Monetary Disorder and Global Fragilties
For the week, the S&P500 dropped 1.8% (up 1.5% y-t-d), and the Dow fell 1.4% (up 2.1). The broader market was stronger this week. The S&P 400 Mid-Caps increased 0.4% (up 1.2%), and the small cap Russell 2000 gained 0.3% (down 1.1%). The Banks declined 2.2% (up 0.4%), and the Broker/Dealers lost 1.4% (up 0.9%). The Morgan Stanley Cyclicals added 0.2% (up 1.3%), while the Transports fell 1.0% (down 2.2%). The Morgan Stanley Consumer index declined 1.8% (down 1.6%), and the Utilities fell 1.1% (up 0.8%). The Nasdaq100 added 0.1% (up 2.4%), and the Morgan Stanley High Tech index gained 0.6% (up 3.4%). The Semiconductors jumped 1.6% (up 6.5%). The InteractiveWeek Internet index was little changed (up 0.9%). The Biotechs fell 1.3% (down 2.4%). With a volatile bullion market ending the week down $7, the HUI gold index rallied back 1.0% (down 11.1%).
One-month Treasury bill rates ended the week at 12 bps and three-month bills closed at 14 bps. Two-year government yields were down 7 bps to 0.55%. Five-year T-note yields ended the week 13 bps lower to 1.85%. Ten-year yields fell 8 bps to 3.33%. Long bond yields ended the week down 3 bps to 4.53%. Benchmark Fannie MBS yields were 2 bps lower to 4.15%. The spread between 10-year Treasury yields and benchmark MBS yields jumped 6 to 82 bps. Agency 10-yr debt spreads declined 3 bps to 8 bps. The implied yield on December 2011 eurodollar futures fell 10 bps to 0.645%. The 10-year dollar swap spread was unchanged at 15.75 bps. The 30-year swap spread was little changed at 27.5 bps. Corporate bond spreads were somewhat wider. An index of investment grade bond risk rose 3 bps to 86 bps. An index of junk bond risk jumped 7 to 421 bps.
Investment grade issuers included Bank of America $1.5bn, Marathon Petroleum $3.0bn, Bank of New York Mellon $1.2bn, Anheuser-Busch $1.65bn, US Bancorp $675 million, Kimberly-Clark $700 million, Family Dollar $300 million and Steelcase $250 million.
Junk bond funds saw inflows of $466 million (from Lipper). Issuers included Reynolds Group $2.0bn, Dana Holding $750 million, Realogy $700 million, Fresensius Medical $650 million, Hertz $500 million, Oasis Petroleum $400 million, Great Lakes Dredge & Docks $250 million, DirectBuy $335, Bi-Lo $285 million, Casella Waste Systems $200 million and Aviv Healthcare Properties $200 million.
I saw no convertible debt issued this week.
International dollar debt issuers included ABN Amro Bank $2.0bn, Vimplecom $1.5bn, Itau Unibanco $1.2bn, National Bank Canada $1.0bn, Development Bank of Kazakh $777 million, UBS $1.75bn, 750 million, El Salvador $650 million, Novatek Finance $600 million, Isbank $500 million, Afren $450 million, Bakrie Telecom $380 million, and Targeta Naranja $200 million.
U.K. 10-year gilt yields declined 4 bps this week to 3.65% (up 26bps y-t-d), and German bund yields dipped 3 bps to 3.15% (up 19bps). Ten-year Portuguese yields jumped 25 bps this week to 6.95%. Spanish yields rose 14 bps to 5.44%, and Irish yields jumped 34 bps to 8.95%. Greek 10-year bond yields gained 16 bps to 11.33%. The German DAX equities index added 0.6% (up 2.7% y-t-d). Japanese 10-year "JGB" yields were little changed at 1.21% (up 10bps y-t-d). Japan's Nikkei rose 0.8% (up 1.3%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index sank 3.7% (down 3.8%), while Mexico's Bolsa declined 1.3% (down 4.4%). South Korea's Kospi index jumped 1.8% (up 2.8%). India's equities index fell 3.3% (down 10.3%). China's Shanghai Exchange gained 1.4% (down 2.0%). Brazil's benchmark dollar bond yields jumped 15 bps to 4.62%, and Mexico's benchmark bond yields rose 10 bps to 4.50%.
Freddie Mac 30-year fixed mortgage rates jumped 6 bps last week to 4.80% (down 18bps y-o-y). Fifteen-year fixed rates rose 4 bps to 4.09% (down 30bps y-o-y). One-year ARMs added one basis point to 3.26% (down 103bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 9 bps to 5.41% (down 49bps y-o-y).
Federal Reserve Credit increased $3.1bn to $2.419 TN (12-wk gain of $184.7bn). Fed Credit was up $185bn from a year ago (8.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/26) jumped $7.8bn to $3.351 TN. "Custody holdings" were up $403bn from a year ago, or 13.7%.
M2 (narrow) "money" supply jumped $46.6bn to a record $8.862 TN. Over the past year, "narrow money" grew 4.5%. For the week, Currency added $2.3bn. Demand and Checkable Deposits jumped $28.0bn, and Savings Deposits surged $29.2bn. Small Denominated Deposits declined $4.4bn. Retail Money Funds fell $8.7bn.
Total Money Market Fund assets (from Invest Co Inst) $bn to $2.7 TN. Over the past year, money fund assets have shrunk $4bn, or 14.%.
Total Commercial Paper outstanding jumped $71.1bn to $988 billion. CP was down $158bn y-o-y, or 16.1%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $1.432 TN y-o-y, or 18.3%, to a record $9.247 TN.
Global Credit Market Watch:
January 26 - Bloomberg (Kati Pohjanpalo): "European leaders are winning over investors as they try to keep the single-currency bloc intact, raising the appeal of the region's so-called rescue bonds, said Timo Loeyttyniemi, the head of Finland's state pension fund. 'European policymakers are very motivated and decisive and will solve these problems... The risk is euro-area risk, but I think it's very manageable as Europe is very determined.' The European Financial Stability Facility is selling the top-rated bonds -- which are backed by euro nations -- in an effort to give the bloc's most indebted members access to affordable funding and quell speculation the region may face defaults... Yesterday's debut EFSF bond sale attracted orders for 44.5 billion euros ($60.7 billion) -- almost nine times the amount offered -- from more than 500 investors..."
January 25 - Bloomberg (Gabrielle Coppola and Ben Bain): "Record overseas dollar bond offerings from Brazilian companies are hurting the government's effort to stem inflows that sparked the real's 39% rally in the past two years. Sales from Itau Unibanco Holding SA, Latin America's biggest bank by market value, and state-run oil company Petroleo Brasileiro SA are pushing January issuance to $10.4 billion, the busiest month on record..."
January 26 - Bloomberg (Kristen Haunss): "Carlyle Group and KKR & Co. are getting leveraged loans for buyouts at terms similar to those before the credit crisis as investors plow record amounts into funds that buy the debt, driving prices to a three-year high. The private-equity firms are obtaining so-called covenant lite loans, which lack typical protections for creditors, to back their leveraged buyouts..."
Global Bubble Watch:
January 28 - Bloomberg (Aaron Kirchfeld and Serena Saitto): "Deutsche Bank AG Chief Executive Officer Josef Ackermann said unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn't increased. 'You have an unregulated area which becomes -- as a consequence of all the regulatory changes -- more and more important," Ackermann... said... 'You may one day wake up and realize that the systemic challenges are so big that you will have to bail out or at least help support the unregulated sector.' Ackermann's warning echoes comments made by former U.S. Treasury Secretary Lawrence Summers, who said this week in Davos that regulators haven't paid enough attention to problems that could emerge in "a large, less healthy buccaneer sector.' Hedge funds have dodged the brunt of new global banking regulation aimed at avoiding a repeat of the worst global financial crisis since the Great Depression."
January 27 - Bloomberg (Soraya Permatasari and Dana El-Baltaji): "Plans by Saudi Arabia, Malaysia and Qatar to spend almost $1 trillion on development projects over the next decade will overwhelm the amount banks can provide in loans, reviving sales of sukuk, according to HSBC Holdings Plc and BNP Paribas SA."
January 28 - Dow Jones (Lynn Cowan): "The amount of money raised through initial public offerings, or IPOs, of stock around the world in January is on track to set a record this year, according to... Dealogic... Proceeds from 81 IPOs so far this month stand at $10 billion, the second-largest amount on record."
January 26 - Financial Times (Nicole Bullock): "Fundraising by US states, cities, hospitals and other public bodies has plunged as fears of defaults and bankruptcies have intensified this month. 'It is likely to be the worst month in about a decade,' said Matt Fabian, managing director of Municipal Market Advisers, citing expectations for less than $11bn of issuance. That would be a monthly level not seen since 2000... In 2010, municipal issuers sold an average of $36bn a month. 'The market has been in disarray and issuers have avoided it,' said George Friedlander, chief municipal strategist, at Citigroup."
January 28 - Bloomberg (Brendan A. McGrail and Matt Robinson): "Investors this month are trading the lowest volume of municipal bonds in more than eight years as new issues dwindle with the end of Build America Bonds and demand cools on speculation about state and local defaults. About $4 billion a day has been traded this month, the least since November 2002... States and local governments plan to sell about $15.6 billion in fixed-rate debt this month... A year ago, about $31.9 billion was sold in the month."
January 24 - Bloomberg (David Mildenberg): "The Texas Senate proposed a $79.7 billion budget that cuts education and health spending and doesn't raise taxes, mirroring a plan issued by the state House of Representatives. The draft two-year budget would slash general-revenue spending on schools by 7.6%, to $45.6 billion, from the current biennium. It would slash health and human services costs by 12%."
January 25 - Bond Buyer (Jim Watts): "The Oklahoma budget-stabilization fund has been so depleted that it's no longer enough to cover the cost of a cup of coffee at most restaurants, let alone help balance the state budget. The rainy-day fund, which topped out at the legal limit of $596.6 million two years ago, now consists of $2.03. As in two dollars, three cents. No billion. No million. No pocket lint."
January 24 - Bloomberg (William Selway): "Hamtramck, a city of 20,000 largely ringed by Detroit that has asked the state to let it file for bankruptcy protection, doesn't have enough spare cash to repave a single street, according to Mayor Karen Majewski. Money for payrolls will run out in March in the Michigan municipality where General Motors Co. builds Chevrolet's Volt... 'There is no money for fixing anything,' Majewski said. 'Finding money to fix roads, it's just an impossibility.'"
January 27 - Bloomberg (Simon Kennedy): "China Investment Corp. Vice Chairman Gao Xiqing said that central banks' quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries. 'You know money is gradually becoming not worth the paper it's printed on,' Gao said... Recent gains in commodity and food prices reflect the 'long-term view' of investors that prices will accelerate, he said... 'We've started collecting Zimbabwe notes,' Gao said, referring to an economy whose currency was scrapped in 2009 after inflation reached 500 billion percent. He noted investors are also discussing whether central banks will pursue more rounds of quantitative easing."
The U.S. dollar index was little changed at 78.15 (down 1.1%), with another week of notable variance in currency performance. On the upside for the week, the New Zealand dollar increased 1.9%, the Swiss franc 1.8%, the South Korean won 0.9%, the Swedish krona 0.9%, the Japanese yen 0.6%, the Australian dollar 0.4% and the Taiwanese dollar 0.4%. On the downside, the South African ran declined 1.7%, the Mexican peso 1.2%, the British pound 0.9%, the Canadian dollar 0.8%, the Brazilian real 0.3%, the Singapore dollar 0.1%, the Danish krona 0.1%, and the Euro 0.1%.
Commodities and Food Watch:
January 27 - Bloomberg: " China may expand its range of state commodity stockpiles, possibly adding reserves of meat and sugar, to help stabilize expectations for inflation, Caijing magazine reported, citing the nation's commerce minister. The country may start reserves for more 'important' commodities... citing an interview with Chen Deming. China may boost imports of goods that are rare locally, and also make it easier for companies to buy bulk goods from overseas, including grains and cotton, Chen said..."
January 24 - Bloomberg (Rudy Ruitenberg): "Speculation and price swings in agricultural markets may threaten food security, 48 farm ministers meeting in Berlin said a month after a United Nations gauge of global costs reached a record. There is a risk of more food riots unless the surge in prices is contained, including through trading regulations, French Agriculture Minister Bruno Le Maire told reporters... 'Food markets may not be the object of gamblers,' German Agriculture Minister Ilse Aigner said... Food and agricultural commodities are not like anything else. Sometimes it's about pure survival.'"
January 27 - Bloomberg (Luzi Ann Javier): "Bangladesh, South Asia's biggest rice buyer, doubled its import target for this year to cool domestic prices that surged to a record in December as consumers and farmers hoarded supplies... The import target was raised to 1.2 million metric tons... That's triple the U.S. Department of Agriculture's estimate of 400,000 tons."
January 28 - Bloomberg (Elizabeth Campbell): "Hog futures extended a rally to the highest in at least 24 years on speculation that U.S. pork exports will climb amid tightening supplies. Cattle also rose. South Korea, the sixth-largest buyer of U.S. pork in 2009, will cull 2.9 million animals to deal with the country's worst outbreak of foot-and-mouth disease... Before today, hogs rose 31% in the past year."
January 27 - Financial Times (Jack Farchy): "Sugar prices approached a fresh 30-year high on Thursday as the European Union said it could boost imports of the sweetener in order to address a regional scarcity. Any additional European sugar imports could put further strain on global supplies at what was seasonally their tightest point of the year, traders said. Global sugar inventories have fallen to their lowest levels in decades, helping push raw sugar futures up 145% from June to a 30-year high of 34.77 cents a pound in December."
January 24 - Bloomberg (Jae Hur and Debarati Roy): "Cotton futures soared to a record on speculation that global supplies will fail to keep pace with rising demand in China, the world's largest user. Chinese imports in 2010 surged 86% from a year earlier as economic growth lifted demand from textile mills and adverse weather hurt the domestic crop."
The CRB index gained 0.4% (up 0.8% y-t-d). The Goldman Sachs Commodities Index rallied 1.2% (up 1.6%). Spot Gold declined 0.5% to $1,336 (down 6.0%). Silver rallied 1.9% to $27.955 (down 9.6%). March Crude increased 21 cents to $89.32 (down 2.3%). February Gasoline slipped 0.2% (up 1.0%), and February Natural Gas dropped 8.7% (down 1.7%). March Copper gained 1.1% (down 2.0%). March Wheat was little changed (up 4.0%), while March Corn declined 2.0% (up 2.4%).
China Bubble Watch:
January 26 - Bloomberg: "The minimum wages in 30 Chinese provinces were raised last year by an average of 22.8%, the official Shanghai Securities News reported..."
January 25 - Bloomberg: "China's 2010 urban unemployment rate was 4.1% with 9.08 million people registered as jobless, Xinhua News Agency reported today..."
January 26 - Bloomberg (Simon Packard): "China attracted the most real estate investment in the world for a second straight year as purchases of development sites helped lift global commercial property sales by 43%, Real Capital Analytics Inc. said. China had $197.1 billion of transactions last year, 23% more than in 2009... That represented 34% of the $582 billion of deals worldwide... Larger down-payment requirements and efforts to clamp down on property speculation slowed transactions in China in the second and third quarters. In the final three months, the deal flow 'reached the second highest in four years,' RCA said."
January 28 - Bloomberg (Elizabeth Campbell): "China may order its biggest lenders, including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., to raise capital ratios to as high as 14% when credit growth is judged excessive, said a person familiar with the matter. Newly proposed rules would require increasing capital adequacy buffers by as much as 2.5 percentage points when the banking regulator determines loan growth to be too fast..."
January 26 - Bloomberg: "China increased the minimum down payment for second-home purchases and asked local governments to boost land supply, seeking to further limit the risk of asset bubbles forming in the world's fastest-growing major economy. 'China will continue to effectively curb investment and speculative purchases of houses to consolidate and expand on previous measures,' the State Council said... The minimum down payment for second house purchases rises to 60% from 50%, it said."
January 27 - Bloomberg (Lily Nonomiya): "Japan's sovereign credit rating was cut for the first time in nine years on concern that Prime Minister Naoto Kan hasn't done enough to curb an $11 trillion debt burden, the world's largest. The nation's debt is now ranked AA-, the fourth-highest level and alongside China, by Standard & Poor's. The reduction from AA was announced by S&P in a statement today. The move fuels concern that policy makers may struggle to finance debt projected to swell to 943 trillion yen, or about twice the size of gross domestic product. Kan may need to speed efforts to raise revenue with a higher consumption tax to prevent a debt crisis like that of Europe."
January 26 - Bloomberg (Shimodoi and Toru Fujioka): "Japan's new bond sales may surpass 50 trillion yen ($609bn) in the year starting April 2013, above the government's current target, according to the Finance Ministry."
January 25 - Bloomberg (Kartik Goyal): "India's central bank raised the benchmark interest rate to a two-year high and signaled further increases in borrowing costs as it boosted the country's inflation forecast. Stocks fell. Governor Duvvuri Subbarao lifted the repurchase rate to 6.5% from 6.25%..."
January 25 - Financial Times (James Lamont): "India has responded to persistently high inflation and an economy exceeding its growth forecasts by continuing its aggressive campaign of raising interest rates. The Reserve Bank of India... raised its policy rate by 25 bps... The move takes the repo rate, the rate at which the central bank lends to commercial banks, to 6.5%, its highest since early 2008."
January 26 - Bloomberg (Kartik Goyal): "India's central bank urged the government to cut subsidies that are preventing inflation from easing as Governor Duvvuri Subbarao increased interest rates for the seventh time in a year. 'Monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control,' Subbarao said... Finance Minister Mukherjee is scheduled to announce in February the budget for the financial year starting April 1. The minister is aiming to narrow the budget deficit to 5.5% of gross domestic product in the current year ending March 31."
Asia Bubble Watch:
January 28 - Wall Street Journal (Soofian J. Zuberi): "For years, East Asia's lack of viable bond markets and its companies' consequent reliance on bank lending sparked concern about the region's financial stability. But in the past few years bond issuance has accelerated dramatically. From 2000-2010, Asian credit market issuance as a share of global issuance has grown to 23% from 5%, the result of an annual growth rate of 27%... In 2010, Asian issuers raised a staggering $2.8 trillion via the bond markets -- 3.3 times the amount raised in the equity markets. The largest Asian nonsovereign credit deal was a $4.4 billion bond by Chinese electric utility State Grid."
January 26 - Bloomberg (Katrina Nicholas): "Inflation in China could hinder Asia's economic growth and damage the ratings outlook for countries in the region this year, according to Fitch... China's policy makers are likely to face greater difficulty as the world's fastest-growing major economy battles 'hot money inflows' and consumer prices that rose 4.6% in December after advancing 5.1% in November..."
January 24 - Bloomberg (Stanley James): "Taiwan's industrial production increased 18.18% in December from a year earlier, the Ministry of Economic Affairs said..."
January 25 - Bloomberg (Suryani Omar and Soraya Permatasari): "Record car sales in Indonesia helped fuel 50% growth in Shariah-compliant banking assets last year and Islamic lenders are setting up booths at automobile shows to further develop the market. PT Bank Muamalat Indonesia, the country's oldest Shariah- compliant lender, said consumer loans jumped 40% in 2010..."
January 24 - Bloomberg (Shamim Adam): "Singapore's inflation rate last month rose to the highest level since December 2008, adding pressure on the central bank to damp price gains by allowing greater currency appreciation. The consumer price index increased 4.6% in December from a year earlier..."
Latin America Watch:
January 26 - Bloomberg (Andre Soliani): "Brazil's mid-month inflation rate jumped more than economists expected, increasing pressure on the central bank to quicken the pace of interest rate increases... Consumer prices, as measured by the benchmark IPCA-15 index, rose 0.76% in the month through mid-January, pushing the annual rate to 6.04%..."
January 26 - Bloomberg (Iuri Dantas and Andre Soliani): "Brazilian credit expansion slowed last month after policy makers raised reserve and capital requirements to prevent a credit bubble and slow inflation. State and non-state bank lending expanded 1.6% in December to a 1.7 trillion reais ($1 trillion)... Altamir Lopes, head of the bank's research department, told reporters that credit will grow 15% this year, slower than the 20.5% pace in 2010."
January 24 - Bloomberg (Camila Russo and Eliana Raszewski): "The shortage of Argentine pesos, driven by accelerating inflation, is pushing up credit card debt to a record as consumers struggle to obtain cash for purchases. Argentines charged 26 billion pesos ($6.6bn) on credit cards in December, 49% more than in the same month a year before..."
Unbalanced Global Economy Watch:
January 26 - Bloomberg (Greg Quinn): "Canadian house prices fell for a third month in November, the Teranet-National Bank Composite House Price Index showed, on declines in four of the six cities it tracks. Prices fell 0.2% during the month, following declines of 0.4% in October and 1.1% in September..."
January 25 - Telegraph (Robert Winnett): "Household's face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned... as he reacted to the shock disclosure that the economy was shrinking again. Families will see their disposable income eaten up as they 'pay the inevitable price' for the financial crisis, Mervyn King warned. With wages failing keep pace with rising inflation, workers' take home pay will end the year worth the same as in 2005 the most prolonged fall in living standards for more than 80 years, he claimed."
January 26 - Bloomberg (Matthew Brockett and Jeff Black): "German import prices rose at the fastest annual pace in more than 29 years in December, driven by soaring costs for commodities such as energy and metal. Import-price inflation accelerated to 12%, the highest rate since October 1981..."
January 25 - Dow Jones (Jonathan House): "Spain is beating its own deficit-reduction targets in the clearest sign to date that its reform efforts are paying off, the Spanish government said... According to advance data from the finance ministry, the central government's 2010 budget deficit was equal to 5.1% of gross domestic product, ahead of its 5.9%-of-GDP target, and down from 9.4% of GDP in 2009... The better-than-expected result was the largely the result of a 10.9% rise in 2010 tax revenue, compared with a forecast increase of 8.1%. The government last year raised its general sales tax rate by two percentage points to 18%, eliminated a tax rebate and raised capital gains taxes."
U.S. Bubble Economy Watch:
January 25 - Bloomberg (Bob Willis): "Payrolls decreased in 35 U.S. states while the unemployment rate rose in 20, showing the labor market recovery is slow to gather momentum. New York led the nation with 22,800 job cuts last month, followed by Minnesota with 22,400 firings, and Florida with 17,900..."
Real Estate Watch:
January 25 - Bloomberg (Sarah Mulholland): "Debt investors are wagering that the worst is over for commercial real estate, driving prices on mortgage bonds to the highest in more than two years. 'Investors have gotten more comfortable and have started putting money back into CMBS,' Chris Callahan, head of commercial-mortgage backed bond trading at Credit Suisse... 'It has gone from being the red-headed stepchild to being a viable asset class again.'"
January 26 - New York Times: "The nation's budget deficit will widen to nearly $1.5 trillion this year, and the country faces 'daunting economic and budgetary challenges,' the nonpartisan Congressional Budget Office said... The budget office noted that 'the deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product, the largest since 1945 - representing 10% and 8.9% of the nation's output.' ...Senator Kent Conrad, Democrat of North Dakota and chairman of the Budget Committee, described the new deficit figures as sobering. 'CBO's report should be another wake-up call to the nation,' Mr. Conrad said... 'In the near-term, due to passage of the tax extension package and the slow pace of the economic recovery, CBO is now expecting to see deficits of more than $1 trillion a year continuing through at least 2012. And as disturbing as those near-term deficits are, the long-term outlook is even worse. It is the deteriorating long-term outlook that is the biggest threat to the country's economic security.'"
January 28 - Bloomberg (Robert Greene): "The U.S. government's debt is likely to reach $15.1 trillion by year-end, exceeding gross domestic product for the first time since the years immediately after World War II... The forecast assumes Congress will again raise the statutory limit on federal debt. The time for another vote is approaching: as of Jan. 26, debt subject to the $14.29 trillion limit set last year was slightly more than $14 trillion... The limit could be reached as early as March 31 and no later than May 16, the department says."
January 28 - Bloomberg (Christine Richard): "Moody's Investors Service said it may need to place a 'negative' outlook on the Aaa rating of U.S. debt sooner than anticipated as the country's budget deficit widens. The extension of tax cuts enacted under President George W. Bush, the chance that Congress won't reduce spending and the outcome of the November elections have increased Moody's uncertainty over the willingness and ability of the U.S. to reduce its debt... 'Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,' wrote Steven Hess, a senior credit officer..."
January 27 - Bloomberg (Pat Wechsler and Christopher Palmeri): "President Barack Obama faces a new challenge from deficit-plagued states over Medicaid costs just as he squares off with Republicans trying to repeal his 2010 health-care law, which extends coverage to 32 million Americans. Arizona Governor Jan Brewer asked for U.S. permission on Jan. 25 to reduce Medicaid eligibility and drop coverage for 280,000 people. That would save $541.5 million for the state, which projects a $1.2 billion budget deficit for the coming fiscal year. U.S. states must confront potential budget gaps of more than $140 billion for fiscal 2012 because tax collections declined by the most on record during the recession... That may prompt more to seek release from some Medicaid obligations, their biggest expense, as federal aid that has helped them cover the costs for the last three years ends. 'There are other states contemplating" requests for waivers, said Dan Mendelson... former associate director for health in the Office of Management and Budget under President Bill Clinton. 'Letters are coming from some big states reaching the point of no return.' Mendelson declined to name them, saying 'border states' such as Texas were in 'fiscally impossible situations.'"
January 26 - Bloomberg (Carol Wolf): "The federal Highway Trust Fund, which pays for U.S. road and mass transit construction, faces insolvency sometime next year as revenue from fuel taxes declines for the sixth year... The Highway Trust Fund will run a deficit of $7 billion this year, compared with a surplus of $11 billion in 2010... The highway and mass transit portions of the fund will probably be unable to meet their obligations in 2012 and 2013..."
January 26 - Bloomberg (Michael B. Marois): "California's capital city of Sacramento, facing a $35 million deficit, will bill out-of-town drivers whose traffic accidents require rescue crews, the latest U.S. municipality turning to a 'crash tax' for revenue. The fees, ranging from $435 to $2,275 if a helicopter is needed, may generate as much as $500,000 a year, according to city data."
Monetary Disorder and Global Fragilities
January 27 - Bloomberg (Mary Childs): "Rising food prices that are causing riots in developing nations from Tunisia to Yemen are sending credit-default swaps soaring on Campbell Soup Co., General Mills Inc. and Darden Restaurants Inc. The cost of protecting bonds from Camden, New Jersey-based Campbell Soup reached a record last week..."
January 27 - Financial Times (Javier Blas and Chris Giles): "Governments across the developing world are stockpiling food staples in an attempt to contain panic buying, inflation and social unrest. But the hoarding is driving agricultural commodity prices even higher. The cost of wheat, the world's most important staple, reached a fresh two-and-a-half-year high on Thursday, after countries from Algeria to Saudi Arabia announced extraordinary purchases. High food prices have been a contributing factor to the recent wave of social unrest across North Africa and the Middle East. In Algeria earlier this month, young rioters chanted 'Bring us sugar!' The cost of the sweetener in the wholesale market is at its highest in 30 years. Earlier this week, Algeria bought 800,000 tonnes of wheat - much more than usual - and Saudi Arabia announced plans to double the size of its wheat stockpile. Bangladesh and Indonesia joined the rush on Thursday, placing extraordinary on rice orders."
There's been this festering dichotomy. Sentiment within the U.S. stock market has moved to bullish extremes. With the Fed still early in its QE2 program, participants perceive that the favorable market liquidity backdrop is safe for the near-term. As for the economy, the combination of some "animal spirit" green shoots and the massive $1.5 TN federal deficit seems to ensure that there is minimal downside risk to growth this year. Aggressive fiscal and monetary policies have bolstered the perception of systemic stability.
In reality, the world is an extraordinarily unstable place: unwieldy finance, extreme economic imbalances and related wealth disparities - along with acute inflation - have created a geopolitical tinderbox.
The unprecedented - and ongoing - global expansion of debt has created myriad risks and vulnerabilities. The ballooning of central bank balance sheets has over-liquefied markets and distorted risk perceptions worldwide. This liquidity backstop has also rejuvenated and emboldened the leveraged speculating community. Ignoring risk has been a fruitful tack throughout the global market landscape.
The combination of massive debt growth and central bank monetization has nurtured an enormous pool of speculative finance that fuels boom and bust dynamics across virtually all risk markets and economies. This backdrop has created what I have often referred to as "Monetary Disorder." One facet of this monetary phenomenon is acute price pressures globally for food and energy. This inflation exacerbates unrest and social instability. Today's developments in Egypt demonstrate how social instability has engendered political instability in a most volatile region of the world.
Today, crude oil surged $3.70 and gold jumped $23. Emerging equities, in particular, were under pressure. While unimpressive, the dollar did enjoy somewhat of a safe haven bid. For the week, sugar and cotton gained about 5%, adding to already spectacular gains. U.S. equities were under selling pressure, although most will question how street protests in Egypt can have much impact on our economic recovery.
Well, heightened unrest in Egypt and beyond adds additional uncertainty for susceptible global markets. Unstable currency markets now have another development to contend with. The possibility for safe haven bids for the dollar, Treasurys, and bunds has increased, which causes additional uncertainty all along the daisy chain of leveraged bond spread trades and currency "carry trades." Moreover, spreading regional unrest increased the probability for spikes and instability for oil and energy prices. Recent developments also have the potential to exacerbate the trend toward price inflation and hoarding throughout the commodities complex, especially in the metals and agriculture commodities arenas.
No one knows what the weekend and next week holds for Cairo. What is clearer, however, is that this crisis is now unfolding at a juncture already demonstrating heightened market vulnerability. As I attempted to highlight last week, 2011 has begun with a number of markets moving abruptly against the "crowd" (i.e. euro, European CDS, precious metals, etc.). Additional uncertainty and related marketplace volatility has the potential to accelerate the process of de-risking and de-leveraging.
I would add that global Bubble Dynamics have been an unappreciated factor fueling U.S. equity prices. In an environment already demonstrating rising bond yields and incipient liquidity issues, the emerging markets may prove especially susceptible to the unfolding geopolitical backdrop. And a pullback in emerging bonds and equities would surely put significant additional pressure on the leveraged players. As such, I don't believe it would take all that much for a bout of "risk off" trading to provide the catalyst for a long-overdue correction in inflated U.S. stock prices. Associated fragilities are an inescapable downside to Monetary Disorder and speculative excess.