By the numbers, the debt to GDP ratios far exceed 2007 numbers that set up the great financial crisis. And all the ratios below use the GDP before the decline from the virus. And the debt is piling on.
Total securities means (stocks and bonds) and the recent market crash only brought them down to 422% of GDP compared to the top of 2007 bull peak of 379%. After the crash. So no, that was not a quick bear market.
The US had record home flipping prior to the virus, now record retail investor mania, and trillions of global debt with negative interest rates – what could go wrong.
Excerpts from Doug Noland’s Extraordinary Q1 2020 Z.1 Flow of Funds
Global markets reversed sharply lower this week. “Risk on” careens to “Risk off” – for global stocks, corporate Credit, EM currencies/equities/bonds and commodities. One Big Unwieldy Speculative Trade. Pundits struggled to explain the abrupt reversal of fortunes. Was it something Powell said? A second wave of COVID infections that might hinder economic recovery? Election anxiety?
Let me suggest Plain Old Speculative Market Dynamics. Daydream, fantasize or hallucinate – if you choose. But this is a fiasco – and rather tangible, at that. It started years – even decades – ago. The craziness turned extreme last year, with the Fed aggressively stimulating in the face of highly speculative markets. It was never going to end well. And when the Bubble began imploding in March, the Fed and global central bankers responded immediately with Trillions of liquidity support. This fueled a rally, short squeeze and reversal of hedges that developed into one dazzling speculative melee.
From my analytical perspective, events over the past few months confirm Bubble Analysis – the Global Bubble Thesis. This week likely marked the beginning of a painful second leg of the bear market or, at the minimum, the return of wild volatility. There appears to have been both capitulation on the short side and “blow-off” speculative excess on the part of the bulls. It was almost like 1999 all over again – frenetic retail online trading, penny stock euphoria, derivatives run amuck, fun and games and throw caution to the wind speculative froth.
The Fed owns the frail Bubble – this disastrous mania. How ironic is it that the more cautious (i.e. realistic) the Fed’s view of economic prospects, the greater liquidity-induced market euphoria propagates delusions of V’s, perpetual bull markets and permanent prosperity? And of all the nonsense emanating from this historic financial mania, history will trash this foolhardy notion that there is no limit to the quantity of central bank Credit and government debt that can be issued. Reviewing the Fed’s Q1 Z.1 report, I was thinking this is how things look as a system self-destructs. Q2 will be worse.
Fed’s Q1 Z.1 Report highlights
Total Securities-to-GDP fell to 422%, down from Q4’s record 469%. Even after Q1’s decline, Total Securities-to-GDP remains significantly above previous cycle peaks of 379% during Q3 ’07 and 359% in Q1 ’00.
First Quarter: Record breaking growth in Debt (non-financial) at $1.6 trillion. Non-financial debt to GDP:
- 2020: 260%
- 2007: 207%
- 1999: 183%
Federal Liabilities surpassed 100% of GDP for the first time in at least six decades. For perspective, Federal Liabilities ended the seventies at 50% of GDP; the eighties at 63%; the nineties at 59%; and 2010 at 85%. It would not be surprising to see this ratio approach 150% over the next three to five years.
Treasuries-to-GDP jumped to 91%, more than doubling the 41% from the end of 2007.
Washington didn’t merely fail to resolve the GSE issue during the “longest expansion on record.” These institutions were once again exploited to juice the markets and economy. The government-sponsored enterprises these days essentially have no meaningful amount of capital. Since receivership, hundreds of billions of accounting profits were transferred to Treasury coffers, helping dreadful fiscal deficits appear a tad less dreadful. Payback time starts now. Treasury will be on the hook for what will surely be years of enormous losses.
Endless “AAA” debt securities these days transform increasingly risky end-of-cycle Credit into perceived money-like, safe and liquid instruments (experiencing insatiable demand).
Total Debt Securities-to-GDP jumped to a record 225%. This ratio ended the nineties at 162% and the eighties at 75%.
Total Equities dropped to 198% of GDP, down from Q4’s record 251%, yet remained above the cycle peak 181% from Q3 ’07 (and just below Q1 00’s 202%). Total Equities-to-GDP bottomed at 93% during Q1 ’09.
I received a lot of pushback in 2009 when I argued that QE was spurring growth in bank and money market deposits (“money supply”) then flowing into the markets. It’s become rather self-evident these days.
It’s been a historic global Bubble, with bipolar U.S. and China epicenters. It’s no coincidence then that recent Credit dynamics share alarming similarities. China’s Aggregate Financing (a gauge of system Credit expansion) surged $450 billion during the month of May. This was 86% ahead of May ’19 growth. A booming May put year-to-date (five months) growth in Aggregate Financing at a blistering $2.450 TN. It’s crazy to contemplate how much Chinese Credit will grow this year – Credit of Rapidly Deteriorating Quality. How long can systemic risk continue to inflate parabolically?
Original Post 13 June 2020
Michael Bond comments: “Systemic risk” is not market risk. It is the risk of the entire financial system breaking down. It already seized this year forcing the Fed’s $3 trillion in 2 months intervention. And look at Japan.
As a side note, when the Bank of Japan prints and buys stocks & bonds from Japanese investors they turn around and use those proceeds to buy US stocks and bonds. This has been going on for some time and is part of the US financial asset bubble machine.
Since the Fed went full Ponzi after the first financial crisis, there is no way out that does not entail significant global system damage – financial, economic, political and most worrying money itself failing. Big investors are starting to take delivery of insurance for the failure of money…
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