No Regrets

By: Doug Noland | Wed, Nov 28, 2007
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For the shortened and volatile week, the Dow dropped 1.4% (up 4.2% y-t-d) and the S&P500 1.3% (up 1.6%). Economically-sensitive shares suffered, with the Transports down 2.5% (down 2.4%) and the Morgan Stanley Cyclical index down 2.2% (up 6.9%). The Utilities actually added 0.6% (up 13.8%), while the Morgan Stanley Consumer index dipped 0.7% (up 6.1%). The broader market continued to be under pressure. The small cap Russell 2000 fell 1.5% (down 4.1%), and the S&P400 Mid-Cap index dropped 2.1% (up 3.7%). The NASDAQ100 declined 1% (up 15.5%), and the Morgan Stanley High Tech index sank 2.4% (up 6.4%). The Street.com Internet Index lost 1.1% (up 13%), and the NASDAQ Telecommunications index dropped 2.4% (up 11.8%). The Semiconductors were hit for 3.1% (down 11.6%). The Biotechs declined 2.0% (up 5.8%). The Broker/Dealers sank 2.9% (down 16%), and the Banks fell 1.2% (down 21.5%). With Bullion recovering $36, the HUI Gold index jumped 4.1% (up 27%).

Three-month Treasury bill rates sank 21 bps this week to 3.22%. Two-year government yields fell 26 bps to 3.08%. Five-year T-Note yields dropped 28 bps to 3.41%, and ten-year yields fell 16 bps to 4.01%. Long-bond yields declined 11 bps to 4.43%. The 2yr/10yr spread widened to 93 bps. The implied yield on 3-month December '08 Eurodollars dropped 17 bps to 3.585%. Benchmark Fannie Mae MBS yields fell 12 bps to 5.66%, this week pushing agency spreads to the widest level against Treasuries since December 2000. The spread on Fannie's 5% 2017 note widened 7 to 72, and the spread on Freddie's 5% 2017 note widened 8 to 72. Today's action reduced the week's widening in the 10-year dollar swap to 2.25 bps (to 76.25). Corporate bond spreads widened further, as the spread on an index of junk bonds ended the week 19 bps wider.

November 22 - Bloomberg (Mark Gilbert): "Shifts in the U.S. Treasury market that have driven two-year note yields to 100 basis points below those on 10-year bonds for the first time since January 2005 are not healthy, according to Merrill Lynch & Co. 'Do not, we repeat, do not believe for a second that this is a healthy steepening of the yield curve,' wrote David Rosenberg, Merrill's...chief North America economist..."

Investment grade debt issuers included Cargill $900 million.

Convert issuers included Wright Medical $175 million.

November 22 - Bloomberg (Laura Cochrane and Oliver Biggadike): "The risk of Australian and Japanese companies defaulting on their debt rose to the highest on record as downgrades on securities tied to mortgage bonds increased concern losses at banks will widen. The iTraxx Australia Series 8 Index rose 2 bps to 67 bps...the highest since its start in 2004..."

German 10-year bund yields declined 7 bps to 4.205%, while the DAX equities index dipped 0.3% for the week (up 15.1% y-t-d). Japanese "JGB" yields fell 5 bps to 1.415%. The Nikkei 225 sank 3.3%, widening 2007 losses to 13.6%. Emerging debt and equities markets were under pressure. Brazil's benchmark dollar bond yields jumped 13 bps to 5.86%. Brazil's Bovespa equities index sank 5.7% (up 37.1% y-t-d). The Mexican Bolsa declined 1.6% (up 8.6% y-t-d). Mexico's 10-year $ yields were unchanged at 5.47%. Russia's RTS equities index declined 1.7% (up 12% y-t-d). India's Sensex equities index slumped 4.3% (up 36.7% y-t-d). China's Shanghai Exchange dropped 5.3%, reducing y-t-d gains to 88.1% and 52-week gains to 144%.

Freddie Mac posted 30-year fixed mortgage rates declined 4 bps this week to 6.20% (up 2bps y-o-y). Fifteen-year fixed rates fell 5 bps to 5.83% (down 8 bps y-o-y). One-year adjustable rates were down 8 bps to 5.42% (down 7bps y-o-y).

Bank Credit declined $24.3bn during the week (11/14) to $9.147 TN. Bank Credit has posted a 17-week gain of $503bn (17.8% annualized) and y-t-d rise of $850bn, an 11.6% pace. For the week, Securities Credit fell $19.8bn. Loans & Leases dipped $4.4bn to $6.699 TN (17-wk gain of $374bn). C&I loans rose $5.8bn (2007 growth rate 20.2%). Real Estate loans dropped $25.4bn. Consumer loans gained $7.8bn. Securities loans jumped $12.3bn, while Other loans declined $4.8bn. On the liability side, (previous M3) Large Time Deposits increased $15.3bn (6-wk gain of $149bn).

M2 (narrow) "money" slipped $3.6bn to $7.403 TN (week of 11/12). Narrow "money" has expanded $360bn y-t-d, or 5.8% annualized, and $444bn, or 6.4%, over the past year. For the week, Currency was little changed, while Demand & Checkable Deposits dropped $21.3bn. Savings Deposits rose $15.2bn, and Small Denominated Deposits increased $1.6bn. Retail Money Fund assets added $0.5bn.

Total Money Market Fund Assets (from Invest. Co Inst) jumped another $21.7bn last week to a record $3.047 TN. Money Fund Assets have now posted an unprecedented 17-week surge of $463bn (55% annualized) and a y-t-d increase of $665bn (30.9% annualized). Money fund assets have ballooned $736bn, or 31.9%, over the past year.

Total Commercial Paper fell $20.8bn to $1.842 TN. CP is down $382bn over the past 15 weeks. Asset-backed CP dropped $23.9bn (15-wk drop of $325bn) last week to $849bn. Year-to-date, total CP has contracted $133bn, with ABCP down $235bn. Over the past year, Total CP has shrunk $80bn, or 4.1%.

Asset-Backed Securities (ABS) issuance fell to $1.6bn this week. Year-to-date total US ABS issuance of $517bn (tallied by JPMorgan) is running 36% behind comparable 2006. At $221bn, y-t-d Home Equity ABS sales are off 56% from last year's pace. Year-to-date US CDO issuance of $288 billion is now 16% below comparable 2006.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 11/21) declined $3.0bn to $2.026 TN. "Custody holdings" were up $274bn y-t-d (17.3% annualized) and $316bn during the past year, or 18.5%. Federal Reserve Credit expanded $2.4bn to $868bn. Fed Credit has increased $15.9bn y-t-d and $29.2bn over the past year (3.5%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.152 TN y-t-d (26.5% annualized) and $1.243 TN year-over-year (26.3%) to a record $5.963TN.

Credit Market Dislocation Watch:

November 22 - Bloomberg (Kabir Chibber): "The market for derivatives grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007, the Bank for International Settlements said. Credit-default swaps, contracts designed to protect investors against default and used to speculate on credit quality, led the increase, expanding 49% to cover a notional $43 trillion of debt in the six months ended June 30, the BIS said... Derivatives of debt, currencies, commodities, stocks and interest rates rose 25% from the previous six months, the biggest jump since the...bank began compiling the data. Investors have been turning to credit derivatives as a way to speculate on a growing risk of defaults amid record U.S. mortgage foreclosures. 'The pace of increase in the credit segment outstripped the rises in other risk categories,' Christian Upper, a BIS analyst...wrote... Credit-default swaps are 'the dominant instrument,' accounting for 88% of credit derivatives, the BIS said. The money at risk through credit-default swaps increased 145% from last year to $721 billion..."

November 23 - Financial Times (David Oakley and Sarah O'Connor): "Liquidity in some of the world's biggest derivatives markets has dried up this week amid increasing fears over the health of the international financial system. Over-the-counter trading in derivatives of equities, credit and interest rates have all seen much lower volumes as problems in financial markets have prompted investors to sit on the sidelines. Analysts said flows had slowed to a trickle this week...as investor appetite for risk had diminished amid talk of potential bank defaults..."

November 21 - Dow Jones (Damian Paletta): "So much for one of the mortgage market's saviors. Freddie Mac, a government-sponsored enterprise that some lawmakers just weeks ago wanted to see expand its activities to help support a teetering mortgage market, reported Tuesday that its regulatory capital surplus has eroded to its lowest level in seven years amid a $2 billion loss in the third quarter. In a sign of the severity of the situation, Freddie warned it might have to cut its dividend for the first time since it became a public company in 1989. The company has also hired Goldman Sachs Group and Lehman Brothers Holdings to line up 'very near term' sources of new capital. If those steps don't work, the company warned it may need to limit its activities or even reduce the size of its holdings... Any contraction in Freddie's activities would have broader effects in the $12 trillion U.S. mortgage market...The company says it ensures financing for one in six homebuyers, and its role has grown as the crisis in subprime lending has caused buyers to flee securities not backed by Fannie or Freddie."

November 23 - Financial Times (Sarah O'Connor): "Losses caused by the US subprime mortgage crisis could hit $300bn and the recent tumble in stock markets could be a precursor for a more protracted fall, according to the Organisation for Economic Co-operation and Development. Banks and hedge funds are 'in the front line for bearing a lot of the losses', the OECD warned... The organisation said that it was too soon to say what ricochet effect the banks' losses would have on their longer-term prospects. 'Such write-offs will use up valuable capital and constrain banks' ability to expand their balance sheets - the so-called credit crunch mechanism that feeds back on to the economy,' the report said."

November 19 - Bloomberg (Caroline Salas and Shannon D. Harrington): "Residential Capital LLC, the biggest privately held U.S. mortgage lender, may not be rescued from bankruptcy by owners General Motors Corp. and Cerberus Capital Management LP because of its bad investments in homebuilders and real estate, according to Gimme Credit... 'GM/Cerberus may elect to put ResCap into bankruptcy given its exposures to homebuilders, and recoveries given default may be even lower than implied by current distressed levels,' Kathleen Shanley, an analyst at...Gimme Credit... 'There are still significant risks embedded in the portfolio.'"

November 21 - Bloomberg (Esteban Duarte and Steve Rothwell): "European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders. The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today... 'We are in a deteriorating situation,' Patrick Amat, chairman of the Brussels-based ECBC... 'A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.' Covered bonds are securities backed by mortgages or loans to public sector institutions."

November 22 - Bloomberg (Esteban Duarte): "German banks agreed to suspend trading in pfandbrief mortgage bonds to 'calm down' the market following a slump that has shut Europe's biggest funding source for home lenders. The Association of German Pfandbrief Banks, an industry group that represents securities firms and borrowers in the the $1.3 trillion market, are following advice from the European Covered Bond Council yesterday to withdraw from interbank trading until Nov. 26... 'The ongoing massive disruptions in the international capital markets have also affected the markets for covered bonds, with increasingly negative repercussions for pricing,' the German association said."

November 22 - Bloomberg (Shamim Adam): "Losses from U.S. subprime mortgage foreclosures, coupled with slowing economic growth and falling house prices, could reach as much as $300bn, the OECD said. Global stock markets have lost $2.9 trillion since Oct. 31..."

November 21 - Bloomberg (Christine Richard): "Banks face additional writedowns of around $17 billion if bond insurers, including those owned by Ambac Financial Group Inc., FGIC Corp. and MBIA Inc., were to lose their AAA ratings, according to CreditSights Inc. Bond insurers' guarantees allow banks to avoid marking down the value of securities if their market price drops... 'In general, it appears that banks have not begun to take writedowns on structured products with monoline protection,' Christian Stracke, an analyst with CreditSights...wrote... CreditSights said banks may hold half of the approximately $900 billion of securities backed by assets such as credit card bills and home equity lines of credit that have been insured against default. If those securities were to fall to 90 cents on the dollar... the banks could take additional losses of $17 billion, Stracke wrote."

November 21 - Financial Times: "Bank capital is precious again. Expect an unusual amount of investor attention to be lavished on balance sheet measures, such as capital ratios, as the markets assimilate the knock-on effects of the credit crisis. Citigroup has garnered the most attention.... The big question, for Citi as well as for other banks, is the extent of further pressure from two sources - more write-downs or further, and undesired, growth in assets. Of the two, the second is probably less troubling. Citi, for instance, has risk-adjusted assets of about $1,260bn at the end of the third quarter. Of course, any more surprise consolidation of assets would be ill received, especially if the assets were thought to be at risk of rating downgrades."

November 19 - Financial Times (Haig Simonian): "Swiss Re emerged as the latest casualty of the subprime crisis on Monday after a $1.07bn loss on two complex credit default swaps... The loss at the world's biggest reinsurer weighed on insurance sector shares across Europe... The Zurich-based group had expressed confidence about its underwriting and investments as recently as its third-quarter results this month. Swiss Re's net SFr981m loss stemmed from two related swaps written by the credit solutions unit, part of a division headed by Roger Ferguson, a former US Federal Reserve board governor... Swiss Re decided to reduce to zero the value of the lowest-quality tranches of securities involved, and to cut significantly the estimated value of even the higher-grade paper... All asset-backed CDOs in the portfolios are deemed worthless and the subprime components have been written down to 62% of their original value. Mr Quinn said the company only became aware of the problem late last week."

November 20 - Financial Times (Haig Simonian): "For Swiss Re, yesterday's $1bn loss on a pair of complex credit default swap products was like a hurricane - only one involving a man-made disaster, rather than the natural catastrophes the world's biggest reinsurer is used to covering. George Quinn, chief financial officer, described the writedown as the result of a 'once in every 30 years' credit event. The deterioration in the markets had exceeded all expectations..."

November 21 - Bloomberg (Jody Shenn): "Fitch Ratings downgraded $29.8 billion of collateralized debt obligations linked to residential mortgage bonds, while Standard & Poor's cut ratings on $5 billion of such assets. Fitch lowered classes from 74 CDOs that hold structured-finance securities... S&P reduced ratings on classes from 28 CDOs... S&P, Fitch and Moody's...have been cutting their CDO assessments after an unprecedented round of downgrades on the underlying mortgage bonds as homeowner defaults rise."

November 23 - Financial Times: "What will be the next shoe to drop? One possibility is bond insurer ACA, which was placed on negative credit watch by Standard & Poor's a few weeks ago. If it actually gets downgraded, there could be yet more bad news for counterparties that hedged their collateralised debt obligations exposure through ACA. ACA has insured $69bn of CDOs, of which about $20bn is of the flavour that most scares investors: asset-backed with some exposure to subprime. Unlike other insurers, ACA has to post collateral if it gets downgraded into the BBB category from its current single-A status. The glitch is that...it would not have the ability to post such collateral given the mark-to-market hit that it recently reported. And if ACA cannot post the collateral required, then the hedges that banks and others have in place no longer look effective. This, in turn, presumably increases the risk of more CDO exposure and potential writedowns on bank balance sheets. No one knows which investment banks bear this counterparty risk."

November 21 - Bloomberg (Christine Richard and Matt Miller): "ACA Capital Holdings Inc. will likely be the first bond insurer to have its credit rating cut, forcing banks to take on as much as $60 billion of collateralized debt obligations, JPMorgan Chase & Co. analyst Andrew Wessel said. 'ACA is a likely candidate to get thrown to the wolves first,' Wessel said... S&P...placed its A rating on ACA's guaranty business under review for a downgrade, following a $1.04 billion third-quarter loss. A downgrade of at least two levels to below A- would force...ACA to post collateral against some of the debt it insures to avoid default... Banks would likely then be forced to bring their $60 billion of CA-guaranteed CDOS back onto their books, Wessel said... Merrill Lynch & Co. may be forced to write down $3 billion of CDOs if ACA defaulted on its obligations, Lehman Brothers Holdings Inc. analyst Roger Freeman wrote..."

November 22 - Bloomberg (Gregory Viscusi): "Natixis SA's bond-insurance unit, CIFG Guaranty, will be taken over by the French bank's controlling shareholders in a $1.5 billion rescue to preserve its top credit rating."

November 23 - Bloomberg (Cecile Gutscher and Steve Rothwell): "Financial Guaranty Insurance Co., the insurer for $315 billion of bonds, may get the capital it needs to avoid losing top credit rankings after French banks bailed out competitor CIFG Guaranty, Fitch Ratings said. FGIC, controlled by PMI Group Inc., Blackstone Group LP, and Cypress Group, has at most three weeks to show it deserves AAA grades, Fitch analyst Thomas Abruzzo said..."

November 19 - Financial Times (Gillian Tett and Saskia Scholtes): "Specialist bond insurers are exploring ways of improving their financial standing and avoiding losing their top credit ratings because of the subprime mortgage crisis. They are considering raising new equity or buying insurance for their operations from traditional reinsurance groups Swiss Re or other more opportunistic players...Some are also considering temporarily halting new business and relying on existing revenue streams, allowing some of their insured securities to mature and thereby reduce their risk."

November 21 - Bloomberg (Kabir Chibber): "A constant proportion debt obligation sold by UBS AG is worth 29% of its net asset value because of the increasing cost of protecting bank debt from default, according to CreditSights Inc. The notes, which had their top credit ratings cut to junk last week, have slumped from 100 cents... in April... The value of CPDOs containing credit-default swaps on banks and insurance companies has fallen as financial firms have written down $50 billion of securities linked to U.S. home loans..."

November 21 - Financial Times (David Oakley and Michael Mackenzie): "The credit crisis deepened yesterday as key interbank rates in the US and Europe showed conditions in the money markets had hit all-time lows, while two big debt deals were delayed because of deteriorating sentiment. US and Euro Libor soared to record levels, suggesting strains in the short-term markets were greater than they had ever been. In the broader credit arena, Allied Irish Banks delayed plans for a covered bond while Chrysler reportedly postponed a $4bn loan sale for the carmaker's buy-out."

November 23 - Financial Times (Joanna Chung): "Investors are shunning European government debt issued by countries other than Germany as worries about a global economic slowdown prompt a flight to safety within Europe. 'There is a strong sell-off in sovereign debt relative to [German] bunds, ranging from top-rated Spain to eastern Europe,' said Ciaran O'Hagan, strategist at SG CIB. 'Credit spreads, derivatives, and currencies are all taking a whack as part of the flight to quality.'"

November 20 - Dow Jones (Michael Aneiro): "Illiquidity was the word of the day for high-yield debt markets Tuesday, as the credit crisis in 'safer' areas of financial markets caused junk bond investors to dive to the sidelines. The gummed-up markets have caused a number of debt offerings to be pulled, with the lastest being the $4 billion sale of loans stemming from Cerberus Capital Management's acquisition of Chrysler, which has been postponed indefinitely, and Quebecor World's refinancing plan, which included a $300 million junk bond issue. 'There's not a lot of money in the market,' said Brian Hessel, portfolio manager at Stonegate Capital Partners."

Currency Crisis Watch:

November 21 - Financial Times (Peter Garnham): "The sliding dollar has presented custodians of the world's massive foreign exchange reserves with a conundrum. Countries such as China and those in the Gulf, which peg their currencies to the dollar, risk inflationary pressure that has the potential to trigger serious economic and social problems. But any move to cut their links to the dollar could spark a run on the currency that would undermine the value of their reserves. Global currency reserves have soared from $2,000bn in the second quarter of 2002 to $5,700bn... Furthermore, two-thirds of the world's reserves are in the hands of six countries: China, Japan, Taiwan, South Korea, Russia and Singapore."

November 21 - Financial Times (Mure Dickie, Krishna Guha, Peter Garnham and Michael Mackenzie): "China yesterday expressed concern at the decline in the dollar, joining a growing chorus of global policymakers alarmed by the weakness in the world's main reserve currency. Wen Jiabao, the premier, told a business audience in Singapore it was becoming difficult to manage China's $1,430bn foreign exchange reserves, saying their value was under unprecedented pressure. 'We have never been experiencing such big pressure,' Mr Wen said... 'We are worried about how to preserve the value of our reserves.'"

November 19 - Financial Times (Javier Blas and Ed Crooks): "When Rafael Correa, Ecuador's president, said yesterday that Opec needed to sell its oil in a 'strong currency', he summed up the discontent widely shared by other Opec members and expressed most volubly by Iran and Venezuela. 'If we continue to trade it in a weak currency [the dollar], we are transferring rents to developed countries,' Mr Correa said. 'We will need to sell more of our oil to buy the same amount of goods and services.'"

November 20 - Financial Times (Gillian Tett): "The US dollar has lost its status as the pre-eminent currency for fixed-income products such as corporate bonds in Asia, a sector it used to dominate, a new study has found. This is because there has been a sharp rise in the use of local currencies in the Asian debt markets, with 53% of the market denominated in them instead of the dollar, according to a report from Greenwich Associates, the research group. 'For the first time since [we] began evaluating the Asian fixed-income markets in 1994, bonds denominated in local currencies made up more than half of total fixed-income Asian trading volume," a research report says."

November 21 - Financial Times (Simeon Kerr and Roula Khalaf): "Popular pressure for a revaluation of US dollar-pegged Gulf currencies is growing as the sliding dollar damages business in the region and hits locals and expatriates. Behind closed doors, Gulf governments and private-sector representatives are discussing how to deal with the dollar's precipitous fall. Even in public, Sultan al-Suwaidi, UAE central bank governor, has said the oil-exporting UAE economy's tie to the US currency stands at a critical point, with the government considering pegging it to a basket of currencies that better reflects the economy's trading patterns... Inflation levels in the UAE and Qatar remain at around 10 per cent, while Saudi Arabia's has risen to 5%, double last year's figure and the highest in many years. 'Historically, it made sense for the Gulf states to add credibility by linking to a strong dollar,' said George Lo, chief investment officer for Lloyds TSB International Private Banking. 'But why tie yourself to an anchor?'"

November 21 - The Wall Street Journal (Joanna Slater and Chip Cummins): "For many years, oil-rich Persian Gulf states have pegged their currencies to the dollar. Now that link is stoking a bad bout of inflation in their red-hot economies and putting policy makers in a dilemma: Break the dollar peg and risk undermining the U.S. currency, or keep it and face growing local discontent. The dollar peg has 'served the economy . . . very well in the past,' said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates' central bank, last week. 'However, we have reached a crossroads.' Because countries such as the UAE, Saudi Arabia and Qatar sit on large reserves of U.S. dollars, their decisions will have repercussions beyond their borders. If they move away from their strict dollar pegs -- perhaps following Kuwait, which earlier this year switched to a basket of currencies -- it could undermine demand for dollars and encourage others to diversify their holdings."

November 19 - Bloomberg (Matthew Brown and Aaron Pan): "When central bankers in the Middle East say they have no plans to end their fixed exchange rates to the dollar, the currency market hears the opposite. Merrill Lynch & Co. predicts either the United Arab Emirates or Qatar will cut their dollar peg within half a year... 'The dollar peg is doomed,' said Jim Rogers, chairman of...Rogers Holdings..."

November 21 - Financial Times: "Mahmoud Ahmadi-Nejad, president of Iran, reckons he has pinpointed the soft underbelly of the US: the dollar. He urges Opec to consider pricing crude oil in other currencies."

The dollar index fell 1% to 75.05. For the week on the upside, the Norwegian krone increased 1.7%, the Japanese yen 1.4%, the Swiss franc 1.2%, the Euro 1.2%, the Danish krone 1.1%, and the Swedish krona 1.0%. On the downside, the Iceland krona declined 2.5%, the Brazilian real 2.2%, the Chilean peso 1.1%, and the South Korean won 1.0%.

Commodities Watch:

November 20 - Bloomberg (William Bi): "China, the world's biggest vegetable oil consumer, will import more soybeans and palm oil to meet growing demand after local farmers reduced oilseed plantings, bolstering prices that have risen by half this year. China's imports will account for 45% of international soybean trade volume... almost twice as much as the 25%...seven years ago... Chinese buying helped push up the price of soybeans traded in Chicago by 56% this year..."

November 23 - Bloomberg (Jeff Wilson): "Soybeans surged to the highest in 34 years as China increased purchases of dwindling U.S. supplies."

For the week, Gold jumped 4.6% to $822.3, and Silver gained 1.6% to $14.735. March Copper fell 5.3%. January Crude surged $4.32 to a record $98.16. December gasoline rose 3.8%, while December Natural Gas declined 1.0%. December Wheat surged 10.3%. For the week, the CRB index increased 1.4% (up 15.3% y-t-d). The Goldman Sachs Commodities Index (GSCI) surged 3.1%, increasing 2007 gains to 42.4%.

Japan Watch:

November 22 - Bloomberg (Elizabeth Stanton and Toshiro Hasegawa): "Japan became the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse after the Topix index declined 21% from its 2007 peak."

November 19 - The Wall Street Journal (Atsuko Fukase): "Sumitomo Mitsui Financial Group Inc. became the latest in a series of Japanese banks to feel the ripple of the U.S. subprime-mortgage crisis. The bank said yesterday that first-half net profit fell 30% on a mix of increased credit costs, mortgage-backed-securities investment losses and a write-down from equity holdings."

China Watch:

November 19 - Bloomberg (Allen T. Cheng): "China's 'massive' foreign-currency reserves were placing its government under unprecedented policy pressure, Premier Wen Jiabao said. 'We now have $1.4 trillion in foreign exchange reserves, and I tell my foreign friends I have never been under more pressure,' Wen said... 'Such a massive reserve is both our strength as well as our huge responsibility...' The flood of cash from overseas sales is making it harder for the government..."

November 19 - Bloomberg (Josephine Lau and Luo Jun): "China's banking regulator told banks to cool loan growth that's already topped its target ceiling of 15% this year and threatens to overheat the world's fastest-growing major economy. The regulator gave 'informal guidance' to lenders, said Lai Xiaomin, the commission's..."

November 22 - Bloomberg (Nipa Piboontanasawat): "Hong Kong's inflation accelerated in October to a nine-year high after rents rose because the government resumed charging a property tax. Consumer prices rose 3.2% from a year earlier..."

November 19 - Bloomberg (Wendy Leung): "Hong Kong's jobless rate fell to a nine-year low after booms in property and stock markets boosted consumption. The...rate...was 3.9%..."

India Watch:

November 23 - Bloomberg (Anil Varma): "Money supply growth in India accelerated this month to the fastest in at least a decade... the M3 measure of money supply increased 23.8% in the two weeks through Nov. 9 from a year earlier..."

Asia Boom Watch:

November 22 - Bloomberg (James Peng and Chinmei Sung): "Taiwan's economy grew at the fastest pace in three years...reinforcing speculation the central bank will increase interest rates next month. Gross domestic product expanded 6.92% in the third quarter from a year earlier..."

Unbalanced Global Economy Watch:

November 23 - Bloomberg (Brian Swint): "U.K. banks approved fewer home loans in October as higher interest rates made debt more expensive, the British Bankers' Association said... The total was down 37% from a year Earlier..."

November 20 - Bloomberg (Brian Swint): "U.K. money supply growth unexpectedly slowed in October, the Bank of England said. M4...measuring currency in circulation and deposits at banks, rose 11.8% from a year earlier, the U.K. central bank said..."

November 23 - Bloomberg (Jennifer Ryan): "U.K. economic growth unexpectedly slowed to the weakest pace in a year during the third quarter as service industries cooled and factory production stalled. Gross domestic product rose 0.7% in the three months through September..."

November 20 - Bloomberg (Robin Wigglesworth and Jonas Bergman): "Norway's economy expanded at the fastest pace in almost two years in the third quarter, adding to pressure on the central bank to keep raising interest rates... The mainland economy, excluding oil and shipping, grew 1.9% from the previous three months, the fastest pace since the last quarter of 2005..."

November 19 - Bloomberg (Maria Levitov): "Russian inflation has reached 9.7% since the beginning of this year, Interfax said, citing Economy Minister Elvira Nabiullina. Consumer prices rose 0.9% in the first two weeks of November..."

Bubble Economy Watch:

November 22 - Reuters (Kristina Cooke): "The cost of Thanksgiving is soaring, according to investment bank Merrill Lynch & Co, which may help explain the gloom among U.S. consumers as they head into the holiday season. Merrill Lynch...calculated a Thanksgiving cost-of-giving index using the prices of traditional holiday meal items such as turkey, cranberries, sweet potatoes and pumpkin pie -- as well as the cost of flowers, gifts ranging from toys to clothing and electronics, plus gasoline, hotels, air fare, and greeting cards. The index has risen 7.9% year-over-year in the approach to the festive season -- a huge swing from a drop of 4.4% a year ago. In fact, this is more than double the historical trend for this time of year and the second highest since 1999, said David Rosenberg, Merrill Lynch North American economist, in a report. 'One reason why consumer confidence is receding at a time of year when everyone would be so joyous may be because the cost of partaking in the holiday spirit has soared and bitten deeply into purchasing power,' he wrote."

November 19 - Financial Times (Rebecca Knight): "The amount of money US employers and workers spend on health benefits will continue to rise at twice the rate of inflation next year, prompting an increasing number of employers to drop coverage for their employees, according to a survey being released today. The survey, conducted annually by Mercer Health & Benefits, the human resources consulting group, found that the total health benefit cost rose by 6.1% in 2007, the same pace as last year, to an average of $7,983 per employee... 'This puts US companies at a significant disadvantage in the global, competitive economy,' he said."

November 20 - Bloomberg (Lindsay Fortado): "New York law firms are cutting associates for the first time since 2001 as the collapse of the subprime mortgage and credit markets causes private equity deal volume and structured finance work to slow dramatically."

Central Banker Watch:

November 20 - Bloomberg (Sandrine Rastello): "European Central Bank governing council member Yves Mersch said a 'second-round' effect from the current acceleration in inflation would probably prompt an increase in interest rates. Mersch, head of Luxembourg's central bank, said ECB policy makers are following wage talks with the 'greatest vigilance' after a surge in oil and food costs sent euro-region inflation to 2.6%, the highest in two years."

GSE Watch:

November 21 - Financial Times (Daniel Pimlott, Ben White and Saskia Scholtes): "Shares of leading US mortgage lenders plunged yesterday after Freddie Mac, the government-sponsored mortgage company, revealed a $2bn loss, its largest, and said it would have to raise more capital to meet its regulatory requirements.... 'The last provider of liquidity in the mortgage marketplace is now liquidity restrained,' said Howard Shapiro, an analyst at Fox Pitt, Kelton. 'This will exacerbate the housing downturn.'"

November 21 - Bloomberg (Jody Shenn): "Capital constraints at Fannie Mae and Freddie Mac...may hurt the U.S. economy by limiting banks' ability to make new loans, according to Bank of America Corp. Banks have been selling mortgage securities to 'clear room' for commitments to finance leveraged buyouts and extend other credit...debt analysts Jeffrey Rosenberg and Hans Mikkelsen wrote... Since June, holdings of commercial and industrial loans at banks have climbed by $80bn to $735bn, while mortgage securities in investment accounts fell $55 billion to $515 billion... With growth potentially limited at Fannie Mae and Freddie Mac because of the government-chartered companies' quarterly losses, U.S. banks may find it harder to sell their mortgage bonds, the analysts wrote. 'That suggests banks may need to limit asset growth by restricting lending to other customers including consumers, potentially further dampening economic growth,' the analysts wrote."

California Watch:

November 20 - Bloomberg (William Selway): "California, the biggest U.S. seller of municipal bonds, had the credit-rating outlook on $48.2 billion of its debt lowered by Standard & Poor's as tax revenue falls short of forecasts because of a slowing economy. S&P altered California's credit outlook to 'stable' from 'positive,' signaling that the state is unlikely to win a higher ranking. S&P has raised California's rating, the fifth-highest investment grade at A+, twice since 2004..."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

November 21 - Financial Times (James Mackintosh and Paul J Davies): "Investment banks need to standardise complex structured credit products if they want to restart growth in the stalled market, Sir John Gieve, the Bank of England's deputy governor for financial stability, said... Sir John said 'sophisticated opaque bespoke products may not survive' the recent market disruptions and called for structured credit instruments to be redesigned around easily understood building blocks. The markets for all kinds of structured finance products have been in turmoil since growing problems among US subprime mortgage borrowers spilled over into a broader fear about contagion to any and all complex debt products... 'People are going to want products built up of units they understand,' he [said]..."

November 19 - Bloomberg (Cecile Gutscher): "UBS AG, Europe's largest bank by assets, may take 'substantial' losses on $20 billion of collateralized debt obligations with the highest ratings, according to CreditSights Inc. More than $9 billion of the so-called super senior portions of CDOs owned by...UBS is at risk of being marked down..."

November 19 - Financial Times (Bernard Simon): "US car loan delinquencies have climbed markedly, raising another potential red flag for financial institutions and the automotive industry. 'We are beginning to see deterioration in auto asset-backed securities (ABS) credit conditions,' Lehman Brothers said... Tom Webb, chief economist at Manheim Auctions, added that the number of repossessed vehicles at the company's used-car auctions had risen, reflecting an uptick in delinquencies and a larger number of contracts."

November 19 - Bloomberg (Jody Shenn): "Car buyers with poor credit will face higher interest rates on auto loans because of concerns that bond insurers will fail, according to JPMorgan Chase & Co. Insurance covered $22 billion of securities backed by 'non-Prime' auto loans sold since early 2006, JPMorgan analysts led by Christopher Flanagan... wrote... Investors have been demanding higher yield premiums over benchmark interest rates to own insured asset-backed debt... That, in turn, makes selling the debt less attractive for originators of the loans. 'These lenders will be forced to return to bank funding, where balance sheets are already constrained, and financing costs will reflect that,' the JPMorgan analysts wrote."

Mortgage Finance Bust Watch:

November 21 - The Wall Street Journal (Danielle Reed): "Wall Street may be in pain from subprime bonds, but it is also increasingly feeling the loss of revenue in the commercial-mortgage bond area. Unlike subprime mortgage-related securities, which have caused losses at scores of Wall Street firms and commercial banks due to plummeting market values, commercial-mortgage bonds have yet to see a sharp increase in defaults or delinquencies... The pullback in this $700 billion sector translates into fewer fees for the many firms that are commercial-mortgage lenders and bond underwriters. 'I think that's a real issue. I think most of the real-estate finance departments on Wall Street are probably doing [as little as] . . . 10% of the volume they were doing in, say, June 2007,' said Lisa Pendergast, managing director of real-estate finance strategy and research for RBS Greenwich Capital..."

Real Estate Bubbles Watch:

November 21 - Bloomberg (Kathleen M. Howley): "Home prices fell in one third of U.S. cities last quarter as stricter lending standards caused a 14% decline in sales nationwide. Prices dropped in 54 of 150 metropolitan areas in the third quarter and the median sales price tumbled 2% nationwide, the National Association of Realtors said... Home sales, including single-family properties and condominiums, slid to 5.42 million at an annualized pace from 6.29 million a year ago."

Financial Sphere Bubble Watch:

November 19 - Bloomberg (Christine Harper): "Shareholders in the securities industry are having their worst year since 2002, losing $74 billion of their equity. That won't prevent Wall Street from paying record bonuses, totaling almost $38 billion. That money, split among about 186,000 workers at Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos., equates to an average of $201,500 per person, according to data compiled by Bloomberg. The five biggest U.S. securities firms paid $36 billion to employees last year."

November 23 - Bloomberg (Jenny Strasburg and Tom Cahill): "Some European quantitative funds that bet on rising stock prices may have lost 15% this month as equity markets declined, according to strategists at JPMorgan Chase & Co. Fund managers using mathematical formulas to pick trades helped fuel the sell-off that wiped out almost $400 billion in value from the Dow Jones Industrial Average from July 19 to Aug. 16. It worsened as client redemptions created 'magnified losses,' according to Marco Dion and Matthew Burgess, JPMorgan analysts..."

Crude Liquidity Watch:

November 21 - Financial Times (Simeon Kerr): "The United Arab Emirates is to raise federal government salaries from January by 70% in a move that economists said could fuel inflation in the Gulf state. The federation of seven emirates has been mulling over revaluing or delinking the dirham from its long-standing US dollar peg in a bid to tame rampant inflation of around 10%. A cabinet meeting yesterday raised the 2008 budget by 47%..."

November 21 - Bloomberg (Matthew Brown): "The value of outstanding loans from U.A.E. (United Arab Emirates) banks to consumers rose 31% in the first nine months of 2007, the central bank said."

No Regrets:

November 23 - Bloomberg (Robin Wigglesworth and Craig Stirling): "Former Federal Reserve Chairman Alan Greenspan said he has `no particular regrets' about his time at the central bank, adding that the deepening U.S. housing-market slump isn't a result of his policies. 'Markets are becoming aware of the fact that the decline in house prices is not stopping,' Greenspan said... 'I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.'"

November 18 - Bloomberg (Anthony Massucci): "Former Federal Reserve Chairman Alan Greenspan said the dollar's decline hasn't affected the global economy and is a 'market phenomenon.' 'So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it's a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences'..."

I don't know which of the two above quotes this week from Alan Greenspan I find more astounding. They are somehow equally despicable. The Greenspan Fed's fingerprints are all over the housing Bubble - at home and abroad. And they're everywhere when it comes to heightened global dollar and currency market tumult. Our much revered former Fed Chairman is making a fool of himself, a spectacle not all too supportive of confidence in our policymakers, Credit system, or currency.

Whether he will admit it or not, mortgage Credit inflation was central to the Federal Reserve's post-tech Bubble reflationary strategy. It really was a "Great Experiment" in inflationist monetary policy and, predictably, it failed miserably. The Fed and some notable Wall Street "strategists" feigned a system-wide "price level" that the Fed was obligated to adeptly manipulate to ensure that that evil "deflation" was not allowed to take root. What a crock. The risk was, then as it is now, U.S. Credit Collapse - and certainly not a somewhat deflating price level. Accommodating history's most reckless Credit expansion over the past six years then ensured that the risk of collapse grew significantly greater while countermeasures turned increasingly unavailing.

I'll assume that the Fed simply lost control of mortgage Credit excesses. And as the risk of a devastating housing bust escalated, the Greenspan/Bernanke Fed became more ideologically intransigent in their opposition to pricking asset Bubbles. In this regard, Dr. Bernanke was Greenspan's ideal surrogate. Unfortunately, we're about to experience the consequences of the fundamentally flawed policy of ignoring Bubbles while they are inflating, choosing instead to wait for post-Bubble "mop up" duties. It was Greenspan himself decades ago that placed responsibility for the Great Depression on the Fed for repeatedly inserting "Coins In the Fusebox" during the Roaring Twenties. How differently would the world look today had the Fed not cut rates to 1% and left them at ultra-low levels for several years? How different would it be if the GSEs had kept their power dry, retaining financial resources to assist the mortgage market during this downturn instead of shooting all their bullets and more perpetuating the fateful Mortgage Finance Bubble? How differently would it be today if the dollar were fundamentally strong, instead of a currency carelessly debased to perpetuate an Economic Bubble?

As gatekeeper for the world's reserve Credit system and currency, to pass off our unfolding housing and financial messes as "global phenomena" would be laughable if it weren't so serious. "No particular regrets"? Somewhere along the line the Federal Reserve lost sight of its fundamental mandate and responsibility - to protect the soundness and stability of our financial system and economy. Doubling our entire stock of mortgage debt in just over six years is certainly not consistent with price stability, financial stability, or economic stability - no matter what the reading on "core" CPI. And $800bn Current Account Deficits are an abomination and talk of a global "savings glut" shameful economics.

Moreover, it was our Credit system that led the world in the proliferation of securitizations, derivatives, leveraged speculation, Credit guarantees/insurance and highly tangled debt structures. And throughout his 18-year reign, Mr. Greenspan was the most vocal proponent of "Wall Street finance." He was the head cheerleader for securities-based risk intermediation, derivatives, dynamic hedging strategies, leveraged speculation and, generally, Credit Bubble Turned Global Financial Fiasco. If he were any kind of statesman, he would today at least be willing to admit where mistake were made.

U.S. mortgage excesses blighted the world. Credit systems around the globe adopted Wall Street securitization and derivatives practices, while incorporating uniform "risk management" strategies. Wall Street cut loose leveraged speculation to overrun financial systems around the world, while our Current Account Deficits were often "Recycled" back to high-yielding "structured products." And while not commonly recognized, U.S. mortgage Credit excesses and attendant Current Account Deficits concurrently debased the dollar while unleashing Credit systems globally. A complete lack of discipline - evolving into outright recklessness - at the "Core" nurtured rampant Credit and speculative excesses at the "Periphery". Bad "money" for the "reserve currency" equated to bad "money" proliferating throughout. And, let there be no doubt, monetary toxicity has progressed to the point where it has severely affected global Economic Structures. The situation will not be rectified by central bankers and an even greater bout of Credit inflation.

It is no coincidence that Greenspan made such ridiculous comments this week. As it has become increasingly apparent to the world that U.S. mortgage finance and the dollar are impending fiascos, our former Fed chairman is compelled to disavow responsibility. The housing Bubble is a "global phenomenon" and dollar weakness a "market phenomenon" with "no real fundamental economic consequences." It's stunning, and I can only contemplate how such nonsense sits with central bankers at the ECB, The People's Bank of China, The Reserve Bank of New Zealand, other European central banks, in the Middle East, and in Asia.

Outside of radically shifting financial, economic and geopolitical power away from the U.S. to the rest of the world, perhaps our policymakers' neglect of our currency hasn't been of real consequence. Historians will look back at this period and have difficulty comprehending how a nation could have so indecorously squandered the benefit and privilege associated with reigning over the world's reserve unit of exchange. Especially when it comes to energy resources, dollar devaluation has had momentous real consequences. Our vulnerabilities have been further exposed, while the standing of our competitors has been enhanced and our enemies empowered. Worse yet, the leading beneficiary of U.S. inflationism has been, not coincidently, the most unstable tinderbox region of the world. It is precisely these types of momentous inflation and economic consequences that manifest into financial and economic upheaval and calamitous global conflicts.

It was a short but eventful week. The Credit disaster unfolding at the GSEs came into clearer focus with the release of earnings from Freddie Mac. Agency debt and MBS spreads widened markedly. The mortgage implosion was at the brink of a major turn for the worst, with liquidity concerns spurring significantly wider Credit default swap prices for Rescap, GMAC, Countrywide, the Credit insurers, and financial institutions generally. The dominoes are lined up. Yet it is this type of acute stress that has always in the past extorted aggressive policymaker action. The Fed's traditional tool box, however, is woefully deficient to deal with impending Credit Collapse. I can only assume they're now diligently at work crafting new implements.

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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