'..As for the big picture, China’s strategy is similar to Fed efforts during the late-twenties: Try to tighten finance for speculative endeavors, while promoting lending for productive investment. It didn’t work for the Fed, and I don’t expect a successful outcome for Beijing .. Why is the Fed dragging its heels? It was reported this week that a number of Fed officials have been actively trading their stock accounts. For an institution in the process of destroying its credibility, they should be smarter than that.''Evergrande’s four-year bond yields rose to 62% in Wednesday trading, before the above news of lender forbearance sparked a relief rally (yields ended the week at 52.5%). Other troubled developer bonds also reversed higher. Yet an index of Chinese high-yield bonds ended the week with yields not far off highs since March 2020.
My assumption is there’s no turning back for Beijing this go round. They intend to break speculative psychology – orchestrating a so-called “Volcker Moment.” And this is consistent with the signal sent this year from safe haven global bond markets. This is, however, necessarily a high-risk strategy, with Chinese officials keen to avoid a “Lehman Moment” – the type of panic and acute market dislocation that would unleash grave systemic instability.
So, Beijing will attempt a controlled process of Bubble deflation. We’ve already witnessed a Huarong bailout and some forbearance for Evergrande. As for the big picture, China’s strategy is similar to Fed efforts during the late-twenties: Try to tighten finance for speculative endeavors, while promoting lending for productive investment. It didn’t work for the Fed, and I don’t expect a successful outcome for Beijing.
Late in a major speculative cycle, levered speculation becomes a primary source of system Credit and liquidity. Faltering Bubbles and resulting deleveraging ensure a contraction of speculative Credit. This could be somewhat offset by Credit growth in “productive” sectors, though this is much easier in theory than in actual practice. Throwing Credit at such an acutely imbalanced economic structure at a cycle inflection point is fraught with risk. I expect the faltering Chinese real estate Bubble - and the associated unwieldy changes in financial flows through the economy - to prove highly destabilizing.
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Off the charts bond issuance. Euphoric. August job openings “JOLTS” data were reported Wednesday, with a record 10.934 million unfilled positions. August Producer Prices rose at a stronger-than-expected 8.3% annual clip (China’s up a larger-than-expected 9.5%). National home prices were reported up 18% y-o-y, the strongest annual housing inflation in the 45-year history of the data series. And the latest thinking is the Fed will pass on beginning tapering at its September 22nd meeting. Why is the Fed dragging its heels? It was reported this week that a number of Fed officials have been actively trading their stock accounts. For an institution in the process of destroying its credibility, they should be smarter than that.'
- Doug Noland,
Necessarily Aggressive, September 10, 2021
Context'..A bursting China Bubble .. a regime contemplating international conflict.'(August, 2021) - '..we’ve reached the most extreme valuations in the history of the U.S. financial markets..'The Corporate Junk Bond Bubble In Two Pictures, September 7, 2021
The Fed Is Killing Money Market Mutual Funds, On Purpose or Collateral Damage? September 1, 2021
'Everyone in the US needs to read a report “The evolution of the Canadian pension model; practical lessons for building world-class pension organizations” '(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'