Q4 2010 Flow of Funds

By: Doug Noland | Fri, Mar 25, 2011
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For the week, the S&P500 jumped 2.7% (up 4.5% y-t-d), and the Dow gained 3.1% (up 5.6%). The S&P 400 Mid-Caps surged 2.9% (up 7.0%), and the small cap Russell 2000 jumped 3.7% (up 5.1%). The Banks slipped 0.5% (down 0.7%), while the Broker/Dealers rose 1.6% (down 0.8%). The Morgan Stanley Cyclicals gained 2.9% (up 4.9%), and the Transports rose 3.0% (up 2.0%). The Morgan Stanley Consumer index increased 1.8% (down 0.4%), and the Utilities gained 1.7% (down 0.3%). The Nasdaq100 gained 4.3% (up 4.4%), and the Morgan Stanley High Tech index rose 3.6% (up 2.0%). The Semiconductors jumped 4.1% (up 5.9%). The InteractiveWeek Internet index rose 3.8% (up 1.9%). The Biotechs advanced 2.0% (up 0.6%). With bullion up $11, the HUI gold index rallied 5.4% (down 1.4%).

One-month Treasury bill rates ended the week at 3 bps and three-month bills closed at 8 bps. Two-year government yields jumped 14 bps to 0.71%. Five-year T-note yields ended the week up 22 bps to 2.12%. Ten-year yields jumped 17 bps to 3.44%. Long bond yields ended the week 8 bps higher at 4.52%. Benchmark Fannie MBS yields were 16 bps higher at 4.26%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed one basis point to 82 bps. Agency 10-yr debt spreads narrowed one to 2 bps. The implied yield on December 2011 eurodollar futures rose 11.5 bps to 0.645%. The 10-year dollar swap spread increased one to 11 bps. The 30-year swap spread increased 3.5 bps to negative 22 bps. Corporate bond spreads were mixed. An index of investment grade bond risk increased 8 bps to 95 bps. An index of junk bond risk narrowed 13 bps to 413 bps.

Investment grade debt issuers included Verizon $6.25bn, Caterpillar $1.0bn, Gilead Sciences $1.0bn, Viacom $500 million, JPMorgan $500 million, Private Export Funding $500 million, and Biomed Realty $400 million.

Junk bond funds saw outflows of $2.88bn (from Lipper). Issuers included CIT Group $2.0bn, Limited Brands $1.0bn, Plains Exploration $600 million, and James River $275 million.

Convertible debt issuers included James River Coal $200 million, Ares Capital $200 million, and Phototronics $100 million.

International dollar debt issuers included Hungary $3.75bn, Volkswagen $3.0bn, Sanofi-Aventis $7.0bn, Bank Nederlandse $2.0bn, Societe Generale $1.1bn, Goodman Funding $500 million, Kabel BW $500 million, Eaccess $420 million, and Export-Import Bank of India $110 million.

U.K. 10-year gilt yields rose 10 bps this week to 3.61% (up 10bps y-t-d), and German bund yields increased 9 bps to 3.28% (up 32bps). Ten-year Portuguese yields surged 45 bps to 7.68% (up 103bps). Spanish yields added one basis point to 5.16%. Irish yields surged 57 bps to 9.92%, and Greek 10-year bond yields rose 37 bps to 12.45%. The German DAX equities index jumped 4.2% (up 0.5% y-t-d). Japanese 10-year "JGB" yields added one basis point to 1.215%. Japan's Nikkei rallied 3.5% (down 6.8%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index gained 1.3% (down 2.2%), and Mexico's Bolsa rallied 3.7% (down 4.6%). South Korea's Kospi index jumped 3.7% (up 0.1%). India's equities index surged 5.2% (down 8.3%). China's Shanghai Exchange gained 2.4% (up 6.0%). Brazil's benchmark dollar bond yields rose 7 bps to 4.60%, and Mexico's benchmark bond yields gained 4 bps to 4.41%.

Freddie Mac 30-year fixed mortgage rates rose 5 bps last week to 4.81% (down 18bps y-o-y). Fifteen-year fixed rates increased 7 bps to 4.05% (down 30bps y-o-y). One-year ARMs were up 4 bps to 3.21% (down 99bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 7 bps to 5.41% (down 40bps y-o-y).

Federal Reserve Credit jumped $13.9bn to a record $2.582 TN (19-wk gain of $301bn). Fed Credit was up $174bn y-t-d and $284bn from a year ago, or 12.4%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 3/23) rose $483 million to a record $3.402 TN. "Custody holdings" were up $389bn from a year ago, or 12.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $1.547 TN y-o-y, or 20.3%, to a record $9.381 TN.

M2 (narrow) "money" supply fell $25.2bn to $8.894 TN. Over the past year, "narrow money" grew 3.1%. For the week, Currency added $1.8bn. Demand and Checkable Deposits declined $4.9bn, and Savings Deposits dropped $12.0bn. Small Denominated Deposits dipped $3.8bn. Retail Money Funds were down $6.3bn.

Total Money Fund assets declined $7.8bn last week to $2.732 TN. Money Fund assets are down $78bn y-t-d, with a decline of $281bn over the past year, or 9.3%.

Total Commercial Paper outstanding increased $4.0bn to $1.080 Trillion. CP is up $111bn y-t-d, although it was down $35bn, or 3.1% from a year ago.

Global Credit Market Watch:

March 22 - Financial Times (David Oakley and Richard Milne): "Investors warned they could boycott peripheral eurozone bond markets as reform of the region's bail-out fund sparked fears of a sovereign default in Europe. Irish three-year bond yields leapt close to a full percentage point at one point on Tuesday, while the cost of borrowing for Portugal and Greece also shot up... European finance ministers finally drew up plans to make investors share the burden of potential sovereign defaults beyond the summer of 2013... Concerns centre on the preferred creditor status given to European Stability Mechanism, the permanent eurozone rescue fund, which takes up the reins from the temporary fund, in the middle of 2013. Investors warn that this will mean they will be the last in the queue for the recovery of money in the event of a default. One fund manager said: 'We will definitely not buy peripheral bonds now, not with the uncertainty this has created.'"

March 24 - Bloomberg (James G. Neuger and Joao Lima): "A bailout for Portugal may total as much as 70 billion euros ($99 billion), two European officials with direct knowledge of the matter said as a credit-rating cut threatened to deepen Portugal's debt woes. Preliminary calculations put the cost of a lifeline between 50 billion euros and 70 billion euros, said the officials who declined to be named..."

March 24 - Bloomberg (Charles Penty and John Glover): "Thirty of Spain's smaller banks had their senior debt and deposit ratings downgraded, as Moody's... reviews whether governments are willing to support all their lenders in a crisis. Citing heightened financial pressure on the country's sovereign rating and 'many weak banks,' the... ratings firm cut 15 lenders by two levels and five by three or four..."

March 21 - Bloomberg (Ben Martin and Esteban Duarte): "Companies are selling the fewest bonds in euros since 2008 as the failure of European politicians to resolve the debt crisis, military intervention in Libya and Japan's unfolding nuclear disaster push up borrowing costs. Investment-grade borrowers sold 125.5 billion euros ($178bn) of bonds this year, down from 193.7 billion euros in the same period of 2010..."

March 24 - Bloomberg (Andrea Wong and Yumi Teso): "Borrowing costs for Chinese companies are climbing at the fastest pace in more than three years relative to the government, driven by record issuance... The premium investors demand to hold 10-year notes of firms rated AAA instead of sovereign debt rose 34 bps to 160 this quarter... The amount of corporate debt sold this year reached 533 billion yuan ($81 billion), double Japan's total and almost quadruple the combined issuance of India, Brazil and Russia... The amount of corporate debt sold this year is 32% higher than in the same period of 2010..."

Muni Watch:

March 22 - Bloomberg (Brendan A. McGrail and Matt Robinson): "Municipal bond issuance is set for the slowest quarter in at least eight years as states and local governments borrowed 55% less than last year amid rising interest rates and an environment of fiscal conservatism. About $43.9 billion in fixed-rate debt is estimated to have been sold in the first three months of 2011, down from $97.3 billion in the same period last year... That compares with $129 billion last quarter, the busiest on record."

March 24 - New York Times (Michael Cooper): "The state budget squeeze is fast becoming a city budget squeeze, as struggling states around the nation plan deep cuts in aid to cities and local governments that will almost certainly result in more service cuts, layoffs and local tax increases. The cuts are widespread. Ohio plans to slash aid to Columbus, Cleveland, Cincinnati and other cities and local governments by more than a half-billion dollars over the next two years under the budget proposed last week by its new Republican governor... Nebraska passed a law this month eliminating direct state aid to Omaha and other municipalities. The governors of Wisconsin and Michigan have called for sending less money to Milwaukee, Detroit and other local governments."

March 22 - Bond Buyer (Jim Watts): "Members of a new Texas Senate special subcommittee were tasked Monday with finding $5 billion of savings and non-tax revenues over the next two weeks... The additional funds would help cover a revenue shortfall over the next two fiscal years estimated at between $15 billion and $23 billion."

Global Bubble Watch:

March 22 - Bloomberg (James G. Neuger and Jonathan Stearns): "European finance ministers announced new steps to fight the debt crisis, running into European Central Bank criticism for doing too little to prevent budget shocks from threatening the euro. Finance chiefs settled on how to enable a permanent rescue fund to lend 500 billion euros ($710bn) as of 2013, while remaining divided over how to get the current stopgap fund up to its full capacity of 440 billion euros."

March 23 - Bloomberg (Caroline Salas and Rainer Buergin): "Federal Reserve Bank of Dallas President Richard W. Fisher said he sees 'extraordinary speculative activity' in the U.S. after the central bank pumped record amounts of stimulus into the economy. 'There is an enormous amount of liquidity sloshing around,' the regional bank chief...said... 'There is abundant liquidity in the machine we know as the United States economy.'"

Currency Watch:

The U.S. dollar index rallied 0.6% to 76.15 (down 3.6% y-t-d). On the upside for the week, the New Zealand dollar increased 3.1%, the Australian dollar 3.0%, the South African rand 2.2%, the South Korean won 1.1%, the Singapore dollar 0.9%, the Mexican dollar 0.5%, the Taiwanese dollar 0.5%, the Canadian dollar 0.4%, and the Brazilian real 0.2%. On the downside, the Swiss franc declined 2.1%, the Swedish krona 1.7%, the British pound 1.7%, the Japanese yen 0.9%, the Euro 0.7%, the Danish krone 0.7% and the Norwegian krone 0.7%.

Commodities and Food Watch:

March 23 - Bloomberg (Madelene Pearson): "Chinese consumption of gold may climb to rival that of India, the top user, as investors buy the metal as a store of value, said GFMS Ltd. and INTL FCStone. Demand in China... almost tripled to 580 metric tons last year from 206 tons in 2001, data from the producer-funded World Gold Council show. Use in India may slump 5% to 26% this year from 963 tons in 2010, Morgan Stanley said..."

March 24 - Bloomberg (Whitney McFerron): "China, the world's largest wheat consumer, made its biggest purchase of the grain from U.S. growers in more than five years, data from the U.S. Department of Agriculture show. China bought 116,000 metric tons of U.S. wheat..."

March 24 - Financial Times (Gregory Meyer): "China is set to import the largest amount of corn in more than 15 years, according to US government analysts in Beijing, injecting new demand into a tight global market. The analysts project that China will import 2.5m tonnes of corn in the crop year that begins in September, making its third significant international purchase in three years. If the projection is confirmed, the imports will be hitting the third-highest level in 50 years."

March 24 - Bloomberg (Whitney McFerron and Elizabeth Campbell): "The worst Texas drought in 44 years is damaging the state's wheat crop and forcing ranchers to reduce cattle herds, as rising demand for U.S. food sends grain and meat prices higher. Texas, the biggest U.S. cattle producer and second-largest winter-wheat grower, got just 4.7 inches of rain on average in the five months through February, the least for the period since 1967... More than half the wheat fields and pastures were rated in poor or very poor condition..."

March 22 - Bloomberg (Jason Scott): "Mining companies in Western Australia state, the nation's biggest raw materials producer, are turning to Chinese banks and share sales abroad after local bank lending dropped to the lowest in more than a year."

The CRB index rallied 2.4% (up 8.0% y-t-d). The Goldman Sachs Commodities Index gained 2.4% (up 13.8%). Spot Gold added 0.8% to $1,430 (up 0.6%). Silver surged 6.6% to $37.36 (up 15.5%). April Crude jumped $3.70 to $105.55 (up 16%). April Gasoline gained 3.7% (up 26%), and April Natural Gas increased 6.3% (up 0.6%). May Copper gained 2.0% (down 0.5%). May Wheat rose 1.4% (down 8%), and May Corn increased 0.9% (up 9.6%).

China Bubble Watch:

March 23 - Bloomberg: "China can grow 8% annually for the next two decades to become twice the size of the U.S. economy, World Bank Chief Economist Justin Lin said. The nation can continue to exploit a 'latecomer' advantage by borrowing the technologies and industries of advanced countries at low risk and cost, Lin said..."

March 24 - Bloomberg: "China will make more use of price tools to implement monetary policy and interest rates will be at the 'core' of that strategy, Zhang Xiaohui, director of the monetary policy department of the People's Bank of China, said... The central bank will shift the focus of policy away from the use of quantitative tools, Zhang said... These instruments include banks' reserve requirement ratios and loan quotas."

March 24 - Bloomberg: "China's M2 money supply may be growing more rapidly than central bank data show because there may have been revisions to the way loans and deposits are tallied, according to Standard Chartered Plc... The central bank may have changed accounting standards, causing 810 billion yuan ($123bn) of loans and deposits to 'disappear' from outstanding totals in January, affecting the base on which M2 is calculated, Standard Chartered economists Li Wei and Stephen Green... said..."

March 24 - Bloomberg: "China's manufacturing growth is accelerating, according to preliminary data from a survey of purchasing managers, signaling the economy may withstand increased interest rates."

Japan Watch:

March 23 - Bloomberg (Keiko Ujikane): "Japan's government estimated the damage from this month's record earthquake and tsunami at as much as 25 trillion yen ($309bn), an amount almost four times the hit imposed by Hurricane Katrina on the U.S."

Asia Bubble Watch:

March 23 - Bloomberg (Stephanie Phang and Chong Pooi Koon): "Malaysia's economy may expand as much as 6% this year and inflation is set to accelerate, the central bank said, highlighting the pressure on prices from rising consumer demand and escalating commodity costs."

March 22 - Bloomberg (Shamim Adam): "Singapore's inflation held above 4.5% for a third month as the cost of transportation, food and housing climbed... The consumer price index increased 5% last month from a year earlier..."

March 24 - Bloomberg: "Vietnamese inflation accelerated to a 25-month high in March on rising gasoline and power costs, adding pressure for another increase in interest rates. Prices rose 13.89% this month from a year earlier..."

Latin America Watch:

March 22 - Bloomberg (Laura Price and Thomas Black): "Mexico's government is raising its forecast for growth this year, betting that rising domestic demand will allow the economy to maintain momentum after the strongest expansion in a decade last year. Latin America's second-biggest economy will expand 4% to 5% this year after 5.5% growth in 2010, Finance Minister Ernesto Cordero said..."

March 23 - Bloomberg (Daniel Cancel): "Venezuela raised price caps on bread and pasta in order to bring costs in line with rising international prices, Food Minister Carlos Osorio said, threatening to accelerate the hemisphere's fastest inflation. The cost of baguette-style bread was increased about 24%... and pasta was raised 33%..."

March 23 - Bloomberg (Lucia Baldomir): "Uruguay's central bank will likely raise its benchmark interest rate... as policy makers in the South American country struggle to slow inflation that is accelerating beyond their target range... Analysts forecast annual inflation of 7.3% in 2011..."

Unbalanced Global Economy Watch:

March 23 - Bloomberg (Rudy Ruitenberg): "Rising world food prices threaten democracies in poor countries, causing riots and civil conflict and widening the gap between rich and poor, a study by the International Monetary Fund found. The findings are 'broadly consistent' with politicians' claims that surging food prices 'put at stake the socio-economic and political stability of the world's poorest countries,' IMF economist Rabah Arezki and Markus Brueckner... wrote..."

March 22 - Bloomberg (Thomas Penny): "Chancellor of the Exchequer George Osborne said the British economy will grow more slowly than forecast in 2011 and the U.K. will need to borrow more than previously thought in the next five years. The Office for Budget Responsibility predicts 2011 growth of 1.7%, down from the 2.1% forecast in November... The government will borrow 122 billion pounds ($198bn) next year compared with an earlier forecast of 117 billion pounds."

U.S. Bubble Economy Watch:

March 24 - Financial Times (Rahul Jacob): Li & Fung, a Hong Kong-based consumer goods sourcing and logistics company, warned that 'a new era in sourcing with higher prices' has begun, as manufacturers pass on the rising costs of both raw materials and Chinese labour to customers... Bruce Rockowitz, president of Li & Fung Trading, said: 'The biggest topic on the minds of everyone in this business is that higher prices are really here to stay. At this point, retailers are not sure what they can pass on to consumers and what they cannot.' William Fung, the company's group managing director, said heightened competition for labour in China, which has resulted in wage increases of about 20% this year, heralded the end of China-led deflation for the world economy."

March 23 - Bloomberg (Alex Kowalski): "Purchases of new U.S. homes unexpectedly declined in February to the slowest pace on record and prices dropped to the lowest level since December 2003, adding to evidence the industry is floundering. Sales decreased 16.9% to a 250,000 annual pace..."

March 24 - Bloomberg (Oshrat Carmiel): "A condominium at Manhattan's Plaza hotel sold this week for $48 million in a record real estate transaction. 'This is the highest price for single condo ever sold in New York City,' said Howard Lorber, chairman of Prudential Douglas Elliman Real Estate..."

Central Banking Watch:

March 25 - Bloomberg (Scott Lanman and Caroline Salas): "Federal Reserve Bank of Philadelphia President Charles Plosser laid out a strategy for withdrawing record monetary stimulus and said the improving economy means policy makers should consider how to exit. The central bank should set a pace for selling its mortgage and Treasury holdings in conjunction with raising interest rates, Plosser said... He suggested selling $125 billion for every 0.25 percentage-point rise in the benchmark rate to almost eliminate $1.5 trillion in bank reserves. Treasuries fell after Plosser... a skeptic of the Fed's decision to expand bond buying in November, laid out one of the most detailed plans by a policy maker for how to tighten credit and shrink a $2.6 trillion balance sheet... 'By tying sales to interest rate decisions, it allows the process for selling assets to be conditional on economic outcomes in ways that are familiar to market participants... This should provide a degree of comfort to the markets and reduce uncertainty about the path of sales.'"

March 25 - Bloomberg (Vivien Lou Chen): "The Federal Reserve has less need to support an improving economy beyond the $600 billion Treasury purchase plan already in place, and any changes to the central bank's stimulative policies should be considered some time after the program ends, said Charles Evans, president of the Fed's regional bank in Chicago. 'The economy definitely continues to improve each month... It would be natural to expect that there would be some period of time between when the $600 billion is completed and an assessment of a change' in the trajectory of policy... 'Each quarter, there seems to be more momentum going into our last FOMC meeting... I personally don't see as many needs for a further amount as I probably thought last fall. Last fall, I thought 600 was a good start and we would evaluate conditions at the appropriate time."

New York Watch:

March 21 - Bloomberg (Henry Goldman): "New York City may need to cut spending by $600 million more because the state Legislature is unlikely to approve aid and other measures anticipated in a preliminary financial plan, Budget Director Mark Page said."

March 23 - Bloomberg (Michael Quint): "New York Governor Andrew Cuomo reminded lawmakers that if there is no agreement on the budget they are negotiating, he could force them to choose between accepting his plans or shutting down the government. Cuomo, a Democrat, said he was still optimistic that a budget deal will be reached by the April 1 start of the fiscal year, even though there are unresolved issues about spending for education, health care and prisons."


Q4 2010 "Flow of Funds"

Total Non-Financial Debt (NFD) expanded at a 5.1% rate during Q4 2010, the fastest pace of quarterly expansion since Q4 2008's 5.7%. For comparison, NFD increased at a 4.2% during Q3 and only 0.8% in the year ago quarter. For all of 2010, NFD grew 4.6%, up from 2009's 3.0% but below 2008's 6.0%. For comparison, NFD expanded 5.0% during year 2000 and 4.3% and 4.5% during the recessionary years 1991 and 1992. During the Credit boom years 2004 through 2007, NFD expanded 8.8%, 9.5%, 9.0% and 8.6%. Total system Credit market borrowings ended the year at $52.636 TN, just shy of a record level. NFD ended 2010 at a record $36.296 TN. Financial Sector borrowings closed the year at $14.236 TN, down significantly from the 2008 high of $17.1 TN.

And while rejuvenated Credit expansion is constructive for the ongoing recovery of GDP, the underlying composition of debt growth is less than encouraging. By sector, federal government debt expanded at a 14.6% rate during the quarter, with state & local borrowings growing at a 7.9% pace. It's worth noting that state & local borrowings expanded at the fastest pace since Q4 2007, although growth slowed markedly during Q1 2011. Total (including financial subsidiaries) corporate borrowings increased at a 5.7% pace, the strongest growth since Q2 2008. Household debt contracted at a 0.6% pace during the quarter, down from Q3's negative 2.0% and the mildest contraction since Q3 2008.

In seasonally-adjusted and annualized dollars (SAAR), NFD expanded $1.830 TN during Q4, the largest expansion since Q4 2008's SAAR $1.897 TN. I have posited that NFD growth in the neighborhood of $2.0 TN is required to sustain the maladjusted U.S. "Bubble Economy," and I don't believe it is a coincidence that the employment backdrop has begun to stabilize now that the Credit system approaches this $2.0 TN threshold. At SAAR $1.320 TN and SAAR $191bn, federal and state & local debt growth combined for 83% of total NFD expansion during the quarter (down from Q3's 102% but still an incredibly high government dominance of system Credit). Total corporate borrowings expanded SAAR $413bn during the quarter, while household sector borrowings contracted SAAR $78bn.

Federal government liabilities increased $1.692 TN, or 17.9%, in 2010 to $11.148 TN. Federal debt has increased $4.450 TN, or 66%, in just the past 10 quarters. Over this period, the increase in federal liabilities has exceeded 11% of GDP. Markets willing, federal borrowings remain on track to double in less than four years. During Q4, federal expenditures were up 6.6% y-o-y to $3.777 TN, while Q4 receipts rose 5.6% y-o-y to $2.356 TN. Comparing Q4 federal receipts/expenditures to pre-crisis Q4 2007, it is worth noting that receipts were down 12.1% from three years earlier, while expenditures were up 21.1%. Receipts would now have to increase 60% to match federal expenditures.

Outside of government borrowing and spending, most of the U.S. Credit system remains moribund. Total Mortgage Debt contracted SAAR $324bn during Q4, although this was down from Q3's SAAR $486bn, Q2's $502bn and Q1's $620bn. This likely reflects reduced mortgage write-downs by lenders. Both Home and Commercial mortgage debt showed their smallest contractions in six quarters. For the year, Total Mortgage Debt dropped 3.4%, this following 2009's 2.0% decline. From its peak at the end of Q2 2008, total Mortgage debt has contracted $872bn, or 6%, to $13.833 TN.

GSE Assets contracted at a 7.5% rate during Q4 to $6.691 TN, while GSE insured MBS expanded at an 18.3% rate to $1.166 TN. The wind-down of outstanding asset-backed securities (ABS) runs unabated. ABS contracted at a 14.7% pace during Q4 - and was down 28.3% y-o-y - to $2.454 TN. The ABS market has now almost been cut in half since its peak level back in 2007. While write-downs have been heavy, huge quantities of "private-label" mortgages have been "refied" and modified - and conveniently transformed into coveted government-backed securities (Fannie, Freddie, Ginnie and FHA). No doubt many of these securities now rest comfortably on the Fed's balance sheet.

While we're on the subject, the Federal Reserve balance sheet expanded (nominal) $127bn, or almost 22% annualized, during Q4 to a record $2.454 TN. In just 10 quarters, Fed assets have ballooned $1.502 TN, or 158%. During the fourth quarter, Treasury holdings jumped $210bn to $1.022 TN. Purchases by the Fed (57%) and Rest of World (33%) amounted to 90% of total Treasury debt issuance during the quarter. For the period, Agency and GSE-backed securities holdings declined about $93bn to $1.140 TN. The unwind of TALF and related crisis-period lending vehicles continues, with these assets shrinking $8bn to $98bn (down from $490bn to end 2008).

With the government sector (Treasury and Fed) in the midst of historic expansion, it's not so easy for others to make headway. Banking system Assets contracted (nominal) $240bn during the quarter to $14.402 TN. Bank Assets are little changed now over the past seven quarters. On a seasonally-adjusted and annualized basis (SAAR), Bank Credit contracted a discouraging $755bn during the quarter to $9.5 TN. Mortgages dropped SAAR $229bn, Consumer Credit fell SAAR $142bn, and corporate and foreign bonds sank SAAR $618bn. On the growth side, Agency and GSE-backed securities expanded SAAR $151bn, Reserves at Fed SAAR $134bn, business Loans SAAR $16bn and Security Credit $15bn.

The Broker/Dealers, not surprisingly, have enjoyed better fortune when it comes to mustering some growth. Assets expanded (nominal) $47bn during the quarter (9.2% annualized) to $2.073 TN. On the growth side, Security Credit expanded a notable SAAR $178 during the quarter. At $278bn, Security Credit has doubled since Q1 2009 and now stands at the highest level since Q3 2008. Credit Market Instruments increased (nominal) $18bn during the quarter to $558bn, while Miscellaneous Assets fell $37bn to $1.025 TN. Elsewhere, Funding Corps expanded at a 7.1% rate during the quarter to $2.316 TN.

Searching for other signs of life, Credit Unions expanded assets at a 2.4% pace during the quarter to $911bn (up 3.2% for the year). REIT liabilities grew at a 1.5% rate to $493bn (up 4.2% y-o-y). Savings Institutions assets were little changed at $1.244 TN (down 0.8% y-o-y). Benefitting from the booming stock market, Life Insurance assets rose at a 10.2% rate to $5.177 TN (up 7.3% y-o-y).

Also boosted by big gains in equities, the Household sector saw its assets jump $2.164 TN during the fourth quarter to $70.740 TN - the first rise above $70 TN since Q3 2008. It is worth noting that Household Real Estate holdings declined another (nominal) $185bn during the quarter to $18.187 TN. Meanwhile, Financial Assets jumped $2.321 TN during the quarter to $47.639 TN, the high since Q2 2008. And with Liabilities little changed, Household Net Worth was up a robust $2.137 TN during the quarter to $56.823 TN. For the year, Household Net Worth jumped $3.166 TN.

Surging perceived financial wealth has clearly bolstered spending (hence GDP, with our nation's consumption/services dominated economic output). There is, as well, no doubt that rising incomes have worked wonders in driving the recovery. National Income jumped (nominal) $125bn, or 4.8%, during Q4 to a RECORD $13.00 TN. National Income was up $590bn, or 4.8%, for all of 2010. Total Compensation expanded at a 3.4% pace during the quarter and was up 3.4% y-o-y to a record $8.101 TN. I would argue very strongly that the government sector's borrowing and spending binge has been integral to the stabilization and reflation of incomes throughout the entire economy.

Rest of World (ROW) holdings of U.S. financial assets continue to inflate. Holdings expanded SAAR $1.258 TN during Q4. For the year, ROW holdings were up $1.136 TN, or 7.2%, to a record $16.952 TN, the largest growth since 2007. For the quarter, Treasury holdings increased SAAR $486bn and Miscellaneous Assets grew SAAR $451bn. For the year, ROW increased Treasury positions by $697bn, or 44% of net Treasury issuance during the period.

Again this quarter, the Fed's Z.1 "flow of funds" report offers few surprises. But, then again, the die has been cast for quarters now. The Treasury launched a historic borrowing and spending program that has bolstered spending, incomes and additional spending. Concurrently, the Federal Reserve embarked on its experimental campaign of massive liquidity injections and market interventions. This has worked wonders when it comes to accommodating the Treasury debt Bubble. Fed operations have at the same time inflated U.S. equities, along with risk markets round the globe. The massive inflation of the government sector has lavished cashflows on corporate America, seemingly supporting inflating stock and corporate debt prices. And each passing quarter of Fed data corroborates the "global government finance Bubble" thesis. Increasingly, I find myself thinking a few quarters ahead - pondering changes to the "flow of funds" - and the financial landscape - after the Fed wraps up QE2.

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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