be ‘destabilizing’ for exchange rates…”
January 12 – Bloomberg (Matthew Bristow): “Brazil’s retail sales rose more than economists expected in November, driven by credit growth and record low unemployment. Sales rose 1.1% in November, their fastest pace in three months, the national statistics agency... Sales rose 9.9% from a year ago…”
January 11 – Bloomberg (Matthew Bristow): “Economists covering the Brazilian economy raised their forecast for 2011 inflation for a fifth straight week… Consumer prices will rise 5.34% this year, up from a week earlier forecast of 5.32%, the survey found.”
January 13 – Dow Jones: “Brazilians will pay more for fruits and vegetables in the wake of heavy rains that have caused massive floods and landslides in the southeastern part of the country, according to an economist Thursday. ‘The torrential rains are going to hinder--and by quite a bit--the production and transport of natural foods, which is going to translate into higher prices for consumers,’ said economist Andre Guilherme Pereira Perfeito at Sao Paulo's Gradual Investimentos fund… The latest natural disaster will compound Brazil's recent troubles with inflation…”
January 10 – Bloomberg (Eliana Raszewski): “Argentina’s central bank plans the biggest increase in the money supply since at least 2006 in a bid to keep local interest rates down. Argentina aims to boost the amount of money in the economy, as measured by the M2 gauge, by 28% in December from a year earlier…”
Unbalanced Global Economy Watch:
January 12 – Bloomberg (Rainer Buergin and Brian Parkin): “German Chancellor Angela Merkel’s policy of deficit reduction, which pushed last year’s government borrowing below target, helps boost growth in Europe’s biggest economy, Deputy Finance Minister Steffen Kampeter said. Net borrowing totaled 44 billion euros ($57.3bn) last year, beating an original target of 80.2 billion euros… The government has to ‘make an effort’ to undershoot a goal of 48.4 billion euros for this year and ‘won’t stray’ from its course… ‘The federal government believes that budget consolidation is an engine of growth,’ Kampeter said. ‘Consolidation has priority and tax reductions are the return on investment.’”
January 12 – Bloomberg (Simone Meier): “European industrial production advanced more than economists forecast in November… Production increased 7.4% in the year.”
January 13 – Bloomberg (Janina Pfalzer and Adam Ewing): “Sweden’s inflation rate rose in December, exceeding the central bank’s target for the first time in two years… Headline inflation accelerated to 2.3% from 1.8% in November… The annual rate was last above the Riksbank’s 2% target in November 2008. On the month, prices rose 0.7%.”
January 13 – Bloomberg (Michael Heath and Daniel Petrie): “Reserve Bank of Australia Governor Glenn Stevens can glimpse the inflation threat he faces from the nation’s floods at the produce shop near his suburban Sydney home in Sylvania Waters. Tomato prices soared 20% in the past week and bananas, grapes and sweet potatoes are up 10% said Maurice Sorace, owner of Sylvania Best Fresh… ‘Prices will be higher in the next week’ as the deluge drowns more crops and clogs roads, he said. The crisis may force the RBA to accept higher inflation in coming months as the floods spur food and commodity costs and slow growth in a disaster zone the size of Egypt.”
January 12 – Bloomberg (Michael Heath): “Australian home-loan approvals unexpectedly rose in November, reaching the highest level of 2010, as the job market posted its biggest gain in 10 months and unemployment declined.”
U.S. Bubble Economy Watch:
January 13 – Bloomberg (Shobhana Chandra): “Wholesale costs in the U.S. increased more than projected in December, led by higher prices for commodities such as fuel and food. The producer price index rose 1.1%, the most in 11 months…”
January 12 – Bloomberg (Michelle Fay Cortez): “Cancer care may cost the U.S. two-thirds more in the next decade, potentially topping $200 billion as the population ages and drug prices rise. The tab last year was $125 billion, according to National Cancer Institute researchers…”
Central Bank Watch:
January 10 – Bloomberg (Jana Randow and Simone Meier): “European Central Bank President Jean-Claude Trichet, speaking on behalf of the world’s central bankers, said the global economy has recovered better than expected, boosting inflation pressures in emerging markets. ‘Inflationary threats present some kind of general feature in the emerging world; it’s something you don’t see necessarily in advanced economies,’ Trichet said… It’s clear that it is extremely important that we all keep control of inflation expectations, and that calls for appropriate decisions.’”
Fiscal Watch:
January 11 – Bloomberg (Patrick Cole): “Against a backdrop of exhibits at New York’s Museum of American Finance highlighting the U.S.’s financial history, Blackstone Group LP Chairman Emeritus Peter G. Peterson told patrons and supporters of the museum that the country’s future could be harmed by its national debt. ‘I think the American dream is threatened,’ Peterson, 84, said… ‘It’s very important that we start educating the country about why this is important.’ The U.S. has accumulated more than $14 trillion of debt and had a $1.3 trillion budget deficit in the fiscal year…”
Muni Watch:
January 10 – Bloomberg (Terrence Dopp): “New Jersey Governor Chris Christie gives his first State of the State speech tomorrow after saying he may cut Medicaid and employee benefits to eliminate a $10.5 billion budget deficit in the second-wealthiest U.S. state. Christie… said he’ll tell lawmakers in his address that New Jersey remains in a financial crisis and they need to maintain fiscal controls as employment and revenue recover slowly from the longest recession since the 1930s.”
January 13 – Bloomberg (Brendan A. McGrail): “New Jersey Governor Chris Christie has learned that talking about state insolvency may have a cost. About 20 minutes after Christie, 48, told a town-hall meeting in Paramus today that health-care costs ‘will bankrupt’ the state, the New Jersey Economic Development Authority cut its tax-exempt school-related bond offering by more than half to $712.3 million.”
January 11 – Bloomberg (David Mildenberg): “Texas state revenue will fall 2.9% to $72.2 billion for the 2012-2013 biennium, Comptroller Susan Combs said, leaving legislators convening tomorrow with the prospects of multibillion dollar budget cuts. Lawmakers also face an unexpected $4.3 billion deficit at the end of the current fiscal year Aug. 31 that must be balanced… The state is spending about $86 billion in the current biennium, including more than $6 billion in federal stimulus money that will not continue, she said.”
Illinois Watch:
January 12 – Bloomberg (Tim Jones): “Illinois lawmakers passed a 67% income-tax increase, the largest in the state’s history, to help close a $13 billion budget deficit. The boost in the tax rate to 5% from 3% was approved by both chambers in the waning hours of the legislative term… The increase, intended to last through 2014, is aimed at fixing Illinois’s worst fiscal crisis, including a backlog of more than $6 billion in unpaid bills and almost $4 billion in missed payments to underfunded state pensions. The deficit amounts to about half of planned general-fund spending for this fiscal year…”
January 13 – Bloomberg (Tim Jones and Esmé E. Deprez): “The biggest tax increase in Illinois history, a last-minute bid to resolve the state’s worst fiscal crisis, drew applause from investors, gloating from neighbors and scorn from taxpayers and businesses. Within hours of Senate approval yesterday for the 67% income-tax increase aimed at closing a $13 billion budget deficit, an eruption of protests put Governor Pat Quinn on the defensive. ‘We had to take decisive action,’ the Democratic governor said… The tax boost was needed to protect a state that was ‘careening toward bankruptcy and fiscal insolvency,’ he said.”
Speculator Watch:
January 13 – Bloomberg (Matthew Leising): “Wall Street’s largest dealers during the fourth quarter eased credit terms to hedge funds and private-equity firms that borrow against securities while provisions for private derivatives trades were little-changed, according to the Federal Reserve.”
Issues 2011:
The unfolding historic Bubble backdrop is the overarching Issue for 2011. This is a “Bubble year.” Yes, the prognosis has remained the same since I wrote “Issues 2010.” There are, however, important distinctions, developments and evolutions from a year ago.
A 12-month period of robust Bubble Dynamics has elevated systemic risks – risks at home and risks to global financial and economic systems. A major worldwide inflation has impacted risk assets generally – if not evenly. One additional year of aggressive policymaking has further distorted market perceptions – in particular how markets perceive liquidity and Credit risks. “Exit strategies” lost their credibility last year, while those acting on faith in the global central banking liquidity “backstop bid” have been rewarded – and emboldened.
To be sure, the dramatic rise in bullish optimism has engendered susceptibility to disappointment – and perhaps even disillusionment. Yet Bubbles do have that perverse way of persevering long enough to ensure that virtually everyone has had the opportunity to climb aboard.
Having survived the Greek crisis and contagion scare, the global government finance Bubble soldiered right through 2010. This allowed – the markets accommodated – another year of our federal and municipal governments adding significantly to their debt loads. It was one more year where the maladjusted U.S. economy ran a Current Account Deficit approaching $500bn. It was a year where the Fed’s bloated balance sheet added another $200bn, while global central bank international reserve holdings expanded an unfathomable $1.6 TN.
The past year saw another $500 billion flee the U.S. money fund complex in search of higher yields. Tens of billions flooded into perceived low-risk bond and muni funds, while tens of billions more headed overseas. Meanwhile, money flowed into the hedge fund community, where assets and leverage are said to now approach pre-crisis levels. All of this amplifies systemic risk.
Stock market risk has grown steadily over the past year. Capping an extraordinary two-year period, the broader market again dramatically outperformed the S&P500. Especially during 2010’s fourth quarter, a highly speculative market turned dangerously speculative. Many of the more suspect stocks continue their period of outperformance. And, despite the overhang of serious economic issues, the broader U.S. stock market now approaches record levels (S&P400 Mid Cap index at new record high).
The market commences 2011 with many of the market’s favored stocks/sectors at wildly bullish levels of valuation and expectations. Overall market sentiment has moved to extreme bullishness. In Bubble Dynamic fashion, equity fund flows have turned strongly positive subsequent to a historic market rally. Equities today are winning by default within a backdrop of near-zero short rates, rising bond yields and municipal bond angst. Throughout the marketplace, prices have become increasingly detached from underlying fundamentals.
Rising global yields is a key Issue 2011. Fixation on deflation risk has given way to the reality that the world faces significant inflation, Credit and, inevitably, liquidity risks. Mounting inflationary pressures were given a major push when the Fed back peddled from an “exit strategy” and moved forward with “QE2”. Subsequent to the initial euphoria, markets now appreciate the heightened risks associated with additional quantitative easing. And as global yields move higher – and deficits mount - risk premiums must adjust further in order to discount the possibility of destabilizing market revulsion to any number of profligate borrowers. It is a major Issue 2011 that central bankers at home and abroad may confront tough decisions as to whether to implement additional market liquidity support into a backdrop of rising long-term bond yields and waning market confidence.
In the case of Europe, market “success” in disciplining politicians has initiated the problematic downside of the Credit cycle. The transition to “austerity” and policy restraint is, as it always has been, challenging, painful and destabilizing. Economic and social upheaval is not conducive to market confidence. Yet, at the same time, fiscal prudence and economic adjustment are fundamental to a more stable economic future. It’s not pretty, but at least Europe has commenced the process.
In the case of the U.S., the markets’ accommodation of fiscal and monetary profligacy creates some short-term benefits along with major intermediate-term risks. Somewhat amazingly, our policymakers still enjoy great flexibility to inflate government/system Credit. This, for now, supports bullish fundamental prospects. The $4.0 TN increase in federal government liabilities over the past 27 months has inflated incomes, corporate revenues and securities markets, while stabilizing real estate prices. At this dangerous stage of the Credit Bubble, so-called economic “fundamentals” will tend to support bullish optimism and elevated stock prices. Strong corporate earnings and accelerating GDP growth will be viewed as confirmation of the bullish thesis, while they are in reality consequences of the unprecedented expansion of governmental control over the Credit system and economy.
It is a major Issue 2011 that U.S. federal government debt will for the third straight year account for all – or at least the vast majority – of total system Credit creation. I would argue (confidently) that this dynamic is dysfunctional. U.S. government debt is being mispriced, over-issued, and misdirected – ensuring only deeper economic maladjustment and financial vulnerability. Tough decisions and tough economic adjustments are only being postponed.
It is a fundamental issue that total system Credit creation is originating from chiefly non-productive marketable debt of the – not especially efficient or productive – governmental sector. It is an Issue 2011 that our recovery is entirely dependent upon a favorable global macro and market backdrop necessary to ensure the ongoing massive issuance of increasingly Credit-challenged U.S. government debt obligations.
It is the (“moneyness”) nature of government obligations that they enjoy special treatment in the marketplace: confidence tends to be sustained during longer periods of over-issuance than for private-sector Credit instruments. And whether it is Greece, Portugal or the United States, fundamentals may very well appear encouraging so long as the marketplace accommodates uninterrupted borrowing excess. But, make no mistake, underlying Minskian “Ponzi Finance” dynamics ensure a problematic day of reckoning when the market inevitably cools to the debt explosion. Importantly, the longer the markets accommodate a government Ponzi debt scheme the greater the inevitable dislocation – the greater the tumult when the financial and economic systems are forced to operate with reduced government debt expansion. The costs associated with a crisis of confidence in government debt – the foundation of contemporary “money” systems – are enormous.
For 2011, the bulls take comfort that, in spite of all the talk and elections and such, Washington has no intention of adjusting its borrowing and spending habits. At the same time, it is becoming increasingly challenging for the marketplace to disregard a troubling debt growth trajectory. Two years ago the bulls could argue that U.S. government debt ratios were ok and that massive borrowing was a short-term phenomenon. Neither has credibility today.
The possibility for a surprising jump in Treasury bond yields is a major Issue 2011. On the one hand, Treasury is not interest-rate sensitive; the marketplace doesn’t have to fear much of an issuance impact from a moderate rise in borrowing costs. On the other hand, this dynamic would imply that yields are poised to surprise on the upside when the markets eventually force borrowing restraint. It doesn’t take a wild imagination to envisage a market problem leading to an economic problem, to additional “TARP,” more bailouts and a jump in borrowing costs – all combining for a dramatic deterioration in our nation’s debt position.
That borrowing restraint is being imposed upon U.S. muni finance is a major Issue 2011. The year has commenced with municipal bond yields adding to Q4’s surprising jump. Today, state and local finance is our Credit system’s weak link. What began in (“subprime”) Greece has made its way to Illinois, California, New York, New Jersey, Florida and elsewhere. Throughout the country, governments will now be forced into the messy proposition of getting their books in order. After ignoring this issue for too long, a global marketplace keen to structural debt issues has commenced the disciplining process.
The dilemma now facing U.S. muni finance has been significantly compounded by policymaking and market dynamics. For two years, loose fiscal and monetary policies allowed governments of all dimensions to paper over structural problems. Washington largess postponed needed austerity measures, while zero rates incited a stampede into seemingly attractive state and local debt instruments. The proliferation of Build America bonds and ETF products, in particular, were critical for enticing atypically large speculative flows into the sector.
Now, with the Bubble having burst, municipal borrowers confront the challenge of large borrowing needs in the face of steady financial flows exiting the sector. Moreover, this poor liquidity backdrop could be further compounded by bearish speculative bets against muni bonds. There is a real downside to the proliferation of seemingly liquid instruments that allow participation in the upside of a sector: they foment acute risk of illiquidity and dislocation to any unexpected reversal fortune.
2010 witnessed the “flash crash.” This is potentially a huge Issue for 2011. Throughout the markets, there has been a proliferation of instruments – especially exchanged-traded funds – that seemingly offer liquid ways of speculating on a vast array of risk assets and market outcomes. Many players have been drawn to these products because they offer a much more attractive liquidity profile than what is available for the underlying stocks, debt instruments, or commodities. Others have taken a more aggressive stance when playing a particular sector or theme specifically because of the capability of rapidly hedging various risks in the liquid ETF and derivatives marketplaces. And I would expect that many of the more sophisticated players have one eye on the exit – and both eyes on what instruments they might use to protect themselves – when they see the Bubble beginning to burst.
The explosion of trading in these instruments has significantly altered risk perceptions and risk taking. Especially because of today’s Bubble backdrop, I believe risk to any number of market liquidity issues has created major systemic vulnerabilities. The concept of “portfolio insurance” has evolved mightily since 1987.
2011 is extraordinary for the degree and variety of risks that confront market participants when compared to the extent speculation and bullishness has become ingrained throughout the marketplace. The ongoing evolution of the European debt crisis creates great uncertainty. There are big unknowns when it comes to issues surrounding the mounting inflationary pressures throughout China and “developing” Asia. The year begins with “developing” economy Credit systems in overdrive, fueled by loose Credit, robust inflationary forces and unrelenting “hot money” inflows. Such Monetary Instability foments myriad market, economic and policy risks.
In particular, China faces very challenging Bubble dynamics. The Credit and inflation backdrop beckons for “slamming on the brakes” – or at least tapping them. There will be none of that. Following in the footsteps of others, Chinese authorities failed to act with sufficient force to quash Bubble and inflationary forces early enough in the cycle. Bubble risks have grown exponentially, and I would expect policymakers to continue to tread softly. The Chinese juggernaut Credit system and economy has become a force to be reckoned with.
If, as I have to presume at this point, the Chinese Credit Bubble is sustained through 2011, Asian economies will become an even greater glutton of global resources and commodities. Policymakers are grappling these days with how to contain the inflationary effects of massive “hot money” inflows and an increasingly complex Credit backdrop that goes way beyond monitoring bank lending and setting loan quotas. And while focus on consumer and real estate inflation garners the most media attention, the Chinese plan to continue stimulating consumption and lower-end housing construction.
China's policy endeavors – is poised to walk the highwire - to manage inflation, while boosting incomes for the hundreds of millions of lower-end and rural workers that have lost major headway against the urban and rising middle and upper classes. To say the Chinese face an extremely challenging task in controlling a runaway Credit Bubble and historic economic transformation is an understatement.
Here at home, policymaking has turned simple: run massive deficits, keep rates at zero, and have the Fed monetize debt until the private sector can be trusted to do the heavy lifting. Well, don’t hold your breath. So, for Issues 2011, we can assume the Fed stands pat on rates. And while they have little credibility, both Congress and the Fed are talking tough against bailing out troubled states. Whether they can stick to this rhetoric is an Issue 2011. The dollar continues to benefit from the capacity of our policymakers to inflate Credit, a dynamic that will compound our dilemma when the markets turn their sights on disciplining Washington.
I’ll posit that each year of massive government marketable debt issuance reduces the likelihood that central bankers will be able to exit their market liquidity backstop operations. History has shown how systems become precariously addicted to inflationary measures and market interventions. The Fed’s balance sheet will only move in one direction. And when push comes to shove, they may be forced to buy municipal debt or monetize more Treasurys to help finance bailouts. For now, the most important Issue 2011 is that serious structural deficiencies ensure that the Federal Reserve errs on the side of liquidity creation. This would seem to ensure a year of even greater Monetary Disorder, with the risk of heightened instability throughout global fixed-income, currency, commodities and equities markets.
One-month Treasury bill rates ended the week at 13 bps and three-month bills closed at 15 bps. Two-year government yields were one basis point lower at 0.54%. Five-year T-note yields ended the week down 4 bps to 1.87%. Ten-year yields were little changed at 3.33%. Long bond yields ended the week 4 bps higher to 4.53%. Benchmark Fannie MBS yields were down one basis point to 4.09%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed one to 76 bps. Agency 10-yr debt spreads were little changed at 9.5 bps. The implied yield on December 2011 eurodollar futures fell 7.5 bps to 0.715%. The 10-year dollar swap spread declined somewhat to 7.2 bps. The 30-year swap spread declined one to negative 30 bps. Corporate bond spreads were narrower. An index of investment grade bond risk declined 5 to 83 bps. An index of junk bond risk sank 20 to 412 bps.
The debt selling machine was at full throttle. Investment grade issuers included JPMorgan Chase $3.25bn, SLM Corp $2.0bn, Commonwealth Edison $600 million, O'Reilly Automotive $500 million, Texas Gas Transmission $325 million, Chevron Phillips $300 million, Georgia Power $300 million, Public Service Oklahoma $250 million, and Senior Housing Realty Trust $250 million.
Junk bond funds saw inflows of $323 million (from EPFR). Issuers included Cequel Communications $1.82bn, Commscope $1.5bn, Citicenter Holdings $1.5bn, Petrohawk Energy $1.22bn, NRG Energy $1.2bn, Grifols $1.1bn, Calpine $1.2bn, Univision Communications $815 million, Exide Technologies $675 million, RSC Equipment Rental $650 million, Polymer Group $560 million, Elm Road Generating Station $420 million, Verso Paper $360 million, Laredo Petroleum $350 million, Level 3 Communications $305 million, Valassis Communications $260 million, Elizabeth Arden $250 million, Dycom $190 million, AS Americas $190 million, Cogent Communications $175 million, Nuveen Investment $150 million, and Columbus Mckinnon $150 million.
Convertible debt issuers included Dendreon $540 million.
International dollar debt issuers included Lloyds Bank $4.75bn, HSBC $4.0bn, Nordea Bank $2.75bn, BNP Paribas $2.0bn, Japan Finance Corp $1.5bn, Nomura $1.25bn, Credit Suisse $2.0bn, Credit Agricole $650 million, Commonwealth Bank of Australia $1.0bn, Cencosud $750 million, Banco Santander $500 million, Banco Cruzeiro $1.05bn, Inversiones $500 million, Uncle Acquisition $400 million, Navios Maritime $350 million, BR Malls $230 million, Texhong Textile $200 million and State Bank India $100 million.
U.K. 10-year gilt yields jumped 10 bps this week to 3.61%, and German bund yields rose 16 bps to 3.03%. Ten-year Portuguese yields dropped 27 bps to 6.81%. Spanish yields fell 17 bps to 5.33%, and Irish yields sank 72 bps to 8.33%. Greek 10-year bond yields collapsed 150 bps to 11.11%. The German DAX equities index gained 1.8% (up 2.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 1.195%. Japan's Nikkei slipped 0.4% (up 2.6%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index gained 1.3% (up 2.4%), while Mexico's Bolsa dropped 1.6% (down 1.4%). South Korea's Kospi index added 1.1% to a record high (up 2.8%). India’s equities index sank 4.2% (down 8.0%). China’s Shanghai Exchange declined 1.7% (down 0.6%). Brazil’s benchmark dollar bond yields declined 2 bps to 4.33%, and Mexico's benchmark bond yields declined 2 bps to 4.34%.
Freddie Mac 30-year fixed mortgage rates declined 6 bps last week to a 5-wk low of 4.71% (down 35bps y-o-y). Fifteen-year fixed rates fell 5 bps to 4.08% (down 37bps y-o-y). One-year ARMs dipped one basis point to 3.23% (down 116bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 6 bps to 5.61% (down 41bps y-o-y).
Federal Reserve Credit jumped $21.6bn to a record $2.432 TN (10-wk gain of $151.7bn). Fed Credit was up $207bn from a year ago (9.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/12) rose $6.2bn to $3.350 TN. "Custody holdings" were up $400bn from a year ago, or 13.5%.
M2 (narrow) "money" supply dropped $23.1bn to $8.826 TN. Over the past year, "narrow money" grew 4.0%. For the week, Currency increased $1.3bn. Demand and Checkable Deposits increased $4.1bn, while Savings Deposits dropped $24.8bn. Small Denominated Deposits declined $4.5bn. Retail Money Funds added $1.1bn.
Total Money Market Fund assets (from Invest Co Inst) slipped $2.0bn to $2.796 TN. Over the past year, money fund assets have dropped $509bn, or 15.4%.
Total Commercial Paper outstanding dropped $29.7bn to $936 billion. CP was down $166bn y-o-y, or 15.1%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.60 TN y-o-y, or 21.0%, to a record $9.243 TN.
Global Credit Market Watch:
January 12 – Bloomberg (Tony Czuczka and Patrick Donahue): “Chancellor Angela Merkel indicated that Germany is ready to revise the terms of a 750 billion-euro ($973 billion) rescue fund for indebted states, saying Europe’s biggest economy will do whatever is necessary to protect the euro… ‘We support whatever is needed to support the euro, also with respect to the bailout package,’ Merkel told reporters… ‘We’re saying what we’ve always said since the Greek crisis: We will stand by the euro,’ Merkel said. ‘We will do whatever is necessary -- and everything else will be discussed step by step.’”
January 12 – Bloomberg (Joao Lima): “Portugal’s borrowing costs fell and demand rose at a sale of 10-year bonds after European Central Bank debt purchases helped push down yields in the last two days.”
January 13 – Bloomberg (Emre Peker and Lisa Abramowicz): “Leveraged-loan prices rose to the highest in more than three years, returning more than junk bonds as investors seek protection from a possible increase in interest rates.”
January 11 – Bloomberg (Dara Doyle): “Irish commercial real estate values have fallen by 60% since peaking in the third quarter of 2007, Jones Lang LaSalle Inc. said.”
Global Bubble Watch:
January 12 – Financial Times (Gregory Meyer, Javier Blas and Jack Farchy): “The world has moved a step closer to a food price shock after the US government surprised traders by cutting stock forecasts for key crops, sending corn and soyabean prices to their highest level in 30 months. The price jump comes after the UN’s Food and Agriculture Organisation warned last week that the world could see repetition of the 2008 food crisis if prices rose further. The trend is becoming a major concern in developing countries. While officials are drawing comfort from stable rice prices, key for feeding Asia, they warn that a sustained period of high prices, especially in grains such as wheat, would hit poorer countries. Food price hikes have already led to riots in Algeria and Mozambique. ‘Stocks of corn and soyabean are at incredibly tight levels ... and the markets are surging to incredibly strong prices,’ Chad Hart, agricultural economist at Iowa State University, said.”
January 13 – Bloomberg (Jana Randow and Jeff Black): “European Central Bank President Jean-Claude Trichet signaled he’s prepared to raise interest rates if needed to fight inflation even as leaders struggle to contain the region’s sovereign debt crisis. ‘We are permanently alert, we are never pre-committed not to move interest rates and our level of interest rates is designed to deliver price stability,’ Trichet said…”
January 10 – Bloomberg (Daniel Kruger): “Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004 as the world’s biggest bond firms bet that the economy will strengthen and demand for higher-yielding assets will increase. The 18 primary dealers that trade with the Federal Reserve reported that holdings of U.S. government debt tumbled to a net $2.34 billion on Dec. 29 from $81.3 billion on Nov. 24…”
January 10 – Bloomberg (Matt Walcoff and Lynn Thomasson): “Following the advice of equity analysts may be perilous for your profits. Companies in the Standard & Poor’s 500 Index that analysts loved the most rose 73% on average since the benchmark for U.S. equity started to recover in March 2009, while those with the fewest ‘buy’ recommendations gained 165%... Now, banks’ favorites include retailers and restaurant chains, the industry that did best in last year’s rally and that are more expensive than the S&P 500 compared with their estimated 2011 profits.”
Currency Watch:
January 12 – Bloomberg: “China said it would ‘welcome’ a positive statement from the U.S. on the stability of Chinese- held dollar assets during next week’s summit in Washington between President Hu Jintao and President Barack Obama. ‘If the U.S. makes a positive statement on this issue we surely will welcome that,’ Chinese Vice Foreign Minister Cui Tiankai said… ‘China follows very closely the economic health of the United States and vice versa.’”
January 9 – Financial Times (Jonathan Wheatley and Joe Leahy): “Brazil has warned that the world is on course for a full-blown ‘trade war’ as it stepped up its rhetoric against exchange rate manipulation. Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new measures to prevent further appreciation of its currency… and would raise the issue of exchange-rate manipulation at the World Trade Organisation and other global bodies. He said the US and China were among the worst offenders. ‘This is a currency war that is turning into a trade war,’ Mr Mantega said… His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe.”
The U.S. dollar index dropped 2.5% to 79.07 (up 0.1%). On the upside for the week, the Swedish krona increased 4.2%, the Danish krone 3.7%, the euro 3.7%, the Norwegian krone 2.6%, the British pound 2.1%, the Mexican peso 1.5%, the Taiwanese dollar 1.2%, the New Zealand dollar 0.8%, the Singapore dollar 0.5%, the Swiss franc 0.4%, the Japanese yen 0.3% and the Canadian dollar 0.3%. On the downside, the South African rand declined 1.9%, the Australian dollar 0.7%, and the Brazilian real 0.1%.
Commodities and Food Watch:
January 10 – Bloomberg: “China, the biggest soybean buyer, boosted imports by 29% to a record in 2010 as the domestic crushing industry expanded to supply higher consumption of livestock feed and cooking oil.”
January 10 – Bloomberg (Mike Lee and Jim Polson): “U.S. natural-gas companies are getting hit with the highest costs in four years as they shift more production to oil to escape low gas prices. EOG Resources Inc., Chesapeake Energy Corp. and SandRidge Energy Inc. each have announced $1 billion transactions in the past year to ramp up onshore production of higher-profit oil and other petroleum liquids as booming gas production deflated prices.”
January 12 – Bloomberg (Ben Sharples): “Coal used by steelmakers may jump to $330 a ton, compared with first-quarter contract levels of $225 and a spot price of $280, amid shortages caused by Australia's floods, Bank of America Merrill Lynch said.”
January 11 – Bloomberg (Aya Takada and Supunnabul Suwannakij): “Rubber extended its rally to a record after data showed China’s car sales jumped by a third last year, boosting expectations that demand for the commodity used in tires will keep expanding amid tight supply.”
The CRB index rallied 2.8% (up 0.1% y-t-d). Spot Gold declined 0.6% to $1,362 (down 4.2%). Silver fell 0.7% to $28.48 (down 7.9%). February Crude gained $3.64 to $91.67 (up 0.3%). February Gasoline jumped 3.3% (up 2.5%), and February Natural Gas gained 1.4% (up 1.8%). March Copper rallied 3.5% (down 0.3%). March Wheat slipped 0.1% (down 2.6%), while March Corn jumped 9.0% (up 3.1%).
China Bubble Watch:
January 14 – Bloomberg: “China told banks to set aside more deposits as reserves for the fourth time in two months, stepping up efforts to rein in liquidity after foreign-exchange reserves rose by a record and lending exceeded targets.”
January 12 – Reuters: “Chinese banks continued their lending frenzy in the beginning of the year, doling out 500 billion yuan ($75.6bn) in new loans in the first week of January alone… The overall lending figure would roughly equal the new loans extended during all of December. New lending in December reached 480.7 billion yuan, meaning China overshot the government's target of keeping bank loans to 7.5 trillion yuan in 2010. The surge in lending in the first week of 2011 continues a pattern seen in recent years of Chinese banks rushing out lending at the start of the year, after they built up a backlog of potential loans at the end of the previous year due to credit curbs and as they sought to extend credit ahead of any further official restrictions. New loans extended in the first quarter have accounted for an average of 33% of the full-year total over the past decade… Banks lent 7.95 trillion yuan ($1.2 trillion) in 2010… In the past, China used loan quotas to keep a handle on lending. This year, the central bank has pledged to refine that system with regular calibrations of reserve requirements and capital ratios targeted at individual lenders. Li Daokui, an academic adviser to the People's Bank of China, said the government wants to rein in bank lending, but added that setting a full-year credit quota by itself was insufficient. ‘China's economic structure is complicated today, so it is not sufficient to only set a lending target this year to control the economic performance,’ Li said.”
January 12 – Bloomberg: “The People’s Bank of China should focus more on regulating the aggregate volume of financing in the economy, Xia Bin an adviser to the central bank, said… China has excessive growth in M2… Xia said. To maintain a steady and stable monetary policy ‘we must use aggregate volume as the figure to be studied,’ said Xia who is director of the Research Institute of Finance at the State Council’s Development and Research Center and a member of the central bank monetary policy committee. Policy makers in the world’s fastest-growing major economy are struggling to control cash flooding the nation from an unprecedented two-year lending spree and surging capital inflows that have boosted foreign-exchange reserves to a record. China’s encouragement of fundraising through bond issues and initial public offerings to cut reliance on bank lending is complicating efforts to rein in liquidity and curb inflation. ‘China’s economic structure is so complex now that only controlling credit isn’t sufficient for macro-economic management,’ Li Daokui, an academic adviser to the People’s Bank of China, told reporters… The government may need to look at managing the total volume of financing in the system this year and not only bank lending, he said.”
January 11 – Bloomberg: “China’s vehicle sales jumped 32% in 2010 as government stimulus measures and economic growth helped the nation stay the world’s largest auto market for a second year. Total auto sales… rose to 18.06 million, while passenger-car deliveries gained 33% to 13.8 million… Sales of cars and light trucks in the U.S. gained 11% to 11.6 million in 2010, according to researcher Autodata Corp.”
January 11 – Bloomberg: “China’s property market isn’t a bubble because household incomes are rising in line with housing prices, according to Andy Rothman, CLSA Asia-Pacific Markets’ China macro strategist. Housing prices in so-called second-tier cities, where most urban Chinese live, are about 75% lower than in larger cities such as Beijing and Shanghai, and price increases are slower, Rothman said… ‘With leverage this low and with house prices rising in line with income, these are not bubbles,’ said Rothman. ‘There are obviously individual segments of the market which have problems. But in terms of systematic problems, I don’t see it.’”
January 10 – Bloomberg: “China reported a less-than-forecast $13.1 billion trade surplus for December… Exports rose 17.9% to $154.2 billion from a year earlier and imports climbed 25.6% to $141.1 billion…”
Japan Watch:
January 12 – Bloomberg (Toru Fujioka and Kyoko Shimodoi): “Japan may extend purchases of bonds sold by a European financial aid fund in coming months to support the region’s recovery from the sovereign debt crisis, two government officials familiar with the matter said. Finance Minister Yoshihiko Noda said yesterday Japan intends to buy more than a fifth of the bonds to be sold later in January to fund the bailout of Ireland.”
India Watch:
January 13 – Bloomberg (Madelene Pearson and Jay Shankar): “Record imports of gold by India show the central bank may be losing the battle to tame inflation, spurring investors to sell government bonds. Shipments into Asia’s third-biggest economy may have increased to 800 metric tons from 557 tons in 2009 and exceeding the previous all-time high of 769 in 2007, according to Ajay Mitra, managing director for… the World Gold Council… ‘Gold is being used as a store of value to protect against never-ending inflation,’ Ritesh Jain, the… head of fixed income at Canara Robeco Asset Management…said ‘Inflation is the biggest concern in the minds of investors and savers.’”
Asia Bubble Watch:
January 13 – Bloomberg (Eunkyung Seo and William Sim): “South Korea’s third interest-rate increase since the global financial crisis and the government’s planned price controls may fail to curb inflation unless the won appreciates further… The Bank of Korea raised borrowing costs by a quarter of a percentage point to 2.75% yesterday and the government said it aims to freeze utility prices and reduce food tariffs to damp quickening inflation.”
January 11 – Bloomberg (Eunkyung Seo): “South Korea’s producer-price inflation rate accelerated to a two-year high, adding to the case for the central bank to raise borrowing costs again. Producer prices increased 5.3% in December from a year earlier…”
January 12 – Bloomberg (Suttinee Yuvejwattana): “Thailand raised its benchmark interest rate for the fourth time in seven months and signaled it will boost borrowing costs further to contain inflation… The Bank of Thailand increased the one-day bond repurchase rate by a quarter of a percentage point to 2.25%... ‘Inflationary pressure going forward is still expected to increase as the economy continues to grow and oil and commodity prices are on an uptrend,’ Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said…”
Latin America Watch:
January 13 – Bloomberg (Matthew Bristow and Jens Erik Gould): “Central banks in Latin America are ‘overburdened’ by capital inflows that reached $203 billion last year, restricting their ability to use interest rates to curb inflationary pressure, the World Bank said. The… lender said Brazil and other Latin American economies may need to contain spending to ease pressure for higher interest rates that could exacerbate the flows… Low interest rates in rich countries, along with the strong growth outlook for Latin America, are attracting flows of money that may be ‘destabilizing’ for exchange rates…”
January 12 – Bloomberg (Matthew Bristow): “Brazil’s retail sales rose more than economists expected in November, driven by credit growth and record low unemployment. Sales rose 1.1% in November, their fastest pace in three months, the national statistics agency... Sales rose 9.9% from a year ago…”
January 11 – Bloomberg (Matthew Bristow): “Economists covering the Brazilian economy raised their forecast for 2011 inflation for a fifth straight week… Consumer prices will rise 5.34% this year, up from a week earlier forecast of 5.32%, the survey found.”
January 13 – Dow Jones: “Brazilians will pay more for fruits and vegetables in the wake of heavy rains that have caused massive floods and landslides in the southeastern part of the country, according to an economist Thursday. ‘The torrential rains are going to hinder--and by quite a bit--the production and transport of natural foods, which is going to translate into higher prices for consumers,’ said economist Andre Guilherme Pereira Perfeito at Sao Paulo's Gradual Investimentos fund… The latest natural disaster will compound Brazil's recent troubles with inflation…”
January 10 – Bloomberg (Eliana Raszewski): “Argentina’s central bank plans the biggest increase in the money supply since at least 2006 in a bid to keep local interest rates down. Argentina aims to boost the amount of money in the economy, as measured by the M2 gauge, by 28% in December from a year earlier…”
Unbalanced Global Economy Watch:
January 12 – Bloomberg (Rainer Buergin and Brian Parkin): “German Chancellor Angela Merkel’s policy of deficit reduction, which pushed last year’s government borrowing below target, helps boost growth in Europe’s biggest economy, Deputy Finance Minister Steffen Kampeter said. Net borrowing totaled 44 billion euros ($57.3bn) last year, beating an original target of 80.2 billion euros… The government has to ‘make an effort’ to undershoot a goal of 48.4 billion euros for this year and ‘won’t stray’ from its course… ‘The federal government believes that budget consolidation is an engine of growth,’ Kampeter said. ‘Consolidation has priority and tax reductions are the return on investment.’”
January 12 – Bloomberg (Simone Meier): “European industrial production advanced more than economists forecast in November… Production increased 7.4% in the year.”
January 13 – Bloomberg (Janina Pfalzer and Adam Ewing): “Sweden’s inflation rate rose in December, exceeding the central bank’s target for the first time in two years… Headline inflation accelerated to 2.3% from 1.8% in November… The annual rate was last above the Riksbank’s 2% target in November 2008. On the month, prices rose 0.7%.”
January 13 – Bloomberg (Michael Heath and Daniel Petrie): “Reserve Bank of Australia Governor Glenn Stevens can glimpse the inflation threat he faces from the nation’s floods at the produce shop near his suburban Sydney home in Sylvania Waters. Tomato prices soared 20% in the past week and bananas, grapes and sweet potatoes are up 10% said Maurice Sorace, owner of Sylvania Best Fresh… ‘Prices will be higher in the next week’ as the deluge drowns more crops and clogs roads, he said. The crisis may force the RBA to accept higher inflation in coming months as the floods spur food and commodity costs and slow growth in a disaster zone the size of Egypt.”
January 12 – Bloomberg (Michael Heath): “Australian home-loan approvals unexpectedly rose in November, reaching the highest level of 2010, as the job market posted its biggest gain in 10 months and unemployment declined.”
U.S. Bubble Economy Watch:
January 13 – Bloomberg (Shobhana Chandra): “Wholesale costs in the U.S. increased more than projected in December, led by higher prices for commodities such as fuel and food. The producer price index rose 1.1%, the most in 11 months…”
January 12 – Bloomberg (Michelle Fay Cortez): “Cancer care may cost the U.S. two-thirds more in the next decade, potentially topping $200 billion as the population ages and drug prices rise. The tab last year was $125 billion, according to National Cancer Institute researchers…”
Central Bank Watch:
January 10 – Bloomberg (Jana Randow and Simone Meier): “European Central Bank President Jean-Claude Trichet, speaking on behalf of the world’s central bankers, said the global economy has recovered better than expected, boosting inflation pressures in emerging markets. ‘Inflationary threats present some kind of general feature in the emerging world; it’s something you don’t see necessarily in advanced economies,’ Trichet said… It’s clear that it is extremely important that we all keep control of inflation expectations, and that calls for appropriate decisions.’”
Fiscal Watch:
January 11 – Bloomberg (Patrick Cole): “Against a backdrop of exhibits at New York’s Museum of American Finance highlighting the U.S.’s financial history, Blackstone Group LP Chairman Emeritus Peter G. Peterson told patrons and supporters of the museum that the country’s future could be harmed by its national debt. ‘I think the American dream is threatened,’ Peterson, 84, said… ‘It’s very important that we start educating the country about why this is important.’ The U.S. has accumulated more than $14 trillion of debt and had a $1.3 trillion budget deficit in the fiscal year…”
Muni Watch:
January 10 – Bloomberg (Terrence Dopp): “New Jersey Governor Chris Christie gives his first State of the State speech tomorrow after saying he may cut Medicaid and employee benefits to eliminate a $10.5 billion budget deficit in the second-wealthiest U.S. state. Christie… said he’ll tell lawmakers in his address that New Jersey remains in a financial crisis and they need to maintain fiscal controls as employment and revenue recover slowly from the longest recession since the 1930s.”
January 13 – Bloomberg (Brendan A. McGrail): “New Jersey Governor Chris Christie has learned that talking about state insolvency may have a cost. About 20 minutes after Christie, 48, told a town-hall meeting in Paramus today that health-care costs ‘will bankrupt’ the state, the New Jersey Economic Development Authority cut its tax-exempt school-related bond offering by more than half to $712.3 million.”
January 11 – Bloomberg (David Mildenberg): “Texas state revenue will fall 2.9% to $72.2 billion for the 2012-2013 biennium, Comptroller Susan Combs said, leaving legislators convening tomorrow with the prospects of multibillion dollar budget cuts. Lawmakers also face an unexpected $4.3 billion deficit at the end of the current fiscal year Aug. 31 that must be balanced… The state is spending about $86 billion in the current biennium, including more than $6 billion in federal stimulus money that will not continue, she said.”
Illinois Watch:
January 12 – Bloomberg (Tim Jones): “Illinois lawmakers passed a 67% income-tax increase, the largest in the state’s history, to help close a $13 billion budget deficit. The boost in the tax rate to 5% from 3% was approved by both chambers in the waning hours of the legislative term… The increase, intended to last through 2014, is aimed at fixing Illinois’s worst fiscal crisis, including a backlog of more than $6 billion in unpaid bills and almost $4 billion in missed payments to underfunded state pensions. The deficit amounts to about half of planned general-fund spending for this fiscal year…”
January 13 – Bloomberg (Tim Jones and Esmé E. Deprez): “The biggest tax increase in Illinois history, a last-minute bid to resolve the state’s worst fiscal crisis, drew applause from investors, gloating from neighbors and scorn from taxpayers and businesses. Within hours of Senate approval yesterday for the 67% income-tax increase aimed at closing a $13 billion budget deficit, an eruption of protests put Governor Pat Quinn on the defensive. ‘We had to take decisive action,’ the Democratic governor said… The tax boost was needed to protect a state that was ‘careening toward bankruptcy and fiscal insolvency,’ he said.”
Speculator Watch:
January 13 – Bloomberg (Matthew Leising): “Wall Street’s largest dealers during the fourth quarter eased credit terms to hedge funds and private-equity firms that borrow against securities while provisions for private derivatives trades were little-changed, according to the Federal Reserve.”
Issues 2011:
The unfolding historic Bubble backdrop is the overarching Issue for 2011. This is a “Bubble year.” Yes, the prognosis has remained the same since I wrote “Issues 2010.” There are, however, important distinctions, developments and evolutions from a year ago.
A 12-month period of robust Bubble Dynamics has elevated systemic risks – risks at home and risks to global financial and economic systems. A major worldwide inflation has impacted risk assets generally – if not evenly. One additional year of aggressive policymaking has further distorted market perceptions – in particular how markets perceive liquidity and Credit risks. “Exit strategies” lost their credibility last year, while those acting on faith in the global central banking liquidity “backstop bid” have been rewarded – and emboldened.
To be sure, the dramatic rise in bullish optimism has engendered susceptibility to disappointment – and perhaps even disillusionment. Yet Bubbles do have that perverse way of persevering long enough to ensure that virtually everyone has had the opportunity to climb aboard.
Having survived the Greek crisis and contagion scare, the global government finance Bubble soldiered right through 2010. This allowed – the markets accommodated – another year of our federal and municipal governments adding significantly to their debt loads. It was one more year where the maladjusted U.S. economy ran a Current Account Deficit approaching $500bn. It was a year where the Fed’s bloated balance sheet added another $200bn, while global central bank international reserve holdings expanded an unfathomable $1.6 TN.
The past year saw another $500 billion flee the U.S. money fund complex in search of higher yields. Tens of billions flooded into perceived low-risk bond and muni funds, while tens of billions more headed overseas. Meanwhile, money flowed into the hedge fund community, where assets and leverage are said to now approach pre-crisis levels. All of this amplifies systemic risk.
Stock market risk has grown steadily over the past year. Capping an extraordinary two-year period, the broader market again dramatically outperformed the S&P500. Especially during 2010’s fourth quarter, a highly speculative market turned dangerously speculative. Many of the more suspect stocks continue their period of outperformance. And, despite the overhang of serious economic issues, the broader U.S. stock market now approaches record levels (S&P400 Mid Cap index at new record high).
The market commences 2011 with many of the market’s favored stocks/sectors at wildly bullish levels of valuation and expectations. Overall market sentiment has moved to extreme bullishness. In Bubble Dynamic fashion, equity fund flows have turned strongly positive subsequent to a historic market rally. Equities today are winning by default within a backdrop of near-zero short rates, rising bond yields and municipal bond angst. Throughout the marketplace, prices have become increasingly detached from underlying fundamentals.
Rising global yields is a key Issue 2011. Fixation on deflation risk has given way to the reality that the world faces significant inflation, Credit and, inevitably, liquidity risks. Mounting inflationary pressures were given a major push when the Fed back peddled from an “exit strategy” and moved forward with “QE2”. Subsequent to the initial euphoria, markets now appreciate the heightened risks associated with additional quantitative easing. And as global yields move higher – and deficits mount - risk premiums must adjust further in order to discount the possibility of destabilizing market revulsion to any number of profligate borrowers. It is a major Issue 2011 that central bankers at home and abroad may confront tough decisions as to whether to implement additional market liquidity support into a backdrop of rising long-term bond yields and waning market confidence.
In the case of Europe, market “success” in disciplining politicians has initiated the problematic downside of the Credit cycle. The transition to “austerity” and policy restraint is, as it always has been, challenging, painful and destabilizing. Economic and social upheaval is not conducive to market confidence. Yet, at the same time, fiscal prudence and economic adjustment are fundamental to a more stable economic future. It’s not pretty, but at least Europe has commenced the process.
In the case of the U.S., the markets’ accommodation of fiscal and monetary profligacy creates some short-term benefits along with major intermediate-term risks. Somewhat amazingly, our policymakers still enjoy great flexibility to inflate government/system Credit. This, for now, supports bullish fundamental prospects. The $4.0 TN increase in federal government liabilities over the past 27 months has inflated incomes, corporate revenues and securities markets, while stabilizing real estate prices. At this dangerous stage of the Credit Bubble, so-called economic “fundamentals” will tend to support bullish optimism and elevated stock prices. Strong corporate earnings and accelerating GDP growth will be viewed as confirmation of the bullish thesis, while they are in reality consequences of the unprecedented expansion of governmental control over the Credit system and economy.
It is a major Issue 2011 that U.S. federal government debt will for the third straight year account for all – or at least the vast majority – of total system Credit creation. I would argue (confidently) that this dynamic is dysfunctional. U.S. government debt is being mispriced, over-issued, and misdirected – ensuring only deeper economic maladjustment and financial vulnerability. Tough decisions and tough economic adjustments are only being postponed.
It is a fundamental issue that total system Credit creation is originating from chiefly non-productive marketable debt of the – not especially efficient or productive – governmental sector. It is an Issue 2011 that our recovery is entirely dependent upon a favorable global macro and market backdrop necessary to ensure the ongoing massive issuance of increasingly Credit-challenged U.S. government debt obligations.
It is the (“moneyness”) nature of government obligations that they enjoy special treatment in the marketplace: confidence tends to be sustained during longer periods of over-issuance than for private-sector Credit instruments. And whether it is Greece, Portugal or the United States, fundamentals may very well appear encouraging so long as the marketplace accommodates uninterrupted borrowing excess. But, make no mistake, underlying Minskian “Ponzi Finance” dynamics ensure a problematic day of reckoning when the market inevitably cools to the debt explosion. Importantly, the longer the markets accommodate a government Ponzi debt scheme the greater the inevitable dislocation – the greater the tumult when the financial and economic systems are forced to operate with reduced government debt expansion. The costs associated with a crisis of confidence in government debt – the foundation of contemporary “money” systems – are enormous.
For 2011, the bulls take comfort that, in spite of all the talk and elections and such, Washington has no intention of adjusting its borrowing and spending habits. At the same time, it is becoming increasingly challenging for the marketplace to disregard a troubling debt growth trajectory. Two years ago the bulls could argue that U.S. government debt ratios were ok and that massive borrowing was a short-term phenomenon. Neither has credibility today.
The possibility for a surprising jump in Treasury bond yields is a major Issue 2011. On the one hand, Treasury is not interest-rate sensitive; the marketplace doesn’t have to fear much of an issuance impact from a moderate rise in borrowing costs. On the other hand, this dynamic would imply that yields are poised to surprise on the upside when the markets eventually force borrowing restraint. It doesn’t take a wild imagination to envisage a market problem leading to an economic problem, to additional “TARP,” more bailouts and a jump in borrowing costs – all combining for a dramatic deterioration in our nation’s debt position.
That borrowing restraint is being imposed upon U.S. muni finance is a major Issue 2011. The year has commenced with municipal bond yields adding to Q4’s surprising jump. Today, state and local finance is our Credit system’s weak link. What began in (“subprime”) Greece has made its way to Illinois, California, New York, New Jersey, Florida and elsewhere. Throughout the country, governments will now be forced into the messy proposition of getting their books in order. After ignoring this issue for too long, a global marketplace keen to structural debt issues has commenced the disciplining process.
The dilemma now facing U.S. muni finance has been significantly compounded by policymaking and market dynamics. For two years, loose fiscal and monetary policies allowed governments of all dimensions to paper over structural problems. Washington largess postponed needed austerity measures, while zero rates incited a stampede into seemingly attractive state and local debt instruments. The proliferation of Build America bonds and ETF products, in particular, were critical for enticing atypically large speculative flows into the sector.
Now, with the Bubble having burst, municipal borrowers confront the challenge of large borrowing needs in the face of steady financial flows exiting the sector. Moreover, this poor liquidity backdrop could be further compounded by bearish speculative bets against muni bonds. There is a real downside to the proliferation of seemingly liquid instruments that allow participation in the upside of a sector: they foment acute risk of illiquidity and dislocation to any unexpected reversal fortune.
2010 witnessed the “flash crash.” This is potentially a huge Issue for 2011. Throughout the markets, there has been a proliferation of instruments – especially exchanged-traded funds – that seemingly offer liquid ways of speculating on a vast array of risk assets and market outcomes. Many players have been drawn to these products because they offer a much more attractive liquidity profile than what is available for the underlying stocks, debt instruments, or commodities. Others have taken a more aggressive stance when playing a particular sector or theme specifically because of the capability of rapidly hedging various risks in the liquid ETF and derivatives marketplaces. And I would expect that many of the more sophisticated players have one eye on the exit – and both eyes on what instruments they might use to protect themselves – when they see the Bubble beginning to burst.
The explosion of trading in these instruments has significantly altered risk perceptions and risk taking. Especially because of today’s Bubble backdrop, I believe risk to any number of market liquidity issues has created major systemic vulnerabilities. The concept of “portfolio insurance” has evolved mightily since 1987.
2011 is extraordinary for the degree and variety of risks that confront market participants when compared to the extent speculation and bullishness has become ingrained throughout the marketplace. The ongoing evolution of the European debt crisis creates great uncertainty. There are big unknowns when it comes to issues surrounding the mounting inflationary pressures throughout China and “developing” Asia. The year begins with “developing” economy Credit systems in overdrive, fueled by loose Credit, robust inflationary forces and unrelenting “hot money” inflows. Such Monetary Instability foments myriad market, economic and policy risks.
In particular, China faces very challenging Bubble dynamics. The Credit and inflation backdrop beckons for “slamming on the brakes” – or at least tapping them. There will be none of that. Following in the footsteps of others, Chinese authorities failed to act with sufficient force to quash Bubble and inflationary forces early enough in the cycle. Bubble risks have grown exponentially, and I would expect policymakers to continue to tread softly. The Chinese juggernaut Credit system and economy has become a force to be reckoned with.
If, as I have to presume at this point, the Chinese Credit Bubble is sustained through 2011, Asian economies will become an even greater glutton of global resources and commodities. Policymakers are grappling these days with how to contain the inflationary effects of massive “hot money” inflows and an increasingly complex Credit backdrop that goes way beyond monitoring bank lending and setting loan quotas. And while focus on consumer and real estate inflation garners the most media attention, the Chinese plan to continue stimulating consumption and lower-end housing construction.
China's policy endeavors – is poised to walk the highwire - to manage inflation, while boosting incomes for the hundreds of millions of lower-end and rural workers that have lost major headway against the urban and rising middle and upper classes. To say the Chinese face an extremely challenging task in controlling a runaway Credit Bubble and historic economic transformation is an understatement.
Here at home, policymaking has turned simple: run massive deficits, keep rates at zero, and have the Fed monetize debt until the private sector can be trusted to do the heavy lifting. Well, don’t hold your breath. So, for Issues 2011, we can assume the Fed stands pat on rates. And while they have little credibility, both Congress and the Fed are talking tough against bailing out troubled states. Whether they can stick to this rhetoric is an Issue 2011. The dollar continues to benefit from the capacity of our policymakers to inflate Credit, a dynamic that will compound our dilemma when the markets turn their sights on disciplining Washington.
I’ll posit that each year of massive government marketable debt issuance reduces the likelihood that central bankers will be able to exit their market liquidity backstop operations. History has shown how systems become precariously addicted to inflationary measures and market interventions. The Fed’s balance sheet will only move in one direction. And when push comes to shove, they may be forced to buy municipal debt or monetize more Treasurys to help finance bailouts. For now, the most important Issue 2011 is that serious structural deficiencies ensure that the Federal Reserve errs on the side of liquidity creation. This would seem to ensure a year of even greater Monetary Disorder, with the risk of heightened instability throughout global fixed-income, currency, commodities and equities markets.
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