“It is nothing short of preposterous that in an economy with 7.5% inflation, that in an economy with the tightest labor market we’ve seen in two generations, that the central bank is still as we speak growing its balance sheet.”
- Larry Summers, February 11, 2022
'..Christine (German nickname “Madam Inflation”) Lagarde has Lost Control .. It’s early, but moving in one direction: Beijing Losing Control .. central bankers have Lost Control.''No one believes the FOMC has the stomach to pull a Volcker. Larry Summers today called for the Fed to immediately hold a special meeting and conclude QE a month early. Seems like the minimum they could do, but I’m not holding my breath. Others suggest a 50 bps hike in March. Reasonable enough, though our cautious central bank is pushing back.
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“It is nothing short of preposterous that in an economy with 7.5% inflation, that in an economy with the tightest labor market we’ve seen in two generations, that the central bank is still as we speak growing its balance sheet.” Larry Summers, February 11, 2022 (Wall Street Week with David Westin).
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..Christine (German nickname “Madam Inflation”) Lagarde has Lost Control.
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I’ve been in awe of Chinese Credit for years now. I hold particular awe for the annual release of January data, a month where banks move aggressively to front-load lending for the new year. With record bank lending and growth in Aggregate Financing, January 2022 did not disappoint. At a staggering $972 billion (not annualized!), growth in Aggregate Financing was about 15% ahead of forecasts - while trouncing previous record growth of $817 billion in January 2021. At $1.754 TN, three-month growth was 24% ahead of last year – and only slightly below the pandemic period record (Feb. to April 2020).
So much for Beijing’s efforts to restrain runaway Credit expansion. Aggregate Financing expanded $5.092 TN, or 11.5%, over the past year to surpass $50 TN for the first time. Aggregate Financing surged 74% over five years.
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Lending to corporations fueled the Credit spree. Corporate Bank Loans surged an unprecedented $529 billion during January, almost a third higher than January 2021. Corporate Loans were up 11.6% over the past year, 24.9% over two years, 38.5% over three and 68.7% over five years. How much bank Credit is flowing to impaired developers who have lost debt market access?
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From a macro perspective, it couldn’t be more ominous. Credit (Aggregate Financing) expanded a blistering $5.1 TN over the past year ($11.4 TN in 25 months!). Yet China’s real estate Bubble is faltering, while the general economy has stagnated.
Importantly, despite various policy easing measures, stress continues to overwhelm the highly-indebted developers. Real estate transactions have collapsed, and the longer the turmoil persists, the lower the odds of a near-term recovery in buyer sentiment.
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Just a sampling of the week’s developer headlines. Evergrande yields jumped almost 700 bps this week to 88.79%. Logan yields (despite a late-week rally) ended the week up 180 bps to 32.32%. China’s developer crisis worsens by the week, despite myriad stimulus measures. While panic is perhaps too strong, indications this week pointed to heightened concerns in Beijing.
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It’s worth nothing that China Construction Bank CDS jumped four to close Wednesday trading at a two-month high 68 bps (began 2022 at 57). China Development Bank CDS jumped four to end Wednesday at a two-month high 65 bps (began year at 54). Industrial & Commercial Bank of China CDS jumped five in two sessions to end Tuesday trading at a nine-week high 69 bps (began 2022 at 57). Bank of China CDS jumped four bps to trade to a 10-week high 67 bps (began the year at 56). China sovereign CDS gained 2.5 this week to 53 bps, trading this week to the high since December 2nd.
The banks and AMCs supporting a collapsing developer industry. The “national team” aggressively buying stocks. I don’t expect these increasingly desperate measures to have much more impact than previous Beijing interventions. It’s early, but moving in one direction: Beijing Losing Control.
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After trading to 2.06% in early Friday trading, the previously MIA safe haven bid for Treasuries flashed an appearance, with 10-year Treasury yields ending the week at 1.94%. Wild instability in securities and derivatives markets, with golden commodities. It’s about as one might expect when fear grows that central bankers have Lost Control.'
- Doug Noland,
Lost Control, February 11, 2022
Context (Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'(Stagflation) - 'U.S. Inflation Storm..'(Stagflation) - Dutch inflation climbed to 7.6 percent in January(Stagflation) - '..picked up to 5.1% .. [Price] Inflation is now more than twice the ECB's 2% target.'