Almost 350,000 Americans dead, with the Covid death toll projected to rise another 100,000 by the end of January. Confirmed Covid cases have exceeded 20 million (84 million globally), ending 2020 with new U.S. infections growing by a million every four to five days. The year ended with more than 125,000 Covid patients in overburdened hospitals across the U.S.
There’s no sugarcoating this human tragedy. As a nation, we failed early on to get the pandemic under control. The federal government response was inept – incomprehensibly so. There was a lack of strong and competent leadership. The Trump administration was dismissive and, tragically, Covid-19 became a polarizing issue. State government responses varied from adequate to appalling. Across the country, masks were considered a political statement as the country was consumed by a heated and pivotal election. Disinformation flourished even more so than the virus.
The national lockdown was an enormous burden that, in the end, sure seems like a wasted effort. Lacking leadership, reliable information and the necessary resolve, pandemic mitigation measures were not sustained to the point of ensuring new infections were reduced to more manageable levels. For various reasons, too many failed to take the pandemic seriously. Not that we will ever adopt Chinese-style draconian measures (i.e. door-to-door dragging out of feverish individuals to be transported to makeshift detention centers). But there needed to have been a comprehensive plan ready to execute – with a well-thought-out communications strategy.
The contrast between the depressing health crisis and booming financial markets could not be more stark. Record stock prices. Record IPOs. Record SPACs. Record corporate bond issuance – investment-grade and high-yield. Surging equities volumes, led by online retail trading. The retail trader community’s embrace of call buying drove record options trading volumes.
Tesla’s stock was up more than 740%, as the Nasdaq100 (NDX) returned (price and dividends) almost 49% for the year. With the bears blown to smithereens, there was nothing to restrain desperately overheated markets. Things tend to turn crazy at the end of cycles. 2020 settled into Epic Screwy Crazy.
Stocks were out of the blocks strongly to start 2020, with the S&P500 posting a 5.1% return by February 19th – as the bubbling NDX returned 11.5%. Responding to late-cycle cracks appearing in “repo” and securities funding markets, the Fed the previous September had embarked on aggressive “insurance” stimulus. Injecting liquidity into already speculative markets at record high prices worked only to stoke greater speculative excess. The NDX returned 27% in less than five months (September 27th to February 19th).
There was no mystery surrounding a speculative marketplace’s initial disregard for mounting pandemic risk. Federal Reserve Credit expanded $418 billion between September 11th and February 19th, an unprecedented injection of market liquidity in a non-crisis environment. The Fed-induced Bubble had inflated to precarious extremes – straight into historic health, financial and economic crises. The Fed had exacerbated precarious Bubble excess – that came home to roost in March.
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.
Global markets “seized up.” After trading at 6.54% on March 4th, Brazil’s local currency 10-year yields had spiked to 9.43% by March 24th. Dollar-denominated Brazilian yields almost doubled to 5.31%. Trading chaos was not limited to EM. Italian yields surged from 1.00% to 2.42% in two weeks, with Greek yields more than tripling to 3.67%.
In the two-week period March 6th to March 20th, the Norwegian krone sank 20.9%, the Mexican peso 17.6%, the Australian dollar 12.8%, the South African rand 11.0%, the British pound 10.9%, the New Zealand dollar 10.2%, and the Swedish krona 9.5%. Levered “carry trades” and myriad hedge fund derivatives strategies were imploding.
Crude oil suffered a one-day 25% decline on March 9th, though that $27 per barrel appeared rather pricey compared to the extraordinary negative $40 experienced during April 20th trading chaos (WTI ended 2020 down 21%). Bitcoin collapsed 41% during the week of March 12th. Gold sank 8.6%, with Silver down 16% and Platinum falling 17%. The Bloomberg Commodities Index suffered a one-week drop of 7.8%.
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.
U.S. Non-Financial Debt (NFD) surged $5.740 TN during the first three quarters of the year, an increase of 188% from comparable 2019 growth. For perspective, NFD expanded on average $1.830 TN annually over the previous decade – and had not previously surpassed $3.0 TN on an annual basis. Outstanding Treasury Securities surged $3.882 TN during 2020’s first three quarters, with year-over-year growth of an astounding $4.329 TN, or 23.3%. After concluding 2007 at about $8.0 TN, Treasury Liabilities (from the Fed’s Z.1) ended September at $25.8 TN.
China largely matched unprecedented U.S. Credit growth. For the first nine months of the year, China Aggregate Financing expanded an unprecedented $4.535 TN ($504bn monthly). This was 45% higher than comparable 2019 growth. Combining growth in China’s Aggregate Financing with NFD, China/U.S. Credit expanded an astounding $10.275 TN through the first three quarters of 2020, double comparable 2019 growth.
For the first 11 months of 2020, the $5.079 TN expansion of China’s Aggregate Financing was 43% ahead of comparable 2019 and 61% above comparable 2018 Credit growth. Through the end of November, China’s M2 “money” supply surged $4.487 TN (to $33.0 TN), up from comparable 2019’s $1.333 TN expansion.
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.
After reversing de-risking/deleveraging, the unprecedented tsunami of central bank liquidity resuscitated the global leveraged speculating community. European sovereign yields collapsed. Ten-year bund yields ended 2020 at negative 0.58%, with Swiss and French yields at negative 0.61% and negative 0.35%. Hopelessly indebted Italy and Greece saw yields end the year near record lows at 0.54% and 0.61%. Even Spain and Portugal’s yields turned negative in December before ending the year positive by a few bps.
With negative-yielding debt globally exceeding a record $18 TN, yield- and performance-chasing liquidity streamed into about every nook and cranny of international finance. Even the weakest EM nations tapped over-liquefied markets to pile on debt crazily.
December 30 – Bloomberg (Sydney Maki): “Emerging-market hard-currency bond sales are heading for another big year in 2021 as governments and companies try to revive growth… Governments will borrow heavily for a second year to fund health-care and poverty relief measures, while pushing the investment needed to reflate their economies. Companies will borrow to cash in on that renewed growth, with loose monetary policy providing the liquidity they need. ‘Our forecast assumes that financing conditions continue to be supportive for both investment grade and high yield,’ Goldman Sachs strategists… wrote earlier this month. But, ‘funding needs come down as the cyclical recovery takes hold.’ Governments and companies from developing economies sold $757.1 billion in dollar- or euro-denominated bonds in 2020, the most in more than two decades of data…”
In the middle of a devastating pandemic, financial conditions loosened dramatically throughout the emerging markets. Equities and bond markets rallied spectacularly. The popular iShares MSCI Emerging Markets Equities (EEM) ETF surged 73% off March lows to end the year at an all-time high (2020 return 17.0%). After sinking 27% in ten sessions back in March, the iShares JP Morgan Emerging Market Bond (EMB) ETF ended 2020 with a return of 5.4%. China’s CSI 300 Index finished the year with a gain of 27.2%, as the growth-oriented ChiNext Index surged 65.0%. South Korea’s KOSPI Index jumped 30.8%, and Taiwan’s TAIEX index rose 22.8%.
With Trillions of newly-created liquidity slushing about the system, U.S. financial conditions loosened spectacularly. Decisively quashing “risk off,” the Fed unleashed a powerful speculative cycle. Indeed, it was a system primed for “blow off” speculative excess following over a decade of extremely loose financial conditions and Federal Reserve market backstops/bailouts. The Goliath ETF complex has been readily nurtured, along with the Herculean options and derivatives universe. The upshot: What in 2020 passed for “investing” was in reality a gargantuan scheme promoting levered and trend-following speculation – the dimensions of which some time ago inflated beyond “too big to fail.”
Retail traders had years to open online trading accounts while enjoying effortless returns. For institutions and the investment management industry more generally, managers more likely to be dismissive of risk (while remaining fully invested) rose briskly through the ranks to control enormous sums of assets. The Fed injected Trillions into a system commanded by potent and deeply embedded speculative impulses (i.e. propensity for trend-following behavior, risk-taking and leveraging, etc.).
Arguably, the resulting chasm between inflating asset markets and deflating economic prospects was the most extreme since 1929. The U.S. employment rate spiked to 14.7% in April from February’s 3.5% (dropping back to 6.7% by November), as U.S. Q2 GDP collapsed at a 31.4% annualized rate. We witnessed the specter of long lines, overwhelmed food banks, and millions of Americans suffering food insecurity.
December 31 – Financial Times (Nikou Asgari and Joe Rennison): “Bankers expect a steep drop in corporate fundraising next year after a record borrowing binge in 2020 that helped companies to survive the coronavirus crisis. Global bond issuance surged by nearly a quarter to $5.35tn in the year to December 22 compared with the same period in 2019. The total easily exceeded the annual record, set last year, of $4.35tn…”
December 31 – Bloomberg (Crystal Tse, Katie Roof and Elizabeth Fournier): “A booming market for U.S. initial public offerings shows no sign of slowing in 2021. Around $180 billion was raised from IPOs on U.S. exchanges in 2020, more than double last year’s total and far above the previous high of $102 billion set in 2000… Companies have been emboldened by soaring equity values, especially in the second half, while a proliferation of listings by blank-check firms has also boosted volumes. ‘In a zero interest world, one of the only asset classes that offers the hope of performance that beats inflation is equities,’ said Jeff Zajkowski, head of Americas equity capital markets at JPMorgan…”
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.
Inequality was an issue in the markets as it was throughout the economy and society. The Fed’s Trillions were a godsend for those with exposure to securities markets – and the riskier the assets the better. The contemporary central bank doctrine of using inflating securities prices as the primary mechanism for system stimulus has been promoting wealth inequality for years now. Inequality took a grievous turn for the worse in 2020 – with our wealth-allocating and deficit-accommodating central bank now irrevocably implanted in political muck.
December 31 – Bloomberg (Devon Pendleton and Jack Witzig): “Billionaires have always traveled in a different orbit than the rest of us. Nicer things, more power, rocket-launching stations. But 2020 threw that gulf into stark relief. While much of the world grappled with soaring unemployment and plunging growth, the 0.001% benefited from unprecedented wealth creation. The world’s 500 richest people added $1.8 trillion to their combined net worth this year and are now worth $7.6 trillion, according to the Bloomberg Billionaires Index. Equivalent to a 31% increase, it’s the biggest annual gain in the eight-year history of the index…”
The Fed as propagator of inequality emerged as a conspicuous issue following its fateful 2020 pandemic measures. In response, the Federal Reserve paid notable lip service to the issue, essentially committing to extreme stimulus measures until the unemployment rate drops back to pre-pandemic, multi-decade lows. While delightful music to the ears of market participants, such a policy course ensures no interruption to the perilous trajectory of systemic inequality. Along with the markets, economy, inflation and inequality, the Fed has added climate change to its directive. Covid was manna to the MMT crowd.
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.
Geopolitical tensions mirrored heightened social stress. U.S./China relations deteriorated alarmingly – and likely irreversibly. Two superpower rivals head-to-head battling over trade, technology, finance and global influence. Especially with Beijing wresting control of Hong Kong, Taiwan became a potential flash point. The “China virus” only inflamed growing anti-China sentiment. Tensions with Iran risked boiling over. The Russians appeared to have orchestrated the most significant hacking operation in years. The UK and European Union mustered a last-minute “Brexit” deal. From Beijing to Brussels to Washington, governments around the world raised the specter of cracking down on the powerful technology oligopolies.
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.
What these days passes as patriotism leaves me discouraged. It’s a terrible reality I’m sickened to document: Our nation is not what it was or what we expect it to be. A dark underbelly has been exposed. Fringe elements – on both the left and right – have been emboldened. They are undeserving of the attention and voice they have been afforded. At this point, it’s up to the great silent majority to rise up and safeguard our cherished American values.
Not without justification, we lost faith in our government and institutions. As an increasingly insecure society, we gravitated to conspiracy theories and disinformation. What had been relegated to the fringe made alarming headway within the mainstream. We’ve contrived too many enemies: the media, rival politicians, law enforcement, the scientific community… Is our future one of adversary “red” and “blue” communities, business establishments, schools and houses of worship? The likes of Dr. Anthony Fauci and Bill Gates have been villainized – their families threatened. Lying, deceit and character assassination were elevated to a national ethos. The election and especially its aftermath have been a national disgrace. We witnessed in 2020 the worst nationwide social strife in decades. The popular support for social justice offers hope.
Washington completely botched the crisis response – restrictions, testing, PPE and so on – and we’re paying a dreadfully steep price. The private sector rose to the challenge with new vaccines in record time. And after a characteristically rocky start, hopefully the smooth distribution of vaccines will in the coming months see a return to some semblance of normalcy.
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!
Categories: Doug Noland