Bubble at the Fringe

By: Doug Noland | Fri, Aug 27, 2004
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UNEDITED!

Stocks generally added to recent gains. For the week, the Dow and S&P500 gained about 1%. The Transports added 0.6%, while the Utilities were about unchanged. The Morgan Stanley Cyclical and Morgan Stanley Consumer indices added 1%. The broader market gained as well, with the small cap Russell 2000 and S&P400 Mid-cap indices up about 1%. The technology rally continued. For the week, the NASDAQ100 and Morgan Stanley High Tech indices gained less than 2%. The Semiconductors actually declined 1%, while The Street.com Internet Index added 2% and the NASDAQ Telecommunications index gained 1.4%. The Biotechs jumped 2.5%. Financial stocks were strong, with the Broker/Dealers up 2% and the Banks up better than 1%. With bullion sinking $9.70, the HUI index declined 2%.

The Treasury market continues to trade well. For the week, 2-year Treasury yields added 2 basis points to 2.45%. Five-year Treasury yields were up 2 basis points to 3.43%. Ten-year yields were unchanged at 4.23%. Long-bond yields ended the week at 5.03%, down 1 basis point on the week. Benchmark Fannie Mae MBS yields were unchanged, in line with Treasuries. The spread (to 10-year Treasuries) on Fannie's 4 3/8% 2013 note narrowed 1 to 31, and the spread on Freddie's 4 ½ 2013 note was about unchanged at 30. The 10-year dollar swap spread rose 1.25 to 46.25. Corporate bond spreads were again little changed for the week. The implied yield on 3-month December Eurodollars rose 4 basis points to 2.215%.

Corporate debt issuance totaled a late-summer light $2.8 billion (from Bloomberg). Investment grade issuers included Citigroup $1.4 billion, Bank of America $750 million, Doral Financial $475 million, Gillette $300 million, Sovereign Bancorp $300 million, Diamond Offshore $250 million, Anthem $200 million, and Textron $200 million.

Junk bond funds reported inflows of $264 million for the week (from AMG). Junk issuance included Fairfax Financial $230 million.

Convert issuance included Century Aluminum $175 million.

Japanese 10-year JGB yields were 1 basis point higher for the week at 1.57%. Brazilian benchmark bond yields declined another 7 basis points to 9.51%, with yields at four-month lows. Mexican govt. yields increased 3 basis points this week to 5.45%. Russian 10-year Eurobond yields declined 10 basis points to 6.27%.

Freddie Mac posted 30-year fixed mortgage rates added one basis point this week to 5.82%. Fifteen-year fixed mortgage rates rose 2 basis points to 5.21%, which is about 110 basis points below the level from one year ago. One-year adjustable-rate mortgages could be had at 4.05%, up 4 basis points for the week. The Mortgage Bankers Association Purchase application index declined 5% last week. Purchase applications were up 19% from one year ago, with dollar volume up 31%. Refi applications declined 8%. The average Purchase mortgage was for $214,100, and the average ARM was $294,400. ARMs accounted for 32.1% of applications last week.

Broad money supply (M3) rose $11.9 billion (week of August 16). Year-to-date (33 weeks), broad money is up $459.8 billion, or 8.2% annualized. For the week, Currency added $1.1 billion. Demand & Checkable Deposits jumped $17.7 billion. Savings Deposits increased $4.1 billion. Saving Deposits have expanded $271.3 billion so far this year (13.5% annualized). Small Denominated Deposits added $0.7 billion. Retail Money Fund deposits dipped $2.5 billion. Institutional Money Fund deposits dropped $11.2 billion. Large Denominated Deposits gained $2.4 billion. Repurchase Agreements rose $4.7 billion, while Eurodollar deposits declined $5.2 billion.

Bank Credit was about unchanged for the week of August 18 at $6.60 Trillion. Bank Credit has expanded $328.4 billion during the first 33 weeks of the year, or 8.2% annualized. Securities holdings jumped $13.3 billion, while Loans & Leases dropped $13.2 billion. Commercial & Industrial loans added $1.9 billion, while Real Estate loans dipped $3.5 billion. Real Estate loans are up $189.3 billion y-t-d, or 13.4% annualized. Consumer loans gained $1.2 billion for the week, while Securities loans declined $5.1 billion. Other loans fell $7.7 billion. Elsewhere, Total Commercial Paper jumped $11.3 billion to $1.360 Trillion, the highest level since July of last year. Financial CP rose $10.9 billion to $1.23 Trillion, expanding at a 9.3% rate thus far this year. Non-financial CP added $0.3 billion (up 30% annualized y-t-d). Year-to-date, Total CP is up $91.7 billion, or 11.1% annualized. For comparison, Total CP declined $56.1 billion, or 4.2%, during 2003.

ABS issuance totaled $11.5 billion (from JPMorgan) this week. With two days to go, this month's $47 billion issuance is already 38% above August 2003. Year-to-date ABS issuance increased to $395 billion, 39% ahead of comparable 2003. Year-to-date Home Equity ABS issuance of $243 billion is running 80% above a year ago.

Fed Foreign "Custody" Holdings of Treasury, Agency Debt jumped another $12.1 billion to $1.278 Trillion. Year-to-date, Custody Holdings are up $211 billion, or 30.2% annualized. For comparison, Federal Reserve Credit has expanded $8.6 billion so far this year, or 1.8% annualized, to $755.2 billion.

Currency Watch:

August 27 - Bloomberg: "Venezuela President Hugo Chavez said the country's economy must move away from capitalism and large land holdings must be eliminated. 'I call on private businessmen to work together with us to build the new economy, transforming the capitalist economic model into a social, humanist and equality economy. The time has come to accelerate the transformation. The revolution has just begun.'"

Currency markets remain treacherous. The dollar index gained 1.8%, while Latin American currencies were notably impressive. The Brazilian real, gaining 0.4%, traded to a 16-week high. The "commodity" currencies suffered, with the Norwegian krone down 3.5%, the Australian dollar 2.9%, the New Zealand dollar 2.8%, and the South African rand 2.7%.

Commodities Watch:

August 27 - Bloomberg (Pratik Parija): "China imported 115.9 million metric tons of iron ore in the seven months ended July, 37 percent more than in the year-earlier period..."

Commodities, especially the energy sector, this week gave back some of recent strong gains. The CRB index dipped 2.2% this week, reducing y-t-d gains to 5.9%. With October crude sinking $3.54 to $43.18, the Goldman Sachs Commodities index declined 6.2% (year-to-date gains of 14.6%).

China Watch:

August 24 - Bloomberg (Samuel Shen): "China's central bank Governor Zhou Xiaochuan said banks should keep up lending curbs because the economy needs to slow more and inflation hasn't abated. 'The current economic expansion and inflationary pressure have not evidently eased,' Zhou said in a speech to a meeting of financial regulators in Beijing yesterday..."

August 24 - Bloomberg (Lily Nonomiya): "Japan's trade with China rose to a record $79 billion in the six months ended June 30, the Japan External Trade Organization said. Exports to China rose 36 percent to $35 billion... It was the sixth straight half-year of export gains... Imports rose 26 percent to $44 billion..."

August 26 - Bloomberg (Philip Lagerkranser): "Hong Kong's exports surged to a record last month as the city's ports handled more components bound for China and Chinese-made toys, clothes and computers en route to the U.S., Europe and Japan. Exports rose 17 percent from a year earlier..."

August 23 - Bloomberg (Philip Lagerkranser): "Hong Kong's economic growth may beat the government's 6 percent forecast this year as surging tourism and falling unemployment bolster demand, Financial Secretary Henry Tang said. 'Growth may exceed the 6 percent we have predicted,' Tang said in a speech at an economic conference in Hong Kong. Last year, Hong Kong's $159 billion economy expanded 3.3 percent after 2.3 percent growth in 2002."

August 23 - Bloomberg (Philip Lagerkranser): "Hong Kong ended a 68-month slide in consumer prices last month as rising tourism and falling unemployment stoked demand, allowing companies to raise prices. The consumer price index climbed 0.9 percent in July, the first increase since October 1998..."

Asia Inflation Watch:

August 26 - The Wall Street Journal (Laura Santini): "The smart money is coming back to Asia. Giant hedge funds are piling into the region, opining trading outposts in Hong Kong and Singapore and recruiting homegrown hedge-fund managers to oversee assets and identify investment opportunities... Hedge funds, for their part, are coming in search of bigger returns. This year has proven particularly difficult for global macro funds...which bet on relative price movements in securities around the world."

August 26 - Bloomberg (Julie Ziegler): "The World Bank, a global lender that advises developing nations on policy, is likely to raise its annual economic growth forecasts for East Asia in October, said Homi Kharas, the bank's chief economist for the region. 'This time around we're seeing a much more broad based recovery,' Kharas said... The bank in April forecast 6.3 percent growth this year and 5.9 percent in 2005 for the region, which excludes industrialized countries such as Japan. Kharas said both forecasts will likely be raised. Increased investment in China and other East Asian nations is now another pillar for growth, joining increases in exports and private consumption, Kharas said."

August 26 - Bloomberg (George Hsu): "Taiwan's export orders rose more than expected to a record in July as electronics manufacturers increased sales to China, the U.S. and Europe. Export orders -- indicative of shipments in one to three months -- rose 28 percent from a year earlier to $18.5 billion, matching June's gain..."

August 26 - Bloomberg (Theresa Tang): "Taiwan's M2 money supply growth in July rose 7.8 percent from a year earlier... M2 is the broadest measure of the island's money supply. Taiwan's money supply in May grew 8.6 percent, its fastest pace in almost five years."

August 23 - Bloomberg (Theresa Tang): "Taiwan's unemployment rate fell in July, sliding to a three-year low as record-low interest rates and surging exports prompt companies including AU Optronics Corp. and Chi Mei Optoelectronics Corp. to expand."

August 25 - Bloomberg (Daisuke Takato): "Japan's large-scale home electronic appliance stores had their biggest monthly sales gain in 3 ½ years, as the Athens Olympics stoked demand for flat-panel televisions and a hotter-than-usual summer increased shipments of air conditioners, industry figures showed. Sales in July rose 9.8 percent...compared with a year earlier..."

August 27 - Bloomberg (Seyoon Kim): "South Korea's inflation rate will exceed 4 percent this month, Finance Minister Lee Hun Jai said. Consumer prices may rise more than 4.5 percent from a year earlier and are expected to increase 0.8 percent to 0.9 percent from July..."

August 26 - Bloomberg (Anuchit Nguyen): "Thailand's exports last month rose 27 percent on rising sales of automobiles, rubber, rice and other products, the commerce ministry said."

August 27 - Bloomberg (Jun Ebias): "The Philippine central bank expects the inflation rate to climb to as much as 6.6 percent this month, its highest in more than three years, because of rising oil prices, Deputy Governor Amando Tetangco said."

August 25 - Bloomberg (Stephanie Phang): "Malaysia's economy expanded at its fastest pace in almost four years in the second quarter as domestic demand grew and manufacturers raised production to meet overseas orders. The central bank said full-year growth will probably top its current forecast of 6 percent to 6.5 percent expansion. Gross domestic product expanded 8 percent in the three months to June from a year earlier, accelerating from 7.6 percent growth in the first quarter..."

August 24 - Bloomberg (Cherian Thomas): "India's Prime Minister Manmohan Singh said the government will seek to ensure economic growth of 7 percent to 8 percent to generate jobs and help alleviate poverty as it presses ahead with economic change. 'One of the basic principles of governance is a commitment to ensure the economy grows at least 7 to 8 percent per annum in a sustained manner for a decade or more,' the prime minister said in New Delhi today..."

August 25 - Bloomberg (Ravil Shirodkar): "India's inflation rate, which is at a 3 1/2 year high, is a concern, said Ratan Tata, chairman of the Tata Group and a member of the central bank's board. 'We must all be concerned about rising prices. We should not be overtaken by our desire to increase corporate profits by raising prices.'"

August 26 - Bloomberg (Jason Folkmanis): "Vietnam's consumer prices rose this month at their fastest pace in more than eight years as food costs jumped... Consumer prices are 9.9 percent higher than they were in August last year, the biggest increase since December 1995..."

Global Reflation Watch:

August 26 - Bloomberg (Brian Swint): "The money-supply growth rate in the dozen euro nations, the European Central Bank's gauge of future inflation, unexpectedly accelerated for a second month in July. M3 grew at an annual pace of 5.5 percent after expanding 5.4 percent in June..."

August 26 - Bloomberg (Gonzalo Vina): "U.K. home-loan approvals fell 9.9 percent in July from the month earlier, the British Bankers' Association said, suggesting the housing market is beginning to cool. The number of mortgages approved dropped to 210,500, and were down 19.5 percent from July a year ago."

August 25 - Bloomberg (Halia Pavliva): "Russia, world's largest oil producer, said gross domestic product expanded 7.4 percent in the first seven months of the year because of high oil prices, Interfax newswire reported."

August 23 - Bloomberg (Halia Pavliva): "Russia, the world's largest oil producer, said its trade surplus widened by more than a quarter in the first half of the year from the same period a year ago as oil prices rose. Russia's trade surplus rose to $36.3 billion in the first half of the year, or 25.6 percent, from $28.9 billion in the same period a year ago... Exports rose faster than imports, increasing 25.2 percent to $78.6 billion, while imports increased 24.7 percent, to $42.3 billion... Crude oil shipments accounted for 28.4 percent of Russia's overall exports in the first half of the year..."

August 25 - Bloomberg (Carlos Caminada): "Brazil's current account surplus held close to a record in July, as world economic growth bolstered demand for Brazilian goods. The surplus in the current account, the broadest measure of a country's trade in goods and services, was $1.81 billion in July compared with a record $2.06 billion in June and a previous record of $1.48 billion in May... Economic growth in the U.S., China, Argentina and other countries has kept demand for Brazilian goods close to record highs, helping sustain inflows into South America's largest economy..."

August 23 - Bloomberg (Igor Munoz and Andrew J. Barden): "Chile's economy expanded 5.1 percent in the second quarter from the year-earlier period, the Chilean central bank said... The expansion was faster than 4.8 percent year-on-year growth in the first quarter..."

August 26 - Bloomberg (Helen Murphy): "Colombia's industrial output rose in June at its fastest pace in 15 months as manufacturers increased exports to neighboring Venezuela and local consumer demand boosted sales in an economy growing at its fastest since 1995."

California Bubble Watch:

The California Association of Realtors (C.A.R.) reported July Existing Home median prices at $463,540, down slightly from June's record but up 21.4% ($81,600) from July 2003. Prices were up 44% ($141,640) from July 2002. Sales volumes were up 7.4% from one year ago. "C.A.R.'s unsold inventory index, which measures the number of months needed to deplete the supply of homes on the market at the current sales rate, increased to more than a three-month supply for the first time in 17 months." Condo median prices were also down about 1% from June but, at $369,670, were up 27.8% y-o-y. By region, High Desert prices were up 49.6% y-o-y, Palm Springs/Lower Desert 39.5%, Riverside/San Bernardino 37.4%, San Diego 35.3%, Monterey County 27%, and Los Angeles 25.8%. Prices in Sacramento were up 31.4% and Northern California 20.7%. And while y-o-y prices were up 30.7% in Orange County, the number of sales actually sank 28%.

U.S. Bubble Economy Watch:

Bloomberg (Terry Barrett) this afternoon released the updated tally of "Worldwide International Reserve Assets." Total central bank Reserve Assets are up $650 billion, or 24.5% y-o-y, to $3.30 Trillion. Japan's reserves were up 49% from a year earlier to $800 billion, China's 36% to $471 billion, Taiwan's 26% to $230 billion, Hong Kong's 5% to $118 billion, India's 40% to $114 billion, and Singapore 15% to $100 billion. Combined, these seven Asian central bank reserve positions were up $521 billion, or 35%, over twelve months to $2.0 Trillion. 

Last week analysts and the media noted that international investors increased their June purchases of U.S. long-term securities to $71.8 billion. I did not read, however, that net buying from Japan accounted for about $29 billion ($158bn y-t-d), with another $21.5 billion coming from the Caribbean ($80.5bn y-t-d). I would caution that heavy purchases from these two major financial "centers" definitely do no represent a global endorsement of the attractiveness of U.S. "investment." Rather, such trading is more akin to excess global dollar balances being funneled back to U.S. securities markets "by default."

August 26 - Dow Jones (Campion Walsh): "U.S. banks and thrifts earned $31.2 billion in the second quarter, the second highest amount ever following a revised $31.8 billion in earnings in the first quarter, the Federal Deposit Insurance Corp. said Thursday. Bank and thrift earnings in the second quarter were propelled by strengthening loan demands at a majority of institutions but offset by higher expenses at a few large banks, the FDIC said."

August 25 - Dow Jones: "About 80% of surveyed banks expect lending to mid-market businesses to rise by at least 10% over the next 12 months, according to a report by a U.S. banking association released Wednesday. Surveyed banks said they expect moderate-to-strong growth in loan originations over the next year, with the majority of growth likely to come from commercial real estate, lines and term loans, according to the survey by the American Bankers Association... 'The economic environment is prime for increased commercial lending activity, and the mid-market is one of the fastest growing segments of the revived commercial lending market,' ABA Chief Economist James Chessen said..."

Mortgage Finance Bubble Watch:

Freddie Mac posted a strong July. For the month, the company's Book of Business expanded by $15.8 billion to $1.476 Trillion, a 13% annualized growth rate. Expanding the most since last October, Freddie's Retained Portfolio increased $11.2 billion, or 20.8% annualized, to $656 billion. Following six months of slow growth, over the past three months Freddie's Book of Business has expanded at a 13% rate and its Retained Portfolio at a 15% pace.

August 27 - "The Mortgage Bankers Association (MBA) today released its quarterly commercial and multifamily mortgage loan originations survey for the second quarter of 2004, showing continued growth in mortgage originations. Commercial mortgage bankers originated $33.2 billion, up by 17.4 percent ($4.9 billion) from the same quarter in 2003 and up 54.1 percent ($11.6 billion) from the first quarter of 2004. The large increase from the first quarter reflects the traditional cycle of low levels of first-quarter originations followed by a pick-up in the second quarter. 'The second quarter extends a period of record capital flows to the commercial and multifamily real estate markets, and sets 2004 on pace to exceed 2003's record origination volumes,' said Doug Duncan, MBA's chief economist and senior vice president."

August 25 - McGraw-Hill Construction Dodge report: "New construction starts in July climbed 5% to a seasonally adjusted annual rate of $595.1 billion... July showed stronger activity for each of the construction industry's main sectors, nonresidential building, residential building, and nonbuilding construction (public works and electric utilities). For the first seven months of 2004, total construction on an unadjusted basis came to $342.4 billion, 10% higher than the corresponding period of 2003."

August 24 - "Sparked by continued low mortgage rates, buyers across all segments in Florida pushed July's sales of existing single-family homes 15 percent above the previous-year mark, according to the Florida Association of Realtors. Statewide, a total of 23,554 homes sold last month compared to 20,503 homes in July 2003. In another sign of Florida's robust housing market, the statewide median sales price also rose 15 percent to $186,700; a year ago, it was $162,600. In July 1999, the statewide median sales price for existing single-family homes was $101,800, representing an increase of about 83.4 percent over the five-year period, FAR records show."

July Existing Homes Sales were reported about as expected at a very strong 6.72 million annualized pace. Sales were up 8.6% from July 2003, with y-t-d sales running 10.4% above last year's record pace (and up 25% from July 2002). At $244,700, the average (mean) price was up 7.2% from one year ago. Calculated Transaction Value was up 16.4% from one year ago to $1.644 Trillion, 47% over two years (prices up 18% and sales up 25%), 63% over 3 years (prices up 28% and sales up 27%), and 95% over six years (prices up 48% and sales up 32%).

New Home Sales were reported at a much weaker-than-expected 1.134 million annualized rate. This was the slowest pace of sales since December and was actually down about 2% from July 2003, although sales were still up almost 30% from July 2001. Average (mean) Prices, however, were up 10.4% from one year ago to a record $274,200. Prices were up 26% from July 2002, 31% from July 2001, and 53% from July 1998. The Inventory of New Homes jumped another 16,000 to 393,000, with an increase from July 2003 of 15.2%.

Combined New and Existing Home Sales for July were up 6.9% from July 2003 to 7.854 million annualized. Year-to-date, combined Sales are running 10.8% ahead of last year's record (7.185 million). Combined Calculated Transaction Value was up 15.0% from July 2003 to $1.96 Trillion (second only to June's record $2.02TN), up 47% from July 2002, up 64% from July 2001, and up 96% from July 1998.

Bubble at the Fringe:

August 26 - The Wall Street Journal (rising star Christine Richard): "Real-estate investment trusts that invest in mortgage-backed securities are stepping up sales of debt securities to lessen what some see as a potentially dangerous over-reliance on borrowing from Wall Street firms. Mortgage-backed securities REITs take debt stakes in the residential real-estate market via mortgage-backed bonds. They are a variation on traditional REITs, which take equity stakes in commercial real estate. This type of mortgage-REIT model of investing in mortgage-backed securities and funding those purchases at low short-term rates has been highly profitable. But it relies heavily on a single funding source: repurchase agreements with Wall Street firms..."

The ongoing REIT Bubble is one to monitor closely. The 8 largest "mortgage REITs" I follow expanded combined assets at a 65% rate during the second quarter, to almost $124 billion. This puts first-half growth at an astonishing pace of 80%. Thornburg increased assets at a 57% rate during the first six months of the year to $24.5 billion. Redwood Trust assets expanded at a 49% rate during the first half to $22.0 billion. Annaly Mortgage expanded at a 65% pace to $17.2 billion. American Home Mortgage increased assets to $9.635 billion from $3.4 billion at year-end. Impac Mortgage Holdings assets surged from $10.7 billion to $17.0 billion in just two quarters. Over the same period, (soon to be REIT) New Century Financial's assets jumped from $8.9 billion to $14.7 billion. Friedman, Billings, Ramsey expanded assets at a 35% rate to $13.3 billion, and MFA Mortgage grew assets at a 40% rate to $5.5 billion. And while not in the "top-tier," Novastar Financial expanded assets at a 67% rate during the first half to $2.2 billion; Newcastle Investment grew assets at a 79% rate to $4.2 billion; Anthracite Capital at a 110% rate to $3.7 billion; and Anworth Mortgage at a 37% rate to $5.1 billion.

The mortgage REITs - aggressively tapping securities-based lending sources (mostly "repos") to leverage mortgage holdings - provide an illuminating example of today's key Credit system dynamics. At the margin, the REITs (and anyone else wishing to leverage MBS!) continue to enjoy unlimited access to inexpensive Wall Street borrowings that are then used to provide liquidity to the American homeowner. Total mortgage Credit is on pace to expand by more than $1 Trillion this year, and it is clear that highly leveraged players are a major force in financing this expansion (and creating "repo" and other non-deposit liabilities along the way). In the process, the "repo" market and mortgage finance are providing the commanding source of liquidity for the financial markets and economy.

About a month ago I titled a Bulletin "Trouble at the Core." The gist of the analysis was that Monetary Disorder at the heart of the U.S. Credit system (specifically the Mortgage Finance Bubble "blow-off" and associated excess throughout "structured finance") was over-liquefying the "periphery" of the global financial system ("emerging" markets and economies, in particular). As such, we should not necessarily expect the typical dynamic whereby financial stress unfolds initially with faltering liquidity for the "marginal" borrower (and lender). It comes to mind that I have not adequately addressed the corollary issue of Monetary Disorder at "The Core" similarly buttressing the Fringe players within the U.S. Credit system. Indeed, there is today a Boom at the Fringe.

Examining year-to-date stock performance, subprime Credit card issuer Metris has gained 82%. Advanta is up 71% and Providian 26%. Subprime auto lending is a hot ticket as well, with AmeriCredit and Credit Acceptance Corp sporting 2004 gains of 33% and 20%. WFS Financial has a 2004 gain of 8%. Smaller players have been in demand also, with Consumer Portfolio Services up 19% y-t-d and Onyx Acceptance up 38%. "Subprime" business lender American Capital Strategies has risen 7%. Mortgage lender New Century Financial has posted a 37% gain so far this year. Other notable gains in the financial arena include Countrywide Financial up 38%, Capital One 13%, and MGIC 22%.

I have in the past referred to subprime lenders (AmeriCredit, in particular) as the mine shaft "canary." Well, AmeriCredit expanded assets at a 23% rate during the second quarter to $8.6 billion, the largest increase in a year (13% first-half growth rate). A booming securitization market (and attendant demand for high-yielding loans) has played the decisive role, as the company appears to have survived yet another near-death experience with faltering liquidity. Yet, as it is with the U.S. economy generally and subprime lending especially, one can for some period grow out of bad loan troubles as long as ample liquidity engenders the funding of a large volume of new loans. Apparently - according to equity and debt investors - the current financial environment affords aggressive lenders exactly this type of opportunity.

Also apparently "pulling through," subprime Credit card lender Metris expanded assets at a 13% rate during the first half, this after assets dropped by almost half during the previous year. Providian Financial assets expanded at a 3% rate during the second quarter to $13.6 billion, reversing 10 straight quarters of asset contraction (assets declining 37% over this period). Subprime auto lender Credit Acceptance Corp. assets expanded at a 16% rate during the first half to $1.02 billion. Subprime mortgage lender Accredited Home Lenders has a 25% stock gain so far this year, with assets having doubled during the first half to $5.4 billion. "Non-conforming" mortgage lender Saxon Capital (up 20% y-t-d) has increased assets at a 23% rate to $5.6 billion. Mortgage Bank IndyMac (up 17% y-t-d) has expanded assets at a 35% rate during the first half to $15.5 billion. And truly back from the dead (remember the fall of 1998?), Delta Financial has increased assets to $1.3 billion after ending 2003 at $257 million. Assets have jumped from $2.5 billion to $4.1 billion in six months at Municipal Mortgage & Equity, and from $2.6 billion to $5.5 billion at multifamily lender CharterMac.

American Capital Strategies ("arranges loans for and invests in small and medium sized businesses") assets expanded at a 65% rate during the first half to $2.7 billion. Capital Source Inc. ("provides loans to small and medium-sized businesses") expanded assets at a 75% rate during the first half to $3.5 billion. Fidelity National Financial ("provides insurance underwriting and diversified real estate services") assets expanded at a 35% rate during the first half to $8.6 billion (stock up 5%). Investors Financial Services total assets (stock up 21%) expanded at a 37% rate during the first half to $10.9 billion.

While Credit Bubble analysis is very much "macro," it is as well imperative to get right down to the nitty-gritty when it comes to examining borrowing and lending: who is lending to whom for what, and what liabilities are created in the process? There is today considerable evidence that Credit Availability is abundant throughout and, perhaps, even turning easier. Subprime lenders have been picking up their lending, while bank loan officer surveys suggest loose standards and a hankering to expand small and mid-market business lending. And, importantly, there is no indication of any tightening from historically ultra-easy lending standards throughout mortgage finance. If anything, the global rush for higher yields (and resulting boons for CDOs, Credit default swaps, and "structured products" generally) has become only more intense. There are today truly Booms at the Fringe and The Core.

But what is there to take away from this analysis? Well, it would be truly extraordinary (unprecedented?) for the economy to roll-over with such ultra-easy general Credit Availability and robust lending growth. At the same time, the economy is ominously less than impressive considering the extraordinary financial backdrop. Looking at the decline in rates over the past few months and, as well, factoring in the apparent heightened quest for risk assets, I will err on the side of expecting spending to be resilient through year-end (although this is an admittedly tenuous forecast). But how much will continued buoyant expenditures stimulate U.S. investments and hiring?

Data from the ports of Long Beach and Los Angeles do not bode well for U.S. economic prospects (or July's trade deficit). Inbound containers into the Port of Long Beach jumped to 281,817, surpassing the previous record set in June by more than 21,000 containers. The Port of Los Angeles also set a new record for inbound containers, with July's 361,584 slightly ahead of May's record. Total Inbound containers were up 15% from one year ago to 643,401, while total loaded outbound containers were about unchanged at 178,382. Containers leaving the two ports empty surged 24% from July 2003 to 384,279, more than double those leaving loaded. Wow...

I recall reading articles highlighting noteworthy examples of spending extravagance that preceded by only months the respective crises in Mexico, Thailand, Russia, Brazil, and Argentina. But, then again, lavish purchases and ballooning trade deficits are a hallmark of Monetary Disorder. And while profligate spending is not a fresh development here in the U.S., I couldn't help but to think that almost 400,000 empty cargo containers leaving the Los Angeles and Long Beach ports during July is a signal along the same lines of booming Mercedes sales in Russia during 1998's first half.

And I cannot also help but believe that "strong vs. weak U.S. economy" debates have basically become moot. What should be clear at this point is that even huge fiscal stimulus and unprecedented financial excess are incapable of fostering a sound and self-sustaining economic expansion. The paramount issue, today and going forward, is the deeply maladjusted U.S. economy and its increasing unresponsiveness to even enormous yet misdirected financial stimulus. Both the Financial Sphere and Economic Sphere are severely maladjusted. Two years of Fed-orchestrated "reflation" have only added to the U.S. economy's inflated cost structure and further weighed on global competitiveness. Meanwhile, the Global Credit Bubble (and China and Asian booms, in particular) has worked to strengthen the capabilities (financial and economic) of our determined competitors.

But we should have expected nothing less. Today's Boom at the Fringe is but a further manifestation of historic Credit Bubble excesses that has inflated asset prices, bolstered consumption and imports, and inflated the general economy's cost structure, while having limited impact on sound business investment. And I will stick with the analysis that today's predicament of Monetary Disorder and Deep Structural Economic Imbalances is on course to precipitate some type of financial crisis. But, appreciating the extraordinary nature of current global financial systems and markets, it is anyone's guess as to how long market "ebb and flow" can hold tumult at bay. We do know that the U.S. economy and markets require $2 to $3 Trillion of total annual Credit growth. Succinctly, there remain two overarching issues: First, how long can this amount of Credit creation be maintained? Second, what will be the nature of Inflationary Manifestations while the Credit Bubble is sustained?


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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