Doug Noland: Central Banks Are “Hostages Of Market Bubbles”
Doug Noland’s weekly Credit Bubble Bulletin is always required reading. The latest – befitting the amazing things that have happened lately – is more necessary than usual. But at 10,000 words it’s also a lot longer than usual. So while everyone should definitely read the whole thing, here are some excerpts to get you started:
I wonder if the Fed is comfortable seeing the markets dash skyward – the small caps up 16.4% y-t-d, the Banks 15.9%, the Transports 15.2%, Biotechs 18.5% and Semiconductors 17.0%. Or, perhaps, they’re quickly coming to recognize that they are now fully held hostage by market Bubbles.
Similarly, I ponder how Beijing feels about January’s booming Credit data – Aggregate Financing up $685 billion in the month of January. Do officials appreciate that they are completely held captive by history’s greatest Credit Bubble?
Bubbles have become a fundamental geopolitical device – a stratagem. Things have regressed to a veritable global Financial Arms Race. As China/U.S. trade negotiations seemingly head down the homestretch, each side must believe that rallying domestic markets beget negotiating power. Meanwhile, emboldened global markets behave as if they have attained power surpassing mighty militaries and even nuclear arsenals.
China’s banks made the most new loans on record in January – totaling 3.23 trillion yuan ($477bn) – as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy.
January’s record China new bank loans were 11.4% higher than the previous record from January 2018 – and 15% above estimates. Total Bank Loans expanded 13.4% over the past year; 28% in two years; 45% in three years; 91% in five years; and an incredible 323% over the past decade.
“The San Francisco Fed put out a white paper about the benefits of negative interest rates. I hope that’s not where we’re going, but we can only cut rates about 225/250 bps to be at zero” — Kyle Bass, Hayman Capital Management.
At 4.37%, 30-year conventional mortgage rates are today already below the lowest levels from 2009. And with the vast majority of borrows over recent years having refinanced at historically low mortgage rates, there’s limited prospects for reduced monthly payments to dampen financial burdens during the next recession. Worse yet, student loan debt has more than doubled since the crisis. And when the next recession hits, there will be record amounts of auto and Credit card debt.
Auto lending, in particular, has gone through a protracted – arguably unprecedented – period of loose lending. A record 7 million Americans are 90 days or more behind on their auto loan payments, even more than during the wake of the financial crisis era.
Among subprime borrowers — those with credit scores below 620— the delinquency rate was 16.3% in mid-2018. A car loan is typically the first payment people make because a vehicle is critical to getting to work, and someone can live in a car if all else fails. When car loan delinquencies rise, it is a sign of significant duress among low-income and working-class Americans.
When it comes to Bubbles, the more conspicuous they are the less likely they are to be deeply systemic. The “tech” Bubble was obvious, yet the most egregious excess was contained within the technology sector. The mortgage finance Bubble was much more systemic, with excesses spread about and not as apparent. I believe today’s Super “Tech” Bubble is much more systemic than back in 2000.
Today’s Bubble in leveraged lending and M&A is greater than 2006/2007. The Bubble in corporate Credit dwarfs that from the mortgage finance Bubble period. Excesses throughout the securities markets phenomenally exceed those from the prior Bubble period. Moreover, I suspect the current level of derivatives-related speculative leverage could be multiples of 2007.
Thinking Ahead to the Next Recession, we should de deeply concerned about our nation’s tenuous fiscal position. To see deficits approaching 5% of GDP – with unemployment and interest rates at such historically low levels – should have us all fearful. Of course deficits matter.
When it comes to a synchronized global policy response, keep in mind that ECB and BOJ policy rates are basically at zero – with little evidence of benefits from negative rates. The ECB just ended QE, while the BOJ just keeps printing. With little effective ammo, policymakers exploit what they can to sustain the Bubble and hold fragilities at bay.
Policymakers continue to throw enormous stimulus at global markets and economies. Instead of stabilization, we’ve witnessed ongoing Bubble inflation and intensifying Monetary Disorder. And the more Bubbles inflate, the greater the underlying financial and economic fragilities – and the quicker the Fed was to conclude “normalization” and China was to, once again, aggressively spur lending.
What worries me most is that underlying instability and vulnerabilities have policymakers resolved to abrogate bear markets and recessions. Extraordinary measures continue to be taken to nullify business and market cycles, with apparently no appreciation for how vital adjustments and corrections are to sound financial and economic systems. Worst of all, structurally maladjusted and highly speculative global markets are emboldened as never before. Party like it’s twenty nineteen – with global financial, economic and geopolitical backdrops uncomfortably reminiscent of ninety years ago.
The 400 richest Americans – the top 0.00025% of the population – have tripled their share of the nation’s wealth since the early 1980s. Those 400 Americans own more of the country’s riches than the 150 million adults in the bottom 60% of the wealth distribution, who saw their share of the nation’s wealth fall from 5.7% in 1987 to 2.1% in 2014.
U.S. small business optimism tumbled last month to its lowest level since President Donald Trump’s election more than two years ago amid growing uncertainty over the economic Outlook.
The outlook for Wall Street earnings has deteriorated significantly in recent months, data shows, raising the risk that companies in the United States may slip into recession before its economy does – with Europe close behind.
China’s securities regulator has started to remove many of the curbs designed to keep out speculators, signaling an end to the highly restrictive era that started when a boom in the country’s stocks turned to bust in 2015. The result has been an intensifying appetite for risk not seen in years. A gauge of small cap stocks has surged almost 11% over the past four trading days, the most since 2016.
Two large Chinese borrowers missed payment deadlines this month, underscoring the risks piling up in a credit market that’s witnessing the most company failures on record.
The collapse in China of a complex web of debt guarantees involving several private firms highlights risks in its financial system and opens up a potentially hazardous front for an economy in the grip of its slowest growth in nearly three decades.
China’s residential mortgage-backed securities issuance more than tripled in 2018, just as the nation’s household debt to disposable income ratio exceeds that of the U.S.
Italy’s coalition government is in sharp disagreement over protecting the independence of the Bank of Italy, after senior politicians threatened to remove its leadership. Matteo Salvini, head of the anti-immigrant League party, said the central bank and Consob, the country’s stock market regulator, should be “reduced to zero.”
Bank of Japan Governor Haruhiko Kuroda said… that it was his responsibility to achieve the central bank’s 2% inflation target by persistently continuing its stimulus policy.
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