Q4 2023 Z.1: Bubble Confirmation
Doug Nolan
The Federal Reserve’s “Financial Accounts of the United States - Z.1” - where the rubber meets the road.
Our quarterly read on systemic monetary (in)stability.
Often concerning, but always refreshing: no Wall Street spin or BS – just 190 pages of data.
And like booming securities markets and conspicuous speculative excess, Fed officials can ignore their own Credit and flows data at all our peril.
Q4 Non-Financial Debt (NFD) expanded at a seasonally adjusted and annualized rate (SAAR) of $3.500 TN, down marginally from Q3’s (SAAR) $3.874 TN – but up significantly from Q4 2022’s (SAAR) $2.244 TN.
This put 2023 NFD growth at $3.625 TN, down only somewhat from 2022’s $3.785 TN.
Notably, 2023 NFD growth was 46% higher than pre-pandemic 2019 ($2.472 TN) – the strongest Credit expansion since 2007’s record $2.530 TN.
At $73.808 TN, NFD has more than doubled (108%) since the end of 2008.
NFD-to-GDP has inflated to 270%, up from 2007’s then record 233% - and the 191% to end the nineties.
Since the end of 2007, Treasury Securities have inflated 324% - from $6.051 TN to $26.227 TN (to 94% of GDP from 41%).
Total Treasury and Agency Securities ($38.187 TN) have inflated to 137% of GDP.
Adding to “government finance Bubble” analysis, even after about 20 months of “quantitative tightening,” the Fed’s balance sheet ended 2023 $5.773 TN, or 607%, larger than Q4 2007.
Q4 data confirm that government finance Bubble dynamics run unabated.
The SAAR $2.878 TN increase in Federal Government borrowings accounts for over 80% of the NFD increase.
For the year, Federal borrowings increased $2.620 TN, up from 2022’s $1.547 TN, and the largest gain since 2020’s $4.581 TN.
Private-sector Credit growth slowed.
Total Household Borrowings declined to SAAR $485 billion, down from Q3’s $622 billion and lower than Q4 ‘22’s $634 billion.
Q4’s decline was despite Consumer Credit jumping to SAAR $166 billion from Q3’s $27 billion.
Total Business borrowings slowed to SAAR $173 billion, from Q3’s $294 billion and Q4 ‘22’s $720 billion.
Domestic Financial Sector borrowings recovered to SAAR $695 billion, after two straight quarters of contraction.
The banking system came back to life during Q4.
Bank (“Private Depository Institutions”) assets expanded nominal $401 billion (to a record $26.159 TN), fully reversing Q3 and Q2 declines.
At nominal $151 billion, Bank Loans grew at the fastest pace since Q4 ’22 ($358bn).
Mortgage loan growth slowed to $50 billion (3.0% annualized), while Consumer loans increased to $41 billion (6.0% annualized).
Bank holdings of Debt Securities jumped $188 billion, or 12.8% annualized, to $6.058 TN – the largest increase since Q4 ’21.
Treasury holdings rose $92 billion (to $1.521 TN), while Agency/MBS gained $103 billion (to $3.086 TN).
On the Bank Liability side, Deposits (Checking and Savings) expanded $163 billion ($20.312 TN), the first increase since Q1 ’22.
This ended a $1.128 TN six-quarter deposit slide. Yet, Total Deposits inflated $4.779 TN, or 30.8%, over four years.
The bigger Credit story continues to unfold in market-based finance.
Broker/Dealer Assets expanded nominal $119 billion, or 10% annualized, during Q4 (to a record $4.876 TN) - the strongest growth since Q1’s $433 billion.
This put 2023 growth at a notable $505 billion, or 11.5%.
Broker Loans posted their first increase ($16bn) in seven quarters, while Treasuries rose $21 billion (to $269bn), Corporate Equities $32 billion (to $283bn), and Miscellaneous Assets $39 billion (to $1.739 TN).
On the Liability side, Security Repurchase Agreements (“repo”) jumped $43 billion to $2.110 TN, the high since Q3 2012.
Repo Liabilities surged $484 billion, or 29.8%, during 2023.
The repo market essentially financed the Broker/Dealer’s strong 2023 balance sheet growth.
Overall, the Repo market contracted nominal $332 billion during Q4 to $6.253 TN, following virtually the same Q3 drop.
This contraction is entirely explained by the rundown in the Fed’s “reverse repo” assets.
Excluding the Fed’s position, the Repo market actually expanded another $140 billion during Q4 to a record $4.863 TN.
Repo ex-Fed surged $1.189 TN, or 32.4%, during 2023. Curiously, the Rest of World (ROW) Repo Liability expanded another $113 billion during Q4 to a record $1.689 TN, with a notable ’23 gain of $528 billion, or 45.5%.
Interesting developments also in the colossal Money Market Fund complex, today’s largest Repo market investor and key intermediary of speculative Credit.
Money Fund (MF) Assets expanded another $215 billion, or 14% annualized, to a record $6.358 TN.
Assets inflated $1.135 TN, or 21.7%, during 2023, with four-year growth of a blistering $2.355 TN, or 49.4%.
Repo holdings declined $283 billion during Q4 to $2.666 TN, with a six-month drop of $567 billion.
Meanwhile, Treasury holdings (T-bills) surged $502 billion, with six-month growth of $1.026 TN.
Amazingly, MF boosted Treasury holdings by $1.206 TN, or 113%, during 2023.
Money Funds also last year boosted Agency debt holdings by $128 billion, or 22.1%, to $798 billion.
Led, of course, by Treasury Debt, Total Debt Securities expanded $1.065 TN during Q4 to a record $59.196 TN – the largest increase since Q4 2020 ($1.092 TN).
Total Debt Securities inflated $3.313 TN during 2023, with 18-quarter growth of $13.451 TN, or 29.4%.
Equities surged $7.901 TN during Q4 to $78.053 TN, second only to Q4 ‘21’s $80.061 TN, with 2023 growth of $13.350 TN, or 20.6%.
Since the end of 2008, Equities have inflated $61.789 TN, or 380%.
Equities-to-GDP ended 2023 at 279%, a record when excluding the pandemic period.
This greatly exceeded previous cycle peaks 188% (Q4 2007) and 210% (Q1 2000).
Total (Debt and Equities) Securities inflated $8.967 TN during Q4 to a record $137.249 TN, with growth lagging only year 2000’s Q2 ($12.327 TN) and Q4 ($9.994 TN) recoveries.
Total Securities rose $16.663 TN, or 13.8%, over one year, and $40.736 TN, or 42.2%, in 18 quarters.
For perspective, prior to the pandemic, the largest annual Total Securities increase was 2019’s $12.515 TN.
Inflating securities markets continue to fuel historic Household balance sheet inflation.
Household Assets jumped $5.009 TN during Q4 to a record $176.743 TN.
Financial Asset holdings expanded $5.561 TN (to a record $118.832 TN), while Real Estate dipped $593 billion (to $49.073 TN).
With Liabilities increasing $170 billion, Household Net Worth surged $4.839 TN to a record $156.214 TN.
Net Worth inflated $11.587 TN in 2023.
For perspective, previous Net Worth peak cycle inflation was 2004’s $6.862 TN and 1999’s $3.973 TN.
Household Net Worth-to-GDP ended 2023 at 571%.
This compares to previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).
Household Total Equities (Equities and Mutual Funds) holdings jumped $3.291 TN during Q4 to $43.002 TN.
Excluding the pandemic period, this was a record 154% of GDP (previous cycle peaks 104% (Q3 2007’s) and 116% (Q1 2000).
Debt Securities holdings gained another $357 billion during Q4 to a record $5.671 TN.
Debt Securities were up $1.236 TN, or 27.9%, during 2023, with three-year growth of $1.621 TN, or 40.0%.
But it’s not just inflating securities prices fueling unprecedented Household Net Worth.
Holdings of money-like instruments continue their unmatched ascent.
Treasury and Agency holdings jumped another $202 billion during the quarter.
Total Deposits gained $154 billion (largest gain in six quarters), while Money Funds deposits added another $117 billion.
In total, Household holdings of Treasuries, Agencies, Deposits, and Money Funds (TAD&M) jumped $473 billion during the quarter to a record $21.579 TN, with a 2023 gain of $1.160 TN.
TAD&M holdings inflated $5.881 TN, or 37.5%, during just the past four years.
The Household Balance Sheet is a key Bubble manifestation, a major factor behind resilient consumer spending.
The Rest of World (ROW) balance sheet is also a key facet of Bubble analysis.
ROW holdings of U.S. Financial Assets inflated a record $4.089 TN during Q4 to a record $48.974 TN.
Holdings surged an annual record $7.501 TN during 2023.
Market gains drove a $1.452 TN Q4 rise in ROW Equities holding.
Debt Securities holdings jumped $863 billion during Q4 to a record $13.910 TN.
For the quarter, Treasuries gained $413 billion (to $8.018 TN), Agencies $104 billion (to $1.429 TN), and Corporate Bonds $338 billion (to $4.165 TN).
ROW has evolved into a prominent Repo market operator.
ROW Repo liabilities jumped $113 billion during Q4 to a record $1.689 TN, with one-year growth of $528 billion, or 45.5%.
Repo Assets gained $77 billion during Q4 to a record $1.759 TN, with 2023 growth of $343 billion, or 24.2%.
It’s worth noting that ROW Repo also expanded rapidly during the mortgage finance Bubble period, where foreign financial institutions aggressively leveraged higher yielding mortgage securities and derivatives.
Chair Powell:
“Interest rates right now are well into restrictive territory.
They are well above neutral... We’ve said for some years that we would start restoring the federal funds rate to a more normal, almost neutral level. We’re far from neutral now.”
March 8 – Bloomberg (Alexandra Harris):
“Federal Reserve Bank of New York President John Williams said… the neutral rate of interest still ‘seems quite low.’
Speaking… at the London School of Economics, Williams said it’s not yet clear whether the neutral rate has moved up since the pandemic, though he said factors such as changing demographics and higher productivity may have an effect.
He also emphasized the importance of using economic models to guide policy decisions… ‘Models are the way we communicate,’ Williams said. ‘If models are no good then the economists haven’t gotten it right.’”
Economic data, including February’s 275,000 job gains, do not suggest a restrictive policy rate.
Booming markets certainly don’t.
And neither does the Fed’s Q4 Z.1 report.
In fact, Z.1 data are consistent with market indicators.
There is a dislocation within the Credit system that generates self-reinforcing liquidity excess.
I believe key sources of liquidity creation originate from a combination of domestic speculative leverage (i.e., repo borrowings intermediated through the money fund complex) coupled with foreign-sourced leveraged speculation (i.e., yen and off-shore “carry trades”).
The Fed may focus on reduced growth in household and corporate borrowings, while disregarding the paramount issue: ongoing booms in repo, money fund, broker/dealer, and ROW holdings.
Resulting extraordinary liquidity excesses are fueling late-cycle speculative melt-up dynamics in equities, corporate Credit, crypto and the like.
The ongoing “neutral rate” debate is a policy dead-end.
I’ll try boiling down complex analysis to a relatively simple proposition: The so-called “neutral rate” these days oscillates with the unstable market environment.
“Risk on” requires a relatively high rate; “risk off” a much lower rate.
And as we’re witnessing, late-cycle blow-off excesses turn largely impervious to conventional policy “tightening.”
The Fed is clearly averse to tightening market financial conditions, a policy bias that stokes speculation and other “Terminal Phase” excesses.
A brief response to John Williams’ comment on economic models.
Good luck modeling speculative market dynamics, financial innovation, and contemporary Credit more generally.
And without an overarching emphasis on today’s dynamic financial system, econometric models will be deficient much of the time and of significant negative value at financial and economic critical junctures.
It’s interesting.
Powell and Fed officials seem hellbent on cutting rates, irrespective of booming markets, liquidity overabundance, economic resilience, and ongoing elevated system Credit expansion.
Powell was all over the subject of financial conditions when conditions were tightening. He now completely disregards exceptionally loose market financial conditions.
The Fed is preparing to back away from its so-called “restrictive” rate policy in anticipation of weaker growth dynamics.
Yet such loose conditions, inflating asset prices, and booming corporate debt issuance further increase the likelihood of overheating.
March 8 – Bloomberg (James Crombie):
“There’s no sign of a letup.
US companies are selling bonds like there’s no tomorrow and booming demand will keep the floodgates open.
The first quarter will likely be the biggest ever for high-grade US bond sales, with spreads close to two-year tights, tiny new issue concessions and all-in funding costs only looking more attractive as Treasury yields fall.
This week’s high-grade supply handily beat expectations, as it has done for the last few weeks, and the outlook is for more of the same.
Year-to-date supply of $440 billion, up 30% compared to last year, puts borrowers on track to crack the $510 billion first-quarter record set in 2020.
Junk and structured credit issuance is also ramping up.
And despite lousy high-grade returns, cash just keeps pouring in, pursuing all-in yields that still seem enticing.”
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