A Phenomenal Year
Doug Nolan
2017 was phenomenal in so many ways. The year will be remembered for a tumultuous first year of the Trump Presidency, the passage of major tax legislation and seemingly endless stock market records. It was a year of synchronized global growth and stock bull markets, along with record low market volatility. It was the year of parabolic moves in bitcoin and cryptocurrencies. “Blockchain the Future of Money.”
Yet none of the above is worthy of Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.
Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.
Coming into 2017, there was some concern for a tightening of financial conditions. U.S. unemployment was below 5% and consumer price inflation was on the rise. A U.S. tightening cycle was expected to support the dollar, while a strong greenback risked pressuring currencies and liquidity conditions in China and EM generally. As the year progressed, however, it became apparent that seemingly nothing would budge the Fed from their commitment to an ultra-dovish gradualist approach to rate “normalization”.
And with virtually all assets experiencing price inflation at multiples of financing costs (short-term rates and market yields), financial conditions only loosened further as the Yellen Fed hesitantly took three little baby-steps (boosting rates a mere 75 bps). A 70 bps 2017 jump in the two-year did not inhibit a four bps decline in 10-year Treasury yields. Of course, the flattening yield curve was interpreted as a warning against further Fed “tightening”. In reality, historically low global bond yields were an indication of extraordinarily loose financial conditions, along with perceptions that central bankers would ensure finance remained loose for years to come.
December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”
December 20 – ETF.com (Drew Voros): “As of last Thursday, the amount of new assets flowing into U.S.-listed ETFs totaled $466 billion, putting the milestone of $500 billion in new assets for the year closer into view, which would be almost double the previous annual record of new ETF assets. What’s more, combined with performance, the asset inflows grew the ETF market to $3.4 trillion—almost $1 trillion bigger than where the market sat a short year ago.”
December 28 – Bloomberg (Patrick Clark): “Your home may not have made the same gains as stocks or bitcoin, but it still was a robust year for the U.S. housing market. The value of the entire U.S. housing stock increased by 6.5% -- or $2 trillion -- in 2017, according to… Zillow. All homes in the country are now worth a cumulative $31.8 trillion. The gain in home values was the fastest since 2013…”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10% lower than the next-closest year. It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.”
When the Fed initially adopted crisis-period QE to reliquefy financial markets, they were clearly on a slippery slope. After the Fed in 2011 revealed its “exit strategy,” I titled a CBB “No Exit.” What I did not anticipate was that the Fed would in a few years again more than double balance sheet holdings to $4.5 TN. In 2012, with Draghi proclaiming “whatever it takes,” I wrote that it was a “pretty good wallop of the can down the road.” I never thought it possible that the Germans would tolerate year-after-year of massive ECB monetary inflation. Yet when I ponder a historic failure of central bankers to tighten conditions in 2017, my thoughts return to chairman Bernanke’s 2013 “the Fed is prepared to push back against a tightening of financial conditions.”
The epic untold story of 2017: markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.
As such, booming equities put no pressure on bond prices. Market concern for a destabilizing fixed-income deleveraged episode disappeared. Indeed, the greater the risk asset Bubble the more certain the bond market became of an inevitable redeployment of QE measures. And with bond markets well under control and confidence in central bank market liquidity backstops running high, why wouldn’t the cost of market insurance sink to record lows? Writing flood insurance during a drought. Moreover, with cheap insurance so readily available, why not push the risk-taking envelope? Build lavishly along the beautiful coastline.
Throughout the markets, speculative forces became only more deeply entrenched and powerfully self-reinforcing. It was a veritable tsunami of “money” into passive equity index, corporate bond and EM ETFs. Why not? Markets are going up, while active managers might adjust to the risk backdrop and underperform index products. It was a year where it never seemed so patently rational to uphold faith in central banking and “invest” in “the market”.
Markets are dominated by Greed and Fear. When central banks banish the latter, one’s left with an overabundance of the former. I chuckle these days when thinking back to the late-eighties as “the decade of greed.” And when it comes to The Year of Greed, most would think of “still dancing” 2007 or “dotcom” 1999. But in terms of global excess across various asset classes, ’99 or ’07 Can’t Hold a Candle to 2017. Booming equities, strong returns in fixed income and still about $10 TN of global sovereign debt sporting negative yields. Phenomenal.
The S&P500 returned 21.8% (price and dividends). The DJIA surged 25.1%. The Nasdaq100 gained 31.5% and the Nasdaq Composite rose 28.2%. Facebook rose 53.4%, Amazon.com 56.0%, Apple 46.1%, Netflix 55.1%, Google/Alphabet 32.9% and Microsoft 37.7%. Tesla jumped 45.7%, Micron Technology 87.6%, and Nvidia 81.3%. The Nasdaq Computer Index gained 38.8%. The Semiconductors (SOX) rose 38.2%, and the Biotechs (BTK) jumped 37.2%. The Homebuilders (XHB) gained 32.7%. The Broker/Dealers (XBD) gained 29.2% and the Banks (BKX) rose 16.3%. Bank of America gained 33.6%, Citigroup 25.1% and JPMorgan 23.9%.
Globally, Japan’s Nikkei gained 19.1%. Asia bubbled. Major indices were up 21.8% in South Korea, 27.9% in India, 36% in Hong Kong, 20% in Indonesia, 48% in Vietnam, 18% in Singapore, 22% in China (CSI 300), 15% in Taiwan and 14% in Thailand. In Europe, Germany’s DAX gained 12.5%, Italy’s MIB 13.6%, and Franc’s CAC 40 9.3%. Notable EM gains included Turkey’s 47.6%, Poland’s 23.2%, Hungary’s 23.0%, Brazil’s 26.9%, Chile’s 34.0% and Argentina’s 77.7%,
This has been going on for so long now that it’s all accepted as normal. Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.
Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.
I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.
Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a Phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.
Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.
Yet none of the above is worthy of Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.
Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.
Coming into 2017, there was some concern for a tightening of financial conditions. U.S. unemployment was below 5% and consumer price inflation was on the rise. A U.S. tightening cycle was expected to support the dollar, while a strong greenback risked pressuring currencies and liquidity conditions in China and EM generally. As the year progressed, however, it became apparent that seemingly nothing would budge the Fed from their commitment to an ultra-dovish gradualist approach to rate “normalization”.
And with virtually all assets experiencing price inflation at multiples of financing costs (short-term rates and market yields), financial conditions only loosened further as the Yellen Fed hesitantly took three little baby-steps (boosting rates a mere 75 bps). A 70 bps 2017 jump in the two-year did not inhibit a four bps decline in 10-year Treasury yields. Of course, the flattening yield curve was interpreted as a warning against further Fed “tightening”. In reality, historically low global bond yields were an indication of extraordinarily loose financial conditions, along with perceptions that central bankers would ensure finance remained loose for years to come.
December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”
December 20 – ETF.com (Drew Voros): “As of last Thursday, the amount of new assets flowing into U.S.-listed ETFs totaled $466 billion, putting the milestone of $500 billion in new assets for the year closer into view, which would be almost double the previous annual record of new ETF assets. What’s more, combined with performance, the asset inflows grew the ETF market to $3.4 trillion—almost $1 trillion bigger than where the market sat a short year ago.”
December 28 – Bloomberg (Patrick Clark): “Your home may not have made the same gains as stocks or bitcoin, but it still was a robust year for the U.S. housing market. The value of the entire U.S. housing stock increased by 6.5% -- or $2 trillion -- in 2017, according to… Zillow. All homes in the country are now worth a cumulative $31.8 trillion. The gain in home values was the fastest since 2013…”
December 26 – Bloomberg (Tom Metcalf and Jack Witzig): “It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10% lower than the next-closest year. It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.”
When the Fed initially adopted crisis-period QE to reliquefy financial markets, they were clearly on a slippery slope. After the Fed in 2011 revealed its “exit strategy,” I titled a CBB “No Exit.” What I did not anticipate was that the Fed would in a few years again more than double balance sheet holdings to $4.5 TN. In 2012, with Draghi proclaiming “whatever it takes,” I wrote that it was a “pretty good wallop of the can down the road.” I never thought it possible that the Germans would tolerate year-after-year of massive ECB monetary inflation. Yet when I ponder a historic failure of central bankers to tighten conditions in 2017, my thoughts return to chairman Bernanke’s 2013 “the Fed is prepared to push back against a tightening of financial conditions.”
The epic untold story of 2017: markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.
As such, booming equities put no pressure on bond prices. Market concern for a destabilizing fixed-income deleveraged episode disappeared. Indeed, the greater the risk asset Bubble the more certain the bond market became of an inevitable redeployment of QE measures. And with bond markets well under control and confidence in central bank market liquidity backstops running high, why wouldn’t the cost of market insurance sink to record lows? Writing flood insurance during a drought. Moreover, with cheap insurance so readily available, why not push the risk-taking envelope? Build lavishly along the beautiful coastline.
Throughout the markets, speculative forces became only more deeply entrenched and powerfully self-reinforcing. It was a veritable tsunami of “money” into passive equity index, corporate bond and EM ETFs. Why not? Markets are going up, while active managers might adjust to the risk backdrop and underperform index products. It was a year where it never seemed so patently rational to uphold faith in central banking and “invest” in “the market”.
Markets are dominated by Greed and Fear. When central banks banish the latter, one’s left with an overabundance of the former. I chuckle these days when thinking back to the late-eighties as “the decade of greed.” And when it comes to The Year of Greed, most would think of “still dancing” 2007 or “dotcom” 1999. But in terms of global excess across various asset classes, ’99 or ’07 Can’t Hold a Candle to 2017. Booming equities, strong returns in fixed income and still about $10 TN of global sovereign debt sporting negative yields. Phenomenal.
The S&P500 returned 21.8% (price and dividends). The DJIA surged 25.1%. The Nasdaq100 gained 31.5% and the Nasdaq Composite rose 28.2%. Facebook rose 53.4%, Amazon.com 56.0%, Apple 46.1%, Netflix 55.1%, Google/Alphabet 32.9% and Microsoft 37.7%. Tesla jumped 45.7%, Micron Technology 87.6%, and Nvidia 81.3%. The Nasdaq Computer Index gained 38.8%. The Semiconductors (SOX) rose 38.2%, and the Biotechs (BTK) jumped 37.2%. The Homebuilders (XHB) gained 32.7%. The Broker/Dealers (XBD) gained 29.2% and the Banks (BKX) rose 16.3%. Bank of America gained 33.6%, Citigroup 25.1% and JPMorgan 23.9%.
Globally, Japan’s Nikkei gained 19.1%. Asia bubbled. Major indices were up 21.8% in South Korea, 27.9% in India, 36% in Hong Kong, 20% in Indonesia, 48% in Vietnam, 18% in Singapore, 22% in China (CSI 300), 15% in Taiwan and 14% in Thailand. In Europe, Germany’s DAX gained 12.5%, Italy’s MIB 13.6%, and Franc’s CAC 40 9.3%. Notable EM gains included Turkey’s 47.6%, Poland’s 23.2%, Hungary’s 23.0%, Brazil’s 26.9%, Chile’s 34.0% and Argentina’s 77.7%,
This has been going on for so long now that it’s all accepted as normal. Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.
Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.
I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.
Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a Phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.
Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.
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