http://www.safehaven.com/article-5111.htm



M3 is a problematic indicator of system liquidity, while it can very well give completely erroneous signals at key junctures. In particular - and as we witnessed during 2003 - when the marketplace is moving aggressively toward higher-yielding and riskier financial assets, M3 growth would be expected to badly lag underlying Credit expansion. Indeed, at critical junctures, a stagnating M3 could be perfectly consistent with rampant Credit expansion and liquidity overabundance in riskier asset classes. And it is worth noting that MZM ("money at zero maturity") is an especially flawed measure of system liquidity, specifically because it includes - and is distorted by the vagaries of - money fund assets (while excluding time deposits). MZM was a good enough indicator of system liquidity when GSE balance sheet growth (and money market borrowings) was a major contributing factor, but has become an especially poor metric the past few years.


At this precarious stage in the cycle, most of my analytical focus is directed to Credit and Speculative Dynamics. As long as Credit expands sufficiently to sustain the boom (which it is clearly doing), analysis of "money" needn't take up much of our time or attention. We don't have to be concerned with the Fed covertly "printing" M3, as the jettisoned components are all financial sector liabilities. And we can remain quite confident that financial sector liability expansion continues in earnest. Inflating asset prices and asset markets - through heightened speculative leveraging - create their own source of liquidity.

When I get time I will try and post some titbits,  if anytime any of you wants to make comments please do so. If by any chance you suffer from shock then you may not be in position to add comments which is understandable.

I could be wrong but rest of the world supply of worthless papers is rising faster then America.

Inflection point or Respite?

Bovespa equities index traded to an all-time high of 42,062 during the May 11th session, at the time sporting a y-t-d gain of almost 26%. Today, 11 sessions later, the Bovespa is 8% off its high. The Mexican Bolsa has declined 10% from record highs, and the Argentine Merval 14%. The highflying India Sensex has dropped 15% from highs and Russia's RTS 17%. Equities have suffered meaningful setbacks across the globe, although most markets remain positive for the year. Brazil's Bovespa is up 15.5% y-t-d, Mexico's Bolsa 10%, Argentina's Merval 9%, India's Sensex 15%, and Russia's RTS 33%. For 12 months, the Bovespa is up 58%, the Bolsa 49%, Merval 16%, Sensex 62%, and the RTS 122%.
The major index in the UK is up 3% y-t-d, France 7%, Germany 7%, Spain 6%, and Italy 3%.
There is a lengthy list of reasons why 2006's wild ups and downs are now par for the course, including 9,000 hedge funds, scores of well-capitalized proprietary trading desks, a plethora of new financial instruments and investment vehicles, $900 billion U.S. Current Account Deficits as far as the eye can see, global Credit systems firing on all cylinders, and resulting unprecedented global marketplace liquidity. Have global financial conditions really tightened meaningfully from the ultra-easy conditions of two weeks ago? Perhaps, but I'll need more convincing.
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Importantly, there is not today a legion of Pegged Currencies biding time to play Catalyst for Domino Credit System Collapses. This dynamic had for awhile held market participants, particularly foreigners and derivative-hedgers, hostage to bouts of intense fear and loathing.
Today's global environment and dynamics are radically transformed in so many respects. Not only do emerging markets and economies appear much less vulnerable to abrupt marketplace dislocations, the pro-dollar bias is very much a fad from the past. Instead of facing only the ever-present "stick" of emerging currency/debt market fragilities, investors in these markets nowadays have sound rationale to focus more keenly on the potential "carrot" of dollar weakness/commodities inflation/potential dollar dislocation. It is worth noting how unimpressively the dollar has performed during recent emerging market unrest, along with how well commodity prices have hung in there
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So far, local Credit systems and economies remain robust and, clearly, less susceptible to the vagaries of international speculative flows. Of course, the nature of today's marketplace dynamics guarantees that these markets are prone to eye-opening volatility and occasional heart-stopping downdrafts. But these days I believe we must be cognizant of the possibility that domestic Credit systems are significantly more resilient than they have been in the recent past. Even major stock market declines do not necessarily entail systemic liquidity crises.

What Difference Does a Year Make

M2 (narrow) "money" supply jumped $24.8 billion to $6.804 Trillion (week of May 22). Year-to-date, narrow "money" has expanded $115 billion, or 4.2% annualized. Over 52 weeks, M2 has inflated $306 billion, or 4.7%. For the week
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Japan, the world's largest oil user after the U.S. and China, said oil imports rose for a third straight month in April, gaining 14 percent from a year earlier
China's increasing number of vehicles will help sustain gains in oil demand in the world's second-largest energy consumer
Japan's government plans to help companies boost overseas oil assets to 40 percent from 15 percent of the country's total oil imports by 2030 in an effort to ensure supplies as resource competition intensifies with China and India.
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A 1960 oil painting by China-born Chu the-Chun led a Hong Kong auction of Asian modern art by Christie's International Plc that fetched a total of HK$353 million ($45.5 million), double the amount
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April Construction Spending was up 8.5% from April 2005. At 7.2% y-o-y, expenditures on Residential construction are slowing. At the same time, the Non-residential construction boom gathers strength. Led by a boom in lodging, office, and healthcare, Non-residential spending was up 10.2% from a year earlier. April factory orders were down 1.8% from March but up 8.7% from a year earlier. Capital Goods orders were up 18.9% y-o-y.
Mercedes-Benz reported a record May in the U.S., with sales up 21.4%
housing price data this week. Nationally, prices were up 2.03% (8.12% annualized) during the quarter, with a y-o-y gain of 12.54%. While this was the weakest quarterly price gain in eight quarters, it is worth noting that not a single quarter surpassed 2% appreciation during the entire decade of the nineties.
Arizona continues to exhibit the greatest appreciation rate, although prices growth has dropped significantly... Quarterly appreciation in Arizona dipped from approximately 7.4% to 3.8%
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it's interesting to reflect back a year. I certainly don't remember anyone forecasting yet another year of double-digit mortgage Credit and home price gains. The consensus view had housing slowing rapidly, in the process forcing the U.S. consumer to retrench. Some saw the Fed wrapping things up last June at 3.25%; others expected that the Fed would be well into another easing cycle by now. With 10-year bond yields stubbornly below 4% this time last year, a view was taking shape that the global economy was beset by intransigent disinflationary forces. If inflation hadn't made its appearance after a few years of ultra-loose global monetary policy,

I recognize that it is popular nowadays to predict the imminent bursting of myriad Bubbles - "energy," "emerging markets," "global risk assets," "commodities," and "hedge funds," etc. Bursting Bubbles are expected to lessen global liquidity, aggregate demand and general price pressures. What I don't see much of is analysis of the ramifications for the historic shift in the flow of global finance to the oil producing economies and their financial institutions. I am certainly not this evening going to claim I have any great insight other than to suggest to readers to contemplate the possibility that current monetary trends are moving in the direction of a radical departure from the nature of global (dis-)inflation experienced over the past two decades.

  “Merger and acquisition activity worldwide is set to reach $1,930bn for the first half of the year, marking the highest half-year volume on record and surpassing even the heady days of the dotcom boom. A record number of billion-dollar deals pushed the size of the global market for initial public offerings in the first half of the year to more than $100bn – second only to the first half of 2000 at the height of the dotcom boom.  There’s no end in sight for this year’s parade of megamergers.  In less than 100 hours starting last Friday, around $110 billion in acquisition deals were sealed world-wide
Everywhere you look these days, people are scrambling for energy supplies.  China is scouring the world, from the oil sands of Alberta to the oilfields of Iran. Morgan Stanley and other investment banks have spent hundreds of millions of dollars for petroleum still in the ground.
Gulf governments have more than trebled investment in domestic infrastructure projects, buoyed by more than $70 a barrel oil prices and driven by a desire to diversify their economies away from hydrocarbons. The scale of the investments points to growing confidence among Arab oil producers that crude prices will remain strong for years.  Middle East Economic Digest, which tracks projects in the region, says current or planned investments exceeded $1,000bn in April, up from $277bn 18 months before.  Vast sums of petrodollars are being recycled overseas but economists say the emerging trend in the present oil boom is a greater focus on investing at home....... Saudi Arabia’s King Abdullah criss-crossed the kingdom in recent weeks, unveiling at every stop generous promises and new projects. ........Until recently reluctant to raise spending, the world’s largest oil producer is hoping to exploit the windfall from the $70 per barrel oil price to diversify the economy and bring down an unemployment rate

The Bernanke Fed today plays a dangerous game of sheep in wolf’s clothing, talking tough on (“core”) inflation while praying it can stay soft on excess.  Highly speculative marketplaces at home and abroad savor in the gamesmanship.  Markets recognize that the Fed will now talk the talk when speculative excess pushes the envelope......I do read commentary that the Fed and global central bankers have been “withdrawing liquidity.”  I don’t see it.  For starters, the vast majority of global liquidity these days emanates from private-sector debt growth and securities leveraging.  Keep in mind that Credit is growing at double-digit rates across the globe.  The Federal Reserve’s balance sheet has become virtually irrelevant to the global liquidity-creation process, and the Fed has not been selling securities to reduce liquidity in the system (and they would have to sell a large amount today to offset record Credit growth!)....................The Fed does, however, hold (held?) a potentially powerful “stick” over the marketplace.  It maintains the capacity to surprise the markets with more aggressive rate hikes, which would likely entail significant Credit market disruption and speculator de-leveraging.................I feel compelled to remind readers of the abbreviated period of time between the near "seizing up" of global Credit markets in October 1998 and the historic Internet/technology Bubble of 1999/2000.  To be sure, powerful inflationary biases had engulfed both the Credit system and the greater technology industry by 1998.  But fearing market tumult, the Fed was unwilling to impose sufficient restraint.  Speculative markets will invariably take full advantage.  And it is worth noting that today’s inflationary biases are more powerful, broader and clearly global in scope, yet the Fed again appears Wedded to Interminable Acquiescence.  For the most part, the markets are happy to pretend there is no inflation problem.  Amazingly, a few pound the deflation drum as loud as ever.

http://prudentbear.com/creditbubblebulletin.asp

I found Freddie Mac's Mid-Year Economic Outlook (from a couple weeks back) quite interesting (and they do occupy an enviable catbird seat over the U.S. economy). Freddie economists forecast second-half consumer spending moderation and a general economic slowdown. They expect both 2006 Housing Starts and Total Home Sales to decline 7% from last year's levels. Home price appreciation is expected to slow to 7%, with Mortgage Originations falling 12%. All the same, "mortgage debt outstanding, supported by new construction and house appreciation, should grow by 13% over 2006..."

It is worth noting that Bank Real Estate Loans expanded at a 13.7% annualized rate during the second quarter (from Fed data), with what appears a major push to commercial real estate lending. Estimates have second quarter bank loan growth as high as 11%, and it is simply difficult to envisage the economy faltering meaningfully in the face of such a rampant expansion of finance. I am reminded of the dramatic falloff of mortgage refinancings in mid-2003. While many of the bearish persuasion expected mortgage lending to subside, the correct analysis was instead that the massive mortgage sector infrastructure put in place for refinancings was to be redeployed to hawk interest-only, negative amortization, and other "exotic" home loans. The upshot was a blow-off period of Mortgage Finance Bubble excess.
It is worth noting that the NYSE Financial is up almost 7% y-t-d, outperforming the S&P500 and most other indices.

August 24 - International Herald Tribune (Carter Dougherty): "During 20 years in the toy business, Anthony Temple has reveled in the bounty of inexpensivestuffed animals, coffee mugs and resin figurines on sale in China. But a buying trip this year for his company, Rainbow Designs...was a rude awakening. Travelingthrough the Pearl River Delta north of Hong Kong, Temple found that cost increases - for raw materials, but above all, for labor - dominated every discussion he had with suppliers. Far from being eager to underbid each other, Chinese companies talked about marking up their prices from 5 percent to 10 percent so consistently, that Temple...became convinced that these were not simply negotiating gambits. 'When I went over there, I was under the belief that China is a bottomless pit of cheap product,' Temple said. 'When I left, I was not.'"
    -------"China's government is targeting annual growth of 11 percent in retail sales in the five years through 2010, the Ministry of Commerce said. 'An acceleration of domestic trade will help direct industrial production, boost consumption, increase employment and sustain social and economic growth-------
"Big companies bought back a record $116 billion worth of shares in the second quarter, according to a Standard & Poor's report----------------
   
Commercial & Industrial (C&I) Loans have expanded at a 17.7% rate y-t-d and 14.8% over the past year. -------------------------------
TXU Corp., the largest Texas power producer, ordered $1.7 billion worth of boilers and turbines from General Electric Co. and... Babcock & Wilcox...for proposed power plants... The equipment is intended to be used as part of TXU's plan to build 11 coal-fired power plants in Texas
-------------------Last week's Bulletin delved into the current Financial Structure. I neglected to Credit the Great Hyman Minsky as my inspiration for this line of analysis. I will expand upon the analysis with this week's focus on the residual - the output - of the Financial Structure: Debt Structures, beginning with pertinent insight directly from the writings of Dr. Minsky (from Inflation, Recession and Economic Policy, 1982).---------------------------

"In order to understand why our economy has behaved differently since the middle of 1960s than it has earlier in the post-World War II epoch we have to appreciate how the broad contours of the financial structure have changed. The changes in the broad contours of demand have changed the reaction of aggregate profits to a change in investment and therefore have changed the cyclical behavior of the ability of business to validate its debts. The changes in the financial structure have increased the proportion of speculative and Ponzi finance in the total financial structure and therefore increased the vulnerability of the financial system to refinancing and debt validating crises."
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"The combined effects of big government as a demander of goods and services, as a generator - through its deficits - of business profits and as a provider to financial markets of high-grade default-free liabilities when there is a reversion from private debt means that big government is a three way stabilizer in our economy and that the very process of stabilizing the economy sets the stage for a subsequent bout of accelerating inflation." (page 56)
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To suggest we're facing considerable crosscurrents is today an understatement. Housing and riskier mortgages are deservedly under the radar screen, while market yields at home and abroad are declining meaningfully. For many sectors, markets, and economies these days demonstrating strong inflationary

China's small and medium-sized exporters are busily responding to a strengthening currency - but not in the way that the government, or China's critics, would like. Even as senior government officials carp on about the need for corporates and financial institutions to improve their hedging capabilities to manage foreign exchange risk, managers at small- and medium-sized enterprises told Market News that it's far easier to boost prices and increase output
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Richard Li, the Hong-Kong based internet and telecoms tycoon, yesterday made history and a hefty profit by selling Pacific Century Group's landmark building in central Tokyo for $1.7bn - the highest price ever paid for a single property in Japan------Land prices in Japan's three biggest cities of Tokyo, Osaka and Nagoya rose for the first time in 16 years as competition intensifies among real estate investment funds for acquisitions. Property prices in the three cities rose an average 0.9 percent, with residential land prices in three central wards of Tokyo surging 18 percent, while commercial areas gained 14 percent in the year ended July 1. 'In Tokyo, big property companies are getting bullish--------Hong Kong overtook London for the highest rents for prime office space in the first half, while Moscow and Dubai surpassed Beijing and Shanghai in new construction,------

India's advance tax collections in the April 1-Sept. 15 period rose 29.8 percent to 371.3 billion rupees ($8 billion) from the year earlier--------------

Millionaires are multiplying in the world's fastest-growing economies, leading to a potential boon for banks that manage money for the wealthy, according to a report by the Boston Consulting Group. Assets held by the rich in Brazil, Russia, India and China are set to rise by $2 trillion, or 71 percent, to $4.8 trillion by 2010... Millionaires' wealth in the four countries is growing 11 percent a year on average, compared with 5.6 percent elsewhere."

Home prices in Southern California, where some of the nation's most-expensive neighborhoods are located, rose 2.7 percent in August-----Confidence among U.S. homebuilders dropped to a 15-year low this month as sales slowed and profits dropped, according to a private survey

Financial Sector Credit Market Borrowings actually accelerated - rising from Q1's 8.6% pace to a notable 10.2% SAA. This confirms that financial conditions remain extraordinarily loose, as well as suggests that expectations for weaker economic activity only foster greater financial sector leveraging and speculating.

Hoping to transition from the theoretical to more practical market analysis, I would like readers to recall the 1999/early-2000 environment - the terminal blow-off phase of the technology Bubble. It was common back then for the major technology companies to write put options on their own stocks. Revenues were surging throughout the industry, and most tech companies were major buyers of their own shares. Writing/selling put options on their ever-rising share prices was pretty much found money and could be rationalized as a way to reduce the cost of buybacks. Treasury departments were happy to participate, turning themselves into profit centers extraordinaire. Come the bursting, many companies were burned by these put positions - although losses generally were embedded in the cost of share repurchases rather than flowing through to (rapidly shrinking) earnings.
I hold the view that this aggressive company put option activity was likely an integral aspect of what developed into a major derivatives market distortion - playing a meaningful yet unrecognized role in the NASDAQ Melt-Up Dislocation. I am delving into this issue tonight because I believe something similar has unfolded in the corporate debt risk markets.
Importantly, throughout the technology blow-off, the huge supply of put selling by the major technology companies worked to distort both market prices and perceptions. For one, technology stock "insurance" was readily available in the marketplace at relatively inexpensive prices (considering the actual, yet at the time unappreciated, risk of collapse). This nurtured a perception within the speculator community that the best strategy was to play the market run for all it was worth, while at the same time either holding puts or planning to use the derivatives market to hedge exposure at the first indication of a bursting Bubble.
Typically, a writer of an equity put option will short a portion of the underlying stock as a hedge. This position is then adjusted (dynamic trading) to ensure that the short position generates sufficient profits in the event the stock declines and the put "goes into the money." Thus, if a large number of market participants move to hedge their equities exposure (buying puts), the market would be expected to come under selling pressure as the writers of this protection short stock to establish their hedges.
But with companies selling puts options and writing other derivatives - on shares they expected to repurchase at some future date - the market did not bear the usual brunt of hedge-related selling pressure. Indeed, a key dynamic unfolded where the availability of inexpensive market insurance altered the market's perception of risk. It certainly emboldened the leveraged speculator community - in the process creating huge buying power to push the market higher and ensure the speculators and "insurance" sellers were aptly rewarded. Additionally, those that had shorted stocks (either as bearish trades or as hedges against "insurance" written) forced to cover - at any price. And the higher the market rose, the greater the incentive to speculate in stocks and call options, write market insurance (capture premiums) and cover shorts. Despite rapidly escalating risk, put protection remained readily available at significantly distorted prices.
Importantly, the speculation and derivative-related market dislocation created a backdrop that virtually ensured a collapse. A wildly distorted derivatives "insurance" marketplace had come to create a prevailing misconception that market risk could be easily and inexpensively mitigated. And it is a very dangerous facet of contemporary derivatives markets that a large segment of a market adopts a strategy that preordains an eventual attempt to offload market risk to "the market." In the end, the technology Bubble became so extended that when it eventually reversed, the crowd rushed to establish hedges and liquidity almost immediately evaporated. Put sellers and derivative speculators, including tech companies, completely backed away from selling new "insurance" and the price of protection skyrocketed. Selling stock essentially became the only mechanism to "offload" risk - and the market collapsed.
http://www.safehaven.com/article-6278.htm