'The Fed blew its transitory inflation call. Moreover, it clung to the misguided notion of a weak jobs market as justification for keeping the printing press running full tilt .. Open-ended “Whatever it takes” QE fundamentally altered perceptions and market function .. Bubbles, at their core, are mechanisms of wealth redistribution and destruction. Ongoing global Bubbles ensure geopolitical instability and worsening conflict. The year was notable for heightened geopolitical pressures on multiple fronts.''..The Federal Reserve is now 13 years into a failed QE experiment. As history teaches, once monetary inflation is unleashed it becomes extremely difficult to rein in. “Just one more year of money printing – only one more crisis or downturn to overcome.” It doesn’t stop. Moreover, the Fed is 25 years into a flawed experiment of using the securities markets as the primary mechanism for system stimulus (as opposed to the traditional principal role held by the banking system and lending).
The Fed blew its transitory inflation call. Moreover, it clung to the misguided notion of a weak jobs market as justification for keeping the printing press running full tilt. Despite pockets of weakness (i.e. leisure and hospitality) and an extraordinary exodus from the workforce, overall labor market dynamics were governed by tight conditions. January’s eight million job openings (“JOLTS” data) surpassed 11 million by July. For comparison, job openings averaged 4.6 million over the period 1999 to 2019. The unemployment rate dropped precipitously, from January’s 6.3% to November’s 4.2%. As companies struggled to retain and attract employees, workers enjoyed their strongest bargaining power in decades.
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Open-ended “Whatever it takes” QE fundamentally altered perceptions and market function. The Fed, of course, is not solely to blame for surging prices. But along with its inflationary money printing, QE operations granted spendthrift Washington a blank checkbook.
The fiscal 2021 federal deficit reached $2.77 TN, with a historic $5.90 TN two-year shortfall. Outstanding Treasuries ended Q3 at $24.250 TN, up from year-end 2007’s $6.051 TN. Treasuries surged $5.678 TN in seven quarters, matching the total amount of accumulated federal debt through 2006. Treasuries ended Q3 at 105% of GDP, up from Q4 2007’s 41%.
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The conventional (“portfolio balance”) economic view of QE effects ignores the reality of the Fed creating and injecting Trillions of purchasing power into the system. And depending on the prevailing inflationary biases in the asset markets and real economy, QE can exert profoundly disparate inflationary effects. The $1.0 TN post-Bubble QE1, for example, largely accommodated market deleveraging, deceptively feeding the notion of QE as non-inflationary. Resume QE when markets have attained powerful inflationary biases (2019), and the additional liquidity will spur manic excess. Throw Trillions into highly exuberant markets, and the upshot will be a full-fledged mania. Manias ran wild in 2021.
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Add Trillions of system liquidity after home price inflation has attained momentum – with mortgage rates held down (3% or lower for adjustable rates!) to a fraction of the rate of housing inflation – and the Fed confirms lessons from the “Great Financial Crisis” went unlearned. Housing Bubble excess running wild…
The S&P CoreLogic Case-Shiller U.S. National Home Price Index jumped 19.1% y-o-y (as of October data), the strongest home inflation in a data series back to 1988. The 20-city index gained 18.4% - “the hottest markets were Phoenix (up 32.3%), Tampa (28.1%) and Miami (25.7%)” (CNBC). Home sales are on track for the highest volume since 2006. At just over one million units, the available inventory of existing homes was the lowest on record. Through the first three quarters of the year, mortgage Credit expanded at the fastest pace since 2006.
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The inflation of perceived wealth ran wild.
At a record $163 TN, Household Assets (Fed’s Z.1) surpassed 700% of GDP for the first time. Household Net Worth (Assets less Liabilities) jumped to $145 TN, or 624% of GDP. This compares to previous cycle peaks $70.9 TN (488%) during Q3 2007 and $44.5 TN (445%) back in Q1 2000. Household holdings of Financial Assets reached a record 500% of GDP, up from previous cycle peaks 374% (Q3 2007) and 354% (Q1 2000).
The last time y-o-y inflation was at 6.8%, 10-year Treasury yields exceeded 14%. Ten-year Treasury yields ended the year at 1.51%, with inflation-adjusted “real” yields deeply into negative territory.
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China’s historic Bubble is faltering. The collapse of developer Evergrande – with its $300 billion of liabilities – sparked a panic throughout China’s developer (and high yield) bond universe. After ending May at 14%, Evergrande bond yields surpassed 60% in August, on their way to 83% to end the year. Cockroaches everywhere. Kaisa Group yields surged to 51%, Sunshine City to 70%, Shanghai Shimao to 67%, Easy Tactic to 95%, Yuzhou Grand to 58%, China Aoyuan to 60%, and Sunac to 80% - to highlight just a few.
Millions of Chinese, having placed down payments for new apartment units, faced the prospect of long construction delays. Tens of millions of investors fretted their investments in developer “wealth management products.” It is unclear how much housing information is making its way to the Chinese people. Housing transactions have slowed markedly. Prices have begun to weaken, though data don’t appear to reflect the steep discounts offered by financially stressed developers.
A year-end CNBC headline: “China’s Big Challenge for 2022: Getting People to Spend Money.” This year marked a profound change in Chinese perceptions. Faith that housing speculation provides a guaranteed vehicle for wealth generation has been shaken. The optimistic view that Beijing has everything under control had to be adjusted. The communist party imposed wide-ranging crackdowns on everything from real estate speculation, financial regulation, technology company dominance, press freedoms, private education, entertainment, video games, and internet “influencers” (among others). The screws were severely tightened on Hong Kong.
After years of exploiting the forces of free market Capitalism as a necessary expedient for national development, chairman Xi shifted Beijing’s focus to “common prosperity,” wealth redistribution, and communist party encroachment upon all aspects of China’s economy and society. Meanwhile, Beijing’s draconian Covid “zero tolerance” further burdened a population discombobulated from an overwhelming barrage of momentous change.
Despite major economic and financial risks associated with a faltering Chinese Bubble, for a manic Wall Street, it was just one more risk to disregard.
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Bubbles, at their core, are mechanisms of wealth redistribution and destruction. Ongoing global Bubbles ensure geopolitical instability and worsening conflict. The year was notable for heightened geopolitical pressures on multiple fronts.
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Such a consequential year on all fronts. It just seemed as though the crucial development of 2021 was the wild divergence that ran unchecked between extreme faith in the securities markets and waning confidence in policymaking (along with our nation’s future). The Fed blew it, and only surging stock prices muzzled growing outrage. Bursting asset Bubbles will expose the badly depleted confidence in the too powerful institution of the Federal Reserve System. Wall Street late in the year trumpeted the success of Powell’s adept “hawkish pivot,” with unwavering confidence that the Fed won’t dare to actually tighten financial conditions and risk bursting myriad fragile Bubbles.
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The year ends ominously. Omicron and Manias. Inflation and ever-widening wealth disparities. Anger, frustration and disillusionment. Irrepressible enthusiasm for stock market and economic prospects – for those fully consumed by the asset markets. A gambling mentality and wanton disregard for risk. Disheartenment for those surviving outside the Bubble, while those on the inside – wallowing in the monetary deluge - bask in the “Roaring Twenties.”
How dark would the public mood dim if securities market Bubbles burst and the deeply maladjusted U.S. economy sinks into recession? S&P500 5,000 in sight! TINA (“there is no alternative”). FOMO (“fear of missing out”). For 2021, there was no taming wild Bubble excess. Paraphrasing the great economist Charles Kindleberger: “There is no more powerful force than the angst of watching your neighbors get rich.” '
- Doug Noland,
2021 Year in Review, January 1, 2022
Context (Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..''Un-Anchored.''..Things turn really crazy at the end of cycles. Monetary Disorder, Manias and Market Dysfunction..'('The "Manic-Depressive" Economy) - 'It’s turning into a debacle..'('..its Credit expansion .. China Bubble thesis') - Weary of Their Experiment in Capitalism - By Doug Noland