Credit Bubble Bulletin
Weekly Commentary:
More on the New Cycle
by Doug Noland
Following is my edited easy to read version
Ye Editor
For the Week Ending May 20, 2022:
GLOBAL STOCK INDEXES:
S&P500 dropped 3.0% (down 18.1% y-t-d)
Dow Industrials fell 2.9% (down 14.0%)
Utilities increased 0.4% (down 1.6%)
Banks declined 0.7% (down 19.4%)
Transports sank 6.7% (down 18.1%)
S&P 400 Midcaps slumped 1.9% (down 16.1%)
Small cap Russell 2000 declined 1.1% (down 21.0%)
Nasdaq100 sank 4.5% (down 27.5%)
Semiconductors dropped 3.0% (down 27.0%)
Biotechs increased 0.7% (down 17.5%).
With gold bullion recovering $35,
the HUI gold stock index rallied 3.5% (down 1.0%).
U.K.'s FTSE slipped 0.4% (unchanged y-t-d).
Japan's Nikkei rallied 1.2% (down 7.1% y-t-d).
France's CAC40 fell 1.2% (down 12.1%).
German DAX slipped 0.3% (down 12.0%).
Spain's IBEX 35 jumped 1.8% (down 2.6%).
Italy's FTSE MIB increased 0.2% (down 11.9%)
Brazil's Bovespa rose 1.5% (up 3.5%)
Mexico's Bolsa surged 3.9% (down 3.3%)
South Korea's Kospi gained 1.3% (down 11.4%)
India's Sensex recovered 2.9% (down 6.7%)
China's Shanghai advanced 2.0% (down 13.6%).
Turkey's Istanbul National 100 index fell 1.9% (up 27.7%).
Russia's MICEX rallied 2.8% (down 37.3%).
US BONDS:
Three-month Treasury bill rates
ended the week at 0.9925%.
Two-year government yields
were little changed at 2.58% (up 185bps y-t-d).
Five-year T-note yields
fell seven bps to 2.80% (up 154bps).
Ten-year Treasury yields
dropped 14 bps to 2.78% (up 127bps).
Long bond yields
fell nine bps to 2.99% (up 109bps).
Benchmark Fannie Mae MBS yields
sank 16 bps 4.00% (up 193bps).
Federal Reserve Credit last week expanded $14.8bn to a record $8.919 TN. Over the past 140 weeks, Fed Credit expanded $5.193 TN, or 139%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
declined five bps to 5.25% (up 225bps y-o-y)
- near highs since August 2009.
Fifteen-year rates fell five bps to 4.43%
- near highs since December 2009 (up 214bps).
Five-year hybrid ARM rates
jumped 10 bps to 4.08% (up 149bps).
Jumbo mortgage 30-year fixed rates
down 18 bps to 5.37% (up 226bps).
CURRENCIES:
For the week, the U.S. Dollar Index
dropped 1.4% to 103.15 (up 7.8% y-t-d).
The Chinese (onshore) renminbi rallied 1.44%
versus the dollar (down 5.03% y-t-d).
COMMODITIES:
May 16 – Bloomberg:
“Wheat jumped by the exchange limit to near a record high after India’s move to restrict exports, exposing just how tight global supplies are during the war in Ukraine and threatening to drive up food prices even more. The government will suspend overseas sales to manage its food security... This drew criticism from the agriculture ministers of the Group of Seven nations, who said that such measures make the world’s crisis worse.”
May 18 – Bloomberg:
“Farmers in parts of Canada’s Prairies are struggling to get crops in the ground as heavy rains continue to wallop the eastern region in the latest threat to global grain supplies. Virtually no seeding has been done in Manitoba as more than 90% of the crop land is suffering from excess moisture, said Trevor Hadwen, agroclimate specialist with Agriculture and Agri-Food Canada. Only 4% of the province’s crops have been sown as of May 17, lagging the five-year average of 50%. Farmers are scrambling to look for dry areas to plant…”
The Bloomberg Commodities Index
recovered 1.7% (up 31.6% y-t-d).
Spot Gold rallied 1.9% to $1,847 (up 0.9%).
Silver jumped 3.1% to $21.78 (down 6.6%).
Copper gained 2.4% (down 4.2%).
WTI crude rose $2.74 to $113.23 (up 51%).
Gasoline dropped 3.1% (up 72%)
Natural Gas rallied 5.5% (up 117%).
Wheat slipped 0.7% (up 52%)
Corn dipped 0.3% (up 31%).
Bitcoin fell $550, or 1.8%,
this week to $29,250 (down 37%).
DOUG NOLAND'S COMMENTARY
(heavily edited)
The thesis is one of secular change – an extraordinary multi-decade Bubble period transitioning (in a highly destabilizing manner) to a most uncertain New Cycle.
...The “world” has gone through monumental change
since the last real tightening cycle back in 1994. The Fed has lost control.
... Since 1994, so-called “tightening” cycles have been gradual and timid affairs, with the clear intention of avoiding bouts of de-risking / deleveraging.
Decades of this deeply flawed monetary regime promoted a gargantuan leveraged speculating community that would bet only more aggressively on increasingly egregious monetary inflation.
... this inherently highly unstable finance maintained a semblance of stability only so long as aggressively accommodated by loose monetary conditions
For more than 25 years, the Fed operated with little concern for a rapid rise in consumer prices.
Over time, the primary policy focus shifted to ensuring that booming asset market inflation sustained loose financial conditions and attendant robust economic expansion.
The Nasdaq100 sank 4.5% this week, boosting 2022 losses to 27.5%.
... it is becoming increasingly clear that a historic financial Bubble has begun to deflate in the U.S.
NEWS SUMMARY OF LAST WEEK
Market Instability Watch:
May 18 – Axios:
“The Fed will face a series of political and economic headaches as it attempts to move away from subsidizing home lending by shrinking its portfolio of mortgage-backed securities. The problem: Extracting itself from this market risks crashing the housing industry and creating intense political blowback for incurring financial losses. By the numbers: Back in February 2020, the Fed owned $1.4 trillion in mortgage-backed securities, and the number was falling rapidly. But when the pandemic took hold, the central bank began a new round of bond purchases (known as ‘quantitative easing’), swelling that number to $2.7 trillion.”
May 18 – Bloomberg:
“Like a supertanker, US debt-service costs only change course very slowly. But it’s happening now -- and from Washington’s point of view, the new direction is the wrong one: they’re heading up. The results of a double jump in the government’s borrowing costs and its debt pile are starting to show up in the federal budget. Monthly net interest payments rose to a record in April, at least in dollar terms. And broader measures of debt expenses are set to climb over the coming years -- potentially squeezing out other kinds of public spending. That’s because Treasury yields have surged, with inflation running hot and the Federal Reserve in an aggressive tightening mode -- while the national debt has grown by some $6 trillion since the pandemic began…”
Bursting Bubble/Mania Watch:
May 15 – Wall Street Journal:
“Options trading by individual investors is fading, the latest sign that the stock market’s speculative fever has broken. Those individual investors had embraced options as a way of riding the stock market’s momentum that drove shares of companies from Apple Inc. to Nvidia Corp. to new heights. Now, the Federal Reserve’s move to raise interest rates to tame inflation has thrown that dynamic into reverse, sending the prices of stocks skidding. Individual investors made up 26% of total options activity in March, down from nearly 30% early last year. That marked the lowest level since March 2020, though was still well above prepandemic levels…”
May 19 – Financial Times:
“The $40bn collapse last week of popular crypto token Luna underscores the crucial role exchanges play as gatekeepers that rule on which digital assets are readily available to mainstream traders. Fierce competition among exchanges has led to a sharp rise in the number of tokens available on platforms that are popular with have-a-go investors. But the risks of listing newer tokens — and the lack of regulation around these assets — was highlighted last week when terraUSD, a coin that promised to match the value of the US dollar, became nearly worthless, also wiping out the value of its sister token Luna, in what research firm CryptoCompare called ‘the largest destruction of wealth in this amount of time in a single project in crypto’s history’.”
May 16 – Financial Times:
“Traders have yanked $7bn from Tether since the world’s biggest stablecoin last week briefly lost its peg against the US dollar, intensifying concerns about the assets that underpin the global cryptocurrency market. Tether’s market value has fallen by 9% since May 12 to $76bn as tokens have been removed from circulation to meet redemption requests, CryptoCompare data show. The decline came after Tether last Thursday traded at about 95 cents, well below the $1 level it seeks to maintain following the failure of a smaller rival. Observers inside and outside the crypto market have warned that deeper or more lasting volatility in stablecoins, which are designed to maintain a one-to-one peg with the dollar, could drag down the value of thousands of speculative crypto assets that have drawn buyers around the world.”
Russia/Ukraine War Watch:
May 18 – Reuters:
“Russia… said it was using a new generation of powerful laser weapons in Ukraine to burn up drones, deploying some of Moscow's secret weapons to counter a flood of Western arms supplied to its former Soviet neighbour. President Vladimir Putin in 2018 unveiled an array of new weapons including a new intercontinental ballistic missile, underwater nuclear drones, a supersonic weapon and a new laser weapon.”
Economic War / Iron Curtain Watch:
May 18 – Bloomberg:
“Russian default risk surged as investors reacted to the possibility that the Biden administration will fully block bond payments from the country to US investors from next week. The move may be the final straw in Russia’s debt saga, pushing the country into its first foreign default in a century. Despite sweeping sanctions, it’s so far managed to avoid that, thanks in part to a US US waiver that allowed bond payments to US investors. But on Wednesday, Treasury Secretary Janet Yellen confirmed that it’s unlikely that the exemption will be extended once it expires on May 25. ‘The expectation was that it was time-limited,’ she said…”
May 15 – Reuters:
“Russia pummeled positions in the east of Ukraine on Sunday, its defence ministry said, as it sought to encircle Ukrainian forces in the battle for Donbas and fend off a counteroffensive around the strategic Russian-controlled city of Izium. The North Atlantic Treaty Organization (NATO) secretary general, meanwhile, told a meeting in Germany that Ukraine could win the war, calling for more military support and fast-track approval of Finland and Sweden's expected bids to join the alliance.”
U.S. / Russia Watch:
May 15 – Associated Press:
“McDonald’s is closing its doors in Russia, ending an era of optimism and increasing the country’s isolation over its war in Ukraine. The Chicago burger giant confirmed Monday that it is selling its 850 restaurants in Russia. McDonald’s said it will seek a buyer who will employ its 62,000 workers in Russia, and will continue to pay those workers until the deal closes. ‘Some might argue that providing access to food and continuing to employ tens of thousands of ordinary citizens, is surely the right thing to do,’ McDonald’s President and CEO Chris Kempczinski said in a letter to employees. ‘But it is impossible to ignore the humanitarian crisis caused by the war in Ukraine.’”
Inflation Watch:
May 18 – Bloomberg:
“With a gallon of milk up about 25% since before the pandemic, and retail bacon 35% higher, it’s hard to imagine how US food inflation could get any worse. But evidence suggests that even higher prices are on the horizon. Consumers have actually been shielded so far from the full brunt of soaring expenses that are facing producers, distributors and small businesses like restaurants. But they can only hold back for so much longer. Take the case of Jeff Good, who co-founded three restaurants in Jackson, Mississippi. Around 18 months ago, a 40-pound box of chicken wings cost him about $85. Now, it can go as high as roughly $150. Expenses for cooking oil and flour have nearly doubled in the past five months... But it’s not just ingredient prices going up. He’s paying more for labor and services, too. Even the company that maintains his air conditioners has tacked on a $40 fuel charge per visit. To cope, he’s raised menu prices.”
Biden Administration Watch:
May 18 – Reuters:
“U.S. Treasury Secretary Janet Yellen… confirmed she is advocating within the Biden administration for eliminating some tariffs on Chinese imports that ‘aren't very strategic’ but are hurting U.S. consumers and businesses. Yellen told a press conference ahead of a G7 finance ministers and central bank governors' meeting that internal discussions are underway about the punitive ‘Section 301’ tariffs imposed by former U.S. president Donald Trump on hundreds of billions of dollars in Chinese goods.”
Federal Reserve Watch:
May 17 – Wall Street Journal:
“Federal Reserve Chairman Jerome Powell said the central bank’s resolve in combating the highest inflation in 40 years shouldn’t be questioned, even if it requires pushing up unemployment. ‘Restoring price stability is an unconditional need. It is something we have to do,’ Mr. Powell said… ‘There could be some pain involved…’ “We will go until we feel like we are at a place where we can say, ‘Yes, financial conditions are at an appropriate place. We see inflation coming down… We will go to that point, and there will not be any hesitation about that.’”
U.S. Bubble Watch:
May 17 – Bloomberg:
“US retail sales grew at a solid pace in April, reflecting broad-based gains and suggesting demand for merchandise remains resilient despite rampant inflation. The value of overall retail purchases increased 0.9%, after an upwardly revised 1.4% gain in March… Excluding vehicles and gas stations, sales rose 1% last month… The data suggest that Americans are still spending on merchandise at a rapid clip -- potentially fueled by credit-card borrowing -- even as prices rise at the fastest pace in decades. That said, economists expect consumer spending to shift away from goods and toward services like travel and entertainment as pandemic-related health concerns wane… To keep pace with price increases, consumers are loading up on their credit cards… Borrowing in March soared by the most on record, and a separate report from the New York Fed showed Americans opened a record 537 million credit card accounts in the first quarter.”
May 17 – Reuters:
“Walmart Inc reported a 25% drop in quarterly earnings and cut its full-year profit outlook… as rising costs of fuel and labor hurt its bottom line while shoppers squeezed by decades-high inflation moved to buy lower-margin basics. Shares of the retailer fell nearly 10% in morning trading…”
May 19 – Associated Press:
“Target reported… that its profit tumbled 52% compared with the same period last year in an environment of rising costs for things like fuel, and also a lightening quick return by consumers to more normalized spending. Purchases of big TVs and appliances that Americans loaded up on during the pandemic have faded, leaving Target with a bloated inventory that must be marked down to sell.”
May 16 – Bloomberg:
“New York state manufacturing activity unexpectedly contracted in May for the second time in three months, reflecting plunges in orders and shipments. The Federal Reserve Bank of New York’s general business conditions index dropped over 36 points to minus 11.6… Figures less than zero indicate contraction… The group’s gauge of new orders dropped nearly 34 points in May to minus 8.8, and the shipments measure fell at the fastest pace since early in the pandemic, sinking about 50 points.”
May 18 – Reuters:
“Permits for future U.S. home building tumbled to a five-month low in April, suggesting the housing market was slowing as rising mortgage rates contribute to reduced affordability… But the report from the Commerce Department on Wednesday also showed a record backlog of houses still to be constructed, indicating the moderation in homebuilding would be marginal… Building permits dropped 3.2% to a seasonally adjusted annual rate of 1.819 million units in April, the lowest level since last November. They rose 3.1% on a year-on-year basis.”
May 17 – CNBC:
“Builder sentiment in the market for single-family homes fell sharply in May, as mortgage rates shot higher and building material costs showed no relief. Sentiment fell an outsized 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Readings above 50 are considered positive, but this is the fifth straight month that builder sentiment has declined. It’s the lowest reading since June 2020… Builder sentiment hit a record high of 90 by November 2020.”
May 15 – Wall Street Journal:
“People who agreed to buy homes under construction but haven’t yet closed are facing mortgage-interest rates that could be nearly double what they anticipated when they paid their deposits. New-home buyers are confronting multiple obstacles this year, from surging mortgage rates to home construction that is taking longer than usual due to supply-chain and labor constraints. Many home buyers who signed contracts for new homes in 2021 or early this year calculated monthly payments based on near-record-low mortgage rates of around 3% or less. But average mortgage rates have climbed this spring to 5.3%..., as the Federal Reserve started raising short-term interest rates.”
May 20 – New York Times:
“Americans have more equity in their homes, thanks to a red-hot housing market pushing up the value of their properties, new research shows. In the first quarter of 2022, 44.9% of the homes in the United States were considered ‘equity-rich,’ meaning the balance of the loan on the home was 50% or less of the estimated market value, according to a new report from Attom, a real estate data analytics firm. That’s slightly higher than the 41.9% recorded in the fourth quarter of 2021 and a jump from 31.9% in the first quarter of 2021, according to Attom, which analyzed… more than 155 million U.S. properties. The increase in equity is prompting some owners to cash out and move, said Rick Sharga, the executive vice president of market intelligence at Attom.”
Fixed-Income Bubble Watch:
May 18 – Wall Street Journal:
“Consumers with low credit scores are falling behind on payments for car loans, personal loans and credit cards, a sign that the healthiest consumer lending environment on record in the U.S. is coming to an end. The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than normal, according to… Equifax Inc. In March, those delinquencies rose month over month for the eighth time in a row, nearing their prepandemic levels. Delinquencies on subprime car loans and leases hit an all-time high in February, based on Equifax’s tracking that goes back to 2007.”
Economic Dislocation Watch:
May 18 – Bloomberg:
“China appears to be gradually easing its lock down of Shanghai, but that won’t bring immediate relief to global supply-chain congestion, according to a major shipping company. Shortages of rail, port and trucking workers in China and the US need to get resolved quicker than is currently happening as they are delaying ships at the world’s major ports, said Jeremy Nixon, chief executive officer of Ocean Network Express Pte. ‘Every government is doing their best to address the issue, but labor shortages still exist and infrastructure shortages still exist,’ Nixon said... ‘We’re putting more ships into service, but we can’t magic up more when we’re running out.’”
China Watch:
May 16 – Bloomberg:
“China’s economy is paying the price for the nation’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop. The unemployment rate climbed to 6.1% and the youth jobless rate hit a record. Investors responded by selling everything from Chinese shares to US index futures and oil.”
May 17 – Bloomberg:
“China’s home prices fell for an eighth month in April as measures to alleviate the real estate downturn failed to revive buyer confidence amid Covid outbreaks. New home prices in 70 cities… dropped 0.3% from March, the fastest decline in five months, National Bureau of Statistics figures showed…. Values slid year-on-year for the first time since 2015.”
May 18 – Reuters:
“Three banks in China's central Henan province have frozen at least $178 million of deposits, offering scant information on why or for how long, leaving firms unable to pay workers and individuals locked out of savings, depositors told Reuters. Yu Zhou Xin Min Sheng Village Bank, Shangcai Huimin Country Bank and Zhecheng Huanghuai Community Bank froze all deposits on April 18, with all three telling customers they were upgrading internal systems. The banks have not issued any communication on the matter since, depositors said.”
May 19 – Bloomberg:
“Florence Mok, a new mother, thought she wouldn’t be able to get a mortgage for her HK$9 million ($1.1 million) dream apartment. When her family signed the papers, China Evergrande Group sales staff said not to worry. The developer’s financing arm offered them 90% leverage, no bank stress-test needed. Now Mok’s suffering from the fallout of Evergrande’s debt crisis. With the cash-strapped company no longer willing to provide financing, her family can’t find a bank for a mortgage. They might lose the down payment and apartment.”
Central Banker Watch:
May 18 – Reuters:
“The European Central Bank has told banks to buckle up and prepare for a bumpy road ahead as the Ukraine war hits the economy and a sudden surge in interest rates makes markets more volatile, the ECB top supervisor Andrea Enria said… Euro zone banks were just coming out of emergency measures imposed at the height of the coronavirus pandemic, including a cap on dividend payouts, when the conflict broke out in February and the economic outlook darkened again… ‘We have asked banks to reassess their projections and capital trajectories in the light of the new macroeconomic picture, also considering adverse scenarios,’ Enria told Italian daily Repubblica.”
Global Bubble and Instability Watch:
May 18 – Bloomberg:
“Britain’s worst bout of inflation in 40 years is quickly becoming a crisis both for Prime Minister Boris Johnson’s government and the Bank of England. The central bank is in the eye of the storm after consumer prices surged 9% in the year through April. Cabinet ministers, economists and even a former BOE boss are complaining that Governor Andrew Bailey was too slow to act and is failing in his job to keep inflation to 2%. That finger-pointing may be meant to distract from rising pressure on Johnson’s administration to protect voters from the biggest squeeze on living standards in memory. Chancellor of the Exchequer Rishi Sunak to date has targeted relief at those in work, while the Labour opposition says help should be extended to pensioners and those on benefits.”
“Canadian consumer confidence recorded its sharpest weekly decline since the depths of the pandemic, with inflation and a deteriorating outlook for housing weighing on sentiment. The Bloomberg Nanos Canadian Confidence Index, a measure of sentiment based on weekly polling, dropped to 54.3 last week, the lowest reading since December 2020. The 1.8-point decline is the largest one-week slump in the index since April 2020.”
May 16 – Bloomberg:
“Canadian home prices fell for the first time in two years as a rapid rise in interest rates looks set to threaten one of the world’s hottest housing markets. Benchmark home prices declined 0.6% in April from the month before, the first drop since April 2020… The number of sales, meanwhile, plunged 12.6%.”
May 18 – Bloomberg:
“Sri Lanka’s impending default on $12.6 billion of overseas bonds is flashing a warning sign to investors in other developing nations that surging inflation is set to take a painful toll. The South Asian nation is set to blow through the grace period on $78 million of payments Wednesday, marking its first sovereign debt default since it gained independence from Britain in 1948… ‘The Sri Lanka default is an ominous sign for emerging markets,’ said Guido Chamorro, the co-head of emerging-market hard-currency debt at Pictet Asset Management… ‘We expect the good times to stop. Slowing growth and more difficult funding conditions will increase default risk particularly for frontier countries.’”
Brazil Watch:
May 15 – Financial Times:
“Carlos Vieira, a carpenter in São Paulo, hoped runaway inflation was consigned to Brazil’s past. Now, with the cost of his materials doubling in just three years, he fears those days are back. ‘Since I set up the workshop in 1998, I’ve never seen anything like this… There have always been ups and downs, but now we’re suffering from this crisis and the one before,’ the 57-year-old said, referring to the Ukraine war and the pandemic. At 12%, annual inflation in Brazil is now at an almost two-decade high. Triggered by the surge in global food and fuel costs, officials are increasingly concerned that price pressures are becoming entrenched across the economy.”
Japan Watch:
May 19 – Reuters:
“Japan's core consumer inflation in April exceeded a central bank target of 2% for the first time in seven years, but only thanks to rising import costs, not the strong domestic demand that the central bank has been trying to kindle. Still, the 2.1% rise in the core consumer price index (CPI)… reinforces market scepticism that the Bank of Japan (BOJ) will maintain its ultra-loose monetary policy, especially since households are suffering rising costs without substantial wage growth.”
May 15 – Reuters (Daniel Leussink):
“Japan's wholesale prices in April jumped 10% from the same month a year earlier, data showed on Monday, rising at a record rate as the Ukraine crisis and a weak yen pushed up the cost of energy and raw materials. The surge in the corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, marked the fastest year-on-year rise in a single month since comparable data became available in 1981.”
May 17 – Reuters:
“Japan's economy shrank for the first time in two quarters in the January-March period as COVID-19 curbs hit the service sector and surging commodity prices created new pressures… The decline presents a challenge for Prime Minister Fumio Kishida's drive to achieve growth and wealth distribution under his ‘new capitalism’ agenda, stoking fears of stagflation - a mix of tepid growth and rising inflation. The world's No. 3 economy fell at an annualised rate of 1.0% in January-March from the previous quarter, gross domestic product (GDP) figures showed…”
May 19 – Bloomberg:
“Japan’s trade deficit widened in April as a weaker yen drove up the cost of imports, while the impact of lockdowns in China added to concerns about the outlook for global commerce. The trade deficit swelled to 839.2 billion yen ($6.6bn) from 414 billion yen in April as imports jumped 28.2% from a year ago… The shortfall was driven by Japan’s ballooning energy import bill, with the value of oil imports doubling and coal imports trebling from the previous year.”
Social Instability Watch:
Energy and Climate Watch:
https://elonionbloggle.blogspot.com/2022/05/climate-amd-energy-news-summary-of-last.html
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