Credit Bubble Bulletin
Revisiting the Bursting China Bubble
Friday July. 8. 2022
by Doug Noland
Following is my edited easy to read version
Ye Editor
For the Week Ending July 8, 2022
GLOBAL STOCK INDEXES:
S&P500 rallied 1.9% (down 18.2% y-t-d)
Dow increased 0.8% (down 13.8%)
Utilities fell 2.7% (down 3.0%)
Banks increased 0.4% (down 3.0%)
Transports advanced 0.8% (down 18.7%)
S&P 400 Midcaps recovered 1.1% (down 18.4%)
Small cap Russell 2000 rallied 2.4% (down 21.2%)
Nasdaq100 surged 4.7% (down 25.7%)
Semiconductors rallied 6.5% (down 33.7%)
Biotechs rose 3.4% (down 11.1%).
With bullion down $65,
the HUI gold stock index dropped 4.5% (down 16.3%).
U.K.'s FTSE increased 0.4% (down 2.5% y-t-d).
Japan's Nikkei rallied 2.2% (down 7.9% y-t-d)
Japan's Nikkei rallied 2.2% (down 7.9% y-t-d)
France's CAC40 recovered 1.7% (down 15.7%)
German DAX gained 1.6% (down 18.1%).
Spain's IBEX 35 declined 0.9% (down 7.0%).
Italy's FTSE MIB rallied 2.0% (down 20.4%)
Brazil's Bovespa gained 1.3% (down 4.3%)
Mexico's Bolsa slipped 0.5% (down 10.7%).
South Korea's Kospi recovered 2.0% (down 21.1%).
India's Sensex jumped 3.0% (down 6.5%).
China's Shanghai declined 0.9% (down 7.8%).
Turkey's Istanbul National 100 dipped 0.4% (up 31.0%).
Russia's MICEX increased 0.7% (down 41.3%).
US BONDS:
Three-month Treasury bill rates ended the week at 1.85%. Two-year government yields surged 27 bps to 3.11% (up 238bps y-t-d).
Five-year T-note yields jumped 25 bps to 3.13% (up 186bps).
Ten-year Treasury yields rose 20 bps to 3.08% (up 157bps).
Long bond yields gained 14 bps to 3.25% (up 135bps).
Benchmark Fannie Mae MBS yields surged 26 bps to 4.51% (up 244bps).
Federal Reserve Credit last week dropped $34.3bn to $8.855 TN. Fed Credit is down $45.5bn from the June 22nd peak. Over the past 147 weeks, Fed Credit expanded $5.129 TN, or 138%.
Federal Reserve Credit last week dropped $34.3bn to $8.855 TN. Fed Credit is down $45.5bn from the June 22nd peak. Over the past 147 weeks, Fed Credit expanded $5.129 TN, or 138%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates dropped 40 bps to 5.30% (up 240bps y-o-y).
Freddie Mac 30-year fixed mortgage rates dropped 40 bps to 5.30% (up 240bps y-o-y).
Fifteen-year rates sank 38 bps to 4.45% (up 225bps).
Five-year hybrid ARM rates fell 31 bps to 4.19% (up 167bps).
Jumbo mortgage 30-year fixed rates down nine bps to 5.69% (up 262bps).
Currency Watch:
For the week, the U.S. Dollar Index gained 0.9% to 107.01
Currency Watch:
For the week, the U.S. Dollar Index gained 0.9% to 107.01
(up 9.9% y-t-d).
The Chinese (onshore) renminbi increased 0.1% versus the dollar (down 5.06% y-t-d).
COMMODITIES:
Bloomberg Commodities Index declined 1.0% (up 16.9% y-t-d).
COMMODITIES:
Bloomberg Commodities Index declined 1.0% (up 16.9% y-t-d).
Spot Gold dropped 3.6% to $1,742 (down 4.7%).
Silver fell 2.7% to $19.32 (down 17.1%).
WTI crude dropped $3.62 to $104.79 (up 41%).
Gasoline sank 6.0% (up 55%)
Natural Gas rallied 5.9% to $6.03 (up 62%).
Copper fell 2.7% (down 21%).
Wheat rallied 6.0% (up 16%)
Corn recovered 2.7% (up 5%).
Bitcoin rallied $2,300, or 11.8%,
this week to $21,900 (down 53%).
DOUG NOLAND'S COMMENTARY:
(highly edited)
The late-nineties U.S. “tech” Bubble was financed, at the margin, by high-yield debt (telecom, in particular), speculative hedge fund levered finance, and GSE liquidity. The Bubble was reasonably well contained within the technology, telecom and media sectors. Importantly, since the Bubble was not systemic, the system readily responded to Fed reflationary measures. It helped tremendously that housing and mortgage finance were, even in the midst of the bursting tech Bubble, demonstrating powerful inflationary biases.
The resulting mortgage finance Bubble was more systemic. This historic Bubble was - at the margin - financed by perceived safe and liquid (money-like) “AAA” mortgage securities and derivatives (too much acquired for leveraged speculation). This critical dynamic ensured the Bubble period was more prolonged, excesses broader and deeper, and associated financial and economic structural impairment much greater. Accordingly, the subsequent U.S. bust was deeply systemic.
The current backdrop is unique. The global Bubble period was unprecedented in scope and duration. Bubble Dynamics went to the foundation of global “money” – central bank Credit and government debt. This provided unparalleled durability to Bubble Dynamics, where years of the most egregious excess (i.e. monetary, fiscal, leveraged speculation, Bubbles, manias, mal-investment, etc.) wreaked historic financial and economic structural maladjustment. Bubble excess could not have been more systemic on a global basis.
... July 4 – CNN (Laura He): “Another major Chinese developer has defaulted on its debt, dealing a new blow to the ailing real estate sector in the world's second largest economy. Shanghai-based Shimao Group failed to pay the interest and principal on a $1 billion bond due Sunday… On Friday, a survey by China Index Academy — a property research firm — showed that prices for new homes in 100 cities plunged more than 40% in the first half of this year, compared with the same period last year.”
There is ample evidence that China’s historic Bubble is in increasing peril. Things are really bad, but are almost certainly a lot worse than what we think. Most ominous of all, China’s Bubbles are faltering even with ongoing massive (double-digit) Credit growth.
... The more positive mood received support from stronger-than-expected June payrolls data (plus 372,000). JOLTS (job openings) data also surprised to the upside (11.254 million). The Services PMI (52.7) and ISM Services Index (55.3) both beat forecasts.
NEWS SUMMARY:
... The more positive mood received support from stronger-than-expected June payrolls data (plus 372,000). JOLTS (job openings) data also surprised to the upside (11.254 million). The Services PMI (52.7) and ISM Services Index (55.3) both beat forecasts.
NEWS SUMMARY:
Bursting Bubble/Mania Watch:
July 3 – Wall Street Journal (Vicky Ge Huang): “It has been three weeks since crypto lender Celsius Network LLC took the drastic step of halting customers’ withdrawals. Many people are starting to wonder if they will ever see their money again… The crypto market is crashing, and the resulting credit crunch is pummeling small-time traders and big-name companies. At least four other crypto firms—Babel Finance, CoinFlex, Voyager Digital Ltd. and Finblox—have told customers that they can’t withdraw their money or capped the amount they can take out.”
July 4 – Financial Times (Adam Samson): “Vauld, a crypto lender backed by Coinbase and investor Peter Thiel, has halted withdrawals and trading on its platform as the credit crisis in the digital asset market intensifies. The company, which offered clients annualised returns of up to 40% to lend out their crypto tokens, said… clients had yanked almost $200mn from its platform in the past three weeks as high-profile failures ricochet through the industry. It had appointed advisers to look at all potential options, including a restructuring, Vauld said…”
July 6 – Reuters (Shivam Patel, Sinead Cruise and Tom Wilson): “U.S. crypto lender Voyager Digital said… it had filed for bankruptcy, becoming another casualty of a dramatic fall in prices that has shaken the cryptocurrency sector. Crypto lenders such as Voyager boomed in the COVID-19 pandemic, drawing depositors with high interest rates and easy access to loans rarely offered by traditional banks. However the recent slump in crypto markets - sparked by the downfall of two major tokens in May - has hurt lenders.”
Russia/Ukraine War Watch:
July 6 – Wall Street Journal (Alan Cullison): “Russia’s steady advances in eastern Ukraine, relying on superior firepower and larger numbers of troops, are grinding down Ukraine’s military and setting the stage for a protracted war of attrition in which Kyiv needs more Western weapons and help training new soldiers to turn the tide. After early missteps, Russia has found tactics that are working. In the invasion’s opening phase, Moscow’s armies tried to make daring thrusts deep into Ukrainian territory. They largely failed and lost elite units in the process. Now, Russian forces are advancing by increments under the cover of artillery. Russia is massing ‘a very heavy concentration of artillery and armor in every square kilometer that we are unable to cope with,’ Oleksiy Danilov, secretary of Ukraine’s National Security and Defense Council, told The Wall Street Journal. ‘This is giving them the advantage.’”
Economic War/Iron Curtain Watch:
July 6 – Bloomberg (Dan Murtaugh and Debjit Chakraborty): “Russia has pocketed $24 billion from selling energy to China and India in just three months following its invasion of Ukraine, showing how higher global prices are limiting efforts by the US and Europe to punish President Vladimir Putin. China spent $18.9 billion on Russian oil, gas and coal in the three months to the end of May, almost double the amount a year earlier… Meanwhile, India shelled out $5.1 billion in the same period, more than five times the value of a year ago. That’s an extra $13 billion in revenue from both countries compared to the same months in 2021.”
Russia/China/U.S. Watch:
July 6 – Bloomberg: “Russian authorities are pushing through a raft of new repressive measures against domestic opponents, expanding crackdowns on critics as the Kremlin’s war in Ukraine is in its fifth month. Legislators have approved new proposals to dramatically broaden treason statutes, as well as restrictions on ‘foreign agents,’ a legal category that’s been used widely against critics and independent journalists. Another new draft law would restrict the publication of any information deemed to be of use by ‘unfriendly countries’ in targeting sanctions. The moves all have strong Kremlin support.”
Inflation Watch:
July 6 – Bloomberg (Martine Paris): “... A record share of new car shoppers are being saddled with monthly payments topping $1,000, according… Edmunds. That’s higher than the average cost of rent in 24 US metro areas on the Zumper National Rent Report… A new poll from Monmouth University showed 42% of Americans say they are struggling to remain where they are financially.”
U.S. Bubble Watch:
July 8 – CNBC (Jeff Cox): “Job growth accelerated at a much faster pace than expected in June, indicating that the main pillar of the U.S. economy remains strong despite pockets of weakness. Nonfarm payrolls increased 372,000 in the month, better than the 250,000 Dow Jones estimate and continuing what has been a strong year for job growth… The unemployment rate was 3.6%, unchanged from May and in line with estimates. An alternative measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons fell sharply, dropping to 6.7% from 7.1%... Average hourly earnings increased 0.3% for the month and were up 5.1% from a year ago…”
July 7 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly rose last week and demand for labor is slowing, with layoffs surging to a 16-month high in June as aggressive monetary policy tightening from the Federal Reserve stokes recession fears. Initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 235,000 for the week ended July 2…”
July 6 – Reuters (Lucia Mutikani): “The U.S. services industry slowed less than expected in June, but a measure of services employment dropped to a two-year low… The Institute for Supply Management said… its non-manufacturing activity index slipped to 55.3 last month from a reading of 55.9 in May. The third straight monthly decline pushed the index to its lowest level since May 2020… The ISM's measure of new orders received by services businesses fell to a still-high reading of 55.6 last month from 57.6 in May. Businesses reported a surge in order backlogs, while exports continued to grow.”
July 5 – Reuters: “New orders for U.S.-manufactured goods increased more than expected in May, bucking a slew of recent data showing a softening in the economy and underscoring that demand for products remains strong even as the Federal Reserve aggressively tightens financial conditions… Factory orders rose 1.6% in May after advancing 0.7% in April…”
July 7 – Bloomberg (John Gittelsohn): “San Francisco, one of the most-expensive US cities for housing, is starting to see prices fall for the first time since the depths of the pandemic. The median house price in the city dropped 3% from a year earlier to $1.89 million in June, according to… Compass Inc., after cresting above a record $2 million in the previous three months. The latest price was still 20% above the level in March 2020… ‘It’s probable, though not yet certain, that one of the longest, most dramatic real estate market upcycles in history — oddly enough, supercharged by a deadly, worldwide pandemic — peaked this past spring,’ Patrick Carlisle, San Francisco Bay area market analyst for Compass, wrote…”
July 2 – NPR (Brittany Cronin): “ ... The average monthly car payment crossed $700 a month earlier this year, the highest on record, according to Cox Automotive/Moody’s Analytics. ‘I joke with people that every new car purchase is a luxury car purchase, I don’t care what you're buying,’ says Ivan Drury, senior manager of insights at the car buying expert Edmunds.”
July 6 – Bloomberg (Claire Ballentine and Ella Ceron): “Households already squeezed by inflation could soon face another financial blow: the resumption of student loan payments. Federal student debt payments were first frozen in March 2020 as part of a broad stimulus effort meant to protect Americans from the worst of the pandemic economic slump… Now, the latest forbearance period is set to end Aug. 31 as prices surge for gas, groceries and rent… ‘People just don't have enough money,’ said Thomas Gokey, co-founder of the Debt Collective… ‘If they restart payments, whether it's in August, whether it's after the midterms, there will be mass defaults because people simply cannot pay.’”
July 4 – Associated Press (Mae Anderson): “ ... most of the government aid programs that helped small businesses get through the pandemic have ended while inflation has sharply pushed up the cost of supplies, shipping, and labor… Thirty-three percent of all U.S. small businesses could not pay their May rent in full and on time, up from 28% in April, according to a survey from Alignable… And 52% said rent has increased over the past six months.”
July 6 – CNBC (Robert Frank): “Sales contracts for Manhattan apartments plunged by nearly a third in June as the city’s scorching real estate market started to cool amid recession fears and declining stocks. New York real estate was on a tear through the early spring... The median sales price for the second quarter rose to a record $1.25 million, according to… Miller Samuel and Douglas Elliman. The number of sales — at over 3,800 — was the highest total for the second quarter since the housing boom of 2007.”
July 6 – Wall Street Journal (James Mackintosh): “ ... households are the most depressed they have been since the University of Michigan began its long-running Consumer Sentiment index in the 1950s. When consumers are worried about their finances and the economy, the danger is a self-fulfilling cut in spending that brings on a recession. The sanity check: Really? Worse than when lines of cars waited for hours for fuel in a deep recession in 1974, if it was even available? Worse than when unemployment was almost double the current level and inflation in double digits in 1980, with interest rates at 14.5%? Worse than after the 9/11 attacks, or when the global banking system was on the brink of failure in 2008?”
China Watch:
July 6 – Bloomberg: “Signs are mounting that China’s economy shrank in the second quarter for the first time since 2020, placing the nation’s official statistics under fresh scrutiny as analysts bet the government will avoid acknowledging that slump. The consensus forecast from economists in a Bloomberg survey is that the government will next week report gross domestic product grew about 1.5% in the second quarter... Yet high-frequency data for June and losses in the previous two months suggest the economy contracted over that period due to the lingering effects of lockdowns in dozens of cities… ‘There is no plausible story that GDP growth should be positive in the second quarter,’ said Logan Wright, head of China markets research at Rhodium Group. ‘The downturn in household consumption is very significant within both the official retail sales data and other proxies. And the property sector remains a significant drag.’”
July 7 – Bloomberg (Liz Ng): “China’s steel mills are sounding the alarm over crisis conditions in the industry as margins plunge due to weak demand. The starkest warning yet has come from Hunan Valin Iron & Steel Group, which met this week to discuss the rapid downturn in the sector and the measures it needs to take to ensure the company’s survival… Citing industry experts, the mill based in southern China said it expects the crisis to persist for five years. Other mills in both the northwest and southwest of the country have pledged to reduce output as they wait on infrastructure spending to revive steel demand.”
Global Bubble and Instability Watch:
July 5 – Associated Press (Elaine Kurtenbach): “Sri Lanka is desperate for help with weathering its worst crisis in recent memory. Its schools are closed for lack of fuel to get kids and teachers to classrooms. Its effort to arrange a bailout from the International Monetary Fund has been hindered by the severity of its financial crisis... But it’s not the only economy that’s in serious trouble as prices of food, fuel and other staples have soared with the war in Ukraine. Alarm bells are ringing for many economies around the world, from Laos and Pakistan to Venezuela and Guinea. Some 1.6 billion people in 94 countries face at least one dimension of the crisis in food, energy and financial systems, and about 1.2 billion of them live in ‘perfect-storm’ countries, severely vulnerable to a cost-of-living crisis plus other longer-term strains, according to… the Global Crisis Response Group of the United Nations Secretary-General.”
July 4 – Reuters (Cynthia Kim and Jihoon Lee): “South Korea's inflation last month hit the highest since the Asian financial crisis more than two decades ago, adding to signs of building strains on the open, trade-dependent economy and fanning expectations of a big rate hike by the central bank… The consumer price index grew a slightly faster-than-expected 6.0% in June over a year earlier - the highest since November 1998 - while other data showed foreign exchange reserves shrank by the most since late 2008.”
Europe Watch:
July 3 – Financial Times (Martin Arnold and Guy Chazan): “Germany’s political and business leaders warned that the country was facing its biggest economic crisis for decades as soaring energy prices and disruptions to trade pushed the country into a monthly trade deficit in goods for the first time in more than 30 years. The rise in energy prices increased the cost of imports to Europe’s largest economy in May, while global trade disruption weighed down exports, causing a $1bn deficit — the first since 1991. The figures contrasted with years in which Germany’s manufacturing exports drove the country’s growth and made it the powerhouse of the EU economy. Warning… that Germany faced a ‘historic challenge’, chancellor Olaf Scholz added that ‘the crisis won’t pass in a few months’ because Russia’s war in Ukraine ‘has changed everything, and supply chains are still disrupted by the pandemic’.”
Emerging Market Bubble Watch:
July 7 – Bloomberg (Sydney Maki): “A quarter-trillion dollar pile of distressed debt is threatening to drag the developing world into a historic cascade of defaults. Sri Lanka was the first nation to stop paying its foreign bondholders this year, burdened by unwieldy food and fuel costs that stoked protests and political chaos. Russia followed in June after getting caught in a web of sanctions. Now, focus is turning to El Salvador, Ghana, Egypt, Tunisia and Pakistan — nations that Bloomberg Economics sees as vulnerable to default.”
July 4 – Bloomberg (Beril Akman): “One of the world’s worst inflation crises closed in further on another grim milestone in Turkey, and government efforts to help the population cope with the fallout only threaten to make it worse. Price growth has been in the double digits almost without interruption since the start of 2017, but it exploded this year near a quarter-century high… Data… showed annual inflation accelerated for a 13th straight month to 78.6% in June… Further upward pressure came from energy prices, which soared 151.3% from a year earlier, while food inflation reached almost 94%.”
Japan Watch:
July 8 – Reuters (Satoshi Sugiyama and Chang-Ran Kim): “Former Prime Minister Shinzo Abe, the longest-serving leader of modern Japan, was gunned down on Friday while campaigning for a parliamentary election, shocking a country where guns are tightly controlled and political violence almost unthinkable. Abe, 67, was pronounced dead around five and a half hours after the shootingin the city of Nara. Police arrested a 41-year-old man and said the weapon was a homemade gun.”
July 4 – Bloomberg (Shoko Oda): “The slump in the Japanese yen, the war in Ukraine and a heatwave in Tokyo are pushing the world’s third-biggest economy toward a full-blown energy crisis. Japan imports about 90% of its energy, mostly priced in dollars, and costs were already soaring… ‘A confluence of factors, including the higher fuel prices since the war and the tumbling currency, is putting a significant pressure on Japan's energy security, making this one of the most serious energy crises Japan has had,’ said Jane Nakano, a senior fellow at the Center for Strategic & International Studies.”
Environmental Watch:
July 8 – LA Times (Ian James and Sean Greene): “California regulators have begun curtailing the water rights of many farms and irrigation districts along the Sacramento River, forcing growers to stop diverting water from the river and its tributaries… ‘The need to take these curtailment actions is in many ways unprecedented. And it reflects just how dry things have been in California over the last three years,’ said Erik Ekdahl, deputy director of the state water board’s water rights division. ‘After three years of really unprecedented drought, reservoir storage is at record lows for much of the state. And there's just simply not enough water to go around.’”
July 7 – USAT (Jeanine Santucci): “Utah's Great Salt Lake has hit a record low water level for the second time in less than a year, a troubling sign amid historic drought conditions ... The lake dipped to 4,190.1 feet on Sunday, lower than the last time the water's surface matched a low record in October 2021… ‘This is not the type of record we like to break,’ Utah Department of Natural Resources Executive Director Joel Ferry said. ‘Urgent action is needed to help protect and preserve this critical resource. It’s clear the lake is in trouble. We recognize more action and resources are needed, and we are actively working with the many stakeholders who value the lake.’”
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