<blockquote>'..a basic premise of Credit Bubble Analysis that market distortions are problematic, cumulative and inevitably resolved. Sooner the better. The central bank liquidity backstop spurs myriad excesses that in the end will expand beyond the capacity of central bankers to sustain system liquidity. There are accumulations of speculative positions, leverage and maladjustment that evolve into Credit and liquidity gluttons. Over time, market misperceptions and distortions become deeply embedded. And, as we’ve witnessed, the greater the excesses the more confident are the markets that central bankers will have no alternative than to provide liquidity backstops. So, market yields remain stubbornly low in the face of efforts to tighten monetary policy, exacerbating excesses throughout the risk markets and the overall global economy. No Conundrum.
I expect U.S. system Credit growth to surpass $2.2 TN this year, roughly broken down by the government sector ($850bn), Business ($750bn), Household Mortgage ($350bn) and Consumer Credit ($250bn). Another big federal deficit is expected, with the perception of a blank checkbook ensuring that deficits inflate until the markets decide otherwise. Rising home prices coupled with low mortgage rates ensure a 2017 expansion of mortgage borrowings. Loose financial conditions and record debt issuance would seem to ensure another big year of Business debt growth. And while there appears to be some tightening in subprime auto and Credit cards, I would be surprised to see Consumer Credit expand by much less than 2016. As such, the relatively stable outlook for U.S. Credit growth certainly supports the global liquidity and market backdrop.
The situation in Chinese is altogether different. Credit growth (Total Social Financing and government borrowings) is on track to approach a record $3.5 TN this year. But I wouldn’t be stunned neither by $4.0 TN or a crisis-induced rapid Credit slowdown. April lending data was out Friday. Total Social Financing (TSF) expanded $201bn during April, down from March’s $307bn. New Loans expanded $159bn during the month, about a third greater than expected. Bank lending took up some of the slack from a sharp decline in various “shadow banking” components. Overall mortgage Credit growth slowed during April. TSF (which excludes government borrowings) expanded a record $1.205 TN during the first four months of the year.
From my analytical perspective, China has evolved into the key marginal source of global Credit. Why is the VIX – along with the price of other market “insurance” - so low? Because of the market perception that Beijing these days has everything under control. Notable complacency, yes. At the same time, and making things more intriguing, I don’t believe markets are all too confident in China prospects over the intermediate and longer-term. So, we’ll continue to monitor closely for indications of escalating Chinese instability. After an “inconclusive” past five days in the markets, Risk On/Risk Off will be monitored diligently once again next week.'
- Doug Noland,
The VIX and the Scheme, May 13, 2017</blockquote>
Context<blockquote>
'..Unlike Irving Fisher .. I have no expectation that the market has reached a “permanently high plateau.” ''..investors’ fear of missing out is looking increasingly desperate..''Unsound Finance gets to the heart of the issue.'</blockquote>