Credit Bubble Bulletin
Weekly Commentary
March 11, 2022
by Doug Noland
Following is my edited easy to read version
More news here this week than I can recall
in decades of reading this column.
Ye Editor
For the Week Ending March 11, 2022:
GLOBAL STOCK INDEXES:
S&P500 dropped 2.9% (down 11.8% y-t-d)
Dow Industrials fell 2.0% (down 9.3%)
Utilities declined 0.9% (down 3.1%)
Banks lost 2.3% (down 7.2%)
Transports declined 1.0% (down 7.6%)
S&P 400 Midcaps fell 1.7% (down 9.5%)
Small cap Russell 2000 down 1.1% (down 11.8%)
Nasdaq100 sank 3.9% (down 18.5%)
Semiconductors dropped 3.5% (down 20.3%).
Biotechs fell 1.8% (down 12.9%).
With gold bullion gaining $18,
the HUI gold index rose 2.6% (up 20.8%)
U.K.'s FTSE rallied 2.4% (down 3.1% y-t-d).
Japan's Nikkei dropped 3.2% (down 12.6% y-t-d)
France's CAC40 rallied 3.3% (down 12.5%)
German DAX recovered 4.1% (down 14.2%).
Spain's IBEX 35 surged 5.5% (down 6.6%).
Italy's FTSE MIB gained 2.6% (down 15.7%)
Brazil's Bovespa dropped 2.4% (up 6.6%)
Mexico's Bolsa little changed (unchanged).
South Korea's Kospi fell 1.9% (down 10.6%).
India's Sensex rose 2.2% (down 4.6%).
China's Shanghai sank 4.0% (down 9.1%).
Turkey's Istanbul National 100 jumped 3.2%
(up 10.6%).
Russia's MICEX did not trade (down 34.8%).
US BONDS:
Three-month Treasury bill rates
ended the week at 0.35%.
Two-year government yields
jumped 27 bps to 1.75%
(up 102bps y-t-d).
Five-year T-note yields
surged 31 bps to 1.95%
(up 68bps).
Ten-year Treasury yields
rose 26 bps to 2.00%
(up 48bps).
Long bond yields
jumped 20 bps to 2.36%
(up 45bps)
Fannie Mae MBS yields
surged 32 bps to 3.07%
(up 101bps).
Federal Reserve Credit last week
increased $3.7bn to $8.870 TN.
Over the past 130 weeks,
Fed Credit expanded $5.144 TN, or 138%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
jumped nine bps to 3.85% (up 80bps y-o-y).
Fifteen-year rates
gained eight bps to 3.09% (up 71bps).
Five-year hybrid ARM rates
rose six bps to 2.97% (up 20bps)
Jumbo mortgage 30-year fixed rates
up 26 bps to 4.35% (up 112bps).
COMMODITIES:
March 9
– New York Times:
“Before its forces invaded Ukraine, Russia provided one out of every 10 barrels of oil the world consumed. But as the United States and other customers shun Russian crude, the global oil market faces its greatest upheaval since the Middle East tumult of the 1970s. An energy price shock will probably last as long as the confrontation goes on, since there are few alternatives to quickly replace Russia’s exports of roughly five million barrels a day. Oil prices were already rising fast as the world economy emerged from Covid-19 shutdowns and producers stretched to meet growing demand. International oil companies had cut back investment over the last two years. Now traders are bidding up crude prices to levels not seen in years…”
March 9
– Associated Press:
“Ukraine’s government has banned the export of wheat, oats and other staples that are crucial for global food supplies as authorities try to ensure they can feed people during Russia’s intensifying war… The export ban is needed to prevent a ‘humanitarian crisis in Ukraine,’ stabilize the market and ‘meet the needs of the population in critical food products,’ Roman Leshchenko, Ukraine’s minister of agrarian and food policy, said…”
The Bloomberg Commodities Index
declined 0.5% (up 27.5% y-t-d).
Spot Gold gained 0.9% to $1,988 (up 8.7%).
Silver added 0.7% to $25.87 (up 11.0%).
Copper sank 6.3% (up 4%).
WTI crude fell $6.35 to $109.33 (up 67%).
Gasoline sank 6.5% (up 49%)
Natural Gas fell 5.8% (up 27%)
Wheat slumped 8.5% (up 44%)
Corn gained 1.1% (up 42%)
Bitcoin was little changed this week
at $38,940 (down 16%).
DOUG NOLAND COMMENTARY:
(highly edited)
What a distressingly Ugly week. The Russian military increased bombardment of Ukrainian cities, as 2.5 million refugees inundated neighboring countries. Peace negotiations made little or no progress, while the Ukrainian military’s success in inflicting damage likely ensures Putin doubles-down with “scorched earth” measures.
WTI crude traded to $130 in early Monday trading,
before reversing sharply lower to end the week
down 5.5% at $109.33.
Aluminum was up as much as 6%,
before ending the week down 9.5%.
Palladium spiked 14% higher Monday
– then ended the week down 6.8%.
Meanwhile, the specter of a $40 billion Russian debt default – with zero liquidity in the underlying instruments – threw a big monkey wrench into hedging strategies.
March 5
– Reuters:
“President Vladimir Putin said… that Western sanctions on Russia were akin to a declaration of war, and warned that any attempt to impose a no-fly zone in Ukraine would lead to catastrophic consequences for the world. Putin reiterated that his aims were to defend Russian- speaking communities through the ‘demilitarisation and de-Nazification’ of the country so that Russia’s former Soviet neighbour became neutral and no longer threatened Russia… ‘These sanctions that are being imposed are akin to a declaration of war but thank God it has not come to that,’ Putin said…”
March 9
– Reuters:
“The Kremlin accused the United States… of declaring an economic war on Russia that was sowing mayhem through energy markets, and put Washington on notice it was considering its response to a ban on Russian oil and energy. Russia's economy is facing the gravest crisis since the 1991 fall of the Soviet Union after the West imposed heavy sanctions on almost the entire Russian financial and corporate system following Moscow's invasion of Ukraine. Kremlin spokesman Dmitry Peskov cast the West's sanctions as a hostile act that had roiled global markets and he said it was unclear how far turbulence on global energy markets would go.”
March 10
– Wall Street Journal:
“The West has also moved to oust Russian banks from international financial networks, while a bipartisan coalition of U.S. lawmakers has introduced legislation calling on the U.S. to press for Russia’s suspension from the World Trade Organization—an action that would have no precedent in WTO history. ‘The trading system as we’ve known it, with the World Trade Organization at its core and with a basic set of rules that everyone traded under, is coming apart,’ said Jennifer Hillman, a trade lawyer and former jurist on the WTO’s trade court…”
With sanctions in the process of strangling the Russian economy, how aggressively will the West penalize nations subverting sanctions to trade with or assist Russia?
China has broken with the U.S., Europe and others that have imposed sanctions on Russia after its invasion of Ukraine
“Many see [China] as little short of an accomplice to the invasion. After all, Putin and Xi did vociferously proclaim their anti-West partnership with “no limits” only days ahead of the invasion. Resulting military and economic wars come at a critical juncture for China’s historic Bubble.
Fed’s Q4 2021 Z.1 report:
The Credit system is firing on all cylinders,
consistent with a highly inflationary backdrop.
Q4
Non-Financial Debt
expanded at an
8.24% annualized rate
during Q4.
2021
Non Financial Debt
expanded at a 6.17% rate
Q4
Household Mortgages
expanded at an 8.0% rate
the strongest since Q2 2007.
2021
7.57% expansion
in Household Mortgages
was the biggest
percentage gain
since 2006’s 11.19%.
Q4
Federal Reserve Assets
inflated an additional $273 billion
during Q4 to a record $8.887 TN.
2021
Fed Assets expanded
$1.231 TN for the year,
with stunning growth
of $4.877 TN over the
past 10 quarters (122%).
2021
Treasury Securities
rose $1.684 TN,
with 10 quarter growth
of an unprecedented
$7.470 TN, or 41.9%.
Since 2007,
Treasuries Securities
inflated $19.234 TN,
or 318%.
Treasury Securities
ended the year
at 122% of GDP,
up from 55%
to close 2007.
2021
Combined Treasury
& Agency Securities
expanded $2.263 TN last year
– an outrageous $8.873 TN
over 10 quarters
- to 150% of GDP.
2021
Total Equities
ended the year
at a record 334% of GDP,
up from previous cycle peaks
188% (Q3 2007) and
210% (March 2000).
2021
Total (Debt & Equities) Securities
expanded $17.879 TN last year
to a record $136.372 TN,
or 568% of GDP.
Previous cycle peaks were
387% (Q3 ’07) and
368% (Q1 ’00)
Q4
Household Net Worth
(Assets less Liabilities)
surged $5.297 TN
during the quarter
to a record $150.290 TN.
2021
Household Net Worth
inflated a record
$18.946 TN in 2021,
with three-year growth
of $44.771 TN, or 42%.
Household Net Worth
ended the year
at a record 626% of GDP,
compared to
previous cycle peaks:
491% (Q1 ’07) and
445% (Q1 ’00).
NEWS FROM LAST WEEK
Russia / Ukraine Watch:
March 8
– Wall Street Journal:
“In the space of two weeks, Russia’s invasion of Ukraine has set off one of the largest and fastest arms transfers in history. By road and rail, the Czech Republic sent 10,000 rocket-propelled grenades to Ukraine’s defenders last week alone. In Poland, the provincial airport of Rzeszow located about 60 miles from the Ukrainian border has been so crowded with military cargo jets that on Saturday some flights were briefly diverted until airfield space became available. On the country’s highways, police vehicles are escorting military transport trucks to the border, with other convoys slipping into Ukraine via snow-covered back roads through the mountains. The race to deliver arms to Ukraine is emerging as a supply operation with few historical parallels.”
March 10
– Wall Street Journal:
“Tens of thousands of Ukrainian civilians have taken up arms or otherwise sought to support a nationwide resistance movement against Moscow’s offensive, which Kyiv says has already left thousands of Ukrainian noncombatants dead. The broad mobilization includes people from all walks of life, including prominent figures from a playwright to a lawmaker, a rock singer and TV host, who have rallied to defend their country’s independence, as the Russian military has moved to encircle and pummel Ukrainian cities.”
March 6
– Wall Street Journal:
“Moscow is recruiting Syrians skilled in urban combat to fight in Ukraine as Russia’s invasion is poised to expand deeper into cities, according to U.S. officials. An American assessment indicates that Russia, which has been operating inside Syria since 2015, has in recent days been recruiting fighters from there, hoping their expertise in urban combat can help take Kyiv and deal a devastating blow to the Ukraine government, according to four American officials. The move points to a potential escalation of fighting in Ukraine, experts said.”
Economic War Watch:
March 10 – Bloomberg:
“Russia is prepared to pay its foreign creditors on condition that a freeze on much of its $643 billion cash pile is lifted, according to Finance Minister Anton Siluanov. Speaking at a government meeting attended by President Vladimir Putin, Siluanov reiterated Russia’s decision to service its dollar and euro-denominated bonds in rubles. Bondholders would be able to get their payments in hard currency only if a block on the central bank’s reserves held overseas is removed... ‘We will repay our external obligations in rubles, but we will carry out the conversion as our gold and foreign exchange reserves are unfrozen,” Siluanov said...”
March 10
– Bloomberg:
“Russia has enough buyers for its oil and gas even as Western nations and their allies impose sanctions in response to the invasion of Ukraine, according to a top Kremlin official. ‘We will not persuade anyone to buy our oil and gas,’ Russian Foreign Minister Sergei Lavrov said… following a meeting with his Ukrainian counterpart Dmytro Kuleba. ‘If they want to replace it with something, they are welcome, we will have supply markets, we already have them.’”
March 10
– Bloomberg:
“Russia’s government moved closer to seizing and even nationalizing foreign-owned companies that are leaving the market over the invasion of Ukraine while planning measures to coax others into staying. In the first explicit response to the exodus of foreign businesses from Ikea to McDonald’s Corp., the Economy Ministry has outlined new policies to take temporary control of departing companies where foreign ownership exceeds 25%. Under the proposals, a Moscow court would consider requests from board members and others to bring in external managers. The court could then freeze shares of foreign-owned companies as part of an effort to preserve property and employees.”
March 9
– Bloomberg:
“In the first full week since the Russian military offensive began late in February, Russian prices for new domestic cars soared over 17% and the cost of television sets jumped 15%. Some medicines and vegetables became 5% to 7% more expensive in the seven days ending March 4.”
March 9
– Reuters:
“Global leasing companies staring at an imminent sanctions deadline to repossess more than 400 jets worth almost $10 billion from Russian airlines have received mostly radio silence as experts warn of legal wrangling that could last a decade. Western bans imposed after Russia's invasion of Ukraine give most leasing firms until March 28 to sever ties with Russian airlines - sparking a game of cat-and-mouse from Asia to Africa as lenders frantically try to seize aircraft.”
U.S./Russia Watch:
March 7
– CNN:
“The US and other NATO members have so far sent Ukraine 17,000 anti-tank missiles and 2,000 stinger anti-aircraft missiles, a senior US official told CNN.”
March 9
– Reuters:
“Late on Tuesday, Russia repeated its accusation of several years that the United States is working with Ukrainian laboratories to develop biological weapons. Such assertions in Russian media increased in the run-up to Moscow's military move into Ukraine and were made as recently as Wednesday by foreign ministry spokesperson Maria Zakharova.”
China/Russia Watch:
March 7
– Reuters:
“China's friendship with Russia is ‘rock solid’ and the prospects for cooperation are very broad, Chinese Foreign Minister Wang Yi said… Cooperation between the two countries brings benefits and well-being to the two peoples, he told his annual news conference on the sidelines of China's annual meeting of parliament.”
March 6
– Reuters:
Even as Apple, Nike, Netflix, fashion chain H&M and many other Western companies have cut or paused business in Russia amid a tide of sanctions and international criticism of President Vladimir Putin's actions, Chinese firms so far have stayed largely silent about their operations in Russia.”
March 6
– Wall Street Journal:
“Russian banks that have been cut off from global payments networks are turning to China’s state-owned UnionPay system as the country tries to sidestep boycotts by Western businesses… Visa Inc. and Mastercard Inc. said they are suspending their Russian operations, making it difficult for Russians to buy goods from abroad. The moves by the two companies go beyond sanctions issued against many Russian banks. Sberbank, Russia’s largest bank by assets, Alfa Bank and Tinkoff Bank said… they were working on the possibility of issuing cards powered by China’s UnionPay. Another Russian lender, Gazprombank, said customers can do cross-border transactions by getting cards that use UnionPay or Japan’s JCB system.”
March 8
– Bloomberg:
“China is considering buying or increasing stakes in Russian energy and commodities companies, such as gas giant Gazprom PJSC and aluminum producer United Co. Rusal International PJSC, according to people familiar... Beijing is in talks with its state-owned firms, including China National Petroleum Corp., China Petrochemical Corp., Aluminum Corp. of China and China Minmetals Corp., on any opportunities for potential investments in Russian companies or assets, the people said. Any deal would be to bolster China’s imports as it intensifies its focus on energy and food security -- not as a show of support for Russia’s invasion in Ukraine -- the people said.”
Market Instability Watch:
March 8
– Reuters:
“The London Metal Exchange (LME) was forced to halt nickel trading and cancel trades after prices doubled on Tuesday to more than $100,000 per tonne in a surge sources blamed on short covering by one of the world's top producers. The LME's shock move came as Western sanctions threatened supply from major producer Russia and marked the biggest crisis to hit the 145-year-old exchange in decades. In the 1990s a rogue Sumitomo trader tried to corner the copper market and tin trading was stopped for five years in the 1980s. ‘The current events are unprecedented,’ the LME said… ‘The suspension of the nickel market has created a number of issues for market participants which need to be addressed.’”
Derivatives Watch:
March 10
– Bloomberg:
“If the swap market is to be believed, Russia is going to default on foreign debt, and insurance is going to pay out. Trading on credit-default swaps, used to insure against non-payment, has skyrocketed this week despite the myriad of questions over whether Russia’s plan to repay some foreign bondholders in rubles could ultimately be judged as a default. There are even concerns that international sanctions and existing bond terms could complicate any settlement of the $39.7 billion of outstanding contracts. And yet, the swaps suggest a record 71% chance of default within one year and 81% within five years…”
Inflation Watch:
March 10
– Bloomberg:
“A measure of rents in the U.S. posted the largest monthly increase in three decades, underscoring an increasingly high cost of living that’s poised to contribute even more to inflation this year. The index for rent of primary residence increased 0.6% in February from the prior month, the most since 1987… It was part of an acceleration across the broader shelter category, which accounted for more than 40% of the monthly increase in an index of consumer prices excluding food and energy. Rents, which have been in rising in the U.S. for the past year, are reported with a lag in the CPI report. That means they’ll contribute even more to inflation going forward…”
March 7
– Bloomberg:
“Concerns of a looming global shortage of coal are driving up prices in every U.S. region that has access to export markets… Coal from the Illinois Basin soared $17 a short ton to $92.50 last week, the highest in records going back to 2005…”
Federal Reserve Watch:
March 9 – Bloomberg:
“The largest Federal Reserve bond-buying program is about to come to an end. With the U.S. central bank having bought close to $6 trillion of Treasuries and mortgage bonds in the past two years after the onset of the Covid pandemic rattled markets, this Wednesday’s $4.025 billion operation looks set to be its last in Treasuries, with mortgage operations running through the end of the week.”
U.S. Bubble Watch:
March 8
– Wall Street Journal:
“The U.S. trade deficit hit a fresh record in January…, as imports of vehicles and energy supplies increased while exports fell. The foreign-trade gap in goods and services expanded 9.4% from the prior month to $89.7 billion in January… Imports increased 1.2% in January, led by shipments of foreign-made vehicles, industrial supplies including crude oil and natural gas, food and capital goods like telecommunications equipment. Exports, meanwhile, fell 1.7%.”
March 9
– Reuters:
“U.S. shale producers are unlikely to replace banned Russian oil imports due to a shortage of oilfield materials, equipment and labor and a dwindling backlog of wells waiting to be completed, energy executives and analysts said… U.S. President Joe Biden imposed an immediate ban on Tuesday on Russian oil imports in retaliation for its invasion of Ukraine, putting a spotlight on shale producers' ability to boost output to make up for the loss of about 200,000 barrels per day of Russia crude typically imported by domestic refiners.”
March 9
– Wall Street Journal:
“The past decade’s booming residential real-estate market has enriched almost every U.S. homeowner, but the gains have largely benefited the wealthiest… From 2010 to 2020, about 71% of the increase in housing wealth was gained by high-income households, according to… the National Association of Realtors. Overall, the total value of owner-occupied homes in the U.S. rose $8.2 trillion over the decade to $24.1 trillion, NAR said. Those wealth gains have continued in the past two years, as housing prices have surged because of robust demand and limited supply.”
Economic Dislocation Watch:
March 8
– Bloomberg:
“Russia’s invasion of Ukraine means the food inflation that’s been plaguing global consumers is now tipping into a full-blown crisis, potentially outstripping even the pandemic’s blow and pushing millions more into hunger. Together, Russia and Ukraine account for a whopping portion of the world’s agricultural supplies, exporting so much wheat, corn, sunflower oil and other foods that it adds up to more than a tenth of all calories traded globally. Now, shipments from both countries have virtually dried up.”
March 7
– Financial Times:
“Russian violence is creating a global food security crisis. Ukraine is the world’s fifth-largest exporter of wheat, but farmers cannot now start what is called their spring sowing campaign. The regular window for starting field work is the first 10 days of March, and planting needs to be fully completed in the last week of April. We have highly productive soil, but also a climate that sets the rules. There is already no way that Ukrainians will be able to sow this year based on a normal schedule.”
March 9
– Bloomberg:
“European fertilizer makers, including Yara International ASA and Borealis AG, are cutting output because of surging natural gas prices, adding to the growing risks for global food inflation. Russia’s invasion of Ukraine has roiled commodities markets and propelled natural gas -- the feedstock of nitrogen fertilizers -- to record levels. That’s forcing producers to curb ammonia output, pushing up farm input costs and adding to the risks of a worldwide food shock.”
China Watch:
March 11
– Financial Times:
“Mainland China is struggling to contain its biggest coronavirus outbreak since the pandemic erupted in Wuhan two years ago, as the Omicron variant tests President Xi Jinping’s zero-tolerance strategy and puts Shanghai at risk of being locked down. Changchun, the capital of north-eastern Jilin province with 9 million people and an important manufacturing base, was ordered into lockdown on Friday after 23 new cases were reported… Health authorities reported that daily case numbers have tripled in the past week, adding up to more than 1,100 cases across 17 regions…”
Central Banker Watch:
March 10
– Bloomberg:
“The European Central Bank unexpectedly accelerated its wind-down of monetary stimulus, signaling it’s more concerned about record inflation than weaker economic growth as Russia’s invasion of Ukraine threatens to propel prices even higher. Calling the war a ‘watershed’ moment for Europe, ECB officials pledged to slow bond buying from the start of May, and said they could halt the program as soon as the third quarter. They tried to temper that by making a subsequent interest-rate hike less automatic.”
Global Bubble Watch:
March 8
– CNBC:
“Morgan Stanley auto analyst Adam Jonas has been among the loudest voices raising concerns. In a note published Monday, he said: ‘As of this writing, nickel is up 67.2% just today, representing around a $1,000 increase in the input cost of an average EV in the U.S.’”
Covid Watch:
March 7
– Bloomberg:
“Even a mild case of Covid-19 can damage the brain and addle thinking, scientists found in a study that highlights the illness’s alarming impact on mental function. Researchers identified Covid-associated brain damage months after infection, including in the region linked to smell, and shrinkage in size equivalent to as much as a decade of normal aging. The changes were linked to cognitive decline in the study, which was published Monday in the journal Nature. The findings represent striking evidence of the virus’s impact on the central nervous system.”
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