'Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017..
..Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.'<blockquote>'..Story of the Year. For that, I turn to this era’s Masters of the Universe: global central bankers. 2017 was a fateful year of central bank failure to tighten financial conditions in the face of bubbling markets and economies. Fed funds ended the year below 1.5%, in what must be history’s most dovish “tightening” cycle. The Draghi ECB stuck to its massive open-ended QE program, though reluctantly reducing the scope of monthly purchases. In Japan, the Kuroda BOJ held the “money” spigot wide open despite surging asset markets and a 2.7% unemployment rate. As for China, the People’s Bank of China was an active accomplice in history’s greatest Credit expansion.
Loose global financial conditions fed and were fed by record Chinese Credit growth. After almost bursting in early 2016, the further energized Chinese Bubble attained overdrive “terminal” status in 2017. Importantly, another year passed with Beijing unwilling to forcefully rein in rampant excess. The situation becomes only more perilous, with global markets increasingly confident that Chinese officials dare not risk bursting the Bubble. Powerful Chinese and global Bubbles were instrumental in stoking Bubble excess throughout the EM “periphery.” In the face of mounting fragilities, “money” inundated the emerging markets. What is celebrated in 2017 will later be recognized as dysfunctional.
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December 19 – Business Insider (Camilla Hodgson): “Corporate borrowing helped push global debt issuance to a record $6.8 trillion this year, according to… Dealogic. Borrowing by corporates — which accounted for more than 55% of the $6.8 trillion — and governments reached a new high in 2017… ’The debt issuance is pretty much off the charts everywhere,’ AJ Murphey, head of capital markets at Bank of America Merrill Lynch told the Financial Times. ‘Latin America had a good year. Asia had a great year. And yet we see money coming from other regions into the US and European markets,’ he said.”
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The epic untold story of 2017: the markets achieved high conviction that the Fed and the cadre of global central bankers would not tolerate even a modest tightening of financial conditions. No amount of stock market speculation would provoke tightening measures. Even as equities markets overheated, chair Yellen unequivocally communicated the Fed’s lack of concern. Greenspan’s old “asymmetrical” on steroids. To be sure, markets harbor no doubt that a 20% S&P500 decline would spark a robust Federal Reserve crisis response.
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..Three decades of financial innovation and evolution have witnessed virtually the entire world coming to be dominated by marketable finance. In the U.S., Total Securities (Debt and Equities) are approaching $90 TN, or about 450% of GDP. This compares to cycle peaks 379% in 2007 and 359% in early-2000. And the greater the inflation of this historic financial balloon, the more convinced the markets become that central bankers won’t dare take the punchbowl away. It was as if 2017 was the year that central banks convinced the markets the party doesn’t have to end. Let the good times roll. Roll the dice.
Not to be a party pooper, but it’s not a good idea to rouse a crowd of drunks with the idea that plentiful “hair of the dog” will be available to nurse through any potential hangover.
I miss former ECB President Jean-Claude Trichet’s “we never pre-commit.” Especially in a world dominated by marketable finance, central bank pre-commitments will be embedded in market perceptions, expectations and asset prices. Yet the world’s central bankers made the most outlandish pre-commitment ever – they committed to years of ultra-low rates, long-term yield control, liquidity abundance, and unwavering market backstops. Recessions and bear markets will no longer be tolerated. “Whatever it takes.” “Push back against a tightening of financial conditions.” Justify it all by fixating on (slightly) “below target” aggregate consumer price inflation – in a maladjusted globalized economic structure replete with extreme inequities and overcapacities.
Bull markets forever. Capitalism without downturns. Enlightened monetary management coupled with stupendous technological innovation. It all came together to ensure a phenomenal 2017. Enjoy, but don’t for a minute allow yourself to be convinced it’s sustainable. The underlying finance is phenomenally unsound. Crazy late-cycle excess. Inflationist central bankers have actively promoted the greatest inflation and mispricing of financial assets in human history. Notions of endless cheap debt have manifested Wealth Illusion of unparalleled global dimensions.
Whether in U.S. equities, European fixed-income or Chinese apartment prices, Bubble psychology this deeply embedded is resolved only through pain, dislocation and crisis. I never bought into the comparisons of 2008 to 1929 - nor the “great recession” to the Great Depression. 2008 was for the most part a crisis in private Credit, with government debt and central bank Credit (fatefully) unscathed. In contrast, the bursting of the super-Bubble in 1929 unleashed a global systemic crisis of confidence in finance and policymaking more generally. In important respects, 2017 reminds me of reckless “caution to the wind” late-twenties excess in the face of darkening storm clouds both domestic and global.'
- Doug Noland,
A Phenomenal Year, December 30, 2017</blockquote>
Context<blockquote>
'..we have too much of the wrong type of debt and thus the velocity of money has been falling since 1997.''..Every serious deflation I've looked at is preceded by an asset bubble and then it bursts..''..China, once supported by strong household savings, is on a debt binge..'</blockquote>