A new credit bubble!

We will continue to look at the continued insanity of the market and TPTB although I suspect there are more earth-shattering events coming than the demition of the economy.

Wait for Max Keiser on this.

My wife told me the story of a colleague who is merrily heading off to Japan; he just as merrily rebuffed any warnings about the situation there. Maybe he'll land in Japan some time around the 21^st December?

World risks fresh credit bubble, Switzerland's BIS warns

Asset prices across the world have risen to heady levels not seen since the credit boom five years ago and may be losing touch with economic reality yet again, the Bank for International Settlements has warned.

The Telegraph,

9 December, 2012

“Some asset prices appeared highly valued in a historical context relative to indicators of their riskiness,” said the bank in its quarterly report. 

 

Yields on morgtage bonds have fallen to the lowest level ever recorded. Spreads on corporate debt have narrowed to the wafer thin margins of 2007, even though default rates are currently three times higher than they were then for junk bonds and twice as high for investment-grade companies. 

 
The venerable Swiss-based institution – almost alone in warning of a global debt crisis in the build-up to the Great Recession – said it is rare for markets to gather steam at a time when the major forecasters are turning gloomy. 

 
The International Monetary Fund and the OECD have downgraded their outlooks for 2012 and 2013, with sharp cuts for much of Europe as well as for Brazil, China, and India. 

 
“Unusually, equity and fixed income gains coincided with a weakening of the global economic outlook. In the past, falling growth forecasts have usually been associated with rising expected default rates and higher bond yields,” it said.

The anomaly is doubly strange given the spate of profit warnings by companies on both sides of the Atlantic. The BIS said earnings expectations on Wall Street have dropped “particularly sharply” with an “unusually high proportion” of companies downgrading forecasts, yet equity prices have risen. 

 
The BIS said funds once again feel pressured to fish for yield in murky waters, despite their better judgement. “Numerous bond investors said that they felt less well compensated for risk than in the past, but that they had little alternative with rates on many bank deposits close to zero and the supply of other low-risk investments in decline,” it said.
This echoes events from 2006 to 2008 when the “savings glut” flooded the world with cheap capital, compressing yields and putting pressure on insurance companies and pension funds to buy mispriced Greek or Icelandic debt for a few extra points of yield in order to match their future liabilities. 

 
The bank said the rally was largely driven by relief that the European Central Bank had taken on the role of lender-of-last-resort, vastly reducing the risk of eurozone break-up or a sovereign bond meltdown. 

 
There is equal relief in Asia that China is recovering at last from a nasty growth-scare in the middle of the year and is likely to avoid a “severe economic downturn”. Worries about China have been haunting the commodities for months.
Interest rate cuts across the world and $40bn (£25bn) of extra mortgage purchases each month by the US Federal Reserve have given the market yet more lift. 

 
The torrid rally in corporate bonds and emerging market debt sits oddly with continued deleveraging by banks. Cross border lending fell 2pc to $29 trillion in the second quarter, the biggest drop since the depths of the crisis in early 2009.
Eurozone banks contined to pull back from emerging markets as they scramble to shed assets and meet tougher capital rules, cutting exposure by $128bn, mostly in Eastern Europe. 

 
They have drastically cut cross-border exposure to sovereign debt in Greece, Italy, Ireland, Portugal, and Spain (GIIPS) to just $201bn from a trillion dollars in early 2010.
The BIS data is clear evidence that Europe’s banking system has been “renationalised” since the European interbank market shut down. It also implies that northern lenders could now withstand the shock of a euro break-up.

Bernard Hickey: The new housing bubble