Q4 2012 Flow of Funds

By: Doug Noland | Fri, Mar 8, 2013
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For years, I would anxiously await the opportunity to sift through each new voluminous quarterly Z.1 "flow of funds" report. On a quarterly basis, the Federal Reserve's Credit data illuminated the evolving U.S. Bubble - with each report reliably offering additional clues and Credit insight. The past few years analyses have been somewhat boring to write and, surely, painful to read. More recently, however, the data have again turned more interesting. As you read through my analysis, please keep in mind the Fed's decision to increase quantitative easing to $85bn monthly beginning this past January.

For Q4 2012, Total Non-Financial Credit expanded at a 6.4% rate, the strongest expansion since Q3 2008 (7.0%). Total Household Borrowings expanded 2.4% annualized, the briskest pace going back to Q1 2008 (3.6%). Household Mortgage Credit contracted 0.8% annualized, the smallest pace of decline since Q1 2009 (positive 0.2%). Corporate borrowings grew at a blistering 10.7% pace, the quickest since Q4 2007 (11.5%). Federal debt expanded at an 11.2% rate during the quarter. In nominal dollar terms - seasonally-adjusted and annualized (SAAR) - Q4 Total Non-Financial Credit expanded $2.536 TN. Looking at the main categories, Total Household debt increased SAAR $312bn, Total Business SAAR $1.076 TN, and Federal Government SAAR $1.259 TN. Credit expansion has become increasingly broad-based.

For full-year 2012, Total Non-Financial Debt (NFD) expanded $1.848 TN, up from 2011's $1.351 TN to the strongest pace since 2008. For comparison, NFD increased $1.457 TN in 2010, $1.078 TN in '09, $1.907 TN in '08, $2.552 TN in '07, $2.387 TN in '06, and $2.343 TN in '05 (nineties avg. $715bn). For the year, Household debt growth turned positive for the first time since 2007, with the strongest (non-mortgage) Consumer Credit growth ($154bn) since 2000 just offsetting the continued contraction in Mortgage borrowings. Total Business Credit expanded $687bn, up from 2011's $546bn for the strongest expansion since 2007's booming $1.316 TN (business Credit expanded $163bn in 2010, after contracting $245bn in '09). The growth in Federal government market debt increased to $1.140 TN, up from 2011's $1.068 TN - for the fifth straight year of Trillion-plus deficits.

I'll briefly interrupt Q4 2012 "flow of funds" analysis in order to update data for the deleveraging vs. leveraging "debate." The fourth quarter's $655bn expansion pushed Total Non-Financial Debt (NFD) above $40 TN ($40.099 TN) for the first time. In the past four years, NFD has increased $5.620 TN, or 16.3%. As a percentage of GDP, NFD ended 2012 at a record 253%, up from 232% to end 2007 and 240% to conclude 2008. It is worth noting that Household liabilities contracted $663bn over the past four years, while Federal debt expanded $5.580 TN.

Total (non-financial and financial) system Credit ended 2012 at a record $56.281 TN (355% of GDP). Total system debt growth has been somewhat restrained by the four-year $3.261 TN drop in Financial Sector debt obligations to $13.852 TN (low since 2006). As I have tried to explain in previous CBBs, the contraction in U.S. Financial Sector Credit market borrowings has been chiefly due to the shift of assets onto the Fed's balance sheet coupled with the significantly reduced intermediation requirements of government debt when compared to mortgage Credit (no need for the financial sector to securitize/intermediate Treasury bills, notes and bonds!). Especially after 2012's strong Credit expansion, the deleveraging thesis has become even more flimsy.

Much of "deleveraging" analyses focuses on the decline in household debt. In aggregate, total Household Liabilities contracted $663bn, or 4.7% during the past four years to $13.453 TN (worth noting liabilities ended 2000 at $7.353TN). Meanwhile, fueled by a remarkable accumulation and price inflation in financial asset holdings, Total Household Assets surged $11.764 TN, or 17.4%, in four years to a record $79.525 TN (up 57% since 2000). Over four years, Household Net Worth (assets minus liabilities) jumped $12.428 TN, or 23.2%. Notably, Household Net Worth surged $5.464 TN, or 9.0%, during 2012, surely helping to explain the ongoing vigor in household consumption. As a percentage of GDP, Household Net Worth jumped to 421%, down from the 2006's real estate Bubble spike to 490% but still significantly above the 385% average for the period 1985-2003.

Along with quite strong inflation in Net Worth, the aggregate household sector continues to enjoy respectable income gains. Fourth quarter Compensation was up 3.9% y-o-y (strongest gain in 6 quarters) to a record $8.662 TN. Total National Income was up 3.3% y-o-y for the quarter to a record $13.995 TN. Compensation increased 3.3% in 2012, somewhat less than 2011's 4.1% increase. Total National income increased 3.6% in 2012, down from 2011's 4.3%. National Income has risen 14.0% over the past three years, with Compensation gaining 9.8%.

Most of the ongoing inflation in asset prices and incomes is either directly or indirectly related to Washington's extraordinary policymaking. Since mid-2008 (18 quarters), publicly held Treasury market debt has increased 120% to $11.569 TN. Federal debt (includes some other obligations) doubled to $13.469 TN, increasing over this period from 46% of GDP to 85%. State & Local debt increased 33% in 18 quarters to a record $3.732 TN.

Federal Expenditures were flat during 2012 at $3.758 TN, or 24% of GDP. Recall that federal spending jumped almost 28% in the three years ended 2010. In the process, federal spending as a percentage of GDP jumped from about 20% of GDP in 2007 (1995-2007 avg. 20.3%) to 25.5% in 2010. Federal Receipts were up 5.9% in 2012 to $2.669 TN, fueled by accelerating non-federal Credit growth. Since 2007 (five years), annual receipts have increased $14bn, or 0.5%, while federal expenditures have surged $858bn, or a whopping 29.6%.

The Fed's balance sheet expanded $117bn during Q4, the strongest expansion since Q2 2011. Federal Reserve Assets were little changed for the year, while being up $502bn, or 20.5% over two years. Fed holdings are up $2.1 TN, or 210%, since Q2 2008. In ten years, Federal Reserves have inflated an historic 292%.

Huge federal expenditures and deficits coupled with the Fed-induced collapse in borrowing cost have lavished inflated earnings and cash-flows upon corporate America. Despite these inflated earnings, ultra-loose financial conditions have nonetheless incited a mini boom in corporate borrowings. Corporate bonds increased SAAR $719bn during Q4 to a record $12.511 TN. For the year, Corporate bonds jumped $527bn, or 4.4%.

Bank Credit has quietly been showing a pulse. Bank Assets jumped $226bn during Q4, or 6.1% annualized, to $14.992 TN. Bank Assets were up 2.4% y-o-y and 10.7% over two years. During Q4, commercial loans increased $75bn, with a 2012 gain of $195bn, or 9.5%, to $2.252 TN. Mortgage loans increased $55bn during the quarter, although they were down $47bn for the year. The banking system continues to accumulate government securities, with this asset class jumping $140bn, or 6.7%, during 2012 to $2.245 TN. It is worth noting that Total Bank Deposits rose $714bn, or 7.0%, in 2012 to a record $10.948 TN.

For the first time since Q2 2008, Total (home and commercial) Mortgage Debt (TMD) actually posted a quarterly increase ($17bn). Overall, TMD declined $259bn (1.9%) in 2012, down from contractions of $328bn in '11, $621bn in '10 and $292bn in '09. Total Mortgage Credit declined $1.567 TN, or 10.7%, from its Q2 '08 high, having now dropped back to 2006 levels. For perspective, TMD is today double the level where it ended the 90's. If the current backdrop holds, I would expect positive mortgage Credit growth in 2013.

While we're on the subject of Mortgage Credit, GSE Assets declined $35bn during Q4 and $211bn for all of 2012, to $6.269 TN. But we have to temper our enthusiasm for the so-called "winding down" of Fannie and Freddie. Agency-backed MBS increased $32bn in Q4 and $135bn (10.4%) in 2012, to $1.440 TN. Overall, outstanding Agency Securities (debt and MBS) declined only $33bn (0.4%) during 2012 to $7.544 TN.

In the miscellaneous financial sector categories, Credit Union assets expanded 6.0% in 2012 to $904bn. Securities Broker/Dealer assets increased 6.1% to $2.068 TN, the first annual growth since 2007. REIT Liabilities were up a notable 22.9% to $778bn, with a two-year gain of 55%. For the year, total Securities Credit jumped a notable $200bn, or 15.2%, to the highest level since 2007. Securities Credit has increased 40% in three years.

Rest of World (ROW) holdings of U.S. assets increased $583bn in 2012 to a record $19.384 TN. ROW Treasury holdings jumped $474bn last year to $5.546 TN, with Official Treasury holdings up $339bn to $3.992 TN. Over three years, total ROW holdings jumped $3.578 TN, or 22.6%. During this period, Treasury holdings jumped 50%, or $1.848 TN, with Official holdings up $1.121 TN, or 39%.

Granted, the fourth quarter was an odd one. There were clearly impacts from fiscal cliff uncertainties and looming tax increases. Still, the quarter was noteworthy for the big jump in Credit growth and the even wider divergence between strong Credit/financial markets and weak economic performance. A jump in (non-financial) Credit expansion to a 6.2% pace equated with a barely positive (0.1%) real GDP reading. It would be easier to dismiss this as an anomaly if it wasn't such a prominent global dynamic (i.e. China, India, Brazil, etc.). As for the maladjusted U.S. economy, we've reached the phase were it requires exceptionally strong Credit expansion (and overheated markets!) to attain what most economists would view as "normal" growth.

A few years back I opined that it would take roughly $2 TN of annual system Credit growth to more fully reflate the deeply maladjusted economy. After four years of outrageous fiscal and monetary stimulus, our Credit system is poised to possibly reach this milestone in 2013. The good news is that jobs are growing at a decent clip. The bad news is that this reflation has required a doubling of federal debt coupled with incredible Bubble-inducing monetary measures.

The government finance Bubble has significantly inflated household incomes and corporate earnings, a Bubble dynamic that has worked to incite speculation and inflation throughout equities and corporate debt markets. The reflation in securities and, increasingly, real estate markets has again inflated Household Net Worth. Perceived gains in wealth and ongoing (government policy-induced) income growth have spurred boom-time spending levels, in the process sustaining the consumption and services-based U.S. economy. Ignore the underlying Credit dynamics and things almost look OK.

Importantly, the government finance Bubble has succeeded in sustaining the U.S. "Bubble Economy" structure that evolved over the prolonged Credit Bubble period. This has ensured unending Current Account Deficits and endless dollar liquidity; historic global financial and economic imbalances; and attendant myriad Bubbles around the world. Desperate global central bankers, meanwhile, are content to disregard precarious Bubble excess throughout global risk markets - fixated instead on acute economic and financial fragilities. Flawed economic doctrine, analytical frameworks and policies over years fostered deep economic maladjustment and market Bubbles. Resulting fragilities these days ensure even more aggressively "activist" policy measures viewed as necessary to bolster an acutely vulnerable global "system."

Two of the savviest "macro" analysts of this era - Stan Druckenmiller and Marc Faber - this week separately warned that this central banker-induced boom will end badly. Mr. Faber went so far as to predict unpleasant happening for 2013. I don't know if this historic Bubble will burst this year. But I am convinced the longer the current backdrop continues the greater the eventual economic and financial turmoil. The Q4 2012 "flow of funds" provides added confirmation that policymakers have painted themselves into a corner. It's hard to believe the Fed will stick with $85bn monthly QE in the face of mounting Credit and market excess. On the other hand, the liquidity backdrop has created such unsettled global markets that central bankers will look for any excuse to avoid watering down the punch.

 


For the Week:

The S&P500 jumped 2.2% (up 8.8% y-t-d), and the Dow rose 2.2% (up 9.9% y-t-d). The broader market was strong. The S&P 400 MidCaps jumped 3.0% (up 10.9%), and the small cap Russell 2000 advanced 3.0% (up 11.0%). The Banks surged 4.5% (up 10.4%), and the Broker/Dealers jumped 3.9% (up 16.6%). The Morgan Stanley Cyclicals gained 3.6% (up 11.1%), and Transports increased 2.7% (up 15.8%). The Morgan Stanley Consumer index rose 1.6% (up 12.7%), and the Utilities added 1.3% (up 7.7%). The Nasdaq100 gained 2.1% (up 5.4%), and the Morgan Stanley High Tech index rose 1.9% (up 7.8%). The Semiconductors jumped 2.4% (up 13.3%). The InteractiveWeek Internet index surged 2.9% (up 12.8%). The Biotechs rose 3.5% (up 15.6%). Although bullion was up $3, the HUI gold index slipped 0.4% (down 21.2%).

One-month Treasury bill rates ended the week at 8 bps and 3-month rates closed at 9 bps. Two-year government yields were up 2 bps to 0.26%. Five-year T-note yields ended the week15.5 bps higher to 0.895%. Ten-year yields rose 21 bps to 2.06%. Long bond yields surged 21 bps to 3.26%. Benchmark Fannie MBS yields were up 23 bps to 2.75%. The spread between benchmark MBS and 10-year Treasury yields widened 2 bps to a six-month high 69 bps. The implied yield on December 2014 eurodollar futures increased 6 bps to 0.59%. The two-year dollar swap spread was little changed at 14 bps, while the 10-year swap spread was down slightly to 8.5 bps. Corporate bond spreads narrowed significantly. An index of investment grade bond risk fell 5 to a two-year low 81 bps. An index of junk bond risk sank 28 to a two-year low 404 bps.

Debt issuance was decent. Investment grade issuers included American Tower $1.8bn, Bank of New York Mellon $1.5bn, Avon Products $1.5bn, Burlington Northern $1.5bn, International Lease Finance $1.25bn, QVC $1.05bn, John Deere $1.0bn, Ace Ina $950 million, Manufacturers & Traders Trust $800 million, Allergan $600 million, McKesson $900 million, Mattel $500 million, Verizon $500 million, Markel $500 million, Southern Cal Edison $400 million, and Carefusion $300 million.

Junk bond funds saw inflows of $820 million (from Lipper). Junk issuers included Range Resources $750 million, Sealed Air $425 million, Mastec $400 million, Coinstar $350 million, Tital International $325 million, Prospect Capital $250 million, Cornerstone Chemical $230 million, Claire's Stores $210 million, and Acadia Healthcare $150 million.

Convertible debt issuers included MGIC $450 million.

International issuers included Royal Bank of Canada $2.0bn, Bank of Nova Scotia $1.0bn, Swedbank $1.0bn, Bharti Airtel $1.0bn, Cosan Luxembourg $500 million, Tanner Financieros $250 million, Stats Chippac $255 million, and Aon $250 million.

Italian 10-yr yields this week fell 19 bps to 4.59% (up 9bps y-t-d). Spain's 10-year yields sank 34 bps to 4.74% (down 53bps). German bund yields jumped 11 bps to 1.52% (up 20bps), and French yields gained one basis point to 2.12% (up 12bps). The French to German 10-year bond spread narrowed 10 to 60 bps. Ten-year Portuguese yields sank 41 bps to 5.81% (down 94bps). The Greek 10-year note yield fell 43 bps to 10.37% (up 10bps). U.K. 10-year gilt yields were up 19 bps to 2.06% (up 24bps).

Italy's FTSE MIB recovered 3.4% (down 0.4% y-t-d). The German DAX equities index jumped 3.6% for the week (up 4.9%). Spain's IBEX 35 equities index surged 5.4% (up 5.6%). Japanese 10-year "JGB" yields slipped one basis point to 0.64% (down 14bps). Japan's Nikkei surged 5.8% (up 18.2%). Emerging markets were mixed to higher. Brazil's Bovespa equities index rallied 2.7% (down 4.1%), and Mexico's Bolsa gained 0.7% (up 1.4%). South Korea's Kospi index declined 1.0% (up 0.5%). India's Sensex equities index rallied 4.0% (up 1.3%). China's Shanghai Exchange fell 1.7% (up 2.2%).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.52% (down 36bps y-o-y). Fifteen-year fixed rates were unchanged at 2.76% (down 37bps). One-year ARM rates were down one basis point to 2.63% (down 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 11 bps to 4.13% (down 58bps).

Federal Reserve Credit jumped another $7.2bn to a record $3.085 TN. Fed Credit expanded $299bn over the past 22 weeks. In the the past year, Fed Credit expanded $220bn, or 7.7%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $682bn y-o-y, or 6.6%, to $10.951 TN. Over two years, reserves were $1.586 TN higher, for 17% growth.

M2 (narrow) "money" supply fell $22.6bn to $10.390 TN. "Narrow money" has expanded 6.4% ($622bn) over the past year. For the week, Currency increased $2.5bn. Demand and Checkable Deposits were little changed, while Savings Deposits dropped $19.5bn. Small Denominated Deposits declined $3.4bn. Retail Money Funds dipped $1.9bn.

Money market fund assets fell $16.7bn to $2.646 TN. Money Fund assets were about unchanged from a year ago.

Total Commercial Paper outstanding sank $40.5bn this week to a 14-week low $1.021 TN CP has declined $45bn y-t-d, while expanding $95bn, or 10.3%, over the past year.

Currency and 'Currency War' Watch:

March 8 - Bloomberg (Rocky Swift and Zeb Eckert): "Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, comments on the effect of quantitative easing policies on currencies... 'Whether it's the Bank of Japan, the Federal Reserve or even the ECB, the idea that they can engineer economic recovery by quantitative easing that may lead to weaker currencies ultimately is not a story that will end in a pretty way. Currency devaluation as a recipe for economic growth always comes at a cost of taking market share from someone else... China is understandably concerned about that, as has been Brazil, as has been most major developing economies that rely on exports as a source of economic growth... The developed economies say, well we're not trying to depreciate our currencies, but they know this is going to happen... This is one of the unintended and potentially dangerous consequences of the financial engineering of quantitative easing.'"

March 6 -Wall Street Journal (Ira Iosebashvili): "Did China just lambaste Japan over its weaker yen, or did we witness an example of carefully crafted diplomacy? Gao Xiqing, president of the China Investment Corporation, minced few words in his interview with the Wall Street Journal. He warned Japan, which has seen its yen fall by 20% against the dollar since September, against treating its neighbors like a 'garbage bin,' and that starting a currency war would 'not only be dangerous for others but eventually be bad for yourself.' Mr. Gao's words made a bold contrast with a statement issued by the Group of 20 nations -- which includes China... last month."

March 8 - Financial Times (Leslie Hook and Simon Rabinovitch): "Beijing has issued a new warning against competitive devaluations by rich countries, saying that emerging markets will pay the price for so-called currency wars. 'For the global economy this year, I am worried about inflation, about competitive currency depreciation and about the negative spillover effects of excessive issuance of the main currencies,' commerce minister Chen Deming said... Mr Chen, speaking at the National People's Congress... said the deliberate depreciation of major currencies could have a 'huge impact' on developing countries including China. Beijing has expressed fears that a 'currency war' will hurt its exporters while driving up the cost of global commodities, fuelling inflation in China, which relies heavily on natural resource imports.

March 8 - Bloomberg: "China's Commerce Minister Chen Deming said he's concerned at the risk of competitive devaluations as the yen slumped to the lowest level against the dollar in more than three years. Large depreciations of major currencies 'will have a big impact on China and other emerging nations,' Chen said... In Tokyo, Japan's top currency official, Takehiko Nakao, said... that inflows of capital from advanced-nation easing can aid developing economies... 'I'm worried about inflation for the year and I worry that competitive devaluations will lead to an oversupply of money and it will have a negative spillover on economic growth globally,' Chen said."

March 4 - Bloomberg (Simon Kennedy, Emma Charlton and Ye Xie): "The currency wars declared by Brazilian Finance Minister Guido Mantega are proving more a battle to salvage economic growth than a spiral of competitive devaluations. While the yen and pound slide on the prospect central banks will intensify stimulus and South Korea's won and Chile's peso strengthen, volatility in the currency market is below its average of the past decade and global stocks have gained $2.15 trillion since the start of 2013."

The U.S. dollar index added 0.5% to 82.70 (up 3.7% y-t-d). For the week on the upside, the Brazilian real increased 1.8%, the Mexican peso 1.0%, the Swedish krona 0.5%, the Norwegian krone 0.5%, and the Australian dollar 0.3%. For the week on the downside, the Japanese yen declined 2.5%, the Swiss franc 0.9%, the British pound 0.8%, the Singapore dollar 0.6%, the New Zealand dollar 0.4%, the South African rand 0.3%, the Canadian dollar 0.2%, the Danish krone 0.1%, the euro 0.1% and the Taiwanese dollar 0.1%.

Commodities Watch:

The CRB index rallied 1.4% this week (down 0.2% y-t-d). The Goldman Sachs Commodities Index recovered 1.0% (up 0.3%). Spot Gold increased 0.2% to $1,579 (down 5.8%). Silver gained 1.6% to $28.95 (down 4.2%). April Crude rose $1.27 to $91.95 (unchanged). April Gasoline jumped 2.4% (up 16%), and April Natural Gas rose 5.0% (up 8%). May Copper gained 0.2% (down 4%). March Wheat fell 3.3% (down 11%), while March Corn was little changed (up 4%).

U.S. Bubble Economy Watch:

March 8 - Bloomberg (Brian Louis): "Prices for U.S. commercial property are expected to climb in the next six months, extending a rebound that has sent values close to levels reached at the market's peak in 2007, according to Green Street Advisors Inc.... Prices climbed 1% in February and are within 1 percentage point of their August 2007 high..."

Federal Reserve Watch:

March 8 - Reuters: "The U.S. Federal Reserve is considering jettisoning a plan to eventually sell off the massive haul of bonds it is now buying, a politically defensive strategy that would have the added benefit of supporting the economy for years to come. In what would be a revision of their blueprint for the eventual tightening of monetary policy, Fed officials have said they could simply allow the trillions of dollars in securities they have bought through three rounds of quantitative easing to mature."

March 4 - Dow Jones (Victoria McGrane): "The potential for the Federal Reserve's easy-money policies to fuel excessive risk taking and undermine financial stability is the most serious potential risk confronting the central bank, a senior Federal Reserve official said... Janet Yellen, vice chairman of the Fed board of governors, stressed she didn't see any 'pervasive evidence' that financial stability is currently under threat but she did indicate that the financial stability risks of current policy are 'the most important potential cost associated with the current stance of monetary policy' in remarks prepared for a policy conference... Moreover, Ms. Yellen emphasized that ending the Fed's bond-buying programs prematurely carries its own risks and made clear that she supports keeping policy easy for the foreseeable future."

March 4 - Bloomberg (Joshua Zumbrun and Jeff Kearns): "Federal Reserve Vice Chairman Janet Yellen said the Fed should press on with $85 billion in monthly bond buying while tracking possible costs and risks from the unprecedented program. 'Turning to the potential costs of the Federal Reserve's asset purchases, there are some that definitely need to be monitored over time,' Yellen said... 'At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.' Yellen, the central bank's No. 2 official, echoed Chairman Ben S. Bernanke's comment last week that the benefits of the Fed's historically low interest rates and near-record $3.09 trillion balance sheet outweigh any risk of financial instability. 'I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment,' Yellen said..."

March 4 - Bloomberg (Alex Kowalski): "Former Federal Reserve Chairman Paul Volcker said U.S. central bank officials may find it difficult to rein in their historic stimulus at the appropriate time because 'there is a lot of liquor out there now.' 'At some point when the worm turns and the party is getting under way, to use that old analogy, at what point do you begin retreating?' Volcker said... 'You can make a mistake and go too quick, but the much more frequent mistake in my judgment is you go too slow, because it's never popular to take the so-called punch bowl away or to weaken the liquor.'"

March 5 - Bloomberg (Vivien Lou Chen): "Benefits of Fed adopting a 'no asset sale' approach are 'compelling enough' that central bank has 'good chance' of adopting strategy, JPMorgan's chief U.S. economist Michael Feroli writes... [The] move would provide 'some modest' further near-term stimulus, reduce concerns about financial instability risks, limit future losses on Fed balance sheet...."

Global Bubble Watch:

March 4 - Bloomberg: "China's foreign currency reserves, which have surged more than 700% since 2004, are enough to buy every central bank's official gold supply -- twice. ...China's foreign reserves surpassed the value of all official bullion holdings in January 2004 and rose to $3.3 trillion at the end of 2012... The price of gold increased 263%percent from 2004 through Feb. 28, with the registered volume little changed... By comparison, China's reserves rose 721% through 2012, while the combined total among Brazil, Russia and India rose about 400% to $1.1 trillion. Dollars brought into China are sold to banks, which in turn sell the greenbacks to the central bank, increasing the reserves."

March 7 - Bloomberg (Catherine Bosley): "The Swiss central bank spent 188 billion francs ($199bn) in 2012, nearly a third of Switzerland's annual output, to enforce the cap on its currency to protect the economy. The Swiss National Bank bought foreign currencies from a wide range of counterparties in Switzerland and abroad... It amassed record foreign currency reserves in its fight to defend the ceiling and holds a large portion of those reserves are held in highly rated government bonds."

March 6 - Dow Jones: "People's Bank of China Governor Zhou Xiaochuan... warned against reading too much into monthly forex purchases data, after recent data signaled strong capital inflows in January. On Tuesday, central bank data showed the PBOC and other financial institutions in China acquired a net 684.0 billion yuan ($109bn) of foreign currency in January, up from CNY134.6 billion in December. The data suggest that capital inflows likely accelerated in January, which could add to domestic liquidity and inflation pressures."

March 7 - Financial Times (Michael Stothard): "Private equity firms have lost no time taking advantage of record low yields in the global leveraged loan markets. And like a school of piranhas sensing blood, they have thrown themselves into the fray with gusto. Financial sponsors have been lowering their portfolio companies' borrowing rates by as much as 125 bps in a single move, despite outcries from investors in the loans. The wave of 'repricings' this year, which are allowed because loans are callable instruments that can be repaid at any time, started in the US. But in recent weeks they have arrived in Europe as well. Refinancing and repricings have reached $130bn globally this year, according to Dealogic... The frenzy of activity comes as institutional investors drive up demand for loans in their search for assets that carry a higher yield than sovereign or high-grade corporate bonds, but are still not as risky as equities."

March 8 - Bloomberg (Sridhar Natarajan): "U.S. loan funds recorded $1.1 billion of inflows this week, extending their position as the best-performing asset class of 2013, according to Bank of America Corp. Investors added to record-setting deposits into funds that purchase floating-rate debt in January and February... The holdings have seen assets expand by 14% this year... The price of leveraged loans climbed to 97.85 cents on the dollar yesterday, the most since July 2007..."

March 8 - Bloomberg (Kristen Haunss): "Collateralized loan obligations paying the lowest rates in five years are being snapped up by investors, providing the fuel that's contributing to the biggest surge in corporate buyouts since before the financial crisis. The top-rated portion of a $420 million CLO sold by a unit of Prudential Financial Inc. paid interest at 110 bps more than the London interbank offered rate, the least offered on slices rated AAA since February 2008... About $19 billion of CLOs have been sold this year, following sales of $52.6 billion in 2012 that were the most since the peak of $94 billion in 2007."

Global Credit Watch:

March 5 - Bloomberg (James G. Neuger and Svenja O'Donnell): "European finance ministers opened the way for looser budget policies after a backlash against austerity thrust Italy into political limbo and shattered months of relative stability in European markets. Italy's deadlocked election, France's refusal to make deeper budget cuts and protests against the shrinking of the welfare state across southern Europe escalated the rebellion against the German-led prescription for fighting the debt crisis. Economic strains 'may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits,' European Union Economic and Monetary Commissioner Olli Rehn told reporters..."

March 5 - Bloomberg (Paul Armstrong and Esteban Duarte): "Morgan Stanley led the busiest day for bank bond issuance in Europe in almost two months as lenders took advantage of borrowing costs that remain near the lowest in five years... Bank bond issuance tumbled 80% to 12.8 billion euros in February from the previous month as the euro-region economy shrank the most since 2009 and Italy's deadlocked election made investors wary of all but the safest government securities."

China Bubble Watch:

March 5 - Bloomberg: "Chinese Premier Wen Jiabao said the nation lacks a sustainable growth model and faces mounting 'social problems,' as he ends a decade in power that saw the economy grow fourfold to be the world's second largest. 'We are keenly aware that we still face many difficulties and problems,' Wen told almost 3,000 delegates in his final report to the National People's Congress in Beijing... He set an economic growth target of 7.5% for this year, unchanged from 2012, and an inflation goal of 3.5%. Wen steps down at the congress, which runs through March 17, after overseeing China's rise to an $8 trillion economy that surpassed Japan and Germany and sustained its expansion through the global financial crisis. Those achievements have come at the cost of surging inequality, environmental degradation and growing financial risks, challenges that he leaves for incoming Premier Li Keqiang. 'There are also many problems Wen left behind, and the new leaders are to face and tackle,' said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. They include 'the risk of a property bubble, significantly increased local government debt, income equality and worsening pollution,' said Zhang, who previously worked for the International Monetary Fund."

March 6 - Bloomberg: "Pollution has replaced land disputes as the biggest cause of social unrest in China, a retired Communist Party official said..., as the country's legislature pays more attention to environmental degradation. China now sees 30,000 to 50,000 so-called mass incidents every year, said Chen Jiping, a former leading member of the party's Committee of Political and Legislative Affairs. Increased use of mobile phones and the Internet has allowed protesters to show their anger more effectively, he said. 'The major reason for mass incidents is the environment, and everyone cares about it now,' Chen told reporters... 'If you want to build a plant, and if the plant may cause cancer, how can people remain calm?'"

March 7 - Bloomberg: "The ranks of China's ultra-wealthy in its legislature swelled 20% this year, highlighting the vested interests that may oppose any measures by incoming President Xi Jinping to reduce the nation's wealth gap. Ninety members of the National People's Congress are on a list of China's 1,000 richest people published by the Shanghai- based Hurun Report, up from 75 last year... Everyone on the Hurun list had a fortune of at least 1.8 billion yuan ($289.4 million), more than former Republican presidential candidate Mitt Romney. The growing presence of wealthy people in the legislature coincides with efforts by Xi to stem corruption and the public display of luxury by officials as he seeks to address concern the Communist Party no longer represents interests of ordinary Chinese."

March 7 - Financial Times (Jamil Anderlini): "The legislature of the world's last major communist country is almost certainly the wealthiest in the world, according to a popular rich list that names 83 dollar billionaires among the delegates to China's parliament this year. Meanwhile, in America there is not a single billionaire in the House of Representatives or the Senate while the wealthiest member, Texas Republican Michael McCaul, is estimated to be worth a paltry $500m... The average fortune among the 83 wealthiest NPC and CPPCC delegates is $3.35bn, according to the Hurun report, compared with the average annual wage for Chinese urban workers of less than $7,000."

March 4 - Bloomberg: "China's property stocks plunged the most since June 2008 after the government intensified a three- year campaign to cool the real estate market, ordering higher down payments and stricter enforcement of sales taxes. The Shanghai Stock Exchange Property Index lost 9.3% at the close of trading, its biggest drop since June 19, 2008... China's cabinet on March 1 told cities with 'excessively fast' price gains to raise down-payment requirements and interest rates on second-home mortgages and ordered individuals selling properties to 'strictly' pay a 20% tax on the sale profit when the original purchase price is available, a levy that is being easily avoided."

March 6 - Dow Jones (Aaron Back): "Chinese policy makers sent signals that Beijing is preparing to tighten monetary policy, as inflation risks rise along with a recovering economy. At the annual meeting of the country's legislature Tuesday, Chinese Premier Wen Jiabao set a lower target for money-supply growth, a clear sign authorities want to rein in lending and liquidity in the financial system. And Wednesday, a vice governor of the central bank and one of its external advisers both argued that excess liquidity needs to be mopped up to stop inflation from rising... Inflation in 2012 was subdued, but economists widely expect it to be rising again this year on higher food prices. Inflationary pressures also are showing up in the property market, prompting Beijing to unveil new taxes and restrictions on apartment sales last week."

March 6 - Dow Jones (Richard Silk and Aaron Back): "China's central bank may use repurchase agreements and central bank bills to soak up excess liquidity and maintain price stability, People's Bank of China Vice Governor Yi Gang said... On Tuesday, central bank data showed the PBOC and other financial institutions in China acquired a net 684.0 billion yuan ($109bn) of foreign currency in January, indicating strong capital inflows that could add to domestic liquidity."

March 4 - Bloomberg: "China will focus on controlling loan defaults in areas such as local government debt, real estate and industries with excessive capacity after banks' bad loans expanded for a fifth straight quarter. Regulators must 'firmly hold the line' on preventing a breakout of systemic and regional financial risks, the China Banking Regulatory Commission said... The banking system should guard against risks from lenders' off-balance sheet activities including wealth management and cross-industry businesses such as mutual funds, trust products and insurance..."

March 7 - Bloomberg: "China doesn't approve of excessively loose monetary policies by other nations, according to a senior government adviser who wrote a book with Li Keqiang, the country's incoming premier. 'We have already taken a position on this before and China doesn't approve of some countries' overly accommodative monetary policy,' Li Yining, 82, a Peking University professor and delegate to China's top advisory body, said... when asked about Japan's recent easing. 'This is an act of transferring the crisis to others.' The remarks may reflect official displeasure over the yen's depreciation amid Japanese Prime Minister Shinzo Abe's campaign for more monetary easing to fight deflation. China is 'fully prepared' for a currency war should one happen, central bank Deputy Governor Yi Gang said March 1..."

March 7 - Financial Times (Simon Rabinovitch and Patti Waldmeir): "Wang Ying and Du Bibo were married only a fortnight ago but already they are lining up in the divorce registry office in Shanghai's Xuhui district to dissolve their marriage. With big smiles on their faces - a facial expression that marks them out as not your normal warring couple - they explain that the mortgage officer at their bank recommended divorce as the best way around a new property tax. A capital gains tax on housing sales was intended to cool China's sizzling property market, but since it was announced last Friday it has had the exact opposite effect: a panic has been unleashed. Sales have spiked and prices have increased as buyers try to close deals before the 20% tax goes into effect. There has also been a jump in divorces, a practical if rather hard-hearted strategy for exploiting a loophole in the rules."

March 7 - Bloomberg: "China's property curbs in the past decade have been unsuccessful and the new round of measures will slow property sales, said billionaire Vincent Lo, also a member of the government's advisory board. 'Certainly they haven't been,' said Lo, chairman of Shui On Land Ltd., a Shanghai-based developer... 'Had they been successful, home prices wouldn't have risen higher the more the government curbed.' China on March 1 imposed its toughest curbs in a year, ordering the central bank to raise down-payment requirements and interest rates for second mortgages in cities with excessive price gains, enforcing a property sales tax and telling local governments with the biggest price pressures to tighten home-purchase limits."

Japan Watch:

March 4 - Bloomberg (Toru Fujioka): "Haruhiko Kuroda said that the Bank of Japan will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could start sooner than next year. 'I would like to make my stance clear that we will do whatever we can do,' Kuroda, president of the Asian Development Bank, said at a confirmation hearing... The central bank hasn't bought enough assets and should consider buying large amounts of longer-term bonds, he said."

March 8 - Bloomberg (Keiko Ujikane): "Japan returned to growth in the fourth quarter, bolstering Prime Minister Shinzo Abe's campaign to end 15 years of deflation and revive the world's third-biggest economy. Gross domestic product rose an annualized 0.2% in the three months through December..."

Latin America Watch:

March 6 - Bloomberg (Blake Schmidt and Matt Malinowski): "Brazil's state banks are on pace to lend more than non-state financial companies for the first time ever as the nation's privately owned institutions dismiss President Dilma Rousseff's pleas to expand credit faster. Lending by state-backed Banco do Brasil SA, Caixa Economica Federal and Brazil's development bank surged 27% to 1.1 trillion reais ($560bn) in 2012, more than triple the 8% increase to 1.2 trillion reais by commercial banks... Private lenders stung by delinquency rates hovering close to 30-month highs have been slow to heed Rousseff's calls for lower borrowing costs as she seeks to boost Latin America's biggest economy after the weakest two years of expansion in a decade."

March 5 - Bloomberg (Raymond Colitt): "Brazil's President Dilma Rousseff plans to cut federal taxes on diesel and ethanol in a bid to rein in consumer prices that have increased more than analysts expected in the past seven months, said a government official... The tax cuts, which are initially scheduled for July, may be brought forward if inflation nears the 6.5% upper limit of the central bank's target over the next two months..."

Global Economy Watch:

March 8 - Bloomberg: "China's exports exceeded forecasts in February, an indication that improving global demand may help to sustain the rebound in the world's second-biggest economy. Overseas shipments increased 21.8% from a year earlier... The number compares with the 8.1% median estimate... Imports fell a more-than-estimated 15.2%, leaving a trade surplus of $15.25 billion."

Europe Watch:

March 4 - Dow Jones (Geoffrey T. Smith): "The European Central Bank may need to change the way it thinks about monetary policy in the future as its role in preserving financial stability increases, board member Yves Mersch said... Mr. Mersch, the ECB's newest board member, told a central-bank event in the Czech Republic that 'it may be desirable to incorporate in the decision-making process of monetary policy certain financial variables which, over the medium to longer term, may influence inflationary developments.' He cited excessive credit growth and asset bubbles as two such variables. The ECB's role has expanded greatly--at least in de facto, if not de jure, terms--as a result of the euro zone's sovereign-debt crisis, after its successful, but narrowly defined, mandate of pursuing low inflation failed to stop other factors which led ultimately to the current crisis across the euro zone."

March 6 - Bloomberg (Marcus Bensasson): "Euro-area exports fell in the fourth quarter for the first time in more than three years and investment declined as the sovereign debt crisis pushed the region deeper into a recession. Shipments from the euro area dropped 0.9% in the last three months of 2012..."

Italy Watch:

March 4 - Bloomberg (Lorenzo Totaro and Giovanni Salzano): "Italy's public debt rose to the highest level since Benito Mussolini won elections 89 years ago, paving the way for his 20-year dictatorship. ... Debt jumped in 2012 to 127% of gross domestic product from 120.8% a year earlier. That's the most since 1924, when Mussolini won 64% of the popular vote in elections that opposition members said were marked by irregularities... 'Nowadays, reducing debt-to-GDP ratio is challenging, much more than it used to be,' said Fabio Fois, an economist at Barclays in Milan. 'Cutting unproductive public expenditures and increasing growth potential are the only viable measures. Maintaining a large primary surplus position over the medium term must remain a policy goal."

March 8 - Bloomberg (Lorenzo Totaro): "Italy's credit rating was cut one level by Fitch Ratings as an inconclusive election in February produced political paralysis that threatens the country's ability to respond to a recession and the European debt crisis. The rating company lowered Italy's government bond rating to BBB+ from A- with a negative outlook... 'The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession... The ongoing recession in Italy is one of the deepest in Europe."

Germany Watch:

March 7 - Bloomberg (Jeff Black and Stefan Riecher): "German factory orders unexpectedly fell in January as the sovereign debt crisis curbed demand in the euro area. Orders, adjusted for seasonal swings and inflation, declined 1.9% from December... In the year, workday-adjusted orders dropped 2.5%."

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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