Credit Bubble Bulletin
by Doug Noland
Friday, May 7, 2021
My highly edited version of Noland's column follows:
For the Week
ending May 7, 2021
“Everything Screams Inflation.”
Lumber year-to-date gain of +93%
WTI Crude 34%,
Gasoline 51%,
Copper 35%,
Aluminum 26%,
Steel Rebar 32%,
Corn 51%,
Soybeans 22%,
Wheat 19%,
Coffee 18%,
Sugar 13%,
Cotton 15%,
Lean Hogs 59%.
STOCKS:
S&P500 gained 1.2% (up 12.7% y-t-d)
Dow Industrials jumped 2.7% (up 13.6%)
Utilities fell 1.3% (up 4.7%)
Transports jumped 3.9% (up 27.5%)
S&P 400 Midcaps rose 1.7% (up 20.1%)
Small cap Russell 2000 added 0.2% (up 15.0%)
Nasdaq100 fell 1.0% (up 6.5%)
Semiconductors little changed (up 11.3%)
Biotechs declined 1.4% (down 3.5%).
With gold bullion rising $62,
the HUI gold stock index surged 9.7%
(up 0.7%).
U.K.'s FTSE rose 2.3% (up 10.4% y-t-d).
Japan's Nikkei rallied 1.9% (up 7.0% y-t-d).
German DAX gained 1.7% (up 12.3%).
Brazil's Bovespa recovered 2.6% (up 2.5%)
South Korea's Kospi gained 1.6% (up 11.3%).
India's Sensex increased 0.9% (up 3.0%).
China's Shanghai declined 0.8% (down 1.6%).
Ten-year US Treasury bond yields
dropped five bps to 1.58%
(up 66bps year over year)
Federal Reserve Credit last week
declined $17.5bn to $7.752 TN.
Over the past 86 weeks,
Fed Credit expanded $4.026 TN,
or 108%.
MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
slipped two bps to 2.96%
(down 29bps y-o-y).
Fifteen-year rates
dipped one basis point to 2.30%
(down 43bps).
Five-year hybrid ARM rates
jumped six bps to 2.70%
(down 47bps).
Jumbo mortgage 30-year fixed rates
down four bps to 3.09%
(down 57bps).
COMMODITIES:
May 4 – Bloomberg
(Gerson Freitas Jr. and Joe Deaux):
“ ... The Bloomberg Commodity Spot Index, which tracks prices for 23 raw materials, rose 0.8% Tuesday to its highest since 2011. The gauge has climbed more than 70% since reaching a four-year low in March of last year.”
May 5 – Reuters
(Zandi Shabalala):
“Copper hit a fresh 10-year high … "
May 5 – Bloomberg
(Isis Almeida
and Fabiana Batista):
“Crop prices are already at the highest levels in more than eight years, and with meat and fuel markets running hot, the rally may still have further to go. ... "
The Bloomberg Commodities Index
surged 3.7%
(up 20.1% y-t-d).
Spot Gold rallied 3.5% to $1,831
(down 3.6%).
Silver surged 5.9% to $27.45
(up 4.0%).
WTI crude gained $1.32 to $64.90
(up 34%).
Gasoline rose 2.4%
(up 51%)
Natural Gas added 0.9%
(up 17%).
Copper surged 6.3%
(up 35%).
Wheat jumped 3.7%
(up 19%).
Corn surged 8.8%
(up 51%).
ECONOMIC NEWS:
Coronavirus Watch:
May 7 – CNBC (Saheli Roy Choudhury):
“India’s daily new Covid-19 cases crossed 400,000 for the third time this month as the country struggles to contain a devastating second wave. Health ministry data… showed there were 414,188 new cases over a 24-hour period, where at least 3,915 people succumbed to the disease.”
Market Mania Watch:
May 2 – Wall Street Journal (Gunjan Banerji):
“Americans are all in on the stock market. Individual investors are holding more stocks than ever before as major indexes climb to fresh highs. They are also upping the ante by borrowing to magnify their bets or increasingly buying on small dips in the market. Stockholdings among U.S. households increased to 41% of their total financial assets in April, the highest level on record. That is according to JPMorgan… and Federal Reserve data going back to 1952…”
May 5 – Reuters (Tom Wilson):
“Meme-based virtual currency Dogecoin soared… to an all-time high, extending its 2021 rally to become the fourth-biggest digital coin. Dogecoin, launched as a satirical critique of 2013’s cryptocurrency frenzy, has climbed 41% in the last 24 hours to a record $0.68, according to CoinMarketCap. This year alone it has soared over 14,000%...”
May 3 – Bloomberg (Crystal Kim): “The marriage between SPACs and clean-tech vehicle startups is on the rocks as regulators push for detail on the one thing most of them lack: a solid business. Stocks of electric-mobility firms like Nikola Corp., Lordstown Motors Corp. and Romeo Power Inc. that went public by merging with special-purpose acquisition companies are down at least 69% from dizzying peaks, as investors question whether their visions for a greener future are divorced from reality. For months, the SEC has raised concern that investors aren’t fully informed of risks embedded in SPACs, also known as ‘blank-check’ companies.”
Inflation Watch:
April 30 – Bloomberg (Eddie Spence and Megan Durisin): “The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as the world economy roars back to life. From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen for years. The rally threatens to raise the cost of goods from the lunchtime sandwich to gleaming skyscrapers. It’s also lit the fuse on the massive reflation trade that’s gripped markets this year and pushed up inflation expectations.”
May 7 – Bloomberg (Patrick Clark):
“Record occupancy rates are emboldening single-family landlords to hike rents aggressively, testing the limits of booming demand for suburban rentals. American Homes 4 Rent, which owns 54,000 houses, increased rents 11% on vacant properties in April… Invitation Homes Inc., the largest landlord in the industry, boosted rents by similar amount, an executive said… Housing costs are jumping across the U.S…”
May 3 – CNBC (Yun Li):
“Warren Buffett ... ‘We are seeing very substantial inflation,’ the Berkshire chairman and CEO said… ‘It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.’ ‘We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up,’ the legendary investor added.”
Biden Administration Watch:
“U.S. President Joe Biden said a corporate tax rate between 25% and 28% could help pay for badly needed infrastructure, suggesting he could accept a lower rate than what he has proposed in his search for Republican support for the funding. ‘The way I can pay for this, is making sure that the largest companies don't pay zero, and reducing the (2017 corporate) tax cut to between 25 and 28%’, Biden said…”
U.S. Bubble Watch:
May 7 – CNBC (Jeff Cox): “Hiring was a huge letdown in April, with nonfarm payrolls increasing by a much less than expected 266,000 and the unemployment rate rose to 6.1% amid an escalating shortage of available workers. Dow Jones estimates had been for 1 million new jobs and an unemployment rate of 5.8%... There was more bad news: March’s originally estimated total of 916,000 was revised down to 770,000… ‘It certainly takes the pressure off the Fed and takes an imminent rate increase off the table,’ said JJ Kinahan, chief market strategist at TD Ameritrade. ‘We’re not going to see inflation in wages, and we don’t have as many people employed as we thought, so we have to keep the party going.’”
May 5 – Bloomberg (Reade Pickert): “U.S. service providers expanded in April at the second-fastest pace in data back to 1997, cooling slightly from the prior month as business activity and order growth pulled back from record highs. The Institute for Supply Management’s services index unexpectedly fell to 62.7 last month from a record 63.7 in March… A gauge of prices paid by service providers climbed for a third straight month. At 76.8, it’s the highest level since July 2008… The report, which covers the industries that make up almost 90% of the economy, follows data out earlier this week that showed supply chain challenges and materials shortages limited further momentum in the manufacturing sector.”
May 4 – Bloomberg (Eric Martin):
“The U.S. trade deficit widened to a new record in March as the value of imports surged to a fresh high. The gap in trade of goods and services expanded to $74.4 billion in March from a revised $70.5 billion in February…”
April 30 – CNBC (Diana Olick):
“ ... it is not just competition fueling prices for new homes. The cost of what goes into the home is adding to it as material and land prices surge. Lumber prices seem to set a new record almost daily, now up 67% this year and up 340% from a year ago… The surge in lumber prices in the past year has added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the NAHB.”
May 2 – Wall Street Journal (Thomas Gryta and Theo Francis): “Consumers are splurging on cars and furniture—and facing extended waits for delivery. Restaurants and gyms are reopening—and struggling to find workers. Factories and home builders are trying to ramp up—but are short on semiconductors or raw materials. Federal Reserve officials and most economists largely play down supply and cost problems as transitory, saying they aren’t widespread enough to threaten corporate profits or the broader U.S. economy for long, especially amid strong sales. But problems are acute for some individual businesses and even entire industries.”
Fixed Income Watch:
May 3 – Wall Street Journal (Kate Davidson):
“The U.S. plans to borrow nearly $1.3 trillion over the next two quarters as federal spending picks up following the Covid-19 relief package enacted in March, the Treasury Department said… That would bring total borrowing for the fiscal year ending Sept. 30 to $2.3 trillion, compared with $4 trillion in the last fiscal year… The Treasury estimated the government would borrow $463 billion during the current quarter, nearly five times as much as the $95 billion it estimated previously, before Congress passed the $1.9 trillion relief bill.”
May 3 – Financial Times (Joe Rennison):
“The additional premium investors are paid for buying the debt of the worst-rated companies in the US has fallen to its lowest level in seven years, raising warnings that the brightening outlook for the American economy is leading to excessive risk taking. The premium, or ‘spread’, above benchmark government bond yields on triple C-rated US corporate bonds, which sit on the precipice of defaulting, has fallen to just above 6.4 percentage points... The spread has been lower on only two occasions: in 2014, just before a collapse in oil prices roiled the debt of energy companies, and in the run-up to the 2008 financial crisis.”
China Watch:
May 6 – Reuters (Stella Qiu and Kevin Yao):
“China’s exports growth unexpectedly picked up in April, official data showed on Friday, as the world’s second-largest economy extended its recovery… Exports in dollar terms surged 32.3% from a year earlier to $263.92 billion…, beating analysts’ forecast of 24.1% and the 30.6% growth reported in March.”
Global Bubble Watch:
May 5 – Bloomberg (Megan Durisin):
“The world faced its worst hunger problem in at least five years in 2020 on the back of the coronavirus crisis, and the outlook remains grim again this year. Some 155 million people across 55 countries… suffered from issues ranging from a food crisis to famine, according to a report with data from more than a dozen agencies. That’s up 20 million from 2019, with economic shocks overtaking extreme weather as the No. 2 cause. The worsening situation highlights how the pandemic has exacerbated food inequalities around the world, on top of extreme weather and political conflicts that are stifling access to key staples.”
May 2 – Bloomberg (Vildana Hajric):
“The global semiconductor shortage roiling a wide range of industries likely won’t be resolved for a few more years, according to Intel Corp.’s new Chief Executive Officer Pat Gelsinger. The company is reworking some of its factories to increase production and address the chip shortage in the auto industry, he said… It may take at least several months for the strain on supply to even begin easing, he added. ‘We have a couple of years until we catch up to this surging demand across every aspect of the business,’ Gelsinger said.”
May 1 – Bloomberg (Christoph Rauwald):
“German Finance Minister Olaf Scholz said a global deal on minimum corporate taxes is possible within months, citing signals of support by President Joe Biden’s administration. ‘I’m convinced we’ll finish up a global minimum tax on corporate profits this summer,’ Scholz, the Social Democratic Party’s candidate for chancellor in Germany’s September election, told Funke Media... ‘The American administration is on board with it now.’ The Biden administration has proposed that the U.S. apply a 21% global minimum rate, leading to speculation that it would push for a high rate in international talks…”
May 3 – Financial Times (David Keohane, Claire Bushey and Joe Miller): “The global chip shortage is set to ignite a power struggle between chip manufacturers and their customers about how the industry’s supply chain works and who pays the costs of carrying inventory… The chief executive of one of Europe’s biggest chipmakers said that customers would have to accept that their ‘dream is over’. Jean-Marc Chéry, chief executive of STMicroelectronics, said that his customers, whether carmakers or car part suppliers, will need to hold more inventory or agree to more non-cancellable contracts to make supply more predictable and reduce the risk of shortages.”
May 3 – Wall Street Journal (Sean McLain):
“Toyota Motor Corp. is stockpiling up to four months of some parts. Volkswagen AG is building six factories so it can get its own batteries. And, in shades of Henry Ford, Tesla Inc. is trying to lock up access to raw materials. The hyperefficient auto supply chain symbolized by the words ‘just in time’ is undergoing its biggest transformation in more than half a century… After sudden swings in demand, freak weather and a series of accidents, they are reassessing their basic assumption that they could always get the parts they needed when they needed them. ‘The just-in-time model is designed for supply-chain efficiencies and economies of scale,’ said Ashwani Gupta, Nissan Motor Co.’s chief operating officer. ‘The repercussions of an unprecedented crisis like Covid highlight the fragility of our supply-chain model.’”
Europe Watch:
May 3 – Bloomberg (Carolynn Look):
“Euro-area manufacturers are battling unprecedented delays in securing raw materials and parts, leading to a record build-up of uncompleted orders and rising prices as the economy starts to recover. Factories surveyed by IHS Markit cited a ‘mismatch of supply and demand’ along with transport difficulties -- especially sea freight -- as the main reasons for delays. A gauge of manufacturing activity rose to 62.9 in April, the highest reading in the survey’s 24-year history… Companies reported higher costs for chemicals, metals and plastics and ran down their inventories to cope.”
Emerging Markets Watch:
May 3 – Reuters (Jamie McGeever):
“Growth in Brazil’s manufacturing sector decelerated in April to its slowest rate since June last year, a survey of purchasing managers’ activity showed on Monday, and prices charged to customers rose towards their recent historic highs.”
May 5 – Bloomberg (Patrick Gillespie and Maya Averbuch): “The Covid-19 pandemic has sent a wave of poverty racing across Latin America, deepening declines that began over the past decade and consigning millions to lives of deprivation. The world’s most unequal region saw 22 million people… join the ranks of the poor from 2019 to 2020, unable to meet basic needs. In all, about one-third of Latin America’s roughly 600 million residents live in poverty or what the United Nations defines as extreme poverty: subsisting on less than $1.90 a day. Short of vaccines and hospital beds, Latin America has been uniquely hard-hit due to the intensity of the pandemic and the steepness of its recession, the worst in two centuries.”
Japan Watch:
May 7 – Bloomberg (Isabel Reynolds):
“Japanese Prime Minister Yoshihide Suga extended a state of emergency that covers Tokyo and expanded it to two more regions hit by rising virus cases, in an attempt to stem infections ahead of the capital’s hosting of the Olympics in less than three months.”
Social, Political, Environmental, Cybersecurity Instability Watch:
May 5 – CNBC (Rich Mendez):
“U.S. birth and fertility rates in 2020 dropped to another record low as births fell for the sixth consecutive year to the lowest levels since 1979, according to… the Centers for Disease Control and Prevention’s National Center for Health Statistics. The number of births in the U.S. declined last year by 4% from 2019, double the average annual rate of decline of 2% since 2014… Total fertility rates and general fertility rates also declined by 4% since 2019, reaching record lows. The U.S. birth rate is so low, the nation is ‘below replacement levels,’ meaning more people die every day than are being born, the CDC said.”
April 27 – Bloomberg (Alex Tanzi):
“U.S. college enrollment dropped to the lowest level in almost two decades last year, as the pandemic shut down schools and persuaded students to put their academic plans on hold rather than pay large sums to attend online-only classes. As of October, 62.7% of high school graduates in the class of 2020 were enrolled in colleges or universities, the smallest share since 2001 and down from 66.2% in 2019, the U.S. Bureau of Labor Statistics reported…”
Geopolitical Watch:
May 5 – Bloomberg (Alberto Nardelli and Kitty Donaldson): “Foreign ministers from the Group of Seven nations singled out China’s treatment of its Uyghur minority and expressed concern over Russia’s large military build-up on Ukraine’s borders, according to a draft communique. ‘We continue to be deeply concerned about human rights violations and abuses in Xinjiang and in Tibet, especially the targeting of Uyghurs, members of other ethnic and religious minority groups, and the existence of a large-scale network of ‘political re-education’ camps, and reports of forced labour systems and forced sterilisation,’ the ministers will say… While the language used on the Asian superpower echoes former G-7 statements, the long list of concerns and the specific mention of Taiwan will irritate the Chinese government: ‘We support Taiwan’s meaningful participation in World Health Organisation forums and the World Health Assembly.’”
May 6 – Reuters (David Kirton):
“China condemned a joint statement by G7 foreign ministers that expressed support for Chinese-claimed Taiwan and cast Beijing as a bully, saying it was a gross interference in China’s internal affairs. G7 foreign ministers said in a communique after a London summit that China was guilty of human rights abuses and of using ‘coercive economic policies’, which the G7 would use collective efforts to stop. In an unusual step, the G7 also said they supported Taiwan's participation in World Health Organization forums and the World Health Assembly - and expressed concern about ‘any unilateral actions that could escalate tensions’ in the Taiwan Strait.”
May 5 – Bloomberg:
“China announced that it was suspending a ministerial economic dialogue with Australia, in a largely symbolic move showing Beijing’s growing frustration with Canberra. China will indefinitely halt all activities under the China-Australia Strategic Economic Dialogue, the National Development and Reform Commission said… While the two sides have held three rounds of talks under the mechanism since 2014, it hasn’t convened since September 2017.”
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