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November 15, 2008

The Only Cure for a Bubble...
by Doug Noland

For the week, the S&P 500 dropped 6.2% (down 40.5% y-t-d) and the Dow fell 5.0% (down 35.9%). Economically-sensitive stocks were hit hard. The Morgan Stanley Cyclicals sank 9.6% (down 54.3%). Transports dropped 4.7% (down 23.5%), the Morgan Stanley Consumer index 3.6% (down 27.7%), and the Utilities 1.1% (down 31.5%). The broader market performed poorly. The small cap Russell 2000 sank 9.7% (down 40.4%), and the S&P Mid-Caps fell 7.8% (down 42%). The NASDAQ100 declined 7.2% (down 43.4%), and the Morgan Stanley High Tech index dropped 8.1% (down 47.7%). The Semiconductors were hammered for 9.8% (down 50.6%). The Street.com Internet Index dropped 6.9% (down 40.3%), and the NASDAQ Telecommunications index declined 8.7% (down 45.2%). The Biotechs fell 6.4% (down 21.8%). The Broker/Dealers sank 14.1% (down 65.3%), and the Banks fell 9.9% (down 45.4%). Although Bullion recovered $5.60, the HUI Gold index was hit for 7.3% (down 54.5%).

One-month Treasury bill rates ended the week at 0.05% and three-month yields at 0.13%. Two-year government yields declined 12 bps to 1.21%. Five-year T-note yields sank 25 bps this week to 2.315%, and 10-year yields declined 6 bps to 3.72%. Long-bond yields fell 6.5 bps to 4.215%. The implied yield on 3-month December '09 Eurodollars dropped 9.5 bps to 2.345%. Benchmark Fannie MBS yields dipped only one basis point to 5.54%. The spread between benchmark MBS and 10-year T-notes widened 6 to 181 bps. Agency 10-yr debt spreads surged a notable 35 to a record 149 bps. The 2-year dollar swap spread increased 7 to 114.5 bps, while the 10-year dollar swap spread declined 8 to 33.75. Corporate bond spreads were mostly wider. An index of investment grade bond spreads increased 10 to 198 bps, and an index of junk bond spreads widened 25 to 989 bps.

Investment-grade debt issuance included Time Warner $2.0bn, AT&T $1.5bn, Philip Morris $1.25bn, Pacific Gas & Electric $1.2bn, Duke Energy $900 million, Georgia Power $400 million, Cleveland Electric $300 million, Southwestern Public Service $250 million, and Alabama Power $250 million.

I saw no junk or convert issues.

International issuance this week included Diageo $1.5bn and BAT Finance $1.0bn.

November 12 - Bloomberg (Denis Maternovsky and Bradley Cook): "The cost of protecting against a default by Russia soared after the central bank increased the ruble's trading band and lifted its benchmark interest rate to stem record capital outflows. Credit-default swaps on Russian government bonds jumped to 7.17% of the amount insured from 6.14% yesterday..."

German 10-year bund yields fell 7.5 bps to 3.60%. The German DAX equities index dropped 4.6% (down 41.6% y-t-d). Japanese 10-year "JGB" yields dipped 2 bps to 1.49%. The Nikkei 225 declined 1.4% (down 44.7% y-t-d). Emerging markets were mostly lower. Brazil's benchmark dollar bond yields were little changed at 8.14%. Brazil's Bovespa equities index fell 2.4% (down 44% y-t-d). The Mexican Bolsa declined 1.5% (down 33.8% y-t-d). Mexico's 10-year $ yields rose 3 bps to 7.62%. Russia's RTS equities index sank 15% (down 71.9% y-t-d). India's Sensex equities index droped 3.6%, with y-t-d losses boosted to 53.7%. China's Shanghai Exchange rallied 13.7%, reducing y-t-d losses of 62.2%.

Freddie Mac 30-year fixed mortgage rates declined 6 bps to 6.14% (down 10bps y-o-y). Fifteen-year fixed rates fell 7 bps to 5.81% (down 7bps y-o-y). One-year ARMs rose 8 bps to 5.33% (down 17bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates 3 bps this week to 7.52% (up 94bps y-o-y).

Bank Credit dropped $121bn to $9.886 TN (week of 11/5). Bank Credit has expanded $673bn y-t-d, or 8.4% annualized. Bank Credit posted a 52-week rise of $715bn, or 7.8%. For the week, Securities Credit dropped $53.7bn. Loans & Leases sank $67.3bn to $7.173 TN (52-wk gain of $470bn, or7.0%). C&I loans declined $6.8bn, with y-t-d growth of 12.4%. Real Estate loans dropped $21bn (up 5.7% y-t-d). Consumer loans declined $3.6bn, and Securities loans fell $15.8bn. Other loans fell $20bn.

M2 (narrow) "money" supply was little changed at $7.878 TN (week of 11/3). Narrow "money" has expanded $415bn y-t-d, or 6.6% annualized, with a y-o-y rise of $487bn, or 6.6%. For the week, Currency increased $2.7bn, and Demand & Checkable Deposits jumped $41.2bn. Savings Deposits dropped $39.1bn, while Small Denominated Deposits rose $9.9bn. Retail Money Funds fell $14.5bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $29.7bn to $3.637 TN, with a y-t-d expansion of $524bn, or 19.5% annualized. Money Fund assets have posted a one-year increase of $613bn (20.3%).

The Asset-Backed Securities (ABS) market remains pretty much closed down. Year-to-date total US ABS issuance of $129bn (tallied by JPMorgan's Christopher Flanagan) is running at 25% of comparable 2007. Home Equity ABS issuance of $351 million compares with 2007's $232bn. Year-to-date CDO issuance of $31bn compares to the year ago $303bn.

Total Commercial Paper outstanding added $2.9bn this week to $1.603 TN, with CP down $182bn y-t-d. Asset-backed CP rose $9.2bn, with 2008 posting a decline of $31.3bn. Over the past year, total CP has contracted $259bn, or 13.9%.

Federal Reserve Credit jumped $142bn to a record $2.198 TN, with a historic 9-wk increase of $1.310 Trillion. Fed Credit has expanded $1.325 TN y-t-d (171% annualized) and $1.332 Trillion y-o-y (154%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 11/12) rose $13.7bn to $2.508 TN. "Custody holdings" were up $452bn y-t-d, or 24.8% annualized, and $479bn y-o-y (23.6%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - have dropped a notable $180bn over the past four weeks. During the past year reserves were up $808bn, or 13.6%, to $6.768 TN.

Global Credit Market Dislocation Watch:

November 11 - Wall Street Journal (Deborah Solomon, James R. Hagerty and Michael Crittenden): "The U.S. government's financial-system rescue plans are coming under pressure as a growing array of distressed companies signal the need for assistance. On Monday, mortgage giant Fannie Mae said it is losing money so rapidly it may need a cash infusion from the Treasury Department by year's end. The funds would come from a special $100 billion pool Treasury set aside back in September to aid the company. Fannie Mae had a loss of $29 billion for the third quarter. In another sign of the stress on financial-services companies, American Express Co. won swift approval from the Federal Reserve to become a bank-holding company..."

November 12 - Bloomberg (John Brinsley and Robert Schmidt): "U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets. 'Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,' Paulson said... 'This is creating a heavy burden on the American people and reducing the number of jobs in our economy.'"

November 10 - Bloomberg (Dawn Kopecki): "Fannie Mae may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt. 'This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,' if there are further 'substantial' losses or if the company is unable to sell unsecured debt... Fannie said... Fannie said it has a limited ability to issue debt maturing past one year, citing market conditions, the lack of an explicit federal guarantee and competition from government-insured bank bonds. Fannie, which along with Freddie Mac was seized by regulators on Sept. 6, slashed the value of its assets by at least $21.4 billion for the third quarter and increased credit loss reserves by 75% to $15.6 billion."

November 14 - Bloomberg (Dawn Kopecki): "Freddie Mac, seized by the government two months ago, asked the Treasury for $13.8 billion after a record quarterly loss caused its net worth to fall below zero. The third-quarter net loss widened to $25.3 billion... after writing down tax assets and providing for bad mortgages and securities..."

November 10 - Bloomberg (Hugh Son): "American International Group... got an expanded government rescue package valued at more than $150 billion after posting a fourth straight quarterly loss. The U.S. will reduce the original $85 billion loan that saved... AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company... The insurer lost a record $24.5 billion... in the period ended Sept. 30..."

November 12 - Bloomberg (John Glover): "The U.S. Treasury's $700 billion Troubled Asset Relief Program will have to be increased to meet the 'phenomenal' demand for government bailouts, according to Deutsche Bank AG strategist Jim Reid. The extra $150 billion pledged to support insurer American International Group Inc. this week and the prospect of a financial package to rescue General Motors Corp., the largest U.S. automaker, from bankruptcy may drain the TARP fund, Reid wrote... 'It does feel that the $700 billion TARP fund is going to have to be increased at some point in the not-too-distant future,' wrote Reid... Either that, 'or another acronym will have to be formulated to deal with the phenomenal amount of government spending that's still likely as this crisis escalates.'"

November 10 - Bloomberg (Craig Torres and John Brinsley): "The U.S. Treasury will take a $40 billion stake in American International Group Inc., and the Federal Reserve will open two new emergency loan units to finance the company's securities..."

November 11 - Bloomberg (Mike Ramsey): "General Motors Corp., burning cash as U.S. sales slide, is being pushed closer to bankruptcy as it waits to learn whether the auto industry will win a new round of government loans. Only federal aid can prevent a collapse by the largest U.S. automaker, analysts...said..."

November 11 - Bloomberg (Erik Holm and Stephanie Luke): "American International Group Inc.'s losses from the collapsing mortgage market account for almost half the $123.6 billion inflicted on North American insurers, helping push the tally for the world's biggest financial firms toward the trillion-dollar mark."

November 10 - Bloomberg (Hugh Son, Craig Torres and Erik Holm): "American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate. AIG will get lower interest rates and $40 billion of new capital from the government to help ease the impact of four straight quarterly deficits, including a $24.5 billion third- quarter loss..."

November 12 - Dow Jones (Jessica Holzer): "Moody's... now predicts the global speculative-grade corporate default rate will rise to 4.3% by the end of the year and to 10.4% a year from now. The figures compare with September's predictions of 4.9% and 7.4%, respectively..."

November 12 - Bloomberg (John Glover): "European companies acquired in leveraged buyouts violated loan restrictions and requested waivers from debt conditions in the past year at almost twice the pace of the previous 12 months, according to S&P."

November 11 - Bloomberg (John Glover): "Companies in Europe face 'substantial refinancing risk' as a total $2.1 trillion of debt matures though 2011, according to an S&P report. Ninety percent of the total coming due is investment-grade bonds and loans, with 72% issued by financial firms, S&P said... Outside of financial services, telecommunications companies have $121 billion of debt maturing and utilities must repay $79 billion."

November 12 - Dow Jones (Jessica Holzer): "U.S. government officials, Fannie Mae and Freddie Mac... unveiled a new effort for modifying delinquent home-mortgage loans, the latest attempt to stem the foreclosure crisis. Under the plan, Fannie and Freddie have agreed to adopt a streamlined approach to modifying mortgage loans, including reducing their principal in some cases. Officials predicted that the program will have a powerful impact, becoming the industry standard... The new plan will target homeowners who are 90 days or more past due... It will aim to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of the principal debt."

November 10 - Bloomberg (Emma O'Brien and Ye Xie): "Russia's currency reserves, the third-biggest in the world, are no match for tumbling oil prices and an exodus of capital that may force the central bank to accept a devalued ruble. Just 10 years ago, Russia let the ruble fall as much as 71% as the government defaulted on $40 billion of debt... Now, the combination of a 61% drop in oil prices from their peak in July, slowing economic growth and increasing investor concern about emerging markets are draining Russia's foreign reserves, which fell 19% to $484.6 billion in the 12 weeks through Oct. 31."

November 11 - United Press International: "October inflation in Pakistan soared to nearly 25% from 9.31% in October of last year, further aggravating the country's current economic crisis. Data supplied by the Federal Bureau of Statistics said the October jump in consumer prices was largely brought on by a 31.7% surge in food prices and a hike of over 39% in transportation costs, Dawn reported."

November 11 - Bloomberg (Christopher Swann): "The World Bank will almost triple lending this year to help prevent a 'human crisis' in developing countries as the turmoil in financial markets weakens economic growth in rich nations. Lending to middle-income nations may reach $35 billion in the 12 months to June 30..."

Currency Watch:

The dollar index gained 0.5% to 86.4. For the week on the upside, the Japanese yen gained 1.1% and the South African rand 0.4%. On the downside, the New Zealand dollar declined 6.5%, the British pound 5.8%, the South Korean won 5.1%, the Canadian dollar 3.9%, the Australian dollar 3.9%, the Brazilian real 3.5%, the Mexican peso 2.0%, and the Swiss franc 1.4%. In the so-called emerging currencies, the Indonesian rupiah declined 5.2%, the Turkish lira 4.2%, the Iceland krona 4.2%, and the Indian rupee 2.8%.

Commodities Watch:

November 13 - Bloomberg (Jens Erik Gould and Hugh Collins): "Mexico hedged oil exports for 2009 at $70 per barrel to protect fiscal revenues against a drop in oil prices linked to the global economic slowdown, Mexico's Finance Minister Agustin Carstens said... The government began buying put options from international financial institutions in late July, Carstens said..."

November 11 - Bloomberg (Xiao Yu and Helen Yuan): "Chinese steelmakers, the largest producers in the world, may cut output by 20% next year even with China's 4 trillion yuan ($586 billion) stimulus plan, Shougang Corp. said. 'The steel market needs time to recover even with the stimulus plan,' Shougang's Chairman Zhu Jimin said..."

November 10 - Bloomberg (Winnie Zhu): "China, the world's second-largest energy user, increased crude-oil imports by 28% last month, said the government."

Gold rallied 0.8% to $742, while Silver declined 4.7% to $9.49. December Crude sank $4.68 to $56.36. December Gasoline fell 9.2% (down 50.5% y-t-d), and December Natural Gas dropped 6.5% (down 15.5% y-t-d). December Copper was little changed. December Wheat rallied 6.4% and Corn 1.3%. The CRB index declined 3.6% (down 31% y-t-d). The Goldman Sachs Commodities Index (GSCI) also fell 3.6% (down 33.6% y-t-d).

China Watch:

November 10 - Bloomberg (Li Yanping and Chia-Peck Wong): "China, the biggest contributor to world growth, unveiled a 4 trillion yuan ($586 billion) plan to sustain its economy... China's cabinet pledged 'fast and heavy-handed investment' in housing and infrastructure through 2010 and a 'relatively loose' monetary policy..."

November 11 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "China reported the slowest export growth in four months... Exports climbed 19.2% in October from a year earlier after gaining 21.5% in September... Imports rose 15.6%, the least since June 2007. The trade surplus swelled to a record $35.2 billion..."

November 14 - United Press International: "A declining export market contributed to the closing of 67,000 factories in China from January through June, government data revealed. While exports are still growing, the annual growth rate of 9% in October contrasts sharply with the September 2007 annual growth rate of 26%, The New York Times reported... Closing factories have left thousands of Chinese workers angry over the loss of back pay, leading to some clashes with police, the Times said."

November 13 - Bloomberg (Nipa Piboontanasawat): "China's industrial output grew at a slower pace than any economist forecast in October, stoking concern that the biggest contributor to global growth is running out of steam. Production rose 8.2% from a year earlier, the smallest gain in seven years... Output grew 11.4% in September."

November 12 - Bloomberg (Nipa Piboontanasawat): "China's retail sales rose 22%, close to the fastest pace in nine years, signaling that domestic demand may help the fourth-biggest economy withstand a looming global recession. Sales climbed to 1.008 trillion yuan ($148 billion) in October, the statistics bureau said today, after gaining 23.2% in September from a year earlier."

November 13 - Bloomberg (Wang Ying and Winnie Zhu): "China's power production fell 4% in October, the first decline since March 2005, as a slowdown in the world's fourth-biggest economy cut demand."

November 11 - Bloomberg (Nipa Piboontanasawat): "China's money supply grew at the slowest pace in more than three years as the economy cooled. M2... rose 15% from a year earlier to 45.31 trillion yuan ($6.6 trillion) at the end of October... That was less than September's 15.3% gain..."

November 10 - Bloomberg (Lee J. Miller): "China's property market is struggling most in export-dependent regions, such as along the Pearl River Delta in the south near Hong Kong, illustrating the relationship between the global economic slowdown and investment on the mainland, analysts said..."

November 10 - Bloomberg (Chua Kong Ho and Judy Chen): "China's slowest growth in five years is finally making carpet salesman Edwin Hong pay attention to his doctor's advice: Stay off the hairy crabs. An autumn delicacy in Shanghainese cuisine, the cholesterol-rich crustaceans can wholesale for as much as $80 a kilogram during their October-November season, or a quarter of the average monthly salary of a new university graduate in China's largest city. 'In times like these, your definition of what is a necessity changes,' said Hong... 'Hairy crabs were a necessity for me in the past, but now they're looking more and more like an extravagance. My doctor will be very happy.'"

Japan Watch:

November 11 - Bloomberg (Toru Fujioka): "Japan's consumers became the most pessimistic they've been in at least 26 years... The confidence index dropped to 29.4 last month from 31.4 in September, the Cabinet Office said today in Tokyo. It's the lowest since the government began compiling the figures in 1982."

November 10 - Bloomberg (Jason Clenfield): "Japanese machinery orders tumbled 10.4% last quarter, matching the biggest drop on record... The decline in orders, an indicator of capital spending in the next three to six months, matched a record drop set 10 years ago..."

November 11 - Bloomberg (Finbarr Flynn): "Lending growth at Japanese banks accelerated in October to the fastest pace in more than 16 years as the global credit squeeze shut off other funding avenues for companies that had previously shunned borrowing. Loans, excluding those by credit associations, rose 2.5% in October, the fastest pace since August 1992, the Bank of Japan said today. Lending grew by 1.8% in September."

India Watch:

November 13 - Bloomberg (Subramaniam Sharma and M.C. Govardhana Rangan): "Mukesh Ambani and Lakshmi Mittal led India's richest in losing $200 billion this year as the global financial crisis triggered a plunge in stocks and property values, Forbes Asia said. The combined wealth of India's 40 wealthiest people slumped 60% to $139 billion, the magazine said... Mittal... lost his top position to Mukesh Ambani of Reliance Industries Ltd. Mittal lost $30.5 billion after the world's biggest steelmaker ArcelorMittal extended production cuts."

November 11 - Wall Street Journal (Santanu Choudhury and Nitin Luthra): "India's local car sales in October had their biggest percentage decline in more than three years as higher rates on loans and increased fuel costs crimped demand for vehicles... Sales in the past month slid 6.6% to 98,900 cars from 105,877 a year earlier..."

Asia Bubble Watch:

November 10 - Bloomberg (Farhan Sharif): "Pakistan's inflation accelerated to near a three-decade high in October, placing further strains on a nation that the International Monetary Fund says needs $10 billion to avoid defaulting on its debt. Consumer prices... soared 25% from a year earlier..."

November 10 - Bloomberg (Patricia Lui): "Pakistan, Sri Lanka and Vietnam are the Asian countries most at risk of a credit-rating downgrade as the global economy heads into a recession and funds become scarcer, said S&P. 'Pakistan is the weakest, followed by Sri Lanka, then Vietnam,' said Elena Okorotchenko, head of Asian sovereign ratings at S&P."

Latin America Watch:

November 14 - Bloomberg (Lester Pimentel and Daniel Cancel): "Ecuador's bonds tumbled, pushing yields above 100 percent, after Finance Minister Maria Elsa Viteri said the government may miss a $30 million interest payment tomorrow."

Unbalanced Global Economy Watch:

November 10 - Bloomberg (Joyce Moullakis): "London's financial services industry, which generates about 10% of British gross domestic product, is being 'deeply affected' by the credit crisis, with investment banks and hedge funds bearing the brunt... Banks may cut 62,000 jobs in London by the end of next year... the Centre for Economics and Business Research estimated..."

November 11 - Bloomberg (Brian Swint): "U.K. home sales declined to the lowest level in at least three decades and the lending freeze pushed down prices for a 15th month, the Royal Institution of Chartered Surveyors said."

November 11 - Bloomberg (Brian Swint): "U.K. unemployment rose at the fastest pace in 16 years in October after companies from banks to builders cut jobs as the economy slid into its first recession since 1991. The number of people receiving jobless benefits rose 36,500 to 980,900, the highest level since March 2001..."

November 14 - Bloomberg (Fergal O'Brien and Simon Kennedy): "Europe's economy fell into its first recession in 15 years in the third quarter... Gross domestic product in the 15 euro nations shrank 0.2% from the previous three months..."

November 14 - Bloomberg (Andreas Cremer): "European car sales plunged almost 15% in October, the sixth straight monthly decline, as credit-market turmoil and an economic slowdown hurt demand."

November 13 - Bloomberg (Gabi Thesing): "The German economy, Europe's largest, contracted more than economists expected in the third quarter, pushing the nation into the worst recession in at least 12 years. Gross domestic product dropped a seasonally adjusted 0.5% from the second quarter, when it fell 0.4%..."

November 10 - Bloomberg (Tasneem Brogger): "Norway's October inflation rate unexpectedly rose to the highest since 1995, after declines in the krone made imports more expensive... Underlying inflation... rose to 3.3% from 3.1% in September..."

Bursting Bubble Economy Watch:

November 14 - Bloomberg (Darrell Preston): "Illinois, the ninth most-populous U.S. state, is $4 billion behind in paying bills to its suppliers of goods and services, Comptroller Dan Hynes said. Vendors face a 12-week delay in getting paid, and the wait may extend to 20 weeks, Hynes said... The 'unprecedented' backlog of bills might grow to $5 billion by March... 'To call this an imminent crisis is an understatement,' said Hynes... The payment delays may hurt school districts waiting for funding and force state police to park vehicles if vendors stop supplying gasoline, Hynes said. The situation also may affect food supplies to state prisons, physician services to Medicaid recipients and funding of transit agencies, he said."

November 13 - Bloomberg (David Scheer): "John Whitehead, former co-chairman of Goldman Sachs Group Inc., said the economy may slump deeper than it did during the Great Depression and that a growing U.S. deficit threatens the country's creditworthiness, Reuters reported... The nation's record deficit is poised to balloon as the public calls on government for more support, he said. 'I think it would be worse than the Depression... We're talking about reducing the credit of the United States of America, which is the backbone of the economic system.'"

November 13 - Wall Street Journal (Miguel Bustillo): "Best Buy Co., the nation's largest consumer electronics chain, sent a shiver through the retail and financial markets Wednesday as it sharply reduced its profit forecast due to plummeting sales... the... retailer warned sales for the final four months of its fiscal year ending Feb. 28 could decline 5% to 15%... 'Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen,' Best Buy Chief Executive Brad Anderson said. 'Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year.'"

November 14 - Bloomberg (Shobhana Chandra and Bob Willis): "Retail sales and prices of goods imported to the U.S. dropped by the most on record, signaling the economy may be in its worst slump in decades. Purchases fell 2.8% in October, the fourth straight decline..."

November 10 - MarketNews International (Claudia Hirsch): "Containerized export volumes dropped in September from August at several major U.S. ports...The U.S. economic slowdown appears to be affecting trends in both directions, with flagging domestic consumption stunting imports of Asian-made consumer goods as well as Asia's thirst for U.S. raw materials and component parts..."

November 11 - Wall Street Journal (Jilian Mincer): "As the economy worsens, a growing number of small businesses are suspending their 401(k) match, and, in some instances, closing the retirement plans altogether. While only about 15% to 20% of small businesses offer a 401(k) plan, many added them in recent years to attract and retain workers... 'It's a cash-flow issue,' says Patrick M. Shelton, a partner at Benefit Plans Plus LLC... 'The companies don't have money to meet payroll and medical insurance, so they're cutting back on 401(k) plans.'"

November 10 - Wall Street Journal (Sarah McBride): "Mounting debt and a sharp drop in advertising at many of the nation's radio broadcasters have led to a slashing of their valuations to fire-sale levels and intense competition with other media for ad dollars. 'It's grim,' says Farid Suleman, chief executive of Citadel Broadcasting Corp., owner of a radio network and more than 200 radio stations... He describes current conditions as 'absolutely the worst I've seen'"

November 11 - Bloomberg (Dawn McCarty and Anthony Effinger): "Yellowstone Club, a private ski resort in Montana that lists Microsoft Corp. founder Bill Gates among its members, sought bankruptcy protection from creditors, citing a slump in real estate prices. The club was unable to pay its creditors because of 'decreasing revenues brought on by, among other things, economic factors causing both difficulties in obtaining credit and declines in the real estate market,' according to its filing in U.S. Bankruptcy Court... The bankruptcy shows that even the most exclusive enclaves aren't safe from the deteriorating U.S. real estate market. Most of the club's revenue came from property sales. Lots once sold for $2 million and higher."

November 13 - Bloomberg (Jeff Wilson): "Thanksgiving dinner will be 5.6% more expensive this year, led by higher prices for turkey, pre-cooked rolls and cranberries, the American Farm Bureau Federation said."

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

November 13 - Bloomberg (Jody Shenn): "Mortgage bonds tumbled for a second day after Treasury Secretary Henry Paulson scrapped plans to buy devalued mortgage assets, credit-default-swap indexes suggest. ABX indexes tied to subprime mortgage securities fell to new lows... The index fell about 8% to a mid-price of 38.5..."

Real Estate Bust Watch:

November 12 - Bloomberg (Dan Levy): "One-third of U.S. homeowners who sold their property in the 12 months through September lost money as foreclosures depressed prices and more Americans became unemployed in a weakening economy, Zillow.com reported. Home values fell 9.7% in the third quarter, the seventh consecutive decline, to a median $202,966... One in seven homeowners had negative equity, or owed more on their mortgages than their houses were worth. 'It's clear we are at a unique point in history,' Stan Humphries, Zillow's vice president...said... 'We've had seven consecutive quarters of decline, and we expect that to continue until at least the middle of next year. Most markets are still seeing five-year annualized returns, but we will see more markets slip into flat or negative long-term change as the economy continues to suffer.'"

November 13 - Bloomberg (Dan Levy): "The price of multifamily homes and apartment buildings fell in New York, Los Angeles and San Francisco in the third quarter as more restrictive lending and foreclosure sales pushed down values, PropertyShark.com said. Median prices dropped 9% to $590,000 across New York City's five boroughs, 35% to $435,000 in Los Angeles County and 5% to $859,000 in the city of San Francisco... PropertyShark, a... online seller of real estate data that tracked sales of residential or mixed-use buildings... 'It looks to me that everything is coming down,' Bill Staniford, ceo of PropertyShark, said... 'You have a potential bottom in L.A., but San Francisco and New York continue to drop. Transactions are frozen in New York and inventory is building up.'"

November 13 - Bloomberg (Kathleen Chu): "Japan offers the best investment opportunity in a global market for commercial property that may fall as much as 30%, said Sonny Kalsi, managing director and co-head of real estate investing at Morgan Stanley. 'Japan has its issues, but relatively speaking the economy and financial institutions are in better shape,' Kalsi said... The global credit crisis is causing a repricing and restructuring of property markets worldwide, Kalsi said..."

Speculator Watch:

November 13 - Bloomberg (Tomoko Yamazaki): "The global hedge fund industry lost $100 billion of assets in October, according to an estimate from Eurekahedge Pte, as firms including Sparx Group Co. and Man Group Plc were hammered by investor redemptions."

November 11 - Bloomberg (Julie Ziegler): "Harvard University's $36.9 billion endowment, the biggest in higher education, may face 'unprecedented' losses, and the school will seek cost cuts and new sources of revenue. Harvard may need to absorb losses in the fund, President Drew Faust said yesterday... Harvard... most likely will receive less from donors, and its grants and contracts from the U.S. may face pressure along with the federal budget, Faust said. Colleges and universities across the country are taking measures to help cope with the worst financial crisis since the Great Depression."

November 14 - Bloomberg (Tim Mullaney): "Universities and pension managers are dumping their holdings in venture-capital funds, depressing values by as much as 50% as the financial crisis extends to private companies. Investors have venture-capital stakes valued at more than $2 billion up for sale... The glut may lead to a chilling in the venture-capital industry that rivals the slowdown between 2000 and 2003, when investments fell 81%, Swildens said."

November 13 - Bloomberg (Gillian Wee): "Fortress Investment Group LLC's hedge-fund clients have asked to pull more than $4.5 billion, or 25% of their money, over the next few months as the company reported its first quarterly loss since going public."

November 14 - Bloomberg (Poppy Trowbridge and Nandini Sukumar): "New Star Asset Management Group Ltd. and RAB Capital Plc, U.K. firms that went public on the backs of star money managers, are shrinking to cope with client defections. RAB... said today that assets under management may slump as much as 73% this year as it closes at least six funds... New Star, set up in 2000... said in a separate statement it will cut 20 million pounds ($30 million) in costs after assets slumped 28% since June 30."

November 10 - Bloomberg (Saijel Kishan and Katherine Burton): "Hedge funds run by Jeffrey Gendell and John Burbank III posted their worst monthly losses in October. Peter Thiel gave back gains made earlier in the year. Nobel-prize winner Myron Scholes froze his biggest fund. The managers, like many in the $1.7 trillion hedge-fund industry, were caught in a downdraft of market declines, client redemptions, demands from lenders for more collateral and forced asset sales that accelerated after Lehman Brothers Holdings Inc. collapsed in mid-September."

November 12 - Dow Jones (Joseph Checkler and Mara Lemos Stein): "Star hedge fund manager Jeffrey Gendell is winding down two of his four hedge funds, including his flagship Tontine Partners LP, because of heavy losses this year... The Tontine Partners fund was down 65% for the year through Sept. 30... and the losses escalated to 75% by the end of October... That was big comedown for a fund that averaged annual returns of about 39% from 1997 to 2007..."

November 11 - Bloomberg (Jason Kelly): "KKR Financial Holdings LLC, the debt-investment affiliate of private-equity firm KKR & Co., halted its dividend and arranged $400 million in loans from banks and KKR to pay off other debts."

Fiscal Watch:

November 13 - Dow Jones (Meena Thiruvengadam): "The U.S. federal government ran a record October budget deficit of $237.18 billion as it grappled to fund multibillion-dollar efforts aimed at stemming a global financial crisis... The figure is an all-time high for any one month and sharply higher than the October 2007 deficit of $56.84 billion. It also is higher than the entire fiscal 2007 deficit of $162 billion... Treasury's monthly budget statement showed receipts totaled $165 billion in October, down 7% from a year earlier as a result of a weakened economy that has driven down... tax payments. Outlays in the first fiscal month of the year totaled a record $402 billion, up about $167 billion, or 71%, from the same month a year earlier. Of the increase, about 70% is connected with TARP-related expenses."

Muni Watch:

November 14 - Bloomberg (William Selway and Adam L. Cataldo): "Philadelphia, Atlanta and Phoenix are asking the U.S. Treasury Department for part of the $700 billion financial rescue package to help them finance construction projects and pay bills. They seek $50 billion on behalf of cities nationally to spend on infrastructure and loans lasting for as long as a year to aid cash flow."

November 12 - Bloomberg (Terrence Dopp): "New Jersey faces a revenue shortfall of $1.2 billion in the year ending June 30 and $5 billion in the following 12 months, Governor Jon Corzine said... Tax revenue fell $211 million below projections in October, with income taxes 14%, or $116 million, below estimates..."

New York Watch:

November 10 - Bloomberg (Michael Quint and Henry Goldman): "New York Governor David Paterson proposed $2 billion of spending cuts, mostly in education and health care, to close this year's $1.5 billion budget gap and begin narrowing next year's record $12.5 billion deficit... 'Many worthy programs with laudable goals, some of which I have supported in the past, will have to experience reductions in funding,' Paterson...said..."

November 12 - Bloomberg (Henry Goldman): "New York City's construction industry could lose more than 30,000 jobs by 2010 as residential and commercial building slows... said Richard Anderson, president of the New York Building Congress."

California Watch:

November 12 - Bloomberg (Adam L. Cataldo): "California faces a $27.8 billion budget shortfall over the next 20 months, according to an analyst for the Legislature, the Los Angeles Times reported. That is $3 billion higher than the amount estimated by Republican Governor Arnold Schwarzenegger's administration... Mac Taylor, a non-partisan analyst for the Legislature, produced the latest figure... 'The numbers are just truly awful,' Taylor told the Times. 'There are no good options left.'"

November 13 - Bloomberg (Michael B. Marois): "The California Public Employees' Retirement System said housing-related real estate investments have lost 35% of their value... Calpers, the largest U.S. public pension fund, said the value of its residential land portfolio was $6.1 billion as of June 30, compared with the $9.4 billion total cost of the properties."

Crude Liquidity Watch:

November 12 - Bloomberg (Matthew Brown): "The advertised price of villas in Dubai dropped 19% between September and October after banks reduced loan-to-value ratios, HSBC Holdings Plc said in a report today."

November 10 - Bloomberg (Haris Anwar): "Growth of lending in the United Arab Emirates will slow as the global credit crisis keeps capital markets in 'turmoil and shut,' said Eirvin Knox, CEO of Abu Dhabi Commercial Bank PJSC. 'U.A.E banks have been growing at 40% to 50% per annum in the last two to three years and that this would inevitably slow...'"

The Only Cure for a Bubble...

I commend Judy Shelton for her insightful op-ed piece, "Stable Money is Key - How the G-20 can rebuild the 'capitalism of the future.'" It was published in this morning's Wall Street Journal, a day ahead of "The G20 Summit on Financial Markets and the World Economy." As Ms. Shelton noted: "One thing is guaranteed: Most attendees will take the view that Wall Street greed and inadequate regulatory oversight by U.S. authorities caused the global financial crisis -- never mind that their own regulatory agencies missed the boat and that their own governments eagerly bought up Fannie Mae and Freddie Mac securities for the higher yield over Treasurys."

She continues: "At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system -- anchored by a gold-convertible dollar -- ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence. Today, a soupy mix of currencies sloshes investment capital around the world, channeling it into stagnant pools while productive endeavor is left high and dry... If we are to 'build together the capitalism of the future,' as Mr. Sarkozy puts it, the world needs sound money. Does that mean going back to a gold standard, or gold-based international monetary system? Perhaps so; it's hard to imagine a more universally accepted standard of value."

As much as I find the notion of sound money and a new gold standard international monetary regime appealing, neither will be part of any solution coming out of Washington or the G20 this weekend or anytime soon. Fundamentally, our nation has only a sliver of bullion available to back tens of trillions in financial claims that are the crumbly bedrock for the entire global financial system. But this is a moot point. The world may today disagree somewhat on how to parcel out blame for international monetary disorder, resulting in the worst financial crisis since the Great Depression, but there exists a consensus that concerted reflationary measures are the only possible solution.

There is little prospect that the direction of global policymaking will engender the return of stability anytime soon. As Ms. Shelton adeptly notes, "In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits. Meanwhile, price signals in the global marketplace are hopelessly distorted." To be sure, the market pricing distortions that for years empowered Wall Street finance and the GSEs these days ensure that the U.S. Treasury borrows and spends in egregious excess.

I think often of the great economist Dr. Kurt Richebacher. My analytical framework was over the years heavily influenced by his writings and mentoring. He would always say, "The only cure for a Bubble is to prevent it from developing." Today's crisis confirms the brilliance of Dr. Richebacher's work. At the other end of the spectrum, conventional economic doctrine is revealed as shallow and fatefully flawed.

I have repeatedly pointed to Milton Friedman's analyses of the causes behind the Great Depression as the keystone for our nation's deeply flawed economic perspective. By the 1960s', there was an eagerness to cast blame for the Depression on policy mistakes made in 1929 and subsequent to the crash. The depression, it was determined, was not due to any weaknesses or vulnerabilities associated with the Credit system or market pricing mechanisms. Instead, the 1920s were conveniently recast as the "golden age of Capitalism." Over the years, Dr. Bernanke has repeatedly excoriated the "Bubble poppers" for their principal role in instigating the thirties downturn.

Those of us who have studied the nature of the financial and economic maladjustments engendered during the rampant Credit excesses leading up to the '29 crash take serious exception. Indeed, the Friedman/Bernanke/conventional view of that historical Bubble and bust has been a most dangerous case of historical revisionism and flawed analysis. I am more interested today in working to change failed economics than fingering blame for the crisis on our public servants working desperately to avert collapse.

It is in this spirit that I am compelled to defend Hank Paulson and his team at Treasury. The severity of today's crisis is not the result of policies - good, bad or otherwise - implemented over the past few months. The greatest Bubble in the history of mankind - nurtured by decades of flawed economics, flawed finance, flawed policymaking and irresponsible behavior throughout - is bursting, and there is little our authorities can do about it. Everyone was content during the boom to buy into the notion of all-powerful Fed reflation and Washington stimulus. We must now come to grips with the reality that the entire framework advocating post-Bubble "mopping up" strategies was specious.

Secretary Paulson has been criticized for "making up the rules as he goes along." Well, there is no rulebook for resolving this crisis. His policymaking has been faulted - perhaps not undeservingly - for lacking transparency. Yet a more substantive policy issue goes back 15 years: regulators looked the other way and didn't demand any transparency as the leveraged speculating community borrowed trillions and accumulated massive holdings. Paulsen and Bernanke likely believed that an unprecedented $700 billion government program to acquire securities would provide the backstop bid to help restore market confidence, securities prices, and lending throughout the economy. It simply didn't work. Yet the system was headed toward collapsed had they not moved aggressively.

The Treasury, Fed, and the marketplace now appreciate that the system faces a multi-Trillion de-leveraging problem - not to mention the issue of new Credit creation necessary to avert economic collapse. The focus has, rightly, turned away from the issue of impaired securities markets to a primary focus on stimulating lending. The hope now is that the economy will receive a much bigger bang for $700 billion bucks if it is used to recapitalize the financial system rather than to acquire securities from distressed sellers. With the securitization markets now essentially lost causes, the last hope rests with a recapitalized and, supposedly, resurgent banking system. The expectation is that $700 billion of additional capital can be multiplied into the Trillions of new loans vital to bolstering the economy going forward. It's not Paulson's fault if it doesn't work.

We are witnessing policymaking out of desperation. Treasury has very limited time, few alternatives and faces dire problems. It has become popular to point out that the marketplace has lost confidence in Mr. Paulson and his team. I believe, however, that it is more aptly stated that the market has lost faith in the prospect of policymaking generally having much influence on developments. This is a consequence, as Ms. Shelton reminds us, of upwards of forty years of "monetary policy indulgence." Regrettably, G20 policymakers will this weekend focus efforts on global stimulus and pay only lip service to monetary system reform.

Fundamentally, individual participant discipline is the nucleus of any stable international monetary regime, whether it is the classic gold standard approach or Bretton Woods system type of arrangement. The global abandonment of any semblance of monetary or fiscal discipline is a hallmark of this extraordinary period of bursting Bubbles. Stable "money" may be the key - but it's also nowhere to be seen.

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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