Doug Noland’s Credit Bubble Bulletin

Selected Notes:

M2 (narrow) “money” supply jumped $32.3bn to a record $9.672 TN. “Narrow money” has expanded at a 9.9% pace y-t-d…

December 20 – Bloomberg (Bob Willis and Alex Tanzi): “More than two years after the U.S. recession ended in June 2009, construction of single-family homes is heading for its worst year on record …While total housing starts bottomed in 2009, construction of one-family houses will probably post a new low this year at around 419,100, about 11% less than in 2010…”

December 21 – Bloomberg (Fabio Benedetti-Valentini): “BNP Paribas SA, Societe Generale SA, Credit Agricole SA and Groupe BPCE, France’s biggest banks, are struggling to fund about 37 billion euros ($48bn) of debt payments due in the first quarter.”   Read more»

Financial Arbitrage Capitalism After 10 Years

Bill Gross penned a discerning op-ed for this past Monday’s Financial Times, “The Ugly Side of Ultra-Cheap Money.” From Gross: “Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy… Historically, central banks have comfortably relied on a model which dictates that lower and lower yields will stimulate aggregate demand and, in the case of financial markets, drive asset purchases outward on the risk spectrum as investors seek to maintain higher returns.

“Near zero policy rates and a series of ‘quantitative easings’ have temporarily succeeded in keeping asset markets and real economies afloat in the US, Europe, and even Japan. Now, with policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.”     Read more»

MF Global and the Great Wall St Re-Hypothecation Scandal

[UDD Editor Note: If the reader wants to gauge the value of this somewhat difficult item, skip to the final paragraph. Perhaps then he or she will return to the top to see how we ‘got there.’]

(Business Law Currents) A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.   Read more»

Target2

December 14 – Dow Jones: “German Finance Minister Wolfgang Schaeuble… said the euro is stable, and the current crisis isn’t one of the currency itself. He made his comments as the euro dipped as low as $1.2994–its lowest point since January this year. ‘We don’t have a crisis of the euro. What we have is a crisis and problems in a series of member states,’ Schaeuble said at a speech to mark the tenth anniversary of the introduction of euro notes and coins… Introducing the euro and giving up the deutschmark was no easy decision, he said. ‘But already then it was the right decision,’ Schaeuble said. The finance minister stressed that inflation during the euro years has been low. ‘The euro is a stable currency,’ he said.”

For months now, European political leaders and central bankers have repeatedly reassured the marketplace that the euro is a “strong” and “stable” currency. We were ensured that confidence in the euro was not an issue – and for months this view was bolstered by the euro’s resiliency in currency trading. But talk of euro confidence rings increasingly hollow. I believe that market perceptions have changed, and faltering European Central Bank (ECB) and euro confidence now likely marks the next phase of the unfolding global financial crisis.

The loss of confidence in currency markets played a critical role in previous financial crises. One can look back not that many years to devastating crises in Mexico, Thailand, Indonesia, Malaysia, South Korea, Russia, Argentina and Iceland (to name only a few) for examples of how currency tumult can become the epicenter of a general crisis of confidence. In each case, there reached a key inflection point when the markets no longer believed policymakers (especially central bankers) had the situation under control.   Read more»

Doug Noland’s Credit Bubble Bulletin

[Selected Notes]

Federal Reserve Credit surged $69.2bn to a record $2.867 TN. Fed Credit was up $459bn y-t-d and $493bn from a year ago, or 20.2%…

M2 (narrow) “money” supply jumped $19.1bn to $9.640 TN. “Narrow money” has expanded at a 9.7% pace y-t-d…

December 14 – Bloomberg (Chiara Vasarri): “Italy had to pay the most in 14 years to sell five-year bonds as Parliament rushes to pass a 30 billion-euro ($39bn) budget plan that Prime Minister Mario Monti says will bring down record borrowing costs. The Rome-based Treasury sold 3 billion euros of the bonds, the maximum for the sale, to yield 6.47%, the most since May 1997… Monti’s Cabinet approved a sweeping budget plan on Dec. 4 aimed at raising revenue and boosting Italy’s anemic growth to persuade investors Italy can tame the region’s second-biggest debt and avoid a bailout… ‘Italy’s predicament is dire: it has become a proxy for euro-zone risk at a time when its funding requirements are about to balloon,’ Nicholas Spiro, managing director of Spiro Sovereign Strategy… said… ‘Every bond auction in January and February is going to be scrutinized for signs that Italy is having trouble maintaining market access.’”   Read more»

MF Global’s Fractional Reserves

Jon Corzine told the House Agriculture Committee, “I simply do not know where the money is, or why the accounts have not been reconciled to date.” The public is outraged that the former CEO of bankrupt global financial-derivatives broker and prime dealer in US Treasury securities MF Global doesn’t know where the missing $1.2 billion in client funds went.

Corzine is the member a few exclusive clubs: he is a Goldman Sachs alum, former US senator, and former New Jersey governor. After the incumbent Corzine was beat by Chris Christie in the 2009 New Jersey gubernatorial race, the MF board probably rejoiced, believing the guy to fix their problems was suddenly available. Now he’s in the club of taking a mere 20 months to create the eighth largest bankruptcy in history.   Read more»

Making the Next Bailout the Last

Ben Bernanke is worried about whether the Fed has the political capital to do it all again.

The European debt crisis isn’t over, and may indeed get a lot worse if the new strategy (as appeared on Friday) is to let European banks borrow unlimited funds from the European Central Bank to cycle back into the bonds of spendthrift governments. If the stock market seems happy, it’s only because the meltdown has been postponed.

Since another bailout of the U.S. financial system may yet be needed as a result of the European mess, it behooves us to ask what we learned from the last one. Happily there was plenty of news this week to help us.

Financial pros were buzzing about a Bloomberg News story that had then-Treasury secretary Henry Paulson, on July 21, 2008, stopping by a hedge fund and musing about wiping out Fannie Mae and Freddie Mac’s shareholders and placing the mortgage lenders under government conservatorship, as he did seven weeks later.   Read more»

Q3 2011 Federal Reserve’s “Flow of Funds” Report

“…[A]ccelerating debt growth helps explain the generally favorable economic data…Importantly, the vast majority of system debt growth continues to emanate from Washington…In percentage terms, federal debt expanded at a 14.1% annualized rate in Q3.”

“Total Federal Debt of $11.87 TN has increased from 46% of GDP to 78% of GDP in only 13 quarters...No one should expect that an economy dominated to such an unprecedented degree by government finance to equate to positive economic performance or a sound      economic structure.”

It is only appropriate that the release of the Fed’s latest Credit data directs our analytical focus back to the U.S. Credit system and economy. For the quarter, total system Credit market debt increased to a record $53.825 TN. While some analysts continue to refer to “deleveraging,” it is worth noting that total system debt remains at a staggering 355% of Gross Domestic Product (GDP). This is not meaningfully below the peak ratio of 375% in Q2 2009 (ended the nineties at 264%).

The third quarter was notable for U.S. economic resilience in the face of a tumultuous global financial backdrop. As always, Z.1 report data provide invaluable insight.   Read more»

Doug Noland’s Credit Bubble Bulletin

[Selected Notes]

December 5 – Bloomberg (Joshua Zumbrun): “Federal Reserve Bank of Chicago President Charles Evans said further monetary stimulus is needed now to help the U.S. economy escape from a ‘liquidity trap.’ ‘There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape,’ Evans said… ‘It is imperative to undertake action now.’”

December 6 – Bloomberg (Jonathan Tirone): “German Finance Minister Wolfgang Schaeuble said the U.S. model for solving the financial crisis would be ‘very dangerous for Europe’ and has resulted primarily in flooding emerging markets with excess liquidity.”

December 5 – Bloomberg: “China can’t use its $3.2 trillion in foreign exchange reserves to ‘rescue’ European nations and the country ‘has done its part’ to help the region deal with its financial crisis, Vice Foreign Minister Fu Ying said…’It’s not money that can be used by the premier or the finance minister.’”

December 6 – Bloomberg (Jeff St.Onge): “European real-estate deals may fall to the lowest level in a decade this quarter as the region’s sovereign-debt crisis stifles lending for property acquisitions. ‘In real estate, you have seen an almost complete shutdown in the debt markets,’ Paul House, head of European real-estate investment banking at Citigroup Inc. said… ‘The sovereign crisis is a banking crisis…’”   Read more»

Fix was in: Bloomberg mag seconds a scoop

So, now do you believe me? The stock market was rigged.

It has been a little lonely telling this story over the past few years.

But now that another news organization has finally gotten off its lazy butt, I’ll tell it again: Under former Treasury Secretary Hank Paulson, confidential government information was regularly leaked to select people on Wall Street.   Read more»