Let the Facts Speak: Q4 2020 Z.1
Doug Nolan
I received a friendly email a few weeks back from a reader inquiring whether my analysis is Fact or opinion.
Well, it’s my opinion that the world is in the “Terminal Phase” of history’s greatest Credit Bubble.
It is opinion that U.S. and global equities markets are historic speculative Bubbles, fueled by runaway Monetary Inflation and Acute Monetary Disorder.
It’s my opinion that markets in U.S. stocks, cryptocurrencies, corporate Credit and derivatives have evolved into full-fledged manias.
It’s certainly my opinion that this all ends very badly.
But this week’s CBB is about Facts rather than opinion.
History informs us that money and Credit are critically important – ignore their disorder at your own peril (policymakers at all our peril).
That’s a Fact.
The Fed’s Z.1 “flow of funds” report is our quarterly glimpse at Credit and financial developments – where "the rubber meets the road".
As far as I’m concerned, the Facts Speak for themselves.
It was another quarter that corroborates Bubble Analysis.
Facts provide the foundation for my analysis and opinions, and Z.1 data reflect monetary inflation spiraling out of control.
Total Non-Financial Debt (NFD) ended 2020 at $61.167 TN, or a record 292% of GDP, having increased $27.8 TN, or 83%, since the end of 2007.
NFD ended 2019 at 254% of GDP, up from 230% to end 2007; 189% to end the nineties; 186% at the end of the eighties; and 140% to conclude the seventies.
NFD inflated an unprecedented $6.778 TN, or 12.5%, during 2020.
For perspective, NFD expanded on average $1.831 TN annually over the previous decade.
NFD grew $2.452 TN during 2019, somewhat below the all-time record $2.899 TN recorded during the mortgage finance Bubble year 2004.
NFD expanded $941 billion during Q4, more than double Q4 2019’s $458 billion, and up from Q3’s $808 billion.
NFD surged $9.230 TN, or 17.8%, over two years.
The Credit Bubble continues to be fueled by a mind-boggling expansion of government debt.
Outstanding Treasury Securities jumped $700 billion during the Q4.
For the year, Treasuries surged an unprecedented $4.582 TN, or 24%, to a record $23.601 TN.
Treasuries rose $5.759 TN, or 32.3%, over two years.
Since the end of 2007, Treasuries have ballooned $17.550 TN, or 290%.
Treasuries ended 2020 at a record 113% of GDP, up from 42% to end 2007.
Agency (GSE debt and MBS) Securities gained another $248 billion during Q4 to surpass $10 TN ($10.114 TN) for the first time.
This boosted 2020 growth to $685 billion (7.3%), the largest expansion since 2008.
For perspective, Agency Securities on average increased $133 billion annually during the previous decade.
Agency Securities expanded $1.002 TN over the past two years.
Combined (“Washington Finance”) Agency and Treasury Securities expanded $5.267 TN, or 18.5%, during 2020 to a record $33.715 TN (2-yr growth of $6.761 TN).
Treasury and Agency Securities increased to a record 157% of GDP, up from 92% to end 2007.
It’s worth noting Agency and Treasury Securities comprised 73% of total NFD growth over the past two years (6.761/9.230)
Led by unmatched Treasury and Agency issuance, Total Debt Securities rose $1.212 TN, or 9.2% annualized, during Q4 to a record $53.920 TN.
Total Securities surged $6.499 TN during 2020, ending the year at a record 248% of GDP (up from 204% to end ’07).
Total Equities surged $8.092 TN during Q4 to a record $64.503 TN, with a stunning nine-month gain of $21.474 TN.
Gaining $9.878 TN for the year, Total Equities ended 2020 at a record 308% of GDP.
This compares to previous cycle peaks 187% at Q3 2007 and 210% during Q1 2000.
It’s worth adding that Equities-to-GDP reached a high of 71% in September 1987, fell to a post-crash low of 54%, and did not surpass the ’87 peak until Q4 1991 (77%).
Total (Debt & Equities) Securities surged $9.303 TN during Q4 to a record $118.422 TN.
Total Securities gained $16.378 TN, or 16.0%, during 2020, surpassing 2019’s record $13.191 TN increase.
Total Securities ended 2020 at a record 566% of GDP.
This was up greatly from previous cycle peaks 387% during Q3 2007 and 368% back in Q1 2000.
For additional perspective, Total Securities-to-GDP ended the eighties at 194% and the seventies at 148%.
Inflating securities values continue to inflate Household Net Worth.
And while headlines and articles refer to “household wealth,” it’s important to distinguish between real economic wealth and perceived wealth generated from massive monetary inflation and market Bubbles.
Household Assets surged $7.223 TN during Q4 to a record $147.211 TN.
And with Liabilities increasing “only” $297 billion (to a record $17.057 TN), Household Net Worth surged $6.925 TN to a record $130.155 TN.
For the year, Household Assets inflated $12.587 TN and Liabilities rose $652 billion, with Net Worth surging $11.935 TN.
This annual gain was second only to 2019’s record $12.702 TN surge (that crushed 2013’s previous high $8.712 TN).
Household Net Worth inflated an unparalleled $24.637 TN, or 23%, over two years, ending 2020 at a record 622% of GDP.
This was up from 485% to end 2007; 448% at the end of 1999; and 378% to conclude the eighties.
Household holdings of Financial Assets surged $6.185 TN, or 25% annualized, during Q4 to a record $104.570 TN (2020 gain $9.867 TN).
Financial Assets-to-GDP ended the year at 499%, up from 2007’s 374%; 1999’s 357%; and 267% to end the eighties.
Total Equities (Corp Equities and Mutual Funds) jumped $4.165 TN during Q4 to a record $34.994 TN, with a one-year gain of $5.084 TN, or 16.4%.
Total Equities surged $9.364 TN, or 35.2%, over the past three years.
For comparison, Total Equities inflated $5.037 TN during the three-year Bubble period 1997 to 1999.
Household Total Equities holdings ended 2020 at a record 172% of GDP.
This compares to previous cycle peaks 104% during Q2 2007 and 115% for Q1 2000.
Total Equities-to-GDP ended the eighties at 47%.
Reminiscent of the mortgage finance Bubble period, Household Real Estate holdings gained $915 billion during Q4, surpassing the previous record $852 billion increase back in Q3 2005.
For 2020, Real Estate inflated $2.267 TN (strongest annual gain since 2005’s $3.122 TN) to a record $35.789 TN.
Real Estate as a percentage of GDP jumped to 171%, up from trough 2011’s 129% to the highest reading since 2007’s 178%.
The Federal Reserve’s Balance Sheet (Assets) jumped $197 billion during Q4 to a record $7.600 TN.
For the year, Fed Assets inflated an unprecedented $3.220 TN, easily surpassing the previous record $1.319 TN gain from the 2008 crisis response.
The Fed’s Balance Sheet has now inflated $6.648 TN, or 700%, since the end of 2007, rising from 7% of GDP to 36%.
During 2020, the Fed purchased $2.677 TN of Treasuries, more than doubling its holdings to $5.218 TN.
The Fed bought no Agency securities until 2008, and after last year’s $677 addition it held $2.148 TN at the end of the year.
The inflating Federal Reserve Balance Sheet continues to fuel a corresponding inflation within the banking system.
Bank (Private Depository Institutions) Assets jumped $554 billion, or 9.7% annualized, during Q4 to a record $23.454 TN.
Assets surged $3.402 TN, or 17%, during 2020, dwarfing 2008’s previous record $1.249 TN increase.
The Asset “Reserves at the Fed” rose $252 billion during Q4 to a record $2.995 TN, with a one-year gain of $1.446 TN.
Banking system Debt Securities holdings rose $274 billion to a record $5.790 TN, with Agency/MBS Securities surging an unprecedented $279 billion, or 36% annualized.
Agency/MBS holdings jumped $740 billion during the year, or 28%, to $3.375 TN.
This was more than three-times 2019’s record $189 billion increase.
Annual purchases had averaged $104 billion over the previous decade.
Treasury holdings increased only $17 billion during Q4 to a record $1.204 TN, though holdings expanded a record $325 billion, or 37%, for the year (up 63% in two years).
As new QE-generated Federal Reserve “IOUs” (“reserves”) are funneled to the banking system in exchange for deposits, the upshot has been an unprecedented expansion in Bank Deposit Liabilities.
Total (Checking and Time & Savings) Deposits jumped $651 billion during Q4 to $18.866 TN.
For 2020, Total Deposits surged an unprecedented $3.344 TN, or 21.5% (vs. 2020’s $3.220 TN gain in Fed Assets).
The previous record annual gain in Bank Deposit growth was 2019’s $855 billion.
Deposit growth had averaged $597 billion annually over the previous decade (Total Deposits up 122% since 2007).
Total Bank Deposits as a percentage of GDP jumped from 72% in one year to a record 90%.
Bank Deposits-to-GDP ended 2007 at 59% and the nineties at 48%.
Lending was traditionally integral to the business of banking.
Loans declined $68 billion during the quarter to $12.092 TN.
For 2020, Loans expanded $365 billion, or 3.1%.
Loans ended the seventies at 73% of Bank Assets.
This ratio then dropped to 68% by the end of the eighties, 65% to end the nineties and 58% by 2010.
Loans-to-Bank Assets fell to 52% to end 2020.
And while bank lending in the real economy may be rather stagnant, the same cannot be said for Broker/Dealer lending into the securities markets.
Broker/Dealer Loans expanded a record $100 billion, or 84% annualized, during Q4 to a record $574 billion.
For 2020, Broker/Dealer Loans surged a record $164 billion, or 40%.
This compares to previous cycle peak growth of $79 billion in 2006 and $75 billion in Bubble year 1999.
Total Broker/Dealer Assets jumped $168 billion, or 19% annualized, during Q4 to a record $3.676 TN.
Assets increased $207 billion, or 6.0%, for the year.
Repo Assets gained $43 billion during the quarter to $1.322 TN.
And while on the subject of booming asset-based lending businesses, it’s worth noting total system Mortgage lending posted its strongest growth since the mortgage finance Bubble period.
Total Mortgages increased $738 billion, or 4.6%, in 2020 to a record $16.783 TN.
This was the largest rise since 2007’s $1.084 TN.
Home Mortgages gained $477 billion to a record $11.666 TN, the largest increase since ‘07’s $722 billion.
The Rest of World (ROW) category remains an intriguing facet of Bubble Analysis.
ROW holdings of U.S. Financial Assets surged a record $3.317 TN, or 36% annualized, during Q4 to a record $40.352 TN.
For all 2020, ROW holdings rose $5.584 TN, or 16.1%, surpassing 2019’s record $4.800 TN increase.
Over two years, ROW holdings were up $11.169 TN, or 37%.
After ending 2007 at $15.842 TN, ROW holdings have surged 192%.
ROW holdings ended 2020 at 193% of GDP.
This compares to 109% to end 2007; 76% at the end of the nineties; and 30% to wrap up the eighties.
The Q4 gain was led by a $1.612 TN increase in Total Equities holdings to a record $11.618 TN, with a one-year gain of $2.523 TN, or 28%.
Debt Securities increased $186 billion during the quarter to a record $12.955 TN, led by a $171 billion increase in Corporate Bonds.
For 2020, Debt Securities surged $884 billion, with Corporate Bonds gaining $501 billion.
It was a manic week for U.S. equities.
The small cap Russell 2000’s 7.3% surge increased y-t-d gains to 19.1%.
The Banks (KWB) jumped 4.3%, boosting 2021 gains to 26%.
The Broker/Dealers surged 5.8%, the Midcaps 5.3% and even the Utilities jumped 4.5%.
The Goldman Sachs Most Short Index surged 10.6%, increasing y-t-d gains to 40.4%.
Meanwhile, Treasury yields jumped to new one-year highs.
Ten-year Treasury yields rose six bps to 1.63%.
The five-year Treasury inflation “breakeven rate” surged another 10 bps to 2.58%, the high since July 2008.
Examining Z.1 data, it’s surprising consumer price pressures have remained somewhat contained to this point (although significant Credit growth is being directed to the asset markets).
But inflationary pressures are now mounting rapidly and Trillions more Credit – including unrelenting fiscal and monetary stimulus – are in the offing.
The Facts support the view that a major bear market is unfolding in long-term Treasuries and fixed income securities.
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