Credit Bubble Bulletin
- Chronicling History's
Greatest Financial Bubble
Saturday, August 21, 2021
Weekly Commentary:
by Doug Noland
My edited and much easier to read version follows.
Ye Editor
For the Week Ending
August 20, 2020:
GLOBAL STOCK INDEXES:
S&P500 declined 0.6% (up 18.3% y-t-d)
Dow Industrials fell 1.1% (up 14.7%)
Utilities jumped 2.0% (up 11.2%)
Banks sank 3.6% (up 27.8%)
Broker/Dealers lost 3.3% (up 24.6%)
Transports dropped 2.5% (up 16.4%)
S&P 400 Midcaps fell 2.0% (up 16.0%)
Small cap Russell 2000 dropped 2.5% (up 9.8%)
Nasdaq100 slipped 0.3% (up 17.1%)
Semiconductors slumped 2.4% (up 16.5%)
Biotechs declined 0.6% (up 0.6%)
While gold bullion gained $1,
the HUI gold index sank 5.9%
(down 19.9%)
U.K.'s FTSE slumped 1.8% (up 9.7% y-t-d).
Japan's Nikkei dropped 3.4% (down 1.6% y-t-d).
France's CAC40 sank 3.9% (up 19.4%)
German DAX lost 1.1% (up 15.2%)
Spain's IBEX 35 declined 0.9% (up 10.4%)
Italy's FTSE MIB dropped 2.8% (up 16.6%)
Brazil's Bovespa index fell 2.6% (down 0.8%)
Mexico's Bolsa was little changed (up 16.7%).
South Korea's Kospi sank 3.5% (up 6.5%).
India's Sensex slipped 0.2% (up 15.9%).
China's Shanghai fell 2.5% (down 1.3%)
Russia's MICEX declined 1.0% (up 16.5%).
US BONDS:
Three-month Treasury bill rates
ended the week at 0.0425%.
Two-year government yields
added two bps to 0.23%
(up 10bps y-t-d).
Five-year T-note yields
increased a basis point to 0.78%
(up 42bps).
Ten-year Treasury yields
declined two bps to 1.23%
(up 34bps).
Long bond yields
dropped six bps to 1.87%
(up 23bps).
Benchmark Fannie Mae MBS yields
added one basis point to 1.79%
(up 44bps).
Federal Reserve Credit last week
expanded $93.2bn to a record $8.298 TN.
Over the past 101 weeks,
Fed Credit expanded $4.572 TN,
or 123%.
US MORTGAGES:
Freddie Mac 30-year
fixed mortgage rates bps to 2.8%
Fifteen-year rates bps to 2.1%
(down 3bps y-o-y).
Five-year hybrid ARM rates bps to 2.4%
(down 4bps).
Jumbo mortgage 30-year fixed rates bps to 3.0%
(down 1bps).
COMMODITIES:
Industrial metals:
Lead fell 3.6%,
Nickel 6.1%,
Tin 8.7%, and
Zinc 3.5%.
Palladium fell 14.3%.
Iron Ore 6.3%
(down 38% from May high
to a 2021 low)
Steel Rebar fell 4.5%.
Wheat dropped 5.9%,
Corn 6.3%,
Soybeans 9.2%,
Rubber 4.7%,
Coffee 2.5% and
Sugar 1.9%.
The Bloomberg Commodities Index
dropped 4.2% (up 16.8% y-t-d).
Spot Gold was little changed at $1,781
(down 6.2%).
Silver fell 3.0% to $23.03 (down 12.8%).
WTI crude sank $6.30 to $62.14 (up 28%).
Gasoline lost 10.6% (up 44%)
Natural Gas slipped 0.3% (up 52%).
Copper dropped 5.9% (up 17%).
Wheat fell 5.9% (up 14%).
Corn sank 6.3% (up 11%).
Bitcoin gained $1,645 this week
to $49,248 (up 69%).
CHINA:
It’s a challenge to place the historic Chinese Bubble into proper context.
Chinese Bank Assets have inflated more than 10-fold from 2004’s $4.5 TN to June 2021’s $52 TN.
China ended Q1 with a debt-to-GDP ratio of 329% (IIF data), having doubled since the 2008 crisis.
China has never experienced such spectacular wealth.
... Beijing has accumulated a $3.34 TN international reserves war chest, bolstered by years of U.S. trade deficits and global “hot money” flows.
... China’s ascendancy on the world stage mirrors the trajectory of its Credit expansion.
The “Nine Dash Line” and militarization of the South China Sea.
The Belt and Road initiative.
Their uncompromising approach to U.S. trade negotiations.
The Hong Kong crackdown.
Playing hardball with Australia and others.
Military drills off the coast of Taiwan.
Negotiations with the Taliban.
Partnered with Russia, China is building a global faction to rival the U.S.-led western alliance.
... President Xi and Chinese leadership have grown Weary of Their Experiment in Capitalism.
It served its purpose, but has turned increasingly problematic. ...
“Having spent four decades creating one of the most unequal societies on Earth, ...
Beijing today seeks to redistribute wealth.
... “some 600m Chinese live off a monthly income of about Rmb1,000 ($154).”
Beijing ... will now insist on the communist party having a hand in everything of significant importance.
And in no way are they willing to now tolerate market forces dictating the nature of the cycle’s downside.
... This week offered important confirmation of the faltering China Bubble thesis.
The risk versus reward calculus for speculative endeavors has been momentously altered, albeit for stocks, corporate Credit and real estate.
NEWS FROM LAST WEEK:
Many items have been deleted,
but those that remain are not edited.
Coronavirus Watch:
August 16 – CNBC
(Rich Mendez,
Robert Towey and
Nate Rattner):
“Five states broke records for the average number of daily new Covid cases over the weekend as the delta variant strains hospital systems across the U.S. and forces many states to reinstate public health restrictions. Florida, Louisiana, Hawaii, Oregon and Mississippi all reached new peaks in their seven-day average of new cases per day as of Sunday… On a per capita basis, Louisiana, Mississippi and Florida are suffering from the three worst outbreaks in the country.”
Market Mania Watch:
August 19
– Bloomberg
(Suzanne Woolley):
“The ranks of 401(k) and IRA millionaires are exploding. The number of 401(k) accounts with balances of at least $1 million at Fidelity Investments grew 84% year over year to 412,000, while the number of seven-figure IRAs jumped more than 64% to 341,600, Fidelity said. Together, the number of accounts with $1 million or more grew 74.5% — though it isn’t clear how many individuals that represents, because people can have multiple accounts.”
August 14
– CNBC
(Robert Frank):
“A McLaren F1 was auctioned at Pebble Beach on Friday night for $20.5 million, showing the continued strength of the classic car market. Gooding & Co. auctioned off the rare McLaren F1 to a packed and excited crowd, blowing past its estimate of at least $15 million. The F1, one of the most prized collector cars for its rarity and place in auto history, became the most expensive car auctioned this year and the most expensive McLaren F1 ever sold.”
Market Instability Watch:
August 14
– Bloomberg
(Jan-Patrick Barnert and
Michael Msika):
“It’s been two decades since Wall Street analysts were this upbeat. About 56% of all recommendations on S&P 500 firms are listed as buys, the most since 2002. It’s one more data point that shows the extent of the euphoria sweeping markets… While analysts are historically a bullish bunch, they’re turning even more optimistic in the face of relentless stock-market gains and corporate earnings that topped even the highest expectations. For all the concerns about the delta variant, China’s regulatory crackdown or waning Federal Reserve stimulus, it hasn’t made much of a dent yet on stock prices. ‘It’s not just financial conditions and low rates fueling the appetite for risk assets -- tremendous fundamental improvement is forecast into 2022,’ Todd Jablonski, chief investment officer at Principal Global Asset Allocation, said…”
August 14
– Bloomberg
(Simon Kennedy and
Benjamin Purvis):
“Former U.S. Treasury Secretary Lawrence Summers said the Federal Reserve’s massive bond-buying program is resulting in a ‘bizarre’ situation in which the government’s funding structure is overly focused on the short-term… ‘In effect, the government now has a floating rate short-term liability outstanding rather than a long-term fixed interest rate liability,’ Summers told Bloomberg… ‘At a moment of super uncertainty, at a moment when many people think rates are remarkably low, a decision to fund more short seems bizarre.’”
Inflation Watch:
August 17
– Bloomberg
(Tope Alake, Fabiana Batista,
Pratik Parija, and Leslie Patton):
“Whether at supermarkets, corner stores, or open-air markets, prices for food have been surging in much of the world, forcing families to make tough decisions about their diets. Meat is often the first to go, ceding space to less expensive proteins such as dairy, eggs, or beans. In some households, a glass of milk has become a luxury reserved only for children; fresh fruit, once deemed a necessity, is now a treat. Food prices in July were up 31% from the same month last year, according to… the United Nations’ Food and Agriculture Organization.”
August 12
– Bloomberg
(Maria Heeter):
“U.S. home prices rose the most on record in the second quarter as buyers battled for a scarcity of listings. The median price of an existing single-family home jumped 23% from a year earlier to an all-time high of $357,900, the National Association of Realtors said… About 94% of 183 metropolitan areas measured had double-digit gains, up from 89% in the first quarter… Buyers are having a hard time finding properties they can afford: Sales of previously owned homes in the U.S. fell for a fourth straight month in May.”
Biden Administration Watch:
August 16
– Associated Press
(Ashraf Khalil and Josh Boak):
“President Joe Biden’s administration has approved a significant and permanent increase in the levels of food aid available to needy families — the largest single increase in the program’s history. Starting in October, average benefits for food stamps… will rise more than 25% above pre-pandemic levels. The increased assistance will be available indefinitely to all 42 million SNAP beneficiaries. The increase coincides with the end of a 15% boost in SNAP benefits that was ordered as a pandemic protection measure.”
U.S. Bubble Watch:
August 13
– Bloomberg
(Christopher Maloney):
“The surge in home prices is forcing buyers to take on larger-sized mortgages, increasing prepayment risk for investors. The National Association of Realtors… reported that the median price of an existing single-family home rose 23% from a year ago to a record $357,900 during the second quarter. Historically low mortgage rates, sparse housing inventory and a flight from urban areas during the pandemic have all been factors in this rise.”
August 18
– Associated Press
(Martin Crutsinger):
“Home construction fell a sharp 7% in July as homebuilders struggled to cope with a variety of headwinds. The July decline put home construction at a seasonally adjusted annual rate of 1.53 million units… It was the slowest pace since April but was 2.5% higher than a year ago. Applications for building permits… rose 2.6% in July from the June level to an annual rate of 1.64 million units… Construction starts for single-family homes fell 4.9% in July to an annual rate of 1.11 million while construction of apartments of five units or more dropped 13.6% to a rate of 412,000 units.”
August 18
– CNBC
(Robert Frank):
“More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report. The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government. According to the Urban-Brookings Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million — or 44% of all taxpayers — in 2019.”
Fixed-Income Bubble Watch:
August 17
– Financial Times
(Joe Rennison):
“A boom in US corporate borrowing has laid the foundation for a wave of defaults at financially risky companies, according to leading debt rating agencies… Sales of low-rated, ‘speculative-grade’ debt have already reached $650bn this year, according to S&P Global Ratings, putting them on track to surpass all-time borrowing records with more than four months left to go in 2021. Companies of all types had already borrowed record amounts of cash in 2020 in an effort to ride out the coronavirus downturn. Senior analysts at both Moody’s and S&P said furious demand from investors on the hunt for higher-yielding assets at a time of low interest rates had given less creditworthy companies access to financing with loose lending terms.”
China Watch:
August 18
– Bloomberg
(Sofia Horta e Costa
and Ye Xie):
“China Huarong Asset Management Co. ultimately proved too big to fail, but its protracted bailout process shows Beijing’s determination to punish creditors who ignore risks in heavily indebted companies. The almost five-month saga triggered some of the most extreme swings ever for an investment-grade Chinese bond issuer, changing the way even seasoned money managers evaluate the nation’s $12 trillion credit market. While some Huarong bonds rallied to 97 cents on the dollar after the company unveiled a recapitalization by state-backed investors late Wednesday, the rescue came too late for many bondholders who sold at heavy losses earlier this year.”
August 16
– Bloomberg:
“Home-price growth in China moderated for a second month in July after authorities took further steps to rein in the market. New home prices in 70 cities, excluding state-subsidized housing, rose 0.3% last month from June, when then gained 0.41%... It was the slowest growth in six months. The residential market has begun to cool after the government increased efforts to curb surging prices. Vice Premier Han Zheng last month vowed that the property sector shouldn’t be used as a short-term boost for the economy, becoming the highest-ranking official to address the real estate issue in recent months.”
August 16
– Reuters
(Kevin Yao and
Gabriel Crossley):
“China's factory output and retail sales growth slowed sharply and missed expectations in July, as new COVID-19 outbreaks and floods disrupted business operations, adding to signs the economic recovery is losing momentum. Industrial production in the world's second largest economy increased 6.4% year-on-year in July… Analysts had expected output to rise 7.8% after growing 8.3% in June. Retail sales increased 8.5% in July from a year ago, far lower than the forecast 11.5% rise and June's 12.1% uptick.”
Global Bubble Watch:
August 19
– Bloomberg
(Craig Trudell and
River Davis):
“Toyota Motor Corp.’s efforts to stockpile enough chips and other key components to ride out supply disruptions only protected the company so long before it too succumbed to the shortages eviscerating automakers. The manufacturer will suspend output at 14 plants across Japan for various lengths of time through next month. The impact of these cuts will be harshest in September, with Toyota slashing its production plan by 40%, though risks will carry forward beyond next month. It’s the latest sign even the best supply-chain planning is proving no match for a pandemic that virtually ground the auto industry to a halt a year ago and has since plagued efforts to restore production.”
Japan Watch:
August 15
– Reuters
(Leika Kihara and
Tetsushi Kajimoto):
“Japan’s economy rebounded more than expected in the second quarter after slumping in the first three months of this year… But many analysts expect growth to remain modest in the current quarter as state of emergency curbs reimposed to combat a spike in infections weigh on household spending. The world's third-largest economy grew an annualised 1.3% in April-June after a revised 3.7% slump in the first quarter…”
Environmental Watch:
https://www.blogger.com/blog/post/edit/594956186701584884/6339729487563863972
Geopolitical Watch:
August 17 –
Wall Street Journal
(Michael R. Gordon and
James Marson):
“The ascent of the Taliban has redrawn the diplomatic map for the U.S. and its rivals as they compete to shape the future of Afghanistan. China and Russia already are moving to build ties with the Taliban and have hosted Taliban officials even before the U.S. military completed its troop withdrawal. In recognition of Beijing and Moscow’s expanding influence in Kabul, Secretary of State Antony Blinken called the Chinese and Russian foreign ministers… A statement from the Russian foreign ministry said that the diplomats agreed to continue consultations, which would include China and Pakistan, on how to encourage ‘an inclusive inter-Afghan dialogue in the new conditions.’”
August 17
– Bloomberg:
“When the Taliban took over Afghanistan the first time in 1996, China refused to recognize their rule and left its embassy shut for years. This time around, Beijing has been among the first to embrace the Islamist militants next door. China’s remarkable shift was on display little more than two weeks ago, when Foreign Minister Wang Yi welcomed a Taliban delegation to the northern port of Tianjin as the group made gains against the administration of President Ashraf Ghani, who fled the country on Sunday. Wang’s endorsement of the Taliban’s ‘important role’ in governing Afghanistan provided a crucial boost of legitimacy for an organization that has long been a global pariah due to its support of terrorism and the repression of women.”
August 18
– New York Times
(Eshe Nelson and
Alan Rappeport):
“Despite the chaotic end to its presence in Afghanistan, the United States still has control over billions of dollars belonging to the Afghan central bank, money that Washington is making sure remains out of the reach of the Taliban. About $7 billion of the central bank’s $9 billion in foreign reserves are held by the Federal Reserve Bank of New York…, and the Biden administration has already moved to block access to that money. The Taliban’s access to the other money could also be restricted by the long reach of American sanctions and influence. The central bank has $1.3 billion in international accounts, some of it euros and British pounds in European banks, the former official, Ajmal Ahmady, said…”
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