Weekly Commentary:
Friday, June 25, 2021
by Doug Noland
My edited easy to read version follows:
Ye editor
For the Week Ending June 25, 2021:
GLOBA: STOCK INDEXES:
S&P500 rallied 2.7% (up 14.0% y-t-d)
Dow Industrials surged 3.4% (up 12.5%)
Utilities added 0.6% (up 1.4%)
Banks up 6.9% (up 30.1%)
Broker/Dealers rallied 4.6% (up 26.0%)
Transports rose 2.4% (up 19.7%)
S&P 400 Midcaps surged 4.4% (up 18.2%)
Small cap Russell 2000 jumped 4.3% (up 18.2%)
Nasdaq100 advanced 2.1% (up 11.3%)
Semiconductors jumped 2.8% (up 16.0%)
Biotechs increased 0.9% (up 3.9%)
Gold bullion recovered $17, but the
HUI gold stock index slipped 0.8% (down 10.2%).
U.K.'s FTSE rallied 1.7% (up 10.5% y-t-d)
.Japan's Nikkei increased 0.4% (up 5.9% y-t-d).
France's CAC40 gained 0.8% (up 19.3%)
German DAX recovered 1.0% (up 13.8%).
Spain's IBEX 35 advanced 0.7% (up 12.6%).
Italy's FTSE MIB recovered 1.2% (up 14.7%)
Brazil's Bovespa declined 0.9% (up 6.9%)
Mexico's Bolsa increased 0.5% (up 14.7%)
South Korea's Kospi rose 1.1% (up 14.9%)
India's Sensex rallied 1.1% (up 10.8)
China's Shanghai jumped 2.3% (up 3.9%)
Russia's MICEX advanced 0.8% (up 16.5%).
US BONDS & MORTGAGES:
Two-year yields added a basis point to 0.27%
(up 15bps y-t-d).
Five-year T-note yields rose five bps to 0.92%
(up 56bps).
Ten-year Treasury yields jumped nine bps to 1.53%
(up 61bps).
Long bond yields surged 14 bps to 2.15%
(up 50bps).
Benchmark Fannie Mae MBS yields
added two bps to 1.90% (up 56bps).
Federal Reserve Credit last week
surged $86.3bn to a record $8.051 TN.
Over the past 93 weeks,
Fed Credit expanded $4.324 TN, or 116%.
Freddie Mac 30-year fixed mortgage rates
jumped nine bps to a 10-week high 3.02%
(down 11bps year-over-year).
Fifteen-year rates surged 10 bps to 2.34%
(down 25bps).
Five-year hybrid ARM rates
added a basis point to 2.53%
(down 55bps).
Jumbo mortgage 30-year fixed rates
down five bps to 3.14%
(down 25bps).
COMMODITIES:
Bloomberg Commodities Index
rallied 1.7%
(up 18.4% y-t-d).
Spot Gold rallied 1.0% to $1,781
(down 6.2%).
Silver recovered 1.2% to $26.10
(down 1.1%).
WTI crude up $2.41 to $74.05
(up 53%).
Gasoline surged 4.4%
(up 61%)
Natural Gas jumped 8.7%
(up 38%).
Copper rallied 3.0%
(up 22%).
Wheat dropped 3.8%
(unchanged).
Corn sank 8.3%
(up 7%).
Bitcoin lost $3,180,
or 8.9%, this week
to $32,364
(up 11.3%).
DOUG NOLAND COMMENTARY:
These days, debt doesn’t matter, and deficits don’t matter.
QE to the tune of $120 billion a month in the face of a booming economy and bubbling securities and housing markets is accepted as enlightened policy.
Zero rates – and near-zero returns for savers – are perfectly acceptable.
Stocks always go up.
The Fed is prepared with its liquidity backstop to rescue the marketplace in the event of any trouble.
QE is a proven commodity – no longer unconventional.
There is a monumental flaw in contemporary central banking doctrine, one not debated and seemingly not even recognized:
it is perilous for central banks to manipulate the securities markets as their chief mechanism for managing financial conditions.
Traditionally, central banks adjusted short-term funding markets to, on the margin, either encourage or discourage bank lending.
... The Fed’s focus began to shift during the prolonged Greenspan era. ...
I found it confounding at the time that such a momentous change in monetary policy doctrine evolved without as much as a debate.
The new regime proved a godsend for the leveraged speculating community.
... The Fed was essentially pegging low interest rates, nurturing asset inflation and (with the help of the GSEs) backstopping marketplace liquidity.
As one would expect, this stoked risk-taking and leveraging. ...
The upshot was a historic Bubble that burst in 2008 – providing a golden opportunity for the Fed to add QE to its expanding arsenal.
... At that point, the Fed was wedded to market intervention and manipulation to maintain the ultra-loose financial conditions necessary to hold Bubble collapse at bay.
... Dr. Bernanke was essentially telegraphing the Fed would not tolerate the consequences of weak securities markets – let alone a correction or bear market.
It’s all been fairly predictable since then: escalating speculative excess, over-leveraging, ...
... and then the Monetary Fiasco unleashed in March 2020. The Fed’s balance sheet has about doubled in 15 months ...
Now what do they do?
The Fed and global central bank community have inflated myriad historic Bubbles.
They’ve irreparably distorted market prices and function ...
(asset price) Bubbles ... will favor a segment of the population and economy.
It will spur inequality and put the Fed’s institutional credibility in jeopardy.
NEWS FROM LAST WEEK:
Coronavirus Watch:
June 25 – Wall Street Journal (Dov Lieber):
“About half of adults infected in an outbreak of the Delta variant of Covid-19 in Israel were fully inoculated with the Pfizer Inc. vaccine, prompting the government to reimpose an indoor mask requirement and other measures to contain the highly transmissible strain. Preliminary findings by Israeli health officials suggest about 90% of the new infections were caused by the Delta variant, according to Ran Balicer, who leads an expert advisory panel on Covid-19 for the government. Around half of the adults who were infected were fully vaccinated…”
June 25 – Wall Street Journal (Shan Li):
“India is warning about new versions of the highly infectious Delta variant of the coronavirus that are spreading around the country, containing a mutation that the original didn’t have. Indian officials have dubbed new versions of the variant containing the mutation Delta Plus. Delta Plus—with the mutation causing concern designated K417N—has been detected in at least 11 countries, including the U.S., U.K. and Japan, according to government health agency Public Health England.”
June 23 – Financial Times (Nikou Asgari and John Burn-Murdoch):
“The Delta variant of coronavirus that has swept across Europe is now gaining ground in the US, posing a particular threat to unvaccinated people and risking a surge in cases. The Delta strain, which was first identified in India, accounts for more than a third of new cases each day in the US…, up from 10% at the end of May.”
Market Mania Watch:
June 23 – New York Times (Erin Griffith):
“All year, amateur investors, propelled by a social media frenzy and a bit of boredom, have poured money into risky forms of investments like meme stocks, SPACs and Bitcoin. With the pandemic easing in the United States and the country reopening, many market watchers expected the investment world to return to something resembling normalcy. That hasn’t happened. Over the last month, overlapping investment manias have become even more unpredictable. Special purpose acquisition companies, known as SPACs, a trendy way for companies to go public, have dried up. Investments in digital art — another pandemic favorite — have also slumped. Bitcoin has lost nearly 30% of its value in just the last week. But so-called meme stocks have soared.”
June 23 – CNBC (Megan Leonhardt):
“The wealthiest 1% of Americans controlled about $41.52 trillion in the first quarter, according to Federal Reserve data... Yet the bottom 50% of Americans only controlled about $2.62 trillion collectively" ... which is 6.3% of the top 1%.
Inflation Watch:
June 25 – CNBC (Jeff Cox):
“A key inflation indicator that the Federal Reserve uses to set policy rose 3.4% in May, the fastest increase since the early 1990s, the Commerce Department reported… Though the gain was the biggest since April 1992, it met the Dow Jones estimate and markets reacted little to the news… The core personal consumption expenditures price index increase reflects the rapid pace of economic expansion and resulting price pressures, and amplified how far the nation has come since the Covid pandemic-induced shutdown of 2020.”
U.S. Bubble Watch:
June 20 – Wall Street Journal (Bob Kerrey and John C. Danforth):
“President Clinton asked us in 1994 to chair the Bipartisan Commission on Entitlement and Tax Reform to study the future of Social Security, Medicare and Medicaid and recommend measures to assure their long-term viability. Reforms of these popular programs were so politically fraught that finding consensus on solutions proved impossible… But there was near unanimity within the commission on the scale of the problem. Entitlements were on an unsustainable trajectory. They consumed an ever-growing share of federal spending. In 1994 the budget deficit was $203 billion (2.8% of gross domestic product), and the national debt was $3.4 trillion (47.8% of GDP). The crisis we identified 27 years ago seems negligible given where the debt stands today. The nonpartisan Congressional Budget Office estimated in January 2020 that annual budget deficits will exceed $1 trillion, and that the debt—then hovering at $17.2 trillion—would more than double as a share of the economy over the next 30 years. These numbers don’t take into account $65 trillion of unfunded liabilities for Social Security and Medicare. The CBO now projects that, under current law, the deficit will reach $1.9 trillion in 10 years and the debt will skyrocket from 102% to 202% of GDP within 30 years.”
June 22 – CNBC (Diana Olick):
“Sales of existing homes in May dropped for the fourth straight month due to a very low supply of homes on the market. Existing home sales fell 0.9% last month from April to a seasonally adjusted annualized rate of 5.8 million units… Just 1.23 million homes were for sale at the end of May, a 20.6% drop from a year earlier. At the current sales pace, that represents a 2½-month supply. Very low inventory amid high demand continues to fuel extraordinary price increases. The median price of an existing home in May was $350,300, a 23.6% increase compared with May 2020. That is not only the highest median price ever recorded but also the strongest annual appreciation ever.”
June 23 – Reuters (Lucia Mutikani):
“Sales of new U.S. single-family homes fell to a one-year low in May as the median price of newly built houses soared amid expensive raw materials, including framing lumber… New home sales dropped 5.9% to a seasonally adjusted annual rate of 769,000 units last month, the lowest level since May 2020. April's sales pace was revised down to 817,000 units from the previously reported 863,000 units. The median new house price jumped 18.1% from a year earlier to $374,400 in May.”
June 23 – Wall Street Journal (Justin Lahart):
“Home builders can’t keep up with housing demand. Much of that is a matter of circumstance, but some of it could be a matter of design… There were 769,000 new single-family homes sold in May, at a seasonally adjusted, annual rate. That marked the fourth month in a row that the pace of sales slipped… Worse, April sales were revised down to 817,000 from 863,000. It isn’t that people aren’t looking to buy. To the contrary, the combination of pent-up demand, low interest rates, and remote work options, among other factors, has spurred a frenzy for homes. That is getting reflected in a surge in prices: The median sales price for a new home was $374,400 in May, up from April’s $365,300… Prices for previously owned homes topped $350,000 for the first time last month. The average existing home spent only 17 days on the market.”
June 23 – Reuters (Lucia Mutikani):
“A measure of U.S. factory activity climbed to a record high in June, but manufacturers are still struggling to secure raw materials and qualified workers, substantially raising prices for both businesses and consumers. Data firm IHS Markit said… its flash U.S. manufacturing PMI rose to a reading of 62.6 this month. That was the highest since the survey was expanded to cover all manufacturing industries in October 2009… The survey's measure of prices paid by manufacturers rose to the highest level since the series started. It said ‘firms raised their selling prices at a quicker rate in an effort to pass on these higher costs.’”
Fixed-Income Bubble Watch:
June 25 – Bloomberg (Lisa Lee):
“Wall Street is packaging leveraged loans into bonds at a record pace, stretching bankers, lawyers and debt graders to the limit while showing no signs of slowing. Money managers that bundle and sell collateralized loan obligations are finding they have to make reservations with bond-rating firms months in advance to get a deal graded. Lawyers say they’re pulling all-nighters to keep up with the flood of documents needed to offer the securities to investors. And firms that arrange or buy the deals are trying to bolster their thinly-stretched staffs, creating a bidding war for talent amid an already limited pool of specialists. Fund managers have sold more than $200 billion of U.S. CLOs this year, including refinancings and resets, a breakneck pace that’s catapulting the market toward $1 trillion globally. It could get even more frenetic soon. Private equity firms are inking bigger and bigger buyout deals…”
China Watch:
June 21 – Bloomberg:
“China summoned officials from its biggest banks to a meeting to reiterate a ban on cryptocurrency services. Representatives from Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and payment service provider Alipay were reminded of rules that prohibit Chinese banks from engaging in crypto-related transactions… The latest development is a sign that China will do whatever it takes to close any loopholes left in crypto trading. In May, China’s State Council -- the country’s cabinet -- called for a renewed crackdown on Bitcoin mining and trading activities.”
Japan Watch:
June 24 – Bloomberg (Isabel Reynolds and Emi Nobuhiro):
“Japanese Defense Minister Nobuo Kishi said the security of Taiwan was directly linked with that of Japan, as tensions around the island build up and its defenses are increasingly overshadowed by China’s military might. The comments from a cabinet minister known for his close ties to Taipei came a week after China sent 28 warplanes near Taiwan… ‘The peace and stability of Taiwan are directly connected to Japan and we are closely monitoring ties between China and Taiwan, as well as Chinese military activity,’ Kishi said… ‘As China strengthens its military, its balance with Taiwan is tipping heavily to the Chinese side,’ he said…”
Leveraged Speculation Watch:
June 23 – Bloomberg (Greg Stohr and Joe Light):
“The U.S. Supreme Court dealt a punishing blow to Fannie Mae and Freddie Mac investors in their challenge to the government’s collection of more than $100 billion in profits from the government-sponsored enterprises. The justices threw out a core part of the investors’ lawsuit, rejecting claims that the Federal Housing Finance Agency exceeded its authority under federal law. Fannie and Freddie cratered, each plunging the most in intraday trading since 2013.”
Geopolitical Watch:
June 25 – Financial Times (Helen Warrell in London and Michael Peel):
“NATO’s most senior military officer has highlighted the ‘shocking’ speed of China’s military modernisation and warned of its growing diplomatic presence overseas, as the alliance prepares to take a more assertive stance towards Beijing. The comments from air chief marshal Sir Stuart Peach highlight the broad array of security challenges posed by China as members of the alliance struggle to progress beyond a diagnosis of the threat to an agreed plan of action. ‘It is quite shocking how quickly China has built ships, how much China has modernised its air force, how much it has invested in cyber and other forms of information management, not least facial recognition,’ said Peach…”
June 24 – Reuters (Guy Faulconbridge and Katya Golubkova):
“Russia warned Britain… it would bomb British naval vessels in the Black Sea if there were any further provocative actions by the British navy off the coast of Russia-annexed Crimea. Russia summoned the British ambassador in Moscow for a formal diplomatic scolding after the warship breached what the Kremlin says are its territorial waters but which Britain and most of the world say belong to Ukraine.”
June 25 – Reuters (Gabrielle Tétrault-farber):
“Russia warned Britain and the United States on Friday against ‘tempting fate’ by sending warships to the Black Sea, and said it would defend its borders using all possible means including military force. In a statement broadcast on state television, the Defence Ministry said it was ill-advised for British and U.S. vessels to approach the coast of Crimea, a peninsula Moscow annexed from Ukraine in 2014. ‘We call on the Pentagon and the British navy, which are sending their warships into the Black Sea, not to tempt fate in vain,’ Major General Igor Konashenkov… said.”
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