The global bubble in paper continues

It's hard to read the news these days and not come away with the impression that a well formed, global bubble in money and credit is now reaching some sort of danger point. The news is full of the same kind of reports from all around the world.

China clamps down on credit growth
China has ordered banks for the second time this month to hold more of their deposits in reserve in the latest attempt to prevent credit and investment growth from destabilising the world's fourth-largest economy.

The People's Bank of China said on its Web site that big banks would have to hold 11 percent of their deposits in reserve at the central bank as from May 15, up from 10.5 percent now.
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Over the past year, the central bank has also raised interest rates three times -- most recently on March 17 -- and economists said the decision to hoist required reserves made another increase in borrowing costs unlikely in the short term.
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The central bank has been struggling to mop up, or sterilise, a torrent of cash flowing in from China's record trade surplus, which doubled to $46.4 billion in the first quarter from a year earlier, and from capital inflows betting on a stronger yuan.

A former Morgan Stanley economist warns of big trouble ahead but, as many others have opined, maybe not until after next year's Beijing Olympics.

Andy Xie warns of China crash
Morgan Stanley former star economist Andy Xie warned of an imminent stock market crash in China -- but still hopes to raise money to invest in the country.

Xie, who attracted a wide following while he was at Morgan Stanley because of his often contrarian views on China's economy and stock markets, also warned that the global boom in equities would be over by 2008 and that this would coincide with a worldwide recession.

The recession would start from the United States and spiral down into Asia where exporters would be hit, Xie, 46, told Reuters in a telephone interview.

"I think it's going to be bust very soon," Xie said, adding that a combination of excess liquidity, rising inflation and rich valuations would result in a global crash soon.
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"College students are putting their tuition money into the market...stroke-stricken retirees get wheeled into branches of securities firms to trade," Xie said in his SCMP article.

"People are not paying attention to anything else," Xie told Reuters.

In parts of the world where overall money supply figures are still released, things seem to be getting out of hand. Isn't there something inherently wrong with the logic of double digit money supply growth when "inflation" is purportedly just a few percent?

Eurozone money supply hits new high in March
Growth in the eurozone money supply -- as measured by the broad M3 indicator -- rose more than expected in March, bolstering expectations for a further rise in interest rates.

M3 growth stood at 10.9 percent on an annualised basis in March, up from 10.0 percent in February, the Eueopean Central Bank said Monday.

M3 covers cash, overnight deposits, other short-term deposits, repurchase agreements, shares and units in money market funds and debt securities with a maturity of up to two years and is the ECB's preferred indicator of medium-term inflationary trends in the eurozone economy.

Analysts polled by financial news agency Thomson Financial had predicted a 9.8-percent rise in March.
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The ECB is expected to approve an increase in its benchmark interest rate in June to 4.0 percent from 3.75 percent.

The move is likely to make the euro more attractive to investors, thereby increasing its value and unsettling certain eurozone governments that fear an appreciating euro will harm growth prospects.

With a burgeoning financial center in London, the U.K. is now one of the more important "global bubble epicenters". Remember how their housing bubble was supposed to pop sometime last year? After a short pause and a preemptive rate cut that was quickly reversed, it is reinflating again.

U.K. Hometrack House Prices Gain Most Since 2003
U.K. house prices advanced the most in almost four years in April as London properties changed hands at a faster pace, according to a survey by Hometrack Ltd.

The average cost of a home in England and Wales rose an annual 6.8 percent, the most since June 2003, to 174,600 pounds ($350,000), the London-based research company said today. Prices rose 0.7 percent on the month. The figures are based on a survey of 3,500 real-estate agents.

London, where some property hunters stood in line for five hours to reserve new canal-side apartments last week, is leading the increase nationwide as bankers and wealthy foreigners pour money into real estate. Sellers in the capital unloaded properties at the quickest pace since at least 2001, Hometrack said.

``We've got a supply and demand imbalance,'' said Richard Donnell, director of research at Hometrack. ``We've had a very strong uptick in London in the past 18 months. As long as the world economy continues to do well and the city does well, there will always be a certain buoyancy in some areas.''

Even Canada is getting into the act now.

Canada Outgrows China as Newest Market for Worldwide Borrowers
From Reykjavik to Wellington, the queue in Toronto is making Canada the fastest-growing market for international borrowers. Not even China's burgeoning bond sales can keep up with the pace of foreign debt being issued in Canadian dollars.

Canada's supremacy as the capital market of choice for companies as diverse as New Zealand's Telecom Corp. and Iceland's Kaupthing Bank hf has a lot to do with the Ottawa-based government's obsession with balanced budgets, some of the lowest interest rates available anywhere, a sinking currency against the euro and a 2-year-old law that lets pension funds own as much foreign debt as they want without a tax penalty.

While the C$21.3 billion ($19.1 billion) of so-called Maple bonds represent 10 percent of the Yankee debt sold by international issuers in the U.S. last year, the Canadian market is growing twice as fast and may exceed C$50 billion in 2007. For RBC Capital Markets and Merrill Lynch & Co., the firms that have arranged more than half of the new offerings, which were scarce prior to 2005, the fees from these deals will top C$160 million, according to data compiled by Bloomberg.

Of course, much of the trouble on "Planet Leverage" originated here in the U.S..

As Funds Leverage Up, Fears of Reckoning Rise($)
Hedge-fund manager John Paulson made $1 billion using a complex financial instrument to pump up a bet that the subprime-mortgage market would crater. The parent company of retail giant Sears made $74 million using a similar device to boost its wager that a basket of stocks would rise in value.

Both were playing with leverage -- the magical power that allows investors to make big investments without putting big money on the table. These days, they have lots of company. Thanks to advances in financial engineering, investors have never had so many different ways to make commitments that exceed their bankrolls. And never before has leverage wormed its way into so many nooks of the financial world.

We're living on planet leverage, and regulators and market gurus are growing nervous.

How did this happen? For starters, hedge funds and leveraged-buyout funds have proliferated. They're pioneers in boosting returns using borrowed money, the most traditional form of leverage. Also, investment banks are pumping out newfangled leveraging tools such as derivatives, complex securities that allow hedge funds and other investors to add leverage without borrowing money.

Finally, mainstream America has gotten into the act. Once-conservative institutions are copying hedge-fund tactics. The Pennsylvania State Employees' Retirement System has begun dabbling in derivatives. Mutual-fund companies such as Easton Vance Corp. and Federated Investors Inc. have launched funds that rely heavily on derivatives. Garden-products maker Scotts Miracle-Gro Co. and other public companies have loaded up on debt to improve returns.

This may not end well. This may also continue for a lot longer than many people think.