Q4 2009 "Flow of Funds"

By: Doug Noland | Fri, Mar 12, 2010
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For the week, the S&P500 gained 1.0% (up 3.1% y-t-d), and the Dow added 0.6% (up 1.9% y-t-d). The Banks surged 3.8% (up 18.1%), while the Broker/Dealers increased 1.1% (up 3.3%). The S&P500 Regional Bank index jumped 5.5%, increasing y-t-d gains to 24.1%. The Morgan Stanley Cyclicals added 1.3% (up 5.7%), and the Transports jumped 3.1% (up 5.5%). The Morgan Stanley Consumer index increased 0.8% (up 3.6%), while the Utilities slipped 0.6% (down 5.1%). The Morgan Stanley Retail index rose 2.3%, increasing 2010 gains to 12.6%. The S&P Supercomposite Restaurant index jumped 4.0% this week, boosting y-t-d gains to 8.5%. The broader market posted another solid week. The S&P 400 Mid-Caps gained 1.7% (up 7.9%), and the small cap Russell 2000 rose 1.6% (up 8.2%). The Nasdaq100 gained 1.9% (up 3.4%), and the Morgan Stanley High Tech index increased 2.2% (up 2.5%). The Semiconductors increased 1.1% (down 1.3%). The InteractiveWeek Internet index jumped 2.8% (up 5.0%). The Biotechs rose another 4.7%, increasing 2010 gains to 30.3%. With bullion down $32, the HUI gold index dropped 2.9% (down 3.1%).

One-month Treasury bill rates ended the week at 9 bps, and three-month bills closed at 14 bps. Two-year government yields rose 6 bps to 0.88%. Five-year T-note yields increased 8 bps to 2.34%. Ten-year yields gained 2 bps to 3.70%. Long bond yields slipped 2 bps to 4.63%. Benchmark Fannie MBS yields rose 2 bps to 4.34%. The spread between 10-year Treasury and benchmark MBS yields was little changed at 64 bps. Agency 10-yr debt spreads narrowed one to 35 bps. The implied yield on December 2010 eurodollar futures gained 2.5 bps to 0.90%. The 10-year dollar swap spread was little changed at 4.75, while the 30-year swap spread increased 1.75 to negative 15. Corporate bond spreads were narrower. An index of investment grade bond spreads narrowed 3 to 82 bps, and an index of junk spreads narrowed 14 to 522 bps.

It was a huge week for debt issuance. Investment grade issuers included Novartis $5.0bn, Medtronic $3.0bn, Directv $3.0bn, Bank of America $2.5bn, Prologis $1.1bn, Amgen $1.0bn, American Honda Finance $1.0bn, Anadarko Petroleum $750 million, Ameriprise Financial $750 million, CME Group $612 million, Partnerre Finance $500 million, Southern California Edison $500 million, Hasbro $500 million, St. Jude Medical $450 million, Cliffs Natural $400 million, Georgia Power $350 million, Airgas $300 million, Premier Aircraft Leasing $300 million, Nstar Electric $300 million, Renre North America $250 million, and Columbus Southern Power $150 million.

Junk issuers included GMAC $1.5bn, MGM Mirage $845 million, Cincinnati Bell $625 million, Amsted Industries $500 million, Steel Dynamics $350 million, Huntsman International $350 million, Building Materials Corp $325 million, Alion Science and Tech $310 million, Parker Drilling $300 million, Boise Paper $300 million, Reckson $250 million, Suburban Propane $250 million, Sonic Automotive $210 million, International Coal Group $200 million, and Prestige Brands $150 million.

The convert market even came to life. Issues included Rovi Corp $400 million, Ciena $375 million, Health Care REIT $340 million and International Coal Group $100 million.

International dollar debt sales remain robust. Issuers included Bank of England $2.0bn, Royal Bank of Scotland $2.0bn, Turkey $1.0bn, BNP Paribas $750 million, Danske Bank $750 million, Shinhan Bank $700 million, Ceva Group $625 million, Axtel SAB $490 million, Transalta $300 million and Garda World Security $250 million.

U.K. 10-year gilt yields increased 3 bps to 4.09%, and German bund yields added one basis point to 3.17%. Bond yields in Greece declined 8 bps to 6.22%. The German DAX equities index gained 1.2% (down 0.2% y-t-d). Japanese 10-year "JGB" yields rose 3.5 bps to 1.34%. The Nikkei 225 surged 3.7% (up 1.9%). Emerging markets were mostly stronger. For the week, Brazil's Bovespa equities index increased 0.7% (up 1.1%), and Mexico's Bolsa added 0.4% (up 1.4%). Russia's RTS equities index gained 1.7% (up 6.2%). India's Sensex equities index increased 1.0% (down 1.7%). China's Shanghai Exchange slipped 0.6% (down 8.0%). Brazil's benchmark dollar bond yields dropped 13 bps to 4.76%, and Mexico's benchmark bond yields sank 23 bps to 4.68%.

Freddie Mac 30-year fixed mortgage rates dipped 2 bps to 4.95% (down 8bps y-o-y). Fifteen-year fixed rates declined one basis point to 4.32% (down 32bps y-o-y). One-year ARMs fell 5 bps to 4.22% (down 58bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 5 bps to 5.82% (down 110bps y-o-y).

Federal Reserve Credit was little changed last week at $2.263 TN. Fed Credit is up $385bn, or 20.5%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 3/10) jumped $12.9bn to a record $2.982 TN. "Custody holdings" expanded $390bn, or 15.1%, over the past year.

M2 (narrow) "money" supply declined $11.2bn to $8.527 TN (week of 3/1). Narrow "money" has increased $14.3bn y-t-d. Over the past year, M2 expanded 1.9%. For the week, Currency added $1.4bn, while Demand & Checkable Deposits declined $6.8bn. Savings Deposits rose $6.5bn, while Small Denominated Deposits fell $4.7bn. Retail Money Funds dropped $7.5bn.

Total Money Market Fund assets (from Invest Co Inst) sank $77.4bn to $3.090 TN. In the first ten weeks of the year, money fund assets have dropped $203bn, with a one-year drop of $816bn, or 20.9%.

Total Commercial Paper outstanding increased $11.2bn last week to $1.145 TN. CP has declined $25.2bn, or 11.2% annualized year-to-date, and was down $339bn over the past year (22.9%).

International reserve assets (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.180 TN y-o-y, or 17.8%, to $7.820 TN.

Global Credit Market Watch:

March 12 - Bloomberg (James Regan and David Yong): "Emerging-market and high-yield bond funds each took in more than $1 billion in the week ended March 10, EPFR Global said, the most since the research firm began publishing weekly data... a decade ago."

March 12 - Bloomberg (Emre Peker): "CF Industries Holdings Inc., the second-largest producer of nitrogenous fertilizer, cut the interest rates and almost doubled the size of bank debt it may use to finance a takeover of Terra Industries Inc."

March 11 - Wall Street Journal (Michael Aneiro): "Companies are aggressively borrowing in the debt markets once again... In the U.S., bond sales by companies such as Bank of America Corp. and GMAC Financial Services are on pace to conclude their busiest week since the beginning of the year. In Europe, borrowing by companies so far in March is already more than 60% of February's totals... So far in 2010, U.S. corporations have issued $195.2 billion of debt, excluding government-guaranteed bonds, according to... Dealogic, up from $166.8 billion during the same period in 2009... Some $375.4 billion flowed into bond mutual funds last year, compared with an $8.7 billion outflow from equity funds, according to data compiled by the Investment Company Institute."

March 12 - Bloomberg (Chris Fournier): "Canadian corporations are on a pace to issue the most debt during a first quarter in four years..."

March 10 - Bloomberg (Katrina Nicholas): "The lowest relative borrowing costs in more than two years and demand from international investors is driving Asian companies to sell record amounts of dollar- denominated bonds. BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of Bank of China Ltd.,and Chinese developer Evergrande Real Estate Group Ltd. led Asia-Pacific borrowers selling $38.4 billion of dollar debt this year, the fastest start on record..."

March 10 - Bloomberg (Denis Maternovsky): "Yields on Russian dollar bonds fell to less than 5% for the first time as oil rallied and investors' appetite for riskier assets increased ahead of the country's first foreign-currency bond sale in 12 years."

March 12 - Bloomberg (Steve Bryant): "Turkey sold $1 billion of 11-year dollar bonds at the lowest yield on record after the government decided it didn't need International Monetary Fund help to meet the country's financing needs... Turkey sold the securities to yield 2.03 percentage points above 10-year U.S. Treasuries."

March 8 - Bloomberg (Tasneem Brogger): "Icelanders' rejection of a foreign depositor bill complicates the prospect of a settlement and may leave the government unable to resolve a dispute with the U.K. and the Dutch for another year, Moody's... said. 'Potentially we could see this dragging on until the middle of 2011,' Moody's Senior Credit Analyst Kenneth Orchard said... 'The voting down of the referendum is going to complicate getting a deal.'"

Global Government Finance Bubble Watch:

March 8 - Bloomberg (Dakin Campbell): "U.S. regulators are encouraging public pension funds that control more than $2 trillion to inject capital directly into the banking system by buying failed lenders... The Federal Deposit Insurance Corp. is trying to attract pension funds that want to buy stakes or assets of distressed bank-holding companies, according to two of the people."

March 12 - Bloomberg (John Fraher): "European Union finance ministers will discuss next week whether any Greek bailout should be funded by EU bonds guaranteed by euro region governments, said... people briefed on preparations for March 15-16 meetings."

March 12 - Bloomberg (Caroline Hyde and Sonja Cheung): "Portuguese, Italian and Spanish companies are rushing to sell bonds, taking advantage of investors' demand for corporate debt after Greece's budget crisis froze issuance... 'There's pure naked demand for corporate bonds as investors need new paper,' said Suki Mann, head of credit strategy at Societe Generale..."

Currency Watch:

The dollar index was down 0.8% this week to 79.80 (up 2.5% y-t-d). For the week on the upside, the Swiss franc increased 1.5%, the Norwegian krone 1.1%, the South Korean won 1.1%, the Canadian dollar 1.1%, the Danish krone 1.0%, the Euro 1.0%, the Swedish krona 0.9%, the Brazilian real 0.9%, the Australian dollar 0.8%, the Mexican peso 0.7%, and the New Zealand dollar 0.6% For the week on the downside, the Japanese yen dipped 0.2%.

Commodities Watch:

March 10 - Bloomberg (Jesse Riseborough): "Iron ore contract prices may surge 60% to a record this year as demand from China increases and steel production recovers in developed economies, Goldman Sachs JBWere Pty said."

The CRB index declined 1.3% (down 3.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) slipped 0.5% (down 0.2% y-t-d). Gold dropped 2.8% to $1,102 (up 0.5% y-t-d). Silver declined 1.6% to $17.10 (up 1.5% y-t-d). April Crude fell 28 cents to $81.22 (up 2.3% y-t-d). April Gasoline dipped 0.6% (up 9.9% y-t-d), and April Natural Gas lost 4.6% (down 21.3% y-t-d). May Copper declined 0.8% (up 1.3% y-t-d). May Wheat fell 1.7% (down 10% y-t-d), and May Corn dropped 3.0% (down 12% y-t-d).

China Bubble Watch:

March 8 - Bloomberg: "China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases. The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as early as this month... A crackdown on such loans, estimated at about 11.4 trillion yuan ($1.7 trillion) at the end of 2009 by Northwestern University Professor Victor Shih, could trigger a 'gigantic wave' of bad debts as projects are left without funding, Shih said... 'By striking the fear of God into lenders, regulators hope to get them to turn off the tap," said Patrick Chovanec, a professor at Tsinghua University in Beijing. 'Banks have lent on the assumption that a lot of these infrastructure projects are risk-free, but many had no creditworthiness beside the guarantees.'"

March 11 - Bloomberg: "China's lending fell in February after the government told banks to limit credit growth... Banks extended 700.1 billion yuan ($103 billion) of local-currency loans, down from 1.39 trillion yuan in January and 1.07 trillion yuan a year earlier... M2... rose 25.5%."

March 11 - Bloomberg: "China's inflation reached a 16-month high, industrial output climbed and new loans exceeded forecasts, adding to the case for the government to pare back stimulus measures. Consumer prices rose 2.7% in February from a year earlier... Production rose 20.7% in the first two months of 2010, the most in more than five years... 'Inflation may top the 3% policy target by April, which is bound to trigger further monetary tightening,' said Dariusz Kowalczyk, chief investment strategist at SJS Markets..."

March 10 - Bloomberg: "China's exports rose more than forecast in February and property prices jumped the most in almost two years, adding pressure on policy makers to pare stimulus measures adopted during the global recession. Shipments abroad gained 46 percent in February from a year before after a 21% advance in January..."

March 10 - Bloomberg (Chia-Peck Wong): "China's property prices rose at the fastest pace in almost two years in February... Residential and commercial real-estate prices in 70 cities climbed 10.7% from a year earlier... That topped a gain of 9.5% in January. Chinese officials are trying to reduce the risk of asset bubbles, resurgent inflation and bad loans for banks after flooding the world's fastest-growing economy with cash to drive a recovery."

March 9 - Bloomberg (Chinmei Sung): "Office rents in China will rise as much as 20% this year as the global economy recovers and the supply of new buildings slows, Jones Lang LaSalle Inc. said."

March 10 - Bloomberg: "China's trade surplus shrank to the lowest level in a year in February as a surge in imports signaled the nation may start to outshine the U.S. as a destination for the world's goods. Imports rose a more-than-estimated 44.7% from a year ago... The surplus was $7.61 billion, and exports gained 45.7%."

March 10 - Bloomberg (Mark Lee): "China Mobile Ltd., the world's biggest phone company by market value, agreed to buy 20% of Shanghai Pudong Development Bank Co. for 39.8 billion yuan ($5.8bn) to expand its electronic-payment business."

March 8 - Bloomberg (Stanley James): "China is in talks to extend its high-speed rail network to about 17 countries, the South China Morning Post reported... China is negotiating with the countries, most of which are in southeast and central Asia, about trading resources for the high-speed rail technology and equipment..."

Japan Watch:

March 12 - Bloomberg (Masahiro Hidaka and Mayumi Otsuma): "Japan's central bank may seek next week to counter a contraction of its balance sheet caused by the month-end expiration of an emergency-credit program as deflation persists in the world's second-largest economy. The Bank of Japan's options include expanding a 10 trillion yen ($111 billion) fund providing loans to banks, according to two central bank officials..."

India Watch:

March 12 - Bloomberg (Kartik Goyal): "India's industrial production rose 16.7% in January, diminishing spare capacity and contributing to inflationary pressures that may spur the central bank to raise interest rates within weeks."

March 10 - Bloomberg (Madelene Pearson and Natalie Obiko Pearson): "Indian companies are stepping up interest to secure coal resources in Indonesia and Australia to meet the power needs of the world's second-most populous country, Australia & New Zealand Banking Group Ltd. said. 'We are seeing a lot of flow in terms of merger and acquisition interest or off-take interest from India into both Indonesia and Australia,' Glenn Porritt, executive director... said..."

Asia Bubble Watch:

March 8 - Bloomberg (Bomi Lim): "South Korea will propose a global safety net to shield emerging economies from the risks triggered by external crises when the leaders of Asia's fourth-biggest economy host the Group of 20 Nations summit in November. South Korea's government was forced to guarantee banks' foreign-currency debt and sign bilateral currency swap agreements to fend off fallout from the collapse of the U.S. housing market and the contagion that then spread through global credit and financial markets."

March 12 - Bloomberg (Aloysius Unditu): "Indonesia's sovereign debt rating was raised to the highest level in 12 years by Standard & Poor's after the central bank increased the country's economic growth forecasts..."

March 10 - Bloomberg (Karl Lester M. Yap and Cecilia Yap): "Philippine exports rose at the fastest pace in more than 14 years in January as demand for electronics goods gained amid the global economic recovery. The peso climbed to an eight-week high. Shipments abroad increased 42.5% from a year earlier to $3.58 billion..."

Latin America Bubble Watch:

March 10 - Bloomberg (Andre Soliani): "Brazil's gross domestic product may grow as much as 6% this year as the economy creates 2 million government-registered jobs, Budget Minister Paulo Bernardo said."

March 12 - Bloomberg (Eliana Raszewski): "Argentine consumer prices rose in February at the fastest pace in almost four years... Prices rose 1.2% from January... Annual inflation was 9.1%, the fastest pace since July 2008."

Unbalanced Global Economy Watch:

March 12 - Bloomberg (Alexandre Deslongchamps): "Canada created more jobs than expected in February and the jobless rate fell to a 10-month low... The jobless rate fell to 8.2%..."

March 9 - Bloomberg (Scott Hamilton): "The U.K. trade deficit unexpectedly swelled in January to the widest in 17 months... The goods-trade gap was 8 billion pounds ($12bn), the most since August 2008..."

March 12 - Bloomberg (Simone Meier): "European industrial output rose the most in more than two decades in January... Output in the economy of the 16 nations using the euro jumped 1.7% from December..."

Bubble Economy Watch:

March 8 - Bloomberg (Anthony Feld and Courtney Schlisserman): "U.S. state and local governments are likely to keep cutting jobs even as the broader labor market shows signs of emerging from the worst slump since World War II, economists said. ... combined employment by state and local governments fell for eight straight months through February. The streak of losses was the longest since two years of declines ending in 1983. State and local governments, which account for about 13% of gross domestic product, have so far cut a total of 192,000 jobs since August 2008..."

March 8 - Bloomberg (Dan Levy): "In California's Napa Valley, producer of the most expensive U.S. wines, 2010 may be a vintage year for foreclosures... As many as 10 wineries and vineyards in Napa will change hands in distressed sales or foreclosures this year and next, up from none in 2008...'We have 250 vintner clients saying this downturn is the worst in 20 years," Bill Stevens, manager of [Silicon Valley Bank's] wine division in St. Helena, California, said... 'Anybody who was late to the party won't have staying power.'"

Central Bank Watch:

March 10 - Bloomberg (Steve Matthews and Scott Lanman): "The Federal Reserve's pledge to keep interest rates close to zero for an 'extended period' has come under criticism from policy makers who say it's restricting their room to maneuver as the economy recovers. Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27... Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed's Charles Plosser have also expressed reservations. The Fed presidents have said the phrase... might reduce the central bank's flexibility to raise interest rates or mislead investors into believing the Fed has a specific date in mind."

Fiscal Watch:

March 11 - Bloomberg (Vincent Del Giudice): "The U.S. budget deficit widened to a record in February... The excess of spending over revenue increased to $221 billion last month, compared with a shortfall of $194 billion in February 2009... The figures show the deficit this year will likely surpass the record $1.4 trillion in the fiscal year that ended in September... Spending for February increased 17% from the same month a year ago, to $328.4 billion. Revenue and other income rose 23% to $107.5 billion, marking the first increase in receipts since April 2008..."

Real Estate Watch:

March 12 - Bloomberg (Scott Hamilton): "U.K. house prices increased in February at the fastest pace in more than seven years... The average cost of a home in England and Wales was 222,008 pounds ($334,033), up 1.9% from January..."

GSE Watch:

March 12 - Dow Jones (Prabha Natarajan): "As the Federal Reserve wraps up its $1.25 trillion mortgage-purchase program, risk premiums on mortgage-backed securities backed by Fannie Mae and Freddie Mac have improved unexpectedly... In the past week, the market prices of these securities, also called pass-throughs, have improved so much that risk premiums, or differences in spreads over comparable Treasury yields, are at the narrowest level of the year and pretty close to the firmest level last year."

Muni Watch:

March 10 - Bloomberg (Margaret Collins): "Investors in search of better returns poured $7.8 billion into high-yield municipal bond funds last year, pushing assets to a two-year high... 'People are starving for yield because rates are at zero,' said Paul Tramontano, co-chief executive officer of... Constellation Wealth Advisors... 'They're taking more risk than they think.'"

Speculation Watch:

March 10 - Bloomberg (Emily Thornton, Cristina Alesci and Jason Kelly): "Buyout funds sitting on half a trillion dollars committed by investors may need more than a decade to put the money to work if mergers and acquisitions continue at the current pace. Firms... announced $87 billion in deals over the past 12 months..."

March 11 - Bloomberg (Ben Moshinsky and Aaron Kirchfeld): "European politicians and regulators could initiate a continent-wide ban on speculative trading of sovereign credit-default swaps tomorrow. Making it stick without the Americans won't work. New York and London dominate swaps trading, and both have resisted greater regulation. Last year, U.S. regulators and Congress rejected a proposed ban on buying credit-default swaps without owning the underlying debt. Adair Turner, chairman of the U.K. Financial Services Authority, said yesterday that these so-called naked swaps weren't the 'key driver' of the Greek debt crisis and it would be wrong to rush to ban them."

 

Q4 2009 "Flow of Funds"

For all of 2009, U.S. Non-Financial Debt (NFD) expanded at a 3.3% rate, down from 2008's 5.9%. In nominal dollars, NFD expanded $1.116 TN, the smallest expansion since year 2000 ($865bn). There has been much discussion about the ongoing Credit contraction. For the year, Household Home Mortgage debt contracted $165bn, Consumer Credit contracted $113bn, and total Business borrowings contracted $200bn. I have tried to highlight the massive counterbalancing inflation of "federal" Credit. Federal Government (Treasury) Credit expanded a record $1.444 TN last year (2-yr gain of $2.683 TN) and GSE-Mortgage-Backed Securities grew $422bn (2-yr $920bn).

In the Domestic Financial Sector, borrowings fell an unprecedented $1.753 TN for the year. Commercial Bank Assets dropped $500bn, GSE Assets dropped $371bn, and the Asset-Backed Securities (ABS) market shrank $675bn. At the same time, the Fed's holdings of Agency and GSE-Backed Securities ballooned $979bn.

It was another extraordinary year in Credit and financial flow analysis. There are numerous complexities that make this a challenging endeavor. There were gigantic charge-offs (banks and GSEs) that reduced outstanding mortgage and consumer debt. Near zero interest rates also worked to reduce the amount of financial sector debt expansion created in the process of paying interest on outstanding liabilities (i.e. deposit liabilities increasing as interest is accrued to depositor accounts). It is also difficult to ascertain the various Credit impacts from the Fed's $1.0 TN monetization of MBS. Many factors make it difficult to gauge the true scope and nature of the Credit creation flowing to the real economy. It's my view that the $1.1 TN net increase of NFD likely understates the real expansion of system Credit/purchasing power for 2009.

I have asserted that the monetary and fiscal policy response to the 2008 bursting of the Wall Street/Mortgage Finance Bubble fostered the emergence of the Global Government Finance Bubble. Over the past 6 quarters, Treasury debt has jumped $2.531 TN, or 48%, to $7.782 TN. During the same period, federally-backed GSE-MBS expanded $624bn, or 13%, to $5.383 TN. Combined "federal" finance ballooned an incredible $3.155 TN in just 18 months. At the same time, the Federal Reserve's balance sheet jumped $1.315 TN, or 138%, to $2.267 TN.

Unprecedented policy responses sent a clear message: the securities markets are too big to fail. Sure, the massive fiscal stimulus mobilized purchasing power throughout the economy. And, yes, the Trillion monetized by the Bernanke Federal Reserve unleashed a wall of liquidity upon the markets. Yet there's another critically important facet of system stabilization: The historic collapse of risk premiums - especially in mortgage and corporate debt - can be at least partially explained by the market's perception that Washington will respond to future crises with the Powell Doctrine of overwhelming fiscal and monetary force.

The market today perceives that essentially no amount of stimulus or monetization is out of bounds. The Fed is there as a backstop bid for debt securities, while the Treasury and Federal Reserve have teamed to establish a floor under GDP/national income. Market malformations now lie at the heart of the unfolding Bubble and go a long way toward explaining the market's complacency when it comes to the simultaneous contraction in private-sector Credit and explosion of federal debt and obligations.

During Q4, Total System Credit (TSC) declined $132bn to $52.417 TN. TSC has declined for three consecutive quarters. Yet it has still increased 52% during the past six years, increasing from just over 300% of GDP to over 360% today. Over the past six years, Non-Financial Credit is up 57% and Financial Sector Credit has gained 42%.

Total Mortgage Debt (TMD) declined 2.1% during 2009 to $14.307 TN. TMD is flat over two years but is still up 72% over seven years. TMD contracted at a 3.2% rate during Q4, the same pace as Q3. Household Mortgage borrowings contracted at a 2.1% rate during Q4 (to $10.786 TN), an improvement from Q3's 3.4%. Commercial Mortgage Borrowings contracted at a 7.4% pace (to $2.486 TN), accelerating from Q3's 4.0% pace of decline.

The ABS market contracted another $186bn during Q4 to $3.394 TN. ABS was down $702bn, or 17.1%, for the year. Much of this decline is explained by the ongoing contraction in "private-label" MBS. There have been huge write-downs in this space. Yet there's an ever bigger factor. Low interest rates and myriad government programs have encouraged millions of borrowers to replace their old mortgages with new ones enjoying government (Fannie, Freddie and FHA) guarantees and much lower yields. Placing a government stamp on hundreds of billions of mortgages has been a major stabilizing force.

Lower debt service costs were not the only factor bolstering household consumption. Importantly, Household Assets rose $657bn during Q4 to $68.188 TN. For the year, Assets jumped $2.579 TN - recovering a chunk of 2008's $13.226 TN drop. Household Liabilities contracted $26bn during Q4 and were down $194bn for the year (1.4%) to $14.0 TN. Accordingly, Household Net Worth gained $682bn during Q4 to $54.176 TN. For the year, Net Worth jumped $2.772 TN. Net Worth has now returned to 2005 levels. For the year, Household Real Estate holdings were down $905bn (to $18.207bn), while Financial Assets were up $3.407 TN (to $45.115 TN).

National Income posted strong Q4 gains ($152bn). For the year, National Income was down only $22bn, or 0.2%, to $12.412 TN. Total Compensation declined slightly ($17bn) during Q4 to $7.735 TN. For the year, Total Comp was down $296bn, or 3.7%. There is no doubt that massive fiscal stimulus was instrumental in stabilizing system incomes at, arguably, rather inflated levels. National Income ended 2009 51% above where it began the decade, with Total Compensation 44% higher.

Q4 Federal Expenditures were up 15.1% y-o-y to an annualized $3.595 TN. Expenditures jumped to $3.466 TN for all of 2009. For comparison, expenditures were $2.573 TN in 2005, $2.728 TN in 2006, $2.897 TN in 2007 and $3.118 TN in 2008. Q4 Federal Receipts were down 8.8% y-o-y to $2.232 TN annualized. For the year, Receipts were down 10%.

State & Local government Q4 borrowings expanded at a 4.7% rate, up from Q4 2008's 0.2% but down from Q3 2009's 5.5%. For all of 2009, State & Local government debt expanded 4.8%, up from 2008's 2.5%. Q4 State & Local Receipts were up 3.5% y-o-y, while Expenditures gained 1.0%.

Returning to the financial sector, Bank Assets were little changed for the quarter at $14.137 TN. For the year, Assets were up $136.3bn, or 1% (largely explained by the acquisition of broker/dealer assets). Bank Credit, on the other hand, was down $371bn y-o-y to $9.301 TN. Down only 0.7% during Q4, Bank Credit stabilized going into year end. For the year, Bank holdings of government securities jumped 15.6% to $1.462 TN. Bank Mortgage loans were little changed for the year at $3.819 TN. Miscellaneous Bank Assets were up $417bn, or 12.1%, for the year to $3.868 TN. On the Bank Liability side, Deposits were up $466bn y-o-y to $7.642 TN.

Rest of World (ROW) Holdings of US assets jumped $290bn last year to $15.423 TN. ROW is up $3.90 TN over four years (despite 2008's $960bn decline). For 2009, total Treasury holdings jumped $503bn to $3.713 TN. Agency holdings dropped $130bn y-o-y to $1.315 TN. Corporate bond holdings declined $100bn to $2.357 TN.

Securities Broker/Dealer Assets expanded slightly during Q4 to $2.080 TN (down 6.2% y-o-y). Finance Company Assets contracted at a 9.9% rate during the quarter to $1.691 TN (down 8.7% y-o-y). Credit Unions expanded 5.9% annualized during Q4 to $885bn (up 8.9% y-o-y). REITs declined 5.9% (down 27% y-o-y). Life Insurance company Assets expanded 5.7% annualized to $4.819 TN (up 6.7% y-o-y). Money Market funds contracted $104bn during Q4 (to $3.59TN), with a 2009 decline of $499bn.

There were few surprises in the Z.1 report. The gains in Household Net Worth and National Income do help explain the decent recovery in consumption. The ongoing expansion of Treasury, GSE MBS and Federal Reserve Credit supports the Government Finance Bubble thesis. As we look forward to 2010 data, I would expect a meaningful uptick in the rate of system Credit expansion. It is my view that, in a more normal rate/liquidity environment, it will take in the neighborhood of $2.0 TN of system Credit growth to sustain our current economic structure. I expect that - until the debt markets say otherwise - the majority of this will be "federal" Credit.

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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