For the week, the Dow slipped 0.5% (down 14.9% y-t-d), and the S&P500 declined 1.2% (down 14.0%). Economically-sensitive issues were hammered. The Morgan Stanley Cyclicals sank 5.0% (down 18.3%), and the Transports fell 4.9% (up 2.4%). Defensive issues fared better. The Morgan Stanley Consumer index dipped only 0.2% (down 12.2%), while the Utilities gained 1.9% (down 5.5%). The broader-market played some downside catch-up with the major averages. The small cap Russell 2000 dropped 4.9% (down 13.1%), and the S&P400 Mid-Caps sank 4.6% (down 8.3%). The NASDAQ100 declined 2.2% (down 12.9%), and the Morgan Stanley High Tech index fell 2.1% (down 12.0%). The Semiconductors dropped 4.1%, increasing y-t-d losses to 13.1%. The Street.com Internet Index declined 0.8% (down 10.0%), and the NASDAQ Telecommunications index fell 3.5% (down 10.7%). The Broker/Dealers dropped 3.4% (down 30.6%), and the Banks shed another 3.4% (down 35.3%). Although Bullion added about $5, the HUI gold index declined 3.5% (up 6.5%).
One-month Treasury bill rates jumped 53 bps this week to 1.85%, and 3-month yields added one basis point to to 1.85%. Two-year government yields declined 10 bps to 2.53%. Five-year T-note yields declined 7 bps to 3.28%, while 10-year yields added one basis point to 3.98%. Long-bond yields increased 2 bps to 4.54%. The 2yr/10yr spread widened 10 to 145 bps. The implied yield on 3-month December '09 Eurodollars dropped 13 bps to 3.935%. Benchmark Fannie MBS yields jumped 14 bps to 5.95%. The spread between benchmark MBS and 10-year Treasuries widened a notable 13 to 198, the high since the height of the March financial crisis. The spread on Fannie's 5% 2017 note widened 4 bps to 81.6 bps, and the spread on Freddie's 5% 2017 note widened 4 bps to 81.5 bps - both highs since March. The 10-year dollar swap spread increased 4.5 to 75.5. Corporate bond spreads were wider. An index of investment grade bond spreads widened 5 to 147 bps, and an index of junk bond spreads widened 4 bps to 538 bps.
I noted no investment grade issuance this week.
Junk issuers included Rite Aid $470 million and Fox Acquisition $200 million.
Convert issuance this week included Smithfield Foods $350 million.
International dollar bond issuance included Intelsat $1.0bn and Oceanografia $335 million.
German 10-year bund yields dipped 3 bps to 4.49%. The German DAX equities index declined 2.3% (down 22.3% y-t-d). Japanese 10-year "JGB" yields added 2 bps to 1.63%. The Nikkei 225 lost 2.3% (down 13.5% y-t-d and 27.1% y-o-y). Emerging markets were hit rather hard. Brazil's benchmark dollar bond yields rose 6 bps to 5.83%. Brazil's Bovespa equities index sank 7.7% (down 7.1% y-t-d). The Mexican Bolsa fell 3.3% (down 4.1% y-t-d). Mexico's 10-year $ yields rose 7 bps to 5.52%. Russia's RTS equities index was hit for 5.6% (down 4.5% y-t-d). India's Sensex equities index declined another 2.5%, boosting y-t-d losses to 33.7%. China's Shanghai Exchange index fell 2.9%, pushing 2008 losses to 49.3%.
Freddie Mac 30-year fixed mortgage rates fell 10 bps to 6.35% (down 38bps y-o-y). Fifteen-year fixed rates dropped 12 bps to 5.92% (down 47bps y-o-y). One-year adjustable rates declined 10 bps to 5.17% (down 54bps y-o-y).
M2 (narrow) "money" supply added $3.6bn to $7.694 TN (week of 6/23). Narrow "money" has expanded $231bn y-t-d, or 6.4% annualized, with a y-o-y rise of $432bn, or 5.9%. For the week, Currency slipped $0.8bn, and Demand & Checkable Deposits fell $2.9bn. Savings Deposits increased $7.7bn, while Small Denominated Deposits declined $0.9bn. Retail Money Funds dipped $1.1bn.
Total Money Market Fund assets (from Invest Co Inst) were little changed at $3.456 TN, with a y-t-d increase of $343bn, or 22% annualized. Money Fund assets have posted a one-year increase of $897bn (35%).
Asset-Backed Securities (ABS) issuance this week slowed to a trickle. Year-to-date total US ABS issuance of $107bn (tallied by JPMorgan's Christopher Flanagan) is running at 26% of the comparable level from 2007. Home Equity ABS issuance of $303 million compares with 2007's $205bn. Year-to-date CDO issuance of $14.3bn compares to the year ago $236bn.
Total Commercial Paper jumped $27bn to $1.780 TN, dropping the y-t-d decline to $5.7bn. Asset-backed CP increased $8.1bn last week to $757bn, reducing 2008's decline to $16.3bn. Over the past year, total CP has contracted $388bn, or 17.9%, with ABCP down $411bn, or 35.2%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 7/2) jumped $23.3bn to a record $2.346 TN. "Custody holdings" were up $289bn y-t-d, or 27.1% annualized, and $363.5bn year-over-year (18.3%). Federal Reserve Credit surged $15.5bn into quarter-end to $890.0bn. Fed Credit has now increased $16.5bn y-t-d (3.6% annualized) and $32.7bn y-o-y (3.8%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.382 TN y-o-y, or 25.4%, to $6.828 TN.
Global Credit Market Dislocation Watch:
June 30 - Reuters: "U.S. mortgage-backed securities issuance plunged more than 80% in the first six months of 2008 from the same period a year earlier... Thomson Reuters said U.S. mortgage-backed securities issuance totaled $117.4 billion in the first half of 2008, down from $622.1 billion a year earlier, a drop of 81%. By proceeds, the second quarter 2008 total of $48.6 billion from 83 issues was the lowest quarterly volume since the second quarter 2000... said Matthew Toole, an analyst... at Thomson Reuters. It was the lowest number of deals in a quarter since the first quarter of 1995... 'Without the implied U.S. government guarantee that Fannie Mae and Freddie Mac offer it is hard to bring deals to the market,' he said."
July 3 - Economist: "In finance, as in Greek tragedy, one of the commonest pairings is between hubris and sheer, toe-curling folly. In the boom years of 2006-07 nothing, it seemed, could constrain the leveraged buy-out (LBO) industry. In 24 months it pulled off deals with an enterprise value of $1.4 trillion, the equivalent, after adjusting for inflation, of about a third of all the buy-outs ever done. Thanks to the credit crunch, buy-outs have since become scarce: so far this year only $131 billion of deals have been announced, according to Dealogic."
July 4 - Financial Times (Sundeep Tucker): "After last year's rush of initial public offerings in Asia the slowdown has come. In 2007, China's domestic exchanges and Hong Kong raised a combined $101bn, with other regional bourses adding a further $25bn. This year, however, has seen a somewhat quieter first half with Asia Pacific, excluding Japan but including Chinese A-shares, raising $25.5bn, according to Dealogic... Stock prices in China have tumbled by more than 50% this year, forcing countless potential issuers to shelve plans to list. India's market virtually closed to listings in January after the subdued performance of the $3bn IPO of Reliance Power, the country's largest ever offering."
July 3 - Dow Jones (Victoria Howley): "Global M&A volume fell 31% in the first half of this year, with Europe registering the steepest decline of all the major regions. Global M&A deals were worth $1.87 trillion, compared to $2.69 trillion in the first half of 2007, according to... Dealogic... Deals involving a European target fell 39% to $645.2 billion from $1.07 trillion in the first six months of 2007... Activity in the U.S. fell 30% to $694.3 billion, while deals in Asia Pacific rose 5% to $390.7 billion."
June 30 - Reuters: "Sales of U.S. convertible securities fell to $52 billion in the first half of the year, down from $55 billion a year earlier..."
July 1 - Wall Street Journal (Randall Smith): "Wall Street stock and bond sales picked up slightly in the second quarter from their anemic pace since the credit crunch began last year. But they remained far below their peak levels of 2005 through mid-2007... The $1.71 trillion in new stocks and bonds issued in the second quarter was up 27% from the first quarter, according to Thomson Reuters... But the total was down 31% from the second quarter of 2007, just before the credit-market downturn..."
June 27 - Reuters (Maya Thatcher): "Bond issuance by European companies was strong in the first half of 2008 despite the credit crisis... Corporate bond issuance by European companies in 2008 so far was the second strongest this decade at $143.6bn, just 3% lower than in the same period of 2007. Bond sales were plentiful in the second quarter, setting an all-time quarterly record of $108.9 billion..."
July 3 - Financial Times (Saskia Scholtes): "As investors digest a recent spate of rating downgrades for bond insurers, concerns have surfaced about risks that could further darken the outlook for the most troubled groups and affect the last remaining insurers with triple A credit ratings. Together with heavy losses on subprime mortgage-related bonds that they guaranteed, bond insurers, or monolines, such as Ambac and MBIA are exposed to problems in their so-called 'guaranteed investment contracts' (GIC) businesses. These problems could result in additional claims on capital at a time they can least sustain them. FSA... is also facing potential difficulties in its GIC business. Analysts at Morgan Stanley warned in a recent report: 'In our view, issues associated with the GIC businesses have the potential to threaten monolines such as FSA, which have carefully avoided writing protection on [asset-backed] CDOs, and thus have so far been immune from downgrades.' The deepening crisis for the bond insurance industry threatens banks with further writedowns on derivatives contracts that they hold with the insurers, and investors with further downgrades and market losses on insured bonds they own."
July 3 - Bloomberg (Shannon D. Harrington): "The amount U.S. commercial banks have at risk in derivatives markets jumped 50% during the first quarter as the credit crisis triggered an increase in the value of contracts that protect against borrower defaults and changes in interest rates. The amount of money banks would be owed if all derivatives contracts were liquidated, known as 'net current credit exposure,' rose $156 billion in the first quarter to $465 billion, the Office of the Comptroller of the Currency said... That's up 159% from a year earlier... 'Continued declines in interest rates coupled with widening credit spreads resulted in a significant increase in counterparty credit risk during the quarter,' Kathryn Dick, deputy comptroller for credit and market risk, said..."
July 2 - Bloomberg (Mark Pittman): "Mountain 1st Bank & Trust Co. Chief Executive Officer Greg Gibson forecast 12 percent loan growth for his North Carolina bank this year. Instead, he's spending more time handing out freshly baked cookies than extending credit. Gibson is 'standing on the brakes' because Mountain 1st, owned by 1st Financial Services Corp. of Hendersonville, North Carolina, can no longer sell trust-preferred stock to raise capital for loans so customers can buy airplanes or build veterinary clinics, Gibson said... The bank, with $650 million in assets, is among more than 8,000 across the U.S. caught for the past six months in the shutdown of the $117 billion market for the securities, a hybrid of debt and equity. The fallout from the subprime-mortgage collapse is spreading from global lenders... to local ones... Less capital for such hometown banks may stymie Federal Reserve Chairman Ben Bernanke's effort to prevent a credit crunch. 'There is no question there is a problem,' said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America... 'Banks need the capital to lend. So that problem of raising capital causes a further slowdown. This inability to raise capital points to a damping of the whole economy.'"
July 2 - Bloomberg (Pierre Paulden): "Prices of high-risk, high-yield loans fell to the lowest levels since April in the past week on concern company defaults will rise as the economy slows. The average actively traded loan fell to 89.32 cents on the dollar..."
June 27 - Bloomberg (Rebecca Christie): "Transactions have climbed 45% in a portion of the $7 trillion-a-day repurchase agreement market, used by bond dealers to finance positions, since procedures were put in place on May 8 to secure payments between the bond market's two trade-clearing banks. Average daily trading in general collateral finance repurchase agreements, known as GCF Repo, increased to $735.3 billion in the 30 days since the interbank transactions resumed, compared to the first four months of 2008. The data comes from... Depository Trust & Clearing Corp., which processes about $3.3 trillion in repos a day."
July 1 - Bloomberg (Elizabeth Hester and Edgar Ortega): "Initial public offerings came to market in the first half of the year at the slowest pace since 2003, and few investors expect a rebound as economic growth tapers off and loan losses mount. Through June, 333 companies went public, down from 702 a year earlier... The $73.2 billion raised was 41% less than during the first half of last year and the least since 2005. For the first time since 1978, U.S. venture capital funds failed to take a company public last quarter."
June 30 - Bloomberg (Martin Z. Braun): "Municipal borrowers... shifted out of $3.4 billion of auction-rate debt last week, as more than half of the market has evaporated since its collapse four months ago. State and local government borrowers converted, refinanced or marked for redemption by Aug. 18 at least $87.2 billion of auction-rate securities, or about 53% of the $166 billion outstanding earlier this year..."
July 4 - Bloomberg (Neil Unmack): "Leveraged-buyout loan defaults may be 'significantly higher' than ratings companies' estimates as about $500 billion of debt used to fund the takeovers comes due, the Bank for International Settlements said. Companies bought by private-equity firms worldwide must repay the high-risk, high-yield loans and bonds by 2010... They may find it hard to raise the cash because of a slump in demand for collateralized debt obligations that pool the loans... Investors are shunning structured debt instruments such as CDOs, the main buyers of leveraged loans, after the credit-market seizure caused by the U.S. subprime mortgage collapse, the BIS said. The ability of LBO firms to refinance may be crimped further as banks tighten lending criteria after reporting $402 billion of credit losses and asset writedowns. 'We've come out of an egregiously lax period in lending,' said Jamie Stuttard, who manages $13bn... at Schroders Plc... 'We expect an increase in defaults because of the wave of very leveraged LBOs.'"
July 4 - Bloomberg (Alexis Xydias and Ambereen Choudhury): "European banks may need to raise as much as 90 billion euros ($141 billion) to restore their capital after the U.S. subprime mortgage collapse caused credit markets to seize up, according to Goldman Sachs Group Inc. European banks have already raised $115 billion from investors to replenish capital after reporting $134 billion in writedowns, Goldman analysts led by Christoffer Malmer said in a note to clients today. They may now seek more than 60 billion euros to increase their Tier 1 capital, a measure of financial strength, to about 9 percent, the analysts said. They could need to raise as much as 90 billion euros were credit losses to rise to levels last seen in the recession of the early 1990s.
July 2 - Bloomberg (Patricia Kuo): "Credit rating profiles of companies in Asia-Pacific region will deteriorate in the second half of the year, Moody's Investors Service said. Almost a quarter of the companies Moody's rates in the region outside of Japan now have negative rating outlooks or face possible downgrade, ``setting the stage for more negative actions in the coming months,' Moody's said..."
July 1 - Bloomberg (Laura Cochrane): "Australian sales of bonds backed by mortgages slumped to a record low in the first half as the fallout from the U.S. housing market collapse reduced demand for the assets and issuers were forced to pay higher yields. Companies sold A$1.90 billion ($1.82bn) of bonds backed by Australian home loans to investors in the six months... down from A$4.87 billion in the second half of last year... Issuance fell almost 96% from the first six months of 2007, when a record A$45 billion was sold, more than half overseas."
Global Inflation Turmoil Watch:
July 3 - Financial Times (Raphael Minder): "Inflation is accelerating in Asia, according to June figures released yesterday by four countries, raising the likelihood that central banks will be obliged to increase interest rates in spite of rising fears of slowing growth."
July 2 - Bloomberg (Brian Lysaght): "Hundreds of U.K. truckers were converging on London to protest diesel fuel prices, meet with government officials and tie up traffic in the city's center."
July 2 - Bloomberg (Kartik Goya): "Indian truckers, who haul the majority of the nation's goods, went on strike today to protest against taxes and rising fuel costs, a union official said. More than 4 million heavy and light commercial vehicles are staying off the nation's roads from today after talks with the government to avert the strike failed last night, said Charan Singh Lohara, president of the All India Motor Transport Congress, an umbrella organization representing the truckers."
June 30 - Bloomberg (Zhang Shidong): "Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said investors should steer clear of the dollar as the U.S. economy slows and favor commodities this year... Avoid the dollar 'at all costs,' Rogers... said... 'The best investments in 2008 are commodities and natural resources. Agricultural prices have much higher to go over the next decade. We have a shortage of everything, including seeds.'"
June 30 - Bloomberg (Kim-Mai Cutler): "A disorderly decline in the dollar remains a possibility as losses on U.S. assets pile up and the current-account deficit triggers ``a sudden rush for the exits,' the Bank for International Settlements said. A plunge in the currency may happen even after its 'remarkably orderly' 14% slide against the euro in the past year, the Basel, Switzerland-based BIS said... 'Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency,' the BIS said. 'While unlikely, indeed highly improbable for public-sector investors, a sudden rush for the exits cannot be ruled out completely.'"
The dollar index rallied 0.5% to 72.73. For the week on the upside, the South African rand increased 1.0%, the Swedish krona 0.6%, the Australian dollar 0.5%, the Norwegian krone 0.2%, and the Canadian dollar 0.2%. On the downside, the Japanese yen declined 0.5%, the British pound 0.5%, the New Zealand dollar 0.4%, the Euro 0.4%, and the Danish krone 0.4%.
July 4 - Financial Times (Javier Blas): "The number of financial market bets on crude oil prices hitting $200 a barrel before the end of this year has almost doubled in the past month, a further sign of growing concern that oil prices will continue to rise sharply in the near term. The strong buying of these call options... comes as spot oil prices in London yesterday hit a record high around the $146 a barrel level."
July 2 - Bloomberg (Greg Walters): "Russian oil production declined in June, bringing the world's second-largest crude exporter closer to its first annual drop since 1998. Production fell to 9.77 million barrels a day, 1% less than in June last year..."
July 3 - Bloomberg (Thomas Kutty Abraham): "India, the world's sixth-biggest corn supplier, banned exports of the grain to boost domestic supplies and curb inflation that accelerated to a 13-year high."
Gold added 0.6% to $933.20 and Silver 2.6% to $18.165. August Crude rose $3.91 to a record $144.12. August Gasoline added 0.9% (up 43% y-t-d), and August Natural Gas rose 2.8% (up 81% y-t-d). September Copper slipped 0.4%. September Wheat fell 2.7% and August Corn declined 1.3%. The CRB index increased 1.7% to a new record high (up 31.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) surged 2.7% to a new record (up 45.9% y-t-d and 77.8% y-o-y).
July 3 - Financial Times (Geoff Dyer): "On the face of it, China might not seem the obvious place to invest at the moment. The local stock market has collapsed, property markets are weak and the interest rate on bank deposits is about half the rate of inflation. Yet that has not prevented a record flood of capital inflows even higher than China's huge accumulation of reserves in recent years. In the first quarter, foreign exchange reserves rose by $154bn. On top of that, according to usually reliable figures leaked to Reuters, reserves jumped by $75bn in April and $40bn in May to a total of $1,800bn. Given that the inflows far outstrip trade and direct foreign investment, China appears to be receiving vast amounts of speculative 'hot money'. China has two big attractions for foreign investors - interest rates are higher than in the US and the currency is expected to appreciate. 'China's FX reserves seem to have turned into some kind of massive black hole for the world's liquidity,' says Stephen Green, economist at Standard Chartered... Logan Wright at Stone&McCarthy analysts in Beijing estimates that hot money entering in the first five months could be as high as $150bn-$170bn."
July 3 - Bloomberg (William Bi): "China, the world's most populous nation, will increase crop subsidies, boost rural spending and allow grain prices to rise to ensure farmers grow enough to feed its 1.3 billion people for at least the next 12 years. The country must continue to produce at least 95% of the grain it consumes, the State Council said..."
July 3 - China Knowledge: "The average price of new houses hit a record RMB 16,988 (US$2,498) per square meter in Shanghai last month, up 21.9%, while sales volume remained almost the same as the previous month, according to Shanghai Youwin Real Estate Information Service Co."
June 30 - Bloomberg (Chia-Peck Wong): "Hong Kong lending rose 24% in May to the highest in more than nine years as the city's economic growth and low interest rates drove demand for credit."
July 4 - Bloomberg (Toru Fujioka): "Japan's accelerating inflation may prompt households to cut spending rather than buy more to beat further price increases... A record 88.9% of consumers expect prices to climb this year and an unprecedented 58.7% said they will cut spending, the Bank of Japan said in a quarterly report... Both levels are the highest since the bank started asking the questions about inflation and purchasing in 1997. 'Japan's consumers are used to deflation, not inflation,' said Kyohei Morita, chief economist at Barclays Capital... 'Consumers are suffering because of rising prices and household spending is going to stall.'"
July 4 - Bloomberg (Kartik Goyal): "India's inflation accelerated to the fastest pace in more than 13 years, strengthening the case for the central bank to increase borrowing costs this month. Wholesale prices rose 11.63% in the week to June 21... Faster inflation has eroded the popularity of Prime Minister Manmohan Singh's government, which is struggling to survive as its communist allies consider withdrawing their support over a nuclear deal with the U.S. A nationwide truckers' strike may have added to inflation. 'Miseries don't come alone,' said Dharmakirti Joshi, an economist at...Crisil Ltd... 'The political disharmony, inflation and the truckers' strike have disrupted the smooth functioning of the economy.' India's 10-year bonds fell for a fifth day, pushing yields to the highest in seven years."
June 30 - Bloomberg (Anoop Agrawal): "India's rupee completed its biggest quarterly loss in a decade as the slide in local stocks prompted overseas investors to reduce equity holdings and record oil prices spurred demand for dollars. The rupee is the second worst performer of the 11 most- actively traded Asian currencies this quarter as global funds sold shares on concern accelerating inflation will slow economic growth. The currency fell to the lowest since April 2007 as a doubling in oil over the past 12 months widened the current- account deficit, a broad measure of trade and investment flows. 'India is not favored by global investors any more, which is why they are selling stocks and the dollar supply is drying up,' said Indrajit Sengupta, a currency trader... 'Oil's steep rise has only added to the rupee's worries. The rupee is still under pressure to fall.'"
July 1 - Bloomberg (Kartik Goyal): "India's exports grew at the slowest pace in 14 months in May as weakening global expansion hurt shipments of clothes, steel and electronic goods. Overseas sales rose 13% from a year earlier to $13.8 billion, slower than April's 31.5% gain... Imports increased 27% to $24.5 billion, widening the trade deficit to a record $10.76 billion."
Asia Bubble Watch:
July 3 - Bloomberg (William Sim): "Foreign direct investment into South Korea rose by the most in more than three years in the first six months of 2008 as U.S. and Japanese companies boosted spending, the Ministry of Knowledge Economy said. Foreign investment jumped 35% to $4.5 billion in the six months to June 30 from the same period a year earlier, the ministry said... That's the biggest gain since the second half of 2004."
July 1 - Bloomberg (William Sim): "South Korea's consumer prices rose by the most in almost 10 years in June, adding to speculation the central bank may have to raise interest rates this year. The consumer price index climbed 5.5% from a year earlier..."
July 1 - Bloomberg (Suttinee Yuvejwattana): "Thailand's inflation accelerated to the fastest pace in a decade in June, heightening expectations the central bank will need to raise interest rates before an increase in fuel costs further spurs price gains. Consumer prices gained 8.9% from a year earlier..."
July 3 - Financial Times (Roel Landingin): "Consumer prices in the Philippines rose by 11.4% from a year ago in June, the highest in 14 years, amid soaring global fuel and food prices, and a string of devastating typhoons that restricted food supply in many across the country in the last two months."
July 1 - Associated Press: "Indonesia's inflation rate climbed to 11% after government fuel hikes caused the price of food and other basic goods to skyrocket..."
July 3 - Bloomberg (Aloysius Unditu and Arijit Ghosh): "Indonesia's central bank raised its benchmark interest rate for the third month in a row after record oil and food prices drove inflation to the fastest in almost two years. Governor Boediono and his seven colleagues increased the key rate to 8.75% from 8.5%..."
Latin America Watch:
July 4 - Bloomberg (Heloiza Canassa): "Brazilian new-vehicle sales rose 29% in June as a declining unemployment rate and growth in incomes encouraged consumers to make large purchases."
July 3 - China Knowledge: "Brazil's imports of goods from China jumped 73.1% year-on-year in the first half, according to... Brazilian Ministry of Development, Industry and Commerce."
July 3 - Bloomberg (Sebastian Boyd): "Chile's annual inflation rate accelerated to the fastest pace since 1994 in June, cementing expectations that the central bank next week will raise interest rates for a third time in 2008. Consumer prices in the 12 months through June rose 9.5%..."
Unbalanced Global Economy Watch:
July 3 - International Herald Tribune (David Jolly): "A housing market in shambles, inflation at the highest level in years and signs that the economy is headed for, or already in, recession. Sound familiar? The British economy, like its counterpart across the Atlantic, has fallen on hard times, and in many ways the experience appears to be mirroring that in the United States. Indeed, the run last September on a British mortgage lender, Northern Rock, was one of the events that helped to embed the terms 'credit crisis' firmly into the global consciousness."
July 1 - Bloomberg (Svenja O'Donnell and Jennifer Ryan): "U.K. house prices fell by the most since 1992 and manufacturing unexpectedly contracted in June as banks starved the economy of loans and commodity prices soared, bringing the nation closer to a recession. The price of an average home declined 6.3% from a year earlier to 172,415 pounds ($343,278), the biggest drop since November 1992..."
June 30 - Bloomberg (Jennifer Ryan): "U.K. consumer confidence dropped in June to the lowest level since the London riots 18 years ago that preceded Margaret Thatcher's downfall, as house prices fell across the nation."
July 3 - Bloomberg (Svenja O'Donnell and Jennifer Ryan): "U.K. services from airlines to the finance industry contracted last month by the most since October 2001 and banks said they'll curb lending further in the third quarter, as Britain edges closer to a recession."
June 30 - Bloomberg (Fergal O'Brien): "Ireland's economy contracted for the first time in more than a decade in the first quarter as a housing-market slump curbed investment and consumer spending cooled. Gross domestic product fell 1.5% from a year earlier..."
July 2 - Bloomberg (Fergal O'Brien): "European producer prices jumped a record 7.1% in May as energy costs surged, adding to the European Central Bank's concerns that faster inflation will become embedded in the economy. The annual increase in factory-gate prices in the euro region was the biggest since the series began in 1990 and followed a 6.2%t gain in April..."
July 3 - Wall Street Journal (Roman Kessler): "More European companies are raising prices to pass higher costs on to customers, increasing the risk of an accelerated inflation spiral. High energy and commodities costs boosted producer prices in the euro-zone by 7.1% in May from a year earlier, the largest year-over-year increase since the European Union's Eurostat statistics office began collecting records in 1990. With May producer prices also up 1.2% from April, the jump presages higher consumer-price inflation in the months ahead, economists said... Companies say they can't avoid raising their prices as the cost of inputs such as energy, raw materials and transportation continue to rise. Car-makers, airlines and consumer-products companies have all announced price increases or plans to raise prices in recent weeks. 'We can't go against the grain amid rising prices,' said spokeswoman Claudia Fasse at Beiersdorf AG, which makes Nivea skin-care products."
June 30 - Bloomberg (Ben Sills): "Inflation in Europe accelerated more than economists forecast, eroding consumers' spending power and adding to pressure on the European Central Bank to increase borrowing costs even as economic growth cools. The inflation rate in the euro area rose to 4% this month, the highest in more than 16 years, from 3.7% in May..."
July 1 - Wall Street Journal (Emma Charlton and Joel Sherwood): "European recession fears grew Tuesday as Denmark became the first European Union country to slip into a technical recession and a raft of weak data indicated others could soon follow. The Purchasing Managers Index for the euro zone's manufacturing sector contracted in June for the first time in three years, dropping to 49.2 in June from 50.6 in May, research group Markit Economics said. A PMI reading above 50 signals an expansion in manufacturing, while a level below 50 indicates a contraction. Europe's economies are currently facing a toxic combination of elevated inflationary pressures, higher oil prices, strong exchange rates, weakening global growth and tight credit conditions. Denmark, Spain, the U.K. and Ireland also face falling housing prices after a recent boom, trailing a trend set in the U.S. after a two-year lag."
June 30 - Bloomberg (Tasneem Brogger): "Norway's domestic credit growth slowed to 14% in May, indicating interest rates at a five-year high are deterring some consumers from taking on more debt. Credit growth for households, companies and municipalities slowed from a revised 14.4% in April... 'The growth in household debt decreased, while the growth in non-financial enterprises debt was still high,' the statistics office said..."
July 1 - Bloomberg (Mike Cohen): "South African house prices fell an annual 11.3% in June, the fourth consecutive decline, after borrowing costs rose and stricter lending laws came into effect..."
Bursting Bubble Economy Watch:
July 4 - Reuters: "The United States service sector shrank unexpectedly in June, according to a closely watched survey released on Thursday, while inflation pressures soared to a record high for the survey's 11-year history. The Institute for Suppy Management's measure of employment in the vital service sector hit a record low, which could fan fears of a return to low growth and high inflation, known as stagflation, that was last seen in the late 1970s and early 1980s. The data also points up the quandary facing the Federal Reserve, which cut benchmark interest rates to support the weak economy at the risk of adding to price pressures."
July 2 - Bloomberg (Hugh Son): "Consumers fell behind on loans secured by their homes at the fastest pace in two decades in the first quarter, signaling deeper distress in the U.S. economy, the American Bankers Association reported. Home-equity lines of credit at least 30 days past due rose 14 bps to 1.1% of accounts for the quarter, the Washington-based group said today in a statement. Delinquent credit-card accounts increased 13 bps to 4.51%, the highest level since 2006. 'People are looking for any source of funds to pay their daily expenses,' Carol Kaplan, spokeswoman for the bankers' group, said... 'It's a sign of the overall condition of the economy that people are having trouble making their payments.'"
July 3 - Wall Street Journal (Michael R. Crittenden): "Cash-strapped U.S. consumers hurt by the weak economy continued to fall behind on credit payments during the first quarter, a trend one financial-industry group said is likely to continue. The American Bankers Association Wednesday said several loan categories showed an increase in the percentage of accounts at least 30 days past due during the quarter, including personal loans, bank credit cards and mobile-home loans. Transportation-related loans also saw an increase in consumers falling behind in payments. 'It was a tough quarter for some people,' ABA Chief Economist James Chessen said... 'Faced with rising food and gas prices and little income growth, fewer resources have been available to manage debt.'"
July 2 - Wall Street Journal (Tamara Audi and Jeffrey McCracken): "The gambling slowdown that began early this year is taking a serious toll on Las Vegas, with banks, investors and private-equity funds growing as tightfisted as the consumers who are gambling less in the slumping economy. Once believed to be recession-proof, casinos are proving to be highly vulnerable to the economic downturn, which is striking the industry at a bad time. Las Vegas is entering its lethargic summer season, and a boom-time frenzy of grand expansion plans and private-equity buyouts has left casinos laden with debt..."
Central Banker Watch:
July 3 - Wall Street Journal Europe: "Any doubts about whether the European Central Bank will tighten monetary policy today were put to rest when June inflation soared to 4% -- a 16-year high... The ECB is fighting a lonely battle against a global trend of monetary recklessness. Euro-zone inflation is largely driven by the same outside factors stoking inflation in the rest of the world: rising commodity prices fueled by the U.S. Federal Reserve's cheap-money policy. Morgan Stanley counts around 50 countries with double-digit inflation. Many have linked their currencies to the dollar, forcing them to import the Fed's loose monetary policy. But unlike the Fed and other central banks, the ECB seems determined to avoid the stagflation mistakes of the 1970s. Back then policy makers failed to prevent inflation from spreading throughout the economy as workers won higher wages and firms passed on higher costs to consumers. Inflation became embedded in wage and price rises, damaging output and employment for years. A modest monetary tightening now may prevent the need for a much harsher cure down the road. The fear is that the higher prices 'may become entrenched in private inflation expectation and lead to second-round effects in price and wage setting,' ECB President Jean-Claude Trichet told the European Parliament..."
July 2 - Bloomberg (Gabi Thesing): "European Central Bank President Jean- Claude Trichet, who may raise interest rates tomorrow, said there's a risk of inflation 'exploding' if central banks don't act decisively. 'We central banks have a big responsibility,' Trichet told Germany's Die Zeit newspaper. 'If we're not decisive, there's a risk of inflation exploding. If we act in a decisive way, we can master the situation.'"
July 3 - Financial Times (David Ibison): "Sweden's central bank... raised interest rates to 4.5%, their highest level in 12 years, and said further increases were likely this year to bring inflation back from the current 4% to within the bank's target of 2%. The Riksbank is tackling the same conundrum faced by other central banks - rising prices and slowing growth... In a carefully worded statement, the central bank warned global developments could turn its expectations for further interest rate movements upside down. 'The repo rate may be lower if commodity prices fall or if the financial market turbulence worsens. The opposite may apply if the high inflationary pressures persist."
Mortgage Finance Bubble Watch:
June 30 - Bloomberg (Erik Holm): "Newly delinquent homeowners with private mortgage insurance outnumbered those who caught up on overdue payments for a 26th straight month in May, according to the... Mortgage Insurance Companies of America. In the worst housing slump since the Great Depression, 67,967 people fell at least 60 days behind on mortgages... Borrowers who put down less than 20% of the purchase price for their homes are often required to buy insurance that pays lenders if they default."
July 3 - Bloomberg (Kathleen M. Howley): "At 10:40 p.m. on April 27, a blaze at the beige Victorian house at 19 Nye St. lit up a neighborhood littered with boarded-up homes on the north side of New Bedford, Massachusetts... The house had been abandoned after the owner defaulted on a $240,000 home loan from GreenPoint Mortgage Funding... a... lender that shut down in August, 2007. The fire was one of four suspicious blazes in foreclosed properties that month in the southern Massachusetts city. All are under investigation. The biggest surge of mortgage defaults in seven decades coincides with an increase in blazes in foreclosed properties... 'The more empty houses we have, the more fires we are going to see,' said James Wright, chief of the Nevada State Fire Marshal Division... 'It's particularly dangerous for firefighters, because they don't know what condition these buildings are in or what they might find in them.'"
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
June 30 - Bloomberg (Jody Shenn): "Subprime and Alt-A mortgage bonds, trading at or near record lows, may continue their declines as banks limit purchases of some securities and are forced to sell off what they hold, JPMorgan Chase & Co. analysts said. Prices for typical fixed-rate Alt-A bonds rated AAA have tumbled to near an all-time low of less than $84 per $100 of principal from about $87 in April, JPMorgan said. Subprime debt is also down, benchmark Markit ABX indexes indicate, as AAA bonds lost 5.1% in three months, Lehman Brothers Holdings Inc. index data show. A year after the subprime meltdown roiled credit investors, the market for new non-agency mortgage bonds is no closer to reopening. Banks have a 'long way to go,' after raising about $400 billion of capital, JPMorgan analyst Chris Flanagan said... Banks will need about $115 billion simply to offset downgrades among the $1 trillion of AAA subprime and Alt-A bonds..."
July 3 - Financial Times (Sam Jones and Gillian Tett): "When investment bankers at groups such as ABN Amro first dreamed up the concept of constant proportion debt obligations almost two years ago, many analysts regarded the idea as the epitome of a credit bubble gone mad. For the CPDO structure pushed financial innovation - and leverage - to a new level, and in a manner that reflected and contributed to excesses in the credit world. These days, however, the CPDO idea is setting another precedent - this time by highlighting the woes plaguing parts of the credit rating agency sector. Yesterday Moody's announced it was starting a wave of disciplinary action against employees following an external enquiry into how the agency had rated CPDOs... For what the episode essentially highlights is the degree to which the structured finance industry has come to rely on complex computer models in recent years - even though these models can sometimes prove far from fail-safe, whether in the ratings process or in many other corners of the financial industry. The roots of the problem lie in the fact that the once slow-moving world of credit has become dramatically more complex and competitive this decade."
Real Estate Bubble Watch:
July 3 - Wall Street Journal (Alex Frangos): "Companies are taking less office space across the nation, driving down rents in most markets and causing pain for real-estate landlords... Nationwide, rents on office properties -- including landlord concessions and discounts -- rose 0.7% in the second quarter to $25.16 a square foot, the slowest growth since the second quarter of 2005, when the office market was just emerging from a half-decade-long slump, according to Reis Inc... With inflation running roughly 1% a quarter, that rent growth is effectively wiped out. 'landlords are having to concede ground on rents and tenant Improvements,' says Sam Chandan, Reis's chief economist. 'The balance is tipping in the favor of tenants in many markets.'"
July 2 - Bloomberg (Sharon L. Lynch): "Manhattan apartment sales dropped the most for a second quarter since 1998 and unsold inventory approached an eight-year record, two signs prices may be poised to drop in the nation's most expensive urban housing market. Sales fell 22% from a year earlier and inventory rose 31% to 6,869 units... real estate appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said... Transactions are declining as financial firms have announced plans to cut almost 90,000 jobs... Those companies may lose as many as 175,000 employees by next June..."
July 3 - Bloomberg (Dawn Kopecki): "Freddie Mac... said it's 'unlikely' to raise capital until after reporting second-quarter earnings next month. Executives... told investors in May that the... company would secure $5.5bn in additional reserves by 'mid-year,' after registering its common stock with the SEC. 'We still feel the SEC process is going well and we believe we will make our mid-summer time frame,' ... a spokeswoman... 'Given how close we are to releasing our earnings, it's unlikely we would do the capital raise prior to the release of our 2Q earnings.'"
July 2 - Associated Press (Andrew Welsh-Huggins): "The funds states use to pay unemployment benefits are running low, raising fears of higher taxes on businesses and less money to help out-of-work employees during tight economic times. Thirty-three states have funds below recommended levels, meaning they're at risk of running out in less than a year... Nearly half the states could run out in less than six months. The funds, totaling about $38 billion today, are in worse shape than before the last recession, when the total was about $54 billion. 'Many states have not built their unemployment trust funds back to levels adequate for even a mild recession,' said Terry Shawn, a spokesman for the U.S. Department of Labor... 'One of the risks the system faces is cutting benefits at a time when they're needed the most,' said Wayne Vroman, an economist at the... Urban Institute. In California, the fund will hit a low of about $1.1 billion by year's end and is predicted to be insolvent next year... Benefit payments are expected to hit $2.6 billion by the end of next year. In New York, the fund stands at about $694 million, compared to potential payouts that could top $3 billion. In Michigan, suffering from the nation's highest annual unemployment rate, the fund is at a paltry $2.8 million."
June 30 - Bloomberg (Jeremy R. Cooke): "U.S. municipal bond sales may beat last year's record as pent-up borrowing for roads, schools, sewers and hospitals follows a first half dominated by the refinancing of debt from the collapsed auction-rate market. State and local government borrowers sold at least $217 billion of long-term bonds so far in 2008..."
July 1 - Bloomberg (Michael B. Marois): "California began its fiscal year today without a budget as an impasse over how to eliminate a $17 billion deficit threatens $1.2 billion owed to vendors, community colleges and legislative staff. Without a budget, Controller John Chiang says he can't pay $505 million to local colleges, $148 million for services such as caterers and $222 million to centers for people with developmental disabilities. He also can't pay the salaries of appointed staff such as press secretaries and budget analysts."
July 4 - Bloomberg (Yi Tian): "Firefighting cost the state of California a record $392 million in the fiscal year ended June 30, the San Francisco Chronicle reported. Governor Arnold Schwarzenegger used more than $310 million from the state's cash reserves of $858 million to pay the firefighting costs... Last fiscal year, the state had put aside $82 million to pay for fighting fires..."
Crude Liquidity Watch:
July 3 - Bloomberg (Will McSheehy and Ayesha Daya): "Saudi Aramco and Dow Chemical Co. plan to build a $26 billion petrochemicals complex in Saudi Arabia to take advantage of the world's biggest oil reserves and meet rising demand for plastics used in consumer goods, said a banker with knowledge of the deal."
Starbucks, the "Core," and Conventional Mortgages:
This week's announcement that Starbucks plans to close 600 stores and fire 12,000 employees is emblematic of the major restructuring that lies ahead for the deeply maladjusted U.S. Bubble Economy. Throughout the real economy, businesses that had previously luxuriated in robust profits during the Credit and asset inflation-induced boom now see earnings and cash-flows rapidly erode. During the boom, Starbucks aggressively spent on capital expenditures, while expanding its employee base, product offerings, and real estate commitments. "Money" was easy, revenues were easy, and growth was easy.
For the economy overall, the enormous expansion of mortgage (and other) Credit poured spending power throughout, especially in the "services" sectors. This purchasing power was "multiplied" by additional borrowings by the likes of Starbucks and others, as well as by the real estate developers borrowing, building and leasing space to tens of thousands of coffee shops, retailers, restaurants, hotels, casinos, nail salons, health clubs and such. It amounted to a historic borrowing and "investment" boom in building out a massive consumption/services-based infrastructure. Now, with the Credit Bubble having burst, the economic viability of broad swaths of this economic structure is in question.
Years of Credit, asset price, and consumption-based investment inflation created a deeply ill-structured real economy. Simplistically, the U.S. Bubble economy was structured for a particular variety of inflation. As long as Wall Street could inflate mortgage and other asset-based Credit, along with real estate and stock prices, additional purchasing power would be created and distributed for spending throughout the economy. Sufficient business and government cash flows ensured adequate household income growth to go along with booming - and self-reinforcing - asset price gains. As such, Household Net Worth (asset values less liabilities) swelled by about $4.0 TN annually for the finale Bubble years 2003-2006.
And as the "world's reserve currency," our Credit system was able to generate endless new (and mostly top-rated) financial claims that so easily financed our import buying binge. Meanwhile, with business profits generated with such ease in the booming finance, consumption and asset sectors of our economy, the U.S. and global Credit booms worked deleteriously to hollow out our nation's manufacturing base. But what difference did it really make if the economy's "output" were goods or services?
For years, we've protested this combination of over-investment in consumption-based infrastructure and the hollowing of manufacturing capacity. And for the longest time, most have scoffed at our analysis and pointed to the rising stock market and generally inflating asset prices as indicators of the efficiency, productivity, and profitability of the so-called New Economy. We warned of the eventual perils of over-borrowing and the lack of household savings, while Alan Greenspan and others argued that it didn't matter because we had become so efficient at investing our limited savings. Besides, the world would always seek the superior quality and liquidity of our securities markets.
Yet the optimists failed to recognize that only massive - and increasing - amounts of system Credit would sustain the inflated boom-time asset prices, household incomes, corporate cash flows, and government receipts that had become essential for levitating the various facets of the Bubble Economy. The deteriorating quality associated with the massive inflation of our financial claims should have been obvious. And today - as symbolized by Starbucks - the required Credit stimulus is no longer forthcoming, leaving scores of enterprises throughout the economy attempting desperate measures to cut expenses and maintain viability.
The finance, automotive and airline industries are also notable for having come to rely on a very different inflationary environment than the one we face these days. And today's unfolding retrenchment will place only further downward pressure on business profits, household incomes, asset prices, and government receipts - forcing additional spending restraint and deeper retrenchment. At the same time, this self-reinforcing retrenchment will create only greater financial strain on an already impaired Credit apparatus, ensuring even greater Credit troubles and tighter Financial Conditions, especially for the business sector.
And to attempt a response to the above question: What difference did it really make that our economy's "output" was services rather than goods? It made a huge difference. At the end of the day - at the conclusion of the Credit boom - a finance and consumption-based economy is left with enormous financial claims backed by woefully inadequate wealth creating assets. During the boom, Starbucks could earn seemingly endless profits by selling $4 lattes. The stock price went to the moon; financial wealth was abounding. Now, with discretionary spending being sharply reduced by the confluence of sinking asset prices, tightened Credit, and inflating energy and food prices, the enterprise value of Starbucks and scores of other businesses has been greatly diminished. Worse yet, for the economy overall, there is little in the way of real economic value remaining for billions of "output" Starbucks and other services providers created over the long boom. Only the financial obligations (the original asset-based borrowings) remain, while the market is increasingly suspect of their true state of underlying quality and value.
And the harsh reality is that Starbucks is a microcosm of scores of enterprises that have come to comprise the Core of the U.S. Bubble economy. The economic viability of so many businesses - and even industries - will be in jeopardy in the unfolding Credit and financial landscape. The stock market is still in the early stage of discounting the unfolding Credit and economic bust. And I'll reiterate that we expect the unfolding economic adjustment to be of such a magnitude as to be classified as an economic depression as opposed to a more typical recession.
June 27 - Bloomberg (Simon Kennedy): "U.S. and European central bankers are intensifying pressure on counterparts in emerging-market countries to step up the fight against inflation. Federal Reserve Vice Chairman Donald Kohn yesterday urged countries where 'rapid' economic growth is elevating prices to respond. Hours earlier, Bank of England Governor Mervyn King said global monetary policy looks 'a little lax.' Bank of France Governor Christian Noyer said the day before that 'coordinated, resolute action' is needed to encourage more exchange-rate flexibility as a way of tackling inflation. The comments reflect concern among central banks in major industrialized economies that their own campaigns against inflation will be undermined by a failure of others to combat price pressures. Demand in emerging markets is already propelling the cost of commodities such as oil, tin and corn to records. 'The bulk of inflation is coming from emerging markets,' said Stuart Green, a global economist at HSBC... 'The concern in developed economies is that inflation is rising because of pressures outside of their remit and that monetary policy overseas is too loose.'"
"The reasons for the trajectory and persistence of increases in prices of food and energy this year, as global growth has moderated, are not entirely clear. The upward trend in prices of food and energy over the past several years, however, importantly reflects the pressures posed by rapidly growing demand in developing economies against relatively inelastic global supplies of commodities." Fed Vice Chairman Donald Kohn, June 26, 2008.
"We are living through the unthinkable... The list of casualties is very different. What has suffered most is the credibility of the most sophisticated financial systems in the world." Mohamed El-Erian, Pimco Co-CEO, June 25, 2008
Now that inflation manifestations have shifted from asset prices to energy, food and general consumer prices, the finger pointing has begun. I am compelled to return to my old "Core" versus "Periphery" analysis. As Mr. El-Erian is suggesting, the "Core" of the global Credit system is in the process of being Discredited. To be sure, the world is increasingly loath to accumulate additional "Core" risk assets. Especially in the case of dollar financial claims, this major devaluation and, increasingly, revulsion is tantamount to a major inflation in the pricing of energy, metals, food, and myriad resources that are in increasingly global short supply.
This supply shortage is related to at least two now powerful dynamics. First, there are the booming emerging economies at the "Periphery" - booms largely fueled by unfettered Credit systems and acute inflationary forces unleashed initially by runway Credit excess at the "Core." And, second, there is today's acute speculative excess in almost anything energy and resource related. This is also a consequence of Dysfunction at the Core, namely the massive U.S. Current Account Deficits and resulting Rapidly Expanding Global Pool of Speculative Finance coupled with the Discrediting of Wall Street Finance. There is today much too much global liquidity (running away from sophisticated financial instruments while) chasing too few global resources whose supply is not easily expanded ("inelastic").
I find it rather incredible that U.S. and European policymakers are increasingly pointing blame and calling upon their emerging economy cohorts to aggressively combat inflation. With the U.S. today stuck with intractable $700bn Current Account Deficits and European Credit systems still churning out double-digit Credit growth, the Periphery is not the root cause of today's escalating global inflationary pressures. The global Credit system has run amuck, a process that evolved from years of Credit and speculative excess generated by, and tolerated at, the Core. It is today unreasonable to expect the Chinese or Asians generally to bring their booming economies to their respective knees to fight global inflation anymore than we can expect the Fed to tighten the economic screws to the point of balancing our Current Account and punishing the destabilizing speculators.
Today's inflationary dynamics have been developing for decades. Only discipline and stability at the Core of the global financial system would have stemmed the strong inflationary bias of contemporary electronic fiat "money" and Credit. But the Core was instead egregiously undisciplined and unstable, setting the stage for the type of runaway inflation we are now experiencing. The Core came to love and rationalize asset inflation and consumption. The Periphery was forced along for the ride and happy to oblige.
And now we find ourselves in the midst of another leg down with regard to the credibility of U.S. (and, increasingly, British) financial assets and economic structures overall. And while recent market tumult has not had the intensity of March's acute de-leveraging, the ramifications of recent developments are more problematic. For one, the markets are now coming to grips with the reality that much of the massive apparatus of various types of Credit insurance is insolvent and has little chance of recovery. While the nature of these companies' obligations may not require bankruptcy filings in the near-term, the market nonetheless recognizes that much of the future protection guaranteed by these companies/financial players has become worthless.
The "monoline" insurers do not have the resources to fulfill their huge future obligations. The players behind the Credit default swap (CDS) marketplace do not have the wherewithal to fulfill their unfolding obligations. And the mortgage insurers do not have the resources to pay their share of the rapidly escalating costs of a historic real estate bust. And if the mortgage insurers are indeed bust, the GSEs have a major dilemma. Not only do they have very large exposures to these firms, the entire "conventional" mortgage market is at great risk to any insurance-related dislocation. If much of the "private mortgage insurance" industry loses it capacity to write new policies - or if this insurance is no longer trusted by the agencies or the marketplace - this would be tantamount to a major tightening in the thus far bullet-proof "conventional" mortgage market. Or, said differently, if significant down payments come to be required for GSE-related mortgages the effects will be felt immediately in neighborhoods all across the country - not to mention the acutely vulnerable consumption-based U.S. Bubble economy.