More than 20 Years in the Making
For an especially idiosyncratic trading week, the Dow rallied 0.9% (down 8.0% y-t-d) and the S&P500 added 0.4% (down 9.4%). The Transports surged 6.6% (down 2.1%), while the Utilities were smacked for 4.7% (down 10.1%). The Morgan Stanley Cyclical index jumped 4.3% (down 8.3%), while the Morgan Stanley Consumer index declined 1.3% (down 8.9%). The S&P400 Mid-Caps gained 2.0% (down 10.1%) and the small cap Russell 2000 rallied 2.2% (down 10.1%). The NASDAQ100 fell 3.1% (down 14.2%), and the Morgan Stanley High Tech index declined 2.3% (down 14.2%). The Semiconductors dipped 1.1% (down 13.1%). The Street.com Internet Index added 0.2% (down 11.4%) and the NASDAQ Telecommunications index recovered 1.1% (down 11.9%). The volatile Biotechs sank 6.5% (down 6.0%). Financial stocks went into panic melt-up mode. The Broker/Dealers surged 6.3% (down 8.5%) and the Banks 10.3% (down 2.4%). With Bullion surging $30.80, the HUI Gold index gained 5.9% (up 12.8%).
More melt-up... Three-month Treasury bill rates collapsed 58 bps the past week to 2.26%. Two-year government yields sank 15 bps to 2.20%. Five-year T-note yields declined 7 bps to 2.77%, and ten-year yields fell 7 bps to 3.56%. Long-bond yields were one basis point lower at 4.27%. The 2yr/10yr spread ended the week at 130 bps. The implied yield on 3-month December '08 Eurodollars declined 4 bps to 2.62%. Benchmark Fannie MBS yields were little changed at 5.05%, this week under-performing Treasuries. The spread on Fannie's 5% 2017 note was one narrower at 49 bps and Freddie's 5% 2017 note one narrower at 49 bps. The 10-year dollar swap spread declined 2.8 to 59.8. Corporate bond spreads were mixed, although the spread on an index of junk bonds ended the week 6 bps wider.
January 21 - Financial Times (Deborah Brewster): "Investors are pouring money into the opposite ends of the risk spectrum, with cash and high-risk emerging markets attracting record inflows while the middle ground - traditional bond and equity funds - attract little or no money. In an unprecedented shift of money from developed world stock markets to emerging markets, US investors last year put a record $40bn into emerging markets funds - almost double the amount of last year... Other than emerging markets, money market funds were the clear winners in 2007, with inflows of $760bn during the year that lifted their assets to a record $3,100bn, according to iMoney-Net."
It was another slow week of debt sales. Investment grade issuance included Bank America $12bn, Wal-Mart $4.25bn, IBM $3.5bn, National City $1.65bn, and Harvard $400 million.
Junk issuance included Panoche Energy $320 million.
Convertible issuers included Kinross Gold $460 million and Solarfun Power $150 million.
Foreign dollar debt issuance included Export Development Canada $1.25bn and Andina de Fomento $750 million.
January 24 - Bloomberg (Lester Pimentel): "Emerging-market bonds rose, with yields over U.S. Treasuries narrowing the most since June 2005, on speculation the Federal Reserve will cut interest rates again next week to support the U.S. economy. The spread, or extra yield investors demand to hold emerging-market securities rather than Treasuries, narrowed 32 bps, the most since June 13, 2005, to 2.63 percentage points..."
German 10-year bund yields were little changed at 3.975%, while the DAX equities index sank 6.4% (down 15.1% y-t-d). Japanese "JGB" yields jumped a notable 8.5 bps to 1.475%. The Nikkei 225 declined 1.7% (down 11.0% y-t-d). Emerging equities markets were down, while debt markets mostly held their own. Brazil's benchmark dollar bond yields gained 5 bps to 5.73%. Brazil's Bovespa equities index rallied 0.8% (down 10.1% y-t-d). The Mexican Bolsa gained 2.5% (down 7.3% y-t-d). Mexico's 10-year $ yields rose 7 bps to 5.17%. Russia's RTS equities index sank 5.8% (down 11.2% y-t-d). India's Sensex equities index fell 3.4% (down 9.5% y-t-d). China's Shanghai Exchange was slammed for 8.1%, increasing y-t-d losses to 9.5% (up 66.6% y-o-y).
Freddie Mac posted 30-year fixed mortgage rates fell another 21bps this week to 5.48% (down 77 bps y-o-y). Fifteen-year fixed rates sank 26 bps to 4.95% (down 103bps y-o-y), with a notable four-week decline of 84 bps. One-year adjustable rates sank 27 bps to 4.99% (down 50bps y-o-y).
Bank Credit declined $8.9bn during the most recent data week (1/16) to $9.293 TN. Bank Credit posted a 26-week surge of $650bn (15.0% annualized) and a 52-week rise of $985bn, or 11.9%. For the week, Securities Credit declined $12.7bn. Loans & Leases added $3.9bn to a record $6.833 TN (26-wk gain of $509bn). C&I loans gained $7.4bn, with one-year growth of 21.3%. Real Estate loans fell $13.1bn (up 7.5% y-o-y). Consumer loans added $0.6bn. Securities loans increased $1.5bn, and Other loans gained $7.3bn. On the liability side, (previous M3) Large Time Deposits jumped $27.3bn.
M2 (narrow) "money" supply fell $16.9bn to $7.441 TN (week of 1/14). Narrow "money" expanded $360bn y-o-y, or 5.1%. For the week, Currency declined $1.6bn and Demand & Checkable Deposits fell $14.4bn. Savings Deposits decreased $5.4bn, while Small Denominated Deposits added $0.8bn. Retail Money Fund assets increased $3.8bn.
Total Money Market Fund assets (from Invest. Co Inst) surged a notable $62.9bn last week (3-wk gain $139bn) to a record $3.252 TN. Money Fund assets have posted a 26-week rise of $668bn (52% annualized) and a one-year increase of $860bn (36%).
Total Commercial Paper dipped $1.6bn to $1.847 TN. CP has declined $377bn over the past 24 weeks. Asset-backed CP gained $8.2bn (24-wk drop of $382bn) last week to $813bn. Over the past year, total CP has contracted $147bn, or 7.4%, with ABCP down $252bn (23.7%).
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 1/21) jumped $24.1bn to a record $2.096 TN. "Custody holdings" were up $316bn year-over-year (17.8%). Federal Reserve Credit declined $6.0bn last week to $861.5bn. Fed Credit expanded $24.4bn y-o-y (2.9%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.337 TN y-o-y, or 27%, to a record $6.273 TN.
Global Credit Market Dislocation Watch:
January 25 - Reuters (Neil Shah): "A government-brokered rescue plan for U.S. bond insurers of about $15 billion came under fire on Friday, with analysts saying the ailing insurers may need as much as $200 billion to remain viable. A cash infusion would allow the bond insurers to maintain their top credit rating, which is critical to their business of guaranteeing some $2.5 trillion of municipal bonds and asset-backed securities. Analysts warned some investors would face huge write-downs on the valuation of securities guaranteed by the insurers if they lost their top credit rating..."
January 21 - Financial Times (Robert Cookson and Sarah O'Connor): "Until a few months ago, 'counterparty risk' was something that only worried professional risk managers at major banks. With the world awash with cheap debt, booming asset prices and the lowest default rate in a generation, the possibility that one's trading partners would not honour their financial commitments seemed remote. But recent weeks have seen an unfamiliar item taking chunks out of banks' balance sheets - counterparty risk is back. Over the weekend, ACA, a small bond insurer, has been in frantic talks to avoid insolvency... Some are waking up to the idea that this might only be the tip of the iceberg. Specialist bond insurers are not the only companies that have been insuring debt. Banks, hedge funds and other financial institutions have been both buying and selling debt default insurance for years. The lightly-regulated market for these contracts now stands at an estimated $45,000bn... 'Can we lay out the intricate web of counterparty risk for swaps and derivatives - who owes what to whom?' asked Richard Bookstaber, an expert on systemic risk and former risk manager at Morgan Stanley and Salomon Brothers. 'At this point we cannot. And so we cannot map out how a failure in one segment of the financial market might propagate out to affect other segments.'"
January 24 - Financial Times (Peter Thal Larsen): "The last thing the world's banks needed right now was a rogue trading scandal. In the past six months, they have been buffeted by large trading losses triggered by the subprime mortgage crisis in the US and market turmoil has raised fundamental questions about their business model. They are facing severe capital constraints and the prospect of an abrupt economic slowdown. Even before Société Générale's shock announcement, most bankers were already deeply apprehensive about the future. Against that backdrop, the idea that a lone trader could apparently blow a €4.9bn ($7.2bn) hole in the world's leading equity derivatives houses could only add to the gloom. The revelation, accompanied by a €5.5bn emergency rights issue, is likely to undermine further investors' fragile faith in large banks' ability to manage complex trading risks."
January 24 - Financial Times (Ben White and Aline Van Duyn): "The largest US banks are under pressure from New York state insurance regulators to provide as much as $15bn in fresh capital to support struggling bond insurers... Eric Dinallo, New York insurance superintendent, has met executives at the banks and has strongly urged them to provide $5bn in immediate capital to support the bond insurers, the largest of which are MBIA and Ambac, and ultimately to commit up to $15bn... Concerns for MBIA and Ambac grew last week when Fitch Ratings downgraded Ambac from triple-A status to double-A. The business model of both companies depends on them keeping their top level credit rating. Share prices for both Ambac and MBIA rose yesterday amid rising hopes for a capital injection. People familiar with the matter said details had yet to be worked out but that contributions to the bail-out fund would not necessarily be based on how much exposure each bank had to the insurers, known as monolines."
January 24 - Bloomberg (John Glover): "The $230 billion backlog of high-risk, high-yield debt that banks planned to sell has stopped shrinking, and probably will hinder lending to new borrowers, Bank of America Corp. said... Lenders have about $160 billion of leveraged loans on their books and about $70 billion of junk bonds still must be sold, analyst Clemens Mueller...wrote... 'With highly volatile secondary markets and high-yield spreads having widened to levels not seen since 2003,' sales of bonds and loans are 'very challenging,' Mueller wrote. Debt financing leveraged buyouts 'represents the lion's share of calendar volume.'"'
January 25 - Bloomberg (Jody Shenn): "The extra yield over benchmark Treasuries that investors demand to own top-rated commercial mortgage-backed securities rose this week by the most ever, according to a Morgan Stanley index. The average spread over similar-maturity Treasuries for AAA rated 10-year securities jumped 32% to 244 basis points... The extra yield over 10-year swap rates, a more commonly used benchmark, rose 48% to a record 185 bps, the biggest increase since October 1998 amid the collapse of Long Term Capital Management LP and Russia's debt default."
January 23 - Bloomberg (Neil Unmack): "American International Group Inc., the world's biggest insurer by assets, will bail out its Nightingale Finance structured investment vehicle, according to Moody's... AIG Financial Products Corp...will either buy the SIV's $2.2 billion of senior debt or replace it with loans..."
January 25 - Bloomberg (Steve Rothwell): "Banks worldwide may need to raise as much as $143 billion of additional reserves to satisfy regulators if bond insurer rating cuts trigger downgrades for the securities they guarantee, Barclays Capital analysts said. Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac... are cut one level from AAA, and six times more for downgrades by two steps to A, Paul Fenner-Leitao wrote... The estimates are based on banks' holdings of the outstanding $820 billion of structured securities covered by bond insurers, the report said. 'This is a huge amount, but the assumptions we use are also very aggressive,' Fenner-Leitao said... The estimate was designed to show how bank capital could be affected if bond insurers are downgraded significantly, he said."
January 25 - Bloomberg (Jeremy R. Cooke and Martin Z. Braun): "U.S. municipal bonds are headed for their first weekly decline this year on concerns the loss of top ratings at two bond insurers will lead more investors to unwind structured trades by selling long-term debt... Banks and other institutions that sell short-term tax-exempt debt to finance purchases of higher-yielding long-term municipal bonds face having to reverse the strategies should money-market buyers balk at holding downgraded debt, investors said. 'Liquidity is out of the market, bidders are pulling away,' said J. Matthew Dalton, a fixed-income money manager at Belle Haven Investments... 'Without liquidity, you've got a real problem.'"
January 25 - Bloomberg (Martin Z. Braun): "Yields on some tax-exempt floating-rate bonds have more than doubled in the past week on concern by money-market investors that the credit standing of insurers backing the debt will weaken further."
January 21 - Financial Times (Aline van Duyn): "Municipal borrowers in the US are increasingly issuing bonds without seeking guarantees from beleaguered insurers MBIA and Ambac, highlighting the risks of a collapse of their bond insurance business model unless confidence is restored. So far in January, US municipalities borrowed $8.6bn through new bonds guaranteed by insurers, according to Thomson Financial. This compares to over $31bn of new guaranteed bonds issued in January of 2007. About 30% of the new bonds this month were guaranteed by FSA, a bond insurer with little exposure to subprime assets..."
January 24 - Financial Times (Lina Saigol): "Companies across the globe are putting multibillion-dollar deals on ice as the rout in equity markets makes it almost impossible to put a value on takeover targets. Several big transactions, including a $9bn bid for Orica, the world's biggest explosives company, and the $3bn sale of Tarmac by Anglo American, have fallen through, with more expected to follow. This has been the slowest start to the year for deals since 2002, with worldwide volume dropping 17% to $116bn, according to...Dealogic. North America and Europe, which traditionally account for about 60% of global volume, are the worst performing regions so far this year."
January 25 - Financial Times (Henny Sender): "So far, most of the rout in the debt markets has been linked to the US subprime mortgage debacle. Increasingly, however, many hedge funds are betting there is far worse to come for the corporate debt market as well. Hedge fund managers and the trading desks of some of the savviest firms on Wall Street are expecting a severe downturn in the corporate debt market... A number of trades have been made on the assumption that, when things go wrong, corporate creditors will receive far less than 100 cents on the dollar, and the more junior their debt, the less they will get back."
January 22 - The Wall Street Journal (Aparajita Saha-Bubna): "Hybrid securities have in the past been an easy source of capital for cash-strapped financial institutions. But that has all changed. Risk premiums on these securities - sandwiched between bank loans and common stock in a company's capital structure - have risen across the board as investors rethink the aggressive terms and conditions under which they lent to these once credit-healthy borrowers."
January 24 - Bloomberg (Bryan Keogh and David Mildenberg): "Bank of America Corp... more than doubled its planned sale of preferred shares to as much as $13 billion, after offering the highest yields in 15 years. The bank will sell as much as $6 billion of perpetual securities that may yield 8%, the most since 1992, and $6 billion to $7 billion of convertible shares..."
January 24 - Bloomberg (Edgar Ortega): "E*Trade Financial Corp., the online brokerage...had a record $1.71 billion loss in the fourth quarter after selling securities to raise capital."
January 22 - Financial Times: "Taxpayers are set to support Northern Rock for at least the next three years under a government-sponsored financing plan likely to raise public sector net debt by close to £100bn. The unprecedented level of support for Northern Rock was presented on Monday by Alistair Darling, the chancellor, as the only viable option to a full nationalisation of the bank. The plan would see the Bank of England's £28bn loan to Northern Rock replaced by bonds backed by Rock assets and guaranteed by the government."
January 23 - Bloomberg (Tim Barwell): "George Soros...comments on the current financial crisis and the threat of a global recession... 'I'm not looking for a worldwide recession, I'm looking for a significant shift in power, influence, away from U.S.,' to 'the developing world, like China. China, India, and the developing world are earning significantly more than they are spending."
January 21 - Bloomberg (John Fraher and Simon Kennedy): "The U.S. Federal Reserve and other central banks are partly to blame for the financial-market slump that's now threatening to derail the global economy, said investors and former policy makers at the World Economic Forum. 'It's hard to give central banks a very high grade over the last couple of years on recognition of bubbles and actions taken to address them in the policy or regulatory spheres,' said former U.S. Treasury Secretary Lawrence Summers... Billionaire investor George Soros said central banks have 'lost control' of financial markets."
January 22 - Bloomberg (Edward Evans): "Cerberus Capital Management LP Chairman John Snow said banks need to 'purge' about $200 billion of loans for which they haven't found buyers before leveraged buyout firms can resume last year's record pace. 'The big issue here this year is the seizure of the credit markets and the prospect of a sharp downturn in economic activity,' Snow said... 'There's got to be a purging' of un-syndicated loans before deals will resume, he said."
January 23 - Bloomberg (Edward Evans and Jenny Strasburg): "Billionaire investor George Soros said the post-World War II era of easy credit backed by the U.S. dollar will end as the nation's economy slips into an 'almost inevitable' recession. 'The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,' Soros said...at the World Economic Forum in Davos, Switzerland. 'Now the rest of the world is increasingly unwilling to accumulate dollars.' A U.S. recession is all but certain as lenders and investors stop the flow of credit, while the global economy probably will avoid contraction, Soros, 77, said later in a Bloomberg Television interview. 'I think it is almost inevitable that the turmoil in the financial markets will affect the real economy..."
The dollar index slipped 0.5% this week to 75.97. For the week on the upside, the New Zealand dollar increased 3.0%, the Brazilian real 2.8%, the Canadian dollar 2.7%, the Australian dollar 2.1%, the British pound 2.1%, the Singapore dollar 1.7%, and the Euro 1.6%. On the downside, the Japanese yen declined 0.7%.
January 25 - Bloomberg (Danielle Rossingh): "Gold and platinum rose to records in London as a shortage of electricity in South Africa forced mining companies to shut production... 'It's kind of a perfect storm' for precious metals, said Wolfgang Wrzesniok-Rossbach, head of marketing and sales at...Heraeus Metallhandels GmbH... 'There are absolutely no platinum reserves, so any supply disruption will have an impact.'"
January 24 - Bloomberg (Jay Shankar and Thomas Kutty Abraham): "Rising cereal prices worldwide may put 300 million rural poor at risk of starvation in South Asian countries such as India, Pakistan and Bangladesh, the Asian Development Bank said. In the Asia-Pacific about 617 million people are classified as poor or living on less than a dollar a day... 'These are the people who are most vulnerable to food prices and in greatest need of protective mechanisms in the event of unexpectedly high food prices,' Frederick Roche, director of agriculture in ADB's South Asia Department, said... World cereal stocks are at their lowest level in more than a decade as wheat prices in Chicago doubled in the past year."
January 22 - Financial Times (Javier Blas): "Scarcity of water and arable land means that the boom in food prices could last longer than most expect, a new study has warned. The report...by the UK-based consultants Bidwells Agribusiness, said the boom - until now fuelled by rising demand from emerging countries and the biofuels industry - would be exacerbated by supply constraints. Richard Warburton, head of Agribusiness at Bidwells, said it was impossible to know yet whether the agricultural market was facing a structural or a cyclical change. But he warned that even if it was cyclical, 'we are up against a long cycle of rising prices'. Wheat and soyabean prices have surged to records, corn prices hit a 12-year high this year and rice prices have doubled in the past year to levels not seen since the mid-1990s. Meat, poultry, eggs and dairy products prices have also increased sharply."
January 23 - Associated Press (Mitch Weiss): "Nuclear reactors across the southeastern U.S. could be forced to throttle back or temporarily shut down later this year because drought is drying up the rivers and lakes that supply power plants with the huge amounts of cooling water they need to operate. Utility officials say such shutdowns probably wouldn't result in blackouts. But they could lead to sharply higher electric bills for millions of Southerners... 'Water is the nuclear industry's Achilles' heel,' said Jim Warren, executive director of N.C. Waste Awareness and Reduction Network... 'You need a lot of water to operate nuclear plants. This is becoming a crisis.'"
January 24 - MSNBC (Alex Johnson): "Double-whammy shortages of two main ingredients are threatening to send the price of beer significantly higher, just in time for the national drinking holiday known as Super Bowl Sunday. After water, the biggest components of most beers are malted barley, whose sugar starches are fermented into alcohol, and hops, which add the bitter tang. In recent months, both have been in increasingly short supply, and when they have been available, their prices have leaped -- by as much as 500% in the case of hops."
For the week, Gold gained 3.5% to a record $914 and Silver 1.9% to $16.53. March Copper declined 1.7%. February Crude gained 83 cents to $90.75. February Gasoline added 0.4%, and February Natural Gas 0.8%. March Wheat declined 3.1%. The CRB index added 0.2%, boosting four-week gains to 0.9%. The Goldman Sachs Commodities Index (GSCI) added 0.4%, with a four-week decline of 1.8% (52-week gain 45%).
January 24 - Financial Times (Richard McGregor): "China's economy grew by 11.4% in 2007, the highest pace in 13 years... China's economy has now grown at double-digit rates for five straight years, an achievement hailed by the government as a 'hard won gain' of difficult policy decisions... New data... showed the December quarter recorded growth of 11.2%, compared to the first three quarters of 11.1%, 11.9% and 11.5%."
January 24 - Financial Times (Richard McGregor): "The sharp cut in US interest rates has increased the conflicting pressures on Beijing's management of its economy and its simultaneous efforts to stem potential losses of billions of dollars in its foreign exchange holdings. To keep the currency stable, the People's Bank of China buys almost all incoming foreign currency, and then attempts to 'sterilise' the monetary impact by issuing renminbi bills to take the funds out of circulation. The US cut means China's central bank will pay almost 200 bps points more on the bills it issues at home to manage its currency than it will get on purchases of US Treasuries. The PBoC pays about 4% on its so-called 'sterilisation' bills, while one-year US Treasuries now carry an interest rate of 2.07%... 'Things just got a lot more complicated for the managers of China's economy,' said Stephen Green, of Standard Chartered bank..."
January 23 - Bloomberg (Kenneth Wong and John Fraher): "Efforts by China's central bank to use interest rates to cool inflation were 'neutralized' by the U.S. Federal Reserve's unexpected cut to its benchmark interest rate yesterday, a former adviser to the bank said... The relatively higher rates in China may attract more capital from overseas and stoke inflation. The Fed's rate cut increases the chances of 'hot money' flooding the economy, Yu Yongding, director of the World Economics and Politics Institute in Beijing, said... The interest rate cut will 'have a neutralizing effect on China's tightening monetary policy.'"
January 25 - Bloomberg (Josephine Lau and Zhang Dingmin): "China's insurers, among the world's biggest companies, risk 'massive' redemptions and liquidity problems in a credit market slump, according to the regulator. 'Once the capital market heads for a downturn, we will suffer very badly and face huge risk,' Wu Dingfu, chairman of the China Insurance Regulatory Commission said... 'There can be massive redemptions and insurers may face liquidity difficulties.'"
January 21 - Bloomberg (Nipa Piboontanasawat): "China's urban jobless rate held at 4% at the end of 2007, the government said."
January 23 - Bloomberg (Wang Ying): "China has shut about 5% of its coal-fired power plants, forcing 13 provinces to ration electricity as snowfalls and transportation delays hamper deliveries of the fuel. The five biggest electricity producers have shut 90 power stations with combined capacity exceeding 20,000 megawatts in northern and central China... Coal stockpiles at the plants have dropped below the 'caution line' of three days' requirements. China, the biggest coal producer, burns the fuel to generate about 78% of its electricity."
January 25 - Bloomberg (Chia-Peck Wong): "The value of new mortgages in HongKong rose 52% in 2007 to the highest in a decade as falling interest rates and accelerating inflation fueled demand for loans."
January 24 - Bloomberg (Nipa Piboontanasawat): "Hong Kong's export growth accelerated in December as increased shipments to mainland China helped make up for weaker demand in the U.S. Overseas sales rose 8.2% from a year earlier..."
January 25 - Bloomberg (Mayumi Otsuma): "Japan's consumer prices rose at the fastest pace in more than nine years in December, as oil and commodity costs surged. Core consumer prices, which exclude fresh food, climbed 0.8% from a year earlier..."
Asian Bubble Watch:
January 23 - Bloomberg (James Peng): "Taiwan's export orders increased in December as demand from China and Hong Kong compensated for weakening sales to the U.S. Orders, indicative of shipments over the coming one to three months, rose 17.56% from a year earlier..."
January 23 - Reuters: "Singapore's December consumer prices rose...0.5% from November, taking annual inflation in the city-state to over a 25-year high on rising food and transport costs. From a year earlier, prices rose 4.4% from the 25-year high figure of 4.2% hit in November..."
Unbalanced Global Economy Watch:
January 22 - Financial Times (Tony Barber): "European policymakers...blamed the turmoil in global equity markets on US economic and fiscal policy... 'The main reason [for the turbulence] is the risk of a recession in the US. It's not about a global recession. It's about a recession in the US, because big imbalances have built up over the years in the US economy - a big current account deficit, a big fiscal deficit and a lack of savings,' said Joaquín Almunia, the European Union's monetary affairs commissioner... Mr Almunia contrasted imbalances in the US economy with what he described as Europe's 'solid, sound fundamentals'. 'We have a positive current account position. We have a level of savings that is the level required to finance our investments. We have improved our fiscal positions a lot. Moreover, we haven't got subprime mortgages in our financial systems,' Mr Almunia said."
January 24 - Bloomberg (Brian Swint): "U.K. mortgage approvals declined an annual 38% to the lowest in at least a decade in December as higher interest rates discouraged people from buying homes."
January 21 - Bloomberg (John Fraher): "The U.K.'s money supply growth rate unexpectedly accelerated in December, a Bank of England report showed. M4...rose 12.3% from a year earlier..."
January 25 - Bloomberg (Brian Swint): "U.K. wage settlements rose to the highest in 15 years in the fourth quarter as workers demanded more pay to compensate for faster inflation... The median wage increase rose to 3.7% in the three months ended in December..."
January 23 - Bloomberg (Fergal O'Brien): "Growth in Europe's service industries, which account for about a third of economic output, cooled this month to the weakest in more than four years as the U.S. economy slowed, credit tightened and the euro neared a record."
January 23 - Bloomberg (Tasneem Brogger): "Danish consumer confidence fell to the lowest since 2003 this month after global stock market declines ate into household savings, threatening to crimp economic growth."
January 23 - Bloomberg (Jacob Greber): "Australian core inflation accelerated to a 16-year high, adding to pressure on the central bank to increase interest rates even as the U.S. slashes borrowing costs to avoid a recession. The Reserve Bank of Australia's measure of underlying inflation...surged 3.8% in the fourth quarter from a year earlier."
Central Banker Watch:
January 25 - The Wall Street Journal (Greg Ip): "Federal Reserve Chairman Ben Bernanke faces a perception problem: It looks like he is too ready to respond to a falling stock market. That criticism was sounded after the Fed moved to cut interest rates Tuesday, in part because of fears that an overseas stock-market plunge would spill over to the U.S. The drumbeat grew more intense yesterday as critics and others confronted the possibility that the global selloff was at least partly a false alarm, reflecting French bank Societe Generale SA's unwinding of a trader's unauthorized bad bets, and due less to economic anxiety."
January 24 - Financial Times (Ralph Atkins): "The European Central Bank made clear yesterday it would not bow easily to pressure for eurozone interest rate cuts... Jean-Claude Trichet, ECB president, emphasised the priority that the bank attached to combating inflation and a belief that eurozone growth would remain robust in remarks that revealed a widening gulf between the bank and financial markets. Markets have priced in several ECB interest rate cuts this year. Mr Trichet's comments also highlighted the contrast between the ECB and the US Federal Reserve, which on Tuesday slashed US interest rates by 75 bps. During times of financial market turbulence 'it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets', Mr Trichet told the European parliament."
January 24 - Bloomberg (John Fraher and Andreas Scholz): "European Central Bank council member Axel Weber said interest rates in the euro region are still 'accommodative' and investors' expectations of reductions later this year may be 'wishful thinking.' 'We have a positive economic outlook and as long as that doesn't change I would say that rates are still on the accommodative side and in no way restrictive,' Weber said..."
January 23 - Bloomberg (Svenja O'Donnell): "Bank of England Governor Mervyn King said inflation may match the fastest pace in at least a decade this year and require an explanation to the Treasury, a sign that policy makers have limited scope to cut interest rates. 'It is possible that inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the chancellor,' King said... 'To put it bluntly, this year we are probably facing a period of above-target inflation and a marked slowing in growth.'"
January 24 - Financial Times (Delphine Strauss): "Worries over rising inflation pressures mean the Bank of England will be far less aggressive than the US Federal Reserve in cutting interest rates, minutes of the recent meeting of the Bank's rate-setting monetary committee signalled yesterday. The committee felt that 'the short-run inflation outlook had worsened markedly' as sterling's sharp decline exacerbated the effects of higher commodity prices, and that a second period of inflation significantly above target, after last spring's peak, could lead people to expect higher inflation."
January 24 - Financial Times: "Mervyn King, governor of the Bank of England, likens the British economy to a ship buffeted by strong crosswinds. From across the Atlantic blows the credit squeeze, sapping output growth. From the east a blast of higher energy and food prices stirs up inflation. These forces resemble a perfect economic storm."
January 23 - Dow Jones (Oliver Klaus and Mirna Sleiman): "Arab oil producers, despite facing rampant inflation, on Wednesday followed the U.S. Federal Reserve and lowered official interest rates to keep their currencies aligned with the dollar and raised banks' reserve requirements to control liquidity. Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain followed the Fed's decision a day earlier to cut interest rates by 75bps in response to sliding international financial markets and in anticipation of a weaker economy... 'Increasingly lower rates run the risk of pushing inflation higher and cementing inflation expectations at increasingly elevated levels,' Deutsche Bank said..."
Bursting Bubble Economy Watch:
January 24 - Financial Times (Jeremy Grant): "Christopher Dodd, the Senate banking committee chairman, insisted...that any economic stimulus package for the US must go beyond short-term measures, proposing a new $10bn-$20bn fund that would buy outstanding mortgages at steep discounts to help distressed homeowners... Mr Dodd's proposals, as well as others to emerge on Wednesday, appear to indicate that Democrats are attempting to take advantage of the recent break-out of bipartisanship in Washington to push broader solutions that may involve investment in the country's crumbling infrastructure, tackling energy independence, and reforming the benefits system. Harry Reid, Senate majority leader, said Congress should work on a long-term plan to pay to build roads, utilities, schools and housing. Mr Dodd's proposals...also included a suggestion that any stimulus package should include passage of a bill to reform the Federal Housing Administration, which provides mortgage insurance on loans."
January 23 - Bloomberg (Alison Vekshin): "Senate Banking Committee Chairman Christopher Dodd proposed creating a federal program to buy 'very distressed' mortgages at steep discounts as part of economic stimulus legislation being developed in Congress. The Federal Homeownership Preservation Corp. would buy loans and finance them as 30-year fixed-rate mortgages to help keep borrowers from losing their homes, Dodd said... The approach 'would allow us to deal with this foreclosure matter in a very creative way,' said Dodd... Dodd's proposal, modeled on the Depression-era Home Owners' Loan Corp., came as Democrats unveiled several proposals reminiscent of 1930s-style economic-stimulus programs. Senate Majority Leader Harry Reid of Nevada said today Congress should work on a long-term plan that would pay to build roads, utilities, schools and housing."
Latin America Watch:
January 25 - Bloomberg (Juan Pablo Spinetto and Jens Erik Gould): "Mexican central bank Governor Guillermo Ortiz said he sees 'latent inflation pressure' from food costs and higher taxes, urging vigilance even as the latest consumer price index was less than economists forecast."
Fannie and Freddie's combined Books of Business (retained mortgages and insured MBS) expanded an enormous $83.7bn during December to $4.979 TN. This was a 20.5% growth rate, capping off 2007 Combined Book growth of an eye-opening $624bn (14.3%). For perspective, Fannie & Freddie's Combined Book expanded $352bn during 2006, $186bn in 2005, $227bn in 2004, and $516bn in (pre-accounting debacle) 2003. A strong case can be made that 2007 was exactly the wrong time for these thinly capitalized and incredibly leveraged mortgage companies to aggressively increase their risk exposure.
January 24 - Reuters (Patrick Rucker): "The size of home loans that may be bought or insured by Fannie Mae, Freddie Mac and the Federal Housing Administration would rise by more than $300,000 under an economic stimulus plan pitched by the U.S. House of Representatives. Under the plan...Fannie and Freddie would be permitted to invest in home loans valued as high as $729,750 for one year, while the FHA would be permitted to indefinitely insure loans up to that level. Currently, Fannie Mae and Freddie Mac loans are capped at $417,000, while FHA loans may not exceed $367,000."
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
January 22 - San Francisco Chronicle (Carolyn Said): "Foreclosures and default notices skyrocketed to record peaks in California and the Bay Area in the fourth quarter of 2007... Lenders repossessed 31,676 residences in California in the October-November-December period, according to DataQuick... That was a dramatic 421.2% increase from 6,078 in the year-ago quarter. In the Bay Area, foreclosures rose an equally stunning 482.5% to 4,573 in the fourth quarter... 'Foreclosure activity is closely tied to a decline in home values,' DataQuick President Marshall Prentice said... It was the most foreclosures since DataQuick began tracking them in 1988 and more than double the previous peak of 15,418 foreclosures in the third quarter of 1996... Mortgage default notices, sent by lenders when homeowners are several months behind on payments, also hit record highs... Statewide, lenders sent 81,550 default notices, up 114.6% from 37,994 in the fourth quarter of 2006... It was the most defaults since DataQuick began tracking them in 1992."
January 25 - Bloomberg (Neil Unmack): "ABN Amro Holding NV clients face 90% losses on two credit derivative products totaling 120 million euros ($176 million), according to Moody's... The so-called constant proportion debt obligations have seen their net asset value fall to 10%, causing them to unwind, or 'cash-out,' Moody' said..."
Mortgage Finance Bust Watch:
January 25 - Bloomberg (David Mildenberg): "Goldman Sachs Group Inc. and 25 other underwriters of Countrywide Financial Corp., the biggest U.S. mortgage lender, were named as defendants in a suit by New York state and city officials for allegedly making misleading statements about the company's prospects. New York City Comptroller William Thompson Jr. and state Comptroller Thomas DiNapoli added the 26 securities firms, two accounting companies and additional Countrywide officers and directors as plaintiffs in the investor securities-fraud lawsuit filed last year in federal court..."
January 25 - Bloomberg (Bob Ivry): "Federal Reserve Chairman Ben S. Bernanke is proving powerless to prevent a deteriorating commercial real estate market. While the yield on 10-year Treasury notes fell 1.43 percentage points in the past three months to the lowest since 2003 following four interest rate cuts, the cost of borrowing for apartment buildings, offices, retail properties and hotels climbed as much as 1.25 percentage points, according to David McLain, principal and chief investment officer of Palisades Financial LLC... 'The market is locked up right now because there's a huge overhang of leveraged assets of every type, development deals that won't meet projections made last year when things were rosy,' said David Tobin, a principal at...Mission Capital Advisors LLC... 'It will end just like the residential housing market.'"
Real Estate Bubbles Watch:
January 24 - Bloomberg (Dan Levy): "The U.S. housing market is the 'worst in 30 years,' said Ryland Group Inc. Chief Executive Officer Chad Dreier... 'Cancellations continue to be a serious headwind for the industry and Ryland,' Dreier said... Ryland had cancellations 'all over the board' as buyers walked away from home orders."
January 23 - Market News International (John Shaw): "The Congressional Budget Office's new budget and economic report...estimates the fiscal year 2008 deficit will be $219 billion..."
January 24 - Bloomberg (Adam L. Cataldo): "The widening budget deficits across the U.S. are forcing California, New York and other big states to consider the once unthinkable decision to sell their roads and lotteries for cash that no one wants to raise with new taxes. Vermont Governor James Douglas and New York Governor Eliot Spitzer said they want to lease their lotteries to pay for education, while South Carolina's Mark Sanford said he may sell or lease toll rights to private buyers. In California, where the $14 billion budget shortfall is the nation's biggest, Arnold Schwarzenegger plans to shed the state's student loan agency."
January 22 - Bloomberg (Michael Quint): "New York Governor Eliot Spitzer proposed a $126.5 billion budget that closes a $4.4 billion gap by paring promised increases in spending for education and property tax rebates, seeking health-care savings and transferring funds among accounts and from reserves... 'These challenging economic times require us to make tough but necessary choices,' said Spitzer..."
January 23 - Bloomberg (Michael Quint): "New York State expects to increase its debt outstanding by $3.3 billion to $53.3 billion in the year ending March 31, 2009, the biggest increase in five years... Spending for bond interest and repayments is projected at $5.28 billion in the 12 months beginning April 1, up from $4.88 billion this year."
January 23 - Bloomberg (Michael McDonald): "Massachusetts Governor Deval Patrick, facing a $1.3 billion budget shortfall, unveiled a spending plan today that includes $124 million in revenue from casino licenses he wants to sell to developers. Patrick... estimated in October that he could raise more than $800 million from selling three casino licenses. He included a portion of that money in a $28.2 billion budget he unveiled today for the year beginning July 1, even as lawmakers debate the merits of expanding gambling."
January 24 - Bloomberg (Michael B. Marois): "California may need to borrow as much as $9 billion later this year to pay bills, as the most populous U.S. state faces its biggest cash shortage since 2003, a budget official said. Governor Arnold Schwarzenegger's finance office estimates the state will need to sell $9 billion of short-term notes in September to cover cash needs for the fiscal year that begins July 1. That compares with $7 billion borrowed in November for this year's operations."
Financial Sphere Bubble Watch:
January 25 - Financial Times (Chris Hughes, Peggy Hollinger, Jennifer Hughes and Jeremy Grant): "That a bank of Société Générale's status could fall prey to a rogue trader shows the fallibility of banks' risk-management and accounting systems - a weakness regulators may tackle with tighter supervision if not fresh regulation. Top derivatives traders say it is not hard to imagine a chain of failures in the departments responsible for risk management that could have led to big positions being taken at SocGen without alarm bells ringing. But they draw a distinction between the risk-management and other related departments. The former could have perfectly assessed the positions taken by Jérôme Kerviel, the trader behind SocGen's losses. But the accounting and finance function may have failed to verify whether those positions were wholly genuine."
January 25 - Financial Times: "The staggering €5bn ($7.4) trading loss at Société Générale has finally knocked Mr Copper off his perch. Since 1996, Yasuo Hamanaka, the copper trader who cost Sumitomo $2.6bn, has held the title of world's top rogue trader. The mid-1990s was the era of the megaloss by the megastar. Trader Nick Leeson famously brought down Barings in 1995 with $1.4bn in losses. That year it also emerged that Daiwa Bank bond trader Toshihide Iguchi...lost $1.1bn. A few months later, Mr Copper made his mark. After that, it seemed that risk management might have improved, with losses declining in absolute terms and the profile of the protagonists shrinking even further...."
Crude Liquidity Watch:
January 24 - Financial Times (Javier Blas): "Opec countries will earn a record $850bn this year in net oil revenues, a jump of nearly 26% from last year's $675bn, according to a fresh estimate from the US government... The sharp rise is likely to fuel the firepower of the Middle East's sovereign wealth funds, including those of Kuwait and the United Arab Emirates, which are buying large stakes in Wall Street banks... The record $850bn revenues represents a three-fold increase from the $258.6bn Opec earned in 2000..."
January 24 - Bloomberg (Lyubov Pronina): "Russia's Stabilization Fund of surplus oil revenue will surpass $200 billion this year, Finance Minister Alexei Kudrin said. Kudrin was speaking today at the World Economic Forum in Davos, Switzerland. The fund's value rose 9.4% last month to end the year at $157 billion."
More than 20 Years in the Making:
It all began innocently enough: "The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."
The newly appointed Federal Reserve chairman, Alan Greenspan, released this statement prior to the opening of market trading on Tuesday, October 20, 1987. The previous day, "Black Monday," the Dow Jones Industrial Average crashed 508 points, or 22.6%. All the major indices were down in the neighborhood of 20%, with S&P500 futures ending the historic trading session down 29%.
The 1987 stock market crash was contemporary Wall Street finance's first serious market dislocation. Stock market speculation had been running rampant, at least partially fostered by newfangled hedging and "portfolio insurance" trading strategies. When a highly speculative market began to buckle, the forced selling of S&P futures contracts to hedge the rapidly escalating exposure to market insurance written ("dynamic trading") played an instrumental role in instigating illiquidity and a market panic.
Following "Black Monday," there was of course considerable media attention directed at the event's causes and consequences. Some believed at the time the stock market was discounting a severe economic downturn. Others recognized the reality that the situation had little to do with underlying economic forces. The economy was in the midst of a robust economic expansion, while Credit was flowing (too) freely. Immediately post-crash, however, the financial system was extremely vulnerable and the Greenspan Fed acted decisively to ensure the marketplace understood clearly that the Federal Reserve was a willing and able liquidity provider.
Credit then really began to flow. Greenspan's assurances came at a critical juncture for the fledging Wall Street securitization marketplace; for Michael Milken, Drexel Burnham and the junk bond market; for private equity, hostile takeovers and the leveraged buyout boom; for the fraudulent S&L industry and for many banks' commercial lending operations. While it sounds a little silly after what we've witnessed since, there was a time when the eighties were known as the "decade of greed."
When the junk bonds, LBOs, S&Ls, and scores of commercial banks all came crashing down beginning in late-1989 to 1990, the Greenspan Fed initiated an historic easing cycle that saw Fed funds cut from 9.0% in November 1989 all the way to 3.0% by September 1992. In order to recapitalize the banking system, free up system Credit growth, and fight economic headwinds, the Greenspan Federal Reserve was more than content to garner outsized financial profits to the fledgling leveraged speculator community and a Wall Street keen to seize power from the frail banking system. Wall Street investment bankers, all facets of the securitization industry, the derivatives market, the hedge funds and the GSEs never looked back -not for a second.
In the guise of "free markets," the Greenspan Fed sold their soul to unfettered and unregulated Wall Street-based Credit creation. What proceeded was the perpetration of a 20-year myth: that an historic confluence of incredible technological advances, a productivity revolution, and momentous financial innovation had fundamentally altered the course of economic and financial history. The ideology emerged (and became emboldened by each passing year of positive GDP growth and rising asset prices) that free market forces and enlightened policymaking raised the economy's speed limit and increased its resiliency; conquered inflation; and fundamentally altered and revolutionized financial risk management/intermediation. It was one heck of a compelling - alluring - seductive story.
But, as they say, "there's always a catch". In order for New Age Finance to work, the Fed had to make a seemingly simple - yet outrageously dangerous - promise of "liquid and continuous" markets. Only with uninterrupted liquidity could much of securities-based contemporary risk intermediation come close to functioning as advertised. Those taking risky positions in various securitizations (especially when highly leveraged) needed confidence that they would always have the opportunity to offload risk (liquidate positions and/or easily hedge exposure). Those writing derivative "insurance" - accommodating the markets' expanding appetite for hedging - required liquid markets whereby they could short securities to hedge their risk, as necessary. There were numerous debacles that should have alerted policymakers to some of New Age Finance's inherent flaws (1994's bond rout, Orange Co., Mexico, SE Asia, Russia, Argentina, LTCM, the tech bust, and Enron to name a few). Yet the bottom line was that the combination of the Fed's flexibility to aggressively cut rates on demand; ballooning GSE balance sheets on demand; ballooning foreign official dollar reserve holdings on demand; and insatiable demand for the dollar as the world's reserve currency all worked in powerful concert to sustain (until recently) the U.S. Credit Bubble - through thick and thin.
Despite his (inflationist) academic leanings and some regrettable ("Helicopter Ben") speeches as Fed governor, I do believe Dr. Bernanke aspired to adapt Fed policymaking. His preference was for a more "rules based" policy approach of setting rates through some flexible "inflation targeting" regime, while ending Greenspan's penchant for kowtowing to the markets. Today, it all seems hopelessly naïve. Inflation is running above 4%, while the FOMC is compelled to quickly slash the funds rate to 3%. And never - I repeat, never - have the financial markets been more convinced that the Federal Reserve fixates on stock prices while is permissive when it comes to inflationary pressures. Today, the contrast to the ECB and other global central banks could not be starker. The Fed has climbed way out on a limb, and it is difficult at this point to see how they regain credibility as inflation fighters or supporters of the value of our currency. It is not only trust in Wall Street-backed finance that is being shattered.
The greatest flaw in the Greenspan/Bernanke monetary policy doctrine was a dangerously misguided understanding of the risks inherent to their "risk management" approach. Repeatedly, monetary policymaking was dictated by the Fed's focus on what it considered the possibility of adverse consequences from relatively low probability ("tail") developments in the Credit system and real economy. In other words, if the markets (certainly inclusive of "New Age" structured finance) were at risk of faltering, it was believed that aggressive accommodation was required. The avoidance of potentially severe real economic risks through "activist" monetary easing was accepted outright as a patently more attractive proposition compared to the (generally perceived minimal) inflationary risks that might arise from policy ease. As it was in the late 1920s, such an accommodative ("coin in the fuse box") policy approach is disastrous in Bubble environments.
The Fed's complete misconception of the true nature of contemporary "inflation risk" was a historic error in monetary doctrine and analysis. To be sure, the consequences of accommodating the markets were anything but confined to consumer prices. Instead, the primary - and greatly unappreciated - risks were part and parcel to the perpetuation of dangerous Credit Bubble Dynamics and myriad attendant excesses. Importantly, the Fed failed to recognize that obliging Wall Street finance was ensuring ever greater Bubble-related distortions and fragilities - deeper structural impairment to both the financial system and real economy. In the end, the Fed's focus on mitigating "tail" risk guaranteed a much more problematic and certain "tail" - and a rather fat one at that.
Fundamentally, the Greenspan/Bernanke "doctrine" totally misconstrued the various risks inherent in their strategy of disregarding Bubbles as they expanded - choosing instead the aggressive implementation of post-Bubble "mopping up" measures as required. They were almost as oblivious to the nature of escalating Bubble risk as they were to present-day complexities incident to implementing "mop up" reflationary policies. "Mopping up" the technology Bubble created a greatly more problematic Mortgage Finance Bubble. Aggressively "mopping up" after the mortgage/housing carnage in an age of a debased and vulnerable dollar, $90 oil, $900 gold, surging commodities and food costs, massive unwieldy pools of speculative global finance, myriad global Bubbles, and a runaway Chinese boom is fraught with extraordinary risk. Furthermore, the Fed's previously most potent reflationary mechanism - Wall Street-backed finance - is today largely inoperable.
I'm not going to jump on the criticism bandwagon and excoriate Dr. Bernanke for his panicked 75 basis point inter-meeting rate cut. From my vantage point, the "wheels were coming off" and I would expect nothing less from our increasingly impotent central bank. Yet it is silly to blame today's mess on recent indecisiveness. The Fed has not been "behind the curve," unless one is referring to the "learning curve." The unfolding financial and economic crisis has been More than 20 Years in the Making. It's a creation of flawed monetary management; egregious lending, leveraging and speculating excess; unprecedented economic distortions and imbalances on a global basis. And I find it rather ironic that Wall Street is so fervidly lambasting the Fed. For twenty years now the Fed has basically done everything that Wall Street requested and more.
It is also as ironic as it is predictable that Alan Greenspan - Ayn Rand "disciple" and free-market ideologue - championed monetary policies and a financial apparatus that will ensure the greatest government intrusion into our Nation's financial and economic affairs since the New Deal. Articles berating contemporary Capitalism are becoming commonplace. I fear that the most important lesson from this experience may fail to resonate: that to promote sustainable free-market Capitalism for the real economy requires considerable general resolve to protect the soundness and stability of the underlying Credit system.
And, speaking of the Credit system, some brief market comments are in order. Stocks generally rallied this week, yet it was a backdrop that provided little comfort that the system is beginning to stabilize. Sure, the banks rallied 10%, the homebuilders 20%, the retailers 7%, the transports almost 7%, and the restaurants 5%. One could easily assume that the bears were squeezed and leave it at that. There are, however, surely more complex and problematic dynamics at work. Notably, many of the favorite sectors were hit this week - the utilities, technology and biotechs all posted notable weakness. Coupled with this week's extreme volatility, I will assume that the huge "market-neutral" and "quant" components of the leveraged speculating community have suffered even greater losses so far this month than those from last August. It is also worth noting that some important Credit spreads have diverged markedly, most notably many corporate, junk and commercial MBS spreads have widened as dollar swap spreads have narrowed. The spectacular Treasury melt-up must also be causing havoc for various strategies, ditto the recently strong yen and Swiss franc.
I'll stick with the view that an unfolding breakdown in various trading models and hedging strategies is at risk of precipitating a crisis of confidence for the leveraged speculating community. I suspect hedge fund trading was much more responsible for chaotic global securities markets this week than a rogue French equities trader. There is, unfortunately, little prospect for markets to calm down anytime soon. There is no quick or easy fix to any of the myriad current problems - seized up securitization markets, sinking housing markets, faltering bond insurers, counterparty issues, a crisis in confidence for "Wall Street finance", or acute economic vulnerability - to name only the most obvious. Again, they've been More than 20 Years in the Making.