TSP Smart: “The numbers are just monstrous”

Our yardstick is the US GDP (economy). By all measures our debt load is a monster and the stock market is the most expensive relative to the US economy in our history.

US equities to GDP: 202% at the 2000 peak, 181% at the 2007 peak, 267% today meaning the stock market today is 30% more expensive than the 2000 market bubble!

Total Debt and Securities to GDP: 359% at the 2000 peak, and 379% at the 2007 peak, 532% today. At the end of the 1980’s, this was only 194%.

This can not end well and will not end fair. More details below from Doug Noland.


Extraordinary Q2 2020 Z.1 Flow of Funds

by Doug Noland

The numbers are just monstrous. The Fed’s own data illuminate the historic Monetary Disorder that today runs wild. The Federal Reserve’s balance sheet. Treasuries. Debt and Equities Securities. The banking system. The Household balance sheet. Rest of World holdings. In short, finance has completely run amuck, with the data corroborating the super cycle “end game” thesis.

Total Non-Financial Debt (NFD) increased $3.522 TN during Q2, more than doubling Q1’s record $1.449 TN gain. This pushed first-half NFD growth to an incredible $4.971 TN. For perspective, NFD expanded $2.439 TN in 2019 and averaged $1.826 TN annually over the past decade. Q2 growth actually surpassed 2004’s annual record $2.912 TN NFD expansion.

At $59.304 TN, Non-Financial Debt surged to a record 304% of GDP. NFD-to-GDP ended 1999 at 184%, 2007 at 227%, and 2019 at 250%. “Off the charts,” as they say.

Unprecedented deficit spending saw Treasury Securities jump $2.852 TN during the quarter to a record $22.371 TN. Treasuries were up $3.352 TN for the first half. Over the past year, Treasuries jumped $4.556 TN, or 25.6%. This dwarfs the previous annual record (2010’s $1.645 TN). After ending 2007 at $6.051 TN, outstanding Treasury Securities ballooned $16.320 TN, or 270%. Treasuries ended Q2 at 115% of GDP. This is up from 44% to end the nineties; 41% to conclude 2007; and 69% to close out 2010.

Agency Securities declined $25 billion during Q2 to $9.746 TN. Agency Securities were up $481 billion over the past year and $786 billion for two years. Having increased an incredible $5.037 TN over the past four quarters, combined Treasuries and GSE Securities ended Q2 at $32.117 TN, or 165% of GDP.

Total Debt Securities jumped $3.364 TN during Q2 to a record $51.690 TN. Over the past year, Debt Securities jumped $5.959 TN (more than double 2007’s record $2.669 TN increase). As a percentage of GDP, Debt Securities surged to 265%. For comparison, Debt Securities ended 2007 at 200% of GDP; the nineties at 157%; the eighties at 126%; and the seventies at 74%.

Total Equities surged $9.121 TN during the quarter to $51.956 TN, with a one-year increase of $884 billion (1.7%). Equities as a percentage of GDP rose to a record 267%. This compares to cycle peaks 181% at the end of Q3 2007 and 202% to conclude Q1 2000.

Total (Debt and Equities) Securities increased an unprecedented $12.485 TN during Q2 to a record $103.646 TN. This growth more than doubled Q1 2019’s record $5.970 TN gain. For comparison, Q4 2009’s $3.449 TN gain was the largest quarterly increase prior to 2019. Total Securities ended Q2 at a record 532% of GDP, compared to cycle peaks 379% during Q3 2007 and 359% to end Q1 2000. Total Securities ended the eighties at 194% and the seventies at 117%.

The Household balance sheet always offers fruitful Bubble Analysis. Unprecedented growth in the Fed’s balance sheet, debt and securities translated into record Household perceived wealth. Household Assets jumped $7.637 TN during Q2 to a record $135.435 TN. And with Liabilities only increasing about $29 million, Household Net Worth inflated a quarterly record $7.607 TN – to an all-time high $118.955 TN. Net Worth was up $5.0 TN over the past year. Net Worth ended the quarter at a record 610% of GDP. This compares to previous cycle peaks 492% (Q1 2007) and 446% (Q1 2000).

Household holdings of Financial Assets increased $7.0 TN during the quarter (up $3.758 TN y-o-y) to $94.548 TN (record 485% of GDP). For comparison, Financial Assets ended 2007 at $54.557 TN (372% of GDP) and 1999 at $34.656 TN (350% of GDP). Real Estate holdings ended Q2 at a record $34.406 TN, with a y-o-y gain of $1.493 TN. At 177% of GDP, Real Estate holdings as a percentage of GDP reached the highest level since Q4 2007.

Banking system (“Private Depository Institutions”) Assets jumped $859 billion (almost 16% annualized) during the quarter to a record $22.780 TN – a gain second only to Q1’s $1.869 TN. Loans increased (a measly) $24 billion, or 0.8% annualized (with mortgages up $36bn). The Asset “Reserves at the Fed” jumped another $313 billion to a record $2.787 TN. The Asset “Fed Funds and Repos” rose $204 billion to a record $863 billion. Debt Securities holdings surged a record $359 billion to an all-time high $5.241 TN. Treasuries gained $207 billion, surpassing $1 TN ($1.102TN) for the first time, and Agency/GSE MBS rose $110 billion to a record $2.934 TN.

Over the past year, Bank Assets surged $3.268 TN, or 16.7% (more than doubling 2008’s annual record $1.249 TN). Reserves at the Fed jumped $1.366 TN, while Loans expanded $862 billion and “repos” increased $507 billion. Bank Debt Securities holdings surged $743 billion, or 16.5%, with Treasuries up $331 billion, or 43%, and Agency Securities gaining $353 billion, or 13.7%. Corporate, muni and open-market paper gained moderately during the quarter and y-o-y.

On the Bank Liability side, Total (Checking and Time & Savings) Deposits surged a record $1.376 TN during Q2 to an all-time high $18.037 TN. Total Deposits rose $2.515 TN during the first half, or 32% annualized – and were up $3.056 TN, or 20.4%, year-on-year. Over the past year, Total Deposits ballooned from 70% to 93% of GDP. Banking system Total Deposits (Liabilities) peaked at 70% of GDP in 1986; ended the eighties at 66%; and the nineties at 48% – before rising back to 65% by 2009.

Rest of World (ROW) holdings of U.S. Financial Assets increased $3.364 TN (more than reversing Q1’s $2.665 TN decline – having been significantly impacted by the recovery in equities prices) to a record $35.465 TN. Debt Securities holdings gained a record $464 billion (after declining only $34bn during Q1) to a record $12.501 TN. Treasury holdings rose $82 billion to a record $6.892 TN, while Agency Securities declined $60 billion to $1.200 TN.

In an intriguing development, ROW boosted holdings of U.S. Corporate Bonds by an unprecedented $427 billion during Q2 to a record $4.177 TN. How much of this gain was associated with buying from foreign domiciled hedge funds, offshore financial entities and structured finance, along with other elements of global leveraged speculation – following the Fed’s move to backstop U.S. corporate Credit and ETFs?

Over the past six quarters, ROW holdings of U.S. Debt Securities jumped $1.315 TN. Treasuries gained $222 billion, and Agency Securities increased $112 billion. Meanwhile, holdings of U.S. Corporate Bonds surged $572 billion. Equities holdings surged $1.608 TN over the past year.

Having doubled over the past decade, Total ROW holdings of U.S. Financial Assets jumped to a record 182% of GDP to end Q2. This compares to 108% to end 2007; 74% at the end of the nineties; 31% to conclude the eighties; and 16% to round out the seventies.

Federal Reserve Assets jumped $1.185 TN, or 19.2%, during the quarter to a record $7.364 TN. This pushed first-half growth to $2.985 TN, or 68.2%. This compares to the $729 billion increase during Q4 2008 – and 2008’s $1.320 TN second-half expansion. The Fed’s balance sheet ballooned $3.355 TN over the past year, or 83.7%.

Fed Assets ended 2008 at $2.271 TN, having ballooned from year-end 2007’s $981 billion. Fed Assets ended 1999 at $697 billion (after a $107bn Q4 gain); the eighties at $315 billion; the seventies at $167 billion; and the sixties at $81 billion. Fed Assets averaged 6.4% of GDP during the three-decade period of the seventies through the nineties. This ratio jumped to 15% in 2008, rose to as high as 28% during Q1 2015, and ended Q2 at 38%.

Unprecedented stimulus and market intervention from the Federal Reserve and global central bank community unleashed epic market speculation (in the face of rapidly deteriorating fundamental prospects). There are indications this speculative cycle has commenced the process of succumbing to reality.

“Risk off” is gathering momentum across global markets. While Friday’s rally cut U.S. equities declines for the week, painful losses were suffered elsewhere. Major equities indices were down 5.0% in France, 4.9% in Germany, 4.4% in Spain and 4.2% in Italy. Hong Kong’s Hang Seng Index sank 5.0%, with China’s CSE 300 index down 3.5%. Real estate jitters rekindle China housing Bubble anxiety.

September 25 – Bloomberg: “China Evergrande Group is facing a crisis of confidence among creditors who’ve lent the world’s most indebted developer more than $120 billion. Long-simmering doubts about the property giant’s financial health exploded to the fore on Thursday, following reports it had sent a letter to Chinese officials warning of a potential cash crunch that could pose systemic risks. The news sparked a bondholder exodus that continued into Friday, sending the price of Evergrande’s yuan note due 2023 down as much as 28% to a record low. Losses in the company’s dollar bonds spread to high-yield debt across Asia.”

September 25 – Bloomberg (Rebecca Choong Wilkins and Denise Wee): “Average spreads on Asian dollar bonds widened 3-5bps by noon in Hong Kong, reversing earlier tightening, according to a trader, amid jitters from a looming cash crunch at Evergrande. This week is set for the biggest widening since March, according to a Bloomberg Barclays index.”

Emerging Markets were under significant pressure. South Korea’s Kospi Index sank 5.5%, with India’s Sensex down 3.8%. Taiwan’s TWSE index fell 5.0%. In EM currencies, the Mexican peso lost 5.4%, the South African rand 4.7%, the Colombian peso 3.9%, the Polish zloty 3.6%, the Russian ruble 3.2%, the Brazilian real 3.1%, the Chilean peso 3.0%, and the Hungarian forint 2.6%. Ten-year (dollar) yields surged 25 bps in Brazil, 25 bps in Ukraine, 12 bps in Indonesia, and eight bps in Philippines.

Global “risk off” squeezed the U.S. dollar bears, as the dollar index rallied 1.8% to a two-month-high. The dollar rally hit commodities markets, with gold dropping 4.6%, Silver 14.9%, Copper 4.7%, and Platinum 8.8%. The industrial metals were all under pressure.

Global bank stocks were under heavy selling pressure. European banks were hit 7.8%, closing Friday near March lows. Hong Kong’s China H-Financials Index fell 5.8% to lows since March. U.S. banks sank 6.8%, trading near four-month lows. Bank debt Credit default swap (CDS) prices jumped to near three-month highs.

“Risk off” is making some headway in U.S. Credit. At $4.86 billion, high-yield bond funds suffered their largest outflows since March. High-yield CDS prices jumped about 50 bps this week to a one-month high 400 bps. A natural gas company postponed its junk bond sale. Investment-grade CDS rose a notable 13 bps this week to a four-month high 74 bps.

The unfolding global de-risking/deleveraging episode only heightens U.S. market fragility. With U.S. elections now about 40 days away, the backdrop is set for extreme instability. The degree of speculative excess experienced over recent months would typically ensure vulnerability to a disorderly downside reversal and market dislocation. These times are, of course, anything but typical. It’s an incredibly worrying backdrop, to say the least. The Q2 report presented by far the most troubling data I’ve encountered in my 20 years of chronicling quarterly Z.1 data.


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Categories: Doug Noland