SOURCE:
Credit Bubble Bulletin : Weekly Commentary: Nowhere to Hide
Credit Bubble Bulletin
Friday, July 22, 2022
Weekly Commentary
Japan's Nikkei surged 4.2% (down 3.0% y-t-d).
Two-year government yields fell 15 bps to 2.97% (up 224bps y-t-d).
Five-year T-note yields sank 17 bps to 2.84% (up 158bps).
Ten-year Treasury yields dropped 17 bps to 2.75% (up 124bps).
Long bond yields declined 11 bps to 2.975% (up 107bps).
Benchmark Fannie Mae MBS yields sank 23 bps to 4.165% (up 210bps).
Federal Reserve Credit last week expanded $11.2bn to $8.870 TN. Fed Credit is down $30.7bn from the June 22nd peak. Over the past 149 weeks, Fed Credit expanded $5.143 TN, or 138%.
US MORTGAGES:
Currency Watch:
to 106.73 (up 11.6% y-t-d).
The Chinese (onshore) renminbi increased 0.08%
versus the dollar (down 5.86% y-t-d).
Commodities Watch:
rallied 2.7% (up 17.5% y-t-d).
Spot Gold recovered 1.1% to $1,728 (down 5.6%).
Silver slipped 0.6% to $18.60 (down 20.2%).
WTI crude dropped $2.89 to $94.70 (up 25.9%).
Gasoline increased 0.3% (up 45%)
Natural Gas surged 18.3% to $8.30 (up 123%).
Copper rallied 3.6% (down 25%).
Wheat fell 2.3% (down 2%)
Corn sank 6.5% (down 5%).
this week to $22,732 (down 51%).
(highly edited)
The mortgage finance Bubble here in the U.S. was significantly more systemic. Fueled by “AAA” money-like mortgage securities, this more prolonged Bubble went to gross excess with associated major structural maladjustment. Accordingly, the bursting episode was much more destabilizing - for the markets, financial system and overall economy – the so-called “Great Financial Crisis” (GFC). And even with an unprecedented $1 TN of QE, it took years for even radical monetary inflation to generate system-wide reflation.
With that theoretical backdrop, let’s delve into the “everything Bubble”. Appraising the Fed’s post-bubble analytical and policy framework, I began warning of the potential for the “global government finance Bubble” – the “Granddaddy of All Bubbles” - back in 2009. With the introduction of QE in conjunction with massive fiscal deficits, the expansive Bubble had finally reached the foundation of finance – central bank Credit and government debt. From my analytical perspective, it was the worst-case scenario: The Bubble was being fueled by an egregious inflation of “money” - and it all was enveloping the world.
It was monetary and fiscal stimulus – inflationism - on a global basis, the likes of which the world had never experienced. And, importantly, the Bubble inflated for an incredible 13 years. History teaches that things can get crazy at the end of cycles, and we witnessed some of the craziest things ever. Readers far into the future will ponder this era, as we do the tulip bulb mania and John Law’s Mississippi Bubble. And, most unfortunately, it’s all coming home to roost now. ...
I remember the mantra in mid-1998: “The West will never allow Russia to collapse.” And then in 2006/2007, “Washington will never allow a housing bust.” Today, it’s “Beijing won’t allow financial and economic crisis – it won’t tolerate fallout from bursting Bubbles – not with its global superpower status on the line.” ...
There is incredible complacency these days, especially considering the environment. Ominous developments at the global “Periphery” are easily disregarded. This is typical. The dollar is exceptionally strong, commodities prices have reversed sharply lower, bond yields are lower, and some see the Fed winding down its tightening cycle in the not too distant future – and all this supports the narrative that peak inflation has passed, and market lows have been established. ...
Markets are extraordinarily vulnerable here – stocks, bonds, housing, private equity, commercial real estate, and so on. ...
The Fed’s most recent $5 TN QE onslaught pushed leverage and speculative excess to unprecedented extremes. ...
Fundamentally altered inflation dynamics are a prominent aspect of the new cycle. The era of endless cheap imports from China and Asia has largely run their course. And Russia’s invasion of Ukraine and the new Iron Curtain solidified the end of a multi-decade period of integration and globalization. And while commodity prices have retreated over recent weeks, we believe the new cycle will be an era of hard asset outperformance versus financial assets. And this dynamic will change so many things, including raising the risk that QE injections feed directly into higher commodities prices and general inflation. The job of a central banker has become incredibly more challenging.
Markets can no longer take for granted that the Fed is willing and able to ensure the perpetual bull market. ...
NEWS SUMMARY:
Market Instability Watch:
July 21 – Bloomberg (Wei Zhou and Dorothy Ma): “China’s credit market is now showing stress on an almost daily basis, as a worsening property crisis shatters assumptions about safe borrowers and even Chinese investors turn against troubled debtors. The country’s junk dollar bonds were on the brink of record lows Thursday, as a state-backed developer sought payment delays on $1.6 billion of dollar notes. In other signs of stress, the debt of a private builder deemed healthy just months ago sank, while creditors spurned a restructuring plan by the parent of BMW AG’s China partner. Taken together, the incidents point to a credit market in a new phase of turmoil as stress spreads from cash-starved private developers to those with government backing and companies outside the housing sector. Chinese investors pushing back on debt reprieves or unfavorable restructuring plans also suggest dwindling confidence in Beijing’s ability to pull off a fast economic turnaround.”
Economic War/Iron Curtain Watch:
July 21 – Reuters (Vitalii Hnidyi and Jonathan Spicer): “Russia and Ukraine will sign a deal on Friday to reopen Ukraine's Black Sea ports, Turkey said, a potential breakthrough that could ease the threat of hunger facing millions around the world as a consequence of Russia's invasion… Although Russia's ports have not been shut, Moscow had complained that its shipments were hurt by Western sanctions. The United States and the European Union have both adjusted their sanctions recently to spell out more clearly exceptions for Russian food and fertiliser exports.”
U.S. Bubble Watch:
July 21 – CNBC (Jeff Cox): “Initial jobless claims hit their highest level since mid-November last week, the latest sign that a historically tight labor market is beginning to slow… Claims totaled 251,000 for the week ended July 16, up 7,000 from the week before and above the 240,000 Dow Jones estimate.”
July 20 – CNBC (Diana Olick): “Sales of previously owned homes in June fell 5.4% from May…, as prices set records and rates surged. The sales count declined to a seasonally adjusted annualized rate of 5.12 million units last month, the group said. Sales were 14.2% lower compared with June 2021 This is the slowest sales pace since the same month in 2020… These numbers are based on home closings, so the contracts were likely signed in April and May, before the average rate on the 30-year fixed mortgage shot above 6%... There were 1.26 million homes for sales at the end of June. That is an increase of 2.4% from the previous June, and the first year-over-year gain in three years. At the current sales pace, inventory now stands at a three-month supply… The still-tight supply, however, is keeping the heat under home prices. The median price of an existing home sold in June set yet another record at $416,000, an increase of 13.4% year over year.”
China Watch:
July 19 – Bloomberg (Rebecca Choong Wilkins): “Over the past few years, President Xi Jinping has reined in China’s biggest tech companies, stamped out democracy in Hong Kong and locked down 26 million people in Shanghai to eliminate Covid cases. Yet he now faces a surprise challenge from middle-class homeowners who are watching their family wealth slip away with a sustained slide in the property market, which makes up a fifth of China’s economic activity. Some 70% of household wealth in China is tied up in property, far more than in the US, making it one of the most sensitive political issues for the Communist Party. For months Xi has stood firm in reining in over-leveraged Chinese developers, spurring a record wave of defaults that spooked global investors and brought at least 24 leading property companies to the brink of collapse. In the process, more than $80 billion has been wiped from its offshore bond market.”
July 19 – Bloomberg: “Some suppliers to Chinese real estate developers are refusing to repay bank loans because of unpaid bills owed to them, a sign that the loan boycott that started with homebuyers is starting to spread. Hundreds of contractors to the property industry complained that they can no longer afford to pay their own bills because developers including China Evergrande Group still owe them money, Caixin reported… One group of small businesses and suppliers circulated a letter online saying they will stop repaying debts after Evergrande’s cash crisis left them out of pocket. ‘We decided to stop paying all loans and arrears, and advise our peers to decline any requests to be paid on credit or commercial bill,’ the group said… ‘Evergrande should be held responsible for any consequence that follows because of the chain reaction of the supply-chain crisis.’”
July 21 – Economic Times: “In a grim reminder of the 1989 Tiananmen Square Massacre, armoured tanks were seen deployed on the streets of China amidst large-scale protests by people demanding the release of their savings frozen by banks. The country's Henan province has been for the past several weeks witnessing clashes between police and depositors with the latter saying they have been prevented from withdrawing their savings from banks since April this year. Fresh videos have surfaced online in which Chinese Peoples Liberation Army (PLA's) tanks can be seen deployed on the streets to scare protestors. Large-scale protests are being held in the province by bank depositors over the release of their frozen funds.”
Global Bubble and Instability Watch:
July 22 – Bloomberg (Chikako Mogi): “Japanese investors cut holdings of overseas bonds for a record eighth week as Federal Reserve interest-rate hikes and accelerating global inflation sap their demand for foreign debt. Funds in the Asian nation offloaded a net 919.6 billion yen ($6.7bn) of overseas fixed-income securities in the week through July 15… The latest figures extend weekly sales to the longest since Bloomberg started collecting the data in 2005. ‘Wariness over a further drop in Treasury prices remains deep-rooted amid concern over US inflation, and that is deterring appetite to buy overseas bonds,’ said Tsuyoshi Ueno, a senior economist at NLI Research Institute... ‘There may also be a move to cut losses.’”
Europe Watch:
July 22 – Bloomberg (Carolynn Look): “Private-sector activity in the euro area unexpectedly shrank for the first time since the pandemic lockdowns of early 2021, adding to signs that a recession might be on the horizon. A survey of purchasing managers by S&P Global dropped to a 17-month low in July, dipping beneath the level that signals contraction… ‘A steep loss of new orders, falling backlogs of work and gloomier business expectations all point to the rate of decline gathering further momentum,’ said Chris Williamson, an economist at S&P Global. ‘Of greatest concern is the plight of manufacturing, where producers are reporting that weaker-than-expected sales have led to an unprecedented rise in unsold stock.’”
Emerging Markets Crisis Watch:
July 22 – Bloomberg: “Russia’s central bank brought interest rates below their level before the invasion of Ukraine, seizing on steep slowdown in inflation to ease monetary policy more than forecast. Policy makers lowered their benchmark to 8% from 9.5% on Friday and signaled they will consider further reductions in the second half of the year. The fifth straight cut was bigger than predicted…”
Japan Watch:
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.