For the week, the S&P500 jumped 3.0% (up 9.8% y-t-d), and the Dow gained 2.6% (up 9.1%). The Banks surged 7.7% (up 12.5%), and the Broker/Dealers jumped 5.2% (up 1.2%). The Morgan Stanley Cyclicals jumped 5.0% (up 20.6%), and the Transports rose 3.9% (up 23.6%). The Morgan Stanley Consumer index increased 2.1% (up 8.9%), and the Utilities added 1.3% (up 0.1%). The S&P 400 Mid-Caps rose 3.2% (up 22.0%), and the small cap Russell 2000 gained 3.2% (up 21.0%). The Nasdaq100 gained 1.7% (up 17.8%), and the Morgan Stanley High Tech index increased 2.1% (up 12.8%). The Semiconductors surged 4.1% (up 14.6%). The InteractiveWeek Internet index added 0.8% (up 32.1%). The Biotechs added 0.4%, increasing 2010 gains to 24.6%. With bullion surging $51, the HUI gold index jumped 7.7% (up 35.3%).
One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 13 bps. Two-year government yields declined 4 bps to 0.46%. Five-year T-note yields ended the week 9 bps higher to 1.56%. Ten-year yields jumped 14 bps to 3.01%. Long bond yields rose 11 bps to 4.32%. Benchmark Fannie MBS yields were 9 bps higher at 3.94%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 5 bps to 93 bps. Agency 10-yr debt spreads were little changed at 16.5 bps. The implied yield on December 2011 eurodollar futures fell 12 bps to 0.705%. The 10-year dollar swap spread increased 0.5 to 16.25. The 30-year swap spread increased 1 to negative 20.25. Corporate bond spreads narrowed. An index of investment grade bond risk declined 4 bps to 92 bps. An index of junk bond risk declined 50 to 475 bps.
Investment grade issuers included AIG $2.0bn, Hewlett-Packard $2.0bn, Citigroup $1.875bn, Apache Energy $1.0bn, CRH America $750 million, Cooper $650 million, Bank of New York Mellon $600 million, St. Jude Medical $500 million, Eastman Chemical $500 million, Harris Corp $700 million, Idex $300 million, Texas Eastern $300 million, Nisource $250 million, Cigna $250 million, and San Clemente Leasing $240 million.
Junk bond funds saw outflows of $450 million (from Lipper). Junk issuers included Clearwire Communications $2.925bn, Transdigm $1.55bn, International Lease Finance $1.0bn, American Tower $1.0bn, Murray Energy $690 million, AMC Entertainment $600 million, Puget Energy $450 million, National Amusements $400 million, Bresnan Broadband $250 million, Darling International $250 million, Adams Outdoor Advertising $350 million, and Vector Group $90 million.
Converts issues included Omnicare $500 million.
International dollar debt sales included Westpac Banking $2.5bn, BG Energy $1.0bn, Digicel $800 million, and Incitec Pivot $500 million.
U.K. 10-year gilt yields rose 7 bps this week to 3.41%, and German bund yields jumped 12 bps to 2.85%. Ireland yields sank 105 bps to 8.14%. Greek 10-year bond yields declined 21 bps to 11.55%. Ten-year Portuguese yields dropped 105 bps to 5.91%. The German DAX equities index increased 1.4% (up 16.6% y-t-d) to another 2010 high. Japanese 10-year "JGB" yields were little changed at 1.20%. The Nikkei 225 gained 1.4% (down 3.5%). Emerging markets were mostly higher. For the week, Brazil's Bovespa equities index increased 2.3% (up 1.7%), and Mexico's Bolsa added 1.3% (up 16.4%). South Korea's Kospi index jumped 2.9% (up 16.3%). India’s equities index rallied 4.3% (up 14.3%). China’s Shanghai Exchange slipped 1.0% (down 13.3%). Brazil’s benchmark dollar bond yields declined 2 bps to 4.01%, and Mexico's benchmark bond yields fell 5 bps to 4.00%.
Freddie Mac 30-year fixed mortgage rates rose 6 bps last week to a 17-wk high 4.46% (down 25bps y-o-y). Fifteen-year fixed rates gained 4 bps to 3.81% (down 46bps y-o-y). One-year ARMs added 2 bps to 3.25% (down 100bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 13 bps to 5.37% (down 62bps y-o-y).
Federal Reserve Credit increased $0.4bn to $2.318 TN. Fed Credit was up $97.9bn y-t-d (4.8% annualized) and $138.8bn, or 6.0%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/1) increased $0.5bn to a $3.341 TN. "Custody holdings" have increased $386bn y-t-d (14.1% annualized), with a one-year rise of $409bn, or 14.0%.
M2 (narrow) "money" supply expanded $10.3bn to a record $8.809 TN. Narrow "money" has increased $276bn y-t-d, or 3.6% annualized. Over the past year, M2 grew 3.3%. For the week, Currency added $1.4bn, and Demand & Checkable Deposits increased $17.0bn. Savings Deposits added $1.0bn, and Small Denominated Deposits declined $5.8bn. Retail Money Fund assets fell $3.1bn.
Total Money Market Fund assets (from Invest Co Inst) declined $3.3bn to $2.810 TN. Year-do-date, money fund assets have dropped $483bn, with a one-year decline of $509bn, or 15.3%.
Total Commercial Paper outstanding sank $44bn to $1.021 TN. CP has declined $149bn year-to-date, and was down $215bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.469 TN y-o-y, or 19.6%, to a record $9.049 TN.
Global Credit Market Watch:
November 29 – Bloomberg (James G. Neuger and Simon Kennedy): “European governments sought to quell the market turmoil menacing the euro, handing Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to bear some cost of future bailouts. European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers…”
December 1 – Bloomberg (Lukanyo Mnyanda and Paul Dobson): “Bailouts for Ireland and Greece and speculation that Portugal and Spain may need aid are prompting investors to shun some of Europe’s highest-rated bonds. The cost of insuring German debt against default rose yesterday to the highest since May. The yield on 10-year French securities climbed to as much as 3.247 percent, the most in more than in six months, and the extra yield, or spread, investors demand to hold 10-year Belgian bonds instead of similar-maturity German bunds climbed to the most since at least 1993.”
December 1 – Bloomberg (Shannon D. Harrington): “The failure of European leaders to contain the region’s debt crisis with a bailout of Ireland has driven relative borrowing costs in the global corporate bond market to a 12-week high. Investors demand an extra 1.77 percentage points in yield to own company bonds instead of government debt, the most since Sept. 8…”
November 30 – Bloomberg (Charles Penty and Gavin Finch): “Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth- biggest economy may need an Irish-style bailout.”
November 30 – Bloomberg (Tim Catts): “Corporate bond sales worldwide are tumbling on concern Ireland’s debt crisis will spread across Europe as returns on the notes approach their worst month since credit markets froze two years ago. Issuance has slumped 29% since Nov. 15, compared with the same period a year earlier, after surging 34% in the first half of the month…”
November 30 – Bloomberg (Andres R. Martinez): “Mexico’s benchmark peso bonds are headed to their biggest monthly slide since February 2009, as investors shun riskier assets on concern the Irish debt crisis may spread to other European nations.”
December 1 – Bloomberg (Ron Harui): “Foreign-exchange losses from carry trades climbed to the highest level in more than two years as hedge funds and other large speculators unwound bets that the euro will strengthen amid Europe’s sovereign-debt crisis. Royal Bank of Scotland Plc’s index for carry trades… fell 9.7% in November, the biggest drop since October 2008.”
November 30 – Bloomberg (Krystof Chamonikolas): “Hungary’s bonds tumbled for a seventh day, lifting five-year yields to the highest since September 2009, as a row between the central bank and the government over interest rates undermined investor confidence. The yield on government bonds in forint due February 2015 jumped 20 basis points to 8.38%...”
Global Government Finance Bubble Watch:
December 3 – Bloomberg (Simon Kennedy and Simone Meier): “Jean-Claude Trichet is keeping the onus on governments to fix the debt crisis as the European Central Bank buys bonds to win politicians time to cut deficits. Warning European Union leaders that they can’t rely on ‘benign neglect’ to quell market turmoil, Trichet, the ECB’s president, is deploying a two-pronged strategy to ease roiled markets. The bank snapped up Portuguese and Irish bonds again today after Trichet yesterday assured investors that policy makers will delay the withdrawal of emergency liquidity.”
December 3 – Bloomberg (Alexandra Harris and Brendan A. McGrail): “U.S. states and cities scheduled sales of $22.6 billion in debt this week, almost the highest level in five years…”
Currency Watch:
November 30 – Bloomberg (Anchalee Worrachate): “The value of currency derivatives worldwide doubled in the past three years to $3.2 trillion amid the ‘turbulence’ of the credit crisis… The gross market value, or the cost to replace all open contracts such as swaps, options and forwards, jumped from $1.6 trillion in June 2007, according to… the BIS.”
The dollar index reversed course, declining 1.5% for the week (up 1.6% y-t-d) to 79.144. On the upside for the week, the South African rand increased 4.4%, the Norwegian krone 3.4%, the Swedish krona 3.0%, the Swiss franc 3.0%, the Australian dollar 3.0%, the Brazilian 2.4%, the New Zealand dollar 2.2%, the South Korean won 1.9%, the Japanese yen 1.8%, the Canadian dollar 1.8%, the Danish krone 1.4%, the Euro 1.3%, the Singapore dollar 1.3%, the Mexican peso 1.2%, the British pound 1.2%, and the Taiwanese dollar 0.5%.
Commodities Watch:
December 2 – Bloomberg: “China’s gold imports jumped almost fivefold in the first 10 months from the entire amount shipped in last year as concern about rising inflation increased its appeal as a store of value, said the Shanghai Gold Exchange. Imports gained to 209 metric tons compared with 45 tons for all of 2009…”
November 29 – Bloomberg (Whitney McFerron, Elizabeth Campbell and Jeff Wilson): “This year’s agriculture boom is a bust for U.S. dairy farmers as surging costs for cattle feed compound a glut of milk products. While the 27% jump in wheat prices and 48% gain in cotton may send farm income to a record, dairies will lose money in 2011 for the second time in three years, said Mike Brown, an economist at Glanbia Foods… Corn, a feed ingredient, jumped 33% in the two months ended Oct. 31…Dairy farmers expanded herds following the 70 percent jump in prices to a record in 2007…”
December 3 – Bloomberg (Yi Tian): “Copper prices rose, capping the biggest weekly gain in more than four months…”
December 3 – Bloomberg (Whitney McFerron): “Wheat rose to the highest price in almost four months on renewed concern that unusually heavy rainfall in Australia will delay the harvest and reduce grain quality.”
December 3 – Bloomberg (Leslie Patton): “Cotton prices surged, capping the biggest weekly gain in 39 years, on mounting concern that exports will be limited from India, the world’s second-largest grower… Futures in New York have soared 75% this year as demand in China climbed and inventories plunged in the U.S…”
December 3 – Bloomberg (Whitney McFerron): “Rice futures rose, heading for the biggest weekly gain since 2009, on concern that global demand will outpace supplies as adverse weather cuts output from Asia to the U.S.”
November 29 – Bloomberg (Yuriy Humber): “Uranium rose to the highest in more than two years after China Guangdong Nuclear Power Co. agreed on long-term supply with the two largest producers and expectations Asia’s biggest economy will boost its reactor-building targets.”
The CRB index surged 5.0% (up 11.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 5.9% (up 16.0% y-t-d). Spot Gold rose 3.7% to $1,414 (up 29% y-t-d). Silver surged 9.8% to $29.40 (up 75% y-t-d). January Crude jumped $5.66 to $89.42 (up 13% y-t-d). January Gasoline gained 9.2% (up 15% y-t-d), while January Natural Gas slipped 1.8% (down 22% y-t-d). March Copper rose 6.6% (up 20% y-t-d). March Wheat surged 13.4% (up 44% y-t-d), and March Corn gained 3.7% (up 38% y-t-d).
China Bubble Watch:
December 1 – Bloomberg: “China’s manufacturing grew at a faster pace for a fourth straight month in November, indicating the economy can withstand higher interest rates as price pressures escalate. The Purchasing Managers’ Index rose to 55.2 from 54.7 in October…”
December 1 – Bloomberg: “China’s home prices rose 0.8% in November, gaining for a second month even as the central bank raised interest rate for the first time since 2007, said SouFun Holdings Ltd., the nation’s biggest real estate website owner.”
December 1 – Bloomberg: “China’s interest-rate swaps jumped the most in three years last month on speculation the central bank will raise borrowing costs further to rein in the fastest inflation since 2008 as foreign capital surges into the nation.”
November 30 – Bloomberg (Eunkyung Seo): “Rolls-Royce Motor Cars Ltd., Bayerische Motoren Werke AG’s ultra-luxury nameplate, plans to sell 800 cars in China in 2011 as it aims to raise sales eightfold in two years in the world’s largest auto market. The automaker delivered almost 500 cars in China in the first 10 months of 2010, compared with about 100 for the whole of last year…”
India Watch:
November 30 – Bloomberg (Kartik Goyal): “India’s economy grew more than economists estimated last quarter, adding to evidence of a strengthening in domestic demand that’s stoked inflation… Gross domestic product rose 8.9% in the three months through September from a year earlier…”
Asia Bubble Watch:
December 1 – Bloomberg (Eunkyung Seo): “South Korea’s exports expanded for the 13th consecutive month in November… Overseas shipments increased 24.6% from a year earlier…”
November 29 – Bloomberg (Novrida Manurung): “Indonesia’s economy may accelerate at least 6% in the fourth quarter and 6% for the full year 2010, Coordinating Minister for the Economy Hatta Rajasa said…”
December 1 – Bloomberg (Shamim Adam and Novrida Manurung): “Indonesia’s inflation accelerated in November, putting pressure on policy makers to raise interest rates and contain price increases… Consumer prices rose 6.33% last month from a year earlier…”
December 1 – Bloomberg (Suttinee Yuvejwattana): “Thailand unexpectedly raised interest rates for the third time this year, signaling policy makers view inflation as a bigger threat than slowing growth.”
Latin America Watch:
November 29 – Bloomberg (Andre Soliani and Iuri Dantas): “Brazil’s broadest measure of inflation quickened to the fastest pace in 28 months on a surge in raw materials and agricultural goods. Consumer, construction and wholesale prices, as measured by the IGP-M price index, jumped 1.45% in November… Prices rose 10.27% from a year ago.”
December 3 – Bloomberg (Andre Soliani and Iuri Dantas): “Brazil’s central bank raised reserve requirements on cash and time deposits to slow consumer lending that’s growing 20% annually and prevent a credit bubble.”
December 1 – Bloomberg (Drew Benson and Camila Russo): “Argentine inflation of almost 30% will drive local governments to borrow 18.4 billion pesos ($4.6 billion) next year to pay for rising wages and budget deficits.”
Unbalanced Global Economy Watch:
December 1 – Bloomberg (Jennifer Ryan): “U.K. manufacturing growth unexpectedly accelerated to the fastest pace in 16 years in November as export orders climbed.”
December 1 – Bloomberg (Simone Meier): “Europe’s manufacturing industries expanded at the fastest pace in four months in November, led by Germany… A gauge of manufacturing in the 16-nation euro area rose to 55.3 from 54.6 in the previous month…"
November 29 – Bloomberg (Simone Meier): “European confidence in the economic outlook improved to the highest in three years in November as Germany’s export-driven growth helped counter concerns that a spreading sovereign-debt crisis will hurt the recovery.”
November 30 – Bloomberg (Rainer Buergin): “German unemployment fell for a 17th month in November as business optimism improved, underscoring the gulf between Europe’s biggest economy and peripheral nations struggling to cut debt. The number of people out of work declined a seasonally adjusted 9,000 to 3.14 million, the lowest since December 1992…”
November 29 – Bloomberg (Toby Alder and Niklas Magnusson): “Sweden’s economic growth gained momentum in the third quarter as exports and private spending supported a rebound in the largest Nordic economy. Gross domestic product expanded 2.1% in the three months through September…”
U.S. Bubble Economy Watch:
December 3 – Bloomberg (Timothy R. Homan): “Employers added fewer jobs than forecast in November and the unemployment rate rose to 9.8%, pointing to economic weakness that’s likely to keep the Federal Reserve pumping money into the financial system. Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg… The unexpected gain in unemployment is likely to intensify political debate over extending Bush-era tax cuts, as well as the Fed’s $600 billion program of asset purchases intended to spur growth.”
Real Estate Bubble Watch:
December 2 – Bloomberg (John Gittelsohn): “U.S. homes in the foreclosure process sold for about 32% less than non-distressed properties in the third quarter, the biggest discount in five years, as buyer demand slumped, according to RealtyTrac Inc… A quarter of all U.S. transactions involved those types of homes, according to the Irvine, California-based data seller.”
Central Bank Watch:
December 3 – Bloomberg (Joshua Zumbrun): “Federal Reserve Chairman Ben S.
Bernanke defended the Fed’s decision to purchase $600 billion in Treasury securities and didn’t rule out expanding the program, in an interview for CBS television’s ‘60 Minutes,’ the network said. ‘He explains why the Fed announced its intention to buy $600 billion in Treasury securities, defending against charges the move will lead to inflation and not ruling out the purchase of more,’ according…CBS.”
November 29 – Bloomberg (Michael Heath and Robert Fenner): “Reserve Bank of Australia Governor Glenn Stevens said the nation’s mining industry may propel the economy over the long term with less volatility, fueled by ‘unprecedented’ demand for steel in China and India. ‘There is likely to be a further significant rise in business investment over the next few years, from a level that is already reasonably high as a share of gross domestic product,’ Stevens said…”
Fiscal Watch:
December 3 – Wall Street Journal (Corey Boles): “The president's U.S. deficit commission received the backing of a majority of its 18-strong panel, but fell short of the 14 votes needed to possibly trigger congressional votes on its recommendations."
November 26 – Bloomberg (Brian Faler): “Senate Republicans have endorsed a call for a constitutional amendment requiring the government to balance its budget after Tea Party candidates made erasing the deficit a rallying cry throughout the U.S. election campaign. While the calls may be urgent, even Washington’s leading deficit foes say it will take decades to balance the books. A proposal by the heads of President Barack Obama’s debt commission to cut the budget by $4 trillion wouldn’t wipe out the deficit for more than 25 years. Representative Paul Ryan, who’s in line to become chairman of the House Budget Committee, predicts it will take a half-century… ‘This budget is screwed up so badly you can’t balance it in the immediate future,’ said Ryan… Senator Dick Durbin of Illinois, the Senate’s No. 2 Democrat, said the problem is ‘pure demographics. Boomers are showing up old and sick and, as a consequence, costs are dramatic.’”
GSE Watch:
November 30 – Bloomberg (Lorraine Woellert and Clea Benson): “Fannie Mae and Freddie Mac are facing growing resistance as they attempt to push failed home loans off their books and onto the balance sheets of banks including Bank of America Corp. and JPMorgan Chase & Co. The two government-owned mortgage companies are enforcing contracts that require lenders to buy back loans that didn’t meet underwriting standards. At the end of September, the companies reported, banks hadn’t responded to $13 billion in buyback requests.”
Muni Watch:
December 3 – Bloomberg (Alexandra Harris): “Investors withdrew $469 million from municipal-bond mutual funds in the week ended Dec. 1, the third straight outflow, according to Lipper FMI…”
December 3 – Bloomberg (Tim Jones): “The Illinois General Assembly placed new demands on the funding of municipal retirement plans, even as it recessed until early January without acting on a $3.7 billion bond proposal to make payments into state employee pension funds.”
Kicking the Can:
Limited time to write, again (I just don’t know what I do with my free time…).
So, are policymakers making things better - or is policymaking simply kicking the can down the road? While this aspect of policy has not been adequately scrutinized, I am of the view that the Fed’s 2007 easing signals (beginning with the August 17, 2007 discount rate cut following an unscheduled meeting) directly contributed to the severity of the 2008 global financial crisis.
Recall that the CRB Commodities Index traded from about 300 in September 2007 to a record high of 474 by July 2008. Crude oil prices almost doubled to trade to 147, a destabilizing price shock for an increasingly susceptible U.S. economy. Global liquidity overabundance had the emerging markets on a rip. And in the face of a mounting crisis, U.S. stocks were on a mini-roar. The S&P500 rallied to a record high in October 2007. Liquidity-driven market excess – across the spectrum of asset classes all across the globe – had created unparalleled systemic vulnerability. In the end, the global financial system came to be detached from fundamentals. Instead, they were hinged tenuously on one gigantic “risk on” liquidity trade.
Sometimes it does seem like déjà vu all over again. I have addressed the discomforting parallels between the eruption of subprime problems in the spring of 2007 (the first crack in the mortgage/Wall Street finance Bubble) and this past spring’s Greek crisis (the initial crack in the global government finance Bubble).
It is worth noting that an aggressive loosening of monetary policy in 2007 - and into 2008 – had no positive effect on the underlying quality of U.S. mortgage Credit, although it likely prolonged the mortgage issuance boom (total mortgage Credit expanded almost $1.1 TN during 2007!). Irreparable damage had been done during the Bubble. Aggressive “activist” policymaking could only prolong market distortions and speculative excess.
The reemergence of financial stress with the Greek crisis incited an aggressive response from the ECB (liquidity support), the Fed (QE2), and global central bankers more generally (reluctance to move away from overly-stimulative policies). Clearly, liquidity operations, the Greek bailout, and ultra-loose financial conditions did not improve the Credit quality of Ireland’s debt (or that of Portugal, Spain, etc.). Yet, succumbing to market demands, the ECB yesterday (again) postponed the initiation of its “exit strategy” to at least April 2011. The markets triumphed yet again in a skirmish with policymakers - and celebrated with a big, emboldened rally.
This summer’s introduction of QE2 (and the death of “exit strategy”) fostered a dramatic loosening of financing conditions. Treasury yields collapsed. Mortgage and municipal borrowing costs sank to record lows. Meanwhile, corporate Credit spreads dropped to levels not seen since before the 2008 crisis. Corporate issuance boomed, with record junk sales. The S&P500 has rallied about 21% off of this summer’s lows and the S&P400 Mid-Cap index has gained 27%. Such a financial backdrop should be constructive for confidence, spending, and economic recovery, and recent data has, unsurprisingly, been generally upbeat. But today’s non-farm payroll report provides a timely reality check.
Considering the unmatched degree of fiscal and monetary stimulus, U.S. economic performance remains ominously dismal. Rising mortgage yields and a rising tide of austerity throughout municipal finance portend challenges for an economy already at 9.8% unemployed.
We’ve been witnessing further evidence of the seductiveness of Bubbles. Massive fiscal stimulus and ultra-loose monetary policy are supporting the most tepid of recoveries. Meanwhile, inflating securities prices ensure investors and analysts view the glass as at least half full. Policymaking works to inflate stock prices, and then policymakers take comfort that buoyant markets are a confirmation of the adeptness of their policies. Is it not apparent that the big winner here is financial speculation?
The bubbling Chinese economy faces its own issues. Entrenched Bubbles scoff at “tinkering” and timid policymaking – and China’s Mighty Credit Bubble is proving no exception. Today, China’s Politburo released a statement proclaiming that next year they “will adopt proactive fiscal policies and prudent monetary policy.” The country’s officials are increasingly aware that aggressive tightening is warranted. Home price inflation has proved resilient, while general consumer price inflation has become well-entrenched. Food price spikes have emerged as a serious problem.
When I read of Chinese policy moves intended to suppress Credit and financial flows going to speculative endeavors – while actively promoting lending to more productive enterprises and to ensure ongoing economic expansion – I am reminded of the failed course of U.S. monetary management in the latter years of the “Roaring Twenties.” It is the nature of Bubble economies that they become Credit gluttons. Credit growth and financial flows grow increasingly unwieldy – and the greater the inevitable imbalances the greater the overall Credit expansion required to sustain the boom. Efforts to sustain boom-time prosperity – while at the same time attempting to harness asset inflation and suppress increasingly destabilizing speculation – are prone to spectacular failure.
Chinese authorities recognize they have a problem – a serious monetary dilemma compounded and complicated by our QE2. Today’s Politburo statement adds further evidence that more aggressive tightening measures will commence in 2011. Yet the markets have turned numb to such warnings. And I’ll be the first to admit skepticism that the Chinese will administer the necessary harsh medicine. Chinese authorities have waited too long and allowed “terminal” Bubble excess to gain a powerful foothold. With the Fed and ECB kicking the can down the road, the markets can be forgiven for believing that Chinese policymakers will lack the fortitude to truly tighten system Credit and liquidity.
Global markets could be at a bit of a crossroad here. Commodities are on the move again, and mounting inflationary pressures – especially in China and Asia – are a serious issue. And it wouldn’t take much renewed dollar weakness to push this issue to the forefront. The European peripheral debt crisis has muddied the waters somewhat, but the upward bias on global yields was back in play this week. The U.S. municipal bond market has stabilized. Yet the small decline in yields following the big spike higher would seem to suggest further vulnerability. A huge list of municipal issuers is lined up to sell debt.
The gamey U.S. stock market has placed a big wager on the “risk on” trade. With QE2 in the early phase, greed has thus far held fear at bay. It surely won’t take months of disappointing data to spark QE3 banter. And there’s nothing like a world of synchronized speculative asset markets to embolden those banking on global policymaker liquidity backstops – the Fed, the ECB, BOJ, PBOC… Perhaps U.S. equities will begin to decouple from global asset inflation when the fragile U.S. economy and Credit system come to be viewed as relatively more vulnerable to surging commodities prices and rising global yields.
An important facet of my thesis holds that – with the post-Greek crisis global focus on structural debt issues - the U.S. is in the process of becoming a major focal point. In the grand scheme of things, Ireland may be only loud noise. Gold, silver and commodities prices don’t seem to be signaling sustainable dollar strength or overall confidence in the way things are heading.
It took months for mortgage Credit contagion to spread from subprime to attack the heart of the U.S. Credit system. Perhaps it’s a stretch to analyze in terms of an unfolding bursting of a global government finance Bubble - as opposed to a European peripheral debt crisis. I just don’t think so. And I fully expect that after market ebbs and flows – and near panics that incite more speculator-emboldening central bank market interventions/liquidity injections – the markets will inevitably discipline Washington. In the meantime, we are left with a game of counting the number of global policymakers kicking the can down the road.
Friday, October 24, 2014
11/19/2010 Ideological and Hostile *
For the week, the S&P500 was unchanged (up 7.6% y-t-d), while the Dow added 0.1% (up 7.4%). The S&P 400 Mid-Caps added 0.8% (up 17.0%), and the small cap Russell 2000 increased 0.7% (up 15.8%). The Banks declined 2.3% (up 7.7%), while the Broker/Dealers were unchanged (down 1.9%). The Morgan Stanley Cyclicals added 0.4% (up 15.1%), and the Transports gained 1.4% (up 18.9%). The Morgan Stanley Consumer index was little changed (up 7.5%), while the Utilities slipped 0.7% (down 0.1%). The Nasdaq100 dipped 0.1% (up 14.8%), while the Morgan Stanley High Tech index gained 1.1% (up 9.9%). The Semiconductors rose 1.2% (up 7.6%). The InteractiveWeek Internet index dipped 0.5% (up 28.8%). The Biotechs gained 1.4%, increasing 2010 gains to 24.5%. With bullion declining $16, the HUI gold index declined 1.1%.
One-month Treasury bill rates ended the week at 12 bps and three-month bills closed at 14 bps. Two-year government yields were little changed at 0.51%. Five-year T-note yields ended the week 16 bps higher at 1.50%. Ten-year yields jumped 9 bps to 2.88%. Long bond yields declined 4 bps to 4.25%. Benchmark Fannie MBS yields were 12 bps higher at 3.76%. The spread between 10-year Treasury yields and benchmark MBS yields widened 3 bps to 88 bps. Agency 10-yr debt spreads were 4 bps wider to 18 bps. The implied yield on December 2011 eurodollar futures declined 7.5 bps to 0.73%. The 10-year dollar swap spread increased 1.75 bps to 15.75. The 30-year swap spread declined 7 bps to negative 30. Corporate bond spreads narrowed. An index of investment grade bond risk declined 5 bps to 89 bps. An index of junk bond risk declined 5 to 481 bps.
Investment grade issuers included Pacific Gas & Electric $1.6bn, Procter & Gamble $500 million, Lowes Companies $1.0bn, Prudential $1.0bn, Laboratory Corp $925 million, Ace Ina $700 million, Steelriver Transmission $560 million, Delta Air Lines $475 million, Continental Airlines $425 million, Genworth Financial $400 million, Southern Cal Gas $300 million, Dun & Bradstreet $300 million, GATX $250 million, TTX $150 million, and California Water Services $100 million.
Junk bond funds saw outflows of $723 million (from Lipper), ending the streak of weekly inflows at 11. Junk issuers included Ally Financial $1.0bn, Dunkin Brands $625 million, Avis Budget Car Rental $600 million, Ball Corp $500 million, Covanta $400 million, AMO $385 million, Stone Energy $375 million, El Paso Pipeline $375 million, Affinity Group $333 million, NV Energy $315 million, Spirit Aerosystems $300 million, Thermadyne Holdings $260 million, CMS Energy $250 million, and Service Corp International $250 million.
Converts issues included Rightnow Technologies $150 million, Kaman Corp $115 million, and PDC Energy $100 million.
International dollar debt sales included Wind Acquisition $1.3bn and Gazprom $1.0bn.
Global yields are on the rise. U.K. 10-year gilt yields jumped 18 bps this week to 3.38%, and German bund yields surged 19 bps to 2.70%. Ireland yields declined 2 bps to 8.11%. Greek 10-year bond yields rose 18 bps to 11.56%. Ten-year Portuguese yields were little changed at 6.73%. The German DAX equities index jumped 1.6% (up 14.9% y-t-d) to a 2010 high. Japanese 10-year "JGB" yields jumped 7 bps to 1.06%. The Nikkei 225 rallied 3.1% (down 5.0%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index edged up 0.7% (up 3.4%), and Mexico's Bolsa advanced 1.5% (up 14.0%). South Korea's Kospi index increased 1.5% (up 15.3%). India’s equities index fell 2.9% (up 12.1%). China’s Shanghai Exchange dropped 3.2% (down 11.9%). Brazil’s benchmark dollar bond yields rose 7 bps to 4.00%, and Mexico's benchmark bond yields rose 20 bps to 4.02%.
Freddie Mac 30-year fixed mortgage rates reversed course, jumping 22 bps last week to 4.39% (down 44bps y-o-y). Fifteen-year fixed rates surged 19 bps to 3.76% (down 56bps y-o-y). One-year ARMs were unchanged at 3.26% (down 109bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 9 bps to 5.25% (down 61bps y-o-y).
Federal Reserve Credit rose $4.0bn to $2.293 TN. Fed Credit was up $73.2bn y-t-d (3.7% annualized) and $102bn, or 4.6%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/17) rose $4.9bn (23-wk gain of $265) to a record $3.341 TN. "Custody holdings" have increased $386bn y-t-d (14.8% annualized), with a one-year rise of $413bn, or 14.1%.
M2 (narrow) "money" supply jumped $16bn to $8.802 TN. Narrow "money" has increased $277bn y-t-d, or 3.6% annualized. Over the past year, M2 grew 3.3%. For the week, Currency added $1.5bn, and Demand & Checkable Deposits jumped $90.4bn. Savings Deposits dropped $70bn, and Small Denominated Deposits declined $4.8bn. Retail Money Fund assets dipped $0.8bn.
Total Money Market Fund assets (from Invest Co Inst) slipped $4.0bn to $2.798 TN. Year-do-date, money fund assets have dropped $496bn, with a one-year decline of $541bn, or 16.2%.
Total Commercial Paper outstanding sank $50.6bn to $1.08 TN. CP has declined $87bn year-to-date, and was down $184bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.520 TN y-o-y, or 20.2%, to a record $9.034 TN.
Global Credit Market Watch:
November 17 – Bloomberg (Veronica Navarro Espinosa and Helder Marinho): “Banco Bradesco SA and Banco Industrial e Comercial SA withdrew bond offerings as a global market rout and an investigation into alleged bank fraud pushed Brazilian corporate borrowing costs to a seven-week high.”
Global Government Finance Bubble Watch:
November 17 - Wall Street Journal (Michael Aneiro and Stu Woo): “America's strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market. The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations.”
November 18 – Bloomberg (Jon Menon and Gavin Finch): “Chancellor of the Exchequer George Osborne says Britain ‘stands ready’ to assist Ireland. What he didn’t say is that U.K. taxpayers have already funded the largest part of an 18.4 billion-pound ($29.4 billion) bailout for Irish lenders. The aid was used to prop up the Irish units of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc since the onset of the credit crisis…”
Currency Watch:
The dollar index increased 0.5% (up 0.8% y-t-d) to 78.50. On the upside for the week, the New Zealand dollar increased 0.7%, the Mexican peso 0.7%, the Brazilian real 0.4%, the Australian dollar 0.2%, the Singapore dollar 0.1%, and the Swedish krona 0.1%. On the downside, the Japanese yen declined 1.22%, the Swiss franc 1.15%, the British pound 0.8%, the Norwegian krone 0.7%, the South African rand 0.5%, the Canadian dollar 0.4%, the Taiwanese dollar 0.4%, and the euro 0.1%.
Commodities Watch:
November 18 – Bloomberg (Madelene Pearson): “Gold imports this year by India, the largest consumer, have already exceeded 2009 levels as consumers boost jewelry purchases, according to the World Gold Council. Imports totaled 624 metric tons by the end of the third quarter, compared with 559 tons in all of 2009…”
November 18 – Bloomberg (Rudy Ruitenberg): “World food imports will exceed $1 trillion this year, close to the record reached in the food- crisis year of 2008… The global cost of importing foodstuffs will jump 15% to $1.026 trillion in 2010…”
November 16 – Bloomberg (Luzi Ann Javier and Susan Li): “China, the biggest cotton importer, may buy 20 million bales this year to meet rising demand from the domestic textile industry, sustaining price gains, Olam International Ltd. said. The amount would be a record. The Asian nation purchased 10.9 million bales in the year ended July 31…”
The CRB index declined 1.6% (up 5.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped 2.8% (up 7.9% y-t-d). Spot Gold fell 1.2% to $1,353 (up 23% y-t-d). Silver rallied 4.8% to $27.19 (up 5% y-t-d). January Crude dropped $3.36 to $81.98 (up 3% y-t-d). December Gasoline slipped 0.6% (up 7% y-t-d), while December Natural Gas rallied 9.6% (down 25% y-t-d). December Copper declined 1.4% (up 15% y-t-d). December Wheat dropped 3.7% (up 19% y-t-d), and December Corn fell 2.5% (up 26% y-t-d).
China Bubble Watch:
November 16 – Financial Times (Geoff Dyer): “China is considering a package of price controls and other measures to contain inflation which rose sharply last month and has become the principal risk to the economy. The National Development and Reform Commission, China’s main economic planning body, is putting together a ‘one-two punch’ of policies to limit food inflation, state media reported… in a sign that debate is breaking out over how to tackle rising prices. Several major cities in China have announced plans to try to cap food prices, while two officials in Beijing also confirmed this week that the government was looking again at price controls.”
November 17 – Bloomberg: “China may impose temporary price controls to counter the fastest inflation in two years, the cabinet said. Price caps on ‘important daily necessities’ and production materials will be used if necessary, the State Council said… China’s accelerating inflation has sent stocks and commodities sliding on speculation that efforts to curb prices will cool the world’s fastest-growing major economy.”
November 16 – Bloomberg: “Chinese Central Bank Governor Zhou Xiaochuan said China is under ‘pressure’ from capital inflows as a state newspaper said price controls could be imposed to cool the fastest inflation in two years. Zhou reiterated government goals of ‘moderate’ credit growth and stronger liquidity management…”
November 16 – Bloomberg: “China’s four biggest banks will not issue any new loans to property developers for the rest of the year, the state-run China Real Estate Business reported...”
November 16 – Bloomberg (Scott Reyburn): “The sale of an 18-century white-jade carving has rounded off a series of auctions of Chinese art in the U.K. that raised a record 105 million pounds ($168 million). The carving of a deer with its young fetched 3.8 million pounds… The price was the second-highest of the series after the 51.6 million pounds for a Qianlong Imperial vase, an auction record for Chinese art, also set at a regional saleroom, Bainbridges in west London. Asian collectors are prepared to pay ever-higher prices for objects associated with Chinese emperors, wherever in the world they are offered, dealers said. ‘China has always been the poor relation of Western art,’ said London-based dealer Alastair Gibson, a director of Asian Art… ‘Now, it’s up there with Picasso and Warhol.”
Asia Bubble Watch:
November 18 – Bloomberg (Eunkyung Seo): “South Korea’s economy is expected to grow 6.2% this year, the Organization for Economic Cooperation and Development said…”
November 17 – Bloomberg (Eunkyung Seo and William Sim): “The Bank of Korea’s second interest-rate increase this year leaves its benchmark below the pace of inflation… Governor Kim Choong Soo raised borrowing costs by 0.25 percentage point to 2.5% yesterday.”
November 18 – Bloomberg (Shamim Adam and Andrea Tan): “Singapore said its economy will expand a record 15% this year, the fastest pace in Asia, even as slowing global growth threatens to damp export demand. The island’s currency rose.”
Latin America Watch:
November 18 – Bloomberg (Randy Woods): “Chile’s gross domestic product in the three months through September grew at its fastest pace since 2005… Chile’s GDP expanded 7% in the third quarter from the previous year…”
Unbalanced Global Economy Watch:
November 16 – Bloomberg (Svenja O’Donnell): “Bank of England Governor Mervyn King said inflation will remain ‘elevated’ throughout 2011 after it unexpectedly accelerated in October, forcing him to write the fourth letter of explanation to the Treasury this year… Consumer prices increased 3.2% in October from a year earlier…”
November 18 – Bloomberg (Maria Petrakis and Christos Ziotis): “Greece’s government plans to cut the budget gap by 5 billion euros ($6.8bn) in 2011 by reducing spending, including wages at state companies, and increasing sales taxes to meet targets under a European Union-led rescue. The deficit will decline to 7.4% of gross domestic product…”
U.S. Bubble Economy Watch:
November 17 – Bloomberg (Jody Shenn and John Gittelsohn): “Home ownership may be falling out of reach for more Americans as lenders toughen their standards for Federal Housing Administration-insured loans beyond what the agency itself requires. Mortgage lenders… have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings.”
November 16 – Bloomberg (Jeff Wilson, Alan Bjerga, Yi Tian): “The best second-half for commodities in a generation is pushing U.S. farm incomes and agricultural land prices toward record highs. While the 17% rise in the Thomson Reuters/Jefferies CRB Index of 19 raw materials since the end of June reflects higher prices for all commodities, agriculture led the biggest rally since 1972.”
November 17 – Bloomberg (David J. Lynch): “Southern Copper Corp., a Phoenix- based mining company that boasts some of the industry’s largest copper reserves, plans to invest $800 million this year in projects such as a new smelter and a more efficient natural-gas furnace. Such spending sounds like just what the Federal Reserve had in mind in 2008 when it cut interest rates to near zero and started buying $1.7 trillion in securities to spur job growth. Yet Southern Copper, which raised $1.5 billion in an April debt offering, will use that money at its mines in Mexico and Peru, not the U.S….”
November 16 – Bloomberg: “Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30% more for clothes as surging cotton prices boost costs. ‘It’s a little terrifying to deal with cotton suppliers now,’ said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients. Cotton futures in China have surged more than 70% this year…”
November 16 – Bloomberg (Christopher Palmeri and Tim Jones): “The nation’s Republican governors and governors-to-be met for the first time since the Nov. 2 election that gave their party control of 29 statehouses, promising to address budget deficits by chopping the size of government. ‘Why do you exist?’ Pennsylvania Governor-elect Tom Corbett said that he would ask every state agency… New Mexico Governor-elect Susana Martinez said she would reduce the public payroll by 5% through attrition to deal with a deficit she said recently nearly doubled to $452 million…”
Real Estate Bubble Watch:
November 18 – Bloomberg (Kathleen M. Howley): “Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a record in the third quarter… The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45% from 2.36% in the previous three months…”
Central Bank Watch:
November 18 – Bloomberg (Craig Torres and Scott Lanman): “Federal Reserve Chairman Ben S. Bernanke defended his expansion of record monetary stimulus in a meeting with Senators as top Republican lawmakers stepped up their criticism of the central bank chief’s policies. Bernanke, in a closed-door meeting yesterday, said the Fed’s plan to buy $600 billion in assets would spur job growth while keeping inflation under control. John Boehner, the presumptive House speaker, and three other Republicans sent Bernanke a letter expressing ‘deep concerns’ about a policy they said risked weakening the dollar and fueling asset bubbles.”
November 17 – Bloomberg (David J. Lynch and Mike Dorning): “The Federal Reserve is facing the fiercest political assault on its powers in three decades as it struggles to help revive the U.S. economy. The Fed’s plan to expand its purchases of Treasury securities has triggered criticism from Republican lawmakers, some economists who wrote an open letter to the Fed protesting the move, and finance officials in Germany, China and Brazil. While central bank officials are pressing ahead with the $600 billion bond-buying program announced this month, analysts said the criticism may fan dissent within the Fed over the quantitative-easing policy. That may limit Chairman Ben S. Bernanke’s ability to take further measures if the economy remains weak.”
November 16 – Bloomberg (Steve Matthews and Joshua Zumbrun): “The Federal Reserve may soon need to tighten policy even amid a high U.S. unemployment rate to avert a rise in prices similar to the 1970s, Richmond Fed President Jeffrey Lacker said. ‘At some point in the not-too-distant future, we are likely to face an economy growing in a self-sustaining way while the unemployment rate is still relatively high by historical standards,’ Lacker said… ‘The decisions we make at that time will be the true test of whether we’ve learned our lessons.’”
November 17 – Bloomberg (Svenja O’Donnell): “The Bank of England’s Monetary Policy Committee split three ways for a second month as some officials became more concerned that Britain’s bout of inflation will dislodge price expectations.”
Muni Watch:
November 16 – Financial Times (Nicole Bullock): “Municipal bonds had their biggest one-day sell-off yesterday since the height of the financial crisis, prompting some borrowers to delay financing plans. The yields on triple A 10-year bonds rose 18 bps to 2.93%, the largest one-day rise since October of 2008… The $2,800bn ‘muni’ bond market where states and municipalities raise money has been under pressure over the past week amid a rise in the yields of benchmark US Treasury bonds, heavy bond sales and uncertainty about federal support for the market.”
November 16 – Bloomberg (Dunstan McNichol): “Washington state… may collect $1.2 billion less in taxes than forecast over the next 31 months because of a sluggish economy, a state council said.”
California Watch:
November 16 – Bloomberg (Michael B. Marois and Brendan A. McGrail): “California is selling $10 billion of one-year notes to boost cash on hand, as the state that produces 13% of the U.S. gross domestic product tries to assure investors it can repay the loan amid a $25 billion budget gap… The issue comes after the state’s Legislative Analyst’s Office said California’s deficit may exceed $25 billion in the next 19 months…”
November 16 – Bloomberg (Michael B. Marois): “California began marketing $2.75 billion of taxable debt today, including $2.5 billion of Build America Bonds. $1.65 billion segment of 30-year Build America securities is being offered to investors at a yield equivalent to 3.3 percentage points above a comparable-maturity Treasuries… The average extra yield Build America Bonds pay over 30-year Treasuries was 184 basis points yesterday…”
New York Watch:
November 16 – Bloomberg (Henry Goldman): “New York City, facing a $3.3 billion deficit in next year’s budget, will cut its workforce by more than 10,000 over the next year-and-a-half, Mayor Michael Bloomberg’s budget office reported.”
Ideological and Hostile:
With Eurozone tensions on the rise, Wednesday’s headline from the Financial Times read “Anger at Germany boils over.” “Bernanke Fires Back, Takes Aim at China,” was how the Wall Street Journal titled its analysis of the Fed Chairman’s speech this morning in Frankfurt. Paul Krugman also takes direct aim at Germany and China – and throws in the Republicans – with his “Axis of Depression” piece in today’s New York Times. In a troubled backdrop beckoning for level-headed analysis and cooperation, the mood has turned decidedly ideological and hostile.
Dr. Bernanke has compiled speeches and academic papers that will be scrutinized for generations to come. He added one more to his list this morning. Global policymakers – already deeply skeptical – will not be impressed. Officials from the “developing” economies are sure to be displeased. The Chinese must be incensed – and it is difficult for me to discern how this will work to our advantage. We’re the big debtor and importer. In no way does our policymaking qualify as the “moral high ground.” Indeed, most would argue we’ve been permanently disqualified. QE2 was one step too far – it crossed the line.
The Bernanke Fed has boxed itself in a corner. QE2 has been poorly received at home and abroad. Yet with this policy having succeeded in inflating global markets, there will be no turning back from our monetary experiment. Bernanke came out swinging today – or at least finger pointing. Appreciating that QE3, 4, and 5… are now anything but sure things, he calls for help from additional fiscal stimulus. In the following breath, he pays lip service to the need to resolve long-term fiscal challenges. We’re at the point where it all lacks credibility. Dr. Bernanke has always been an inflationist – and these stripes are increasingly apparent for all to observe. Having been unsuccessful in “marketing” his latest installment of Treasury debt monetization, it is apparently now time to identify culprits.
From Dr. Bernanke’s speech, “Rebalancing the Global Economy”: “As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new… In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account. Thus, it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole.”
After Treasury Secretary Geithner’s “global rebalancing” proposals smacked up against a cement wall at the G20, Chairman Bernanke must know his global rebalancing speech will be flatly rejected in terms of providing a legitimate policymaking proposal. It was instead a rehash of flawed doctrine – and a stinging slap in the face. Our economy has been running Current Account Deficits since the eighties. The Fed has been accommodating financial excesses since the eighties. We’ve had insufficient household and national savings since the eighties. Monetary policy has nurtured imbalances for decades. So, we’re going to castigate the Chinese?
I find it embarrassing - to blame our trade partners and Creditors for our predicament. Worse yet, it is frightening that there is obviously no plan of attack for dealing with our nation’s structural issues. The Geithner/Bernanke “global rebalancing” gimmick is to have China and the “developing” economies inflate domestic demand and stimulate imports. In the meantime, we stay the course with massive deficits, monetization and near-zero interest rates. This approach has no chance of rectifying our deep structural impairment nor resolving global imbalances. It does, however, increase the odds of a crisis of confidence in our debt markets and currency.
“In Defense of Ben Bernanke” (Wall Street Journal, November 15, 2010), Alan Blinder states that QE2 is “not a radical departure from conventional monetary policy.” Only an individual that has been an integral part of the revolution of monetary management at the Federal Reserve would make such a statement.
Beginning back with early-nineties banking system impairment, the Greenspan Federal Reserve nurtured Wall Street financial engineering and the rapid expansion of non-bank marketable debt. The GSEs, securitization markets and derivatives were viewed as instrumental for fostering the needed Credit expansion in the face of severe banking and fiscal headwinds. The Fed unleashed a lion.
No longer was monetary policy focused on creating and extracting banking system reserves in an effort to influence bank lending (and through bank Credit, growth and inflation). The old rules for governing a largely contained financial system no longer applied. A New Era was born. The Fed now could manipulate short-term borrowing costs and immediately stimulate flows into the securities markets, speculator risk-taking and leveraging, asset inflation, mortgage refinancing and equity extraction, home price gains, additional household net worth, spending... It became The Age of the Maestro, The Masters of the Universe, the enterprising investment banker and opportunistic mortgage originator. Traditional measures of economic health – the Current Account, savings rates, sound investment, productive capacity, stable money and Credit, balanced financial flows – were discarded. What mattered now were the markets, market perceptions and how the Fed could be counted on to orchestrate and sustain a boom.
I’ve argued for years now that the Fed had adopted a radical approach to monetary management - and it was disturbingly apparent that our central bank had become enamored with history’s most powerful monetary policy mechanism. And with dynamic marketable debt increasingly supplanting the boring old bank loans as the main driver of system Credit expansion (especially as the nineties progressed), the Federal Reserve had to take an increasingly aggressive and activist approach to ensuring ample marketplace liquidity and unwavering market confidence. The ’94 bursting of the bond/MBS Bubble, SE Asia, LTCM, the tech bust… The Fed nurtured a historic Credit Bubble and the larger the Bubble inflated the greater role monetary policy had to play to ward against a devastating crisis of confidence. Policy was conspicuously radicalized in the aftermath of the 2008 collapse of the mortgage/Wall Street finance Bubble.
But the chickens are bound to come home to roost. Especially after the past two years’ unprecedented global expansion of government debt, marketable debt securities that now absolutely dominate the world. The specter of market illiquidity reemerged with this spring’s Greek contagion crisis, and it was sufficiently scary. The ECB intervened to support struggling debt issuers and a vulnerable banking system. The Fed, fearing a more systemic crisis, played its QE2 trump card. The markets perceived this move as an unending commitment from the Fed to provide a liquidity backstop. Risk markets have inflated across the globe.
It is my view that a world financial apparatus dominated by marketable debt instruments is inherently unstable. Implement a monetary policy regime to manage marketplace liquidity and asset prices at your own peril. Be prepared for market dependency and ever-increasing liquidity injection requirements. Such a regime will reward the savviest speculators and ensure acute systemic vulnerability. To be sure, recent notions of perpetual QE inflated global markets indiscriminately. The “liquidity trade” threw caution to the wind. Liquidity overabundance also pushed inflationary forces in China and throughout Asia into the danger zone.
These days, Fed policy to manipulate U.S. securities markets has extraordinary spillover effects. In my vernacular, inflationary biases have shifted from U.S. mortgage finance and American housing to China, Asia, the “developing” economies and commodities. The Fed will now have an increasingly challenging task of ensuring sufficient liquidity to sustain inflated U.S. securities markets. Meanwhile, the “periphery” will have an increasingly frustrating job of trying to manage unwieldy financial flows into their markets and attendant overheated economies.
The basic premise of the “Bretton Woods II” thesis has been that it is in the interest of both parties for the U.S. to run Current Account Deficits and for Asian economies to send us manufactured goods while their central banks recycle the resulting dollar flows back into U.S. securities. And for as much distaste as I’ve had for “BWII” analysis, there has been the semblance of truth to the thesis of mutual benefits. I’ve argued that the arrangement where we exchange new debt instruments for imported goods, services, energy and commodities was dysfunctional and unsustainable. Today, with our massive expansion of non-productive – hence inherently vulnerable – debt and Asia’s heightened susceptibility to inflation and unwieldy financial flows, this arrangement has turned problematic. It is also fundamental to global marketplace liquidity.
Our policymakers are acting to the detriment of our Creditors. They speak in a tone that does not inspire confidence and may likely antagonize. The Chinese, in particular, can be counted on to act in what they perceive as their own best interest. They today confront serious inflation, “hot money” and overheating issues. As such, what has appeared as favorable prospects for continued global liquidity overabundance now look a lot less certain. Global yields were on the rise again this week, with heightened attention to structural debt issues. U.S. municipal bonds were hammered. My premise has been that the markets will inevitably discipline Washington. This may occur after it works its way up the food chain.
One-month Treasury bill rates ended the week at 12 bps and three-month bills closed at 14 bps. Two-year government yields were little changed at 0.51%. Five-year T-note yields ended the week 16 bps higher at 1.50%. Ten-year yields jumped 9 bps to 2.88%. Long bond yields declined 4 bps to 4.25%. Benchmark Fannie MBS yields were 12 bps higher at 3.76%. The spread between 10-year Treasury yields and benchmark MBS yields widened 3 bps to 88 bps. Agency 10-yr debt spreads were 4 bps wider to 18 bps. The implied yield on December 2011 eurodollar futures declined 7.5 bps to 0.73%. The 10-year dollar swap spread increased 1.75 bps to 15.75. The 30-year swap spread declined 7 bps to negative 30. Corporate bond spreads narrowed. An index of investment grade bond risk declined 5 bps to 89 bps. An index of junk bond risk declined 5 to 481 bps.
Investment grade issuers included Pacific Gas & Electric $1.6bn, Procter & Gamble $500 million, Lowes Companies $1.0bn, Prudential $1.0bn, Laboratory Corp $925 million, Ace Ina $700 million, Steelriver Transmission $560 million, Delta Air Lines $475 million, Continental Airlines $425 million, Genworth Financial $400 million, Southern Cal Gas $300 million, Dun & Bradstreet $300 million, GATX $250 million, TTX $150 million, and California Water Services $100 million.
Junk bond funds saw outflows of $723 million (from Lipper), ending the streak of weekly inflows at 11. Junk issuers included Ally Financial $1.0bn, Dunkin Brands $625 million, Avis Budget Car Rental $600 million, Ball Corp $500 million, Covanta $400 million, AMO $385 million, Stone Energy $375 million, El Paso Pipeline $375 million, Affinity Group $333 million, NV Energy $315 million, Spirit Aerosystems $300 million, Thermadyne Holdings $260 million, CMS Energy $250 million, and Service Corp International $250 million.
Converts issues included Rightnow Technologies $150 million, Kaman Corp $115 million, and PDC Energy $100 million.
International dollar debt sales included Wind Acquisition $1.3bn and Gazprom $1.0bn.
Global yields are on the rise. U.K. 10-year gilt yields jumped 18 bps this week to 3.38%, and German bund yields surged 19 bps to 2.70%. Ireland yields declined 2 bps to 8.11%. Greek 10-year bond yields rose 18 bps to 11.56%. Ten-year Portuguese yields were little changed at 6.73%. The German DAX equities index jumped 1.6% (up 14.9% y-t-d) to a 2010 high. Japanese 10-year "JGB" yields jumped 7 bps to 1.06%. The Nikkei 225 rallied 3.1% (down 5.0%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index edged up 0.7% (up 3.4%), and Mexico's Bolsa advanced 1.5% (up 14.0%). South Korea's Kospi index increased 1.5% (up 15.3%). India’s equities index fell 2.9% (up 12.1%). China’s Shanghai Exchange dropped 3.2% (down 11.9%). Brazil’s benchmark dollar bond yields rose 7 bps to 4.00%, and Mexico's benchmark bond yields rose 20 bps to 4.02%.
Freddie Mac 30-year fixed mortgage rates reversed course, jumping 22 bps last week to 4.39% (down 44bps y-o-y). Fifteen-year fixed rates surged 19 bps to 3.76% (down 56bps y-o-y). One-year ARMs were unchanged at 3.26% (down 109bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 9 bps to 5.25% (down 61bps y-o-y).
Federal Reserve Credit rose $4.0bn to $2.293 TN. Fed Credit was up $73.2bn y-t-d (3.7% annualized) and $102bn, or 4.6%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/17) rose $4.9bn (23-wk gain of $265) to a record $3.341 TN. "Custody holdings" have increased $386bn y-t-d (14.8% annualized), with a one-year rise of $413bn, or 14.1%.
M2 (narrow) "money" supply jumped $16bn to $8.802 TN. Narrow "money" has increased $277bn y-t-d, or 3.6% annualized. Over the past year, M2 grew 3.3%. For the week, Currency added $1.5bn, and Demand & Checkable Deposits jumped $90.4bn. Savings Deposits dropped $70bn, and Small Denominated Deposits declined $4.8bn. Retail Money Fund assets dipped $0.8bn.
Total Money Market Fund assets (from Invest Co Inst) slipped $4.0bn to $2.798 TN. Year-do-date, money fund assets have dropped $496bn, with a one-year decline of $541bn, or 16.2%.
Total Commercial Paper outstanding sank $50.6bn to $1.08 TN. CP has declined $87bn year-to-date, and was down $184bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.520 TN y-o-y, or 20.2%, to a record $9.034 TN.
Global Credit Market Watch:
November 17 – Bloomberg (Veronica Navarro Espinosa and Helder Marinho): “Banco Bradesco SA and Banco Industrial e Comercial SA withdrew bond offerings as a global market rout and an investigation into alleged bank fraud pushed Brazilian corporate borrowing costs to a seven-week high.”
Global Government Finance Bubble Watch:
November 17 - Wall Street Journal (Michael Aneiro and Stu Woo): “America's strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market. The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations.”
November 18 – Bloomberg (Jon Menon and Gavin Finch): “Chancellor of the Exchequer George Osborne says Britain ‘stands ready’ to assist Ireland. What he didn’t say is that U.K. taxpayers have already funded the largest part of an 18.4 billion-pound ($29.4 billion) bailout for Irish lenders. The aid was used to prop up the Irish units of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc since the onset of the credit crisis…”
Currency Watch:
The dollar index increased 0.5% (up 0.8% y-t-d) to 78.50. On the upside for the week, the New Zealand dollar increased 0.7%, the Mexican peso 0.7%, the Brazilian real 0.4%, the Australian dollar 0.2%, the Singapore dollar 0.1%, and the Swedish krona 0.1%. On the downside, the Japanese yen declined 1.22%, the Swiss franc 1.15%, the British pound 0.8%, the Norwegian krone 0.7%, the South African rand 0.5%, the Canadian dollar 0.4%, the Taiwanese dollar 0.4%, and the euro 0.1%.
Commodities Watch:
November 18 – Bloomberg (Madelene Pearson): “Gold imports this year by India, the largest consumer, have already exceeded 2009 levels as consumers boost jewelry purchases, according to the World Gold Council. Imports totaled 624 metric tons by the end of the third quarter, compared with 559 tons in all of 2009…”
November 18 – Bloomberg (Rudy Ruitenberg): “World food imports will exceed $1 trillion this year, close to the record reached in the food- crisis year of 2008… The global cost of importing foodstuffs will jump 15% to $1.026 trillion in 2010…”
November 16 – Bloomberg (Luzi Ann Javier and Susan Li): “China, the biggest cotton importer, may buy 20 million bales this year to meet rising demand from the domestic textile industry, sustaining price gains, Olam International Ltd. said. The amount would be a record. The Asian nation purchased 10.9 million bales in the year ended July 31…”
The CRB index declined 1.6% (up 5.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped 2.8% (up 7.9% y-t-d). Spot Gold fell 1.2% to $1,353 (up 23% y-t-d). Silver rallied 4.8% to $27.19 (up 5% y-t-d). January Crude dropped $3.36 to $81.98 (up 3% y-t-d). December Gasoline slipped 0.6% (up 7% y-t-d), while December Natural Gas rallied 9.6% (down 25% y-t-d). December Copper declined 1.4% (up 15% y-t-d). December Wheat dropped 3.7% (up 19% y-t-d), and December Corn fell 2.5% (up 26% y-t-d).
China Bubble Watch:
November 16 – Financial Times (Geoff Dyer): “China is considering a package of price controls and other measures to contain inflation which rose sharply last month and has become the principal risk to the economy. The National Development and Reform Commission, China’s main economic planning body, is putting together a ‘one-two punch’ of policies to limit food inflation, state media reported… in a sign that debate is breaking out over how to tackle rising prices. Several major cities in China have announced plans to try to cap food prices, while two officials in Beijing also confirmed this week that the government was looking again at price controls.”
November 17 – Bloomberg: “China may impose temporary price controls to counter the fastest inflation in two years, the cabinet said. Price caps on ‘important daily necessities’ and production materials will be used if necessary, the State Council said… China’s accelerating inflation has sent stocks and commodities sliding on speculation that efforts to curb prices will cool the world’s fastest-growing major economy.”
November 16 – Bloomberg: “Chinese Central Bank Governor Zhou Xiaochuan said China is under ‘pressure’ from capital inflows as a state newspaper said price controls could be imposed to cool the fastest inflation in two years. Zhou reiterated government goals of ‘moderate’ credit growth and stronger liquidity management…”
November 16 – Bloomberg: “China’s four biggest banks will not issue any new loans to property developers for the rest of the year, the state-run China Real Estate Business reported...”
November 16 – Bloomberg (Scott Reyburn): “The sale of an 18-century white-jade carving has rounded off a series of auctions of Chinese art in the U.K. that raised a record 105 million pounds ($168 million). The carving of a deer with its young fetched 3.8 million pounds… The price was the second-highest of the series after the 51.6 million pounds for a Qianlong Imperial vase, an auction record for Chinese art, also set at a regional saleroom, Bainbridges in west London. Asian collectors are prepared to pay ever-higher prices for objects associated with Chinese emperors, wherever in the world they are offered, dealers said. ‘China has always been the poor relation of Western art,’ said London-based dealer Alastair Gibson, a director of Asian Art… ‘Now, it’s up there with Picasso and Warhol.”
Asia Bubble Watch:
November 18 – Bloomberg (Eunkyung Seo): “South Korea’s economy is expected to grow 6.2% this year, the Organization for Economic Cooperation and Development said…”
November 17 – Bloomberg (Eunkyung Seo and William Sim): “The Bank of Korea’s second interest-rate increase this year leaves its benchmark below the pace of inflation… Governor Kim Choong Soo raised borrowing costs by 0.25 percentage point to 2.5% yesterday.”
November 18 – Bloomberg (Shamim Adam and Andrea Tan): “Singapore said its economy will expand a record 15% this year, the fastest pace in Asia, even as slowing global growth threatens to damp export demand. The island’s currency rose.”
Latin America Watch:
November 18 – Bloomberg (Randy Woods): “Chile’s gross domestic product in the three months through September grew at its fastest pace since 2005… Chile’s GDP expanded 7% in the third quarter from the previous year…”
Unbalanced Global Economy Watch:
November 16 – Bloomberg (Svenja O’Donnell): “Bank of England Governor Mervyn King said inflation will remain ‘elevated’ throughout 2011 after it unexpectedly accelerated in October, forcing him to write the fourth letter of explanation to the Treasury this year… Consumer prices increased 3.2% in October from a year earlier…”
November 18 – Bloomberg (Maria Petrakis and Christos Ziotis): “Greece’s government plans to cut the budget gap by 5 billion euros ($6.8bn) in 2011 by reducing spending, including wages at state companies, and increasing sales taxes to meet targets under a European Union-led rescue. The deficit will decline to 7.4% of gross domestic product…”
U.S. Bubble Economy Watch:
November 17 – Bloomberg (Jody Shenn and John Gittelsohn): “Home ownership may be falling out of reach for more Americans as lenders toughen their standards for Federal Housing Administration-insured loans beyond what the agency itself requires. Mortgage lenders… have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings.”
November 16 – Bloomberg (Jeff Wilson, Alan Bjerga, Yi Tian): “The best second-half for commodities in a generation is pushing U.S. farm incomes and agricultural land prices toward record highs. While the 17% rise in the Thomson Reuters/Jefferies CRB Index of 19 raw materials since the end of June reflects higher prices for all commodities, agriculture led the biggest rally since 1972.”
November 17 – Bloomberg (David J. Lynch): “Southern Copper Corp., a Phoenix- based mining company that boasts some of the industry’s largest copper reserves, plans to invest $800 million this year in projects such as a new smelter and a more efficient natural-gas furnace. Such spending sounds like just what the Federal Reserve had in mind in 2008 when it cut interest rates to near zero and started buying $1.7 trillion in securities to spur job growth. Yet Southern Copper, which raised $1.5 billion in an April debt offering, will use that money at its mines in Mexico and Peru, not the U.S….”
November 16 – Bloomberg: “Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30% more for clothes as surging cotton prices boost costs. ‘It’s a little terrifying to deal with cotton suppliers now,’ said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients. Cotton futures in China have surged more than 70% this year…”
November 16 – Bloomberg (Christopher Palmeri and Tim Jones): “The nation’s Republican governors and governors-to-be met for the first time since the Nov. 2 election that gave their party control of 29 statehouses, promising to address budget deficits by chopping the size of government. ‘Why do you exist?’ Pennsylvania Governor-elect Tom Corbett said that he would ask every state agency… New Mexico Governor-elect Susana Martinez said she would reduce the public payroll by 5% through attrition to deal with a deficit she said recently nearly doubled to $452 million…”
Real Estate Bubble Watch:
November 18 – Bloomberg (Kathleen M. Howley): “Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a record in the third quarter… The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45% from 2.36% in the previous three months…”
Central Bank Watch:
November 18 – Bloomberg (Craig Torres and Scott Lanman): “Federal Reserve Chairman Ben S. Bernanke defended his expansion of record monetary stimulus in a meeting with Senators as top Republican lawmakers stepped up their criticism of the central bank chief’s policies. Bernanke, in a closed-door meeting yesterday, said the Fed’s plan to buy $600 billion in assets would spur job growth while keeping inflation under control. John Boehner, the presumptive House speaker, and three other Republicans sent Bernanke a letter expressing ‘deep concerns’ about a policy they said risked weakening the dollar and fueling asset bubbles.”
November 17 – Bloomberg (David J. Lynch and Mike Dorning): “The Federal Reserve is facing the fiercest political assault on its powers in three decades as it struggles to help revive the U.S. economy. The Fed’s plan to expand its purchases of Treasury securities has triggered criticism from Republican lawmakers, some economists who wrote an open letter to the Fed protesting the move, and finance officials in Germany, China and Brazil. While central bank officials are pressing ahead with the $600 billion bond-buying program announced this month, analysts said the criticism may fan dissent within the Fed over the quantitative-easing policy. That may limit Chairman Ben S. Bernanke’s ability to take further measures if the economy remains weak.”
November 16 – Bloomberg (Steve Matthews and Joshua Zumbrun): “The Federal Reserve may soon need to tighten policy even amid a high U.S. unemployment rate to avert a rise in prices similar to the 1970s, Richmond Fed President Jeffrey Lacker said. ‘At some point in the not-too-distant future, we are likely to face an economy growing in a self-sustaining way while the unemployment rate is still relatively high by historical standards,’ Lacker said… ‘The decisions we make at that time will be the true test of whether we’ve learned our lessons.’”
November 17 – Bloomberg (Svenja O’Donnell): “The Bank of England’s Monetary Policy Committee split three ways for a second month as some officials became more concerned that Britain’s bout of inflation will dislodge price expectations.”
Muni Watch:
November 16 – Financial Times (Nicole Bullock): “Municipal bonds had their biggest one-day sell-off yesterday since the height of the financial crisis, prompting some borrowers to delay financing plans. The yields on triple A 10-year bonds rose 18 bps to 2.93%, the largest one-day rise since October of 2008… The $2,800bn ‘muni’ bond market where states and municipalities raise money has been under pressure over the past week amid a rise in the yields of benchmark US Treasury bonds, heavy bond sales and uncertainty about federal support for the market.”
November 16 – Bloomberg (Dunstan McNichol): “Washington state… may collect $1.2 billion less in taxes than forecast over the next 31 months because of a sluggish economy, a state council said.”
California Watch:
November 16 – Bloomberg (Michael B. Marois and Brendan A. McGrail): “California is selling $10 billion of one-year notes to boost cash on hand, as the state that produces 13% of the U.S. gross domestic product tries to assure investors it can repay the loan amid a $25 billion budget gap… The issue comes after the state’s Legislative Analyst’s Office said California’s deficit may exceed $25 billion in the next 19 months…”
November 16 – Bloomberg (Michael B. Marois): “California began marketing $2.75 billion of taxable debt today, including $2.5 billion of Build America Bonds. $1.65 billion segment of 30-year Build America securities is being offered to investors at a yield equivalent to 3.3 percentage points above a comparable-maturity Treasuries… The average extra yield Build America Bonds pay over 30-year Treasuries was 184 basis points yesterday…”
New York Watch:
November 16 – Bloomberg (Henry Goldman): “New York City, facing a $3.3 billion deficit in next year’s budget, will cut its workforce by more than 10,000 over the next year-and-a-half, Mayor Michael Bloomberg’s budget office reported.”
Ideological and Hostile:
With Eurozone tensions on the rise, Wednesday’s headline from the Financial Times read “Anger at Germany boils over.” “Bernanke Fires Back, Takes Aim at China,” was how the Wall Street Journal titled its analysis of the Fed Chairman’s speech this morning in Frankfurt. Paul Krugman also takes direct aim at Germany and China – and throws in the Republicans – with his “Axis of Depression” piece in today’s New York Times. In a troubled backdrop beckoning for level-headed analysis and cooperation, the mood has turned decidedly ideological and hostile.
Dr. Bernanke has compiled speeches and academic papers that will be scrutinized for generations to come. He added one more to his list this morning. Global policymakers – already deeply skeptical – will not be impressed. Officials from the “developing” economies are sure to be displeased. The Chinese must be incensed – and it is difficult for me to discern how this will work to our advantage. We’re the big debtor and importer. In no way does our policymaking qualify as the “moral high ground.” Indeed, most would argue we’ve been permanently disqualified. QE2 was one step too far – it crossed the line.
The Bernanke Fed has boxed itself in a corner. QE2 has been poorly received at home and abroad. Yet with this policy having succeeded in inflating global markets, there will be no turning back from our monetary experiment. Bernanke came out swinging today – or at least finger pointing. Appreciating that QE3, 4, and 5… are now anything but sure things, he calls for help from additional fiscal stimulus. In the following breath, he pays lip service to the need to resolve long-term fiscal challenges. We’re at the point where it all lacks credibility. Dr. Bernanke has always been an inflationist – and these stripes are increasingly apparent for all to observe. Having been unsuccessful in “marketing” his latest installment of Treasury debt monetization, it is apparently now time to identify culprits.
From Dr. Bernanke’s speech, “Rebalancing the Global Economy”: “As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new… In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account. Thus, it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole.”
After Treasury Secretary Geithner’s “global rebalancing” proposals smacked up against a cement wall at the G20, Chairman Bernanke must know his global rebalancing speech will be flatly rejected in terms of providing a legitimate policymaking proposal. It was instead a rehash of flawed doctrine – and a stinging slap in the face. Our economy has been running Current Account Deficits since the eighties. The Fed has been accommodating financial excesses since the eighties. We’ve had insufficient household and national savings since the eighties. Monetary policy has nurtured imbalances for decades. So, we’re going to castigate the Chinese?
I find it embarrassing - to blame our trade partners and Creditors for our predicament. Worse yet, it is frightening that there is obviously no plan of attack for dealing with our nation’s structural issues. The Geithner/Bernanke “global rebalancing” gimmick is to have China and the “developing” economies inflate domestic demand and stimulate imports. In the meantime, we stay the course with massive deficits, monetization and near-zero interest rates. This approach has no chance of rectifying our deep structural impairment nor resolving global imbalances. It does, however, increase the odds of a crisis of confidence in our debt markets and currency.
“In Defense of Ben Bernanke” (Wall Street Journal, November 15, 2010), Alan Blinder states that QE2 is “not a radical departure from conventional monetary policy.” Only an individual that has been an integral part of the revolution of monetary management at the Federal Reserve would make such a statement.
Beginning back with early-nineties banking system impairment, the Greenspan Federal Reserve nurtured Wall Street financial engineering and the rapid expansion of non-bank marketable debt. The GSEs, securitization markets and derivatives were viewed as instrumental for fostering the needed Credit expansion in the face of severe banking and fiscal headwinds. The Fed unleashed a lion.
No longer was monetary policy focused on creating and extracting banking system reserves in an effort to influence bank lending (and through bank Credit, growth and inflation). The old rules for governing a largely contained financial system no longer applied. A New Era was born. The Fed now could manipulate short-term borrowing costs and immediately stimulate flows into the securities markets, speculator risk-taking and leveraging, asset inflation, mortgage refinancing and equity extraction, home price gains, additional household net worth, spending... It became The Age of the Maestro, The Masters of the Universe, the enterprising investment banker and opportunistic mortgage originator. Traditional measures of economic health – the Current Account, savings rates, sound investment, productive capacity, stable money and Credit, balanced financial flows – were discarded. What mattered now were the markets, market perceptions and how the Fed could be counted on to orchestrate and sustain a boom.
I’ve argued for years now that the Fed had adopted a radical approach to monetary management - and it was disturbingly apparent that our central bank had become enamored with history’s most powerful monetary policy mechanism. And with dynamic marketable debt increasingly supplanting the boring old bank loans as the main driver of system Credit expansion (especially as the nineties progressed), the Federal Reserve had to take an increasingly aggressive and activist approach to ensuring ample marketplace liquidity and unwavering market confidence. The ’94 bursting of the bond/MBS Bubble, SE Asia, LTCM, the tech bust… The Fed nurtured a historic Credit Bubble and the larger the Bubble inflated the greater role monetary policy had to play to ward against a devastating crisis of confidence. Policy was conspicuously radicalized in the aftermath of the 2008 collapse of the mortgage/Wall Street finance Bubble.
But the chickens are bound to come home to roost. Especially after the past two years’ unprecedented global expansion of government debt, marketable debt securities that now absolutely dominate the world. The specter of market illiquidity reemerged with this spring’s Greek contagion crisis, and it was sufficiently scary. The ECB intervened to support struggling debt issuers and a vulnerable banking system. The Fed, fearing a more systemic crisis, played its QE2 trump card. The markets perceived this move as an unending commitment from the Fed to provide a liquidity backstop. Risk markets have inflated across the globe.
It is my view that a world financial apparatus dominated by marketable debt instruments is inherently unstable. Implement a monetary policy regime to manage marketplace liquidity and asset prices at your own peril. Be prepared for market dependency and ever-increasing liquidity injection requirements. Such a regime will reward the savviest speculators and ensure acute systemic vulnerability. To be sure, recent notions of perpetual QE inflated global markets indiscriminately. The “liquidity trade” threw caution to the wind. Liquidity overabundance also pushed inflationary forces in China and throughout Asia into the danger zone.
These days, Fed policy to manipulate U.S. securities markets has extraordinary spillover effects. In my vernacular, inflationary biases have shifted from U.S. mortgage finance and American housing to China, Asia, the “developing” economies and commodities. The Fed will now have an increasingly challenging task of ensuring sufficient liquidity to sustain inflated U.S. securities markets. Meanwhile, the “periphery” will have an increasingly frustrating job of trying to manage unwieldy financial flows into their markets and attendant overheated economies.
The basic premise of the “Bretton Woods II” thesis has been that it is in the interest of both parties for the U.S. to run Current Account Deficits and for Asian economies to send us manufactured goods while their central banks recycle the resulting dollar flows back into U.S. securities. And for as much distaste as I’ve had for “BWII” analysis, there has been the semblance of truth to the thesis of mutual benefits. I’ve argued that the arrangement where we exchange new debt instruments for imported goods, services, energy and commodities was dysfunctional and unsustainable. Today, with our massive expansion of non-productive – hence inherently vulnerable – debt and Asia’s heightened susceptibility to inflation and unwieldy financial flows, this arrangement has turned problematic. It is also fundamental to global marketplace liquidity.
Our policymakers are acting to the detriment of our Creditors. They speak in a tone that does not inspire confidence and may likely antagonize. The Chinese, in particular, can be counted on to act in what they perceive as their own best interest. They today confront serious inflation, “hot money” and overheating issues. As such, what has appeared as favorable prospects for continued global liquidity overabundance now look a lot less certain. Global yields were on the rise again this week, with heightened attention to structural debt issues. U.S. municipal bonds were hammered. My premise has been that the markets will inevitably discipline Washington. This may occur after it works its way up the food chain.
11/12/2010 The Official Start of QE2 *
For the week, the S&P500 dropped 2.2% (up 7.5% y-t-d), and the Dow fell 2.2% (up 7.3%). The Banks sank 3.3% (up 10.2%), and the Broker/Dealers declined 2.7% (down 1.9%). The Morgan Stanley Cyclicals fell 2.4% (up 14.7%), and the Transports declined 2.4% (up 17.3%). The Morgan Stanley Consumer index declined 2.3% (up 7.5%), and the Utilities fell 2.5% (up 0.6%). The S&P 400 Mid-Caps declined 2.0% (up 16.1%), and the small cap Russell 2000 fell 2.4% (up 15.0%). The Nasdaq100 declined 2.2% (up 14.9%), and the Morgan Stanley High Tech index lost 2.2% (up 8.7%). The Semiconductors dropped 2.4% (up 6.3%). The InteractiveWeek Internet index lost 2.1% (up 29.5%). The Biotechs gave back 1.3%, reducing 2010 gains to 22.8%. Although bullion declined $25 for the week, the hyper-volatile HUI gold index added 0.4% (up 28.4%).
One-month Treasury bill rates ended the week at 10 bps and three-month bills closed at 13 bps. Two-year government yields jumped 13 bps to 0.50%. Five-year T-note yields ended the week 26 bps higher at 1.31%. Ten-year yields jumped 25 bps to 2.79%. Long bond yields jumped 17 bps to a 5-month high 4.28%. Benchmark Fannie MBS yields were 32 bps higher at 3.63%. The spread between 10-year Treasury yields and benchmark MBS yields widened 7 bps to 84 bps. Agency 10-yr debt spreads were 3.5 bps wider to 13.5 bps. The implied yield on December 2011 eurodollar futures jumped 25 bps to 0.815%. The 10-year dollar swap spread increased 0.75 bps to 14.0. The 30-year swap spread was little changed at negative 37. Corporate bond spreads widened. An index of investment grade bond risk jumped 8 bps to 94 bps. An index of junk bond risk jumped 50 to 486 bps.
Investment grade issuers included United Parcel $2.0bn, Time Warner Cable $1.9bn, JPMorgan $1.75bn, PPG Industries $1.0bn, Becton Dickinson $1.0bn, LG & E Energy $875 million, Boston Properties $850 million, Talisman Energy $600 million, Plum Creek Timber $575 million, Louisville G&E $535 million, Autozone $500 million, Ventas Realty $400 million, Public Service Colorado $400 million, Coca-Cola Enterprises $400 million, Entergy Arkansas $350 million, American Honda $350 million, Continental Trust $350 million, Hubbell Inc. $300 million, Cleco Power $250 million, Integrys Energy $250 million, Avalonbay Communities $250 million, Kentucky Utilities $1.5bn, and AMB Property $175 million.
Junk bond funds attracted inflows of $382 million (from Lipper), the tenth straight week of positive flows. Junk issuers included HCA Holdings $1.525bn, Berry Plastics $800 million, Mylan $800 million, West Corp $650 million, Omega Healthcare $575 million, Univision Communications $500 million, Ferrellgas $500 million, Affinion Group $475 million, Health Care REIT $450 million, Calfrac Holdings $450 million, Checkout Holdings $440 million, Polypore International $365 million, Seneca Gaming $325 million, Icahn Enterprises $500 million, Medassets $325 million, Allen Systems $300 million, Mercer Intl $350 million, Roofing Supply $225 million, Beazer Homes $250 million, Mobile Mini $200 million, Frontier Oil $150 million and Star Gas $125 million.
Converts issues included Radian Group $450 million.
The list of international dollar debt sales included IPIC $2.5bn, Odebrecht Drill $1.5bn, Peru $1.0bn, ICICI Bank $1.0bn, Precision Drilling $650 million, Vnesheconombank $1.6bn, Renhe Commercial $600 million, MBPS $320 million, China Oriental $300 million, China Forestry $300 million, Allied World Assurance $300 million, Aerospace Satellite $165 million, Global Crossing $150 million, and International Bank of Reconstruction and Development $100 million.
U.K. 10-year gilt yields rose 24 bps to 3.21%, and German bund yields gained 9 bps to 2.51%. Greek 10-year bond yields declined 5 bps to 11.39%. Ten-year Portuguese yields jumped 23 bps to 6.725%. Ireland yields rose 70 bps to 7.62%. The German DAX equities index slipped 0.3% (up 13.0% y-t-d). Japanese 10-year "JGB" yields jumped 7 bps to 0.99%. The Nikkei 225 gained 1.0% (down 7.8%). Emerging markets were under pressure. For the week, Brazil's Bovespa equities index dropped 3.1% (up 2.6%), and Mexico's Bolsa slipped 0.7% (up 12.3%). South Korea's Kospi index declined 1.3% (up 13.7%). India’s high-flying Sensex equities index fell 4.0% (up 15.4%). After today's steep decline, China’s Shanghai Exchange ended the week down 4.6% (down 8.9%). Brazil’s benchmark dollar bond yields jumped 32 bps to 3.90%, and Mexico's benchmark bond yields rose 36 bps to 3.82%.
Freddie Mac 30-year fixed mortgage rates dropped 7 bps last week to a record low 4.17% (down 74bps year-over-year). Fifteen-year fixed rates fell 6 bps to 3.57% (down 79bps y-o-y). One-year ARMs were unchanged at 3.26% (down 120bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 5 bps to 5.16% (down 75bps y-o-y).
Federal Reserve Credit expanded $8.4bn to $2.289 TN. Fed Credit was up $69.3bn y-t-d (3.6% annualized) and $173.5bn, or 8.2%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/10) surged $20.4bn (22-wk gain of $260bn) to a record $3.336 TN. "Custody holdings" have increased $380.7bn y-t-d (14.9% annualized), with a one-year rise of $419bn, or 14.4%.
M2 (narrow) "money" supply jumped $22.4bn to $8.786 TN. Narrow "money" has increased $253bn y-t-d, or 3.5% annualized. Over the past year, M2 grew 3.2%. For the week, Currency added $1.9bn, and Demand & Checkable Deposits gained $6.1bn. Savings Deposits jumped $22.0bn, while Small Denominated Deposits declined $6.1bn. Retail Money Fund assets slipped $1.6bn.
Total Money Market Fund assets (from Invest Co Inst) increased $2.0bn to $2.802 TN. Year-do-date, money fund assets have dropped $492bn, with a one-year decline of $533bn, or 16.0%.
Total Commercial Paper outstanding declined $11.7bn (8-wk gain of $97.6bn) to $1.134 TN. CP has declined $36.4bn year-to-date, and was down $105bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.516 TN y-o-y, or 20.2%, to a record $9.033 TN.
Global Credit Market Watch:
November 8 – Bloomberg: “Chinese Vice Finance Minister Zhu Guangyao said the U.S. Federal Reserve’s decision to pump $600 billion into the economy might ‘shock’ emerging markets by flooding them with capital. The first round of quantitative easing, as the Fed policy is termed, in 2009 was justified because the global economy lacked liquidity, Zhu told reporters… With a recovery now under way, new purchases of Treasuries to inject funds into the financial system may be destabilizing, he said. ‘Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,’ Zhu said. The U.S. ‘has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.’”
November 8 – Bloomberg (Jonathan Stearns): “Luxembourg’s Jean-Claude Juncker, who heads the panel of euro-area finance ministers, said he agreed with German Finance Minister Wolfgang Schaeuble’s criticism of the Federal Reserve’s decision to pump more money into the U.S. economy. ‘I am in full agreement with Mr. Schaeuble when it comes to the way he was criticizing the U.S.,’ Juncker told reporters… Schaeuble on Nov. 5 described the Fed’s move as ‘clueless.’”
November 10 – Bloomberg: “President Barack Obama finds himself on the defensive as world leaders gather in Seoul for the Group of 20 summit, with members disparaging U.S. economic policies they say weaken the dollar and stoke hot-money flows. The U.S. Federal Reserve decision last week to pump $600 billion into world’s biggest economy has stolen the spotlight away from China’s currency. Brazilian Finance Minister Guido Mantega said… that the Fed’s move may inflate commodities prices and proposed the world move away from using the dollar as the main reserve currency. Former Chinese central bank governor Dai Xianglong this week faulted the U.S. for adopting policies without regard for the dollar’s global role.”
November 8 – Bloomberg: “China’s middle-income and affluent consumers will probably almost triple in 10 years with the bulk of the increase coming from smaller cities, Boston Consulting Group Inc. said… There will be 270 million more consumers whose annual household incomes exceed 60,000 yuan ($9,000) in the world’s most populous country by 2020, said Carol Liao… That would lift the total number of middle-class and affluent Chinese to 415 million from 148 million now, she said.”
November 11 – Bloomberg (Veronica Navarro Espinosa and Gabrielle Coppola): “The best year for Brazilian bank bond sales may be over as a probe into accounting irregularities at Banco Panamericano SA increases investor scrutiny and drives up borrowing costs for lenders. Yields on dollar debt… jumped yesterday to the highest level since they were issued this year… Panamericano is being investigated by the central bank after the controlling shareholder, Grupo Silvio Santos, borrowed 2.5 billion reais ($1.5 billion) from the deposit insurance fund to cover potential losses at the bank that it said were caused by accounting ‘inconsistencies.’ Brazil’s banks have sold a record $15.2 billion of debt this year, up from $4.3 billion in all of 2009, to help finance loan growth...”
November 8 – Bloomberg (Patricia Kuo): “Leveraged loans prices climbed to a three-year high as demand for secured high-yield investments overshadowed Europe’s deepening sovereign debt crisis. The average bid price for actively-traded European leveraged loans rose 52 basis points to 97.23% of face value last week…”
November 12 – Bloomberg (Emre Peker): “Lenders led by Bank of America Corp. and JPMorgan Chase… are on pace to double U.S. leveraged-loan sales, tapping demand to help companies finance buyouts and dividends… Armstrong World Industries… led borrowers raising $8.1 billion of high-yield loans this week as 2010 issuance rose to $299 billion, 76% more than all of last year…”
November 9 – Bloomberg (Cristina Alesci and Alex Nussbaum): “HCA Inc., the hospital chain acquired four years ago in a $33 billion leveraged buyout, plans to pay a $2 billion dividend to private-equity owners including KKR & Co. and Bain Capital LLC. The dividend will be partly funded with a $1.53 billion high-yield bond issue…”
Global Government Finance Bubble Watch:
November 12 – Bloomberg (Liz Capo McCormick): “The Federal Reserve began a second round of unconventional monetary easing by buying $7.229 billion of Treasuries in attempt to drive down borrowing rates to help reduce unemployment and avert deflation… The acquisitions are part of the Fed’s plan to acquire $600 billion of Treasuries through June and reinvest maturing mortgage holdings.”
November 8 – Bloomberg (Joao Lima): “China said it’s ‘available’ to support Portugal’s efforts to come through the economic crisis that has prompted its borrowing costs to spiral this year. ‘We are available to support, through concrete measures, Portuguese efforts to face the impacts caused by the international financial crisis, and deepen and broaden our economic and commercial cooperation,’ Chinese President Hu Jintao said…”
Currency Watch:
November 12 – Bloomberg (Theophilos Argitis): “The Group of 20 said emerging markets facing a surge of capital inflows can adopt regulatory steps to cope, offering them cover to limit currency swings and stem asset bubbles as the U.S. adds $600 billion of liquidity. ‘In circumstances where countries are facing undue burden of adjustment, policy responses in emerging-market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro- prudential measures,’ leaders of the G-20 nations said in a statement…”
The dollar index rallied 2.0% (up 0.3% y-t-d) to 78.11. For the week on the downside, the Swedish krona declined 3.7%, the Norwegian krone 3.3%, the Australian dollar 3.1%, the New Zealand dollar 2.8%, the South African rand 2.7%, the Brazilian real 2.5%, the euro 2.4%, the Danish krone 2.4%, the Swiss franc 2.0%, the South Korean won 1.8%, the Japanese yen 1.5%, the Canadian dollar 1.2%, the Mexican peso 1.1%, the Singapore dollar 0.9%, the British pound 0.4%, and the Taiwanese dollar 0.3%.
Commodities Watch:
November 12 – Bloomberg (Alaric Nightingale): “Frontline Ltd., the world’s biggest supertanker operator, said it’s seeing ‘huge’ demand for crude-oil imports from China, potentially reversing a slump that contributed to mostly unprofitable charter rates since June.”
November 8 – Bloomberg (Leslie Patton): “Arabica-coffee prices rose to a 13-year high in New York on speculation that adverse weather will disrupt supplies in Vietnam, the world’s second-largest grower.”
The CRB index dropped 3.2% (up 7.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 2.1% (up 10.9% y-t-d). Spot Gold declined 1.8% to $1,369 (up 24.7% y-t-d). Silver dropped 2.7% to $26.02 (up 55% y-t-d). December Crude declined $1.98 to $84.87 (up 7% y-t-d). December Gasoline gained 1.8% (up 8% y-t-d), while December Natural Gas fell 3.0% (down 31% y-t-d). December Copper declined 1.7% (up 16% y-t-d). December Wheat sank 8.2% (up 24% y-t-d), and December Corn dropped 9.1% (up 29% y-t-d).
China Bubble Watch:
November 10 – Bloomberg: “China posted a larger-than-forecast $27.1 billion October trade surplus… Exports gained 22.9% from a year earlier and imports rose 25.3%... With the surplus pumping cash into the fastest-growing major economy…”
November 10 – Bloomberg: “China will force banks to hold more foreign exchange and strengthen auditing of overseas fund raising, stepping up efforts to curb hot-money inflows… The State Administration of Foreign Exchange will introduce new rules on currency provisioning and tighten management of banks’ foreign-debt quotas, the regulator said… The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.”
November 10 – Bloomberg: “China’s property prices rose at the slowest pace in 10 months in October… Home prices in 70 cities climbed 8.6% from a year earlier, the statistics bureau said… That’s slower than the 9.1% increase in September… Price gains also slowed to 0.2% from September after increasing 0.5 percent last month.”
November 10 – Bloomberg: “China’s passenger-car sales in October rose at the fastest pace in six months… Wholesale deliveries of cars, sport-utility vehicles and multipurpose vehicles increased 27% from a year earlier to 1.2 million last month… Passenger-car sales surged 76% to 946,400 vehicles in October 2009 as the government cut the tax rate for small cars…”
November 9 – Bloomberg (Wing-Gar Cheng): “China’s challenger to Boeing Co. and Airbus SAS expects to announce the first order for its single-aisle passenger plane next week, breaking into a market that may be worth $1.68 trillion over 20 years… ‘This is a big breakthrough for China, which will eventually become a player in the global aircraft market,’ said Bai Bingyang, an analyst at Capital Securities Corp in Shanghai. ‘Boeing and Airbus’s duopoly will be under threat.’”
November 11 – Bloomberg: “Moody’s… raised China’s debt rating to its fourth highest ranking, citing the nation’s financial strength and ability to contain losses from a credit boom. The increase is to Aa3 from A1…”
November 12 – Bloomberg (Sophie Leung): “Hong Kong reported a more-than- estimated 6.8% economic expansion in the third quarter from a year earlier as Chief Executive Donald Tsang warned asset bubbles could threaten the city’s recovery.”
November 9 – Bloomberg (Debra Mao): “An office property in Hong Kong’s Central business district sold for a record HK$25,581 ($3,300) per square foot as vacancies drop in the world’s second-most expensive market, according to Knight Frank LLP and Savills Plc.”
Japan Watch:
November 9 – Bloomberg (Toru Fujioka and Mayumi Otsuma): “Japan’s current-account surplus widened in September as exports increased, indicating that demand from Asia has helped offset the impact of a yen near its highest level against the dollar since 1995. The gap expanded 24% from a year earlier to 1.96 trillion yen ($24bn). Exports climbed 16%, while imports advanced 11%...”
India Watch:
November 11 – Bloomberg (Madelene Pearson): “In his office above a room stacked with jute sacks of turmeric, many streaked yellow by the powder, Deepak Shah is extolling the virtues of the spice. ‘It’s very good for health, it’s used in cooking, in cosmetics and it’s medicinal,’ said Shah, owner of P. Amratlal & Sons, a trader at Mumbai’s wholesale Vashi market. Falling stockpiles and speculation have also pushed up the price of the curry ingredient 64% this year…boosting food costs in a country where 7 out of 10 people live on less than $2 a day.”
Asia Bubble Watch:
November 9 – Bloomberg (Barry Porter): “Asian economies may need to turn to capital controls as quantitative easing by the U.S. threatens to spur asset bubbles in the region’s stock, currency and property markets, the World Bank said. Any curbs should be ‘targeted,’ temporary and tailored to address specific problems, Sri Mulyani Indrawati, a World Bank managing director, said…This could include countries tying up funds for as long as a year to help limit hot-money, she said.”
November 8 – Bloomberg (Joshua Fellman): “China and Indonesia signed $6.6 billion of agreements for trade and cooperation, in areas including finance, energy, electricity and agriculture, Xinhua News Agency reported.”
November 12 – Bloomberg (Scott Reyburn): “A battle between Asian buyers last night pushed a Qianlong-dynasty vase to a price of 51.6 million pounds ($83.2 million), an auction record for Chinese art. The vase had been discovered during a routine house clearance in the suburb of Pinner in London.”
Latin America Watch:
November 10 – Bloomberg (Jens Erik Gould and Andres R. Martinez): “The peso’s biggest rally on record may prompt Mexico’s central bank to cut interest rates next year to boost exports after other Latin American policy makers raised borrowing costs to cool their economies. Governor Agustin Carstens signaled… he would consider cutting rates should the peso keep gaining, according to analysts…”
Unbalanced Global Economy Watch:
November 12 – Bloomberg (Simone Meier and Emma Ross-Thomas): “Europe’s economic growth weakened in the third quarter from the fastest pace in four years… Gross domestic product in the 16-nation euro area rose 0.4% from the second quarter, when it increased 1%...”
November 8 – Bloomberg (Klaus Wille): “The Swiss jobless rate fell to the lowest in more than 1 1/2 years in October… The jobless rate dropped to 3.6% from 3.7% in September…”
U.S. Bubble Economy Watch:
November 10 – Bloomberg (William Selway): “The Republican landslide in U.S. House elections may derail efforts to extend the Build America Bond program, a part of President Barack Obama’s stimulus that has helped pump $158 billion into local public-works projects. With the federally subsidized bond program set to expire at year-end, supporters are pressing for an extension… Prospects will grow dimmer in January, when Republicans, who have called Obama’s $787 billion stimulus too costly, take control of the House and reduce the Democratic majority in the Senate.”
November 12 – Bloomberg (Elizabeth Campbell): “Americans will be paying more for their Thanksgiving turkeys this month… U.S. wholesale, frozen turkeys jumped to $1.09 a pound on average yesterday, the highest price ever and up 28% from a year earlier…”
Real Estate Bubble Watch:
November 11 – Bloomberg (Kathleen M. Howley): “Home prices fell in half of U.S. cities in the third quarter… The median price of a single-family home dropped in 76 of 155 metropolitan areas measured, the National Association of Realtors said… The median U.S. price fell 0.2% to $177,900.”
Central Bank Watch:
November 8 – Bloomberg (Vivien Lou Chen): “The Federal Reserve’s decision to undertake a second round of large-scale Treasury purchases may be prescribing the ‘wrong medicine’ to the economy’s ailments, said Richard Fisher, president of the Fed bank of Dallas… ‘I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering,’ Fisher said… ‘The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed.’”
November 8 – Bloomberg (Niklas Magnusson and Kim McLaughlin): “Sweden’s economy needs higher interest rates to prevent the build-up of financial imbalances even as concerns mount about the strength of recovery in the U.S. and Europe, Riksbank Governor Stefan Ingves said. It is ‘appropriate to gradually continue to make monetary policy somewhat less expansionary,’ Ingves said…”
Fiscal Watch:
November 12 – Bloomberg (Angela Greiling Keane): “The U.S. Postal Service said its loss widened to $8.5 billion in the year ended Sept. 30, exceeding its forecast… Revenue fell 1.5% to $67.1 billion for the year and mail volume dropped 3.5%... The loss in the previous fiscal year was $3.8 billion…”
California Watch:
November 12 – Bloomberg (Michael B. Marois): “California Governor Arnold Schwarzenegger, citing a $25.4 billion budget gap over the next 19 months, declared a fiscal emergency and called lawmakers to a special session next month to begin dealing with the problem… In addition to the gap forecast for the fiscal year through June, the nonpartisan Legislative Analyst’s Office yesterday projected a $19 billion gap in the following 12 months. By Jan. 10, Governor-elect Jerry Brown, a Democrat who will be sworn in Jan. 3, must propose a plan to erase the next year’s deficit.”
November 8 – Bloomberg (Michael B. Marois): “The budget agreement California Governor Arnold Schwarzenegger and lawmakers reached last month will have a ‘negative influence’ on the credit of school districts more than on other parts of local government, Moody’s… said… Schwarzenegger signed the $86.6 billion budget Oct. 8 after lawmakers wrestled over an agreement for 100 days into the fiscal year, the longest the most populous U.S. state has ever gone without a spending plan. It eliminated a $19 billion deficit by cutting spending almost $8 billion, half of that from health and welfare programs administered by local governments. It also delayed paying more than $5 billion in subsidies to schools and community colleges.”
November 8 – Bloomberg (Alison Vekshin): “California’s finances are less flexible after voters approved a ballot measure last week that barred the state from diverting money destined for transport and local government projects, Moody’s… said… ‘In fiscal year 2012 and beyond, this action decreases budgeting flexibility by further restricting the use of various funds,’ Moody’s said.”
Speculator Watch:
November 9 – Bloomberg (Tomoko Yamazaki): “Hedge-funds assets exceeded $1.6 trillion, reaching the highest in more than two years, as managers returned 2.3% last month helped by gains in global markets, according to Eurekahedge Pte.”
November 9 – Bloomberg (Alexis Xydias): “Quantitative funds, which choose stocks according to mathematical models, may have lost almost half their assets since 2007 after failing to capture swings in markets, according to…Nomura Holdings Inc. Money overseen at a sample of 137 quant funds fell 43% over three years to $44 billion, while the quant share of actively managed equity funds is also estimated to have halved since 2007…”
The Official Start of QE2:
There are a couple key facets of my thesis worthy of some extra focus today, the official start of QE2: First, in the post-Greek crisis world – with parallels to the subprime eruption in the spring of 2007 – the markets are increasingly keen to structural debt issues. Second, inflationary pressures have gained significant momentum in China, Asia and the “emerging” economies, more generally.
In the world of structural debt problems, the European debt crisis turned more acute this week. Ireland’s 10-year yields surged to almost 9% yesterday (from about 5% in early-August), before declining 76 bps today on more conciliatory talk from European officials. Prior to today’s bond rally, Portuguese yields were up another 50bps (to 7.0%) this week and Greece yields were another 15 bps higher (to 11.60%). Recalling the 2007-08 experience in U.S. mortgage finance, the initial policy response to the European peripheral debt crisis may have bought some time but has had little effect on underlying structural debt problems.
On the inflation front, Chinese stocks (Shanghai Composite) were hit for 5.2% today on fears of more aggressive monetary tightening by the People’s Bank of China. Chinese authorities have warned of the heightened inflation risk related to QE2. The markets are taking this talk seriously.
Earlier this week, gold and cotton surged to new record highs. Silver, sugar and rubber jumped to near 30-year highs. Copper, corn and crude traded to 2-year highs. From the beginning of September, the CRB Commodities Index rallied about 20%. Indicative of increasingly unstable global markets, the CRB index sank 3.7% today after trading to a 2-year high earlier in the week.
Yesterday, China reported a larger-than-expected 4.4% y-o-y jump in consumer prices. Also this week, China reported its October money supply (up 19.3% y-o-y) and bank loan growth ($89bn) surprised on the upside. Reports on China’s retail sales (up 18.6% y-o-y) and auto sales (up 27% y-o-y) were strong. And to the chagrin of Chinese authorities, real estate prices remain resilient at elevated levels. These days, China’s policymakers face an overheated Bubble Economy, a dilemma compounded by the prospects for surging commodity costs and destabilizing “hot money” inflows. Patience is wearing thin. Prospects are not favorable for monetary “tinkering” to be effective.
For the past couple of months, the world has been enamored with QE2 and prospects for concerted global central bank monetization/liquidity creation. European peripheral debt problems were viewed as ensuring ECB market intervention/support. Deflation had the Bank of Japan poised for aggressive action. In the U.S., structural problems were sure to support multiple QE’s and a feeble dollar. A faltering greenback equated to ongoing Asian central bank dollar purchases and the “recycling” of these balances back to the U.S. Treasury market. Ultra-low Treasury yields would then remain a steadfast anchor on market yields for the vast spectrum of global borrowers.
Global markets – stocks, bonds, commodities, and currencies – have been luxuriating in visions of endless liquidity over-abundance - for all. It’s been a backdrop where fundamental factors and issues were relegated to the backburner.
This week, it seemed like the focus may have shifted toward fundamentals. Risk is returning to the equation. For starters, the markets’ disregard for global inflation risks has begun to wane. And despite all the focus on global liquidity abundance, systemic risks remain quite elevated. Moreover, the world is increasingly keen to structural debt problems. As the week wore on, the liquidity backdrop suddenly looked a lot less certain. Perhaps the future does not guarantee ultra-loose “money” for all – but rather an increasingly discriminating market environment of “the haves” and “have nots”.
Global yields were on the rise. German bund yields gained 9 bps to 2.51% and Japan’s JGB yields rose 7 bps to 0.99%. Notably, UK 10-year yields jumped 24 bps (3.21%), Spain 17 bps (4.53%), and Italy 18 bps (4.15%). Our 30-year Treasury yields rose 17 bps to 4.29%, the high since mid-May. Benchmark U.S. municipal yields jumped 24 bps to 3.70% (from Bloomberg).
If the markets are indeed beginning to reevaluate the global inflation backdrop and the prospects for China/Asian monetary tightening, the marketplace would also be expected to become more discriminating based on respective borrower fundamentals. After all, the potential for rising global yields and a less accommodating liquidity backdrop would more severely impact the most heavily indebted. As such, I take particular interest in this week’s jump in yields for the UK, Spain, Italy, U.S. Treasurys and American municipal bonds.
If the market has in fact begun to shift from “endless liquidity for all” to a more fundamentally-driven focus, don’t expect such a transition to go smoothly. After all, ultra-loose financial conditions tend to most benefit the weakest borrowers. That has certainly been the case in the U.S. Credit market, with junk bonds, leveraged loans, and municipal debt having enjoyed such stellar performance. In our stock market, many of the most fundamentally-challenged stocks and sectors have posted tremendous gains. An extraordinary liquidity backdrop has nurtured speculative excess – in the process creating acute vulnerability to changing market perceptions.
On a global macro basis, few governments have benefited more from global liquidity excess than the U.S. Treasury. It is worth noting that in the face of today’s global risk markets drubbing – Treasury yields rose and the dollar index barely tread water.
Has quantitative easing – on this, the initial trading day of QE2 – turned counterproductive? Have markets reached an inflection point, with concern shifting away from perceived liquidity benefits to the heightened risks associated with additional Federal Reserve liquidity creation (i.e. inflation, Chinese/Asian tightening, unwieldy global liquidity flows, heightened market instability, worsening structural problems, etc.)? Did global policymaking and the markets’ euphoric perception of endless liquidity set the stage for disappointment and liquidity issues? This week felt different; highly speculative global markets are overdue for a bout of “soul searching.”
One-month Treasury bill rates ended the week at 10 bps and three-month bills closed at 13 bps. Two-year government yields jumped 13 bps to 0.50%. Five-year T-note yields ended the week 26 bps higher at 1.31%. Ten-year yields jumped 25 bps to 2.79%. Long bond yields jumped 17 bps to a 5-month high 4.28%. Benchmark Fannie MBS yields were 32 bps higher at 3.63%. The spread between 10-year Treasury yields and benchmark MBS yields widened 7 bps to 84 bps. Agency 10-yr debt spreads were 3.5 bps wider to 13.5 bps. The implied yield on December 2011 eurodollar futures jumped 25 bps to 0.815%. The 10-year dollar swap spread increased 0.75 bps to 14.0. The 30-year swap spread was little changed at negative 37. Corporate bond spreads widened. An index of investment grade bond risk jumped 8 bps to 94 bps. An index of junk bond risk jumped 50 to 486 bps.
Investment grade issuers included United Parcel $2.0bn, Time Warner Cable $1.9bn, JPMorgan $1.75bn, PPG Industries $1.0bn, Becton Dickinson $1.0bn, LG & E Energy $875 million, Boston Properties $850 million, Talisman Energy $600 million, Plum Creek Timber $575 million, Louisville G&E $535 million, Autozone $500 million, Ventas Realty $400 million, Public Service Colorado $400 million, Coca-Cola Enterprises $400 million, Entergy Arkansas $350 million, American Honda $350 million, Continental Trust $350 million, Hubbell Inc. $300 million, Cleco Power $250 million, Integrys Energy $250 million, Avalonbay Communities $250 million, Kentucky Utilities $1.5bn, and AMB Property $175 million.
Junk bond funds attracted inflows of $382 million (from Lipper), the tenth straight week of positive flows. Junk issuers included HCA Holdings $1.525bn, Berry Plastics $800 million, Mylan $800 million, West Corp $650 million, Omega Healthcare $575 million, Univision Communications $500 million, Ferrellgas $500 million, Affinion Group $475 million, Health Care REIT $450 million, Calfrac Holdings $450 million, Checkout Holdings $440 million, Polypore International $365 million, Seneca Gaming $325 million, Icahn Enterprises $500 million, Medassets $325 million, Allen Systems $300 million, Mercer Intl $350 million, Roofing Supply $225 million, Beazer Homes $250 million, Mobile Mini $200 million, Frontier Oil $150 million and Star Gas $125 million.
Converts issues included Radian Group $450 million.
The list of international dollar debt sales included IPIC $2.5bn, Odebrecht Drill $1.5bn, Peru $1.0bn, ICICI Bank $1.0bn, Precision Drilling $650 million, Vnesheconombank $1.6bn, Renhe Commercial $600 million, MBPS $320 million, China Oriental $300 million, China Forestry $300 million, Allied World Assurance $300 million, Aerospace Satellite $165 million, Global Crossing $150 million, and International Bank of Reconstruction and Development $100 million.
U.K. 10-year gilt yields rose 24 bps to 3.21%, and German bund yields gained 9 bps to 2.51%. Greek 10-year bond yields declined 5 bps to 11.39%. Ten-year Portuguese yields jumped 23 bps to 6.725%. Ireland yields rose 70 bps to 7.62%. The German DAX equities index slipped 0.3% (up 13.0% y-t-d). Japanese 10-year "JGB" yields jumped 7 bps to 0.99%. The Nikkei 225 gained 1.0% (down 7.8%). Emerging markets were under pressure. For the week, Brazil's Bovespa equities index dropped 3.1% (up 2.6%), and Mexico's Bolsa slipped 0.7% (up 12.3%). South Korea's Kospi index declined 1.3% (up 13.7%). India’s high-flying Sensex equities index fell 4.0% (up 15.4%). After today's steep decline, China’s Shanghai Exchange ended the week down 4.6% (down 8.9%). Brazil’s benchmark dollar bond yields jumped 32 bps to 3.90%, and Mexico's benchmark bond yields rose 36 bps to 3.82%.
Freddie Mac 30-year fixed mortgage rates dropped 7 bps last week to a record low 4.17% (down 74bps year-over-year). Fifteen-year fixed rates fell 6 bps to 3.57% (down 79bps y-o-y). One-year ARMs were unchanged at 3.26% (down 120bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 5 bps to 5.16% (down 75bps y-o-y).
Federal Reserve Credit expanded $8.4bn to $2.289 TN. Fed Credit was up $69.3bn y-t-d (3.6% annualized) and $173.5bn, or 8.2%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/10) surged $20.4bn (22-wk gain of $260bn) to a record $3.336 TN. "Custody holdings" have increased $380.7bn y-t-d (14.9% annualized), with a one-year rise of $419bn, or 14.4%.
M2 (narrow) "money" supply jumped $22.4bn to $8.786 TN. Narrow "money" has increased $253bn y-t-d, or 3.5% annualized. Over the past year, M2 grew 3.2%. For the week, Currency added $1.9bn, and Demand & Checkable Deposits gained $6.1bn. Savings Deposits jumped $22.0bn, while Small Denominated Deposits declined $6.1bn. Retail Money Fund assets slipped $1.6bn.
Total Money Market Fund assets (from Invest Co Inst) increased $2.0bn to $2.802 TN. Year-do-date, money fund assets have dropped $492bn, with a one-year decline of $533bn, or 16.0%.
Total Commercial Paper outstanding declined $11.7bn (8-wk gain of $97.6bn) to $1.134 TN. CP has declined $36.4bn year-to-date, and was down $105bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.516 TN y-o-y, or 20.2%, to a record $9.033 TN.
Global Credit Market Watch:
November 8 – Bloomberg: “Chinese Vice Finance Minister Zhu Guangyao said the U.S. Federal Reserve’s decision to pump $600 billion into the economy might ‘shock’ emerging markets by flooding them with capital. The first round of quantitative easing, as the Fed policy is termed, in 2009 was justified because the global economy lacked liquidity, Zhu told reporters… With a recovery now under way, new purchases of Treasuries to inject funds into the financial system may be destabilizing, he said. ‘Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,’ Zhu said. The U.S. ‘has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.’”
November 8 – Bloomberg (Jonathan Stearns): “Luxembourg’s Jean-Claude Juncker, who heads the panel of euro-area finance ministers, said he agreed with German Finance Minister Wolfgang Schaeuble’s criticism of the Federal Reserve’s decision to pump more money into the U.S. economy. ‘I am in full agreement with Mr. Schaeuble when it comes to the way he was criticizing the U.S.,’ Juncker told reporters… Schaeuble on Nov. 5 described the Fed’s move as ‘clueless.’”
November 10 – Bloomberg: “President Barack Obama finds himself on the defensive as world leaders gather in Seoul for the Group of 20 summit, with members disparaging U.S. economic policies they say weaken the dollar and stoke hot-money flows. The U.S. Federal Reserve decision last week to pump $600 billion into world’s biggest economy has stolen the spotlight away from China’s currency. Brazilian Finance Minister Guido Mantega said… that the Fed’s move may inflate commodities prices and proposed the world move away from using the dollar as the main reserve currency. Former Chinese central bank governor Dai Xianglong this week faulted the U.S. for adopting policies without regard for the dollar’s global role.”
November 8 – Bloomberg: “China’s middle-income and affluent consumers will probably almost triple in 10 years with the bulk of the increase coming from smaller cities, Boston Consulting Group Inc. said… There will be 270 million more consumers whose annual household incomes exceed 60,000 yuan ($9,000) in the world’s most populous country by 2020, said Carol Liao… That would lift the total number of middle-class and affluent Chinese to 415 million from 148 million now, she said.”
November 11 – Bloomberg (Veronica Navarro Espinosa and Gabrielle Coppola): “The best year for Brazilian bank bond sales may be over as a probe into accounting irregularities at Banco Panamericano SA increases investor scrutiny and drives up borrowing costs for lenders. Yields on dollar debt… jumped yesterday to the highest level since they were issued this year… Panamericano is being investigated by the central bank after the controlling shareholder, Grupo Silvio Santos, borrowed 2.5 billion reais ($1.5 billion) from the deposit insurance fund to cover potential losses at the bank that it said were caused by accounting ‘inconsistencies.’ Brazil’s banks have sold a record $15.2 billion of debt this year, up from $4.3 billion in all of 2009, to help finance loan growth...”
November 8 – Bloomberg (Patricia Kuo): “Leveraged loans prices climbed to a three-year high as demand for secured high-yield investments overshadowed Europe’s deepening sovereign debt crisis. The average bid price for actively-traded European leveraged loans rose 52 basis points to 97.23% of face value last week…”
November 12 – Bloomberg (Emre Peker): “Lenders led by Bank of America Corp. and JPMorgan Chase… are on pace to double U.S. leveraged-loan sales, tapping demand to help companies finance buyouts and dividends… Armstrong World Industries… led borrowers raising $8.1 billion of high-yield loans this week as 2010 issuance rose to $299 billion, 76% more than all of last year…”
November 9 – Bloomberg (Cristina Alesci and Alex Nussbaum): “HCA Inc., the hospital chain acquired four years ago in a $33 billion leveraged buyout, plans to pay a $2 billion dividend to private-equity owners including KKR & Co. and Bain Capital LLC. The dividend will be partly funded with a $1.53 billion high-yield bond issue…”
Global Government Finance Bubble Watch:
November 12 – Bloomberg (Liz Capo McCormick): “The Federal Reserve began a second round of unconventional monetary easing by buying $7.229 billion of Treasuries in attempt to drive down borrowing rates to help reduce unemployment and avert deflation… The acquisitions are part of the Fed’s plan to acquire $600 billion of Treasuries through June and reinvest maturing mortgage holdings.”
November 8 – Bloomberg (Joao Lima): “China said it’s ‘available’ to support Portugal’s efforts to come through the economic crisis that has prompted its borrowing costs to spiral this year. ‘We are available to support, through concrete measures, Portuguese efforts to face the impacts caused by the international financial crisis, and deepen and broaden our economic and commercial cooperation,’ Chinese President Hu Jintao said…”
Currency Watch:
November 12 – Bloomberg (Theophilos Argitis): “The Group of 20 said emerging markets facing a surge of capital inflows can adopt regulatory steps to cope, offering them cover to limit currency swings and stem asset bubbles as the U.S. adds $600 billion of liquidity. ‘In circumstances where countries are facing undue burden of adjustment, policy responses in emerging-market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro- prudential measures,’ leaders of the G-20 nations said in a statement…”
The dollar index rallied 2.0% (up 0.3% y-t-d) to 78.11. For the week on the downside, the Swedish krona declined 3.7%, the Norwegian krone 3.3%, the Australian dollar 3.1%, the New Zealand dollar 2.8%, the South African rand 2.7%, the Brazilian real 2.5%, the euro 2.4%, the Danish krone 2.4%, the Swiss franc 2.0%, the South Korean won 1.8%, the Japanese yen 1.5%, the Canadian dollar 1.2%, the Mexican peso 1.1%, the Singapore dollar 0.9%, the British pound 0.4%, and the Taiwanese dollar 0.3%.
Commodities Watch:
November 12 – Bloomberg (Alaric Nightingale): “Frontline Ltd., the world’s biggest supertanker operator, said it’s seeing ‘huge’ demand for crude-oil imports from China, potentially reversing a slump that contributed to mostly unprofitable charter rates since June.”
November 8 – Bloomberg (Leslie Patton): “Arabica-coffee prices rose to a 13-year high in New York on speculation that adverse weather will disrupt supplies in Vietnam, the world’s second-largest grower.”
The CRB index dropped 3.2% (up 7.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 2.1% (up 10.9% y-t-d). Spot Gold declined 1.8% to $1,369 (up 24.7% y-t-d). Silver dropped 2.7% to $26.02 (up 55% y-t-d). December Crude declined $1.98 to $84.87 (up 7% y-t-d). December Gasoline gained 1.8% (up 8% y-t-d), while December Natural Gas fell 3.0% (down 31% y-t-d). December Copper declined 1.7% (up 16% y-t-d). December Wheat sank 8.2% (up 24% y-t-d), and December Corn dropped 9.1% (up 29% y-t-d).
China Bubble Watch:
November 10 – Bloomberg: “China posted a larger-than-forecast $27.1 billion October trade surplus… Exports gained 22.9% from a year earlier and imports rose 25.3%... With the surplus pumping cash into the fastest-growing major economy…”
November 10 – Bloomberg: “China will force banks to hold more foreign exchange and strengthen auditing of overseas fund raising, stepping up efforts to curb hot-money inflows… The State Administration of Foreign Exchange will introduce new rules on currency provisioning and tighten management of banks’ foreign-debt quotas, the regulator said… The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.”
November 10 – Bloomberg: “China’s property prices rose at the slowest pace in 10 months in October… Home prices in 70 cities climbed 8.6% from a year earlier, the statistics bureau said… That’s slower than the 9.1% increase in September… Price gains also slowed to 0.2% from September after increasing 0.5 percent last month.”
November 10 – Bloomberg: “China’s passenger-car sales in October rose at the fastest pace in six months… Wholesale deliveries of cars, sport-utility vehicles and multipurpose vehicles increased 27% from a year earlier to 1.2 million last month… Passenger-car sales surged 76% to 946,400 vehicles in October 2009 as the government cut the tax rate for small cars…”
November 9 – Bloomberg (Wing-Gar Cheng): “China’s challenger to Boeing Co. and Airbus SAS expects to announce the first order for its single-aisle passenger plane next week, breaking into a market that may be worth $1.68 trillion over 20 years… ‘This is a big breakthrough for China, which will eventually become a player in the global aircraft market,’ said Bai Bingyang, an analyst at Capital Securities Corp in Shanghai. ‘Boeing and Airbus’s duopoly will be under threat.’”
November 11 – Bloomberg: “Moody’s… raised China’s debt rating to its fourth highest ranking, citing the nation’s financial strength and ability to contain losses from a credit boom. The increase is to Aa3 from A1…”
November 12 – Bloomberg (Sophie Leung): “Hong Kong reported a more-than- estimated 6.8% economic expansion in the third quarter from a year earlier as Chief Executive Donald Tsang warned asset bubbles could threaten the city’s recovery.”
November 9 – Bloomberg (Debra Mao): “An office property in Hong Kong’s Central business district sold for a record HK$25,581 ($3,300) per square foot as vacancies drop in the world’s second-most expensive market, according to Knight Frank LLP and Savills Plc.”
Japan Watch:
November 9 – Bloomberg (Toru Fujioka and Mayumi Otsuma): “Japan’s current-account surplus widened in September as exports increased, indicating that demand from Asia has helped offset the impact of a yen near its highest level against the dollar since 1995. The gap expanded 24% from a year earlier to 1.96 trillion yen ($24bn). Exports climbed 16%, while imports advanced 11%...”
India Watch:
November 11 – Bloomberg (Madelene Pearson): “In his office above a room stacked with jute sacks of turmeric, many streaked yellow by the powder, Deepak Shah is extolling the virtues of the spice. ‘It’s very good for health, it’s used in cooking, in cosmetics and it’s medicinal,’ said Shah, owner of P. Amratlal & Sons, a trader at Mumbai’s wholesale Vashi market. Falling stockpiles and speculation have also pushed up the price of the curry ingredient 64% this year…boosting food costs in a country where 7 out of 10 people live on less than $2 a day.”
Asia Bubble Watch:
November 9 – Bloomberg (Barry Porter): “Asian economies may need to turn to capital controls as quantitative easing by the U.S. threatens to spur asset bubbles in the region’s stock, currency and property markets, the World Bank said. Any curbs should be ‘targeted,’ temporary and tailored to address specific problems, Sri Mulyani Indrawati, a World Bank managing director, said…This could include countries tying up funds for as long as a year to help limit hot-money, she said.”
November 8 – Bloomberg (Joshua Fellman): “China and Indonesia signed $6.6 billion of agreements for trade and cooperation, in areas including finance, energy, electricity and agriculture, Xinhua News Agency reported.”
November 12 – Bloomberg (Scott Reyburn): “A battle between Asian buyers last night pushed a Qianlong-dynasty vase to a price of 51.6 million pounds ($83.2 million), an auction record for Chinese art. The vase had been discovered during a routine house clearance in the suburb of Pinner in London.”
Latin America Watch:
November 10 – Bloomberg (Jens Erik Gould and Andres R. Martinez): “The peso’s biggest rally on record may prompt Mexico’s central bank to cut interest rates next year to boost exports after other Latin American policy makers raised borrowing costs to cool their economies. Governor Agustin Carstens signaled… he would consider cutting rates should the peso keep gaining, according to analysts…”
Unbalanced Global Economy Watch:
November 12 – Bloomberg (Simone Meier and Emma Ross-Thomas): “Europe’s economic growth weakened in the third quarter from the fastest pace in four years… Gross domestic product in the 16-nation euro area rose 0.4% from the second quarter, when it increased 1%...”
November 8 – Bloomberg (Klaus Wille): “The Swiss jobless rate fell to the lowest in more than 1 1/2 years in October… The jobless rate dropped to 3.6% from 3.7% in September…”
U.S. Bubble Economy Watch:
November 10 – Bloomberg (William Selway): “The Republican landslide in U.S. House elections may derail efforts to extend the Build America Bond program, a part of President Barack Obama’s stimulus that has helped pump $158 billion into local public-works projects. With the federally subsidized bond program set to expire at year-end, supporters are pressing for an extension… Prospects will grow dimmer in January, when Republicans, who have called Obama’s $787 billion stimulus too costly, take control of the House and reduce the Democratic majority in the Senate.”
November 12 – Bloomberg (Elizabeth Campbell): “Americans will be paying more for their Thanksgiving turkeys this month… U.S. wholesale, frozen turkeys jumped to $1.09 a pound on average yesterday, the highest price ever and up 28% from a year earlier…”
Real Estate Bubble Watch:
November 11 – Bloomberg (Kathleen M. Howley): “Home prices fell in half of U.S. cities in the third quarter… The median price of a single-family home dropped in 76 of 155 metropolitan areas measured, the National Association of Realtors said… The median U.S. price fell 0.2% to $177,900.”
Central Bank Watch:
November 8 – Bloomberg (Vivien Lou Chen): “The Federal Reserve’s decision to undertake a second round of large-scale Treasury purchases may be prescribing the ‘wrong medicine’ to the economy’s ailments, said Richard Fisher, president of the Fed bank of Dallas… ‘I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering,’ Fisher said… ‘The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed.’”
November 8 – Bloomberg (Niklas Magnusson and Kim McLaughlin): “Sweden’s economy needs higher interest rates to prevent the build-up of financial imbalances even as concerns mount about the strength of recovery in the U.S. and Europe, Riksbank Governor Stefan Ingves said. It is ‘appropriate to gradually continue to make monetary policy somewhat less expansionary,’ Ingves said…”
Fiscal Watch:
November 12 – Bloomberg (Angela Greiling Keane): “The U.S. Postal Service said its loss widened to $8.5 billion in the year ended Sept. 30, exceeding its forecast… Revenue fell 1.5% to $67.1 billion for the year and mail volume dropped 3.5%... The loss in the previous fiscal year was $3.8 billion…”
California Watch:
November 12 – Bloomberg (Michael B. Marois): “California Governor Arnold Schwarzenegger, citing a $25.4 billion budget gap over the next 19 months, declared a fiscal emergency and called lawmakers to a special session next month to begin dealing with the problem… In addition to the gap forecast for the fiscal year through June, the nonpartisan Legislative Analyst’s Office yesterday projected a $19 billion gap in the following 12 months. By Jan. 10, Governor-elect Jerry Brown, a Democrat who will be sworn in Jan. 3, must propose a plan to erase the next year’s deficit.”
November 8 – Bloomberg (Michael B. Marois): “The budget agreement California Governor Arnold Schwarzenegger and lawmakers reached last month will have a ‘negative influence’ on the credit of school districts more than on other parts of local government, Moody’s… said… Schwarzenegger signed the $86.6 billion budget Oct. 8 after lawmakers wrestled over an agreement for 100 days into the fiscal year, the longest the most populous U.S. state has ever gone without a spending plan. It eliminated a $19 billion deficit by cutting spending almost $8 billion, half of that from health and welfare programs administered by local governments. It also delayed paying more than $5 billion in subsidies to schools and community colleges.”
November 8 – Bloomberg (Alison Vekshin): “California’s finances are less flexible after voters approved a ballot measure last week that barred the state from diverting money destined for transport and local government projects, Moody’s… said… ‘In fiscal year 2012 and beyond, this action decreases budgeting flexibility by further restricting the use of various funds,’ Moody’s said.”
Speculator Watch:
November 9 – Bloomberg (Tomoko Yamazaki): “Hedge-funds assets exceeded $1.6 trillion, reaching the highest in more than two years, as managers returned 2.3% last month helped by gains in global markets, according to Eurekahedge Pte.”
November 9 – Bloomberg (Alexis Xydias): “Quantitative funds, which choose stocks according to mathematical models, may have lost almost half their assets since 2007 after failing to capture swings in markets, according to…Nomura Holdings Inc. Money overseen at a sample of 137 quant funds fell 43% over three years to $44 billion, while the quant share of actively managed equity funds is also estimated to have halved since 2007…”
The Official Start of QE2:
There are a couple key facets of my thesis worthy of some extra focus today, the official start of QE2: First, in the post-Greek crisis world – with parallels to the subprime eruption in the spring of 2007 – the markets are increasingly keen to structural debt issues. Second, inflationary pressures have gained significant momentum in China, Asia and the “emerging” economies, more generally.
In the world of structural debt problems, the European debt crisis turned more acute this week. Ireland’s 10-year yields surged to almost 9% yesterday (from about 5% in early-August), before declining 76 bps today on more conciliatory talk from European officials. Prior to today’s bond rally, Portuguese yields were up another 50bps (to 7.0%) this week and Greece yields were another 15 bps higher (to 11.60%). Recalling the 2007-08 experience in U.S. mortgage finance, the initial policy response to the European peripheral debt crisis may have bought some time but has had little effect on underlying structural debt problems.
On the inflation front, Chinese stocks (Shanghai Composite) were hit for 5.2% today on fears of more aggressive monetary tightening by the People’s Bank of China. Chinese authorities have warned of the heightened inflation risk related to QE2. The markets are taking this talk seriously.
Earlier this week, gold and cotton surged to new record highs. Silver, sugar and rubber jumped to near 30-year highs. Copper, corn and crude traded to 2-year highs. From the beginning of September, the CRB Commodities Index rallied about 20%. Indicative of increasingly unstable global markets, the CRB index sank 3.7% today after trading to a 2-year high earlier in the week.
Yesterday, China reported a larger-than-expected 4.4% y-o-y jump in consumer prices. Also this week, China reported its October money supply (up 19.3% y-o-y) and bank loan growth ($89bn) surprised on the upside. Reports on China’s retail sales (up 18.6% y-o-y) and auto sales (up 27% y-o-y) were strong. And to the chagrin of Chinese authorities, real estate prices remain resilient at elevated levels. These days, China’s policymakers face an overheated Bubble Economy, a dilemma compounded by the prospects for surging commodity costs and destabilizing “hot money” inflows. Patience is wearing thin. Prospects are not favorable for monetary “tinkering” to be effective.
For the past couple of months, the world has been enamored with QE2 and prospects for concerted global central bank monetization/liquidity creation. European peripheral debt problems were viewed as ensuring ECB market intervention/support. Deflation had the Bank of Japan poised for aggressive action. In the U.S., structural problems were sure to support multiple QE’s and a feeble dollar. A faltering greenback equated to ongoing Asian central bank dollar purchases and the “recycling” of these balances back to the U.S. Treasury market. Ultra-low Treasury yields would then remain a steadfast anchor on market yields for the vast spectrum of global borrowers.
Global markets – stocks, bonds, commodities, and currencies – have been luxuriating in visions of endless liquidity over-abundance - for all. It’s been a backdrop where fundamental factors and issues were relegated to the backburner.
This week, it seemed like the focus may have shifted toward fundamentals. Risk is returning to the equation. For starters, the markets’ disregard for global inflation risks has begun to wane. And despite all the focus on global liquidity abundance, systemic risks remain quite elevated. Moreover, the world is increasingly keen to structural debt problems. As the week wore on, the liquidity backdrop suddenly looked a lot less certain. Perhaps the future does not guarantee ultra-loose “money” for all – but rather an increasingly discriminating market environment of “the haves” and “have nots”.
Global yields were on the rise. German bund yields gained 9 bps to 2.51% and Japan’s JGB yields rose 7 bps to 0.99%. Notably, UK 10-year yields jumped 24 bps (3.21%), Spain 17 bps (4.53%), and Italy 18 bps (4.15%). Our 30-year Treasury yields rose 17 bps to 4.29%, the high since mid-May. Benchmark U.S. municipal yields jumped 24 bps to 3.70% (from Bloomberg).
If the markets are indeed beginning to reevaluate the global inflation backdrop and the prospects for China/Asian monetary tightening, the marketplace would also be expected to become more discriminating based on respective borrower fundamentals. After all, the potential for rising global yields and a less accommodating liquidity backdrop would more severely impact the most heavily indebted. As such, I take particular interest in this week’s jump in yields for the UK, Spain, Italy, U.S. Treasurys and American municipal bonds.
If the market has in fact begun to shift from “endless liquidity for all” to a more fundamentally-driven focus, don’t expect such a transition to go smoothly. After all, ultra-loose financial conditions tend to most benefit the weakest borrowers. That has certainly been the case in the U.S. Credit market, with junk bonds, leveraged loans, and municipal debt having enjoyed such stellar performance. In our stock market, many of the most fundamentally-challenged stocks and sectors have posted tremendous gains. An extraordinary liquidity backdrop has nurtured speculative excess – in the process creating acute vulnerability to changing market perceptions.
On a global macro basis, few governments have benefited more from global liquidity excess than the U.S. Treasury. It is worth noting that in the face of today’s global risk markets drubbing – Treasury yields rose and the dollar index barely tread water.
Has quantitative easing – on this, the initial trading day of QE2 – turned counterproductive? Have markets reached an inflection point, with concern shifting away from perceived liquidity benefits to the heightened risks associated with additional Federal Reserve liquidity creation (i.e. inflation, Chinese/Asian tightening, unwieldy global liquidity flows, heightened market instability, worsening structural problems, etc.)? Did global policymaking and the markets’ euphoric perception of endless liquidity set the stage for disappointment and liquidity issues? This week felt different; highly speculative global markets are overdue for a bout of “soul searching.”
11/05/2010 QE2 *
For the week, the S&P500 jumped 3.6% (up 9.9% y-t-d), and the Dow rose 2.9% (up 9.7%). The Banks surged 7.0% (up 14.0%), while the Broker/Dealers jumped 6.0% (up 0.8%). The Morgan Stanley Cyclicals rose 5.2% (up 17.5%), and the Transports increased 3.6% (up 20.1%). The Morgan Stanley Consumer index gained 2.0% (up 10.0%), and the Utilities added 1.0% (up 3.1%). The broader market was quite strong. The S&P 400 Mid-Caps jumped 3.9% (up 18.5%), and the small cap Russell 2000 surged 4.7% (up 17.8%). The Nasdaq100 gained 2.9% (up 17.5%), and the Morgan Stanley High Tech index increased 2.5% (up 11.2%). The Semiconductors jumped 5.2% (up 8.9%). The InteractiveWeek Internet index gained 2.4% (up 32.3%). The Biotechs added 0.5%, increasing 2010 gains to 24.3%. With bullion jumping $35, the HUI gold index jumped 5.3% (up 27.9%).
One-month Treasury bill rates ended the week at 12 bps and three-month bills closed at 12 bps. Two-year government yields rose 3 bps to 0.36%. Five-year T-note yields ended the week down 7 bps to 1.04%. Ten-year yields declined 6 bps to 2.54%. Long bond yields jumped 14 bps to 4.12%. Benchmark Fannie MBS yields were down 4 bps to 3.32%. The spread between 10-year Treasury yields and benchmark MBS yields widened 2 bps to 78 bps. Agency 10-yr debt spreads were little changed at 11 bps. The implied yield on December 2011 eurodollar futures increased 1.5 bps to 0.555%. The 10-year dollar swap spread jumped 5 bps to 13.25. The 30-year swap spread declined 1.5 bps to negative 36.5. Corporate bond spreads narrowed. An index of investment grade bond risk declined 8 to 86 bps. An index of junk bond risk sank 53 to 435 bps (low since October 2007).
Investment grade issuers included Coca-Cola $4.5bn, Dow Chemical $2.5bn, GE Capital $2.0bn, Northrop Grumman $1.5bn, Chicago Parking $600 million,Williams Partners $600 million, Jefferies $500 million, Northern Trust $500 million, Oglethorpe Power $450 million, and Harvard $300 million.
Junk bond funds attracted inflows of $259 million (from Lipper), the ninth straight week of positive flows. Junk issuers included Sungard Data Systems $1.6bn, Metropcs Wireless $1.0bn, Hanesbrands $1.0bn, Frac Tech Services $550 million, Harbinger Group $350 million, USG $350 million, Goodman Group $325 million, Seminole Tribe of Florida $330 million, Jarden $300 million, Quality Distribution $225 million, New York Times $225 million, Spansion $200 million, and Asbury Auto Group $200 million.
Converts issues included Lennar $435 million, Developers Diversified $350 million, and Vishay Intertech $275 million.
The list of international dollar debt sales included BNP Paribas $2.4bn, Sinochem Overseas $2.0bn, Kazmunaigaz Finance $1.25bn, China Overseas $1.0bn, Lukoil $1.0bn, Banco Santander $850 million, Korea National Oil $700 million, Banco Do Nordeste Brasil $300 million, Telefonica Movil $300 million, AES Andres $285 million, NCL $250 million, EMP Distribuidora $230 million, General Shopping $200 million, and Arcor $200 million.
U.K. 10-year gilt yields fell 10 bps to 2.97%, and while German bund yields dropped 10 bps to 2.42%. Greek 10-year bond yields surged 89 bps to 11.45%. Ten-year Portuguese yields jumped 56 bps to 6.50%. Ireland yields rose 70 bps to 7.62%. The German DAX equities index rose 2.3% (up 13.4% y-t-d) to a 2010 high. Japanese 10-year "JGB" yields were little changed at 0.93%. The Nikkei 225 jumped 4.4% (down 8.7%). Emerging equity markets were higher. For the week, Brazil's Bovespa equities index rose 2.7% (up 5.9%), and Mexico's Bolsa increased 2.1% (up 13.1%). South Korea's Kospi index gained 3.0% (up 15.2%). India’s Sensex equities index jumped 4.9% (up 20.3%) to a record close. China’s Shanghai Exchange rallied another 5.1% (down 4.5%). Brazil’s benchmark dollar bond yields rose 4 bps to 3.58%, while Mexico's benchmark bond yields were little changed at 3.55%.
Freddie Mac 30-year fixed mortgage rates added one basis point last week to 4.24%, but were down 74 bps year-over-year. Fifteen-year fixed rates declined 3 bps to 3.63% (down 77bps y-o-y). One-year ARMs were down 4 bps to 3.26% (down 121bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 7 bps to 5.11% (down 99bps y-o-y).
Federal Reserve Credit declined $8.5bn to $2.281 TN. Fed Credit was up $60.8bn y-t-d (3.2% annualized) and $132bn, or 6.1%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/3) surged $21.6bn (21-wk gain of $240bn) to a record $3.316 TN. "Custody holdings" have increased $360.4bn y-t-d (14.4% annualized), with a one-year rise of $405.9bn, or 13.9%.
M2 (narrow) "money" supply declined $9.6bn to $8.764 TN. Narrow "money" has increased $231bn y-t-d, or 3.3% annualized. Over the past year, M2 grew 2.9%. For the week, Currency added $1.6bn, and Demand & Checkable Deposits jumped $6.6bn. Savings Deposits dropped $16.9bn, and Small Denominated Deposits declined $5.4bn. Retail Money Fund assets dipped $3.6bn.
Total Money Market Fund assets (from Invest Co Inst) slipped $6.6bn to $2.800 TN. Year-do-date, money fund assets have dropped $494bn, with a one-year decline of $539bn, or 16.1%.
Total Commercial Paper outstanding fell $22.5bn (7-wk gain of $109bn) to $1.145 TN. CP has declined $24.7bn year-to-date, and was down $170bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.519 TN y-o-y, or 20.3%, to a record $9.009 TN.
Global Credit Market Watch:
November 2 – Bloomberg (Dara Doyle): “Irish Finance Minister Brian Lenihan may have just one month to stave off an international bailout. The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record today as Lenihan tries to put together a 2011 budget by Dec. 7 that convinces investors he can get the country’s finances in order.”
November 2 – Bloomberg (Jason Webb and John Glover): “The yield gap between junk-rated company bonds and investment-grade debt in emerging markets is near the smallest since June 2008 as less creditworthy borrowers benefit most from cash pouring into developing countries. The spread has narrowed to 225 basis points… from this year’s high of 314 basis points on June 8 amid a worldwide rally in corporate bonds… Bondholders are seeking out riskier, higher-yielding securities as central banks’ attempts to stoke economic growth by keeping down interest rates also curb returns on investments such as government debt.”
November 2 – Bloomberg (Patricia Lui): “China’s U.S. dollar borrowing costs fell in October by the most since January as investors bet record currency reserves of $2.65 trillion will help the world’s fastest-growing economy win a higher debt rating… The extra yield over similar-maturity Treasuries narrowed 15 basis points to a three-month low of 95.”
November 1 – Bloomberg (Jody Shenn): “JPMorgan Chase & Co. analysts lowered their estimate for the cost to sellers of repurchasing soured U.S. mortgages to as much as $90 billion from a range that went as high as $120 billion.”
Global Government Finance Bubble Watch:
November 1 – Financial Times (Martin Feldstein): “The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy. Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks’ excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar’s international value, bid up the price of commodities and farm land and raised share prices.”
November 4 – Bloomberg (Frances Yoon and William Sim): “The Federal Reserve’s plan to buy an additional $600 billion of Treasuries will spark another influx of money to emerging markets, underscoring the need for South Korea to consider capital controls, the finance ministry said. Less than nine hours after the Federal Open Market Committee issued its statement on securities purchases, the Bank of Korea said excessive foreign capital flows into the stock market pose a risk as the rising value of the won attracts overseas investors. Nation’s from South Korea to Brazil are struggling to manage the flows, which are driving up the value of their currencies and reducing the competitiveness of exporters… ‘Our country will actively consider implementing capital control measures to improve the macro-economy,” Kim Ik Joo, a director general of South Korea’s finance ministry, said…”
November 3 – Bloomberg (Steve Matthews and Scott Lanman): “The Federal Reserve may be underestimating the inflation outlook for the second time in less than a decade as it prepares to pump more money into the U.S. economy. The Fed today will probably restart purchases of bonds to spur the economy even as growth is likely to accelerate… By expanding Fed assets, Chairman Ben S. Bernanke may go down the same policy path taken in 2003-04, when he and other central bankers kept rates near a record low as inflation rose faster than initially measured. Bernanke may risk increasing expectations for higher inflation by too much, causing a shake- up in currency and bond markets, said James D. Hamilton, a University of California… economist. ‘That perception alone would bring about a series of immediate challenges, such as a rapid flight from the dollar, commodity speculation and possible under-subscription to Treasury auctions,’ said Hamilton, a former visiting scholar at the Fed board and the New York and Atlanta district banks. ‘So the Fed has a careful tightrope act here.’”
November 5 – Bloomberg (Simon Kennedy and Shamim Adam): “U.S. Treasury Secretary Timothy F. Geithner’s shot to end the “currency war” by pushing for targets to shrink current-account gaps risks failing over the complexity of shifting trade and investment flows. Geithner may use a Nov. 5-6 meeting of Asia-Pacific Economic Cooperation forum counterparts in Kyoto, Japan, to press his case for current-account deficit or surplus targets of less than 4 percent of gross domestic product. The issue will also likely feature at a Group of 20 summit in Seoul next week.”
November 4 – Bloomberg (Arnaldo Galvao and Andre Soliani): “Brazil may buy back some of its international real-denominated bonds and sell new securities with longer maturities in a bid to temper capital inflows that helped drive the currency to a two-year high last month.”
November 4 – Bloomberg: “China will boost the number of mutual funds that can invest overseas next year, spurring inflows into other emerging markets and slowing the yuan’s appreciation, according to fund research companies Z-Ben Advisors and Howbuy.”
Currency Watch:
November 1 – Bloomberg: “China should purchase gold and oil overseas with its foreign-exchange reserves to avoid losses from a weakening dollar, according to a newspaper commentary by Shao Fenggao, an official at China Construction Bank Corp.”
The dollar index declined 0.9% (down 1.6% y-t-d) to 76.60. For the week on the upside, the New Zealand dollar increased 3.7%, the South African rand 3.3%, the Australian dollar 3.2%, the Swiss franc 2.1%, the Canadian dollar 1.9%, the Taiwanese dollar 1.7%, the South Korean won 1.6%, the Norwegian krone 1.6%, the Mexican peso 1.2%, the Brazilian real 1.1%, the British pound 0.9%, the Swedish krona 0.9%, the Danish krone 0.7%, and the euro 0.6%. On the downside, the Japanese yen declined 1.1%.
Commodities Watch:
November 5 – Bloomberg (Simon Clark and Stephen Morris): “Federal Reserve Chairman Ben S. Bernanke’s decision to pump a further $600 billion into the economy shows his grasp of economics is weak, said investor Jim Rogers, chairman of Rogers Holdings. ‘Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance, Rogers…said… ‘All he understands is printing money.’ ‘His whole intellectual career has been based on the study of printing money,’ said Rogers, who predicted the start of the global commodities rally in 1999. ‘Give the guy a printing press, he’s going to run it as fast as he can.’”
November 5 – Bloomberg (Grant Smith): “Oil traded near its highest level in two years in New York as the dollar headed for a weekly decline against most major counterparts after the Federal Reserve’s decision to purchase more debt to boost the U.S. economy.”
November 4 – Bloomberg (Mark Shenk and Grant Smith): “Oil may return to $100 a barrel for the first time since the 2008 financial crisis as the U.S. Federal Reserve’s stimulus measures weaken the dollar, drawing investors to raw materials. Crude may rally to three digits next year as central banks pump cash into their economies to revive growth, according to JPMorgan Chase & Co. and Bank of America Merrill Lynch.”
November 4 – Bloomberg (Tony C. Dreibus): “Commodities rose to a two-year high after the Federal Reserve said it would expand steps to boost the world’s largest economy, spurring demand for raw materials as a hedge against inflation.”
November 2 – Bloomberg (Stephen Morris and Debarati Roy): “Raw sugar surged to a 29-year high as dry weather crimps output in Brazil, the world’s biggest producer, and India may cap exports to boost domestic supplies. Output in Brazil’s Center South, the country’s biggest producing-region, tumbled 30% in the first half of October from a year earlier… Stockpiles in India… are about 4 million metric tons, compared with the nation’s preferred level of 10 million tons, according to Rabobank International. ‘Both Brazil and India are contributing to this frenzy,[ said Judith Ganes-Chase, the president of J. Ganes Consulting… ‘The prices will remain strong.’ Sugar has more than doubled since touching a 13-month low on May 7…”
November 3 – Bloomberg (Luzi Ann Javier): “Cotton futures… advanced to records on lingering concerns that a production deficit in China, the world’s biggest buyer, may be wider than estimated, boosting the nation’s import needs… ‘We continue to hear of reports of strong physical demand and concerns about the Chinese cotton crop,’ Luke Mathews, a commodity strategist at Commonwealth Bank of Australia, said… ‘It’s a global phenomenon that we’re seeing at the moment, reflective of the fact that global cotton supplies are extraordinarily tight.’ Global production is forecast to lag behind demand for a fifth straight year, draining stockpiles to the lowest level in 14 years…”
November 4 – Bloomberg (Leslie Patton): “A doubling of cotton prices since Feb. 1 may mean more expensive clothes, sheets and towels as textile mills… and retailers… pass along higher costs to their customers.”
November 3 – Bloomberg (Supunnabul Suwannakij): “Rubber futures in Thailand, the world’s largest producer, and Singapore surged to records as floods spread across major producing nations in Southeast Asia, hurting production of the commodity used to make tires.”
The CRB index surged 4.3% (up 10.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 5.4% (up 13.3% y-t-d). Spot Gold gained 2.6% to $1,394 (up 27% y-t-d). Silver jumped 4.7% to $26.755 (up 59% y-t-d). December Crude rose $5.64 to $87.07 (up 10% y-t-d). December Gasoline surged 6.1% (up 7% y-t-d), while December Natural Gas slipped 2.3% (down 29% y-t-d). December Copper jumped 5.9% (up 18% y-t-d). December Wheat added 1.6% (up 35% y-t-d), and December Corn gained 1.0% (up 42% y-t-d).
China Bubble Watch:
November 1 – Bloomberg: “Shanghai’s World Expo transformed the city with a $44 billion makeover of roads, subway lines and its riverside Bund and was celebrated with traditional songs and dance when it closed late yesterday. The six-month event attracted 73.1 million visitors, topping the record of 64 million set in Osaka, Japan, in 1970.”
November 3 – Bloomberg: “The World Bank said China should raise interest rates and allow a stronger yuan to damp inflation, along with guarding against a surfeit of capital inflows… Funds pouring into Asia because of liquidity injections by central banks in developed countries shouldn’t deter China from raising rates, the lender said.”
November 4 – Bloomberg (Luzi Ann Javier): “Bears on Chinese equities are in retreat even as bets against the country’s companies exceed those of any of the world’s biggest markets… Short sales of Hang Seng China Enterprises Index shares dropped to an average 16% of equity available for lending from 21% at the end of August…”
November 3 – Bloomberg: “China’s worldwide search for copper begins in the gnarled hands of 76-year-old Yang Caiguan, who is fiddling with the cables of his digital television tuner… Around him sit amenities of modern life -- flat-screen TV, air conditioners, washing machine, water heater and gas-ignition stove -- that were foreign to him and his wife until this year. With their new apartment in the central Chinese town of Daojiang in Hunan province, the couple acquired at least 41 kilograms (90 pounds) of copper in electrical wiring and appliances, about 10 times the nation’s annual per capita consumption of the metal.”
November 3 – Bloomberg (Luzi Ann Javier and Jay Wang): “Textile makers in China, which uses more than 40% of the world’s cotton, face a supply shortage that has sent prices to a record and is ‘endangering’ their survival, an industry group said.”
Japan Watch:
November 4 – Bloomberg (Mayumi Otsuma): “The Bank of Japan’s planned purchases of real-estate investment trusts and exchange-traded funds may bolster investor confidence and support markets that have failed to recover ground lost since the global financial crisis. Governor Masaaki Shirakawa and his policy board will start a two-day policy meeting today to discuss the purchases, which are part of a broader 5 trillion-yen ($62 billion) fund unveiled last month. The bank brought forward its November meeting date by more than a week to speed up the purchases."
India Watch:
November 4 – Bloomberg (Rajhkumar K Shaaw): “Indian stocks climbed, driving the benchmark index to a record close, as foreign buying of the equities surged to an all-time high… This year’s 20% rally makes the Sensex the best performer among the world’s 10 biggest stock markets. Foreign fund inflows have surged 80%...”
November 4 – Bloomberg (Rakteem Katakey and Rajesh Kumar Singh): “Coal India Ltd. surged 40% on its first trading day to become the world’s second-most valuable coal miner after investors bid for 15 times the shares sold in the country’s largest initial public offering.”
Asia Bubble Watch:
November 1 – Bloomberg (Claire Leow, Thomas Kutty Abraham and Jeff Wilson): “Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years. Inventories of soybean oil and palm oil used… in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12% in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show.”
November 4 – Bloomberg (Michael Heath): “Asia-Pacific officials are preparing for stronger currencies and asset-price inflation as they blamed the U.S. Federal Reserve’s expanded monetary stimulus for threatening to escalate an inflow of capital into the region. Chinese central bank adviser Xia Bin said Fed quantitative easing is ‘uncontrolled’ money printing, and Japan’s Prime Minister Naoto Kan cited the U.S. pursuing a ‘weak-dollar policy.’ The Hong Kong Monetary Authority warned the city’s property prices could surge and Malaysia’s central bank chief said nations are prepared to act jointly on capital flows. ‘Extra liquidity due to quantitative easing will spill into Asian markets,’ said Patrick Bennett…strategist at Standard Bank Group Ltd. ‘It will put increased pressure on all currencies to appreciate, the yuan in particular has been appreciating at a slower rate than others.’”
November 1 – Bloomberg (Eunkyung Seo and William Sim): “South Korea’s exports grew faster than projected… Exports increased 29.9% in October from a year earlier, after gaining a revised 16.5% in September…”
November 1 – Bloomberg (Eunkyung Seo and William Sim): “South Korea’s consumer prices grew more than expected, increasing at the fastest pace in 20 months and bolstering the case for higher borrowing costs. The consumer price index rose 4.1% in October from a year earlier…”
November 4 – Bloomberg (Shamim Adam and Novrida Manurung): “Bank Indonesia kept its benchmark interest rate at a record low as slowing inflation allowed policy makers to delay an increase that could attract capital inflows and strengthen the currency further.”
Latin America Watch:
November 1 – Bloomberg (Matthew Bristow): “Brazilian economists raised their year-end consumer price forecasts for 2010 and 2011 as rising consumer demand powers the fastest economic growth in over two decades… Consumer prices will rise 5.29% this year and 4.99% in 2011…”
Unbalanced Global Economy Watch:
November 3 – Bloomberg (Gelu Sulugiuc): “Norway’s unemployment rate was 3.4% in the August quarter...
U.S. Bubble Economy Watch:
November 4 – Wall Street Journal (Julie Jargon and Ilan Brat): “An inflationary tide is beginning to ripple through America’s supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades. Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald’s Corp., Kellogg Co. and Kroger Co. have begun to signal that they'll try to make consumers shoulder more of the higher costs for ingredients.”
November 3 – New York Times (Stephanie Clifford): “Synthetic linings. Smaller buttons. Less Italian fabric. And yes, even more polyester. Unusually high cotton prices have apparel makers scrambling to keep down costs, but consumers be warned: cotton clothing will be getting more expensive. ‘It’s really a no-choice situation,’ said Wesley R. Card, president and chief executive of the Jones Group… ‘Prices have to come up.’”
November 1 – Bloomberg (Lu Wang): “U.S. infrastructure-spending plans are ‘too little, too late’ and should be increased in preference to quantitative easing, said Zhou Yuan, head of asset allocation at China’s $300 billion sovereign wealth fund. Proposed spending of about $500 billion over six years on infrastructure should be doubled, Zhou said…”
November 2 – Bloomberg (Steven Church): “Bankruptcy filings by U.S. consumers totaled 132,173 last month, 1.4% more than in September, keeping Americans on track to file 1.6 million bankruptcies this year, the American Bankruptcy Institute said. October’s total fell 2.8% from the same month last year…”
November 2 – Bloomberg (Kathleen M. Howley): “The U.S. homeownership rate was unchanged at a 10-year low in the third quarter… The homeownership rate was 66.9 percent… The homeowner vacancy rate, or the share of properties vacant and for sale, was unchanged at 2.5%...”
Central Bank Watch:
November 2 – Bloomberg (Kartik Goyal and Michael Heath): “Australia…raised interest rates to cool inflation, hours before the U.S. Federal Reserve meets to debate a round of asset purchases that may stoke price and currency pressures in Asia. The Reserve Bank of Australia cited medium-term inflation risks for today’s unexpected decision to raise its benchmark rate. India’s central bank boosted borrowing costs for a sixth time this year after consumer prices accelerated at the second- fastest pace among Group of 20 nations. The decisions highlight the divergence between Asian and emerging economies where recoveries are strengthening…”
November 2 – Bloomberg (Kartik Goyal): “India’s central bank raised interest rates for a sixth time this year in Asia’s fastest round of increases and said the chance of further policy tightening in the ‘immediate future is relatively low.’ The Reserve Bank of India boosted the repurchase rate by a quarter-point to 6.25%...”
November 2 – Bloomberg (Shamim Adam): “Former Federal Reserve Chairman Paul Volcker, an adviser to President Barack Obama, said quantitative easing may spark inflation in the future and the amount involved may be a cause for concern. ‘When money is too easy for too long, we will have more’ asset bubbles, Volcker, 83, said…”
November 4 – Bloomberg (Jana Randow): “Federal Reserve Chairman Ben S. Bernanke is making it harder for Jean-Claude Trichet to lead the European Central Bank out of crisis mode. Last night’s decision by the Fed to buy an additional $600 billion of Treasuries through June to bolster the U.S. economy may force the ECB to delay the withdrawal of its own stimulus measures, economists said… ‘It’s complicating the ECB’s exit and council members really need to think hard about their strategy,’ said Julian Callow, chief European economist at Barclays Capital… ‘They may have to reconsider their plans.’”
November 4 – Bloomberg (Jennifer Ryan): “The Bank of England kept its emergency stimulus program unchanged as the strength of the U.K. recovery persuaded officials not to join the Federal Reserve in buying more government bonds.”
QE2:
The late-July arrival of St. Louis Federal Reserve President Bullard’s monetary policy white paper commenced serious discussion regarding “QE2.” From August lows, the S&P500 has gained almost 18%, the S&P400 Mid-Caps 21%, and the small cap Russell 2000 25%. Notably, many global market prices have enjoyed even more robust inflation. Gold is up 19% and silver has surged 50%. The Shanghai Composite has rallied 22%. India’s Sensex index rose 18% to a record high. Copper is up 23% from August lows. Cotton has surged 80%, sugar 82%, and corn 46%. The Goldman Sachs Commodities index has gained 21% from mid-August lows.
In Bill Gross’s latest, he posits that the Fed is “pushing on a string.” This is not the case. The current backdrop has little-to-no similarity to the 1930’s; the world is definitely not today stuck in a Credit collapse and deflationary quagmire. Instead, much of the globe is facing an unrelenting onslaught of financial inflows and heightened inflationary pressures. Faltering dollar confidence is the prevailing force behind troubling inflationary pressures and strengthening Bubble Dynamics.
Increasingly, “emerging” economy Credit systems have succumbed to overheating, while key developed economies are locked into a perilous cycle of massive non-productive government debt expansion. Our unsound debt, liquidity and currency dynamics ensure that excess flourishes throughout global Credit systems. Bubbles are today left to run uncontrolled and undisciplined by a market hopelessly distorted by liquidity overabundance. Fed policies seemingly ensure that global liquidity goes from extraordinary to extreme overabundance.
The Fed may today be alone in “quantitative easing” through the purchase of domestic government obligations. Our central bank, however, has considerable global company when it comes to monetization and liquidity creation. From Bloomberg’s tally we know that global central bank international reserve positions have inflated $1.5 TN over the past 12 months. That last thing the global financial system needs is an additional shot of liquidity and reason to believe that dollar devaluation will be accelerated.
In post-announcement analysis of the Fed’s commitment to another $600bn of Treasury purchases, Bill Gross commented on CNBC that “the biggest risk is inflation down the road.” I again disagree with Mr. Gross. The greatest risk is a destabilizing crisis of confidence for our nation’s debt obligations. Our system doubled total mortgage debt in just over six years during the mortgage/Wall Street finance Bubble. Washington is now on track to double the federal debt load in just over 4 years. Federal Reserve policy remains instrumental in accommodating a precarious Credit Bubble at the heart of our monetary system.
It seems again worth highlighting a couple key sentences from ECB President Jean-Claude Trichet’s July 22, 2010 op-ed piece in the Financial Times, “Stimulate no more – it is now time for all to tighten”: “…Given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.”
The Bernanke Fed is playing with fire here. QE1 was implemented in an environment of deleveraging, impaired global financial systems and acute economic contraction. And, importantly, the dollar was enjoying strong performance in the marketplace as global risk markets suffered from de-risking and general outflows. QE1 had a stabilizing influence, as it worked to accommodate financial sector de-leveraging.
The QE2 backdrop is altogether different. Global markets are these days demonstrating robust inflationary biases. Risk embracement is back in vogue – speculation is rife. The “emerging economies” and global risk markets have been on the receiving end of massive financial (“hot money”) flows. Meanwhile, the dollar has been under heavy selling pressure with heightened risk of a crisis of confidence. This week’s market activity supported my view that the environment would seem to dictate that QE2 will only exacerbate increasingly unwieldy financial flows and unstable global markets.
It has been critical to my analysis that current reflation dynamics are different in kind from those that for the past two decades provided the Federal Reserve the most potent mechanism for domestic monetary stimulus. In today’s post-mortgage finance Bubble and housing mania backdrop, the Fed has lost much of its capacity to inflate household net worth and spending. The robust inflationary biases – and fledgling Bubbles – are now in global markets and economies. The “Core to Periphery” financial flow dynamic has become deeply embedded.
The key dynamic today is one where deep structural U.S. impairment elicits an unprecedented monetary response from our central bank. Yet the markets anticipate that this liquidity will seek out the inflating asset classes and most robust global economies. This week, gold climbed to a record high, crude oil to a two-year high, and copper to a 28-month high. The Shanghai Composite jumped 5.1% this week and India’s Sensex was up 4.9%. So far, indications support the view that the Fed’s move will further stimulate unfolding global booms.
Whether it is Asia or the commodities/natural resources economies, QE2 will exacerbate the already powerful financial flows and Bubble fuel. The U.S. economy is poorly structured to benefit from these new global financial flows, inflation and growth dynamics. There may be some gain from inflating U.S. stock prices. Yet the struggling consumer sector is going to get smacked with higher food and energy prices.
In his Thursday op-ed in the Washington Post – “What the Fed did and why: supporting the recovery and sustaining price stability” – Chairman Bernanke argued that “the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability.” The dilemma for the Fed is that the financial and economic environment will dictate that their policies have minimal impact on both U.S. employment and growth, while providing a major impetus for additional global Monetary Disorder. A strong case can be made that QE2 will only worsen already unprecedented global imbalances. Global policymakers must be at their wits’ end.
November 5 – Financial Times (Alan Beattie, Geoff Dyer, and Chris Giles): “’With all due respect, US policy is clueless,’ Wolfgang Schäuble, German finance minister, told reporters. ‘It’s not that the Americans haven’t pumped enough liquidity into the market,’ he said. ‘Now to say let’s pump more into the market is not going to solve their problems.’”
November 4 – Bloomberg (Arnaldo Galvao and Andre Soliani): “Brazil’s Finance Minister Guido Mantega said he’s not considering additional currency measures even as the U.S. throws ‘money from a helicopter’ in a bid to boost economic growth. Mantega said the Federal Reserve’s decision yesterday to inject $600 billion into the economy through debt purchases won’t work and increases the risk of asset bubbles forming around the globe. He said President Luiz Inacio Lula da Silva will urge the U.S. to change its policy next week when he attends the Group of 20 nations summit in Seoul, South Korea. It doesn’t work to throw money from a helicopter because this won’t make growth flourish,’ Mantega told reporters… ‘In Brazil, there is no risk of bubbles because we took measures that block exaggerated inflows.’”
November 5 – Bloomberg: “China said the U.S. Federal Reserve needs to explain this week’s decision to purchase bonds to pump money into the world’s biggest economy or risk undermining the global recovery. ‘Many countries are worried about the impact of the policy on their economies,’ Vice Foreign Minister Cui Tiankai said… ‘It would be appropriate for someone to step forward and give us an explanation, otherwise international confidence in the recovery and growth of the global economy might be hurt.’”
One-month Treasury bill rates ended the week at 12 bps and three-month bills closed at 12 bps. Two-year government yields rose 3 bps to 0.36%. Five-year T-note yields ended the week down 7 bps to 1.04%. Ten-year yields declined 6 bps to 2.54%. Long bond yields jumped 14 bps to 4.12%. Benchmark Fannie MBS yields were down 4 bps to 3.32%. The spread between 10-year Treasury yields and benchmark MBS yields widened 2 bps to 78 bps. Agency 10-yr debt spreads were little changed at 11 bps. The implied yield on December 2011 eurodollar futures increased 1.5 bps to 0.555%. The 10-year dollar swap spread jumped 5 bps to 13.25. The 30-year swap spread declined 1.5 bps to negative 36.5. Corporate bond spreads narrowed. An index of investment grade bond risk declined 8 to 86 bps. An index of junk bond risk sank 53 to 435 bps (low since October 2007).
Investment grade issuers included Coca-Cola $4.5bn, Dow Chemical $2.5bn, GE Capital $2.0bn, Northrop Grumman $1.5bn, Chicago Parking $600 million,Williams Partners $600 million, Jefferies $500 million, Northern Trust $500 million, Oglethorpe Power $450 million, and Harvard $300 million.
Junk bond funds attracted inflows of $259 million (from Lipper), the ninth straight week of positive flows. Junk issuers included Sungard Data Systems $1.6bn, Metropcs Wireless $1.0bn, Hanesbrands $1.0bn, Frac Tech Services $550 million, Harbinger Group $350 million, USG $350 million, Goodman Group $325 million, Seminole Tribe of Florida $330 million, Jarden $300 million, Quality Distribution $225 million, New York Times $225 million, Spansion $200 million, and Asbury Auto Group $200 million.
Converts issues included Lennar $435 million, Developers Diversified $350 million, and Vishay Intertech $275 million.
The list of international dollar debt sales included BNP Paribas $2.4bn, Sinochem Overseas $2.0bn, Kazmunaigaz Finance $1.25bn, China Overseas $1.0bn, Lukoil $1.0bn, Banco Santander $850 million, Korea National Oil $700 million, Banco Do Nordeste Brasil $300 million, Telefonica Movil $300 million, AES Andres $285 million, NCL $250 million, EMP Distribuidora $230 million, General Shopping $200 million, and Arcor $200 million.
U.K. 10-year gilt yields fell 10 bps to 2.97%, and while German bund yields dropped 10 bps to 2.42%. Greek 10-year bond yields surged 89 bps to 11.45%. Ten-year Portuguese yields jumped 56 bps to 6.50%. Ireland yields rose 70 bps to 7.62%. The German DAX equities index rose 2.3% (up 13.4% y-t-d) to a 2010 high. Japanese 10-year "JGB" yields were little changed at 0.93%. The Nikkei 225 jumped 4.4% (down 8.7%). Emerging equity markets were higher. For the week, Brazil's Bovespa equities index rose 2.7% (up 5.9%), and Mexico's Bolsa increased 2.1% (up 13.1%). South Korea's Kospi index gained 3.0% (up 15.2%). India’s Sensex equities index jumped 4.9% (up 20.3%) to a record close. China’s Shanghai Exchange rallied another 5.1% (down 4.5%). Brazil’s benchmark dollar bond yields rose 4 bps to 3.58%, while Mexico's benchmark bond yields were little changed at 3.55%.
Freddie Mac 30-year fixed mortgage rates added one basis point last week to 4.24%, but were down 74 bps year-over-year. Fifteen-year fixed rates declined 3 bps to 3.63% (down 77bps y-o-y). One-year ARMs were down 4 bps to 3.26% (down 121bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 7 bps to 5.11% (down 99bps y-o-y).
Federal Reserve Credit declined $8.5bn to $2.281 TN. Fed Credit was up $60.8bn y-t-d (3.2% annualized) and $132bn, or 6.1%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/3) surged $21.6bn (21-wk gain of $240bn) to a record $3.316 TN. "Custody holdings" have increased $360.4bn y-t-d (14.4% annualized), with a one-year rise of $405.9bn, or 13.9%.
M2 (narrow) "money" supply declined $9.6bn to $8.764 TN. Narrow "money" has increased $231bn y-t-d, or 3.3% annualized. Over the past year, M2 grew 2.9%. For the week, Currency added $1.6bn, and Demand & Checkable Deposits jumped $6.6bn. Savings Deposits dropped $16.9bn, and Small Denominated Deposits declined $5.4bn. Retail Money Fund assets dipped $3.6bn.
Total Money Market Fund assets (from Invest Co Inst) slipped $6.6bn to $2.800 TN. Year-do-date, money fund assets have dropped $494bn, with a one-year decline of $539bn, or 16.1%.
Total Commercial Paper outstanding fell $22.5bn (7-wk gain of $109bn) to $1.145 TN. CP has declined $24.7bn year-to-date, and was down $170bn from a year ago.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg’s Alex Tanzi – were up $1.519 TN y-o-y, or 20.3%, to a record $9.009 TN.
Global Credit Market Watch:
November 2 – Bloomberg (Dara Doyle): “Irish Finance Minister Brian Lenihan may have just one month to stave off an international bailout. The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record today as Lenihan tries to put together a 2011 budget by Dec. 7 that convinces investors he can get the country’s finances in order.”
November 2 – Bloomberg (Jason Webb and John Glover): “The yield gap between junk-rated company bonds and investment-grade debt in emerging markets is near the smallest since June 2008 as less creditworthy borrowers benefit most from cash pouring into developing countries. The spread has narrowed to 225 basis points… from this year’s high of 314 basis points on June 8 amid a worldwide rally in corporate bonds… Bondholders are seeking out riskier, higher-yielding securities as central banks’ attempts to stoke economic growth by keeping down interest rates also curb returns on investments such as government debt.”
November 2 – Bloomberg (Patricia Lui): “China’s U.S. dollar borrowing costs fell in October by the most since January as investors bet record currency reserves of $2.65 trillion will help the world’s fastest-growing economy win a higher debt rating… The extra yield over similar-maturity Treasuries narrowed 15 basis points to a three-month low of 95.”
November 1 – Bloomberg (Jody Shenn): “JPMorgan Chase & Co. analysts lowered their estimate for the cost to sellers of repurchasing soured U.S. mortgages to as much as $90 billion from a range that went as high as $120 billion.”
Global Government Finance Bubble Watch:
November 1 – Financial Times (Martin Feldstein): “The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy. Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks’ excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar’s international value, bid up the price of commodities and farm land and raised share prices.”
November 4 – Bloomberg (Frances Yoon and William Sim): “The Federal Reserve’s plan to buy an additional $600 billion of Treasuries will spark another influx of money to emerging markets, underscoring the need for South Korea to consider capital controls, the finance ministry said. Less than nine hours after the Federal Open Market Committee issued its statement on securities purchases, the Bank of Korea said excessive foreign capital flows into the stock market pose a risk as the rising value of the won attracts overseas investors. Nation’s from South Korea to Brazil are struggling to manage the flows, which are driving up the value of their currencies and reducing the competitiveness of exporters… ‘Our country will actively consider implementing capital control measures to improve the macro-economy,” Kim Ik Joo, a director general of South Korea’s finance ministry, said…”
November 3 – Bloomberg (Steve Matthews and Scott Lanman): “The Federal Reserve may be underestimating the inflation outlook for the second time in less than a decade as it prepares to pump more money into the U.S. economy. The Fed today will probably restart purchases of bonds to spur the economy even as growth is likely to accelerate… By expanding Fed assets, Chairman Ben S. Bernanke may go down the same policy path taken in 2003-04, when he and other central bankers kept rates near a record low as inflation rose faster than initially measured. Bernanke may risk increasing expectations for higher inflation by too much, causing a shake- up in currency and bond markets, said James D. Hamilton, a University of California… economist. ‘That perception alone would bring about a series of immediate challenges, such as a rapid flight from the dollar, commodity speculation and possible under-subscription to Treasury auctions,’ said Hamilton, a former visiting scholar at the Fed board and the New York and Atlanta district banks. ‘So the Fed has a careful tightrope act here.’”
November 5 – Bloomberg (Simon Kennedy and Shamim Adam): “U.S. Treasury Secretary Timothy F. Geithner’s shot to end the “currency war” by pushing for targets to shrink current-account gaps risks failing over the complexity of shifting trade and investment flows. Geithner may use a Nov. 5-6 meeting of Asia-Pacific Economic Cooperation forum counterparts in Kyoto, Japan, to press his case for current-account deficit or surplus targets of less than 4 percent of gross domestic product. The issue will also likely feature at a Group of 20 summit in Seoul next week.”
November 4 – Bloomberg (Arnaldo Galvao and Andre Soliani): “Brazil may buy back some of its international real-denominated bonds and sell new securities with longer maturities in a bid to temper capital inflows that helped drive the currency to a two-year high last month.”
November 4 – Bloomberg: “China will boost the number of mutual funds that can invest overseas next year, spurring inflows into other emerging markets and slowing the yuan’s appreciation, according to fund research companies Z-Ben Advisors and Howbuy.”
Currency Watch:
November 1 – Bloomberg: “China should purchase gold and oil overseas with its foreign-exchange reserves to avoid losses from a weakening dollar, according to a newspaper commentary by Shao Fenggao, an official at China Construction Bank Corp.”
The dollar index declined 0.9% (down 1.6% y-t-d) to 76.60. For the week on the upside, the New Zealand dollar increased 3.7%, the South African rand 3.3%, the Australian dollar 3.2%, the Swiss franc 2.1%, the Canadian dollar 1.9%, the Taiwanese dollar 1.7%, the South Korean won 1.6%, the Norwegian krone 1.6%, the Mexican peso 1.2%, the Brazilian real 1.1%, the British pound 0.9%, the Swedish krona 0.9%, the Danish krone 0.7%, and the euro 0.6%. On the downside, the Japanese yen declined 1.1%.
Commodities Watch:
November 5 – Bloomberg (Simon Clark and Stephen Morris): “Federal Reserve Chairman Ben S. Bernanke’s decision to pump a further $600 billion into the economy shows his grasp of economics is weak, said investor Jim Rogers, chairman of Rogers Holdings. ‘Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance, Rogers…said… ‘All he understands is printing money.’ ‘His whole intellectual career has been based on the study of printing money,’ said Rogers, who predicted the start of the global commodities rally in 1999. ‘Give the guy a printing press, he’s going to run it as fast as he can.’”
November 5 – Bloomberg (Grant Smith): “Oil traded near its highest level in two years in New York as the dollar headed for a weekly decline against most major counterparts after the Federal Reserve’s decision to purchase more debt to boost the U.S. economy.”
November 4 – Bloomberg (Mark Shenk and Grant Smith): “Oil may return to $100 a barrel for the first time since the 2008 financial crisis as the U.S. Federal Reserve’s stimulus measures weaken the dollar, drawing investors to raw materials. Crude may rally to three digits next year as central banks pump cash into their economies to revive growth, according to JPMorgan Chase & Co. and Bank of America Merrill Lynch.”
November 4 – Bloomberg (Tony C. Dreibus): “Commodities rose to a two-year high after the Federal Reserve said it would expand steps to boost the world’s largest economy, spurring demand for raw materials as a hedge against inflation.”
November 2 – Bloomberg (Stephen Morris and Debarati Roy): “Raw sugar surged to a 29-year high as dry weather crimps output in Brazil, the world’s biggest producer, and India may cap exports to boost domestic supplies. Output in Brazil’s Center South, the country’s biggest producing-region, tumbled 30% in the first half of October from a year earlier… Stockpiles in India… are about 4 million metric tons, compared with the nation’s preferred level of 10 million tons, according to Rabobank International. ‘Both Brazil and India are contributing to this frenzy,[ said Judith Ganes-Chase, the president of J. Ganes Consulting… ‘The prices will remain strong.’ Sugar has more than doubled since touching a 13-month low on May 7…”
November 3 – Bloomberg (Luzi Ann Javier): “Cotton futures… advanced to records on lingering concerns that a production deficit in China, the world’s biggest buyer, may be wider than estimated, boosting the nation’s import needs… ‘We continue to hear of reports of strong physical demand and concerns about the Chinese cotton crop,’ Luke Mathews, a commodity strategist at Commonwealth Bank of Australia, said… ‘It’s a global phenomenon that we’re seeing at the moment, reflective of the fact that global cotton supplies are extraordinarily tight.’ Global production is forecast to lag behind demand for a fifth straight year, draining stockpiles to the lowest level in 14 years…”
November 4 – Bloomberg (Leslie Patton): “A doubling of cotton prices since Feb. 1 may mean more expensive clothes, sheets and towels as textile mills… and retailers… pass along higher costs to their customers.”
November 3 – Bloomberg (Supunnabul Suwannakij): “Rubber futures in Thailand, the world’s largest producer, and Singapore surged to records as floods spread across major producing nations in Southeast Asia, hurting production of the commodity used to make tires.”
The CRB index surged 4.3% (up 10.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 5.4% (up 13.3% y-t-d). Spot Gold gained 2.6% to $1,394 (up 27% y-t-d). Silver jumped 4.7% to $26.755 (up 59% y-t-d). December Crude rose $5.64 to $87.07 (up 10% y-t-d). December Gasoline surged 6.1% (up 7% y-t-d), while December Natural Gas slipped 2.3% (down 29% y-t-d). December Copper jumped 5.9% (up 18% y-t-d). December Wheat added 1.6% (up 35% y-t-d), and December Corn gained 1.0% (up 42% y-t-d).
China Bubble Watch:
November 1 – Bloomberg: “Shanghai’s World Expo transformed the city with a $44 billion makeover of roads, subway lines and its riverside Bund and was celebrated with traditional songs and dance when it closed late yesterday. The six-month event attracted 73.1 million visitors, topping the record of 64 million set in Osaka, Japan, in 1970.”
November 3 – Bloomberg: “The World Bank said China should raise interest rates and allow a stronger yuan to damp inflation, along with guarding against a surfeit of capital inflows… Funds pouring into Asia because of liquidity injections by central banks in developed countries shouldn’t deter China from raising rates, the lender said.”
November 4 – Bloomberg (Luzi Ann Javier): “Bears on Chinese equities are in retreat even as bets against the country’s companies exceed those of any of the world’s biggest markets… Short sales of Hang Seng China Enterprises Index shares dropped to an average 16% of equity available for lending from 21% at the end of August…”
November 3 – Bloomberg: “China’s worldwide search for copper begins in the gnarled hands of 76-year-old Yang Caiguan, who is fiddling with the cables of his digital television tuner… Around him sit amenities of modern life -- flat-screen TV, air conditioners, washing machine, water heater and gas-ignition stove -- that were foreign to him and his wife until this year. With their new apartment in the central Chinese town of Daojiang in Hunan province, the couple acquired at least 41 kilograms (90 pounds) of copper in electrical wiring and appliances, about 10 times the nation’s annual per capita consumption of the metal.”
November 3 – Bloomberg (Luzi Ann Javier and Jay Wang): “Textile makers in China, which uses more than 40% of the world’s cotton, face a supply shortage that has sent prices to a record and is ‘endangering’ their survival, an industry group said.”
Japan Watch:
November 4 – Bloomberg (Mayumi Otsuma): “The Bank of Japan’s planned purchases of real-estate investment trusts and exchange-traded funds may bolster investor confidence and support markets that have failed to recover ground lost since the global financial crisis. Governor Masaaki Shirakawa and his policy board will start a two-day policy meeting today to discuss the purchases, which are part of a broader 5 trillion-yen ($62 billion) fund unveiled last month. The bank brought forward its November meeting date by more than a week to speed up the purchases."
India Watch:
November 4 – Bloomberg (Rajhkumar K Shaaw): “Indian stocks climbed, driving the benchmark index to a record close, as foreign buying of the equities surged to an all-time high… This year’s 20% rally makes the Sensex the best performer among the world’s 10 biggest stock markets. Foreign fund inflows have surged 80%...”
November 4 – Bloomberg (Rakteem Katakey and Rajesh Kumar Singh): “Coal India Ltd. surged 40% on its first trading day to become the world’s second-most valuable coal miner after investors bid for 15 times the shares sold in the country’s largest initial public offering.”
Asia Bubble Watch:
November 1 – Bloomberg (Claire Leow, Thomas Kutty Abraham and Jeff Wilson): “Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years. Inventories of soybean oil and palm oil used… in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12% in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show.”
November 4 – Bloomberg (Michael Heath): “Asia-Pacific officials are preparing for stronger currencies and asset-price inflation as they blamed the U.S. Federal Reserve’s expanded monetary stimulus for threatening to escalate an inflow of capital into the region. Chinese central bank adviser Xia Bin said Fed quantitative easing is ‘uncontrolled’ money printing, and Japan’s Prime Minister Naoto Kan cited the U.S. pursuing a ‘weak-dollar policy.’ The Hong Kong Monetary Authority warned the city’s property prices could surge and Malaysia’s central bank chief said nations are prepared to act jointly on capital flows. ‘Extra liquidity due to quantitative easing will spill into Asian markets,’ said Patrick Bennett…strategist at Standard Bank Group Ltd. ‘It will put increased pressure on all currencies to appreciate, the yuan in particular has been appreciating at a slower rate than others.’”
November 1 – Bloomberg (Eunkyung Seo and William Sim): “South Korea’s exports grew faster than projected… Exports increased 29.9% in October from a year earlier, after gaining a revised 16.5% in September…”
November 1 – Bloomberg (Eunkyung Seo and William Sim): “South Korea’s consumer prices grew more than expected, increasing at the fastest pace in 20 months and bolstering the case for higher borrowing costs. The consumer price index rose 4.1% in October from a year earlier…”
November 4 – Bloomberg (Shamim Adam and Novrida Manurung): “Bank Indonesia kept its benchmark interest rate at a record low as slowing inflation allowed policy makers to delay an increase that could attract capital inflows and strengthen the currency further.”
Latin America Watch:
November 1 – Bloomberg (Matthew Bristow): “Brazilian economists raised their year-end consumer price forecasts for 2010 and 2011 as rising consumer demand powers the fastest economic growth in over two decades… Consumer prices will rise 5.29% this year and 4.99% in 2011…”
Unbalanced Global Economy Watch:
November 3 – Bloomberg (Gelu Sulugiuc): “Norway’s unemployment rate was 3.4% in the August quarter...
U.S. Bubble Economy Watch:
November 4 – Wall Street Journal (Julie Jargon and Ilan Brat): “An inflationary tide is beginning to ripple through America’s supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades. Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald’s Corp., Kellogg Co. and Kroger Co. have begun to signal that they'll try to make consumers shoulder more of the higher costs for ingredients.”
November 3 – New York Times (Stephanie Clifford): “Synthetic linings. Smaller buttons. Less Italian fabric. And yes, even more polyester. Unusually high cotton prices have apparel makers scrambling to keep down costs, but consumers be warned: cotton clothing will be getting more expensive. ‘It’s really a no-choice situation,’ said Wesley R. Card, president and chief executive of the Jones Group… ‘Prices have to come up.’”
November 1 – Bloomberg (Lu Wang): “U.S. infrastructure-spending plans are ‘too little, too late’ and should be increased in preference to quantitative easing, said Zhou Yuan, head of asset allocation at China’s $300 billion sovereign wealth fund. Proposed spending of about $500 billion over six years on infrastructure should be doubled, Zhou said…”
November 2 – Bloomberg (Steven Church): “Bankruptcy filings by U.S. consumers totaled 132,173 last month, 1.4% more than in September, keeping Americans on track to file 1.6 million bankruptcies this year, the American Bankruptcy Institute said. October’s total fell 2.8% from the same month last year…”
November 2 – Bloomberg (Kathleen M. Howley): “The U.S. homeownership rate was unchanged at a 10-year low in the third quarter… The homeownership rate was 66.9 percent… The homeowner vacancy rate, or the share of properties vacant and for sale, was unchanged at 2.5%...”
Central Bank Watch:
November 2 – Bloomberg (Kartik Goyal and Michael Heath): “Australia…raised interest rates to cool inflation, hours before the U.S. Federal Reserve meets to debate a round of asset purchases that may stoke price and currency pressures in Asia. The Reserve Bank of Australia cited medium-term inflation risks for today’s unexpected decision to raise its benchmark rate. India’s central bank boosted borrowing costs for a sixth time this year after consumer prices accelerated at the second- fastest pace among Group of 20 nations. The decisions highlight the divergence between Asian and emerging economies where recoveries are strengthening…”
November 2 – Bloomberg (Kartik Goyal): “India’s central bank raised interest rates for a sixth time this year in Asia’s fastest round of increases and said the chance of further policy tightening in the ‘immediate future is relatively low.’ The Reserve Bank of India boosted the repurchase rate by a quarter-point to 6.25%...”
November 2 – Bloomberg (Shamim Adam): “Former Federal Reserve Chairman Paul Volcker, an adviser to President Barack Obama, said quantitative easing may spark inflation in the future and the amount involved may be a cause for concern. ‘When money is too easy for too long, we will have more’ asset bubbles, Volcker, 83, said…”
November 4 – Bloomberg (Jana Randow): “Federal Reserve Chairman Ben S. Bernanke is making it harder for Jean-Claude Trichet to lead the European Central Bank out of crisis mode. Last night’s decision by the Fed to buy an additional $600 billion of Treasuries through June to bolster the U.S. economy may force the ECB to delay the withdrawal of its own stimulus measures, economists said… ‘It’s complicating the ECB’s exit and council members really need to think hard about their strategy,’ said Julian Callow, chief European economist at Barclays Capital… ‘They may have to reconsider their plans.’”
November 4 – Bloomberg (Jennifer Ryan): “The Bank of England kept its emergency stimulus program unchanged as the strength of the U.K. recovery persuaded officials not to join the Federal Reserve in buying more government bonds.”
QE2:
The late-July arrival of St. Louis Federal Reserve President Bullard’s monetary policy white paper commenced serious discussion regarding “QE2.” From August lows, the S&P500 has gained almost 18%, the S&P400 Mid-Caps 21%, and the small cap Russell 2000 25%. Notably, many global market prices have enjoyed even more robust inflation. Gold is up 19% and silver has surged 50%. The Shanghai Composite has rallied 22%. India’s Sensex index rose 18% to a record high. Copper is up 23% from August lows. Cotton has surged 80%, sugar 82%, and corn 46%. The Goldman Sachs Commodities index has gained 21% from mid-August lows.
In Bill Gross’s latest, he posits that the Fed is “pushing on a string.” This is not the case. The current backdrop has little-to-no similarity to the 1930’s; the world is definitely not today stuck in a Credit collapse and deflationary quagmire. Instead, much of the globe is facing an unrelenting onslaught of financial inflows and heightened inflationary pressures. Faltering dollar confidence is the prevailing force behind troubling inflationary pressures and strengthening Bubble Dynamics.
Increasingly, “emerging” economy Credit systems have succumbed to overheating, while key developed economies are locked into a perilous cycle of massive non-productive government debt expansion. Our unsound debt, liquidity and currency dynamics ensure that excess flourishes throughout global Credit systems. Bubbles are today left to run uncontrolled and undisciplined by a market hopelessly distorted by liquidity overabundance. Fed policies seemingly ensure that global liquidity goes from extraordinary to extreme overabundance.
The Fed may today be alone in “quantitative easing” through the purchase of domestic government obligations. Our central bank, however, has considerable global company when it comes to monetization and liquidity creation. From Bloomberg’s tally we know that global central bank international reserve positions have inflated $1.5 TN over the past 12 months. That last thing the global financial system needs is an additional shot of liquidity and reason to believe that dollar devaluation will be accelerated.
In post-announcement analysis of the Fed’s commitment to another $600bn of Treasury purchases, Bill Gross commented on CNBC that “the biggest risk is inflation down the road.” I again disagree with Mr. Gross. The greatest risk is a destabilizing crisis of confidence for our nation’s debt obligations. Our system doubled total mortgage debt in just over six years during the mortgage/Wall Street finance Bubble. Washington is now on track to double the federal debt load in just over 4 years. Federal Reserve policy remains instrumental in accommodating a precarious Credit Bubble at the heart of our monetary system.
It seems again worth highlighting a couple key sentences from ECB President Jean-Claude Trichet’s July 22, 2010 op-ed piece in the Financial Times, “Stimulate no more – it is now time for all to tighten”: “…Given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.”
The Bernanke Fed is playing with fire here. QE1 was implemented in an environment of deleveraging, impaired global financial systems and acute economic contraction. And, importantly, the dollar was enjoying strong performance in the marketplace as global risk markets suffered from de-risking and general outflows. QE1 had a stabilizing influence, as it worked to accommodate financial sector de-leveraging.
The QE2 backdrop is altogether different. Global markets are these days demonstrating robust inflationary biases. Risk embracement is back in vogue – speculation is rife. The “emerging economies” and global risk markets have been on the receiving end of massive financial (“hot money”) flows. Meanwhile, the dollar has been under heavy selling pressure with heightened risk of a crisis of confidence. This week’s market activity supported my view that the environment would seem to dictate that QE2 will only exacerbate increasingly unwieldy financial flows and unstable global markets.
It has been critical to my analysis that current reflation dynamics are different in kind from those that for the past two decades provided the Federal Reserve the most potent mechanism for domestic monetary stimulus. In today’s post-mortgage finance Bubble and housing mania backdrop, the Fed has lost much of its capacity to inflate household net worth and spending. The robust inflationary biases – and fledgling Bubbles – are now in global markets and economies. The “Core to Periphery” financial flow dynamic has become deeply embedded.
The key dynamic today is one where deep structural U.S. impairment elicits an unprecedented monetary response from our central bank. Yet the markets anticipate that this liquidity will seek out the inflating asset classes and most robust global economies. This week, gold climbed to a record high, crude oil to a two-year high, and copper to a 28-month high. The Shanghai Composite jumped 5.1% this week and India’s Sensex was up 4.9%. So far, indications support the view that the Fed’s move will further stimulate unfolding global booms.
Whether it is Asia or the commodities/natural resources economies, QE2 will exacerbate the already powerful financial flows and Bubble fuel. The U.S. economy is poorly structured to benefit from these new global financial flows, inflation and growth dynamics. There may be some gain from inflating U.S. stock prices. Yet the struggling consumer sector is going to get smacked with higher food and energy prices.
In his Thursday op-ed in the Washington Post – “What the Fed did and why: supporting the recovery and sustaining price stability” – Chairman Bernanke argued that “the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability.” The dilemma for the Fed is that the financial and economic environment will dictate that their policies have minimal impact on both U.S. employment and growth, while providing a major impetus for additional global Monetary Disorder. A strong case can be made that QE2 will only worsen already unprecedented global imbalances. Global policymakers must be at their wits’ end.
November 5 – Financial Times (Alan Beattie, Geoff Dyer, and Chris Giles): “’With all due respect, US policy is clueless,’ Wolfgang Schäuble, German finance minister, told reporters. ‘It’s not that the Americans haven’t pumped enough liquidity into the market,’ he said. ‘Now to say let’s pump more into the market is not going to solve their problems.’”
November 4 – Bloomberg (Arnaldo Galvao and Andre Soliani): “Brazil’s Finance Minister Guido Mantega said he’s not considering additional currency measures even as the U.S. throws ‘money from a helicopter’ in a bid to boost economic growth. Mantega said the Federal Reserve’s decision yesterday to inject $600 billion into the economy through debt purchases won’t work and increases the risk of asset bubbles forming around the globe. He said President Luiz Inacio Lula da Silva will urge the U.S. to change its policy next week when he attends the Group of 20 nations summit in Seoul, South Korea. It doesn’t work to throw money from a helicopter because this won’t make growth flourish,’ Mantega told reporters… ‘In Brazil, there is no risk of bubbles because we took measures that block exaggerated inflows.’”
November 5 – Bloomberg: “China said the U.S. Federal Reserve needs to explain this week’s decision to purchase bonds to pump money into the world’s biggest economy or risk undermining the global recovery. ‘Many countries are worried about the impact of the policy on their economies,’ Vice Foreign Minister Cui Tiankai said… ‘It would be appropriate for someone to step forward and give us an explanation, otherwise international confidence in the recovery and growth of the global economy might be hurt.’”
Subscribe to:
Posts (Atom)