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August 30, 2008

Ponzi Finance Dynamics Still at Play
by Doug Noland

For the week, the Dow (down 13.0% y-t-d) and S&P500 (down 12.6%) both declined 0.7%. The Transports added 0.9% (up 11.7%), while the Morgan Stanley Cyclicals dipped 0.3% (down 12.7%). The Morgan Stanley Consumer index declined 1.1% (down 6.7%), and the Utilities fell 0.7% (down 11.9%). The broader market made a better showing. The small cap Russell 2000 added 0.3% (down 3.5%), and the S&P400 Mid-Caps added 0.1% (down 5%). Technology stocks were weak. The NASDAQ100 slumped 3.1% (down 10.2%), and the Morgan Stanley High Tech index fell 2.6% (down 10%). The Semiconductors were hit for 3.7% (down 13.5%), The Street.com Internet Index 2.0% (down 6.5%), and the NASDAQ Telecommunications index 3.2% (down 4.2%). The Biotechs declined 2.5% (up 5.7%). Financial Stocks, on the other hand, rallied sharply. The Broker/Dealers jumped 4.0% (down 27%), and the Banks gained 3.1% (down 25.5%). With Bullion up $7.30, the HUI recovered 0.4% (down 16%).

One-month Treasury bill rates dropped 10 bps this week to 1.61%, and 3-month yields fell 9 bps to 1.72%. Two-year government yields dipped 3 bps to 2.375%. Five-year T-note yields declined 5 bps to 3.10%, and 10-year yields fell 6 bps to 3.81%. Long-bond yields declined 4 bps to 4.42%. The 2yr/10yr spread declined about two to 144 bps. The implied yield on 3-month December '09 Eurodollars sank 12.5 bps to 3.565%. Benchmark Fannie MBS yields dropped 12 bps to 5.82%. The spread between benchmark MBS and 10-year T-notes narrowed 6 to a one-month low 200 bps. The spread on Fannie's 5% 2017 note widened 12 bps to 77.6 bps, and the spread on Freddie's 5% 2017 note widened 11 bps to 76.2 bps. The 10-year dollar swap spread declined 4.25 to 67.75. Corporate bond spreads were mixed to narrower. An index of investment grade bond spreads widened 11 to 162 bps, and an index of junk bond spreads widened 3 bps to 571 bps.

It was another an extremely light week of debt issuance. Investment grade issuance this week included Sierra Pacific Power $250 million and McCormick & Co. $250 million.

I saw no junk or convertible issuance this week.

International dollar debt issuers this week included European Investment Bank $4.0bn, Ontario $1.5bn, Asian Development Bank $1.25bn, and Korea Railroad $500 million.

August 29 - Financial Times (Rachel Morarjee): "Investor sentiment towards Russia has soured sharply since the conflict in Georgia began this month, triggering a steep stock market sell-off and chilling corporate efforts to raise funds. 'So many deals have fallen by the wayside; debt, equity, cross-border M&A and financing of all sorts,' a banker in Moscow said. Since the start of the month, the RTS index, the benchmark for Russian equities, has fallen 18.2%, dropping 6.6% this week... after the Kremlin recognised the independence of South Ossetia and Abkhazia... Debt raised by Russian companies in August has fallen 87% from July levels to $1.18bn (£643m). Equity market issuance has plummeted..."

German 10-year bund yields declined 4 bps to 4.17%. The German DAX equities index rallied 1.3% (down 20.4% y-t-d). Japanese 10-year "JGB" yields fell 3.5 bps to 1.405%. The Nikkei 225 jumped 3.2% (down 14.6% y-t-d). Emerging markets were mixed. Brazil's benchmark dollar bond yields dropped 9 bps to 5.84%. Brazil's Bovespa equities index dipped 0.3% (down 12.8% y-t-d). The Mexican Bolsa declined 2.2% (down 11% y-t-d). Mexico's 10-year $ yields declined 2 bps to 5.645%. Russia's RTS equities index sank 3.3% (down 28.1% y-t-d). India's Sensex equities index increased 1.1%, lowering y-t-d losses to 28.2%. China's Shanghai Exchange was little changed, with 2008 losses at 54.4%.

Freddie Mac 30-year fixed mortgage rates fell 7 bps to 6.40% (down 5 bps y-o-y). Fifteen-year fixed rates dropped 7 bps to 5.93% (down 19bps y-o-y), while one-year ARMs rose 4 bps to 5.33% (down 51bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates this week down 4 bps to 7.36% (up 20bps y-o-y).

Bank Credit increased $9.4bn to $9.438 TN (week of 8/20). Bank Credit has expanded $225bn y-t-d, or 3.7% annualized. Bank Credit posted a 52-week rise of $623bn, or 7.1%. For the week, Securities Credit dropped $13.4bn. Loans & Leases jumped $22.7bn to $6.958 TN (52-wk gain of $498bn, or 7.7%). C&I loans fell $5.0bn, with y-t-d growth of 7.0%. Real Estate loans rose $12.3bn (up 2.5% y-t-d). Consumer loans gained $3.8bn, and Securities loans jumped $15.2bn. Other loans declined $3.5bn.

M2 (narrow) "money" supply declined $10.5bn to $7.718 TN (week of 8/18). Narrow "money" has expanded $255bn y-t-d, or 5.4% annualized, with a y-o-y rise of $378bn, or 5.2%. For the week, Currency dipped $0.3bn, and Demand & Checkable Deposits fell $16.1bn. Savings Deposits increased $7.5bn, and Small Denominated Deposits gained $4.7bn. Retail Money Funds fell $6.5bn.

Total Money Market Fund assets (from Invest Co Inst) were unchanged at $3.572 TN, with a y-t-d increase of $459bn, or 22.6% annualized. Money Fund assets have posted a one-year increase of $809bn (29.3%).

There was no Asset-Backed Securities (ABS) issuance this week. Year-to-date total US ABS issuance of $120bn (tallied by JPMorgan's Christopher Flanagan) is running at 26% of comparable 2007. Home Equity ABS issuance of $303 million compares with 2007's $219bn. Year-to-date CDO issuance of $20bn compares to the year ago $207bn.

Total Commercial Paper outstanding rose $7.1bn this week to $1.794 TN, with CP up $8.9bn y-t-d. Asset-backed CP jumped $8.4bn last week to $758bn, reducing 2008's decline to $14.5bn (2.8% annualized). Over the past year, total CP has contracted $185bn, or 9.4%, with ABCP down $241bn, or 24.1%.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 8/27) declined $1.0bn to $2.405 TN. "Custody holdings" were up $348bn y-t-d, or 25.2% annualized, and $426bn y-o-y (21.5%). Federal Reserve Credit declined $3.3bn to $884bn. Fed Credit has expanded $10.8bn y-t-d (1.8% annualized) and $34.4bn y-o-y (4.0%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.286 TN y-o-y, or 23%, to $6.970 TN.

Global Credit Market Dislocation Watch:

August 27 - Wall Street Journal (Carrick Mollenkamp): "U.S. and European banks, already burdened by losses and concerns about their financial health, face a new challenge: paying off hundreds of billions of dollars of debt coming due. At issue are so-called floating-rate notes -- securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so... That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt. The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase... analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months. The problem highlights how the pain of the credit crunch, now entering its second year, won't end soon for banks or the broader economy... As banks scramble to pay the floating-rate notes, they could see profit margins shrink as wary investors demand higher interest rates for new borrowings. They're also likely to become less willing to make new loans to consumers and companies, aggravating economic downturns in both the U.S. and Europe..."

August 26 - Bloomberg (Pierre Paulden): "Merrill Lynch & Co., Wachovia Corp., Lehman Brothers Holdings Inc. and the rest of the U.S. finance industry are about to find out how expensive credit has become. Banks, securities firms and lenders have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co., just as yields are at their most punitive compared with Treasuries. The increase in yields may cost them as much as $23 billion more in annual interest versus a year ago based on Merrill Lynch index data. Higher refinancing expenses will restrict the ability of banks to borrow in the capital markets and lend, further cutting off credit to consumers and businesses and curbing what is already the slowest growing economy since 2001. S&P said last week that it had a 'negative' outlook on almost half of the 50 highest-rated financial institutions in the U.S. as of June 30, the highest proportion in 15 years. 'The gears of capitalism are grinding to a halt,' said Mirko Mikelic, senior bond fund manager at... Fifth Third Asset Management... 'There is a tremendous concern over the banking sector and a scramble right now for capital.'"

August 29 - Bloomberg (Bryan Keogh): "Sales of U.S. high-yield bonds fell this month to the lowest in at least a decade as investors shunned the market and defaults on the debt accelerated...Caribbean Restaurants LLC... and...Texas Industries Inc. were the only speculative-grade issuers in August, raising a total of $449 million of debt, the lowest since at least 1999... Sales of junk bonds this year fell 46% from a year ago to $58.8 billion, the slowest pace since 2002..."

August 26 - Bloomberg (Alison Vekshin): "The U.S. Federal Deposit Insurance Corp. said its 'problem list' of banks increased 30% in the second quarter to the highest total in five years. The list had 117 'problem' banks as of June 30, up from 90 in the first quarter and the highest since mid 2003, the agency said... FDIC-insured lenders reported net income of $4.96 billion, down from $36.8 billion in the same quarter a year ago. 'Quite frankly, the results were pretty dismal, and we don't see a return to the high earnings levels of previous years any time soon,' FDIC Chairman Sheila Bair said... Nine banks have failed this year, including ...IndyMac Bancorp Inc., the third-largest federally insured institution to be seized by U.S. regulators... Second-quarter [bank] earnings fell from $19.3 billion in the previous quarter. It was the second-lowest net income reported since the fourth quarter of 1991 behind the fourth quarter of 2007, the agency said."

August 26 - Dow Jones (Jessica Holzer): "The Federal Deposit Insurance Corp. said that it had increased its estimate of its expected losses from taking over IndyMac. The FDIC said it expected the bank's failure to cost its deposit insurance fund $8.9 billion, rather than $4 billion to $8 billion it had originally estimated."

August 29 - Dow Jones (Marshall Eckblad): "The credit crisis is pushing a growing number of small and community banks to reduce or eliminate shareholder dividends. The goals of the painful move are both preserving capital to offset future loan losses, and appeasing bank regulators determined to avoid as many bank failures as possible."

August 26 - Bloomberg (William Selway and Lisa Harris): "Jefferson County, Alabama, officials told their lawyers to prepare a bankruptcy filing if the county can't reach an agreement with creditors over how to escape from $3 billion of bonds with soaring interest rates. The Jefferson County Commission voted unanimously today to have the law firm Bradley, Arant, Rose and White LLP and the county attorney take over negotiations with creditors led by JPMorgan Chase & Co. and draw up bankruptcy papers should talks falter."

August 25 - Bloomberg (Jeremy R. Cooke): "Credit quality is falling at not- for-profit U.S. hospitals and health-care systems as debt costs and capital needs rise, according to S&P. Rating cuts outnumbered increases by more than 2-to-1 this year for the first time since 2003... 'We expect the number of downgrades to exceed upgrades for the rest of 2008 and probably in 2009, as business and financial challenges squeeze operating margins and weaken balance sheets,' Martin Arrick, lead S&P analyst... said..."

August 28 - Financial Times (Paul J Davies): "The eurozone mortgage-backed bond market and the banks which rely on it are braced for some potentially harsh medicine following increasing hints from governors of the European Central Bank about some form of crackdown on banks' use of its liquidity facilities. The use of mortgage-backed debt and other ABS as collateral for central bank funding in Europe has increased significantly since the credit crunch. Strong signs that the ECB is now about to take action over this have the potential to unsettle not just securitisation markets, but other areas too. 'Increasing speculation about diminishing central bank support in illiquid, difficult-to-price asset-backed security markets is likely to undermine investor risk sentiment and raise the level of writedowns in the banking sector,' says Lena Komileva, head of G7 market economics at interdealer broker Tullett Prebon. Yves Mersch, Luxembourg's central bank governor, said this weekend that some refinement of the rules had been agreed. Nout Wellink, his Dutch counterpart, said last week that banks would have to be stimulated to use other sources of funding if they were seen to have become too reliant on central bank money."

August 28 - Financial Times (Brooke Masters): "Eighteen months ago, the City of London was riding high. Companies flocked from all over the world to take advantage of London's principles-based regulation and wide investor base. The mood on Wall Street was more embattled. The subprime mortgage market was showing signs of strain and three separate commissions were bemoaning a loss of US competitiveness in financial services. What a change the credit crunch has wrought. Both financial districts are suffering through tens of thousands of lay-offs and are wary that their cash-strapped governments will impose new taxes. Initial public offerings have fallen off a cliff, and each country has suffered through a high-profile financial failure - the UK's Northern Rock and Bear Stearns in the US. But it is London that seems to have suffered more, perhaps because it had more to lose. 'The brand of London has taken a hammering because of Northern Rock,' said Tim Linacre, chief executive of Panmure Gordon, a City stockbroker that also has a large US presence. 'I don't think it is terminal but London needs to be absolutely on its toes.'"

August 28 - Bloomberg (Ben Sills and Esteban Duarte): "Spain's economy, brought to the brink of a recession by surging global credit costs, may find money even harder to come by when the European Central Bank tightens its lending practices. Spain's banks have stored up 89 billion euros of their own asset-backed securities, more than any euro-region country, because the ECB accepts them as collateral in auctions... Now the central bank wants to change the rules, ECB council member Yves Mersch said..., a move that may leave Spain holding the bag. 'This may affect negatively the profitability of Spanish banks and their ability to lend,' said Willem Buiter, a professor at London School of Economics and a former Bank of England policy maker. 'It could lead to slower growth.' Spain's banks have relied on cheap money from the ECB to help provide credit to consumers and companies even as the economy is buffeted by a real-estate downturn."

August 28 - Bloomberg (Farhan Sharif and Chua Kong Ho): "Pakistan imposed emergency trading limits to halt a slide in stocks that sent the benchmark index down 42% since April, the second attempt in two months to restore confidence in a market battered by political upheaval. Curbs to prevent shares from falling below yesterday's closing prices will remain for seven to 10 days 'until the situation improves,' said Razi-ur-Rahman Khan, chairman of the Securities and Exchange Commission."

August 28 - Bloomberg (Abigail Moses): "The cost of default protection on Pakistan government debt soared to a record as investors speculated political instability may cripple the state's ability to meet borrowing obligations. Credit-default swaps on Pakistan jumped 16 bps to 913, according to CMA Datavision... The contracts surged 258 bps this month..."

August 25 - Bloomberg (Christian Wienberg and Tasneem Brogger): "The Danish Central Bank will lead a buyout of Roskilde Bank A/S after a slumping property market drove the lender into insolvency and a private purchaser couldn't be found. Roskilde will receive 4.5 billion kroner ($890 million) in cash from the central bank and Danish lenders."

Global Inflation Turmoil Watch:

August 27 - AFP: "Iran is to lop several zeros off its currency as it battles double-digit inflation, central bank vice president Hossein Ghazavi said... 'A special committee has been formed within the central bank to prepare the currency reform and the suppression of several zeroes,' the financial daily Sarmayeh quoted Ghazavi as saying. 'A 10,000-rial note has the same purchasing power now as IRR25 30 years ago,' he said. The rial trades at 9,650 to the dollar now against just 70 at the time of the 1979 Islamic revolution."

August 27 - Bloomberg (Steve Bryant and Ben Holland): "At Denizati, a bakery in Turkey's capital city of Ankara, customers can no longer afford the top-priced cream and pistachio wedding cakes because of high food and fuel prices. As the cost of flour and sugar has more than doubled since 2007, the family owned bakery has had to fire 4 of its 15 employees. The bakery is one of the fortunate shops on Hosdere Street in central Ankara. In a five-block stretch of the street, 10 businesses are up for sale or shuttered. 'Customers aren't coming anymore,' says Hanim Baltici, manager of the Kartal liquor store... 'They're all in debt, and every penny they earn goes straight to the bank.' After a six-year boom, marked by the construction of multistory shopping malls, art and history museums and a highway network to replace potholed roads, Turkey's $660 billion economy is racked by inflation once again. Driven by record commodity prices and a surge in government spending, the rate jumped to 12.1% in July from a 37-year low of 6.9% a year earlier."

August 25 - Bloomberg (Beth Thomas): "Vietnam's inflation quickened this month after the government increased fuel prices by a record amount to pass on rising oil costs. The consumer-price index rose 1.6% from July, when it gained 1.1%... Annual inflation accelerated to 28.3%, the fastest pace since at least 1992, from 27% last month."

August 27 - Bloomberg (Mike Cohen): "The cost of goods leaving South African factories and mines rose at the fastest pace in 22 years last month, buoyed by surging fuel and electricity prices. Producer-price inflation accelerated to 18.9% from 16.8% in June..."

August 27 - Bloomberg (Nasreen Seria): "South African inflation accelerated to 13% in July, the fastest pace since the targeted measure was introduced in 1998, after the state-owned electricity utility raised prices."

August 28 - Bloomberg (Eric Ombok): "Annual inflation in Kenya, east Africa's biggest economy, may slow to 20% by the end of this year as food prices decline after the start of the rainy season, Stanbic Investments East Africa Ltd. said. 'Inflation will reduce off the back of the short rains' that begin in October, Kenneth Kaniu, Stanbic's investment manager, told reporters..."

August 29 - Bloomberg (Fred Ojambo): "Uganda's inflation rate rose to 15.6% in August, the highest in 14 years, as food and fuel costs increased, the Uganda Bureau of Statistics said."

Currency Watch:

The dollar index gained 0.7% to 77.38. For the week on the upside, the South African rand increased 0.9%, the Japanese yen 0.4%, and the Singapore dollar 0.2%. For the week on the downside, the British pound declined 1.7%, the Swedish krona 1.6%, the Mexican peso 1.4%, the Canadian dollar 1.2%, the South Korean won 0.9%, the Norwegian krone 0.9%, the Australian dollar 0.6%, and the Euro 0.6%.

Commodities Watch:

August 28 - Dow Jones (Brian Baskin): "Tropical Storm Gustav will have more and bigger offshore energy targets to hit than the 2005 hurricanes did, should the storm stick to its projected path through the central Gulf of Mexico. In 2005, only two platforms produced more than 100,000 barrels a day; this summer, six are producing at that level or are preparing to do so. Since 2005, oil and gas production has increasingly shifted to deeper water off the coast of Louisiana, with a handful of giant platforms generating volumes once produced by dozens of small, shallow-water facilities... 'There are a lot of things in the industry that have improved since the '04 and '05 seasons, but at the end of the day, it's going to be a question of how destructive storms are and how powerful they are when they go through the Gulf,' said David Dismukes, associate executive director of the Center for Energy Studies at Louisiana State University."

Gold rallied 0.9% to $830 and Silver 0.6% to $13.68. September Crude gained $1.00 to $115.59. September Gasoline jumped 4.9% (up 21.6% y-t-d), and September Natural Gas added 0.3% (up 6.8% y-t-d). December Copper dropped 2.3%. September Wheat sank 10%, and August Corn dropped 3.1%. The CRB index declined 0.8% (up 9.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) slipped 0.5% (up 16.1% y-t-d and 43% y-o-y).

China Watch:

August 28 - Wall Street Journal Asia (Laura Santini): "Its years-long love affair with stocks on the rocks, corporate China is turning to debt. Many of mainland China's major companies are issuing billions of dollars of new corporate bonds, bucking the global aversion to debt. The trend is helped by expectations of a rising yuan, which would goose returns for foreign bondholders and has helped Chinese companies issue bonds under less-costly terms. At the other end of the spectrum, hedge funds have become the lender of last resort to a group of less-established, cash-strapped Chinese companies -- loans that sometimes come at a heavy price to the borrower. Other routes to capital have suffered at the hands of China's ailing stock market, skittish bank lenders and Beijing policy makers hoping to tame growth and slow inflation."

August 27 - Bloomberg (Chia-Peck Wong): "The value of new mortgages advanced in Hong Kong rose 5.7% in July, the smallest gain in two years as home sales fell in the city."

Japan Watch:

August 29 - Bloomberg (Mayumi Otsuma): "Japan's inflation rate exceeded 2% for the first time in a decade as prices of food and gasoline surged, prompting consumers to spend less. Core prices... climbed 2.4% in July from a year earlier... Household spending fell 0.5% from a year earlier, a fifth monthly decline."

August 26 - Bloomberg (Nancy Moran): "Japanese corporate pension shortfalls rose for the first time in five years in fiscal 2007, tripling to 7.31 trillion yen ($66.6bn) as the Nikkei 225 Stock Average declined, Nikkei English News reported..."

August 28 - Bloomberg (Kathleen Chu, Katsuyo Kuwako and Kazue Somiya): "The list of Japanese real estate companies filing for bankruptcy will grow this year as banks cut lending, said Takeo Higuchi, chairman of Daiwa House Industry Co., Japan's second-biggest home builder... Developers and construction companies dominated the ranks of failures in July, accounting for a third of 1,131 bankruptcies in the month, the largest number since April 2005. 'It's hard to see any light at the end of the tunnel,' said Higuchi... 'Banks will take an even tougher stance on providing loans to property firms after the bankruptcies and we will probably see more failures this year.'"

August 26 - Bloomberg (Patrick Rial): "Japanese companies are increasing overseas acquisitions, using their cash-hoards to snap up assets beaten down by the global credit crisis and economic slowdown. The value of foreign purchases by Japanese companies this year has already topped 2007's total by 91%, according to... Bloomberg. That's the biggest gain among the world's 10 largest markets and contrasts with fewer deals in the U.S. and U.K., where credit is drying up after the subprime rout."

India Watch:

August 28 - Bloomberg (Kartik Goyal): "India's inflation held near a 16-year high as floods in half the country damaged crops and disrupted food supplies. Wholesale prices rose 12.40% in the week to Aug. 16, after increasing 12.63% in the previous week..."

August 29 - Bloomberg (Cherian Thomas): "India's economy grew at the slowest pace since 2004 last quarter as the fastest inflation in a decade and increased borrowing costs damped consumer spending. Asia's third-largest economy expanded 7.9% in the three months to June 30 from a year earlier, following an 8.8% gain..."

Asia Bubble Watch:

August 25 - Bloomberg (Janet Ong): "Taiwan's export orders increased by the least in five years in July as Chinese demand faltered and U.S. sales remained weak. Orders, an indicator of actual shipments over the next one to three months, rose 5.52% from a year ago, cooling from June's 9.27% gain, the Ministry of Economic Affairs said..."

August 25 - Bloomberg (Suttinee Yuvejwattana and Shanthy Nambiar): "Thailand's economic growth slowed more than expected in the second quarter, increasing the likelihood the central bank will soon stop raising interest rates. Southeast Asia's second-biggest economy expanded 5.3% in the three months ended June 30 from a year earlier after a revised 6.1% gain in the first quarter... Growth was forecast to be 5.8%..."

August 29 - Bloomberg (Stephanie Phang): "Malaysia will post its biggest budget deficit since 2003 as embattled Prime Minister Abdullah Ahmad Badawi triples subsidies on food and fuel to bolster support amid accelerating inflation and slowing growth. The government's 2008 budget shortfall will reach 34.5 billion ringgit ($10.2bn), or 4.8% of gross domestic product..."

Latin America Watch:

August 25 - Bloomberg (Telma Marotto): "Brazilian bank lending expanded last month at the slowest pace since February... State and non-state bank lending climbed to 1.086 trillion reais ($669.5 billion) last month, a 1.7% rise from a revised 1.068 trillion reais in June... Lending rose 32.7% from the year-earlier month."

August 27 - Bloomberg (Andre Soliani): "Brazil's President Luiz Inacio Lula da Silva plans to boost spending excluding interest payments by 13% in 2009, the government's budget proposal for next year shows."

August 25 - Bloomberg (Thomas Black): "Mexico's second-quarter current account deficit unexpectedly widened on a decline in remittances from workers abroad and an increase in interest payments and repatriation of foreign profits. Mexico posted a shortfall of $2.02 billion in its current account, the broadest measure of goods and services exchanged between the country and nations abroad..."

Unbalanced Global Economy Watch:

August 28 - Bloomberg (Alexandre Deslongchamps): "Canada's current account, the broadest measure of international trade, grew to the highest in a year in the second quarter as prices for exported commodities such as oil and natural gas rose. Receipts from outside Canada exceeded payments sent abroad by C$6.76 billion ($6.47 billion), after a revised C$4.46 billion first-quarter surplus..."

August 26 - Bloomberg (Jennifer Ryan and Brian Swint): "U.K. mortgage approvals held close to the lowest in at least 11 years in July as property values slumped... Banks granted 22,448 loans for house purchase, down 65% from a year earlier..."

August 28 - Bloomberg (Svenja O'Donnell): "U.K. house prices declined at the fastest annual pace in almost two decades in August after lower mortgage lending and the prospect of a recession discouraged home buyers, Nationwide Building Society said. The average value of a home plunged 10.5% to 164,654 pounds ($301,500)..."

August 26 - Bloomberg (Jon Menon and Poppy Trowbridge): "British subprime-mortgage arrears rose to a record in the second quarter as fixed interest-rate deals expired, leaving borrowers struggling to meet increased repayments, according to... S&P. About 23.3% of mortgages in S&P's index of 32.1 billion pounds ($59bn) of nonconforming U.K. residential mortgage-backed securities were delinquent by more than 30 days in the second quarter. That's up from 22.2% in the first three months of 2008..."

August 29 - Bloomberg (Ian Guider): "Irish mortgage lending advanced at the slowest pace in 21 years in July as a slump in the housing market deepened. Home loans grew 9.6% in July from a year ago..."

August 26 - Bloomberg (Fergal O'Brien): "Irish house prices will extend declines and fall around 30% from their peak because of an oversupply of properties, according to Goodbody Stockbrokers. 'Ireland does not have the problem of forced sales as yet, but our analysis of the stock of homes for sale does suggest a significant overhang of properties in the market,' Dermot O'Leary, chief economist at... Goodbody, said..."

August 26 - Bloomberg (Sandrine Rastello): "France's stock of new, unsold homes reached a record in the second quarter, when the euro region's second-largest economy shrank. The difference between the number of new homes put on the market and those purchased reached 110,500 in the three months through June... Sales dropped 34% in the quarter from a year earlier..."

August 26 - Bloomberg (Simone Meier): "German business and consumer confidence fell more than economists forecast, heightening concern that Europe's largest economy may be slipping into a recession."

August 25 - Bloomberg (Emma Ross-Thomas): "Producer prices in Spain rose at the fastest pace in almost 24 years in July as record oil prices increased costs for manufacturers. The price of goods leaving Spain's factories, refineries and mines increased 10.2% from a year earlier after advancing 9% in June... Producer prices gained 1.4% from June, the biggest monthly increase in more than two years."

August 25 - Bloomberg (Charles Penty): "More than half of Spain's real estate agents have closed since the start of the year as a property slump hits demand for homes, El Pais reported. Of 3,001 agent branches representing the top 10 real estate sales franchises open at the end of last year, only 1,434 are still in business, the newspaper said, citing Tormo & Asociados, a consulting firm."

August 28 - Bloomberg (Johan Carlstrom): "Swedish retail sales grew at the second slowest pace in more than six years in July as economic expansion eased, unemployment increased and interest rates rose. Sales increased 1.3%, compared with a revised 3% in June..."

August 27 - Bloomberg (Tasneem Brogger): "Icelandic inflation accelerated to the fastest pace in 18 years this month after the krona plummeted in value, putting pressure on the central bank to keep interest rates at record highs. The inflation rate rose to 14.5% from 13.6% in July..."

August 27 - Bloomberg (Tarek Halim): "Mortgage loans and consumer credits in Morocco surged to a record in the first half helped by lower interest rates. Outstanding mortgage loans climbed 47% to 125.9 billion dirhams ($16.3bn) through June, while consumer credits rose 28% to 22.7 billion dirhams... Overall lending in the financial system increased 29% to 479.3 billion dirhams."

August 29 - Bloomberg (Jacob Greber): "Australian new home sales fell to a two-year low in July and lending to consumers and businesses rose at the slowest annual pace since 2002, reinforcing speculation the central bank will cut interest rates next week. Sales of newly built homes dropped 7.2% from June..."

Bursting Bubble Economy Watch:

August 26 - Dallas Morning News (Angela Shah): "The capital markets crunch has hit Main Street, leaving many entrepreneurs in need of financing in the lurch. Take Don Scribner, a recent transplant to North Texas from Washington state. The former engineer decided to buy a seafood restaurant in Hurst, one that had been in business for nearly 20 years and had strong cash flow. He thought the deal would appeal to bank loan officers, but they proved coy. One bank that seemed interested in making him the $300,000 loan changed its lending requirements midstream, deciding it would no longer lend money on restaurants without real estate. Mr. Scribner found another lender and spent a month filing paperwork. But three days before that loan was to close, the bank pulled out. 'They never called me back. They didn't want to talk about it.' Loans that banks would have approved readily a year ago don't pass muster today."

August 26 - Bloomberg (Joyce Moullakis): "Citigroup Inc., the biggest U.S. bank by assets, will ban off-site meetings among its own employees and cut back on color photocopying as part of a plan to clamp down on expenses as investment banking revenue declines. Executives in the... bank's institutional clients group will need to ensure spending is 'highly efficient,' according to an internal memorandum... Employee meetings must be held within Citigroup offices and client events will require approval, the memo said. Color photocopiers will be removed from some locations and their use will be limited... Citigroup cut about 14,000 jobs in the first half after reporting $55 billion of writedowns and credit losses in the past year..."

August 27 - Bloomberg (Alan Bjerga): "U.S. agricultural income is the highest in three decades after corn and soybeans rose to records. The risk for farmers is that costs are rising even faster, increasing concern of a profit squeeze. A U.S. Department of Agriculture report tomorrow may show costs are accelerating as revenue growth slows, similar to a pattern that led to a 1980s farm crisis that was the worst since the Great Depression, said Gary Schnitkey, a University of Illinois farm economist. Corn, wheat and soybean prices are all at least 18% below their peaks. Fertilizer costs doubled from a year ago, while fuel increased 62%, USDA data show. Expenses probably will surpass the $279.2 billion that the USDA estimated in February, eroding net income the government pegged at a record $92.3 billion for 2008..."

August 27 - Associated Press: "American workers' confidence in the job market is as low as it was during the 2001 recession, according to a new survey. When asked whether this is a bad time to find a quality job, 65% said it was... according to the survey by Rutgers University's John J. Heldrich Center..."

Central Banker Watch:

August 27 - Bloomberg (Christian Vits and Andreas Scholz): "European Central Bank council member Axel Weber said there's no scope for interest-rate cuts and policy makers may need to raise borrowing costs once the economy emerges from its slump. 'Monetary policy at the moment is roughly where it should be and I think the discussion about declining rates in Europe is premature,' Weber... said... 'If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary.'"

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

August 29 - Bloomberg (Jody Shenn): "Downgrades by S&P on collateralized debt obligations linked to U.S. home loans are approaching $400 billion, the ratings company said. S&P lowered rankings on $19.3 billion of CDOs, lifting the original value of downgraded classes to $398.5 billion..."

August 25: "Reported incidents of mortgage fraud in the U.S. increased by 42% in the first quarter of 2008 from a year ago, according to a new report released today by the Mortgage Asset Research Institute (MARI)... The report is based on data submitted by MARI subscribers about loans that were originated in the first quarter of this year and have since been classified as fraudulent. Florida continues to lead all states in mortgage fraud... Florida accounted for 24% of all properties with material misrepresentation submitted by MARI subscribers for loans originated during the first quarter of 2008. California is second in the first quarter 2008 mortgage fraud rankings, followed by a three-way tie for third place among Illinois, Maryland and Michigan."

Real Estate Bust Watch:

August 26 - Bloomberg (Sharon L. Lynch): "U.S. home prices fell 4.8% in the second quarter from a year earlier, the biggest decline in a 17-year-old government home price index, as banks made it harder to get a mortgage. On a seasonally adjusted basis, the index was 5% lower in June than its April 2007 peak, the Office of Federal Housing Enterprise Oversight said... 'Nothing seems to indicate that we've hit bottom,' said Dennis Yeskey, a principal... at Deloitte... 'We're in a malaise and there's nothing to break us out of that pattern. It's Groundhog Day. You wake up and feel, 'I heard this before.'"

August 25 -Illinois Association of Realtors: "July total home sales (which include single-family and condominiums) were down 5.76% in July 2008 to 11,021 sales compared to June 2008 sales of 11,694; year-over-year sales were down 25.2% from July 2007 totals of 14,738. The Illinois median price in July was $199,900, down 4.8% from $210,000 in July 2007."

August 27 - New York Times (Terry Pristen): "Until a few years ago, places like Upper Manhattan and the Bronx held little allure for investors in residential property. But as the New York real estate market heated up, major real estate companies began competing vigorously for rent-regulated buildings in these neighborhoods in the belief that they could manage them more professionally and, hence, more profitably. The recent disclosure that the owners of Riverton Houses, a 1,228-unit apartment complex in Harlem, might default on their loan has shocked the real estate industry. And it has raised fears about other apartment building deals from the not-so-distant past, when the frenzy in the market was reaching its peak."

GSE Watch:

Fannie and Freddie's combined Books of Business expanded only $16.4bn during July, or 3.7% annualized, the smallest expansion in two years. For comparison, their Books expanded $40.4bn during June and $56.9bn in May. Year-to-date Book of Business growth slowed to $265bn, or 9.1%, with one-year growth of $591bn, or 12.8%. Combined Retained Portfolio growth slowed to $14.9bn during the month, or 12% annualized, with y-t-d Retained Portfolio growth of $111.6bn, or 13.2%.

August 29 - Dow Jones (Shannon D. Harrington): "Bank of China Ltd., the nation's third-largest bank, pared its holdings of Fannie Mae and Freddie Mac corporate debt by 29 percent in the past two months as the mortgage-finance companies faced growing losses and the potential need for a U.S. government bailout. The portfolio was reduced by about $3.14 billion to $7.5 billion..."

Speculator Watch:

August 29 - Bloomberg (Finbarr Flynn): "Aozora Bank Ltd., the Japanese lender controlled by Cerberus Capital Management LP, fell to a record low in Tokyo trading after a report said it may post a loss for the fiscal first half ending Sept. 30."

August 26 - Wall Street Journal (Diya Gullapalli and Craig Karmin): "Russell Investments, known for its Russell 2000 index of small stocks, has earned a reputation for financial savvy and smart money management. Then it went into the hedge-fund business. The result was a misadventure... At issue are its funds of funds -- umbrella holdings that channel investments into collections of hedge funds. Russell... set them up over the past seven years to get in on a lucrative trend. Now, partly as their performance has slipped and investors have run for the exits, it is winding down three of them... The funds Russell is closing, which focused on institutional investors, are gradually returning principal to clients, although when all the money will be reimbursed is unclear. The funds of funds' assets shrank to less than $2 billion from $6 billion since last year."

August 26 - Bloomberg (Meera Bhatia): "Norway's sovereign wealth fund, the world's second largest, declined for a second straight quarter this year as global markets slumped. The Government Pension Fund - Global lost 1.9% in the second quarter..."

Muni Watch:

August 25 - Bloomberg (Jeremy R. Cooke): "U.S. municipal borrowers have refinanced, converted or marked for redemption at least $100.3 billion of auction-rate bonds, less than seven months after dealers' support for the market collapsed. States, cities, hospitals and colleges since mid-February have shrunk their amount of debt outstanding with rates set through weekly or monthly bidding by at least 60% from $166 billion, according to... Bloomberg..."

California Watch:

August 29 - Bloomberg (Michael B. Marois): "The California Senate is poised to reject a budget that would increase taxes to fill a $15 billion deficit, extending an impasse that has left the state operating without a spending plan for two months. The proposal, which would raise the state's sales tax for three years by 1 cent per dollar to 7.25%, was failing in a 24-15 vote... Democrats control the Senate but needed at least two Republicans to back the bill. All 15 Republicans voted against it. 'We're in a recession,' said Republican Senator Bob Dutton, vice-chairman of the Budget Committee. 'The last thing we need to do for the hard-working people of California is to put a tax on them.'"

August 25 - California Association of Realtors: "Home sales increased 43.4% in July in California compared with the same period a year ago, while the median price of an existing home fell 40.3%... The median price of an existing, single-family detached home in California during July 2008 was $350,760, a 40.3% decrease from the revised $587,560 median for July 2007... The July 2008 median price fell 4.5% compared with June..."

August 25 - Bloomberg (Dan Levy): "Luxury-home prices in the Los Angeles and San Diego areas fell the most in more than 10 years in the second quarter as stricter lending terms reduced the number of buyers, while the San Francisco Bay area was little changed. The average price of a luxury home in Los Angeles dropped 3.8% in the quarter from a year earlier, the most since 1996, according to... First Republic Bank... Luxury homes were defined as those costing more than $1 million with up to 6,000 square feet, six bedrooms and six bathrooms. Prices fell 7.8% in San Diego, the most since 1997, while San Francisco prices rose 0.2%. 'Values of luxury homes throughout California remain under pressure due to increased caution among buyers,' Katherine August-deWilde, president and chief operating officer of... First Republic Bank, said... Lenders are requiring higher credit scores and larger down- payments after more than $500 billion in subprime-related writedowns and credit losses..."

New York Watch:

August 28 - New York Times (Patrick McGeehan): "With unemployment on the rise, New York State's jobless benefits fund is likely to run out of money again in early 2009, if not sooner, according to state officials and labor market analysts... 'We know that the trust fund is not where we'd like it to be,' said Nancy E. Dunphy, the state Labor Department's deputy commissioner for employment security... Ms. Dunphy said the state fund, which is the source of all the standard unemployment benefits paid out to New York residents, now totals about $760 million. That is about $90 million less than at this time last year..."

Crude Liquidity Watch:

August 29 - Bloomberg (Maria Levitov): "Russia's trade surplus rose to $121.8 billion in the first seven months of this year compared with the same period in 2007 as the world's biggest energy exporter benefited from higher oil and gas prices. The surplus increased from $70.4 billion..."

August 26 - Bloomberg (Arif Sharif): "Saudi Arabia's M1 money supply growth, an indicator of future inflation, slowed to 24% in July from 29% in June. M3 money supply... grew 21% in July, the same pace as in June... Saudi commercial bank lending increased an annual 31% in July, slowing from 35% in June, SAMA said today."

August 25 - Bloomberg (Fiona MacDonald): "Kuwait's M1 money supply growth, an indicator of future inflation, slowed to 13% in July from 16% in June."

August 25 - Bloomberg (Haris Anwar): "Home rents in the United Arab Emirates rose 18.5% in 2007, Emirates Business 24/7 reported... The overall housing price index, which includes rents, water, electricity, and furniture, posted a 17.5% increase when compared with the previous year, the newspaper said."

August 24 - Bloomberg (Zainab Fattah): "The United Arab Emirates' inflation rate is expected to reach 13% next year, Emarat Alyoum reported, citing the head of the finance committee at the Federal National Council."

Ponzi Finance Dynamics Still at Play:

Second quarter GDP expanded at a 3.3% pace, the strongest since Q3 2007's 4.8%. Durable Goods Orders, Existing Home Sales, and the Chicago Purchasing Managers' index were all reported "stronger-than-expected". And with commodity prices almost 20% off July highs - and crude oil notably unimpressive this week in the face of a major Gulf hurricane - the markets seem to lend support to the waning inflation viewpoint. The dollar rallied further this week. Meanwhile, despite today's downdraft, Freddie Mac gained 60% this week and Fannie Mae advanced 37%. Monoline insures MBIA and Ambac surged 59% and 35%, respectively. MBIA saw its stock price more than double during August, to surpass $16. The Bank index jumped 3.1% this week and the Broker/Dealers rallied 4.0%. Homebuilding stocks were up 9%.

Investors are increasingly willing to accept that the worst of the Credit crisis has passed. Talk that the nation's housing markets are bottoming becomes louder each week. And every day market participants seem more receptive to the "economic resiliency" thesis.

First of all, I am certainly of the view that the economy is much weaker than the headline 3.3% growth rate. At the minimum, I am skeptical that the 1.2% annualized increase in the GDP price index accurately captures what I believe is a significant inflationary component in current "output". It is worth noting that the favored inflation gauge of Greenspan and the Fed, the PCE Deflator, was up 4.5% from a year earlier, the strongest year-over-year increase since 1991.

There is bountiful wishful thinking when it comes to our nation's mortgage and housing crises. Granted, many of the burst Bubble markets - including some spectacular busts throughout California, Florida, Nevada, and Arizona - have in some cases seemingly reached somewhat of a "clearing price". Transaction volumes are up significantly in many of the locations with the greatest y-o-y price declines. I'll suggest, however, that it is unwise to extrapolate trading dynamics in these burst markets to national housing trends more generally. I believe the vast majority of markets around the country are more aptly described as Bubbles leaking air, as opposed to the collapsed markets that garner the greatest media attention.

I'll turn more constructive on home prices and housing markets generally when mortgage Credit Availability begins to loosen. It remains my view that Credit continues in a tightening dynamic. Notably, the growth in Fannie and Freddie's Combined Books of Business slowed sharply to a 3.7% rate during July, the slowest pace in two years. And while there is nothing really in the works to compare to the abrupt Credit tightening that emanated from collapsing subprime and Alt-A securitization markets, I'll argue today's tighter Credit is a more subtle dynamic resulting from various types of lending institutions restricting, on the margin, loans to even prime Credits.

From the Wall Street firms down to the small community banks, tighter lending terms are leading to higher downpayments and less flexible payment terms for even high quality borrowers. And while the nature of this dynamic specifically does not lead to collapses for the relatively stable housing markets around the country, it nonetheless will definitely continue to pressure prices. And downward home prices will, over time, lead to only more lender nervousness and restraint.

And despite the lull, vulnerable housing markets remain acutely susceptible to any worsening in the GSE crisis. With MBS spreads having tightened somewhat during August, I'll assume Fannie and Freddie resumed aggressive mortgage purchases in the marketplace after somewhat slowing their buying during July. Importantly, overall marketplace liquidity has deteriorated to the point where the GSEs must expand aggressively in order to forestall another major leg down in the ongoing housing crisis. As such, the marketplace of late is involved in a dangerous game of "chicken" with both the GSEs and Treasury. These days, any time the GSEs slow their marketplace buying of mortgage paper (back away from their "backstop bid"), spreads widen sharply and fears of a liquidity crisis - and forced Treasury bailout - intensify. So, I'll assume the GSEs have resorted again to ballooning their exposure aggressively - recklessly.

There has been a lot of talk about the GSEs being "privatized." As the thinking goes, Fannie and Freddie should be temporarily "nationalized," recapitalized, split up and then released as responsible participants in the free marketplace - Credit providers no longer posing a risk to the American taxpayer. This all sounds wonderful in theory - yet is completely impractical in reality. I fully expect the GSEs to be nationalized. But I suspect the federal government will be running - and recapitalizing - these institutions for many years to come.

The private mortgage marketplace self-destructed, and now the entire "prime" mortgage/housing market is dependent upon ongoing cheap mortgage finance available only through American taxpayer backing and subsidies. The private sector simply cannot today - or at any time in the foreseeable future - provide the hundreds of billions of cheap ongoing new mortgage Credit necessary to forestall a systemic housing/economic/financial collapse. There will be no happy "recapitalize and privatize" ending to this saga. The bill to the taxpayer is now growing rapidly - along with GSE exposure - and will balloon into the trillions over the coming years and decades. And for how long the holders of GSE debt and MBS will be allowed such handsome returns at taxpayer expense is a quite intriguing question.

I also read and hear too much about the continued need for "Keynesian" stimulus. Regrettably, the system has been in non-stop government (fiscal and monetary) stimulus mode for years now. It may have been indirect at the time, but it is now apparent that GSE obligations should be included today right along with debt owed directly by the Treasury. And before all is said and done, the taxpayer will also be on the hook for enormous losses from various federal guarantees of deposits, student loans, pensions, and the like. The bottom line is that a whole range of direct and indirect federal guarantees - especially since the 2001/02 recession - have played an integral role in spurring Credit and Economic Bubbles. "Keynesian" ammunition - fired way too early and freely in order to sustain multiple Bubbles - has definitely buoyed the U.S. Bubble Economy, although such measures will have only limited effect down the road when they're sorely needed.

Returning back to my initial paragraph, these days the economy and markets don't appear all that bad - certainly nothing as nasty as we dour prognosticators have been forecasting. I'll warn, however, that there are some very dangerous "Ponzi Finance" Dynamics Still very much At Play. The most obvious resides with the GSEs. And there are closely related Bubbles throughout the agency and Treasury bond arena. Meanwhile, a view has gained adherents that the U.S. economy is actually in much better shape than Europe and elsewhere. The reality that Europe is not buoyed by their own government-sponsored mortgage behemoths and that their economies are more manufacturing based (and thus vulnerable to cyclical downturns) are only short-term relative disadvantages.

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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