Peak Monetary Stimulus 

Doug Nolan


Not again. 

Bloomberg is referring to “the bond market riddle.” 

The Financial Times went with the headline, “US Government Bond Investors Left Bewildered by ‘Bonkers’ Market Move.” 

It’s been three weeks of declining Treasury yields in the face of robust economic data (and surging commodities prices!). 

Too soon to be discussing a new “conundrum,” but I am finding the various explanations of Treasury market behavior interesting – if not convincing.

Treasury sentiment had turned negative. 

A decent short position had developed, and it’s perfectly reasonable to expect the occasional squeeze. 

Squeezes, after all, have become commonplace throughout the markets. 

But could there be something more fundamental unfolding? 

Over the years, I’ve relied upon a “Core vs. Periphery” model of market instability as a key facet of my analytical framework. 

Instability and financial crises typically emerge at the “periphery” – at the fringe where the structurally weakest – the most vulnerable to risk aversion and tightening financial conditions - reside. 

I believe this dynamic is already in play for the global Bubble, with the emerging markets earlier in the year experiencing an opening round of instability. 

Are we in the “quiet” before the next EM storm?

The dog that didn’t bark. 

Ten-year Treasury yields are down 18 bps this month. 

Meanwhile, the dollar index had dropped 2.5% to a six-week low. 

Why haven’t the emerging markets mustered a more impressive rally, especially considering the degree of bearish sentiment that had developed? 

Could this be as good as it gets? 

The week’s developments lent support to the latent fragility at the “Periphery” thesis. 

Are central bank responses to liquidity overabundance and mounting inflationary pressures an escalating risk to fragile EM Bubbles?

The Bank of Russia surprised markets Friday with a 50 bps rate increase (to 5.0%), while warning additional hikes could be in the offing. 

At her press conference, central bank governor Elvira Nabiullina commented: “There’s a real risk of delaying the return to neutral monetary policy. 

These risks may make it necessary for a more serious, significant increase in the rate in the future.” 

Russia’s consumer price inflation is running up almost 6% y-o-y. 

April 20 – Bloomberg (Josue Leonel and Matthew Malinowski): 

“Brazilian policy makers should have been more cautious when cutting interest rates last year and now need to stress they will raise them as needed to bring inflation to target, according to former central bank President Ilan Goldfajn. 

Rather than committing to a ‘partial adjustment’ of monetary stimulus, the bank needs to show it’s ready to do whatever is necessary to control prices that will soon be rising by 8% a year, Goldfajn said… 

Likewise, the bank may have gone too far when it cut rates to an all-time low of 2% and signaled they would stay there for the foreseeable future, he added. 

‘In an emerging market like Brazil, using forward guidance is brave,’ said Goldfajn...

 ‘Unfortunately, I feel that this instrument isn’t available for us yet.’”

Brazil’s year-over-year inflation rate has jumped to 7%, the high since 2016, and is projected to even move higher. CPI has surged from last year’s below 2.5% rate. 

The Brazilian real is down 5.4% versus the dollar year-to-date, exacerbating Brazil’s inflation problem. 

April 22 – Bloomberg (Maria Eloisa Capurro): 

“Mexico’s annual inflation surged further above the target ceiling to the highest in over three years, a spike that for now closes the window for the central bank to resume its cycle of interest rates reductions. 

Consumer prices rose 6.05% in early April from the same period last year due in part to base effects, the national statistics institute reported...”

Following news of the strongest consumer price inflation since 2017, Mexico’s central bank deputy governor Gerardo Esquivel tweeted, “Inflation isn’t out of control and won’t stay in elevated levels for a prolonged period. 

It’s primarily an arithmetic and transitory phenomenon.” 

After trending lower for three years (CPI up 2.2% y-o-y in April 2020), Mexico’s inflation trend has shifted markedly. 

Taking pressure off Mexico’s central bank so far (and differentiating itself from other EM banks), the Mexican peso holds a slightly positive year-to-date gain versus the dollar.

After rising above 7.5% last year, India’s y-o-y consumer price inflation had subsided to about 4% in January. India’s March (y-o-y) inflation rate was reported at a stronger-than-expected 5.52%, as inflation regains momentum. 

With an out of control pandemic threatening economic recovery, the Reserve Bank of India in its April meeting remained focused on spurring growth. 

Increasingly, India’s loose monetary and fiscal stances are being poorly received in currency and bond markets. 

April 18 – Financial Times (Hudson Lockett in Hong Kong and Benjamin Parkin): 

“India’s currency has swung from emerging market leader to laggard as the country battles a ferocious wave of coronavirus infections, prompting concerns among global investors that a nascent economic recovery will crumble. 

The rupee has dropped about 3% to 75.14 per dollar since the start of April, the worst performance among a basket of two dozen emerging market peers…”

April 18 – Bloomberg (Subhadip Sircar): 

“India ended up selling fewer bonds than planned for a second straight week, highlighting the weak appetite for debt even as the nation is in the grip of the world’s worst virus outbreak. 

The central bank sold 220b rupees of bonds as against 320b rupees planned on Friday. 

It scrapped all bids for a five-year bond after it had rejected all bids similarly for the benchmark 10-year bond last week. 

Traders now speculate that the sharp increase in virus cases means the government will have to spend and subsequently borrow more. 

Comments from the finance minister didn’t bring much calm when she said that the government wouldn’t hesitate to front-load borrowing as much as needed.”

India’s sovereign Credit default swap prices jumped a notable 20 bps this week to 101 bps, up from a February low 64 - to a near nine-month high. 

State Bank of India ($557bn of assets) CDS surged 25 bps this week to 123 bps, the high since July. 

India’s multinational Reliance Industries’ (largest publicly traded company in India) CDS jumped 23 bps to a seven-month high 102 bps. 

India’s rupee declined 0.9% this week to the low versus the dollar since August. 

India’s Sensex Equities Index has dropped 4.3% over the past three weeks.

April 21 – Financial Times (Ayla Jean Yackley): 

“When a flood of posters and banners appeared this month bearing the number 128 on them, police were quick to tear them down — arguing that they insulted President Recep Tayyip Erdogan, a crime in Turkey. 

‘Where is the $128bn?’ asked the opposition Republican People’s party (CHP) on banners hung from its offices across Turkey, referring to the money it says the central bank has used to shore up the lira in recent years. 

Estimates vary widely over the amount spent, and Erdogan… put the figure at $165bn — the highest assessment yet.” 

April 23 – New York Times (Jack Ewing): 

“A cryptocurrency exchange in Turkey suspended operations this week amid accusations of fraud, freezing an estimated $2 billion in investors’ money, and authorities said they were seeking the company’s founder. 

The Turkish authorities raided offices in Istanbul associated with Thodex, a cryptocurrency trading platform, on Friday morning and arrested more than 60 people, the private news agency Demiroren reported. 

Thodex’s 27-year-old founder, Faruk Fatih Ozer, left Turkey for Albania on Tuesday… 

The cryptocurrency firm has nearly 400,000 active users, whose accounts were nominally worth a total of $2 billion…”

As numerous EM nations these days can attest, a horde of international reserves tends to support a nation’s currency even in the face of some shaky fundamentals. 

Using those reserves to bolster a currency under pressure generally buoys market confidence. 

In short, it works until it doesn’t. 

When a troubled nation blows through much of its reserve position in a failed attempt to keep an unsound currency elevated and its Bubble inflating, the end result is widespread dismay (from Turkish citizens to international holders of Turkish assets). 

Turkey’s 10-year bond yields surged 55 bps this week to 17.73%, the high since the spike to 18.22% on March 31st (yields ended February at 12.86%). 

The Turkish lira dropped 3.9% this week, pushing y-t-d losses to 11.3%. 

Turkey’s BIST 100 Equities Index sank 4.5% this week (down 8.9% y-t-d), trading to the low since the March 23rd panic decline.

April 23 – Bloomberg (Maria Elena Vizcaino and Ezra Fieser): 

“Peru’s currency hit a record low as investors dumped everything from stocks to sovereign bonds after a little-known leftist candidate gained a clear lead in presidential polls, rattling investor confidence… 

Pedro Castillo, a former school teacher whose party has praised Latin American leftists such as Hugo Chavez, came from no-where to lead the first-round election on April 11. 

Now, he is ahead in the polls for the runoff and investors are spooked.” 

The Peruvian currency (sol) sank 4.1% this week, closing Friday at an all-time low versus the dollar. 

Peru’s 10-year local currency yields surged 54 bps this week to 5.41%, up from 3.50% to begin 2021 - to the high since the March 2020 yield spike. 

Peru sovereign CDS jumped 17 bps to an 11-month high 93 bps. 

Outside of last year’s Covid spike, Peru CDS traded this week near four-year highs. 

Peru’s major equities indices dropped more than 10% this week. 

Colombia CDS rose eight bps, and Uruguay gained seven bps. 

China Huarong International CDS dropped 368 bps this week to 684 bps, though the price remains far above the 149 bps to begin the month. 

According to a Bloomberg report, the People’s Bank of China is considering absorbing $15bn of troubled Huarong assets. 

China’s asset management companies (“AMCs”) have $50 billion of dollar-denominated bonds. 

In a signal the storm has yet to pass, China Orient Asset Management Company CDS jumped 22 bps this week to (a contract high) 157 bps. 

This CDS began the month at 97 bps. 

Market concerns persist regarding offshore debt structures and the protections foreign investors will be afforded, and these concerns are causing a rise in yields and CDS for offshore borrowers (highly levered financial institutions and real estate companies, in particular).

April 21 – South China Morning Post (Karen Yeung): 

“‘On the one hand, they [Beijing] are keen to reduce a moral hazard by forcing investors to take a haircut – thereby teaching them the hard way that even state-controlled institutions such as Huarong do not enjoy blanket government guarantees,’ said Wei He, China economist at Gavekal. 

‘On the other, they want to prevent any disorderly knock-on effects in the domestic financial system and to limit the damage to confidence in China’s offshore market.’ 

China’s onshore corporate bond market has stayed calm so far... 

But the issue is with Huarong’s so-called Keepwell provisions that enable China’s banks and non-bank finance companies to access foreign currency financing in the global bond markets.

Essentially, a Keepwell provision is a pledge, not a guarantee, to keep an offshore subsidiary that issues the bonds solvent in the event of distress. 

The immediate risk is that Huarong’s offshore issuance vehicles may not be supported in any restructuring, Hank Calenti, credit analyst at research firm CreditContinuum, wrote…”

Beyond the bond market riddle, it was a kooky week in the markets. 

Bitcoin sank 18%. 

French 10-year yields jumped nine bps to a 10-month high 0.08%, as European bonds continue to disregard declining Treasury yields. 

The five-year Treasury inflation “breakeven rate” dropped 18 bps to a six-week low 2.44%. 

Meanwhile, the Bloomberg Commodities Index jumped 2.2% to an almost three-year high (even as energy prices declined). Corn surged 10.2%, 

Wheat jumped 8.7% and Soybeans advanced 7.4%. 

Coffee rose 6.0%, and Cotton was up 4.5%. 

Copper rose 4.2% (up 23% y-t-d), and Iron Ore jumped 5.0%. 

Lumber surged another 6.0%, increasing 2021 gains to 57%. 

April 22 – Bloomberg (Theophilos Argitis and Ye Xie): 

“The Bank of Canada sent out a warning to investors this week that inflation still matters. In a surprise move, it accelerated the timetable for a possible interest-rate increase and began paring back its bond purchases... 

That made Canada the first major economy to signal its intent to reduce emergency levels of monetary stimulus. 

It’s a turn in policy by Governor Tiff Macklem that shows there’s a limit to how much he’s willing to test the upper boundaries of inflation, with new forecasts showing the central bank expects the biggest persistent overshoot of its 2% target in at least two decades. 

The question is whether Canada’s situation is unique, or foreshadowing the start of a global exit from stimulus.”

Give the Bank of Canada Credit.

“Inflation Forces the Bank of Canada’s Hand Ahead of Fed and ECB” was the headline for the above article. 

Economies are recovering more quickly than expected. 

Inflationary pressures are much more robust. 

Central banks should be responding. 

They’re surely turning increasingly apprehensive. 

Another Bloomberg headline, this one from Friday: “ECB Officials Expect Heated June Decision on Crisis Program.”

It sure appears the world has embarked on a treacherous descent from Peak Monetary Stimulus. 

This bodes poorly for the fragile “Periphery.” 

And while trouble at the “Periphery” has been known to somewhat prolong Bubble excess at the “Core” (i.e. subprime and the greater mortgage finance Bubble), extending the U.S. mania would come at a very steep price. 

From this perspective, a modicum of safe haven demand might be just what untangles the Treasury riddle. 

April 21 – Bloomberg (Matthew Brooker): 

“Mohamed El-Erian, former co-chief investment officer of Pacific Investment Management Co., says the Federal Reserve needs to find a way to exit its extremely loose monetary policy, and delaying a start to the process is risky. 

It still has a window to exit in a relatively orderly manner but this is getting smaller by the day. 

Markets are likely to see something between the 2013 taper tantrum and the 2008 Lehman moment if the Fed misses its window, according to the former Pimco executive.” 

Labour markets are working, but also changing

Labour markets have coped with covid-19 better than expected. But they have changed


The jobs numbers a year ago were grim. 

Unemployment across the rich world rose from 5% to 9% in April 2020. 

In America unemployment rose from 4% to nearly 15% in a month, such a rapid increase that some social-security computers broke. 

In its June 2020 forecasts, the oecd foresaw worse to come. 

If there were a second wave of covid-19 at the end of the year, it said, unemployment would reach 12.6% before inching downwards, but not falling below 10% until the second half of 2021.

There were good reasons to expect high unemployment to persist. 

Rather like the price of petrol, it tends to be quick to rise but slow to fall. 

Fifty years of data from America, Australia, Canada and Japan suggest that increases in unemployment happen 50% faster than declines. 

A worker can clear her desk in minutes, but searching, applying and interviewing for a job takes time. 

After recessions bosses are cautious about hiring new workers, as they want to be sure that business has genuinely recovered. 

Moreover, the pandemic turned out to be even more malevolent than the oecd predicted, with some countries experiencing three waves of infection. 

Yet unemployment across the club fell rapidly from a peak of 9% in the spring. 

By the end of 2020 it was 6.9%, half the level that the oecd had feared.

Some pundits fret that unemployment is now a poor guide to the labour market, because large numbers of people have dropped out of the labour force. 

Correcting this by assuming that everyone who has left the labour force really wants a job raises “true” unemployment by 1.5 percentage points. 

That is a big difference, but not enough to change the story of a labour market performing better than expected.

Using official data is tricky for another reason. 

In many places, including Australia, Japan and especially Europe, governments launched furlough schemes, under which people were counted as employed even though they were not working. 

There have been efforts to correct for this, including one by ubs, a bank, that analyses economy-wide working hours to estimate a “shadow” unemployment rate. 

Yet there is evidence of a bounceback. 

The Economist has adapted ubs’s methodology and finds that Europe’s shadow unemployment rate rose from 7% in 2019 to 20% in the second quarter of 2020, but fell to 10% in the third quarter and has probably fallen further since.

The idiosyncrasies of a pandemic-induced recession may explain why the labour-market recovery has been faster than expected. 

The rich world has got better at coping with lockdowns. 

Restaurants have found ways to offer takeaway and delivery services. 

Governments have allowed more low-risk activities, such as manufacturing and construction, to continue. 

Even under lockdown, demand for workers has been higher than it was when covid-19 arrived in early 2020.


The type of unemployment matters. 

Last spring the vast majority of unemployed Americans said they were “on temporary layoff”, meaning that they had been told there was no work for them but there might be soon. 

Returning to an old job is easier than finding a new one, speeding recovery. 

A big majority of individuals who left unemployment in May and June of 2020 returned to work at their previous employers, according to a paper in February by the JPMorgan Chase Institute. 

That corporate bankruptcies have been far lower than many people expected also means more workers had jobs to go back to. 

For many people who had to leave their jobs for good, labour-market “reallocation” has found them new ones. 

Although demand in leisure, hospitality and travel has plunged, the pandemic has created new needs, from contact-tracers to Zoom trainers. 

The boom in online shopping has similarly boosted demand for warehouse workers and delivery drivers.

The upshot is that jobs are churning. 

A recent paper by José Maria Barrero of itam Business School and colleagues finds that the rate of employment reallocation (a calculation that accounts for some firms creating jobs and others destroying them) in America is running at twice its pre-pandemic level. 

In mid-March 2021 American job postings on Indeed, a website, were 9% above the previous baseline. 

Reallocation in Europe has been slower, in part because furlough schemes have kept workers tied longer to pre-pandemic jobs, but it is happening. 

In 11 European countries total advertised vacancies fell by 50% in the financial crisis of 2007-09, but by only 25% during the pandemic. 

In Australia, which locked down hard but is now bouncing back, vacancies are an astonishing 20% above their previous level.

Extra demand for workers has in part been met by existing companies. 

But new firms have also entered the market to fill gaps. 

America has seen a burst of startups. In 2020, 1.5m firms that are likely to end up employing people were founded, according to official data, up by 16% on 2019. 

Other countries, such as Britain, Canada and France, saw a similarly big rise in business formation in the second half of 2020. 

A recovery with lots of startups tends to be more jobs-rich than one without, since young firms are typically quicker to expand.

Technology has smoothed reallocation. 

Compared with the recession after the financial crisis, job-search websites such as Indeed and Monster are now more widely used. 

This makes it easier for firms to find workers, and vice versa. 

Yong Kim of Wonolo, a platform for blue-collar workers based in San Francisco, says that in the early days of the pandemic many industries, including fulfilment centres for online deliveries, struggled with labour shortages, but his platform has helped people to fill the gaps.

The rich world’s job-market recovery still has a way to go. 

During the northern hemisphere’s winter the fall in unemployment has slowed, reflecting rising covid-19 cases. 

And much of the remaining joblessness is concentrated among the poor. 

In America, over 25% fewer jobs paid less than $27,000 a year in January 2021 than in January 2020, even as higher-wage jobs recovered. 

In Europe unemployment among people with tertiary education is marginally higher than it was before the pandemic, but a lot higher among high-school dropouts. 

Will vaccines allow poorer folk to find work again—or might they find it hard for years to come?

Consumer habits will partly determine the fate of low-wage workers. 

Even if the covid-19 threat passes entirely, people may be more homebound than they were, either because they are more risk-averse or because they are more often working from home. 

As a result, demand for the sorts of low-wage jobs that help people outside their home—such as serving staff, hotel workers or flight attendants—might be lower than it was.

Yet there is reason to hope that the pandemic will not turn people into hermits. 

In New Zealand attendance at restaurants, cafés, shopping centres and theme parks is higher than it was before the pandemic. 

According to OpenTable, a booking platform, in the first two months of 2021 the number of Australian restaurant diners was 65% higher than before the pandemic. 

Because borders are closed, Australians are spending more locally. 

“The martinis were so good,” reports one bon vivant in Sydney, “that we ended up not ordering wine with the meal. 

We just had seven martinis each.”

Even in Australia and New Zealand, though, employment is still somewhat lower than it should have been. 

And the jobless include many low-wage workers. 

The covid-19 shock elsewhere was larger, making it more likely that consumers’ preferences have permanently changed and some workers have lost habits that made them more employable. 

The coming wave of jobs will not catch everyone, at least not for a while. 

Yet it will be broader and more powerful than even optimistic pundits had predicted.

Biden’s big fiscal gamble on America’s future

Many obstacles stand in the way of the president’s infrastructure bill

Edward Luce 


As a share of the US economy, Joe Biden’s fiscal expansion is many times larger than Lyndon Johnson’s ‘guns and butter’ spending © Getty Images



The last time the US budget deficit as a percentage of gross domestic product was in double digits for more than a year was during the second world war. 

Joe Biden was just an infant. 

Few had heard of Harry Truman. 

As Biden approaches his first 100 days as president, the sheer size of his throw of the dice is starting to sink in. 

As a share of the US economy, Biden’s fiscal expansion is many times larger than Lyndon Johnson’s “guns and butter” spending, which ushered in the nation’s most recent era of high inflation.

Nobody can be sure whether Biden’s roughly $5tn in new spending will lead to runaway inflation. 

Lawrence Summers, the former US Treasury secretary, puts the risk of inflation at about a third. 

He gives the same odds to the prospect that America will continue to enjoy non-inflationary growth. 

For what it is worth, the US bond market’s inflation expectations have leapt in the past few weeks. 

But neither the bond markets nor most economists foresaw the era of inflation that began in the late 1960s or the “great moderation” that replaced it in the 1980s.

The fact that Biden is taking a risk is not in doubt. It is the composition of his gamble that is open to question. 

Biden put most of his fiscal chips on the $1.9tn American Rescue Plan that was passed last month. 

That was a stimulative bill for an economy that did not need much more aggregate demand. 

It came on top of more than $3tn of stimulus last year.

By comparison, his proposed $2.3tn American Jobs Plan, better known as the infrastructure bill, which he proposed last week, is small. 

The spending, at least half of which has little to do with infrastructure, will be spread out over eight years, which means it will add less than $300bn a year in federal investments. 

Given that Biden’s “build back better” plan was the centrepiece of his campaign, the end result is surprisingly modest.

Which leads to the odd situation where both the centrist Summers and the socialist Bernie Sanders are saying almost the same thing. 

Sanders believes Biden’s infrastructure bill is far too small. 

Summers believes the stimulus was far too big. 

Both may be right at the same time. 

It is worth stressing that investment spending is less inflationary than stimulus as, in principle, it boosts long-term productivity growth.

What is the political risk? 

Biden’s logic was that it was better to make the first bill as large as possible as he may not get a second chance. 

That may turn out to be true. 

It is still unclear what price moderate Democrats, such as Senator Joe Manchin of West Virginia, will demand for supporting his infrastructure bill. 

The deal could unravel over the proposed corporate tax increases that would partly fund it. 

It could also come unstuck over demands that state income tax rebates be restored to wealthy taxpayers in Democratic states such as New York (Donald Trump removed most of them in his 2017 tax bill).

Even without the tax increases, Republicans would probably unanimously oppose it. 

The plan includes $80bn in extra funding for Amtrak, the US rail system, which conservatives revile as a form of socialist transport. To give a sense of its size, that sum is roughly a third higher than Britain’s annual defence budget.

The bill, nevertheless, would go a long way to correcting decades of under-investment in US roads, bridges, broadband and public housing. 

Biden’s expected $1tn-$2tn “caring economy” bill, which he is expected to unveil soon, would also make education and worker training more affordable, and would bring US parental leave rights into line with other wealthy nations. 

All of which is badly needed. 

None of which will necessarily happen.

The risk is that Biden is over-interpreting the times. 

The pandemic has undoubtedly changed the political weather in the US. 

It helped defeat Trump. 

But did coronavirus herald what many observers insist is the demise of neoliberalism? 

That remains to be seen.

If Biden has overshot and the US Federal Reserve is forced to apply the brakes to control inflation, or new spending leads to a string of white elephant projects that lessen trust in government, Republicans would reap the downside. 

In which case Biden’s new era could turn into a one-term blip. 

His gamble is noble and could pay off. 

But it is a gamble nevertheless. 

How Can These Two Trends Coexist?

BY JOHN RUBINO 


Before the pandemic, auto sales were booming, mostly because car loans were available to pretty much anyone with a driver’s license and a heartbeat. 

“Subprime” auto loans – which charge high interest rates and run for up to eight years (hence the nickname “car mortgage”) — accounted for about 20% of a $1 trillion+ market.


Not surprisingly, the past year’s lockdowns have popped that mini-bubble:

Risky Borrowers Are Falling Behind on Car Payments

(Wall Street Journal) – More subprime borrowers are missing monthly payments on their cars and trucks, pointing to an uneven economic recovery

A greater share of people with low credit scores has been falling behind on their car payments in recent months, a sign of stress among consumers whose finances have been hit hard by the pandemic.

Some 10.9% of subprime borrowers with outstanding auto loans or leases were more than 60 days past due in February, up from 10.7% in January and 8.7% a year prior, according to credit-reporting firm TransUnion. It marked the sixth consecutive month-over-month increase and the highest level in monthly data going back to January 2019.

More than 9% of subprime auto borrowers were more than 60 days past due in the fourth quarter, the highest quarterly figure in data going back to 2005.

But at the same time, this is happening:

US Automakers Report Blowout First Quarter As EV Sales Soar

(Zero Hedge) – The major automakers look to finally be back. And this time around, they’re selling EVs, too.

What’s selling? “Everything,” said one Ford dealer.

“The only explanation that I can even muster is that cars are 2021’s version of toilet paper in 2020,” said Chad Wilson, general manager of Wilson Ford in Saginaw and Midland Ford.

“We are taking a lot of retail orders because we don’t have anything (in stock). Normally between our two stores, we’d have 150-180 F-series in stock. I think right now there might be 10. I do think there’s an element of fear of missing out.”

GM said its U.S. retail deliveries were up 19% in Q1, the company’s first number reported against pandemic-impacted comps. The automaker sold 642,250 vehicles in the U.S. in the first quarter of 2021, according to Bloomberg. While retail sales were up 19%, fleet sales were down 35%

The automaker said its truck and full size SUV plants are currently at full capacity and that it’s seeking to recover lost car and crossover production in the second half of 2021.

Toyota sold 603,066 vehicles in the quarter, a 22% rise from Q1 2020, according to IBD. Even more pronounced was the company’s numbers for March, which were up 87% against the first month of coronavirus lockdowns in 2020.

Volkswagen also posted blowout comps, as sales rose 21% in Q1 to 90,853 vehicles sold. The company was helped along by robust SUV demand while also selling 474 units of its new ID.4, which only went on sale in the U.S. in late March.

So it looks like 1) the car market is still booming and 2) the thing that was driving the boom – subprime lending – is ending. 

How can those two trends coexist? 

Because … inequality. 

Lots of people are making lots of money out there, at the same time that lots of other people are too broke to cover their car payments.

As with so many other current problems, this is the result of a seriously screwed-up financial system AND the past year’s lockdowns, which have affected different groups in different ways. 

The very rich – who own the stocks and real estate that have soared on a tide of easy money – are thriving. 

The people who work online or who otherwise benefit from the “stay-at-home” e-commerce boom are also doing well enough to indulge in new cars.

But the people left behind by the destruction of restaurants, bars, and brick-and-mortar retail are poor and getting poorer. 

They were the folks who took out subprime auto loans and are now missing payments. 

So expect not just auto loans, but credit cards, personal loans, and apartment rentals to see spiking defaults in the coming year.

Since the gap between haves and have-nots was already a chasm before the pandemic, this sudden widening will be a potential flashpoint going forward. 

Put another way, the aristocracy had better make things right with the peasants before the latter storm the castle.

But therein lies the problem. Booming auto sales are a sign of an overheating economy (as are spiking prices for equities, houses, industrial commodities, and collectibles, among many other things). 

Such synchronized blow-off tops are usually followed by mirror-image busts which primarily hurt — you guessed it — the same people who were crushed by the lockdown. 

So the serfs get the shaft coming and going.

And it’s not clear that more easy money – the perennial tool of the 1% to enrich themselves while pretending to help the country at large – will do anything at all this time around.

China’s Economic Self-Harm

China’s antagonistic response to concerns over the use of forced labor in Xinjiang suggests that its leaders believe that the Chinese market is simply too lucrative for Western firms or governments to abandon. They may be overplaying their hand.

Minxin Pei


CLAREMONT, CALIFORNIA – Early last month, China’s rubber-stamp legislature, the National People’s Congress, officially approved the country’s 14th Five-Year Plan. 

The strategy was supposed to demonstrate that China has a long-term economic vision that will enable it to thrive, despite the country’s geopolitical contest with the United States. 

But before the ink on the NPC’s stamp could dry, China had already begun sabotaging the plan’s chances of success.

The 14th Five-Year Plan’s centerpiece is the “dual-circulation” strategy, according to which China will aim to foster growth based on domestic demand and technological self-sufficiency. 

This will not only reduce China’s reliance on external demand; it will also increase the reliance of its major trading partners – except the US – on access to its market and increasingly high-tech manufactures.

China has been laying the groundwork for this strategy for a while. 

Notably, at the end of last year, President Xi Jinping concluded the Comprehensive Agreement on Investment (CAI) with the European Union. 

He had to make some concessions to get there, but it was worth it: the deal had the potential not only to deepen EU-China ties, but also to drive a wedge between Europe and the US.

But Xi is now undermining his own good work, by poisoning relations with critical trading partners. 

Over the last couple of weeks, China has blacklisted several members of the European Parliament, British and Canadian lawmakers, and academics and research institutions in Europe and the United Kingdom.

To be sure, the sanctions were retaliatory: the EU, the UK, and Canada had sanctioned a small number of Chinese officials who are implicated in ongoing human-rights abuses against the largely Muslim Uighur minority in Xinjiang province. 

While these abuses are nothing new, recent reports that forced Uighur labor is being used to harvest cotton have brought them to the fore.

China is sanctioning its critics to display its indignation at these accusations, which it insists are politically motivated lies. 

But whatever message the sanctions are supposed to send, they are unlikely to be worth the cost.

Canada, Europe, and the UK have so far remained relatively neutral in the Sino-American rivalry – and it is in China’s interests that they stay that way. 

China can afford an economic decoupling with the US (though it will be costly). 

It cannot afford a simultaneous decoupling with the rest of the major Western economies.

Already, the CAI is under threat. 

The agreement still needs to be approved by the European Parliament. 

But, to protest Chinese sanctions against some of its members, the Parliament canceled a recent meeting to discuss it. 

Some lawmakers now argue that China should ratify the International Labor Organization’s conventions on forced labor before the CAI is ratified.

Further undermining its economic prospects, China is attacking private corporations for having expressed concerns over forced-labor allegations. 

Last year, the Swedish apparel retailer H&M announced that it would no longer use cotton sourced in Xinjiang, because it was too difficult to conduct “credible due diligence” there.

As the conversation about Xinjiang cotton has heated up, H&M’s statement has resurfaced – and drawn a barrage of criticism. 

China’s leading e-commerce companies have pulled H&M products from their platforms, and Chinese celebrities have canceled deals with the brand. 

And, encouraged by state media, a movement to boycott H&M – as well as other Western brands that refuse Xinjiang cotton, including Nike, New Balance, and Burberry – is gathering steam.

China seems confident that its bullying tactics will succeed. 

After all, Western multinationals don’t want to be driven out of China, an important growth market. 

And, indeed, H&M has already released a new statement highlighting its “long-term commitment” to China and expressing its dedication to “regaining the trust and confidence” of its “customers, colleagues, and business partners” there.

Nonetheless, China may be overplaying its hand. 

Just as Western multinationals want to sell their goods to Chinese consumers, Chinese firms need these companies to keep sourcing inputs from them. 

These are mutually dependent relationships.

Moreover, while the size of China’s market may be appealing enough to draw concessions from multinationals, it is not worth jeopardizing their reputations in the West, which still accounts for the vast majority of their revenues. 

For example, H&M’s top two markets are the US and Germany; China is its third-largest market, but accounted for about only 5% of its total revenue in 2020.

In other words, H&M can afford to lose access to the Chinese market. 

But its 621 Chinese suppliers may not be able to afford losing H&M as a buyer. 

More broadly, an exodus of Western multinationals from China would inevitably force the supply chains that serve them to move as well, resulting in the closure of Chinese factories and the loss of millions of jobs.

There is still time for China’s government to reverse course. 

That means, for starters, allowing independent experts to conduct an investigation of cotton farms in Xinjiang. 

If China really isn’t using forced labor, this is the best way to prove it – and improve relations with Western businesses and governments.

But such a sensible response seems unlikely, not least because China’s leaders remain convinced that its market is simply too important to abandon. 

They should recall that, not too long ago, they were absolutely certain that the US could not afford an economic decoupling from China. 

They were wrong then, and they may well be wrong now. 

The difference is that, this time, China cannot afford a decoupling, either.


Minxin Pei is Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States.