Credit Bubble Bulletin
Saturday, May 14, 2022
Weekly Commentary: The Acceleration Phase
by Doug Noland
My edited easy to read version follows
Ye Editor
For the Week Ending May 13, 2022:
GLOBAL STOCK INDEXES:
S&P500 declined 2.4% (down 15.6% y-t-d)
Dow Industrials fell 2.1% (down 11.4%)
Utilities declined 1.5% (down 1.9%)
Banks sank 4.6% (down 18.8%)
Transports lost 3.0% (down 12.3%)
S&P 400 Midcaps slumped 2.0% (down 14.5%)
Small cap Russell 2000 dropped 2.5% (down 20.2%)
Nasdaq100 fell 2.4% (down 24.1%)
Semiconductors slipped 0.4% (down 24.7%)
Biotechs dipped 0.2% (down 18.1%).
With gold bullion down $72,
the HUI gold stock index sank 9.7%
(down 4.4%).
U.K.'s FTSE increased 0.4% (up 0.5% y-t-d).
Japan's Nikkei declined 2.1% (down 8.2% y-t-d).
France's CAC40 rallied 1.7% (down 11.0%)
German DAX recovered 2.6% (down 11.7%).
Spain's IBEX 35 increased 0.2% (down 4.3%).
Italy's FTSE MIB rallied 2.4% (down 12.1%).
Brazil's Bovespa gained 1.7% (up 2.0%)
Mexico's Bolsa was little changed (down 6.9%).
South Korea's Kospi fell 1.5% (down 12.5%).
India's Sensex sank 3.7% (down 9.4%).
China's Shanghai rallied 2.8% (down 15.3%).
Turkey's Istanbul National 100 lost 1.6% (up 30.2%).
Russia's MICEX slumped 3.6% (down 39.1%).
US BONDS:
Three-month Treasury bill rates
ended the week at 0.9275%.
Two-year government yields
fell 15 bps to 2.58% (up 185bps y-t-d).
Five-year T-note yields
dropped 21 bps to 2.87% (up 160bps).
Ten-year Treasury yields
sank 21 bps to 2.92% (up 141bps).
Long bond yields
declined 15 bps to 3.08% (up 118bps).
Benchmark Fannie Mae MBS yields
dropped 16 bps 4.16% (up 209bps).
Federal Reserve Credit last week
added $0.7bn to $8.905 TN.
Over the past 139 weeks,
Fed Credit expanded $5.178 TN, or 139%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
increased three bps to 5.30% (up 236bps y-o-y) -
the high since August 2009.
Fifteen-year rates
dipped four bps to 4.48%
- near the high since December 2009 (up 222bps).
Five-year hybrid ARM rates
increased two bps to 3.98% (up 139bps).
CURRENCIES:
For the week, the U.S. Dollar Index
gained 0.9% to 104.56 (up 9.3% y-t-d),
The Chinese (onshore) renminbi dropped 1.80%
versus the dollar (down 6.38% y-t-d).
COMMODITIES:
May 11 – Wall Street Journal:
The U.S. Department of Agriculture said 22% of corn was planted, compared with 50% for the previous-five-year average. For soybeans, 12% was planted, compared with the previous-five-year average of 24%, and 27% of spring wheat was in the ground compared with a typical 47%...”
The Bloomberg Commodities Index
declined 1.6% (up 29.4% y-t-d).
Spot Gold fell 3.8% to $1,812 (down 1.0%).
Silver sank 5.6% to $21.11 (down 9.4%).
Copper dropped 2.2% (down 7%)
WTI crude increased 72 cents to $110.49 (up 69%).
Gasoline jumped 5.3% (up 78%)
Natural Gas fell 4.7% (up 105%)
Wheat surged 6.2% (up 53%)
Corn slipped 0.4% (up 32%)
Bitcoin sank $6,300, or 17.4%,
this week to $29,800 (down 36%).
DOUG NOLAND'S COMMENTARY
(highly edited)
After beginning the week at $34,000, Bitcoin traded down to $25,488 in early-Thursday panic selling.
May 12
– Wall Street Journal:
Bitcoin’s loss for the week was 17.4%,
boosting y-t-d losses to 36%.
Ethereum ended the week down 24.5%.
XRP ended the week down 29.2%.
If there was less crypto mining, there would be
more electricity available for more productive uses.
The junk bond market has essentially been closed for new issuance. And, importantly, the leveraged loan market has rather quickly ground to a halt.
I can’t emphasize enough the ramifications for what I believe is a historic reversal of speculative finance. ... contemporary finance appears to function splendidly so long as speculative leverage is expanding and asset prices are inflating. It functions quite poorly in reverse, and it’s now in full reversal – de-risking / deleveraging – mode. And over the years, we’ve witnessed several problematic speculative de-leveraging episodes spur dovish pivots, rate cuts, and ever larger QE that invariably thwarted Crisis Dynamics and resuscitated Bubble Dynamics. Epic pandemic monetary inflation basically guaranteed eventual collapse.
Compounding the complex and high-risk U.S. backdrop, there are synchronized Bubble collapses unfolding across the globe. And nowhere are the stakes higher than in China, where Bubble deflation has entered the high-risk acceleration phase.
Chinese Consumer Loans contracted $32 billion last month, down from April 2021’s $79 billion expansion. This places four-month (2022) growth at $153 billion, 66% below comparable 2021’s $455 billion. One-year growth dropped to 8.9%, the first single-digit rate in data back to 2007. It’s worth noting that one-year growth exceeded 15% from March 2009 through December 2019.
Credit growth slowed dramatically in April, as the Chinese economy suffered from draconian lockdowns. Moreover, Consumer borrowing has recently collapsed. After averaging quarterly growth of $285 billion over the last 13 quarters, Consumer Loans increased only $29 billion during the past three months.
The great Chinese apartment Bubble is bursting, and Beijing stimulus measures will now have only muted effects. The days of millions of Chinese borrowing aggressively to speculate in multiple apartment units have run its course. It’s now a matter of how quickly and dramatically prices adjust – along with how long before tens of millions of unoccupied units come to market.
With no indication Beijing is prepared to back off from “Covid zero,” there is now a heightened risk of a precipitous drop in consumer / business sentiment and economic activity. The risk of destabilizing capital flight is high. It seems to boil down to one critical question: Can Beijing thwart collapse?
NEWS SUMMARY OF LAST WEEK
Market Instability Watch:
May 10 – Wall Street Journal:
“China’s equity market has plummeted, capital outflows have accelerated, and its teetering real-estate sector is struggling with unwieldy debts. Meanwhile the Federal Reserve has begun hiking rates. The yuan is down 5% against the dollar since late April. For those with long memories, all of this calls to mind the most turbulent time in Chinese financial markets over the past decade: In 2015 and 2016 the yuan lost around 10% of its value, China’s foreign-exchange reserves fell by nearly a trillion dollars, and the country narrowly avoided a real-estate and industrial debt crisis. Is history about to repeat itself?”
May 13 – Reuters:
“Global equity funds witnessed a surge in outflows in the week ended May 11… In a fifth straight week of net selling, investors liquidated global equity funds worth $10.53 billion, compared with just $1.65 billion worth of net selling in the previous week, according to Refinitiv Lipper… U.S. equity funds witnessed net selling worth $8.46 billion, European funds saw disposal of $4.33 billion, but investors were net buyers in Asian funds worth $2.23 billion.”
May 11 – Financial Times:
“European corporate debt has been hit by its heaviest pullback on record as fears over persistently high inflation and the threat of a recession send traders dashing out of the market. Bonds issued by highly rated companies in the eurozone have lost investors more than 10% since the peak nine months ago, marking by far the biggest decline since at least 2000 for an asset class typically expected to deliver much steadier returns than stock markets…”
Bursting Bubble/Mania Watch:
May 12 – New York Times:
“The price of Bitcoin plunged to its lowest point since 2020. Coinbase, the large cryptocurrency exchange, tanked in value. A cryptocurrency that promoted itself as a stable means of exchange collapsed. And more than $300 billion was wiped out by a crash in cryptocurrency prices since Monday. The crypto world went into a full meltdown this week in a sell-off that graphically illustrated the risks of the experimental and unregulated digital currencies. Even as celebrities such as Kim Kardashian and tech moguls like Elon Musk have talked up crypto, the accelerating declines of virtual currencies like Bitcoin and Ether show that, in some cases, two years of financial gains can disappear overnight.”
May 12 – CNBC:
“Bitcoin fell below $26,000 for the first time in 16 months, amid a broader sell-off in cryptocurrencies that erased more than $200 billion from the entire market in a single day. The price of bitcoin plunged as low as $25,401.29 on Thursday morning… That marks the first time the cryptocurrency has sunk below the $27,000 level since Dec. 26, 2020… Ether, the second-biggest digital currency, tanked to as low as $1,704.05 per coin. It’s the first time the token has fallen beneath the $2,000 mark since June 2021.”
May 9 – Financial Times:
“... digital assets have also come under heavy pressure in recent weeks, pushing the market value of the top 500 digital assets down by half from the record reached in November 2021 to $1.6tn, CryptoCompare data collated by the Financial Times show.”
Russia / Ukraine Watch:
May 11 – Associated Press:
“Russia pummeled the vital port of Odesa, Ukrainian officials said…, in an apparent effort to disrupt supply lines and Western weapons shipments as Ukraine’s foreign minister appeared to suggest the country could expand its war aims. With the war now in its 11th week and Kyiv bogging down Russian forces and even staging a counteroffensive, Foreign Minister Dmytro Kuleba seemed to indicate that the country could go beyond merely pushing Russia back to areas it or its allies held on the day of the Feb. 24 invasion.”
May 10 – Reuters:
“Belarus will deploy special operations troops in three areas near its southern border with Ukraine, the armed forces said… as President Alexander Lukashenko talked up the role of Russian-made missiles in boosting the country's defences. A close ally of Russia, Belarus said in March that its armed forces were not taking part in what Moscow calls its ‘special operation’ in Ukraine, but it did serve as a launchpad for Russia to send thousands of troops across the border on Feb. 24. Minsk has complained for months about NATO countries amassing soldiers near its borders - Poland, Lithuania and Latvia are all members of the alliance - and is increasing the amount and intensity of its own military exercises in response. ‘The United States and its allies continue to build up their military presence on the state borders of the Republic of Belarus,’ Chief of General Staff Viktor Gulevich said.”
Economic War / Iron Curtain Watch:
May 7 – Bloomberg:
“Russia narrowly avoided a debt default last week, but markets are still priced like it’s on the brink. Bonds are stuck at distressed levels and five-year credit default swaps put an 87% chance of a default. Those odds are lower than in April, but still elevated. The reason? The trend of international governments toward tougher sanctions and more widespread restrictions is keeping investors in the dark about the likelihood of them getting their hands on the future payments they’re owed. Even if Moscow keeps pushing to get money through the labyrinth of rules, success is far from guaranteed.”
U.S. / Russia Watch:
May 12 – Fox News:
“Former Russian President Dmitry Medvedev is warning… that the ‘pumping of Ukraine by NATO countries with weapons’ brings the risk of the conflict ‘turning into a full-fledged nuclear war.’ Medvedev, who now is the deputy chairman of Russia’s Security Council, wrote in a Telegram post that such an escalation would be a ‘catastrophic scenario for everyone.’ ‘The pumping of Ukraine by NATO countries with weapons, the training of its troops to use Western equipment, the dispatch of mercenaries and the conduct of exercises by the countries of the Alliance near our borders increase the likelihood of a direct and open conflict between NATO and Russia instead of their ‘war by proxy,’’ he said.”
May 11 – Reuters:
“Former Russian president Dmitry Medvedev accused the United States… of waging a ‘proxy war’ against Russia after the House of Representatives approved a $40 billion aid package for Ukraine, and said the U.S. economy would suffer. Writing on the messenger app Telegram, Medvedev said that the bill approved by the House on Tuesday read more was a bid ‘to deal a serious defeat to our country and limit its economic development and political influence in the world.’ Medvedev said: ‘It won’t work. The printing press by which America is constantly increasing its already inflated government debt will break faster.’”
China / Russia / U.S. Watch:
May 9 – Bloomberg:
“Chinese imports from Russia surged to a record in April, likely due to soaring global energy prices, while exports fell to the lowest level since the early months of the pandemic. Chinese companies bought $8.9 billion worth of goods from Russia in April, an almost 57% jump from the same month a year ago.”
Inflation Watch:
May 11 – Associated Press:
“U.S. consumer prices jumped 8.3% last month from a year ago… That was below the 8.5% year-over-year surge in March, which was the highest since 1981. On a monthly basis, prices rose 0.3% from March to April, the smallest rise in eight months… In April, a fallback in gas prices helped slow overall inflation… But since then, gas prices have surged to a record $4.40 a gallon. Grocery prices, too, are still soaring, in part because Russia’s invasion of Ukraine has heightened the cost of wheat and other grains. Food prices rose 1% from March to April and nearly 11% from a year ago. That year-over-year increase is the biggest since 1980.”
May 12 – Associated Press:
“U.S. producer prices soared 11% in April from a year earlier, a hefty gain that indicates high inflation will remain a burden for consumers and businesses in the months ahead. The… producer price index — which measures inflation before it reaches consumers — climbed 0.5% in April from March. That is a slowdown from the previous month, however, when it jumped 1.6%.”
May 10 – Associated Press:
“Parents across the U.S. are scrambling to find baby formula because supply disruptions and a massive safety recall have swept many leading brands off store shelves. Months of spot shortages at pharmacies and supermarkets have been exacerbated by the recall at Abbott, which was forced to shutter its largest U.S. formula manufacturing plant in February due to contamination concerns. On Monday, White House press secretary Jenn Psaki said the Food and Drug Administration was ‘working around the clock to address any possible shortages.’”
Biden Administration Watch:
May 10 – Politico:
“The Senate… gave President Joe Biden his first official stamp on the Federal Reserve at a pivotal moment for the central bank. Lisa Cook, a Michigan State University economist, was approved on a party-line vote to become the first Black woman ever to get a vote on U.S. interest rate policy, two weeks after Lael Brainard, a Fed board member since 2014, was confirmed for the No. 2 job. Two more nominees, including Chair Jerome Powell, are expected to be easily confirmed soon. The vote for Cook was 51-50, with Vice President Kamala Harris casting the tie-breaking vote.”
Federal Reserve Watch:
May 10 – Reuters:
“U.S. Federal Reserve Chair Jerome Powell's signal that the central bank plans to raise interest rates by 50 bps at each of its next two policy meeting is sensible, New York Fed President John Williams said…, as he underscored the challenging environment in which policymakers seek to tame inflation. ‘I do think as a base case of thinking, 50 bps increases makes sense exactly as Chair Powell laid out,’ Williams told reporters… ‘We are removing accommodation pretty quickly...and that gives us a little space to move in something like the 50 bps increment at the next couple of meetings.’”
U.S. Bubble Watch:
May 10 – Financial Times:
“US households added $266bn to their debt balances in the first quarter, led by mortgage loans, in the largest single-quarter increase since 2006, according to the Federal Reserve Bank of New York. The borrowing took US household debt to $15.84tn, or $1.7tn above pre-pandemic levels… Household credit card balances declined by $15bn in the quarter as borrowers paid down some of last year’s holiday spending. But the seasonal decline was more modest than normal and credit card balances were still $71bn higher than a year before.”
May 13 – Bloomberg:
“US consumer sentiment declined in early May to the lowest since 2011 as persistent concerns over inflation dimmed Americans’ views on the economy. The University of Michigan’s sentiment index fell to 59.1 from 65.2 in April… The figure was lower than all estimates…, which called for a median reading of 64. A gauge of current conditions dropped to 63.6, the lowest in 13 years, while a measure of future expectations declined 6.2 points, erasing most of April’s gains. Consumers expect prices to rise 5.4% over the next year, holding at a four-decade high for the third month in a row.”
May 10 – Wall Street Journal:
“ ... in the first quarter. Lenders issued about $859 billion in mortgages in the first quarter, down 25% from the previous year, according to… the Federal Reserve Bank of New York... The quarter also marked the first time since early 2020 that originations fell below $1 trillion The main cause was a sizable drop in refinancings, which fell about 40% from a year ago. Purchase mortgages were roughly flat, a turnaround from two years of double-digit gains.”
May 11 – Reuters:
“The average interest rate on the most popular U.S. home loan rose to its highest level since 2009 last week and demand for mortgages jumped for a second straight week despite the rising costs… The average contract rate on a 30-year fixed-rate mortgage increased to 5.53% in the week ended May 6 from 5.36% a week earlier… It has now risen 242 basis points from 12 months ago, the sharpest rise in decades…”
May 7 – CNBC:
“Between October 2021 and March of this year, union representation petitions filed at the NLRB increased 57% from the same period a year ago… Unfair labor practice charges increased 14% during the same period.”
Economic Dislocation Watch:
May 13 – Bloomberg:
“China’s biggest chipmaker and a major iPhone supplier cut their outlooks for the second quarter, joining a growing list of manufacturers warning about the fallout from lockdowns aimed at containing the country’s worst Covid outbreak in two years… China’s Covid Zero strategy, which relies on a playbook of closed borders, quarantines, lockdowns and mass testing, is up-ending its giant manufacturing sector even as the rest of the world lives with Covid and opens up.”
May 10 – Yahoo Finance:
“The long-anticipated labor negotiations between the International Longshore and Warehouse Union (ILWU) and their employers represented by the Pacific Maritime Association (PMA) begin on Tuesday. The stakes are high for supply chains as the two parties involved represent 22,000 dockworkers and shipping companies that do business at 29 West Coast ports, which account for nearly 9% of the U.S. gross domestic product. While past contract disagreements caused disruptions, leaders from both the ILWU and PMA are downplaying those fears.”
China Watch:
May 8 – Associated Press:
“China’s export growth tumbled in April as global demand weakened, adding to pressure on the world’s second-largest economy after Shanghai and other industrial cities were shut down to fight virus outbreaks. Exports rose 3.7% over a year earlier to $273.6 billion, down sharply from March’s 15.7% growth… Reflecting weak Chinese demand, imports crept up 0.7% to $222.5 billion, in line with the previous month’s growth below 1%.”
May 11 – Reuters:
“China's overall vehicle sales for April plunged almost 48% from a year earlier as COVID-19 lockdowns hit factories and showrooms, but sales of electric vehicles surged and Chinese brands took share from global rivals. The monthly sales volume was the lowest for the month in a decade, underscoring the economic toll of the tough restrictions China put in place in April in Shanghai and other cities to control the spread of COVID.”
May 10 – Financial Times:
“Venture capital and private equity funds concentrating on the Greater China region raised just $1.7bn in the first quarter of 2022, according to estimates from… Preqin, down more than 90% year on year. That marked the smallest haul since the depths of the global financial crisis in 2009. The steep drop in fundraising by the type of early-stage investors who helped Alibaba and Tencent become global brands underscored growing uncertainty over how to operate in China.”
Global Bubble and Instability Watch:
May 12 – Wall Street Journal:
"Lockdowns aimed at stamping out Covid-19 are throttling activity in the world’s second-largest economy. Overseas demand for China’s exports is fading as economies wrestle with surging prices and rising interest rates. The effects of China’s slowdown are showing up everywhere from German factories to Australian tourist spots. Exports are weakening in Asia as China’s neighbors watch their largest market sag. Companies including Apple Inc. and General Electric Co. warned investors about production and delivery problems stemming from China’s troubles, as well as dwindling sales.”
Emerging Markets Bubble Watch:
May 11 – CNN:
“Protesters in Sri Lanka have burned down homes belonging to 38 politicians as the crisis-hit country plunged further into chaos, with the government ordering troops to ‘shoot on sight.’ Police in the island nation said Tuesday that in addition to the destroyed homes, 75 others have been damaged as angry Sri Lankans continue to defy a nationwide curfew to protest against what they say is the government's mishandling of the country's worst economic crisis since 1948.”
Japan Watch:
May 10 – New York Times:
“For years, as Japan tried to boost its chronically weak economic growth, it pursued what its central bank saw as a magic formula: stronger inflation and a weaker yen. It didn’t quite work as intended. Inflation never met the government’s modest target, despite rock-bottom interest rates and heaps of fiscal stimulus. Workers’ wages stagnated, and growth remained anemic. Now, Japan is suddenly getting what it wished for — just not in the way it had hoped. While overall inflation remains moderate, food and energy costs are rising rapidly, an outgrowth not of increased demand but of market turmoil related to the pandemic and Russia’s invasion of Ukraine. And the yen has hit a two-decade low against the dollar, a dizzying drop of more than 18% since September that has unnerved Japanese businesses.”
Covid Watch:
May 11 – Reuters:
“The United States has now recorded more than 1 million COVID-19 deaths…, crossing a once-unthinkable milestone about two years after the first cases upended everyday life and quickly transformed it. The 1 million mark is a stark reminder of the staggering grief and loss caused by the pandemic even as the threat posed by the virus wanes in the minds of many people. It represents about one death for every 327 Americans, or more than the entire population of San Francisco or Seattle.”
Geopolitical Watch:
May 7 – Reuters:
“North Korea fired a ballistic missile from a submarine on Saturday, South Korea said, an escalation just before the inauguration of a South Korean president who has vowed to take a hard line against the North and the visit of the U.S. president. South Korean military said North Korea fired what is believed to be a submarine-launched ballistic missile (SLBM) into the sea off its east coast…”
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