Weekly Commentary
Credit Bubble Bulletin
by Doug Noland
My edited easy to read version follows
Ye Editor
The Fed’s balance sheet has inflated more than 10-fold since 2007. ... The pandemic created the necessary backdrop for the mobilization of $5.0 TN of additional Fed liquidity ($6.4TN, or 40%, M2 growth) in 120 weeks.
December CPI is forecast to exceed 7% for the first time in 40 years.
... Suddenly, the Federal Reserve has lost the aura of competence and infallibility. It’s wishful thinking on the part of the Fed, Wall Street or anyone to think that historic monetary inflation and associated market speculation can simply be tamed by a nudge higher in short-term rates and some liquidations of Fed Treasury bond holdings. inflation presents a clear and present danger. In a major problem for such highly inflated manic markets, the Fed will have to think twice before restarting the electronic printing press.
Ten-year Treasury yields jumped 25 bps in the first week of the year, to an almost two-year high 1.76%.
The U.S. household sector (from the Z.1)
ended Q3 with Total Equities exposure at
184% of GDP, dwarfing previous cycle peaks
104% from Q2 2007 and
115% back in Q1 2000.
Nasdaq Bank Index up 7.9%
Philadelphia Oil Service Sector Index surged 14.4%.
There were 850,000 new Covid cases reported today. Over 130,000 Covid sufferers are currently hospitalized, rising with a trajectory to soon surpass the previous pandemic peak. Deaths are approaching 2,000 a day Staggering numbers. Already stretched global supply chains will face greater challenges as Omicron spreads through Asia and, at some point, China. We’re living history.
For the Week Ending January 7, 2022:
S&P500 dropped 1.9% (up 22.3% y-o-y)
Dow slipped 0.3% (up 16.5%)
Utilities fell 2.0% (up 12.3%)
Banks surged 10.1% (up 36.9%)
Transports declined 1.3% (up 26.4%)
S&P 400 Midcaps lost 1.7% (up 15.6%)
Small cap Russell 2000 slumped 2.9% (up 4.2%)
Nasdaq100 sank 4.5% (up 19.0%)
Semiconductors dropped 3.8% (up 29.3%)
Biotechs fell 5.7% (down 12.7%)
With bullion dropping $33,
the HUI gold index sank 6.0% (down 19.5%)
U.K.'s FTSE gained 1.4% (up 8.9% y-o-y).
Japan's Nikkei declined 1.1% (up 1.2% y-o-y)
France's CAC40 increased 0.9% (up 26.5%)
German DAX added 0.4% (up 13.5%)
Spain's IBEX 35 increased 0.4% (up 4.1%).
Italy's FTSE MIB rose 1.0% (up 21.2%)
Brazil's Bovespa dropped 2.0% (down 17.9%)
Mexico's Bolsa little changed (up 13.9%)
South Korea's Kospi declined 0.8% (down 6.3%)
India's Sensex jumped 2.6% (up 22.5%)
China's Shanghai fell 1.7% (up 0.3%).
Turkey's Istanbul National 100 index up 9.5% (up 32.0%).
Russia's MICEX dipped 0.4% (up 9.2%).
BONDS:
Three-month Treasury bill rates ended the week at 0.09%.
Two-year government yields rose 13 bps to 0.86% (up 73bps y-o-y).
Five-year T-note yields jumped 24 bps to 1.50% (up 102bps).
Ten-year Treasury yields surged 25 bps to 1.76% (up 65bps).
Long bond yields rose 21 bps to 2.12% (up 24bps).
Benchmark Fannie Mae MBS yields up 34 bps to 2.41% (up 94bps).
Federal Reserve Credit last week declined $21.5bn to $8.720 TN. Over the past 121 weeks, Fed Credit expanded $4.994 TN, or 134%.
MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
surged 11 bps to a 19-month high 3.22% (up 57bps y-o-y).
Fifteen-year rates rose 10 bps to 2.43% (up 27bps).
Five-year hybrid ARM rates unchanged at 2.41% (down 34bps).
Jumbo mortgage 30-year fixed rates up 13 bps
to a nine-month high 3.36% (up 42bps).
COMMODITIES:
Bloomberg Commodities Index up 2.1% (up 27.2% y-o-y).
Spot fell 1.8% to $1,797 (down 2.8%).
Silver dropped 4.0% to $23.37 (down 9.2%).
WTI crude jumped $3.69 to $78.90 (up 51%).
Gasoline gained 3.2% (up 49%)
Natural Gas surged 5.0% (up 45%)
Copper declined 1.2% (up 20%).
Wheat fell 1.6% (up 19%)
Corn jumped 2.3% (up 22%).
Bitcoin sank $4,800, or 10.4%, this week
to $41,560 (up 3.8%)
January 5 – Reuters:
“Fuelled by the highly transmissible Omicron variant, Australia's daily coronavirus infections soared to a fresh peak on Thursday, overwhelming hospitals, while isolation rules caused labour shortages, putting a strain on businesses and supply chains.”
January 6 – Washington Post:
“The omicron coronavirus variant is slowing the economic recovery, making worker shortages for already-shorthanded employers more severe and leading consumers to pull back from spending on restaurants, hotels and airlines that have been battered by two years of pandemic upheaval… Omicron’s fallout, which is likely to worsen before it eases, shows that the recovery remains vulnerable to the coronavirus’s unpredictable trajectory. The growing toll of sick workers — Capital Economics says more than 5 million Americans are in quarantine — is hammering employers that already were struggling to secure enough labor.”
January 3 – Bloomberg:
“New York City ... One in three Covid tests came back positive over the last seven days, according to city data as of Dec. 31. The seven-day Covid positivity rate surpassed 45% in some areas of the Bronx, while hospitalizations have more than tripled since mid-December to 492.” About 1,300 subway operators and conductors have been out daily this week, or roughly 21%...”
January 5 – Financial Times:
“Investors poured a record $330bn into private start-ups in the US last year, nearly doubling the total from 2020 in a flurry of dealmaking that rapidly inflated company valuations. ... Private venture-backed companies in the US raised a total of $329.8bn last year compared with $166.6bn in 2020, the previous record, according to PitchBook... Investors put about four times as much money into start-ups than they did five years ago.”
January 4 – Bloomberg:
China is hoarding key commodities. By mid-2022, according to the U.S. Department of Agriculture, China will hold 69% of the world’s corn reserves, 60% of its rice and 51% of its wheat. By China’s own estimation, these reserves are at a ‘historically high level’ and are contributing to higher global food prices. For China, such stockpiles are necessary to ensure it won’t be at the mercy of major food exporters such as the U.S. But other countries, especially in the developing world, might ask why less than 20% of the world’s population is hoarding so much of its food.”
January 6 – Bloomberg:
“A record 48% of U.S. small-business owners said they raised compensation in December and nearly a third said they plan to do so in the coming months, the National Federation of Independent Business said… With almost half of small businesses reporting job openings they could not fill last month, employers are boosting pay to attract and retain workers. The share of firms that raised compensation last month was the largest in monthly data back to 1986 and up four points from November.
January 3 – Associated Press:
The average price of a used vehicle in the United States in November, according to Edmunds.com, was $29,011 — a dizzying 39% more than just 12 months earlier ... more than half of America’s households have less income than is considered necessary to buy the average-priced used vehicle.”
January 4 – Bloomberg:
“Cotton prices climbed back near 10-year highs in New York on bets that strong demand will keep supplies constrained. Arabica coffee surged on sinking Brazilian exports. Hedge funds are actively buying cotton, which means this year’s commodity index rebalancing may be positive for the market…”
January 2 – Reuters:
“U.S. President Joe Biden… told Ukraine's President Volodymyr Zelenskiy the United States and its allies will ‘respond decisively’ if Russia further invades Ukraine, the White House said… The call came days after Biden held a second conversation in a month with Russian President Vladimir Putin amid tensions on Russia's border with Ukraine, where Russia has massed some 100,000 troops."
January 7 – CNBC:
“The U.S. economy added far fewer jobs than expected in December just as the nation was grappling with a massive surge in Covid cases… Nonfarm payrolls grew by 199,000, while the unemployment rate fell to 3.9%... That compared with the Dow Jones estimate of 422,000 for the payrolls number and 4.1% for the unemployment rate… The unemployment rate was a fresh pandemic-era low and near the 50-year low of 3.5% in February 2020. That decline came even though the labor force participation rate was unchanged at 61.9% amid an ongoing labor shortage in the U.S.”
January 4 – New York Times:
“The number of Americans quitting their jobs is the highest on record, as workers take advantage of strong employer demand to pursue better opportunities. More than 4.5 million people voluntarily left their jobs in November, the Labor Department said... That was up from 4.2 million in October and was the most in the two decades that the government has been keeping track.”
January 4 – Associated Press:
“Residents of the Chinese city of Xi’an are enduring a strict coronavirus lockdown, with business owners suffering yet more closures and some people complaining of difficulties finding food, despite assurances from authorities that they are able to provide necessities for the 13 million people largely confined to their homes. Stringent measures to stem outbreaks are common in China, which still maintains a policy of stamping out every COVID-19 case long after many other countries have opted to try to live with the virus. But the lockdown imposed Dec. 23 in Xi’an is one of the harshest in the country since a shutdown in 2020 in and around Wuhan…”
January 3 – Financial Times:
“Hong Kong’s free press is on the brink of extinction after the two largest remaining independent news websites in the Chinese territory announced they were shutting down in the space of a week. Citizen News… said it would cease operations…, citing safety concerns for its reporters. The decision… was announced after pro-democracy publication Stand News closed last Wednesday. Stand News was raided by police and a number of journalists and former directors were arrested for allegedly publishing ‘seditious’ materials.”
January 3 – Reuters:
“Turkey's annual inflation rate surged to 36.1% last month, its highest in the 19 years that Tayyip Erdogan has ruled, laying bare the depths of a currency crisis engineered by the president's unorthodox interest rate-cutting policies. In December alone, consumer prices took a rare step into double-digits, rising 13.58%..., eating deeper into the earnings and savings of Turks rattled by the economic turmoil.”
January 3 – Financial Times:
In the dying days of 2021, the Russian and Chinese governments both took dramatic action to censor discussion of their countries’ history. In both cases, the decision to ‘control the past’ sends a bleak signal about the future. Russia’s Supreme Court closed Memorial, an organisation founded in the last years of the Soviet Union to record and preserve the memory of the victims of Stalinism. In Hong Kong, local universities bowed to China’s central government — removing from campuses statues commemorating the Tiananmen Square massacre of 1989. In the decades after decolonisation in 1997, Hong Kong was a bastion of free speech within the People’s Republic of China. But that era has now definitively come to a close.”
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