Monitoring for Peak Bubble Excess - Q3 2024 Z.1
Doug Nolan
Non-Financial Debt (NFD) expanded at a seasonally adjusted and annualized rate (SAAR) of $3.642 TN, up from Q2’s SAAR $3.471 TN for the strongest expansion in a year.
For perspective, NFD expanded $2.534 TN in 2007 - an annual record that held all the way to pandemic 2020’s historic $6.797 TN.
Treasury debt expanded SAAR $2.261 TN during Q3, up from Q2’s $1.888 TN, while accounting for 62% of Q3’s growth in NFD (equating to 7.7% of GDP).
In nominal dollars, Treasury Securities expanded $683 billion to a record $27.586 TN.
Treasuries inflated $1.965 TN, or 7.6%, over the past year, $3.970 TN, or 16.8%, over two years, and $10.957 TN, or 66%, over the past 19 quarters.
Since the end of 2007, Treasuries have ballooned $23.093 TN, or 514%.
We’re just talking about electronic IOUs here.
Washington (and governments around the world) will lack the resources to ever pay down ballooning debt loads.
Yet for now, the irrepressible inflation of these IOUs boosts incomes, spending and GDP, corporate profits, and extreme market exuberance.
Importantly, the massive inflation of Treasury IOUs validates debt throughout the entire system, including prices for corporate bonds, MBS, ABS, leveraged loans, municipal debt, and structured finance more generally.
First warning of the unfolding global government finance Bubble in a February 6, 2009, CBB, “Government Finance Bubble”, I had spent the previous years analyzing the critical role of the GSEs and Wall Street “alchemy” in transforming Trillions of risky Credit into perceived money-like (safe and liquid) instruments that enjoyed insatiable boom-time demand.
The “moneyness of Credit” dynamic was fundamental to the great mortgage finance Bubble.
Early in the post-Bubble reflationary maelstrom, I became worried that guardrails were to be abandoned on government “money” (sovereign debt and central bank Credit) – the foundation of global finance.
This government “money” had unparalleled inflationary potential.
Not only would governments and central banks initially enjoy insatiable demand for their IOUs, central banks also have the power to use their liquidity (balance sheets) to bolster the perception of moneyness for government debt, even in the face of massive over-issuance.
Moreover, central bank liquidity backstops incentivize speculation, in particular leveraged speculation in government debt (i.e., “basis” and “carry trades”).
In hindsight, it should have been obvious that the Bernanke Fed's revolutionary reflationary tactics would seduce the entire world – and that Mario Draghi’s 2012 “whatever it takes” permutation would further unleash historic global monetary inflation.
After all, history is unequivocal: Monetary inflation is such a slippery slope.
Government (modern-day electronic) “printing presses” are the most destructive force for stability in finance, economics, and humanity.
We’re in the throes of end-of-super-cycle blowoff excess.
Massive fiscal deficits, enormous Treasury “basis trades” and other speculative leverage, parabolic growth in “repo” and money market fund assets, AI and equities manias, along with social, political and geopolitical animus, are not coincidental.
For Q3, growth in Non-Financial Debt is mirrored throughout the overheated financial sphere.
The Financial Sector expanded $4.252 TN during Q3 to a record $144.142 TN – with one-year growth of $13.361 TN, or 10.2%.
Debt Securities rose $1.235 TN, or 8.2%, to a record $61.461 TN – the strongest quarterly expansion since pandemic Q2 2020.
Debt Securities gained $3.342 TN over the past year.
For perspective, prior to record 2020 ($6.195 TN), 2007 held the record for annual Debt Securities growth at $2.566 TN.
Debt Securities inflated $17.763 TN, or 40.7%, over the past five years.
Agency Securities increased (nominal) $80 billion, boosting Total Treasury and Agency Securities to $39.724 TN, or 135% of GDP.
Corporate Bonds jumped $466 billion during Q3, or 11.7% annualized, the strongest quarterly gain since Q2 2021.
One-year growth of $1.087 TN would be second only to 2007’s annual record $1.399 TN.
The $174 billion (14.6% annualized) growth in Financial Sector bond liabilities was the strongest in 13 quarters, with a one year expansion of $420 billion, or 9.3%.
Equities inflated $5.812 TN during Q3 to a record $91.720 TN.
One-year growth of $21.105 TN, or 29.9%, compares to 2003’s pre-2008 crisis annual record gain of $4.385 TN.
Over the last five years, Equities inflated $40.950 TN, or 80.7%.
At 312%, Q3’s Equities-to-GDP ratio compares to previous cycle peaks 187% (Q3 2007) and 210% (Q1 2000).
Total (Debt and Equities) Securities inflated $7.047 TN, or 19.3% annualized, during Q3 to a record $153.181 TN.
One-year growth of $24.447 TN (19.0%) compares to 2006’s cycle peak growth of $5.369 TN and 2021’s (market recovery) annual record of $17.963 TN.
Total Securities inflated $58.714 TN, or 62%, over the past 20 quarters, and $107.590 TN, or 236%, since the end of 2008.
Total Securities ended Q3 at 522% of GDP, dwarfing cycle peaks 375% (Q3 2007) and 357% (Q1 2000).
It’s worth noting that Total Securities ended 2008 below $50 TN, less than the increase over the past five years.
Z.1 data confirms the ongoing historic expansion in speculative finance.
Broker/Dealer Assets surged $341 billion, or 26.3% annualized, during the quarter to a record $5.526 TN.
Broker/Dealer Assets expanded $769 billion, or 16.2%, over the past year, and $1.581 TN, or 40%, over 18 quarters.
Repo Assets (securities loans) jumped $124 billion, or 28.9% annualized to a record $1.832 TN.
Miscellaneous Assets gained $114 billion to $1.904 TN (most since Q3 ’08).
Debt Securities holdings rose $67 billion to $598 billion, with Treasuries increasing $25 billion to $334 billion, and Agencies up $34 billion to $176 billion.
On the Liability side, Repos surged $129 billion to surpass $2.5 TN for the first time since Q3 2008.
Total system “Repo” Assets inflated $388 billion, of 22.2% annualized, during Q3 to $7.395 TN – with six-month growth of $678 billion, or 30% annualized.
The Broker/Dealer Repo Liability jumped $129 billion to $2.508 TN, with one-year growth of $441.1 billion, or 21.3%.
The Rest of World Repo Liability rose $88 billion, or 21.4% annualized, for the quarter, and $261 billion, or 17.7%, y-o-y to a record $1.734 TN.
It's worth noting that the Fed’s Repo Liability declined $153 billion during the quarter to $900 billion.
As such, the total system Repo Liability excluding the Fed ended the quarter at a record $5.272 TN, with one-year growth of $654 billion, or 14.2%, and a two-year expansion of $1.645 TN, or 45.4%.
Money Market Fund Assets (MMFA) expanded another $291 billion, or 17.8% annualized, during Q3 to a record $6.839 TN.
Money Fund “Repo” holdings expanded $74 billion to $2.688 TN, though growth was impacted by the $153 billion reduction in the Fed’s “Repo” liability.
MMFA Treasury holdings surged $210 billion to $2.660 TN.
MMFA expanded $696 billion, or 11.3%, over the past year, and $2.837 TN, or 71%, over 19 quarters.
Banking (“Private Depository Institutions”) system Assets expanded $127 billion, or 1.8% annualized, during Q3 to $27.836 TN.
Loans expanded at a 2.3% rate ($83bn) to a record $14.696 TN, with one-year growth of $363 billion, or 2.5%.
Why lend when there is such easy money to be made financing and purchasing securities?
Bank “Repo” Assets increased $77 billion, or 47% annualized, to $729 billion – the strongest expansion since Q2 2020 (one-year growth of $124bn, or 20.4%).
Debt Securities holdings surged $220 billion, or 14.5% annualized, to $6.306 TN – the strongest growth since Q4 ‘21.
Agency Securities holdings jumped $135 billion (to $3.170 TN), Treasuries $65 billion ($1.670 TN), and Corporate Bonds $21 billion ($958bn).
The Rest of World (ROW) category never fails to intrigue.
ROW holdings of U.S. financial assets surged $2.749 TN, or 20.5% annualized, during the quarter to a record $56.368 TN.
Debt Securities holdings jumped a quarterly record $826 billion, or 23.4% annualized, to a record $14.935 TN – with one-year growth of $1.869 TN, or 14.3%.
Treasury holdings increased $451 billion (to $8.662 TN), Agency Securities $68 billion ($1.402 TN), and Corporate Bonds $297 billion ($4.619 TN).
ROW holdings surged $10.509 TN, or 22.9%, over the past year, and $17.652 TN, or 45.6%, over 16 quarters.
The ROW sector is a formidable player in securities finance.
“Repo” Liabilities jumped $88 billion (21.4% annualized) during Q3 and $261 billion (17.7%) y-o-y to a record $1.735 TN.
“Repo” Assets gained $71 billion (20.6% annualized) for the quarter and $152 billion (11.7%) over the past year – to a record $1.447 TN.
Over four years, ROW “repo” Assets inflated 68% and “Repo” Liabilities 44%.
A booming stock market helped ROW Total Equities holdings surge $920 billion for the quarter and $4.182 TN (31.6%) over the past year – to a record $17.403 TN.
The spectacular inflation in (non-financial, financial, and speculative) Credit and securities prices continues to fuel spectacular inflation in perceived wealth.
Household Assets jumped $4.94 TN during Q3, or 10.7% annualized, to a record $189.700 TN, with one-year growth of $17.859 TN, or 10.4%.
While Real Estate holdings declined slightly to $52.329 TN, Total Equities (Equities and Mutual Funds) jumped $3.519 TN to a record $49.789 TN.
Household Liabilities expanded $174 billion (3.4% annualized) to a record $20.900 TN.
Household Net Worth (Assets less Liabilities) inflated $4.766 TN (11.6% annualized) to a record $168.800 TN, with one-year growth of $17.277 TN, or 11.4%.
For perspective, Net Worth inflated a then record $4.006 TN in 1999, and a mortgage finance Bubble high of $6.871 TN in 2004.
The pre-pandemic record was set with 2019’s $12.710 TN increase.
Net Worth inflated $49,873 TN over 17 quarters, or 42%.
There’s no mystery surrounding the ongoing economic boom.
Household holdings of Treasuries rose $209 billion to a record $2.826 TN, with Total Deposits growing $202 billion to $14.500 TN, and Money Funds rising $177 billion to a record $4.311 TN.
Treasury Holdings inflated $2.135 TN, or 309%, in three years, with Money Market Funds up $1.605 TN, or 59.3%.
Perceived safe Household holdings of Total Deposits, Money Funds, Treasuries and Agency Securities (D, MM, T, &A) surged $590 billion (10.5% annualized) during Q3 to a record $23.021 TN. “D, MM, T, &A” was up $1.435 TN, or 6.7%, y-o-y, and $4.500 TN, or 24.3%, over three years.
Household Net Worth ended September at 575% of GDP (versus Q3 ‘23’s 542%).
This compares to Q4 2019’s pre-pandemic record 535%, and previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).
Total Household Equities holdings ended the quarter at 170% of GDP, compared to previous cycle peaks 105% (Q2 2007) and 115% (Q1 2000).
The American public is all in.
December 12 – Wall Street Journal (Gina Heeb):
“The Trump transition team has started to explore pathways to dramatically shrink, consolidate or even eliminate the top bank watchdogs in Washington.
In recent interviews with potential nominees to lead bank regulatory agencies, President-elect Donald Trump’s advisers and officials from his newfound Department of Government Efficiency have, for example, asked whether he could abolish the Federal Deposit Insurance Corp., people familiar… said.
Advisers have asked the nominees under consideration for the FDIC, as well as the Office of the Comptroller of the Currency, if deposit insurance could then be absorbed into the Treasury Department, some of the people said.”
This is an especially inauspicious environment to be goosing an already overheated financial sector.
There has been a post-election window where the bond market has given the new administration the benefit of the doubt.
This week, January 20th suddenly seemed to be approaching quickly.
Ten-year Treasury yields surged 24 bps to 4.24% – the largest weekly jump since October 2023.
Benchmark MBS yields rose 30 bps to 5.69%.
The market closed the week pricing a 93% probability for a 25 bps rate cut next Wednesday.
With overheating risks rising and Team Trump ready to hit the ground running next month, you can’t fault the bond market for being apprehensive.
The Fed should be on the sidelines.
Bonds were under pressure globally.
Despite another ECB rate cut, yields jumped 20 bps in Italy, 19 bps in Portugal, 17 bps in Greece and Spain, 16 bps in France, and 15 bps in Germany.
Dollar-denominated yields were up 28 bps in Peru, 21 bps in Mexico, 21 bps in Chile, and 14 bps in Brazil.
Local currency yields were 33 bps higher in Colombia, 18 bps in Cyprus, and 16 bps in Poland.
Seems a bit of a race against the clock is materializing.
“Risk off” storm clouds seem to be descending on global markets, with only a couple weeks left before Wall Street books a historic year.
One of these years, de-risking/deleveraging will momentously impact Z.1 data, along with so much more.
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