Unnecessary Head Scratching: Q3 2020 Z.1 

Doug Nolan


Airbnb traded to $165 in early Thursday trading, more than doubling its Wednesday evening $68 IPO price - valuing the company north of $100 billion. 

After pricing its IPO shares at $102, DoorDash saw its stock price quickly trade up to $184, valuing the food delivery business at about $59 billion. 

December 11 – Bloomberg (Bailey Lipschultz and Drew Singer): 

“The first initial public offerings in the wake of Airbnb Inc.’s red-hot debut soared, led by four nascent drug developers. The massive gains for AbCellera Biologics Inc., Certara Inc., Nanobiotix and 4D Molecular Therapeutics Inc. showcased Wall Street’s appetite for both newly public companies as well as blossoming drug developers... AbCell soared more than 200% above its IPO price on Friday, while 4D climbed by 84%. Vivos jumped 71%, Certara by 51% and Nanobiotix is up 25% from its offering price.”

December 11 – Bloomberg (Sonali Basak): 

“The exuberance is stunning. Airbnb -- valued at $18 billion just seven months ago -- was worth more than $100 billion when it went public on Thursday. It’s still valued at more than Marriott and Hilton combined. The price differential to its IPO had many on Wall Street scratching their heads.”

Note to head scratchers: Unnecessary. 

The blistering IPO market is but one of the myriad late-cycle manifestations of Acute Monetary Disorder. If Tesla can trade with a market capitalization approaching $600 billion (more than double Toyota!), what’s keeping Airbnb from sporting a snazzy $100 billion valuation? Wall Street should waste no time in bringing scores more IPOs to market – with so many billionaires in the making. 

November’s record $121 billion ETF inflow – boosting the y-t-d flow tsunami to a record $659 billion. SPACs and frenetic retail call option buying (one can only imagine current hedge fund derivatives strategies). 

Friday’s record $18 TN of negative-yielding global bonds (now including overindebted Portugal and Spain). 

Bund yields at negative 0.64%. The bottom line: Securities markets – profoundly speculative and unmoored. These darling IPOs – along with the equities market more generally – are dispensing some serious “wealth creation.” 

Future historians will recognize it much more in the context of Bubble period wealth redistribution and destruction. 

For now, this fiasco is one hell of party (patrons luxuriating at the endless punchbowl). 

It’s a globalized Bubble – notably central bank Credit, Chinese finance, speculative leverage/securities Credit, and sovereign debt across developed and EM economies. 

And once a quarter we have the opportunity to examine the Fed’s Z.1 “flow of funds” report – data that help illuminate the U.S. financial sector’s contribution to the Great Global Credit Bubble. 

As the below analysis will highlight, the U.S. system is in the throes of runaway central bank “money” creation; unparalleled system Credit growth; unprecedented government debt expansion; and record “money” supply inflation, along with an attendant powerful inflationary dynamic throughout the bubbling securities markets feeding into inflated Household perceived wealth (Net Worth). 

The numbers are so huge as to be numbing; nothing remotely normal about any of this. 

Total Non-Financial Debt (NFD) expanded $737 billion during Q3 to a record $60.113 TN. Through the first three quarters of 2020, NFD surged an unprecedented $5.740 TN, or 14.1% annualized. NFD was up $6.181 TN over the past year (11.5%) and $8.817 TN (16.7%) over two years. For perspective, NFD expanded on average $1.830 TN annually over the past decade. NFD has ballooned 71% since the end of 2008.

Washington continues to propel borrowing mayhem. 

Outstanding Treasury Securities jumped $530 billion during the quarter to a record $22.900 TN. Treasuries were up $3.882 TN over three quarters, with year-over-year growth of a staggering $4.329 TN, or 23.3%. Since the end of 2007, Treasuries outstanding have inflated $16.849 TN, or 278%. Q3 federal Expenditures were up 50% y-o-y, while Receipts were about flat. Borrowings accounted for about half of federal spending during the quarter. Noteworthy as well, at $429 billion the federal deficit for the first two months of the new fiscal year (post Q3) is running 25% ahead of the year ago level.

Yet Treasury is not the only profligate borrower residing within the beltway. 

GSE (government-sponsored enterprises) Securities jumped $123 billion during Q3 to a record $9.866 TN. GSE Securities increased $437 billion y-t-d, $523 billion y-o-y, and $845 billion over two years. That these thinly (I’m being generous) capitalized financial juggernauts continue to balloon ensures massive future taxpayer bailouts. I suppose there’s some pressure on the GSEs to crank out securities to be conveniently monetized by our overbearing central bank. 

Corporate Bonds increased $97 billion during the quarter to a record $14.973 TN, with a one-year increase of $1.016 TN (7.3%). Corporate bonds are on pace for the strongest annual expansion since 2007’s record $1.398 TN. 

Total Debt Securities rose $734 billion during the quarter to $52.619 TN, with record one-year growth of $5.851 TN. At 249%, Q3 Total Debt Securities-to-GDP compares to 213% at the end 2008; 158% to end the nineties; 126% to close the eighties; and 74% to conclude the seventies. Total (Debt and Equities) Securities rose $5.206 TN during Q3 to a record $109.687 TN – with a one-year gain of $11.834 TN, or 12.1%. Total Securities have inflated $63.504 TN, or 138%, since the end of 2008. At 518%, Q3 Total Securities-to-GDP compares to 373% at the end of 2007; 351% to end the nineties; 194% to close the eighties; and 117% to conclude the seventies. 

With housing finance the cheapest ever, no surprise that mortgage Credit is now expanding at the strongest pace since 2007. 

Overall mortgage Credit increased $227 billion during Q3 to a record $16.562 TN. This was up from Q3 ‘19 growth of $193 billion and the largest gain since Q3 2007. 

Household Mortgage borrowings increased $165 billion (vs. Q3 ‘19’s $98bn) to a record $11.507 TN, also the fastest expansion (5.8% annualized) since Q3 2007.

The Household Balance Sheet remains fundamental to Bubble Analysis. Bolstered by gains in both Financial Assets and Real Estate, Household Assets surged $4.080 TN, or 12.0% annualized, during Q3 to a record $140.310 TN. Household Assets have now almost doubled from year-end 2008’s $76 TN. After declining $6.814 TN during Q1, Household Assets experienced an unparalleled six-month gain of $12.418 TN. 

With Household Liabilities rising $262 billion (largest gain since Q2 ’07!) to a record $16.790 TN, Household Net Worth jumped $3.817 TN during the quarter to a record $123.520 TN. Net Worth was up $8.768 TN, or 7.6%, y-o-y, with a three-year gain of $20.541 TN, or 20%. At 584%, Household Net Worth-to-GDP compares to previous cycle peaks 493% during Q1 2007 and 447% during Q1 2000.

Household holdings of Financial Assets surged $3.398 TN during Q3 to a record $98.713 TN. Financial Holdings were up $25.890 TN, or 36%, over five years. At 467%, Q3’s ratio of Financial Assets-to-GDP was up from 328% at the Q1 2009 cycle low - and compares to cycle peaks 377% during Q3 2007 and 356% for Q1 2000. 

Household Total Equities (Equities and Mutual Funds) jumped $2.431 TN during the quarter to a record $32.426 TN, with an unprecedented six-month gain of $7.775 TN (more than reversing Q1’s $6.6 TN drop). At 153%, Q3 Total Equities holdings-to-GDP compares to a cycle low 53% during Q1 2009 - and previous cycle peaks 104% during Q2 2007 and 117% for Q1 2000.

Household Real Estate holdings jumped $430 billion during Q3 to a record $34.867 TN. At $1.596 TN, the y-o-y increase in Real Estate holdings is the largest since 2006. And at 165%, Real Estate-to-GDP compares to Q2 2012’s cycle low 125% and the previous cycle peak 190% during Q3 2006. 

With Washington and market-based finance dominating system Credit expansion, the banking system was relegated to second class bit player for the quarter. 

Bank Assets expanded $130 billion during Q3 to a record $22.903 TN. Bank Loans actually contracted $171 billion during the quarter (though Mortgage loans increased $24bn) to $12.160 TN. The Bank Asset “Reserves at the Fed” contracted $43.8 billion during Q3 to $2.743 TN - but with an unprecedented year-over-year rise of $1.316 TN. 

What has the banking system been doing with much of this central bank (play) “money”? 

Bank Debt Securities holdings jumped another $280 billion during the quarter to a record $5.509 TN, with an unprecedented one-year gain of $868 billion (18.7%). 

For comparison, 2019 posted an annual record $347 billion jump in Debt Securities holdings – after averaging $153 billion annually over the previous 20 years. Over the past four quarters, Bank holdings of Treasuries increased $326 billion, Agency Securities $458 billion, and Corporate bonds $43 billion. 

On the Bank Liability side, Total Deposits rose another $180 billion to a record $18.217 TN, with an unparalleled one-year gain of $3.018 TN (19.9%). Total Bank Deposits ended the quarter at 86% of GDP, up from 62% to end 2008. Total system Checking and Time Deposits jumped $4.779 TN, or 27.5%, year-over-year to $22.132 TN. For perspective, Total Deposits expanded on average $534 billion annually over the previous 25 years. Contracting $228 billion during Q3 to $4.408 TN, Money Market Fund Assets were nonetheless up $966 billion, or 28.0%, year-over-year.

Federal Reserve Assets expanded $39 billion during Q3 to a record $7.403 TN – or 35% of GDP. Fed Assets inflated $3.024 TN in three quarters and $3.393 TN, or 85%, over five quarters. Fed Assets ended June 2008 at $951 billion, or 6% of GDP. As such, Federal Reserve Assets have inflated 678% in just over 12 years. Quarter-end Fed holdings included $5.056 TN of Treasuries and $2.198 TN of Agency/MBS Securities.

Rest of World (ROW) holdings of U.S. Financial Assets jumped $1.731 TN during Q3 to a record $37.117 TN, or 175% of GDP. 

ROW holdings ended 2009 at $14.362 TN, or 92% of GDP, and the nineties at $5.621 TN, or 58% of GDP. Holdings of U.S. Debt Securities rose only $45 billion during Q3 to a record $12.768 TN, with a one-year gain of $673 billion. Corporate Bond holdings jumped $94 billion during the quarter to a record $4.302 TN, with a notable one-year expansion of $392 billion. Benefitting from rising stock prices, ROW Total Equities holdings surged $931 billion during the quarter to a record $9.969 TN (one-year gain $1.483 TN). Also buoyed by inflating values, ROW U.S. Direct Foreign Investment surged $731 billion to a record $9.799 TN. 

Nothing short of an incredible three quarters of U.S. “money” and Credit growth. 

Next week China.

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