Credit Bubble Bulletin
- Chronicling History's
Greatest Financial Bubble
Friday, September 24, 2021
by Doug Noland
My edited easy to read version follows:
Ye Editor
For the Week Ending September 24, 2021:
GLOBAL STOCK INDEXES:
As gold bullion slipped $4,
the HUI gold stock index sank 3.0%
(down 23.1%)
US BONDS:
Three-month Treasury bill rates
ended the week at 0.025%.
Two-year government yields
rose five bps to 0.27% (up 15bps y-t-d).
Five-year T-note yields
jumped nine bps to 0.95% (up 59bps).
Ten-year Treasury yields
gained nine bps to 1.45% (up 54bps).
Long bond yields
rose eight bps to 1.99% (up 34bps).
Benchmark Fannie Mae MBS yields
jumped eight bps to 1.93% (up 59bps).
Federal Reserve Credit last week
surged $86.3bn to a record $8.438 TN.
Over the past 106 weeks,
Fed Credit expanded $4.712 TN, or 126%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
added two bps to 2.88%
(down 2bps year-over-year).
Fifteen-year rates rose three bps to 2.15%
(down 25bps).
Five-year hybrid ARM rates
dropped eight bps to 2.43%
(down 47bps)
Jumbo mortgage 30-year fixed rates
up two bps to 3.05%
(up 2bps).
COMMODITIES:
Bloomberg Commodities Index rose 1.5%
(up 26.8% y-t-d).
Spot Gold slipped $4 to $1,750
(down 7.8%).
Silver recovered 0.2% to $22.42
(down 15.1%).
WTI crude oil jumped $2.01 to $73.98
(up 53%).
Gasoline added 0.7%
(up 55%)
Natural Gas gained 0.7%
(up 102%).
Copper recovered 0.9%
(up 22%).
Wheat rose 2.1%
(up 13%).
Corn was little changed
(up 9%).
Bitcoin sank $4,363, or 9.2%, this week
to $42,918 (up 48%).
COMMENTARY:
And speaking of massive monetary inflation,
let’s take a look at the Fed’s Q2 2021
Z.1 “flow of funds” report.
Non-Financial Debt (NFD)
increased a nominal $1.002 TN
during Q2 to a record $63.254 TN.
For perspective, NFD on average
gained $1.842 TN annually
for the decade 2010-2019.
While slightly below recent record highs,
Q2’s 278% ratio of NFD to GDP
compares to previous cycle peaks,
227% to end 2007 and
184% to conclude 1999.
US Treasury borrowings
surged $6.487 TN, or 36%,
over the past two years.
Agency Securities
gained another $181 billion
during the quarter
to a record $10.408 TN.
At $663 billion, one-year growth
was the strongest since 2007.
Home Mortgages
rose $238 billion during Q2
(strongest since Q3 2006)
and $687 billion for the year
(largest since 2006).
Total Debt Securities (TDS):
At 240%, TDS to GDP compares
to 201% to end 2007 and
158% to finish the 1990s.
Total (Debt & Equities) Securities:
Total Securities ended Q3 2007
at 387% of GDP
and ended 1999
at 360% of GDP)
Household Net Worth to GDP
ended Q2 at a record
$623% of GDP
This compares
to previous cycle peaks
of 491% (Q1 ’07)
and 445% (Q1 2000).
Real Estate holdings:
At 171%,
the ratio of Real Estate to GDP
remains below the cycle peak
of 190% from Q3 2006.
Household Financial Assets to GDP
ended Q2 at a record 498%,
up from cycle peaks 374%
(Q3 ‘07) and 354% (Q1 2000).
NEWS FROM LAST WEEK:
Coronavirus Watch:
September 21 – Associated Press (Carla K. Johnson):
“COVID-19 has now killed about as many Americans as the 1918-19 Spanish flu pandemic did — approximately 675,000. The U.S. population a century ago was just one-third of what it is today… But the COVID-19 crisis is by any measure a colossal tragedy in its own right, especially given the incredible advances in scientific knowledge since then and the failure to take maximum advantage of the vaccines available this time.”
September 23 – CNBC (Nate Rattner and Robert Towey):
“An average of more than 2,000 Americans are once again dying from Covid every day, a grim threshold that the country has not seen in more than six months. The seven-day average of reported U.S. Covid deaths stood at 2,031 as of Tuesday, according to… Johns Hopkins University.”
September 23 – Associated Press (Jocelyn Gecker):
“One desperate California school district is sending flyers home in students’ lunch boxes, telling parents it’s ‘now hiring.’ Elsewhere, principals are filling in as crossing guards, teachers are being offered signing bonuses and schools are moving back to online learning. Now that schools have welcomed students back to classrooms, they face a new challenge: a shortage of teachers and staff the likes of which some districts say they have never seen. Public schools have struggled for years with teacher shortages, particularly in math, science, special education and languages. But the coronavirus pandemic has exacerbated the problem. The stress of teaching in the COVID-19 era has triggered a spike in retirements and resignations.”
Market Mania Watch:
September 24 – Bloomberg (Chester Yung):
“China’s central bank continued to pump liquidity into the financial system on Friday as policy makers sought to avoid contagion stemming from China Evergrande Group spreading to domestic markets. The People’s Bank of China has injected a net 460 billion yuan ($71bn) of short-term cash into the banking system in the past five working days, including 70 billion yuan on Friday. That’s helping ensure sufficient liquidity throughout the Evergrande crisis… The cost of borrowing overnight fell to 1.68%, the lowest level since late July, down from 2.28% last week.”
September 24 – Bloomberg:
“The Chinese central bank says all cryptocurrency-related transactions are illegal, according to a Q&A statement published Friday on PBOC’s website about a joint government guidelines on cracking down on cryptocurrency trading and speculation risks. Online crytocurrency services to Chinese clients by overseas exchanges are also illegal, according to the guidelines. Banned transactions also include conversion between fiat currency and cryptocurrency, trading of the cryptocurrency as central counterparty, providing information and pricing services, initial coin offerings…”
September 19 – Wall Street Journal (Sebastian Pellejero):
“The $3 trillion market for low-rated companies’ debt is having its best year ever… U.S. companies… have sold more than $786 billion of junk-rated bonds and loans so far in 2021, according to S&P Global Market Intelligence’s S&P. That tops the previous high for a full year in data going back to 2008.”
Inflation Watch:
September 20 – Bloomberg (Alexandre Tanzi):
“U.S. homeowners enjoying historic gains in the value of their property will likely face a hit next year through a higher tax bill. Property taxes -- up the most in 15 years in 2020… will likely see even sharper jumps this year. The median price of previously-owned, single-family homes set new highs last year, and have climbed even more in 2021, which could haunt homeowners when the bills come due and potentially force Americans to dig deeper into their savings.”
September 23 – Reuters (Stephen Nellis):
“Nearly four in five electronics manufacturers say that it has become harder to find qualified workers, compounding problems from an ongoing chip shortage and causing delays in shipping products, a trade group representing them said… IPC, which represents contract manufacturers…, chipmakers…, circuit board makers and other industry players, said about 80% of respondents in its most recent survey said they were having trouble finding workers. More than two-thirds of the companies surveyed said that their labor costs were also rising.”
U.S. Bubble Watch:
September 21 – Reuters (Lucia Mutikani):
“The U.S. current account deficit increased to a 14-year high in the second quarter as businesses boosted imports to replenish depleted inventories amid robust consumer spending. The… current account deficit, which measures the flow of goods, services and investments into and out of the country, rose 0.5% to $190.3 billion last quarter. That was the largest shortfall since the second quarter of 2007.”
September 23 – CNBC (Jeff Cox):
“First-time filings for unemployment benefits jumped last week, hitting the highest level in a month… Initial claims for the week ended Sept. 18 on a seasonally adjusted basis totaled 351,000, an increase from the previous week’s upwardly revised 335,000 and well ahead of the 320,000 Dow Jones estimate. The total was the highest since the week of Aug. 21.”
September 22 – Reuters (Lucia Mutikani):
“U.S. home sales fell in August as supply remained tight… Existing home sales dropped 2.0% to a seasonally adjusted annual rate of 5.88 million units last month. Sales fell in all four regions, with the densely populated South posting a 3.0% decline… The median existing house price increased 14.9% from a year ago to $356,700 in August. That is a deceleration from a 23.6% jump in May. There were 1.29 million previously owned homes on the market last month, down 13.4% from a year ago. At August's sales pace, it would take 2.6 months to exhaust the current inventory, down from 3.0 months a year ago.”
September 21 – Reuters (Lucia Mutikani):
“U.S. single-family homebuilding fell for a second straight month in August as builders continued to struggle with shortages of materials and labor, suggesting the housing market could remain a drag on economic growth in the third quarter. The… the number of houses authorized for construction but not yet started raced to a record high last month, a sign of reluctance by builders to take on new projects. Builders' inability to ramp up the production of single-family homes amid a massive housing shortage is driving up prices and keeping some first-time buyers from the market.”
September 20 – Associated Press (Alex Veiga):
“Even in the hottest U.S. housing market in more than a decade, new home construction has turned into a frustratingly uncertain and costly proposition for many homebuilders. Rising costs and shortages of building materials and labor are rippling across the homebuilding industry… Construction delays are common, prompting many builders to pump the brakes on the number of new homes they put up for sale. As building a new home gets more expensive, some of those costs are passed along to buyers. Across the economy, prices having spiked this year amid shortages of manufactured goods and components, from cars and computer chips to paint and building materials.”
China Watch:
September 20 – Wall Street Journal (Lingling Wei):
“Xi Jinping’s campaign against private enterprise, it is increasingly clear, is far more ambitious than meets the eye. The Chinese President is not just trying to rein in a few big tech and other companies and show who is boss in China. He is trying to roll back China’s decadeslong evolution toward Western-style capitalism and put the country on a different path entirely, a close examination of Mr. Xi’s writings and his discussions with party officials, and interviews with people involved in policy making, show. For most of the 40 years after Deng Xiaoping first unleashed economic reforms in China, Communist Party leaders gave market forces wider room to flourish. That opening helped lift hundreds of millions of people out of poverty and created trillions of dollars in wealth, but also led to rampant corruption and eroded the ideological basis for continued Communist rule. In Mr. Xi’s opinion, private capital now has been allowed to run amok, menacing the party’s legitimacy, officials familiar with his priorities say. The Wall Street Journal examination shows he is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.”
September 21 – Wall Street Journal (James Mackintosh):
“Teetering Shenzhen property conglomerate China Evergrande is the Chinese economy in miniature. Both have operated for decades on the principle that it was worth borrowing to build, in Evergrande’s case mostly housing, in China’s case not just apartments, but roads, rail, airports and other infrastructure. Evergrande’s business has run out of credit, in large part due to policy shifts by the Chinese government. Investors have watched in horror as its bonds, and those of other wobbly property developers, collapsed. China’s economic model has also run out of road, and the process of putting it on a new track is likely to bring more Evergrande-like mistakes. We now have to contend with the short-term risks of spillovers from Evergrande while assessing the longer-term effects from the shift in China’s economic model. Both could have serious implications for the rest of the world.”
September 21 – Reuters (Zhang Yan, Tony Munroe and Samuel Shen): “Lured by the promise of yields approaching 12%, gifts such as Dyson air purifiers and Gucci bags, and the guarantee of China's top-selling developer, tens of thousands of investors bought wealth management products through China Evergrande Group. Now, many fear they may never get their investments back after the cash-strapped property developer recently stopped repaying some investors and set off global alarm bells over its massive debt.”
September 20 – Bloomberg:
“Visitors to Byton Ltd.’s website are greeted with color-saturated images of shiny electric cars gliding along manicured streets. Those paying a visit to the automaker’s factory in Nanjing, eastern China may be less impressed. The plant is modern and huge, gleaming under the hot summer sun. But there’s total silence. Production has been suspended since the pandemic began and there’s no one around except for a lone security guard. It’s a similar situation across town at Bordrin Motors. Weeds dot the factory’s perimeter and there’s a court notice pasted to the main gate announcing the electric carmaker’s bankruptcy. Bordrin and Byton represent the flip side of China’s EV success. While home-grown stars like Nio Inc. and Xpeng Inc. have gone on to raise billions of dollars and are now selling cars in numbers that rival Tesla Inc., scores more have fallen by the wayside, unable to raise the crazy amounts of capital needed to make automobiles at scale.”
September 21 – Financial Times (James Kynge and Sun Yu):
“A dramatic video filmed in the southwestern city of Kunming in August hints at the scale of China’s property bubble. Onlookers can be heard screaming in awe as 15 high-rise apartment blocks are demolished by 85,000 controlled explosions in less than a minute. The unfinished buildings, which formed a complex called Sunshine City II, had stood empty since 2013 after one developer ran out of money and another found defects in the construction work. ‘This urban scar that stood for nearly 10 years has at last taken a key step toward restoration,’ said an article in the official Kunming Daily… Such ‘urban scars’ are common all over China… Evergrande, for all of the high drama of its meltdown, is merely the symptom of a much bigger problem. China’s vast real estate sector, which contributes 29% of the country’s gross domestic product, is so overbuilt that it threatens to relinquish its longstanding role as a prime driver of Chinese economic growth and, instead, become a drag on it.”
September 22 – Bloomberg (Jasmine Ng):
“China once again warned of the impact of skyrocketing energy prices on fertilizer supplies and signaled concern that food security could be affected. The National Development and Reform Commission said fertilizers are important for agricultural production and maintaining food security, and urged authorities to ensure stable prices and prioritize the supply of raw materials and energy to chemical fertilizer companies…”
September 21 – Financial Times (Harriet Agnew):
“Evergrande’s crisis could be ‘far worse’ for investors in China than a ‘Lehman-type situation’ because it points to the end of the property-driven growth model in the world’s second-largest economy, said short-seller Jim Chanos. ‘There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest,’ Chanos told the Financial Times… ‘But all the developers look like this. The whole Chinese property market is on stilts,” said the founder of… hedge fund Kynikos Associates…”
Global Bubble Watch:
September 21 – Bloomberg (Ari Altstedter):
“Canadian Prime Minister Justin Trudeau won a historic third term with the promise of higher taxes, bigger deficits and more government spending -- a direction that brings angst to the country’s fiscally conservative business leaders. ‘If you believe that big government is a good thing then you’re dancing in the streets right now,’ said David Rosenberg, an economist who runs his own research firm after years with major investment banks and money managers… ‘If you have a semblance of free market capitalism then you’ve been put into the penalty box.’”
September 23 – CNBC (Michael Wayland):
“With no end in sight, the semiconductor chip shortage is now expected to cost the global automotive industry $210 billion in revenue in 2021, according to consulting firm AlixPartners. The forecast is almost double its previous projection of $110 billion in May. The… firm released an initial forecast of $60.6 billion in late January… ‘Of course, everyone had hoped that the chip crisis would have abated more by now, but unfortunate events such as the COVID-19 lockdowns in Malaysia and continued problems elsewhere have exacerbated things,’ said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners…”
Emerging Markets Watch:
September 23 – Bloomberg (Maria Eloisa Capurro):
“Brazil’s central bank pledged to deliver a third consecutive interest-rate hike of 100 bps next month, saying such a pace of monetary tightening is convenient to bring inflation back to target. The bank on Wednesday lifted the Selic to 6.25% from 5.25%... Board members said that an even more restrictive monetary policy is needed to control inflation that’s nearing 10% amid pressures from services and goods, including food and fuels.”
Environmental Watch:
Natural gas news from last week:
https://elonionbloggle.blogspot.com/2021/09/natural-gas-news-from-last-week.html
September 17 – Reuters (Fred Greaves):
“Fire crews in California have resorted to wrapping the bases of some giant sequoias in fire-resistant coverings in a desperate effort to save the towering specimens, including the General Sherman, the world’s largest tree, the National Park Service said…”
September 21 – Reuters (Valerie Volcovici, David Brunnstrom and Michelle Nichols):
“Chinese leader Xi Jinping said… that China would not build new coal-fired power projects abroad, using his address at the United Nations General Assembly to add to pledges to deal with climate change. Xi provided no details, but depending on how the policy is implemented, the move could significantly limit the financing of coal plants in the developing world. China has been under heavy diplomatic pressure to put an end to its coal financing overseas…”
Geopolitical Watch:
September 23 – Reuters (Ben Blanchard):
“Taiwan’s air force scrambled again on Thursday to warn off 19 Chinese aircraft that entered its air defence zone, Taiwan's defence ministry said, the latest uptick in tensions across the Taiwan Strait. The Chinese aircraft included 12 J-16 fighters and two nuclear-capable H-6 bombers…”
September 23 – Reuters (Anton Kolodyazhnyy):
“Russia's navy practised firing at targets in the Black Sea off the coast of annexed Crimea using its Bastion coastal missile defence system, Russia's Defence Ministry said… as Ukraine held joint military drills with the United States. The exercises in Ukraine involving U.S. and other NATO troops are set to run until Oct. 1. They follow huge war games staged by neighbouring Russia and Belarus earlier this month that alarmed the West.”
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