'It was monetary and fiscal stimulus – inflationism - on a global basis, the likes of which the world had never experienced. And, importantly, the Bubble inflated for an incredible 13 years. History teaches that things can get crazy at the end of cycles, and we witnessed some of the craziest things ever. Readers far into the future will ponder this era, as we do the tulip bulb mania and John Law’s Mississippi Bubble. And, most unfortunately, it’s all coming home to roost now.
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..I am reminded of a passage from a book I read years ago analyzing the late-twenties: It said, “Everyone was prepared to hold their ground, but the ground gave way.” .. a much more perilous storm is approaching, and we need to ponder the possibility that there will be nowhere to hide – that the unfolding crisis is global, deeply systemic and uncontrollable for the global central bank community. I worry about a crisis of confidence in policymaking, in the markets and finance more generally..
..An altered and much less hospitable world order is fundamental to the new cycle..''In short, the so-called “everything Bubble” transitioned to Bubbles bursting everywhere. The backdrop beckons, at least in my eyes, for some Credit and Bubble analysis. Bubbles are a monetary phenomenon. There is invariably an underlying source of Credit expansion driving a “self-reinforcing but inevitably unsustainable inflation” – my Bubble definition. As I am fond of explaining, a Bubble fueled by junk bonds might turn a little crazy, but it would not be expected to pose major systemic risk. Because of the elevated riskiness of the underlying Credit, a junk bond issuance boom will reach a point where apprehensive buyers say, “No more junk, I’ve got enough!” – and this point of risk aversion ensures the Bubble doesn’t inflate year upon year, thereby inflicting deep structural damage.
A Bubble fueled by “money” – Credit instruments perceived as safe liquid stores of value - is a completely different animal. Unlike junk bonds, “money” enjoys insatiable demand – we literally can never get enough of it. Bubbles fueled by money-like instruments can inflate for years, in the process imparting deep structural maladjustment to market, financial and economic structures.
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With that theoretical backdrop, let’s delve into the “everything Bubble”. Appraising the Fed’s post-bubble analytical and policy framework, I began warning of the potential for the “global government finance Bubble” – the “Granddaddy of All Bubbles” - back in 2009. With the introduction of QE in conjunction with massive fiscal deficits, the expansive Bubble had finally reached the foundation of finance – central bank Credit and government debt. From my analytical perspective, it was the worst-case scenario: The Bubble was being fueled by an egregious inflation of “money” - and it all was enveloping the world.
I also introduced the concept of “moneyness of risk assets” – an expansion of my “moneyness of Credit” tenet from the mortgage finance Bubble era. Basically, the Bernanke Fed used zero rates and inflated market prices to coerce savers into stocks and bonds. Then, aggressive monetary stimulus was employed to backstop the markets, promoting the perception of safety and liquidity. “Stocks always go up”. It was all reckless inflationism that was clearly fueling dangerous asset and speculative Bubbles.
There were some serious bouts of instability along the way – 2012, 2013, 2018, 2019 and March 2020. And, in each instance, the Fed and global central bank community adopted the ever increasing radical monetary inflation necessary to sustain Bubbles. It culminated during the pandemic, with $5 TN from the Fed and similar amounts from the ECB and BOJ. There were Trillions more from central banks everywhere.
It was monetary and fiscal stimulus – inflationism - on a global basis, the likes of which the world had never experienced. And, importantly, the Bubble inflated for an incredible 13 years. History teaches that things can get crazy at the end of cycles, and we witnessed some of the craziest things ever. Readers far into the future will ponder this era, as we do the tulip bulb mania and John Law’s Mississippi Bubble. And, most unfortunately, it’s all coming home to roost now.
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..This central bank-induced “moneyness of everything” stoked a historic period of myriad synchronized Bubbles across the globe. History offers nothing remotely comparable.
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China’s international reserves dropped $116bn during Q2, suggesting significant capital flight. China’s currency lost 5.4% versus the dollar. China’s bubble collapse has recently taken a turn for the worse – perhaps a decisive turn. Recall that China faced heightened instability late in Q1. Its developer bond market crisis had jumped from the “Periphery” to the “Core”, with Country Garden, China’s largest developer, seeing bond yields spike from 6.5% to surpass 30%.
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..Despite all of Beijing’s measures, developer bond yields began rising again. The crisis deepened. China’s apartment bubble is one of history’s greatest bubbles. Its collapse has significant ramifications – for China’s economy and financial system, along with the global economy and the global financial system. There are clear geopolitical repercussions. Crisis dynamics often move at a glacial pace – only to suddenly accelerate at seemingly lighting speed. And crisis dynamics can appear manageable for some time - only to reach a point where fear takes hold that they might be uncontainable. China’s crisis is on such a trajectory.
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Keep in mind this is new territory for China’s households, developers, banks, regulators and Beijing officials, all experiencing their first housing/mortgage finance bust. It’s worth noting that Consumer - chiefly mortgage - borrowings almost doubled over the past five years – and were up four-fold in 10 years - to almost $11 TN. Chinese Bank Assets – which, by the way, were up a record $1.95 TN just during Q1 - surged 50% over the past five years – and 200% in 10 years - to an astronomical $53 TN.
Country Garden saw its bond yields surge a full 11.5 percentage points last week to a record 41%. These bonds yielded 3.25% in September. Another top five developer, Lonfor bond yields have spiked 23 percentage points in eight sessions to 126%. Sunac yields jumped to 117% and Evergrande yields to 141%. Vanke, another top five developer, is worth special attention. It is considered the financially strongest of the major private sector developers. Its bonds yielded 3.0% in September, with its credit default swaps priced at 100 bps.
Vanke yields have surged to almost 10%, with its CDS surpassing 650 bps. The market is saying China’s apartment Bubble has made it to the strongest – to the “Core”. If Vanke is in trouble, I believe China’s Bubble collapse is quickly approaching the point of no return. And we’re talking about an industry with Trillions of liabilities.
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..China’s historic Credit and apartment Bubbles are unmitigated disasters. Yet markets have been content to look the other way, while renewing their faith in the almighty Beijing meritocracy. No issue was too big to be resolved by Communist leadership. No amount of debt too excessive. No Bubble too big. No degree of structural maladjustment too deep for Beijing stimulus. And, apparently, there’s no economic downturn that won’t be countered by boundless Beijing-directed lending and spending.
I remember the mantra in mid-1998: “The West will never allow Russia to collapse.” And then in 2006/2007, “Washington will never allow a housing bust.” Today, it’s “Beijing won’t allow financial and economic crisis – it won’t tolerate fallout from bursting Bubbles – not with its global superpower status on the line.”
And this is precisely the mindset that sets the stage for destabilizing crisis. First, faith in government control underpins sustained Credit and speculative excess and associated maladjustment. Bouts of instability resolved by government actions over the course of a cycle only embolden risk-taking. With everyone well-conditioned, confidence is sustained for a while, even as Bubbles begin to deflate.
Importantly, however, there reaches a critical juncture where speculative de-risking/deleveraging attains certain momentum, where instability forces markets to begin questioning whether policymakers actually have things under control. I refer to a “holy crap moment” – in 1998, this dynamic revealed egregious leverage at Long-Term Capital Management and elsewhere. In 2008, it was with Lehman and Wall Street finance.
The unraveling process commenced last week in China. The movement to halt mortgage payments was on the heels of some protests by depositors of failed banks. I believe there’s growing recognition that the Chinese people are being pushed to their breaking point. A most protracted Bubble period inflated many things, including expectations. The Chinese have been willing to tolerate increasingly brazen government repression because of confidence that a highly effective Beijing would continue to improve standards of living. This trust is being shattered. There is heightened recognition that Beijing has seriously mismanaged economic development. Zero-Covid is seen by many as terribly misguided government overreach. And I would imagine there are many questioning China’s “partner without limits” alliance with Putin’s Russia.
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..I’ve witnessed a number of EM crises during my career, but never has there been a setup like today’s dominoes all lined up across the globe.
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It should be obvious by now that money printing will not resolve Europe’s issues. I’ve argued that, at the end of the day, I don't expect the Germans and Italians to share a common currency. And that’s why the ECB and global markets turn so anxious when European periphery yields spike. It poses nothing short of an existential threat to European monetary integration.
The ECB faces a crisis of confidence. They are concocting a liquidity backstop mechanism for the eurozone’s periphery that, truth be told, they really hope they won’t have to use. When they are forced to employ bond support operations and its efficacy is questioned, they will then face the real prospect of a serious run on periphery bond markets and even the euro currency.
.. he Bank of Japan is also facing a crisis of confidence. The Bank of Japan has been creating and spending hundreds of billions to maintain its 25 bps ceiling on Japanese 10-year yields. This was a crazy bad idea to begin with, and these days, with spiking global inflation and yields, it has become untenable. The yen has sunk to 20-year lows versus the dollar, and confidence in the yen and monetary management has taken a big hit. When their misguided yield peg breaks, there will be serious risk of a major bond market dislocation and currency turmoil.
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..I am reminded of a passage from a book I read years ago analyzing the late-twenties: It said, “Everyone was prepared to hold their ground, but the ground gave way.”
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Recall the portentous dynamic from March 2020. The Fed hastily responded to de-risking/deleveraging and market dislocation by announcing a major QE program. Yet market dislocations only worsened. An increasingly desperate Fed repeatedly boosted its crisis policy response until the prospect of Trillions of QE finally reversed de-risking/deleveraging and halted the run on some ETFs.
The Fed’s most recent $5 TN QE onslaught pushed leverage and speculative excess to unprecedented extremes. When serious de-risking takes hold at the “Core”, it would take Trillions of additional liquidity to rejuvenate risk-taking and leveraged speculation. And, at this point, with inflation raging and bond markets fragile, such a massive QE program would pose great risk to inflation and bond market stability, not to mention Federal Reserve credibility.
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But a much more perilous storm is approaching, and we need to ponder the possibility that there will be nowhere to hide – that the unfolding crisis is global, deeply systemic and uncontrollable for the global central bank community. I worry about a crisis of confidence in policymaking, in the markets and finance more generally..
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..An altered and much less hospitable world order is fundamental to the new cycle..'
- Doug Noland,
Nowhere to Hide, July 22, 2022
Context(Global Stagflation) - 'Inflation and the impact it has had on a households in New Zealand have become a political issue.'(Banking Reform) - 'Disaster is a strong but appropriate word that applies perfectly to the state of U.S. monetary policy..' - Dr. Hunt(Global Stagflation) - 'This situation has essentially morphed into a cost-of-living crisis..' - Dr. Hunt(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'