Home » Posts tagged 'credit bubble bulletin'

Tag Archives: credit bubble bulletin

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Weekly Commentary: Powell on Inflation

Weekly Commentary: Powell on Inflation

The Treasury yield spike runs unabated. Ten-year Treasury yields rose another 10 bps this week to 1.72%, the high since January 23, 2020. The Treasury five-year “breakeven” inflation rate rose to 2.65% in Tuesday trading, the high since July 2008. The Philadelphia Fed’s Business Survey Prices Paid Index surged to a 41-year-high. In the New York Fed’s Manufacturing Index, indices of Prices Paid and Received both jumped to highs since 2011.
While crude oil’s notable 6.4% decline for the week spurred a moderate pullback in market inflation expectations (i.e. “breakeven rates”), this did not translate into any relief in the unfolding Treasury bear market.

Chairman Powell was widely lauded for his adept handling of Wednesday’s post-FOMC meeting press conference. He was well-prepared and could not have been more direct: The Federal Reserve will not anytime soon be contemplating a retreat from its ultra-dovish stance. It was music to the equities mania, as the Dow gained 190 points to trade above 33,000 for the first time. Treasury yields added a couple bps, but without any of the feared fireworks. Markets were breathing a sigh of relief.

Labored breathing returned Thursday. Ten-year Treasury yields spiked another 10 bps, trading above 1.75% for the first time since January 2020. And after trading as low as 0.76% during Powell’s press conference, five-year Treasury yields spiked to almost 0.90% in increasingly disorderly Thursday trading. The Nasdaq100 was slammed 3.1%, with the S&P500 sinking 1.5%.

The Treasury market would really like to take comfort from the Fed’s steadfast dovishness. It’s just been fundamental to so much. It’s worked incredibly well for so long. Not now. This raises a critical issue: Paradigm shift? Regime change? What’s driving Treasury yields these days? What is the bond market fearing? If it’s inflation, is Fed dovishness friend or foe?

…click on the above link to read the rest of the article…

credit bubble bulletin, doug noland, inflation, price inflation, fed, us federal reserve, jerome powell

Weekly Commentary: Regime Change

Weekly Commentary: Regime Change

Ten-year Treasury yields closed out a tumultuous week at 1.41% bps, pulling back after Thursday’s spike to a one-year high 1.61%. Ten-year Treasury yields are now up 49 bps from the start of the year and almost 100 bps (1 percentage point) off August 2020 lows. More dramatic, five-year yields jumped 16 bps this week to 0.73%.

Surging yields are a global phenomenon. Ten-year yields were up 12 bps in Canada (to 1.35%), 30 bps in Australia (1.90%), 28 bps in New Zealand (1.89%), five bps in Germany (-0.26%), and five bps in Japan (0.16%) – with Japanese JGB yields hitting a five-year-high.

“Periphery” bond markets were under intense pressure, Europe’s and EM. Greek yields surged 22 bps to 1.11%, while Italian yields rose 14 bps to 0.76%. EM dollar bonds were bloodied. Yields were up 31 bps in Turkey (5.90%), 28 bps in the Philippines (5.90%), 25 bps in Peru (2.39%), 23 bps in Indonesia (2.57%), 16 bps in Qatar (2.14), 16 bps in Ukraine (6.95%), and 16 bps in Mexico (2.92%). Local currency bonds were walloped. Yields were up 125 bps in Lebanon, 31 bps in Brazil, 29 bps in Colombia, 27 bps in Romania, 19 bps in Poland, and 17 bps in Hungary.

Global bond markets have an inflation problem. The international central bank community has an inflation problem. Perhaps Treasuries and the Fed face the biggest challenge in managing around mounting inflationary risks.

The U.S., after all, is running unprecedented peacetime deficits, with a new $1.9 TN stimulus package scooting through Congress. This legislation will be followed by what is sure to be a major infrastructure program. There is literally colossal deficits and Treasury issuance as far as the eye can see.

February 23 – Bloomberg (Gerson Freitas Jr.): “Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn…
…click on the above link to read the rest of the article… 

Weekly Commentary: Short-Term Unsustainable

Weekly Commentary: Short-Term Unsustainable

Outstanding Treasury Securities began 2008 at $6.051 TN, or 41% of GDP. Treasuries ended 2019 at $19.019 TN, or 87% of GDP. And then, in only three quarters, Treasuries surged another $3.882 TN to $22.900 TN, or 108% of GDP. We must wait a few weeks for the Fed’s Q4 Z.1 report, but the federal government posted a fiscal deficit of $573 billion during this period, likely pushing outstanding Treasuries to near $23.5 TN, or about 110% of GDP. Since the end of 2007, Treasuries have inflated around $17.5 TN – approaching a three-fold increase.
For years now, I’ve listened as Washington politicians and central bankers admit to the obvious – that the trajectory of our federal debt is unsustainable – while invariably arguing it was not the time to be concerned or address it. With Treasuries blowing right through the 100% of GDP milepost – and likely poised to reach 125% within the next year or two – there’s no time like the present to recognize our nation is in serious fiscal trouble.

Senator John Thune (from Yellen’s confirmation hearing): “I’m going to try and roll a lot of thoughts and questions into sort of one big package here. But the one thing that concerns me that nobody seems to be talking about anymore is the massive amount of debt that we continue to rack up as a nation. And, in fact, the President elect has proposed a couple trillion dollar fiscal plan on top of that which we’ve already done – which would add somewhere on the order of about $5.3 trillion to deficits and that’s according to the committee for responsible budget of which you have been a board member.
…click on the above link to read the rest of the article…

Weekly Commentary: Just the Facts – 12/25/2020

Weekly Commentary: Just the Facts – 12/25/2020

For the Week:

The S&P500 slipped 0.2% (up 14.6% y-t-d), while the Dow was little changed (up 5.8%). The Utilities declined 0.9% (down 2.9%). The Banks jumped 3.1% (down 15.0%), and the Broker/Dealers gained 1.9% (up 29.8%). The Transports dipped 0.3% (up 14.9%). The S&P 400 Midcaps rose 1.2% (up 12.2%), and the small cap Russell 2000 jumped another 1.7% (up 20.1%). The Nasdaq100 slipped 0.2% (up 45.6%). The Semiconductors declined 0.5% (up 48.7%). The Biotechs added 0.3% (up 17.1%). Though bullion added $2, the HUI gold index declined 0.8% (up 24.4%).

Three-month Treasury bill rates ended the week at 0.08%. Two-year government yields were unchanged at 0.12% (down 145bps y-t-d). Five-year T-note yields declined two bps to 0.36% (down 133bps). Ten-year Treasury yields slipped two bps to 0.93% (down 99bps). Long bond yields fell three bps to 1.66% (down 73bps). Benchmark Fannie Mae MBS yields declined a basis point to 1.39% (down 132bps).

Greek 10-year yields were unchanged at 0.64% (down 79bps y-t-d). Ten-year Portuguese yields gained three bps to 0.06% (down 38bps). Italian 10-year yields added two bps to 0.59% (down 83bps). Spain’s 10-year yields rose three bps to 0.07% (down 40bps). German bund yields increased two bps to negative 0.55% (down 36bps). French yields increased two bps to negative 0.31% (down 43bps). The French to German 10-year bond spread was unchanged at 24 bps. U.K. 10-year gilt yields added one basis point to 0.26% (down 57bps). U.K.’s FTSE equities index declined 0.4% (down 13.8%).

Japan’s Nikkei Equities Index fell 0.4% (up 12.7% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.01% (up 3bps y-t-d). France’s CAC40 was little changed (down 7.6%). The German DAX equities index slipped 0.3% (up 2.6%). Spain’s IBEX 35 equities index gained 0.9% (down 15.1%). Italy’s FTSE MIB index rose 0.7% (down 5.9%). EM equities were mixed. Brazil’s Bovespa index dipped 0.2% (up 1.9%), and Mexico’s Bolsa fell 1.1% (down 0.4%). South Korea’s Kospi index jumped 1.3% (up 27.7%). India’s Sensex equities index was unchanged (up 13.9%). China’s Shanghai Exchange fell 0.9% (up 10.3%). Turkey’s Borsa Istanbul National 100 index gained 1.3% (up 24.6%). Russia’s MICEX equities index fell 1.1% (up 6.3%).

Investment-grade bond funds saw inflows of $2.529 billion, while junk bond funds posted outflows of $896 million (from Lipper).

…click on the above link to read the rest of the article…

Weekly Commentary: Monetary Disorder In Extremis

Weekly Commentary: Monetary Disorder In Extremis

November non-farm payrolls gained 245,000, only about half the mean forecasts – and down from October’s 610,000. It was the weakest job growth since April’s employment debacle. U.S. equities rallied on the disappointing news. A few Bloomberg headlines captured the aura: “Stocks Gain as Jobs Miss Boosts Stimulus Bets;” “Fed Case for Fresh Action Gets Stronger on Soft U.S. Jobs Report;” and “Jobs Data Was a ‘Perfect Miss’ for Fed and Aid.”
Bad news has never been more positively received in the stock market. Some analysts are now anticipating the Fed will soon supersize its already massive monthly bond purchases. Chairman Powell’s comments this week did little to dissuade such thinking: “We are going to keep our rates low and keep our tools working until we feel like we really are very clearly past the danger that is presented to the economy from the pandemic.”

The U.S. Bubble Economy structure has evolved into a voracious Credit glutton. There’s a strong case for significant additional fiscal stimulus. The case for boosting monetary stimulus is not compelling. Financial conditions have remained ultra-loose. Credit stays readily available for even the riskiest corporate borrowers, as bond issuance surges to new heights. While formidable, the remarkable speculative Bubble throughout corporate Credit is dwarfed by what has regressed to a raging stock market mania.

Manic November will be chronicled for posterity. Future historians will surely be confounded. It is being called the strongest ever November for equities. Up 12% for the month, the Dow posted its largest one-month advance since January 1987. The S&P500 returned 10.9%, a huge bonanza relegated to small potatoes by the “melt-up” in the broader market. The “average stock” Value Line Arithmetic Index posted an 18.3% advance in November. The small cap Russell 2000 also surged 18.3%, and the S&P400 Midcaps rose 14.1%.

…click on the above link to read the rest of the article…

Weekly Commentary: Pondering the New Secretary of the Treasury

Weekly Commentary: Pondering the New Secretary of the Treasury

The U.S. Goods Trade Deficit jumped to a then record $76 billion back in July 2008. A few short months later, financial chaos unleashed the “great recession” economic crisis. Traditionally, large trade deficits are evidence of loose monetary conditions and resulting unsustainable spending patterns. By May 2009 – only 10 months from an all-time record – the Goods Trade Deficit had shrunk to a seven-year low $35 billion. It’s worth noting, as well, that M2 money supply expanded $253 billion, or 3.1%, during 2009.
Fast forward to the current crisis period. M2 has surged $419 billion in only six weeks. Over the past 38 weeks, M2 has expanded an unprecedented $3.60 TN, with year-over-year growth of $3.785 TN, or 24.7%. October’s Goods Trade Deficit was reported Wednesday at $80.3 billion, lagging only August’s record $83.1 billion. Last month’s Trade Deficit was actually 21% ahead of pre-crisis October 2019.

No doubt about it, this crisis period is unique. More than three Trillion worth of Fed liquidity injections coupled with more than a Three Trillion fiscal deficit has thrown traditional crisis dynamics on its head. In this New Age Crisis backdrop, financial conditions have actually dramatically loosened. Money supply has skyrocketed, and stocks have gone on a wild speculative moonshot. Corporate bond issues surged to new records. And, as noted above, booming imports pushed the Goods Trade Deficit to an all-time high. At $170 billion, the second quarter Current Account Deficit was the largest since 2008.

The bloated services sector has accounted for a majority of historic job losses. Massive stimulus has bolstered spending on goods – which has led to the rapid recovery of imports. Home sales have boomed, with the strongest house price inflation in years. It’s only fitting that stimulus-induced “Terminal Phase” Bubble excess now engulfs the housing sector as well. That asset inflation and Bubble excess run rampant in the throes of crisis should have us all worried.

…click on the above link to read the rest of the article…

Weekly Commentary: Scorched Earth

Weekly Commentary: Scorched Earth

November 18 – Reuters (Rodrigo Campos): “Global debt is expected to soar to a record $277 trillion by the end of the year as governments and companies continue to spend in response to the COVID-19 pandemic, the Institute of International Finance said in a report… The IIF… said debt ballooned already by $15 trillion this year to $272 trillion through September. Governments – mostly from developed markets – accounted for nearly half of the increase. Developed markets’ overall debt jumped to 432% of GDP in the third quarter, from a ratio of about 380% at the end of 2019. Emerging market debt-to-GDP hit nearly 250% in the third quarter, with China reaching 335%, and for the year the ratio is expected to reach about 365% of global GDP.”
Covid’s precision-like timing was supernatural – nothing short of sinister. A once in a century international pandemic surfacing in the waning days of an unrivaled global financial Bubble. A historic experiment in central bank monetary management already floundering (i.e. Fed employing aggressive “insurance” QE stimulus with stocks at record highs and unemployment at 50-year lows). A Republican administration running Trillion-dollar deficits in the midst of an economic boom. Yet, somehow, reckless U.S. fiscal and monetary stimulus appeared miserly when compared to the runaway excess percolating from China’s epic Credit Bubble. Monetary, fiscal, markets, at home and abroad: Covid bestowed end-of-cycle excess a hardy additional lease on life.

From the FT: “Global debt rose at an unprecedented pace in the first nine months of the year as governments and companies embarked on a ‘debt tsunami’ in the face of the coronavirus crisis… From 2016 to the end of September, global debt rose by $52tn; that compares with an increase of $6tn between 2012 and 2016.”
…click on the above link to read the rest of the article…

Weekly Commentary: Well, That’s Some Weird… Stuff

Weekly Commentary: Well, That’s Some Weird… Stuff

The “average stock” Value Line Arithmetic Index jumped 6.4% for the week. The NYSE Arca Oil Index surged 19.8%, with the Philadelphia Oil Services Index up 17.4%. The KWB Bank Index rose 11.5%, as the Nasdaq Bank Index advanced 13.6%. The Bloomberg REIT Index jumped 6.8%.
The S&P600 Small Cap Index gained 7.5% for the week, as the S&P400 Midcaps rose 4.3%. The Bloomberg Americas Airlines Index jumped 12.9%. The JPMorgan Leisure Travel Index surged 15.3%. Major equities indices rose 13.3% in Spain, 11.9% in Austria, 11.5% in Greece, 10.5% in Belgium, 8.5% in France, 6.9% in the UK and 4.8% in Germany. Turkish stocks surged 8.3%. Crude (WTI) prices jumped 8.1%. Meanwhile, Zoom was down 19%, Netflix 6.2%, Facebook 5.6%, Amazon 5.5%, and Tesla fell 5.0%. Well, That’s Some Weird… Stuff.

I have no interest in disparaging Pfizer’s (and BioNtech’s) Monday announcement of 90% effectiveness for their Covid vaccine. It’s encouraging news. But it is a two-shot vaccine with what reportedly can induce strong post-shot reactions. Moreover, logistical challenges await a vaccine requiring extreme cold storage (negative 100 Fahrenheit). There will be limits to its availability, but mainly I expect a majority of American’s initially to approach Covid vaccines with caution. While many questions remain unanswered, the bottom line is 90% effectiveness bodes well for Covid vaccines generally.

Monday’s market reaction to the news doesn’t bode so well for general market stability.

November 13 – Bloomberg (Justina Lee): “Jon Quigley says he probably should have known something big was coming — even if his risk models didn’t. Just a day after the Great Lakes Advisors manager watched CBS’s ‘60 Minutes’ about America’s unprecedented efforts to deploy a vaccine when it comes, Pfizer Inc. revealed significant progress on its pandemic cure. That revelation spurred the biggest moves ever in Quigley’s $3.9 billion portfolio. While stock benchmarks cheered the news, Wall Street’s most popular styles of quant trading got hit by a historic storm…

…click on the above link to read the rest of the article…

Weekly Commentary: State-Directed Credit Splurge

Weekly Commentary: State-Directed Credit Splurge

New data released Friday confirm ongoing historic Chinese Credit excess. Total Aggregate Financing increased (a ridiculous) $524 billion during August to $40.5 TN, doubling July’s growth and exceeding estimates by almost 40%. It was the strongest monthly gain since March’s record $759 billion. This pushed y-t-d (8-month) growth to $3.828 TN, up 45% from comparable 2019 ($2.650 TN) and 67% ahead of comparable 2018 ($2.297 TN) growth. It’s worth noting Aggregate Financing surged an incredible $2.960 TN over the past six months, 62% ahead of comparable 2019 ($1.823 TN). At 13.3%, year-over-year growth was the strongest in several years.
With 2020 GDP estimates in the 2.0 to 3.0% range, the divergence between Chinese Credit and economic output is unprecedented. That Credit growth has accelerated in the face of rapidly deteriorating economic prospects portends major troubles ahead. China’s “Terminal Phase” excess – including rapid acceleration of late-cycle loans of deteriorating quality – is unparalleled in terms of both degree and duration. Stoking a stock market mania while prolonging a historic apartment Bubble only exacerbates systemic fragility.

August New Bank Loans increased an above forecast $187 billion. This boosted y-t-d loan growth to $2.102 TN, 20% ahead of comparable 2019. Six-month growth ($1.481 TN) was 29% above comparable 2019. Bank Loans were up 13.0% over the past year, 27% in two years, and 84% over five years.

Consumer Loans rose $123 billion during August. Year-to-date growth of $755 billion was 4.7% ahead of comparable 2019. However, six-month Consumer Loan growth of $722 billion was 23% ahead of comparable 2019. Consumer Loans were up 14.5% year-over-year, 33% over two years, 58% in three and 135% over five years.

Corporate Bonds expanded $53 billion. This pushed year-to-date growth to $580 billion, up 80% from 2019 and 133% from comparable 2018 growth.

But the August winner of the Chinese Credit Sweepstakes goes to government finance. Government Bonds jumped $202 billion during the month to $6.362 TN, the largest monthly increase in a data series going back to 2017. At $837 billion, year-to-date growth was 59% ahead of comparable 2019. Government Bonds increased 18.7% over the past year, 38% in two and 66% over three years (5-yr data not available).

…click on the above link to read the rest of the article…

Weekly Commentary: Summer of 2020

Weekly Commentary: Summer of 2020

QE fundamentally changed finance. What commenced at the Federal Reserve with a post-mortgage finance Bubble, $1 TN Treasury buying operation morphed into open-ended purchases of Treasuries, MBS, corporate bonds and even corporate ETFs holding high-yield “junk” bonds. Markets assume it’s only a matter of time before the Federal Reserve adds equities to its buy list.

For years now, Treasury bonds (and agency securities) have traded at elevated prices – low yields – in anticipation of an inevitable resumption of QE operations/securities purchases. Conventional analysis has focused on persistent disinflationary pressures as the primary explanation for historically depressed bond yields. While not unreasonable, such analysis downplays the prevailing role played by exceptionally low Federal Reserve interest-rates coupled with latent (and escalating) financial fragility. Meanwhile, near zero short-term rates and historically low Treasury and agency securities yields have spurred a desperate search for yields, significantly inflating the demand and pricing for corporate Credit.

The Fed’s COVID crisis leap into corporate debt has wielded further profound impacts on corporate Credit – yields, prices and issuance.

September 2 – Financial Times (Joe Rennison): “Companies have raised more debt in the US bond market this year than ever before… A $2bn bond from Japanese bank Mizuho and a $2.5bn deal from junk-rated hospital operator Tenet Healthcare helped nudge overall US corporate bond issuance to $1.919tn so far this year, surpassing the previous annual record of $1.916tn set in 2017, according to… Refinitiv. The surge marks a dramatic revival for the market since the coronavirus-induced rout in March, when prices slumped and yields soared… ‘There has been a phenomenal amount of issuance,’ said Peter Tchir, chief macro strategist at Academy Securities… ‘It’s been the busiest summer I have ever seen. It’s felt like we have been setting issuance records month after month.’”
…click on the above link to read the rest of the article…

Weekly Commentary: Moral Hazard Quagmire

Weekly Commentary: Moral Hazard Quagmire

The Nasdaq100 jumped another 3.5% this week, increasing 2020 gains to 32.3%. Amazon gained 4.3% during the week, boosting y-t-d gains to 77.8% – and market capitalization to $1.626 TN. Apple surged 8.2% this week, increasing 2020 gains to 69.4%. Apple’s market capitalization ended the week at a world-beating $2.127 TN. Microsoft rose 2.0% (up 35.1% y-t-d, mkt cap $1.612 TN). Google rose 4.8% (up 18.2% y-t-d, mkt cap $1.073 TN), and Facebook gained 2.2% (up 30.1%, mkt cap $761bn). The Nasdaq100 now trades with a price-to-earnings ratio of 37.4.
This era will be analyzed and debated for decades to come – if not much longer. Market Bubbles, over-indebtedness, inequality, financial instability and economic maladjustment – festering for years – can no longer be disregarded as cyclical phenomena. Ben Bernanke has declared understanding the forces behind the Great Depression is the “Holy Grail of economics”. It’s ironic. That the Fed never repeats its failure to aggressively expand the money supply in time of crisis is a key facet of the Bernanke doctrine – policy failing he asserts was a primary contributor to Depression-era financial and economic collapse. Yet this era’s unprecedented period of monetary stimulus is fundamental to current financial, economic, social and geopolitical instabilities.

August 18 – Bloomberg (Craig Torres): “The concentration of market power in a handful of companies lies behind several disturbing trends in the U.S. economy, like the deepening of inequality and financial instability, two Federal Reserve Board economists say in a new paper. Isabel Cairo and Jae Sim identify a decline in competition, with large firms controlling more of their markets, as a common cause in a series of important shifts over the last four decades. Those include a fall in labor share, or the chunk of output that goes to workers, even as corporate profits increased; and a surge in wealth and income inequality, as the net worth of the top 5% of households almost tripled between 1983 and 2016. 

…click on the above link to read the rest of the article…

Weekly Commentary: Precarious World

Weekly Commentary: Precarious World

Another fascinating – if not comforting – week. A Friday Wall Street Journal headline: “Big Tech’s Embarrassment of Riches – Amazon, Apple, Facebook and Google all show resilience during pandemic while undergoing congressional scrutiny.” Amazon, Apple, Facebook and Google all reported booming earnings the day following Wednesday appearances by respective CEOs before the House Antitrust Subcommittee hearing. Down the road from Capitol Hill, the FOMC released their post-meeting policy statement. Chairman Powell conducted a virtual press conference where he addressed key issues: “inflation running well below our symmetric 2% objective,” and “inequality as an issue has been a growing issue in our country and in our economy for four decades.”

While it is true that inequality has been building for decades, this trend has worsened markedly since the 2008 crisis. Much more so of late.

Powell: “So [inequality is] a serious economic problem for the United States, but it’s got underlying causes that are not related to monetary policy or to our response to the pandemic. Again, four decades of evidence suggests it’s about globalization, it’s about the flattening out of educational attainment in the United States compared to our other competitor countries. It’s about technology advancing too.

If we could chart “inequality,” it would at this point be rising parabolically – following the trajectory of the Fed’s balance sheet. I had been assuming Fed holdings would at some point be getting a lot larger. It seemed clear inequality would only get worse. COVID dramatically accelerated both trends.

Bubble analysis is these days as fruitful as ever. We’re in the waning days of a multi-decade super-cycle. Bubble markets have become extraordinarily distorted and increasingly disorderly. Protracted deep structural maladjustment has fostered pervasive Bubble Economy Dynamics. Aggressive monetary inflation and central bank market interventions – primary contributors to financial and economic Bubbles – are being deployed to hold Bubble collapse at bay. And we’re now witnessing the initial consequences of desperately throwing massive stimulus at speculative market Bubbles and a Bubble Economy.

…click on the above link to read the rest of the article…

Weekly Commentary: Drone Money

Weekly Commentary: Drone Money

In particular, to maintain downward pressure on longer-term interest rates, the Federal Open Market Committee (FOMC) likely will provide forward guidance about the economic conditions it would need to see before it considers raising its overnight target rate. And it likely will clarify its plans for further securities purchases (quantitative easing). It is possible, though not certain, that the FOMC will also implement yield-curve control by targeting medium-term interest rates.” Ben Bernanke and Janet Yellen, Testimony on COVID-19 and Response to Economic Crisis, July 17, 2020.

With highly speculative securities markets having fully recovered COVID losses – and Nasdaq sporting a 17% y-t-d gain – why the talk of more QE? And with 10-year yields at 0.63% and financial conditions extraordinarily loose, what’s the purpose for discussing the pegging of Treasury bond prices (aka “yield curve control”)? Aren’t the markets already conspicuously over-liquefied?

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” Milton Friedman, “The Optimum Quantity of Money,” 1969.

It was Dr. Ben Bernanke that, in the wake of the “tech” Bubble collapse, elevated Friedman’s academic thought experiment to a revolutionary policy proposal. And in this runaway real world experiment, “often repeated” supplanted Friedman’s “will never be repeated” – and it changed everything.

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

…click on the above link to read the rest of the article…

Weekly Commentary: Utmost Crazy

Weekly Commentary: Utmost Crazy

The Shanghai Composite surged 7.3% this week, increasing y-t-d gains to 10.9%. The CSI 300 rose 7.6%, with 2020 gains of 16.0%. China’s growth-oriented ChiNext Index’s 12.8% surge boosted year-to-date gains to 54.5%. Copper jumped 7.1% this week. Aluminum rose 4.6%, Nickel 4.0%, Zinc 8.3%, Silver 4.2%, Lead 4.2%, and Palladium 3.5%. China’s renminbi advanced 0.9% this week to a four-month high versus the less-than-king dollar.

July 9 – Bloomberg: “Like millions of amateur investors across China, Min Hang has become infatuated with the country’s surging stock market. ‘There’s no way I can lose,’ said the 36-year-old, who works at a technology startup… ‘Right now, I’m feeling invincible.’ Five years after China’s last big equity boom ended in tears, signs of euphoria among the nation’s investing masses are popping up everywhere. Turnover has soared, margin debt has risen at the fastest pace since 2015 and online trading platforms have struggled to keep up. Over the past eight days alone, Chinese stocks have added more than $1 trillion of value — far outpacing gains in every other market worldwide.”

China’s Total Aggregate Financing (TAF) expanded a much stronger-than-expected $490 billion in June, up from May’s $455 billion expansion and 30% above growth from June 2019. TAF surged a remarkable $2.976 TN during the first-half, 43% ahead of comparable 2019 (80% ahead of first-half 2018).

It’s not easy to place China’s ongoing historic Credit expansion in context. While not a perfect comparison, U.S. Total Non-Financial Debt (NFD) expanded a record $3.3 TN over the four quarters ended March 31st. In booming 2007, U.S. NFD expanded about $2.5 TN. Chinese Total Aggregate Financing has expanded almost $3.0 TN in six months.

In the face of economic contraction, TAF increased a blistering $4.39 TN, or 12.8%, over the past year. For perspective, y-o-y growth began 2020 at 10.7% – and is now expanding at the strongest pace since February 2018. Beijing is targeting TAF growth of $4.3 TN (30 TN yuan) for 2020, about 25% ahead of record 2019 growth (and up 45% from 2018 growth).

…click on the above link to read the rest of the article…

Weekly Commentary: More W than V

Weekly Commentary: More W than V

The much vaunted “V” recovery is improbable. To simplify, a somewhat “w”-looking scenario is a higher probability. After such an abrupt and extraordinary collapse in economic activity, a decent bounce was virtually assured. Millions would be returning to work after temporary shutdowns to a substantial chunk of the U.S. services economy. There would be pent-up demand, especially for big ticket home and automobile purchases. A massive effort to develop vaccines would ensure promising headlines.

With incredible amounts of liquidity sloshing around, constructive data supporting the “V” premise were all the markets needed. The enormous scope of hedging and shorting activity back in the March and April timeframe ensured the availability of more than ample firepower to fuel a rally. An equities revival would then spur a general restoration of confidence and spending – in a self-reinforcing “V” dynamic.

Inevitably, highly speculative Bubble Markets inflated way beyond anything even remotely justified by the fundamental backdrop – actually coming to believe the “V” hype. The rapid recovery phase, however, will prove dreadfully short-lived. Scores of companies won’t survive, and millions of job losses will prove permanent. Fearful consumers have made lasting changes in spending patterns, with many retrenching. Tons of fiscal stimulus will be burned through with astonishing rapidity. And a raving Credit market luxuriating in Fed monetary inflation will confront Credit losses at a breadth and scale much beyond the last crisis.

My concern has been that the COVID dislocation would be with us for a while. It’s surprising we haven’t seen at least some relief as summer unfolds. I was not expecting major outbreaks in Arizona, Florida, Texas and Southern California this time of year.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase