Credit Bubble Bulletin
Weekly Commentary
by Doug Noland
My Edited Easy to Read Version Follows:
Ye Editor
For the Week Ending January 21, 2022:
GLOBAL STOCKS:
S&P500 fell 5.7% (down 7.7% y-t-d)
Dow 30 Industrials fell 4.6% (down 5.7%)
Utilities slipped 0.6% (down 4.1%)
Banks down 10.0% (up 0.1%)
Transports lost 4.1% (down 7.5%)
S&P 400 Midcaps sank 6.8% (down 8.7%)
Semiconductors down 11.9% (down 13.0%)
Biotechs lost 6.6% (down 11.0%).
With gold bullion rising $17,
the HUI gold stock index jumped 1.8%
(down 1.0%)
U.K.'s FTSE declined 0.6% (up 1.5% y-o-y).
Japan's Nikkei dropped 2.1% (down 4.4% y-t-d).
France's CAC40 fell 1.0% (down 1.2%)
German DAX lost 1.8% (down 1.8%).
Spain's IBEX 35 declined 1.3% (down 0.2%).
Italy's FTSE MIB down 1.8% (down 1.0%)
Brazil's Bovespa rose 1.9% (up 3.9%)
Mexico's Bolsa sank 4.0% (down 3.2%).
South Korea's Kospi down 3.0% (down 4.8%).
Russia's MICEX sank 4.4% (down 9.2%).
US BONDS:
US MORTGAGES:
COMMODITIES:
Natural Gas dropped 6.2% (up 7%).
Copper rose 2.3% (up 1%).
Corn jumped 3.4% (up 4%).
Bitcoin collapsed $6,660, or 15.5%,
this week to $36,435 (down 21%)
Semiconductor stocks fell 11.9%.
The 1990s was a rather petite Bubble
in comparison to today’s gross obesity.
Ten year US Treasury yields were higher
– trading Wednesday to 1.90%,
the high since year-end 2019.
While appearing miraculous on the upside,
I have long argued contemporary finance
doesn’t function well in reverse.
So long as Credit and speculative leverage
are expanding, markets appear highly liquid,
financial conditions will remain loose,
and asset price inflation will maintain
self-reinforcing momentum.
After surpassing 6.0% in 1990,
y-o-y inflation was as low as 1.1% by 2002.
And after running negative in 2009,
CPI bounced back to trade as high
as 3.9% in 2011. But between 2012 and 2021,
CPI spent much of the time below 2%.
The Fed responded with momentous
monetary stimulus in March 2020
- with zero fear of inflation.
But now inflation has surged
to a 40-year high 7.0%.
The Fed is still at least a couple months from its first little baby step rate increase – yet speculative Bubbles are already coming unglued. I don’t see the Fed’s tightening cycle getting far.
Meanwhile, persistently elevated inflation creates a momentous challenge for both Fed policy making ...
NEWS FROM LAST WEEK:
January 20 – Bloomberg:
“Mexico registered a record number of new Covid-19 cases Wednesday -- more than double the amount seen in previous waves -- as the omicron variant extends its spread through the country. The country recorded 60,552 new coronavirus cases, pushing total cases up to 4,495,310…”
January 19 – Bloomberg:
“Brazil reported the biggest one-day increase in coronavirus cases since the start of the pandemic…, bringing the total tally to 23,416,748. Govt confirmed 204,854 new infections in the last 24 hours, beating a previous record of 150,106 on Sept. 18…”
January 16 – New York Times:
“Companies are bracing for another round of potentially debilitating supply chain disruptions as China, home to about a third of global manufacturing, imposes sweeping lockdowns in an attempt to keep the Omicron variant at bay. ... At least 20 million people, or about 1.5% of China’s population, are in lockdown…The country’s zero-tolerance policy has manufacturers — already on edge from spending the past two years dealing with crippling supply chain woes — worried about another round of shutdowns at Chinese factories and ports.”
January 20 – Bloomberg:
“Russia’s central bank proposed a blanket ban on the use and creation of all cryptocurrencies within one of the world’s biggest crypto-mining nations, citing the dangers posed to the country’s financial system and environment. Crypto bears the hallmarks of a pyramid scheme and undermines the sovereignty of monetary policy, the central bank said... It also took aim at mining, which it said hurts the country’s green agenda, jeopardizes Russia’s energy supply and amplifies the negative effects of the spread of cryptocurrencies, creating incentives for circumventing attempts at regulation.”
January 20 – Bloomberg:
“The safest corporate bonds in the world are having their worst start to the year in just over two decades as investors brace for tighter monetary policies. A global index of investment-grade company debt has posted total return losses of 2.2% since the start of the year, the most since data going back to 2000. The gauge is faring worse than all others in the category of credit securities outside of emerging markets.”
January 19 – Reuters:
“Brent crude futures, which soared 50% in 2021, are up a further 14% already in 2022 at seven-year highs of $89 a barrel. With production capacity tight, inventories low and geopolitics racking several producing regions, oil is hurtling towards $100, a level Goldman Sachs predicts will be breached by mid-year.”
January 21 – Wall Street Journal:
“From South America’s avocado, corn and coffee farms to Southeast Asia’s plantations of coconuts and oil palms, high fertilizer prices are weighing on farmers across the developing world, making it much costlier to cultivate and forcing many to cut back on production. That means grocery bills could go up even more in 2022, following a year in which global food prices rose to decade highs. An uptick would exacerbate hunger—already acute in some parts of the world because of pandemic-linked job losses—and thwart efforts by politicians and central bankers to subdue inflation.”
January 20 – Yahoo Finance:
“Health care costs have continued to increase over the past decade despite the landmark passage of ObamaCare in March 2010. A recent report from the Commonwealth Fund found that health insurance premiums and deductibles for Americans with employer-sponsored coverage accounted for 11.6% of median income in 2020, a whopping 9.1% increase from 2010.”
January 17 – Wall Street Journal:
The U.S. Agriculture Department expects Florida to produce 44.5 million 90-pound boxes of oranges this year, trimming its already low expectations and predicting that the crop will wind up smaller than the one that was ruined by 2017’s Hurricane Irma. If the forecast is accurate, it will be the smallest harvest since 1945. The big culprit this time around… is citrus greening, an incurable disease that thins the crowns of trees and saps their vitality.”
January 19 – Reuters:
“Inflation in Britain rose faster than expected to its highest in nearly 30 years in December, intensifying a squeeze on living standards and putting pressure on the Bank of England to raise interest rates again. The annual rate of consumer price inflation increased to 5.4% from November's 5.1%, the highest since March 1992…”
January 20 – CNBC:
“Jobless claims took an unexpected turn higher last week in a potential sign that the wintertime omicron surge was hitting the employment picture. Initial filings for the week ended Jan. 15 totaled 286,000, well above the Dow Jones estimate of 225,000 and a substantial gain from the previous week’s 231,000.”
January 18 – CNBC:
“The average rate on the popular 30-year fixed mortgage hit 3.7% Tuesday morning, according to Mortgage News Daily. That is the highest since early April 2020 and now 83 bps higher than the same time one year ago.”
January 19 – Reuters:
“U.S. homebuilding rose to a nine-month high in December amid a surge in multi-family housing projects, but soaring prices for materials after the government nearly doubled duties on imported Canadian softwood lumber could hamper activity later this year. The housing construction backlog surged to a record high last month, underscoring the challenges builders are facing from supply strains, including labor shortages… Housing starts rose 1.4% to a seasonally adjusted annual rate of 1.702 million units last month, the highest level since March.”
January 18 – Bloomberg:
“The time it would take to sell all available homes in some of the hottest U.S. housing markets continued to shrink in December as active listings fell. Seattle had the fewest months of supply, with San Jose and Denver close behind. Active listings in those markets fell by more than 30% in December compared to the previous month, according to… Redfin Corp. It would take less than a week to sell all the inventory in Seattle, and about 9 days for San Jose and Denver at current prices.”
January 19 – Yahoo Finance:
“AT&T and Verizon agreed to delay the rollout of 5G frequency near some airports and aviation infrastructure, but a permanent fix still eludes all of the major players – including the government and airlines worried about the impact on flight technology.”
January 7 – Bloomberg:
“China’s property sector shrank at a faster pace in the final three months of last year as the country’s housing slump continues to take its toll on the economy. Output in the real-estate sector shrank 2.9% in the fourth quarter after a 1.6% contraction in the previous three months… That was the first consecutive quarterly decline since 2008. The construction sector also saw its output decline by 2.1% during the same period. Those two sectors combined were 13.8% of national output in 2021…, lower than the 14.5% in 2020.”
January 16 – Bloomberg:
“China’s central bank cut its key interest rate for the first time in almost two years to help bolster an economy that’s lost momentum because of a property slump and repeated virus outbreaks. In a stark policy divergence with other major economies, the People’s Bank of China lowered the rate at which it provides one-year loans to banks by 10 bps -- the first reduction since April 2020.”
January 19 – Bloomberg:
“China’s real estate firms face a hefty debt bill just as signs of contagion begins to spill over to the nation’s stronger, larger developers. Nearly half the $99 billion of outstanding bonds maturing in 2022 are offshore notes, according to… Bloomberg. Prohibitively high borrowing costs in the overseas debt market have effectively prevented many weaker developers from refinancing, triggering a wave of defaults that could build if stronger firms also begin struggling to roll over their borrowings. Concerns that healthier builders may also be on the hook for hidden debt triggered a dramatic selloff among some investment-grade developers this week.”
January 17 – Financial Times:
“The crisis at Evergrande, the world’s most indebted property company, reached a milestone last month when it officially defaulted on offshore bonds. But the rest of the saga could take years to unfold. The builder, a symbol of China’s heavily leveraged property sector, shook world markets when it started missing offshore bond payments in September. It took three months for Evergrande, weighed down by construction delays, litigation and its vast liabilities of more than $300bn, to formally default, by which time liquidity troubles had engulfed the sector… While last month brought some clarity over Evergrande’s default status, the developer’s fate and that of many of its peers remains uncertain… Beijing’s priority is to ensure that apartments are delivered to customers, many of whom paid for properties prior to their completion.”
January 17 – Reuters:
“The world's 10 wealthiest people more than doubled their fortunes to $1.5 trillion during the pandemic as poverty rates soared, according to a study released… ahead of a high-profile World Economic Forum (WEF) event… The 10 richest people have boosted their fortunes by $15,000 a second or $1.3 billion a day during the pandemic. They own more than the world's poorest 3.1 billion people combined. A new billionaire has been created every 26 hours since the pandemic began. More than 160 million people are estimated to have been pushed into poverty during the health crisis.”
January 15 – Bloomberg:
“Europe is gripped by one of the worst energy crunches in history, forcing politicians to step in as soaring prices threaten to leave millions of households unable to pay their bills. But with market forces signaling that the crisis will last way beyond the winter, the dilemma facing leaderships is that their stopgap measures are unlikely to be enough. The cost of electricity and gas across the continent already looks like one of the biggest challenges facing nations as they navigate their way out of the pandemic.”
January 19 – Wall Street Journal:
“Worried about wildfire exposure and frustrated by state regulations, insurers in California have been cutting back on their homeowner businesses. Now, affluent homeowners are feeling more of the pain, as two of the biggest firms offering protection for multimillion-dollar properties end coverage for some customers.”
January 19 – Reuters:
“U.S. Secretary of State Antony Blinken said… Russia could launch a new attack on Ukraine at ‘very short notice’ but Washington would pursue diplomacy as long as it could, even though it was unsure what Moscow really wanted. On a visit to Kyiv to show support for Ukraine, the top U.S. diplomat said Ukrainians should prepare for difficult days. He said Washington would keep providing defence assistance to Ukraine and renewed a promise of severe sanctions against Russia in the event of a new invasion.”
January 20 – Reuters:
“The United States is looking for ways to potentially accelerate delivery of Taiwan's next generation of new-build F-16 fighter jets, U.S. officials said, bolstering the Taiwanese air force's ability to respond to what Washington and Taipei see as increasing intimidation by China's military.”
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