http://www.prudentbear.com/2014/06/credit-allocation.html#.U5Sf_5RdWI1
http://www.zerohedge.com/news/2014-06-07/madness-crowds-and-great-insanity
Submitted by Tyler Durden on 06/07/2014 20:32 -0400
Credit Allocation
June 6, 2014
Signs of an upside dislocation
Total (financial and non-financial) Credit jumped $484bn during Q1 to a record $59.399 TN, or 347% of GDP. Although economic growth faltered during the period, Q1 2014 Total Non-Financial Debt (NFD) expanded at a 5.0% rate. Corporate borrowings grew at a robust 9.3% pace, up from Q4’s 7.7% and Q1 2013’s 7.2%. Federal government debt mounted at a 7.1% rate, down from Q4’s 11.6% and Q1 2013’s 10.1%. Consumer Credit accelerated from Q4’s 5.3% rate to 6.6% - the strongest increase in borrowings since Q2 2012. Consumer Credit expanded 4.1% in 2011, 6.2% in 2012 and 5.9% in 2013. If Q1 consumer borrowing is sustained, 2014 will post the strongest consumer (non-mortgage) debt growth since 2001 (8.6%).
The historic increase in federal debt runs unabated. Recall that federal government debt expanded 24.2% in 2008, 22.7% in 2009, 20.2% in 2010, 11.4% in 2011, 10.9% in 2012 and 6.5% in 2013. Federal debt has increased $9.718 TN, or 145%, in 23 quarters. The ongoing expansion of corporate debt is also noteworthy. Corporate debt expanded 8.3% in 2012 and another 8.9% in 2013 – significantly exceeding the growth in the real economy. We’re in the midst of the strongest corporate debt expansion since the 9.2% in 2006 followed by 13.5% in 2007.
The Household (& Non-profits) Balance Sheet remains key to current Credit Bubble analysis. Household Assets increased $1.506 TN during the quarter to a record $95.549 TN. And with Household Liabilities up only $16.7bn, Household Net Worth jumped another $1.490 TN during the quarter. Over four quarters, Household Assets surged $8.189 TN, or 9.4%, with Liabilities increasing $209bn (1.5%). Household Net Worth surged $7.98 TN, or 10.8%, over the past year.
During the past four years, Household Net Worth has inflated an unprecedented $26.797 TN, or 49%. Over this period, Household holdings of Financial Assets have surged $22.0 TN, or 49%, to a record $67.2 TN. On the back of the QE3 liquidity onslaught, Household Net Worth jumped from 417% of GDP at mid-year 2012 to the recent 478% (and counting!). For comparison, Household Net Worth as a percentage of GDP peaked at 447% during the manic height of the “tech” Bubble (Q1 2000).
Analyzing the Fed's most-recent Z.1 “flow of funds” report recalls 2007 market exuberance. Looking back at the data, Non-financial Debt (NFD) growth increased to a blistering $2.344 TN in ‘07. Total Mortgage Debt growth, while slowing somewhat from the record 2004-2006 period, was still almost $1.1 TN (vs. 90’s average $268bn). Total Business borrowing rose to a record $1.045 TN. It was easy to ignore some subprime tumult with the economy seemingly firing on all cylinders.
Importantly, near-record 2007 NFD growth was matched by record Financial sector debt expansion. Financial sector borrowings increased an unprecedented $1.944 TN (up from ‘06’s $1.30 TN and ‘05’s $1.08 TN) to $17.103 TN. This pushed six-year growth of Financial sector borrowings to $7.077 TN, or 78%. At the time, I saw the “parabolic” financial sector ballooning as a major problem. For one, it was indicative of ever heavier financial sector intermediation – the “Wall Street Alchemy” necessary to transform progressively risky loans into perceived safe/“money”-like instruments. This unrecognized spike in systemic risk was occurring even in the face of initial cracks in mortgage finance. Actually, subprime stench had the markets salivating over imminent monetary accommodation. The Fed cut the discount rate in an unscheduled meeting on August 17th and pushed rates 100bps lower by year-end. The S&P 500 traded to its then all-time high in October 2007, less than a year away from the abyss.
For the year 2007, GSE issues (debt & MBS) increased $887.6bn, up from 2006’s $331bn growth. Outstanding ABS increased $350bn. Net Corporate bond issuance was a strong $709bn. A highly unbalanced financial and economic system was becoming only more vulnerable to what I believed was an imminent market tightening of Credit and resulting mortgage downturn. I saw fragility from a highly leveraged system and a heavily imbalanced real economy addicted to enormous amounts of cheap Credit and liquidity. There was acute fragility associated with gigantic speculative leverage in securities and instruments with market prices detached from unfolding fundamental developments. Despite record stock prices and a resilient real economy, the risk of a problematic period of speculative de-leveraging was extreme and growing.
I'll try to explain what I see as current parallels. Federal Reserve Credit has been this cycles’ prevailing source of liquidity, “money” distorting pricing, risk perceptions and the flow of finance through both the markets and real economy. Importantly, this key source of financial Credit is supposedly ending in a few short months. And like 2007, highly speculative financial Bubble markets choose to disregard fundamental prospects and instead go into destabilizing blow-off mode. Indeed, deteriorating prospects – along with accompanying shorting and hedging – provide market melt-up fuel.
In the 23 quarters Q3 2008 through Q1 2014, Federal Reserve Credit expanded $3.338 TN, or 351%. Over the final “parabolic” expansion, Fed Credit/liquidity has surged $1.474 TN, or 52%, in the past 82 weeks. The S&P 500 has increased 50% from June 2012 lows – and is now up 122% from March 2009 lows. Over this period, the small caps have gained 140% and the Morgan Stanley High Tech index has surged 215%.
Similar to 2006/07, a huge expansion in Financial sector Credit stokes an ongoing boom in corporate Credit. A replay of Chuck Prince’s “still dancing” lending euphoria ensures a problematic Credit cycle downside. It is these days worth noting that net issuance of Corporate and Foreign Bonds increased $873bn in 2005, $1.242 TN in 2006 and a record $1.251 TN during (an oblivious) 2007. The 2008 Credit dislocation saw Corporate debt contract $215bn – a harsh reminder of how abruptly the Credit cycle can reverse course and bury folks.
It is worth recalling that Non-financial Debt (NFD) growth averaged $720bn annually during the nineties. It jumped to $1.046 TN during bubbling 1999. After a brief slowdown in 2000, aggressive Fed stimulus (and a resulting surge in mortgage borrowings) had NFD growth back in record territory in 2001 at $1.147 TN. NFD growth then jumped to $1.420 TN in 2002 and $1.716 TN by 2003. Fast-forward to 2007 and NFD expansion had jumped to $2.59 TN – more than triple the average from the nineties.
It’s central to my Macro Credit Analytical Framework that prolonged Credit inflations/Bubbles inflate myriad price levels throughout the markets and real economy. After years of Bubble distortions, even the $942bn growth in NFD growth during 2009 was woefully insufficient to sustain real estate, stock and asset prices; as well as incomes, spending and corporate profits in the real economy. Market dislocation abruptly closed the Credit/liquidity spigot for key sectors.
Since the collapse of the mortgage finance Bubble, I have posited that it would require in the neighborhood of $2.0 TN of annual NFD growth to fuel a self-reinforcing recovery in asset prices and economic activity. While I expected the federal government to run big deficits, it was not obvious at the time that a rapid doubling of Federal debt would be accommodated at historically low borrowing costs. The key has been a previously unimaginable inflation in Federal Reserve Credit - liquidity that has inundated the securities market and inflated asset prices almost across the board.
The Fed did succeed in rejuvenating strong Credit growth. Q1 2014 NFD was reported at a Seasonally-adjusted and Annualized Rate (SAAR) of $2.113 TN – with NFD growth now above my $2.0 TN bogey for two straight quarters. Considering the degree of Credit expansion, the performance of the economy has been most unimpressive (Q1 GDP up SAAR $11.7bn). I’m further troubled by the composition of the recent Credit expansion. Over the past six months, the $2.0 TN bogey has been achieved with federal debt growth of SAAR $1.1 TN and total Business borrowing at about SAAR $940bn. I would argue that large federal borrowings coupled with corporate debt funding M&A and stock buybacks (“financial engineering”) provide the real economy little bang for the Credit buck. Indeed, the massive inflation of Fed Credit has chiefly fueled dangerous speculation and runaway Bubbles in securities and asset prices. The divergence between inflated asset prices and deflating fundamental prospects now widens by the week.
I have repeatedly drawn parallels between the current extraordinarily protracted Credit Cycle and that from the WWI to 1929 period. Both share similar characteristics of profound technological advancement, “globalization,” financial innovation, experimental activism in monetary management and resulting prolonged Credit, speculative and economic cycles.
Late during the “roaring twenties” Bubble period, prices, finance and economic performance all began functioning abnormally. There was confusion. In hindsight, there were obvious warnings. Yet at the time they were so easily drowned out by a boisterous financial mania. There was the camp that accurately recognized and feared the consequences of historic Credit excess. They argued unsuccessfully for policy-makers to rein in the Bubble to save the financial system and economy from catastrophe (Bernanke’s “Bubble poppers”). The Federal Reserve repeatedly acted to reinforce the boom – in the end believing downward pressure on prices and associated economic vulnerability dictated ongoing monetary accommodation.
Our central bank at the time was certainly not unaware of the stock market Bubble. The Fed’s focus turned to trying to ensure Credit was allocated to productive endeavors in the real economy – rather than to the market exchanges. There were two sides to this debate. The “Bubble poppers” were again correct in stating that it was fallacy to expect that Fed measures could ensure Credit was used productively, not when the pricing and profit backdrop in the real economy was so weak compared to the enormous gains being achieved in the booming securities markets.
The ECB this week introduced “targeted long-term refinancing operations” (TLTRO). Despite a historic collapse in sovereign yields and booming stock markets, the Eurozone economy is expected to grow only 1% this year. Many fear that downward pricing pressures are intensifying. In Europe, as around the globe, central bank liquidity has stoked heated financial speculation as economies and prices have continued to cool. The European Central Bank’s plan is to lend to banks specifically to finance loans to business and the real economy. Good luck with that, with feeble return prospects in the real economy paling in comparison to outsized speculative returns so easily achieved in manic securities markets.
The markets foresee only more central bank liquidity making its way to enticing market Bubbles. Italian 10-year sovereign yields sank 20 bps points this week to a record low 2.76%. Imagine a country with complete economic stagnation and debt-to-GDP approaching 130% - and borrowing at yields below 3%. This week saw Spain’s yields sink another 22 bps to a record low 2.63%. Portuguese yields sank 11 bps to a near-record low 3.52%. With mounting debt and deep economic problems, French yields ended the week at 1.70%. A strong case can be made that the European debt Bubble has inflated into one of history’s greatest mispricings of debt securities. European bonds – and global risk markets more generally – are showing signs of upside dislocation – likely spurred by derivatives and speculative trades gone haywire. The “global government finance Bubble” thesis finds added confirmation on a weekly basis.
June 6 – Bloomberg: “China’s banking regulator vowed to expand loans and cap borrowing costs, seeking to boost the supply of funds to the real economy as growth slows amid a clampdown on shadow financing. Lending to small businesses, major infrastructure projects and first-home buyers will be a priority, the China Banking Regulatory Commission said… To give banks more capacity to lend, the regulator may ease the ratio of loans to deposits by including some stable sources of deposits in the calculation, CBRC Vice Chairman Wang Zhaoxing said… The CBRC will also take measures to rein in bubbles in the nation’s real estate market because reliance of the economy on property and too much credit exposure to the sector could damage the financial system, he said.’”
Predictably, China is also focused on boosting the “supply of Credit to the real economy.” After allowing their Credit and economic Bubbles to run completely out of control, Chinese officials now confront a monumental task. They must attempt to rein in speculative Credit excess and financial fraud, while ensuring that the “real” economy receives sufficient Credit to stave off collapse. Acute addiction to copious cheap finance is a fundamental dilemma associated with drawn-out Credit Bubbles. An inevitable tightening of financial conditions (less Credit Availability and associated higher borrowing costs) exposes previous fraud, malfeasance and mal-investment – in the process spurring the self-reinforcing downside to the Credit cycle.
China still retains unusual capacity to sustain lending and Credit growth. Yet, at this point, only a more damaging “Terminal Phase” of excess is ensured. From my perspective, it will take an enormous amount of ongoing Credit to hold a nasty Chinese financial and economic downside at bay. This portends serious trouble for the Creditworthiness of the now behemoth Chinese banks as well as the sovereign.
Here in the U.S., with our booming markets dragging the listless economy along, there’s not much talk of Credit allocation. With Bubble excess – stocks, bonds, corporate Credit, “tech,” etc. – increasingly hard to ignore, there appears to finally be some concern building at the Fed. The headline from Jon Hilsenrath’s Tuesday WSJ article read “Fed Officials Growing Wary of Market Complacency.” This was toned down from the original Dow Jones Newswire headline: “Fed Worried Calm Markets Forecast A Storm to Come.” Federal Reserve Bank of Kansas City President Esther George was out again this week with her rational raise rates “sooner and faster” than the dovish consensus. “My concern is that keeping rates very low into late 2016 will continue to incentivize financial markets and investors to reach for yield in an economy operating at full capacity, posing risks to achieving sustainable growth over the longer run.”
Back in 2007, with cracks forming in mortgage finance, I spent a lot of time pondering how the system could possibly generate sufficient Credit to fuel such an unbalanced and maladjusted economic structure. I have similar concerns today. If Fed Credit growth disappears, I just don’t see how the necessary $2.0 TN of non-financial sector debt growth will be sustained. There is little indication that mortgage Credit expansion will provide much help. Federal deficits are supposed to continue to decline, while state & local government borrowings remain minimal. Corporate Credit growth could continue to boom, although the marketplace appears more late-cycle euphoric to me.
Yet there remains a critical unknown. We are, after all, in the midst of the “Granddaddy of all Bubbles” – and when and how this all concludes nobody knows. It’s an important aspect of Bubble Theory that leverage associated with speculative Bubbles creates its own self-reinforcing liquidity. So I will posit that so long as this Bubble continues to inflate at such a fervent pace, the tapering of Fed Credit has little impact. However, the bigger these Bubbles inflate the greater the risk of a destabilizing “risk off” bout of de-risking/de-leveraging. What is a leading catalyst for puncturing a speculative market Bubble? The unsustainability of parabolic “blow off” speculative excess.
The next “risk off” period will find participants contemplating a marketplace without constant Federal Reserve liquidity injections. The markets will fret about life without an open-ended Fed QE backstop. Will the Fed be there with its typical timely reinsurance – or might a divided Fed struggle to live up to Dr. Bernanke’s promises? For now, it’s exuberance – emboldened by the notion that persistent “deflation” risks will keep global central bankers in an accommodating and experimental mood.
Total (financial and non-financial) Credit jumped $484bn during Q1 to a record $59.399 TN, or 347% of GDP. Although economic growth faltered during the period, Q1 2014 Total Non-Financial Debt (NFD) expanded at a 5.0% rate. Corporate borrowings grew at a robust 9.3% pace, up from Q4’s 7.7% and Q1 2013’s 7.2%. Federal government debt mounted at a 7.1% rate, down from Q4’s 11.6% and Q1 2013’s 10.1%. Consumer Credit accelerated from Q4’s 5.3% rate to 6.6% - the strongest increase in borrowings since Q2 2012. Consumer Credit expanded 4.1% in 2011, 6.2% in 2012 and 5.9% in 2013. If Q1 consumer borrowing is sustained, 2014 will post the strongest consumer (non-mortgage) debt growth since 2001 (8.6%).
The historic increase in federal debt runs unabated. Recall that federal government debt expanded 24.2% in 2008, 22.7% in 2009, 20.2% in 2010, 11.4% in 2011, 10.9% in 2012 and 6.5% in 2013. Federal debt has increased $9.718 TN, or 145%, in 23 quarters. The ongoing expansion of corporate debt is also noteworthy. Corporate debt expanded 8.3% in 2012 and another 8.9% in 2013 – significantly exceeding the growth in the real economy. We’re in the midst of the strongest corporate debt expansion since the 9.2% in 2006 followed by 13.5% in 2007.
The Household (& Non-profits) Balance Sheet remains key to current Credit Bubble analysis. Household Assets increased $1.506 TN during the quarter to a record $95.549 TN. And with Household Liabilities up only $16.7bn, Household Net Worth jumped another $1.490 TN during the quarter. Over four quarters, Household Assets surged $8.189 TN, or 9.4%, with Liabilities increasing $209bn (1.5%). Household Net Worth surged $7.98 TN, or 10.8%, over the past year.
During the past four years, Household Net Worth has inflated an unprecedented $26.797 TN, or 49%. Over this period, Household holdings of Financial Assets have surged $22.0 TN, or 49%, to a record $67.2 TN. On the back of the QE3 liquidity onslaught, Household Net Worth jumped from 417% of GDP at mid-year 2012 to the recent 478% (and counting!). For comparison, Household Net Worth as a percentage of GDP peaked at 447% during the manic height of the “tech” Bubble (Q1 2000).
Analyzing the Fed's most-recent Z.1 “flow of funds” report recalls 2007 market exuberance. Looking back at the data, Non-financial Debt (NFD) growth increased to a blistering $2.344 TN in ‘07. Total Mortgage Debt growth, while slowing somewhat from the record 2004-2006 period, was still almost $1.1 TN (vs. 90’s average $268bn). Total Business borrowing rose to a record $1.045 TN. It was easy to ignore some subprime tumult with the economy seemingly firing on all cylinders.
Importantly, near-record 2007 NFD growth was matched by record Financial sector debt expansion. Financial sector borrowings increased an unprecedented $1.944 TN (up from ‘06’s $1.30 TN and ‘05’s $1.08 TN) to $17.103 TN. This pushed six-year growth of Financial sector borrowings to $7.077 TN, or 78%. At the time, I saw the “parabolic” financial sector ballooning as a major problem. For one, it was indicative of ever heavier financial sector intermediation – the “Wall Street Alchemy” necessary to transform progressively risky loans into perceived safe/“money”-like instruments. This unrecognized spike in systemic risk was occurring even in the face of initial cracks in mortgage finance. Actually, subprime stench had the markets salivating over imminent monetary accommodation. The Fed cut the discount rate in an unscheduled meeting on August 17th and pushed rates 100bps lower by year-end. The S&P 500 traded to its then all-time high in October 2007, less than a year away from the abyss.
For the year 2007, GSE issues (debt & MBS) increased $887.6bn, up from 2006’s $331bn growth. Outstanding ABS increased $350bn. Net Corporate bond issuance was a strong $709bn. A highly unbalanced financial and economic system was becoming only more vulnerable to what I believed was an imminent market tightening of Credit and resulting mortgage downturn. I saw fragility from a highly leveraged system and a heavily imbalanced real economy addicted to enormous amounts of cheap Credit and liquidity. There was acute fragility associated with gigantic speculative leverage in securities and instruments with market prices detached from unfolding fundamental developments. Despite record stock prices and a resilient real economy, the risk of a problematic period of speculative de-leveraging was extreme and growing.
I'll try to explain what I see as current parallels. Federal Reserve Credit has been this cycles’ prevailing source of liquidity, “money” distorting pricing, risk perceptions and the flow of finance through both the markets and real economy. Importantly, this key source of financial Credit is supposedly ending in a few short months. And like 2007, highly speculative financial Bubble markets choose to disregard fundamental prospects and instead go into destabilizing blow-off mode. Indeed, deteriorating prospects – along with accompanying shorting and hedging – provide market melt-up fuel.
In the 23 quarters Q3 2008 through Q1 2014, Federal Reserve Credit expanded $3.338 TN, or 351%. Over the final “parabolic” expansion, Fed Credit/liquidity has surged $1.474 TN, or 52%, in the past 82 weeks. The S&P 500 has increased 50% from June 2012 lows – and is now up 122% from March 2009 lows. Over this period, the small caps have gained 140% and the Morgan Stanley High Tech index has surged 215%.
Similar to 2006/07, a huge expansion in Financial sector Credit stokes an ongoing boom in corporate Credit. A replay of Chuck Prince’s “still dancing” lending euphoria ensures a problematic Credit cycle downside. It is these days worth noting that net issuance of Corporate and Foreign Bonds increased $873bn in 2005, $1.242 TN in 2006 and a record $1.251 TN during (an oblivious) 2007. The 2008 Credit dislocation saw Corporate debt contract $215bn – a harsh reminder of how abruptly the Credit cycle can reverse course and bury folks.
It is worth recalling that Non-financial Debt (NFD) growth averaged $720bn annually during the nineties. It jumped to $1.046 TN during bubbling 1999. After a brief slowdown in 2000, aggressive Fed stimulus (and a resulting surge in mortgage borrowings) had NFD growth back in record territory in 2001 at $1.147 TN. NFD growth then jumped to $1.420 TN in 2002 and $1.716 TN by 2003. Fast-forward to 2007 and NFD expansion had jumped to $2.59 TN – more than triple the average from the nineties.
It’s central to my Macro Credit Analytical Framework that prolonged Credit inflations/Bubbles inflate myriad price levels throughout the markets and real economy. After years of Bubble distortions, even the $942bn growth in NFD growth during 2009 was woefully insufficient to sustain real estate, stock and asset prices; as well as incomes, spending and corporate profits in the real economy. Market dislocation abruptly closed the Credit/liquidity spigot for key sectors.
Since the collapse of the mortgage finance Bubble, I have posited that it would require in the neighborhood of $2.0 TN of annual NFD growth to fuel a self-reinforcing recovery in asset prices and economic activity. While I expected the federal government to run big deficits, it was not obvious at the time that a rapid doubling of Federal debt would be accommodated at historically low borrowing costs. The key has been a previously unimaginable inflation in Federal Reserve Credit - liquidity that has inundated the securities market and inflated asset prices almost across the board.
The Fed did succeed in rejuvenating strong Credit growth. Q1 2014 NFD was reported at a Seasonally-adjusted and Annualized Rate (SAAR) of $2.113 TN – with NFD growth now above my $2.0 TN bogey for two straight quarters. Considering the degree of Credit expansion, the performance of the economy has been most unimpressive (Q1 GDP up SAAR $11.7bn). I’m further troubled by the composition of the recent Credit expansion. Over the past six months, the $2.0 TN bogey has been achieved with federal debt growth of SAAR $1.1 TN and total Business borrowing at about SAAR $940bn. I would argue that large federal borrowings coupled with corporate debt funding M&A and stock buybacks (“financial engineering”) provide the real economy little bang for the Credit buck. Indeed, the massive inflation of Fed Credit has chiefly fueled dangerous speculation and runaway Bubbles in securities and asset prices. The divergence between inflated asset prices and deflating fundamental prospects now widens by the week.
I have repeatedly drawn parallels between the current extraordinarily protracted Credit Cycle and that from the WWI to 1929 period. Both share similar characteristics of profound technological advancement, “globalization,” financial innovation, experimental activism in monetary management and resulting prolonged Credit, speculative and economic cycles.
Late during the “roaring twenties” Bubble period, prices, finance and economic performance all began functioning abnormally. There was confusion. In hindsight, there were obvious warnings. Yet at the time they were so easily drowned out by a boisterous financial mania. There was the camp that accurately recognized and feared the consequences of historic Credit excess. They argued unsuccessfully for policy-makers to rein in the Bubble to save the financial system and economy from catastrophe (Bernanke’s “Bubble poppers”). The Federal Reserve repeatedly acted to reinforce the boom – in the end believing downward pressure on prices and associated economic vulnerability dictated ongoing monetary accommodation.
Our central bank at the time was certainly not unaware of the stock market Bubble. The Fed’s focus turned to trying to ensure Credit was allocated to productive endeavors in the real economy – rather than to the market exchanges. There were two sides to this debate. The “Bubble poppers” were again correct in stating that it was fallacy to expect that Fed measures could ensure Credit was used productively, not when the pricing and profit backdrop in the real economy was so weak compared to the enormous gains being achieved in the booming securities markets.
The ECB this week introduced “targeted long-term refinancing operations” (TLTRO). Despite a historic collapse in sovereign yields and booming stock markets, the Eurozone economy is expected to grow only 1% this year. Many fear that downward pricing pressures are intensifying. In Europe, as around the globe, central bank liquidity has stoked heated financial speculation as economies and prices have continued to cool. The European Central Bank’s plan is to lend to banks specifically to finance loans to business and the real economy. Good luck with that, with feeble return prospects in the real economy paling in comparison to outsized speculative returns so easily achieved in manic securities markets.
The markets foresee only more central bank liquidity making its way to enticing market Bubbles. Italian 10-year sovereign yields sank 20 bps points this week to a record low 2.76%. Imagine a country with complete economic stagnation and debt-to-GDP approaching 130% - and borrowing at yields below 3%. This week saw Spain’s yields sink another 22 bps to a record low 2.63%. Portuguese yields sank 11 bps to a near-record low 3.52%. With mounting debt and deep economic problems, French yields ended the week at 1.70%. A strong case can be made that the European debt Bubble has inflated into one of history’s greatest mispricings of debt securities. European bonds – and global risk markets more generally – are showing signs of upside dislocation – likely spurred by derivatives and speculative trades gone haywire. The “global government finance Bubble” thesis finds added confirmation on a weekly basis.
June 6 – Bloomberg: “China’s banking regulator vowed to expand loans and cap borrowing costs, seeking to boost the supply of funds to the real economy as growth slows amid a clampdown on shadow financing. Lending to small businesses, major infrastructure projects and first-home buyers will be a priority, the China Banking Regulatory Commission said… To give banks more capacity to lend, the regulator may ease the ratio of loans to deposits by including some stable sources of deposits in the calculation, CBRC Vice Chairman Wang Zhaoxing said… The CBRC will also take measures to rein in bubbles in the nation’s real estate market because reliance of the economy on property and too much credit exposure to the sector could damage the financial system, he said.’”
Predictably, China is also focused on boosting the “supply of Credit to the real economy.” After allowing their Credit and economic Bubbles to run completely out of control, Chinese officials now confront a monumental task. They must attempt to rein in speculative Credit excess and financial fraud, while ensuring that the “real” economy receives sufficient Credit to stave off collapse. Acute addiction to copious cheap finance is a fundamental dilemma associated with drawn-out Credit Bubbles. An inevitable tightening of financial conditions (less Credit Availability and associated higher borrowing costs) exposes previous fraud, malfeasance and mal-investment – in the process spurring the self-reinforcing downside to the Credit cycle.
China still retains unusual capacity to sustain lending and Credit growth. Yet, at this point, only a more damaging “Terminal Phase” of excess is ensured. From my perspective, it will take an enormous amount of ongoing Credit to hold a nasty Chinese financial and economic downside at bay. This portends serious trouble for the Creditworthiness of the now behemoth Chinese banks as well as the sovereign.
Here in the U.S., with our booming markets dragging the listless economy along, there’s not much talk of Credit allocation. With Bubble excess – stocks, bonds, corporate Credit, “tech,” etc. – increasingly hard to ignore, there appears to finally be some concern building at the Fed. The headline from Jon Hilsenrath’s Tuesday WSJ article read “Fed Officials Growing Wary of Market Complacency.” This was toned down from the original Dow Jones Newswire headline: “Fed Worried Calm Markets Forecast A Storm to Come.” Federal Reserve Bank of Kansas City President Esther George was out again this week with her rational raise rates “sooner and faster” than the dovish consensus. “My concern is that keeping rates very low into late 2016 will continue to incentivize financial markets and investors to reach for yield in an economy operating at full capacity, posing risks to achieving sustainable growth over the longer run.”
Back in 2007, with cracks forming in mortgage finance, I spent a lot of time pondering how the system could possibly generate sufficient Credit to fuel such an unbalanced and maladjusted economic structure. I have similar concerns today. If Fed Credit growth disappears, I just don’t see how the necessary $2.0 TN of non-financial sector debt growth will be sustained. There is little indication that mortgage Credit expansion will provide much help. Federal deficits are supposed to continue to decline, while state & local government borrowings remain minimal. Corporate Credit growth could continue to boom, although the marketplace appears more late-cycle euphoric to me.
Yet there remains a critical unknown. We are, after all, in the midst of the “Granddaddy of all Bubbles” – and when and how this all concludes nobody knows. It’s an important aspect of Bubble Theory that leverage associated with speculative Bubbles creates its own self-reinforcing liquidity. So I will posit that so long as this Bubble continues to inflate at such a fervent pace, the tapering of Fed Credit has little impact. However, the bigger these Bubbles inflate the greater the risk of a destabilizing “risk off” bout of de-risking/de-leveraging. What is a leading catalyst for puncturing a speculative market Bubble? The unsustainability of parabolic “blow off” speculative excess.
The next “risk off” period will find participants contemplating a marketplace without constant Federal Reserve liquidity injections. The markets will fret about life without an open-ended Fed QE backstop. Will the Fed be there with its typical timely reinsurance – or might a divided Fed struggle to live up to Dr. Bernanke’s promises? For now, it’s exuberance – emboldened by the notion that persistent “deflation” risks will keep global central bankers in an accommodating and experimental mood.
***
AND.......
The Madness Of Crowds And The Great Insanity
Submitted by Ty Andros via TedBits,
Never in my 30+ year career as a market observer have I seen so many out on a limb which is about to be SAWED OFF. Those who live within the matrix are fully loaded for a recovery which is not and will not appear. Nominally the Main stream media can proclaim ECONOMIC recovery has arrived, point to the rising developed world stock markets, seemingly benign bond markets of all categories: sovereign, investment grade and Junk, Private equity, corporate buy backs and more have priced in “Happy Days are here again”. HFT, unrestrained leverage in a financially repressed world and Quantitative easing have done the rest in pushing financial assets to heights rarely, if ever, seen. Volatility is at all-time lows in most markets and investor confidence at superhuman levels. Like a boat where all the passengers are on one side of the boat and it is about to capsize, investors similarly have no fear.
“In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.”- Friedrich Nietzsche
The central banks have created moral hazard on a scale which is simply unbelievable and set a stage for a bonfire of the vanities seldom, if ever, seen in history. In fact, nothing I can see rivals it.
“Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is a large weight to units engaged in speculative and Ponzi finance. . . . The greater the weight of speculative and Ponzi finance, the smaller the overall margins of safety in the economy and the greater the fragility of the financial structure.”- Hyman Minsky, 1992
Professional Investors who have spent a lifetime playing these contrarian opportunities offered by human behavior are being carried out on stretchers as historic market behaviors fail to materialize. So the financial imbalances and historic overvaluations just grow and grow and when they are resolved only God knows. In my opinion, it isn’t materializing because many markets are manipulated, pure and simple, with and without the assistance of the central banks, government regulators and the bankster financial community. As long as the results and consequent headlines are politically correct there are no consequences to be feared, they will be allowed to continue. Politicians HATED markets because they used to expose them as the liars they are. NO MORE as they are now in the hands of megalomaniac’s and sociopaths who don’t know the difference between right and wrong.
“Sometimes the law defends plunder and participates in it. Sometimes the law even places the whole apparatus of judges, police, prisons and gendarmes at the service of the plunderers, and treats the victim, when he defends himself, as a criminal. But often the masses are plundered and do not even know it.”- Frédéric Bastiat
The masses are being plundered on a scale which is inconceivable and unmatched in history; it is the source of the middle classes dying in the developed world. The developed world has become a well-disguised plantation of serfs and slaves. They are given nothing to store and save their labor in as the currency they hold are printed endlessly and have no reserves to back them and are redeemable in NOTHING, contrary to every sound currency in history. Modern day money is nothing less than a wealth confiscation scheme run by morally and fiscally bankrupt central banks and governments against their own citizens.
Is there any human activity where you are not taxed today in one way or another? Is there any major financial holding which people own free and clear of annual taxes or don’t have to share any gain with the masters in central governments? They are your partners in everything even though you performed the work to buy your assets. The government has given the working man nothing in exchange for sharing in the profits or appreciation. Government services such as roads, schools, sewers, police and courts are paid for out of taxes.
“None are more hopelessly enslaved than those who falsely believe they are free.”- Johann Wolfgang von Goethe
As long as big government progressives, elites, the main stream media, and banksters can manipulate and control the reality for the vast majority of citizens they tell themselves they are doing a public good. Fredric Bastiat described this nexus well:
“Sometimes the law defends plunder and participates in it. Sometimes the law even places the whole apparatus of judges, police, prisons and gendarmes at the service of the plunderers, and treats the victim, when he defends himself, as a criminal. But often the masses are plundered and do not even know it.”- Frédéric Bastiat
Throughout the developed world, progressive governments have created huge welfare states that have crippled the futures of the people under whom they were meant to place a safety net. Now, it is a permanent way of life for them and the rolls are exploding daily.
“See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Then abolish this law without delay. If such a law is not abolished immediately it will spread, multiply and develop into a system.”- French economist Frederic Bastiat (1801-1850)
This is the system in the developed world today and it will not be stopped except by Mother Nature and Darwin. These programs have now created a class of people who have no ability to rise and prosper in life: they have no skills, no ability to produce more than they consume, and do not know the source of their inability to do so. They are told their lack of success is someone else’s fault. They are crippled intentionally to be victims of the elites who wish to prey on them and their ignorance. They have been provided a POTEMKIN FAKE education by public schools who FAIL to provide them the educations necessary to rise through adversity and in life. These FAKE educations have ONLY one goal as outlined by George Carlin:
“…But I’ll tell you what they don’t want. They DON’T want a population of citizens capable of critical thinking. They don’t want well-informed, well-educated people capable of critical thinking. They’re not interested in that, that doesn’t help them. That’s against their interests. That’s right. They don’t want people who are smart enough to sit around the kitchen table and figure out how badly they’re getting F#CKED by system that threw them overboard 30 f#ckin’ years ago. They don’t want that. You know what they want? They want OBEDIENT WORKERS. OBEDIENT WORKERS. People who are just smart enough to run the machines and do the paperwork, and just dumb enough to passably accept all these increasingly shittier jobs with the lower pay, the longer hours, the reduced benefits, the end of overtime, and the vanishing pension that disappears the minute you go to collect it.”- George Carlin
Is this not the world we live in today? These words were said over 15 years ago. The USEFUL idiots as Lenin called them have no ability to think, manufactured by public school monopolies (which I call indoctrination/brain washing centers) and told they have been born with the right to all of their basic needs provided by the government:
“It is not an endlessly expanding list of rights —the “right” to an education; the “right” to health care; the “right” to food and housing. That is not freedom. That is dependency. Those are not rights. Those are the rations of slavery – hay and a barn for human cattle.”- Alexis de Tocqueville
They believe the impossible dream that they have the right to live their lives at the expense of others and will vote for the people that tell them this is so and use a government gun to make it happen. Most of society today does not know: where money comes from, what it is or isn’t in a historical or practical sense, how wealth is created, the virtues of capitalism and wealth creation, why it’s important to stay debt free and live within your means, why they should work hard and never give up, why save money, why it’s important to be self-reliant, what the constitution is and why it’s important to protect our freedom and future, nor economics of any sort but socialism and Keynesianism (central government control of all aspects of life also known as Marxism).
In my estimation this means they are functually ILLITERATE to life’s basic requirements to grow and thrive as a human in society. They couldn’t be less prepared to meet life’s challenges. The school systems are designed to create peasants and serfs to socialism. Not educated, self-reliant and independent citizens. Prior generations such as mine where taught all these things. We want it restored, and now are labeled extremists and terrorists for insisting on it. This teaching of socialism labeled democracy has led to very destructive behavior:
Democratic institutions awaken and foster a passion for equality which they can never entirely satisfy. This complete equality eludes the grasp of the people at the very moment they think that they have grasped it… the people are excited in the pursuit of an advantage, which is more precious because it is not sufficiently near to be enjoyed. Democratic institutions strongly tend to promote the feeling of envy. A depraved taste for equality, which impels the weak attempt to lower the powerful to their own level and reduces men to prefer equality in slavery to inequality with freedom.- Alexis de Tocqueville, 1825
This is the agenda of the voting public with the president and his minions in congress and the bureaucracy as his supporters. I have never seen an administration so dedicated to dividing people and attacking the private economy which is the basis of future prosperity. Progressives in Government espouse the gospel of Carl Marx even though they never say so explicitly:
“The whole gospel of Karl Marx can be summed up in a single sentence: Hate the man who is better off than you are. Never under any circumstances admit that his success may be due to his own efforts, to the productive contribution he has made to the whole community. Always attribute his success to the exploitation, the cheating, the more or less open robbery of others. Never under any circumstances admit that your own failure may be owing to your own weakness, or that the failure of anyone else may be due to his own defects, to his laziness, incompetence, improvidence or simple stupidity.”- Henry Hazlitt on envy and Marxism
This is from where progressives derive their power as this is what the public is taught in public schools. They are a generation of unaccountable victims. Government does not create prosperity or wealth, it destroys prosperity and wealth… correction: it CONSUMES them.
Several weeks ago, I commented on the $30 trillion dollars ($30 million million dollars printed out of THIN air) of new debt which has been created since the nadir of the Global Financial Crisis in late 2008. This has created the greatest fire hose of HOT money zooming around the world in history. Too much money chasing too few opportunities is repressing yields and returns. Combine this with deliberate FINANCIAL REPRESSION by banksters and governments as they transfer the returns from prudent savers to themselves to fill in the insolvency their Reservelessbanking systems created. Trillions of dollars of unpaid interest has flowed to insolvent governments and banks during this period and continues to do so as REAL inflation eats the money the public is paid in and stores its wealth in. While bankers and governments borrow money for nothing, false government inflation statistics hide the theft from the public (see www.shadowstats.com).
“You never want to let a serious crisis go to waste.”- Rahm Emanuel, February 9, 2009
This debt has been disguised as GDP by the governments of the world while they used the crisis not to reform themselves but, instead, to implement new and innovative ways to loot and enslave the publics they claim to serve by increasing taxes, taking regulations to levels of suffocation of private enterprise (moving this demand to connected crony capitalists), removing freedoms and taking confiscation of private property to new extremes. An insidious process, and exactly opposite of the recipe for economic recovery. They have destroyed the human spirit of hope, hard work, and tenacity as they destroy the incentives to do so.
“When people who earn more than the average have their ‘surplus,’ or the greater part of it, seized from them in taxes, and when people who earn less than the average have the deficiency, or the greater part of it, turned over to them in hand?outs and doles, the production of all must sharply decline; for the energetic and able lose their incentive to produce more than the average and the slothful and unskilled lose their incentive to improve their condition.”- Henry Hazlitt
In the process, creating a society of misery spread widely (definition of socialism):
No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”- Adam Smith
Is this not the mood of the vast majority of the developed world? And they are giving up in record numbers, succumbing to the hopelessness in the world their elite masters have created for them.
“One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.”- Carl Sagan
In closing, the greatest top in economic activity and leverage in human history has been in the making since 2000. When the leverage FAILS, the world’s developed economies will be thrust into the next leg of the cleansing process of deleveraging which began in 2000, made another top in 2008 and now this time. The leverage is far greater now than it was at the 2000, and the 2007/2008 highs. The destruction of it will be equally bigger. The world has slipped below the proverbial event horizon of a Black hole, slipping closer and closer to the final denouement of the insanity running amok today.
Then, we will have a time of great economic and social turmoil as what has gone before slides to its doom.Then, a great reformation will emerge just as it did in China after the cultural revolution failed in 1976 and then with Deng Xiaoping in 1989 when he said “to get rich is glorious” and he unleashed the human spirit in China and wealth creation exploded. Don’t you think similar epiphany’s lie in the future after the socialist welfare states of the world collapse?
“Political ideas that have dominated the public mind for decades cannot be refuted through rational arguments, they must run their course in life and cannot collapse otherwise than in great catastrophe.”- Ludwig Von Mises
This conclusion is firmly on the horizon; let’s call it the great INSANITY. I believe this version is the greatest in history and will be written about for centuries. Those that forget history are doomed to repeat it and this time is no different. However, there is always great opportunity with great danger as the greatest transfer of wealth from these that hold it in paper to those that don’t is underway and there is nothing that can stop it. The sociopaths and elites have no ability to turn the ship of states around as their policies have created the collapse. While this is a manmade disaster, it is most definitely the greatest opportunity in history for those that see it and adjust their behavior accordingly. Don’t ever forget, THEY WILL PRINT THE MONEY!
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