'With U.S. and Chinese Credit systems having come completely off the rails, Credit became unhinged around the globe – “developed” and “developing.” The ECB’s balance sheet expanded $3.2 TN in the final nine months of 2020 to $8.553 TN. In Japan, central bank assets jumped $1.5 TN to $6.888 TN. According to Bloomberg data, “G4” (Fed, ECB, BOJ and Bank of England) central bank balance sheets inflated $8.5 TN in nine months to $23.804 TN (up from $6.429 TN to end 2009). With momentous ramifications, the very foundation of global finance succumbed to unbridled inflationism like never before.
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The second-half of 2020 marked the emergence of a full-fledged market mania – stoked by retail and institutions alike. What began as a Fed-induced unwind of hedges and short squeeze morphed into securities prices completely detached from reality. Tesla with a market capitalization approaching $700 billion. Scores of IPOs – most with loss-generating businesses – seeing prices more than double on the initial day(s) of trading. The “Robinhood effect” – with booming trading volumes. The craze of call option market speculation.''Less than two weeks from equities at all-time highs, the Fed in an unscheduled March 3rd emergency meeting slashed rates 50 bps to 1.0%. Ominously, the NDX sank 3.2% on the Fed’s announcement, with the S&P500 down 2.8%. The market rout was unrelenting, with the Thursday, March 12th market panic called the “Worst Day Since the 1987 Market Crash” and the “Biggest VaR Shock in History.” Perhaps even more alarming, it was the “Worst Week for Credit in Decades.” The Fed dropped rates to zero on March 15th after a second unscheduled emergency meeting. In what must have sparked panic within the FOMC, de-risking/deleveraging only intensified.
The global Bubble was bursting. High-yield U.S. Credit default swap (CDS) prices surged 500 bps in three weeks to 870 bps, the high since the previous crisis. Investment-grade CDS almost tripled to 152 bps, also the high going back to 2009. Huge outflows led to dislocations throughout the ETF complex. From March 5th to March 23rd trading lows, both the iShares High Yield and iShares Investment-Grade bond ETFs dropped about 22%. Bloomberg News responded to dislocation in the municipal debt market with the headline, “A Day of Hell: The Muni Market’s Worst Day in Modern History.” Over 12 chaotic trading sessions, the small cap iShares Russell 2000 ETF collapsed 37%. Runs on prime money market funds were gaining momentum.
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In the clearest indication of the systemic nature of market dislocation, even the Treasury market fell into disarray. Thirty-year Treasury yields collapsed an incredible 59 bps on March 9th to a record low 0.70%. Deleveraging was fomenting extreme trading anomalies, including sharply widening spreads between “off the run” and “on the run” Treasury securities. The Fed later pointed to illiquidity and dislocation within the Treasury market as a key factor behind the vehemence of their crisis mitigation efforts.
March 12 – Financial Times (Colby Smith and Brendan Greeley): “The Federal Reserve said it would pump trillions of dollars into the financial system in a dramatic attempt to ease stresses in short-term funding and US Treasury markets that have accompanied the spread of the coronavirus. The US central bank is also making changes to its programme of Treasury purchases ‘to address highly unusual disruptions in Treasury financing markets’. For the third time in four days, the Fed’s New York arm announced on Thursday that it would increase the size of its lending in the repo market… this time by multiples of the amounts previously on offer… The Fed would now offer up at least $500bn in three-month loans, beginning immediately, with another $500bn of three-month loans on Friday. It said it would also provide a $500bn one-month loan on Friday that settles on the same day. It also said it would continue to offer $500bn of three-month loans and $500bn one-month loans on a weekly basis until April 13, on top of its ongoing programme of $175bn in overnight loans and $45bn in two-week loans twice per week.”The Fed saw no option – other than unprecedented, overwhelming, unrelenting “whatever it takes” monetary inflation. The Federal Reserve’s ongoing experiment in underpinning market-based finance had reached a most critical juncture. Nothing else mattered. The Bubble had to be reflated – and the Fed was prepared to fully embrace the previously unimaginable.
Create Trillions of new “money” – and inject this liquidity directly into the markets to reverse de-risking/deleveraging dynamics. Purchases were commenced (directly and through ETF shares) to backstop corporate debt. Old emergency financing facilities from the 2008 crisis were reinstated and new ones created. And, importantly, keep this massive stimulus flowing even in the face of market recovery, record stock prices, and increasingly egregious financial excess. In not many months, the “insurance” stimulus had exacerbated Bubble excess that contributed to global financial collapse that incited unprecedented monetary inflation and even more outrageous speculation and Bubble mayhem.
In only 43 weeks, Federal Reserve Credit inflated $3.206 TN to a record $7.350 TN. Going back to the September 2019 restart of QE, Federal Reserve Assets had surged $3.624 TN, or 97%. We are now in the throes of one of history’s greatest monetary inflations. M2 “money” supply inflated $3.793 TN, or 29% annualized, over 43 weeks to $19.197 TN. A most extreme and destabilizing period of Monetary Disorder is fated.
The most calamitous global pandemic in a century has altered history in ways not to be fully comprehended for years to come. I fear the resulting Scourge of Monetary Inflation will haunt humanity for decades. Fatefully, the pandemic struck in the waning days of a historic global Bubble. Systems – financial, economic, social and political – were unstable and vulnerable. The overwhelming policy response both exacerbated and extended late-cycle “Terminal Phase” excess – at home and globally. From my analytical perspective, it’s been a worst-case scenario beyond anything imaginable.
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With U.S. and Chinese Credit systems having come completely off the rails, Credit became unhinged around the globe – “developed” and “developing.” The ECB’s balance sheet expanded $3.2 TN in the final nine months of 2020 to $8.553 TN. In Japan, central bank assets jumped $1.5 TN to $6.888 TN. According to Bloomberg data, “G4” (Fed, ECB, BOJ and Bank of England) central bank balance sheets inflated $8.5 TN in nine months to $23.804 TN (up from $6.429 TN to end 2009). With momentous ramifications, the very foundation of global finance succumbed to unbridled inflationism like never before.
..
The second-half of 2020 marked the emergence of a full-fledged market mania – stoked by retail and institutions alike. What began as a Fed-induced unwind of hedges and short squeeze morphed into securities prices completely detached from reality. Tesla with a market capitalization approaching $700 billion. Scores of IPOs – most with loss-generating businesses – seeing prices more than double on the initial day(s) of trading. The “Robinhood effect” – with booming trading volumes. The craze of call option market speculation.
December 31 – Bloomberg (Gearoid Reidy, Ishika Mookerjee and Sarah Ponczek): “Look at a screen at almost any point in 2020, and chances are you saw something like this: A company that nobody had ever heard of 12 months ago was in the process of trading 20 million shares in a day. Ideanomics Inc., fuboTV Inc., Vaxart Inc. -- names that would’ve elicited a collective ‘who?’ in January are obscure no longer, after seducing the retail day-trader horde whose presence defined the coronavirus era in equities. A mattress maker called Purple Innovation Inc. saw turnover surge 13-fold as it went from $5 to $25 in three months. Blank-check-born Fisker Inc. posted four sessions in which volume topped 40 million shares each. Buttressed by equally huge demand for older names like Eastman Kodak Co. and Carnival Corp., it added up. At a time when headlines were dominated by a raging virus, recession and the fastest-ever bear market, a record $120 trillion of stock changed hands on U.S. stock exchanges this year, up 50% from 2019 to a record. The average Russell 3000 stock saw average daily share volume surge 46% to 1.9 million shares.”With ominous parallels to some of history’s great speculative manias, market “naysayers” were taken out to the wood shed and shot. The Fed fomented a historic short squeeze. The Goldman Sachs Most Short Index rallied an incredible 200% off March lows, to end the year with a gain of almost 50%. The estimated $38 billion loss suffered by Tesla short positions is surely the biggest ever.
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December 31 – Bloomberg (Prashant Gopal): “Record-low mortgage rates were supposed to make it easier for homebuyers. Instead, they’ve helped push affordability to a 12-year low. Buyers in the fourth quarter needed to spend almost 30% of the average wage to afford a typical house, the biggest share for any three-month period since 2008, according to… Attom Data Solutions. Low borrowing costs, now below 3% for a 30-year loan, have spurred a buying frenzy, driving up prices across the country as shoppers compete for a shrinking supply of listings. During the pandemic, prices have increased faster than earnings, leaping by double digits in 79% of the 499 counties included in the report. More than half of those counties are now less affordable than their historic averages, Attom said…”Our younger citizens hoping to purchase homes will now be forced to take on the risk of even larger debt loads. The FHFA (Federal Housing Finance Agency) Housing Price Index surged to a 10.2% y-o-y gain in October, the strongest housing inflation since September 2005’s cycle peak 10.7%. Housing Bubbles have re-inflated. In ways both glaring and subtle, Monetary Disorder is aggravating already corrosive inequity between the haves (assets) and the have nots.
The issue of “sound money” is viewed as hopelessly archaic, a reality that my 20 plus years of CBBs has failed to alter. The challenge to warning of the myriad pernicious dangers associated with Monetary Inflation is made no easier by markets creating Trillions of added perceived wealth. The Fed is almost universally lauded for its crisis response. With memories of 2008 having faded completely away, there are these days only advocates for asset inflation.
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Climate change became increasingly difficult to dismiss. A brutal hurricane season, flooding, drought and a devastating West Coast fire season. Tens of millions of Americans were directly impacted.
2020 was such an emotional year. I am grateful to not have suffered the grief so many confronted with the loss of loved ones and dear friends. For me, frustration and anger were for the most part still overshadowed by sadness. My fears for our future are being realized. Writing that our nation “lost its innocence” would be both cliché and imprecise. But we did lose our tolerance. We lost objectivity and sound judgment. We sacrificed our cohesion as fellow Americans, as we doggedly fragmented into vitriolic political partisanship. Too many times in 2020 I was reminded of the quote, “We had to destroy the village in order to save it,” from the Vietnam War.
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But I worry about these deepening scars. I lament the further corrosive damage inflicted upon our fragile society from Trillions of monetary inflation. “When Money Dies…” History informs us that societies become increasingly susceptible to degeneration, instability and unpredictability. I am confident we will meet the major challenge posed by the coronavirus. I have less faith in our capacity to recover from epic monetary inflation and resulting financial and economic debasement. History informs us that inflationism proves extremely difficult to remedy. I have faith in the American people, but reckless borrowing and “money printing” is placing our future in great jeopardy.
If not for (somewhat less) reckless bouts of monetary inflation around the globe, the U.S. dollar index would surely have suffered more than its 6.8% 2020 decline. As a typical consequence of excessively loose financial conditions, November saw a record $84.8 billion goods trade deficit (Current Account Deficits quickly inflated to 2008 levels). Gold jumped $380, or 25%, to end the year at $1,899. Silver surged 47% to $26.41, with Copper up 26%, Platinum 11%, and Palladium 26%. With monetary inflation reigniting speculative zeal, Bitcoin inflated more than 300% to surpass $29,000.
It was truly a year for the history books. The Chinese proverb (“curse”): “May you live in interesting times.” When I look back on the year, I personally feel incredibly grateful. As a father and husband, I am thankful for my family’s good health, positive attitudes and resilience. As an analyst chronicling “History’s Greatest Financial Bubble” – it simply could not be a more fascinating environment. I’m excited for the challenges presented by the new year – and am incredibly blessed to have this opportunity to think and write during such extraordinary times. And I am thankful to have you readers. Thank you!'
- Doug Noland,
2020 Year in Review, January 2, 2021
Context(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'Affective IntrospectionEthical Affective Ambiance in the Electric Universe – Production of Money, Prices and MarketEstimate: October, 2025 – Safire Plasma (fusion) Reactors commercially available – Abundance, 2021