History's Biggest Margin Call

By: Doug Noland | Sat, Oct 25, 2008
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What a vicious crisis. For the week, the Dow was hammered for 5.3% (down 36.8% y-t-d) and the S&P500 6.8% (down 40.3%). Economically-sensitive issues were, again, hammered. The Morgan Stanley Cyclical index dropped 12.0% (down 50.9%). The Transports fell 6.6% (down 24.6%), while the Utilities dipped 0.4% (down 34.4%). "Defensive" stocks weren't much help, as the Morgan Stanley Consumer index declined 6.1% (down 28%). The broader market was under heavy liquidation. The small cap Russell 2000 dropped 10.5% (down 38.5%), and the S&P400 Mid-Caps sank 9.6% (down 41.6%). The NASDAQ100 fell 8.3% (down 42.3%), and the Morgan Stanley High Tech index was hit for 8.4% (down 45.4%). The Semiconductors dropped 11.2% (down 48%), The Street.com Internet Index 8.8% (down 39%), and the NASDAQ Telecommunications index 13.3% (down 44.3%). The Biotechs declined 4.3% (down 21.2%). The Broker/Dealers sank 17.4% (down 60.7%), and the Banks fell 10.2% (down 42%). With Bullion sinking $51, the HUI Gold index dropped 17.2% (down 58.8%).

One-month Treasury bill rates declined 8 bps to 0.24% and three-month yields fell 12 bps to 0.86%. Two-year government yields dropped 10 bps to 1.52%. Five-year T-note yields sank 25 bps this week to 2.59%, and 10-year yields fell 24 bps to 3.69%. Long-bond yields dropped 28 bps to 4.06%. The 2yr/10yr spread declined 14 to 217 bps. The implied yield on 3-month December '09 Eurodollars rose 4 bps to 2.65%. Benchmark Fannie MBS yields declined only 4 bps to 5.75%. The spread between benchmark MBS and 10-year T-notes widened a notable 20 to 205 bps. Agency 10-yr debt spreads widened 17 to a new high 115 bps. The 2-year dollar swap spread increased 1.5 to 125.5, while the 10-year dollar swap spread declined 6.5 to 47.5. Corporate bond spreads were wider. An index of investment grade bond spreads widened 26 to 242 bps, and an index of junk bond spreads widened 16 to 840 bps.

Investment-grade debt issuance included Pepsico $2.0bn, Bottling Group PLC $1.3bn, Baker Hughes $1.25bn, National Rural Utility Cooperative $1.0bn, CSX Transportation $575 million, and Illinois Power $400 million.

I saw no junk, convert or international issuance this week.

It was chaotic. German 10-year bund yields dropped 26 bps to 3.75%. The German DAX equities index sank 10.2% (down 46.8% y-t-d). Japanese 10-year "JGB" yields declined 9 bps to 1.49%. The Nikkei 225 was hammered for 12.0% (down 50% y-t-d), and today trades at about the same level as where it began 1982. Emerging markets were in many cases destroyed. Brazil's benchmark dollar bond yields surged 97 bps to 9.92%. Brazil's Bovespa equities index was walloped for 13.5% (down 50.7% y-t-d). The Mexican Bolsa sank 16.4% (down 42.5% y-t-d). Mexico's 10-year $ yields surged an astonishing 176 bps to 9.76%. Russia's RTS equities index dropped 17.7%, with y-t-d gains now at 76.0%. India's Sensex equities index sank 12.8%, with y-t-d losses rising to 57.1%. China's Shanghai Exchange fell 4.7%, boosting y-t-d losses to 65.0%.

Freddie Mac 30-year fixed mortgage rates dropped 42 bps to 6.4% (down 29bps y-o-y). Fifteen-year fixed rates also dropped 42 bps, to 5.72% (down 27bps y-o-y), while one-year ARMs rose 7 bps to 5.23% (down 43 bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 15 bps this week to 7.47% (up 88bps y-o-y).

Bank Credit jumped $38.6bn to a record $9.915 TN (week of 10/15), with a 6-wk gain of $522bn. Bank Credit has now expanded $702bn y-t-d, or 9.4% annualized. Bank Credit posted a 52-week rise of $889bn, or 9.8%. For the week, Securities Credit declined $14.9bn. Loans & Leases surged $53.5bn to $7.270 TN (52-wk gain of $608bn, or 9.1%). C&I loans increased $7.9bn, with y-t-d growth of 13.2%. Real Estate loans rose $8.7bn (up 6.8% y-t-d). Consumer loans gained $7.5bn, while Securities loans dropped $32.1bn. Other loans surged $61.5bn.

M2 (narrow) "money" supply jumped $43.6bn to $7.870 TN (week of 10/13). Narrow "money" has expanded $408bn y-t-d, or 6.9% annualized, with a y-o-y rise of $508bn, also 6.9%. For the week, Currency rose $4.5bn, while Demand & Checkable Deposits fell $12.6bn. Savings Deposits jumped $21.7bn, while Small Denominated Deposits rose $16.6bn. Retail Money Funds jumped $13.4bn.

Total Money Market Fund assets (from Invest Co Inst) increased $17.5bn to $3.536 TN, with a y-t-d expansion of $423bn, or 16.8% annualized. Money Fund assets have posted a one-year increase of $566bn (19.1%).

The Asset-Backed Securities (ABS) market remains essentially shut 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 $228bn. Year-to-date CDO issuance of $24bn compares to the year ago $290bn.

Total Commercial Paper outstanding sank $61.5bn this week to $1.449 TN (6-wk decline $366bn), with CP down $336bn y-t-d. Asset-backed CP dropped $12.6bn, with 2008 posting a decline of $78bn. Over the past year, total CP has contracted $423bn, or 22.6%.

Federal Reserve Credit expanded another $63.2bn to a record $1.803 TN, with a historic 6-wk increase of $915bn. Fed Credit has expanded $930bn y-t-d (129% annualized) and $944bn y-o-y (110%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 10/22) declined $7.6bn to $2.479 TN. "Custody holdings" were up $422bn y-t-d, or 25% annualized, and $448bn y-o-y (22%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.033 TN y-o-y, or 18%, to $6.921 TN.

Global Credit Market Dislocation Watch:

October 22 - Bloomberg (Anthony Massucci): "Opaque financial instruments in the U.S. have created an 'unprecedented' financial crisis that needs to be repaired by rebuilding the banking system, said former Federal Reserve Chairman Paul Volcker. 'We are really going to have to rebuild this system from the ground up. The system is rebuilding itself.'"

October 24 - Financial Times (Chris Hughes and Kate Burgess): "The survival of a raft of hedge funds is being threatened by fresh pressure to stump up more collateral for trades made in a range of illiquid assets. So-called prime brokers, who provide a range of services to hedge funds, are imposing tougher conditions on their clients and charging more for financing following the collapse of Lehman... raising fears that more funds face collapse. The more conservative terms mean that a hedge fund would have to put up additional collateral against financing if markets fall further or sell down its holdings. The problem for many hedge funds is that they have already sold down their more liquid investments and are grappling with a wave of redemptions from their own investors. Further collateral requests or higher financing costs may push many hedge funds over the edge. One fund manager said: 'Funding is being withdrawn by prime brokers and funding rates have risen sharply in the past week or two. A tough environment is just getting tougher.'"

October 22 - Bloomberg (Neil Unmack, Abigail Moses and Shannon D. Harrington): "Investors are taking losses of up to 90% in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman... and Icelandic banks send shockwaves through the global financial system. The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses... Some synthetic CDOs, tied to credit-default swaps on corporate bonds, are trading at less than 10 cents on the dollar, according to Sivan Mahadevan, a derivatives strategist at Morgan Stanley in New York."

October 20 - Wall Street Journal (Neil Shah): "A recent rash of bank failures is wreaking havoc on a large but little-known corner of the credit markets... Even as some lending markets begin to recover from last month's demise of Lehman Brothers..., the securities firm's default -- together with those of other U.S. and European banks -- is causing new dislocations in the multitrillion-dollar market for complex investments known as synthetic collateralized debt obligations... Many synthetic CDOs contain a heavy dose of exposure to financial companies, including Lehman, U.S. thrift Washington Mutual Inc. and recently nationalized Icelandic banks Glitnir Bank hf, Kaupthing Bank hf and Landsbanki Islands hf."

October 23 - Bloomberg (Liz Capo McCormick): "Failures to deliver or receive Treasuries in the $7 trillion-a-day market for borrowing and lending securities rose to a record last week even after the Treasury Department re-opened past bond issues and increased sales to reduce shortages... Failures, an indication of scarcity, rose to $5.061 trillion in the week ended Oct. 15, up from $4.767 trillion the prior week... Failures averaged $195 billion per week through 1990."

October 24 - Bloomberg (Shannon D. Harrington and Michael Shanahan): "The cost of protecting corporate bonds from default surged to a record as a global asset sell-off pushed U.S. stocks lower and sent commodities markets falling. Credit-default swaps protecting against a default by companies including Bayer AG, Germany's largest drugmaker, French automaker PSA Peugeot Citroen and U.S. newspaper publisher New York Times Co., soared to records. A benchmark European index climbed above 900 basis points for the first time as the U.K. economy shrank more than forecast."

October 23 - Bloomberg (Denis Maternovsky and Laura Cochrane): "Developing nations' borrowing costs jumped to the highest in six years as Belarus joined governments seeking a bailout from the International Monetary Fund... The extra yield investors demand to own emerging-market government bonds instead of U.S. Treasuries rose 25 bps to 8.27 percentage points... Ex-Soviet Belarus followed Iceland, Pakistan, Hungary and Ukraine in requesting emergency loans as the global financial crisis limits its ability to borrow, the IMF said..."

October 23 - Bloomberg (Hugh Son): "American International Group Inc., the insurer bailed out by the U.S., may need to borrow more than the $122.8 billion already offered by the government if capital markets don't improve, said CEO Edward Liddy."

October 22 - Bloomberg (William Selway): "The California Public Employees' Retirement System, the largest U.S. public pension fund, may force state and local governments to pay more for retirement benefits because of losses suffered in the stock market's slide. The fund lost more than 20% of its value since July 1, the beginning of its fiscal year. Should those losses be sustained until the end of June, the fund may need to raise employer contributions by 2% to 4% as soon as July 2010, according to an actuarial report."

October 23 - Bloomberg (David Wilson): "Companies in the S&P 500 Index will end the year with their worst cumulative pension-fund deficit, according to Howard Silverblatt, an analyst at S&P. Even a 50% advance in the index from now until year-end wouldn't prevent the shortfall from exceeding the record of $218.5 billion, set in 2002, Silverblatt said... Companies 'will have to put in additional cash' to make up the difference, he said."

October 21 - Bloomberg (Gabrielle Coppola): "The default rate for high-yield, high-risk corporate borrowers may reach 7.6% in the next 12 months...according to S&P. The share of junk-rated debt trading at distressed levels jumped to 53% as of Oct. 15, the highest since S&P began tracking the data in October 2002... That compares with about a 30% distress ratio in September... As of Oct. 15, 75 companies have defaulted, affecting $226 billion of debt."

October 20 - Bloomberg (Jeremy R. Cooke): "Weekly interest costs on auction-rate bonds issued by U.S. municipal borrowers held above 7% for a third week amid slack demand and persistent failures caused by the fallout from tightened credit markets... Before the auction-rate market collapsed this February, the index averaged less than 4%."

October 24 - Bloomberg (Neil Unmack): "The cost of protecting U.K. mortgage-backed bonds from default soared as concern mounted the global economy is sliding into recession. Credit-default swaps on top-rated mortgage securities... rose 35 bps to 360, with insurance offered as high as 430 bps..."

October 21 - Bloomberg (Theresa Tang): "Citic Pacific Ltd. tumbled the most in 18 years in Hong Kong trading after predicting HK$15.5 billion ($2 billion) in losses from unauthorized currency bets. The unit of China's biggest state-owned investment company dropped 55%..."

October 20 - Bloomberg (Niklas Magnusson and Johan Carlstrom): "Sweden pledged as much as 1.5 trillion kronor ($205 billion) to guarantee bank loans and created a fund that may buy shares in banks as it looks to revive lending in the financial system."

October 23 - Bloomberg (Maria Levitov and Emma O'Brien): "Russia's international reserves, the world's third largest, fell $14.9 billion last week after the central bank sold currency to prop up the ruble... The value of reserves decreased to $515.7 billion... 'The speed of the fall in reserves is quite alarming,' Vladimir Tikhomirov, chief economist at UralSib Financial Corp. in Moscow said... Investors withdrew at least $63 billion from Russia since Aug. 8..."

October 22 - Bloomberg (Denis Maternovsky and Juan Pablo Spinetto): "Russian companies may default on almost a third of local-currency bonds as soaring borrowing costs make it 'impossible' to refinance the debt, according to the Bank of Moscow. A third of ruble debt is 'under severe distressed risk,' Denis Gaevski, head of capital markets at Bank of Moscow, the third-biggest arranger of ruble bonds, said..."

October 24 - Bloomberg (Denis Maternovsky): "The market for credit-default swaps on Russian government debt is 'dead' after investors pushed up the cost of protection to distressed levels, said Pavel Pikulev, a fixed-income analyst at Trust Investment Bank in Moscow."

October 21 - Bloomberg (Torrey Clark and Bradley Cook): "Russian companies and banks have applied for almost $100 billion of loans from state development bank Vnesheconombank to refinance foreign debt after credit markets worldwide seized up, threatening economic growth. Banks have asked for $64 billion, while companies have requested $33 billion, Chairman Vladimir Dmitriev said..."

October 21 - Bloomberg (Matthew Brown and Khalid Qayum): "Pakistan may need as much as $10 billion from donors over the next two years to avoid defaulting on its debts, the International Monetary Fund said."

October 24 - Bloomberg (Christopher Swann): "The International Monetary Fund is considering loans of up to five times the quota contributions of member nations, in an unprecedented effort to avert an economic collapse in emerging markets. The Washington-based lender is discussing plans to offer so-called hard currency loans of between three and six months that wouldn't carry the fund's usual demands for policy changes..."

October 22 - Bloomberg (Kevin Cho): "Samsung Electronics Co., the world's second-largest maker of semiconductors, scrapped a $5.85 billion offer to buy SanDisk Corp., saying losses at the U.S. company may worsen as a glut forces chipmakers to cut prices."

Currency Watch:

October 24 - Bloomberg (Kim-Mai Cutler): "The pound tumbled below $1.53 in its biggest drop in at least 37 years after a report showed the U.K. economy contracted more than forecast in the third quarter, bringing the nation to the brink of a recession. The decline surpassed that of Black Wednesday in September 1992, when the U.K. was driven out of Europe's Exchange Rate Mechanism."

Global currency markets dislocated badly. The dollar index jumped 4.9% to 86.44. For the week on the upside, the Japanese yen jumped 7.8% to a 13-year high. On the downside, the South African rand declined 10.4%, the Australian dollar 9.7%, the New Zealand dollar 9.1%, the Brazilian real 8.2%, the British pound 8.0%, the Canadian dollar 7.5%, the Swedish krona 6.5%, the South Korean won 6.2%, the Norwegian krone 5.9%, and Euro 5.9%, and the Swiss franc 2.7%. In the emerging currencies, the Polish zloty sank 12.1%, the Turkish lira 11.8%, the Chilean peso 8.0%, the Hungarian forint 7.8%, and the Iceland krona 6.4%.

Commodities Watch:

Commodity markets were in heavy liquidation. Gold dropped 6.6% to $732. Silver was little changed at an almost 3-yr low $9.32. December Crude sank $7.42 to $64.71. November Gasoline dropped 10.6% (down 40% y-t-d), and November Natural Gas deflated 8.4% (down 16.9% y-t-d). December Copper collapsed 22.5%. December Wheat dropped 8.8%, and Corn fell 7.5%. The CRB index sank 9.3% (down 28.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 9.9% (down 29.9% y-t-d).

China Watch:

October 22 - Bloomberg (Luo Jun): "Agricultural Bank of China will get $19 billion from the government, paving the way for the lender to sell shares to the public and capping a decade-long bailout of the nation's banking industry..."

October 20 - Bloomberg (Li Yanping): "The global financial crisis is posing challenges to the world trade system, China's Minister of Commerce Chen Deming said. 'Actively pushing forward the Doha round of talks and improving the multilateral trade system will help fight trade protectionism, boost confidence among economies and aid smaller and less developed countries to overcome difficulties,' Chen told World Trade Organization Director-General Pascal Lamy..."

October 24 - Bloomberg (Lee Spears): "China High Speed Transmission Equipment Group... the nation's largest maker of gears for wind turbines, fell to a record low in Hong Kong trading on concern over a wrong-way bet in an equity-swap contract. China High Speed dropped 28%... before trading was suspended, completing a three-day, 53% slide."

Japan Watch:

October 24 - Bloomberg (Masaki Kondo and Satoshi Kawano): "Japan stocks plunged, sending the Nikkei 225 Stock Average to the brink of 1982 levels, as Sony Corp. cut its forecast, Toyota Motor Corp.'s car sales fell for the first time in seven years, and the yen reached a 13-year high."

October 23 - Bloomberg (Jason Clenfield): "Japan's exports rose less than economists estimated in September as overseas demand weakened in the wake of a deepening global financial crisis. Exports... climbed 1.5% from a year earlier..."

India Watch:

October 24 - Bloomberg (Anoop Agrawal): "India's rupee fell through 50 against the dollar to a record low as stocks in the region slumped on increasing signs that global economies are headed for a recession."

October 23 - Bloomberg (Kartik Goyal): "India's inflation slowed more than economists... Wholesale prices rose 11.07%... from a year earlier..."

October 23 - Bloomberg (Kartik Goyal): "The Indian government has asked banks to lend aggressively to help increase the amount of cash available in the financial system, Finance Minister Palaniappan Chidambaram said. 'I hope the message will go down the line and lending will take place,' Chidambaram told reporters..."

Asia Bubble Watch:

October 24 - Bloomberg (William Sim): "South Korea's economy expanded at the slowest pace in four years last quarter, sparking concern the nation is headed for its first recession since requiring an International Monetary Fund bailout 10 years ago. The economy grew 0.6% from the previous three months..."

October 23 - Bloomberg (Janet Ong): "Taiwan's export orders grew at the weakest pace in six years in September as demand from China fell and sales to the U.S. slowed. Orders... rose 2.82% from a year earlier..."

October 20 - Bloomberg (Chen Shiyin): "Singapore's S$150 billion ($102 billion) backing for its bank deposits is more than sufficient because the government has enough reserves and the likelihood of a bank failure here is small, Trade Minister Lim Hng Kiang said."

October 23 - Bloomberg (Shamim Adam): "Singapore's inflation accelerated more than expected... The consumer price index increased 6.7% from a year earlier..."

Latin America Watch:

October 23 - Bloomberg (Andre Soliani and Jamie McGee): "Brazil's central bank pledged to sell $50 billion of currency swaps, its boldest move yet to stem a two-month, 28% tumble in the real that has saddled companies with losses and sparked concern inflation will surge..."

October 22 - Bloomberg (Joshua Goodman and Andre Soliani): "Brazil's efforts to shore up the falling local currency totaled $22.9 billion in the past month, including sales of foreign reserves, derivatives and loans."

October 21 - Bloomberg (Joshua Goodman and Andre Soliani): "New lending by Brazilian banks fell 13% in the first eight business days of October compared with the same period last month, Brazilian central bank President Henrique Meirelles said."

October 21 - Bloomberg (Thomas Black): "Vitro SAB, the century-old Mexican glassmaker which sells in more than 45 countries, may be forced into creditor protection because of derivative losses, according to analysts at ING Groep NV and Deutsche Bank AG."

Central Banker Watch:

October 21 - Bloomberg (Simon Kennedy): "The European Central Bank's lending to banks and its exposure to possible collateral losses jumped to records last week as the battle against the credit crisis forced it to shoulder more risk. The... ECB said it loaned banks 773.2 billion euros ($1.02 trillion) through monetary operations, up from 739.4 billion euros a week earlier and a 68% surge from the first week of September."

October 22 - Wall Street Journal (Jon Hilsenrath and Diya Gullapalli): "In another move to bolster fragile credit markets, the Federal Reserve said it would lend as much as $540 billion to the money-market mutual-fund industry, which has been plagued by investor withdrawals."

October 24 - Bloomberg (Tasneem Brogger): "Denmark's central bank unexpectedly raised the benchmark lending rate by half a percentage point to an eight-year high, showing policymakers will defend the krone even as the economy teeters on the brink of recession. ...Nationalbanken lifted the rate to 5.5%..."

October 22 - Bloomberg (Balazs Penz and Zoltan Simon): "Hungary's central bank raised the benchmark interest rate by 3 percentage points today, after a series of earlier measures to prop up the forint failed to halt the flight of investors from local assets. The Magyar Nemzeti Bank lifted the two-week deposit rate today to 11.5%..."

Unbalanced Global Economy Watch:

October 24 - MarketNews International: "The UK is possibly facing the biggest financial crisis in human history, according to Bank of England Deputy Governor Charles Bean... 'We have had bank crises in the past but what is unique about this event is its sheer scale. It is global. It originated in the United States but its tentacles have spread across the world. Particularly in the last six weeks when financial markets really ground to a halt, and trust in the financial positions of a whole range of institutions have come into question. This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history'."

October 23 - Bloomberg (Simon Kennedy): "After easing the financial-market panic by committing trillions of dollars to shore up their banking systems, governments are broadening their focus to buffering its economic aftershocks. U.S. lawmakers are moving toward the second fiscal stimulus bill this year and Japanese Prime Minister Taro Aso is set to cut income taxes. In Europe, Britain's Gordon Brown plans to spend more on schools, Italy's Silvio Berlusconi looks to enact tax breaks for manufacturers and Angela Merkel of Germany mulls tax rebates. French President Nicolas Sarkozy today lifted a tax on business investment until the start of 2010. 'Having taken action on the banking system, we must take action on the global recession,' Prime Minister Brown told U.K. lawmakers... 'No country can insulate itself.'"

October 24 - Bloomberg (Jennifer Ryan): "The U.K. economy shrank more than forecast in the third quarter as the financial crisis ravaged industries from banking to construction, evidence that Britain is in the grips of its first recession since 1991. Gross domestic product dropped 0.5% from the second quarter..."

October 20 - Bloomberg (Mark Deen): "Britain had its biggest six-month budget deficit since World War II as the slide into a recession hobbled tax receipts and government spending jumped. The 37.6 billion-pound shortfall ($65 billion) in the fiscal first half through September was the largest since records started in 1946..."

October 22 - Bloomberg (Alex Nicholson): "Russia's inflation rate in the year through Oct. 20 reached 11.2%, as egg and poultry prices rose."

October 21 - Bloomberg (Tasneem Brogger): "More than any of its Nordic neighbors, Iceland under Prime Minister Geir Haarde imbibed the economic policies of Margaret Thatcher and Ronald Reagan -- state-asset sales, light regulation and corporate growth abroad through debt. Now that the hangover has arrived, many of Haarde's countrymen want his Independence Party-led coalition to pay the price for turning one of the world's wealthiest countries per capita into a beggar state staving off depression."

October 20 - Bloomberg (Steve Bryant): "Turkey plans to increase government spending by 12% to almost 262 billion liras ($175 billion) in 2009, under a draft budget submitted to the Ankara parliament over the weekend, a Finance Ministry official said."

October 22 - Bloomberg (Jacob Greber): "Australia's annual inflation accelerated in the third quarter to the fastest pace since 2001, driven by costs for housing and food. The consumer price index jumped 5% from a year earlier..."

October 21 - Bloomberg (Tracy Withers): "New Zealand's annual inflation rate accelerated to the fastest pace in more than 18 years in September, fanned by fuel and food costs that have hastened the nation's slide into a recession. The consumer prices index rose 5.1% in the year..., the most since 1990..."

Bursting Bubble Economy Watch:

October 21 - Wall Street Journal (Joe White): "Baby Boomers have pumped up the global economy with their profligate ways for nearly two decades. It's been a great party. Now the music's over. Generalizations about the 79 million people born between 1946 and 1964 are overdone and easy to debunk... But what Baby Boomers of all persuasions have done, without dispute and to an unprecedented degree, is spend money instead of saving it... When Boomers ran out of cash, they financed their dreams. The U.S. household saving rate plunged to 2% of income in the 2000-2005 period, when Boomers were hitting their earning peak, from 10% during the early 1980s."

October 20 - Bloomberg (Rich Miller): "The U.S. may be on its way to becoming a nation of savers, whether Americans like it or not. With home and stock prices declining and credit hard to come by, consumers who have fallen out of the savings habit are being forced to curb borrowing and rein in spending. That is bad news for companies catering to them, which will have to retrench as well. Detroit automakers may need to slash costs and merge... Shopping malls might be forced to shut as retail traffic trails off. Hotels may have to shelve expansion plans as vacationers become stingier..."

October 24 - Associated Press: "Traders and investment bankers might have more to worry about than dwindling bonus pools this year as mass firings on Wall Street are set to hit a record. The fallout from this year's global credit crisis has claimed jobs throughout Wall Street, from hedge fund managers to floor traders and beyond. More than 110,000 people have lost their jobs so far this year, and some industry experts forecast it could come close to 200,000 before the year is over... 'Wall Street the way we know it is, frankly, gone,' said Michael Williams, dean of the graduate school of business at Touro College in New York."

October 22 - Wall Street Journal (Scott Kilman): "The Farm Belt, one of the hottest parts of the U.S. economy in recent years, is rapidly cooling. The Midwest faces plunging crop prices and stubbornly high production costs. Corn prices have dropped from $7.54 a bushel around July Fourth in central Iowa to just $3.81 a bushel on Tuesday. But growers are hearing from suppliers that fertilizer and seed costs could rise by more than 40% each for next spring's plantings... Many Midwest farmers worry that the combination of lower crop prices and high costs will usher to an end, by next year, one of the most flush periods in American farm history."

October 22 - Wall Street Journal (Matthew Futterman): "The Tampa Bay Rays have slayed the big-market bullies from New York, Chicago and Boston, but the team will soon face a much greater foe. 'The economy could kill us,' says Stuart Sternberg, the team's principal owner and a former partner at Goldman Sachs... But Mr. Sternberg has a problem: The Rays, he says, can barely afford their $44 million payroll with their current attendance.... Once the glamour of October baseball fades, the Rays will need to build a stable fan base in a region that has never truly embraced them -- and it must do so during an economic crisis that is worse in Florida than nearly anywhere else."

October 23 - Bloomberg (Gene Laverty): "New sponsorship money for Nascar race teams is down about 10% this year and may fall more in 2009 as the financial crisis takes a toll on the most-watched U.S. motorsports circuit, the head of the racing league said."

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

October 23 - Bloomberg (Dan Levy): "U.S. foreclosure filings increased 71% in the third quarter from a year earlier to the highest on record as home prices fell and stricter mortgage standards made it harder for homeowners to sell or refinance, RealtyTrac said. A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on in the quarter, the most since records began in January 2005..."

GSE Watch:

October 20 - Bloomberg (Jody Shenn): "Fannie Mae and Freddie Mac... said they are rethinking their policies on investing and bond-guarantee pricing to provide aid to the housing market. 'I want to assure you we at Fannie Mae are doing all we possibly can,' Fannie CEO Herb Allison said... He said the company is putting less emphasis on investment returns and more of a focus on helping the market. Fannie is buying or guaranteeing about $40 billion of new loans a month... Allison said. Allison and Freddie CEO David Moffett both said they are reviewing the fees charged to lender as another option to help the market."

October 23 - Bloomberg (Dawn Kopecki): "Fannie Mae and Freddie Mac's government-run conservatorship provides an 'explicit guarantee to existing and future debt holders,' Federal Housing Finance Agency Director James Lockhart said. FHFA's seizure of the mortgage-finance companies last month and the U.S. Treasury's pledge of $200 billion in funding and other access to credit is 'effectively' a guarantee of Fannie and Freddie's corporate debt and mortgage-backed securities, Lockhart told the Senate Banking Committee..."

October 21 - Bloomberg (Dan Levy): "The U.S. Mortgage Bankers Association plans to ask the Federal Housing Finance Agency to increase the limit for Fannie Mae and Freddie Mac purchases or guarantees of single-family mortgages to $625,500..."

Real Estate Watch:

October 22 - Bloomberg (Bob Willis): "Mortgage applications in the U.S. fell last week to the lowest level in almost eight years as the worst financial crisis in seven decades dried up lending..."

October 22 - Bloomberg (Dan Levy): "U.S. new-home sales will fall 12% next year as housing starts drop by a record, Mortgage Bankers Association Chief Economist Jay Brinkmann said... U.S. housing starts will drop to 525,000 in the second quarter of 2009, a record 70% decline from the peak in the third quarter of 2005..."

Speculator Watch:

October 24 - Dow Jones (Jessica Papini): "Citadel Investment Services said in an impromptu conference call held with noteholders that its losses in its funds were not due to counterparty risk, but the dislocation in the market. Citadel stated the current market environment is 'unprecedented,' but the firm is 'significantly diversified.' Citadel's largest fund, Kensington, is down 35% year to date, Citadel founder Kenneth Griffin said on the call."

October 24 - Dow Jones (Marietta Cauchi): "Hedge fund redemptions could reach as much as $330 billion over the next three to six months as panicked investors continue to cash out, people involved in the sector told Dow Jones Newswires. Even the best-performing managers expect withdrawals of up to 15% of their fund value, while several more of the weaker funds will be forced to close..."

October 23 - Bloomberg (Tom Cahill and Ben Livesey): "Emmanuel Roman, the co-chief executive officer at GLG Partners Inc., said as many as 30% of hedge funds will close and the U.S. will regulate the $1.7 trillion industry. 'In a fairly Darwinian manner, many hedge funds will simply disappear,' Roman told the Hedge 2008 conference... U.S. regulators will 'find a way to force regulation,' said Roman... The firm... now manages about $24 billion in assets."

October 22 - Wall Street Journal (Joseph Checkler): "Growing numbers of hedge-fund investors, desperate to redeem their money and avoid further losses, are turning to a secondary market in which to sell their stakes. It can be difficult for investors to redeem stakes in hedge funds. A flood of investor-redemption requests has triggered the activation of several hedge funds' automatic 'gates,' which limit the percentage of a fund's assets that can be redeemed... Other funds have voluntarily suspended redemptions altogether, and many people fear that more gates and suspensions are coming. That concern has forced investors to look for more creative and immediate ways to get out."

October 20 - Bloomberg (Saijel Kishan): "Millennium Global Investments Ltd., the London-based money manager founded by former Goldman Sachs Group Inc. executive Michael Huttman, is liquidating a hedge fund that buys emerging-market debt after lenders withdrew credit..."

Muni Watch:

October 20 - Bloomberg (Terrence Dopp): "New Jersey faces a shortfall of as much as $3.5 billion next fiscal year as fallout from the global economic crisis damps state finances, a budget analyst said."

New York Watch:

October 21 - Bloomberg (Henry Goldman): "New York City's $59 billion budget for the current fiscal year, which had been balanced, has a $500 million revenue gap... The city's financial crisis will extend into the 2010 fiscal year that begins in July when officials will have to find $3.3 billion in new revenue or expense reductions... The figure is $1 billion more than officials predicted in June. 'We originally had 2010 with a $2.3 billion deficit,' Bloomberg said... 'That's ballooned by a billion dollars because tax revenues are certainly not stronger and look to be a little bit lower.'"

October 20 - Bloomberg (Joi Preciphs): "New York Governor David Paterson said all possibilities are being considered to close the state's budget shortfall. 'Everything is eventually on the table,' Paterson said... The state may need $2 billion to $2.5 billion to close the gap just for this year, he said."

October 23 - Bloomberg (Sharon L. Lynch): "Long Island house prices fell the most in at least four years... as the national housing slump extended its grip on New York City's suburbs. The median price of a one- to three-family house dropped 6.9% to $427,388 from a year ago..."

California Watch:

October 21 - Bloomberg (Michael B. Marois): "California Governor Arnold Schwarzenegger said lawmakers will need to return for an emergency session to cut spending or raise taxes to address a $3 billion budget shortfall. Lawmakers would likely need to come back in November, once Schwarzenegger's finance office completes an analysis of how big the hole might be..."

October 21 - Bloomberg (Daniel Taub): "Home sales in the San Francisco Bay Area rose 45% last month, the biggest increase in more than six years, as buyers took advantage of discounted prices on foreclosed homes, MDA DataQuick said... Almost 42% of all existing homes sold across the Bay Area in September had been foreclosed upon..."

October 21 - Dataquick: "Southern California home sales shot up by an unprecedented 65% last month from the dismal, record lows of a year ago... Foreclosure resales rose to half of all transactions."

History's Biggest Margin Call:

The entire world was seemingly positioned for a particular financial backdrop and received an altogether different one. Some years ago I wrote something to the effect that "financial crisis is like Christmas." After all, during the Greenspan era periods of heightened financial and/or economic pressures were almost cause for celebration within the leveraged speculating community. Aggressive rate cuts and "easy money" were the trumpeted solution to any problem, which equated to easy financial fortunes for the savvy market operators. Over time this culture of leveraging, speculation and financial shenanigans fanned out across the globe - throughout finance, commerce and government endeavors.

This mindset was firmly ingrained when our subprime crisis erupted in the spring of 2007. The whole world apparently was of the view that the unfolding U.S. mortgage and housing crisis ensured "easy money" as far as eyes could see. "Helicopter Ben" was at the controls; dollar devaluation was in full-force; dollar liquidity was barreling out of the U.S. Credit system; financial systems across the globe had succumbed to Credit Bubble dynamics; inflationary fires blazed everywhere; and speculative finance was literally inundating the world. In most places, making "money" had never been so easy.

This backdrop created epic price distortions and some incredibly maligned market perceptions. It's now clear that unprecedented leverage became deeply embedded in markets and economies everywhere. These excesses had been unfolding over a longer period of time, but terminal speculative "blow off" dynamics really engulfed the global economy when U.S. housing vulnerability began to emerge. A confluence of many extraordinary and related dynamics was severely undermining the global system. The U.S. financial sector was desperately overheated, the U.S. mortgage/housing Bubble was bursting, the expansive international Bubble in leveraged speculation was in "blow-off" mode, global imbalances were at dangerous extremes, and inflationary psychology took hold throughout global financial systems, asset markets and real economies. It was an unparalleled period of synchronized global Credit, asset market, and economic Bubbles.

Only today is it readily apparent what a mess the global pricing system had become. Think in terms of a net Trillion plus U.S. dollars inflating the world each year, of which a large part was recycled through Chinese and Asian purchases of U.S. securities (inflating domestic Credit systems and demand in the process). Think in terms of rapidly inflating economies with several billion consumers (Brazil, Russia, India, and China). Think in terms of the surge of inflation that forced thoughtful policymakers in economies such as Australia, New Zealand and elsewhere to significantly tighten monetary policy. Rising rates, however, only enticed more disruptive speculative finance flowing loosely from (low-yielding) Credit systems including the U.S., Japan, and Switzerland. Speculation could have been as simple as shorting a low-yielding security anyplace to finance a higher-returning asset anywhere. Or, why not structure a complex leveraged derivative transaction that, say, borrowed in a cheap currency (i.e. yen or swissy), played the upside of rising emerging equities markets, and at the same time had triggers to hedge underlying currency and/or market exposure. And the counterparty exposure for a lot hedges could be wrapped up in collateralized debt obligations (CDOs).

And the more loose global finance inflated the world, the more the leveraged speculating community inundated "commodity" economies such as Australia, Canada, Brazil, South Africa and Russia. Of course, speculative inflows ignited domestic asset market and Credit systems, in the process fostering dangerous Bubbles. And in concert with the deflating dollar, speculating on virtually any emerging market or commodity was immediately profitable. The more leverage the stronger the returns, and the world was introduced to the concept of the billionaire hedge fund manager. In commodities markets, wild price inflation and volatility forced both producers and commodity buyers to employ aggressive hedging strategies. More often than not, derivatives employed trend-following trading mechanisms. These "hedging" mechanisms covertly created huge buying with leverage on the upside and, more recently, liquidation and a collapse of prices and leverage on the downside.

It was Hyman Minsky "Ponzi Finance" on a grand scale. It was also a bout of George Soros "Reflexivity" of epic proportions. The more markets perceived a New Era of endless cheap finance and rising asset and commodities prices, the more U.S. and global Credit systems created the necessary inflationary fuel to perpetuate the Bubble. Markets believed the hedge fund and private equity game could go on indefinitely. Participants thought that Wall Street would securitize loans and be in a position to expand finance forever. Prime brokers would always be willing outlets to finance leveraged securities holdings on the cheap.

The derivatives market would always provide an efficient and effective marketplace for placing bets, as well as for hedging myriad risks. Why not speculate aggressively when insurance was so easy to obtain? At the same time, contemporary "repo" and money markets were viewed as an endless source of inexpensive finance. And, in the event of anything unexpected, the Fed (and global central bankers) would always ensure liquid markets - and inflate as required. Again, why not speculate? The markets had unwavering faith in enlightened contemporary finance and central banking.

But it was all part of the greatest mania in human history. As it turned out, the markets could not have been more wrong on the sustainability of the financial backdrop, the economic environment, asset price inflation, and all types of sophisticated financial structures and strategies. Markets were not only absolutely wrong, they were absolutely wrong on so many things on such an unprecedented global basis. Now things are blowing up. In the thick of it all, confidence in the securitization, "repo" and derivatives markets has been broken.

As a result, Wall Street simply no longer has the wherewithal to apportion ample finance for securities speculation. Without speculative demand for high-yielding loans and securities, Bubble economies are starved of sufficient finance. And with asset markets bursting everywhere, this has quickly evolved into History's Biggest Margin Call. Scores of derivative structures used to speculate in the asset Bubbles have collapsed - because of counterparty issues, illiquidity, or the structures just didn't make any sense to begin with. Moreover, the whole notion that derivatives would provide an effective hedging mechanism is proving a fallacy. Again, counterparty issues and illiquidity are the culprits. Markets can't hedge themselves, as there is no one with the wherewithal to take the other side of the trade (especially during devastating bear markets). In particular, the Credit default swap structure is proving an unmitigated disaster - for bond, equities and currency markets. Hopefully this period of liquidation and deleveraging is over very soon.

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
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